Faraday v Carmarthenshire County Council

LORD JUSTICE PETER GIBSON: This is an appeal by the claimant, Brian Faraday, from part of the decision of the Lands Tribunal (Mr NJ Rose FRICS). The Member by his decision determined the compensation payable by the respondent, Carmarthenshire County Council, as successors to Llanelli Borough Council, to Mr Faraday for his freehold interest in a commercial building at 10 Island Place, Llanelli ("the Property"). It is unnecessary for the purposes of this judgment to distinguish between the two councils which I call "the acquiring authority".

The Property was the subject of a compulsory purchase order ("CPO"). It was not and is not in dispute that in principle Mr Faraday was entitled to be compensated for the value of the Property to him, including his disturbance loss, and that such loss included loss which he sustained prior to the making of the CPO, subject to three conditions: (1) that the loss was caused by the scheme as part of which the Property was compulsorily acquired; (2) that the loss was not too remote; and (3) that the loss was not such as a reasonable person would have avoided: see Director of Buildings and Lands v Shun Fung Ironworks Ltd [1995] 2 AC 111 at page 126 per Lord Nicholls, giving the judgment of the majority in the Privy Council.

However, in computing the loss suffered by Mr Faraday through the adverse effect of the scheme on the business carried on by him at the Property, the Member, having calculated the additional profits which would have been earned from the Property in the absence of the scheme, then reduced them to reflect the value of what he called the "freed up time" of Mr Faraday. That is the time which Mr Faraday did not have to devote to the business because of the loss of business caused by the scheme, and which he could have devoted to other profitable activities.

The primary question raised on this appeal is whether the Member erred in making that reduction. Associated with it is the question whether in any event it was open to the Member to do so in the absence of evidence or submissions directed to the point, neither Mr Faraday nor the acquiring authority having contended for such reduction.

The facts can be stated shortly. The Property is a part three-storey and part two-storey end-of-terrace property on the periphery of Llanelli town centre, with a total floor space of 190.6 square metres. Mr Faraday purchased it in 1973. His background is as a property investor and developer. From the beginning of 1981, he carried on the business of an estate agency under the name Park Estates from the ground floor of the Property. There was office accommodation on the first and second floors and space for car parking at the rear.

Over the years Mr Faraday appears to have carried on his property investment and development business as well as the estate agency business. From the early 1980s the acquiring authority began to acquire buildings in the surrounding area, the buildings being boarded up on acquisition and eventually demolished. In July 1982 Mr Faraday first became aware that the Property might be required by the acquiring authority when an article appeared in a local paper stating that a new bus station was to be built.

In January 1983 Mr Faraday acquired a 5-year lease of other premises, 67/69 Stepney Street, Llanelli ("67/69"), so that he would have alternative premises to which his business could be relocated. But they were in poor condition and substantial works were effected over the next six years.

On 25th January 1993 the CPO under which the Property was compulsorily acquired was made. The CPO was confirmed by the Secretary of State for Wales on 18th August 1994, a general vesting declaration was made on 26th October 1994 and the freehold was vested in the acquiring authority on 26th November 1994. That is the agreed valuation date.

The lease of 67/69 was renewed in January 1988. Early in 1990 Mr Faraday transferred his estate agency business there. By then that business had been run down and he had very few properties on his books. He did not complete any sales whilst he was at 67/69 and in July 1991 he was forced to cease trading.

Mr Faraday and the acquiring authority were not far apart on the value of the freehold of the Property, but differed substantially on the compensation for disturbance and losses. Mr Faraday claimed £783,429. The acquiring authority contended for £106,793. The parties were unable to agree. The dispute over compensation was referred to the Lands Tribunal.

The Member in paragraph 32 of his decision identified eight issues of which only two are relevant to this appeal. Issues (2) and (3) were:

The Member dealt with issue (2) at paragraphs 57 to 81 under the heading "Loss of profits". He found that there had been a decline in turnover in the year to 31st March 1984 and thereafter caused by the scheme, that in the absence of the scheme the business would have continued to trade satisfactorily until the valuation date, and that Mr Faraday might reasonably have been expected to continue to take part of the available pool of business away from the other established agents, as he had done in the period up to the end of March 1983. The Member calculated what turnover would have been achieved in each of the years from the year ended 31st March 1983 to the year ended 31st March 1994, and in the period from 1st April 1994 to the valuation date if there had been no scheme. He also found what cost items should be deducted from the turnover figures. He concluded that the profit margin would have been 30 per cent of the gross turnover figures. From that notional profit were deducted actual profits or to that notional profit were added actual losses in each year in which there were such profits or losses. The result was that in each year before the freed-up time deduction there was a loss of profits varying from £9,651 in 1986 to £29,454 in 1988.

