Eronpark Ltd v Secretary of State for the Environment, Transport and the Regions (No 2)
Compensation for acquisition of land –– Disturbance –– Loss of profits due to scheme blight –– Loss of anticipated profits on additional facility not constructed –– Interest as disturbance element –– Calculation of interest –– Determination of disturbance compensation in claim based on equivalent reinstatement –– Rule (5) of section 5 of Land Compensation Act 1961
The claimant owned a property used as a residential specialist nursing home for the physically disabled and operated on a commercial basis. In March 1990 the claimant served a blight notice in respect of proposals to carry out a highway scheme. The acquiring authority accedpted that notice the following April. As a result of the blight, the claimant abandoned a scheme to construct an additional 15-bed facility. The parties agreed that compensation should be payable on the equivalent reinstatement basis under r (5) of section 5 of the Land Compensation Act 1961. The claimant acquired an alternative site at the acquiring authority’s expense in May 1992, and the authority paid an additional sum of £1,436,923 towards the construction costs of the replacement facilities. In Eronpark Ltd v Secretary of State for Transport [2000] 2 EGLR 165 the Lands Tribunal decided that the claimant was entitled to additional compensation for disturbance and/or loss of profits. At the substantive hearing, the claimant advanced a claim for the outstanding balance of losses alleged to have been suffered due to blight, and as a consequence of dispossession, in the sum of £687,067, together with interest. The claim consisted of three elements: (a) loss of profits relating to the reduced occupancy of a 30-bed facility that existed in April 1989, due to blight caused by the scheme (£167,419); (b) loss of anticipated profit from a proposed additional 15-bed facility, on the assumption that it would have been ready for occupation by April 1990 (£519,648); and (c) interest on such losses. The acquiring authority calculated the losses under (a) and (b) at £61,704 and £115,004 respectively.
Decision: The sum awarded was £488,569 for loss of profits plus interest and Tobin costs: £140,871 was attributable to the first element of the claim for the period 1989 to 1993, on the basis of applying to the product of the number of bed vacancies and the weekly fees a profit percentage of 58.9%; £347,698 was attributable to the second element for the period 1990 to 1995, which was calculated by finding the difference between the potential and actual profits for the relevant years (the losses) and applying a net operating profit to determine the total gain, from which bank interest necessary for funding the additional facility was deducted. Interest at LIBOR rates, plus 2% for the whole of the relevant period between 1989 and 1994, calculated at the end of the claimant’s financial year in the sum of £92,590, was payable; such sums were losses incurred due to the extra interest payable on the increased borrowings, necessitated by the lack of profits that would have been available to reduce the borrowings, and were an element of disturbance.
Compensation for acquisition of land –– Disturbance –– Loss of profits due to scheme blight –– Loss of anticipated profits on additional facility not constructed –– Interest as disturbance element –– Calculation of interest –– Determination of disturbance compensation in claim based on equivalent reinstatement –– Rule (5) of section 5 of Land Compensation Act 1961
The claimant owned a property used as a residential specialist nursing home for the physically disabled and operated on a commercial basis. In March 1990 the claimant served a blight notice in respect of proposals to carry out a highway scheme. The acquiring authority accedpted that notice the following April. As a result of the blight, the claimant abandoned a scheme to construct an additional 15-bed facility. The parties agreed that compensation should be payable on the equivalent reinstatement basis under r (5) of section 5 of the Land Compensation Act 1961. The claimant acquired an alternative site at the acquiring authority’s expense in May 1992, and the authority paid an additional sum of £1,436,923 towards the construction costs of the replacement facilities. In Eronpark Ltd v Secretary of State for Transport [2000] 2 EGLR 165 the Lands Tribunal decided that the claimant was entitled to additional compensation for disturbance and/or loss of profits. At the substantive hearing, the claimant advanced a claim for the outstanding balance of losses alleged to have been suffered due to blight, and as a consequence of dispossession, in the sum of £687,067, together with interest. The claim consisted of three elements: (a) loss of profits relating to the reduced occupancy of a 30-bed facility that existed in April 1989, due to blight caused by the scheme (£167,419); (b) loss of anticipated profit from a proposed additional 15-bed facility, on the assumption that it would have been ready for occupation by April 1990 (£519,648); and (c) interest on such losses. The acquiring authority calculated the losses under (a) and (b) at £61,704 and £115,004 respectively.
Decision: The sum awarded was £488,569 for loss of profits plus interest and Tobin costs: £140,871 was attributable to the first element of the claim for the period 1989 to 1993, on the basis of applying to the product of the number of bed vacancies and the weekly fees a profit percentage of 58.9%; £347,698 was attributable to the second element for the period 1990 to 1995, which was calculated by finding the difference between the potential and actual profits for the relevant years (the losses) and applying a net operating profit to determine the total gain, from which bank interest necessary for funding the additional facility was deducted. Interest at LIBOR rates, plus 2% for the whole of the relevant period between 1989 and 1994, calculated at the end of the claimant’s financial year in the sum of £92,590, was payable; such sums were losses incurred due to the extra interest payable on the increased borrowings, necessitated by the lack of profits that would have been available to reduce the borrowings, and were an element of disturbance.
No cases are referred to in this report.
Robin Purchas QC and Douglas Edwards (instructed by Manby & Steward, of Telford) appeared for the claimant; Alice Robinson (instructed by the Treasury Solicitor) represented the acquiring authority.
Introduction
1. Wrottesley Park House, Wrottesley Park Lane, Perton, Staffordshire (the subject property), was a registered nursing home owned and operated by Eronpark Ltd (the claimant). It was affected by blight from mid-1989, and subsequently compulsorily acquired by the Secretary of State for the Environment, Transport and the Regions (the acquiring authority) in connection with the Highways Agency’s proposals for a new bypass. The construction would necessitate the demolition of the buildings, and, hence, the business was required to relocate.
2. The claim is for the outstanding balance of losses alleged to have been suffered due to the blight and as the consequence of dispossession, and for reinstatement and/or disturbance (after taking into account the payments already made by the acquiring authority) in the sum (amended by the correction of a mathematical error during the hearing) of £687,067, together with interest on that sum and on sums paid by the acquiring authority prior to the consolidated notice of claim.
3. The claim consists of three elements, summarised as:
(a) loss of profits incurred by the claimant relating to the reduced occupancy of the 30-bed facility that existed at April 1989, due to blight caused by the scheme (£167,419) (phase 1);
(b) loss of anticipated profit from the proposed additional 15-bed facility, on the assumption that it would have been ready for occupation by April 1990, and that occupancy would have been at 50% for the first six months following completion (£519,648) (phase 2);
(c) The basis upon which interest is calculated on the losses on (a) and (b) above, and for what period.
4. The acquiring authority calculates the loss under (a) and (b) above at £61,704 and £115,004 respectively, totalling £176,708.
5. Robin Purchas QC and Douglas Edwards of counsel appeared for the claimant and called:
(1) Mr Trevor Harding Green, a director of Eronpark Ltd, who gave evidence relating to the business formerly carried on at the subject property.
(2) Mr Gareth John Morgan FRICS, a director of Cavendish Tate Ltd, chartered surveyors, of Dudley, who gave expert evidence in respect of loss of profits and building costs.
(3) Mr Peter Gerard Marsh ACA, who gave evidence of fact relating to the claimant’s trading accounts.
In addition, witness statements of fact were submitted from Ms Gillian Hemming (a former patient at the subject property), Ms Christine Taylor, Ms Lynn Nolan and Ms Pauline Taylor (former employees) and Mr Roy Green, a director of the claimant company.
Ms Alice Robinson of counsel appeared for the acquiring authority and called:
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(1) Mr John Frederick Russell ARICS, a senior regional building surveyor with the Valuation Office, who gave expert evidence in respect of projected building costs.
(2) Mr Keith Leslie Peters FCA, a chartered accountant, who gave evidence in respect of loss of profits.
Facts
6. The parties produced a statement of agreed facts and issues from which (excluding the details not relevant to this aspect of the claim), together with the evidence and further matters agreed during the hearing, I find the following facts:
6.1 The claimant company, of which Trevor and Roy Green are the sole directors (with their wives as additional shareholders), formerly carried on the business of a residential nursing home at the subject property, having acquired it as stables in 1985 and converted it to form a home for 16 physically handicapped persons that opened in June 1986.
6.2 There were four residents on opening, cared for by four care staff and an officer-in-charge. The numbers of residents increased gradually until full occupancy was achieved in April 1988. The home was registered by Staffordshire County Council’s social services department on 19 April 1988 as a registered care home to accommodate 16 physically handicapped persons under the Registered Homes Act 1984.
6.3 In December 1987 planning permission was granted by South Staffordshire District Council for an additional 24 bedrooms, communal areas and staff accommodation (subsequently amended to incorporate additional facilities), and a quote for the cost of building was received from TC Dolman (Building Contractors) Ltd in the sum of £520,000, subsequently amended to £522,000.
6.4 The work was to be carried out in two phases. The first (phase 1) commenced in April 1988, and was completed in November of that year at a cost of £213,500. It provided an additional 14 bedrooms (bringing the total to 30) with en-suite facilities, lounge, offices and storage, together with drainage and other preparatory work for the second phase, and opened for occupation during April 1989. The development was funded by a loan from Barclays Bank of £220,000. On 11 April 1989 the home was registered by the Mid-Staffs Health Authority as a nursing home to accommodate a maximum of 25 physically disabled and physically disabled elderly persons. Modifications to both registrations were sought following the opening of the phase 1 extension (April 1989), authorisation being achieved for a maximum of 30 persons. This was subject to a maximum, at any one time, of 16 persons requiring social care (the balance being those requiring nursing care), or 25 persons requiring nursing care, the balance being those requiring social care.
6.5 The second phase (phase 2), providing a further 15 bedrooms, was intended to have been commenced within six months of the completion of phase 1. The bank had also considered it preferable that the development as a whole should take place in two separate stages, in offering facilities on phase 1, and had confirmed a willingness to assist with further funding (for phase 2) subject to completion of phase 1 within budget, and a satisfactory take-up of the newly available bed spaces therein.
6.6 During the summer of 1988, the Department of Transport announced its proposals to construct a new orbital route around the West Midlands conurbation, part of which was to include a bypass to the A449 and A441 through Wolverhampton and Stourbridge. Of the two alternatives for this section, one would affect the subject property. In March 1989 the department announced that the preferred route was the one that would affect the property, and with amendments that had been made to the original consultation document, the construction would incorporate both the land and buildings of the home.
6.7 As a result of the blight, the claimant abandoned phase 2 of the development. The cost of construction of the second phase, if it had been commenced by TC Dolman & Sons shortly after the opening of phase 1, and if the original contract quote were not capable of renegotiation, would have been £350,000.
6.8 A blight notice was served by the claimant on 26 March 1990, this being accepted by the acquiring authority on 26 April 1990.
6.9 Following a search, and consideration of three alternatives, agreement was reached between the claimant and the acquiring authority in March 1992, providing for the acquisition of a new site for equivalent reinstatement (r 5 of section 5 of the Land Compensation Act 1961) sufficient in size to enable new premises to be constructed. The site was at Keepers Lane, Wergs Road, Tettenhall, Staffs (Wergs Road), and, following the grant of outline planning permission for the development of a nursing home for the disabled, the acquisition was completed on 1 May 1992 at a total cost, paid by the Department of Transport, of £1,299,216.
6.10 Agreement was reached in respect of the construction costs for a new home, and works commenced in September 1993. During the construction work on the new premises, further planning permission was sought, and obtained, for a 12-bedroom extension (bringing the total to 57), but the cost of this did not form part of the claim for compensation. The 42-bedroom part of the home was completed and ready for occupation in December 1994, at which time the residents of the subject property were moved. All the beds in the new home were filled by January 1995. The remaining 15 bedrooms were completed in April 1995, and were filled within six months of opening. Compensation in the sum of £1,436,923 has been paid in respect of the construction and associated professional fees.
6.11 Total compensation paid to the claimant to date, including legal and professional fees and disbursements in relation to this claim and part of the other claims arising in consequence of dispossession, and/or as part of reinstatement and/or disturbance amounts to £2,860,646.10. Tobin costs have been agreed.
