Keydon Estates Ltd v Eversheds LLP

In this case the claimant Keydon Estates Ltd (“Keydon”) is a small commercial property investment company all of whose shares are held in the name of the Hon. John Donovan (“Mr Donovan”). Keydon’s directors are Mr Donovan and Mr Anthony Martin. Keydon claims against the defendant Eversheds LLP (“Eversheds”), until recently its solicitors, damages for negligence, alternatively, breach of contract arising from advice given in the course of the purchase by Keydon of the freehold reversion of a commercial office building (“the Property”) known as Willow House Pascal Close, St Mellons, Cardiff. Eversheds have admitted negligence. The only issue in the case is the proper measure of the resulting damage recoverable by Keydon.

The underlying facts in the case are not in dispute. Commencing in the early 1990’s Keydon embarked on the business of the conversion of barns into workspaces for letting as commercial investments. In 1995 it acquired the freehold reversion of an office block known as Raglan House Newport South Wales consisting of a number of self contained office suites let to numerous tenants on relatively short leases requiring intensive management. Nonetheless this turned out to be a highly profitable investment. But in 2000 it was decided to sell Raglan House with a view to investment of the proceeds in further commercial property on longer leases to quality tenants so as to provide greater security but requiring less intensive management. This change of investment policy was brought about by Mr Donovan, whose principal source of income was Keydon and who in 2000 had reached the age of 62. He wished to invest the assets of Keydon in properties with high but secure rental yields in order to provide him with income for his retirement which was not otherwise provided for.

In 1995 Keydon retained Messrs Phillips & Buck of Cardiff as their solicitors and, in particular, instructed Mr David Woodward a partner mostly concerned with property matters. Shortly thereafter Phillips & Buck were merged into Eversheds. Mr Woodward remained a partner at what became the Cardiff branch of Eversheds and from 1995 until 2002 acted for Keydon in a large number of property transactions.

With the sale of Raglan House which produced £1.2M in the summer of 2000 Keydon embarked on a search for further commercial properties meeting Mr Donovan’s requirements. Those requirements were set out in a letter to Mr Donovan dated the 8^th February 2001 from Mr Gilman of DTZ the property advisors as follows:-

“I understand you are already in conversation with our Cardiff office, however I will speak to them direct and confirm your details with them to ensure you receive the regional service required. To this end I have discussed your requirement with our Birmingham and Bristol offices as this is an area which you will also consider. The details of your requirement are as follows:-

•

Maximum lot size of circa £1.5M

•

A double figure yield hence it is likely that the majority of the properties we consider would be of secondary nature.

•

A building of less than 20 years old with the minimum of circa 5 years remaining on the lease.

•

An opportunity to increase the value either through review, development, or strategic management.

•

The area covered would be Birmingham to the North, Winchester to the South, Swansea to the West and High Wycombe to the East.”

It is accepted that the collapse of the stock market had, by the year 2000, produced an unusual property market brought about by institutional disinvestment from stocks and shares and the simultaneous liquidation of property portfolios. Thus commercial properties were available for sale at unusually high yields. It is also accepted that by 2000 the market was in the process of correcting this unusual situation and that that correction went on from mid 2000 over April 2002 when Keydon purchased the freehold reversion of the Property. In the meantime Mr Donovan had only been able to find one property which fitted his requirements namely a shopping centre at Talbot Green near Llantrisant, Cardiff (“Talbot Green”). At paragraph 16 of his witness statement Mr Donovan describes the acquisition of this property as follows:-

“16

In June 2001 DTZ brought to our attention before any general marketing a freehold shopping investment in Talbot Green near Cardiff. Within a week of inspection we had agreed to buy for £685,000. As DTZ knew that Keydon was looking to purchase such an investment and was ready and able to proceed, they brought this property to our attention before commencing any general marketing. I attach at pages 14 to 21 agents particulars in respect of this property, together with my letter to the Royal bank of Scotland of 24 May 2001 which sets out why we wished to buy this investment and the one in Newbury referred to below. The main tenant of the Talbot Green shopping centre is the Department of Environment who held their property on a long lease of 15 years without a break from December 1996 expiring December 2011 with a rent review due in December 2001. This unit provided over 30% of the total rent from the investment. The next substantial tenant was Barclays Bank which held a 14-year lease from 1991 expiring in June 2005 and with a rent review in 2001. We knew when we bought the investment that Barclays, having been there since the early 1970's, were likely to renew their lease in 2005. Indeed I now understand from Keydon's agent Emmanuel Jones that Barclays agents Donaldsons have indicated that their client wishes to renew the lease. I attach a tenancy schedule provided by DTZ at the time at page 22. Keydon felt that this was a more secure investment than Raglan house let on short leases and Keydon's bankers, Royal Bank of Scotland, lent us £400,000 against a purchase price of £685,000 with I personally lending the residue. Eversheds not only acted for the company in the purchase but also the subsequent rent reviews with the Department of Environment and Barclays Bank and other transactions involving the smaller tenants within the parade. On purchasing this investment the rents received totalled £81,580 but have now been increased to £92,500. DTZ valued this investment in July 2004 at £1.1 million which will be increased further assuming Barclays enter into a new lease.”

