MICHAEL DAVID MATTHEWS MANDY MATTHEWS v THE ENVIRONMENT AGENCY LCA/192/2000

UPPER TRIBUNAL

LANDS CHAMBER

LCA/192/2000

Case No LCA/192/2000

Between

MICHAEL DAVID MATTHEWS MANDY MATTHEWSApplicant

THE ENVIRONMENT AGENCYRespondent

Before

N J Rose FRICS

Date 28 May 2002

Property: Beach, beach front leisure facilities, and dwelling,, Squires Gate,, Brean Down Cove,, Burnham-on-Sea

Catchwords: COMPENSATION – sea defence works – beach-front leisure facilities and dwelling – loss of profits and capital loss on sale – whether business experiencing growth – whether annual accounts, not submitted to Inland Revenue, reliable – rate of growth likely to be achieved in the future – whether loss of profits and capital loss to be assessed using same growth rates – whether possible new sources of income to be taken into account – structure of the notional profit and loss account – calculation of capital value lost on sale – whether Ryde’s scale (1996) appropriate for assessing surveyors’ fees –

[1]This is a reference to determine the compensation payable to Mr M D and Mrs M Matthews (“the claimants”) under paragraph 5(1) of Schedule 21 of the Water Resources Act 1991 (“the Act”) for the injury they have sustained by reason of sea defence works carried out on or adjoining their land by the Environment Agency (“the compensating authority”) pursuant to s165(2) of the Act. The land in question (“the subject property”) comprises a beach, beach-front leisure facilities, surface car parking and a dwelling house known as Squires Gate, Brean Down Cove, Burnham-on-Sea, Somerset, TA8 2R5. By the end of the proceedings the total compensation sought by the claimants was £824,876.16; the compensating authority’s figure was £294,091.17.

[2]Mr Matthews appeared on behalf of both claimants and gave evidence of fact and opinion. He also called three factual witnesses, Mr N J Chapple, ATII, Mr R D Attaway and Mr E W Jones and one expert witness, Mr C P Grimshaw, FRICS, FIRRV, MCIArb. Mr Andrzej Kolodziej of counsel appeared for the compensating authority and called two expert witnesses, Mr H S Papworth, BSc, FCA and Mr A D C Weaver, MRICS, FCAAV. Facts

[3]During the course of the hearing a statement of agreed facts and areas of disagreement was prepared by the three expert witnesses. In the light of that statement and of the evidence I find the following facts. Brean Down is a scheduled ancient monument and an area of scientific interest, much favoured by walkers, fishermen and bird watchers. It has been owned by the National Trust since 1953. The subject property occupies a very prominent position fronting onto the beach immediately to the south of Brean Down and provides a variety of leisure facilities for the use, among others, of visitors to Brean Down. It lies approximately five miles north of Burnham-on-Sea and just south of Weston-super-Mare. Brean has one of the largest concentrations of caravans in the United Kingdom and is a major destination for holiday-makers and day-trippers from Bristol, Birmingham and Wales.

[4]The subject property comprised a café and take-away, shop unit, ice cream kiosk, amusement arcade, male and female toilet blocks and a detached four bedroom private dwelling house. It had parking facilities for approximately 200 vehicles and external trading areas for the café. Also included was part of Brean beach, which was privately owned by the claimants and the owners of three adjacent properties. The beach is very shallow and has a very high tidal range. It is one of only a few in the United Kingdom where vehicles are allowed; this and its shallow gradient being major reasons for its popularity. The claimants’ ownership of their section of the beach extended down to the mean high water line. It also included a slipway, affording access to the car parking facilities on the beach. The property had the benefit of an off licence and restaurant licence. An application for a full on licence would have been favourably received by the appropriate authorities at the relevant time. 3

[5]The claimants purchased the house, café and surface car parks in February 1991. They opened the amusement arcade and established a Saturday market on the car park in May 1992 and the shop was purchased in the following month. In July 1992 they acquired the beach, correcting a previous conveyancing error. At about the same time beach activities and franchises were established and a bus service to the property commenced.

[6]Prior to November 1993, the business was operated through three trading partnerships. The claimants were partners in the 4M Company, which operated the shop. Mr Matthews and his brother-in-law, Mr Empson, were partners in the Brean Down Cove Kiosk, which also operated the car park and the amusement arcade. Finally, Mrs Matthews and Mrs Empson were partners in Brean Down Café, which included the take-out operation. The business was conducted in this manner because Mr Matthews was reluctant to create an employer-employee relationship with his brother- and sister-in-law. In fact, Mr and Mrs Empson resigned their respective partnerships on 30 November 1993. Thereafter the business was in the sole ownership of the claimants.

[7]There has been a long history of flooding in the vicinity of the subject property. This was caused primarily by waves overtopping the sea wall and the banks of the river Axe, with the worst events occurring in 1859, 1903, 1910 and 1936. More recently, breaches to the wall took place in 1981 and 1990, both resulting in considerable damage. The sea wall had been gradually raised and strengthened and was of adequate height in terms of predicted water levels. The foreshore, however, was receding westwards, leading to the sea wall footings being exposed in certain areas and the need to undertake remedial measures to underpin it at several locations. Some weak sections of wall had increased the risk of a breach occurring, causing severe flooding to properties directly fronting the coastline and to farmland behind.

[8]When the scheme for improving the existing sea defences was first proposed in the early 1990s by the National Rivers Authority, the compensating authority’s predecessor, the claimants and their neighbouring landowners wanted it to proceed. Four options were considered and it was eventually decided to improve the sea defences by supplementing the existing concrete wave return wall with rock armouring. This solution was endorsed at a formal meeting with local villagers in December 1993, and again at meetings in May and June 1995 at which Mr Matthews was present. When planning the scheme, the compensating authority took into account the interests of the various landowners who would be affected, including the claimants.

[9]The work was carried out in two stages. Phase 1 took place in February and March 1996. It involved the installation of an initial trial section of rock armouring adjoining the subject property. This work included the use of part of the claimants’ car park as a site compound. Phase 2 comprised sheet piling along the beach, the construction of a concrete plinth adjoining the café and the excavation of the shingle and installation of rock armouring along the remainder of the foreshore south from Brean Down. In addition to the works on the beach, half of the claimants’ adjoining car park was occupied as the site compound. Work commenced on 9 September 1996 and continued until the following Spring. 4

[10]By March 1996, as a result of inadequate reinstatement, the beach had become impassable to vehicles in the area of phase 1. In April 1996 the compensating authority installed a series of posts to prevent vehicles parking on the affected areas. By then, the slipway and the foul drainage system at the subject property had been damaged as a result of heavy vehicle movements. The claimants were unable to offer WC facilities to their customers over the Easter holiday period.

[11]On 26 October 1996 the café and shop buildings were damaged as a result of a storm. Mr Jones’ building firm was instructed by the claimants’ insurers to carry out the necessary repairs. He was advised by the compensating authority’s engineers, however, that for safety reasons he should not start work until the rock armour construction had been completed. In March 1997 Mr Jones was given the compensating authority’s contractors’ requirements to allow him access. He did not consider it safe to commence the works externally until 13 April 1997, because of the contractors’ requirements and the forthcoming high tides.

[12]Stripping out the damaged internal fittings of the shop revealed structural damage. This needed to be monitored by the compensating authority’s consultants until September 1997 before any repairs could be considered. Mr Jones was subsequently informed that no further works could be performed under the insurance contract until the compensating authority had implemented various structural repairs. In October 1998 Mr Jones was awarded a contract by the compensating authority to carry out remedial works to the subject property for which it had accepted responsibility. The specification of remedial works subsequently increased in size, as other items of disrepair were discovered once structures were exposed. Since these repairs had to be completed before the insurance works could be finalised, the site was not fully repaired until November 1999.

[13]On 7 September 1996, following the problems resulting from phase 1, the compensating authority agreed to consider a claim for loss of profits suffered by the claimants in the six months commencing 1 May 1996. Mrs Matthews started to prepare the relevant accounts and the current year’s sheets and invoices were stored in the shop. When the storm took place on 26 October, the café and shop were flooded. As a result, the claimants’ accounting records became illegible and were destroyed.

[14]The effect of the damage to the subject property was that the claimants were unable to operate all its facilities from 1996 onwards. This resulted in reduced visitor numbers, turnover and profitability.

