Prudential Assurance Company Ltd v. McBains Cooper [2000] EWHC Technology 85 (27th June, 2000)

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2. On 12th April 1995 the claimant made to the then owners of the building, Royal Life Insurance Limited, an offer in the sum of Ј6.9 million to purchase the building. That offer was subject, among other things, to a structural survey. The offer was accepted on 3rd May 1995. On the same day, the defendant was instructed on behalf of the claimant by fax to carry out the survey of the property as soon as possible, and on the following day was formally instructed to carry out the survey in accordance with an existing agreement. Under that agreement, which dated from 1992, the defendant was appointed to act as building surveyors for the claimant. In clause 3.1 of the agreement, it was provided :

Without prejudice to any implied warranties arising in respect of the performance of the Services, the Surveyor shall, in the performance of the Services, exercise all the skill, care and diligence reasonably to be expected of a professional consultant holding himself out as having the competence, experience and resources necessary for the proper performance of such Services.

3. On 22nd August 1994 the claimant had written to the defendants a letter of which the material part reads as follows:

We appear to have inherited a number of problems with roofing tiles and slates which are not always fixed with the precision and detailing required by the manufacturers (number of fixings etc). Such installations are giving rise to some concern, expecially having regard to the sums needed to rectify the defects.

In order to protect the fund from similar circumstances, I shall be grateful if you will ensure this issue accordingly.

Please will you ensure that investigations into such construction are as detailed and thorough as is possible having regard to access limitations.

4. A question arose whether that letter imposed a higher duty on the defendants than would otherwise have existed. The defendants' position was that it would not lead a reasonably competent surveyor to do anything other than what he would normally do in any event. But the basis of the defendant's position, which I accept, was that compliance with the general duty of care and skill required consideration of possible problems with roofing tiles and that investigation should be as detailed and thorough as possible having regard to limitations of access. It was not suggested that the limitation of the time available for the work affected either the duty or the performance of the work.

5. Mr Ney inspected the site, without having access to the building, on 8th May 1995. He took photographs using a telephoto lens and used binoculars to inspect the general state of the roofing and tiling. He inspected the building the following day, when he had access to it.

6. In accordance with the agreement, the defendants provided an executive summary report ("ESR") to the claimant in advance of a condition survey report ("CSR"). The agreement provided, by clause 3.4 and schedule 5 under heading 4, that the executive summary should be an overview of the recommendations and conclusion in the report, and must include major defects. Mr Ney completed the ESR on 15th May 1995 and it was sent to the claimant on 24th May 1995. Contracts between the vendor and the claimant were exchanged on 12th June 1995. Some time later Mr Ney completed the CSR, which was sent to the claimant on 17th June 1995, but not received until 23rd June, the day when the contract of sale was completed.

2.1 The roofs are built in two principal methods: the pitched sections are framed up in prefabricated timber trusses with nail plated joints. The trusses are sarked and battened and hung with clay pan tiles. The flat sections are of profiled sheet metal decks, with some form of insulating board overlay and built up felt covering. The feltwork is sound, but is a short life material, with an anticipated life span of some fifteen years, of which some ten years have passed.

2.2 The tiling requires minor repairs and these will require access by means of an hydraulic platform (known as a "cherry picker").

In section 7, under the heading Defects and Essential Repairs, the ESR stated, so far as material:

7.1 The defects and essential repairs we consider necessary now and within the next five years are set out below, together with the liabilities for those repairs:

8. It is clear on the evidence that the claimant relied on the ESR in deciding to go ahead with the contract. The complaint is that paragraph 2.2 and the section of paragraph 7.1 that I have quoted above were insufficient and the report failed to put the claimant on an enquiry which would show the roof to have required far more attention than was indicated in the ESR.

10. On 30th June 1995, one week after completion, a section of roofing tiles from the building fell on to the pavement beneath. No-one was injured. In consequence of the fall, the street was closed and emergency works were carried out to make the roof safe for pedestrians walking beneath. Interim remedial works were carried out in October and November 1995, and full remedial works were carried out between September and December 1996.

11. There were numerous defects in the roof. It is unnecessary for me to do more than to give a general description of them. My findings are based on the evidence of Mr Robert Bruce, FRICS, who gave expert evidence on behalf of the claimant. He had the advantage over the defendants' expert in having inspected the property before the repairs were carried out. Throughout the property the mortar bedding the verge tiles was cracked, and in one place a section of mortar was dislodged. Several ridge tiles were loose and their bedding mortar was cracked. As to the hip tiles, two arris hip tiles had fallen into the gutter below; many of the hip slopes undulated. The hip tiles should all have been nail fixed and spot bedded in mortar. Almost all of them had not been spot bedded in mortar, though in a few places mastic spot bedding had been applied to the edges of the tiles. The tiling adjacent to the hip tiles was not nailed or mechanically fixed; it should have been. In many places the tiles had not been lapped and coursed correctly, resulting in enlarged gaps between hip tiles and adjacent tiles. Tile battens had been poorly fixed, leaving gaps between battens and the adjacent hip batten. That caused the un-nailed tiling adjacent to the hip tiles to be prone to slippage. Battens were secured to the central rafter, allowing the weight of the tiles to displace the battens, causing the tiles to slip.

12. At the point where the tiles had fallen off the roof, the cavity brick and block wall which supported the verge detail had not been fully constructed. In consequence, the tiling could not be nailed at every course and relied solely on the mortar bedding to the outer leaf of brickwork. Moreover, the tiles abutting the verge tiles were not all nailed, as they should have been. Similar faults existed at other verges. At a verge on the North Street elevation, the battening to support the tiles had been cut short.

13. It is not suggested that Mr Ney ought to have, or indeed could have, found all those defects. Many of them were found by Mr Bruce when, together with representatives of the claimant and the defendants, he made an examination of the roof from a mobile access platform and with the assistance of specialist roofing contractors, Richardson Roofing Company Limited, who removed areas of tiling temporarily and replaced them once the investigations were completed. Mr Ney did not have, nor was he expected to have, that equipment or such assistance when he carried out his survey.

