Marchday Group Plc v British Telecommunications Plc [2003] EWHC 2627 (TCC)

Case No HT-03-24[2003] EWHC 2627 (TCC)
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
St. Dunstan’s House,
Venue 133-137, Fetter Lane,Date 11 November 2003
London, EC4A 1HD
B e f o r e :
HIS HONOUR JUDGE RICHARD SEYMOUR Q.C.
Between
MARCHDAY GROUP PLCClaimantBRITISH TELECOMMUNICATIONS PLCDefendant
Edward Denehan (instructed by Stallard for Claimant)James Barker (instructed by Addleshaw Goddard for Defendant)
JUDGMENTH.H. Judge Richard Seymour Q. C. :Introduction
[1]In this action the Claimant, Marchday Group Plc (“Marchday”), claims damages from British Telecommunications Plc (“BT”) in respect of the alleged breach of repairing, cleansing and decorating covenants contained in an underlease (“the Lease”) dated 26 November 1976. By the Lease Star Northern Developments Ltd. (“Star”) let to the Post Office the twelfth to seventeenth floors of a building in Middlesbrough at that time called Corporation House (“the Building”) for a term of 25 years from 25 March 1975. The demise included 16 car parking spaces. It seems that at the date of the Lease Star held the Building under the terms of a lease dated 22 November 1976 made between Pearl Assurance Co. Ltd., Star and English Property Corporation Ltd. However, on 23 May 1996 the reversion immediately expectant upon the determination of the Lease became vested in a company now called Limegrid Plc (“Limegrid”), but at that time called The Marchday Group Plc. That company remained entitled to the reversion immediately expectant upon the determination of the Lease as at 25 March 2000, when the term created by the Lease expired by effluxion of time. Subsequently, however, Limegrid assigned to Marchday all its causes of action arising out of the alleged breaches of the covenants in the Lease to which I have referred.[2]In this judgment I shall refer to the premises which were demised by the Lease as “the Demised Premises”. On or about 6 August 1984, upon the privatisation of the telecommunications business up to that time carried on by the Post Office, the residue of the term created by the Lease became vested in BT.[3]There is now no dispute that as at the date upon which the term created by the Lease expired by effluxion of time BT was in breach of the covenants to which I have referred. It has been agreed between surveyors acting on behalf of the parties that the cost of the works necessary to remedy the admitted breaches of covenant, together with appropriate professional fees, was £348,830.25. However, it was alleged on behalf of Marchday that losses in addition to the cost of remedial works had been sustained as a result of the admitted breaches of covenant on the part of BT, namely loss of rent, insurance rent and service charges in respect of the Demised Premises over a period of some 19 months between the date of expiry of the term created by the Lease and the end of the period which it is contended was reasonably necessary for the undertaking of the remedial works required to the Demised Premises and the subsequent re-letting of those premises. Those losses were put at a total of £808,319. The premise underlying the claim for those losses as put was that, but for the breaches of covenant on the part of BT, it would have been possible immediately to re-let the Demised Premises from 25 March 2000 at an annual rent of £390,500, and on terms that the incoming tenant pay a due proportion of the sum paid for insuring the Building, together with a due proportion of the service charges applicable to the Building. Various calculations of the net internal area of the Demised Premises were put in evidence, but they did not differ by much. The calculation of the expert valuer called on behalf of Marchday, Mr. Ian Battle, who is a partner in the firm of Storeys:ssp, resulted in a total of 52,070 square feet. If that calculation were correct, the level of rent which it was contended on behalf of Marchday the Demised Premises could have commanded as from 25 March 2000 amounted to £7.50 per square foot. The rent payable under the Lease at the time it came to an end was £300,000 per annum, equivalent, on Mr. Battle’s calculation, £5.76 per square foot, if no value were attributed to the 16 car parking spaces included within the demise. The figures for rent per square foot alter by a few pence downwards if any of the other suggested figures for the net internal area of the Demised Premises, respectively 52,220, 52,259 or 52,319 square feet, were correct. The position adopted on behalf of BT in relation to the alleged losses of rent, insurance rent and service charges was, essentially, that no loss had been suffered in relation to any of these elements because each depended upon the proposition that the Demised Premises could have been let earlier than in fact they were, and that proposition was incorrect.[4]A period of 19 months from 24 March 2000 would have come to an end on 24 October 2001. The Demised Premises were not in fact re-let as from October 2001. What actually happened was that a company called C. J. Garland & Co. Ltd. (“Garland”) in 2003 entered into four leases of various parts of the Demised Premises. By a lease dated 30 January 2003 the twelfth and thirteenth floors of the Building were let to Garland for a term of 13 years from 30 January 2003 at a rent of £164,854 per annum. The total area let under the lease was said to be 17,822 square feet, making the rent equivalent to £9.25 per square foot. By a lease dated 13 March 2003 the fourteenth floor of the Building was let to Garland for a term of 13 years from 13 March 2003 at a rent of £82,426 per annum. That rent was also equivalent to £9.25 per square foot. By a further lease of the same date the fifteenth floor of the Building was let to Garland for a similar term at an identical rent. Finally, by a lease dated 7 July 2003 the sixteenth floor of the Building was let to Garland for a term of 13 years from 7 July 2003 again at a rent of £82,426 per annum, equating to £9.25 per square foot. There was a suggestion in the evidence that Garland might be about to enter, or had just entered, into a lease of the seventeenth floor of the Building, but there was no firm material to support that suggestion. As at the date of this judgment it appears that the seventeenth floor remains unlet. Certainly no copy of a lease of the seventeenth floor to Garland was put in evidence.[5]It is plain from considering the leases into which Garland has entered that the provision of car parking was an important element from its point of view. Under the lease dated 30 January 2003 the landlord, in fact a company called Marchday Holdings Ltd. (“Holdings”), granted Garland the right to use 12 spaces in the car park at the Building and agreed, by clause 4.3 of the lease, that:- “The Landlord will use reasonable endeavours at the Landlord’s expense to procure that the Tenant is able to park 50 private motor cars in the Zetland Car Park, Middlesbrough (or in such other car park in reasonable proximity to the Building as the Landlord may from time to time specify) and, in substitution for that right after 5pm each day will use reasonable endeavours to provide the same number of spaces in the car park at The Cleveland Centre, Middlesbrough.” Each of the leases dated 13 March 2003, and the lease dated 7 July 2003, included 6 car parking spaces at the Building and a provision equivalent to clause 4.3 of the lease dated 30 January 2003 in respect of 25 car parking spaces. Thus overall the deal in respect of the letting of four floors of the Building to Garland included 30 car parking spaces at the Building and using reasonable endeavours to obtain 125 car parking spaces at the Zetland Car Park until 5 p.m. each day and a similar number of spaces after 5 p.m. in the car park at The Cleveland Centre. No additional sum was payable by Garland to Holdings in respect of any of these car parking spaces. If some value were attributed to them in the rent paid by Garland the effect obviously would be that the rent for the office space alone would be reduced from £9.25 per square foot to some lesser figure.[6]What the justification may be for taking the period of 19 months upon which the calculations made on behalf of Marchday have been based is a matter to which I shall have to return. Certainly the position adopted on behalf of BT was that the requisite remedial works to the Demised Premises did not in fact take 19 months, or anything like that long, and a period of 19 months would have been grossly excessive. Another matter to which I may have to return is what account, if any, should be taken in evaluating Marchday’s claim of the fact that the rate per square foot of the rent which Garland has agreed to pay exceeded by £1.75 the rate which it was contended Marchday would have been able to obtain in relation to lettings as from 25 March 2000.[7]What is necessary in order to evaluate the claims of Marchday which are in dispute is to make an assessment of the letting market for office property in Middlesbrough as at 25 March 2000 and thereafter. The evidence called before me in relation to that question was that of Mr. Battle and that of Mr. Richard Bullen, an Associate Director of DTZ Debenham Tie Leung, on behalf of BT. Mr. Battle prepared a report setting out the substance of his evidence in chief, which report was dated 3 September 2003. There were a number of annexures to his report, to some of which it will be necessary to refer. The substance of Mr. Bullen’s evidence in chief was set out in his report dated 10 October 2003. Again there were a number of annexures to his report, and again it will be necessary to refer to some of them.

