Pankhania and another v Hackney London Borough Council and another

Misrepresentation — Negligent misrepresentation — Assessment of damages — Acquisition of development properties at auction — Misrepresentation by vendors as to status of occupier — Occupier protected under Part II of Landlord and Tenant Act 1954 — Whether normal measure of damages applying (transaction date rule) — Whether application of overriding compensatory rule displacing normal measure in favour of consequential losses — Whether residual valuations appropriate in assessing value of properties in actual state — Whether 50% division of marriage value appropriate price in obtaining possession against occupier In 1999, the claimant property developers acquired, at auction, a car park and a factory from the two defendants for a total price of £3.925m. They had intended to redevelop the properties. Prior to the auction, the defendants, through their agents, represented that National Car Parks Ltd (NCP) occupied the car park under a contractual licence, terminable on three months’ notice. Following the acquisition, the claimants realised that NCP’s tenancy was not a licence but was protected by Part II of the Landlord and Tenant Act 1954; they eventually obtained possession of the car park in June 2001, upon payments to NCP totalling £78,931.25. The claimants brought proceedings for negligent misrepresentation under section 2(1) of the Misrepresentation Act 1967. Mr Rex Tedd QC, sitting as a deputy judge of the division, determined liability by holding that the representation was false, in that NCP had a tenancy protected by Part II of the 1954 Act, and that it had been made deliberately by the defendants’ agents in the knowledge that it was inaccurate. He also held that the claimants had relied upon the misrepresentations and that the defendants were liable for damages. On the hearing for the assessment for damages, the claimants contended that the normal rule applied and that they were entitled to the difference in value of the properties between the price paid and the true value as at the date of the purchase, namely £750,000 (the transaction date rule). They also contended that, once they had decided to retain the properties, that decision broke the chain of causation, so that what occurred following the acquisition, in terms of dealing with NCP, did not form part of a continuous transaction of which the negligent misrepresentation was the inception; the later events in dealing with NCP were irrelevant. The defendants contended that the claimants owed a duty to mitigate their losses and that, acting reasonably, NCP’s claim to protection could have been bought off for £45,000. In the alternative, the damages were the sums actually paid to NCP. Held: Damages of £500,000 were awarded. The measure of damages for negligent misrepresentation, under section 2(1) of the Misrepresentation Act 1967, was the same as that for fraudulent misrepresentation: see Royscot Trust v Rogerson [1991] 2 QB 297. The normal measure of damages (the transaction date rule) is subject to the overriding compensatory principle that a claimant is entitled to reparation for all the actual damage he has sustained that directly flows from the transaction: see Smith New Court Securities v Citibank NA [1997] AC 254. In considering whether the normal measure applies, the court has to consider, in a general way, what damages would be awarded, in accordance with the overriding compensatory principle, if the normal measure were not applied. If the normal measure were not applied, the claimants would have been entitled to the amount actually paid to NCP, the additional finance (holding) costs, and the additional construction costs caused by NCP’s presence. The claimants had not acted unreasonably in the steps they had taken to obtain possession and develop the properties; if the normal measure were not applied, the court would be faced with an exceedingly complex task of assessment, and the losses would be of the same order or even greater. The normal measure applied because it properly reflected the overriding compensatory principle. In applying the normal measure to find the value of the properties in their actual state, subject to NCP’s protected tenancy, the residual valuation method was appropriate. In applying that method, the claimants’ valuer had been correct in the marriage value that a developer might have to pay NCP, and the defendants’ valuer was incorrect in considering only the valuation consequences of the actual post-acquisition events. A fair worst-case valuation of the properties was £3m, but, applying a 50/50 split of the difference (the marriage value) between that value and the value of £3.925m, the true value of the properties at the transaction date was £3.425m, and the measure of loss was £500,000. The following cases are referred to in this report. Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452 British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673; (1912) 81 LJKB 1132; 107 LT 325 Burdis v Livsey [2003] QB 36, CA Dimond v Lovell [2002] 1 AC 384; [2000] 2 WLR 1121; [2000] 2 All ER 897, HL Downs v Chappell [1997] 1 WLR 426; [1996] 3 All ER 344, CA Gardner v Marsh & Parsons [1997] 1 WLR 489; [1997] 3 All ER 871; (1998) 75 P&CR 319; [1997] 1 EGLR 111; [1997] 15 EG 137 Hussey v Eels [1990] 2 QB 227; [1990] 2 WLR 234; [1990] 1 All ER 449; [1990] 1 EGLR 215; [1990] 19 EG 77, CA Needler Financial Services Ltd v Taber [2002] 3 All ER 501; [2002] Lloyd’s Rep PN 32 Royscot Trust Ltd v Rogerson [1991] 2 QB 297; [1991] 3 WLR 57; [1991] 3 All ER 294, CA Smith New Court Securities Ltd v Citibank NA; Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254; [1996] 3 WLR 1051; [1996] 4 All ER 769, HL This was the hearing of an application for the assessment of damages payable by the defendants, Hackney London Borough Council and the Metropolitan Police Authority, to the claimants, Vray |page:136| and Joshna Pankhania, following judgment on liability in proceedings by the claimants for negligent misrepresentation under section 2(1) of the Misrepresentation Act 1967. Stephen Jourdan (instructed by Cunningham Blake) appeared for the claimants; David Christie (instructed by Browne Jacobson) appeared for the defendants. Giving judgment, Mr Geoffrey Vos QC said: Introduction [1] The claimants, Vraj Pankhania and his wife Joshnia Pankhania, are property developers. In fact, however, Mr Pankhania has always acted on behalf of both himself and his wife in all his dealings in this case. For convenience, therefore, I will refer, in this judgment, only to Mr Pankhania. [2] The defendants, Hackney London Borough Council and the Metropolitan Police Authority (the MPA) sold two properties at auction on 8 November 1999. The first property (the chocolate factory) at 14-18 Nile Street and 7 Shepherdess Place, London N1, was registered at HM Land Registry under title number EGL 402879, and was owned by Hackney. The second adjoining property (the car park) at 17-35 Westland Place, London N1, was registered at HM Land Registry under title number EGL 402877, and was owned by the MPA. [3] The properties were knocked down to Mr Pankhania for £3.925m. Mr Pankhania calculated his acquisition costs at about £4.2m, of which he borrowed £2.8m from the Bank of India. The rest he paid from his own resources. The sale was duly completed on 9 February 2000. [4] Mr Pankhania brought these proceedings