When the cap doesn't fit: when and why do solicitors have to pay more
than the difference in value?
by
Mark Cannon
1.
Lawyers like rules. They can be applied to produce results and so avoid the need
to think. Certainty outcome is to be desired in the law, if not at the expense of
justice. The mis-named “diminution in value” rule is invariably applied to
professional negligence claims by purchasers of property against valuers. Its
primacy was established in Philips v. Ward1 and Perry v. Sidney Phillips & Son2
and an attempt to overturn or at least circumvent it in was quashed by the Court of
Appeal in Watts v. Morrow.3
2.
The rule is better described as the “difference in value” rule, because the negligent
valuer does not diminish the value of the property, he merely overstates it, either
because he has failed to spot some negative feature of the property or because his
valuation is outside the acceptable range.4 The decisions in reported cases show
that, in general, it tends to benefit valuers and their insurers.5
3.
In broad terms, the rule works as follows.6 The claimant purchases a property in
reliance on a negligent valuation report. As a result he pays more than the
property is actually worth. He has therefore suffered loss to the extent that he has
1
2
3
4
5
6
[1956] 1 W.L.R. 471, C.A.
[1982] 1 W.L.R. 1297, C.A.
[1991] 1 W.L.R. 1421. The theorist behind the rebellion was John Powell in the second edition of
Jackson & Powell (1987). The main rebel in the field was HH Judge Bowsher Q.C., the trial
judge in Watts v. Morrow and in Syrett v. Carr & Neave [1990] 2 E.G.L.R. 161, a decision
disapproved by the Court of Appeal when allowing the appeal in Watts.
The authors of Professional Negligence and Liability (Simpson ed.) adopt “difference in value” in
chapter 8 (Surveyors, Valuers and Estate Agents), but “the valuation method” in chapter 9
(Solicitors). The latter term is also used in Flenley & Leech, Solicitors’ Negligence (1999).
But see Gardner v. Marsh & Parsons [1997] 1 W.L.R. 489, C.A., for a case where the rule
worked in favour of the purchaser.
See Jackson & Powell on Professional Negligence, paragraphs 9-130 to 9-148 for a full
discussion.
1
overpaid. It does not matter whether, had he received a non-negligent report, he
would have reduced his offer to the correct value or whether he would have not
purchased the property at all. In the latter case, he still obtained a valuable asset
and has to give credit for that. If he would have proceeded and paid more than the
actual value, then damages are reduced accordingly. Sometimes claimants get a
bit more for inconvenience and distress and something towards the cost of moving
to a house in which they actually want to live.
4.
Solicitors also advise the purchasers of property. Like valuers they get things
wrong from time to time and face claims. The difference in value rule might be
thought to apply to those claims. Sometimes it does.7 But sometimes it does not.
It is not unusual, at least in my experience, to find that the issue between claimant
and the defendant solicitors is whether damages should be assessed on the basis of
the difference in value rule or whether some other, higher measure of damages is
appropriate. What I hope to do in this paper is to explore when and why the rule
should not be applied.
5.
The cases which claimants rely on usually include one or more of County
Personnel (Employment Agency) Ltd. v. Alan R. Pulver & Co., 8 Hayes v. Dodd,9
a passage from the dissenting judgment of Sir Thomas Bingham M.R. in Reeves v.
Thrings & Long10and Stanley K. Oates v. Antony Pitman & Co.11 Each merits a
brief discussion.
6.
County Personnel12 concerned an unduly onerous rent review clause in a
commercial lease. The result was that at the first rent review the rent rose by over
250% to nearly 3½ times the open market rental. The solicitor had negligently
failed to give adequate advice about the unusual clause which produced this
7
8
9
10
11
12
See, for example, Pilkington v. Wood [1953] Ch. 770 (Harman J) and Ford v. White [1964] 1
W.L.R. 885 (Pennycuick J).
[1987] 1 W.L.R. 916, C.A.
[1990] 2 All E.R. 815, C.A.
[1996] P.N.L.R. 265, C.A.
[1998] P.N.L.R. 683, C.A.
[1987] 1 W.L.R. 916, C.A.
2
disastrous result. The tenant paid £18,761 to extricate itself from the lease.
