Jacfun Pty Limited v Sydney Harbour Foreshore Authority

Factual Background 2SHFA is a statutory corporation established by the Sydney Harbour Foreshore Authority Act 1998 ( SHFAA ). It was created to manage the harbour foreshore area, including Darling Harbour. The management of its day-to-day activities are the responsibility of a chief executive officer (see SHFAA, s 30) who, during the relevant time, was Mr Greg Robinson. It also has a board which is responsible for overseeing the activities of the Authority. The Board consists of the CEO, the Director-General of the Department of Urban Affairs and Planning, who at the time was Ms Sue Holliday, and up to 5 other persons, including a chairperson, who were appointed by the relevant Minister: SHFAA s 29. One of the members appointed by the Minister was Mr Frank Sartor, who at the time was Lord Mayor. The chairperson of the board was Mr Gerry Gleeson, a well known and respected public servant. SHFA was and remains subject to the "control and direction" of the relevant Minister: SHFAA s 28. Section 17(1) of the SHFAA permits SHFA to acquire land by agreement or by compulsory process in accordance with the L a nd Acquisition (Just Terms Compensation) Act 1991. 3The Darling Harbour Development Plan No 1 1985, which was made under the (now repealed) Darling Harbour Authority Act 1984 , required development approval for commercial development at the Darling Walk site. Under the 2002 version of the Environmental Planning and Assessment Act 1979 ( EPAA ), the Minister for Planning was the consent authority for development approval for the Darling Harbour area: EPAA, Sch 6, cl 22(1). Only SHFA, or a person with its written consent, could apply for development approval in relation to land under its control: Environmental Planning and Assessment Regulations 2000 (NSW), reg 49(1) (historical version as at 6/9/02). 4The lease of the Darling Walk site to Jacfun commenced on 22 March 1997. It was for an initial term of 41 years, with two options to renew of 26 years each. Clause 4.3 of the lease provided: 4.3 Permitted Use (a) During the Term the Demised Premises shall be used as an Entertainment Complex and for any other purposes referred to in the Lessee's Proposal. (b) The Lessee will not, during the Term, permit any noxious, immoral, offensive or illegal act, trade, business occupation or calling at any time during the Term to be exercised, carried on, permitted or suffered in or upon the Demised Premises. 5The document referred to as the "Lessee's Proposal" was not in evidence. The case proceeded on the basis that that document did not permit use of the Darling Walk site for commercial office space or for use as a hotel. 6The lease required Jacfun to pay rent calculated by reference to the income it received from the premises. It also set a minimum rent which was payable each year. Jacfun was entitled to assign the lease but, in that event, cl 6.7 gave SHFA a first right of refusal. 7Jacfun subleased the premises. Initially, the principal subtenant was SEGA Enterprises (Australia) Pty Limited ( SEA ) which operated an entertainment complex known as "SEGA World". The balance of the subtenancies were for a mixture of retail and entertainment uses. 8In 1999, SEGA Enterprises of Japan, SEA's parent, transferred its shares in SEA to interests associated with Jacfun in return for $36,810,769. A proportion of that amount was used to pay Jacfun's external debt, with the result that Jacfun was from that time funded entirely by its shareholders. 9The SEGA World concept was not a success and, after the end of the Sydney Olympics, it was closed. Following the closure of SEGA World, Jacfun began exploring how it might derive value from its lease. It regarded the issue as pressing, since by then the leased premises were approximately 75 percent vacant and Jacfun was incurring significant losses. 10In October 2000, Jacfun commenced work on concept plans for the redevelopment of Darling Walk. It engaged the Hayson Group of Companies and, in particular, Mr Ian Hayson to assist it in that task. At about the same time, SHFA decided that it would prepare a Master Plan for Darling Harbour. That plan became known as the Darling Harbour 2010 Master Plan. Both parties recognised that the original concept for Darling Walk was flawed. Part of the problem was that the site could not attract people during the week. In addition, as Mr Ronald Dyne, Jacfun's general manager, was to record a year later following a meeting with representatives of SHFA on 19 November 2001: [I]t has been proven through the demise of Sega World, Luna Park and Fox Studios that Sydney cannot support any major destination entertainment businesses. 