seeking, among other things, damages for negligent misrepresentation under section 2(1) of the Misrepresentation Act 1967. The trial of liability came on before Mr Rex Tedd QC, sitting as deputy judge of the High Court, in the summer of 2002. Mr Tedd delivered a lengthy judgment on 2 August 2002, [2002] EWHC 2441 (Ch) in which he made the following findings and holdings: (1) The defendants, by their agents, represented to Mr Pankhania, before the auction sale on 8 November 1999, that National Car Parks Ltd (NCP) occupied the car park under a contractual licence, which was terminable upon three months’ notice: see [24] to [28], and [44] to [45]. (2) The representation was false, in that NCP was, in fact, a tenant of the car park, protected by Part II of the Landlord and Tenant Act 1954: see [19], [21], [45] and [64]. (3) The representation was made deliberately by the defendants’ agents, in the knowledge that it was inaccurate: see [24], [25], [62] and [73]. (4) The representation was made in order to induce potential purchasers (and Mr Pankhania in particular) to purchase the property: see [34], [62] and [63]. (5) Mr Pankhania relied upon the misrepresentation in bidding for and purchasing the property: see [58], [61], [63] and [73]. (6) It was reasonable for Mr Pankhania to rely upon the representation: see [63]. (7) The misrepresentation was a misrepresentation of fact: see [56]. (8) But that, in any event, an action lies for a misrepresentation of law: see [55]. (9) Mr Pankhania has suffered loss caused by the misrepresentation, namely at least some part of the payment to NCP: [67]. (10) The defendants were, therefore, liable under section 2(1) of the Misrepresentation Act 1967 for damages for misrepresentation to be assessed: see [68], [69] and [100]. (11) Mr Pankhania would, on the balance of probabilities, not have purchased the property had he known the true position: see [62] and [73]. Mr Tedd found in the defendants’ favour in respect of another alleged representation, concerning the likelihood of planning consent being granted. [5] In consequence, Mr Tedd made an order against the defendants for damages, to be assessed in respect of the misrepresentation that he had found proved. It now falls to me to assess those damages. Properties [6] Access to the chocolate factory was, and is, obtained via a narrow road called Shepherdess Place, which is frequently blocked by parked cars and vans (despite the presence of double yellow lines). There was some doubt as to whether Shepherdess Place is an adopted highway. Access to the car park is from Westland Place, which is an altogether more convenient public road. [7] Mr Pankhania knew, when he bought the properties, that: (1) the car park was occupied by NCP; (2) the planners would permit conversion, but not demolition, of the chocolate factory; and (3) the planners were inclined to grant planning permission for development of the car park. [8] Hackney’s informal planning guidelines were also available to Mr Pankhania before the auction sale, in respect of both the chocolate factory and the car park. Suffice it to say that the guidelines suggested: (1) making a new access to the chocolate factory from Westland Place; (2) converting the chocolate factory to mixed use of offices on the lower floors and a mixture of residential and live-and-work units on the upper floors; and (3) developing the car park so as to provide some 800m2 of office/commercial floor space. [9] There is no doubt that developing the chocolate factory without access to the car park was always going to be a difficult project, for three primary reasons. First, the factory site is very tight, in that the building is constructed close up to many of the boundaries. Second, a crane was likely to be required, and the required size of crane could conveniently be situated only on the car park. Third, there was, as I have said, poor access from Shepherdess Place. Pankhania’s dealings with the properties after the purchase [10] There was a certain amount of dispute on the evidence I heard as to what was done after the completion of the purchase of the properties on 9 February 2000. The relevant facts are straightforward, and may be summarised as follows. (1) Immediately following completion, Mr Pankhania began stripping out the chocolate factory so that it would be ready for development. He did so using the inconvenient access from Shepherdess Place, because, of course, the car park was occupied by NCP. (2) On 11 February 2000, Mr Pankhania gave NCP three months’ notice to quit the car park, under its supposed licence. (3) On 21 February 2000, Mr Pankhania applied for planning permission to redevelop the warehouse, broadly in line with the planning guidelines, save that he did not seek to make a new access from Westland Place as Hackney had suggested in the planning guidelines. (4) On 18 April 2000, to Mr Pankhania’s surprise, NCP’s solicitor, Hamlins, wrote to Mr Pankhania’s solicitor, rejecting the validity of his notice, and claiming to have a tenancy of the car park protected by the 1954 Act. (5) Without delay, on 25 April 2000, Mr Pankhania’s solicitor served a section 25 notice under the 1954 Act, terminating NCP’s alleged tenancy. It appears, however, that this notice was later realised to have been invalid. (6) On 25 April 2000, Mr Pankhania’s solicitor drafted a letter to Hamlins, asking what compensation NCP required to give possession of the car park by mid-May 2000. It appears that this draft was never sent. Instead, on 2 May 2000, Mr Pankhania’s solicitor wrote to Hamlins without seeking such proposals. (7) Mr Pankhania quickly ascertained that NCP was likely to be right in its contention that it had a tenancy of the car park. So, he set about negotiating a consensual delivery of possession. He knew that, if negotiations failed, he would have a good chance of obtaining possession by court order on section 30(1)(f) grounds, but he also knew that that would take some time. |page:137| (8) At a meeting before 15 May 2000, Mr Pankhania’s solicitor offered NCP £21,148 for immediate possession of the car park. (9) On 15 May 2000, Mr Pankhania’s solicitor served a valid section 25 notice under the 1954 Act, giving six months’ notice to terminate NCP’s tenancy of the car park, without prejudice to the contention that NCP occupied only under a licence. The notice stated that Mr Pankhania intended to oppose any application for a new tenancy on the grounds contained in section 30(1)(f) of the 1954 Act, which are that he intended to “demolish or reconstruct the premises… or to carry out substantial work of construction on the holding… and that he could not reasonably do so without obtaining possession of the holding”. (10) On 9 June 2000, NCP served a notice saying that it was not willing to give up possession of the car park. (11) On 22 June 2000, Hackney granted planning permission for the redevelopment of the chocolate factory. (12) On 10 July 2000, the solicitors for Mr Pankhania and NCP met on a without-prejudice basis, and Mr Pankhania offered to pay NCP £28,250 (being £13,250 statutory compensation and £15,000 representing one year’s income for NCP). (13) On 16 August 2000, Hamlins made a counter-offer on behalf of NCP. It suggested a payment of £60,000, to include statutory compensation, and the grant of a new five-year lease excluded from the provision of the 1954 Act, terminable only when Mr Pankhania had obtained