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Centenary House Royal Commission of Inquiry into the Centenary House Lease Report by the Hon. David Hunt AO AC, Royal Commissioner, December 2004


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leport of the Inquiry:into the,

entenary

House ease

Report of the Inquiry into the

Centenary House Lease

The Hon David Hunt AO QC Royal Commissioner

December 2004

C Commonwealth of Australia 2004

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ISBN 0 646 44290 2 (print version) ISBN 0 646 44292 9 (web version)

The Hon David Hunt

AO QC Inquiry into the

ROYAL COMMISSIONER Centenary House Lease

3 December 2004

His Excellency Major General Michael Jeffery AC CVO MC Governor-General of the Commonwealth of Australia Government House CANBERRA ACT 2600

Your Excellency,

Pursuant to the Letters Patent issued on 24 June 2004 (as varied by the Letters Patent issued on 29 September and 26 November 2004), I have inquired into the circumstances surrounding the Centenary House lease and now have the honour to present to you the Report of my Inquiry.

The Report is accompanied by the Letters Patent.

Yours faithfully

The Hon David Hunt AO QC ROYAL COMMISSIONER

Suite 1902, Level 19, 55 Market Street, Sydney NSW 2000 P0 Box Q151, QVB Post Office NSW 1230 Telephone (02) 8289 4100 Fax (02) 9261 3520 E-mail centenaryhouseinquiryag.gov.au Website www.centenaryhouseinquiry.gov.au

Contents

Letters Patent ix

Summary xiii

1 Introduction I

2 The Audit Office 5

3 John Curtin House Ltd 15

4 New financial arrangements for accommodation 23

4.1 Outline 23

4.2 Statutory requirements 24

4.3 Policy requirements 25

5 The negotiations 31

5.1 Early discussions 31

5.2 The 19 March 1991 meeting between Lend Lease and Mr Collins 32

5.3 The Project Control Group and other meetings 33

5.4 The 3 July 1991 meeting between Lend Lease and Mr Collins 35

5.5 Subsequent meetings 37

5.6 Withdrawal of the ACTU and introduction of Mr McFadden 38

5.7 The 30 August 1991 meeting between Lend Lease and Mr Collins 40

5.8 The initial letter of intent 42

5.9 The 17 October 1991 meeting between Lend Lease and Mr Collins 44

5.10 The request for valuation 44

5.11 The instructions given to Mr Jeffress 45

5.12 The two Jeffress—McCann meetings 46

5.13 The Australian Valuation Office report 49

5.14 The letter of intent dated 3 December 1991 and the departure of Mr Collins 50

5.15 Conclusions 51

Report of Inquiry into the Centenary House Lease v

6

Political parties and ownership of office buildings 53

7 The terms .. 59

7.1 The Crown lease 59

7.2 The building 60

7.3 The current occupants . 60

7.4 The formal lease documents 61

7.5 The lease 64

7.6 The Canberra market for good-quality office space in1990to1992 64

7.7 The reasonableness of the terms of the transaction judged as at April 1992 . 86

7.8 Conclusion 92

8 The fair market net rent for Centenary House from September 1993 to the present ... 95

8.1 September 1993 95

8.2 1994 to 2004 97

8.3 2003 to 2008 100

8.4 Conclusion 101

9 Other leases 103

9.1 The Tuggeranong Office Park lease 105

9.2 The AUSLIG lease 106

9.3 The MLC Tower sublease at Woden 108

9.4 Other leases 109

9.5 Conclusion 113

10 Whether the Australian Property Group acted appropriately 115

10.1 The conduct of the negotiations 115

10.2 Communications with the Audit Office 116 10.3 Dealings with other agencies 119

11 Whether the Valuation Office acted appropriately 121

12 Whether the Audit Office acted appropriately 125

12.1 Mr John Taylor 126

12.2 Other members of the Audit Office 130

Vi Report ofInquiry into the centenary House Lease

13 Whether the Department of Finance acted

appropriately 137

13.1 The Department's response to the Audit Office proposal 137

13.2 The conduct of the Department 138

13.3 Whether the Department properly fulfilled its role under Estimates Memorandum 1991/32 147

14 Whether Australian Estate Management acted appropriately 151

15 Whether John Curtin House Ltd or the Australian Labor Party should be criticised 155

16 Misleading statements 157

16.1 Negotiations for the lease 157

16.2 Proposals to renegotiate or vary the lease 157

16.3 Conclusion 161

17 The offer to pay $50,000 163

18 The 1994 Inquiry... 171

19 Hindsight. . 179

20 Other issues of concern . 181

Appendixes 183

Appendix A Public discussion of the Centenary House lease 185

Appendix B The 1994 Inquiry: terms of reference and findings 195

Appendix C Documents 201

Appendix D Photographs of Centenary House 235

Appendix E Synopses of leases 237

Appendix F Schedule of leases prepared by the Property Group 259

Appendix G A roadmap to the Report 261

Appendix H The 2004 Inquiry 263

Report ofInquiry into the Centenary House Lease vii

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Letters Patent

ELIZABETH THE SECOND, by the Grace of God Queen of Australia and Her other Realms and Territories, Head of the Commonwealth:

TO the Honourable David Anthony Hunt AO QC

WHEREAS it is desired to have an inquiry into certain matters relating to the leasing by the Commonwealth of accommodation for the Australian National Audit Office in Centenary House at Barton in the Australian Capital Territory (the Centenary House tease), which was the subject of the Royal Commission of Inquiry conducted by the Honourable Trevor Rees Morling QC in 1994 (the 1994 Inquiry):

BY these Letters Patent issued in Our name by Our Governor-General of the Commonwealth of Australia on the advice of the Federal Executive Council and pursuant to the Constitution of the Commonwealth of Australia, the Royal Commissions Act 1902 and other enabling powers, We appoint you to be a Commissioner to inquire into and report on the circumstances surrounding the Centenary House

lease.

AND in particular, We direct that you inquire into:

(a) whether movements and trends in commercial rates and leasing arrangements since the 1994 Inquiry, or any other matters, cast new light on the findings of that Inquiry;

(b) whether the Centenary House lease is in line with leasing arrangements, whenever made, of a comparable kind;

(c) whether the terms of reference of the 1994 Inquiry could have been better designed to enable information relevant to the Centenary House lease to be elicited;

(d) whether the resources provided to the 1994 Inquiry, the absence of counsel assisting, or the particular processes adopted, adversely affected the 1994 Inquiry;

(e) whether Commonwealth agencies gave or received appropriate advice in relation to the Centenary House lease before it was entered into, including in relation to: (i) the term of the lease; (ii) the effect of the rent escalation provisions in theOIS (iii) whether there was an adequate market review,echathsm in

the lease;

(iv) market conditions; and (v) other relevant matters;

Report of Inquiry into the centenary House Lease ix

4

Governor-General

Attorney-General for the Prime Minister

(f) whether, in light of any new information that is elicited, there were payments or inducements offered in relation to the Centenary House lease which raise issues of impropriety, and whether further examination of witnesses or documents by the 1994 Inquiry may have identified such issues;

(g) whether, in light of any new information that is elicited, any person involved made a misleading statement in relation to the Centenary House lease or any proposal since 1994 to renegotiate or vary the lease;

(h) whether the government leases referred to in submissions to the 1994 Inquiry, or in the Report of the 1994 Inquiry, for the purposes of comparison with the Centenary House lease provided a reasonable basis of comparison, and whether other leases, including non-government leases, would have provided a more appropriate basis of comparison; and

(i) whether there exist any other issues of concern in relation to the Centenary House lease.

AND We declare that the Commission established by these Letters Patent is a relevant Commission for the purposes of sections 4 and 5 of the Royal Commissions Act 1902.

AND We require you to begin your inquiry as soon as practicable, to conduct your inquiry as expeditiously as possible, and, not later than 15 October 2004, to furnish to Our Governor-General of the Commonwealth of Australia the report of the results of your inquiry and such recommendations as you consider appropriate.

WITNESS His Excellency Major General Philip Michael Jeffery, Companion of the Order of Australia, Commander of the Royal Victorian Order, Military Cross, Governor-General of the Commonwealth of Australia.

Dated 2g..- L4. 2004

X Report of/n quiry into the Centenary House Lease

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ELIZABETH THE SECOND, by the Grace of God Queen of Australia

and Her other Realms and Territories, Head of the Commonwealth:

TO the Honourable David Anthony Hunt AO QC

WHEREAS it is desired to amend the Letters Patent issued to you in relation to an inquiry into certain matters relating to the leasing by the Commonwealth of accommodation for the Australian National Audit Office in Centenary House at Barton in the Australian Capital Territory (the Centenary House lease):

BY these Letters Patent issued in Our name by Our Governor-General of the Commonwealth of Australia on the advice of the Federal Executive Council and pursuant to the Constitution of the Commonwealth of Australia, the Royal Commissions Act 1902 and other enabling powers, We amend the Letters Patent, dated 24 June 2004, appointing you to be a Commissioner to inquire into and report on the circumstances surrounding the Centenary House lease, by omitting the words:

,not later than 15 October 2004,' and substituting the words:

'not later than 26 November 2004,'

WITNESS His Excellency Major General Philip Michael Jeffery, Companion of the Order of Australia, Commander of the Royal Victorian Order, Military Cross, Governor-General of the Commonwealth of Australia.

Dated

4 ;;W-4

2004

Attorney-General for the Prime Minister

Report oflnquiry into the centenary House Lease xi

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ELIZABETH THE SECOND, by the Grace of God Queen of Australia and Her other Realms and Territories, Head of the Commonwealth:

TO the Honourable David Anthony Hunt AO QC

WHEREAS it is desired to amend the Letters Patent issued to you in relation to an inquiry into certain matters relating to the leasing by the Commonwealth of accommodation for the Australian National Audit Office in Centenary House at Barton in the Australian Capital Territory (the Centenary House lease):

BY these Letters Patent issued in Our name by Our Governor-General of the Commonwealth of Australia on the advice of the Federal Executive Council and pursuant to the Constitution of the Commonwealth of Australia, the Royal Commissions Act 1902 and other enabling powers, We amend the Letters Patent, dated 24 June 2004, and amended by further Letters Patent dated 29 September 2004, appointing you to be a Commissioner to inquire into and report on the circumstances surrounding the Centenary House lease, by omitting the words:

,not later than 26 November 2004,' and substituting the words: ,not later than 6 December 2004,' WITNESS His Excellency Major General Philip Michael

Jeffery, Companion of the Order of Australia, Commander of the Royal Victorian Order, Military Cross, Governor-General of the Commonwealth of Australia.

Dated is 2004

Governor-General

Attorney-General for the Prime Minister

xii Report of Inquiry into the Centenary House Lease

Summary

This Inquiry has examined the circumstances surrounding John Curtin House Ltd's lease to the Commonwealth of Centenary House. The lease commenced in September 1993.

Centenary House is an office building in the Canberra suburb of Barton, in the area colloquially known as the Parliamentary Triangle. John Curtin House Ltd is associated with the Australian Labor Party, which occupies part of the ground floor of Centenary House as its national headquarters. The remainder of the building is occupied by the Auditor-General and the Australian National Audit Office.'

The terms of the lease

The terms of the Centenary House lease negotiated between the parties are as follows:

• a term of 15 years with an option for a further five years

• a starting rent of $367.95 a square metre a year (and separate amounts for car spaces and bays), escalating by a compound 9% a year, with rent reviews to market at the end of the fifth and tenth years

• the rent after each rent review being either the market rent or 9% more than the previous year's rent, whichever is the greater the ratchet clause - with a continuing escalation by a compound 9% each year thereafter.

The rent is net rent, and the Commonwealth is required to pay 91.7% of the building's outgoings.

John Curtin House Ltd agreed to provide the fit-out of the Audit Office's premises at a cost of approximately $3,000,000 and to contribute items to that fit-out to a value of $400,000, the items contributed in this way remaining the company's property. The premises were to be refurbished during the tenth year in the event that the Commonwealth exercised its option for a further five-year term. That option was not exercised.

The starting rent was calculated by reference to what the parties to the transaction agreed had been the market rent as at 1 January 1991, a date 15 months before that agreement was reached and some two-and-a-half years before the lease was expected to commence. The agreed rent was then escalated by a compound

10.5% a year until the building was constructed and rent became payable. The

The Commonwealth sublet the top floor of Centenary House to Kellogg Brown & Root Pty Ltd on 1 December 2002.

Report of Inquiry into the Centenary House Lease xiii

parties also agreed on the size of the escalator at much the same time, when the

market was already indicating a strong likelihood that 10.5% would produce an over-market starting rent for the lease. 2

The agreed rent at 1 January 1991 was at the top of the range for that time. 3 When the parties signed the agreement committing the Commonwealth to enter into a lease in these terms in April 1992, the rent as so escalated was already 7.6% above market; when the lease was executed and the period of the lease commenced in September 1993, the starting rent was 26.9% above market. 4 By September 2004, the rent was over three times the market rate. The annual rent in the first year of the lease was $2,450,981.15, and it will be $8,190,510.57 in the fifteenth and final year of the lease. 5

At the end of the 15-year term, John Curtin House Ltd will emerge with a building fully or almost fully paid for at no financial risk and having had the benefit of a regular and significant surplus cash flow throughout the term.

The terms of the lease were agreed by Mr Dominic Collins of the Australian Property Group, acting for the Commonwealth, and Mrs Penelope Morris of the Lend Lease Property Group, acting for John Curtin House Ltd .6 The terms were neither reasonable nor prudent from the Commonwealth's perspective. Nor were they supported by reference to other transactions occurring in the market at the time. The result was very unsatisfactory for the Commonwealth and exceptionally beneficial for John Curtin House Ltd.'

Causes

There are many causes for this extraordinary result - too many to outline them all in this summary. The following are the more significant ones.