6.12 The reduced occupancy levels at the subject property due to blight (phase 1), the periods during which there was an element of blight and the average fees achieved on a per-patient basis were:
1989
1.5 (for 21.6 weeks of that year)
£235.00 per week
1990
4.5 (for full year)
£259.93 per week
1991
5.75 (for full year)
£339.29 per week
1992
2.25 (for full year)
£351.42 per week
1993
1.5 (for full year)
£361.16 per week
6.13 The demand for bed spaces throughout the period to which the claim related would have resulted in an occupancy of 29 when the subject property was a 30-bedroom unit (phase 1), and 44 assuming the registration had increased to 45 (phase 2). For the remaining 21.6 weeks of the 1989 trading year (the company operated to a 30 September year end), occupancy of the additional 14 beds (phase 1) at the subject property would have been 50%
6.14 Pursuant to r 43(1) of the Lands Tribunal Rules 1996, the question of whether, in law, the claimants can recover, in addition to compensation for equivalent reinstatement (or, as agreed by the parties, as part of the costs thereof), (a) compensation for disturbance and/or (b) loss of profits sustained in consequence of dispossession up to the time of equivalent reinstatement, was decided as a preliminary issue in favour of the claimant by this tribunal (Judge Marder (then president)) on 31 March 1998.
Background
7. The failure of the parties to agree on the appropriate compensation to be awarded under 3(a) and (b) above is principally (although not entirely) due to the difference of approach adopted by the experts in respect of the analysis of the claimant’s accounts and its projections for future staffing and wages levels. I consider it will be helpful at this stage, before dealing with the evidence, to summarise briefly the bases upon which Messrs Morgan and Peters have submitted their evidence, to illustrate those differences.
8. Mr Morgan had, in respect of the loss of profit resulting from the reduced occupancy of the 30-bed unit between 1989 and 1994, analysed the 1991 trading accounts, which were based upon an occupancy rate of 23.25, forecast the additional wage and other costs appropriate to an occupancy of 29, and concluded that the additional net operating profit that would have been earned by those additional occupants would135 amount to 70% of the increased turnover. He then projected this percentage forward, at the same rate, for each of the years in which occupancy was reduced, on the basis of the agreed reductions in occupied bed spaces due to the blight caused by the scheme.
9. In respect of phase 2, Mr Morgan reconstituted the accounts for the four years 1990 to 1993, and “rebuilt” them on a hypothetical basis to reflect his estimate (allowing also for interest on additional borrowings) of the increases in wage and other costs that would be appropriate for operating a 45-bedroom home, based upon his experience and his company’s substantial database.
10. Mr Peters had based his assumptions for the loss of profits on both phases solely upon the actual trading accounts, analysing a total nine-year period (including three years in the new Wergs Road premises), and applying (on the evidence of the average net profits actually earned of 27.3% pa) an estimated overall net operating profit for each of the relevant years of 27.5%. He subsequently revised this to 30%. In calculating this projected level of profit, Mr Peters had considered staffing requirements and wage costs, based upon health authority requirements and advice received from Christie & Co. I deal with the detailed arguments in regard to those in the evidence. Taking the agreed actual and projected turnover figures as provided by the claimant, Mr Peters was able to calculate the difference between the actual profits earned and those that would have been earned on a basis of 30% net operating figure had the empty beds in phase 1 (numbers agreed) been filled. This produced a figure for phase 1 loss of profits of £61,704.
11. Applying the same principles to phase 2, allowing for interest on borrowings calculated at £155,125, this resulted in a loss on that phase of £115,004.
Claimant’s case
12. Mr Purchas said that, as the turnover figures were agreed, assuming the potential occupancy of the 30-bed unit had been achieved in a no-blight situation, and assuming the additional 15 bedrooms had been built, the only real issue relating to loss of profits (both actual and anticipated) was in respect of expenses, and particularly appropriate staffing ratios and wage levels. The approaches adopted by the experts in these areas needed thorough scrutiny, and it was the claimant’s case that its expert, Mr Morgan, had adopted the correct methodology and had the in-depth experience in respect of nursing and residential care homes that the acquiring authority’s expert did not.
13. In respect of phase 2, there was a dispute over its likely date of completion, the claimant contending that the 15-bedroom extension would have been finished and ready for occupation by April 1990. The acquiring authority was suggesting that, due to the bank’s requirements for interest cover, and comfort, it would not have authorised the necessary funding as soon as the claimant wanted, and the extension would not have been completed until mid-1991.
14. A further issue was the likely cost of the extension, the claimant’s case being that a price had been agreed with the contractor in respect of both phases, and construction of phase 2 was simply a continuation of that contract, and the price would have been held. The acquiring authority was suggesting that if the start of the works had been delayed for the reasons given, the contractor would have sought to renegotiate the price to a higher level, and had based the estimated revised cost upon Spon’s Building Cost Tables. Mr Purchas said that the extent of the external financing required for the extension, and particularly the amount of profits that the claimant would have utilised to pay back capital, was in issue, the latter being dictated by the amount of profits that would actually have been achieved.
15. Finally, Mr Purchas said that the parties had been unable to agree the basis upon which interest on the loss of profits claimed should be calculated.
16. Mr Green is a director of the claimant company. He outlined the history of its venture into residential and specialist nursing care. He and his brother, Roy, acquired the subject property in 1986 when it was being marketed with planning permission for conversion to a residential home for 16 physically disabled persons. On obtaining amended planning consent (but for the same number of persons), they set about converting it into a facility specifically developed to fill a niche in the market. The Greens intended that the home would provide an active environment structured to provide and maintain a quality of life that they had identified as lacking in many other residential homes. The type of clients envisaged were those who required long-term accommodation, and who could anticipate remaining there for 10 to 20 years, as opposed to “respite care” patients. Those, he explained, were patients who only remained in occupation for very short periods, up to a maximum of two months, but more often just for a couple of weeks while allowing their normal carers holidays or sickness leave.
17. The new home opened in June 1986, and by April 1988 full occupancy was achieved. Initial registration was obtained from the social services department of the county council for domiciliary care only. Subsequently discovering that qualified nursing care would be required, thus necessitating a change of policy on the registration issue, dual registration (with social services and the area health authority) was obtained.
18. facility, and planning consent for an additional 30 bedrooms and associated facilities was sought and obtained. As this involved trebling the size of the facility, the directors considered it prudent to undertake the development in two phases: the first for an additional 14 bedrooms, and the second for the remaining 16 (subsequently amended to 15).
19. A contract was negotiated with TC Dolman & Sons, the contractor that had carried out the initial conversion, and a budget price of £520,000 was accepted on 8 February 1988. This was subsequently amended, following minor adjustments, to £522,000. A letter was obtained by the company’s architect from Allan Reynolds, a chartered quantity surveyor, which confirmed that the lowest tender prices for the project would be likely to be in the region of £500,000 to £520,000, which Mr Green said gave them comfort that Dolman’s price was reasonable.
20. As to financing of the project, Mr Green said that they approached both Barclays and Midland Banks. Barclays obtained a report and valuation on the business from Pinders, a specialist firm of nursing home valuers, and in respect of the proposals (which, at the time they were instructed, was on the basis of an eventual 40-bed space and assuming continuing dual registration). This report, Mr Green said, was wholly supportive of the proposals, and Pinders forecast a fee income of £440,000 following final completion of both phases and registration for 40 patients, and a net operating profit of £190,000 –– 43%. The freehold was valued on a bricks-and-mortar basis, again assuming satisfactory completion, at £800,000, with a going concern value of £1.2m. The bank confirmed the availability of £220,000 in respect of phase 1 and a commitment to further assistance in respect of phase 2 “subject to the satisfactory completion of the second block [phase 1] and a reasonable rate of occupancy of this block”. While it was the company’s choice to seek the whole costs from the bank, it was, he said, its intention to reduce capital from profits as and when they became available, especially as interest rates had been increased at one stage to 4.5% over base rate. It was also its choice (in respect of the company’s earlier borrowing) to start the loan on the basis of overdraft facilities –– allowing immediate access to funds for making stage payments to the builder, converting to a term loan when appropriate.
21. Mr Green said that it was their plan to commence the second phase of the development as soon as the first part was completed and ready for occupation. Work started on phase 1 in April 1988, and building work was completed in November. Following some delays, it was not ready for occupation until April 1989, when it was opened and the home was re-registered for a total of 30 residents. From a waiting list, the extra accommodation was 60% full immediately upon opening. The date of opening was coincident with the announcement of the preferred route for the proposed road scheme. As a result, the directors decided to abandon phase 2, which, Mr Green said, they had intended to commence by November 1989 at the latest, the drainage for it having136 been laid in conjunction with phase 1, and the bricks already being on site.
22. The threat of dispossession resulted in fewer referrals from social services, and Mr Green said that, due to the uncertainties, they were compelled to accept short-term respite care patients until things settled down again when the long-term future of the home was assured. Although these short-term patients (the levels of which peaked at 11 in 1991, as also evidenced by the highest level of admissions and discharges in that year) helped to keep up occupancy levels during the years when the home was blighted (agreed to be from 1989 to 1993), occupancy was still below that which it would have been. Mr Green said that the parties had agreed the reduced occupancy levels resulting from the blight, and the appropriate anticipated average income per bed space, during the relevant period.
23. Mr Green then described the search for suitable alternative premises, the eventual acquisition of the site at Wergs Road, and construction of a new facility that, when it opened in December 1994 (and the residents and staff of the subject property moved thereto), had 42 beds, and, by the time it was finally completed four months later, provided a total of 57 beds. I do not recite this evidence in detail, as most of it related to matters upon which compensation has now been agreed. However, in respect of the arguments between the experts relating to his business philosophy, and particularly profit levels, he said the first 42 beds in the new home had been filled within one month of it opening, and the additional 15 bed spaces had been filled within six months of completion. The fact that the profitability, per the accounts, on the new premises was less than had been achieved in the subject property was due to the new building being very different; it was on two floors, with a clover-leaf configuration that needed more staff to supervise the patients, and it was in a different health authority area, where the staffing-to-patient ratio is 4:1 compared with 5:1 for the old building.
24. As to the losses being claimed in respect of phase 1, Mr Green said that the profit of the business is a function of the number of filled beds, and, bearing in mind that, at any one time, they were fully staffed for up to 30 patients, filling the last few beds is the difference between profit and loss. It follows, therefore, that, as per Mr Morgan’s analysis, the highest profit comes from the last beds occupied. In assessing the losses due to blight, Mr Green said they have recognised that, in reality, one bedroom in the home would be void during any period, and both experts’ calculations were therefore based upon an assumed occupancy of 29.
25. In respect of the occupancy levels actually achieved at the subject property during the period 1989 to 1994, Mr Green said the health authority’s staffing requirements went in bands of five patients. Thus, as soon as the number of residents exceeded 25, the number of staff required was sufficient to cover up to 30 patients, and this level needed to be, and indeed was, maintained even if there were only 26. By March 1994, the home had the full complement of 30 patients, and remained full until the move in December 1994.
26. Therefore, Mr Green said, even when patient numbers were at, or below, the 25-patient health authority threshold, they were at all times fully staffed for 30. Thus, where the requirement stated that there needed to be five staff on a particular shift for up to 25 patients, and six for 26 and above, there would still be six when patient numbers were at, or below, 25. He said that once good staff had been recruited, it was not the company’s policy to lose them.
27. The phase 2 assumptions were also that one bed would be empty at any one time, and the calculations had therefore been based upon a notional occupancy of 44. However, bearing in mind that six months would be needed to fill the beds following opening (which the directors had anticipated would have been in March 1990), the assessment of loss does not begin until the start of the new accounting year in October 1990. Mr Green said, in connection with the assessment of loss of profits, staff wages are by far the greatest overhead, and, once the fixed overheads have been met, the additional cost of keeping each individual resident, in terms of food and medical extras, is minimal.
28. The requirements of Barclays Bank in terms of approval of funding for the phase 2 extension were clear, Mr Green said in cross-examination, and he did not accept Mr Peters’ contention that the bank would wish to see interest cover of 2.5 times profits before advancing the additional funds. He also did not accept that there would have been a delay before approval was given while the bank sought to establish that occupancy levels in phase 1 were “maintained”. He said that it was the policy of the bank to lend on the strength of forecast future trading, and they were looking at a growth business. The company was achieving a good level of enquiries. Even if the bank had caused a delay, or been unprepared to lend the full amount of the construction costs, Mr Green said they had sufficient personal funds to inject if necessary, although he accepted that they did not really want to.
29. As to whether Mr Dolman would have held his price if there had been a delay, Mr Green said that, bearing in mind the state of the market, and his relationship with him, he (Mr Green) would have been able to negotiate a price held at the level of the original quote. He said that he was unable to comment on the legal aspect of whether Mr Dolman was bound by the original budget quote.
30. Mr Peters had suggested that it would take at least six months to obtain registration following completion of the works, but Mr Green said that, in reality, for phase 1 it took only two. They would apply for registration prior to completion of the works, and, as they worked closely with the authorities during the design and construction process, arrangements could be made for the registration to be in place very soon. Having originally had dual registration, the home eventually transferred to single registration in December 1991. The remaining five residential patients at that time were gradually, during 1992, converted to nursing-care patients. Nursing-care fees, although all negotiated individually depending upon the needs of the patient, were higher than for residential patients. Hence, Mr Green said, the substantial increases in weekly fees that were achieved.
