PROVING THINGS 208: IMPACT OF COVID MEANS THAT THE CLAIMANT HAS LOST NOTHING AND DEFENDANT GAIN NOTHING: NO AWARD FOR THE CLAIMANT’S “LOSSES”

The judgment of HHJ Hodge QC (sitting as a High Court judge) in Wigan Borough Council v Scullindale Global Ltd & Ors [2021] EWHC 779 (Ch)  has much of interest. The judge’s observation that “one of the particular pleasures of sitting as a judge of the Business and Property Courts in Liverpool and Manchester is the insight it has afforded me into the sporting and leisure activities of the citizens of the north of this country” and the continuance of that theme to analogy using the rugby scores of the various codes (paragraph 137).  However I am going to look at the judge’s decision in relation to the claimant’s claim for damages (more accurately mesne profits).

“The reality is that the Council has suffered no financial loss, and Scullindale has derived no financial benefit, from its continued possession of Haigh Hall since 22 November 2019. That is entirely the effect of matters consequent upon the global pandemic which were entirely outside the parties’ own control and were extraneous to their continuing, enforced relationship. In these unusual, indeed unprecedented, circumstances, I would award the Council nothing by way of mesne profits.”

THE CASE

The claimant’s case was that it had lawfully  effected a break clause in a lease of a hotel that the defendant operated. The judge found that the council’s use of the break clause had been effective. The claimant then sought damages for trespass for the period that the defendant had been in occupation of the premises after the lease had been terminated.  The judge found that the council had suffered no loss and the defendant had made no profit, primarily due to covid.

THE JUDGMENT ON THIS ISSUE

1. 1. The Council claims damages for trespass or mesne profits from the defendants in respect of the period from 22 November 2019 until possession is delivered up. So far as the calculation of mesne profits is concerned, I understood Mr Hutchings to accept in closing the method of assessment set out at paragraph 16.23 of Mr Elliott’s principal report although not his precise figures. In my judgment this is indeed the correct method of assessment if any mesne profits are properly payable. The starting figure should be the stabilised Year 3 net operating income as it appears from the revised DCF calculation. From this should be deducted the costs of the tenant’s works amortised at 10%. Mr Elliott assessed the tenant’s bid at 40% of the resulting figure which I would accept. However, that still leaves the exercise of quantifying the costs of the tenant’s works.

1. 1. According to the spread sheet supplied with the defendants’ further response dated 17 July 2020 to the Council’s request for further information, the defendants claim to have spent some £4,435,549 on works to the property; and this was the figure adopted in Mr Elliott’s calculation. This would appear to be inclusive of VAT (which would presumably have been recoverable by Scullindale) and include the premium of £480,000 (inclusive of VAT). On the morning of Day 6 of the trial Mr Hutchings produced a colour-coded schedule and analysis of figures extracted from the invoices disclosed by the defendants. These were said to total £2,412,039.10, of which the Council disputed up to £1,066,680.49. On Monday 8 March, in the interval before the trial resumed on Day 11 Mr Latimer produced a responsive schedule in which he accepted that £900,156.02 fell to be deducted from the figure of £2,412,039.10 if this were accurate; but he contended that Mr Hutchings’s schedule appeared to omit unquantified items of expenditure. The defendants had not had the time to list out specific omissions as that would have involved working through more than 800 disclosed receipts. At the very least, the claimant’s total for receipts of £2,412,039.10 was not an agreed figure. Against that unsatisfactory background, and had it proved necessary, I would have felt compelled to direct an inquiry as to the defendants’ actual expenditure, to be conducted by a District Judge of the Business and Property Courts in Manchester, if the appropriate figure could not be agreed between the parties.

1. 1. In closing Mr Hutchings referred me to paras 19.012 (Liability for mesne profits and other losses) and 19.013 (Amount of mesne profits) of Woodfall: Landlord and Tenant. I accept that the amount of the mesne profits for which a tenant who holds over after the termination of his tenancy is liable is an amount equivalent to the ordinary letting value of the property in question; and that this is so even if the landlord would not have let the property during the period of trespass. However, in a case where the landlord would not have let the property, he has suffered no actual loss so the liability of the former tenant to pay mesne profits is in the nature of restitution for unjust enrichment; and the value of the occupation to the former tenant may therefore be taken into account. On the unusual facts of the present case, I am satisfied that whether mesne profits fall to be assessed by reference to the loss which has been caused to the Council, or restitution of the value of the benefit which Scullindale has received from its continuing possession of the premises, the end result is that the Council should be entitled to recover nothing by way of mesne profits.

