Lane v O'Brien Homes

MR JUSTICE DAVID CLARKE: This is an appeal against the judgment of His Honour Judge Michael Kennedy QC, given in the Brighton County Court on 1^st November 2002, awarding damages of £150,000 to the claimant against the defendant, O’Brien Homes Limited. The defendant sought permission to appeal against the finding of liability, as well as the award of damages.

On 10^th February 2003 Lawrence Collins J refused permission to appeal against the finding of liability, but held that an arguable question of principle arose in relation to the award of damages made by the judge. He granted permission to appeal solely on the question whether the award of damages was made on an appropriate basis. At a subsequent hearing in April, the judge was pressed to change his mind and to grant permission to appeal on the issue of liability, but he maintained his earlier decision, which was that the essential question on liability was one of fact, and that the judge had taken into account all relevant considerations.

The dispute between the parties arose from the sale by the claimant to the defendant of an area of land in Angmering in Sussex, which included the house owned by her and in which she was still living, namely Orchard End. Also on the land in question, but not included in the sale to the defendant, was another house, Raffles Place, jointly owned by the claimant and her friend, Mr Hilbourne, who acted as her agent in the negotiations which led to the transaction.

The judge held that, although there was no relevant restrictive covenant in the contract for the sale of the land, a collateral contract was formed between the parties, whereby the purchasers (the defendants in the action) would not build more than three new houses on the land. This was on the understanding that the existing house, Orchard End, would remain standing, and that three new houses in addition were contemplated. There was existing planning permission for this level of density of development.

Some months after the sale to the defendants, they were able to obtain planning permission from the local authority authorising the construction not of three but four new houses on the land. The judge held that, at the time of the contract of sale in April 2001, neither party had any reason to anticipate that such planning permission would be forthcoming. The essential issue of liability which he had to determine, in the absence of a restrictive covenant or any other form of stipulation in the contract of sale limiting density of development to three new houses, was whether the defendants were in fact prohibited in any other way from increasing the density beyond that contemplated at the time of the sale, and whether the subsequent grant of that planning permission entitled the claimant to any redress for misrepresentation or otherwise.

When these proceedings were launched, the claimant sought from the court an injunction restraining the development insofar as it involved the construction of four rather than three houses, and this issue was compromised by the defendant’s undertaking not to do so pending resolution of the dispute. It may be significant that the claimant took this step and indeed gave the appropriate undertaking as to damages should her claim in due course fail. The fact that she was prepared to do so, despite the uncertainty as to the prospects of success in her action (having regard to the absence of the relevant stipulation from the contract of sale), is some indication of her determination.

As I have indicated, the judge held that there came into existence a collateral contract, whereby the defendants were prohibited from constructing four houses on the site. This contract was evidenced by Mr Hilbourne’s letter on behalf of the claimant, dated 23^rd March 2001, which reads as follows:

“Following our meeting yesterday between Joan and you and me, I write to confirm the basic terms of our agreement as follows.

1.

Joan will sell and your company will purchase the whole of the property known as Orchard End and the land that forms part of it, but excepting the property known as Raffles Place, which is included in a separate title.

2.

The purchase price is £950,000, to be paid as follows.”

Certain terms for payment are set out.

“3.

You will build not more than three new houses on the land, pursuant to the existing planning permission, which was implemented when Raffles Place was built in 1997. These terms are, I believe, agreed, and I understand you will confirm them in writing. In the meantime, I am writing to our solicitors to put them in the picture.”

By his letter of 30^th March 2001, Mr Stephen O’Brien, Managing Director of the defendant company, replied:

“Dear Kenneth,

Further to your most recent letter, I write to confirm that your proposals are acceptable to me.”

The letter then went on to deal with the purchase price arrangements and added:

“I hope this confirms our agreement. I look forward to executing the paperwork.”

It was argued before the judge that although these letters had been exchanged, the absence of any stipulated limit of three houses from the eventual contract of sale indicated that the parties did not intend this to become a legal obligation. The judge rejected that contention and held that a collateral contract was thereby formed. As I have indicated, no appeal now lies against that decision, permission having been refused by the High Court judge.

