Stanley & Anor (As the Joint Liquidators of New Grass of Manchester Ltd) v TMK Finance Ltd & Anor

This is a claim by the joint liquidators of New Grass of Manchester Limited, formerly called Holdcroft Properties Limited (the company), for relief under ss.238 and 241 of the Insolvency Act 1986. The claim arises out of the sale of a freehold property in Hanley, Stoke on Trent on 11 May 2005 by the company to an associated company, TMK Finance Limited (TMK). The price was £2,279,331 which, the liquidators allege, was about £1m less than its market value at that date.

The relief claimed is against TMK an order for payment of the alleged undervalue, together with interest, and against its holding company TG Holdcroft (Holdings) Limited (Holdings) an order for payment of just over £1.55m, being the amount of a dividend paid to it out of the profits arising on a subsequent sale of the property.

Section 238, so far as relevant, provides as follows:

The company went into creditors’ voluntary liquidation on 23 February 2007 and it is accepted, as is clear, that the sale took place within the “relevant time” of two years before the date of liquidation. It has been accepted by Holdings at trial, although it did not do so in its pleaded defence, that if the sale was at a material undervalue, the court can make an order against it under s.238 (3). Such an order would fall within the very general words of s.238(3) read with s.241(2) although not, I think, within any of the specific examples in s.241(1). Holdings accepts that it will not be able to rebut the presumption imposed on it by s.241(2A).

The parties agree that the sole issue arising for decision is whether the sale was at a significant undervalue and, if so, the amount of such undervalue. The respondents, TMK and Holdings, deny that there was any undervalue in the sale price.

In order to determine this issue, I have heard evidence of fact relating to matters relied on by the applicants in support of their case of undervalue and I have also heard extensive expert evidence called by both sides relevant to the market value of the property on 11 May 2005. Whether the market value exceeded the sale price turns largely on the prospects for planning permission for alternative uses on the property and on the costs of remediation and associated ground works before the property would be fit for development. There are wide disparities on these issues and I accordingly heard evidence from experts in property valuation, planning and remediation works.

For the most part, there is agreement on the legal principles governing the application of s.238. First, the burden of proving that a transaction was entered into at an undervalue lies upon the applicant: Stone & Rolls Ltd v Micro Communications Inc [2005] EWHC 1052 (Ch) at para 93, although the circumstances may be such as to impose an evidential burden on the respondents: Phillips v Brewin Dolphin [2001] WLR 143 at para 27. Secondly, the applicant does not have to establish any intention to sell at an undervalue or other subjective element, although if established it may have an impact on the appropriate remedy under s.241. Thirdly, the consideration passing between the parties is to be valued as at the date of the transaction: Phillips v Brewin at para 26. Fourthly, the value of an asset is prima facie not less than the amount that a reasonably well informed purchaser is prepared, in arms’ length negotiations, to pay for it: ibid at para 30. As noted by HHJ David Cooke in Ailyan and Fry (Trustees in Bankruptcy of Kevin Foster) v Smith and others [2010] BPIR 289 at para 69:

The only disputed issue of law between the parties was the extent to which the court was entitled to take account of later events in determining value at an earlier date. Specifically, the issue was whether the court could take account of the sale of the property in October 2006 in determining its value as at May 2005.

Mr Alexander for the respondents submitted that, in general, the court should confine itself to matters capable of being known to a hypothetical purchaser at the valuation date. This is the test which applies to valuations carried out by professional valuers in accordance with the rules and guidelines of the Royal Institute of Chartered Surveyors. These are rules and guidelines carefully prepared by the professional body with the relevant expertise with a view to providing the most reliable basis for an open market valuation as at a particular date and they should therefore be applied by the court when carrying out what is in effect the same exercise.

Mr Maynard-Connor for the applicants submitted that the task of the court is to make a finding as to value based on all the evidence available to it, provided of course it is relevant and cogent. Part of that evidence may well be, as it is in this case, expert valuation evidence prepared in accordance with the RICS rules and guidelines. It is important evidence but the court is not confined by any rule of law to those rules and guidelines nor should it be as a matter of principle. Provided that a later event genuinely sheds light on open market value at an earlier date, evidence of it is relevant and admissible.

There was consideration of this issue by the House of Lords in Phillips v Brewin Dolphin Ltd [2001] 1 WLR 143, also a claim brought under s.238 of the Insolvency Act 1986. A stockbroking business had been sold in consideration, as the House of Lords held, for (i) a nominal sum of £1 and (ii) a sub-lease of the computer equipment used in the business. The sub-lease was made in breach of covenant in the leases of the equipment and, before the sub-lease was entered into, the transferee of the business had decided not to use the equipment. Two months later, and before the first payment under the sub-lease became due, the owner of the equipment terminated the head leases for non-payment of rent and re-possessed the equipment. The relevant issue was the value to be ascribed in these circumstances to the sub-leases as consideration for the transfer of the business. Because of the way the case had been decided below, this issue was not considered by the judge at first instance or the Court of Appeal.

Lord Scott of Foscote, giving the only reasoned speech, noted that, because of the breach of the covenants against sub-letting, the head leases were terminable at any time by the head lessors. What, asked Lord Scott, was “the value, in money or money’s worth, of a covenant by [the sub-lessee] that was so precarious?” In addressing this question, Lord Scott considered that the actual events which took place were relevant. Within a week of the sub-lease, the head lessors complained about it and threatened proceedings, and within two months there was a default in the payment of rent under the head lease, leading quickly to its termination. Lord Scott observed that “the sub-lessee’s” covenant, which had been precarious at the outset, had become worthless.”

At paragraph 26, Lord Scott said:

The decision of the House of Lords establishes that, in appropriate circumstances, regard may be had to subsequent events, but it was in the context of attributing value to a covenant which was, on the facts known at the date of the transaction, precarious. I would agree with the comments of Professor Goode in Principles of Corporate Insolvency Law (3^rd ed.) at para 11-31:

The purpose for which the applicants seek to rely on the sale of the property in October 2006 is not the same. It is not to put a value on an existing quality or defect in the asset. The purpose is to establish that a price agreed for this property between independent third parties in 2006 shows what the open market value was in May 2005, because the evidence establishes that there was no material difference in market conditions between those dates, including the prospects for planning permission. The only difference was a general rise of about 10% in values for properties of this type in Stoke-on-Trent, and a suitable discount can be applied to reflect this.

In my judgment, as a matter of principle, the court is entitled on this basis to have regard to the price agreed in 2006. It is not an application of a hindsight principle, which in an insolvency context usually means taking account of later events to value a contingency as at an earlier date (see Stein v Blake [1996] AC 243). It is simply using the later sale to establish by inference the market value at the earlier date.

This depends for its validity crucially on two factors. The first is to establish that there was no significant change in market conditions between the two dates, apart from those such as a general rise in market values which can be quantified without otherwise affecting market conditions.

The second is that the circumstances of the sale are such that it can truly be regarded as establishing market value at the date of the sale and, hence, be used as a reliable basis for inferring market value at the earlier date. It is this second factor which is controversial in this case and which I will consider when dealing with the sale in October 2006.

The property lies on the southern side of Clough Street, Hanley, Stoke-on-Trent which itself lies about half a mile to the west of the city centre. The site area is approximately 2.27 hectares (5.6 acres). In the early to mid part of the 20th century it was used as a greyhound track and before that it had been the site of a marl pit. There were also some mine-workings under the site. From the 1960s it was used as a car dealership, showroom and workshop. Since its acquisition by the Holdcroft group in 1998, it has been used as a car workshop, offices for the group, and vehicle storage.

The buildings on the site are a showroom (about 17,500 sq ft.), offices (about 2,000 sq ft.) and workshops (about 44,000 sq ft.) The general condition of the buildings is fairly poor. There are extensive open-air areas used for car storage.

A striking physical feature of the site is that it is on two levels. The northern part, adjacent to Clough Street for a length of about 150 metres, is on the same level as the road. It is a relatively narrow strip and covers in total an area of about one acre. Part of the showroom and a forecourt area is on this level. There is a drop of about 5 metres to the lower level which covers the rest of the site. Access to the lower level is gained from the upper level by two solid ramps on the eastern and western boundaries, each about the width of a vehicle. The general setting of the site is accurately described by one of the experts as “urban-commercial”. Clough Street has mainly commercial premises, including another car dealership and trade counter outlets and some of the premises are now empty. To the north of Clough Street are mainly commercial and industrial premises. Immediately to the east is a property with an area of about 1.3 hectares (the Steelite site) which was previously a pottery but has been derelict for some years, the buildings on it having been demolished. Immediately to the west are commercial buildings adjoining a minor road, Mount Pleasant, with a residential area to the west of the road. Immediately to the south are several warehouse buildings bordering on Sun Street, to the south of which is a residential area of terraced housing built in the last 30 or so years.

The property is within an area which for many years before 2005 had been zoned for industrial use and the property itself had planning permission for motor retail uses.

To the east of the Steelite site and to the west of the city centre lies a large site. Tesco applied in 2003 for planning consent to develop it as a superstore. As was common procedure with important applications of this sort, it was called in by the Secretary of State and a public enquiry was held in October 2004.

Notice was given that the Secretary of State had approved Tesco’s planning application on 19 May 2005, eight days after the sale of the property by the company to TMK. The decision to transfer the property to TMK had been made in March 2005, and it is not suggested that the decision or the transfer were deliberately made in advance of the announcement, so as to justify a lower price.