The Building

[8]Before coming to consider the letting market for commercial property in Middlesbrough from 25 March 2000 it is convenient to describe the Building as it was as at 25 March 2000 and as it is now. The Building has, since March 2000, had considerable works undertaken to it separate from those necessary to remedy the consequences of the breaches of covenant on the part of BT. In the light of those works the Building has been re-branded, or at any rate re-named, being given the modest title “Centre North East”.[9]The Building was constructed in the early 1970s. As originally constructed it comprised a basement, a ground floor adapted for retail use in a number of different units, a first floor intended for office use, a second floor providing some 43 car parking spaces, and third to seventeenth floors comprising office accommodation. The total net internal floor area of the Building was some 165,917 square feet. The Building is in a prominent site in Middlesbrough, being on the corner of Corporation Road and Albert Road, opposite the Town Hall and adjacent to The Cleveland Centre. It is apparently the tallest building in Middlesbrough, although views seem to differ as to whether this is an attractive attribute. The Cleveland Centre, as I understand it, is a retail development with on-site car parking. Access to the car park on the second floor of the Building is through the car park at The Cleveland Centre. It is because the car parking at The Cleveland Centre is required for shoppers during the day that spaces for Garland are only available after 5 p.m. There is a purpose-built reception area on the ground floor of the Building, with an entrance from Albert Road, through which access is obtained to the offices on the upper floors. There are five passenger lifts affording access to the upper floors. The lifts are in the central service core. On each floor there are lavatories and a tea making point. As originally constructed the office floors had concrete screed floors which were carpeted, suspended ceilings with surface mounted fluorescent lighting, plastered walls, perimeter heating and ventilation and an open plan layout. In other words, on the upper floors it was a typical 1970s office building.[10]As I have already indicated, the six upper floors of the Building – the Demised Premises – were let for a term of 25 years from 25 March 1975 to the Post Office. The third to eleventh floors of the Building were also let for a term of 25 years from 25 March 1975 to a single tenant. That tenant was the Government department which in due course became the Department of the Environment, Transport and the Regions (“DETR”). By 25 March 2000 both BT and DETR had ceased to occupy the entirety of the parts of the Building respectively demised to them. As at about November 1995 and thereafter the third, fifth, eighth, tenth, sixteenth and seventeenth floors seem simply not to have been occupied at all for much of the time, while DETR did not occupy parts of the fourth, sixth and ninth floors and had sub-let the entirety of the eleventh floor. When BT gave up occupation of the Demised Premises DETR also ceased to occupy any part of the accommodation previously let to it. In other words, practically all of the office accommodation in the Building became vacant from 25 March 2000.[11]After the expiry of the term created by the Lease considerable work, apparently costing some £3 million, has been undertaken to the Building in addition to anything necessary in the light of breaches of covenant on the part of BT or DETR. In particular a new reception area has been constructed, new suspended ceilings have been provided, there is new Category 2 lighting, new power circuits have been installed, air conditioning has been provided, raised flooring has been installed, and lavatories and lifts have been refurbished. Mr. Dudley Leigh, a director of Marchday, was called to give evidence and he said, at paragraph 10 of his witness statement, that at the time The Marchday Group Plc acquired the freehold interest in the Building it was recognised that in order to attract tenants it would be necessary to repair the accommodation fully, improve car parking provision, redecorate common parts attractively and imaginatively, and improve the image of the Building.[12]Mr. Bullen attached to his report a copy of an article in the 24 September 2003 edition of The Journal newspaper concerning the Building. While no doubt allowance must be made for the possibility of misunderstanding on the part of the author of the article, it was not suggested before me that what was reported was in substance inaccurate. One of those quoted in the article was Mr. Battle in his capacity as letting agent for the Building. He expressed no unhappiness concerning the correctness of the comments attributed to him. The text of the article was:- “Centre North East, the region’s tallest office building, is changing its branding to reflect the new vibrancy surrounding the building. A new logo has been designed and will feature on all the building’s stationery and literature and work is ongoing to produce new signage for the entrance canopy and the distinctive barrel on the corner of the building overlooking Albert Road and Corporation Road, Middlesbrough. More than £4m has been invested in the building which hosts tenants including Garlands Call Centres, which wants to place more than 200 staff there. Since 2000, almost 70,000 square feet of space has been let within the completely refurbished 18-storey glass fronted building. Shops and bars are being attracted to the ground floor. The letting to Garlands is the largest single office letting in over 20 years in Middlesbrough and is seen as a boost for the town when many jobs in the sector are being lost overseas. Atalina Wright, Marketing Manager for Centre North East said:
“Centre North East has come back to life in the last couple of years and is now a vibrant and lively business community. “We decided that this was a good time to update the building’s branding to reinforce our position as a modern and innovative location for business”
. The building has changed completely since Marchday bought it as a 30-year-old eyesore in 1995 for £4.5m. The London-based developer replaced floors, ceilings, fascia and décor in the former Corporation House which for years hosted hundreds of British Telecom staff and civil servants. The landmark building has also seen a transformation on the outside. Cleveland Arts worked with Marchday, owners of Centre North East, to commission an artist to work with light to illuminate the side. Ian Battle of Storey Sons & Parker said:
“The work done by Marchday to update and refurbish the facilities at Centre North East has really paid dividends. “It now stands proudly as a beacon of the regeneration of Middlesbrough Town Centre and has been instrumental in attracting business and jobs to the area. “The change in the building has been quite outstanding over the last couple of years and it is now once again a vibrant and lively business community offering excellent facilities for its many hundreds of workers.” ”
The next day’s edition of the newspaper reported that Marchday had spent £50,000 adding pink lights to the Building.[13]As I understand it, consideration is currently being given to the conversion of the existing first floor office accommodation at the Building to provide additional on-site car parking.

