Town of Gibsons lost $200,000 over failed arbitration
The Town of Gibsons has lost more than $200,000 in arbitration after attempts to more than double the Marina lease rental fees failed.
Documents recently released via a Freedom of Information request reveal that in 2013 the arbitrator appointed to settle the dispute between the Town and Gibsons Marina Hotel Inc. (GMHI) over the rental fees for the next 30 years did not agree with any of the Town’s arguments for higher rates. The Town paid the legal costs and arbitration fees in 2013 and 2014.
GMHI sold the Marina to Marina Hotel Holdings Ltd (MHHL), a Klaus Fuerniss enterprise, in May this year.
GMHI, in which Art McGinnis and Jon McRae were two of the partners, had operated the Marina since 1983 on 14 lots of land leased from the Town. The Province had leased the associated water lot to the Town, which had sub-leased it to GMHI.
The sub-lease was set to expire on December 31, 2011, and GMHI was eager to renew it for another 30 years. At the end of March 2011, the company wrote to the Town that it was eager to start negotiations.
On May 5, 2011, GMHI asked again. Nothing happened. On June 15, GMHI inquired once more. On June 16, the Town replied that they needed more time because new staff had to familiarize themselves with the Marina lease.
On August 26, 2011, the Town said that then mayor Barry Janyk and then chief administrative officer (CAO) Warren Waycheshen would not be available to meet with GMHI until October 2011. The province had yet to issue a new 30-year water lease to the Town. A month later, in November 2011, Wayne Rowe became mayor.
GMHI was required to pay a percentage of the gross income of the Marina to the Town every year. Between 2009 and 2012, GMHI paid an average of $76,000. In addition, GMHI had to pay a yearly property tax of a little over $25,500.
The FOI documents released by the Town contain notes from a meeting on August 8, 2013, where, among others, Klaus Fuerniss (the developer of the George Hotel and Residences) and Art Phillips (project manager for the Hotel and Residences) met with Town planner Andre Boel.
At that meeting, Art Phillips “explains that his client has expressed interest to the Town regarding additional moorage as far back as five years ago (2008).” And, Phillips said, in 2011 Klaus Fuerniss had expressed interest in leasing and managing all of Gibsons Marina. “Klaus Fuerniss explained how the proposed moorage for the George Hotel is integral to its success,” the notes read. “It will be one of the main transportation modes to get to the hotel.”
On April 26, 2012, the Town notified GMHI of “the possible removal of one arm of the Marina for a proposed hotel on adjacent property.”
“I am contacting the hotel proponent’s agent to inquire about their expectations for costs for this project,” CAO Warren Waycheshen wrote. “There will be capital costs for the existing structures, lost revenues to GMHI, and legal and other costs.”
On July 4, 2012, the Town was finally ready to negotiate. It wanted $199,825 per year in rent for the next five years. No more percentages but a fixed amount, with re-evaluations every five years.
GMHI was alarmed. They looked at their 2011 income and realized that with a rent of $199,825 plus property taxes, net income would have been only $47,800. Furthermore, GMHI estimated, $70,000 worth of repairs and upgrades were necessary.
Looking at the figures for the first six months of 2012, they estimated that the proposed rent of $199,825 would mean a loss of $12,000 for that year. The Town’s proposal “would effectively destroy the financial viability of the marina,” GMHI said.
The Town was aware of GMHI’s financial situation: the company had to submit an audited financial statement every year.
That was not the only bad news. In the same letter of July 4, 2012, the Town said that as part of the Marina lease renewal, it wanted to insert a clause authorizing the Town to remove a portion of the water lot if the hotel- conference centre were to proceed.
The application for the George Hotel and Residences was filed with the Town seven months later, on February 1, 2013.
On July 20, 2012, GMHI told the Town that the matter would have to go to arbitration if the Town insisted on its rent demand. And they were not prepared to discuss anything but the rental rate. In the now expired lease, it was stipulated that GMHI had the right to renew, that the rental rate was the only thing that could be negotiated, and that in case of disagreement, the matter could only be resolved by binding arbitration, not in court.
On August 9, 2012, the Town again told GMHI it wanted changes to the Marina lease to accommodate a proposed hotel/convention centre.
On August 24, 2012, GMHI wrote to the Town that it hoped that the rent could be negotiated and that lengthy arbitration could be avoided. “Hopefully we can find a common ground to complete this agreement. We all wish to avoid a lengthy period of binding arbitration,” the letter said. On September 1, 2012, Emanuel Machado took over from Warren Waycheshen as chief administrative officer.
