WHEN AN EXPERT RELIES ON MATTERS FROM THE INTERNET FOR MATTERS OUTSIDE THEIR EXPERTISE THEN YOUR CASE IS LIKELY TO FALL APART: THE CIDER HOUSE RULES
I am returning to the decision of HHJ Paul Matthews (sitting as a High Court Judge) in Devon Commercial Property Ltd v Barnett & Anor  EWHC 700 (Ch). Here was are looking at the judge’s view of one of the experts. Involved. The more you read the case the more extraordinary it becomes. It illustrates the danger of relying on an expert without first “drilling down” hard to assess whether the evidence given is in fact “expert” evidence and whether this expert is capable of giving it.
The claimants brought an action alleging negligence by the defendant when they acted as agents in the selling of a property which had been used for the manufacturing of cider. The claimant relied on the report of an expert on valuation.
That expert based his view on the value of the property on the assertion that the property was a “Trade Related Property”. This led the expert:
- To give a view as to the strength of the cider market in the UK (something on which he had no expertise).
- To gather information on the cider market using the internet.
- Give a view as to what a particular company would be willing to pay. (Which evidence was inadmissible).
- To review a company’s accounts and state what a company would be able to pay (the expert had no expertise in forensic accountancy).
- To state that there was “no evidence” of a valuation figure but then to state what a reasonable figure was (the judge stated “it looks to me like guesswork”).
THE JUDGMENT ON THIS ISSUE
“Certain classes of real property, which are designed for a specific type of business and that are normally bought and sold in the market, having regard to their trading potential”.
“Individual properties, such as hotels, fuel stations and restaurants that usually change hands in the marketplace while remaining operational. These assets include not only land and buildings but also fixtures and fittings (furniture fixtures and equipment) and a business component made up of intangible assets, including transferable goodwill”.
“profits method of valuation, sometimes called the income approach. This is a market-based concept where a potential purchaser, and therefore the valuer, estimates the maintainable level of trade and future profitability that could be achieved by a competent operator of the business conducted on the premises, acting in an efficient manner.”
I am bound to say that I find it hard to accept the view that the Property should be valued on the basis that it is a Trade Related Property. (As I shall note shortly, so does Mr Clarke.) It does not seem to me to resemble at all the examples of such properties given in the International Valuation Guidance Note 12 relied on by Mr Neason. Hotels, fuel stations and restaurants (and no doubt cafes and bars, as well as casinos and perhaps even other places of public entertainment) seem to me to be quite different from factories – even specially designed factories – carrying on an industrial activity. The occupier of such a factory does not carry on a trade or business with the public of the kind postulated in the definition, which business can be sold to a purchaser together with the premises, to which goodwill probably attaches. In my view the Property is not a Trade Related Property (as defined) at all.
However, probably as a result of the designation of the Property as a Trade Related Property, Mr Neason’s approach to its valuation is to assess the level of special value by reference to how much it might have been worth to Aston Manor. This leads him to give an opinion about the strength of the cider market, something which (as I say) lies outside his expertise. For example, in paragraph 11.46 of his first report, he says
“There is sufficient published information relating to the growth of the cider market from 2010 onwards, details of some of which is attached at the Appendix 7, to suggest that there would have been demand from this sector of the market.”
Moreover, he has gathered information relevant to this question by himself, using the Internet. His conclusion, “to suggest that there would have been demand” (emphasis supplied) is in any event weak. But in my judgment, so far as Mr Neason’s opinion on the level of special value depends upon the strength of the cider market, in suggesting how much cider companies might be prepared to pay for premises such as the Property, it is simply inadmissible.
“In my opinion it is therefore likely that, prior to the grant of the New Lease, Aston might reasonably have decided that they could afford to pay a sum based on a multiple of their operating profit in order to maintain the business, weighed against the cost and risk of having to find alternative premises.”
Again, the conclusion is weak, in saying that Aston Manor “might reasonably have decided that they could afford to pay…” (emphasis supplied). But in any event, this also depends to some extent on the strength of the cider market, and therefore on stock market or industrial analysis. In addition, however, it involves another expertise, namely, the ability to analyse a company’s accounts, such as is found in forensic accountancy. For example, in paragraphs 11.27 and 11.28 of his report, he says
“11.27 Finally, I have also reviewed historic trading information for Aston obtained from Companies House which shows the following pattern …
11.28. I note from the published accounts of Aston that the profit in 2010 and 2011 was adversely affected by one off costs and if these items are excluded the actual performance and increase in EBITDA would have been somewhat greater. It is in any event clear that the trading business of Aston was growing organically in the period leading up to the purchase of the business of Devon Cider Company Ltd with a subsequent jump in turnover following the acquisition as would be expected with acquisition of the DCC business which itself had a turnover in excess of £20m per annum.”
But this too is outside Mr Neason’s expertise. To this extent his opinion is also inadmissible.
“the capital and rental valuation of restaurants bars public houses and nightclubs”.
But (as I have already pointed out) the Property is none of these.
“There is no clear comparable evidence to support as to what that figure might be but I think it reasonable to conclude that it could have been in the range of £10–£15m.”
“on the assumption that they were not actually aware of what other interest or offers there had been … I am of the opinion that Aston as a special purchaser would have been prepared to pay a figure in the range £7.5m-£10m prior to the grant of the New Lease.”
No explanation or reasoning is given for the leap from what Aston Manor could afford to what it would be prepared to pay. Mr Neason then goes on to say that, after the new lease had been granted, Aston Manor were in a stronger position. Nevertheless, his opinion is that Aston Manor would still have been prepared to pay a premium to acquire the freehold. He concludes:
“on this basis I am of the opinion that, following grant of the new lease, they might have been prepared to pay a sum in the range £5 – £7m.”
Once again, no evidence or other reasoning is given for the amount or proportion of the reduction made to the earlier figure by reason of the existence of the new lease.
Moreover, Mr Neason does not explain how Aston Manor could possibly have decided to spend even £5 million, let alone £7.5 million, on a property without planning permission (and no prospect of obtaining it in the short term) that no-one else was willing to buy for even £3 million at the relevant time, and which even in the exuberant days before the financial crunch of 2008 only commanded a top offer of £6 million from a housebuilder without any due diligence and assuming full residential planning permission (which as I say on the evidence would have been difficult to obtain).
In the light of these matters, I do not think that I can place any reliance on Mr Neason’s opinion evidence of valuation at all. It is based on a false premise, partly inadmissible, partly unsupported by appropriate reasoning, and in its conclusions frankly incredible. But I also note that he agreed that at the time of sale the state of the general industrial and property development market was poor. And he also agreed that Aston Manor was unlikely to have agreed to a landlord’s break-clause. I also note that in his supplementary report he accepted that
“there would have been little appetite in the funding market for a speculative scheme at the [Property]”.