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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Ravengate Estates Ltd v Horizon Housing Group Ltd & Ors [2007] EWCA Civ 1368 (19 December 2007) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2007/1368.html Cite as: [2007] EWCA Civ 1368 |
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CENTRAL LONDON COUNTY COURT
HHJ LINDSAY Q.C.
Claim No LB224259
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE JACOB
and
MR JUSTICE MANN
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RAVENGATE ESTATES LIMITED |
Claimant/ Appellant |
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- and - |
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(1) HORIZON HOUSING GROUP LIMITED |
First Defendant/Respondent |
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(2) PERSONS UNKNOWN |
Second Defendant |
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MR. MARTIN HUTCHINGS (instructed by Cook & Partners Solicitors) for the Respondent.
Hearing dates : 5th and 6th December 2007
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Crown Copyright ©
Mr Justice Mann :
Introduction
The lease and the premises
i) On the ground floor across most of the frontage there is the post office and an entrance to the nightclub. To the right there is an entrance to a passage giving access to the rear of the premises. Roughly speaking, the rear one-third of the premises comprises two flats. One flat lies across the entire width of the rear of the premises. The other flat is somewhat forward of that. It gives on to a central lightwell which is roughly square. One side of the well is bounded by an access passage leading from the front of the premises to the rear flats; one side is bounded by part of the flat just referred to; a third side is bounded partly by another part of that flat and partly by the post office; and the fourth side is bounded by the post office.
ii) On the first floor there is a single flat giving on to the rear of the premises at one side and on to the lightwell on the other. Apart from an area which is given up to a common staircase, it spans the entire rear of the building. Across the front there is the post office again.
iii) The second floor contains two flats. One flat fronts on to the street, and its rear gives on to the lightwell. The other flat gives on to the rear of the property on one side and the lightwell on the other. It does not span the entire width of the building; on one short side there is a balcony whose floor is also a roof of the first floor flats below. Over the top of the rear flat there is a flat roof; there is no accommodation above that flat roof. The possibility of developing so as to use the space above that flat roof, and to incorporate the balcony within the living accommodation, is one of the matters which forms the background to the present dispute.
iv) On the third floor there is just one flat. It is at the front of the building. The rear of the flat contains a short balcony, whose floor forms part of the roof to the front flat on the (second) floor below. The balcony gives on to the central lightwell. Behind that balcony there is not only the lightwell, but across the other side of the lightwell one would look down on to the flat roof covering the second floor flat. Again, development plans include the incorporation of the balcony to form part of the living accommodation at that level.
"The rear section of the ground floor, the rear section of the first floor and the whole of the second and third floors of 225 Streatham High Road London SW16 as is for the purposes of identification only edged red on the attached plan together with all necessary rights of access to and from the Demised Premises."
The "attached plan" is in fact four plans, one for each floor, and each apparently signed by a representative of each party. On the ground floor the red edging comprises everything except the post office and the entrance to the nightclub. In other words, it runs from the front of the building down the long side, across the shorter rear of the building, back halfway up the other side and then turning to delineate the precise boundary of the ground floor flat and running round the lightwell so as to encompass it. At this level, therefore, it seems that the lease includes the lightwell. The first floor plan is similar – the red line encloses the flat, the common passage and the lightwell. On the second and third floors the red outlining runs around the entirety of the building shape. It is therefore rectangular. As a plan, it clearly indicates that at floor level the demise includes the flat, the balcony and (at the same level) the roof over the second floor, together with the lightwell in between. Obviously it is not intended to operate only at floor level so far as the flat is concerned; it is intended to denote and carry with it the volume occupied by the flat. The question for us is whether it also includes the volume occupied by the balconies and by the air space from the second floor roof up to third floor roof level.
i) The parcels clause refers to the "whole of the third floor". He said that this could only refer to the flat at the front. There was nothing other than the flat which could be described as the third floor, so the airspace to the rear was excluded. The answer to that has been supplied above. If it had been intended to exclude the airspace above second floor level, the plan would have been drawn differently to delineate only the flat. It was not.
