Beckett and Kay Chartered Surveyors

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1 Beckett and Kay Chartered Surveyors Damages in commercial dilapidations claims Valuation Peter Beckett FRICS

2 Damages in commercial dilapidations claims Valuation Peter Beckett FRICS Item index 1. A set of these slides 2. A list of cases 3. A Scott Schedule 4. A type 2 (Shortlands-type) valuation 5. The valuation in Shortlands 6. A type 3 valuation 7. The type 4 valuation in Bruntwood 8. The Bruntwood case 9. A sensitivity analysis presented in Bruntwood

3 Item 1 A set of these slides

4 Slide 1 Damages in commercial dilapidations claims Valuation Peter Beckett FRICS Slide 2 Valuation in dilapidations Slide 3 In your pack A set of these slides A list of cases A Scott Schedule A type 2 (Shortlands-type) valuation The valuation in Shortlands A type 3 valuation The type 4 valuation in Bruntwood The Bruntwood case A sensitivity analysis presented in Bruntwood H:\Specialisms\Dilapidations\Talks\PBA seminar\set of slides.docx

5 Slide 4 Summary 1. Common features of all claims 2. Types of claim: Type 1: cost of works Type 2: straightforward Type 3: deeper analysis Type 4: multiple futures Slide 5 Common features of all claims at the end of the term Why not during? Damages: the only remedy once the tenancy is at an end s18(1) apart, they behave normally: the measure is the landlord s loss. Damages means money only not physical restitution.* The claimant can only proceed for his loss, not more. If he can't prove loss, he doesn't even get started.** * The Baltic Surveyor ** Simmons v Dresden Slide 6 Common features (continued) s18(1) says: diminution, in relation to repair (and some types of decoration covenant*) High proportion of reinstatement in office claims (70%?) Generally, the same test: landlord s loss**, and this means diminution (at least until Nick gets his way). Could we please say diminution valuation, not s18 valuation? * Latimer v Carney ** James v Hutton 2

6 Slide 7 Type 1 valuation: cost of works An industrial building in the West Country: no other use; landlord doing the work. Slide 8 Type 1 valuation: cost of works The normal measure: logical, and the law * Cost of works some indication of loss ** The first port of call in every case In a simple case (ie. most cases), cost = diminution See the sample Scott Schedule in your pack In such a case, no need for a valuation Moreover, in most cases the building surveyor can make a good first assessment * Jones v Herxheimer ** Latimer v Carney Slide 9 Type 2 valuation: straightforward Shortlands: Court s valuation in your pack 3

7 Slide 10 Type 2 valuation: straightforward Methods: comparables; stand-in-the-street; analysis A simplified Shortlands-type valuation 1 Supersession: the best known dilutive effect Examples: a wall to be demolished; a heating system with no future 2 1 Shortlands 2 Latimer v Carney; Ultraworth v General Accident Slide 11 Type 2 valuation: straightforward Shortcut approach: survival items only 1 In a listed City building: what did the purchaser pay? 1 Ravengate v Horizon Slide 12 Type 2: straightforward worked example Target value: same in valuations A and B 1 E s timated rental value ("E R V") 29,500 2 Years ' purchas e in perpetuity at: 8.00% Inves tment value 368,750 4 Inves tor's acquis ition cos ts at: 4.75% 16,721 5 Gross development value ("GDV") 352,029 6 S ale costs at: 2.75% 9,681 7 Net sale proceeds 342,348 4

8 Slide 13 Type 2: straightforward Valuation A (in compliance): 50-week project 7 Net sale proceeds 342,348 8 S cott schedule work 0 9 Less supersession 0 10 Net cos t of work attributable 0 to the outgoing tenant 17+ Total cos t of work plus interes t on it 109, P rofit to purchas er at: 20.00% of GDV 70, Total deductions unrelated to purchas e price 180, Value in compliance, adjus ted for interes t and acq cos ts 148,011 Slide 14 Type 2: straightforward Valuation B (actual): 54-week project 7 Net sale proceeds 342,348 8 Scott schedule work 100,000 9 Less supersession 32, Net cost of work attributable 67,493 to the outgoing tenant 17+ Total cost of work plus interest on it 193, Profit to purchaser at: 20.00% of GDV 70, Total deductions unrelated to purchase price 272, Value in actual condition, adjusted for interest and acq costs 63,284 Slide 15 Type 2: straightforward Diminution Valuation A: value in compliance with covenants on expiry 148,011 Valuation B : value in actual condition 63,284 Diminution in the value of the landlord's revers ion 84,727 B ut s ay 85,000 5

9 Slide 16 Type 3 valuation: deeper analysis An industrial estate within the M25: the present building. Slide 17 Type 3 valuation: deeper analysis An industrial estate within the M25: possibility of redevelopment one day. Slide 18 Type 3 valuation: deeper analysis The very precise exercise required Not conventional valuation, but valuation analysis * What does value mean? Beware premature approximation How does the Scott Schedule translate into difference in value? Putting it that way shows the primacy of the Scott Schedule: start there. The approach is to consider the extent of dilution, item-by-item. * The Mason case 6

10 Slide 19 Type 3 valuation: deeper analysis (continued) The logical relationship between diminution and the schedule The parallel worlds Probability; deferment; beneficial breaches Future of an industrial estate; an atrium floored over Reconcile to the schedule? Slide 20 Type 4 valuation: multiple futures 1 Portland Street, Manchester: before Slide 21 Type 4 valuation: multiple futures 1 Portland Street, Manchester: after 7