I am told that at the hearing of the leave application before him he suggested that the claimant might have been entitled to no more than nominal damages. The basis for this suggestion seems to be as follows. On the understanding on which the land was sold – with planning permission permitting the development of three new houses on the site – the sale price was a reasonable price. The land was not undervalued. The construction of the fourth house on the site would have no adverse effect on the enjoyment by the claimant of the property which she, together with Mr Hilbourne, was then retaining, namely Raffles Place. The projected fourth house was on the most distant corner of the site from that property, on a low-lying part of the site. Thus, the subsequent obtaining of planning permission to construct four houses occasioned no loss to the claimant. Accordingly, she should be entitled to no more than nominal damages.

That argument is not pursued by Mr Webster, on behalf of the appellant/defendant. He sensibly recognised that it is not a result which would appeal to the court, any more than such an argument appealed to Brightman J in the Wrotham Park case, to which I shall shortly turn.

A preliminary point was taken by counsel for the respondent/claimant, Mr Darton, that the permission to appeal did not extend beyond a consideration of the appropriateness of the basis on which the judge assessed the damages and therefore did not extend to permitting this court, in the event of it finding that the basis of assessment was inappropriate, to proceed to reassess damages on the proper basis. Either the court should find that the basis was correct, in which case the appeal fails, or it was incorrect and the claimant should be left with no more than nominal damages. This was not a pure technicality. There was some substance in it, because, in the absence of transcripts or any other record of the oral evidence, particularly of the joint valuation expert, Mr Hampton, whose evidence I was told diverged in various ways from his written report, I might have had insufficient material for making a satisfactory reassessment. Despite this, in a brief ruling I rejected the argument, and held that the grant of leave must be taken to cover the issue of damages generally. I accordingly granted leave to the appellant to amend their grounds of appeal to those set out in the appeal bundle at tab 3, and to the respondent/claimant to rely, if necessary, on her counter notice, by which she sought to uphold the assessment on additional grounds.

Judge Kennedy’s judgment on the issue of damages was as follows: I read paragraphs 68 to 76 of his judgment.

“What the claimant has really suffered is loss of the contractual effect of the prohibition against building a fourth home, i.e. the value and bargaining terms of that prohibition, or the value of releasing Mr O’Brien from it. As indicated, I do not believe that if anyone had thought of the possibility of a fourth house prior to the sale, either side would have valued the prospect of that highly. Nor, however, do I accept that Mrs Lane would have refused to negotiate or to sell on the basis that Mr O’Brien had said he might try for a fourth house. She could have refused to sell, but I do not believe she would have. She could have put it into the contract of sale. I do not believe that she would have preferred to go back to Berkley House.”

I interpose that that is a reference to Berkley Homes, who had also been bidding with her to buy the property for development. The judgment continues:

“Had the possibility been seriously raised, she would have had to choose whether to refuse to sell (which I really do not believe was her state of mind at that date), or to have considered putting the prohibition onto the land itself by a suitable covenant, so as to make it a condition binding upon successors of the defendants.

What she has lost therefore in truth is the value of that bargaining position, which I believe is the true measure of her loss. Had the land been sold with permission, either in planning or contractual terms for four more houses, I have considered the lengthy evidence of Mr Hampton. I regret I do not see this as a case of a covenant removable by the Lands Tribunal, but simply as one for valuation of a site with four houses, bearing in mind that in negotiation the agreement would have had to be conditional upon obtaining such permission, for Mr O’Brien wanted to buy – it was his kind of development, I have no doubt – and Mrs Lane wanted to sell. Even if she was uncertain about leaving, Canary Wharf was imminent.”

I interpose that that is a reference to the then plans of the claimant and Mr Hilbourne to buy a London flat. Reading on:

“That does not mean, however, that the true measure of her loss in contract is the equivalent of a difference in value. Nor, in my judgment, does it mean any assessment of diminution of value in the land, Orchard House and Raffles Place, that she retained. If it were, I should say that was minimal, for the reasons I have already given, in the sense of amenity.

