This judgment was handed down remotely at 10.30am on Thursday 1 May 2025 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
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Richard Farnhill (sitting as a Deputy High Court Judge of the Chancery Division):
- This dispute concerns the valuation of a site that was, at the time, a derelict building (the Property) at 140 Causewayend, Aberdeen. The Property was to be demolished and replaced with Purpose Built Student Accommodation (PBSA) that was then to be rented out (the Development). Construction of the Development was to be carried out through a special purpose vehicle, initially Visage (Causewayend) Ltd (Visage) and later, for reasons I will come to address, Visage (Aberdeen) Ltd (Visage (Aberdeen)). Visage (Aberdeen) was granted a 170 year lease of the Property and, subsequently, the Development (the Leasehold), the ground rent provisions of which are central to this dispute.
- The Claimant provided mezzanine finance with a profit share, ultimately secured on the Leasehold, to Visage and, later, Visage (Aberdeen). It says that in deciding to do so it relied on a valuation of the Leasehold provided by the Defendant on 18 February 2015 (the Valuation). The Claimant further asserts that the Valuation was negligent in a number of respects. The Development has now been sold for a sum significantly lower than the Valuation and the Claimant will not recover anything on its investment.
Witnesses
- Typically in this section of a judgment the judge will go through each witness with brief observations as to their evidence, and I will perform that ritual in due course. It is necessary to raise some broader concerns about the witness statements submitted on behalf of the Claimants before doing so, however.
- My first concern was that the statements were not in the witnesses' own words, as is required by paragraph 18.1 of PD 32 and paragraph 3.3 of PD 57AC. This can most easily be illustrated with examples from the statements of Mr Tellwright, of the Claimant, and Mr Taylor, of Visage (and later Visage (Aberdeen)). At paragraphs 26-27 of his statement, Mr Taylor observed:
26. Mark engaged his network of contacts to assist me in pitching the Aberdeen project to banks to source the additional borrowing required to build the development. Specifically, Mark contacted the Royal Bank of Scotland Plc, which, in principle, was prepared to offer construction lending at 60-65% of the loan to cost, with an estimated cost of 7-8%, and Mark referred this back to me. The figures Mark and I discussed involved Mezzanine Lending of around £2.5 million, which would be used to complete on the lease and to advance the Aberdeen deal to attract primary funding. The remainder of the funding required to complete the build, around £8 million, would be borrowed from the bank and secured by way of a first charge on the leasehold interest.
27. Based on this structure, Mark's initial proposal for the profit share arrangement with me was as follows:
a. The SPV loan is charged at 30% p.a.
b. If the money is returned in full within 6 months, the percentage is reduced to 20% p.a.
c. If the money is returned in full within 9 months, the percentage is reduced to 25% p.a.
d. Over and above the preference rate on equity, the profit split is 50:50.
- Mr Tellwright put these points in the following way at paragraphs 27-28 of his statement:
27. To help Andy Taylor, I engaged my network of contacts to assist him in pitching this project to the bank for further lending. Specifically, I reached out to the Royal Bank of Scotland, which, in principle, was prepared to offer construction lending at 60-65% of the loan to cost, with an estimated cost of 7-8%. I referred this back to Andy Taylor. The figures we discussed involved "mezz lending" (secondary or "mezzanine" lending) of around £2.5 million, which would be used to complete on the lease and to advance the Aberdeen deal to attract primary bank funding. The remainder of the funding, around 8 million, would be borrowed from the bank and charged on the leasehold title.
28. Based on this structure, my initial proposal for the profit share arrangement with Andy was as follows:
a. The SPV loan would be charged at a rate of 30% p.a.
b. If the money were to be returned in full within 6 months, the percentage would be reduced to 20% p.a.
c. If the money is returned in full within 9 months, the percentage is reduced to 25% per annum
d. Over and above the preference rate on the SPV loan, the profit would be split 50:50.
- Not only is the language strikingly similar, Mr Tellwright accepted that the reference to the bank lending at a rate of 7-8% potentially involved an error. As an email dated 8 January 2015 from Mr Taylor to Mr Tellwright makes clear, combined with the Claimant lending at 25-30% and further lending at 12%, the blended rate would be 7-8%. To achieve that, the rate from the bank would have to have been significantly lower than 7-8%.
- The position is worse in Mr Taylor's paragraph 40 and Mr Tellwright's paragraph 71. It is pointless quoting both because they are almost a cut and paste of one another; the trivial differences between the two are indicated by text in square brackets:
Skykomish lent the sum of £250,000 on 27th March 2015 and a further £250,000 on 1st May 2015 and £140,000 on 30th July 2015 and £1,757,285.93 on 14th December 2015. The main amount of the Skykomish loan of [circa] £1.75 million was not advanced by Skykomish until 14th December 2015[,] following the signature of [the Facility Letter with Titlestone / the Titlestone Facility Letter] when it was clear that £10 million would be forthcoming from the bank.
- Self-evidently, the text is almost identical. It also gives the dates when the Claimant arranged to put its lawyers Pinsent Masons LLP (Pinsents) in funds; there was then a delay before the loan was drawn down by Visage. There is no obvious way in which Mr Taylor could have been aware of these dates at the time. To his credit, he readily accepted that on cross-examination. The problem is that it should not have come to that; this was not his evidence to give and should not have been in his witness statement. Mr Tellwright accepted that the similarities were obvious and was unable to offer an explanation for them.
- Of equal concern are Taylor 23 / Tellwright 21. Again, it is simpler to show the minor discrepancies in square brackets. After referencing an Excel spreadsheet from December 2014 which both men exhibited, those paragraphs read:
It will be seen that the total development costs were estimated at £11,711,775. This was by comparison to the resale valuation of £16,507,439[n] (taken from the special assumption of completed scheme from [the Blackcube Valuation / the valuation for Blackcube dated 13th October 2014]), with net sale proceeds (profit) of £4,795,664. This [provided/enabled] a return on costs after finance of 41% and a return on sales after finance of 29%.
- Aside, therefore, from a typographical error and the use of a defined term, in a paragraph of text only one word is different. Perhaps even more to the point, however, the figure of £16,507,439 does not come from the Blackcube Valuation; the figure there is £16,570,000.
- These were not isolated incidents: Mr Tellwright's paragraph 20 is very similar to Mr Taylor's paragraph 22; Mr Tellwright's paragraph 24 looks very much like Mr Taylor's paragraph 25; Mr Tellwright's paragraphs 70-73 are largely replicated in Mr Taylor's paragraphs 39-42.
- Ms Swaffield initially suggested on closing that this was potentially coincidence, a result of two witnesses who had worked closely together at the time recalling a structured transaction in the same terms. Were it limited to that I would have had no issue with these statements: that they structure the Claimant's remuneration in Taylor 27 / Tellwright 28 in the same order reflects a commercial logic and is wholly unremarkable.
- It is not limited to that, however. It is not simply that the structure or flow of the points is the same; so, too, is the grammar, syntax and lexicon and both men made the same mistakes. I was put in mind of a thought experiment used in studies of randomness and probability, which has passed into popular culture, called the infinite monkeys theorem: if an infinite number of monkeys were to type randomly on keyboards for an infinite amount of time, would they ultimately produce the complete works of Shakespeare? Showing the breadth and depth of the Academy, that question, or at least one very closely related to it, was answered last year in a study by Stephen Woodcock and Jay Falletta at the University of Technology in Sydney. According to their mathematical model, the time it would take for 200,000 chimpanzees randomly to write the complete works of Shakespeare would extend beyond (indeed, well beyond) the heat death of the Universe, when the Universe will have expanded to the point where all energy has dissipated and all life has ceased. That is as close to zero as a probabilistic analysis ever is. It is a vivid illustration of the limits of chance.
- This is not a strict application of the infinite monkeys theorem because that is premised on independent events (acting randomly, the monkey is as likely to input combinations such as "q;z", which have no meaning in English, as it is to type "and") whereas Mr Taylor and Mr Tellwright experienced the same events, at least in part, and communicate in the same language. It is not surprising to see some overlap, certainly in the structure of their evidence. As I say, however, even allowing for that, the probability of overlap on this scale being entirely fortuitous seems to me much closer to near zero probability that is at the heat death of the Universe end of the spectrum than it does to exceeding the 50% that represents a probable reason for the similarity in drafting between the two statements.
- It is, of course, the role of counsel at times to defend the indefensible, and I make no criticism of Ms Swaffield for the way in which she put her client's case on this point. I do reject it, however; in explaining how almost identical paragraphs made their way into both statements, the coincidence of experience and, even more, the vagaries of chance take a remote back seat.
- It seems to me that there are five logical possibilities:
i) Mr Tellwright saw Mr Taylor's statement in draft and adopted sections of it.
ii) Mr Taylor saw Mr Tellwright 's statement in draft and adopted sections of that.
iii) Mr Taylor and Mr Tellwright worked together to produce their statements.
iv) The two statements came from a common source document and Mr Taylor and Mr Tellwright, independently, tweaked the language.
v) On rebuttal Ms Swaffield, it seemed to me, retreated somewhat from her initial position to recognise that the translation of the witness interviews into a document drafted by the same lawyer (which I recognise is wholly permissible both as a matter of general practice and under PD 57AC) may have given rise to the use of similar language.
- Mr Tellwright and Mr Taylor both denied having worked with one another to produce their respective statements. I accept those denials. That would rule out (i), (ii) and (iii). The sheer scale of replication rules out (v) – blatantly, significant sections of text have been cut and pasted either from one draft statement to another or from a common source document into both. Logic therefore suggests that at least one witness and possibly both were provided with quite an advanced draft of their respective statements prepared without proper reference to what that witness had said, at least in respect of the paragraphs I have identified. The witness then tweaked the language. I understood from Mr Taylor that this is what had happened at least in his case.
- That does not in any way mean that the evidence of either witness was untruthful; on the contrary, in both cases I accept that they now believe it to be their recollection. The problem is that at least in places it has become a single "recollection", and it is not even that of either witness. Mr Taylor simply had no way of knowing when funds were transferred to Pinsents; neither witness could have recalled RBS suggesting a rate of 7-8% because it did not do so; they did not rely on the Blackcube Valuation when calculating the potential profit of the Development in December 2014.
- Nor is the problem limited to the areas of overlap. If both witnesses were working from a source document that has influenced their recollection, as I believe they were, then the areas of overlap simply show where that has happened; it does not show that there is no issue with the balance of each statement. To conclude that one would need to see the source document, over which privilege has presumably been asserted.
- The end result is that parts, possibly significant parts, of the statements of two of the critical witnesses in this case, Mr Tellwright and Mr Taylor, are not their own unaided recollection, are not in their own words and so are exposed to all the risks of contamination identified in PD 57AC and the line of cases running from Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm). I had significant doubts about the robustness of their evidence.
- In some ways, the position was even starker with Ms Ilett. The substance of her first witness statement, totalling two pages the overwhelming majority of which was the rubric one sees in all witness statements, was:
I have read the witness statement of my colleague Colin Jonathan Summers of today's date and the exhibit CJS 1. I have first-hand knowledge of its content and confirm the same to be true.
- Even in the absence of PD 57AC this evidence would be of very dubious value. Put simply, it is not the evidence of Ms Ilett. It was always inherently unlikely that she was involved in all of the same discussions as Mr Summers, and she confirmed to me that there was some division of labour between them, particularly in the earlier marketing period when Visage (Aberdeen) was trying to sell the Development in 2017. She is therefore confirming the accuracy of Mr Summers' account in respect of meetings she did not attend, which plainly she cannot do, but says nothing about discussions to which she was a party and he was not, which is where she would potentially have valuable evidence to give. Even at meetings they both attended one would expect her to have a slightly different perception of events, given her different focus, or for her recollection in some way to have varied from that of Mr Summers. Her evidence, implausibly, states otherwise.
- Ms Swaffield recognised in the course of her rebuttal submissions that I should attach no weight to Ms Ilett's first witness statement. I think it goes a little further than that. In paragraph 1 of her first statement, Ms Ilett states: "This witness statement sets out only my personal knowledge and recollection, in my own words." In fact, it adopts Mr Summers' recollection, and does so in Mr Summers' words. When she repeated that language in her second statement one is therefore entitled to have reservations as to whether she fully appreciated what that entailed.
- These were serious failings, especially in the context of a trial such as this where much turns on the factual evidence of witnesses and not simply documents. I deal with it here because I accept Ms Swaffield's submission that it would be unfair to impute these failings onto the individual witnesses themselves, none of whom are legally qualified and none of whom can therefore be expected to know the details either of the rules of evidence in general or the provisions of PD 32 and PD 57AC governing trial witness statements in particular. These points do go to their credibility, however – they call into question the extent to which their recollection has been contaminated because Mr Tellwright, Mr Taylor and Ms Ilett have obviously, to some extent, been led to adopt a description of the relevant events in terms other than their own.
- Turning to the individual witnesses, Mr Tellwright is the sole director of the Claimant and was its decision-maker throughout the relevant period. His evidence was fundamental to this claim, in that it is for the Claimant to show that it relied on the Valuation. As the decisionmaker, the relevant reliance (if any) is that of Mr Tellwright.
- In closing Mr Benson recognised that Mr Tellwright is intelligent, charming and articulate. If anything I felt that understated things; Mr Tellwright is also fluent with numbers and commercially highly astute. It is unsurprising that he has achieved success in his chosen field. His manner of giving evidence reflected this; he was confident and clear in the majority of his answers.
- In his witness statement, Mr Tellwright explained that he had not previously had a problem with his property investments, and given what I have observed above I have no difficulty in accepting that. Moreover, he feels aggrieved that the Defendant, to his mind, abused his trust by purporting to have carried out an inspection of the Property, and invoicing him on that basis, when in fact it did nothing of the sort. He has a right to feel aggrieved: it was a clear breach of contract for which no satisfactory explanation has been offered by the Defendant. To his credit, Mr Benson did not seek to suggest that the Defendant's conduct was acceptable.
- The difficulty is that this clear breach seems to have persuaded Mr Tellwright of the rightness of his cause, and other events have, in his mind, come to fit that narrative. That is always a risk for client witnesses involved in the running of the case; it has been compounded by the way in which his witness statement has been prepared.
- Mr Benson made clear that there was no challenge to Mr Tellwright's honesty; the Defendant accepted that Mr Tellwright believed firmly in his case and in his answers, but submitted that they have become heavily coloured by his sense of grievance, meaning that at times he was more advocate than witness. Those submissions chimed with my own view of Mr Tellwright: while he was unquestionably honest and seeking to assist the court, his evidence was unreliable. Much of it was in fact reconstruction, derived from the documents or his usual practices; I accept that some of it was more submission than evidence.
- Mr Taylor was the lead at Visage, responsible for bringing the project to Mr Tellwright and for the Development itself. He was measured and thoughtful in giving evidence with a ready command of the property market and the economics relevant to it.
- Mr Taylor obviously has considerable respect for Mr Tellwright. Possibly as a result, his evidence went beyond his recollection. I stress that there was no dishonesty involved; Mr Taylor believes in the Claimant's case and has come to believe his recollection of events. But as I have noted there were parts of his evidence where he was not giving evidence in his own words and, at least in the case of the loan dates and the December 2014 profit calculation, he was giving evidence of matters of which he was either unaware at the time or which were simply wrong. It seemed to me that the position had been significantly compounded by the way in which his witness statement was prepared.
- The position was the same in the course of his cross-examination; when he came to address when and by whom an RICS Red Book valuation of the Development was requested his evidence started forcefully but it ultimately became clear that he had limited recollection of what had happened: he did recall that such a valuation was required in connection with the financing, but could not recall why or by whom and concluded that it was a "tick box" exercise.
- Mr Summers was the lead at Bidwells, who since 2017 have been marketing the property, ultimately successfully. He is obviously very familiar with the property market in general and the PBSA market in particular, but his experience is in the sales side of the market; he is not a professional valuer and has no formal training in that field.
- While Mr Summers was very fluent on market issues, in respect of the Development his evidence was heavily affected by hindsight bias. The sale of the Development has been very difficult, such that some degree of hindsight is possibly unavoidable, but I believe it has been aggravated by his preparation of various economic models, I understand for the purposes of these proceedings but certainly some time subsequent to the Valuation, to show what Mr Summers has come to believe was the true value of the Development in February 2015. Not only is that not contemporaneous evidence, it is not an exercise that Mr Summers is qualified to undertake; as I have noted, he is not a valuer.
- Again, I had some concern that he took on the role of advocate at times. In particular, his explanation of a letter sent by Bidwells to Mr Taylor in 2017 estimating that the property was worth around £14 million – to the effect that he was, in essence, telling a prospective client what they wanted to hear with a view to securing the instruction – was simply not credible.
- Ms Ilett also works at Bidwells and has worked alongside Mr Summers, who is her line manager, in marketing this property. Given the unusual nature of her first statement it was ultimately accepted that her evidence in that respect stood or fell with the cross-examination of Mr Summers. What that meant in practice is that she had little of any value to add. As with many of the Claimant's witnesses I felt she was at times an advocate, but considered her to be honest.
- Mr Fraser's evidence was very brief, limited to confirming that certain documents prepared for these proceedings had been derived from the client ledgers of Pinsents. I accept that evidence as being true.
- Mr Moir was the lead valuer at the Defendant who had primary responsibility for producing the Valuation that is at the heart of this case. Plainly, the value that he put on the Leasehold did not anticipate subsequent events. It is also fair to say that other aspects of the Valuation came up short. Those points were robustly put to Mr Moir in the course of his cross-examination. He accepted some of those criticisms but, as he was entitled to, contested others; he defended the Valuation but was not defensive about it. He came across as experienced and knowledgeable, a professional who on this file had made mistakes.
- There was some suggestion that Mr Moir's evidence failed to address documents or how they influenced his recollection. I reject any such criticism. The Court cannot have it both ways, in my view: PD 57AC states that witnesses should not simply offer a commentary on other evidence; if Mr Moir could not recall an exchange after reviewing it he was right to say so. Of course, there may be relevant evidence he could give as to his usual practice, but in my view he did that. Where a document neither jogged a recollection nor called for any other evidence, Mr Moir was right to say nothing.
