Malkins Nominees Ltd v Societe Financiere Mirelis SA & Ors

In an inquiry into damages for conversion of shares, recoverable loss was assessed by reference to the benefit the claimant’s associated company would have obtained from acquiring a headlease. The Landlord and Tenant Act 1987 did not prevent that benefit where qualifying tenants held more than 50 per cent of the flats but the voting majority required to defeat the transaction was unlikely to be achieved. Valuation required assessment of each realistic benefit, deduction of associated costs, and deduction of the agreed price of the headlease. Recoverable benefits included enhanced flat value from a roof terrace, a capitalised notional rent from a caretaker’s flat, and the realistic hope of lease-extension premiums.

This was the damages inquiry following an earlier liability trial in which Etherton J found for the claimant and directed an inquiry. Laddie J subsequently ruled that damages were to be assessed on the basis of permanent deprivation of 100 shares, at 1 November 1996, by reference to any benefit Circle Trade Inc would have obtained from the headlease of a residential property.

The issues were whether the Landlord and Tenant Act 1987 prevented Circle from obtaining any benefit, and, if not, what that benefit would have been.

1. The claimant succeeded in the inquiry. The court had announced an award of £39,950, representing the assessed benefits less the agreed £60,000 price of the headlease.

2. Part I of the Landlord and Tenant Act 1987 applied because five of the eight flats were occupied by qualifying tenants, exceeding 50 per cent. Under section 18A, the requisite majority depended on the available votes, with one vote for each constituent flat. Circle held two votes. All three other qualifying tenants would have had to vote against Circle for it to lose the headlease.

3. On the evidence, Peninsula Enterprises Inc would not have voted for the exercise of rights of first refusal, or would at least have abstained. Its financial vulnerability, its default and Mirelis’s security position made that conclusion compelling. Circle could therefore have obtained a benefit from the headlease.

4. The roof-terrace benefit was valued by estimating the flat’s value, applying a 10 per cent enhancement, and deducting construction, professional, premium and associated costs. The recoverable amount was £31,400.

5. The court accepted that the market in 1996 would have treated a notional rent for the caretaker’s flat as an income stream under the headlease. Applying a 9 per cent yield produced a benefit of £54,000.

6. The possible lease-extension and enfranchisement benefits were assessed by reference to the realistic prospect of receiving premiums, after accounting for the rent consequences. A 5 per cent hope value was appropriate, producing £14,550.

7. The three heads totalled £99,999. After deducting the agreed price of the headlease, the claimant was entitled to £39,950.

The judgment records two earlier trials in the same litigation:

• Liability trial: Etherton J gave judgment for the claimant and directed an inquiry as to damages by order dated 17 May 2002.
• Preliminary issues in the inquiry: Laddie J ruled on 18 November 2004 that damages were to be assessed on the basis of permanent deprivation of the shares, at 1 November 1996, by reference to the benefit obtainable from the headlease.
• High Court (Chancery Division): The present inquiry determined the amount recoverable as £39,950.