ii) Clause 2 contains the tenant's covenants, and sub-clause (h) provides as follows:
"(h) To keep the Demised Premises and all window glass to include such part of the roof as are [sic] above the Demised Premises in good and tenantable repair damaged by risks insured by the landlord… excepted…"
That clause tends to suggest that the roof might not be within the demise because it is described as "the roof…above the Demised Premises". However, in my view that is not a very strong indication at all. It is no more than inelegant wording reflecting a desire to make it clear that the tenant's part of the roof is to be repaired, as opposed to some other part of the roof. In fact, as far as I can see, every bit of roof covers the Demised Premises anyway, so the clause seeks to draw a distinction which does not exist on the ground (as it were). For that reason alone I do not think that any weight can be given to this clause as something which potentially modifies the clear effect of the plans. The plans are extremely clear and what one takes from them is not materially affected by this clause.
iii) Clause 2(u) contains an obligation to contribute to expenses:
"To pay to the Landlord 46.25% of all costs and expenses incurred and expended by the Landlord on or in connection with the repair and maintenance replacement rebuilding cleansing and lighting of the Building or any part or parts thereof (other than the Demised Premises or such parts of the roof as the Tenant is bound to maintain) (including without prejudice to the generality of the foregoing such parts of the roof and the roof timbers as are not the responsibility of the Tenant…)"
Mr Knox relied on this as demonstrating that there were two types of roof, one included in the demise and one not. He said that the third floor plan was operating at ground floor level so far as the red lining goes. The purpose of the completely rectangular red line on the third floor plan was designed to make it clear that the roof over the second floor was included in the demise, but did not go so far as to enclose the airspace above it (and ostensibly within the line). The third floor roof was said to be not included in the demise. This was his explanation of how it could be that the red lining on the third floor plan could be intended to achieve something useful without including the airspace above the second floor flat. In my view it is an extremely tortuous process of construction designed to find an explanation of the third floor plan consistent with the result he wishes to achieve rather than a process designed to work out what the lease overall means. It does not, either by itself or with any of the other indicia relied on by Mr Knox, provide material which gainsays the clear impression given by the third floor plan.
The want of repair and the commencement of these proceedings
The trial and judgment below
"(1) Damages for a breach of a covenant or agreement to keep or put premises in repair during the currency of a lease, or to leave or put premises in repair at the termination of a lease, whether such covenant or agreement is expressed or implied, and whether general or specific, shall in no case exceed the amount (if any) by which the value of the reversion (whether immediate or not) in the premises is diminished owing to the breach of such covenant or agreement as aforesaid and in particular no damage shall be recovered for a breach of any such covenant or agreement to leave or put premises in repair at the termination of a lease, if it is shown that the premises, in whatever state of repair they might be, would at or shortly after the termination of the tenancy have been or be pulled down, or such structural alterations made therein as would render valueless the repairs covered by the covenant or agreement."
"….Mr Hutchings is right in his final submission where he asserts that in this case the Claimants are waiting for its dilapidations 'payout' before undertaking a major redevelopment.
117. I have no hesitation in concluding that the Claimants do not intend to carry out any repairs. They intend to carry out a scheme of refurbishment in order to maximise the value of the reversion."
"In a case where the landlord has carried out the works or clearly intends to carry out the works then the cost of the works is, or at the very least can be, prima facie evidence of the diminution in value. However in a case where the landlord has not carried out the works, and there is no evidence that he intends to carry them out, then the cost of the works is of no assistance. One cannot say that a costed schedule of dilapidations of itself, in the absence of any other evidence, constitutes even prima facie evidence of the diminution in the value of the reversion, let alone that there is any sort of prima face evidence of the actual diminution." (see pages 131 and 132)
"126. ….Has the claimant satisfied the court that there is a diminution in value arising from the disrepair; if so (a) to what extent does that cap the Claimant's claim to damages; (b) how should those damages be assessed?"
