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You are here: BAILII >> Databases >> High Court of Ireland Decisions >> Luxor Investments Ltd & ors -v- Beltany Property Finance Ltd [2015] IEHC 316 (13 May 2015)
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Cite as: [2015] IEHC 316
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Judgment
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Neutral Citation [2015] IEHC 316 THE HIGH COURT COMMERCIAL [2015 No. 1200 P.] BETWEEN LUXOR INVESTMENTS LIMITED, LUXOR LEISURE LIMITED, ALMADA LIMITED, BALLINCASTLE CONSTRUCTION LIMITED, PADRAIC RHATIGAN, PSR PROPERTY COMPANY LIMITED, DRIFTVIEW ENTERPRISES AND PSR PROPERTY HOLDING COMPANY PLAINTIFFS AND
BELTANY PROPERTY FINANCE LIMITED DEFENDANT JUDGMENT of Mr. Justice Brian J. McGovern delivered on the 13th day of May, 2015 1. On 5th March, 2015, Fullam J. directed an expedited hearing of a discrete issue in these proceedings, namely:-
Background 4. Luxor Investments Limited (the first plaintiff) is a limited liability company and a wholly owned subsidiary of PSR Property Company Limited (sixth plaintiff). It is the owner of properties in Dublin City Centre. It is also the developer and owner of the Radisson Blu Royal Hotel, Golden Lane, Dublin 8 (“the hotel”). 5. Luxor Leisure Limited (second plaintiff) is a limited liability company which holds the occupational interest in the hotel pursuant to the terms of an occupational lease and is the operating company of the hotel. It is also the guarantor of a loan facility in respect of the hotel. 6. Almada Limited (third plaintiff) is a limited liability company and is the owner of a property at Ship Street, Dublin and three apartments known as Castleway Apartments at Castleway, Golden Lane, Dublin 8. 7. Ballincastle Construction Limited (fourth plaintiff) is a limited liability company and is the developer and owner of manufacturing units at Athlone, Co. Westmeath, developed in conjunction with the Industrial Development Authority. It is also the owner of premises known as the Atlantaquaria, Galway. 8. In 2012, UBIL, on instructions from its parent Royal Bank of Scotland (“RBS”), commenced a strategy designed to deleverage their loan book. At that time, they indicated to the plaintiffs that they were not prepared to extend further facilities and that the Rhatigan Group should seek new investors for their facilities. A number of proposals were put forward by the Rhatigan Group but were not acceptable to UBIL and this culminated in a restructuring of certain facilities and ultimately led to the fee agreement being concluded. In restructuring the Rhatigan Group, certain facilities were granted by UBIL in respect of the funding of loans connected to those properties other than the hotel. These are referred to as the “non-hotel facilities”. The non-hotel facilities are supported by First Legal Mortgages over Luxor properties, the Almada properties and the Ballincastle properties, together with various corporate guarantees and an extension of conditional personal guarantees provided by Mr. Padriac Rhatigan (fifth defendant). The non-hotel facilities are “demand facilities” repayable on or before 30th April, 2015. 9. The hotel was built between 2005 and 2007, and was funded by a combination of debt provided by UBIL, equity contributions provided by certain entities in the Rhatigan Group and a number of third party investors (the “consortium”). The funding provided by UBIL was (pursuant to a facility letter of 21st December, 2007) to two nominee companies established by agents of UBIL, namely Cassius Investments Limited and Tolamor Limited (the “hotel borrowers”). This was supplemented by a facility letter of 23rd September, 2009. The funding of the hotel was part of a tax efficient scheme whereby investors could avail of capital allowances. On 20th December, 2007, Luxor contracted to sell the hotel to the hotel borrowers on behalf of the consortium, who acquired and held the beneficial ownership of the hotel on trust for members of the consortium. The purchase price for the sale of the hotel to the hotel borrowers was €50m of which €39,854,000 was funded by the hotel facility with the balance being funded by equity mainly from the Rhatigan Group. 10. The hotel facility is secured by legal mortgages, charges and security assignments over the respective interests of the hotel borrowers, Luxor and Luxor Leisure in the hotel, the occupational lease, an option agreement, a management agreement and co-ownership agreement and the assignment of contracts and collateral warranties entered into in respect of the construction of the hotel. In 2009, additional security for the hotel facility was provided to UBIL by the first plaintiff and Driftview Enterprises Limited (seventh plaintiff) which was a guarantor of the hotel facility and by Ballincastle, Almada and J.J. Rhatigan and Company. Notwithstanding this funding structure, the plaintiffs claim that it was always intended that the repurchase of the hotel by Luxor (on foot of a put and call option) would be funded by longer term property finance. When the original funding structure was put in place, it was not believed that it would be difficult to obtain such longer term finance. 