planning permission for redevelopment of the car park and when “works are required to commence for that redevelopment”. It seems to me that, whatever the value of such an excluded lease, such an offer was wholly unacceptable, because it deprived Mr Pankhania of access to the chocolate factory in order more conveniently to progress the imminent redevelopment of the chocolate factory (in respect of which stripping-out works were already in progress). (14) There followed an incident concerning the wall of the chocolate factory abutting the car park, and an exchange of correspondence concerning the grant of access by NCP so that Mr Pankhania could repair that wall. Nothing, in my judgment, turns on the detail of that lengthy exchange. (15) On 4 September 2000, Mr Pankhania’s solicitor offered NCP £30,000 at a further without prejudice meeting. (16) On 6 September 2000, NCP issued a claim form in the Chancery Division, seeking an order that NCP be granted a new tenancy of the car park. (17) On 13 September 2000, Hamlins wrote to Mr Pankhania’s solicitor, saying that no application for planning permission had been made for the car park, and saying that it appeared, therefore, that Mr Pankhania was not in a position to prove his opposition to NCP’s new tenancy. (18) On 25 September 2000, Mr Pankhania applied for planning permission for the car park for 530m2 of floorspace for offices, and some residential use. The application did not accord with the planning guidelines. (19) On 13 October 2000, Mr Pankhania filed his answer to NCP’s application for a new tenancy. (20) On 14 December 2000, the planning application for the car park was refused. (21) Immediately thereafter, Mr Pankhania appealed the planning refusal, and made two further applications: the first was a revised application (this time for 618m2) in respect of the car park, and the second was an application for light wells and stairways serving the chocolate factory, to abut or encroach onto the car park. (22) In the first four months of 2001, evidence was filed in relation to NCP’s application for a new tenancy. The defendants complained that Mr Pankhania did not file (or produce to NCP) any substantive evidence explaining his redevelopment plans for the car park until 15 February 2001. I do not think that Mr Pankhania can, justly, be criticised for this omission. As far as I am able to tell from the material before me, the evidence was filed, and documents were supplied to NCP, reasonably in accordance with the normal course of events. (23) On 26 March 2001, negotiations resumed, and Mr Pankhania offered NCP £40,000. (24) On 28 March 2001, Hamlins repeated the counter-offer NCP had made on 16 August 2000 (including the requirement for a new five-year lease outside the 1954 Act). (25) On 10 April 2001 (just over one month before the date fixed for the trial), Mr Pankhania and NCP reached an agreement, in principle, for NCP to vacate the car park. (26) On 4 May 2001, Master Bowman made a consent order recording that NCP had undertaken to give up possession of the car park on 4 June 2001. Mr Pankhania had agreed to pay £78,931.25 to NCP, comprising: (a) £13,250 by way of statutory compensation; (b) £36,750, plus VAT of £6,431.25, by way of additional compensation. I note that the VAT was recoverable by Mr Pankhania, and can therefore be disregarded; and (c) £22,500 as a contribution to NCP’s costs. (27) On 4 June 2001, NCP duly delivered up possession of the car park to Mr Pankhania. Competing approaches [11] Mr Stephen Jourdan, who appeared for Mr Pankhania, and Mr David H Christie, who appeared for the defendants, have contended for entirely different approaches to the assessment of damages in this case. [12] Mr Jourdan submits that this is a case in which the “normal rule” should be applied, so that damages should be assessed as the difference between the price paid for the properties, as represented, and the true value of the properties as they in fact were at the date of purchase (the normal measure). His expert evidence suggested that this difference was around £750,000, and he claimed that sum and no other consequential or other losses. [13] Mr Christie submitted that Mr Pankhania had: (i) owed a duty to mitigate his loss; (ii) failed properly to mitigate his loss, so that all he could claim was the amount he would have had to pay to NCP if he had acted reasonably, that sum being £45,000; (iii) in the alternative, in fact (at least in part) mitigated his loss, so that, at most, all he could claim was the amount he actually paid to NCP to terminate its tenancy (some £72,000, excluding VAT, which he had already recovered). [14] Mr Jourdan’s answer to this approach is to argue that Mr Pankhania’s decision to retain the properties, after he had discovered the misrepresentation, breaks the chain of causation, so that what happened thereafter was not part of a continuous transaction of which the negligent misrepresentation was the inception. Accordingly, Mr Jourdan contends that what happened after the decision to retain the properties is irrelevant. Things could have gone disastrously wrong for Mr Pankhania, and he would not have been able to claim more. But, if things went well for Mr Pankhania, that is his good fortune. The loss recoverable is the normal measure. [15] In the face of these starkly different approaches, I should deal first with the law. Law [16] Although Mr Tedd found that the defendants’ agents had made the misrepresentation deliberately and had set a trap for the purchaser (see: [62]), there was no finding of fraud – mainly because, it seems, that fraud had not been pleaded. [17] In Royscot Trust Ltd v Rogerson [1991] 2 QB 297, the Court of Appeal had held that measure of damages for negligent misrepresentation under section 2(1) of the 1967 Act was the same as that for fraudulent misrepresentation, because the section introduced a “fiction of fraud”: see at p306H per Balcombe LJ, and at pp308-309 per Ralph Gibson LJ. Although this decision has been the subject of some academic criticism (see, for example, Lord Steyn in Smith New Court infra at p283A-C), and Mr Christie wished to reserve his position as to its correctness, it was accepted that it was a decision binding on me, and that I should follow it. [18] Thus, I must assess Mr Pankhania’s damages as if they were damages for fraudulent misrepresentation. The leading case on |page:138| damages for fraudulent misrepresentation inducing a contract is Smith New Court Securities Ltd v Citibank NA [1997] AC 254, where the House of Lords held that there was no inflexible rule that the damages had to be assessed by reference to the value of the asset acquired at the transaction date: see Lord Browne-Wilkinson at p264H-265E, and Lord Steyn at pp283H-284E. The “overriding compensatory rule” is that the claimant is entitled to reparation for all the actual damage he sustained directly flowing from (that is, caused by) entering into the transaction. Put in the words of Lord Steyn, quoted below: “The plaintiff is entitled to recover as damages a sum representing the financial loss flowing directly from his alteration of position under the inducement of the fraudulent representations of the defendants.” [19] As Lord Browne-Wilkinson made clear at p266C-F in Smith New Court, however, the normal measure has not been abrogated altogether: Thus, if the asset acquired is a readily marketable asset and there is no special