11 Slide 22 Type 4 valuation: multiple futures The rarest type of valuation problem in dilapidations Margin of error is back: sensitivity analysis needed? Main subset of multiple futures: crossover Culworth v Licensed Victuallers Shane v Runwell Bruntwood Slide 23 Type 4 valuation: multiple futures The contractual claim * S upers es s ion Approach 1 Approach Prime costs : 2 Building fabric 23, ,700 works agreed 565,110 Building fabric works not agreed Mechanical and electrical 210, ,141 Lift 86, , ,732 23, ,182 Contractors preliminaries etc 86,173 2,317 59,418 TOTAL prime costs 947,905 25, ,600 F ees 110,270 TOTAL ex VAT 1,058,175 * Tenant view only, to simplify. Slide 24 Type 4 valuation: multiple futures A B Diminution, R ef Approac h (c omplianc e) (ac tual) s ay A: the three futures: tenant's view 1. R elet after light refurbishment 5,572,903 4,448,428 1,120, R elet after major refurbishment 5,106,722 4,786, , R edevelopment 3,963,895 3,963,895 0 Best price to landlord 5,572,903 4,786, ,268 B : the three futures: landlord's view 1. R elet after light refurbishment 5,831,494 4,453,656 1,380, R elet after major refurbishment 4,533,673 3,989, , R edevelopment 2,647,488 2,647,488 0 Best price to landlord 5,831,494 4,453,656 1,377,838 8

12 Slide 25 For another time Proportionality What does value mean? Schedules of condition: the three views The fact and degree test Responsibilities of the tribunal to the valuation witness The RICS Guidance Note The PLA Protocol Slide 26 Peter Beckett FRICS Beckett and Kay LLP 16 Savile Row London W1S 3PL (020)

13 Item 2 A list of cases

14 Cases quoted in the talks Not all mentioned in this talk The Baltic Surveyor 1 Bruntwood v BT 2 Culworth v Licensed Victuallers 3 Hanson v Newman 4 James v Hutton 5 Jervis v Harris 6 Jones v Herxheimer 7 Latimer v Carney 8 The Mason Case 9 Ruxley v Forsythe 10 Shane v Runwell 11 The Shortlands Case 12 Simmons v Dresden 13 Ultraworth v General Accident 14 1 Voaden v Champion (The "Baltic Surveyor" and "Timbuktu") [2002] EWCA Civ 89 2 Bruntwood 2000 First Properties Ltd v British Telecommunications plc [2008] (unreported) 3 Culworth Estates Ltd v Society of Licensed Victuallers [1991] 62 P&CR 4 Hanson v Newman [1934] Ch James v Hutton and J Cook and Sons Ltd [1950] 1 KB 9 6 Jervis v Harris [1996] 1 EGLR 78 7 Jones v Herxheimer [1950] 2KB Latimer v Carney [2006] EWCA Civ Mason v. TotalFinaElf UK Ltd [2003] EWHC Ruxley v Forsythe [1995] 3 All ER Shane v Runwell [1967] EGD Shortlands Investments Ltd v Cargill plc [1995] 1EGLR Simmons v. Dresden [2004] EWHC 993 (TCC) 14 Ultraworth v General Accident [2000] EGCS 19 H:\Specialisms\Dilapidations\Talks\Quoted cases.docx

15 Item 3 A Scott Schedule

16 Annexe 4: Scott Schedule Case: Streamside, Robin Hood Way, Nottingham Repair and decoration Section No 1: Page 1 of Item no Clause no Breach complained of Remedial works required Tenant's comments Landlord's comments Landlord Tenant 1 4(6)(a) Floodlighting is provided within the planting area to light the front elevation of the building. Floodlight fittings are corroded and broken. None of the 4 No Fittings are in working order. 2 4(6)(a) Car parking and hardstanding to east of the north wing. Precast concrete paving slabs to paths adjacent to building. 30 No slabs are cracked and broken. 50 No slabs are displaced and uneven. 3 4(6)(a) Grass covered banks between perimeter paving and footpath to roadway. Grass has died to 25 m². Car parking area Renew 4 No. Floodlight fittings and check switchgear and wiring. Take up and dispose of damaged slabs. Lay new slabs to match existing. Take up and re-lay uneven and displaced slabs. Prepare top soil base and lay 25 sq m of new turf. Item agreed - allow for retubing 4 No. floor light fittings and check electrical wiring to ensure safe operation. Landlord's claim is Item agreed - numerous broken and displaced precast concrete paving flags are noted to the access path to the north wing east elevation. Landlord's claim is excessive. Renewal is closer to the standard contemplated by the covenant. 1,200 will not meet the requisite standard. At the time of the lease term The grassed area should have expiry an area of approximately been put into and kept in the 25m² of the grassed area was condition contemplated by the noted to be bare and/or covenant. missing. The landlord has failed to maintain the condition of the soft ladnscaping since lease expiry in January The soft landscaping is now heavily weed growth affected. Landlord's claim is excessive. The tenants should pay only a contribution towards the reinstatement of the landscaping back to the condition as witnessed at lease term expiry. 2, , , , /09/2009 Page 1 of 5 Pack 3 - example of Scott Schedule

