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England and Wales High Court (Queen's Bench Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Queen's Bench Division) Decisions >> Proteus Property Partners Ltd v South African Property Opportunities Plc  EWHC 768 (QB) (30 March 2011)
Cite as:  EWHC 768 (QB)
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QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| Proteus Property Partners Ltd
|- and -
|South African Property Opportunities PLC
Cyril Kinsky QC (instructed by Travers Smith LLP) for the Defendant
Hearing dates: January 24-28, February 7-8.
Crown Copyright ©
Mr Justice Mackay:
A: The Parties
B: The Management Agreement of 20 October 2006
6.1 In consideration for the services rendered by the Manager hereunder SAPO shall pay to the Manager the following fees:
(a) the amount of 2 per cent per annum of the Net Asset Value, such fee payable quarterly in advance on the first Business Day of January, April, July and October (based on the Net Asset Value at the last Business Day of the immediately preceding month)…. and
(b) a performance fee in accordance with clause 6.3 below.
6.3 SAPO shall, in addition to the fees payable pursuant to clause 6.1(a), pay to the Manager a performance fee calculated and payable in accordance with the following provisions of this Clause 6. Such fee, if any, shall be charged to the capital or revenue Account of SAPO in such proportions as the Board may determine. The performance fee is payable by the reference to the increase in Net Asset Value per Ordinary Share over the course of a "performance period" referred to Clause 6.3 (a) and (b) below. The Manager shall be entitled to receive a performance fee (subject to the provisions of this Clause 6) payable in respect of:
(a) the period from Admission up to 30 June 2009; and
(b) each period commencing 1 July and ending 30 June (the first such year ending on 30 June 2010)
6.4. The Manager will be entitled to a performance fee in respect of a performance period if the following performance hurdles are met;
(a) In respect of the period from Admission to 30 June 2009, the performance fee hurdle is 100 pence per Ordinary Share increased at a rate of 12 percent, per annum, on an annual compounding basis up to the end of the period, but adjusted by subtracting, as at the date(s) of payment, the amount in pence per Ordinary Share of any dividend paid or distribution made in respect of the Ordinary Shares during such period;
6.5 If the respective performance hurdle referred to in Clause 6.4 is met, the performance fee payable will be an amount equal to 20 percent of the amount of the increase in the Net Asset Value per Ordinary Share, multiplied by the time- weighted average of the number of Ordinary Shares in issue, in each case since the performance period in respect of which a performance fee was last earned ( or since Admission if no performance fee has yet been earned). For the avoidance of doubt the Net Asset Value per share as at Admission shall be calculated after deducting the expenses of the Placing".
"… the net asset value of the Group as calculated in accordance with customary accountancy or industry practices relating to SAPO".
i) The Manager's appointment can be terminated for any reason within four years of the date of the agreement, and thereafter on one year's notice.
ii) The performance fee is payable when a defined "hurdle" is met. If that hurdle is surpassed, even by £1, the performance fee is payable in full; there is no sliding scale. If it is not surpassed nothing is payable but the management fee.
"This Letter sets out the terms under which the Management Agreement is amended with effect from Admission to clarify the calculation of the Net Asset Value of the Group for the purposes of the calculation of the management fee (including any performance fees). The Company and the Manager hereby agree as follows:
2. The Management Agreement shall be clarified by the amendment of the definition of Net Asset Value to read as follows;
"Net Asset Value" means the net asset value of the Group as calculated in accordance with customary accountancy or industry practices relating to SAPO but valuing the Group's property assets on an open market basis in accordance with the prevailing RICS Valuation Standards published by the Royal Institution of Chartered Surveyors, such property valuation to be prepared by an internationally recognised firm of surveyors, or in accordance with such other guidelines as the Board and the Manager may from time to time agree.
3. To the extent that the clarification referred to in paragraph 2 requires an adjustment to be made to the amount of any management fee previously paid to the Manager, the Company and the Manager shall agree the adjustment in management fees and the relevant amount shall be payable within 14 days of such agreement…
4. The terms of the Management Agreement shall in all other respects continue to apply in full to govern the relationship between the Company and the Manager".
C: Relevant Accounting Recommendations and Guidance
"….to make the financial statements of public real estate companies in Europe clearer, more transparent and comparable across Europe".
It acknowledged that most EPRA members reported in accordance with IFRS. The EPRA recommendations were said to provide "specific additional guidance for real estate companies within the IFRS framework". The recommendations included two forms of measure of NAV.
(i) EPRA NAV"Represents fair value of equity on a long term basis. Items that have no impact on the company long term, such as … deferred taxes on property fair value, are therefore excluded".
EPRA NAV was a measure based on cost price plus fair current value and was therefore capable of reflecting periodic revaluations.
(ii) EPRA Triple Net NAV, which was said to represent -"….fair value of equity and includes fair value adjustments of all material balance sheet items which are not reported at their fair value as part of the NAV per IFRS balance sheet statement."
This measure required-"Provision for deferred tax in respect of the latent capital gains tax or similar according to each country's tax rules arising on the revaluation of investment and development properties and other investments to market value."
It added that discounting this provision was a common method to arrive at an approximation of fair value of that deferred tax based on the average expected holding period and manner of realisation. This changed in the 2010 edition of the recommendations, but that change does not affect the issues in this case.
