### Breaking accommodation claims down (Swift v Carpenter)

Lois Norris, pupil barrister at No5 Barristers' Chambers, explains why the judgment in this case is eagerly awaited and takes a look at the different options put forward for calculating accommodation claims.

For those of you on Twitter, our timelines have been filling with practitioners tweeting about the long awaited hearing of Swift v Carpenter, which ran from 23 – 25 June 2020 in the Court of Appeal, and the implications it will have on the accommodation head of loss in serious injury claims. However, for those who have only joined the PI practitioner world in the last few years, there is an awful lot to catch up on.

The long-lived status quo – Roberts v Johnstone

It is often the case that the accommodation a Claimant lived in prior to their injury is unsuitable for their needs going forward and, accordingly, new accommodation is sourced. The conventional formula used to calculate accommodation costs was confirmed by the case of Roberts v Johnstone [1]  ["R v J"] and has been in use ever since.

Without delving into the same too much, the formula was based upon the difference in price between the old property and the new property, the relevant life multiplier and the discount rate.

Take as an example, a female Claimant who is 35 years old at the date of trial, who has sustained a serious injury which means she requires single storey accommodation. Let us assume that her pre-injury property was worth £200,000 but the new property she now requires costs £300,000. She cannot simply recover the additional capital cost of the new house because that would amount to double recovery: she would receive an additional capital sum of £100,000 and would also have an asset worth £100,000 more than her previous house. Following R v J, the Claimant would however be able to recover the loss caused by this additional capital being tied up in the property.

By way of a very simple working example, the R v J calculation would work as below (assuming the Claimant’s life expectancy is unaffected by her injury and the discount rate is 2.5%):

 Value of pre-injury accommodation: £200,000.00 Value of post-injury accommodation: £300,000.00 Difference in capital cost of accommodation: £100.000.00 Life multiplier: 29.31 Discount rate: 2.5%

Price of new property (300,000) less price of original property (£200,000) = £100,000

£100,000 x discount rate (2.5%) x relevant life multiplier (29.31) =  £73,275

The calculation above is very simplistic and does not factor in the cost of any adaptations which may need to be made to the new property nor whether those adaptations will serve to increase the value of the new property.

If we re-do this calculation on the new discount rate (-0.25%), one can see the problem which arises:

£100,000 x discount rate (-0.25) x relevant life multiplier (29.31) = -£7,327.50

The Claimant is left with a negative figure for accommodation.

Swift v Carpenter

With the new discount rate, it was only going to be a matter of time before this accommodation conundrum came before the courts; cue the first instance decision in Swift v Carpenter judgment in July 2018. The Claimant suffered serious lower limb injuries in a road traffic accident in 2013 which resulted in her left leg being amputated below the knee. At trial, it was found that the cost of suitable accommodation was likely to be in the region of £2.35 million which was £900,000.00 more than the value of her pre-injury property. If the conventional R v J calculation was adopted, the Claimant would recover a nil award for accommodation. On behalf of the Claimant, it was submitted that R v J was no longer fit for purpose in the context of a negative discount rate whereas the Defendant argued that the court was bound by R v J.

Whilst Mrs Justice Lambert touched upon other alternatives in her judgment, she noted that these alternatives would require expert evidence and held that she was bound by the Court of Appeal’s decision in R v J. It followed that no award was made in respect of the additional capital cost of purchasing the new property.

The appeal

The matter proceeded to appeal, and after various delays, was heard remotely from 23-25 June 2020 in the Court of Appeal, with several witnesses, consisting inter alia, of economists and actuaries. The appeal was heard before Lord Justice Underhill, Lady Justice Davies and Lord Justice Irwin.

The remote streaming videos remain on YouTube and, if you are a member of PIBA, the skeletons are available for your perusal. The below is a streamlined and much less eloquent version of some of the arguments put forward.

By the time the appeal was heard, the Claimant had bought a property suitable for her needs, without having to borrow.

Should R v J still apply?

The first hurdle for the court to decide was whether R v J should still be adopted.

That issue is twofold:

• Is it for the court to depart from R v J?
• Is R v J fit for purpose?

Is it for the court to depart from R v J?

