K/S Lincoln & Ors v CB Richard Ellis Hotels Ltd [2010] EWHC 1156 (TCC)

Case No HT-09-147[2010] EWHC 1156 (TCC)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LL
Date of Draft Judgment: 13.5.10
Date of Approved Judgment: 24.5.10
Before
THE HONOURABLE MR JUSTICE COULSON
Between
(1) K/S LINCOLNClaimants(3)K/S CHESTERFIELDClaimant(5) K/S QUAYSIDEClaimant(8) K/S WELLINGBOROUGHClaimantCB RICHARD ELLIS HOTELS LIMITEDDefendants
Mr Anthony Speaight QC (instructed by Stockler Brunton) for ClaimantsMr Patrick Lawrence QC and Miss Sian Mirchandani (instructed by Reynolds Porter Chamberlain) for DefendantsHearing Hearing dates: 14 th, 15 th, 19 th, 20 th, 21 st and 22 nd April 2010
JUDGMENTDate 2010-05-24

INTRODUCTION

[1]In these proceedings, the Claimants seek in excess of £4 million in damages against the Defendants for professional negligence arising out of the Defendants’ valuation reports of April 2005 relating to the four budget hotels now owned by the four individual Claimants. Although this case has a number of unusual features, it is, at its heart, a straightforward dispute about whether or not the valuations produced by the Defendants in their reports were within or outside a reasonable bracket/margin of error. Similar claims in respect of four other hotels were compromised shortly before the trial.[2]One of those unusual features concerns the identity of the four Claimants. A ‘K/S’ is a commercial entity with a legal personality under Danish law. It is, to all intents and purposes, a limited partnership. The four K/S Claimants in this case respectively own budget hotels in Lincoln, Chesterfield, Bradford (which is owned by K/S Quayside) and Wellingborough. Each K/S Claimant is owned by a maximum of ten individual partners, whom I shall call “the investors”. Typically, these investors are Danish individuals, using the K/S mechanism as an entirely legitimate tax-efficient investment. Mr Poul Moller was a typical investor who gave evidence during the trial; he is a practicing dentist in Holbaek in Denmark, but he is also the chairman of the fourth Claimant, K/S Wellingborough. How is it that a Danish dentist comes to own a share of (and be responsible for) a budget hotel just outside Wellingborough in Northamptonshire?[3]The answer to that question lies in the inter-relationship between a number of parties, with rather different interests, who all feature in this story. In Denmark, there are tax advantages in owning property investments abroad. In 2004, a Danish company who specialised in identifying potential property investment in the UK was Scanplan Ejendomme A/S. Although they subsequently changed their name to Estatum A/S, and are now in a form of receivership/liquidation, I shall refer to them as “Scanplan”. The owner of Scanplan was Mr Christian Betting (and/or his family), whose stewardship of Scanplan has given rise to claims, complaints and investigations by the authorities in Denmark. The individual at Scanplan who was at least nominally responsible for the purchase of these four hotels was Mr Anthony Ashton who, despite his anglicised name, is a Dane. The person reporting to Mr Ashton, who was responsible for much of the figure work, was Mr Lars Bentzen.[4]Obviously, in order to find property in the UK, Scanplan needed an English arm for their business. That was provided by a company called ESL, run by two experienced property surveyors, Mr David Owen and Mr Robert Harris. The precise relationship between Scanplan and ESL is unclear because, amongst other things, no copy of any contract between them has been made available, but it is clear that ESL were at the very least agents for Scanplan, and to be regarded as the English end of their property operation. ESL had powers of attorney and were authorised by Scanplan to negotiate and sign documents on their behalf.[5]In about November 2004, ESL learnt that LR Economy Hotels Limited (“LR”) were planning to sell off eight of their hotels. Each of those hotels was leased out to the Accor hotel group, and operated under the ‘Ibis’ brand. They included the four hotels that are now the subject of this action. Within a few weeks, Scanplan had agreed to buy the eight hotels for £38 million. Thereafter there were some delays, which appear to have been connected to Scanplan’s need to raise financing for the purchase. Ultimately, the West Bromwich Building Society provided loans in respect of the purchase of the hotels in Lincoln and Chesterfield and the Alliance and Leicester provided loans in respect of the purchase of the hotels in Bradford and Wellingborough. Some secondary financing was provided by the Icelandic bank, Landsbanki, although it is unclear precisely what proportion of the funding they provided.[6]After some further delays, on 27th May 2005, Scanplan exchanged contracts for the purchase of the eight hotels, including these four. Completion was achieved on 29th June 2005.[7]Although Scanplan were wholly responsible for the purchase of the hotels, the legal entity that bought each hotel was the individual K/S Claimant. At the time of the purchase, the only partner in those four K/S entities was Scanplan. Thereafter, in 2005, having purchased the hotels in the name of the individual K/S entities, Scanplan then looked for the necessary investors to buy shares in each K/S. In this way, Scanplan then divested themselves of any interest in the K/S entities and their hotels, and became entitled to about £1 million by way of fees. To that end, Scanplan produced detailed prospectuses for the individual K/S entities, which were then sent out to potential investors. A limit of 10 investors for each K/S was permitted. And that is how people like Mr Moller ended up as the part-owner of a budget hotel in the UK.[8]The Defendants are expert hotel valuers. They acted for a variety of parties with an interest in these hotels. In October-December 2004, they were asked by LR’s bank to produce a valuation of the hotels. They produced a detailed valuation which suggested a total value for the eight hotels, including these four, of just over £39 million.[9]Scanplan/ESL then wanted their own valuation of the hotels in order to raise financing and, because of the Defendants’ particular knowledge, they wanted them to produce that valuation. Although the issue of a potential conflict of interest was properly raised by Mr McCutchion of the Defendants, the documents suggest that the matter was never fully considered. At all events, the Defendants agreed to carry out a further valuation. They were instructed by the West Bromwich and the Alliance and Leicester in March 2005. They adjusted their November valuations in April 2005 and their eight separate valuation reports were sent to Scanplan in May 2005. It is Scanplan’s case that they then purchased the eight hotels, through the K/S entities, in reliance upon the Defendants’ April valuation reports.[10]There are two principal elements of the claim in negligence against the Defendants. The first focuses on what the Defendants said, or did not say, about the lack of rental growth in respect of these four hotels. It is the Claimants’ case that they would never have bought these hotels if they had realised that, because of an unusual feature of the lease arrangements, the base rent was not likely to be exceeded by the (higher) turnover rent, at least in the medium-term, and that therefore, in the absence of a rent review provision, there would be no, or very little, prospect of rental growth. It is the Claimants’ case that they were misled into thinking that there would be rental growth by mis-statements in the Defendants’ valuation reports.[11]The second part of the case in negligence is the allegation that the valuations for these four hotels were too high and outside any permissible bracket/margin of error. It was common ground that a key factor in identifying the value of a hotel is its net initial yield, which is stated as a percentage. That percentage is then translated into a multiplier which, when multiplied by the annual rent, produces the valuation figure. The lower the yield percentage, the higher the multiplier, and therefore the higher the value of the hotel. It is the Claimants’ case that the Defendants’ yield figures, which were all in the region of 6.25%, were much too low and should have been in the region of 7% and, for Bradford, 7.25%.[12]Before addressing each of those issues, I must address a number of the difficulties which have arisen in connection with the documentary evidence and the oral evidence in this case. I do that at Section B below. Then, at Section C below, I set out the relevant events by reference to such documents as have been provided. Thereafter, at Section D below, I deal with the negligent mis-statement case against the Defendants in respect of rental growth and, at Section E below, I analyse the over-valuation case. There is a brief summary of my conclusions at Section F below. I should at this stage express my gratitude to leading counsel for the efficient way in which this trial was conducted and kept to its original timetable.

B1. The Missing Documents

[13]Both before and during the trial, there was a persistent problem with the Claimants’ disclosure. A large number of documents which I would have expected to see, and which I regard as important, were simply not disclosed. Some, but not all, of these difficulties can be traced back to the fact that, although Scanplan had set up the purchase of the hotels and, at the time of the purchase, was the only partner in the K/S entities, they no longer had any share or interest in the Claimants. Indeed, I was told that the Claimants are now pursuing separate claims against Scanplan in Denmark arising out of these same events. The result of Scanplan’s subsequent distance from the Claimants has been a major difficulty with disclosure.[14]First and foremost, there has been no disclosure of the internal Scanplan documents. I accept Mr Lawrence’s submission that, since Scanplan themselves said at the time that this was the biggest purchase that they had ever been involved with, it is inconceivable that there were not detailed internal communications (in particular emails) from November 2004 to May 2005, dealing with every aspect of this potential purchase. Mr Ashton confirmed at various times during his cross-examination that there would have been internal documents which, with one exception, have simply not been provided.[15]Mr Stockler, the Claimants’ solicitor, swore an affidavit dealing with his attempts to obtain these documents from Scanplan. Originally I was told that, although I had ordered this affidavit as a result of an application for specific disclosure by the Defendants, I could not look at it because it was privileged. The Claimants’ repeated assertion of privilege in this case has been another of its unusual features. In the end, not only was I invited to read this affidavit but, in his closing submissions, Mr Speaight relied on the contents of the affidavit to demonstrate that the Claimants’ solicitors could not have done any more.[16]Having considered this material carefully, I have reached the firm conclusion that further efforts should have been made to obtain the internal Scanplan documents. That is because: a). At the time that the K/S entities were created, they were wholly owned by Scanplan. Therefore, it seems to me that the K/S entities had the legal right to see all of Scanplan’s internal documents relating to the purchase of the hotels, and could have issued an application for third party disclosure, either here or in Denmark, to obtain those documents. b). Mr Stockler’s affidavit records that Scanplan had told him that going through their emails “was a big job” and they would need to use a keyword search to facilitate the process. But there is no evidence as to what keywords were used, and how (or even if) such an electronic search was actually conducted. c). Mr Stockler’s affidavit is also rather vague as to what precisely he was asking for and what responses he was getting. There are no contemporaneous documents, letters or attendance notes evidencing his requests to Scanplan or their responses.[17]In addition, Mr Stockler states on more than one occasion that he was told by Mr Ashton of Scanplan that there were no more documents. It was clear, when Mr Ashton was cross-examined, that this statement could not be right, and that there was a good deal of internal Scanplan documentation which had just not been disclosed. No explanation for this change of position was given. I concluded that Mr Ashton had attempted to control the disclosure process in an inappropriate way, although his motivation for so doing was obscure. This was one of many reasons why I considered Mr Ashton to be an unsatisfactory witness (see further at paragraph 29 below).[18]The Defendants’ criticisms are not limited to Scanplan’s internal documents. Although, somewhat reluctantly and late in the day, certain files were produced by ESL, it was plain from the evidence that there were other documents relating to this purchase which ESL would have had or created, and which have not been disclosed. Given ESL’s central role, these omissions are potentially significant. In addition, Scanplan’s mortgage broker, Mr Tim Hinks, has refused to provide his file at all. As we shall see in Section C below, Mr Hinks played a key role in setting up this transaction and it is inevitable that his file would have included highly relevant material. Moreover, although I expressly required Mr Stockler to deal with this omission in his affidavit, he simply said that, as at 20th January 2010, Mr Hinks’ search was “still pending” and there is nothing to say that this matter has ever been revisited by Mr Stockler.[19]I consider that the Claimants were entitled as of right to a copy of all of ESL’s files and all of Mr Hinks’ files. They were both acting as agents for the K/S entities at the time of the purchase of the hotels, and the documents would have been held by them on behalf of their principals. For the reasons that I have given, I am not persuaded that proper attempts were made by the Claimants to obtain what were, in law, their own documents.[20]As a result of these omissions, as I made plain to the parties during the closing submissions, I am uneasy that, in telling the detailed story in this case, and making findings of fact in a large case of professional negligence, I am doing so on an incomplete understanding of all of the relevant events. That is an unsatisfactory position for any judge to be in. Unhappily, my unease has been compounded by the Claimants’ decision to claim privilege in relation to their then solicitors’ file (and other documents as well).

B2. The Privileged Documents

[21]The solicitors acting for Scanplan at the time of the purchase of the eight hotels were Maxwell Batley. Their input and advice was obviously of great importance to the issues before me, particularly in relation to the terms of the Accor leases: the Claimants’ case in these proceedings on rental growth arises out of the unusual terms of those leases. Although the Claimants have disclosed Maxwell Batley’s Reports on Title, and some other Maxwell Batley documents, they have claimed privileged for the remainder of the Maxwell Batley documents.[22]I acknowledge at once that no adverse inferences may be drawn as a result of the Claimants’ assertion of legal professional privilege: see Sayers v Clarke Walker [2002] EWCA Civ 910 and China National Petroleum v Fenwick Elliott [2002] EWHC (Ch) 60. I therefore draw no such adverse inferences in this case. But it is only right to make plain that the Claimants’ decision to assert such privilege has compounded the difficulties created by their own inadequate disclosure, identified above. It has only heightened my concern that I am being asked to make findings on information that, one way or another, has been circumscribed.

B3. The Missing Witnesses

[23]The problem of missing evidence in this case extended to the witnesses called on behalf of the Claimants. I was told that the critical decision in this case – the decision to purchase the hotels in May 2005 - was taken by Mr Christian Betting, the owner and/or controller of Scanplan. He was not called to give evidence. In view of the absence of any internal Scanplan documents, I therefore remain unclear as to the actual basis of his decision to buy these hotels in the first place. Although I noted Mr Ashton’s evidence, that he had reported Mr Betting to the authorities because of unspecified concerns about his business practices, I was given no explanation as to the lack of any evidence from Mr Betting at all.[24]In addition, the individuals most closely involved with giving advice to Scanplan in the run-up to and at the time of that purchase were Mr Owen and Mr Harris of ESL, the mortgage broker Mr Hinks, and Mr Marks at the solicitors Maxwell Batley. There were no witness statements or oral evidence from any of these individuals, and no explanation for their absence. Mr Ashton said that he knew of no reason why they were not giving evidence. The lack of any evidence from Messrs Owen and Harris is, as we shall see in the next section of this Judgment, of particular significance.[25]Although Mr Speaight sought to deflect the Defendants’ criticisms on this topic by claiming that there were others involved in these reports on the Defendants’ side who also did not give evidence, I did not consider that to be a fair criticism. The Defendants called Mr McCutchion, who was involved in the production of some of the reports, and he properly accepted a number of the justified criticisms of the Defendants’ work that Mr Speaight made. In cases of this sort, the valuations which are the subject of the claiming party’s criticism usually speak for themselves and it was therefore unnecessary for the Defendants to call every person who was involved in their production.

