Multi Veste 226 BV v Ni Summer Row Unitholder BV & Ors

In February 2004 Wolverhampton City Council (“the Council”) published a development brief for the regeneration of Wolverhampton Town Centre. In May 2004 Multi Development UK Limited (“Multi UK”) were chosen as the Council’s preferred developer. Multi UK worked up a scheme comprising two large units, five medium sized units (MSUs), 85 unit shops, an underground car park containing 758 spaces and 152 flats above the shops in the main shopping centre and above the shops fronting Victoria Street and Worcester Street. It was to be known as Summer Row. Multi UK entered into a Development Agreement, dated 4 October 2005 (“the Development Agreement”), with the Council. This provided that, subject to a number of conditions precedent, the Council would acquire the land needed for the site where Summer Row was to be built, and then grant a 250 year headlease, at a peppercorn rent, over the site to a special purpose vehicle limited liability partnership. In turn, Multi UK would carry out the “Development Works” (as defined in the Development Agreement). The Development Works as defined included the construction of the residential component, part of which was to consist of affordable dwellings.

One of the large units was intended to be a department store. Debenhams entered into a conditional agreement for lease of that store on 17 March 2006. On 27 July 2006 Multi UK were granted outline planning permission for the development. In the meantime Multi had been looking for investors to participate in the development. By October 2006 initial Heads of Terms were agreed between Multi and a consortium of Northern Ireland investors (“the NI Investors”).

In September 2007, a Jersey Unit Trust was established to hold the development; and Multi Veste 226 BV (“Multi 226”) and the NI Investors entered into a Unit Sale Agreement (“the USA”). Under the terms of the USA Multi 226 was entitled to sell a half share in the development at a price to be determined by multiplying rental income at Summer Row by a fixed yield of 5.85%, up to an agreed rental figure on a unit by unit basis. The buyer was to be NI Summer Row Unitholder BV (“the NI Unitholder”). The USA also provided for the funding of the development. This was originally contemplated as being a mixture of bank borrowing and equity participation by Multi 226 and the NI Unitholder respectively. Multi 226 and the NI Unitholder were to contribute £27 million each. If these contributions plus the bank lending turned out not to be enough, Multi was required to make up the shortfall. The USA provided for the NI Unitholder to provide bank guarantees to support the guarantees of the NI Investors themselves that the NI Unitholder would perform its own obligations.

By 3 February 2009 the bank guarantees had not been provided. The NI Investors now admit that that was a breach of contract. On that day Multi 226 alleged that the failure to provide the guarantees was a repudiatory breach of contract, and terminated the USA. The NI Investors retorted that Multi 226’s purported termination of the USA was itself a repudiatory breach; and they in turn terminated the USA. The project to build Summer Row has since been abandoned. Multi 226 now sues for damages for breach of contract. Although the parties have identified no less than 31 issues, in essence they boil down to three:

The story involves a number of interlocking themes. Unusually, I think that it is best understood in part thematically rather than strictly chronologically, although I will begin the narrative with a general view of the facts.

Multi’s case was presented by Mr Alan Gourgey QC and Mr Iain Pester; while the NI Investors’ case was presented by Mr Jonathan Gaunt QC and Mr James Cutress.

Multi 226 and Multi UK are part of a group of companies, which are ultimately owned by Multi Corporation B.V. It is not usually necessary to discriminate between them; and except where it matters I use “Multi” interchangeably for all of them. The group’s head office is in Gouda, the Netherlands. The group has developed and built over 150 developments, involving both offices and shopping centres and has won over 60 major international awards. As at December 2010, it was the second largest retail developer in Europe. Since January 2006 it has been largely owned by Morgan Stanley Real Estate Funds.

For each country in which Multi operates it has a country manager. The country manager for the UK was Mr Paul Sargent. Above the country manager is a regional manager. In the case of the UK the regional manager was Mr Glenn Aaronson, who was also Multi’s CEO. Above the regional managers was the Executive Committee (or ExCom), on which Mr Aaronson also sat, together with other Multi personnel. Above the ExCom was the Investment Committee (or ICom), on which Mr Aaronson also sat together with other Multi personnel and representatives of Morgan Stanley. At the very top of the hierarchy was the Board of Directors on which Mr Aaronson also sat.

The various committees consider a formal investment proposal. Each investment proposal remains current until it is either approved or rejected. An investment proposal takes the form of a written presentation, backed by spreadsheets showing the financial implications of the proposal in question. A project of the size of Summer Row would have needed the approval of ExCom, ICom and the full board.

It is common ground that the burden lies on Multi to show that the breach of contract by the NI Investors caused a loss. Whether Multi would or could have built out the development was not just a question of Multi’s own wishes and capabilities. It would have needed to borrow money. There are two potential sources of lending which I will have to consider in due course: banks and mezzanine financiers. It is also common ground that the conditions precedent in the Development Agreement had not in fact been satisfied when the USA was terminated; and that the Council would have had to consent to their waiver. Thus Multi’s ability to build out the development would have depended, in part, on decisions made by third parties.

In Allied Maples Group Ltd v Simmons & Simmons [1996] 1 WLR 1602 Stuart-Smith LJ explained that:

Turning to the present case, Multi’s position both in opening the case and in closing submissions is as follows:

I proceed on that basis.

In approaching the evidence I have tended to place weight on contemporaneous documents and documents which came into existence before the problems emerged. In assessing the recollections of witnesses, it is also important to avoid the benefit of hindsight. I must try to assess what people did, said and thought at the time. In that connection I have borne in mind the words of Lord Pearce in his dissenting speech in Onassis v Vergottis [1968] 2 Lloyd’s Rep. 403, 431:

“Credibility involves wider problems than mere “demeanour” which is mostly concerned with whether the witness appears to be telling the truth as he now believes it to be. Credibility covers the following problems. First, is the witness a truthful or untruthful person? Secondly, is he, though a truthful person, telling something less than the truth on this issue, or, though an untruthful person, telling the truth on this issue? Thirdly, though he is a truthful person telling the truth as he sees it, did he register the intentions of the conversation correctly and, if so, has his memory correctly retained them? Also, has his recollection been subsequently altered by unconscious bias or wishful thinking or by overmuch discussion of it with others? Witnesses, especially those who are emotional, who think that they are morally in the right, tend very easily and unconsciously to conjure up a legal right that did not exist. It is a truism, often used in accident cases, that with every day that passes the memory becomes fainter and the imagination becomes more active. For that reason a witness, however honest, rarely persuades a Judge that his present recollection is preferable to that which was taken down in writing immediately after the accident occurred. Therefore, contemporary documents are always of the utmost importance. and lastly, although the honest witness believes he heard or saw this or that, is it so improbable that it is on balance more likely that he was mistaken? On this point it is essential that the balance of probability is put correctly into the scales in weighing the credibility of a witness, and motive is one aspect of probability. All these problems compendiously are entailed when a Judge assesses the credibility of a witness; they are all part of one judicial process and in the process contemporary documents and admitted or incontrovertible facts and probabilities must play their proper part.”

In addition, in this case the main areas of dispute are not about what actually happened; but about what would have happened if the bank guarantees had been provided. In essence, since the events are hypothetical, the evidence is opinion evidence. The witnesses are not testifying about actual facts, but about what they think the facts would have been. Such evidence is often coloured by hindsight; and also by bitter regret that the hoped for outcome did not materialise. I think, therefore, that I must be cautious in evaluating witnesses’ evidence of what they say would have happened, no matter how confidently expressed, especially where it appears to me to run counter to the tenor and thrust of contemporaneous documents. As so often, it is the contemporaneous documents and inferences that can be drawn from them that tell the real story. The narrative that follows contains my findings of fact and my more detailed observations about the evidence where the resolution of conflicts of evidence has been necessary.

It is common ground that within the hierarchy of retail centres accepted in the retail and property world Wolverhampton is a sub-regional centre. It faces competition from Birmingham City Centre and Merry Hill to the south and from Telford to the north-west. Birmingham City Centre is 15 miles away; and Merry Hill is 9 miles away. Telford is a 20 minute drive. Within national rankings of shopping populations Wolverhampton is 50^th. Its demographic profile shows it to be a town of relatively low affluence. A higher proportion of its inhabitants are on state benefits than in most places. It has one of the highest rates of unemployment in the country. There are fewer inhabitants in socio-economic classes A and B.

Wolverhampton’s prime shopping pitch is a pedestrianised section of Dudley Street. Many well-known retailers occupy shops and stores there. They include Marks & Spencer, Next, River Island, Top Shop and others. There is also a Beatties department store (150,000 square feet) a short distance away. The store is operated by House of Fraser and houses a number of high end fashion concessions. In addition there are two shopping centres in the town centre: the Mander Centre and the Wulfrun Centre. The Mander Centre is anchored by Boots, BHS, Tesco, TJ Hughes and New Look, and provides lower ground floor access to Beatties. It was developed in the 1960s and was refurbished in 1987, 2004 and 2006. The total size of the Mander Centre is of the order of 500,000 square feet. It also has a car park of 550 car spaces. The Wulfrun Centre consists of 200,000 square feet of retail space, with its main entrance on Dudley Street. It also opened in the 1960s, originally as an uncovered centre; but in 1999 it was refurbished and roofed over. It is anchored by TK Maxx, Argos and Primark. It too has a car park, with 570 spaces.

The Council’s developer’s brief outlined what the Council wanted to achieve by the development. It envisaged a retail led, mixed use development. Paragraph 4.5 of the brief said that the predominant use of the scheme would be retail. It was expected that the scheme would include at least one department store and a range and mix of other units. The Council was also supportive of the incorporation of other uses, including residential, restaurants and leisure facilities, a small foodstore and office uses. Paragraph 5.1 said that the provision of affordable housing was one of the Council’s priorities in bringing forward the scheme. The planning brief outlined the requirement of a minimum of 20 per cent of all dwellings on the site to be affordable; and the Council expected the developer to work with one or more registered social landlords in that respect. Although the Council already had interests in part of the site, it was prepared to use compulsory powers of acquisition in order to assemble the overall site. The developer would be required to indemnify the Council against the costs involved.

Multi competed against a number of other interested developers; and in May 2004 was selected as the Council’s preferred developer.

On 4 October 2005 the Council and Multi entered into the Development Agreement. The structure envisaged at that time (and embodied in the Development Agreement) was that Multi would carry out the development and that the Council would grant a 250 year lease to a partnership (the Summer Row Partnership) wholly owned by Multi. The Development Agreement is a long and complex document. As is common with such agreements many of the details are contained in definitions within a definitions clause. In broad terms, the Development Agreement provided that:

The Conditions Precedent were divided into two categories: Essential Conditions, and Commercial Conditions. Multi was entitled to waive the latter conditions, but not the former. The Essential Conditions (which Multi could not waive) were:

The Commercial Conditions (which Multi was entitled to waive) were:

The right of waiver was contained in clause 3.4.5 of the Development Agreement. It was not an unqualified right. The Developer had to demonstrate to the Council’s reasonable satisfaction that it could still proceed with the carrying out and completion of the Development despite the non-fulfilment of the relevant condition. In addition Multi was not entitled to waive the Pre-Letting Condition until it had entered into an agreement for lease of the proposed department store.

Clause 4 contained obligations relating to the satisfaction of the Conditions Precedent.