Since the cap imposed by section 18(1) was very much in play in this case, those were two very important questions. Unfortunately, in setting about answering them the judge did not adopt any particularly clear structure, though at the end of the day he does seem to have addressed the questions that he posed. He had heard evidence from surveyors for the claimant and defendant (Mr Langley and Mr Balmforth respectively). Mr Langley's initial valuation valued each of the existing 6 flats as if in proper repair (totalling £1.44m) and set out their letting values. He then carried out a "Section 18 valuation" which merely set out the costs of the works (£288,976) and added £30,600 for six months loss of rent during a deemed period of remedial works. He then had one paragraph headed "Diminution value of the reversion" [sic] in which he stated that "we consider that the flats would have been unlettable/unsaleable at the time and therefore the correct valuation approach could only be the cost of the works as this would be the only way for which the landlord could obtain recompense." He prepared that valuation in September 2005. In October 2005 Mr Balmforth prepared a valuation, again on a flat by flat basis, which stated his view that the flats would be saleable in disrepair, but each at a reduced price. That led to a diminution in the value of the reversion (on his figures) of £70,500, when calculated on that basis. However, he attached this to a witness statement served in January 2006 in which stated:
"7. In my Valuation I have looked at the capital value flat-by-flat, simply because that was the way that Mr Langley did it in his Report. But I consider the whole of the residential element of the building has a significant value particularly to developers. The fact that there is a valid planning permission for increasing the number of flats to 14 significantly enhances the value, especially to Housing Associations.
"11. My view is that whoever bought the flats as a whole would regard it as an on-going development scheme …"
"With regard to the foregoing, therefore, I am of the view that the breaches of repairing covenant did not result in any substantial diminution in the value of the demised premises, in fact had the landlords chosen to offer the property for sale in the Open Market, they would have achieved a higher price than the current use value of the demise if sold in the best condition required under the lease.
The diminution in value is restricted to the costs (including profit element) of undertaking the 'survival items of disrepair' outlined in Appendix VI. I assess this in the sum of £30,500".
i) "It was always intended and intends [sic] to undertake some form of refurbishment to the premises. The best solution is to carry out the Balmforth plan or proposals of a similar nature." (para 2). By the Balmforth proposals the judge means development proposals of the nature set out above (the redevelopment to create 12 or 14 flats).
ii) He identified Mr Langley's contention as being that the diminution in the value of the reversion was represented by the cost of repairs.
iii) He made remarks indicating that he found Mr Balmforth a careful and good witness.
iv) He considered and ruled on various adjustments that he said fell to be made to Mr Balmforth's residual value calculation and other points arising out of the putative development.
v) At paragraph 23 he found :
"If Mr Balmforth's plan could have been undertaken, despite adjustments made by him, and notwithstanding Mr Knox's criticisms, I consider a residential developer could have made a profit and would have been the likely bidder at the end of the term."
vi) He then turned to the cost of the "survival items" and ruled on various adjustments to be made to them. He valued them at £50,000 to include fees and overheads (para 27).
vii) He summarised what he saw as being the thrust of Mr Balmforth's evidence in relation to purchasers. Mr Balmforth had to consider at what price a developer would be likely to buy in the property, and is recorded as saying that £800,000 would not be attractive to the existing vendor, and £950,000 (a figure at the other extreme of figures being bandied around) would be too much for a developer. "This could lead to a potential impasse – no incentive on the vendor to sell at £800,000 and no incentive for the purchaser to buy at £900,000."
viii) He did not resolve that apparent impasse at that stage of his judgment, but instead went on to deal with the airspace point, which he dealt with in the manner referred to above.
ix) Having determined that the demised premises would be sold with the airspace, so as to permit development of it all together, he found:
"38. Without hesitation I find that in this case from the time of purchase and at the end of the lease and currently Mr Patel intended and intends to develop the premises. Lack of funds prevented the development at the termination of the lease.
39. The redevelopment will involve making maximum use of the available space in the premises. … The premises at all material times have been ripe for development by the Claimant or by a purchaser."