The letting market in Middlesbrough for office property

[14]Mr. Bullen drew attention in his report to a study commissioned by English Partnerships and Middlesbrough Borough Council (“MBC”) from a concern called EDAW in relation to options for the regeneration of the town centre of Middlesbrough. EDAW apparently led a multi-disciplinary team of consultants which comprised Chestertons, Ove Arup and Partners and Urban Cultures. The final report following the study, which was dated January 1998, included these passages:- “E.10 Middlesbrough’s office market has undoubtedly experienced a difficult period over the last few years. The dramatic increase in office vacancy levels has been the result of a range of factors including:• considerable restructuring within the financial services sector• local government reorganisation, leading to a considerably reduced office requirement from the public sector• a gradual shift towards out of centre locations offering a higher quality of environment and parking provision. E.11 Albert Road’s role as an office location has been substantially eroded and a legacy of vacant and obsolete buildings remain. The Teesdale development at Stockton is increasingly assuming the mantle of sub-regional office centre. There are concerns in the business sector over parking and quality of environment and these issues must be tackled to allow the town centre to re-build its role as an office location. … 5.7 Historically, the public sector has provided a significant source of demand for office floorspace. In addition to the new law courts, Middlesbrough has been successful in attracting investment from the Benefits Agency and Inland Revenue in recent years. However these developments cannot mask overall trends which have seen a significant decline in take-up. …. 5.9 Local government reorganisation has had a significant impact on the office market in the town. This has resulted in the availability of all or part of several increasingly obsolete 1960s office buildings (Gurney House, Rede House, Jupiter House). 5.10 This process has combined with the rationalisation of the financial services market in the town, impacting on Albert Road’s traditional role as the office core of the town, particularly to the north of Corporation Road. As Albert road’s [sic] importance as a route linking the town centre and the docks has declined some of this activity has relocated to other parts of the town centre. Much of it has shifted to out of town locations. Whereas the main professionals i.e. solicitors, surveyors and accountants have traditionally been accommodated in small “own front door” offices within the town centre (e.g. in Albert Road/Bedford Street), these services have also shifted out of the town centre. The move of offices to out of town locations where car parking is available in abundance along with high quality, flexible accommodation is self evident particularly to Riverside Park and the Teesdale scheme. These factors have all limited private sector occupier demand in the town centre, depressing rental level to £5 per sq. ft. or less. 5.11 As table 5.2 highlights, the supply of vacant office accommodation has increased dramatically in recent years. The town centre now has an office vacancy rate of 21%, compared with Newcastle upon Tyne (14.5%), Leeds (13.7%), Edinburgh (9.6%) and Glasgow (8.8%). Evidence from elsewhere suggests that for market equilibrium to be achieved, a vacancy rate of between 10 – 12% is required. … 5.15 Much of the overhang of vacant office accommodation is contained within a relatively limited group of 1960s/70s buildings. Rede House, currently vacant and on the market, is owned by Legal & General whilst Gurney House extends to 63,000 sq. ft in the ownership of a London – based investment company. This building is let to MBC with 10 years of lease remaining but only the ground floor is fully occupied with five floors completely vacant. Asking rentals are in the order of £5.30 per sq. ft which will be very difficult to achieve in the current market. 5.16 Jupiter House, to the south east of the town centre, is also vacant and on the market. It is also of great concern that the major leases on Church House and Corporation House will fall in around the year 2000, potentially adding a substantial amount of vacant office space within the town centre and depressing rentals still further. Of the substantial town centre office buildings, only Dundas Tower – above the Dundas Arcade – is fully occupied, with British Telecom tied to a lease to 2005 but paying a minimal rental believed to be less than £2 per sq. ft. … 8.5 The town’s office market has undoubtedly experienced a difficult period over the last few years. The dramatic increase in office vacancy levels has been the result of a range of factors, including:• considerable restructuring within the financial services sector• local government reorganisation, leading to a considerably reduced office requirement from the public sector• a gradual shift towards out of centre locations offering a higher quality of environment and parking provision 8.6 Many of these changes have had national, rather than simply local impacts. However, the substantial overhang of office accommodation has led to a significant loss of market confidence in the town centre’s role as the sub-regional office centre. Albert Road’s role as an office location has been substantially eroded and a legacy of vacant and obsolete buildings remain. The Teesdale development at Stockton is increasingly assuming the mantle of sub-regional office centre…. 11.6 The upper floors of Corporation House are particularly difficult to let and the building is the most damaging of the major office blocks in townscape terms. The pattern of lease expiries over the next three years, the refurbishment opportunity for the Cleveland Centre in 2004 and the pedestrianisation proposals for Corporation Road/Albert Road create the possibility to address this issue. The proposals involve partial demolition and refurbishment [of the Building, to reduce its height to four storeys and to reduce the office accommodation available to 30,000 square feet]. …”[15]The EDAW report dealt with the position in Middlesbrough as it was perceived to be in January 1998. Mr. Battle annexed to his expert report extracts from the results of research undertaken by Northern Property Analysis Service (“NPAS”) for the second quarter of 2000. That research covered the whole of the North East of England. It did not deal separately with Middlesbrough, but included Middlesbrough in the wider area of Teesside. The data as recorded in the report of the research parts of which were annexed to Mr. Battle’s report was expressed, so far as areas were concerned, in square metres. One square metre equals 10.764 square feet. Mr. Battle’s summary and assessment of material set out in an NPAS report relating to the first quarter of 2000, no part of which was put before me, was set out in section 6 of his report as follows:- “6.1 The letting potential of the property has to be seen in the context of the office market in Teesside. 6.2 The NPAS Report for the 1st Quarter 2000 (Appendix 8) records that there were some 582,000 sq ft of office suites in excess of 1,600 sq ft available in the Teesside area. [The data in fact annexed showed 99 units of available office accommodation larger than 150 square metres, or 1,614 square feet, in Teesside totalling 55,300 square metres, or 595,249 square feet as at 30 June 2000] This would cover a diverse range of offices in terms of location, specification, and sizes. The schedule at page 22 of the report (page 2 of Appendix 8) demonstrates that only 15 units out of a total of 109 had a floor plate in excess of 7,500 sq ft. [Again, the data in fact annexed showed that in Teesside as at 30 June 2000 10 out of 99 units available for letting exceeded 700 square metres, or 7,534 square feet] 6.3 The take up of office (which includes both premises let and withdrawn from the market) for the Teesside area for the year ending in March 2000 was 519,000 sq ft (Page 32 of the NPAS Report – page 12 of Appendix 8). [The data in fact annexed showed 66 units of office accommodation totalling 46, 000 square metres, or 495,144 square feet, ceasing to be available for letting in the year ended 30 June 2000]. 6.4 Whilst the above statistics can only provide a general overview of the Teesside market it provides an impression that there is reasonable demand for office space in the region. 6.5 It is my opinion that the office market in Teesside has been dominated until recently by the developments at Teesdale and to a lesser extent by Hartlepool quayside area. 6.6 At Teesdale there are two distinct markets – the high specification developments undertaken by Teesland and Terrace Hill with the larger floor plates and the lesser, basic specification with smaller floor plates, in the main, constructed by Mandale Properties. 6.7 The development at Teesdale is nearing completion with the final phases of both the Teesland Clearwater Park development and Terrace Hill’s St. Mark’s Basin. 6.8 Consequently any large enquiry looking specifically at the Teesside area is restricted to the existing office accommodation in Middlesbrough Town Centre.” Thus in his report Mr. Battle moved seamlessly from considering the position at the beginning of 2000 at paragraphs 6.2 and 6.3 to expressing his view as to the current position. However, he did seem to agree with the views expressed in the EDAW report that a principal feature of the office letting market in Teesside in recent times has been the availability of new accommodation at Teesdale.[16]An interesting comment in the NPAS material in fact annexed by Mr. Battle to his report, at paragraph 3.13, was that, “Teesside continues to record the highest proportion of quality rated units described as new or refurbished to modern standards (75%) …” At paragraph 3.22 it was recorded that over the year to 30 June 2000 Teesside contributed 22% of the units of office accommodation newly available for letting in the North East.[17]At paragraph 6.16 of his report Mr. Battle stated that:- “I consider that four floors of the accommodation [that is, the Demised Premises] could have been let as at 25 March 2000 if the property had been put into good repair. The remaining floors would have been let within a year later. I believe that most prospective Tenants would expect the premises to be in repair before they would consider taking a lease.” What seems to have led Mr. Battle immediately to that conclusion were the matters set out at paragraphs 6.13 and 6.14, namely:- “6.13 I have undertaken a survey of larger office lettings along the A19 corridor (Appendix 9). Lettings were being achieved in Teesside around the expiry date of the subject lease. In my opinion this demonstrates that there were parties looking for premises in the area at that time. 6.14 At paragraph 5.36 I referred to the interest of Merchants in taking a lease of five floors of the subject premises and at paragraph 5.40 to Tradezone who had expressed an interest and entered into detailed discussions for two floors of Centre North East. [Neither of these transactions proceeded]”[18]Mr. Bullen in his report took a different view. In paragraph 9.5 c) of his report he emphasised what in his view were the peculiarities of the office letting market in Middlesbrough, as opposed to other locations:- “Middlesbrough is regarded as a secondary office location with moderately weak demand and an oversupply within the central area of office accommodation. It bears little comparison to the other surrounding cities such as Newcastle upon Tyne, Leeds and Manchester where significant rental growth has been experienced through the 1990’s and early 2000’s. Unlike many other towns of its size, Middlesbrough does not really have a principal office location albeit historically this would have been regarded as Albert Road. The peculiarities of the market are not fully appreciated and not always familiar to those operating outside of it. Particular features are: 1. It is a relatively small office centre. 2. There has been no speculative office development since the mid 1970’s. 3. The majority of office lettings are for accommodation less than 2,000 sq ft. 4. Considerable restructuring within the local Government had led to a considerable reduced office requirement from the public sector. 5. There has been a shift out of the town centre to locations offering a high quality of environment and parking provisions. In effect Middlesbrough is a small office centre which is dominated by the competing centre of Newcastle which happens to be the regions primary business centre. It is Newcastle where the larger professional service groups would locate such as national solicitors, surveying groups etc with at best a satellite office in Teesside.”[19]At paragraph 9.3 a) of his report Mr. Bullen set out his assessment of the office letting market in Middlesbrough and the attractiveness of the Building as it was, or would, if repaired, have been, in early 2000:- “Corporation House immediately fronts Albert Road which has traditionally been regarded as the principal thoroughfare in Middlesbrough. However, since the mid 1990’s the Middlesbrough office market has experienced severe difficulties having seen an erosion of business confidence in the town centre. This has resulted in an increase in the supply of vacant office accommodation which has increased dramatically. Corporation House is now approximately 25 years old. Occupiers requirements for offices during this period have significantly changed with the advent of information technology and businesses requiring a floor area of 4,559 sq m (53,376 sq ft) are more discerning often requiring their own front door and as a minimum gas fired central heating, comfort cooling, Category II lighting, suspended ceilings and raised access floors and a good provision of onsite car parking. Typically tenants would also demand this space be over as few floors as possible. At Corporation House each individual floor has an irregular shaped footprint around a rectangular service core site in a central position. This layout and the fact that there is a combination of perimeter heating/ventilation apparatus and regular structural columns sited at 1.5 m from the external walling, prohibit full and ready use of such space. Accordingly, there exists internal corridors some 2 m wide around the periphery of each floor which is incapable of maximum floor utilisation … The natural light levels within the office are generally good. Utilisation of this perimeter space for dedicated private office/board rooms/meeting rooms would adversely affect the use of accommodation in the more central locations. The floors are of concrete and prevent the easy installation of ducting for computer terminals. Suspended flooring can be installed to remedy this but the existing ceiling heights are restrictive and the resultant floor to ceiling height is limited. Given the age of the building and the resulting inefficiency of the heating and ventilation equipment and electrical installations, I would anticipate disproportionate repairing obligation occurring in the future years as opposed to modern purpose built office accommodation with new services.”[20]A major factor in the office letting market in Middlesbrough since 31 March 1996, according to the evidence of Mr. Bullen, which was not challenged on this point, has been the availability on the market of office accommodation previously occupied by the now defunct Cleveland County Council (“CCC”). CCC was abolished as from 31 March 1996. It used to occupy, amongst other premises, Gurney House, an office block comprising some 72,468 square feet and with 30 on-site car parking spaces. Gurney House was let to CCC under a lease for a term of 20 years from 24 June 1988. The current rent is £362,500, equivalent to £5 per square foot of the office space with no addition for the car parking spaces. The block has been vacant since 1996 and has been available since then. Thus anyone who wanted 72, 500 square feet of office space in Middlesbrough at any time since 1996 would have been able to acquire it at a cost of £5 per square foot by the simple expedient of taking an assignment of CCC’s lease. Another building formerly occupied by CCC, but vacant since 31 March 1996, is Teesside House, amounting to some 50,000 square feet and with 25 car parking spaces. Teesside House lies within 250 yards of the Building. Since 31 March 1996 it has been immediately available for letting. Martin House was also formerly occupied by CCC. It was vacated in 1993 and renamed Jupiter House. It comprised some 50,000 square feet. It failed to let at an asking rent of £2.50 per square foot and was subsequently demolished.[21]Other substantial office accommodation which, on the unchallenged evidence of Mr. Bullen, was available in the market for letting in Middlesbrough in 2000 included Church House, comprising some 68,115 square feet and offering 30 car parking spaces. It failed to sell at auction in February 2000 and continues to be vacant. Rede House, formerly occupied by the Inland Revenue, became vacant in March 2000. That property has subsequently been redeveloped. Apparently the redevelopment was prompted by, or at any rate involved, Hyder Business Services Group Ltd. (“Hyder”). According to the information available to Mr. Bullen, when MBC decided to seek to put out to tender the provision of various services theretofore provided by it for the residents of the district for which it was responsible, Hyder was interested in tendering. Hyder sought to sharpen the competitiveness of its bid by indicating a preparedness to procure the redevelopment of Rede House, if it were successful, as it has proved to be.[22]In the light of the material to which I have referred Mr. Bullen, at paragraph 9.4 of his report, expressed the view that:- “As an overview the office market in Middlesbrough in March 2000 was not buoyant and market conditions remain difficult today following the down turn in the economy.” I accept that evidence. In my judgment that expression of view was amply justified by the material to which I have referred. Mr. Bullen was cross-examined at length by Mr. Edward Denehan, who appeared on behalf of Marchday, as to his qualifications to express the views which he did in his report. In particular, it was pointed out, and Mr. Bullen agreed, that he is currently based in Newcastle upon Tyne, not Middlesbrough, that he has had no personal experience of the office letting market in Middlesbrough since 1995, and he is not now a letting agent. All of these points fail to recognise that the expertise which is of assistance to the Court in a case such as the present is the identification and assembly of relevant material for the Court’s consideration and the provision of an informed professional opinion on such material. That is what Mr. Bullen did. For the reasons which I have endeavoured to explain in analysing the material put before the Court, the matters identified by Mr. Battle, considered with the matters upon which Mr. Bullen relied as justifying his views, did not, in my judgment, support Mr. Battle’s conclusions. Mr. Denehan urged me to accept the evidence of Mr. Battle on the basis that he is based in Middlesbrough and has many years experience of the office letting market in the area. Those qualifications are of significance, but unless Mr. Battle’s conclusions were supported by proper evidence, as in my judgment they were not, inviting me to rely upon his experience amounts to little more than a talismanic invocation of a mantra in an attempt to trump the weight of the material produced by an expert of apparently lesser experience. The Court does not evaluate expert evidence simply by reference to the superficial criterion which expert has the longer experience. It was, moreover, difficult to resist the conclusion that, no doubt subconsciously, Mr. Battle’s unrealistically optimistic views about the office market in Middlesbrough, and the attractions of the Building in particular, were influenced by the very fact that he is based in Middlesbrough and has acted as the letting agent for the Building for over 20 years.

