SVM113070 - The Statutory Open Market: Case Law - the Special Purchaser

A question that sometimes arises is whether the interest of a single special purchaser can affect the open market value. This was shown in the early case of IRC v Clay [1914] 1KB 339. The parties were agreed that the house to be valued was worth no more than £750 as a dwelling house. However, next door to it was a nurses’ home, and it was conveyed on 29 September 1910 to the trustees of the nurses’ home for £1000. The date of the conveyance was (under the relevant legislation) the date of valuation. The trustees had offered the owner £850 in 1908, which she had declined, and the 1910 price was as a result of bargaining. There was evidence to show that in fact the trustees would have been prepared to give £1100. The High Court and Court of Appeal both rejected an argument that the interest of the trustees meant that the market price was only “one more bid” than £750 (say, £800), and they confirmed a valuation of £1000. This was a reflection of how speculation operated in the real world: per Pickford LJ (at page 480):

“The effect on the market of such a probable purchaser is a matter to be estimated by the referee. I agree with Scrutton J that the referee is not bound to take the actual figure given, and should not do so arbitrarily, but should consider all the circumstances and estimate what he considers the value in the open market. Here he has done so, and has come to the conclusion that under all the circumstances the amount this house might be expected to realize in the open market would be £1000, an amount, it is to be noticed, less than the trustees were in fact willing to give, if compelled.”

However, it cannot be assumed from Clay that the mere fact of the existence of a special purchaser is enough to have a substantial effect on market value. A critical part of the reasoning as to the special purchaser’s relevance was the fact that the special purchaser’s existence was known to the market. This point was identified by Lord Pearson in Lynall (at 706C-D). Writing in the context of the fact that confidential information in the possession of the board was (under the then legislation) irrelevant to open market value, he distinguished Clay:

“The situation differs from that in [Clay], where the special fact enhancing the price of the property was assumed to be a matter of local knowledge”.

The open market excludes no-one. The open market must be assumed to include all possible purchasers who both wish to buy the shares and have the necessary funds to do so. This includes not only hypothetical purchasers but also, possibly, the institutions or pension funds if the value of the holding is exceptionally large, and actual members of the company, including directors.

The directors and actual members may be special purchasers because they may have some special reason for paying more than market value to acquire a particular holding (because it may provide them with control for instance). Whether or not the statutory open market is influenced by such purchasers is a question of fact acknowledging as we must that all likely purchasers are present.

In the Crossman case - the existence of a special purchaser (a trust company) was acknowledged but the special price it was prepared to offer was ignored because the evidence pointed to the fact that the extra sum which could be obtained from trust companies was not an element of the value in the open market but a particular price beyond the ordinary market price that a trust company would give for special reasons of its own.

Following the decision in Lynall, it appears that the open market is influenced by the existence of a special purchaser only where it can be clearly established by cogent evidence that at the date of valuation, the special purchaser was in fact:

• offering to buy the shares;
• financially able to buy the shares at the enhanced price; and
• this fact was known to the open market.

The courts will require clear proof of this situation before any weight is given to it.

In re Lynall CA [1969] 3 WLR 984:

“…it would be very unsatisfactory if the amount of Estate Duty payable in cases such as this were to depend on evidence, which in the nature of the case cannot easily be challenged, given by persons who may be personally interested in the result.”

Cross L J at page 995

“In Crossman’s case it was decided that the fact that a ‘special’ purchaser, namely a trust company, would have offered a special price must be ignored but this was because that particular purchaser had a reason special to him for so doing. So, here, a director who would give an enhanced price because he would thus obtain control of a company would be left out of account. But that is not to say that directors as such are to be ignored. All likely purchasers are deemed to be in the market.”

Harman L J at page 990

Re Lynall HL [1971] 3 AER 914

“…it is said that the likely purchasers might have included a director of the company and he would have had the (special) information ex officio. But unless others also knew it, his possession of the information would not materially affect the market price which he or any other purchaser would have to pay. The situation differs from that in Commissioners of Inland Revenue v Clay (1914) 3 KB 466, at pages 471-2 where the special fact enhancing the price of the property was assumed to be a matter of local knowledge.”

Pearson L J at page 928

In re Crossman HL [1937] AC 26

“The whole world was hypothetically there, making hypothetical bids. “

Lord Russell of Killowen at page 69

Valuers should seek advice at an early stage where it appears that the special purchaser argument is likely to be a major factor in the valuation exercise.

Additional Guidance: SVM150000