Harrison & Ors v Shepherd Homes Ltd & Ors

This appeal concerns the proper measure of damages to be awarded to property owners when their homes have suffered damage as a result of negligent design and construction of piling, which supported their homes. Eden Park, Hartlepool, is an estate of 94 new houses which were built by the appellants (“SHL”) between 2002-2004. The estate plan provided for six different types of house. All are detached and were designed so that they could be sold as high-quality “executive homes”. The estate was built on a former landfill site, so that it was necessary to use extensive piling in the construction of the houses. In fact the company engaged to design and construct the piling, Encia Remediation Limited, (“Encia”), failed to use reasonable care in the design and installation of the piling. The result was that some piles associated with some houses settled. As a result at least 57 of the 94 houses on the estate suffered significant cracking. This was in most cases not structural but it was sufficiently serious for it, broadly, to render the houses either unmortgageable or unsaleable save at very low prices. Between 2005 – 2007 there was litigation between SHL and Encia in which the latter eventually accepted that it had not exercised care and skill in the design and installation of the piling used on the estate.

Then, in 2008, the current proceedings were brought by the owners 71 houses. I will call the current respondent house owners collectively “the houseowners”. Subsequently, it was decided that there should be a trial of 10 sample “lead cases”, which were selected by the parties in the hope that this would provide a sufficient range of types of house, defects and consequent damage so that the result of the test cases would enable the other claims to be settled amicably. That is, in fact, what has happened in all but one case. The defendants were SHL, the builders, and also the National House Building Council (“NHBC”) and NHBC Building Controlled Services Limited. The latter two took no part in the trial or on this appeal and I do not need to spend time on explaining why they were brought into the proceedings.

The allegations of the houseowners were that: (i) all the houses suffered from significant cracking which was progressive and rendered the houses unmortgageable and/or unsaleable; (ii) all the houses needed underpinning and the claimants were entitled to claim that cost even though, (as was admitted), it would exceed the value of the houses in their undamaged state; and (iii) they were entitled to claim further damages based on a “diminution in value” of the houses and further costs or damage, once the properties had been underpinned.

There was a five week trial before Ramsey J in July 2010. In the course of the trial the judge heard expert evidence on valuation (Mr Watson for the houseowners and Mr Lewis for SHL) and on structural engineering (Mr Taylor for the houseowners and Mr Johnson for SHL). The judge also went to view the houses concerned. He reserved his judgment and handed it down on 11 July 2011. The present appeal is against his order of 11 July 2011.

In his judgment the judge considered first the evidence and principles in general; then he applied his findings and conclusions to each of the ten houses concerned. On the general principles he concluded that SHL was liable to the houseowners (a) in contract; (b) under the Defective Premises Act 1972 and (c) pursuant to Section 2 of the “Buildmark Cover” which provides that the builder, SHL, will have liability for “Defects” and “Damages” in the first two years after the house has been built. Those conclusions are not appealed.

As to the damages recoverable by the houseowners, the judge concluded: (1) it was not reasonable for the houseowners to receive damages based on the full cost of repiling the houses and the necessary costs associated with doing that work. Instead the correct measure of damages was an award for the diminution in value of the houses suffered as a result of the defective piling. (2) Two different methods for valuation of the houses were used; that used by Mr Lewis was called the “capital comparison” and that used by Mr Watson “investment return”. The first is that most usually used in valuing residential houses but Mr Watson used the second because he thought there were insufficient comparables to use the usual method. That method produced a value of the property concerned based on the return to a “buy to let” investor. The judge concluded that both methods were equally valid and applicable and could appropriately be used: [282]. (3) Two out of the ten properties were probably mortgageable albeit with difficulty; two were probably unmortgageable; the remaining six might or might not be mortgageable - to varying degrees. (4) As regards the first of those categories, Mr Lewis’s “capital comparison” method was the more appropriate approach. For the second category, Mr Watson’s “investment method” was the more appropriate: [292]. (Mr Lewis accepted that the investment method was appropriate if the property was unmortgageable). As regards the properties in between, they were to be valued using a mixture of both methods. (5) For the mortgageable properties the judge rejected Mr Lewis’ figures on diminution in value. SHL contends on appeal that the judge also rejected those of Mr Watson and used his own. That is contested by the houseowners. (6) For the unmortgageable properties the judge accepted Mr Watson’s revised inputs: [306]-[316]. (7) The houseowners could recover the cost of both current minor remedial work but also the cost of carrying out two lots of remedial work over the course of the next 20 years. The figures were set out in the judge’s order of 8 September 2011.

