(1) Capita Alternative Fund Services (Guernsey) Ltd (formerly known as Royal & SunAlliance Trust (Channel Islands) Ltd) (2) Matrix-Securities Ltd v Drivers Jonas (A Firm)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Eder |
| Judgment Date | 09 September 2011 |
| Neutral Citation | [2011] EWHC 2336 (Comm) |
| Docket Number | Case No: 2009 FOLIO 977 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 09 September 2011 |
[2011] EWHC 2336 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Eder
Case No: 2009 FOLIO 977
Ms Sue Carr Q.C., Mr Graham Chapman and Ms Lucy Colter (instructed by Bond Pearce LLP) for the Claimant
Mr Roger Stewart Q.C. and Ms Sian Mirchandani (instructed by Berrymans Lace Mawer LLP) for the Defendant
Hearing dates: 5, 6, 9, 10, 11, 12, 16, 17, 18, 19, 24, 25 May 2011
Section A: Introduction
A1 introduction
This is a substantial claim for professional negligence. The claim arises out of a failed investment in a factory outlet shopping centre ("FOC") which was to be developed from a Grade II* listed structure known as the "Boiler Shop" situated at Chatham Historic Dockyard, Medway, Kent ("Dockside"). Dockside was acquired for the residue of a 155 year leasehold term on 5 April 2001 by the First Claimant ("Capita") which was then known as Royal & SunAlliance Trust (Channel Islands) Limited. Capita is trustee of The Matrix Chatham Maritime Trust ("the Trust") which was an investment vehicle established to enable 480 individual investors to invest in Dockside. The Second Claimant ("Matrix") sponsored the creation of the Trust and was responsible for establishing and promoting the investment. Capita paid the vendors of Dockside total consideration in the sum of £62,850,000 in order to acquire its interest in Dockside. Capita was appointed as trustee of the Trust by a Trust Deed dated 2 April 2001 which was executed by Capita and Matrix. The Trust is in the form of an Enterprise Zone Property Unit Trust ("EZPUT") although, for reasons set out below, it is resident in Guernsey. Matrix is the Trust Manager under the terms of the Trust.
The Claimants say that they retained the Defendants, who were at the material time a firm of chartered surveyors and property consultants, to advise them in relation to the acquisition of Dockside; and that pursuant to such retainer the Defendants provided positive advice about Dockside's commercial prospects and valued Dockside in the sum of £62,850,000 (with the benefit of Enterprise Zone tax allowances) and £48,150,000 (without the benefit of Enterprise Zone tax allowances). The Claimants say that they relied upon this and, in particular, that Capita relied on this advice when it acquired its interest in Dockside. Capita retains the long leasehold interest in Dockside that it acquired on 5 April 2001. The Defendants received fees totalling in excess of £500,000 for their work on the project, of which nearly £400,000 was, according to the Defendants' invoice, for "investment and valuation advice". The Claimants contend that the Defendants' advice substantially overstated the commercial prospects and also the value of Dockside and that, in short, the Defendants' approach to assessing the commercial prospects and value of Dockside was fundamentally flawed. They say that this is an "advice" case where the Defendants were effectively advising the Claimants whether or not to proceed with the transaction. The Claimants say that provision of advice on the attractiveness of the investment represented by Dockside is, on the facts here, unremarkable: this is precisely the sort of advice that the Defendants had provided to Matrix and equivalent trustees with regard to very many earlier transactions, as well as being what they were retained to provide in respect of this particular transaction. Further, the provision of advice on the commercial viability of a new-build FOC is, the Claimants say, natural once it is understood that the ability of a FOC to secure and to retain tenants and, further, the level of rent that it is able to demand from those tenants depends on the commercial viability and success of the FOC itself. There is no "rack rent" for a FOC: instead the rent paid is a mix of a base rent and turnover rent. As is explained below, turnover rent is, as the name suggests, calculated as a percentage of the turnover earned by a tenant per square foot of the unit occupied. The tenant pays the higher of base rent and the turnover rent. Accordingly, the rent payable by the tenants and receivable by the owner of the FOC depends on the success of the FOC and its tenants in attracting consumers to the centre and encouraging those consumers to spend money at its stores. Thus, if a FOC is not able to attract sufficient consumer spend through its doors then it will not attract, or will find it more difficult to attract, tenants and the rent that those tenants will be prepared to pay (both as base rent and as a percentage of their turnover) will be lower than at a successful FOC. The value of the FOC is assessed on a discounted cashflow basis by reference to an evaluation of the income (in the form of rent) that it is likely to be able to receive.