11Mr Hayson recommended that the solution to these difficulties was to redevelop the Darling Walk site for use as commercial offices as well as for entertainment and retail and, during the period from October 2000 to August 2001, Jacfun put forward to SHFA a number of proposals which involved redeveloping the site in that way. Each of those proposals was rejected by SHFA. 12On 27 July 2001, SHFA wrote to Jacfun saying that Jacfun should not do any further work on a proposed redevelopment until the Darling Harbour 2010 Master Plan was complete, which was expected to take 6 to 9 months and, at a board meeting of SHFA on 13 September 2001, the board delegated to Mr Robinson authority "to negotiate the purchase of the site from Jacfun at an acceptable value". It appears that the board thought at that time that that would enable SHFA to redevelop the site to include residential accommodation. Although the timing is not clear from the evidence, it appears that, shortly after the SHFA board meeting, Mr Robinson met with Mr Hayson and raised the possibility of SHFA buying out Jacfun's lease for an amount of $15 million. Mr Robinson also told Mr Hayson that SHFA proposed to appoint Mr Max Bowen, who had extensive experience in the property development industry, to conduct negotiations with Jacfun concerning the surrender of its lease. 13Mr Hayson had several discussions with Mr Bowen concerning a buyout during which he indicated that a price in the order of $20 million would be acceptable to Jacfun. However, negotiations to buy out the lease soon stalled and, on 5 November 2001, Mr Bowen told Mr Dyne that SHFA was no longer interested in a buyout. Instead, Mr Bowen proposed that SHFA and Jacfun enter into some form of cooperative arrangement under which SHFA would seek to change the use that could be made of the site and would share in the resulting increase in value. A few days later, on 8 November 2001, Mr Robinson confirmed in a letter to Mr John Leece, one of Jacfun's directors, that SHFA was no longer interested in a buyout. In that letter Mr Robinson said: It appears that your view of the value of your leasehold stake is significantly greater than that which we could justify, particularly from a Government process point of view, and as such we are not in a position to negotiate further. 14During the first half of 2002, the parties discussed proposals to redevelop the Darling Walk site. During that time, SHFA took active steps to progress that part of the Darling Harbour 2010 Master Plan concerned with the Darling Walk site. It appointed Cox Richardson, architects, and other consultants to progress those plans. Representatives of SHFA and Jacfun met regularly together and with Cox Richardson to discuss various options. The option preferred by both the management of SHFA and by Jacfun was one that involved three towers, one of which would accommodate a hotel and the remaining two of which would accommodate commercial office space. During one of the meetings, it was also suggested that the then proposed cross city tunnel ventilation shaft could be included in one of the office towers and that that may make the proposal more attractive to government. 15During this period, Jacfun largely put on hold attempts to sublease space in Darling Walk in the expectation that a redevelopment plan would be agreed. 16On 19 June 2002, there was a board meeting of SHFA. At that meeting, both Mr Sartor and Ms Holliday expressed concern about the preferred option and, in particular, the height of the proposed office buildings. The board resolved: As the majority of Members considered that a higher stack for the Cross City Tunnel is preferable, a number of options should be considered and referred to the Minister for consideration. These options are to include the Darling Walk re-development ... If a tower building is to be constructed as part of the Darling Walk re-development, consideration should be given to locating the building out of the Darling Harbour precinct and across the envelope separating Darling Harbour from the city. Shortly afterwards, SHFA terminated the consultants it had engaged to work on the proposed redevelopment. 17On 4 July 2002, Mr Bowen and Ms Di Talty, Director Major Projects with SHFA, met with Mr Dyne to inform him of the board's position. Mr Dyne's file note of that meeting records in part: They advised that the proposed plan for the Darling Walk development had met with some resistance at the SHFA board meeting. Most vocal opponents were Frank Sartor and Sue Holliday, Director of Planning NSW. Sartor, supported by Holliday, objected to the height and scale of the development and as a result the board adopted the conservative approach that they should wait to see the results of the Master Plan 2010 before proceeding with any development at Darling Walk. It was stated that consideration should be given to a low-rise development and uses should be determined after completion of Master Plan 2010. Master Plan 2010 is the new plan that SHFA is developing for the entire Darling Harbour precinct. It is a detailed study of what is needed in Darling Harbour for the future. The problem that this presents is that this master plan is expected to be completed in September 2003 and SHFA is no longer able to fast track the Darling Walk development as originally stated. The delay is at least 12 months. They also cannot be sure that they can deliver the minimum area of 55,000 square metres as set out in the proposed deed with Jacfun. The SHFA executives expressed regret for their board's position. ... Jacfun asked for a rent reduction, but that was refused. Mr Dyne reported what he was told by Mr Bowen and Ms Talty to the directors of Jacfun in an email he sent to them on the day of the meeting. 