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All talk and no pay make house prices a fruitless conversation

legal matters

Movement (or lack of it) in the price of houses remains a popular topic of conversation but rarely troubles the courts. But what happens if a developer is delayed in selling several houses as a result, it says, of its designer's negligence, but during the delay the value of the houses increases? Does the developer have to give credit to the defendant for the increase in price?

This and other tricky issues were explored by the Technology and Construction Court in Earl Terrace Properties (ETPL) v Nilsson Design (7 November 2003). The parties asked the court to make findings of law on the basis of assumed, rather than proved, facts to try to help them resolve the matter themselves.

ETPL was the developer, a company set up to undertake the redevelopment of 25 Georgian terraced houses in Kensington. The development sounds like a grand affair. A new 76-space underground car park was built at the front of the terrace, accessed from the houses at basement level.

The houses also gained a rear basement, containing a games room and cinema, or a swimming pool.

Unfortunately some of the basements leaked.

The assumed facts were that the discovery of this problem, its investigation and the remedial works, delayed the project by 15 months. For that period some £48 million of ETPL's money was tied up in the delayed part of the development.

ETPL sued its architectural consultant, Nilsson, saying it had failed to give the contractor, Charter, appropriate waterproofing details, and had wrongly relied on the membrane supplier to provide the necessary details. Nilsson, in turn, sued Charter, saying that it had failed to install the membrane in accordance with the design.

ETPL formulated its claim as a reasonable commercial rate of interest on the funds tied up in the development for the period of the delay. The defendant argued that this was not right. ETPL had borrowed the money from its parent company under a loan agreement, so it did not have to finance any borrowing or lending. The costs that ETPL did incur were those stipulated in its loan agreement from its parent. The defendant objected that the interest claimed by ETPL was a notional loss, as no one had been charged it.

As a separate point, the defendant argued that when the houses were finally sold, because the prices had gone up, they were sold for much more than they would have been if there had been no delay. So, the defendant said, as the delay had been to ETPL's advantage, it should give credit for the increase.

The judge decided against the defendant on both counts. ETPL could recover as damages the losses suffered by its parent as a result of the funds being tied up in the development. Furthermore, it was acceptable for that claim to be made on the basis of a reasonable interest rate that could have been earned by placing the money on deposit, rather than ETPL having to establish an actual loss.

As for the enhanced proceeds of sale, the judge considered the reverse position first. If the market had fallen during the delay, would ETPL be entitled to claim the loss on the sales from Nilsson?

The answer was no, unless the scope of Nilsson's duty included such a loss, and the possibility of such a loss had been brought to Nilsson's attention at the time the contract was made. The same applied to an increase in the price.

The subsequent sale of the houses, and the consequences of the sale, were too remote from Nilsson's duties and the alleged breach of them.

What is more, ETPL elected to wait until the leaks were fixed before selling. There was nothing to stop it from selling at the time, albeit at a reduced price because of the defects. In other words, the delayed sales that gave rise to the increased price were not a consequence of the alleged breach, so the defendant could not require ETPL to give credit for the increase. The judge found further support for his decision on the price increase in the usual rule that damages are assessed at the date of breach.

So, as usual, talking about the price of houses passed the time, but ultimately proved to be of little consequence.

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