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OUTER HOUSE, COURT OF SESSION
[2024] CSOH 99
CA106/22
OPINION OF LORD RICHARDSON
In the cause
DALE HOUSE DEVELOPMENTS LIMITED
Pursuer
against
BRIAN C RONNIE
First Defender
and
RYDEN LLP
Second Defender
Pursuer: Brown; DAC Beachcroft Scotland LLP
First and Second Defenders: A Jones KC (sol adv), C Watt (sol adv); Brodies LLP
6 November 2024
Introduction and background
[1]
This case concerns a property known as Dale House on West George Street in
Glasgow. The pursuer was formerly the proprietor of the property.
[2]
The property is situated in a prominent location, a few metres from Queen Street
Railway Station between Buchanan Street and George Square. The property consisted of a
cash storage and counting facility which had been built for the Royal Bank of Scotland
2
in 1982. By 2016, which is the relevant date for the present proceedings, the property was
vacant and had been unoccupied for a number of years. It was dilapidated. By this stage,
the property, given its location, represented a development opportunity which would
require demolition and re-development.
[3]
The pursuer acquired the property for the sum of £2,640,000 with entry in
October 2014. Also in October 2014, the pursuer concluded missives to sell the property to
the Legal & General Assurance Society Limited ("L&G"). In terms of clause 16 of the
missives, the pursuer was entitled to receive what was described as the "Profit Share" in
certain circumstances. The amount of the profit share was to be determined as at the
"Valuation Date" (as that term was defined in the missives) in accordance with a formula
provided in the missives. The formula required the parties to seek to agree the "OMV" or
open market value of the property on the valuation date. The pursuer and L&G
subsequently agreed that the valuation date was to be 16 September 2016.
[4]
However, in the event, the pursuer and L&G were unable to agree the open market
value of the property. In those circumstances, clause 16.5 provided that:
"Failing agreement in accordance with Clause 16.4 hereof the Seller [the pursuer]
and the Purchaser [L&G] shall jointly appoint the Independent Valuer to determine
the OMV of the Property as at the Valuation Date using the current edition of the
RICS Valuation Professional Standards having regard to information provided by
both parties in support of their proposed valuation. Both the Seller and the
Purchaser will each submit all marketing reports, surveys, offers and disclose the
contact of all negotiations will third parties [sic]."
The appointment of the first defender
[5]
The "Independent Valuer" was defined in the missives as being CBRE Limited. In
the event, CBRE was unable to accept the appointment as independent valuer. The pursuer
and L&G agreed to accept the nomination of a replacement valuer by the Chairman of the
3
Royal Institution of Chartered Surveyors (RICS). On 11 July 2017, Mr Kenneth Thurtell of
Gerald Eve LLP, acting on behalf of the pursuer, submitted an application to RICS seeking
the nomination of an independent valuer. In respect of the preferred professional
background, Mr Thurtell stated:
"The Independent Valuer should have specific sector knowledge and experience of
undertaking development led valuations in Glasgow with a particular focus on the
hotel, office and retail sectors to be able to compile a formal valuation in accordance
with the RICS 'Red Book'."
[6]
The first defender was subsequently nominated and accepted appointment as the
independent valuer. The first defender was a member of the second defender and was
acting in the course of its business. Following a preliminary hearing which took place on
26 September 2017, the first defender issued terms to the pursuer and L&G by letter dated
27 September 2017. Those terms were accepted by both.
[7]
In his letter, the first defender set out a procedure whereby the pursuer and L&G
were to provide him with written submissions. In the event, the first defender received both
submissions and counter-submissions from the pursuer and L&G. For the pursuer, they
were prepared by Ken Thurtell of Gerald Eve LLP. For L&G, they were prepared by
Niall Bryers of Jones Lang LaSalle. The submission made by Mr Thurtell proposed a market
valuation of the site based solely on a mixed office/retail use in the sum of £9,100,000.
[8]
The submission from Mr Bryers included a valuation of the property based on re-
developing it as a hotel as well as office/retail use. The L&G hotel valuation was based on a
planning application which had been jointly submitted by L&G and Meininger Hotels. The
Meininger scheme was based upon the proposed hotel containing 160 bedrooms. In terms
of his submission, Mr Bryers was of the view that £2,000,000 was a reasonable valuation of
the site.
4
The first defender's valuation
[9]
Thereafter, the first defender produced his valuation of the property on 8 December
2017. He assessed the open market value of the property on 16 September 2016 as
being £3,900,000. The first defender commented:
"In my opinion the premises have reached the end of their economic life. I, therefore,
considered other alternative uses for the subjects and was of the opinion that the
highest use values would be that of either an office with retail/leisure on the ground
floor or a hotel with retail/leisure on the ground floor.
After having carried out a residual valuation, it was my opinion that the highest and
most sustainable use would be based on an office and leisure scheme."
In his valuation, the first defender considered the development of the property based upon
the Meininger scheme and concluded that the property's residual value on that basis
was £2,576,000 (paragraph 2.11.53). The first defender concluded that valuing the property
on the basis of office/retail use was likely to produce a higher value. On the basis of this
valuation, the pursuer was not entitled to any profit share in terms of the missives.
Sale to Bloc
[10]
In July 2019, L&G concluded a sale of the property to Bloc Glasgow Limited at a
price of £8,750,000. Bloc purchased the property in order to develop it for use as a hotel with
associated retail space. Bloc originally proposed 260 hotel rooms and a further
10 apartments. This scheme was subsequently amended to propose 190 rooms and
70 apartments.
5
The pursuer's case
[11]
In the present proceedings, the pursuer sues the defenders for breach of contract.
This case is advanced on two bases. First, the pursuer contends that the first defender failed
to carry out the valuation in terms of the missives. The pursuer submits that, contrary to
clause 16.5 of the missives, the first defender failed to carry out the valuation in accordance
with the RICS Valuation Professional Standards colloquially known as the "Red Book"
and, in particular, RICS Valuation Information Paper 12: Valuation of development land
("VIP 12"). Second, the pursuer submits that, in preparing the valuation, the first defender
failed to exercise the reasonable skill and care to be expected of a chartered surveyor of
ordinary competence suitably qualified in the relevant area of practice. The pursuer
contends that, had the valuation been properly carried out, it would have been entitled to a
profit share in terms of the missives.
[12]
I heard the parties at proof before answer.
Evidence
[13]
Helpfully, the parties entered into a joint minute which agreed much of the
background which I have set out above. The parties also agreed that the documentary
productions which had been lodged in process were what they bore to be. In terms of the
joint minute, the parties dispensed with the need for two witnesses to attend in person:
Craig Westmacott of L&G and Robert Seeley, a surveyor who had acted for Meininger. The
parties agreed that the witness statements of each of these witnesses were to be taken as
their evidence.
6
The pursuer's evidence
Philip Kavanagh
[14]
Mr Kavanagh is, along with George Aldridge, one of the two principals of the
pursuer. He gave evidence as to his background in property development and to his
involvement with Dale House. He had first become aware of the property in 2010 when it
was being offered for sale. At that stage, Mr Kavanagh described the sale as being
"distressed" in that the seller was in some kind of financial difficulty. He and Mr Aldridge
were attracted by the location of the site and put in an offer of £3,255,000 to purchase it. This
was unsuccessful.
[15]
Thereafter, the property was brought back to the market in 2013 and, in June 2014, he
and Mr Aldridge made a further offer for the property. The second offer was in the sum
of £2,640,000 and was successful. The pursuer's offer was conditional on obtaining planning
and licensing consent. The transaction did not settle until October 2014 when the pursuer
entered into a back-to-back transaction with L&G. Mr Kavanagh described the role of L&G
as being a "forward funder" or banker for the property development. He considered the
relationship with L&G essentially to be a form of joint venture whereby the pursuer
provided the property development expertise and L&G provided the funding.
[16]
The two transactions settled simultaneously with the pursuer using the proceeds
received from L&G to pay the original seller. Mr Kavanagh explained that he and
Mr Aldridge made a couple of hundred thousand pounds immediately on settlement. In
terms of the missives, the pursuer was also entitled to a share of any profits realised through
the development.
[17]
Mr Kavanagh explained that the pursuer had focussed on developing the property
through refurbishment with retail on the ground floor and basement together with an office
7
development on the upper floors. The pursuer had pre-let two units to Done Brothers
(operator of the Betfred chain) and Prezzo (a chain of Italian restaurants). However,
following the completion in 2014, L&G had been responsible for taking the development
forwards. Mr Kavanagh had had no contact with Meininger.
George Aldridge
[18]
Mr Aldridge gave evidence consistent with Mr Kavanagh's in relation to the
background to the pursuer's involvement with the property.
[19]
In relation to the initial attempt to purchase the property in 2010, Mr Aldridge was
aware that the successful purchaser at that stage was Shepherd Developments. Shepherd
subsequently obtained planning permission, on appeal, to develop the site as a 120 room
aparthotel. However the transaction involving Shepherd had subsequently fallen through.
[20]
Mr Aldridge also clarified that the price to be paid by L&G in terms of the missives
with the pursuer, £2,840,000, did not, in his view, represent a valuation of the property. The
payment of this price did result in a small profit to the pursuer but Mr Aldridge emphasised
that L&G had also agreed to cover the professional fees for the project which amounted to
several hundreds of thousands of pounds as well as agreeing to the profit share.
Mr Aldridge also spoke about the way in which the pursuer and L&G had dealt with the
profit share mechanism within the missives. This involved the discussion and agreement of
the various elements used in the missives to calculate the "Distributable Profit" and,
therefore, the profit share.
8
Robert Chess
[21]
Mr Chess is a fellow of the RICS with over 25 years of experience in the hotel market
sector. He had been instructed by the pursuer and had prepared a principal report together
with two supplementary reports in respect of the case. Mr Chess is a partner in the hotels
team at Gerald Eve. He is also the principal in his own consultancy.
[22]
Mr Chess was asked to explain the importance when carrying out a residual
valuation of cross-checking with comparable market transactions. This comparison or
benchmarking was important because of the large number of variables involved in a
residual valuation each of which involved an exercise of judgment by the valuer.
Accordingly, finding a comparator formed, as Mr Chess put it, a landing pad to determine
whether the residual value was in the right area. In relation to hotels, this comparison could
be carried out on a per room basis.
[23]
Mr Chess explained that in carrying out a residual valuation of a hotel development,
the first input was effectively a valuation of what would be there were a hotel to be built.
This could be achieved by following one of the standard valuation methods for hotels. It
could be based on a discounted cash flow valuation based on the prospective trading
performance of a hotel in the relevant location. Alternatively, one could consider a
valuation based on the value arising from a hotel being developed and then let to a third
party operator.
[24]
Having obtained this gross valuation figure, it was then necessary to deduct the costs
of all the elements which would be required to achieve completion of the hotel
development. These would include costs for demolition, building, contingencies and indeed
the developer's profit. Each one of these elements involved the surveyor making an
9
assessment based on the surveyor's knowledge and experience together with any other
relevant evidence they could identify.
[25]
In relation to the Meininger scheme, as this proceeded on the basis of a hotel being
rented to the operator, it would be necessary for the valuer to make assumptions about the
rental and the yield in order to determine the capital value. Determining the yield would
involve considering the quality of the investment and making judgments about: the location
of the hotel, the physical nature of the property, the potential for growth in the rental income
and the quality of the tenant's financial covenant. The better the quality of the investment,
the lower the assumed yield in percentage terms and, therefore, the greater the multiplier to
determine the capital value.
[26]
Each one of the factors that were included in a residual valuation involved an
element of surveying judgment. As a result, the cumulative impact of these judgments
could have a significant effect on the land value.