On October 12, 2012, GMHI met with the Town. Machado maintained that the rent demand was still $199,825 and that GMHI must agree to a potential split sub-lease if the hotel project proceeded.
GMHI refused to discuss this and informed the Town they would proceed to arbitration.
The following week, GMHI gave the Town the choice of three arbitrators in Vancouver. The Town picked Nicholas Glas.
On October 29, 2012, the province finally gave the Town a new water lease. GMHI then offered the Town a slightly higher percentage, resulting in an annual rent of $82,914 instead of the average of $76,000. The Town refused.
The parties lawyered up.
On January 17, 2013, Michael Armstrong, lawyer for GMHI, told Adrienne Atherton, lawyer for the Town, that GMHI was ready to discuss a settlement so that arbitration could be avoided. He repeated the offer on January 25.
On January 29, 2013, Atherton replied that GMHI would have to discuss the matter of the George Hotel or there would be no settlement of the rental issue.
The arbitration hearings took place in Vancouver on May 2 and 3, and on July 31, 2013. Mayor Rowe said he wanted to attend, but it is not known whether he did.
At the hearings, Atherton presented a number of arguments to justify the rental rate of $199,825. But at the final hearing on November 18, 2013, it was clear the arbitrator did not accept any of them. He awarded GMHI the same rental percentage it had had for 30 years.
The Town ended up with less rent than it would have received if it had accepted GMHI’s 2012 offer. The matter did not end there.
Because it had won, GMHI wanted the Town to pay their legal costs. “I hope you are sitting down when you review the costs GMHI is seeking,” lawyer Atherton wrote to CAO Machado on December 5, 2013. The total came to $138,568.59.
The Town refused to pay, and the matter went to arbitration again. Costs went up. On January 11, 2014, arbitrator Glas wrote in his ruling that the Town’s financial proposal had been “very substantially out of line” with what was reasonable.
“The Town’s position prior to the arbitration did not vary in any substantial way and its final offer demanded a rent amount which was more than double what was actually awarded. GMHI did make an offer to settle the rent and its offer exceeded the rent ultimately awarded at the arbitration.”
It had not been GMHI’s fault that there had hardly been any settlement discussion, Glas wrote. The Town had wanted to talk about matters other than rental but GMHI did not, and did not have to.
The arbitrator ruled that one item on GMHI’s legal bill was not admissable, but required that the Town pay GMHI $103, 572 for legal expenses, plus the full cost of the first arbitration and half of the second one. The total came to $114,125.84.
That figure, however, does not include the Town’s own legal fees. The specific amount could not be found in the FOI documents or in the Town’s budget. Between 2009-2012, the average amount for the Town’s total legal fees was $47,663. But in 2013, it was $160,746 and in 2014, it came to $75,455. If GMHI’s legal fees, which were judged reasonable by the arbitrator, were $103,572, and we make a conservative estimate that the Town’s legal expenses came to only $80,000, this arbitration cost the taxpayer around $200,000.
Moreover, for the next 28 years, the Town receives less rent than it would have if it had accepted GMHI’s offer of a slightly higher percentage. The new Marina owner, Klaus Fuerniss, pays the (lower) percentage the arbitrator awarded.
LeeAnn Johnson, Town councillor until November 2014, is “flabbergasted” to learn about the cost of the arbitration. “We did not know that. All we were told was that the Town had lost the arbitration. I had no idea the Town got even less than GMHI had offered.
“When on council, it is very difficult to make decisions in the public interest when you don’t know what information is being withheld. This is totally unacceptable.”
“I am pleased to see the facts about the Town's approach to renegotiation of the marina sub-lease become known to the public,” Dan Bouman, Town councillor at the time of the arbitration, said in an email.
“For me, two issues stand out. The first is that the Town's negotiating positions never received informed review and consent from Council.
“And secondly, the Town's insistence on using the sub-lease negotiations as a context for providing benefits to the 'George' was found to be unreasonable and has cost Gibsons' residents $200,000 in cash and approximately $300,000 in future revenues.
“In my view, the arbitrator's findings are a severe rebuke of the Town's current culture of administrative and political secrecy.”
This article was carefully written on the basis of documents obtained from the Town through a Freedom of Information request. In the event the Town wants to dispute the facts mentioned in this article, it should be prepared to provide more information than was forthcoming in the FOI. The taxpayer has a right to know.
Click here to read an interview with Art McGinnis of GMHI about the sale of the Marina to Klaus Fuerniss.