feature (such as a continuing misrepresentation or the purchaser being locked into a business that he has acquired) the transaction date rule may well produce a fair result. The plaintiff has acquired the asset and what he does with it thereafter is entirely up to him, freed from any continuing adverse impact of the defendant’s wrongful act. The transaction date rule has one manifest advantage, namely that it avoids any question of causation. One of the difficulties of either valuing the asset at a later date or treating the actual receipt on realisation as being the value obtained is that difficult questions of causation are bound to arise. In the period between the transaction date and the date of valuation or resale other factors will have influenced the value or resale price of the asset. It was the desire to avoid these difficulties of causation which led to the adoption of the transaction date rule. But in cases where property has been acquired in reliance on a fraudulent misrepresentation there are likely to be many cases where the general rule has to be departed from in order to give adequate compensation for the wrong done to the plaintiff in particular where the fraud continues to influences the conduct of the plaintiff after the transaction is complete or where the result of the transaction induced by fraud is to lock the plaintiff into continuing to hold the asset acquired… (Judge’s emphasis.) [20]. Lord Steyn also acknowledged, at p284A-C, that the normal measure might still apply in some cases: It is right that the normal method of calculating the loss caused by the deceit is the price paid less the real value of the subject matter of the sale. To the extent that this method is adopted, the selection of a date of valuation is necessary. And generally the date of the transaction would be a practical and just date to adopt. But it is not always so. It is only prima facie the right date. It may be appropriate to select a later date. That follows from the fact that the valuation method is only a means of trying to give effect to the overriding compensatory rule: Potts v Miller, 64 CLR 282, 299, per Dixon J and County Personnel (Employment Agency) Ltd v Alan R Pulver & Co [1987] 1 WLR 916, 925-926, per Bingham LJ. Moreover, and more importantly, the date of transaction rule is simply a second order rule applicable only where the valuation method is employed. If that method is inapposite, the court is entitled simply to assess the loss flowing directly from the transaction without any reference to the date of transaction or indeed any particular date. Such a course will be appropriate whenever the overriding compensatory rule requires it. An example of such a case is to be found in Cemp Properties (UK) Ltd v Dentsply Research & Development Corporation [1991] 2 EGLR 197, 201, per Bingham LJ. There is in truth only one legal measure of assessing damages in an action for deceit: the plaintiff is entitled to recover as damages a sum representing the financial loss flowing directly from his alteration of position under the inducement of the fraudulent representations of the defendants. The analogy of the assessment of damages in a contractual claim on the basis of cost of cure or difference in value springs to mind. In Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344, 360G, Lord Mustill said: “There are not two alternative measures of damages, as opposite poles, but only one; namely, the loss truly suffered by the promisee.” In an action for deceit the price paid less the valuation at the transaction date is simply a method of measuring loss which will satisfactorily solve many cases. It is not a substitute for the single legal measure: it is an application of it… (Judge’s emphasis.) [21] Thus, it can be seen from Smith New Court that, if the normal measure is appropriate and if the normal measure produces a fair result, then such damages would not be reduced on the ground that, whatever happened to the property after discovery of the misrepresentation, loss has reduced or mitigated that loss. The question really is whether, in all the circumstances of the case, the normal measure properly reflects the overriding compensatory rule (to which Lord Steyn referred). [22] In my judgment, questions of mitigation and causation are intimately bound up with whether the application of the normal rule does indeed achieve a fair result. But if it does, then, as Lord Browne Wilkinson said: “The plaintiff has acquired the asset and what he does with it thereafter is entirely up to him.” [23] As Lord Browne-Wilkinson indicated, in the passage that I have set out above, two situations will be indicative of the normal measure being inapplicable: (1) where the misrepresentation continues to be operative long after the acquisition; and (2) where the claimant is locked into the transaction. In this case, neither of these situations existed. The misrepresentation was discovered little more than three months after completion of the purchase of the properties, and Mr Pankhania was not locked in. He could have resold the properties subject to NCP’s tenancy of the car park at any time. It is just that, had he done so, he would have expected to receive a somewhat lower sum than he himself had paid. [24] Before leaving Smith New Court, I should mention that Lord Browne-Wilkinson sought to set out, at pp266H-267D, a series of seven rules for the assessment of damages in fraudulent misrepresentation cases. Mr Christie placed great emphasis upon the seventh of these rules: “The plaintiff must take all reasonable steps to mitigate his loss once he has discovered the fraud.” I do not understand that rule to be in conflict with the approach Lord Browne-Wilkinson had set out earlier in his judgment. All he was saying was that the normal rules of mitigation apply as much in cases of fraudulent misrepresentation as they do elsewhere. [25] The basic rule as to mitigation of loss was set out by Lord Haldane in British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673, where Viscount Haldane LC said, at p689: The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps. In the words of James LJ in Dunkirk Colliery Co v Lever, “The person who has broken the contract is not to be exposed to additional cost by reason of the plaintiffs not doing what they ought to have done as reasonable men, and the plaintiffs not being under any obligation to do anything otherwise than in the ordinary course of business.” This principle applies as much in tort as in contract. [26] It should not, however, be overlooked that the measures that a claimant is required to take to extricate himself from a problem created by the defendant ought not, as Lord Macmillan put it in Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452, at p506, to be “weighed in nice scales”. Lord Macmillan continued by saying that: “It is often easy after an emergency has passed to criticise the steps which have been taken to meet it.” [27] Before dealing with the question of how the application of the normal measure interacts with the principles of mitigation, I should explain how those principles of mitigation usually operate in a case where loss has actually been avoided. That is important in this case, because Mr Christie’s main argument is that, at worst, Mr Pankhania has lost only the £72,000 he paid to NCP. Otherwise, he has now got what he bid for at the auction. [28] The question of whether