31. Mr Green said he did not concur with Mr Peters’ assessment of average profits at 27.5% (or even his amended 30%), as he had included three years’ accounts from the new Wergs Road facilities, where profit levels had been lower due to its configuration and the fact that it was on two floors, and the new health authority’s staffing requirements pushing up costs. By 1994, the Care in the Community provisions had come into force, which, while not directly adding to administration costs, had created more work, had resulted in less referrals and, due to the Health Authority’s need to negotiate on rates, profits had been put under pressure.
32. In respect of Mr Peters’ analysis of staff numbers (taken from the accounts), Mr Green said this was not a true reflection of the actual numbers employed in both direct healthcare and domestic/administration capacities. The accounts figures were those required for statutory purposes and did not reflect full-time equivalents. Extra staff had been employed in 1994 in readiness for the move to the new facility, and thus that year’s figures did not reflect a normal trading year.
33. In cross-examination, Mr Green agreed that the effects of blight were dropping off by 1992; business had improved, but it was still not back to normal. It was suggested that rather than 1991 being taken by Mr Morgan as the most appropriate year upon which to base his loss of profits forecasts, as profitability was at its highest, it would have been better for him to look at 1994 as the most normal year, where wage costs, in the acquiring authority’s submission, were much more a true reflection than Mr Morgan’s assessment. Mr Green said that while, in terms of numbers of patients, 1994 was more normal, the wage costs reflected the impact of the move. Mr Green accepted that in 1992 and 1993 efforts were being made to pare costs to a minimum, especially as it had been thought in the early stages that the home might have to close.
34. The witness statements of Ms Gillian Hemming, Ms Christine Taylor, Ms Lynn Nolan, Ms Pauline Taylor and Mr Roy Green all supported the evidence of Mr Trevor Green.
35. Mr Morgan is a chartered surveyor with over 15 years’ experience in the valuation of businesses, at least 11 of which have been involved in the healthcare sector. He is a director of Cavendish Tate Ltd, one of the pre-eminent national firms of business appraisers and valuers. He137 was chairman of a subcommittee of the Royal Institution of Chartered Surveyors in 1995 that prepared Valuation Guidance Note 14, which sets out best practice in the valuation and reporting of private healthcare businesses, and which is now incorporated in the Valuation and Appraisal Manual of the RICS (the Red Book). Specialising in the valuation of businesses for mortgage purposes (in respect of purchase and refinancing schemes), Mr Morgan founded the Association of Healthcare Valuers in 1996.
36. He said that the subject premises had comprised a modern, purpose-built, highly specialist private healthcare facility that, during the period in question, was the only unit of its type in the Wolverhampton and South Staffordshire areas. He explained the difference between general residential care homes and those providing specialist nursing care (for those with severe physical and/or mental difficulties) and the history relating to registration requirements and funding. He pointed to the substantial increase in per-patient fees that had occurred in 1991, when the home was transferring from dual registration to single, specialist registration, where fees were much higher than was the case with standard residential care homes.
37. As to the government’s Care in the Community scheme, which came into being in 1993 following delayed implementation of the 1990 Health Act (the 1990 Act), and devolved responsibility for funding from central government to local health authorities, Mr Morgan said there would have been little, if any, early impact upon this particular home. Although there would have been increased administration, as Mr Green had said, the type of long-stay patients already catered for in the home were those for whom funding was protected under the 1990 Act and would continue to be paid by the Department for Social Services. New residents coming in after April 1993 would be subject to the new rules, and the home would have to negotiate fees on an individual-needs-driven basis with the local social services departments. It was Mr Morgan’s view, therefore, that, in terms of profitability, the Care in the Community provisions would have had no adverse effect during the period in dispute, it being 1994 by the time the implications were felt. In 1994 it had been agreed that no loss of profits occurred due to blight.
38. Mr Morgan said that he had analysed the company’s trading accounts from 1989 to 1994 and had adopted the 1991 accounts as the basis for forecasting actual and anticipated loss of profits. This was the year when the number of vacancies due to blighting was at its highest (5.75), but neither this, nor any of the other years, could be taken, he said, as “normal” in trading terms. He said that he had estimated the additional wage costs that would be incurred in catering for 29 patients, rather than the actual average occupancy for that year of 23.25. Although Mr Green had said that he was staffed-up for the additional patients, Mr Morgan had allowed for another two staff, bringing the wage bill to £213,000 (from £195,920). He had also made appropriate adjustments to other costs as necessary, but had concluded that, in overall terms, these were minor, and it was wages that had the greatest impact upon profitability.
39. As shown at Appendix 1 to this decision, Mr Morgan estimated that the additional profit that would be earned from the extra income of £100,142, produced by increasing the occupancy to 29, at £71,003 or 70.9%. This he had rounded to 70%, which, he said, gave an overall net operating profit of 42.1%, which was still 11.6% less than the industry norm. He then used the same additional profit percentage for each of the years during which the property was blighted to assess the overall claim sum in respect of phase 1, as follows (allowing for the agreed 50% occupancy in 1989):
Year
Vacancies
Weekly fees
No of weeks
Loss
1989
3 x
£235.00 x
21.6 x 0.5 x 70%
£5,330
1990
4.5 x
£259.93 x
52 x 70%
£42,576
1991
5.75 x
£339.29 x
52 x 70%
£71,013
1992
2.25 x
£351.42 x
52 x 70%
£28,781
1993
1.5 x
£361.16 x
52 x 70%
£19,719
Total loss:
£167,419
40. Mr Morgan said that in assessing or estimating costs, he had referred to Cavendish Tate’s database, which had analysed the previous three years’ accounts of over 8,000 registered care and nursing homes. Therefore, he said, analyses of staff costs were scientifically based upon actual industry statistics, rather than upon the actual wages costs incurred by the business. The actual wages costs in the other years were not representative, he said, because they did not reflect what the staffing situation would actually be with the extra patients. For instance, in 1994 wages costs were high, due to the fact that Mr Green was gearing up for the move to the larger premises.
41. He did not agree with Mr Peters’ approach to the exercise, saying that analysing the accounts from when the company first started operating in 1986, through to, and including, three years in the new premises, and then averaging the profits throughout, was inappropriate and unrepresentative. For instance, profitability at start-up would have been minimal, the effects of the blight were reflected in the accounts from 1989 to 1993, and the profitability had been affected by the move to the new premises. Also, in analysing wage costs in the new premises, the figures would be distorted due to that health authority’s 4:1 staffing requirement, and the fact that the configuration of the building was such that additional staff were needed in any event.
42. Taking a broad-brush approach such as this, and applying the average profit figure to the additional income that would be produced by the extra occupants in the unblighted world, was, Mr Morgan said, unrealistic, and did not take into account the indisputable fact that the highest levels of profit were achieved with the last few patients, most of the on-costs already having been incurred. Indeed, he said, if Mr Peters’ analysis were used, profitability per bed would actually reduce, rather than increase –– this, in itself, proving the unreliability of that approach.
43. In respect of phase 2, Mr Morgan said that, in calculating the hypothetical loss of profits from the additional 15 bedrooms, he had analysed the five years’ company accounts (1990 to 1994), reconstituting them on the agreed standard basis, and then rebuilding them on a hypothetical basis to reflect additional costs. For 1995, he had projected the 1994 figures forward on a straight-line basis for the eight weeks between the year end and when the business moved to the new premises. He had assumed identical per-patient fee income to that actually received, and had applied his own knowledge and experience in projecting staffing levels, wages costs and other expenses. He had also, following discussions with the claimant, assumed an additional borrowing requirement of £170,000 on the basis of a build-out cost of around £324,000, with the entire 1990 profits (assumed) and half the 1991 profits (assumed) being used to defray the balance of the building costs. Interest costs of the borrowing (assumed over a 10-year period), assessed following advice from Bank of Ireland at 2% over LIBOR, were deducted from the anticipated profits.
44. Mr Morgan said that he agreed with Mr Green that TC Dolman & Sons would be likely to have completed the contract within the original budget price, there being no standard XT contract, and thus, even if there had been a slight delay between completion of phase 1 and commencement of phase 2, there was more flexibility. Also, bearing in mind the state of the market at the time, and Mr Dolman’s relationship with the claimant, he thought there would be no question of the build cost being increased.
45. He also said that he did not agree with Mr Peters’ assertions that the bank would have delayed approval to the additional funding pending the provision of interest cover, or maintenance of occupancy levels following completion of phase 1. The banks that undertook commercial funding based their lending criteria principally upon bricks-and-mortar value and upon forecast viability. While in 1990 banks were getting their fingers burnt on many types of commercial lending, Mr Morgan said that care homes were the exception, demand for them being due to a bottomless pit (at that time) of government funding, making them the Holy Grail. Bearing in mind the comfort that had been provided by the Pinder report, and the fact that take-up of space in phase 1 had been good, Mr Morgan said there was no reason why the funding for phase 2 would not have been forthcoming at the time it was required. He had138 therefore assumed a completion date for phase 2 of April 1990, and 50% occupancy of the new beds for the remaining five months of the 1990 financial year (to 30 September) and the first two weeks of 1991.
46. In undertaking the hypothetical rebuilding of the accounts, Mr Morgan said he had carried out a detailed assessment of the staffing levels that would be required assuming 45 patients, including salaries for a matron, deputy matron, administrative assistant, gardener/handy man and an occupational therapist, together with other qualified staff (RGNs and SENs), care assistants and domestic staff, who would be paid hourly. The rates had been obtained by direct comparison with the figures from a comparable 46-bed unit he had valued in 1990, and from reference to the Cavendish Tate database. He then allowed 6% national insurance to arrive at his 1990 projected staff cost of £300,000. For the following years, he assumed staff levels remained the same, and applied inflationary wage increases to give figures increasing at the rate of £20,000 pa up to, and including, 1994.
47. As to other costs, Mr Morgan said that he used his experience, and the database, to project likely levels, and these were not in dispute, staffing levels and wages being the only issue, relating to the accounts, between the parties. The hypothetical profit figures derived from this exercise would, if not adjusted, incorporate an element of double counting by duplicating the loss of profit already calculated in respect of phase 1 for the years 1990 to 1993. The loss of profits claimed in respect of phase 1, therefore, needed to be deducted. However, the calculation was complicated, Mr Morgan said, in respect of 1990 and 1991, as the claim for loss consequent upon phase 2 is abated to five months of 1990 and two weeks of 1991 to reflect the “start-up” period. Thus, only 50% of the loss claimed in that period is double counted and should be adjusted.
48. The projected profitability, in comparison with the actual profits was therefore, allowing for the double counting:
Year
Potential profit
Actual profit
Loss ofprofit
Less doublecounting
Netclaimed
£
£
£
£
£
1990
197,720
78,456
24,847(5 months@50%)
8,870
15,977
1991
354,495
144,905
200,857(11.5 monthsonly)
68,054
132,803
1992
347,048
172,608
174,440
28,781
145,659
1993
345,334
162,364
182,970
19,719
163,251
1994
286,716
139,140
147,576
0
147,576
1995
286,716
139,140
22,704(@ 8 weeks)
0
22,704
Total
£627,970
49. From this total was to be deducted £82,450, being the estimated interest repayments on the £170,000 additional funding between 1 October 1990 (allowing for an agreed repayment holiday) and 30 November 1994, to give a net claim in respect of phase 2 loss of profits of £545,520. Following agreement during the hearing as to what the actual cost of phase 2 would have been if building had commenced immediately phase 1 was completed, and the contractor had been unable to renegotiate the price (£350,000), Mr Morgan reassessed the interest element on the basis that the full £350,000 cost would have been raised by borrowings in October 1990 until March 1991, this sum being reduced by £150,000 to £200,000 of profits from the business, or through the private funds of the directors, for the period April 1991 to December 1994. The interest cost was thus revised to £108,322, which, when deducted from the estimated loss of profits of £627,970, leaves a net claim for phase 2 of £519,648.
50. In cross-examination relating to phase 1, Mr Morgan said that by taking the 1991 accounts as the basis for his projections, the worst year in terms of blight, he was not “writing his own script”. Adjustments could be made to any year –– it was not just the blight that had affected profits and made each year unrepresentative of a normal trading year. For instance, the changes in registration requirements in 1989, the move from dual to single registration during 1991, the transfer of the remaining residential care patients to nursing patients during 1992, and the effects of the Care in the Community requirements beginning to be felt in 1994. Also, in 1994 staff costs were substantially increased due to the staffing-up for the move to the new, larger premises.
