Capita Alternative Fund Services (Guernsey) Ltd & Anor v Drivers Jonas (A Firm) [2012] EWCA Civ 1417

“1. This is a substantial claim for professional negligence. The claim arises out of a failed investment in a factory outlet shopping centre (‘FOC’) which was to be developed from a Grade II* listed structure known as the ‘Boiler Shop’ situated at Chatham Historic Dockyard, Medway, Kent (‘Dockside’). Dockside was acquired for the residue of a 155 year leasehold term on 5 April 2001 by the First Claimant (‘Capita’). … Capita is trustee of The Matrix Chatham Maritime Trust (‘The Trust’) which was an investment vehicle established to enable 480 individual investors to invest in Dockside. The Second Claimant (‘Matrix’) sponsored the creation of the Trust and was responsible for establishing and promoting the investment. Capita paid the vendors of Dockside total consideration in the sum of £62,850,000 in order to acquire its interest in Dockside. Capita was appointed as trustee of the Trust by a Trust Deed dated 2 April 2001 which was executed by Capita and Matrix. The Trust is in the form of an Enterprise Zone Property Unit Trust (‘EZPUT’). … Matrix is the Trust Manager under the terms of the Trust. 2. The Claimants say that they retained the Defendants, who were at the material time a firm of chartered surveyors and property consultants, to advise them in relation to the acquisition of Dockside; and that pursuant to such retainer the Defendants provided positive advice about Dockside’s commercial prospects and valued Dockside in the sum of £62,850,000 (with the benefit of Enterprise Zone tax allowances) and £48,150,000 (without the benefit of Enterprise Zone tax allowances). The Claimants say that they relied upon this and, in particular, that Capita relied on this advice when it acquired its interest in Dockside. Capita retains the long leasehold interest in Dockside that it acquired on 5 April 2001. …”

“There is no ‘rack rent’ for a FOC: instead the rent paid is a mix of a base rent and turnover rent. … turnover rent is, as the name suggests, calculated as a percentage of the turnover earned by a tenant per square foot of the unit occupied. The tenant pays the higher of base rent and the turnover rent. Accordingly, the rent payable by the tenants and receivable by the owner of the FOC depends on the success of the FOC and its tenants in attracting consumers to the centre and encouraging those consumers to spend money at its stores. Thus, if a FOC is not able to attract sufficient consumer spend through its doors then it will not attract, or will find it more difficult to attract, tenants and the rent that those tenants will be prepared to pay (both as base rent and as a percentage of their turnover) will be lower than at a successful FOC. The value of the FOC is assessed on a discounted cashflow basis by reference to an evaluation of the income (in the form of rent) that it is likely to be able to receive.”

“Without such a report … it is impossible to predict or to assess the likely rental levels that the FOC will be able to achieve and it is the income stream represented by the rents that then drives the capital valuation of the FOC. … the Defendants’ failure to appreciate this and/or to undertake any such exercise competently lies at the heart of this case.”

“12. Enterprise Zones were established by the government in 1981 in order to encourage investment into deprived areas of the country with the aim of regenerating those areas. … In order to attract investment into the new Enterprise Zones, the zones were afforded a number of advantages. In particular, developments in the zones were subject to a simplified and accelerated planning process and expenditure on such developments received favourable tax treatment. These tax incentives took two forms: (a) relief from development land tax (which was abolished in any event in 1985) and, (b) the availability of 100% capital allowances for (qualifying) capital expenditure on the construction of commercial and industrial buildings within an Enterprise Zone. The availability of these capital allowances effectively reduced the net cost of investing in the construction of commercial and industrial buildings in an Enterprise Zone thus making such an investment more attractive than might otherwise be the case. … the capital allowances in effect provided a ‘buffer’ which partly reduced or off-set the risk of investment because any losses on such an investment would have to exceed the value of the allowances received before the investment represented a net or overall loss. As this makes clear, the rationale for investment in an Enterprise Zone was still, of course, the expectation of making a profit. The availability of tax relief simply provided some comfort as regards the downside risk of making that investment. 13. Generally, Enterprise Zone developments were of relatively high value, precluding the opportunity for individuals to make their own investments in them in the absence of some sort of investment structure employing unitisation. … an EZPUT is a unit trust scheme in which the trust acquires the property and each investor acquires units in the trust with each unit in turn carrying with it an entitlement to a pro-rata share in the underlying trust property. … investors were required to retain their interest for at least 7 years in order to benefit from the capital allowances.”