14. The claimant's case is that Mr Ney ought to have seen enough to become aware that the roof needed further investigation. It was wrong to describe the repairs required to the tiling as minor and wrong to say that they were likely to cost only Ј1,500 within the five years following the report. He was negligent, says the claimant, in stating those conclusions in the ESR and in failing, in the ESR, to recommend the claimant to carry out further investigations with the aid of a mobile access platform.

15. Mr Bruce himself had carried out an initial survey on his own, without an access platform, though with the benefit of knowledge of the incident when tiles had fallen off the roof. He had noticed that several of the ornate clay ridge tiles were loose and their bedding mortar was cracked; he could easily lift several of those tiles. He noticed the two arris hip tiles that had fallen and saw that two adjacent tiles had become dislodged. Using binoculars he could see that those tiles were not generally bedded in mortar. That prompted him to look more closely at the hip tiles generally. By examination closely from the flat roof areas and from street level and the adjacent car park roof using binoculars, he could see that many of the hip slopes undulated very noticeably and that there was little evidence that they were bedded in mortar as he would have expected. Along the Hayden Place elevation there was some special hip tiling which showed little evidence of any bedding mortar. He noticed that in various places round the property, a mastic compound had been used to secure the edges of tiles to adjacent tiles. That indicated to him that the hip tiles relied predominantly on their nail fixings. He thought that the mastic had probably been used at some time after completion of the building to try to secure tiles believed to be at risk from falling, and concluded that further investigations were warranted.

I also noted that there was a wide range of inconsistency in the manufacture of the tiles, and many arris hip tiles were curled up at their edges and consequently slightly mis-shapen. This, coupled with the undulations of the hipped slopes, could increase the risk of wind uplift and possibly account for the tiles having become dislodged.

In addition, I found that a few plain tiles had slipped from the roof-slope onto the flat roof areas and these allowed me to identify that the tiles were manufactured by Hawkins of Cannock from the markings on the underside of the tiles....... On returning to the office I telephoned the manufacturer and obtained details of the tiles, including the arris hip tiles and the manufacturer's recommendations for fixing. This quickly established that the hip tiles should all have been nail fixed and spot bedded in mortar. This was not the case at the Property and all of these facts alerted me to the need for further investigations.

17. A verge detail overlooking North Street was badly rucked. Mr Bruce concluded that there were potential problems with the structure beneath; the tiles themselves appeared loose. The lead cover flashing tucked under the edge of the verge tiling had loosened and did not appear to be adequately clipped. The poor condition of that tiling and the defective mortar to the verge tiling generally warranted further investigation, in Mr Bruce's opinion.

The main slopes generally appeared in fair condition, however on a closer examination with binoculars from street level, poor setting out of tiling was noted with tiles inadequately side lapped in many places. Further investigations should have been recommended, particularly in the light of other general findings, to determine the adequacy of the fixings.

19. Photographs illustrate the points made by Mr Bruce. But they represent only selected locations on a huge roof. The rucking of the verge detail is, however, particularly noticeable as photographed from the street, probably through a telephoto lens. Mr Ney did not notice it, either when he inspected the property from street level on 8th May 1995, or when he inspected the property on the following day. I am satisfied that he could easily have noticed it if he had looked down the sloping roof in question from the flat roof above, to which he had ready access. I find him to have been negligent in not noticing that marked feature, indicating that something might be wrong with the roof structure.

20. Mr Ney gave his evidence frankly. Regarding the plain tiling, he gave these answers to questions put to him by Mr Duncan McCall, counsel for the claimant, in cross-examination:

Q: Do you see in the centre of that photograph there are two rows of plain tile which are in line with each other?

A: It is not. I did not observe that in the generality of the tiling, no. ......

...... The generality of the plain tiling seems to me reasonably regular and properly executed. The fact that there are these errors, I have to confess I did not observe these areas during the course of my survey, so that the fact there are these areas where the lap of the tiles is not quite as it should be is something I did not observe.

Q: If you had observed them, would you have felt that they were perhaps indicative of poor workmanship?

A: They would have indicated to me that there had been some work carried out to the tiling that had not been done properly and it would need to be rectified as part of maintenance and repair.

Q: Would you have drawn attention to that aspect of poor workmanship in your report?

Q: Do you accept that with a telephoto lens or binoculars you could have got a view akin to photograph 8?

Q: Do you accept that other than a reference in the descriptions to your photographs, this defect is mentioned nowhere at all in the Condition Survey Report?

Q: Do you accept that it is not mentioned at all in the Executive Summary Report?

A: It is not specifically referred to. It is included in the repairs which would necessitate a hydraulic platform.

Q: From photograph 8, which is a view you say you could have had, you can see quite clearly, can you not, that these hip tiles were not spot bedded with mortar?

Q: It is true, is it not, that throughout this building the hips were not spot bedded with mortar. Do you accept?

Q: Do you also accept in your notes and your two reports you made no mention of the fact that these hip tiles anywhere on the building were not spot bedded with mortar?

A: That is correct, because I was not expecting them to be spot bedded with mortar.

A: From the manufacturer's data sheets issued in 1991 it would appear that that is what they recommended. ......

Q: You knew that the hips were not spot bedded in mortar, and you told us that, and you would have known, had you seen it, that repairs using mastic had been carried out at some locations. Would you not have concluded that somebody at some time had felt that the tiles in the hips should have been spot bedded but were not?

Q: My question was: Do you now acknowledge that your assumption that it was a dry hip roof was incorrect?

Q: Had you not made that incorrect assumption and had you been aware that mortar bedding had not been used, would you have then mentioned that fact in your reports?

A: If I had been aware that spot bedding was a requirement of this particular manufacturer, I think I would have then wanted to go back and look again at some of the hips at least.

Q: Would you have mentioned in your report that a further investigation was recommended?

Q: The specific question I asked you which you did not answer was to ask whether you agreed with this, that virtually all text books on the subject of roof tiling which mention arris hips say very clearly that arris hip tiles should be spot bedded in mortar. Do you accept that?

A: I knew that they were not bonnet hip tiles which are fully bedded in mortar and so, yes that is the only other form of hip tile which you can have which is an angle hip.