51. It was pointed out to Mr Morgan that by taking the 1991 financial year, when actual staff costs (based upon 23.25 patients) were 47% of turnover, and adding only two extra staff to cater for the additional 5.75 patients, his wages-to-turnover ratio became 41%. The letter that Mr Morgan had produced from Christie & Co, confirming that, in its view, a wage percentage in the band 41% to 47% for the period 1989 to 1995 was “broadly realistic”, conflicted with the letter from Christie & Co to Mr Peters. That had said that wage levels normally ran at 50% to 55% of turnover. By not referring to the actual accounts for the later years, when staff costs actually rose substantially against patient numbers approaching 29, Miss Robinson said the £213,000 taken by Mr Morgan was not representative of what did happen in reality, and, by also adjusting only some of the other expenses on an arbitrary basis, the exercise gave a falsely inflated additional profit forecast.
52. Mr Morgan said that, on the contrary, the projections that he had used [in Appendix 1] had been for 29 patients in a typical year. The year 1989 had not been used as it was during the start-up period, and 1990 was unrepresentative because fee income was contaminated by a mix of residential and the higher-fee nursing patients (although he subsequently accepted that the same “contamination” applied to the 1991 year). He said that total fee income was calculated and then expenditure deducted, based, not on a broad-brush approach, as had been adopted by Mr Peters, but upon a more sophisticated basis to reflect the fact that fixed costs (eg rates, insurance and advertising) would not change despite the increase in occupancy. Other costs would vary to a greater or lesser degree, the principal item of which was wages. He said that although fee income had been forecast to increase by 24.3%, the increase in wages was only 9.2%, this relating to the costs of providing one additional nurse and one care assistant. There would be no need to increase numbers in respect of any of the other domestic staff, and Mr Morgan reminded the tribunal that Mr Green had said he was fully staffed-up for 29 patients in 1991. It was Mr Morgan’s experience of the industry that led him to allow for the extra staff, despite what Mr Green had said. In his view, therefore, the projection of a figure of £213,000 for staff costs in 1991 was a fair assessment. Indeed, if he had not allowed for the extra staff, the profit attributable to the extra patient numbers would have been even higher than 70%.
53. When analysing the estimated wage cost per patient in the phase 1 scenario (£213,000÷29 = £7,345), it was put to Mr Morgan that this ratio had never, in reality, been as low. Was it that he was relying too much upon statistical analysis, and ignoring actual wage costs from later years, when there were more patients, and costs were actually higher? Mr Morgan said that the 5:1 staffing ratio required by the area health authority translated, on a full-time equivalent (FTE) basis, assuming a 40-hour week, to a need for 25.2 staff. This was less, he said, than the number of staff Mr Peters had assumed, from the 1991 accounts, at 30. The 30 shown had included one of the directors, and part-time staff. Mr Peters had also produced a schedule that showed wage costs per bed staffed in 1991 at £7,836 (amended to £7,804 in evidence)(when 23.25 beds were occupied), rising to £9,925 by 1994 (when, as agreed between the parties, 29.5 beds were occupied). Mr Morgan reiterated that in 1994 wage costs were higher due to the impending move to the new premises, new staff recruitment and the fact that a project manager was employed to supervise the completion of the Wergs Road premises and organise the move. However, he accepted Mr Marsh’s evidence that the project manager’s salary had been included in capital costs rather than under wages. Nevertheless, he said that, according to the accounts, there were 39 staff employed in 1994 –– enough for a home of 45 patients.
54. It was put to Mr Morgan that if, basing percentages upon the multipliers used by him in respect of phase 2, inflationary increases were applied to his 1991 wages figure of £213,000, it would become139 £243,473 in 1993 (against an actual wages bill of £273,953 –– 27.5 patients) and £250,845 in 1994 (against the actual wages cost of £297,772 –– 29.5 patients). Thus, counsel for the acquiring authority submitted that his estimates were unrealistically low. If he had used the actual wages costs, the additional profit that he had assessed at 70% would be substantially reduced. Mr Morgan said that his estimates had been based upon a detailed analysis of the minimum number of staff that would be required under the regulations, rather than the actual numbers of staff employed and their costs.
55. As to whether 1992, 1993 and 1994 could be considered normal trading years, Mr Morgan insisted that none of them were. The premises were blighted up until the end of 1993, and the effect on respite-care patients had to be considered (although he later accepted the evidence produced that showed the largest number of respite-care patients in 1991, with none in 1992/93, and one in 1993/94). Thus, he thought it better to rely upon what he had considered to be the most representative year, and, as he had said in evidence, to forecast the turnover (which had been agreed with the acquiring authority) and costs that a prudent and competent nursing-home owner would be likely to incur.
56. There was considerable discussion regarding actual staff numbers during the period 1991 to 1994, and, following Mr Marsh’s evidence, in which he said that, for the statutory accounts, he had taken “snapshot” figures on a quarterly basis from the salaries records, had taken a broad-brush overview of numbers, and, in terms of full-time equivalents, had treated part-time staff as 0.5, whatever hours they worked, it was accepted that these were not reliable enough to facilitate a detailed staff cost analysis. Mr Morgan did not agree with the suggestion that, in reality, staff numbers were increased substantially to cater for the increased number of patients, whereas he had estimated the only additional staff costs that would be required were the two extra he had allowed for in his 1991 analysis. However, Miss Robinson said that Mr Peters’ evidence had shown, per the accounts, that while patient numbers only increased by 0.75 (2.8%) in 1993, wages had increased by almost 15%. In 1994 patients had increased by two, and wages had increased again by a further 7.3%. Mr Morgan said that this proved there must have been other factors in play, as these increases did not follow the statistical pattern he had applied.
57. Miss Robinson referred to Mr Morgan’s calculations suggesting that the number of FTE staff required under the area health authority guidelines was 25.2, to cater for up to 30 patients, and asked if this included domestic staff. Mr Morgan said that it did, and that his assessments had been based upon a 5:1 staffing ratio on the morning shift only, as required by the health authority, that being the busiest time of the day in terms of patient needs. The ratio reduced in the later shifts. It was pointed out to Mr Morgan that the staffing notice sent by the Mid-Staffordshire health authority to the claimant on 18 April 1991 specifically excluded domestic, laundry or catering staff. As a result, Mr Morgan produced a further, and much more detailed, analysis of staffing requirements for a 30-bed home, based upon the staffing notice (which he had not previously seen, and which, he said, was unusual in excluding domiciliary staff).
58. Mr Morgan then added the costs of domestic and administrative staff, together with 6% national insurance and a further 7.5% to allow for sickness/holiday cover (to accord with the way Mr Peters had calculated costs). This rather more scientifically produced model, he said, gave a total FTE staff requirement of 25.9 (based upon a 37.5 hour week), and produced a total staff cost figure (including 7.5% for sickness/holidays) of £213,624. These staff numbers were only 0.7 more than the 25.2 he had originally calculated. He said that having taken the staff costs from the 1991 accounts in his original calculations, and added his estimate of the costs of two extra nursing staff to arrive at his figure of £213,000, the new calculations “balanced out”, and not only justified his original figure but also went to prove that, in terms of the health authority’s minimum requirements, the home had actually been overstaffed in the subsequent years.
59. Cross-examined on the newly produced figures, Mr Morgan said that he had allowed for shift overlaps as per the health authority requirements, but had assumed staff were not paid for that extra time. He also accepted that in terms of the matron and deputy matron, he had assumed all their time would be spent on nursing care. He did not accept Miss Robinson’s contention that these two full-time employees would need to spend a significant proportion of their time (up to 50%) on administrative and other matters, and, therefore, additional nursing staff would be needed throughout the various shifts, thus adding to the costs. Mr Morgan said that his new analysis was exactly as per the health authority requirements, and it was perfectly in order to assume the matron and deputy matron’s time being included in the nursing care hours analysis.
60. Miss Robinson said that an analysis of the total nursing hours allowed for by Mr Morgan (at 728 per week, converted to 2,912 hours for a four-week period to compare with an analysis of the actual nursing hours produced in evidence) proved that he had significantly underestimated what happened in practice when patient numbers had increased. In 1994 actual staff costs were £297,000, and, even allowing for inflation on Mr Morgan’s projected 1991 costs of £213,000, this figure was significantly higher.
61. Mr Morgan also produced a reworked projection of the wages for the increase in registration to 45 patients, assuming the construction of phase 2, calculated in the same manner and using the same assumptions as the newly produced figures for phase 1. This produced 934.5 nursing hours per week (including the matron and deputy matron), and with domestic staff, NI costs and allowances for sickness/holidays came to £294,271. This, he said, proved the figure of £300,000 for 1991 wages costs in his original analysis.
62. Miss Robinson questioned the number of additional nursing staff Mr Morgan had allowed form bearing in mind that the home would have increased in terms of numbers of patients by 50%. For instance, she said, only one additional care assistant had been allowed for on the night shift, but Mr Morgan said that the numbers he had allowed were based upon his 46-bed comparable. However, he accepted that that was a home for the elderly and infirm, whereas the subject property was a home for the young and physically impaired.
63. As to the construction of phase 2, Mr Morgan did not agree with Mr Peters’ costing of the works, based upon Spon’s Building Cost Tables, at £425,000. Those tables were based upon average contracts, not specifically related to healthcare premises. The parties had agreed that if TC Dolman & Sons had completed the contract in accordance with the original budget quote, and if construction had commenced shortly after phase 1 was completed (April 1989), the cost would have been £350,000. Reference was made to the RICS/BCIS building cost indices, and Mr Morgan said that if Mr Peters’ estimate, which was based upon mid-1990 figures, was discounted back to the first quarter of 1988 (when Dolman had prepared his estimate), the figure would reduce from £425,000 to £386,000.
64. While Mr Morgan agreed that, in 1989, the business was not profitable, when the accounts were reconstituted in accordance with industry standards (the basis of which had been agreed between the parties), there would have been sufficient to cover interest costs on the bank funding required for phase 2, as per his calculations. Even if, as was suggested by counsel for the acquiring authority, the claimant would have needed to borrow more than the £170,000 he had been told was the amount required, he said that the Greens had indicated they had sufficient personal funds to inject if necessary. Mr Morgan did not accept the suggestions that the bank would have required a period of up to one year following the opening of phase 1 before approving funding for phase 2, and reiterated the criteria that all commercial lending institutions use. Where there was a loan-to-value (LTV) ratio of, in this case, only 73.5% (assuming the Pinder valuation based upon a proposed 40-bedroom unit, increased by £100,000 to allow for the extra five bedrooms to £900,000), Mr Morgan said that while the bank would be interested in the profitability, this would be of secondary importance to the bricks-and-mortar value, and projections. In any event, by 1989 the claimant (on the basis of the reconstituted profits) was already able to show 1.5 times interest cover.
65. As to interest on loss of profits, it was the claimant’s case that this part of the claim was compensation for having been deprived of moneys140 that, if they had been paid, could have been used to reduce the bank borrowings relating to the cost of constructing phase 2. Due to the loss of profits, as claimed in (a) and (b), the claimant would be forced to borrow money that otherwise would not have been required. Mr Green had said that profits would have been used to reduce borrowing, and so the company was incurring interest that, during part of the claim period at least, was costing 4.5% above LIBOR. Mr Purchas pointed out that there was no evidence that the claimant would have done anything other than repay loans with those additional profits, and it was only right therefore that the interest being claimed should be based upon the cost of borrowing, as indeed was the practice in the courts throughout the period during which losses were incurred. He referred to McGregor on Damages in this regard.
66. Miss Robinson said that for the periods other than those during which it had been contended the additional profits would definitely have been used to repay loans, the profits would have been available for other uses, so the standard investment rate would be appropriate. Mr Morgan did not agree, and said that the claimant was only suggesting 2% over LIBOR, which was actually less than he was paying for the loans he did have, and whether or not he chose to pay off borrowings, the profits could have been used for that purpose. The differentiation being suggested by the acquiring authority was, therefore, inappropriate and unjustified. The interest rate being claimed was also very substantially less than the level of investment return that a businessman could realistically achieve –– for instance, investment in property could produce in excess of 20% return, although he did accept that this was high risk compared with the standard bank or building society deposit account.
67. Mr Marsh was the claimant’s accountant and gave evidence of fact relating to the construction of the accounts for the relevant years. He said that the staff numbers shown in the accounts for the years 1989 to 1993, and which had thus been relied upon by Mr Peters in his calculations of ratios and staff/patient costs, were not the result of a detailed payroll analysis. The published figures had been arrived at by taking a bimonthly snapshot of payroll numbers (disregarding small elements of casual labour) and averaging them out for the year. He said he took part-time employees on a full-time equivalent basis at 50%.