loss that has actually been avoided can be recovered has arisen in numerous cases. [29] In Hussey v Eels [1990] 2 QB 227*, the Court of Appeal applied the normal measure (assessed by reference to the cost of the repairs at the date of discovery), where the claimant had purchased a bungalow after a misrepresentation that it was not the subject of subsidence. |page:139| The defendant argued that that measure should be reduced because the claimant had mitigated his loss by applying for planning permission, demolishing the bungalow and replacing it with two new buildings. It was held by Mustill LJ, at p241D, that: It seems to me that when the plaintiffs unlocked the development value of their land they did so for their own benefit, and not as part of a continuous transaction of which the purchase of land and bungalow was the inception… —————————————————————————————————- * Editor’s note: Also reported at [1990] 1 EGLR 215 —————————————————————————————————- [30] In Gardner v Marsh & Parsons [1997] 1 WLR 489*, the Court of Appeal again rejected a defendant’s attempt to argue that the normal measure should be displaced because of subsequent events. In that case, the claimant had bought the maisonette in reliance upon a misrepresentation as to its structural integrity. When the defect was discovered, some years later, after prolonged negotiations, the landlord remedied the defect. Hirst LJ held as follows, at p503F: In evaluating these arguments I bear very much in mind Mustill LJ’s salutary warning against laying down potentially unreliable statements of principle in the field of damages [in Hussey supra], and I respectfully adopt his approach, namely that the issue is primarily one of fact, and that the relevant considerations are mutatis mutandis those cited by him in his conclusion, which seem to me in line with the Westinghouse case [1912] AC 673 (see especially the second passage quoted above from Viscount Haldane LC’s speech, at pp691-692)… In my judgment, having regard to the intervening events and to the long interval of time, the repairs executed in 1990 were not part of a continuous transaction of which the purchase of the lease as a result of Mr Dyson’s negligence was the inception. Furthermore, these repairs undertaken by Guidedale at the plaintiff’s insistence were res inter alios acta and therefore collateral to Mr Dyson’s negligence… (Judge’s emphasis.) —————————————————————————————————- * Editor’s note: Also reported at [1197] 1 EGLR 111 —————————————————————————————————- [31] In Needler Financial Services Ltd v Taber [2002] 3 All ER 501, Sir Andrew Morritt V-C declined to reduce the claimant’s damages for negligent financial advice, on the ground that the claimant had received shares on the demutualisation of the Norwich Union, with which he had been advised to take out a personal pension plan. After reviewing the authorities, he said, at [24]: In my view the authorities to which I have referred establish two relevant propositions. First, the relevant question is whether the negligence which caused the loss also caused the profit in the sense that the latter was part of a continuous transaction of which the former was the inception. Second, that question is primarily one of fact. [32] Finally, in Burdis v Livsey [2003] QB 36, Aldous LJ, giving the judgment of the Court of Appeal, drew an important distinction between direct and consequential losses. It is to be borne in mind that the court in Burdis was considering the normal tort of negligence, not fraudulent or negligent misrepresentation, so what is said about remoteness (at the very least) will be inapplicable: 84. In our judgment a fundamental distinction must be drawn, for present purposes, between repair costs and hire charges. When a vehicle is damaged by the negligence of a third party, the owner suffers an immediate loss representing the diminution in value of the vehicle. As a general rule, the measure of that damage is the cost of carrying out the repairs necessary to restore the vehicle to its pre-accident condition: see Dimond v Lovell [2002] 1 AC 384, 406 per Lord Hobhouse. … 88. In a case of direct loss, subsequent events will operate to reduce or extinguish the loss only in so far as such events are referable to the claimant’s duty to mitigate his loss, and hence referable in a causative sense to the commission of the tort: see the British Westinghouse case [1912] AC 673 and Koch Marine Inc v D’Amica Societa di Navigazione ARL [1980] 1 Lloyd’s Rep 75. In the Koch Marine case Robert Goff J said, at p88: “what is alleged to constitute mitigation in law can only have that effect if there is a causative link between the wrong in respect of which damages are claimed and the action or inaction of the plaintiff.” … 91. In our judgment, the authorities to which we have so far referred establish that subsequent events which are not referable in a causative sense to the commission of the tort, that is to say events which, on a true analysis, are collateral to the commission of the tort, or res inter alios acta, or too remote — we regard these expressions as interchangeable – do not affect the measure of a direct loss suffered when the tort was committed. 92. In the case of potential future losses, on the other hand, the general rule is that to the extent that such a loss is in fact avoided, for whatever reason, it is a loss which is never suffered and which is accordingly irrecoverable for that reason. [33] Mr Christie placed emphasis upon the passage from Lord Hobhouse’s speech in Dimond v Lovell [2002] 1 AC 384 (see [32] E, this page), which Aldous LJ also set out in his judgment in Burdis: see [99]. Lord Hobhouse said that: Each case depends upon its own facts but loss of use of the chattel in question is, in principle, a loss for which compensation should be paid. However one of the relevant principles is that compensation is not paid for an avoided loss. So, if the plaintiff has been able to avoid suffering a particular head of loss by a process which is not too remote (as is insurance), the plaintiff will not be entitled to recover in respect of that avoided loss. If the loss has only been avoided by incurring a substituted expense, it is that substituted expense which becomes the measure of that head of loss. Under the doctrine of mitigation, it may be the duty of the injured party to take reasonable steps to avoid his loss by incurring that expense. [34] The question that arises in this case is whether the principles that I have sought to set out above, in relation to mitigation and avoided loss (which normally apply in a case of fraudulent misrepresentation) also apply in the situation in which the normal measure is applicable. In my judgment, they do. But their application is not quite as straightforward where the normal measure is applicable, as compared to where it is not. [35] In a case where the normal measure is not applicable, because it does not accord with the overriding compensatory principle for one of many possible reasons, the claimant will be unable to recover: (a) any direct losses that have been avoided as part of a continuous transaction of which the tort was the inception (so that events that allow the direct loses to be avoided will be ignored only if they are collateral to the commission of the tort); and (b) any consequential losses that are, in fact, avoided for whatever reason. [36] In a case where the normal measure is applicable, the