While the outcome of the Tesco application could not be predicted with certainty, it received strong backing from the local authority and the valuation experts are agreed that it would be assumed as at 11 May 2005 that planning consent would in all probability be granted.

The significance of a successful application by Tesco is a matter of some dispute between the experts, which I will address later in this judgment. At this point, I will simply note the two aspects of it which may be of significance. First, a major development such as a Tesco superstore can attract other developments to the surrounding area. Secondly, as part of its application, Tesco offered to fund a major link road connecting the ring road to the south with Etruria Road to the north. Again, the significance of this is in dispute. On the one hand it would greatly improve road access to the area including the property. On the other hand, it would act as a physical barrier between the property and the city centre.

The company and TMK were both subsidiaries of Holdings and part of a largely successful group of companies, mainly engaged in dealing in new and used cars and car servicing. The business has been built up by Terence George Holdcroft who started the business in 1966 and remains the principal shareholder. The group now has retail franchises with ten car manufacturers and operates on a number of sites in the Stoke on Trent area.

In a re-organisation in 1995, all the companies then owned by Mr Holdcroft were brought under Holdings. As part of this re-organisation, the company was acquired off the shelf to act as the property holding company for the group. It was called Holdcroft Properties Limited and its present name was adopted only as a precursor to going into liquidation. The properties belonging to the various trading companies were transferred to the company.

The property was purchased by the company in 1998 from the receiver of a major car dealer at a price of £2.1m with an additional £150,000 for fixtures, fittings, plant and machinery. The property was shown in the company’s accounts at its total cost of £2,279,033. It was purchased to be used in the group’s car dealership business and has been put to a variety of uses : second-hand car sales, repairs and bodywork, fleet sales and the pre-delivery inspection of new cars. It became the group’s principal car compound and an integral part of the group’s operation, as continues to be the case under a lease from the freehold owners to whom it was sold in October 2006.

In 2002 and 2003 Mr Holdcroft was advised that as a result of tax changes introduced by the Finance Act 2002 it was disadvantageous for the group’s properties to continue to be owned by the company. In September 2003 all the properties owned by the company, except for the property, were transferred to various trading companies in the group. The property was excluded because at that time it was subject to a conditional contract of sale to an unconnected third party, as a result of which stamp duty at the full rate would be payable on an intra-group transfer.

The property was transferred out of the company by the sale to TMK in May 2005, some time after it had ceased to be subject to any conditional contract of sale. The proceeds of sale were paid to the group’s bank which had a legal charge over the property. It is not alleged that the sale was motivated by a desire to put the property beyond the reach of creditors of the company, at least in these proceedings. The company’s principal external creditor commenced proceedings in July 2008 for relief under s.423, as well as s.238, of the Insolvency Act 1986 against TMK and others. The proceedings were stayed following the issue of the present claim, to await its outcome.

The insolvent liquidation of the company occurred as a result of liabilities to the lessor of a site in Widnes from which a car franchise had been operated. One of the group companies acquired the franchise in October 2003 and the company took an assignment of the lease. This franchise traded at a substantial loss and was terminated in 2006. Trading ceased at the Widnes property and the company was left without funds to meet its liabilities under the lease. It went into creditors’ voluntary liquidation, as I have mentioned, on 23 February 2007. Its liabilities to third party creditors, as claimed in the liquidation are £365,000 due to the lessor of the Widnes site and £6,000 due to HMRC. In addition, there is a debt of £498,000 claimed to be due to Holdings. Interest, amounting in total to £257,000, would be payable on these debts in the event of a surplus of assets over proved debts. In addition the costs of the liquidation, excluding the costs of these proceedings, amount to £134,000. The company has no assets.

The valuation experts are now agreed that the existing use value of the property in May 2005 was in the range of £2m-2.25m. This was the range at which the respondent’s valuation expert placed the existing use value. The applicants’ expert put it at just £2m, in a preliminary report prepared in July 2008 and repeated in his report for these proceedings. It accords with the view of Lambert Smith Hampton who prepared two reports in 2005, the first for the Holdcroft group’s bank in April 2005 and the second for the group itself in July 2005. The issue is the amount, if any, to be attributed to hope value.

The applicants’ case is that the prospects in May 2005 for a successful re-development of the site were sufficiently good that the market value at that time was about £3.3m. They attribute a hope value of between £1m and £1.3m to the property.

In order to arrive at this conclusion, it is of course necessary to identify the type or end-use of such re-development. As will become apparent, there was for four years or so up to mid - 2004, some material prospect that the property could be developed for large-scale retail use. If planning consent could have been obtained for this use, it would have maximised the value of the site. The experts are however largely agreed that there was little chance of such consent by May 2005 and the applicants do not advance a case for hope value based on large-scale retail development.

Until the start of the trial, the applicants’ pleaded case was that the most likely suitable use for the property was residential development. The respondents did not oppose an amendment put forward during the course of the trial, that “the most suitable use for the Property, as expanded in the BJB report dated 7 May 2010 [their valuation expert’s report], involved some residential development either solely or as part of a mixed use scheme”. In fact, there was only the barest discussion in their expert’s report of the likely re-development.

In the joint report of the valuation experts, which in substance is a summary reiteration of the reasons for their conflicting opinions, the applicants’ expert suggests that the mixed use would incorporate residential and retail uses. A further suggestion of the addition of hotel use was not really pursued at trial, and would in my view on the evidence be highly improbable. In his opening skeleton Mr Maynard-Connor, appearing for the applicants, submitted that hope value existed because there was a realistic chance that the property would be granted planning permission for alternative uses, “whether residential use only or mixed use – residential/retail and leisure”.

It was only in the course of cross-examination that the outline of the applicants’ alternative use crystallised to the point of identifying in broad terms the relative sizes and character of the suggested residential and retail development. Ultimately the outline of the scheme on which the applicants based their case involved blocks of apartments on the lower level, with a density of not less than 30 apartments per acre, and retail development on the upper level involving a bulky goods or motor parts store with an area of about 5,000 sq ft and associated car parking.

As the bulk of this development, representing about four-fifths of the ground area, would be residential, I am satisfied that the planning and valuation issues are much the same as if the whole site were to be residential. I consider it reasonably likely that consent could have been obtained for bulky goods retail use on the upper level. The real issue relates to the prospects, if any, for consent for residential development, either on the whole site or on the lower level.

The expert evidence of both sides in this connection was in large part directed at establishing the chances of a grant of planning permission existed as at May 2005. However, in the course of cross-examination, particularly of the defendants’ valuation expert, and in closing, the emphasis of the applicants’ case was not so much focussed on immediate prospects as on a perception in May 2005 that in a changing planning environment there was a good prospect that over a longer period, perhaps after about two years, planning permission would be granted. I will consider these aspects when I deal with the expert evidence.

There are also important factual matters on which the applicants rely in support of their case that the price agreed for the sale of the property in May 2005 was a significant under-value. There are essentially three matters. First, there were a series of offers and agreements between late 1999 and 2004 for the purchase of the property, in some cases at prices very substantially in excess of £2.2m, but all of these were conditional on the grant of planning consent and in most cases for retail use. Secondly, the property was re-valued in the company’s accounts for the year ended 30 September 2000 to £3.2m, on the basis of a director’s valuation. Following its transfer at cost to TMK, it was re-valued back to £3.2m in TMK’s accounts, again on the basis of a director’s valuation. Thirdly, in July 2006 TMK received an unsolicited offer to purchase the property for £3m. This offer was rejected but quickly increased to £4m. It was not conditional on any planning consent and was subject to a lease back of part of the property to Holdings so that the group could continue to use the property in its business. Contracts were exchanged on 12 September 2006 and completed on 24 October 2006. It was from the profit arising on this purchase that TMK declared a dividend of £1.5m in favour of Holdings.

I will consider the sale of the property in 2006 later, after dealing with the expert evidence. But I will deal now with the other two factual matters.

There was substantial interest in the site between 1999 and 2004, principally for potential large-scale retail use. In November 1999 the company received an offer of £2.5m for the property, conditional on planning consent for retail use, from agents acting for Characin Developments Limited (Characin). The offer was rejected. Characin returned in May 2000 with an offer to take a 3 year option to purchase the property for £4m, conditional on retail planning consent and the acquisition of the adjacent Steelite site. There were discussions with Characin but no agreement was reached.

In September 2000 the Holdcroft group instructed GVA Grimley to assist in relation to a possible realisation of the property. This resulted in an approach in January 2001 from Henry Boot Developments Limited (Henry Boot) which was interested in acquiring the property and the Steelite site. An offer was in due course indicated to acquire both sites at a total price of £8.75m, conditional on retail planning consent, but no formal offer was made because the main board of Henry Boot did not give approval.

In April 2001, Helical Retail Limited (Helical) proposed a contract, conditional on retail planning consent, for the acquisition of the property and the Steelite site at a combined price of £9.213m. This led Grimley to contact Henry Boot and another property developer, Asda Properties Limited, to invite proposals. Henry Boot and Asda Properties offered respectively £8.75m and “a minimum” of £3.5m (quickly increased to £8.75m) for both sites, conditional on planning consent for large-scale retail use.

In July 2001 the company and Helical entered into a contract with a term of 30 months for the purchase of the property at a price of £5.54m, conditional on a number of matters including retail planning consent. A similar conditional contract was made at the same time with the owner of the Steelite site.