68. For 1994, he had adopted a slightly different basis. Due to the fact that additional staff were being taken on in connection with the new building and in readiness for the move to Wergs Road, and, in reality, the Care in the Community provisions were having little impact on staff requirements, he took the 1993 staff figures and arbitrarily added one FTE. He confirmed that the project manager taken on to supervise the building and the move was not costed through the payroll, but had been accounted for under capital costs.
69. In cross-examination, Mr Marsh confirmed that as far as the 1994 wages figures in the accounts were concerned, they included the costs of staff associated with the move to the new premises (other than the project manager). He accepted that the staff numbers shown did not accurately reflect the actual numbers of employees on the payroll.
Acquiring authority’s case
70. Mr Russell is a chartered building surveyor, and since 1991 has been employed as a senior regional building surveyor by the Valuation Office Agency. He has experience in the preparation of specifications of works, feasibility studies and estimating costs. Inspections of the subject property were undertaken by him in connection with the claim in 1992, and again in 1997.
71. His report included his estimate of the apportioned cost of completing the phase 2 extension, based upon TC Dolman & Sons’ originally quoted price for the whole contract, in 1990, at £339,000. During the hearing, after allowing for some additional works relating to the central-heating system that had not been originally included, the parties agreed that if Dolman had agreed to do the works within the original contract price, and they had been completed by April 1990, a figure of £350,000 would have been appropriate. However, this was an apportioned figure from the original 1988 quote, and Mr Russell agreed that if the building cost indices were applied, this figure would become £385,000 at April 1990 prices.
72. The report also set out Mr Russell’s true opinion of the cost of completing phase 2, based upon Spon’s Building Cost Tables, as at 1990, in the sum of £445,250. Again, the parties agreed that if this were the basis opted for by the tribunal, the figure, as at the second quarter of 1990, would have been £425,000. He said that, in his opinion, construction of phase 2 would have taken about six months.
73. In cross-examination, Mr Russell confirmed that he did not know TC Dolman & Sons. He had referred to the original quotation and subsequent papers relating to additional works to be able to establish appropriate costs for the completion of phase 2. He accepted that, from the correspondence he had seen passing between the builder and the claimant, there had been no indication of an intention to increase the quoted price, and that if Mr Allan Reynolds’ letter was to be relied upon, Dolman’s quote fell within, albeit at the upper end, of the likely band of quotes that could have been expected in 1988.
74. Mr Russell said that, as far as estimating for a nursing home building from Spon’s was concerned, those tables encompassed a wide range of contracts, and his calculations, taking into account required building finishes, had been at the bottom end of the ranges given.
75. Mr Peters is a chartered accountant with 22 years’ experience in the West Midlands area. He has acted for the past 12 years for a company and individuals that own and operate 14 nursing and special needs homes, and said that although these were in many ways different to the subject property, the accounting principles were the same. In projecting the future profitability of the subject property, Mr Peters said that in his experience the profit a business makes depends largely upon the philosophy of those who run it. There were those, he said, who were out to make profit at all costs, and others who were less profit-oriented, and were happy to plough earnings back into patient care. As a generalisation, he said that the sort of profits being forecast by Mr Morgan would be difficult to achieve, especially bearing in mind the profit record of the claimant throughout the nine years he had examined. He said that, for instance, it was very difficult to get wage costs below 50% to 55% of turnover.
76. Mr Peters had analysed the accounts for the years 1989 to 1997, and then adjusted them to reflect the extra staffing requirements and associated costs of catering for additional patients. He had relied, for example, in calculating staff costs, upon the actual wages incurred when staff numbers had reached the levels projected, rather than, as Mr Morgan had done, take one (unrepresentative) year and apply information from a database that did not reflect what costs actually turned out to be at the subject property.
77. Mr Peters said that his analysis of the accounts showed an operating profit as a percentage of turnover ranging from 23.74% to 35.3%, averaging 27.32% over the nine-year period. This period included three years at the new Wergs Road premises, but it was notable that, for the period from 1993 to 1997, during which the claimant was operating at full capacity, operating profits were still only in the range 25.03% to 26.21%. This, he said, was an important factor in disproving Mr Morgan’s evidence that a figure of 70% marginal profit could be expected from the additional patients. The fact that, at no time during the nine years he had analysed, had the claimant made a profit anywhere near the 41% overall suggested by Mr Morgan proved that that figure was likely to be unachievable. Mr Peters had, therefore, in originally calculating the loss of profits, assumed a net operating profit for each of the applicable years at 27.5%. This had subsequently, in the light of the evidence, been increased to 30%, to give the phase 1 figure of £61,704.
78. The three most profitable accounting years were 1991 to 1993, where the net operating profit at 35.02%, 35.3% and 31.42% respectively was substantially above that achieved at any other time, including the years when each of the homes was running at full capacity. Bearing in mind these were the years during which the claimant alleged the blight was at its worst, Mr Peters had considered these results merited further analysis. While accepting that there had been substantial increases in per-patient fee income, he did not concur with Mr Morgan’s hypothesis that this was due to conversions from141 residential to nursing care. Figures produced at the hearing had shown that there were few conversions during this period, and Mr Marsh had said all conversions were completed by 1992. He thought the level of respite-care patients might have been a contributing factor to the increased income.
79. Mr Peters said that his analysis showed wages costs to turnover in 1991 (47.61%) and 1992 (48.57%) as being substantially below those percentages actually incurred in the other years, where they ranged from 52.94% to 57.97%. This, together with the increased fee income per patient, was the main reason for the exceptional level of profitability (in comparison with other trading years, not in comparison with the industry norm), although maintenance costs were also down in these years –– understandably so. He thought that a prudent businessman would be, in the knowledge of the impending compulsory acquisition, striving to save costs, and referred to the fact that Mr Green had admitted that was the case. While Mr Morgan had said that he did not agree with Mr Peters’ contention that the 1991 to 1993 profits were higher than normal, but were substantially below the industry norm, Mr Peters reiterated that his comparison was with other years of the claimant’s trading, an exercise he felt to be more appropriate.
80. In his experience, Mr Peters said, industry average staff costs were at least 50% to 55% of turnover, and information he had received from Christie & Co had confirmed this to be the case. Indeed, it had said that for specialist homes, the staff costs were often higher. The use, therefore, by Mr Morgan, of the actual 1991 wages costs (£195,920) as the basis for his estimate of wages costs for the home, accommodating 29 patients (£213,000), was wholly inappropriate. Allowing for the additional turnover created by the extra patients, Mr Morgan’s staff costs would be reduced to 41.22% of turnover in 1991, 42.29% in 1992 (allowing as he had done for inflationary increments) and 43.57% in 1993. These percentages, Mr Peters said, were not only well below the industry norm, but also at levels that the company at no time had been able to achieve.
81. He said he could not accept Messrs Morgan and Green’s assertions that the home was fully staffed-up for the additional patients (bar the two extra staff allowed for by Mr Morgan) in 1989. The increases in wages per the accounts in 1990, 1991 and 1992 showed that even if, as indicated by the table of employees produced at the hearing, there appeared to be no great fluctuations in actual staff numbers, there must have been substantial additional hours worked by those who were there. It was plainly evident that the actual wages paid in the years following 1991 were significantly more than those projected by Mr Morgan. As an example, Mr Peters said that if the actual 1993 wages costs of £273,953 were indexed back to Mr Morgan’s 1991 estimate, this would give a figure, per Mr Morgan, of £243,473 –– some £30,000 less than was actually paid. In Mr Peters’ view, Mr Morgan might have come up with more sustainable figures if he had taken a year in which uncertainty was less, such as 1993 or 1994, when the home was full. As to staff numbers, Mr Peters said that information provided in the accounts under section 56 of Schedule 4 to the Companies Act 1985 showed an average of 30 staff employed in 1991 and 38 in 1993.
82. While, in normal circumstances, it would be acceptable to assume a much increased profit from the last few beds filled, Mr Peters said he found it difficult to believe, bearing in mind the actual results achieved throughout the nine-year period, and the question marks over Mr Morgan’s assumptions, that additional profits of this level would be achievable. To illustrate this, he took the actual turnover per the accounts, and added the agreed additional turnover per the claim. He then compared this with the actual profit from the accounts and the additional profit that Mr Morgan had assumed would be generated on the 70% basis. This produced forecast operating profit percentages of 25.59% in 1989, 30.93% in 1990, 42.09% in 1991, 37.99% in 1992 and 33.42% in 1993. These profit levels, apart from 1989, were far in excess of what had been actually achieved by the business, even when operating at full capacity, but significantly less than Mr Morgan’s suggested overall profit levels of approaching 41%. This exercise, he said, showed that Mr Morgan had been selective in using 1991 as the benchmark year for forecasting future profits.
83. Having noted from the accounts that to cater for 27.5 patients in 1993, eight extra staff were needed over those employed in 1991, as against Mr Morgan’s suggestion of two, Mr Peters had carried out an exercise on the same basis as used by Mr Morgan. He calculated the average wage in 1991, and added the cost of eight people, this resulting in a total wage cost of £250,872 and an increased profit of 33%, as against Mr Morgan’s suggestion of 70%. Mr Peters said that if, as it appeared from the accounts, the additional eight staff were needed to cater for the extra patients, it was not appropriate for Mr Morgan to have assumed only two. On Mr Peters’ analysis, whichever way he looked at it, he concluded that an appropriate wage cost, under the phase 1 scenario in 1991, would have been at least £250,000, not £213,000 as Mr Morgan had projected. As to total net operating profits under this analysis (rather than the additional profit just relating to the extra patients), Mr Peters’ figure became 34.8%, against an actual profit, achieved with the agreed 23.5 patients, of 35.21%.
84. On the subject of the required levels of staffing, both in respect of nursing care and administration/domestic personnel, Mr Peters produced an analysis based upon the requirements of the Mid-Staffordshire health authority. The authority’s staffing notice set out the minimum nursing staff required, dependent upon the number of patients (20, 25 and 30). Domestic staff were specifically excluded, and therefore additional allowance had to be made for them. Taking the matron and deputy matron as salaried staff, and assuming, for comparison purposes with Mr Morgan’s figures, that they both spent all their time on nursing duties (the time taken up with administration duties such as working out shifts, supervising staff and dealing with visitors being, therefore, calculated as nursing hours), and allowing for nursing staff to be paid during shift overlap periods, Mr Peters assessed the 1991 staff costs on the 30-bed requirement at £261,729. Mr Peters pointed out that, in reality, Mr Green had had a staff count well in excess of the figures Mr Morgan was suggesting as appropriate.
85. In respect of phase 2, Mr Peters had taken a calculated turnover of the claim for each of the years 1990 to 1995 and applied an operating profit (as he had done in relation to phase 1) of 27.5%, and compared this to the actual profits achieved in those years. From the resulting figure of £305,945, he had deducted interest on the capital outlay using both the claimant’s cost of construction and the estimate of the construction cost provided Mr Russell. Depending upon which building cost figure was taken, the loss of profit for the extra 15 bedrooms was either £99,820 or £223,945. Carrying out the same exercise on the basis of 25.5% profit (equivalent to the actual profit percentages earned over the appropriate years), the loss of profit became £29,107 or £152,782.
86. If the claimant’s alleged loss of profits were taken, the net operating profits ranged from 33.25% to 45.66%, compared with the average actually achieved during the period the old and new homes were operating to full capacity of 25.25%. Thus, again, he felt that Mr Morgan’s projections were wholly unrealistic.
87. Mr Peters also disputed Mr Morgan’s estimate of staff requirements, giving a wages cost for 1990 of £300,000, to which had been applied inflationary increases for each of the following years. In Mr Peters’ estimation, using an assumed health authority requirement for a 45-bedroom home resulting in 20% extra input (in terms of costs per hour) for RGNs and SENs, and 60% extra for the care assistants, this would give a realistic wages cost for 1990 of £375,000. Alternatively, if the additional hours all related to care workers, the wage bill would become £350,000. To these, he would apply inflationary increases on the same basis as Mr Morgan had done. Once again, therefore, it was Mr Peters’ view that Mr Morgan had significantly underestimated staff costs, this resulting in inflated profit projections.
88. In his supplementary reports, Mr Peters had come to the conclusion that the construction of phase 2 would not have commenced immediately phase 1 was completed. Due to the bank’s requirement for 2.5 times interest cover on profits, he thought the bank would not have been prepared to lend on phase 2 (especially as, in his view, the LTV was high) until it had considerable comfort relating to the success of phase 1. He thought the bank would need at least 12 months’ trading of the 30-bed unit before even considering phase 2. Allowing nine months142 for construction and six months for registration, this gave a date of July 1991 for the practical commencement of operation of phase 2.