[27]
In this context, Mr Chess was asked about the March 2008 version of VIP 12. He
considered that it was an important document for surveyors to have regard to. Insofar as
this document recommended a methodology, Mr Chess considered that it would represent
normal and usual practice in the profession. Paragraph 5.2 of VIP 12 highlighted the risk
associated with residual valuation. VIP 12 also stressed the need "if at all possible" to
attempt to compare the result of a residual valuation with such comparative market
evidence as might exist. Mr Chess explained that, in his opinion, it was very important to
carry out the exercise of comparison with market transactions otherwise the residual
exercise risked being essentially theoretical. In essence, Mr Chess' opinion was that it was
necessary for a valuer to "stand back and look" at the conclusion of his or her calculation
and ask whether it was in line with the market transactions.
10
[28]
In preparing his report, Mr Chess had considered potential comparators for the Dale
House site. In his oral evidence, he explained that, generally speaking, hotels were valued
on price per room or key basis. Mr Chess highlighted three comparators in particular: the
Ibis Styles hotel at Waterloo Street in April 2017 with a reported price of £4,000,000 and a
price per key of £31,008; Native aparthotel at St Vincent Place in January 2016 with a
reported price of £2,280,000 and a price per key of £35,625; and the Dakota hotel at West
Regent Street in April 2014 with a reported price of £2,050,000 and a price per key of £24,405.
Each of these comparators had been developed by owner operators (whether directly or
through a management company).
[29]
Mr Chess considered that all three of these comparators were in close proximity to
Dale House albeit both Waterloo Street and West Regent Street were further to the west and
were less well located. The Ibis Styles hotel was also of a similar quality and budget as
Mr Chess would have anticipated for the Dale House site. Mr Chess recognised that the
Native aparthotel was a different style of operation: aparthotels tended to have larger room
sizes than conventional hotels. As a result of having fewer and larger rooms, this would
tend to produce a higher price per key. Mr Chess also recognised that the Dakota hotel was
a little smaller and a little more upmarket than he would have envisaged for the Dale House
site
[30]
Mr Chess highlighted he had considered comparators which had been developed by
owner operators. Mr Chess explained that owner operators tended to pay more than
property investors because they had a different business model. Unlike the investor, the
owner operator enjoys profits from the business and anticipates capital growth in the asset.
11
[31]
Mr Chess criticised the approach adopted by the first defender because the first
defender had failed properly to cross-check the residual hotel valuation he had prepared.
Mr Chess emphasised a number of aspects of this.
[32]
First, had the first defender adopted the "stand back and look" approach spoken to
by Mr Chess, he would have recognised that the Meininger scheme was not typical. In
particular, the Meininger scheme envisaged greater slab-to-slab heights than the norm. This
arose, in the Meininger scheme, from the use of bunk beds in the rooms. However, it had
the result of reducing the number of floors and rooms in the potential hotel. The Meininger
scheme envisaged six floors and 158 rooms. Mr Chess had developed a scheme whereby a
hotel could be constructed on the Dale House site using conventional slab-to-slab heights
and would have seven floors and 192 rooms. (In this regard, Mr Chess noted that the office
development envisaged by the first defender also contained seven floors.)
[33]
Second, had the first defender compared the result of his residual hotel valuation he
would have had to ask himself why his valuation produced a value of approximately
£2.5 million which equated to a price per key of £15,600. This was significantly lower than
the comparables. Mr Chess considered that such a comparative exercise would have
immediately indicated that the residual value produced was not in line with the market. In
this regard, Mr Chess noted that the first defender did not appear to have considered the
development of the site as a hotel by an owner operator and, as a result, had not considered
those comparables.
[34]
Mr Chess also highlighted that the figure of £2.5 million produced by the first
defender for the hotel valuation apparently encompassed the retail and leisure development
on the ground floor. Given the likely value of the retail and leisure space at street level,
12
Mr Chess considered that this again strongly indicated that the residual hotel valuation
carried out by the first defender was not correct.
[35]
Mr Chess had carried out his own valuation of the Dale House site as at the agreed
date of valuation. He used the residual valuation approach. Mr Chess had considered
comparable developments both inside and outside Glasgow. He accepted that good local
evidence was likely to trump geographically remote evidence but also considered that there
was strong comparability in relation to hotel transactions across equivalent cities. Mr Chess
had also considered comparable transactions which had occurred after the date of valuation
but prior to the date on which the first defender had prepared his report. Mr Chess
considered that the first defender would be likely to have been aware of such transactions
and they formed part of the overall picture.
[36]
Mr Chess' residual valuation was based on a seven floor hotel development with
retail and leisure on the ground and mezzanine floors. He envisaged 192 rooms. Unlike the
Meininger scheme he had used conventional slab to slab heights. Mr Chess had worked out
the project development costs having regard to the RICS Building Cost Information Service.
Mr Chess explained that the use of this index was common practice in carrying out a
valuation exercise of this sort. Mr Chess noted that the figures took account of the proposed
location for the development Glasgow city centre. He considered it reasonable to rely on
these figures. In relation to demolition costs, he had derived his figure for demolition costs
of £525,000 from the information which had been submitted to the first defender on behalf of
L&G.
[37]
In valuing the site, Mr Chess had considered the potential development of the site as
a hotel by an owner operator as well as by a developer as an investment to be let to a third
party operator. In relation to the former, Mr Chess assessed the site as having a value of
13
£7 million. In relation to the latter, Mr Chess assessed the value at £3 million. Mr Chess
rejected the second figure as out of line with the comparable evidence of transactions which
had been principally carried out by owner operators. Accordingly, having considered the
comparables and also having made an allowance for risk, Mr Chess considered that the site
had a market value of £6.3 million.
[38]
Mr Chess was asked about what weight, if any, could be placed on the fact that Bloc
had subsequently purchased the site for £8.75 million. Mr Chess did not consider that much
could be taken from this. He had carried out an alternative valuation of the site based on the
Bloc development. The Bloc scheme required a greater room density than Mr Chess had
assumed in the scheme he had valued. This produced a market valuation of £8,070,000.
However, Mr Chess did not consider that a prudent valuer would have had the confidence
to produce a valuation on this basis at the valuation date.
[39]
During cross-examination, Mr Chess was asked repeatedly and extensively both
about the terms of the missives and the documents relating to the appointment of the first
defender. In respect of the missives, Mr Chess explained that he had seen them only shortly
before giving evidence following a meeting with Mr Murphy, the other expert surveyor
instructed in the case. In relation to the appointment documents, he had not seen these. In
re-examination, Mr Chess was asked whether, having seen both the missives and the other
documents which were put to him, his views had in any way changed. He confirmed they
had not.
[40]
It was put to Mr Chess that on the basis of the missives and his appointment the first
defender, as an independent valuer, had been instructed to consider the competing schemes
which had been put to him by the pursuer and L&G respectively. Mr Chess did not accept
this. He considered that the first defender was not acting as arbitrator and was not
14
prevented from carrying out his own independent investigations. An independent valuer
was required to have proper regard both to his instructions and what was put to him, but he
could carry out his own investigations and was required to draw his own conclusions.
[41]
It was also suggested to Mr Chess that he had assessed the first defender on the basis
of the standard to be expected of an ordinary competent hotel valuer rather than an
independent valuer. Mr Chess did not consider that these were mutually exclusive. In
Mr Chess' opinion, insofar as the first defender's instructions required him, in valuing the
site as an independent valuer, to consider a hotel valuation, the first defender required to do
this. Mr Chess considered that it would have been open to the first defender, if he felt
unable to fulfil this part of his role, to obtain assistance either from elsewhere in his firm, the
second defender, or externally.
[42]
Mr Chess was also asked about the planning history for the site. This had been set
out in a report prepared by Turley which had been appended to Mr Thurtell's submission to
the first defender. He was aware of the planning application submitted by Shepherd
Developments for a nine storey mixed development including a 124 bed hotel. This
application had been granted in May 2012 but the development had fallen through.
Mr Chess was also aware of the planning application which had been made in support of
the Meininger scheme that was for a mixed use development with mixed retail and leisure
on the ground floor and a 160 bed hotel. The application had been made on 12 October
2017.
[43]
Mr Chess accepted that the only valuation based on a hotel development which had
been provided to the first defender was based on the Meininger scheme. This had formed
part of the submission made on behalf of L&G by Mr Bryers. He accepted that there was no
evidence of interest in the site by an owner operator in 2010 or 2013 and that the first
15
defender had no such evidence. Mr Chess noted that the sale to the pursuer in 2013/14 had
been from an administrator. He did not think that such a sale necessarily represented a
reliable guide to value. Mr Chess said he was not aware of the site being exposed for
development as a hotel until 2018. On this basis, it was put to Mr Chess that his valuation,
which was based on development by an owner operator was based on a hypothetical or
imaginary market. Mr Chess strongly rejected this. In his view, it was apparent from the
amount of interest shown in relation to other comparable sites in Glasgow city centre that
there was demand for such a development.
[44]
In relation to Mr Chess' own valuation, it was put to him that Mr Murphy had
queried the assumptions which Mr Chess had made about void periods and yield in relation
to the ground floor and retail elements of the proposed development. Altering these two
factors reduced the valuation by £700,000. Mr Chess accepted that Mr Murphy had
expertise in relation to retail letting. However, Mr Chess emphasised that there was an
important difference between generating a residual value and valuing the land. In order to
understand whether the former was reasonable, one required to look at what was going on
in the market. That was the importance of looking at the comparables.
[45]
Mr Chess also addressed Mr Murphy's criticism of his inclusion of the additional
revenue income in determining the residual valuation for the hotel. Mr Chess explained that
every valuation based on an owner operator model required to be approached on a
discounted cash flow approach. He had fully set out in his report the way in which he made
this calculation including consideration of the amount of trade in Glasgow and profitability.
[46]
It was put to Mr Chess that, taking account of Mr Murphy's criticisms of his
valuation, Mr Murphy's alternative valuation of £4.4 million for the hotel development was
16
a reasonable figure. Mr Chess considered that it was a low figure but he accepted that there
was a range around the potential value.
The defenders' evidence
Kenneth Thurtell
[47]
Mr Thurtell is a chartered surveyor. He had previously worked full time for
Gerald Eve but since his retirement he had been working part time.
[48]
Mr Thurtell gave evidence as to his instruction by the pursuer to act essentially as an
advocate for the pursuer in the negotiations with L&G. Mr Thurtell considered that his role
was to work with the pursuer to assess and evaluate various schemes of development for
the property with a view to maximising its value in terms of the formula contained in the
missives. Mr Thurtell confirmed that he had not received any instructions from the pursuer
to assess or evaluate a scheme for the property which involved a hotel use. Mr Thurtell
considered that the highest development value scheme was a combination of retail and
leisure with an office development. He noted that this view appeared to be shared by
Mr Bryers (who was instructed by L&G) and the first defender. His valuation of the
property, which he had submitted to the first defender, brought out a figure of £9.1 million.
Niall Bryers
[49]
Mr Bryers is also a chartered surveyor. He had previously worked for Jones Lang
LaSalle but was currently working for his own property consultancy.
[50]
Mr Bryers gave evidence about his professional background. He explained that his
particular specialism was in office, retail and industrial valuations. He was not an expert in
17
the hotel market although he had experience in dealing with hotels particularly if the hotel
was under lease.
[51]
Mr Bryers also gave evidence as to the background to his instruction by L&G to
prepare submissions. He accepted that his role was to represent L&G and to assist the first
defender in coming to a valuation which was in his client's interests. He was not acting as
an independent expert or carrying out a formal valuation exercise.