Mr McCall went on to put to Mr Ney a statement in his witness statement that the hip tiles were supported by a dry system:

Q: Did you make any enquiries, whether by looking in the text books or by contacting the manufacturers or anything, to discover whether the hip tiles should have been spot bedded in mortar?

21. In re-examination, Mr Ney answered some questions put to him by Mr David Holland, counsel for the defendants, as follows :

Q: You accepted that, had you known of the manufacturer's recommendation, you would or might have recommended a further investigation?

Q: What would be the nature of that further investigation that you would have recommended?

A: It would have been in association with the repairs I had noted on that one hip. One would have opened that up to do the repairs, and that would have then indicated that perhaps further investigation would be necessary.

Q: Would that have been something that you would have recommended on an urgent basis?

A: I had not recommended it on an urgent basis in the report; I had said it was work that needed to be done.

Q: I accept that is what you say about the maintenance problem. If you had been recommending an investigation, would that have been recommended on an urgent basis?

A: If once we had opened up that hip and found they were not spot bedded, and that they should have been, then, yes, I would have said it as a matter that should be investigated quickly on the other slopes.

22. I find that Mr Ney was negligent in failing to appreciate that the hip tile system ought not to have been a dry system, but that the hip tiles ought to have been bedded in mortar; that he could readily have found out from textbooks or the manufacturer's data sheets that the hip tiles ought to have been spot bedded in mortar, but failed to do so; and was negligent in failing in consequence to recommend in his ESR that a further investigation should be carried out, which he should and would have done if he had appreciated that the hip tiles ought to have been spot bedded in mortar. It is unnecessary for me to decide whether the rucking in the tiles on the roof overlooking North Street ought to have led Mr Ney to recommend further investigation.

23. I am satisfied of the following matters on the evidence of Mr Peter Hoskyn, who was involved as a director of Prudential Portfolio Managers Limited ("PPM") in the provision of advice on investment and property management to the claimant as well as to other members of the group of which the claimant and PPM are members, and was responsible for the acquisition of the property. The claimant had been advised by its investment agents that the value of the property, with an initial rental yield of 7.6% allowing for purchase costs, was Ј6.9 million on the assumption that the property had no material defects. It made an offer of Ј6.75 million which was not accepted, and increased the offer to Ј6.9 million, which was accepted. The offer was subject to contract, full measured survey and board approval. Full measured survey is a shorthand expression for a full structural survey and a measured survey. It is the former that is the subject of these proceedings. In most pre-purchase surveys it can be expected that there will be a number of items of disrepair identified. If items of disrepair, other than very minor matters, are identified a recommendation to the Property Fund Manager of the acquiring fund, in this case the claimant, will be made proposing either:

(ii) to negotiate with the vendors a reduced purchase price reflecting the cost of rectifying the defects identified by the structural survey; or

(iii) to confirm authority to proceed at the original purchase price with the Fund accepting the extra cost of rectifying the defects. This option is only chosen very rarely, and only after a thorough investigation of the defects has revealed that, notwithstanding the defects, the proposed purchase price still represents a good investment.

In this instance, if the pre-purchase survey had identified the roof defects which were subsequently discovered, or suggested that there were grounds for concern over the roof construction and state of repair, Mr Hoskyn would have recommended that the claimant should not proceed to exchange of contracts until the matter had been clarified. That recommendation would have been agreed. Mr Hoskyn would not have proceeded with the purchase unless he had been able to negotiate an arrangement with the vendor whereby the claimant would have continued with the acquisition of the Property but on the basis of a price reduction to reflect all the anticipated costs of fully rectifying the roof defects. Assuming that the vendor did not withdraw, Mr Hoskyn would have caused to be commissioned a fuller survey into the condition of the roof to determine the extent of the problem.

24. It has not been suggested that such survey would have been less thorough than that which was in fact conducted after the tiles fell off the roof. I am satisfied that Mr Hoskyn would have attempted to negotiate a reduction in price to reflect the perceived cost of remedying the defects. If he had not succeeded in negotiating a reduction to his satisfaction, the sale would not have gone ahead.

25. The interim remedial works were valued at approximately Ј29,000 in December 1995. In April 1996 the firm in which Mr Bruce was a partner, Tuffin, Ferraby & Taylor, provided budget repair costs in the region of Ј200,000. They prepared a specification for the remedial works which was put out to tender. There were four tenderers, their tender figures being approximately Ј200,000, Ј163,000, Ј116,000 and Ј125,000, the last being from Richardson Roofing. Richardson Roofing submitted an alternative and lower tender, in the sum of approximately Ј100,000, for the complete removal of roof tiles and leadwork, the carrying out of remedial repairs and reinstatement of roof covering making up any deficiencies in materials.

26. The claimant accepted that alternative tender because of its competitive price and because it involved not only repairs to those known defects but also any other hidden defects which might be discovered in consequence of the complete removal of the roof tiles and leadwork.

27. The work was finally completed for a sum of Ј116,286.40, and the total cost to the claimant of carrying out the repairs to the roof was as follows:

28. Counsel are agreed that the measure of damage in this case is the diminution in value of the property. That shorthand expression means the difference between what would have been the value of the property if it had been in the state indicated by the report, and its actual value in its actual state. No distinction has been drawn between the value of the property based on the hypothesis that it was in the state indicated by the report, and the price actually paid for the property. Nor has any distinction been drawn between the actual value of the property and the price that would have been paid for it if the report had been as it should have been.

29. As a preliminary to considering the quantum of damages, I must mention this. The property was let to five tenants, occupying four shops and a snooker hall. The total annual rent was Ј540,601. One of the tenants (the occupant of the snooker hall) paid only a nominal rent, which was not subject to review, but it paid 29% of the total annual service charge. The tenants had covenanted to bear the costs of repair of the premises. A proportion of the cost of repairs equal to the proportion of its liability for the service charge could be recovered from each of the tenants, subject, however, to the fact that one of the tenants (not the occupant of the snooker hall) had the benefit of a deed which excluded costs and expenses in connection with the initial construction of the building. It was arguable that the works carried out to the roof fell within that description. Thus that tenant's share, which amounted to 29% of the whole expenses, might be irrecoverable.