The negotiations

There had been no negotiation of the terms of the lease in the commonly understood sense of give and take and compromise from previously stated positions by both sides. Rather, the terms finally agreed had been decided in advance by the Lend Lease representatives of John Curtin House Ltd, using as a basis an assessment by Mr John McFadden of Lend Lease of what was necessary to present to financiers a risk-free proposal for the construction of the building. A financial arrangement

2 Sections 7.4 and 7.5. Section 7.6. Section 8.1. Section 8.4. 6 Section 5.15.

Section 7.8.

xiv Report of Inquiry into the Centenary House Lease

guaranteeing a return to the company and an additional cash flow to John Curtin

House Ltd throughout the lease was seen as essential. 8

Mr Noel McCann, the company's property adviser, was responsible for finding market details which could be used to justify the terms, rather than for assessing what the market did in fact show was foreseeable over the next 15 years. 9

Mr Collins had negligible experience in negotiating leases and was thoroughly out of his depth in relation to this lease and the dealings he had with Mrs Morris, Mr McCann and Mr McFadden. By contrast, Mrs Morris and Mr McFadden were astute business people, very experienced in negotiation and property transactions, and they overwhelmed Mr Collins both in number and in force of personality. 10

The parties' respective strengths

The Commonwealth was effectively the only available or possible tenant for Centenary House by virtue of the policy limiting the Barton area to "national capital use" - that is, use by the Commonwealth Government and national associations (including political parties). Notwithstanding the firmly expressed and strongly pursued wish of the Auditor-General, Mr John Taylor, to be accommodated in the

Parliamentary Triangle, it was not essential for the Audit Office to be housed there. Other accommodation was available elsewhere in Canberra where the market was lower than in Barton. Nor were the needs or wishes of any other Commonwealth agency at that time so great as to require the abandonment of ordinary principles of common sense in the negotiations for the Centenary House lease.

Although John Curtin House Ltd wanted the additional cash flow produced by the commercial parameters designed by Mr McFadden, there was plenty of scope for a strong negotiator to obtain terms more favourable to the Commonwealth, and the company might have been persuaded to construct the building and to lease it at a rent which helped finance the construction without producing the benefit of such a significant additional cash flow.

Mr Collins never understood the strength of the Commonwealth's position or, if he did, he failed to take advantage of that strength."

Fixing the starting rent

None of the valuers who gave evidence in this Inquiry and in the Inquiry in 1994 had previously seen a lease in which the starting rent was fixed by reference to the market as it had stood some two-and-three-quarter years before the lease commenced and then escalated by a fixed and predetermined percentage up to that commencement.

S Section 5.15. 9 Sections 5.7 and 7.6. 10 Section 5.15. 'I Section 5.15. Report of Inquiry into the Centenary House Lease xv

The normal course would have been either to fix a precise starting rent (without

escalation) at the time the agreement for lease was signed or to provide in that agreement for the starting rent to be decided by reference to the expected market as at the date the lease was to commence to be determined by agreement between the parties, arbitration, or expert assessment by valuers. The latter approach was the more usual.

There was no sensible reason for the Commonwealth to have agreed to the course it followed. The only rational explanation for John Curtin House Ltd's representatives to have chosen a date so far back was a realisation on their part that the market was already showing signs of slowing by the time the agreement was reached. 12

The length of the term

Mr McCann's approach to determining what the market was going to be for the next 15 years was to rely solely on historical data over the preceding 15 or so years. This approach unrealistically assumed a continuous economic cycle of at least 30 years. It took no account of factors which were already apparent at the time and which suggested the cycle was unlikely to continue as it had in the past. 13

To enter into a transaction which contractually bound the Commonwealth to annual increases of the magnitude of 9% compound for as long as 15 years was imprudent. It was tantamount to entering into a high-risk futures contract. This was particularly so where government policy was so critical to the demand for office accommodation in the Canberra market generally. 14

Systemic and other failures

No-one in the Audit Office was aware of the terms of the proposed lease before the Commonwealth had signed the agreement for lease, or "pre-commitment" agreement. Everyone, from the Auditor-General down, proceeded on the assumption that the Audit Office's budget would be increased each year to reflect whatever rent was payable under the lease.

That assumption was inconsistent with advice the Department of Finance had given the Audit Office about the new financial arrangements for accommodation that an Australia-wide deflator would be applied to budget items such as rent and that any rent payable above the figure obtained by application of the deflator had to be met out of the Audit Office's funds. The Canberra rental market was recognised as increasing at a rate above that for the rest of Australia at that time, but there was a provision in the new financial arrangements permitting an agency to seek exclusion

from the application of the fixed deflator on the basis that the bulk of the agency's

12 Section 7.7. 13 Section 7.6. 14 Section 7.7. xvi Report ofInquiry into the Centenary House Lease

property costs arose in one location. The price for this protection was, however,

"close Finance scrutiny" at lease renewal. 15

Mr Taylor had an obligation to make arrangements to ensure that the proposed lease represented the best available value for the expenditure and that future rental payments could be met from the Audit Office's future budget allocations. Regulation 44B of the Finance Regulations under the Audit Act 1901 imposed this obligation on him as Auditor- General. ' 6 He did not fulfil that obligation. He relied entirely on his subordinates to perform the task for him. It was not sufficient for

him to give a general delegation of responsibility for the corporate area of the Audit Office to Mr Michael Jacobs, the Deputy Auditor-General. 17

When Senator Warwick Parer gave publicity to the terms of the proposed lease after agreement to the terms had been reached but before the agreement for lease had been signed - he described the lease as "Labor's Fifteen Year Rort" and its terms as "incredibly generous" to the landlord, raising a very serious question about the reasonableness of those terms and thus about the Audit Office's capacity

to afford the lease. But Mr Taylor took no action to investigate whether the terms were reasonable, and his failure to do so contributed to the Audit Office's failure to act appropriately.

Mr Jacobs, having responsibility for the Office's corporate affairs, informed Mr Taylor that inquiries were being made of the Property Group as to what was behind the allegations, but Mr Jacobs never became aware of the results of those inquiries. His failure to follow the matter up also contributed to the Audit Office's failure to act appropriately. 18

Nothing was done to investigate whether the provision excluding the application of the deflator where the bulk of the Audit Office's property costs arose in one location could be used for the Centenary House lease. 19

Neither Mr Collins nor anyone else in the Property Group communicated adequately with the client, the Audit Office. The Audit Office was not informed of the full terms of the lease before the Commonwealth signed the agreement for lease. The Property Group failed to obtain the Audit Office's informed agreement to those terms before the agreement was signed. 2°

' Chapter 12. 16 The Auditor-General is treated as the Secretary of the agency and thus responsible for making appropriate arrangements for implementing the provisions of the Regulations. " Chapters 4 and 12. 18 Chapters 2 and 12. 19 Chapter 12. 20 Section 10.2, Report oflnquUy into the Centenary House Lease xvii

The Audit Office should have insisted on information about the terms of the

lease being supplied. It was not prudent for that Office to permit a 1 5-year lease to be entered into on its behalf when it had no knowledge of the lease's terms. 2'

The usual procedures required that the Property Group obtain valuation advice from the Australian Valuation Office before agreeing to a lease. However, instead of asking the Valuation Office to provide valuation advice about the agreed terms and the two escalators which had not been agreed, Mr Collins informed Mr Graham Jeffress of the Valuation Office that the terms he had agreed with the owner's representatives were necessary in order that the deal might go ahead and asked him to negotiate on behalf of the Commonwealth with the owner's valuer to achieve the best he could in relation to the two escalators. There was no prospect of Mr Jeffress producing a proper valuation: his instructions made it clear that he was not expected to query the reasonableness of the escalators which resulted from his discussions with the owner's valuer. 22

Although Mr Jeffress expressed concern about his instructions from Mr Collins merely to negotiate the terms of the two escalators as best he could, he did not think he was in a position to reject those instructions, and in any event he probably did not have the grit necessary for someone in his position to do so. Yet the

"recommendations" he made were not really recommendations at all: they were nothing more than his opinion of the boundary beyond which the owner's valuer would not go. He did not consider it was open to him to advise against the whole deal or to hold out for what he thought were appropriate terms at the risk of losing the deal and thus the building. He was obliged to consummate the deal within the already agreed framework and to do so on the best terms he could negotiate. That was not a valuation opinion or a recommendation. 23

Mr Collins was inadequately supervised by his superiors in the Property Group and was not subject to proper controls. When he retired from the Public Service before the agreement for lease had been signed, no-one in the Property Group who became responsible for the transaction questioned the terms of the lease. 24

There were many communication failures in the Property Group. There were no written communications to the Audit Office reporting on the progress of the negotiations, and there was no record of the agreement eventually reached before the agreement for lease binding the Commonwealth was signed. It is not sufficient for the details of a large transaction such as this to be given verbally when a number of people in the client agency should be kept aware of what is going on.

Subsequently, in the Audit Office's files a copy of a draft of Mr Collins' initial letter of intent was found, but there was no accompanying explanatory note and there were none of the usual annotations to show who (if anyone) had read it. This

21 Section 12.2. 2 ' - Section 10.3.1; Chapter II. 23 Section 5.11. 24 Section 10.1. xviii Report oflnquiiy into the centenary House Lease

is the only document containing details of the terms of the lease which appears to

have been sent by Mr Collins or anyone in the Property Group to its client before the agreement for lease was signed. Even that document has blanks in place of the fixed escalators, and it omits a paragraph of the letter as it was later sent to the owner's valuer indicating that the escalators would be limited to 9.75% and fixed by the two parties' valuers. 25

When Senator Parer first publicised the proposed lease, a minute Mr Collins developed to assist the Minister in preparing a proposed ministerial press release omitted all reference to the escalators. There is no logical explanation for this omission other than sensitivity on Mr Collins' part to disclosing the escalators to the Minister, who had to reply to the criticism of the lease. The omission was neither an oversight nor a mistake. 26

Mr Robert Ireland was the Property Group officer responsible for preparing a minute to the State Manager, seeking authorisation to enter into the lease in accordance with the Lands Acquisition Act 1989. Although the appendix to the minute identified the two escalators which had been negotiated by the Valuation Office, he calculated the item "Total Rent for Term" without taking either escalator into account. The total cost shown thus underestimated the total expenditure by some 60%.27

The Department of Finance asserted to the 1994 Inquiry that its role was to require the Audit Office to establish that it was in a position to service both the Centenary House lease and any borrowings against future appropriations pursuant to a resource agreement. The new financial arrangements continued the need for agencies to obtain approval from that Department to change accommodation, even when no additional outlays were involved.

The Department failed to perform the role it claimed, and it saw no need to express any views on the leases presented for its approval. Mr Ian McPhee, the Department's most senior officer directly involved in the consideration of the Audit Office proposal, told this Inquiry it was not the Department's responsibility to vet the Centenary House lease and that the Department had neither an obligation nor felt any reason to express a view on the merit of the transaction. It had taken all reasonable steps to ensure that the Audit Office understood the implications for it of the new financial arrangements.

This was not compliance with the Department's obligations. The Department saw itself as being responsible for budgetary integrity. There was no point in requiring agencies to obtain its approval in the absence of a requirement that the Department satisfy itself that the new accommodation was unlikely to affect the Commonwealth budget detrimentally. Budgetary integrity is not protected or

25 Section 10.2. 26 Section 10.3.2. 27 Section 10.1.2. Report ofinquity into the Centenary House Lease xix

maintained if agencies can, on behalf of the Commonwealth, enter into

commitments they cannot afford.

It was conceded that the Department expected the assumptions made by the Audit Office in its Centenary House proposal were likely to prove incorrect, that it considered it likely that the Audit Office would have to fund its rent commitments from sources other than its budget appropriation, and that it might well have substantial difficulties in doing so in the future. The attitude was that this was a matter for the Audit Office: if the Audit Office wanted to take the risk, that was its own decision, but it would have to live with the consequences.

The Department's failure to fulfil the role it claimed was to some extent caused by its ignorance of the actual terms of the proposed lease, an ignorance it shared with the Audit Office. Neither sought to ascertain those terms the Department from the Audit Office and the Audit Office from the Property Group. Both the Department and the Audit Office are to blame for this.

Had the Department insisted on being told the proposed terms, the Audit Office would have been compelled to ascertain those terms. Had such disclosure occurred, the prospects of the Department approving, or of the Audit Office accepting, the proposed lease on the terms agreed between Mr Collins and Lend Lease would have been slim indeed. Had the Department performed its role, the likely discrepancy between the increases in rent in the lease and the increases in rent allowed to the Audit Office in the budget would have been revealed. In turn, that revelation would undoubtedly have led at least some of the public servants involved to come to two realisations that the transaction was not going to be appropriately funded in the future from the Audit Office's point of view and that the transaction was improvident from the Commonwealth's point of view. 28

The other party

The lease was negotiated on behalf of John Curtin House Ltd by representatives of Lend Lease and at arm's-length. The advantage the company obtained from the lease was not achieved as a result of any conduct on the part of the company or its representatives which denied to the Commonwealth an equal opportunity to obtain its own advantage. John Curtin House Ltd and Lend Lease were entitled to assume

in the negotiations for the lease that the Commonwealth was capable of looking after its own interests. The fact that those entrusted with protecting the Commonwealth's interests failed in that task is neither the fault nor the responsibility of the company or those who acted on its behalf.

No conduct on the part of John Curtin House Ltd was unconscionable or constituted undue influence, unfair pressure or unfair tactics such as might in another context amount to conduct warranting statutory or equitable relief. Criticism is expressed of the conduct of Mrs Penelope Morris of Lend Lease in

28 See Section 4.3 and Chapter 13.

xx Report of Inquiry into the Centenary House Lease

relation to the offer to pay $50,000 to the Property Group, but that conduct had no

effect on the result achieved in the negotiations.

John Curtin House Ltd and Mr Robert Hogg, the National Secretary of the Labor Party and a director of the company, were conscious at all times of the sensitivity inherent in leasing to the Commonwealth premises owned by a company associated with a political party, and they were at pains to ensure that no Labor Party members of parliament were involved in the discussions within the company. The final decision to proceed with the project nevertheless rested with the Labor Party's National Executive, not the directors of John Curtin House Ltd, and some politicians became aware of the essential ingredients of the transaction, although only after the negotiations in relation to the lease were complete. 29

Other issues

The offer to pay $50,000 to the Australian Property Group

Mrs Morris of Lend Lease made an offer to pay the Property Group $50,000 as a "fee". She claimed that it was compensation to the Group for work it had done in connection with an earlier, uncompleted part of the negotiations. She conceded that to have made the offer (even as compensation for past services) before the terms of the deal were struck in relation to the lease would have been seen as an inducement and therefore improper.

