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27 August 2014
In the past the courts have turned to the ’diminution in value’ principle in negligence actions involving property. But as Peter Causton reports, this is no longer the case
In cases of negligence by solicitors involving property transactions, it is invariably the rule that the property will be less valuable than was assumed at the time of the sale. The measure of damages, as with surveyors’ cases, is normally the diminution in value of the property at the date of purchase, which is commonly referred to as the ’diminution in value’ principle.
However, a recent case has highlighted the fact that the diminution in value principle is not applicable in every case, with the real underlying principle being to do justice in compensating the wronged party, as long as the losses claimed fall within the scope of the solicitor’s duty.
It was already known that the courts do not always follow the diminution in value principle in every solicitor’s negligence case, which is probably because the scope of a solicitor’s advice is generally wider than that of a surveyor, but they sometimes award additional costs, such as for unnecessary expenditure incurred, extrication costs and so on. Exceptionally, the court can also make an award based on the cost of cure. The recent first instance decision in Keydon Estates Ltd v Eversheds (2005) suggests that, in appropriate circumstances, the courts can award damages on the alternative basis of loss of profit.
Looking at the scope of the solicitor’s duty, the purpose of a solicitor providing information in relation to the purchase of a property may relate to its suitability for business purposes. This is particularly so in the case of commercial property, where businesses are more likely to suffer loss of profits and losses exceeding the loss of value. In such cases, the solicitor’s duty can be wide enough to encompass loss of business profits.
Even so, normally loss of profits would not be claimable, because the claimant would have difficulty in proving that they would have purchased a different property and made profits from its use. Usually, the claimant would simply not have proceeded with the purchase at all. However, if the claimant can show that they would have obtained profits from an alternative but similar purchase, which would have been made if properly advised, then loss of profits can be claimed.
In Keydon Estates, this is exactly what happened: the claimant (a property investment company) purchased a leasehold commercial property for investment purposes, but received negligent advice from Eversheds as to whether a sub-tenancy had operated as an assignment of the tenancy, as a result of which the tenant was able to avoid its obligations. Eversheds sought to argue that the usual approach would be that the claimant would be entitled to the diminution in value, which was £110,000. However, the claimant alleged that the appropriate measure of damage, where the purpose of the transaction was to obtain an income stream, was the loss of the alternative income stream that it would have been able to obtain had Eversheds performed its duty properly.
The court at first instance followed the decision in SAAMCO and Oates v Pitman & Co (1998), which was authority for the proposition that a claim for loss of profits could be justified if it could be shown that the loss would not have been incurred anyway if the information had been correct.
The court accepted that the diminution in value rule could not be applied indiscriminately and that it was necessary to examine the facts of the individual case. On the evidence, it found that the claimant, had it not proceeded with the purchase of the property, would have decided to invest further in another equivalent property or properties and would not have experienced the problems that had occurred because of Eversheds’ negligence.
The court found that the rule was not of universal application, but could be departed from if the facts of the case demonstrated that its application would work an injustice to the injured claimant, and that equally the court must be careful to ensue that an alternative method of assessment did not produce overcompensation or double recovery.
Accordingly, the court held that the claimant had lost rental payments of approximately £190,000, which should be discounted by 5 per cent to reflect that it was unlikely that the claimant would have found a property yielding an equivalent rental. It also awarded the claimant damages for the loss of the tenant’s covenant to keep the property in good repair. The total damages recoverable were more than £300,000.
This decision is another illustration of the manner in which the law is developing in the area of damages in favour of claimants (as with Chester v Afshar (2004) in relation to causation) and how the courts are willing to bend the strict ’rules’ in order to achieve justice in a particular case. This decision (if followed and not appealed successfully) increases the risk in relation to solicitors’ property transactions and should be borne in mind when quantifying and reserving solicitors’ negligence claims.
Peter Causton is an assistant at Browne Jacobson