Mr Justice Eder:
Section A: INTRODUCTION
- This is a substantial claim for professional negligence. The claim arises out of a failed investment in a factory outlet shopping centre ("FOC") which was to be developed from a Grade II* listed structure known as the "Boiler Shop" situated at Chatham Historic Dockyard, Medway, Kent ("Dockside"). Dockside was acquired for the residue of a 155 year leasehold term on 5 April 2001 by the First Claimant ("Capita") which was then known as Royal & SunAlliance Trust (Channel Islands) Limited. Capita is trustee of The Matrix Chatham Maritime Trust ("the Trust") which was an investment vehicle established to enable 480 individual investors to invest in Dockside. The Second Claimant ("Matrix") sponsored the creation of the Trust and was responsible for establishing and promoting the investment. Capita paid the vendors of Dockside total consideration in the sum of £62,850,000 in order to acquire its interest in Dockside. Capita was appointed as trustee of the Trust by a Trust Deed dated 2 April 2001 which was executed by Capita and Matrix. The Trust is in the form of an Enterprise Zone Property Unit Trust ("EZPUT") although, for reasons set out below, it is resident in Guernsey. Matrix is the Trust Manager under the terms of the Trust.
- The Claimants say that they retained the Defendants, who were at the material time a firm of chartered surveyors and property consultants, to advise them in relation to the acquisition of Dockside; and that pursuant to such retainer the Defendants provided positive advice about Dockside's commercial prospects and valued Dockside in the sum of £62,850,000 (with the benefit of Enterprise Zone tax allowances) and £48,150,000 (without the benefit of Enterprise Zone tax allowances). The Claimants say that they relied upon this and, in particular, that Capita relied on this advice when it acquired its interest in Dockside. Capita retains the long leasehold interest in Dockside that it acquired on 5 April 2001. The Defendants received fees totalling in excess of £500,000 for their work on the project, of which nearly £400,000 was, according to the Defendants' invoice, for "investment and valuation advice". The Claimants contend that the Defendants' advice substantially overstated the commercial prospects and also the value of Dockside and that, in short, the Defendants' approach to assessing the commercial prospects and value of Dockside was fundamentally flawed. They say that this is an "advice" case where the Defendants were effectively advising the Claimants whether or not to proceed with the transaction. The Claimants say that provision of advice on the attractiveness of the investment represented by Dockside is, on the facts here, unremarkable: this is precisely the sort of advice that the Defendants had provided to Matrix and equivalent trustees with regard to very many earlier transactions, as well as being what they were retained to provide in respect of this particular transaction. Further, the provision of advice on the commercial viability of a new-build FOC is, the Claimants say, natural once it is understood that the ability of a FOC to secure and to retain tenants and, further, the level of rent that it is able to demand from those tenants depends on the commercial viability and success of the FOC itself. There is no "rack rent" for a FOC: instead the rent paid is a mix of a base rent and turnover rent. As is explained below, turnover rent is, as the name suggests, calculated as a percentage of the turnover earned by a tenant per square foot of the unit occupied. The tenant pays the higher of base rent and the turnover rent. Accordingly, the rent payable by the tenants and receivable by the owner of the FOC depends on the success of the FOC and its tenants in attracting consumers to the centre and encouraging those consumers to spend money at its stores. Thus, if a FOC is not able to attract sufficient consumer spend through its doors then it will not attract, or will find it more difficult to attract, tenants and the rent that those tenants will be prepared to pay (both as base rent and as a percentage of their turnover) will be lower than at a successful FOC. The value of the FOC is assessed on a discounted cashflow basis by reference to an evaluation of the income (in the form of rent) that it is likely to be able to receive.
- An important element of the Claimants' case is that the exercise of assessing the value of a FOC cannot begin until an assessment of that FOC's likely ability to attract consumer spend has been undertaken. Such an assessment has been referred to in the present case as a "CACI Report" or a "CACI-type Report", the abbreviation CACI referring to the name of a company that specialises in the production of such an assessment. Without such a report, the Claimants say it is impossible to predict or to assess the likely rental levels that the FOC will be able to achieve and it is the income stream represented by the rents that then drives the capital valuation of the FOC. The Claimants say that the Defendants' failure to appreciate this and/or to undertake any such exercise competently lies at the heart of this case. Their resulting failure to make a competent assessment of the likely level of turnover rents that Dockside might achieve led them to overstating substantially the rent, value and commercial prospects of Dockside. In addition, the Defendants made a series of failures relating to their assessment of the attractiveness of the location and design of Dockside and as to the competence and experience of the Developer to be able to operate Dockside successfully. According to the Claimants, there is a ready explanation for these failings: the Defendants did not possess the necessary expertise to advise on Dockside and this lack of expertise led them to make fundamental errors in their approach to valuing and assessing the commercial prospects of Dockside which ultimately led to their advice to the Claimants being woefully inadequate.
- The main monetary claim is that advanced by Capita viz Capita claim damages from the Defendants in respect of these breaches of duty in relation to all of the losses they have suffered as a result of entering into the transaction. Capita calculate these on the basis of the difference between (a) the price paid for Dockside (£62,850,000) together with interest at base rate plus 1% from 5 April 2001 to date and the expenses and losses incurred in operating Dockside to date and (b) any profits earned from Dockside to date and its current market value (pleaded at no more than £9,650,000 and in fact most recently valued at £7,200,000). Alternatively, they claim damages on the basis of the difference between the price paid for Dockside and its true value as at April 2001 (either including or excluding the benefit of Enterprise Zone tax allowances). On any footing the damages claimed exceed £16,000,000. In addition, Matrix claim an indemnity in respect of potential claims by investors.
- The Defendants deny liability and causation and put quantum in issue.
- As will already be plain from this overview, this is not a simple valuation case where a surveyor is said to have reached the wrong figure for the value of a commercial property. Both the Claimants and the Defendants say that the case has very special features. On the Claimants' side, it is said that the Defendants (a) introduced the transaction to Matrix with a view to Matrix structuring it as an Enterprise Zone investment scheme; (b) purported to conduct due diligence on the potential acquisition and, further, undertook the negotiation of the commercial terms of the transaction with the vendor and its agent; and (c) in addition to advising on value, provided advice to the Claimants on the commercial viability of Dockside as a FOC and, further, advice on the merits of the commercial investment proposition represented by the Dockside development. So, it is said by the Claimants that this is a case where the Defendants were effectively advising Capita and Matrix as to whether or not to proceed with the transaction at all and, if so, at what price and on what terms. On the Defendants' side, it is said that this was, in effect, a speculative venture driven in large part by the desire to obtain for the individual investors extremely valuable tax allowances at the very end of the 2000-2001 tax year; that the Claimants were fully aware of the risks in investing in such a venture which involved the acquisition and transformation of a listed building and the set-up of what was a completely new and specialised shopping outlet with multiple units; that although the Defendants played a certain role in providing advice, such role was much more limited than the Claimants now say; that the venture was "conceived in a boom but born in a bust"; and that the reasons for the failure of the investment were not due to any actionable fault on their part.
A2 The Evidence at the Trial
- The main events occurred in the early part of 2001 ie over 10 years ago. This gap in time gave rise to some difficulty. Some documents which one might assume would have existed then were not produced. Questions arose as to whether such documents had ever existed or were no longer available. Perhaps unsurprisingly, the memory of at least some of the witnesses was, in some important respects, hazy or non-existent.
- I list below the witnesses who gave evidence on behalf of the Claimants. (Their witness statements had been carefully prepared with prodigious references to the contemporary documents. Most, if not all, had had the benefit of "witness training".)
i) Mr Robert Randall. Mr Randall is a director of Matrix Group Limited and had conduct of the Dockside transaction at the material time on behalf of Matrix.
ii) Mr Jonathan Putsman. At the material time, Mr Putsman was Head of Property Legal at Matrix.
iii) Mr Nigel Peters. Mr Peters was employed at the material time by Royal & Sun Alliance Trust Company Limited ("RSA") as a Trust Administrator. RSA was acquired by The Capita Group plc on 17 May 2001. It subsequently changed its named to Capita Trust Company Limited.
iv) Mr Anthony O'Keeffe. He was and is employed by entities within the Capita group of companies (formerly the Royal & SunAlliance group of companies). He is currently the CEO of Capita Fiduciary Group Limited.
v) Mr James Kaberry. He was and is an IFA who introduced some of the investors to the investment based on Dockside. He now represents the interests of 49 investors who between them had around 13.73% of the Trust.
vi) Mr Colin Brooks. Mr Brooks is managing director of REALM Limited ("Realm"), a leading FOC operator. He has been in that position since Realm was incorporated in the latter part of 2001. Mr Brooks previously worked for some 14 years with MEPC PLC ("MEPC") in London on various retail development projects. In 1998, he was asked by MEPC to head up their in-house outlet centre management team and, in particular, to consider co-funding the acquisition and development of Dockside. Subsequently, MEPC decided to set up a discrete FOC management business which became Realm.
vii) Mr Paul Nicholls. He was at the material time employed by Matrix as Senior Asset Manager for the Matrix EZPUTS and was responsible for Dockside after completion of its acquisition.
viii) Mr Anthony Sutton. Mr Sutton is the Centre Manager at Dockside. He has held that position for over 6 years since October 2004.
ix) In addition, the Claimants relied on the expert evidence of Mr Ian Barbour (FOC valuation and commercial prospects/viability), Mr Daniel Parr (retail performance and scenario analysis) and Mr Jeremy Wessels (Guernsey law).
- The following witnesses gave oral evidence on behalf of the Defendants
i) Mr Ian Blake. He was previously employed by the Defendants for a period of 9 years from 1992 to July 2001. He was employed by the Defendants as a Partner in the Investments Team. He was the individual who had the conduct of the Dockside transaction on behalf of the Defendants at the time and was primarily responsible for providing advice and carrying out the evaluation of Dockside in 2000 and early 2001. Mr Blake left the Defendants to join Matrix shortly after the transaction completed. He remains employed by Matrix which has, for the avoidance of doubt, made it clear both to Mr Blake and the Defendants that he has been and is free to co-operate with the Defendants in any way he wishes. Although he was plainly the crucial factual witness, I should mention that the statement which he signed and which was served prior to the commencement of the trial was extremely vague and, in some respects, very unsatisfactory. In particular, it appears that it was prepared hastily and, surprisingly, without him having recourse to the underlying documentation including (it would seem) even the advice and Reports that he had prepared. Although he had since had full access to his files, no attempt was made to serve a supplemental statement from him or to fill in what seemed some obvious gaps. Furthermore, when he came to give evidence, it was plain that he had some difficulty in explaining why what had been done was satisfactory and competent.
ii) Mr Howard Richards. He qualified as a chartered surveyor in 1979 and is a fellow of the Royal Institution of Chartered Surveyors. He has been involved in investment transaction work since that date. He previously worked at DTZ and became an equity partner of the Defendants in 1994. He took over the Investment Team of the Defendants in 1998. At the time of the valuation in 2001 (and at all times since then) he had a general supervisory role over the Investment Team. Mr Richards had considerable experience. He was keen wherever possible to support the work that the Defendants (including Mr Blake) had done at the time and was resistant to any suggestion of shortcomings on the part of the Defendants. However he had little direct involvement in relevant events and therefore his evidence was in the event of marginal value.
iii) Mr Robert Scott. He qualified as a chartered surveyor in October 1997 and is a member of the Royal Institution of Chartered Surveyors. He joined the Defendants as a graduate in August 1996 starting out in the property management team. In around June 1997 he moved to DJ Finance (a wholly owned subsidiary of the Defendants) in which he worked closely with the Investment Team headed by Mr Richards. From June 1997 until July 2001, he worked very closely with Mr Blake. However, like Mr Richards, Mr Scott had little direct involvement in relevant events. He came to the project late and was only really concerned with assessing the location. Thus, his evidence was also of little assistance.
iv) Mr Peter Woolley. He began his career as an accountant at Coopers & Lybrand in September 1983. From November 1996 to January 2008 he was Finance Director of Freeport Plc ("Freeport"). In that capacity he entered serious negotiations between 1999/2000 with the vendors of Dockside for the purchase development and running of an FOC at that site.
v) In addition, the Defendants relied on the expert evidence of Mr Alan Sargent (FOC valuation), Mr Martin Farr (Enterprise Zone valuation) and Mr Gareth Bell (Guernsey law). So far as relevant my comments in relation to these witnesses are set out below.
- As I have mentioned, Mr Brooks worked for Realm and Mr Woolley for Freeport. Both were active in the FOC market at the material time as employees of two of the three operators that dominated the market; and both supported the Claimants' case as to:
i) The importance of spend and a proper analysis of spend when appraising and valuing a new FOC.
ii) The availability and use of "full" CACI retail analysis reports for that purpose. Both obtained them before purchasing a site or FOC.
iii) The maturity of the FOC market in 2001 and the dearth of new development opportunities.
iv) The absence of any boom in the FOC market in 2001.
v) The softening of yields for FOC properties in 2000/2001.
- Notwithstanding the absence of development opportunities, neither Mr Brooks nor Mr Woolley proceeded with Dockside. The former discounted it almost immediately on grounds that mirror what the Claimants say ought to have been included in competent advice from the Defendants. The latter pursued the deal for a period (although probably at a stage well before the Claimants' involvement) but, in the event, withdrew on the ground of price and, did so, at a stage prior to obtaining a full CACI report
Section B: EZ SCHEMES
- Enterprise Zones were established by the government in 1981 in order to encourage investment into deprived areas of the country with the aim of regenerating those areas. Each Enterprise Zone was administered by an Enterprise Zone Authority ("EZA"). In order to attract investment into the new Enterprise Zones, the zones were afforded a number of advantages. In particular, developments in the zones were subject to a simplified and accelerated planning process and expenditure on such developments received favourable tax treatment. These tax incentives took two forms: (a) relief from development land tax (which was abolished in any event in 1985) and, (b) the availability of 100% capital allowances for (qualifying) capital expenditure on the construction of commercial and industrial buildings within an Enterprise Zone. The availability of these capital allowances effectively reduced the net cost of investing in the construction of commercial and industrial buildings in an Enterprise Zone thus making such an investment more attractive than might otherwise be the case. As Mr Randall of Matrix explained, the capital allowances in effect provided a "buffer" which partly reduced or off-set the risk of investment because any losses on such an investment would have to exceed the value of the allowances received before the investment represented a net or overall loss. As this makes clear, the rationale for investment in an Enterprise Zone was still, of course, the expectation of making a profit. The availability of tax relief simply provided some comfort as regards the downside risk of making that investment.
- Generally, Enterprise Zone developments were of relatively high value, precluding the opportunity for individuals to make their own investments in them in the absence of some sort of investment structure employing unitisation. In this regard, one of two structures was habitually employed: either an EZ Syndicate or an EZPUT. In general terms an EZ Syndicate is structured as a trust for land in which each member will have an interest in the property purchased in the Enterprise Zone; an EZPUT is a unit trust scheme in which the trust acquires the property and each investor acquires units in the trust with each unit in turn carrying with it an entitlement to a pro-rata share in the underlying trust property. Whichever structure is employed, investors were required to retain their interest for at least 7 years in order to benefit from the capital allowances.
- A further point arises in relation to timing. In general, an area was only designated as an Enterprise Zone for a period of 10 years and capital allowances were only available during that 10 year period. However, where a person has incurred capital expenditure on the acquisition of an industrial or commercial building situated in an expired zone, that person is treated as incurring capital expenditure on the construction of the building, provided (i) the building was acquired from someone carrying on a trade which consisted, in whole or in part, of the construction of buildings with a view to their sale and (ii) the expenditure on the construction was incurred in the course of such a trade under a contract entered into before the Enterprise Zone designation expired. Thus the availability of capital allowances could be preserved even after the Enterprise Zone designation had expired if these two conditions were met. The second condition was met if a building contract was entered into before expiry of the Enterprise Zone designation. Such contracts became known as "Golden Contracts". Just such a contract was entered into here in relation to Dockside.
B2 The North West Kent Enterprise Zone and Dockside
- Dockside is located in the former North West Kent Enterprise Zone. The EZA for this zone is the South East England Development Agency ("SEEDA"). The Enterprise Zone designation for North West Kent expired on 9 October 1996. Nevertheless, the availability of capital allowances in respect of expenditure on Dockside was preserved by a golden contract. Thus, on 8 October 1996 prior to expiry of the Enterprise Zone designation, SEEDA entered into an agreement with Chatham Maritime J3 Developments Limited ("the Developer") for the development of Dockside. On the same day, the Developer entered into a building contract in respect of the building works required to develop Dockside with Chatham Maritime J3 Construction Limited ("the Contractor"). The broad effect of these arrangements was that the Developer was obliged to develop Dockside in accordance with the terms of the development agreement and would be entitled to a long lease (granted by SEEDA) on completion of the development. The building contract set out the specification and design of the FOC and, importantly, represented the golden contract which preserved the availability of capital allowances.
- These arrangements were put in place by SEEDA in order, in effect, to preserve the position as it was prior to expiry of the Enterprise Zone. The Developer and the Contractor were special purpose vehicles created by SEEDA. Until shortly before completion of the Dockside transaction both the Developer and the Contractor were wholly owned by SEEDA. Latterly, SEEDA agreed that the site would in fact be developed by Dockside Developments Limited ("DDL"), a company owned and controlled by a Michael Hewitt and Steven Reeves. As explained further below, SEEDA transferred the ownership of both the Developer and the Contractor to DDL. Save where it is necessary to distinguish between them, references to "the Developer" are to each of Chatham Maritime J3 Developments Limited, DDL and Messrs Reeves and Hewitt. The structure that was in fact put in place was as follows:
i) Capita, Matrix, the Developer and DDL entered into a Purchase and Development Agreement dated 5 April 2001 ("the PDA") pursuant to which the price payable by Capita to the Developer was £62,850,000.
ii) On completion of the PDA, the Developer procured that SEEDA granted Capita a long lease with a term of 155 years of the Dockside site for a premium of £4,000,000 (which sum was paid from the total price of £62,850,000) and a peppercorn rent.
iii) At the same time, the Developer covenanted with Capita that the FOC on the Dockside site would be constructed in accordance with the building contract. The development was to be carried out pursuant to the building contract by the Contractor sub-contracting the works to a building contractor, Galliford (UK) Limited, which provided a direct warranty in respect of the building works to Capita. Capita appointed the Defendants as its monitoring agent to monitor the progress of the development works.
iv) Immediately following completion, Capita granted the Developer a sub-lease of Dockside for a term of 17 years at an initial rent of £4,006,750 plus additional rent (or priority return) of £550,000 per annum. The priority return was payable as the first £550,000 of rent earned from the occupational tenants of Dockside after the deduction of the Developer's allowable expenses. Any priority rent that was deferred, attracted interest at the rate of 7.25%.
B3 The calculation of capital allowances
- As set out above, tax relief was available on certain qualifying expenditure made within an Enterprise Zone. Section 469 of the Income and Corporation Taxes Act 1988 ("ICTA 1988") provides in like terms to its predecessor (being section 354A of the Income and Corporation Taxes Act 1970) that ordinarily income arising to the trustees of a unit trust scheme will be treated as income of the trustees and not of the unitholders for the purpose of the Tax Acts and that, accordingly, the trustees will be regarded as the persons to or on whom allowances and charges are to be made. EZPUTs are exempted from this provision by virtue of regulations 3 and 4 of the Income Tax (Definition of Unit Trust Scheme) Regulations 1988 ("the 1988 Regulations"). Importantly, the effect of this is that the capital allowances were made available to individual unitholders in an EZPUT rather than being treated as available only to the trustee of the Trust (a concept known as "transparency"). Relief is only available in respect of expenditure that is attributable to construction within the Enterprise Zone ("Qualifying Expenditure"). Thus, in determining the relief to which an individual investor is entitled, an assessment must be made of how much of the purchase price being paid by the Trust (which is funded by the acquisition of units in the Trust by investors) is Qualifying Expenditure. Any part of the price attributable to the site of the building that falls outside the Enterprise Zone, trustee fees and any other non-allowable costs and expenses will not attract relief ("Disallowable Expenditure"). In most cases the level of Qualifying Expenditure can be ascertained by applying to the total purchase price the fraction:
[Diagram or picture not reproduced in HTML version - see original .rtf file to view diagram or picture]
Where A is the replacement cost of the building and B is the bare site value.
- As Mr Randall explained, the replacement cost of the building (A) is the estimated amount which it would cost to replace the building in order to have it available for occupation. This includes estimates of site works, professional fees and finance costs but not reclamation works which would enhance the value of the bare land. The bare site value (B) is also taken as at the date of purchase and is computed on the assumption that the site is cleared of buildings and works, access and services are available up to the boundary and planning permission is available for the type of development in question. The level of Qualifying Expenditure on Enterprise Zone transactions which were sponsored by Matrix ranged from 70% to 94%. In the case of Dockside, it was originally anticipated to be 84.09%. Thus, in practice, the fraction explained above will be applied to the total purchase price for a property located within an Enterprise Zone so as to identify that part of the purchase price which is Qualifying Expenditure and which will attract relief. In terms of individual investors, the fraction is applied to the cost of their units and this will identify that part of the cost of the units which will attract relief. Thus, if Qualifying Expenditure was assessed at 85%, then an investor paying income tax at 40% would be likely to receive tax relief of around £34 (i.e. 40% of £85) for every £100 invested by way of the acquisition of units.
B4 Loan finance
- In many EZ Schemes loan finance was available to investors to finance (in part) the cost of acquiring units. Loans provided in respect of EZ Syndicates tended to be on a non-recourse basis in that the loan was secured against the property being purchased and investors' assets were not otherwise at risk. In the case of EZPUTs, however, the loan finance was typically provided on a limited or full recourse basis, in that while the lending bank would take security in the form of a charge over the investors' units in the trust, the investors would be responsible for repaying their loans in any event (such that if the value of the units proved to be insufficient to discharge the debt then investors would have to fund any shortfall from elsewhere).
- EZPUTs are structured with the intention that periodic distributions of rental income to investors will be sufficient to cover the interest on any loans used to finance the acquisition of units and, further, will enable the outstanding balances on those loans to be reduced with a view to the loans being repaid in full on exit (after the 7 year lock in period) upon a sale of the property. Any sums over and above those necessary to repay the loans represent profits to investors on their investments. It is here that the availability of allowances and the "buffer" becomes relevant. Take, for example the case (not unlike Dockside) where the tax relief available on an investment of £100 is £34 and the loan is £67. Once the arrangement fee on the loan of 1% is taken into account, the investment is cash neutral for the investor but the investor has a liability to repay the £67 loan (which liability may be reduced by rents received). In effect, the investor replaces a tax liability (as to £34) with a property investment risk. Even if the loan is not reduced over the term of the investment, investors need the property to realise 67% of its acquisition cost in order to discharge their loans. Thus, on the facts of Dockside, if the acquisition cost is £62.85m, and open market value £48.15m, net proceeds of sale of approximately £42.11m were needed in order to provide investors with sufficient to repay their loans. Provided the open market value of £48.15m was correct, and assuming sale costs of, say, £1m, there was effectively a "buffer" of approximately £5m before investors would suffer a loss on exit. Plainly, if the proceeds of sale are insufficient to cover the outstanding loan liabilities then investors suffer a loss on their investments and are left with any residual liability to the bank.
- The Claimants say that the foregoing is important because it undermines the Defendants' refrain to the effect that the sole or main reason for investing was the tax relief. On the contrary, the Claimants say that the investment had to be a success in order not only for investors to secure a return on their investment but also to avoid a loss on that investment.
B5 The effect of allowances on purchase price
- The availability of capital allowances will often influence the purchase price that a particular purchaser will be prepared to pay for a property within an Enterprise Zone. The effect of those allowances will mean that, if the purchaser pays only the open market value of the property, then, once the allowances are taken into account, the net cost of the property will be below (and, indeed, perhaps substantially below) its true open market value. Thus, a purchaser might well be prepared to pay more than the open market value: how much more will depend on its view of the commercial viability of the property and the strength of the investment represented by it. As set out above, the availability of allowances operates in effect as a "buffer" against losses on the investment. How large a "buffer" a purchaser will require will depend on its view of the risk of the buffer being required. In general terms, the more confident the purchaser is in the investment proposition represented by the property, the more it will be prepared to pay with the result that the net cost of the property once the allowances have been taken into account becomes closer to its open market value. By contrast, if the purchaser is less enthusiastic about the prospects of the property then it will demand a larger "buffer" such that the gross purchase price it is prepared to pay will be closer to the open market value and the net cost (after allowances) will represent a greater discount to the open market value.
- The vendor will, of course, have its own view about the attractiveness of the commercial proposition that it is seeking to sell and will set its pricing demands accordingly. The stronger the investment proposition, the more able the vendor is to demand a purchase price which, after taking account of the allowances, produces a net cost that is closer to the open market value of the property.
- To take an example, if the investment proposition is viewed with confidence and the open market value of the property is £80, then the purchase price might be agreed at £100 on the basis the capital allowances will be available on 85% of the £100 (giving total relief of £34). This produces a net cost to the purchaser of £66 i.e. £14 less than the open market value. In this example, the available allowances of £34 are effectively "shared" between the purchaser (which receives £14 of benefit because it pays £14 less than the open market value for the property) and the vendor (which receives the remaining £20 of the allowances because it receives £20 more than the open market value of the property). By contrast, if the investment proposition is viewed as being more speculative, then using the same assumptions in the foregoing example as to open market value and qualifying expenditure, the purchaser might only be prepared to pay £90, producing a net cost of £59.40 (total relief being 85% x £90 x 40% = £30.60). At this net cost, the purchaser is purchasing at a discount of £20.60 to the open market value while the vendor is receiving only £10 more than the open market value of the property. In this example, the purchaser receives the greater share of the benefit of the allowances and secures a larger "buffer" in the form of a greater discount to the open market value of the property.
- For these reasons, and as Mr Randall explained, in structuring an investment into an Enterprise Zone, three figures are considered in conjunction with their associated yields:
i) the open market value of the property without the benefit of capital allowances;
ii) the gross value of the property with the benefit of capital allowances and purchaser's costs: effectively the purchase price; and
iii) the post-tax value of the property, being the net cost once capital allowances have been taken into account.
- What this reveals is that there is no particular magic introduced by the EZ structuring of a purchase of property: as with any other purchase of retail property, the value of the property is determined by its open market value and its commercial prospects, and it is the open market value and the view taken on the commercial prospects that then drives the particular considerations or facets of the structuring that arise from the EZ nature of the transaction.
Section C: FOCs
- In summary, a FOC is a shopping centre where the goods offered are sold at discounts to their original price of between 30% and 70%. The name "factory outlets" reflects their historical origins in sites adjacent to factories (one of the first schemes being next to the C&J Clark shoe factory in Street) and does not now accurately reflect their location or the buildings in which they are housed. By 2001 the FOC concept had developed such that FOCs tended to be purpose-built centres or "villages" with a wide-range of tenants, including some of the most well-known brand names from the high street selling discounted goods. In effect, there were two groups of tenants: high street retailers selling their own goods at a discount and specialist FOC tenants selling discounted goods. While the range of goods offered in FOCs is relatively wide, ordinarily planning conditions restrict the range to less than that offered on traditional high streets so as to offer a degree of protection to the latter.
- By 2001 there were 36 FOCs trading in the United Kingdom with several more under development and a number at the proposal stage. The market was dominated by three large operators namely McArthurGlen Group ("McArthurGlen"), MEPC Limited (which later became known as Realm) and Freeport. As I have already mentioned, Mr Woolley was the finance Director of Freeport from 1996 – 2008.
C2 Lease structure
- A novel, and, in this case, particularly important feature, of FOCs is the lease structure that they employ. Traditional high street shops and shopping centres generally employ a "rack" rent lease structure where a rent is agreed between the parties (usually with reference to comparable shops or centres) and paid quarterly in advance with five yearly rent reviews. By contrast, FOCs usually employ a turnover lease structure such that rent comprises two elements viz (i) base rent; and (ii) turnover rent which is calculated as a percentage of the turnover which the tenant earns at its unit. The rent actually paid will be the higher of the base rent and the turnover rent. The turnover rent is thus sometimes referred to as "top up" rent because it "tops up" the base rent. Ordinarily, base rent will be paid in advance and turnover rent in arrears. As a general rule, lease terms at FOCs will be shorter than on the high street or at other shopping centres and will usually be for 5 years. In addition to rent, tenants will be required to pay a service charge and a contribution to marketing and promotional costs (which is usually calculated as a rate per square foot subject to any other caps or terms agreed). Self-evidently, as a result of this lease structure the rent earned by the owner of the FOC will depend on the financial performance and success of its tenants and, in particular, the success both of the FOC and its tenants in attracting consumers to the FOC and persuading them to spend money there.
Section D: THE RELEVANT FACTS
D1 The Defendants' relationship with Matrix
- Prior to the Dockside transaction, Matrix had sponsored investments into at least 15 other EZPUTs and 25 EZ Syndicates. The Defendants were retained in at least 27 of these transactions as property adviser. Matrix and the Defendants had developed a close working relationship over the course of these transactions. In particular, a good relationship had developed between the team at Matrix, led by Mr Randall, and the Defendants, in particular Mr Blake. The relationship dated back to at least 1995 when Matrix instructed the Defendants to act as property advisers to an earlier EZ Property Trust in Sunderland. The Claimants rely in particular on a letter dated 16 February 1995 sent by Matrix to the Defendants (i.e. Mr Blake) setting out the scope of the Defendants' role in relation to that Trust (ie to advise both Matrix and the Trustee of that Trust "on all property related matters") and stating that the Defendants' work would include (amongst other things) "acquisition advice", "letting report" and a "valuation report". The Defendants countersigned that letter indicating their agreement. The Claimants rely on this letter to indicate generally what the Defendants' role was including with regard to Dockside.
- Save for their signed acceptance of the engagement letter on the first transaction in 1995 for the Matrix Sunderland Trust it would appear that the Defendants did not record their instructions in writing (other than in their reports) in respect of any of the earlier transactions or in respect of the Dockside transaction itself. The advice provided by the Defendants in respect of these earlier transactions took a similar form. The Claimants say this is relevant when it comes to considering the terms of the Defendants' retainer and the duties they owed in respect of the Dockside transaction. The existing close relationship between the parties, founded, as it was, on repeat instructions to provide similar advice in respect of Enterprise Zone property transactions, informed the negotiation and agreement of the retainer in relation to Dockside. In short, both parties knew what was expected of the Defendants and so the negotiation of the terms of the retainer could and did take place informally over a series of conversations between Mr Randall and Mr Blake. In addition to providing advice in relation to the transactions, the Defendants were also often responsible for introducing the transactions to Matrix. In every case, the Claimants say that the Defendants were not simply retained to provide a valuation of the subject property but to provide their "views and recommendations on the terms of the purchase".
D2 Negotiations in relation to Dockside
- Chatham is located in North Kent, part of Kent's largest urban area, the Medway Towns. Chatham is located approximately 35 miles to the south west of London and 10 miles to the north of Maidstone. The development was situated within the area of the Chatham Maritime Regeneration project which comprised a total of 350 acres in and around the former Royal Naval Dockyards to the north of Chatham town centre and on the west bank of the River Medway. The Developer was Chatham Maritime J3 Developments Ltd. The site comprised approximately 5.25 acres including the structure known as the Boiler Shop. The proposed development involved the construction of a factory outlet centre in and around the listed structure including a number of extensions which would, on completion, provide a total net lettable internal floor area of approximately 145,700 square foot with a minimum of 800 car parking spaces and the potential to increase to 1500.
- Although Matrix had been generally aware of the proposed development of Dockside, it was introduced formally to Matrix as a potential investment opportunity by Mr Blake in the latter part of 2000. It would appear that Mr Blake had himself been approached by the Developer's agent, Michael Brodtman of Insignia Richard Ellis ("IRE") specifically with a view to Mr Blake then presenting the project to Matrix with the aim that Matrix would then agree to put in place an EZ structure for the development. (IRE subsequently became CBRE but will be referred to as IRE for convenience.) Mr Brodtman and IRE were effectively seeking to sell the development to Mr Blake and his clients.
- Mr Blake presented the potential investment to Mr Randall at a meeting held in or around September 2000 and it was agreed that Mr Blake and the Defendants would carry out further discussions with the Developer and IRE through which the potential of Dockside would be explored. Pursuant to this agreement, the Defendants then explored both the investment and its structure with the Developer and IRE. The contemporaneous documents clearly show that the Defendants were heavily engaged in negotiating the proposed terms of the transaction with the Developer and IRE. The pattern was one of the Defendants formulating proposals, reporting back to Matrix on these and on the progress being made with the Developer and of the Defendants undertaking the negotiation of terms with IRE.
- The initial negotiations with the Developer envisaged that Matrix, as sponsor, would be entitled to a substantial fee of 7.5 %. On 5 January 2001, the Defendants wrote to the Developer setting out the expenditure covered by Matrix's fee of 7.5 % (including fees to independent financial intermediaries, its own sponsor's fee, site stamp duty, legal fees and property acquisition and valuation advice) and what was described as "the response of key financial intermediaries which Matrix have consulted." As to the latter, the Defendants stated as follows:
"Feedback From Financial Intermediaries
The feedback we have received supports our pricing of 6%. Whilst the factory outlet scheme presents an unusual and in many respects "real property" investment opportunity compared to other transactions there are risks, in particular:-
i) It is a speculative development and whilst a level of letting may be anticipated at practical completion there is no assurance of this at the time of funding.
ii) The scheme is being compared to existing successful developments such as the McArthur Glen and Freeport centres. However, the centre will not be managed by an operator who has an established track record and "pulling power" from operating a portfolio of centres to help secure tenants.
iii) The building is a listed structure which in the event that a factory outlet scheme is not successful will have minimal residual values.
iv) A lot size in the order of £66.8m is very large for a transaction funded with full recourse facilities.
Having regard to the feedback received from the market we believe the pricing structure is appropriate. It provides your client with a lower initial yield than anticipated for speculative developments but the unique characteristics of the development and opportunity for enhanced returns compensate for this. On balance, we are confident that the development can be funded but recognise it will not be an easy job and require considerable placing power."
A copy of this letter was provided to Mr Randall.
- Following further negotiations, the Defendants prepared draft heads of terms and submitted these to Matrix for its approval on 16 January 2001. The Defendants sent draft heads of terms to IRE later the same day. In summary these proposed:
i) The purchase would be by a property Enterprise Zone unit trust sponsored by Matrix.
ii) The proposed development would be of a FOC comprising not less than 145,000 net internal square feet with 100,000 on the ground floor and 45,000 on the first floor. The Developer would enter into an agreement with the trust to construct the development.
iii) The trust would acquire a long leasehold interest from SEEDA.
iv) The gross purchase price would be £66,800,000 less fees paid to Matrix resulting in a net price to the Developer of £61,790,000.
v) On completion, the trust would leaseback the entire development on a full repairing lease to another company, Dockside Factory Outlet Ltd, for a term of 15 years subject to a mutual break option on the 7th anniversary.
vi) The trust would receive rent of £4,006,750 per annum for a term of 7 years, the payment of which was to be secured by cash deposited by the Developer in an interest bearing account. In addition, the Developer would also pay a rent equal to the first £700,000 pa received from occupation leases.
vii) Matrix was to be granted an exclusivity period in which it could market the investment.
- Negotiations continued on the draft heads of terms throughout the remainder of January. These were conducted by the Defendants with the pattern again being one of the Defendants conducting the negotiations and reporting back to Matrix. It was inherent in the Defendants' role in negotiating the terms of the transaction that they were, at the same time, advising Matrix on those terms generally as regards the commercial prospects and attractiveness of the transaction and, specifically, as regards the purchase price/value. This advice included considering the capital allowances that might be available in respect of the transaction and, in this regard, the Defendants liaised directly with SJ Berwin.
- Given that the proposed structure of the transaction as an EZ Scheme envisaged the use of loan finance, Matrix took steps at an early stage to ascertain whether the Bank of Scotland ("the Bank") would be prepared in principle to offer the necessary funding. It was always envisaged that the Bank would need valuation advice before agreeing to lend.
D3 The Defendants' Research
- During this period, the Defendants carried out research with regard to turnover levels at other factory outlet centres with a view to assessing the likely rental income at Dockside. According to Mr Blake's written statement, Dockside was unusual and difficult to value. As set out in that statement, this was because Dockside was the only FOC in an Enterprise Zone; in terms of comparables, this was a "very young market"; there were some established FOC's at that time but many of them were still under construction; and it was not clear what the saturation point of the market would be. Further, according to Mr Blake's statement, it was not possible to get detailed letting terms in relation to other factory outlet centres because of the commercial sensitivity of the information. There was, according to Mr Blake, a further complication viz (and I quote from Mr Blake's statement):
"18 ….no single person had both the essential skills for doing this valuation, i.e. no-one had experience in valuing both FOCs and developments in Enterprise Zones. Had there being such a person, Drivers Jonas may, albeit reluctantly, have agreed to pass over the task to them, or more likely we would have to subcontract that person to help us in producing the valuation. However, there was no such person.
