Seventh Earl of Malmesbury & Ors v Strutt & Parker (a Partnership)

Where professional negligence causes the loss of a more valuable contractual right, damages may be assessed by comparing the capital value of the actual and hypothetical rights at the relevant dates. The valuation is a hypothetical market exercise. It excludes special purchasers and offers that no prudent purchaser would make, while allowing for commercial risk and uncertainty.

Alternatively, where loss is assessed by projected future income, the court determines the most probable income and discounts it for early receipt. It does not apply a further discount merely because the income is uncertain. The court must do the best it can on the evidence, including where valuation is difficult.

The Estate alleged that Strutt & Parker’s consultant negligently failed to negotiate turnover rents in leases of land adjoining Bournemouth International Airport. Liability had already been determined. The court found negligence in relation to the 2002 and 2003 leases and assessed the hypothetical turnover rent at 10 per cent of net car-parking income.

The damages hearing concerned the proper assessment of loss. Two alternative bases were considered: the capital-value difference between the actual leases and hypothetical leases containing the turnover provisions, and the projected income that would have been received over the lease terms. The central issues were the treatment of risk, uncertainty, planning prospects, passenger forecasts, and discounting.

1. Capital-value basis. The appropriate comparison was between the capital values of the actual leases and hypothetical leases containing a 10 per cent turnover rent, valued at the dates of the leases. The freehold reversions were excluded because the negligence was not alleged to affect their value and their values would be the same in both comparisons.
2. The hypothetical sale was to be assessed in the national market to which sophisticated purchasers would have been exposed. The valuation had to reflect what a prudent valuer would advise a willing purchaser. Special purchasers, and hypothetical offers from foolish or over-optimistic purchasers, were excluded.
3. The court accepted that the valuation exercise involved substantial uncertainty but was required to do the best it could. It adopted a 17 per cent discount rate for Fields A and B and 20 per cent for Field C. The court accepted the appropriate passenger forecasts and made no deduction for a presumed tendency of the forecasting model to overstate revenue.
4. Loss-of-income basis. The court assessed the most probable future turnover rents as at the date of judgment and discounted them for early receipt at 4.8375 per cent. A company purchasing an uncertain income stream would apply a commercial-risk discount, but the court’s task was different. Once probable income had been assessed, no additional discount was made merely because it was uncertain.
5. The court refused a further deduction for the risk of BIA’s insolvency, finding no evidence of a real risk that the rents would not be paid. The earlier finding that Field C would have carried a turnover rent could not be reopened during the damages assessment. Further expert work was required to convert the findings into final figures, and the issue of interest was left for further argument.

The judgment followed an earlier liability judgment delivered by the same court on 11 May 2007. The damages assessment was conducted on both the capital-value and loss-of-income bases. No appellate decision is stated.