18According to a file note prepared by Mr Dyne, Mr Robinson also met with Mr Hayson on 18 July 2002 to explain SHFA's position. That note records Mr Robinson as saying: 1 There was strong opposition by the external board members to a large-scale development. 2 Expressed bitter regrets that the board had not approved the plan. 3 If it was up to him and Gerry Gleeson, the plan would have been approved. 4 Goodwill exists between SHFA executives and Jacfun. 5 SHFA should buy the site from Jacfun but they could not meet the price expectations put forward by Jacfun in 2001. 6 Wants Max Bowen to negotiate a deal with us in the range of $9 to $10 million. 19Subsequently, discussions took place between Messrs Hayson and Bowen. Mr Hayson reported back to Mr Dyne the results of those discussions. Mr Dyne set out what he was told in an email dated 1 August 2002 to members of the Jacfun board. The email relevantly says: The SHFA board decided that they [sic] would be no large scale development on the Darling Walk site in the foreseeable future and the status quo would remain until the Darling Harbour Master Plan 2010 is completed. However the CEO, Greg Robinson, believes that because of the current situation at this end of Darling Harbour and the additional disruptions that will be caused by the construction of the Cross City Tunnel he can convince the board to buy the site. They cannot justify a valuation for the site and the purchase would result in a negative cash flow to SHFA but he believes they should purchase to be able to control their own destiny. ... They are not trying to con us into selling out and at best they see a hotel development with retail but no offices. They acknowledge that Greg Robinson mentioned a figure of $15 million last year but thereafter they were not able to justify that price. That is why they then put forward the joint venture proposal. Max believes that $8 million is "appropriate and generous" ... Mr Hayson's only recollection of the conversation is that he was told that the SHFA board was against large scale development. 20Following these meetings, Jacfun received a number of enquiries about selling the site. It appointed Laing & Simmons and Colliers International to develop a marketing strategy. Laing & Simmons expressed the view in a marketing report that the current market sales potential of the lease was in the range of $13 million to $16 million. It also advised Jacfun that the "investment value" of the lease was $12,100,000 "fully leased". Colliers International expressed the view in a similar report that the "realistic sale price range for Darling Walk is $14 million to $20 million". Its estimate of the investment value fully leased was $13,500,000. The reason for the difference between market value and investment value was not explained in the evidence; and the reports themselves were not admitted as evidence of value. SHFA also obtained a confidential valuation report from Handley Paris & Partners. That report estimated that the commercial value of the lease was $0 and that the estimated compulsory acquisition value was $12,000,000 to $16,000,000 (on the basis that the lease was worth $2,000,000 to $4,000,000 and the buildings were worth $10,000,000 to $12,000,000). The report recommended an "acquisition range" of $7,750,000 to $12,000,000. 21At the same time that Jacfun was investigating the sale of its lease it also once again started actively to seek tenants. 22On 10 October 2002, Mr Dyne and Mr Hayson met with Mr Bowen. Mr Dyne made a handwritten file note of that meeting which records: $10m to emotionally control the site. Compulsory acqu." In his affidavit, Mr Dyne says that he recalls Mr Bowen saying words to the effect of: SHFA is prepared to pay $10 million to emotionally control the site. If you do not agree to sell then it will consider compulsory acquisition. Neither Mr Hayson nor Mr Bowen had a practice of keeping file notes and neither gave evidence about the meeting. No explanation was given of what precisely was meant by the expression "emotionally control the site". 