30. Mr McCall submitted, on the expert evidence of Mr James Steevens, FRICS, a partner in Weatherall Green & Smith, property consultants, that the diminution in value was Ј250,000.

31. Mr Holland relied on the expert evidence of Mr D J Preston, FRICS, a director of Jones Lang LaSalle Limited responsible for the valuation of all kinds of property owned by institutions, corporations and the public sector. He was of the opinion that the diminution in value was nil.

32. Mr Steevens formed his opinion by reference not only to the defects, quoting the cost of repairs at approximately Ј200,000, but also what he described as the stigma attached to defective properties, being the suspicion that they were poorly constructed originally, and the large risk factor remaining with the purchaser that the structural survey might have uncovered only half the problem. He pointed to the four options open to an intending purchaser on receiving an adverse structural survey. The first was simply to withdraw from the acquisition, which he described as a not uncommon response with most institutional investors who are simply not prepared to accept defective properties in their portfolios. With reference to the stigma, he went on :

This uncertainty over the true condition of a property would also deter investors from simply choosing to try and recover the cost of the known defects through the tenants service charge and is why it makes little difference to some purchasers whether or not the properties are let under full repairing insuring leases where the cost of repairs are fully recoverable. Therefore the existence of defects has much wider implications for investors than just the likely cost of repair work and whether or not the tenant is liable under a lease.

The second option was to negotiate a reduction in the price to reflect the existence of the defects, the element of risk as to the extent and cost of necessary repairs, and the diminished marketability of the building in its defective state. The third option was to proceed regardless. That situation would arise where the purchaser was confident he was getting a bargain, which was not this case, or in the unlikely event that he could recover the costs from the service charge with no adverse effect on the tenants. The fourth option was to place the responsibility for remedying the defects on the vendor, the purchaser making a retention against the purchase price. The retention would be released once the defects had been remedied by the vendor at his expense. In that scenario the risks and the managerial time in organising the necessary repair works were with the vendor and the purchaser would release the retention only on the satisfactory completion of the works.

33. In my judgment it is clear that the third option does not apply in this case, since the price paid was treated as the value of the property in the condition described in the report.

34. Mr Preston took the view that the sum of Ј40,000 recovered under a builder's warranty, a matter to which I shall return, implied that that sum represented the real cost of repairs inclusive of fees. He accepted the temporary repair costs at Ј30,000, but considered the balance of Ј105,000 to constitute unnecessary works. He expressed the view that the sum of Ј40,000 for necessary works would not have had a material impact on the purchase price of Ј6.9 million. His view was based on the fact that the capital value of a let investment was dependent upon the expectation and constancy of a net rental income, adjusted for landlord's liabilities (if any). Where an investment was let on full repairing and insuring covenants by the tenant ("FRI terms") or effective FRI terms, the future rental income could become prejudiced in certain circumstances, notwithstanding that repairs were or would become necessary. Those circumstances were threefold. First, there could be repairs falling outside the covenant. He understood the claimed costs to be fully recoverable from the lessees. Second, the covenant strength of the lessees might be perceived as insufficiently strong to meet the costs, i.e. they might not be good for the money. Third, owing to multiple occupation of the premises the cost of recovering sums might be disproportionately high in relation to their amount.

35. As to the first point, it turns out that Mr Preston was mistaken; I have indicated above the position as to the repairing covenants as it finally emerged during the trial. As to the other two points, it was not suggested that the cost of repairs might be irrecoverable or that it might be uneconomic to recover it.

36. Mr Preston also referred to some secondary factors which could have an impact on the negotiation of the price. The only two I need mention at this point are these. The first was the increase in service charge as a proportion of the usual level in the context of the total cost of occupation, viz. the aggregate of rent, rates payable and service charge. He calculated that increase as varying between about 13% and about 19% for the tenants of the shops, on the basis that the whole Ј175,000 would be charged to the tenants in one year. Those figures were the proportionate increases in total charges. The service charges were themselves comparatively small, and I find that if the whole of the repair costs had been charged in one year to those tenants liable to pay them, the tenants in question would have found their service charges increased almost elevenfold.

37. Mr Preston's second secondary factor was the effect of an unusual increase in service charge on rent review negotiations between lessees and the purchaser. Mr Preston concluded that that would not be an adverse factor. On the evidence, I am satisfied that although the increase in service charge is a matter that could be used in argument in rent review negotiations or before a tribunal, its effect on the new rent would be nil or minimal.

38. Mr Preston adhered to his view even if a sum of Ј175,000 was held to amount to a reasonable repair cost. He pointed to the fact that that sum would still be less than the costs of acquisition (stamp duty, agents' fees and legal fees) at 2.7625% of the price, (ie Ј190,612.50).

Q: Go to paragraph 8.1 over the page, please, dealing with the relevant valuation principles. You say this:

"The starting point is that the capital value of a let investment is dependent upon the expectation and constancy of a net rental income, that is adjusted for landlord's liabilities (if any)".

Mr Preston, I appreciate of course that net rental income is very important, but surely if you are valuing any building, the starting point is the building itself, is it not? You would look at the building and get some idea of what it is worth?

A: As an investor, what you are buying is the cashflow and you are going to be appraising the risks that are associated with buying that cashflow. Very few investors will buy buildings that are in poor condition. But if you have costs to recover, you want to be able to recover them. If you cannot recover them, you will make an adjustment to what you think you will pay for the building.

Q: Can I test that? Imagine two identical buildings side by side in the same location, both precisely the same size, the same number of units, and both on full repairing and insuring terms. If the only difference between those buildings is that one has defects which require repair at a cost of, say, Ј200,000, all other things being equal, the building in need of repair will be worth less than the other one, is it not?

Q: Can I add to my assumption that both are fully let to good tenants on full repairing terms?

A: You then have to put it into a question of degree. How much is Ј200,000 against the overall value of the building? If it is a small amount, something which the tenants are gong to be able to physically bear, then why should the value change? The tenants are under an obligation to keep the building in repair. Why does the value change?