- He was also criticised for responding to multiple questions with words to the effect of, "That's your opinion." Ultimately, the relevant exchanges all involved criticisms of Mr Moir's practice, approach in this case or the Valuation which in each case he rejected. In the circumstances it is not wholly clear what else he was to say; he was simply recording his disagreement.
- Ms Tawse's evidence went to the failure to inspect the Property. It is accepted by the Defendant that it was required to inspect the Property under the RICS Red Book unless the Claimant agreed that no inspection was required; it is also accepted that no such agreement was reached; it is now accepted that no inspection was carried out but that photographs were taken by Ms Tawse's brother (Mr Tawse) that were included in the Valuation; and finally it is accepted that Mr Tawse lacked the necessary qualifications and was, in any event, not employed by the Defendant at the time. In short, it is accepted that these requirements of the RICS Red Book and, in turn, the Engagement Letter (defined below), were breached. Ms Tawse's evidence went to how this had happened. Put simply, she could not recall what had happened but was clear that she would not have acted in the way that she did had she known that a Red Book valuation was required.
- In my view she was an honest witness, doing her best to recall, 10 years later, events that would doubtless have seemed quite ordinary, even mundane, at the time. Much of her evidence was reconstruction, and she was open about that, but she was clear about what she would and would not have done and, in particular, that she would not have been satisfied with Mr Tawse taking photographs had she known a Red Book valuation was to be carried out. I accept that evidence.
- Ms Cubitt was the Claimant's valuation expert. She is the head of PBSA valuing at Savills and has current experience in the field, although she was not involved in this type of work in 2014 or 2015 having first become involved in PBSA around five years ago.
- The circumstances leading to the appointment of Ms Cubitt could not be described as ideal. Initially the Claimant instructed Mr Timney of Savills in Edinburgh who put in what was described as a "Preliminary Expert Report" on 19 December 2019. In 2020 Mr Hanmer was engaged to provide what Mr Timney described as "further input". Ms Cubitt explained that while Mr Hanmer was a registered valuer, he headed the agency side of Savills' practice. He was therefore senior to Ms Cubitt, but worked in a slightly different part of the business.
- So far as I can tell, Mr Hanmer did not so much provide input as replace Mr Timney altogether. I say that both because Mr Hanmer submitted what he described as a "Without Prejudice Preliminary Expert Report" on 15 January 2021 and because Mr Timney, by his own admission, had no involvement with this case between his initial report in 2019 and February 2024, when he was "approached to resume [his] role as an expert in this case" following Mr Hanmer's departure from Savills. However, Mr Timney in turn withdrew at the end of last year because he considered that the dispute had shifted in the intervening five years and was now focussed on the valuation of PBSA, an area in which he lacked the requisite experience. Ms Cubitt, who as I have noted does have relevant experience, was appointed at that stage.
- It seemed to me that this was a source of three difficulties. First, Ms Cubitt's report was obviously prepared in a short time frame. Possibly as a result it contained multiple errors. Some were immaterial – an incorrect date or cross reference. Some were much more significant, however. Critically, shortly before Ms Cubitt was due to give evidence I was informed by Ms Swaffield that there was an error in Ms Cubitt's calculations that had resulted in her valuation being understated by £300,000. It transpired that the error was considerably more significant than that, totalling £460,000 or roughly 5% of Ms Cubitt's estimate of value. A schedule of corrections was provided shortly before Ms Cubitt came to give evidence before me.
- That was not the end of the errors, however, as over the course of her cross-examination further issues arose, again some minor some of greater significance (although none that were said to affect her final figure). Full credit must be given to Ms Cubitt for recognising most of those errors when they were pointed out to her, but as was the case with Mr Taylor's errors, candid admission upon discovery is not the way the system is supposed to work. At least in the case of Ms Cubitt, had she had more time I believe she would have presented a more accurate report.
- The second issue flows from the fact that Ms Cubitt was the third expert from Savills involved in these proceedings. It was put to her that she was defending the Savills "house view". She rejected that and I accept that she was not consciously doing so. I do consider, however, that her evidence was affected by the history.
- Mr Benson referred me to a speech of Popplewell LJ on the way that issues of recollection are, at times, issues of perception. He gave a number of instances, one of which seemed to me to be a reference to what is known as anchoring. In his book, "Thinking, Fast and Slow" the Nobel prize winner, Professor Daniel Kahneman, described the phenomenon and illustrated it with an example that is perhaps especially vivid for judges:
The power of random anchors has been demonstrated in some unsettling ways. German judges with an average of more than fifteen years of experience on the bench first read a description of a woman who had been caught shoplifting, then rolled a pair of dice that were loaded so every roll resulted in either a 3 or a 9. As soon as the dice came to a stop, the judges were asked whether they would sentence the woman to a term in prison greater or lesser, in months, than the number showing on the dice. Finally, the judges were instructed to specify the exact prison sentence they would give to the shoplifter. On average, those who had rolled a 9 said they would sentence her to 8 months; those who rolled a 3 said they would sentence her to 5 months; the anchoring effect was 50%.
- If experienced judges can be influenced by apparently random and obviously extraneous data, the risks involved in Ms Cubitt's evidence would seem to be greater: she was working at speed and the anchor was a view expressed by other experts including a former senior colleague, whose judgment she made clear she respected. Two examples stood out. The first came when she was addressing rental comparables in her report. She explained:
I have had regard to the rental comparables in the James Hanmer report, GE report, the Cushman & Wakefield report and the Knight Frank report. However, I am unaware as to whether or not the information is accurate or well researched. I have set out in the table below the comparable evidence of market rents for studios which I have taken from the reports of James Hanmer, GE and Cushman & Wakefield. There are some minor discrepancies in the rental levels across the three reports, where this is the case, I have adopted the rents provided in the James Hanmer report.
- If Ms Cubitt had reservations about the accuracy of those figures there was no reason why she should adopt them; she could have researched them herself. Less still was there a reason to default to Mr Hanmer's figures. When the latter point was put to her in cross-examination she explained that: "I have adopted Mr. Hanmer's because I have worked with him and I am of the opinion that he would have pulled that information through from the data available at Savills, which I would also have done." Again, she could have carried out the work herself but simply assumed it was not necessary because she believed, without checking, that Mr Hanmer would have adopted that approach.
- The second was a striking exchange, which I address below, when Ms Cubitt was being asked questions on the RICS guidance around discounted cash flow (DCF) modelling, important aspects of which she either could not recall or had not considered. But she did recall the evidence of other experts previously involved in this claim, going so far as to give specific page references from the reports of those experts. In that case it was the Defendant's former expert, but this went to demonstrate how focussed Ms Cubitt was on those reports.
- The risk of anchoring is especially acute here. Ms Cubitt used a DCF model. A DCF is very sensitive; a slight change in the variables can have a significant impact on the outcome. Moreover, there is a degree, at times a considerable degree, of subjectivity in determining the value of the inputs. I am not suggesting that Ms Cubitt set out to achieve a particular number. I also recognise that there were aspects of her report where she took a different view to Mr Hanmer. I do believe her evidence was influenced by the earlier work of her colleagues, nonetheless.
- The third issue flows, I think, from both the deeply acrimonious nature of this dispute, which was obvious even before me, and the previous two issues. Ms Cubitt was also the subject of a skilful, highly detailed, forensic cross examination by Mr Benson. It goes without saying that this is no criticism of Mr Benson, but I recognise that for a witness, even an expert, giving live evidence for the first time it would create considerable pressure.
- Even allowing for all that, however, Ms Cubitt was at times an advocate for the Claimant's case. In response to questions that I thought were entirely proper she would argue points with Mr Benson, often giving answers that ranged far beyond the question put and referencing documents that seemed to me to have nothing to do with the topic. In one exchange, she was taken to the report and accounts of Empiric, a listed plc involved in the PBSA market in 2014, which showed a different yield to that which she had adopted in her model. It was put to her that this reflected a stronger market than she had allowed for. Ms Cubitt responded:
So the valuation yield is obviously provided by their valuation house who will have been valuing their portfolio, I suspect for this year, it might be that they have also done it for previous years. You know, you could question perhaps their independence in providing that yield.
- The suggestion seemed to be that a listed plc in its audited, filed accounts knowingly mis-stated the value of its assets with the active involvement of its valuers. For my part, it was not the independence of those valuers that I questioned when I heard that answer; it was that of Ms Cubitt.
- Similarly, there were repeated references in her report to the failure by the Defendant to inspect the Property, but that is admitted by the Defendant and Ms Cubitt herself recognised it would not have impacted the Valuation. She referred twice to Mr Moir's incorrect use of feuhold, when the tenure is properly now called heritable, but again that could not affect the valuation exercise. In her report Ms Cubitt criticised the Defendant for not having disclosed that it had carried out an earlier valuation for Visage. In fact it did disclose this, but on cross-examination Ms Cubitt maintained that the date of the earlier valuation should have been disclosed. That is also wrong because, as I will address, Mr Taylor told Mr Moir on 3 February 2015 in his email of instruction that Mr Tellwright had the earlier valuation. More importantly, for current purposes, Ms Cubitt gave the sense of trying to argue the Claimant's case. All of these were attempts to undermine the credibility of the Defendant, not factors relevant to the "true" value of the Leasehold in 2015.
- For these reasons, which I again emphasise arose, in my view, at least in part from circumstances that were outside Ms Cubitt's control, I had reservations about significant parts of her evidence.
- Mr Yeung was the Defendant's expert on valuation. He is a senior director at CBRE where he specialises in the valuation of PBSA, a sector in which he has been involved for around 15 years. He was actively involved in valuations in the Aberdeen market in 2014 and 2015.
- Mr Yeung was unquestionably an impressive expert. He had a ready command of the details both of the market at the time and of the issues in this case. He was fair minded and demonstrated the independence that makes experts so valuable to the court, readily recognising criticisms of the Valuation and his own methodology where he considered them to be fair. At times I felt that the Claimant verged on, and indeed strayed into, conducting trial by ambush in the course of Mr Yeung's cross examination, presenting him with new material while in the course of giving evidence; he engaged with the new figures presented to him and was able to offer clear, comprehensive answers to the questions put.
- Mr Yeung was open in accepting that his approach in this case is not one referenced in the RICS Red Book or, indeed, by the RICS more generally. His explanation was economically logical and compelling, however. Given the unusual nature of the ground rent clause in this case, at least in the PBSA market, it was difficult to find comparable assets for the Leasehold. He therefore took the heritable interest, for which there were 2014/2015 comparables, and valued that. There were also comparables for a heritable / freehold that was subject to a long lease with a ground rent escalation clause tied to RPI. He accepted that the comparable evidence was limited and that the comparables themselves were not perfect but, as he repeatedly pointed out, he was looking for an evidence based approach and some evidence was better than none at all. He then valued that interest. His logic, which I accept, was that at inception the dynamics of the market meant that the heritable interest less the heritable subject to a lease interest should equal the leasehold interest, since the seller had no incentive to reduce the value of its property by creating the lease and the potential purchaser (who at this stage of the hypothetical could simply walk away) had no reason to overpay. In addition to its logic, Mr Yeung explained that this approach reflected discussions he had had with investors.
- There were four specific criticisms of Mr Yeung's evidence that I should address here.
- First, there appeared to be criticism of his evidence that he had discussed an approach similar to his methodology with investors. If such criticism was intended I do not accept it; an expert's role is to assist the court with their expertise, which includes their experience. Moreover, Mr Yeung's role was to give evidence as to "issues relating to the value of the completed development on the date of the [Valuation]". The definition of market value in the RICS Red Book at the time was:
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
- Evidence of the approaches to valuation that willing buyers and willing sellers, in fact, considered at the time seemed to me to fall squarely within the scope of what Mr Yeung was asked to do.
- Secondly, there was criticism of Mr Yeung in the course of cross-examination for not exhibiting his letter of instruction. Under CPR 35.10 he was not required to do so. The Claimant could seek disclosure of it, which would then be a matter for the court, but what Mr Yeung said about his instructions was obvious from the face of his report, dated 5 February 2025. The Claimant had ample opportunity to make any application that it considered necessary, most obviously at the PTR. Leaving the point until cross-examination plainly, in my view, crossed the line and was trial by ambush. I reject any criticism of Mr Yeung in this regard; the situation was one of the Claimant's own making.
- Thirdly, there was criticism of Mr Yeung for not having used a discounted cashflow (DCF) model. It transpired that Mr Yeung's model ran a DCF in the background, but that model had not been disclosed and so the criticism was that there was no way that the Claimant could test Mr Yeung's assumptions in his DCF.
- Mr Yeung explained both in his report and in the joint statement of experts that he regarded a DCF as a useful cross-check but he was not explicit in saying that he had carried out such a check. I accept that there was no attempt to mislead on his part and that Mr Yeung's evidence reflected his position that a DCF approach was too subjective and lacked the necessary evidential basis to be used in this case. It was, of course, open to the Claimant to ask questions of him in accordance with CPR 35.6 and it elected not to do so. In the circumstances, while I recognise that Mr Yeung's report could have been clearer in this regard, I reject any criticism intended to be levelled at him: he understandably did not address an approach (more accurately approaches, since a change in assumptions in a DCF would change the outputs, possibly very significantly) that he had rejected in principle and only used as a sense-check in practice.
- Somewhat remarkably, in my view, this issue resurfaced in Ms Swaffield's rebuttal submissions as an allegation that Mr Yeung had deliberately suppressed the results of the DCF because it would show that the Defendant's Leasehold valuation was unreasonably high. I consider this remarkable because the allegation is so serious, it is unclear why it was not made in closing. Certainly, it did not appear to respond to anything Mr Benson had said in his closing. I reject it entirely and without any hesitation. It was based on a passage of cross-examination that I considered at the time to be confusing and difficult to follow. It was put to Mr Yeung that he had deliberately not produced a DCF because it would contradict the Leasehold valuation. Mr Yeung responded, "I think I agreed with you before the break." He was referring to the short transcriber break that had happened a few minutes before. It was wholly unclear, however, what answer he was referring to, and no attempt was made to clarify that with him. The discussion before the break had related to his attempt to recreate the results of Ms Cubitt's DCF. I can only conclude that Mr Yeung had misunderstood the question. Certainly, as I say, I have no hesitation in rejecting any allegation that he deliberately withheld his DCF modelling because it in some way would have compromised his evidence.
- A similar allegation was made, again on rebuttal, regarding Mr Yeung's modelling of the value for the unencumbered heritable and the ground rent investment. It was said that the inputs for the unencumbered heritable were "manipulated and unclear" but had been "deliberately increased"; the inputs on the ground rent investment had been "deliberately decreased". If an allegation of deliberate manipulation of figures by an expert to achieve a particular result were to be advanced, it ought to have been put to the expert. In fact, the exchange was:
Q. By adjusting both ends of this equation, very quickly the amount for the leasehold, which is the final figure, the result of the equation, changes, and in the same way that you complain that the DCF is unworkable, uncertain, I am going to put to you that so is your equation here, particularly this component of it.
A. I have to disagree with you, because I feel that at least with this approach I am trying my hardest to find an evidence based approach, and I have looked back at all the other valuations undertaken by the other experts. The challenging one I have the most is with the Savills' valuation which suggests that the yield is, using Ms. Cubitt's number ----
- Ms Swaffield interrupted and moved on to other questions. At the risk of stating the obvious, there is an enormous difference between saying that an approach is unworkable and uncertain and saying it is a deliberate attempt to manipulate the data to achieve a desired end. There was no basis whatsoever for that point to be made in closing, less still in rebuttal. Again, I entirely reject the submission; it was wholly misconceived. Mr Yeung was transparent in accepting that the comparables he had to work with were limited and the information he had on them was imperfect. That is, as he noted, unsurprising for transactions that happened 10 years ago.
- Finally, there was a suggestion by Ms Swaffield in closing that Mr Yeung had recognised that his approach was not the best one to use, and that it in fact needed at least to be combined with another approach, like a DCF. What Mr Yeung said was:
I think that the piece that I would say stepping back as an independent valuer for this is that this is a difficult valuation to make. Every methodology has its flaws. The best way to approach this would be to actually consider all of the approaches that have been posited and actually say if I make sensible assumptions on this approach, what result does that give on this, what result does that give on this? Actually, all of the approaches should give you a similar-looking answer. That I feel is the best approach, which is what I tried to. Obviously, it is quite difficult to do that because each of the approaches has a different problem with it.
- Far from being a basis to doubt Mr Yeung's evidence, that seemed to me to sum up his strength as an expert: the valuation exercise was not an argument he had sought to win but, rather, a problem he had tried to solve. He was right to recognise that the problem was a difficult one, right to consider different approaches and right to recognise that none were perfect.
- As will be apparent from what I have said, I had very considerable confidence in Mr Yeung's evidence. Happily, in this part of the case, the system worked largely as one would hope and the experts were able to reach agreement on a substantial number of the issues. Where they differed, both in terms of methodology and, were it to have been relevant, the inputs to a DCF, I uniformly preferred the evidence of Mr Yeung.
- Mr Griffiths was the Claimant's lending expert. Mr Griffiths has extensive institutional experience but only second-hand experience of working with lenders such as the Claimant. He has not worked actively for a lender for a number of years but given that the events in question occurred over a decade ago that is irrelevant. He was a measured and thoughtful witness. It seemed to me he was towards the more risk tolerant end of the spectrum, albeit generally still some way inside the band of what would be reasonable.
- Mr Penman was the Defendant's lending expert. His background is somewhat similar to Mr Griffiths', and while his experience in the industry is more recent that is, as I say, not an issue given the timing of the events in question. Again like Mr Griffiths he was measured and thoughtful but it seemed to me that he was at the more conservative, risk averse end of what might be considered reasonable lending.
Factual position
Background to the transaction
- In late 2013 Visage (at the time called Blackcube (Causewayend) Ltd, but it was the same legal entity) was considering a PBSA development in Aberdeen and had identified the Property as a possible option. On 15 November 2013 Mr Taylor emailed Mr Moir requesting a desktop valuation and a quotation for a full Red Book valuation. Conditional Planning Permission had been granted in respect of the Property for 147 studio flats and Mr Moir was asked to value on that basis. Mr Taylor described the potential lease terms in the following way:
Our intention is to structure a deal with a premium payable to Wellfair for a 125 year lease of around £1.5m and a ground rent payable commencing 1 year from purchase that at a cap rate of 5% will equate to the uplift to the residualised market value of the land.