Once the Development Agreement became unconditional the Council was required to grant the lease. The Developer was obliged to carry out the Developer’s Works in accordance with the Approved Drawings and the Qualifying Planning Permission. The “Developer’s Works” were defined as the carrying out of the Development; which was in turn defined as:

“the development of the Site to comprise a retail led mixed use scheme including the Minimum Development Requirements and broadly in accordance with the … Planning Brief and the Council’s Objectives.”

The Minimum Development Requirements in turn included a minimum of 50 residential units no more than 20% of which were to be allocated as affordable housing units.

The envisaged development was large scale. As mentioned, Multi worked up a scheme comprising two large units, five medium sized units (MSUs), 85 unit shops, an underground car park containing 758 spaces and 152 flats above the shops in the main shopping centre and above the shops fronting Victoria Street and Worcester Street. One of the large units was intended to be a department store and the other (sometimes called “the Iconic Building”) was originally intended to house a cinema and one of the MSUs. The site was a sloping one. The scheme was designed with shops on a lower ground and upper ground levels at the western end and shops at upper ground level only at the eastern end. The eastern end of the Scheme was completed by the Iconic Building. The lower ground floor shops at the western end opened on to an uncovered mall. The upper ground floor shops at the western end opened on to covered walkways; and the upper ground floor shops at the eastern end opened on to an uncovered mall, rather wider than the mall at the western end. In the course of progressing the Scheme, Multi carried out periodic feasibility analyses, known as “HBAs”. At the time they entered into the Development Agreement with the Council in October 2005 HBA-8 estimated the project costs at £237 million and the gross development value at £274 million based on an estimated rental value (“ERV”) for the retail element of £16.7 million, a yield rate of 6.5% and a value of the residential element of £18 million; thus projecting a profit of £42 million.

As mentioned Debenhams entered into an agreement for lease of the proposed department store on 17 March 2006. However, it was not an unconditional agreement. It was conditional on the Developer entering into agreements for lease of 50% of the gross internal area (“GIA”) of the retail units. Multi was entitled to waive this condition.

The gross construction area was to be 600,000 square feet; and the estimated value of the completed development was about double the size of Multi’s usual scale of development. Accordingly Multi set about finding investors to share some of the risk. Mr Sargent explained the options. The first was to find a developer partner who would enter into a joint venture with Multi, sharing both risks and rewards. The second was to find an investing partner who would provide some equity and would not be involved in the development works themselves. Multi opted for the latter. The NI Investors were introduced to Multi by BTW Shiells, the largest commercial property consultants in Northern Ireland. Mr Sargent had come across them during his time in Belfast where Multi had recently developed a shopping centre. The NI Investors consisted of a consortium comprising MAR Properties Ltd (“MAR”) and Lagan Development Holdings Ltd (a company owned by Messrs Michael Lagan and Kevin Lagan), who were later joined by Windsor Securities Ltd (“Windsor”). Multi’s idea was to forward sell a 50 per cent interest in the completed development. After considering a number of offers from interested parties, Mr Sargent drafted a memo for the Executive and Investment Committees of Multi in Holland. Those committees decided to go with the NI Investors in the autumn of 2006. This was not Mr Aaronson’s preferred option. He would have preferred a true joint venture partner, who would share both risks and rewards; but he was outvoted by the Executive and Investment Committees. The effect of the arrangement was that Multi continued to bear the risks of rising costs and falling rents; but Multi believed that the yield for half the scheme was secure.

In the course of the negotiations Multi provided the NI Investors with a cashflow. This showed that the scheme would cost £260 million to build. The cost would be funded by a bank loan of £208 million and equity contributions of £27 million each from Multi on the one hand and the NI Investors on the other. No further financing was envisaged at that stage. But even before the NI Investors had agreed a deal projected costs had begun to rise. A report to ExCom’s meeting on 16 July 2007 estimated the costs at £287 million. The expectation of the NI Investors was that they would put in their £27 million, to be followed by a balancing payment when the development was complete. They expected that the development loan would be replaced by an investment loan (probably with a loan to value ratio of 80 per cent as opposed to the loan to value ratio of 70 per cent applicable to a development loan); and that on that basis the balancing payment would be of the order of £3 million. This expectation was shared by Mr Baris of Multi, as shown by his e-mail of 16 March 2007. It was this expectation that resulted in the corporate and personal guarantees in the USA being limited to £30 million in total.

Originally, under the Development Agreement, it had been intended that the Partnership would hold the interest in the site of the future Summer Row. However, given the involvement of the NI Investors, it was found necessary for them to hold an interest in Summer Row as well. Multi was advised by PriceWaterhouseCoopers that the best way to do this was to have a unit trust. The NI Investors’ investment in Summer Row was thus to be structured by way of a Jersey Unit Trust, to be known as the “Summer Row Property Unit Trust” (“the Unit Trust”). A single purpose vehicle on behalf of each of Multi and the NI Investors (namely, Multi 226 on behalf of Multi and the NI Unitholder on behalf of the NI Investors) would each acquire 50% of the units in the Unit Trust. The interposition of the Unit Trust was designed to make the structure tax efficient.

Entry into the USA was accompanied by the execution of a number of other agreements. Multi 226 agreed to sell its entire interest in the Partnership to the Unit Trust. Thus, on 18 September 2007 the Summer Row Property Unit Trust was constituted under the Trust Deed; and on 19 September 2007 the original Partnership agreement was amended and restated as an agreement between Summer Row GP Ltd (still as general partner) and Summer Row Trustee Ltd as trustee of the Unit Trust as limited partner in place of Multi 226. Under clause 2.9.2 of the USA Multi was immediately obliged to subscribe for 9,400 units in the Unit Trust; and the NI Unitholder was immediately obliged to subscribe for 600 units. These initial units were to be paid for at a price of £100 per unit (making a total initial investment of £940,000 by Multi, and £60,000 by the NI Unitholder). The sale of further units was dependent on the Development Agreement becoming unconditional.

Other obligations under the USA were not dependent on the Development Agreement becoming unconditional; and it is these obligations which have led to the current dispute. Clause 2.1 defined the “Council Pre-Condition” as the grant by the Council of its consent (to the extent contractually required) to the assignment or novation by Multi to the Partnership of Multi’s rights and obligations under the Development Agreement and the CPO Indemnity Agreement and entry into and completion of the Relevant Documents (as defined). Under clause 2.5:

“Upon the Council Pre-Condition being satisfied the Partnership shall give the NI Unitholder written notice forthwith of that fact and 5 Business Days after that notice” the parties were to perform the obligations listed in clause 2.5.

These obligations included the following. The Partnership was required to deliver certified copies of certain documents; and to enter into leases of the residential parts of the development and of the car park. Multi 226 was to procure that any loans made by the Multi group companies were repaid, and to subscribe for units in the unit trust to enable that to be done. Other parties were to enter into other agreements (e.g. a sale and purchase agreement relating to the car park and a shareholders’ agreement). Clause 2.5.2 of the USA provided that Multi would enter into a Development Cost Subscription Agreement; and both Multi and the NI Unitholder would enter into a Post Unconditional Date Basic Subscription Agreement and a Cost Overrun Subscription Agreement. The effect of these various agreements can be summarised as follows:

The overall effect, therefore, was that the NI Unitholder was required to provide £27 million towards the costs of Summer Row. Anything beyond that amount (to the extent that bank borrowing could not be secured) would be funded via the Cost Overrun Subscription Agreement by Multi alone. All these obligations were conditional on the Development Agreement becoming unconditional.

In addition clause 2.5.8 required the NI Unitholder to deliver the NI Bank Guarantees.

Clause 2.6 said that the parties were not obliged to take any of the steps set out in clause 2.5 unless all the steps set out in that clause were effected. Clause 3 set out a number of obligations designed to pave the way towards unconditionality. These included, in clause 3.11, an obligation on the part of Multi and the partnership to “use reasonable endeavours to obtain development funding as soon as reasonably practicable after satisfaction of the Council Pre-condition”.

The remaining relevant obligations would come into effect only if the Development Agreement were to become unconditional. Payments by the NI Unitholder were to be made in two tranches: the Initial Price and the Deferred Price. The Initial Price was to be paid on the Completion Date. This was defined as the later of the expiry of notice given by Multi under clause 6.1 of the USA and the date of satisfaction of the Conditions Precedent under the Development Agreement. The Initial Price was calculated in accordance with the following formula:

“IP = (1/2 x (VAC + PAC)) – PAC

where IP is the Initial Price; VAC is the aggregate amount subscribed by the Vendor for Units in the period up to Completion; and PAC is the aggregate amount subscribed by the NI Unitholder for Units in the period up to Completion.”

Under clause 8.1 and Part 2 of Schedule 8 of the USA the Deferred Price, was to be paid the NI Unitholder to Multi (or if a negative sum, to be paid by Multi to the NI Unitholder) the later of 10 business days after the Practical Completion Date or the agreement of the Deferred Price. The Practical Completion Date was the date of final practical completion of the Works (as defined). The formula for the calculation of the Deferred Price was set out in paragraph 5 of Part 2 of Schedule 8. This provides that:

“The Deferred Price shall be (i) one half of the Initial Investment Value less one half of the Estimated Development Costs less (ii) the aggregate of the Initial Price, the NI Subscription Price and the NI Priority Investment Return ...”

These terms are themselves defined. The “Initial Investment Value” is an amount calculated in accordance with the following formula:

“(A x 17.09) + (B x 11.963) – C

where A is the Achieved Rent for each Letting Unit on Practical Completion up to and including the Base Rent, B is the Achieved Rent for each Letting Unit let on Practical Completion in excess of the Base Rent, and C is the adjusted amount of Principal Rent foregone after Practical Completion as a result of any Rent Free Periods under the leases.”

The multiplier of 17.09 is the reciprocal of the agreed yield of 5.85%. It is common ground that B does not feature in the calculation on the facts of the case. Once the Initial Investment Value has been calculated, a number of deductions are made in order to arrive at the Deferred Price. The first deduction is that of Estimated Development Costs (i.e. development costs still to be incurred). It is common ground that no deduction falls to be made under this head. The second deduction is the aggregate of the Initial Price already paid by the NI Unitholder, the NI Subscription Price and the NI Priority Investment Return.

Although the USA does not say so, it is common ground that a further deduction needs to be made before arriving at the Deferred Price. This deduction is the amount that the partnership would have been able to borrow against the completed development, by replacing the development loan with an investment loan. The overall effect of this deduction would be that the NI Investors would only have to pay for half the equity in the completed scheme.

This price would then be subject to further “interim payments” prior to the Final Payment Date, under schedule 8, Part 3 of the USA, to take into account the fact that not all of the retail units would necessarily be let as at the Practical Completion Date. The Final Payment date is defined as the earlier of (a) the date 2 years after Practical Completion and (b) the date every Letting Unit is Let.

The USA also provided for an “Income Guarantee” whereby Multi 226 was to pay to the Partnership on the Practical Completion Date and each quarter day thereafter until the Final Payment an amount calculated for each letting unit which was not then let, calculated in accordance with the formula

Clause 21 of the USA contained guarantees by the NI Investors of the obligations of the NI Unitholder.