On behalf of the Claimant, it was submitted that R v J should no longer apply as the parameters within which it was meant to operate no longer exist, that being there is a negative discount rate. They submitted that the court did not mandate the use of R v J in very different circumstances.

Judicial precedent

The Defendant’s primary case was that the court is bound by R v J as no exceptions apply. They also said the principle set out in Thomas [2] is binding on the court. That principle, they said, is that the multiplicand is determined by the discount rate, which is set by the Lord Chancellor. They say that is not merely a judicial guideline. Intervention during the hearing was interesting in this regard; dealing with whether the previous cases were binding given that the argument put forward was to disregard the R v J methodology entirely and querying whether R v J was proposing the best approach, as opposed to the only approach.

The Damages Act 1996

A significant amount of time was spent on Section A1 of the Damages Act 1996; the power it confers on the Lord Chancellor; and whether it prohibits the court from setting another discount rate for special accommodation claims.

The relevant passage from the Damages Act is below:

'(1) In determining the return to be expected from the investment of a sum awarded as damages for future pecuniary loss in an action for personal injury the court must, subject to and in accordance with rules of court made for the purposes of this section, take into account such rate of return (if any) as may from time to time be prescribed by an order made by the Lord Chancellor.

(2) Subsection (1) does not however prevent the court taking a different rate of return into account if any party to the proceedings shows that it is more appropriate in the case in question.

(3) An order under subsection (1) may prescribe different rates of return for different classes of case.

(4) An order under subsection (1) may in particular distinguish between classes of case by reference to—

(a) the description of future pecuniary loss involved;

(b) the length of the period during which future pecuniary loss is expected to occur;

(c) the time when future pecuniary loss is expected to occur.'

On behalf of the Claimant, it was submitted that the court was being asked to adopt a different methodology and not being asked to change the discount rate. The court is not prohibited from doing that by the Damages Act; common law is doing what it has always done: reacting to events and circumstances as they change.

The Defendant noted that, whilst the court has the power to adopt a different discount rate as per A1(2), that is for the claim as a whole i.e. for all heads of losses, not just one. They said the setting of a different discount rate for special accommodation is a power which was conferred on the Lord Chancellor (primarily under added new subsection (4)) and is not a matter for the court.

The Claimant on the other hand proposed that the S1(4) was merely explanatory of the existing power that the Lord Chancellor already had under S1(3). The Defendant said that, even if that were so, it shows Parliament envisaged this is a matter for the Lord Chancellor.

Is R v J fit for purpose?

The position of the Claimant was quite clear in this regard; if the court accepts that the Claimant has suffered a loss in having to purchase suitable accommodation as a result of the injury, then R v J leads to the Claimant not being compensated for a loss, which cannot be right under the purpose of tortious damages.

The argument by the Defendant was quite unusual; they said (relying on actuarial evidence) that the Claimant cannot show that R v J leads to injustice, because she cannot prove a net loss. They said that as the Claimant has now purchased her new property without borrowing, and will only need to borrow much later in life, she will be a saver for a long period (and thus achieve a gain) and only borrow for a shorter period. Over the whole period they say the Claimant is unlikely to suffer any net loss.

What are the alternatives for the court if they decide not to adopt R v J?

Prior to the appeal being heard, there were many options mooted as alternatives to R v J. By the time of the appeal, there were a number of proposals which the parties had agreed were unworkable. These included periodical payments to fund an interest only mortgage for life, and a loan.

Whilst submissions were heard on equity release, a substantial part of the hearing focused on the potential option of a reversionary interest, which the parties agreed could be a viable solution. Another option was for the Defendant to pay the Claimant the full additional capital cost.

• Full Capital Cost

This is the simplest proposal. Absent other suitable alternatives, the Claimant would be awarded the full capital cost of purchasing the new property.

The opposition to this is simple; the Claimant will be overcompensated.

• Reversionary Interest

This is where it gets tricky. Reversionary interest is one of the alternative options which has been considered by the parties.

A simple example of reversionary interest is this: I am the life tenant of a property and I am entitled to reside there for as long as I live. Ryan holds all the reversionary interest in the property. Once I die, the property reverts back to Ryan and not to my estate. For ease of lingo if you watch the hearings on YouTube, in this example Ryan would be the 'remainderman'.

