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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> ESO Capital Luxembourg Holdings II SARL v GSA Invest Management SA & Ors [2017] EWHC 1351 (Ch) (12 June 2017) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2017/1351.html Cite as: [2017] EWHC 1351 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Rolls Building, Fetter Lane, London, EC4A 1NL
		12 June 2017

MR JUSTICE SNOWDEN :

1. This is a case about the value of a luxury Swiss ski hotel, the Chalet Royalp Hotel & Spa ("the Hotel"), which is a 5-star "ski-in/ski-out" hotel and spa in Villars-sur-Ollon in the Vaud Alps region of Switzerland.
2. The main issue which I have to decide is the value of the Claimant's 30% shareholding in the Fifth Defendant ("Promoroche" or the "Company"), which was the company that owned the Hotel. That valuation is to be conducted as at 10 October 2012, which is the date upon which the Defendants accept that they committed a breach of a contract that deprived the Claimant of the value of its shareholding in Promoroche.
3. There is a significant divergence in the contentions of the parties. The Claimant submits that the Hotel was worth just over CHF 53 million, with the result that, taking into account the Company's debts, its 30% shareholding was worth CHF 8.24 million. The Claimant contends that after further adjustments to which it is entitled under the contract, it is entitled to damages of CHF 10.1 million. The Defendants submit that the Hotel was worth only about CHF 16 million, so that when the substantial indebtedness of Promoroche is taken into account, the shareholding was worthless. Accordingly, they contend that the Claimant is entitled to nothing.

Parties

4. The Claimant ("ESO") is a Luxembourg entity that was established in 2007 as an investment vehicle for one of the funds managed by ESO Capital Group, which is an investment management group which was founded by Mr. Alex Schmid in 2006. Prior to forming the ESO Capital Group, Mr. Schmid was a managing director of DB Zwirn (London).
5. The First Defendant ("GSA") is a Swiss company in the Duet group of companies which are engaged in alternative asset management. The Duet group was founded by the Third Defendant ("Mr. Schibl") and the Fourth Defendant ("Mr. Gabay"). The Second Defendant ("Mr. Aim") was an executive of the Duet group.
6. Mr. Schibl was originally the owner of the land upon which the Hotel and 30 associated private apartments were built by Promoroche between 2005 and 2008 as a joint venture between Mr. Schibl and the Duet group. The apartments were sold off to private buyers and the Hotel opened for business in December 2008 at the height of the worldwide economic turmoil following the collapse of Lehman Brothers in September 2008.
7. Until ESO acquired its 30% shareholding in Promoroche in 2011, Promoroche was wholly owned by GSA, which in turn was owned via an intermediate holding company by Mr. Schibl and Duet Real Estate Partners 1 LP ("DREP"), which is an exempted limited partnership registered in the Cayman Islands.

The Settlement Agreement

8. ESO acquired its shareholding under a settlement of an earlier dispute between it and DREP. In April 2008, ESO had lent €36 million to a subsidiary of DREP in order to fund the development of an unrelated hotel in Saint-Barthelemy, France. The loan was not repaid in accordance with its terms, and in March 2011 a series of claims and cross-claims erupted between the parties in various jurisdictions. These included proceedings in the Cayman Islands in which DREP sought but failed to obtain an injunction to restrain ESO from commencing winding-up proceedings against it, following which ESO duly presented a winding-up petition against DREP on 7 June 2011. The Grand Court of the Cayman Islands then appointed Joint Provisional Liquidators to DREP ("the JPLs") on 7 July 2011 and a hearing of the petition was set for 28 July 2011.
9. Very shortly before the petition was due to be heard, the parties reached a settlement of their disputes, which was ultimately documented in a "Settlement Agreement" executed on 5 August 2011. By that stage, the accrued interest on the loan from ESO was about €17 million in addition to the outstanding principal of €36 million, and ESO had incurred about €1.5 million in legal costs and expenses – a total debt of about €54.5 million. Under the Settlement Agreement, DREP, its subsidiary and Messrs. Aim, Schibl and Gabay together agreed to pay ESO a total of €37.5 million and to transfer to ESO 30% of the issued shares in Promoroche.
10. Given the manner in which the Settlement Agreement had been arrived at, it was not possible for ESO to carry out any meaningful due diligence into Promoroche. It is also apparent from the terms of the Settlement Agreement that it was not intended that ESO should retain the shares in Promoroche as a long-term investment, but that it should hold them merely as a means to obtaining a further cash payment in addition to the €37.5 million. To that end, the Settlement Agreement provided for a regime under which Promoroche and the Hotel would be independently managed over a short period before being sold and the proceeds distributed to the parties. Specifically, the agreed terms included that the parties would procure the resignation of the incumbent directors of Promoroche and their replacement by a board of directors comprising independent professionals nominated by an independent hotel manager. The independent hotel manager would also be given a mandate to sell all of the shares in Promoroche or the Hotel itself within a year for a price of no less than CHF 45 million (less any debt owed by Promoroche to UBS or to third parties under arm's length transactions).
11. The Settlement Agreement also contained a number of provisions relating to the finances of Promoroche in the period after completion and prior to sale. In outline these included (i) the Duet group and its principals warranting that Promoroche's financial indebtedness to connected parties (i.e. excluding arm's length trade and ordinary course debt) did not exceed CHF 4 million and undertaking that such connected indebtedness would be removed "without any cost, liability or prejudice to Promoroche"; (ii) an agreement that in addition to procuring the resignation of the incumbent directors, the incumbent directors would not perform any acts without ESO's prior written consent and that they "do not and will not receive any remuneration or fees in connection with their board membership", and (iii) a representation by the Duet group and its principals that they were not in the market to acquire Promoroche's existing CHF 22 million loan facility from UBS and an agreement that they would not acquire such debt without ESO's prior written consent.

The underlying dispute

12. There were, to put it neutrally, delays in implementing the Settlement Agreement. The independent hotel manager had originally been intended to be Alix Partners, but it was subsequently agreed that it would be Assistance Hotels Management SA ("AHMI"), which was appointed in January 2012. The new directors were then not appointed until August 2012, and notwithstanding the terms of the Settlement Agreement, they included one of the incumbent directors (Mr. Marich) who was also a director of GSA. No sale of the Hotel or of the shares in Promoroche took place within a year of the Settlement Agreement.
13. Matters reached a head when, in September 2012, ESO was informed by GSA that Promoroche required an urgent recapitalisation. In October 2012, GSA voted to increase Promoroche's share capital by about CHF 8 million and to allow payment to be made by setting off any debts owed by Promoroche to its shareholders. In the case of GSA this included about CHF 6 million which represented a loan which GSA had taken out from UBS in March 2012 and lent to the Company to enable it to repay an equivalent amount of the existing UBS loans without ESO's prior written consent. ESO had no such debt to off-set, and the consequence was that it decided not to invest further funds and not to take up any shares in the recapitalisation. ESO therefore saw its 30% shareholding diluted to 0.375% on 10 October 2012.
14. These events prompted ESO to bring the proceedings in November 2013, claiming damages for breach of the Settlement Agreement and conspiracy. After initially denying the claim, in September 2015 the Defendants amended their Defence to admit breaches of the Settlement Agreement, albeit that they continued to deny the allegations of conspiracy. The Defendants accepted that ESO was entitled to damages for breach of contract equivalent to the value of the 30% shareholding in Promoroche immediately prior to its dilution on 10 October 2012, and assuming that the Settlement Agreement had been complied with in all other respects.

The rival contentions in outline

15. Some matters are common ground between the parties and between the experts. They agree that the value of ESO's 30% shareholding in Promoroche should be arrived at by first determining the market value of the Hotel, and then using a net asset basis for valuing the shares in the Company as a whole, without applying any discount to reflect ESO's status as a minority shareholder.
16. Secondly, the parties also agree that the general principle is that damages for breach of contract are designed to compensate the innocent party for the loss of the contractual benefits to which that party was entitled, that such damages will normally be assessed by reference to the date of breach (10 October 2012), and that only events that had occurred by that date can be taken into account in assessing the value of the contractual benefits lost: see Ageas (UK) Limited v Kwik-Fit (GB) Limited [2014] Bus LR 1338 at [30]. Those general principles may be departed from where it is necessary to do so to reflect the overriding compensatory principle, e.g. by the selection of a later date for valuation than the date of breach, or by the use of hindsight to value a contingency to which the innocent party or his property was subject at the date of valuation: see Ageas at [35]-[38]. But those exceptions have no application in the instant case.
17. Beyond that common ground, there is, first and foremost, a fundamental dispute between the parties about the correct approach to valuation of the Hotel. The Defendants contend that the Hotel should be valued on the footing that it would have been sold in the expectation that it would continue to operate as a hotel business and that it is therefore appropriate to value the business on a discounted cash-flow ("DCF") basis. In that regard, they submit that the trading performance of the Hotel since opening had been poor and that even allowing for some growth in tourism in the Swiss Alps, the realistic prospects for the Hotel were such that once Promoroche's indebtedness was taken into account, its shares had little or no value.
18. In contrast, ESO's primary contention was that it would be appropriate to value the Hotel on a "real estate" basis – i.e. on the basis that in 2012 there existed buyers who would have been prepared to pay a (higher) price based upon the possibility of converting most of the Hotel into serviced apartments for sale to investors so as to form a so-called "condo-hotel". This condo-hotel concept would have involved the apartments being furnished to a standard design and serviced by the existing facilities of the Hotel, whilst being administered on a condominium basis under which they could be occupied by their owners for a limited number of weeks in high season per year and would then be required to be made available for rent to the general public for the remainder of the year. As its secondary position, ESO contends that the Defendants' DCF valuation of the Hotel does not properly reflect the potential of the Hotel's business in October 2012 and is far too low.
19. The parties are also not agreed as to whether, and if so, to what extent it is permissible for the court to have regard to other valuations of the Hotel obtained at various times both before and after the date of valuation as a cross-check, either of the reasonableness of the forecasts made by the experts or the results at which they arrive. In that respect, ESO places reliance on a number of pieces of evidence that it says suggest that the value of the Hotel in 2012 was substantially more than the Defendants' expert's DCF figure. These include a number of other valuations performed for a variety of purposes both before and after October 2012, the minimum sale price fixed in the Settlement Agreement itself, statements made by entities in the Duet group in accounts and to investors, and the unwillingness of Mr. Gabay in early 2013 to countenance selling the Hotel for less than CHF 50 million. ESO contends that those valuations that pre-date October 2012 are relevant evidence, and that those that post-date October 2012 can be relied upon for the limited purpose of cross-checking the reasonableness of the forecasts of the experts in the manner suggested by Staughton J in Buckingham v Francis [1986] 2 All ER 738 at 740 and 742.
20. The Defendants accept that third party valuations and expressions of subjective opinion prior to October 2012 cannot be excluded, but submit that they are of little weight compared with the expert valuation evidence prepared for the court. They do not accept that any such evidence which post-dates October 2012 should be taken into account, but submit that it is of little weight in any event.

Background

21. Having given that introduction, and before turning to the law and evidence on valuation in more detail, I should set out in outline some of the attributes of Villars-sur-Ollon and the Hotel, the trading history of the Hotel and the other events to which the parties referred, together with some background to the Swiss alpine property market.
22. Villars is the leading ski resort in the Swiss Canton of Vaud with an altitude of 1,300 metres. It is about 115 km (1 hour 15 minutes drive) from Zurich airport. Skiers from Villars have access to the greater Villars-Gryon-Les Diablerets area which has 77 ski lifts and other winter activities. The resort is, however, not as well recognised internationally as the more glamorous Verbier, Gstaad and Zermatt, and is also smaller than Crans Montana, all of which are in the neighbouring Canton of Valais. In 2012 there had been hotel closures in Villars such that the Hotel was the only five-star hotel left, together with three four-star and two three-star hotels. The other resorts to which I have referred were and are significantly larger with many more luxury hotels, shops and restaurants.
23. The plot on which the Hotel stands has at all relevant times been designated as a "hotel" zone. The Hotel was built between 2005 and 2008 and is a member of "The Leading Hotels of the World" marketing group. It has 63 'keys' (rooms and suites) each with a balcony which are located on five upper floors. It also has three restaurants, two bars, three conference rooms forming a conference centre, a small cinema and a spa which includes a swimming pool, sauna, fitness room and six treatment cabins.
24. The Hotel was built and furnished to a high standard in a traditional alpine chalet style, and forms an integrated complex with 30 "Chalet Royalp" apartments which were sold by Promoroche following the completion of construction, and which are now privately owned. Those apartments are organised according to a system called "Propriété par étages" ("ownership by floor" or "PPE"), which governs the basis on which certain common costs are shared between Promoroche (as the owner of the Hotel) and the apartment owners. Some of the apartment owners choose to make their apartments available for rent through the Hotel, with the revenues being split 60/40 between the apartment owners and Promoroche.
25. The original budget for construction of the Hotel and apartments was in the region of CHF 73 million, but by completion, close to CHF 85 million had been spent. The costs were funded for the most part by a construction loan of CHF 57 million from UBS, but substantial loans totalling about CHF 27 million were also provided by Duet (CHF 2.9 million), GSA (CHF 8.3 million) and ESO (CHF 16 million).
26. The first few years of any hotel's trading are generally expected to be difficult, but in the case of the Hotel, the timing of its opening was particularly unfortunate. It opened in December 2008 just after the start of the global economic crisis sparked by the collapse of Lehman Brothers in September 2008, and at a time at which the Swiss franc had strengthened against other currencies, including sterling and the euro. According to Promoroche's audited accounts, the first year of the Hotel's trading to the end of December 2009 showed a net operating loss of CHF 507,730. The company did, however, sell a significant number of the Chalet Royalp apartments in its first year, and used the proceeds to pay down a significant part of the UBS construction loan.
27. During 2010 the outstanding amount of the UBS loan and the ESO loan were refinanced by a loan from Pamplona Funds in the total amount of CHF 22 million. The trading results of the Hotel saw some improvement during 2010, but the company still recorded a very small net operating loss of CHF 4,499.
28. In November 2010 a tentative indication of interest was received for the Hotel from a hotel group based in Germany called the Althoff Group, who indicated that they were interested in acquiring the Hotel with a Swiss partner at an indicative price of €34 million (then about CHF 45 million), subject to full due diligence. At that time, however, it would seem that the Duet group were seeking a price of CHF 51 million and matters did not progress. A further expression of interest by way of a letter of intent signed by an asset management company on behalf of a potential buyer named as Cheikh [sic] Mohammed El-Kereiji was received by Duet in September 2011 at a figure of CHF 55 million, but again, nothing came of that.
29. The year to 30 November 2011 saw further improved trading results for the Hotel, which showed a net operating profit of CHF 551,543 for the first time. During that year, the debt to Pamplona was refinanced with UBS SA, but without the income from any further sales of apartments, the high level of interest payments on the outstanding debt continued to be a drain on Promoroche's resources.
30. In December 2011, the Duet group produced an investment report relating in part to the Hotel. That report attributed a value to the Duet group's 47.6% interest in Promoroche of US$ 14.4 million, which translated to a net value of the company of about CHF 28 million. Taking into account the outstanding indebtedness of CHF 22 million to Pamplona, this indicated that the Hotel was thought to be worth about CHF 50 million.
31. The relevant entity in the Duet group – DREP - also produced financial statements for the year ended 31^st December 2011 in the Autumn of 2013. The general partners' report to the partnership, signed by Mr. Gabay, included the statement,

"A valuation was carried out in March 2012 by THED (Tourism Hospitality Engineering Development) valuing the [Hotel] at CHF 52 million."

That note was a reference to a report commissioned from THED by Promoroche shortly after AHMI had been appointed as Independent Hotel Manager under the Settlement Agreement. AHMI and THED were related enterprises.

32. The THED Report was dated 14 March 2012 and contained a number of valuations of the Hotel on the basis of various assumptions as to increases in occupancy rates and operating profits. Those assumptions resulted in a range of values of CHF 23.385 million, CHF 31.197 million and CHF 41.911 million respectively. To these numbers, THED added CHF10.395 million in each case on account of the supposed development potential of the land adjoining the Hotel. The figure of CHF 52 million quoted in the report to the investors in DREP was therefore the highest of those combined values.
33. In addition, THED valued the Hotel on the basis that it could be converted into private apartments for sale. In that regard, THED assumed that the rooms in the Hotel could be converted to 4,000 m² of apartments, which at a value of CHF 15,000 per m² (less CHF 5 million of capital expenditure) gave a real estate value of CHF 55 million. With the assumed value of the adjoining land this gave a total value of CHF 65.395 million.
34. Although THED had assumed that it would be possible simply to convert the Hotel into private apartments for sale, a few days before THED issued its report in March 2012 there was a very significant development in the property market in Switzerland. For many years, the acquisition of Swiss residential real estate by foreigners had been restricted by a number of statutes (including the so-called Lex Friedrich and the Lex Koller). However, the Swiss public were also troubled by another issue – the problem of so-called "cold beds" in tourist areas, particularly the Alps. The mountain resorts were filled with holiday apartments (secondary residences) occupied for relatively short periods during the winter ski season, but unoccupied for much of the rest of the year, leaving the resorts and mountain villages relatively empty.
35. Against this background, on 11 March 2012 the Swiss people and the cantons voted in a referendum on an initiative to introduce further regulation restricting the construction of new secondary residences in the Alps. The effect of the vote was to require legislation to be put into force that would prevent permission being given for construction of any further secondary residences in any municipality in which the number of existing secondary homes exceeded 20% of the housing stock. Since the amount of secondary residences in Villars clearly exceeded 20%, it would have been generally understood after March 2012 that it would not be possible simply to redevelop the Hotel into private apartments for sale as THED had envisaged.
36. Nor, significantly, would it have been possible for the land surrounding the Hotel to be redeveloped into apartments for sale as THED had also contemplated. As a result, it was common ground between the parties that for the purposes of a valuation of Promoroche as at 10 October 2012, the land adjoining the Hotel had no potential for development and should therefore be ignored for valuation purposes.
37. In due course the Swiss government passed an "Order on secondary residences" on 22 August 2012 which came into effect on 1 January 2013 and which gave interim effect to the referendum proposals ("the Secondary Residences Order"). The law giving effect to the referendum - the lex Weber - was itself finally passed in 2015.
38. There was undoubtedly considerable confusion and uncertainty in the Alpine property market in the aftermath of the referendum in March 2012. One consequence of the uncertainty over the impending restrictions on the development of new secondary residences was that the Swiss construction industry and property developers were prompted to look for alternative concepts for property development which might be attractive to investors. The position was explained in a paper in July 2012 by Dr. Andreas Deuber and Professor Dr. Peter Tromm (two academics at the University of Applied Sciences in Chur) entitled "Apartment Hotels in the Canton of Graubünden" ("the Deuber & Tromm paper"),

"Upon approval of the Second Residence Initiative by the people and the cantons on 11 March 2012, the construction of second residences in Switzerland will be heavily restricted in the future and under certain conditions will be entirely impossible. This will eliminate a substantial source of income for the construction industry, which is important economically in many locations in the Alpine region. It is therefore expected that in the search for alternatives, hybrid hotel forms and resorts with managed residential units, will increasingly become the focus of the construction industry… On the investor side, as a result of shortage in traditional second residences and ever greater prices for normal homeownership, there is likewise interest in new forms of residential real estate and innovative models for financing them."