B4 The Factual Witnesses

[26]As noted, the Defendants called Mr McCutchion who was employed by the Defendants at the time. I considered Mr McCutchion to be a straightforward witness who, as I have said, rightly accepted a number of the criticisms that were made of the Defendants’ performance in March and April 2005. The Defendants also relied on a short statement from a Ms Kendall, who was not employed by the Defendants at the relevant time and which dealt with peripheral matters.[27]The Claimants called a number of the investors who now, through the K/S entities, own a share of these hotels. They were Mr Moller, Mr Stovring-Hallsson, and Mr Nyborg. They were all clear and concise. What came over from their evidence was the critical importance to them, as investors, of rental growth. Each of them said essentially the same thing: that the prospectuses published by Scanplan to encourage investors to buy shares in the K/S entities stated that, in relation to each of these hotels, there would be medium-term rental growth, because there would come a time in the relatively near future when the turnover rent would exceed the base rent. The investors each said, and I accept, that they would not have bought into the K/S entities if they had known that, in reality, there would be no rental growth, certainly not in the short and medium-term. Whose fault it was that these investors were misled in this way is an issue that I deal with in Section C10 below.[28]There was a witness statement from Mr Bentzen which, because of the travel difficulties and the relatively junior nature of his role, was admitted under the Civil Evidence Act. Mr Kaalund, another more junior employee at Scanplan, was not able to assist with the detail. That meant that by far the most important witness called by the Claimants was Mr Ashton, the person at Scanplan who was responsible for organising the purchase of these hotels, and the individual who managed the K/S entities when they were wholly owned by Scanplan. In the next section of this Judgment I deal with Mr Ashton’s pivotal role as the story unfolded.[29]As a witness, however, I found Mr Ashton to be unsatisfactory in a number of ways. During his cross-examination, although he had a good recall of events which were of peripheral relevance, whenever he was asked questions about the more important matters, such as his knowledge of the lease terms and the issue of rental growth, Mr Ashton repeatedly said that he “could not remember”. There were times when I felt that he repeated this answer as soon as he realised that the question was straying towards this potentially difficult topic. On another occasion, he maintained (in answer to questions about emails he had sent at the time which demonstrated his clear and detailed knowledge of relevant information):
“I didn’t know anything at all”
. I do not accept Mr Ashton’s stated lack of recall of these events, or his lack of knowledge of the detail (particularly when compared to his better memory of events which showed him in a better light). I consider that his evidence was, at least in part, tailored to minimise what was, in my judgment, his overarching responsibility for the gathering of the information that was needed in order to make an informed decision to purchase these hotels and thereafter to attract investors into the K/S entities. C THE RELEVANT EVENTS

C1 The Accor Leases

[30]In 2000, the four hotels that are the subject of these proceedings were owned by LR. They were let to Accor UK Economy Hotels Ltd (“Accor”), perhaps the best-known operator of budget hotels in Europe, and operated as Ibis hotels. The leases ran for 25 years from August 2000. There was a base annual rent payable by Accor: £320,253 for Wellingborough; £325,497 for Lincoln; £359,365 for Chesterfield; and £306,735 for Bradford.[31]There was no rent review clause. Instead there was an arrangement by which, in certain circumstances, a higher rent, known as turnover rent, would become payable instead of the base rent. The turnover rent payable was assessed by reference to the amount by which 28.6% of gross turnover for any relevant turnover period exceeded the base rent payable in respect of that period. In other words, if the turnover of the hotel increased to a certain point, then Accor would have to pay rent at a commensurately higher level.[32]There was, however, an unusual feature of this arrangement. The lease provided that, in any turnover period where the specified percentage (28.6%) was less than the base rent, then the shortfall would be taken into account in the next and each successive turnover period, and would be deducted from the next payment of turnover rent. In other words, where the tenant failed to reach the specified percentage from its turnover, so that there was a shortfall when compared to the base rent, then the tenant carried forward the benefit of that shortfall to the next and successive turnover periods. So turnover rent would only actually become payable when the total shortfall, which might have been built up over a number of years, had been fully accounted for.[33]The evidence was that this was an unusual and ‘tenant-friendly’ provision. I shall refer to it below as “the shortfall clawback provision”. It meant that, depending on the precise forecasts for turnover growth, any rent higher than the base rent may not actually be payable for many years because, no matter how optimistic the forecast, the tenant had an entitlement to set-off the shortfall, which would have doubtless accumulated in the early years, before the turnover reached parity with the base rent. In this way, the prospect of rental growth in these hotels was adversely affected. It was this provision in the leases that the subsequent investors in the K/S Claimants complained that they had simply not been told about.

C2 The November 2004 Valuations

[34]The documents suggest that, at some point in September 2004, the Defendants were asked to value the LR hotels. The instructions were originally issued informally by LR and then, more formally, by their bank, the Bank of Scotland, in a letter dated 22nd October 2004. The valuation date was 10th October 2004. A combined valuation report was provided to the Bank of Scotland, at least in draft, in about November 2004. It was dated 12th November 2004. It dealt with each of the eight hotels that were eventually bought by Scanplan, and therefore included the four with which these proceedings are concerned.[35]The hotel at Bradford was valued at £4,620,000. The important net initial yield figure was 6.53%. The text of the November report in relation to Bradford said:
“The lease also provides for a surplus rent to be paid, when the turnover rent of 28.6% exceeds the guaranteed rent. However, based upon our projections the hotel will not generate any surplus rent until the 10th year of trading, and in our valuation we have taken this fact into account.”
[36]The part of the report dealing with the hotel in Chesterfield identified a net value of £5,380,000 and a net initial yield of 6.52%. The text referred to the turnover rent and the 28.6% and went on to say:
“Based upon our projections the hotel will generate surplus rent, and in our valuation we have taken this factor into account, by valuing this income stream at a capitalisation rate of 7.5% to reflect the additional uncertainty of this rent.”
[37]In respect of the hotel in Lincoln, the report identified a net value of £4,870,000, and a net initial yield of 6.52%. In the text, there was a reference to surplus rent and an (incorrect) percentage of 25.5%. The Defendants said:
“In our projections, the hotel will not generate any surplus rent until the sixth year of trading and in our valuation we have taken this fact into account. We have capitalised this income stream at 7.5% and applied a discount rate of 10% to reflect the additional uncertainly attached to it.”
[38]Finally, in relation to Wellingborough, the Defendants indicated a net value of £4,790,000 and a net initial yield of 6.52%. Dealing with the rent, the text of the report said:
“The lease also provides for a surplus rent to be paid, when the turnover rent of 28.6% exceeds the guaranteed rent. However, based upon our projections the hotel will not generate any surplus rent, and in our valuation we have taken this fact into account”
. The spreadsheet setting out the calculations in relation to the hotel at Wellingborough identified the turnover rent at ‘0’ percent. That of course was an error; there was a turnover rent kicking in at 28.6% but, in the Defendants’ view, the rent was never going to exceed the base rent, so it was therefore not ultimately a relevant figure. As noted below, the error was spotted and understood by ESL.[39]The total valuation of the eight hotels arising out of the Defendants’ November valuation exercise was £39,080,000.

C3 The Early Involvement Of Scanplan/ESL

[40]It appears that, at some point in November 2004, Scanplan, through ESL, expressed an interest in buying the eight hotels. Because of the missing documents, there is nothing which indicates how or why the possible sale of these hotels first came to the attention of Scanplan/ESL. However, the documents which ESL have disclosed demonstrate that, from the very outset of their involvement, ESL and Scanplan were aware of the particular rental provisions described in Section C1 above.[41]In an e-mail dated 5th November 2004, from David Owen at ESL to Andy Tudor, an estate agent at Donaldsons who seems to have been acting on his own behalf in bringing the possible sale of these hotels to the attention of ESL, Mr Owen said this:
“Also we will need to see at what level the occupancy kicker comes in on each property and historic information on how close they are to hitting that level to try and estimate whether we will ever get anything over the base rent. Or we can give you a figure now assuming that we will only ever get the base rent and nothing else. On this basis I cannot imagine the yield will be that exciting though.”
[42]On 16th November 2004, Mr Owen sent an e-mail to his colleague Mr Harris, Mr Hinks the broker, and Mr Ashton at Scanplan, attaching the turnover figures for the eight Accor hotels which, he said, showed a year-on-year improvement. Mr Ashton was interested and e-mailed the following day, 17th November:
“I need some more information on the Accor hotels, and some hep with getting the rent estimated, and a better description of what gets the rent to increase.”
[43]Although, when he gave evidence, Mr Ashton said that he did not remember this exchange and that he was not involved in a consideration of the detailed figures, it seems to me that this e-mail made it plain that, from the outset, Mr Ashton was keenly interested in the forecast as to when and how the base rent might be increased (because turnover rent would have become payable). What is more, ESL were themselves aware of the significance of this information. That can be seen from Mr Owen’s reply on the same day, when he e-mailed Mr Ashton in these terms:
“The way the lease works is that there is a fixed rent payable but once a certain turnover figure is reached the owner will receive 28.6% of the increased rent in excess of this figure. However, while the turnover is below that figure the shortfall between 28.6% of turnover and the actual rent paid will accumulate to effectively be repaid out of excess rent that should be paid to the owner once the turnover hurdle is exceeded. I have attached a sheet which shows that, taking the average of the portfolio, this would happen in 2009 assuming that the average turnover increase for the previous two years is maintained. We are waiting to hear from the valuers as to whether this is a reasonable approach to take. You will see that the growth on some has been much better than the growth on others. We would either need to take this into account on the net initial yield we pay for each or (and I think you will probably tell me this will not be possible) try and find some way that each K/S could share in the average excess rent across the whole portfolio rather than just a single hotel. Andy, could you confirm that once the hurdle is exceeded the excess rents will actually be paid to us rather than sitting in an accumulation account. This is obviously important for case flow.”
[44]The calculations referred to by Mr Owen were sent later on 17th November under cover of a separate e-mail. The detailed figures demonstrated three things. First, they showed that Mr Owen fully understood how the shortfall clawback provision worked, and how the shortfall had to be paid off before the turnover rent actually became payable. Secondly, the figures that he used demonstrated that the shortfall could get as high as £2.27 million before the increase in turnover led to its reduction. Thirdly, Mr Owen’s figures showed a year-on-year increase in turnover at 11.78% on each hotel from 2001 through to 2010. All the other evidence at this trial demonstrated that this was unrealistically optimistic.[45]Accordingly I find that, in consequence of these e-mails, ESL, and Mr Owen in particular, had a clear and complete understanding of the shortfall clawback provision in the leases, and how they would impact upon the rent actually received by the owners. Furthermore, he set out that understanding in both the first e-mail to Mr Ashton (paragraph 43 above) and the spreadsheet forecasts sent to Mr Ashton with the second e-mail (paragraph 44 above). Mr Ashton did not query either document at the time; neither did he say that these documents were not clear or comprehensible. They were plainly both. I find therefore that Mr Ashton, as the recipient of these e-mails, was fully informed at the outset as to the shortfall clawback provision and its potentially significant effect upon the rent actually payable. In the light of these emails, Mr Ashton’s answer in cross-examination, that he knew nothing at all about the shortfall clawback provision, was demonstrably untrue.[46]It seems that Scanplan made a decision to buy the eight hotels on about 1st December 2004. There are no documents whatsoever to indicate their decision-making process; nothing to demonstrate what Mr Betting was relying on and why. However, given the email exchanges to which I have referred in paragraphs 41-45 above, it is clear that Scanplan agreed to enter into the (non-binding) agreement with LR to buy the eight hotels in the full knowledge of the shortfall clawback provision in the leases. This is important because Mr Kaalund, when shown in cross-examination the ESL email about the shortfall clawback provision referred to at paragraph 43 above, said that if he had seen it at the time, he would not subsequently have suggested to investors to buy into the K/S entities. He said that, in the light of that email, he was ‘very surprised’ that Mr Ashton had gone ahead with the purchase.[47]There is an e-mail from Mr Ashton dated 1st December 2004, which indicated that Scanplan had decided to buy the hotels. In reply to this e-mail, also on 1st December, Mr Owen said that Scanplan could have the hotels for £38 million. He compared this with LR’s valuation, about which he had been told, of £39.2 million. Mr Owen went on in his e-mail to say that Scanplan could use LR’s valuers (the Defendants) “if we want to”. In consequence of these exchanges, on 3rd December 2004, Scanplan entered into a non-binding agreement to purchase the eight hotels from LR for £38 million.[48]There is one other event of note at this time. The day before the non-binding agreement was entered into, Mr Owen at ESL sent Messers Hinks, Harris and Ashton at Scanplan an example of the Accor lease. Therefore, even though this was sometime before Maxwell Batley were instructed by Scanplan to produce their Reports on Title, it seems that the terms of the leases, which are at centre stage in these proceedings, were provided to Scanplan at an early stage. Mr Stovring-Hallsson, one of the subsequent investors, told me that he spotted the problem created by the shortfall clawback provision the first time he read the lease.

C4 The Production of the Defendants’ November Report

[49]As noted in Section C2 above, the Defendants had prepared their valuations for the Bank of Scotland in November 2004 and the bottom line figure of £39 million had been provided to LR. It appears that LR had used that figure to reach the non-binding agreement with Scanplan in the sum of £38 million. However, it appears that the final production of the reports themselves was delayed and they were not provided to the Bank of Scotland until some time in December. On 7th December 2004, LR told the Defendants about the non-binding agreement to purchase, and about Scanplan’s request that their own bank be allowed to rely on the Defendants’ valuation report. The e-mail said that if that happened “clearly he [Scanplan/their banks] will be paying for them”. This was the start of a long-running difficulty that the Defendants experienced in recovering their fees for the work that they had done in October-December 2004. The evidence was that LR/Bank of Scotland sought to pass on liability for the cost of those reports to Scanplan or their own lenders. In the result, the Defendants had not been paid for those detailed valuation reports when, some months later, they were instructed by Scanplan’s lenders to update their valuation reports, and the emails showed that (perhaps unsurprisingly) this still rankled.[50]Mr McCutchion was concerned that the Defendants could not act for the proposed purchasers, and said to his superior, Mr Harper, in an email on the same day:
“Not sure we can do this can we – given that we are valuing for bank and vendor?!”
I consider that Mr McCutchion was right to raise this point, but it does not appear that it was further considered within the Defendant organisation. At this stage, although they were pushed to do so by Scanplan and their other advisors, the Defendants refused to provide copies of the valuation reports of November 2004 until this had been authorised by LR.[51]Just before Christmas 2004, the Bank of Scotland raised a number of points arising from the November valuation report produced by the Defendants. One of the questions that they asked was:
“Have you been advised that there are a number of the hotels where there exists a subsidy account to take account of previous turnover shortfalls in relation to the base rent levels?”
In his reply, Mr Harper of the Defendants said that “we have taken into account the shortfall provisions on the properties that have been failing to make the base rent levels.” It is not clear from this rather opaque answer whether the Defendants were actually aware of the shortfall clawback provision, and its effect on medium-term rental growth.