After the acquisition of Talbot House Mr Donovan continued his search. Keydon’s bankers had indicated that they were prepared to make a facility of approximately £2M available for investment in commercial property. Accordingly, after the purchase of Talbot Green, Keydon had available from its bankers rather more than £1.5M for further investment. In the course of his cross-examination he accepted that the market for commercial properties by this time was becoming increasingly competitive with the entry of large numbers of private investors into the market and that this had the effect of forcing prices up and thus yields down with the consequence that sellers were increasingly selling at auction in order that they would keep abreast of the rising property market. In early 2002 Mr Donovan produced a document dated the 18^th February 2002 setting out his revised investment requirements after the purchase of Talbot Green. This was a redraft of a similar document dated 23^rd April 2001 itself a redraft of the bullet points in Messrs DTZ’s letter of the 8^th February 2001 which I have set out above. This document reads as follows:-

“Investment Requirement

1.

The maximum lot size to be around £1-1¼ million.

2.

The yield to be dependent on the potential. For a good secondary we should hope to buy at a double figure yield; anything better down [to] 8%.

3.

A commercial building of less than 20 years, preferably multi-let and with reviews or reversions within the next 3 years.

4.

The majority of the income to be secured on leases of at least 10 years unexpired.

5.

The possibility to increase rental levels by on-hand management, development or rent reviews.

6.

The geographical spread to be between Birmingham in the north, Southampton in the south, the outskirts of London to the east and West Wales to the west.”

In the Spring of 2002 the Property was drawn to the attention of Mr Donovan. By a lease dated the 27^th March 1997 (“the 1997 lease”) the Property was let to South Wales Electricity plc, then Western Power Distribution plc (“WPD”) as tenant for a term of 25 years from the 27^th March 1997. The original rent reserved was £72,920 per annum plus insurance rent, with upwards only rent reviews to the current market rent as defined in the 1997 lease every fifth anniversary of the 27^th March 1997. The 1997 lease contained a break clause, at the option of the tenant, at 15 years, namely at the 27^th March 2012. By a sub-lease (“the sub-lease”) dated the 21^st December 2001 WPD (as landlord) sub-let the Property to Hyder Infrastructure Management Ltd (“Hyder”) its subsidiary, for a term of 22 years from the 27^th March 2000. The sub-lease, therefore, concluded at the same moment as the 1997 lease. Eversheds were retained by Keydon in the Spring of 2002 to act on the purchase of Willow House. It is common ground that Eversheds knew from the outset of their retainer that Keydon was proposing to acquire the Property, not to occupy itself, but as an investment from which a rental income would be generated and thus that the enforceability of WPD’s covenant to pay rent under the 1997 lease was of the upmost importance to Keydon because, inter alia, Hyder’s covenant under the sub-lease was an unknown quantity.

It appears that early in their retainer Eversheds realised that the fact that the expiry of the 25 year term of the 1997 lease and the 22 year term of the sub-lease, to which the vendor had assented, might operate as an assignment of the 1997 lease. A letter of the 8^th April 2002 from Mr Donovan to Mr Woodward concludes with these words:-

“In the meantime let me know what progress you are making on the underlease, which has apparently been granted by the head lessees Western Power Distribution Plc. If this is going to be a deal breaker let me know straight away.”

In an internal communication of Eversheds, which has been disclosed, an Eversheds solicitor, concerned in the matter, is shown communicating with a colleague in the following terms:-

“I have informed the freeholders’ solicitors of this [i.e. the coinciding expiry of the leases] and have indicated that we believe that the underlease will operate as an assignment. He has referred me to Aldridge on Leaseholds… which I haven’t located as yet. However he is arguing that because the lease is within the LTA 1954 then strictly speaking the term will not be coterminous with that of the under lease which is excluded from the LTA.

We do not want any room for argument on this as the reason why the premises were underlet was that the landlord refused consent for assignment on grounds of the strength of the under-tenant’s covenant (the under tenant is a group company of the tenant).

Could you let me have an answer ASAP as this may be a deal breaker as far as the client is concerned and we are due to exchange contracts by Friday.”

