Investec Bank (Channel Islands) Ltd v The Retail Group Plc
| Jurisdiction | England & Wales |
| Judge | Mr Justice Sales |
| Judgment Date | 13 March 2009 |
| Neutral Citation | [2009] EWHC 476 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC07C03495 |
| Date | 13 March 2009 |
[2009] EWHC 476 (Ch)
Before : The Honourable Mr Justice Sales
Case No: HC07C03495
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Charles Hollander QC (instructed by Eversheds) for the Claimant
Neil Mendoza (instructed by Altermans) for the Defendant
Hearing dates: 17/02/09 – 24/02/09
Mr Justice Sales:
The Claimant (“Investec”) is a bank. The Defendant (“TRG”) is a property development company. TRG's sole shareholder and one of its two directors is David Murphy. This is a claim by Investec for a payment which it says is due from TRG in respect of what has been termed an “exit fee”. This is a fee which Investec says is due to it under a profit-sharing arrangement in the form of an Exit Fee Agreement dated 22 October 2004 made between Investec and TRG (“the EFA”) in respect of the development of a shopping precinct at Palmerston Road in Southsea.
The shopping precinct was comprised of shops and other retail outlets on the east and west sides of Palmerston Road. I will refer to the properties owned by TRG on the east side of Palmerston Road as “the East Block”. I will refer to the properties which TRG purchased from Portsmouth City Council (“Portsmouth CC”) in October 2004, located on the west side of Palmerston Road, as “the West Block”.
From 2003 TRG had been acquiring properties in the East Block piecemeal in order to build up a property portfolio which could be developed as a coherent unit. The plan was to try to improve the overall quality of the shops and outlets so as to achieve better rental income over time and improved capital values, and also to obtain planning permission to build residential flats above the retail outlets, which could then be let or sold. Mr Murphy also entered into negotiations on behalf of TRG with Portsmouth CC to acquire the West Block, so as to achieve a larger portfolio capable of development as a still larger unified project. I will refer to the East Block and West Block together as “the portfolio”, and to the development of the portfolio as “the development” or “the project”.
By letter of 15 June 2004 Portsmouth CC offered to sell the West Block to TRG for £9,750,000, subject to contract. This was an important opportunity for TRG. TRG had to raise the finance necessary to acquire the West Block and also to refinance the East Block at the same time. Mr Murphy therefore entered negotiations with a range of possible lenders.
By July 2004 it appears that Mr Murphy had found possible senior loan providers for TRG (i.e. lenders who would take a first charge over the portfolio and lend TRG funds equal to some 70–75% of its value), but he still needed to find a provider of higher risk lending (referred to as “mezzanine lending”), secured by a second charge over the portfolio ranking behind the first charge in favour of the senior loan provider, in order to fund the balance of the purchase price for the West Block and the refinancing of the East Block. Investec was a well-known provider of such mezzanine lending for property development transactions.
TRG's then solicitors were Messrs Glinert Davis. Mr Murphy had a particular connection with that firm, because his sister Ms Hibberd (now Ms Biagi, by which name I shall refer to her throughout this judgment) was a solicitor there. Daniel Glinert of Glinert Davis had contacts with Investec, so Mr Murphy arranged for Mr Glinert to approach Investec to see whether it would be interested in providing mezzanine lending of £2.5m for the development. Mr Glinert wrote a letter dated 21 July 2004 to Marc Weinberg at Investec setting out summary details of a proposal that Investec provide mezzanine lending of £2.5m for a term of 30 months to be discharged at the end of that term by a payment of £4m. The disparity between the sum lent and the sum repaid reflected the risk inherent in mezzanine lending in relation to a property development of the kind in question.
Investec was interested. Mr Weinberg and Michael Donovan of Investec met Mr Murphy and a surveyor representing TRG, Tim Clark. They also visited the site of the development. TRG supplied Investec with detailed information about the project.
On 5 August 2004 Mr Weinberg sent Mr Murphy an e-mail asking for, amongst other things, simplified cash flows to be provided and a breakdown of the £8m profits which TRG had suggested could be made from the development. Mr Clark responded on 9 August 2004 on TRG's behalf. He attached some new cash flows to his reply, as requested. He wrote:
“The breakdown of profits is as follows —£3.75m residential gains, £5.75m commercial gains. As at completion none of the commercial gains are included in the projected figures.”