C5 Communications Between Scanplan, ESL and Mr Hinks

[52]At the end of 2004, and in the early months of 2005, there were a number of important communications between Scanplan, Mr Hinks and ESL. I identify below some of those which I consider to be of the most significance to the issues in the trial. The sequence of events set out in this part of the Judgment is also taken from those emails.[53]On 16th December 2004, Mr Hinks sent an e-mail to Messrs Owen and Harris at ESL attaching what he described as “indicative cash flows” in respect of the eight hotels. These were all calculated by reference to the base rent rather than any turnover rent. These cash flow documents were being prepared for the approaches which Scanplan/ESL/Hinks were going to make to the West Bromwich Building Society and the Alliance and Leicester for the necessary funding for the purchase of the hotels. The obvious point was put to Mr Ashton in cross-examination that these forecasts were all expressly based on a flat (base) rent, with no allowance or forecast of surplus rent. Mr Ashton could only say that he could not recall seeing these projections at the time.[54]There were then delays as a result of problems in Denmark, although the scarcity of documents means that it is not possible to identify fully what those problems were and what precise impact they had on progress. In an e-mail of 18th January 2005, Mr Owen indicated that the problem was connected with funding. Eventually, on 1st February 2005, Mr Owen informed LR hotels that he had finally “pushed the Danes into making a decision”. It appears that, because of cash-flow problems, Scanplan were intending to go ahead with the four purchases financed by the West Bromwich Building Society, but they were not yet in a position to make a final decision on the other four. The four hotels to be financed by the West Bromwich included Lincoln and Chesterfield.[55]In March and April 2005, the Defendants were instructed by the lenders to produce new valuations. Those instructions, and the valuation reports themselves, are dealt with in Sections C6 and C7 below. It appears that, in the meantime, ESL, Scanplan and Mr Hinks were somehow provided with copies of the Defendants’ November 2004 valuation report, summarised in Section C2 above. The November 2004 report was plainly studied carefully. For example, on 24th March 2005, in an e-mail to Mr Hinks, Mr Owen points out the error on the Wellingborough spreadsheet, where 0% was identified for turnover rent, when it should of course have been 28.6% (see paragraph 38 above).[56]Also at this time, Scanplan’s solicitor, Mr Marks at Maxwell Batley, was researching the question of title. He communicated regularly with Lawrence Graham, the solicitors acting for LR, and others, on the issues being raised. As noted above, the vast bulk of his communications have been withheld on the grounds of privilege, although it is still possible to discern some of the more important steps in the process. For example, the topic of the shortfall clawback provision was revisited by Mr Harris in an e-mail dated 1st April, to the agent, Mr Tudor, chasing up LR. He referred to a conversation that he had had with Maxwell Batley on this subject. He said this:
“I spoke to Maxwell Batley last night having read the original valuation report and my interpretation of the “turnover rent” and surplus over “base rent” differs from theirs. I read it as very tenant friendly i.e. if the base rent is £50k higher than the turnover rent in 1 year then it exceeds the base rent by £200k in the second year, the tenant will actually pay an additional £150k (£200-£50k) over base rent. Do you know whether that is right?”
Mr Harris’ understanding of the shortfall clawback provisions, as set out in this email, was entirely accurate. This therefore suggests that, at least at this stage, Mr Marks had a different (and erroneous) view, which was less ‘tenant-friendly’, and therefore more in Scanplan’s interests. Information concerning that interpretation, and who might have been aware of it, has not been disclosed.[57]On the same day, there were a number of other important e-mail exchanges on this same topic. At 11.43am, Mr Harris sent an e-mail to Mr Hinks, with a copy to Mr Owen and Mr Marks, which dealt with a variety of points arising from the Defendants’ original valuation reports of November 2004. He concluded by asking Mr Marks:
“Are we in agreement on how the turnover rent works now?”
Mr Marks replied at 16.10pm to say that “it is not all that clear how shortfalls in turnover are treated” and he said that he had sought clarification from Lawrence Graham.[58]The clarification from Lawrence Graham to Mr Marks was dated 31st March 2005 and apparently received by him on or after 2nd April. The Lawrence Graham letter dealt with the shortfall clawback provisions in these terms:
“The procedure outlined in the last paragraph on page 19 is a mechanism whereby the tenant is relieved of its liability to pay the Turnover Rent in circumstances where, in a previous accounting period, no Turnover Rent was payable on account of the fact and to the extent that the base rent exceeded the Specified Percentage of Gross Turnover. This difference is not payable by the Landlord back to the Tenant, but a record of this amount is kept and set off against future payments of Turnover Rent.”
Again, I find that this was a clear statement of the way in which the shortfall clawback provision worked. In the absence of any documents to the contrary, I assume that this correct analysis was passed by Mr Marks to Scanplan, ESL and Mr Hinks.[59]Also on this topic, and also on 1st April, at 5.24pm, Mr Harris had e-mailed Mr Ashton to say:
“Anthony, are you clear how the turnover rent/base rent provisions in the lease work on the above? Apologies if David has already covered this with you.”
On the 3rd April 2005 Mr Ashton replied to say tersely: “It is covered”. In cross-examination, he agreed that he did not need to hear from anyone else on this topic because it had all been explained to him.[60]I make two findings about this exchange. First, I find that Mr Harris was right to think that this had already been covered by Mr Owen: the documents referred to in paragraphs 41-45 above make plain that Mr Owen had indeed explained the shortfall clawback provision to Mr Ashton many months previously, before Scanplan’s decision to enter into the non-binding agreement to purchase the eight hotels for £38 million.[61]Secondly, I find that Mr Ashton fully understood how the turnover/base rent provisions worked. He was expressly asked that question by Mr Harris and he made it plain in his reply that he did understand the provisions. He would not have said that “it was covered” if it was not. Mr Ashton did not challenge that proposition when it was put to him in cross-examination. Again, therefore, it seems to me that it is idle to suggest that Mr Ashton did not understand this important element of the lease arrangements.[62]On 4th April 2005, again prompted by the Defendants’ original valuation report, Mr Harris sent an email to Mr Hinks, making a point about rounding figures which, he said, on the hotel at Barlborough, would indicate turnover rent exceeding base rent in year 9, whilst the Defendants had said that there would be no excess. However, Mr Harris then went on to say this:
“This is all academic because presumably the previous shortfalls would wipe out any excess. The same applies for Wellingborough- it will never reach base rent but we will still need the correct percentages in there.”
Mr Hinks replied in these terms:
“From the lender’s point of view, I do not think the structure of the lease would be a problem, because they tend to assume no growth anyway. So if it works for the Danes, it should work for the lenders.”
[63]A number of points arise from this exchange. First, it demonstrates that, by this time, the Defendants’ valuation report of November 2004 had been carefully studied by ESL and Mr Hinks. To the extent that there were even minor errors in those reports, concerned with the correct rounding of figures and the like, these were well understood by ESL and Mr Hinks. Secondly, these emails demonstrate that Mr Harris was not only aware of the way in which the shortfall clawback provision worked, but was also making plain that, at least on some hotels, they rendered ‘academic’ any possibility of rental growth beyond the base rent.[64]Thirdly, by reference to Mr Hinks’ reply, it can be seen that, from his point of view, as the broker setting up the loans with the West Bromwich and the Alliance and Leicester, the shortfall clawback provision did not represent a problem, because the lenders assumed no rental growth anyway. Mr Hinks’ e-mail recognised that, as purchasers who would subsequently be looking for investors, Scanplan might have a different interest and therefore might take a different view. However, despite being given this opportunity to make plain that, in contrast to the lenders, rental growth was a significant factor for Scanplan, ESL did not do so.[65]On 14th April 2005, Mr Owen sent Mr Ashton a series of spreadsheet documents entitled “Interim Turnover Rent Certificate”. These documents were prepared by LR Hotels. They clearly stated the amounts of shortfall which had accumulated on each hotel being carried forward to the next period. The figures showed that, by the end of 2004, across the eight hotels, the total shortfall to be carried forward was in excess of £4 million. Again, the fact and the size of the shortfall would have come as no surprise, either to ESL or to Scanplan, in view of the previous communications to which I have already referred (paragraphs 41-45 and 56-63 above).[66]The whole purpose of the Certificates was to identify the level of the shortfall that was to be carried over when Scanplan bought the hotels. I find that, again, Mr Ashton, as the recipient of these e-mails, can have been in no doubt as to the effect of these figures. They revealed a total shortfall, as at the end of 2004, of over £4 million, and Mr Ashton can have been in no doubt that this large sum would have to be paid off before any surplus rent (over and above the base rent) would be payable to the owners. In cross-examination, Mr Ashton agreed that these documents would only have made sense to someone (like him) who understood the shortfall clawback provision.[67]In the middle of April 2005, it appears that Mr Ashton was in Luxembourg trying to arrange the secondary financing from Landsbanki. When he was there, he was sent an e-mail by Mr Bentzen which identified a whole series of different figures and forecasts in connection with these hotels. This was the only internal Scanplan document that has been disclosed. Included within this detailed information was a forecast in relation to turnover rent. This forecast was much more realistic than that provided months earlier by ESL (paragraph 43-44 above).[68]Mr Bentzen’s figures showed that, in relation to Lincoln, the base rent would not be exceeded until 2011; in relation to Chesterfield the base rent would not be exceeded until 2013; and that in relation to Bradford and Wellingborough, the base rent would not be exceeded until 2016. There is nothing in the documents to indicate whether or not, in undertaking this calculation, Mr Bentzen had taken into account the shortfall clawback provision. On the basis of these forecasts, however, there was not going to be any rental growth for some considerable time. There was nothing in the documents to indicate that this important information, which was very different to the earlier forecasts provided by ESL, was acted upon or even queried by Mr Ashton. Mr Ashton said that he could not remember the figures that were sent to him in Luxembourg.

C6 The Defendants’ Instructions

[69]On 16th March 2005, the West Bromwich Building Society instructed the Defendants to undertake the valuation of the hotels, including Chesterfield and Lincoln. The letter of instruction was lengthy. The core of the letter said this:
“With regard to specific instructions relating to this property, these are detailed as follows:- To provide a satisfactory report and valuation of the current open market value of the property. You are requested to advise and comment upon the following:- -the durability and saleability of the property over the proposed mortgage term of 20 years. -the tenant demand for the property -the current open market vacant possession value of the property - the current open market rental value of the property -the current open market investment values of the property based on both the current passing rents and current open market rents -fire reinstatement value of the property.”
[70]The Alliance and Leicester instructed the Defendants to carry out the valuations of, inter alia, the hotels at Wellingborough and Bradford on 21st March 2005. Again, the letters of instruction were lengthy. Paragraph 13 was in these terms:
“Where premises are subject to occupational leases: a) State whether the passing rent is above, at or below current market rents for the occupational lease. b) Give an opinion on the financial standing of the tenant c) State whether there is a guarantor d) Describe the alienation provisions especially in relation to privity of contract and authorised guarantee agreements e) Describe the landlord’s position relating to the recovery of outgoings f) Describe the rent review provisions and comment if the landlord’s interest is adversely affected. g) State whether there are any rental or service charge arrears.”
[71]Mr Hinks sent Mr Harper of ESL and Mr McCutchion of the Defendants an e-mail on 23rd March 2005 asking for eight separate reports with invoices to be sent to each of the eight separate K/S entities. This was agreed.[72]Internally, the Defendants were clear that this work would involve making adjustments to their November valuation reports in two ways: first, by bringing it up to date to reflect current market conditions; and second, by altering the percentage for the notional costs of purchase. In the reports of November, this percentage had been put at 2.5% but the Defendants were now expressly requested to state it at 5.75%. In an e-mail of 24th March to Mr McCutchion, Mr Harper of the Defendants said:
“Ibis Hotels-Tim Hinks will need the portfolio revaluing- the date is too late for his funders and the values are wrong (stamp duty exempt etc) I told him he had paid for a copy of the November report and he would need to re-commission this. Not mentioned fees, but a desk top would do. He was hoping that if we relooked at them, the values would stay the same or increase (he needs costs of 5.75% rather than 2.5% that we have allowed) I suggested that with the movement in the market this was likely to be OK. I said you were around to chat next week and you would discuss fees…”
[73]It is clear that, even though they did not consider the work to be onerous, the Defendants were not overly-enthusiastic about these further instructions, due to the non-payment of their original fees. Their internal e-mails demonstrate this lack of interest. Eventually it was agreed that LR would cover the additional fees to allow the November report to be amended, up to a maximum of £5,575 plus VAT. Once this had been agreed, the Defendants then worked out how long it would take to revamp the November report. Mr McCutchion’s e-mails on 14th April 2005 calculated that it would take about 1 hour per property. Mr Harper said that they would just need to look at the yields and change the transaction costs. Mr McCutchion responded:
“Easy then. We can go to the pub to do that.”
[74]Mr McCutchion confirmed in his cross-examination that, as a result of these exchanges, there were only two matters that he needed to consider when revamping the November report: the changing of the transaction costs percentage to 5.75%, and the adjustment of the yield to reflect any changes in the market since the previous valuation date of October 2004. Mr Harper confirmed that in his e-mail of 15th April, when he said “all it will be is looking at the trans costs (now 5.75) and then shifting the yields appropriately. About 20 minutes work.”[75]On the same day, Mr Hinks told Mr Owen and Mr Ashton that he had spoken to the Defendants and was chasing them for a schedule of values. He went on:
“I will push them as much as possible on the numbers…”
On 19th April 2005, Mr McCutchion sent Mr Hinks “a schedule showing the revised numbers”. The limited work referred to in the preceding paragraphs had apparently been done and the result was an overall increase in the valuation of the eight hotels to £39,470,000. 76 The 19th April 2005 was taken as the valuation date for the Defendants’ April 2005 valuation reports, dealt with in Section C7 below. The reports themselves were produced after that date. Thus, as Mr McCutchion accepted in cross-examination, the values had been decided before the text of the report had been updated and finalised. Although this was poor practice, it was perhaps understandable, given Mr Hinks’ “pushing”.[77]Although it had been agreed in March that the Defendants would provide eight separate reports (one for each hotel), in late April they initially refused to split up the original full report, apparently on cost grounds. Eventually, however, this is what happened. At the same time, it appears that one or two minor changes were made to the vacant possession values, again at the direct request of Mr Hinks. It was put to Mr McCutchion that this was also shoddy practice. Mr McCutchion said that these were small changes in the overall values. Although they did not affect the figures with which this litigation is concerned, I accept Mr Speaight’s submission that it was bad practice for a valuer to change his figures simply at the request of the broker. I also accept the wider point that this was just one of a number of ways (set out above) in which the Defendants’ approach to this particular commission was less than professional.