“17. … tax relief was available on certain qualifying expenditure made within an Enterprise Zone. Section 469 of the Income and Corporation Taxes Act 1988 (‘ICTA 1988’) provides in like terms to its predecessor … that ordinarily income arising to the trustees of a unit trust scheme will be treated as income of the trustees and not of the unitholders for the purpose of the Tax Acts and that, accordingly, the trustees will be regarded as the persons to or on whom allowances and charges are to be made. EZPUTs are exempted from this provision by virtue of regulations 3 and 4 of the Income Tax (Definition of Unit Trust Scheme) Regulations 1988 (‘the 1988 Regulations’). Importantly, the effect of this is that the capital allowances were made available to individual unitholders in an EZPUT rather than being treated as available only to the trustee of the Trust (a concept known as ‘transparency’). Relief is only available in respect of expenditure that is attributable to construction within the Enterprise Zone (‘Qualifying Expenditure’). Thus, in determining the relief to which an individual investor is entitled, an assessment must be made of how much of the purchase price being paid by the Trust (which is funded by the acquisition of units in the Trust by investors) is Qualifying Expenditure. …”

“132. … at least so far as Capita is concerned, the purpose of such ‘commercial investment advice’ was to provide a valuation. Given the particular features of Dockside, that exercise of necessity involved an evaluation of the commercial prospects of Dockside as a trading FOC which, in turn, of necessity involved the Defendants giving consideration to and making recommendations regarding the likely prospects of Dockside to attract customer spend and tenants. However, in my judgment, the whole (or at least main) purpose of such exercise was to enable the Defendants to provide their valuation either with or without the benefit of relevant tax allowances. …”

“On the whole, I found him an impressive witness although he was at times prone to make sweeping generalised statements which were not always supported by relevant specific evidence. That is not to say that such statements were necessarily incorrect but simply that they were sometimes difficult to test.”

“172. It goes without saying that although I accept that Mr. Barbour had relevant expertise it does not follow that I should necessarily accept all or even part of his evidence. In light of the important errors that I have already referred to and my conclusions … below with regard to Mr. Parr’s evidence which Mr. Barbour relied upon, I approach the remainder of Mr. Barbour’s evidence with what I consider to be necessary caution. 173. As Mr. Barbour made clear, he would not expect a competent adviser to rely blindly or unthinkingly on a CACI report. Rather, it provides an informed basis for the exercise of professional judgment based on experience and expertise in the market in question. Thus Mr. Barbour did not suggest that it was necessary or even appropriate to rely unquestioningly on a full retail performance analysis report: his opinion was that such a report is research upon which the competent adviser can then rely when exercising their own expert judgment based on their experience in the market as to the likely rents that will be achieved and the report enables judgment to be exercised based on experience and an informed basis. The Claimants submitted that this is infinitely preferable to Mr. Sargent’s ‘gut feeling’ (let alone to Mr. Blake’s gut feeling from a premise of no relevant experience). I agree.”