Lettings within the Building other than of the Demised Premises since March 2000

[23]Before concluding my consideration of whether, on the evidence led before me, the Demised Premises or any part of them would, if in good repair as at 25 March 2000, have been let immediately or at some other time earlier than they actually were, it is necessary to consider the lettings of parts of the Building other than the Demised Premises since March 2000.[24]By a lease dated 9 May 2000 and made between Limegrid and Middlesbrough Town Centre Co. Ltd. (“MTCC”) Limegrid demised to MTCC some 2,443 square feet of space on the eleventh floor of the Building for a term of 5 years from 25 March 2000 at an annual rent of £12,500, equivalent to £5.12 per square foot.[25]By a lease dated 5 June 2000 and made between Limegrid and P.W. & Co, a service company associated with the well-known accountancy firm PricewaterhouseCoopers, Limegrid demised to P.W. & Co some 5,410 square feet of space also on the eleventh floor of the Building, and two car parking spaces, for a term of 5 years from 25 March 2000 at an annual rent of £31,355, equivalent to £5.80 per square foot, if one ignores the car parking spaces. Mr. Battle seemed from Appendix 4 to his report to value the car parking spaces at £800 per annum per space. On that basis the rent per square foot of the office space is equivalent to £5.50.[26]By a lease dated 12 January 2001 and made between Holdings and Trillium (Prime) Property GP Ltd. (“Trillium”) Holdings demised to Trillium some 3,250 square feet of office space on the third floor of the Building, together with two car parking spaces, for a term commencing on 10 November 2000 and expiring on 31 March 2019 at an annual rent of £19,475. Ignoring the car parking spaces, the rent is equivalent to a rent of £5.99 per square foot. However, from Appendix 4 to Mr. Battle’s report he seems to value the car parking spaces to be occupied by Trillium at £3,225 per annum, for he recorded the equivalent rent per square foot of the office space as £5.[27]By a lease dated 24 May 2001 and made between Holdings and Hyder Holdings demised to Hyder the whole of the fourth floor of the Building, amounting to some 8,891 square feet, for a term commencing on 24 May 2001 and expiring on 23 November 2002 at a rent of £80,200 per annum, equivalent to £9.02 per square foot.[28]Each of the lettings of space within the Building which did not originally form part of the Demised Premises to which I have referred had some unusual feature, as Mr. Battle made plain in his report. He said:- “5.7 The Middlesbrough Town Centre Company have taken part of accommodation that had previously been occupied by PWC on the 11th floor. PWC had previously refurbished this space to a higher specification than the original specification of the building. 5.8 The letting to PWC [that is, to P.W. & Co], also on the 11th floor, is part of an area that had been previously occupied by this company under a sublease from The Secretary of State for the Environment, Transport and the Regions. As mentioned in 5.7, this floor had been refurbished by PWC to a higher standard than the original specification of the building. 5.9 The third agreement in this building is the letting to Hyder, which was for the whole of the 4th floor. This was a short-term lease of 18 months with effect from the 24th May 2001 at a rental representing £9.00 per sq ft per annum exclusive…. 5.12 The fourth agreement in the building is in respect of the letting to Trillium. This space has been let to them as a “developers shell”. As the description implies the demised area is stripped of ceiling, wall and floor finishes ready to receive finishes and all lighting and power circuits to be installed by the incoming tenant. 5.13 It is noticeable from the four comparables at Centre North East (as described in paragraph 5.6) that: i) Each of these lettings is considerably smaller than the total areas represented on the relevant floors. ii) a greater proportion of the areas subject to these lettings is used for corridors than in the case of a letting to a single occupier of one floors [sic] or several. iii) the number of such lettings would be restricted because of the fire officer’s requirements as to the distances required to emergency exit routes/stairs. iv) the condition of the areas let to Middlesbrough Town Centre Company and PWC was better than that of the subject premises as at the 25 March 2000.”[29]It appears that the need of Hyder for nearly 9,000 square feet of accommodation for only 18 months arose out of the requirement to have office space pending the completion of the redevelopment of Rede House. That seems to have prompted Hyder to pay a rent substantially greater than those agreed to be paid by other occupants of parts of the Building not previously included within the Demised Premises. Leaving aside the special case of Hyder, the other occupants required small amounts of space for which they were prepared to pay relatively low rents. The analysis of the rent per square foot which Garland agreed to pay which I have undertaken earlier in this judgment left out of account completely the car parking spaces which Holdings agreed to make available or use its best efforts to procure. If each of those spaces were valued at £800 per annum the effect would be to reduce the rate per square foot paid by Garland for the office space to £6.47. The valuation of each of the spaces in the Zetland Car Park, at £800 is undoubtedly unrealistic. At various places in the material put before the Court figures in the range £250 to £350 per annum were suggested as the value of spaces in the Zetland car park. In the end both Mr. Battle and Mr. Bullen seemed to come to rest at a valuation of spaces in the Zetland car park at £300 per annum each. If that were the correct allowance to make for car parking spaces in the Zetland car park, the equivalent rate per square foot paid by Garland for the office space which it occupies would be £7.87.[30]At paragraph 9.3 a) of his report Mr. Bullen, as to whose source of information I do not speculate, said this about the Zetland Car Park:- “The additional problem with the Zetland car parking is its location. As I have mentioned above, it is some distance from Corporation House and would involve members of a tenant’s staff crossing or going under the busy A66. It is also an unfortunate feature of the Zetland car park that it is situated in or around the “red light” district in Middlesbrough. This would be a most unfortunate feature for proposed tenants, especially Call centres where flexible working is the norm and a significant number of staff would be young females. For about 6 months of the year members of staff would be going to and from the car park in darkness in what is a most undesirable location.” It was suggested to Mr. Bullen in cross-examination that his information as to the activities in the environs of the Zetland car park was historic rather than current. To his credit he did not feel able to dissent from that, although he was unpersuaded that what may in the past have been an important part of the local economy had relocated entirely.[31]In his cross-examination Mr. Battle did accept as a general proposition that one would ordinarily expect that a tenant would pay a lower rent per square foot per annum the larger the area which he agreed to take. In the light of the lettings of space to MTCC and P.W. & Co as from 25 March 2000 at rents of the equivalent of £5.12 per square foot and £5.50 per square foot, respectively, one might expect that the rent which could be expected for the Demised Premises as from 25 March 2000, if it had been possible to let them, would have been rather less than the lower of those figures. In one document to which my attention was drawn Mr. Battle himself suggested that a discount of the order of 10% from the rent per square foot for a smaller area might be appropriate for a letting of an area comprising the bulk of the Demised Premises. However, when he was cross-examined about this point Mr. Battle contended that each of the lettings to MTCC, P.W. & Co and Trillium had some special feature about it which meant that the general rule should not be considered as applicable. He asserted that the levels of rent agreed to be paid by MTCC and P.W. & Co, admittedly for accommodation of a higher specification than that which the Demised Premises would have met if delivered up in repair by BT, were concessionary, intended to attract particularly desirable tenants. The letting to Trillium was at a rent which reflected that Trillium would have to fit out the area let.