In the result Eversheds advised Keydon that the underlease did not operate as an assignment of the 1997 lease with the result that WPD was not released from its obligations under the 1997 lease and remained liable on the covenants of that lease. Keydon exchanged contracts for the purchase of the Property on 19^th April 2002 and the transaction was in due course completed. On the 12^th December 2002 Hyder entered into administration. WPD then refused to make payments of rent to the claimant pursuant to the provisions of the 1997 lease on the basis that the sublease had operated to effect an assignment of the 1997 lease thereby releasing WPD. Keydon launched proceeding in the County Court to test the issue but these were stayed for arbitration under the provisions of the 1997 lease. In the subsequent arbitration WPD succeeded. Eversheds have admitted that their advice was negligent. It is common ground that the earliest date at which Keydon might have declined to proceed with the purchase of the Property, on the receipt of correct advice from Eversheds as to the effect of the underlease, is 8^th April 2002.

The parties have agreed that, as at April 2002, the value of the Property with vacant possession was £760,000. The difference between that figure and the price which Keydon paid on completion, when the costs of acquisition are removed namely, £870,000, is £110,000.

It is Eversheads’ submission on the authorities, that the usual approach of the court to the measure of damages, where a claimant has been induced to enter into a transaction by reason of incorrect information provided by a solicitor, is the diminution in value of the property purchased resulting from the information being incorrect. Eversheds therefore submit that Keydon’s recoverable damage is confined to that figure of £110,000 with interest to date together with certain consequential losses namely the costs incurred in the arbitration and in an abortive appeal from the result of that arbitration.

The basic rule for the measure of damage consequent on a wrongful act is to award “that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation” see Livingstone v Rawyards Coal Co [1880] 5 App. Cas. 25.

The law as to the appropriate measure of damage in the case of solicitors negligence has recently been reviewed in the judgment of Mr Justice Lawrence Collins in Greymalkin Ltd v Copleys (a firm) [2004] PNLR 44. So far as relevant to the issues in this case Mr Justice Lawrence Collins reviews the legal principles between paragraphs 72 and 78 of his judgment as follows:-

“72

If a person is under a duty to take reasonable care to provide information on which someone else will decide upon a course of action, he is responsible only for the consequences of the information being wrong. If he is under a duty to advise whether or not a course of action should be taken, and is negligent, he is responsible for all the foreseeable loss which is a consequence of that course of action having been taken: South Australia Asset Management Corp v York Montague Ltd [1997] AC 191, at 214. The distinction was applied, e.g., in Dent v Davis Blank Furniss [2001] Lloyd's Rep PN 534.

73

Where a claimant claims that he has suffered loss by entering into a transaction as a result of negligent advice or information provided by the defendant, the first question is whether the claimant can establish that the defendant's negligence caused him to enter into the transaction. The claimant must then go on to show what (if any) part of his loss is attributable to the defendant's negligence: Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602; Bristol & West Building Society v Mothew [1998] Ch 1; Boateng v Hughmans [2002] Lloyd's Rep PN 449;Dent v Davis Blank Furniss [2001] Lloyd's Rep PN 534.

74

Consequently the fact that the claimant would not have purchased the property but for the defendant's negligence does not mean that the defendant is necessarily liable for all the consequences which would not have happened but for the negligence: South Australia Asset Management Corp v York Montague Ltd [1997] AC 191, at 214; Cottingham v Attey Bower & Jones [2000] Lloyd's Rep PN 591. The defendant is liable to compensate the claimant for the foreseeable consequences of the fact that it purchased as a result of the negligence.

75

A solicitor is generally under a duty to provide specific information or advice, and not to advise on the wisdom of transactions in general, and the loss for which he is responsible will normally be limited to the consequences of the specific information being inaccurate: for a recent example see Cottingham v Attey Bower & Jones [2000] Lloyd's Rep PN 591.

76

As Sir Thomas Bingham MR (as he then was) said in Reeves v Thrings & Long [1996] 1 PNLR 265 at 278 (in a judgment in which he dissented on liability): "The assessment of damages is ultimately a factual exercise, designed to compensate but not over-compensate the plaintiff for a civil wrong he has suffered. While this is not an area free of legal rules, it is an area in which legal rules may have to bow to the peculiar facts of the case." So also Cooke P (as he then was) said in McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39, 41: " … in the end assessment of damages is a question of fact: … there is no such thing as a rule, applicable to all cases: … the ultimate question as to compensatory damages is whether the particular damage claimed is sufficiently linked to the breach of the particular duty to merit recovery in all the circumstances."