11. From the establishment of the hotel in 2007, the hotel facility at all times continued to perform in accordance with its terms. And as of the year ending December 2014, the hotel returned an operating profit of approximately €2.8m. 12. In 2009, the non-hotel facilities were refinanced for a further three years on the basis that all income from non-hotel assets would be applied to service interest in the first place and that any surplus would be applied in reduction of capital. In the five years prior to these court proceedings, all interest on the non-hotel facilities has been fully serviced and the capital has been reduced by approximately €14m. When the non-hotel facilities fell due for review in 2012, UBIL informed the plaintiffs that they were not prepared to extend further facilities but were seeking to deleverage their loan book and that the Rhatigan Group should seek new investors and funding elsewhere. During 2012 and 2013, the Rhatigan Group sought new funders and discussions continued with UBIL culminating in a restructuring of non-hotel facilities in October 2013. 13. These restructuring facilities involved the existing UBIL loans granted to Almada, Ballincastle and Luxor being extended and a new facility letter dated 15th October, 2013, was signed. The 2013 facilities were “demand” facilities but repayable on or before 30th April, 2015. UBIL was pressing the Rhatigan Group to sell non-hotel assets and insisted on the appointment of selling agents and solicitors to engage in that process. The plaintiffs claim that they cooperated with UBIL in this process and were not made aware that the bank intended to sell their loans. It was agreed, that insofar as the relevant commercial properties were sold, the conditional personal guarantee which had been entered into by Mr. Padraic Rhatigan (fifth plaintiff) would be reduced by an agreed amount in respect of each property. The programme of property sales appears to have slowed down or ceased in the spring of 2014, but the Rhatigan Group continued to manage the assets on a day to day basis. 14. In March 2014, Mr. Rhatigan was advised by Mr. Gareth Fay of UBIL that it had discussed the possibility of the sale of the Rhatigan Group loans (including the hotel facility) to a potential investor representing an international private equity fund. These loans were eventually sold to the defendant and on 14th October, 2014, UBIL formally notified the Rhatigan Group that it had agreed the sale of the loans to the defendant. Both the hotel facility and non-hotel facilities were included in the sale. The Fee Agreement 16. It is clear that the agreement provided for the payment of the fee independently of the repayment of the loans. Counsel for the defendant argues that it was only if the loans were redeemed at par that the fee could be paid. There was to be a minimum fee of €1m. The fee was to be calculated on the disposal of the hotel or at the termination date by reference to the market value of the hotel at disposal or termination date against a base value. Redemption at Par 18. Having purchased the loans and the Fee Agreement, the defendant has refused to consent to the redemption of the loans but maintains that it is entitled to a fee calculated on the basis of the Fee Agreement. In order to remove this obstacle, the plaintiffs have offered to place €2.1m into an Escrow account pending the determination of these proceedings. The €2.1m was calculated on the basis of a hotel valuation of €43m. That proposal was not acceptable to the defendant. The defendant indicated to the plaintiffs that it considered a sum of €8.4m would be required to protect its position in respect of the fee that would be payable in October 2016, but eventually it put forward a proposal that the sum of €7.35m would be paid into Escrow account by the plaintiffs to protect the defendant’s position and that the plaintiffs’ financial backer would take a second charge on the properties. The parties have been unable to reach any agreement on this. 19. In summary, therefore, the position is that the plaintiffs have a financial backer which will enable them to redeem their loans at par (including all interest payments due) but the defendant which has bought the plaintiffs’ loans and the Fee Agreement is unwilling to discharge the plaintiffs from liability under the Fee Agreement. Issues
(b) is the Fee Agreement void as a clog on the plaintiff’s equity of redemption? 22. His oral testimony to the court is supported by a letter of 27th May, 2014, which he wrote on behalf of the bank to the plaintiffs’ solicitors in which he stated:-