[15]Mrs Matthews’ health had been poor since 1996. By March 1998 her condition had become serious and as a result the claimants needed to sell the subject property. Their then surveyors, Messrs Grimley, formally suggested that the compensating authority should acquire the property and pay compensation on a total extinguishment basis. Alternatively, the claimants would sell the property and the business and claim the difference between the proceeds and the no scheme world value from the compensating authority. The authority was not prepared to purchase the property but, following the intervention of the claimants’ member of Parliament, it indicated on 1 May 1998 that it would not seek to prevent the property being sold. In June 1998 the claimants instructed Mr Grimshaw’s firm to prepare a 5 marketing report. The property was subsequently offered for sale and eventually sold to the National Trust on 14 April 2000 for £300,000. The insurance claim was settled at £22,709. Issues

[16]It is agreed that the claimants are entitled to full compensation for all losses resulting from the damage to the subject property that occurred from March 1996 until 14 April 2000 (in practice 30 April 2000). The following items of claim are agreed: £ Physical damage 8,985.94 Miscellaneous losses 3,416.50 Administration costs 1,025.40 Engineers’ fees 12,631.79 Legal fees 9,856.00 Accountants’ fees 5,010.00 Tankering charges 2,013.00 Finance charges 3,962.00 46,900.63

[17]The dispute between the parties relates to the claims for loss of profits, capital loss on the sale of the subject property, management time and the fees payable to the claimants’ surveyors for preparing and negotiating the compensation claim. There is also disagreement about the commencement date for the payment of statutory interest. The amounts contended for are as follows: Claimants £ Compensating Authority £ Loss of profits 384,349.18 181,218.91 Capital loss 282,059.00 39,000.00 Management time 82,635.00 14,364.00 Surveyors’ fees 28,932.35 12,607,63 777,975.53 247,190.54

[18]The principal issue in this case is the amount of profits which would have been earned by the claimants between 1996, when the subject property was damaged, and 2000 when it was sold, on the assumption that it had not been damaged. These notional profits must, of course, be ascertained in order to calculate the extent of the profits which were lost in the period in question. In addition, they are relevant to the capital loss which the claimants incurred. This is because it is agreed that the profits which would have been earned by the claimants in the years immediately preceding the sale provide the starting point for calculating the unblighted market value of the property at the date of sale. 6

[19]A number of subsidiary issues arise under the principal issue. I shall refer to each of them later in this decision. The remaining issues are as follows. On management time: are the claimants entitled to compensation for the time spent by Mr Matthews in connection with applications for advance payments of compensation? If so, how many hours should be compensated and should the hourly rate for management time be related to the profitability of the business or the potential charges of other professional advisers? On surveyors’ fees: should they be calculated using table E of Ryde’s scale (1996) or based upon a reasonable charge for the work involved? Finally, on interest: what were the relevant dates of the claims for compensation, from which interest at the statutory rate is payable? Loss of profits

[20]It is agreed that compensation should be paid for loss of profits up to 30 April 2000 and that such compensation should be reduced by the amount of the insurance settlement. The amounts attributed by the parties to the loss of profits in the relevant period, before the insurance adjustment, are as follows: Date Claimants £ Compensating Authority £ 1995/96 5,393.33 Nil 1996/97 50,505.30 24,907 1997/98 97,629.94 42,562 1998/99 106,630.67 62,604 1999/2000 146,898.94 73,854 407,058.18 203,927 April 1996

[21]The claim for the financial year 1995/96 relates only to the final month, April 1996. In addition to being an item of claim in its own right, it has an effect on the loss of profits sustained in subsequent years, as both parties use the 1995/96 results as the starting point for estimating the unblighted profits between 1996 and 2000.

[22]Mr Matthews said that, on 16 March 1996, some vehicles sank into the beach where they had been parked. The compensating authority’s engineers, Sir William Halcrow and Partners Limited, arranged for the affected area to be fenced off. The result was that none of the claimants’ beach south of the slipway could be used for car parking. Moreover, the contractors had failed to remove the temporary roads which they had constructed of compacted clay on the lower reaches of the rock armour to provide access for the installation of the upper parts of the armour. This had serious public safety implications.

[23]There were, said Mr Matthews, two further significant events in April 1996. Firstly, the foul drainage system was damaged, probably as a result of heavy vehicle movements and the claimants were unable to offer WC facilities over the Easter holiday period. Until the damage was repaired it was necessary for the septic tank to be pumped out every other day. 7 Secondly, the disruption to the beach meant that a Mr Clayton, who had entered into an agreement with the claimants on 16 February 1996 to operate his Brean Dragon train along the beach, using the subject property as a terminus, was unable to operate that service. Mr Matthews said that this deprived the claimants of the custom of many people staying in the Pontins holiday resort in the centre of Brean, since most of them would arrive by coach and were unlikely to walk the two miles or so to the subject property. The effect of the disruption was reflected in the turnover of the claimants’ business which declined to £18,668 in April 1996, compared with £23,462 in April 1995. He suggested that turnover in April 1996 would have been £9,339 higher if the damage had not occurred.

[24]Mr Papworth qualified as a chartered accountant in 1985. Since 1992 he has been a partner in Messrs Butterworth Jones and Co. in Taunton. He pointed out that he had not seen any independent accounting information to support Mr Matthews’ allegation that there had been a loss of profits in April 1996. The only available methodology for assessing what had happened in that month was to carry out the following exercise. He deducted Mr Matthews’ April 1996 figure of £18,668 from the full year’s turnover in the 1996 accounts to produce a turnover for the 11 months ending 31 March 1996 of £219,660. In the year to 30 April 1998, where the relevant records were available, the April turnover was 6.25% of the total. He therefore assumed that the turnover to 31 March 1996 represented 93.75% of the annual turnover and grossed up the figure of £219,660 by the “missing” 6.25%. The resultant “expected” total turnover for the year to 30 April 1996 was less than the actual turnover in the accounts. Mr Papworth said that there were three possible explanations for this. Mr Matthews’ figures might be unreliable; the percentage of annual turnover in April 1996 may have been higher than the corresponding figure two years later; or the effect in April 1996 had been negligible. Using the only data available to him, Mr Papworth concluded that the turnover in April 1996 had not been materially affected by the compensating authority’s works.

[25]Mr Matthews was unable to produce the documentation which he had used, before it was destroyed by the storm on 26 October 1996, to establish that the turnover in April 1996 was £4,794 below the equivalent monthly figure one year earlier. On the other hand, Mr Papworth’s calculation assumes that the seasonal distribution of the total turnover at the property was identical in 1996 and 1998. Mr Matthews said that, by 1998, the subject property had changed from being operated as a seasonal business to one that was open throughout the year, in an effort to recoup some of the turnover that had been lost. I accept that evidence. It follows that Mr Papworth’s calculation does not compare like with like. Moreover, the conclusion to be drawn from Mr Papworth’s calculation is inconsistent with his admission in cross-examination that some physical disruption occurred and that it was likely to have had an effect on certain areas of the claimants’ trade in April 1996.

[26]I therefore find that the turnover in April 1996 was less than it would have been if the damage had not occurred. Mr Grimshaw is the managing director of the Exeter office of Messrs Chesterton and director in charge of his firm’s licensed leisure and hotel division for Wales and the West Country. He considered that Mr Matthews’ assessment that the lost turnover in April 1996 was £9,339 was reasonable. He said – and I accept - that the month of April contains several important weekends in the holiday season, particularly for the users of 8 caravans. Against that background I consider that Mr Matthews’ estimate is reliable and find that the unblighted turnover for the 12 months to 30 April 1996 was £247,667. Was the business growing?

[27]An important subsidiary issue arising from the loss of profits claim is the extent, if any, to which the claimants’ business was growing in the period leading up to April 1996. Mr Matthews says that it had been enjoying a period of high growth in turnover and that sales would have continued to increase – by 13% in 1996/97, 12% in 1997/98, 8% in 1998/99 and 4% in 1999/2000. For his part, Mr Papworth suggests that the business had reached a plateau by April 1996. He assumes, when calculating the loss of profits, that thereafter the net contribution to fixed costs made by each section of the business would have increased only in line with inflation, which he assesses at 3% per annum. He adopts a different approach when calculating net profit for the purpose of assessing the capital loss. In this case he assumes that turnover - not net contribution - would have increased at 3 per cent per annum. I consider these two approaches in more detail later in this decision.