The offer was probably made before the initial letter of intent was sent but, even if it were made after that, it was made before the two escalators had been agreed between the valuers. It was the Property Group which had to instruct the Australian Valuation Office as to its role. The instructions given to the Valuation Office were to negotiate with the owner's valuer for the best deal available, rather than (as might be thought to be usual) to give valuation advice.

The offer was therefore improper, and Mrs Morris knew it was. 30

Political parties and the ownership of office buildings

When leasing office premises to the Commonwealth, a political party or a company associated with a political party should take great care to act transparently, at arm's-length and on a market basis. Such arrangements are very likely to engender public controversy and political debate in the strongly adversarial context of politics in Australia. This is particularly so when the political party leasing premises to the Commonwealth is the party in government. There has long been a perception and perhaps more so now than 15 years ago - that decision making by some public servants is affected, consciously or subconsciously, by what they believe the party

29 Chapter 15. 30 Chapter 17. Report of Inquiry into the Centenary House Lease xxi

in government wants to be the result. This perception might or might not be

accurate, but it exists and it can be skilfully manipulated by opposition parties. There is no illegality involved in such transactions in themselves. The real (and difficult) problem is with the public perception of them.

There was also a perception pervading the evidence in the 1994 Inquiry, and (to a lesser extent) in the present Inquiry, that "everybody does it ... it has always happened ...". That perception appears to have been, and to still be, widely held among public servants and politicians alike. The evidence shows, however, that it does not quite reflect the true position. Only the Labor Party has leased commercial office space to the Commonwealth with any regularity and frequency. It has done so systematically in John Curtin House since 1975 and in Centenary House since

l993.'

Misleading statements

I was directed to investigate whether, in the light of any new information elicited, any person "involved" made a misleading statement in relation to the Centenary House lease or any proposal to renegotiate or vary the lease.

No information was elicited which suggested that a misleading statement was made by any person in the course of the negotiations for the Centenary House lease.

When the Audit Office attempted on a number of occasions to renegotiate or vary the terms of the lease, the directors of John Curtin House Ltd stated that the company was unable to reduce the rent payable under the lease because of its obligations under its contracts with the project's financiers and the directors would be in breach of their own fiduciary duties to the company to do so.

The directors sought and obtained legal and financial advice about their own position and that of the company. The contracts with the financiers of the Centenary House project prevented the company from varying the terms of the lease in such a way as to reduce the rent.

No person involved in the proposals to renegotiate the terms of the lease made a misleading statement in relation to those proposals. 32

The 1994 Inquiry

The conclusions I have reached are significantly different in a number of areas from those reached by Commissioner Morling in the 1994 Inquiry. These different conclusions were reached on the basis of a much greater amount of material than was before Commissioner Morling and with the benefit of the different perspective the additional evidence cast on those matters.

31 Chapter 6. 32 Chapter 16. xxii Report of-Inquiry into the Centenary House Lease

The 1994 Inquiry's terms of reference were, if anything, wider than this

Inquiry's terms of reference so far as they concerned the negotiation of the Centenary House lease. They did not inhibit Commissioner Morling from obtaining the additional evidence this Inquiry obtained,

With the exception of two Liberal Party parliamentarians (then in opposition) who were permitted to appear but were unrepresented, a common front was presented by all parties appearing before Commissioner Morling that the Centenary House lease had been properly negotiated and represented a prudent transaction offering the Commonwealth value for expenditure. The 1994 Inquiry was conducted informally and was largely guided by the submissions filed by the parties and by the documents voluntarily provided by the parties.

The retention of counsel assisting this Inquiry and the use of a more adversarial procedure in order to test the apparently common front presented by the parties in 1994, together with extensive use of the power to compel the production of documents, resulted in the emergence of a much more detailed picture of the course of negotiations. It demonstrated that the impression successfully conveyed to Commissioner Morling of a market-determined transaction was incorrect and misleading.

The resources provided to the 1994 Inquiry, the absence of counsel assisting it and the particular processes used were decided or agreed by Commissioner Morling at the start of that Inquiry. There is no suggestion that, if he had sought further resources, they would not have been provided. Those decisions, however, resulted in the much smaller amount of relevant material being discovered. The absence of that material did adversely affect the 1994 Inquiry - in that its investigation was, as a consequence, not as complete as it could have been, and the outcome did not still the disquiet the Centenary House lease had generated.

The further examination of witness and documents in this Inquiry allowed me to reach the conclusion of impropriety in relation to Mrs Morris. Had such examination taken place in the 1994 Inquiry it would have revealed the same 33 matters .

33

Chapter 18.

Report of Inquiry into the Centenary House Lease xxiii

I

Introduction

Centenary House is in Canberra, at 19 National Circuit, Barton, in an area colloquially known as the Parliamentary Triangle. It was planned, constructed and fitted out by companies which form part of the Lend Lease Property Group. Its owner has at all times been John Curtin House Ltd, a company associated with the Australian Labor Party. The building was named Centenary House to mark the centenary of the founding of the Labor Party in Australia, and the Party's national headquarters are located in it.

In 1993, when the Labor Party was in government, all but one small area of Centenary House was leased to the Commonwealth for occupation by the Australian National Audit Office. The lease was for 15 years, with an option for a further five years. The base rental had been fixed in the initial agreement for lease in 1992 by

reference to what was suggested to be the market rate on a date some two-and-a-half years before the lease was expected to commence, with a 10.5% a year cumulative escalation clause operating during the construction phase until the commencement of the lease. The rent as so escalated at that time became the base rate for the term of the lease, escalated by a cumulative 9% each year, with rent reviews to market to

be held after the fifth and tenth years, the rent after each such review being either the current market rent or the previous year's rent escalated by 9%, whichever is the higher.

Before the negotiations leading to the agreement for lease had been finalised, a public controversy arose at the instigation of members of the then Opposition (the Liberal—National Coalition) who alleged that the proposed rent was excessive and that the Labor Party was to be the beneficiary of a "rort". The agreement for lease (often referred to as a pre-commitment agreement or lease) was signed in April

1992, and the lease itself was executed in October 1993.'

The Opposition continued to draw attention to the political implications it saw in the lease and pursued the matter in various Senate committees by questioning the Auditor-General and government officers involved in the negotiations leading to the agreement for lease. 2

In late 1993 the Auditor-General instituted a statutory inquiry into the Centenary House lease, to be conducted by the Auditor-General of South Australia and the Audit Office's own Independent Auditor. Difficulties were experienced in having this inquiry commence its task, so in May 1994 the Government acted to

resolve the problem by advising the Governor-General to appoint the Hon Trevor Morling QC to conduct an Inquiry into the circumstances of the Centenary House lease pursuant to the Royal Commissions Act 1902. Commissioner Morling reported

The lease commenced on 23 September 1993. 2 The controversy is more fully described in Appendix A.

Report oflnqui,y into the Centenary House Lease I

in October 1994, having found that the terms of the lease were reasonable and not

unduly generous to the lessor, that no party to the lease had obtained unfair or above-market commercial advantage from the lease, and that the Commonwealth had not failed to achieve value for the money it expended or was likely in the future to expend on the lease. 3

Despite this, the controversy was resurrected some six years later by members of the Coalition, by then in government. On 4 March 2004 the Senate passed, without opposition, a motion by an Australian Democrats senator calling on the Government to institute a new Royal Commission to "review" Commissioner Morling's findings in the light of later evidence, "particularly with regard to movements and trends in commercial rates and leasing arrangements since 1994". On 24 June I was appointed to inquire into and report on the circumstances surrounding the Centenary House lease pursuant to the Royal Commissions Act. My terms of reference go beyond those of Commissioner Morling, but they do not include any term requiring me to "review" the findings be made. Rather, T am required to make my own findings on many of the same issues, having regard to material which was not before Commissioner Morling and which casts new light on his findings. Indeed, I am required to take into account movements and trends in commercial rates and leasing arrangements since the 1994 Inquiry which also cast light on those findings, but I propose to deal with that issue quite separately. I also have to make findings on some additional issues.

The present Inquiry is unusual by nature in that it is the second inquiry into the same basic issues, but that circumstance is not unique: there were, for example, two Royal Commissions into the loss of HAMS Voyager.4 Unlike the second Voyager Inquiry, though, the present Inquiry into the leasing of Centenary House was not sparked by any revelation of apparently important additional material, although such

material was certainly discovered during the course of this Inquiry.

This Inquiry is also unusual in that I have to consider events which took place 12-15 years ago. The length of time which has passed has made it difficult for some witnesses to recall those events with clarity, although most of the witnesses recorded their version of the events in one way or another within a relatively short period of the events themselves.

Another important factor in assessing the relevant events is that the processes whereby government departments and agencies dealt with their accommodation were in a state of flux at the time, with a slowly evolving new policy being put into effect over a number of years and some unfortunate consequences flowing from rules which may not have been fully developed when they were laid down.

Commissioner Morling's terms of reference and findings are set out in Appendix B. Royal Commission into the Loss of HMAS Voyager (Royal Commissioner, the Hon Sir John Spicer), report dated 13 August 1964; Royal Commission on the Statement of Lieutenant-Commander Cabban and Matters Incidental Thereto (Royal Commissioners, the Hon Sir Stanley Burbury and the Hon Mr Justice KW Asprey), report dated 13 March 1968.

2 Report of Inquiry into the Centenary House Lease

Finally, it is essential to keep in mind that one of the principal provisions in the

lease which eventuated for Centenary House involved a forecast made in 1992 of what would happen in the Canberra property market over 15 years, starting in 1993. It is accepted by everyone, as I understand it, that the forecasts made at the time have now proved to have been conspicuously wrong. That, however, does not mean that those forecasts were unreasonable at the time they were made. Hindsight is no substitute for foresight.

Chapter 2 of this Report explains the Australian National Audit Office's need to obtain new accommodation following its forced vacation of its previous accommodation; it also describes the Audit Office's relationship with the Australian Property Group (effectively the Commonwealth's estate agent) and its dealings with the Department of Finance (as it was then known).

Chapter 3 explains the Australian Labor Party's need (in common with other political parties) to place itself on a more secure financial footing after conducting many expensive federal elections over a short period and describes the Party's wish, through its associated company John Curtin House Ltd, to construct an office building in Canberra for its new national headquarters, part of which would be leased and so produce a cash flow. The chapter also introduces the Lend Lease Property Group, which was retained to advise the Labor Party in relation to financing the project and to construct the office building once a "pre-commitment" agreement to enter a long-term lease of the building had been signed.

Chapter 4 outlines the statutory requirements and the financial policy framework determining how a government agency obtained new accommodation at the time.

Chapter 5 follows the negotiations between officers of the Property Group and employees of Lend Lease which led to the agreement for the Centenary House lease. It also describes the parts played in those negotiations by officers of the Australian Valuation Office and Australian Estate Management on behalf of the

Commonwealth, and by Mr Noel McCann, the Labor Party's property adviser, on behalf of John Curtin House Ltd.

Chapter 6 investigates political parties' ownership of office buildings in Canberra leased to the Commonwealth.

Chapter 7 considers whether the terms of the lease as eventually executed - viewed as at the times when the Property Group sought valuation advice from the

Valuation Office in November 1991 and when the pre-commitment agreement was signed in early April 1992 - were in keeping with leasing agreements of a comparable kind.

Chapter 8 examines the fair market net rent for Centenary House from the commencement of the lease in September 1993 to the present.

Chapter 9 considers the leases put forward at various times as market transactions justifying the Centenary House lease.

Report of Inquiry into the Centenary House Lease 3

Chapters 10 to 14

discuss whether the various government agencies involved in the negotiations for the lease agreement that is, the Property Group, the Valuation Office, the Audit Office itself, the Department of Finance and Australian Estate Management acted appropriately in those negotiations.

Chapter 15 considers whether any criticism should be levelled at John Curtin House Ltd or the Australian Labor Party in relation to those negotiations.

Chapter 16 considers whether, in light of any new information elicited, any person involved made a misleading statement in relation to the Centenary House lease or any proposal since 1994 to renegotiate or vary the lease.

Chapter 17 investigates whether there were payments or inducements offered in relation to the Centenary House lease which raise issues of impropriety.

Chapter 18 considers the terms of reference for the 1994 Inquiry - whether that Inquiry's terms of reference could have been better designed to enable information relevant to the lease to be elicited; whether the resources provided to that Inquiry adversely affected it; and whether further examination of witnesses or documents at that Inquiry might have led to the identification of any new information considered in Chapter 17.

Chapter 19 deals with what may be called the "hindsight issues" I have been asked to examine - whether movements and trends in commercial rates and leasing agreements since the 1994 Inquiry, or any other matters, cast new light on the findings of that Inquiry; and whether the Centenary House lease is in keeping with leasing arrangements, whenever made, of a comparable kind.

Chapter 20 considers whether there are any other issues of concern in relation to the Centenary House lease.

4 Report of Inquiry into the Centenary House Lease

2

The Audit Office

Before January 1989, the Australian National Audit Office had been accommodated mainly in the Silverton Centre in the Civic area of Canberra. Its head office was in the Centre, and the Audit Office occupied 4430 square metres of space there, including storage bays and 19 car spaces. At that time it also occupied space in Tasman House in the Civic area (about 2000 square metres), Colbee Court at Philip (640 square metres) and a building in Botany Street, Philip (712 square metres). 1

In January 1989 the Audit Office was required at very short notice to vacate the Silverton Centre following allegations that the building had serious construction defects. These allegations eventually led to the demolition of the building. 2 The evacuated staff were housed, initially on a temporary basis, in the Medibank Building in Woden Town Centre, where they occupied 5149 square metres.

The forced abandonment of the Silverton Centre coincided with an inquiry by the Commonwealth Parliament's Joint Committee of Public Accounts. The report of that inquiry, The Auditor-General: ally of the people and parliament reform of the Australian Audit Office, Report 296, is dated 9 March 1989. The Joint Committee's Recommendation 78 was as follows:

That the Australian Audit Office plan for a new building either within the Parliamentary Triangle or on State Circle adjacent to the new Parliament House and that the building be called Audit House.

This recommendation assumed great significance in subsequent discussions and correspondence relating to the Audit Office's accommodation needs in particular, as justification for the proposal that the Audit Office should move to accommodation in Barton, notwithstanding the Government's response to the recommendation, tabled on 1 October:

The Government notes the recommendation and has decided that consideration of AAO accommodation requirements will proceed through the normal processes.'

