- Capita v Drivers Jonas: Valuers Hit by Multi Million Pound Negligence Claims
- November 13, 2012
- Law Firm: Norton Rose Canada LLP - Montreal Office
The waiting game is over. With no signs of the real estate market improving (in most sectors), banks, issuers of mortgage backed securities and investors are beginning to crystallise their losses.
As part of that process, valuation reports produced during better (boom) times are being scrutinised and in cases where (in hindsight) the valuation and in turn the investment/security did not stack up, valuers may find that they are being pursued for multi million pound claims.
Hatfield Philips has just issued a claim against Colliers for €79 million for an allegedly negligent valuation of a mixed use complex in Germany. Last week, the Court of Appeal ordered Drivers Jonas to pay Capita £11.86 million plus interest for a negligent valuation of a Factory Outlet Centre (FOC) in Kent.
More of these claims will inevitably come as the six year limitation period approaches for bringing claims in relation to transactions made at the peak of the market and just before the property market crash in 2007.
The Capita v Drivers Jonas case highlights that it is not easy to determine whether a valuer has been negligent. Many interdependent factors must be carefully considered and the existence of unit trust and structured investment arrangements can add an additional and significant layer of complexity to the issue at hand.
Whether you are a lender, issuer, investor or valuer, specialist advice should be obtained to assess the likelihood and strength of a professional negligence claim.
The claim by Capita arose from a failed investment in a FOC at Chatham Historic Dockyard, Medway, Kent (Dockside).
Capita is the trustee of the Trust that was set up as the investment vehicle for 480 individual investors in Dockside. Matrix sponsored the creation of the Trust and was responsible for establishing and promoting the investment.
Dockside is located within an Enterprise Zone (EZ). EZs were established by the Government in 1981 to encourage investment in deprived areas and stimulate regeneration. The EZ classification of Dockside meant that investors in the Trust would benefit from capital allowances.
In 2001, Drivers Jonas (DJ) was engaged to value Dockside and it advised that the market value (for the 155 year leasehold interest that Capita acquired) was £62.85 million. That figure became the purchase price paid by Capita.
In 2011, Dockside was worth only £7.2 million, the upshot being that Capita had paid the vendors significantly more than the market value of the development.
One of the main (and most contested) components of DJ’s valuation was the expected rental value of Dockside at year 7 of the investment. The seventh year was significant because investors must retain their investment for that period to benefit from the EZ capital allowances.
On the £62.85 million purchase price, the tax credits were worth around £21.5 million. The tax relief was said to provide a “buffer” for the investors rather than the sole reason for the investment.
DJ calculated that the rental value at year 7 would be £27.50 per sq foot (psf) based on an average turnover of £275 psf.
Decision at first instance
At first instance, the Judge (Mr Justice Eder) found for Capita and ordered DJ to pay damages of £18.05 million plus interest (from 2001) amounting to a further £8.5 million. A total of £26.55 million.
The judgment considered in great detail the extent of DJ’s duty of care, whether that duty had been breached, whether DJ’s advice had caused the loss that Capita/the investors had suffered and the level of any damages that should be paid.
Below is a summary of the main areas of contention.
Scope of DJ’s retainer and duty
There was no letter of instruction from either Matrix or Capita or a letter of retainer setting out DJ’s role. This left room for DJ to argue that it was only retained by Matrix and did not act as adviser to either the investors or Capita. These arguments were rejected by the Judge on the basis that DJ’s report was addressed to Matrix and Capita, it expressly said that Capita could rely on it and DJ had described itself in its report as the Trust’s surveyor.
DJ also tried to say that its duty of care was limited by the Trust arrangements and the role of Matrix. The Judge disagreed. He said that DJ was retained by Capita to provide valuation and investment advice in relation to Dockside. This extended to advice on the commercial viability and success by reference to the likelihood of Dockside attracting a sufficient calibre of tenants and sufficient customer spend.
Breach of duty
To succeed, Capita needed to show both that DJ had not exercised reasonable skill and care and that its valuation was wrong i.e. outside the permissible range.
The Judge identified the following failings in DJ’s advice:
DJ had not considered the ability of Dockside to attract consumer spend from its catchment area so that it was impossible to predict or assess the likely rental levels that would be achieved;
DJ had simply based its views on brief and informal discussions with other agents, heavy reliance on rents at other FOCs that were not comparable and inadequate market research;
fundamental issues had not been taken into account such as market trends, the threat of competition and the need to attract anchor tenants;
DJ had failed to appreciate the disadvantages of the design, layout and listed building status of Dockside and the consequences that these had for attracting consumer spend, tenants and running costs.
Fundamentally, the Judge concluded that DJ did not have the requisite experience or knowledge to advise on an FOC investment such as Dockside and that its use of comparables was “largely unhelpful”.
According to DJ, unforeseeable events were the real causes of problems at Dockside. It was (as DJ put it) “conceived in a boom and born in a bust” with the events of 9/11 having (in DJ’s view) an adverse impact on the UK retail market. DJ also blamed Capita’s loss on alleged failings by the appointed developer in its management and marketing of Dockside.