17 Annexe 4: Scott Schedule Case: Streamside, Robin Hood Way, Nottingham Repair and decoration Section No 1: Page 2 of Item no Clause no Breach complained of Remedial works required Tenant's comments Landlord's comments Landlord Tenant 4 4(6)(a) Gas access chamber adjacent to directors parking bays. Chamber is damaged. 5 4(6)(a) Tarmacadam surfacing to car park areas with thermoplastic markings to car park bays. There is localized damage to tarmac surface including pot holes approx 300mm dia. particularly adjacent to gullies. 6 4(6)(a) The markings to car parking bays are worn and missing in places. Repair damaged chamber. Patch repair tarmac to damaged areas. (allow 15 m²). Burn off all residual markings and apply new thermoplastic markings to all parking bays; re-design and set out to standard size parking bays A small gas chamber is located within the paving flag access path adjacent to the directors car park. Extremely minor impact damage is noted to the concrete haunching/bedding to the gas chamber housing. Lanlord's claim is excessive The minor damage nonetheless requires a major repair. Item disagreed - generally the Agreed, and cost reduction tarmacadam hardstanding is in agreed. reasonable order with the exception of small number of pot holes. The areas identified the landlord's schedule (15m²) are excessive. Approximately 10 No. pot holes to all car parks require attention in order to return them into a good condition. Landlord's claim is excessive. Allow for making good 10 No. pot holes size approx 500m² by 150mm deep. Item agreed - the road markings to the rear car park area are aged, weathered and require to be renewed. The landlord's claim is excessive. 2,500 will not meet the requisite standard , , /09/2009 Page 2 of 5 Pack 3 - example of Scott Schedule

18 Annexe 4: Scott Schedule Case: Streamside, Robin Hood Way, Nottingham Repair and decoration Section No 1: Page 3 of Item no Clause no Breach complained of Remedial works required Tenant's comments Landlord's comments Landlord Tenant 7 4(6)(a) 4 No. New infill bays following removal of tenant blockwork. Glazing not tinted to match existing Internal: ground floor - west wing Replace glass with tinted glass - 16 No windows in total 8 4(7) Versatemp units installed by tenant. Refix units that have not been securely mounted on external walls 9 4(7) Computer Trunking skirting to perimeter. Not laid against the floor leaving uneven gap. 10 4(7) Ceiling Tiles: damp staining already showing from roof leaks above. 2 No tiles missing. Take up. Refit at lower level to close up the gap; make good finishes; redecorate. Item agreed - the glazing panes Agreed. 3, , to the new replacement curtain walling to the ground floor west wing does not match the tint and colour of the original curtain walling sections. Item agreed. Agreed. 1, , A nominal gap between the Agreed, but cost would be floor slab and underside of the 750. new electrical skirting trunking is noted. The new skirting trunking installed at the time of the reinstatement works has been lined through with the head of the original skirting trunking insitu to provide an even finish to the floor plate. Electrical skirting trunking is operable and has been provided with test certification. Therefore no breach of covenant or disrepair has been identified by the landlord. Allow for providing cloaking piece to base of new infill sections of skirting trunking. 2, , Replace missing and damaged tiles. Item agreed. Cost excessive. 100 reasonable /09/2009 Page 3 of 5 Pack 3 - example of Scott Schedule

19 Annexe 4: Scott Schedule Case: Streamside, Robin Hood Way, Nottingham Repair and decoration Section No 1: Page 4 of Item no Clause no Breach complained of Remedial works required Tenant's comments Landlord's comments Landlord Tenant 11 4(7) Smokers Room Window Frames heavily stained from nicotine etc. 12 4(7) Plasterwork is damp damaged particularly at high level in lobbies adjacent to curtain wall enclosure. 13 4(7) Decorative finishes to wall surfaces have been damaged and are soiled. 14 4(6)(b) Plasterwork is damp damaged particularly at high level in lobbies adjacent to curtain wall enclosure. 15 4(6)(b) There is extensive cracking to plastered surfaces. Replace cover frames left by tenant when this area was formerly a smoking room. Hack off damp damaged plasterwork and make good. Repair wall surfaces and prepare for redecoration. Apply mist coat and two full coats emulsion paint finish to all previously decorated surfaces. Escape stairs to west wing Hack off damp damaged and cracked plasterwork and make good Hack off damp damaged and cracked plasterwork and make good Location not identified - landlord to provide further evidence as to location and breach of covenant or disrepair identified. Areas of damp and rainwater penetration have been recorded within the main stairwell at high level around the junction of curtain walling and flat roof soffit. We anticipate that there is an approximate 5m² in total patch repairs to be undertaken to the plaster finishes throughout this area. The landlord's claim and costs are excessive. Tenant is under an obligation in the last year of the term to redecorate. Approximately 20m²in total patch repairs of rainwater affected loose and off key plaster finishes are recorded. Landlord's claim excessive. Landlord's claim and costs are excessive. Refer to item 14 above. Cost included in item 14. To follow n/a The area in question is more like 12m². 3, , Agreed. 2, , Area is about 60m². 3, See above Inc above Inc above 21/09/2009 Page 4 of 5 Pack 3 - example of Scott Schedule

20 Annexe 4: Scott Schedule Case: Streamside, Robin Hood Way, Nottingham Repair and decoration Section No 1: Page 5 of Item no Clause no Breach complained of Remedial works required Tenant's comments Landlord's comments Landlord Tenant 16 4(6)(b) Decorative finishes to wall surfaces have been damaged and are soiled 17 4(6)(b) Ceiling tiles are generally discoloured. Many tiles are damaged, chipped or stained. 18 4(6)(b) Carpets have widespread staining as a result of spillages and poor maintenance. Repair wall surfaces and prepare for Item agreed - tenant is under Agreed. 2, , redecoration. Apply mist coat and two full an obligation to redecorate coats emulsion paint finish to all previously within the last year of the term. decorated surfaces. Renew all suspended ceiling tiles. Refer to item No Disrepair is significant. 3, (replacement of damaged tiles only will disrepair accepted. result in a patchy and inconsistent appearance). Take up and dispose of all carpet tiles. Supply and lay new carpet tiles of a grade and quality to match existing tiles. Item agreed - carpet tile finish within west wing stairwell is aged and worn. Landlords claim is excessive. Agreed and reduced cost agreed. 5, , , , /09/2009 Page 5 of 5 Pack 3 - example of Scott Schedule