Whilst not an outright rejection of the recommendation (as some within the Department of Finance saw it), this response could not have been seen by the Auditor-General, Mr John Taylor, as an encouraging one.

The Government's response certainly did not affect Mr Taylor's single-minded quest to obtain accommodation for the Audit Office in the Parliamentary Triangle. He has provided various justifications for such a move. His justification to the

Ex 5 at CH94.003.0163. 2 The detail of the evacuation is to be found in Commonwealth v Silverton Ltd (1997) 130 ACTR 1 (Higgins J).

Ex 36 at COMM.010.0022.

Report oflnquiiy into the Centenary House Lease 5

Minister for Finance was that it would consolidate all of his staff and allow

efficiency gains through the elimination of dual locations. He said that this, together with the Joint Committee's recommendation, required him to rationalise the Audit Office's accommodation in the Barton area as quickly as possible, using the private construction sector if necessary. 4 In his evidence to this Inquiry, Mr Taylor

expanded his justification to include the need for greater formal and informal contact between Audit Office staff and parliamentary staff, the important symbolism in having the Audit Office located close to Parliament, and the improvement of his staffs morale in having premises in the parliamentary precinct.' He did, however, accept that, had there been no alternative in Barton, the Audit Office would have remained in Medibank House in the longer ten -n.6

During 1989 and 1990 Mr Taylor regularly raised the need for a permanent home for the Audit Office in correspondence with the Minister for Administrative Services and the Secretary of that Department. 7 Mr Taylor repeatedly referred in the correspondence to the Joint Committee recommendation. He raised it so often that he himself said in evidence be had "often wondered whether we had a macro" which inserted the terms of the recommendation in the letters. 8

In the course of this correspondence, and in other letters from Mr Taylor's officers, the Audit Office tentatively accepted an offer of long-term accommodation in Medibank House, subject to the premises being refurbished and to appropriate security arrangements being made. 9 The lack of security for the Audit Office in Medibank House was a theme also repeated by Mr Taylor and his staff during this period.' 0 Mr Taylor expressed a preference for a separate building but indicated - no doubt with an eye to the Audit Office being included in what was called the York

Park proposal" - that he was prepared to accept accommodation in a larger complex if the Audit Office had control over access to its area.

In August 1990 the Australian Property Group, which acted as the property agent for government agencies, suggested to Mr Taylor that the Audit Office could

4 Ex 5 atCH94.002.0184-0185 (28 May 1992). 5 Ex 19 at pars 7-10. 6 T396.

7 Ex 5 at CH94.001.0229 (1 May 1989), at CH94.001.0232 (22 August 1989), at CH94.001.0236 (6 December 1989), and at CH94.001.0256 (5 October 1990). 8 T 401.

9 Ex 5 at CH94.001.0240 (4 January 1990), at CH94.001.0245 (2 May 1990), at CH94.001.0247 (24 July 1990), and at CH94.001.0250 (31 July 1990). '0 See in particular Ex 5 at CH94.001.0236 (6 December 1989), at CH94.001.0247 (24 July 1990), and at C1194.00 1.0256 (5 October 1990). II The York Park proposal was for a very large office complex for the Commonwealth,

in the Parliamentary Triangle but somewhat closer to Parliament House than where Centenary House was subsequently constructed. The proposal had not gained Cabinet approval by the time the agreement for lease for Centenary House was signed.

6 Report of Inquiry into the Centenary House Lease

move to the Sir Keith Campbell Centre, also in Woden.'

2 This option did not suit

Mr Taylor: he said in evidence that it was not just the size of the building which was of concern to him, but also the fact that the building was "on a peninsula out from the bus interchange, which was a centre of crime at the time, [and] very unsafe at night". These concerns also applied to Medibank House but to a lesser extent. 13

In October 1990 the Secretary of the Department of Administrative Services drew Mr Taylor's attention to the fact that "a number of smaller buildings for the Parkes/Barton area are being planned by private developers", 14 but the buildings proposed were not large enough for the Audit Office's purposes. The Property Group then advertised, calling for expressions of interest in providing between 3000 and 8000 square metres of office accommodation in the Barton—Parkes—Forrest area. 15 Fourteen organisations, including the Lend Lease Property Group on behalf of the Australian Labor Party, responded to the advertisement. 16

Mr Dominic Collins, a team leader with the Australian Property Group, wrote to Mr Taylor on 21 November, outlining various options for satisfying the medium- to long-term needs of the Audit Office. 17 Mr Collins included information on current and projected rents in Medibank House and the Sir Keith Campbell Centre. He also set out a "Summary of projected potential accommodation in the Barton—Parkes—

Forrest—Griffith area", in which he listed all but one of the 14 expressions of interest received in response to the advertisement. The Lend Lease proposal was omitted. 18

Mr Collins dismissed Medibank House on four grounds: sharing the building with the Department of Employment, Education and Training would make the security desired by Mr Taylor "costly and almost impossible to achieve"; the space was not quite as much as the Audit Office needed; the building was substandard;

and the lessor had no interest in the welfare of its tenants. He advised against a relocation to the Barton—Parkes—Forrest—Griffith area because all of the proposed buildings there were too small or far too large or were poorly located. He also noted that the options in the Parliamentary Triangle would be more costly than other

options. He concluded by recommending the Sir Keith Campbell building.

This recommendation did not conform with Mr Taylor's preference for accommodation in the Parliamentary Triangle, which was firmly held and well known to the senior members of the Audit Office. The Office's Management Committee decided that the Office should occupy two buildings in the

Parliamentary Triangle Macquarie House and the Australian Chamber of

12 File note of meeting on 23 August 1990: Ex 5 at CH94.001.0254. 13 T418. ' Ex 5 at CH94.001.0258 (12 October 1990). 15 Ex 5 at CH94.009.0 150. 16 For discussion of the circumstances surrounding the lodgment of the expression of interest by Lend Lease see Chapter 5. 17 Ex 5 at CH94.003.0161. Mr Collins gave differing explanations for the omission in the 1994 Inquiry and in the present Inquiry, but in the end the omission was not significant. Report oflnquiiy into the Centenary House Lease 7

Manufactures Building, which were to be built opposite one another on Blackall

Avenue in Barton. 19

Six days later, on 29 November 1990, the Property Group brought to the Audit Office's attention the Lend Lease proposal to construct a building in Barton. 2° At that stage the Audit Office did not know that the owner of the proposed building was a company associated with the Labor Party. The Management Committee agreed the following day that the Lend Lease proposal was preferable to Macquarie House and the Australian Chamber of Manufactures building. The Audit Office promptly raised with the Depaitiiient of Finance the question of funding for a move to Barton, 21 and in March 1991 it began an investigation (in consultation with representatives of the Lend Lease Property Group) of its office space requirements. 22 By this time it is clear that the Audit Office knew of the Labor Party's interest in the property.

After a presentation by Lend Lease representatives to the Auditor-General and senior staff of the Audit Office on 5 June 1991, Mr Taylor confirmed the Audit Office's interest in the building and its commitment to negotiating for a "pre- commitment" agreement for the project. 23 No discussion of the commercial terms of the proposed lease took place at the presentation.

Correspondence and discussions between the Audit Office and the Department of Finance and between the Audit Office and the Australian Property Group throughout 1991 are more fully discussed in Chapters 10, 12 and 13, but it is important to record here the broad effect of those communications.

On 11 June 1991 the Audit Office delivered to the Department of Finance a proposal (ostensibly pursuant to the policy framework known as Works Technical New Policy) seeking funding for the fit-out and the relocation costs of moving to the new premises in Barton. 24 The Audit Office attached calculations to that proposal to demonstrate that the proposed move to Barton would be cost-effective. The calculations were based on a number of assumptions, one being that the rent the Audit Office would pay for the new premises in Barton would be identical to the rent it could expect to pay in Medibank House after it had been refurbished. On this basis the move appeared cost-effective because it enabled a reduction in the office space occupied by the Audit Office. But this assumption was based on no more

than the absence of information about expected rent increases. 25

19 Ex 5 at CH94.001.0281. 20 Exllat par l9. 21 The progress of those discussions is discussed in more detail in Chapters 12 and 13. 22 Ex 5 atCH94.001.0316, CH94.009.0298. 23 Minutes of PCG meeting No 5, Ex 33 at ALP.O1O.0176 and Ex 19 at par 32. 24 Ex 5 at CH94.002.0002. 25 Ex7at par 13. 8 Report ofinquiry into the Centenary House Lease

The Department of Finance considered the Audit Office's assumption optimistic

and concluded that the move to Barton would in fact be significantly more expensive than if the Audit Office were to remain in a refurbished Medibank House.

On 26 June 1991 the Audit Office formally authorised the Property Group to proceed with negotiations to obtain the new building in Barton for the Audit Office. 26 In that letter Mr John Barwood was identified as the Audit Office's point of contact with the Property Group.

Mr Robert Morison (Senior Director, Financial Administration, Audit Office) was responsible for seeing whether there was money available for what had to be spent in the Audit Office and for finding out where the money to be spent would be found.27 The Audit Office subsequently did some analysis of space requirements and staffing levels. 28

The Department of Finance rejected the Audit Office's argument that funding of the fit-out could proceed by way of the Works Technical New Policy procedure and suggested that a "new policy" proposal (which would require the approval of Cabinet) be prepared . 29 The Department eventually agreed to proceed by way of a resource agreement, 3° on the basis of the Audit Office's assumption - notwithstanding that it considered the assumption optimistic and expected the Audit

Office would be forced to supplement its rental budget from other areas when the assumption did prove optimistic.

Although the Audit Office recognised that, in order to enter into a resource agreement, it was necessary to investigate the likely terms of the lease , 3' it did not analyse the probable cost of the Barton proposal beyond the cost of relocation. Before the agreement for lease was signed, neither the Audit Office nor the Department of Finance made any attempt to ascertain what the rent was likely to be either at the commencement of the lease or in subsequent years.

The Audit Office accepted a resource agreement in principle on 1 August 1991, following discussions with the Department of Finance. 32 There is no evidence that Mr Taylor was involved in, or even aware of, these discussions, but it is clear that his wishes were known to those in the Audit Office who were involved in these

decisions.

26 Ex 5 at CH94.002.0017. 27 T 152. 28 Ex 5 at CH94.002.0026. 29 The Works Technical New Policy procedure is explained in Chapter 4. 30 A resource agreement permitted an agency to borrow against future allocations in order to fund large upfront costs such as the fit-out of new premises. 31 Mr Morison said, "To this end, we are endeavouring to firm-up on timings, costs, lease terms, naming rights, fitout, etc associated with the [Barton] site" - minute to Acting Deputy Auditor-General, 23 July 1991: Ex 5 at CH94.002.0026. 32 These facts were recorded by Mr Morison in an annotation on Mr Barwood's minute of 1 August 1991: Ex 5 at CH94.002.0028. Report ofInquiry into the Centenary House Lease 9

In the meantime, the Department of Finance had prepared three spreadsheets

analysing the various assumptions on which the Audit Office had sought to justify the cost-effectiveness of the move, 33 and had compared the Audit Office's assumptions with those of the Property Group and the Department itself. 14 Both the Department's and the Property Group's assumptions suggested that the accommodation at Barton would be more expensive than accommodation in Medibank House, even after refurbishment. Mr Morison asserted that he had analysed those figures and sought to understand them, 35 but he did not adjust his own assessment of the comparative costs as a result of any such analysis.

Negotiations with the Department of Finance proceeded thereafter on the basis that the Audit Office stood by its assumptions and would bear the brunt of any underestimation of the costs of the move to Barton. This was the intended effect of a resource agreement.

Mr Barwood was appointed to the position of Accommodation Project Manager for the Barton proposal in October 1991,36 and he became very heavily involved in the detail of planning for and organising the fit-out of the new premises. That, however, was the extent of his concern. When the Department of Finance identified a number of agencies which would need to be consulted or notified in relation to the proposed move, Mr Barwood forwarded this suggestion to the Property Group, asking whether it had complied with the requirements.

In addition to the Department of Finance, those agencies were the Public Works Committee, the National Capital Planning Authority, Australian Estate Management and possibly, if the proposed lease were to be classified as a "finance lease", the Loan Council. A finance lease is a lease which "effectively transfers [to the lessee] substantially all the risks and benefits incident to ownership". 31 If the lease is cancellable it is an operating lease. 38 The advice given to the Audit Office by Mr Robert Ireland, who worked with Mr Collins, was that it was unnecessary to include the project under Loan Council approved borrowings because the lease was not a finance lease "on the grounds of being cancellable, non-transferral of ownership and lack of a purchase option". 39 Mr Ireland was unable to explain the basis on which he concluded the lease was cancellable. 40

' Ex 36 at ANAO.019.0091. 34 The "APG assumptions" were based on a letter from Ms Obst of the Property Group to Mr Barwood dated 8 July 1991 (Ex 5 at CH94.002.0023) in which rents in Barton and Woden were compared, the conclusion being that Barton rents would be 7-8%

higher than those in Woden. 35 Ex7at par 34. 36 Ex 5 at CH94.002.0050; T 161. ' Australian Accounting Standard AASI7; Ex 5 at CH94.002.0068. 31 Ibid. Ex 5 at CH94.002.0065. 40 Ex89at par 25. 10 Report oflnqui.'y into the Centenary House Lease

The closest any senior executive of the Audit Office came to making explicit

inquiries in relation to the terms of the lease the Property Group was negotiating occurred on 5 November 1991. In a minute of that date, Mr John Meert, Executive Director of the Audit Office's Support Branch, asked the Property Group to identify the amount of money the Audit Office needed from the Department of Finance, the arrangements into which Lend Lease was prepared to enter, whether Lend Lease could change the rent fit-out relationship in order to avoid the need for the Audit Office to go to the Department, and the short- and long-term economic considerations which needed to be taken into account in any options put forward by Lend Lease.41

