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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Multi Veste 226 BV v Ni Summer Row Unitholder BV & Ors [2011] EWHC 2026 (Ch) (29 July 2011) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2011/2026.html Cite as: [2011] EWHC 2026 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		29 /07/2011

Mr Justice Lewison:

	Paragraph
Introduction	1
Multi's governance	7
Burden of proof	10
Approach to the evidence	14
Retailing in Wolverhampton	16
The factual background	18
The USA	32
Bank funding	47
Multi's assessment of the viability of the scheme	49
The run up to termination of the USA	93
The affordable housing	116
The Bank loan	122
Mezzanine finance	134
Appraisals and valuations	137
The DTZ Development Team	137
Cushman & Wakefield	140
Mr Harris	142
The DTZ Viability Appraisal	143
HBA-25	149
The expert evidence	153
The outlines	153
Zone A rental values	155
Tenant incentives in December 2008	161
Extent of pre-letting	163
Permanent voids	164
Mall Income	165
Car parking income	168
Yields	169
Residential	176
Purchaser's costs	179
Developer's contingency	180
Value in December 2008	182
Viability	183
Did Multi lawfully terminate the USA?	186
If the NI Investors had provided the bank guarantees would the project have gone ahead?	206
Multi's position	206
Would the banks have lent at all?	210
If the banks had lent how much would they have lent?	214
Would Apollo have lent money?	216
Would the Council have agreed to waiver of the Commercial Conditions?	217
What would Multi have done?	222
If Summer Row had been build would Multi have made a profit?	235
The framework	235
Rental values in Q4 2011	239
Tenant incentives in Q4 2011	247
Permanent voids	248
Yields in Q4 2011	249
Residential	253
Value	254
Finance costs	255
Interest	255
Multi's cost of capital	256
The £28 million subscription	267
The overall loss	273
Result	275

Introduction
 


1. 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.
2. 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").
3. 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.
4. 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:

i) Was Multi 226 entitled to terminate the USA when it purported to do so?

ii) Would the development have been built out if the bank guarantees had been provided?

iii) If the development had been built out would it have been profitable?

5. 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.
6. 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's governance

7. 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.
8. 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.
9. 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.

Burden of proof

10. 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.
11. In Allied Maples Group Ltd v Simmons & Simmons [1996] 1 WLR 1602 Stuart-Smith LJ explained that:

i) Where the wrong consists of an omission (as in the present case) causation depends, not upon a question of historical fact, but on the answer to the hypothetical question, what would the claimant have done if the wrong had not been committed? This can only be a matter of inference to be determined from all the circumstances. The claimant's own evidence that he would have acted to obtain the benefit or avoid the risk, while important, may not be believed by the judge, especially if there is compelling evidence that he would not. Although the question is a hypothetical one, the claimant must prove on balance of probability that he would have taken action to obtain the benefit or avoid the risk. But if he does establish that, there is no discount because the balance is only just tipped in his favour.

ii) In many cases the claimant's loss depends on the hypothetical action of a third party, either in addition to action by the claimant, as in this case, or independently of it. In such a case, the claimant can succeed provided he shows that he had a substantial chance rather than a speculative one, the evaluation of the substantial chance being a question of quantification of damages.

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

i) Whether the banks would have lent in accordance with the terms of the draft facility letter is to be decided on the balance of probabilities;

ii) Whether the Council would have agreed to the waiver of the conditions precedent; or would have agreed to remove any requirement in the Development Agreement for building the residential component; or would have agreed to the removable of affordable homes, is to be decided according to the lower threshold of a substantial or significant chance;

iii) Whether mezzanine finance would have been available (if needed) is to be decided according to the lower threshold of a substantial or significant chance.

13. I proceed on that basis.

Approach to the evidence

14. 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."

15. 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.

Retailing in Wolverhampton

16. 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.
17. 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 factual background

18. 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.
19. Multi competed against a number of other interested developers; and in May 2004 was selected as the Council's preferred developer.
20. 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:

i) Subject to the satisfaction of certain conditions precedent ("the Conditions Precedent"), the Council would grant to the Partnership the lease for the Site.

ii) Subject to the satisfaction of the Conditions Precedent, Multi would carry out or procure the carrying out of "the Developer's Works" (as defined).

21. 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:

i) The Planning Condition: obtaining of a Qualifying Planning Permission.

ii) The CPO Condition: the coming into existence of a Confirmed CPO (separately defined) or if sooner the parties acquiring the whole of the Site by way of Site Assembly to their reasonable satisfaction; and

iii) The Highway Condition: obtaining of the Highway Closure Order and the Highway Pedestrianisation Order (each separately defined), in each case subject only to such conditions as were reasonably acceptable to the Developer.

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

i) The Pre-Letting Condition: the Developer or Tenant entering into agreements for lease with prospective tenants in respect of (i) the Principal Department Store (separately defined) and (ii) other Commercial Units for which agreements for lease provided and secured (in the aggregate) 50% of the Estimated Rental Value.

ii) The Funding Condition: the Developer securing with an Approved Funder and on Approved Funding Terms funding for the carrying out of the Development upon the Site and that funding being or becoming unconditional, or conditional only on the satisfaction of the Conditions Precedent.

iii) The Minimum Return Condition: the Developer confirming that it expects to achieve a minimum anticipated return of 15% on anticipated Total Development Costs.

23. 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.
24. Clause 4 contained obligations relating to the satisfaction of the Conditions Precedent.
25. 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."

26. 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.
27. 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.
28. 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.
29. 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.
30. 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.
31. 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.

The USA

32. 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.
33. 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.

34. 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:

i) The Development Cost Subscription Agreement required Multi to subscribe for units to meet the development costs incurred up to the Unconditional Date;

ii) The Post Unconditional Date Basic Subscription Agreement required both Multi and the NI Unitholder to subscribe for units up to a "cap" of £27 million each;

iii) The Cost Overrun Subscription Agreement required Multi to bear the costs of any cost overrun to the extent that the costs exceeded the £54 million required by the Post Unconditional Date Basic Subscription Agreement.

35. 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.
36. In addition clause 2.5.8 required the NI Unitholder to deliver the NI Bank Guarantees.
37. 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".
38. 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."

39. 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 ..."

40. 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."

41. 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.
42. 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.
43. 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.
44. 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

(A – B) + C

Where A is the Base Rent for the unlet Letting Unit, B is the amount of any receivable by the Partnership in respect of that Letting Unit for the Quarter then beginning by way of any insurance monies and all rent and other income of whatever nature derived from the use, enjoyment or occupation of the Site, and C is any amount by which the Mall Income (as defined) falls short of the Base Rent for the Mall Income as at the relevant date.

45. Clause 21 of the USA contained guarantees by the NI Investors of the obligations of the NI Unitholder.
46. 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.

Bank funding

47. 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.
48. 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's assessment of the viability of the scheme

49. 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%).
50. 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.
51. 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.
52. 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.
53. 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.
54. 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.
55. 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.
56. 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.
57. 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%).
58. 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."
59. 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.
60. 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.
61. 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.
62. 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."

63. 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.
64. 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."

65. 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.
66. 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.
67. 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."

68. 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.
69. 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.
70. 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."

71. 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."

72. 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.
73. 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."

74. 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.
75. 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.
76. 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."

77. 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.
78. 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.
79. 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.
80. 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.
81. 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.
82. 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.
83. 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.
84. 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."

85. 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."

86. 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.
87. 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."

88. 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."

89. 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.
90. 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.
91. 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."

92. 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.

The run up to termination of the USA

93. 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.
94. 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."

95. 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.
96. 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.
97. 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.
98. 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.
99. 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."

100. 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."

101. 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."

102. 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.
103. 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."

104. 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.
105. 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.
106. 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.
107. 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.
108. 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.
109. 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.
110. 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.
111. 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.
112. 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.
113. 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?
114. 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."

115. 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.

The affordable housing

116. 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.
117. 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."

118. 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.
119. 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.
120. 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.
121. 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 Bank loan

122. 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.
123. 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.
124. 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.
125. 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:

i) Evidence of the source, availability and application of all sums (being not less than the borrower's commitment) required in addition to the facilities to complete the transaction and meet all costs and tax associated with it; and

ii) Evidence that the borrower has paid from its own resources towards the total costs the amount by which the borrower's commitment exceeds £67.3 million;

iii) The NI bank guarantee;

iv) A formal valuation including the market value of the property prior to development, gross development value, reinstatement value assuming completion of the development and ERV assuming completion of the development;

v) A development appraisal from the banks' monitoring surveyor.

126. 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."

127. 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.
128. 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).
129. 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."

130. 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.
131. 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.
132. 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.
133. 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.

Mezzanine finance

134. 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.
135. 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.
136. 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.

Appraisals and valuations

The DTZ Development Team

137. Multi were advised throughout by valuers (Donaldsons who later merged with DTZ). They also had their own in-house leasing director, Mr Harris, who was himself a qualified valuer. But neither DTZ nor Mr Harris, nor Multi themselves ever carried out a valuation of the scheme. The appraisals submitted to the various committees and to the Board were all based on projections forward of what rental values might be once the scheme opened after the construction period.
138. The DTZ Development Team provided rent schedules. Mr Percy of DTZ explained what they were. They were not valuations. They were forecasts of what rents might be once the scheme had been completed. The method they used was, at least in my experience, highly unusual in a number of respects. The rent schedules were produced in 2008. But they did not look at market rental values in 2008. Instead they began with an ERV that they had set in June 2005. They then applied a compound growth factor of 2.5 per cent per annum to that figure to bring the figures up to 2008. The projection for growth in rents seems particularly optimistic, especially in the light of Multi's own experience in Bath that rents were falling during 2008. In addition there is no evidence of rental growth in Wolverhampton during that period. Moreover, Mr Harris said that the best comparable evidence for rents was the Westfield Centre in Derby, which opened in 2008 although largely pre-let in 2007. Why, then, rents at Summer Row were projected forward from a base of June 2005 defies coherent explanation. Mr Harris did suggest that the rent schedules produced in 2007 and 2008 reflected current rental values; but this evidence was in flat contradiction to Mr Percy's. As Mr Percy said this was not a valuation, let alone one which complied with RICS standards (a "red book valuation"). It was more in the nature of a forecast of target rents; and that was indeed what the schedules were labelled. But in November 2008 this method of appraisal was thought to be too confusing; and it was abandoned. Nevertheless, it was figures based upon this confusing method of appraisal that were placed before Multi's committees and board. Multi then applied a yield to this rental forecast. Since a yield itself reflects the market's perception of future growth this was a very dangerous thing to do. It would result in double counting. To some extent Mr Percy accepted that this was so.
139. The revised appraisal in November 2008 was itself not an estimate of current rental values. It was also a projection forward of what rents the scheme might achieve at practical completion which was then forecast to take place at the end of 2011. After considerable resistance in cross-examination Mr Percy accepted that the figures in the November appraisal themselves contained an element of future growth.