So far as the development itself was concerned, clause 10.1.1 required the partnership to use all reasonable endeavours to carry out the Works in accordance with the Development Agreement. The Works were defined by reference to the Development, which in turn was defined by reference to the Development Agreement. The Development Agreement was the agreement of 4 October 2005 “as amended or novated to the Partnership”. Clause 10.2.3 prohibited variations of the Development Agreement except with the NI Untiholder’s consent, not to be unreasonably withheld or delayed. The overall effect of these clauses was that with the agreement both of the Council and of the NI Investors (the latter not to be unreasonably withheld) Multi was able to vary the contents of the development project.

On 12 June 2008 a consortium of banks led by Lloyds TSB and the Partnership agreed the Term Sheet for the making of a loan. Signature of the Term Sheet was not a contract, and did not commit the banks to lend. The proposed terms included the provision of two facilities amounting in aggregate to £202 million, at an interest rate of 1.5 per cent per annum over LIBOR (reducing as more of the development became pre-let). 75% of the facility was to be hedged. The loan was to be secured by (among other things) a debenture, including a first fixed and floating charge; a guarantee from the partners; an equity commitment letter from Multi of £67.5 million; and an unconditional bank guarantee provided by the NI Unitholder. Although the nominal amount of the facility was £202 million, it was nevertheless limited to the lower of (i) 70 per cent of the gross development value, net of costs, of the property on practical completion and (ii) 75 per cent of the development costs.

The banks had the benefit of a formal valuation from Cushman & Wakefield carried out in March 2008. Cushman & Wakefield had assessed the rental value of the scheme at £16.8 million (or £16.9 million with Marks & Spencer); and had applied a yield of 6 per cent. One of the main issues in the case is whether this non-binding term sheet would have been converted into a legal agreement if the NI Investors’ bank guarantees had been provided.

Multi prepared a series of feasibility studies referred to as HBAs. One early version (HBA-8) prepared in October 2005 assessed rental value at £16.6 million and applied a yield of 6.5 per cent to give an investment value of £256 million, to which was added the value of the flats, to give a total of £274 million. Project costs were assessed at £232 million, giving a profit of 42 million (or 15.39%).

As mentioned, at about the time that the USA was under negotiation in June 2007 Multi’s lawyers supplied the NI Investors with a schedule showing project costs and financing figures. This schedule assessed project costs at £260 million, which would have been fully financed by equity injections of £27 million each by Multi and the NI Investors, topped up by a bank loan of £208 million.

By July 2007 when a new investment proposal was placed before ExCom project costs had increased again to £287 million. But the yield had been reduced from 6.25% to 6%, so the appraisal still showed a profit. Mr Aaronson’s view, recorded in the minutes of the meeting on 16 July 2007, was that lowering the yield was not the right solution. He explained in evidence that he thought that there should be more independence between the yield and the project costs. The inference was that the yield was being massaged downwards to keep the appraisal showing a healthy profit. The rental figure that had been used in the presentation to ExCom was £18.1 million per annum. That was not the current rental value of the scheme (which DTZ assessed at £16.56 million); but was a projection forward to what the rental value might be on practical completion. Nevertheless, ExCom approved the investment proposal for a budget of £3.4 million for land and other costs.

A Summer Row team workshop took place on 3 October 2007. By now the projected project costs had risen to £290 million. The estimated rental value was given as £16.5 million.

By January 2008 terms had been agreed with Marks & Spencer, who were to take what had originally been envisaged as the cinema. Although Marks & Spencer would pay a lower rent than a cinema operator (and would also require an incentive package of £9.3 million) the letting was said to be justified by the prospect that the presence of Marks & Spencer in the scheme would push up rental values for the other retail units by £10 per square foot Zone A; and that it might lower the yield by 0.25%. This would increase the ERV by £1.5 million. (In their valuation for the banks Cushman & Wakefield had also said that a letting to Marks & Spencer would increase the ERV of the scheme; but only to the extent of £150,000). The projected rental figures put before the committee were again not current rental values; they were the figures that had been produced by DTZ which included an inflation allowance projected forward to the possible date of practical completion. Mr Aaronson’s view was that having two anchor tenants in the scheme (Debenhams and Marks & Spencer) made the scheme particularly attractive. ExCom approved the letting to Marks & Spencer on this basis on 21 January 2008. But ExCom wanted Multi to seek a contribution from the NI Investors to the incentive package for Marks & Spencer. The NI Investors agreed, subject to contract, to contribute £2.25 million.

On 1 February 2008 the Secretary of State confirmed the Wolverhampton City Council (Retail Core Expansion) CPO 2006. On 8 February 2008 the Stopping Up of Highways (City of Wolverhampton) (No.1) Order 2008 was made.

On 27 February 2008 an Agreement for Lease was exchanged with H&M Hennes & Mauritz. The lease was to be a lease of one of the MSUs.

During the summer of 2008 market conditions worsened. Multi had no less than 163 projects in the pipeline; and could not afford to continue with them all. A meeting of country managers was convened in Gouda on 17 July 2008. The materials presented to the meeting showed that by Q1 of 2010 there would be a funding gap of € 311 million, increasing to € 338 million by Q4 of the same year. Even if 19 projects were to be put on hold, there would still be a funding gap of nearly € 200 million. The clear message to the country managers was to find projects that could be put on hold, in order to help bridge the funding gap. One of the slides was titled “Dedicated focus on external liquidity solutions”. This reflected the view that Multi’s liquidity could only be restored by bringing in funds from outside. Mr van Duren explained in evidence that there was a change of strategy within Multi at about this time. In its early years Multi had been what he called a “merchant developer”; that is a developer who sells a completed development. After the takeover by Morgan Stanley, Multi’s strategy changed to becoming what he called an “investing developer”; that is a developer who retains completed projects. Now, in the light of the upheavals in the financial world, and Multi’s own lack of cash, strategy was changing back to that of being a merchant developer. This strategy envisaged funding developments by forward purchase agreements with investors. The idea, as Mr van Duren explained in evidence, is that the investor “supplies the vast majority of equity needed from the moment we start construction.” Both the record of this meeting and Mr van Duren’s evidence about it suggest that Multi would not be committing more equity of its own.

HBA-23 was prepared on 22 July 2008. Rental value was assessed at £18.5 million; and the adopted yield was 5.85%. This gave a value for the shopping centre of £316 million, and a total value for the scheme of £344 million. Project costs had risen again; this time to £323 million. The projected profit was now £20 million (6.09%).

The banks took further advice from Cushman & Wakefield, who advised that yields had moved out from 6 per cent (which they had applied in March) to 6.25 per cent in June and 6.5 per cent in July. Their prognosis was that yield might move out further; and that as at 24 July the possible yield for Summer Row was in the region of 6.5 to 7 per cent. Mr Monnickendam of Lloyds TSB passed this information on to Multi on 30 July. Mr van der Ploeg of Multi commented in an e-mail on 8 August that the banks were scared that the loan to value ratio would limit the available funds and that using the yield of 6.5% Multi would not be able to draw down more than £185 million. This would mean Multi having to inject “much more equity than forecasted thus far.”

This was reflected in HBA-24. This assessment assessed the rental value of the scheme as £18.7 million and used a yield of 5.85 per cent (which was significantly lower than then current yields). But even on that basis the assessment revealed that even if the full bank loan of £202 million was still available, Multi would have to find additional funding of over £85 million. This was an increase of nearly £60 million over and above the amount of equity that Multi had originally envisaged. As Mr Aaronson was constrained to accept in evidence, if the bank loan had been no more than £185 million as Mr van der Ploeg feared, then Multi would have had to find an equity commitment of over £100 million.

HBA-25 was prepared in support of an investment proposal presented to ExCom on 28 August 2008. This was an important proposal, because it remained the proposal before ExCom and the other decision making bodies within Multi for the remainder of the relevant period. The investment proposal sought approval for an interim pre-development budget of £21.1 million for the period from September to December 2008. The rationale stated that the supporting feasibility study reflected a “conservative/robust approach”. HBA-25 assessed rental value at £18.7 million and applied an overall yield of 5.85%, giving an investment value for the shopping centre of £320 million. To this there had to be added the value of the Victoria Street and Worcester Street properties and the flats (all of which were to be sold), giving a total value for the scheme of £342 million. From this there had to be deducted the project costs; then assessed at £314 million. The projected profit was thus £27 million. By this time half of the development had been forward sold to the NI Investors at a yield of 5.85%; so the use of this yield may have been legitimate as regards half. But in the light of the information from Cushman & Wakefield that yields had already moved out to 6.5% and might be as high as 7%, a yield of 5.85% applied to the whole development could not be called “conservative/robust”, as Mr Aaronson accepted. Moreover, this appraisal also showed that the residential component was loss-making, as the cost of construction exceeded its value. The investment proposal itself explained that the yield of 5.85 per cent was the expected exit yield in Q1 of 2012; so it was projecting several years ahead. The estimated rental value was also a projection forward rather than an assessment of actual rental value. The projected rents had been inflated by a growth factor. A projection forward of this kind would be anathema to a valuer. During 2008 rental values were not in fact rising. They were falling. Multi themselves knew that as a result of their experience in Bath where they had developed a shopping centre. Multi also knew that Cushman & Wakefield had assessed rents at a much lower level in March 2008; but that was ignored. But Mr Aaronson explained that in order to be a developer you had to be an incorrigible optimist; and in my judgment the only explanation for the stated yield and rental value is incorrigible optimism. The investment proposal also said that the equity required to complete the project had grown from £38.5 million to £65.7 million. This was on top of the £27 million that Multi had already spent; with the consequence that Multi’s total commitment would now exceed £90 million. Mr Aaronson commented on HBA-25 in an e-mail that the amount of interest appeared to be understated. But it does not appear that a revised version was placed before ExCom.

The Development Manager’s monthly report of 1 September recorded (among other things) that the total spend to date was £21 million; and that it was expected that the facility agreement with the banks would be in place by the end of September.

On 12 September 2008 Mr Sargent wrote to the Council. He said that he had been able to begin the approval process to obtain the budget to go unconditional on the Development Agreement. But he added:

“Fundamental to this is the viability of the scheme and following the submission and review of a draft paper I regret that the Multi Corporation Board has suspended any formal approval of the scheme unless the profit returns can be improved upon by the UK team.”

Mr Aaronson said that this statement was untrue; and that although he was in frequent communication with Mr Sargent, he had never led him to believe that the scheme had been suspended. It may be true that Mr Aaronson had not told Mr Sargent that the Board “had suspended” the project, not least because the project had not yet been before the Board. However, in view of later e-mails from Mr Sargent reflecting an increasing sense of alarm that the project was likely to be cancelled, it is abundantly clear that Mr Aaronson led Mr Sargent to believe that the project was at very serious risk of cancellation. This would have been entirely consistent with the strong message emerging from the country managers’ meeting back in July. Mr Sargent also said that what he had told the Council was untrue; and excused the untruth as “commercial licence”. There are other examples in the case papers of Multi making or contemplating making false statements to advance their negotiating position. This is one factor that makes it difficult for me to accept the evidence of Multi witnesses as reliable. Mr Sargent’s letter included a table showing a number of areas in which he looked for cost savings. These included the affordable housing element, in relation to which he was seeking the removal of the condition that they be affordable units. At this stage he was not looking to reduce the number of residential units to be comprised in the scheme. I will return to the question of the residential component later.