On the balance of probabilities, with the possibility of four houses being mooted, I have no doubt Mr O’Brien would have offered more; not the full site price, as defined by Mr Hampton, but a proportion of it, based on the conditional option of seeking a fourth permission if he chose to. But neither side would have taken the chance of such an application succeeding highly, as Mr Harris confirmed. I repeat, however, I think the probable outcome or the likelihood of Mr O’Brien losing the transaction altogether would have been minimal. Even less likely that he would have lost it to Berkley Homes, and indeed, had Berkeley Homes been considering the possibility of a fourth house, I believe they would have continued to be as difficult to deal with in comparison to Mr O’Brien as they already had.

Broadly, since I regarded Mr O’Brien as a very competent and well-organised developer, I believe he would have made calculations of his profit on a fourth house not too far removed from those of Mr Hampton. A builder’s profit of at least £280,000 would have been in his mind should he obtain permission, and had Mrs Lane thought of it, he would have offered a good slice of it to her, to ensure keeping the deal. In my view, it is that chance that I believe is the true measure of Mrs Lane’s loss, and I value it at £150,000.”

The court’s approach to damages in this sort of situation and the principal authorities in which damages have been awarded are conveniently summarised in McGregor on Damages at paragraphs 22-049 to 22-054. The line of authority starts with Wrotham Park Estate Company v Parkside Homes [1974] 1WLR 798, a decision of Brightman J. It and succeeding cases arose from contracts of sale containing restrictive covenants. In each case the purchaser was subsequently in breach of covenant. In each case the court was concerned with assessing damages rather than awarding injunctions. In one case, Gafford v Graham [1999] 7 P&CR 73, an injunction had been awarded in the lower court but was set aside in the Court of Appeal, and accordingly it was the Court of Appeal which concerned itself with the assessment of damages.

In the Wrotham Park case Brightman J said at 815B:

“In the present case I am faced with the problem what damages ought to be awarded to the plaintiffs in the place of mandatory injunctions which would have restored the plaintiffs' rights. If the plaintiffs are merely given a nominal sum, or no sum, in substitution for injunctions, it seems to me that justice will manifestly not have been done.

As I have said, the general rule would be to measure damages by reference to that sum which would place the plaintiffs in the same position as if the covenant had not been broken. Parkside and the individual purchasers could have avoided breaking the covenant in two ways. One course would have been not to develop the allotment site. The other course would have been for Parkside to have sought from the plaintiffs a relaxation of the covenant. On the facts of this particular case the plaintiffs, rightly conscious of their obligations towards existing resident, would clearly not have granted any relaxation, but for present purposes I must assume that it could have been induced to do so. In my judgment a just substitute for a mandatory injunction would be such a sum of money as might reasonably have been demanded by the plaintiffs from Parkside as a quid pro quo for relaxing the covenant.”

The judge then went on to assess his award on the facts of that case at no more than 5% of the developer’s anticipated profit, remarking that in this situation the court should act with extreme moderation. It is relevant to notice, however, that it is the developer’s expected profit which is taken as the starting point for the assessment.

A somewhat similar result was reached in Jaggard v Sawyer [1995] 1WLR 269. Both were cases in which no interlocutory relief was sought and in which no realistic possibility of a mandatory injunction arose at trial because of the advanced stage that the developments had reached by then.

I am satisfied that these cases laid down no general principle that the damages must be limited to a small percentage of the purchaser’s potential profit arising from his breach of covenant or contract. In Gafford v Graham, to which I have already referred, the award of £25,000 was largely based on the evidence of the plaintiff’s surveyor, Mr Lush, who assessed the loss on two alternative bases, of which one was the income assumed to be generated by the business which the defendants were running in breach of covenant. The defendants in that case had argued for an award based on 5%, no doubt founding this argument on Brightman J’s decision in the Wrotham Park case, but the judge awarded a sum close to that sought on behalf of the plaintiffs.