C7 The April 2005 Valuations

[78]In general terms, the valuation reports of April 2005 were in precisely the same form, with the same text, as identified in Section C2 above. As advertised, the changes were twofold: a change to reflect the purchase costs of 5.75%, and a change to the yield to reflect the movement in the market since the previous valuation date of October 2004. The evidence was that the market for budget hotels was improving throughout the latter part of 2004 and into 2005. It is common ground that a reduction in the yield identified in the November valuations was appropriate to reflect this. The Defendants therefore reduced the yield by about 0.25% in each case. However, since these were the reports on which the Claimants say they relied when they purchased the hotels, I identify the key ingredients of the four reports below. a). Lincoln[79]The April report stated at page 5 that “the hotel will be subject to a base rent which will be payable to the landlord each year. In the event that the base exceeds the rent in a year, the landlord will receive the base but any excess payment (above rent) can be claimed back by the tenant in any subsequent years where the rent exceeds the base”. This is agreed to be a correct statement of the shortfall clawback provision.[80]In a table headed ‘CBRE Projected Trading’ on page 37, forecasts were shown for years 1, 2, 3, 4 and 5. Mr McCutchion said in cross-examination that year 1 was the 12 month period starting in April 2005. This showed a percentage growth from years 1 to 2 of 5.4% and, in years 3, 4 and 5, a growth of 2.5%. Under the heading ‘Valuation considerations’ on the same page, there was a paragraph that talked about surplus rent being generated in the sixth year of trading. This was in the same terms as the equivalent paragraph in the November report (paragraph 37 above), except that the turnover rent percentage was (correctly) changed to 28.6%. There was no express mention of the shortfall clawback provision.[81]The spreadsheet showing the figures was in the same form as before but now showed a net value of £4,920,000 and a net initial yield of 6.26%. Consistent with the text, it identified the turnover rent being higher than the base rent in year 6. There was an extremely important exchange about this spreadsheet towards the end of Mr Ashton’s cross-examination, when the point being made related to each of the four spreadsheets produced by the Defendants. It was put to Mr Ashton that he knew, when he looked at the spreadsheet at the time, that the shortfall had to be exhausted before the turnover rent shown there was payable. He agreed with that proposition I should point out Mr Speaight’s note was that Mr Ashton agreed that “anyone who knew about the shortfall would have known” that there would be a delay in the payment of surplus rent until the shortfall was exhausted, rather than making any admission as to his own knowledge. That is contrary to my note of the evidence. But it matters not because, for all the reasons set out above, Mr Ashton was plainly someone “who knew about the shortfall”. . b). Chesterfield[82]The text contained the same correct statement as to the shortfall clawback provision as is set out in paragraph 79 above. The figures assumed inflation growth of 2.5% per annum. There was an equivalent paragraph as to surplus rent being generated as could be found in the November report (paragraph 36 above). The net value increased to £5,430,000 figure and the net initial yield was reduced to 6.26%. The spreadsheet showed the turnover rent exceeding the base rent in year 7. c). Wellingborough[83]Again, the report on Wellingborough contained the same correct statement as the shortfall clawback provision (paragraph 79 above). The text was largely replicated from the November report with the consequence that, whilst the full figures for 2004 were obviously not known in November 2004, and the report said so, the same statement was made in April 2005, even though, of course, by then the figures would have been known. Mr McCutchion accepted that this omission was perhaps a reflection of the fact that the Defendants were looking to undertake this work “as quickly as possible”.[84]The report also included at page 38 the same paragraph as set out in the November report (paragraph 38 above), to the effect that, based on the Defendants’ projections, the hotel at Wellingborough would not generate any surplus rent. Again, the 0% for turnover rent, which was not an accurate statement of the turnover rent but a reflection of the Defendants’ conclusion that turnover rent would never be payable, was set out in the spreadsheet. Of course, this error had already been spotted by ESL in the original report and deemed by them to be of no account (see paragraph 55 above).[85]The valuation of the Wellingborough hotel was now £4,840,000, and the net initial yield had again been reduced to 6.26%. One of the points made by Mr Speaight on behalf of the Claimants is that this yield was the same as the yield percentage for Lincoln, even though, on the Defendants’ figures, a surplus rent would be generated on Lincoln in year 6, but would never be generated at Wellingborough. The suggestion was that, in such circumstances, it was wrong to use the same yield percentage for those two hotels. d). Bradford[86]Again, there was the same correct statement in the text as to the shortfall clawback provision (paragraph 79 above). There was the same paragraph as in the November report to the effect that, according to the Defendants’ forecast, a surplus rent would not be generated until the tenth year of trading (see paragraph 35 above). This was then reflected in the spreadsheet. The net value was now put at £4,640,000. The net initial yield was put at 6.25%.

C7 The Reports On Title

[87]At exactly the same time, the Reports on Title were provided by Maxwell Batley to the Claimants on the 8th May 2005. There is a report on each of the eight hotels. There was a detailed analysis of the turnover rent provisions. The relevant section of each report, for the purposes of these proceedings, was in the same terms:
“d) Failure to meet Specified Percentage Where the Tenant’s turnover does not reach the Specified Percentage for any Turnover Period then the Tenant is only obliged to pay the Base Rent. The Lease goes on to provide that in any Turnover Period where the Specified Percentage is less than the Base Rent then this amount (“the Shortfall”) is taken into account in the next and each successive Turnover Period. The Shortfall will be deducted from the next payment of Turnover Rent. In effect, then, where the Tenant fails to reach the Specified Percentage from its turnover so that there is a Shortfall, then the Tenant carries forward the benefit of the Shortfall to the next and successive Turnover Periods.”
[88]There was no dispute about the correctness of this passage and I find that it was a clear and unequivocal statement as to the working of the shortfall clawback provision in each of the relevant leases.

C8 The Decision To Purchase

[89]The decision to purchase the eight hotels was made by Scanplan, who were the sole partners in each of the relevant K/S entities at the time of the purchase. According to Mr Ashton, the decision was actually made by Mr Christian Betting. As I have already indicated, I have no information as to what he actually took into account when he made the decision to buy. In my judgment, what he should have taken into account was: a). The valuation reports produced by the Defendants; b). The Reports on Title produced by Maxwell Batley; c). The plethora of advice received by and from Mr Ashton and ESL as recorded in their detailed email communications referred to in Sections C3 and C5 above.[90]Mr Bentzen’s witness statement suggests, in very general terms, that the Defendants’ reports (and those of Maxwell Batley) were relied on when the hotels were bought and the prospectuses prepared. Tellingly, he makes no reference to the critical advice to which I have referred from ESL and others. In any event, since he was not taking the decisions, I consider that Mr Bentzen’s evidence is of limited assistance. It is also very general. In my judgment, it is necessary to look beyond that mere assertion, to analyse whether, on all the evidence, whether and to what extent the Defendants’ reports were in fact relied on by Scanplan when they bought the hotels.[91]Mr Speaight demonstrated in his re-examination of Mr Ashton that there was some pressure on Scanplan to go ahead with the purchase of these eight hotels in any event, because of the irrecoverable costs that they had already incurred by May 2005. These costs, which would had to have been payable even if Scanplan had pulled out, included the lender’s legal fees, the loan fee, some fees to Mr Hinks, a third of the fees incurred by Maxwell Batley, fees due to Danish lawyers, and fees due to a company which may have been a vehicle for Mr Tudor. This liability would have been quite considerable.[92]In addition, Scanplan and ESL had other reasons for wanting the deal to happen. The evidence was that they both stood to earn around £1 million each by way of fees if the sale went through. That was also a powerful motive for ensuring that no last minute hitches got in the way of the purchase.[93]One of the difficulties created by the absence of so many of the documents and the failure to call Mr Betting as a witness is the absence of any compelling evidence as to what, if any, room for manoeuvre Scanplan had in May 2005, and how their own commercial interest in the purchase going ahead was balanced against the potential risks. Were they obliged to go ahead because they had spent too much to back out now? Was there any room for negotiation with LR or were Scanplan in a weak negotiating position because of their decision, long before the Defendants’ April 2005 valuations, to enter into the agreement to purchase of December 2004? What, if any, priority was given to the fees that ESL and Scanplan would earn from the purchase?[94]The complete absence of relevant evidence makes it all but impossible to answer these questions. However, I am prepared to infer from the evidence that it is more likely than not that Scanplan relied upon the Defendants’ valuation figure for each of the hotels, as set out in each of the eight reports. In particular, I think that the email traffic, such as the email from Mr Hinks to which I have referred in paragraph 75 above, leads to the conclusion that, if the Defendants’ valuation figures had been significantly lower, Scanplan would either have pulled out altogether or, more likely, attempted to renegotiate the price with LR. The Defendants’ valuation figures were clearly important to Scanplan, a point that is reinforced by a consideration of the prospectuses (see Section C9 below and paragraph 103 in particular). But was that true of any other parts of the Defendants’ reports? Did Scanplan or Mr Betting rely on other elements of the reports, aside from the valuations themselves, when purchasing the hotels? One way of attempting to answer that question is to look at what happened after the hotels had been purchased.

C9 The Scanplan Prospectuses

[95]Following Mr Betting’s decision to purchase the hotels, the next thing that needed to happen was for Scanplan to divest themselves of their interest in the K/S entities. Scanplan would earn about £1 million by way of fees from the K/S entities for arranging the purchases but, although there is no hard information as to when those fees would be payable, it seems to me obvious that those fees would not be payable until the money from the investors was in place and Scanplan were no longer the owners of the hotels. It was therefore in their interests (and the interests of ESL, who were also due a similar fee) promptly to attract investors to buy shares in the K/S entities. To that end, Scanplan produced a detailed prospectus for each K/S within a few weeks of the purchase.[96]The prospectuses were each in very similar form. It is therefore only necessary to consider one in any detail, and I take the prospectus in relation to Wellingborough, which Mr Lawrence went through with Mr Ashton in cross-examination, as the example. I note the following features of the prospectus: a). The opening page, which was a summary of the best features of the hotel from an investment point of view, said:• “UK Hotel property in an attractive location in Wellingborough• 20 year non-terminable lease contract guaranteed by Accor (UK) Limited. Accor (UK) Limited is part of the Accor chain with its 4,000 hotels is the world’s largest hotel chain.• In addition to the agreed minimum rent, the rent rises with the hotel’s turnover” b). At page 1, the rent was referred to as “a minimum of £320,253, with the option of an additional rent, which tracks the turnover of the Ibis Hotel Wellingborough”. c). Page 7 of the prospectus said that:
“It is the aim of the prospectus to provide a true and comprehensive picture of the limited partnership’s assets liabilities, financial position, and expected financial performance.” d). At page 9, a comparison between the rental market in the UK and Denmark, the prospectus stated that, whilst in Denmark rent “can both rise and fall” in the UK rent “rise typically ever 5 years. Can never fall.” e). In relation to lease details, at page 15 the prospectus said this: “The lease contract has been entered into with Accor UK Economy Hotels Ltd with a guarantee from Accor UK Limited. The rent is set throughout the lease term at 28.6% of the lessee’s turnover, subject to a minimum, however of £320,253, referred to as the basic rent. Over and above this agreed basic rent, the investor will thus receive 28.6% of the rise in the hotel’s turnover, once the turnover exceeds approximately £1.1 million. Turnover, today, is almost £0.9m. In other words, the rent starts to rise in parallel with the hotel’s turnover when the latter has risen by around 26%. In relation to standard UK property lease contracts, this lease contract thus confers the following advantages: 1) Annual rate of increase 2) No or very low costs in relation to rent reviews 3) Reduced uncertainty concerning the rate of increase in the rent. Firstly, the lease contract provides for annual rises in the rent, once the hotel’s rent turnover has passed the £1.1 million. Normal UK contracts provide for rent to increase only ever 5 years. This improves liquidity in the investment significantly. Secondly, the expense of rent reviews is saved, which can frequently be significant. This is because, in this case, hiring a chartered surveyor to carry out the rent review, as would normally be the case, is not necessary. Thirdly, uncertainty surrounding the rate of increase in the rent is reduced, as there are the hotel’s official financial statements to use as a basis, and it is not necessary to identify similar leases to calculate the increase in the rents. Experience furthermore suggests that the turnover of hotels of this type follows the retail prices index. Over the last 10 years this index has risen on average by 2.65% pa. According to the latest published figures, the rise in the RPI is now 3.4% pa. The hotel itself has actually, over the last 2 years, shown a growth in turnover of 1.9% and 12.5% respectively. Nonetheless, we have budgeted carefully, projecting the first rise in rent in 2014, which corresponds to an annual growth in turnover of only 2.5%. f). At page 33 there was what was described as a “Summary of the solicitor’s review”
. The critical part of this page said: “No rent review has been agreed in relation to the basic rent, which is therefore fixed at £320,253 pa. The annual rent is, however, adjusted upwards to the extent that 28.6% of the gross turnover exceeds the base rent. The gross turnover is defined as the gross revenue from the lessee’s sale of service units in a period aligned with the calendar year. If turnover does not reach the specified percentage in the period, the lessee is obliged to pay only the basic rent”.[97]I find that, in two critical respects, the prospectus issued by Scanplan in respect of K/S Wellingborough bore no relation to the advice provided to it by its UK advisors. First, the prospectus makes much of the fact that there would be rental growth at Wellingborough as a result of increases in turnover. That was completely contrary to the advice which they had received from the Defendants who, as set out in paragraphs 38 and 84 above, made plain in both their November 04 and the April 05 valuation reports that there would be no rental growth at all for Wellingborough, because the turnover would never exceed the base rent. Somebody at Scanplan (or possibly ESL) must have come up with the calculations which produced the date of 2014 as the year when the first rent rise would occur, because such a forecast formed no part of the Defendants’ April reports. There was no evidence as to who that was, or how they had arrived at that date.[98]Secondly, the ‘Summary of the solicitor’s review’ was, in reality, no such thing. In his Report on Title, Mr Marks at Maxwell Batley had carefully advised as to the effect of the shortfall clawback provision (see paragraph 87 above). That advice was completely excised from the summary of his report which was included in the prospectus.[99]These two omissions could not have been more important. Each of the investors bought into the K/S entities as a result of these prospectuses. They told me that, if they had known that there was in fact no prospect for medium-term rental growth (either because the turnover would not exceed the base rent or because of the shortfall clawback provision) they would not have invested in the K/S at all. But, certainly in relation to Wellingborough, neither of those omissions can be traced back to the Defendants or to Maxwell Batley; on the contrary, although both the Defendants and the solicitors had provided the correct advice, that advice was not included in the prospectus. Why not?[100]Mr Lawrence put this question to Mr Ashton in a number of ways. Mr Ashton had no answer; no explanation at all for how, for example, the part of the Maxwell Batley report dealing with the shortfall clawback had been omitted from the K/S Wellingborough prospectus. Beyond attempting to distance himself personally from the physical production of the prospectuses, Mr Ashton was unable to assist as to how the information available to Scanplan in the reports had been omitted.[101]I can deal more shortly with the prospectuses in respect of Lincoln, Chesterfield and Bradford. They all contained a so-called ‘Summary of the solicitor’s review’ which was in precisely this same form as the equivalent page in the Wellingborough prospectus (paragraphs 96f) and 98 above). In other words, the reference to the shortfall clawback provision was excluded each time.[102]As to rent rises, the prospectus for Lincoln indicated that the first rent rise (ie turnover rent becoming payable) would occur in 2009. That was not the date in the Defendants’ report which forecast that base rent would be exceeded in year 6 (paragraph 81 above) namely 2010-2011. Thus the calculation in the prospectus was again significantly more optimistic than that provided by the Defendants, and must again have been calculated by someone at Scanplan. The forecasts in the prospectuses for when the predicted rent rise would occur for Chesterfield and Bradford were 2011 and 2014 respectively, which was again more optimistic – although this time possibly only by a few months – than the Defendants’ April reports. Again, there is no evidence as to how Scanplan calculated these dates.[103]Finally, I should also note that each of the four prospectuses emphasised that Scanplan had bought the hotels for less than the valuations provided by the Defendants. This provides further support for the conclusion that Scanplan relied on the Defendants’ valuations when buying the hotels, although it also suggests that, if the Defendants’ figures had been lower then, depending on the precise figures involved, Scanplan would have attempted to re-negotiate rather than pull out altogether.