77

In County Personnel (Employment Agency) Ltd v Alan R. Pulver & Co [1987] 1 WLR 916, 925–926, Bingham LJ reviewed the principles governing the assessment of damages in cases where a solicitor's negligence has led to a client acquiring defective property. This judgment has been applied on numerous occasions both at first instance and in subsequent decisions of the Court of Appeal. Bingham LJ made the following points: (a) the diminution in value rule appears almost always, if not always, to be appropriate in cases where property is acquired following negligent advice by surveyors and solicitors; (b) that was not, however, an invariable approach, at least in claims against solicitors, and should not be mechanistically applied in circumstances where it may appear inappropriate; (c) consequently the court may make a more general assessment, taking account of the "general expectation of loss", and in other cases the measure of damage may properly include the cost of making good the error of a negligent adviser; (d) while the general rule is that damages are to be assessed as at the date of breach, the rule should not be mechanistically applied in circumstances where assessment at another date may more accurately reflect the overriding compensatory rule. See also Reeves v Thrings & Long [1996] 1 PNLR 265, 278;Oates v Pitman & Co [1998] PNLR 683, 694–695; Gregory v Shepherds [1996] PNLR 769, 782.

78

The diminution in value approach has been applied in the context of solicitors' negligence in Ford v White & Co [1964] 1 WLR 885; Dent v Davis Blank Furniss [2001] Lloyd's Rep PN 534; Shaw v Fraser Southwell [1999] Lloyd's Rep PN 633; and Oates v Pitman & Co [1998] PNLR 683.”

The conclusions set out in these paragraphs which I gratefully adopt led the judge to the conclusion at paragraph 86:-

“86

The weight of authority supports the conclusion that prima facie the diminution in value approach to damages is the appropriate one. In my judgment there is no alternative basis of assessment which can do justice in this case. I accept that in an appropriate case the court may award the costs incurred in removing the defects together with compensation for losses owing to their existence….”

Keydon submits that the appropriate measure of damage in the present case where, to the knowledge of Eversheds, the purpose of the transaction which Keydon undertook on the advice of Eversheds was to obtain an income stream, is the loss of the alternative income stream that Keydon would have been able to obtain had Eversheds performed their duty. In those circumstances, Keydon would have bought another investment property instead of the Property; and the best indication of what they have lost through being deprived of the opportunity to but that alternative investment is the amount of income they have lost in respect of the Property, namely the loss of the income stream from the Property that has actually occurred at the date of judgment, and which the court concludes will be lost in the future together with other consequential losses such as the loss of the tenant’s covenant to keep the Property in good repair.

Mr Martin QC for Keydon in addition to the survey of the authorities in the Greymalkin case, draws particular attention, as authority for his suggested approach, to the judgment of Lord Hoffmann in South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 (“SAAMCO”). He cited a passage in the speech of Lord Hoffmann at page 216 of the report at letter D and following the effect of which is repeated at page 218 of the report at E, where he is recorded as saying this:-

“But in principle there is no reason why the valuer should not be entitled to prove that the lender has suffered no loss because he would have used his money in some altogether different but equally disastrous venture. Likewise the lender is entitled to prove that, even though he would not have lent to that borrower on that security, he would have done something more advantageous than keep his money on deposit: a possibility contemplated by Lord Lowry in Swingcastle Ltd…,. Every transaction induced by a negligent valuation is a 'no-transaction' case in the sense that ex hypothesi the transaction which actually happened would not have happened. A “successful transaction” in the sense in which that expression is used by the Court of Appeal (meaning a disastrous transaction which would have been somewhat less disastrous if the lender had known the true value of the property) is only the most common example of a case in which the court finds that, on the balance of probability, some other transaction would have happened instead.”

In East v Maurer [1991] 1 WLR 461 the Court of Appeal were dealing with a case where a business of hairdressing had been purchased on the false representation by the vendor that he would not practise as a hairdresser in the area of the premises sold on a regular basis. At page 468 of the report Mustill LJ says this:-

“In my judgment the best course in a case of this kind is to begin by comparing the position of the plaintiff as it would have been if the act complained of had not taken place with the position of the plaintiff as it actually became. This establishes the actual loss which the plaintiff has suffered and often helps to avoid the pitfalls of double counting, omissions and impermissible awards of both a capital and an income element in respect of the same loss…

It is only when this exercise is complete that attention can be given to whether on grounds of principle some items must be omitted or, exceptionally, added. In the present case the act complained of is the making of the fraudulent representation, coupled with the reliance placed upon it by the plaintiffs in concluding the bargain. If this had not happened the plaintiffs would, on the judge’s findings, have sold the Oxford business and bought a new business in Bournemouth, albeit not the one in Exeter Road. Thus, by the time the writ was issued they would have had the capital asset constituted by the new business, plus the profits made by that new business in the intervening period. One may assume the value of this capital asset to be the same as the value which the plaintiffs placed on the Exeter Road business, namely £20,000. In the event, the plaintiffs’ position is that they have no business they are out of pocket in respect of the legal fees, improvements and accumulated losses on Exeter Road, and they are in pocket to the extent of £7,500 made on the realisation of the premises. If one then subtracts the one from the other, the plaintiffs’ loss is shown to be £20,000 minus £7,500, namely £12,500, plus accumulated losses and resale expenditures and the profits which would have been derived from the putative new Bournemouth business. This is what the judge has in fact awarded.

