£1m overage clause NWDA ‘failed to consider’

An independent report into the controversial sale of the Mann Island waterfront development site in Liverpool concluded that the North West Development Agency entered into an overage clause with the former site owner which it then disregarded when it sold the land on to developers.

The 4.25-acre Mann Island site was sold by car dealership Robert Smith Group to the NWDA in 2002 for £9.2m subject to an overage clause and subsequently sold on to Neptune Developments and Countryside Properties for £3.57m in 2007. The site was originally intended for the Fourth Grace development, with Neptune and Countryside the preferred developers. The Fourth Grace concept was abandoned but Neptune and Countryside retained their interest in the site and are currently building apartments and offices there.

Download the full PWC report below

PricewaterhouseCoopers was asked by the NWDA to look into the sale after a lengthy dispute between Robert Smith and NWDA over the overage calculation triggered by the sale to Neptune and Countryside.

The report is dated 15 October 2010 but was only released this year by the NWDA following a Freedom of Information Act request.

NWDA Forensic Investigation into Mann Island by PWC

Robert Smith Group argued the NWDA's sale to Neptune and Countryside triggered the overage and that the site was to be valued on an open market basis. The overage agreement provided for Robert Smith Group to receive 50% of the increase in value if it exceeded £10m.

Hitchcock Wright & Partners, acting as third party expert, used 1 August 2007 as the pricing date for the overage. The NWDA argued the value of the site was sub-£5m whilst Robert Smith said it was in excess of £20m. The third party expert found the market value, less the proper costs, was £12m, or £2m over the £10m overage trigger, meaning £1m was due to Robert Smith Group.

Before the overage payment was agreed, Robert Smith Group received £500,000 from the NWDA to release the title deeds. The NWDA said it also spent £92,530 on professional fees during the arbitration process.

PWC found that NWDA had written an overage clause into the contract with Robert Smith Group but PWC saw "nothing to confirm that the likelihood of such payments was considered by NWDA and / or GVA Grimley [advising the NWDA] prior to the decision being made to sell Mann Island for £3.57m."

Roland Maguire, the solicitor who acted for Robert Smith Group on the sale of the site and the overage clause, commented that: "Following the sale of the site to NWDA we maintained regular contact with the NWDA's lawyers in respect of the overage. They provided a copy of their sale agreement with Neptune before they exchanged contracts but did not deal with the overage at that time."

The NWDA said in response: "The agency sold the site to Countryside Neptune for £3.57m, which was well below what we acquired the site for and so overage did not apply. The extra expense occurred when the £3.57m disposal price was challenged by the original site owner and we were forced into an independent re-valuation process in order to have the title restriction lifted and enable the development to proceed."

PWC said the NWDA withheld selected documents, citing confidentiality agreements with Neptune and Countryside.

The final paragraph of PWC's summary and conclusions states: "Finally, we note that the documentation made available to us in relation to the sale of Mann Island does not identify if NWDA or its external advisors considered the risk of additional costs on disposal as a result of potential further payments by NWDA to the previous owner of Mann Island. In particular, we understand that NWDA had entered into an agreement with the previous owner, which included an overage clause to provide for the prospect of further payments in the event that NWDA disposed of the land within 20 years. We have seen nothing to confirm that the likelihood of such payments was considered by NWDA and/or GVA Grimley prior to the decision being made to sell Mann Island at £3.57m. We have not considered this matter further as it is outside of the scope of our instructions to do so, save we note that [name blacked out] has already reported to the Audit Committee in relation to the difficulties that may stem from such overage clauses, making recommendations for future practice in the exceptional circumstances where NWDA is again faced with land deals on terms that include an overage provision."

Responding to the findings of the PWC report, the NWDA said in a statement: "The NWDA is pleased that the independent PwC report into the sale of Mann Island finds that we acted properly in what is a complex site with a long and rich history. The NWDA is delighted with progress on the site and is proud to have led the development of this high quality, prestigious location, enhancing the beautiful and unrivalled Liverpool waterfront and creating a lasting legacy project for the city's residents businesses and visitors."

Law firm Eversheds advised the NWDA. Eversheds declined to comment.