39. One such possibility was the construction of a so-called "condo-hotel", which, as I have explained, involved the creation and sale to investors of serviced apartments, managed on a condominium basis, with access to the amenities of an associated hotel. The serviced apartments would, however, have been subject to a number of restrictions designed to comply with the Secondary Residences Order, the most important of which would be that the owner of the apartment would not be permitted to decorate or furnish it in an individualised way and would only be entitled to occupy it for a maximum of three weeks during the high season every year (approximately December to March). For the remainder of the time the apartment would be required to be made available for rent to the general public with bookings taken through the administration of the associated hotel, and the income received would be shared between the owner of the apartment and the hotel.
40. To some extent, this idea of a condo-hotel was similar to that of an "apart-hotel" which had been known in Switzerland since the 1970s and which provided for privately-owned apartments to be managed like a hotel in conjunction with a hotel's own guest rooms. The Deuber & Tromm paper analysed the experience of apart-hotels in the Canton of Graubünden (which is the largest of the Swiss cantons and includes Davos, Klosters and St. Moritz), and discussed whether that experience might provide an indication of the future prospects for condo-hotels. I shall briefly consider their findings later in this judgment.
41. Returning to the operation of the Hotel, 2012 saw an easing in the global recession, and there was an improvement in levels of ski tourism in the Alps generally and at the Hotel in particular. The audited accounts of Promoroche for the year ending 30 November 2012 (which were not produced until 3 July 2013 and which reflected the capitalisation issue of which ESO complained) showed an increase in revenues of the Hotel and of its net operating profit to CHF 826,658.
42. An impression that the Hotel's trading was improving was also reflected in some figures that Mr. Schibl sent in December 2012 to an agent (Mr. Markus Steffen) who was given the task of attracting buyers for the Hotel. The figures suggested that the Hotel had an occupancy of about 50% and that it had moved into operating profit in the year ended November 2012 to the tune of about CHF 750,000. Mr. Schibl included forecasts showing increasing occupancy rising steadily over the next 5 years to reach 60% by 2016 with EBITDA rising from CHF 448,305 in 2012 to CHF 2.8 million in 2016. Mr. Schibl's covering email to Mr. Steffen also suggested that the real estate value of the Hotel was around CHF 80 million.
43. In March 2013 the Duet Group sent a quarterly investment report to investors in DREP. That generated some email communications with investors who questioned the value attributed to the investment in Promoroche. In response Mr. Gabay expressed his view that the replacement cost of the Hotel exceeded CHF 65 million and that "we will not sell [for] less than CHF 50 million".
44. Mr. Gabay also indicated that the Duet Group had received a number of early indications of interest in the Hotel from apparently wealthy overseas buyers. One such indication of interest in the Hotel was received in March 2013 from a person identified as "Kozareff" at a price of CHF 53.1 million and a meeting was arranged at a notary's office, but Mr. Kozareff did not turn up. A further approach was received in May 2013 from the Zech Group of Germany in the sum of CHF 58 million, but again this did not lead to a sale.
45. Although the Hotel's results were improving, Promoroche continued to be heavily burdened with debt. The UBS loan had been restructured in May 2012, and the recapitalisation of which ESO complained occurred in October 2012. UBS was reluctant to renew the loans which were due to mature in May 2013 and the company approached other lenders for assistance. One of them was BAWAG PSK, an Austrian bank, which commissioned a valuation of the Hotel as at 31 December 2013 from commercial property consultants, SPG Intercity Geneva SA ("SPG") "for loan security purposes taking into consideration the current hotel operation". That DCF valuation was based upon a predicted net operating income for the Hotel for 2014 of CHF 1.77 million: applying a net capitalisation rate and discount rate of 6.5%, SPG arrived at a value of CHF 41.97 million.
46. As an alternative, the SPG report considered the alternative of a real estate sale of condominium rooms. SPG indicated that on the basis of the information that had been provided to them, 3,429 m² of the Hotel could be converted into condominium rooms which could be sold for CHF 15,000 per m², and that on this basis, "a value of more than CHF 51 million could be expected".

The law on valuation

47. I have already set out, in brief terms, the common ground and areas of dispute between the parties on the approach to valuation. The parties agreed that the task of the court is to arrive at a valuation on the assumption of a hypothetical sale on the open market between a willing vendor and a willing purchaser. Both parties agreed that the vendor should be taken to be motivated to sell the Hotel for the highest price he could obtain, but they disagreed as to the extent to which the court should, when ascertaining what a willing purchaser might be prepared to pay, take notice of the possible presence in the market of persons who would be prepared to acquire the Hotel with a view to redevelopment as a condo-hotel rather than continuing to run it as a conventional hotel.
48. The issue of how to approach an open market valuation was considered by Hoffmann LJ in IRC v Gray [1994] STC 360 at 371-372. Although the case concerned a statutory provision (section 38 of the Finance Act 1975) that referred to a valuation for the purposes of capital transfer tax at "the price which the property might reasonably be expected to fetch if sold in the open market" at a particular time, it seems to me that Hoffmann LJ's comments are equally apposite in the current context. He said,

"…the theme which runs through the authorities is that one assumes that the hypothetical vendor and purchaser did whatever reasonable people buying and selling such property would be likely to have done in real life. The hypothetical vendor is an anonymous but reasonable vendor, who goes about the sale as a prudent man of business, negotiating seriously without giving the impression of being either over-anxious or unduly reluctant. The hypothetical buyer is slightly less anonymous. He too is assumed to have behaved reasonably, making proper inquiries about the property and not appearing too eager to buy. But he also reflects reality in that he embodies whatever was actually the demand for that property at the relevant time. It cannot be too strongly emphasised that although the sale is hypothetical, there is nothing hypothetical about the open market in which it is supposed to have taken place. The concept of the open market involves assuming that the whole world was free to bid, and then forming a view about what in those circumstances would in real life have been the best price reasonably obtainable. The practical nature of this exercise will usually mean that although in principle no one is excluded from consideration, most of the world will usually play no part in the calculation. The inquiry will often focus upon what a relatively small number of people would be likely to have paid. It may have to arrive at a figure within a range of prices which the evidence shows that various people would have been likely to pay, reflecting, for example, the fact that one person had a particular reason for paying a higher price than others, but taking into account, if appropriate, the possibility that through accident or whim he might not actually have bought. The valuation is thus a retrospective exercise in probabilities, wholly derived from the real world but rarely committed to the proposition that a sale to a particular purchaser would definitely have happened."

49. Explained in this way, it seems to me that in addition to assessing the value on a DCF basis – which it is common ground would have been used as a basis for making an offer by any prospective purchaser who intended to operate the Hotel in its existing form – I should determine whether the market at the relevant time included prospective purchasers who would have been prepared to buy the Hotel on the basis that they could redevelop it into a condo-hotel. If they existed, such persons would (to use Hoffmann LJ's analysis) have a "particular reason" for paying a higher price (the so-called "real estate" value) than others who were only prepared to acquire the Hotel as an existing business.
50. This inquiry as to whether it was likely that the market included purchasers who would have been prepared to pay more for the Hotel for partial redevelopment as a condo-hotel seems to me to be conceptually different from the question of whether there might have been "special purchasers" for the Hotel. "Special purchasers" are persons who, because of their own particular circumstances or position, have a special reason for being willing to offer more than the ordinary market price: see e.g. Crossman v IRC [1937] AC 26 at 43-44. Such persons might, for example, be occupiers of neighbouring land, or persons who wish to acquire the land for a special purpose which stems from their own particular characteristics and interests. The courts have generally been unwilling to ascribe a higher market value to an asset because of a special demand for a special purpose from a particular buyer: see Crossman v IRC (supra).
51. A further type of person referred to in the evidence as potentially willing to buy the Hotel was a so-called "trophy buyer" – i.e. a person who might have been interested in buying the Hotel as a "trophy" to enhance his personal prestige, and who would be willing to do so at a premium rather than as a strict commercial proposition. I shall return to consider the evidence on the possible existence of such persons later in this judgment, but at this stage I simply note that there must be a real question as to whether such persons would, in any event, fall within Hoffmann LJ's description of a hypothetical reasonable buyer.
52. So far as the evidence of value was concerned, in addition to the various valuations and other pieces of evidence to which I have referred above, I also received expert evidence at trial from a number of witnesses called by both sides. As a matter of general principle, a court is entitled to have regard to all such evidence and is not restricted to or bound to favour the expert evidence: see Capita v Drivers Jonas [2012] EWCA Civ 1417. Naturally, however, it will pay closest attention to the experts who have addressed the very issue that is before the court and whose opinions have been tested by cross-examination. Other valuation evidence is likely to have been prepared under less rigorous conditions, by persons who are not bound by the same duties to the court as the experts in the case, and will have been prepared for the specific purposes of the person commissioning the report.
53. Similarly, evidence of unconsummated offers or expressions of interest for the property by persons who do not give evidence must be treated with considerable caution: see e.g. Cohen v TSB Bank [2002] 2 BCLC 32 at [89]-[91]. It is also obvious that statements made out of court by persons with a vested interest in the value of the property must be treated with particular caution. This will include statements by the owners as to the price at which they might wish to sell the property, which, in the nature of things, may well exceed what a reasonable purchaser is prepared to pay.

The witness evidence

54. I heard from three witnesses of fact: Mr. Schmid (for the Claimant); and Mr. Schibl and Mr. Gabay (for the Defendants). Their evidence was, on the whole, of far less importance to the valuation issues than the evidence of the expert witnesses. That was particularly so with Mr. Schmid, who had little or no direct evidence concerning the Hotel or the operation of its business. Nevertheless, I should briefly record that I found Mr. Schmid to be an obviously intelligent and candid witness.
55. I regret that I did not, however, consider either Mr. Schibl or Mr. Gabay to be similarly satisfactory witnesses. Mr. Schibl was vague and somewhat off-hand in many of his answers, and was at times also argumentative and evasive (either simply avoiding answering the question he had been asked or claiming a surprising lack of recollection of events). Mr. Gabay was slightly more focussed, but again, rather than simply answering the questions he was asked, he too was rather argumentative and was clearly intent on delivering a message which he thought it important for me to hear concerning the nature of potential buyers for the Hotel and its value. Mr. Gabay was also surprisingly dismissive of the utility of the professional property valuations that had been prepared relating to the Hotel from time to time; and his evidence as to his approach to the statements made to investors in DREP from time to time either showed a remarkably cavalier attitude to such matters, or was simply untrue and designed to diminish the potential importance of those statements. Either way it was not to his credit. As a result, I treat the evidence of Mr. Schibl and Mr. Gabay with some caution.

The expert evidence

56. I heard from four expert witnesses. ESO called Mr. André Mack and Mr. Will H Davies. Mr. Mack is a Swiss citizen who is a director of Lausanne Hospitality Consulting SA. He holds qualifications and has 25 years' experience of management and consulting in the hospitality industry, with particular interests in food and beverage retailing and in finding and developing investment opportunities in the hotel sector. Mr. Davies is a Partner in Grant Thornton UK LLP, whose speciality is forensic accounting and corporate valuation.
57. Mr. Mack was of the opinion that in October 2012, redevelopment as a condo-hotel would have been seen by potential buyers as a viable proposition for the Hotel, and by Promoroche as the most advantageous basis upon which to sell the Hotel. Mr. Mack's first report suggested that a scheme could have been adopted under which 6,800 m² of the Hotel (including the 63 rooms and suites, together with the areas currently used for the conference centre and cinema) could be transformed into 4,080 m² of apartments and 2,720 m² of common parts, which would be run together with the remaining parts of the Hotel as a condo-hotel. On this basis Mr. Mack valued the Hotel on a real estate basis at CHF 53.1 million. Mr. Davies then used those figures and made other adjustments to the balance sheet of Promoroche to reach an adjusted net asset value of the company of CHF 29.431 million, with the result that the value of ESO's 30% shareholding was, in his opinion, CHF 8.829 million. As an alternative, Mr. Mack valued the Hotel on a DCF basis at CHF 42.8 million which, after adjustment by Mr. Davies, gave a value for ESO's 30% shareholding of CHF 5.36 million.
58. The Defendants' experts were Mr. Andy Cottle and Mr. Patrick Knüsel. Mr. Cottle is a Partner in the forensic practice of BDO LLP with experience in valuing companies and quantifying losses. In his initial report, Mr. Cottle prepared an adjusted net asset valuation of Promoroche based upon a DCF valuation of the Hotel of CHF 19.038 million. Mr. Cottle subsequently reduced his DCF valuation of the Hotel to CHF 15.994 million in light of some additional information as regards PPE and energy costs. In essence, when the debts of the company were taken into account, Mr. Cottle's conclusion was that the shares in Promoroche had no value at 10 October 2012.
59. Mr. Cottle had prepared his report with the assistance of Mr. Knüsel, who is head of the hotel and gastronomy sector of BDO's member firm in Switzerland. Mr. Knüsel had personal experience of working as a chef in the hotel business before studying economics and corporate finance. He also worked for five years for Schweizerische Gesellschaft für Hotel kredit ("SGH") which is a partially state-owned and funded organisation set up to support the Swiss hotel sector, inter alia, by providing low interest funding. After the initial exchange of expert reports, Mr. Knüsel produced a report of his own in which he commented on various aspects of Mr. Mack's report for ESO. He was not, however, asked by the Defendants to produce a valuation of his own of the Hotel and did not do so. In due course Mr. Mack responded to Mr. Knüsel in a supplemental report.
60. As might be expected, the expert witnesses all gave careful evidence which attempted to assist the court. There were, however, obvious differences in approach between them, in many respects due to their very different backgrounds and experience.
61. Mr. Mack was an engaging witness, who drew heavily upon his personal experience and activities in the hospitality industry. His evidence tended to be somewhat anecdotal and discursive, influenced by a subjective "feel" for what might be achieved. This was exemplified by the following exchange early in his cross-examination,

"Q Do you consider that you have a good instinct … for the value of the Alpine ski hotels?

A. I have good experience because I've been active in the Alpine resorts for many years, with several customers, several destinations. Do I have a good instinct? I don't know what you mean by "instinct".

Q. Well, I think one of the points you make is that valuation is not a science but an art?

A. Correct.

Q. It is in part a matter of impression, it is in part a matter of telling a story, and the soft features that you were mentioning earlier. Do you think you have a good feel for that and what they add up to?

A. Yes … I would like to extend a little bit on this …

One day, one of my customers said, "Mr Mack, when I talk to you I have the feel that you are like somebody who is preparing a perfume". Because we spent three days together, and this is a wealthy person who wanted to sell his property, his castle, and then trying to see what's the opportunity. And at the end of the three days we walked in the forest and I was summarising what could be the various opportunities. And he came out with that.

And I found this very relevant to what I'm doing, very relevant to the value I'm adding to my customers. I'm trying to get from the seller, the buyer, from the destination, from the product, the different ingredients which will make the difference for the future. If there is a potential future. I sometimes don't recommend to create a perfume as well.

… When the odour is bad I recommend not to move forward … [but] if there is one element that has a good smell, then it is worth pursuing and seeing what can be done … And we are talking about a business opportunity here… And that is my job.

Q. Yes. Making the absolute most of the asset?

A. Making the absolute most of an asset which is worth making the absolute most [of] …"

62. In contrast, and perhaps due to his background and the limited scope of the instructions that he had received, which were essentially to provide a critique of Mr. Mack's evidence, Mr. Knüsel was inherently more conservative in his approach, and was not prepared to operate on the basis of intuition without evidence. This point was put to him in cross-examination,

"Q. I think Mr Mack has been frequently referred to by my learned friend as a management consultant, or as you say hotel consultant. Whereas you are looking, you say from experience of valuing hotels but:

"My experience of appraising hotel funding applications."

You were, how long, five years in SGH?

A. SGH, mm-hmm.

Q. Do you think that's fair? Do you think Mr Mack has a somewhat different philosophical approach to this? He is more the buyer's agent, the management consultant: I can look at this and I can turn this round. Whereas you are looking at it more: what has it done to date? That's not very impressive, I am not very impressed with this asset. Tell me if you think that's fair or not?

A. Yes, on this basis, that's fair."

63. As for the expert accountants, both were experienced, careful and impressive, but again differed in their philosophical approach. Mr. Cottle concentrated on the DCF cashflows as regards the operations of the Hotel, and plainly applied a critical eye to the detail of the Hotel's operations and its trading history. In contrast, Mr. Davies deferred to Mr. Mack in matters of property valuation and the detail of the trading prospects for the Hotel. He also cautioned that weight should not be mechanistically placed on a DCF valuation, which is heavily dependent upon the assumptions made, without sense-checking the result against the wider picture of evidence available at the time.

