McKeil Deal Revisited: Reading the Fine Print

Back in August, I read that Point Edward Marine — a company majority owned by McKeil Marine — was subletting its land in the Sydport Industrial Park to Heddle Marine (another Point Edward Marine partner, in the news lately for its spot of bother with the federal government over the $4 million refit of a Coast Guard research vessel).

Point Edward Marine leases its property from the CBRM, as a result of a very dodgy deal that went down in June 2015, and I wondered if that lease permitted subletting, so I wrote to the CBRM requesting a copy of it. The CBRM’s communications people have been “working on” getting that to me since August 7.

But the joke, frankly, is on me because the lease is available online — it’s attached to the minutes of the 16 June 2015 Council meeting at which Port of Sydney CEO Marlene Usher made the case for the deal, which would see the CBRM pay $1.2 million to two private companies (both of which list Jim Kehoe as president) to buy land it would then lease to a third private company, Point Edward Marine. Although the video from the meeting is no longer available, I imagine that presentation went reasonably smoothly as Usher was merely recapping material she’d already covered during an in camera session on 2 June 2015.

You can read the Issue Paper, the sales contract and the lease agreement here:

McKeil_Docs_16.06.2015

 

The bottom line was that the answer to my subletting question was easily found:

38. The Tenant shall be at liberty to sublet all or any part of the Demised Premises to any subsidiary, affiliate or successor to the assets or business of the Tenant.

 

MGA compliant?

But re-reading all these documents over two years later was instructive in other ways. For example, it reminded me just how bizarre this deal was, with the CBRM inserting itself into what should have been a straight-up private sector arrangement between the sellers (or landlords) — East Coast Metal Fabrication Inc (ECMF) and Sydport Operations Inc (SOI) — and the buyer (or tenant) — Point Edward Marine.

The lease agreement, after identifying the CBRM as the “Landlord” and Point Edward Marine as the “Tenant,” begins:

Whereas the Landlord is the owner of certain lands and improvements located in the Sydport Industrial Park, Edwardsville, Nova Scotia;

And whereas the Landlord is authorized to lease real property owned by it to a third party at market value pursuant to s.50(5)(c) of the Municipal Government Act;

But then, under the section labeled: Term, Renewal, Permitted Use and Deposit, the lease agreement states the conditions that must be met before the lease term “commences.” The final condition is this:

5.c) the acquisition by the Landlord of the Demised Premises from Sydport Operations Inc. and East Coast Metal Fabrications Inc.

The CBRM was not the owner of the “demised premises” (legalese for the property in a real estate transaction) — it intended to acquire those premises for the sole purpose of leasing them. Is that really in keeping with the Municipal Government Act? Moreover, in doing so, the CBRM had to forgo $50,000 a year in taxes and assume any environmental liabilities associated with the property (more on this later). And yes, it was to receive $90,000 a year in rent, but locking that amount in for the next 20 years, which the lease does, doesn’t sound like a particularly good deal for the municipality.

 

1 Lawyer, 3 Clients

Revisiting the deal reminded me of the dual role played by Jim Gogan (like Lindsay Lohan in The Parent Trap, minus the cute outfits). Gogan, who is described somewhere in these piles of paper as the lawyer for the Port of Sydney, represented both the buyer and the sellers in the property transaction. Representing the sellers, okay, that makes sense — he was the recognized agent for both East Coast Metal Fabrication Inc and Sydport Operations. But representing the CBRM? Why, exactly?

Contact information from contract between East Coast Metal Fabrication, Sydport Operations and the CBRM.

Contact information from contract between East Coast Metal Fabrication, Sydport Operations and the CBRM.

I remembered that back in March 2016, I’d asked Victoria Rees, director of professional responsibility for the Nova Scotia Barristers’ Society about the propriety of a lawyer representing both sides in a real estate deal and she had told me that:

It is not unusual for a lawyer to represent more than one party in a real estate transaction, and doing so is not contrary to the rules of ethics as set out in the Code of Professional Conduct. If a lawyer is going to represent more than one party, such representation is considered a joint retainer and the following rules apply:

Joint Retainers
3.4-5 Before a lawyer acts in a matter or transaction for more than one client, the lawyer must advise each of the clients that:
(a) the lawyer has been asked to act for both or all of them;
(b) no information received in connection with the matter from one client can be treated as confidential so far as any of the others are concerned; and
(c) if a conflict develops that cannot be resolved, the lawyer cannot continue to act for both or all of them and may have to withdraw completely.