19. In essence, the valuation of this centre hinged on the viability of this development as compared to other FOCs. Drivers Jonas did not have anyone with specific retail background in FOCs but we recognised this and obtain reports from CBRE [i.e. IRE], who did have relevant retail experience. In any event, I struggle to think of anyone else who could have provided a valuation in the circumstances. The most relevant comparable information regarding rents being achieved at other FOCs was very sensitive and full details such as rent free periods and tenant incentives were very difficult to obtain and not available for the major FOC developments of McArthur Glen and Freeport."
- However, the Defendants did carry out certain research which can be summarised as follows.
Discussions with Mr Montgomery
- First, on about 19 January 2001 Mr Blake spoke on the telephone to a Mr Simon Montgomery who was a letting agent at Rapleys. Mr Montgomery had previously been with DTZ where he had been letting agent for MEPC and also the Whiteley Development. The Defendants' file note of that conversation records that Mr Montgomery told Mr Blake (amongst other things):
a. Turnover averages for Division 1 FOCs (Clarks, Bicester and Cheshire Oaks) were between £300-£450 per square foot.
b. Turnover averages for Division 2 FOCs (Swindon, Bridgend, Ashford, Braintree, Freeport, Gunwharf (anticipated) and Whiteleys (expected)) were between £250 - £300 per square foot.
c. Turnover averages for Division 3 FOCs (Clacton, Ebbw Vale, Stoke Freeport and Yorkshire Outlet) were under £250 per square foot.
d. Cash incentives are generally required or rent free periods.
e. To induce an international name such as The Gap, Polo and Nike to take units of approximately 10,000 square foot a budget figure would be £1 million.
f. UK tenants taking typically 1,000-2,000 square foot units are today commanding incentives in the order of £80,000, a year ago £140,000-£150,000.
g. Marketing was generally in the order of £250,000 - £300,000 per annum. Maximum recovery from tenants is generally in the order of £1.50 per square foot. This usually creates a shortfall.
h. It is a "fickle market".
- Shortly thereafter, Mr Blake had a meeting with Mr Montgomery. The Defendants' file note of that meeting records (amongst other things):
i) Mr Montgomery agreed that the catchment demographics for Dockside were attractive and that a target rent of £27.50 per square foot (base rent and turnover) was realistic.
ii) Mr Montgomery was of the view that the market had become more competitive and that turnover percentages which were traditionally 12% had been reduced to 10%. Big traders often have turnovers of only 5%-6% and Nike have no turnover.
iii) Mr Montgomery stated traders liked to deal with managers who knew their business.
iv) Mr Montgomery warned about the potential problems of trading on more than one floor.
Investigations by Mr Perry
- Second, Mr Perry contacted the letting agents for a number of FOCs to obtain information. Mr Perry was at the time about 22 years old and employed by the Defendants as a graduate trainee; but he did not have any professional qualifications. Mr Perry did not give evidence. However, Mr Perry's note of these calls indicates (amongst other things) conversations with letting agents of the following FOCs and the advice received.
i) McArthur Glen Centres (Ashford, Bridgend, Cheshire Oaks, Derby, Swindon, York): quoting terms are the greater of a base rent of £30 psf or 13% of turnover.
ii) Freeport Leisure Centres (Braintree, Castleford, Fleetwood, Hornsea, Talke and West Calder): quoting terms are the greater of £25 psf or 15% of turnover.
iii) Mr Sargent at Colliers CRE who was involved in the valuation of FOCs including the Freeport portfolio. His remarks included that base rents range between £15-£25 psf and that turnover rents can range between 7.5% - 15% of turnover. He also stated: "The market has become increasingly competitive with the UK nearing saturation point… diversification such as the incorporation of leisure centres has been found to benefit factory outlets….." [I should mention that Mr Sargent was the expert instructed to give evidence on behalf of the Defendants in the present case. I refer to that evidence below.]
iv) MEPC FOCs (including Bideford Street, Kendal, Loch Lomond, Royal Quays and Doncaster). The quoting terms are the greater of £20 psf base rent or 12% of turnover – 13.5% inclusive of service charges etc with the exception of Street where the base rent is £30 psf.
v) Guinea Group and Rocheagle FOCs (Clacton, Jacksons Landing, Hartlepool, Festival Park, Ebbw Vale and a number of smaller schemes including Wilton Village). The quoting terms are the greater of £20 psf base rent or 10% of turnover.
vi) Bicester FOC: The quoting terms are the greater of £40 – 45 base rent or 12.5% of turnover.
vii) Brighton Marina: quoting rent of £20 psf or 10% of turnover.
viii) Hatfield Galleria: quoting rent of £25 psf base rent or 10-12% turnover (Mr Perry noted that this was an unusual scheme as it included leisure uses and some full price retail).
ix) Ramsgate Boulevard: This was in course of construction with completion anticipated by Easter 2002. Quoting terms were the greater of £15-16 psf base rent or 10% of turnover with 3 months rent free.
x) Whiteley Village Southampton: This FOC was newly opened in November 1999 with 85% occupancy in 2001. According to Mr Perry's note, the centre was "yet to fully establish". Quoting rents are the greater of £15 psf base rent or 8-12% of turnover.
- On the basis of this information, Mr Perry produced various tables comparing the data broken down into three main sections viz premier centres (turnover £300 psf plus), successful centres (turnover £250-£300 psf) and secondary centres (turnover under £250 psf).
Discussions with IRE
- Third, the Defendants sought information from IRE. In particular, on 23 January, Mr Blake had a meeting with Mr Brodtman and Ms Louise Songeur who was an Associate Director of the City Centre Retail Team at IRE. According to the Defendants' note of that meeting, there was a general discussion of rental levels at various FOCs including at Ashford (where Aroma took a lease at a base rent of £30 psf) and Gunwharf which was due to open for trading in spring. Mr Blake was told that the minimum base rent there was £15 psf with a maximum inducement of no more than 6 months rent although by that time the anchor tenants had already been secured and the terms of their incentives were not clear. Following that meeting, IRE sent to the Defendants under cover of a letter dated 25 January 2001, a copy of report dated 23 November 2000 which they (i.e. IRE) had previously obtained from a company called Illumine. This contained certain demographic and consumer expenditure data potentially relevant to Dockside. In addition, it appears that at the meeting on 23 January, Mr Blake must have asked Ms Songeur to provide written comments of IRE's view of the letting prospects of Dockside. These were set out in IRE's letter to Mr Blake dated 31 January. In that letter she commented on what she described as various "particular attractions" of Dockside including:
i) Location ("…..readily accessible from A2/M2. Its catchment includes large areas of dense urban population and the 60 minute drive time area includes much of south and south east London as well as most of the urban areas of Kent").
ii) Immediate environment ("The Boiler Shop is adjacent to attractive areas of nature, including an active marina and adjacent to interesting historic attractions and a significant potential leisure development. It will be served by a large car park and linked to town centres and the railway station by a regular bus service").
iii) Competition ("Braintree and Ashford have both been extremely successful…These developments have both attracted a significant number of tenants and the strength of demand from retailers suggests substantial unsatisfied demand that would be available for Chatham").
As to the proposed average rent of £27.50 psf leading to a total rent of just over £4 million pa, Ms Songeur's letter stated: "….subject to analysis of the detailed configurations of the development we would expect this to be achievable." Reference was also made to (lower) rentals achieved at other FOCs and the potential necessity to pay capital contributions and "key money". The letter concluded:
"We believe that the Boiler Shop is well suited to its future use as a factory outlet centre and that there is strong retail demand for such proposals. The size, configuration and location of the development would appear to have been well considered and we would expect the scheme to be highly attractive to retailers in current market considerations."
Discussions with Messrs Lyons and Jacobs
- Fourth, on 25 January 2001 Mr Blake (together with Mr Randall and representatives from Dockside) met representatives (Mr Lyons and Mr Jacobs) of a company called Bed & Bath Works who were traders at a number of other FOCs and were, they said, interested in investing in Dockside. According to the Defendants' note of that meeting, they also offered assistance in particular with regard to marketing and teaming up with people that they said they knew, some of whom would take space others of whom could operate the centre. In particular, they indicated that of their immediate trading contacts, they would be able to secure lettings of at least 20,000 square feet; they also said they had contacts with other traders that they knew well that would expand this further.
- Mr Lyons and Mr Jacobs also told Mr Blake that they would take space in Dockside for Bed & Bath Works. Their unit requirement was from 3-5000 square feet. They said that they would prefer a base rent of £15 psf rather than £25. This was followed by a general discussion with regard to rents. Mr Blake explained that the Defendants' exit rent assumption was £27.50 psf on ground floor and 75% of this at first floor level. Mr Jacobs said that they were "comfortable with this assumption". Furthermore, he was more relaxed about trading rates at the first floor when he recognised there was a reasonable level of space which would create its own and attractive trading environment and could accommodate, for example, the food court which would draw people to this level. According to the note, both Mr Lyons and Mr Jacobs were "very enthusiastic about the building"; they thought that the structure was interesting and a good advantage for a shopping environment; they were very interested in the historic dockyard and the alternative activity and leisure destination that Chatham provided alongside the factory outlet scheme; and both thought that the location was good now that road infrastructure was in place. Mr Jacobs' parting comment was apparently "that it was a better location than Ashford".
Information from the internet
- Fifth, in addition to the above, it appears that the Defendants probably also had available or obtained information from other sources including the internet both as regards demographics in the vicinity of Chatham and the state generally of the FOC market. This included one report from the internet "The Factory Outlet Phenomenon" dated 28 June 2000 and apparently downloaded on 2/2/2001 which contained data from the UK showing both total number of FOCs and total floor space over the period 1992 – 2000, other data from the USA and commentary generally with regard to the FOC market. The recap in that report stated: "Increasing competition between existing and planned sites in the UK in maturing market close to saturation". A similar internet report from "Retail Week" apparently downloaded by the Defendants from the internet in October 2000 had a headline: "Factory outlets worth £1 billion as sector nears saturation" and, in the body of the report, similarly stated: "Retail Intelligence forecasts that the UK market will shortly reach saturation and the focus of development will shift to mainland Europe".
Investigations as to the status and experience of the Developer
- I should also mention that about this time, the Defendants made certain investigations as to the status and experience of the Developer including the owner of the company, Steven Reeves. They appear to show (amongst other things) that Mr. Reeves had developed a detailed understanding of the factory outlet shopping centre and its role as a destination and had been involved in the development of 7 projects around the UK.
D4 The Bank of Scotland
- During this period, the Defendants and Matrix were both in contact with the Bank. In particular, the Defendants' views as to Dockside's value and prospects were set out in a document sent by Mr Blake to the Bank on 26 January 2001. The document is divided into four sections: Location Summary, Demand Considerations, Income Commentary and Appraisal Commentary. It assumes rental levels after 7 years to be approximately £3,630,000 capitalised at an initial yield of 7%. It considers this to be "conservative" and to be based on a number of assumptions including rent across the ground floor of £27.50 psf and on the first floor of 75% of that and an exit value net of purchase costs at approximately £49,000,000 or £336 psf. A range of rental values was included from £22.50 psf overall to £35.00 overall psf.
D5 Mr Blake's Memorandum dated 31 January 2001
- On 31 January 2001, Mr Blake produced a Memorandum and a set of documents containing what were described as the Defendants' "draft appraisals and supporting information". These documents were prepared for submission to and approval by the Defendants' Valuation Panel.
- The Defendants' panel process was described by Mr Richards in his witness statement as follows:-
"DJ (i.e. the Defendants) has a robust panel process in respect of all valuations. Each panel consists of two people, usually a Partner and an Associate, but sometimes two partners. The job of the panel is to review the valuation and decide whether it is realistic and reasonable. In general terms, the surveyors who undertake the valuation would provide to the panel their valuation figures and perhaps a draft valuation report. A meeting between the panel and the valuers is then held where the valuation is discussed and challenged as necessary. The meetings would generally last around half an hour.
What was ordinarily produced as a result of the panel meeting was a single sheet of paper, including the name of the producer, the term, the valuation and the members of the panel.
In terms of the importance of the panelling process, it is rare that the panelling process would lead to an alteration in the valuation. Indeed, I cannot recall an instance of an individual transaction such as Chatham where the valuation changed as a result of the panelling process, although it may have happened where you were dealing with a large portfolio of a variety of different properties. DJ had well trained staff carrying out precise valuation procedures and it should not be seen as surprising that the panel process did not lead to alterations of valuations."
- The Memorandum dated 31 January 2001 was addressed to Chris Matthew and Rob Colley. It comprised five sections.
- Section 1 was "Appraisals for Valuations". The Memorandum stated: "We will be required to produce a valuation report addressed to the investors and bank". A brief explanation was given as to the structure of the proposed deal. The Memorandum stated:
"A valuation is required with the benefit of enterprise zone allowances and without the benefit of enterprise zone allowances. The purchase price and therefore valuation with the benefit of enterprise zone allowances is £66.8m inclusive of purchase costs. Our indicative value of the development without the benefit of enterprise zone allowances that has been reported to the bank and Matrix is £50m."
- The attachment to section 1 contained a brief description of Dockside and a summary of the purpose of the appraisal status, assumptions, limitations and restrictions including the following:
"THE BOILER SHOP, CHATHAM MARITIME
The property comprises a Grade II* listed building dating from 1850s. The property has outline planning consent for the refurbishment of the building as a factory outlet centre comprising approximately 145,700 sq.ft NIA retail. The retail would be on two floors with approximately 100,000sq.ft on the ground floor. Approximately 800 car parking spaces would be provided initially, increasing to 1,500 in due course. The property occupies a very prominent position at a major junction to the south of the Medway Tunnel. Associated development is uncertain but may take the form of a cinema etc.
Purpose of Appraisal:
Indicative appraisal for potential acquisition by a client of DJ.
Draft – indicative only and subject to a number of assumptions set out below. Our appraisals are very sensitive to changes in inputs as illustrated in our sensitivity analysis.
The only information provided has been in the form of investment particulars prepared by Insignia Richard Ellis – no floor plans have been provided. Property has not been inspected. We have assumed that the property is complete and available for occupation. We have therefore assumed that all necessary (planning, listed building regulations etc) have been obtained.
No investigations have been undertaken to verify the proposed developments on adjoining sites. This will be important when looking at the sustainability of the location.
Brief information has been provided by IRE on other factory outlet centres to substantiate some of the values they have noted in their particulars. This information has been taken at face value, and IRE will provide further and more detailed information in due course if the purchase goes ahead. Our appraisal and sensitivity analysis is for the completed centre and our appraisals take no account of any development costs, either on or off-site.
Limitations and Restrictions:
This appraisal has been prepared based on limited information and is subject to a number of special assumptions. "
- In addition, there was included in the attachment to section 1, a table showing various calculations which indicated an appraisal figure on exit of £50 million. This figure was based on a gross income of £3,628,625, a yield of 7% less costs of 5.75%. This calculation and the figure of £50 million seems to me likely to have been the basis of the £50 million indicative value referred to in section 1 of the body of the Memorandum. However, when Mr Blake gave evidence he had no recollection of this and the Defendants' position was that this was not, or not necessarily, the case. I was somewhat baffled by this because it seems to me that the documents are quite clear. The explanation may be that the table in the attachment to section 1 appears to be based upon calculations projecting rental growth based on turnover of £343.17 and then discounted back to 2001 prices, an exercise which the Defendants accepted was inappropriate.
- Section 2 set out indicative values assuming different income levels in an attached table :
||Value (net of costs at 5.75%)
The notes to that table show various assumptions including a 5% income void, and a net expenditure shortfall of £182,125. The final note states:
"A more conservative yield is assumed for a lower rental value to cover the event that the centre does not achieve the target income of £27.50 psf. This does have the disadvantage of valuing the income conservatively if the centre is still part let but trading well, not long after opening."
- Section 3 related to the proposed management of the factory outlet in particular the appointment of a leasing manager (who was to be appointed shortly) and retail manager (who was to be appointed approximately 6 months before the centre opened). According to the note, the Developer (Mr Reeves) was intending to appoint Mr David Allen of McArthur Glen. Sections 4 and 5 enclosed a note to the Bank of Scotland with background information and other meeting notes with IRE, Mr Montgomery and Messrs. Lyons and Jacobs that I have already referred to.
D6 The Defendants' Valuation Panel
- As I have stated, this Memorandum and attachments were prepared by Mr Blake for submission to the Defendants' Valuation Panel. However, there was no evidence and no documents were produced by the Defendants to show what, if any, consideration was actually given by the Valuation Panel to this particular appraisal. In particular, there were no minutes or other contemporaneous record of any meeting of the Valuation Panel or of any decision which they might have taken. Mr Richards' evidence was that the panel for Chatham consisted of Rob Colley and Chris Perry and that the panel meeting would be likely to have taken place sometime before 21 February 2001. No satisfactory explanation was provided by the Defendants as to the absence of any documentary record in relation to the valuation panel process for Dockside. At a very late stage of the trial, the Defendants produced certain guidance notes relating generally to the Defendants' panel review process. These indicated that for capital valuations above £50 million and rental valuations above £2 million pa the panel should have consisted of a minimum of two partners in each case one from list 1A and one from list 1B. Mr Colley was a partner on list 2A but he was not on either of the stipulated lists. Mr Perry was not a partner and not on either list. Thus, even on the basis of Mr Richards' own evidence, it would seem that the Defendants' own guidance notes with regard to the valuation process were not followed.
D7 Further Negotiations
- Initially the investment was to be in the form of an EZ Syndicate as opposed to EZPUT. This was later revised during negotiation in February 2001. The gross value of the investment had until that point been placed at £66.8m. This figure was negotiated down by Mr Randall and Mr Blake at a meeting with the Developer and IRE sometime in mid-February 2001. (I should mention that there was some uncertainty as to whether Mr Blake was present at that meeting. This does not seem a crucial point but so far as may be relevant, I accept the evidence of Mr Randall and Mr Putsman that Mr Blake was probably present.)
D8 The Draft Short-Form Valuation Report
- On 21 February 2001 the Defendants wrote to Matrix enclosing what was described as "our short form valuation certificate for the Chatham Trust without the benefit of Enterprise zone allowances." The covering letter continued: "As noted in the valuation certificate our full report including the basis of valuation and definition of open market value will be forwarded in due course". The document attached to that letter carried the header "The Boiler Shop – Chatham Maritime Draft short-form Valuation". I shall refer to this as the "Draft Short-Form Valuation Report". It was four pages long and contained 3 main sections, viz (1) Introduction; (2) Valuation and (3) Main Assumptions. The most important parts were as follows:
1.1 Drivers Jonas has been asked to prepare a valuation of The Boiler Shop, Chatham Maritime, on the basis of various assumptions, which are set out in this short-form report. A full valuation report will be provided in due course when requested.
The report has been prepared for the benefit of the Matrix Chatham Maritime Trust (the Investor) and Bank of Scotland (the Bank). The valuation is required for loan security and investment purposes………
Basis of Valuation
The basis of the valuation is Open Market Value (OMV), defined in the RICS Appraisal and Valuation Manual (the "Red Book"). The definition of OMV will be included in the final report."
At this stage in the investment structuring process, we have been requested only to supply a short-form report, which summarises our opinion of value and our main assumptions. Our final report will include full valuation, property description, approach and methodology, valuation commentary, basis of valuation and limitation sections. It will also contain an appendix entitled sources and verification of information, which will formally set out the information we have relied on and the enquiries we have made."
- The stated assumptions included the following:
(i) The initial guaranteed rent would be £4,006,750 for the first 7 years plus additional priority rental income of £550,000 from the first net rents received from subtenants.
(ii) The Scheme would be 50% let at year 2½ building up to 95% at year 7.
(iii) Catch-up payments would be made between years 2½ and 4 after which time the Purchaser would receive a straight £550,000 per year in additional rent.
(iv) At year 7 the Scheme would generate an estimated rental income of £3,629,000 at the then 2001 values, equivalent to £27.50 per sq foot on the net lettable area of 131,950 square feet. Lettable areas have been estimated on the basis of 100% of the lettable retail area for the ground floor and 75% for the first floor.
D9 Promotion of the scheme: The Information Memorandum
- Alongside the negotiations referred to above, Matrix took steps to draft (with the assistance of SJ Berwin and the Defendants) an IM for issue to individual investors. The drafts of the IM were prepared based on the heads of terms agreed by 11 February and on the basis of the Defendants' advice. A substantial part of the text for the draft IM was provided by the Defendants on 2 February 2001. This addressed the location of Dockside, the site, the proposed development, the market for FOCs, competing centres, tenure and planning permission. This wording was then incorporated into the draft IM prepared by Matrix which, at this stage, was working on the basis that the investment would be structured as an EZ Syndicate rather than an EZPUT. The draft IM proceeded on the basis of the Defendants' advice as to yields, rents and value/purchase price. By the time of the next draft, the EZPUT structure had been adopted with Royal & SunAlliance Trust Company Limited ("RSA") as the proposed trustee.
- On 16 February 2001 the Defendants provided Matrix with a section for the draft IM dealing with rental and capital values. This set out details of what the Defendants described as comparable FOCs, including Ashford and Braintree, and advised that turnover rents at such centres were in the region of £27.50 to £30.00 psf. As to yields, this draft referred to yields achieved at other centres of 5%, 6% and 6.5%. Having incorporated the material provided by the Defendants, Matrix issued what was described as a "probable penultimate draft" of the IM to the Defendants, SJ Berwin, RSA and the Bank on 19 February 2001. Draft Verification Notes were also prepared at this time. The Defendants were asked to verify, among other things, what was said about the investment summary, the details relating to Dockside, the yield to investors, the market for FOCs, demographics, rental and capital values, competing centres, location, communications, the Enterprise Zone and the site, the property, and planning and the section 106 agreement. The Defendants completed and returned the Verification Notes as they applied to them on 20 February 2001. The February IM was finalised on 22 February 2001 (after receipt of the Draft Short-Form Valuation Report) and thereafter distributed by Matrix to investors and IFAs.
- As promoted, the investment scheme in relation to Dockside envisaged (in summary) the following:
i) The Scheme would take the form of an EZPUT.
ii) The Trust would purchase a 155 year leasehold of the Dockside site from the Developer starting from 29 September 1996.
iii) The Trust would lease back Dockside to the Developer on a non-occupational and full repairing and insuring basis for a term of 17 years subject to mutual break options on the 7th and 12th anniversaries of purchase.
iv) The Developer would pay the Trust a guaranteed rent for the first 7 years amounting to £4,006,750 per annum, payable quarterly in advance (which would be supported by a cash deposit charged to the Trust).
v) The Developer would pay an additional rent to the Trust (by way of priority return) for the first 7 years of £550,000 from the net sub-lease income with payments deferred until the sub-lease income exceeded non-recoverable expenditure.
vi) If the break option was not exercised the rent payable from the 7th year was to be 95% of net income (after annual irrecoverable operating costs) quarterly in arrears.
vii) The Developer would deposit the capital sum of £4,000,000 in an interest bearing escrow account to be used to fund the costs of tenant inducements, marketing, advertising and letting the FOC.
viii) The Developer would be responsible for the management of the FOC during the period of the lease.
ix) The Developer would appoint a Leasing Manager and a Centre Manager.
x) Dockside could be sold after the 7th anniversary via the grant of a long lease following the passing of an extraordinary resolution at a general meeting of investors.
xi) Investors could fund part of their investment in the Scheme by way of a loan to be provided by the Bank.
- Investment examples were provided in the February IM which illustrated how the investment might work. In summary, an investor making an investment of (say) £100,000 was anticipated to be able to receive tax relief in the form of capital allowances on Qualifying Expenditure of £33,636. Thus, the net cost of the investment would be £66,364. On an investment of £100,000 a loan of up to £67,000 was available. While the availability of the tax relief (if obtained) thus generated a modest initial cash surplus of £636, this carried with it, of course, a liability on the part of the investor to repay the loan of £67,000. It was envisaged that the interest on the loan and some capital repayments would be funded by the investor's share of the income of the Trust (in the form of rents) such that as at year 7 the outstanding liability on the loan would be either £54,169 or, if the priority return was received, £47,887. Thus, in order to discharge the loan at the end of year 7, the net proceeds of sale of Dockside would have to be such so as to meet the remaining indebtedness to the Bank. If the net proceeds of sale were insufficient, then investors would have a remaining liability to the Bank (and would suffer a loss on the investment).
- The February IM invited applications for up to 62,850 units of £1,000 each. The minimum investment required was £5,000 (5 units). Applications were made by way of Application Form (which was included in the February IM). The Application Form provided that the application for units was made on the terms and conditions of applications for units set out on page 28 of the IM and on the terms of the Trust Deed. It was intended that the investment would take place in the 2000-2001 tax year, such that it would need to complete by midnight on 5 April 2001 (the "Closing Date"). The terms and conditions of applications for units included:
i) At clause 5, a provision that Matrix, as Sponsor, would determine whether an application was valid in its absolute discretion and reserved the right not to accept any application.
ii) At clause 7, a provision that if, by the Closing Date, valid applications for less than 52,850 units had been received then no applications would be accepted. (The figure of 52,850 appears here rather than 62,850 because Matrix itself agreed, if necessary, to underwrite 10,000 units at a cost of £10m such that if applications for 52,850 units were received then (with such underwriting) the trust would be fully capitalised.)
- The February IM stated that the Defendants had valued Dockside at (i) £62,850,000 with the benefit of Enterprise Zone allowances; and (ii) £51,000,000 without the benefit of Enterprise Zone allowances and inclusive of purchasers' costs. The Defendants approved and signed a set of Verification Notes by which they verified the accuracy of the contents of the February IM including the representations as to the matters referred to above. These included (i) the investment summary; (ii) the rental income that would be derived from Dockside; (iii) the estimated investment yield that would be returned to investors in the Scheme; and (iv) the location of Dockside, applicable demographics, comparable and competitor factory outlets.
- Shortly after the IM had been issued, the Defendants confirmed their advice as to rental and capital value in a letter to SEEDA, copied to Matrix, dated 2 March 2001. This reiterated the advice that the rent that was achievable was between £27.50 and £30.00 psf and stated:
"The initial rent may be analysed as £27.50 psf overall or approximately £25 psf at first floor and £30 psf at ground floor. The analysis is complicated however as the food court is likely to be located at first floor and these units, at other centres, generate above average turnover rents."
- In terms of capital value, the Defendants repeated the view that the value of Dockside without the benefit of the capital allowances was £48.5m net of costs (£51m including the costs of purchase) and that the value with the benefit of the capital allowances was £62.85m. The Defendants explained that in valuing Dockside they had valued three elements of the valuation at different rates with the three elements being (1) the guaranteed income for the first 7 years of £4,006,750pa; (2) the additional priority rent of £550,000pa; and (3) the likely value of the centre after 7 years when the guarantee expired.
D10 The change in trustee and the move offshore
- The February IM stated (as was at the time of its issue envisaged to be the case) that the trust that would acquire Dockside would be based in the UK with an English trustee, RSA. The February IM was prepared on that basis, identifying the "Trustee" as "…..the Royal & Sun Alliance Trust Company Limited or the trustee for the time being of the Trust…" However, it became apparent towards the end of March 2001 that there was a potential problem with the structure of the investment. The problem arose because while the buildings comprising Dockside fell within the Enterprise Zone, part of the car-park fell outside it. The Claimants' transactional lawyers (SJ Berwin) advised that there was a risk that capital allowances might not be available as represented in the February IM because the relevant tax requirements would not be met (namely, regulation 4 of the Regulations). Accordingly, they advised that the Trust be moved off-shore so as to ensure that the relevant reliefs became available. Exporting the Trust in this way would ensure that capital allowances remained available to individual investors rather than being treated as available only to the trustee of the Trust. Having received this advice (and relying upon it) Matrix moved quickly to ensure that the Trust could move off-shore prior to the end of the tax year. This involved the following steps:
i) On or about 26 March 2001, another entity within Capita, agreed to act as Trustee in place of RSA.
ii) Capita executed the Trust Deed together with Matrix on 2 April 2001.
iii) A revised Information Memorandum, changed only to include Capita's details and reflect the fact that the Trust was moving off-shore was prepared and verified for submission to the Guernsey Financial Services Commission ("GFSC") through the completion and execution of Verification Notes including by the Defendants ("the March IM").
iv) However the March IM was never provided to any of the actual or potential investors before 5 April 2001 or thereafter. An addendum to the February IM was prepared so that investors could be notified of the amendments that had been made to the February IM which were reflected in the March IM. While I accept the evidence of Mr Putsman that it was intended that this addendum (which was created solely for the purpose of informing investors of the amendments to the February IM embodied in the March IM) would be distributed to investors at least after 5 April 2001, the Claimants were unable to locate any documentary evidence that the addendum was in fact sent to investors. As the Claimants accept, it therefore appears that investors were not informed at the time that the Trust had been moved off-shore. I accept the evidence of Mr Putsman that this was due to administrative oversight.
v) The GFSC duly gave its authorisation and consent on 4 April 2001.
- The Defendants relied on these arrangements and, in particular, the failure to circulate the March IM or the addendum to investors in support of their argument that neither Capita nor Matrix has locus to bring these proceedings. I revert to this aspect below.
D11 The Trust and Trust Deed
- On 2 April 2001 the Trust Deed was executed by Matrix and Capita. The express terms of the Trust Deed included the following provisions:
i) At clause 3.1 a term to the effect that the Trust shall be constituted by the receipt by or on behalf of Capita of the net cash proceeds of the issue of Units.
ii) At clause 4 provisions relating to the application of contributions to the Trust and, in particular, at clause 4.1 a provision that Contributions (defined as being, in effect, the sums subscribed by the investors) shall be applied and expended "in accordance with the Information Memorandum"; at clause 4.1.1 a provision that Contributions will be applied and expended in respect of the acquisition and development of Dockside in accordance with the proposals set out in the IM; at clause 4.1.4 a provision as to the expenditure of Contributions that are not applied as mentioned in clause 4.1.1 (on the acquisition and development of Dockside); and at clause 4.1.5 a provision providing the Trustee with a general power to apply and expend the Contributions in respect of "any other purposes".
iii) At clause 5.5.3 a provision to the effect that no units in the Trust will be issued unless valid applications acceptable to Matrix shall have been received in respect of not less than 52,850 units.
iv) At clause 9.2.1 a provision that the Trust shall terminate if Dockside is not acquired by the Trustee on or before 5 April 2001.
v) At clause 9.2.2 a provision enabling the Trust to be terminated by Extraordinary Resolution.
vi) At clause 14.1.4 a provision providing Capita with power to enter into, determine or vary in such manner as it shall think fit any contract relating to Dockside.
vii) At clause 14.2.3 a provision providing Capita with power to take such action as it shall think fit for the adequate protection of any part or parts of the Trust Fund (including seeking counsel's opinion and making application to the Court).
viii) At clause 16.2 a provision providing that Capita shall not be under any liability in respect of anything done by it pursuant to any direction, instruction, request or advice of Matrix.
ix) At clause 16.5 a provision providing that Capita shall not incur any liability other than in respect of a breach of trust arising from fraud, wilful misconduct or gross negligence on the part of the Trustee.
x) At clause 16.20 a further provision relieving Capita and any of its advisers from liability unless and to the extent that it is proven that the Trustee has committed fraud, wilful misconduct or gross negligence.
xi) At clause 26, a provision enabling Capita and the Trust Manager (Matrix) to vary the terms of the Trust.
xii) At clause 32, a provision providing for the governing law of the Trust to be the laws of the Island of Guernsey.
- Further, the Trust Fund was constituted, pursuant to clause 3.1 of the Trust Deed, by the receipt by the Trustee of subscriptions from individual investors whose applications for units had been approved by Matrix. Matrix was appointed as the Original Trust Manager pursuant to the Trust Deed. As is explained below, following completion, the Defendants were appointed as valuer and property adviser to the Trust and they performed this role until 2007 when they were replaced by DTZ.
D12 The Defendants' Report
- On 4 April 2001 by an email timed at 16.47 the Defendants provided what they described as their latest draft of their advice and valuation report to both Matrix and the Bank ("the Draft Report"). In the event, this version of the report was not amended further (save as to very limited typographical matters or highlighting, and the insertion of a short ratings section) and it was emailed by the Defendants again to both Matrix and the Bank under cover of an email timed at 17.26 referring to it as the final report on 5 April 2001 ("the Final Report"). The Final Report was also faxed to the Trustee by the Defendants on 5 April 2001. It is not in dispute that the Final Report was not received until after completion had occurred. Save where it is necessary to distinguish between the two, references below to "the Report" are to the Draft Report and the Final Report. The Report was addressed to both Matrix and Capita. The covering letter to the Report stated that the Defendants were "pleased to report with [its] views and recommendations on the terms of the purchase of [Dockside]"; and that the Report was confidential to Matrix and the Trustee and "[c]onsequently, no responsibility is accepted to any further party in respect of the whole or any part of [the Report's] contents". The contents of the Report effectively repeated the advice with regard to Dockside and its value that had already been provided by the Defendants prior to 4 April 2001 and, in particular, were consistent with the contents of the IM (as verified by the Defendants and which included text provided by the Defendants that was repeated in the Report) and the Draft Short-Form Valuation Report.
- After an executive summary (section 1), the Report set out a brief description of the location of Dockside (sections 2 and 3). At paragraph 3.5, the report stated:
"3.5 The Boiler Shop scheme to develop the factory outlet shopping centre will provide the catalyst for much of the development that is planned for the Dockside and Marina area, as it will attract many more people to the area."
Sections 4, 5 and 6 contained a summary of the size, features, ground conditions and development plans of Dockside. Section 7 contained an analysis of the factory outlet centre market generally, the demographics concerning Chatham, a comparison of rental and capital values with regard to other FOCs (based largely on the research done by Mr Perry), a consideration of other competing centres (in particular Braintree, Ashford and Portsmouth) and, finally, a discussion as to the likely market demand for Chatham. In particular, in terms of the FOC market, the Defendants referred (at paragraph 7.1) to data from the report from Retail Intelligence referred to above and stated: "This suggests that there is significant potential for further growth". As for Dockside itself, the advice included advice on catchment area that Dockside benefited from "a large catchment population for a factory outlet centre" which "demonstrates the importance of the newly improved road improvements to the area" and that "[w]hen compared with the UK as a whole the demographic profile of the 30 and 60 minute drive time populations are above average in terms of household expenditure, car ownership and the socio-economic profile". The Report also advised that the development of Dockside would act as a catalyst for further development in the area as it will "attract many more people to the area".
- As regards rents, the Report identified that established FOCs like Braintree and Ashford trade at an average turnover of approximately £275-£300 psf with the most successful centres trading at in excess of £400 psf. Turnover rents were said typically to average approximately 10% of turnover such that estimated rental income at "competing and comparable centres, such as Ashford and Braintree is therefore in the region of £27.50-£30.00 psf". Quoting rents for base rents at these centres (that is Ashford and Braintree) were said to be £25.00 to £30.00 psf. As against this, the Report identified that gross and net income at the Clacton FOC was just £15.00 and £12.10 respectively but advised that "the Clacton centre is not comparable to [Dockside] which is clearly demonstrated when the level of turnover achieved is compared with competing centres at locations such as Braintree and Ashford".
- Yields were addressed at paragraph 7.14 of the Report where it was advised that initial yields on sales of three other FOCs had been 6% (Bridgend), 6.5% (Swindon) and 5% (Cheshire Oaks) and that average turnover for these FOCs ranged from £260-£300 psf. Given the advice to the effect that Dockside was likely to achieve rental income of £27.50 psf it seems to me that (as the Claimants submitted) the clear implication or inference here was that the purchase yields for Dockside (of 5.75% on the guaranteed rent, 7.75% on the priority rent and 7% on the rent after year 7) were appropriate. As mentioned above, the Report also referred to the Clacton FOC and, identified that a purchase price reflecting an initial yield of 10.35% was being sought for that centre but that this centre was not comparable (and thus not relevant) to an assessment of Dockside. The Report went on to advise that Dockside would become a "first division" FOC (like Braintree and Ashford and behind the "premier" FOCs like Bicester Village and Cheshire Oaks).