[52]
Mr Bryers' view was that the best way to reduce risk in the hotel development sector
was to obtain a pre-let for the completed development. That would involve finding out
what the hotel operator wanted, designing it to their needs and agreeing a lease on this
basis. Mr Bryers did not consider that owner operator hotels were built on a speculative
basis in Glasgow as they were too risky. At the time he was involved, Meininger were the
only party interested in the site. He did not know why the Meininger development did not
proceed. He considered that the marketing of the property up to and beyond the valuation
date strongly suggested that it would only have appealed to budget/limited service hotel
operators.
[53]
In relation to his submissions to the first defender, Mr Bryers concluded that the
property had a higher value as an office development than as a hotel. His valuation was at
the lower end of the possible range which he attributed to market uncertainty and the lack
of pre-lets by the date of valuation. Mr Bryers did not consider that the value of the
property could be the same as or greater than the price initially paid for it.
Craig Westmacott
[54]
The parties agreed that Mr Westmacott's evidence could be given in the form of a
signed written statement.
18
[55]
Mr Westmacott is a qualified chartered surveyor. He is employed by L&G. In 2017,
at the material time, he was the senior fund manager for L&G's commercial property fund.
He gave evidence concerning L&G's involvement in the purchase of Dale House from the
pursuer.
[56]
Mr Westmacott was also able to explain, from his perspective, the Meininger scheme.
Meininger was a German hotel brand which provided hostel-style rooms. They had decided
that 160 rooms were enough for them at the property. Mr Westmacott had no insight as to
the underlying reasoning for this. Meininger became involved with the property in 2016.
Prior to their involvement, Mr Westmacott recalled that other hotel operators did look at the
property including Premier Inn but, ultimately, only Meininger were interested. Premier
Inn chose another site near to Queen Street station. So far as Mr Westmacott was aware, the
deal fell through because the development costs increased significantly from the point at
which the negotiations had begun.
[57]
So far as L&G were concerned, its preference was to develop the property and then
lease to a hotel operator. Although L&G would not have developed the site speculatively, it
would have been open to selling to a hotel owner operator for the right price.
Robert Seeley
[58]
As with Mr Westmacott, the parties agreed that Mr Seeley's evidence could be given
in the form of a signed witness statement.
[59]
Mr Seeley is also a chartered surveyor. He works for his own consultancy. In 2015,
Mr Seeley was appointed as UK head of development by Meininger Hotels. Mr Seeley
explained that Meininger operates a limited service hotel model. That means it provides
sleeping accommodation, breakfast facilities and a basic bar operation. The main difference
19
between Meininger and other budget hotels is that Meininger offers multi-occupancy rooms
in a hostel/hotel hybrid model. The scheme for the Dale House site was for 160 rooms with
some being larger dormitory-style rooms and some a more traditional double room size.
The need for the rooms to accommodate bunk beds did present constraints in respect of the
floor to ceiling heights.
[60]
So far as Mr Seeley was aware, the reason that the deal with L&G did not go ahead
was because the L&G board declined to approve it. As Mr Seeley understood it, the L&G
board were concerned with Meininger's financial covenant strength and with the security of
the income which could be generated.
Gary Murphy
[61]
Mr Murphy is a chartered surveyor who had been instructed as an expert on behalf
of the defenders. He is a senior director at BNP Paribas Real Estate. Mr Murphy had
prepared three reports on behalf of the defenders. He had undertaken a wide range of
valuation work and had over 25 years' experience in the Scottish commercial property
market. Mr Murphy was clear that he was not an expert hotel valuer and would not accept
instructions from a hotel developer or lender to carry out a hotel-specific valuation.
[62]
In his principal report, Mr Murphy set out his answers to a series of questions which
had been posed by those instructing him. In his opinion, the first defender was obliged to
take the guidance provided by the RICS Red Book into account in undertaking his role as an
independent expert. Mr Murphy considered that the first defender had acted in a way
expected of an ordinarily competent valuer acting as an independent expert. Mr Murphy
noted that the first defender was presented with two separate reports with each report
appearing to have a consensus as to use and density. Both reports identified the highest
20
value form and extent of development to be accommodated on the site, considering the
likelihood of obtaining planning consent, as a mixed-use scheme with retail and leisure on
the ground floor and office use of the upper floors. Presented with this information, the first
defender adopted a similar approach to the use of the site in order to arrive at his opinion of
the open market value.
[63]
Mr Murphy considered that, in accordance with the guidance provided by RICS, it
was good practice to cross-check the reasonableness of residual valuations, by way of
analysis of comparable sales transactions. This was because residual valuations were
extremely sensitive to small changes over the array of inputs necessary to arrive at an
opinion of open market value.
[64]
However, Mr Murphy emphasised that the guidance provided by RICS in VIP 12
was merely guidance. Direct analysis of other transactions could be misleading for a
number of reasons and it was imperative to consider each comparison in isolation.
Mr Murphy considered that accuracy of inputs adopted within the residual valuation was
every bit if not more important. Having tendered build costs, an established planning
position and associated costs, along with an identified exit strategy significantly reduced the
inherent risk associated with any residual approach.
[65]
Mr Murphy considered that the relevant standard which was applicable when
considering the first defender's actions was that of an ordinarily competent surveyor with
specific sector knowledge and experience of undertaking development valuations in
Glasgow with a particular focus on hotel, office and retail sectors. That was what the parties
had sought from RICS.
[66]
Mr Murphy was asked to consider the first defender's actions bearing in mind the
three-part test set down in Hunter v Hanley 1955 SC 200. Mr Murphy's opinion was that the
21
first defender had exceeded the duties incumbent on him. Mr Murphy based this conclusion
on the fact that only the submission prepared by Mr Bryers, on behalf of L&G, considered
the use of the site as a mixed-use hotel opportunity. The first defender followed normal
practice by way of a secondary check to arrive at a possible open market value from this use.
Mr Murphy noted that the first defender had also considered the further possible use of the
site as purpose-built student accommodation.
[67]
In his first supplementary report, Mr Murphy, although acknowledging that he was
not an expert in hotel valuation, offered a "critique" of Mr Chess' valuation. Pursuant to
what Mr Murphy described as "this shadow exercise", he varied various factors involved in
Mr Chess' analysis. On this basis, Mr Murphy varied the yield figure used by Mr Chess for
the retail element of the proposed development from 5.25% to 4.75%. He varied the void
periods from 12 to 15 months. Mr Murphy reduced the figure used by Mr Chess for
additional revenue income by 50%. Mr Murphy also queried the figure for demolition costs
used by Mr Chess. More generally, Mr Murphy considered that the approach adopted by
Mr Chess was perhaps indicative of his expertise as a specialised hotel valuer as opposed to
the approach which would have been adopted by the ordinarily competent surveyor. On
the basis of the adjustments made by Mr Murphy, he concluded that the market value of the
property was £4.4 million.
[68]
In his first supplementary report, Mr Murphy also criticised the comparables used by
Mr Chess. In particular, Mr Murphy considered that Mr Chess had, wrongly, disregarded
the two most obvious comparators, Motel One on Oswald Street and Custom House Quay
on Clyde Street, as outliers. In this regard, he highlighted the fact that between 11 April
2007 and 31 March 2017, assets which had been vacant for more than 12 months could apply
for the Business Premises Renovation Allowance. This was a 100% tax allowance for certain
22
spending when converting or renovating unused qualifying business premises in a
disadvantaged area. In his report, Mr Murphy considered that this was a significant factor
to be borne in mind when considering comparable developments to the Dale House site.
Albeit, when asked about this in cross-examination, he accepted that the impact of this
allowance would depend on a number of factors including, for example, the tax position of
the investor.
[69]
Finally, Mr Murphy also offered the opinion that an ordinarily competent valuer
acting on the instructions received by the first defender would not have valued the property
on the basis of a sale to an owner operator. Mr Murphy considered that the first defender
rightly took into consideration the level and source of interest shown from the market at the
date of valuation. However, Mr Murphy considered that at the time the first defender was
carrying out his valuation it was not obvious that there was much of a depth of market for
owner operators. This was by contrast with the position for investors as was evidenced by
the Meininger offer. Mr Murphy was of the view that considering an owner operator
purchase option would require the expertise of a hotel expert.
[70]
In cross-examination, Mr Murphy accepted that the task carried out by the first
defender in respect of the hotel was a residual valuation. He also accepted that VIP 12
represented normal and usual practice for a surveyor undertaking this type of valuation by
carrying out a cross-check where at all possible. On this basis, Mr Murphy was asked how
he had concluded that the first defender had followed normal practice in respect of the hotel
valuation (see [66] above). Mr Murphy's initial response was that the first defender had
carried out a cross-check to a satisfactory level given that the focus was on an office
development. This was because, in Mr Murphy's opinion, the first defender had concluded
that an office development produced the highest value and so the comparison with a
23
potential hotel valuation was itself the secondary check. However, Mr Murphy also
maintained that, given his focus had been the office development, the first defender had
followed normal and usual practice in respect of the residual valuation of the site as a hotel.
[71]
Mr Murphy was asked whether it was legitimate for the first defender, in carrying
out the residual valuation of the site as a potential hotel only to consider investment
transactions. In addressing this point, Mr Murphy accepted that an expert did require to
look beyond the submissions which had been put before him if other information was
relevant. Mr Murphy also accepted that if the first defender was aware of comparable sites
which had been developed by owner operator then he required to analyse them. He
accepted that the Ibis Styles hotel at Waterloo Street was a direct comparator for the site. In
comparison with Dale House, he accepted that the Ibis Styles had fewer rooms (129) and
was in a worse location without potential for restaurant or retail development at street level.
Mr Murphy speculated that the first defender may have disregarded the Ibis Styles hotel on
the basis that it was refurbishment rather than a new build. Mr Murphy could not explain
why the first defender had done this as there was no explanation in the report. He agreed
that he would expect any material detail such as this to have been included in the report.
Mr Murphy accepted that the same point could be made in respect of a number of other
comparable sites which had been developed by owner operators including the Dakota at
West Regent Street.
[72]
Ultimately, in the course of his cross-examination, Mr Murphy appeared to accept
that it was incumbent on a surveyor in the position of the first defender, in carrying out a
cross-check, to consider the market and all those transactions which might properly be
considered to be comparable. That general obligation meant that it would be normal and
usual practice for a surveyor in the position of the first defender to look beyond solely lease
24
transactions and consider development by owner operators. It was then put to Mr Murphy
that, insofar as the first defender had not done this, he had departed from normal and usual
practice. Mr Murphy appeared to struggle to respond to this. After the point was put to
him in a number of different ways, I understood his position to be that the first defender had
formed a judgment that the non-leasehold comparables could be disregarded. Albeit,
Mr Murphy accepted that there was no reference to the making of this judgment or on what
basis it had been made in the first defender's report. Mr Murphy accepted further that as a
material part of the reasoning the report ought to have made this clear. In the absence of
any such reference in the report, Mr Murphy acknowledged that this was an assumption on
his part. Mr Murphy also declined the opportunity of concurring with what he understood
was the first defender's judgment but considered that it was appropriate for the first
defender to have made the judgment. Mr Murphy's understanding was that this judgment
was based on the absence of any evidence of interest in the Dale House site by owner
operators. It was noticeable during this passage of his evidence that, unprompted,
Mr Murphy began to refer to the first defender by his first name.
[73]
Mr Murphy was then asked about what evidence there was in relation to the Dale
House site. He accepted that it had been exposed for sale in 2010 and 2013. In 2010, the
successful bidder had been Shepherd Developments who had sought to purchase the site
with a view to constructing an aparthotel. That transaction had not been completed for
reasons which were not known. Mr Murphy accepted that in 2010 there was a very different
market environment in which it was difficult to obtain commercial finance. Thereafter, the
property had returned to the market in spring 2013 and the pursuer had been successful.