In reply, the Property Group supplied a copy of the instructions it had given the Australian Valuation Office when seeking valuation advice about the proposed lease. That letter did state that such a lease would have fixed rental escalators, but it gave no indication of the size of the escalator. The letter and the surrounding circumstances are discussed later in Chapter 5 •42 This inadequate reply received no apparent consideration by anyone in the Audit Office. 43 Mr Meert gave evidence

that by early April 1992, shortly before the agreement for lease was signed, the Audit Office was, to the best of his recollection, aware of the terms of the lease.' Mr Meert is mistaken. He agreed that there was nothing in any Audit Office records recording such awareness. There are many Audit Office records in which if the Audit Office was aware of the details of, for example, the escalation percentage it would be usual to find a reference to those details, but there is no such reference in documents brought into existence before the agreement for lease was signed.­

On 15 January 1992 Senator Parer issued a press release alleging that the proposed lease contained terms which were "incredibly generous" to the landlord. 46 The Property Group forwarded a copy of the release to Mr Taylor the following day.47 On the same day (16 January), the press release received publicity in the

Canberra Times; this was forwarded to Mr Taylor by his Deputy, Mr Michael Jacobs, who told him inquiries were being made of the Property Group as to what was behind the allegation. 48 Mr Jacobs was not made aware of the results of any such inquiries .49 The press release received further publicity on 17 January in the Sydney Morning Herald, where it was suggested that "enraged" staff of the Audit Office had their "knives ... out for Senator Parer". Mr Taylor wrote to Senator

41 Ex 5 at CH94.007.0242. 42 The letter appears in Appendix C at C.5. 'Ex 5 at CH94.007.0280. "" 1119-120. 45 Ibid. 46 Ex 5 at CH94.005.0041. See Appendix C at C.9. Ex 12atANAO.014.0264. 48 Ex 12atANAO.014.0255. 49 T242. Report of Inquiry into the centenary House Lease 11

Parer to assure him

that the Audit Office had not briefed the Sydney Morning Herald and was not enraged by the press release. 5°

Mr Taylor gave evidence to this Inquiry that he had no recollection of seeing Senator Parer's press release, but he said that even if he had seen the assertion of "incredibly generous" conditions at the time he would not have wanted to know what the conditions were since he was relying on the Property Group, who were the

experts. He assumed that those advising the Audit Office were better placed to assess the reasonableness of the lease's terms, 51 and he made no examination of that issue himself. Mr Taylor dismissed Senator Parer's comments as political. 52

In late January 1992 Australian Estate Management (whose duty it was to ensure that Commonwealth-owned property remained tenanted) told the Property Group's Mr Collins that it would not approve the Audit Office's proposed move to Barton.53 Mr Collins explained to Mr Taylor that this was because Australian Estate Management wanted to use the Audit Office's accommodation needs as part-justification for the construction of a major office complex in the Barton area, a

proposal which, he said, had already been rejected by Cabinet but which in any event could not be ready for occupation until 1996. He suggested that Mr Taylor follow this up through "other avenues". 54

Mr Taylor took notice of that suggestion. He told the Secretary of the Department of Administrative Services he would take up the matter with the Prime Minister if necessary. 55 Australian Estate Management thereupon reversed its position and approved the proposed move. Australian Estate Management's conduct is the subject of brief comment in Chapter 14.

Although the Audit Office made some inquiries about the availability of alternative accommodation in Barton, the inquiries were not extensive and were not the result of any considered review of the appropriateness of Centenary House as the preferred location.

Mr Taylor complained to the Minister for Finance at this time of the "continual difficulties" he claimed the Audit Office was having with the Department of Finance one of those difficulties being the Department's refusal to negotiate a "fair and equitable resource agreement" to enable the Audit Office to become the

tenant in "a building to be erected in Barton near Parliament House despite this having been recommended to us by the Australian Property Group as a suitable permanent home".56 This led to a face-to-face meeting and correspondence with Mr Stephen Sedgwick, who became Secretary of the Department of Finance at about

° Ex 5 at CH94.010.0239. T 502-504; Submission, 11 November 2004, par 58. 52 T499-504. Ex 5 at CH94.002.0 123. 14 Ex 5 at CH94.002.0124. 55 Ex 19at par 42;1509. Ex 5 at CH94.008.0085. 12 Report oflnquiiy into the Centenary House Lease

this time, in order to resolve the terms of the resource agreement.

57 The resource

agreement followed. 58

In early April 1992 the Audit Office confirmed to the Property Group that it had "available funds to meet Lend Lease's revised cost plan of $2,995,000 for the preliminary Scope of Works ... for fitout of the new John Curtin House, Barton" ,59 its accommodation requirements in "the new John Curtin House, Barton" and its

approval for the Property Group entering into an agreement for lease on behalf of the Audit Office . 60 The agreement for lease was signed shortly thereafter.

' Ex 5 at CH94.002.0 143, letter from Mr Taylor to Mr Sedgwick (10 February 1992); at CH94.002.0147, letter from Mr Sedgwick to Mr Taylor (11 February 1992); at CH94.002.0149, letter from Mr Taylor to Mr Sedgwick (12 February 1992); and at CH94.002.0151, letter from Mr Sedgwick to Mr Taylor (14 February 1992).

See Appendix C at C.10. Ex 5 at CH94.002.0 164, letter from Mr Meert to Mr Ferrari (2 April 1992). 60 Ex 5 at CH94.002.0 166, letter from Mr Meert to Mr Ferrari (3 April 1992).

Report oflnquiiy into the Centena ry House Lease 13

3 John Curtin House Ltd

Following the 1990 federal election, the Australian Labor Party found itself with a substantial debt about $4 million. It was not the only political party under financial pressure after four federal elections in seven years. It sold an interest in John Curtin House to the Australian Council of Trade Unions in order to help repay its debt. It also took the view that it was important to find some way of placing itself on a more secure financial footing for the future. The availability of land in the Parliamentary Triangle for national associations such as the Labor Party for the construction of commercial premises which could be let to other national associations or government agencies - presented a possible solution. At the same time Mr Robert Hogg (the National Secretary) and others in the Labor Party considered that the construction of a new national headquarters for the Party would be an appropriate way of recognising the Party's centenary in 1991.'

Preliminary talks about a possible joint venture were held with the National Press Club in May 1990. Those talks came to nothing, but the participation of the Lend Lease Property Group in the talks led to Lend Lease becoming aware of the Labor Party's interest in developing a new building. 2 There had been a previous association between the two when Civil & Civic Pty Ltd, a Lend Lease company, built John Curtin House. 3

On 6 June 1990, Mr Hogg was invited to meet Mrs Penelope Morris, an executive director of Lend Lease, to discuss what could be done. Two possibilities were considered restructuring the ownership of John Curtin House Ltd and a new property development .4 Discussions with the ACT Office of Industry and Development followed about the Labor Party acquiring a site on which to construct

a building.' The site at Section 22 Barton was identified as the location of the proposed new building, 6 and it is now the site of Centenary House.

Mr Hogg next retained Mr Noel McCann, who had been a property consultant to the Labor Party since 1979, to negotiate with the ACT Government for the acquisition of Section 22.8

1 11717-1719. 2 Ex 70 at par 10; LEND.002.0346. T880,1723. Ex 5 at CH94.001.00 10 at par 3; Ex 104 at ALP.014.0296. Ex 40 at ALP.004.0040; Ex 104 at LEND.009.0216. 6 The site is referred to in a letter from Mr Glen Nicholson (ACT Branch Manager of Civil & Civic) to Mr Hogg dated 21 June 1990: Ex 40 at ALP.004.0042. 'ExlO3at par 2. 8 Ex 103 at ALP.004.0046. Report oflnquLry into the Centenary House Lease 15

By early September 1990, Lend Lease had produced for Mr Hogg a project

management proposal which identified, among key services to be offered by Civil & Civic, "assistance with the identification of likely tenants and timing of occupancy" and "assistance with investment planning and financial structuring". 9 As project manager, Civil & Civic would "underwrite that the design and construction project cost will not exceed the agreed budget" and "warrant the project completion on program".

The Labor Party's National Finance Committee resolved on 6 September to continue negotiations with Lend Lease in relation to the proposal. At that time the ACTU was understood to be an equity partner in the project. 10 The Labor Party's National Executive Committee met the next day and passed the same resolutions."

Mr Hogg told Mrs Morris of these resolutions on 12 September. Mrs Morris recorded in her notes that Lend Lease needed to do more work on rent levels, the broad lease structure and how to establish in advance the rent for June 1992, when it was expected construction would be complete. She also noted that Lend Lease needed to obtain market rent levels for the Barton—Parkes area - "ie solid market evidence". 12

Mr Hogg said in evidence that his view at the time was that, whatever rent was struck with the Commonwealth for a lease of the new building, it would have to be justifiable having regard to the market. This was both to ensure that the Labor Party was not subject to criticism and because he anticipated the Commonwealth would "quite understandably, maximise its position". 13

The ACT Office of Industry and Development informed Mrs Morris that a lease of Section 22 to the Labor Party would include a requirement that the Party's national headquarters be located in the new building in order to justify the transaction. 14 Such a requirement reflected the policy at the time restricting the Barton area to "national capital use" that is, by the Commonwealth Government and national associations - and excluding developers from obtaining an interest in the land. Lend Lease could become involved in the construction of developments in that area only through a national association such as the Labor Party.

On 7 December the Labor Party made its formal application for a lease of Section 22. 15 The application estimated that the development expenditure involved in the construction of the building which was anticipated to be 7000-8000 square metres net lettable area - would be $16 million. The ACT Department of

Ex 104 at ALP.0 14.0296 at 0299. '° Ex 5 at CH94.012.0363 at 0364. Ex 5 at CH94.012.0428. 12 Ex atCH94.001.0033. 13 1 1757-1758. 14 Ex 104 atALP.004.0067. 15 Application for the Direct Grant of a Lease for the Purpose of an Association: Ex 104 at ALP,004.0079. 16 Report of Inquiry into the Centenary House Lease

Environment, Land and Planning responded on 21 December, stating that the

National Capital Planning Authority would impose a condition restricting the use of the land to national capital use and informing the Labor Party that any variation of such a condition would have to be considered by the Planning Authority.' 6 Lend Lease was well aware of the need to alter the purpose clause if any tenant other than

the Commonwealth was to be contemplated.' 7 Mrs Morris also acknowledged that she was very well aware that the only potential tenant was the Commonwealth. 18

On 7 February 1991, Mr Hogg gave formal approval to Civil & Civic to proceed with Stage 1 of the Project Management Proposal, "Investment Analysis/Needs Determination".' 9

The ACTU's proposed interest in the project was identified as 50%-60% at this stage .20 All parties were very conscious of the political sensitivities involved in the lease of premises to a Commonwealth government agency by a company with which the Labor Party and the ACTU had an association. The papers produced for an early meeting of the Project Control Group included a "political" sensitivity

list:2'

. Above board negotiations and agreements with:

Authorities Government agencies Consultants and contractors

• Adherence to relevant awards and agreements

Mrs Morris agreed that this was appropriate as reflecting a concern that, because of the political sensitivity of the clients (the Labor Party and the ACTU), "the absolute highest levels of probity had to be observed" and "particular care had to be taken in the dealings with the Commonwealth bureaucracy'

Civil & Civic provided a report of Stage I of the project on or about 30 May. 23 The report identifies the Audit Office as the Property Group's "preferred tenant" and as "keen to commit to new office space". It says that the Property Group:

16 Ex 104 atALP.004.0087. 17 See papers for Project Control Group meetings on 26 February 1991 (Ex 104 at ALP.010.0011); 11 March 1991 (Ex 103 at ALP.010.0063); 10 April 1991 (Ex 33 at ALP.010.0098); 8 May 1991 (Ex 103 at ALP.010.0145) and 5 June 1991 (Ex 104 at ALP.0 10.0163). 8 T898-900. 19 Ex 33 at FREE.00 1.022 1. 20 Ex 104 atALP.004.0114. 21 10 April 1991. Ex 104 at ALP.010.0128. The Project Control Group consisted of representatives of each of the parties involved in the proposed development. It was regarded as a form of board of directors for the project: Ex 104 at ALP.010.0007. 22 T986. 23 Ex 120 at ALP. 014.0179. Report of Inquiry into the Centenary House Lease 17

have indicated that Audit will commit to a long term lease (10-15

years) based on a current rent of $320 with fixed escalators for the following 3 years; then adjusted to market and fixed for a further 4 year period.

On 30 May Mr McCann sent Mr Hogg a development feasibility study incorporating architectural plans and design proposals. 24 He adopted a rental of $360 per square metre based on a "current rental value of $315 per square metre factored at 10% per annum for 18 months" and noted a vacancy rate of 2.5% in Canberra compared with 10-15% in Sydney and Melbourne. Mr McCann recommended a 50% equity participation in the project for reasons including:

increase in the capital base of the company's assets, tax shelter position during the first three to five years on depreciation of building costs and value growth potential.

On 1 June the Labor Party's National Executive gave approval to the proposed new building project on the understanding that agreement was reached between the joint venture partners (the ACTU and the Labor Party) and that the Labor Party was to take up 50% equity in the project. 25 By July, though, the ACTU had ceased to be involved. The reason for its departure from the project is unclear '26 but it is in any event immaterial for the purposes of this Inquiry. Its departure did, however, oblige the Labor Party to seek additional finance from a different source, and this led to the close involvement of Mr John McFadden of Lend Lease in the project . 27 That close involvement was a vital event in the course of the project. Mr McFadden's role is dealt with in Chapter 5.

In the meantime, Mr Hogg sought from Coopers & Lybrand advice as to how the Labor Party should proceed with the project, bearing in mind that "the major objective is to develop a better long term income flow for the administration" and, if John Curtin House Ltd were to proceed in the project alone, it would "give us in the long term a very substantial potential income to the Party, as you would observe from the projections" . 28 After conferring with Mr McFadden, Mr Hogg was able to provide to the Commonwealth Bank the Labor Party's bank - cash flow projections assuming an 11% escalator during the construction stage and 9% rental growth annually throughout the lease. 29

On 18 September the ACT Department of Environment, Land and Planning wrote to Mr Hogg, formally offering a lease of part of Section 22 subject to the

24 Ex 5 at CH94.004.0010. 25 Ex 5 at CH94.012M440. 26 According to Mr McCann, Mr Hogg decided that the Labor Party could go it alone (T 2710-2711). On the other hand, Mr Hogg said that the ACTU withdrew from the project, and he described this as a setback (T 1762-1763). 27 T 1344, Ex 51 at pars 6-7. 28 Ex 120 at ALP.004.0230. 29 Letter from Mr Hogg to Mr Woolridge of the Commonwealth Bank dated 22 August 1991: Ex 70 at ALP.004.0245. 18 Report ofInquiry into the Centenary House Lease

purpose clause already noted. 30

If the Labor Party's national headquarters were to

occupy only 10% of the area, the premium payable would be $2.03 million. During the next two days the Labor Party's National Finance Committee and National Executive considered a feasibility report which said that the lease offered was "in accordance with the requirements of the proposed finance arrangements". 3' On a

page of the feasibility report which is missing from the document tendered in the 1994 Inquiry, 32 the Executive Summary stated:

• Detailed analysis of the respective financiers' proposals will be based on satisfying the ALP project criteria. The main thrust of this project is to provide long term financial support to the ALP.