C10 The Production and Effect of the Prospectuses

[104]In his opening and closing submissions, Mr Speaight submitted that, when dealing with how and why the information in the prospectuses took the form it did, the court had a choice: either it could make an unpleaded finding of fraud on the part of Scanplan, or it could say that the omissions/changes to which I have referred were inadvertent. I do not see this issue in quite such apocalyptic terms, partly because, in the absence of any pleading of fraud, I am in no position to make any such finding, and partly because the prospectuses were produced after the purchase of the hotels, so that issues arising out of their production might be said to be of limited relevance to the negligence case against the Defendants. That said, it seems to me that the question of whether the material was omitted from the prospectuses deliberately or through inadvertence is relevant to the issue of reliance that I have to decide, so it is a matter which I need to address.[105]In my judgment, there is no evidence on which I could find that the omission from the prospectuses of any reference to the shortfall clawback provision (or its effect) was inadvertent. On the other hand, there is a considerable amount of evidence which leads me to infer that the omission must have been deliberate. Amongst the particular factors which lead me to infer that the omission was deliberate are the following: a). Scanplan would have known that the possibility of medium-term rental growth was important for the investors. In those circumstances, they would have had a clear incentive to play down forecasts which suggested that there would be no such rental growth. Whilst I note Mr Speaight’s submission that they would have been unlikely to have knowingly excised the offending passages, because they would have known that this would subsequently result in trouble with the investors, that argument assumes that, in the summer of 2005, Scanplan intended to be in business for the longer term. But, as with so many matters surrounding Scanplan, I have no direct evidence as to that, because of the failures noted in Sections B1 and B3 above. In addition, I note that Scanplan have subsequently been through a name-change, the departure of key staff like Mr Ashton, complaints about Mr Betting’s conduct that were made to the authorities in Denmark, the suggestion of a police investigation, and now the Danish equivalent of receivership/liquidation. That all suggests that Scanplan (or more properly Mr Betting) may not have had an intention to be in business for much longer after 2005. b). Further, I cannot help but record other evidence which, in my view, indicated a cavalier attitude on the part of Scanplan to the subsequent investors, and which was therefore consistent with the deliberate omission of pessimistic material from the prospectuses. There was the evidence of Mr Moller that, although Scanplan were aware of the rental growth problem in 2006, they sent a representative to the board meetings of K/S Wellingborough in 2006 and 2007 who made no mention of the problem at all. And there was the evidence of Mr Stovring-Hallsson to the effect that he raised the problem with Mr Betting directly, who had no explanation and took no action. It seems to me that such evidence is consistent with the deliberate excision of the warning in the Maxwell Batley Reports. c). The warning about the shortfall clawback provision was clear in those reports; indeed it was also apparent from at least one part of the text of the Defendants’ valuation reports (paragraph 79 above), as well as the numerous emails from ESL set out in Sections C3 and C5 above. It is inherently unlikely that those at Scanplan putting together the four prospectuses would have inadvertently failed to address this critical information, given that it came from (and was contained in) so many different source documents. d). If the omission was a mistake, it was not made once but on four separate occasions, in four separate prospectuses, each of which was different. (Indeed, I assume that the same omission also arose in connection with the other four prospectuses as well, in respect of which the claims have been compromised). Moreover such a mistake itself would have been based upon the failure to register advice from numerous sources. Again, such a scenario is so unlikely that it must again suggest that the omission was deliberate and not inadvertent.[106]Furthermore, I have noted that, in relation to rental growth, and the date when surplus rent might become payable, the prospectuses do not reflect the Defendants’ reports, and instead set out Scanplan’s own forecasts and calculations. In the case of Wellingborough, this involved forecasting rental growth when the Defendants had said that there would be none (paragraph 84 above), and when ESL had also said that there would be none (paragraph 62 above). In the case of the other three hotels, it involved a different and more optimistic forecast than that provided by the Defendants (paragraph 102 above), and different again to the forecasts produced by Mr Bentzen (paragraph 68 above). How, one asks rhetorically, can that have been a mistake? Specific figures and calculations were inserted by Scanplan into the prospectuses which did not come from the Defendants. In the absence of any evidence as to how these figures were arrived at, I cannot accept that they were included in the prospectuses ‘by mistake’ Mr Speaight contends that this finding overlooks paragraphs 19 and 24.1 of Mr Bentzen’s statement. But these passages refer only to the Defendants’ reports (which, for the reasons that I have given, do not tally with the information in the Prospectuses) and offer no explanation as to why, for example, on Wellingborough, rental growth was predicted by Scanplan despite the fact that the Defendants had said that there would be none. .[107]I have already said that I accept that Scanplan relied on the Defendants’ bottom-line valuation figures. But the findings set out in the previous paragraphs will be relevant to the wider negligent mis-statement case dealt with in Section D below, where the issue of reliance is central. In addition, what this analysis of the omissions from the prospectuses also highlights is that the investors who now constitute the four K/S Claimants are only here, pursuing this claim against the Defendants, because they relied on the terms of the Scanplan prospectuses which were, in my view, wholly misleading. D. THE NEGLIGENT MIS-STATEMENT CASE ON SHORTFALL/RENTAL GROWTH

D1. Duty

[108]On behalf of the Claimants, Mr Speaight argued that, in addition to the admitted duty which the Defendants owed to the Claimants in relation to the valuation exercise, the Defendants also owed a duty to take reasonable care not to mis-state in their reports any important matter that they might have considered when undertaking that valuation exercise. He submitted that, by reference to the classic statements of duty in the professional negligence context, such as Hedley Byrne & Co v Heller & Partners [1964] AC 465 and Customs & Excise Commissioners v Barclays Bank Plc [2006] UKHL 28, the Defendants in this case voluntarily assumed such a duty to the Claimants because they possessed a special skill and, in return for fees, made statements which they knew or could reasonably have foreseen would be relied on by the individual Claimants and lead to foreseeable loss.[109]On behalf of the Defendants, Mr Lawrence properly accepted that there was a duty of care in respect of the valuations produced by the Defendants in April 2005. Thus, if the Defendants had mis-stated the position in respect of the shortfall, and this had caused their valuation to be negligent, they would prima facie be liable to the Claimants in tort. That second element of the Claimants’ claim is addressed in Section E below. However, he submitted that there was no separate, free-standing duty of care in respect of any statement made by the Defendants concerning the operation of the shortfall clawback provision and/or the related topic of rental growth.[110]I consider that, taking account of all the circumstances, there was a separate duty of care, as alleged by the Claimants. It seems to me to be artificial to suggest that a valuer in the position of the Defendants owed a duty in relation to the ultimate valuation, but no duty in respect of any other statements in their report that might be both significant and erroneous. There may be difficulties with such a case for other reasons (being able to establish reliance, for example, on any part of the report beyond the stated valuation figure) but that is a different issue. Accordingly it seems to me that, in relation to these hotels, the Defendants owed a duty of care in tort that extended beyond the pure question of valuation, to the making of negligent statements.[111]For what it is worth, however, I do not accept that, in relation to the hotels at Bradford and Wellingborough, the duty was extended further or confirmed by the letter of instruction from the Alliance and Leicester (paragraph 70 above) which expressly required the Defendants to “describe the rent review provisions and comment if the landlord’s interest is adversely affected”. There were no rent review provisions in this case, something which the Defendants made plain in their report, and something of which Scanplan made much in the prospectuses. The issue therefore did not separately arise for the Defendants to consider. D2. Breach a). Lincoln, Chesterfield, Bradford[112]It is the Claimants’ case that the Defendants were in breach of duty in relation to these three hotels because the valuation reports of April 2005 said that the hotels would generate surplus rent in the sixth, seventh and tenth year of trading respectively, and those statements were wrong and negligent because they failed to take into account the shortfall clawback provision. In particular, they draw attention to the forecasts, referred to at paragraphs 80, 82 and 86 above, which the Claimants say mis-stated the position, because they ignored the effect of the clawback.[113]The Defendants say that, although these statements were ineptly worded, they have to be seen in the light of the fact that each of the April 2005 reports also expressly set out the shortfall clawback arrangement at the outset of the report (in the terms set out in paragraph 79 above) and that, seen in that context, these statements were not made in breach of duty.[114]I have concluded that the Defendants’ forecasts as to when surplus rent might be generated on these three hotels did constitute a negligent mis-statement. The average intelligent reader of the April valuation reports would have concluded that the shortfall clawback provision, referred to at the outset of each report, had been taken into account in the Defendants’ future projections as to when the surplus rent would be payable. To that extent, I do not regard the passages in the April reports as being in any way inconsistent; the paragraph in the earlier part of the report summarises the shortfall clawback provision, whilst the later paragraph would reasonably have been taken to have allowed for that provision in the forecast.[115]It is easy to see how this breach of duty occurred. The spreadsheet was set up in such a way that it tracked, by reference to forecast increases in turnover, the year when the turnover rent would exceed the base rent. That calculation was then fed straight into the text. Thus the text took no account of the shortfall clawback provision. So I agree with Mr Speaight that the error which the Defendants made was to fail to make any allowance in the spreadsheet (or more properly in the computer programme which ran the spreadsheet) for the effect of the shortfall clawback provision. b). Wellingborough[116]In my judgment, there was no similar breach in relation to Wellingborough. Contrary to their reports on the other three hotels with which I am concerned, the Defendants made it plain that, in relation to the Wellingborough hotel, there was no possibility of surplus rent. That statement was clearly set out on the face of their April valuation report and, even if the statement of the turnover rent at 0% was a technical error, it seems to me that, in one way, it made it even clearer that, in their view, no surplus rent would ever be payable.[117]I reject the suggestion that, in some way, the Defendants erred because they did not set out the forecast that there would be no surplus rent on Wellingborough in what might be called neon terms. It seems to me that this criticism is entirely artificial. The court has to assume that the Defendants’ April 2005 valuation reports, which are at the heart of this case, would have been read carefully by an intelligent reader. Had they been read carefully at Scanplan (and there is no evidence that they were not), it would have been seen at once that there was no prospect of rental growth on Wellingborough.[118]Of course, in one sense, the Defendants were fortunate in respect of Wellingborough, because there was nothing to say that they had considered the shortfall clawback provision here, any more than on the other three hotels. The point, however, was that the clawback was academic at Wellingborough, because the Defendants had advised that turnover would never get to the stage when the base rent was exceeded, just as Mr Harris of ESL had noted in April (see paragraph 62 above).[119]In those circumstances, I reject the negligent mis-statement claim against the Defendants in relation to the hotel in Wellingborough. D3 Causation and Reliance a). The Issues[120]Accordingly, although I reject the case at the breach stage in relation to Wellingborough, I accept the Claimants’ case that, in relation to the hotels in Lincoln, Chesterfield and Bradford, the Defendants owed a separate duty to the Claimants and that they were in breach of that duty because they made forecasts as to future rental that failed to take into account the shortfall clawback provision. Thus it is necessary for me to go on to consider issues of causation and reliance which, on this part of the case, was where the parties were principally at odds.[121]Mr Lawrence submitted that, even if it had got this far, the Claimants’ case in relation to negligent mis-statement must fail at this stage. He said that the evidence pointed overwhelmingly to the conclusion that Scanplan knew about the shortfall clawback provision, how it worked and what it might be worth. He said, therefore, that whatever the wording in the Defendants’ reports, nobody could have relied on the mis-statement in taking the decision to purchase the hotels.[122]In addition, Mr Lawrence said that ESL, who were at the very least Scanplan’s agents, and therefore the agents of the legal entity who constituted the K/S at the time of purchase, were also well aware of the provisions. He relied on the proposition that where, in the course of any transaction in which he is employed on the principal’s behalf, an agent receives notice or requires knowledge of any fact material to that transaction, then the principal is precluded from relying upon his own ignorance of that fact and is taken to have received notice of it from the agent: see Ayrey v British Legal and United Provident Assurance Co Ltd [1918] 1KB 136 and paragraph 137 of Halsbury’s Laws of England, 5th Edition, Volume 1 (Agency), 2008.[123]Mr Speaight properly accepted that, to establish his case on mis-statement, he had to establish reliance: see BBL v Eagle Star [1994] 2 EGLR 108 and paragraph 10-122 of Jackson and Powell on Professional Liability, 6th Edition, 2007. But he said that the threshold was low, and he relied on BBL as authority for the proposition that, even where the lender believed the valuation to be too high, the fact that he had relied on that figure as a comfort in purchasing the property was sufficient to establish reliance. A similar result obtained in Speshal Investments v Corby Kane Howard [2003] EWHC 390 (Ch) where the reliance placed on the advice was found to be unreasonable, but was still sufficient to establish liability. In that case, Hart J said that unreasonableness would be relevant for the purposes of contributory negligence.[124]Mr Speaight also denied that ESL’s knowledge could be imputed to the Claimants, on the grounds that reliance was subjective and factual, and could not be imputed. In this regard he also relied on Speshal Investments. b). Analysis[125]The findings that I have made in Section C above that are relevant to the issue of reliance can be summarised as follows: a). Scanplan (certainly Mr Ashton) knew about the shortfall clawback provision and how it worked. They knew about it because they had received repeated advice about the provision and its effect from ESL (see in particular the e-mail exchanges at paragraphs 41-45 and 56-61 above) and because of the clear terms of the Maxwell Batley Reports on Title. b). Scanplan (certainly Mr Ashton) had not queried any of this advice (paragraph 45 above) and had subsequently confirmed that they understood it (paragraph 61 above). This should be compared with Mr Kaalund’s genuine surprise when he first saw the advice that Mr Ashton had received about the shortfall clawback provision (paragraph 46 above). c). Scanplan (certainly Mr Ashton) had received detailed advice from the same sources as to the relevant figures, which demonstrated the potentially significant financial effect of the shortfall clawback provision. They had been advised, for example, that sums in the order of £2.27 or £4 million by way of turnover rent had to be earned before a penny of surplus rent would actually become payable (paragraphs 44 and 65-66 above). d). Scanplan and/or ESL also knew that the forecasts provided to the lenders would be based upon the assumption that there would be no rental growth (paragraphs 53 and 62 above) and, despite having opportunities so to do, they had not indicated that Scanplan had a different or contrary interest (paragraph 63 above). Indeed, they cheerfully accepted that, at least for some hotels, rental growth was “academic” (paragraph 62 above). e). Mr Ashton confirmed in his cross-examination that he knew, when looking at the spreadsheets produced by the Defendants in their valuation reports, that the shortfall had to be exhausted before the turnover rent there forecast would become payable (paragraph 81 above). That it was not difficult to spot this point was consistent with the evidence of one of the investors, Mr Stovring-Hallson, who did not even have the forecasts, but said that he immediately saw the problem when he read the lease (paragraph 48 above). f). Scanplan (certainly Mr Ashton) were also aware that the Defendants had advised that at least one of the hotels with which we are concerned, namely the hotel in Wellingborough, was not going to achieve anything other than the base rent over the 20 year term of the lease (paragraphs 38 and 84 above).But when they came to produce their prospectus, Scanplan plainly did not rely upon the rental growth forecast in the Defendants’ Wellingborough report. If they had done, the prospectus on Wellingborough would have made it plain that there was going to be no rental growth. Instead, Scanplan did their own calculation (paragraphs 97 and 106 above). g). Similarly, in relation to the hotels in Lincoln, Chesterfield and Bradford, Scanplan did not use or rely upon the Defendants’ rental growth forecasts in the prospectus, and instead undertook their own calculations (paragraphs 102 and 106 above). Again they could not have relied upon the Defendants’ forecasts. h). Maxwell Batley’s Reports on Title were not properly summarised in the prospectuses because the advice about the shortfall clawback and its effect was omitted altogether. That again suggests that Scanplan were not relying on at least some aspects of the advice which they received (paragraphs 98 and 105 above).[126]Armed with all this detailed information (both positive and negative), Scanplan – who were, at the time of the purchases, the sole partner in each of the K/S Claimants - went ahead and bought the hotels. In the absence of any evidence to the contrary, I conclude that this decision can only have been taken because Scanplan believed that, despite the clear advice/knowledge concerning the shortfall clawback provision which they received, the hotels represented a worthwhile investment opportunity for them. The findings summarised in paragraph 125 above lead to the overwhelming conclusion that, whilst they relied upon the Defendants’ final valuation figure for each hotel, Scanplan did not separately rely on the Defendants’ rental growth forecasts, and therefore did not rely on the Defendants’ failure to take account of the shortfall clawback provision when undertaking those forecasts.[127]Mr Speaight submitted that Scanplan relied on the Defendants because it was only the Defendants who were giving expert advice as to when the shortfall would be exhausted, such that turnover rent would then become payable. He suggested that the Defendants were in a unique position in this respect. But the evidence was quite contrary to that submission. First, as we have seen, a number of people, including ESL and Mr Bentzen, produced calculations and other documents showing the amount of the shortfall and forecasts of rental growth which either did take, or should have taken, the shortfall clawback provision into account. Secondly, Mr Ashton expressly confirmed that he was aware of the need for the shortfall to be exhausted before the surplus rent shown in the Defendants’ forecasts would become payable. That knowledge was the product of advice from a variety of sources, including ESL. Thirdly, Scanplan’s prospectuses actually ignored the Defendants’ advice as to rental growth altogether, and used their own calculations as to when surplus rent might be payable. In my judgment, there is nothing to suggest that Scanplan relied on the Defendants for anything other than the valuation figures themselves.[128]Whilst Mr Speaight was right to say that the courts will often be prepared to infer reliance from relatively limited material, it is not appropriate to infer that the claiming party relied on a statement that purported to say X, when the overwhelming evidence is that the claiming party knew that the position was, in truth, Y. That is this case. Moreover, Mr Speaight’s authorities on the issue of reliance were all concerned with reliance upon the ultimate valuation figure (which I have found to have occurred in this case, but which is irrelevant to this part of the claim) and not with reliance upon separate statements in the report, which is the issue with which I am presently concerned.[129]One of the cases to which I was referred was Tenenbaum v Garrod [1988] 2 EGLR 178, in which the Court of Appeal dismissed an appeal in a case where the claimant alleged that he had relied on a letter from the respondent estate agent who had valued a property at £400,000. The judge accepted, and the Court of Appeal agreed, that the letter was not intended as a genuine independent valuation; that it was known to the appellant that it was sent as a bargaining counter in negotiations with the liquidator; and that the appellant did not therefore rely upon the valuation figure. It seems to me that this is not that far removed from the present case: whatever the Defendants’ reports said on the topic of rental growth (and whether or not they took into account the shortfall clawback provision), Scanplan did not rely upon it, because they had received clear advice from a variety of sources that focused expressly on that very provision, and ultimately undertook their own calculations and forecasts.[130]I reiterate that, on the issue of reliance, I have been hampered by the lack of any evidence, either oral or contemporaneous, from Mr Betting, the man who took the decision to purchase the hotels. But, on the limited material before me, I consider that it is inconceivable that Mr Betting relied on the Defendants’ mis-statement concerning the clawback/rental growth, in circumstances where the English arm of his operation (ESL) and his solicitors, who were instructed to look at this very point, had each given Scanplan such clear advice about it, and when Mr Ashton, the man at Scanplan responsible for the deal, was, by his own admission, aware of the true position. The Claimants cannot now be in a better position on this issue merely because they have chosen not to disclose any internal Scanplan documents or call Mr Betting as a witness.[131]Of course, on the basis of my findings of fact, summarised above, the issue as to whether Scanplan (as principal) should be imputed to have the knowledge that ESL had (as their agent) is largely immaterial. Assuming for the moment that Mr Speaight is right, and reliance is entirely a subjective matter, the evidence of Mr Ashton and the evidence of the contemporaneous documents is clear beyond any doubt: ESL (and others) had told him about the shortfall clawback provision and its financial effect, and he had acknowledged that he understood that advice. In those circumstances, the only inference that I can properly draw is that Scanplan in general, and Mr Ashton in particular, knew about the shortfall clawback provision, how it worked, and knew what financial impact it might have. As a matter of fact, the knowledge of ESL was passed on to Scanplan, and therefore imputing knowledge to Scanplan becomes unnecessary.[132]However, although it is not strictly necessary for me to decide the point, I should add that, in my judgment, Mr Lawrence was right to say that Scanplan were fixed with the knowledge of their agents (in particular, ESL). It would be absurd to find that Scanplan did not know about the shortfall clawback provision, and its legal and financial effect, in circumstances where ESL - who were acting on their behalf throughout - had a complete knowledge of both matters. Such a conclusion would also be contrary to the principle of law set out in paragraph 122 above.[133]For all these reasons, I conclude that the separate claim based on negligent mis-statement fails on the issue of reliance. The Claimants did not rely on the Defendants’ mis-stated forecasts when purchasing the hotels.