In the period between the end of the hearing in July 2010 and the time when judgment was handed down, one of the houses on the estate, 47 Meadowgate Drive, (which was not one of the ten houses the subject of the trial) was put on the market by a person who had bought the house at auction just before the end of the hearing before the judge. Both parties requested and were permitted to put in further evidence from the valuation experts on what they said were the conclusions that could be drawn from the figure at which the house was being marketed for sale: see [285] to [289] of the judgment. Subsequently, in February 2011, that house was sold, for £170,000 for which a loan of £150,000, secured by a mortgage, had been obtained. SHL wished to put before the judge a further statement from Mr Lewis relating to this actual sale. The judge refused permission to do so. This refusal is challenged in one of the grounds of appeal.

The grounds of appeal for which Tomlinson LJ gave permission concern four principal areas. (1) The judge’s decision to create an intermediate category of houses that were neither “probably mortgageable” nor “probably not mortgageable” but were in a “twilight zone” between those two categories. (2) The figure (or percentage) used by the judge for the diminution in value award for those properties found to be “probably mortgageable” including those in the “twilight zone”. (3) The judge’s decision to grant an additional head of damages equal to the cost of remedial work to be done on the houses, immediately in the first place and then twice more in the course of the next 20 years, on top of the damages based on diminution in value. (4) The judge’s refusal to admit the further evidence from Mr Lewis concerning the actual sale of 47 Meadowgate Drive in February 2011. I will set out in more detail the judge’s findings and the arguments of the parties as I consider each head of appeal.

The creation of an intermediate category of houses between those that were “probably unmortgageable” and those that were “probably mortgageable”.

The judge found, at [276], that the worst of the lead properties (plot 15) had a “low probability” of significant foundation movements in the future. For the second worst, plot 20, he concluded that there was only a “remote probability” of such movement. But for all the other eight plots he considered that the probability of movements in the foundations was “extremely remote”. Such movement would require only cosmetic repair, in particular the re-pointing of brickwork and internal redecoration.

The judge also decided that the valuation of each property in its damaged state depended directly on whether a purchaser could obtain a loan secured by a mortgage on the property. That in turn would depend, not on what the judge found to be the case in his judgment, but on reports which gave engineering and valuation advice to a prospective purchaser: see [319] of the judgment. The judge concluded that he had to evaluate the likely advice that might be given in each case, given the circumstances of the particular property concerned, and thus determine the property’s mortgageability. He did this in general terms at [320] and then performed this exercise and reached conclusions on each of the ten houses.

Mr Stewart QC, who appeared on the appeal for SHL, submitted that the judge’s “compromise” position in relation to six of the ten houses was unsupported by either the valuation or the engineering evidence. He submitted that because the six properties in the “twilight zone” were all ones where the chance of movement was very remote, the judge should have concluded that all were in the same “probably mortgageable” class as the “top” two properties. He submitted that the judge should then have approached the valuation exercise accordingly, which would have produced a lower figure for the diminution in value. In the result, Mr Stewart submitted, the judge awarded damages that were too high for the houses in this middle category, particularly bearing in mind that the judge had also started from too high a percentage for the diminution in value for “mortgageable” houses in the first place.

Mr Bartlett QC, who appeared for the houseowners, submitted that the judge was correct to approach the question of what figure for diminution in value should be awarded by asking the question: how likely is it that the house will be mortgageable? He submitted that the judge was also correct to conclude, first, that there could be no certainty that a house would be mortgageable, even if the chance of movement was remote and, secondly, that the critical issue would be the engineer/surveyor’s report on the particular house concerned. Mr Bartlett pointed out that although the judge had concluded that the chance of movement in these houses was very remote, he had also concluded that the piles were not designed and constructed with the required factors of safety and that the standard of construction was unreliable; and, further, that there was always the risk that something unforeseen might happen which could give rise to movement of a house that had been built on piles: see [197] and [199].

In my view the judge was correct not to be dogmatic in deciding whether a particular house was “probably mortgageable” or probably not so. The fact that, in eight out of the ten test cases, the chances of movement were remote or very remote, is not the only relevant factor. The judge accepted, at [301], that even potentially mortgageable houses would all need to be subject to a structural engineer’s report. The terms of that report would be crucial to the question of whether a loan secured by a mortgage could be obtained. Nuances in a particular engineer’s report would depend on the particular house and the particular expert giving the report. The particular terms of a report may well determine the likelihood of a particular house being “mortgageable”. The judge was correct to take account of this uncertainty by approaching the question of damages for diminution in value on a “gradated basis” as he put it in [320]. I would therefore reject this ground of appeal.

The percentage figure for the diminution in value award for those houses found to be “probably mortgageable”.