The pursuer had concluded a back-to-back transaction with L&G in which L&G had agreed
to purchase the site for an uplift, had undertaken to pay the significant professional fees
25
incurred by the pursuer and had agreed to a profit share with the pursuer. Thereafter, L&G
had had discussions with Premier Inn and had taken steps to market the property for
development as an investment. However, Mr Murphy accepted that L&G had not exposed
the property for sale on the open market. He also accepted that, subsequently, when the
property had been marketed it had been purchased by Bloc, an owner operator, for
£8.75 million. On this basis, Mr Murphy further accepted that, in sum, all this amounted to
was an absence of evidence of unsolicited interest by an owner operator for the site.
Nonetheless, Mr Murphy maintained that this absence of interest would provide the basis
for a surveyor entirely to discount development by an owner operator.
[74]
Mr Murphy was asked about the potential for retail or leisure development on the
ground floor. He accepted that there was abundant evidence for this. Mr Murphy had
valued this element as being worth £1.8 million. Mr Murphy also accepted that when the
first defender's valuation for the hotel development of approximately £2.5 million, which
included retail/leisure on the ground floor, was considered it should have been clear to any
competent surveyor that the figure could not be right. He agreed that it was ludicrous that
on the logic of these figures, a 160 room hotel ended up being valued at £750,000. In this
respect, he agreed that the first defender could be considered to have departed from the
usual standard to be expected of an ordinarily competent surveyor.
[75]
Mr Murphy was cross-examined in relation to his critique of Mr Chess' valuation.
He was asked about the basis on which he had reduced the yield figure used by Mr Chess
and about how he had reached this conclusion given no working was shown in his report.
His position was that he was carrying out a critique and not a valuation. There was no
working underpinning his conclusion. This was also true of the view he had reached in
relation to the rent-free period. In respect of the demolition costs, when he was taken to the
26
source of Mr Chess' figure the Gardiner & Theobald assessment which had formed part of
the Meininger scheme he did not take issue with it. In relation to the construction costs, it
appeared that in his analysis Mr Murphy had overlooked the existence of a lane at the back
of the site. Ultimately, his position was that the Dale House site would not be any easier to
develop than any other in Glasgow city centre.
[76]
Mr Murphy was challenged as to his proposed reduction of the figure used by
Mr Chess for additional revenue income by 50%. It was put to him that he was criticising
the methodology of Mr Chess, a surveyor with expertise in the field of hotel valuation,
whereas he, Mr Murphy, had no such expertise. When challenged, Mr Murphy accepted
that, notwithstanding what he had put in his supplementary report, he could not properly
criticise Mr Chess' methodology. Rather to my surprise, at the end of this passage of
questioning when it was put to Mr Murphy that what he had done was to "whack out
£1.2 million to keep the score down", his response was "Fair point".
The first defender
[77]
The first defender set out his professional background and experience. He was a
chartered surveyor for over 30 years. He is now retired. He had been a partner of the
second defender from October 1998 to April 2023 when he retired. He specialised in
valuations, rent reviews and rating. His main fields of expertise were industrial, office and
retail development together with land and universities. He was an expert in valuing
buildings and development-led opportunities within Glasgow city centre. He was not an
expert in the hotel market or in valuing trading hotels but he did have experience and
expertise in the valuation of hotel schemes. He was a RICS Accredited Registered Valuer
and a RICS Accredited Expert Witness.
27
[78]
The first defender stated that he had never been involved in another negligence
claim where there were allegations against him as an individual or against the second
defender.
[79]
The first defender set out the background to his instruction by the pursuer and L&G.
The first defender was aware from the RICS appointment paperwork that the parties sought
a valuer who had
"specific sector knowledge and experience of undertaking development led
valuations in Glasgow with a particular focus on the hotel, office and retail sectors to
be able to compile a formal valuation in accordance with the RICS 'Red Book'".
The first defender understood "development led" to be a reference to a valuation derived by
the residual approach. The first defender considered that he had the appropriate knowledge
and experience. His evidence was that he could not think of any other individual who
would have been a more appropriate candidate than himself for the Glasgow market. The
first defender presumed that the matter had been referred to him on the basis that the
parties did not anticipate a hotel proposal to be the means of generating the highest value.
He noted that neither of the parties' representatives, Mr Thurtell and Mr Bryers, both of
whom knew him professionally, had objected to his appointment.
[80]
The first defender considered that the overall feel of his instruction was that of a
"quasi-arbitration". However, he was clear that he was acting as an expert because an
expert opinion had been specified in the parties' missives. He had been appointed as an
"Independent Valuer". The first defender considered that the terms independent valuer,
expert or arbitrator were all one and the same. He considered his role was to gather
evidence and produce an independent valuation of the market value of the property at the
valuation date.
28
[81]
The first defender also set out his understanding of the procedural background
which led up to the production of his valuation. He had convened a preliminary hearing on
26 September 2017 because he considered this to be an unusual case and he wanted to gather
as much information as possible. The meeting had been attended by both sides and their
representatives. It had been business-like and, so far as the first defender remembered, the
great majority of the meeting had been taken up by discussion of office development
schemes. A hotel development had only been mentioned by Mr Bryers. The first defender's
impression, throughout the process, was that hotel use did not appear to be on the parties'
radar. The first defender had also invited the parties each to provide submissions and
counter-submissions. He did this in order to obtain as much information as possible to
ensure he understood the property.
[82]
In terms of his own valuation, the first defender explained that he considered the
development schemes proposed by each of the parties. He did not consider creating a hotel-
based development scheme of his own. This was particularly so given that the Meininger
scheme, with which he had been provided, had a pending application for planning. He was
not an architect and so he considered that it would not have been appropriate for him to
create an alternative scheme. The first defender did not consider any other hotel valuations
or comparative hotel sales in the city because none had been provided to him. He
considered that a higher value was associated with office use. The first defender's position
was that the hotel valuation carried out by him was, in itself, the "cross-check" referred to in
VIP 12. He had carried this out alongside sensitivity analysis and his own market research.
[83]
The first defender explained that the practice of the second defender was to carry out
peer reviews of valuations with personnel from various sectors including office, retail,
29
building consultancy, hotel and leisure. The first defender had consulted with seven of his
colleagues from these sectors as a cross-check prior to finalising his valuation report.
[84]
The first defender was very critical of Mr Chess' reports. The first defender
considered that Mr Chess had a conflict of interest and was, effectively, advocating for the
pursuer. The first defender had formed this view on the basis that Mr Chess currently
worked part time for Gerald Eve. This was the same firm as Mr Thurtell had acted for. The
first defender considered that Mr Chess had a conflict of interest in that it would be in his
interest to direct blame away from Gerard Eve who should have put forward a hotel scheme
in their original submissions to him.
[85]
In cross-examination, the first defender accepted that the broad consensus was that
the street-level use of Dale House was likely to be either retail or leisure. He had valued the
building on this basis. On this basis, the first defender was asked whether he had taken the
further step of identifying the value of the ground floor as a standalone valuation as part of
the sense-checking of the valuation of the building. The first defender did not take this step
and did not understand why one would go down that route. It would be very unlikely to be
developed on its own and the costs would be different if only the ground floor were to be
developed.
[86]
The first defender accepted that in carrying out a "Red Book" valuation it was
necessary, at an early stage, to identify the class of buyers who might be interested in the
site. In his valuation report, he had considered four possibilities and had dismissed two
residential and student accommodation. The first defender had settled on two possibilities
either office or hotel with mixed retail or leisure on the ground floor. He had then worked
up a valuation for each possibility and concluded that the office development produced the
higher figure. The first defender was asked about the transactional evidence which he had
30
considered in respect of the hotel valuation. He confirmed that he had looked only at lease
valuations. The first defender confirmed that the reason he did not consider acquisition of
the site by a hotel owner operator was that he was not aware of any demand or interest in
the Dale House site by this type of buyer. His position was that, although in theory he could
have considered any number of different possibilities including industrial use, that was not
what the parties had presented to him. He had assessed the schemes presented.
[87]
In relation to the Meininger scheme, the first defender agreed that it was not a
mainstream offering but, not being an architect, he did not consider that he could look
behind a scheme which had been developed and which was being advanced through
planning. He did not consider that there was anything untoward about the Meininger
scheme.
The pursuer's submissions
The first defender's appointment
[88]
The starting point was what the parties to the missives had agreed that the first
defender was to do. That was set out in clause 16.5 of the missives (see [4] above). The
Independent Valuer was to determine the Open Market Value of the property at the
Valuation Date "using the current edition of the RICS Valuation Professional Standards
having regard to information provided by both parties in support of their proposed
valuations."
[89]
It was common ground that clause 16.5 was referring to the RICS Red Book. The first
defender had specifically quoted from this in his valuation (at Appendix 2.0). The Red Book
provided that the valuer was to assume a willing buyer and a willing seller in an arm's
31
length transaction after proper marketing and where the parties had each acted
knowledgeably, prudently and without compulsion.
[90]
The pursuer submitted that it was clear that the parties to the missives had intended
that the exercise to be carried out was one of expert determination and not arbitration. This
was apparent from the wording of clause 16.5 itself particularly when compared with
clauses 15.2 and 16.7 which referred expressly to the appointment of an "arbiter". Counsel
for the pursuer submitted that the process the parties had gone through of appointing the
first defender did not alter the nature of the task which the "Independent Valuer" was to
carry out. In particular, counsel rejected the suggestion that the first defender's task was
altered by the information set out on the RICS application to the effect that the Independent
Valuer was to have "sector specific knowledge and experience of undertaking development
led valuations in Glasgow with a particular focus on the hotel, office and retail sectors to be
able to compile a formal valuation in accordance with the RICS 'Red Book'".
[91]
In any event, the first defender had confirmed his own understanding of the task in
his letters dated 27 September 2017 and 24 November 2017 where he had described his role
as being that of an "Independent Expert". The first defender's report also confirmed that he
had carried out his own investigations in arriving at his opinion of market value (see
paragraph 1.1.8). Such investigations would not have been consistent with the first defender
acting as an arbitrator or in some kind of quasi-judicial manner.
Liability of an independent expert
[92]
Having been appointed as an independent expert, the first defender owed the parties
a duty to carry out the valuation with reasonable skill and care (Zubaida v Hargreaves
[1995] 1 EGLR 127).
32
Residual valuations
[93]
Counsel for the pursuer submitted that when considering the normal and usual
practice in the field of the valuation of development land, it was necessary to consider the
aforementioned RICS Valuation Information Paper 12: Valuation of development land
(VIP 12). In 2008, this paper had been stated to be reflective of established practice among
surveyors (Dunfermline Building Society v CBRE Limited [2018] PNLR 13 at paragraph 40).
VIP 12 explained that there were two approaches to the valuation of development land:
first, comparison with the sale price of land for comparable development; and, second, the
assessment of the value of the scheme as completed and deduction of the costs of
development (including developer's profit) to arrive at the underlying land value: the
residual method (at paragraphs 1.5 to 1.7). Counsel highlighted the fact that VIP 12 made
clear that the residual method is very sensitive to variations in the variables which make up
the calculation of residual value (at paragraph 7.3). This sensitivity was notorious (see
Dunfermline Building Society at paragraphs 45 to 47). It was for this reason that VIP 12 stated
the following:
"The residual value is not necessarily the same as the value of the land as it has to be
considered in the context of the valuation as a whole. The following matters may
have an impact on the residual value and need to be addressed before the final
conclusion is reached ...