- On 19 November 2013 Mr Moir provided a valuation of £12.73 million, which he explained to Mr Taylor was "drafted so as to assist you in your negotiations with the landowner", which I take to mean the valuation was a conservative one.
- Visage entered into negotiations with the heritable owner of the Property, Offshore Heights Ltd (Offshore); the heritable interest in Scots law is the equivalent of the freehold in English law. On 19 June 2014 Offshore and Visage entered into, effectively, an option agreement in favour of Visage for the grant of a lease.
- On 26 September 2014 Mr Taylor again contacted Mr Moir regarding a valuation. He wanted "a short form desktop report that values the Leasehold interest, the freehold interest above the lease under the existing structure and then the freehold asset if the lease is married back together, with a residual value for the land". He described the lease as "a 170 year lease … with a premium of £1.5m payable on grant of the lease, and then effectively continued rent to be reviewed to 10% of turnover." That very much simplified the ground rent review mechanism that is at the heart of this case, but the full draft lease was also attached.
- Mr Moir provided Mr Taylor with the valuation on 13 October 2014 (the Blackcube Valuation). Based on a 175 room scheme it valued the heritable interest at £19,920,000; the Leasehold at £16,570,000; and the land value at £4,500,000. The Blackcube Valuation made the following observations regarding saleability:
The estimated Market Values stated above, make the assumption that, prior to the valuation date, the property is exposed to the market in the most appropriate manner and over a sufficient length of time so as to effect its disposal at the best price reasonably obtainable.
We are of the opinion that a sale of the subject premises would take in the order of six months from commencement of marketing to exchange of contracts.
We would expect potential purchasers to mainly include private investors and a broad range of property funds. We would expect the scheme to attract a good level of competing interest.
- The Blackcube Valuation was expressed to be provided on a non-reliance basis and for internal use only.
- Mr Taylor started to seek funding for the Development. He was introduced to Mr Tellwright by Jonathan Sutton, a chartered surveyor, of Lewis Sutton Property Consultants. Mr Tellwright and Mr Taylor met at a hotel in Edinburgh on 9 December 2014. The recollection of both men is that no documents relating to Aberdeen were discussed at that time.
- It is obvious that at this meeting Mr Taylor made a very favourable impression on Mr Tellwright. In his witness statement, Mr Tellwright stressed repeatedly how he was impressed by Mr Taylor personally and also with the project planning. He confirmed the point in the course of cross-examination.
- Just how favourable was borne out by the lending experts. Mr Griffiths repeatedly emphasised in cross-examination that the relationship between the Claimant and Visage, which on an individual level was represented by the relationship between Mr Tellwright and Mr Taylor, was more akin to an equity joint venture, the highest risk highest return form of investment, than any true form of lending. Mr Penman considered that there was inadequate due diligence by the Claimant into Visage, a company with which it had never previously worked and about which it knew nothing. Mr Griffiths suggested that this was mitigated by the fact that Mr Taylor had worked for and subsequently attracted investment in another project from Galliard, a recognised name in the field. I accept that this may have provided reassurance, but I equally accept that considering such a high risk high reward strategy with a partner whom he barely knew highlights how impressed Mr Tellwright had been by Mr Taylor.
- Mr Tellwright was, on his own evidence, keen at this stage to invest in PBSA. The evidence of Mr Griffiths and Mr Yeung was that the market was very vibrant at the time, presenting good returns and a perceived low risk. Aberdeen was considered a "prime regional" city. As Mr Yeung explained, while other cities such as Glasgow would be considered better prospects, due to their higher student numbers, Aberdeen was still considered to be a "good market" and one that was "considered very, very positively".
- Two days later, on 11 December 2014, Mr Taylor emailed Mr Tellwright attaching various documents, including the Blackcube Valuation. He explained that various alternative schemes were still under consideration, including an acquisition of the heritable interest. At the time it was estimated by Mr Taylor that the Development would be complete for occupation on or before 1 September 2015; the overall project budget was £7.5 million.
- Mr Tellwright raised a number of questions about the Project apparently via Mr Sutton, to which Mr Taylor responded by way of an email to Mr Sutton that was forwarded to Mr Tellwright. It was not clear why this indirect route was used, given that Mr Taylor had emailed Mr Tellwright directly on 11 December. In any event, Mr Taylor offered some further explanation on a number of points, including the Blackcube Valuation.
- At this point in their respective witness statements, Mr Tellwright and Mr Taylor both addressed Mr Tellwright's efforts to secure bank funding, which seems to have been happening in the second week of January 2015. These are two of the paragraphs that are in almost identical terms in those statements, and which miscalculate, in an identical fashion, the rate apparently being suggested by RBS. I was forced to conclude that both witnesses were reconstructing, erroneously, from the contemporaneous document and some common source document on this point and had nothing useful to add to the email itself.
- The proposed structure was described in these terms:
i) The SPV loan would be charged at a rate of 30% per annum.
ii) If the money were to be returned in full within 6 months, the percentage would be reduced to 20% per annum.
iii) If the money was returned in full within 9 months, the percentage would be reduced to 25% per annum.
iv) Over and above the preference rate on the SPV loan, the profit would be split 50:50.
- There appears to be no contemporaneous evidence of this. Ms Swaffield suggested there may a privileged document that referenced it. How a communication between one potential joint venture partner and another might attract privilege was not clear to me, but the basic structure of loan plus profit share was ultimately recorded in the agreements and is not, so far as I am aware, controversial.
Instruction of the Defendant by the Claimant
- Mr Taylor, on behalf of the Claimant, wrote to Mr Moir on 3 February 2015 requesting a valuation in accordance with the RICS Red Book. This is a significant email exchange on two levels.
- First, it marks the start of a pattern of behaviour where Mr Taylor dealt with the Defendant on the Claimant's behalf. That is an unusual structure. The Claimant was to provide funds, Mr Taylor's vehicle was to receive them. While both parties would want the Leasehold to have sufficient value to support the investment, the Claimant's funds were at risk in a way that Visage's funds were not. Indeed, the whole purpose of valuing the Leasehold was to ensure that the Claimant had adequate security if Visage breached its obligations to the Claimant.
- The purpose of the Valuation was therefore to protect the Claimant, not Visage. Of course Visage might be reassured by its contents, but as the Valuation itself made clear, only the Claimant could rely on it. In the circumstances, one would expect the Claimant to take an active role in obtaining and scrutinising the Valuation; in fact, it was largely passive, leaving things to Mr Taylor.
- Secondly, the terms of this email, which were incorporated by reference into the engagement letter, are significant. Mr Taylor informed Mr Moir: "I have included Mark Tellwright who is lending equity to the development SPV…". He then set out what was required:
Mark has had a copy of your desktop valuation done for the SPV already and would be similarly requiring valuation on assumptions of 173 studio units to include
1. Feuhold completed
2. Leasehold completed value as per the draft Lease supplied previously and
3. Land value
Ive [sic] attached for you a market commentary from one of your competitors for your interest also and would like you to bring [sic] attention to the current market transactions in Scotland, at the Ballet school in Glasgow in particular, as reference to market conditions.
- There was no express request for advice as to suitability for secured lending but there was a reference to Mr Tellwright's investment vehicle (which was ultimately the Claimant) "lending equity" and it is obvious from Mr Moir's email to which Mr Taylor was responding that Mr Moir understood that the valuation needed to be "a full Red Book valuation for secured lending". There was similarly no express request for advice on saleability, albeit such advice had been given in the Blackcube Valuation and the request was for something similar.
- The Defendant accepts that for the requested valuation to be Red Book compliant the Defendant needed to carry out an inspection of the Property. The Defendant further accepts that no such inspection of the Property was carried out. As I have noted Mr Tawse, who was based in Aberdeen at the time, visited the Property and took photos, which were included in the Valuation. Mr Tawse was not employed by the Defendant and has, so far as I am aware, no experience in chartered surveying or property valuation other than a brief work experience placement with the Defendant when he was a student.
- Mr Clarkson, at the time a partner of the Defendant based in Glasgow, and Mr Moir knew that a Red Book valuation was required, that this involved an inspection of the Property and that no agreement had been reached with the Claimant dispensing with the need to inspect. Ms Tawse knew that no such inspection had been undertaken and that the photos had been taken by her brother. It was readily apparent from the email to Mr Clarkson from Ms Tawse attaching the photographs of the property that they had been taken by Mr Tawse, from which it should have been obvious that the inspection had not been carried out by Ms Tawse. Mr Clarkson sent the photos on to Mr Moir in any event.
- I accept Ms Tawse's evidence that she would not have used photographs taken by her brother for the purposes of a Red Book valuation. Her evidence on this was clear and I believed it. I also believed Mr Moir's evidence that he understood that an inspection of the Property had been carried out. He had requested that, pushed for it and had no reason to believe that it had not happened. That leaves Mr Clarkson. He, very sadly, has terminal cancer; quite understandably the Defendant was reluctant to call him as a witness. That reluctance was only increased by the fact that nothing turns on the inspection – the Defendant admits it did not happen and that was a breach on its part; the Claimant and its expert recognise that an inspection would have made no difference to the valuation exercise and so no loss flows from that breach. I do not criticise anyone for the decision not to call Mr Clarkson; on the contrary, in the circumstances I have outlined it seems to me entirely right.
- The consequence is that I believe the evidence of the two people who were before me, but in circumstances where I have not heard from the third person involved. There are, of course, cases where the court will make adverse findings of fact, including findings of dishonesty, in respect of parties not before the court. I accept Mr Benson's submission that this is not one of them. Mr Clarkson is neither a party nor a witness, and the reason for that is wholly understandable. The fact that I have not heard from him is not his choice. Critically, I do not need to make any finding in this respect because, as I have noted, it is accepted that the failure to inspect the Property made no difference to the Valuation: it was always going to be demolished in any event, its condition was irrelevant.
- At the same time I am conscious that this is something about which Mr Tellwright feels strongly, as was apparent from his evidence before me. I feel it is right to record that the Defendant failed entirely in its obligations in this regard to the Claimant and to Mr Tellwright and has offered no satisfactory explanation for that. It is wholly understandable that Mr Tellwright feels aggrieved over the way he and the Claimant were treated, regardless of whether recoverable damages flow from the breach. I have already expressed my concerns over how this might have affected his recollection and so his evidence; that should not be taken to condone what happened in any way.
The formal engagement
- On 16 February 2015, Mr Moir on behalf of the Defendant sent to Mr Tellwright a signed engagement letter; Mr Tellwright countersigned on behalf of the Claimant on 17 February. That letter (the Engagement Letter) is the basis of the breach of contract claims in this case.
- The Engagement Letter referred to the 3 February 2015 email as being the Claimant's instructions. The Defendant confirmed that the valuation would be carried out by RICS registered valuers in accordance with the RICS Standards and would represent "our honest and objective opinion of the value of the property". It further confirmed that it had "current local and national knowledge of the particular market and the skills and understanding to competently prepare the valuation".
- The Defendant disclosed its earlier preparation of the Blackcube Valuation. The purpose of the Valuation was stated to be for secured lending. It referred to the definition of market value in the RICS Red Book that I have quoted above.
- The Defendant confirmed that it had been provided with a copy of the draft lease with Offshore and that: "We shall carry out an inspection of the subject premises and the immediate locality in order to ascertain their configuration, specification, condition and setting." In terms of reliance, it stated: "The valuation shall be provided for the stated purpose only and is solely for your and your professional advisers' use."
- The Engagement Letter itself contained a limit of liability in a section headed "Professional Indemnity Insurance" (the Limitation Clause):
We confirm that we have professional indemnity insurance in place and that our maximum liability for all advice and services provided in connection with this project both before and after the date of this 'Engagement Letter' shall not in aggregate exceed £5,000,000 (five million pounds). This limitation shall apply to you (together with any Associated Person as identified herein for whom you are acting as agent in relation to the Contract) on any basis for any losses, damages, costs or expenses arising from or in connection with our services in relation to this instruction.
- Mr Tellwright confirmed that he was aware of this provision at the time he countersigned the Engagement Letter.
- The Engagement Letter expressly incorporated the Defendant's general terms of engagement, which were in appendix two to the Engagement Letter itself. These provided, so far as is relevant:
"Services" are …the services the [the Defendant] will provide [the Claimant] under the Contract.
…
[The Defendant] shall provide the Services with reasonable skill, care and diligence and acknowledges that (save as otherwise provided in these Terms of Engagement) [the Defendant] will be liable to you for losses, damages, costs or expenses ("losses") directly caused by its negligence or wilful default.
[The Defendant] shall have no liability for: (i) losses where there is no breach of the Contract or of a legal duty owed to the Client by us; (ii) losses that are not a reasonably foreseeable result of any such breach by us; (iii) any increased losses resulting from breach of the Contract by the Client; (iv) any business losses and/or losses to non-consumers.
- I shall refer to the final paragraph as the Exclusion Clause.
- On 17 February 2015 Mr Tellwright's assistant, Ms Fussell, wrote to Mr Moir noting that "our lawyer has picked up one point on your letter before [Mr Tellwright] signs it". As I have noted, privilege has been asserted over Pinsents' files, but Mr Tellwright confirmed in his witness statement that this was a reference to them.
- The "one point" was the description of what was being valued. Mr Moir accepted the point and sought to clarify the Engagement Letter. That changed seemed sufficient; as I have noted, Mr Tellwright countersigned it on 17 February.
The Valuation
- The Valuation is at the centre of all aspects of the Claimant's case.
- The Valuation was being prepared at the same time that the Engagement Letter was being negotiated. I have already addressed at some length the issue of the inspection. One further aspect of the preparation is relevant, however.
- Mr Moir is based in London. His evidence, which I accept, was that he had experience of valuing PBSA in Scotland but did not do so very often – he estimated between five and 10 properties. He sought input from Mr Forbes, an associate based in the Defendant's Glasgow office. Mr Forbes sent a marked up version of what appears to be the Blackcube Valuation to Mr Moir. Mr Moir accepted some but not all of the changes. One of the changes he rejected was the correction of "feuhold" to "heritable", which the Defendant and Mr Moir now recognise should have been accepted. Mr Moir had no explanation for why he did not do so.
- The Valuation opened by, once again, recognising why it had been commissioned: "We understand that the purpose of this valuation report is to assist you in forming a decision as to whether the feuhold and/or long leasehold interest in the above property provides suitable security for lending purposes." It then repeated the £5,000,000 limitation of liability from the Engagement Letter.
- The Valuation then confirmed that it had been prepared "in accordance with the Valuation Practice Statements and Practice Guidance contained in the Valuation – Professional Standards, incorporating the International Valuation Standards … of the Royal Institute of Chartered Surveyors". This meant it was a Red Book valuation that could be relied on by the Claimant. However, the Valuation further specified: "This valuation and report is only applicable to and should only be relied upon for the original loan which has triggered this report."
- The Valuation stated: "A full inspection of the subject property was undertaken by Mahri Tawse on 13 February 2015." I have dealt at some length with this point: that statement was untrue and there is no satisfactory explanation for how it came to be made, but no loss is said to flow from it.
- There followed a section headed "Valuation for Loan Security Purposes", in which the Defendant stated: "Assuming that the loan-to-value ratio, interest cover ratio and loan term length are within market-typical parameters, we are of the opinion that the subject premises provide acceptable security for lending purposes." That section described the lease as a "170 year ground lease with rent at c.10% of gross turnover" and valued the Leasehold at £16,580,000 on the assumption that a premium of £1,500,000 had been paid.
- There followed a description of the Development and its location, which is irrelevant for the purposes of the current dispute. There were comments on the condition of the Property, which repeated the untrue assertion that it had been inspected. That was followed by sections on environmental issues, planning, the proposed development and tenure. Again, no dispute arises in respect of these parts of the Valuation.
- Section 9 of the Valuation described the lease. Relevant for current purposes is the description of the rent reviews: "Annual reviews to the greater of the passing rent increased by RPI subject to a minimum increase of 3% or 10% of the annual gross turnover. Every five years there is also a review to open market rental value, if higher." The Claimant accepts that this is an accurate summary of the relevant provision; the complaint is that it is a very bland summary with no attempt to warn of the way in which the provision favours the landlord, Offshore. I will deal with that complaint in detail when I address the issues.
- The market commentary in section 10 highlighted the shortage of student accommodation in Aberdeen and the fact that students were being housed in local hotels. It also set out recent grants of planning permission for student accommodation developments and applications that were pending. Importantly, it set out details of the comparable developments that the Defendant had considered in conducting its valuation. The majority of these were held on heritable rather than freehold tenures, although that is not highlighted in the Valuation and again the absence of such commentary is part of the Claimant's claim.
- Market rents at other developments were addressed in section 11 of the Valuation, which concluded:
Our estimate of the gross income potential once fully developed is as set out in the table below. We believe 51 week lets will be achievable. In determining our opinion of value we also add £10,000 of ancillary income from vending and laundry etc.
- The table gave a gross income figure of £1,652,101.
- Sections 12-14 of the Valuation are a central part of the Claimant's criticisms in this dispute. Section 12 gives the market value of the heritable as £20,800,000; of the Leasehold as £16,580,000; and of the land as £4,500,000. The heritable and land values are not in dispute. By contrast, the valuation of the Leasehold is alleged to be negligent.
- The basis for the valuation was said to be:
The principal reduction in value of the leasehold arises due to the requirement to pay, out of net income, the annual rent which we have adopted in our calculations to be 10% of the gross income (c £166,200 per annum). Otherwise we have moved out the initial yield by 40 basis points to take account of the constraints of a lease, albeit the premises are assumed to be purpose designed for the optimum use which minimises the differential.
- Mr Moir accepted in his witness statement that he could not now recall why he chose a 40 basis point adjustment but that it indicated he was not unduly concerned with the ground rent structure. He referenced the fact that the ground rent was a small proportion of the overall costs, so that as long as income also rose the increase in ground rent was not problematic.
