Nelson resort developer plans appeal over $7.4m
Developer Scott Sanders is still in the gun to repay $7.4 million to 11 investors in his Grand Mercure Nelson Monaco development, which began in 2004 when the property market was running hot.
This week he failed to overturn a High Court ruling in favour of the investors, which was delivered in Christchurch in November 2016 by Justice Rachel Dunningham.
Sanders said he had an appeal set down for August and he was confident it would find in his favour because the way in which the units were sold was common practice at the time.
In the meantime, he was relieved the latest rulings would not affect the resort management company even though he was still fighting personal liability.
The legal arguments focused on whether the development company, Monaco Management Ltd, should have issued a prospectus with financial projections to help guide investors’ decisions when the units were sold in 2004.
Justice Dunningham highlighted how the investors were disappointed at the returns.
‘‘The real issue though, from the plaintiffs’ perspective, is that throughout the time they have owned their units, the income that they have received from them has not matched the promises made at the time of purchase.
‘‘Indeed, because the management lease requires the investor to meet the outgoings of the accommodation business, and these have exceeded the rental income, most of the owners have been paying to keep the accommodation business afloat,’’ Justice Dunnigham said in her latest ruling.
‘‘Consequently, the value of the units has also fallen dramatically, and they have proved impossible to sell at anywhere near their purchase price.’’
The units were sold subject to a lease back to a management company, which rented them to guests and pooled the income for investors after deducting costs.
The resort was initially promoted as producing returns of 11.14 per cent a year, and, later on, 8 per cent to 11 per cent a year.
Sanders gave evidence that the investors had all taken advice from their lawyers, but the investors argued that if they been more fully informed of the risks they would not have invested.
Justice Dunningham concluded that while the investors’ evidence ‘‘may have been coloured with the benefit of hindsight’’ she could not ignore their claims that they would not have invested in the units if they had financial forecasts to inform them.
‘‘It is clear, given my finding that the offer of units in the resort was the offer of a participatory security, that there was a major shortcoming in the information provided to the purchasers.
‘‘In my earlier decision I held that ... this was not, in substance, an investment in commercial real estate. Instead, it was an investment in a hotel business where the earnings were dependent on the success of that business venture that was being jointly undertaken with other unit owners.
‘‘In those circumstances I consider that the breach was not simply a technical one, but was a substantive breach of section 37 (6) of the Securities Act,’’ she ruled.
Other evidence at the hearing included the fact Sanders took over the development from two other businessmen, that two sets of lawyers had approved the process of selling the units, and that the Securities Commission had been aware of the process.