Q: Let us just extend your notion here. Assuming that the tenants in both cases are AAA-rated Swiss banks and similar institutions who will undoubtedly be able to pay whatever service charge is levied against them and it is fully let in both cases. Surely there would come a point in your assessment when the cost of the remedial works, as it got higher and higher, would have some effect on the value of the building; surely you would accept that?

A: You are now changing the question you gave me. If you are saying it is escalating up, then there will come a point at which you will say the cost of repairs versus the value of the whole looks like a very big number and that could have an impact. When you are dealing with a small amount of money versus the value of the property I am saying that it does not have an impact. It is recoverable from other people. ...

Q: Would your opinion be the same if the remedial costs had been, say, half a million pounds?

Q: So can I glean from your answers that at some point between 175,000 and half a million, there would have come a point when the cost of remedial works would have been such as to have a detrimental effect on the value of the property; is that right?

A: No because it could have been that the starting point is half a million pounds and anything below that is not. You cannot draw the inference between 175,000 and 500,000 just like that.

Q: Maybe you would like to state what your case is. At what figure would the value start to decrease?

A: I do not think you can be as categoric to say there is a figure at which it happens. As the costs start getting bigger, so as a valuer you will start to say that there is quite a lot of expenditure required on this building. But at Ј175,000, in my opinion that is a containable amount of money.

40. I think it is a fair interpretation of Mr Preston's evidence (and, indeed, he said so) that with repair costs of Ј175,000 the effect on the value of the property is so small that it is lost in the uncertainty of valuation. Mr Preston did not value the property on either basis, and in my judgment it is a mistake, when seeking to determine the diminution in value, if any, to ignore a comparatively small sum on that ground.

41. Mr Preston himself gave evidence of instances of sales of property where prices had been reduced because defects had been found in the property and the leases were not on FRI terms. In the present case, 29% of the repair costs might not have been recoverable from the tenants.

42. It is clear from Mr Preston's evidence that I have quoted above that very few investors will buy a building that is in poor condition, apparently because that increases the risks associated with buying the cash flow. If there is a paucity of investors, the price in my judgment is likely to be depressed. And an increase in risk in my judgment is likely to increase the required rate of return. If one adopts Mr Steevens's figure of Ј250,000 for the diminution in value, that would increase the rate of return from 7.6% to 7.9%.

43. On the totality of the evidence, including his own, I cannot accept Mr Preston's view that the diminution in value was nil. I accept Mr Steevens's evidence that a stigma, to use his word, would have attached to the property if the report had been as it should have been. If the damages have to be assessed as at the date of the transaction, which the diminution in value criterion seems to imply, that must be a relevant factor in assessing the diminution in value. In this case, given the thorough nature of the work carried out by Richardson Roofing, I am satisfied that on completion of that work the stigma would have been reduced if not removed.

44. Mr Steevens gave three reasons for arriving at his figure of Ј250,000. The first was the estimate of about Ј200,000, plus fees, for carrying out the repairs. The second was what the situation would have been if the claimant had re-offered the property for sale in the market without carrying out any repairs. He considered the effect on the price and pointed out that his figure represented an increase on yield of 0.3%. For the third point, I shall quote evidence he gave in the course of his cross-examination:

I think looking at the issues that surround the recovery of the repairs, the basis on which the tenants might dispute them....You are also looking at a potential litigation situation and on that basis alone I think you could justify reducing the price by quarter of a million.

A: It is a subjective view on how the market would approach a different set of circumstances to the one under which the price was negotiated.

I think from a purchaser's point of view this is now a management intensive situation with problems to work out and institutional investors do not like management intensive situations of this nature particularly if they lead on to litigation.

A: We had a very similar situation for one of our institutional clients, which was British Gas,where Spanish slates were used as opposed to Welsh slates on the roof. The structural survey pointed that up as a possible defect, and they just withdrew immediately. It was perfectly capable of repair. I stand by what I say, in my experience, if a building does not pass its structural survey, some institutions will just withdraw full stop. They will not go through the process of sorting the problems out. They will not go through the process of litigating on warranty. They will just withdraw and say, "Find me another one."

Q: All institutional investors are not like that. It does not render a property unsaleable, does it?

"This uncertainty over the true condition of a property would also deter investors from simply choosing to try and recover the cost of the known defects through the tenants service charge and is why it makes little difference to some purchasers whether or not the properties are let under full repairing insuring leases."

Q: You say there even, if you are right, it makes little difference to some purchasers; obviously to some purchasers it does make a difference, does it not?

A: I am saying to some purchasers it makes little difference whether the costs are recoverable under leases, simply because they do not want to get involved with these type of properties which have defects full stop......

Q: But the point I was making is that any institutional investor, or commercial property organisation, part of their commercial risk is that, at some stage, they may have to get involved in litigation in order to recover service charges; you accept that?

A: It is part of the commercial risk but, as I understand it, it is fairly rare.

Q: It is part of the commercial risk. It is part of the commercial risk they might get into a dispute with one of their tenants as to the liability or for all or quantum of the service charge?

Q: It is part of the commercial risk, in any event, that some or all of the sums which they have expended might not be fully recoverable?

45. I was impressed by Mr Steevens's evidence on this point, which was coherent and persuasive. As he said, his view was subjective. On balance, I am satisfied that the diminution in value was Ј250,000.