If at all possible an attempt can be made to compare the result with such market
evidence as may exist because the residual method sometimes produces theoretical
results that are out of line with prices being achieved in the market ..."
(paragraph 7.3)
[94]
Counsel for the pursuer submitted that the need to carry out a cross-check was not
controversial. The first defender had accepted this and there was ultimately no dispute
between Mr Chess and Mr Murphy that this represented normal and usual practice.
33
Allegations of negligence
[95]
The pursuer's case was advanced on three overlapping strands of negligence.
[96]
First, the pursuer submitted that the first defender had acted negligently in
uncritically adopting the Meininger Scheme and failing to ask himself why the proposed
hotel development had one fewer floor than an office development which was subject to the
same height constraint. The first defender had simply made no investigation in this regard.
The guidance was clear in directing the valuer to consider what the site would support in
the hands of a competent developer. There was clear evidence that the Meininger Scheme
did not represent a "mainstream" development involving, as it did, bunkbeds and higher
ceilings. Furthermore, Mr Chess' evidence in respect of the slab-to-slab heights and the
possibility of inserting an additional floor without any compromise on room size was
unchallenged. Mr Chess' indicative scheme resulted in 192 rooms rather than the 160 rooms
which featured in the Meininger scheme. It appeared that the first defender, having
received the Meininger Scheme, had simply not looked beyond it. Counsel recognised that
the causal potency of this first strand was relatively limited. Essentially, its principal result
was to mask the true extent to which the value per room in the first defender's residual
valuation was indefensibly low.
[97]
The second strand relied upon by the pursuer was the failure by the first defender
properly to cross-check the result of the residual calculation he had performed for the
proposed hotel development with transactional evidence. As noted above, VIP 12 made it
clear that if at all possible an attempt to compare with market evidence ought to be made.
As Mr Murphy had ultimately come to accept, the exercise of cross-checking with
transactional evidence necessitated a prior exercise in ascertaining what the relevant
34
transactional evidence was. It was apparent from his report that the first defender had been
aware of transactions involving owner operators in the hotel development market in
Glasgow at the relevant time. He mentioned these transactions but did not analyse them.
The first defender restricted his analysis to the transactions that were structured as leases.
[98]
Counsel submitted that it was apparent from the evidence how this error had arisen.
The first defender had proceeded on the assumption that he was valuing a lease transaction
because that was what had been put before him by Mr Bryers on behalf of L&G. By
proceeding in this way, the first defender also remained in his comfort zone. Considering
lease transactions, the methodology was basically the same whether one was considering
retail, office or hotel.
[99]
When one considered the comparators more closely, it became apparent that the
value of Dale House had to be significantly higher than the first defender had assessed. The
pursuer submitted that there was consistent evidence that owner operator transactions
generated higher values. A valuer having sufficient understanding of hotel valuation would
understand the reason for that as had been persuasively explained by Mr Chess. The
pursuer's position was straightforward: the first defender had undertaken a hotel valuation
but had failed to do it properly. What the first defender had done represented a departure
from normal and usual valuation practice and there was no explanation for it.
[100]
Counsel for the pursuer submitted that neither of the possible justifications which
had been advanced by Mr Murphy were plausible. First, it could not be relevant that neither
of the parties had suggested that the first defender look at the owner operator comparators.
That argument depended on the first defender acting as some sort of quasi-arbitrator. It was
clear that was not what he was doing. The first defender had recognised the need to carry
35
out his own investigations and had done so. The first defender had himself identified a
series of hotel projects which were being constructed or which were "in the pipeline".
[101]
The second suggestion was that the first defender's approach might be justified if he
had made a prior valuation judgment that the history of the Dale House site indicated that
there was no interest from owner operators. Counsel submitted that there were a number of
significant problems with this suggestion. First, there was nothing in the first defender's
report to indicate that this was, in fact, what he had done. Second, there was, in any event,
no evidential basis for such a conclusion. The site had not been exposed to the open market
from the date of the pursuer's acquisition up until late 2017 when the first defender was
completing his valuation. Finally, even if it could be suggested that there was a body of
professional opinion justifying the exclusion by the first defender of the owner operator
comparators from his cross-check of the residual valuation of hotel development, that
opinion did not stand up to rational analysis (cf Bothwell v DM Hall 2009 CSOH 24 at
paragraphs 36 and 37).
[102]
The final strand of negligence founded upon by the pursuer was the first defender's
failure to recognise that the value of the ground floor retail/leisure development was such
that the remaining value attributable to the hotel element was obviously far too low. This
had been accepted by Mr Murphy.
Scope of duty relevant standard
[103]
The pursuer submitted that determination of this issue turned on the proper
construction of the documents which formed the trilateral contract between the pursuer, the
first defender and L&G. On this basis, it was straightforward that the first defender had
undertaken to carry out a "Red Book" valuation of the site at the valuation date. The first
36
defender had asserted competence in undertaking development-led valuations in Glasgow
with a particular focus on the hotel, office and retail sectors. If, in fact, he was unable
competently to carry out valuations of owner-operated hotels, he ought not to have accepted
the appointment or, at least, he ought to have made this clear. If necessary, it would have
been possible for the first defender to obtain specialist input in this area as he had done in
others (see paragraph 1.3 of his valuation report). In these circumstances, the first defender
could not now contend that the relevant standard to be applied was anything other than the
ordinarily competent hotel valuer (cf Baxter v FW Gapp & Co Ltd [1938] 4 All ER 457, per
Goddard LJ at p459).
Valuation
[104]
Once negligence was established, it was the task of the court to find the true value of
the property. It was not to find the lowest non-negligent value (South Australia Asset
Management Corp v York Montague Ltd [1997] AC 191 at 221 per Lord Hoffman). To adopt the
latter course would confuse the standard of care with the question of the damage which falls
within the scope of the duty.
[105]
On this basis, the only admissible evidence came from Mr Chess. The pursuer
submitted that his evidence ought to be accepted for a number of reasons. First, as was
apparent, his expertise in the field was obvious. He was vastly experienced. Second, he had
been able to explain his opinion persuasively and clearly. Third, he had set out the basis for
the various inputs that he had used in this calculation. Fourth, he had been prepared to
make appropriate concessions. For example, he readily accepted that his approach to the
valuation of the retail or leisure elements might not be more reliable than others. Finally,
counsel emphasised that Mr Chess had been fundamentally cautious. It was clear from his
37
evidence that there was scope for a significantly higher residual value. This could be seen
from the alternative 224 room scheme which Mr Chess has worked up based on the Bloc
scheme. However, Mr Chess did not consider that this alternative scheme would have been
alighted upon by a reasonable surveyor and, as a result, he had disregarded it. Counsel also
noted that Mr Chess has made a series of relatively pessimistic assumptions in his
calculation: he had increased the contingency cost and made a 10% allowance for what
might thought to be a fairly negligible planning risk.
[106]
Counsel for the pursuer contrasted the position of Mr Chess with that of Mr Murphy.
Mr Murphy had been clear that he was not in a position to give admissible evidence on the
proper hotel valuation of the site. Albeit, Mr Murphy had, apparently, felt able to offer a
critique of Mr Chess' valuation. This seemed to amount to giving evidence about a number
of the individual inputs which Mr Chess had included in his calculation.
[107]
On demolition costs, Mr Chess had explained that the source of the £525,000 figure
he used was the detailed cost estimate prepared by Gardiner & Theobald for L&G.
Mr Chess had explained why he considered it was likely to be the most reliable. The first
defender had used a figure of £600,000. He had indicated that this figure had been arrived
at following a discussion he had had with colleagues. Mr Chess had accepted that this was a
perfectly legitimate approach albeit he considered £525,000 was the better figure.
[108]
On build costs, the pursuer submitted that Mr Murphy had not been able to justify
his contention that the site was unusually difficult. On the contrary, it appeared to have a
number of features which made it easier to develop than other city centre sites: including
the gates on the front elevation and the right of access via the lane at the side of the
property. Notably, the first defender had not uplifted the build cost figures he had used on
this basis.
38
[109]
The pursuer took issue more generally with the evidence of Mr Murphy on the basis
that, at times, he had ceased to be an independent expert and had strayed into the role of
partisan advocate on behalf of the first defender. Counsel highlighted that in his report
Mr Murphy failed properly to address the principal thrust of the pursuer's case namely,
the failure by the first defender properly to cross-check the residual value of hotel
development. Counsel also drew attention to the fact that in respect of a number of issues,
Mr Murphy had adopted a trenchant position in his report which had been quickly
abandoned in cross-examination. An example of this was Mr Murphy's positon as regards
the relevance of transactions that had occurred after the valuation date but before the first
defender carried out his valuation. In his report, Mr Murphy had stated these properties
ought not to be considered and yet he had subsequently accepted their relevance when
crossed on this issue.
Calculation of damages
[110]
The pursuer sought damages in the sum of £928,650.96 together with interest at the
judicial rate from the date of citation. The calculation of the principal sum was the result of
the application of the formula for determining the Profit Share set out in clause 1 of the
missives. The Profit Share was defined as being 50% of the "Distributable Profit". The
Distributable Profit was to be determined in accordance with the following formula:
"`Distributable Profit'" means such sum as is calculated in accordance with the
following formula:
A = B - (C + D + E)
where A is the Distributable Profit
B = the OMV as determined in accordance with Clause 16.
39
C = the Project Costs less the Receipts
D = the Finance Charge
E = the Purchaser's Priority Return"
[111]
The parties had agreed by joint minute the value of each of the elements, C, D and E.
Accordingly, the total of those three factors - (C + D + E) - was equal to £4,442,698.08. In
terms of the formula, the pursuer was entitled to 50% of the difference, if any, once this total
was subtracted from the Open Market Value. The pursuer submitted that the correct figure
for the Open Market Value was the figure of £6,300,000 which had been proposed by
Mr Chess.
The defenders' submissions
[112]
Senior counsel for the defenders moved me to assoilzie the defenders.
Duty of care
[113]
The defenders submitted that there was much which was uncontentious under this
heading. The defenders accepted that they owed a duty of care to the pursuer. They also
accepted that the relevant standard of care was, as was averred by the pursuer, that to be
expected of a chartered surveyor of ordinary competence (Article 14 of condescendence).
[114]
It was also uncontentious that, in order to establish negligence, the pursuer required
to prove: first, that there was a normal and usual practice; second, that the first defender
did not adopt that practice; and, third, that the course adopted by the first defender was one
which no surveyor of ordinary skill and care would have taken if acting with ordinary skill.
40
[115]
In this regard, senior counsel drew attention to the fact that the expert relied upon by
the pursuer, Mr Chess, was a surveyor with particular expertise in the field of hotel
valuation (see below at [120] and [121]).
Scope of duty
[116]
Senior counsel submitted that an issue arose in respect of the scope of duty owed by
the defenders. The starting point was that the scope of the defenders' duty was to be
governed by the purpose of the duty (Manchester Building Society v Grant Thornton UK
LLP [2022] AC 783 at paragraph 4). In the present case, that meant determining the purpose
of the valuation to be carried out by the first defender by reference to the terms on which he
was appointed.
[117]
The pursuer's allegations of negligence all essentially turned on what was said to be
a failure to look beyond the Meininger scheme. However, senior counsel submitted that
when the evidence of the first defender's terms of appointment were considered, the court
would be entitled to conclude that the purpose of the first defender's instruction did not in
fact extend to going behind or beyond the Meininger scheme.