3.4-6 If a lawyer has a continuing relationship with a client for whom the lawyer acts regularly, before the lawyer accepts joint employment for that client and another client in a matter or transaction, the lawyer must advise the other client of the continuing relationship and recommend that the client obtain independent legal advice about the joint retainer. Amended July 20, 2012

3.4-7 When a lawyer has advised the clients as provided under rules 3.4-5 and 3.4-6 and the parties are content that the lawyer act, the lawyer must obtain their consent.

But if it’s not unusual, it was certainly unnecessary in this case — the CBRM has a Regional Solicitor, he is listed on the lease agreement as the contact for the “Landlord” i.e. the CBRM, so why would he not have handled the real estate deal too? The idea the lawyer employed by the private companies in this transaction would also be best positioned to safeguard the interests of the municipality is ludicrous.

 

Clean-up costs

And then there are the aforementioned environmental liabilities associated with the “demised premises.”

During that 16 June 2015 Council meeting, Norma Boyd, who had been on the board of Laurentian Energy which had owned Sydport, tried to address council from the floor about potential environmental problems with the property and was shut down by CBRM Mayor Cecil Clarke. Interestingly, then-Councilor now Deputy Mayor Eldon MacDonald voted against the deal, citing concern that the environmental assessment of the property had yet to be completed, “but the agreement states that the CBRM will be responsible for half of the cleanup costs.”

“That’s just unbelievable to me, to enter into an agreement without having that knowledge,” he said.

It’s even more unbelievable when you read the lease agreement and see that the costs the CBRM shared (with Point Edward Marine) were for the Phase I and Phase II Environmental Assessments of the property. If those assessments identified any contamination that some government should one day order cleaned up, the CBRM is on its own:

17.b) The Landlord shall indemnify and save the Tenant harmless from any environmental contaminant, pollutant or toxic substance disclosed in the Phase I and Phase II Environmental Reports existing as at the Commencement date of this Lease, and shall further indemnify the Tenant with respect to any claims, actions, suits, fines, sanctions, remediation orders or demands of any kind whatsoever with respect to any such contaminant, pollutant or toxic substance on or in the Demised Premises as at the Commencement date and contained in the aforementioned reports. It is understood and agreed that the Landlord shall bear sole responsibility and expense for the clean-up, remediation and/or removal of any such contaminant, pollutant or toxic substance if ordered by a governmental authority having jurisdiction to do so and shall be further responsible for any consequential damages claimed by any third party with respect thereto. [emphasis mine]

What savvy businessperson would agree to a deal like that? What lawyer would look at those conditions and say, “Yes, I think this is a great deal for the CBRM — you not only lose out on $50,000 in taxes each year, you get to take on liability for any future environmental clean-up of this property. Win/win!”

Which is why it is worth remembering that not all Councilors voted for the McKeil deal. Here’s the vote record on the “Port of Sydney Project Proposal” as the purchase and subsequent lease of the Sydport property was described:

Of course, the missing information here is that Phase II Environmental Assessment. We know it exists — then-CAO Michael Merritt referenced it in the Post story mentioned above. It is supposed to be attached to the lease agreement as “Schedule C,” but it isn’t available online and it is, I’m guessing, the reason CBRM communications people are having such a hard time providing me with a final copy of the lease.

So just to hedge my bets, I FOIPOPed a copy of the lease with the environmental assessment. I should have it in 30 days. Or 60 days. Or 120 days. Or maybe I’ll get a copy of the contract with the environmental assessment redacted. Or maybe the CBRM will try to charge me $42,000 to locate and copy the document. Really, I’m not so much hedging my bets as spinning the wheel and waiting to see where it stops.

 

Wharf improvements?

But back to the information I actually have. Here are the benefits to the McKeil deal as outlined by Usher in that Issue Paper mentioned earlier. One of them (see bullet five) related to the wharf, which was part of the sale and which Usher said had been valued in 2011 at $356,000:

Now read what the lease agreement has to say about the wharf:

19. For greater certainty, the Parties hereto acknowledge the current deteriorated condition of the wharf facilities and neither party shall bear the responsibility for maintenance, upkeep or repair of such wharf facilities during the Term or any subsequent renewals.

