The Judgment in Swift v Carpenter: Accommodation Claims Revisited

What’s the issue?

Injured Claimants who have a need for different accommodation brought about by their injury, and who are not in rented accommodation, are entitled to claim the cost of more suitable accommodation (often alongside the cost of making suitable adaptations). In the most part, that accommodation tends to be more expensive than the accommodation already owned by the Claimant.

Historically, Claimants have not just simply been awarded the difference in value, because to do so would be to compensate not only the Claimant, but to additionally benefit the estate of the Claimant with a windfall it would not otherwise have had. This windfall of course assumes a national house price growth.

Historic approach

Roberts v Johnstone [1989] Q.B. 878 – Court of Appeal

The Court of Appeal balanced the competing concerns and decided that the approach should be to award a sum equivalent to the loss of income which would be achieved if the capital used from the Claimant’s proceeds to purchase the new property had been invested in risk-free investments.  The Defendant should pay a sum annually to compensate the Claimant for having to invest more money in property than would otherwise have been the case.

This approach required an assumed rate of interest on the total capital expenditure to calculate an annual figure, to which was applied a lifetime multiplier. The Court of Appeal’s approach was endorsed by the House of Lords as “an elegant solution” (Wells v Wells [1999] 1AC 345).

Although initially the rate was set at the same rate as interest on general damages (i.e. 2%), since 1999 the rate has been pegged to the “prevailing discount rate” which is set by the Lord Chancellor under s.1 Damages Act 1996.  Until 2017, the rate had been 2.5%. In 2017, it changed to -0.75% (as it was at the time of trial in Swift) and now stands at -0.25% (as also at the time of appeal in Swift).  The change in the “prevailing discount rate” in 2017 caused the mathematical calculation set out in Roberts v Johnstone to produce a negative figure, i.e. a nil loss.

Calls for change

There has been widespread call for change, although understandably, those calls have not been universal. The “imperfect but pragmatic” award when the discount rate was positive has been tolerated – in the absence of industry-wide agreement, the status quo seemed certain. But in the world of a negative discount rate, it was inevitable this matter would have to be determined by the Court of Appeal, or the Supreme Court.

Swift

Although another case came close to first putting the issue before the Court of Appeal only to settle, Swift is the first and was heard over three days commencing in June 2020.  A number of different approaches were submitted as being appropriate, and many other cases involving the same issue have been stayed pending the outcome.  The Court of Appeal handed down their judgment on Friday 9 October 2020.

Ms. Swift was involved in a serious road traffic accident in October 2013 in which she sustained crushing injuries to both feet and lower legs leading to a left-sided below-knee amputation.  The Defendant was the driver of the vehicle, now Ms. Swift’s husband. As against the Defendant’s insurer, Ms. Swift was awarded a significant lump sum in damages at trial in 2018, but no award was made for her future accommodation needs as the Judge (Mrs. Justice Lambert) considered herself bound by the Roberts v Johnstone approach. That was a conclusion reached notwithstanding the finding that there was a reasonable need for alternative accommodation and assessing that figure for the purposes of onward computation was £900,000.

The Court of Appeal’s Judgment

The lead judgment was given by Lord Justice Irwin who considered three questions:

  1. Was the Court of Appeal bound by the decision in Roberts v Johnstone?
  2. If yes, should the court award the full capital value of the incremental sum required or should the court award that sum but reduced to reflect the value of the notional reversionary interest, in other words the value of the “windfall” to the claimant’s estate?
  3. If the latter approach was correct, how should the court reach a conclusion as to the value of the reversionary interest?

As to Question 1, the Court of Appeal decided it was not bound by the decision in Roberts on the basis the ratio of Roberts was guidance, rather than legal principle. The guiding legal principle was to provide injured Claimants with fair, just and reasonable compensation without overcompensating them. The formula in Roberts was a ‘means to an end’ to achieve this. On that basis, the Court of Appeal determined that, in the context of a negative discount rate, Roberts no longer provided a fair, just and reasonable basis to quantify claims for accommodation. It could not be right that Claimants who could establish a need for different (and more expensive) accommodation should be denied an award.