In November 2001, Helical submitted a planning application for both sites for non-food retail development, a drive-through restaurant, a hotel/leisure unit and a pub/restaurant. It was withdrawn in August 2002. A similar application was lodged again by Helical in November 2002, principally it appears to give Helical standing to object to a large-scale development proposed on a 5.5 hectare site at the edge of Hanley town centre at Waterloo Road by Lear Management Limited (Lear). A public inquiry took place in relation to Lear’s application for the Waterloo Road site between 26 November and 6 December 2002.

In January and February 2003 it became clear from correspondence and meetings with Stoke City Council officials that the second Helical application was meeting considerable opposition from the Council, with a large number of sites seen as preferable to the property and Steelite site. Helical withdrew its application in August 2003 and lost interest in pursuing the development of the property. The company’s agreement with Helical was formally terminated in March 2004.

In February 2004 there were discussions with another developer, Morbaine Limited (Morbaine) which put forward proposals for an acquisition of the property and the Steelite site at a combined price of approximately £12m, conditional on, amongst other things, retail planning permission and unconditional agreements with end-users. Heads of terms were agreed in April 2004.

The arrangement with Morbaine was, critically, dependent on the retail development proposed by Lear at Waterloo Road not proceeding. A grant of permission for that development made it very unlikely that consent for a large-scale retail development at the property and the Steelite site would be granted. It was for this reason that Helical had ensured it had standing to be represented at the public enquiry which took place in November/December 2002. In December 2003, the Secretary of State indicated that he was minded to agree to the grant of planning permission for the Waterloo Road development. Permission was subsequently granted. In April 2004, Morbaine issued an application for judicial review of the decision to grant permission, but the application was refused in August 2004. Morbaine pursued no further interest in the property or the Steelite site.

On 8 March 2004 Anthony Bland, an agent who had acted for Characin in 2000, had written to Mr Holdcroft, confirming an interest on behalf of Broad Street Properties Limited in acquiring the property and suggesting a proposal for an option period of “say, one year, during which we would obtain the necessary consents for the development”. If the option were exercised, the price would be “in the order of £500,000 per acre”. Mr Bland was not specific as to the use for which he would seek planning consent. This approach was rejected, the group confirming that it fell well short of its requirements and that the group’s best interests were in pursuing a retail application with adjoining owners. Against the background of the discussions then taking place with Morbaine, this response is not in the least surprising.

An approach, apparently on behalf of Lear, was received in September 2004. The response was a request that Lear contact the group but it never did so. Mr Holdcroft and Mr Shenton, the group’s property manager and consultant, were right to treat this approach as not serious or, as Mr Shenton put it, a fishing expedition.

In November 2004 King Sturge, property consultants, prepared a report for the owner of the Steelite site, which recommended that it be promoted for the bulky goods retail sector, with units totalling 115,000 sq.ft. Apart from a bulky goods outlet of about 5,000 sq.ft on the upper tier, this type of development is not put forward by the applicants as a basis for hope value for the property in May 2005.

There was no further interest shown by developers in a large-scale retail scheme, or indeed any other scheme, for the property. It seems clear that the grant of permission for retail development at Waterloo Road ended any real prospects for such development at the property. As I have earlier mentioned, the experts are agreed that by May 2005 there was little chance of permission being granted for extensive retail development.

For this reason, the various offers and proposals in the years 1999 – 2004, all of them conditional on planning permission and all of them except Broad Street Properties’ approach conditional on retail planning permission, provide no basis for a conclusion that there was hope value in the property in May 2005. The approach from Broad Street Properties in March 2004 was in vague terms and offered a total of only £2.8m if permission for an unspecified use were granted. It provides no basis for any hope value in May 2005.

The original revaluation in the company’s accounts for the year ended 30 September 2000, increasing the book value by £1m over cost, was prompted, and as it seems to me justified, by the interest being shown in the property for retail development.

The directors took no valuation advice on the revaluation amount. It was essentially Mr Holdcroft’s decision and his evidence was that the amount was “plucked out of the air really” and was, he thought, a conservative figure in the light of the offers then being put forward. It is not clear exactly when the revaluation was decided but it could have been at any time until shortly before the accounts were approved in June 2001 by when offers had been received from Helical, Henry Boot and Asda Properties.

I have previously referred to the decision taken in August 2003 to transfer properties out of the company to other group companies. This followed advice from Christopher Kane, the group’s principal tax advisor as well as auditor that as a result of changes introduced by the Finance Act 2002 it would be advantageous if the properties were held by the operating companies. As evidenced by an email to the group’s solicitors, all the properties held by the company were to be transferred to operating companies at book value, including the property at its re-valued book value of £3,258,288. The transferee was to be TG Holdcroft (Motors) Limited, chosen because it was using the property more than any other group company.

The transfer of the property did not then proceed, only because the group’s solicitors advised that stamp duty relief for intra-group transfers would not be available, because of the conditional contract with Helical.

Following the end of any likelihood of a large-scale retail development of the property and the end of any interest from developers, Mr Holdcroft concluded in March 2005 that the process of transferring properties out of the company should be completed with the transfer of the property, which he assumed would be effected at the re-valued book value.

Mr Holdcroft briefly discussed the matter with Mr Kane in early March 2005. Three significant points were raised. First, Mr Kane advised that while the profit over cost realised on the transfer by the company could be distributed by way of dividend to Holdings, it could not be distributed out of Holdings. He advised that the transfer should be at cost (including the cost of any improvements). Mr Holdcroft’s evidence was that Mr Kane was emphatic about this.

Secondly, Mr Holdcroft was concerned at how a transfer at less than re-valued book value would affect the group balance sheet. His concern was that the reduction would be picked up by car manufacturers and would affect the amount of credit allowed to the group. Mr Kane advised that in the transferee’s accounts it could be re-valued back to the existing re-valued amount, as long as the accounts made clear that it was a directors’ valuation.

Thirdly, Mr Kane advised that the transfer should be made to a non-trading company, so that if the property was at any time sold, there would be the option of offering to sell the company, as owner of the property, and thereby reduce the stamp duty charge.

Mr Holdcroft accepted Mr Kane’s advice on these matters and gave instructions to the group’s solicitors to proceed on that basis on 10 March 2005. TMK was chosen as the transferee. It was necessary to obtain the consent of Barclays Bank, the group’s bankers, which had a first legal charge on all the group’s properties.

In February 2005, Barclays Bank had instructed Lambert Smith Hampton (LSH) to prepare a valuation of the group’s properties. The valuation was dated 15 April 2005 and placed a market value of £2m on the property. When Mr Holdcroft became aware of this, he asked Mr Kane whether this affected the price at which it should be transferred. Mr Kane advised it should be the higher of cost and market value. The transfer was completed on 11 May 2005 at a price of £2,279,331.

Mr Holdcroft requested Mr Shenton to obtain a valuation of the property from LSH addressed to the company. The valuation report for Barclays Bank had also contained two errors, that the property was included in the proposed site of the Tesco superstore and that the company had entered into a contract with Tesco in relation to it. LSH had expressly excluded this incorrect assumption from their market value figure.

The valuation report of the property prepared by LSH for the group was dated 4 July 2005. It gave a figure of £2.2m as the market value of the freehold interest in the property. Under the heading “valuation considerations”, the report stated:

In March 2006, the accounts for the Holdcroft group and for the individual companies within the group were approved. The re-valuation reserve of £1m in the company’s accounts had been released on the transfer of the property at cost to TMK. The property was included in TMK’s accounts at £3,292,701, with a note in the following terms:

The group accounts continued to show the property at the slightly different figure of £3,280,513 and continued to contain the following note:

Mr Holdcroft’s evidence was that he had never read the note in TMK’s accounts and that it was factually wrong. He, and the other directors, had not re-valued the property on an open market basis, nor had any decision as to its book value been taken in the period 1 May to 30 September 2005. His concern was only that the book value should remain the same in the group accounts, so as not to affect adversely its credit position with car manufacturers. He was content to accept Mr Kane’s advice that it could be included at the re-valued amount, provided that the accounts made clear that it was a directors’ valuation (or “only” a directors’ valuation, as Mr Holdcroft put it in his oral evidence). Mr Holdcroft gave no thought to whether the re-valued amount, adding £1m to its cost, was still a proper figure. Mr Kane supported this evidence, and said that as auditor he was not concerned because the figure was not material in the context of the group accounts. I doubt that the same could be said of TMK’s accounts, which were also audited by Mr Kane’s firm.

This case is not concerned with whether Mr Holdcroft, or indeed Mr Kane, behaved properly in relation to the issue of re-valuation.

I am concerned with whether Mr Holdcroft in fact addressed the question of the market value of the property, and, if he did, whether he had a sound basis for including the property at its re-valued amount in the 2005 accounts.

Having heard Mr Holdcroft’s evidence, I am satisfied that in its essentials it was truthful. I accept that his only concern was whether the group’s standing with the car manufacturers would be damaged and that, acting on Mr Kane’s advice as he understood it, he was content to see the re-valued amount in the accounts without giving real thought as to whether that amount could in fact be justified as its market value. The only advice as to its market value was provided by LSH in July 2005, which indicated that the re-valued amount exceeded market value by nearly £1.1m. Mr Holdcroft said that he gave no consideration to LSH’s valuation in relation to the book value of the property, evidence which I find it difficult to accept. I think it more likely that he decided to ignore it, and so avoid any difficulties with the car manufacturers.