On 15 September 2008 Lehman Brothers filed for Chapter 11 bankruptcy protection in the USA. The collapse of Lehman Brothers sent the financial markets into turmoil round the world. On the very same day Multi’s Executive Committee met to consider a number of investment proposals, including that for Summer Row. The minutes said:

“5.85% was used for calculating feasibility and yield. Market value is now closer to 6.5% (possibly slightly lower with M & S lease creating dual department store anchored scheme), so the profit of € 35 million is pressured and only held up due to 50% pre-sale to Irish investors. Backing out would mean taking a loss on € 25-30 million invested with at best small recovery. Solvency of Irish investors need to be checked.

A leasing hurdle of 40% with M & S is condition.

Alternatives for residential like hotel are being investigated.

The investment proposal is approved with the following conditions: critical review of pricing of residential, lease signed with M & S, financial viability check and willingness to close of Irish investors at 5.85% forward funding.”

This was not a formal suspension of the scheme; but the approval was plainly conditional. ICom met on the same day. The minutes of that meeting record that Multi was delaying Summer Row; and that an equity call of € 74 million would be prepared. There was to be a Board meeting on 1 October, at which the focus was to be on liquidity. On the following day Mr Sargent passed on to his team in the UK ExCom’s request about which Mr Aaronson had told him. His team were to investigate the financial status of the NI Investors, provide an update on Marks & Spencer, and review the residential element of the scheme. Mr Sargent added that in the event that the information was satisfactory the investment proposal would proceed to ICom on 29 September. In fact it never did. One inference is that it never proceeded to ICom because the information was not satisfactory.

On 19 September Mr Rebbeck prepared a review of the residential element of the scheme in response to ExCom’s request. This showed that the residential element would be worth £17.7 million but would cost £25.7 million to build; thus producing a loss of just under £8 million. This outcome was some £4 million worse than the outcome shown on HBA-25. Mr Rebbeck’s figures were current figures, rather than forward projections. He did, however, say that there would be positive sales growth in late 2009. There is no documentary evidence that these changed figures were ever placed before ExCom, ICom or the board; but Mr Aaronson said that he thought that ExCom saw this note, either as part of its next meeting or as part of a follow up that he did with individual members of the committee. Mr van Duren (who sat on both committees and the board) said that he did not see Mr Rebbeck’s review before preparing for trial; and had no recollection of it having been included in documents presented to ExCom. I prefer Mr van Duren’s evidence on this point, and reject Mr Aaronson’s. This evidence was an example of Mr Aaronson exaggerating the quantity and quality of information given to the decision makers within Multi.

On the same day an internal report on the financial position of the NI Investors was prepared for internal consumption. The report noted that: “The main risk for Multi is if NI do not enter into these commitments or give these guarantees upon satisfaction of the Council pre-condition.” The report recommended that “To get more comfort on NI’s position at unconditional date, we will have to get into contact with NI to request further specific information on liquidity and, for example, comfort letters from Ulster Bank.” The strategy seems to be that outlined by Mr Sargent in an e-mail of 24 September:

“We need to diplomatically say that we need confirmation from their bank (Ulster Bank) that they are good for the bank guarantee required in January!

We need to make an excuse and say for example we are being requested this from the council as we look to go unconditional and that they are asking us for similar confirmation of our current financial status due to the current economic climate.

Obviously it is Gouda that really wants this.”

Mr Aaronson, in particular, was concerned that the NI Investors might try to walk away from the deal, given the worsening conditions in the property market. He asked Mr Sargent to set up a meeting, which duly took place in Belfast on 10 October 2008.

The final condition that ExCom had stipulated at its meeting on 15 September was the preparation of a “financial viability check”. There is no satisfactory evidence that this was ever done. It will be recalled that HBA-25 was before the meeting; and that HBA-25 valued the scheme at a yield of 5.85%. It is also recorded in the minutes that the committee were told that market yields were closer to 6.5%. The obvious inference is that the committee wanted an updated HBA applying a market yield to that part of the scheme that Multi was to retain. Mr Aaronson’s explanation was that the idea of a financial viability check was that Multi would “go back through … the numbers, make sure that all of the numbers were aligned correctly and completed in a way that they were summed correctly.” But even this does not appear have been done. He also said that viability was forward looking rather than based on current values. I find this explanation hard to reconcile with the committee’s concern about current yields rather than future ones putting the profit under pressure. The fact is that ExCom were not given any updated information about the viability of the scheme at Summer Row, despite the fact that internally the value of the residential component had been severely reduced, and it was acknowledged that yields had risen.

In the meantime Mr Sargent had clearly got the impression that the project would be cancelled. On 27 September he e-mailed Mr Aaronson. His e-mail began:

“After several recent conversations it is clearly apparent that Summer Row is potentially to be cancelled as an active project. I cannot sit by and let this happen without comment.”

He continued:

“I am not aware of the board’s detailed debate and the reasoning behind this course of action. I am, although, fully conscious of the revised level of equity required to bring the project to fruition and the implication this has in the current financial marketplace.”

As Mr Sargent explained, he knew that the board were continuously reviewing Multi’s liquidity and the position of the projects; and that all its projects would “be fighting for the same pot”. He then set out his case for keeping the project alive. He ended by saying that he was considering “all alternative courses of action that would reduce our equity exposure”. Mr Aaronson described this e-mail as very much exaggerated; and flatly denied having led Mr Sargent to believe that the project might be cancelled. He hypothesised that Mr Sargent might have asked him what would happen if the NI Investors did not put up their guarantees, and that he replied that he could not figure out how the project could go ahead if that did not happen. I do not accept this evidence. There is no trace of it in Mr Sargent’s e-mail, which among other things says that the NI Investors were being asked that week to confirm their ability and willingness to make the payment of £27 million on unconditionality. There is no mention of bank guarantees. Mr Sargent’s reference to the need for increased equity and lack of liquidity as being the driving forces behind the Board’s reasoning is borne out by the contemporaneous documents. Mr Aaronson’s evidence is not. It was one of a number of occasions on which, in my judgment, Mr Aaronson’s evidence was at best a post hoc rationalisation of what he wished had happened in order to conform to the position that Multi has taken in this litigation. Mr Sargent said that he had no recollection of what prompted him to write the e-mail; but it seems to me to be an obvious inference that he was told that Summer Row was likely to be cancelled. Mr Sargent’s convenient memory loss was, in my judgment, deliberate evasion.

On 27 September Mr Sargent, at Mr Aaronson’s request, prepared a memorandum on the risks to Multi in not completing agreed land purchases. His conclusion was:

“On cancelling the project it will be virtually impossible to keep this decision confidential in the market place as suppliers will immediately speculate. This will severely weaken our negotiating position if we intend to sell the project. It may also trigger NI to initiate legal proceedings for consequential loss.”

The last sentence of this e-mail is wholly inconsistent with Mr Aaronson’s evidence that the potential reason for cancellation of the project was the prospect of the NI Investors failing to honour their contract. If that had been the reason for cancellation there could have been no question of the NI Investors suing for damages. It is also clear from this memorandum that, contrary to Mr Aaronson’s evidence, cancellation of the project was a real possibility.

ExCom met on 29 September. The minutes record that the topics for the forthcoming Board meeting on 1 October would include a liquidity analysis, to include a liquidity forecast for each project.

The Board duly met on 1 October. The chairman opened the meeting by saying that it would be a crucial one and that Multi was confronted with higher costs of financing and fewer leverage possibilities. He said that Multi could not afford to finance the whole portfolio; and he drew attention to cost overruns in the UK. The cashflow position had worsened. The liquidity chart now showed a funding gap of close to € 1 billion in Q1 of 2011. 17 projects had already been cancelled or put on hold. But even on that basis there was still a funding gap of over € 700 million in Q1 of 2011. The minutes record that the total amount of cash required in 2008 and 2009 was €514 million, of which Turkey, Ukraine, Spain and the Czech Republic had the greatest need. The board then turned to consider the so-called green line. This related to projects that had either been completed or were under construction. These projects did not include Summer Row. As regards all other projects (which included Summer Row) the starting point was that Multi “will spend no more equity (including its corporate credit facility) for projects in acquisition or under development”. Those projects could only be continued after 100% finance had been guaranteed upfront; for instance by a forward funding sale. On that basis the funding gap could be reduced to € 30 million in Q4 of 2011. Mr van Duren then outlined the position project by project. As regards Summer Row:

“Hans van Veggel [the chairman] is of the opinion that the project should be sold now. Answering a question … Eric van Duren confirms that this project is not a green line project. The meeting supports the idea … to sell the project as soon as possible to get the invested equity back.”

The Board agreed that all projects that were not green line projects should go back to ICom and be based on “very conservative yields, rents, costs etc.” ExCom was to rescind all approved budgets regarding projects not under construction and review all the budgets again. The Board realised that the review “might kill most projects”; but that could only be avoided by a forward funding sale of the project against the newly determined exit yield. Both Mr Aaronson and Mr van Duren suggested that the proposal that the project be sold was a reference to closing with the NI Investors. I reject that suggestion. In the first place, selling the project is not the same as closing a forward sale of half the project. Second, closing the deal with the NI Investors would not recoup Multi’s equity. At best it would only recoup half. Third, if that was the Board’s instruction it is remarkable that no attempt was made to close the deal with the NI Investors for many months. Fourth, when minutes of ExCom dealt with closing with the NI Investors, they said so explicitly. Fifth, in the light of the pressure on cash flow, and Multi’s change of strategy to being a merchant developer funding “the vast majority” of needed equity by forward purchase, it is obvious that the board wanted to find additional external investors. Sixth, immediately following that board meeting Multi did indeed make efforts to find a new investor in the project. Lastly, Mr van Duren explained that since there was no investment proposal for Summer Row before the board, the board could not have been giving its consent to proceeding with the development or, indeed, closing with the NI Investors. I regret to say that in my judgment, both Mr Aaronson and Mr van Duren were tailoring their evidence to fit the party line.

Mr Sargent telephoned Mr Aaronson the following day. Within a few days he e-mailed Mr Baris to find out the equity requirements for Summer Row (which he understood to be £32 million); and asked Mr Vernooij what Multi would be able to offer an equity partner willing to put in £32 million. Mr Sargent’s e-mail assumed that the NI Investors would put in their £27 million; so it is plain (despite Mr Sargent’s attempt in evidence to suggest the contrary) that what was under discussion was additional equity. In other words the inquiry was designed to achieve a result in which Multi would put in no more equity. This is consistent with what the Board had decided and inconsistent with the evidence of both Mr Aaronson and Mr van Duren. In fact, as Mr Baris told Mr Sargent, the perceived funding gap was £59 million rather than £32 million.

On 6 October Multi prepared the twelfth Development Manager’s monthly report for circulation to the NI Investors. It said that the target was to sign the agreement for lease with Marks & Spencer and the building contract with Carillion on 16 October 2008. It also stated that the funding contract was expected to be in place by the end of October 2008. This was not said to be dependent on the provision of the NI Bank guarantee. In paragraph 4.5 it said that the estimate for total construction costs had been £130 million, but that Carillion’s latest estimate had increased that to £141 million. This increase in construction costs had been factored into a cashflow which was presented to the NI Investors for the first time. It showed that the total amount of funding required was £314 million. The NI Investors were to provide £27 million; and the bank loan was put in as £202 million. But that left £85 million for Multi to provide from elsewhere, of which it had already spent £26 million. Thus according to the cash flow it would need to find another £60 million or thereabouts, on the basis that it would be entitled to borrow the whole of the £202 million from the bank. If the bank loan turned out to be no more than £175 million, then Multi would need to find another £87 million, bringing its total contribution to over £100 million.