[28]Mr Grimshaw was not instructed to deal with the loss of profits claim. It was, however, necessary for him to estimate what would have happened to profits in the period up to April 1999, in order that he could assess the unblighted capital value of the property when it was sold, using the profits method of valuation. He agreed with Mr Matthews that the turnover of the business had been growing in the period before the damage occurred. His own estimate of future growth, however, was lower than that of Mr Matthews, being 8% per annum between 1 May 1996 and 30 April 1998 and 5% in the following year.

[29]One reason for the apparently surprising disagreement as to the growth history of the business is that two sets of accounts were prepared in respect of the three year period from 1 May 1992 to 30 April 1995. One set, upon which the claimants rely, consists of three annual accounts. The other set is relied upon by Mr Papworth. It relates to two periods – 19 months to 30 November 1993 and 17 months to 30 April 1995. The latter set of accounts was submitted to and approved by the Inland Revenue. It excluded the shop, which was operated by the 4M Company, the accounts of which were always produced on an annual basis.

[30]In his first report dated July 1998 Mr Papworth said that he was not prepared to rely on the annual accounts for the three years to 30 April 1995 because they were not independently drawn up, they had not been agreed with the Inland Revenue and they were not auditable. He accepted that his favoured accounts were not directly comparable, as one reflected two summer seasons and the other only one. He therefore re-stated them to annual equivalents by using the monthly analysis of income based on cash book takings for the year ended 30 April 1998. He accepted that the monthly trend derived in this way would not mirror exactly the pre-disruption period, but he believed it to be the best information available. In order to assess the likely potential of the business, Mr Papworth considered each enterprise in turn, as he considered it probable that any disruption to the overall business would have had a different effect on the individual elements. He concluded that, by April 1996, the turnover of each enterprise was either approaching a plateau or had already levelled off. 9

[31]After his first report was submitted Mr Papworth inspected the files of Mr Chapple, a chartered taxation practitioner and taxation partner in Messrs Conway Chapple and Co. of Clevedon, who had been responsible for submitting the claimants’ accounts to the Inland Revenue. Following that inspection, Mr Papworth qualified the assumption he had made when preparing his first report, namely that the three annual accounts had been derived from - and thus came into existence after – the two sets of accounts which had been approved by the Inland Revenue. He now accepted that the Conway Chapple files indicated, although they did not conclusively prove, that the first two of the three annual accounts – to 30 April 1993 and 30 April 1994 – were prepared before the accounts for the 19 and 17 month periods to 30 April 1995.

[32]In his second report, however, Mr Papworth referred for the first time to a summary of the claimants’ VAT returns which had been supplied by H M Customs and Excise on 17 August 1999, the original returns having been destroyed in the storm in October 1996. He suggested that these returns provided a better quality of evidence than either of the two sets of accounts. His conclusion was that the VAT summary – which related to the café and the shop businesses but not the kiosk - did not support an underlying sustained growth. His initial conclusion that the business had reached a plateau therefore remained unchanged.

[33]Mr Chapple explained that he was instructed in 1993 to act as taxation agent to the claimants’ three businesses that operated the subject property. In a letter of 18 March 1993 to HM Inspector of Taxes he proposed that accounts for the kiosk and café partnerships should be prepared for the period to 30 April 1992 and thereafter annually to 30 April. Accounts for the first trading period, together with supporting income tax computations, were submitted to the Inland Revenue on 14 January 1994. At the same time Mr Chapple advised the Inspector of the resignation of Mr Empson from the kiosk partnership and of Mrs Empson from the café partnership.

[34]It was not clear at that time whether it would be advisable for the claimants to elect that the respective businesses of the two partnerships should be deemed to “continue” for taxation purposes. Under the then current tax legislation a change in the persons carrying on a trade automatically resulted in that trade being deemed to cease. It was, however, possible to elect that the change should be ignored, provided such election was made within two years of the date of the change. The election was purely for tax purposes and the decision whether to do so depended on the patterns of trade before and after the outgoing partners left.

[35]The usual procedure, in accordance with the Inland Revenue statement of practice, was for taxpayers to submit an election to continue. This election could then be withdrawn if trading results subsequent to the change in the partnership resulted in a higher tax burden on the continuing partners. Accordingly, on 14 February 1994 elections to continue both businesses were submitted to the Inspector of Taxes. In July 1995 Mr Chapple suggested to the claimants that they should review the continuation election in the light of trading results to date. On 18 July 1995 Mr Matthews sent Mr Chapple by facsimile transmission accounts for each of the three businesses for the 12 months ending 30 April 1993 and 30 April 1994. These had been prepared by Mr Attaway, an old business colleague of Mr Matthews. They covered the period when the changes of partners took place. Mr Chapple undertook an initial review of the claimants’ tax liability in the light of these accounts. He also calculated the tax 10 that would be payable if the elections were withdrawn. He met Mr Matthews on 20 July 1995 to discuss the results of this review. He suggested that, depending on the figures for the year to 30 April 1995, the claimants’ tax liabilities might be minimised if the continuation elections were withdrawn. He also advised that, again depending on the results for the year to 30 April 1995, it might be beneficial for the existing accounts of the two businesses for the three years ending 30 April 1993, 1994 and 1995 to be revised to cover two periods, namely 1 May 1992 to 30 November 1993 and 1 December 1993 to 30 April 1995.

[36]The claimants accepted this advice and agreed to provide Mr Chapple with accounts for the year ended 30 April 1995 so that he could confirm the position. On the basis of those discussions, Mr Chapple wrote to the Inspector of Taxes on 28 July 1995, stating that it was unlikely that the elections would stand and seeking to reduce the tax payments required at that time. On 3 October 1995 Mr Chapple wrote to Mr Matthews, reminding him of the deadline for withdrawal of the election, namely 30 November 1995. At some stage between that letter and 28 November 1995, Mr Matthews provided the accounts for the year ended 30 April 1995. Mr Chapple could not identify the precise date, as the accounts were not date stamped on receipt.

[37]On 28 November 1995, Mr Chapple met the claimants to discuss the results of his further tax calculations. He confirmed that the elections should be withdrawn and both businesses be deemed to cease on 30 November 1993. The claimants agreed to prepare new sets of accounts for both businesses for the revised periods, using the same results as the originals. Formal notices of withdrawal of the elections to continue were submitted to the Inspector on 28 November 1995. The reconstructed accounts of both the kiosk and the café for each of the two periods between 1 May 1992 and 30 April 1995, again produced by Mr Attaway, were faxed to Mr Chapple by Mr Matthews on 3 January 1996. Those accounts, together with supporting tax computations, were forwarded to the Inspector on 28 February 1996 and the figures were all agreed by the Inspector in March 1996.

[38]Mr Chapple was quite sure that the three annual accounts for the kiosk business and the café business existed before he advised the claimants to prepare two sets of accounts for 19 and 17 months respectively. He said that he would not have advised the claimants to change the accounting periods until he was in possession of all the facts about the three years in question. I accept Mr Chapple’s evidence in its entirety. Since the second sets of accounts were accepted by the Inland Revenue, and since they had been prepared using the same results as appeared in the annual accounts, there is in my view no reason to place any more weight on one set of accounts than the other.