SHL argued that the judge rejected both Mr Lewis’ and Mr Watson’s figures for the percentage of diminution in value for those properties (including those in the “twilight zone”) that were “probably mortgageable” and that he should not have done so. The judge considered this issue at [293] – [305]. The judge accepted the principle of Mr Lewis’s “capital comparison” method of arriving at a diminution in value percentage, but he rejected Mr Lewis’ figure because Mr Lewis could only use one comparable (31 Clover Drive) and, even if he could have used the subsequent information about 47 Meadowgate Drive, that would have only given two comparables and it was normal to use three. The judge also found that, given the particular circumstances of the houses on the estate that had suffered from the defective piles, there would be a “limited market” for them. He therefore concluded that this lack of comparables and the limited market meant that he must assess a “discount” (ie. between the undamaged market value and the actual value of the 10 houses concerned) that was higher than Mr Lewis’ figure of 25% and that of Mr Watson of 27.5% “…which could be derived from the one comparable in such a limited market”: [302]. The judge then said that he would choose a figure of 32.5% as one which “…represented the appropriate reduction from the market value of each property as it would have been without the problems”. He then set out the figures for all 10 properties.

The houseowners submit that the point taken by SHL on this issue is a false one, based on a misreading of the judgment. I agree. I am satisfied that the discount figure of 27.5% referred to in [302] as being “Mr Watson’s 27.5%” is a reference to the percentage for diminution in value of the one property, 31 Clover Drive, that would be obtained by taking Mr Watson’s figure for the value of that property in good condition (less the conservatory), compared with the actual sale price obtained for it. As Mr Watson’s “good condition” figure for 31 Clover Drive was higher than Mr Lewis’, this meant that Mr Watson’s diminution in value percentage would be higher, viz. 27.5%.

In fact, Mr Watson disagreed with Mr Lewis’ figures for obtaining a diminution in value figure for the “probably mortgageable” properties which, in Mr Lewis’ case, was based solely on one (or even two) comparables. The judge effectively accepted that Mr Watson’s broad view on the figures was correct. But, as the judge had also accepted, at [292], that the capital comparison method for assessing diminution in value was correct for houses that were “probably mortgageable”, he had to make his own decision on what that percentage should be, using that comparison method. There is no basis on which this court could interfere with the judge’s decision that the proper percentage figure should be 32.5% as set out at [302]. There must be a band of possible figures. The judge considered all the evidence about the 10 houses, collectively and individually. He had the experts’ views well in mind. Mr Stewart has not convinced me that the figure chosen by the judge was outside the reasonable band within which the judge could have assessed the percentage for diminution in value. I would therefore reject this ground of appeal also.

The additional head of damages based on the cost of two sets of remedial work over the next 20 years, on top of the diminution in value head of damages.

The judge considered this head of claim in principle at [329] – [332]. The two expert engineers (Mr Taylor and Mr Johnson) had disagreed in their joint statement on whether the defective piling would be the cause of cracks which would require future remedial work that was out of the ordinary for new properties. The valuers could therefore not assess what effect this might have have on the diminution in value of the houses affected. Thus when the judge came to assess his diminution in value figures for the houses he was not able to decide finally whether he should take into account the fact that future remedial work would be needed. The judge decided that these two issues (defective piling causing cracks which would need remedial work and the cost) should be determined by the two quantity surveyor experts, who, he was confident, would be able to agree matters, but if not, he would deal with them subsequently: [331]. The judge decided, for the purposes of his judgment, that he should proceed on the basis that further remedial work would be necessary and that he should allow for “…two further similar sums to be expended over the next 20 years, with a discount for early receipt of the damages”: [332].

Subsequently, the experts agreed the issues of whether those remedial works were necessitated by the defective piling and the costs of such remedial works. This agreement was embodied in an order of 8 September 2011. The figure for remedial work for each of the ten houses was then multiplied by 2.3 times. This multiplicand, as I understand it, was intended to reflect the cost of one immediate set of remedial works, then two more within the next 20 years, but discounted for early receipt: see also [364] of the judgment.

Mr Stewart submitted that the award of these damages for two further sets of remedial work means that the houseowners have benefited from a measure of “double recovery”. That is because, he argued, the judge must have taken into account the fact that further remedial work might be needed in arriving at his percentage figure for the diminution in value head of damage. He accepted that the houseowners were entitled to receive the cost of one set of remedial works which had to be done immediately.

Mr Bartlett submitted that the judge was fully aware of the need not to give double recovery and that he guarded against it. Properly understood, the judgment awarded a figure for diminution of value which excluded the figures for future remedial works. Therefore, it was legitimate for the judge to award a suitably discounted figure for such future works.