In paragraph 81 of his decision the Member said:

The Member then dealt with issue (3) in paragraphs 82 to 90 under the heading "Mr Faraday's duty to mitigate losses". He referred to the facts relating to 67/69 and to the criticism made by the acquiring authority that Mr Faraday unjustifiably delayed carrying out the works needed to make 67/69 suitable for use as an estate agency and then moving his business there. He found that the acquiring authority did not approach the negotiations to purchase the Property in good faith. With that in mind, he found that Mr Faraday did not behave unreasonably in his slow progress in delaying the transfer of the business there until 1990. Accordingly, he held that Mr Faraday was entitled to be compensated for all the losses he suffered as a result of the compulsory acquisition of the Property. In other words, the Member held that there was no failure by Mr Faraday to mitigate his loss. The Member dealt with all the other issues which he had identified. He determined the compensation at £354,111, plus £133,028 interest.

Mr Faraday sought permission to appeal to this court in relation to the single point of the validity of the deduction for freed-up time. Such permission was granted by Carnwath LJ on the papers. The Lord Justice (whose unrivalled expertise in the field of compulsory purchase was recently acknowledged by Lord Nicholls in Waters v Welsh Development Agency [2004] UKHL 19 at paragraph 3) described the concept of that deduction as "novel".

Mr John Brooks for Mr Faraday submits that the concept is not only novel but also without legal foundation. He points out that the acquiring authority did not advance any argument for such a deduction, nor was there any evidence directed to whether in fact Mr Faraday had any freed-up time. Mr Brooks submits that the Member, who accepted that Mr Faraday had acted reasonably in relocating his business to 67/69 only in 1990, was inconsistent in reducing the compensation by reference to freed-up time.

Mr Brooks draws attention to the fact that there is no decided case nor textbook authority which refers to freed-up time in the field of compulsory purchase, or indeed in any other field. He submits that if the concept were to be accepted, it could open the floodgates in a variety of cases. He further submits that the Member was wrong arbitrarily to quantify and determine the freed-up time of Mr Faraday in the absence of any evidence. Accordingly, he asks that to the compensation awarded be added the £66,345 deducted plus interest.

Mr Mark Spackman for the acquiring authority submits that the Member in paragraph 81 of his decision was merely restating the basic principle that Mr Faraday was under a duty to mitigate his loss, and should have done so by devoting the additional time which became available to him in consequence of the decline of the estate agency business to some other profitable activity. He referred us to two passages in the judgment of Lord Nicholls in the Shun Fung case at pages 126 and 138 respectively, which establish that a person claiming compensation for loss on a compulsory purchase has to act reasonably and can only obtain compensation for a reasonably incurred loss. He submits that the Member in his reductions of only 25 per cent and 50 per cent was conservative.

I have come to the clear conclusion that the Member's decision on freed-up time cannot stand. I start with what in my judgment was the procedural unfairness in the Member's decision on this point. If there was to be a deduction for freed-up time, one would have expected the point to have been taken by the acquiring authority in its pleaded response to Mr Faraday's claim for compensation and for the facts to have been investigated in the evidence before the Member. That did not occur. Mr Spackman told us that it would have been inconsistent with the acquiring authority's case for him to have taken the point. His argument before the Member had been that Mr Faraday should have relocated the estate agency business much sooner than he in fact did, or closed down that business altogether. Whilst the freed-up point could have been advanced by the acquiring authority in the alternative to what it actually argued, the acquiring authority accepts that it did not take the point, nor was it raised by the Member at the hearing. We are told that the point only emerged when the decision of the Member was sent to the parties. It would appear to have been an afterthought.

If a significant point is not taken by the parties but occurs to the Member and he is minded to rely on it in his judgment, it is only fair that he should give the parties an opportunity to deal with it. This is so even if the point only occurs to the Member after the conclusion of the hearing. As we have seen from paragraph 81 of the decision, the Member himself adverted to the fact that no evidence was given as to the amount of time devoted by Mr Faraday to the estate agency business in its best year, nor on how he could profitably have used the freed-up time in the other years. The Member appears to have thought that the absence of any evidence somehow entitled him to assess the quantum of the reduction by adopting a broad-brush approach. He should at least have invited submissions on the point. I do not doubt that he would have been urged by Mr Faraday in that event not to allow the point hitherto not taken and that, if the Member was still minded to rely on the point, he should hear further evidence to deal with it. By failing to come back to the parties, the Member, with all respect to him, adopted a course which was procedurally unfair.

I turn to the substantive point. It would not appear that the Member treated the point as a matter of mitigation, because he dealt with it under issue (2) rather than issue (3). I think that most lawyers would have regarded it as a point on mitigation. However, for my part it would not have mattered under what heading it was dealt with, provided that it was recognised that such a point can only succeed if it can be established that a reasonable person in the position of Mr Faraday would have recognised that he had spare time in consequence of the decline in the estate agency business and would have devoted that time to another activity, while at the same time continuing with the estate agency business. Mr Spackman properly accepts that there is no direct correlation between a decline in the turnover of a business and the amount of work devoted to the business. Such a decline might in some circumstances lead to the owner of the business reasonably devoting even more time to the business to arrest the decline.

