PROVING THINGS 216: THE DANGERS OF RELYING ON EXPERT REPORT TO PROVE VALUE

There are some similarities between the case of Serene Construction Ltd v Salata and Associates Ltd & Ors [2021] EWHC 2433 (Ch) and the previous post in this series. In both cases the claimant’s case related to the valuation of land, and relied on expert evidence. In both cases the claimant’s failed.  There were also some issues in relation to the structure of the claimant’s report and the use of supplementary letters and comments which, the judge held, had no significant weight.

 

THE CASE

The claimants brought an action alleging that the defendant, as administrators, had been negligent in selling property at an undervalue. The property had been sold at £175,000. The claimants alleged the property had a value of £575,000 at that time.

THE EXPERT EVIDENCE

The judge assessed the reports of each party as to the value of the property at the time.

Expert evidence
    1. By order of District Judge Rouine at a CCMC on 20 November 2020 each party was given leave to rely on the written reports of an expert valuer. There are some difficulties arising from the fact that the instructions given to the respective experts were not consistent with each other, and the opinions they expressed were, not surprisingly, not addressed in all respects to the same matters. The claimant’s expert is Mr Tim Boffey, and the claimant relies heavily on his written and oral evidence. A number of documents were submitted as Mr Boffey’s written evidence.
    1. Firstly a report dated 25 October 2017 (p 278). In cross examination he said that this had in fact been produced at a later date in 2020 and was an amended version of a report prepared in 2017 that had been attached to the Particulars of Claim, but he had omitted to amend the date. In his report, which has an expert’s declaration attached, Mr Boffey records his instructions as being to prepare an opinion of “the valuation of the site as at September 2012 and February 2013” (p 279). He notes that his instructions came from Mrs Kumari but does not exhibit any letter of instruction. The valuation is based on the 13 units envisaged in the 2003 planning permission, which Mr Boffey estimates could have been sold at an average of £145,000 each. He estimates the build costs at £80 per square foot and at p 283 says:
“The 13 units at a sale price of £145,000 each makes a total of £1,885,000 and less the build costs of £220,000 already spent, less professional fees, finance costs, sales and promotions costs, contingency profit etc I end up with a valuation of £569,000 for the land.”
    1. Mr Boffey did not give any detail of this calculation, such as the figures he had allowed for professional fees or finance costs. It became clear from his oral evidence that when he referred to “less the build costs of £220,000 already spent” he was giving credit for that amount, which he had been told by Mrs Kumari had already been spent, against his estimate of build costs at £80 psf. He had not made any evaluation of what had been achieved by that spending or the value it produced, in the sense of reducing the cost to a purchaser of completion of the works from their then actual state.
    1. Somewhat confusingly Mr Boffey’s report went on to say that in his opinion the market value of the site between September 2012 and February 2014 (I assume he meant 2013) “was somewhere in the region of £550,000 to £600,000 therefore a figure of £575,000 has been adopted as the valuation.” If he was indicating a permissible range of opinion, he did not say why its mid point would be higher than his own estimate of £569,000. He also said at p 283 “the value of the land on a ‘forced sale’ basis is expected to be less than the Market Value, somewhere in the region of £450,000 to £500,000 in my opinion would be appropriate.” He did not comment on whether he would have regarded a sale by the Receivers as a ‘forced sale’.
    1. There were also a number of letters written by Mr Boffey between May 2019 and May 2021 (pp313-325). These are in the form of response to queries made by Mrs Kumari and/or Mr Raj, but do not set out what exactly was asked, or attach the emails that contained the requests. In some cases Mr Boffey says he has been told that the claimant’s solicitor has requested information but there is no letter from the solicitors showing what exactly he was asked. None of these letters has an expert’s declaration attached and they have not been incorporated into the report that does have such a declaration. They appear to have been written with a view to assisting the claimant in preparing its case rather than reporting to the court. In part Mr Boffey gives his opinion on what steps should have been taken to market the site, and the extent of a receiver’s duty, but I do not consider I can place any significant weight on this given (a) the fact these letters are not in the proper form for expert evidence (b) Mr Boffey does not seem to have been referred to the documents or evidence showing what the receivers and their agents actually did or their explanation of why that was justified and (c) such opinions are on the face of it beyond the scope of the order later granted permitting expert evidence, as reflected in the fact that no similar questions were put to Mr Willet for the defendants.
    1. Mr Boffey wrote a letter on 29 June 2021, which is expressed to be an addendum to his report and has an expert’s declaration, recording that he has been asked for an opinion of the value of the site if the 2003 planning permission was not extant in 2012. His opinion was that there would have been some extra costs, mainly as a s106 contribution of £65,000 would have been required, but a renewed application would have been straightforward and accordingly his estimate of market value should be reduced by £100,000 to £475,000, or £350-400,000 on a forced sale basis.