21 Item 4 A type 2 (Shortlands-type) valuation

22 Beckett and Kay Diminution valuations Type 2: straightforward Valuation A: assuming Tenant's compliance with covenants TARGET VALUE FOR THE PROPERTY: 1 Estimated rental value ("ERV") 29,500 2 Years' purchase in perpetuity at: 8.00% Investment value 368,750 4 Investor's acquisition costs at: 4.75% 16,721 5 Gross development value ("GDV") 352,029 6 Sale costs at: 2.75% 9,681 7 Net sale proceeds 342,348 DEDUCTIONS UNRELATED TO PURCHASE PRICE: 8 Scott schedule work 0 9 Less supersession 0 10 Net cost of work attributable to the outgoing tenant 0 11 Other building work, say 72, Other (carpets, blinds, appliances) 5, Supervision fees on lines at: 11.00% 8, Letting fees as % of ERV: 10.00% 2, Marketing costs, say VAT on lines at: 17.50% 15, Total cost of work 105, Interest on the work for: 34 weeks 4, Irrecoverable service charge 0 weeks 0 20 Void rates 0 weeks 0 21 Profit to purchaser at: 20.00% of GDV 70, Total deductions unrelated to purchase price 180, Gross cost 162,317 COSTS RELATED TO PURCHASE PRICE: 24 Interest for project length: 50 weeks on purchase cost 10, Purchase cost including acquisition costs 152, Acquisition costs at: 2.75% 4, Value in compliance with covenants at the date of expiry 148,011 NB interest rate points over Base Rate: 7.00% Date of valuation 25-Dec-06 Date of calculation 30-Jul-09 30/07/2009 Page 1 of 3 Simple diminution valuations 03!'Valuation A'

23 Beckett and Kay Diminution valuations Type 2: straightforward Valuation B: in actual condition (originating differences from Valuation A highlighted) TARGET VALUE FOR THE PROPERTY: 7 Net sale proceeds per line 7 on Valuation A 342,348 DEDUCTIONS UNRELATED TO PURCHASE PRICE: 8 Scott schedule work 100,000 9 Less supersession 32, Net cost of work attributable to the outgoing tenant 67, Other building work, say 72, Other (carpets, blinds, appliances) 5, Supervision fees on lines at: 11.00% 15, Letting fees as % of ERV: 10.00% 2, Marketing costs, say VAT on lines at: 17.50% 28, Total cost of work 193, Interest on the work for: 36 weeks 9, Irrecoverable service charge 0 weeks 0 20 Void rates 0 weeks 0 21 Profit to purchaser at: 20% of GDV 70, Total deductions unrelated to purchase price 272, Gross cost 69,751 COSTS RELATED TO PURCHASE PRICE: 24 Interest for project length: 54 weeks on purchase cost 4, Purchase cost including acquisition costs 65, Acquisition costs at: 2.75% 1, Value in actual condition at the date of expiry 63,284 30/07/2009 Page 2 of 3 Simple diminution valuations 03!'Valuation B'

24 Beckett and Kay Diminution valuations Type 2: straightforward The diminution in the value of the Landlord's reversion Valuation A: value in compliance with covenants 148,011 Valuation B: value in actual condition 63,284 Diminution in the value of the landlord's reversion 84,727 But say 85,000 30/07/2009 Page 3 of 3 Simple diminution valuations 03!'Diminution'

25 Item 5 The valuation in Shortlands

26

27 Item 6 A type 3 valuation

28 Item no Beginnings of a type 3 valuation Breach category: repair Clause Landlord's Tenant's Dilution: no Breach complained of Remedial works required costing Tenant's comments costing Valuation remarks landlord (9) Minor damage to roof soffit panels with 6No holes through panels from old flue penetrations and 2No panels missing completely (9) Roof soffit panelling generally dirty as a result of dust and atmospheric staining (9) Minor impact damage and staining to perimeter blockwork walls of warehouse up to approx 1500 mm high (9) Warehouse lighting is of single troughed fluorescent light fittings on galvanised box section generally appear to be intact but dirty as a result of dust build up and atmospheric staining (9) Tenant installed suspended gas fired Colt unit heaters within warehouse area (9) The warehouse concrete floor has minor impact damage to bay joints with a build up of dirt and staining throughout (no item 2.07) Replace all damaged panels. Thoroughly clean all roof soffit areas. (3, ) Carry out isolated repairs as required and clean blockwork up to 1500mm high. Clean all lighting installations and leave in good working order. Provide electrical test certificate on completion. Retain all 4No. Units, provide service history and carry out service prior to lease expiry. Carry out specialist repairs to damaged joints and carry out a specialist clean of the entire warehouse concrete floor area following all reinstatement and repairs. (3, ) INTERNALLY Warehouse Liability agreed. Cost agreed. Landlord has not undertaken work. 6, Liability agreed. Cost agreed. New Tenant responsible for cleaning. Landlord has not undertaken work. 4, Liability agreed. Cost not agreed. Landlord has not undertaken work. 2, Liability agreed. Cost agreed. New Tenant responsible for cleaning. Landlord has not undertaken work. 1, Liability agreed. Cost agreed. Units installed by New Tenant. Landlord has not carried out work. 8, Liability agreed. Cost agreed. Landlord has not carried out work. Amenity Block Located Left Hand Side of Main Warehouse Doors 2.(9) Vinyl tiled flooring to entrance lobby very worn. Renew to entrance lobby ) Liability agreed. Cost agreed. Landlord has not carried out work (9) General overhaul and cleaning of toilet installations required. Overhaul and thoroughly clean all fittings. Main Two Storey Office Block Liability agreed. Cost agreed. New Tenant's responsibility. Landlord has not carried out work Included in the rent-free period granted to New Tenant Dilution: tenant 0 0 6, Included in the rent-free period , Included in the rent-free period , Included in the rent-free period , Included in the rent-free period , Included in the rent-free period Included in the rent-free period Included in the rent-free period (9) Damaged and displaced sections of perimeter trunking (9) Light fittings generally of surface fixed twin modular units of dated design and installation require relamping and cleaning throughout (9) Twin gas fired boilers located on the first floor provide office central heating via continuous perimeter convector heating panels which were reported to give ongoing maintenance problems due to air locks, leaks, etc (9) Carpeting to ground and first floor offices worn throughout. Carry out repairs and provide electrical test certificate on completion. Relamp and clean fittings throughout. Provide electrical test certificate on completion. Provide service history for boilers and carry out full overhaul and servicing of all installations prior to lease expiry. Provide a gas certificate on completion of all works. Renew carpeting to all areas ) Liability agreed. Cost agreed. New Tenant responsible for statutory testing. Landlord has not carried out work Liability agreed. Cost agreed. New Tenant resonsible for statutory compliance. Landlord has not carried out work. 4, Liability agreed. Cost agreed. New Tenant responsible for statutory compliance and testing. Landlord has not carried out work. 17, Liability not agreed. Carpet was installed by Tenant. Cost not agreed. Carpet in use by New Tenant. Landlord has not carried out work. nil Included in the rent-free period Included in the rent-free period , Included in the rent-free period. 0 0 If a landlord's fixture, then cost deferred 10 years to expiry of New Lease. 9,158 nil 21/09/2009 Page 1 of 3 H:\Specialisms\Dilapidations\Talks\PBA seminar\pack 6 - type 3 valuation!'repair'