In the first week of October 2008, and in response to the Board’s view that the project should be sold, Multi began to investigate the possibility of raising additional finance from elsewhere. The funding gap was £60 million on top of what Multi had already spent; and on the assumption of the full bank loan of £202 million. Mr Aaronson and Mr Sargent co-ordinated approaches to outside bodies; either as potential lenders or as potential investors. Mr Sargent also considered asking the building contractors to take an equity stake or to provide a mezzanine loan. Mr Aaronson said that this process had begun six weeks to a month earlier; but there is no trace of that in the case papers. I reject this evidence. The process was plainly triggered by the Board’s wish to “sell the project”. Internal e-mails considered what sort of return Multi could offer. It is clear from contemporaneous documents that Mr Sargent remained very concerned that the Summer Row project might be closed down. Mr Aaronson professed not to know why Mr Sargent was so concerned. But in my judgment the reason was that these were the signals that were relayed to him about the attitude of the board in Gouda.

On 6 October Mr Monnickendam e-mailed Mr Baris. He reported that the bank’s valuers had not done any more work on rental values since the valuation in March, but that they had been considering the effect of the softening of yields. He attached a table showing various outcomes applying the maximum loan to value ratios. Using the ERV as estimated by Cushman & Wakefield back in March, and applying a yield of 7%, there would be a shortfall in the amount of the loan of £31 million. The tables finished with a table showing the best case, mid case and worst case scenarios. The best case scenario required an equity commitment of £97.7 million, the mid case required £113.2 million and the worst case £128.7 million.

On 9 October Mr Sargent prepared a number of different appraisals. These all assumed that the NI Investors would proceed with their purchase of one half of the scheme at a yield of 5.85%. On that basis, and using Cushman & Wakefield’s rental valuation of £17.2 million, the scheme would show a loss at a yield of 6 per cent or above for the half that Multi was to retain. At a yield of 7 per cent for Multi’s retained half, the loss would be £23 million. Using Multi’s own rental value of £18.7 million, the scheme showed a profit. The appraisals assumed receipts of £21.7 million for the residential component despite Mr Rebbeck’s earlier work on residential values. These appraisals were also based on the full amount of the facility of £202 million being available for drawdown from the bank. If Mr Rebbeck’s figure of £17.7 million were substituted, the loss would increase to £27 million. These appraisals were never placed before any of Multi’s committees. Mr van Duren confirmed in cross-examination that he had not seen them before.

A meeting between Multi and the NI Investors took place on 10 October. It was attended by Mr Aaronson, Mr Baris and Mr Sargent for Multi; and Mr Horner and Mr Scott for the NI Investors. As was usual, the meeting was preceded by the circulation of the Development Manager’s report a few days earlier. Mr Aaronson introduced himself and gave an upbeat account of the project. He said that although the economic climate was difficult, Multi had the ability and the will to make the project succeed; and that Multi would be the “last man standing”. He envisaged a start on site in January 2009. The NI Investors were told that the Council’s approval to their participation in the scheme had not yet been obtained, but that the Council would be asked to give consent at the beginning of December. This would mean that the bank guarantees would have to be provided five days later. The NI Investors said that there was no issue with the bank guarantees and that they were all in place. But they did say that they would no longer guarantee to contribute to the incentive package to be offered to Marks & Spencer (which they were not contractually obliged to do); and also said that if the deal had been presented to them in the current climate they would not have entered into it. Since they had agreed a purchase at a yield of 5.85% and yields now exceeded 6.5%, this was hardly surprising. They pointed out that the cashflow that had been attached to the October report showed a funding gap of £85 million; and asked where the money was to come from. They wanted some guarantee that Multi had the funds available to cover the additional £60 million. They said that Multi had 96 schemes under construction or under consideration; and were very concerned about Multi’s exposure. Multi blandly assured them that they had the money, but gave no further details. The NI Investors said that they wanted the funds to be confirmed. Mr Aaronson said that there was no point in going forward if it wasn’t smart. He then raised the possibility of altering the deal, by changing it to a joint venture. This would entail the NI Investors putting in more money, in return for a better yield. Mr Aaronson said that he did not raise this possibility. But both Mr Horner and Mr Scott recorded it in their contemporaneous notes; and confirmed their recollections to that effect in their oral evidence. Once again I reject Mr Aaronson’s evidence; and prefer Mr Horner’s and Mr Scott’s. Mr Scott raised the question of paying Multi £1 or £2 million in order for the NI Investors to walk away. It was left that Multi would come back to the NI Investors with proposals. The NI Investors would give further consideration to the cash contribution that they would be prepared to make in order to exit the deal; and come back to Multi on that subject.

Although the NI Investors had said that their guarantees were in place, the meeting did not reassure Multi about the NI Investors’ keenness to carry on with the project. It seems to have been the casual reference to paying to walk away that caused this feeling. Mr Aaronson asked Mr Sargent to prepare an internal memorandum setting out the possible options available to Multi if the NI Investors abandoned the project. This memorandum noted that the economic climate had weakened; and that yields had softened. In the event that yields at exit would have increased from 5.85% (at which the NI Investors had agreed to buy) to 6.25%, the NI Investors would have had a substantial negative return on their investment. That in itself was “cause for concern and reason to consider if N.I. Investors will commit”. One of the options under consideration was to propose an exit payment by the NI Investors of between £6 million and £9 million. Another option was to consider a joint venture with the NI Investors “[i]n order to reduce our risk”. The memorandum indicated that the project required a total equity commitment of £93 million; of which Multi’s contribution would be £66 million. A true joint venture would reduce that to £46.5 million. The memorandum concluded with the following recommendation:

“To proceed we need to present the JV proposal and the abortive payments proposal as soon as possible to NI Investors. It is recommended that this is done during the week of 13^th October.”

The JV proposal was to a large extent a reversion to the form of deal that Mr Aaronson had originally wanted before the USA was signed. Mr van Duren commented on that; and was pessimistic about the chances of persuading the Executive Committee to accept it. The Executive Committee considered this memorandum at their meeting on 13 October 2008. At the meeting, it was reported that the required equity to progress the scheme had been raised from £54 million to £84 million. The meeting were also told that the NI Investors were “positioning themselves not to pay” their £27 million. Both options canvassed in the memorandum were considered but neither was approved. The final decision was:

“The proposal is not approved. Costs should go down.”

It is common ground that “the proposal” was not just the two options canvassed in the memorandum, but the whole of the Summer Row development. Mr Aaronson said that the instruction that “costs should go down” was a reference only to the costs to be incurred in the coming month until the NI Investors had said that they were willing to go forward. But that is not what the minute said. The opening part of the minute warns the committee that an extra £30 million will be needed from Multi in order for the scheme to go forward (and that is on the assumption of the full bank loan of £202 million). It is that context that the meeting decides that “costs must go down”. Once again in my judgment Mr Aaronson was putting a convenient “spin” on the document. Mr van Duren was not sure what costs were referred to. The HBA that was before the committee showed that the scheme was only marginally profitable; and in my judgment the committee’s concern was that the overall costs should be reduced. The project as it stood was not approved. As will be seen, in the case of a project at Karolina in the Czech Republic, costs were reduced by €20 million; and it was that scheme that Multi actually built.

On 14 October Mr Scott wrote to Mr Sargent thanking him for the meeting. He said that the NI investors would consider what contribution they would be willing to make towards the incentive package to be offered to Marks & Spencer. He continued:

“I confirm that I have updated the other members of the group about our meeting and I informed them that Multi is considering how to proceed in connection with the Scheme.

I look forward to receiving your proposals as and when available.”

However, in the light of ExCom’s rejection of the two proposals that had been floated at the meeting on 10 October, Multi did not go back to the NI Investors with proposals. On 15 October Mr Sargent e-mailed Mr Baris, saying that they needed to discuss Wolverhampton. He said that “As you know GOUDA wants us to stop.” On the same day Mr Aaronson sent an e-mail to all Multi’s country directors. He informed them that all projects had been colour coded green, yellow or red. Those in the yellow category were projects that were substantially along in the development phase but not yet under construction. They included projects (such as Summer Row) where there was committed construction finance in place or a forward purchase contract signed. He continued:

“These projects are now put on HOLD with all earlier Investment Committee approval rescinded; but will be the first projects allocated start approval as Multi undertakes to carefully manage its cash reserves. In order to proceed forward in making the necessary equity allocations, Excom is requesting a revised Investment Proposal explaining how each project can be moved forward and preserved with as small a current expenditure as possible in accordance with a new estimate of a future timeline for construction start.”

Investment proposals were to be completed and submitted before 24 November. The start date was dependent on “a combination of available project finance or forward funding commitment and the availability of Multi equity”. Mr Aaronson added that expenditure on all projects other than green should be delayed as investment proposal budgets for those projects had been rescinded. Summer Row was coded yellow. It was one of 36 similarly coded projects. There is no evidence that a revised investment proposal was ever submitted for Summer Row. The position in mid October was, therefore, that Summer Row had been put on hold, and all previously approved budgets had been rescinded. In order for the project to go forward, fresh approval from ExCom, Icom and the board would be needed. Thus it was that on the same day (but probably before actual receipt of the e-mail from Mr Aaronson) Mr Sargent e-mailed his own team to tell them that for “all purposes the project is to be put on ice”. He said that initially this was to see if the NI Investors turned up with their guarantee. Likewise Mr Aaronson insisted in evidence that Summer Row was put on hold because Multi were waiting for the indication by the NI Investors that they were going to go forward with the project. But this was not true, because the instruction from the board applied to all coded yellow projects. There was no special reason for putting Summer Row on hold. Mr van Duren accepted this in cross-examination. In my judgment even if the NI Investors had produced their bank guarantees, the project would still have had to go back through the approval process. For the time being it was simply on hold. At about the same time Mr Aaronson (unknown at the time to Mr Sargent) told the lawyers working on the financing documents and the building contract to stop work. The design team was put on hold at the end of the month. This was consistent with the board’s instruction to delay all expenditure.

