| Date | 14 April 2004 |
|
|
| Judgment | Earls Terrace Properties Limited v Nilsson Design Limited, TCC 20 February 2004 |
|
|
| The Issue | The assessment of funding losses occasioned by delay in completion of building works and whether a rise in property value should be taken into account in assessing those losses. |
|
|
| Implication |
The movements of the property market are too remote to be considered as a consequential loss or gain and should not be taken into account in assessing damages arising from delay in completion of development works. |
printEarls Terrace Properties engaged Nilsson Design as architects for a substantial refurbishment project to a row of 25 Grade II Georgian houses situated in Earl's Terrace, Kensington, London. The refurbishment scheme involved the construction of a 76 space underground car park at the rear of the properties. Once refurbished, each property was also to have a rear basement extending beyond the existing building line underneath the rear garden that contained either a games room and cinema or a swimming pool. As the works were nearing completion, water penetration was discovered into the rear basement structure of 11 of the houses. The remedial works necessary to correct this water penetration was extensive and resulted in a delay to the completion of the project of some 15 months. Earls Terrace commenced proceedings against Nilsson for the recovery of its losses. Nilsson in turn brought contribution proceedings against the contractors. The loss and damage claimed by Earls Terrace fell into three categories. Firstly, they claimed some £1.3 million in connection with the direct costs of the remedial works. Secondly, they claimed some £600,000 as compensation for the cost of storage of materials and delay and disruption claims made by the mechanical and electrical contractor who had been engaged under a separate contract with Earls Terrace. Finally, they claimed some £6 million in finance charges which they described as "holding costs". This latter claim was the subject of a separate preliminary hearing in front of His Honour Judge Anthony Thornton QC in the Technology and Construction Court. In short, Earls Terrace claimed that the process of investigating and remedying the water proofing defect was extensive and involved noisy and unsightly work that had deterred potential purchasers from buying the properties. As a result, Earls Terrace claimed that funds had been held in the project for 15 months longer than would otherwise have been the case. Earls Terrace disclosed that through a funding agreement with its parent company, the first £20 million of funding was being provided interest free and thereafter interest was being charged at the more onerous rate of 10% per annum. They argued that the precise terms of that funding agreement should be ignored and that instead it should be entitled to claim interest based upon a reasonable commercial rate. Making certain assumptions as to liability for the purposes of this preliminary issue, Judge Thornton was asked to confirm whether Earls Terrace would be entitled to be compensated by applying interest at a general commercial rate, or whether instead Earls Terrace would be entitled only to the actual cost of borrowing the funds during the period of delay. Put another way, Nilsson were contending that it should be liable to meet only the funding losses of Earls Terrace and not the losses of its parent company with whom Nilsson were not in contract. In addition to that point, Nilsson had a further point that it wished Judge Thornton to answer. It contended that the market had slumped during the period when this 15 month delay had occurred and that Earls Terrace would not have attempted to sell and would have been unsuccessful in selling the bulk of the houses in that period, unless it had taken a huge and unacceptable reduction in the asking prices for the properties. Thereafter, Nilsson contended, the market had recovered very rapidly so that Earls Terrace was able to sell the houses ultimately at very significantly increased levels. Thus, the sales of the properties would have been delayed in any event and any delay caused by Nilsson's assumed negligence in respect of the waterproofing had been to Earls Terrace's advantage, since it was able in consequence to sell the houses at a significantly enhanced price compared to those obtainable 15 months earlier. Dealing with the first point, Judge Thornton was satisfied that in principle, Earls Terrace was entitled to recover as damages the loss incurred by its parent company arising out of the late unlocking of funds that it had advanced for the development. This loss fell within the contemplation of Earls Terrace and Nilsson and was within the scope of Nilsson's duty. That approach followed the guidance by the Court of Appeal in the case of Alfred McAlpine Construction -v- Panatown in 1998. Provided Earls Terrace could prove that either it or its parent had funds locked into the development for the period caused by the remedial works and providing also that it could establish that it could have put these funds to an alternative commercial use, Earls Terrace was entitled to a reasonable commercial rate of interest for these funds for the relevant period. Dealing with the second issue, Judge Thornton was satisfied that the uncertainties of the property market were not directly linked to the development of property or to delay and completion of the development work. Although over time the price of property increased generally, that increase was not consistent and could be subject to short-term downturns. Such uncertainties in the property market showed that movements in property values were not directly linked to the development of property or to the delay in the completion of remedial works. In conclusion, on the basis of the assumed facts, the rise in the sale prices of the houses did not need to be taken into account in assessing Earls Terrace's recoverable damages.
CJ-0415
|
|||
|
© Brewer Consulting |
|||
 |
|||