Damages were awarded accordingly. Bingham L.J. set out a series of principles,
often recited in later cases. They included the following:
(2) On the authorities as they stand the diminution in value rule appears almost
always, if not always, to be appropriate where property is acquired following negligent
advice by surveyors. Such cases as Philips v. Ward [1956] 1 W.L.R. 471; Pilkington v.
Wood [1953] Ch. 770; Ford v. White & Co. [1964] 1 W.L.R. 885 and Perry v. Sidney
Phillips & Son [1982] 1 W.L.R. 1297, lay down that rule and illustrate its application
in cases involving both surveyors and solicitors.
(3) That is not, however, an invariable approach, at least in claims against solicitors,
and should not be mechanistically applied in circumstances where it may appear
inappropriate. In Simple Simon Catering Ltd. v. Binstock Miller & Co. (1973) 228 E.G.
527 the Court of Appeal favoured a more general assessment, taking account of the
"general expectation of loss." In other cases the cost of repair or reinstatement may
provide the appropriate measure: the Dodd Properties case [1980] 1 W.L.R. 433, 456
per Donaldson L.J. In other cases the measure of damage may properly include the
cost of making good the error of a negligent adviser: examples are found in Braid v.
W. L. Highway & Sons (1964) 191 E.G. 433, and G. + K. Ladenbau (U.K.) Ltd. v.
Crawley de Reya [1978] 1 W.L.R. 266.13
7.
Bingham L.J. did not explain why solicitors should be treated differently from
valuers. He went on to hold that application of the difference in value rule on the
facts would produce a negative value and that there was firm evidence as to what
it had cost to get out of the mess and that that sum represented the cost of
mitigation.14 Bingham L.J. also considered that there could be a claim for loss of
goodwill had the business been run from different premises. This would have
fallen under the second limb of Hadley v. Baxendale15 but depended on the
evidence when damages were assessed.16
8.
Sir Nicholas Browne-Wilkinson V.-C. agreed with the result, holding that the
difference in value rule applied to the acquisition of capital assets, but not to an
underlease at a rack rent which would have no capital value. He also agreed with
13
14
15
16
Ibid at 925F-H.
Ibid at 926B-D.
(1854) 9 Exch. 341.
[1987] 1 W.L.R. 926D-H.
3
the reasons given by Bingham L.J., as did the third member of the Court of
Appeal, Stephen Brown L.J.17
9.
In Hayes v. Dodd18 the problem was not the rent, but access. The claimants
bought a combination of leasehold and freehold property intending to run a motor
repair business. There appeared to be two means of access, one suitable for the
proposed business, the other not. There was no right of access over the first as
was discovered soon after the claimants moved in. It took them 6 years to escape
from their predicament. The Court of Appeal held that the appropriate approach
to damages was the “no transaction method” rather than the “successful
transaction method”.19 Staughton L.J. said:
The difference between the two methods is unlikely to be of importance in a case which
concerns some commodity that is readily saleable, such as peas or beans, and if there is
no difficulty or delay in ascertaining that a breach has occurred. A plaintiff who has
agreed to buy beans at the current market price and has received a quantity which is
defective can sell them forthwith and realise their actual value. If he intended to perform
a profitable sub-contract, he can buy other beans in the market for that purpose. In such a
case it makes no difference whether damages are assessed on the no-transaction method,
so that he recovers the price paid less the sum realised on disposition of the defective
beans, or on the successful-transaction method, which gives him the difference between
the value of sound beans and the value of defective beans.
However, this case is not concerned with a readily saleable commodity: it took the
plaintiffs nearly 5 years from the date of their purchase to dispose of the maisonette and
another year expired before they were free from the obligations imposed by the lease of
the workshop and yard. During all that period they were incurring expenses, such as rent
and other items, together with interest on the money which they had borrowed from the
bank.20
Damages were awarded for the losses suffered over that period, rent, rates,
insurance, bank interest and so on, but not for loss of the profit which would have
been made had the claimants been able to carry on their business.
17
18
19
20
Ibid at 927B-928B.
[1990] 2 All E.R. 815.