24. I am satisfied on the evidence that at the time when the Fee Agreement was concluded, the parties did not expect that the plaintiffs’ loans would ever be redeemed at par, notwithstanding the wording of the Fee Agreement, which I will discuss in more detail later. The facts of this case raise interesting and difficult legal questions. The plaintiffs collectively carry on a substantial business enterprise and in order to finance that business they have borrowed large sums of money from UBIL. The UBIL loan and the Fee Agreement have been purchased by the defendant. The plaintiffs have secured the support of a financial backer and are in a position to redeem their outstanding loans at par. But the defendant which has bought the loans and the Fee Agreement will not agree to this unless the terms of the Fee Agreement are adhered to. If the defendant is correct in the position it has adopted, it will effectively mean that it will recover a sum which could be any figure between €1m and €8.4m over and above the amount of the loans. In circumstances where the loans will be repaid at par this seems to impose a very harsh burden on the plaintiffs. 25. When the plaintiffs entered into the Fee Agreement it is clear that they had legal advice. They cannot repudiate the agreement nor have they sought to do so. They are simply challenging its enforceability or applicability in the circumstances which have now arisen and were never contemplated at the time when the agreement was concluded. In considering the Fee Agreement, I have to decide whether there are ambiguities in it or matters requiring a construction of the document. Having considered the document and the evidence and legal submissions, I am satisfied that there is no ambiguity in the words used in the Fee Agreement. The language of the Fee Agreement is clear. But as Lord Hoffman said in Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 All ER 98 at p. 115:-
(Emphasis added) 27. The words used in the Fee Agreement are clear. But there is a lack of clarity about the circumstances in which the agreement is enforceable due to omissions in the agreement. Under the agreement, the defendant will be entitled to a fee on the disposal of the hotel at the termination date whether this be October 2018 or an early date being not less than three years from the date of the agreement. 28. Mr. Denis Murphy of Deloitte and Touche gave evidence to the court. He was part of the advisory team that assisted the plaintiffs in negotiating with Ulster Bank in 2012 and 2013. He said that at the time of the restructuring it was generally accepted that there was going to be a loss on the sale of the assets. In conversations with Mr. Gareth Fay of UBIL in early 2013, it was accepted that there was a deficit in the non-hotel portfolio between €31.8m or €27.5m depending on which CBRE valuation was applied. Mr. Fay referred to the bank taking a “big hit” on the property portfolio and the restructuring negotiations centred around the bank taking equity in either the hotel or trading company, J.J. Rhatigan and Company. His evidence was that the Fee Agreement was not heavily negotiated but that the main change made was that the “relevant percentage” in the agreement was reduced from 95% to 70%. He said that the theme of an equity participation by the bank was repeated continuously over the course of the restructuring process. Clearly if the plaintiff group of companies was capable of paying off the debt in full, the restructuring would not have taken place. 29. The evidence at the trial establishes that the bank did wish the non-hotel properties to be sold off and while valuers were retained, it appears that this process stalled at some point and was never completed. At that time, the proposed sales would not have yielded full value in respect of the loans. In his evidence, Mr. Murphy said that at the time the Fee Agreement was concluded there was no prospect of repayment of the loans at par and that the assets had values of approximately €20m and the debts were around €45m to €48m. 30. Although the agreement contains a “complete agreement” clause, it seems to me that this is not of assistance in resolving the dispute between the parties because the dispute arises not out of some alleged agreement or collateral understanding but rather out of matters not covered by the agreement itself. 31. One of the curious features about this case is that while the evidence establishes that the parties to the agreement did not expect that circumstances would permit the loans to be redeemed at par, the agreement itself, on one reading, might suggest otherwise. The agreement prescribes a detailed and comprehensive mechanism for calculating the fee payable, principally by reference to two contractual constructs namely, a base value and the market value. It provides for a “Minimum Fee” of €1m, which begs the question as to how that minimum fee was to be paid if the loans could not be redeemed at par. The agreement recites that the first named plaintiff has outstanding debts to the bank of €76,227,609.17, including interest accrued to 15th October, 2013. While there was no evidence as to the exact sum currently outstanding on the loans, it is clear that the loans have been performing and the amounts due have been reducing. Nevertheless, on the basis of the evidence given to the court it is reasonable to assume that the sum outstanding on the hotel facilities and non-hotel facilities is considerably in excess of the fee payable under the Fee Agreement whether one takes the figures postulated by the plaintiffs or the defendant. 