- The Report addressed market demand at paragraph 7.23 where it stated that in addition to considering the location and demographic characteristics of Dockside the Defendants had discussed the development with letting agents and traders with experience of FOCs and from that they had drawn a number of conclusions. As will be seen later, the extent and appropriateness of this research is in issue. In any event, paragraph 7.23 then went on to advise that the catchment population and demographic characteristics were attractive for a FOC; the target rent of £27.50 psf was "felt to be realistic having regard to the quality of the location"; the historic nature of the building was attractive for a FOC; and letting agents expected demand from occupiers.
- Section 8 contained construction details including at paragraphs 8.10 – 8.11 a brief description of Dockside Developments Ltd., the experience of its owners, Michael Hewitt and Steven Reeves as well as Trevor Goff and their involvement in the McArthur Glen FOC at Swindon. In paragraph 8.11 it was stated: "Many of the original team from this project will be employed on the Boiler Shop". Sections 9, 10, 11 and 12 dealt respectively with tenure, rating, planning permission and the terms of the proposed underlease, rent security and the occupational leases.
- Section 13 contained an analysis of "market considerations". In particular, the report stated:
"13.7 Tourism and leisure uses help to enhance a location as a retail centre. Chatham Maritime is already established as a leisure destination with the Chatham Historic Dockyard currently attracting in excess of 100,000 visitors a year. The development of the adjoining site, which has Outline Planning Consent for a leisure scheme with a gross area of approximately 200,000 gross sq. ft, would further strengthen the appeal of Chatham Maritime.
13.9 The Development is to be operated by Chatham Maritime J3 Developments Ltd (the Tenant). The existing Directors of the company are experienced developers but do not have direct experience of operating factory outlet centres. They propose to appoint industry experts to act as Leasing Managers and Centre Managers. These appointments will be critical to the success of the development.
13.10 At the end of 1999 factory outlet centres accounted for sales of approximately 0.6% of total UK retail spending. In the USA a more mature factory outlet market accounts for over 2.5% of total retail spending, suggesting that the UK has significant potential for further growth. However, the rate of development will be substantially reduced in the future due to the impact of revised planning policy guidance and the presumption in favour of town centre retail development.
13.13 The Development is anticipated to achieve an average turnover of £275 psf once it is trading as an established factory outlet centre. The retail units are to be let on a 10% turnover rent, which therefore equates to a rental income of £27.50 psf. Enquiries to letting agents and factory outlet traders have confirmed that the target rent and anticipated turnover levels are realisitic.
13.15 The initial income of £4,006,750 pa is secured by a cash backed rent guarantee for 7 years from the completion of the purchase. To supplement the initial rent, investors are also to receive an additional priority return of £550,000 pa from income received from occupational tenants. Outstanding additional rent, which accumulates before the Centre is income producing, is to accrue interest at 7.25% pa. The seven year period of the rent guarantee will provide time for the Centre to establish itself and build up turnover income levels.
13.18 The development will provide a factory outlet centre in a geographical area that remains under-provided. Chatham Maritime and the listed Boiler Shop should prove an attractive and accessible environment for both retailers and customers, which will be further enhanced by the development of the adjoining leisure scheme. Whilst the centre at Clacton is currently being marketed off lower rents and an initial yield in excess of 10% it is not comparable to the Chatham Maritime
13.19 The occupancy costs of the proposed Development will be competitive compared to other factory outlet centres of a similar size. Only the factory outlet centres at Ashford and Braintree provide in excess of 11,613 sq. m (125,000 sq. ft) in the 60 minute drive time catchment area and no other schemes are proposed. The McArthur Glen factory outlet at Ashford is the closest competing centre, approximately 29 miles away. Chatham Maritime should compete well with Ashford as it is closer to the London conurbation and each scheme is located on different motorway routes out of London, the M2 (Chatham Maritime) and the M20 (Ashford)".
- Section 14 dealt with allowable expenditure. Section 15 was headed "Valuations" and contained (amongst others) the following paragraphs:
15.1 Drivers Jonas has been instructed to prepare a valuation of The Matrix Chatham Maritime Trust's (the Purchaser's) long leasehold interest in the Boiler Shop, Chatham Maritime. The property is in former North West Kent Enterprise Zone. We have prepared valuations on the assumption that the purchaser has the benefit of Enterprise Zone allowances and without the benefit of Enterprise Zone allowances…….
Sources and Verification of Information
15.6 We have relied on information contained elsewhere in this report on floor areas, tenure, planning and the nature of the transaction. We have carried out research into the current factory outlet letting and investment market, relying on published data and information from our own professional contacts……".
Section 15 then set out (in paragraph 15.11) details of other transactions that had been offered to the market and, in many cases, sold during that financial year. Section 15.16 contained a brief discussion (with examples) of post-tax yields for pre-let investments during that financial year (ranging from 7.5%-10%). Paragraph 15.18 stated:
"The agreed purchase price of £62,850,000 for the proposed Development and guaranteed initial rent will provide investors with a pre-tax yield of 6.375% and a post tax yield of 9.61%, assuming allowable expenditure at 84.15% of the purchase price and the maximum 40% marginal rate tax. However, investors are also to receive an additional priority return of £550,000 pa which will provide investors with a pre-tax yield of 7.25% and a post tax yield of 10.93%, assuming allowable expenditure at 84.15% of the purchase price and the maximum 40% marginal rate of tax. Nothwithstanding the strengthening of the market for Enterprise Zone investments the yield on the guaranteed and priority income is attractive when compared with those achieved for speculative developments in the previous financial year."
- The Report then stated the Defendants' opinion of the open market value of the long leasehold interest of Dockside with the benefit of Enterprise Zone allowances and on the basis of stated assumptions as being in the order of £62,850,000.
- Under the heading "Valuation Commentary", paragraph 15.23 referred back to sections 7 and 14 and stated: "From this knowledge and previous valuations…..we have made realistic assumptions on achievable rents". Paragraphs 15.24 and 15.25 set out the Defendants' assumptions:
"15.24 We assume that the scheme is 50% let at year 2 ½, building up to 95% at year 7. Making assumptions for non-recoverable expenditure we estimate that "catch-up" payments in addition to the guaranteed payment of £4,006,750 will be made between years 2 ½ and 4,after which time the purchaser receives a straight £550,000 per year, in addition to the guaranteed payment of £4,006,750.
15.25 At year 7 we assume the estimated rental value (in today's value) to be £3,629,000. This equates to approximately £25 psf overall or approximately £27.50 psf for ground floor space and £20.50 psf for first floor space. Alternatively it can be analysed as:-
- £27.50 psf overall before deducting an allowance for irrevocable costs and void units, or
- 95% of gross rental income received by the Tenant in the event that the purchaser does not terminate the lease and the development is sold with the benefit of the underlease. "
Paragraph 15.27 then stated:-
"On the basis of a straight rent per square meter or square foot (rather than a base rent plus turnover-related element) and the research we have carried out, we believe the assumed exit rent to be realistic, given our contention that the Chatham Maritime factory outlet centre will become a "first division" centre behind the "premier" designer outlet centres like Bicester Village and Cheshire Oaks."
The Defendants then stated their opinion that the current open market value of the long leasehold subject to the underlease of the tenant was in the order of £48,150,000.
- The investment in Dockside proved to be popular and by 3 April 2001 Matrix had received sufficient subscriptions to fully capitalise the Trust (indeed the investment was over-subscribed). Matrix wrote to Capita by letter dated 4 April 2001 (which was delivered by post and by fax) enclosing a completion statement and requesting that Capita give certain instructions detailed in the letter which would enable the requisite funds to be moved on 5 April 2001 to enable completion of the acquisition of Dockside to take place. By 15:50 on 5 April 2001, Capita purchased the long leasehold interest in Dockside, executed the Purchase and Development Agreement and other associated agreements and paid the Developer the purchase price of £62,850,000. The purchase costs were funded by the monies subscribed by investors (which were held by RSA as cash agent for Capita) and loan funds provided by the Bank. Funds were transferred by RSA and the Bank on 5 April 2001 at Capita's direction and held to its order pending completion which occurred later that day.
- It is important to note that a number of important issues remained unresolved until very close to completion on 5 April 2001. These included issues relating to the specification being provided by the Developer to Galliford, (the building contractors) as well as those concerning the actual measured square footage of the developed FOC and as to the ground conditions and potential contamination. The terms of the various transactional documents were still being discussed and negotiated until the afternoon of 5 April 2001. These issues had the capacity to prevent the deal from reaching completion.
- As from completion, (i) Capita became the headlessee of Dockside pursuant to the headlease granted by SEEDA for 155 years from September 1996; and (ii) Capita became the lessor under an underlease granted to the Developer for a term of 17 years subject to mutual options to terminate the lease at years 7 and 12. The underlease was to become subject to various occupational sub-underleases granted to the tenant retailers. Insofar as investors were concerned, those whose applications for units were successful received notification of this and a tax certificate which identified the Trustee and set out the capital allowances to which they were entitled in respect of the Qualifying Expenditure on Dockside.
D14 Events following completion
- Following completion, steps were taken to complete the necessary building works and prepare Dockside for opening. The building works were commenced and undertaken by Galliford. In addition to their role in relation to the transaction described above, and their appointment as Trust Property Adviser, the Defendants were also appointed as the Monitoring Agent of the Bank and Capita in respect of the building works at Dockside. This required them to monitor the works so as to protect the interests of the Bank and Capita. This role was performed by Mr Richard Close.
- The day-to-day management of Dockside was delegated by the Developer from the outset. Thus, IRE were appointed managing agent and joint letting agent together with David Allen Associates. Prior to the centre opening, Colin Wilding (who had previously been the retail marketing director of the Bluewater shopping centre) was appointed as Commercial Director of Dockside. The Defendants were the Trust Property Adviser and so were actively involved in decisions relating to the operation of Dockside, particularly when it came to letting units. The Defendants' role here was usually discharged by Mr Robert Scott. The Defendants' role is demonstrated, for example, by their recommendation to Matrix (for onward communication in Matrix's role as Trust Manager to Capita) that IRE and David Allen Associates be appointed.
- Alongside the building works, the Defendants, IRE, David Allen Associates, the Developer and Matrix attended regular meetings to discuss efforts to let units in Dockside. These took place between September 2001 and March 2003. Meanwhile, in 2002 Chatham Maritime J3 Developments Limited split its interest in the underlease such that it retained the beneficial interest but the legal interest was assigned to another company in common ownership, The Boiler Shop (Chatham) Limited.
- Dockside opened to the public on 2 July 2003. On opening it was only approximately 60% let. Adjoining attractions of the cinema and Dickens World did not open until much later ie October 2006 and Easter 2007 respectively. In the event it proved to be extremely difficult to let units at Dockside and for tenants to trade there successfully. The net rent actually received was as follows:
2006/2007 Confirmed data not available.
These trading figures were well below those which had been forecast by the Defendants in 2001. In his two statements, Mr Sutton (who was appointed Centre Manager at Dockside in October 2004 and has been in that position for over 6 years) set out his reasons for Dockside's poor performance.
- The Defendants disputed the reasons given by Mr Sutton for this poor performance. It was common ground that this dispute was not relevant to the Claimants' alternative claim for damages. However, the Defendants submitted that the reasons for the poor performance were relevant (i) to the Claimants' primary i.e. "total loss" case and (ii) to demonstrate that there is no link between the fact that Dockside is now worth less than the amount of the initial investment and the alleged negligence of the Defendants.
- In particular the Defendants submitted that the real causes of problems at Dockside can be categorised into two types – the external and the internal - both of which had a real and lasting impact on the success of the centre and were not foreseeable at the time the Defendants were advising in 2001.
- The alleged external causes were said to be as follows:
i) First, events in the world at large as led to the radically different economic environment in July 2003 when Dockside opened, compared with February to April 2001, when Dockside was launched, e.g. the events of "9/11"; the ensuing drop in rental values for retail tenants; the difficulties in the retail market leading to permanent discounts on the High Street (selling current stock at discounts), which put FOCs at a disadvantage as they were compelled to sell only 'past-season' stock at discounts. The Defendants summarised the foregoing as Dockside being a development which was 'conceived in a boom but born in a bust'. It seems to me that there are a number of short answers to this alleged "external problem". First, whilst, of course, the events of 9/11 are undisputable their impact on the UK retail market and, in particular, the FOC market was, at best, equivocal. Second, on the evidence before me, I was wholly unpersuaded that the mantra that Dockside was conceived in a boom and born in a bust had any real foundation. On the contrary, such evidence as there was indicated that the suggested "boom" was already beginning to wane well before 9/11. Third, whatever effects these events may have had, the evidence before me did not support the assertion that such effects were not foreseeable.
ii) Second, the delay to the progression of the other developments at Chatham (for which there was outline planning permission) which resulted in Dockside being a 'stand alone' entity for some time (until October 2006 when the Odeon Cinema opened and until May 2007 when Dickens World opened). Again, there is a short answer viz it may well be that the Defendants themselves did not foresee this delay but, in my judgment, that is their own fault. In any event, it is impossible for the Defendants to suggest that such delay was not foreseeable.
iii) Third, the practice of paying large premiums to tenants who were not 'anchor tenants'. It is possible that this unwelcome (for Dockside) development was precipitated by the strategy of REALM (and Mr Colin Brooks), which was, of course, designed to give REALM-managed FOCs an advantage. Again, there is a short answer viz there was no satisfactory or coherent evidence to suggest that there was no practice of paying incentives to tenants who were not "anchor tenants" or that such practice was not foreseeable. On the contrary, according to the note of Mr Blake's conversation with Mr Montgomery dated 19 January, it appears that Mr Montgomery told Mr Blake that quite apart from large incentives paid to attract an international name to take units of approximately 10,000 sq feet, he also told him that UK tenants taking typically 1000-2000 sq ft (i.e. non-anchor tenants) were commanding incentives of £80,000 a year previously £140,000 - £150,000.
iv) Fourth, the sum allowed to "fund the costs of letting the Centre" including the cost of incentive payments to tenants at £4,000,000 should have been enough. The Defendants noted that Freeport's appraisal allowed for less than this amount (£3,696,640). It was not sufficient due to these changes in market conditions. For the reasons set out below, I do not agree.
- As to the alleged internal causes the Defendants relied, first, on the failures of the Developer in the course of the managing and marketing of Dockside. The relevant facts can be summarised as follows. Within approximately a year of opening in July 2003 there was a succession of counterproductive events. In particular:
i) The marketing and promotion of the centre for the six months leading into summer 2004 was badly handled by the Developer.
ii) The Developer sacked its centre manager (Mr Colin Wilding) and one of its joint letting agents (Insignia Richard Ellis – IRE) by April 2004.
iii) The Developer dispensed with its other joint letting agent (David Allen / Allen Hodkinson) by September 2004.
iv) There was a three and a half month delay to the recruitment of Mr Wilding's replacement (Mr Sutton).
The Defendants submitted that it was quite clear that these adverse events in 2004 caused the progress of the centre, which had opened successfully and positively at 60% let, and which had performed well in the first quarter of 2004, to 'stall' at around the 80% let stage; and that from this point although the promotion and marketing were still being strongly criticised, the centre might have recovered and continued to progress, with the appointment of a new letting agent, Rohleder Lumby in October 2004. I accept that these adverse events certainly occurred although it is impossible to say whether they were the cause of the "stalling" effect suggested by the Defendants. In any event, it seems to me that they were in large part the result of an inexperienced Developer which (as I consider further below) the Defendants signally failed to highlight as a significant risk at the time they gave their advice in 2001 as they ought to have done.
- In the latter part of 2004, disputes with the Developer came into play, leading with a dispute over Capita's entitlement to the priority return. The dispute rapidly gathered pace and, as anticipated by Mr Nicholls, by January 2005 the Developer had introduced its demand for repayment for the cost of the Food Court into the mix. By February 2005, Mr Scott was warning that "fresh impetus" was needed to prevent a downward spiral. However a decision was taken apparently by Mr Randall to seek to resolve the priority return dispute. This "executive decision" from Mr Randall in February 2005 to not proceed with the Extraordinary General Meeting (EGM) (intended to obtain Investors' consent for raising bank funding for capital contributions) meant that securing Marks and Spencer ("M&S") as a much pursued and highly desirable anchor tenant, was put on hold until the priority return dispute was resolved. I should make plain that the Defendants expressly disavowed any suggestion that Mr Randall's decision was "wrong" or "negligent". It was one which, the Defendants accept, Matrix was entitled to take but it explains how, the Defendants say, the project "stalled". In the event, the expert determination (by Mr Dowding QC) was not received until October 2005. The determination was very substantially in Capita's favour.
- In the event, there was a delay in securing M&S as a tenant. The initial intention had been for M&S to open in April 2005, and this anticipation was accompanied by articles in the local press in April. The tenants at Dockside cannot have been unaware that M&S were supposed to be coming into Dockside – the delay to their arrival inevitably caused unhappiness amongst the tenants. Mr Sutton, the centre manager agreed that the delay to this tenant's opening (April 2005 to October 2006) had been "extremely deleterious" to the performance of the centre.
- Meanwhile, a further dispute arose as a result of the discovery in about July 2005 of a defect in the wording of the break clause in the head underlease. This was the responsibility of the Claimants' then solicitors, SJ Berwin. In short, the break clause provided that either Capita or the Developer could determine the lease at the 7th or 12th anniversaries. As drafted, however, if either party exercised this option the sub-underleases to the (retailer) tenants would also fall away. It was proposed that this defect could be resolved either by way of a variation to the underlease or by the assignment of the underlease from the Developer to Capita or a new company to be nominated by Capita. The Developer attempted in effect to hold Capita to ransom and demanded a payment in the region of £2.6m in order to agree to an assignment of the underlease. In the event the matter was resolved because the Developer was unable to discharge the liability determined against it as regards the additional rent by the expert determination, causing Capita to issue proceedings in respect of the unpaid rent against it. Ultimately, these were resolved in favour of Capita and the Developer was placed into liquidation. Capita then purchased the business and assets of the Developer from the liquidators on 25 March 2008. Finally, proceedings were commenced by Capita and Matrix against SJ Berwin in respect of the defects in the drafting of the underlease. These were resolved by way of settlement in June 2008.
- The Defendants submitted that the effect of these events was that instead of moving onwards and upwards from a good start in its first trading year, Dockside thereafter lurched from one crisis affecting its management to another; and that it is small wonder that the centre commenced a rapid downward spiral. Mr Nicholls, who was of course the person at Matrix with primary responsibility for Dockside, disagreed. He did not consider that the disputes had any or any significant impact beyond causing lost rent from 2004-2008. Mr Nicholls was cross-examined at length on this topic and in closing the Defendants submitted that he (Mr Nicholls) had given "partisan evidence" and had tied himself "in knots" trying not to accept that his statements gave an untrue and misleading picture. It is unnecessary to set out these criticisms at length because I accept that, contrary to Mr Nicholls' evidence these events must have had some longer term adverse effect on Dockside. Mr Randall fairly conceded that "some" of these post-completion events had some part to play in Dockside's problems. However, the Defendants did not suggest that it was possible to calculate in money terms the effect of these events, either individually or cumulatively.
D15 The Defendants' 2006 Valuation
- Pursuant to their appointment as Trust Property Adviser to the Trust and to a retainer evidenced by a retainer letter dated 28 February 2006, the Defendants produced a further valuation of the leasehold interest in Dockside held by the Trust for the 5th anniversary of the Trust's acquisition of that interest. This was initially provided in a short form by letters dated 28 April 2006. These valued the leasehold interest in the sum of only £23,500,000, or £26,500,000 on the special assumption that Marks & Spencer became a tenant (as was then envisaged would be the case) or £29,150,000 on the special assumption that Marks & Spencer became a tenant (but without it receiving a capital contribution) and the further assumption that the lease between Capita and the Developer was broken in 2008 and Capita became the immediate landlord of the tenants. These short form valuation letters were subsequently supplemented by a fuller report (referred to together as "the 2006 Valuation"). This identified average rents achieved at Dockside as being between £15 and £20 psf. The report sought to provide a number of reasons (other than the expiry of five years of the 7 year rent guarantee period) as to why the value of Dockside had declined at all and, in particular, so dramatically in the 5 years since the Defendants' Report. These reasons included the following (i) Dockside had a number of significant competitors in the area, including the FOC at Ashford; (ii) close competition had adversely affected other FOCs; (iii) Dockside fell within the "lower bracket" of FOCs; and (iv) Dockside lacked an anchor tenant. It was anticipated that securing Marks & Spencer as an anchor tenant might improve matters although the costs of securing the tenancy would outweigh the rental income received from it.
D16 The Standstill Agreement
- On 14 December 2006, the Claimants and the Defendants entered into a Standstill Agreement. However, the Defendants say that this agreement is of very limited effect with the result that certain of the Claimants' claims are now statute barred. I consider this further below.
D17 Later and current valuations of Dockside
- Further valuations of Dockside were performed by DTZ in 2008, 2009 and 2010. These valued the Trust's interest in Dockside at £17,000,000, £9,650,000 and £7,200,000 respectively.
The Main Issues
- Against that background, I turn to consider the main issues under the following heads: Section E: Scope of Retainer and Duty; Section F: Breach; Section G: Causation; Section H: Quantum; Section I: Limitation.
Section E: SCOPE OF RETAINER AND DUTY
- There was in the present case no letter of instruction from either Matrix or Capita or letter of retainer setting out the work which the Defendants were required or agreed to do. This gave rise to an important issue as to the scope of the Defendants' duties both in contract and in tort. Given that the Defendants in fact produced their Report, this might seem surprising. But the issue is important when considering the other issues in the case, in particular breach, causation and quantum.
- Although not specifically pleaded, the fact that the Defendants failed to record their retainer in writing before issuing their Report was itself relied upon by the Claimants as a breach of RICS (Royal Institution of Chartered Surveyors) Practice Statement 2.2.2. Moreover, the Claimants submitted that this breach was illustrative of the Defendants' approach to their work, entirely consistent with the lax procedures relating to the Defendants' Valuation Panel (if any formal procedures were, indeed, ever put in place) and a general lack of care that seems to have been brought to bear on this project. In cross-examination, Mr Blake said that the lack of a formal letter was not unusual when working on an acquisition because the work was done speculatively with ongoing debate about fees. However, he admitted that there had been a breach of the RICS Practice Statement, an admission positively relied upon by the Claimants. However, I am not entirely convinced that there was any breach of the RICS Practice Statement. The Claimants originally suggested to Mr Blake that a retainer had to be provided "at the outset of the job" but this was obviously incorrect – as the Claimants subsequently accepted. The relevant requirement is only that "the valuer must always agree with/confirm his instructions…. in writing before issuing the Report or Valuation Certificate". It seems to me at least arguable that this requirement was met when the Defendants provided their Draft Short-Form Valuation Report. As indicated above, that set out at the very beginning the Defendants' instructions; and the Defendants' Report was issued at a later stage. In any event, it does not seem necessary to resolve the issue as to whether or not there had been a breach of the RICS Practice Statement and the Claimants did not press the issue.
E2 The Claimants' Case in Contract
- The Claimants allege that they each and both retained the Defendants to advise them in relation to Dockside. The full terms of the alleged retainer are set out in paragraphs 17 and 18 of the Amended Particulars of Claim. In summary, the Claimants say that the Defendants were retained to:
i) Advise them on the value of Dockside both with and without the benefit of Enterprise Zone allowances.
ii) Provide them with investment advice in respect of Dockside including but not limited to the commercial viability, attractiveness and prospects of Dockside as a newly-developed FOC.
iii) Conduct due diligence in relation to the acquisition of Dockside including but not limited to due diligence on the Developer and its management and development/professional team.
iv) Conduct the negotiations of the purchase price of Dockside.
v) Inform Matrix and/or Capita if and to the extent that they became aware (whether as a result of their due diligence, further research or investigations or otherwise) that representations and/or advice that they had earlier provided in the course of the transaction were inaccurate or gave rise to concerns about their accuracy.
- There is no doubt that at the outset, as the Claimants accept, the Defendants were retained by Matrix alone. But the Claimants say that it was agreed (and in any event must have been an implied term of the contract between Matrix and the Defendants) that the initial retainer as between the Defendants and Matrix would be replaced with a tripartite contract between the Defendants, Matrix and the trustee of the EZPUT (in the event, Capita) once Capita had agreed to act as Trustee and/or had been appointed as Trustee by executing the Trust Deed and that, further, any and all valuations and advice provided to Matrix under the initial retainer would be repeated and/or communicated to Capita which would be entitled to rely upon them
E3 The Defendants' Case.
- As originally pleaded, the Defendants described their role (at least initially) as follows.
" The Defendants initial role was to source for Matrix potential investment prospects in the form of developments in Enterprise Zones such as Dockside. The Defendant would then provide to Matrix alone an indicative appraisal of the investment prospect. Matrix would then consider the potential investment and decide whether or not it could be sold as an investment scheme to their clients. If Matrix' decision was affirmative, Matrix would instruct the Defendant to carry out due diligence in respect of the investment value of the investment prospect."
- The Defendants accepted that they played the part of the expert valuer; that they sourced Dockside as a potential investment prospect for Matrix; that they provided an indicative proposal on Dockside to Matrix; and that they were instructed to and did provide valuation advice for loan security and investment purposes. To this extent the Defendants accepted that they acted as a commercial property investment adviser to Matrix when Matrix was effectively acting as potential buyer of Dockside. However, although a trustee would have been envisaged as part of the overall structure of the transaction if it proceeded, the Defendants submitted that the identity of that trustee was not fixed and the trustee played no part and had no interaction with the Defendants. In support of that position, the Defendants posed rhetorically: Had the transaction not proceeded, there would be presumably no suggestion that the Defendant had been retained by Capita. On this basis, the Defendants submitted that the work so undertaken by the Defendants for Matrix was speculative: there was no guarantee that the Defendants would be formally instructed until the purchase completed and the level of fees was at large.
- The Defendants submitted that once the decision had been made, solely by Matrix, to proceed with the proposed promotion of Dockside as an EZPUT, the situation changed to a proposed sale of Dockside as an EZPUT. In this "selling" or promoting role, Matrix was itself an expert and experienced commercial and EZ property investment adviser. As such it did not need or seek commercial property investment advice from the Defendants in order to "sell" Dockside as an EZPUT investment. In this context, the Defendants relied in particular upon the evidence of Mr Blake to the effect that Matrix was an "investment advisor" and is very familiar with the structure and the risks of the investments it promotes and also makes recommendations.
- Thus, the Defendants submitted that their retainer was solely by Matrix: the invoice for its fees was addressed solely to Matrix and stated in terms the nature of the retainer (with emphasis added):
"Introducing and advising on the terms of a speculative factory outlet centre development of 145,700 sq ft. Reporting to you with our advice on the value of the development with the benefit of enterprise zone allowances and without the benefit of enterprise zone allowances. First tranche of fee as agreed - £141,500 plus VAT"
- In essence, the Defendants' case was that this was a case of a period of speculative investment advisory work performed by the Defendants for one professional client coming to an end, followed by a formal retainer for valuation and the introduction of another party, which it is intended would rely on that valuation. The nature of the Defendants' role changed because the Defendants, having been effectively Matrix's surveyor and valuer, for the purposes of introducing and advising on the indicative proposal, then became the prospective provider of a valuation report, to both Matrix and Capita, whose interests conflicted. According to the Defendants, at the point of 'crossover' from buyer to seller a conflict arose for Matrix between its own interests and those of Capita/the Investors, because it was then going to be promoting the EZPUT and the higher the price, the larger its fee (based on a percentage of the EZPUT value) would be. Conversely paying a higher price was not in the investors' interests and Matrix's role (as admitted by Mr Randall) was, in part, to negotiate the price down. As was put to Mr Randall, the points made to the Developer's agent to bring the price down meant Matrix knew of these matters as being likely to affect the value. That knowledge did not 'go away' when it came to promoting the EZPUT to the Investors.
- As submitted by the Defendants, since the Defendants had been operating as Matrix' surveyor/valuer and adviser, the Defendants would similarly have a conflict, this time between the interests of one client (Matrix) and another putative client (Capita). More prosaically, as Mr Blake stated:
"We only produced one report, so I struggle to see what is outside of the valuation report that we're providing to the trustee."
- In further support of its case, the Defendants placed considerable emphasis on the separate roles of the parties involved in the transaction (Matrix, the investors, Capita, the Defendants) and their necessarily different obligations.
The Defendants' Case as to the Role of Matrix
- The Defendants relied upon the following evidence which I accept:
i) Matrix, and in particular Rob Randall, had very considerable experience of speculative (as opposed to pre-let) developments and, in particular, promoting investment schemes in Enterprise Zones.
ii) Matrix and Mr Randall had a high level of understanding of the figures (including yields) and calculations for the proposed deal with the Developer.
iii) Matrix and Mr Randall in particular had enough knowledge about commercial letting to be able to say what was "fairly standard" or "normal commercial terms". Mr Randall's indication was that he had not been but had become so aware. It is not clear why that would have been the case since his evidence was that he had no role post 2001 (beyond managing Mr Nicholls), and every reason to presume that he was knowledgeable at the index time, given his considerable experience with the previous commercial property transactions he had promoted since joining Matrix in 1996.
iv) Matrix and Mr Randall knew that the value of the leasehold interest in Dockside would probably drop between the date of valuation and year 7, as the seven years' worth of guaranteed income would have been paid out.
v) Mr Randall knew the signal importance of getting an anchor tenant, such as M&S into Dockside, not simply as another unit occupied but due to their enhancement of the overall attraction of Dockside. Mr Nicholls certainly knew that the tactic of waiting until the dispute with the developer had been determined risked M&S finding out about the dispute and then walking away.
vi) In addition, and in any event, Matrix had to know and understand the investment it was promoting in order to meet its own regulatory obligations, as confirmed by "Introduction to the Verification Notes". The verification notes also confirm that Matrix shared responsibility for the verification notes which covered "the Developer" section of the IM.
- More generally, the Defendants submitted that Dockside, like any EZ investment was "inherently risky with such risk being mitigated by the certainty of tax benefits" as reflected, in particular, in a report from Allenbridge and that Matrix must have been aware of such risks. Indeed, Matrix' level of knowledge of the risks at Chatham Dockside was, the Defendants submitted, inevitably greater given their involvement at the heart of the transaction. Irrespective of what may be the general risks of an EZ scheme, I accept that Matrix (and Mr Randall in particular) knew the proposed FOC at Chatham was an unusual scheme and also knew about some significant risks carried with it namely that:
i) It was speculative, and that although 'a level' of letting would be expected when construction was complete, there was no assurance of this.
ii) Dockside could not be compared with such existing successful developments as McArthur Glen and Freeport centres, as it was not going to be managed by an operator who had an established track record, or had the power to attract tenants due to its portfolio of operated centres.
iii) The Developer had experience of developing but not running FOCs, and knew this lack of experience was being 'made up' by the appointment of IRE as letting agents.
iv) The Developer and its attributes were critical to the success of the centre.
v) If the relationship with the Developer broke down, or if there was a disruption of the letting that this was likely to have a deleterious effect on the performance of the centre.
The Defendants' case as to the Role of Investors
- In this context, the main thrust of the Defendants' submission was that it was important to recognise that the investors' investment in Dockside was "tax-driven". None of the investors themselves gave evidence. The only evidence close to the investors was from one IFA, Mr Kaberry who was (and remains) adviser to 49 of the investors. As I have said he was called by the Claimants. In very broad terms, his evidence was (amongst other things) that the investment was driven by the prospect of capital growth. The Defendants cross examined Mr Kaberry and were (in particular) critical of (i) the fact that he had failed to produce any contemporaneous corrobative documentation (including with regard to the advice he gave in 2001) and (ii) Mr Kaberry's attempts to support the Claimants' case by (as submitted by the Defendants) his reluctance to state anything which could be construed as unhelpful to that case. Further, the Defendants submitted that since the group of investors whom he represented would be beneficiaries of any recovered damages, his evidence must be reviewed with this fact in mind. The first point (i.e. the absence of documentation) may well have some justification and the second point (a vested interest in the outcome of these proceedings) was no doubt correct. However, it seems to me that the attack on Mr Kaberry was something of a "phoney war". Mr Kaberry did not suggest that tax considerations were irrelevant. I am inclined to accept that any particular investor will presumably have been aware and taken into account that his/her investment would (at least potentially) attract a tax allowance of the kind that I have already described. Thus, the existence of the "buffer" was obviously a relevant factor in any investment decision. But, in my judgment, it does not follow that the decision to invest was not also driven (at least in part) by the prospect of capital growth still less that the tax considerations meant that the underlying commercial viability of the scheme or the valuation and advice provided by the Defendants were irrelevant.
- Further, the Defendants submitted as follows:
i) The restrictions on promotions of such unregulated collective investment schemes (within the meaning of the Financial Services Act 1986) meant the potential market for the Dockside EZPUT was already a knowledgeable cohort of 'suitably qualified individual investors', or persons with the benefit of advice from an independent financial adviser (IFA) such as Mr Kaberry. In particular, from the evidence of Mr Kaberry, who was IFA to 49 of the Investors, it was to be inferred that the investors in Dockside had a good level of knowledge of the risk they were taking on and did not think that the Defendants' estimate of value was a guarantee of it. Mr Kaberry also confirmed that he, too, would have known of the importance of the operator of the FOC to its success, a feature of this investment which (the Defendants submitted) he presumably passed on in his advice to his clients.
ii) Apart from advice from their IFA, who would have had access to such commentators as Allenbridge, the Information Memorandum was itself similarly peppered with warnings of risk, in particular, the usual or 'standard' warning that 'the value of investments can go down as well as up'.
iii) Despite all these warnings, and despite the risks entailed, the EZPUT was fully subscribed (at the latest) by 3 April 2001, and subsequently substantially oversubscribed, despite being an intrinsically higher risk product than a syndicate (where the loan would be non-recourse, but backed by residual value insurance). This reflects the appetite of the market for the product, which in turn drives the market price for the product. This was Mr Randall and Matrix's especial area of expertise and the success of their selection and promotion can be measured by the fact that from a mid-February launch, the trust was fully subscribed by 3 April 2001 and subsequently oversubscribed.
The Defendants' Case as to the Role of Capita
- In summary, the Defendants' position was that Capita was intended simply to administer arrangements and not expected to take material decisions as to whether to invest or on what terms: they were not paid as a decision maker (receiving a £25,000 initial fee; £10,000 annual fee; 1/8% on capital distributed as exit fee). In this context, the Defendants relied, in particular, on the evidence of Mr Peters that Capita's remuneration was "tiny" compared to the fees paid to Matrix. Although Mr Peters' evidence was that Capita's role was to "police" the actions of Matrix, the Defendants submitted that the Trustees' role was parasitic on that of the trust manager and that the Trustee would be led by Matrix. Further, although Mr O'Keeffe gave evidence as to what he expected to happen with regard to the change of the trust offshore and notification to investors, the Defendants emphasised the absence of any evidence that Mr O'Keeffe was awaiting (eagerly or otherwise) receipt of the Defendants' Report.
The Defendants' Case as to the Role of the Defendants
- The Defendants submitted that although they did act as a professional adviser to Matrix they did not act as a general adviser to either the investors or Capita. In particular, the Defendants submitted that so far as the investors were concerned (i) the critical document which involved input from the Defendants was the information the Defendants provided in the IM as it was on the basis of this that investors put money into the Trust; (ii) although the Defendants did, of course, send a copy of its Final Report to Capita and accepted responsibility to them for the same on 5th April, by then the transaction had already completed; and (iii) there was no question of this report being relied upon by Capita as a matter of fact and there is no evidence to support any actual reliance on the Defendants' Draft or Final Reports.
E4 Conclusion on Retainer/Scope of Duty
- I have summarised (at some length) the Defendants' case in relation to their retainer and scope of duty. However, it seems to me that much of the Defendants' case in this context is either confused or irrelevant. In particular, the fact that Matrix (and, in particular, Mr Randall) and Capita were aware of the speculative nature of the project and that the investors were also presumably aware of the risks involved does not necessarily detract from whatever the Defendants agreed to do ie the scope of their retainer; still less does such awareness constitute any agreement by the Claimants (or the investors) to accept any relevant breach of duty in the performance of such retainer. Acceptance of risk is quite different from acceptance of negligence. There is a helpful analogy with the position of a name at Lloyds (at least as it used to be): cf Deeny v Gooda Walker  CLC 1224.