46. Mr Holland submitted that once the repairs were carried out, the stigma was removed. To award the claimant damages in the sum of Ј250,000 would be to give it an award for loss which it had not in fact suffered. In my judgment, given the basis of the measure of damages as the diminution in value, Mr Holland's argument is an argument that the claimants have mitigated their loss (if, as I have found it to be, greater than the cost of repairs) by carrying out the repairs, thereby removing not only the stigma but eliminating the whole diminution in value (as I assume). The force of that argument depends upon the basis upon which the measure of damages is arrived at. If the claimant would have bought the property at Ј6,650,000, the carrying out of the repairs cannot mitigate its loss, which is the difference between the price paid and the price that would have been paid if the report had been as it should have been. The claimant could have carried out the repairs in any event. If, on the other hand, the claimant would not have bought the property, then it has been landed with a property worth Ј6.65 million, having spent Ј6.9 million. Mr Ney did not warrant the value of the property, but if he had not been negligent the claimant would not have had the property and would not have spent the Ј6.9 million on it. It is thus Ј250,000 worse off as a foreseeable and direct result of the defendant's negligence, a loss which falls within the defendant's duty. By spending the cost of repairs the claimant has, one may assume, recovered the diminution in value. In my judgment, if the principle enunciated in British Westinghouse -v- Underground Electric Railways (1912) AC 673 were to be applied, the claimant would thereby have mitigated its loss and be entitled to only the amount of the cost of repairs as damages. The problem here is that it is uncertain whether the claimant would have bought the property at Ј6.65 million or not at all; I am unable to make any finding on the point. This seems to be the normal situation in circumstances like the present. In what is now the leading case on this subject, Watts -v- Morrow [1991] All ER 937, CA, it was found that the female plaintiff purchaser would not have gone ahead with the purchase; the male plaintiff purchaser would either not have agreed to buy the house or would have agreed to buy only if he had been able to negotiate a substantial reduction in the price based on quotations for the work required. But there was, not surprisingly, no finding what would actually have happened, given that the plaintiffs were joint purchasers. The effects of the two different hypothetical outcomes of a proper report were considered; but nevertheless for the generality of cases, the outcome where the claimant would not have bought the property was assimilated to that where the claimant would have bought the property at a reduced price. Ralph Gibson L.J. said this (pp.950,951):

The consequences of the negligent advice and of the plaintiff entering into the transaction into which he would not have entered if properly advised may be such that the diminution in value rule is not applicable.......

It is also clear, and again there was no argument for the plaintiffs to the contrary, that, if the plaintiff would have bought the house anyway, if correctly advised, the ruling in Phillips v. Ward is applicable: the fact that after purchase he discovers that the unreported defects will cost more than the diminution in value does not entitle him to recover the excess. That is, again, because, if the contract had been performed properly, he would have negotiated and, absent proof of a different outcome, would have done no better than reduction to the market value in true condition.

It was rightly acknowledged for the plaintiffs that proof that the plaintiff, properly advised, would not have bought the property does not by itself cause the diminution in value rule to be inapplicable. It was contended, however, that it becomes inapplicable if it is also proved that it is reasonable for the plaintiff to retain the property and to do the repairs. I cannot accept that submission......

I would accept Mr Naughton QC's contention that the measure of damages cannot be governed by an inflexible rule of law to be applied in all cases irrespective of the particular facts and regardless of whether or not such measure gives effect to the underlying principle. But this does not mean that there may not be sound prima facie rules to be applied in the ordinary run of cases. Examples may be found in ss 51(3) and 53(3) of the Sale of Goods Act 1979: these are only prima facie rules, but they reflect the same underlying principle and they govern cases to which they are not shown to be inapplicable......

The prima facie rules referred to by Bingham L.J. are, I think, based on the proposition that in the case of sale of goods the innocent party is deemed to have re-sold the goods in the market at once in order to mitigate his loss, and any further loss or gain caused by fluctuations in the market while he delays in so doing is for his own account. That rule, applicable prima facie to sale of houses, has been applied by common consent, and I do not doubt correctly, in this case. If the claimant in this case had immediately re-sold the property, it would have suffered a loss of Ј250,000. Thus even if it be assumed that the claimant would not have bought the property if the report had been as it should have been, it is arguable that the expenditure does not go in mitigation of the damage. If the claimant had held on to the property for a while, without repairing it, and then sold it at Ј6.9 million, the market having risen, it would be strongly arguable that that advantage was for its own account. It would be odd if it were worse off by spending money on repairing the property in a static market. Having regard to the logic behind the prima facie rule applied in this case, that the measure of damage is the diminution in value, I hold that the damages are not to be reduced by reason of the carrying out of the repairs.

47. Mr Holland, for the defendants, contended that the claimant had failed to mitigate its damage. First, he said that the claimant ought to have charged the repairs to the tenants as part of their service charges, given that the leases contained repairing covenants on the part of the tenants. In my judgment, given that the claimant is not claiming the cost of repairs, that contention is irrelevant. Nevertheless, I shall deal with it. Second, Mr Holland said that the claimant ought to have obtained more than the Ј40,000 that it did obtain from the contractors who had built the property, under a guarantee of which the claimant had the benefit.

48. I shall consider the first point first. I say at once that I would not readily accept the proposition that a person causing damage by a breach of duty on his part should be entitled to escape liability on the basis that the damage ought to be transferred by the claimant to an innocent third party.

49. The leading case on mitigation of damage is British Westinghouse -v- Underground Electric Railways [1912] AC 673. Viscount Haldane, LC, in a unanimous decision concurred in by Lord Ashbourne, Lord Macnaghten and Lord Atkinson, said (p.689) that the plaintiff had to take all reasonable steps to mitigate the loss, and went on:

In the words of James L.J. in Dunkirk Colliery Co -v- Lever (1878) 9 ChD 20, 25 "The person who has broken the contract is not to be exposed to additional cost by reason of the plaintiffs not doing what they ought to have done as reasonable men, and the plaintiffs not being under any obligation to do anything otherwise than in the ordinary court of business".

As James L.J. indicates, this second principle does not impose on the plaintiff an obligation to take any step which a reasonable and prudent man would not ordinarily take in the course of his business.

Simon Brown L.J. in Walker -v- Medlicott & Son [1999] PNLR 531, 549 said that it was a well-established principle that the standard of reasonableness required of the plaintiff is not a high one.

50. No case has been cited to me in which it was held that a claimant had unreasonably failed to mitigate his loss by failing to pass on the loss to an innocent third party.