“… that the Defendants made no or no adequate or competent assessment of Dockside’s ability to secure consumer spend from its catchment area and thereby acted in breach of duty …”

“190. The main flaw with regard to the reliance placed by the Claimants on Mr. Parr’s evidence is … that the exercise carried out by Mr. Parr was designed to show what would have been predicted in 2001 as to the sales density of Dockside in 2003 i.e. at the time of opening of Dockside. … In particular, the Claimants sought … to rely on Mr. Parr’s evidence (specifically his figure of £190 psf) to show likely sales density at the end of year 7 i.e. in 2008. But that is not an exercise which Mr. Parr ever did. Nor had he ever been asked to do such an exercise. Indeed his evidence was that he had never been asked to or actually carried out a CACI analysis looking seven years ahead. His evidence was that this would be ‘crystal ball gazing’. For this reason alone, the exercise carried out by Mr. Parr is … of little, if any assistance when considering the main issue at the heart of this part of the case i.e. the likely rentals at the end of year 7. 191. Quite apart from this fundamental difficulty, it seems to me that the figures used by Mr. Parr to reach his sales density figure of £190 psf were, at the very least, questionable, at virtually every stage. 199. For all these reasons, it is my conclusion that the exercise carried out by Mr. Parr is of no real assistance in the present case. In summary … that exercise was not the relevant exercise for present purposes and, in any event, was flawed or at least questionable for the reasons set out above. The result is that although I accept the Claimants’ case that the Defendants acted in breach of duty in failing to carry out or to obtain a full retail spend analysis, the analysis produced by Mr. Parr and relied upon by the Claimants does not … provide any reliable answer to the likely rental figure that would have been predicted by such an analysis if it had been performed in 2001 for the end of year 7 (2008).”

“204. The Defendants submitted that without adequate support from the CACI Report Mr. Barbour’s evidence does not provide adequate admissible evidence for an incompetent valuation by the Defendants i.e. Mr. Barbour should, in effect, just fall away. I do not agree. For the reasons which I have already given, I do not accept the Defendants’ general objections to Mr. Barbour’s expertise. Although there is no doubt that Mr. Barbour relied upon the CACI report in support of his own conclusions, his reports fairly read did not depend exclusively on the CACI report. On the contrary, it seems to me that the views and conclusions expressed by Mr. Barbour were based not only on the CACI report but also on his own experience and expert analysis. I then turn to consider that evidence of Mr. Barbour and the particular criticisms of the work done by the Defendants and the advice which they gave.”

“230. In summary, the Defendants failed to appreciate the disadvantages of the design, layout and listed building status of Dockside and the consequences these had for, among other things, attracting consumer spend and tenants and running costs. ”

“… what would have been the advice of a competent adviser/valuer as to the likely rental income at year 7?”

“236. These particular criticisms of Mr. Barbour’s evidence were … forceful. However, the difficulty is that each FOC is unique and the use of ‘comparables’ is largely unhelpful. As I have said, there is no doubt that Mr. Barbour has considerable general experience in the FOC market and, despite certain important errors in his evidence which I have identified, he was … an impressive witness. Ignoring Mr. Parr’s evidence, the figures of £19 psf for the ground floor and £9.50 for the first floor were based on that experience and a broad assessment of the general state of the FOC market, the location of Dockside, the competition which it would face and the significant deficiencies inherent in its size and design which I have already addressed.”

“248. I have set out at some length the particular criticisms of the work done by the Defendants as advanced by the Claimants based largely on the evidence of Mr. Barbour. For the reasons set out above, I accept most of those criticisms. I have also set out above my comments with regard to the evidence of Mr. Barbour and Mr. Sargent concerning the likely rental figures. The Defendants emphasised what they described as the ‘absolute vulnerability to an overdependence on statistics and mathematics’. They relied in particular on what Mr. Sargent said viz ‘… with valuation you do have to stand back and look at the overall number. You can drill down into the minutiae but, at the end of the day, it is the standing back approach and saying what looks reasonable.’ I agree with the importance of that ‘standing back approach’. Accepting that approach and having regard to everything I have said, it seems to me that the appropriate average rental figure for the ground floor was £19 psf and 50% of that figure i.e. £9.50 psf for the first floor … ”

“The exercise required is not about the Court reaching an immaculate or absolute value, but about reaching the most likely figure on the basis of the evidence it has heard. That evidence may well not be perfect, indeed it is unlikely ever to be so.”