• Within this general criteria in mind the proposals [sic], when they are finalised, will be reviewed in detail with a view to maximising cashflow and tax benefits and minimising costs and risks.

• The project viability is dependent on securing a known rent stream and minimising as many other unknowns as possible.

• Feasibility analysis based on the progress made in securing the land, tenancy precommitment, design and costing advice and financing arrangements demonstrate the long term benefits for the ALP in developing the new Headquarters Building. To enable the Project to

proceed, the ALP needs to commit to progressing:

land negotiations to achieve a lease offer for the site from [the Department of Environment, Land and Planning].

- design to enable contract pricing, a Project Management Agreement and Authority approvals.

tenancy negotiations to achieve an agreed Precommitment Agreement with APG.

- finance negotiations to achieve finance arrangement for the ALP.

Finalising the above documents will take four months. Final ALP commitment to the development should be based on the above matters being resolved to achieve the ALP's agreed parameters.

Other parts of the report included a reference by Coopers & Lybrand to "provision of a long term income generating asset which will assist the ALP to become self-sufficient with respect to campaign and administrative funding" and "minimisation of costs and risks and fixing of variable parameters", including interest rates and

rent escalation. The lease envisaged by the report was for 15-plus years, with a Commonwealth tenant and an estimated annual rental escalator of 9.00-9.75%. Mr McCann provided an analysis demonstrating that the project was feasible and

30 Ex 104 at ALP.003.0050 at 0051. " Ex 104 atMACQ.024.0226 at 0228-0229. 32 Ibid at 0229. Report of Inquiry into the Centenary House Lease 19

added to the study a target date of January 1992 for signing an agreement for

lease.33

The National Finance Committee resolved to proceed with the building project on 19 September, and the Labor Party's National Executive passed the same resolution the following day. 34

From July to November 1991, negotiations took place with various financiers, among them Westpac Banking Corporation, Hambros Australia, and Barclays de Zoete Wedd Australia. The proposal submitted by each bank assumed a lease to the Audit Office for 15 years with 9% escalators. 35 The Project Control Group reviewed these proposals and decided to proceed with Westpac on 6 November 1991.36 Westpac withdrew shortly afterwards, however, citing as its reasons the absence of any equity contribution by the Labor Party and the fact that the Labor Party was a political party. 37

Mr McFadden and Mrs Morris then approached Macquarie Bank to provide finance. In early February 1992, Macquarie Bank submitted a proposal which imposed as a condition precedent confirmation that the Audit Office would lease 6200 square metres plus car parks at an initial rent of $2.366 million each year, escalating annually by at least 9% for 15 years, and that rental abatement risk would apply only in force majeure circumstances. Mr Hogg accepted those terms. 38 It appears that some concerns had been expressed within Macquarie Bank about two issues - "the commerciality of the lease and probity issues". 39 Mrs Morris was able to assuage those concerns using information provided by Mr McFadden in relation to other transactions. 40

Macquarie Bank made a formal offer of a finance facility to fund the new building on 11 March 1992. Mr Hogg accepted the offer on behalf of John Curtin

33 Ex 5 at CH94.012.0398 and CH94.012.0448. " Ex 5 at CH94.012.0398 at 0400, 0446-0447. Ex 104 and Ex 51 at ALP.014.0383-0437, 0402-0403, 0419 and 0436. 36 Ex 104 atALP.011,0072. in Ex 104 at ALP.006.0087; Ex 70 at ALP.006.0083. 38 Ex 104 at ALP.005.0047. 39 See memorandum from Mr Sheppard to Mr Berg dated 25 February 1992, produced from Macquarie Bank's files: Ex 104 at MACQ.008.0 101. Mr McFadden also commented in a memorandum dated 26 February 1992 to Mr Banek, Chief Executive of Lend Lease Development (Ex 51 at LEND.0 17.0057), that "Macquarie Bank is nervous about funding the ALP project on the grounds of potential bad publicity, not commercial grounds". 40 Mrs Morris used a document prepared by Mr McFadden, "Fixed Escalator Leases in the Canberra Market": Ex 33 at FREE.003.0131. It contains details of two completed leases (one of them, Tuggeranong Office Park, inaccurately described; see Chapter 9), one uncompleted negotiation for a lease, and much argumentative material. A copy of the document was given to Macquarie Bank: Ex 51 at MACQ.004.01 82. 20 Report of Inquiry into the Centenary House Lease

House Ltd the next day. 4

' The loan documents were executed on 23 April 1992 after the Commonwealth had formally committed itself to lease the premises by signing the agreement for lease.

In November the previous year, Mr McFadden had prepared a draft letter to Mr Hogg, seeking payment to the Lend Lease Development company of a development fee of 25% of surplus cash flow available to John Curtin House Ltd .42 Mr McFadden estimated that the fee would be about $1.4 million. The draft letter identified a range of structural benefits said to have been introduced with the assistance of the Lend Lease Development company. It was not sent. Mr McFadden was, however, the author of a letter in similar terms seeking an additional fee of $400,000; it had been sent under the name of Civil & Civic's general manager on 5 December 1991, shortly after a letter of intent had been received from the Property Group confirming the terms of the lease, including the escalators .43

Mr McFadden justified the additional fee by reference to what he described as "the full extent of services and added value as provided" to Civil & Civic by the Lend Lease Development company in securing an "exceptionally sound development opportunity" for John Curtin House Ltd. He also referred to his role in negotiations with Westpac. The letter was sent shortly before Westpac withdrew. The $400,000

fee was nevertheless paid.

Ex 104 atALP.005.0175. 42 Ex 120 at LEND.009.0107. Ex 33 at FREE.004.0255.

Report of Inquiry into the Centenary House Lease 21

4

New financial arrangements for accommodation

4.1 Outline In 1991 and 1992, both statutory requirements and policy frameworks determined the process whereby a government agency obtained new accommodation. The statutory provisions were found in the Audit Act 1901, the Finance Regulations

promulgated under that statute, and the Lands Acquisition Act 1989.

Between 1989 and 1992, the policy framework governing accommodation of government agencies was changing as a result of a government decision to transfer budgetary and financial responsibilities from centralised control to individual departments and agencies. In particular, in 1989 the centralised Department of Administrative Services rent appropriation was separated into an allocation of

individual property operating expenses to each department and agency. At the same time the Australian Property Group was created as a fee-for-service property consultancy, and Australian Estate Management effectively became the landlord of all Commonwealth real estate.'

The rules and guidelines associated with implementation of these policy changes were published in "estimates memoranda" issued from time to time by the Department of Finance. Of particular importance in relation to the Centenary House lease was Estimates Memorandum 1991/32, issued on 17 October 1991.2

While the Centenary House Lease was being negotiated in 1991 and 1992, a proposed policy providing for the incorporation of property operating expenses into running costs was under discussion. 3 The policy would lead to the eventual elimination of separate allocations for all property expenses, so that agencies were permitted to make their own decisions about the proportions of their budget allocated to rent and other property expenses.

These matters were described in the Department of Finance submission to the 1994 Inquiry (Ex 5 at CH94.003.0301), the accuracy of which was confirmed by Mr Ian McPhee (T 1683), a First Assistant Secretary of that Department in 1991. 2 See Appendix C at C.4.

A discussion paper was circulated in October 1990 (Ex 5 at CH94.012.0028) and a document was circulated for comment on 30 December 1991 (Ex 5 at CH94.012.0173). The Audit Office received and commented on both documents (Ex 5 at CH94.007.0063 and CH94.008.0050).

Report of Inquiry into the Centenary House Lease 23

Approved by Cabinet on 3 August 1992, the policy came into effect in stages

from 1992-93. One element of it which began coming into effect in 1993-94 was the application of a single inflation index (or deflator) to allocations of property operating expenses.

4.2 Statutory requirements

In 1991 and 1992, the allocation of responsibility for ensuring that an agency was able to meet its commitments out of funds appropriated for that purpose was governed by the Finance Regulations promulgated under the Audit Act. Section 2AB of the Act gave the Auditor-General responsibility for implementing the Regulations in relation to the Audit Office. 4 Regulation 44B provided as follows:

44B A person must not enter into a commitment requiring the expenditure of moneys:

(a) unless a person who has authority to approve a proposal to spend the moneys has given that approval; and

(b) except in accordance with any terms specified in that approval; and

(c) unless the person who enters into the commitment is satisfied, after making such inquiries as are reasonable, that when the commitment is entered into;

(i) the Commonwealth is unable to obtain better value for the expenditure in all the circumstances; or

(ii) if compliance with a direction by a Minister prevents the Commonwealth from obtaining better value for expenditure in all the circumstances - the

Commonwealth will obtain the best value that is possible while complying with the direction; and

(d) unless

(i) funds for the expenditure have been appropriated; or

(ii) provision for the appropriation of funds for the expenditure is included in a proposed law submitted to the Parliament; or

(iii) having regard to an appropriation that is expected to be submitted to the Parliament, the Minister has given approval in writing for the commitment to be entered into; and

4 Section 2AB(l) of the Audit Act 1901 (as in force in 1992) imposed responsibility for making arrangements for implementing the provisions of the Regulations on the Secretary of a department. By virtue of s 2AB(2) of the Audit Act and s 25(4) of the Public Service Act 1922 (as in force in 1992), the Auditor-General was treated as the Secretary of the Audit Office.

24 Report ofInquiry into the Centenary House Lease

(e) unless the funds so appropriated or to be appropriated will be

sufficient to meet the expenditure together with all other expected expenditure of those funds.

As Commissioner Morling recognised, this provision's application to future commitments is far from clear.' On one reading of r 4413(d)(iii), the written approval of the relevant Minister would be necessary for any commitment to expenditure beyond the current forward estimates or even beyond the current year. Commissioner Morling recorded that in practice such approval was not generally sought. 6

There is no suggestion that the Auditor-General sought ministerial approval for the Centenary House lease. It would therefore seem that, as Commissioner Morling noted, the entry into the agreement for lease was in breach of r 44B. Commissioner Morling concluded that in doing so Mr Taylor "did no more than follow what appears to have been the general practice adopted by other agencies" .7

Regardless of whether ministerial approval was necessary, Mr Taylor clearly did have an obligation under the regulation to make appropriate inquiries and investigations to ensure that the proposed lease represented the best available value for the expenditure and that the future rental payments could be met from the Audit Office's future budget allocations. The extent to which he complied with these obligations is discussed in Chapter 12.

Ministerial approval was also required pursuant to s 40 of the Lands Acquisition Act. In the case of the Centenary House lease, that approval was given by Mr Bruce Holden (State Manager in the ACT Office of the Property Group) pursuant to delegated authority. 8 The Lands Acquisition Act also required that a statement

describing the lease be laid before each House of the Commonwealth Parliament within 15 days of entry into the agreement for lease. 9 This was not done but, as Commissioner Morling also found, that failure did not invalidate the lease.' °

4.3 Policy requirements

The Audit Office needed to obtain a substantial number of approvals.

1994 Report, pars 13.8-13.10. 6 Ibidatpar 13.8. " Ibid. 8 Mr Holden's approval was recorded on a minute, dated 6 April 1992 and addressed to the State Manager, ACT Office, from Mr Robert Ireland as project manager: Ex 5 at CH94.008.0 127. 'Section 40(3). '° Lands Acquisition Act, s 40(4); 1994 Report, par 13.18. Report of Inquiry into the Centenary House Lease 25

4.3.1 The extent to which approval was required from the Department of

Finance

Estimates Memorandum 1991/32 stated unequivocally that:

agencies will need to continue to seek approval from Finance to change accommodation arrangements even where no additional outlays are involved.

The manner in which the Department of Finance and the Audit Office dealt with this requirement is discussed in Chapter 13. In short, their approach was that, provided the Audit Office's move to Centenary House did not require any funds beyond those already allocated to property operating expenses in the Audit Office budget, departmental approval of the move was not necessary. This approach did not meet the requirements of Estimates Memorandum 1991/32.

Although the Audit Office did have funds available for the fit-out of the new premises they had been set aside at the time of the evacuation of the Silverton Centre it recognised that those funds would not be sufficient to pay for the fit-out as well as the moving costs and dead rent; that is, rent in respect of the unexpired portions of leases of premises the Audit Office proposed to vacate." Throughout

1991 and early 1992, the Audit Office and the Department of Finance discussed whether, and if so how, the Audit Office could obtain the additional funding necessary to pay the immediate costs associated with the move.

The Audit Office sought to have the Department of Finance deal with the proposed move under the Works Technical New Policy approval procedure, which was governed by Estimates Memorandum 1991/13.12 The procedure permitted accommodation proposals "for the delivery of existing policy" with a total cost under $6 million to be approved without the need for a Cabinet submission where the accommodation complied with existing standards.

The Department of Finance took the view that the Audit Office's proposal was not suitable for processing under the Works Technical New Policy procedure. 13 It suggested an alternative approach requiring the Audit Office to enter into a resource agreement. Pursuant to a resource agreement, the Audit Office would receive increased funding in the short term in return for a reduced allocation of property operating expenses over a seven- to ten-year "pay back" period.

The resource agreement put forward was permissible only to the extent that the Department. of Finance applied to the Audit Office the procedures proposed by the policy for incorporating property operating expenses into running costs which was then under discussion.