[39]Mr Papworth’s conclusion that the claimants’ business had reached a plateau results from his re-stating of the accounts that were actually approved by the Inland Revenue into annual equivalent figures. He did this by assuming that the income generated in each month between 1 May 1992 and 30 April 1995 can be assessed by reference to the cash book takings for the year to 30 April 1998. He accepts that the monthly trend derived in this way would not exactly mirror the pre-disruption period, but he believes it to be the best information available. I disagree. In my judgment, the best information as to the turnover of the claimants’ businesses in the four years to April 1996 is provided by the annual accounts for those years. The accounts to April 1993, 1994 and 1995, while not formally approved by the 11 Inland Revenue, used the same figures for turnover and net profits as the accounts which were. The accounts for the year to 30 April 1996 are not in dispute. It follows that the turnover trend in the business in the four years prior to the damage may be obtained by reference to the following table, which has been abstracted from the relevant accounts and reflects the adjustments for April 1996 referred to earlier: 1993 1994 1995 1996 £177,637 £196,888 (10.83%) £218,772 (11.15%) £247,667 (13.2%) I have excluded the year to April 1992, because the claimants did not own the shop then. The bracketed figures indicate the percentage increase in turnover compared with the previous year. They show an increasing growth in turnover year on year. Mr Papworth’s assumption that the business had reached a plateau is therefore wrong. Future growth of the business

[40]As I have said Mr Papworth’s view was that, disregarding the annual accounts for the three years to 30 April 1995, and in the absence of the damage, the turnover of the business might have been expected to increase by 3% per annum from April 1996 onwards. In response to a question from me he said that, if the April 1996 turnover should properly be increased as suggested by the claimants, and if the three sets of annual accounts had been accepted by the Inland Revenue, Mr Grimshaw’s suggested increases in turnover, of 8%, 8% and 5%, were not unreasonable. Mr Matthews’ suggested increases for those years of 13%, 12% and 8% were, however, in his view optimistic. I have found that the April 1996 turnover should be increased. I have also found that the annual accounts carry the same weight as those which were approved by the Inland Revenue. It follows that Mr Papworth and Mr Grimshaw effectively agree on the growth in turnover which would have occurred in the 3 years to April 1999. Mr Matthews considered that the growth would have been appreciably greater. I am satisfied that, in arriving at that conclusion, he has done his best to be fair. Nevertheless, I prefer the consensus of the two independent expert witnesses on this point and I find that, between 1 May 1996 and 30 April 1999, turnover would have increased by 8%, 8% and 5% per annum. Mr Grimshaw did not express a view on the growth rate in the year to 30 April 2000. Mr Matthews thought it would have been 4% and Mr Papworth 3%. I prefer Mr Matthews’ figure.

[41]I would make one further observation on this aspect of the claim. Mr Matthews and Mr Grimshaw suggested that the percentage growth in turnover could be different, depending on whether it was used to assess the loss of profits or the capital loss. I agree that the loss of profits must be assessed in terms of the loss to the claimants, whereas for the purpose of calculating capital loss it is necessary to estimate the future trading potential which might be realised in the hands of an average competent operator taking over the existing business. However, both Mr Grimshaw and the compensating authority’s valuation expert, Mr Weaver, agreed that the claimants were average competent operators. In the light of that agreement between the valuers, which I accept, I consider it is appropriate to treat Mr Grimshaw’s projected growth rates as being applicable to the loss of profits claim as well as the capital loss calculation. 12 New sources of income

[42]These growth rates have been applied to the business as it was operated in March/April 1996. In addition, Mr Matthews and Mr Grimshaw suggested that account should be taken of additional sources of income which, they said, would have existed in the absence of the blight. Such income would have been derived from the change of the first floor of the café building from storage to restaurant use; the purchase of the machines in the amusement arcade; and the reintroduction of charges for the surface car park.

[43]Mr Matthews said that the first floor of the café had an attractive outlook towards the sea and had been used as a restaurant in the 1970s. He had planned to bring it back into profitable use by providing evening dining and bar facilities in what he described as a “non- pub atmosphere”, that is without music. This use required the provision of additional kitchen and storage facilities on the ground floor. Planning permission existed for the construction of those facilities and also for the proposed use of the first floor. In November 1995 Mr Jones submitted quotations for the necessary building works, apart from fitting out the restaurant itself which was to be undertaken by Mr Matthews, assisted by his sons. Barclays Bank had offered to advance £20,000 towards the cost of the works and, in January 1996, the claimants had cash resources of £30,000 which could have been used to fund the balance. The work was scheduled to start in 1996, with a view to commencing trading in 1997. These plans were abandoned in May 1996, before work had started, following discovery of serious damage to the building.

[44]Mr Papworth considered that there was insufficient evidence available to justify including the proposed first floor restaurant when calculating the compensation payable to the claimants. He said that if Mr Jones had started work on the new facility, that would have provided some evidence, but not enough to establish the final outcome. If there had been in existence a financial budget indicating the anticipated income and expenditure, and if that budget had been submitted to a bank to secure the facility required to complete the work, that would have been more helpful, but Mr Papworth was still not sure that it would have been totally sufficient. If, on the other hand, the restaurant had been completed and trading for at least three months and the financial records were available, he would definitely have included the restaurant in his calculations.

[45]In my opinion Mr Papworth has been far too demanding in requiring proof that the proposed first floor restaurant is a legitimate item of claim. In particular, his contention that a business project should not be taken into account unless and until it has been operating for at least three months, even if all the necessary consents, budgets and finance are available, is unreasonable. I consider that Mr Grimshaw summarised the position fairly when he said that, given the existence of the planning permission, building estimates and much of the finance, the proposed extension “complied with the perception of reality” and should therefore be taken into account. I propose to do so.

[46]I have not overlooked the fact that, although Mr Matthews estimated that he could have completed the extension at a total cost of £51,000, Mr Grimshaw felt that the cost of employing a contractor to do all the work would have been substantially higher. Although the claimants have only produced evidence to show the availability, in January 1996, of 13 £50,000, the new restaurant would not have been completed until early in the following year. I deal with the likely cost of the works later in this decision, but I am satisfied that any additional monies required in excess of the £50,000 available in January 1996 could have come from profits earned during the next 12 months.

[47]Mr Matthews assumed that the turnover of the first floor restaurant, in terms of 1995/96 prices, was £32,000 and would thereafter have increased in line with the rest of the business. Mr Grimshaw was much more optimistic, assuming that turnover would have reached £60,892 in the year 1997/1998. Mr Grimshaw’s calculation assumed that the first floor would produce exactly one half of the sales per cover that were achieved on the ground floor. I am not persuaded that such an approach is appropriate, since the nature of the trade in the restaurant would have been very different from that conducted in the ground floor café. The compensating authority accepted Mr Matthews’ starting point of £32,000 as at 1995/96 and so do I. I should mention, however, that this element of the loss of profits claim relates only to the period from 1997/1998 onwards, since the facility would not have been operational before then.

[48]The second new source of income for which a claim has been made is the amusement arcade. The machines in the arcade were owned and maintained by a Mr Petrie of Tonyvale Limited, the largest operator of arcades in Brean, who had originally applied for the necessary licence at the subject property. The takings were shared equally between Tonyvale and the claimants. In 1994 the claimants were granted a licence in their own right, but they continued the financial arrangement with Tonyvale, and subsequently with South West Amusements who had acquired all Tonyvale’s machines. Mr Matthews said that by 1996 he had become dissatisfied with the standard of maintenance service received. If the damage had not taken place, he would have purchased the machines from South West Amusements and retained all the takings from then on. He estimated that it would have cost between £4,500 and £6,000 to purchase the machines and £2,000 per annum for an alternative company to maintain them.

[49]Mr Papworth does not accept this item of claim, again because there is inadequate supporting evidence. On this occasion I agree with him. The claimants were unable to produce a single document to demonstrate their intention to purchase the machines or the cost of alternative maintenance. The onus is on them to prove their loss and, in this instance, they have failed to do so. This aspect of the claim fails.

[50]Finally, the claimants say that additional income could have been obtained by charging for use of the surface car parks. This income was reflected in Mr Grimshaw’s capital loss calculation, but was omitted in error by Mr Matthews from his loss of profits claims. Mr Matthews explained that the previous owner of the subject property had made a charge for using the surface car park and at first he adopted the same practice. In the year to April 1994, however, he stopped charging for surface parking although he continued to charge for parking on the beach. The main reason for this change was to encourage people who had arrived at the subject property and who did not already know it to stop. Mr Matthews produced a copy of an advertisement he had placed in 1995, which emphasised free surface parking as a prime attraction of the site. He said that, by April 1996, parking charges were generally more widely accepted and the reputation of the subject property was well 14 established. He would therefore have re-introduced charges for surface parking if the site had not been blighted.