It is objected that the loss of profits is not properly recoverable because it is appropriate not to a claim in fraud but to a claim based on a contractual warranty of profits, for in such a case the loss of profits does not stem from the making of the contract but from the fact that the profit made was not what was anticipated.

 I should have thought this argument sound if the judge had included an item for loss of the Exeter Road profits but he has not done so. The loss of profits awarded relates to the hypothetical profitable business in which the plaintiffs would have engaged but for buying the Exeter Road business, and the profits of the latter are treated by the judge solely as some evidence of what the profits of the other business might have been. In my judgment there is no error of principle here.”

It was objected by Mr Hodge QC for Eversheds that this was a case of fraud where different and much wider rules apply for the measure of damage. He does, however, accept that SAAMCO is authority for a two stage approach in such cases. The two stages are, first, an assessment of the damage which the claimant has actually suffered as a result of the information passed by the defendant being incorrect. The second stage is to determine how much of that loss can be shown to have been caused by the information being incorrect, the test being, would the loss have occurred anyway if the information had been correct: if so the loss is not recoverable: see per Lord Hoffmann at page 214 D. I accept Mr Martin’s submission that Lord Justice Mustill, in the passage which I have quoted, is going through the first stage of the SAAMCO test and that a divergence of approach because the case was one of fraud would only occur at the second stage.

In Oates v Pitman & Co [1998] PNLR 683 the Court of Appeal was considering a case where the claimants had purchased a property for conversion to a hotel instructing a firm of solicitors who failed to inform them of the true extent of the planning permission to which the property was subject. The claimants claimed damages which included diminution in the value of the property but also loss of profits due to being restricted in carrying on the business of holiday letting for a period during the winter months. Liability was admitted and the only issue therefore was the measure of damage. The leading judgment was given by Sir Brian Neill. The claim for loss of profits failed because the court found that that was not caused by entering into the transaction of purchase since they could not have been earned had the transaction not been entered into. The claim therefore failed the second stage in the SAAMCO process but not the first. In his judgment at page 691 Sir Brian Neill says this:-

“The liability of solicitors in circumstances which are broadly similar to those in the present case has been considered in a number of authorities. As Pennycuick J. explained in Ford v White & Co. [l964] 1 WLR 885 at 888:

“In the simple case of the purchase of property at a price in excess of its market value as a result of wrong advice, the measure of damage must be the difference between

1)

the market value of the property at the date of purchase, and

2)

the price actually paid.”

This has been described as “the diminution in value rule”. But the rule cannot be applied indiscriminately and it is necessary to examine the facts of the individual case.”

He continues at page 694:-

“From these authorities and the other authorities to which our attention was directed it seems that where a claim is made against a solicitor for damages for negligence in circumstances such as the present the assessment of damages can be approached in at least three possible ways, provided always that it is remembered that, in the words of Lord Hoffmann in [SAAMCO] it is necessary “to decide for what kind of loss” the plaintiff is entitled to compensation.

In the ordinary case it may be possible to apply the diminution in value rule without difficulty by considering evidence as to the market value of comparable properties. Such evidence, from witnesses with knowledge of the relevant market, should enable the court to decide the market value of the property in question with the attributes, or lack of attributes, which it possessed at the time of the transaction concerned.

The application of the diminution in value rule may be more difficult, however, where the property is unusual, or where, to the knowledge of the solicitor, it is being purchased for a particular purpose, or where a substantial interval has elapsed between the purchase and the defects coming to light. In such a case there may be no satisfactory evidence which would enable the court, by making a comparison with other properties, to decide the market value of the property in question. The court may then have to consider the price which the hypothetical reasonable buyer would have been willing to pay had he known of the defects, and the estimated cost of removing or correcting the defects may be the most reliable guide to the reduced market value. Any other method of calculating the market value might be too speculative.

In a third class of case the negligent advice or other negligent conduct of the solicitor may have led the plaintiff to enter into a transaction from which subsequently he has had to extricate himself. Hayes was such a case, and the damages were assessed in effect on the basis of the cost of extrication.”