These findings do not reflect well on Mr Holdcroft’s conduct in relation to the accounts. Equally, however, I am satisfied that the manoeuvres with the accounting entries in the 2005 accounts provide no basis for a conclusion that the property was transferred to TMK at an under-value in May 2005.

Mr Maynard-Connor submitted that the decision to transfer the property to TMK, a non-trading company, so as to facilitate any future sale, showed that a direct or indirect sale of the property was envisaged. It clearly shows that a future sale of the property separate from any business was seen as a possibility, but in my judgment it shows no more than contingency planning and does not assist the applicants in establishing any hope value as at May 2005.

The parties called experts in three areas, remediation, planning and valuation. The valuation of the property would very largely depend on remediation costs and the prospects for planning permission for alternative use. Without a sufficient prospect of receiving planning permission, there was no hope value. The amount of any hope value could be significantly affected by the likely remediation costs.

Remediation or abnormal development costs are costs which must be incurred to bring a site to the condition required for development for its intended use. In effect, it is the costs required to bring a brownfield site to a condition equivalent to a greenfield site. Dealing with toxic land and old mine-workings are examples. The costs have a direct impact on the cost of development and therefore on the profit to be made on a development. In turn, these costs therefore affect the market value of a site with development potential. It is in the interests of the applicants to pitch these costs for the property as low as possible and, conversely, in the respondents’ interests to pitch them as high as possible.

In October 2001, Thornton-Firkin and Partners (Thornton-Firkin), chartered and quantity surveyors, produced for Helical Bar a ground-works estimate for a retail scheme on the combined site of the property and the Steelite site. This estimate was based on a geo-environmental investigation and assessment and drawings produced by Roscoe Capita Limited, consulting civil, structural and geotechnical engineers, and by architects. The estimate was prepared as a feasibility estimate for Helical Bar before it entered into a conditional contract for the purchase of the property, with costs based on Thornton-Firkin’s knowledge of similar schemes in the Stoke on Trent area. Essentially, Roscoe Capital devised the scheme and Thornton-Firkin costed it.

The total cost was estimated in 2001 by Thornton-Firkin at £1.38m. In response to the prospect of a claim that the property had been sold at an undervalue, Holdcroft Holdings instructed Thornton-Firkin in 2008 to prepare an estimate as at May 2005 for the remediation costs associated with a development of the property on its own without the Steelite site, for residential purposes. To produce this estimate, Thornton-Firkin adjusted their 2001 estimate by excluding the Steelite site, making provision for work required for residential development, and allowing for cost inflation between December 2001 and May 2005.

The revised estimate totalled £2.16m. It included additional works required for residential development costed at £190,841 but the principal reason for the increase from the 2001 estimate was the inclusion of £600,000 as an allowance for imported landfill material which under the scheme for the two sites would have been obtained from the Steelite site.

On the instructions of the applicants, Hydrock Special Projects Limited (Hydrock) prepared an estimate in December 2008 of remediation costs as at May 2005, which totalled £1.16m. This was on the basis of a commercial, rather than residential, development. The business of Hydrock is engineering and environmental consultancy and contracting, specialising in remediation work.

The experts called by the applicants and the respondents are from Hydrock and Thornton-Firkin respectively. The applicants’ experts were Eric Cooper and Jonathan Ridgeway, respectively a technical director and a commercial manager with Hydrock. Mr Cooper’s expertise lies in devising remediation schemes, while Mr Ridgeway’s experience is in costing works for estimates and tenders. Mr Cooper had prepared the letter in December 2008 identifying remediation solutions for the property and providing a costs estimate. Mr Ridgeway was not involved in it. Mr Cooper has 36 years’ experience in land remediation and manages Hydrock’s Stoke on Trent office in Hanley. He is familiar with ground conditions in the area from other development projects. Mr Cooper’s methodology was to assess the land quality conditions of the property based on a review of information contained in the reports prepared by Roscoe Capita in 2001, Thornton-Firkin in 2001 and others. Using that assessment he identified remediation requirements for commercial and residential end uses. Those works were then costed by Mr Ridgeway on the basis that Hydrock was tendering for the work in 2005. The total costs are stated in their report as just over £1m for commercial use and £1.2m for residential use.

I should mention here that in their report as originally served, these costs were stated in paragraph 6.2 as a little over £1.3m and £1.5m respectively, without any costs schedule to show the constituent elements despite a reference to a costs schedule in paragraph 6.1. The lower figure of £1.2m for residential use appeared as Hydrock’s figure in the joint report of both sides’ experts. The respondents were understandably concerned about these higher figures and both Mr Cooper and Mr Ridgeway were cross-examined about them. Neither could understand what these figures were or why they appeared in the report as served. Both said that they did not represent costs estimates made by them for the property, and I accept their evidence.

The respondents called Stephen Thomas Holman, a quantity surveyor for over 40 years and a partner in Thornton-Firkin since 1978. His methodology was to assess the estimates prepared by Thornton-Firkin in 2001 and 2008-9 and to consider whether they were reasonable. The elements of the remediation scheme are those identified by Roscoe Capita in 2001, adjusted so as to exclude the Steelite site. No separate scheme was produced for residential development. As regards costing, the figures are based on those provided by Thornton-Firkin in 2001, adjusted for building cost inflation, subject to the adoption in some cases of figures as at 11 May 2005 quoted in 2008-09 by Hydrock

Mr Holman did not himself devise a remediation scheme, and he readily accepted that he was not qualified to do so. He explained that he is not a remediation expert, and that his field is construction costs and procurement.

A very significant difference between the figures produced by Hydrock and Thornton-Firkin depended on whether the ground level of the lower tier of the property would be raised and therefore whether landfill material would be needed. Thornton-Firkin had included a figure of £600,000 for this cost. While raising the ground level of the lower tier had formed part of the proposals for a joint development of the property and the Steelite site as a single retail site, it would not necessarily be essential to a development of the property on its own. The applicants’ case is that the property could have been sold in May 2005 with a view to residential development on the lower tier and either residential or, more likely, bulk retail use on the upper tier, without the need to raise the level of the lower tier.

Taking account of this point, Mr Holman’s report includes figures on alternative bases which totalled, for a residential scheme, £2.4m if the lower tier level were raised and £2.26m if it were not. It might be expected that this latter figure would be significantly lower, but this is not the case largely because Mr Holman adopted, for some items, figures which appeared in Hydrock’s estimate prepared in December 2008.

The joint report of the experts records a reduction in Mr Holman’s estimate to a little over £2m, leaving them some £800,000 apart. The difference between them is largely accounted for by four items.

First, Mr Holman allows £231,150 for reconstruction work to the retaining walls which run along three sides of the lower tier of the site. There is no evidence that they are not sound, but Mr Holman’s view was that because of its importance, provision for this item would be made at the pre-purchase stage, although all or some of it might not in the event be needed.

I am satisfied that without evidence to justify a provision of this size, a developer would not factor it into his assessment of the price to be offered for the site. It seems likely that the vehicle ramp on the eastern side of the property would need widening, therefore requiring a new retaining wall against the side of the ramp, and some provision would be required for it.

Secondly, Mr Holman allowed £50,000 for a pumping station and associated works to pump drainage from the lower to the upper tier. He agreed in cross- examination that this was unnecessary, in the light of more detailed plans of the existing drains than he had not previously seen.

Thirdly, there were significant differences in the estimates for some of the remediation works. Mr Holman used in his report estimates provided by Hydrock in December 2008. Mr Cooper who was responsible for these estimates explained that they were conservative figures of a type which might be provided at a preliminary stage. A serious prospective purchaser was likely to look closely at remediation costs before finalising a purchase offer, as in fact happened in relation to a number of the prospective retail schemes.

The figures provided by Mr Ridgeway for the report produced for these proceedings, which were significantly lower for some items, represented the figures at which, in Mr Ridgeway’s opinion, a specialist remediation contractor would be prepared to tender as the basis of a binding commitment. The difference for remediation costs including imported material to fill hot spots (contaminated areas), is just over £202,000.

In the joint report, Mr Holman accepted that “based on its experience as a remediation contractor, Hydrock may be able to provide alternative, less expensive ways of meeting the same objectives” as those addressed by his own more expensive estimates. Nonetheless, he considered that Mr Ridgeway’s figures were untested in a competitive process and that a prospective purchaser would adopt a conservative approach at the stage of deciding his offer for the property, and hope to make savings as the work progressed.

Hydrock are specialist remediation contractors whose business requires them to tender for contracts with prices which, if accepted, are binding on them. I accept that the relevant figures put forward by Mr Cooper and Mr Ridgeway for these particular works represent prices which would have been quoted by Hydrock in 2005, and could have been relied on by a developer deciding whether and at what price to offer for the property. The same goes for the sub-contract quotation for shallow mine workings, where the difference is just over £131,000. Mr Ridgeway was not challenged in cross-examination on any of these figures.

Fourthly, Mr Holman proceeds on the basis that a specialist contractor such as Hydrock would be engaged by the main contractor as a sub-contractor. This adds nearly £185,000 to his estimate, representing the main contractor’s overheads and profits. Clearly, some developers will wish to deal only with one contractor and may regard that as a price worth paying. However, provided that the works were scheduled to occur before the start of the main contractor’s work, I see no reason why a developer should not save himself this not insubstantial sum and engage the remediation contractor directly. It appears from Mr Cooper’s evidence this occurs with some regularity.