The most recent example cited to me was the detailed judgment of Mr Anthony Mann QC (as he then was), sitting as a Deputy Judge, in Amec Developments v Jury’s Hotel Management [2001] EGLR 81, which concerned the breach of a restrictive covenant relating to the building line beyond which the developers’ new hotel should not extend. Because the design and construction did take place beyond that line, giving the hotel an enlarged footprint, the hotel could have a larger number of bedrooms and the defendants a higher potential profit from its operation. The Deputy Judge in that case set out at page 87D-K in the report the various matters which he took into consideration in arriving at the figure which he awarded of £375,000. One was that the basis of the hypothetical negotiation would be a split of the perceived gain to the defendants. He also added this at (n) in his formulation of the relevant factors – page 87J-K:

“(n)

As important as any of the above factors is this. In any negotiation science and rationality gets one only so far. At the end of the day the deal has to feel right. Some of the numbers that have been suggested by Amec in the course of this litigation, while perhaps intellectually justifiable, seem to me to be way over the top of what Jury would be prepared to pay, when set in the context of the rest of the cost of this hotel.”

The Deputy Judge went on to his conclusion and said this:

“As was pointed out by Nourse LJ in Gafford v Graham[1999] 3 EGLR 75 at p 80L, the sort of damages questions involved in cases like the present are matters of judgment which are incapable of strict rational and logical exposition from beginning to end. I have sought to set out the principal factors that have operated in my mind and which would have operated in the minds of the parties to the hypothetical negotiation.”

It is argued by Mr Darton, based on a passage in McGregor on Damages at paragraph 22-054 and Attorney General v Blake [1998] Ch 439, that the law may be moving towards awarding the totality of any profit rather than a share in circumstances such as these. The factual context of that case, however, is so far from the present case that I do not find it helpful in my task.

I should add that it is not suggested by either counsel that the fact that the defendants’ obligation arose not within the contract of sale but by way of collateral contract makes any difference to the Wrotham Park approach being the proper approach to damages in the present case. It is, however, argued that the actual assessment of damages, i.e. the application of that principle to the assessment of damages, is affected, because in two respects it alters the parties’ respective bargaining positions from that which would apply in a true covenant case. I shall return to this argument shortly.

Against this background, I return to the judge’s judgment, which I have set out. Wrotham Park had been cited to him in the closing submissions, and he clearly had this basis of assessment of damages in mind, even though he did not refer to the authorities in terms in his judgment. Paragraphs 68 and 71 of his judgment demonstrate this. In my view he did not, as is asserted in paragraph 1 of the amended grounds of appeal, award damages on a wrong basis. Assessing damages on the Wrotham Park basis is not, in my view, the same thing as awarding damages for the loss of a chance, when a two-stage assessment has to be made: first, of the value of the potential benefit lost as a result of the relevant wrong and, secondly, of the degree of probability that this benefit would have accrued but for the wrong. Awarding damages for the loss of that bargaining power does not involve this two-stage approach. In my view, the judge’s use of the word “chance” in paragraph 76 was not entirely fitting.

It seems to me that the judge’s formulation of his judgment is open to some criticism in another sense. He appears to have made his assessment of the extra price which the defendants would have been prepared to pay if the possibility of obtaining planning permission for a fourth house had been mooted at the time of the negotiations for the sale of land to him, i.e. in March and April 2001. But at that time, as he also held in paragraph 72, the prospect of obtaining such planning permission would not have been thought good by either party. On that approach, it can be said with some force that the notional price which the defendants would at that time have been prepared to pay, at over 50% of the figure of £280,000 (which the judge took to be the builder’s profit), was manifestly excessive. Furthermore, the £280,000 figure is not the true builder’s profit, in that it does not take into account the construction costs which would have been involved, as to which there was and is no evidence before the court.

However, I am satisfied that the Wrotham Park principle requires the court to consider the course of hypothetical negotiations for the release from the prohibition not at the time of the sale, but later. Mr Webster, for the appellant, so argued specifically. Damages, he pointed out, for breach of contract, are to be assessed as at the time of the relevant breach of contract, not at the time of its formation. In the present case, of course, the defendants had not gone so far as to be in actual breach of their collateral contract, in that they had not started to construct the fourth house. But their application for planning permission for four houses could be regarded as an anticipatory breach, or at least evidence of an intention to be in breach. It seems to me clear that the relevant time is the time at which the defendants would have sought to be released from their contractual commitment to build no more than three new houses on the land: namely, the time at which the planning permission for four had been granted. As at that time, with the certainty rather than merely the remote prospect of planning permission being granted, the stakes had become very much higher. What the claimant had, namely the benefit of a contractual term prohibiting development to the full extent which the defendants now had planning permission to carry out, would have been very much more valuable to her than it was before. Conversely, the defendants would, in my view, have been prepared to a pay a substantially higher price for it.