- In my judgment, the starting point is to consider what terms (both as to what the Defendants would do and as to the contractual relationship between Capita and the Defendants) were expressly agreed between Mr Randall and Mr Blake. In support of their case, the Claimants relied, in particular, upon the evidence of Mr Randall and the contemporaneous documents. Mr Randall did not say that he or Mr Blake used the actual words pleaded in paragraphs 17 and 18 of the Amended Particulars of Claim (which seek to put into legal terms the substance of the agreement reached and which are summarised above) and he did not suggest that he could remember the precise words that were used in these conversations; but he was clear that the substance of what was agreed is accurately set out in the pleading. At the end of the day, that evidence was not substantially challenged by any of the Defendants' witnesses (including Mr Blake). Further, the Claimants' case and Mr Randall's evidence in relation to it are supported both by the documents and by what the Defendants in fact did or purported to do in terms of advising both Matrix and Capita in connection with the Dockside transaction.
- In particular, as to there being a contract between Capita and the Defendants:
i) The Report was addressed to both Matrix and Capita. Further, it was said to be confidential to Matrix and Capita and that, as a consequence, "no responsibility is accepted to any further party in respect of the whole or any part of its contents".
ii) Further, it is clear from its contents that the Report was providing advice to the proposed purchaser of Dockside which was identified in the Report as the Trust.
iii) The Defendants described themselves as the "Trust's Surveyor" in the draft Heads of Terms.
iv) The Defendants described their services as including "acquisition advice". Given that the Trust and not Matrix acquired Dockside this further indicates that the retainer was with Capita as well as Matrix.
v) Further, the fee narrative to the Defendants' invoices describe their services as relating to "introducing and advising on the terms of" the transaction. Again, advice on the terms can only sensibly be regarded as having been provided to and for the benefit of the Trust.
vi) The fees charged by the Defendants in respect of what they described as "acquisition and valuation advice" formed part of a total fee that also included the fees in respect of project monitoring which they undertook on behalf of Capita.
vii) It was clearly agreed that Capita would be entitled to rely on the Defendants' advice. So, for example, the Draft Short Form Valuation Report provided at paragraph 1.2 that it had been prepared by the Defendants "for the benefit of [the Trust] (the Investor)".
- As to what the Defendants were retained to do, this is made plain by what they actually did or purported to do. Thus,
i) The Defendants purported to conduct due diligence and the negotiations with regard to the transaction: indeed, it is admitted that the Defendants were retained to carry out due diligence.
ii) In providing their advice in the Report, the Defendants addressed each and all of the matters pleaded in the sub-paragraphs of paragraph 17.3 of the Amended Particulars of Claim as regards rental income, comparables, the attractiveness of Dockside to tenants and consumers, market trends, location, the development plans, competitors and the factors relevant to whether the new FOC would be a success. What is in issue is whether they did so competently.
iii) The Defendants provided advice on the commercial viability of Dockside and investment advice. This is clear from the Report and is also how the Defendants themselves described their advice. Thus, the Defendants received £396,020 for what they themselves described as their "investment and valuation advice" in respect of the acquisition of Dockside. When providing their invoice, the Defendants described it as relating to "the first tranche of our investment fee". The invoice itself described the Defendants' work in the following terms in the narrative:
Introducing and advising on the terms of a speculative factory outlet centre development of 145,700 sq.ft. Reporting to you with our advice on the value of the development with the benefit of enterprise zone allowances and without the benefit of enterprise zone allowances.
iv) Further, Mr Blake referred to the provision by the Defendants of "investment advice" in respect of the acquisition of Dockside in the context of discussing the Defendants' fees in respect of work carried out after completion.
- For these reasons, it is my conclusion that each and every one of the pleaded terms of the retainer has, in my judgment, been established on the evidence. Thus, the Defendants were retained by the Claimants and agreed to:
i) Prepare, for loan security and investment purposes, open-market valuations of the long leasehold interest in Dockside which it was proposed would be purchased.
ii) Provide investment advice in respect of Dockside including but not being limited to the commercial viability, attractiveness and prospects of Dockside as a newly-developed FOC.
iii) In preparing its valuations and investment advice the Defendants would:
(i) Consider and advise upon the rental income that Dockside was likely to be able to generate from its tenants including how such rent was likely to be calculated, an assessment of rental income streams, rent profiles, how rental income might vary over time and the cost of securing tenants.
(ii) Obtain and utilise appropriate rental comparables.
(iii) Make a full and careful assessment of, and advise upon, the attractiveness of Dockside to both potential tenant retailers and consumers.
(iv) Consider and comment upon the market trends in respect of FOCs.
(v) Consider and advise upon the suitability of the location for the establishment of a FOC.
(vi) Consider and advise upon the suitability of the Dockside site itself for the development of a FOC.
(vii) Consider and advise upon the impact of potential competitors on the commercial prospects of Dockside.
(viii) Consider and advise upon the factors that would determine whether a new FOC could successfully establish itself in the market.
iv) Conduct due diligence in relation to the acquisition of Dockside including, but not being limited to, due diligence on the Developer and its management and development/professional team.
v) Conduct the negotiations of the purchase price of Dockside for and on behalf of Matrix and the trustee of any trust established to purchase Dockside (in the event, the Trustee).
vi) If and to the extent that it became aware (whether as a result of its due diligence, further research or investigations or otherwise) that representations and/or advice that it had provided were/was inaccurate or gave rise to concerns about their/its accuracy, to inform the Claimants of this expeditiously and clearly and, as necessary, to correct any inaccuracies expeditiously and clearly.
vii) Exercise the standard of reasonable skill and care to be expected of an ordinarily competent valuer and commercial property investment adviser in and about performing the terms of their retainer.
- To this extent, it seems to me that the Claimants were plainly correct as to the scope of the retainer and the scope of the Defendants' duty.
Commercial Investment Advice
- It is convenient at this stage to consider an important submission advanced by the Claimants with regard to the role which, it is said, the Defendants agreed to and did play in the transaction. In particular, the Claimants said that in agreeing to and providing commercial investment advice with regard to Dockside, the role of the Defendants extended far beyond that of simply providing a valuation. I agree that the role which the Defendants agreed to and did perform was here more extensive than what would generally occur in what might be said to be an "ordinary valuation". This is important and requires some explanation.
- In, for example, the case of residential property, any valuation will normally be based on "comparables". The valuer may, for example, look at other comparable sales of properties in the locality both present and historic. Even in the case of commercial property, such an approach may often be appropriate. The valuer may then look on a wider basis to general market trends (both geographic and, again, historic). This information will commonly form the basis of his opinion as to valuation. This exercise is relatively straightforward although there can, of course, be considerable debate as to what are relevant "comparables"; and it is not unknown, even in such a case, for the valuer to make a mistake or be guilty of negligence.
- However, the present case is different – indeed, very different from a simple residential valuation or even a valuation of at least some commercial property. This is so for a number of important reasons. In particular, at about the relevant time ie early 2001, there were no directly comparable sales of FOCs in the open market still less as an EZPUT. In these circumstances, it was common ground between the parties that any valuation of Dockside depended largely on an evaluation of likely future income stream and a determination of one or more appropriate yield figures. However, in early 2001, Dockside was no more than a "shell". In order to trade as a FOC, the site required development which would take some time. Importantly, the future success of the FOC depended on the development of the Chatham site as a whole including leisure facilities which would serve as an attraction for potential customers to visit Chatham. At that stage, i.e. in 2001 these facilities were still in the process of development. There were no existing lettings for Dockside. Indeed, Dockside was not due to complete and to open for some two years or so. As to future rentals, the investors would have the benefit of the fixed rental from the Developer (guaranteed by the cash deposit) and the "top-up" during the first 7 years. There were some disputes before me as to how these income streams should be valued but, as appears later in this judgment, such disputes fell within a relatively narrow compass. However, in terms of valuation in April 2001, the core issue before me concerned the likely rental income and appropriate yield figure at the end of the first 7 years i.e. in April 2008.
- I accept, indeed it seems to me pretty obvious, that as the Claimants submitted, the assessment of such likely rental income and yield figures for Dockside looking forward some 7 years involved commercial investment advice as to the commercial prospects of Dockside. In broad terms: would Dockside be a success? Would it attract sufficient tenants – in particular, tenants of a sufficient calibre? Would it attract sufficient customers with sufficient spending power? Would it be able to compete with other FOCs in the vicinity? Unsurprisingly, all these matters were considered by Mr Blake in the course of preparation of the Report which he ultimately produced. In particular, I accept, as is clear from the Report itself, that the Defendants provided advice on the commercial viability of Dockside and investment advice. When read as a whole, this was what the Report was providing: advice as to the commercial viability and prospects of Dockside and whether its acquisition represented a good investment opportunity taking account of its underlying commercial viability and its feasibility as an Enterprise Zone investment. This reflected the advice that had been provided earlier and which was repeated in the IM. Importantly, Mr Blake took no issue with and, indeed, accepted that he was retained to provide investment advice.
- The Claimants also sought to highlight further matters:
i) First, that the Defendants acted as "introducers" of the deal ie the Defendants introduced the transaction to Dockside. This is, said the Claimants, the opposite to the sort of situation that Mr Sargent came across in his career. His experience was of where a client (almost exclusively Freeport) had a trading FOC and required a valuation of that FOC for loan security or accounting purposes. In the one case where he was asked to value a speculative FOC (Talke in 1998), the client (again Freeport) had already put in place the deal and the valuation was again required for loan security purposes only. By contrast, here the Defendants had sourced the potential transaction and presented it to their clients (Matrix and Capita). On this basis, the Claimants submitted that if the starting point is that the Defendants were introducing the potential transaction to their clients on the basis of "this is something you might be interested in" it is not at all surprising that the Defendants were thereafter retained to provide commercial investment advice to address the question "should I make this investment?"
ii) The Defendants played an important role in the commercial negotiations with the Developer. Mr Blake accepted that the "general pattern" was of him having the face to face dealings and reporting back to Mr Randall and that the general discussions were "fronted" by himself and Mr Brodtman of IRE. This is entirely consistent with the documents which demonstrate that the negotiations were led and conducted by the Defendants (and by Mr Blake in particular) and not by Matrix. Thus, initial exploration of the investment and its structure with the Developer and its agent was undertaken by Mr Blake. Thereafter, he was heavily engaged in negotiating the proposed terms of the transaction with the Developer and its agents. The pattern was one of the Defendants formulating proposals, reporting back to Matrix on these and on the progress being made with the Developer and of the Defendants undertaking the negotiation of terms with the Developer's agent. This included finalising the agreed terms as to the price of £62.85m agreed during the course of a meeting with the IRE and Mr Reeves.
iii) The advice was provided by members of the Defendants' Investment Team and not by the Valuation Team and that, again, the contrast with Mr Sargent's experience was all too apparent. His evidence was that his firm's investment team would deal with transactions and only involve his valuation team if the client purchaser also required a valuation (the inference being that the valuation would be in addition to any commercial appraisal or investment advice provided by the investment team).
iv) The Defendants accurately recorded the nature of their advice at the material time. For example, the Defendants referred to their "investment and valuation advice" in respect of the acquisition of Dockside and when providing their invoice, the Defendants described it as relating to "the first tranche of our investment fee". The invoice itself described the Defendants' work in the following terms in the narrative:
"Introducing and advising on the terms of a speculative factory outlet centre development of 145,700 sq.ft. Reporting to you with our advice on the value of the development with the benefit of enterprise zone allowances and without the benefit of enterprise zone allowances."
Further, Mr Blake referred to the provision by the Defendants of "investment advice" in respect of the acquisition of Dockside in the context of discussing the Defendants' fees in respect of work carried out after completion.
v) The Defendants received a fee of £396,020 for what they called their "investment and valuation advice". This is to be contrasted with the much more modest fee of £7,500 that Mr Sargent received for his valuation of Talke. According to the Claimants, the huge disparity in fee charged reflects the different type of service being provided.
vi) Mr Blake's involvement (once at Matrix) in considering the terms upon which third party advisers (DTZ) would be retained to advise Matrix on the potential acquisition of Dickens World is illustrative of what he understood to be the sort of advice that Matrix required from its advisers, including the Defendants in relation to Dockside. Thus, he made it clear that the advice needed to include the following, namely that: "There should be a clear recommendation that Matrix proceed with the transaction." This, said the Claimants is entirely consistent with what the Defendants did here. Their covering letter to the Report, for example, referred to them reporting with their "views and recommendations on the terms of the purchase of the … property". This was also supported by Mr Blake's evidence.
- I have set out, at some length, the matters relied upon by the Claimants in support of their broad submission that the role of the Defendants here extended far beyond that of simply providing a valuation and involved giving commercial investment advice including recommendations as to the prospects of Dockside. Inherent in that submission is the argument that these two exercises were distinct. I do not agree. In my judgment, at least so far as Capita is concerned, the purpose of such "commercial investment advice" was to provide a valuation. Given the particular features of Dockside, that exercise of necessity involved an evaluation of the commercial prospects of Dockside as a trading FOC which, in turn, of necessity involved the Defendants giving consideration to and making recommendations regarding the likely prospects of Dockside to attract customer spend and tenants. However, in my judgment the whole (or at least main) purpose of such exercise was to enable the Defendants to provide their valuation either with or without the benefit of relevant tax allowances. It will be necessary to revert to this topic in the context of quantum.
E5 Duty of Care in Tort
- The Claimants alleged that the Defendants owed a parallel continuing duty of care in tort to both Claimants to exercise the reasonable standard of skill and care to be expected of an ordinarily competent valuer and commercial property investment adviser in and about producing their valuations, advising the Claimants, carrying out due diligence and negotiating the purchase price and terms of the acquisition of Dockside. The Claimants said that this duty was owed concurrently with and was co-extensive in its scope to the contractual duties owed by the Defendants and pleaded at paragraph 17 of the Amended Particulars of Claim.
- The Claimants' primary case was that these duties were owed as an incident of the Defendants' retainer. But, in any event, the Defendants plainly assumed responsibility to both Matrix and Capita so as to give rise to such duties by in fact providing advice to them and, in particular, by providing the Report.
- Finally, the Claimants alleged that the Defendants owed the Claimants a duty (both as part of the duty of care in tort and/or as an implied term of the retainer) to decline to act or to continue to act in relation to the acquisition of Dockside if acting in relation to Dockside fell outside their competence or expertise (or that of the particular individuals assigned by the Defendants to perform the Retainers on their behalf) and, further or in the alternative, a duty to inform the Claimants if acting in relation to Dockside did fall outside their expertise or competence (or that of the particular individuals assigned by the Defendants to perform the retainers on their behalf).
- While the Defendants put in issue the scope of any duty of care in tort owed, they accepted that they owed such a duty to Matrix but denied owing any duty of care to Capita. The Defendants' position here is difficult to understand. The Defendants accepted that they owed a duty of care to the trustee named in the February IM (i.e. RSA) but denied owing a duty to Capita. This is notwithstanding the fact that the Defendants did not provide advice to RSA but did provide advice and, in particular, their Report, to Capita while seeking to exclude reliance on that advice by anyone other than Matrix and Capita. The Defendants' position here appears to be bound up with their position on locus (which is considered further below). However, the short answer to it is that there was in my judgment a clear assumption of responsibility by the Defendants to Capita on the basis that their advice was expressly addressed to Capita and Matrix and, further, addressed to them to the exclusion of all others.
- Aside from the point on locus, the Defendants asserted that they did owe a duty of care in tort directly to investors. This rather curious position (particularly in light of the denial of a duty to Capita to whom they sent their Report) is adopted as part of the Defendants' case to the effect that the proper claimants are the investors rather than Capita or Matrix. Thus, their positive case is that the transaction (and presumably their retainer) was structured such that any breach of duty on the part of the Defendants in providing their advice (to Matrix and Capita) would give rise to a cause of action in the hands of investors rather than Capita or Matrix. It is said that the Defendants owed investors a duty through the "mechanism" of those parts of the IM which the Defendants expressly approved by the means of the Verification Notes. There is a number of difficulties with this:
i) First, the Defendants provided their advice to Matrix and Capita (and not to investors).
ii) Second, in providing their advice to Matrix and Capita the Defendants made it clear that they would not accept responsibility to anyone else.
iii) Third, the Verification Notes are a "mechanism" for protecting Matrix in that they provide clear evidence of the basis for its belief in the truth and accuracy of the contents of the IM. They are not a "mechanism" for assuming responsibility to investors not least because, as the Verification Notes themselves make clear, they are confidential and must not be disclosed to third parties.
- Moreover, the Defendants' advice was provided in respect of the acquisition of Dockside and that acquisition was completed by Capita (and not by anyone else). It i.e. Capita parted with £62,850,000 in exchange for taking the lease of Dockside and the rights under the PDA. The fact that it did so as trustee of a unit trust does not render the unitholders the proper claimants for claims in respect of losses suffered as a result of acquiring Dockside in reliance upon the Defendants' advice. If the Defendants were correct here, by parity of reasoning, in every case where a unit trust suffers loss as a result of entering into a transaction based upon professional advice where that advice is included in information provided to unitholders, then the proper claimants in any claim in respect of that professional advice will be the unitholders rather than the party to the contract entered into as a result of that advice (i.e. the trustee). That is a somewhat remarkable proposition, which I do not accept.
- For all these reasons, it seems to me plain that the Defendants owed the Claimants a duty of care in tort as alleged by the Claimants and summarised above.
Section F: BREACH
F1 Standard of Care
- Whether in the context of the Claimants' claims in contract or in tort, there was broad agreement as to the relevant general applicable principles:
i) The relevant duty is to exercise reasonable care and skill in all work carried out.
ii) Not every error will amount to a breach of duty.
iii) In order to succeed, the Claimants must show that the advice and/or valuations provided by the Defendants were such that an ordinarily competent valuer and commercial investment adviser could not have provided them exercising reasonable skill and care.
iv) The standard of care expected is properly defined as "that degree of skill and care which is ordinarily exercised by reasonably competent members of the profession". That standard will not be relaxed for a valuer or adviser with limited experience of, for example, a certain type of property or a certain type of task. Moreover, if a professional holds itself out as having a particular skill, it is to be judged by the standards of people holding that skill.
v) In the present case, the Defendants were a firm of chartered surveyors and property consultants offering a range of consultancy services including commercial property investment and valuation advice. As a minimum, by agreeing to act as they did, they held themselves out as being competent to perform the appraisal, assessment and valuation of an undeveloped FOC for EZPUT purposes. Thus, their work falls to be judged by reference to an ordinarily competent valuer and commercial investment adviser competent to advise on EZPUTs and FOCs ("ordinarily competent valuer and commercial investment adviser").
- It is important to note and indeed to emphasise that, as was again common ground, the question whether or not the Defendants were in breach of duty must be considered at the time ie in early 2001. There was some evidence during the trial concerning subsequent events. This evidence was relied upon in particular by the Defendants to explain some at least of the reasons why Dockside did not succeed and, on one view at least, such evidence is potentially relevant to quantum. However, there is no doubt that these subsequent events and any suggestion of hindsight are irrelevant to the question of breach.
- The classic statement of the required standard of care for professional men and women is "the Bolam test" which derives from the clinical negligence case of Bolam v Friern Hospital Management Committee  1 W.L.R. 582 /  2 All ER 118 at 121. First the judge defined what "negligence" meant:
"Before I turn to that, I must tell you what in law we mean by "negligence." In the ordinary case which does not involve any special skill, negligence in law means a failure to do some act which a reasonable man in the circumstances would do, or the doing of some act which a reasonable man in the circumstances would not do; and if that failure or the doing of that act results in injury, then there is a cause of action. How do you test whether this act or failure is negligent? In an ordinary case it is generally said you judge it by the action of the man in the street. He is the ordinary man. In one case it has been said you judge it by the conduct of the man on the top of a Clapham omnibus. He is the ordinary man."
Then the judge looked at what amounted to "professional negligence":
"But where you get a situation which involves the use of some special skill or competence, then the test as to whether there has been negligence or not is not the test of the man on the top of a Clapham omnibus, because he has not got this special skill. The test is the standard of the ordinary skilled man exercising and professing to have that special skill. A man need not possess the highest expert skill; it is well established law that it is sufficient if he exercises the ordinary skill of an ordinary competent man exercising that particular art…….in the case of a medical man, negligence means failure to act in accordance with the standards of reasonably competent medical men at the time. That is a perfectly accurate statement, as long as it is remembered that there may be one or more perfectly proper standards; and if he conforms with one of those proper standards, then he is not negligent."
The judge went on to consider the "standard" by reference to peer opinion:
"…a mere personal belief that a particular technique is best is no defence unless that belief is based on reasonable grounds. That again is unexceptionable. But the emphasis which is laid by the defence is on this aspect of negligence, that the real question you have to make up your minds about on each of the three major topics is whether the defendants, in acting in the way they did, were acting in accordance with a practice of competent respected professional opinion…. if you are satisfied that they were acting in accordance with a practice of a competent body of professional opinion, then it would be wrong for you to hold that negligence was established…
….he is not guilty of negligence if he has acted in accordance with a practice accepted as proper by a responsible body of medical men skilled in that particular art. …..Putting it the other way round, a man is not negligent, if he is acting in accordance with such a practice, merely because there is a body of opinion who would take a contrary view. At the same time, that does not mean that a medical man can obstinately and pig-headedly carry on with some old technique if it has been proved to be contrary to what is really substantially the whole of informed medical opinion."
- In the present context, the Defendants emphasised that the court retains the right to subject any "body of opinion" view to logical analysis and to hold that the body of opinion is not reasonable or responsible. This has been re-stated more recently by the House of Lords in another clinical negligence case, Bolitho v City & Hackney HA  AC 232:
"[Counsel for the claimant] submitted that the judge had wrongly treated the Bolam test as requiring him to accept the views of one truthful body of expert professional advice even though he was unpersuaded of its logical force. He submitted that the judge was wrong in law in adopting that approach and that ultimately it was for the court, not for medical opinion, to decide what was the standard of care required of a professional in the circumstances of each particular case.
My Lords, I agree with these submissions to the extent that, in my view, the court is not bound to hold that a defendant doctor escapes liability for negligent treatment or diagnosis just because he leads evidence from a number of medical experts who are genuinely of opinion that the defendant's treatment or diagnosis accorded with sound medical practice."
- It was an important part of the Claimants' case that one of the Defendants' many alleged failures was a failure to carry out any consumer spend analysis i.e. a CACI report. In particular, the Claimants' case was that the obtaining of such a report was not merely a practice accepted as proper by a responsible body of men/women but the universal market practice, such that failure to obtain such a report was incompetent. In that context, the Defendants submitted that the last extract from Bolam and the above citation from Bolitho were particularly pertinent.
- Before considering the evidence relating to valuation, it is necessary to consider the question of "range". In this context, there is a relatively large body of authority that addresses the approach to be adopted by the Court when considering the question of negligent valuation. These authorities are not always easy to reconcile. Lewison J considered the issue in Goldstein v Levy Gee  PNLR 35 and his approach has subsequently been followed in at least two further cases: Dennard v PricewaterhouseCoopers LLP  EWHC 812 (Ch) and K/S Lincoln v CB Richard Ellis Hotels Ltd  PNLR 31 (TCC). From these, the following propositions can be drawn:
i) The process of valuing real property has strong subjective elements; it is an art not a science and not every error of judgment amounts to negligence. This leads to the concept of 'the bracket', or "the permissible margin of error": see per Watkin J. in Singer & Friedlander v John D Wood & Co  2 EGLR 84 at 85G-H and 86.
"Pinpoint accuracy in the result is not, therefore, to be expected by he who requests the valuation. There is, as I have said, a permissible margin of error, the 'bracket' as I have called it. What can properly be expected from a competent valuer using reasonable care and skill is that his valuation falls within this bracket."
ii) It is a necessary pre-condition to liability that the final valuation figure is shown to be "wrong", that is, 'outside the bracket': see per Buxton LJ in Merivale Moore plc v Strutt & Parker  PNLR 498 at 515-517.
"A valuation that falls outside the permissible margin of error calls into question the valuer's competence and the care with which he carried out his task: ibid. But not only if, but only if, the valuation falls outside that permissible margin does that enquiry arise...To find that his valuation fell outside the "bracket" is, as held by this court in Craneheath and also, I consider, by the House of Lords in Banque Lambert, a necessary condition of liability, but it cannot in itself be sufficient."
iii) Where the Court is considering whether a valuation in itself is negligent, the claimant must normally show, not only that the valuer fell in some way below the standards to be expected of a reasonably competent professional, but also that the valuation fell outside the range within which a reasonably competent valuer could have valued the asset. If the valuation is within the range, then the valuation will not be found to have been negligent even if some aspect of the valuation process can be criticised as having fallen below reasonably competent standards.
iv) In each case the Court must assess what it regards as being the competent valuation and what it regards as the being the size of the permissible range. In each case, both are findings that will depend on the particular facts of the case. The assessment of range should not be approached mechanistically.
v) Where the valuation is made up of a number of different aspects, a different methodology may have to be adopted in relation to different aspects because of the nature of the particular valuation process with which the Court is dealing. In general, the bracket should be assessed by arriving at a bracket for each of the variables rather than only for those variables that are alleged (or found) to have been negligently assessed: see Vos J in Dennard at paragraph 91 following Lewison J's interpretation of Merivale Moore at paragraph 63 of his judgment in Goldstein.
vi) As summarised in K/S Lincoln v CB Richard Ellis at paragraph 183, for a standard residential property, the margin of error may be as low as plus or minus 5 per cent; for a valuation of a one-off property, the margin of error will usually be plus or minus 10 per cent; if there are exceptional features of the property in question, the margin of error could be plus or minus 15 per cent, or even higher in an appropriate case. However, a range of 14.5% to 23% has been described as "absurd" (see Staughton LJ in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd  1 EGLR 119 @ pp 120/121).
vii) Even if the valuation is outside the range, the professional may escape liability if he can prove that he exercised reasonable skill and care. If the valuation is found to fall within the range, the claimant will still be entitled to succeed if it can demonstrate that it has suffered loss as a result of negligent advice given in the course of, or in addition to, the valuation process.
- Whatever the range may be, the Court must still form a view as to what the correct valuation would have been (i.e. the figure which it considers most likely that a competent valuer would have put forward). If that "correct valuation" falls outside the appropriate range of the actual valuation, damages will be assessed by reference to that figure. It follows that in such circumstances the damages should not be limited to the excess over the highest valuation which would not have been negligent. The reason for this approach was explained by Lord Hoffman in Banque Bruxelles S.A v Eagle Star  AC 198, at p221E-222A. This approach has been criticised. In particular, it has been suggested that this method of assessing damages diverges from the normal rule (at least in contract cases) that the party in breach of contract is assumed to have performed the contract in the manner most favourable to himself and that the application of this method may give rise to a conclusion which is not "comfortable": see Lewison J in Goldstein at paragraph 46 of his Judgment. However, as acknowledged by Lewison J, the ruling of the House of Lords is clear and is supported by a line of authority.
F3 The Evidence in Outline
- Before considering the evidence in relation to valuation in detail, it is convenient to look broadly at its overall shape. In broad terms, the evidence fell into four main categories.
- First, there was the evidence as to what the Defendants, in particular Mr Blake, did or did not do. I have already summarised that above although it will be necessary to revert to certain aspects of such evidence.
- Second, there was evidence of a qualitative nature concerning the FOC market generally and, more specifically, the particular features or characteristics of Dockside both physically and with reference to is geographic location. In this context, it was the Claimants' case (explored in detail in cross-examination of Mr Blake and supported principally by the evidence of their expert, Mr Barbour) that there were particular features or characteristics of Dockside which the Defendants had ignored or failed properly to take into account with the result, so it was said, that the Defendants had been hopelessly over-optimistic as to the prospects of success of Dockside as a FOC.
- Third, there was evidence of a quantitative nature concerning the Defendants' valuation figures both with and without the benefit of the relevant EZPUT allowance. In considering this quantitative evidence, the starting point is (or at least ought to be) Mr Blake's own open market value ("OMV") which was as stated in his Report in the order of £48,150,000 or £62,850,000 with the benefit of EZ allowances. The reasoning behind these figures and their component parts were to some extent explained in the Defendants' Report. However, there is nowhere in that Report nor in any other contemporaneous document a detailed and complete breakdown of either of those figures. That is, to my mind, extremely surprising. Nor was Mr Blake able to give a detailed or at least complete explanation of these figures when he gave evidence. However, based on the explanations which were given in the Report and a certain amount of back-engineering to fill in the gaps, Mr Stewart QC suggested that the breakdown of the first figure was (or at least must have been) broadly as follows:
|A. Guaranteed Rent for first 7 years
|YP 7 years @ 5.75%
|B. Top-up Priority Rent
|YP 7 years @ 7.75%
|C. Value of Reversion at Year 7
|Estimated Rental Value Net
|YP Perp @ 7%
|PV 7 years @ 8.25%
||Net of purchaser's costs @ 5.75%
This breakdown shows that the three main components of the open market value figure of £48,150,000 were as follows:
i) The guaranteed rent for the first 7 years.
ii) The value of the top-up rent during the first 7 years.
iii) The value of the reversion at the end of year 7.
Of these components, issues concerning the first two fell within relatively narrow parameters.
- The fourth main category of evidence concerned the effect of EZ allowances on market value.
F4 The First Component: The Guaranteed Rental
- As to the first component, the guaranteed rental figure of £4,006,750 pa was indisputable and undisputed. I do not consider that there is any scope for any "bracket" for this figure. The only possible area of dispute was the appropriate yield figure. Both experts, Mr Sargent and Mr Barbour, agreed that this was or should be 6.75% giving a value for this component of £21,975,000 (there was a slight difference in arithmetic but this is, in my view, the most accurate figure). However, this yield figure (6.75%) was different from that used by Mr Blake (i.e. 5.75%) resulting in the Defendants suggesting a slightly different value i.e. £22,567,330. I consider this further below.
F5 The Second Component: Top-Up Rental
- As to the second component i.e. the top-up rental, although the annual figure of £550,000 pa itself was not disputed, there was a dispute as to the number of years during which it would - or should (at least) reasonably be assumed - be received. (In addition, there was also a dispute as to the appropriate yield - which again I consider separately below.) The basis of this dispute appears to have been founded upon a comment in paragraph 19.3.8 of Mr Barbour's report where he stated as follows:
"Priority Return: The priority return (turnover top up) of £550,000 was payable pursuant to the terms of the Third Schedule to the underlease on rental income (net of annual irrecoverable operational cost) received from occupational leases during the first 7 years of the term. For the reasons set out above including in particular the competition Dockside faced and the inadequate incentive budget I have assumed an occupancy rate of 60% by year 3 rising to 80% by year 7. With a deduction of the annual irrecoverable operational costs including service charge and promotion I calculate that no overage top up would become payable until the 4th year of the term."
- For these reasons, it was in effect Mr Barbour's evidence that the value of this second component based on the top-up rental should be calculated by reference to a period of only 4 years (i.e. 4 x £550,000 = £2.2m) not the full 7 years (i.e. 7 x £550,000 = £3.85m). In my judgment, this part of Mr Barbour's evidence was problematic – and indeed unsatisfactory. Although he stated (in the last sentence just quoted) that he "calculated" that no overage top-up would become payable until the 4th year of the term, he had not in fact produced the calculation to which he referred in his report or otherwise in evidence. It was therefore difficult, if not impossible, to evaluate this evidence. Quite apart from this difficulty, there was, in my view, a more fundamental difficulty with this part of Mr Barbour's evidence. Even taking (for present purposes) Mr Barbour's assumed levels of occupancy at face value (which were in dispute) and even on the assumption that no overage top- up would become payable until the 4th year of the term, it seems to me that it does not necessarily follow that the income stream should be valued as £2.2m rather than £3.85m. Two points need to be borne in mind. First, the entitlement to the top-up rental was from the "ground up" ie it became payable as soon as the stipulated operational costs etc had been paid. Second, if it was not paid in a particular year, it was carried forward (with interest) to the following year. Mr Barbour was obviously right to the extent that in years 1 and 2 there would be no top-up rental in fact payable in those years because during those periods the development would still be in the course of construction with no tenant rents being paid at all. However, the obligation to pay the top-up (with interest) for both those years would carry forward into year 3 and thereafter and similarly (if appropriate) for the subsequent years. When Dockside opened in 2003 and tenant rents would become payable from year 3 onwards, the top-up rental (including any accumulated entitlement with interest from previous years) would become payable after deduction of irrecoverable operational costs etc. Even on the basis of Mr Barbour's assumed rental figures and levels of occupancy (which, as I say, were in dispute), the irrecoverable operational costs would have to be very large indeed if there were, in effect, to be less than £3.85m net available over the first 7 years. On the evidence before me, that seems a most unlikely scenario.
- Of course, the value of this second component of income stream has to be assessed as at the index date ie April 2001. Nevertheless, for the reasons set out above, I see no reason why it was unreasonable to assume that such value was less than the full annual amount ie £550,000 pa payable over the first 7 years. So I proceed on that basis. Again, I do not consider that there is scope for any "bracket" for this figure. The only other issue with regard to this second component was the appropriate yield which, as I say, I deal with separately below.
F6 The Third Component: The Rental Value at Year 7 (2008)
- It was this third component i.e. the value of the reversion at the end of year 7 which was the main focus of dispute in the course of the trial. It was broadly common ground that this depended on (i) the likely future rental figure for Dockside when trading as a FOC at the end of year 7 and (ii) the appropriate yield. As to the former, it was also broadly common ground that this was driven by likely future turnover calculated on a per square foot basis; and that the likely future rental was then to be calculated as a percentage (generally assumed to be 10%) of that figure. In summary, it was the Claimants' case based largely on the evidence of Mr Barbour and Mr Parr that the base rental figure used by Mr Blake, i.e. £27.50 psf was incompetent; that the appropriate figure was, at most, £19 psf for the ground floor, half of that figure i.e. £9.50 psf for the majority of the first floor and £6.50 psf for the back area of the first floor from which had to be deducted certain significant expenses (which deductions were also in dispute); that the result was that the Defendants' valuation figures were too high and incompetent; and that they should be substantially reduced.
- As to this third component, the Claimants' case had two main aspects which overlapped. First, the Claimants relied generally on their criticisms of a qualitative nature (including the evidence of Mr Barbour) as referred to above to attack the base figure of £27.50 psf figure used by Mr Blake and the deductions to be made. Second, the Claimants submitted that if the Defendants had carried out a proper consumer spend analysis (which the Claimants said should have been carried out by the Defendants) then such analysis would have shown that the likely future consumer spend at Dockside would have produced a gross turnover at Dockside of £190 psf; and that, on certain assumptions, the appropriate likely rental was 10% of that figure i.e. £19 psf. In support of that figure, the Claimants relied on the report of their expert, Mr Parr. Having regard to all the above, it was the Claimants' case that the OMV of Dockside was only £31,764,000 or £42,455,762 with the benefit of EZ allowances.
- As set out below, Mr Parr's Report was the subject of a sustained frontal attack by Mr Stewart QC on behalf of the Defendants in respect of Mr Parr's expertise, general approach and methodology, assumptions and calculation. Indeed, it was the Defendants' submission that there was a lack of probity on the part of Mr Parr. It is important to understand how Mr Parr's evidence fitted into the Claimants' case. His report had apparently been obtained by the Claimants at the suggestion of the Claimants' other expert, Mr Barbour. It (i.e. Mr Parr's report) was put in evidence as an exhibit to Mr Barbour's report and relied upon, at least in part, by Mr Barbour in arriving at his overall conclusion. The Defendants said that since Mr Parr's report was deeply flawed so too was Mr Barbour's evidence; and that Mr Barbour's evidence was in any event flawed for other reasons.
- On the Defendants' side, they denied any breach. The opinion of Mr Sargent, the Defendants' expert, was that the OMV without the benefit of any enterprise allowance was £45,200,000 and that although the Defendants' equivalent valuation (i.e. £48,150,000) figure was 6.5% higher than this, his view was that it fell "…..within an acceptable range of values for normal property assets". The Defendants also relied upon the evidence of Mr Farr. He is (amongst other things) a Fellow of the RICS and a Valuation Director of GVA Grimley Ltd. He has some 44 years of experience of preparing valuations and commercial advice in respect of commercial and industrial development properties in all parts of the country. He is very familiar with Chatham Maritime and also more generally with the structure and operation of EZPUTS and has given advice in regard to the value of such schemes in the early to late 1990s. The main focus of Mr Farr's evidence was to consider the effect of the EZ allowances on market value. In effect, Mr Farr's evidence sat on top of Mr Sargent's evidence. He, Mr Farr, proceeded on the assumption that Mr Sargent's views in relation to rental values, floor areas and all other factors including likely prospects of success of Dockside were correct. On the basis of that evidence, Mr Farr gave an assessment of the appropriate yield figure from an EZ perspective with regard to each of the three components referred to above. His conclusion was that the market value with EZ allowances was £58,825,000 subject to a 15% possible variance, up or down. Although the Claimants did not themselves call a separate expert to deal with this aspect they challenged Mr Farr's evidence both with regard to methodology and overall conclusion.