51. In London & South of England Building Society -v- Stone [1983] 1 WLR 1242,1263 Stephenson L.J. said that a plaintiff need not take steps to recover compensation for his loss from parties who, in addition to the defendant, are liable to him. Mr Harvey McGregor QC said the same thing in McGregor on Damages 16th ed (1997) 213 at paragraph 329. The passage in question reads as follows:

A plaintiff need not take steps to recover compensation for his loss from parties who, in addition to the defendant, are liable to him. This is an undoubted principle: indeed without such a principle it would have been unnecessary for the legislature to make provision for contribution and indemnity between joint and several tortfeasors. And The Liverpool (No. 2) shows that, even if the third party offers payment of the amount for which he is liable, the plaintiff is not required to accept it in mitigation.

In my judgment, that passage is perfectly correct, though The Liverpool (No. 2) [1963] P 64 was not a case directly on the question of mitigation. The Court of Appeal decided that no duty rested on a claimant against a fund provided by a tortfeasor to satisfy part of the damages by resorting to another tortfeasor or, still less, to an innocent party made liable to the claimant by statute. The fund being insufficient to meet all claims in full, the court applied the analogy that a creditor proving for a debt in bankruptcy did not have to give credit against his claim for any security he might have from a third party. But it also gave as a reason for its decision the point raised in the second sentence of the passage from McGregor on Damages that I have quoted above. Harman L.J., giving the judgment of the Court of Appeal, said (p.83):

If it were otherwise there would be no necessity for the Law Reform (Married Women) and Tortfeasors Act 1935, and the law about contributions between tortfeasors, for any tortfeasor could oblige the creditor to sue the other debtors in order to alleviate his burden.

It must follow, in my judgment, that a claimant cannot be said to have failed to mitigate his damage by failing to recover his loss, or part of his loss, from a tortfeasor liable as a joint tortfeasor with the defendant. I reach that conclusion notwithstanding that the court said that the case had nothing to do with the duty to mitigate damages. I read that statement as meaning simply that the argument did not depend on the duty to mitigate damages.

52. In my judgment, if there is no duty to mitigate damage by pursuing a third party liable, along with the defendant, to the claimant, it would be absurd if there were any duty to mitigate damage by pursuing or charging an innocent third party. The facts and the decision in Finlay -v- Kwik Hoo Tong [1929] 1 KB 400, CA, may be said to be an instance of that proposition, but the reasoning is narrower. It was there held that a purchaser suing a seller of goods was not bound, in order to mitigate his damage, to enforce contracts with sub-purchasers, as to do so might seriously injure his commercial reputation. That case supports the general proposition that a claimant need not prejudice his commercial reputation in order to mitigate his damage. That proposition appears both in McGregor and in the judgment of Stevenson L.J. (loc.cit.).

53. A third proposition appears in both those places: a plaintiff need not act so as to injure innocent persons. For that proposition Banco de Portugal -v- Waterlow & Sons Limited [1932] AC 452 is cited. It may be that the proposition is more general than is justified by the facts of the case. The bank had honoured forged currency notes presented by innocent third parties. Scrutton L.J. in the Court of Appeal was quoted by Viscount Sankey L.C. (p.471) as having said:

"...I cannot think the Bank was bound to sacrifice innocent holders and the reputation of its national currency to protect the printers, the wrongdoers."

The evidence is that the Bank - remembering always that they were the issuing Bank of the paper currency - had to protect before anything else the confidence which such currency inspired in the Portuguese public. "What confidence," they asked, "would all the other notes of the Bank of Portugal merit if the Bank did not adopt such a policy?" "It is one," they say, "always adopted and similar to that adopted as a rule by banks of issue, even when they can allege the forgery is manifest and that the public has not taken the precautions necessary in receiving false notes." I have come to the conclusion that the Bank would have been failing in their duty to their shareholders, their customers and their country if they had not taken the step they did.

In my opinion these findings are correct, and the Bank had no alternative on December 7 but to do what they in fact did. They were in a position of extreme difficulty and extreme danger, caused, as I think, by the unfortunate and unwitting breach of contract on the part of Messrs. Waterlow.

As the Bank urge, for a country to find that what it believed to be a substantial portion of its legal wealth was nothing more than worthless pieces of paper instead of genuine notes of the Bank would have created an economic panic and confusion which would have caused the gravest damage to the credit of the Bank and might even have shaken the whole economic and commercial life of the country.

Thus, there were wider and compelling reasons for honouring the forged notes beyond the fact that those presenting them were innocent; moreover, such notes might have been unwittingly accepted and re-issued by the bank, in which case the bank would be responsible for them in any event (see p.506). Also, the bank had acted in an emergency created by the defendant's breach of contract, and, as Lord Macmillan said (p. 506) the measures which it was driven to adopt ought not to be weighed in nice scales at the instance of the defendant.

54. Nevertheless, in my judgment the proposition is right on principle. A claimant does not unreasonably fail to mitigate his loss by failing to pass on the loss, or part of it, to an innocent third party.

55. It is said that in this case it would have been reasonable to charge the cost of repairs to the tenants. It would not cause them any loss since, if the reversion had not changed hands, the repairs if carried out would have been charged to the tenants by the previous landlord. I am not satisfied that that is so; the previous landlord might have acted in the same way as the claimant. Mr Hoskyn gave this evidence:

When the true extent of the defects became known shortly after the incident of falling tiles on 30 June 1995 we considered recovering the cost of rectifying the defects through the service charge provisions of the tenants service charge. However in these circumstances it was considered inequitable to recover the loss from the tenants and also against the principles of good estate management not to attempt to recover the loss from McBains Cooper who we considered to be clearly responsible for any loss.

Mr Hoskyn said that those were commercial considerations that could not be ignored. I am satisfied that Mr Hoskyn's attitude was reasonable; and that that is so regardless of whether any of the tenants would have had a right of recourse against their own surveyors, if any.

56. I conclude that the claimant's non-recovery of the cost of repairs, or part of it, from the tenants did not constitute an unreasonable failure to mitigate its damage.

57. Mr Holland's second point on mitigation arose from the fact that the claimant had the benefit of a warranty from a firm called Crowngap, the builders of the property. That warranty, given by Crowngap to the vendors, contained an undertaking that Crowngap would exercise all proper skills and care expected of a building contractor in the performance of its duties. The warranty was assigned to the claimant as part of the sale of the property to the claimant. I am, incidentally, satisfied on the evidence of Mr Hoskyn that it had no significant effect on the price of the property. The claimant made a claim against Crowngap under that warranty. The claim was settled for Ј40,000. Mr Holland submitted that that sum went in mitigation of damages and indeed constituted an unreasonably low settlement; the claimant should have obtained substantially more, which should also go in mitigation of damages.