11 See letter from Mr Meert to Mr McPhee, 11 June 1991: Ex 5 at CH94.010.0018. 12 Ex 5 at CH94A004.0283. 13 The reason given was that the move would involve a pre-commitment agreement, and thus a total cost in excess of $6 million. See Appendix C at C. p.3. 26 Report of Inquiry into the Centenary House Lease

One of the "major issues of incorporation" addressed in a discussion paper

relating to that proposed policy and circulated in October 1990 was price adjustment. The paper's suggested mechanism for price adjustment of property expenses was use of a fixed Australia-wide deflator. The measure of prices to be used in the short term was the Commonwealth Government Final Consumption Expenditure Deflator, which, it was suggested, was likely to be a generous price adjustment factor. 14

During the four years to 1991, this deflator had fluctuated between 5% and 6.5%.' That information would have been available to the Audit Office had it been sought before April 1992, when the agreement for lease was signed. After the agreement for lease had been signed but by the time the Centenary House lease

commenced in September 1993, the Department of Finance had advised all departments and agencies that the inflation index to apply to property operating expenses budgets for 1993-94 would be 1%.16 In 1994 this figure was revised up to 2% and then down to 1.8%.17

The discussion paper had suggested that allowance would be made for situations where a fixed single deflator would operate unfairly for particular agencies. That proposition was taken up in a document circulated in December 1991 which contemplated that, where the preponderance of an agency's rental costs were in a single lease or a particular location, the Department of Finance would consider an

adjustment. 1 That concession was, however, subject to the rider that any exclusion from automatic price adjustment would be in exchange for "close Finance scrutiny at lease renewal". 19

Clearly, therefore, government policy in 1991 and 1992 required the Department of Finance to play a role in relation to the Audit Office's proposed lease:

• pursuant to Estimates Memorandum 1991/32

• because the resource agreement was to be negotiated between the Audit Office and the Department of Finance

• if the Audit Office wished to have the Centenary House rent excluded from application of the fixed deflator, the requirement for the Office to seek the Department's agreement before execution of the agreement for lease.

The extent to which the Department fulfilled that role is dealt with in Chapter 13.

14 See Ex 5 at CH94.012.0028 at 0054, 0036. 15 See Ex 104 at ABS.001.0001 and ABS.001.0010. 16 Estimates Memorandum 1993/34, 13 July 1993: Ex 5 at CH94.004.0294. 17 Estimates Memoranda 1994/7 and 1994/20: Ex 5 at CH94.004.0296 and 0297. 18 Ex atCH94.012.0173 at 0178. 19 Ibid at 0178 and 0195. Report ofInquiry into the Centenary House Lease 27

4.3.2 The need to consult Australian Estate Management

Estimates Memorandum 1991/32 also expressly required agencies to 'obtain from APG advice on the controlled office environment set by AEM relating to the owned estate and new leases in the ACT". 20 The requirement for Australian Estate Management to approve new accommodation proposals in the Australian Capital Territory was introduced because the Commonwealth was both the predominant tenant and a major landlord in the Territory. Through this requirement the Commonwealth could protect its investment in office space, by ensuring that leases of privately owned office space were not entered into by Commonwealth agencies when suitable space in Commonwealth-owned offices was available or expected to

11

become available;

The circumstances in which Australian Estate Management approved the Audit Office's entry into the Centenary House lease are dealt with in Chapter 14.

4.3.3 The need to consult the National Capital Planning Authority

Estimates Memorandum 1991/32 required agencies to "demonstrate that any accommodation proposal complies with the National Capital Plan as applicable to developments or leasing upon either Territory or National land"." To comply with this requirement it was necessary for the Audit Office to obtain approval from the National Capital Planning Authority, which had responsibility for the National Capital Plan. The Authority's approval was granted in relation to the Centenary House lease on 3 February 1992.23 There is no controversy surrounding that approval.

4.3.4 The need to obtain the approval of the Public Works Committee

In October 1991, the Department of Finance informed the Audit Office that the involvement of the Joint Standing Committee on Public Works in approving the accommodation proposal was important . 24 Among other things, the Committee investigates the need for and the purpose and cost-effectiveness of each public work referred to it and then reports to the Parliament.

20 Ex 5 at CH94.003.0329 at 0330. 21 See also letter from Mr Alan Pearson of the Department of Finance to Mr Meert of the Audit Office, dated 18 October 1991 (Ex 5 at CH94.002.0052 at 0054, par 10); internal Property Group minute signed by Mr Holden, dated December 1991 (Ex 120 at DOFA.049.0055); and a minute from Mr Holden to Mr Richard Williams of Australian Estate Management, dated 12 December 1991 (Ex 120 at DOFA.049.0076). 22 Ex 5 at CH94.003.0329 at 0330. 23 Ex 5 at CH94.003.0206. 24 Letter from Mr Pearson to Mr Meert, 18 October 1991: Ex 5 at CH94.002.0052. 28 Report oflnquir1' into the centenary House Lease

The Department advised that it was mandatory for works involving a fit-out

costing $6 million or more to be agreed by Parliament before a contract was let. That requirement did not apply to the Audit Office proposal since the cost of the fit-out was less than $3 million. The Department advised, however, that it might nevertheless be necessary to advise the Public Works Committee of the proposed project.

In the event, the Audit Office did not notify the Public Works Committee of the proposed Centenary House lease until 14 May 1992 (after the agreement for lease had been signed), when Mr Paul Ferrari of the Property Group advised the Office that any fit-out works exceeding $2 million should be notified to the Committee and provided a draft notification. 25

The interest of the Public Works Committee was limited to the proposed fit-out, so there is no reason to consider this aspect further.

4.3.5 The extent of any obligation to notify the Loan Council of the proposed lease

The Department of Finance also suggested in October 1991 that the proposed lease might be classified as a "finance lease" and that it might be necessary to have the Treasurer include the project under future Loan Council—approved borrowings. 26

The Audit Office received advice from Mr Robert Ireland of the Property Group that the lease was not a finance lease . 27 It appears not to have queried Mr Ireland's conclusion on this, despite the fact that it had itself reached a different conclusion in relation to the lease to the Australian Taxation Office of a building in Hobart . 28 The

leases were different, so the same conclusion would not follow as a matter of course. 29 What is noticeable is that the Audit Office, which was far better qualified than Mr Ireland to make this assessment, took no steps to review the classification Mr Ireland gave to the lease - a classification which is difficult to accept as correct. On the basis that the present value of the minimum payments under the

lease at the relevant time exceeded 90% of the fair value of the leased property, every indication suggests that it was a finance lease. 30

25 See letter from Mr Meert to Secretary of the Public Works Committee, 14 May 1992 (Ex 5 at CH94.002.0 180); letter from Mr Meert to Mr Ferrari, 14 May 1992 (Ex 5 at CF194.002.0179); and letter from Mr Ferrari to Mr Meert, 13 May 1992 (Ex 5 at CH94.002.0 178). 26 Ex 5 at CH94.002.0052 at 0054. 27 Letter from Mr Ireland to Mr Barwood, 4 November 1991: Ex 5 at CH94.002.0065. 28 This conclusion was expressed in a letter dated 25 July 1991 from Mr Russell Coleman of the Audit Office to the Property Group's Hobart office: Ex 5 at CH94.0 12.0111. 29 In particular, the anticipated useful life of the Hobart property was only 15 to 20 years. There has been no suggestion Centenary House has such a limited lifespan. ° Australian Accounting Standard AAS17; Ex 5 at CH94.002.0068. Report of inquiry into the Centenary House Lease 29

The Centenary House lease was not referred to the Treasurer for inclusion in

Loan Council—approved borrowings. Had that occurred, it is quite possible that the lease would have been further delayed or scrutinised, presenting another obstacle which could have prevented the finalisation of the lease.

30 Report of/n quiiy into the Centenary House Lease

5

The negotiations

5.1 Early discussions

Contact between the Lend Lease Property Group and the Australian Property Group concerning the proposed new building which later became Centenary House began in August 1990, when Mrs Penelope Morris of Lend Lease suggested to Mr Ross Divett of the Property Group an arrangement whereby the Property Group might help Lend Lease obtain a tenant for the proposed building.'

Mrs Morris was employed by Lend Lease to pursue project development and construction opportunities, with particular emphasis on government-related projects. 2 For some years until late 1987, she had been the Director of the former Commonwealth Property organisation in the Department of Administrative Services. Mr Divett had been one of those who reported to her. Mrs Morris was regarded as a very astute businesswoman and a good negotiator.'

Further discussions between Mrs Morris and Mr Divett, and also Mr Rex Hoy from the Property Group - both at a face-to-face meeting in Sydney in September 1990 and by telephone canvassed a proposal whereby the Property Group would, in return for a substantial fee, bear the tenancy risk in relation to the proposed building. These discussions proceeded to the stage where in October and December Lend Lease delivered to the Property Group two drafts of a proposed heads of agreement. 4 Correspondence and discussions about the proposed heads of agreement continued into February 1991.5By March that year the proposal had been superseded. 6

The heads of agreement proposal was superseded because in October 1990 the Property Group advertised for expressions of interest in the provision of office accommodation for a long-term lease of about 3000-8000 square metres in the Barton—Parkes—Forrest—Griffith precinct of Canberra. 7 There was some misunderstanding between Mrs Morris and the Property Group as to whether Lend Lease should respond to the advertisement. After receiving a telephone call from

See Mrs Morris' file note dated 22 August 1990: Ex 5 at CI-194.001.0025. 2 Statement to 1994 Inquiry by Mrs Morris: Ex 5 at CH94.001 .0010 at par 2. See evidence of Mr Dominic Collins at T 547 and Mrs Morris at T 927. Ex Sat CH94.001.0036, CH94.001.0046.

See facsimile from Mr Hoy to Mrs Morris, 8 February 1991: Ex 5 at C1194.00 1.0054. 6 Mrs Morris gave evidence that in March 1991 Lend Lease was confused about whether the heads of agreement proposal was still proceeding but that by April 1991 she had concluded that that proposal was no longer on track. See T 981-982, 1004.

' Ex 5 at CH94.009.0 150.

Report oflnquiry into the Centenary House Lease 31

Mr Dominic Collins of the Property Group, however, Mrs Morris did fax a response

on 115 November. 8

Mr Collins was an Assistant Director and leader of Team 1 of the Property Group, based in Canberra. 9 Team 1 was responsible for dealing with the accommodation requirements of the Audit Office, among other government agencies. Mr Collins had been involved in lease negotiations only since 1988, at the earliest, 10 He was not experienced in such matters.

As stated in Chapter 2, the Audit Office took up Lend Lease's expression of interest as its preferred option, and Mr Collins was asked to secure the proposed Centenary House site for the Audit Office."

There was no real progress in the negotiations for leasing the new building for the Audit Office until 19 March 1991. A meeting between Mrs Morris and the Property Group had been held on 5 March, but that resulted in no more than confirmation of a "positive attitude" on the part of the Property Group. 12 It seems likely that the Audit Office's concerns about security were also discussed at that meeting, since the Project Control Group decided at a meeting on 11 March that the part of the building set aside for the Australian Labor Party's national headquarters would be moved from the third floor to the ground floor, to allow the Audit Office control over access to its area in the building."

By early March Mr John Taylor, the Auditor-General, was pushing for the Lend Lease site in Barton to be allocated to the Audit Office, 14 and negotiations for the acquisition of the site itself were well advanced.' 5

5.2 The 19 March 1991 meeting between Lend Lease and Mr Collins

The first meeting at which the terms of the lease were discussed by Lend Lease and the Property Group was held on 19 March. It was attended by Mr Collins and

8 See handwritten notes of Mrs Morris dated 1 November 1990 (Ex 5 at CH94.001.0057) and 15 November 1990 (Ex 5 at CH94.001.0040) and letter to Mr Collins dated 15 November 1990 (Ex 5 at CH94.001.0041). Ex 25 at pars 2 and 16. 10 T543-544. ' See letter from Mr Jacobs to Mr Collins, 7 December 1990: Ex 5 at C1194.00 1.0287. 12 See minutes of Project Control Group meeting held on 11 March 1991: Ex 103 at ALP.010.0091. 13 Ibidat0093. 14 See internal Property Group file note dated 28 February 1991: Ex 5 at CH94.0 14.0090. 15 A formal proposal dated 21 December 1990 had been sent by the ACT Department of Environment, Land and Planning to Lend Lease (Ex 5 at CH94.012.0370 and Ex 120 at LEND. 015.0367) and discussions had taken place in relation to that proposal. 32 Report ofInquiry into the Centenary House Lease

Mrs Morris, Mr Richard McKeon of Civil & Civic, and Mr Alastair Swayn,

representing the building's architects. 16 Before that meeting, the Lend Lease representatives had already identified some important terms to be proposed to Mr Collins: these included a 15-year term for the lease, a rent and rent review structure similar to that applying to the MLC building at Woden, and a current

market rent of $320 gross per square metre. 17 Mr Noel McCann had advised the Labor Party and Lend Lease about the appropriate asking rent. He had also suggested that the transaction be based on the MLC Woden lease and that a formal agreement for lease (or pre-commitment agreement) was desirable. 18 At the meeting which then took place with Mr Collins, agreement in principle was reached that the

lease would be for a 15-year term, that the rent structure would be similar to that for the MLC building in Woden (which involved a fixed escalator for three years, with a review to market after four years and every four years thereafter) and that the rent level currently appropriate (that is, as at mid-March 1991) was $320 gross per square metre. 19

In evidence to this Inquiry, Mr Collins accepted that these matters had been discussed but disputed that any agreement had been reached at the meeting. 20 In light of the contemporaneous records and the subsequent course of negotiations, however, it is reasonably clear that both Mr Collins and Mrs Morris regarded these matters as settled between them after that meeting.

Among other points of discussion during the meeting were the escalation of rent during construction, at a rate of 10-12%, and a rent escalator of 10% during the three years following completion of construction. Finally, a proposal that the Commonwealth enter into a pre-commitment agreement was raised by Lend Lease and favourably received by Mr Collins. 2'

Mr Collins confirmed that it was the Audit Office which the Property Group had in mind as a tenant.

5.3 The Project Control Group and other meetings

Representatives of the Property Group, the Audit Office and Lend Lease met on 3 April, 23 April and 7 May.22 The meetings were concerned mainly with the fit-out and building quality and did not involve any discussion of the commercial terms of the proposed lease.