normal measure will not be reduced because particular losses have, in fact, been avoided, nor will it be increased because the transaction has turned out worse for the claimant than it might have, owing to some subsequent misfortune. But that is because the court will have already decided, in the words of Lord Browne-Wilkinson in Smith New Court, that the normal measure gives a “fair result”, or, in the words of Lord Steyn in the same case, that the normal measure “give(s) effect to the overriding compensatory rule”. [37] In deciding whether the normal measure gives a fair result, the court has, in my judgment, to consider, in a general way, what damages would be awarded, according to the overriding compensatory principle, if the normal measure were not applied. That may not be easy. It will certainly involve the consideration of the principles of mitigation and avoided the loss that I have referred to above. In my judgment, however, the court is not obliged to conduct a scientific exercise in every case to work out the precise sum that would be awarded on each basis. The court is entitled to take a general view of what heads of loss would be recoverable if the normal measure were not applied, and which of such losses can properly be said to have been avoided by mitigation. If, taking those matters into account, the court forms the view that the normal measure broadly represents the claimant’s loss flowing from the tort, and broadly satisfies the overriding compensatory principle, it can award the normal measure, without deduction for any elements comprised in the valuation method that may, in fact, have been avoided. If the normal measure can be seen to represent over-compensation, it will not be appropriate and will not give a fair result, and the court will not employ it. |page:140| Application of the principles to this case [38] I have had the benefit of considerable argument about the actual figures applicable in this case. But, before turning to the figures, I want to deal with the question as a matter of the application of the law to the facts of this case. Although the figures will provide a test of whether the principles have been properly applied, in a case where there is much doubt about the figures (as there is here), one is better to be guided by principle. [39] The normal measure in this case involves two valuations of the properties as at the date of the auction (or the date of completion – the differences are immaterial). The parties’ expert surveyors agreed that the price paid by Mr Pankhania (£3.925m) properly represented the true value of the properties as described. [40] The value of the properties as they, in fact, were (that is, subject to a tenancy, rather than a licence, in favour of NCP) has attracted much argument between the experts. But the important point is that the valuation methods adopted by both surveyors took into account the future prospects for the development of the properties. Losses that Mr Pankhania might have sustained in the future as a result of NCP occupying under a tenancy were fully considered, in an attempt to value what would have been paid for the properties at the auction had NCP’s tenancy been accurately described. Both experts considered the fact that the tenancy made it likely that the development would take longer (because of the need to remove NCP, either by negotiation or through the courts). They took into account, among many other things, the extra finance costs that might arise as a result of the tenancy making the development slower, the additional costs of getting possession from NCP, and the additional costs of construction caused by NCP’s presence. Each expert took different figures and approached the valuation in a different way, but their evidence as to the normal measure was premised on their evaluation of these and other matters. [41] I have considered carefully the matters for which Mr Pankhania would be entitled to compensation if the normal measure were not applied. It seems to me that he would, in that situation, be able to claim at least the following consequential losses: (1) the amount actually paid to NCP (or the amount that should have been paid had I held that he had failed to act reasonably in relation to NCP to mitigate the loss); (2) the additional finance costs occasioned, as a result of the delay caused to the development as a result of NCP having a tenancy; and (3) the additional costs of construction caused by NCP’s presence. [42] The question arises as to whether, in addition, on this basis, Mr Pankhania would also be able to claim, as direct loss, the additional amount that he had paid for the properties, which he would not have paid had the misrepresentation not been made. This would be likely to be the same as the normal measure itself. It is to be noted, in this regard, that Mr Tedd found, in effect, that Mr Pankhania would not have bought the properties at all but for the misrepresentation. It seems to me, therefore, that, in the absence of the normal measure, this additional amount is not automatically recoverable. It is not like the repair costs of a damaged car or a subsided house. Since he would not have bought the properties at all, he should be put in the same position as if the misrepresentation had not been made. He is not entitled to be put in the same position as he would have been in had the absence of a tenancy been warranted. Had the misrepresentation not been made, he would not have bought at all. What he would have done with the money he spent on the properties, and what benefit or detriment the purchase has caused him, is a huge enquiry about which there has been no evidence whatsoever. It is also worthy of note that Lord Steyn, in Smith New Court, overruled Hobhouse LJ’s decision in Downs v Chappell [1977] 1 WLR 426, at p444, “to compare the loss consequent upon entering into the transaction with what would have been the position had the represented, or supposed, state of affairs actually existed”. It seems to me that I need not go so far as to consider these questions. [43] It would, in any event, be a hugely complex exercise to assess the consequential losses that can be clearly identified. It would be necessary to decide whether any of the losses arose as a result of a failure to behave reasonably in mitigation of the damage. The evidence was that Mr Pankhania’s construction works were slowed down, and cost more, as a result of being unable to gain access to the chocolate factory through the car park until June 2001. But there was no evidence from a quantity surveyor as to what those extra costs amounted to. The additional finance costs, arising from what were undoubtedly additional construction costs, would also be a complicated calculation. [44] I have formed the clear view that all these questions can properly be avoided in this case for the following reasons: (1) I am clearly of the view that the normal measure in this case would, indeed, give a fair result and accord with the overriding compensatory principle. (2) In my judgment, Mr Pankhania did not behave unreasonably in failing to obtain possession from NCP sooner, or in not making more and better offers to NCP sooner, so that he would be entitled (were the normal measure not to be applied) to compensation for his losses during the period of NCP’s additional occupation (which was between May 2000, when it should have left, and June 2001, when it did in fact