Cushman & Wakefield

140. In March 2008 Cushman & Wakefield prepared a red book valuation for the banks. They pointed out that prime rents in Dudley Street were in the region of £140 per square foot Zone A, which was a slight increase since 2006; but that there had been very little rental growth since 1997. The highest rents in the Mander Centre were in the region of £115 per square foot Zone A, and those in the Wulfrun Centre £70. The vacancy rate in the Mander Centre was a little less than 12 per cent and in the Wulfrun Centre was more than 4.5 per cent. They expected that Summer Row would have a lower vacancy rate than the rest of the town. They considered that the gross rental value of the scheme would be £17 million, but that there would be a vacancy rate of 1.5 per cent, giving a net rental value of £16.8 million. If Marks & Spencer were to replace the planned cinema, the gross rental value would increase to £17.2 million, and the net rental value to £16.9 million. They considered that the appropriate yields were 5.9% for the main part of the scheme on the basis that Marks & Spencer entered the scheme, 6.5% for the retail units on Victoria Street and Worcester Street, and 5.5% for the residential ground rents. The value of the residential units themselves was put in as £21.2 million. This led them to a gross development value of £287.5 million.
141. The valuation also contained a development appraisal as required by the Red Book. In effect this was a residual valuation of the site, on the assumption of a developer's profit of 15 per cent. Making this assumption the residual value of the site was £42.2 million (inclusive of costs). The overall profit was given as £37.5 million. However, if actual figures for land costs are substituted (£63 million in place of £42 million), and the increased estimate for construction costs is likewise substituted (£141 million instead of £128 million), then the projected profit disappears, even at the yields applied by Cushman & Wakefield.

Mr Harris

142. Mr Harris provided current rental values as at June 2008 for incorporation into Multi's modelling. His view of ERV at that time was £17.7 million per annum. However, that figure was then inflated by £1 million per annum for assumed rental growth. It was the inflated figure that was placed before Multi's committees. On 3 October 2008 he received an e-mail from Mr Baris telling him that Cushmans had raised concerns about these rental levels. Mr Baris said that this needed to be discussed with Cushmans; but it never was.

The DTZ Viability Appraisal

143. In October 2008 Mr Sargent instructed DTZ to carry out an appraisal of the viability of the scheme. But this was no ordinary appraisal. As the instructions to DTZ made clear, the appraisal was to be based on assumptions that Multi had given to them (called "the base case"); and it is plain that DTZ thought that many of those assumptions were unreliable. DTZ produced a lengthy report. As the report itself made clear it was not a "red book valuation". The appraisal was made on the assumption that the forward sale to the NI Investors would be completed; and therefore that half the completed scheme would be sold at a yield of 5.85%. In section 14 of the report they commented that securing Debenhams and Marks & Spencer would enable a range of middle market fashion and associated retailers to locate in the scheme. But they warned that:

"The principal obstacle we see at the present time is the current economic situation which is likely to mean that retailers will decline to commit to additional representation, and if they do decide to proceed, will require increased incentives to do so."

144. Section 15 discussed rents. They had been provided with rental values by the DTZ leasing team. These were £140 Zone A for the lower ground floor and £155 Zone A for the upper ground floor. The assumption was that a tenant would receive a rent free period of 6 months and a capital contribution equivalent to 12 months rent. Their view was that these assumptions amounting to an 18 month incentive package reflected "a best case scenario in current market conditions."
145. Section 17 discussed the residential component. The base case valued this component at £21.5 million. DTZ said that the market was deteriorating and that further house price falls were anticipated. They said that there was unlikely to be significant demand for new build apartments in Wolverhampton city centre; and that in order to attract demand the sale price of the flats would need to be "substantially reduced". Their overall comment on the residential element was that they had assumed that the value of the residential element was that given to them in the base case, but that this element of the scheme was only marginally viable.
146. Section 19 discussed viability. The report said that one of the given assumptions was that the scheme was 100% let at practical completion. But it is clear from paragraphs 19.4 to 19.6 that DTZ thought that this was an unrealistic assumption. Paragraphs 19.7 to 19.13 looked at retail rents. In paragraph 19.16 the report stated that the assumed incentive package of 18 months rent was inadequate in "the current deteriorating market"; and that in the case of several schemes shortly to open the equivalent of 2 to 3 years for a 10 year lease had been given. In paragraph 19.17 DTZ expressed the view that the realisation figures for the residential units were "extremely ambitious". The report then turned to consider capitalisation rates for the half share in the scheme that Multi was proposing to retain. It commented that the yield in the base case "might now be optimistic"; and concluded that "having regard to the deteriorating outlook for retail property" the appropriate yield would be nearer 6.25% or 6.5%. Making all the assumptions in the base case, but extending the equivalent rent free period to two years and adopting a yield of 6.5% for Multi's retained half share, the scheme became loss-making. DTZ's overall conclusion was that the scheme's viability "reduces significantly once prevailing capitalisation yields are incorporated into the appraisal model." They said that the "major risk at the present time is the letting up assumptions. We are of the opinion that potential developers would be extremely cautious in this respect and budget for increased letting up costs. However, the scheme then becomes only marginally profitable when increased costs equating to say 6 months rents are [incorporated]."
147. It will be recalled that the DTZ report adopted a residential value of £21.5 million as given by the base case, whereas Mr Rebbeck's figure was £17.7 million. It is also noticeable that the MSUs were valued in the base case at £22.50 per square foot overall, although the only two actual transactions thus far were at £8.20 and £13.13 per square foot respectively. So the viability was undoubtedly worse than presented in that report.
148. It is quite unclear why this report was commissioned or what happened to it. Mr Sargent did not refer to it in his written or oral evidence. From its date, it might be thought to have been the feasibility check that the Executive Committee had requested; but no one suggested that it was. It does not appear to have been shown to any of Multi's committees; or even to have been summarised for them. If it had been it would not have been encouraging.

HBA-25

149. I have already mentioned HBA-25 which was the last of the HBAs to be prepared by Multi for Summer Row. By December 2008 it was already four months out of date. Nevertheless it is worth recapitulating some of its assumptions, before going on to consider the expert evidence.
150. The site acquisition costs were stated as £67.8 million. This was some £25.6 million more than Cushman & Wakefield's residual valuation. Total project costs were given as £314 million; but this was on the assumption that the NI Investors would contribute £2.25 million towards the incentives to be given to Marks & Spencer. By December 2008 this assumption has been falsified. The projected income from the residential component was given as £21.75 million; but by this time Mr Rebbeck had re-evaluated the value of the residential component as £17.7 million. HBA-25 therefore assumed £4 million too much in relation to the residential component. The ERV for the whole scheme was assessed at £18.76 million per annum. Not only was this figure £2.9 million per annum more than Cushman & Wakefield's figures, all the experts agree that the figures for ERV in HBA-25 cannot be justified. HBA-25 also assumed a yield for the whole development of 5.85%, despite the fact that only half the scheme had been sold at that yield; and yields had moved out to at least 6.5%.
151. Making all these favourable assumptions, HBA-25 calculated the profit at £27.75 million, or a return of 8.82% on cost.
152. Mr Aaronson knew that yields had softened. In his witness statement he remarked on the fact that in calculating a possible payment to be made to Multi by the NI Investors as the price of exiting from the deal Mr Sargent had used a yield of 6.25%. Mr Aaronson said that he himself would have calculated an exit payment based on 6.5%. The Executive Committee seems to have agreed with him; because the minutes of the meeting on 15 September 2008 already record that market yields were close to 6.5%. The Executive Committee did not, however, know that the value of the residential component had been reduced by £4 million; or that the NI Investors had backed out of their informal agreement to contribute £2.25 million towards Marks & Spencer's incentive package.

The expert evidence

The outlines

153. In addition to the appraisals and valuations prepared at the time I had the benefit of expert evidence.
154. Mr Neill Mylroie FRICS prepared a report on the estimated rental value of the development for lending purposes, on the assumption that it was completed as at December 2008. In effect this valuation was the proxy for the rental valuation that the banks would have obtained in order to decide whether to lend money to Multi and, if so, how much. Mr Mylroie's opinion was that the Zone A rate applicable to standard shop units in Summer Row as at December 2008 would have been in the region of £120 to £160 per square foot (depending on the position of the unit within the scheme). He valued the MSUs at £15 to £20 per square foot overall (apart from those MSUs where deals had actually been agreed). This gave him an overall rental value for the development as at December 2008 of £17.88 million per annum. This was about £1 million per annum less than the figure in HBA-25. In order to achieve that figure it would have been necessary to offer tenants' incentives of £37.6 million. Mr Mylroie's figure for ERV did not include an allowance for permanent voids. Mr Neil Dooley MRICS prepared a report on the investment value of the development as at December 2008, based on Mr Mylroie's opinion of estimated rental value. He assumed that the centre would be 85% let at practical completion, with the remaining units being let over the next two years; but he allowed for a permanent void of 1.5%. He adopted an overall yield of 7% (equivalent to 14.28 YP) giving a value for the scheme (excluding the residential component, and net of purchasers' costs) of £236.113 million. Mr Graham Chase FRICS reported for the NI Investors. He estimated the rental value of the scheme at £15.7 million and took a yield of 7.6%. He thought that Summer Row would be 80% let at practical completion. He allowed for a permanent void of 2.5%. This gave him a gross development value (excluding the residential component) of £200 million.

Zone A rental values

155. In arriving at his figure for headline Zone A rents as at December 2008 Mr Mylroie used the Westfield Centre Derby as his "most comparable shopping centre in terms of size, anchor stores and opening date." The Westfield Centre Derby opened in October 2007. The Zone A rate on opening established by that comparable was £135 on level 1 of the centre; and £151 on level 2. These rates compared with his assessment for Summer Row of £140 on the lower ground floor and £160 on the upper floor. Mr Mylroie accepted that:

i) Derby is a more affluent city than Wolverhampton, which was below the national average;

ii) Derby has a larger potential shopping population than Wolverhampton;

iii) Derby has no competing shopping centre, whereas Wolverhampton has two;

iv) Derby has no competing department store, whereas Wolverhampton has one;

v) Even without Summer Row, there is more retail space in Wolverhampton than in Derby;

vi) The Westfield Centre at Derby is a covered shopping centre, whereas Summer Row would not have been;

vii) Rents at the Westfield Centre Derby were established in 2006 and 2007 when the market was much stronger than it was in December 2008.

