Development Agreements, the devil may be in the detail

The New South Wales Supreme Court decision of Crown Sydney Property v Barangaroo Delivery Authority; Lendlease (Millers Point) v Barangaroo Delivery Authority^[1] highlights the need for government entities entering commercial agreements, such as development agreements, to judiciously choose the language used and to carefully comply with the terms, or face the potentially costly implications of failing to do so.

The Court determined that the Barangaroo Delivery Authority (or its predecessor^[2]) (Authority) had failed to comply with its obligation to negotiate in good faith with two developers at Barangaroo South at the appropriate time, resulting in declaratory relief being given preventing the Authority from proceeding with what would have otherwise been an extensive, and presumably lucrative, development of an adjoining site at the desired scale, and a costs order being made against the Authority.

Background

In May 2015^[3] the Authority had entered into development agreements with both Crown Sydney Property (Crown) and two related entities of Lendlease (Millers Point) (Lendlease) to allow Crown to develop an integrated casino and residential development, and Lendlease to develop luxury residential apartments at Barangaroo South.  At the time these agreements were entered:

• while the NSW State government was contemplating a metro stop being constructed at Barangaroo, no decision had been made to do so
• the approved Concept Plan for nearby Central Barangaroo contemplated relatively low height development
• as a consequence, parts of buildings to be constructed by Crown and Lendlease on their development sites would have striking, and highly valuable, views of the Sydney Harbour Bridge and the Sydney Opera House.

Both the Crown and Lendlease developments agreements contained a ‘Sight Lines Clause’ which provided that:

• each of Crown and Lendlease acknowledged that ‘optimisation of development at Central Barangaroo is of critical importance to the Authority’
• the Authority acknowledged that ‘retention of sight lines across Central Barangaroo from the Harbour Bridge to the Sydney Opera House’ were of ‘critical importance’ to both of the developers
• before ‘considering or approving any application which provides for development different to that provided for in the Concept Plan Approval’ … ‘the Authority will discuss and negotiate in good faith with’ the developers ‘to agree any changes to that application so as to retain the sight lines [to the Sydney Opera House and the Sydney Harbour Bridge] while at the same time optimising the development opportunity for Central Barangaroo’.

Crown and Lendlease acknowledged that the Sight Lines Clauses did not ‘guarantee’ that the views of the Sydney harbour would be retained.  However, the Judge^[4] described the Sight Lines Clauses as giving Crown and Lendlease ‘a seat at the table’ to ‘negotiate with the Authority about the form of development of Central Barangaroo’ if there was potential for the Concept Plan to change.

Shortly after the development agreements were entered with Crown and Lendlease, the State government announced the intended construction of a metro station at Barangaroo which meant that the density of office or commercial development at the adjacent Central Barangaroo could be far greater.  This announcement was closely followed by the Authority calling for fresh expressions of interest to develop Central Barangaroo.

In February 2016 a consortium led by a Grocon company (Grocon) put forwarded two proposals to develop Central Barangaroo, both of which included building designs which far exceeded the approved Concept Plans for Central Barangaroo, and importantly, would severely impact Lendlease’s, and to a lesser extent, Crown’s, sight lines to the harbour.  Prior to lodging its bid, Grocon was under the impression that there were no height limits.  Grocon was selected as the preferred bidder in mid-2016 and the Authority subsequently entered a development agreement with Grocon in November 2017.

Determining when the Sight Lines Clauses were triggered was critical to the outcome.

The Authority met with Crown and Lendlease in April 2016 and presented various designs of the Central Barangaroo development.  However, each would impact the sight lines and were rejected by Crown and Lendlease.  Subsequent discussions by the parties did not resolve the matter.

The Authority was not the planning authority for Barangaroo but was (or in substance was) the owner of the site.  Changes to the Concept Plan required the approval of the Minister or his or her delegate upon an application to the relevant Department (a ‘SEARS request’).  A draft SEARS request was submitted to the Authority and after ‘extended consultation’ and negotiation, appears to have been agreed by the Authority and Grocon in about September 2018. The daft SEARS request was submitted to Crown and Lendlease for consideration on 13 September 2018.

The Authority argued that it had not breached the Slight Lines Clauses by submitting the SEARS request to Lendlease and Crown in September 2018.  However, the Court declared that the Sight Lines Clauses were triggered and that the Authority should have commenced the good faith discussions with Lendlease and Crown, at least by the time Grocon became the preferred bidder.

The Court was also required to determine whether the retention of the sight lines was paramount, or whether optimising the development of Central Barangaroo was of equal importance.

The Judge:

• placed emphasis on the choice of word ‘optimise’ development distinguishing it from the term ‘maximising’ and determined that ‘while there is only one way to retain the sight lines, there are many ways in which development opportunities could be optimised’
• considered that ‘the concept of good faith discussions’ required the Authority not to have reached a view before starting its discussions with Crown and Lendlease, and by commencing its negotiations with the ‘proposition that some part of the sight lines is to be lost’, the Authority had breached its obligation to negotiate in good faith with the developers.

Costs were ordered against the Authority.

Although raised as an issue by Crown and Lendlease, given the Judge’s declarations above, he was of the view that it was unnecessary for him to determine whether there was also an implied term for the Authority to act in good faith (and if so the extent of those implied terms).

Crown announced in August 2019 that it had reached a confidential settlement with the Authority with the Authority agreeing not to pursue its appeal of the decision.  It was also reported in the press at the time that Lendlease had also.

The Judge conducted a careful examination of the language used in the development agreements and the order in which the Authority progressed its dealings with Crown, Lendlease and Grocon.

While it may not be possible to draft for all eventualities, the Court sent a clear message that an open mind was essential in order for good faith discussions and negotiations to proceed and the timing of engaging with the parties ultimately had a critical impact on the outcome.

Authored by:

Gail Black, Partner