Roberts v Johnstone – where next?

Articles | Tue 30th May, 2017

Although the recent reduction in the discount rate has been warmly welcomed by claimant lawyers across the country, there has been a sting in the tail in relation to accommodation claims. Put simply, the formulation in Roberts v Johnstone no longer works with a negative discount rate and the question on everyone’s lips is where next?

Before we look to the future, it is important to look to the past to remind ourselves of the principles regarding the purchase of alternative accommodation. In R v J the Court of Appeal held that a claimant cannot recover the total purchase price of a suitable property less the value of an existing / but for property because the capital value of the property remains intact at the claimant’s death and would represent a windfall to his/her estate. The solution adopted in R v J, and applied by the courts ever since, is to treat the claimant’s loss as the loss of ability to earn an income on the additional capital sum required to purchase suitable accommodation. This loss was originally set at 2% pa but increased to 2.5% pa in 2001 following the decision of the then Lord Chancellor to fix the discount rate at that level.

The R v J formulation has come under widespread and repeated attack for giving rise to injustice in higher value cases. In Mann v Central Manchester University Hospitals NHS Trust [2017] EWCA Civ 12, Tomlinson LJ neatly encapsulated the key criticisms as follows:

“The exercise in which the court is thus engaged is in modern conditions increasingly artificial. The assumption underlying the approach is that the claimant will be able to fund the capital acquisition out of the sums awarded under rubrics other than accommodation. But in modern times residential property prices have increased rapidly while general awards for pain, suffering and loss of amenity have remained at their traditional levels. Whilst Peter is no doubt robbed to pay Paul, it must often be the case that the accommodation assessed by the court as suitable is simply not purchased. A further problem confronts the claimant with immediate and pressing needs but a relatively short life expectancy. The adoption of the appropriate multiplier in his case, when allied to the 2.5% notional return upon investment, will lead to a relatively modest award and a large shortfall between it and the cost of acquiring the property which is acknowledged to be required to meet the claimant’s needs during his admittedly short life expectancy. A similar problem confronts the claimant who establishes less than 100% liability in the defendant, as here, where the award is only for 50% of the sums regarded as necessary to meet the Claimant’s reasonable needs”

However, despite these criticisms, no better solution has been found over the past 28 years and R v J remains good law.

The reduction in the discount rate to -0.75% has offered up the opportunity to seek an alternative methodology as a matter of necessity. However, opinions differ on how this is best achieved. The 4 core options (leaving rental aside) appear to be as follows:

1. The defendant buys a property for the claimant (either by way of outright purchase or by way of mortgage) and gives the claimant a life interest in the property;
2. The claimant buys a property using funds provided by the defendant and the claimant grants a charge to the defendant;
3. The claimant takes out a mortgage with interest on that mortgage paid by way of PPO;
4. An alternative theoretical approach to R v J is taken, with the notional costs of mortgage interest replacing the notional loss of investment income

Whilst options 1-3 are all good in principle, they are not without some significant practical challenges. The author of this article takes the view that option 4 offers a more straightforward and pragmatic solution. This option is also consistent with the Court of Appeal’s comments in George v Pinnock [1973] 1 WLR 118 where Orr LJ said:

“An alternative argument advanced was, however, that as a result of the particular needs arising from her injuries, the plaintiff has been involved in greater annual expenses of accommodation than she would have incurred if the accident had not happened. In my judgment, this argument is well founded, and I do not think it makes any difference for this purpose whether the matter is considered in terms of a loss of income from the capital expended on the bungalow or in terms of annual mortgage interest which would have been payable if capital to buy the bungalow had not been available. The plaintiff is, in my judgment, entitled to be compensated to the extent that this loss of income or notional outlay by way of mortgage interest exceeds what the cost of her accommodation would have been but for the accident”

In JR (A Protected Party) v Sheffield Teaching Hospitals NHS Foundation Trust [2017] EWHC 1245 (QB) the court has had to grapple with the issue of accommodation in the context of a negative discount rate for the very first time. The claimant in this case had suffered spastic cerebral palsy and required specialist single level accommodation. In a judgment handed down on 25th May 2017 Mr. Justice William Davis reviewed the law in this area and concluded:

“I consider that the editor of McGregor was quite correct when he opined that a fair and proper solution should be found to the conundrum of providing a claimant with the means to purchase special accommodation. He also was correct when he suggested that a negative discount rate would mean that the approach in Roberts v Johnstone would lead to a nil award. But I am not in a position to find “the fair and proper solution” to the problem as a whole. I am faced simply with the case of this Claimant. In his case maintaining the conventional approach would provide him with the full capital cost of the accommodation, something which clearly would be wrong.”

On behalf of JR, it was submitted that the approach in George v Pinnock should be followed with the court assessing accommodation costs by “reference to a multiplicand based on a positive percentage” and the sum recovered capped at the capital cost of accommodation to prevent a windfall benefit. However, as the judge noted, this would not avoid a windfall to the claimant’s estate as the estate would include the total value of the property. Moreover, no evidence had been put before the court that allowed the judge to consider an alternative approach. William Davis J therefore unsurprisingly concluded that he was bound to apply R v J, resulting in a nil award.

Interestingly, William Davis J commented on the “superficially attractive” argument of a defendant taking a reversionary interest in a property purchased on behalf of a claimant (akin to option 1 or 2). He also speculated whether:

“…given the current cost of borrowing it might have been possible to say that the interest element on an appropriate mortgage (say £600,000 as the cost of the property less the amount of general damages) over a 25 year term would provide a reasonable figure, the cost of annual mortgage interest being an alternative method of assessment suggested in George v Pinnock. It was rejected in Roberts v Johnstone because the rate of mortgage interest at that time was so high than an award on that basis would result in full recovery of the capital cost of the accommodation. That is no longer the case.”

The author of this article would submit that the correct approach under option 4 would probably be to calculate the mortgage interest on the additional capital required to purchase suitable accommodation (over and above the but for property) over the term of a typical mortgage (25 years) using an average of long-term fixed mortgage rates.

It is by no means a perfect solution but it does offer a practical evolution of the R v J model in a climate where damages overall are higher and claimants have more flexibility in funding suitable accommodation.

Fortunately, the decision in JR v Sheffield Teaching Hospitals NHS Foundation Trust seems destined for an expedited appeal. This will hopefully provide some much needed clarity on the future of accommodation claims. In the meantime, the safest option for a claimant in a case where an alternative property is to be purchased is likely to be to plead all 4 options and obtain evidence to support each one.