Taj Mansingh: Caught in lease tangle

The prospect of auction has groups such as Accor and Sahara in the fray while Indian Hotels Company IHC is battling to retain control of the property.

With the Union urban development ministry suggesting fresh bids for the property,the New Delhi Municipal Council NDMC,from whom the land was leased under an agreement,had engaged Ernst amp; Young as a consultant to advise on the modalities to be followed once the lease period is over,and whose report is with the municipal body to be acted upon.

GENESIS

In 1976,NDMC,with an objective of developing tourism in the Capital city before the Pacific Area Travel Association PATA Conference of 1978 and to boost its own revenues decided to develop a five star hotel as per the standards laid down by Central government.

The municipal body made a request to what was then known as the Union Ministry of Works and Housing for a plot of land measuring 3.78 acres located at 1,Mansingh Road in New Delhi. It was around this time that the ministry was approached by IHC for this plot. The Union governments Land and Development Office allotted the plot to the NDMC.

Being a municipal body,NDMC did not have the experience or expertise in setting up and running a five star hotel. IHCs offer to the NDMC of developing a hotel as a joint venture project was taken up at the meeting of the civic bodys council. With time ticking away for the conference,and considering that IHC was a leading player in this field,the council entered into an agreement with the hotelier. The plot was allotted to IHC in July,1976.

THE DEAL

The joint venture was a unique one,signed between a government body and a private company. NDMC provided the land and financed the construction,while IHC would provide for technical services such as planning,designing,supervision and quality control of the hotel. IHC would also provide the necessary equipment,furniture and furnishings etc. and would bear the cost of maintenance and operations.

The joint venture actually comprises three agreements: Licence deed for the land,Collaboration Agreement and Supplementary Agreement.

Licence deed for land: The License Deed entered in December,1976 for the land area of 3.78 acres or 1,61,706 sq ft and the covered area of the building that stood at 3,23,438 sq ft stated that NDMC owned the land and the constructed building with its assets.

As per the deed,IHC was liable to pay a licence fee at the rate of 10.5 per cent of gross receipts or 15 per cent of NDMC investments in the hotel building,which then stood at Rs 6.26 crore whichever was higher. An additional sum of Rs 12 lakh per annum was to be paid towards House Tax and Rs 2.29 lakh per annum for ground rent.

Collaboration agreement: This agreement stated the total investment by both parties. NDMC invested Rs 6.26 crore and IHC Rs 5.5 crore.

Supplementary agreement: This agreement was signed in September,1979 that captured the final investment by NDMC,which stood at Rs 6.26 crore in the building along with fixtures and fittings,cost of land and construction supervision.

As per documents available with NDMC,IHC had invested nearly Rs 129 core as of March,2011 in renovating and refurbishing the hotel.

NEXT STEPS

As per the agreement,the joint venture would last 33 years,i.e. up to October 10,2011. This time frame was calculated from the date on which the first paying guest occupied a hotel room.

A clause in the licence deed provided that,The licensor shall have the option to grant the licence for a further period on such terms and conditions as may be mutually agreed upon between the licensor and the licensee… if the licensee shall be desirable of obtaining the licence for a further period after the expiry of the present licence8230;

On February 15,2010,IHC applied for extension of the agreement. As the original agreement provided option to grant further term to IHC,the case was processed for appropriate decision, said an official of the NDMC who did not wish to be identified.

Once IHC made the proposal,the chairperson of NDMC constituted a committee on July 27,2010 to examine the legal,contractual,and financial implications of the proposal. After consultations,the municipal body advised that it was a joint venture project and cannot be compared with normal licence shops8230; NDMC could vary the percentage of revenue sharing based on gross receipts of the hotel,so as to get an amount equivalent to the fair market value. The committee submitted its report in July,2011.

The committee recommended a three-stage revenue sharing model. For the first ten years,the licence fee would be Rs 21 crore per annum or 17.25 per cent of gross turnover. The next ten years would see the licence fee increasing to Rs 25 crore per annum or 18.25 per cent of gross turnover and for the final decade,it would be Rs 30 crore per annum or 19.25 per cent of gross turnover.

IHC,in its letter to the director of NDMCs estates department,wrote,8230; is committed to the proposal/offer made by NDMC8230; covering the terms for the extension of collaboration agreement for a fresh period of 30 years,inclusive of three cycles of 10 years each and from October 11,20118230;

Future secure?

Amidst this,the Union Ministry of Urban Development in August 2011,suggested that fresh bids should be invited for the property while giving right of first refusal to IHC. The municipal body said that it was not in accordance with the agreement. The reply from the ministry is still pending, said a senior NDMC official.

The municipal body then decided to consult experts to give the best possible evaluation for extending the agreement on mutually agreed terms. It initially approached Infrastructure Development Finance Company IDFC,which backed out citing conflict of interest.

NDMC then appointed Ernst amp; Young Eamp;Y to prepare a report on the options that the civic body can choose from,before taking a final decision. According to sources in the know,the Eamp;Y report is said to have listed the pros and cons of both an open auction for the property and extension of lease with the company.

In Tajs case,perhaps the lack of clarity on the mechanism of renewal of lease had led to this problem. The key question to ask is,if the agreements clearly defined the mode of renewal of lease agreements and the renewal process followed it in letter and spirit. It is a valuable property and any lacunae would tend to get exploited by competing interests. It becomes difficult to project the current market scenario 30 years ago,so it boils down to the diligence and rigour one should exercise while drafting these agreements, said Rajeev Bairathi,director,Investment Advisory,DTZ India,a property advisory firm.

Will IHC retain its iconic hotel property? Or will it come up for auction? NDMCs decision is keenly awaited,for it can have implications for several hotels built in the Capital under such joint ventures.

REWORKING THE DEAL

The agreement between NDMC and IHC lasted 33 years until October 2011

A year before expiry,IHC proposed extension of the lease with NDMC

The municipal body constituted a committee to study the agreement afresh

The Union urban development ministry favoured open auction with right of first refusal to IHC

NDMC extended the lease till October 10,2012 and appointed Ernst amp; Young to prepare a report on various options available to the civic body

NDMCs decision is awaited

pragya.kaushikaexpressindia.com