29 Item no Beginnings of a type 3 valuation Breach category: repair Clause Landlord's Tenant's Dilution: no Breach complained of Remedial works required costing Tenant's comments costing Valuation remarks landlord Toilets and Kitchens Dilution: tenant (9) General overhaul and cleaning of all areas required. Overhaul and thoroughly clean all fittings, tiled surfaces, floor coverings, etc. EXTERNALLY Liability agreed. Cost agreed. New Tenant responsibility. Landlord has not carried out work Included in the rent-free period (9) Numerous temporary patch repairs have been carried out to the big six corrugated asbestos roof coverings with "Flashband" and mineral felt (9) The pressed steel gutters to the valleys and surrounding parapets has a worn bitumen coating with silting and debris throughout (9) Moss and lichen growth to parapet brickwork particularly on the top face with some areas of open pointing (9) Cement fillets to lead flashings to parapet gutter cracked and spalled in areas. Range over whole roof and carry out permanent repairs to all affected areas. Clean out, thoroughly prepare and repaint all gutter linings. Clean to remove all moss and lichen and repoint all affected areas. Repair all affected areas. Main Pitched Roofs 20, Liability agreed. Cost agreed. Landlord hasnot carried out work. Flat Roof to Two Storey Office Block 1, Liability agreed. Cost agreed. Landlord has not carried out work. 3, Liability agreed. Cost agreed. Landlord has not carried out work. 1, Liability agreed. Cost agreed. Landlord has not carried out work. 20, Cost deferred 10 years to expiry of New Lease. 1, Cost deferred 10 years to expiry of New Lease. 3, Cost deferred 10 years to expiry of New Lease. 1, Cost deferred 10 years to expiry of New Lease. 10,600 10, ,723 1, (9) Temporary "Flashband" repairs have been applied to the leadwork apron surrounding the upstand in 7No areas and there are 3No areas of temporary bitumen repairs (9) Moss and lichen staining to brickwork parapet capping with some areas of open pointing. Carry out permanent repairs to all affected areas. Clean to remove all moss and lichen and repoint affected brickwork. 1, Liability agreed. Cost agreed. Landlord has not carried out work. 1, Liability agreed. Cost agreed. Landlord has not carried out work. 1, Cost deferred 10 years to expiry of New Lease. 1, Cost deferred 10 years to expiry of New Lease External Elevations Front Elevation to Warehouse (9) Brickwork repairs required at 3No old pipe penetrations. Cut out affected brickwork and repair Liability agreed. Cost agreed. Landlord has not carried out work (9) Leak staining to brickwork from old waste outlet. Clean Liability agreed. Cost agreed. Landlord has not carried out work (9) Impact damage to leading edge of 2No vertical panels Replace the affected 2No vertical panels to match Liability agreed. Cost agreed. above right hand centre bay door. existing. Landlord has not carried out work (9) General staining and minor damage to lower Repair affected brickwork and clean Liability agreed. Cost agreed. brickwork around main entrance bays and to the Landlord has not carried out work. bottom two courses of elevation along the whole frontage (9) The centre right hand bay door has impact damage to the third and fourth panels above ground level. Replace affected panels to match existing Liability agreed. Cost agreed. Landlord has not carried out work Included in the rent-free period Included in the rent-free period Included in the rent-free period Included in the rent-free period Included in the rent-free period (9) The 4No bay doors to be left in good working order prior to lease expiry (9) Weathered and faded vertical cladding above main bay entrances (9) Paint/graffiti staining above right hand office entrance door. Overhaul and service 4No doors. Refurbish. Clean. 2, Liability agreed. Cost agreed. Landlord has not carried out work Liability agreed. Cost agreed. Landlord has not carried out work Liability agreed. Cost agreed. Landlord has not carried out work. 2, Included in the rent-free period Included in the rent-free period Included in the rent-free period /09/2009 Page 2 of 3 H:\Specialisms\Dilapidations\Talks\PBA seminar\pack 6 - type 3 valuation!'repair'