- It was repeatedly put to Mr Moir during cross examination that this figure was inadequate to reflect the risks. He rejected the criticism, maintaining the position that it was an appropriate adjustment, but accepted it was opinion-led:
Q. The 40 basis points is just a figure between, a figure out of the air, a figure that your opinion has produced?
A. Certainly not a "figure out of the air" but that is my opinion of the appropriate adjustment.
- Section 13 addressed saleability. Again it is heavily criticised and merits quoting in full:
The Market Value stated above, makes the assumption that, prior to the valuation date, the property is exposed to the market in the most appropriate manner and over a sufficient length of time so as to effect its disposal at the best price reasonably obtainable.
We are of the opinion that a sale of the subject premises would take in the order of six months from commencement of marketing to exchange of contracts.
We would expect potential purchasers to mainly include private investors and a broad range of property funds. We would expect the scheme to attract a good level of competing interest.
- Section 14 gave the Defendant's view that the Leasehold provided acceptable security for lending purposes. It then set out a SWOT analysis. Relevant for current purposes this gave as a strength "There will be high demand for the studios due to the current shortage of student accommodation in Aberdeen." A corresponding threat was "Competition from other student accommodation schemes". A weakness was given as "The Aberdeen property market is currently experiencing uncertainty due to the depressed oil price".
- The Valuation concluded: "We would be happy to discuss any of the issues or recommendations raised in this report." The photographs taken by Mr Tawse were one of the exhibits.
- The Defendant charged £2,850 plus VAT for the Valuation; its invoice expressly referenced an inspection of the Property. Ms Swaffield also drew my attention to the invoice for the Valuation, which referred to "Reporting to you with our advice". This was dated 26 February 2015, the day after the execution of the transaction documents. As such, she accepted it could not go to Mr Tellwright's understanding when he entered into the transaction – the fact that he might later have come to believe he received advice would be irrelevant. It does go, of course, to Mr Moir's understanding of what he was being asked for at the time he provided the Valuation. It seems to me of limited weight, however; that understanding is more clearly and comprehensively evidenced in the 3 February email requesting the Valuation, the Engagement Letter and the Valuation itself.
Mr Tellwright's response to the Valuation
- A critical issue in this case is the extent to which the Claimant, in the form of Mr Tellwright, relied on the Valuation. As I will come to address, the parties are agreed on the legal principles around causation. The question is therefore principally one of fact.
- In assessing reliance one needs to step back a little in the chronology. In his witness statement Mr Taylor explained:
[Mr Tellwright] told me in our [9 December 2014] meeting that it was important to him (and a condition to him agreeing to provide funding) that an independent Red Book valuation was undertaken for his purposes so that he could have the full benefit of expert advice. This was particularly the case because [Mr Tellwright] told me that PBSA was not a sector of which he had any prior experience.
- When pressed on this during cross-examination, his evidence changed:
A. It was requested for in January or so, I cannot remember who was it, Woodstock Property Law were acting for us. In those interactions between Pinsents and Woodstock it became a requirement to get a Red Book valuation.
Q. You think Pinsents wrote to Woodstock and said, "We require this as part of the suite of documents"?
A. I cannot recall that. I know it was asked for, a Red Book valuation was asked for.
Q. By Pinsent?
A. By Skykomish.
Q. Companies act through human beings. Do you remember which human being asked for it?
A. No, I don't, I don't. It was effectively a tick the box on a Conditions Precedent basically at that point for me. We had a lot of documents in discussion.
- In Mr Taylor's recollection the discussion therefore shifted from December to January, it was no longer a demand from Mr Tellwright to Mr Taylor but had become an issue addressed by the lawyers, it no longer seemed linked to Mr Tellwright's professed inexperience in PBSA, and far from this being something core to Mr Tellwright's lending decision, at least as far as Mr Taylor was concerned it was a "tick the box" exercise.
- Of course, as I have noted, the question I must determine relates to Mr Tellwright, not Mr Taylor. In his evidence, and indeed before me, he suggested it was central. But his evidence on this point was no more convincing than that of Mr Taylor. I say that for a number of reasons.
- First, all of the negotiations with the Defendant were via Mr Taylor. If the Valuation were central to Mr Tellwright's decision-making process I can see no reason why he would go via a third party. One would expect him to have his own questions and concerns that he wanted answered, particularly in circumstances where this was a new sector for him but one with which Mr Taylor had some familiarity and where Mr Taylor was much more familiar with the project. But far from showing sufficient concern to go direct, he went via his contractual counterparty, the last person one would expect him to use if he wanted independent advice on the merits of the deal. And he used a valuer who had (as the Defendant quite openly and rightly declared) previously provided a valuation to that counterparty. If he was seeking independent advice to assess the merits of Mr Taylor's proposal none of that makes sense. If it was a "tick the box" exercise on a deal he had already decided was attractive it does.
- Secondly, on its face the Venture Profit Share Agreement dated 25 February 2015 between the Claimant and Visage (the VPSA) under which the money was lent does not make the Valuation a condition precedent of lending; the only relevant condition precedent relates specifically to the Blackcube Valuation.
- In closing, Ms Swaffield submitted that, applying rules of contractual interpretation, one could construct an interpretation in which the apparent reference to the Blackcube Valuation can be read as a reference to the Valuation instead. That was consistent with the definition of Valuer, which meant "[the Defendant] or any other surveyor or valuer appointed by [the Claimant]". It also, she submitted, made more commercial sense.
- In my view that is wrong. Applying the rules of contractual interpretation, the starting point is the plain and ordinary meaning of the language used by the parties, and the language here was unquestionably referring to the Blackcube Valuation. This was a professionally drafted document, prepared by lawyers and so the language is particularly important. It is certainly the case that the second limb of the definition of "Valuer" is difficult to reconcile with the definition of Valuation: since the Valuation had already happened, the Valuer who prepared it could not be changed. However, Valuer is used elsewhere in the VPSA, notably Part 2 of Schedule 1, which sets out the following conditions precedent:
2.1 A copy of the Valuation.
2.2 Confirmation that [the Claimant's] valuer has carried out a satisfactory inspection of the Property.
- This seems to me relevant in two respects. First, if 2.1 were a reference to a Red Book valuation one would not need 2.1, because a Red Book valuation would, itself, involve an inspection. If it is referring to a non-Red Book valuation, like the Blackcube Valuation, it makes much more sense. Secondly, while valuer is not used in 2.2 as a defined term ("valuer" rather than "Valuer") it seems to me to do less damage to the VPSA if that is read as the defined term. At that point the definitions do work. For the purposes of the definition of Valuation the Valuer had to be the Defendant, reflecting the historical fact; going forward, notably for the inspection contemplated in Schedule 1, Part 2, paragraph 2.2, the Claimant was entitled to nominate another valuer.
- I have dealt with this issue briefly because in some ways the proper interpretation of the VPSA is beside the point. Privilege has been asserted over Pinsents' files and so I have not seen the communication with them, but they are a large firm with particular experience in this field; Mr Tellwright considered them to be "fairly heavyweight" and I agree that he was right to do so. I can only assume that they did what they were told, such that the reference to the earlier Blackcube Valuation reflected their instructions from Mr Tellwright at the time. If a Red Book valuation had been so central to Mr Tellwright, he would not have done that.
- I was also struck by the way that this was dealt with by Mr Tellwright in his cross-examination:
Q. … "Valuation". Do you see that?
A. Yes.
Q. "All information supplied by it or its behalf to the Valuer for the purposes of the Valuation was true and accurate. ..."11.15.2 As far as it is aware, it has not omitted to supply any information to the Valuer which, if disclosed, would adversely affect the Valuation." Nothing has occurred to affect the valuation. Do you see that?
A. Yes.
Q. That is the condition precedent you have in mind?
A. No, because I think that definition, the valuation, probably referred to Blackcube. How is valuation defined?
Q. It is defined like that, Mr. Tellwright. It is a very impressive knowledge of the documents there, that is 1295.
A. Yes.
Q. The valuation of the property by the valuer dated 13 October 2014?
A. Yes.
Q. That is a very impressive memory. This very document was drafted, a very technical document drafted by solicitors ten years ago. How do you remember that the valuer and the valuation is the Blackcube valuation?
A. Because I actually looked -- I was flipping through as you were talking about I happened to alight on "Valuation" as I was flipping through.
Q. If there had been electronic documents that would not have been possible, but there we are. There is nothing in this document, as far as I can tell, which refers to an up-to-date Skykomish valuation. Are you aware of any such clause?
A. No.
- There followed some back and forth on Pinsents' role but one can skip to the dénouement:
Q. So they knew, Pinsent Mason knew that Gerald Eve were being retained to produce a further report?
A. Yes.
Q. And nonetheless the drafting of Skykomish for your company only refers to the Blackcube one. Is that where we have got to with the facts?
A. That is what it would seem in this document.
Q. That is because I suggest the reality is that you were not relying on the Skykomish valuation report at all, it was the Blackcube report which was what was important and decisive?
A. No, no. I needed a Red Book valuation made out to Skykomish and I appreciate that that conflicts with this document here setting out the conditions of lending, so 11.15.
- Two things were notable about this exchange. Mr Tellwright did not suggest, at least until he appreciated the significance of the point, that the reference to the Blackcube Valuation was wrong. It seemed to me that it reflected his understanding of the VPSA. As a matter of contractual interpretation a party's subjective understanding is irrelevant, but that is not the point here. If the reference to the Blackcube Valuation did not reflect his instructions, one might expect Mr Tellwright to react with some surprise or concern; in fact, his initial reaction was simply to correct Mr Benson as to the correct definition of "Valuation".
- Related to that, Mr Tellwright did not suggest, even having understood the significance of the definition, that the VPSA meant anything other than what it said: the condition precedent was the Blackcube Valuation; there was no requirement for a further Red Book valuation.
- Even were one to accept that the defined term, contrary to what the VPSA says, meant the Valuation there would still be issues for the Claimant's case. Under clause 4.1 of the VPSA the Claimant was not obliged to make funds available until the conditions precedent in Schedule 1, Part 1 were met; once they were satisfied, Visage could access £325,000. As I have just noted, however, the condition precedent requiring a valuation was not in Part 1 but in Part 2. Accordingly, under the VPSA the Claimant was obliged to proceed, up to a point, without any valuation. That is inconsistent with Mr Tellwright's evidence that he would simply have walked away without a Red Book valuation.
- Ms Swaffield sought to reconcile this apparent contradiction by noting that regardless of the operation of the VPSA, Mr Tellwright could have refused to execute it until he received the Valuation, which is consistent with the chronology – the VPSA was only executed after the receipt by the Claimant of the Valuation. As a matter of logic that is undoubtedly correct. The difficulty is that it does not reflect Mr Tellwright's evidence, which was that this was a formal condition precedent to the deal. It also begs the question of why he would instruct Pinsents to draft the VPSA on one basis – that the Claimant was committed up to a point even without a valuation (however defined) – if he only ever intended to proceed on a quite different basis.
- Mr Tellwright's evidence on reliance was further compromised, in my view, by his claim that he relied on the Valuation both in February 2015, when it was provided, and in February 2016 when primary lending was secured and the deal was restructured to accommodate it. That is wholly implausible. Ms Cubitt said that experienced lenders would not rely on reports older than three months. Mr Summers, Mr Yeung and Mr Penman all gave evidence that the outer limit of a valuation was six months.
- Mr Griffiths agreed with that, although then suggested that it might in some cases be nine or even 12 months. That was one of the few aspects of his evidence that I found to be unsatisfactory and I reject it. The point came up on re-examination:
Q. And over what stretch of time would it have been reasonable or a lender, a prudent lender in those circumstances to have relied upon that report?
A. Well the gap of time here was nine months and I think that is reasonable. I think anything beyond a year, a whole load more planning applications could come into play.
- This was more an issue for the valuation experts, since Mr Griffiths could only speak to his own experience of receiving such reports. Mr Griffiths did not expand on why he had moved from nine months to a year. In any event, the gap between the Report and the restructuring of the loan in fact was a little over a year and so beyond even Mr Griffiths' longstop. Finally, given that the evidence of the valuation experts and Mr Summers was that Aberdeen was an unusual market because of its sensitivity to oil price, it seemed to me that planning applications could not sensibly be the only relevant factor.
- In any event, as I have noted, the Valuation itself states: "This valuation and report is only applicable to and should only be relied upon for the original loan which has triggered this report." I will go on to address the changes that happened in 2016, but critically for current purposes the borrower changed from Visage to Visage (Aberdeen) and the sum at risk increased significantly. A different borrower and an increase in the amount at risk by over a third is, in my view, not the same loan.
- Certainly I do not accept that Mr Tellwright simply assumed that it was the same, both because his experience of previous transactions would have made him aware of the general practice in the market that limited the shelf-life of valuations and because of the language in the Report itself. If the Valuation was as central at the time as Mr Tellwright now believes, and I emphasise again honestly believes, he would not have been content to rely on figures a year out of date. He is too good at what he does for that. The fact that he has persuaded himself that he did so rely in 2016 casts doubt on his evidence regarding the extent to which he relied on the Valuation in 2015.
- It also seems to me significant that Mr Tellwright did not see the similarities between the Blackcube Valuation and the Valuation. He said in his witness statement: "I was aware of the previous valuation for Blackcube but did not realise at the time that the Skykomish Report was a copy of the desktop report carried out by Richard Moir previously for Blackcube." He was more than "aware" of the Blackcube Valuation, however:
i) It was the only valuation he had from December until mid-late February. Unquestionably, it had informed his decision to go so far as he did with this transaction. I understand Mr Tellwright's point that he could and would have walked away if he did not get his own valuation or if that valuation in some way fell short. That is a different issue, however; the fact is, what had interested him in the Project was the Blackcube Valuation. I have no doubt that Mr Tellwright, who is as I say intelligent and commercially astute, would have thoroughly read and digested that report before proceeding as far as he did.
ii) The Blackcube Valuation was referred to in the VPSA. I have addressed above Ms Swaffield's submissions on construction, but again for these purposes it does not matter if one accepts them or not. The VPSA refers to a valuation dated 13 October 2014; blatantly, Pinsents did not pluck that date from thin air. Either Mr Tellwright or one of his team had told them about it; quite possibly he had sent it to them. I cannot believe he would do that without having read it himself.
- For these reasons it is probable that Mr Tellwright had read and digested the Blackcube Valuation. The similarities between the Blackcube Valuation and the Valuation are extensive and striking. The only way Mr Tellwright would not have noticed such obvious similarities is if he had read one of the documents quickly and in limited detail. I believe that is precisely what happened, but the document he skimmed was the Valuation. Indeed, he accepted this up to a point in his witness statement, recognising that he focussed on the market commentary, market rent, market value, saleability and security sections of the Valuation. He did not, apparently, focus on the tenure section in which the Leasehold was described.
- A somewhat different aspect is what Mr Tellwright would have done if appropriate warnings had been given. That begs the question of what, if any, warnings were appropriate. Since that is not part of the factual narrative but, rather, the counterfactual narrative it is addressed when I come to deal with the warnings issue.
- In my view, Mr Tellwright was induced to do this deal by three things:
i) As I have noted, he was impressed by Mr Taylor. A narrative where he relied on Mr Taylor is much easier to reconcile with Mr Taylor instructing the valuers, structuring the deal and picking the broader team to implement it.
ii) Mr Griffiths and Mr Yeung both explained that the PBSA market was buoyant at this time and, as Mr Griffiths explained, perceived to be lower risk than some sectors of the property market. Mr Tellwright accepted that it was a sector in which he wanted to invest.
iii) Both Mr Penman and Mr Griffiths agreed that the Claimant was an expensive source of funding for Visage. Mr Griffiths stressed that he thought the rate was fair given the risk profile that the Claimant was accepting, but even so it was a very good return on investment and Mr Tellwright would have recognised that.
- In saying that, I accept that Mr Tellwright wanted a Red Book valuation and would not have proceeded without one. I further accept that if the value had changed between the Blackcube Valuation and the Valuation he would have had concerns and may well have pulled out. At the end of his cross examination, Mr Benson posed to Mr Tellwright a number of values and asked if those left enough profit for him to go ahead. It was a vivid demonstration of Mr Tellwright's numerical and commercial fluency. The conclusion was that he would have pulled out if the Valuation had put a value of £13 million on the Leasehold; I fully accept that he would.
- Likewise, if the report on saleability or suitability for secured lending had said that there would be no or no realistic market for the Leasehold he would at the very least have had concerns. However, for reasons I go on to address, while some warning or qualification should have been given to those parts of the Valuation they would not have been in anywhere near such stark terms. The type of warning that was required would not have put Mr Tellwright off the deal.
- The real importance of the Valuation, however, was in attracting other lenders. As it was put to me in the Claimant's opening: "[Equity finance] comes along, mezzanine, primes the pump, gets other funders, typically institutional funders at the level of 10 million, involved." Mr Griffiths and Mr Penman agreed that a non-Red Book valuation would concern them as an institutional funder. Mr Tellwright must equally have understood that, given his extensive experience. It explains why an inspection of the Property, which in many ways was meaningless given that it would be demolished, and its locality mattered so much: without it the Valuation was not Red Book compliant. Having something to show to potential primary lenders was the structural box that needed to be ticked.
- For that reason I reject Mr Benson's suggestion that Mr Tellwright likely would not have read the Report at all, instead relying solely on the Blackcube Valuation. In my view that goes too far. It was not enough for Mr Tellwright to have any Red Book valuation; he needed one that would support his attempts to interest primary lenders. They would not be interested if the numbers in the Valuation had come up short or if there were serious potential issues with realising the security.
- Where I do accept Mr Benson's submission is that Mr Tellwright did not read the Valuation in great detail. He did not need to – he had familiarised himself with the commercial and civil engineering aspects of the Project already. Had he given the Report any kind of detailed analysis he could not have missed the striking similarities between it and the Blackcube Valuation. In my view he was heavily focussed on the Leasehold valuation figure and the fact that an inspection had been carried out as the Red Book required; he paid less attention to the balance of the Valuation.
The loan to Visage
- In the lead-up to the execution of the VPSA Pinsents were put in funds by the Claimant's parent, Hartwill. Mr Tellwright confirmed in the course of his cross-examination that the Claimant did not have a bank account of its own at this time.
- The Claimant's case is that there was an undocumented agreement between it and Hartwill under which the sums dues under the VPSA would be advanced direct to Pinsents by Hartwill, with Hartwill to be reimbursed in due course. There is no alternative submission advanced as to how those sums might be due to Hartwill, for example in unjust enrichment.