The "real estate" basis of valuation

64. The first, and potentially most significant valuation issue that I must resolve is whether, and if so, to what extent, there were reasonable buyers in October 2012 who would have been prepared to pay a price for the Hotel based upon the possibility that it could be converted to a condo-hotel.
65. In that regard, the evidence from the Deuber & Tromm paper to which I have already referred indicates that in October 2012 the possibility that developers might look to construct condo-hotels was being discussed in the Swiss property industry. Both Mr. Mack and Mr. Knüsel were also of the view that in principle, the legal structure of the Hotel would have permitted its partial redevelopment so as to form a condo-hotel. The legal position was set out in a letter of advice from Fidexpert to Promoroche on 24 June 2013, which confirmed that the rooms of the Hotel were registered as part of units in the form of a condominium and that such a sale would be compliant with tax and legal requirements, as the main plot supporting the condominium was dedicated to the hotel industry.
66. Importantly, however, the experts also agreed that by October 2012 there was no established history in Switzerland of successful new-builds or conversion of existing hotels into condo-hotels. Mr. Mack did not provide any examples of persons of whom he was aware at the time who were looking to invest in condo-hotels, and he accepted that he had not seen any success stories in relation to such hotels in the Alps. He even added that some projects that had been commenced in 2009 were still awaiting completion.
67. Mr Mack had referred in his expert report to an established and successful condo-hotel in Montreux, some 35 minutes drive from Villars, but he accepted in cross-examination that this was not in a mountain resort, but in a business district. As Mr. Knüsel pointed out, different considerations apply to a condo-hotel in such a location, because of the demand throughout the year from business travellers, including those who prefer to rent an apartment in a condo-hotel rather than a hotel room for extended stays.
68. It is perhaps understandable that so soon after the March 2012 referendum and the passing of the Secondary Residences Order, there might be no statistical evidence as to the existence of persons willing to invest in condo-hotels. But neither was there any direct evidence that such persons existed. Mr. Mack did not identify any such persons and his evidence was somewhat vague and speculative as to who such persons might be. For example, he referred generally to having received requests from banks who said that they had customers looking to invest in hotels notwithstanding the strength of the Swiss franc, and at one point he remarked,

"I still believe that such an object will attract a certain form of investor. Yes, it's an investor who is not risk-adverse, okay. It is an investor who will [be] looking into -- as the type of investors I've had in front of me -- who will be looking into opportunities to invest, maybe even develop a company in Switzerland, and find an opportunity to do so -- I don't want to say under the cover, but having here a whole object which they can purchase and then either hold to it, do something with it in one year, in two years, in three years."

69. In the absence of any actual evidence of there being identified investors or developers in the market for condo-hotel opportunities in October 2012, the evidence and submissions also addressed the potential attractiveness of the condo-hotel concept to a hypothetical investor who might have been in the market in October 2012.
70. In that regard, as Mr. Knüsel observed, anyone thinking about investing at the time would have had access to the Deuber & Tromm paper, which contained some cautionary statistics derived from the experience in Graubünden in the 1970s and 1980s with apart-hotels, which bore some similarities to the new idea of condo-hotels. There had been a very high failure rate for such apart-hotels in Graubünden with 74% of such hotels having had their licences revoked. Even among the apart-hotels created in connection with established hotel businesses – where the owners of the apartments could be thought to have a pre-existing attachment to the hotel - the failure rate had been 58%. Dueber & Tromm did not entirely dismiss the condo-hotel concept, but it is fair to say that from the experience with apart-hotels, they could provide no clear vision that it would be a success. They concluded that,

"Only the future can tell whether, in this heavily regulated market, projects are even possible that are interesting both to developers and operators as well as investors."

71. In evidence, Mr. Mack accepted that in October 2012 there was considerable uncertainty caused by the March 2012 referendum, and that the experience highlighted in the Dueber & Tromm paper would not have been an encouragement for anyone thinking about developing a condo-hotel. He also accepted that in these circumstances, any person seeking to make such an investment would have needed to have an increased appetite for risk,

"A. You see, the situation is the following: after the vote of Lex Weber anybody who would have written anything about alternative investments in the mountains would have come up to negative conclusions because there was total confusion. Nobody knew. I even recall a discussion with the, at that time, President of the Swiss Hotel Association, Mr Brentel, who said – because I was flagging one of our investors who said "I have understood Lex Weber; I know exactly what to do", and I said, "Oh, good, at least one person who knows". That was at the end of the year. And he looked at me and said, "Hey, nobody knows in which direction it's going to go. We're completely lost".

So it is a holding investment if you decide to invest, because nobody knew at that time in which direction it would go.

We would know that there would be restrictions. We talked about them, completely agreed. Which ones and how much it would be, we did not know.

MS BINGHAM: But a purchaser going ahead with this, goodness, he'd have quite a high-risk tolerance profile wouldn't he?

A. It is a risk -- how do you say this? Not risk-adverse, the opposite. The risk -- okay, he likes risk, yes."

72. Putting aside for the moment the question of appetite for risk, one of the first questions that a reasonable developer or investor would have asked when considering whether to make a bid for the Hotel on the basis of conversion to a condo-hotel would have been whether there would be a demand from prospective buyers of the serviced apartments. Mr. Knüsel saw that as the "ultimate" question, and Mr. Mack did not disagree,

"Q. I mean, put simply, Mr Mack, a developer is not going to rush to embark on a building programme of the sort that you are envisaging if he is not confident that he's going to be able to sell the apartments at the end of the day, is he?

A. If we are talking about a normal investor, I agree with you."

73. In that regard, and echoing the Deuber & Tromm paper, the experts were agreed that the major market for sales of serviced apartments would be foreign buyers. Demand for serviced apartments in the domestic Swiss market was largely non-existent. Mr. Mack also accepted that the serviced apartments in a condo-hotel in Villars would not be attractive to any buyers looking for a significant financial return on their investment. He expressed the view, however, that there might be interest from foreign buyers who were happy just to protect their money without concern over any return, as well as buyers who wanted to cover the cost of the loan taken out to acquire the apartment and the operating costs.
74. Although the Swiss franc was a strong currency in 2012, Mr. Mack pointed out in his report that the Swiss National Bank had taken steps to ensure that the Swiss franc was held at about CHF 1.2 to €1, and he repeated in his evidence that his experience at the time was that there were some investors from countries where the currency was losing value who were interested in placing their money for a certain period into properties in Switzerland, where there was stability and political safety.
75. That said, Mr. Mack accepted in cross-examination that if he had been called upon to advise such a prospective purchaser of the Hotel in 2012, he would have carried out a formal viability study of the likely demand for the finished apartments. He had not, however, done any such study for the purposes of his expert report, and he was not able to point to any examples or data showing that there was a specific demand in October 2012 for purchase of serviced units as opposed to any other type of residential properties in Switzerland. Mr. Mack also accepted that at the time in 2012 there was a surfeit of ordinary residential properties for sale in Villars which did not have any of the restrictions that would have been imposed upon serviced apartments in a condo-hotel. Such other properties would (at the very least) have presented an alternative investment opportunity for any foreigners looking to acquire an apartment in Villars.
76. A further important question that a prospective purchaser of the Hotel who was thinking about the condo-hotel idea would have asked, would be whether there was any demand among visitors and tourists to rent an apartment in Villars as opposed to staying in a hotel. This would have been relevant to any potential buyer of a serviced apartment who would wish to assess whether there would be a rental stream during the periods when he was not entitled to be in occupation. It would also have been directly relevant to a prospective purchaser of the Hotel who would share in that rental stream.
77. Mr. Mack accepted that this would have been a critical consideration, but the problem which he acknowledged was that in the years prior to 2012, tourist numbers had been down and a number of other hotels in Villars had closed. Moreover, as I have indicated, even though the Hotel was the only five-star hotel left in Villars in October 2012, it was only running at about 50% occupancy. Though exhibiting the understandable loyalty of a local to the resilience of the inhabitants of the Canton of Vaud, Mr. Mack's evidence would not, in my judgment, have provided much reassurance, still less confidence, to a prospective purchaser looking for solid evidence of a real demand for such serviced units in October 2012,

"Q. Given that the owner can only occupy his serviced unit for three weeks during high season, it will be critical to any prospective investor to establish that there is a rental market for the other 49 weeks of the year, won't it?

A. Yes.

Q. But could a purchaser of the site in October 2012 really satisfy himself, let alone anyone else, that there was going to be a steady pool of people wanting to rent these units?

A. Well, there was a pool of people which were willing to come to Villars and have the opportunity to go to hotel rooms with services coming from hotels. Now, a condo type of property would be very similar, maybe with some reduced services, but I would not say that there is no market. There is an existing market. There are people who are going to Villars at that time and who are looking to rent and take advantage of a service.

Q There are some people going but, I mean, the hotels are dropping like flies. The hotels are closing, Mr Mack?

A. Yes. It's all a question how you look at it. I'm from this country, I'm from there, and I've seen ups and downs in this part of the world, Canton de Vaud … In the 90s we have been through a big recession in this part of Switzerland … So we had to find resources in ourselves to find solutions. And then the government participated, companies participated, and we could find solutions … So my impression here is, yes, yes, we had closure of hotels but I see this region doing well and therefore I see them looking for a destination like Villars again. So I'm not killing Villars. I cannot, because the region tells me different and the economy tells me different. So the oldest destination in the region, which is Villars in the mountains, is not going to die, and is going to rebound because there is a resilience which exists in this part of Switzerland."

78. There were other uncertainties that would have come into any evaluation of the demand for serviced apartments in a condo-hotel in Villars in October 2012.
79. There was, for example, a lively debate in the evidence and submissions as to the subjective attraction (or otherwise) of owning an apartment in a condo-hotel, subject to restrictions on furnishing and occupation. Ms Bingham QC suggested, for example, that no-one in their right mind would contemplate buying a supposed "luxury unit" which might not be fitted with a fully-equipped kitchen, where the owner could not even choose the tiles and finishes, or make the accommodation available to his friends to stay in except on the basis that they would pay the standard tourist rate. Mr. Mack, on the other hand, countered that some buyers might well be attracted by an apartment that would come together with the facilities and services of an attached hotel, such as access to a swimming pool and spa, the restaurants and laundry.
80. There was also a similar debate about the attractions of Villars itself. Ms Bingham QC suggested that there was "not a big shopping scene in Villars", so that, for example, there was no Hermés store at which visitors could "flex their credit cards". Foreign visitors would, Ms Bingham QC suggested, also have been disappointed not to find any Michelin-starred restaurants in Villars. She pointed out that, for example, Gstaad had three, together with six restaurants listed in the Gault Millau guide. Mr. Mack agreed that Villars did not cater for the type of customer who might frequent Hermés, but he extolled the rival virtues of the individual shops and boutiques of Villars.
81. The clear impression gained from these exchanges was that Villars was, as Mr. Mack described it, an "old and traditional destination" which would have attracted the well-established families of the region, having medium to high income, rather than attracting the high-net-worth foreign individuals who would have been at home in the very different atmosphere and attractions of Zermatt or Gstaad.
82. The particular venue for an alpine holiday is of course a matter of personal taste, and I certainly appreciate the understated attractions of Villars that Mr. Mack described. But in my judgment this evidence indicated that any prospective purchaser of the Hotel in October 2012, who would have understood that the success of any condo-hotel project would be likely to depend upon the numbers of foreigners seeking to protect their money by investing in an alpine apartment in Switzerland, would also have appreciated that any such overseas investors would have had a real choice of other investment properties and other nearby locations vying for their attention. Moreover, for many in the most affluent category of foreign investors, the merits of owing a personalised and unrestricted apartment, near to the many amenities, the bright lights and the glamour of Zermatt and Gstaad, would be a far greater lure than a serviced apartment in a condo-hotel in Villars.
83. There was a further uncertainty which Ms. Bingham QC raised, concerning the requirement in the PPE Rules and Article 648 of the Swiss Code of Obligations governing the relationship between Promoroche and the owners of the 30 existing Chalet Royalp apartments, that any change of use of any of the "lots" in the Hotel (which included the restaurants and conference rooms) would require the consent of a double majority of more than 50% in number and 50% by ownership shares of the Hotel and apartments. Ms. Bingham QC suggested to Mr. Mack that the owners of the existing Chalet Royalp apartments would be very unlikely to agree to any conversion of the Hotel from a five-star hotel to a condo-hotel that would be bound to diminish its status and create a second set of apartments associated with the Hotel which would be for sale. Mr. Mack had not considered this issue in his reports, and his response was to suggest that if the Chalet Royalp owners were faced with the prospect of closure of the Hotel as the alternative, they might be forced to agree. This said little about how the owners might respond in the scenario which Mr. Mack contended actually existed in October 2012 – namely of a viable Hotel whose business was actually looking up. But in any event, I think that the significance of the issue was not precisely how it might be resolved, but simply that it would have presented a further complication and potential obstacle to an investor looking to make a bid to buy the Hotel on the basis of a plan to convert it into a condo-hotel.
84. Pulling these various threads together, I do not consider that Mr. Mack's evidence can be a reliable foundation for a conclusion that in October 2012 there would actually have been any demand for the Hotel from any reasonable purchaser on the basis of a plan to turn it into a condo-hotel.
85. I have little doubt that if asked at the time, Mr. Mack might well have considered promoting the condo-hotel idea to one of his clients looking for an investment opportunity. Mr. Mack was plainly an enthusiastic adviser who saw it as his role to be innovative and present opportunities to his clients,

"Q. If you had been called in as a management consultant to advise a prospective purchaser would you have advised him to do this conversion that you are talking about?

A. If this is an opportunity which I would have identified, yes.

Q. Would you have?

A. Well, in this context, yes.

Q. Yes. And your advice, it wouldn't depend on the investment objectives of the purchaser?

A. Well, as I said early on with the perfume, the purchaser would be one of these. Now, we don't know who's the purchaser at that stage, yes, in this context, so it is my role to look at all the type of opportunities which would exist on the market and in this case the going concern is a hotel as well as a real estate redevelopment or transformation."

86. That, however, is not the question that I have to decide. As Hoffmann LJ indicated in the extract from IRC v Gray to which I have referred, what the court has to decide, as a retrospective exercise in probabilities by reference to the real world, is whether there was a demand for the property in question and, by reference to a reasonable buyer who is, "assumed to have behaved reasonably, making proper inquiries about the property, and not appearing too eager to buy", what price would have been offered and accepted.
87. The question that I have to decide is therefore not whether Mr. Mack might have formulated and presented the condo-hotel idea as an opportunity to one of his clients. It is whether, in October 2012, any such client, behaving reasonably, making proper inquiries, and not being too eager to buy, would have been prepared to make an offer on the "real estate" basis suggested by Mr. Mack.
88. In that respect, for the reasons I have set out, I conclude that the evidence gives me no reason to believe that in October 2012 any reasonable person fitting Hoffmann LJ's description would have seriously contemplated buying the Hotel on the basis of a plan to convert it into a condo-hotel. Any inquiries by such a person would have revealed that there was no successful track-record for such properties, the ink was barely dry on the Secondary Residences Order, and there was very considerable uncertainty about whether, and if so how, the property market would develop. There was also no evidence of any objective data that might have suggested a demand for the particular type of serviced apartments that would be created in a condo-hotel; and there were many other more obvious alternative investment opportunities for foreigners in the locality and surrounding resorts.
89. As I have indicated, Mr. Mack accepted that anyone looking to make such an offer for the Hotel in these circumstances would have needed to have an appetite for risk. In my judgment, this significantly understated the position. I think that it would have been apparent to any reasonable prospective purchaser in October 2012 that planning to convert the Hotel and run it as a condo-hotel would have been taking a very substantial risk indeed. That does not appear to me to be an investment that would fit the risk profile of Hoffmann LJ's hypothetical reasonable buyer. Moreover, although Mr. Mack speculated that he might recommend a condo-hotel project to a foreign investor seeking protection for his money in Switzerland and who did not want to make the investment in human resources necessary to run a hotel business, I also do not think that an investor who was cautious enough to seek to protect his money by investing in Switzerland would be attracted by the high-level of risk involved.
90. Still less, to my mind, does the very nature of the condo-hotel project fit the profile of a "trophy buyer". There was only very sketchy evidence of possible "trophy buyers" being interested in Villars in October 2012 at all, and since, by definition, they would be seeking the prestige of owning a luxury hotel, I fail to see how they would be likely to be interested in the comparatively untried and considerably less glamorous idea of an apartment project run on condominium lines.
91. Accordingly, I reject the argument that the appropriate basis for valuation of the Hotel is a "real estate" valuation.
92. I should also deal with an argument advanced by the Claimants, perhaps in response to a suggestion from me early in the trial, that even if I did not conclude that the real estate basis of valuation was the primary basis for valuation of the Hotel, I might nevertheless adopt a "blended" valuation on the basis that a reasonable purchaser making a bid on the basis of a DCF valuation might be prepared to add something to his bid to reflect the possibility that he might be able to convert the Hotel to a condo-hotel in the future.
93. Mr. Mack did not suggest such an approach, and although Mr. Cottle did not entirely dismiss such an idea out of hand when I suggested it to him, he was clear that it could only be for an individual buyer to decide to add such an amount on an entirely subjective basis, and he could not ascribe very much additional value to it.
94. On reflection, I accept Ms. Bingham QC's submission that such an approach would not be appropriate. I have found that there is no good evidence to suggest that a reasonable purchaser would have contemplated making a bid for the Hotel in October 2012 on the basis of a high-risk plan to convert it to a condo-hotel. As such, there can be no logical basis for assuming that the reasonable purchaser who was merely intending to continue to run the Hotel in its current form would have been prepared to increase his bid on account of what he would regard as an unwanted opportunity. I also agree with Ms. Bingham QC that there would be no sound basis upon which I could arrive at a number representing any such additional bid value.
95. That conclusion is sufficient to dispose of this part of the case, but in light of the fact that the detail of Mr. Mack's real estate valuation was subjected to extensive challenge by Ms. Bingham QC, I should briefly express my views on the two most significant points that she raised, namely (i) the size (area) of the Hotel that could be converted into serviced apartments, and (ii) the price per m² that could be obtained for sale of such apartments.
96. Mr. Mack's valuation on a real estate basis was derived on a relatively simple basis from a starting assumption that the Hotel's total surface area was 12,160 m². That figure was derived from a brochure produced in relation to the Hotel by Jones Lang LaSalle ("JLL") which set out in tabular form what it described as the "Surface sqm" of the various levels of the Hotel. The brochure also contained an express disclaimer that the descriptions and measurements were for indicative purposes only, and prospective purchasers were invited to carry out their own measurements.
97. As I have indicated, Mr. Mack proposed that the 63 hotel rooms and suites, together with the conference centre and cinema should be converted into apartments. This essentially would involve the conversion of the entirety of the first to sixth floors of the Hotel. Using the numbers from the JLL brochure, this would have involved a total of about 6,800 m² being converted.
98. Mr. Mack then observed that, "Presently, the total surface area [of] the 6 floors where the rooms are located is over twice that of the actual rooms." He then made an assumption that of the converted space, 60% (4,080 m²) would be serviced apartments and 40% (2,720 m²) would be "left for common areas".
99. Mr. Mack then adopted a sale price of CHF 17,000 per m² for the finished apartments. This figure was derived by him from the reported asking price in 2015 for one of the Chalet Royalp apartments (Apt 21D which was being offered for CHF 16,810 per m²) and a reported sale of another Chalet Royalp apartment in 2012 for CHF 17,000 per m². Multiplying the saleable area of the finished apartments by the assumed selling price gave a total value of CHF 69.36 million for the 4,080 m² of finished apartments. He then deducted the "transformation" costs which he calculated by applying CHF 2,400 per m² (derived from his own experience) to the total area of 6,080 m² which he had assumed would be converted, giving a total of CHF 16.32 million. Deducting the costs (CHF 16.32 million) from the total value of the finished apartments (CHF 69.36 million) gave a real estate value of CHF 53.1 million.
100. The accurate dimensions of the Hotel had not been raised as an issue in the meetings of joint experts, or commented upon by Mr. Knüsel in his report, or raised by the Defendants in their opening. So it came as something of a surprise when Ms Bingham QC announced during the cross-examination of Mr. Mack that there had been a "terrible mistake" or a "terrible misunderstanding" on his part in relying upon the JLL brochure as giving the true size of the Hotel. Ms Bingham QC contended that the Hotel was actually far smaller, and that the JLL brochure gave the dimensions of both the Hotel and the 30 Chalet Royalp apartments.
101. Unsurprisingly, Mr. Mack was not able to deal with this new contention on the spot whilst in the witness box, and it led to a considerable amount of time being spent subsequently by the lawyers on both sides attempting to agree the true size of the Hotel by reference to floorplans for the Hotel and Chalet Royalp apartments, together with a document entitled "Calcul des Lots" which was said to show the accurate dimensions of the various rooms and spaces in the Hotel and the Chalet Royalp apartments for the purposes of calculating the allocation of lots for PPE purposes.
102. As I observed at the time, I do not think that this method of springing an attack upon Mr. Mack without warning in the course of cross-examination was remotely satisfactory. Had the point been appreciated and raised earlier, a considerable waste of time, cost and effort could have been avoided, because the parties would have been able to reach agreement on the dimensions of the Hotel. As it was, no such agreement was reached during the course of the hearing, and it was only afterwards that the parties were able finally to agree upon the actual dimensions of the Hotel and to put the agreed facts to Mr. Mack in writing for his review and comments.
103. The agreed position finally arrived at between the parties was as follows:

i) The total surface area of the Hotel, including the terraces, balconies and cellars designated as part of the Hotel, but excluding the Chalet Royalp apartments, is 12,210.57 m².

ii) The total surface area of the Hotel excluding the terraces, balconies and cellars designated as part of the Hotel is 10,355.05 m².

iii) The total internal surface area of all of the internal areas, excluding common areas, designated as part of the Hotel is 7,507.15 m².

iv) The total surface area of all the common areas designated as part of the Hotel is 2,847.9 m².

v) The total internal surface area of the 63 Hotel rooms is 3,205.65 m². This does not include the common areas or any balconies associated with the Hotel rooms.

vi) The total internal surface area of the cinema is 77.6 m² and the total internal surface area of the conference centre is 530 m².

vii) Therefore, the total internal surface area of the 63 Hotel rooms, the cinema and the conference centre which Mr. Mack had proposed in his real estate valuation would be converted into serviced apartments is 3,813.25 m². This does not include any balconies, terraces or common areas associated with these rooms.

viii) The existing 63 Hotel rooms have balconies with an aggregate surface area of 448.1 m². The existing conference centre has a terrace which covers an area of 117.6 m². It is not possible to ascertain the surface area covered by the common areas surrounding the existing Hotel rooms, cinema or conference centre.

104. Given that these figures would indicate that the area of the Hotel that could be converted into serviced apartments would be reduced from that which Mr. Mack had assumed in his first report, it is perhaps surprising that Mr. Mack's written response in an "amendment report" was to suggest that his overall valuation of CHF 53.1 million should be slightly increased to CHF 53.3 million.
105. Mr. Mack reached this conclusion by first assuming that the "sellable space" of new apartments would be "fixed" at the 3,813.25 m² which was the internal area of the existing 63 Hotel rooms, the cinema and the conference centre. He thought that this would give a revised total sales price of CHF 64.1 million on the basis of a selling price per m² of CHF 16,810 per m².
106. Mr. Mack then assumed that between 25% and 60% of the 2,847.9 m² common areas (i.e. between 711.98 m² and 1,708.74 m²) would be required to be converted. When added to the internal "sellable space" of 3,813.25 m², he suggested that this would give a total area to be converted of between 4,525.23 m² and 5,521.99 m², which at a cost of CHF 2,400 per m² would give transformation costs of between CHF 10.8 million and CHF 13.2 million.
107. Mr. Mack therefore concluded that his revised real estate value would be between CHF 53.3 million and CHF 50.9 million (CHF 64.1 million minus between CHF 10.8 million and CHF 13.2 million).
108. So far as the question of the dimensions of the Hotel are concerned, I think that it is apparent that Mr. Mack had not made the "terrible mistake" of which Ms. Bingham QC accused him in cross-examination. The JLL brochure was not selling the Hotel and the Chalet Royalp apartments, it did clearly distinguish between the two, and the measurements it gave were limited to the Hotel. It is also clear that in his amendment report, Mr. Mack assumed only that the internal 3,813.25 m² of the 63 rooms, the conference centre and the cinema could be converted and sold (i.e. excluding balconies, terraces and cellars).
109. The main reason why Mr. Mack's revised overall valuation had hardly changed was because he made a significant reduction in transformation costs. In that regard, it is not apparent to me why Mr. Mack arrived at his revised assumption that the proportion of common parts relating to the areas of the Hotel to be transformed should be between 25% and 60% of the total common parts, or why Mr. Mack then chose a valuation based upon the lower percentage. Even approaching matters relatively simplistically, according to the agreed numbers, and excluding common parts, the internal area of the top six floors of the building which would be converted would be 3,813.25 m² out of a total internal building area of 7,507.15 m² - i.e. about 50%. This would tend to suggest that the proportion of common parts to be converted should be nearer the upper rather than the lower figure for the costs of transformation.
110. So far as the question of the sale price of the finished apartments is concerned, Ms. Bingham QC was critical of Mr. Mack for adopting a sale price of CHF 17,000 in his report based upon a reported sale price of CHF 17,000 for a Chalet Royalp apartment in 2012 or the asking price of CHF 16,810 per m² for Chalet Royalp Apt 21D in 2015. Ms. Bingham QC contended that these were not true comparables, because the Chalet Royalp apartments were not subject to the same restrictions that furnished apartments in a condo-hotel would be subjected to in order to comply with the Secondary Residences Order.
111. When pressed on this point in cross-examination, Mr. Mack accepted that (even ignoring the possibility that prices might have moved between 2012 and 2015) the sale price that might realistically be expected for the serviced apartments was less than for the Chalet Royalp apartments,

"MS BINGHAM: … let us do the comparison with the original 30 apartments that are here in this complex because, Mr Mack, they have the advantages that you have mentioned: they have got the restaurant on tap. They have got the spa, they have got the pool, they can actually call up room service, can't they? Okay, you're the purchaser, you have got the same pot of money, are you going to pay more for one of the 30 apartments … or one of these non-individualised … serviced units?

A. No, the logical answer is that you would be willing to pay less."

112. Mr. Mack accepted that same point again later in his cross-examination, indicating that he had balanced the higher price which a Chalet Royalp apartment would command by choosing what he described as "conservative assumptions" as to the area of the Hotel that could be converted. He then elaborated upon his methodology,

"Q. My point is that [Chalet Royalp Apt 21D] it is not a comparable. My point is that it is not truly a comparable because it's a luxury no strings attached mainstream residential apartment and it's not a serviced unit. That is my proposition.

A. Well, I had to have a starting point.

Q. Yes.

A. So I chose to identify a range within the market which is a secondary residences range of prices which I had available and I came to this between 16,000 and 17,000 per square metre. That was my starting point. And then I had two ways of leveraging and, you know, two elements on which I could influence my calculation: so either I consider both as variables, the price per square metre and the square metres and the opportunities within the building or, and I found this a bit confusing, so I decided I keep one as fixed which is the price per square metre and then I have this element of variable which is, what is the opportunity within the building for transformation, for other business opportunities?

Q. I understand your methodology, but I do want us to be clear, I just want you to put the spotlight on the rate for a minute because in this part of the examination I am just asking you about the rate. Do you accept that it is too high because you are not comparing like with like?

A. Yes."

113. The fundamental problem with this evidence is that Mr. Mack appears to have chosen to leave unchanged one of his two variables (price per m² of the finished apartment) on the basis that he thought he was adopting conservative figures for the area of the Hotel that could be converted. But, even if leaving one variable unchanged might have been appropriate, it seems that Mr. Mack's assumption of the area of the Hotel that could be converted into apartments (4,080 m²) was not in fact "conservative", but actually slightly greater than the agreed dimensions of the Hotel would have permitted (3,815.25 m²). The consequence is that Mr. Mack's valuation necessarily failed to take any account of the factor that he clearly accepted, namely that one could not assume that a serviced apartment in a condo-hotel would sell for the same price per m² as an existing Chalet Royalp apartment.
114. On that matter, there was, of course, no actual evidence as to the prices that could actually be obtained for serviced apartments in a condo-hotel in Villars in 2012, because there were no such developments at the time. Equally obviously, attempting to draw direct comparisons between such apartments in a condominium and independent chalets or other secondary residences in the area would be difficult, because the two types of property are very different.
115. In that regard, in his expert report, Mr. Knüsel had referred to two comments in the SPG valuation report compiled in December 2013. In a section commenting generally on the supply of hotel accommodation in Villars, SPG had stated,

"In addition to the hotel accommodations, the accommodation capacity equally includes a large number of secondary residences. Indeed, being located a relatively short driving distance from the wealthy Swiss "Riviera" and the cities of Lausanne and Geneva, we note a large number of recent chalets and apartment developments. Prices per sqm for these luxury developments can reach CHF 20,000 per sqm. Generally, prices for condominium apartments range from CHF 6,000 to CHF 11,000 /sqm."

116. Mr. Knüsel referred to this passage in his report as illustrating the significant differential between the value of luxury chalets and apartments on the one hand, and condominium apartments on the other. He also reiterated that condominium apartments subject to the occupancy restrictions of the Secondary Residences Order would be likely to result in a lower price than an unrestricted apartment. The clear inference which Mr. Knüsel sought to draw was that any apartments in a condo-hotel subject to restrictions would be worth very much less than the CHF 17,000 per m² figure that Mr. Mack had used in his valuation.
117. In cross-examination, Mr. Anderson QC pointed out to Mr. Knüsel that at the end of the SPG report, SPG provided a short alternative real estate valuation of the Hotel in 2013 as follows,

"In reference to previous discussions and documents provided by the owner, there is the alternative to proceed with a condominium sale of all rooms. In this matter and as previously maintained, the future conditions of the Lex Weber will have an impact on the feasibility of this scenario. The achievable sale price for all 63 rooms is expected to be higher than the value generated by the hotel operation. Indeed, a recent sales comparable of an apartment in the residence show a price of more than CHF 17,000/sqm reflecting the fact that a sale to foreign buyers is allowed and also the existing amenities in the complex (swimming pool, spa, catering etc). Considering a total condominium surface of 3,429.80 sqm (calculated from the provided information) for the 63 rooms and an average sales price of CHF 15,000/sqm, a value of more than CHF 51 million could be expected."

118. Mr. Anderson QC suggested to Mr. Knüsel that this showed that whilst the prices for simple condominium apartments in the locality might range between CHF 6,000 and 11,000 per m², it was reasonable to assume that apartments in a luxury condo-hotel redevelopment of the Hotel might command a higher price in the region of CHF 15,000 per m². Mr. Knüsel did not agree. He pointed out that it was not possible to detect the basis upon which SPG had arrived at their figure; and he did not agree that the price range of CHF 6,000 to CHF 11,000 per m² was for condominium apartments that were subject to the restrictions envisaged by the Secondary Residences Order.
119. I consider that Mr. Knüsel was probably right in his comments on the SPG report. By December 2013 it is most unlikely that there were apartments in condo-hotels near Villars that were subject to the restrictions under the Secondary Residences Order that had only come into force at the start of that year. Still less do I understand it likely that there would have been a market in such properties. It therefore seems to me far more likely that the generalized comments of SPG as to the price range of CHF 6,000 to CHF 11,000 per m² in the earlier passage in its report were directed at existing condominium apartments (without restrictions) in comparison to "upscale chalets and apartment developments" (also without restrictions). I also note that the SPG valuation at CHF 51 million did not take any conversion costs into account.
120. Accordingly, having regard to the fact that Mr. Mack appears not to have varied his figure of CHF 17,000 per m² to take account of the restrictions under the Secondary Residences Order in comparison to the price per m² for unrestricted Chalet Royalp apartments, and there is no information as to where SPG obtained their figure of CHF 15,000 per m² from, I simply do not think that I have any reliable evidence as to what would, in October 2012, have been the likely sale price per m² of serviced apartments in a condo-hotel based upon the Hotel. My distinct impression, however, is that the figure per m² which would likely have been placed upon such apartments in October 2012 would have been materially lower than either CHF 17,000 or CHF 15,000. In that regard, it should also be recalled that in March 2012 THED had given a real estate value of the Hotel based upon a sale price of CHF 15,000 per m² for apartments which did not take into account the restrictions which were subsequently introduced by the Secondary Residences Order.
121. In all the circumstances, and in addition to my conclusion that there is no reliable evidence to suggest that in October 2012 any reasonable purchaser would have contemplated bidding for the Hotel on the basis of a plan to turn it into a condo-hotel, I do not in any event think that I can accept the figures put forward in Mr. Mack's real estate valuation of the Hotel.

The DCF Valuation

122. I therefore turn to consider the rival DCF valuations of the Hotel.
123. The purpose of a DCF analysis is to estimate the money an investor would receive from an investment using future cash flows which are adjusted (discounted) for the time value of money. The future cash flow is made up of the cash flows within the determined forecast period (typically 5 or 10 years) and a continuing value (the terminal or residual value) that represents the cash flow stream after the forecast period.
124. The first step in a DCF analysis is to estimate the entity's cash flow growth. The valuer usually takes the immediately preceding twelve months' cash flows and then estimates the rate of growth year on year of these base year figures over the forecast period.
125. The second step is to determine the appropriate discount rate for the forecast period and then calculate the current value of the future cash flows by applying a formula based upon the discount rate to each yearly cash flow to arrive at the net present value of the future cash flows for the forecast period.
126. The third step is to calculate the terminal value. It is calculated by taking the projected cash flow for the final year of the cash flows and dividing it by the capitalisation rate, which is the discount rate less the long-term growth rate of the economy (typically taken as 1%). That sum is then discounted back to present day values using the discount rate.
127. The final step is to add the discounted cash flows to the discounted terminal value to arrive at the DCF valuation.
128. It was emphasized on a number of occasions in the expert evidence that valuation is not a precise science and that a valuation based upon a DCF valuation will incorporate a model that has a number of variables, many of which are inter-related with each other, and some of which depend upon the subjective judgment of the valuer.
129. The point was put to the experts in a variety of ways in the evidence. For example, Mr. Mack was asked,

"MS BINGHAM: I think we can agree, Mr Mack, that a valuation is a rich tapestry of threads. Yes?

A. Of, sorry -- threads, yes, yes, yes, yes.

Q. Rich tapestry of threads. For instance if you are very conservative in your revenue growth assumptions, it might be appropriate to adopt a relatively low discount rate. Yes?

A. I don't follow you.

Q. What I mean is you have to balance all the constituent parts of your valuation. For instance, if you are very aggressive in your revenue assumptions, it might be appropriate to have a sort of … cold shower by a higher discount rate. Do you follow me? You have calibrate it properly.

A. Agreed."

130. When this exchange was put to Mr. Cottle he agreed. He was also asked,

"Q. …you are without doubt aware of the well known dictum of Lord Justice Balcombe in Craneheath v York Montague [2001] Lloyds Law Rep 348 at 350 - you might recognise the quote rather than the citation:

"Valuation is not a science, it is an art and the instinctive feel for the market of an experienced valuer is not something that can be ignored."

Is that something you would agree with?

A. I've heard that term used on a number of occasions, in fact I think I have probably used it myself in the past. I would qualify that though, it's not all about art, it cannot all be about a feel for something, it has to have some foundation in terms of fact, in terms of the numbers, but certainly you would expect to make judgments and judgments are potentially more art than science in some cases."

131. The net result is that when altering individual variables and inputs in a DCF model, a valuer needs to be careful not simply to consider each variable or input in isolation, because this risks arriving at an unreasonable result. At the end of the exercise the valuer needs to stand back and review the overall result. This point was perhaps put most vividly in cross-examination by Mr. Davies,

"A. … the really important thing here is -- certainly with discounted cash flow valuations of this type -- there's loads of assumptions, as the court has heard, on interest rates, marketing costs, et cetera. And the danger is, individually, each of those might sound reasonable, but the bottom line is if you are walking through a wood -- and you take individual [assumptions] -- before you know it you can stand up and you're in a very dark place indeed. And what you have to do is stand back and say: do these individual assumptions get me to a figure that I can back up by other evidence that was available at the time?"

132. Mr. Cottle also accepted that a valuer needs to look at a DCF valuation in totality, and added,

"It has to make sense. At the end of the day you have to have assumptions that are broadly consistent with each other and you make judgments around things like the discount rate having regard to what assumptions you've used."