The judge rejected the houseowners’ primary case that they were entitled to recover the cost of re-piling. The basic measure of damages was therefore bound to be that of the diminution in value of the houses affected. The judge also concluded that, ideally, the houseowners wished to sell their houses and move elsewhere: [277]. He also appears to have concluded, doubtless because of the combination of his conclusion that they could not recover the cost of re-piling and his conclusion on the difficulties in obtaining a loan secured by a mortgage on one of the houses affected, that it was likely that the owners would stay there for 20 years: see eg [332]. The judge had to arrive at a figure for diminution in value based on what he knew at the time of writing his judgment. He was clearly aware that he must not award a “double recovery”. But he also decided that he was not in a position (at the time of writing his judgment) to decide whether the defective piling would give rise to the need for further remedial works or what the cost of such work might be. Given all these factors, it seems to me that the judge must have appreciated that he needed in his judgment to make an award for diminution of value, but excluding the cost of any further necessary remedial work which would be the subject of further work by the experts. Hence the judge’s conclusion in principle on the former head of damage, at [320], and then, individually, for each of the houses in the second part of his judgment. His conclusion in principle on the latter head is given in principle at [332] and then, after the experts had done their further work, in the order of 8 September 2011 as regards each of the ten houses.

In the particular circumstances of this case I consider the approach of the judge was proper and cannot be criticised. He did not award an element of “double recovery”. I would therefore reject this ground of appeal also. In his written submissions, Mr Bartlett also suggested that Mr Stewart had conceded in argument before the judge that the judge was entitled to award damages for diminution in value and also something for making good the defects and Mr Bartlett relied on an excerpt from the transcript. I do not accept that the transcript discloses any particular concession. However the judge was correct to approach the matter as he did for the reasons I have attempted to give.

The refusal to admit the further expert evidence relating to the sale of 47 Meadowgate Drive

After the sale of 47 Meadowgate Drive, Mr Lewis prepared a short further statement which set out the fact of this sale, but nothing more. It was this statement only that the judge refused to admit. The judge dealt with the application of SHL to adduce further evidence from Mr Lewis following the actual sale of 47 Meadowgate Drive without a further hearing, as the parties agreed. The judge correctly identified the issue on which that evidence might assist as being whether the lead properties were mortgageable and “…on that basis” what value those properties had at the date of trial: [290]. The judge explained in [291] that he had decided that he should not admit that evidence because it would necessitate further investigations and further evidence being submitted.

Mr Stewart submitted that this decision of the judge was wrong and led to serious prejudice to SHL. 47 Meadowgate Drive is a “Langdale” type property, which is similar to four of the ten “lead properties” the subject of the trial (nos 2, 5, 7 and 8). The valuers agreed that such a property had a value, undamaged, of £230,000. No 47 had been sold at auction on 8 July 2010, ie. at the end of the trial, for a figure of £128,000. The house was then put on the market at a price of £174,950, as the judge recorded at [286]. In fact, as noted above, the house was sold on 25 February 2011 for £170,000 and the purchaser obtained a loan of £150,000 secured by a mortgage on that house.

Mr Stewart submitted that Mr Lewis’ proposed evidence affected two vital issues at the trial: (i) how easy it was to get a mortgage on the properties concerned; and (ii) the appropriate diminution in value of a mortgageable property. He argued that it was perverse of the judge to refuse to admit this evidence, particularly as he had admitted the earlier evidence about the price at which this house had been put on the market by those who had purchased it at auction.

Mr Bartlett submitted that the decision of the judge, which was a case-management decision, was reasonable and cannot be successfully impugned. He pointed out that the judge knew of the fact that the house had been put on the market for £174,950 and that there was a possibility of it being sold and with the aid of a loan secured by a mortgage on the property. Therefore the fact of the actual sale added nothing new on the two points identified by Mr Stewart.

In my view the judge was entitled to refuse to admit the further evidence concerning the sale of 47 Meadowgate Drive. First, by itself Mr Lewis’ evidence would have added little to what the judge already knew. Secondly, if SHL had wished to use that factual evidence as the basis of making further submissions on the two points identified by Mr Stewart and set out above, that would have necessitated further expert evidence from Mr Lewis and that would have required a response from Mr Watson, on which the parties may (or may not) have wanted to cross-examine the witnesses. The circumstances of the sale of this house were unusual and it is likely there would have been arguments about whether the circumstances of this sale could be regarded as typical. Thirdly , there has to be a limit to the litigation process and the judge had already been generous in admitting the evidence on events after the trial concerning the marketing of No 47. Lastly, the judge effectively took the matter into account anyway, as I think is clear at [300] and [301]. So I would also reject this ground of appeal.

For the reasons I have given, I would reject each of the grounds of appeal that have been pursued by SHL. I would dismiss this appeal. The houseowners did not attempt to pursue their cross-appeal so nothing more need be said about it.

I agree

I also agree.