Overall, I accept the figures put forward by Mr Cooper and Mr Ridgeway as a reliable guide to the provision for remediation costs which a prospective purchaser would make when deciding a price to offer for the property. Provision would need to be made for the construction of a new retaining wall along the length of a widened ramp. A figure of, say, £50,000 appears appropriate for this item, which would almost certainly be carried out as part of the main contract along with widening the ramp (the cost of which is not covered in the evidence).

It was submitted for the applicants that, as (i) their case involves a mixed residential/commercial scheme, (ii) remediation costs are lower for commercial end-use than for residential end-use and (iii) the Hydrock figures are for an exclusively residential scheme, I should proceed on the basis of a reduced figure. I do not propose to do so, as the commercial element is confined to the upper tier, whereas the bulk of the suggested development is residential. Any saving is insufficiently material to be taken into account, save perhaps as providing an increased contingency provision.

The respondents submitted that it must be reasonably likely that the remediation costs would have been somewhere between Hydrock’s figure of £1.2m and a figure of about £2m put forward by Mr Holman and that the prudent buyer would have budgeted for about £1.5m-£1.6m. Having considered the differences between the experts’ respective figures, I do not think that this approach is justified. The evidence satisfies me that a prospective purchaser, particularly in a competitive situation, would wish to quantify these costs as closely as possible. If a bidder builds in too much provision for remediation costs in its offer price, it risks bidding too low a price. It is clear that Helical Bar looked closely at these costs before it made the conditional contract for the purchase of the property and the Steelite site. I am satisfied that, having examined the elements of the proposed works, a prospective purchaser would feel able to proceed on the basis of the Hydrock figures. This is particularly so if, as was the evidence of Mr Cooper and Mr Ridgeway, a specialist contractor such as Hydrock would have been willing to bind itself to the tendered figures.

Accordingly, allowing for the retaining wall for the ramp and for some caution, I find that a figure of no more than £1.3m would have been taken by a prospective purchaser as the remediation costs.

Each side called an expert on planning, both members of the Royal Town Planning Institute and both with experience in the Stoke on Trent area.

The applicant’s expert was Carl Copestake, who has 17 years planning experience in the private and public sectors. He was employed for eight years prior to May 2005 by Stoke on Trent City Council, working in the areas of development control and regeneration and is now director of planning with a town planning consultancy.

The respondent’s expert was Gerald Willard, who has been in private practice for the last 10 years but before then was employed by local authorities in Staffordshire. Between 2004 and 2009 he acted for a number of clients seeking to obtain permission or allocations for residential development in North Staffordshire, including companies in the Holdcroft group, and he also issued a written submission on behalf of the Holdcroft group in relation to the property in July 2005. Having heard his evidence, I am satisfied that Mr Willard’s independence and objectivity were not compromised by these connections.

When expert reports were originally exchanged, the applicants did not produce a separate planning report. They relied on the valuation report of Robert Elliott who had made his own assessment of the prospects of obtaining planning permission for a new development on the property. It was clear from his oral evidence that he continued to rely principally on his own assessment. Mr Copestake’s report was produced in response to the report of Mr Willard for the respondents.

The explicit terms of reference of each expert’s report were the prospects of receiving planning permission for the property on or about 11 May 2005. It is important to underline this, because much of the way in which the applicants’ case was put in closing was that a developer purchasing the property in May 2005 would have waited perhaps two years before making an application. The planning experts concentrated on the prospects for planning permission for residential development, as this was the pleaded basis of the applicants’ case until amended during the trial. However, as the applicants’ case continued on the basis that most of the property would be developed for residential use, the amendment makes no significant difference and the central issue remains the prospects for planning permission for residential development for the majority of the property. So far as obtaining permission for some retail use, such as bulky goods, on the upper tier, there is no good reason on the evidence for considering that permission would not be granted, but the upper tier is only about one-fifth of the entire site.

Mr Copestake based his opinion primarily on the documents comprising the development plan for the Stoke-on-Trent area in May 2005, as to which s.38(6) of the Planning and Compulsory Purchase Act 2004 provides:

Mr Willard’s evidence was that there was little or no prospect of a successful application for residential development on the property, because it did not lie within the city centre or within one of the areas of major interventions (AMIs) identified in the Renew Housing Market Renewal Prospectus. This prospectus was submitted by Renew North Staffordshire, with the full support of the Stoke on Trent City Council, to central government in March 2004. The background to this is that in 2002, the government announced the creation of nine market renewal pathfinders, in areas in the North of England and the Midlands with housing market weaknesses. One of the areas was North Staffordshire, including Stoke on Trent, and Renew North Staffordshire (Renew) was established as the “pathfinder” for that area. It was, and remains, responsible for securing funding, attracting public and private sector investment and co-ordinating efforts with a view to a revival of the housing market in North Staffordshire. In particular, it worked with the local authorities in the area. The government created the Housing Market Renewal Fund in 2003 with funds of £500m, increased to £1.2 billion in January 2005, to support the work of the pathfinders.

The prospectus identified four first phase AMIs, including Hanley South and a further four second phase AMIs. The property is close to the Hanley South AMI but not within it, nor is it within any of the other AMIs.

As mentioned above, the prospectus was strongly supported by Stoke on Trent City Council, which was the relevant planning authority. The evidence showed that the planning officials in Stoke on Trent consistently recommended applications for significant residential development for approval only if they were for a site within an AMI. In most cases the recommendation was followed. In Mr Willard’s opinion, consistently with this evidence, an application in May 2005 for planning consent for significant residential development on the property would have been refused, whether alone or as part of a mixed use scheme.

Mr Copestake accepted that officials consistently recommended against consent for significant residential developments outside an AMI and he also accepted that the likelihood was that an application for housing development on the property would not get planning officer approval. However, “while the LPA officers largely supported Renew’s objections”, he explained in his oral evidence:

If an application was not supported by the planning officials, Mr Copestake said that an application could nonetheless have been approved “had councillors been convinced that the proposal was in accordance with the development plan”, and he instanced two applications in April/May 2005 for 34 apartments and 24 apartments. As they were in suburban areas, they were in his view less likely to be approved than a scheme close to the city centre. However, as he accepted in oral evidence, both were much smaller sites and both were disused pubs in residential areas.

Mr Copestake referred in particular to the planning official’s report on one of those applications, in which they pointed out that the site of the proposed development lay outside any AMI and also outside the boundaries of proposed area action plans in the “embryonic” local development plan. Mr Copestake relied on the fact that not only was the property in an inner city, as opposed to a suburban, area but also that it lay within a proposed area action plan. Since the committee members had overturned the officials’ recommendation in that case, there were therefore real prospects that they would do so in the case of the property. It does not seem to me to be possible to argue from that application, which was for a smaller development in the middle of existing residential area, that there was a good chance of a grant of planning permission for the property against the advice of the officials.

It is worth quoting from the officials’ report prepared in February 2005 because it clearly illustrates the approach adopted by the officials:

Mr Copestake described it as “a challenge” to persuade a planning committee to grant consent against the advice of officials, but not impossible. He thought that there was a case to be put to the members of the planning committee. It was a question of “could” not “would”, and while he did not say that it was likely that the committee would reject the officials’ recommendation against permission, he thought “there was every possibility that it could have happened.”

If the local authority planning committee refused consent, the applicant could appeal and, as Mr Copestake states, “an Inspector may have given a favourable decision”. In this connection, Mr Copestake cited four successful appeals in 2005-2006 in respect of applications for residential development which had been opposed by Renew on the grounds that the sites fell outside an AMI. Two were very small-scale, for one and four dwellings respectively. Of the other two, one in September 2006, related to an application for flats and town houses on a site with an area of 0.38 hectares. The other appeal, in December 2005, related to an application for permission to build 53 dwellings on a previously developed site near the town centre. These last two appeals related to sites with some characteristics which were similar to the property. One was in the city centre and the other was on the edge of a town centre. Both were however significantly smaller than the property and both appeal decisions were after May 2005, and so would not be known at that time.

As to the overall prospects for a successful appeal, Mr Copestake considered that there was “every chance that the appeal could [or would, as per his oral evidence] have been successful”. However, he agreed that it was always uncertain as to what would happen on an appeal. Mr Copestake mentions also that on a national level, 34% of all appeals across the board were successful in 2004-2005.

Mr Copestake accepted that there would have been considerable uncertainty in May 2005 and he was careful not to say that it was likely that an application would succeed. I am satisfied on the basis of the evidence of both the planning experts that a prospective purchaser in May 2005 would have no confidence that planning consent would be likely to be forthcoming for significant residential development on the property.

The prospects were against a recommendation by officials in favour of consent and the prospects for a contrary decision by the planning committee or a successful appeal were highly uncertain.

This conclusion is not affected by the shared position of the valuation experts that as 11 May 2005 the market would have assumed that planning consent would be given (as, in fact, it was on 18 May 2005) for the Tesco superstore and associated link road. There was no evidence from either expert that this would materially improve the chances of consent for substantial residential development on the property. The furthest that Mr Copestake would go was to say that the new link would improve access, but he develops that in connection with retail, rather than residential, use. Mr Willard considered that, if anything, it was a disadvantage because the link road would sever the property from the city centre for pedestrian movement, and so make it harder to rely on proximity to the city centre. Whatever may be made of the inconsistency between that and Mr Willard’s representations on behalf of Holdcroft Holdings to the city council in July 2005 in relation to the LDF, it does not help to show that the grant of consent to Tesco improved the prospects for consent to a substantial residential development.