Interest in the Demised Premises after 24 March 2000

[32]As I have already indicated, one of the matters upon which Mr. Battle sought to rely in support of his opinion that four floors of the Demised Premises could have been re-let as from 25 March 2000 if only the Demised Premises had been in good condition at that time was the interest expressed in the Building by prospective tenants who did not in the event become tenants. Mr. Battle seemed to feel that the only likely tenant for substantial areas of the Building would have been a call centre operator, and was encouraged by interest shown by a company called Merchants Group Ltd. (“Merchants”) and by a company called Tradezone International Ltd. (“Tradezone”). What Mr. Battle said in his report about these companies was this:- “5.36 During the latter part of 2000 my firm was in detailed negotiations with a party (known as Merchants) requiring some 5 floors in Centre North East. Terms were discussed in detail with them as set out in the attached notes and letter from their retained surveyors (Appendix 7). 5.37 Whilst terms were not finalised (due to a downturn in the call centre market at this time), the correspondence is indicative of the attractiveness of the subject premises to this type of user. It has to be acknowledged that the specification required by Merchants included features over and above the “standard” specification of the premises assuming that the premises had been kept in good repair. These additional features include: i) raised floors; ii) improved power circuits; iii) Category 2 lighting; iv) extra car parking spaces. 5.38 The rental sought, as shown in the notes of a meeting in Appendix 7 averages to a rental over the first five years to approximately £8.45 per sq ft per annum. 5.39 An allowance has to be made for the “improved” specification as itemised in paragraph 5.37. The specification of the subject premises in good repair would, in my opinion, be higher than some of the “lower” standard new buildings at Teesdale as shown in Appendix 3. As mentioned in paragraph 5.4 these range from £7.50 to £8.50 per sq ft per annum. However these lettings are for smaller suites and this has to be balanced with the lesser specification. 5.40 In addition to the transactions at Teesdale to the Inland Revenue and Cummins, the design and build for DSS at Corporation Road, the transactions in Centre North East (outlined in paragraph 5.6), and the discussions with Merchants (outlined at paragraph 5.36), there had been other enquiries for space around the relevant date ie 25 March 2000. A list of these enquiries is provided at Appendix 5. One of the parties on that list was Tradezone with whom we had agreed heads of terms for some 17,800 sq ft at Centre North East. They were subsequently taken over by Just2Clicks and their expansion programme changed.”[33]What a consideration of the circumstances in which a letting to Merchants did not proceed as set out in the report of Mr. Battle shows quite clearly is that Merchants was not prepared to proceed without the accommodation which it was to occupy being refurbished in just the way that the Building now has been. In other words, it would not have been prepared to go into occupation of the Demised Premises or some part thereof if only the Demised Premises were in proper repair as at 25 March 2000. Moreover, it is plain from the account given by Mr. Leigh at paragraph 33 of his witness statement that Merchants, unlike Marchday or Limegrid or Holdings, was not prepared to commit itself to anything in terms of taking occupation of some part of the Building until it had obtained a contract from its prospective customer for call centre services, One2One. What Mr. Leigh said was:- “Our original intention had been to complete all repairs to floors 4 to 9 [not part of the Demised Premises] in one single contract and to follow that with a very similar contract in respect of floors 12 to 16 inclusive. However in December 2000 terms were agreed with an outsourcing group known as Merchants Group who had an urgent need to provide a call centre for their client, One2One. They agreed to take five floors of the building, were insistent that it should be floors 12 to 16 and an occupation date of April 2001 was critical for their contract. This gave us a rather awkward decision, particularly as contracts had not been exchanged for letting, but we decided to suspend work temporarily on floors 4 to 9 and to ask the contractor to switch to floors 12 to 16 inclusive, which job they had already priced. In the event this letting never occurred. The sudden and very savage downturn in the telecoms sector of the Stock Market in January 2001 made all major telecoms companies very nervous. One2One delayed signing their contract with Merchants Group and eventually some months later aborted the entire call centre project.” Demand for the Demised Premises in fully repaired condition as at 25 March 2000 - conclusions[34]Absolutely no evidence of an existing, unsatisfied demand for any, still less substantial, office accommodation in Middlesbrough in March 2000 or at any time thereafter before 2003 was put before me. On the contrary, all the evidence led before me, the material parts of which I have summarised earlier in this judgment, showed conclusively, as it seems to me, that in March 2000 and at all times thereafter Middlesbrough was vastly oversupplied with relatively poor quality office accommodation for which there was no demand. In part the amount of accommodation available was a consequence of the abolition of CCC and the resultant cessation of need for the office accommodation which it had previously occupied. A major factor in the lack of demand for the accommodation which was available was that new accommodation to modern standards was being built at Teesdale, only some 3 miles from Middlesbrough. As long as new accommodation was available at Teesdale or elsewhere in the vicinity of Middlesbrough it was unlikely that there would be any demand for the existing accommodation available in Middlesbrough itself. Car parking seems to be a matter of great concern in the local office letting market, and the need for car parking was being met on the new developments. Prospective tenants would only return their gaze towards the centre of Middlesbrough if the amount of accommodation which they required was not available in the new developments.[35]Once a prospective tenant had turned its gaze upon the centre of Middlesbrough, what was there to attract it to the Building particularly? Until the Building was refurbished as it has now been, and the issue of providing car parking was addressed, as it has now been (even if one retains concerns for the female staff of the tenants), the answer was nothing. The Building was just a 1970s office block without distinguishing features, save that it may have been convenient for the shops in The Cleveland Centre, in a city with plenty of other 1970s office blocks which offered substantial amounts of accommodation and were vacant.[36]The only realistic conclusion, in my judgment, is that the Demised Premises were unlettable until they, and the rest of the Building, were refurbished and the flow onto the market of new accommodation at Teesdale had abated. Once the Demised Premises were refurbished and there ceased to be significant competition in Teesdale for tenants requiring large amounts of office accommodation the Demised Premises were able to attract a major tenant, Garland. There is no reason whatever to suppose that the Demised Premises were capable in the real world of being re-let any earlier than they have been, even if delivered up by BT fully repaired. The claims of Marchday which are still in dispute therefore fail.