ExCom met on 27 October. Summer Row was not discussed as an individual project. However the minutes record that all cash flows and financial data would be reviewed and that ExCom would sit together on 17 November to prioritise. This meeting never took place. However, a meeting did take place on 30 and 31 October. According to Mr Aaronson and Mr van Duren this meeting, spread over two days, involved Mr Aaronson, Mr Van Duren and the country managers. Both these witnesses spoke of it as an important meeting. Mr Aaronson explained that the meeting took place in a conference room equipped with video conferencing facilities in Multi’s HQ. He and Mr van Duren were both present. The country directors came in or were available on video link; and the financial analysts, who were down the hall, brought in spreadsheets which had cashflows on them. Mr Aaronson said that he recalled accumulating a large pile of spreadsheets on his office floor; but that he had thrown them away after a few months. He explained that there was no decision taken at that meeting. There were just different inputs into an overall model. These inputs were then available for Mr van Duren to prepare a revised liquidity model. The meeting did not prioritise between different projects. Mr van Duren gave evidence along the same lines. He said that over the two days the meeting considered 160 projects and discussed 30 to 40 extensively. That would seem to indicate about half an hour spent on each of those projects. The purpose of the meeting was not to decide anything, but to prepare material on which the various committees of Multi could make decisions. However, nothing was changed in relation to Summer Row; or indeed in the cashflow analysis. Bearing in mind that Mr Rebbeck had reduced the estimated sale proceeds of the residential component by £4 million and that Multi knew that yields had softened, I find this astonishing. After all, any deal with new investors would have to be done at current yields and values, as Mr van Duren accepted. There are three other very surprising features of the evidence. The first is that neither Mr Sargent (who was the country manager for the UK) nor Mr Harris (who was the leasing director in charge of Summer Row) mentioned this meeting in their evidence. If it was such an important meeting involving country managers, this silence is inexplicable. I can only infer that they took no part in the meeting; and that they were not consulted about the inputs into the HBA or cashflows. Second, the meeting has left no trace in the documentary record which extends to well over 10,000 pages. Third, Mr Aaronson himself did not mention the meeting in his first witness statement. I cannot accept that this was the financial viability check that ExCom had requested. I reject the evidence of both Mr Aaronson and Mr van Duren about this meeting.

On 3 November 2008 Marks & Spencer entered into an agreement for lease to take what had originally been envisaged as the cinema building. Multi and the NI Investors had agreed, subject to contract, to share the cost of the incentive package that had been offered to Marks & Spencer to induce it to enter into the agreement for lease. But the NI Investors now said that they were unwilling to make that contribution (which would have been some £2.25 million). A meeting took place on 3 November 2008 at which both Multi and the NI Investors were represented. The report to the meeting went through the position as regards the satisfaction of the various conditions precedent in the Development Agreement. The three Essential Conditions were reported to have been fulfilled, and the remainder capable of waiver. Agreements for lease had been made with Debenhams, H & M and Marks & Spencer. Agreements were in solicitors’ hands for TJ Hughes and JD Sports, while deals had been struck with Starbucks, and were close to finalisation with Top Shop, Dorothy Perkins, Burton and Miss Selfridge. In fact the letting position was not as good as reported. Turning to financial matters the report noted that:

“The design team is now on hold from 31^st October until all funding arrangements with NI Investors are in place. On delivery of guarantees, Multi will prepare the necessary paperwork to a state to request unconditionality with [the Council]. This is expected at the Members meeting at the beginning of January 2009.”

Cost savings (including savings in relation to affordable housing) were to be explored. The report also noted that the total spend to date was £27.4 million and that term sheet had been signed off with a consortium of three banks. The funding agreement itself was in final stages of preparation with a final meeting scheduled for early November to sign off the contract. The report stated that the Council had given consent to the NI Investors as approved funders which, under the terms of the USA, would trigger the requirement for the bank guarantees to be provided once notice had been given that the consent had been obtained. However, the NI Investors were not told that provision of their bank guarantees was essential to enable the loan documentation with the banks to be signed, as Mr Sargent accepted in cross-examination. (The Development Manager’s report dated 24 December 2008 asserted that the NI Investors had been told at the meeting that the facility agreement could not be progressed without the NI bank guarantee. This assertion was false.) Mr Sargent said in evidence that he wanted to see the whites of the NI Investors’ eyes and the colour of their money in the shape of the bank guarantees and then decide whether the scheme would go ahead. At the meeting he told the NI Investors that Multi would obtain a valuation before the decision was made; and that if the valuation was “not OK” then Multi could walk away. Mr Sargent told the meeting that Multi was able to put in the additional equity; although he had no authority to make that statement, since none of the committees, let alone the Board, had made that decision. This seems to me to be another example of Multi telling untruths in order to advance its position. But Mr Sargent said that he wanted to hold all the cards, and make the decision. He explained that he wanted to sign up the banks first; but that Multi could still walk away from the scheme.

On 4 November the NI Unitholder was notified by letter that the Council pre-condition had been satisfied. This triggered the timetable for provision of the bank guarantees. The letter proposed a completion meeting on 12 November 2008 in Amsterdam. The NI Investors’ first reaction, through their lawyers Semple Fraser, was to question whether the Council’s letter giving its consent to the novation of the various agreements was in satisfactory form. Although bank guarantees were in place for both Windsor and Lagan, Mr Horner of MAR realised that MAR’s guarantee required MAR to satisfy a number of conditions precedent. These included depositing a substantial amount of cash (£4.5 million) in a blocked account: cash that MAR did not have. Clearly this is something that should have been dealt with much earlier as Mr Horner acknowledged. He regarded the problem as both sensitive and embarrassing for the NI Investors. The fact is, however, that neither Multi nor their solicitors Norton Rose were told at that stage that there was a problem. It is difficult to escape the conclusion that the NI Investors, through Semple Fraser, were to a large extent playing for time. However, it is also right to note that Semple Fraser also referred to clause 2.5.10 of the USA and asked Norton Rose to confirm how much was outstanding on loan by the partnership to other group companies and what the loans related to.

Multi’s Executive Committee met on 10 November 2008. So far as Summer Row is concerned the minutes record:

“This investment proposal is to keep the project alive. Notice was sent to NI to post 27 million of bank guarantees per the forward purchase contract. Negative reaction is received. Land price with the Municipality cannot be changed without a new tender.

Investment proposal remains pending. Project is put on hold.”

The minutes also record that downsizing of the company was to be expected. In fact many of the UK team involved in Summer Row were made redundant. Mr Rebbeck said that the number of UK staff left would not be enough to manage the project if it went forward; and I accept his evidence.

On 11 November Norton Rose, acting for Multi, sent Semple Fraser a revised form of consent from the Council. They said that they would agree to treat the condition as having been satisfied on that date (and thus triggering the timetable for completion). They attached a ledger which, they said, showed the amount of the loans to be repaid. The ledger showed debts due from the partnership to Multi Developments UK Ltd of some £27.9 million. The parties now began, at least ostensibly, to make arrangements for a completion meeting at which, among other things, the bank guarantees would be produced. The arrangements included internal arrangements within Multi for the repayment of the loans that had been made to the partnership, as evidenced by Mr Baris’ e-mail to Mr Lambrecht of 14 November. It was to be done by way of a transfer of money through different Multi entities.

On 17 November Semple Fraser told Norton Rose that the NI Investors understood that Multi would have to find £60 million equity, and wanted “to be comfortable” that Multi was in a position to invest those sums. On the same day Norton Rose sent a number of documents to Semple Fraser in anticipation of a pre-completion meeting on 18 November and completion the following day. They also confirmed that £27.9 million was owing by the partnership to Multi group companies; that these loans would be repaid; and that Multi 226 BV would subscribe for units to that amount. Semple Fraser replied that they had not been aware that a pre-completion meeting was envisaged; and that the NI Investors would not be in a position to complete on 19 November. However, they said that they were “aware that the parties are seeking to implement clause 2.5 of the USA” and confirmed that they were “preparing for that”. They said that the process would be accelerated if the financial information were provided. They proposed that a mutually acceptable completion date be agreed.

On 18 November Mr Baris sent Mr Horner some financial information about Multi. This information was sent in response to the NI Investors’ question about where the additional £85 million was to come from. The information stated that Multi had a corporate credit facility of €900 million of which €750 million had been drawn, meaning that €150 was still undrawn. It also stated that from the total shareholders’ commitment put in place on Multi’s takeover by Morgan Stanley €50 million was still undrawn. What it did not say, however, was that these funds would be committed to Summer Row as opposed to any of the green projects to which Multi was committed; or to other yellow projects competing with Summer Row. In fact the remainder of the corporate facility was drawn down as to €50 million in November 2008 and as to the remainder in Q1 of 2009. It is unclear on the evidence how that money was used. It has not, in my judgment, been established that it remained available for Summer Row. The NI Investors were not prepared to hand over their bank guarantees until Multi had demonstrated that it was in a position to fund the whole development. Their fear was that by handing over their guarantees they would lose control. On the same day Mr Baris informed Multi’s accountants that the repayments of the loans would take place and asked whether this could be done by book entry only.

Norton Rose replied to Semple Fraser on 19 November 2008. They took issue with a number of points that Semple Fraser had taken; but continued:

“… our client had set Monday, 24 November 2008 as the date upon which the actions required by clause 2.5 of the Unit Sale Agreement be undertaken. …

We will be in contact with you concerning the mechanics of completion and attendance in Amsterdam.

You should be aware that our client will not be offering any further extensions of time in relation to completion. It fully intends to comply with its obligations in relation to completion on Monday, 24 November and will expect your client to do likewise.”

On 21 November Norton Rose e-mailed Semple Fraser to say that Multi was not prepared to accept any further delay and that they required the NI Investors to complete on the following Monday in Amsterdam. Later that afternoon Semple Fraser replied, saying that they were instructed not to attend a completion meeting “until the M & S position” had been resolved and Multi had supplied the financial information requested by the NI Investors. In fact, because MAR had still not solved the problem over satisfaction of the conditions precedent to its bank guarantee, the NI Investors were not in a position to complete. At just after 6 p.m. Norton Rose responded, stating:

“We … put you on notice that in our view any failure by your clients to fulfil their obligations pursuant to clause 2.5 and to complete this stage of the transaction on Monday afternoon at our office in Amsterdam at 3 pm will amount to a repudiatory breach of the USA and we shall so advise our client.”

On the following Monday, 24 November, Semple Fraser confirmed that they would not be attending the completion meeting. They again asked for evidence that debt funding was available for carrying out the scheme; for up to date appraisals; and for evidence that significant levels of capital that Multi would have to provide were readily available. On 25 November 2008 Norton Rose wrote to Semple Fraser. They reserved their clients’ rights arising out of the NI Investors’ failure to attend the completion meeting. Having reiterated the obligation to complete they said that they would agree to defer completion to 3 December; but without prejudice to their contention that the NI Investors had already committed a repudiatory breach of contract. They concluded by saying:

“You should be aware that if completion does not take place as planned, our clients will look to enforce their contractual rights by way of an action for specific performance in relation to the provision of the NI Guarantees and/or by a claim for damages resulting from your clients’ repudiatory breach.”

On 1 December Mr Sargent wrote to the Council. In his letter he said that “the Scheme’s viability is still well below where it needs to be in order to be sanctioned by the board in Gouda.” He also reported to Mr Aaronson that in recent conversations with the NI Investors they confirmed that they had the money and liked the project still, but they did not like the deal.

In their e-mail of 2 December Semple Fraser acknowledged that the bank guarantees had not been delivered; but also said that the NI Investors still did not have comfort or reassurance that Multi had the funding in place to deliver the scheme. They said that the financial information provided thus far as wholly inadequate. They asserted that the NI Investors remained “very much committed to Summer Row” and believed that the scheme would “in time” succeed. However, they said that it would be foolhardy not to reappraise the scheme in the light of prevailing market conditions. They did not consider that a completion meeting on 3 December was appropriate and proposed a round table meeting instead. Norton Rose responded on the same day to say that:

“If completion does not take place tomorrow … our client will enforce its contractual rights against your client in the manner envisaged in my letter to you of 25 November.”