Ibid at 818j (Staughton L.J.) and 825b (Purchas L.J.). Staughton L.J. appears to have thought that
the application of the difference in value rule in Perry v. Sidney Phillips & Son (a firm) [1982] 1
W.L.R. 1297 was based on a finding or assumption that the claimant would still have bought the
property, but at a lower price (see 819a-b).
Ibid at 819h-820b.
4
10.
Reeves v. Thrings & Long21 was another commercial case. This time the business
was a hotel and the alleged negligence was a failure to explain that access to the
hotel car park was only permitted by a licence which was determinable on notice
4 years later. By a majority22 the Court of Appeal held that the trial judge had
been right to hold that the solicitors had not been negligent. Sir Thomas Bingham
M.R., who dissented, expressed some views on quantum. Having considered the
possible orthodox application of the diminution of value rule, he said:
There is an undoubted attraction in following the normal rule in cases of this kind, but
there are problems when, as in this case, the problem does not come to light for some
years, by which time changes have taken place and expenditure has been incurred. I am
inclined to think that in this case a fairer and more accurate assessment of Mr Reeve’s
loss would be achieved by applying the diminution in value test as at March 1990 when
the problem came to light, although it may be that even then there would be additional
claims which would be properly recoverable.
An alternative approach would be to award Mr Reeves the net cost of rectifying the
defect in the hotel’s car-parking rights, which he was able to do (at some expense) in
1990-1991 after the problem had come to light. This could yield a more reliable answer
than the method just considered.
We were urged to rule on the proper approach to damages in principle. Having regard to
the majority decision on liability it is unnecessary to do so. I also think it is undesirable.
The assessment of damages is ultimately a factual exercise, designed to compensate but
not over-compensate the plaintiff for the civil wrong he has suffered. While this is not an
area free of legal rules, it is an area in which legal rules may have to bow to the peculiar
facts of the case. It would be in my view be dangerous to state principles in ignorance of
the figures to which they would be applied.23
11.
Finally, Stanley K. Oates v. Anthony Pitman & Co. (a firm). 24 Here the claimants
bought a property with the intention of carrying on a business of holiday lettings.
For 18 months all went well. The claimants ran their intended business, spending
£55,000 refurbishing the property. Then they discovered that the property only
had planning permission for use as a hotel. Limited planning permission to use
the property for holiday lettings was obtained 2½ years later subject to conditions
which would cost about £38,000. The claimants could not afford to do this, so
21
22
23
24
[1996] P.N.L.R. 265.
Simon Brown and Hobhouse L.JJ.
[1996] P.N.L.R. 278C-F.
[1998] P.N.L.R. 683.
5
they sold the property. Sir Brian Neill, with whom the other members of the
Court of Appeal25 agreed, said:
From these authorities and the other authorities to which our attention was directed it
seems that where a claim is made against a solicitor for damages for negligence in
circumstances such as the present the assessment of damages can be approached in at
least three possible ways, provided always that it is remembered that, in the words of
Lord Hoffmann in Banque Bruxelles S.A.,26 it is necessary "to decide for what kind of
loss" the plaintiff is entitled to compensation.
In the ordinary case it may be possible to apply the diminution in value rule without
difficulty by considering evidence as to the market value of comparable properties. Such
evidence, from witnesses with knowledge of the relevant market, should enable the court
to decide the market value of the property in question with the attributes, or lack of
attributes, which it possessed at the time of the transaction concerned.
The application of the diminution in value rule may be more difficult, however, where the
property is unusual, or where, to the knowledge of the solicitor, it is being purchased for
a particular purpose, or where a substantial interval has elapsed between the purchase and
the defects coming to light. In such a case there may be no satisfactory evidence which
would enable the court, by making a comparison with other properties, to decide the
market value of the property in question. The court may then have to consider the price
which the hypothetical reasonable buyer would have been willing to pay had he known of
the defects, and the estimated cost of removing or correcting the defects may be the most
reliable guide to the reduced market value. Any other method of calculating the market
value might be too speculative.
In a third class of case the negligent advice or other negligent conduct of the solicitor
may have led the plaintiff to enter into a transaction from which subsequently he has had
to extricate himself. Hayes27 was such a case, and the damages were assessed in effect on
the basis of the cost of extrication.28
12.