89. Furthermore, Mr Peters said that he believed any funding for phase 2 would be on the basis of a phased payment arrangement (overdraft) during construction, then conversion to, say, a 10-year fixed loan. It was not practical, therefore, to think in terms of using future profits to do anything other than cover the loan repayments at first instance. As to the amount to be borrowed, Mr Peters thought, due to the lack of profits in 1989, and the requirement to service the pre-existing loans, the claimant would have needed to borrow the whole cost.
90. In his revised calculations of loss of profits on phase 2, Mr Peters assumed an operating profit of 30% (as he had subsequently done with phase 1) based upon the agreed levels of turnover, and assumed that the building would not have been operational until mid-1991. On the basis that the claimant borrowed the whole of the building cost (at Mr Russell’s figure of £425,000), the revised claim becomes £115,004. This increases to £149,679 if the claimant’s figure for building of £330,000 is taken.
91. In cross-examination, Mr Peters accepted that none of the homes with which he had an involvement were comparable with the subject property in terms of size, and also in terms of the type of nursing care provided, only one being a home registered with the health authority, and that having only six patients. However, he thought that they were typical of the care homes industry.
92. Mr Peters said that, in his view, it would be difficult to run a specialist care home at the low levels of wage costs promulgated by Mr Morgan. He accepted that industry averages were a broad-brush analysis, and took in the good with the bad. While not suggesting that Eronpark was run as anything other than a money-making investment, and there was also no suggestion that the directors were less than competent, Mr Peters said the levels of profitability had been consistently below those that were achieved throughout the industry generally, even when per-patient fees were higher than the industry average. He agreed that the claimant’s philosophy was to provide a standard of care well in excess of that that was being provided in other homes, and that the testimonies of the staff and patients supported the view that it had been well run. Indeed, the claimant could be applauded for achieving the levels of occupancy it did. However, he could find no evidence to support the profit levels Mr Morgan was projecting, which were so much higher than those that had been achieved at any time over the nine-year period, even, as he had said before, when the home was full.
93. Mr Peters accepted that the report undertaken by Pinders had been in a pre-blight situation, and its analysis of the figures provided forecast profitability of 43% in the first full trading year. He also agreed that if the home had closed in 1990, the advice of experts, and reference to databases, would have been a good starting point for assessing losses of profits, but these figures would then have needed to be applied to the actual business, and what had actually happened. He had done this, and so his assessment was related to the actual, and not a hypothetical, business. He had thus been able to gauge whether or not this business was likely to under- or over-perform the market.
94. Mr Peters’ revised analysis for 1991 gave a wage cost of £261,729 for phase 1. He agreed that he had made assumptions as to salaries and hourly rates. Mr Morgan produced, on the last day of the hearing, a reworking of Mr Peters’ analysis, using the same assessment of required hours worked, but substituting the actual wages and hourly rates paid, based upon information provided by Mr Green, together with the costs of an additional cleaner. This resulted in a wage cost of £217,811 –– close to the £213,000 he had originally calculated [Appendix 1]. The same exercise for phase 2 (45 bedrooms) resulted in Mr Peters’ figure of £375,000 (or £350,000, depending upon whether all extra staff were hourly paid care assistants), becoming, on Mr Morgan’s analysis, £326,413. Mr Peters pointed out that this was still some £6,000 above Mr Morgan’s original estimate for 1991. On these bases, Mr Morgan’s projected total loss of profits becomes £503,380, with net operating profits being reduced from Mr Morgan’s original average of around 41% to a range of between 28% (two years) to 39% (1991, the company’s most profitable year). This, Mr Peters said, proved Mr Morgan’s projected net operating profit figures were unsustainable and unrealistic.
95. On the subject of profit per bed occupied, Mr Peters said that this was actually £6,195 in 1991; £6,516 in 1992; and £5,913 in 1993. His projections for phase 2 (44 beds occupied) resulted in profits-per-bed occupied of £5,293 in 1991, £5,482 in 1992 and £5,634 in 1993. Over the three-year period, therefore, the profits were an average of 12% less on his projections based upon 30% net operating profit. This proved, in Mr Peters’ view, that it was unlikely that any additional profit would be achieved from filling the extra beds, although he did concede that it was unlikely that the company would, in reality, earn lesser profits. It was possible, he said, that despite what Mr Green had said about being fully staffed for 30 patients in 1990, he was exercising cost-cutting measures that had the effect, particularly in 1991, of increasing profitability beyond levels that the company had otherwise sustained.
96. Mr Purchas suggested that, in order to prove that there would not be less profit achieved by filling the additional beds, it would be helpful to compare Mr Morgan’s 1991 projection [Appendix 1] with Mr Peters’ calculations, taken from the accounts, of the wage cost per bed staffed. Mr Peters had divided the actual wages cost in 1991 of £195,920 by 25, his assumption being that, in that year, the staff numbers were appropriate for that number of patients. The resulting figure was £7,832. However, if that figure is multiplied by 30, per Mr Green’s evidence that the home was staffed-up for that number of patients, the wage cost would become £235,000. This is £22,000 more than Mr Morgan’s estimate of £213,000, and, if applied, would serve to reduce the additional profit per patient to 49% from the 70% originally envisaged.
97. He said that if you then apply 49% (which happens to be 70% of 70) to the rest of Mr Morgan’s figures, it serves to reduce the claim by 30%. Allowing for the deduction of any element of double counting (between phase 1 and phase 2 losses), Mr Purchas said that this made the difference between the parties in respect of the phase 1 claim only about £12,500. Mr Peters did not agree with this analysis, as the calculation was based upon the premise that one could simply gross up the cost per bed staffed by the number of patients. If, alternatively, one were to gross up the actual cost per bed occupied in 1991 (agreed at 23.25) for the 29 patients, for phase 1 (£195,920 ÷ 8,426 x 29) the wages cost would become £244,354. This would serve to reduce the effect of the phase 1 claim accordingly.
98. As to Mr Peters’ opinion that the bank would have delayed granting approval for the funding of phase 2, wishing to obtain some comfort from, say, 12 months’ full trading and patient take-up from phase 1, he said it was most unlikely that Barclay’s (or any other lender, for that matter) would have immediately granted funds on the opening of phase 1. He did not accept Mr Morgan’s argument that the principal lending criterion was bricks-and-mortar value, although he accepted that there was no documentary evidence regarding the interest cover requirement. He did accept that registration for 30 bedrooms had occurred contemporaneously with the completion of phase 1 in April 1989, and that the calculations in his original report were based upon completion of phase 2 in 1990, as per the claimant’s case.
Closing submissions
99. Mr Purchas said that it was common ground that: the business had suffered a loss; if it had not been for the road proposal, a 45-bedroom unit would have been built; the home was a unique facility in the area in terms of the speciality care provided; and it would have enjoyed virtually full occupancy. The experts having agreed upon the other costs that would have applied in both the phase 1 and phase 2 scenarios, the key area of dispute was wages costs. The numbers of staff that would have been required, and the analysis of their likely costs based upon salaries, hours worked and cost per bed staffed and occupied had all been considered. Also, the roles of the matron and assistant matron, and the extent to which they would have been involved with administrative duties, were an important factor.
100. The effect that those staff costs would have upon the projected net operating profit was key to establishing the levels of loss that had143 occurred as a result of there being fewer patients in residence (and, thus, reduced income). It was agreed what the annual reduction in occupancy levels was, as was the per-patient income that would have been achieved had the beds been filled.
101. The approaches adopted by Mr Morgan, for the claimant, and Mr Peters, for the acquiring authority, were fundamentally different, and it was this aspect that had resulted in the insurmountable differences of opinion. (The 1991 wages cost shown in appendix 1 to this decision is incorrectly shown as £195,120, but it is agreed that this makes a very marginal difference to the net result.)
102. With appropriate adjustments to some of the other operating costs (the basis of which is not in dispute), and the increased income figure calculated upon the agreed basis, the result shows the net operating profit per extra patient to be in the region of 70%. Comparing the projected profit to that actually earned, the loss of profit is established. He had then simply adopted the same basis for the remaining 21.6 weeks of the 1989 financial year, at 50% –– to allow for patient take-up –– and for all of the following years to September 1993, the point at which it was agreed the blight ceased. The additional fee income had been calculated upon the basis of the agreed reduction in patient numbers for each year.
103. As to phase 2, Mr Morgan accepted that there were far more imponderables to consider in running a home that would have been 50% larger than in the phase 1 scenario. He had thus analysed the actual accounts for the four-year period 1990 to 1993, reconstituted them on the standard basis and then hypothetically rebuilt them, using as guidance his company’s database of over 8,000 nursing homes. The wages for 1990, on the basis of the agreed occupancy of 44, were £300,000, and he had adjusted these for the following years for inflation. Mr Morgan had also deducted the element of double counting when calculating the net losses.
104. Mr Purchas said that a major issue was whether it was appropriate to base the likely wages for a 45-bed unit in 1990 on the actual wages paid (in terms of individual salaries and hourly rates) by the claimant. Mr Morgan’s original calculations had been based upon his database, and his knowledge of health authority requirements. Even when the actual wage rates were substituted (which Mr Morgan had done during the course of the hearing in an attempt to narrow the issues), his projected 1990 staff costs of a 45-bed home increased by only £26,413 over his original £300,000 assessment. Mr Peters’ analysis of costs per health authority requirements produced during the hearing, indicated very substantially higher figures (at £350,000 or £375,000, dependent upon staffing grades). It was, Mr Purchas said, for the tribunal to decide whose figures, and which basis for projecting loss of profits, were the more reliable.
105. The cost of completing phase 2 had been agreed between the parties at £350,000, if Dolman’s were to complete it in accordance with its original budget estimate, and this was the claimant’s case. Mr Russell’s approach, carrying out a new costing exercise on the basis of Spon’s Building Cost Tables, was considered inappropriate and a considerable overestimate.
106. The suggestion by the acquiring authority that the claimant would not have made sufficient profits to facilitate repayment of the loans at the rate stated, and that even if it had done, it would have chosen not to repay them, was not correct. The compensation moneys, for instance, had been used to pay off all the company’s borrowings when they were received in 1993. The fact that more of the earlier borrowings had not been repaid prior to the receipt of the compensation was, Mr Green had said, due to the blight caused by the scheme. No evidence had been adduced to suggest that the company would not have repaid the borrowings. The bank had been charging interest at 4.5% over base during the early nineties, and Mr Green had said that had the profits been there to do so, repayments would certainly have been made on a year-by-year basis.
107. The question of interest on the loss of profits had been dealt with in evidence, and it was, Mr Purchas suggested, a matter for the tribunal to decide as to the basis upon which it should be calculated –– the claimant’s case being, quite reasonably, he said, that it should be based upon LIBOR plus 2% for the full amount.
108. For the acquiring authority, Miss Robinson said that for both phases 1 and 2, the object was to ascertain what profits the claimant’s business would have made but for the blight caused by the road proposal, and to do this it was necessary, as the authority’s expert had done, to carry out a careful analysis of the actual trading accounts. Such an analysis had proved that the levels of profits that the management of this particular company had achieved were substantially less than had been suggested by the claimant’s expert. He had sought to focus upon industry averages and his expectations of the competent proprietor, rather than concentrating upon the facts of this particular case. The accounts showed clearly that, even in the years unaffected by blight, and when both the old and new premises were trading at full capacity, net operating profits were well below those being projected. In this regard, it was not possible to dismiss the actual results upon the basis that none of the relevant years were “normal”.
109. As an example of the inappropriateness of Mr Morgan’s figures, Miss Robinson said that in 1994, the net operating profit was 26.21%, compared with Mr Morgan’s database figure of 43%. Even if it were accepted that the whole of the increase in wage costs from 1993 to 1994 was caused by staffing-up for the impending move to Wergs Road (which was unlikely), the NOP would have still been only 30.7%. Also, the fact that the profits earned in the new premises, when they were operating at full capacity, were still only about 25% begged the question: if the claimant cannot achieve profits of the levels claimed in the real world, with no blight, then how can it justify the figures promulgated by Mr Morgan?
110. Mr Morgan had failed to grasp the fact that this particular business appeared to operate to a different philosophy than others. Mr Green’s own evidence that the company was operating a “different type of home, structured to provide and maintain a quality of life lacking in many residential homes” indicates that the company’s prime aim was care, rather than profit. It had been accepted that the home was staffed in excess of the minimum requirements, a fact proved by the disparity between Mr Morgan’s forecast wages costs and those that were actually incurred.
111. In respect of phase 1, Mr Morgan had analysed the year worst affected by blight: there was the highest number of vacancies and the most respite care patients. The NOP was 35.02% (almost the highest achieved in any year) compared with 26.21% in 1994, and an average 1989 to 1994 NOP of 29.29%. If profits were so much higher, in comparison terms, in 1991, it must have been because of unusually high income, or lower than average costs, or both. This was, therefore, an unrepresentative year, and, Miss Robinson said, making any adjustments to reflect the effects of blight involved making assumptions as to the very things the claimant was trying to prove.