- The VPSA was executed on 25 February 2015, along with a suite of security documents. The total amount of the facility was £2,500,000. Mr Tellwright signed on behalf of the Claimant; Mr Taylor signed for Visage.
The 2016 restructuring
- Mr Tellwright's evidence, which I accept, is that it was always intended that a primary lender would be brought in to fund the bulk of the construction cost. The Claimant's role was the "priming of the pump", to which I referred earlier.
- In May 2016 Mr Tellwright introduced Mr Taylor to one of his banking contacts, Paul Hughes, with a view to securing primary funding. Mr Taylor sent a number of documents to Mr Hughes, including the Blackcube Valuation but not the Valuation. I do not make anything of that; the Valuation was prepared for the Claimant, not Visage; it is unsurprising that Visage sent the report it had commissioned. Like Mr Tellwright, Mr Hughes was immediately impressed by Mr Taylor and the project.
- Mr Hughes introduced Mr Taylor to Mark Quigley at Titlestone Property Finance Ltd (Titlestone), a lender with whom Mr Tellwright had his own contact, Robert Orr. In the course of negotiations Titlestone raised a concern with the borrower being Visage because it was a Northern Irish company. For that reason, in October 2015 Visage (Aberdeen), an English company, was incorporated. Apparently at Mr Orr's request Mr Tellwright became one of its directors.
- On 19 October 2015 Titlestone appears to have sent a draft offer to Visage (Aberdeen). A condition precedent to that offer was:
A detailed valuation report on the Property addressed to us. Such valuation report should be no more than four months old on initial drawdown of the Facility. If initial drawdown of the Facility has not occurred within four months of the valuation report we shall require a written update of the original valuation, and any additional cost incurred therein shall be deemed a valid Expense payable by you. In addition:-
10.5.1 We shall require a minimum valuation of £16,230,000 after purchaser's costs on completion of the Building Works.
- I note that the insistence on a valuation no more than four months old is far more consistent with the evidence of Mr Yeung, Mr Summers, Ms Cubitt and Mr Penman than that of Mr Griffiths. It is also notable that Titlestone, unlike the Claimant, made it a condition precedent to any lending that it have a valuation.
- In June 2015 Mr Hughes had suggested the Defendant as a potential valuer, but Titlestone objected both because it had its own panel of valuers and because it raised concerns about potential conflicts for the Defendant. That concern as to conflicts is, as I have noted, not something that the Claimant had raised.
- On 21 October Mr Taylor approached Sarah Jones, at Knight Frank, for her "views" on the value of the long leasehold interest. Attached to his email was a copy of the Valuation.
- On 27 October Ms Jones provided Mr Taylor with what she described as a "spec appraisal":
We have adopted the costs provided by Acis as we consider these to be in line with the market. Our appraisal is based on a leasehold basis (long leasehold for 170 years) with a ground rent of £128,000 for the first year and increasing annually to the greater of RPI or 10% of gross turnover with a 3% minimum. We have assumed for the purpose of our appraisal that the increase will be based on 10% of gross turnover.
- Knight Frank valued the Leasehold at £16,420,000. Their subsequent Red Book valuation was slightly higher, at £16,810,000.
- Following further exchanges Titlestone issued its offer letter to Visage (Aberdeen) on 7 December 2015. It contained the same condition precedent set out above. It also required an initial security deposit from the Claimant in the sum of £1 million to cover cost over-runs and interest (the Deposit). Mr Tellwright explained that Titlestone had initially sought a personal guarantee from him but he had been unwilling to provide one. Half of the Deposit was repayable (and repaid) on practical completion being achieved by 31 July 2017. The balance has been consumed covering interest payments.
- Mr Taylor countersigned the offer for Visage (Aberdeen) on 10 December 2015; Mr Tellwright signed both for Visage (Aberdeen) and for the Claimant in its capacity as Deposit provider on 14 December 2015. Their report confirmed that the Leasehold was suitable for secured lending but expressed no view on its saleability. Mr Tellwright accepted that he was aware of the Knight Frank report at the time and said he drew comfort from it but was still relying on the Valuation in his own decision-making. For reasons I have already given, I reject that aspect of his evidence going to reliance.
- On 25 February 2016 the Claimant, Visage, Visage (Aberdeen) and Visage Investments LLP entered into what was described as a Deed of Amendment Restatement and Novation (the DARN). The recitals to the DARN stated:
The Parties are entering into this Deed to (a) acknowledge the transfer by novation of all of [Visage's] rights and obligations under the [VPSA] to [Visage (Aberdeen)], and (b) to amend and restate the [VPSA] to reflect certain changes agreed between them.
- It went on to provide:
2. NOVATION
2.1 Agreement by [Visage Aberdeen] and [Visage]
2.1.1 With effect from the Novation Date [23 February 2016], [Visage] transfers to [Visage (Aberdeen)] by novation all of the rights and obligations of [Visage] in respect of the [VPSA].
2.1.2 With effect from the Novation Date, [Visage (Aberdeen)] accepts the transfer by novation, and assumes all, of [Visage's] rights and obligations under the [VPSA] in accordance with clause 2.1.1. above.
2.1.3 [Visage (Aberdeen)] agrees with effect from the Effective Date to observe and perform the terms of the [VPSA] and to be bound by the terms of the [VPSA], in every way as if [Visage (Aberdeen)] had at all times been an original party in lieu of [Visage] including any obligations arising prior to the Effective Date except to the extent that such obligations have already been fully and properly discharged by [Visage].
2.1.4 [The Claimant] agrees with effect from the Effective Date to observe and perform the terms of the [VPSA] and to be bound by the terms of the [VPSA] in every way as if [Visage (Aberdeen)] had at all times been an original party in lieu of [Visage] including any obligations arising prior to the Effective Date except to the extent that such obligations have been fully and properly discharged by [the Claimant].
- That provision is reflected in the security arrangements. Although the disclosure in this respect paints a somewhat incomplete picture, Visage drops out of the picture and Visage (Aberdeen) steps in.
- At the time of the DARN, a little over £1.8m had already been drawn down under the VPSA.
- It is worth emphasising here what changed following the DARN:
i) Visage (Aberdeen) became the borrower "in lieu of" Visage "in every way as if [it] had at all times been an original party".
ii) The Claimant provided an additional £1.35m, of which £350,000 was by way of additional lending and £1m was the Deposit. However, since half the Deposit could be used to cover interest payments to Titlestone, an additional £850,000 was at risk if the security could not be realised as originally contemplated, increasing the Claimant's exposure to this project by over a third.
iii) The Claimant's position was subordinated to Titlestone. This is to my mind a minor matter in the context of this dispute, since subordination to a primary lender was always likely to happen.
iv) While not a consequence of the DARN itself, it was apparent when it was entered into that the construction date had slipped, such that income would start in 2017 rather than the 2016 originally contemplated.
- The lease between Visage (Aberdeen) and Offshore was executed the following day, locking in the ground rent provisions that are central to this dispute.
Post-refinancing events
- The Titlestone facility was principally to fund construction costs, and with that money in place the civil engineering aspects of the Development progressed. As they approached completion Visage (Aberdeen) started to look at the commercial realisation of the asset so as to repay the Claimant and Titlestone. To that end, Mr Summers and Ms Ilett at Bidwells were approached.
- Mr Summers wrote to Mr Taylor on 20 January 2017 with a proposed marketing strategy. He noted:
…
The LSH UK Vitality Index 2017 has recently reported the most notable exception to their league of successful cities is Aberdeen. With a third of its employment dependent on the oil and gas industry, the sharp contraction in oil prices since mid-2014 has clearly impacted the local economy. One of the sharpest declines in average wages and one of the largest increases in unemployment was recorded over the past year. As a result, Scotland's third largest city was the biggest faller of the 65 locations surveyed, falling 20 places to 36th. Some investors may be concerned on a micro level by Aberdeen's economy.
Given the economic issues, long lease and significant ground rent liability, this will impact on the attractiveness of the sale and it should be priced realistically. In order to attract sufficient interest, we have discussed a quoting yield in the 7% NIY+ range based on conservative rent projections.
…
The Aberdeen economic dynamics and ground rent will make it more difficult to engage with traditional student accommodation investors, especially funds who prefer to payer lower yields for lower risk. In addition to the usual buyers, we would therefore speak to other parties with higher yielding investment strategies such as property companies and high net worth individuals and family trusts.
…
To attract interest, we would recommend pricing is set at £14,500, which on the basis of 95% occupancy reflects a more attractive net initial yield of 7.12%.
…
In this context, we would hope to find a suitable purchaser within Q2 2017 and exchange contracts within early Q4 2017.
- The Bidwells letter went on: "We would anticipate the following range of funds, investors and owner occupiers to look at the opportunities (non exhaustive)". It listed 30 entities.
- A number of points arise from this. First, by this stage the ground rent mechanism was perceived to be an issue, but it was not the principal one; the first point raised by Bidwells was the change in the Aberdeen market caused by a prolonged decline in the oil price. Secondly, despite that they considered a sensible yield to be around 7.1% giving a price of £14.5m. Thirdly, there would be interest from a variety of potential investors. Finally, sale could be achieved in around six months.
- When asked about this letter, Mr Summers sought to explain that this had been essentially, a marketing piece:
It was the client, Mr Tellwright and Andy were quite distressed at the time based on what they had realised was the problem with the ground rent. Selfishly and I fully admit as an agent we want to put a property on to the market in order to sell it in order to achieve a fee out of it, but at that time the client would not have let us put it on the market at any less than the £14.5 million and indeed when we actually did put it on the market later on that year we did not quote a price at all because we knew how difficult it was going to be to sell the property in that range.
- I do not accept that answer. It would suggest that Mr Summers was prepared to say anything to secure the instruction, regardless of whether he thought it was true. That was not at all my measure of him; he gave his evidence honestly before me and I believe would have been just as honest in his dealings with Mr Tellwright and Mr Taylor. It also would mean he was told in January 2017 by Mr Taylor, Mr Tellwright or both that the ground rent was a significant problem, when Mr Tellwright's evidence was that he only came to perceive this as a serious issue later in 2017 at a dinner with Mr Shearer, of Knight Frank, at which the Bidwells team was present.
- In my view this part of Mr Summers' evidence is badly distorted by hindsight. This has been a brutally difficult sale that realised less than a third of his initial estimate and took many times longer to achieve. The distortion has only been aggravated by the way that his evidence has come to be presented, as I have noted above. The Bidwells letter is, it seems to me, a much more accurate reflection of their perception at the time: however it had come to their attention they could see that the ground rent associated with the Leasehold would put some buyers off but they still considered that this was an asset that had significant value and could be sold in a reasonable timeframe. Of course, as I have noted, neither Mr Summers nor Ms Ilett are valuers and in any event they had not even visited the Development at this stage; I do not take their £14.5 million as being in any sense an expert valuation. Equally, however, the ground rent issue obviously did not appear to them at the time to be as big an issue as it does now.
- On 6 March 2017 Mr Taylor contacted Mr Moir and requested an updated desktop valuation "as guidance for our intended sale or refinance on practical completion in July 17." Mr Moir produced a draft report on 20 March. This time he used a DCF analysis. He came to a value of £12.1m which reflected a net initial yield of 7.1%.
- The Development was completed in July 2017. Repeated attempts were made to sell the Development, all of which failed. Ultimately a sale was achieved in October 2024 for £4.2 million. This was the highest of five bids, the lowest being £3.5 million.
- Around £9.5 million is owed to Titlestone and none of Visage, Visage (Aberdeen) or the guarantor are said to have funds that would allow the Claimant to be repaid. From the Claimant's perspective, the investment is a total loss.
The Issues for Determination
- The parties helpfully agreed a list of the issues outstanding between them.
Duties in contract and tort
- The first issue is the scope and standard of the duty of care.
- The Defendant admits that it owed the Claimant a duty of reasonable care and skill in preparing the Valuation. It further admits that so far as the Valuation gave commentary on saleability and security that commentary also had to be prepared with reasonable care and skill. In terms of absolute obligations, the Defendant accepts that it was required to inspect the Property. It denies there were other absolute obligations.
- Ms Swaffield referred me to Wood v Capita Insurance Services Ltd [2017] UKSC 24 at [8]-[15] for the correct approach to take in interpreting the Engagement Letter. It was, she noted, an iterative approach that involved assessing both the text and its context. I accept that.
- She noted that the Engagement Letter stated that the Valuation would be prepared by RICS registered valuers in compliance with the RICS Standards (the Standards) and, separately, that the Defendant had current local and national knowledge of the PBSA market and the skills and understanding to competently prepare the valuation. Ms Swaffield particularly relied on two of the Standards:
i) PS2, which required appropriate qualifications, including "sufficient current local, national and international (as appropriate) knowledge of the asset type and its particular market, and the skills and understanding necessary, to undertake the valuation competently".
ii) VPS3 required that: "The report must clearly and accurately set out the conclusions of the valuation in a manner that is not ambiguous or misleading, and does not create a false impression. If appropriate, the valuer should draw attention to, and comment on, any issues affecting the degree of certainty, or uncertainty, of the valuation." Particular reference was made to VPGA 9, which dealt with markets susceptible to change. This emphasised that "if a failure to draw attention to material uncertainty gave a client the impression that greater weight could be attached to the opinion than was warranted, the report would be misleading and in breach of VPS3".
- Mr Benson submitted that the effect of the Claimant's position, were it correct, would be remarkable: in any claim against valuers based on a departure from the Standards liability would effectively be strict; that would be inconsistent, he suggested, with the recognition in VPGA 9 paragraph 1.2 that valuations are expressions of opinion, not fact. It would also be at odds with the position set out in Jackson & Powell "Professional Negligence" at 2-027 – 2-046 that a professional is typically only required to exercise reasonable care and skill, not to guarantee a result. He accepted that there might be simple obligations that were absolute, such as the obligation to inspect the correct property which was addressed in Platform Funding v Bank of Scotland [2008] EWCA Civ 930.
- Platform Funding seems to me to provide a useful summary of the position. In that case the valuer was sent to value a property over which a charge was to be taken. The property was one of a number being built on a site that were in various states of completion. The borrower showed the valuer around an almost completed property, which the valuer took to be the correct one. It was not. The borrower defaulted and the lender claimed against the valuer for breach. The valuer sought to strike out the claim on the ground that its obligation was to act with reasonable care and skill and no breach of that duty was pleaded, meaning there was no case to answer.
- At [30], Moore-Bick LJ stated:
…although there is a presumption that those who provide professional services normally do no more than undertake to exercise the degree of care and skill to be expected of a competent professional in the relevant field, there is nothing to prevent them from assuming an unqualified obligation in relation to particular aspects of their work. Whether a professional person has undertaken an unqualified obligation of any kind in any given case will depend on the terms of the contract under which he has agreed to provide his services. …the very nature of the obligation on which the client relies may itself make it more or less likely that it was intended to be qualified or unqualified, as the case may be. …Finally, I think these authorities support the conclusion that, although the court should be cautious about holding that a professional person has undertaken an unqualified obligation in the absence of clear words to that effect, there is no reason not to give effect to the language of the contract where it is clear.
- The Court of Appeal found that the duty to inspect the right property was such an absolute obligation in that case.
- Applying those principles to this case, as I have noted it is accepted by the Defendant that the obligation to inspect was an absolute one and the failure to do so was a breach. In light of Platform Funding, that conclusion seems to me to be inescapable: if the obligation to inspect the right property is absolute, that necessarily means that the duty to inspect is absolute.
- Likewise, I accept that the Defendant represented, in unqualified terms, that it had the requisite skill and expertise to undertake this work. The representation in the Engagement Letter was clear: "We also confirm that we have current local and national knowledge of the particular market and the skills and understanding to competently prepare the valuation." There is no suggestion that this was simply a statement of opinion or belief; that is in contrast with the preceding sentence, which was confined to being "our honest and objective opinion". Finally, going to Mr Benson's point, this was a statement of fact. The same analysis applies to the language of PS2. The experience obligation was also, in my view, absolute.
- That leaves the obligation to draw attention to material uncertainty. Here, it seems to me, Mr Benson was on much stronger ground. VPS3 paragraph 2 requires the valuer "should draw attention to, and comment on, any issues affecting the degree of certainty, or uncertainty, of the valuation". If the issue was one of which the valuer was unaware and had no reasonable means of becoming aware, plainly they could not draw attention to or comment on it. If, for example, the government had on the morning of 18 February 2015 decided to revoke all North Sea drilling licences, or if Unite, a competitor in the PBSA sector, had in a confidential board meeting approved a string of developments in Aberdeen, those facts would greatly affect the certainty of the valuation. Until they were announced, the Defendant would have no reasonable way of knowing of them, however. In the circumstances, interpreting VPS3 to mean that the Defendant "should" comment on things it had no reasonable means of discovering is not an obvious reading of the sentence. Even were the language clearly requiring such a step, which in my view it is not, it would make no sense; applying Wood that is a relevant criteria.
- By contrast, if the obligation is to draw attention to or comment on those things about which the Defendant knew or acting reasonably would have known, the sentence makes more sense, both grammatically and commercially. If the government's or Unite's hypothetical decisions had been reported in the national press, such that a reasonable valuer would have known of them, it makes perfect sense to say that these should be factored into the valuation.
- The same analysis applies to facts of which the valuer was aware but dismissed as inconsequential. VPS 3 refers to "any issues", which on its face is broad. Why "should" the Defendant draw attention to such things if a reasonable valuer would not? To borrow Edward Lorenz's well-used metaphor, Mr Moir may well have been aware that butterflies half a world away were flapping their wings at the time of the Valuation, but if no reasonable valuer would consider that relevant, why "should" he mention it? If the language is read to require comment on literally any issue that affects the certainty of a valuation, regardless of materiality or reasonableness, the range of factors that must be addressed becomes almost limitless and the valuation becomes so caveated as to be useless. That is not, in my view, what is contemplated.
- I also accept what Mr Benson says in respect of paragraph 1.2 of VPGA 9: the valuation is a statement of opinion. Part of the process of forming that opinion is separating that which seems relevant from that which seems irrelevant. That, inevitably, is a judgment call, and that imports the concept of reasonableness, not of absolutes.