That last sentence is a particularly important finding.
x) He pointed out that Mr Patel awaits the outcome of the proceedings before developing either in stages or as one project, and that Ravengate's evidence did not include its own residual valuation; it had pinned its colours to a costs of repair-based valuation.
xi) He set out submissions made by Mr Hutchings on behalf of Horizon, which depended on certain evidence given by Mr Balmforth in cross-examination. He records Mr Balmforth as saying:
"By spending another £500,000 maximum [on carrying out building works to develop the building] this increases the flow [ie rental] to over £100,000. By developing this from 5 to 7% … it would make sense for the Developer to develop it on a letting scheme … if the developer spent £500,000 this increased income from 6 to 12 flats … gross income goes up to £100,000 … this increases the return on the overall capital investment. "
Mr Hutchings submitted that on a sale a purchaser would pay a sum between £800,000 and £950,000 and was "bound to carry out the development because he knows his return on the extra investment would be healthy", and that if the claimant intended to develop the property with a scheme similar to the Balmforth scheme then that was compelling evidence of what a purchaser would do. The judge expressly accepted those submissions.
xii) In paragraph 48 the judge identified the relevant question under section 18(1) as being to ask whether a hypothetical purchaser of the reversion would reduce his bid because of any identified disrepair, and if so by how much, and accepted a submission from Mr Hutchings that any potential purchaser would have done what the claimant was intending to do, because the premises were ripe for development.
"50 Any hypothetical purchaser would have considered development, would have come to the conclusion that Planning Permission would be granted and that Mr Balmforth's plan or some similar plan could have been carried through at the term date.
"51. I likewise agree with Mr Hutchings' additional submissions that the purchaser of the reversion would carry out the Balmforth plan or some similar scheme whatever he paid for the reversion because of the potential return.
"52. In my judgment the answer to the question, assuming a sale what difference does the repair make the answer is none. The diminution in value in my judgment is limited to the cost of the survival items to which I have referred above."
The arguments on this appeal
i) The premises were ripe for development.
ii) Any potential purchaser would give effect to development.
iii) That development would render otiose the carrying out of most of the repairs claimed by Ravengate. The only things that would make a difference to the developer would be survival items, and he would require a deduction for those.
"You caught me a bit on the hop yesterday with the way you changed tack and it was only sitting on the train, as I probably do sitting in my office, reflecting, that I thought well in actual fact this scheme makes sense to keep as a letting scheme. We talked yesterday about: 'Well, why would you want to sell this when he has £55,000 a year in income?' Well, in actual fact by spending another £50,000 maximum it actually increases income flow on the basis of the figures which we have agreed for [mesne] profits to over £100,000 a year. In actual fact, by developing this he would increase his return on capital on a return at the moment of about 5% to nearly 7%. So in actual fact it would make sense for a developer to develop it and keep it as just a letting, investment scheme".
Having confirmed his evidence that a developer looking at the property with a view to redeveloping into 14 flats and then selling them would find the project too marginal at a price of £950,000 Mr Balmforth elaborated on this in an answer to the judge as follows:
"Q. Would you like to elaborate on this then? What you are now saying, as I understand it, is your developer would look at this and say: "If I spent £500,000" on what though?
A. On the redevelopment, as it were, which is more than was in my figure but I just said £500,000 is a round figure. If you are doing it to the buy for let scheme you might actually – or doing it as a letting scheme you might do it to a lesser specification, but I have not bothered with that. My model is £500,000 and you would increase your income based on going from six flats to 12 flats on –
Q. So no sales, no capital sales?
A. Your gross income would go to over £100,000. Allowing 30% deduction for what we talked about yesterday, your net income would be nearer £70,000 which actually produced an increased return on your overall capital investment so it is about balancing the beast which you are dealing with, and this is factored into risk. What is plan B? Most developers would think if plan A does not work what is plan B? Plan B would be this would service borrowings as a letting scheme on net income. I am sorry I did not discuss it before, but it only came up in cross-examination yesterday on that basis."
The value of the survival items
Conclusion
Lord Justice Mummery
Lord Justice Jacob
Note 1 In what follows references are to paragraphs in the judgment. At this point in the judgment the paragraphs start numbering from 1 again. [Back]