133. In this case there were a number of differences between the experts at each stage of the DCF valuation process. Some of those differences led to a greater divergence in the final valuation than others, and having regard to the points that I have just made about the nature of the process, I will concentrate upon the main issues having such a material impact upon the final DCF valuation. These were,

i) the appropriate revenues and expenses to be used to generate the cashflows of the Hotel business over the main forecast period. The main differences between the parties related to (a) revenues from rooms, food and beverages and the spa, and the associated staff costs and administration expenses, and (b) PPE expenses (expenses required to be paid by the Hotel under the arrangements with the owners of the Chalet Royalp apartments);

ii) the treatment of capital expenditure (CAPEX) in the cashflows; and

iii) the appropriate discount rate and whether it should be applied to pre-tax cashflows or post-tax cashflows.

Revenues and costs

134. At the first stage – cash flows – in general terms the main difference between the experts was that Mr. Mack assumed that the net operating profit (or EBITDA) could be increased year on year more quickly and to a greater level over the first six years of the forecast than Mr. Cottle, and that such year on year increase could be maintained for longer. So, for example, Mr. Mack was of the opinion that starting from a base of CHF 408,232 in 2012, the EBITDA could be expected to more than double to CHF 881,095 in 2013, and then continue to increase to about CHF 1.5 million in 2014, CHF 2.24 million in 2015 and CHF 2.68 million in 2016. His projected rate of increase then began to slow and the EBITDA reached 2.86 million in 2018. In comparison, Mr. Cottle's EBITDA figures commenced from a lower base of CHF 662,100 in 2013, rising only to CHF 978,200 in 2014, about CHF 1.3 million in 2015, CHF 1.65 million in 2016, and reaching about CHF 2.34 million in 2018.
135. Looking at the component elements of these figures, the two experts were not significantly at odds over their assumptions as to the increased occupancy rates that could be achieved: Mr. Mack forecast an increase in occupancy rates from 2013 to 2016 (inclusive) from 52% to 58.5%, whilst Mr. Cottle's forecast was an increase from 53% to 59%. The two experts were, however, some distance apart as to the prices at which such rates could be achieved. This can be illustrated by the respective figures for "RevPAR" or "Revenue Per Available Room" which is a better guide to performance than occupancy rates alone, since occupancy rates can generally be increased by lowering rates. In this respect, Mr. Mack assumed a RevPAR of CHF 274 for 2013, rising to CHF 362 in 2018, whereas Mr. Cottle's comparables were CHF 211 for 2013, rising to CHF 291 for 2018.
136. Mr. Mack's report accepted that the latitude for a substantial increase in room rates was restricted by the fragile economic recovery and the strength of the Swiss currency in 2012, so that his predicted increase in RevPAR was tied to his idea that the Hotel would be "repositioned" in the market as a health and wellness destination to tourists from Switzerland and abroad, with a spa that would be marketed locally and regionally as a weekend destination. Mr. Mack coupled these plans with a "focus on lean operations" which amounted to an assumption that the Hotel would be run more efficiently to industry standards, and a plan to reduce staff costs until at least 2015 (from CHF 4.3 million to CHF 4.17 million) by hiring more seasonal staff during the high season and reducing what he viewed as excessive staff levels during the low season.
137. The result of this "repositioning" and increased efficiency measures would, according to Mr. Mack, have been a 46% increase in both food and beverage and spa revenues between 2013 and 2016. Mr. Mack suggested that there would not need to be more than a few additional covers in the restaurants for lunch and dinner, together with bookings for spa treatments to increase what he accepted were very low restaurant and spa occupancy rates in 2012.
138. These revenue growth assumptions were strongly attacked by Mr. Knüsel in his report as being the type of bullish advice that Mr. Mack might have given to a prospective owner of the Hotel if engaged to act as a hotel consultant. He suggested that they were an over-optimistic assessment of what could sensibly be achieved given the limited market for fine dining in Villars and the fact that the spa was already offering the type of packages and taking the type of marketing initiatives that Mr. Mack suggested. For the same reasons, Mr. Cottle based his more conservative DCF forecast on an assumption that revenues from the spa and from food and beverage operations, together with staff costs, would increase at a similar rate to the increase in hotel room revenues.
139. Mr. Mack was closely cross-examined in relation to these issues. The following exchanges indicated the role that Mr. Mack saw for himself in providing a valuation,

"Q. It is, but what you are trying to help the court with is what the reasonable purchaser would have paid in 2012. The proposition I'm putting to you is that it's absolutely legitimate to have optimistic forecasts but a purchaser isn't going to pay up front for a product which isn't already there. He's not going to pay full whack just for the potential; he's going to discount the price to reflect the risk inherent in the possibility that those forecasts won't be met.

A. Well, the purpose of a valuation is to demonstrate – at least this is what I'm hired for by my customers in 100 per cent of the cases -- is for them to understand what can I get from this property? What does this property have in her as potential?"

And later,

"… Here, this for me is the realistic valuation. This is not the optimistic, this is the realistic. Because if I would have come up with an optimistic, I would have come up with much more radical changes in this hotel. But here I've applied one change and the rest is normal progression.

MR JUSTICE SNOWDEN: So you would say that if you factor in what can be done with the hotel and reduce it back to net present value, that provides a ceiling --

A. Yes. That provides a ceiling, exactly.

MR JUSTICE SNOWDEN: But then your purchaser would try, presumably, to pay as far below the ceiling as possible.

A. That is then part of the negotiations which are taking place. This is a normal process and you are getting a range of values for a property. This is how it works. This is exactly what we have here. And then how much the property is really purchased, that is ... I would almost say it's another story."

140. Against that background, Mr. Mack gave an enthusiastic account of how he would generally go about seeking to increase revenues and reduce costs so as to address underperformance in a hotel. He was also critical of the results that were being achieved by the Hotel in October 2012. But although Mr. Mack had visited the Hotel in the course of preparing his report for this case, he was not clear as to the detail of what the Hotel had offered in 2012, and he could not give any specific proposals as to how the significantly increased performance that he envisaged in his DCF forecast would be achieved.
141. So, for example, in relation to the spa,

"Q. I want to ask this: your projections assume this 46 per cent increase. Is it that you will derive this extra spa income from existing hotel guests or would you be opening the spa to non-residents, for instance?

A. I would be looking at all types of alternatives and opportunities, obviously, to come to that result. And yes, partly from guests within the hotel and partly looking into whether I should also open it again to business coming from outside.

...

Q. Do you happen to know whether the policy of refusing entry to non-hotel guests was in operation as at October 2012?

A. I know it was taken, I don't know if that was in operation at that time.

Q. If I ask this: how can you value the hotel on the basis that you will increase the Revenues by 46 per cent over a five year period if you don't actually know what was going on as at 2012 and who was being allowed in and who wasn't?

A. Because I look at it, again, as a new buyer and I say: what's the potential? So the rules which have been put in place by my -- before, I can potentially consider that they are not valid any more. So I will put in place my own rules and if I consider that it makes sense to apply a different business model to the spa as it is now, I will."

142. Similarly,

"A. [The] opening hours of the spa have to be adapted to the type of business you're having, and this is something which is easily done in mountain destinations.

So the regular opening hours you would have for a normal spa in a city, you will then look at what is the pattern I need to adopt in order to maximise my occupancy of my spa.

Q. I am sure they do that in this spa, don't they?

A. Well, they reached 20 out of 48 which is below 50 per cent occupancy.

Q. You say that, but I am not sure where you get your occupancy from because people cannot spend all day being pampered. If the ski lifts close at about 4.00/4.30 pm, then people get back; yes? You've really only a few hours in the spa before everyone wants to have a bath and change for dinner. Isn't that how it works?

A. Not really, no.

Q. How does it work?

A. Well, the thing is -- okay, a spa, you have the swimming pool side, swimming pool follows the type of pattern which you are mentioning, that's correct. But the rooms where you have the massages and the treatments works a lot in the morning in the mountains, up until 10/11 o'clock and there you already have three or four hours where you can sell a lot of treatments. And then, it works as from 4/5 o'clock in the afternoon for a period of five or six hours. And, I mean, I remember putting in place in spas in the mountains some night massages.

Q. Some night massages?

A. Yes.

Q. I'm comfortable with some night massages --

A. You see, that's the beauty of this industry, we have to be innovative, we have to be creative, we have to seek for money. And a spa is, by definition, like any product in the hospitality industry, it's an inventory. So here, we have an inventory which is available and our objective and our duty as managers is to sell this inventory. If I am not selling the available inventory of a massage, which lasts about one hour to one hour and a half in one room, then I am failing to provide and to do my duty.

Q. What I suggest to you is that 20 massages or facials packed in between the hours of -- après ski and dinner is really not too bad.

A. Everything which is below 50 per cent occupancy, according to my definition -- I came to 48 potential massages per day, I could have more because I didn't include the couple massage room. So everything which is below 50 per cent with the highest month of occupancy for my hotel is below what I should be achieving.

So non-satisfactory definitely."

143. Likewise with food and beverage revenues,

"Q. So you're assuming a 46 per cent increase in revenues and expenses going up by just 12.5 per cent. Tell me this: why should the court conclude that that level of improvement would have been assumed by a reasonable purchaser in October 2012? In a nutshell why would that have been a reasonable assumption?

A. Because I would have come up with a full analysis of the food and beverage services which are being provided. Not in 2012, because the analysis would be based on perception. So it has to be on this year because in 2012, I was not there.

I would definitely come up and say that the food and beverage, as it is organised right now, may answer the need and emotions of a certain population. But they are being provided in a very traditional manner, according to a pattern which can be considered for certain five star hotel customers, which obviously I am not there yet, as kind of old fashioned.

It corresponds to a certain image of a five star hotel, which I would find typically in the city, but not the image of a five star hotel which I would find in the mountains. Where I also expect and I will cut it short, in one word, some fun."

144. And further,

"Q. Am I right, Mr Mack, that you have salaries decreasing year on year from 2012 through 2015? You're nodding. But in the same period you have hotel occupancy increasing from 51 per cent to 55.7 per cent; correct?

A. That is correct, yes.

Q. So you are cutting staff costs but you're increasing the number of guests; yes? All the while Swiss GDP is forecast to grow.

A. That's correct.

Q. I appreciate you have your management consultant hat on here, but where can we buy some of this magic potion?

A. No, the principle is quite simple. It's either I'm looking into a potential where I will be applying a change of concept, therefore I will be relooking at my operating costs, I will be relooking at my staffing, and this is exactly what I'm applying here.

I'm saying: let's review the entire food and beverage offering because it's not satisfactory.

Hence, there will have to be, in this recommendation, a combination of an increased income and a reduced cost. This is what you would be looking at, definitely, when you're reviewing a food and beverage concept. And it goes line in line, it goes hand in hand.

If I'm -- typically, a different concept here, and I started on it earlier, is that I will be involving my customers because this is one trend, nowadays. Is that customers want to be part of the experience, they don't want -- I mean they also want but they want to have something different where you can ask them to create their own meal, to even cook part of it -- this is the extreme -- you can ask them to stand up and, typically in the mountain, to fetch dishes. You can ask them to -- you can ask them to be active in the restaurant, and you can do this in a five star manner. You can do this in a way that the customer actually is thrilled, without realising that I've cut my costs by 30 per cent."

145. Although he was forthright in his criticisms of the Hotel's performance, Mr. Mack also accepted that he could not pinpoint precisely why the Hotel's revenues in 2012 were not up to the levels that he would have been seeking to achieve. He agreed that there were experienced personnel involved in the running of the Hotel at the time, including, in particular, Mr. Marich, who had management experience from a well-known five-star hotel in Lausanne, and that the Company had also been in receipt of expert reports and advice from various other sources, including Starling and AHMI,

"Q. What we saw from those Starling marketing reports was that significant efforts were being made to boost revenues across all three departments, weren't they?

A. That is completely correct.

Q. You are aware, also, aren't you, that AHMI was looking over the shoulder of management and reviewing budgets and staff costs?

A. I'm completely aware of this.

Q. Okay. Can we just look at one of them…This is one of the monthly reports prepared by AHMI. It's dated August 2012 … They are analysing the revenues and costs, and margins of the different departments, and then comparing them against forecasts.

Yet you are, in effect, telling the judge, with your considerable experience and with your management consultant hat on, that very substantial efficiencies were there to be achieved but weren't spotted by AHMI. Is that a summary?

A. Yes."

146. As these extracts illustrate, Mr. Mack was clearly a knowledgeable and enthusiastic witness, at home in his specialist subject of hotel management and keen to demonstrate how he might have investigated using innovative methods to improve the performance of the Hotel in 2012. However, I found his evidence to be rather generalized and high-level. It was in essence simply an outline of the type of steps that Mr. Mack might investigate in relation to any hotel property which was underperforming, rather than a specific critique of what the Hotel was actually doing in 2012 or a particularized remedial action plan for the Hotel in 2012.
147. Accordingly, I am prepared to accept Mr. Cottle's conservative approach of forecasting a steady increase in occupancy rates and room revenues for the Hotel as the Swiss alpine hotel industry moved ahead in late 2012, together with a corresponding increase in revenues from the spa and from food and beverages, but accompanied by increased staff costs to cater for the increased numbers of guests. However, I do not think that I can accept the much more radical step-change in food and beverage and spa revenues, together with cuts in staffing costs forecast by Mr. Mack. In spite of Mr. Mack's own assessment of his forecasts as realistic, I think that they would have been seen as distinctly over-optimistic by a reasonable purchaser, who I do not think would have been prepared to pay an enhanced price based upon an assumption that such objectives could be achieved.

PPE expenses

148. Promoroche had a liability under Article 27 of the PPE Rules relating to the management of the Hotel and Chalet Royalp apartments to pay a proportion (about 60%) of the common costs of the complex which could not be separately attributed to the Hotel or to the apartments. These common costs would include items such as energy costs.
149. The financial statements of Promoroche for 2012 included an item of CHF 422,424 in respect of "condominium expenses" under "non-operating income/expenses". Pending clarification of what this item related to, neither expert had included it in their original cashflow forecasts, because it did not appear to relate to the costs of operating the Hotel.
150. The amount shown in the accounts was slightly less than 60% of the amounts shown on a list of PPE expenses for 2012 which was provided to Mr. Knüsel, and which totalled CHF 755,286.96. The inference – though the figures did not exactly match – was that the item in respect of condominium expenses in the Company's accounts in fact related to Promoroche's share of the common PPE costs.
151. It was the opinion of Mr. Knüsel and Mr. Cottle that there was no reason to believe that these common costs had not been properly incurred or that they had not been subjected to scrutiny by the owners of the Chalet Royalp apartments as well as by Promoroche and its auditors. As such, and since the Company (and any purchaser of the Hotel from it) would have a legal obligation to pay its share of the PPE expenses, they were of the opinion that these additional costs should be taken into account in any valuation of the Hotel. Mr. Cottle therefore took a figure of CHF 400,000 for annual PPE costs and reduced his cashflows accordingly.
152. Mr. Mack could not dispute that these expenses appeared to represent an on-going liability of the Company. His objection was that when added to the separate costs for the same items already included in the accounts of the Company in respect of the Hotel, the totals were too high. For example, he observed that if one added 60% of the CHF 200,000 shown in the PPE figures for 2012 for energy costs to the CHF 294,537.16 already included in the accounts for the energy costs in relation to the Hotel for the same period, the combined total of about CHF 420,000 was much higher than would be expected for a new building of the same type in the same type of location. Mr. Mack could not, however, shed any further light on the question of why the costs should be so high.
153. As a matter of principle, I accept Mr. Cottle's point that a reasonable buyer of the Hotel would realise that he had to take into account the liability which attaches to the owner of the Hotel to pay a share of the PPE expenses. Accordingly, and in the absence of any clear evidence to explain why these costs should be disregarded, I think that I must accept that the DCF valuation should also take them into account in some way.
154. I do not, however think that it necessarily follows that the full amount of CHF 400,000 per annum should simply be deducted from Mr. Cottle's cashflows as he suggested. The evidence in relation to these items was not altogether clear and I share some of Mr. Mack's concern as to the overall level of such costs. I also note that neither of two contemporaneous valuations which are closest in time to the valuation date (those from THED and SPG) included any similar amount for PPE expenses. Neither included any reference that I can see to PPE expenses, and SPG, for example, included only 3% of revenues for energy costs (CHF 265,552). Whilst that may, of course, have been a flaw with those valuations, leading to them being overstated, if the Company's share of the PPE costs and the total bill for items such as energy was as large as Mr. Cottle assumed, it is surprising that no reference was made to them.
155. That is not least because a deduction of CHF 400,000 of PPE expenses per annum from Mr. Cottle's cashflows has a very significant effect upon the ultimate DCF valuation. On the figures that I have been given, and depending upon the discount rate used and other assumptions, the difference is in the region of CHF 7 million to CHF 8 million.
156. As such, it seems to me that a reasonable purchaser of the Hotel faced with the facts as I have described them might legitimately take the view that some further investigation would be required, and that some savings might well be capable of being made in relation to these combined items of expenditure. In that regard I also bear in mind that Mr. Cottle's cashflows already contained higher growth assumptions than Mr. Mack's in relation to energy, cleaning and repairs and maintenance. I therefore accept to some extent the opinion of Mr. Davies that Mr. Cottle's full figure of CHF 400,000 per annum should not simply be deducted from the cashflows. I shall return to consider the precise adjustment to be made in this respect after dealing with the other main areas of dispute and considering the overall result of the DCF valuation below.