D4. Loss

[134]Again, although it is unnecessary for me to express a view as to the loss claimed arising out of the mis-statement case (because I have concluded that there was no reliance) I ought to add, for completeness, that I was not at all convinced on the evidence that an entitlement to the pleaded loss said to arise from the mis-statements had been made out. The Claimants’ case on loss is the same in respect of both the negligent valuation case and the negligent mis-statement case; it is principally the alleged over-payment for the hotels. Whilst, of course, that would be the prima facie measure of loss arising out of the claim for negligent valuation, it by no means follows that that would be the measure of loss arising out of the separate mis-statement case in respect of rental growth. Even if, contrary to my finding above, there was reliance on the mis-statements as to rental growth, there was no evidence to support a conclusion that, if the Defendants’ valuation figures had been non-negligent but the error in their rental growth forecast had been known, Scanplan would not have gone ahead and bought the hotels.[135]In order for the Claimants to recover the alleged over-payment for the hotels as a result of the mis-statement case alone, it seems to me that they would need to demonstrate that, notwithstanding the reasonableness of the Defendants’ valuation (which would have to be assumed for this purpose), specific advice about rental growth and the shortfall clawback provision would have meant that they would have not bought these hotels after all, thus entitling them now to claim damages for mis-statement on the basis of over-payment for the hotels. I was troubled about the absence of cogent evidence to support such a case and put the point to Mr Speaight during his closing submissions. He appeared to accept that it was not straightforward, but maintained that it was the appropriate measure of loss in all the circumstances. In my judgment, for the reasons that I have given, that case was not made out. Thus, even if the Claimants had succeeded on reliance, their case would have fallen at this stage, because I would have found that the mis-statement did not give rise to the head of loss claimed. D5 Summary on Negligent Mis-Statement Allegation.[136]A separate duty was owed by the Defendants to the Claimants to take reasonable care in making statements about rental growth in general and the shortfall clawback provisions in particular. For the reasons set out above, I find that there was no breach of that duty in respect of Wellingborough. In relation to the hotels at Lincoln, Chesterfield and Bradford, I have concluded that there was a breach of that duty, but that breach was of no consequence because correct advice from a wide range of sources relating to the shortfall clawback provision and its financial effect had been given to - and understood by - Scanplan. They did not separately rely upon that part of the Defendants’ April valuation reports. They cannot now argue that in some way the Defendants’ error was causative of the claimed loss or had any separate adverse consequences.[137]Of course, as I have made plain throughout this section of the Judgment, that only deals with the Claimants’ case concerned with the negligent mis-statements themselves. If the negligent mis-statements as to the shortfall clawback provision/rental growth gave rise to or formed part of a negligent valuation by the Defendants (because, for example, the failure to note the effect of the clawback resulted in an unjustifiably optimistic valuation figure), then the Claimants would have an entirely separate cause of action against them. Moreover, that claim would not be vulnerable to the same causation/reliance arguments, because I have found that Scanplan did rely upon the Defendants’ valuations of each hotel when they purchased them. I therefore turn to deal with that second (and rather more conventional) part of the Claimants’ case. E. THE NEGLIGENT VALUATION CASE

E1 The Issues

[138]There were a number of issues between the parties in respect of the negligent valuation element of the claim. They can be summarised as follows: (a). What is the focus of the court’s enquiry in a negligent valuation case? Is liability made out every time a particular failure of approach or methodology is demonstrated, or is there no case on liability if, despite the breach or breaches that may have been established, the valuation figure itself was within a permissible bracket? This was very largely a dispute of law, and I deal with it in Section E2 below. (b). Although they agreed that it was the critical calculation, the parties were in dispute as to the appropriate net initial yield percentage. The Defendants’ figures were all in the region of 6.25%. Their expert, Mr Elliott, identified figures at between 6.41% and 6.55%. The Claimants’ expert, Mr Chess, originally utilised a percentage of 6.75% (and 7% for Bradford) but, in his final report, he identified a percentage of 7% for Lincoln, Chesterfield and Wellingborough, and a yield percentage of 7.25% for Bradford. I deal with the yield issue at Section E3 below. (c). What, on the evidence in this case, is an appropriate bracket/margin of error? This was a dispute which encompassed some principles of law and some expert analysis. Mr Chess focused on the yield percentage, and maintained that an appropriate margin of error was a 0.5% deviation from the mean (in other words 0.25% up or down). This was considerably less than 10% up or down when translated into an overall valuation figure. Mr Elliott argued that the right percentage was in excess of 10% up or down on the correct valuation figure. I deal with this issue in Section E4 below. (d). Finally, taking into account all of the foregoing matters, I have to decide whether the defendant’s valuation of these four hotels was negligent: Section E5 below.

E2 The Law

[139]The issue between the parties can be summarised by reference to two of the many authorities cited to me. It was the Claimants’ case that “there is no proposition of law that in valuation cases a valuer is not negligent if his valuation falls within such a [permissible] bracket”: see Mr E A Machin QC, sitting as a deputy High Court judge, in McIntyrev Herring Son & Daw [1988] 1 EGLR 231 at 233F. The Defendants, on the other hand, relied on what Neuberger J (as he then was) said in Lewisham InvestmentPartnership Limited v Morgan [1997] 2 EGLR 150 at 153G: “If I were to conclude that the defendant was negligent in respect of one or more of the specific allegations, it would still be necessary to consider whether his valuation fell within the permissible bracket because, if it did, then the defendant would still escape liability”.[140]The debate can also be seen in the pages of the text books. In Jackson & Powell, at paragraph 10-060, the authors say:
“…the English courts have held that it is a necessary condition for liability, at least in the case of errors in the assessment of rentals or yields, that the final result should be outside ‘the bracket’. The extent of authority is now such that it appears unlikely that a first instance judge will find a valuation negligent unless it is outside the bracket.”
On the other hand, in Professional Negligence & Liability (Informa, 2008), at paragraph 8.148, the learned editor writes:
“It is submitted that, while reference to a margin of error, or bracket, may justifiably be used to cast doubt on the degree of skill and care exercised by a valuer, the concept should be permitted no greater status than this. The legal duty of a valuer, like any other professional adviser, is to exercise reasonable skill and care, and evidence as to the figure which the valuer has put forward cannot itself show whether or not this duty has been fulfilled.”
[141]It is not the purpose of my Judgment to re-invent this particular legal wheel. That is partly because I believe there to be Court of Appeal authority, binding on me, which gives a clear answer to this question; partly because this issue has recently been considered and, in my view, resolved by Lewison J in Goldstein v Levy Gee (a firm) [2003] PNLR 35 (page 691); and partly because I have reached a firm conclusion of my own which is consistent with these authorities. All point in exactly the same way: that, whilst a valuer might be in breach of duty because he fell below the standard of a reasonable valuer in his methodology, that valuer will not be liable in negligence if it can be shown that, notwithstanding the error, the valuation figure that he produced was within a reasonable bracket. I set out briefly below those three strands of my reasoning. (a). The Decision inMerivale Moore PLC v Strutt & Parker (a firm)[2000] PNLR 498[142]In this case, the judge at first instance had found that the valuer had been negligent in two respects: first, in his finding that the potential rental income was £60 per square foot; and secondly, in his failure to qualify a 7.50% yield figure as being speculative, given the lack of an extensive market in that type of lease. The Court of Appeal held by a majority that the finding of negligence in respect of the rental income could not stand, because the over-valuation was of the order of 9% and was therefore within the permissible margin of error. However, they went on to dismiss the appeal because they concluded that the finding of negligence in respect of the absence of a warning about the yield figure was justified.[143]In dealing with the law on this topic, Buxton LJ said this, at pages 515-516: Negligent valuation: authority “It has frequently been observed that the process of valuation does not admit of precise conclusions, and thus that the conclusions of competent and careful valuers may differ, perhaps by a substantial margin, without one of them being negligent: see for instance the often quoted judgment of Watkins J in Singer & Friedlander Ltd v John D Wood[1977] 2 EGLR 84 at p85G; and the House of Lords in the Banque Lambertcase, [1997] AC 191 at p221F-G. That has led to the courts adopting a particular approach to claims of negligence on the part of valuers. In the general run of actions for negligence against professional men:
‘it is not enough to show that another expert would have given a different answer...the issue...is whether [the defendant] has acted in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession’: Zubaida v Hargreaves[1995] 1 EGLR 127 at p128A-B per Hoffmann LJ, citing the very well-known passage in Bolam v Friern Hospital Management Committee [1957] 1 WLR 582 at p587. However, where the complaint relates to the figures included in a valuation, there is an earlier stage that the court must be taken through before the need arises to address considerations of the Bolam type. Because the valuer cannot be faulted in any event for achieving a result that does not admit of some degree of error, the first question is whether the valuation, as a figure, falls outside the range permitted to a non-negligent valuer. As Watkins J put it in Singer & Friedlander, at p86A, ‘There is, as I have said, a permissible margin of error, the 'bracket' as I have called it. What can properly be expected from a competent valuer using reasonable care and skill is that his valuation falls within this bracket’
. A valuation that falls outside the permissible margin of error calls into question the valuer's competence and the care with which he carried out his task: ibid. But not only if, but only if, the valuation falls outside that permissible margin does that enquiry arise. That is what I take to have been the view of Balcombe LJ, with whom the remainder of the members of this court agreed, in Craneheath Securities v York Montague[1996] 1 EGLR 130 at p132C, when he said:
‘It would not be enough for Craneheath to show that there have been errors at some stage of the valuation unless they can also show that the final valuation was wrong’
. As it was put by His Honour Judge Langan QC in Legal & General Mortgage Services v HPC Professional Services[1997] PNLR 567 at p574F, in an analysis that I have found helpful, once it is shown that the valuation falls outside the ‘bracket’: ‘the plaintiff will by that stage have discharged an evidential burden. It will be for the defendant to show that, notwithstanding that the valuation is outside the range within which careful and competent valuers may reasonably differ, he nonetheless exercised the degree of care and skill which was appropriate in the circumstances’”.[144]It seems to me plain from that analysis that Buxton LJ, with whom, on this point, Nourse LJ agreed, was making it plain that a discrete breach of duty in arriving at the valuation figure would not give rise to liability, unless the valuation figure produced by the breach was outside the permissible bracket. Subject to the next issue, I consider that that conclusion is binding on me.[145]In order to minimise the potential effect of the decision in Merrivale Moore, Mr Speaight argued that, because the appeal was dismissed, the passage set out above was not part of the ratio decidendi and therefore not binding on me. I cannot accept that submission. It seems to me plain that the Court of Appeal expressly rejected the judge’s finding of liability in tort in relation to the rental figure because it was within the permissible bracket: see the analysis at page 519. The only reason that the appeal was ultimately dismissed was because, in relation to the quite separate question of the qualification to the yield percentage, the court was not persuaded that the judge was wrong. It does not seem to me that, simply because of the existence of this entirely separate argument, the analysis by Buxton LJ did not form part of the ratio and/or is not binding on me. I therefore regard myself as bound to conclude in the present case that, if the valuation figure was within the permissible bracket, liability is not established.