- I have already summarised the evidence with regard to the work done by the Defendants. In broad terms, the evidence of Mr Blake was that the valuation exercise was not easy but that the work was satisfactory at the time and that the problem was the "changed mind in the market" in later years. According to his statement: "I was satisfied with my valuation of the Chatham development at the time and I do not see any reason to think differently now. Obviously, with the benefit of hindsight, it can be seen that the factory outlet centre market did not do as well as was anticipated at the time of the valuation and there has been a changed mind in the market since then, bearing in mind the general economic outlook and the drop in retail market as a result of 9/11. After that, things were all economically tighter."
- I have some sympathy with Mr Blake with regard to the difficulties in carrying out a valuation of Dockside in 2001; and I am very conscious of the importance of avoiding the benefit of hindsight. The task of valuing a project like Dockside in early 2001 was far from easy. In particular, I accept that the task of valuing this third component ie the likely rental stream and appropriate yield at the end of year 7 was particularly problematic. To borrow the words expressed by Mr Parr it might conceivably be said that this was no more than "crystal ball gazing". However, Mr Blake did not shrink from the task. He did not suggest that it was impossible or too difficult to do. It is true that in his letter dated 5 January 2001 addressed to IRE but seen by Mr Randall, he emphasised that the development was "speculative". However, that was at a relatively early stage. Thereafter, Mr Blake and others on behalf of the Defendants carried out their work and provided their advice and valuation figures as I have already summarised. In my judgment, both were deeply flawed broadly for the reasons advanced by the Claimants as set out below.
The Defendants' Want of Expertise/Experience
- The starting point is that, in my judgment, the Defendants did not have the experience or expertise to advise upon Dockside competently particularly with regard to this third component and so should either have declined to act or commissioned FOC expertise from elsewhere or advised that it be obtained. In taking on the project they thereby acted in breach of duty. If the Defendants had had someone with relevant FOC experience then Mr Blake agreed that he would have handed the job over to them. He did not do so. In the course of cross-examination, both Mr Blake and Mr Richards suggested that such experience and expertise had been brought to the project by in particular the involvement of Mr Lomax (who it was said, had valued the BAA MacArthur Glen FOC's and therefore did have relevant historic experience in 2001) in the Valuation Panel process. However, I am unable to accept that suggestion. It did not appear to be based on any specific knowledge or evidence and seemed to me rather a self-serving and somewhat desperate expression of a hope of what might have been. In any event, it seems to me quite impossible to draw any comfort from the involvement of the Valuation Panel process with regard to Dockside for the reasons already stated above. Moreover, Mr Lomax did not himself give evidence and there is nothing in the contemporaneous documents to indicate any particular input from him.
- Further, and in any event, it is clear that the three individuals who actively worked on the project and who were responsible for the Defendants' advice – Messrs Blake, Scott and Perry – did not have any FOC experience between them. The Defendants sought to meet this in a number of ways. First, according to Mr Blake's statement (paragraph 19), the Defendants obtained reports from IRE. However, IRE was the Developer's agent seeking to achieve a sale. IRE was not in a position to give independent advice to the Defendants as ought to have been obvious to Mr Blake and, in my view, it was foolhardy in the extreme to rely on any advice IRE might provide. Second, the Defendants suggested (or at least this seemed to be Mr Blake's suggestion) that they could effectively acquire experience "on the job". However, it is, in my view, illogical to suggest that experience can be gained on any particular project (at least a project of this type) when that experience is required in order for that project to be completed competently. Absent relevant experience, the Defendants had no idea whether the research they were undertaking was appropriate or adequate or whether the information gleaned from that research (and which thus became their only experience) was accurate or reliable. The inappropriateness and, indeed, dangers of employing such an approach are magnified in circumstances where the market being considered was (as in the present case) secretive and the entities from whom information was being sought all had particular vested interests to advance. Third, the Defendants suggested that the Claimants, through Mr Randall, knew of their lack of expertise in any event. However, this is also no answer. It is true that Mr Randall knew that Mr Blake did not have personal experience of valuing an FOC but he understood (from Mr Blake himself) that he had the necessary and "requisite expertise or he could find the requisite expertise to do a thorough evaluation and investment advice". Further, Mr Blake never advised Mr Randall that he would (or even might) not be able to perform the retainer competently.
Assessment of Consumer Spend
- As I have said, it was an important part of the Claimants' case that in order to advise competently the Defendants were required to undertake a full and competent analysis of Dockside's ability to capture consumer spend. It was common ground that the Defendants never carried out such an analysis themselves nor commissioned such a report. The main questions were (i) were they required to do so and (ii) what would such analysis or report have shown?
- As a matter of common sense, it seems to me that the necessity or at least desirability of undertaking some analysis of this kind cannot be seriously doubted or open to dispute. Absent an analysis of some such kind, it is difficult to see how the ability of a new-build FOC to attract and to capture consumer spend from its catchment could have been assessed competently. To my mind, the real issue is not whether this needed to be carried out but rather how this was to be undertaken competently; whether it was in fact done so and what further information (if any) such analysis would have provided.
- This issue falls to be addressed at two levels, first by reference to the standards of an ordinarily competent valuer and commercial property adviser charged with advising on Dockside as the Defendants were, and, second, by particular reference to the Defendants' particular knowledge as regards this transaction.
- Mr Barbour expressed the clear opinion that there was a universal market practice when it came to appraising and valuing FOCs in 2000/2001 to commission a full retail performance analysis report. In particular, it was, Mr Barbour's evidence that it was "crucial" and "critical" to obtain such a report and that it was representative of "core practices". The Defendants disagreed. The Defendants accepted that there may have been, and probably was, a practice of obtaining basic demographic data, including most crucially the population within a 30, 60 and 90 minute drive time of a proposed site. This information may be obtained in a 'first stage' or CACI demographic report. CACI is just one such supplier of this data. Illumine was another. The Defendants had recourse to such demographic reports including drivetime figures from Illumine, and used this information. However, the Defendants submitted that there was no standard practice in 2001 (or indeed at any time) amongst valuers of FOCs or investment advisers of obtaining a CACI-type interpretative report.
- This was a major issue at trial. In support of this case that a full CACI – type interpretative report was "crucial", the Claimants relied heavily on the evidence of Mr Barbour. In response, the Defendants submitted that the Court should, in effect, ignore or reject Mr Barbour's evidence. In particular, the Defendants submitted that Mr Barbour only achieved MRICS status in 2000 having previously been a member of the ISVA. He admitted in evidence that he had himself done no "Red Book" valuations prior to March 2001. In the year 2000 he admitted that "professional valuations" (rather than agency work) made up less than 10% of his fee income. He also admitted that as at 16 May 2011, he was not registered with the RICS as a valuer (such registration being compulsory as of 30 April 2011). Mr Randall, Director of one of the four main sponsors in the EZ market who was familiar with such firms of valuers as Healey & Baker and IRE, had never heard of him or his then practice, Markham Vaughan Gillingham. Given this lack of experience, both at the index date and at the time of trial and his admitted total lack of experience in EZ valuations, it was submitted by the Defendants that Mr Barbour's views cannot be accepted as those of an appropriately qualified expert in this case.
- In support of that submission, the Defendants relied on a number of authorities including Barings Plc v Coopers & Lybrand (a firm)  1 Lloyd's Rep PN 379 at , Clarke v Marlborough Fine Art (London) Ltd (No 3)  2 All ER (D) 105, JP Morgan Chase Bank v Springwell Navigation Corporation  EWHC 2755 (Comm). In particular, the Defendants relied on the test set out in the Australian criminal case in R v Bonython  SASR 45 at 46:
"Before admitting the opinion of a witness into evidence as expert testimony, the Judge must consider and decide two questions. The first is whether the subject matter of the opinion falls within the class of subjects upon which expert testimony is permissible. This first question may be divided into two parts: (a) whether the subject matter of the opinion is such that a person without instruction or experience in the area of knowledge or human experience would be able to form a sound judgment on the matter without the assistance of witnesses possessing special knowledge or experience in the area and (b) whether the subject matter of the opinion forms part of a body of knowledge or experience which is sufficiently organised or recognised to be accepted as a reliable body of knowledge or experience, a special acquaintance with which of the witness would render his opinion of assistance to the Court. The second question is whether the witness has acquired by study or experience sufficient knowledge of the subject to render his opinion of value in resolving the issue before the Court."
- The Defendants submitted that such test had not been satisfied in the present case. Furthermore, the Defendants submitted that Mr Barbour had failed to comply with many requirements of the CPR which embodied well-known principles summarised by Cresswell J in the Ikarian Reefer  2 Lloyd's Rep 68 at 81-82. Thus it was said that Mr Barbour's evidence was not properly admissible.
- I do not accept the broad thrust of these submissions. It is true that in certain respects Mr Barbour's evidence was flawed. I have already referred to Mr Barbour's comments with regard to the second component i.e. the top-up rental with which I disagree. In addition, for example, in performing his own valuation exercise Mr Barbour took Mr Parr's figure of £190 psf without realising (i) that it was based on a lettable area of 107,565 sf (rather than 145,700 sf) and (ii) that Mr Parr had already applied a 50% reduction for turnover on the first floor resulting in a totally unjustified "double reduction" when Mr Barbour applied a further 50% reduction to his rental figure of £19 psf (based on 10% of Mr Parr's figure of £190 psf). Both of these matters were obvious from even a brief reading of Mr Parr's report and Mr Barbour's failure to appreciate them suggested that Mr Barbour's work was or might not be entirely reliable. However, in general terms and despite these not insignificant errors as well as certain breaches of the CPR which it is unnecessary to consider in detail, it seems to me that Mr Barbour had relevant expertise to qualify as an expert as appears from his full CV which was attached as Appendix 5 to his Report. For present purposes it is sufficient to note that he was a fellow of RICS and a Partner and Head of UK Retail at Knight Frank LLP. He had over 21 years experience in the valuation of both FOCs and full price centres let on turnover leases. He has worked extensively over the last 17 years in the FOC sector providing valuation and commercial property investment advice and development consultancy to developers, operators and retailers on a large number of FOCs. The most significant were listed on pp12-13 of his Report. For present purposes, it is sufficient to note that 4 were before 2001 ( i.e. Jacksons Landing, Hartlepool Marina (1993), Clacton (1995-1996), Festival Park, Ebbw Vale (1995/1998) and the Lakes Outlet (2000/2002)) and the remainder, another 9 FOCs, covered the period 2002-2009. As Mr Barbour stated in cross-examination, he "lived and breathed" the FOC market for a 12 year period from the early 1990's until mid-2000's. This experience was not only in letting schemes (which is relevant experience and expertise in itself) but in appraising and valuing centres and potential new centres. About 60% of his time was spent in the FOC market and most of this was spent on appraisal work and viability studies. On the whole, I found him an impressive witness although he was at times prone to make sweeping generalised statements which were not always supported by relevant specific evidence. That is not to say that such statements were necessarily incorrect but simply that they were sometimes difficult to test.
- It goes without saying that although I accept that Mr Barbour had relevant expertise it does not follow that I should necessarily accept all or even part of his evidence. In light of the important errors that I have already referred to and my conclusions set out below with regard to Mr Parr's evidence which Mr Barbour relied upon, I approach the remainder of Mr Barbour's evidence with what I consider to be necessary caution.
- As Mr Barbour made clear, he would not expect a competent adviser to rely blindly or unthinkingly on a CACI report. Rather, it provides an informed basis for the exercise of professional judgment based on experience and expertise in the market in question. Thus, Mr Barbour did not suggest that it was necessary or even appropriate to rely unquestioningly on a full retail performance analysis report: his opinion was that such a report is research upon which the competent adviser can then rely when exercising their own expert judgment based on their experience in the market as to the likely rents that will be achieved and the report enables judgment to be exercised based on experience and an informed basis. The Claimants submitted that this is infinitely preferable to Mr Sargent's "gut feeling" (let alone to Mr Blake's gut feeling from a premise of no relevant experience). I agree.
Mr Brooks (Realm) and Mr Woolley (Freeport)
- In any event, the Defendants submitted that there was no 'peer review' type literature supporting the universal market practice suggested by Mr Barbour. Mr Barbour admitted he had seen no publication anywhere which states the only competent way to value an FOC is by reference to a CACI-type analysis. On this basis, the Defendants submitted that it was highly improbable that the valuers' professional journals and press would have missed this 'standard practice' in the course of the ten years since 2001. I agree that the absence of relevant literature is perhaps somewhat surprising. However, the view expressed by Mr Barbour was supported by Mr Brooks and Mr Woolley who both gave evidence (which I accept) to the effect that they, as developers, would have obtained such reports before purchasing or developing a new FOC (or have carried out the exercise in house). Mr Woolley agreed that if he had got as far as commissioning a full CACI report in respect of Dockside (and he did not do so) then he would have taken its contents into account when it came to considering whether or not to proceed with the acquisition and, if so, at what price.
The GVA Collyer Coxhead Report
- This witness evidence as to the market practice of obtaining full retail performance analysis reports is supported further by the contemporaneous report prepared by GVA Collyer Coxhead in respect of a proposed FOC at Lowestoft. Although Mr Sargent characterised this as a marketing document, it is, in my view, helpful because it is a report that sets out to provide an appraisal of the commercial viability of a proposed FOC. Accordingly, I accept that, as submitted by the Claimants, it bears direct comparison to at least part of the exercise that the Defendants were required to perform as regards Dockside. The report identified and analysed demographic information provided by Illumine but went on to identify that it was not within the expertise of the authors of the report to "predict the potential footfall for the centre" and so they would "strongly recommend that before a full viability assessment is carried out further research into this area is undertaken". The report offered to identify suitable companies who could provide such research. Most pertinently of all, having identified that there was at the time a great variance in the performance of different FOCs, the report advised as follows:
"It is outside the scope of our expertise to project the likely average sale turnover for the centre as this requires in depth retail research into the demographics of the area, the available retail spend in the region, the market share Lowestoft has in this region and further research into visitor numbers that can be attracted to the site. In order to ascertain the expected sale turnover we would recommend further research being carried out by independent retail experts. With this information, together with the anticipated rental levels, a more accurate estimate of the rents receivable across the centre can be established."
The Claimants submitted that this was exactly the advice that the Defendants should have but failed to give here. Again, I agree.
- The GVA Collyer Coxhead report also advised on a number of other matters that the Defendants failed to consider or considered incompetently, in particular:
i) The FOC market had matured extremely quickly and was "close to saturation for the major centres". As a result, it was becoming increasing competitive to secure tenants.
ii) Average sales densities and performance data for other FOCs are "not readily available".
iii) The turnover percentages paid by tenants depended on the strength of each particular tenant.
iv) It was necessary to pay incentives to attract the best tenants and, given the competitive markets, to pay incentives to tenants other than anchors.
v) For a location to be attractive for an FOC it needed to be situated away from strong retail centres to avoid competition between brands sold at a discount and those at full price.
vi) The desirability of pre-lets.
vii) The need to make an allowance for the shortfall of the recovery of annual marketing costs from void units.
- Mr Sargent maintained that a full retail performance analysis was not necessary although he would not have ignored such a report either had it been available. His view appeared to be that the available consumer spend (and from that the likely rents achievable) could be ascertained by speaking to people in the market. However, although this is obviously another important source of information, it does not in my judgment provide any reliable information on consumer spend, likely sales densities or, as a result, likely turnover rents.
- It was not clear from his oral evidence whether Mr Sargent sought to suggest that spend could be assessed by the use of comparables. If this was the case, then in my judgment it would be misconceived. Self-evidently, unless the catchment of one FOC is identical or nearly identical to another's then data relating to the ability of the first FOC to capture consumer spend from its catchment area and against the particular competition it faces in that catchment will be of little or no assistance when it comes to assessing the second FOC.
- Mr Sargent had not even heard of a full retail performance analysis report, yet his principal client, Freeport, not only had heard of one but habitually commissioned such reports or at least carried out their own full analysis in-house before purchasing or developing a FOC. Freeport's approach was mirrored by that of MEPC/REALM as was made clear by Mr Brooks. However, Mr Sargent's position in this regard is entirely explicable by reference to the fact that he was essentially engaged in providing different services to those which the Defendants were engaged to provide here and, moreover, by the fact that the appraisal and assessment of commercial prospects and viability that the Defendants were retained to provide were habitually undertaken by his clients rather than by Mr Sargent himself.
- For all these reasons, I do not accept Mr Sargent's evidence that a full retail performance analysis was not necessary. On the contrary, I accept that those who were in fact engaged in carrying out commercial appraisals of FOCs in 2000/2001 were, as a matter of standard practice, commissioning and relying upon full retail analysis reports and that the Defendants' failure to do so here was an important breach of duty on their part.
- Further and in any event, it seems to me incompetent for the Defendants not to have obtained a full retail performance analysis in circumstances where Mr Blake was aware of the existence and use of such an analysis: he had asked if the Developer had obtained one (and so plainly considered it to have been of relevance) and he accepted that it would have been very easy to have obtained one. It was also relatively inexpensive.
- Mr Blake's evidence on this point appeared confined to the suggestion that because the Illumine demographic information which had been provided by IRE had been considered, a sufficient analysis had been performed. I do not agree. The problem with this is that the basic demographic information provided in that report was limited to what, as I understand, is referred to as "chimney-pots" i.e. it only provides information on what type of people lived in the drive-time catchment area and how much money they had: it did not provide any information or analysis of where they spent that money and that, of course, is key.
Conclusion with regard to Spend Analysis
- Beyond a consideration of the Illumine report, the Defendants carried out no such assessment or analysis here at all. Accordingly, I accept the Claimants' submission in this regard viz that the Defendants made no or no adequate or competent assessment of Dockside's ability to secure consumer spend from its catchment area and thereby acted in breach of duty. For the avoidance of doubt, I do not consider that the Defendants are assisted by reference to the extracts from the Bolam or Bolitho cases cited above.
- In my judgment, what is much more problematic is what a competent full retail analysis would have shown. The Claimants say that a full retail performance analysis report, had it been commissioned, would have reported in materially identical terms to the report that Mr Parr prepared for the purposes of this litigation. This was an important part of the Claimants' case.
The CACI Report: Mr Parr
- Mr Parr's report was generated by a computer model as is any CACI report. In summary, using gravity modelling software, the model is intended to predict the ability of a shopping centre to attract consumer spend from its catchment area and may be summarised as follows:
i) The first input into this software provided is the Retail Footprint ("RF") score for the centre in question. The RF score reflects the extent (i.e. size) and quality of the retail offer provided by the centre in question. It may be adjusted downward to reflect an assumption as to whether the centre will be fully let or only partially let on opening/at the time of the assessment.
ii) The RF score is then used by the gravity modelling software which analyses the catchment by individual postcodes to calculate a "Market Potential" assessed in both percentage and money terms. This represents the maximum potential market share of the consumer spend that the centre might attract from its catchment. This analysis is driven by data obtained from a third party (referred to as "ACORN data") which analyses demographic, geography and lifestyle information about the catchment.
iii) CACI then applies an attainment figure to this Market Potential which reflects its opinion (based on experience and CACI's classification of the centre as being "major", "large", "medium" or "small") of the centre's ability to attain a particular turnover from its Market Potential. This effectively scores the centre's conversion rate being its ability to convert Market Potential into actual turnover.
iv) The attained Market Potential is then divided over the number of revenue generating square feet at the centre to produce a sale density per square foot.
v) CACI also benchmarks the centre's performance against other FOCs for catchment Market Potential on opening and demographics.
vi) The results of this process are then analysed and included in the report.
- Mr Parr's report was, said the Claimants, an attempt to recreate the report that he and CACI would have produced in 2001 had they been instructed to produce one for Dockside. In order to do this, he needed to be able to make the same or similar assumptions as would have been made in 2001 as regards RF Score, classification and attainment and to apply these to a model based upon the same modelling software and ACORN data as was (or would have been) used in 2001. Accordingly, Mr Parr was required to take steps to ensure that the data and software used for his report in 2011 most accurately reflected that which was (or would have been) available as at 2001.
- This required him to take the following steps:
i) The earliest version of the CACI model available at the time Mr Parr produced his report was that for 2004. Accordingly, Mr Parr took this model and then, using information available from other sources such as Estates Gazette, removed from the model those shopping centres (or extensions to shopping centres) that were present in 2004 but which were not present in 2001. Having done this, he added back those centres or extensions to centres which in 2001 would have been anticipated to have opened by the time of Dockside's own opening in 2003.
ii) The earliest ACORN data available was that for 2008 but Mr Parr took the view that this was unlikely to have differed materially from that available in 2001.
iii) The 2004 model contained RF Scores (from 2003) for the FOCs then trading. At that date (ie 2004) Dockside's actual RF Score in CACI's database was 39. However, Mr Parr excluded this RF Score (of 39) from his analysis because that was, he said, based on trading information that would not have been available in 2001. As explained by Mr Parr, when assessing the prospects of a new, as yet un-built FOC, trading information would not be available and so the RF Score would be assessed by reference to the average RF point per square foot achieved by other FOCs.
iv) The average RF point score per square foot of space taken across the FOCs trading and with RF Scores available in 2003/4 was 0.00032 psf. Mr Parr applied this to the ground floor lettable area at Dockside. He then halved the score ratio (to 0.00016 psf) to reflect the relative difficulty of trading successfully on the first floor. He did so based on what he said was his experience and judgment.
v) Applying the average score psf approach as above produced an RF Score for Dockside of 36.6 which Mr Parr reduced to 29.3 (rounded down to 29) to reflect what Mr Parr said was CACI's standard assumption that the centre would be 80% let on opening.
vi) This RF Score of 29 placed Dockside in the "medium" category for FOCs.
vii) Using this RF score of 29 and gravity computer modelling based on what was described as a "total outlet centre goods potential" of approximately £3.8 billion, the model then calculated that Dockside would have a Market Potential of 1.5% of the available consumer spend within its catchment ie £58.4m. It faced considerable competition from Bluewater (which dominated its catchment with 20.6% of the available spend) and Ashford (2.7%).
viii) With a Market Potential of £58.4m, Dockside was ranked 29th of all FOCs. Somewhat confusingly, this ranking was on the basis that the other FOCs were being analysed by reference to their 2004 RF Scores. According to Mr Parr, this was because they were the only scores available to Mr Parr and, in any event, Dockside's relative position to, for example, its nearest competitor at Ashford was unlikely to change even if an earlier RF Score for Ashford had been available. Moreover, it was Mr Parr's evidence that the benchmarking had little effect on the overall sale density produced.
ix) Taking a Market Potential of £58.4m for Dockside, Mr Parr then applied what was described as an "attainment rate" of 35%. He then assumed a gross sales area of 107,565 square feet. The latter was calculated as 145,700 square feet less 2,500 in respect of the large area at the rear of the first floor as per paragraph 19.3.3 of Mr Barbour's report multiplied by 75%. This produced a lettable area of 107,565 sf. In summary, the calculation was as follows:
________ x 35% = £190 psf
The last figure represented the predicted average sales density psf.
x) This was the figure that Mr Parr said would have been reported as at 2001 by CACI. This figure was regarded by Mr Parr as being accurate to a relatively fine margin of error: indeed his experience suggested that CACI's evaluations of sales densities proved to be uncannily accurate. Nevertheless, he accepted that a variation of 5% either side of this figure of £190 psf (so £180.50 to £199.50) might be possible.
xi) It is important to have in mind the interrelationship between RF Score, gravity modelling, Market Potential and attainment. In particular, it is inaccurate to think that an increase in RF Score, for example, leads to a directly proportionate (or any) increase in sales density.
The Defendants' attack on Mr Parr
- On behalf of the Claimants, it was submitted that Mr Parr was well-placed to speak to what CACI, as an organisation, would have done as at 2001. In particular, they relied on the fact that he had 14 years' experience of retail performance and scenario analysis, all of which has been obtained while employed by CACI, the acknowledged market leader in the provision of this analysis. Thus, Mr Parr has occupied a consultancy role since 1998 and this effectively remains his role today: he was in 2001 a consultant providing retail performance and scenario analysis and consultancy services as he does today. Further, even in 2001 approximately one third of Mr Parr's work was concerned with the FOC market.
- As I have already indicated, Mr Stewart QC on behalf of the Defendants attacked Mr Parr's evidence on a number of grounds. In summary, the Defendants submitted that despite Mr Parr's confirmation that he had read carefully the requirements of CPR Part 35, the Practice Direction to Part 35 and the protocol for instruction of experts to give evidence in civil claims, he had comprehensively failed to comply with such requirements and was not competent to act as an expert. I accept much of those criticisms. In particular, Mr Parr's CV contains no details of formal qualifications whatsoever. At the index date (April 2001) Mr Parr had a maximum of two years' experience of selling services to clients as a consultant. Although by his CV he represented that he had been in Retail Location Planning since June 1997 (when he left university) in fact his first 18 months of time at CACI had been spent in the telesales team selling "simple area reports", which comprised basic demographic data. Mr Parr had moved into a role as "a consultant in the market planning team" at around the end of 1998. Of that two year period, only one-third of his time was claimed to consist of FOC work although the precise nature of such work was somewhat unclear. Moreover, Mr Parr's training does not include any statistical background, such as formal qualifications or training. His only experience is in the use and presentation of demographic data by CACI. He does not operate the CACI models as a matter of course. It follows that the statement in paragraph 4.1 of Mr Parr's report: "in the following pages of this report appears the report that I would have produced in 2001 if I had been instructed" was, in my view, somewhat misleading as the report (or at least the report it contained) would not have been produced by Mr Parr himself in any real sense albeit under his direction. I accept that Mr Parr may well have had some general familiarity with the CACI model and had experience of presenting the work of CACI but (although I do not accept the Defendants' submission that he was no more than a "salesman") he did, in my view, lack the necessary detailed technical expertise. Thus, it is noteworthy that contrary to the impression that might be assumed from Mr Parr's Report, he was not actually the individual who carried out the work summarised in it. In fact, as was revealed by cross examination (because it had not been stated anywhere in his report or addendum report) any work contained in the CACI report which involved the actual operation of the CACI model was not his but the unattributed work of a Miss Alison Francis, who no longer works for CACI, and with whom Mr Parr had not discussed the work for over 18 months. It also seems that Miss Francis is unaware of the use to which her work has been put. I accept that the model was built under Mr Parr's "supervision" and on the basis of his assumptions (such as those relating to the first floor) which he said were based upon his "experience" and that he verified Ms Francis' work at the time. However, as appears further below, Mr Parr showed himself to be unable to speak with any real authority about certain important aspects of the actual work, calculations and analysis that had gone into the creation of the CACI report, or the impact of the decisions and assumptions in that work. More specifically, it seems to me that Mr Parr's report is both problematic and unsatisfactory in important respects for the following reasons.
The Main Flaw with regard to Mr Parr's Report
- The main flaw with regard to the reliance placed by the Claimants on Mr Parr's evidence is in my judgment that the exercise carried out by Mr Parr was designed to show what would have been predicted in 2001 as to the sales density of Dockside in 2003 i.e. at the time of opening of Dockside. I should make plain that that is not so much a criticism of Mr Parr but of the use sought to be made of his evidence by the Claimants. In particular, the Claimants sought (or at least sought at the beginning of the trial) to rely on Mr Parr's evidence (specifically his figure of £190 psf) to show likely sales density at the end of year 7 i.e. in 2008. But that is not an exercise which Mr Parr ever did. Nor had he ever been asked to do such an exercise. Indeed his evidence was that he had never been asked to or actually carried out a CACI analysis looking seven years ahead. His evidence was that this would be "crystal ball gazing". For this reason alone, the exercise carried out by Mr Parr is, in my view, of little, if any assistance when considering the main issue at the heart of this part of the case i.e. the likely rentals at the end of year 7.
- Quite apart from this fundamental difficulty, it seems to me that the figures used by Mr Parr to reach his sales density figure of £190 psf were, at the very least, questionable at virtually every stage.
The RF Score for Dockside
- First, Mr Parr's route of calculation of the RF score at 29 involved two main assumptions. First, it involved an assumption that the first floor should be treated as being half as powerful in terms of sales as the ground floor. It was plain that Mr Parr had no relevant expertise to assess the appropriate discount although, in the event, it is my conclusion that 50% for the majority of the first floor is reasonable. Second, the RF score of 29 involved an assumption of 80% let over the first two years of opening. The sole justification for using this percentage was, in effect, that it was what CACI had always done. The Defendants submitted that this assumption was demonstrably wrong because in fact within two months of opening Dockside was already 80% let. However, this is hindsight and as such is, in my view, irrelevant. Notwithstanding, it seems to me that the figure of 80% is at least highly questionable if one is looking in 2001 not at the time when Dockside was due to open in 2003 but at the end of year 7 i.e. in 2008. The likely letting percentage in 2008 would, of course, depend on the likely success (or failure) of Dockside but, in broad terms there was general consensus that by that date, Dockside would have been trading for some 5 years and that a reasonable assumption would be a figure of at least 95%. The Defendants submitted that a full figure of 100% should be taken. I consider this further below but it seems to me that the figure of 80% is, on any view, inappropriate to take at the end of that year (i.e. 2008) and that the appropriate figure should be significantly higher ie at least 95% and possibly more.
The RF Scores for other FOCs
- Second, Mr Parr used CACI published 2004 RF scores (or 2003 RF scores – the evidence was not clear as Mr Parr seemed to use both at different times) for all the other FOCs upon which the calculation was based. The Defendants submitted that if Mr Parr had used the actual RF score for Dockside in 2004 as he had used for the other FOCs, then the RF score for Dockside should not have been 29, but 39. Mr Parr admitted that he had had this 2004 data when doing his report. He had not checked this point. He admitted that this was something it would have been important to tell the Court although he did not do so. When he was asked why he had not told the Court, his response was that it had been provided to the Defendants' advisers; this was although he accepted that there was nothing in his report to advise the reader about the use of the 2004 figures for all the other centres. When further questioned about this point Mr Parr demonstrated what seemed to me a lack of understanding of the need to present a balanced view, as well as his lack of grasp of statistics and forensic analysis. Be that as it may, Mr Parr was unable to provide any real assistance about the effect that changing the RF score from 29 to 39 would have, particularly on the categorisation of Dockside FOC. He cannot claim to have been unaware of the categorisation levels, or that a score of 39 would have made Chatham a "Large Mass Market FOC" rather than a "Medium Sized FOC", since he provided an FOC classification table in his report. His evidence was that he had not plugged the 2004 CACI figure of 39 into the CACI model which had been created. The Defendants submitted that this in itself is astonishing. At the very least this seems a little odd since he had used, unchanged, the 2004 RF scores for every other centre. His only response for this and why he failed to make any statement about the actual classification of Dockside in his report was that the report was "as at 2001", However that response and approach are again difficult to justify because Mr Parr used the 2004 CACI RF scores for every other centre. However, although these criticisms advanced by the Defendants appear to have much force, it does not seem to me that it can be right to assume that the appropriate RF score which would have been adopted or calculated for Dockside at the index date (i.e. 2001) was the actual RF score in 2004 i.e. 39 rather than 29. This would be objectionable as hindsight. However, it seems to me that there was considerable justification in the Defendants' general submission that Mr Parr's analysis did not compare like with like and that (at the very least) this highlights the problem of using the CACI analysis performed by Mr Parr.
The 1.5% market share figure
- Third, the 1.5% market share attributed to Dockside was drawn from the RF score of 29 used by Mr Parr. The relationship between RF score and market share is a function of the computer model. According to Mr Parr's evidence, that relationship is not directly proportional but he was unable to say what was the precise relationship. He accepted that if the RF score for Dockside went up then the market potential figure (of £58.4m) would also go up. He suggested that if the RF score had been 39 (rather than 29), the market potential figure would have gone up by what he estimated would be 10%. However, he had not carried out the exercise of inputting the RF 2004 score of 39 (or any score other than 29) for Dockside; and the basis of the estimate he gave was (at best) unclear.
The Attainment Figure
- Fourth, the percentage attainment figure of 35% which had been applied to the market potential figure of £58.4m was a crucial component of Mr Parr's analysis and the ultimate figure of £190 psf. However, this 35% figure was not supported by any "hard" evidence beyond a claimed but unsubstantiated recollection by Mr Parr that a similar percentage had been used in relation to another FOC at Spalding. Mr Parr accepted he had no records of what attainment levels had been used in the other CACI reviews of FOCs carried out in 2001. Nevertheless, as stated in his report, it was Mr Parr's evidence that CACI had worked on numerous factory outlet schemes across the UK since 1997, that this had given them a detailed understanding of trading levels and patterns at these centres and that this "informs the levels of attainment achievable" at Dockside; that attainment levels at Dockside "assume the scheme has a lower mass-market focus"; that although a large, strongly performing FOC could achieve an attainment of 60%, only a very limited number of FOCs would in fact achieve this level; that "the industry norm" was somewhere between 30%-60%; that a "major" FOC with a greater presence in their catchment area competing most strongly for trade with other large retail centres would likely achieve an attainment of over 50% but that a "medium sized" FOC would achieve lower levels due to the overall lack of scale and smaller provision of offers at these FOCs. Accordingly, Mr Parr stated that CACI "believe" that Dockside would have achieved an attainment of 35% and this was why that figure had been assumed in the analysis he had carried out. In my view, this "belief" or "assumption" provides, at best, a very slender basis for the ultimate sales density figure of £190 psf calculated by Mr Parr. In a way, it seems, at least in part, to assume the conclusion which the analysis performed by Mr Parr was being relied upon by the Claimants to prove. And even if it were a reasonable figure to assume in 2001 as a prediction of the appropriate level of attainment at the time of opening in 2003, it is, at least, questionable, as to whether it would be an appropriate figure to assume in 2001 for the likely level of attainment in 2008. If one were to assume that the figure was not 35% but (say) 40% or 45% and all other things being equal, Mr Parr's sales density figure would increase from £190 psf to approximately £217 psf or £244 psf respectively. Needless to say this would have a significant impact on rentals.
- The Defendants went further. They submitted that even on Mr Parr's evidence an increase in the RF score for Dockside from 29 to 39 would (a) put Dockside into the category of a Large Mass Market FOC; (b) generate (even on Mr Parr's own evidence) a 10% increase in market potential ie a further £5.84m on top of the £58.4m he proposed, resulting in a total market potential of £64.24m; and (c) suggest an appropriate attainment figure of (or at least nearer to) 50% rather than the 35% assumed by Mr Parr. If the latter 50% figure were then applied to the increased market potential of £64.24m and without changing any other figures (ie £64.24m x 50% divided by gross sales floor area 107,565 sq ft), this resulted in a sales density of £298.6 psf. As stated, the main basis of this submission by the Defendants is the actual RF figure for Dockside in 2004 i.e. 39 rather than the 29 used by Mr Parr. As submitted by the Claimants, I agree that this again involves hindsight and is, to that extent, irrelevant. However, as stated above, the RF score of 29 used by Mr Parr would seem too low in any event if one is looking not at the time of opening in 2003 but after 5 years of trading in 2008; and although it may be impossible to say that an RF score of 39 in 2008 would have been a reasonable assumption in 2001 it seems equally impossible to say that it would not have been a reasonable assumption. At the very least, this highlights the sensitivity of the calculations performed by Mr Parr and the importance of identifying the appropriate RF score and figure for attainment.
Margin of Error
- Fifth, Mr Parr's claimed margin of error on the £190 per sq foot sales density figure was within 5%. However, there was no specific material to confirm this figure. The only other evidence of CACI figures for sales density in or around 2001 was in relation to the Spalding outlet, produced by Mr Barbour. A sales estimate figure of £352 per sq ft was apparently produced by CACI in November 2001. However, by February 2002 this figure would seem to have been revised to £275 per sq ft, based on the "discovery" of one further retail park. This is an apparent 'error' of 28%, caused by the omission of one piece of information which the Defendants submitted was an extraordinary omission given CACI's supposed total coverage of retail centres. Mr Parr cited an instance (with no corroborative evidence) of an accuracy in one example of within 1%. The Defendants submitted that in respect of both examples it can be said: "one swallow does not make a spring"; that it was absurd to suggest based on the CACI report produced for this litigation that CACI's accuracy was generally within 5%; and that without corroboration such margin of 5% cannot be accepted as true or even likely. On the evidence before me, it seems to me impossible to resolve that issue; and, in my view, it is unnecessary and undesirable to do so. It may well be that the accuracy of CACI's predictions fall generally within a margin of plus or minus 5%. However, the question here concerns the accuracy and reliability of the particular figure of £190 psf in the circumstances of the present case.