The Court of Appeal awarded damages on the difference in value, assessed at
£36,000, a figure derived largely from the estimated cost of carrying out the
works required by the conditional planning permission and £1,480, being the cost
of obtaining that planning permission. They declined to award damages for loss
of profits.
13.
Why, then, are solicitors sometimes treated differently from valuers? The
following candidates emerge from the authorities:
25
26
27
28
Schiemann and Millett L.JJ.
[1997] A.C. 191, H.L.
[1990] 2 All E.R. 815, C.A.
[1998] P.N.L.R. 683, at 694F-695C.
6
13.1
The client may acquire an onerous lease with no commercial value, so
there is no capital value to assess.29
13.2
An interest in real property is not the same as a sack of beans or peas:
there may be no easy way of ridding oneself of a lease or even a
freehold.30
13.3
It is depends on the facts and the figures. It would be dangerous for courts
to state rules in the abstract. In this kind of cases rules sometimes have to
“bow to the peculiar facts of the case” (i.e. to be bent by judges in order to
do what they perceive to be justice).31
13.4
The starting point is “to decide for what kind of loss” the plaintiff is
entitled to compensation. This can produce 3 different approaches: (i) the
difference in value rule; (ii) cases where the property acquired has special
features or the transaction has some other special feature so that a
modified form of the difference in value rule may be appropriate; (iii)
extrication cases.32
None of the candidates passes muster.
14.
Leases at a rack rent: It is right to say that the assumption of an onerous
obligation which would not have been assumed had the solicitor not been
negligent is not an obvious candidate for the difference in value rule. This can
explain the decision in County Personnel not to apply the rule. However, it does
not explain why the rule is not applied in other circumstances.
15.
Beans and peas: The analogy with the sale of goods cases is helpful to an extent.
It draws attention to the predicament in which a purchaser may find himself if let
down by his solicitor. But the same could be said for a purchaser who is let down
by his valuer. It does not explain why in some cases the rule applies, but in others
it does not. Another problem with this analogy is that it has encouraged
29
30
31
32
Sir Nicholas Browne-Wilkinson V.-C. in County Personnel: see paragraph 8 above.
Staughton L.J. in Hayes v. Dodd: see paragraph 9 above.
Sir Thomas Bingham M.R. in Reeves v. Thring & Long: paragraph 10 above. See also the extract
from his judgment as Bingham L.J. in County Personnel in paragraph 6 above.
Sir Brian Neill in Stanley K. Oates v. Anthony Pitman & Co. (a firm): see paragraph 11 above.
7
concentration on the date at which the difference in value rule is to be applied,
rather than as to why it may not be appropriate to apply it at all.33
16.
Rules are dangerous and decisions should be made on the basis of known facts
and figures: It is important to bear in mind the basic purpose of an award of
damages, which to provide monetary compensation for the wrongful act or
omission.34 Rules should yield to the facts of particular case if their application
would not achieve that purpose. But if the rules are not really rules at all, you are
left with the length of the Secretary of State for Constitutional Affairs’ foot as a
guide. It is all very well saying that the rules should “bow to the peculiar facts of
the peculiar case”, but when and why should they do so?
17.
Multiple categories: Grouping decisions into categories can assist, because you
can see into which category a new case falls or to which it is closest.35 This
enables you to predict the result, but it does not tell you why that result is reached.
In one sense the doctrine of precedent requires no further understanding of the
law, but it should be possible to understand why a particular result is reached and
not just that it will be.
18.
The answer is to be found in considering the scope of a solicitor’s duty when
acting for a client who intends to acquire an interest in land. While some of the
advice which the solicitor should give will be concerned with the value of the
interest to be acquired, the solicitor’s role is wider than that. If the role is wider,
then so too may be the damages.
33
34
35
See for example, Professional Negligence and Liability (Simpson ed.) at 9.281-9.294
It is traditional at this point to quote from the speech of Lord Blackburn in Livingstone v.
Raywards Coal Co. (1880) 5 App.Cas. 25, at 39 and to say that the measure of damages is “that
sum of money which will put the party who has been injured, or who has suffered, in the same
position as he would have been if he had not sustained the wrong for which he is now getting his
compensation or reparation.” This needs to be qualified by considerations of the scope of duty,
foreseeability, causation and policy considerations.