Both experts sought in their reports to gain support for their views from conversations each had with Joanne Mayne, a senior planning officer with Stoke-on-Trent City Council. Mr Willard referred in his report to his conversation with her on 16 March 2010 and, in preparing his report, Mr Copestake spoke to her on 20 July 2010.

On 5 August 2010 Ms Mayne provided a written memorandum to Mr Copestake. On 29 September 2010 the applicants’ solicitors served what purported to be a hearsay notice under s.2 (1) of the Civil Evidence Act 1995 in respect of this statement. The memorandum is expressed in the cautious and non-committal terms that one would expect. She writes:

Ms Mayne’s comments underline the uncertainty of outcome for any application for residential development on the property in May 2005. I should, however, make clear that I regard these attempts to introduce the views, and reports of the views, of Ms Mayne as unacceptable. Her views are necessarily expressions of opinion on what might have happened five years ago. They are admissible therefore only as expert evidence. Expert evidence is admissible only with the permission of the court (CPR 35.4) and no directions or permission was given for her evidence.

Reports by Mr Willard and Mr Copestake of what Ms Mayne has told them are inadmissible without the permission of the court and are in a wholly unsatisfactory form. At least the memorandum was in her own words, but on a contentious topic I would not have given permission for it to be admitted unless she was going to give oral evidence. This is however somewhat academic in this case because, as a serving official, it is difficult to see that it would be appropriate for her to express a personal view on the issue and she has been careful not to do so.

The expert valuers agreed that for the purposes of their evidence the correct approach to an assessment of the value of the property as at 11 May 2005 is as set out in the RICS Appraisals and Valuation Standards, and associated practice statements and guidance notes. Market value is defined as:

The prospect of development where there is no current permission for that development;

The realisation of marriage value arising from merger with another property or interests within the same property.

The applicants’ valuation expert, Robert Elliott, is a partner in a firm of chartered surveyors, specialising in particular in the North Staffordshire and South Cheshire region. He has a detailed knowledge of Stoke on Trent, having previously worked for over 17 years in its property services and regeneration departments.

In arriving at his valuation of £3.3m for the property as at 11 May 2005, Mr Elliott assumed a 50 per cent prospect for consent for residential development with a density of 30 units per acre. He regarded this assumption as conservative. He thought the chances were much better than 50 per cent. In re-examination he put them at 75-85 per cent.

There is little or no support for this view in Mr Elliott’s own report. He states in paragraph 9.1 his belief that there was significant hope value attached to the property on 11 May 2005 due to four factors:

Mr Elliott sought to support his view in his oral evidence by reference to the location of the property and by his assessment, based on his experience of dealing with Renew and planning policy officers at the city council, that Renew would not try to prevent residential schemes in or close to the city centre and that the officials were concerned to increase the number of sites available for housing. He relied also on draft planning documents produced in 2006 and 2007.

I have concluded that Mr Elliott’s personal view of the prospects for residential planning consent in May 2005 is unrealistically optimistic. There is nothing in his evidence which causes me to change my assessment of the evidence of the planning experts, that a prospective purchaser would have viewed the prospects for a successful planning application lodged as soon as reasonably practicable after a purchase in May 2005 as highly uncertain.

Mr Elliott gave evidence as to how good the prospect for the grant of planning consent needs to be in order to create any material hope value. He said that a 50 per cent chance was a reasonable percentage to consider. A ten or twenty per cent chance would not add hope value. A thirty per cent chance was not appealing. When asked what value he would put on the property if there was a 30 per cent chance of planning permission, he replied:

I am satisfied on the expert planning evidence that prospective purchasers would view the prospects for planning permission for residential development or mixed-use development with a substantial residential element as well below 50 per cent. In my judgment, the prospects were not at a level which would lead to an attribution of any significant hope value to the property, judged by reference to a proposed application made in or reasonably soon after May 2005.

In his report, Mr Chittenden concluded that no hope value would attach to the property in May 2005, in the light of a number of factors, in particular the planning situation but also other factors including the location of the property and strong doubts that it would have been attractive to residential developers. While he valued the property on an existing use basis at £2 - 2.5m, he put its value as a purely development property at less than that:

This conclusion was derided by Mr Maynard-Connor, but it is not in my judgment self-evidently wrong. If existing use is removed from the equation, its value rests on holding it for rental income or on redeveloping it for existing permitted use or on the prospects for permission for alternative use. I do not regard as fanciful Mr Chittenden’s view that these purposes, excluding existing use, would be insufficient to support a value of £2.25m. So I do not regard Mr Chittenden’s credibility as an expert as damaged by his view on this. It is not however necessary to go further than this, because it is accepted that without a sufficient prospect of planning permission for alternative use, the property had no hope value and was not worth more than was paid by TMK.

The focus of the expert planning and valuation evidence was on the prospects for a planning application if made at about the time of purchase in May 2005 and the value of the property in the light of those prospects. This was as true of the applicants’ experts as it was of the respondents’. So at para. 3.02 of his report, Mr Copestake, the applicants’ planning expert, wrote that his research had enabled him:

In his closing speech, Mr Maynard-Connor presented his case on a broader, somewhat different, basis. He had sought to lay the ground for this in his cross-examination of Mr Chittenden, and his case in closing was based to a significant extent on Mr Chittenden’s evidence. By contrast, he made little of Mr Elliott’s evidence. Paragraphs 9-13 of his written closing submissions read:

The theme of the ‘changing landscape’ in terms of planning policy and its effect on value is developed at paragraphs 42-50:

As I have earlier mentioned, the point made in paragraph 50 as regards the focus of the respondents’ expert evidence is true equally of the applicants’ evidence.

In considering these submissions, it is necessary to look at the features of the ‘changing landscape’ in May 2005. Existing planning policies and factors such as the approach of Renew and the attitude of planning officials to residential developments outside AMIs represented material considerations for any planning application in May 2005. By contrast, this part of the applicants’ case is directed rather to policies which were in the course of formulation and could, once developed and adopted, be expected to have a significant effect on planning decisions.

The property lies in or close to an area known as Etruria Valley. The Renew market renewal prospectus published in March 2004, had identified four present AMIs and a further four proposed AMIs, none of which included the property. Six smaller general renewal areas were proposed, again none containing the property. Looking even further forward, the prospectus stated:

The Planning and Compensation Act 2004 required the production by Stoke-on-Trent city council, in common with other local planning authorities, of a local development framework (LDF). In April 2005, the city council published its local development scheme (LDS) which was, quoting from an internal but published report dated 29 March 2005, “a three year management programme outlining the preparation and adoption of the City of Stoke-on-Trent Local Development Framework (LDF) which will guide sustainable development in the City”. The LDS set out the timetable for developing the LDF. It involved the preparation of draft plans, periods of public consultation and final adoption over a period of two to three years, although adoption did not occur until 2009. The timetable set out in the report dated 29 March 2005 included the following items and dates which are of some significance. The strategic planning documents, comprising or including a joint core strategy and a development portfolio, would be submitted to the planning inspectorate in December 2005 with a projected adoption date of spring 2007. Of more direct and local significance for the property, the preparation of area action plan documents had commenced in November 2004 and again would be submitted in December 2005 with adoption projected for spring 2007. Four area action plans were identified, including one for “City Centre and Etruria Road”, an area which included the property. The policies for these areas would be developed in the course of and following extensive public consultation.

According to Mr Copestake’s report, as amplified by his oral evidence, the LDS or other document published by the city council in May 2005 stated that the purpose of the proposed area action plan was to “provide detailed guidance for the regeneration of the City Centre and Etruria Road Corridor area. The purpose of the plan is to create a vibrant City Centre that builds on its core assets for business and increasingly becomes the focus for City Living”. This document was not in evidence, nor was any other document which evidenced the city council’s thinking at that time for this area.

There was a lengthy public consultation process. It was in response to the invitation for submissions that Mr Willard contacted clients with properties in the relevant areas. They included the Holdcroft group and I refer below to the submission made on its behalf.

A clear indication of the length of time taken by this process is that in September 2007 the planning officials were taking steps with a view to the release of “the draft City Centre and Etruria Road Corridor Area Action Plan – Draft Spatial Options” for consultation purposes.

The internal but published report dated 20 September 2007 stated that “we are at the second stage of plan making where we set out choices for public comment”. The draft plan would or might be amended before submission to central government for independent scrutiny. The purpose of the exercise was “to give interested individuals and organisations the opportunity to have their say on the choices in front of us”. The plan itself was “intended to set out where we want to be in 2026 and how we might get there”.

There are extracts from the draft area action plan in evidence, and they include on page 93 of the document details of the 5.9 hectare site on the south side of Clough Street, including the Steelite site and the property. Appropriate land uses are stated to be employment/residential mixed use including shops, business, general industry and dwellings. Development would be subject to sequential assessment (i.e. assessing the order in which sites in the area covered by the action plan should be developed) and projected impact on city centre regeneration prospects. “Key development requirements” included “High density town housing. This land could provide about 140 residential units”.