156. All these differences tend to suggest that rents at Summer Row would have been lower than rents at the Westfield Centre Derby, which Mr Mylroie accepted in cross-examination. However, in his report he said that they would have been higher. In commenting on his Zone A figure of £140 for the lower ground floor Mr Mylroie said that this figure was "consistent with Wolverhampton's historic prime pitch". In fact this figure was within £1 of the highest rent ever achieved for Wolverhampton's prime pitch in Dudley Street; and that was in June 2007. Other rents achieved were considerably lower. Mr Mylroie was also influenced in his opinion by his understanding that there had been an open market pre-letting of a unit on the upper ground floor of Summer Row to JD Sports at a rent of £155 Zone A. In fact he was mistaken about that. There was no such letting. But even if he had been right about that, his Zone A figure for the upper ground floor was £5 higher than the only evidence. Mr Mylroie sought to justify the figures in his report by reference to his general experience in the leasing market; but I regret that I found that unpersuasive. Mr Mylroie also said that rents in new shopping centres commanded a premium rent over historic rental values in what had formerly been the prime shopping pitch. But the empirical evidence that he produced did not bear out this theory. In the first place Mr Mylroie had compared rents fixed on rent review (where the tenant would have received no incentives or inducements) with headline rents achieved on first lettings (where the tenant would undoubtedly have received inducements of one kind or another). Second, Mr Mylroie compared rents achieved in a market that everyone agrees was rising between the dates of his prime shopping pitch comparator and his later shopping centre comparator. The results of the comparison were thus misleading. As he eventually accepted in cross-examination none of the empirical evidence on which he relied supported his opinion that the best Zone A rate at Summer Row would have been as high as £160 in December 2008. It was just his opinion. In my judgment Mr Mylroie considerably overestimated the Zone A rate at which Summer Row would have been valued in December 2008.
157. Mr Chase's corresponding figures for headline Zone A rates as at December 2008 were £120 to £130 on the upper level of Summer Row; and £100 to £115 on the lower level. He derived these rates predominantly from transactions within Wolverhampton. Starting with Dudley Street (which is agreed to be the best retail pitch in Wolverhampton) he considered that the tone of rents was no more than £130. The rent paid by Next has remained constant at that rate for some 10 years or more (despite an intervening rent review); and although Next have extended their lease at the same rent, the landlord paid an inducement of £500,000 to secure that extension. A letting to Clinton Cards shows the same Zone A rate. Rents in the Mander Centre were £115 at the top of the market and have since declined. Rents at the Wulfrun Centre were of the order of £65. In my judgment Mr Chase's view of actual rental values in Wolverhampton as at December 2008 was well supported by the evidence.
158. So it seems to me that the question then becomes: would unit shops in Summer Row have improved on rental values in Wolverhampton? Mr Mylroie said that the quality of space within Summer Row was better configured than space at the Mander Centre and the Wulfrun Centre respectively. I accept that there is some truth in this, although the difference is not nearly as great as Mr Mylroie tried to suggest; but Mr Chase's Zone A figure is considerably higher than both. There is, finally, the evidence of the Westfield Centre Derby which Mr Chase also acknowledged as a useful comparable.
159. Mr Mylroie explained that the construction of Summer Row would complement the Mander Centre and the Wulfrun Centre forming a "seamless loop" for shoppers. It is not easy to see why a retailer would be prepared to pay more than double the going rate for one part of that seamless loop to be on another part of the same loop. Mr Mylroie suggested that the reason was that the retail units at Summer Row would have been better configured than those in the Mander or Wulfrun Centres. By this he meant that the units in Summer Row would have been on an 8 metre grid and larger than the units at either of the other centres. However, he accepted that large units had been created at the Wulfrun Centre for both TK Maxx and Primark and that the TK Maxx unit was a "good space". He also suggested that retailers were looking for MSUs, but if that is right it does not explain why a standard unit shop would have commanded a rent so much higher in Summer Row than in the Mander or Wulfrun Centres. Moreover, as he accepted, the owners of the Mander Centre had created an MSU for New Look. He was also constrained to accept that the upper level units at Summer Row between Marks & Spencer and Debenhams were poorly configured, even though one might have expected this part of the mall to have been the best pitch for fashion retailers.
160. In my judgment the best Zone A rates at Summer Row, assessed in the light of the market in December 2008, would have been lower than rents at the Westfield Centre, Derby. This gives a ceiling of £150. How much lower? Rents in the prime retail pitch in Wolverhampton had peaked at £141 and the market had since declined. Rents in the competing Mander and Wulfrun Centres, which were to have been part of the seamless loop, were £115 and £65 respectively. On the other hand there is some force in Mr Mylroie's point that the unit shops in Summer Row would have been better quality space than space at the Mander and Wulfrun Centres; and perhaps better quality space than Wolverhampton's existing retail offer in Dudley Street. In my judgment the best Zone A rates at Summer Row would have been of the order of £140 per square foot. I will increase Mr Chase's rates by £10 across the board. This gives Zone A rates of £130 to £140 on the upper level of Summer Row; and £110 to £125 on the lower level.

Tenant incentives in December 2008

161. Both Mr Mylroie and Mr Chase agreed that in order to achieve lettings at Summer Row it would have been necessary to offer incentives to prospective tenants. These incentives would have taken the form of rent free periods, capital payments or a mixture of the two. It is convenient to express them in the form of equivalent rent free periods. Mr Mylroie considered that a package of 18 months would have been appropriate in 2008, whereas Mr Chase thought that the package would have been 24 months.
162. Mr Mylroie supported his view by reference to shopping centres that opened in the course of 2008. But in the real world, pre-lettings for those centres would have been negotiated in the much stronger market of 2007. Centres opening in 2009, where the pre-lettings would have been negotiated in the weaker market prevailing at the end of 2008, showed an increased level of incentives. In the case of St David's Cardiff the package was 24 months; in the case of Union Square Aberdeen it was 36 months; and in the case of Southgate Bath it was 18 months. As Mr Mylroie himself said in his original report incentives increased due to distressed market conditions which intensified during the latter part of 2007 and 2008/9. Accordingly I do not consider that it is appropriate to assess the incentive package that would have been offered to tenants at the end of 2008 by reference to shopping centres that opened earlier in that year. I note also that in their appraisal carried out in October 2008 DTZ said that an 18 month incentive package was a "best case scenario". A valuation for lending purposes would not have assumed a "best case scenario", but a realistic one. I agree with Mr Chase that incentives at Summer Row would have been 24 months for standard shop units.

Extent of pre-letting

163. Mr Mylroie also said in his report that Summer Row would have been pre-let to the extent of 85 per cent of its rental value. However, he and Mr Chase agreed that there was no shopping centre that opened in the relevant period with pre-letting in excess of 80 per cent of rental value. Mr Mylroie was unable to point to any evidence to support his figure of 85 per cent. In my judgment he also overestimated the extent of pre-lettings that would have been achieved. I accept Mr Chase's figure of 80 per cent.

Permanent voids

164. Both Mr Dooley and Mr Chase agreed that it was appropriate to make an allowance for permanent voids: Mr Dooley took 1.5 per cent and Mr Chase 2.5 per cent. The derivation of Mr Dooley's figure was, according to his first report, the Cushman & Wakefield valuation in March 2008. In his second report, commenting on Mr Chase's figure of 2.5 per cent, he said that he thought that Mr Chase was too bearish based on his experience of valuations of new schemes that were fully let (as Summer Row was assumed to be). Data from the annual accounts of Land Securities suggested a void rate exceeding 2.5 per cent in most of its shopping centres (6% across its entire portfolio); and data from Capital Shopping Centres showed an overall void rate of 2.3 per cent across its portfolio of shopping centres. Wolverhampton (albeit without Summer Row) is experiencing a very high level of voids; well in excess of Mr Chase's figure. In my judgment Mr Dooley's allowance is too low, based on the empirical evidence. I accept Mr Chase's figure of 2.5 per cent.

Mall Income

165. Mall income is income derived from stalls, advertising, new media, the centre's website, promotional activities, vending, ATMs and mobile phone masts and so on. Mr Mylroie assessed this source of income as £250,000 per annum, while Mr Chase assessed it as £150,000. Neither valuer relied directly on comparables, but Mr Mylroie said that the Mander Centre produced mall income of £232,000 as at February 2007. However, the Mander Centre is a covered centre, and Mr Mylroie agreed in cross-examination that traders selling in malls would prefer a covered centre to an open one like Summer Row. In addition the planning permission for Summer Row contained a condition to the effect that no stalls were to be permitted without the consent of the local planning authority. Whether the Council would have given consent is unknown and uninvestigated. Mr Mylroie also said in cross-examination that retailers do not like mall units outside their own frontages, because they believe that they obstruct sight lines and disrupt footfall. Thus he agreed that the centre owner might well limit street trading. Lastly there are requirements for vehicular access at Summer Row, which could not be impeded. For those reasons I consider that Mr Mylroie's figure is too high. I do not consider that the mall income at Summer Row would have been as high as mall income at the Mander Centre.
166. Mr Chase on the other hand, said that his figure of £150,000 could be seen as the rental value of 10 to 15 stalls. It appeared to me that he had not given sufficient weight to other sources of revenue. I therefore consider that his figure is too low.
167. In my judgment the appropriate figure to take for mall income is £200,000 per annum.

Car parking income

168. Both Mr Mylroie and Mr Chase adopted a figure of £930,000 per annum. I will do likewise.

Yields

169. In looking at the gross development value of Summer Row as at December 2008 Mr Dooley's starting point was to take the yields of prime shopping centres, which were 6.5%. He then made an adjustment of 0.5% to reflect Summer Row's characteristics, giving him a yield of 7% (a multiplier of 14.28). He looked at city centre shopping developments owned by Capital Shopping Centres as a cross-check. These showed a yield of 6.99% as at December 2008. He then applied this unitary yield to the ERV of the whole scheme after allowing for rent free periods and a permanent void. In his report in reply he identified the shopping centres to which he had had particular regard. They were: Chapelfield, Norwich; The Potteries, Stoke on Trent; The Chimes, Uxbridge and the Glades, Bromley. Averaging the yields on these centres gave Mr Dooley a yield of 7.02%, marginally above his selected yield of 7%. Of these four schemes, Mr Dooley considered that The Potteries, Stoke on Trent and the Chimes, Uxbridge were "sound comparables with Summer Row". The yields for these two schemes were 7.3% and 6.95% respectively, giving an average yield of 7.125%. However, unlike these two centres Summer Row would have faced competition on its doorstep from the Mander Centre and the Wulfrun Centre, as well as from the Beatties department store. This, in my judgment, would have tended to increase the yield on Summer Row as compared with these comparables.
170. Two inter-related questions arise: should a single yield be applied to the whole of the scheme; and, if so, is 7% the right figure?
171. Mr Chase applied differential yields to different parts of the development to arrive at what he called a "blended yield". He applied a yield of 7.5% to the shops in Summer Row itself; 9% to the secondary shops on Victoria and Worcester Streets and 8% to the car park and mall income. This gave him an overall yield of 7.6%. However in cross-examination Mr Chase accepted that his selected yield of 7.6% was "out of kilter" when compared with market sentiment at the time. As an overall yield it is, in my judgment, too high.
172. Cushman & Wakefield had also applied differential yields in their valuation of March 2008. They had adopted 5.9% for the main Summer Row scheme and 6.5% for the secondary shops on Victoria and Worcester Streets. It is, of course, common ground that yields had softened since the date of their report; but it is the principle of differential yields that is important for this point. I note also that as early as July 2008 Cushman & Wakefield thought that the likely yield for Summer Row would be 6.5% to 7% (having increased by ½% in the previous six months); and that in their development appraisal of October 2008 DTZ said that for larger sub-regional shopping centres the nominal yield was 6.5% to 7% but "trending outward".
173. In his report in reply Mr Dooley said that a blended yield approach is an acceptable alternative, but only if the yield for the prime units reflects yields for unit shops which will be less than the yield for a shopping centre. He agreed in cross-examination that a higher yield for the secondary shops would have been valid if they had been valued alone; but not if valued as part of the scheme. He thought that Mr Chase's differential was on the high side but would have accepted between 0.5% and 1%.
174. In my judgment it is not appropriate to apply to the entirety of the Summer Row scheme a unitary yield derived from comparisons with prime or regional shopping centres. The reason is straightforward. The overall development in the present case includes the secondary shops which are not physically part of the main scheme and cannot be described as being in the prime pitch in Wolverhampton. As Mr Dooley accepted in cross-examination those shops are likely to attract weaker tenants with less secure covenants, so that the income carries greater risk. In addition there is less potential for growth and a higher risk of voids. In those circumstances either a blended yield must be used; or the overall yield derived from pure shopping centres must be increased to take account of that characteristic of the overall scheme. However, I agree with Mr Dooley that it is not necessary to apply a different yield to the car park or kiosks or to the mall income, all of which are present in the comparables. Even on Mr Chase's approach the adoption of differential yields leads to a very small overall difference. I will not apply differential yields, but I do allow the characteristics of the secondary shopping to influence my selection of the overall yield.
175. Taking all these considerations into account, I consider that an overall yield of 7.25% should be applied to the ERV of the entire scheme, giving a multiplier of 13.79.