30 Item no Beginnings of a type 3 valuation Breach category: repair Clause Landlord's Tenant's Dilution: no Breach complained of Remedial works required costing Tenant's comments costing Valuation remarks landlord Front Elevation to Offices Dilution: tenant (9) Profiled steel canopy structure weathered and stained. Clean and refurbish Liability agreed. Cost agreed. Landlord has not carried out work Included in the rent-free period (9) There is a brickwork repair located at the rear right hand corner following collision damage by a car but repairs appear to be incomplete as there is associated cracking in the adjacent panel between the ground and first floor windows plus displacement of the first floor window showing a significant gap to the right hand reveal where the mastic pointing has completely opened. Complete all remedial works. Right Hand Elevation to Offices Rear Elevation of Offices 3, Liability agreed. Cost agreed. Landlord has not carried out work. 3, Included in the rent-free period (9) Steel spiral stair beginning to corrode. Thoroughly prepare prior to repainting (repainting schedules in section 3). Generally - All Elevations to Offices Liability agreed. Cost agreed. Landlord has not carried out work Included in the rent-free period (9) The powder coated bronze finish to the single glazed double sliding sash windows has generally faded and tarnished (9) The upper section of the parapet brickwork is weathered and stained with some open jointed brickwork. Carry out specialist refurbishment of powder coated finish ) Clean brickwork and patch point affected areas. EXTERNAL AREAS 1, Liability agreed. Cost agreed. Landlord has not carried out work. 1, Liability agreed. Cost agreed. Landlord has not carried out work. 1, Included in the rent-free period , Included in the rent-free period (9) Drainage gullies to front forecourt are silted with damage to approximate 28 linear metres of precast channel (9) Severe surface spalling and damage to forecourt concrete in front of right hand warehouse door extending to approximately 80 m (9) Cracking and slight subsidence to left hand front edge of forecourt area adjacent to left hand door. Clean out and renew damaged sections to match existing. Cut out and relay concrete to affected area. Take up and relay approx 1m2 of concrete (9) Fine cracking to the forecourt concrete. Carry out specialist resin injection repairs to approx 4 linear metres (9) 20No cracked precast concrete paving slabs to right Renew affected slabs to match existing. hand warehouse frontage and 2No slabs cracked to left hand warehouse frontage. 1, Liability agreed. Cost agreed. Landlord has not carried out work. 4, Liability agreed. Cost agreed. Landlord has not carried out work Liability agreed. Cost agreed. Landlord has not carried out work Liability agreed. Cost agreed. Landlord has not carried out work Liability agreed. Cost agreed. Landlord has not carried out work. 1, Included in the rent-free period , Included in the rent-free period Included in the rent-free period Included in the rent-free period Included in the rent-free period (9) Concrete and precast concrete pavings generally stained and silted throughout. Pressure wash all forecourt frontages Liability agreed. Cost agreed. Landlord has not carried out work Included in the rent-free period. 0 0 TOTALS - repair 95, , ,768 15,610 Less dilution 24, Less dilution 15, Diluted claim 70, Diluted claim 59, /09/2009 Page 3 of 3 H:\Specialisms\Dilapidations\Talks\PBA seminar\pack 6 - type 3 valuation!'repair'

31 Item 7 The type 4 valuation in Bruntwood

32 Peter Beckett / Mark Walsh 1 Portland Street, Manchester Valuations of the interest of Bruntwood 2000 First Properties Ltd Master valuation sheet A: the Primary Variables and the resulting valuations = Primary Variable Factors Valuation B Ref Scheme Resultant ft² ERV ( /ft²) ERV ( pa) Yield A (compliance) (actual) Diminution 1. Covenanted standards only Shops 2, , % Offices 49, , % 6,328,279 5,071,727 1,256, Refurbished and remodelled as actually done Shops 7, , % Offices 52, , % 7,023,388 6,718, , A hybrid scheme (See section D) Shops 7, , % Offices 44, , % 7,192,734 5,933,585 1,259,149 Best price to landlord: 7,192,734 6,718, ,076 B: constant factors in the valuations Scheme: Note: Defendant's valuer values only on the basis of Scheme 2, and has therefore not agreed any factor for Schemes 1 and 3 Date of valuation 30-Mar-04 Date of calculation 21-Sep-09 Acquisition cost rate 1.75% Sale cost rate 2.00% Supervision fees 8.00% 6.30% 8.00% NB contractor absorbed some fees in his price Letting fees as % of ERV 15.00% Marketing costs 5,000 15,000 5,000 C: Definition of the hybrid scheme VAT rate 0.00% Convert of remainder of GF to shops Profit as % of GDV: Defendant's valuer 17.50% 18.50% 17.50% Remodel entrance hall Interest rate (2.00% over Base Rate) 5.41% Insurance premium 11,530 per annum Empty rates * 105,090 per annum Advertising income 0 194,000 0 per annum * Rateable value: 2004/5 half rate p in the 21/09/2009 H:\Main instructions\portland Street\Valuation matrix 24 (Judgment)\Master 24!'Master'