[118]
In this regard, senior counsel emphasised the following. First, he highlighted that, in
terms of clause 16.5 of the missives, both the pursuer and L&G were obliged to provide the
valuer with "all marketing reports, surveys, offers and disclose the contact of all
negotiations will third parties [sic]." Second, senior counsel drew attention to the RICS form
that had been completed by Mr Thurtell, on behalf of the pursuer, seeking the appointment
of an independent valuer. The form stipulated that the independent valuer "should have
specific sector knowledge and experience of undertaking development led valuations in
Glasgow with a particular focus on the hotel, office and retail sectors to be able to compile a
41
formal valuation in accordance with the RICS 'Red Book'". Third, senior counsel referred,
generally, to communication between the pursuer, L&G and the first defender following his
appointment including what had been discussed at the meeting on 26 September 2017.
Finally, senior counsel drew attention to the submissions and counter-submissions which
had been provided to the first defender by the pursuer and L&G respectively. Importantly,
in the submissions which the first defender had received, each party had put forward
valuations based on a mixed office and retail/leisure development but the only hotel scheme
put forward was the Meininger scheme (proposed by L&G). Furthermore, neither party put
any evidence before the first defender of any interest being expressed in the site by a hotel
owner operator.
[119]
In these circumstances, the defenders submitted that the purpose of the exercise
which the first defender was asked to accomplish was to carry out a valuation based on
what had been submitted to him together with any other information he felt was relevant. It
did not extend to the consideration of an alternative hotel scheme.
The expert witnesses
[120]
Senior counsel submitted that the dispute between the parties as to whether there
had been a breach of duty turned on the differences between the expert surveyors who had
given evidence. In this regard, senior counsel submitted that Mr Murphy was a surveyor
with a similar background and experience to the first defender. By contrast, Mr Chess was a
surveyor who had specialised in hotel valuation for over 25 years. The defenders argued
that this difference in expertise was significant.
[121]
First, the defenders objected to the admissibility of Mr Chess' evidence on the basis
that he lacked the relevant knowledge and expertise to give evidence in relation to the
42
appointment of the first defender. The short point for the defenders was that the first
defender had been instructed as a surveyor with specific sector knowledge and experience
of undertaking development-led valuations in Glasgow with a particular focus on the hotel,
office and retail sectors. The defenders contrasted this with Mr Chess who could only speak
to the usual and normal practice of an expert hotel valuer.
[122]
Second, even if his evidence were admissible, Mr Chess, with his experience in hotel
valuation, considered that it was necessary for a surveyor, acting consistently with
paragraph 7.3 of VIP 12, to consider the wider transactional evidence of hotel owner
operator purchases. On the other hand, senior counsel submitted that Mr Murphy's
evidence had been to the effect that ordinary practice would not include looking at the
comparative owner operator sales where there was no "source of demand" demonstrated
for the site. According to senior counsel, Mr Murphy considered that whether to look at
other sectors of the hotel market was a matter of judgment for the surveyor concerned
having considered the information, or lack thereof, in respect of the site together with any
other information, such as any transactions in the wider market.
[123]
In respect of Mr Murphy's evidence, senior counsel accepted that it had been unwise
of Mr Murphy to have gone down the route of engaging with Mr Chess' hotel valuation
given that Mr Murphy expressly disavowed any expertise in this field. However, senior
counsel emphasised that it was to Mr Murphy's credit that he recognised that he had
crossed the line in this respect. Mr Murphy had also made appropriate concessions when
challenged during cross-examination in other areas. Importantly, the defenders submitted
that Mr Murphy had not moved on the position that the first defender's decision not to look
at the owner operator hotel comparators was a question of judgment which depended on
the absence of any evidence of demand for the site by owner operators.
43
[124]
For these reasons, the defenders submitted that the pursuer had failed to prove that
the first defender had acted negligently.
Causation
[125]
In the defenders' written submissions, a number of challenges were advanced under
this heading. First, it was argued that the pursuer's case based on the hotel valuation
carried out by the first defender was at odds with the absence of any criticism of the first
defender's valuation of the site based on a mixed office and retail/leisure development.
Second, various criticisms were made of Mr Chess' approach to the comparable transactions.
[126]
In the event, as the points were not advanced in oral submission, it was not clear to
me to what extent, if at all, they are insisted in.
Valuation
[127]
Under this heading, the defenders accepted that, beyond the criticisms which had
been made by Mr Murphy, the only relevant evidence which the court had before it was that
from Mr Chess. However, senior counsel highlighted that, while Mr Chess considered that
Mr Murphy's figure of £4.4 million was low, he had accepted that there was a range of
figures for the potential value of the site. Mr Chess had also accepted that the assumptions
which Mr Murphy had made in respect of the retail elements of the development and the
extension to the rent-free period were both reasonable.
[128]
The defenders also contended, both in their written submissions and orally, that any
loss to the pursuer should be calculated on the basis of a loss of chance. This proposition
was advanced on the basis that the present case was analogous with a situation in which, as
44
a result of a negligent undervaluation, a property is sold at a price less than that which
should have been achieved if proper advice had been given.
Decision
Objections to evidence
[129]
In accordance with normal practice in the Commercial Court, I had ordered the
parties to prepare and exchange written notes of objection based on the expert reports and
witness statements lodged by each party. Thereafter, the parties were agreed that the
evidence be heard under reservation with objections being dealt with at the stage of
submissions. In the event, when it came to submissions, two grounds of objection were
insisted on one for the pursuer and one for the defender.
[130]
The pursuer objected to the evidence of Mr Murphy and the first defender which, so
the pursuer contended, was directed to the construction of the first defender's appointment
(see, for example, [65] and [79] above). This objection was made on the well-recognised
basis that matters of construction of the terms of the first defender's appointment are
properly questions of law for the court and neither the subjective evidence of one of the
parties, nor the evidence of a non-legally qualified expert are admissible. As a general
statement of law, the pursuer's position is clearly correct. However, I do not consider that
the impugned evidence falls to be excluded as a result. That is because I do not consider
that this evidence has been led in order to address the proper construction of the first
defender's appointment. In this regard, I note that the defenders do not rely on this
evidence in support of their arguments as to the proper construction of the first defender's
appointment. As I understand it, the evidence, for what it is worth, was intended, in each
45
case, to explain the witness' understanding of the first defender's obligations in order to give
context to each of their evidence.
[131]
The defenders, for their part, objected to the evidence of Mr Chess for the reasons I
have set out above at [118]. As this objection is closely linked to the defenders' arguments in
respect of scope and breach of duty, I have dealt with the objection below at [145].
[132]
Finally, I would note for completeness, that, at an earlier stage in proceedings, the
defenders took objection to Mr Chess apparently on the grounds that he was currently a
partner at Gerald Eve and, therefore, in some way lacking independence. Mr Chess was
cross-examined by the defenders' senior counsel on this basis. However, having heard
Mr Chess' evidence, the defenders indicated, entirely correctly in my view, that they were
not insisting on this ground of objection. In this regard, as I have noted above (at [84]), the
first defender took it upon himself to criticise Mr Chess in his witness statement on a similar
basis. Why it was thought appropriate to include his irrelevant and inadmissible opinions
on these matters in his witness statement is entirely unclear to me. Plainly the first defender
cannot be regarded as independent and impartial in the present proceedings. Furthermore,
the allegations he made were unsubstantiated at the time and, as it turned out after the
evidence had been heard, without foundation.
Duty of care
[133]
At the outset, there are two foundational issues which are not contentious.
[134]
First, there is no dispute between the parties that, as a result of his acceptance of the
instruction by the pursuer and L&G, the first defender owed them a duty of care to carry out
the valuation with reasonable skill and care (Zubaida v Hargreaves [1995] 1 EGLR 127 per
Hoffman LJ (at 127 K-L and 128 A-C)). It was further agreed that in accepting the
46
instruction, the first defender was acting both in his capacity of a member of the second
defender and in the course of the ordinary business of the second defender. Accordingly,
insofar as the first defender has acted in breach of duty and or contract, the second defender
is also liable.
Standard of care
[135]
Second, there is no dispute that the relevant standard against which the actions of the
first defender are to be assessed is that to be expected of a suitably qualified chartered
surveyor of ordinary competence acting with reasonable skill and care. This is
uncontroversial and is a term which falls to be implied into the tripartite contract formed
between the pursuer, L&G and the first defender following the first defender's acceptance of
his appointment.
Scope of duty
[136]
However, there is an issue between the parties in respect of the scope of the first
defender's duty.
[137]
The pursuer's position is straightforward. The parties had agreed the purpose of the
first defender's appointment in clause 16.5 of the missives. The "Independent Valuer" was
to determine the open market value of the property at the valuation date using the current
edition of the RICS Valuation Professional Standards having regard to the information
provided by both parties in support of their proposed valuation. It was plain that the
parties intended that the exercise conducted by the independent valuer was to be one of
expert determination and not arbitration or quasi-arbitration. The process of appointing the
first defender had not changed this. It was apparent from the first defender's own
47
contemporaneous correspondence and his report that he regarded himself as being an
independent expert conducting his own investigations as part of his own valuation exercise.
[138]
On the other hand, it is contended on behalf of the defenders that the scope of the
first defender's duty was restricted in some way with the effect that it did not extend to
looking beyond the parties' submissions and, in particular, the Meininger scheme. As I
understood it, the defenders advanced this argument on the basis that this restriction flowed
from the purpose of the first defender's duty being the purpose for which the first defender
was instructed. In general terms, the defenders relied upon the terms of the missives, the
process of the first defender's appointment, and the procedure followed by the first
defender (see [116] to [119] above).
[139]
I found this aspect of the defenders' argument difficult to follow as I was unable to
see any basis for it. First, I consider that the terms of clause 16.5 of the missives are clear.
The "Independent Valuer" is to be appointed in order to determine the open market value of
the property in accordance with the current RICS standards. In that regard, it is notable
that, although the parties have made provision at various points in the missives for the
appointment of an independent arbiter (e.g. clauses 15.2 and 16.7), the parties have elected
not to use that wording in clause 16.5. Although the independent valuer is to have regard to
the information put forward by each of the parties including all marketing reports,
surveys, offers and details of negotiations there is no suggestion that he or she is to be
restricted to that information.
[140]
Thereafter, I am unable to find any basis in the appointment documentation for the
restricted scope of duty contended for by the defenders. Certainly, the RICS Application
form dated 11 July 2017 completed by Mr Thurtell provides no assistance. Under the
heading "Nature of Dispute", the form essentially seeks to repeat the terms of clause 16.5:
48
"Dale House Developments and Legal and General wish to jointly appoint an
Independent Valuer to undertake a market valuation of Dale House, 21 West George
Street, Glasgow as at 12 September 2016. The process is as per a condition within the
'missives' between the Parties taking the form of letters between the Parties Solicitors
[sic]. The Independent Valuer will be required to produce an RICS 'Red Book'
valuation which will be used to calculate the Distributable Profit in accordance with
the Parties legal agreement [sic]."
Thereafter, under the preferred professional background of the dispute resolver, the form
provides:
"The Independent Valuer should have specific sector knowledge and experience of
undertaking development led valuations in Glasgow with a particular focus on the
hotel, office and retail sectors to be able to compile a formal valuation in accordance
with the RICS 'Red Book'."
[141]
This wording was specifically founded on by senior counsel for the defenders and
yet no explanation was provided as to why this stipulation should be regarded as in any
way restricting the first defender's scope of duty. If anything, by requiring that the
independent valuer has particular knowledge and expertise to be able to prepare a
valuation, it would seem to reinforce the notion that the independent valuer is to carry out
his or her own exercise rather than being restricted in some way to the parties' submissions.