The NI Investors did not attend the completion meeting on 3 December. On that day Semple Fraser wrote to say that two of the three bank guarantees were within their control; and that the third was pending resolution of a condition precedent. They said that their client was in discussions to ensure that the last condition precedent was resolved so that the last remaining bank guarantee could be released. They said that no material loss would be caused to Multi by delaying completion. On 4 December Norton Rose wrote again. They said that the bank guarantees were necessary to obtain funding going forward and to give Multi the confidence necessary to invest further time and funds in the development. They said that Multi was reserving its position “in respect of your clients’ repudiatory breach of contract and right to seek specific performance”. They said that their letter should be taken as a letter before action. Semple Fraser now revealed that the problem guarantee was that of MAR. They said that MAR had put proposals to Ulster Bank on 2 December, and that the bank were considering them, but that they were aware of the urgency of the situation. However, they would not give Norton Rose details of the outstanding condition precedent.

Multi’s main board also met on 4 December. The chairman opened the meeting by saying that the world was upside down and Multi was part of it. But he was “convinced that Multi will be able to survive”. The support of Morgan Stanley would be needed to help Multi find new investment and financing partners. The board considered the broad overview of Multi’s financial position, noting among other things that liquidity in the market had not improved. The predicted cashflow showed a negative balance of €332 million, which was considerably worse than the last cashflow that had been presented to the board. It then turned to consider the green projects (i.e. those where construction was under way). The three Spanish projects all reported increased costs. One of the Portuguese projects showed a decrease in the result of € 12.1 million. The two Italian projects also showed decreased results. The two French projects showed decreased results, as did the two in the Netherlands. Things were better in Germany. Mr Aaronson then presented the UK. He reported that the result of Multi’s project in Bath had decreased by € 38 million due to a reduction of 7% in forecasted rental income. In response to a question how much equity Multi had invested in the scheme, Mr Aaronson replied that the equity amounted to € 40 million, but that it would grow to € 60 million. Mr van Duren then explained the colour coding of projects. He explained that those coded yellow would become green “as soon as financing from banks or investors is available.” There was no suggestion that projects would go green as a result of Multi investing its own cash. The meeting turned to consider individual yellow projects. It noted that € 40 million had already been invested in a yellow project in Rome; and € 21 million in a yellow project in the Netherlands. Mr Aaronson reported that the result on Summer Row had decreased by € 14.2 million as a result of increased construction costs and tenant incentives. However, the gross yield had decreased from 6% to 5.85% reflecting the agreed yield with the NI Investors. This was a bold claim, because the NI Investors had only agreed to buy half the scheme at that yield, and yields generally had softened. In addition the investment proposal before the board was based on a projected rental value of £18.76 million. Apart from an improvement in the yield, these figures had not changed since the summer. Mr Aaronson said in evidence that Multi had asked itself whether the figures were the right ones; and expressed the view that the figures were “robust answers for the future”. There is no trace of any process of review of the figures in the case papers, as Mr Aaronson accepted. I do not accept that Multi carried out the reappraisal that Mr Aaronson suggested. Nor were the assumptions made “conservative” as the board had previously requested. The meeting was also informed that the Karolina project in the Czech Republic was 70 per cent pre-let, and that there had been cost savings of € 20 million. However, Multi needed additional equity of € 30 million. The meeting closed with the chairman saying that Multi should concentrate on the realisation of financing selling and leasing deals, and that the liquidity situation should be the main concern of all attendees. Mr Aaronson said in evidence that the plan for funding Summer Row was that the funding would come from internal sources, unless Multi could find mezzanine finance. There is no trace of this in the records of board meetings. The minute of this meeting does, however, show that Multi needed to find €30 million additional equity for the Karolina project, which was in fact built. But since costs had been reduced by 20 per cent and the scheme was 70 per cent pre-let, that decision is understandable. That scheme was in a far healthier position than Summer Row. I also consider that when Mr Aaronson was confidently asserting Multi’s ability to find the additional equity, he had not really appreciated the extent of the funding gap, in the light of the expert evidence about the likely size of the available bank loan.

On 8 December there was a meeting between the NI Investors and Multi. Although the meeting was a without prejudice meeting, Multi’s witnesses described it. The NI Investors asked Multi for further financial information and a recent valuation.

On 9 December 2008, the sale of Multi Turkey Retail Fund to Canadian Pension Plan completed, which provided Multi with €167million in cash. On the same day Ulster Bank sent MAR the revised terms on which they would provide the bank guarantee. Norton Rose chased Semple Fraser about the outstanding bank guarantee. Semple Fraser replied that MAR were dealing direct with the bank and that they were seeking an update. On the following day Semple Fraser reported that Mr Horner of MAR was meeting the bank on 11 December.

On 12 December Mr Bell of Lagan wrote to Mr Sargent. He reported that Mr Horner had had a positive meeting with Ulster Bank; and had reached agreement on the outstanding condition subject to credit approval and the legal paperwork being finalised. Semple Fraser communicated the same news to Norton Rose that day.

On 17 December Semple Fraser wrote to Norton Rose asking more questions about Multi’s financial position and its ability to fund the scheme. On 19 December Ulster Bank gave credit approval to the new terms for the MAR guarantee. On 23 December Norton Rose wrote to Semple Fraser complaining about the delay. They accused Semple Fraser of obfuscating the NI Investors’ breach of contract by raising questions about Multi’s financial position. On the same day Semple Fraser complained to Norton Rose abut press statements that Multi had put out alleging that the NI Investors had pulled out of the deal. On 24 December Ulster Bank issued a draft facility letter to MAR.

The Executive Committee met on 6 January 2009. The committee considered a project in Portugal, in relation to which Mr Aaronson said that an equity input of €9 million was too much for a 6.5% yield. Cost overruns of €12 million were reported in relation to projects in Turkey and €322,000 in relation to a project in Amsterdam. Two projects in France were cancelled. A further twelve projects were cancelled at the next meeting on 2 February. There is no suggestion in the minutes of that meeting that the cash receipts from the recently completed sale of the Multi Turkey Retail Fund should be allocated to Summer Row. On the contrary the meeting was told that the money was used to meet obligations in many non-Turkish projects as well as Project Bazaar.

On 9 January Norton Rose refuted Semple Fraser’s complaints about the press releases. They told Semple Fraser for the first time that the banks’ funding offer contained in the term sheet had expired; and that Multi had met Lloyds to discuss revised terms. A long section of the letter set out the importance of the NI bank guarantees (although it wrongly alleged that the guarantees were conditions precedent to the facility agreement, rather than to drawdown). Semple Fraser put this point to Norton Rose in their reply of 22 January.

Through December 2008 and January 2009 Mr Horner had been taking steps to persuade Ulster Bank to accept alternative security to the cash deposit of £4.5 million. The bank signed off a new facility letter on 16 January. This required alternative security, which included guarantees to be given by both Windsor and Lagan, as well as by MAR’s principal active shareholders. It also required the deposit of £500,000 in cash. Mr Horner said that MAR had the cash available. Lagan had agreed in principle to give the guarantee, but the terms on which it would be given had yet to be discussed, let alone agreed. No discussions over the giving of a guarantee had taken place with Windsor.

Ultimately on 3 February 2009, when the bank guarantees had still not been provided, Norton Rose gave notice stating that Multi accepted the NI Investors’ repudiatory breach of contract and terminated the USA. In response to Semple Fraser’s question why Multi had not signed the facility agreement they simply said that Multi was not in a position to do so. In their turn on 6 February 2009 Semple Fraser said that Norton Rose’s letter of 3 February was itself a repudiation of the USA which the NI Investors accepted. It is thus common ground that the USA had been terminated: the question is: by whom?

On 6 March 2009 Mr Sargent wrote to the Council. He said:

“It is already clear to us that with the further deterioration of the economic climate since our last press release in December that a start on site this year will not be achievable. It is questionable if the current scheme, designed in a dramatically different economic climate, is deliverable at all without substantial redesign.”

The Executive Committee met on 23 March. The report on Summer Row indicated that balancing the value of the project against the cost, there would be a profit for Multi of £35 million. But even with that projected profit the report said that the project was “no longer viable at current market yield”. The Board met on 26 March 2009. The papers before the board included a report on Summer Row. They said that the result from Summer Row was now €17 million negative; and that the current yield led to “an unfeasible project”. Summer Row was on the list of cancelled projects, rather than projects on hold. Mr van Duren’s evidence was that Multi would look at yields as low as 6 per cent.

As I have said, Mr Rebbeck’s appraisal of the residential element of the scheme projected a loss on that part of the scheme of £7 million. Of that amount about £1.6 million was attributable to the discount for affordable housing. Multi investigated the possibility of eliminating the affordable housing element of the scheme and reducing or even eliminating the residential component. The removal of the restriction to affordable housing was one of the costs savings that Mr Sargent had canvassed in his letter to the council of 12 September 2008. Multi’s advice from DTZ was that the Council would be reluctant to support a scheme removing the entirety of the residential element. They added that this option would require a new application for planning permission and that there was a risk of legal challenge if there were significant changes to the scheme. Multi’s advice from their architects was that in design terms part of the residential component could be removed without undue difficulty; but that it would be very difficult to remove it entirely. The architects, like DTZ, thought that obtaining planning permission for a scheme that omitted the residential component would not be possible.

The Council replied to Mr Sargent’s letter of 12 September on 14 October. They said:

“The Wolverhampton Affordable Housing SPD states that “Where a developer considers that there are major inhibiting factor which would so threaten the economic viability of their proposal, that only a mitigation of the affordable housing requirement can resolve, then they should submit to the Council a full and comprehensive Financial Viability Assessment (FVA) for the Council to appraise and come to a decision whether mitigation is justified. The Council will appoint its own assessors for this purpose to provide professional and impartial advice.”

The letter also enquired whether the appraisal included with Mr Sargent’s letter of 12 September was the one that he wanted the Council to appraise. Mr Sargent replied on 4 November. He said that the removal of the affordable housing would “assist in reaching a suitable financial return on the project” and said that he would supply an amended Financial Viability Appraisal in due course. He never did. On 18 November the Council said that they were looking forward to receiving the latest Financial Viability Appraisal “in order to progress consideration of your requests…” Mr Sargent informed the Council by his letter of 1 December that the “Scheme’s viability is still well below where it needs to be in order to be sanctioned by the board in Gouda”. Mr Aaronson’s evidence was that this was not true; and that he had never led Mr Sargent to believe that the board would not sanction the scheme unless the costs were reduced. If Mr Sargent’s statement was not true then, apart from reflecting poorly on his (and Multi’s) integrity in negotiation, it would have put him in an awkward position. Consistently with the Council’s policy on affordable housing, he would have had to have persuaded the Council that the whole scheme was indeed threatened in order to persuade the Council to drop the requirement. But on the other hand in order to be in a position to waive the Commercial Conditions, Multi had to be able to convince the Council that it was in a position to carry out and complete the development. Mr Sargent accepted that if an appraisal for the project showed that it would make a loss, the Council might well not have been convinced.

Mr Sargent said that by the time the USA was terminated the documentation for the building contract was more or less complete. He said that the contract was for the whole of the development (including the residential component) but that there were provisions in the contract that enabled the residential component to be cancelled. This would have required both a fresh planning permission and a redesign of the scheme to eliminate residential service cores and the like. Since the building contract was for a guaranteed maximum price, it would have been a strange bargain for a building contractor to strike.

