Council unanimous in Norcross buy-out, 'seamless transition'

Posted September 18, 2012

The Hornet's Nest era at the New Tecumseth Recreation Centre (NTRC) is over following last night's 8-0 recorded council vote in favour of paying Ward 6 councillor Richard Norcross $50,000 to terminate his rights to the food and beverage component of the contract he holds at the facility. And where the original motion paid the deal out over five annual instalments plus interest (prime), an approved amendment will pay out in one lump sum in 2013 to save the interest charges.

While Mr. Norcross is giving up his exclusive rights on food and alcohol, including the Hornet's Nest bar and grill, he retains his hold on the concession and vending machines at the NTRC for 10 more years, under the same conditions. The Town is also proposing to provide additional lease-hold improvements that will accommodate hamburger/grill sales at the concession booth.

The buy-out is referenced as the Town's only option to reclaim the 6,000+ sq. ft Hornet's Nest space because of the contract language - which itself became a topic of discussion - that provides Mr. Norcross with the renewal rights so long as he is in compliance with its provisions, which the Town deemed he was.

Before councillors tackled the buy-out recommendation, CAO Terri Caron, and Town solicitor Jay Feehely explained why the final lease agreement signed in June 2008, did not match the deal agreed to in principle in September 2007 which stated that the contract would be for an initial five (5) year term and "may" be renewed for an additional two (2) five (5) year terms; and That the terms of the contract "are to be re-negotiated after each five (5) year term." In the same report, Mr. Norcross's brief "business plan" spells out the same terms that he was agreeable too.

The lease now considered binding, shows that the tenant "will have the right to renew" for an additional two five year terms. However, the provision that "the terms of the contract are to be re-negotiated after each five year term," was removed.

"In order to address that in the lease, you either have more than one five year term, and you're renegotiating the details of the lease, or you just have one five year term, and at the end of that you renegotiate everything," said Ms. Caron. "That was the interpretation that was being provided to the direction that council was giving. And the way that that was implemented in the lease itself was to put in a requirement that the right to renew was dependent upon whether the operation of the business had been conducted in a manner satisfactory to the landlord and that the expected standards of operation were being met. That clause was included in the renewal section of the lease to deal with the first hurdle. And then the second piece was, at the end of the first term, there could be details that could be renegotiated which was honouring the second clause of the direction. So, you're renegotiating terms, you're not renegotiating the whole contract or whether there is or isn't a contract, that was the interpretation that was being put on. In fact we are renegotiating the term as to whether it applies to the restaurant or not.

"The terms that both parties have been able to arrive at, is that the rights to the restaurant are being purchased by the Town and the rest of the lease would continue. We're negotiating a change to the original terms. The restaurant has a value, the current tenant has the right to occupy that space because they are in compliance with all of the other terms. They've achieved therefore the right for the renewal, we're taking away - just as in the case of a residential tenancy where the landlord wants the space back earlier because they have another opportunity to rent it for more money to a different tenant and they have to negotiate with the current tenant to get the space back earlier than otherwise they would be entitled too."

Mr. Feehely said the language discrepancies are part of the normal procedure in crafting contracts, particularly in this instance where they were not working from any previous templates.

"I've drafted a dozen different versions of this lease to implement the various reports and general idea of getting a solid workable lease that would make this property respond to what council was looking for," he said. "At the end of that process we had a lease that in my opinion was workable, it came back to council. Is the wording exactly the same as the direction in the recommendation? No, but it never is. You go from four paragraphs of recommendations to 14 pages of detailed legal wording. In my opinion we achieved what the intention was even if it's not the exact wording and that was to put a successful lease in place. And is it binding yes, because it came back to council after all that drafting for council's approval."

Ward 1 councillor Bob Marrs, who was not on council when the lease was signed, took some credit for nudging Mr. Norcross into pursing the option at a time when tenders to operate the restaurant were not drawing much interest.

"I do remember when this was going on, I talked to a couple of people that picked up the first package, and the second package that went out and we couldn't get anybody involved in this that no way could they put a proper business plan in place that would be good enough for them to make it worth their while taking on which is why we weren't getting anybody coming in," said Mr. Marrs. "In talking to the present tenant he said he had thought it could be made viable, and I said well why don't you get involved then. I don't know whether he was thinking much about it before that, but I know I gave him a pretty hard push. After that he did get involved. He went out, he picked it up, he ran with it and he's done a really good job. I've heard a few people coming down on him saying he's had a special thing. He didn't have a special thing. He came up and made sure we had this facility that we wanted and made it work."

In March 2007, New Tecumseth did receive an reply to its first tender. The sole bidder was Recreation Leisure Services (RLS) Ltd. of Aurora, owned by Rusty Barrese, whose past interests included Escar Foods, the largest concessionare at the CNE. RLS was guaranteeing the Town $30,000 per year or 11 per cent of sales, "which ever is greater" and $321,000 in lease-hold improvements, for a five year contract. His bid was rejected. The original tenders put the lease-hold improvement costs on the successful bidder's plate.