After hearing extensive expert evidence, the Judge concluded that DJ’s valuation research was “inadequate and incompetent” and found DJ to be in breach of duty.
However, DJ would only liable for negligence if its valuation figure was outside the permissible bracket of values for Dockside (Merivale Moore plc v Strutt & Parker  PNLR 498). Typically, the margin of error will be around 10 per cent but can be higher or lower depending on the circumstances.
The Judge decided to apply a generous range of plus or minus 20 per cent to the calculation of the rental value at year 7 on the basis that it was exceptionally difficult to assess.
In deciding on the appropriate figure, the Judge considered the evidence of two experts called on behalf of Capita, Mr Parr and Mr Barbour. Mr Parr (a retail performance analyst) gave evidence of the likely sale density and Mr Barbour (an FOC expert) used Mr Parr’s findings to calculate the rental value of Dockside at year 7 at £19 psf.
Despite finding Mr Parr’s evidence unreliable and unsound, the Judge agreed with Mr Barbour that the correct figure was indeed £19psf and that DJ’s £27.50 psf figure was therefore “far too high”. This was on the basis that “Mr Barbour has considerable expertise in the FOC market and, despite important errors in his evidence....he was ...an impressive witness.”
The Judge decided that a competent valuer would have arrived at a capital value figure for Dockside of £44.8m (with the benefit of EZ allowances); with the result that DJ’s overall valuation figure of £62.85m was outside the acceptable bracket.
DJ had therefore been negligent.
Causation and reliance
For DJ to be liable to Capita in damages, Capita needed to show that the loss suffered was caused by DJ’s negligent advice and Capita’s reliance on it. The advice did not need to be in itself the decisive factor in Capita’s decision to invest in Dockside, but it needed to play a real and substantial part (JEB Fasteners v Mark Bloom  1 All ER 582).
DJ’s answer to the issue of causation was that (by reference to the way in which the Trust had been created and issues concerning the validity of Capita’s appointment as Trustee) Capita had no locus to bring the claim, it was precluded from relying on DJ’s advice and no reliance by Capita had (as a matter of fact) occurred.
The Judge disagreed. He found that DJ had caused Capita’s loss because Capita would not have completed the purchase of Dockside if it had received advice that the open market value was as low as £44.8 million.
Capita sought to recover all of the losses it had suffered as a result of acquiring Dockside including all acquisition, funding costs and loss of profit less the market value of Dockside in 2011. A grand total of £63.87 million.
However, the Judge took the view that damages should be awarded on a diminution in value basis. He said the consequences of DJ being wrong about Dockside’s value were that Capita paid £18.05 more for Dockside than they should have done (i.e. £62.85m less £44.8m). The judge therefore awarded Capita damages of £18.05m plus interest from the date of the investment in 2001.
Decision on appeal
There were three grounds for DJ’s appeal, namely that:
there was no proper basis for the Judge’s conclusion as to the correct valuation or valuation range of Dockside;
credit should have been given for the tax benefits received by investors; and
Capita should not have been awarded interest from 2001. Rather the interest should have run from 2008 when the investors first had access to the investment funds.
The first ground of appeal attacked the reliance by the Judge on the evidence of Mr Barbour given that it was based on the unreliable and unsound evidence of Mr Parr. By a majority, the Court of Appeal concluded that the Judge was entitled to accept Mr Barbour’s view particularly given his immersion in the FOC sector. There was no need for “pinpoint accuracy” and there was enough “rational and evidential basis” for the Judge to do the best he could to determine a figure for damages. By contrast, Lord Justice Lloyd expressed a forceful dissenting view that if the Judge adopts the evidence of a witness who has been discredited, without any independent explanation, the decision of the Judge cannot and should not stand.
In relation to the tax issue, the Court of Appeal took the view that tax credits had to be relevant in the calculation of damages. This was because the tax considerations were an integral part of the investment, it would be unreal to leave tax considerations out in assessing the loss “really suffered” and it could not be said that the tax element was so remote that it should be disregarded.
Accordingly, DJ’s appeal on the tax issue was allowed and Capita’s damages were reduced down to £11.86 million.
DJ’s case on tax was on the premise that the loss was suffered in 2001 rather than in 2008, when investors would have access to the investment funds. As DJ had succeeded in its appeal on the tax issue, it followed that interest had to run from 2001 (when the loss was suffered). The appeal on the interest award therefore fell away.
This case highlights the complex arguments that can arise in professional negligence disputes against valuers particularly where a property is held under a trust or structured finance arrangement. Even before the typically difficult valuation issues are considered, arguments over the nature of the duty of care, to whom it is owed and reliance on the valuer’s advice are likely to arise. These problems can be avoided if sufficiently detailed terms for the engagement of the valuer are put in place from the outset making it clear who can rely on the advice and what it should cover.
For valuers this case is a stark reminder that very specific expertise may be required to value certain types of properties/developments. DJ’s assumption that they could acquire the requisite experience “on the job” was clearly dangerous and (as it turns out) exceptionally expensive.