“14.99 … rents under a turnover lease structure comprised two elements: a base rent generally established at levels of between 70% and 80% of the estimated rental value … and a turnover top up of x% (usually ranging from between 9-11%). Budget rents of £15 per sq ft or £10 per sq ft for units in excess of 5,000 sq ft had been established by the Developer for Dockside and on the basis of the levels outlined above would have provided an estimated total rental value (i.e. including the turnover or ‘top up’ rent) of between £18 and £19.50 per sq ft. The Developer had attached a rental value of £27.50 per sq ft overall for Dockside to provide the rental guarantee of £4,006,750 per annum (145,700 sq ft x £27.50 per sq ft). 14.100 £27.50 was 83% in excess of the budget base rents of £15 per sq ft, a disparity which is significantly in excess of the norm and one I have not come across before (either prior to 2001 or since). In 2001 I would normally have expected the uplift to be around 20% above the base rent figure. This ought to have prompted serious questions by Drivers Jonas.”

“312 … I was not referred to any authority. I confess that I have not found it easy. It is, of course, now well established ever since the decision of BTC v Gourley [1956] AC 185 that the incidence of taxation is – or at least may be – relevant in the calculation of a claimant’s damages. However, the issue normally arises in the context where the damages are subject to no tax or a different level of tax. The issue here is different i.e. the question here arises because, as is common ground, the original investment attracted a tax credit for the benefit of the individual investors and any damages that would be recovered would (as the Claimants accepted) be held on trust for the individual investor … The issue is further complicated because the nature of the tax credit in effect required the individual investors (through Capita) not to dispose of their investment for a period of at least 7 years and that the Defendants’ calculation based on the difference between the purchase price less the likely tax credits and the correct open market value therefore seems artificial in the extreme. Moreover, as I have calculated, on the assumption that the individual investors had, through Capita, paid £44.8m, the net cost to them after relevant tax credits would have been in the order of £29.735m. Thus, it seems to me that the Claimants are right when they say, in effect, that the Defendants are not comparing like with like and that the Defendants’ submission is, at best, over simplistic. If the tax benefit is to be taken into account, I can see a possible argument that the damages recoverable are to be limited to the difference between £41,303,506 and £29,735,000, i.e. £11,368,506. However, that was not the submission which was, as I understood, advanced by the Defendants. That possible argument apart, … the short answer is the one advanced by the Claimants viz that whatever tax credits may have been obtained by the individual investors, these do not affect the damages properly recoverable by Capita.”

“… where any injury is to be compensated by damages, in settling the sum of money to be given for reparation of damages you should as nearly as possible get at that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation.”

“The real question in each case is: what damage has the plaintiff really suffered from the breach?”

“In the simple case of the purchase of property at a price in excess of its market value as a result of wrong advice, the measure of damage must be the difference between (1) the market value of the property at the date of purchase, and (2) the price actually paid.”

“Self-evidently, as a result of this lease structure the rent earned by the owner of the FOC will depend on the financial performance and success of its tenants and, in particular, the success both of the FOC and its tenants in attracting consumers to the FOC and persuading them to spend money there.”

“I should explain that the methodology of comparing rents quoted in other centres and different locations was appropriate when advising as to the value and viability of a shop on a high street or a full price shopping centre where tenants pay rent on what is known as a “rack” rental basis, as explained above. It was not appropriate in the assessment of turnover income where each FOC draws upon a different catchment, with a different level of available spend, different demographic models dictating the typical shopper in the FOC and a different pool of competition.”