- Sixth, Mr Parr's figure of £190 psf was calculated on the basis of a floor area of 107,565 square feet. As stated above, that figure was supposedly arrived at by taking the gross floor area (ie 145,700) less 2500 multiplied by 75% - although this does not quite work as a matter of arithmetic. In any event, the basic floor area assumed by Mr Blake in 2001 – and indeed by the experts giving evidence – was the gross floor area ie 145,700 sf. If that latter figure is taken, then this would substantially reduce Mr Parr's figure from £190 psf to approximately £140 psf; and it would also significantly affect ie reduce the other calculations referred to above.
Conclusion with regard to CACI Report
- For all these reasons, it is my conclusion that the exercise carried out by Mr Parr is of no real assistance in the present case. In summary, it seems to me that that exercise was not the relevant exercise for present purposes and, in any event, was flawed or at least questionable for the reasons set out above. The result is that although I accept the Claimants' case that the Defendants acted in breach of duty in failing to carry out or to obtain a full retail spend analysis, the analysis produced by Mr Parr and relied upon by the Claimants does not in my judgment provide any reliable answer to the likely rental figure that would have been predicted by such an analysis if it had been performed in 2001 for the end of year 7 (2008).
- I should mention that in challenging Mr Parr's analysis, the Defendants placed reliance upon the RCT analysis which was carried out in October 2002 and also upon the report prepared by Trevor Wood Associates.
- As to the RCT report, the Defendants said that the RCT forecast was a turnover of approximately £42m pa which (on the assumption of a rental based on 10% of turnover) indicated a likely rental of in excess of £4 million pa; and that this was considerably more optimistic that Mr Parr's analysis. Further, the Defendants said that there is no reason to accept the CACI forecast as the more accurate one, and every reason to adopt the RCT one as a better indicator. I do not agree. First, the RCT analysis was carried out in October 2002 ie about 18 months after the relevant time and to that extent is probably too late to be of much probative value as to what was or should have been a competent assessment in early 2001. Moreover, even if considerations such as the absence of RCT's instructions and the assumptions that they may have been asked to make together with the fact that they appeared to be a different type of organisation to CACI are ignored, it would appear (as submitted by the Claimants) that the RCT report was not and was not intended to be a studied appraisal of likely future rental. Its function would seem to be entirely different ie it was a report prepared to set targets for the marketing plan that was to be introduced at Dockside: it was identifying targets (including target catchment populations) and what was required in terms of the number of visits per annum and average spend per visit in order to generate particular turnover (i.e. that of £40m). It cannot be relied upon to support a case that Dockside would actually generate this sort of turnover. Indeed, as submitted by the Claimants, this is rather graphically demonstrated that it was unlikely to do so by advising that in order to generate sales of £40m Dockside would need to establish a customer base of about half that of a regional (full price) shopping mall such as Meadowhall, the Trafford Centre or Metro Centre whilst having less than 15% of the space of such centres. The position may be tested further by comparing the average number of visits per year used by RCT in its analysis of 12 with Mr Sargent's view that the average for FOCs was 2-3. Similarly, the Illumine Report providing, as it does, only demographic information and no performance analysis, takes the matter no further forward.
Trevor Wood Report
- As to the report prepared by Trevor Wood Associates, the Defendants suggested that this demonstrated that Mr Parr's scoring of the attractiveness of Dockside was too pessimistic. Quite apart from the absence of any evidence being adduced to explain the Trevor Wood scorings, the scorings relied upon are included in a 2011 report and only date back to 2004. Again, it seems to me that this is hindsight. They cannot shed any light on how Dockside may have been scored in 2001. Moreover, as submitted by the Claimants, curiosities in the scorings which are inconsistent with the expert evidence adduced in this case, such as, for example, that Trevor Wood appears to have ranked Dockside as being above Braintree in 2004 call into question the reliability of these scores.
Use of the CACI Report
- Given my conclusions as to Mr Parr's report, the question arises as to what effect such conclusions have on the rest of the Claimants' case. As I have indicated, Mr Parr's report was an important part of the Claimants' case and formed an important part of Mr Barbour's own evidence. This was on the basis, as stated by Mr Barbour in paragraph 14.2 of his Report that the procurement of such a report was of "critical importance" for a new FOC. There are numerous references in Mr Barbour's Report to Mr Parr's Report and there is no doubt that Mr Barbour relied on it in expressing his own conclusion. Thus Mr Barbour stated in paragraph 19.2 of his Report:
"19.2 For all the reasons set out above, including in particular Dockside's location, the lack of certainty in the development of surrounding attractions, the significant level of competition in Dockside's catchment, its layout and design and inadequate tenants incentives budget, Dockside was over-valued at a totally unrealistic rental level (£27.50 per square foot overall). CACI in their analysis calculated a projected sales density for Dockside at £190 per square foot. Applying a turnover percentage of 10%, this would provide a rental value of the ground floor of £19 per square foot, and a first-floor sales density equating to a rent of £9.50 per square foot. From my experience of the FOC market at the time this level of rent would be considered appropriate by a competent valuer and commercial property investment adviser. The first-floor rear unit at 12,500 sq ft (net) due to its irregular shape and layout was likely to dictate lower rents and therefore a competent valuer and commercial property investment adviser would have applied a rental value to this unit of £6.25 per sq ft."
- The Defendants submitted that without adequate support from the CACI Report Mr Barbour's evidence does not provide adequate admissible expert evidence for an incompetent valuation by the Defendants ie Mr Barbour should, in effect, just fall away. I do not agree. For the reasons which I have already given, I do not accept the Defendants' general objections to Mr Barbour's expertise. Although there is no doubt that Mr Barbour relied upon the CACI report in support of his own conclusions, his reports fairly read did not depend exclusively on the CACI report. On the contrary, it seems to me that the views and conclusions expressed by Mr Barbour were based not only on the CACI report but also on his own experience and expert analysis. I then turn to consider that evidence of Mr Barbour and the particular criticisms of the work done by the Defendants and the advice which they gave.
Assessment of rents and tenant interest
- The figure of £27.50 psf identified by Mr Blake was according to Mr Blake based on the research that the Defendants carried out which I have already set out above. In summary, that research was limited to (a) informal conversations carried out by the most junior member of the team (Mr Perry ) and with letting agents (which only revealed quoting and not actual rents); (b) a brief discussion with Mr Sargent; (c) a phone conversation and then a meeting with Mr Lyons and Mr Jacobs of Bed & Bath Works; (d) information and advice from IRE in particular in the form of the letter from Ms Songeur; and (e) internet research on articles referring to the FOC market.
- In my judgment, this research was inadequate and incompetent for the reasons broadly given by Mr Barbour (as summarised below) and as largely accepted even by Mr Sargent. This research was supposedly to cross-check or substantiate the information provided to the Defendants by IRE, including, importantly, the rental figure of £27.50 psf. It is plain that the Defendants placed far too much (unquestioning) reliance on what they were being told by the Developer's (selling) agent and far too little emphasis on their own enquiries notwithstanding their recognition of the need for such enquiries in what was a secretive market with its participants each having a vested interest in painting a particular picture with the information they provided. It is really quite telling that IRE was apparently surprised when approached by the Defendants for assistance with letting information as IRE had assumed that the Defendants had already satisfied themselves in this regard.
- The approach of the Defendants was to include in their advice everything positive that they had received from IRE and anything else positive revealed by their researches and little or at least much less of the negatives that even their own researches had uncovered. As to this, their own research revealed the following important matters which were not reflected in the Defendants' advice, nor properly taken into account in providing their valuation.
i) Negative market trends and, in particular, the saturation or near saturation of the market and increasing competition for tenants. Mr Sargents' view was that the FOC market was doing well in 2001 in the sense that it was attractive to investors, turnover and profitability were rising and there was significant potential in the market for growth. However, the contemporaneous internet reports which were available to the Defendants (and effectively ignored in the Defendants' Report and valuation) showed otherwise and this was confirmed by the evidence of Mr Barbour (which I accept).
ii) The threat of competition and the risks posed by trying to compete with another nearby FOC.
iii) The risk of brand dilution by proximity of full price centres (which would deter tenants from locating at Dockside).
iv) The importance of surrounding and compelling leisure or other attractions to draw consumers to the FOC.
v) The importance of attracting major brands.
vi) The need for capital contributions and tenant incentives. Significantly, no attempt was made to approach any potential anchor tenants and it was therefore completely unknown and uncertain whether any anchor tenants would be interested in moving into Dockside and, if so, on what terms.
vii) The importance of critical mass and the requirement, in particular, to have a centre of between 150,000-200,000 psf: something that IRE had mis-quoted and an error which rudimentary checks would have revealed.
viii) The importance of the identity and experience of the operator/developer. Had Mr Blake put "two and two together" he would have identified that not only did the Developer lack experience but that it also had a failed experience (together with the scheme architects) of developing an FOC.
- The Claimants submitted that this last failing was particularly important as it was clear that the Defendants failed to carry out even rudimentary due diligence with regard to the Developer notwithstanding that they recognised that it was central to the success or otherwise of Dockside. While it is true that it was proposed to engage highly experienced individuals to manage the centre, as Mr Blake accepted, there was a limit to this "contracting in" of expertise and the role of the Developer remained key. Yet the Defendants failed to identify that not only did the Developer have very little FOC experience but that which it had included experience of developing a failed FOC at Rolling Stock. (This was the subject of a late application by the Claimants to amend their Particulars of Claim during the trial in respect of which I gave leave.) As Mr Blake accepted, had this been identified, he and the Defendants would have been obliged to draw this to the attention of the Claimants and different advice would have been given. In response, the Defendants submitted that this added nothing to the Claimants. In particular the Defendants submitted:
i) It was also the Claimants' case that Mr Steve Reeves had only construction experience and did not have experience at managing an FOC. Given his role was, on the Claimants' own case, limited to construction, the fact that this FOC failed 24 months after opening (by which time the construction phase had presumably ended by at least 24 months) cannot be laid at the door of Mr Reeves, much less be relied upon as an indication that he had "failed experience" as a manager of FOCs; and there is no evidence whatsoever that a factor in its failure was its construction.
ii) Unless the Claimants could show that this past history, if reported to them (and Mr Blake's evidence was this is what he would do, to allow them to decide), would have caused them to act differently, it did not avail the Claimants. There was no supporting evidence for this claim.
iii) The matter was considered by the Defendants' valuation expert, Mr Sargent, who provided details of another developer whose past track record included a failed FOC scheme but who nevertheless went on to have successful FOC developments. It was axiomatic that one failed development does not mean the future developments by that developer are bound to fail nor even that this would materially affect the likelihood of failure. It must be remembered that the Developer had not run, but merely constructed, that earlier, failed development and did not appear to have had any role in its subsequent failure.
- In my judgment, the first and last of these points are forceful and, in the event, I make no finding in the Claimants' favour in regard to the "failed experience" of the Developer. I leave it out of account. However, even ignoring this "failed experience", the undeniable fact is that unlike (say) Realm or Freeport, none of the three individuals that comprised the Developer (Messrs Reeves, Goff and Hewitt) possessed any credible FOC experience. Mr Barbour strongly criticised the Defendants' failure to carry out proper due diligence in this regard, to take this lack of experience into account and to advise the Claimants properly as to the limitations and risk imposed by the Developer's identity, lack of market credibility and appropriate expertise. I agree. In my judgment, this was a major failure on the part of the Defendants in particular because Mr Blake had specifically been told by Mr Montgomery that traders generally wanted a "recognised name and…a manager that knows what he was doing."
- In my judgment, another major failing was the Defendants' reliance on the FOCs at Braintree and Ashford again broadly for the reasons given by Mr Barbour. In particular, the Report identified that established FOCs like Braintree and Ashford traded at an average turnover of approximately £275-£300 psf with turnover rents typically said to average approximately 10% of turnover such that estimated rental income at "competing and comparable centres, such as Ashford and Braintree is therefore in the region of £27.50-£30.00 psf" [added emphasis]. Quoting rents for base rents at these centres (that is Ashford and Braintree) were said to be £25.00 to £30.00 psf. As against this, the Report identified that gross and net income at the Clacton FOC was just £15.00 and £12.10 respectively but advised that "the Clacton centre is not comparable to [Dockside] which is clearly demonstrated when the level of turnover achieved is compared with competing centres at locations such as Braintree and Ashford". The Claimants submitted that this reasoning was entirely circular and incompetent. I agree. Even Mr Sargent considered that Dockside was not comparable to either Ashford or Braintree.
- The result of the failures referred to above is that the Claimants did not receive a full, still less a balanced picture of the true position or of the risks associated with the investment in Dockside and that the base rental figure of £27.50 psf identified by the Defendants was, in my judgment, not soundly based.
- Moreover, I also accept the evidence of Mr Barbour that the advice provided by the Defendants' evaluation was flawed for the following reasons.
- The Defendants failed to take account of the competition presented by competing full-price retail offerings and, in particular, that presented by what was then Europe's largest retail shopping centre at Bluewater, some 14 miles away. Mr Sargent accepted that it would have been prudent for the Defendants to mention Bluewater although his view was that it made no difference to the value. I do not agree. Although it may be correct as submitted by the Defendants that the FOC shopper is a separate and very discrete part of the market, I accept the evidence of Mr Barbour that Dockside faced strong competition from Bluewater as well as other centres which the Defendants largely ignored. In particular, the Defendants incompetently assessed that Dockside would "compete well" with its nearest competing FOC, Ashford. This completely ignored that Ashford was already established as a successful first division FOC with designer label tenants, a superior location and access, more attractive and less costly design and layout, critical mass in terms of floor space, and an experienced and, indeed, market-leading operator, in the shape of McArthur Glen. Again, these failings were recognised (in the end) by Mr Sargent. As submitted by the Defendants, I accept that Mr Woolley's evidence was that the "main driver" was the catchment and even with overlapping catchments for Chatham and Ashford, there was still around 2.5-3 million population nearer to Chatham than Ashford which he described as "considerable". Nevertheless, I accept the Claimants' submission based largely on Mr Barbour's evidence that it was or should have been obvious that there was at the very least a significant risk that Dockside would or might be "trumped" by Ashford and that the Defendants failed properly to take such risk into account.
- The presence of Ashford not only provided competition but the additional problem that tenants at Ashford would probably be prevented by the terms of their leases from taking a unit at a competing FOC within a radius of 50 miles and so would thereby be prevented from taking a unit at Dockside. Whether or not such terms were strictly enforceable as a matter of law, they were generally heeded in the market. In any event, tenants were unlikely to take units in two different FOCs in the same catchment, as Mr Sargent himself recognised. His view was that Dockside would be able to establish itself by attracting those tenants who were unable to find space at Ashford and by marketing itself as a more mid/mass-market centre. Whether or not this were even possible (and, as Mr Sargent graphically demonstrated, in the case of other FOCs that shared a catchment the mid/mass-market centre inevitably lost out and earned less than its brand-led rival), this risk was not assessed by the Defendants or drawn to the attention of the Claimants. It was plainly relevant not only to the commercial viability of Dockside but also to its value.
- In my judgment, the impact of competition cannot be over-stated. The pattern in the FOC market was, as demonstrated even by Mr Sargent's evidence, clearly established: McArthur Glen Livingstone "trumped" Freeport Scotland, Braintree "trumped" Clacton and Gunwharf "trumped" Whiteley Village. In each case, the larger, designer-brand FOC out-performed its mass-market rival. This was so even where the rival was operated by an established operator and developer such as Freeport and so the risks of failure with the Developer with its thin experience were all the greater.
Tenant incentives and marketing budget
- The Defendants accepted the Developer's figures for what was required in terms of a budget for tenant incentives and marketing budget i.e. £4m.
- Mr Sargent was aware of the practice of payment of large incentives to anchor tenants. He considered this to be of less relevance to value where there was a seven year rent guarantee but accepted that a view had to be formed in the process of valuing an FOC. His view was that there had been a change of practice (which he could not precisely date) when payment to non-anchor tenants started to happen. Mr Sargent admitted he had not been involved in letting or setting up a non-trading FOC. However he did write an article on the requirement to pay tenant incentives, the date of which by his best estimate was some time in 2000. The fact that he had not mentioned payments to non-anchor tenants indicated (so it was suggested by the Defendants) that this was not market practice at the time, otherwise it would have been mentioned. As to the amount of incentive, he proffered the level suggested by Freeport. His Talke report in 1998 had also included £2m for tenants' incentives. In my judgment, the Defendants' acceptance of the figure of £4m was incompetent and demonstrated to be so very shortly after completion. Concerns about the adequacy of the marketing budget of £4m were raised almost immediately following completion by the Defendants themselves, at a meeting on 14 September 2001 to discuss the letting strategy to be employed. This meeting also included consideration of the need to offer large incentives to secure anchor tenants and to offer those tenants modified lease terms. At the next meeting on 11 October 2001, Mr Reeves informed the meeting that while Polo Ralph Lauren would be an ideal anchor tenant, it might cost up to £750,000 (in the form of incentives) to secure them as a tenant. Although these events occurred after April 2001, there is no question of hindsight: the position here was plain prior to completion and even from the Defendants' (inadequate) research. Thus, for example, Mr Montgomery identified the need to pay a tenant of the calibre of Nike something like £1m by way of incentive to take a 10,000 sf unit while an allowance of £80,000 per unit for the other 75 units might be required: a total budget of in the order of £8m. This position reflected the message given in Mr Sargent's article (which the Defendants also appear to have obtained). It is also apparent that very substantial incentive payments were being made to tenants from as early as 1998. In summary, Mr Barbour's expert evidence (which I accept) was that a budget for incentives alone of around £50 psf namely £7,285,000 would be the minimum requirement for a scheme such as Dockside (inclusive of incentives for anchor stores). That is slightly less than the figure based on Mr Montgomery's own advice at the time.
- The Defendants' suggestions that any inadequacies in the budget could be addressed by the Developer offering rent free periods and/or would be immaterial come year 7 are unpersuasive for a number of reasons. First, as emphasised by Mr Barbour, it was imperative that the scheme was viable from opening in order to avoid a downward spiral from which the scheme would not recover. Second, the Developer was prevented by the terms of its lease from offering rent free periods in excess of 6 months without permission. Third, the tenants were in any event interested in receiving cash contributions (which could be used to finance fit out costs for example) rather than simply rent free periods. Fourth, the level of incentives available to let the centre in the early years was plainly relevant to how successful (and occupied) it was likely to become by year 7 and, further, given that lease terms were usually 5 or 10 years, further incentives would be required to retain existing tenants or to attract new ones at years 8 (5 years after opening) and 13 (10 years after opening).
- A similar position applies as regards the inadequate assessment of the proposed marketing budget. Again, the material was in fact obtained by the Defendants but not deployed or analysed. So, again, Mr Montgomery identified the need for a pre-launch marketing budget of £350,000 and a continuing annual budget in a similar sum. Again, Mr Barbour's expert evidence on this issue was not challenged. Mr Sargent could not assist in terms of amount. His opinion was that it would be normal for such costs to be recovered under the service charge. Whilst Mr Barbour accepted that this might be true in part, his evidence (which I accept) was that there would almost certainly be a shortfall.
Location, design, layout and listed building status
- The Defendants recognised the importance of having other attractions and leisure facilities locally to Dockside so as to attract consumers and to increase dwell time. They also recognised, as is clear from the submission to the Valuation Panel, that there was no certainty that the various attractions that they listed in their Report would be built at all or in time for the opening of Dockside. While the submission to the Panel recorded this uncertainty, the Report did not. Mr Sargent's view was that the Defendants' Report accurately summarised the developments which were underway or proposed; and that the other attractions were an "added bonus" but they were not essential. He did not accept that the Defendants' advice should have warned of the risk that the plans did not materialise or did so late. I do not agree.
- This accurate recording of uncertainty (and thus risk) in the submission to the Panel was entirely inconsistent with (i) the representation in the IM, verified by the Defendants, that Dockside was situated in a "prime location" containing a "multitude of family-leisure oriented attractions and facilities"; and (ii) the advice in the Report that the development of Dockside would act as a "catalyst" for further development in the area as it will "attract many more people to the area". The true, bleak picture if, as happened, the planned attractions were delayed is revealed by the aerial photograph of the area. This advice was, in my judgment, again incompetent. Such a conclusion is supported by the expert evidence where, again, Mr Barbour was effectively unchallenged. Again, it is important to emphasise that this is not a criticism founded in hindsight. In my view, it was essential not only to recognise but to take properly into account the risks involved which were patently obvious at the time of the Report in 2001. Mr Sargent conceded the important effect of other attractions but otherwise sought to refer to the position as it exists now rather than as it did in 2001 or 2003. However, as emphasised by Mr Barbour, this ignores the importance of timing. The danger was that if everything was not in place at the time of opening of Dockside or shortly thereafter, there was a risk of a "downward spiral" from which it would never properly recover.
- The Defendants also failed to advise upon three core limitations as regards access to Dockside namely that (i) it could not be seen from the Tunnel Link Road which provided the main access to the site because once drivers had exited the Medway Tunnel on the Link Road Dockside was then behind them and out of view; (ii) there was no or very little passing trade, as Mr Blake himself conceded (another feature that Dockside shares with Clacton); (iii) there were restrictions on signage to draw trade to the centre; (iv) consumers coming from its catchment to the west (i.e. those coming from London) would have to drive past Bluewater in order to reach Dockside; and (v) public transport access was poor, certainly relative to that provided by Ashford. Mr Barbour's expert evidence here was not challenged. Although Mr Sargent addressed the issue very shortly in his report, it seems to me that the failings identified by Mr Barbour were clear and obvious.
- The design of Dockside was the responsibility of Kemp Muir Wealleans who had also been responsible for the design of the failed FOC at Rolling Stock. Save for this, they did not appear to have any relevant FOC or even retail expertise. In any event, there were three key restrictions in terms of design upon which the Defendants ought to have (but failed) to provide advice: (i) the two-level nature of the centre and the lack of critical mass on either level; (ii) letting restrictions; and (iii) maintenance and operating costs (higher than other FOCs).
- The first of these was fundamental when it came to assessing commercial viability and value. Mr Sargent acknowledged that the design of the property and its listed status were "significant issues"; and he agreed with Mr Barbour that the two-level nature of the centre was unusual. Further, he acknowledged that the first floor was less attractive although he did not agree that it was incompetent not to include a discussion on this point in the Defendants' Report. He relied on the fact that Freeport, in its original appraisal attributed a rent of 80% of the ground floor rent to the first floor which, according to Mr Sargent, suggested that the first floor would have rather less impact than had been suggested. I do not agree. The 80% figure used by Freeport was only very preliminary. The fact is that in order for the Defendants' average figure of £27.50 psf (i.e. over the entire lettable space) to be achieved, this either had to be generated on the first floor or significantly higher rents earned on the ground floor. Neither was at all likely and I accept Mr Barbour's evidence that the failure to recognise this was incompetent.
- The absence of advice here is, again, surprising, as the Defendants had been alerted to the issue. Thus, (i) the Defendants knew that Rolling Stock (another two-level scheme) had already failed; and (ii) Mr Montgomery highlighted to the Defendants the importance of drawing customers to the upper floor (and also made it clear that two-level design was unusual). These points in and of themselves ought to have alerted the Defendants to the risks posed by the design. The only other multi-level centres were Rolling Stock (which had failed), Loch Lomond (which was not successful), York and Hatfield Galleria (both of which had particular reasons for succeeding). Again, on this Mr Barbour's expert evidence was not really challenged.
- In addition to the general problems with the first floor, there was also the particular problem relating to the large irregularly shaped unit of 15,000 sf at the rear of the first floor. Mr Barbour's evidence as to the need to make an adjustment i.e. additional reduction in respect of this area was not challenged.
- These problems regarding the first floor meant an absence of what was referred to as "critical mass". The ideal size for a FOC had been identified as being between 150,000 and 200,000 sf. At 145,700 sf Dockside fell just below this but when the first floor is taken into account it had insufficient critical mass on either level. This is relevant when it comes to classifying Dockside.
- The Defendants failed to advise on the letting restrictions imposed by the planning permission applicable to Dockside which restricted all bar two units on the ground floor to unit sizes of no more than 4,304 sf. This restricted flexibility in terms of unit size generally and, in particular, when it came to offering units that were attractive for anchor tenants. Mr Sargent addressed this issue by referring to the co-operative approach of the planning authorities that has in fact been experienced but this relies on hindsight and would not have been known at the time. In my judgment, competent advice would have highlighted this as a risk. As Mr Barbour noted (again in unchallenged evidence) there was also a problem with the design of the central ground floor units. Even if these units could be combined, they would remain unattractive to tenants because they would have relatively long frontages compared to their depth. These last points highlight the obvious point that not every unit was capable of earning the same level of rent yet the Defendants' assessment of rent required them all to earn £27.50 psf or an average of £27.50 psf before deducting an allowance for irrecoverable costs and void units. For an average to be achieved, plainly some units would have to earn very considerably in excess of £27.50 psf, requiring Dockside to perform at least as well as Ashford or Braintree.
Maintenance and operating costs
- Mr Barbour's evidence was that the design, location and listed status of Dockside were likely to lead to increased maintenance and operating costs. I accept that evidence. Mr Sargent agreed although he refused to reflect this in lower rental levels because he had been unable to identify any comparable evidence to justify an effect on rent. It is fair to say that it is impossible now to assess quantitatively what those increased costs would be and the effect such increased costs would likely have on rents. However, such effect would not have been insignificant. It is notable that the fact that running costs would be likely to be high contributed to Mr Brooks' decision to reject Dockside as a suitable investment for MEPC. In my judgment the Defendants' failure to investigate the likely increased costs and to take this into account was another significant failure on their part.
- In summary, the Defendants failed to appreciate the disadvantages of the design, layout and listed building status of Dockside and the consequences these had for, among other things, attracting consumer spend and tenants and running costs. It is unsurprising that Mr Brooks and Mr Woolley together with others either discounted Dockside or walked away from it.
- Given all these failings by the Defendants, it seems to me that the base figure of £27.50 psf used by Mr Blake was far too high as even Mr Sargent accepted. However, the critical question remains ie what would have been the advice of a competent adviser/valuer as to the likely rental income at year 7?
- Before considering the expert evidence, on this crucial issue it is convenient to go back to Mr Blake's own Memorandum dated 31 January 2001 which was prepared for submission to the Valuation Panel. It is, in my view, significant that as appears in the Table contained in Attachment 2 of that Memorandum, a range of "indicative" rental figures (and yields) is given. This Table is, in my view, most telling. Surprisingly, this range of possible rental values was never carried through into the Defendants' advice to the Claimants as contained (for example) in the Defendants' Report. Even more surprisingly, it appears that the rental figure which formed the basis of the Defendants' advice to the Claimants was equivalent to the very top of the range in this Table. In my judgment, such advice was incompetent and inexcusable. Even on the basis of the Defendants' own apparent appreciation of the possible range of rental figures, there was no justification for simply plumping for the top figure and ignoring the range identified in the Defendants' own internal Memorandum. That top figure might be justifiable as a "target" or "goal" on the assumption that Dockside was able to compete effectively with Braintree and Ashford and ignoring all the other significant deficiencies relating to Dockside which I have summarised above and which were largely ignored by the Defendants. But as I have already concluded, there was no basis for making that assumption or ignoring these deficiencies. Bearing these matters in mind, it seems to me that the Defendants had no proper basis for suggesting that the base rental figure was any higher than the bottom of the range that they had themselves indicated in this Table i.e. £20 psf (ground floor) and £15 psf (first floor). For the reasons set out below, even these figures were, in my judgment, too high and a competent valuer would have advised even lower figures.
- So far as the expert evidence is concerned and as I have already indicated, Mr Barbour's evidence was that a figure of £19 psf for the ground floor and a first floor sales density equating to a rent of £9.50 psf would be considered "appropriate" by a competent valuer and commercial property investment adviser. The basis of these figures is set out in paragraph 19.2 of Mr Barbour's Report which I have already quoted above. The difficulty with this evidence is that to the extent that it relies on Mr Parr's Report it is unreliable given my conclusions with regard to the latter; and to the extent that it appears to be based on Mr Barbour's "experience", Mr Barbour's Report did not identify the specific "experience" which would justify in quantitative terms the figures identified by Mr Barbour rather than any other figures.
- It was the Defendants' submission that Mr Barbour's vaunted actual experience did not stand up to scrutiny, neither did it support his claim that: "From my experience of the FOC market at the time, this level of rent [£190 per sq ft] would be considered to be appropriate...": see paragraph 19.2 of his report. In particular, the Defendants submitted:
i) Mr Barbour had produced no documents evidencing rental levels in FOCs pre-March 2001.
ii) His experience at Jacksons' Landing dated from 1994 and concerned a small (75,000 sq ft) FOC which had failed in 2004. His involvement in the letting had been "extremely limited". It was obviously irrelevant what the rental levels had been at this FOC, some seven years previous to the index date.
iii) At Clacton FOC, (where the base rent had been £15 psf) again he did not personally deal with the letting, and his company's involvement had been in 1995/1996. Moreover, when cross-examined as to the possible relevance of Clacton FOC, Mr Barbour said that he did not believe that information regarding Clacton FOC would be relevant and helpful because "…every centre is different. What I've said earlier [i.e. in relation to Clacton FOC] is that I've purely used this not as a benchmark but just to gauge other schemes and, from my experience, where I felt those rents should or would be".
iv) His other listed FOC experience related to the FOC at Ebbw Vale a 100,000 sq ft centre in 1995-1998 a minimum of three years before the index date.
v) Mr Barbour also listed some limited experience, the details of which he could not recall where he acted for a number of retailers again with base rents at £15 psf.
- Moreover, the Defendants submitted that there was a fundamental inconsistency with Mr Barbour's evidence viz, having rejected the use of comparables as an appropriate methodology (at least for rental values), he could not easily cite examples from other FOCs or schemes, without contradicting his own methodology, as he in fact did when justifying his reliance on his experience at Jacksons Landing:
"Q. Does it give you any assistance as to the level of rents achievable at Dockside if you were looking at the position in March 2001?
A. To a degree I think it does, because I think rents had changed very little across the board throughout the whole time outlet had been in existence. They certainly changed once trading -- a scheme was opening and there was trading performance and you could actually view how they would -- the attainment level. But at Dockside we're dealing with a speculative non-built scheme without any tenants."
Q. Mr Barbour, I want to be clear about this, because I had understood your position to be -- correct me if I'm wrong -- that rentals achievable at other centres was of no relevance to you in determining what was achievable at Chatham. Is that not right?
A. That is correct, but I think it does give a good cross-reference to see if the levels that you feel comfortable with in a scheme are cross-referenced to other things in your experience."
- These particular criticisms of Mr Barbour's' evidence were, in my view, forceful. However, the difficulty is that each FOC is unique and the use of "comparables" is largely unhelpful. As I have said, there is no doubt that Mr Barbour has considerable general experience in the FOC market and, despite certain important errors in his evidence which I have identified, he was, in my judgment an impressive witness. Ignoring Mr Parr's evidence, the figures of £19 psf for the ground floor and £9.50 for the first floor were based on that experience and a broad assessment of the general state of the FOC market, the location of Dockside, the competition which it would face and the significant deficiencies inherent in its size and design which I have already addressed.
Mr Sargent's approach to rents
- The Defendants relied on Mr Sargent's assessment of rents and his overall valuation as suggesting that, notwithstanding any breaches of duty in preparing their advice, the valuation provided by the Defendants was nevertheless competent or at least fell within a range of possible valuations that would be competent.
- The Defendants submitted that as Freeport's appointed valuer Mr Sargent's pedigree for valuing FOCs was unquestionable. In terms of valuing existing FOCs, that was certainly correct. However, as Mr Sargent properly accepted, he had not provided commercial investment appraisals (though he had provided valuations and signed off verification notes on rights issues) and Freeport would carry out such appraisals itself. Mr Sargent's experience was confined to providing loan security valuations to banks and valuations for accounting purposes. He was (and is) a valuer in a valuations department. He is not now and has never been in the investment department which, it would seem, performs different work. Other than in the context of rights issues, it does not appear that he has, for example, provided advice in connection with or for inclusion in an IM. There is thus a material mis-match between the role performed by the Defendants (as to which Mr Barbour can speak with experience and authority) and the role discharged by Mr Sargent for his clients. The only non-trading FOC which Mr Sargent had valued, in 1998, was Talke and which subsequently he had valued for year-end accounts' purposes. In all other cases, the valuations were provided in respect of trading data which was available from the operator Freeport. Perhaps most importantly of all, Mr Sargent was only ever retained to advise on value after his client had purchased and developed the FOC in question and, indeed, had commenced trading or, in the case of Talke, had already purchased and commenced the development of the FOC. In no case was Mr Sargent asked to provide an appraisal of a FOC for his client, to assess its commercial prospects or to provide investment advice. This is not surprising: his client was Freeport which, as Mr Woolley explained, made its own assessment of the commercial viability and prospects of any FOC that it was considering purchasing or developing and did not need Mr Sargent to advise it in this regard. By contrast, Mr Barbour was regularly carrying out appraisals of FOCs for his clients. The Defendants submitted that the foregoing did not invalidate Mr Sargent's expertise. However, in my view, there is an important difference between, on the one hand, a valuation of an existing FOC of an experienced operator (like Freeport) fully let and trading and, on the other hand, a valuation of a new site such as Dockside in 2001 which was not yet developed, was not trading and had no tenants.
Mr Sargent's valuation
- Mr Sargent's valuation was based on an average rent of £18.50 psf. In evidence, he stated that this could be arrived at by applying £20psf to 85% of the total floor area and £10 psf to 15% of that area. Such a breakdown, which would accommodate the lower rate commanded by anchor tenants, would lead to the same overall average rent psf. Mr Sargent's evidence as to rental values was largely based on comparables. Mr Sargent admitted that his rental value was a lot lower than that of the Defendants. There had been some lettings at £22.50 and one at £25.00; and in his view it was quite normal to have a range of base rents for different categories or "tiers" of FOCs. In the case of base rents it was his view that there was almost a 'benchmarking' of £15 per sq ft for third tier; £20 per sq ft for second tier and £25 plus per sq ft for upper tier, with little variation across the country. Although Mr Sargent personally felt the Defendants' rental value was high, he knew of such rental levels as £27.50 being used at the time in other centres. Three of the six comparables upon which he relied were trading Freeport Schemes: Fleetwood, Hornsea and Talke.
- The first and obvious point about these is that it is very difficult indeed to see what trading FOCs in Lancashire, East Yorkshire and Stoke-on-Trent can provide in terms of comparable evidence for an assessment of the rental levels likely to be achieved at a yet to be built FOC in Chatham in Kent. These other centres were located in completely different parts of the country, with completely different catchment areas, were of different sizes, with different tenants and with different competitors within their catchments. They were also being operated by one of the three market leaders, Freeport.
- Even if this lack of comparability is ignored, Mr Sargent's approach to calculating the average rents earned at these three FOCs for the purposes of making his own assessment of the rent likely to be earned at Dockside was, in my judgment, flawed. His approach was to average the base rents payable over only the square footage relating to those units that were paying base rent and to exclude from the average square footage of units on which no base rent was being earned (either because they were vacant or because, in the case of Next, for example, at Fleetwood, the tenant was not paying base rent). The effect of this was to overstate the average base rent being earned. Thus, for example, at Fleetwood, Mr Sargent's average was £19.41 whereas a true average calculated across the lettable space as a whole was just £17.55.
- Quite apart from lacking logic, this approach is objectionable on a number of levels. First, having calculated his averages, Mr Sargent used these to justify his own figure for base rents on the ground floor at Dockside of £18.50 psf which he then applied across the ground floor lettable space as a whole. It seems to me that this assumes, wrongly, that the centres from which the averages are calculated are not only comparable to Dockside in the respects identified above, but also as regards occupancy levels. Second, Mr Sargent appeared willing to include in his average calculation the square footage relating to units where tenants were paying very low base rents but nevertheless excluded those who pay none. Thus, the averages do take account of those (powerful) tenants who are able to negotiate lower or low base rents but exclude the effect of those who are able to negotiate terms which require them to pay none. Mr Sargent made no other adjustments in his calculation to take account of this. For these reasons, it is my view that Mr Sargent's reliance on averages of base rent earned at other FOCs provides no sound basis for his assessment of base rent at Dockside.
- Mr Sargent viewed the FOC at Talke (with an average rent for the retail units of £20.68) to be the best comparable but that overall Dockside was better than Talke. The Defendants submitted that this was also the only non-trading FOC which Mr Sargent had valued, making it very clearly his most suitable comparable. In particular, the Defendants submitted that Talke was comparable because it was also a converted, existing building; it was smaller than Dockside; it was a long leasehold: it was fairly recently developed (1998); it had not been pre-let except for the supermarket tenant (Co-op) and one other tenant, and the location was similarly "quirky" being between an industrial and a residential area. However, the Defendants submitted that Dockside had a better location than Talke which was on the outskirts of a former mining town. Talke also had a lower socioeconomic demographic and unlike Dockside had no other complementary uses around it. In 2001 Talke was still a fairly new development, which had not reached its potential.