[51]Mr Papworth rejected this item of claim, due to lack of supporting evidence. Again, I agree with him. There is no documentary evidence to suggest that surface parking charges would have been re-introduced. Even if they had, I consider it is inevitable that some motorists would have been deterred from stopping at the site. Any additional parking income would thus have been offset, in whole or in part, by a decline in turnover elsewhere. I therefore discount surface parking charges when determining the compensation payable. Structure of the notional profit and loss account

[52]Another significant difference between the parties relates to the structure of the profit and loss account to be used in assessing the loss of profits. The approaches of Mr Matthews, Mr Papworth and Mr Grimshaw are all different and I shall consider each in turn.

[53]Mr Matthews prepares profit and loss accounts for the site as a whole. He starts by calculating turnover by applying growth percentages to the previous years’ figures. He deducts 47% from turnover to cover the cost of sales in order to arrive at gross profit. This percentage is based on the historic average rate, even though the trend had been towards a reducing percentage. He then makes deductions for the various costs of operating the site. These are divided into fourteen categories and are treated in one of three ways. Some – such as labour – are calculated on the basis of their historic relationship to turnover. Others – such as insurance – are maintained at their historic average level. The final category, which includes professional fees, is based on historic levels, but increased on a yearly basis. The effect of deducting these various costs is to produce the net profit of the business for each year.

[54]When Mr Papworth assesses the loss of profits, he considers each enterprise separately because, he says, it is probable that any disruption to the overall business would have had a differential effect on the individual elements. An enterprise in this context is one for which a set of accounts has historically been separately prepared. There are five such enterprises: existing catering facilities, retail, car parking, amusements and market rents. For each enterprise Mr Papworth forecasts the appropriate contribution in terms of profit generated towards the fixed costs of the business. He terms this the net contribution. He arrives at these forecasts by reference to the historic trend of each enterprise. For this purpose he utilises the two sets of accounts which were submitted to the Inland Revenue in respect of the period 1 May 1992 to 30 April 1995, which he translates into annual equivalents by reference to the monthly takings in the year to 30 April 1998. He then assumes that the total net contribution thus arrived at will increase at 3% per annum. In times of low inflation, he says, this is equivalent to a 3% increase in net profit each year.

[55]Mr Papworth adopts a different approach when assessing the net profit of the business for the year to 30 April 1999 for the purpose of assessing capital loss. He again considers the five enterprises individually. He starts with the 1995/96 turnover and increases it at the rate of 3% per annum for 3 years. These turnover figures are then used to arrive at net profit by 15 applying the average net margin actually achieved for each particular enterprise in previous years. The average net margins adopted range from 46% to nil.

[56]Mr Grimshaw starts his calculation of net profit by using the 1995/96 turnover for each element of the business except beach parking, where he makes his own assessment of the potential income. He makes an addition to reflect the 3 new sources of income. He then increases these figures at 8% per annum for 2 years, and at 5% in 1998/1999. To the total site turnover thus produced he applies a net profit ratio of 30%.

[57]I start by considering Mr Matthews’ approach. He arrives at net profit by subtracting fourteen cost figures from his estimate of gross profit. Each of these costs is estimated. An inevitable consequence of such a method is that a relatively small error in some or all of the estimated costs can have a disproportionate effect on the resultant net profit. To that extent the approach is comparable to a residual valuation of a development site, about which this Tribunal has expressed serious reservations on numerous occasions.

[58]I shall give one example of the unreliability of Mr Matthews’ approach. He assumes that rates payable would have been £3,755 in each of the five years commencing 1 May 1995. This figure is based on the historic average. In fact, in the absence of an alteration to the rating assessment, the rates payable would have increased year on year throughout the life of the 1995 rating list. Mr Matthews is not to be criticised for not knowing what would be a basic point for a rating surveyor. His lack of knowledge of rating, however, demonstrates the danger of relying on the very detailed profit calculations that he has made. Accordingly, I derive little assistance from his estimate of the loss of profits.

[59]In answer to a question from me, Mr Papworth agreed that the figures for unblighted net profit that are implicit in his loss of profits claim are different from those that result from his approach to net profit for the purposes of assessing capital loss. He sought to justify this difference on the grounds that capital loss is an absolute figure rather than a change in an absolute figure. I am quite unable to accept that explanation. Mr Papworth does not suggest that the actual profits earned at the subject property should be adjusted to reflect the claimants’ particular circumstances when assessing capital loss. It follows that, whether one is considering loss of profits or capital loss, the starting point is the profit which the claimants would have earned if their property had not been blighted. In any year, they would have earned only one profit. Consequently, at least one of Mr Papworth’s two estimates of the unblighted net profit of the claimants’ business must be incorrect.

[60]In preparing those estimates, Mr Papworth suffers from the disadvantage that he has no direct knowledge of the operation of the business before April 1996. Nor, because of the storm in October 1996, has he been able to examine any accounting records relating to that period. Moreover, his understanding of the business has not been assisted by the compensating authority’s refusal to permit Mr Matthews to attend the without prejudice meeting between experts that took place prior to the hearing. 16

[61]Having given the matter careful consideration, I have come to the conclusion that neither of Mr Papworth’s approaches to the calculation of net profit may be relied upon. This is because his basic assumption, that the business may effectively be considered as a number of separate enterprises, is commercially unrealistic. The most striking illustration of the artificiality of Mr Papworth’s approach appears in his capital loss calculation, where he considers the loss attributable to the shop. In 1995/96 the turnover of the shop was £91,686, or some 38.5% of the total for the entire site. Mr Papworth notes that the average net profit margin of the shop in the five previous years’ accounts was nil and he assumes that this situation will continue. The effect of this assumption, according to Mr Papworth’s calculation, is that the unblighted value of the shop in April 2000 was nil.

[62]Mr Matthews explained that he and his wife wished to provide an incentive to Mrs Empson, who operated the café in partnership with Mrs Matthews. Accordingly, they arranged for a considerable proportion of the total operating expenses of the business to be attributed in the accounts to the shop, which was operated by themselves alone. The majority of motor expenses and repairs and renewals were allocated to the shop, as was all loan interest. This approach continued after Mr and Mrs Empson left in November 1993, as the claimants had intended in due course to make their sons partners in the business.

[63]Mr Papworth’s analysis ignores the essential nature of the claimants’ undertaking. It was a small family business, operating on a single site and, after November 1993, wholly owned and managed by the claimants. In answer to a question from me Mr Matthews said that, if the shop had really been operating for years at a consistent loss, he would have converted it to another use, probably as an additional amusement arcade. I accept that answer, and Mr Matthews’ explanation for the continued losses incurred by the shop, without hesitation.

[64]Finally, I consider Mr Grimshaw’s approach to net profit. So far as the calculation of net profit based on a 30% margin is concerned, he relies on his experience which suggests that, for this type of business, a ratio of 30% can properly be taken as a fully maintainable net profit. He also points out that, ignoring any turnover adjustment for April 1996, the net margin earned by the claimants in the three years immediately preceding the date of the damage was as follows: 19% in 1993/94; 22% in 1994/95 and 29% in 1995/96. In the light of this rapidly increasing profit margin, I am satisfied that Mr Grimshaw’s suggestion of 30% for each of the years subsequent to April 1996 is reasonable and I accept it.

[65]I should add that Mr Papworth suggests that the net profit margin should be 24%. He says that this is based on his re-statement of the accounts approved by the Inland Revenue. Even if it were appropriate to use the annual accounts, however, he does not consider that they would produce a fair result. This is because 30% seems too high compared with the Croyde Bay beach complex in North Devon. I have explained why I consider that the claimants’ loss should be assessed by reference to the annual accounts. The accounts of Croyde Bay were produced by Mr Grimshaw in an attempt to demonstrate that his estimate of the turnover of the subject property was reasonable. I inspected Croyde Bay in company with the parties’ representatives immediately following our inspection of the subject property on 8 March 2002. In the light of that inspection and the evidence I am satisfied that there is no justification for relying on the net profit earned at Croyde Bay in preference to the 17 accounts of the subject property. There are three reasons for this conclusion. Firstly, in the absence of exceptional circumstances, the profit earned at the subject property is likely to be more relevant than that earned at another site some 50 miles away. Secondly, it is clear from Mr Grimshaw’s evidence that the profitability of Croyde Bay was adversely affected by the unhappy personal circumstances of the proprietors. Finally, a substantial proportion of the turnover at Croyde came from a supermarket operation, where the profit margin was relatively low. The subject property, on the other hand, did not have a supermarket, but it enjoyed income from car parking, amusements and market rents, all of which had a relatively high profit margin. There were no such high margin facilities at Croyde.