The cash flows included an exit return analysis which showed a projected property valuation for the portfolio as at December 2007 of about £20.2m. The cash flows showed senior debt of £12.25m, mezzanine debt from Investec of £2.5m and further subordinated lending (including what was described as “equity” from Mr Murphy) of about £1.2m. In addition, an investment return was expected on the residential element within the development. This was projected to be in the order of about £3.75m.
By a letter dated 10 August 2004, Investec Bank (UK) Limited made an indicative offer to provide mezzanine funding to TRG subject to approval by its credit committee. (In due course the relevant loans were made by another company in the Investec group, namely the Claimant; in this judgment it is not necessary to distinguish between these companies and for convenience I refer to them both as Investec). The indicative offer proposed mezzanine lending of £2.5m by Investec for a term of three years to assist with the acquisition of the portfolio for a consideration of £16.35m (i.e. covering both the East and West Blocks). There was to be an arrangement fee of 1% of the value of the loan. The letter also stated that there should be: “A profit share of 35% of the net profit after all costs with a minimum fee of £500,000 at expiry of the Loan.” Investec was to be protected by a second legal mortgage over the portfolio, ranking behind the first mortgage in favour of the provider of the senior loan.
On 11 August 2004 Mr Murphy sent Mr Weinberg some additional information by e-mail. This included an exit analysis showing the anticipated valuation of the portfolio as about £19.6m in December 2007 which (after deduction of combined senior and mezzanine lending of £14.5m) gave an equity or profit value of about £5.1m, excluding any return on the residential elements in the project. The information Mr Murphy provided also showed expected rents of the order of about £1.1m a year against interest payable on the senior and mezzanine lending of about £920,000 a year. A degree of coverage of interest by anticipated income of the order of about 20% would be normal in a transaction of this kind, to give the lenders comfort that the interest payments would indeed be met.
In the course of July and August 2004 TRG negotiated with various potential providers of senior lending. In the event, however, it was Investec which was chosen as the provider of the senior loan as well as a mezzanine loan. On 26 August 2004 Mr Weinberg and others presented an application to Investec's credit committee for a loan in the total sum of £14.75m, made up of a senior loan of £12.25m and a mezzanine loan of £2.5m. This lending was proposed in order to refinance the East Block for £3.8m and to fund the purchase of the West Block for £10.45m. The terms proposed involved payments of interest, an upfront fee and a profit share in these terms:
“35% of the net profit after all costs with a minimum fee of £500,000 at expiry of the Loan.”
The application contemplated an exit at the end of three years. The value of the East Block was estimated at £6.15m. The application referred to the scope for improving the commercial rental values within the development and improving its capital value. It also referred to the residential planning gains which it was hoped would arise from a substantial residential development as part of the East Block. The application referred to planning permission dated 9 June 2004 for the development of part of the East Block and to further applications for planning permission. There was also a reference to a potential further phase of the development to expand holdings close to the West Block. This was referred to as “phase 4”, but it was stated not to form part of the application. The financial analysis set out in the application referred to purchase costs for the portfolio of about £16.3m, proceeds of sale of the commercial development of about £20.4m and net proceeds from residential sales of about £3.6m. On these projected figures, and making allowance for interest charges and rental receipts, the analysis showed a profit share for Investec of about £2.7m at the end of the three year term and for TRG of about £5m at the end of that term, reflecting the 35% / 65% division between them. These figures reflected information provided by TRG and were broadly in line with the predicted profits previously indicated by TRG.
On 26 August 2004 Investec's credit committee approved the transaction in principle. One of the conditions set out in the approval was, “the client is to receive no coupon [i.e. interest] on his equity in the profit share calculation.” The reference to “equity” related to the finance which it was expected TRG would provide (from its own resources or borrowings from third parties) in relation to the purchase of the West Block and the refinancing of the East Block.
Investec indicated to TRG that it would issue a letter of offer. By letter dated 15 September 2004 from Glinert Davis...
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