Residential

176. Mr Christopher Bywater FRICS reported on residential values for Multi. Mr Ruraidh Adams-Cairns FRICS reported on residential values for the NI Investors. They reached agreement that the value of the residential component with affordable housing in December 2008 was about £14.35 million. Without affordable housing it would have been worth £15.67 million, although only £10.97 million on a block sale basis. The corresponding values for the last quarter of 2011 would have been £13 million with affordable housing, and £14.25 million without; although only £9.97 million if sold on a block basis.
177. So far as the December 2008 valuation is concerned, the Council had not agreed to remove the requirement for affordable housing. It follows, in my judgment, that any valuation for the banks would have been carried out on the basis that the affordable housing had to be built. However, it does not follow that the bank's valuer would have assumed a block sale. There is no indication that Cushman & Wakefield valued on a block sale basis, and there is no reason to suppose that they would have done so had they been asked to update their valuation in December 2008. This means, in my judgment, that the value of the residential component for the purposes as at December 2008 must be taken to be £14.35 million.
178. Multi's preferred strategy was, however, different. In the business plan for 2009 one of Multi's objectives was stated as being the active marketing of the residential units in Wolverhampton "on a block sale basis". Mr Aaronson agreed that this was Multi's objective, because individual vending of the units would be a little more difficult than a block sale. Thus if Multi could sell them en bloc that would be a better way to do it. Mr Sargent explained that Multi was not a residential developer and that the residential units were seen as an add-on, usually due to planning restrictions. Multi looks to the possibility of selling en bloc off plan to another residential developer. If Multi proceeds to construction it looks to sell to a buy-to-let investor; and if than cannot be achieved then it looks to make sales to individual private buyers. Although Multi's preferred strategy would have been a sale en bloc, there is no real evidence that it would have been achieved. I am not prepared to assume that it would have been.

Purchaser's costs

179. If SDLT is taken into account, both experts agree that purchaser's costs should be assessed at 5.75%. In my judgment it is plainly right to take account of SDLT because any secured lender is concerned with the underlying value of the property, rather than the corporate wrapper in which it is held.

Developer's contingency

180. Mr Chase added to the costs figure a "developer's contingency" of 3%. He did this "to cover unexpected costs arising which is usual in the market place." Mr Dooley disagreed with this addition. He said that although developers often add contingencies on top of the usual construction contingency, in the present case there was already a construction costs contingency and also a contingency on the land purchase costs. Thus there was no need for a further contingency. In his second report Mr Chase explained that the contingencies he had in mind were incentives, voids, fees, archaeology, insurance, design variations and unforeseen circumstances. He said that the contingencies that had already been built in amounted to 2% of construction costs; and £2 million for land costs both of which he considered to be low. He had only added the additional developer's contingency to the construction costs, making a total construction costs contingency of 5%. In money terms, and on Mr Chase's figures, the contingency amounted to £9.65 million.
181. I note that in preparing their appraisal in October 2008 DTZ expressed the view that for a fixed construction contract it was usual market practice to adopt a 2.5% to 5% contingency to reflect the risk of contractor default. The built in contingency in the present case was only 2%. I note also that because of slippage in the timetable Multi had to renegotiate the agreement for lease with Debenhams, at a cost of £1 million. This sort of payment would not have been covered either by a contingency on construction costs or by a contingency for land acquisition. There was also considerable uncertainty over the size of possible blight claims. In those circumstances I consider that Mr Chase's allowance of a 3% developer's contingency is a reasonable one; and I adopt it.

Value in December 2008

182. On the day that the hearing concluded I provided the parties with the components of the valuation based on the reasons I have set out above. On 21 July I was informed that, on the basis of those inputs, the experts agreed that the gross value of the completed development that would have been reported to the banks was £208,800,745 (say, £208.8 million) for the commercial part, and £224,150,745 (say, £224.15 million) with the addition of the residential component.

Viability

183. Among the matters on which Mr Dooley was instructed to report was the viability of the scheme. This is also one of the requirements of a Red Book valuation of the kind that would have been carried out for the banks. In the context of a valuation report "viability" plainly means "financial viability"; and that in turn poses the questions: will the scheme make a profit and, if so, how much? I did not understand why Mr Dooley was so reluctant in cross-examination to agree that this was so. Although Mr Dooley's report contained a section headed "Viability of the Development as at December 2008" in fact he studiously refrained from giving his opinion on viability. What he said was that going ahead with the scheme would have required Multi to inject further equity. His conclusion was:

"Given the amount of Bank funding that would have been provided, and given the overall future costs of the Development, there would have been a shortfall. Provided that the shortfall could be met by Multi or other parties, then the scheme was viable."

184. This is not an answer to the question: was the scheme viable? Equally in cross-examination he skirted round the subject. He would not confront the issue. It was clearly not a question that he wanted to answer. In fact on Mr Dooley's own figures the cost of the commercial part of the scheme was £254.285 million and the gross development value was £236.113 million. This represents a loss of £18.172 million. These figures exclude the residential component, on which Mr Dooley did not report. Based on Multi's estimate of construction costs as detailed in HBA-25, the cost of constructing the residential component would have been £23.1 million. The experts agreed that its maximum value without the affordable housing would have been £15.67 million. This would have increased the loss by £7.43 million, bringing the overall loss to £25.6 million. With the affordable housing the value of the residential component would have been £14.35 million, increasing the overall loss to £26.932 million.
185. I cannot see how on these figures anyone could describe this scheme, in any objective sense, as "viable". If the figures are reworked using a lower ERV, greater tenant incentives than Mr Mylroie allowed, and a yield of 7.25% the loss increases. On the figures I have adopted, the cost of construction was of the order of £314 million and the gross development value of the whole scheme (including the residential component) was £224.15 million. This gives a loss of £89.85 million.

Did Multi lawfully terminate the USA?

186. It is common ground that the failure to provide the bank guarantees and to complete the other documents required by clause 2.5 within 5 working days after satisfaction of the Council Pre-condition was a breach of contract by the NI Unitholder. The question is whether that breach of contract gave Multi the right to terminate the USA; and, if it did, whether Multi lost that right by affirming the contract.
187. Multi puts its case in two ways:

i) Time was of the essence of the obligation under clause 2.5 to provide the bank guarantees and to complete the other documents;

ii) Alternatively, time was made of the essence by one or other of Norton Rose's communications to Semple Fraser.

188. Whether a time limit is of the essence of a contractual provision is a question of interpretation. In Bunge Corp v Tradax Export SA [1981] 1 WLR 711 Lord Wilberforce said:

"As to such a clause there is only one kind of breach possible, namely to be late, and the questions to be asked are: first what importance have the parties expressly ascribed to this consequence? And, second, in the absence of expressed agreement, what consequence ought to be attached to it having regard to the contract as a whole?"

189. Similarly, Lord Lowry said:

"It is by construing a contract (which can be done as soon as the contract is made) that one decides whether a term is, either expressly or by necessary implication, a condition, and not by considering the gravity of the breach of that term (which cannot be done until the breach is imminent or has occurred)."

190. In the present case the NI Unitholder's obligation to provide the bank guarantees was one of a number of obligations to be simultaneously performed. In my judgment it would be artificial to single out some obligations as having greater importance than others, when all are governed by the same time stipulation contained in the same clause. The other obligations included obligations to enter into conveyancing documents, in relation to which time has never been of the essence. To my mind this is a strong indication that time was not of the essence of clause 2.5. Moreover, the stringency of time being of the essence is that purported performance one day late would amount to a repudiatory breach. I cannot see that the reasonable reader of the USA, armed with the background knowledge of the parties at the date of the contract, would have concluded that delivery of the bank guarantees on the sixth business day after notice of satisfaction of the Council Pre-Condition would have such serious consequences as to entitle Multi to terminate the USA forthwith. I therefore reject the submission that time was of the essence of the obligation to deliver the bank guarantees.
191. If time was not of the essence, was it made of the essence? Mr Gourgey relied on the speech of Lord Simon of Glaisdale in United Scientific Holdings Ltd v Burnley BC [1978] AC 904, 946:

"In equity, and now in the fused system, performance had or has, in the absence of time being made of the essence, to be within a reasonable time. What is reasonable time is a question of fact to be determined in the light of all the circumstances. After the lapse of a reasonable time the promisee could and can give notice fixing a time for performance. This must itself be reasonable, notwithstanding that ex hypothesi a reasonable time for performance has already elapsed in the view of the promisee. The notice operates as evidence that the promisee considers that a reasonable time for performance has elapsed by the date of the notice and as evidence of the date by which the promisee now considers it reasonable for the contractual obligation to be performed. The promisor is put upon notice of these matters. It is only in this sense that time is made of the essence of a contract in which it was previously non-essential. The promisee is really saying, "Unless you perform by such-and-such a date, I shall treat your failure as a repudiation of the contract." The court may still find that the notice stipulating a date for performance was given prematurely, and/or that the date fixed for performance was unreasonably soon in all the circumstances. The fact that the parties have been in negotiation will be a weighty factor in the court's determination. …To say that "time can be made of the essence of a contract by notice," except in the limited sense indicated above, would be to permit one party to the contract unilaterally by notice to introduce a new term into it."

192. In his opening written argument Mr Gaunt said that time had not been made of the essence of the obligation to comply with clause 2.5. Norton Rose's e-mail of Friday 21 November requiring completion on the following Monday was too short notice to be effective. Norton Rose's letter of 25 November, which deferred completion until 3 December, did not contain a sufficient warning that if the NI Investors failed to complete Multi would treat the contract as at an end. He did not press this argument in his closing submissions; in my judgment rightly. Whatever may be said about the e-mail of 21 November, the letter of 25 November clearly said that failure to complete on 3 December would amount to a repudiatory breach. In my judgment that is sufficient warning, particularly in a letter written by lawyers to lawyers. I conclude, therefore, that time was made of the essence of completion on 3 December.
193. Mr Gourgey submitted that if time had been made of the essence, then a failure to comply with the time limit automatically amounted to a repudiatory breach of contract. However, in the light of authority he did not press that submission. In Re Olympia & York Canary Wharf Ltd (No. 2) [1993] BCC 159 Bear Stearns International ("BSI") entered into an agreement for lease to take a floor in Canary Wharf. Clause 6 provided for Olympia & York Canary Wharf Ltd ("O & Y"), the intending landlord, to take over the Bear Stearns group's liabilities under existing leases and, in clause 6(c)(v), to indemnify Bear Stearns in respect of all reasonable costs and expenses incurred by Bear Stearns in respect of their continuing obligations as tenant under the leases. After an administration order had been made in respect of O & Y, BSI invoiced O & Y for sums due under the leases in respect of rent etc. BSI then demanded further sums due under the leases and the rent etc already paid by BSI and invoiced to O & Y. In the same letter BSI asked the administrators for confirmation that they would honour O & Y's obligations under the agreement to lease; and said that if they did not receive it they would treat that as a repudiatory breach. When BSI did not receive the sums demanded or the confirmation, they claimed that this constituted a repudiatory breach by O & Y of the agreement, which BSI had then accepted.
194. It was common ground that the term in question was not a condition of the contract; but BSI contended that time had been made of the essence of the obligation to pay. Morritt J thus considered whether time could be made of the essence of any term of the contract (whatever its legal character), and if so, what was the effect of a failure to comply with an imposed deadline. He held that the effect of making time of the essence was to remove equity's interference with a party's rights at common law, with the result that time could be made of the essence of any contractual obligation. However, he went on to consider whether a failure to comply with an imposed deadline necessarily amounted to a repudiatory breach of contract. He held that it did not. He said:

"First there is nothing in Federal Commerce v Molena Alpha [1979] AC 757 to suggest that the principles expressed, particularly by Lord Wilberforce at pp. 778–779, have no application to stipulations in respect of which time is originally, or is made, of the essence. Second, if the effect of making time of the essence is, as described by Nourse LJ in Behzadi v Shaftesbury Hotels Ltd, to remove equity's interference with the legal rights of the parties, the natural inference is that those rights arise from the ordinary principles of the common law and are not something special consequential on the removal of that interference. Third, and arising from the second consideration, if failure to comply with a notice making time of the essence of itself constitutes a repudiation irrespective of the consequence of the breach, then contrary to the statement of Lord Denning in Eshun v Moorgate Mercantile [1971] 1 WLR 722 at p. 726 it is possible to put upon another a repudiation which he has never committed. Fourth, there is no suggestion in Universal Cargo Carriers Corp v Citati [1957] 2 QB 401 that the delay in providing the cargo would have been a ground of rescission if notice had been given making time of the essence."