An important element of the Claimants' case is that the exercise of assessing the value of a FOC cannot begin until an assessment of that FOC's likely ability to attract consumer spend has been undertaken. Such an assessment has been referred to in the present case as a "CACI Report" or a "CACI-type Report", the abbreviation CACI referring to the name of a company that specialises in the production of such an assessment. Without such a report, the Claimants say it is impossible to predict or to assess the likely rental levels that the FOC will be able to achieve and it is the income stream represented by the rents that then drives the capital valuation of the FOC. The Claimants say that the Defendants' failure to appreciate this and/or to undertake any such exercise competently lies at the heart of this case. Their resulting failure to make a competent assessment of the likely level of turnover rents that Dockside might achieve led them to overstating substantially the rent, value and commercial prospects of Dockside. In addition, the Defendants made a series of failures relating to their assessment of the attractiveness of the location and design of Dockside and as to the competence and experience of the Developer to be able to operate Dockside successfully. According to the Claimants, there is a ready explanation for these failings: the Defendants did not possess the necessary expertise to advise on Dockside and this lack of expertise led them to make fundamental errors in their approach to valuing and assessing the commercial prospects of Dockside which ultimately led to their advice to the Claimants being woefully inadequate.
The main monetary claim is that advanced by Capita viz Capita claim damages from the Defendants in respect of these breaches of duty in relation to all of the losses they have suffered as a result of entering into the transaction. Capita calculate these on the basis of the difference between (a) the price paid for Dockside (£62,850,000) together with interest at base rate plus 1% from 5 April 2001 to date and the expenses and losses incurred in operating Dockside to date and (b) any profits earned from Dockside to date and its current market value (pleaded at no more than £9,650,000 and in fact most recently valued at £7,200,000). Alternatively, they claim damages on the basis of the difference between the price paid for Dockside and its true value as at April 2001 (either including or excluding the benefit of Enterprise Zone tax allowances). On any footing the damages claimed exceed £16,000,000. In addition, Matrix claim an indemnity in respect of potential claims by investors.
The Defendants deny liability and causation and put quantum in issue.
As will already be plain from this overview, this is not a simple valuation case where a surveyor is said to have reached the wrong figure for the value of a commercial property. Both the Claimants and the Defendants say that the case has very special features. On the Claimants' side, it is said that the Defendants (a) introduced the transaction to Matrix with a view to Matrix structuring it as an Enterprise Zone investment scheme; (b) purported to conduct due diligence on the potential acquisition and, further, undertook the negotiation of the commercial terms of the transaction with the vendor and its agent; and (c) in addition to advising on value, provided advice to the Claimants on the commercial viability of Dockside as a FOC and, further, advice on the merits of the commercial investment proposition represented by the Dockside development. So, it is said by the Claimants that this is a case where the Defendants were effectively advising Capita and Matrix as to whether or not to proceed with the transaction at all and, if so, at what price and on what terms. On the Defendants' side, it is said that this was, in effect, a speculative venture driven in large part by the desire to obtain for the individual investors extremely valuable tax allowances at the very end of the 2000–2001 tax year; that the Claimants were fully aware of the risks in investing in such a venture which involved the acquisition and transformation of a listed building and the set-up of what was a completely new and specialised shopping outlet with multiple units; that although the Defendants played a certain role in providing advice, such role was much more limited than the Claimants now say; that the venture was "conceived in a boom but born in a bust"; and that the reasons for the failure of the investment were not due to any actionable fault on their part.
A2 The Evidence at the Trial
The main events occurred in the early part of 2001 ie over 10 years ago. This gap in time gave rise to some difficulty. Some documents which one might assume would have existed then were...
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