Investors in hotel project sue developer
Investors in 4-star Nelson hotel complex Monaco are suing the developer for $12 million for alleged Securities Act breaches relating to insufficient disclosure.
The hotel, now trading as the Grand Mercure Nelson Monaco Hotel and Resort, was initially developed by Mike Gepp and Roderick Duke (not the Briscoes managing director of the same name).
It was taken over by hotelier Scott Sanders in 2005 after the project ran into trouble and opened in 2008.
Investors, who each sunk hundreds of thousands of dollars to buy units at Monaco, complain that the leases left their promised share of profits almost completely eaten up by operational costs and fees paid to Sanders' management company.
Sanders and two Sanders-directed companies, Monaco Village and Monaco Management, are named as defendants in the suit filed in the High Court in Christchurch.
Sanders, in a statement from his lawyers, said he had won similar complaints by the same investors at arbitration in 2011. "There is a very strong element of ‘sour grapes' behind the issuing of proceedings," Sanders said.
Sanders' lawyer, Geoff Saunders of SRB, said the claim was without merit and under the statute of limitations had been filed too late. But Grant Cameron, a partner in GCA who is acting for the 45 complainants, said he remained confident the majority of the complaints would survive any statute of limitation challenges.
"The law says: ‘We don't give a damn whether you go into a bad investment, providing the issuer gives disclosure'," said Cameron.
The $60m project was part-financed by investors who bought individual rooms or apartments within the complex. The suit, brought by investors who bought units for as much as $385,000 each, alleges insufficient disclosure by Monaco and Sanders and that investment in the project falls under the Securities Act.
In 2005 the Securities Commission issued Monaco an exemption from the Securities Act when selling its units to investors, but Cameron said undertakings promised by Duke and Gepp were not properly enacted and Sanders' new company was not covered by that notice. They say Sanders should have filed a prospectus which would have provided more disclosure.
Motueka investor and retiree Mike Bannock, who bought two units and is party to the suit, told Sunday Star-Times his investment had turned into a cash sinkhole and the High Court action was the last roll of the dice.
"If we don't win this one, they can have it [the units]. I've been running a loss for the better part of a decade." He said his investment had failed to generate any net returns and annual body corporate and rates bills of $6000 led to regular losses.
He estimated his total losses to be in the region of $600,000. "It's gutted us to be honest," he said. Bannock, who chairs a group representing investors, said the Monaco project had caused plenty of grief. "It's pretty sad. There's a family living in Australia with six kids - they've sold their family home and are now living in rentals. She's driving a school bus now."
Bannock estimated the unit holders bringing the suit bought 55 rooms or apartments, paying $12m for properties now worth only a fraction of that.
Sanders' company, Monaco Management, holds leases entitling rent-free use of the units. The suit seeks to cancel these lease agreements and return the capital payments made by investors.
In February 2010 unit holders rejected a creditors' compromise proposed by Sanders, then successfully applied to appoint liquidators Deloitte to property owner, Monaco Village.
In its reports Deloitte noted units were sold with an 8 or 10 per cent guaranteed rate of return, with these guarantees backed by now-failed Lombard Finance.
"We understand that the company only made the guaranteed level of return to investors for a short period. Lombard was placed into receivership in April 2008 meaning that the underwrite of the guarantee could not be fulfilled," the liquidators' first report said.
Lombard appointed receivers PWC shortly after the company entered liquidation and reported the principal asset of the company was 13 units within the Monaco complex.
The units proved difficult to sell and required deep discounting showing unit holders may have to accept a large haircut if they also want to sell.
After a long-running sales campaign, PWC reported selling 11 of the units for an average of just over $40,000 each - a write-down from the average $280,000 paid by investors for identical properties.
According to property records, two of the three entities who purchased the units from PWC have Sanders as sole director. He noted the PWC sale was conducted by public tender.
Sanders blamed the collapse in prices on bad publicity brought on by unit-holders complaining in the courts and the media, and the global financial crisis.
- © Fairfax NZ News
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