To arrive at the conclusion that the compensation payable to Mr Faraday should be reduced by 25 per cent until 1991 and 50 per cent between 1991 and 1994 for freed-up time, the Member would have had to be of the opinion that it was, or would have been, unreasonable for Mr Faraday not to have devoted himself in that time to some other activity. The Member does not in terms apply the test of reasonableness in paragraph 81. Instead, he only refers to the time which Mr Faraday would have "needed" to deal with the declining selling instructions. But the Member could not properly have reached that conclusion without there being much more evidence about the working practices of Mr Faraday in his estate agency business and of any staff he had, and about how business was generated for the estate agency. He would furthermore have had to identify what other activity should reasonably have been pursued by a person in Mr Faraday's position. Mr Spackman suggests that the Member would have had in mind Mr Faraday's property investment and development business. But the Member does not refer to it in paragraph 81, and it is far from obvious that there was in fact another activity available to Mr Faraday which he could have pursued in the freed-up time but unreasonably did not pursue. It would also have been relevant for the Member to consider the profitability of such other activity, as it would not have been reasonable for Mr Faraday to pursue that other activity unless it was profitable. It is arguable that the profits of such other activity, which Mr Faraday should have pursued, should be taken into account in arriving at the appropriate deduction.

None of this was explored in evidence or argument. None of this appears to have been taken into account by the Member. Further, the Member seems to have plucked his figures of 25 per cent and 50 per cent out of the air, without there being any solid evidence on which to base those figures.

I conclude therefore that the Member's decision on this point was, on the facts of the case, not open to him. I would not rule out the possibility that there might be circumstances where the freeing up of time as a result of a decline in trade caused by a scheme could lead to a deduction from compensation, but, as no other decision has been identified where such a deduction has been made, that is likely to be an exceptional case. It will not be easy to establish that a person in the position of a claimant seeking compensation acted unreasonably in not conducting some other activity concurrently with his existing business at the premises which come to be compulsorily acquired. But in any event, the present was not such a case on the material before the Member.

Mr Spackman submitted that if the court were to conclude that the appeal should be allowed but that it is possible for there to be a deduction from compensation in respect of freed-up time, we should remit the case back to the Member. I cannot accept that submission. In the present case, given that the point was never raised at the hearing and lacked any evidential foundation, it would not in my view be just to give the acquiring authority an opportunity to advance a new case at a further hearing which it did not put forward at the earlier hearing. Mr Brooks rightly reminded us that it is now 10 years since the CPO.

I agree that this dispute should not be further prolonged. In my judgment, the appropriate course for this court is to allow the appeal and to vary the decision of the Member by adding to the compensation ordered to be paid by the acquiring authority to Mr Faraday the sum of £66,345 which the Member deducted and interest, which we are told is agreed.

I would so order.

LORD JUSTICE SEDLEY: In granting permission to appeal Carnwath LJ wrote:

Here, on examination, all that is novel in the Lands Tribunal's reasoning is the expression "freed up time". What the member was discussing under this head was the obligation of a claimant to have done as much as was reasonable to mitigate the loss which he is now claiming.

This obligation is uncontroversial. What is controversial is whether, given the way the County Council's case was presented and the consequent gaps in the evidence, it was open to the Lands Tribunal to hold, as it did albeit in somewhat contradictory fashion, that Mr Faraday had not taken reasonable steps to mitigate his loss by using his freed-up time to earn money in other ways.

For the reasons given by my Lord, I agree that the holding in paragraph 81 was not open to the Lands Tribunal. It was not how the County Council, for understandable reasons, had chosen to present its case; it was not an issue raised by the member in the course of the argument; and it was consequently unexplored in the evidence and unanswered by Mr Faraday. The use of a broad brush is not an answer to these deficiencies. The need to use it at all illustrates that something is wrong with the materials. My Lord has amply described what that was.

So long as it is not supposed that freed-up time is a new way of reducing the compensation payable on compulsory purchase, and so long as proper regard is had to the ordinary principles of mitigation of loss, of notice, of evidence and of proof, the kind of issue the member had in mind here may legitimately arise where the facts warrant it. I would not for my part wish to say that such a case will necessarily be exceptional, but this case as presented was not such a case and the County Council is, I agree, not entitled to a remission in order to try again.

I agree that the appeal succeeds.

LORD JUSTICE MAURICE KAY: I agree with both judgments.

In view of the member's clear conclusion that Mr Faraday had acted reasonably in continuing with the estate agency business for as long as he did, the finding about "freed up time" can only translate into a finding of a failure by Mr Faraday to mitigate his loss by doing something else at the same time as that business declined. This might take the form of an intensification of his efforts in his parallel business of property development, conducted from the same premises, or some new unspecified venture or part-time employment. As none of these alternatives was advanced by the acquiring authority before the Lands Tribunal or was canvassed in evidence, in my judgment there was not a basis upon which the member could properly conclude that the compensation for loss of profits should be reduced on a "broad brush basis". Mr Spackman commends such an approach. I accept that broad brushes are sometimes useful in assessing compensation, but the brush in this case did not have the necessary paint on it.

I agree that the appeal should be allowed and would dispose of the case as has been suggested.