- In addition to the express duties the Claimant contends that the Defendant had a duty to warn it about the impact of the ground rent provisions on the valuation figure and the suitability of the Project for lending purposes. There were two aspects to this submission: that the Defendant owed a duty incidental to their retainer or that there was a free-standing common-law duty in tort premised on an assumption of responsibility.
- The principles on the incidental duty were addressed by Jackson LJ in Minkin v Landsberg [2015] EWCA Civ 1152. That case involved solicitors, but the statement of principle is a general one and does not turn on the particular facts of the case. Jackson LJ stated at [38]:
Let me now stand back from the authorities and summarise the relevant principles:
(i) A solicitor's contractual duty is to carry out the tasks which the client has instructed and the solicitor has agreed to undertake.
(ii) It is implicit in the solicitor's retainer that he/she will proffer advice which is reasonably incidental to the work that he/she is carrying out.
(iii) In determining what advice is reasonably incidental, it is necessary to have regard to all the circumstances of the case, including the character and experience of the client.
(iv) In relation to (iii), it is not possible to give definitive guidance, but one can give fairly bland illustrations. An experienced businessman will not wish to pay for being told that which he/she already knows. An impoverished client will not wish to pay for advice which he/she cannot afford. An inexperienced client will expect to be warned of risks which are (or should be) apparent to the solicitor but not to the client.
(v) The solicitor and client may, by agreement, limit the duties which would otherwise form part of the solicitor's retainer. As a matter of good practice the solicitor should confirm such agreement in writing. If the solicitor does not do so, the court may not accept that any such restriction was agreed.
- I was also referred to Merivale Moore plc v Strutt & Parker [1999] 2 EGLR 171 and Large v Hart [2021] EWCA Civ 24, both of which identify a duty to warn in the case of surveyors.
- Given what is said at (iii) and, to a degree, (iv), there is an immediate temptation to focus on Mr Tellwright's extensive experience in the property sector. I do not think that would be right for two reasons. First, Mr Tellwright only had experience of part of the picture. It was readily apparent from his cross-examination that he was familiar with leaseholds and the issues that might arise with them. Certainly, he understood the way that the ground rent provisions in issue here operated and the linkage between returns and capital value. He was not familiar with PBSA, however, and the experts broadly agreed that there was more risk with PBSA on the income side because it is less reliable; indeed, I did not understand the Defendant to contest this. So while Mr Tellwright may have readily appreciated the risks on the cost side of the equation, he had less of an understanding of the hedge against that risk represented by the income side. Mr Tellwright was, simultaneously, Jackson LJ's experienced businessman and inexperienced client. In this case the criticism is principally around what should have been said by the Defendant about the risk side, with which he was more familiar. The fact remains, however, that this was not as clear cut a case as it might first appear.
- The second issue is that, as Jackson LJ made clear, one must look to all the circumstances of the case, not just the experience of the client. In some markets one may expect to see more fulsome advice; in others, more will be left to the advisor.
- Both as regards the obligation to draw attention to material uncertainty and in respect of the incidental duty to warn much therefore turns on the facts of the particular case and the evidence of the experts as to what is expected of a valuer in a case such as this. In his report Mr Yeung addressed what he described as "Failures Within [the Defendant's] valuation". These included a failure to warn that the ground rent reflected upward only rent reviews; a failure to highlight the lack of directly comparable evidence, meaning there was potential uncertainty within the valuation; and a failure to highlight that the residual method of valuation was sensitive to key inputs. The concept of failure collapses the concepts of duty and breach into a single question, but I accept Mr Yeung's evidence that these areas were ones where a warning should have been given.
- The Joint Statement of Experts addressed what are described as "omissions" in the Valuation. Not all of these could properly be classed as failures to warn of the risks associated with the ground rent or other provisions of the lease. Referring to "feuhold" rather than "heritable" is a lapse in terminology, not a failure to advise; it is wholly irrelevant to the issues in this case. Legal issues such as irritancy, the Scots equivalent to forfeiture, were to an extent in the realm of the lawyers. Ms Cubitt explained how it also fed into the valuation, because if the ground rent exceeds the income at some point, the leaseholder's most economical option is to default and hand back title of the asset to the heritable owner. I accept that, but it means that irritancy is really part of the issues with ground rent, rather than being a free-standing issue. While it may be typical to show the details of the valuation model used, it is not clear to me why not doing so is a breach independent of the figure being said to be incorrect.
- There were a number of issues that the experts agreed should have been part of the Valuation that add to the points identified by Mr Yeung, however. Several seem to overlap, but three groups are relevant:
i) There was no warning about the effect of the ground rent having a minimum 3% collar but no cap.
ii) There was no warning about the possible impact on saleability of leasehold interests generally.
iii) There was no analysis as to why a 40 bps adjustment to yield was the appropriate measure of risk in comparing the leasehold to the heritable interest.
- Taking that evidence together I accept that it was required under VPS3 (incorporating VPGA9) or, alternatively, incidental to the Defendants' duties of care and skill to give warnings that the Valuation was subject to the following caveats:
i) The ground rent provisions strongly favoured the landlord, in that: it was upward only; would increase by the higher of 3%, RPI, 10% of gross turnover and, every five years, by reference to a review of open market rental value if higher; and was uncapped (the Ground Rent Warning).
ii) The residual method of valuation was sensitive to key inputs, in this case there was a lack of comparable evidence from which to draw conclusions and so the 40 bps that was the basis of the leasehold valuation was largely or wholly opinion led (the Valuation Warning).
iii) Leaseholds were inherently less saleable than freeholds / heritables (the Leaseholds Warning).
- There is a critical caveat to all this. Ms Swaffield drew my attention to Large v Hart. That was a somewhat extreme case, as the Court of Appeal there recognised. The valuation was of a newly rebuilt house. Given that it was a newbuild the valuer raised with the buyers the possibility of obtaining a Professional Consultancy Certificate (PCC) from the architects who had supervised the work but did not positively advise obtaining one. It was found that the surveyor should have advised the buyers not to proceed at any price without a PCC and was negligent in failing to do so; reliance was placed on an RICS practice note. Ms Swaffield sought to draw a parallel with the absence of comparables and the risk resulting from the ground rent review provisions here to say that the Claimant should have received a similar warning.
- I do not accept that parallel exists. The warning that had to be given must be seen in the context of the Valuation as a whole. The Defendant gave a figure for market value of £16,580,000. As I have noted, market value is defined by the RICS as the price that a willing seller would pay to a willing buyer after proper marketing in the absence of compulsion. If that figure was one that could reasonably have been given, and for reasons I will address at length I believe it was, then any warning would have been properly in the context of a conclusion that said a willing buyer could be found for the Leasehold, with proper marketing, at a price of £16,580,000.
- Thus, the Ground Rent Warning would have been to the effect that the review mechanism was unusual and strongly favoured the landlord, but even so a willing buyer would likely emerge at around the £16.5 million price level. The Valuation Warning would highlight the lack of comparables and stress the opinion-led nature of the exercise, but again reach the same conclusion around the sale price and timing of any sale. Likewise, the Leaseholds Warning would have told Mr Tellwright that leaseholds are less attractive to purchasers than heritables / freeholds but still said a sale would be possible at the level given in the Valuation.
- That leaves the duty of care in tort. Spire Property Development LLP v Withers LLP [2022] EWCA Civ 970, referenced Minkin on the issue of incidental obligations and put the test in very similar terms at [56] but went on at [58] to make clear that the tortious duty is a separate consideration. To the extent it simply repeats what is said above, it does not add anything on the facts of this case. It is, of course, incumbent on the Defendant to give any statements around saleability or suitability for secured lending with reasonable care and skill, but that has not been contested by Mr Benson.
- There is then a question of what knowledge the Defendant had about the proposed lending by the Claimant. Mr Moir had no recollection of what was discussed in this regard but recognised that the 3 February 2015 email on instruction referred to lending equity, such that he was aware of that. The Defendant was obviously aware that the Valuation was to be used in connection with secured lending; the Valuation itself recognises that.
- Ms Swaffield raised a point about the standard of care. She suggested, by reference to Earl of Malmesbury v Strutt & Parker [2007] EWHC 999 (QB), that the standard was that of a reasonably competent commercial valuer expert in the field of PBSA. Mr Benson submitted the standard was that of a general practitioner capable of doing PBSA valuations. As Ms Swaffield recognised, little, if anything, seemed to turn on that distinction.
Breach of duty
- In closing this aspect of the case, Ms Swaffield engaged in what might be described as mood music: various criticisms were made of the Defendant generally or Mr Moir personally that either were swept up in other aspects of the breach allegations (for example, his approach to valuation, or his adjustment to yield of 40 basis points being said to be too low) or were not really issues of breach at all (Mr Moir's manner of giving evidence, or his lack of recollection). This reflected the approach in the Amended Particulars of Claim, where breaches were pleaded that did not give rise to loss (the failure to inspect) and others (the allegation that the valuation in the Report was too high) were atomised into their component parts.
- In my view, the grouping of issues adopted in the Agreed List of Issues was more helpful, and I adopt that structure here, dealing with specific issues such as yield calculations as they arise in that context.
- The first issue is the "true" value of the Project at the date of valuation.
- Both parties, it seemed to me, sought to use post-valuation data as evidence of true value, while criticising the other side for doing exactly the same thing. Mr Benson referred me to Knight Frank's valuation for Titlestone in February 2016 of £16,810,000. Nobody from Knight Frank was before me to give evidence and that valuation is itself the subject of proceedings. He also referred to the £14.5m valuation carried out by Mr Summers for sale purposes in early 2017. I accept that was Mr Summers' view at the time, but Mr Summers is not a trained valuer, had not even been instructed at that point, had not viewed the Development at that stage and his view would have been influenced by events at the time that could not have been known to the Defendant at the time of the Valuation; ultimately the Project was never marketed at that value.
- Ms Swaffield referred me to the ultimate sale price of the Project of £4.2m. Between the date of the Valuation and that offer being made the United Kingdom voted to leave and did leave the European Union, the Ukraine conflict started, the Israel-Hamas conflict started, RPI moved from 1% to 3.6%, peaking at 14.2% in the interim, and the Bank of England base rate moved from 0.5% (a level unchanged since 2009) to 5.25% (having in the interim dropped as low as 0.1%). Controlling for the impact of any of those factors on the sale price, let alone all of them and all the other potentially relevant factors, was beyond the scope of this trial. Ms Swaffield submitted that other PBSA developments in Aberdeen had not dropped in value to anything like the same degree. That may show that the Development was unusually exposed to particular changes in the market in a way that another development was not. It does not show either that those changes were reasonably foreseeable at the time of the Valuation or that the market has not changed.
- The difficulty with relying on the sale price can be vividly illustrated on the Claimant's own case. Ms Cubitt's corrected valuation, which the Claimant presumably considers to be reasonable and in which it has confidence, was £9.77 million. The bracket for a reasonable margin of error was agreed to be between 10 and 15% (although the parties disagreed where, within that bracket, this case fell). If the agreed purchase price is in any way evidence of the "true" value in 2015, Ms Cubitt's figure was 233% too high. The £4.2m achieved in 2024 tells me nothing about the accuracy or otherwise of the Valuation in 2015.
- Ultimately, I found none of the suggested comparators to be especially helpful. Most of them were not sufficiently contemporaneous to offer any guidance. The Knight Frank valuation was closest in time, but even that was a year later, well after the date when the majority of the experts and lay witnesses with experience in valuation agreed that the Valuation would have needed to be updated to reflect changes in the market. Moreover, for it to have been a useful comparator I would have needed to understand how the methodology compared and whether it worked, but as Mr Yeung noted it was not clear to him what Knight Frank had done.
- In terms of the evidence before me there were, broadly, three routes to a figure. Mr Moir capitalised a net initial yield. Regardless of whether that happened to produce the right result, both experts agreed that it was the wrong approach because there was too much uncertainty: there were simply no comparable leasehold structures by which one could carry out the exercise. Mr Moir had used heritable / freeholds as comparables then increased the yield to reflect the risk, but the experts further agreed that there was no obvious justification for this increase of 40 basis points and that this seemed too low to reflect the risk. Mr Moir, as I have noted, defended the 40 basis points number but was unable to explain precisely how he had arrived at it.
- I accept the evidence of the valuation experts. As guidance from the RICS makes clear, evidence of comparable transactions is fundamental to arriving at a valuation based on capitalising a net initial yield. I can see that freehold / heritable comparables are relatively weak, such that there needs to be some increase in yield to reflect the risk. It should have been possible to say clearly why 40 basis points was the right number. In the absence of such an explanation, the process by which the Defendant arrived at its valuation breached the duty of care and skill.
- The second route was to use a DCF methodology, which was the approach adopted by Ms Cubitt. At the time of the Valuation the RICS had in force a note "Discounted cash flow for commercial property investments" (the DCF Guidance). This was a document that Ms Cubitt said was part of her analysis.
- The DCF Guidance was not mandatory; as it notes:
On the other hand, it does not follow that a member will be adjudged negligent if he or she has not followed the practices recommended in this guidance note. It is for each individual surveyor to decide on the appropriate procedure to follow in any professional task. However, where members depart from the good practice recommended in guidance notes, they should do so only for good reason.
- It later emphasises: "This guidance note is designed to be informative rather than prescriptive."
- The DCF Guidance draws a distinction between market value – the price at which a willing seller and a willing buyer will transact – and investment value – the value of the property to a particular investor. As the DCF Guidance explains:
An individual's opinion of [investment value] will almost invariably differ from the Market Value because everyone has different income requirements, expectations, attitudes to risk, tax position, etc. It is those differences of opinion that create a market in which investments are bought and sold.
- I pause to note that Ms Cubitt seemed unaware that the RICS drew such a distinction until taken to the relevant paragraphs of the DCF Guidance. It continues:
The explicit discounted cash flow (DCF) valuation method is of greatest application in the assessment of investment value to assist in buy/sell decisions or selection between alternative available investments. However, it can also be used to estimate Market Value by adopting a set of tenable assumptions that are consistent with observed market prices, and then applying those assumptions, with appropriate adjustments, to the valuation of the subject property. Where there are no transactions, the explicit DCF model provides a rational framework for the estimation of Market Value not present in the ARY (capitalisation rate) approach, which relies on comparables for the identification of the ARY.
- The DCF Guidance then helpfully summarises how a DCF works: "DCF valuation involves projecting estimated cash flows over an assumed investment holding period, plus exit value at the end of the period, usually arrived at on a conventional ARY basis." It expands on the latter point: "The exit valuation will reflect anticipated rental growth, the reversionary nature and unexpired terms of the leases at the exit date, and the application of an appropriate ARY." The issue is dealt with again in section 4 of the DCF Guidance:
The exit value should reflect the anticipated state of the property, physically and in tenure / leasing terms, at the exit date. This should be overlaid with forecast movements in general interest rates and property yields.
- Ms Cubitt did not do that; as she explained in her cross-examination, she targeted an internal rate of return (IRR). Again, she seemed unfamiliar with the DCF Guidance in this regard:
Q. And in that area I would suggest that you departed from the RICS guidance because they suggested you have a capitalised exit price?
A. It does appear to be phrased as such, which surprises me given that this guidance note acknowledges that when there is a lack of comparable evidence that a discounted cash-flow should be used. If you are relying on an ARY [all risks yield] as an input, you know, that relies on your ARY being established through comparable evidence.
- This marked the end of Ms Cubitt's first day of cross-examination. When she returned the next morning I felt she lapsed somewhat into arguing the Claimant's case on the value of a DCF approach:
Q. So, if there are no comparables to help you value this particular property with this particular rent review clause on entry, then you are not going to use this guidance to measure your exit price, are you?
A. Yes, I think the term they use is "usually", and obviously you cannot use an all-risks yield basis when there are no comparables in which to base that yield assumption on. So it does not say "always", it says "usually", which I appreciate in the majority of cases there would be comparable evidence. In this case unfortunately there was not any, and as such an alternative approach which is IRR driven has to be taken.
Q. That is not what this guidance says the reasonably competent valuer ought to do, does it? It does not say if there is no methodology then you go an IRR-driven approach, does it?
A. No, but it does identify where there are no transactions the DCF model provides a rational framework, so that is the approach that I have taken.
Q. The hypothetical valuer doing this job, looking at this guidance in 2015, could reasonably think 2.1 meant that a DCF was not appropriate for this particular property; is that not right?
A. I would not say that that is the case, no.
Q. So you say every reasonably competent valuer in 2015 ought to have read 2.1, ignored it and done their own IRR-driven methodology instead?
A. Again, I refer to the word "usually" within that. Now clearly, if you have evidence then you would potentially look at it on a yield input basis, but where you do not you need to look at alternatives. In terms of the use of DCF for this, I would probably draw your attention to a number of the other reports, and the acknowledgment of DCF as a method here. So just running through ----
Q. Mrs. Cubitt, I am asking you about your evidence at 2015. We will come to the reports later in this process. Please do not be argumentative. 2.4?
A. I think it is relevant to flag that there is an acceptance amongst the reports around DCF as a methodology.
- I had essentially three issues with this evidence. First, as I have just noted, I accept Mr Benson's criticism that this was an instance of Ms Cubitt arguing the case. Her insistence on referring to other expert reports was a vivid example. Not only did she want to be taken to the reports, she knew which page of which specific report she wanted to deal with. The answer seemed to me to be a prepared argument that she was keen to advance. In any event, the question related to what the DCF Guidance said, not to what other people had said. Secondly, she was not following the DCF Guidance. There is nothing wrong with that. As I have noted, the DCF Guidance is not prescriptive and I accept what Ms Cubitt said about the absence of comparables presenting an issue for the approach contemplated in it. The point is, Mr Yeung was criticised by the Claimant for taking a methodology that was not in accordance with the DCF Guidance when, in turn, Ms Cubitt had been forced to do the same thing. He accepted that, she did not. Finally, her conclusion that "an alternative approach which is IRR driven has to be taken" is flawed. It is only possibly correct if one accepts that a DCF approach must be taken. Nothing in the DCF Guidance says that; on the contrary, it expressly states that it is not prescriptive.
- IRR was central to Ms Cubitt's approach and is dealt with in section 5 of the DCF Guidance, which addresses the discounting process:
IRR is the discount rate which, when applied to all future expected income and capital flows, equates the price with the present value of these discounted income flows. The NPV is therefore zero. IRR can be used to compare potential returns from alternative investments whose purchase prices are known.