(b) The Decision in Goldstein v Levy Gee

[146]Between paragraphs 37 and 69 of his careful judgment in this case, under a heading ‘How is Negligence Established?’, Lewison J analyses the relevant authorities on this issue, what might be called the battle between methodology, on the one hand, or result, on the other. Save for one point, addressed briefly below, it is unnecessary for me to set out that analysis in any detail. Suffice to say that, at the end of that part of his judgment, Lewison J concluded that the passage in the Court of Appeal judgment in Merrivale Moore, to which I have already referred, was part of the ratio and that he was bound to follow it. As I have already made plain, that is a conclusion which I too have reached.[147]One of the difficulties that Lewison J noted in connection with this debate was that there were indications in speeches by Lord Hoffman that the method route was to be preferred to the result route. Reference in particular was made to his advice in the Privy Council case of Lion Nathan v C-C Bottlers Limited [1996] 1 WLR 1438 and his speech in SAAMCO v York Montague [1997] AC 191. However, rather like Judge Langan QC in Legal & General Mortgage Services, I consider that these observations can properly be distinguished because those were both cases which were concerned with the quantification of damages, as opposed to an assessment of liability. Whilst that point did not appear to impress Lewison J overmuch (see paragraphs 55-57 of his judgement in Goldstein), I consider that, on its face, it is a clear point of difference between those two cases and any case, like the present one, which is concerned with an assessment of liability.[148]Accordingly, I regard the analysis in Goldstein v Levy Gee asextremely helpful, and I consider, with respect, that Lewison J’s conclusion, to the effect that a judge at first instance must analyse a valuer’s liability by reference to the results route, not the methodology route, is correct.

(c) My Own Views

[149]For what they are worth, my own views can be summarised in this way. A professional valuer, asked to value a property, a company or some other kind of asset, is in a slightly different position to other professionals. In the ordinary course, he knows that, ultimately, all that is likely to matter will be the final figure that he puts on the asset being valued. He knows that, in the commercial world, his clients may not understand or even look at the text of his report or the methodology that he has adopted to arrive at his valuation. Particularly in property valuation, all that usually matters is the result: the figure on the last page of the report.[150]This is rather different to the position of other professionals. An architect’s design advice will be judged by reference to a whole raft of factors: structural, aesthetic, economic, and whether the design is permissible under planning or building regulations. A lawyer who gives advice as to the prospects of success in a particularly difficult case will know that, whilst his suggested percentage chance of success (if he has been unwise enough to state such a percentage) will be of importance to his client, so too might be his analysis of each of the particular difficulties which have given rise to that ultimate percentage. So a bullish advice on the limitation aspects of a claim which may face other difficulties might lead the client to adopt a particular course of action, even if the overall chance of success in the case is considered low. Accordingly, it seems to me only a matter of common sense that, in the ordinary valuation case, the valuer’s performance should be judged by reference to the final figure, not the minutiae of how he got there.[151]There is another reason why I consider this to be the appropriate analysis. It is often quite easy to point to particular aspects of a valuation process in any given case which were less than satisfactory. In the present case, the Defendants went about some aspects of their work in a sloppy fashion, doubtless a reflection of the rumbling dispute about their fees for the November 2004 report. But if, on analysis, their final valuation was within a reasonable bracket, then what would be the effect of a finding of breach which did not take the valuation outside a reasonable bracket? Where would such a finding lead? What loss would be caused? Save in an exceptional case, if the valuation was within a reasonable bracket, any discrete breaches would not have caused any loss and therefore there could be no finding of liability in any event.[152]This can be illustrated by a simple example. Suppose the valuer made a negligent error as to the appropriate comparables, which resulted in a grossly over-stated starting figure. And then suppose that, in doing his detailed calculations, the valuer made another inexcusable error, this time a purely mathematical mistake, which led to a final figure that was much lower than it would otherwise have been if he had done the maths correctly. These two breaches may cancel each other out so that, whilst the valuer may have been in breach of duty twice over, his ultimate valuation figure may be very close to the correct figure. In those circumstances, liability would not have been made out because, possibly as a result of sheer luck, his final figure cannot sensibly be criticised.

(d) Summary

[153]For all these reasons, I am in no doubt that, in valuation cases, the law properly focuses on the end result, not the way in which that end result may have been achieved.

E3 The Appropriate Yield Percentage

(a) Introduction

[154]As noted above, the parties were in dispute about the appropriate net yield percentage. The differences can be summarised in the table below: Hotel Defendants’ Figure Chess Original Chess Final Elliott Lincoln 6.26% 6.75% 7% 6.55% Chesterfield 6.26% 6.75% 7% 6.41% Wellingborough 6.26% 6.75% 7% 6.45% Bradford 6.25% 7% 7.25% 6.44%[155]The column headed ‘Chess Original’ needs to be explained. As Mr Lawrence demonstrated in cross-examination, the Claimants’ original letter of claim did not contain any figures as to yield and therefore no cogent case as to the correct valuation. In a letter dated 16 January 2009, the Claimants’ solicitors responded to the Defendants’ solicitors’ complaint about this by sending through a schedule identifying what they said were the “correct yields”. The yields were 6.75% for Lincoln, Chesterfield and Wellingborough, and 7% for Bradford.[156]Mr Chess confirmed that those figures came from him. Although he suggested in his report that these figures were produced before he had inspected the properties and so forth, it became apparent in cross-examination that this was incorrect and that he had inspected the properties and undertaken a good deal of work by the time he calculated these yield figures. Indeed, despite extensive questioning on this point by Mr Lawrence, it was impossible to identify any relevant matter that Mr Chess had not taken into account when fixing the yield percentages which I have set out under the heading ‘Chess Original’.[157]It was common ground that the appropriate method of calculating the net initial yield in this case was to identify the yield that would be appropriate for an ordinary lease (that is to say, a lease with a five year rent review), and then to add an allowance to that yield (which would reduce the final valuation figure), to reflect the fact that, in this case, the shortfall clawback provision meant that the base rent would not be exceeded, either for many years into the future, or at all.

(b) The Basic Yield Figure

[158]The basic yield figure is largely a product of the relevant comparables. There was a list of such comparables at Section 3 of the Experts’ Joint Statement. The list includes two types of property. The first was a number of Travelodge hotels, which would all have been the subject of five year rent reviews. The experts were agreed that the Travelodge hotels were directly comparable to the Ibis hotels with which this case is concerned (save, of course, for the shortfall clawback provision which is addressed in the next section of this Judgment).[159]The other comparables in the list are a number of Holiday Inn Express hotels, two Days’ Inns, and the Central Hotel in Glasgow. The experts were again agreed that these were of much less assistance because these hotels were run by franchisees and often varied significantly in quality. The experts were doubtful as to their relevance as comparables. I therefore disregard them for present purposes.[160]The experts were agreed that the comparables showed an improvement in the market during the latter part of 2004/early 2005 and therefore what was called a ‘sharpening’ of the yield. In April and May 2004, the yield achieved on the sale of the Travelodge in Buckingham and the Travelodge in Berwick on Tweed was 6.25%. However, in September 2004, although the yield on the Travelodge in Perth was 6.32% and the yield on the Travelodge in Gateshead was 6.25%, the yield on the sale of the Travelodge in Leatherhead was 6.01%, the yield on the Travelodge in Kings Cross was 6.00% and the yield on the Travelodge in Slough was 5.97%.[161]In March 2005, the sale of the Travelodge in Sutton Scotney achieved a net initial yield of 5.58%. It seems to me that this was the single best comparable in this case. It was a yield achieved the month before the Defendants completed their relevant valuation reports. It was achieved on a Travelodge which the experts agreed had numerous similarities with the Ibis Hotels with which we are concerned. And it achieved a yield that was entirely in line with the improving figures being achieved in the preceding six months or so.[162]Unhappily, although this was an agreed comparable, and plainly of great relevance, it appears that, very late in the day, Mr Chess sought to undermine it by making further enquiries which he had not thought necessary prior to the trial. It is not clear what triggered this change of position: he said, without explaining further, that “I have been pressed to find out if there is anything about that transaction”. As a result of his further enquiries, a point arose during the trial as to whether or not there was some farmland which was also part of the sale of the hotel in Sutton Scotney. Ultimately, there was no clear evidence about this farmland and whether or not it could have had any effect on the net initial yield percentage. I therefore conclude that, even if it was included in the sale, the farmland did not affect the achieved yield.[163]Furthermore, I accept Mr Lawrence’s submission that, if there were any doubt about the net initial yield of 5.58% on Sutton Scotney, he was entitled to point to the subsequent sale of the Travelodge in Shrewsbury, which occurred in June 2005, a month after these transactions. Paragraph 10.28 of Mr Elliott’s report makes plain that, again, the net initial yield on that transaction was 5.6%.[164]It was the Claimants’ case that the appropriate basic yield percentage was 6%. That was supported by the fact that, on one view of their reports, that was the percentage used by the Defendants at the time. It was the Defendants’ case at trial that the appropriate base percentage was 5.4%. They arrived at this by identifying the 5.6% figure from Sutton Scotney and Shrewsbury, and then making a small further reduction to reflect the agreed evidence that the Accor covenant was, at least at this time, superior to the Travelodge covenant, and that the Accor hotels were of a better standard and more recently built than the Travelodge hotels.[165]Accordingly, on the evidence, the appropriate range for the yield, before factoring in the effect of the shortfall clawback provision, was between 5.4% and 6%. I have concluded that the right percentage was in fact 5.6%, which was the yield achieved on the best single comparable (the Travelodge in Sutton Scotney) and which was supported by the figure of 5.6% achieved on the sale of the Travelodge atShrewsbury the following month. (c). The Percentage Addition to Reflect the Shortfall Clawback Provision[166]In his report, Mr Chess did a calculation which showed that, in his view, in order properly to reflect the particular lease arrangements in the present case, an additional yield percentage of 1.5% was appropriate. That was the Claimants’ case in opening. However Mr Chess accepted in cross-examination that this calculation contained a mathematical error. The corrected figure was on any view lower. Mr Chess claimed that the right figure was 1.25%. The corrected calculation which was put to Mr Chess in cross-examination, and which he could not gainsay, produced a figure of 1.19%.[167]Mr Elliott argued that this percentage was in any event too high because it assumed no growth in the exit price for the hotel at the end of ten years. He maintained that, at the ten year point, once the shortfall clawback provision had been taken into account, turnover rent would start to be payable after a further five years and that, as a result, at that point, the valuation process would be akin to valuing a lease with a five year rent review. His adjusted figures, having made allowance for this, indicated that the additional percentage to be added to the yield to reflect the clawback was just 0.5%. Mr Chess argued that the further reduction to 0.5% was unrealistic and took no account of matters such as obsolescence and the tenant’s then trading position.[168]It seemed to me that Mr Elliott’s point was broadly valid: a calculation which took no account of the fact that the shortfall clawback provision would have largely been spent in, say, 15 years, might be regarded as unrealistically pessimistic, and issues of obsolescence and the like were not material, because no other calculations, on either side, had taken them into account. Moreover there was a full repairing covenant.[169]In addition, there was also good deal of argument and counter-argument between the experts at the trial about IRRs (Internal Rate of Return) which, as I pointed out, was a little unrealistic in circumstances where, although the Defendants had done a calculation of IRR on the spreadsheet, it had not previously featured in any of the allegations (or in any detail in the written experts’ reports). In this connection, Mr Chess did some other calculations during the trial which seemed principally designed to demonstrate that, on altered assumptions, his own figure of 1.19/1.25% could be exceeded.[170]The principal point I took from this somewhat arid debate was that the figures were shown to be very susceptible to even minor changes in the underlying assumptions: it really did seem possible to prove anything by these increasingly arcane calculations. I was not persuaded that any of the IRR calculations produced in the latter stages of the trial were of any real assistance to me.[171]I have concluded that a significant percentage increase in the yield was justified to reflect the unusual and tenant-friendly rental provisions. On all the evidence, I would add one percentage point to the yield to reflect the tenant-friendly nature of the lease in general, and the shortfall clawback provision in particular.