“For all the reasons set out above, including in particular Dockside’s location, the lack of certainty in the development of surrounding attractions, the significant level of competition in Dockside’s catchment, its layout and design and inadequate tenants’ incentives budget, Dockside was over-valued at a totally unrealistic rental level (£27.50 per sq ft overall). CACI in their analysis calculated a projected sales density for Dockside of £190 per sq ft. Applying a turnover percentage of 10%, this would provide a rental value for the ground floor of £19 per sq ft, and a first floor sales density equating to a rent of £9.50 per sq ft. From my experience of the FOC market at the time this level of rent would be considered appropriate by a competent valuer and commercial property investment adviser.”

“A. I think to carry out a valuation, and certainly from both rental and capital values, you have to ascertain turnover levels of a scheme. Factory outlet centres, unlike normal shopping centres, are dealt with on a turnover basis. And therefore to get an accurate reflection of rental value you have to understand turnover levels, so yes. Q. So your view is that anyone would have been doing that other than on the basis of a CACI type analysis would have been incompetent? A. You needed turnover information on which to base an assessment, yes.”

“Q. As I understand it, you are not prepared to accept that it is appropriate, so far as rentals are concerned, to look at other centres for comparables; is that right, Mr Barbour? A. Every scheme is unique. No scheme – I cannot — no schemes can be compared on a like for like basis in my view because the catchment will always be different, the spend will be different and the demographics will be different. So you have to assess it on a one-off basis.”

“Q. Mr Barbour, the figure of £190 per sq ft which is provided by Mr Parr is at the very heart of your report, isn’t it? A. It is certainly one of the elements of my report, but I have used my own judgment in looking at those figures. Q. If that figure changes, for any reason, do you have any way at all, now, of saying what you consider the value of the centre was back in 2001, so that a figure of £250 per sq ft would be appropriate? A. No, I think I would be looking at the information that was before me and taking a judgment on that from my experience.”

“Well, I would need to see that calculation, because I’m not an analyst. I would be looking at the end figures from which I would base my assessment.”

“Q. In this case you have resolutely refused, have you not, to accept that it is appropriate to look at comparable properties to see what they’re being let for in order to form a judgment on rental values; yes? A. That is correct. And I will go back to my comments of yesterday. Each centre, in terms of outlet, because you are looking at performance and, hence, rents actually have a relation to that, are unique. The catchment of any centre cannot be the same. The demographics are not the same. And the competition are not the same. And all those elements bring you to a calculation of sales density. And they will be different for all schemes.”

“Well, I don’t believe so, because I would go back [to] the start of our appraisal process of dealing with rents, in that every centre is different. What I’ve said earlier is that I’ve purely used this not as a benchmark but just to gauge other schemes and, from my experience, where I felt this rents should or would be.”

“As I’ve stated earlier, I certainly used CACI’s figures in part and in terms of my assessment. And that’s the basis of my valuation on the rental side. But, from my experience, you don’t get a number out and actually question the validity or if you feel that’s in the right order.”

“Q. So you have no idea whether that attainment level is right or wrong? A. It’s a level that CACI provided me with and advised me that is how they dealt with their calculations … for not only this but for other centres.”

“Q. You have placed very heavy reliance on CACI’s report in arriving at your evidence in this case, haven’t you, Mr Barbour? A. Yes, I have. But I have made my own judgment looking at that, from my experience also. Q. You understood that the attainment factor explained in Mr Parr’s report is absolutely critical to the end result of £190 per sq ft across the centre as a whole, didn’t you? A. Yes, it is a part of the calculation. Yes. Q. It is an absolutely critical part of the calculation, isn’t it? Because it is directly proportional to the £190 per sq ft? A. Yes, there are a number of inputs of which that forms part of the calculation, yes. Q. The difference between £190 per sq ft across the development as a whole and £270 per sq ft across the development as whole is extremely significant; do you agree? A. I mean it is a significant amount, but I go back to earlier. Without seeing if that data is correct, I can’t verify that. Q. What data? A. In terms of the production of the figures and the calculation of the attainment level. Q. Mr Parr explained yesterday that all he had done to get to his attainment level wasn’t any analysis at all. It was simply an assumption of 35%. That’s your understanding, isn’t it? A. The assumption I think he made was based on the attainment level for a scheme of that size, yes. Q. I’ve read out to you the question and the answer. But assume, for the present purposes, that if he had categorised that as a large centre instead of a small one he would have used 50%, 42% more than 35%, yes? A. I can’t comment because I’m not a party that actually deals with the calculation or the inputting of the data. Q. Would you accept that a figure of £270 per sq ft for turnover across the development as a whole is just as likely to have been right in 2001 as one of £190 per sq ft? A. I can’t comment without knowing if the data is correct or relevant. I believe the figures from Mr Parr were correct. There are a number of points, I think, in terms of the range that I’m now aware which would make a small variation. But without looking at the data and having the benefit of that, I can’t comment. It is not my area of expertise.”