I cannot help thinking that, despite the way the judge expressed himself in his reserved judgment, delivered some time after the hearing, he did in reality make his assessment on the proper basis: namely, the price which would have been offered and accepted at the time when release from the contractual prohibition was being sought. Reference to the closing written submissions of both parties prepared in July, soon after the conclusion of the 5-day hearing in June, tends to confirm me in that view. I refer to paragraph 4.6 of Mr Darton’s submission for the complainant and paragraph 13(b)(i) of Mr Webster’s for the defendants, where he referred specifically to a percentage of “the uplift in value caused by the variation in the planning permission from three to four new houses”. That can only be taken as a reference to the changed circumstances caused by the grant of that planning permission.

I referred earlier to two respects in which the fact that this was a collateral contract rather than a restrictive covenant might be relevant. First, it was argued by Mr Webster, for the appellants, in his first appeal skeleton argument at paragraph 29.3, that an important element in the negotiations would have been uncertainty as to whether this was a contractual term at all, and he argued orally that the judge should have discounted heavily for this uncertainty. But, in my judgment, the hypothetical negotiations must be considered on the basis that there was indeed a contractual prohibition in place, rather than merely the risk of one. The court has to consider hypothetical negotiations conducted in a particular factual situation: namely, the desire of the purchaser to be rid of a contractual obstacle and the desire of the seller to exact the best price. The existence of that obstacle is the starting point from which the negotiations begin.

Secondly, it is argued that an element in the negotiations would have been the fact that, this being a contract collateral to the contract of sale rather than a restrictive covenant within it, and not having been registered as an interest in land, the defendants could have threatened to sell the fourth plot to another developer rather than paying the claimant’s price for release. I accept that this argument could theoretically have been deployed in those negotiations, but I do not think in reality it would have been. This was a single development site with a single access to and from it. The defendants had bought it for development and had obtained the necessary planning permission, which gave them the prospect of achieving the builder’s profits on the four houses. To have another developer building one of the houses would have involved severe practical difficulties.

It is then argued that the judge apparently reached his assessment by reference to the figure of £280,000 as being the builder’s profit, whereas that figure did not allow for the cost of construction of the fourth house. He said, as I have already read at paragraph 75:

“A builder’s profit of at least £280,000 would have been in his mind should he obtain permission, and had Mrs Lane thought of it he would have offered a good slice of it to her to ensure keeping the deal.”

The true position, however, is that the overall potential benefit to the defendants was not limited to the builder’s profit, albeit a much smaller figure for builder’s profit than £280,000. The joint expert’s evidence was that the undeveloped site value of the fourth plot was £217,000, which was also the amount by which he considered that the value of the totality of the land had been increased by the grant of the planning permission. These two elements could be equated, because Mr Hampton did not think that the values of the three other new houses would be depressed to any significant extent by the presence of a fourth. The projected sale price of the fourth house was a little under half a million pounds. The suggested figure was £497,000 including the site value of £217,000. The judge was fully aware of these figures and of the overall level of benefit which the defendants could derive from the grant of planning permission for four houses, even though there was no evidence of the construction costs before him.

I remind myself that the assessment of this form of damages is not a precise mathematical process. In the end, the question for me is whether I am persuaded that the judge below, in arriving at his figure of £150,000, must have made a wholly erroneous assessment of the course of the hypothetical negotiations which must be taken to have occurred. Having rejected Mr Webster’s primary submission that Wrotham Park damages should necessarily be limited to a relatively small percentage of the purchase of the potential profit, I am not so persuaded. Accordingly, the appeal is dismissed.