As part of their pleading Keydon filed a schedule of losses in accordance with paragraphs 5.4 and 5.5 of the first report of Mr Steevens their expert witness. Section 1 of that schedule sets out Keydon’s case as to the loss sustained as a result of the acquisition of the Property up to the 25^th March 2005. The losses shown are therefore historical. Eversheds challenge the level of the rent shown on the schedule as that to which the rent would have been raised under the 1997 lease at the review date immediately following the acquisition. They submit that the level should be £95,000 per annum as opposed to the £97,000 shown on the schedule. They also challenge the dilapidations figure of £89,500 pointing out that as originally pleaded the figure was around £20,000. These are challenges to which I will have to return. But even if these challenges are accepted it is clear that the total of historical loss which Keydon can today establish that it has suffered by way of rent loss alone (without taking account of interest on the accumulating rent deficit) substantially exceeds the totality of damage recoverable when calculated in accordance with Eversheds’ case, applying the “diminution in value rule”.

It is Keydon’s case that this fact, taken with Eversheds’ admitted knowledge of the purpose for which the Property was acquired namely, the acquisition of a secure income stream, demonstrates that the application of that rule substantially underestimates Keydon’s recoverable loss and that the court should resort to a different method of assessment.

Eversheds accept that had they correctly advised Keydon that the sublease operated as an assignment of the 1997 lease with the effect of releasing WPD from its covenant under that lease, Keydon would not have purchased the freehold reversion of the Property. Eversheds submits, however, that it is inappropriate to measure the consequential loss suffered by Keydon as a result of purchasing the Property, on the basis that Keydon would have purchased another property having broadly the characteristics that Keydon thought the Property had when advised by Eversheds as to the effect of the sublease. This was because, as a matter of fact, no property having those characteristics was available for Keydon to buy on the 8^th April 2002 when, it is accepted, the problem of the underlease might first have emerged. It follows, so it is submitted, that the court is driven back on the diminution in value rule.

I reject this submission.

Eversheds called no witnesses of fact. As a result of the agreement as to the value of the Property with vacant possession in April 2002 they elected not to call expert evidence. Keydon called Mr Walters on the issue of what would have been the rental agreed at the rent review taking place simultaneously with the purchase of the Property by Keydon but which was never finally concluded. Mr Walters was a partner in the Cardiff office of Knight Frank LLP instructed by Keydon to conduct a retrospective rent review as at the 27^th March 2002 after Keydon had purchased the Property. Mr Donovan gave evidence for Keydon primarily concerned with the history of his search for replacement investment properties after the sale of Raglan House up to the purchase of the Property and subsequent events to the present date, primarily concerned with attempts to dispose of it. Their evidence was tested in cross-examination. Mr Martin whose brief witness statement was simply confirmatory of the witness statement of Mr Donovan was not cross-examined. Keydon called Mr Steevens a fellow of the Royal Institution of Chartered Surveyors and a consultant in the firm of C B Richard Ellis UK to give expert evidence primarily as to property market conditions during the period of Keydon’s search and as to the availability of commercial properties meeting Mr Donovan’s requirements both before and after the 8^th April 2002. He again was cross-examined. It did not seem to me that cross-examination drove him to make any material departures from the conclusions in his four reports.

I have come to the clear conclusion from the evidence of Mr Donovan that had Keydon not proceeded with the purchase of the Property in April 2002 it would not have decided not to invest further and left its bank facilities unused but would have invested the money not spent on acquiring the Property, on another property or properties which came as close to meeting Mr Donovan’s requirements as the market had available. Thus if a precise equivalent of the Property, with WPD as a tenant on the terms of the 1997 lease could not be found, Keydon would have invested in the next best opportunity that it found to be available.

I have also come to the conclusion from the evidence of Mr Donovan and Mr Steevens that, at the 8^th April 2002 or within a few months thereafter there were available on the market commercial properties offering secure returns comparable with those exhibited by the Property. In the course of the evidence I was shown estate agents particulars of a large number of properties on the market at about this time, of which Mr Donovan had been notified or to which Mr Steevens was able to point, from contemporary records. In the course of his submissions in reply Mr Martin QC for Keydon drew my attention to four in particular.