IRR can be derived only by an iterative trial and error process, which is the method used by spreadsheet IRR formulae.
- There was general consensus that a DCF is highly sensitive to a change in inputs. Moreover, Ms Cubitt recognised that in PBSA there are more inputs to consider than in other property classes because for PBSA both the rental income and the operating costs can fluctuate significantly.
- In my view the DCF methodology used by Ms Cubitt was unreliable.
- First, it is not an approach, less still the approach, advocated by the RICS in the relative information vacuum that existed in this case. At best, the DCF Guidance cuts both ways, saying DCF provides one rational framework for estimating Market Value in the absence of market comparables but working on the basis that the all risks yield, which depends on such comparables, was available. As I have noted, the same is true of Mr Yeung's approach, but the Claimant suggested that its approach was to be favoured as reflecting the relevant RICS guidance. I do not accept that to have been the case. It seems to have been based, at least in part, on Ms Cubitt having missed or misread the parts of the DCF Guidance that I have highlighted above.
- Secondly, in the context of PBSA there are more variables than normal in a DCF. All of them involve a judgment call by the valuer. It seemed to me that Ms Cubitt tended to the pessimistic limits of the range in all cases, at times in the face of evidence directly to the contrary:
i) I have already noted, and rejected, her answer on yield when shown the accounts of Empiric.
ii) Ms Cubitt modelled on the basis of a 10 year hold period for the investment, but the evidence in this case was that the Claimant intended to exit well before that; Ms Cubitt was not able to say what impact that would have on the valuation.
iii) In her report Ms Cubitt said she assumed a growth in ancillary income (principally made up of laundry and vending charges) of 2% but in fact her model assumed no growth.
iv) Ms Cubitt assumed a sinking fund that was above what was seen elsewhere in the market and which, it seemed to me, was high for a new build that was intended to be sold soon after completion.
v) Ms Cubitt adopted an income growth rate of 2%, which as she acknowledged is a key variable. She said she had referred to Savills' files from around that time, although none were referenced in her report and she could not recall the details. In fact, in its publications on the PBSA sector nationally Savills was predicting growth of 3.5%; Empiric predicted growth across its portfolio, again national but including a close comparator property in Aberdeen, at 3%. As Ms Cubitt noted, that is not specific to Aberdeen but the only factor that she referred to as distinguishing Aberdeen was the pipeline of new developments. That an increase in supply can depress prices is basic microeconomic theory, but the pipeline was around 1,000 beds and the shortfall in accommodation was around 14,000 beds. Her figure therefore seemed unrealistically low.
vi) RPI is an important aspect of the valuation because it is one of the factors that can drive ground rent. In her report Ms Cubitt said she took the ten year average, which would have been 3.65%. In fact, she took the five year average of 3.8%. She recognised, when it was put to her, that a smaller sample size would be more vulnerable to being skewed by outlying variables, but did not explain why she preferred it. This was an aspect of Ms Cubitt's valuation where she included a sensitivity analysis, from which it appeared that the impact would be minor. My concern was more with why the statistically less reliable approach of using a smaller sample size had been adopted.
vii) IRR is a key driver of the valuation, as Ms Cubitt recognised in her cross-examination. To determine it she has used comparables to derive a 9% IRR for a transaction on the heritable and added 5% to reflect what she considered to be the risk. That 5% is Ms Cubitt's opinion; there was no supporting evidence for it. It reflected what she thought an investor in that market at that time would seek, yet she was not working in that market at that time so it is unclear how she would know that. While she accepted that there was a range of possible IRRs it was not clear to me what they were or how they impacted her valuation calculation. Moreover, in setting out the basis for her opinion in her report she explained the factors that went to her selecting 5%. One of those was that the effect of ground rent increasing in a non-linear fashion (it compounds) was that net operating income would continually reduce. That is not, in fact, what she allowed for in her model.
- Thirdly, Ms Cubitt's model gave counter-intuitive results. Specifically, when she corrected her model to give the revised valuation it adjusted other elements of the valuation. The net effect was that it suggested that an asset that generated less income would cost more to acquire. That, obviously, makes no sense. Ms Cubitt explained that this was because the sale price had also changed, such that the figures balanced, but that depended on her various assumptions driving the sale price being correct. As I have explained, I had significant reservations around Ms Cubitt's assumptions.
- For these reasons, I do not accept that the use of a DCF was required by the RICS in the DCF Guidance; in my view the lack of comparables made it impossible to use a DCF as the RICS contemplated. I agree that a DCF could still be a useful framework, particularly as a means of cross-checking other approaches, but in order to do that one would need to adopt "tenable assumptions", to quote the DCF Guidance. Ms Cubitt adopted a uniformly pessimistic approach, in part driven by an IRR for which she had no evidence. I did not have any confidence in her figure.
- Mr Yeung took a different approach, which he sought to ground as far as he could in the evidence available to him. As I have explained, he calculated the value of the heritable interest, which everyone agrees is possible, calculated what a heritable or freehold would be worth if subject to a long lease on comparable terms to the Leasehold and subtracted the latter from the former.
- The principal criticism of this methodology by the Claimant was that it had no basis in any RICS guidance. I have addressed that in part above with reference to the DCF Guidance: the Claimant's preferred approach, equally, is not grounded in RICS guidance but, rather, in a variation of it. Moreover, one can overstate the extent to which Mr Yeung was doing anything novel or unorthodox.
- Mr Yeung's approach to valuing the heritable is uncontroversial; Mr Moir did the same and the Claimant does not criticise his figure, Knight Frank took a similar approach, so did Ms Cubitt. Everyone has followed the RICS guidance in doing so and everyone reached a broadly similar figure.
- Equally, Mr Yeung has applied the RICS guidance to valuing the freehold / heritable subject to a comparable lease. Here, the pool of comparables is thinner and of poorer quality, but Mr Yeung recognised that and explained that he had allowed for it. He was clear that he wanted, so far as was possible, an evidence based approach. He accepted there was uncertainty in his approach, but considered there was greater uncertainty in a DCF. I accept that.
- What is novel, and does not derive support from the RICS guidance, is the process of then subtracting the value of the encumbered heritable from the value of the unencumbered heritable to arrive at the value of the encumbrance, i.e. the Leasehold. Mr Yeung explained his logic, however, which seemed to me firmly based on the way that markets operate. The heritable owner will not look to destroy value through creating the lease; the party purchasing the lease has no reason to overpay for it because at this point in the hypothetical they are free to walk away. Once one accepts those propositions, which as I say seem to me basic truisms of market economics, one is driven to the conclusion that the value of the heritable encumbered with the lease plus the value of the lease should equal the unencumbered value of the heritable. If one accepts that, which I do, ascertaining the value of any two of those variables tells you the value of the third.
- Ms Swaffield made a number of further criticisms of this approach which it is important to address.
- First, she submitted that a DCF is the approach recommended by the RICS. I have addressed that; the DCF Guidance is not prescriptive and is in any event targeted at a situation where there is more objectively verifiable data available as to entry and exit prices than exists in this case.
- Secondly, she submitted that all experts other than Mr Yeung had used some form of DCF, and even Mr Yeung had run a DCF in the background of his principal model; she estimated there were around 12 DCFs in the papers before me. That latter figure, to my mind, highlights the weakness of using a DCF based approach: it is a methodology, not a method. Translating the former into the latter turns very heavily on the variables used. That would be unproblematic if key variables like the entry and exit price or the IRR had an objectively verifiable basis. Here, they do not.
- Finally, Ms Swaffield criticised Mr Yeung's methodology as being based upon two fictions. The first was that the encumbered heritable was a fictional construct that was not something that Mr Yeung had been asked to value. I have dealt above with the point about Mr Yeung exceeding his instructions. As to the idea that the encumbered heritable was a fiction, Mr Yeung rightly pointed out that it is an actual interest on the facts of this case. There was no reason why it could not be valued if sufficient data existed.
- The second was that the idea of uniting the two interests was a fiction. Ms Swaffield put the criticism in the following way:
That is a hypothesis that is completely unrealistic, because they do not exist as joint in a situation where they could ever be joined together as tenures. They are different, they are owned by different people and they turn on different axis, the pool purchasers investors is different, one is the inverse of this other in terms of benefit and burden, if I can use that expression. Yet they are falsely bolted together to create what he says is certainty.
- I do not accept that is what Mr Yeung was saying. He was not premising his valuation exercise on the two estates being united; he was looking at the point in time when they were separated. He went on, later in his report, to touch upon what might happen later in time if there were an attempt to reunite the two interests, and in doing so I think created confusion. Mr Yeung accepted that his report in this respect was "quite badly written". His evidence overall was clear, however. As he explained in his cross-examination:
So as at the creation of this structure, one would expect that a freeholder or the heritable or the party that holds a heritable interest would not want to create a structure that diminishes the value of the structure they had before, so one would not put a structure in place where if I was to then acquire the other part would lead to a drop in the value of the assets, but at the same time a leaseholder at the outset of this structure is not going to agree a structure where if they try to acquire the freehold or have the opportunity to, they are not going to also agree to a structure that costs them more than the value of the two interests amalgamated. One should not be able to create a long leasehold structure and create value without either a significant covenant in place or something else that drives a value. Creating a pure financial structure from one interest should not create additional value unless there is some sort of covenant in place.
- For the reasons I have given I agree with that analysis.
- As I noted in considering Mr Yeung as a witness, I had considerable confidence in his evidence. I recognise that the totality of the approach he has adopted is not something referred to in any RICS guidance, but that guidance is not prescriptive and, while she seemed not fully to recognise it, Ms Cubitt's analysis equally is not the way the DCF Guidance contemplates using a DCF. I considered Mr Yeung's methodology to be a logical approach that has the strongest evidential support of any of the valuations advanced. I accordingly accept his conclusion that the "true" market value of the leasehold interest at the date of the Report was £15.1 million.
- The second area of dispute is the bracket or range within which a reasonable figure could fall. The experts both agreed that it would typically need to be within 10%; of the "true" value. Mr Yeung said this was such a difficult lease to value given its unusual nature such that the margin for error was greater – up to 15%. Ms Cubitt accepted this was a difficult valuation but considered that the building was not unusual and the clause was clear, such that in her view 12.5% was appropriate.
- I have accepted Mr Yeung's approach to valuation for the reasons I have given. There is plainly no issue in valuing the unencumbered heritable – as I have already said, lots of people have done it and their figures are broadly comparable. The issue is with the valuation of the encumbered heritable. As I have recognised, and more importantly as Mr Yeung recognised, the evidence available is limited. There is, though, still evidence. It therefore seems to me that the far end of the bracket is too high. There is uncertainty but of a more limited order of magnitude. In the circumstances, I accept Ms Cubitt's 12.5%, albeit for different reasons to those she gave.
- Accordingly, the Defendant's valuation figure fell within the bracket (indeed, that would have been the case even had the bracket been 10%) and was not negligent.
- The last sub-issue on breach addressed the duty to warn but it is also right to deal here with the other breaches alleged.
- The duty to warn can be dealt with quite briefly because, as I have noted, the experts addressed these issues by way of a single question – what did the Valuation fail to do – thereby addressing both duty and breach. I have already accepted their evidence in this regard. The Defendant breached its duty in failing to give the Ground Rent Warning, the Valuation Warning and the Leaseholds Warning in the terms I have described.
- I have also already addressed the duty to inspect: that duty, too, was breached.
- Finally, the Defendant was required to have appropriate local and national experience in the relevant market of PBSA and the Valuation had to be prepared by RICS registered valuers. In my view, with exception of the inspection duty these obligations was not breached. Mr Moir is not an expert in PBSA in the way that Mr Yeung or, to a lesser degree, Ms Cubitt are, but his evidence was that it comprised 10-20% of his practice, which in my view was sufficient to satisfy the contractual requirement. He had some but not extensive experience in Scotland but Mr Forbes, with whom he consulted in preparing the Valuation, did have experience of both the Scottish market and legal system. The Engagement Letter is explicit in saying "we" have the relevant experience, referring to the firm collectively; the relevant Standard, PS2, equally applies to the firm, not the individual.
- There is, of course, a separate question as to whether in ignoring some of Mr Forbes' proposed amendments Mr Moir breached the duty of care and skill. He could offer no explanation for why, for instance, he changed heritable back to feuhold when the latter no longer existed as an estate in land. Those breaches were trivial, however, and in no way affected the substance of the Valuation.
Causation
- This group of issues is focussed on Mr Tellwright as the decisionmaker of the Claimant. As I have noted, Mr Tellwright was highly experienced and successful in property development; I have no doubt that he knew how leases, and specifically ground rents, worked and their impact on the economics of an investment. He was not experienced in PBSA, or therefore the income side of the equation. Again as I have noted, that is relevant on the duty to warn.
- A question arose as to how much was lent and by whom. Ultimately, it seemed to me, that the first question was agreed – the total amount lent was £3,524,552.92.
- The second question was more complex. The Claimant is an SPV; it started this transaction without assets and at no relevant time did it have a bank account. Sums were transferred to Pinsents, who in tun advanced them to Visage and Visage (Aberdeen), by Hartwill, the Claimant's 100% parent. The Defendant contends that if the money advanced belonged to Hartwill rather than the Claimant then it is Hartwill, not the Claimant, that has suffered any loss. Put simply, the Defendant contends that whatever else may be true, the wrong party appears to have brought the claim.
- There is no documentary evidence of any intragroup loan from Hartwill to the Claimant. Both the Amended Particulars of Claim and Mr Tellwright's witness statement talk about the Claimant making its funds available or lending to Visage but do not address or even mention the relationship with Hartwill. The only evidence is therefore Mr Tellwright's cross-examination. There he was clear that while the arrangement was not documented it was intended that the sums advanced were the property of the Claimant rather than Hartwill and that they came from Hartwill was simply an administrative convenience driven by the Claimant not having banking facilities.
- I accept, of course, that a loan is not a contract that needs to be in writing or evidenced in writing. I also see that a single use SPV used for a fairly short-term investment might find it more convenient to work via the account of another group company. It is more odd, and as Mr Benson noted potentially a breach of the Companies Act, for the SPV (and indeed the parent) not to document what is happening with over £3.5 million, particularly in a transaction conducted with the assistance of a commercial law firm. What is inexplicable is the almost total lack of any witness evidence or pleading explaining the point.
- Balanced against that is the document produced by Pinsents showing payments in and out of its client account on behalf of the Claimant. That document identifies the Claimant as the client. Mr Fraser's unchallenged evidence was that this was taken from Pinsents' systems, suggesting that the client ledger was in the name of the Claimant. Accordingly, the starting point is that the money was held by the Claimant's solicitors to the Claimant's order. Nothing I have seen contradicts that.
- As such, it seems to me that the money was under the control of the Claimant at the time it was paid away. That is consistent with it being the Claimant's money, which chimes with Mr Tellwright's evidence. There may well have been an obligation on the Claimant to refund sums to Hartwill; indeed, that seems to me very probable. That, though, is consistent with a loan from Hartwill to the Claimant, meaning that the money paid out under the VPSA was the Claimant's money. On balance, I accept that to have been the case.
- The question then arises of what the Claimant relied on in lending the money. The parties agree that the legal test is set out in Capita Alternative Fund Services (Guernsey) Ltd v Drivers Jonas [2011] EWHC 2336 (Comm) at [268]. The Valuation needed to have a real and substantial though not by itself decisive part in Mr Tellwright's decision. The test is subjective – what did Mr Tellwright think, rather than asking what a reasonable party in Mr Tellwright's position would have thought. However, reasonableness can assist in determining what Mr Tellwright is likely to have thought at the time. There is a rebuttable presumption that a client who sought, paid for and obtained professional advice relied upon it.
- I have addressed what I consider to be the factual position when dealing with the chronology. In my view, Mr Tellwright relied on:
i) Mr Taylor.
ii) The potential upside he saw in the Development, in which the Claimant was an equity participant.
iii) The Leasehold valuation figure.
- The Valuation was otherwise something of a tick-box exercise for him; it would in due course show to institutional lenders that the Claimant had done its homework on the transaction. I therefore do not believe that the sections on saleability and suitability for secured lending sold Mr Tellwright on the transaction; Mr Taylor had done that, and they reflected conclusions that both men had already reached.
- That is not the end of the analysis, however, because I have found that warnings should have been given and were not. The question then arises as to what impact such warnings would have had. For the reasons I have given I do not consider that any of the warnings needed to be in the form of a Large v Hart "walk away" warning. Each of the warnings were more in the form of caveats to the Leasehold valuation figure of £16,580,000.
- That is significant in the context of Mr Tellwright's evidence. In his witness statement he described his approach to the advice he received: "My experience is that of working with professionals and not in spite of them." Had Mr Moir given warnings but still reached the conclusion that the Claimant could proceed on the basis of a valuation of £16,580,000, the advice would be represented by the conclusion, not the warnings. I believe that the overall advice was what mattered to Mr Tellwright. That is reflected in an exchange from his cross-examination:
Q. Now you know that often professionals sometimes like to put caveats in their advice in order to cover themselves if something goes wrong. You have seen that before?
A. I am aware of it, yes.
Q. You must have seen it in your ----
A. Yes.
Q. "Should be this, but may be this, maybe be other, and if it happens, well, who knows" is a colloquial way of putting what sometimes some professionals put in their reports. I suppose when that comes in you have regard to it but you make a decision based on the overall tenor and the overall gist of what the professional was saying?
A. Yes.
- That answer was clear and I accept it. The difficulty for the Claimant is that any warning should have been in precisely that "should be this, but may be this" form. The overall tenor of what was being said would properly have remained that the market value for the Leasehold was £16,580,000. Put another way, it was reasonable for the Valuation to say that despite the warnings a willing buyer would emerge at that price; that is what market value means. It was that conclusion that was the gist of the Valuation, and that conclusion that Mr Tellwright would have focussed on.
- The Ground Rent Warning is in some ways the most serious. The ground rent provisions themselves are accurately summarised in the Report, so that is not the issue. Indeed, Mr Tellwright's evidence was that he did not focus on this section of the Valuation; I actually believe he did not read it at all. Even if he did read it, that they favour the landlord is readily apparent from that description, and must have been obvious to someone of Mr Tellwright's experience and ability. The complaint, rather, is that their impact was not explained. That was the thrust of Mr Tellwright's witness statement. It also came across clearly in his cross-examination:
Q. The reality is, I suggest that any warning on the part of Gerald Eve about the ground rent clause would not have put off Skykomish or you from making money available?