If F. Scott Fitzgerald is right that the test of a first-rate intelligence is “the ability to hold two opposed ideas in mind at the same time and still function” (and honestly, I don’t know why he would be right or if he was even sober when he concocted that theory) then the CBRM in 2015 was blessed in its elected representatives, because those Councilors who voted in favor of the deal were able to believe both that it would result in wharf improvements and that neither party would be responsible for wharf improvements for the next 20 years.

 

Tug Services

Let’s look at another of Usher’s promises about the McKeil deal versus the reality: in her Issue Paper, she claimed buying the land and leasing it to McKeil would secure tug services for the harbor, provision of which would add $3 million to the local economy (via the cruise industry) in 2014 alone. (See bullet point three in the list above).

Compare that to her remarks during the 19 September 2017 Regional Council meeting, at which she explained that the Port of Sydney has “no regularly available tug service.”

When the Port of Sydney needs tug services — for “weather diverted” cruise ships — said Usher, it needs them within “hours” and that’s “not how it operates currently.” Mayor Clarke (who added a lot of what he described as “clarity” to Usher’s report to Council that evening) said that although a tugboat may physically be in the harbor at times, the “operators have to come in.”

McKeil Marine and Heddle Marine would “happily” provide tug service to the Port of Sydney, said the Mayor and it’s hoped that with the construction of the second berth we will have enough business to hire them.

I’m going to go out on a limb here and guess that the cruise industry did not add $3 million to the local economy in 2014 on the strength of its access to tug services.

 

Economic spin-off

Then there’s the $1 million paint shop East Coast Metal Fabrication was going to build with the proceeds from the land sale. Usher explained elsewhere in the Issue Paper that this would result in the company paying an additional $58,000 in taxes each year which would offset the $50,000 that would be lost when the CBRM bought the Sydport land and that the investment would result in “job creation.”

I’ve asked the CBRM if any of this has proven to be the case. Spokesperson Jillian Moore told me:

“As of today, the assessment of the property has increased by $700,000, property taxes have increased from $57,225 to $83,917.”

So that seems to be a win, although I don’t know if that increase is due to the construction of a Paint Shop or to other factors (I will find out and let you know. Or perhaps you already know and can let me know!)

As far as the $18 million in capital investment and the $3 to $4 million in fuel purchases, PEM is a private company and there is no way to verify such expenditures. Nor are we ever likely to get accurate figures on how many jobs have been created as a result of this deal because, again, these are private companies, they have no obligation to share staffing numbers with the public.

 

Lessons learned?

Why revisit this deal? Because we don’t revisit deals enough in this municipality. We don’t hold people to their promises or verify that what we’ve been told is actually true. And without this kind of followup, we all but guarantee that we’ll find ourselves on the losing end of future deals as well.

Credit for the McKeil deal goes to Albert Barbusci and Barry Sheehy (then Harbor Port Development Partners now Sydney Harbour Investment Partners) who, during that same 16 June 2015 meeting, were granted a two-year exclusive agreement to market the Port of Sydney.

As Usher explained to Council:

For the past 16 months HPDP have provided development services for the Port of Sydney; specifically, they have brought finance, engineering, shipping and construction companies to the table to discuss specific port-related projects in the CBRM, including Point Edward Marine Inc (PEM).

Besides their significant time commitment, HPDP have invested money as well. They have paid for services related to legal engineering graphic design, feasibility and consulting. They have disclosed that their investment to date is in excess of 1.2 million.

Imagine, for a moment, what would have happened if Sheehy and Barbusci had decided to provide snow-removal services to the CBRM for 16 months, at no one’s behest and free of charge. Imagine if you had looked out your window one dark and stormy night and there was Albert Barbusci, clearing your street with his own snowblower. What if they had then announced that they had spent $1.2 million of their own money clearing snow and felt it was time they were given a two-year, exclusive, snow-removal contract with the CBRM, even though they had no real experience in snow removal? What if they said they would accept no money for these exclusive snow removal services but would provide them in return for future considerations?

Would Council have gone for it? Or would Council have said, “You can bid for the tender to provide services like everyone else.”

My guess is that Council would never have agreed to such a contract if the subject were snow removal and yet, somehow, when it came to port “development,” Barbusci and Sheehy’s approach was considered reasonable. In fact, their two-year contract has been extended to five years.

I see a huge lesson in this story just waiting to be learned. I wonder will we learn it?

 

 

 

 

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