112. Mr Green had said that costs were pared down to a minimum in 1991, and that, despite being fully staffed-up to cater for 30 patients, they were not necessarily working the same number of hours as when the home was full. Indeed, Mr Green had admitted that the increase in staff costs between 1991 and 1994 was due to the extra beds being filled, yet Mr Morgan had chosen 1991’s expenses and adjusted some of them, rather than taking a year in which the home was actually cateringfor 29 patients. If, for instance, he had factored the 1993 staff costs back to 1991 prices, the wages would have been £243,473, rather than the £213,000 he had forecast. Alternatively, the cost of employing the 36 staff actually employed in 1993 and early 1994, when the average occupancy was 27.5 to 29.5 patients, by multiplying the cost per employee of the 28 staff employed in 1991, gave an equivalent figure of £250,872. This exercise clearly demonstrated that Mr Morgan’s approach was wrong.
113. In respect of the timing of the loan for phase 2, it was submitted that the bank would have required a settling-down period after the opening of phase 1 before approving the funding. If it was to be, as agreed, six months before full occupancy was achieved, it was only reasonable to expect a further six months to see that occupancy levels were being maintained. This would mean a start date of April 1990 at the earliest,144 and there was no contemporaneous evidence to support the claimant’s case that the bank would have lent the funds in the autumn of 1989. Given that there would be this delay, it was even more unlikely that Dolman’s would have maintained its original estimate. If building work on phase 1 was finished in February 1989, and if construction on phase 2 was not able to be commenced until at least April 1990, Miss Robinson said that according to Emden’s Construction Law, vol 1 paras 13 and 40, this would have amounted to a repudiatory breach. Dolman’s would not, therefore, be bound by the original contract.
114. However keen Mr Dolman’s price, and however good the relationship with the claimant, it was inherently improbable that he would have agreed to construct phase 2 in accordance with a quote that had been calculated back in 1988, especially considering the amounts by which tender prices had risen over the intervening period. In reality, it was much safer to rely upon Mr Russell’s estimate of costs, based upon Spon’s, in the sum of £425,000. At the very least, the minimum price Dolman’s would have charged would be £350,000, rolled forward to second quarter 1990 prices, making it £382,350.
115. It was agreed that the bank would have lent the whole of the cost of constructing phase 2, so the issue was how much profit from the business would have been available to reduce the borrowings, and whether it would have been so used. The amount of money available would have been limited to the extent that it would have been impossible to start construction in the autumn of 1989 and borrow only £170,000, as contended by the claimant. Therefore, Mr Morgan’s revised estimate of £108,322 interest charges was wrong. At the end of 1989, the business made a loss, even taking into account Mr Morgan’s claim for loss of profit on phase 1. At that stage, the claimant would have borrowed the full cost, and, in 1990, the profits available to repay the loan would have been £56,158 on the claimant’s revised figures. Even if all the profits were used, the vast majority of the loan would still be outstanding on 30 September 1990. Not until the end of 1991 would it be possible to reduce the borrowing to Mr Morgan’s figure of £170,000. It was submitted that the tribunal would need to revisit this point once the loss of profits issue has been determined, as this would affect the amounts available for repayment.
116. As to the claimant’s calculations for loss of profits on phase 2, many of the considerations that apply to phase 1 are the same: the wrongful assumption that the company would be able to create profits at levels approaching those on Cavendish Tate’s database, the wrongful rejection of the business’s actual finances in the most appropriate years for comparison, and Mr Morgan’s significant underestimate of wages costs. The assessment of £300,000 as the appropriate staff cost in 1990 had not taken account of the fact that the matron and deputy matron would have to spend up to 50% of their time on administrative matters. Other staff would be needed to make up the time to offer the basic care requirement. He had also not considered, in his original projections, the cost of holiday and sickness cover. There were different assumptions as to levels of staff required, and the parties had been unable to agree shift cover, and whether staff would be paid for overlaps.
117. Mr Morgan had sought, during evidence, to justify his figure of £300,000 by relying upon the actual costs in 1990, divided by 30 and multiplied by 45 to give £285,000. However, the average actual occupancy in 1990 was 24.5, and substituting 24.5 for 30 gives a resulting figure of £349,000 –– very close to the lower of Mr Peters’ two figures (£350,000).
118. As to interest, Miss Robinson submitted that while it was agreed that the claimant was entitled to interest on loss of profits, the issue was what would be a fair reflection of the loss it had suffered as a result of not having the use of the money. The contention being that the profits from five months of 1989 (if there were any), 1990 and half of 1991 would be used to repay borrowings, then it was reasonable to conclude that interest should be calculated on the standard costs of borrowing. The claimant’s suggested figure of 2% over LIBOR was a fair figure. However, it was the acquiring authority’s case that for the rest of the period, the interest should be based upon the equivalent of a short-term deposit rate.
119. The claimant’s contention that interest should be calculated at the mid-point in each accounting year was not accepted, and the acquiring authority’s submission was that it should be calculated at year-end –– 30 September in each year.
Decision
120. The three issues for my determination are:
(a) The loss of profits that would have been earned from the 30-bed facility were it not for the blight that caused a reduction in occupancy.
The patient numbers that would have been accommodated were agreed at 29 (subject to the 50% occupancy during the “start-up period”), as was the income, both actual, in the blight situation, and anticipated, on full occupancy. The actual costs, subject to blight, were agreed, and thus also the profits in that situation, as per the accounts. None of the projected operating costs in the non-blight world were in dispute, except for wages, and, therefore, in respect of phase 1, it was solely the anticipated staff costs to cater for 29 patients that were at issue.
121. (b) The loss of profits that could have been anticipated had the 15-bedroom extension been constructed.
The patient numbers were agreed at 44, again subject to a six-month take-up period from the date of opening at 50% additional occupancy. The income and all projected operating costs were agreed, again save for the wages costs. Additional issues in respect of phase 2, upon which the parties failed to agree, were the timing and cost of the construction, when registration would have occurred, and, thus, the estimated date it would have opened. The amount that the claimant would have had to borrow to fund the construction and the costs of that borrowing were also in dispute.
122. (c) The interest on the loss of profits decided under (a) and (b) and the period to which those rates apply. On this, the parties have invited me to determine only the basis, or bases, upon which interest is calculated, and the relevant period for which it is payable, rather than determine an amount.
123. From the evidence, therefore, the principal issue between the parties, and that which must be resolved in order to gauge the levels of lost profits in respect of both phases 1 and 2, is the wage costs that would have applied throughout the relevant period. In considering this issue, reference to information databases and research statistics from other homes is appropriate and helpful, but it is important to keep in mind the facts relating to this particular home in the real world.
124. The lack of coherent and factual evidence as to exact numbers of staff employed by the claimant, their precise roles and hours worked during each of the relevant years, especially when the home was fully occupied, was unfortunate. However, the various calculations, analyses and reworkings handed in during the hearing were helpful in crystallising what staffing levels, precise roles and costs, bearing in mind health authority requirements, would actually have been, and they did serve to narrow the gap between the parties.
125. Mr Morgan’s exercise to establish the phase 1 loss of profits has created, as pointed out by counsel for the acquiring authority, average profit levels of 41% pa, which are well in excess of anything that the claimant actually achieved in any year of operation, including those at the new premises. In evidence, Mr Morgan said that none of the years could be considered normal, and I accept this point. The home was blighted during the years in question, and it is only reasonable to anticipate that the levels of overall profitability, in percentage terms, would improve once the vacant beds were filled. I also accept the logical conclusion that the highest amount of profit is likely to come from the last few beds filled. As Mr Green said, once the staff and infrastructure are in place, the additional costs per patient are relatively marginal.
126. Mr Morgan produced statistics from his company’s database showing net profit margins for specialist nursing care ranging from 45% in 1989 and 1990 to, on an annually reducing basis, 41.2% in 1995. The figures he produced from Christie & Co were consistently 2% to 3% below those on his database, but still significantly higher than had ever been achieved by the claimant. His staff costs had been assessed at £213,000 for 1991, assuming a requirement for two additional members145 of staff, which would be sufficient for the whole period to which the phase 1 claim relates. However, in 1993 wages were £274,000. In 1992, when there were only 26.75 patients, the staff costs were £237,628. The numbers of staff employed per the accounts (shown as 30 in 1991, increasing to 36 in 1992 and 38 in 1993) indicates that, in reality, additional personnel were needed and employed.
127. While I have no reason to question Mr Green’s statement in evidence that there were sufficient staff numbers employed for 29 patients in 1991, the facts show, and, indeed, Mr Green admitted in cross-examination, that additional staff were taken on to cater for rising numbers. Mr Morgan’s comment that the home may have been overstaffed against the minimum health authority requirements therefore has some merit. As no conclusive evidence was produced pointing to the exact numbers of staff employed in the relevant years, and their precise roles (only the statutory figures from the accounts being relied upon by Mr Peters, and these being of questionable value), I found the recalculations produced during the hearing by Mr Peters and Mr Morgan particularly useful. These were based upon the health authority’s actual staffing requirements. Mr Peters’ analysis had assumed a staff cost of £261,729 in 1991, but this was amended to £217,811 by Mr Morgan using the actual salaries and hourly rates paid in that year.
128. However, while payment for shift overlaps had been allowed for, the extra nursing hours that would have been required to cover for the matron and her deputy while they were undertaking necessary administrative duties was not. An allowance does, therefore, need to be made in that regard, and, furthermore, I consider an arbitrary increase to account for the fact that, in the real world, blighted or not, the home was staffed above the minimum requirements to be appropriate. In all the circumstances, therefore, I conclude that an additional £7,189 should be applied to the £217,811, giving a round figure of £225,000. In my judgment, this figure more accurately reflects what the reality would have been, and reflects a fair balance between the minimum requirements and the staffing arrangements that were actually in place.
129. Using the annual wage inflation figures agreed between the parties, the wage cost in 1992 would become (at 6.25%) £239,062, against an actual cost of £237,628, and, in 1993, would become (at 5.9%) £251,648, against the actual cost of £274,000.
130. Mr Peters has undertaken a more detailed analysis of the accounts over a much longer period, and has concluded that this management, operating this home in accordance with its philosophy and with staff costs based upon those actually incurred, a realistic expectation of overall profits would be 30%. The analysis is for nine years, and does, as submitted by the claimant, include the start-up period, the blighted years and three years at the new premises, and, as such, his “broad-brush” approach is criticised by the claimant as unrepresentative. I agree that the adoption of a straight 30% net operating profit assumption on the phase 1 and 2 scenarios, based upon that long-term analysis, is somewhat simplistic, and does not reflect the benefits to be obtained upon achieving full occupancy.
131. All other figures (income and costs) not being in dispute, the revised wages cost of £225,000 serves to give a net operating profit for 1991 (per Appendix 1) of £203,908: 36.9%, and a loss in that year of £59,003. The marginal additional profit from the extra beds occupied becomes 58.9%
132. As to the suggestion that by taking the most profitable year as a basis for his analysis and projections, Mr Morgan’s evidence is self-serving, this would undoubtedly be the case if I were to accept his projected wages costs, and apply his resulting 70% marginal profit throughout. However, the parties have agreed all the other costs and the income, and I have no reason to assume that the profits I have outlined above could not be achieved, despite the fact profits were substantially less in many of the other years. The low profits in the start-up years are understandable, and reference to the low levels obtained in the first three years’ trading at Wergs Road is not, in my view, relevant to this case.
133. As has been shown in evidence, the profitability in the years 1989 to 1993 averaged 29.9%. In my judgment, it is not unrealistic to anticipate that had there been a virtually full complement of 29 patients throughout this period, and all other factors resulting from the blight (eg the need for high levels of respite care patients) are excluded, additional net operating profit would be achievable by this company. The additional profitability from the extra patients at 58.9% also reflects the views, which I accept, of both Mr Green and Mr Morgan that profitability, in marginal terms, will be higher with the last few patients.
134. On the basis of a projected 1991 net operating profit of £203,908, the profit per patient/bed occupied amounts to £7,031, compared with the £6,198 actually achieved with 23.25 patients. The accounts reveal that, in comparison with the immediately following years, staff costs were low and staff numbers increased substantially (from 28 to 34 excluding directors) right from the start of 1992. Wages as a percentage of turnover amount to 41.6%, rather less than the 50% to 55% figure provided to Mr Peters by Christie & Co, but broadly in line with the figures provided to Mr Morgan by another branch of the same firm, (41% to 47.5% being “broadly realistic”).