Rental value of the Demised Premises

[37]Mr. Battle in his report expressed the view that the rental value of the Demised Premises if they had been delivered up in repair would have been £7.50 per square foot. It was also his view that in the condition in which they were actually delivered up they were worth £4.50 per square foot. The process of reasoning which led to the conclusion that the rental value of the Demised Premises if in good repair as at 25 March 2000 was £7.50 per square foot was not clearly explained in Mr. Battle’s report or in his cross-examination. He began the relevant section of his report, Section 5, by identifying four categories of letting, namely lettings of high specification accommodation at Teesdale, lettings of poorer specification accommodation at Teesdale, lettings in Middlesbrough town centre and the lettings in the Building itself. His initial comments on each of these categories, in a part of Section 5 entitled “Rental Values Generally”, were:- “5.3 In the Teesside area the highest rentals achieved as at the expiry date of the please [sic] were at Teesdale with rentals at or around £12.00 per sq ft per annum exclusive, on the basis of lease lengths generally no greater than 10 years (see Appendix 1). These deals were in respect of premises where the specification included: i) Suspended ceilings; ii) Category II lighting; iii) Raised floors; iv) Comfort cooling/air conditioning; v) Floor plates of 5/15,000 sq ft; vi) Car parking spaces to a standard of 1:250 sq ft. 5.4 In addition a lower specification of offices was also offered at Teesdale. This second category of office accommodation principally excluded raised floors and comfort cooling/air conditioning outlined above. These developments had been for small floor plates of less than 5,000 sq ft (see Appendix 2). Rentals achieved ranged, in the main, from £7.50 to £8.50 per sq ft per annum exclusive. 5.5 In Middlesbrough Town Centre the lettings that have been achieved are limited to properties with a specification of: i) Suspended ceiling system; ii) Perimeter trunking; iii) Carpet tiles to screed finish; iv) Gas central heating systems; v) No car parking; vi) Floor plates of less than 5,000 sq ft. The rentals that have been achieved for such accommodation has [sic] ranged from £4.00 to £5.00 per sq ft per annum exclusive. (See Appendix 3). 5.6 Elsewhere within Centre North East, lettings have been agreed with; i) Middlesbrough Town Centre Company ii) Price Waterhouse Coopers (“PWC”) iii) Hyder iv) Trillium Details of these transactions are given at Appendix 4.” Details of these transactions are given at Appendix 4.”[38]In a part of Section 5 of his report entitled “Rental Values Assuming the Actual Condition of the Premises as at 25 March 2000” Mr. Battle made some further comments upon the lettings in the town centre of Middlesbrough:- “5.14 At Appendix 3 I have included details of lettings achieved elsewhere in Middlesbrough Town Centre. The property at 16/26 Albert Road was built to a specification slightly higher than the norm outlined in paragraph 5.5. The property has faster lifts and Category 2 lighting. However, the location of 16/26 Albert Road, in my opinion, is not as good as the subject premises being that much further away from the centre of town. There were two lettings at 16/26 Albert Road as at the 26 May 1999. These rentals were based upon a rental of £5.00 per sq ft per annum. 5.15 In the case of the lettings at 139 Albert Road the rentals show a significant differential between the rentals agreed at £4.46 per sq ft per annum in respect of the 3rd floor and £5.00 per sq ft per annum in respect of the 4th floor. This may be a reflection of the fact that the former party was represented in the negotiations and the latter was not. The standard of specification was not as good as 16/26 Albert Road. 5.16 These four lettings (two at 16/26 Albert Road and the two at 139 Albert Road) are of a similar size to the letting to PWC. 5.17 I consider that the rental of the 3rd floor St James House, 139 Albert Road is a useful starting point in assessing the rentals achievable for the 12th to 17th floors in the condition in which they were left as at the 25 March 2000. The rental is at £4.46 per sq ft per annum for a lesser specification of accommodation than the subject premises. The lease commencement date was the 1 June 2000 and therefore just over 2 months from the subject date. At the other extreme the letting to PWC, in Centre North East, which was on the 25 March 2000 for a better specification and condition at £5.50 per sq ft per annum, is higher than could be achieved for the subject premises in the condition outlined in the Schedules of Dilapidations.”[39]Mr. Battle only considered lettings of properties in the centre of Middlesbrough and in the Building itself, in passages quoted earlier in this judgment, in the context of his assessment of the letting value of the Demised Premises in their actual condition as at 25 March 2000. In particular, he only took into account other lettings in the Building for the purpose of eliminating them. He did not seem to consider those lettings to be relevant at all to his consideration of the letting value of the Demised Premises as at 25 March 2000 if in repair. He did not explain in his report why he did not consider those lettings relevant for that purpose, although in cross-examination he did identify more precisely the factors which caused him to treat all of the lettings as special for one reason or another. As I have already remarked, at paragraph 5.19 of his report he expressed the view that the Demised Premises would, as at 25 March 2000, have been attractive to operators of call centres. He did not identify any unmet demand as at that date from operators of call centres for premises in the centre of Middlesbrough. While Mr. Battle did refer, in the context of the rental value of the Demised Premises if delivered up in repair, to rentals agreed in respect of design and build projects, in excess of £10 per square foot, and to the rental of £12 per square foot agreed for Rede House, his justification in his report for his figure of £7.50 per square foot seemed to lie in these paragraphs of his report:- “5.25 In my opinion the rental value assuming that the repairing covenants and yield up provisions contained in the lease for the subject premises had been complied with would have been better than the lower rentals achieved by Mandale Properties at Teesdale. This is because of the larger floor plate and the facility of air conditioning/heating units within the subject premises. 5.26 There would, however, have been a need to upgrade the lighting to Category II provision, panelling to the external walls and providing raised floors for incoming Tenants. 5.27 In addition, there may have been a need to upgrade certain common areas including minor works to the lifts, decorating of the lift lobbies and entrance foyer. …. 5.35 Elsewhere in the town, but in a more peripheral location, a letting was achieved to The Learning and Skills Council for England for the 2nd to 5th floors inclusive at Enterprise House, 2 Queen’s Square. The details of this transaction are attached at Appendix 6. The rent devalued to £6.91 per sq ft per annum exclusive. This lease was subject to 3 year rent reviews and had a tenant’s option to break at the end of the fifth year. In my opinion the poorer location of the above premises compared with the subject premises, and the lease terms agreed for this comparable property, are such to indicate that a rental value of £7.50 per sq ft per annum exclusive for the subject premises is appropriate.”[40]In his cross-examination Mr. Battle also relied heavily upon the rentals discussed between him and Mr. Tim Young of Messrs. Fletcher King, the estate agent acting on behalf of Merchants, in December 2000 for the twelfth to sixteenth floors inclusive of the Building as justifying the view that the Demised Premises if in repair as at 25 March 2000 would have been able to command a rent of £7.50 per square foot. The material put before me in relation to those discussions did not justify the conclusion which Mr. Battle sought to draw. Draft Heads of Terms sent to Mr. Battle by Mr. Young under cover of a letter dated 7 December 2000 made an offer to pay a total of £323,857 per annum for a total of 44,455 square feet, 25 car parking spaces at the Building and 75 car parking spaces in the Zetland car park. In a note to Mr. Leigh also dated 7 December 2000 Mr. Battle analysed that offer as amounting to 25 car parking spaces at the Building at £800 per annum each, 75 car parking spaces at the Zetland car park at £300 per annum each, and 44,455 square feet at £6.33 per annum. In a discussion with Mr. Young on 13 December 2000, of which he made notes which were put in evidence what was said about rent, according to the notes, was:- “There was some discussion as regards this and again IB [Mr. Battle] stressed this had to be seen in the totality of the Heads of Terms. It was not possible to select particular items then seek a reduction in the rental value. However given the spirit of the discussion there was some debate as to a rental figure of £366,750 per annum exclusive (£8.25 per sq ft per annum) for the first three years of the term rising to £389,000 per annum exclusive (equating to £8.75 per sq ft).” Although what was written would not encourage a reader of the notes to suspect this, Mr. Battle’s evidence was that the figures set out in the passage quoted were figures which both he and Mr. Young agreed to recommend to their respective clients. Mr. Battle in his evidence treated a rate of £8.25 per square foot for three years, rising to £8.75 per square foot, as equivalent to a rent of £8.45 per square foot. In the event Merchants pulled out of the negotiations on 5 January 2001. There was thus no transaction which one could treat as indicative of a market view of the value of the Demised Premises. Leaving that point on one side, as I have already pointed out Merchants was looking for premises matching the specification which the Demised Premises have now, not that which they would have had if BT had performed its obligations under the covenants in the Lease. For that superior accommodation, totalling 44,455 square feet, rent at £8.25 per square foot of the office space would total £366,753.75, at £8.45 would total £375,644.75 and at £8.75 would total £388,981.25. If one subtracted from each of these figures 25 car parking spaces at £800 and 75 car parking spaces at £300, a total of £42,500, the resultant figures are £324,253.75, £333,144.75 and £346,481.25. The rent per square foot then being paid for the office space alone is arrived at by dividing each of these figures by 44,455. The answers are £7.29, £7.49 and £7.79. In other words, once one eliminates the allowance for the car parking spaces which Mr. Battle considered appropriate at the time there remains little or no scope for making an allowance in respect of the superior nature of the accommodation as compared with that which BT would have left if fully repaired to result in a rate per square foot of £7.50 for the value of the Demised Premises as at 25 March 2000 if in good repair. The fact that Mr. Battle did not seek in his report to rely upon the discussions with Mr. Young as justifying a figure of £7.50 per square foot and the ease with which it was possible to demonstrate using information readily available to Mr. Battle that the reliance which he sought to place on the negotiations with Merchants was flawed indicated, in my judgment, that on this point Mr. Battle was making up his evidence as he went along and it was not the product of mature, or indeed any, consideration.[41]In Appendix 1 to Mr. Battle’s report were details of just three lettings of high specification offices at Teesdale. Two of these lettings were in Dunedin House and one was in Churchill House. The Dunedin House lettings were of 8,700 sq ft for 10 years from 29 September 1999 at an initial rent equivalent to £11.50 per square foot per annum and of 17,103 for 10 years from 1 July 2000 at an initial rent equivalent to £10.25 per square foot per annum. The reduction in the rate per square foot between the two lettings suggests either the application of the general principle that a lower rate per square foot is accepted for a letting of a larger area, or a declining market, or both. The Churchill House letting was of 32,740 square feet for 10 years from 1 February 1999 at an initial rent, after a rent-free year, of the equivalent of £11.75 per square foot per annum.[42]The details given in Appendix 2 to Mr. Battle’s report again related to lettings in just two buildings, this time Robert House and Victoria House. The four lettings in Robert House were of small areas – between 1,636 and 3,312 square feet – from dates in 1997 at rents equivalent to £7.60 to £8 per square foot per annum, with the letting of the smallest area being at the highest rate per square foot. The eight lettings in Victoria House were again of small areas - between 1,844 and 3,500 square feet - from dates in 1998 at rents equivalent to £4.77 to £11 per square foot per annum. The rents at either end of that bracket were in each case by some margin outside the range of the other rents, which, with the exception of one at £9.10, fell in the bracket £7.20 to £8.25 per square foot.[43]The four lettings details of which were contained in Appendix 3 to Mr. Battle’s report were those which he specifically mentioned in the body of his report in the passage which I have quoted. The lettings of parts of 16/26 Albert Road were of 3,024 square feet and 4,962 square feet, respectively, for 6 years from 26 May 1999 at rents equivalent to £5 per square foot per annum. The lettings of parts of 139 Albert Road were of 4,856 square feet for 10 years from 13 April 2000 at a rent equivalent to £5 per square foot per annum, and of 5,040 square feet for 25 years from 1 June 2000 at a rent equivalent to £4.46 per square foot per annum.[44]On the assumption, contrary to his view, that the Demised Premises were capable of being let as from 25 March 2000 if delivered up in repair, Mr. Bullen’s conclusion as to rent which could have been secured was stated at the end of section 9.7 e) of his report in this way:- “In conclusion I do not envisage the landlord securing any better offer than a headline rate £5.00 per sq ft for the subject premises, floors 12 – 17 inclusive of Corporation House if available as at March 2000. This assumes the premises were left vacant in the condition required by the lease. Indeed taking account of rent free periods that would have been secured by any party seeking representation in Middlesbrough, the net rent would have been significantly lower such as: 6 months rent free - £4.75 per sq ft 9 months rent free - £4.50 per sq ft 12 months rent free - £4.25 per sq ft The above assumed three months of the incentive is ignored for fitting out purposes as common practice in the market.” 6 months rent free - £4.75 per sq ft 9 months rent free - £4.50 per sq ft 12 months rent free - £4.25 per sq ft[45]The principal reason which Mr. Bullen gave for his conclusion was that on rent reviews of the parts of the Building occupied by DETR in 1995, of 100 Russell Street, Middlesbrough in 1996 and 2001, and Fountain Court, Middlesbrough in 2000 the rent in each case was not increased above that fixed in 1990 or 1991. He said that he drew little assistance from lettings negotiated in the Building itself. His conclusion concerning those lettings was:- “….no useful indication is obtained as to the market value of 52,259 sq ft from the market letting negotiated in Corporation House during the period March 2000 until May 2001. Each letting has factors influencing the terms negotiated. It is noted tenants have often secured very flexible term.” While I accept that a letting of a large area like 52,259 square feet is something very different from a letting of the sorts of areas let to MTCC, P.W. & Co or Trillium, the largest of which was of 5,410 square feet, I should have thought that the lettings of space to MTCC and P.W. & Co as from 25 March 2000 at rates per square foot per annum exclusive of parking spaces equivalent to £5.12 and £5.50 did rather confirm the accuracy of Mr. Bullen’s view. As Mr. Battle accepted, the space let to MTCC and P.W. & Co was of a higher specification than that in which the Demised Premises were required to be left. It would be very surprising if an enormous quantity of lower specification space had anything like the same value per square foot as the space let to MTCC and P.W. & Co, and an application of the general principle to which I have already referred would lead to the conclusion that it did not. I incline to the view that Mr. Bullen’s rate of £5 per square foot for the Demised Premises, if in repair and if lettable, probably errs on the generous side. Nonetheless I would accept it, if it were necessary to make a finding as to the rental value of the Demised Premises if in repair as at 25 March 2000.