[66]The result of my various findings is that the unblighted profit of the business would have been as follows: £80,244 in 1996/97; £97,861 in 1997/98; £102,754 in 1998/99 and £106,864 in 1999/2000. Adding the profit lost in April 1996 produces total lost profits, after deducting the insurance recovery, of £315,501.00 (Appendix). Capital Loss

[67]Evidence on the capital value of the subject property in the “no scheme world” was given by Mr Grimshaw for the claimants and by Mr Papworth and Mr Weaver for the compensating authority. Mr Weaver is an associate partner of Messrs Humberts of Taunton.

[68]All three experts arrive at their valuations by using the profits method, because there are very few comparable properties with the same mixture of uses as the subject property. Mr Grimshaw starts by assessing the fully maintainable trade of the average competent operator of the business. For this purpose he adopts the claimants’ turnover from catering, the shop, amusements and market rents in 1995/96 and makes his own estimate of the potential income from beach parking. He assumes that the first floor is converted to a restaurant, that charges are introduced for surface parking and that full ownership of the amusement machines is secured. The turnover arrived at in this way is projected forward to April 1999, using growth rates of 8%, 8% and 5%. He thus arrives at a turnover of £395,191. The application of a net profit margin of 30% produces a profit of £118,557 in the year to April 1999, which would have been the latest profit figure available to a prospective purchaser at the valuation date. Mr Grimshaw capitalises this profit at 5.5 years purchase. He then deducts £70,000, which is his estimate of the cost of completing and fitting out the first floor restaurant and ancillary accommodation, constructing new WC facilities pursuant to an agreement with the local authority and purchasing the amusement machines. His estimate ignores the fact that some of these works may have been undertaken by Mr Matthews and his sons direct. He thus arrives at an unblighted value of £582,000 and a capital loss of £282,000.

[69]I have previously outlined Mr Papworth’s approach to the assessment of net profit for the purpose of calculating the capital loss. This results in a projected net profit for the year to April 1999 of £61,591. Mr Papworth agrees with Mr Grimshaw’s application of a multiplier to the net profit and he also agrees with Mr Grimshaw’s figure of 5.5 years purchase. He does not accept that it is appropriate to allow for the possibility of any new facilities, nor to disregard the actual income from beach parking. His no scheme world valuation is therefore £339,000 and the capital loss £39,000. 18

[70]Mr Weaver does not attempt to assess the change in profitability of the business between 1996 and 1999, but simply adopts Mr Papworth’s net profit figure to April 1999. Like Mr Papworth he discounts the possibility of any additional facilities and agrees that the appropriate multiplier is 5.5. He therefore arrives at the same valuation as Mr Papworth. Mr Weaver accepts that, if the Tribunal determines a higher net profit than he has been given by Mr Papworth, his valuation should increase pro rata.

[71]Both Mr Grimshaw and Mr Weaver, as I have said, agree that the claimants may be considered to be the same as the average competent operator and I have accepted that agreement. The capital value of the subject property should therefore be calculated using the figure of net profit that I have decided the claimants would have earned in the year to 30 April 1999, namely £90,997 from the existing facilities plus £11,757 from the new restaurant; a total of £102,754. Applying the agreed multiplier of 5.5 to this profit produces a capital value of £565,147. In assessing the claimants’ loss, it is necessary to take account of the cost of the additional facilities which I consider they would have provided by the sale date, namely the new restaurant and associated facilities including new WCs. In my view this cost should reflect the fact that, as I find, some of the works would have been undertaken by the claimants direct, thus avoiding the contractor’s labour and profit costs for those elements. Mr Grimshaw and Mr Weaver agree that the full cost of these works would be £70,000. This figure includes the purchase of the amusement machines. Mr Grimshaw assumes that the cost of machines would be between £4,500 and £6,000 and this estimate was not disputed. I have found that the machines would not have been purchased. I therefore deduct, say, £5,250, producing a total “contractor’s cost” of £64,750. Mr Matthews considers that he could have carried out the work for £51,000. That seems to me to be an excessive saving to result from undertaking part only of the work himself. Doing the best I can, I find that the claimants would have spent a total of £58,250 on the works. Their capital loss is therefore £207,000, as follows: Net profit £102,754 Y.P. 5.5 £565,147 Less proceeds of sale £300,000 £265,147 Less costs of works £ 58,250 Capital Loss £206,897 say £207,000 Surveyors’ fees

[72]In July 1996 the claimants instructed Messrs Grimley to act as their surveyors in negotiating the compensation claim. The compensating authority made it clear that it would only pay a surveyor’s fees based on Ryde’s scale (1996). Grimley were not prepared to accept Ryde’s scale and the claimants agreed to pay them based on the time spent at agreed hourly rates. On 1 January 1999 Mr Matthews advised the compensating authority that he was no longer able to afford professional representation and had therefore suspended Grimley’s involvement in the negotiations. In late 1999 or early 2000 the compensating 19 authority agreed to increase its contribution towards surveyors’ fees to Ryde’s scale plus 50%, to reflect the extended nature of the claim.

[73]The fees paid to Messrs Grimley total £28,932.35. The fee based on table E of Ryde, which the compensating authority suggests is appropriate, depends on the amount of compensation payable. In view of my decisions so far on the main items of claim, it will inevitably be significantly below the fees that the claimants have actually paid Messrs Grimley, even allowing for the 50% uplift offered by the compensating authority.

[74]Ryde’s scale (1996) was prepared by the valuation office agency on behalf of the Department of the Environment. I have been provided with a full copy of the scale. It was intended to be adopted for the assessment of surveyors’ fees by all bodies and organisations, whether public or private, having access to compulsory powers for the acquisition of land or interests or rights in or over land. Although the valuation office agency prepared the scale after taking representations from and consulting with interested professional bodies, acquiring authorities, practising surveyors and claimants’ representative bodies, there is no suggestion that the scale was actually agreed by those representing claimants. Indeed, in the course of his closing submissions that typified the very fair approach he had adopted on behalf of the compensating authority throughout the eleven day hearing, Mr Kolodziej conceded that there was a resistance to Ryde’s scale in the surveying profession; he described the scale as being “possibly mean”. Nevertheless, said Mr Kolodziej, Ryde’s scale reflected the accepted practice in the profession and the claimants at all material times knew that the application of the scale was the accepted practice; it should therefore be adopted. Mr Matthews, on the other hand, said that he wished merely to recoup the professional fees which the claimants had actually incurred.

[75]Mr Kolodziej accepts that the claimants’ entitlement to “full compensation” under the Act means an entitlement to compensation no less and no more than the loss imposed on them. In the case of surveyor’s fees, the claimants have paid £28,932.35 to Messrs Grimley. It is agreed that that figure represents a reasonable sum for the work involved. That being the case, the application of Ryde’s scale would result in the claimants receiving less compensation than the loss they have suffered. It would therefore not represent full compensation. Accordingly, I find that the claimants are entitled to reimbursement of all the fees paid to Messrs Grimley.

[76]I would add this. Mr Matthews pointed out that the Government has recently proposed that Ryde’s scale should be abandoned. That was a reference to a paper setting out proposals for changes to compulsory purchase powers and processes, including compensation arrangements, published by the Minister for Housing, Planning and Regeneration in December 2001. The relevant proposal was contained in paragraph 4.15, which said: “We consider it important that no claimant should be deterred from pursuing a fair compensation settlement by the risk of incurring professional fees for which he would not be fully recompensed. We therefore propose that the new legislation should provide for the reimbursement of all professional fees on the basis of the actual expenditure reasonably incurred. While being aware of a body of opinion 20 within the surveying profession that Ryde’s scale of fees should still prevail, we can see no justification for retaining a different approach to calculating the fees due to surveyors from that applicable to all other professional advisers”.