A report from then Parks and Recreation Manager Joyce Epstein explained that "a number of proponents" who had picked up the tender packages were asked why they did not follow through with bids.

"They stated that the investment required by the proponents without any Town contribution to the lease-hold improvements was prohibitive," wrote Ms. Epstein. "Most potential proponents were looking to the Town to be a partner in the investment by providing restaurant equipment such as roof top units, an exhaust hood and associated fire suppression system, walk-in freezer and a cooler all which would become fixed assets of the facility."

"We had gone out twice," said Ms. Caron, "it was before council to determine whether to go out a third time with some other changes to the circumstances, or whether to just finish the room, or this offer had come in to work with the Town to try and develop something from Mr. Norcross, and that was the direction that was provided."

The Town agreed to contribute approximately $700,000 in lease-hold improvements and furnishing the space, in exchange, the 10 per cent on gross sales, included 2.5 per cent to pay back the lease-hold.

"The idea being initially we were concerned as to how this would work because it was a unique proposal, it didn't come from any RFP or any standard proposal," said Mr. Feehely. "It was something we had to work out at the time. Looking down the road five years our concern was, is it being done in the spirit of the MURF? And is it achieving the minimum targets we were expecting? The answer to those I think were yes, so therefore we weren't in a position to say we're going to take it away from you. By then it became a question of are the parties willing to negotiate something different just because times have changed for both parties."

Ward 3 councillor Paul Whiteside asked whether the contract language limited what the Town could negotiate with Mr. Norcross.

"We could have five years ago put in a menu of things that would be renegotiated,' replied Mr. Feehely. "We didn't do that. That wasn't really in our contemplation at the time because we were trying to structure this to make it work. Usually what you have in a commercial lease, the right to renew is coupled occasionally with the right of the parties to renew the rent which is usually the one that's reviewed, and if they can't agree then they have a mechanism to get it resolved, usually by way of arbitration or whatever."

"So therefore it appears we're between a rock and hard place and that we have two options," said Mr. Whiteside. "Either renew it as it is, or take the tenant's negotiated offer which appears would increase our net operating profit by $75,000. Is that correct? (The Town estimates it can generate $100,000 net revenue by taking over the food and beverage service - the $75,000 referenced is minus the $25,000 the Hornet's Nest was providing in rent).

"Essentially, yes," replied Mr. Feehely. "You're choice is between two successes at this point. You've got a lease operation that is successful. The issue is whether you want to take an opportunity to negotiate something that might make it even more successful."

Ward 2 councillor Jamie Smith, who said he was part of the council that approved the September 2007 agreement in principle, but distanced himself from the final lease because he was absent from the June 9, 2008 council meeting that ratified it, said the lease could have been renegotiated at anytime, that nothing in it triggered the discussions.

"What's going on now could have happened last year, or two years in the future. If the parties agree they can renegotiate. And in fact this negotiation is only going on because the parties agree not because of any clauses in the lease," said Mr. Smith who suggested now in hindsight that the final draft of the lease should have been brought back to council at the time for review.

"I think it's quite clear, that should have come back to council, it should have been further discussed so to clarify whether or not there was a right to renegotiate some of the terms. After all, as the CAO has said, this lease is unusual, and one of the unsual things about it is, it has a term of 15 years when there is no capital investment whatsoever made by the lesee. And that's normally one of the main reasons why these leases have a long term. It is to allow people to re-earn their capital. And furthermore, there is no particular advantage, except as a sort of subsidiary of the business in the rec centre that the tenant has put into it. In other words, it's not promoted, its business depends largely on the success of the rec centre. ...... I'm not particularly happy about the way this has come out. I feel that we should have been re-consulted at the time, I don't think the lease reflects what was in the minds of at least some of the people there, and that should have been clarified, and I do agree however I think we're stuck with it."

Deputy mayor Rick Milne said he was happy with how the deal had worked out, that the Mr. Norcross had followed through on his commitments, and that the Town had few options in the beginning.

"I thought it was a good deal," said Mr. Milne. "I listened to the three people involved in it, we made $150,000 in the last five years on this. We didn't lose money."

Mayor Mike MacEachern, who didn't make many comments during the debate, did conclude the debate by noting how the discussion could have taken place in camera.

"As was indicated in the last meeting, it was felt that as important issue this is, with rumours the way they go, it would be better to do all of this work in the public session while it could have quite rightly, a portion at least, could have been done in the closed session. But I think it's important all of this discussion happen in the public so everyone gets the same information."

For its part, the Town is preparing to make the changes "seamless" which at this point is not clear what that means.

"The Manager has been charged with developing a transitional plan," said the mayor in an email this morning.

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