The Court went on to determine the method for calculating the loss. The crucial question was how to value the windfall to the Claimant’s estate gained by being provided with an asset rather than damages. It was not appropriate to simply withhold an award of damages in its entirety in order to offset the risk of such a windfall. The most appropriate way of doing so would be to value the reversionary interest and deduct that from the capital sum awarded to the claimant. That depended upon whether a ‘valid and reasonably workable approach’ could be reached to establish the value of such a windfall. Irwin LJ therefore answered Question 2 by choosing the reversionary interest approach.

As an aside, it is worth exploring why the Court of Appeal adopted this approach. A reversionary interest is the future interest in a property (or other asset) which cannot be accessed until, in this case, the death of the Claimant. Reversionary interests most often arise in the context of inheritance: a husband dies and leaves the family home to his children. However, his widow will have the right to live in the house until she dies. In this example, the wife would have a life interest and the children would have a reversionary interest. In order to realise the reversionary interest early, it is possible to sell the interest in property. The Court in Swift took the view that this was the most appropriate way of valuing the windfall to the estate, as one could deduct from the capital cost of the property the value of the reversionary interest. In other words, one can deduct the value of the interest after the Claimant dies.

The Court went on to consider Question 3, namely, how to value the reversionary interest. Despite the fact that the market in reversionary interests is currently extremely small, the Court decided a market approach represented the correct way to value the windfall. As Irwin LJ put it, the consideration was the current value of a future interest in the property, the best measure of such a value was what someone would pay to acquire it. The Court heard evidence from a director of the only known company auctioning reversionary interests in property. He gave evidence that, of the last ten cases his firm had handled, “eight out of ten had produced sales of the interests on the basis of a projected return between 6.2% and 7% per annum.” He therefore proposed a rate of return at 6.6%.

The Court of Appeal, however, disagreed that this was the appropriate figure and adopted a more cautious rate of 5%. This reflected the small size of the market and the fact that Mr Watson’s figures were predominantly based on shorter life interests than in Mrs. Swift’s case. However, Irwin LJ conceded that, as a result of the decision, a broader market in reversionary interests might develop. If that were the case then ‘a better evidence base from which a revision of the discount rate may be considered’.

The Formula

With credit to the Personal Injuries Bar Association for the following formula which we understand almost made it into the judgment, it seems the correct approach to the valuation of an accommodation claim is now as follows:

Value of the reversionary interest:R = (P – B) x 1.05-L
  Where:  R = reversionary interest P = value of property now required B = value of property owned but for the accident L = predicted life expectancy D = damages
  
Damages award:D = (P – B) – R
  

So in Mrs Swift’s case:

Value of the reversionary interest:  R = (£2,350,000 – £1,450,000) x 1.05– 45.32 = £98,087
Where:P = £2,350,000 B = £1,450,000 L = 45.43
  Damages award:  D = (2,350,000 – £1,450,000) – £98,087 = £801,913

Short Life Cases

The Court expressly reserved the position in cases where the Claimant has a shorter life expectancy. The reason is that, the shorter the life expectancy, the higher the value of the reversionary interest and therefore, on the formula above, the smaller the award of compensation. There may come a point where the life expectancy is so short that the reversionary interest approach is not appropriate. For example, if Mrs Swift had a life expectancy of 5 years, the value of the reversionary interest would be £705,174, leaving her with an award of only £194,826 with which to purchase alternative accommodation. Caution must therefore be applied before using the Swift formula for elderly or reduced-life Claimants.

Unhelpfully, the Court provided no guidance on (1) what constitutes a ‘short life’ and (2) on the approach to be used in these cases. Indeed, Irwin LJ stated: “It may be that different considerations and arguments could be applied to that category of case [short life cases]. I make no further comment on that and should not be understood to express a view on it.” It may be that litigators will need to take another trip to the Court of Appeal to establish the approach in these types of cases.

The Final Word

The Respondent applied to the Court of Appeal for permission to appeal to the Supreme Court. Permission was refused on 6 November 2020. For now at least, the Swift approach remains unassailable. But the authors remain in no doubt that further trips to the Court of Appeal will prove necessary on this thorny subject in due course!

39 Essex Chambers has produced a podcast explaining the judgment in Swift v Carpenter in more detail, as well as a webinar discussing key aspects of the judgment and how to apply the formula in practice. For information, please contact the Marketing Department at marketing@39essex.com.

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Shaman Kapoor
Daniel Laking

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Author: Shaman Kapoor
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Author: Daniel Laking