leave). Mr Pankhania’s conduct is not to be weighed in fine scales. In my view, he proceeded at a proper pace towards the court hearing that would have determined NCP’s tenancy. He is not to be criticised for having failed to plead a detailed case informally to NCP, in the hope that it would accept a modest offer and go quickly. (3) I do not accept that Mr Pankhania has been shown to have behaved unreasonably in developing the chocolate factory first (as he did), or in applying for a rather different kind of planning consent for the car park than that set out in the planning guidelines. Mr Pankhania was entitled to seek whatever (reasonable) planning permission he chose. The fact that he has yet to obtain a consent for the car park does not show that he has failed to mitigate his loss. He has made three applications, and each one has been turned down. That is as likely to be because of the awkwardness of the planners as it is to be because of any fault of Mr Pankhania. I should say, in this connection, that Mr Pankhania struck me as a reasonable and honest witness, who had done his best to develop the properties within a reasonable timescale and in accordance with his own reasonable commercial wishes. (4) If the normal measure were not applied, the court would be faced with an exceedingly complex task, which would be imprecise. (5) I am satisfied that the losses that would, if the normal measure were not applied, eventually be assessed as recoverable under the heads I have set out above, and be of the same order as would be produced by the normal measure. It is possible that they would be greater. (6) This is because I accept that Mr Pankhania’s costs were significantly increased by his failure to be able to obtain access to the car park in April 2000, as he would have been able to do had the representation been true. I accept also that his finance costs must have been increased. Mr Pankhania would, by this route, also recover what he actually paid NCP (namely £72,000 without VAT), because I am sure that what he paid was reasonable to avoid the uncertainties of litigation. [45] There remains the question of whether Mr Jourdan was right to say that the decision to retain the properties broke the chain of causation, so that no mitigation or benefits arising thereafter had to be taken into account. Or, put in the way that the vice-chancellor put it in Needler: was the decision to retain the properties part of a continuous transaction of which the tort was the inception? For the reasons that I have sought to give, I do not think that that is the relevant question in this case. Loss has not truly been avoided by that decision, in any event. And the question would arise anyway only if the value difference were being claimed as a direct loss, in addition to other consequential losses. If, however, I had to answer that question, I would say that the decision to retain the properties was indeed collateral to the tort, because Mr Pankhania would not have bought the properties but for the tort. He could have been expected to sell the properties when he found out about the tenancies, but he chose not to in the circumstances then prevailing. That was not part of a continuous transaction of which the misrepresentation was the inception. [46] For the reasons that I have given, as a matter of principle, this is a case in which the normal measure is apposite and should be applied. |page:141| Appropriate method of valuing the properties for the purpose of the normal measure [47] Mr Patrick Hill FRICS, of FPDSavills, gave expert evidence for Mr Pankhania, and Mr Sandy Macqueen FRICS, of Daniel Watney, gave evidence for the defendants. I found Mr Hill the more impressive witness. This was not for any want of diligence on Mr Macqueen’s part. It was simply that Mr Macqueen did not have a great deal of recent and appropriate experience of considering the rather complex valuation of this kind of development property. [48] Mr Hill and Mr Macqueen helpfully agreed a joint statement. They agreed, also, that the valuation of the properties as described was £3.925m, which was what Mr Pankhania bid for them. They differed, however, in their approach to the method of valuing the properties on the basis that NCP had a tenancy rather than a licence. [49] Both experts employed the residual method of valuation, which makes use of a complex computer programme into which one feeds certain variables upon which the valuer has made judgments. Unfortunately, however, they used different computer programmes. The aim of the residual valuation is to find out what price a developer might pay for a property by working backwards from the value of the development it is intended to create. In working out what the value of the development site must be, one has to feed in figures for the required profit, construction costs, finance costs, contingencies and many other elements. [50] Mr Macqueen valued the properties on the basis of the tenancy by using the benefit of hindsight. He fed in to the computer programme the figures that he thought best represented what had actually happened in the development. Mr Hill, on the other hand, looked at the worst-case position from the developer’s point of view as at the date of the auction, without considering what actually occurred after the auction. He then compared that with a valuation of the properties as described with a view to considering the marriage value of the properties with NCP so as to identify what a developer would pay for the properties, on the basis that he would want to do a deal with NCP to persuade them to vacate the car park. He told me that this process (or a variation of it) was commonly used by developers. [51] Both experts emphasised the imprecise nature of this method of valuation. Indeed, Mr Jourdan referred me to p176 of Modern Methods of Valuation (9th ed) 2000 by Tony Johnson and others, which draws attention to the uncertainty of the method, and to the fact that Lands Tribunal does not like it because it is not tested by “haggling in the market”. [52] None the less, in my judgment, the residual method, using estimates as Mr Hill has done, is the appropriate approach in this case. Here, the object of the valuation is to find out the “normal measure”. The normal measure demands that the court identifies the value of the properties as they really were at the date of the tort. One cannot properly make that assessment by reference to matters that occurred thereafter. For that reason, I believe that Mr Macqueen’s approach was flawed, and I disregard it. Value of the properties as they in fact were at the date of the auction/completion [53] I turn then to determine the true value of the properties as they were at the date of the auction/completion. The difference between the two dates is, as I have said, immaterial. [54] It was common ground between the experts that a developer, even one looking at a worst-case scenario, would assume that he could get possession from NCP, even if it had a tenancy, on the basis of section 30(1)(f) of the 1954 Act. There was a difference as to timing, but I formed the view that the very worst position that could be expected was that it might take two years to obtain possession from NCP. [55] I start, as Mr Hill started, by looking, from the hypothetical purchaser developer’s point of view, at the worst-case scenario. There were, in effect, six variables that Mr Hill used for this