The proposal is effectively that the Defendant will give the Claimant the additional capital required to purchase the new accommodation minus the value of the reversionary interest. It is then for the Claimant to either sell or retain the reversionary interest. Upon death, if she had not retained the interest herself, it would pass to the third party who had purchased the reversionary interest, and the Claimant’s compensation for special accommodation would be exhausted.

Seems simple enough? Wrong.

There were several methods proposed to the court for valuing that reversionary interest and just two of the options are covered below.

Another option for valuing life interest was a 'fair and reasonable' methodology with reference to rental yield which the Defendant submitted was not analogous or pragmatic.

• Market Value based upon a 6.6% yield

One viable solution the Claimant put forward is that the Claimant should be awarded the capital cost with a deduction for the market value reversionary interest; as provided for by the report of Mr Watson, an actuary who has expertise in valuing and auctioning reversionary interests. This method was based upon an assumed yield for the reversionary interest of 6.6% per annum.

That would create a lower initial value for the reversionary interest than the methodology put forward by the Defendant (because if you are relying on a higher yield then you start with a lower initial value). Accordingly, the deduction from the initial capital cost will be lower.

The Claimant says this method allows for differing life expectancies (with the reversionary interest increasing in the example before the court as the life expectancy reduces) and is therefore applicable in all cases.

The Defendant says the problem with that approach is there is no real market and accordingly no market value can be calculated. They say the market for reversionary interests overall is tiny and that the sales provided to the court are the sales of reversionary interests in trusts and not in single residential properties where the Claimant intends to live in the property (which will be the case in all special accommodation cases). In addition, they note that, in the cases before the court, the life tenant was much older (which is relevant as presumably the life interest would be realised sooner).

• Fair and reasonable assessment by Mr Robinson

The Defendant relied upon the 'fair and reasonable' methodology put forward by their expert Mr Robinson, an actuary, which they said has as its aim balancing the interests of the life tenant and the remainderman. They said the property should be treated as an asset which is capable of investment in a mix of equities and gilts and on the assumption it provides an income over life.

That methodology arrived at a yield of 1.1% based on the current discount rate. The Defendant noted that the current discount rate is not the one which was in place when Swift was decided at first instance (it was -0.75% at that time) and thus an adjustment needed to be calculated; they suggested a yield of 0.75% for this claim.

The Defendant replied to written submissions by PIBA as to whether the 1.1% was above RPI because, if it was, that would cause issues with permissibility of factoring RPI into a multiplicand. The Defendant said that it was not; the fund would be balanced between GILTS and shares and the 1.1% is based on the yield of those assets.

The Claimant said there is no evidence of this methodology being applied to produce a value in the case before the court, and all calculations are illustrative only. It was also submitted that, if it is not assessed at market value, there will be more cases where the gap between the money the Claimant has and the money the Claimant needs to buy a property  is going to be unbridgeable. If the reversionary interest is valued at a greater sum, the Claimant will be left with less capital.

Hybrid solution

The Claimant also put forward a hybrid solution: if the Defendant is to have the benefit of the deduction based upon the valuation of the reversionary interest, then it should be on the basis that Defendant is prepared to purchase the reversionary interest. That in itself would create an internal market and assist with bridging any gap.

The Defendant said that would not work in practice as it would be akin to a shared ownership scheme, which it has been agreed is unworkable, primarily for regulatory reasons on part of the Defendant and a reluctance on the part of the Claimant to have an ongoing relationship with the insurer. The court queried whether there could be a mechanism to allow the same; whilst it seems theoretically possible on the basis that a subsidiary company could be set up to buy the reversionary interest, it would be difficult and the Defendant said the practical way to handle this matter is to deduct a sum rather than forcing reluctant parties to invest.

Where now?

It seems that, if an alternative methodology is to be adopted by the courts rather than R v J or an award of the full capital cost, a reversionary interest calculation is the clear front runner. However, deciding any mechanism and what the appropriate yield might be will be no mean feat and the judgment remains eagerly awaited.

[1] [1989] Q.B. 878

[2]Thomas v Brighton Health Authority [1999] 1 AC 345

This blog post was first published on the website of No5 Barristers' Chambers on 3 July 2020 and can be accessed here. It is reproduced with permission.

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