A. If I had known that this property, this leasehold property was unsalable or very difficult to sell, that would have been a major concern and I would not have gone ahead with the transaction.
- In my view the Ground Rent Warning did not need to go remotely that far. Once one accepts, as I have, that the figure was reasonable then one must accept that the Leasehold was saleable at that price. The warning should have been that the pool of potential purchasers was diminished, but one or more purchasers would still come forward at over £16.5 million. It was a "should be this, but may be this, maybe be the other, and if it happens, well, who knows" type of warning. The overall gist was that the price should be achieved; that would have been Mr Tellwright's focus.
- The Valuation Warning related to the mechanics, not the figure itself. For the reasons I have just given I think that it was the figure that concerned Mr Tellwright. Had he been told that this was a tricky valuation, that there was limited evidence to work from, that the conclusion was opinion led but that Mr Moir, an experienced valuer, considered that 40 bps was the right number, that, too, would have been a "should be this, but may be this, maybe be the other" warning. I believe that Mr Tellwright would still have accepted Mr Moir's advice, would have worked with the professional not in spite of him, and proceeded.
- On the Leasehold Warning, I do not believe for a moment that this would have come as any surprise at all to Mr Tellwright. Both the valuation experts and Mr Moir thought the point was obvious and I agree that it is. I accept the evidence that a valuer would think that it merited a warning, but had Mr Tellwright been told that he would have shrugged and wondered why he was being given such a basic point.
- The final issue on causation relates to what happened in 2016 when Titlestone came in and the financing shifted from Visage to Visage (Aberdeen). Obviously, Mr Tellwright would not rely on the Valuation in 2016 to the extent he had not done so in 2015. Everything I say above applies here.
- It seems to me that it goes further, however. Almost all of the witnesses who commented on this, including the valuation experts, agreed that the window for relying on a valuation was three to six months. Mr Griffiths gave 12 months as an outside figure; in fact the refinancing was a little over 12 months after the Valuation and so beyond even Mr Griffiths' long-stop date. In any event, Mr Griffiths' figure was based on there being a stable investment environment, when in fact evidence shows that the oil price – a key driver of the Aberdeen investment environment and a factor referenced in the Valuation's SWOT analysis – fell significantly during that period. Moreover, some time around June and July 2015 the construction completion date slipped from 2016 to 2017. That, in itself, seems to me sufficiently significant to justify revisiting the Valuation.
- The terms of the loan had also changed in the way I have addressed above. In particular, the borrower had changed and the amount at risk had increased significantly. As I have noted, under the terms of the Valuation itself that necessitated a revisiting of the figures.
- It was obvious that by 2016 Mr Tellwright would have needed an updated report. He could not reasonably rely on a valuation over a year old.
Novation
- The events of 2016 are said by the Defendant to give rise to a further issue for the claim. It argues that the effect of that transaction was to release Visage from its obligations to the Claimant, with equivalent obligations being assumed by Visage (Aberdeen). Since any reliance related to the loan to Visage, once it was released it could no longer be the cause of the loss. Mr Benson relied, in particular, on Preferred Mortgages v Bradford & Bingley Estate Agencies Ltd [2002] EWCA Civ 336.
- Ms Swaffield submitted that this was not the right interpretation of the DARN, that on the contrary it restated and amended the obligations of the VPSA. She sought to distinguish Preferred Mortgages on the ground that it involved a loan that was fully redeemed, which she submitted was not the case here.
- There are, it seems to me, three issues for the Claimant.
- First, and most obviously, I have found that the only aspect of the Valuation on which the Claimant was relying in entering into this transaction was the valuation figure, and that there was no breach of the duty of care and skill in giving that figure. Warnings about certain aspects of the Valuation should have been given but they would not have changed the Claimant's decision. Those things are fatal to the claim, regardless of whether there was a novation.
- Secondly, I broadly accept the Defendant's interpretation of the DARN. The parties agree that the principles in ascertaining whether novation was intended are summarised in Chitty on Contracts at 23-097 – 23-098. Novation can be of part or all of a contract; the label chosen is less significant than the intention of the parties.
- The starting point is the language of the DARN. This, it seems to me, is clear. The object of the DARN, summarised in the recitals, is to "transfer by way of novation" all of Visage's rights and obligations under the VPSA to Visage Aberdeen. That is reflected in the operative provisions of clause 2: Visage transfers its rights and obligations to Visage (Aberdeen) and the latter accepts them. Visage (Aberdeen) agrees to perform Visage's obligations under the VPSA and the Claimant agreed to accept that performance "in every way as if [Visage (Aberdeen)] had at all times been an original party in lieu of [Visage]". In my view this language is clear: Visage (Aberdeen) steps in; Visage steps out.
- Against that Ms Swaffield points to the restatement of the VPSA in clause 3 of the DARN. I accept that it is restated, but that clause cannot be read in isolation. As clause 2 makes clear, the VPSA is being restated in respect of, and only in respect of, Visage (Aberdeen). In light of the language used I simply do not see how any breaches, certainly any breaches post-dating the DARN, could be enforced against Visage.
- The factual matrix supports that. Mr Taylor gave evidence that Titlestone did not want to deal with a Northern Irish company. As a consequence there was a delay brought about by the need to negotiate with Offshore so that the lease would be granted to the new entity, Visage (Aberdeen). There then followed a transfer of the missives from Visage to Visage (Aberdeen) or a cancellation of the original missives and a grant of new ones to Visage (Aberdeen); either way, the effect is the same – the option agreement created by the missives was now in favour of Visage (Aberdeen), not Visage. Everyone wanted the Northern Irish entity's involvement to end and the new, English entity's involvement to begin. There was simply no ongoing role for Visage. That supports the clear and obvious meaning of the language used.
- Thirdly, while I accept that Preferred Mortgages was a full redemption case, it seems to me that was equally the case here. As I have noted, the language of the DARN talks about Visage (Aberdeen) being involved "in lieu of" Visage. Those words mean that Visage (Aberdeen) steps in and Visage steps out.
- Ms Swaffield relied on Barclays Bank plc v RBS & V Ltd [2016] EWHC 2948. In that case the borrower restructured their loan mid-term following a default. The original loan was repaid and a new, larger loan was granted from the same lender to the same borrower. Dove J at [93] stated:
The key issue which distinguishes, in my view, this case from the Preferred Mortgages type of situation, is that the security of the all monies charge by way of mortgage entered into in reliance on the valuation provided by the defendant had not been redeemed as was the position in the Preferred Mortgages case. Thus, in my view, the scope of the duty owed by the defendant remained extant notwithstanding the internal accounting adjustments which had been made by the claimant in 2008 following Mr and Mrs Watson's default.
- While I accept the principle, this is not the same sort of case at all. The only charge was granted by Visage (Aberdeen); Visage's debt was either released with a corresponding debt assumed by Visage (Aberdeen) or there was a transfer between the two entities, but however one characterises the legal mechnics the effect was the same – the borrower changed; and so as a consequence no action could be taken against Visage for any default after the DARN. In my view this does fall within Preferred Mortgages and that, in itself, would defeat the claim.
Loss
- It follows from what I say on causation that the Claimant has suffered no loss from the breaches of the Engagement Letter. It follows from that that no interest is due.
Contributory negligence
- This seemed to be a defence pursued with declining vigour as the trial progressed. Ultimately the argument was that the lending was high risk and vulnerable to a slight shift in occupancy rates, yields or market growth.
- None of this seems to me to go anywhere. There is no suggestion that Mr Tellwright failed to act as a prudent joint venture partner would. Had I found that he had relied on the Valuation, I would have seen no basis for concluding that he had been negligent in the way he acted.
Exclusions and limitations of liability
- The final question is whether the Exclusion Clause or the Limitation Clause operate to catch the Claimant's losses. Obviously, given my other findings it seems to me that this does not arise – there is no recoverable loss to be caught. To the extent it were relevant, in my view both clauses are valid and effective.
- The first issue is incorporation. I did not understand there to be any issue with the incorporation of the Limitation Clause. Mr Tellwright saw it and understood what it meant; he simply underestimated the scale of his potential losses. Indeed, far from saying there was an issue with drawing attention to the Limitation Clause, Ms Swaffield's point was that it was used to distract attention from the more wide-reaching Exclusion Clause. The Limitation Clause was part of the Engagement Letter.
- As to the Exclusion Clause, Ms Swaffield relied on Sky Solutions Ltd v Be Caring Ltd [2021] EWHC 2619. That case involved a cancellation charge which arose under the claimant's standard terms and conditions. The claimant's case was that a contract was concluded on the defendant signing an order form, which referred to but did not provide the standard terms.
- HHJ Stephen Davies referred to the principle in Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] EWCA Civ 1371 at [29]: "It is a well-established principle of common law that, even if A knows that there are standard conditions provided as part of B's tender, a condition which is 'particularly onerous or unusual' will not be incorporated into the contract, unless it has been fairly and reasonably brought to A's attention."
- Applying that principle, the learned Judge focussed on a number of factors at [110]:
(ii) Prior to receiving the order form the defendant was not told and had no reason to expect that it would be exposed to a very substantial contractual liability from the claimant should it decide not to enter into a contract for MNS.
(iii) The order form did not make clear and, to the contrary, positively obfuscated the nature of the contract which the claimant was putting forward to the defendant. It is not surprising that the defendant was misled into believing that it was simply signing an order form as a precursor to entering into a contract with EE rather than entering into a contract with the claimant which made it liable to pay a very substantial cancellation charge if it did not do so.
(iv) Although the order form did make express and reasonably clear reference to the claimant's STCs, it did not explain their essential purpose or give any warning that they imposed potentially substantial obligations on the defendant in favour of the claimant if it did not proceed with the MNS contract or cancelled it early.
- He considered at [111] that the offending clause "was cunningly concealed in the middle of a dense thicket which none but the most dedicated could have been expected to discover and extricate". He concluded at [112]:
I accept that this was a contract between two commercial entities and that the defendant had every opportunity to access and read the STCs before signing the order form. However, in my view this case comes very close to a misrepresentation case, in that the offending terms are concealed within detailed T&Cs, making it very hard to see the important from the unimportant, and introduced by reference to an order form which gives the impression that it is the first step to entering into a commercial relationship with EE. In my judgment that is a very powerful reason for holding that the clauses were onerous and that not only were they not fairly and reasonably drawn to the defendant's attention but that on an objective analysis they were positively concealed.
- The analysis, in my view, has two stages. First, one must ascertain whether the clause is onerous. That involves ascertaining its meaning, which in this case was not immediately clear. Ultimately the parties seemed to agree that it was an exclusion of liability for indirect and consequential loss. Such provisions are common in business contracts, reflected by the number of cases that have considered what the term "indirect and consequential" means. The clause in Sky Solutions, by contrast, was an unusual one, creating liability where the defendant was entitled to think that none was likely to arise. In deciding whether a clause was onerous it also seems to me relevant, applying Goodlife at [46], that the Defendant was charging a modest fee for its work; it would have come as no surprise that it was not assuming unlimited liability in return.
- In the circumstances, I do not consider the Exclusion Clause to be onerous. As Goodlife and Sky Solutions make clear, the obligation to bring a clause to the other party's attention is limited to onerous or oppressive clauses; it does not apply here.
- Even were it to apply, however, it seems to me that it was brought to the Claimant's attention. Goodlife at [54] highlighted the relevance of a party having had the opportunity to take legal advice. Here, not only did the Claimant have such an opportunity, it availed itself of it and took such advice, sending the Engagement Letter to Pinsents. They obviously reviewed it because they had comments on it. As I have noted, the Exclusion Clause was in an appendix to the Engagement Letter, rather than the letter itself which referred only to the Limitation Clause. But the appendix was sent with the main letter, is only three pages long and the Exclusion Clause is on the first page. It would be remarkable for any lawyer to have missed it.
- I therefore consider that the Exclusion Clause was incorporated into the Engagement Letter.
- As I have indicated, a further issue arises with the interpretation of the Exclusion Clause, which is said to catch "all business losses". Given that an SPV engaged in commercial property investment and lending would have no other types of loss, that arguably catches all possible losses.
- Neither party contended for anything so broad. Mr Benson submitted that the clause when read in context was intended to apply to indirect and consequential losses. Ms Swaffield, I think, agreed, but contended that the losses suffered by the Claimant were direct, relying on GB Gas Holdings Ltd v Accenture (UK) Ltd [2010] EWCA Civ 912 at [66]:
The judge held that none of these items of these items of loss was excluded by clause 16.2 of the Amended JPA. That subclause provides that neither party is to be liable for:-
i) loss of profits or of contracts arising directly or indirectly;
ii) loss of business or of revenues arising directly or indirectly;
iii) losses or damages to the extent that they are indirect or consequential or punitive.
The judge considered each item and held that none of the losses claimed came within the second limb of Hadley v Baxendale (1854) 9 Exch 341, were not therefore indirect and could therefore be recovered. This meant that the losses did not fall within 16.2 and to that extent I agree with the judge.
- I do not read that as a blanket statement that all losses of profits are direct losses. Rather, whatever loss of profit that was claimed in that case was direct and so recoverable.
- The reference to Hadley v Baxendale was to the following passage of Field J's judgment in GB Gas Holdings:
78. It was common ground that the words "directly" and "indirectly" in Clause 16.2 referred respectively to the first and second limb of the rule in Hadley v Baxendale (1854) 9 Exch 341 : "Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of it."
- The loss will therefore be direct if it arises according to the usual course of things. The Claimant is an SPV. Mr Tellwright's evidence was that he would use a new SPV for each transaction. In the ordinary course of things there would be no profits for the Claimant on further transactions because there would be no such transactions. Profits that could have been made by the Claimant on this transaction would therefore have been direct and not caught by the Exclusion Clause; profits on other transactions would have been indirect and so excluded (and in any event would likely have been the profits of another SPV, not the Claimant).
- Finally, there is a question of whether the Exclusion Clause or the Limitation Clause are unenforceable under the Unfair Contract Terms Act 1977 (UCTA). The parties agreed that UCTA applies and that I am to consider, among other things, the factors set out in schedule 2. Under section 11(5) the burden is on the Defendant, as the party relying on the clause, to show that it was reasonable.
- While the Exclusion Clause and the Limitation Clause are different in their operation, neither party distinguished between them for the purposes of the UCTA reasonableness test. The Defendant relies on a number of factors:
i) Caps and exclusions are common in this industry, evidenced by the terms from other valuers.
ii) The fee of £2,850 was small compared to the £5 million cap.
iii) The Claimant had legal advice and knew about both the Limitation Clause and the Exclusion Clause.
iv) The Claimant could have used another advisor – there were multiple valuers with PBSA experience.
v) There was equality of arms in the bargaining position.
- The Claimant's case focussed on these being standard terms that were not negotiated. Ms Swaffield also observed that the Defendant could, and indeed had, obtained professional indemnity insurance.
- In my view the Limitation and Exclusion Clauses were both reasonable. It does appear that such limits on liability and exclusions of indirect losses are used by other valuers, and in the context of a relatively small, fixed fee one can see why they are appropriate; a similar point was made in Goodlife. Mr Benson raised the point specifically in the context of the Limitation Clause, but the same logic applies with equal force to the Exclusion Clause.
- Mr Tellwright was certainly aware of the Limitation Clause and his evidence was that he did not seek to negotiate it up because he considered it to be "appropriate". I have already found that Mr Tellwright had the Exclusion Clause fairly drawn to his attention; I believe he could also have sought to negotiate that. The Claimant's point that the terms were not negotiated therefore goes nowhere – it was the result of a decision made by the Claimant.
- Finally, I accept that there were alternatives to the Defendant had the Claimant been uncomfortable with their terms. In this dispute alone expert reports have been submitted from three different firms and Titlestone obtained a valuation from a fourth firm. It was not suggested that there was a shortage of valuers from whom the Claimant could have obtained a report.
- Had it been relevant I would therefore have found that the Limitation and Exclusion Clauses were incorporated and enforceable, the latter applying to exclude indirect and consequential losses.
Conclusion
- In late 2014 the Aberdeen PBSA market, which up to then had been performing well, was approaching the point of reversal. Over the time that the Development was under construction inflation would rise and demand would fall, taking rents and occupancy with it. The terms of the lease meant that, for the Claimant, this was a perfect storm – risks materialised and the hedges put in place to mitigate them failed. With hindsight all of this is clear; at the time it was neither foreseen nor reasonably foreseeable to the parties.
- Mr Benson acknowledged that this was not the Defendant's finest file. I agree it was not. Mis-statements were made to Mr Tellwright about an inspection of the Property that have never been fully explained, such that he was charged for a service he did not receive. Warnings were not given that should have been given about features of the Leasehold, the very features that ultimately proved problematic in realising the Claimant's investment. It is understandable, in such circumstances, that Mr Tellwright has come to feel aggrieved over what happened.
- The difficulty is that his sense of grievance has meant that the facts in this case have come to fit the theories, when the reverse should be the case: the facts must come first. I have found that Mr Tellwright was used to working with, not against, his professionals. He was used to the caveats such professionals used, and used to identifying the gist of what was being said even so. His skill in that regard has brought him considerable success. Even had appropriate warnings been given, in the buoyant Aberdeen PBSA market of late 2014 and early 2015 I believe he would have taken what looked at the time like a manageable risk based on the gist of the Valuation, which was reasonable, that in 18-24 months there would be a willing buyer ready to pay around £16.5 million for the Leasehold. I do not believe that Mr Tellwright would have walked away from a deal with such potential over the failure to carry out an inspection of a building that was to be demolished in any event. That aspect of the Valuation was to show institutional lenders that the Claimant had done its due diligence; had he found out before investing that there had been no inspection he would have taken the pragmatic approach of either insisting that it be done by the Defendant or of engaging another firm.
- On those facts, no theory of law provides for recovery. What caused loss was that the valuation figure was wrong, but it was a reasonable figure when given such that there was no breach. Other terms of the Engagement Letter were breached, but they were not the cause of loss in this case. In such circumstances, the claim must fail.