valuation that were in dispute: (1) The amounts that would have to be paid to, or would be received from NCP. (2) The proper profit figure that a developer would want, if he had to face the uncertainty of an NCP tenancy. (3) The proper contingency/inflation figure to be employed. (4) The proper percentage for finance charges. (5) The proper capital value of the office premises. (6) The lead-in periods that are required before a developer could expect to start work on each of the properties. [56] My findings on each of these points of contention are as follows: (1) NCP: Mr Hill had included a cost of £63,250 for the payment to be made to NCP, and a payment of £17,350 to be received as rent from NCP. Mr Hill accepted that, if the case went to court and NCP lost, it would have to pay the developer’s costs, so his figure of £63,250 was overstated by costs of £25,000 and took no account of the costs that the developer could expect to recover from NCP. Mr Hill also accepted that £41,331 was the proper figure for expected rental receipts over two years. Thus, in my view, Mr Hill should have valued on the basis that: (a) the costs of removing NCP after two years would be £30,000. This is on the basis of £13,250 for statutory compensation and the balance for irrecoverable legal and surveyor’s fees; and (b) the receipts from NCP should be £41,331. (2) I accept Mr Hill’s figure of 20% as the profit a developer would want in this situation. Both experts took 15% in the situation where there was a licence. It seems to me that a developer taking the risk of a significant delay, caused by a difficult and experienced tenant like NCP, would want a higher reward. (3) Mr Hill increased his contingency figure from 5% to 10% for this valuation. Mr Macqueen preferred to stick to a 5% contingency and a 2% inflation figure. Again, I prefer Mr Hill’s figures. It seems to me that the significant uncertainty caused by the need to buy out NCP, and the need to access the chocolate factory from Shepherdess Place, warrants a significantly increased contingency percentage. (4) Mr Hill increased the finance charges from 7.5% to 8%. Mr Macqueen stayed with 7.5%. Again, I accept Mr Hill’s evidence. It seems to me that interest rates were rising at the time, and that a developer would have assumed a higher borrowing percentage, if he was unsure when he would gain vacant percentage of the car park. (5) Mr Christie challenged Mr Hill on the capital value of the office premises that he had employed. Mr Hill accepted that he had agreed a figure of £250 psf with Mr Macqueen, but had employed a figure of £236 psf in both his valuations. This was an error. But Mr Hill told me that it had been caused by his failure to factor in a nine-month rent-free period in capitalising the agreed office rent of £20 psf at a yield of 8%. He also told me that he had recalculated both valuations using the higher figure, and that it made no difference to the differential between them. I accept his evidence that £236 psf was the right figure to use, and that it made no real difference even if it was not. (6) The lead-in periods were hotly disputed. The experts agreed that a nine-month lead-in period for phase 1 (the development of the chocolate factory) was appropriate for the valuation of the properties as described. There the agreement ended. For the true valuation, Mr Hill extended the lead-in time from nine months to 24 months for phase 1, and from 24 months to 39 months for phase 2 (the development of the car park). Mr Macqueen was in favour of much shorter periods, on the basis that NCP could be bought out, and that one could start to develop the chocolate factory without access across the car park. Although Mr Pankhania actually started the stripping out of the chocolate factory without access across the car park (at increased cost), I do not think that a developer planning to buy the properties as they were would have budgeted for doing so – certainly not on a worst-case scenario. In the circumstances, I accept Mr Hill’s figures for lead-in. [57] In the result, I have broadly accepted Mr Hill’s worst-case valuation, except for the figures for the NCP buy-out. Mr Hill’s computer programme produced the figure of £2,934,850, which he rounded down to £2.925m. I was warned against thinking that any one figure would simply make a difference to the bottom-line figure. But Mr Hill’s costs and receipts figures were wrong by £57,231, which, |page:142| added to Mr Hill’s valuation, gives £2,992,081. Doing the best I can, therefore, I have reached the conclusion that a fair worst-case valuation should have been £3m. [58] I have now to decide how a developer would decide how much more than his worst-case valuation to pay for the properties at auction. Mr Hill’s approach was to determine that NCP would want to split the difference between the two valuations as a ransom figure, and then to discount the 50% by half to represent the risk and uncertainty of the negotiations with NCP. Mr Macqueen did not embark upon this course at all, because he had not used the worst-case figures in the first place. [59] In my judgment, Mr Hill made too much allowance for the developer’s feeling that NCP might be awkward. He accepted that his worst-case valuation was on the basis that NCP would leave within two years. That meant that the risks and uncertainties for the developer were limited. In addition, although we know that NCP demanded £60,000 plus a five-year excluded lease, we do not know what the value of such a lease would have been. [60] Again, doing the best I can, I have decided that I should follow Mr Hill’s 50/50 split of the difference between the worst-case value of the properties with the tenancy (£3m), and the value as described (£3.925m), making £462,500, but should only reduce that figure by 10% for the risks of the negotiation with NCP. I take into account that NCP could have appealed a decision of the court, and that things can go wrong, but I do not think that a full 50% of the £462,500 is justified. [61] By this calculation, therefore, the value of the properties as they really were at the auction was £3,416,250 (£3m plus £462,500 less £46,250), which should be rounded up to £3.425m. Normal measure of the claimants’ damages [62] On the basis of the above figures, the normal measure in this case is the agreed value of the properties, as described, of £3.925m, less the value of the properties as they really were (that is, with a tenancy in favour of NCP), being £3.425m. The normal measure is, therefore, £500,000. It is that figure that I regard as the appropriate damages to award to the claimants in this case. [63] At this point, I should say that I have tested the figure that I have reached for the appropriate damages back against the reasoning that I have followed as to the law. It seems to me that £500,000 does, indeed, give a fair result in valuing Mr Pankhania’s loss. It is quite possible that the additional costs he incurred in trying to start the development of the chocolate factory without access to the car park, and the additional finance costs he incurred, could quite easily have exceeded that sum, even without considering the true cost of the NCP buy-out. Conclusion [64] For the reasons that I have set out, I assess the claimant’s damages under section 2(1) of the Misrepresentation Act 1967 at £500,000. I will hear counsel on the appropriate rates of interest, if they cannot be agreed.