195. Accordingly it was still necessary to consider whether the breach relied on went to the root of the contract or deprived the injured party of a substantial part of the whole benefit that he was entitled to receive. Morritt J concluded:

"The failure to pay did not deprive BSI of anything of value to BSI. BSI was not and is not liable to the landlord under the Devonshire Square leases. The evidence of Mr Hacker, a director of BSI, pointed out that BSI was not the tenant but he provided no evidence to suggest that BSI is in any way liable to the landlord or to Bear Stearns International Corp by way of indemnity against the liabilities arising from the Devonshire Square leases. So far as BSI is concerned the unperformed obligations of the parties under the agreement to lease are the grant and acceptance of the underlease of floor 25. The underlease of floor 25 is the benefit to BSI to which it is entitled. The breach on which BSI relies does not affect these obligations and does not deprive BSI of this benefit."

196. This was followed by Christopher Clarke J in Dalkia Utilities Services plc v Celtech International Ltd [2006] 1 Lloyd's Rep 599 in which he said (§ 131 (d)):

"If the defaulting party fails to perform after service of such a notice, the failure is not automatically a repudiation of the contract, giving rise to a right to terminate. The breach must go to the root of the contract."

197. In the Dalkia case Celtech had failed to pay certain instalments due under a financing agreement. It told Dalkia that it could not honour its commitments as they fell due and asked for a six month moratorium. Christopher Clarke J considered whether time had been made of the essence of the obligation. As I read the judgment (§ 132) he held that it had not been because the letter relied on had given an unreasonably short deadline; but he went on to say that in any event the breach relied on was not, even after the expiry of the notice, such as went to the root of the contract. He decided that the correct test to apply was that stated in Chitty on Contracts (§24-018):

"If one party declares his inability to perform some, but not all, of his obligations under the contract, then the right of the other party to treat himself as discharged depends on whether the non-performance of those obligations will amount to a breach of a condition of the contract or deprive him of substantially the whole benefit which it was the intention of the parties that he should obtain from the obligations of the parties under the contract then remaining unperformed."

198. Applying this test, Christopher Clarke J held that this did not amount to a repudiation, because it did not evince an intention to perform in such a manner as would deprive Dalkia of substantially the whole benefit of the contract. The position might have been different if Celtech had said that it could never pay; but those were not the facts.
199. Mr Gourgey took issue with the last part of this. He made the fair point that if the question was whether the failure by the party in breach to perform his obligation by the deadline set by making time of the essence deprived the innocent party of substantially the whole benefit of the contract, then that was the same question that would be asked even if time had not been made of the essence. If that were right, then there was no point in serving a notice making time of the essence. To take an example: if time is made of the essence of completion of a contract for the sale of a house, the defaulting buyer is not saved by turning up with the money one day late. The question whether the breach in failing to complete in accordance with a time limit of which time has been made of the essence amounts to a repudiation is decided on the tacit basis that it is to be assumed that the buyer will never complete. In support of his submission Mr Gourgey relied on other parts of the judgment of Morritt J in the Olympia & York case. Morritt J quoted an observation of Mason J in an Australian case concerning the case of non-completion of a purchase of land:

"The result of non-compliance with the notice is that the party in default is guilty of unreasonable delay in complying with a non-essential time stipulation. The unreasonable delay amounts to a repudiation and this justifies rescission."

200. Commenting on that observation, Morritt J said:

"This was said in reference to the completion of contracts for the sale of land. Thus although the contractual date for completion may be inessential, failure to complete at all will go to the root of the contact. Accordingly, Mason J was not considering the case of a term which was inessential in that sense. What was initially non-essential was the stipulation as to time not nature of the term, which plainly was a term breach of which was capable of going to the root of the contract."

201. Thus Mr Gourgey submitted that if the nature of the term was essential in the sense that a failure to comply with it at all would be a repudiation, then a failure to comply with it by a time limit that had been made of the essence would also amount to a repudiation. In my judgment Mr Gourgey's submission is also supported by the test that Christopher Clarke J applied in Dalkia. He equiparated renunciation and repudiation. The basic test for renunciation is whether non-performance of the obligation (as opposed to timely performance of the obligation) would go to the root of the contract. This also explains why failure to complete a land purchase in accordance with a notice to complete amounts to a repudiation, even though the additional day's delay of itself causes no material prejudice to the seller. It is true that the fourth of Morritt J's reasons in Olympia & York suggests that the test is the same whether or not a notice making time of the essence has been served; but in my judgment the service of such a notice must have some effect. On the facts of Olympia & York it seems to me that even an indefinite or permanent failure to pay the invoices could not have amounted to a repudiation. So Morritt J was undoubtedly correct in deciding the case as he did. I do not think that there is any authority binding on me which precludes my adoption of the view that I think is right in principle. I conclude therefore that the service of notice making time of the essence changes the question from whether delay amounts to a repudiation to the question whether failure to perform the obligation at all amounts to a repudiation.
202. In the present case it seems to me that the question I must decide under this head is whether a failure by the NI Investors to comply with their obligations under clause 2.5 of the USA deprived Multi of substantially the whole benefit they were to receive under the USA. I put the question in that way because although the focus of the evidence has been on the failure by the NI Investors to provide the bank guarantees, clause 2.5 contained additional obligations which had to be fulfilled. In his closing address Mr Gourgey emphasised that those obligations included entry into the contractual commitment to subscribe for units in the unit trust up to the capped maximum of £27 million. Unless the NI Investors signed up to that commitment, there was no liability to make the contribution. Mr Gaunt retorted that there was a binding obligation to enter into the subscription agreement which equity would recognise. But the effect of having made time of the essence is to remove equity's interference in the contractual relations between the parties, so this retort is no answer. I do not, I think, need to decide whether failure to provide one (or even all three) of the three NI bank guarantees would on its own amount to a repudiatory breach. The fact is that the NI Investors refused to complete. In my judgment that did amount to a repudiatory breach, which in principle entitled Multi to terminate the USA.
203. I say "in principle" because Mr Gaunt argued that Multi affirmed the contract by repeated calls for performance by the NI Investors of their obligations. I do not regard this as amounting to an affirmation. Mr Gourgey relied on the decision of Moore-Bick J in Yukong Line Ltd of Korea v Rendsberg Investments Corporation of Liberia [1996] 2 Lloyd's Rep 640, 608. Moore-Bick J said:

"… the Court should not adopt an unduly technical approach to deciding whether the injured party has affirmed the contract and should not be willing to hold that the contract has been affirmed without very clear evidence that the injured party has indeed chosen to go on with the contract notwithstanding the other party's repudiation. In my view, the Court should generally be slow to accept that the injured party has committed himself irrevocably to continuing with the contract in the knowledge that if, without finally committing himself, the injured party has made an unequivocal statement of some kind on which the party in repudiation has relied, the doctrine of estoppel is likely to prevent any injustice being done.

Considerations of this kind are perhaps most likely to arise when the injured party's initial response to the renunciation of the contract has been to call on the other to change his mind, accept his obligations and perform the contract. That is often the most natural response and one which, in my view, the Court should do nothing to discourage. It would be highly unsatisfactory if, by responding in that way, the injured party were to put himself at risk of being held to have irrevocably affirmed the contract whatever the other's reaction might be, and in my judgment he does not do so. The law does not require an injured party to snatch at a repudiation and he does not automatically lose his right to treat the contract as discharged merely by calling on the other to reconsider his position and recognize his obligations."

204. Much the same point was made by Rix LJ in Stocznia Gdanska SA v Latvian Shipping Co (No 2) [2002] 2 Lloyd's Rep 436, 452:

"In my judgment, there is of course a middle ground between acceptance of repudiation and affirmation of the contract, and that is the period when the innocent party is making up his mind what to do. If he does nothing for too long, there may come a time when the law will treat him as having affirmed. If he maintains the contract in being for the moment, while reserving his right to treat it as repudiated if his contract partner persists in his repudiation, then he has not yet elected. As long as the contract remains alive, the innocent party runs the risk that a merely anticipatory repudiatory breach, a thing "writ in water" until acceptance can be overtaken by another event which prejudices the innocent party's rights under the contract - such as frustration or even his own breach. He also runs the risk, if that is the right word, that the party in repudiation will resume performance of the contract and thus end any continuing right in the innocent party to elect to accept the former repudiation as terminating the contract." (Emphasis added)

205. In my judgment Multi did not unequivocally affirm the contract, with the result that it lawfully terminated the USA on 3 February 2009.

If the NI Investors had provided the bank guarantees would the project have gone ahead?

Multi's position

206. Mr Aaronson was clear in his evidence that he thought that Multi would have gone ahead with the scheme if the NI Investors had provided their bank guarantees. His reasons were as follows. First, Multi had "de-risked" the scheme by forward selling half the scheme at a yield of 5.85%. That would enable Multi to live through the turbulent times ahead. Second, Multi had invested time and money creating a presence in the UK. Third, this was a regeneration project of the kind in which Multi specialised. Fourth, the scheme had two anchor tenants which would produce more tenant demand and higher rents. Fifth, Multi had already invested £28 million in the scheme, which it would not wish to write off. Last, many other developers were pulling out of projects and if Multi went ahead, theirs would be the only new shopping centre coming on stream in 2011.
207. By way of preliminary it is not correct to say that Multi had "de-risked" the project. Multi still bore all the risks of rising costs and falling rents. It bore the risks of not finding tenants for the scheme. It also bore all the risks attributable to the residential component. The only part of the project that had been "de-risked" was the exit yield for half the project. Even that is something of an exaggeration once it is accepted (as it is) that the NI Investors would not in fact pay for half the value of the completed scheme, but for half the equity in the scheme after refinancing the development loan with an investment loan. In other words, once the NI Investors had made their contribution of £27 million towards the construction costs Multi could look forward to a balancing payment of a few £million rather than a balancing payment of tens of £million. Mr Aaronson's heavy reliance on the "building block" of a forward sale of half the project at a yield of 5.85% was, in my judgment, misplaced.
208. Moreover, even when he came to write his first witness statement Mr Aaronson had not appreciated the extent of the equity that Multi would have had to inject into the project. There were at least two reasons for this. First, until he saw the expert evidence he had assumed that the banks would lend the full amount of £202 million, whereas it is now common ground that if they had lent at all, the loan would have been far less. Second, he had not appreciated that even on Multi's own figures the amount of equity required from Multi was double the amount he had thought (£60 million rather than £30 million). Mr Aaronson gave a convoluted and incredible explanation in cross-examination of the evidence contained in his witness statement. I reject it.
209. It is also important to recall that at the meeting on 3 November Mr Sargent assured the NI Investors that Multi would obtain an up to date valuation, and that if the valuation was "not OK" Multi would walk away even if the NI bank guarantees had been delivered and the banks had signed up. There was no suggestion at the time that Multi would proceed with the project if it was shown by the valuation to be likely to produce a loss.

Would the banks have lent at all?