D: The factual background – first phase
He was therefore not making any choice as between the two available EPRA measures.
"I don't think Triple Net is the right approach as making assumptions on tax is not fair to us in the event the tax is lower or non-existent or delayed for a number of years' which are all quite possible outcomes".
I do not doubt that this was the result of his conversations with Wolstenholme and Currie whose evidence was clear, that they were strongly opposed to any deduction for deferred taxation, and were prepared to look for other opportunities if they did not get the measure they wanted. Mr Wolstenholme in his evidence said that such assumptions were objectionable as you did not know whether you would end up with a gain at all, how the tax authorities would treat it (as a capital or revenue gain) and what tax mitigation may have been put in place by then.
"My only concern would be by going the EPRA route we leave ourselves open to be persuaded to use the EPRA Triple Net NAV which might be detrimental".
"… such that it is simply valuing the property assets on an open market basis in accordance with the prevailing RICS Valuation Standards…"
Mr Sutch responded on 12 September by sending his third draft, which is word for word the same as paragraph 2 of the Letter Agreement and to which no alteration was made over the next five months up to the date on which that agreement was signed.
E: The factual background – second phase
F: The factual background – final phase
"… the Company has adopted the IRFS NAV adjusted by the open market valuation of the property portfolio for the purposes of calculating Proteus Property Partners' remuneration under the investment management agreement, which is equivalent to the EPRA NAV."
The interim results were also approved and it was agreed that the Letter Agreement was recommended to the board for approval. Late that same day the board approved the Letter Agreement, which was signed three days later.
G: Events following the signing of the Letter Agreement
H: Legal Principles
"The principles may be summarised as follows.
(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce [in Prenn v Simmonds 1WLR 1381 at 1384-6] as the "matrix of fact," but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear…
(4) The meaning which a document …would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax..."
"No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as "the surrounding circumstances" but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn pre-supposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating"
Later at 996E he added -
"When one speaks of the intentions of the parties to the contract one is speaking objectively – the parties cannot themselves give direct evidence of what their intention was – and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim or object or commercial purpose one is speaking objectively of what reasonable persons would have in mind in the situation of the parties".
"The [exclusionary] rule may well mean… that parties are sometimes held bound by the contract in terms which, upon a full investigation of the course of negotiations, a reasonable observer would not have taken them to have intended. But a system which sometimes allows this to happen may be justified in the more general interest of economy and predictability in obtaining advice and adjudicating disputes…..The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract meant. It does not exclude the use of such evidence for other purposes: for example, to establish that a fact which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it".
"It is true that evidence may always be adduced that the parties habitually used words in an unconventional sense in order to support an argument that words in a contract should bear a similar unconventional meaning. This is the "private dictionary" principle which is akin to the principle by which a linguistic usage in a trade or among a religious sect may be proved…"
I: The Expert Evidence
a) Do customary accountancy or industry practices relating to SAPRO required deferred taxation to be taken into account when calculating the Net Asset Value of SAPRO's group (the "group")?
b) If so, how should "Net Asset Value" as defined in the Letter Agreement be calculated in practice?
|Claimant's case ("EPRA NAV Calculation")||£87,307|
|EPRA Triple Net NAV – Claimant's calculation
(Tax only deducted; and on a discounted basis)
|Agreed level of the hurdle as at 30.6.09||£84,217|
|Defendant's pleaded case
(on "EPRA Net basis"; tax deducted, no discounting)
|Mr Benaim's adjusted NAV||£80,494
J: The Construction of Paragraph 2 of the Letter Agreement
i) Everything set out at sections A, B and C of this judgment, and he would have had access to the company's published financial statements.
ii) That the company had acquired 15 properties by the end of 2008, from his reading of the report of the investment manager (page 6 interim report to 31 December 2008).
iii) All those properties were carried in the balance sheet of the company at cost. All but one were development properties.
iv) As at 31 December 2008 the value of the 15 properties to SAPRO had increased by 38% over cost (the interim report page 7).
v) From the IFRS recommendations and standards, this increase could not have been and was not reflected in the NAV of the company which formed the basis of the calculation of the management and performance fees.
vi) This increase was solely attributable to the performance of the investment manager's agents Wolstenholme and Currie.
vii) From the evidence of Mr Wolstenholme (which was not challenged on these points) and from Mr Tice's report to his co-directors of 11 February 2009, that the investors were pleased with the performance of the two men, which was achieved at a time when other property funds were "tanking" to use Mr Wolstenholme's word.
viii) The hurdle was recognised, prior to the signature of the management agreement, as a high one. The terms of the management agreement were such that it would be impossible for the performance hurdle to be surpassed unless its definition of NAV was amended.
ix) As a matter of inference from these facts, that was in the company's interests, viewing these objective facts in isolation from any statements of intention on its part, to ensure the continued services and good performance of the agents.
x) Both parties regarded the terms of the management agreement relating to the definition of Net Asset Value as unacceptable and therefore it required amendment. This would have been clear from the wording on the face of paragraph 2 which expressed itself as a measure to amend so as to clarify the definitions in the management agreement, as well as the defendant's stance in this action, which does not say that it did not need to be changed.
xi) That the amendment adopted the previous definition of NAV as found in the 2006 agreement but with one change, and one change only, namely the re-valuation of the acquired properties from book value to market value.
Costs, Interest and Permission to appeal
Permission to Appeal