33 Peter Beckett FRICS 1 Portland Street, Manchester Valuations of the interest of Bruntwood 2000 First Properties Ltd Diminution in value: in accordance with the judgement of the Court Valuation Scheme A B Property left in condition required by lease Property in actual condition No Full Conversion of Covenanted Full Conversion works refurbishment GF to shops works only refurbishment and works Gross Development Value: the value of the building after any necessary works and once it is let Ground floor Rental value psf Square feet 2,145 7,627 7,627 2,145 7,627 7,627 Annual rental value 51, , ,048 51, , ,048 Yield 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% YP in perpetuity Capital value of ground floor 858,002 3,050,806 3,050, ,002 3,050,806 3,050,806 Upper floors (all floors in the case of Scheme 1) Rental value psf Square feet 49,720 52,808 44,238 49,720 52,808 44,238 Annual rental value (offices) 621, , , , , ,094 Annual rental value (garage spaces) 40,000 40,000 40,000 40,000 40,000 40,000 Total annual rental value 661, , , , , ,094 Yield 7.875% 6.875% 7.875% 7.875% 6.875% 7.875% YP in perpetuity Capital value of upper floors 8,399,992 14,023,898 7,810,710 8,399,992 14,023,898 7,810,710 Value of ground and upper floors 9,257,994 17,074,704 10,861,516 9,257,994 17,074,704 10,861,516 Purchase costs at 1.75% 159, , , , , ,807 Gross Development Value (GDV) 9,098,766 16,781,036 10,674,709 9,098,766 16,781,036 10,674,709 Sale costs at 2% 181, , , , , ,494 Net sale proceeds 8,916,791 16,445,415 10,461,215 8,916,791 16,445,415 10,461,215 Costs required to achieve that value, and profit Cost of works (including professional fees) Numbers not 3,945, ,332 Numbers not 4,268,509 1,306,256 Letting fees (15% of rental value) reworked for 172, ,721 reworked for 172, ,721 Marketing costs elimination of 15,000 5,000 elimination of 15,000 5,000 Cost of insuring the building until it is let: rent-free rent-free Period for which insurance payable in weeks period, as not period, as not Insurance for that period at the rate of 11,530 p.a. required for the 31,486 8,869 required for the 31,929 19,512 Empty rates payable until building let: result result Period in weeks for which payable (first 3 months free) Rates for that period, at the rate of 105,090 p.a. 153,593 54, ,593 64,671 Period during which advertising income received, in weeks Advertising income (deduction) 186, ,000 0 Period during which interest payable on cost of works, in weeks Interest rate 5.41% 5.41% 5.41% 5.41% Interest on cost of works 517,191 17, , ,440 Profit Rate of profit 18.50% 17.50% 18.50% 17.50% Profit, at that rate on GDV 3,104,492 1,868,074 3,104,492 1,868,074 Total net costs and profit 7,752,659 2,335,506 8,115,594 3,547,674 Net sale proceeds minus total costs and profit 8,692,756 8,125,709 8,329,821 6,913,541 Interest and acquisition costs Interest rate 5.41% 5.41% 5.41% 5.41% Period in weeks Interest for that period 1,546, ,102 1,493, ,718 Purchase cost including acquisition costs 7,146,297 7,318,607 6,836,235 5,958,823 Acquisition costs at 1.75% 122, , , ,486 Net value of property 7,023,388 7,192,734 6,718,658 5,856,337 Appendix 1 (conformed to the judgment of the Court) Scheme 3 headline rent psf Virtual yield Diminution Highest value in covenanted condition 7,192,734 Highest value in actual condition 6,718,658 Diminution in value 474,076 21/09/2009 H:\Main instructions\portland Street\Valuation matrix 24 (Judgment)\Master 24!'Diminution summary'

34 Item 8 The Bruntwood case

35 IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION MANCHESTER DISTRICT REGISTRY The Civil Justice Centre, 1 Bridge Street, Manchester. Case No: 6MA90479 Thursday, 11th December, 2008 Before: HIS HONOUR JUDGE PELLING QC (Sitting as a Judge of the High Court) BRUNTWOOD 2000 FIRST PROPERTIES LTD. Claimant -v- BRITISH TELECOMS PLC Defendant MR. S. JOURDAN (Instructed by Messrs. DLA Piper appeared on behalf of the Claimant. MR. S. HORNETT (Instructed by Messrs. Addleshaw Booth) appeared on behalf of the Defendant. Transcript prepared from the official record by Cater Walsh Transcription Ltd., 1st Floor, Paddington House, New Road, Kidderminster DY10 1AL.

36 Tel: /510118; fax: ; J U D G M E N T (Approved)

37 Thursday, 11th December, 2008 JUDGE PELLING QC: 1. Down to 29th March 2004 the claimant was the lessor by assignment and the defendant was the lessee by assignment of an office building at 1 Portland Street in Manchester. The lease contained a covenant by which the lessee covenanted to leave the building good condition, decorated and with any partitioning removed. It is common ground that the defendant vacated the building without complying with these repairing obligations. It is also common ground that the reasonable cost of doing what should have been done by the defendants at the relevant date, 29th March 2004, was 1,020, In these proceedings the claimant seeks as its principal remedy damages for breach of covenant. It is common ground that at Common Law damages for breach of this type of covenant is measured by the cost of repair, plus, where appropriate, the loss of rent and other outgoings, subject, however, to a statutory cap imposed by Section 18(1) of the Landlord and Tenant Act 1927 by which the sum recoverable is capped at the amount by which the value of the reversion in the building is diminished by reason of the breach of covenant. 3. In fact, the claimant embarked upon a substantial refurbishment or redevelopment of the building following the end of the lease at a cost of in excess of 4m. The claimant's case is that it should recover by way of damages for breach of covenant the sum of 852,883, which it maintains is the difference between the net value of the property following refurbishment ( 5,903,125) and the value that the building would have had if it had been delivered up in covenanted condition when, following a much more limited refurbishment of the ground floor at a cost of 261,332, it would have had a value of 6,756, The defendant's case is that no-one in position of the claimant would have undertaken the hypothetical scheme the claimant maintains would have been undertaken if the building had been delivered up in covenanted condition and that a hypothetical purchaser of the building would have undertaken the full scale refurbishment in fact undertaken by the claimant irrespective of whether the building was delivered up in covenanted condition or not. In consequence, the defendant alleges that the claimant's claim for damages is limited to the difference between the value of the property fully refurbished, having been delivered up in covenanted condition, which the defendant