210. One question that needs to be asked is whether the banks would have lent at all. It will be recalled that fresh credit approval was needed for Lloyds and SNS, and ING was under pressure to exit from transactions; so the banks' commitment to lend was not a foregone conclusion. Mr Monnickendam had said to his colleagues at the other banks that "As long as the ERV hits £18m, the yield stays at 6.5% and the resi sells for £18m we should be ok." On the basis of Multi's own expert evidence the ERV would not have hit £18 million (it would have been £17.88 million before an allowance for voids, and £17.61 million after making that allowance); the yield would not have stayed at 6.5% (it would have been 7%) and the residential component would not have sold for £18 million (it would have sold for a maximum of £15.3 million). But as I have said, in my judgment, Multi's experts over-valued the scheme. So Mr Monnickendam's stated position at the time suggests that the banks would not have been OK. Mr Van de Meer's position was that turning away from the term sheet was not the preferred option, as long as "the risk profile does not change materially".
211. In round terms Multi's experts assessed the overall value of the completed scheme, including the residential component, as being in the region of £250 million. This compares with the projected cost of building out the scheme of £314 million. On the face of it, therefore, the scheme would incur a loss of £64 million. Given that none of Mr Monnickendam's targets would have been met, together with the fact that the development would have been seen as liable to incur a loss of at least £64 million, there is a very serious question mark over whether the banks would have lent at all. ING was under pressure to exit from any scheme to which it was not committed, and Mr Van de Meer had had to be persuaded to stay in the transaction at a time when the figures looked much healthier. With the need for increased equity and a large projected loss one might be forgiven for thinking that the risk profile had changed materially. Both Lloyds and SNS needed to seek fresh credit approval. Although Mr Monnickendam expressed confidence that Lloyds would have gone ahead, he was not the decision maker. On more than one occasion in the course of his evidence he made it clear that he was not part of the transaction team who would have approved the final release of money. However, as I have said, I consider that Mr Mylroie overestimated the ERV of Summer Row as at December 2008 and Mr Dooley underestimated the yield; so the figures that would have been presented to the bank would, in my judgment, have shown an even worse picture. On the figures I have adopted the projected loss on the project would have been £89.85 million. The worsening picture would have given the banks an opportunity to pull out of the deal without loss to their reputations.
212. In addition Multi would have had to satisfy the banks that the project was "fully funded" before the banks would have gone ahead with the transaction. By the time that the USA was terminated discussions between other funders and Multi were at a very preliminary stage. In the case of Apollo matters had not even progressed as far as a letter of intent. Multi never produced the letter of equity commitment required by the term sheet. The fact is that Multi never demonstrated to the banks that, even assuming that the NI Investors came up with their £27 million, Multi had the available funds to complete the development on the basis of a bank loan of £202 million; let alone a smaller amount. On the basis of the figures I have adopted the maximum bank loan would have been 70 per cent of £209.8 million: £146.86 million. That would have left £157.1 million to find.
213. Whether the banks would have lent in those circumstances is, I think, anybody's guess. To put the point in more formal language, I do not consider that Multi has proved on the balance of probabilities that the banks would have lent. As I have said, Multi accepted that, although the hypothetical action of the banks in deciding whether or not to lend was the action of a third party, it had to prove on the balance of probabilities that the banks would have lent, rather than that there was a substantial chance that the banks would have lent. My remaining findings, therefore, must proceed on the basis that the banks would not have lent.

If the banks had lent how much would they have lent?

214. Assuming that the banks would have agreed to lend, and given the agreed loan to value ratio, the maximum amount of the bank loan would have been £156.9 million.
215. There was, accordingly, at least £157.1 million to find in order for the scheme to proceed. Of that sum Multi had already spent £29 million and the NI Investors were due to contribute £27 million, making a total of £56 million. Even assuming that Apollo would have been willing to advance £35 million, that still left a shortfall of £66.1 million.

Would Apollo have lent money?

216. Mr Robertson's evidence was clear that in principle Apollo would have lent Multi £30 to £35 million by way of mezzanine finance ranking in priority after the bank loan at an interest rate of 15 per cent per annum. But he was equally clear that he would not have permitted drawdown of Apollo's money until Multi had put in its own equity. If the project had been valued at £250 million and overall cost was £314 million, Mr Robertson would have been comfortable with the figures, although he would have asked "hard questions" about why Multi was proceeding with a loss making scheme. If the projected value of the completed scheme had been £200 million, he would not have lent. However, in my judgment the value of the scheme would have been assessed as somewhere in the region of £209.8 million. That is very close to the figure at which Mr Robertson said that he would not have lent. Accordingly, I cannot conclude that there is a substantial chance that Apollo would have made the mezzanine finance available. In addition if, as I have found, the banks would not have lent, I do not consider that Mr Robertson would have lent either.

Would the Council have agreed to waiver of the Commercial Conditions?

217. It will be recalled that none of the Commercial Conditions in the Development Agreement had been satisfied either at the date when Multi terminated the USA or, indeed, thereafter. So the Development Agreement never in fact became unconditional. Multi had the power to waive those conditions, but in order to do so it would have had to satisfy the Council that it could still proceed with the carrying out and completion of the Development despite the non-fulfilment of the relevant condition.
218. Multi's understanding is recorded in a note of 29 September 2008 prepared by the Council but sent to Multi at the time:

"Where waiver is potentially possible in accordance with the Development Agreement the Council must be satisfied that the Developer can proceed with the Development. Where Multi, in confirming the status of the above conditions are indicating that waiver is being considered, Multi should advise on what basis they consider the development to be capable of being undertaken. For the avoidance of doubt the Council will expect compliance with the provisions of the development agreement in satisfying the conditions precedent."

219. Mr Sargent said that if Multi had presented the Council with a proposal that showed that the scheme would make a loss, the Council might well refuse to permit waiver of the Commercial Conditions. He added that the council would be "extremely concerned" if the scheme were showing a loss and "very concerned" if the profit margins were low; but that that did not mean that the Council would refuse to permit waiver.
220. Even assuming that the sale to the NI Investors had been in place, I do not consider that Multi could have provided the Council with a realistic appraisal that showed anything other than a very substantial loss. In addition, I am very doubtful that the Council would have agreed to a waiver of the Commercial Conditions unless Multi had demonstrated that the scheme was fully funded. As I have said, Multi has never been in a position to demonstrate this. In those circumstances, the chance of the Council agreeing to a waiver of the Commercial Conditions is, in my judgment, no more than speculative.
221. Since it is common ground that the Commercial Conditions had not in fact been fulfilled, Multi has failed to establish that the Development Agreement would have gone unconditional.

What would Multi have done?

222. It is clear from the contemporaneous documents that Multi was very concerned, from the summer of 2008, about the extent of its equity exposure. This is borne out by Mr Sargent's rather desperate e-mail of 27 September, which he ends by saying that he is considering "all alternative courses of action that would reduce our equity exposure". Far from being willing to commit more equity, Multi was looking for a way to reduce equity. It was at that time that Mr Sargent, at Mr Aaronson's request, considered the consequences of not completing land purchases. Since his memorandum raised the possibility of the NI Investors suing for breach of contract, it is plain that the prospect of cancellation had nothing to do with the NI bank guarantees.
223. I have already recounted the Board meeting of 1 October 2008. This was a very significant meeting; and its conclusions are highly material to the main issue I have to decide. What, to my mind, emerges clearly from this meeting is that:

i) The Board did not want to put more equity into projects in acquisition or under development;

ii) This kind of project could only go forward on the basis of 100% guaranteed finding upfront;

iii) All previously approved budgets were rescinded;

iv) A project that was not a green line project would only go forward by a forward funded sale of the project against a newly determined exit yield;

224. As regards Summer Row itself, the sense of the meeting was that the project should be sold in order to recoup invested equity. The point that projects that were not green would only go forward on the basis of 100% funding is reinforced by a consideration of the Board meeting on 4 December. In explaining the significance of the yellow coding Mr van Duren made it clear to the board that a yellow project would go green "as soon as financing from banks or investors is available". The injection by Multi of its own equity was not on the table.
225. The letter sent to country managers on 15 October is also significant. It puts on hold projects which had not yet started construction, even where those projects had committed construction finance or a forward purchase contract in place. These projects included Summer Row. It does not demonstrate any appetite on Multi's part to commit more equity.
226. Mr Aaronson and Mr van Duren were not the ultimate decision makers for a project of this size. Decisions were made by the board. The board's clear position on 1 October was that Multi would spend no more equity on any project in acquisition or under development (of which Summer Row was one). Such projects would only be continued after 100% finance had been guaranteed upfront. In my judgment this is clear evidence of Multi's corporate position. It contradicts the evidence of both Mr Aaronson and Mr van Duren that Multi would have committed £60 million of its own equity to bridge a funding gap. I reject this evidence. There is nothing to support the view that the board would have undertaken such a volte face from its clearly stated position in the minute of the board meeting of 1 October.
227. In his letter to the Council of 1 December Mr Sargent had said "the Scheme's viability is still well below where it needs to be in order to be sanctioned by the board in Gouda." This letter was written before Multi had given up on the NI Investors. Unless Mr Sargent was lying to the Council again (which he denied having done) this letter is a clear contemporaneous indication of what senior personnel in Multi thought the Board's reaction would be.
228. Mr Aaronson said more than once in the course of his evidence that the sale of the Turkish Retail Fund would have given Multi the cash to bridge the funding gap at Summer Row. Mr van Duren gave evidence to similar effect. But not only is there nothing in the case papers to support the notion that this money would have been invested in Summer Row, the minutes of the Executive Committee meeting on 9 January 2009 show that that money was needed for other commitments.
229. In my judgment it is also significant that although provision of the NI bank guarantees was not a condition precedent to signing the facility agreement with the banks, who were exerting pressure on Multi to close the deal, Multi refused to sign. The reason given in evidence was that Multi did not want to incur the arrangement fee of some £1.2 million. Multi's reluctance to risk £1.2 million of its own money to secure the funding (which it could have recovered as damages from the NI Investors if the latter pulled out of the deal) demonstrates, to my mind, a high degree of risk aversion. In fact it is very doubtful whether this explanation was true. Neither the term sheet nor the draft facility agreement required the arrangement fee to be paid on signing the facility agreement. They required the fee to be paid on drawdown. A much smaller cancellation fee of about £150,000 was payable if the facility was cancelled after signing the facility agreement. The banks had offered to waive the cancellation fee if the arrangement fee were paid on signature; but Multi never accepted that proposal. If Multi was unwilling to take the risk of securing the bank finance because of the potential liability for £150,000 the degree of risk aversion must be even higher.
230. Mr Aaronson said that if the figures before the board had shown that it would cost £315 million to build the scheme and that its end value would be £255 million, Multi would have gone ahead. He said that even if the scheme was projected to make a loss of £100 million, Multi would still have gone ahead. He added, in re-examination, that Multi would have gone ahead with the scheme even if it would not have recovered any of its sunk costs; or even if Multi would have incurred a loss of £20 or £25 million on top of its sunk costs. Although he said that there would come a point at which the figures were such that Multi would not take the risk, he said that he had no feel for what those figures might be. I found this evidence incredible. Quite apart from anything else, if Multi had been as willing to incur losses as Mr Aaronson asserted, it is impossible to explain why Multi did not sign the facility agreement in advance of the provision of the NI bank guarantees; or why it did not go ahead with the scheme after it terminated the USA. In March 2009 when the Board were told that the scheme would make a loss of €17 million, they cancelled it. In addition this evidence is inconsistent with Mr Aaronson's recommendation to the Executive Committee on 6 January 2009 that an equity input of €9 million was too much for a 6.5% yield. In my judgment Mr Aaronson's evidence on this subject was at best wishful thinking.
231. Mr van Duren, on the other hand, said Multi would not proceed with a project if it would not be able to recoup its invested money, although it would proceed if it were able to recoup part of its invested money. This, too, is contradicted by the Board's decision in March. In addition Mr van Duren also said, as I have recorded, that Multi was changing strategy from being an investment developer to being a merchant developer. The latter seeks investors who will provide "the vast majority of the equity needed" from the moment construction starts. That was not the deal that had been done with the NI Investors; and in my judgment the change of strategy is reflective of Multi's unwillingness or inability to put in equity of its own. Mr van Duren's evidence that Multi would have gone ahead if it could have recouped part of its invested equity also sat uneasily with the classification of red projects as those where the yield was too low; and his explanation that Multi looked at yields as low as 6 per cent. Mr Sargent's evidence was that in the UK Multi's norm was a return of 8 to 10 per cent. This conclusion is also consistent with Multi's recognition in the early part of 2009 that at then current yields the Summer Row project was not viable. A fortiori that would tend to suggest that if a project was loss making, Multi would not have gone ahead with it. I think that Mr van Duren confirmed this later in his evidence when he said that if the result was "negative … you don't go ahead". Mr Sargent was unaware of any project where Multi had gone ahead in the face of a projected loss. In my judgment Multi would not have gone ahead if the project was predicted to result in a significant loss. As mentioned, Mr Sargent had assured the NI Investors that Multi would not take the final decision without an independent valuation. An independent valuation would have projected a loss of £89.85 million or thereabouts. Even if I were to take Mr van Duren's evidence at face value, a projected loss of that magnitude would have caused Multi to incur a far greater loss than its sunk costs. Thus Multi would not have expected to recoup any part of the expenditure it had already incurred. It would have been a case of throwing good money after bad.
232. Equally, Multi's change in strategy from being an investing developer to a merchant developer casts considerable doubt on Mr Sargent's evidence that "as an investing developer" Multi would not have been concerned that the project lost money.
233. It must also be borne in mind that as far back as September 2008 the Executive Committee had asked for a financial viability check; and that on 1 October the Board had said that all investment proposals should go back to ICom based on "very conservative yields, rents, costs etc." If ICom had received an investment proposal based on very conservative yields and rents, then even taking into account the forward sale of half the Summer Row scheme at 5.85% I do not believe that they would have gone ahead. The difference in yield for the part that had been forward sold, compared with the retained part would not have amounted to more than £20 million. Thus if ICom had received an independent valuation, they would have been facing a loss of over £60 million.
234. In the light of all these considerations I conclude that Multi has failed to establish that it is more probable than not that the project would have gone ahead, even if the NI Investors had produced the requisite bank guarantees. In short, Multi has failed to prove that the breach of contract by the NI Investors has caused any loss. Multi is entitled to £2 nominal damages.