135. I consider that it would be appropriate to apply the 58.9% marginal profit that is derived for 1991 to each of the years 1989 to 1993 for the purposes of assessing the phase 1 losses. Although overall profitability at the home varied during these years, it seems to me unlikely that the marginal profit from the last few patients will have varied significantly. The calculations are as follows:
Y/ESeptember
Vacancies
Weekly fees
Weeks
% Profit
Loss
£
£
1989
3
x
235.00
21.6 x 0.5
58.9
4,485
1990
4.5
x
259.93
52
58.9
35,825
1991
5.75
x
339.29
52
58.9
59,752
1992
2.25
x
351.42
52
58.9
24,217
1993
1.5
x
361.16
52
58.9
16,592
Total loss
140,871
136. In respect of phase 2, before calculating hypothetical loss of profits, it is necessary for me to determine when it would have been built and ready for occupation, and at what cost. The claimant says the construction for phase 2 would have started very soon after phase 1 was opened, and would have taken six months to complete. Registration for the additional patients would have been timed to coincide with, or follow very soon after, completion. It was anticipated that it would be ready to commence trading by April 1990, and that it would take six months for all the beds to be filled. Funding would have been straightforward, and the builders would have undertaken the works in accordance with the previously agreed budget figure (for both phases).
137. The acquiring authority was far more pessimistic. In its view, the bank would have wanted to obtain an element of comfort in respect of occupancy rates for phase 1, and would wish to see those levels being maintained for a reasonable period before authorising the funding for phase 2. There would, therefore, have been a delay, and it was unlikely that the works would commence before April 1990. Mr Peters had estimated that it would take six months to complete, and a further six months to obtain registration. As a result of these delays, it was considered most unlikely that the builder would have stuck to its original quote, and a new contract would have to be negotiated at a cost of £425,000. It is worthy of note that in Mr Peters’ original report, he had assumed phase 2 would have been completed by April 1990, as per the claimant.
138. On this aspect, I prefer the claimant’s evidence. No evidence was adduced to support the contention that the bank would have required 2.5 times interest cover before agreeing to the additional funding, and there was no evidence to suggest that the criteria adopted by commercial lending institutions were anything other than as set out by Mr Morgan. I also accept the claimant’s evidence in respect of registration, and, bearing in mind how closely it would have worked with the health authority during the construction process, see no reason why registration could not have been in place to coincide with the opening.
146
139. In my view, finance would have been forthcoming when it was required, and construction would have commenced by the autumn of 1989, with completion by the spring of 1990. There might have been some slippage, due to weather or other constructional complications, but that assumption can only be speculative, and I see no reason to make an allowance in that regard. TC Dolman & Sons would, in my judgment, have completed the contract in line with the original quote, and the parties have agreed, in that case, that the cost would have been £350,000.
140. Mr Morgan had, for phase 2, rebuilt the 1990 accounts assuming a home 50% larger than previously, and, in respect of staffing, had considered the health authority’s requirements and also used a direct comparable –– a 46-bedroom home he had valued in that year. This gave a figure of £300,000 for that year, to which he applied inflationary increases for the following years up to the date the business moved to the new premises. Again, staffing levels and costs were the only issue between the parties.
141. Mr Peters, having originally taken the agreed projected turnover figures and applied a net operating profit of 27.5%, revised this to 30%. Then, in line with the exercises that had been carried out on phase 1, he undertook further analyses based upon Mr Morgan’s estimates of minimum staffing requirements, hours worked etc. This gave, in his view, likely wage costs in 1990 in the band £350,000 to £375,000. Mr Morgan had then produced a reworking of these figures based upon actual 1990 wage costs (Mr Peters having again overestimated these), which reduced the figure to £326,413.
142. As with phase 1, I found the revised costings helpful, and, with the reworkings for the 45-bed unit being on the same basis as those for the 30-bed unit, I intend to adopt them. However, the figure of £326,413 again does not allow for any margin for additional staff above the minimum, or for an allowance in respect of the matron and deputy matron’s administrative duties. This figure represents an increase over the phase 1 wages costs before the addition of the £7,189 referred to in para 128 above (£217,811) of 66.7%. Therefore, if the same percentage increase is applied to the £7,189 I added to that cost (making £11,984), the additional cost becomes £338,397. For rounding purposes, I determine the 1990 wages cost for phase 2 at £340,000.
143. The inflationary increases, assessed by Mr Morgan, are agreed, and I adopt the same percentage figures. The annualised wage costs therefore become:
£
1990
340,000
(6.6%)
362,440
(6.6%)
1992
384,911
(6.2%)
1993
407,620
(5.9%)
1994
429,631
(5.4%)
1995
429,631
(8 weeks taken at same rate as 1994)
144. Having assumed completion and registration of the facility at the same time as that contended for by the claimant, the revised profitability and losses (deducting the extra wage costs from the otherwise agreed figures as supplied by Mr Morgan, and allowing also for the deduction of double counting calculated on the agreed basis) becomes:
Year
Potentialprofit
Actualprofit
Loss
Less doublecounting
Claim
Netoperatingprofit
£
£
£
£
£
1990
157,720
78,456
16,513*
7,464†
9,049
26.5%
1991
312,055
144,905
167,150
57,262‡
109,888
40.2%
1992
302,137
172,608
129,529
24,217
105,312
37.5%
1993
297,714
162,364
135,350
16,592
118,758
36.0%
1994
237,085
139,140
97,945
0
97,45
29.9%
1995
237,085
139,140
15,068§
0
15,068
29.9%
561,555
105,535
456,020
* 21.6 weeks of 1990 at 58.9% x 50% (to reflect occupancy take-up)
† 5 months of 1990 at 50% (to reflect occupancy on take-up)
‡ Apportioned to 11.5 months
§ Apportioned to 8 weeks.
145. I now deal with the deduction for interest payable on the loans relating to the construction of phase 2. Mr Morgan had assumed a borrowing requirement of £170,000 (allowing for the use of the entire 1990 actual profits, and half of those of 1991, to defray the balance of the building costs (based upon £324,000), and had calculated, at 2% over LIBOR, interest for the period 1 October 1990 to 30 November 1994 at £82,450. This was subsequently amended to £308,322, based upon a £350,000 building cost. It was submitted by the acquiring authority in closing that even if I found for the claimant in respect of the likely dates for commencement and completion of the building works, the availability of funding and cost of the works, the additional initial costs of the loan, before it could be reduced to £170,000, would need to be taken into account.
146. No evidence was adduced from either of the acquiring authority’s experts as to the likely level of borrowing that would have been required, and it was only in submissions that the sufficiency of the £170,000 was questioned. Mr Purchas pointed out that there had been no evidence to disprove Mr Green’s contention that the profits would have been used to defray the costs.
147. If, as I have stated, building works would have commenced in the autumn of 1989 and been completed by around April 1990, the contractor would have required stage payments during the process. Profits from the 1989 financial year, available for the repayment of loans (in addition to existing liabilities), were assessed by the acquiring authority at around £56,000, and I have no reason to dispute this assessment. Assuming that the whole of that amount was used to reduce the £350,000 total costs, a balance of £294,000 would be needed before the 1990 profits became available in, say, October 1990. Those profits, with 50% of the 1991 profits, provide £150,000 to £200,000 of “cashflow” to be injected into the building, according to Mr Morgan. It is not clear how he arrived at that figure, as the revised profitability set out in para 144 above suggests more would be available. However, from one of the schedules produced at the hearing it is evident that the claimant had around £375,000 of other loans outstanding at the relevant time, and these borrowings would also have had to be serviced.
148. Whether the amount of profits that Mr Morgan was suggesting would be used to defray the costs would actually be used for that purpose, I am satisfied that while short-term borrowings in early 1990 might have had to exceed £170,000, that sum would have been sufficient, in mortgage terms, on balance. This is taking into account the pending availability of profits. I therefore adopt Mr Morgan’s revised figure of £108,322 for interest over the relevant period, based upon a £170,000 requirement. This needs to be deducted from the claim figure of £456,020 in para 144 above to leave a balance of £347,698, representing the phase 2 claim.
149. In summary therefore, I determine that the loss of profits suffered by the claimant as a result of the scheme are:
Phase 1:
£140,871
Phase 2:
£347,698
Total
£488,569
150. The only outstanding issue for my determination relates to the assessment of interest on loss of profits. I can see no justification, as submitted by counsel for the acquiring authority, for differentiating between cost of borrowing for that part of the lost profits that might have been used to repay loans, and using standard deposit rate for the balance. Nevertheless, I do accept Miss Robinson’s contention that the relevant sums should be calculated at the end of each of the company’s accounting years.
151. As was evident from the passages Mr Purchas quoted from McGregor on Damages, the commercial courts have been moving towards allowing the cost of borrowing money in awarding interest on damages claims, and I see no reason to differ from that practice. I determine therefore that the basis for the calculation of this element of the claim (which the parties agreed they would calculate) shall be LIBOR plus 2% throughout the period during which the losses determined under (a) and (b) above occurred.
152. In summary, I order that the acquiring authority shall pay the claimant compensation in the sum of £488,569 in respect of loss of profits on phases 1 and 2 at the subject property, and interest on the loss of profits so determined shall be calculated on the basis of LIBOR plus 2% for the whole of the relevant period (the last 21.6 weeks of 1989 to 4 December 1994), those sums being calculated at the end of the claimant’s financial year. There is no statutory right to interest prior to the date of entry, and as the sums to be calculated are, strictly speaking, losses incurred due to the extra interest payable on the increased borrowings necessitated by the lack of profits that would have been available to reduce those borrowings, this becomes an element of disturbance. Thus, quantum needs to be established before this decision can be finalised.
153. What I have said so far therefore concludes my determination of the substantive issues in this case, but it can only take effect as an interim decision until the parties have agreed the amount of interest, calculated in accordance with the decision on issue (c) above. If the parties are unable to agree, and provide the tribunal with evidence of such agreement, I shall have to hear further evidence, and issue a determination, in that regard. Following agreement or a further determination, the final decision will take effect as a decision when the question of costs is decided, and at that point, and not before, the provisions relating to the right of appeal in section 3(4) of the Lands Tribunal Act 1949 (as amended) and Part 52 of the Civil Procedure Rules will come into operation. The parties are invited to make submissions as to the costs of this reference at the same time as providing the agreement or further evidence in respect of interest as outlined above, and a letter accompanying this decision sets out the procedure for submissions in writing.
Addendum
154. Following the issue of the interim decision on 3 July 2000, the parties have agreed the outstanding matter as to interest set out in para 152 thereof in the sum of £92,590.
155. The sum referred to as Tobin costs in para 6.11 is agreed with disturbance as part of this award in the sum of £6,292.13, together with the fees for one surveyor assessed on Ryde’s scale.
156. These sums shall be added to the award of £488,569.
Addendum as to costs
157. I have received representations from the parties, who have agreed that as my award exceeds the scaled offer made to the claimant by the acquiring authority prior to the substantive hearing, the costs of the reference shall be paid by the Highways Agency.
158. I therefore order that the claimant’s costs of the reference (save for any duplication in respect of work done and agreed to be paid as part of the Tobin costs) be paid by the acquiring authority. Such costs to be agreed and, if not so agreed, to be subject to a detailed assessment by the registrar of the Lands Tribunal on the standard basis, in accordance with r 44.4 and r 44.7 of the Civil Procedure Rules. The procedure laid down in r 52 of the Lands Tribunal Rules 1996 will apply to such detailed assessment.
Appendix 1
Copy of Appendix 3 to Mr Morgan’s main report
The following accounts/projection is to illustrate the basis of adopting a 70% net profit margin on lost fee income within table 7 of the main report.
It is based upon an annual occupancy of 23.25 patients in 1991 and average fees of £339.29 per patient per week derived form existing accounts, and one vacancy at identical fees for the projection. Some of the expenses are fixed (eg rates) some vary to a minor extent with higher occupancy (eg wages), and some proportionately (eg provisions and cleaning).
1991 Accounts Analysis
Projection for29 patients
£411,507
Fee income
£511,649
£
£
195,120
Wages
213,000
1,139
Rates
1,139
10,891
Heat and light
11,500
2,200
Insurance
2,200
28,050
Provisions
33,614
2,486
Motoring
3,000
8,164
Repairs
10,000
1,208
Post and stationery
1,500
1,388
Advertising
1,388
650
Accounts
1,000
1,164
Telephone
1,400
3,071
Cleaning
3,500
11,063
Miscellaneous
12,500
£266,602
Total profit
£295,241
£144,905
£215,908
Loss of profit is therefore
£
215,908
144,905
71,003
Thus, the percentage profit of fee income for the additional beds is:
71,003 ÷ £100,142
= 70.9%
Say 70%