[77]The present case clearly illustrates how a compensating authority’s adherence to Ryde’s scale can result in claimants being deprived of professional advice to which they are entitled. It is to be hoped that effect will be given to the Government’s proposal, whether by legislation or as a result of a policy change on the part of compensating authorities, as soon as possible. Management time

[78]The original claim for management time was £82,635. It was based on 1,836 hours at £45 per hour. Approximately half the total time claimed relates to the period from January 1999 onwards. No documentary evidence was produced to support the latter period and I disregard it. During the course of the hearing it was agreed that the claimants are entitled to be paid for 532.07 hours of time spent by Mr Matthews between 1996 and 1998 on the following matters:(i) Initiating, executing or supervising remedial works 69.10

(ii) As a direct consequence of the difficulties 384.95

(iii) Dealing with insurers arising out of the scheme and remedial works 78.02 Total 532.07 hours

[79]The first difference between the parties relates to a further 313.07 hours, most of which were devoted to preparing applications for interim payments of compensation. Mr Kolodziej submits that these hours are claimable, if at all, as part of the costs of the reference. Mr Matthews says that the time claimed for also included liaising with his surveyors and his member of Parliament as a result of the compensating authority’s initial refusal to permit him to sell the property; negotiating with his insurers, in the light of the compensating authority’s initial insistence in May 1998 that they would only proceed to repair the structural damage if no additional claims were submitted; and liaising with Messrs Grimley on both matters.

[80]Since there is no supporting evidence relating to the later period, I am only concerned with the claim for time spent by Mr Matthews up to the end of 1998. The disputed 313.07 hours relate to that period. Throughout that time the claimants were represented by Messrs Grimley. That firm’s bill included the work involved in applying for interim compensation payments and has been allowed in full. I accept that Mr Matthews would have spent some time in obtaining the information necessary for Messrs Grimley to quantify their claims. I also accept that he had to spend further time liaising with his insurers, his MP and his surveyors on certain other matters. In answer to a question from me, however, he said that, in 1996, only 90 per cent of his normal time was spent working on the business and, in 1998, only 80 to 90 per cent. Mr Kolodziej suggested that, in a normal year, Mr Matthews would have worked a total of 1,400 hours. Mr Matthews did not disagree with that suggestion. The compensation awarded for loss of profits assumes that Mr Matthews would have worked full- time on the business in the relevant period. In my opinion, even if all the 313.07 hours in 21 question are properly compensatable in principle, in practice Mr Matthews will have been compensated for 140 hours in 1996 and between 140 and 280 hours in 1998 which he did not in fact devote to the business in those years. There is therefore no justification for paying additional compensation in respect of the 313.07 disputed hours. Accordingly, I restrict the compensation payment to the 532.07 hours that have been agreed.

[81]The parties also disagree about the hourly rate that should be applied to those hours. Mr Matthews suggests that it should be £45 which, he says, is substantially less than would be charged by a professional adviser. The compensating authority’s figure is £27 per hour, arrived at as follows. In the year to 30 April 1996 the accounts show a net profit, adjusted for the (not admitted) April blight of , say, £75,000. As Mr Matthews was in partnership with his wife, his entitlement was £37,500. Assuming he worked 1,400 hours in a typical year, his hourly rate was £26.79, say £27.

[82]The claimants are entitled to compensation for the loss they have suffered. The hourly rate which they might have paid a professional adviser, but did not, is irrelevant. In the absence of any other evidence to support the claimants’ approach, I prefer the compensating authority’s calculation by reference to the profitability of the business. I consider, however, that the suggested starting point of £75,000 profit is too low. The hours in question were spent in 1996, 1997 and 1998. I propose to adopt a robust approach and use the notional profit of £80,244 that I have found would have been earned in the year to April 1997 as the starting point for calculating the appropriate hourly rate. On that basis, Mr Matthews would have earned £28.65 per hour. Accordingly, the compensation for lost management time is £15,250, calculated thus: 532.07 hours at £28.65 = £15,243.80, say £15,250.

[83]I therefore find that the total compensation payable for the four disputed items of claim is £566,683.35, as follows: Loss of profits £315,501.00 Capital loss £207,000.00 Management time £ 15,250.00 Surveyors’ fees £ 28,932.35

£566,683.35

[84]This figure, together with the other eight items which have been agreed in the sum of £46,900.63, produces total compensation payable to the claimants by the compensating authority of £613,583.98. Statutory interest

[85]It is agreed that the claimants are entitled to interest on the total compensation monies under the Planning and Compensation Act, 1991, s.80 and Schedule 18, Part I (“the 1991 Act”). Accordingly, interest runs from the “date of the claim”. 22

[86]Mr Matthews submitted that three dates had to be determined in this regard. The first related to the claim for damage and expenses, where he suggested that the relevant date was 15 July 1996. The second concerned the loss of profits, where he said the date was either 15 July 1996 or 13 August 1996 and the third was for the loss of capital value, where the date was 2 May 1996. For the compensating authority, Mr Kolodziej agreed that the claim for capital loss should be considered separately from the remaining items of claim. He submitted that the date of the claim for capital loss was 11 July 2000 and that the date for the remainder of the claim was either 11 July 2000 or 15 June 1999.

[87]Although determination of the claim date is not within this Tribunal’s statutory powers, the parties have agreed that in this case the Tribunal should make such a determination. In my view it is at least arguable that the 1991 Act requires a single claim date to be fixed. Nevertheless, the parties have also agreed that, for the purposes of this reference, the claim for capital loss is to be treated separately from the remainder of the claim. In the circumstances I consider it appropriate to determine dates for those two elements only.

[88]Mr Matthews submits that interest on the capital loss should be paid from the date when the subject property depreciated in value. That date, he says, was 2 May 1996, when Barclays Bank informed him that, because of the damage that had been caused, “It may be difficult for the Bank to advance any more monies to the business whilst the insurance/compensation claim is being processed.” In support of this submission he refers to the decision of this Tribunal in Bestley v North West Water Limited

[1998] 1 EGLR 187

[89]As for the remainder of the compensation monies, Mr Matthews divides these into two categories. He says that the claim for damage and expenses was submitted by the claimants’ then solicitors on 15 July 1996 and interest should run from then. Interest on loss of profits should run from the same date or, if not, from 13 August 1996, when a claim was submitted by Messrs Grimley.

[90]Mr Kolodziej submits that the expression “date of the claim” means a claim for compensation, in writing, and in open correspondence, that writing providing a full breakdown of the claim. In support of this submission he refers to the White Book, and also to Bestley. In his submission the date of the claim was 11 July 2000, when Mr Matthews submitted a detailed, itemised claim to cover all the heads of claim. This was the first notification of a claim for capital loss and is therefore the relevant date for that item. It is also the relevant date for the remainder of the claim. Alternatively, he submits that the appropriate date for the latter is 15 June 1999, when Mr Matthews sent Mr Weaver an up- dated claim for the period to April 1999.

[91]In Bestley the Member, Mr Michael Hopper, FRICS, said:

“Considering the ordinary and natural meaning of the words I do not think ‘date of claim’ can be equated with the date of the notification of an unquantified claim, 23 effectively notice of an intention to claim. I find that ‘date of claim’ means the date of a formal statement of a claim. I do not go so far as to say that it must include full and detailed quantification of each and every item, but I think that the earliest communication from the claimants to the company in these cases, which can be described as a claim, is Mr Dawson’s letter of July 31 1992 and that this is the ‘date of claim’ in these cases for the purposes of Schedule 18 to the 1991 Act.”

[92]I respectfully agree with that approach and will therefore consider the various communications by the claimants in that light. Dealing firstly with the claim for capital loss, there is in my view no justification for Mr Matthews’ suggestion that interest is payable from the date the property was first depreciated in value. The first time a formal claim for capital loss was made was in Mr Matthews’ letter dated 11 July 2000. I find that that is the date of the claim for capital loss.

[93]So far as the claim for the other losses is concerned, I start with the letter from Mr Matthews’ then solicitors, Messrs Baileys Shaw and Gillett to the compensating authority dated 15 July 1996. That letter claimed only for physical damage and was accepted in full. The eventual claim was for a total of 11 items, excluding capital loss. The letter of 15 July 1996 did not refer to a future claim for the other 10 items in due course; it merely indicated that the claim was without prejudice to any future claims that may arise. In my judgment that letter does not amount to a claim for the purpose of the 1991 Act.

[94]Mr Matthews’ alternative suggestion was that the claim date was 13 August 1996. On that date Messrs Grimley submitted a claim to Mr Weaver. It was stated to be for compensation “based on information available so far”. It related to only six of the eleven items eventually claimed. Again, in my view, that letter cannot be considered to be a formal statement of the claim which is the subject of this reference.