If Summer Row had been build would Multi have made a profit?

The framework

235. In the light of my finding on causation, the quantum of potential loss is academic.
236. Multi's case on loss is based on a calculation showing:

i) The payments it would have received from NI Unitholder for a half share in the development, had Summer Row gone ahead, consisting of the Initial Price and the Deferred Price, less certain adjustments between Practical Completion and the Final Payment Date; plus

ii) the value of the half share in the completed development retained by Multi; less

iii) the costs to Multi of financing and building Summer Row.

237. This calculation of Multi's loss assumes that the Final Payment Date would not have been reached until two years after Practical Completion; that is the final quarter of 2011. The date of the calculation is common ground.
238. The Initial Price is calculated by reference to the formula in the USA. However, although it is payable in advance of the Deferred Price, it is ultimately deducted from the Deferred Price. In addition, the NI Priority Investment Return is a further deduction from the Deferred Price, representing compound interest at 6.25% on the amount subscribed by the NI Investors. In simple (perhaps over-simplified terms) the Deferred Price is one half of the ERV of the completed development multiplied by 17.09. This in turn involves determining the ERV of the completed scheme as at Q4 2011.

Rental values in Q4 2011

239. Both Mr Mylroie and Mr Chase agreed that the market had worsened between December 2008 and Q4 2011. Mr Mylroie was asked to consider rental values as at the assumed date of practical completion, which would have been in the final quarter of 2011. He assessed the Zone A figures for Summer Row at £130 for the lower ground floor and £150 for the upper ground floor. These figures were somewhat confusingly described in his report as "2 years post PC"; but it emerged in cross-examination that they were in fact the rents that he thought would be achievable when Summer Row was expected to open. Mr Mylroie reflected the worsening state of the market by decreasing his Zone A rates by £10 per square foot in the case of standard shops in Summer Row; and £5 per square foot in the case of the shops in Victoria and Worcester Streets. On the other hand he increased the rate for the MSUs by £2.50 per square foot overall, on the ground that there had been "limited growth" for that type of unit. His overall ERV was £17.143 million. Mr Chase reflected the fall in the market not by applying lower rates per square foot but by increasing tenant incentives; thus maintaining headline rents. Mr Chase's figure for ERV remained at £15.747 million, based on a Zone A rate of £120 to £130 on the upper level of Summer Row; and £100 to £115 on the lower level.
240. The worsening market in Wolverhampton itself can be readily demonstrated. Two transactions took place after the end of 2008. The first was a rent review of a shop occupied by Clinton Cards. The rent review date was March 2009; and the review was upwards only. There was no increase in the rent. Mr Mylroie and Mr Chase disagreed about the analysis of that rent; but I am satisfied that the correct devaluation produces a Zone A rate of £130. First, although Mr Mylroie said that a deduction had been made for an unusual width to depth ratio, there was no other evidence to that effect, and it appeared to be contradicted by an examination of the Goad plan. Second, the devaluation on which Mr Mylroie relied attributed no value to the first floor accommodation. That is not to say that £130 was in fact the rental value of the shop; because the rent review was upwards only. The true rental value of the shop at the review date may have been lower, but there is no way of knowing. Two years later Clinton Cards extended their lease for a further five years at the same rent, but the landlord conceded a rent free period of 12 months. Mr Chase amortised that rent free period over the whole term of the extended lease. This showed that the effective rent had fallen to £115 Zone A or thereabouts. Second, Next renewed their lease on their shop in Dudley Street. They surrendered their lease and took a new one from December 2010 for a term of 10 years. The headline rent devalues to £130 Zone A, but the landlord paid a capital inducement of £500,000. If that inducement is devalued over the whole term of the lease, the effective Zone A rate drops to £95 or thereabouts.
241. In addition to these transactions, the vacancy rate in retail space in Wolverhampton has increased. One example is that of the shop in the Mander Centre formerly occupied by Woolworths. It was vacated after Woolworths went into administration in November 2008 and has remained vacant ever since. In February 2010 the vacancy rate for shops in Wolverhampton overall stood at 23.9%.
242. The fall in rental values is not a phenomenon that is local to Wolverhampton. Mr Mylroie expressed the view in his report that rents at the Westfield Centre, Derby had fallen from £135 and £151 Zone A to £115 and £131 Zone A: a drop of £20. Mr Mylroie was not able to explain to my satisfaction why the assumed drop at Summer Row was only half that at Westfield Derby. Moreover, in my judgment Mr Mylroie understated the extent of the fall in rents at the Westfield Centre Derby. He presented two of the seventy two transactions that had taken place at the Westfield Centre since its opening in 2007. The two that he selected were in fact the highest of all the rents achieved during that period. They were not representative of the general tone. The general tone did not exceed £100 Zone A on the upper level; and was in the region of £50 to £75 on the lower level. It is true that one shop at Westfield Derby did let at £131 but it was not fair to extrapolate from that that it would be possible to achieve that level of rent across the whole of Summer Row. As Mr Mylroie conceded in cross-examination "it does look rather odd". Thus as he accepted in cross-examination, Westfield Derby did not support his view of rental values at Summer Row in the last quarter of 2011. In my judgment his evidence in this respect was unfair and misleading.
243. When Mr Mylroie wrote his report in February 2011 he was of the view that the market had reached the bottom and that an "upward curve is now well established". But as he acknowledged in cross-examination, this was too optimistic a view. The market has continued to deteriorate; and retailer insolvencies have, if anything, accelerated. A string of well known retailers nationwide has entered some form of insolvency process; and that continues unabated. Others are reappraising their retail estates and are closing stores.
244. Very surprisingly, none of this had any effect on Mr Mylroie's opinion of values in the last quarter of 2011; although he said that achieving the rents set out in his report would be "very, very challenging". I find it difficult to accept that, consistently with his duty to the court, Mr Mylroie could have maintained his view and to have spoken to rents that he himself said would be "very, very challenging" to deliver. As John Maynard Keynes said: "When the facts change, I change my opinions." As mentioned, Mr Mylroie also said that the rental values of MSUs had increased during this period; contrary to the general trend in rents. But he was unable to cite any concrete example of where this had happened. I do not accept that rental values of MSUs increased. Mr Mylroie's opinion about MSUs was expressed at a time when he held the mistaken belief that rents were on an upward curve. So again, in my judgment, Mr Mylroie substantially overestimated the rents that would have been achieved at Summer Row on the assumed practical completion of the scheme in the last quarter of 2011.
245. As I have said, Mr Chase maintained his headline rents. They were £120/130 on the upper ground floor and £100/£115 on the lower ground floor. In my judgment £120/£130 is above the going rate for the best retail space in Wolverhampton as at Q4 of 2011 and equivalent to the rate for the best space at Westfield Derby, which is a superior centre. They are, if anything, too high.
246. However, Mr Chase's estimates of Zone A rates in Q4 of 2011 were not challenged in cross-examination. In those circumstances I accept Mr Chase's Zone A rates for Q4 of 2011, even though I have increased his rates as at December 2008.

Tenant incentives in Q4 2011

247. Both Mr Mylroie and Mr Chase agreed that tenant incentives increased by the equivalent of six months rent free between December 2008 and Q4 2011. Since I have accepted Mr Chase's view that the starting point was 24 months in December 2008, I also accept his view that by Q4 2011 incentives would have increased to 30 months. The empirical evidence also supports that view. Mr Chase cited the example of companies within the Arcadia group whose five transactions in 2010 involving units shops in shopping centres all came with incentive packages exceeding 48 months. The renewal of Next's lease in Dudley Street itself came with an incentive package of more than 30 months.

Permanent voids

248. The increasing number of retailing insolvencies provide further support for Mr Chase's figure of 2.5% for permanent voids, and that is the figure that I adopt for Q4 of 2011.

Yields in Q4 2011

249. The NI Investors were to buy a half share in the Summer Row shopping Centre. This excluded the shops in Worcester Street, which would have remained owned by Multi. Multi would also have retained a half share in the shopping centre. It is common ground that the value of Multi's retained interest must be valued at market rates, rather than at the rate prescribed by the USA.
250. Mr Dooley said that the investment market hit the bottom between June and September 2009 and has since improved. He referred to a sale of Silverburn, Glasgow at a yield of 6.2% at the end of 2009; a half interest in the Bentall Centre, Kingston at a yield of 5.76% in February 2010; and a sale of the N1 Centre in Islington at an equivalent yield of 5.92% in July 2010. However, the comparable on which he placed most reliance was the sale of Drake's Circus Plymouth at the end of 2010. This is a shopping centre of 650,000 square feet, anchored by Primark and Next. Marks & Spencer is adjacent but not part of the scheme. It sold on a yield of 6%. Taking all these transactions into account he applied a yield of 6% to Summer Row.
251. Although both the date and size of the transaction are similar to the assumed transaction for Summer Row, there are significant differences between Drake's Circus and Summer Row:

i) Plymouth is a regional centre rather than a sub-regional centre; and the latter are regarded as less dominant than the former;

ii) The shopping population of Plymouth is 345,000 compared to Wolverhampton's of 249,000. The corollary of this is that Plymouth has a greater penetration of its catchment area than Wolverhampton;

iii) Drake's Circus does not face the same level of competition from other retail centres as Wolverhampton as a whole; or indeed from internal competition within the town, whereas Summer Row would face competition from the Mander and Wulfrun Centres.