CAPEX

157. Mr Mack's and Mr Cottle's DCF valuations both include a continuing cost relating to the future capital expenditure of the Hotel. Mr. Knüsel explained that the purpose of a CAPEX provision would be to provide sufficient funds to replace assets within the Hotel (such as the kitchens, spas, swimming pool) over the passage of time in much the same way as a sinking fund is often created in relation to leasehold premises.
158. The key differences between the experts in relation to CAPEX were that Mr Mack calculated CAPEX as a percentage of annual revenue (4%), whereas Mr Cottle derived his CAPEX provision by reference to the replacement cost of the Hotel and its fixtures and fittings. More significantly, although Mr. Cottle's CAPEX provision for the first few years of his forecast was much lower than Mr. Mack's, it increased quickly and his CAPEX provision for the residual year of his cashflow was significantly higher than Mr. Mack's (CHF 742,400 as opposed to CHF 501,380).
159. Mr Cottle's evidence was that he had been told by his Swiss colleagues (including Mr. Knüsel) that the rough rule of thumb in calculating CAPEX was to provision annually for 1.5% of the replacement costs of the property. Mr. Cottle based himself upon an insurance rebuild estimate and an estimate for the fixtures, fittings and equipment in the Hotel which totalled CHF 49 million. He therefore adopted a low CAPEX figure for the first few years of his forecast, and increased in what he described as a "fairly gradual but arbitrary" manner to a figure of approximately CHF 735,000 in the final year of his primary period for CAPEX to ensure that the Hotel would build up replacement costs of CHF 49 million within 70 years.
160. It was Mr. Mack's evidence that in October 2012, many Swiss valuers of hotels and hospitality properties would have used a percentage of revenue as a provision for CAPEX. The reasons for that approach were explained by Mr. Mack: CAPEX provisions are used to replace fixtures, fittings and equipment and for refits of the facilities like the spa and kitchen and are therefore directly linked to business load, so that disconnecting CAPEX assumptions from assumptions about the daily business load would risk putting money aside that a hotel owner may never need to use. Mr. Mack explained how replacement of assets and furnishings within a hotel was a dynamic process, that the structure of the Hotel would be expected to have a very long lifetime, and that Mr. Cottle's CAPEX distribution over his cash flow period meant that the Hotel would be under-provisioned in its early years and over-provisioned in its later years.
161. In cross-examination, Mr. Knüsel accepted that in October 2012 many Swiss valuers would have used the same CAPEX provisioning method employed by Mr. Mack, and for my part and for the reasons Mr. Mack gave, I accept that it appears to be a reasonable approach to providing funds for the periodic replacement of the assets forming the Hotel.
162. The main objections of Mr. Knüsel and Mr. Cottle to Mr. Mack's approach of taking a percentage of revenue was that it was not sufficiently "transparent" in that "you never know where you end up" so that an underperforming hotel might not sufficiently provide for CAPEX. That might well be right in theory, but I fail to see how it could apply in the instant case. The exercise upon which everyone was engaged was using a DCF forecast to arrive at a market price which would have been paid by a willing buyer for the Hotel in October 2012. For the first six years of the forecast it was common ground that there was no under-provisioning in Mr Mack's forecasts (since Mr Mack's provisions were higher than Mr Cottle's), and thereafter both experts were forecasting on the basis that the Hotel would be generating significant revenues at a relatively constant rate, so that there would be no lack of transparency and no risk of under-provisioning.
163. Accordingly, I accept that Mr. Mack's approach to CAPEX is the correct approach to be adopted.

Discount rate

164. The discount and capitalisation rates are obviously important factors in any DCF valuation and small changes in the rates used can have a significant impact in the end result. In their initial reports, Mr. Mack applied a flat rate of 5.3% for both the discount rate and the capitalisation rate, whereas Mr. Cottle applied a discount rate of 7.5% and a capitalisation rate of 6.5%. If Mr. Mack's rates were adjusted to incorporate Mr. Cottle's 1% long-term growth assumptions in his terminal value, the same resultant value could have been achieved by Mr. Mack using a discount rate of 6% and a capitalisation rate of 5%.
165. A preliminary point between the experts was whether it was appropriate to apply the relevant discount and capitalisation rates to pre-tax cash flows or post-tax cash flows. Although of some conceptual importance, the financial impact of the point was somewhat limited on the facts, since Mr. Mack applied his discount rate to pre-tax cash flows and Mr. Cottle's cashflow forecast assumed that the owner of the Hotel business would not be paying any tax during the primary five-year period of his cash flow, because it would be able to carry forward losses from earlier periods for up to seven years to off-set against profits. The difference in approach was, therefore, only relevant to the terminal or residual calculation, where Mr. Cottle applied his capitalisation rate to a residual value calculated after deducting tax at 18%.
166. In his supplemental report, Mr. Mack expressed his view that valuers in the Swiss hospitality industry generally calculate their DCF valuations on a pre-tax basis. The reasons which he gave were that when the identity of a buyer is unknown, it cannot be assumed that the buyer would not be able to mitigate the effects of taxation on the business or company to be acquired. Mr. Mack explained that typically potential buyers of Swiss hotels have an investment strategy to optimise their tax planning opportunities. Mr. Mack was not challenged in cross-examination on that evidence, but there was no uniformity among the historic and other valuations in evidence on this point. Some used pre-tax cashflows (e.g. CBRE) and others post-tax cash flows (e.g. THED).
167. Mr. Knüsel and Mr. Cottle took the opposite view from Mr. Mack. Mr. Knüsel stated that he had never seen Swiss valuers use pre-tax cashflows, and opined that the discount and capitalisation rates should be applied to the post-tax ("free") cash flow that belongs to the owner of the business. Mr. Cottle explained that if someone was looking to acquire an asset such as the Hotel in a jurisdiction where tax was payable – such as Switzerland - they would want to take any tax liability that they could not mitigate into account in their assessment of the cash flows: otherwise they would in effect be paying the vendor a price for part of a future cashflow that they would not be able to receive.
168. On this basis, Mr. Cottle explained that in performing his computations, he had assumed that the owner of the Hotel would be able to carry forward sufficient losses from the business itself to avoid having to pay any taxes on profits for the first five years of his cash flow, but that thereafter the tax losses would have been used up, and so he assumed that tax would be payable on the profits which represented his terminal (residual) cashflow value.
169. Mr. Cottle did, however, accept in general terms that apart from the losses generated by the business itself, circumstances might exist under which a purchaser might not have to pay tax on trading profits from the Hotel. He gave the example that if a purchasing company was part of a group with another loss-making subsidiary, tax relief could be passed between the companies so as to shield the business owned by the purchasing company from tax.
170. I accept Mr. Cottle's exposition of the underlying rationale for the application of the discount and capitalisation rates in a DCF forecast. On that basis, what this issue appears to boil down to is a disagreement between the experts over the likelihood of a potential buyer of the Hotel being able to use tax planning techniques of the type mentioned by Mr. Cottle to shield himself from Swiss tax on the trading profits of the business once the initial losses have been utilised. Put another way, in assessing the market value of the Hotel, it is necessary to assess the likelihood of the reasonable hypothetical buyer in 2012 being able to continue to avoid paying tax after 2018. If there is a reasonable prospect that buyers would exist in the market who would be able to achieve such tax efficiencies and hence be prepared to pay a higher price for the Hotel, then that prospect should be taken into account; but if the prospects are remote, then I see no basis for ignoring the potential liability for tax.
171. As a general proposition, I do not doubt that in the hospitality industry as a whole, there will at any point in time be groups of companies who have tax losses available for tax planning purposes. It might also be surmised that such losses would have been more generally available in the years following the start of the recession in 2008, when many hotels were struggling. But beyond that, the simple fact is that I had no evidence as to the existence or potential existence of such companies or groups in the market for Swiss hotels in 2012.
172. Accordingly, whilst I think that Mr. Cottle's approach of assuming that no tax would be payable on the profits of the Hotel until after 2018 was entirely reasonable, I also think that he was right not to assume that this situation would continue to exist thereafter. I do not think that I have any basis for concluding that the hypothetical reasonable purchaser of the Hotel in 2012 would be in a position to shelter the cashflows of the Hotel from tax for any material period after 2018, still less indefinitely. I therefore agree that Mr. Cottle's approach of applying a capitalisation rate to the value of the post-tax residual cashflow is appropriate in this case.
173. Mr. Cottle justified his use of a 7.5% discount rate on the basis that he had been told by his Swiss colleagues that discount rates of between 5.5% and 7.5% were in use in the Swiss hotel industry in 2012, and Mr. Knüsel confirmed in his evidence that those were post-tax discount rates. Mr. Cottle pointed out that THED had used a post-tax discount rate of 7.5% in March 2012 in valuing the Hotel, and he suggested that if anything the performance of the Hotel in the remainder of 2012 against its forecasts would have justified the use of a higher rate in October 2012.
174. In his expert report, Mr. Cottle indicated that he thought it appropriate to use the rate at the highest end of this range of discount rates because his forecasts reflected a significant turnaround in the assumed profitability of the Hotel. He said that in these circumstances a buyer would try to reflect the greater risk of failing to achieve those levels of profitability by using a higher discount rate. He repeated this reasoning in cross-examination,

"The issue as I see it is essentially we are looking almost at a sort of turnaround-type situation where this is a business which has been struggling to make profits prior to the valuation date and I am adopting cash flows that effectively assume this business would turn around quite significantly over the next five years. To my mind that represents a greater risk relative to a business that's already trading at that level. And in my experience purchasers and valuers will take risk into consideration by one of two ways: you either apply a sort of probability discount against the cash flows, effectively downgrading them; or the other commonly adopted approach is to adopt a slightly higher discount rate."

175. Although I have accepted Mr. Cottle's approach to the profit projections for the business, I think that in his approach to setting a discount rate, Mr. Cottle mischaracterised the true position and the perception that a reasonable purchaser would have formed of the Hotel in October 2012 by describing it as being "almost at a … turnaround situation".
176. In general terms, the concept of a "turnaround" suggests a business that has been and is failing, and which therefore requires a reversal of its fortunes to save it. In this case I think that a reasonable purchaser would have appreciated that the Hotel business had been launched in the most difficult trading conditions imaginable, and that it had survived through a prolonged period of worldwide economic crisis in which the Swiss franc was strong. Whilst Promoroche itself was heavily burdened with expensive debt and might legitimately be described as experiencing financial difficulties, the underlying Hotel business had shown a steady improvement in its trading fortunes in each year of the four years since it opened. It did not, therefore, need to be "turned around". Moreover, I consider that a buyer would have thought that, if anything, the prospects for the Hotel were improving during 2012. As I have already indicated, the Hotel had continued to generate significant net operating profits and by October 2012 the Swiss economy and the prospects for tourism in the Alps were looking up.
177. Against that background, and recalling that Mr. Cottle's cashflows were certainly not overly optimistic, but simply assumed a steady rate of improvement in the business, I consider that Mr. Cottle adopted too high a discount rate. The rate of 7.5% that Mr. Cottle applied to post-tax cashflows put the Hotel right at the top of the range of post-tax discount rates that he had been advised might be used in Switzerland at the time, and hence right at the top of the range for investment risk. Whilst of course it was obvious that the Hotel was still at a relatively early stage of its life, and for that reason might be seen as having a slightly higher level of risk by comparison to a more mature business, I do not think that by October 2012 the Hotel's prospects of achieving the reasonable improvements in cash-flow that Mr. Cottle had forecast would have been seen as giving rise to a risk of the magnitude which he assumed.
178. That said, I also have some reservations as to the very low rate which Mr. Mack used in his original report. Mr. Mack's single discount and capitalisation rate of 5.3% was put forward for use in relation to his pre-tax cashflows, and he accepted that it "might appear low by international standards". Indeed, if translated to a post-tax rate, 5.3% would amount to a post-tax discount rate of only 4.1%.
179. In his first report, Mr. Mack justified his use of this rate by a reference to 10-year Swiss government bond yields, and also by reference to an assertion that a discount rate of 5.3% had been used by SGH for the last five years. In his second report, Mr. Mack sought to support his use of this rate by reference to calculations of the weighted average cost of capital (WACC), concluding that on the assumption of a long-term interest rate on debt finance of 1.65%, his discount rate of 5.3% would represent a return on equity of 10.8% for a 40/60 equity/debt split or 13.8% for a 30/70 equity/debt split.
180. It is not entirely clear to me whether the rate of 5.3% claimed to have been used by SGH was a pre-tax rate or a post-tax rate. I think it was, however, implicit in Mr. Knüsel's evidence that he had never seen Swiss valuers applying a discount rate to pre-tax figures, that SGH (for whom he had worked for 5 years) must have applied its 5.3% rate to post-tax figures. If so, that would indicate that it was not appropriate to apply it to pre-tax cashflows.
181. Moreover, Mr. Knüsel explained that SGH is a semi-public entity which is a co-operative between various organisations including the Swiss government and various cantons. Its role is to provide low interest finance to Swiss hotels outside the main cities, and for that purpose it receives low cost loans from the Swiss government. It does not, therefore, operate under the same type of pressures as an ordinary investor seeking a commercial return on its capital. Mr. Knüsel also explained that the SGH utilises highly conservative provisioning for CAPEX based upon a proportion of the assumed replacement value of a hotel and its fixtures, fittings and equipment, which results in an assumed life cycle for four and five star hotels of between 20 and 26 years.
182. Mr. Mack did not seriously challenge this evidence concerning SGH. As such, given that Mr. Mack's CAPEX provisioning was not on the same conservative basis as SGH, and accepting that a reasonable buyer of the Hotel would not be adopting the same type of approach to his investment as SGH does to its business, I think that a discount rate of 5.3% would be too low to be applied to the cashflows of the Hotel, whether pre-tax or post-tax.
183. Taking all these factors into account, it seems to me that the appropriate discount rate which a reasonable buyer would apply to post-tax cashflows would be between the rate suggested by Mr. Cottle and that suggested by Mr. Mack. As I have explained above, the selection of a particular figure within that range is necessarily a matter of judgment, influenced by the nature of the other assumptions which go into the formulation of the cashflow figures.
184. Taking into account the various inputs which I have referred to above, and especially that I think that Mr. Cottle's cashflows were, if anything, on the conservative side, I consider that the appropriate discount rate to apply to post-tax cashflows is 6%. Using the convention adopted by Mr. Cottle this would also have the result that the appropriate capitalisation rate to apply to post-tax cashflows is 5%.

The provisional DCF valuation

185. The result of my analysis is that I consider that the DCF valuation of the Hotel should be arrived at by adopting Mr. Cottle's approach to the cashflow figures, including some adjustment for PPE expenses, but with a reduced CAPEX provision as suggested by Mr. Mack. I would then apply a (post-tax) discount rate of 6% to arrive at the present value of the primary cash flows, and use a (post-tax) capitalisation rate of 5% to calculate the terminal value of the Hotel.
186. It is my understanding from agreed computations provided to me whilst preparing this judgment that this would give a result for the market value of the Hotel in October 2012 of between CHF 25.3 million and CHF 33.1 million, depending upon the extent to which the CHF 400,000 per annum PPE expenses are deducted from the cashflows. Having regard to the conclusion that I have reached that I should not simply incorporate the whole of that CHF 400,000 figure into the cashflows, I think that it is appropriate to arrive at a final valuation that lies in the lower half of that range. I therefore conclude that the true market value of the Hotel at the valuation date in October 2012 (excluding transaction costs) was CHF 27.5 million.

A sense-check

187. As the experts agreed, when performing a DCF valuation, it is necessary to stand back and assess whether the result reached makes sense and is consistent with other relevant evidence.
188. The other potentially relevant evidence in this case can be categorised as (i) the Settlement Agreement itself, (ii) other valuations, (iii) expressions of interest in the Hotel; and (iv) statements made by the Defendants from time to time of their belief as to the value of the Hotel. The parties were at odds as to the importance or weight to be attached to this evidence, and I should therefore summarise it.

(i) The Settlement Agreement

189. As indicated above, Clause 8.2(C) of the Settlement Agreement provided that the independent hotel manager was to be provided with an irrevocable mandate to sell (i) the Hotel for a price not less than CHF 45 million; alternatively (ii) the shares in Promoroche for not less than CHF 45 million less any debt owed by Promoroche to UBS and any debt owed by Promoroche to third parties under arm's length transactions. In addition, Clause 2.1(C) provided that in the event that GSA was unable to transfer to ESO 30% of the shares in Promoroche, ESO was to receive either Equivalent Rights (as defined in the Settlement Agreement) or: (i) a sum of CHF 6.9 million; and (ii) a call option allowing ESO to acquire the Hotel for a price of CHF 42 million.
190. It is relatively clear that the figure of CHF 45 million was not in any sense an agreed valuation of the Hotel. For the Defendants, Mr. Schibl denied having much knowledge of the basis upon which the Settlement Agreement was negotiated, but asserted that the floor of CHF 45 million had come from ESO. Mr. Schmid said that ESO had simply taken the view, based upon their own knowledge and experience of hotels, that the value of the Hotel was "probably in the mid-40s". He accepted, however, that the Defendants were not prepared to provide any guarantee to ESO of a minimum return from any sale price calculated by reference to the figure of CHF 45 million.
191. At a meeting in the Cayman Islands on 21 July 2011 in the course of the litigation to which I have referred, Mr. Schibl was recorded by the Cayman Islands JPLs as telling them that,

"… Duet has been looking to sell the Villars property for the last twelve months and have engaged a firm to run this process. To date, an offer of CHF 30m has been received, however, Duet are looking for a prince [sic] in the range of CHF 40m to CHF 50m."

In cross-examination, Mr. Schibl said he had no recollection of saying that, but he did not dispute the note was likely to have been accurate.

192. When a deal between the parties was in prospect a few days later, one of the JPLs' staff sent an email to Mr. Schibl and Mr. Aim indicating that the JPLs had not by then conducted their own review of the Duet companies' books and hence would be relying upon representations made by the Duet Principals in deciding to execute the Settlement Agreement. To that end, the JPLs asked for a copy of the latest valuation of the Hotel and an explanation of how the figure of CHF 45 million in the Settlement Agreement had been determined.
193. The answer from Mr. Aim, copied to Mr. Schibl, was that the Duet Principals were happy to make appropriate representations to the JPLs and continued,

"Jones Lang have valued Villars at SFr 45 million. The only offers received have been in the neighbourhood of SFr 34-35 million. There is a SFr 22 million loan to UBS as well as approximately SFr 4 million of third party loans in Promoroche."

Although the email indicated that "the valuation documents" were attached, no such valuation from Jones Lang was produced by the Defendants in disclosure in this action, and beyond confirming that he would not have lied to the JPLs, Mr. Schibl was unable to assist as to its whereabouts.