Despite the advice that Multi had been given by its consultants, Mr Sargent said that he thought that planning permission would have been achievable for a scheme omitting the residential component. He also said that despite the Council’s expressed attitude his confidential talks with Council officers led him to believe that the Council would not object to the omission (or at least reduction) of that component once the development agreement had become unconditional. In my judgment this is pure speculation. There is no trace of the omission of the residential component (as opposed to the omission of the requirement that some of them be affordable housing) being suggested to the Council at that time. Moreover the scheme was being marketed to potential investors and funders on the basis that the residential component would be included. I have already referred to Mr Sargent’s letter of 6 March 2009 in which he said that the scheme might not be deliverable without a substantial redesign. In his reply of 9 April Mr Boyes of the Council said that the Council would need to understand whether any new proposals would “fit within the terms of the existing CPO and planning permission framework.” Part of the justification for the CPO had been the mixed use scheme; and to remove the residential component might have led to serious legal difficulties. When Mr Sargent amplified his suggested design changes in his letter of 15 September 2009 Mr Boyes’ response was that a new application for outline planning permission would be needed; the Council would have to assess whether it could still implement the CPO; and that under-bidders might mount a legal challenge. Moreover, even if the Council had agreed to the omission or reduction of the residential component it would have prevented a start on site until the new design had been approved and had received planning permission. Thus the development timetable on which Multi’s claim for damages is based would not have permitted the omission of the residential component.

As far as the affordable element was concerned, as I have said Multi was on the horns of a dilemma. On the one hand in order to persuade the Council to agree to waiver of the Commercial Conditions it would have had to persuade the Council that it had the ability to carry out and complete the development. On the other hand, in order to persuade the Council to drop the requirement for affordable housing it would have had to persuade the Council that, with the affordable housing, the development was not viable. The difference in value in December 2008 between the residential component with and without affordable housing on the basis of the agreed evidence was of the order of £1.2 million. In my judgment the Council would have taken a lot of persuasion that a difference of that magnitude on a project expected to cost over £300 million threatened its very viability. I cannot, therefore, conclude that the chance of the Council dropping the requirement for affordable housing before the Development Agreement went unconditional was a substantial chance. Once the Development Agreement had gone unconditional Multi would have lost its bargaining position as against the Council. Equally, therefore, I cannot conclude that the chance of the Council dropping the requirement for affordable housing during the course of construction was substantial.

The term sheet signed in July 2008 envisaged a maximum facility of £202 million; but that was subject to a loan to value ratio of 70 per cent. It was not contractually binding. The evidence of Mr Monnickendam of Lloyds TSB was that the banks would not have agreed to enter into a binding facility agreement unless the banks were satisfied that the development was “fully funded”. This expression signifies that the banks needed to be satisfied that Multi had the money to carry out and complete the project. Part was to come from the bank loan itself; and the rest was to be provided by “equity”. “Equity” did not necessarily mean free funds: the equity could be provided by funds from other lenders, provided that they did not rank in priority to the banks’ own loan. The final decision on whether to release any money was not Mr Monnickendam’s. He was, in bank jargon, the “originator” of the loan. Other departments within the banks dealt with the satisfaction of conditions precedent to drawdown. But Mr Monnickendam explained that the banks would not have been prepared to sign a facility agreement unless they were satisfied that conditions precedent to drawdown were likely to be satisfied. However, if the banks had signed the facility agreement, but the conditions precedent to drawdown had not been met, then neither the arrangement fee nor the commitment fee mentioned in the term sheet would have been payable.

One of the conditions precedent referred to in the term sheet was the signing by Multi of a letter of commitment of £67.5 million. This figure included the £27 million to come from the NI Investors, leaving Multi with a residual commitment of some £40 million. The point of this letter was for Multi to demonstrate to the banks that they had allocated sufficient equity to allow the scheme to proceed. The amount of the equity commitment had been chosen at a time when it was thought that the bank loan plus £67.5 million would be enough. On 8 September Mr Baris sent Mr Monnickendam a copy of HBA-25, which showed that the projected costs had risen to £314 million. It was clear that £67.5 million would not be enough. But no commitment letter stating that Multi had committed even £67.5 million to the project was ever produced.

Another of the conditions precedent was the obtaining of an up to date valuation of the project in order to determine the size of the available loan, in the light of the limitation to 70 per cent of the gross development value. The importance of this was stressed by Mr Jones, the senior manager of credit at Lloyds, in his e-mail to Mr Monnickendam of 17 September. In early October more recent appraisals showed that the full facility of £202 million was unlikely to be available. Mr Monnickendam e-mailed Mr Baris to say that he wanted no surprises at drawdown and wanted to be sure “that we can demonstrate that the facility is fully funded, a combination of the equity commitment letter and debt at drawdown.” In his evidence Mr Monnickendam accepted that in the autumn of 2008 Multi had not demonstrated that the transaction was fully funded; and that, absent such demonstration, the banks would not have proceeded with the transaction.

The draft facility agreement which was to give effect to the arrangements recorded in the term sheet contained a number of conditions precedent to drawdown. They included:

Mr Van de Meer, of ING which was one of the consortium of banks, was worried because the banks would have to rely on Multi much more than originally estimated. He considered that the figures showed that the project would be loss making, and he wanted to discuss that with his fellow bankers. Mr Monnickendam accepted that Mr Van de Meer was looking to get out of the transaction; and explained that Mr Van de Meer had told him that the ING real estate team were being told to get out of any transaction that they could exit. At this time ING was an organisation that was looking to exit any loan where they did not feel obliged to continue either for legal or reputational reasons. Like the other banks, ING had no legal commitment to Summer Row. Mr Monnickendam prepared revised figures on a spreadsheet which he sent to his colleagues on 13 October. His conclusion was:

“As long as the ERV hits £18m, the yield stays at 6.5% and the resi sells for £18m we should be ok.”

On 15 October the bankers talked. Mr Kovacs of SNS, which was the third bank in the consortium, had calculated that the total equity required from Multi would be £97.7 million; far more than had been originally envisaged. Mr Monnickendam persuaded Mr Van de Meer to stay in the transaction by dint of some very strong talking. The upshot of their conversation was that any additional equity required from Multi would have to be paid in upfront before the 50:50 debt:equity contribution started. Mr van de Meer pointed out that the loan to value ratio might mean that even more equity was needed. There was also a question over the cancellation fee that had been mentioned in the term sheet. Multi were not happy with it; and the suggestion from the bankers was that it could be waived if Multi agreed to pay the arrangement fee on signing, rather than on drawdown. This proposal was passed on to Mr Baris on 16 October.

By the third week in October both Mr van de Meer and Mr Kovacs were calling for “some level of renegotiation” as current pricing levels were far from what had been approved back in April. Mr van de Meer also said that “as long as the risk profile of the facility does not change materially” turning away from the term sheet was not the preferred option. It was also at this time that the banks turned down Multi’s request to provide a bank guarantee for the security deposit of £20 million that Multi was required to lodge with the Council for the purposes of implementing the CPO. Mr Monnickendam’s evidence was that the banks told Multi that the arrangement fee would have to be paid on signing the facility agreement rather than on drawdown, although there is no document that says this. Assuming this to be so, the arrangement fee would have been of the order of £1.2 million, depending on the size of the eventual loan (which was itself dependent on a valuation which was never obtained).

Mr Baris told Mr Monnickendam in November 2008 that Multi had put the lawyers on hold and that Multi first wanted to have security on the NI Investors commitment of £27 million before signing the facility agreement. He explained Multi’s strategy to Mr Monnickendam:

“… first NI, and then close the deal.”

This was not a requirement of the term sheet, or indeed of the draft facility agreement. Provision of the bank guarantees was a condition precedent to drawdown but not to signing. Mr Aaronson said that it did not occur to Multi to close the deal with the banks before the NI Investors had produced their own bank guarantees. The deterrent appears to have been the prospect of having to pay the commitment fee. Mr Aaronson said that Multi had decided to take a risk on funding; and that that was a good business decision. However, Multi had still not shown the banks that the transaction was fully funded; and had not told the banks where the money for the shortfall was to come from.

On 10 November the senior sanctioning director at Lloyds e-mailed his colleagues in the light of increasingly prevalent recessionary trends. He said that where relationship managers were looking to sign documents several months after authorisation by a sanctioner it was essential to make appropriate referrals back to the credit team. Mr Monnickendam interpreted this to apply to Summer Row, which would have to be referred back to the credit team for approval. It appears from an e-mail of 24 November 2008 that SNS was also required to seek a renewed credit approval for participation in the loan.

On 13 November Mr Baris reported that the banks were “still there” but that they were pushing Multi to finalise the deal by the end of the month. At the same time the banks were demanding a rise in the interest rate. On the following day Mr Monnickendam said that all three banks had to review pricing in the light of market conditions. Both the margin and the commitment fee were to be increased; but the arrangement fee was to remain as stated in the term sheet. He also told Mr Baris that if the loan document had not been signed by the end of November, the three banks would find it difficult to remain in the deal. None of this pressure from the banks was communicated by Multi to the NI Investors.

On 11 December Mr Kovacs informed his colleagues that SMS had decided internally to cancel their commitment at the end of December. On the same day Mr Monnickendam e-mailed Mr Baris. He said that the term sheet had expired; and that if the deal were revived in 2009 all three banks would need to seek fresh credit sanction; and that he had no doubt that key terms of the deal would be revised. But he said that all three banks remained interested in seeing the transaction succeed. Why Mr Monnickendam said that the term sheet “had expired” is mysterious because it had no expiry date. But it was non-binding, so the banks could have withdrawn at any time. I think that this was Mr Monnickendam’s way of telling Multi that the deal was off.

Mr Aaronson had made an informal approach to Mr Robertson of Apollo Real Estate in the summer of 2008. The approach was renewed in November. The Multi team made a presentation to Mr Robertson and his business partner in mid-November 2008. Multi were looking for a loan of about £30 million. The presentation revealed total costs of some £317 million funded in part by the bank loan of £202 million. The costs figure is £3 million higher than that shown on HBA-25. But even on the basis of a bank loan of £202 million, and the agreed contribution from the NI Investors, a loan of that size would still have left a sizeable funding gap of some £27 million. Mr Robertson was never told where that additional money was to come from. His assessment was that he would have to be satisfied that some £80 million was being invested in the scheme ranking behind his money. He would have wished to satisfy himself that the money was there before any drawdown, although he would have been prepared to issue a letter of intent before undertaking the necessary due diligence.

Although Mr Robertson would have wished to see a formal valuation of the scheme before committing his money, his primary concern was to ensure that on completion of the project he would be able to get his money back together with a return on that money, which he put at 15 per cent per annum. For that purpose his interest was in the relationship between the value of the scheme and the aggregate amount of the bank loan and his own loan. Provided that the value exceeded that aggregate by an amount sufficient to give him acceptable cover, he was not unduly concerned that the project might make an overall loss. In practical terms he would have required Multi’s money to go in first, followed by his money and then the banks’. He would have required the right to attend periodic meetings to monitor the development, and step-in rights in case things went wrong. The expenditure of Multi’s money first would have been a condition precedent to drawdown. In that way there would be some assurance that the project could be carried to completion.

In early December Mr Robertson told Mr Aaronson that Apollo would be willing to lend £30 to £35 million on the basis of a return of 15 per cent per annum. But matters never got as far as a letter of intent; still less due diligence.