252. Mr Chase applied an additional 0.5%, giving him a yield of 6.5% for the main part of the centre. He justified this by saying that just as there was a differential between the best centres within the category of prime and other weaker centres within the same category, so also there was a difference between stronger regional centres and weaker sub-regional centres. Mr Dooley accepted that within each category there could be gradations in the appropriate yield, but stuck to his position that the yield at Drake's Circus was a good comparable for Summer Row. Once again Mr Chase also applied a higher yield to different parts of the overall development resulting in a "blended yield" of 6.7%. In my judgment one cannot simply transpose the yield achieved for Drake's Circus to the assumed sale of Summer Row. In my judgment a higher yield must be applied. There are two main reasons for this. First, as I have already said it is not the case that the whole scheme is part of the Summer Row centre: the scheme includes the shops on Victoria and Worcester Streets. Second, I agree with Mr Chase that Drake's Circus is likely to have been a better and more secure investment than Summer Row would have been. In my judgment the appropriate yield to reflect these two factors is 6.5%, giving a multiplier of 15.38.

Residential

253. As I have said I do not regard the chance of the Council dropping the requirement for affordable housing as having been substantial. I have also said that I am not prepared to assume a sale of the units en bloc. In my judgment, therefore the value of the residential component as at Q4 of 2011 must be taken as £13.05 million.

Value

254. Based on the inputs that I provided to the parties at the conclusion of the hearing, the experts agree that the value of the whole scheme, at PC + 2, assuming completion in Q4 2011, would have been £246,847,094 (say, £246.85 million).

Finance costs

Interest

255. It is common ground that interest would have been payable at 7.5% per annum on the amount of any bank loan. It is also common ground that interest would have been payable at 15% per annum on any mezzanine finance.

Multi's cost of capital

256. Multi's claim for damages assumes that it would have bridged the funding gap by use of its own capital. The case pleaded in the Amended Particulars of Claim is:

"Multi would have funded any costs of the Development (beyond the amounts provided by the consortium of banks and the NI Unitholder) through its own funds, on the basis of its weighted costs of capital at 5.87%."

257. The weighted average cost of capital goes by the acronym WACC. At this point it is necessary to differentiate between the claimant (Multi Veste 226 BV) and the Multi group generally. The claimant was a special purpose vehicle, with no assets of its own. When, therefore, the pleading asserts that Multi would have funded any costs "through its own funds" what it means is that funds would have been provided by the Multi group (via Multi Finance which was the group treasury company). Multi says that it must give credit for the amount it has saved as a result of not having had to finance the development. The NI Investors, on the other hand, say that it is not a question of giving credit, because the claimant had no assets of its own. Rather, the WACC is a cost which the claimant would have borne in carrying out the development, and it to be treated no differently from the other finance costs. All sources of funds are external to the claimant. This submission is borne out by what actually happened. When Multi carried out its own cashflow calculations at the time it showed the cost of capital on a compounded basis. To my mind this is a strong pointer towards the conclusion that this is the correct method to adopt. The contrary argument is based on the proposition that the return on capital would have been paid out to Multi's creditors and shareholders. But without income coming in it is impossible to see how this could have been arranged. Moreover, even if one looks as Multi as a group, it was operating at a loss and therefore did not in fact make any payments out to shareholders. I prefer the argument of the NI Investors.
258. The only significance of this particular dispute is whether the WACC should be compounded or not. In the light of my conclusion I consider that WACC must be compounded.
259. The next question is what rate of WACC should be used. The WACC is a blended rate that takes into account the cost of debt and the cost of equity. In very round terms the ratio of debt to equity across the Multi group has been 60% debt and 40% equity. Historically, in preparing its own HBAs Multi allowed the cost of capital at 8.5%. Multi's accounts refer to a weighted average interest rate in 2008 of 8.72%. The notes to the partnership accounts for 2008 state:

"Interest-bearing loans and borrowings only consist of group financing … Group financing is denominated in GBP and is repayable on demand. The weighted average interest rates paid is 8.72% (2007: 8.60%)."

260. During the pendency of these proceedings Multi continued to advance a case based on a cost of funding of 8.5%; a figure to which Mr Vernooij of Multi spoke in his first witness statement. Cost of capital at this rate formed the basis of Multi's claim for reliance losses, which it abandoned in January 2011. However, in a significant departure from that position it now asserts that the cost of capital should be assessed at 6.5%. This figure was supported by Multi's expert Mr Steadman. The NI Investors' expert, Mr Mitchell, said that the figure for WACC should be 8.2%.
261. Mr Mitchell said that established corporate finance theory is that the cost of capital is a market driven rate which represents the expected yield rate necessary to induce investors to commit available funds to the investment in question. I did not understand Mr Steadman to disagree. In his own report he said that a company's cost of capital as measured by WACC is a market driven rate, being the expected rate of return the market requires to commit capital to an investment. The experts agreed that the capital asset pricing model ("CAPM") is an accepted method used to estimate a cost of equity based on market data. Mr Mitchell employed this method; and Mr Steadman agreed that the way in which Mr Mitchell had applied this method was "not unreasonable", subject to the reservation that the selection by Mr Mitchell of comparable companies might not be appropriate. In fact the comparable companies to which Mr Mitchell referred were all property companies; and hence in the same market sector as Multi. They showed an average WACC of 8.9% for Europe and 8.5% for the UK. Mr Gourgey made no criticism of these comparables in his closing submissions; and I can see nothing wrong with them.
262. There was a difference between the experts over the cost of debt. Mr Mitchell took the average rate of Euribor during 2008 and 2009 and applied that for the entire period from 2009 to the end of 2013. Mr Steadman agreed in cross-examination that it was fair to take an average over the whole year. However, this is not what he did. He calculated the cost of debt by reference to the lowest rate of Euribor for both 2009 and 2010. I prefer Mr Mitchell's opinion and calculations.
263. The focus of Mr Gourgey's attack in his final submission was that it was wrong to assess the cost of capital by reference to market values; and that the cost ought to be assessed by reference to Multi's actual costs. But since Multi's pleaded case relied on WACC; and the experts agreed that WACC is market driven, I reject this submission.
264. Once that point has been cleared out of the way, I consider that Mr Mitchell's rate of 8.2% is justified both by reference to Multi's own accounting treatment and also by reference to comparable data.
265. Mr Gourgey objected that the NI Investors had assumed that Multi 226 would borrow money from other companies within the group at interest; and that there was no evidence to support either the making of such a charge or its amount. However, in the first place Multi's own feasibility studies treated the cost of capital as a cost; and in the second place the partnership accounts showed sums expended on the development as debts owed to group companies bearing interest at 8.72% and repayable on demand. In my judgment there is nothing in this point.
266. I therefore conclude that the appropriate rate for WACC is 8.2%, compounded.

The £28 million subscription

267. It will be recalled that at the time when the USA was terminated Multi had already spent some £28 million on the scheme. One of the obligations contained in clause 2.5 of the USA was that on completion "the Vendor" (i.e. Multi Veste 226 BV) would:

i) Procure that any loans made by members of the Multi group to the partnership were repaid; and

ii) Subscribe for units to finance that repayment.

268. The money that Multi had spent had not been spent by the partnership or by Multi Veste 226 BV. It had been spent by Multi Development UK Ltd. Multi Veste 226 BV had no money to spend. It was shown in the partnership accounts as a debt due to Multi Development UK Ltd; not to Multi Veste 226 BV. The correspondence between Norton Rose and Semple Fraser specifically raised the question of the repayment of loans. In their letter of 17 November 2008 Norton Rose stated unequivocally that £27.9 million was owing by the partnership to Multi group companies; and that these would be repaid and that Multi 226 BV would subscribe for units to that amount. Internal e-mails (to which I have already referred) make it clear that steps were being taken within the Multi group to make the necessary transfers by way of book entries.
269. Accordingly on completion Multi Veste 226 BV was obliged to subscribe for £28 million of units in the unit trust; and to procure the repayment of the loan of that sum. In principle, therefore, I consider that if the contract had been performed Multi Veste 226 BV would have incurred a liability to pay £28 million. That liability (and any attendant costs of finance) should therefore be taken into account in assessing the financial consequences to Multi Veste 226 BV of building out the scheme.
270. Multi seeks to meet this point in three ways. First it says that because the loan was made by one group company to another, and repayment would have been made by book entries, no "real money" was involved; and Multi Veste 226 BV would have incurred no "real cost". In my judgment there is nothing in this point. First, in the modern world all transactions of any substance are carried out by means of book entries. A CHAPS transfer, for example, simply results in the adjustment of credit and debit entries in two bank accounts. They may even be accounts held at the same bank, which remains the owner of the money throughout. Second, it ignores the separate corporate personalities of companies within the Multi group which Multi, for good or ill, chose to set up. Third, Mr Zwiers, Multi's corporate controller with responsibility for group accounting, accepted in cross-examination that the result of the book entries would be that Multi Veste 226 BV would have ended up owing £28 million to another group company.
271. The second argument that Multi advances is that the obligation to procure the repayment of loans and to subscribe for units had already arisen before the USA was terminated. It arose under clause 2.5 five business days after satisfaction of the satisfaction of the Council Pre-Condition. In my judgment there is nothing in this point either. First, clause 2.6 of the USA said that the parties were not obliged to effect any of the steps set out in clause 2.5 unless all the actions set out in that clause were effected. In other words, procurement of repayment of the loans and subscription for the units were to take place simultaneously with all the other steps required in order to complete. To take an analogy: suppose that a contract for the sale of land required the seller to transfer the land and the buyer to pay the price. Suppose also that the seller failed to complete on the contractual completion date; and that following service of a notice to complete the buyer terminated the contract and sued for loss of bargain. It would make no sense at all if the buyer did not have to take into account the obligation to pay the price in assessing loss of bargain. The fact that the obligation to make the payment arose on the contractual completion date (and hence before the contract was terminated) would make no difference. Second, Multi 226 BV did not in fact procure the repayment of the loans or subscribe for the units. So that obligation remained outstanding for future performance at the date of termination of the USA.
272. The third argument is that the payments made by Multi Development UK Ltd were payments made for the benefit of Multi Veste 226 BV and the partnership under an implied agency. Thus Multi 226 BV incurred an implied obligation to reimburse Multi Development UK Ltd for those payments; and that liability was incurred before the USA was terminated. However, on 1 January 2006 Multi Development UK entered into a written Project Management Service Agreement with the partnership under which it performed a number of services. It was entitled to recharge the costs to the partnership under article II 2; and was entitled to additional fees under article IV. There is, therefore, no need for any implication. The entitlement of Multi Development UK is governed by the written agreement to which Multi Veste 226 BV was not a party. I reject this argument too.

The overall loss

273. To summarise the issues on quantum that I was asked to decide:

i) I prefer Mr Chase's view of the level of capital incentives required to attract tenants;

ii) The centre would have been 80 per cent let at practical completion;

iii) If the development had been built out, it would have included the residential component (with the affordable housing); and Multi would have disposed of them individually rather than by block sale;

iv) Mr Chase was justified in adding a 3 per cent contingency;

v) If the development had been built out with a bank loan the maximum amount of the loan would have been £156.9 million;

vi) Multi would have had to buy units in the unit trust to finance the repayment of group loans;

vii) The appropriate WACC is 8.2%, compounded.

274. Based on these decisions, the parties have agreed the overall consequences in financial terms. They are contained in two schedules. On the basis that, as I have decided, Multi would have had to subscribe for units in the unit trusts to repay group loans, the financial consequences of building out the scheme would have been that Multi would have incurred a loss of £81 million.

Result

275. Although Multi has established a repudiatory breach of contract entitling it to terminate the USA, it has failed to establish that but for the breach the project would have been built out; and has failed to establish any loss. The result, therefore, is that Multi is entitled to £2 nominal damages.