(ii) Independent DCF valuations

194. Of the historic DFC valuations that I have referred to above, the only two valuations that are in any approximate sense contemporaneous with the valuation date of 10 October 2012 are the valuation by THED dated 14 March 2012 and the valuation by SPG dated 16 December 2013. I recognise, of course, that the SPG valuation post-dates the valuation date in this case.
195. The valuation by THED in March 2012 assumed three different scenarios each based upon an assumption that the occupancy rate for 2012 was 54% and that this would increase so as to reach a maximum occupancy rate by 2015. The first scenario made the assumption that the Hotel had already reached its maturity in terms of revenue, that its performance would be below the norm for hotels of its type, and that its maximum occupancy rate would only be 60%. The second scenario assumed that the Hotel would perform in accordance with the norm for hotels of its type and reach a maximum occupancy rate of 63% in 2015 and thereafter. And the third scenario assumed that the Hotel would out-perform the market and reach a maximum occupancy rate of 68% in 2015.
196. Albeit that the experts ended up with maximum occupancy rates which were broadly similar to THED's second (middle) scenario, THED's assumption as to the speed of increase in occupancy rates was considerably more optimistic than those of either Mr. Mack and Mr. Cottle. As I have indicated, Mr. Mack assumed that the rates would steadily rise from 51% in 2012, to 55.7% in 2015, 61.5% in 2018 and reaching a peak of 64% in 2021. Mr. Cottle assumed a steady 2% increase per year, from 51% in 2012 to 57% in 2015 and reaching a maximum of 63% in 2018. The average room rates assumed by THED were, however, somewhere between those assumed by Mr. Mack and Mr. Cottle.
197. For each scenario, THED assumed a provision for CAPEX which rose to 4% of total operating revenues. THED then applied a post-tax discount rate of 7.5%. THED did not include any express provision for shared PPE expenses in its cashflows.
198. The values given by THED on these bases for the Hotel (without any reference to the value of its accompanying land) were (a) CHF 23.385 million, (b) CHF 31.197 million; and (c) CHF 41.911m.
199. The SPG valuation was prepared for BAWAG bank "loan security purposes" and was said to have an effective date of 31 December 2013. It assumed that the occupancy rate of the Hotel would stabilise in 2018 at 62% with an average room rate of CHF 527. Those assumptions are mid-way between the assumptions of Mr. Mack and Mr. Cottle. SPG also made various assumptions about revenue from food and beverages and the spa, which led it to arrive at a figure for total revenues of CHF 8.85 million for 2014, which was significantly lower than Mr. Mack's assumptions, and slightly less than Mr. Cottle's. SPG also assumed lower operating costs than either Mr. Mack or Mr. Cottle for 2014, together with a lower CAPEX provision of between 0.5% of total revenues in 2014, rising to 2%. On these bases, SPG arrived at an estimated operating income for 2014 of CHF 1.77 million, which appears to be significantly above the estimates of either expert. Using a flat discount rate and capitalisation rate of 6.5%, which they applied to pre-tax cashflows, SPG then arrived at a DCF valuation of CHF 41.97 million.

(iii) Indications of interest from third parties

200. As I have indicated, there were from time to time a number of expressions of interest from third parties in the Hotel, though none proceeded to an exchange of contracts, and none that pre-dated the valuation date were close in time to it.
201. The first significant approach was made prior to the 2012 referendum in November 2010 by the Althoff group. The approach was at about CHF 45 million, but that was not pursued after the Duet group sought a price of CHF 51 million. The Althoff group were, however, not entirely deterred, because they renewed their interest in the Hotel via THED in January 2013. I did not however, have any details of the price under discussion at that time, and it was Mr. Gabay's evidence that the Althoff group were only really interested in a rental deal, which the Duet group rejected.
202. The only other evidence of a third party interest relatively close in time to the valuation date was the offer by a Josef Kozareff in March 2013 – albeit that, again, I recognise that this is obviously after the valuation date. That offer was split into two parts: CHF 34.1 million for the Hotel, and CHF 19 million for GSA's shares in Promoroche and its management company, debt free. The total consideration was therefore CHF 53.1 million. The sale did not, however, proceed, because although arrangements were made for representatives of Promoroche and Duet and their lawyers to attend at the offices of a notary on 26 March 2013, the buyer, Mr. Kozareff, did not turn up.
203. It was suggested to Mr. Schibl that this was, in effect, a proposal for a sale of the Hotel for CHF 53.1 million, and he agreed with that proposition. Mr. Schibl's evidence was as follows,

"Q. So this was to be a sale of the hotel?

A. Yes.

Q. So you actually get to the notary's office and you are standing there waiting to sell your hotel for [CHF] 53.1 million and the bride doesn't turn up?

A. That is it, sir."

204. Mr. Schibl's evidence was that he did not manage to find out why Mr. Kozareff had not turned up, and that he was fobbed off with excuses by his representative. But he also sought to characterise Mr. Kozareff as a "trophy buyer",

"Q. But this got to … the point of sale … By that stage they must have done their due diligence?

A. I suppose so, sir.

Q. They must have done. To actually get the notary to get to the point where you are going to sign the piece of paper to spend 53 million on a hotel, there must have been due diligence. We don't see anywhere in the document, in the bundles any samples of this due diligence, any documents being sent by you to them.

A. I sent a presentation to Mr Steffen as you saw. They did their own work. Mr Kozareff is presented me by Mr Steffen as a very rich Russian person who want to buy trophy assets so it was the ideal customer that we want to have because there is no value in the hotel unless it is a trophy asset so we were very pleased with that."

(iv) The Defendants' statements

205. I have referred above to the statements made by Mr. Schibl in 2011 to the effect that the Duet group was looking to sell the Hotel for between CHF 40 million and CHF 50 million, and to the email from Mr. Aim stating that Jones Lang had valued the Hotel at CHF 45 million.
206. When the terms of the Settlement Agreement were put to Mr. Schibl in cross-examination he asserted, somewhat theatrically, that he would have been very eager to sell the Hotel for CHF 45 million,

"Q. … the agreement, do you recall, was that the hotel … should be sold as soon as possible ideally within 12 months for a minimum price of 45 million?

A. My Lord, ESO didn't want to go to the hotel business. Trust me, I didn't want to go that either. And sadly I'm stuck with it since 2008/2009, I'm still paying for it every month, so, yes, it is a wrong investment. I agreed it is my fault. I took it. Probably ESO didn't want to be in this business and since the day I opened the hotel I tried to sell it, so that's a fact, and as counsel just [stated], yes, ESO want to sell it at 45. Trust me, my Lord, at 45 I would have sold it every single day of my life but I couldn't find a buyer, so, yes, sir."

207. The impression that Mr. Schibl plainly sought to create by this evidence was that he always thought that the Hotel was worth much less than CHF 45 million. It is not easy to reconcile that evidence with what Mr. Shibl told the JPLs in 2011. Nor do I think that Mr. Schibl's suggestion that "at 45 I would have sold it every single day of my life but I couldn't find a buyer" sits well with what had occurred in November 2010 when the Althoff group had indicated an interest in buying the Hotel for the equivalent of about CHF 45 million. At that point, rather than proceed at that figure, the Duet group made a counter-proposal of CHF 51 million.
208. Mr. Schibl and Mr. Gabay also made a number of statements to third parties and to investors in DREP as to the value of the Hotel in late 2012 and 2013. Again, I recognise that these statements all post-dated the valuation date.
209. On 12 December 2012, Mr. Schibl sent some financial projections concerning the business of the Hotel by email to a Mr. Markus Steffen, who was a real estate broker. The email was copied to Mr. Gabay. The projections showed the Hotel approximately doubling its EBITDA from CHF 448,305 in 2012 to CHF 880,273 in 2013 and continuing to increase its profitability significantly to an EBITDA of CHF 1.56 million in 2014 with further increases thereafter. These figures were significantly greater than the figures adopted by either expert in this case.
210. In early March 2013 DREP issued a report to its investors (misdated March 2012), which contained an extremely optimistic set of financial projections for the Hotel, indicating that it would increase its EBITDA from its actual level of CHF 448,305 in 2012 to CHF 2.657 million in 2013, with further increases thereafter to CHF 3.51 million in 2014 and upwards to CHF 5.87 million in 2017. This report prompted a lively exchange of views between certain of the investors and Mr. Gabay over the value of the Hotel.
211. One such investor (a Mr. Florian de Signy of Gamma Finance) questioned the value placed upon the Hotel in the report, and drew attention to the THED valuation at CHF 41 million. He asked Mr. Gabay why, "if you are so convinced that CHF 40m is way off reality and the Hotel is really sellable at CHF 50m", the Duet group had not found a buyer for Gamma's stake (which it had offered to sell on the basis of a valuation of CHF 40 million). Mr. Gabay's response on 13 March 2013 was that,

"In Switzerland we explained many times that the THED valuation doesn't mean anything for us, that the replacement cost is 65 Million+ and we will not sell less than 50 Million CHF."

212. Mr. Gabay then offered to buy Gamma or any other investor's stake out at a 55% discount. This prompted another investor, Mr. Stephane Farouze of Deutsche Bank to respond shortly thereafter that he was not interested in such an offer and would stay in the fund, adding

"Now I thought that we agreed last time that if we had an offer at 40M or 42M You will take the offer.  That is what I thought.  Now you wrote 50.  Anything changed."

213. Mr. Gabay responded five minutes later,

"Yes, it seems like over the last 2 months there is strong foreign appetite for Swiss Hotels.  We had early indication from a Qatari family based in Zurich, an Indian group who already owns 2 chalet in Villars and 1 Russian entrepreneur.

All of those are at a very early stage, I believe if we are patient we will get there, in addition to that the nature of the potentials (sic) buyer we have is less price sensitive bit (sic) rather if they want it or not."

214. Later in 2013, DREP issued its financial statements for the year ending 31 December 2011. These were signed by Mr. Schibl and Mr. Gabay and carried an audit certificate dated 29 August 2013. The financial statements were prepared under the historical cost convention. Nonetheless, the General Partner's report to the partnership which accompanied the financial statements referred to DREP's investment in GSA and hence in Promoroche and the Hotel, and continued,

"A valuation was carried out in March 2012 by THED … valuing the property at CHF 52 million … ($55 million at Dec 2011 FX Rates). The hotel opened for business on December 15^th 2008."

That statement was obviously based on the most optimistic of THED's three scenarios (which had valued the Hotel at CHF 41.911 million and included an extra CHF 10.395 million for the land surrounding the Hotel).

215. When questioned about why he had included this statement in the report to investors accompanying the financial statements, Mr. Gabay was very dismissive of the THED report and sought to distance himself from its content and reasoning. He suggested that he had included the specific reference to the value from the THED report only because it happened to correspond with the price which he believed could be obtained from a trophy buyer,

"Q. Okay. Just two more points if I may. You told his Lordship earlier in your evidence that you didn't think much of the THED valuation, you thought it was a piece of nonsense, it's something that no doubt – these valuers in their ivory towers produced these documents but they had nothing to do with reality.

If you really thought the THED valuation was nothing to do with reality, you wouldn't have voluntarily chosen to mention it, would you?

A. It's a personal opinion, what I think about third party valuations.

Q. Okay.

A. As a diligent person, I need to show people what the third parties are valuing to it. But for a different reason than mine, THED has put in valuation at 52. At that time I'm putting a value, a wishful value selling, of 50 million to sell this to a trophy buyer. So it's -- we are comparing comparable things."

And later,

"Q. In your reasonable and prudent judgement, it was that valuation, at 52 million, which you chose to put into the financial statements which you then signed?

A. My common sense was that through trophy buyers we would be able to sell this asset around the 50 million Swiss francs level. This is nothing to do with that.

After that, why I chose A, B over C, it's because most probably it was the figure closer to what I believe was the case.

Q. Yes, I'm sure –

A. It has nothing to do with the content and the reason or anything like that."

216. The financial statements to 31 December 2012 were not signed off until 2015, and contained a similar reference to the THED valuation. Mr. Gabay's evidence, however, was that his belief that a trophy buyer might be found for the Hotel had gone after 2013. When I asked Mr. Gabay why the note referring to the THED valuation had still been included in accounts signed in 2015 in these circumstances, his explanation was that this was simply a "housekeeping matter" because the auditors had wanted the financial statements and he had just adopted the earlier report.

Analysis

217. At first blush the various figures which are derived from other sources and which I have set out above seem to be in a range which is higher than the value which I have arrived at. This has naturally given me some reason to question my conclusions closely, but I think that the other sources of evidence need to be put into proper context.
218. In light of the wholly uncertain origins of the figure of CHF 45 million in the Settlement Agreement, and the fact that neither Duet nor its principals were prepared to provide any guarantee or assurances as to a sale at that value, I do not think that I can place any real weight upon the Settlement Agreement when determining the true value of the Hotel. Nor do I think that the statements made by the Defendants to the JPLs in 2011 cast any significant further light upon the true value of the Hotel: they were unparticularised references to unconsummated offers which had allegedly been received in the region of CHF 30-35 million some time before the referendum that led to the Secondary Residences Order and some time before October 2012.
219. I did not find the Defendants' lack of an explanation for the absence of a Jones Laing valuation at CHF 45 million remotely convincing. However, I do not think that I can jump from that dissatisfaction to any reliable assumption as to what such valuation might have said, still less to the basis upon which it was made.
220. I also do not think that I can place any real weight upon the various expressions of interest or offers made in relation to the Hotel by third parties from time to time. I recognise, of course, that offers made for a property may, in certain circumstances, be a relevant source of evidence which can inform a conclusion as to what the reasonable hypothetical buyer described by Hoffmann LJ in IRC v Gray might pay for the property. But as I have indicated earlier in this judgment, such offers must be treated with some caution, especially if, as here, the surrounding circumstances were not explored in the evidence in any depth, little more was known about the nature of the offerors other than their names, and they were not subjected to cross-examination.
221. I also cannot place any real weight on the various other statements made by the Defendants to investors and agents as to the value of the Hotel. I have already indicated that I did not find Mr. Schibl and Mr. Gabay to be satisfactory witnesses, and I do not think that their various forecasts and statements to investors and agents concerning the Hotel's prospects and potential value were any more reliable guides to the true value of the Hotel.
222. Specifically, I think that the Defendants were quite willing to exaggerate the prospects of the Hotel and its value when it suited them to do so, either in dealings with agents looking for potential buyers, or in order to keep the DREP investors placated (or at least at arm's length). That said, there is some support in the contemporaneous evidence – and particularly in the candid exchange of emails between Mr. Gabay and investors after the production of the DREP investor report in March 2013 - for the view that the Defendants were concerned about the viability of the Hotel business and the levels of debt which Promoroche carried, and that they had taken the view that their best hope was to wait for the appearance of a "trophy buyer" - a wealthy foreigner who was prepared to pay a premium price for a luxury property.
223. The difficulty in placing much weight upon this evidence is that whatever the Defendants' aspirations at the time, and whatever they may either have believed or found it expedient to tell investors at the time, I saw and heard little or no real evidence, other than anecdotal comments, to substantiate a conclusion that such persons (who would not only have been willing to make a higher offer, but more importantly, who would have been able to carry it through and complete a purchase at a premium price), really did exist in the marketplace at the time.
224. Indeed, I note that in the THED valuation dated 14 March 2012, THED commented, under the heading "To go forward",

"…this property through its exceptional nature and its rarity is placed in a very selective and closed market. The prices of comparable properties have nothing in common with their profitability, apart from a capital gain on exit.

The true value will be that which a purchaser is ready to pay to acquire such a property, in a reasoning approaching that of purchasing a work of art, or a masterpiece.

However, a large number of potential clients would not be able, in the current context, to make a high offer for such a property. The Russians, Anglo-Saxons and Middle Eastern people also being hit be the crisis and devaluation of some money versus CHF contribute to get some difficulties to borrow from bankers."

(my emphasis)

225. At the other end of the spectrum, I also reject the Defendants' evidence at trial which sought to suggest that the Hotel had little or no value in the normal marketplace unless a "trophy buyer" could be found. In particular, I thought that Mr. Gabay's repeated express references to that concept owed more to his efforts to shape his evidence to fit the Defendant's arguments than to an accurate account of his thought processes at any earlier time.
226. That leaves the two third-party valuations obtained close to the relevant valuation date. Of these, the THED mid-range valuation in March 2012 of CHF 31.197 million for the Hotel (without surrounding land) is plainly the most significant. The main reason for the difference between my value of CHF 27.5 million and the THED valuation appears to be that even at its mid-range, THED adopted some rather optimistic projections for rapid increases in occupancy levels and only included a much lower level of PPE expenses than the level that I have found should be included in any valuation. Those overstatements were, however, balanced to some extent by the fact that THED then used a higher (7.5%) post-tax discount rate than I have found appropriate. The net result, however, is sufficiently close to the figure that I have arrived at to provide some confirmation for my view, and is certainly not so markedly different so as to require me to revise my valuation.
227. The other third-party valuation was the SPG valuation for BAWAG in 31 December 2013 in the sum of CHF 41.97 million. In evaluating the SPG valuation of CHF 41.97 million at the end of 2013 as a reference point, it is, of course, obvious that there is a significant difference in over a year between the valuation date and the later date of the SPG valuation. It is also clear that as the SPG valuation is later in time than the valuation date of October 2012, it cannot be treated as directly relevant evidence to the valuation exercise that I have to perform. I would not, however, entirely dismiss it on that basis alone as a potential sense-check to my valuation. But I think that there are other, more significant, difficulties in using it even in that way.
228. The first such difficulty is the evidence of Mr. Mack and Mr. Knüsel, neither of whom thought that SPG were established valuers for Swiss alpine property. Mr. Knüsel had only heard of SPG for "tenant service", whilst in re-examination, Mr. Mack was equally unconvinced as to their credentials as valuers,

"Q. The first thing is, you were asked if you knew SPG and you said you did. In fact, the way it was put to you by my learned friend, and I quote is:

"You must know SPG."

And you said:

"Yes, I do."

The implication of the question seemed to be that SPG are a well known and reputable valuation company. Is that fair?