Insurance rent

[46]Insurance rent in respect of the Demised Premises from 25 March 2000 for 19 months would only be payable on the assumption that the Demised Premises could have been let during that period. As I have found that they could not have been I need not give much attention to the evidence as to what insurance rent might have been charged. Mr. Stephen Gilroy of Storeys:ssp, which firm is the managing agent of the Building as well as the letting agent, was called to give evidence as to the insurance premiums paid for the period 1 March 2000 to 28 February 2001 and produced copies of the relevant renewal notices. The renewal notices showed that the premiums paid were £12,157.99 for building insurance, £871.15 for terrorism insurance and £1,344.90 for engineering inspection insurance. I accept the evidence of Mr. Gilroy that in the past, at least, insurance premiums had been recovered from tenants of the Building in the proportion that the area a tenant occupied represented of the total area which had the benefit of the relevant insurance. I also accept his evidence that the Demised Premises amounted to 35.87% of the total floor area of offices in the Building, but 31.74% of the total floor area of the let parts of the Building when the retail areas were taken into account. I further accept the evidence of Mr. Gilroy that the building insurance and terrorism insurance relate to the whole of the Building, while the engineering inspection insurance only relates to the offices. The consequence is that the amount of the insurance premiums which I have found was paid in respect of the period 1 March 2000 to 28 February 2001 which related to the Demised Premises was £4,616, being 31.74% of the building and terrorism insurance premiums (£13,028) and 35.87% of the engineering inspection insurance premium (£1,344.90). No evidence was led as to the amounts of insurance premiums paid for any period other than 1 March 2000 to 28 February 2001.

Service charges

[47]Again, the question of the loss of the ability to recover service charges as a result of breaches of covenant on the part of BT would only arise if I had found that the Demised Premises, or some part thereof, would otherwise have been let earlier than it in fact was.[48]It was not in dispute that the actual expenditure upon services for the Building in the period 1 April 2000 to 31 December 2000 was £151,668. 31.74% of that figure, arithmetically, is £48,142.63. Further, it was not in dispute that the management charge made by Storeys:ssp in respect of the same period was £14,250. 31.74% of that figure is £4,522.95. The service charges incurred in the period now under consideration also included an element in respect of fire alarm equipment maintenance. Mr. Gilroy told me that that element of expenditure was shared between only those parts of the Building which had the benefit of the fire alarm, which was the offices and part of the ground floor. Of the area served by the fire alarm the Demised Premises constituted, according to Mr. Gilroy, some 34.98%. I accept that evidence. The expenditure upon fire alarm equipment maintenance in the period 1 April 2000 to 31 December 2000 I find was £3,204.65, as Mr. Gilroy said in his evidence. 34.98% of that figure is £1,120.99.[49]The alleged expenditure upon provision of services in the calendar year 2001 was said to be £343,762.14 upon matters other than the fire alarm equipment maintenance and management charges. Expenditure upon fire alarm equipment maintenance was said to be £3,221.82 and expenditure upon management charges was said to be £19,000. I accept the alleged expenditure upon fire alarm maintenance and management charges. The annual rate of the management charges was the same as in the previous year, and the fire alarm maintenance cost was essentially similar to that in the previous year. No attempt was made to support in detail any of the other alleged items of expenditure. By comparison with the figures which were not challenged in the statement of expenditure for the nine month period 1 April 2000 to 31 December 2000, I accept as accurate the following elements of alleged expenditure in 2001:-(i) professional fees £400(ii) boiler and plant maintenance £22,283.00(iii) cradle maintenance £407.99(iv) water rates £1,945.15 All of the other items which appeared as an item in both years were very substantially increased in 2001 and without explanation I should not have been inclined, had the figures been challenged, to accept that they were accurately recorded or properly to be brought into account in assessing the amounts of service charges recoverable from tenants of the Building. However, in fact only four figures in the statement of items brought into account in calculating the service charges for 2001 were challenged, and only one of those was challenged as to amount rather than as to the principle of whether it should be included in a calculation of service charges. The figure challenged as to amount was that for electricity, which had increased from an annual rate equivalent to £23,415.45 in 2000 to £40,030.39. Mr. Gilroy told me in cross-examination, and I accept, that the increase in electricity costs reflected the running costs of air conditioning plant. It was thus, I find, a proper cost to include at the figure at which it was put into the statement of service charges. The three items challenged in principle were in respect of the capital cost of replacing the main electrical switchgear in the Building, the capital cost of replacing the window cleaning cradle and the capital cost of replacing the fire alarm in the landlord’s areas. Under the terms of the Lease BT was obliged to contribute to these capital costs. The issue raised on behalf of BT was whether a new prospective tenant would have been likely to have accepted a similar liability. When the point was put to Mr. Gilroy he responded that some incoming tenants of the Building had agreed to pay a service charge initially fixed at £3 per square foot, but subject to adjustment in accordance with the Index of Retail Prices. That rate of contribution, he said, was approximately that being sought from BT in respect of 2001. No further evidence was led in relation to this question. Without knowing more than the limited material to which I have referred I do not accept that a new tenant of a substantial amount of space at the Building, being aware that the Building was being upgraded to make it more attractive to potential tenants, would have been prepared to agree to contribute to the cost of making the Building more attractive to himself. I am not, therefore, satisfied that an incoming tenant would have been prepared to agree to contribute to capital expenditure on improving the amenities of the Building.[50]In the result, had it been necessary to find what amount of service charges incurred in 2001 should have formed the basis of a calculation of damages payable by BT for breaches of covenant I should have found that, apart from charges for fire alarm maintenance and management charges, the figure was £253,651.84.