- However, in my view, there are important specific differences between Talke and Dockside. First, the Talke valuation report was prepared in 1998, 2 ½ years prior to the material report here. Second, the Talke project in June 1998 was almost complete. It had already been purchased by Freeport. Completion was only a few months away. Third, the Talke report proceeded on the basis of specific instructions which asked Mr Sargent to value on specific express assumptions as to letting and vacant possession. Fourth, the Talke Report was prepared in the knowledge of two pre-lets: one to the Co-op and one to an FOC retailer, the Designer Room. Fifth, Talke was not on two floors. Sixth, the task of refurbishing a hypermarket was a rather different prospect to starting from scratch with a 19th century boiler shop. Seventh, Talke and Dockside were in different geographic locations with a unique catchment spend in each. Lastly, (unlike Dockside) Talke was operated by Freeport, a highly experienced operator. For all these reasons, I do not accept that Talke was a useful or relevant "comparable".
- The other technique used by Mr Sargent is that of hindsight by relying on the rents in fact agreed by tenants at Dockside. Self-evidently, this information would not have been available to the Defendants when assessing rents in 2001. In any event, and as Mr Sutton explained (in his unchallenged evidence on this issue) the rents in fact received at Dockside are far below the figures quoted by Mr Sargent. This also meets Mr Sargent's point at paragraph 6.3.2 of his supplemental report that investigations of those tenants that actually took units at Dockside, had they been made by the Defendants in 2001, would have revealed their interest in Dockside. Quite apart from the fact that this is entirely speculative, the interest (if any) revealed would not have begun to justify the Defendants' figure of £27.50 psf or even Mr Sargent's assessment of rental income.
- Finally, it is necessary to refer to Mr Sargent's evidence in relation to the Whiteley Village FOC. In his first report, Mr Sargent considered this to be a comparable to Dockside (with an average rent of £17.08) and was given as an example of a case where two FOCs could co-exist (in its case with Gunwharf Quay) side-by-side in the same catchment. It was relied on again at paragraph 3.2 of his supplemental report to point to a valuation of the centre which proceeded on a rental value of £25 psf. However, this was later discovered to be inaccurate and the true base rent at Whiteley Village as at May 2001 was revealed to be just £14.69 psf. Mr Sargent then disavowed Whiteley Village as a comparable as accepted by the Defendants in their final submissions.
- As summarised above, Mr Sargent's view of rents (ground, first and turnover) seems to me to be flawed for the reasons I have given. The result is that his figure for an average base rent must be reduced to in the order of £16 psf (if, that is, his figure of £18.50 psf is intended to have a broadly proportionate relationship with the calculated averages) and below this if, as would appear to be the case, Whiteley Village is comparable. This in turn reduces both his assessment for rent on the first floor and his turnover rents for both the ground and first floors to levels that are broadly similar to (if not lower than) those adopted by Mr Barbour.
Conclusion as to likely rental in 2008
- I have set out at some length the particular criticisms of the work done by the Defendants as advanced by the Claimants based largely on the evidence of Mr Barbour. For the reasons set out above, I accept most of those criticisms. I have also set out above my comments with regard to the evidence of Mr Barbour and Mr Sargent concerning the likely rental figures. The Defendants emphasised what they described as the "absolute vulnerability to an overdependence on statistics and mathematics". They relied in particular on what Mr Sargent said viz "…..with valuation you do have to stand back and look at the overall number. You can drill down into the minutiae but, at the end of the day, it is the standing back approach and saying what looks reasonable." I agree with the importance of that "standing back approach". Accepting that approach and having regard to everything I have said, it seems to me that the appropriate average rental figure for the ground floor was £19 psf and 50% of that figure i.e. £9.50 psf for the first floor. The ground floor figure needs to be reduced to take account of the incentives for anchor tenants. The evidence of Mr Barbour (which I accept) is that this should be based on an assumed floor area on the ground floor of 18,000 sf and a reduced rental of £10 psf. In addition the rental figures require further reduction for an appropriate void allowance (see below), marketing budget shortfall (£100,000) and asset management fees @ 4%. I am unpersuaded that any further specific additional reduction should be allowed for incentives to non-anchor tenants or the irregular shape on the first floor. However, I recognise that the valuation of this "component" would be subject to a substantial "range". I revert to the appropriate range when considering the question of yield.
- Void allowance. As Mr Sargent indicated there is a debate amongst valuers over whether there should be a 'void allowance' in FOC valuations, since it is not usually applied for commercial property. In summary, his evidence was that a more usual approach is to have reversions on units which are not let. He indicated that deductions for void service charge and vacant rates (as he had used in his Sterling Mills valuation) reflected a 'problem' property. With Dockside and its 7 year rent guarantee, and when valuing on the basis of reversionary income after year 7, Mr Sargent suggested that it would be reasonable to assume that any such 'problems' would be behind it and that if a property was expected to trade normally it would not be necessary to make any allowances for voids or non-recoverable outgoings. In that context, the Defendants relied on the fact that contrary to his valuation in this case, Mr Barbour's valuation of Spalding was carried out without any adjustments for void allowance or non-recoverable outgoings. However, in my view Spalding was not comparable and the assumption of zero voids is, to my mind, unrealistic. Again, the Memorandum dated 31 January 2001 is telling: the indicative values in the Table contained in Attachment 2 assume a 5% income void. This is consistent with the evidence of Mr Barbour (which I accept) that there was a "standard 5% provision that was adopted throughout the FOC sector". In addition, it is also necessary to allow for a 5% void in the service charge.
- For the reasons set out above, it is my conclusion that the likely rental figure which a competent valuer would have calculated for the end of year 7 (i.e. 2008) is as follows:
Ground Floor (Base Rent and Turnover Rent)
Standard Unit 72,700 sqf @ £19 psf £1,381,300
Anchor Stores 18,000 sqf @ £10 psf £180,000
All Units 52,500 sqf @ £9.50 psf £498,750
Straight line rental void @ 5% £103,000
Straight line service charge void @ 5% £53,070
Marketing budget shortfall £100,000
Asset Management Fees £82,402
- The question of yields needs to be addressed under two heads viz (i) yields without the benefit of any enterprise zone allowance and (ii) yields with the benefit of an enterprise zone allowance.
- As to the former i.e. yields without the benefit of any enterprise zone allowance, it was common ground that relevant yields need to be considered by reference to each of the three components which I have identified i.e. (i) the guaranteed rental i.e. £4,006,750 pa for 7 years; (ii) the top-up priority return and i.e. £550,000 pa for 7 years (iii) the likely rental at the end of year 7 (2008) which I have concluded was £1,721,578.
- With regard to the guaranteed rental, as I have already stated, there was an agreement between the experts (Mr Barbour and Mr Sargent) that the appropriate yield was 6.75% providing a capital value for this component of approximately £21,975,000. The Defendants suggested that I should nevertheless taken the yield used by Mr Blake (i.e. 5.75%). I do not agree. I see no reason to depart from the yield figure agreed by the experts.
- With regard to the second component i.e. the top-up priority return, it was common ground that the yield figure would be higher than 6.5% in particular to reflect the fact that this component was not covered by any guarantee. Mr Barbour's evidence was that an appropriate yield was 10%. In support of that yield figure, the Claimants also relied on the fact that the Clacton FOC was being marketed at about this time at a yield of 10.35%. Mr Sargent's evidence was that an appropriate yield was 7.5%. This was the yield which he used for his valuation of Talke in June 2001. A lower figure (6.75%) was used for Freeport Fleetwood also in June 2001; a higher figure (8.00%) was used for Freeport Hornsea in April 2001. In broad terms, the yield figure will, of course reflect the risk. If the commercial prospects are relatively weak, then the yield will tend to go up. The higher the risk, the weaker the prospect, the bigger the yield. So an assessment of yield will depend on an assessment of the risk in obtaining the top-up return. The risk associated with this component was obviously bigger than with regard to the guaranteed rent element. There was, of course, always a risk that Dockside would fail completely in which case some or all of this top-up priority return would never be paid. However, even the Claimants did not suggest this was likely and, for the reasons already stated, it would seem that this top-up priority return would have become payable even if Dockside was only moderately successful. This suggests a lower rather than higher yield. However, I note that Mr Sargent took a yield of 8% when he carried out a valuation for Hornsey in April 2001. That was an existing, fully trading FOC operated by Freeport. On this basis, the Claimants submitted that Mr Sargent's yield figure of 7.5% was unrealistically low. I agree. However, I am equally unpersuaded that the figure of 10% assumed by Mr Barbour is appropriate (he only took a figure of 8% for Spalding) still less the figure of 10.35% since Clacton had its own special features and was not in my view directly comparable. Given everything I have said and doing the best I can on the material before me, it seems to me that the appropriate yield which a competent valuer would have used for this component is 8.5%. I calculate that this produces a capital value in April 2001 of approximately £2.8m. This is not an exact figure but it is, I believe, reasonably accurate for present purposes.
- As to the third component i.e. the value of the reversion at the end of year 7 (2008) it seems to me inevitable that the appropriate yield is even higher. This is so for three main reasons. First, unlike the second component, the underlying rental figure is not a relatively small top-up priority rental. On the contrary, the underlying rental figure depends upon an assessment of the likely value (and receipt) of tenant rents from the entirety of Dockside and therefore necessarily depends on the success of Dockside as whole. Second, the relevant date was, of course, the end of year 7 (2008) which was relatively far away from the index date (April 2001). Third, at the index date (April 2001), Dockside was, of course, a project which was not yet trading and, indeed, not yet built with no pre-let tenants and in a location which was in the course of development. In my judgment, the risks associated with such a project were significant and such risks would necessarily mean a higher yield. For all these reasons, I do not accept the yield of 7.5.% suggested by Mr Sargent. In my judgment, the proper yield figure is the one suggested by Mr Barbour i.e. 9.5%. I calculate that this produces a capital value in April 2001 of approximately £9,600,000.
- For these reasons, I calculate that the total capital value of all components in April 2001 is thus £21,975,000 + £2,800,000 + £9,600,000 = £34,375,000. This is the figure which I conclude a competent valuer would have advised was the capital value of Dockside in April 2001 without the benefit of EZ allowances.
- As to range, having regard to the principles which I have summarised above, it seems to me inappropriate to apply a single range or bracket to this total capital value figure. The right approach is to consider what if any range or bracket should be applied to each of the components and, on that basis, to calculate an overall range or bracket. Adopting that approach, it seems to me that so far as the first component is concerned (i.e. the guaranteed rental), there is no real scope for any significant range or bracket. The rental itself is fixed and secure. Any range or bracket would depend solely on a possible variation in the yield figure but since the rental is, as I say, fixed and secure, any such variation would be minimal. In my judgment, the appropriate range or bracket for this first component is no more than plus or minus 1%.
- As to the appropriate range or bracket for the second component, i.e. the top-up priority return, the rental figure was (as I have found) relatively certain but obviously involved greater risk which is of course already reflected in the higher yield. Nevertheless I accept that there is substantially more scope for a difference of views which might be expressed by a competent valuer. In my judgment, the appropriate range or bracket for this component is plus or minus 10%.
- As to the appropriate range or bracket for the third component i.e. the value of the reversion at year 7 (2008), it seems to me that is an exceptional case. The task of carrying out this element of the valuation was, as I have said, particularly difficult for reasons which I need not repeat. Given these particular difficulties it seems to me that the appropriate range or bracket for this component is plus or minus 20%. I recognise that this is much higher than even the top end of the third category (i.e. plus or minus 15%) referred to in K/S Lincoln v CB Richard Ellis Hotels although that is plainly not an absolute ceiling as the Judge in that case himself made plain. I also recognise that a range of plus or minus 20% falls within the range which Staughton LJ said was "absurd" in Nykredit Mortgage v Edward Erdman. However, it seems to me that the range of plus or minus 20% is appropriate here for at least this particular component because of the exceptional difficulties relating to its assessment. There is, of course, the obvious point that the Defendants should have alerted the Claimants to the exceptional difficulties of making a proper assessment of this component at the time and given appropriate warnings to the Claimants in particular with regard to the accuracy and reliability of at least this component of the valuation which the Defendants failed to do. However, in the event, I do not consider that this assists the Claimants in this case because (as I summarise below) the overall valuations provided by the Defendants at the time were in any event far outside any relevant range of competency.
Conclusions as to breach
- Drawing these figures together and with some small rounding, my conclusions are as follows:
|Top-Up Priority Return
|Reversion at Year 7 (2008)
- For the avoidance of doubt I repeat: these figures are on the basis of an open market valuation without any enterprise zone allowance. They are to be compared with the figure given by the Defendants and included in their Report of £48,150,000. It is obvious that the latter figure is well in excess of (i.e. almost 50% above) the figure which I have concluded would have been advised by a competent valuer i.e. £34,375,000; and also well in excess of (i.e. almost 33% above) the maximum overall top of the range which I have concluded is appropriate i.e. £36,795,000. It follows in my judgment, that the Defendants' open market valuation without the benefit of enterprise zone allowance was in breach of duty and negligent.
- I turn then to consider the question of yields and overall valuation with the benefit of an enterprise zone allowance. The latter figure originally calculated by Mr Blake in the Report was, of course, £62,850,000. After deducting relevant tax allowances, this produced a discount to the Defendants' open market value (i.e. £48,150,000) of some 13.41%. In effect, the benefit of the tax allowances was shared between the Developer and the investors i.e. in round terms £13.7m rent to the Developer and £6m rent to the investors.
- The question of yields and overall valuation with the benefit of an enterprise zone allowance was the main focus of Mr Farr's evidence. The thrust of his evidence was as follows. His starting point was the rental figures for each of the three components calculated by Mr Sargent. He then applied his own yield figures viz 7.75% to the guaranteed rental, 9.5% to the top-up priority return and 9.75% to the rental at the end of year 7 (2008). Applying these yields to Mr Sargent's rental figures he arrived at an overall valuation of approximately £39,025,000. He then calculated what total market value (pre-tax) would be appropriate if the tax benefit at 33.64% (84.09% + 0.40p in £) was discounted back to the net investment figure which he had previously calculated (i.e. £39.025m) i.e. by 66.36%. This produced a market value taking into account the tax allowances in the order of £58,825,000. However, in his view any appraisal of EZPUT property interest in April 2001 was open to what he said were "particularly wide ranges of opinion". In particular, Mr Farr considered that the main difficulties with Dockside were as follows:-
"a) A factory outlet scheme in an untried and untested poor location but with a potential regional retail catchment, but with no direct comparisons
b) No directly comparable EZPUT transactions upon which to rely.
c) The proportions of tax benefit enhancement due to the investor and the developer given the particular circumstances of the scheme, in particular the 7 year rental deposit.
d) The immature state of the factory outlet market with no EZPUT or pre-tax investment resale comparisons. "
For these reasons, he concluded that his market value figure was subject to a 15% possible variance, up or down i.e. a total 30% margin. Applying this margin, the appropriate range would be approximately £50m - £67.65m.
- My comments and conclusions with regard to Mr Farr's evidence are as follows.
- Mr Farr's chosen yields were plainly different (i.e. higher) than Mr Sargent's yields. The reason given by Mr Farr for taking these different (i.e. higher) yields was simply that these were the yields that would in his view apply (based on his experience of the EZPUT market) having regard to the nature of Dockside and the individual income streams in the specific context of the EZPUT market in April 2001. However, the precise evidential basis of the yields Mr Farr chose was somewhat vague and I was not necessarily persuaded that they were soundly based. In particular, both the first (i.e. 7.75% for the guaranteed rental) and the second (i.e. 9.5% for the top up priority return) seemed very high for reasons which I consider extremely doubtful. However, it does not appear necessary to resolve these points because Mr Farr accepted that the overall result of his net or post tax valuation showed a discount to the open market value of 13.66% which was comparable to the Defendants' 13.41% discount figure. And he also accepted in cross-examination that an approximate solution which had some merit was to calculate from the open market value both a gross valuation and a post tax valuation by applying this approximate discount rate.
- I agree. Thus, on the basis of the open market value which I have concluded would have been advised by a competent valuer i.e. £34,375,000 and applying a discount rate of (say) 13.50%, I calculate a post tax valuation figure of approximately £29,735,000. Performing the same exercise carried out by Mr Farr to arrive at a total market value (pre-tax), I calculate that this produces a figure of approximately £44,800,000 as follows: £44,800,000 x .6636% = £29,735,000. On the basis of my findings and calculations, the figure of £44,800,000 is thus the market value of Dockside in April 2001 which would have been advised by a competent valuer at that time with the benefit of an enterprise zone allowance. The comparable figure advised by the Defendants in April 2001 (i.e. £62,850,000) was thus much higher (i.e. almost 30% above) than this figure of £44,800,000 and far outside even the range of plus or minus 15% suggested by Mr Farr. In my judgment, it follows that the Defendants' valuation in the order of £62,850,000 for Dockside with the benefit of the enterprise zone allowance was in breach of duty and negligent.
Section G: CAUSATION
- The Claimants submitted that they relied on the Defendants' advice, valuations, due diligence and/or negotiations, and that such reliance caused loss and damage.
- For the avoidance of doubt, the Claimants submitted and I accept that they need not show that the Defendants' advice was the only matter relied on in determining to acquire Dockside; it will suffice if the advice played "a real and substantial, though not by itself a decisive part, in inducing" the Claimants to act as they did: see JEB Fasteners v Mark Bloom  1 All ER 582 where Stephenson LJ said at p589 "…..as long as a misrepresentation plays a real and substantial part, though not by itself a decisive part, in inducing a plaintiff to act, it is a cause of his loss and he relies on it, no matter how strong or how many are the other matters which play their part in inducing him to act" [emphasis added]. Whilst Stephenson LJ expressed the test in terms of the effect of a misrepresentation, this was in the context of a claim in respect of the negligent preparation of accounts. Further, the test has been adopted and applied in investment and valuation cases: see, eg, Cavendish Funding v Henry Spencer  PNLR 122 at para 125, Precis v William M Mercer  EWHC 838 at para 182. Moreover, where a client retains and pays a professional adviser to provide advice a rebuttable presumption will arise that, having sought, paid for and obtained such advice, the client relied upon it: see, eg, Levicom International Holdings BV v Linklaters  PNLR 29.
- As to such reliance, the Claimants relied, in particular, on the evidence of Mr Randall as set out in paragraphs 164 and 165 of his witness statement viz.
"164 Had Matrix been told at any point before issue of the IM in February 2001 that the OMV of Dockside was not £48,150,000 but in the region of £31,765,000 or materially less than £48,150,000 and/or that the commercial prospects of Dockside were not as strong or positive as DJ had advised them to be (for example, because the rents were likely to be materially less than £27.50 psf) then Matrix would not have sponsored the Trust on the agreed terms or issued the IM or agreed to underwrite the issue of units in the Trust.
165 Had Capita and Matrix received such advice at any point prior to completion on 5 April 2001 (either through the issuance of a competently drafted Report, whether in draft or final form or an oral correction, qualification or caveating of its earlier advice), Capita and Matrix would not have proceeded with the transaction. I would have been particularly concerned by any suggestion that Dockside was not likely to be as commercially successful as Drivers Jonas had been advising and continued to advise through to completion including for example that it was not likely to be a 'first division' FOC as advised and that rents they had advised as likely to be achievable were not."
- In addition the Claimants relied on the evidence of Mr Putsman and Mr O'Keeffe which was broadly to similar effect.
- In response, the Defendants advanced three major submissions viz (i) Capita has no locus to bring any substantive claim for damages; and/or (ii) as a matter of law, Capita was, in effect, precluded from relying on the Defendants' advice once the Trust was fully subscribed; and/or (iii) there was no reliance in fact by Capita. I consider each of these submissions below.
Capita has no locus?
- Initially it was the Defendants' submission that neither Capita nor Matrix had locus. However, in the event, such submission was limited to the status of Capita. As I understood, the Defendants accepted that Matrix had locus although it was submitted that Matrix' claim (which was limited to a declaration for an indemnity) should be rejected. I deal with that issue below. As to the argument that Capita had no locus, the Defendants relied on the following facts and matters:
i) The IM was produced by Matrix and intended to elicit subscriptions from investors for purchase of units in the proposed EZPUT, which was to be based in the UK, with a UK based trustee, RSA. The closing date for applications was 4th April 2001 and a copy of the Trust Deed was said to be available for inspection at SJ Berwin's offices. Investors submitted monies with an application form which specifically stated that "full details relating to the Trust and to Units are set out in the Information Memorandum".
ii) Sometime after the IM was distributed to investors and after investors' subscriptions had begun to come in, a decision was made (apparently by Matrix) to seek to change the EZPUT to a Guernsey based trust.
iii) The change to a Guernsey based trust necessitated getting consent from the Guernsey Financial Services Commission (GFSC) for a collective investment scheme in the form of a unit trust. The GFSC required submission of the IM in order to approve the same. However the one which had been sent to investors was unsuitable for this purpose as it showed that investors had been told that there would be a UK trustee and the trust would be based in the UK. Accordingly a new IM, which provided for the trust to be based in Guernsey, and the trustee to also be Guernsey based, was needed. Matrix produced this "Guernsey based" IM, ("the revised IM"), and presented it to the GFSC, in order to obtain its consent. This document, on its face, purported to have been issued to investors but it had not been and never was.
iv) It seems that there was never any intention that the document would be sent to investors. According to Mr Putsman a document was prepared to inform investors. It was never sent.
v) The proposed trust was fully capitalised by subscriptions by 3 April 2001. Consent from the GFSC was given on 4 April 2001. The documentation required to complete the purchase of Dockside was executed on 5 April 2001. At no time had the investors been informed of the change to the trust.
- The matters referred to above were uncontroversial save for the assertion in the first sentence of sub-para (iv) above that there was never any intention that the document or its contents would be sent to investors. I do not agree. As I have already indicated above, while it is correct that the Addendum was never sent to investors, I accept the evidence of Mr Putsman that this was the result of an administrative oversight.
- On the basis of the facts and matters stated above, the Defendants submitted as follows:
i) The only trust which can ever have been validly created is the trust which was advertised in the IM, (being the February IM, which was distributed to Investors). This was a trust based in the UK, with a UK based trustee.
ii) It was on the basis of, and for the purpose of the trust described in the IM, that the investors subscribed and sent their monies to Matrix in order to buy units. The investors knew of no other trust.
iii) It follows that the only terms upon which the investors' subscription monies could be held, or used, were those identified in the IM, namely for a UK based trust.
iv) That UK based trust has never been formally constituted; no trust deed for it exists though the IM indicated it was available to investors for inspection, and it has no appointed trustee other than RSA: see Bond Pearce's letter 3 November 2010 confirming this.
v) Capita was never validly appointed as trustee. It does not have locus to act as though it was validly appointed.
vi) The Trust Deed dated 2 April 2001, upon which Capita relies for its appointment as trustee is for a Guernsey based trust, with a Guernsey based trustee. This Guernsey based trust has never been the trust which was envisaged, promoted or authorised to hold the Investors' subscription monies. This trust and the Trust Deed dated 2 April 2001 is not the trust to which the investors subscribed, and the investors' monies were never subject to this trust.
vii) Due to the lack of informed consent from the Investors to the proposed change of location of the trust, and change of trustee, there was no valid constitution of a trust, and the Trust Deed dated 2 April 2001 is irrelevant. The Claimants were obliged to either return the monies to the Investors, or to apply them in accordance with the IM.
- In my judgment, there are at least three answers to the above. The first and short answer is that Capita's right to claim against the Defendants does not depend on whether Capita is the validly appointed trustee of the Trust or any other trust. Capita's claim against the Defendants derives from its acquisition of its interest in Dockside for £62,850,000 in reliance on the Defendants' advice. Capita still retains its interest and continues to suffer substantial loss. It also retains its claim against the Defendants. In fact Capita holds both its interest in Dockside and the cause of action against the Defendants on trust for the investors, but that is not a pre-condition of the claim. Further, Capita must hold its interest in Dockside and, with it, the claim against the Defendants, for and on behalf of the investors either as a duly appointed trustee or as a de facto trustee. The status of a de facto trustee was explained by Lord Millett in Dubai Aluminium v Salaam  2 AC 366 at paragraph 138. So far as locus to sue a negligent professional adviser is concerned, there is no relevant distinction to be drawn between the two and the Defendants cited no authority to suggest otherwise.
- The second answer is that the Defendants' assertion that Capita has no locus depends upon a flawed construction of the relevant contractual arrangements:
i) In completing the Application Form at the rear of the February IM to acquire units in the Trust (being the entity that would go on to acquire Dockside, the object of the investment opportunity promoted in the February IM) prospective investors made an offer to RSA and Matrix to subscribe for units in the Trust.
ii) Neither the Application Form nor the terms and conditions of the application specified that the Trust (identified only by name) had to be based in the UK.
iii) Investors applying for units in the Trust gave their authority to structure the documentation giving rise to the Trust and the acquisition of Dockside in such a way as to ensure that investors would obtain the benefit of capital allowances set out in the February IM. The tax advantages potentially offered by the investment are set out at pp.3, 4, 5 and 25 of the February IM. Page 25 is particularly important here and includes the following statement:
"All documentation (i.e. the Trust Deed, the documents concerning the acquisition and letting of the Property and the security documents concerning the Tenant's rental obligations and the Developer's development obligations) will be structured so that it should comply with the relevant provisions of the Capital Allowances Act 1990 and the Finance Act 1994. On this basis, Investors should be entitled to capital allowances."
iv) Thus, as promoted, the investment was one where the relevant structural and transactional documentation would be structured in such a way as to ensure, insofar as was possible, that the relevant tax relief that the February IM indicated might be available would be available to investors.
v) As explained above, the movement of the Trust off-shore and the change from RSA to Capita as Trustee under the terms of the Trust Deed governed by Guernsey law were each necessary steps to achieve this objective. The only reason these steps were taken was to ensure that the capital allowances would be available to investors as had been stated in the February IM (or at least to ensure that there was the best possible prospect of this occurring).
vi) Accordingly, by the terms of their applications for units investors gave their express, alternatively implied, authority for the trust arrangements to be structured in the way that they were and they were properly constituted as unitholders in the Trust of which Capita was and is the Trustee.
- On the Defendants' construction of the February IM, the Claimants had only two options in the events which happened, namely (a) to return investors' monies or (b) to obtain investors' "informed consent" (presumably in advance) to the export of the Trust. Apart from attaching no weight to the critical passage on p.25 of the February IM, this construction is wholly impractical and uncommercial:
i) As for (a), why should it be thought that the investment opportunity had to be abandoned when everything that was envisaged in the February IM, including tax reliefs, could be secured by the expedient of exporting the Trust? It is to be noted that the Defendants' pleaded case was that obtaining tax relief was a "key attraction" for investors and "the sole or at the very least main reason" for investment in the Trust: see paragraphs 4.4 and 19.1 of their Amended Defence.
ii) As for (b), it was completely impractical for the Claimants to obtain the prior consent of investors given the short period available before the completion deadline of 5 April 2001 and the number of investors (480 in total). Such a situation would have been clearly foreseeable when the February IM was drafted and circulated.
- The third answer to the Defendants' argument is that even if, which is not the case, Capita was not validly appointed as Trustee from the outset, its position as Trustee has subsequently been ratified or affirmed by the investors. Capita has acted in all respects as Trustee of the Trust since 2 April 2001 and Matrix has acted as Trust Manager. They have not only acted in these capacities but reported to investors in relation to their work:
i) Copies of the annual Report and Accounts of the Trust, identified Capita as trustee and provided its address in Guernsey and Matrix as Trust Manager.
ii) Copy tax certificates provided to investors by Matrix which have then been used by investors to claim their capital allowances and which identify Capita as the off-shore Trustee.
- It is clear from these documents that investors are and have been for many years fully aware of both the identity of the Trustee (i.e. Capita) and Trust Manager (Matrix) and that the Trustee is based in Guernsey. At no stage has any investor raised any objection to the location of the Trust or the identity of Capita as trustee. Indeed, investors have only been able to claim capital allowances in the amounts and on the basis in fact claimed by them because Capita is a Guernsey trustee and the Trust based in Guernsey. Investors have done so through sending the tax certificates referred to above which clearly name Capita as the Guernsey trustee to HMRC on an annual basis with their individual tax returns.
- Accordingly, I reject the Defendants' case that Capita has no locus to bring the present proceedings.
No reliance on the part of Capita as a matter of law?
- Under this head, the Defendants argued that Capita was precluded from relying on their advice because, once sufficient subscriptions had been received to capitalise the Trust fully, Capita was obliged under the terms of the February IM and/or the Trust Deed to complete the acquisition of Dockside in any event. In particular, the Defendants relied upon Clauses 4.1, 4.7 and 9.2.1 of the Trust Deed and also the terms of the IM which provided in relevant part as follows:
"The Trustee will, on completion of the Trust, enter into an agreement to acquire the leasehold interest in the land comprising the Property.
Completion of the Trust will be conditional on irrevocable and unconditional applications and cleared funds for not less than 52,850 units having been received and accepted by the Trustee not later than Wednesday 4th April 2001..
Immediately on acquiring the headlease the Trustee will grant a non-occupational lease ("the Lease") to The Boiler Shop (Chatham) Limited ("the Tenant")."
- In particular, the Defendants submitted that this wording is unambiguous and plainly imperative: it gave no discretion to the Trustee, following completion of the Trust, to choose not to acquire the leasehold interest in the Property. In support of this argument, the Defendants relied upon the unreported decision of Hart J in Royal & SunAlliance Trust Company Ltd v Healey & Baker ("Healey & Baker") (13 October 2000 Ch.D), which they said was "analogous".
- The Defendants are correct to identify that the IM provides that acceptance of applications by Matrix was to be conditional upon the completion of an agreement for the acquisition of Dockside by no later than the "Closing Date" (which was expressed to be 12 noon on 4 April 2001). As is common ground, no such agreement was entered into until 5 April 2001. However, in my judgment the flaw in the Defendants' argument is to suggest that these provisions in the IM obliged Capita to purchase Dockside (come what may) as soon as sufficient applications to capitalise the Trust had been received by Matrix. The receipt of applications is not to be elided with acceptance of those applications by Matrix: indeed many applications were returned (in whole or in part) because the investment was over-subscribed. The applications were not "accepted" for the purpose of the IM until completion on 5 April 2001.
- As regards the Trust Deed and Healey & Baker a number of points arise. First, in order to be able to rely on Healey & Baker at all the Defendants require there to be a trust deed here on materially identical terms to that which was considered in Healey & Baker. The trust deed in Healey & Baker was in materially different terms to the Trust Deed in the present case. In particular, the operative provision as regards acquisition in that case provided, in effect, that the trustee should acquire the subject property if it received a Viability Forecast from Healey & Baker. Thus, the learned Judge found in that case that if a report matching the description of the Viability Forecast was received, then the trustee had no choice other than to complete the acquisition. This is very different from the position here. Clause 4.1 of the Trust Deed is in the following terms:
" The Contributions shall, subject to the provisions of Clause 4.7 be applied and expended in accordance with the Information Memorandum in the following manner:-
4.1.1 in respect of the acquisition by purchase of the freehold and, to the extent contemplated by the Proposals, the development of the Property including (without limitation) the construction of buildings and structures on the Property or any part thereof.
4.1.4 to the extent (but without prejudice to Clause 4.1.5) that the Contributions are not applied and expended:
(i) as mentioned in Clause 4.1.1, or
(ii) in relation to a building or structure, or to that part of a building or structure, which is not on land situated or formerly situated in an Enterprise Zone, or
on the provision of machinery or plant
in respect of expenditure in relation to which Chapter 1 of Part 1 of the Capital Allowances Act 1990 applies;
4.1.5 in respect of any other purposes (including the payment of any fees, costs, expenses, taxes or duties) which, in the opinion of the Trustee, will not prejudice the treatment or status of the Trust as a trust whose trustees are not resident in the United Kingdom or its ability to be so treated or to obtain such status."
Clause 4.2 is also of relevance. It is headed "Composition of Trust Fund" and provides that Capita and Matrix "shall endeavour to ensure" that the assets comprised in the Trust Fund comprise only:
"4.2.1 the Property …
4.2.2 cash held temporarily by the Trustee pending its expenditure as mentioned in clause 4.1 or its distribution to the Beneficiaries generally; and
4.2.3 cash or other assets held by the Trustee in connection with the management of the Trust Fund,
PROVIDED THAT the Trust Fund may also include any other assets which do not prejudice the treatment or intended treatment of the Trust for UK tax purposes as a trust whose trustees are not resident in the United Kingdom."
- Thus, by clause 4.1 of the Trust Deed Capita was obliged to apply the Contributions "in accordance with the Information Memorandum". If Dockside did not conform with the description of Dockside provided in the IM, particularly as regards its value and commercial prospects, then an acquisition of Dockside would not have been "in accordance with the Information Memorandum" and would have been made in breach of trust. Accordingly, if Capita was on notice of material (still less substantial) non-conformity between the property and investment as described in the IM and the property and investment to be purchased/made (as it would have been had competent advice been provided by the Defendants) then Capita would have been obliged to withdraw from the purchase and not to complete. Far from being required to complete the acquisition in any event, Capita was only permitted to complete if the transaction was in accordance with the IM. Further, clause 14.2.3 of the Trust Deed provided Capita with an important power to take "such action as the Trustee shall think fit for the adequate protection of any part or parts of the Trust Fund". This too would have enabled Capita to have withdrawn from the transaction if to have done so would have been for the protection of the Trust Fund (as it would have been).
- I should mention that the Claimants submitted insofar as may be necessary that Healey & Baker was wrongly decided. However, in the event it is unnecessary for me to decide that question because it is in my view distinguishable for the reasons set out above.
- I should also mention that the Claimants also relied upon the old authority of Boss v Godsall (1842) 1 Y&C Ch 617 (which was not referred to in Healey v Baker) in support of this further submission that if there was a sufficient change of circumstance, Capita would have been wholly entitled to withdraw under the principle there established i.e. Clause 4.1 (even if it did impose an absolute obligation to purchase Dockside as the Defendants contend) would cease to have any effect. Although Boss v Godsall is reported inadequately and does not appear to have been referred to in modern times, it is still cited as authority in the leading text book in the area: see Lewin on Trusts, 18th Edition, para 29-113. My tentative view is that the principle in Boss v Godsall could well apply here but in the event it is unnecessary to decide that issue.
- I have so far considered the position as a matter of English law and having regard to the particular terms of the Trust Deed. However, it was the Claimants' case (indeed it was their primary case) that the Trust Deed was governed by Guernsey law and that the question whether or not Capita was entitled to withdraw from the Dockside was a matter of Guernsey law. Subject to the question of locus which I have already addressed, the foregoing was common ground. It was also common ground that as a matter of Guernsey law, Capita was obliged by the duty to act "en bon père de famille" as now set out in section 18(1) of the Trusts (Guernsey) Law, 1989 (the "1989 Trust Law"):
"General Fiduciary Duties: 18.(1) A trustee shall, in the exercise of his functions, observe the utmost good faith and act en bon pere de famille…."
Section 73(1) of the 1989 Trust Law provides that unless the context otherwise requires "functions" includes "…rights, powers, discretions, obligations, liabilities and duties.."
- The expert evidence of the Guernsey lawyers focussed on two main issues which overlapped viz (a) the proper construction of the Trust Deed and, in particular, whether (as the Defendants submitted) the effect of Clause 4 imposed an absolute obligation on Capita to purchase Dockside provided only that sufficient applications for units were accepted prior to 5 April 2001; and (b) the scope and effect of the "en bon pere de famille" doctrine and, in particular, s18(1) of the 1989 Trust Law.