The first was a property providing a number of shop premises in Dorchester which sold at auction on the 11^th July 2002 for £1.04M, which was below the guide price, part let to a tenant providing a good covenant with a lease having 12 years to run and a gross initial rental yield of 8.41% and a rent review outstanding. The second property at Sutton in Surrey had been converted from the previous tenants Lloyds TSB bank’s use to provide the premises for a café /brasserie. The bank had sublet to the present tenant. More than 9 years remained outstanding of the bank’s lease the rent of which was due to be reviewed in 2005. It was sold on the 11^th July 2002 for £1.1M which was at the bottom of the guide price for a gross initial rental yield of 8.45%. The third property was in Aylesbury providing office accommodation currently let also to Lloyds TSB bank Plc the lease having more than 10 years to run with a rent review in 2003. It sold at auction on 9^th October 2002 for £1.4M at a gross initial rental yield of 8.1%. The fourth property provided retail shop premises let to a company, Be-Wise Ltd on a lease with 13 years to run with a rent review in 2005. The “tenant information” in the particulars reveals Be-Wise Ltd to be a substantial company and it was Mr Steevens view that their covenant was entirely acceptable. This property went to auction on the same date as the third property but did not sell. It was available for sale after the auction at £1.25M showing a gross initial rent yield of 9.08%. By way of comparison the Property was bought by Keydon for £870,000 at an initial rental yield of 7.95% but with a rent review imminent where a significant rent increase was to be anticipated. Lambert Smith Hampton valued the Property for mortgage purposes at the time of purchase at £875,000 with a rent of £81,500 per annum giving a yield of 8.85%.

If Keydon had not bought the Property it would have had rather less than £1.5m available to borrow from its bank and it was Mr Donovan’s evidence that, if appropriate investments had been found, it would have been able from its own resources to spend somewhat more. Each of these properties, therefore, was well within Keydon’s ability to buy. They were each within the area specified in Mr Donovan’s “investment requirements” dated 18^th February 2002. All four had rental yields in excess of 8% with secure covenants. All had rent reviews within three years, two had outstanding tenants with leases with more than ten years to run. The tenants of the other two were on leases with nine years to run. There were other examples of properties available at approximately the same time not markedly less attractive. It was clear from Mr Donovan’s evidence that he had comprehensive access to information from the commercial property market in his chosen area.

In my judgment, accepting Keydon’s submission, the diminution in value rule should not be applied in the assessment of the damage suffered by Keydon in the present case. It is clear from the authorities which I have cited and other authorities to which my attention was drawn, that that rule is not of universal application in such cases as the present, but can be departed from if the facts of the case demonstrate that its application would work an injustice to the injured Claimant contrary to the fundamental rule in the Livingstone case. Equally, in adopting another method of assessment, the court must be astute to ensure, as far as possible, that the result of such alternative method of assessment does not produce overcompensation or double recovery. Subject to that caveat I broadly accept the method of assessment for which Keydon contend. In particular I accept that the appropriate point at which damages fall to be assessed in this case is the date of judgment and the approach should be to come to a factual conclusion as to what use Keydon would have put the money which, on receipt of correct advice as to the effect on the 1997 lease of the provisions of the sub-lease, it would not have applied in the purchase of the Property. Keydon’s damage is the difference between the likely result of such an application of Keydon’s money and what in fact has transpired.

I turn therefore to consider the assessment of damage as at today’s date. In doing so, I take as the starting point the losses incurred in respect of the Property and make appropriate adjustments to recognise the fact that the loss for which compensation is awarded is not the loss of the income stream from the Property itself but the loss of a similar alternative income stream.

The present position is that the Property has been on the market for sale or rent for 10 months with no serious interest.

The schedule of losses incurred covers three periods: The period from the acquisition of the Property up to the 25^th March 2005, secondly, the period from the 25^th March to the 27^th March 2012 when the tenants break clause might have been operated, and, thirdly the period from the 28^th March 2012 to the expiry of the lease.

Section 1 sets out the loss claimed for the period from the acquisition of the Property to 25^th March 2005 which I will treat as the loss as at the date of judgment. Eversheds challenge only three items on this schedule. The first is the figure of £97,000 per annum for the amount of the rent for the Property to which it is assumed it would have been reviewed pursuant to the retrospective rent review in progress after Keydon’s purchase. The review was conducted on the tenant’s side by the sub-tenant, Hyder WPD’s subsidiary, by Mr Powell of Lambert Smith Hampton and on Keydon’s side by Mr Walters. The final positions which the negotiations reached before they were abandoned were contained in Mr Powell’s letter of the 8^th November 2002 stating that he would be prepared to recommend his client to agree a rent of £91,000 and in Mr Walter’s letter in response of 12^th November 2002 offering to agree a rent of £100,000 but, if no agreement, stating that the matter would have to go to arbitration. Eversheds’ position was that the difference between those two positions should be split at £95,000. The position of Keydon was that Mr Walters only had authority to go down to £98,000 and would not have obtained authority to drop below £97,000. It was Mr Steevens’ view as the only expert witness, that the appropriate level of rent would have been £97,000. In the absence of any expert evidence to contradict that I will accept the £97,000 figure shown on the schedule of loss as the correct figure.