See, for example, Jackson & Powell, paragraphs 10-270 to 10-276 and Evans, Lawyers’ Liabilities
(2nd ed.), paragraphs 10-07 to 10-13.
8
19.
This can be illustrated by the decision in Murray v. Lloyd.36 The claimant
instructed the defendant solicitors to act for here in the purchase of a 15 year
leasehold interest in a property on the Cadogan Estate. The purchase price was
£50,000. Her solicitors advised her to purchase through a British Virgin Islands
company. While this saved tax, there was a downside. A clause in the lease
prohibited assignment without the landlord’s consent, not to be unreasonably
withheld. Consent was withheld some years later on the reasonable ground that,
if the claimant were herself the tenant, she would acquire a statutory tenancy
under the Rent Acts at the end of the 15 years and so be able to live there as long
as she liked at a low rent. Companies could not do this. The claimant sued her
solicitors. Damages were awarded for the current value of what she had lost,
namely the prospect of becoming a statutory tenant. That prospect was valued at
£115,000.
20.
This decision did not involve an application of the difference in value rule. That
is obvious from the figures: the claimant had only paid £50,000 but recovered
£115,000, yet the interest she acquired did not have a negative value. Moreover,
the claimant had not entered the transaction herself: the company was the correct
claimant if the claim was for overpayment on the purchase. There is no
suggestion in the judgment that the company, Fizz Investments Ltd., had paid
over the odds.
21.
The reason why this decision was right was because the negligent advice had not
been as to the value of the leasehold interest, but as to whether it should be
purchased by the claimant in person or through Fizz Investments. That had
nothing to do with the open market value of the property. What was lost was not
an overpayment at the time of purchase, but a benefit 15 years later.37
36
37
[1989] 1 W.L.R. 1060, Mr John Mummery Q.C., sitting as a deputy High Court judge.
Attempts to reconcile this decision with the difference in value rule or to explain it by relation to
the rule do not succeed: see, for example, Flenley & Leech, Solicitors’ Negligence (1999),
paragraph 8.80, where it is suggested that the decision is to be explained by the fact that “the rights
in question were personal and non-assignable and whilst unquestionably valuable, could not be
bought and sold on the open market”. It was the nature of the advice not the nature of the rights
9
22.
Traditionally, if not now uniformly, solicitors would produce a report on title for
clients intending to acquire an interest in land. That report would inform the
client of the extent of the interest which he was intending to acquire, of the rights
which it enjoyed and to which it was subject. The client relies on the solicitor for
advice not only as to the value of the interest, but also as to the use to which it is
to be put and, as Murray v. Lloyd38 shows, as to other aspects of the proposed
transaction too.
23.
Attempts to bring all claims against solicitors in which the client is acquiring an
interest in land within the diminution in value rule will always fail. This is
because solicitors are not valuers. They do not just advise as to value. In a case
against a solicitor the first step should be to consider the purpose for which the
relevant advice was given. It may go to value. In that case the difference in value
rule should apply. But it may go to something else. This can be tested against
three of the cases discussed above.
24.
In County Personnel39 the negligence was a failure to advise as to the way in
which the rent review clause might work. The advice should have been directed
to the position after the first rent review, 5 years away and to the prudence of
entering the lease at all. The reason why the client needed to be advised was
because if it entered the lease it would be bound by that clause. Not surprisingly,
it was found that, had it been aware of the clause, the client would not have
entered the lease.40 The award of damages for the cost of getting out of that
clause was plainly right. Bingham L.J. was also right to recognise the possibility
of a claim for loss of goodwill if the claimant could show that it would have
leased other premises and so have had an established business to sell.
38
39
40
which explained the decision. Evans, Lawyers’ Liabilities (2nd edition), paragraph 10-12, adopts
the analysis suggested here.
[1989] 1 W.L.R. 1060.
[1987] 1 W.L.R. 916.
Ibid. at 924F-G.
10
25.
Hayes v. Dodd41 also makes sense. It did not necessarily follow from the lack of a
right of way over one of the apparent access routes that the price paid for the
property was above the actual value. It did follow, however, that it was not
suitable for the claimants’ proposed business. It was the wrong property for them.