58. As to the Ј40,000, in my judgment the same argument as led me to the conclusion that the repairs do not go in mitigation of damages leads to the conclusion that the Ј40,000 does not go in mitigation of damages. Moreover, it was not the defendant's negligence, but a contract wholly independent of the relation between the claimant and the defendant, which gave the claimant its advantage. Thus, it was not to be taken into account: see British Westinghouse, ib. at p.690.

59. Mr McCall relied on the case of Treml -v- Gibson (1984) 272 EG 70. In that case the plaintiff recovered damages for the negligence of a surveyor and valuer in the making of a report on the condition of a house in reliance on which the plaintiff bought the house. She received a grant from the local authority to go towards the cost of repairs. Popplewell J. held that she did not have to give credit for that sum against her damages. He said (p.72)

I am clearly of the view that the sum does not fall to be deducted. Firstly, because it is irrelevant to a claim where the difference in value is the measure of damage and, secondly, because, to use legal shorthand, it is a collateral benefit which does not have to be taken into account.

60. As to any excess over Ј40,000 which ought to have been secured, the same arguments apply. In addition, in my judgment, as I have already indicated in the context of recovery of the cost of repairs from the tenants, there is no duty to mitigate damage by pursuing a third party liable, along with the defendant, to the claimant.

61. As to the reasonableness of the settlement of the claim under the warranty at Ј40,000, evidence was given by Mr Anthony Jones, a building surveyor and associate director of PPM. He had been involved in the negotiations with Crowngap. I am satisfied on his evidence that the claimant found it difficult to assess the value of its claim against Crowngap owing to a lack of documentation relating to the original construction of the property. Mr Jones said that PPM were able to obtain a copy of the building contract from Royal Insurance, but despite their best endeavours, they were unable to get hold of any documents relating to the specification of the property or the final certificate. As a result they were unsure of the strengths of their case against Crowngap. They issued a protective writ against Crowngap the day before expiry of the 12-year limitation period.

Q: On the grounds that Crowngap had arguably breached the undertakings I am saying it is putting it too low. It was not arguably, from what you were being told, it is almost certainly?

A: Within the context of the negotiations we had with Crowngap they had obviously a very different view on that. We had restrictions on our view as to our strength of argument under the warranty. We did not have, and could not find, copies of the original Building Contract to which the warranty reverts to in terms of its definition of duty. We did not have, or could not find, any of the original construction information detailing what the architect's design was and what their responsibility was. We could not find the status of the Final Certificate and whether the architect had finally signed off the works under the building contract and were told that this might prejudice the status of the warranty.

Crowngap also claimed defence against any patently obvious defects on the grounds that we have a survey carried out and that we should seek protection of that survey against those defects.

There is also some evidence that some works had been carried out some years after the completion, we could not find the precise information on that. Crowngap claimed very limited knowledge of this and it was another aspect which clouded the whole issue of the warranties.

"It must be observed that the terms of the warranty do not confer on the building owner entitlement to 100% perfection on the part of the Contractor, but merely reasonable compliance with the specification and drawings. This is not to say that we wish to shelter behind wide margins of tolerance."

Q: Obviously that argument refers to compliance with specifications and drawings. Were you in a position to assess the extent to which Crowngap had complied with specifications and drawings?

"Certain alleged defects are so visible to casual inspection as to be considered patent. As such they would be excluded from further criticism after the issue of the final certificate. This would eliminate all Tuffin's comments as to mis-shapen tiles, irregularity of tiles etc."

"The whole of the Works was subject to rigorous inspection by both the architect, BDP, and surveyors appointed by Royal Life (to whom Crowngap had covenanted to exercise all proper skill and care) both during the execution of the Works and at handover."

Did you have any documents or other information which enabled you to assess the merits of that argument?

A: We did not have documents relating to the Final Certificate. I believe there were some practical completion certificates issued to us. I think that may have come through with the information on the Building Contract.

Q: The argument refers to inspection by the architect and surveyors. Did you have any documents relating to those inspections?

A: I believe there were snagging lists attached to the practical completion documentation.

"Additionally the careful scrutiny to which the Prudential and its advising surveyors would have subjected the building prior to purchase, must have similarly recognised the patent aspects of the construction of which complaint is now made. This should have been reflected in the purchase price or the complaint abandoned."

"Such defects as are visible to the ridges are, in our view, nominal and do not justify the extreme measures originally proposed."

Then if one quickly glances at the next page and page 57, it appears that similar specific points were raised about other parts of the roof?

Q: I want you to confirm whether that was the case. Did Crowngap raise these specific arguments in the negotiations?

A: They raised these specific arguments. We did not necessarily agree with their observations but they were matters which they put forward, yes.

63. In those circumstances, I am satisfied that the settlement at Ј40,000 was reasonable.

64. Mr Holland submitted, correctly, that a snow guard erected round the building in order to catch any falling tiles constituted an element of betterment to the building. In my judgment, that is irrelevant to the quantum of damages on the basis of diminution in value; moreover, no figure has been put on the value of the snow guard, and I am not satisfied that it was more than minuscule as a proportion of the diminution in value of the property.

BETWEEN	PRUDENTIAL ASSURANCE COMPANY LIMITED	Claimant
	-and-
	McBAINS COOPER ( A FIRM )	Defendant

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You are here: BAILII >> Databases >> England and Wales High Court (Technology and Construction Court) Decisions >> Prudential Assurance Company Ltd v. McBains Cooper [2000] EWHC Technology 85 (27th June, 2000) URL: http://www.bailii.org/ew/cases/EWHC/TCC/2000/85.html Cite as: [2000] EWHC Technology 85

England and Wales High Court (Technology and Construction Court) Decisions

Prudential Assurance Company Ltd v. McBains Cooper [2000] EWHC Technology 85 (27th June, 2000)