[142]
For completeness, I note, for what it is worth, that, as pointed out by the pursuer,
this conclusion is consistent both with the first defender's contemporaneous correspondence
and with the report he produced. Both make it clear that the first defender was acting as an
independent expert able to conduct his own investigations and unconstrained by the parties'
submissions. After the preliminary hearing on 26 September 2017, the first defender wrote
to the parties on the following day setting out the procedure he wished to adopt. This
included the provision to him of written submissions from each of the parties and an agreed
statement of facts relating to three particular matters. The first defender then said:
49
"I would reiterate that my role is as an Independent Expert and this is merely to
provide me with all the factual elements available in order than [sic] I can progress
with my valuation. ..."
In his valuation report dated 8 December 2017, the first defender acknowledged receipt of
the submissions and counter-submissions from both parties (paragraph 1.1.6) and also
confirmed that he had carried out his own investigations in arriving at his opinion of market
value (paragraph 1.1.8).
[143]
Accordingly, I do not consider that the first defender's scope of duty falls to be
constrained as contended for by the defenders. The purpose of the first defender's
instruction was no more and no less than that provided for by clause 16.5 of the missives,
namely to determine the open market value of the property at the valuation date using the
current edition of the RICS standards.
[144]
For the avoidance of doubt, in reaching this conclusion, I place no weight upon the
evidence of the first defender to the effect that he considered that the feel of his instruction
was that of a "quasi-arbitration" (above at [80]). Quite properly, this evidence of the first
defender's subjective opinion as to the meaning of his appointment was not founded on by
the defenders. In any event, as the first defender candidly acknowledged, given that the
terms independent valuer, expert and arbitrator were all one and the same to him, it is not
clear to me what the first defender intended to convey by his remark other than, perhaps, a
sense of the formality involved.
Objection to the evidence of Mr Chess
[145]
The principal evidence led by the pursuer on the issue of breach of duty came from
Mr Chess. As I have noted above (at [121]), the defenders objected to Mr Chess' evidence.
Accordingly, it is appropriate to deal with the defenders' objection at this point.
50
[146]
The defenders' objection was, in short, that Mr Chess lacked the relevant knowledge
and experience to give opinion evidence in respect of the actions of the first defender. This
was because Mr Chess was a surveyor with extensive experience and expertise in the
valuing of hotels whereas the standard against which the actions of the first defender were
to be measured was that of a suitably qualified chartered surveyor of ordinary competence
acting with reasonable skill and care. The defenders accepted that in the present case, based
on his appointment, the appropriate qualifications were:
"specific sector knowledge and experience of undertaking development led
valuations in Glasgow with a particular focus on the hotel, office and retail sectors".
On this basis, so the defenders submitted, the evidence of Mr Chess as to the usual and
normal practice of an expert hotel valuer were neither relevant nor admissible in respect of
the assessment of the actions of the first defender.
[147]
The pursuer's response to the defenders' objection was that the defenders failed to
recognise that the valuation of the property necessarily involved considering its potential
use as a hotel. That had been expressly recognised in the formulation of the preferred
professional background stipulated for in the first defender's appointment which referred to
experience of undertaking development-led valuations in Glasgow with, among other
things, a particular focus on hotels. In these circumstances, it was not open to the first
defender to accept the instructions, as he had done, and then to assert that he did not have
the appropriate expertise to carry them out. The defender's position was akin to a
submission of tailoring the duty to the actor rather than to the act. This argument had been
consistently rejected in the professional negligence field (Wilsher v Essex Area Health
Authority [1987] QB 730 at 749 to 751; Jackson & Powell, Professional Liability (9th Edition)
at paragraphs 10-059 to 10-061).
51
[148]
I agree with the pursuer's argument and repel the defenders' objection to Mr Chess'
evidence. As a starting point, it is clear that where negligence is alleged on the part of a
professional, it will usually be necessary to lead evidence from an expert of the same
discipline in order to establish whether the actions of that professional fell below the
reasonable standard of his or her profession. I also recognise that where one is dealing with
an action against a surveyor that that profession encompasses a very wide set of sub-
specialisms (see Jackson & Powell at paragraphs 10-003 and 10-064). As a result, it is more
useful to define the surveyor's job by reference to the particular task which he or she was
carrying out rather than focussing on his or her particular position.
[149]
From this starting point, the learned authors of Jackson & Powell suggest that the
next question which requires to be asked is was the task one which the professional
undertook within his or her own proper and usual professional sphere? If not, a question
may arise as to whether the professional should be judged not according to his or her usual
professional practice but rather according to the practice of the specialism in which the
professional purported to act (Jackson & Powell at 10-064).
[150]
In the present case, the parties are agreed that the task which the first defender was
to carry out was the valuation of the property at the valuation date on the basis of a
development-led valuation and with a particular focus on the hotel, office and retail sectors.
That is what can be taken from clause 16.5 of the missives together with the appointment
documentation. As to the question posed by the learned authors of Jackson & Powell, there
was no suggestion that in carrying out his instructions the first defender was acting
otherwise than within his own proper and usual sphere. That was very emphatically the
first defender's own evidence (see [79]). There was also no suggestion from Mr Murphy that
52
he considered the first defender was acting outside his usual sphere. Accordingly, there is
no basis for the subsidiary question to arise.
[151]
Having undertaken the task of valuing the property and having held himself out as
an expert valuer having experience of undertaking development-led valuations in Glasgow
with a particular focus on, among other things, hotels, the first defender's actions fall to be
judged by that standard. As Lord Justice Mustill (as he then was) put it in Wilsher "If ... [a
professional] assumes to perform a task, he [or she] must bring to it the appropriate care and
skill" (at 747 B-C). On this basis, the evidence of Mr Chess, an acknowledged expert in hotel
valuation, is plainly both relevant and admissible.
Breach of duty
[152]
The pursuer's case on breach of duty was broken down into three linked elements or
as counsel described them "strands". In summary, these were: first, the failure by the first
defender to notice that the proposed hotel scheme he was valuing, the Meininger scheme,
had one fewer floor than the office scheme he was valuing; second, the failure by the first
defender properly to cross-check the result of the residual valuation of the proposed hotel
development with transactional evidence; and, third, the failure of the first defender in
cross-checking the residual value of the proposed hotel development to take account of the
likely value of the retail/leisure development on the ground floor.
[153]
Although presented as three separate stands, the essence of the pursuer's case is the
alleged failure by the first defender to cross-check the result of his residual valuation of the
proposed hotel development. In submissions, counsel for the pursuer recognised that the
first strand had limited causal potency. The other two strands, upon which the pursuer's
case is principally founded, are both directed towards what the first defender did, or
53
perhaps more accurately, did not do with the results of his residual valuation for the
proposed hotel development.
[154]
There being no real dispute as to what, as a matter of fact, the first defender had
done in carrying out his valuation, the principal evidence in respect of this issue came from
the two expert witnesses: Mr Chess and Mr Murphy. Notwithstanding the sharply
divergent views expressed in the reports both he and Mr Chess had prepared, it became
apparent during the course of Mr Murphy's cross-examination that there was, in fact, a
considerable degree of common ground between them.
[155]
On the basis of their evidence, I consider that Mr Chess and Mr Murphy were agreed
on the following:
·
First, the task being undertaken by the first defender involved carrying out a residual
valuation based on a hotel development with mixed retail and leisure on the ground
floor.
·
Second, that, as was set out in VIP 12, it was normal and usual practice for a surveyor
undertaking this type of valuation to carry out a cross-check with available market
evidence where at all possible. The need for this cross-check arose from the large
number of variables involved in a residual valuation, each of which involved an
exercise of judgment by the valuer, and which could have significant impact on the
resulting valuation.
·
Third, that an ordinarily competent expert, in the position of the first defender, could
not restrict him or herself simply to considering the submissions which had been
made to them.
54
·
Fourth, that in carrying out a cross-check, such an expert required, first, to consider
the market and all those transactions which might properly be considered
comparable.
·
Fifth, that such an expert, in the position of the first defender, would, in cross-
checking the residual value of the hotel development, have considered the likely
value of the proposed retail or leisure development on the ground floor.
·
Sixth, that the first defender, in failing to do this, had not acted in accordance with
the normal and usual practice of an ordinarily competent surveyor.
[156]
As will be immediately apparent from the fifth and sixth points noted above, the two
expert witnesses were agreed that the first defender had not acted in accordance with the
normal and usual practice of an ordinarily competent surveyor in failing to consider the
likely value of the proposed development on the ground floor when cross-checking his
residual valuation of the proposed hotel development. Given that this is one of the two
main elements of breach of duty founded upon by the pursuer, this consensus is, of course,
highly significant.
[157]
In light of the significance of this point, I am compelled to observe that I find it
difficult to square Mr Murphy's evidence in relation to it when under cross-examination
with the evidence given in his various reports. As I have noted above (at [66]), Mr Murphy
was specifically asked in his first report, which was dated 11 August 2023, to consider the
first defender's actions bearing in mind the three part test set down in Hunter v Hanley. At
that stage, Mr Murphy's opinion was that the first defender had not merely acted in
accordance with usual and normal practice but had exceeded the duties incumbent upon
him (at paragraph 6.4.10). Notably, at that time, it is clear from his report that Mr Murphy
had Mr Chess' first supplementary report dated 26 May 2023 in which the issue of the value
55
of the ground floor development was specifically raised (at paragraph 6(iii)). Mr Murphy
adopted these reports during examination-in-chief. When subsequently asked, in cross-
examination, why he had not said anything about this issue, Mr Murphy remarked candidly
that he had simply not considered it. It was also striking that no attempt was made either in
re-examination of Mr Murphy on behalf of the defenders nor in submissions to address or
justify this aspect of the first defender's actions.
[158]
I consider that Mr Murphy's preparedness to concede this point frankly when under
cross-examination reflects well on him. However, it is highly disappointing, to put it mildly,
that a point of this significance was not addressed in any of the three reports prepared by
him and only arose in cross-examination. At the very least, this omission highlights a
worrying lack of rigour in the preparation of Mr Murphy's reports. Furthermore, as will be
seen below (at [164] and [179]), this is not the only aspect of Mr Murphy's evidence which
caused me concern. Overall, taking these aspects together, they did reduce the weight I was
prepared to attach to his opinion.
[159]
Turning to the other main strand of the pursuer's case, in light of the agreement
between the experts, it would seem that the outstanding issue is a narrow one.
[160]
First, the experts were in agreement that, in accordance with VIP 12, it was normal
and usual practice for a surveyor undertaking a residual valuation, if at all possible, to cross-
check the result with available market evidence. The experts were also agreed that the first
defender had carried out a residual valuation of the proposed hotel development. On this
basis, it is clear that the first defender's initial position that the residual valuation of the
proposed hotel development was itself the cross-check is untenable. I note that this position
was not advanced on the defenders' behalf in submissions. I note further that comparing
the first defender's residual valuation for office development to a residual valuation for
56
hotel development does not seem to accord with the guidance provided in VIP 12 which is
to compare the result of a residual valuation with "such market evidence as may exist"
(paragraph 7.3).
[161]
Second, the experts were agreed that, at least in general, an expert valuer in the
position of the first defender could not restrict him or herself to the submissions which had
been provided by the parties but required to consider the market in order to determine
which transactions might be comparable. There was also no doubt that the first defender
was aware of the owner operator comparables. He had made reference to them in his report
(at paragraphs 2.10.89). On this basis, the remaining issue in dispute was whether, in the
circumstances of this particular case, the first defender was justified in having restricted
himself to considering only those transactions which had been on a leasehold basis and not
considering those transactions which had involved a hotel owner operator.
[162]
As I understood it, the position of the defenders, based on the evidence of
Mr Murphy, was that in the whole circumstances of the present case the first defender was
entitled to make a judgment that there was no evidence of owner operator demand for the
site and, therefore, entitled not to consider the owner operator comparables on that basis.