An earlier and separate development was that in November 2005, Renew issued a lengthy Scheme Update, of which a few pages were put in evidence. At page 5, it is stated that a clear set of geographical priorities had been established for investment, and “at the top of this list is the ‘Urban Core’ – made up of the City Centre and the surrounding neighbourhoods”. The Urban Core Study included proposals for the Etruria Valley area. Further detail at pages 45-46 includes residential development in the City Centre and a plan which showed a large area, including the property, zoned for “employment”.

Most of these documents post-date May 2005 and, in the case of the draft area action plan, it does so by over two years. As Mr Maynard-Connor stressed in his cross-examination of Mr Chittenden, the hypothetical developer would not have known of these documents, or, I would add, their likely contents, in May 2005. The most that can be said as at May 2005 is that the property fell within a large area for which an area action plan was to be developed with a lengthy process of public consultation, and adoption anticipated in spring 2007.

There is no evidence of what, if anything, the City planners had in mind for the area in which the property lay. There is certainly no evidence that it was being considered for residential development or for mixed-use development with a large residential element.

In support of their case that the property would have been seen at that time as an attractive prospect for development, much was made of a submission sent to the planning authority in July 2005 by Mr Willard on behalf of the Holdcroft group. It was made in response to the call for suggestions in the initial round of public consultation on the proposed LDF. Paragraph 1.3 stated:

The regeneration of the City Centre is identified by the Council as a strategic priority, and the focus for major retail, leisure and office development. The allocation of this site for the uses suggested will assist with the delivery of City Centre regeneration, in particular the provision of a wider range of shopping offer, either for an appropriate retail offer or for bulky goods retail.

Given the sites location adjoining the City Centre, the site performs well when judged against a range of sustainability criteria. The site is brownfield in character; urban in location; highly accessible by public transport, walking and cycling; and presents opportunities for a high quality mixed use development, to complement existing city centre uses, either existing or proposed.

There are a number of points to be made about this document. First, it is not an independent assessment by Mr Willard of the suitability of the property for development, nor in particular does it assess its suitability as against other sites in the same broad area. It is a submission made on behalf of a client. Secondly, it does not suggest that it is suitable for residential development either alone or as a substantial part of a mixed scheme. Thirdly, it specifically promotes the property for retail development, but as I have earlier found there was little prospect at that time of large-scale retail development on the property. I accept Mr Willard’s explanation of this document when he said in evidence:

The planning experts were unanimous in their view that the steps being taken to develop the LDF and an area action plan for the City Centre and Etruria Road Corridor were “embryonic” in May 2005. It could be afforded little, if any, weight in relation to any planning application. Mr Copestake said that the situation in May 2005 was that the area action plan was a line on a plan. The purpose of the consultation exercise was to assist in creating a development strategy for the area. I appreciate, of course, that the applicants seek to rely on this material for the different point that the property would in general terms have been perceived as having development potential in the longer term. But there is in truth no evidence to support this thesis. I except for the moment from that the purchase of the property in September 2006 which I will address later, but it is worth noting now that there is no evidence that the purchasers had read any of the Renew or LDF documents or knew anything about them, and their agent Mr Sanders gave evidence that he made no inquiries about the planning position or prospects.

The applicants adduced no evidence from any developers or agents either that they had any interest in the property in 2005 or would have had interest in it if it had been marketed. No developer or agent in fact made any inquiries or showed any interest in the property between Morbaine losing interest in about August 2004 and Mr Sanders’ approach in July 2006.

The applicants’ own expert evidence does not support this case. Their valuation expert, Mr Elliott, tied any hope value to the prospects of obtaining planning consent on an application made in or about May 2005. In other words, hope value for the property was attributable to planning prospects as they then existed, not on how they might develop in the future. There is no support in Mr Elliott’s evidence for any significant hope value to be derived from the embryonic LDF.

In view of the applicants’ reliance on parts of Mr Chittenden’s oral evidence, it is important to consider his evidence in a little detail. He accepted that developers will buy property with an eye to the future. He agreed that developers will work with planners to devise a scheme that is most suitable both to the site and also to the prevailing planning conditions “either at the time or that are about to come into force”. He agreed that they know that the planning process is uncertain and that developers have land banks. He accepted that a developer buying in 2005 would factor in building costs and sales price inflation over the following 12 to 18 months, and would know that the housing market was buoyant with an expectation of further price increases and strong demand for city centre flats.

He agreed that “if I [a developer] buy on a Thursday and the circumstances are not right for me to maximise my profit on a Thursday, then I will wait until such time as I feel I can maximise my profit”. It is a proposition that really answers itself, but it presupposes that the developer had already purchased the site unconditionally, as was made very clear when Mr Maynard-Connor returned to the point at the end of day 8. He was not agreeing, or being asked to agree, that the developer would in such circumstances have purchased the site. In particular he was asked to assume that the developer had purchased the site under an unconditional contract. He added that a diligent, prudent purchaser would have undertaken all their investigations before purchasing.

In his report Mr Chittenden referred to planning policies and considerations current in May 2005, including in particular the Renew prospectus. He referred also to the LDF but commented that it would not have been “particularly relevant at the date of valuation as it was still in an embryonic stage”. He went on to refer to the contents of the consultation documents produced in September 2007, but only because Mr Elliott had done so in his earlier report prepared in 2008.

Mr Chittenden accepted that a developer considering whether to purchase the property in May 2005 would have regard to the LDF process and the fact that the property fell within an area to be covered by an area action plan. In his report, he said as regards the draft plan produced for consultation in September 2007:

But Mr Chittenden was clear that, while there was a push for regeneration in Stoke-on-Trent and developers would have regard to the early LDF documents which were initiating the first stage in the consultation process, this did not translate into significant hope value for the property in 2005.

The fundamental difficulty faced by the applicants in this part of their case is to translate the general policy of regeneration and the very preliminary stage of the development of the LDF into sufficiently good prospects for this particular property for it to attract hope value.

Mr Chittenden’s evidence does not provide the basis for this conclusion, nor can the applicants rely on their own valuation expert, Mr Elliott. Mr Elliott’s evidence was firmly grounded in the prospects for a successful planning application made in about May 2005 and he was clear that any hope value was directly linked to those prospects. He gave no evidence to support a hope value as at May 2005 based on the prospects for a planning application submitted in 2007.

The fact that developers will often look to the future, will have regard to emerging planning policies and may build up land banks does not mean that there would have been demand from developers for this property in May 2005, sufficient to create hope value.

A factor requiring consideration which is particular to the property is the impact of Tesco’s application and the grant of consent on 18 May 2005. Mr Elliott and Mr Chittenden are agreed that as at 11 May 2005 it would be assumed that consent would in all probability be granted. Although Mr Chittenden drew attention to the factors which could delay completion of the development by Tesco, and in fact in the event there has been considerable delay, I find that as at May 2005 the general view would be that it was likely to be completed within about two years.

In his report, Mr Elliott stated that the Tesco scheme was relevant because it provided for the building of the link road, extending the city ring road, which would improve access to Clough Street and the property. The link road would result in a significant impact on the development potential of the sites on Clough Street. Mr Elliott does sound a warning note:

Mr Chittenden stated in his report:

He concludes that it would not have assisted in the development of the property for large-scale retail purposes, because as the planning experts agree, there was little chance of permission being granted for it.

So far as adding value to the property for other purposes, Mr Chittenden, like Mr Willard, noted that the effect of the link road would clearly be to take Clough Street outside the city centre. The link road and Tesco development would create a barrier between the property and the city centre. At the same time, he accepted that there would be regeneration benefits in the surrounding area generally, including Clough Street. When asked whether it was a game-changer, he replied:

Mr Chittenden also accepted as a general proposition that the effect of a Tesco development is to increase land values around it.

It is straightforward on this evidence to find that the effect of a successful application for the Tesco superstore was to increase very significantly the value of the property for large-scale retail development. But the planning experts are agreed that there was little chance of obtaining planning consent for such retail development on the property. The applicants’ case is that, while the upper tier would have bulky goods retail development, the lower tier which is most of the site would be residential development. As Mr Maynard-Connor accepted, there is no evidence that the presence of the Tesco superstore would increase the value of the property for residential purposes, or that the link road would have a significant effect on its value for those purposes.

I am not persuaded that, given that the property would very probably not get planning consent for large-scale retail development, the Tesco development had a significant effect on the value of the property.

In my judgment, there is no substantial basis in the evidence for concluding that there was hope value to be attributed to the property by reference to the prospects for a purchase by a developer with a view to applying for planning permission two years or so later.

Overall, my conclusion on the totality of the expert planning and valuation evidence is that there was no hope value in the property as at May 2005 which would increase its value significantly above the price of nearly £2.28m paid for it by TMK in May 2005.

On 12 September 2006, contracts were exchanged for the sale of the property by TMK to Michael Cannon and Owen Kirk at a price of £4m. The sale was completed on 24 October 2006. The sale was subject to a lease back to the Holdcroft group of those parts of the property used by it for a fixed term of two years, and thereafter terminable by either party on 6 months’ notice, at an annual rent of £100,000.

The terms of the sale had been agreed in the course of July 2006 between Darren Holdcroft, Mr Holdcroft’s son and a director of the group companies, and one John Sanders, acting for the purchasers.

Apart from a rise in property prices of the order of 10% in the Stoke-on-Trent area between May 2005 and September 2006, there was no significant change either in market conditions or planning expectations either generally in the area or specifically as regards the property.

On the face of it, therefore, this sale negotiated at arms length with an independent third party would appear to provide a strong indication of the property’s market value in September 2006 and, by inference, in May 2005.