Time necessarily taken to carry remedial work

[51]The work which was in fact undertaken in the Building following the termination of the lease on 25 March 2000 fell into five broad categories, namely remedying of wants of repair in the Demised Premises, upgrading the Demised Premises to modern office standards, remedying wants of repair in the parts of the Building previously let to DETR, upgrading the parts of the Building previously let to DETR to modern office standards, and renovating the landlord’s parts of the Building to increase its overall attractiveness. Only work in the first of these categories was rendered necessary as a result of the breaches of covenant on the part of BT which have given rise to this action. The totality of the work in all five categories, save for some work to lavatories with which I need not be concerned, was not completed until 27 April 2001, some 13 months after the expiry of the Lease. Marchday’s case was that it was entitled, on the assumption, which I have rejected, that it would have been able to re-let at least substantial parts of the Demised Premises immediately from 25 March 2000 if they had been delivered up in repair, to compensation for loss of rent, insurance rent and service charges for the entire period until the completion of the totality of the works to the Building, plus a period of six months to allow for marketing after that date. BT’s case was that it could only be liable at worst for loss of rent for the period reasonably necessary to enable works to remedy the wants of repair in the Demised Premises to be undertaken.[52]The evidence of Mr. Leigh, to some of which I have referred, was principally concerned with demonstrating how reasonable the approach adopted to the undertaking of works at the Building had been. That was no doubt so from the point of view of Marchday. However, the question which could arise if I had found that any part of the Demised Premises could have been re-let any earlier than it in fact was, would be whether BT was liable to compensate Marchday not only in respect of the consequences of its own breaches of covenant, but also in respect of the consequences of the breaches of covenant of DETR and in respect of the consequences of the decisions of Marchday to upgrade the Building. The answer is obviously negative. No evidence was called on behalf of Marchday in relation to the issues how long the work of remedying the breaches of covenant on the part of BT in fact took or how long it ought reasonably to have taken, although Mr. Reginald Busby, whose knowledge of the relevant matters was limited, was cross-examined about them. However, Mr. Kevin Mullis, a building surveyor, was called as an expert on behalf of BT. By analysis of various records of the progress of the works Mr. Mullis concluded that the works in the Demised Premises, not only those necessary to remedy breaches of covenant, but also the upgrading works, in fact took 31.4 weeks. He reached that conclusion by considering programmes of work prepared by W. S. Atkins Consultants Ltd., which company was engaged as project manager in respect of the relevant works. He eliminated from the activities shown in those programmes periods indicated as occupied in works in the part of the Building occupied by DETR and a period during which the works required were re-tendered following a decision on the part of Marchday to have work to the third floor of the Building added to that originally intended. He assessed the additional time taken to undertake the upgrading works in the Demised Premises at the same time as the remedial works at 3 weeks. However, his view was that the upgrading works in the Demised Premises, if undertaken separately, would have taken 23.4 weeks. Thus his conclusion was that the undertaking of the remedial works actually only delayed the time when the Demised Premises would have been available for letting by 5 weeks. I accept Mr. Mullis’s evidence. Had it been necessary to assess the period by which the need to undertake works to remedy breaches of covenant on the part of BT delayed the ability of Marchday to accommodate a new occupier of the Demised Premises, I should have found that period to be 5 weeks. Both Mr. Leigh and Mr. Battle accepted that upgrading works to the Demised Premises were necessary before they could be re-let.[53]Mr. Mullis also noted that there had been a delay between 25 March 2000 and 1 May 2000 in the commencement of the activity of preparing a specification and tender documents. He did not consider that delay to have been justified, and I agree with him. It was suggested that the cause of the delay was the need to prepare a schedule of dilapidations before a specification could be prepared. Mr. Mullis did not accept that the preparation of a schedule of dilapidations was a necessary preliminary to the preparation of a schedule of work and I do not either. The explanation offered is probably untrue in any event, because the first schedule of dilapidations produced in respect of the Demised Premises after 25 March 2000 seems to have been dated September 2000.[54]As I have indicated, Marchday’s case was that it was entitled to compensation for being deprived of the opportunity to let the Demised Premises during the period in which works to the whole of the Building were in fact being undertaken, those works being completed on 27 April 2001, plus a period of six months in which to market the Demised Premises. The logic underlying this formulation of claim eludes me. I could understand a claim put on the basis that as a result of breaches of repairing covenants a property was unable to be let from the date of the expiry of the relevant term until a letting was in fact achieved, but I cannot see any justification in law or logic for a claim based on a period for alleged repairs plus a “marketing period”, unless it was accepted by the claimant that it ought to have achieved a letting by the end of the period in respect of which a claim was made but had failed, by reason of its own deficiencies, to do so. There was no element of mea culpa in how Marchday put its claim.

Interest

[55]It was common ground that I should award interest pursuant to the provisions of Supreme Court Act 1981 s. 35A to Marchday on whatever sum I found to be due as compensation in respect of the admitted breaches of covenant on the part of BT. The position adopted on behalf of Marchday was that I should award interest at the rate applicable to judgments, 8% per annum, as from the date of the expiry of the term created by the Lease, in the case of the agreed cost of repairs. It was contended on behalf of BT by Mr. James Barker that as the cost of repairs was in fact incurred over a period ending on the date of practical completion of the whole works, 27 April 2001, it would be wrong to award interest from 25 March 2000. In the absence of evidence as to when particular items of expenditure were incurred, submitted Mr. Barker, I should award interest only from the date of practical completion. Mr. Barker further submitted that in these days of low interest rates a rate of 8% per annum was excessive and that a more appropriate rate would be 4%.[56]The only sum which I have found to be due to Marchday is the agreed cost of repairs, £348,830.25. It is accepted that BT is entitled to a credit against the sum due of an amount of £22,604.66 as a rebate on service charges. That means that the sum to which Marchday is entitled is £326,225.59. Although in theory BT became liable to pay damages for breaches of covenant on 25 March 2000 when it delivered up the Demised Premises out of repair, in fact the quantification of the sums properly payable depended upon identifying what work was required to be done to remedy the breaches of covenant and what that work would cost. It seems to me realistic not to calculate interest from 25 March 2000, but from a date which reflects the fact that the actual expenditure of the sum which I have found to be due was incurred over a period ending on 27 April 2001. In my judgment it is unreal and disproportionate to expect a claimant in a case such as the present to adduce evidence as to exactly when particular items of expenditure were incurred to enable sophisticated interest calculations to be undertaken in respect of possibly small individual amounts for periods of a few days at a time. The Court traditionally exercises its discretion in relation to interest in a broader manner than that. It seems to me that justice would be served in the circumstances of the present case by taking as the date from which interest should run 1 October 2000.[57]The question then is what is the appropriate rate of interest to take. While in the real world interest is charged and paid on a compound basis, the Court only has power to award simple interest. In practical terms the inability of the Court to award compound interest can be mitigated by awarding simple interest at a higher rate than the compound rate which would be charged on loans by a bank. The policy of Parliament, as exemplified in Supreme Court Act 1981 s. 35A, is that the Court should only have power to award simple interest, but the rate is in the discretion of the Court. At the same time, the rate of interest payable on judgment debts fixed by Judgment Debts (Rate of Interest) Order 1993, SI 1993 No. 564, has remained unchanged notwithstanding the historically low rates of compound interest prevailing in the financial markets now for a number of years. In my judgment the failure of the responsible authorities to alter the rate of interest payable on judgment debts indicates a recognition that in reality a rate of simple interest lower than 8% is unlikely to provide adequate compensation for being kept out of money which ought to have been paid. In the real world a typical commercial rate of compound interest for a business borrower is 2% over base rate, which would be equivalent at present to a rate of 5.75%. I therefore intend in this case to award interest on the sum of £326,225.59 from 1 October 2000 at a rate of 8% per annum simple. To the date upon which this judgment is handed down interest is payable for three years and 42 days and thus comes to £81,297.21

Conclusion

[58]There will be judgment for the Claimant in the total sum of £407,522.80.

Cited in 1 later judgment