The solicitors’ advice went as much, indeed probably more, to the use of the
property after it was acquired than to the price at which it should be purchased.
Having acquired a property which they could not use in reliance on their
solicitors’ advice, the claimants were entitled to the costs incurred in getting out
of that transaction.
26.
So far, so good. But the claim for loss of profits failed. Why? The claimants
tried to run their business there, but could not do so. While the solicitors did not
warrant that the property was suitable for a car repair business, they should have
advised, in effect, that it was not suitable. As a result the claimants found
themselves struggling unsuccessfully to run a car repair business. They were
prevented from earning their living. There is nothing odd about an award of
damages in tort for the resulting loss: look at personal injury claims for loss of
earnings.
27.
The decision in K. Oates v. Anthony Pitman & Co. (a firm) 42 suffers from the
attempt to award damages on a difference in value basis, when the negligence
went not to the value of the property but to its possible use. The “difference in
value” found was based on the cost of carrying out the works necessary to comply
with the conditions attached to a consent to a change in use to holiday letting. But
the property might have been worth what was paid for it for its existing permitted
use as a hotel.43 The decision can only be justified as a crude, if not entirely
unsuccessful attempt to achieve practical justice.
41
42
43
[1990] 2 All E.R. 815.
[1998] P.N.L.R. 683.
The valuation evidence for the plaintiffs was on the assumption “that a holiday flatlet use is the
proper basis for our valuation”: ibid at 689B-C.
11
28.
Again the claim for loss of profits failed. Sir Brian Neill held that “whereas in
some cases where damages are claimed for breach of a warranty a plaintiff may
be able to recover in respect of the profits which he would have made had the
property purchased not been in accordance with the warranty, such damages are
not recoverable as a loss suffered by him by reason of having entered into the
transaction”.44
29.
He thought he was following this passage from Lord Hoffmann’s speech in
Banque Bruxelles Lambert S.A. v. Eagle Star Insurance Co. Ltd.:45
In the case of a breach of a duty of care, the measure of damages is the loss attributable to
the inaccuracy of the information which the plaintiff has suffered by reason of having
entered into the transaction on the assumption that the information was correct. One
therefore compares the loss he has actually suffered with what his position would have
been if he had not entered into the transaction and asks what element of this loss is
attributable to the inaccuracy of the information. In the case of a warranty, one compares
the plaintiff’s position as a result of entering into the transaction with what it would have
been if the information had been accurate. Both measures are concerned with the
consequences of the inaccuracy of the information but the tort measure is the extent to
which the plaintiff is worse off because the information was wrong whereas the warranty
measure is the extent to which he would have been better off if the information had been
right.46
30.
The difference between breach of a duty of care and breach of a warranty is clear
in cases concerned with the value of land or other property.
It is less clear when
the breach of a duty of care involves failing to advise that land is not suitable for
its intended commercial use. The client acts on the assumption that it will be
suitable and then finds that it is not. The loss that he suffers may well include
financial loss caused by his inability to use the land as a source of income.
31.
There is no reason why the resulting loss of income/profit should not be recovered
in a duty of care case, as long as the claimant proves that, had he been correctly
advised, he would have carried on that business elsewhere as well as that he
would have made a profit. This is not to say that there is no difference between a
44
45
46
Ibid. at 696A-B.
[1997] A.C. 191, H.L.
Ibid. at 216.
12
duty of care case and a breach of warranty case. There is. It cases of breach of a
duty of care the claimant has to prove that he would have carried on the business
elsewhere. In cases of breach of warranty he does not: he just has to show that he
would have made a profit or greater profit had the warranty been accurate.
32.
To conclude: the difference in value rule is a sound rule but it is limited in its
application. Underlying it is a principle: the scope of the duty which has been
breached is one to provide information relating to the value of property. It
follows that the measure of loss will be related to the value of the property
purchased in reliance on the information. However, if the information which
should have been provided had a different or wider application then the rule will
not or may well not provide the measure of recoverable loss. Rules provide
convenient short cuts. Principles tell you when you can take them and why they
take you to the correct destination.
Mark Cannon
4 New Square,
Lincoln’s Inn
October 25th 2003
13