23There was a further meeting between Mr Dyne and Mr Bowen on 11 October 2002. Mr Dyne made a typewritten file note of that meeting. It is not clear when that file note was prepared. However, it was prepared no later than 16 October 2002. The file note records the following: Met with Max Bowen on Friday 11 th October 2002 for an "off the record" discussion. I advised that Jacfun was extremely dissatisfied at the way SHFA had dealt with us over the years. Bowen advised that SHFA wish to gain full control of the Darling Walk site to be in a position to control its destiny. But this would not be at the expense of Jacfun. They do not foresee an office development ever being permitted and at best the only additional rights could be a low-rise hotel. They may consider some negotiation with RTA on the smoke stack for the Cross City Tunnel. Bowen stated that he had consulted a valuer who had determined that Jacfun's interest in the site was worthless. However, to get control SHFA is willing to pay $10,000,000 to Jacfun. This would be the maximum. SHFA is also considering a Compulsory Purchase of the site which Bowen maintains they are entitled to do. In this event the value would be determined by the Valuer General. Bowen believes there is a "window of opportunity" for Jacfun to do a deal with SHFA. I stated that I would not submit any proposal to the Jacfun board unless it contained a clause allowing for additional payments to Jacfun in the event that additional value was created post sale by changing zoning. Bowen agreed to this. It is the conversation recorded in this note that is said to amount to misleading and deceptive conduct on the part of SHFA. 24There was a further conversation between Mr Dyne and Mr Bowen on 15 October 2002. Mr Dyne's note of that conversation records that Mr Bowen indicated that the price of $10 million was acceptable subject to due diligence in relation to any tenants' claims and that SHFA would negotiate an additional payment to Jacfun in the event of changes to zoning of the site in the future - described in the note as a "kicker". 25Mr Dyne repeated the contents of his file note of the 11 October 2002 meeting in his report to the Jacfun board in a note he circulated on 16 October 2002. The board met on 17 October 2002. The meeting was attended by Mr John Landerer, Mr John Leece, Mr Kevin Bermeister and Mr Bruce Fink. The board agreed in principle to accept Mr Dyne's recommendation that Jacfun should accept SHFA's proposal to buy out Jacfun's lease. However, it was agreed that Jacfun should try to get a higher price. Each of Mr Landerer, Mr Leece and Mr Bermeister gave evidence. Each said they relied on Mr Dyne's report of his conversation with Mr Bowen on 11 October 2002 and, in particular, the statement that SHFA did not foresee an office development ever being permitted in reaching that conclusion. Each also said he took other matters into account, including the threat of compulsory acquisition and the fact that SHFA may have been able to frustrate a sale through the first right of refusal. Each of the directors and Mr Dyne was cross-examined on what he understood was the effect of what Mr Bowen had said at the meeting on 11 October 2002. Mr Dyne said that he understood Mr Bowen to be saying that "there would be no office development in the foreseeable future", which he took to mean the next 10 to 20 years. Mr Landerer thought that he was being told that no office development would ever be permitted. Mr Leece thought that he was being told that SHFA did not foresee an office development ever being permitted until such time as the Darling Harbour 2010 Master Plan was available. Mr Bermeister thought that he was being told that SHFA did not foresee an office development being permitted until the expiry of the initial term of the lease - that is, for 35 years. 26Following Jacfun's board meeting, there were extensive negotiations concerning the terms of the buyout. Jacfun was unsuccessful in negotiating an increase in the price. It originally sought a "kicker" that extended for a period of 10 years. That, however, was resisted by SHFA. The surrender of lease was finally signed on 3 March 2003. Under the terms of the deed of surrender SHFA paid Jacfun approximately $10 million. Clause 7.1 of the deed relevantly provided: If, at any time up to and including 1 July 2008, the Landlord Disposes of the Premises to realise a Net Disposal Price in excess of $40,000,000 (excluding GST) then any excess above $40,000,000 (excluding GST) is to be shared equally by the Landlord and the Tenant. Jacfun regarded this term as the best it could negotiate in the circumstances. 27In late 2007 and early 2008, there were a number of press reports that Lend Lease had been selected by SHFA to construct a substantial commercial development on the Darling Walk site. Jacfun became aware of those reports and, on 15 May 2008, Landerer & Company, its solicitors, wrote to SHFA expressing concern that there had been a disposal of the site within the meaning of cl 7.1 of the deed of surrender and seeking information relevant to that question. There was no suggestion in that letter that Jacfun had been induced to surrender its lease by misleading conduct. That allegation was first made in an affidavit sworn by Mr Dyne on 29 August 2009 in support of an application for preliminary discovery. 28On 2 January 2009, the Minister for Planning approved a development and building application for the construction of two 9 storey buildings on the site.

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Judgment (7 paragraphs)

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