A. SPG is a very well known -- I would not say valuation company, but real estate transaction company in Switzerland.

Q. Okay. Would they have experience of valuing property in the Swiss/French Alps?

A. Not really. Not really."

229. Other difficulties relate to the inputs which SPG used for their valuation. Although SPG adopted assumptions as to room revenues that were between those of Mr. Cottle and Mr. Mack, they assumed significantly lower operating costs and CAPEX provision than either expert (e.g. a CAPEX provision of only 0.5% of total revenues). SPG then applied a discount (and capitalisation) rate of 6.5% to pre-tax earnings which would equate to a 5% post-tax rate, which is below the range of post-tax rates which the evidence established were used by Swiss valuers at the time.
230. In light of these differences I do not derive any real assistance from the SPG valuation, even as a sense-check.
231. Standing back, therefore, I think that my value of CHF 27.5 million for the Hotel (without transaction costs) is in accordance with such other evidence as is reliable in this case. It sits between the DCF valuations advanced by Mr. Cottle (CHF 16 million) and by Mr. Mack (CHF 42.8 million) and is not radically different from the closest contemporaneous valuation (THED). It is also not dissimilar from the valuation that would have been arrived at by applying a hospitality industry "rule of thumb" for valuing hotels suggested in his evidence by Mr. Mack. That rule of thumb involves multiplying the average room rate by the number of rooms and multiplying again by one thousand. This would give a value of CHF (397.90 x 63 x 1,000) = CHF 24.437 million. Mr. Mack indicated that this rule of thumb is used to value three-star and four-star hotels rather than five-star hotels, which presumably command some additional premium. That premium might, however, be somewhat limited by the fact that the Hotel was still a relatively new enterprise that was only just moving into profitability at the valuation date.

Adjustments to arrive at the value of ESO's shares in the Company

232. The first adjustment to the value that I have arrived at for the Hotel in order to compute the value of ESO's shares in the Company is one that was agreed between the experts. They agreed that a deduction of 4% needs to be made for the transaction costs of selling the Hotel. That amounts to a deduction of CHF 1.1 million, leaving a net value of CHF 26.4 million which can be inserted into a balance sheet of the Company based upon its audited accounts to 30 November 2012.
233. There were a number of agreed (upwards) adjustments for trading losses of CHF 590,000 during October and November 2012, the removal of CHF 2.666 million of "connected indebtedness" so as to comply with a warranty in the Settlement Agreement (see below) and an adjustment relating to legal expenses of CHF 177,000, giving a value of CHF 29.833 million. From that figure the experts were agreed that the net carrying value of the Hotel of CHF 25.347 million needed to be deducted, giving a figure of CHF 4.486 million.
234. There were then a number of further adjustments upon which the parties and the experts were not agreed. I shall take them relatively shortly.

Further connected indebtedness

235. Under clause 9.1(J) of the Settlement Agreement, each of the Duet Parties represented and warranted that at the date of completion of the agreement, Promoroche's "Connected Indebtedness", i.e. its financial indebtedness to certain connected parties (excluding arm's length trade and ordinary course debt) did not exceed CHF 4 million. The Duet parties also undertook by clause 5.1(K) that such "Connected Indebtedness" would be "removed without any cost, liability or prejudice to Promoroche".
236. Those provisions gave rise to the adjustment of CHF 2.666 million to which I have referred above, which represented the agreed amount of the Connected Indebtedness as the date of the Settlement Agreement which had not in fact been removed by the valuation date.
237. However, the parties did not agree on the treatment of further debt amounting to CHF 6.2 million which Promoroche had also incurred, without ESO's consent, to GSA (which it is common ground was a "connected party") between the date of the Settlement Agreement and the valuation date.
238. For its part, ESO contended that it would be an obvious commercial nonsense if the Settlement Agreement required Connected Indebtedness to be removed by a specified date at no cost to Promoroche, but contained no restrictions upon the Company incurring any further indebtedness to connected parties thereafter. ESO contended that this meant that for the purposes of assessing the value of its share of the Company as at the valuation date, the CHF 6.2 million should be added back to the balance sheet.
239. The Defendants did not agree. They contended, first, that the Settlement Agreement did not contain any express provision prohibiting new connected indebtedness being incurred, and that no term could be implied to that effect. Secondly, they pointed out that the further connected indebtedness in essence replaced debts which the Company owed to third parties, that the overall liabilities of the Company had not been altered by the transaction, and hence no adjustment was required to the value of the Company or ESO's shares in it. In particular, they drew attention to the fact that the bulk of the new debt was the result of a transaction in May 2012 in which GSA had borrowed CHF 6 million from UBS which it had then lent to Promoroche, enabling Promoroche to reduce its own indebtedness to UBS from CHF 22 million to CHF 16 million in May 2012.
240. In response, ESO drew attention to the terms of clause 25 of the Settlement Agreement under which the Duet Parties (including GSA) expressly represented that they had no intention to acquire the UBS loans to Promoroche and agreed that they would not do so without the prior written consent of ESO, which was not to be unreasonably withheld. Mr. Anderson submitted that this provision and the commercial background made it clear that the Settlement Agreement was intended to prevent the Defendants acquiring the debt owed by Promoroche to UBS or any part of it. That, he said, was in effect what had occurred, because GSA had ended up as a creditor of Promoroche to the tune of CHF 6 million in place of UBS. He also pointed out that GSA had then used that debt to pay for the new shares that it had acquired in the dilutive rights issue which was the foundation for ESO's claim.
241. The authorities on interpretation and implication of terms were reviewed by the Supreme Court in Arnold v Britton [2015] AC 1619. At paragraph 15 Lord Neuberger summarised the relevant principles,

"15. When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean", to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, para 14. And it does so by focussing on the meaning of the relevant words …in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions."

242. The law on implication of terms has also been recently considered by the Supreme Court in Marks & Spencer plc v BNP Paribas [2016] AC 742. The majority of the Supreme Court considered that the process of implication of terms was part of the interpretation of a contract in the broadest sense, but indicated that it was governed by different rules which were conveniently summarised in a well-known statement of Lord Simon in BP Refinery (Westernport) Pty v Shire of Hastings (1977) 180 CLR 266 at 283,

"…for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."

243. At paragraph 21, Lord Neuberger then continued,

"21. In my judgment, the judicial observations so far considered represent a clear, consistent and principled approach. It could be dangerous to reformulate the principles, but I would add six comments on the summary given by Lord Simon in the BP Refinery case as extended by Bingham MR in the Philips case [1995] EMLR 472 and exemplified in The APJ Priti [1987] 2 Lloyd's Rep 37. First, in Equitable Life v Hyman [2002] 1 AC 408, 459, Lord Steyn rightly observed that the implication of a term was "not critically dependent on proof of an actual intention of the parties" when negotiating the contract. If one approaches the question by reference to what the parties would have agreed, one is not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time at which they were contracting. Secondly, a term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them. Those are necessary but not sufficient grounds for including a term. However, and thirdly, it is questionable whether Lord Simon's first requirement, reasonableness and equitableness, will usually, if ever, add anything: if a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable. Fourthly, as Lord Hoffmann I think suggested in Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988, para 27, although Lord Simon's requirements are otherwise cumulative, I would accept that business necessity and obviousness, his second and third requirements, can be alternatives in the sense that only one of them needs to be satisfied, although I suspect that in practice it would be a rare case where only one of those two requirements would be satisfied. Fifthly, if one approaches the issue by reference to the officious bystander, it is "vital to formulate the question to be posed by [him] with the utmost care", to quote from Lewison, The Interpretation of Contracts 5th ed (2011), p 300, para 6.09. Sixthly, necessity for business efficacy involves a value judgment. It is rightly common ground on this appeal that the test is not one of "absolute necessity", not least because the necessity is judged by reference to business efficacy. It may well be that a more helpful way of putting Lord Simon's second requirement is, as suggested by Lord Sumption JSC in argument, that a term can only be implied if, without the term, the contract would lack commercial or practical coherence."

244. Applying these principles, I am strongly inclined to agree with Mr. Anderson QC that Promoroche's incurring of a debt of CHF 6 million to GSA without the consent of ESO was a breach of the express terms of clause 25 of the Settlement Agreement. It seems to me that having regard to the overall purpose of the Settlement Agreement, which contained many provisions designed to protect the position of ESO as a minority shareholder until the Company could be sold, the prohibition in clause 25 should be read so as to prevent not only the direct acquisition by GSA of the entire loan owed by Promoroche to UBS, but also any transaction to equivalent financial effect in respect of any part of that loan. From the perspective of the parties and given the purpose of the Settlement Agreement, it made no commercial difference whether GSA took an assignment of part of the existing debt from UBS or lent the Company the monies with which to repay its loan to UBS in part.
245. I would also be inclined to hold that it is necessary in order to give business efficacy to the Settlement Agreement (i.e. to make it commercially coherent) to imply a term that no further connected indebtedness would be incurred at a cost to the Company once the existing Connected Indebtedness had been removed. Otherwise, as Mr. Anderson pointed out, the specified indebtedness could be removed so as to comply with the literal terms of the contract on the specified date, but then the indebtedness reinstated the next day to the obvious detriment of the minority shareholders in the Company. That would make no commercial sense.
246. However, neither of those conclusions would, it seems to me, have the consequence for which ESO contends. That is essentially for the reasons given by Miss Bingham QC. As I indicated at the start of this judgment, the exercise upon which I am engaged is to value the Company and ESO's shares in it at the valuation date in October 2012, in order to give a remedy to ESO for the Defendants' breaches of the Settlement Agreement. Even if incurring the CHF 6.2 million debt to GSA without ESO's consent was a breach of clause 25, I do not think that I can disregard the fact that it took place as part of a transaction under which the Company was relieved of an equivalent amount of debt owed to UBS (as to CHF 6 million) and to a third party (as regards the remaining CHF 200,000). The purpose of a remedy for breach of contract is to put the parties in the position that they would have been in had the contract been performed. If the new debt to GSA had not been incurred, neither would the equivalent debt owed to UBS have been discharged. In short, the value of Company as at the valuation date would not have been any greater. Alternatively, put in terms of clause 5.1(K) and the implied term derived from it, it would also be true to say that the CHF 6.2 million of connected debt to GSA was incurred "at no cost" to the Company because it enabled the Company to discharge an equivalent part of the debt owed to UBS.
247. Accordingly, I decline to make any adjustment to the value of the Company in respect of connected indebtedness.

Directors' fees

248. Clause 8.1(A) of the Settlement Agreement provided for the appointment of an independent board of directors of Promoroche which was to replace the existing directors. The "New Directors" were to consist of professionals not connected in any way to either the Duet Parties or the ESO Parties. By clause 8.1(C) the existing directors were not to carry out any acts without the prior written agreement of ESO. And by clause 8.1(F), the Defendants agreed that "the incumbent directors of Promoroche do not and will not receive any remuneration or fees in connection with their board membership".
249. There is no dispute that both Mr. Marich and Mr. Bezzola fell within the category of "incumbent director" at the time of the Settlement Agreement, and I do not think that the fact that Mr. Marich was purportedly appointed a "New Director" in August 2012 (albeit without ESO's approval) changes that position. The experts agree that fees totalling CHF 280,110 were paid to these two incumbent directors between the date of the Settlement Agreement and the valuation date. The first issue between the parties is whether such fees were paid "in connection with their board membership" contrary to clause 8.1(F): and the second issue is how (if at all) the value of Promoroche as at the valuation date must be adjusted to take account of any such payments made in breach of clause 8.1(F).
250. On the first issue, the Defendants submit, on the basis of Mr. Schibl's evidence, that the fees were in fact paid to Mr. Marich and Mr. Bezzola for "day-to-day management services … over and above their duties to the Company" and that as such they did not fall foul of clause 8.1(F). The Defendants contend that this is supported by the fact that the same level of fees continued to be paid to Mr. Bezzola after he had ceased to be a director but remained involved in management of the Hotel.
251. I do not accept these arguments. The Settlement Agreement had its origins in an antagonistic dispute and deep distrust between the parties, and its express provisions provided for a regime under which the interests of ESO pending sale of the Hotel were to be protected by the replacement of the incumbent directors, a strict limitation on the activities of the incumbent directors pending their replacement, and the future management of the Company and the Hotel being carried out by independent parties. Against that background, where the incumbent directors had been managing the Hotel generally, but their future role was to be strictly limited, I think that clause 8.1(F) must be read as providing for a broad prohibition on any payments to them.
252. I also do not accept the distinction that Mr. Schibl sought to draw between payments made to the incumbent directors for the performance of the duties of directors, and payments for services "over and above" those duties. This was a rather ill-defined concept which is not reflected in the terms of the Settlement Agreement. Given the detail in which other matters were regulated by clause 8.1, if this type of regime had been intended, I would have expected to see some more precise contractual definition of the type of services which could be provided and paid for, and those which could not. Instead, there was a general prohibition on the incumbent directors carrying out any acts without written consent of ESO, and no such consent was given for the acts said to justify the payments to them. Moreover, when the Company came to draw up its accounts, it did not distinguish between any of the payments made to the incumbent directors, simply classifying all of them under the category of "Board of Directors' fees".
253. The second argument advanced by the Defendants was that even if, as I find, that the payments to Mr. Marich and Mr. Bezzola were made contrary to clause 8.1(F), no adjustment should be made to the value of the Company. The Defendants argue that if Mr. Marich and Mr. Bezzola had not rendered the services that they did, the Company would have had to pay someone else an equivalent amount to do so.
254. I also reject that argument. I see the potential logic (which has some similarity to the point that I have accepted in relation to the connected indebtedness), and there is no dispute that Mr. Marich and Mr. Bezzola did render some services to the Company to merit the payments in question. However, there has been no evidence as to precisely what those services were, or as to the extent which, if they had not been performed, a third party (presumably in addition to THED) would have had to be employed to provide the services, or at what cost. The onus of establishing this argument must be on the Defendants, and it has not been discharged.
255. I therefore do not propose to limit or reduce the adjustment which should be made to the valuation of the Company for the breach of clause 8.1(F) and I shall therefore require an adjustment to be made for the full CHF 280,110.

Legal provision

256. Promoroche's balance sheet as at the valuation date includes a provision for potential legal liabilities of CHF 1.5m. The potential liabilities concerned a dispute with contractors over the Hotel, and the provision had been in the Company's accounts since 2009.
257. In October 2012 DREP informed its investors that the risks of crystallisation were considered to be very low. On this basis, Mr. Davies was of the view that the provision should be removed from the balance sheet in its entirety when seeking to ascertain the true value of the Company as at the valuation date. He also pointed out that in the ordinary course of negotiations for a sale of a company, matters such as this are often resolved by the purchaser paying a price based upon the removal of such provision from the balance sheet, but with the vendor providing an indemnity to the purchaser.
258. For his part, Mr. Cottle was of the view that the provision of such an indemnity would be a matter of negotiation between the parties. In the absence of any further evidence, he made an assumption of equal bargaining power between a willing buyer and a willing seller and contended that this would justify the removal of one-half of the provision (CHF 750,000).
259. I prefer ESO's arguments and Mr. Davies' approach to that of Mr. Cottle on this issue. I think that the key point that would drive the outcome of any negotiations between a hypothetical buyer and seller would be the evidence that the underlying liability was historic and very unlikely to crystallise. In my view, the well-informed and reasonable parties to a sale would appreciate that the provision was likely to be released and that the Company's true value was correspondingly greater than it might appear from balance sheet. In these circumstances, in my view any seller would reasonably ask to receive, and a reasonable purchaser would agree to pay, a higher price for the Company, and the parties would agree some form of indemnity or deferred consideration arrangement to deal with the contingency as Mr. Davies suggested.
260. I therefore find that an upwards adjustment should be made to the balance sheet for the full value of the provision (CHF 1.5 million).

AHMI's incentive fee

261. The arrangements under which THED was to act as independent manager of the Hotel included an incentive arrangement under which THED was entitled to be paid a fee of 1.5% of the proceeds of sale of the Hotel less the amount of Promoroche's debt if it was the effective cause of the sale, and a fee of 0.5% if it was not. The Defendants contend that the value attributable to ESO's shares in the Company should be reduced on account of this potential liability. ESO contends, however, that THED was already acting as the Company's real estate broker, and that any fee payable to THED should be included in the 4% deduction which the experts have already agreed was typical for real estate transactions costs in Switzerland in 2012.
262. Given the value for the Hotel which I have arrived at above, the amount of any incentive fee payable to THED would be relatively small. In these circumstances, and having regard to the likelihood that THED would be involved as real estate broker in any event, I agree with ESO that any incentive fee should be treated as subsumed within the assumed 4% transaction costs already deducted.

Taxation

263. The Defendants submit that any damages payable to ESO should be reduced to take account of the likelihood of Promoroche itself having to pay tax on the sale of the Hotel. I did not, however, have any means of calculating the tax (if any) payable by Promoroche on a sale of the Hotel at the price which I have found represents its true value. Accordingly, and also having regard to the fact that the experts were agreed that the shareholders in Promoroche might well seek to minimise any tax payable by selling the shares in the Company instead of causing the Company to sell the Hotel, I do not propose to make any deduction on this account.

The Result

264. The result of the adjustments that I have found should be made is that a total sum of CHF 1,780,110 needs to be added to the restated balance sheet value of the Company of CHF 4.486 million. This gives a total value of CHF 6,266,110 of which 30% is CHF 1,879,833. That is the amount of damages to which I conclude that ESO is entitled. I shall hear further submissions on the questions of interest and costs if agreement cannot be reached between the parties.

Postscript

265. After having prepared this judgment in draft, I received a communication from ESO's solicitors dated 23 May 2017, drawing my attention to the fact that a meeting of Promoroche had been convened to approve the sale of the Hotel to a Hong Kong entity for CHF 35.5 million. Exchange was due to take place on 19 May 2017. ESO contended that this evidence was relevant as a "sense check" to some of Mr. Cottle's evidence concerning the sale of a neighbouring hotel in Villars for CHF 13.5 million in 2015.
266. The Defendants' solicitors responded on 25 May 2017, submitting that this was a very late and illegitimate attempt to introduce new evidence into the case, pointing out that it concerned events that significantly post-date the valuation date.
267. I agree with the Defendants that since the recent sale post-dates the valuation date by more than four and a half years, it cannot be direct evidence that could be taken into account on a valuation as at a date in October 2012.
268. Moreover, I do not think it can be of any assistance to me, even as a sense check to my valuation. I have had no evidence as to the performance of the Hotel since October 2012, or as to any material changes that might have been made to its operations, or as to the general conditions and trends in the Swiss alpine market in that intervening period. All of these things might have affected the current value of the Hotel. I am therefore unable to assess in any meaningful way how the recently agreed price might relate to the market value of the Hotel in October 2012. Accordingly, I do not propose to take any account of this new information.