- As to the proper construction of the Trust Deed, the view expressed by Advocate Wessels on behalf of the Claimants was, in summary, that Clause 4.1 did not place Capita under an absolute obligation to purchase Dockside and that this was in part due to the application of the principle of "en bon pere de famille" which was, in effect, a "separate substantive duty" and a "distinct duty". I simplify but, in essence, the thrust of the Defendants' submission was that this approach was wrong because, relying on the expert view of Advocate Bell, the duty of a trustee to act "en bon pere de famille" did not assist in the identification or definition of any express duties arising from the Trust Deed. Rather, submitted the Defendants, it was, in effect, the standard of care which any trustee (including Capita) must reach in the exercise of the express duties arising from the Trust Deed ie as stated by Advocate Bell, it "..informs consistently how you go about exercising your functions under the deed…" Further, relying upon the views of Advocate Bell, the Defendants submitted that the Claimants' position was contrary to the mandatory nature of an "obligation". In particular, the Defendants submitted as follows:
i) The fact that the 1989 Trust Law provides in absolute terms at section 11 that: "...a trust is valid and enforceable in accordance with its terms" makes it clear that under Guernsey law, a trustee who is under an express obligation under the terms of the trust deed to do something, must indeed enforce the terms of the trust deed.
ii) The scope of Advocate Wessels' proposed leeway to the Trustee to not perform an express obligation imposed upon it by Clause 4 was not a minor incursion. It included if there was a change to what had been stated in the IM in the assumed qualities and information about the property (such as yields, comparable units, competing centres), and that it was going to make a profit for the unit holders.
iii) It included, even in the absence of any indication in the IM that a further valuation report was expected, a change in the value ascribed to the property, based on an implicit assumption that this would be reported. If so wide a range of considerations, including ones based not on the wording of the IM, but on implied effects of the wording of the IM, could excuse the trustee from performing an express obligation it would render the trust concept of "obligation" a nonsense.
iv) The notion that a trustee in the position of Capita should be able to decide whether or not it will complete the purchase of the property described in the IM, and for which it had received monies from investors, offends against the very notion of a trust obligation.
v) It is particularly inapposite where the trust deed, as here, is couched in mandatory terms: this was an "obligation" not "a power". Had such a discretion been intended to be conferred on the Trustee, it would have been a simple matter for the Trustee's drafting lawyers to have provided for such a discretion in precise terms.
vi) As it stands, because it suits the Claimants' case in the context of these proceedings, they contend for what amounts to a 'discretion at large'. One has only to view the position in these stark terms to see the interpretation for which the Claimants contend to be false.
vii) The fact that the Trust Deed includes an express and mandatory provision (Clause 9.2.1) that the Trust will terminate if the property is not acquired, and by the specified date, cannot possibly or sensibly result in the conclusion that the Trustee was not under an absolute obligation to acquire the Property. Such a provision is the inevitable corollary of the mandatory obligation to acquire at Clause 4.1.
viii) At least as a matter of Guernsey law, Boss v Godsall was wrong or would not be followed. According to Advocate Bell that case was, at most, an example of the very limited exception to the general rule that a trustee will be obliged to follow an imperative duty.
ix) The en bon pere de famille doctrine is not a 'stand alone' duty. It arises from section 18(1) of the 1989 Trust Law which is declaratory of the then existing law. It is, in effect, no more than a required standard of care, namely a requirement to act "as a good father of the family", or "a prudent administrator for the benefit of the incapable" and does not indicate a more fundamental or wider or higher or more sensitive duty than that of reasonable care and skill: see Spread Trustee Limited v Hutcheson & Others  UKPC 13. The doctrine of en bon pere de famille, cannot apply in a vacuum. There must be a pre-existing duty to do something to which it applies, namely the "exercise of his functions", being the wording of section 18(1) of the 1989 Trust Law. Thus, the doctrine is only relevant to establish, in this instance, the manner in which the obligations of the Trust Deed were to be performed.
x) In effect what the Claimants and Advocate Wessels seek to do is to assume, because there are mechanisms for a trustee to seek directions from the Court and because the 1989 Trust Law provides for a trustee to be relieved of the liability for breach of trust, by order of the Court, that a trustee complying with the duty or acting to the standard of en bon pere de famille can sidestep this Court-controlled process, and just not comply with the terms of the trust deed, even if those terms are obligatory. This is simply wrong. It may well be that the Court would exonerate the trustee, but the Claimants' contentions would require a re-writing of the trust deed, and a re-statement of what functions are obligations and what functions are powers. This cannot be done.
xi) The Court-controlled process referred to above has its own significance because there was a fixed deadline – the end of the tax year on 5 April 2001. Firstly the Claimants would have to show that in the tight time available, Capita would have sought directions of the Court, or that it would have proceeded to commit a breach of trust (i.e. not comply with the Trust Deed and IM obligation to acquire Dockside), because it was sufficiently certain of the exoneration it would obtain from the Court. It requires time to compile such evidence of certainty - time the Claimants did not have.
- These submissions in relation to Guernsey law (which I have summarised) raise potentially interesting questions but in the event it seems to me that they are irrelevant. The experts on Guernsey law both agree that "the Trustee was obliged under clause 4.1 to determine whether the purchase of the Property was in accordance with the IM" – see paragraph 21 of the Joint Statement. On this basis, it seems to me that the Claimants are right to say that if the purchase of Dockside was not "in accordance with the IM" (as I have already concluded was the case), Capita was not just entitled but obliged not to acquire Dockside. In my view, that is the short and sufficient answer.
Causation in fact
- In any event, the Claimants submitted that they would not have completed the purchase of Dockside in any event and that to have done otherwise would have been deliberately to expose investors to extensive but avoidable losses and would have seriously damaged the Claimants' commercial reputations. The Claimants submitted that the evidence of their witnesses on this topic (which I have already referred to above) was clear. In particular, the Claimants submitted that Mr Blake's evidence under cross-examination was that he would immediately have informed both Capita and Matrix of any material change in the property advice; that the oral evidence of Messrs Randall and Putsman under cross-examination was fully consistent with their witness statements; that Mr O'Keeffe's witness evidence was also clear in this regard and was not challenged in cross-examination; that, in respect of what would have happened had Capita and Matrix been so informed, the oral evidence of Mr Kaberry was entirely supportive of Mr Randall's evidence that he would have contacted the IFAs who had submitted applications and would have explained the position; that Mr Randall's evidence was that he would have expected the IFAs to support the decision to stop the deal; and that Mr Kaberry's evidence was again supportive.
- It is fair to say that the Defendants did challenge in particular Mr Randall and Mr Putsman on the issue of reliance. In summary, the broad thrust of that challenge was that in reality Matrix formed its own view of the proposed scheme when it received the Defendants' "indicative appraisal" in January 2001; that the one factor which determined above all others whether the acquisition of Dockside would go ahead or not was whether or not Matrix could sell the EZPUT into the market; that Matrix evidently felt that it could as was proven by the fact that the scheme was fully subscribed by 3 April 2001; and that from this point onwards the completion of the acquisition of Dockside would inevitably follow. Moreover, the Defendants submitted that Matrix would have suffered in credibility terms (and financially) if they had "pulled" the scheme; and that, in addition, there was a need to get the deal done by (or before) the end of the tax year in order to secure the tax allowances for that year for the investors.
- Thus, the Defendants submitted that there was in fact no reliance by the Claimants and that such conclusion was also supported by the absence of documented evidence of anticipation of the arrival of the Defendants' Final Report e.g. e-mails chasing it up on 4 April 2001. As well as a direct challenge to Mr Randall, the Defendants mounted a sustained attack on the credibility of Mr Putsman criticising him for his "singularly selective recollection of events" and the fact that some at least of his oral evidence was inconsistent with his written statement which, said the Defendants, contained a "lawyer-drafted narrative of events based on the documents and not his actual recollection".
- I accept certain of these criticisms. In particular, I accept that Mr Putsman's written statement was not, as indeed he admitted himself, a "perfect document"; and that there were some important inconsistencies between what was stated in his written statement and his oral evidence. However, it is, in my view, important to remember that Mr Putsman was giving oral evidence in May 2011 with regard to events which occurred over a period of some months in the early part of 2001 ie over 10 years previously. In my view, it is also important to bear in mind that the Defendants had already provided their essential advice and valuation prior to delivery of their draft report on 4 April 2001; and that the Claimants had plainly relied on that earlier advice. The Draft Report did not arrive out of the blue. It was in nature confirmatory of the advice that had already been given by the Defendants albeit in a much more expensive and detailed form. Whatever difficulties may exist with regard to his evidence, I am satisfied on the core issue that had Capita and Matrix received advice at any point prior to completion that the open market value of dockside was materially less than £48,150,000 and in particular was (as I have concluded) £34,375,000, then Capita and Matrix would not have proceeded with the transaction. I accept Mr Putsman's evidence on that issue as I accept the evidence of the Claimants' other main witnesses on this topic ie Mr Randall, Mr Peters, Mr O'Keeffe and also Mr Kaberry.
- The Claimants' position is hardly surprising given the consequences of completing if competent advice had been received prior to completion. Even if, contrary to the arguments set out above, withdrawing from the acquisition would have constituted a breach of the terms of the Trust Deed, it is most unlikely that this would have sounded in any adverse consequences for Capita as (a) no unitholder was likely to complain as a matter of fact; and/or (b) as a matter of English and/or Guernsey law, Capita was likely to be relieved from liability in respect of any such breach. I therefore do not accept the Defendants' suggestion that the Claimants would have been unmoved by the change in advice and pursued the transaction in any event. In this regard, it is notable that both Claimants had duties and responsibilities in respect of the Trust following completion. This was very far from being a matter where the Claimants could, even if they wished to, allow the transaction to go ahead and then to wash their hands of it.
- For all these reasons, I reject the Defendants' case as to causation and reliance.
Section H: QUANTUM
H1 The primary measure of Capita's loss
- On its primary case, Capita seeks to recover damages assessed by reference to all of the losses it has suffered as a result of acquiring and owning Dockside. The Claimants say that these fall to be assessed as follows:
|Cost of acquisition
|Cost of funding acquisition
|Profit from operating Dockside
|Current market value of Dockside
- By way of explanation, the reference to "current market value of Dockside" refers to the market value of Dockside in 2010. Capita maintains that this measure most appropriately and fairly compensates it for the losses it has suffered as a result of entering into the Dockside transaction in reliance on the Defendants' advice. However, Capita accept that credit should be given against this total figure for the tax relief obtained by individual investors which is likely to have been £21,547,494 reducing the total claim to £42,322,509
- The Defendants denied that this represents the correct measure of loss and contended that if Capita is entitled to damages at all then these fall to be assessed by reference to the amount by which Capita overpaid for Dockside (i.e. the secondary, and alternative, measure of loss advanced by Capita). Save for disputing Capita's entitlement to the costs of funding the acquisition and an argument that Capita was not entitled in any event to claim damages on the basis of any further reduction in value after 2008, the Defendants did not otherwise advance any positive case in answer to the calculation of Capita's loss on its primary measure. Thus, the main issue here turns on whether Capita is entitled to recover damages assessed on its primary measure of loss rather than on the quantification of those damages.
- In support of its primary case, the Claimants submitted (in summary) as follows:
i) The starting point for the analysis is a correct understanding of the limits of the principle as stated in Banque Bruxelles Lambert S.A. v Eagle Star Insurance Co. Ltd. Sub nom. South Australia Asset Management Corporation v York Montague Ltd. (H.L.)  AC 191 ("BBL"). What is clear from BBL is that the scope of the duty depends on a careful analysis of what the defendant has agreed to do:
"Before one can consider the principle on which one should calculate the damages to which a plaintiff is entitled as compensation for loss, it is necessary to decide for what kind of loss he is entitled to compensation. A correct description of the loss for which the valuer is liable must precede any consideration of the measure of damages…." (see Lord Hoffmann at p211A-B)
"How is the scope of the duty determined? In the case of a statutory duty, the question is answered by deducing the purpose of the duty from the language and context of the statute: Gorris v. Scott (1874) L.R. 9 Ex. 125 . In the case of tort, it will similarly depend upon the purpose of the rule imposing the duty. Most of the judgments in the Caparo case are occupied in examining the Companies Act 1985 to ascertain the purpose of the auditor's duty to take care that the statutory accounts comply with the Act. In the case of an implied contractual duty, the nature and extent of the liability is defined by the term which the law implies. As in the case of any implied term, the process is one of construction of the agreement as a whole in its commercial setting. The contractual duty to provide a valuation and the known purpose of that valuation compel the conclusion that the contract includes a duty of care. The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking…" (see Lord Hoffmann at p212D-F)
ii) Where, on a proper analysis, the defendant has agreed to advise on the course of action that the claimant should take then the defendant will be liable for all of the foreseeable loss suffered as a result of the claimant following that course:
"The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong." (see Lord Hoffmann at p214E-F)
iii) This issue was considered further in Aneco Reinsurance Underwriting Limited (in liquidation) v Johnson & Higgins Limited  1 Lloyd's Rep 157 (HL). There the question was whether the defendant brokers were liable in negligence for the whole of the foreseeable loss suffered by the claimants as a consequence of entering into a treaty of reinsurance with an underwriter at Lloyds, or whether the recoverable loss was limited by the principle stated in BBL. This depended in turn on whether the defendant brokers had undertaken a duty not merely to obtain reinsurance cover in the sum of $11 million but also to advise on the availability of reinsurance cover in the market, without which the transaction would not have gone ahead. This advice involved an investigation as to the market's assessment of the risks involved.
iv) In his summary of BBL in Aneco, Lord Lloyd emphasised the narrow scope of the valuers' duty in that case. Contrasting that with the position of the brokers in Aneco, he continued at p181 rhc:
"….…But I am quite unable to accept that the duty of the brokers was so narrowly confined. At the very least they owed a duty to inform Aneco whether or not reinsurance was available. If they had performed that duty carefully, they would have told the insurers that reinsurance was not available, in which case "the whole thing would have collapsed", as the brokers well knew. For it would have been obvious to Aneco that the unavailability of reinsurance was due to the current market assessment of the risks. It is really fanciful to suppose that there might have been some other reason for reinsurance being unavailable. Why then should the brokers not be liable for the full extent of the losses attributable to their breach of duty? Why should it be assumed in favour of the brokers that reinsurance was available on the market, thus limiting their liability to U.S.$11m., when if they had done their job properly they would have known that it was not?"
Lord Lloyd also concluded at p182 lhc that the brokers were advising underwriters what course to take:
"…..In the course of his cross-examination Mr. Forster agreed that he was advising Mr. Crawley as to the state of the market. In the light of these and other passages Lord Justice Evans said that it would be "highly artificial" to derive from the evidence any suggestion that Mr. Forster was not advising Mr. Crawley what course to take. I agree. I agree also with his conclusion at para. 83, that the current market assessment of the reinsurance risks was central to Aneco's decision to undertake those risks, and that Mr. Forster took it upon himself to advise Mr. Crawley with regard to those risks. This is, as Lord Justice Evans pointed out, far removed from the lender-valuer relationship in BBL. The difference does not depend on calling the one "information" and the other "advice". It depends on a difference of substance, and in particular, on the scope of the advice which the brokers undertook to give. In some cases it may be difficult to draw the line. But I have little doubt on which side of the line the present case falls."
Lord Steyn in Aneco also found that the claimant was entitled to recover the whole of its loss but not on the basis that the brokers had a duty to advise on whether or not to accept the risk, rather on the basis that they were obliged to provide information, namely "the current market assessment of the risks". Thus, in appropriate cases a claimant will be able to recover the full amount of its loss even where the relevant duty does not extend to giving advice on the course of action to be adopted.
v) Here, the Defendants were not simply providing a valuation or even providing advice and information as regards rents and yields as component parts of that valuation; rather they were advising on the commercial viability of Dockside and providing commercial investment advice. On this basis alone, Capita is entitled to recover all of its loss. Further, and in any event, it is plain that the Defendants here agreed to provide and did provide advice on whether or not Capita should proceed with the acquisition.
- To the extent that the scope of the duty owed by the Defendants might be evidenced by the advice actually given, the Claimants also relied on certain specific parts of the Defendants' Report (in particular paragraphs 1.10, 15.18, and 15.28) which, submitted the Claimants, contained specific investment advice; the covering letter to the Report which the Claimants submitted made clear that the Report did not simply contain a valuation but set out the Defendants' "views and recommendations on the terms of the purchase of the above property" including the matters set out in paragraphs 1.5, 1.6, 1.7, 1.8 and, in particular, 1.9 of the Report which mirrored the terms set out in the Heads of Terms negotiated by the Defendants on behalf of the Claimants and upon which they had advised; the Defendants' advice as to the likely rental levels that would be achieved at Dockside, the question as to whether the guaranteed rent of £27.50psf was "realistic" or "reasonable" being, said the Claimants, directly relevant to the EZ structuring of the transaction and the whole viability of the transaction as structured; and the fact that the Defendants had verified material parts of the IM .
- I recognise the force of these submissions. As stated by Lord Lloyd in one of the passages from his speech in Aneco that I have just quoted, in some cases it may be difficult to draw the line. The main thrust of the Defendants' submissions was that the "total loss" claim is wrong as a matter of law as it is equivalent to a claim for the cost of repair against a valuer - which has repeatedly been rejected in cases such as Watts v Morrow  1 WLR 1421. In that case the Court held that in the absence of a warranty (that no repairs were required beyond those identified in the valuer's report), there was no basis for awarding the cost of repair. On this basis, the Defendants submitted that the analogy continues to apply – the Claimants' total loss claim is tantamount to a claim for a warranty measure of loss but there was no warranty by the Defendants that Dockside would be successful. Further, the Defendants submitted the "total loss" claim is also defective because (unlike the difference in value case) it "wraps up" the defects in the lease with the alleged over-valuation.
- In my view, the reliance placed by the Defendants on Watts v Morrow is of limited assistance. However, I am unable to accept the Claimants' submissions for the following reasons.
- First, in his speech in BBL agreed by Lords Goff, Jauncey, Slynn and Nicholls, Lord Hoffmann stated at p213C-D that rules which make the wrongdoer liable for all the consequences of his wrongful conduct are exceptional and need to be justified by some special policy. Normally the law limits liability to those consequences which are attributable to that which made the act wrongful. In the case of liability in negligence for providing inaccurate information, this would mean liability for the consequences of the information being inaccurate. That is what Lord Hoffmann goes on to describe as the "more usual principle". After discussing his illustration of the mountaineer, Lord Hoffmann sought to generalise the relevant principle at p214C-E as follows:
"…. It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortuous duty arising from the relationship between them."
In my view, the consequences of the information provided by the Defendants being wrong are that Capita paid an amount of £62.85m whereas (as I have concluded) if the information provided by the Defendants had been correct, Capita would only have paid £44.8m ie an excess of £18.05m. It will be necessary to consider a further submission by the Defendants with regard to the effect of the tax benefit to individual investors but it seems to me that that figure ie £18.05m represents Capita's loss; and that Capita's attempt to recover higher damages by reference to the subsequent further reduction in value of Dockside after 2001 would not be consistent with Lord Hoffmann's "usual principle".
- Second, consistent with the passage of the speech of Lord Hoffmann in BBL at p211A-B which I have already quoted above, the right place to begin is to decide for what kind of loss Capita is entitled as compensation to loss; this involves a correct description of the loss for which the Defendants are liable and a consideration of Capita's cause of action. As Lord Hoffmann stated at p212C after the citation from the speech of Lord Bridge in Caparro Industries Plc v Dickman  2 AC 605: "The real question in this case is the kind of loss in respect of which the duty was owed." Lord Hoffmann then considered the question as to how the scope of the duty was to be determined in a passage which I have already quoted above. The present case is, of course, concerned with the duties owed by the Defendants both in tort and in contract. Applying what Lord Hoffmann said in that passage, the scope of the duty in tort would seem to depend on the purpose of the rule imposing the duty; and the scope of the duty in contract will depend on the construction of the agreement as a whole in its commercial setting ie to give best effect to the express obligations assumed by the Defendants neither cutting them down so that Capita obtains less than it was reasonably entitled to expect nor extending them so as to impose on the Defendants a liability greater than they could reasonably have thought they were undertaking. As I have already accepted when considering the scope of the Defendants' retainer, there is no doubt that the Defendants agreed to and did provide commercial investment advice in particular advice as to the commercial viability and prospects of Dockside but, at least so far as Capita was concerned, the purpose of such commercial advice was, as I have said, to provide a valuation. It was the valuation figure which was critical with regard to the purchase price of Dockside. Whether viewed in tort or in contract, the scope of the Defendants' duty was, in my judgment, to take reasonable care to ensure that the valuation was accurate. In my judgment, that is what Capita was reasonably entitled to expect and the liability that the Defendants could reasonably have thought they were undertaking was limited to any relevant inaccuracy in the valuation which they provided in April 2001.
- Third, it seems to me that this conclusion is further supported by Lord Hoffmann's comments specifically in relation to the Nykredit appeal at p222G-223H when dealing with the submissions advanced on behalf of the lender in that case that they were misled not only as to the value of the security but also as to the risk of default because of various comments made by the valuer as to the commercial viability of the particular project. At p223G, Lord Hoffmann concluded that these comments were not, as a matter of construction of the contract between the bank and the valuer, independent items of information on which the bank was entitled to place reliance separately from the open market valuation. As I have noted, that conclusion was reached on the basis of the construction of the contract in that case and I accept, of course, that the contract between the present Claimants and Defendants was not contained in a simple letter as in the Nykredit case. Nevertheless, it seems to me Lord Hoffmann's comments provide a helpful parallel. As in Nykredit, it seems to me that the contract in the present case was not one which entitled the Claimants (and, in particular, Capita) to place reliance on the commercial advice provided by the Defendants separately from their valuation. As in Nykredit, the Defendants would not in my view have incurred any liability if any part of the advice which they provided to justify their valuation had been wrong but (perhaps on account of a compensating error) the valuation itself had been correct. I accept that in certain circumstances, a valuer may be liable for giving negligent advice independent of his valuation see eg Merivale Moore Plc v Strutt & Parker  PNLR 498 and K/S Lincoln v CB Richard Ellis Hotels Ltd  PNLR 31. But it does not seem to me that such possibility is relevant in the circumstances of the present case.
- Fourth, for the avoidance of doubt, I do not consider that the decision of the House of Lords in Aneco (heavily relied upon by the Claimants) leads to any different conclusion. The facts of that case were very different. As stated by Evans LJ in the Court of Appeal in a passage quoted by Lord Steyn at  1 Lloyd's Rep 186 rhc, the facts in Aneco were far removed from the lender/valuer relationship and even from the client/professional adviser relationship to which the BBL case applies and even more so from the doctor and mountaineer. The main issue in Aneco was whether the defendant brokers owed the Claimants in that case a duty to advise whether or not reinsurance was available. The House of Lords held that the defendants did owe such a duty and on that basis the claimants in that case were held entitled to recover damages for the loss which they suffered as a result. In my view, the conclusion is unremarkable particularly once the scope of the duty owed by the defendants in that case was determined. Nor do I consider that any assistance is to be derived by the Claimants from Lord Lloyd's comments at -, the way in which Lord Steyn formulated in the issue in that case at  or the comments of Lord Millett at -.
- For all these reasons, it is my conclusion that Capita's primary case on damages fails and that, subject to the Defendants' further argument with regard to the tax relief obtained by the individual investors, Capita is entitled to damages in the sum of £18.05m as calculated above. It follows that it is unnecessary to consider the Defendants' fallback argument that Capita's primary case on damages is in effect limited to the difference between the purchase price of Dockside in 2001 and its value in 2008; or Capita's further alternative argument that damages should be assessed by reference to the difference between the open market value of the interest in Dockside as advised by the Defendants (£48,150,000) and the true value of that interest as at 5 April 2001 which, as I have found, was £34,375,000.
- It was common ground that the individual investors obtained tax credits by investing through the Trust in Dockside and that, although the tax position of each investor was not the subject of detailed evidence, the likely tax credits to those investors would have been a total of 40% x 85.71% x £62.85m = £21,547,494. On this basis, the Defendants submitted as follows:
i) This sum (ie £21,547,494) must be deducted from the purchase price of £62.85m before considering what, if any, damages Capita is entitled to recover and that once this is done it is only if the value of Dockside at acquisition were less than £41,303,506 that any loss could be said to have been suffered at acquisition. As I have concluded, the open market value of Dockside which would have been advised by a competent valuer was £34,375,000. Thus, the Defendants' submission is, in effect, that Capita's claim is limited to the difference between (say) £41.3m and £34.375m = £6.925m.
ii) In failing to give credit for these tax credits, the Claimants seek to circumvent the compensatory nature of damages which is to put a claimant into a position he would have been in if a wrong had not occurred but not a better one. This can be easily illustrated. Consider a situation where the valuation, of the property as here, was for £62.85m including the benefit of Enterprise Zone allowances and the purchase price was £62.85m. The tax allowances could be used once only as they were for the forward funding of construction (i.e. development) which was to take place pursuant to the sale and development agreement. It follows that immediately upon completion, the Trust would suffer an immediate and inevitable "loss" if the "loss" is to be calculated in the way in which the Claimants suggest – namely the difference between the price paid and the value of the property ignoring tax credits.
iii) Insofar as the Claimants seek to suggest that they were expecting the property at acquisition to be worth more than £41.30m after the effect of tax credits, this expectation does not give rise to a recoverable loss. Consider a claimant who is advised that a painting is worth £10,000 and buys it for £100 when it is actually worth £1,000. Unless the valuer has warranted the valuation (which is not suggested in this case), there is no recoverable loss – indeed the buyer has made a profit.
- In response, the Claimants submitted that the tax relief was not obtained by Capita but by the individual investors (provided that the relevant claims for relief were made) and, even in their hands, did not represent a gain. The cost to the Trust of acquiring Dockside (as is recorded in its accounts) was and remains £62,850,000. Further, the Claimants advanced a more general point viz that in calculating damages one must compare like with like ie open market value to open market or gross to gross and that what the Claimants described as the "buffer" is there not to protect the negligent property adviser against loss but there to protect the investor.
- This point was only addressed very briefly in the parties' written and oral submissions and I was not referred to any authority. I confess that I have not found it easy. It is, of course, now well established ever since the decision of BTC v Gourley  AC 185 that the incidence of taxation is – or at least may be – relevant in the calculation of a claimant's damages. However, the issue normally arises in the context where the damages are subject to no tax or a different level of tax. The issue here is different ie the question here arises because, as is common ground, the original investment attracted a tax credit for the benefit of the individual investors and any damages that would be recovered would (as the Claimants accepted) be held on trust for the individual investors. (There was no evidence before me as to what the individual investors might have done or might reasonably or foreseeably be assumed to have done with their investment monies if they had not invested in Dockside.) The issue is further complicated because the nature of the tax credit in effect required the individual investors (through Capita) not to dispose of their investment for a period of at least 7 years and that the Defendants' calculation based on the difference between the purchase price less the likely tax credits and the correct open market value therefore seems artificial in the extreme. Moreover, as I have calculated, on the assumption that the individual investors had, through Capita, paid £44.8m, the net cost to them after relevant tax credits would have been in the order of £29.735m. Thus, it seems to me that the Claimants are right when they say, in effect, that the Defendants are not comparing like with like and that the Defendants' submission is, at best, over simplistic. If the tax benefit is to be taken into account, I can see a possible argument that the damages recoverable are to be limited to the difference between £41,303,506 and £29,735,000. ie £11,368,506. However, that was not the submission which was, as I understood, advanced by the Defendants. That possible argument apart, it seems to me that the short answer is the one advanced by the Claimants viz that whatever tax credits may have been obtained by the individual investors, these do not affect the damages properly recoverable by Capita.
- For these reasons, it is my conclusion that Capita is entitled to recover damages in the sum of £18.05m.
Matrix's claim to an indemnity
- This leaves Matrix's claim to an indemnity in respect of any loss or liability to which it may fall subject as a result of its promotion of the scheme, its issue of the IM and/or its sponsorship of the Trust in circumstances arising from or relating to the Defendants' advice as to the value and/or commercial prospects of Dockside. In essence, it was Matrix's submission that given that the Defendants' advice as to value and commercial prospects was incorporated by Matrix into the IM (which it issued relying upon the Defendants' advice), Matrix is plainly entitled to this relief; that whether or not claims would be statute barred cannot be determined now and will be individual specific; and that it is irrelevant that there have been no claims to date.
- In the event, I decline to grant a declaration in effect giving Matrix a blanket indemnity over all and any claims that might be advanced. It seems to me that the prospect of such claims being advanced is entirely hypothetical and, given that the relevant events took place over 10 years ago, highly unlikely. At this stage and on the assumption that any potential claims which might exist are not statute barred, it is impossible to say what claims might be made or how such claims might be formulated. The present parties will be bound as a matter of res judicata by the conclusions which I have reached and that seems to me sufficient although it may be necessary to consider the precise form of any order that I should make.
Section I: LIMITATION
- The Claim Form in the present case was issued on 17 July 2009. Although it was common ground that the parties entered into a Standstill Agreement dated 14 December 2006 the Defendants said that as a matter of construction it was of very limited effect. In particular, the Defendants said that it has no relevance to any of the following claims: -
i) Any claims arising from the Defendants' Short Form Report dated 21 February 2001.
ii) Any claims arising from the Defendants' input to the Information Memorandum dated February 2001.
iii) Any claims relating to advice alleged to have been given as to the "commercial viability of Dockside and its value...prior to 4 April 2001" .
iv) Any claims which relate not to the Report and Valuation but to another more general role as a commercial property adviser.
In essence the Defendants submitted that all these claims are unaffected by the Standstill Agreement and are statute barred and that the Standstill Agreement operated only to protect claims arising out of or relating to the Final Report itself i.e. the Final Report dated 5 April 2001. The latter is particularly important because, if it is correct, the Defendants have a further argument that any such claims must fail as matter of causation because such Final Report was issued only after the acquisition of Dockside.
- The relevant provisions of the Standstill Agreement are as follows:
i) Recital (B) which stated "Matrix engaged Drivers Jonas in 2001 on behalf of the Trustee in order, inter alia, to provide a Report and Valuation on Site J3 Chatham Maritime Kent ("the Property") to inform Capita and Matrix's decision to acquire a lease of the Property and to develop the Property as a Factory Outlet Shopping Centre."
ii) Recital (C) which stated: "Drivers Jonas provided their Report and Valuation to Matrix ("the Report and Valuation"), and subsequently Capita entered into a Purchase and Development Agreement to acquire a lease of the Property and various related documentation to facilitate the development and occupation of the Property on behalf of the Trust. The relevant documentation to this effect was executed simultaneously on 5 April 2001"
iii) Recital (E) which stated: "Capita and Matrix are investigating what claims, if any, they have against Drivers Jonas relating to the Report and Valuation and more generally. Pending that investigation, Capita and Matrix wish to ensure that they preserve all their legal rights against Drivers Jonas….In consideration of Capita and Matrix not issuing legal proceedings against Drivers Jonas at this time, without prejudice to the rights of all parties to this agreement and to ensure that all parties hereto have a reasonable amount of time to investigate this matter whilst fully preserving their rights."
iv) Clause 1.1 which defined "Claims" as: "actual or contingent claims subsisting as at 13 December 2006 as well as claims thereafter, which relate to the Report and Valuation as detailed in the recitals above and which Matrix and Capita have against Drivers Jonas".
v) Clause 1.2 which defined "Limitation Period" as: "all periods, statutory or otherwise, following the expiry of which causes of action in the Claims become time barred".
vi) Clause 2 which provided: "Drivers Jonas undertakes and agrees that the Limitation Period is extended to 5.30pm on the Termination Date and no argument will be raised or any issue will be taken in any proceedings concerning the Claims that the Limitation Period expired on or before 5.30pm on the Termination Date."
- As to the principles to be applied when construing the effect of the Standstill Agreement, the Defendants submitted:
i) The object is to discover the common intention of the parties.
" The result of all the authorities is, that when a court of law can clearly collect from the language within the four corners of a deed, or instrument in writing, the real intentions of the parties, they are bound to give effect to it by supplying anything necessarily to be inferred from the terms used, and by rejecting as superfluous whatever is repugnant to the intention so discerned."
See: Gwyn v Neath Canal Co (1865) LR Ex 209 @ 215 per Kelly CB.
ii) The contract is to be construed with reference to its object and the whole of its terms.
iii) The contract should be given the meaning that it would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time the contract was made. See: Investors Corporation Scheme Ltd v West Bromwich Building Society  1 WLR 896, 912
iv) The words must be construed as they stand, in the document itself, but the Court will look at all the circumstances surrounding the making of the contract which may assist in understanding what the reasonable man understood from its language.
v) The starting point is to give the words their ordinary and natural meaning, unless to do so would involve an absurdity or would create some inconsistency with the rest of the contract: "The rule that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties and intention which they plainly could not have had." See: Investors Compensation Scheme at 913.
vi) If the contract is poorly drafted, the Court should prefer a construction that attributes to the parties a sensible and businesslike intention.
I did not understand the Claimants to dispute any of these propositions. They are all consistent with the shift away from literal methods of interpretation espoused, for example, by Paley in the nineteenth century towards a more commercial approach: see per Lord Steyn in Sirius International Insurance Co v FAI General Insurance Ltd  I WLR 3251  - .
- In summary, the Defendants' submissions were as follows :
i) The Report and Valuation referred to in the Standstill Agreement was the Defendants' Final Report and Valuation dated 5 April 2001. This is so because it would have made no sense to refer to a "draft" and because of the reference to simultaneous execution in Recital (C). It appears that the fact that the purchase documentation was actually executed before the Report and Valuation was received was overlooked.
ii) The operative definition of "Claims" includes only claims which "relate" to the Report and Valuation.
iii) The agreement to extend the limitation period was thus only in respect of claims which related to the Report and Valuation.
iv) There is no agreement extending the limitation period in respect of any other claims than those defined as "Claims" in the Standstill Agreement.
v) Any claims relying on anything other than the Defendants' final Report and Valuation are statute barred; alternatively
vi) Claims which rely on the Defendants as having some more general status (such as investment property adviser rather than valuer – should such claim be sustainable which is not accepted) are statute barred.
vii) This limit on the scope of the Standstill Agreement is consistent with the Claimants' pleaded case that they relied upon "the Report", which is defined in the Particulars of Claim at paragraph 45, as the final report emailed by the Defendants on 5 April 2001.
viii) Given the different roles of Matrix and the Defendants, it would have been obvious that claims relating to the Report and Valuation were of a different nature and order from those arising from, say, earlier advice to Matrix even as to valuation let alone more generally. Such advice was and would have been understood to be separate and distinct.
- I recognise that the Standstill Agreement is perhaps not well drafted and that certain of the points of construction raised by the Defendants might, wearing nineteenth century lunettes, be regarded as having some flicker of life – at least when viewed in isolation and ignoring the commercial background. I suppose they might have made some impression on Paley. However, in my view, they largely ignore most of the general propositions set out above and are, at best, founded on the kind of semantic and syntactical analysis which was strongly deprecated by Lord Diplock in Antaios Compania Naviera SA v Salen Rederierna AB  AC 191 at p201. In my judgment, the short answer is that they are inconsistent with Recital (E) which makes plain that at the date of the Standstill Agreement, the Claimants were investigating what claims, if any, they had against the Defendants relating to the Report and Valuation and more generally; and that pending that investigation, the Claimants wished to ensure that they preserved all their legal rights. In addition, clause 1.1 refers not only to the "Report and Valuation" but to the "Report and Valuation as detailed in the recitals above". The recitals go beyond claims relating to the "Report and Valuation" (if by that is meant the Defendants' Final Report) when explaining what the parties were intending to protect and to preserve. Thus, when construed as a whole the clear (and indeed express) intention of the Standstill Agreement was to preserve any and all claims that the Claimants might have as against the Defendants not only in relation to the "Report and Valuation" but also "more generally". Further, there would be no commercial sense for the Standstill Agreement to relate only to claims concerned with a single "Report and Valuation" when the Defendants' involvement extended beyond the provision of a single report.
- In so far as may be necessary, the foregoing is also supported entirely by the facts as they emerged in evidence. First, the covering letter to the Draft Short-Form Valuation Report and that Report itself at paragraphs 1.1, 1.5 and 3.16 promises the provision of the Final Report in due course. Second, the Claimants' interpretation of the Standstill Agreement is entirely supported by the Defendants' evidence in respect of the work carried out for the Claimants (in particular that come 5th April 2001, the work carried out over an extended period culminated in the Final Report.) In particular, it was Mr Blake's evidence under cross-examination that the advice for the Trustee and Matrix was indivisible and culminated in the Final Report; that work carried out was one process, culminating in the Final Report. His evidence in re-examination was consistent. Further in respect of the on-going and indivisible nature of the work carried out by the Defendants, the Defendants signed a final draft version of the verification notes (verifying the March Information Memorandum) and returned these under cover of a letter dated 3 April 2001.
- For all these reasons, I reject the Defendants' case that any of the Claimants' claims are statute barred.
Section J: CONCLUSION
- For all these reasons, it is my conclusion that Capita is entitled to recover damages against the Defendants in the sum of £18.05m. I decline to make any order for an indemnity in favour of Matrix at least at this stage although it will be necessary to consider carefully the terms of the order to be drawn up. Counsel are requested to seek to agree a draft order for my consideration to deal with that and any other outstanding issues including interest and costs. Failing agreement, I will of course hear any further argument.