The whole circumstances included the submissions and associated information presented to
the first defender by the parties. In this regard, the defenders highlighted the fact that, in
terms of clause 16.5 of the missives, the parties were obliged to provide the first defender
with all marketing reports, surveys, offers and to disclose any contact or negotiations with
third parties. Senior counsel emphasised that there was no evidence before the first
defender of any interest in the property by a hotel owner operator.
[163]
I reject the defenders' arguments for two principal reasons. First, the defenders'
position is predicated upon the first defender having exercised his judgment to exclude
57
those comparable transactions which involved owner operators. However, there is simply
no contemporaneous evidence that the first defender in fact exercised any such judgment.
There is no reference to the exercise of any such judgment in the first defender's valuation
report. Having been referenced, the comparable transactions involving owner operators are
not mentioned again. This omission of any reference to a judgment by the first defender is
significant in that Mr Murphy considered that this ought to have been set out in his report.
[164]
Notably, there is also no reference to any such decision making in the first defender's
witness statement (which formed the entirety of his evidence in chief). I recognise that, in
cross-examination, the first defender's position was that the reason he had not considered
owner operator comparators was that he was not aware of any demand or interest in the
property (at [86]). However, I do not consider this evidence to be of significance or that it
points to a different conclusion. The first defender's evidence was plainly given with the
benefit of hindsight and does not alter the fact that there was no contemporaneous evidence
of an exercise of judgment by the first defender. Furthermore, I do not consider that the first
defender's evidence actually supports the conclusion that, having considered the particular
circumstances of the property, he concluded that owner operators could be disregarded.
Rather it is more consistent with the first defender's position that he was justified in taking
the approach he did because neither of the parties had presented an owner occupier scheme
to him.
[165]
Second, the defenders' position is dependent upon Mr Murphy's evidence that,
notwithstanding the normal and usual practice, the first defender's actions did not represent
a departure from that practice (see [72] above). I found this part of Mr Murphy's evidence to
be unpersuasive. As I have noted, during this passage of his evidence, I found him to be
hesitant and difficult to follow. He offered no explanation as to why Dale House would not
58
be of interest to a hotel owner operator. He was only able to point at the absence of
unsolicited interest by an owner operator in the site. As such, his position seemed to be
perilled upon the fallacy that an absence of evidence constituted evidence of absence. On
this point, I preferred the evidence of Mr Chess that no ordinarily competent valuer would
have failed to consider the possibility that the purchaser of the property might be an owner
operator.
[166]
Accordingly, I conclude that the first defender acted in breach of the duties
incumbent upon him in both of the two principal ways founded upon by the pursuer,
namely: the first defender failed properly to cross-check the result of the residual valuation
of the proposed hotel development with transactional evidence; and he failed, in cross-
checking the residual value of the proposed hotel development, to take account of the likely
value of the retail/leisure development on the ground floor. In so acting, the first defender
was in breach of contract both in having failed to value in accordance with the RICS
Valuation Professional Standards and in having failed to carry out the valuation of the
property to the standard to be expected of a suitably qualified chartered surveyor of
ordinary competence acting with reasonable skill and care.
[167]
For completeness, in respect of the first strand founded upon by the pursuer the
alleged failure relating to the difference in the number of floors in the Meininger scheme and
the first defender's proposed office development I am not persuaded that this aspect of the
valuation exercise can meaningfully be considered in isolation. In the circumstances in
which the scheme was provided to him, I do not consider that it was unreasonable for the
first defender to take the Meininger scheme as his starting point. However, for the reasons I
have set out above relating to the other strands of the pursuer's case, I consider that the
59
difficulties for the first defender arise once he had produced a residual valuation based on
the Meininger scheme.
Causation of loss
[168]
The pursuer's position in respect of causation is that, as a result of the defenders'
breach of contract, the value for the property was understated and, in terms of the missives,
the pursuer was not entitled to any profit share. The logic of the pursuer's position is that
but for the defenders' breach of contract, the first defender would have carried out the
valuation of the property to the standard to be expected of a suitably qualified chartered
surveyor of ordinary competence acting with reasonable skill and care. The pursuer
contended that if the first defender lacked the necessary expertise to do this properly, he
could have obtained the necessary assistance either from the second defender or externally.
On the basis of Mr Chess' evidence, the pursuer asserts that such a surveyor would have
concluded that the property had a value of £6.3 million. The pursuer then seeks payment of
the profit share to which it would have been entitled in terms of clause 16.2 of the missives
had the property been valued at that figure.
[169]
As noted above (at [125]), although during oral submissions the defenders advanced
no arguments in respect of causation, two arguments were included in their written
submissions. The first argument was that the pursuer's case on causation was at odds with
the absence of any criticism by the pursuer of the first defender's valuation based on an
office development. The second argument focussed on what the defenders contended were
issues with Mr Chess' approach to the comparable owner operator transactions.
[170]
I am not surprised that senior counsel elected not to advance either of these
arguments during oral submissions. In respect of the first, the fact that the pursuer made no
60
criticism of the first defender's office valuation is entirely irrelevant. The pursuer's case
proceeds on the basis that, had the first defender acted in accordance with his contractual
obligations, the resulting market value of the property would have been greater than the
first defender had produced for the proposed office development.
[171]
As to the second argument, once breach by the defenders has been established, the
court requires to determine what loss has been caused to the pursuer. In the present case,
that requires the court to determine what the correct valuation of the property being
developed as a hotel would have been. The pursuer advances the evidence of Mr Chess in
order to address this. Although included under the heading of causation, the second
argument for the defenders is essentially a criticism of Mr Chess' evidence as to the correct
valuation of the property as a hotel. I deal with those arguments below.
[172]
Accordingly, as a matter of causation, I have no difficulty in concluding that as a
direct and natural result of the defenders' breach of contract the pursuer has been caused
loss.
Valuation
[173]
As a starting point, I accept the pursuer's submission that in terms of the
quantification of the pursuer's loss, the court requires to establish the correct value of the
property rather than seek to determine what the lowest non-negligent valuation of the
property might be. In this regard, I consider that Lord Hoffman's analysis on this point in
South Australia Asset Management Corp is entirely apt (at 221E to 222A).
[174]
The pursuer relies on the evidence of Mr Chess. Mr Chess is extremely experienced
in hotel valuation. He had set out, both in his reports and in oral evidence, the basis upon
61
which he had determined that the value of the property, were it be developed as a hotel by
an owner operator, was £6.3 million.
[175]
By contrast, the defenders advanced no evidence from a surveyor with expertise in
hotel valuation. Mr Murphy described himself as not being an expert in hotel valuation.
However, notwithstanding that lack of expertise, as I have noted, Mr Murphy did advance
what he described as a critique of Mr Chess' valuation. It was on the points identified in
Mr Murphy's evidence that the defenders relied.
[176]
I accept the evidence of Mr Chess for a number of reasons.
[177]
First, he was an impressive witness and I found his evidence to be persuasive. He
had obvious expertise in the field. He was able to set out clearly both his methodology and
the various inputs into the calculation of the residual valuation of the property. He also
explained how he had then cross-checked the results of that calculation before reaching his
final view of the market value. I am also satisfied that Mr Chess took a fundamentally
cautious approach. That is evidenced both by his rejection of an alternative scheme based
on the Bloc purchase together with his treatment of contingency and risk.
[178]
Second, Mr Chess' approach was, to a very great extent, unchallenged. That was
largely as a result of the fact that the defenders elected not to lead evidence from a witness
with expertise in the valuation of hotels.
[179]
Third, I found certain aspects of Mr Murphy's evidence in respect of Mr Chess'
valuation to be unsatisfactory. It was not clear to me how, despite professing not to be an
expert in the field of hotel valuation, Mr Murphy felt able to criticise aspects of Mr Chess'
methodology which appeared to fall peculiarly with the province of hotel valuation. It was
also notable that the effect of all of Mr Murphy's criticisms was to reduce the overall
valuation. A particularly striking example of this was Mr Murphy's view, set out in his
62
supplementary report, that Mr Chess' assumption for revenue income should be reduced
by 50% (at [76]). I agree with senior counsel for the defenders that it was unwise of
Mr Murphy to have engaged in this process.
[180]
Finally, I do not consider that any of the criticisms advanced by Mr Murphy are of
sufficient force as to undermine Mr Chess' overall valuation. In this regard, I accept
Mr Chess' evidence that it is important to distinguish between, on the one hand, the process
of generating a residual valuation and, on the other, the actual value of the land itself. I note
that this distinction is also set out in VIP 12 (at paragraph 7.3).
[181]
Accordingly, on the basis of the evidence of Mr Chess, I am satisfied that the
property had a market value of £6,300,000.
Quantum
[182]
The pursuer seeks £928,650.96 in damages together with interest at the judicial rate
from the date of citation. The principal sum is calculated in accordance with the formula
provided in clause 1 of missives under the definitions for "Profit Share" and "Distributable
Profit" (see [110] above).
[183]
The only figure for calculating the Distributable Profit which is not a matter of
agreement is that for the open market value as calculated in accordance with clause 16. For
the reasons set out above, I hold that this figure should be £6,300,000. The Distributable
Profit is therefore £1,857,301.92 and the Profit Share is £928,650.96.
[184]
As I have noted above (at [128]), the defenders argued that the pursuer's damages
fell to be calculated on the basis that the pursuer had suffered a loss of a chance. The Inner
House has recently reaffirmed that assessment of damages on a loss of chance basis is
applicable where the supposed beneficial outcome to the pursuer is dependent upon what
63
others, unrelated to the parties, would have done (Centenary 6 Limited v TLT LLP
[2024] CSIH 13 at paragraph 68).
[185]
In the present case, the beneficial outcome to which the pursuer would have been
entitled but for the defenders' breach of contract was the payment of the profit share by
L&G under the missives. On this basis, properly analysed, I consider that the defenders are
correct that the valuation of the pursuer's loss falls to be approached as a loss of chance.
[186]
Lord Hodge helpfully analysed the correct approach to be taken to this exercise of
the valuation of a lost right or entitlement in his opinion in McCrindle Group v Maclay Murray
& Spens [2013] CSOH 72 at paragraph 139:
"Once it is shown that loss has occurred, the court has to quantify that loss. In
(at para 25):
'Where that involves a hypothetical exercise, the court does not apply the
same balance of probability approach as it would to proof of past facts.
Rather, it estimates the loss by making the best attempt it can to evaluate the
chances great or small (unless those chances amount to no more than remote
speculation), taking all significant factors into account. (See Davies v
para 17 (Lord Nicholls) and paras 67-69 (Lord Hoffmann)).'"
[187]
Applying this to the present case, the question becomes one of assessing the
pursuer's chance of recovering the profit share from L&G. On the basis of the evidence I
have heard, I consider this to be straightforward. There was no suggestion at all that L&G
would do other than honour its obligations under the missives. That was clearly the
understanding of the pursuer's principals Mr Kavanagh and Mr Aldridge. The latter was
involved in reasonably extensive discussions with Mr Westmacott of L&G in relation to
agreeing the other elements of the Distributable Profit formula contained in the missives.
Perhaps unsurprisingly, there was also no suggestion of this in Mr Westmacott's statement.
Accordingly, I see no basis for making any discount to my assessment of the pursuer's loss.
64
Disposal
[188]
On this basis, I will sustain the pursuer's first, second and third pleas-in-law and
grant decree against the defenders in the sum of £928,650.96 together with interest thereon
at 8% from the date of citation until payment. I will reserve all questions of expenses
meantime.
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