32. The defendant argues that the Fee Agreement has no meaning except in the context of redemption at par because that is the only circumstance in which there would be funds available to the plaintiffs to pay the fee. While this is an attractive argument, it seems to me to be somewhat simplistic. The agreement clearly anticipates insolvency events and events of cross default. (See clause 5) That clause does no more than reflect the state of mind of the parties who negotiated the Fee Agreement and entered into it since the parties to the agreement did not anticipate that the loans would be redeemed at par. I am satisfied that the Fee Agreement was entered into to ameliorate the position of the bank when it extended the facilities to the plaintiffs. The agreement recites that the fee “…has been calculated so as to reflect the additional interest which, in the light of the continuing and/or increased risk referred to above, the bank would reasonably require to continue and/or extend Luxor Investments facilities and those of the Principals”. Giving the words of the Fee Agreement their natural and ordinary meaning, I have to decide whether or not the claim asserted by the defendant attributes to the parties an intention which they plainly could not have had, or did not have, to use the words of Lord Hoffman in Investors Compensation Scheme when he quoted remarks of Lord Diplock made in the case of Antaios Compania Neviera S.A. v. Salen Rederierna A.B [1985] A.C. 191 at p. 201; where he said:-
34. The question is whether or not I can, as a judge, apply rules of construction if there is no ambiguity in the language of the Fee Agreement. I believe I can. The construction of a document is not merely a consideration of the text, but involves the court in carrying out an exercise to give effect to the agreement in a way which reflects the intention of the parties as found in the document and is most closely allied to business commonsense. In Mannai Investment Co. Limited v. Eagle Star Life Assurance Co. Limited [1997] AC 749 at p. 775, Lord Hoffman said:-
35. In Jumbo King Limited v. Faithful Properties Limited [1999] 2 HKCFAR 279, while sitting as a member of the Hong Kong Court of Final Appeal, Lord Hoffman emphasised the practical approach which should be taken to the interpretation of documents, saying that:-
37. When Mr. Gareth Fay (formerly employed by the bank) came to give evidence, he acknowledged that he was in court on foot of the subpoena as he was not willing to give a statement voluntarily because of the previous customer relationship with Mr. Rhatigan. In the course of his evidence, he stated that Mr. Rhatigan and his companies were one of the better performing clients that UBIL had and that interest was repaid on loans and capital was repaid in circumstances which were unusual during the downturn in the economy. In seventeen years that Mr. Rhatigan and his companies have been clients of the bank, not one demand for payment was made. He described how in 2012, the bank’s parent company, RBS, instructed the bank in Ireland to deleverage even though this meant selling assets below their loan value. 38. It is a well established principle that in construing contractual documents, the courts must not rewrite the bargain made by the parties. The parties to an agreement must be held to it. It is true, of course, that the Fee Agreement does not state that it was not applicable if there was a redemption at par. Such a clause or statement is not to be found in the agreement because it was simply never in the contemplation of the parties that such a situation would arise. Now that the plaintiffs are in a position to redeem the loans at par is the agreement enforceable in its terms? I think not. For some considerable time, the courts have interpreted contractual provisions in a contextual and purposive manner in order to determine their application. In Rainy Sky S.A. v. Kookmin Bank [2011] 1 WLR 2900 at p. 2908, Lord Clarke of the UK Supreme Court said:-
40. In Bromarin A.B. & Anor v. I.M.D. Investments Limited [1999] S.T.C. 301, Chadwick L.J. in the Court of Appeal stated at p. 310 :-
It is not, to my mind, an appropriate approach to construction to hold that, where the parties contemplated event ‘A’, and they did not contemplate event ‘B’, their agreement must be taken as applying only in event ‘A’ and cannot apply in event ‘B’. The task of the court is to decide, in the light of the agreement that the parties made, what they must have been taken to have intended in relation to the event, event ‘B’, which they did not contemplate. That is, of course, an artificial exercise, because it requires there to be attributed to the parties an intention which they did not have (as a matter of fact) because they did not appreciate the problem which needed to be addressed. But it is an exercise which the courts have been willing to undertake for as long as commercial contracts have come before them for construction. It is an exercise which requires the court to look at the whole agreement which the parties made, the words which they used and the circumstances in which they used them; and to ask what should reasonable parties be taken to have intended by the use of those words in that agreement, made in those circumstances, in relation to this event which they did not in fact foresee.” (Emphasis added) 41. Adopting that approach and having regard to what I have set out above, I would answer the question directed to be tried by Fullam J. as follows:-
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