1. 1. Mr Latimer submitted that nothing should be payable for mesne profits and that the amount of mesne profits should therefore be assessed as nil. Since Scullindale had remained in possession after the break date, the Council had not had the burden of maintenance, insurance or any of the other liabilities that can come with an ageing building, and it had not incurred any potential liability for business rates. There is no evidence that the Council could have relet the property. It had taken the better part of two years, between 2014 and 2016, to negotiate the lease to Scullindale. Even if a potential lessee had come forward, the Council would have been into the first lockdown in March 2020 before there was any realistic prospect of a new lease being signed. The reality is that no lessee would have taken the hotel in 2020; nor was it was even clear, until early 2021, that vaccines might be capable of working on a mass scale to bring down Covid infections. Even now, lockdown measures are not expected to be entirely lifted until June 2021. Likewise, it cannot be said that Scullindale has enjoyed any windfall benefit. It has endured several months of lockdown restrictions of varying severity and its wedding business had ended when the break notice was publicised. I accept these submissions, which are entirely borne out by the evidence.

1. 1. Mr Hutchings emphasised that a trespasser should not be able to use another person’s land without paying compensation, and that mesne profits are payable even if the landowner would not have relet the premises. However, I do not accept that mesne profits are payable if the premises are effectively unlettable and the trespasser makes no profit from them because they are incapable of beneficial occupation. In my judgment, mesne profits are awarded on either a compensatory or a restitutionary basis and not as a matter of legal right simply by virtue of legal ownership.

1. 1. On the issue of rental value and mesne profits, both valuers accepted that even if Scullindale had vacated Haigh Hall on the termination date of 22 November 2019, there would have been no realistic prospect of achieving a re-letting of that property before the effect of the Coronavirus pandemic on the hospitality sector had become apparent, and the first national lockdown had been introduced, in March 2020. Both valuers agreed that the pandemic had had a significant impact on the ability of the Hotel to operate since the first lockdown in March 2020 and that market sentiment is weaker after the pandemic. Both valuers also agreed “that post Covid-19 … the business is likely to be loss making”. Whilst (as Mr Elliott states at paragraph 13.10 of his principal report) there may be “a wall of money keen to invest” in the hotel sector, I find that from March 2020, and continuing up to the present time, Haigh Hall would have been viewed, in the short-term, and for the immediate future, as a liability rather than as an asset. I am satisfied that it would have generated no immediate rental income for the Council and no immediate profit for any hypothetical hotel or events operator. Even before the pandemic, Haigh Hall Hotel Limited had made a loss for the financial year ended 30 June 2019 of £5,156; and even with no business rates to pay since March 2020 and Government grants of £42,342, the loss for the following financial year increased to £89,106.

1. The reality is that the Council has suffered no financial loss, and Scullindale has derived no financial benefit, from its continued possession of Haigh Hall since 22 November 2019. That is entirely the effect of matters consequent upon the global pandemic which were entirely outside the parties’ own control and were extraneous to their continuing, enforced relationship. In these unusual, indeed unprecedented, circumstances, I would award the Council nothing by way of mesne profits.

THE CLOSING LINES OF THE JUDGMENT: WHAT HAS THE CLAIMANT WON?

The claimant may well have scored a somewhat pyrrhic victory, the economics of which may be of considerable interest to the council tax payers of Wigan.

1. I would invite the parties to consider whether the terms of this judgment may assist them in coming to some form of sensible accommodation over the future of Haigh Hall. The world has changed considerably since the Cabinet first resolved to determine the Lease on 29 August 2019. The Covid pandemic means that the Council will have to pay Scullindale over a million pounds more than Haigh Hall is presently worth when it comes to vacate the property. Scullindale has delivered a first-class hotel and wedding and events venue in an appropriately, and splendidly, restored and refurbished Grade II* listed building. It has become clear during the course of this trial, that there are tensions between the ability to operate the Hall successfully and profitably and maintaining unrestricted public access to its grounds which IHL and the Council will need to address but which they are likely to find difficult to resolve. Even at this late hour, the Council may feel that permitting Haigh Hall Hotel Limited to operate the hotel business and act as a buffer between itself and the public, but with more clearly defined, but restricted, rights of public access, may prove to be a sensible, and more cost-effective, way forward. If the parties so wish, I am prepared to allow them time for negotiations in advance of the next hearing.