[95]Mr Weaver referred to a number of further interim claims which were submitted by the claimants or their advisers. One of these was enclosed with a letter from Messrs Grimley to Mr Weaver dated 19 February 1998. It included itemised claims relating to all the eventual heads of claim except administration costs, tankering charges and finance charges. These three items are all minor, and have been agreed in total at £7,000.40. I consider that, subject to one qualification, the letter of 19 February 1998 constitutes the claim for non capital losses for the purpose of the 1991 Act.

[96]The qualification is that that letter, unlike other letters claiming compensation, was marked “without prejudice”. Mr Kolodziej accepted that it was possible that the letter was incorrectly so marked, but on balance he submitted that the letter should properly be considered to have been written without prejudice and should therefore not be taken into account. The letter said:

“Please find enclosed a revised claim for compensation and a formal request for an advance payment. 24 As you will see, a claim for Director’s time has been included as requested. The claim also incorporates any invoices subsequent to the date at which the last claim was submitted and an updated set of account figures for the accounting period of May 1st to October 31st. The profit loss element of the claim is now prorated on a 3 year trend basis, which gives a more accurate prediction of turnover and profits than the previously used 2 year trend basis … As you know, Mr Matthews’ business has been severely affected by the works. I would therefore be grateful if you would give the enclosed claim your urgent attention with a view to making a substantial advance payment in the near future. I look forward to hearing from you shortly.”

[97]Whether or not this letter was correctly marked without prejudice depends upon whether it was written as part of an attempt to settle a dispute. In my opinion, the purpose of the letter, which was written at a time when the claimants’ losses were still continuing, was not to settle the compensation claim, but merely to obtain an advance payment of compensation. Accordingly, the contents of the letter were not truly without prejudice.

[98]Even if that view is wrong, however, I do not think it follows that the letter was not a claim for the purposes of Schedule 18 of the 1991 Act. The matter is referred to in the following terms in Phipson on Evidence, Fourteenth Edition:

“It is certainly the case that without prejudice communications are admissible for the purpose of showing that they have been made. It is long established that they may be adduced in evidence as explaining delay. (Walker v Wilsher (1889) 23 QBD 335(CA)). Though there is little authority on this topic, in practice without prejudice correspondence is regularly exhibited to affidavits without objection from the court or counsel on interlocutory applications, for example to strike out for want of prosecution, or for discovery. In some cases this is because the correspondence, though headed without prejudice, is in reality nothing of the sort. In others, however, it genuinely falls within the protection accorded to without prejudice correspondence, but is admissible because the purpose for which it is tendered does not infringe the policy of the rules.”

[99]I adopt that extract as a correct statement of the legal position. Thus, even if the letter dated 19 February 1998 was correctly marked “without prejudice”, I consider that I am still entitled to have regard to it as evidence that a claim was made on that date. I therefore find that interest is payable from 19 February 1998 on the entire compensation, except for the capital loss of £207,000, where interest will run from 11 July 2000.

[100]In the course of the hearing, I raised the question whether, if statutory interest on the total compensation was not payable until 11 July 2000, I had power to award a further payment of interest from an earlier date if I considered it met the justice of the case. The claimants submitted that I had the ability to make such an award under s. 49 of the Arbitration Act 1996, which applies to all proceedings in this Tribunal (Rule 32(b) of the Lands Tribunal Rules 1996). The compensating authority, on the other hand, submitted that s. 49 did not apply in the circumstances of this reference. 25

[101]In my opinion, the interest payable under the 1991 Act meets the justice of the case. It is therefore not necessary for me to decide whether I have power to order an additional payment of interest.

[102]A letter on costs accompanies this decision which will take effect when, but not until, the question of costs is decided. Dated: 24 April 2002 (Signed) N J Rose ADDENDUM

[103]I have received written submissions on costs from both parties.

[104]The claimants ask for their costs. They say that the amount of compensation awarded substantially exceeded the acquiring authority’s sealed offer and also substantially met the amount claimed. They submit a schedule of their costs, totalling £118,604.79 and they seek that amount. If the Tribunal is not satisfied with the details provided, they ask for a costs order in their favour, such costs to be assessed if not agreed on the indemnity basis.

[105]The acquiring authority accepts that costs should be awarded to the claimants, subject to three qualifications. Firstly, it points out that the claimants re-formulated their loss of profits claim immediately before the commencement of the hearing. The original claim had been based on loss of gross profits and it was amended to loss of net profits. This resulted in the compensating authority incurring additional costs in preparing anew for the cross- examination of Mr Matthews and it asked to be compensated for those extra costs. Secondly, during the course of the hearing, and at the invitation of the Tribunal, Mr Matthews again re- formulated his claim. This, too, resulted in additional costs being incurred by the compensating authority in preparing further cross-examination and these costs should be reimbursed by the claimants. Finally, the Tribunal had asked the parties to prepare submissions on the applicability of rule 32(b) of the Lands Tribunal Rules. In the event, it was not necessary for the Tribunal to make a decision on this point and each party should bear its costs of the exercise.

[106]The first two grounds upon which the compensating authority seeks a contribution towards its costs relate to the claim for loss of profits. This aspect of the claim was originally advanced on behalf of the claimants by a firm of surveyors. Although that firm insisted on being paid a fee which exceeded that based on Ryde’s scale (1996), the compensating authority – wrongly, as I have held – declined to depart from that scale. In consequence, the loss of profits claim was subsequently pursued by Mr Matthews in person. The 26 compensating authority then refused to permit Mr Matthews to attend the without prejudice meeting of experts, presumably because he was not himself an expert.

[107]The loss of profits claim was complex. If it was made more complex – and therefore more expensive for the compensating authority to deal with – because it was presented in person by Mr Matthews rather than by an expert, that is due at least in part to the compensating authority’s attitude towards surveyor’s fees and towards Mr Matthews’ attendance at a without prejudice meeting designed to narrow the issues. There is therefore no justification in my view for requiring the claimants to make any contribution to the compensating authority’s costs relating to loss of profits.

[108]The third ground on which the compensating authority seeks part of its costs relates to the submissions it made on rule 32(b). The background to those submissions is as follows. Although the claimants’ losses started in April 1996 and continued for several years thereafter, the compensating authority’s primary case was that interest on the compensation monies should only start in July 2000. Because that seemed to me to be unjust, I raised with the parties the possibility that I might have jurisdiction to order interest from an earlier date pursuant to rule 32(b). In the event I found that interest on all compensation except for capital loss should be paid from 19 February 1998 and, since that seemed to me to meet the justice of the case, it was not necessary to consider rule 32(b). Nevertheless, the request for submissions on rule 32(b) arose from the compensating authority’s own case, which was not successful. Again, therefore, the claimants should not be required to contribute to the authority’s costs of dealing with the point.

[109]I order that the claimants shall recover their costs from the compensating authority. There is in my view no justification for the award of costs on an indemnity basis. Accordingly, the claimants’ costs are to be agreed or, in default of agreement, assessed on the standard basis by the Registrar of the Lands Tribunal in accordance with the Civil Procedure Rules. Dated: 28 May 2002 (Signed) N J Rose 27 APPENDIX BREAN DOWN COVE DETERMINATION OF LOSS OF PROFITS BY THE LANDS TRIBUNALa. A. Existing facilities 1996/97 (8% growth) 1997/98 (8% growth) 1998/99 (5% growth) 1999/00 (4% growth) Turnover 1995/96 238,328 Add for April 1996 9,339 Blight adjusted turnover 247,667 Projected turnover 267,480 288,879 303,323 315,456 Net profit @ 30% 80,244 86,664 90,997 94,637 Less actual profit 37,169 15,086 17,610 -17,551 Profit lost from 1 May 1996 onwards 43,075 71,578 73,387 112,188 = 300,228.00 April 1996 – lost turnover £9,339 @ 30% = 2,801.00

b. B. New facilities Turnover at 1995/96 prices 32,000 Projected turnover (34,560) 37,324 39,190 40,758 Net profit @ 30% - 11,197 11,757 12,227 = 35,181.00 338,210.00 Deduct insurance settlement 22,709.00 Loss of profits compensation £315,501.00 28