38 alleges would have been 10,592,936, and its value fully refurbished having been delivered up in the condition it was delivered up in, which the defendant alleges was 10,305,336. This approach, if adopted, results in the damages claim being quantified at 287, In addition to the principal claim the claimant claims the costs of preparing the schedule of dilapidations pursuant to clause 4.36 of the lease. By the end of the trial this claim had been agreed in the sum of 6,500 and I need say no more about it. 6. The final claim made by the claimant was a claim made pursuant to clause 4.11 of the Clause. The sum claimed is the agreed costs of what are called the "survival items". That is the cost of that element of the works that should have been carried out by the defendant and which if carried out would have survived the refurbishment of the building by the claimant following delivery up. This sum has been agreed at the sum 421,998, though the claim itself is disputed. 7. The trial took place between 24th and 27th November I heard oral evidence on behalf of the claimant Mr. Christopher Oglevy, the Chief Executive Officer of the claimant, Mr. John Marlon, a Director of the claimant, and an expert valuer called on behalf of the claimant, Mr. Peter Beckett FRICS. The only witness called on behalf of the defendant was an expert valuer, Mr. Mark Walsh MRICS. 8. In relation to the principal claim the question that has to be addressed is the amount by which, if at all, the market value of the claimant's interest in the building had been diminished at the end of the lease by reason of the failure of the defendant to comply with the covenant. Diminution is to be assessed as at the date of the termination of the lease, here 29th March In consequence, as a matter of law, events occurring after the end of the lease cannot themselves enhance or reduce the damages the lessor can recover, although such events may in appropriate circumstances be relied upon as throwing light on the correct valuation of the reversion at the relevant date. The exercise I am required to carry out necessarily involves identifying a hypothetical buyer who notionally would purchase the property on the relevant date. This in turn involves identifying the relevant attributes of the hypothetical purchaser and the price which such a purchaser would pay for the site. It is agreed between experts that this figure is to be arrived at using the residual method of valuation. Usually the application of this method will involve the comparison of

39 the same scheme, assuming the building is delivered up in covenanted and in actual condition. Here, however, the claimant maintains that a different scheme would have been used if the building had been delivered up in its covenanted condition. 9. In this case it is common ground that the notional purchaser would not purchase simply to let out again. This is agreed because the net value to such a person of the building whether in its covenanted condition or not would be substantially lower than the value of the building following refurbishment whether fully or in the limited way the claimants contends would have been adopted in the event the building had been delivered up in its covenanted condition. 10. It is common ground that the notional purchaser of the building would be a developer investor - that is someone who would purchase the building to refurbish and then hold the building over the medium to long-term. The alternative would have been a developer dealer, who would redevelop and then sell. This gives rise to a critical difference between the parties' valuers for Mr. Walsh contended that in those circumstances it is wrong in principal to take into account the costs of sale when striking net value, whereas Mr. Beckett contended that when adopting the residual method of valuation sale costs must always be taken into account when striking net value. 11. Where, as is common ground here, the hypothetical purchaser is likely to refurbish the building it is possible that the pre-existing condition of the premises will be relevant only to the extent that the covenanted work, which should have been done but which had not been carried out, would survive the likely post-acquisition refurbishment. In such circumstances, as Arden LJ put it in Latimer v. Carney [2007] 1 P & C R 213 at 225: "The landlord would have to show that the repairs caused damage to the reversion and this may in the circumstances be difficult. Alternatively, he will have to show that the refurbishment would be incorporate some of the repairs the former tenant should have carried out, ie, that specific repairs would survive the refurbishment. The question whether the repairs to be done by the former tenant in any particular case survive may raise difficult issues of fact and judgment but no specific examples of difficulty have been suggested to us".

40 Two points arise from this: First, in this case the reasonable cost of the survival work has been agreed so that the difficulty highlighted by Arden LJ does not arise in this case. Secondly, Arden LJ recognises that proving damage to the reversion, other than by reference to the cost of survival work, might be difficult. This highlights the critical first issue that has to be resolved in this case, namely, whether the claimant, on whom the onus of proof rests, has proved that if the building had been delivered up in covenanted condition the hypothetical purchaser would have embarked upon the hypothetical limited refurbishment scheme contended for by Mr. Beckett, which is referred to in appendix 1 to this judgment and was referred to at trial as the 'A3 Scheme'. It is only if the claimant establishes this on the balance of probabilities that it can succeed in recovering damages for a sum in excess of costs of survival work. For reasons that will become apparent my conclusions on this issue must be regarded at this stage as provisional only. 12. I start, first, by setting out a little more about the building itself. The building was constructed in the 1970s. It is located on the corner of Piccadilly and Portland Street in Manchester. This area is outside what is or was in 2004 conventionally recognised as being the Central Business District ("CBD") of Manchester but was within Central Manchester, in an area where significant efforts were then being made to develop and improve the area as a business location. It is convenient for Piccadilly Station and is within a short walk of the Central Business District. The building itself consists of a basement, ground floor and with six other storeys. It was constructed from reinforced concrete slabs and columns with glazed certain walling. It had a slab to slab dimension of 2.7 metres. This last point gives rise to an issue between the valuers relevant to the estimated rental value ( ERV ) of the office element of the building. Mr. Beckett considered the dimension to be a factor likely to depress rental value. Mr. Walsh considered that to be an outmoded approach. Such thoughts were driven by the need to accommodate air conditioning and cabling under suspended floors and ceiling, modern equipment took up less space than before and thus the distance between slabs had ceased to be significant. The building consists of offices, apart from part of the ground floor, which prior to the end of the lease was sublet by the defendant to a travel agent, which, however, had vacated the building prior to the defendant. The building had 19 car parking spaces and was located close to a modern multistorey car park. It was single glazed throughout. It was described by both experts in summary as