It is, however, necessary to examine the circumstances of this sale with some care, notwithstanding that it was an arms length deal between independent parties. The sole source of evidence about the sale of the property from the point of view of the purchasers was provided by Mr Sanders. He was initially contacted for the purposes of this case in December 2008 by Mr Elliott, who was then providing valuation advice to the applicants and who was subsequently instructed as their valuation expert. Following a meeting Mr Elliott sent him a letter dated 10 December 2008, summarising what he had told Mr Elliott, which Mr Sanders signed as correct on 21 January 2009. There is an unfortunate difference of recollection between Mr Elliott and Mr Sanders as to whether he was willing to give evidence. In any event, when the applicants’ solicitors sent him a draft witness statement, Mr Sanders refused to sign it. The applicants served a hearsay notice in respect of the draft statement. The defendants required his attendance to give evidence but also shortly before the trial obtained a signed witness statement from him in respect of which they too served a hearsay notice. It transpired that Mr Sanders was willing to attend to give evidence and I ruled that, as the defendants had served a witness statement signed by him, they should call him as their witness.

It was, I think, regrettable that Mr Elliott, not a lawyer but a potential expert witness, should have been involved in this evidence-gathering process. It identifies him too closely with one of the parties and, as here, leaves him open to differences of recollection on matters which should not be the concern of an expert. I accept that Mr Elliott had not then been instructed as the applicants’ valuation expert but, having given full advice on the subject, it must have been a real possibility that he would be instructed. I accept too that Mr Elliott was acting in complete good faith and that in the event no real harm was done.

There is very little evidence before the court about Cannon and Kirk themselves. The evidence such as it is comes from Mr Sanders. They are established developers and house-builders who have been in business for a long time, undertaking developments mainly in the Republic of Ireland but also in Scotland and, more recently, in England. They had developed a site in Coventry and were developing a site in the Stoke-on-Trent area.

Mr Sanders introduced the opportunity to purchase the property to Cannon and Kirk. He has been in the building trade in the Stoke-on-Trent area for most of his working life, operating as he said as “a one-man band”, doing relatively small jobs such as house extensions and occasionally buying a plot of land and building a house on it. He knows the area well.

He first met Cannon & Kirk in 2000. He put to them the opportunity to buy a site in the Stoke-on-Trent area. They bought it and are still developing it. It has been a success for them and gave Mr Sanders credibility in their eyes. Mr Sanders used his local knowledge to keep his eyes open for sites which he thought might have potential. He was aware of the projected development by Tesco and thought there was potential for other sites in the area. Tesco was important because “it acts like a honey-pot” and the proposed link road was, he agreed, a big plus point. Without them he would not have bothered with the property.

In about January 2006 he became aware of the property, which he saw as the best in the area for his purposes of introducing it to a developer. It was close to the proposed link road and bigger than the Steelite area. He appreciated that the property must have permission for its current use as a car showroom and a repair shop. He made no enquiries of the local authority or, it would seem, anyone else as to the type of any other development which might be permitted on the property. As he said in his witness statement, “I simply relied on my own local knowledge and interest”. In his oral evidence, he referred to the existing use and continued:

Mr Sanders decided at some time in 2006 that he would try to negotiate the terms of a purchase of the property on the basis that he was acting as agent and, once terms were agreed, take it to Cannon and Kirk. Through a contact he met Darren Holdcroft in July 2006 and offered £3m for the property. The offer was refused because, as Darren Holdcroft made clear, Holdcrofts did not wish to sell as they were still using the site.

Mr Sanders formed the view that if he was to persuade Darren Holdcroft to agree a sale, he would have to go back with a much higher price. He decided to offer £4m which Darren Holdcroft agreed, subject to a lease-back arrangement.

Mr Sanders’ evidence was that he “valued the site at £3m but then emotions took over”. “If I had got it at £3m I would have been happy with it”. He also knew that Cannon & Kirk were buying land elsewhere, so time was not on his side if he wanted to introduce the purchase to them. His evidence was that he did not think that at £4m Cannon and Kirk would make a loss on the site. He said that he knew in his own mind that he was paying £1m more than his valuation but he thought they would get it back in the long run. He was also content to go to £4m because Cannon and Kirk were going to make a great deal of money from the development site that he had earlier introduced to them, and if they only broke even, or lost money, on the property they “wouldn’t bat an eyelid”. In these circumstances, Mr Sanders did not feel it necessary to inform Cannon and Kirk that he had offered £3m and that this represented his own view of the value of the property. It was a matter for Cannon and Kirk whether they chose to purchase at £4m.

The consideration given by Cannon and Kirk to the merits of the property appears to have amounted to the following. Mr Sanders told them the property had potential, because it was close to the Tesco site and the link road and based on “my experience of the area”. No inquiries were made with the local planning authorities and no professional advice was taken as to the prospects for planning permission or the uses for which permission might be given. Mr Sanders, and Cannon and Kirk, relied entirely on his own local knowledge. Mr Kirk walked round Hanley with Mr Sanders who pointed out the Tesco site and the route of the proposed link road. They walked to the property and had a look at it without, it appears, going on to it. Mr Kirk was positive about its potential, because in Mr Sanders’ words “he knows that I know my area”. There were no ground-works investigations, because any developer in the Stoke-on-Trent area knows that allowance must be made for remedial work. However, with costs of £1m or more, he would have negotiated the price back down to £3m. In broad terms, with remediation costs of £1m, he would be content with a purchase price of £3m. If he was advised that the remediation work would cost up to £1.7m, he would proceed on the basis that he could get the costs down to about £1m.

As to the use of the property, Mr Sanders’ evidence is that when they acquired it Cannon and Kirk had no particular use in mind. In a subsequent discussion, they envisaged a mixed residential/commercial or retail development. Mr Sanders told them that he did not think it should be a purely residential development. The reason appears to have been that a commercial or retail element would make more money. He gave no oral evidence as to the likely proportions of commercial/retail and residential use, although following a meeting with Mr Sanders in December 2008 Mr Elliott wrote to one of the applicants saying that it was to be “predominantly commercial”. I conclude on the evidence that Cannon and Kirk did not give much consideration, and certainly no detailed consideration, to uses for the property.

As already noted, the property has not to date been developed and there is no evidence that Cannon and Kirk have submitted any planning applications.

It would, of course, have been easier to understand more fully the reasons for the purchase by Cannon and Kirk if there had been evidence from them, but no written or oral evidence was provided by them. As it is the applicants who seek to rely on the sale, it was most obviously for them to call such evidence.

I have concluded that it is impossible to place significant weight on this purchase in determining the market value of the property in May 2005. There is no evidence that Cannon and Kirk would themselves have been in the market for it in May 2005. That would depend on the state of their other developments and other factors personal to them and their business at that time. Mr Maynard-Connor accepted that I could not assume that they would have been potential purchasers at that time.

The purchase could nonetheless be a very telling indication, by inference, of market value in May 2005, if Cannon and Kirk had approached the purchase in a way which, on the expert valuation evidence, a hypothetical reasonable developer would approach it. Such a person would have investigated with some care the planning position and the prospects for the grant of permission.

The valuation experts are agreed that without an assessment of those prospects it is impossible to attribute a hope value to the property. Cannon and Kirk relied solely on Mr Sanders and his local knowledge, but he had no expertise in the subject and he made no inquiries or investigations which might have enabled him to give an informed view. Likewise, there was no investigation of the likely level of remediation works, nor even any form of survey of the property, apart from a simple mining report which did not require any inspection of the property.

In my judgment, Cannon and Kirk cannot be categorised as knowledgeable and prudent purchasers. Without evidence that they or buyers with a similar approach would have been in the market for the property in May 2005, I must proceed on the basis that buyers would act knowledgeably and prudently. This is not altered by the fact, as the evidence demonstrated, that this was in a period when there was a great deal of investment by Irish developers in the UK property market. I do not agree with Mr Chittenden that the presence of a well-funded group of investors looking for buying opportunities is to be ignored when considering market value. However, there is no evidence that Cannon and Kirk were in their approach typical of Irish buyers. I must assume that a hypothetical buyer, whether from the Republic of Ireland or elsewhere, would take reasonable steps to be well-informed on planning and remediation issues.

The applicants pleaded, by way of amendment during the trial, an alternative basis on which it was said that the sale to TMK was at an undervalue. It was said that the sale at a price of £2.279m enabled TMK to revalue the property by £1m, thereby conferring a collateral benefit on TMK for which it gave no consideration. It was submitted that the revaluation was worth £1m to TMK and to the group.

In my judgment, this submission cannot succeed. The short answer is that, on my findings as to the value of the property, there was no proper basis in 2005/06 for the revaluation. There is no value in the opportunity to make an unjustified increase in the book value of an asset. If by contrast, the increase, or a significant part of it, had been justified, then the sale would have been a transaction at an undervalue not because it would have provided an opportunity for a revaluation but because TMK would have paid too low a price.

In the result, therefore, I find that the property was not sold at a significant undervalue in May 2005. I can well see why the particular facts and circumstances of this case, especially the revaluation of the property in TMK’s accounts following the sale, caused the applicants to consider that a claim lay against the respondents. Those facts and circumstances undoubtedly created a strong prima facie case. But following the close scrutiny which is the purpose of a trial, I am satisfied that the claim is not made out. Accordingly, I dismiss the application.