    1. Mr Adrian Willet was instructed for the defendants and has made two reports. The first is dated 24 March 2021 (p 330). It is in a much more conventional layout for a CPR compliant expert’s report and in particular attaches his letter of instruction. That letter, as Mr Pennock pointed out, stated that the 2003 planning permission had expired and Mr Willet formed his opinion of value on that basis. I note that it also set out the allegations of breach of duty in the Particulars of Claim, but Mr Willet was not instructed to express any opinion on them. He was asked only for his opinion on the market value of the site as at 21 January 2013, when contracts were exchanged.
    1. Mr Willet sets out in some detail the residual value calculation he made and the basis of the figures he adopted. He started with an estimate of the total selling price of the units proposed in the 2003 planning permission, noting criticisms of those designs and taking comparable prices from sales of new build properties in September 2012- January 2013, most of which seem to have been at a single development at Kynance Grove Bilston. From this he estimated a GDV of £2m. He gives in detail the costs he has deducted in arriving at a residual value for the land. In particular he notes the different figures up to £247,000 said to have been spent by the claimant on the site and gives detailed reasons based on his examination of the invoices produced and the site itself why he is not satisfied that those figures are reliable or that they reflect costs that a purchaser would not have to incur to take the site to completion. His own estimate of the allowance against total costs for the work already done was £125,000.
    1. From this calculation Mr Willet arrived at a residual value of the land, on the assumption that the 2003 planning permission was subsisting, of (in round terms) £339,000. He accepted in cross examination that, on that assumption, he had been wrong to include an allowance for s 106 costs of £65,000 because no s 106 contribution would have been due if the 2003 permission was still effective. Adding that back, his valuation with the 2003 planning permission in force would be £404,000.
    1. Mr Willet’s report then says that if the 2003 planning permission was not subsisting, and it was his opinion that it was not:
“Taking into account prevailing market conditions as at January 2013, the location, nature and condition of the Property at that date, the virtual absence of a functioning development finance market, the works completed to date (most likely without any form of assignable warranty) and the planning risk/delay/cost attached to securing a replacement planning permission, I am of the opinion that the applicable discount to market value to reflect the Property’s lapsed planning status is 40% of its ‘with planning’ value.”
    1. Applying that to his estimated value of £339,000 he arrived at a figure of £203,388 which he rounded to £200,000. Although this calculation was not put to Mr Willet, a 40% discount on £404,000 would give £242,400, but the 40% figure plainly did not include the known additional s 106 cost and if that was then deducted the net value without planning permission would be £177,400. At best, from the claimant’s point of view, if the s 106 cost was deducted before applying the 40% discount the result would get back to Mr Willet’s figure of £200,000.
    1. Mr Willet did not separately evaluate the Woburn scheme, but said that in his opinion it did not add anything to these values.
  1. Somewhat unusually, I also have before me some real-world contemporary evidence of how the value of the site was considered by a party potentially interested in the acquisition, because Mr Sparrow approached Mr Harper, the principal of K&M Homes, in 2018 and was given by him a copy of a valuation prepared in December 2012 for Zorin Finance Ltd, who provided finance for K&M’s successful offer. That valuation (p 272) is by Mr Alan Herbert FRICS, and indicates that the intention of the buyer is to develop in accordance with the 2003 scheme, although it refers to that consent as having lapsed. Mr Herbert refers to informal discussions he has had with Ms Herrera at the planning authority from which he believes consent for a similar scheme would be granted again, though noting that a s 106 payment of £67,500 would probably now be required. It must be inferred from what he says, in my judgment, that Ms Herrera’s position on behalf of the authority was that the 2003 consent had indeed lapsed so that a new application would be necessary. Mr Herbert advised the lender that the GDV was £1,725,000 and having performed a residual value calculation the market value of the land if planning permission had been extant would have been £331,500. He went on to say however that he was valuing it as being without a current consent, on which basis the value was £175,000. He states that he has derived that figure by applying a percentage discount to the ‘with planning’ value to reflect the costs and risks of applying for consent. He does not state the discount figure, but it amounts to about 47% including the estimated s 106 cost, or 27% if that is taken separately.

THE JUDGE’S ASSESSMENT OF THE EXPERT EVIDENCE

The judge preferred the evidence of the defendant’s expert.

  1. Taking all those matters into account, I prefer the evidence of Mr Willet and find that if the receivers had instructed valuers other than Mr Sparrow to provide a valuation on the basis of the relevant RICS valuation assumptions, they would likely have been advised that the market value of the site, at the date of sale and on that basis of was of the order of £200,000. I am fortified in that finding (a) by the fact that it is very close, certainly within the margin of inevitable range of opinion, to the valuation given at the time by Mr Herbert and (b) because it must be inherently unlikely that the land value (with planning permission) could have increased from the £516,000 estimated by Aitchison Raffety in 2008, when as Mr Boffey acknowledged the sale prices of houses had fallen considerably in that four year period.