Ernst & Young’s pre-emptive rights would become worthless
Ernst & Young has won a judgment against Kiwi Property Holdings Ltd (manager of the Kiwi Income Property Trust) over plans to erect an IBM sign on the Majestic Centre in Wellington, but the decision has been appealed.
The accountancy firm went to court to stop IBM’s sign going up on the roof because, Ernst & Young said, the IBM sign would effectively prevent Ernst & Young from exercising its 1st right of refusal on naming rights.
The issues in the Auckland High Court hearing before Justice Barrie Paterson revolved around the difference between naming rights & signage, and the sanctity of a contract between Kiwi and IBM.
IBM NZ Ltd was 2nd defendant in the court case, but was dropped from the case shortly before it went to hearing.
The 31-level building was completed in 1991, by which time developer Primacq Holdings Ltd had collapsed. The building cost $200 million and was the final asset of the failed former government-owned DFC investment bank to be sold by the statutory managers.
Ernst & Young signed up for 9 floors of the Willis St tower for 12 years from 27 March 1991, but later cut back to 5 floors. It also had a 1-month 1st right of refusal on naming rights if the building’s owner wanted to change the name.
The accountancy firm had wanted naming rights, but a council condition for the development prevented signs above the podium level.
Kiwi bought the Majestic Centre in 1994 for just under $49 million, initially in partnership, later taking 100% ownership.
IBM secured its signage rights in April 2002 and moved into 2 floors in September. The signage was at an initial rent of $70,000 plus gst Evidence from 1 valuer for Ernst & Young was that naming rights in Wellington were in the $10-30,000/year range, with 1 example of $60,000/year.
Rob Fardell QC, for Kiwi, told the judge there was a clear distinction in the lease between naming & signage rights, and that Ernst & Young was trying to obtain rights for which it didn’t bargain or obtain under the lease. These were the signage rights above the podium level and the right to restrict others to place signs above that level.
Mr Fardell said Kiwi had no intention of changing the name from the Majestic Centre.
Property consultant John Whitehead, a former director of Mainzeal, called by Mr Fardell, said there was a difference between naming rights & high-level signage rights.
Naming rights normally required not only the commercial address of the property to incorporate the name, but also an obligation for all tenants to incorporate the name if they included a building description in their commercial address, on such things as letterhead or other business forms.
By contrast, high-level signage was simply a high-level billboard where a commercial sign is attached to the building at an upper level.
This seemed an appropriate point for the judge to consider whether the proposed IBM sign would prevent a “building letterhead” from being erected on this building. What he did, however, was to go through numerous examples of other buildings given in evidence as being relevant â€“ but which he found mostly were irrelevant â€“ before turning to a question of whether the term “naming rights” included the ability to erect signs.
Concurring with Mr Whitehead, Justice Paterson said: “Notwithstanding that IBM has received signage rights to which a holder of naming rights is entitled, I am of the view that the grant of signage rights does not, particularly at this stage, amount to a grant of naming rightsâ€¦ In this case, the evidence indicates that naming rights have not been granted. IBM has not been given the right to name the buildingâ€¦
“Finally, while many of the public may come to call the tower the IBM tower, if the signage is erected, the official name of the building for the purposes of clause 12.07 [of the Ernst & Young lease agreement] will remain the Majestic Centre.”
Justice Paterson found Kiwi didn’t breach its contractual obligations to Ernst & Young to give it 1st right of refusal on naming rights. But Kiwi put itself in a position where it couldn’t deliver the signage rights included in a grant of naming rights, virtually rendering nugatory the right of refusal. The judge found this was a derogation of grant and that Ernst & Young succeeded on this claim.
On the sanctity of the Kiwi-IBM contract, Justice Paterson found Kiwi recognised the IBM signage proposal might conflict with possible Ernst & Young rights: “Kiwi derogated from its grant with its eyes wide open.”
Although Ernst & Young hadn’t demonstrated any loss â€” because it only ever had a pre-emptive option which hadn’t become exercisable â€“ the judge said if the sign was erected Ernst & Young would never be able to obtain any benefit under its pre-emptive rights, and granted the firm an injunction stopping Kiwi from erecting an IBM sign.