(d) Summary

[172]Accordingly, for the reasons set out above, I consider that the correct yield percentages for each of these hotels was 6.6%. I arrive at that by taking the 5.6% figure for the basic yield (paragraph 165 above) and 1% for the adjustment to reflect the specific shortfall clawback provision (paragraph 171 above).[173]Another way of approaching the figures is to consider the permissible range of figures and calculate the mean, as Lewison J did at paragraphs 132 – 134 of his judgment in Goldstein. The permissible range of figures for the basic yield, as I have noted in paragraphs 158 - 165 above, was between 5.4% and 6%, giving a mean figure of 5.7%. For the reasons set out in paragraphs 166 - 171 above, I consider that the permissible range for the additional adjustment to reflect the leases was between 0.5% and 1.25% with a mean figure of 0.87%.[174]These figures can be averaged in two alternative ways. The two mean figures of 5.7 and 0.87, taken together, produce a total of 6.57%. Alternatively, I can add together the two lowest figures (5.4 and 0.5), which produces 5.9%, and the two highest figures (6 and 1.25), which produce 7.25%. The half-way figure between 5.9 and 7.25 is also 6.57%. These calculations therefore broadly support my conclusion that the correct yield in this case was 6.6%.[175]I am confirmed in my conclusion by a wider consideration of the expert evidence. Generally, I preferred the evidence of Mr Elliott to that of Mr Chess: he was more straightforward in his reasoning, and more willing to consider different permutations. Mr Chess was rather dogmatic, and seemed curiously reluctant to commit himself to any answer – no matter how uncontroversial – that was not set out in his report. He also failed to think through the effect of some of his opinions, which led to questions being put in cross-examination to which he had no real answer (see, by way of example, paragraphs 185 and 187 below).[176]I was also very surprised that, in his report, Mr Chess had purported to support his figures by making express reference to work done by his colleagues at Christie and Co for LR some time previously, but when he was asked for details, he had refused to make good that alleged comparison by claiming privilege and confidentiality in the original material. I do not accept that such stale information, relating to hotels which LR sold 5 years ago, could possibly be privileged or confidential. I note that LR had not even been asked whether the information could be provided. In my view, this was not a proper way to produce an expert’s report, and it exacerbated the impression I formed that Mr Chess (in common with the Claimants themselves) was attempting to make a case by putting forward one item of carefully selected information, without allowing the Defendants an opportunity to undertake any sort of proper check or comparison.[177]Mr Elliott’s yield figures were around 6.5%, and my figure of 6.6% is therefore closer to his figure than Mr Chess’ 7%. But another way of looking at it is that my figure is halfway between Mr Elliott’s figure and Mr Chess’ original figure produced in 2009 (paragraph 155 above).[178]I should deal here with Mr Chess’ argument that Bradford should have had a higher percentage because, on his analysis, the figures demonstrated that no surplus rent would ever be payable on that hotel. I consider that there is no reason in principle to treat the hotel at Bradford any differently to any of the other three hotels. The approach that I have adopted for all four hotels, by reference to the evidence, is to take as a starting point the appropriate yield assuming a five year rent review, and then make an allowance for the fact that, for the medium term, none of these hotels was likely to see a situation in which anything other than the basic rent would be payable. That properly pessimistic approach, which on my analysis leads to an increase of a full 1% in the yield, arises because of the shortfall clawback provision. Thus, as Mr Elliott noted, it is artificial to treat Bradford any differently merely because, on that hotel, the forecasts of increased turnover were particularly pessimistic. For what it may be worth, the same analysis provides an answer to Mr Speaight’s point when comparing forecast turnover for the hotels at Lincoln and Wellingborough (paragraph 85 above).[179]For all these reasons, I conclude that the correct yield percentage on each of the four hotels was 6.6%.

E4 The Margin of Error

(a) The Law

[180]There are a number of authorities dealing with the appropriate margin of error. The starting point is Singer and Friedlander Limited v John D Wood & Co [1997] 2 EGLR 84 at 85H-J where Watkins J said:
“The permissible margin of error is said …to be generally 10% either side of a figure which can be said to be the right figure… in exceptional circumstances, the permissible margin…could be extended to about 15%, or a little more, either way.”
[181]The only case to which I was referred where a lower percentage was imposed was in Axa Equity and Law Home Loans Limited v Goldsack & Freeman [1994] 1 EGLR 175, where a bracket of roughly plus or minus 5% was fixed by the judge. That was a case involving residential property. There are other cases involving residential property where the experts agreed that a plus or minus 5% range was appropriate: see for example, BNP Mortgages v Barton Cook and Sams[1996] 1 EGLR 239. I can certainly see that, for standard estate houses for example, a smaller bracket than 10% may well be appropriate.[182]There are a number of cases in which a higher bracket has been identified. A bracket of 15% up or down was adopted in Corisand v Druce & Co[1978] 2 EGLR 86 where the property in question was a hotel. And there are other cases, such as Mount Banking Corporation Ltd v Cooper & Co[1992] 2 EGLR 142 and Arab Bankplc v John D Wood Commercial Ltd [1998] EGCS 34, where the relevant percentages were, respectively, 17.5% and 20%. However, in all of these cases, the relevant percentages were agreed between the experts. They were not the subject of consideration by the court because, unlike the present case, the margin of error/bracket was not itself in dispute.[183]It seems to me that, as a matter of general principle, the position to be taken from the authorities is as follows: a). For a standard residential property, the margin of error may be as low as plus or minus 5%; b). For a valuation of a one-off property, the margin of error will usually be plus or minus 10%; c). If there are exceptional features of the property in question, the margin of error could be plus or minus 15%, or even higher in an appropriate case. b). The Evidence In The Present Case[184]The problem for the court in the present case was that the experts approached the question of margin of error/bracket from two entirely different starting-points. Mr Chess said that the margin of error should be calculated by reference to the yield, and that a margin of error of just 0.5% on the yield, that is to say plus or minus 0.25%, was appropriate. Mr Elliot on the other hand, said that a margin error of more than 10% on the final valuation figure was appropriate in this case.[185]The immediate difficulty with Mr Chess’s approach was that, when his 0.5% was translated into valuation figures, it produced a range that was far less than plus or minus 10%. Indeed, on one view, his 0.25% either way on the yield showed a deviation of just plus or minus 3% in terms of the overall valuation figure. Mr Chess accepted that, contrary to the approach in the reported cases, he had not considered the margin of error/bracket in terms of the overall valuation. He appeared to concede that this may have been an error on his part, concluding his cross-examination with the rueful words:
“I will leave myself to be hanged on that point, I think.”
[186]In my judgment, it is not appropriate to consider the question of margin of error/bracket by reference to the yield percentage. There are a number of reasons for this. First, it gives rise to the real risk of artificiality, because what mattered most to the Claimants (and the lenders) was the overall valuation of the hotel, and not the yield. Secondly, it does not reflect the process of valuation adopted by the Defendants. Although the yield was an important element of the valuation, it was, at least in this case, a figure that was produced by the valuation of each hotel, rather than an element of the valuation process itself. In other words, as a number of the witnesses confirmed to me, the yield percentage arose out of the valuation figure rather than the other way round. Again, therefore, it seems to me that it would be inappropriate to calculate the bracket by reference to yield as opposed to the overall valuation.[187]Thirdly the evidence demonstrated that small adjustments to the yield gave rise to large differences in value and, in such circumstances, I consider that it would be potentially misleading to calculate the bracket (and therefore to consider the allegations of negligence) by reference to the yield, as opposed to the overall valuation figure. This was neatly demonstrated during the cross-examination of Mr Chess, when he was asked whether he was really saying that a valuer who had identified a yield of 6.5% on the hotels in Lincoln, Chesterfield and Wellingborough would have done something that no reasonable valuer could have done. Mr Chess was clearly uncomfortable about answering this valid question: he could not say ‘no’, but he seemed to realise how unconvincing it would be to say ‘yes’. He first said that “on the face of it, I would not have expected a yield of 6.5%”; when asked again if that is what he was really saying, he said, after considerable hesitation, “I have no choice but to agree”.[188]Again, therefore, I prefer the evidence of Mr Elliott to that of Mr Chess, and I consider the margin of error/bracket by reference to the correct valuation of each hotel. Therefore I will take what I consider to be the correct valuation for each hotel, and then apply a percentage up and down to delineate the margin of error. What is the correct percentage?[189]Beyond their case as to a range of 0.5% on the yield, which I have rejected, the Claimants had no positive case as to margin. By reference to the authorities summarised above, it seems to me that the margin should be at least 10%, up or down, on the correct valuation figure. On behalf of the Defendants, Mr Lawrence argued that the margin percentage should be more than 10%, as suggested by Mr Elliott. There were a number of reasons for this. In particular, he stressed the agreed evidence that: a). There were limited comparables, particularly because many of the hotels purchased involved management contracts as opposed to standard leases. b). The investment market in hotels was immature; as Mr Chess accepted, this was true “when compared with other markets”. Thus, although there are numerous publications which contained comparable figures for yields in relation to residential and commercial property, there are none in relation to hotels. c). By 2004/2005, there was a rising hotel investment market, as demonstrated by the sharpening of the yields referred to above, but the experts were agreed that this improving market also gave rise to particular difficulties for valuers.[190]In cross-examination, Mr Chess agreed that there were a whole range of matters on which, in this case, a valuer would need to exercise his judgment. These included the location of the hotels; their physical condition and configuration; the sustainability of the rental; the reliability of the property; and the strength of the tenant’s covenant. There was also the question of the market conditions, referred to above. As Mr Chess himself said, a valuer in these circumstances was not merely a calculating machine and he made the point forcefully that it was repeatedly overlooked that what the valuer was providing was an opinion of the valuation, nothing more. Although Mr Speaight had indicated in opening the Claimants’ case that the margin should actually be less than 10%, because the valuation exercise in this case was simple and turned only on the yield, Mr Chess’ answers in cross-examination provided no support for such a submission.[191]Taking all that into account, it seems to me that this is a case where the appropriate margin of error may well be in excess of 10%. There were particular factors involved in the valuing of these hotels, noted in paragraphs 189 and 190 above, that probably justified a wider than normal margin of error. I conclude, however, that 15% would have been very much the upper limit of the permitted range. E5 Were The Defendants’ Valuations Negligent? a). The Figures[192]As set out in Section E3 above I have identified what I consider to be the correct yield percentage at 6.6%. The tables used by valuers, and the figures provided to me in this case by the parties, translate yield percentages into appropriate multipliers in increments of 0.25%. I have therefore calculated the value at a figure that is half way between the two figures produced by a yield of 6.5% and a yield of 6.75%, which exercise marginally favours the Claimants. All the valuation figures allow for the reduction of 5.75% in order to reflect the costs of the transaction. The relevant figures are set out in the table below: Hotel Yield Correct Value 10% + Def’s Figure Lincoln 6.75% 6.5% 6.6% £4,560,000 £4,720,000 £4,640,000 £5,104,000 £4,920,000 Chesterfield 6.75% 6.5% 6.6% £5,030,000 £5,210,000 £5,120,000 £5,632,000 £5,430,000 Wellingborough 6.75% 6.5% 6.6% £4,480,000 £4,640,000 £4,560,000 £5,016,000 £4,840,000 Bradford 6.75% 6.5% 6.6% £4,290,000 £4,450,000 £4,370,000 £4,807,000 £4,640,000[193]I have not done a calculation showing the minus 10% figures, because the table demonstrates that, for each hotel, the Defendants’ figure was in excess of the correct value that I have calculated. However, each time, the Defendants’ figure was within the plus 10% margin of error, let alone the margin of error that I consider appropriate in this case which, for the reasons set out above, I have concluded should be greater than 10%, and perhaps even as much as 15%. Accordingly, on the basis of the figures, the Defendants’ valuations were well within the permissible margin of error and liability in negligence has not been made out.[194]In the circumstances, it is unnecessary for me to consider the particular criticisms made by Mr Speaight of the methodology adopted by the Defendants in arriving at their valuation figures. I accept that the Defendants did not go about every aspect of this task with the skill and care that was to be expected. I consider that these flaws led to an over-optimistic conclusion on value. But on any view, this over-optimism was marginal, and well within any permitted deviation. I would however wish to make two final comments in relation to liability. b). The Defendants’ Good Fortune[195]I acknowledge that there is one sense in which the Defendants might be considered to have been fortunate. It follows from my findings in Section D above that they failed to take account of the shortfall clawback provision when they undertook their valuations. I am in no doubt that this explains why their valuations were higher than those which I have calculated to be the correct figures at paragraph 192 above. But, for reasons which may well be lost in what both sides were agreed was the Defendants’ over-complicated methodology, this error did not ultimately lead to a valuation which was outside the permissible bracket. This may be, as was suggested at the trial, because in the box headed ‘surplus’ on the Defendants’ spreadsheets, which might have been where they took into account surplus rent (and where the failure to make an allowance for the shortfall clawback provision would then have been expressly apparent in any valuation) the Defendants did no calculation at all. But, whatever the precise explanation, it seems to me that, like so many of the reported cases involving valuers, this case turned (and failed) on the issue of bracket/margin of error. c). The Changing Nature of the Claimants’ Case[196]The evidence suggests that the Claimants were slow to realise the significance of the bracket/margin of error issue. When this case was first formulated by the K/S Claimants, it was advanced from the standpoint of the investors (those who had subsequently bought their shares from Scanplan), as opposed to those (like Mr Ashton) who had been involved in the original transaction. That explains why the original letter of claim, and the early focus of the Claimants’ solicitors’ letters, was all about the failure to warn as to the lack of rental growth and the shortfall clawback provision.[197]It was only when the Defendants’ solicitors pointed out that the case as originally formulated was hopeless (because no criticism was apparently being made of the valuations themselves), that the Claimants finally set out a case in relation to the Defendants’ valuation figures. It was at that stage that Mr Chess’s original yield percentages of 6.75% and 7% were put forward. Of course, as I have already noted, the yield percentage that I have taken is very close to Mr Chess’s original assessment (at least on three of the hotels) and demonstrates that the Defendants’ valuations were high, but well within the permissible margin of error.[198]The Defendant’s solicitors then pointed out to the Claimants that, now that they had belatedly considered this aspect of the case, Mr Chess’ calculations were insufficient to support a case in negligence, because the valuation figures that were produced by his yield of 6.75% were close to or within the 10% bracket. I am in no doubt that this then led to the further increase in the yields contended for by Mr Chess and the Claimants. No other cogent reason was advanced for this significant change. This may also explain why Mr Chess’ case about margin of error/bracket focused, not on the ultimate valuation, but on the permissible range for the net initial yield, which produced a narrower range of figures. Ultimately, I have found that this case, which only emerged at the third time of asking, must fail because it never took proper account of the margin of error on the valuation figures themselves.

F. CONCLUSIONS

[199]For the reasons set out in Section D above, I have concluded that, although on three of the four hotels there was a negligent mis-statement in relation to rental growth, that mis-statement had no causative effect whatsoever because Scanplan, who were the only partners in the Claimants at the time that the hotels were bought, knew that the shortfall clawback provision meant that there would be no medium-term rental growth. There was no reliance on the Defendants’ mis-statements. I also find that the only proper inference that I can draw from the evidence is that the relevant advice which they received as to the shortfall clawback provision and the lack of rental growth, including the advice from ESL and the Reports on Title from Maxwell Batley, was deliberately, as opposed to inadvertently, omitted from the prospectuses that the investors relied on when they came to buy their shares in the individual K/S entities.[200]For the reasons set out in Section E above, I have concluded that, although justified criticisms could be made of the way in which the Defendants went about their valuation exercise in April 2005, their valuation figures were, each time, well within a 10% margin of error. Accordingly, liability in tort has not been made out and the claim in relation to negligent valuation must also fail.

Cited in 3 later judgments