The schedule shows two periods of rent loss from the 13^th May 2002 to the 28^th September 2003 (incorrectly shown as 2002) during which Keydon received payments of rent at the rate of £72,920 per annum throwing up a differential of £33,068.77p between that rent and the rent they should have been receiving after a rent review to £97,000 per annum. The second period goes from the 29^th September 2003 to 25^th March 2005 during which period they received no rent at all and thus a rent loss of £169,750. It seems to me that these figures should be discounted somewhat to reflect the fact that the Property was Keydon’s first choice of investment and it is unlikely that they would have found a property yielding an equivalent rental to replace it in April 2002. I would therefore discount those figure by 5% to reflect this view and accordingly they should be £31,415.26p and £161,262.50p respectively.

The second ground of challenge is to the figure for dilapidations of £89,500. It is accepted by Keydon that that figure should be reduced by £5,500 to reflect a certain expense that was not incurred. Eversheds position is that Keydon has adduced no evidence to support their figure representing compensation for the loss of WPD’s covenant to keep in good repair. The only evidence in support of this figure is contained in Mr Steeven’s reports of 13^th April 2005, at paragraph 4, and 20^th April 2005, at paragraph 2, by reference to a letter of the 14^th April 2005 to Keydon from Mr Andrew Paynter a building surveyor with Knight Frank LLP of Cardiff. Mr Donovan said under cross-examination that some of the work specified in this letter had been done and he had been advised that some of the work namely the removal of internal partitions should not be done.

In my judgment Keydon are entitled to be compensated for the loss of WPD’s covenant to keep the Property in good repair. However I am not prepared to attempt to fix a figure for that compensation on the basis of the evidence as it currently stands. This is a claim which has grown from £20,000 to £89,500 in the course of April 2005. My conclusion is that I should direct an inquiry as to the damages suffered by Keydon as a result of the loss of the covenant to repair.

The final matter in dispute is the claim for £2,000 in respect of costs ordered to be paid by Keydon to WPD when Keydon’s proceedings against WPD were stayed for the matter to go to arbitration. I accept that Keydon ought to have anticipated that proceedings in court would fall foul of the arbitration clause contained in the 1997 lease and that this sum is therefore irrecoverable because it cannot be said to be a loss occasioned by Eversheds’ incorrect advice, in the purchase of the Property notwithstanding that in the County Court proceedings Eversheds were acting for Keydon.

In the result therefore the damages recoverable to date are £310,294.31p with the figure for the loss of the repairing covenant yet to be determined. Against this sum, there should be credited a sum of £900 which Mr Donovan accepted was received for the use of the car park at the Property for a TV film shoot in December 2004.

I turn to consider the schedule of loss for the second period namely from the 26^th March 2005 to 27^th March 2012 at which date the tenant’s break clause in the 1997 lease might have been operated. The original schedule section 2 covered the period from the 26^th March 2005 to 27^th March 2022 when the 1997 lease would have expired. Mr Steeven’s first supplemental report substitutes the schedule appearing at appendix 2 for that schedule.

There is an issue between the parties in respect of this schedule concerning the appropriate period to allow as a rental void from today to represent an assessment of how long it will take to let the Property and then sell it. It was Eversheds’ contention that this should be 18 months (including a 6 months rent holiday period) from 26^th March 2005 alternatively 2 years (including a similar rent holiday period) from June 2004 when the marketing of the Property by Keydon started. It is Mr Steevens’ expert evidence that that period should be 2 years from today (including a rent holiday period of 6 months) at which point the Property should become income bearing. As I understood his evidence it was his view that it would take a further 2 years from letting the Property (i.e. 18 months from the conclusion of that 2 year period) in which to sell it. Mr Steevens’ view expressed in his report was unshaken in cross-examination and, in the absence of any contrary expert evidence, I must accept it. The only other matter in respect of this schedule is that there should be a 5% reduction of all loss of rent figures as in the previous schedule.

It was Mr Steevens’ evidence which I accept that the longest lease that it could be anticipated would be obtained for the Property in March 2007 would be a 5 year lease extendable under the 1954 Act, alternatively, a 10 year lease with a tenant’s break clause after 5 years. The period of 5 years, from the 26^th March 2007 would take matters up to the date for operation of the break clause.

No challenge is made to the mathematics by which the future losses of rent shown in the schedules are discounted to reflect payment today.

I turn to consider the period from the 27^th March 2012 to the expiry of the 1997 lease on the 27^th March 2022. I was urged by Mr Martin to award some damage for this period to recognise the possibility that WPD might have elected not to operate the break clause. It seems to me that, if at that date the market rent for the Property had been significantly below the reviewed rent then payable, the likelihood that WPD would not have enforced the break clause is so small as not to require recognition by an award of damages. Of course if the market rent were above the reviewed rent at March 2012 WPD might well have stayed on but, on that assumption, Keydon would not have been suffering any damage.

In the result Keydon’s claim broadly succeeds. I will hear further argument on the form of the order and costs.