“14.1. As explained above, by 2001 it was clearly established that a competent assessment by a valuer and commercial property investment adviser of the likely rents achievable in a new FOC could only be achieved by an approach that included a detailed analysis of the FOC’s catchment and a correlation of catchment, spend and competition data. This analysis, together with detailed research as to tenant interest, would provide an assessment of the FOC’s sales densities from which turnover rent could be calculated. 14.2 This was of critical importance for a new FOC where there would be no existing information such as a turnover history to inform the assessment. 14.3 As set out at paragraph 8.4 above, the steps that a competent valuer and commercial property investment adviser would have taken to obtain this information would have been a Performance Analysis and through carrying out a Retail Audit. … 14.9 At the valuation date the Dockside Investment was based on a forward purchase commitment without the benefit of any lettings or trading history. It was fundamental to ascertain tenant interest for a new FOC at an early stage. This formed one of the critical areas of the due diligence and analysis required in order to consider both viability and assessment of risk and was typically carried out as the step immediately following receipt of the catchment analysis report or prior indication of outcome from the research provider. As set out above, I refer to this process as a Retail Audit. 14.10 A competent valuer or commercial property investment adviser would have a list of tenant contacts with whom to carry out their Retail Audit. They would have identified suitable tenants to be contacted based on the conclusions/expected outcome of the Performance Analysis and would have mapped out a suitable tenant mix for Dockside.”

“14.99 In particular, as set out at paragraph 7.11 above, rents under a turnover lease structure comprised two elements: a base rent generally established at levels of between 70% and 80% of the estimated rental value (i.e. the total rent expected to be achieved including the turnover top up) and a turnover top up of x% (usually ranging between 9-11%). Budget rents of £15 per sq ft or £10 per sq ft for units in excess of 5,000 sq ft had been established by the Developer for Docksideand on the basis of the levels outlined above would have provided an estimated total rental value (i.e. including the turnover or “top up” rent) of between £18 and £19.50 per sq ft. The Developer had attached a rental value of £27.50 per sq ft overall for Dockside to provide the rental guarantee of £4,006,750 per annum (145,700 sq ft x £27.50 per sq ft). 14.100 £27.50 was 83% in excess of the budget base rents of £15 per sq ft, a disparity which is significantly in excess of the norm and one I have not come across before (either prior to 2001 or since). In 2001 I would normally have expected the uplift to be around 20 % above the base rent figure. This ought to have prompted serious questions by Drivers Jonas. 14.101 CACI from their analysis calculated Dockside’s sales density at £190 per sq ft for the ground floor.Applying a discount of 50% I have assessed appropriate sales density of £95 per sq ft for the first floor. Based on a turnover rent percentage of 10% this would have provided a rental value of £19 per sq ft for the ground floor units and £9.50 per sq ft for the first floor. Plainly, this accords with the budget rents that the Developer set. I have been unable to identify any basis upon which it could have been said that base rent of £15 per sq ft could justify an expected total rent of £27.50 per sq ft. A competent valuer and commercial property investment adviser in 2001 would have shared the view that such a base rent could not justify such an expected total rent.”