16 T 994; see also Mrs Morris's diary (Ex 33 at MORR.001.0036). " See Mr McKeon's handwritten notes (Ex 41 at LEND.002.0367). 18 T2698. 19 See Mr McKeon's notes (Ex 41 at LEND.002.0367); T 1200-1203; and the report to the Project Control Group meeting on 10 April 1991 (Ex 5 at CH94.004.0089). ° Ex 25 at par 54; 1 607-610. 21 T 612 and minutes of Project Control Group meeting held on 10 April 1991: Ex 5 at CH94.004.0089. 22 T 2176; Ex 5 at CH94.001.0062; Ex 104 at LEND.007.0132-0134. Report of Inquiry into the Centenary House Lease 33

Mrs Morris reported to Project Control Group meeting No 3, held on 10 April,

the substance of what had been discussed and settled at her meeting with Mr Collins on 19 March. Her written tenancy report was included in the package circulated for that meeting. 23 Mr McCann was present at the meeting. He read Mrs Morris's tenancy report and listened to what she had to say about her 19 March discussions with Mr Collins.

This was the beginning of a series of detailed formal and informal reports made from time to time by Mrs Morris and Mr McKeon to Mr McCann about what had passed between them and Mr Collins concerning the commercial terms of the 74 proposed lease.

At its meeting on 8 May the Project Control Group considered a document prepared by Mrs Morris canvassing possible rent levels and rent structures. 25 Among the matters discussed in the document were possible inducements related to the fit-out, some commitment to partial refurbishment after 10 years as an incentive to the Commonwealth to take a lease for 15 years, and a "possible $50,000 'agency commission' to the APG". Chapter 17 deals with the proposal to pay $50,000 to the Property Group. There is some evidence that the Lend Lease personnel had considered the payment of such an incentive as early as March 1991.26

The rent structures discussed in Mrs Morris's document involved a commencement rent at 15 March 1993 in the range of $400-435 per square metre, calculated on the basis of escalation of $320 between 1 January 1991 and 15 March 1993 at between 10% and 15% a year, and a fixed percentage escalation to be applied on the first three anniversaries of the lease commencement in a range of "probably 8-10% per annum". The rent was to be reviewed to market after four

years, at which time further rent escalators for the following three years would also be fixed. These terms were based on those of the Commonwealth lease for the MLC building at Woden. According to Mrs Morris, the escalators were based on advice she had received from a real estate agent, Mr Ray Davis. 27

The Project Control Group left it to Mr McCann, the Labor Party's property consultant, and Mr James Service, who was advising the Australian Council of Trade Unions, to consider Mrs Morris's document and the MLC Woden lease and develop a strategy for further discussions with the Property Group. 28

Such discussions had apparently not occurred before the next Project Control Group meeting, held on 5 June, at which Mr McCann and Mr Service were again

23 See 'Tenancy Report', Section 9.0: Ex 33 at ALP.010.0105. 24 T2675-2677. 25 T 1019; Ex 5 at C1194.001.0066, 26 See Mr McKeon's notes: Ex 120 at LEND.011.0010, "If above works - Incentive to APG up to only $50,000". 27 T1028-1029, 1058; Ex 33 at LEND.012.0208. 28 Minutes of Project Control Group meeting held on 8 May 1991: Ex 33 at ALP.010.0159 at 0161. 34 Report ofInquiry into the Centenary House Lease

instructed to meet to confirm commercial boundaries to enable negotiations with the

Property Group to proceed. 29

A formal presentation relating to the design concept and other aspects of the proposed building was also made to representatives of the Audit Office on 5 June. It did not include any discussion of commercial terms . 30 At the conclusion of the presentation the Auditor-General, Mr Taylor, confirmed the Audit Office's interest in the building and its commitment to negotiations in relation to the project. That statement was recorded in the minutes of the Project Control Group meeting (which had in fact taken place before the Audit Office presentation) because it was considered significant that Mr Taylor had made it his business to inform the owner's

representatives that he was committed to the building and had in effect overridden or ignored the Property Group in order to make clear his personal position. 31

The Property Group obtained formal approval to proceed with negotiations on behalf of the Audit Office on 26 June, 32 although Mr Collins had anticipated that approval by confirming the Audit Office's interest in tenanting the proposed building on 21 June. 33

On about 1 July Mrs Morris received from Mr Service a statement of criteria acceptable to the ACTU and to John Curtin House Ltd. 34 The minimum criteria involved a 15-year term; a gross rent as at 30 June 1991 of $330 per square metre, that figure escalating during construction at 12%; fixed biennial escalations of rent

for the first four years of the lease at not less than 11% (probably to be applied annually, although the document may be ambiguous on that issue); and a market review in the fourth year with new escalators.

5.4 The 3 July 1991 meeting between Lend Lease and Mr Collins

Armed with these instructions, Mrs Morris and Mr McKeon held a further meeting with Mr Collins on 3 July. Before the meeting Mrs Morris had made a note of matters requiring discussion. 35 Because Mrs Morris took the precaution after the meeting of forwarding to Mr Collins a record of matters discussed and agreed,

16 and

because Mr Collins did not suggest either at the time or in evidence to this Inquiry

29 Minutes of Project Control Group meeting held on 5 June 1991: Ex 104 at ALP.010.0176 at 0179. ° T 1215. ' T 1037. 32 Ex 5 at CH94.014.0 176. 13 Ex 5 at CH94.010.013 1. 14 Ex 5 at CH94.001 .0069. Ex 5 at CI-I94.001.0071; Mrs Morris's statement to the 1994 Inquiry: Ex 5 at CH94.00I .00 10 at par 35. 16 Ex 5 at CH94.001.0072. Report of Inquiry into the centenary House Lease 35

that this record was inaccurate,

37 it is safe to assume the record accurately reflects

the matters discussed .38

At the beginning of the meeting Mrs Morris made it clear that the Lend Lease representatives were not in a position to conclude the negotiations until they had received clearance from the owners that is, the ACTU and the Labor Party. Discussion followed about the possibility of the Audit Office paying net rather than gross rents, thereby accepting financial responsibility for maintenance and other contingent costs. Mr Collins argued against the proposition because until that time the Commonwealth had always opted for gross rather than net rents. He did not agree to accept a net rent at this meeting, saying that, in his experience, net rents "takes away the owners [sic] obligations to maintain building" and that the Audit Office were "no building managers". 39

Mr Collins indicated that the Property Group was happy with a 15-year term and that a further five-year option was not essential but might be related to a refurbishment at the end of the tenth year. The idea that there be a refurbishment at the end of the tenth year had initially been put forward by Mrs Morris. There was agreement on an opening rent at 1 January 1991 of $320 gross per square metre and that valuers, appointed on behalf of the Property Group and the owner, would determine the rent escalation rate during the construction period until the commencement of the lease. Lend Lease expressed the view that the rate of escalation in 1991 was likely to be at least 12% and a similar or marginally lesser figure in 1992. Mr Collins did not express a firm view but did say that a commencing rent of $400 or more in early 1993 might be hard to accept. Implicit in that view is the rejection of a 12% escalation, which would have brought the agreed $320 per square metre as at 1 January 1991 to over $400 at 1 January 1993. Mr Collins informed the meeting that the Audit Office had $1.7 million allocated for the fit-out.

Mrs Morris put forward the proposal to fix a starting rent at 1 January 1991 and to escalate that figure until the commencement of the lease. She did not explain to Mr Collins why she had chosen that date. It seems clear that Lend Lease's decision to opt for that date had been taken before 3 July, but no-one involved in the decision explained the reasons for it. Mr Collins did not seek to explore whether a starting rent fixed at a later time was possible. 40

Mrs Morris also introduced the possibility of varying the rent structure. She indicated that the final structure would be influenced by the way in which John Curtin House Ltd intended to finance the development. Before that time Mr Collins

1' T 622, 642-649. 38 The content of the discussions is also confirmed by Mr McKeon's handwritten notes taken at the meeting (Ex 120 at LEND.007.0139) and an earlier draft of Mrs Morris's record (Ex 41 at LEND.007.0094). 39 See MrMcKeon's note of the meeting of 3 July 1991 (Ex 120 at LEND.007.0139) and Mrs Morris's record of the meeting (Ex 5 at CH94,001.0073). ° T643. 36 Report of Inquiry into the centenary House Lease

had understood that the Labor Party needed a "fairly high level of certainty" in

relation to cash flows so that it could borrow money to finance the building. 4' Mrs Morris suggested that there should be fixed annual escalations. The suggestion did not meet with immediate disapproval from Mr Collins . 42

The picture which emerges of this meeting is one of Mrs Morris telling Mr Collins the matters Lend Lease wished to have included in the proposed lease. The matters to which Mr Collins agreed were noted as a record of what had been discussed and also so that Mr Collins could not back away from what he had agreed to. Where Lend Lease could not get Mr Collins' agreement, the matter was deferred until another occasion. Mrs Morris could not recall any aspect of the transaction which was raised by Mr Collins as something he wanted to see included in the contract .43 He was in no way pro-active. He behaved purely reactively.

5.5 Subsequent meetings

At Project Control Group meeting No 6, held on 10 July, Mrs Morris reported on the outcome of her 3 July discussions with Mr Collins. The minutes of the 10 July meeting show that Mrs Morris's discussions with Mr Collins on 3 July 1991 were reviewed and accepted by those in attendance. Mr McCann was to define further the commercial parameters to enable negotiations with the Property Group to proceed further. He was also to negotiate the rent escalators with the Valuation Office representative appointed by the Commonwealth. 44

At her meeting with Mr Collins on 3 July, Mrs Morris had secured agreement to a starting rent fixed by reference to 1 January 1991, agreement to a fixed escalator for the construction period, and confirmation of the other terms and matters agreed at the meeting on 19 March. She had raised with Mr Collins the possibility of a review mechanism different from that embodied in the MLC Woden lease

including the possibility that there would be fixed annual escalators - but this had not yet been agreed. She had also raised the possibility of a net rent being required rather than a gross rent, but this too had not been agreed. Indeed, Mr Collins appeared to be opposed to such an approach. The idea that the construction period escalator would be agreed by the parties' valuers was raised by Mrs Morris and

embraced by Mr Collins.

All these matters were conveyed to Mr McCann and others at Project Control Group meeting No 6, and Mr McCann was aware soon after 3 July of the precise position reached in discussions between Mrs Morris and others on behalf of Lend Lease and Mr Collins on behalf of the Commonwealth. The critical concept of fixed

4! T 633. 42 T 1041- 1042. 43 T 1052. 44 Minutes of Project Control Group meeting No 6, held on 10 July 1991, Section 9.0, "Tenancy": Ex 33 at ALP.010.0130 at 0133-0134. Report oflnquiiy into the Centenary House Lease 37

escalators had been raised. The mechanism for fixing the starting rent had been

agreed in principle. Three matters were yet to be finalised:

• the rent review mechanism for the term of the lease

• the quantum of the construction period fixed escalator

• whether a net rent rather than a gross rent would be the basis on which rent would be fixed.

The only other matter subsequently raised was use of the lease for the Scrivener Building at Fern Hill Technology Park as a benchmark for the terms and conditions of the lease.

5.6 Withdrawal of the ACTU and introduction of Mr McFadden

In July 1991 Mr John McFadden of Lend Lease Development Ltd was asked to become involved in the proposal and to help structure the transaction. 45 This coincided with the ACTU's withdrawal from the project and the need for the Labor Party to seek additional finance from another source. Those events are discussed in Chapter 3.

Mr McFadden was Canberra Branch Manager of Lend Lease Development. He was seen as having the necessary financial knowledge and skills to identify the means whereby John Curtin House Ltd's proposal might be financed. 46 He had been involved in other recently constructed office complexes in Canberra which had been leased to the Commonwealth, among them the Tuggeranong Office Park Development and the Scrivener Building, housing AUSLIG (the Australian Surveying and Land Information Group). He had particular expertise in developing structures that would meet the criteria financiers were likely to impose. 47

Mr McFadden was introduced to Mr Robert Hogg, National Secretary of the Labor Party, at some time in July, when he presented a document described as an "Opportunity Analysis". 48 In that document Mr McFadden identified certain "development criteria", including that the Labor Party was seeking an income-

producing property and wanted to retain long-term ownership with 100% equity and that the Labor Party wanted the project to be fully self-supporting financially. 49 Mr McFadden also recorded the proposition that the "Government will do structured arrangements". That proposition was founded on Mr McFadden's knowledge of the

45 Ex51at par 6. 46 Ex 40 at par 15. 'T 1361. 48 Ex 5 at CI-I94.004.0025. See Appendix C at C.2. 49 Mr McKeon had told Mr McFadden about the ALP development criteria: Ex 51 at par 9. 38 Report ofIiquiry into the Centenary House Lease

AUSLIG lease, which is discussed in Chapter 9. By "structured arrangements"

Mr McFadden was referring to lease arrangements in respect of buildings to be constructed which guaranteed a return to the developer. 50

Mr McFadden put forward a financing option which incorporated negotiation of a lease with fixed rental growth for 15 years at 9% a year with an option to renew. It was his view that, should such an arrangement be achieved, the Labor Party would then be able to secure development funding against the fixed and certain Commonwealth-guaranteed cash flow. He had identified this financing option after

conducting a sensitivity analysis of cash flows associated with the proposed development on a range of assumptions relating to interest rates, rental growth rates, initial rents and contingency allowances .5 ' He knew that a 10-year lease would be insufficient to pay off the debt associated with the development. 12

Mr McFadden's conclusion was that the Labor Party could finance the project on its own, without any contribution of capital, provided it obtained lease terms which reflected this financing option. 53 He assumed that the Commonwealth would agree to a 9% escalator for the Audit Office lease because it had recently agreed to a 9% fixed escalator for the AUSLIG lease, 54 which was for 10 years. Mr McFadden had also prepared a document he provided to potential financiers in which he incorporated a number of assumptions in relation to the lease terms, including a 9%

fixed escalator over a 15-year term .55 This critical assumption appeared in all of Mr McFadden's financial models constructed after completion of his sensitivity analysis in July 1991.

From about mid-July onwards, Mr McCann saw Mr McFadden's financial modelling work and commercial assessments from time to time and was aware of the contents of those documents. 56 Also from about that time, as a result of Mr McFadden's work and views, negotiations with the Property Group proceeded on a basis designed to achieve a fixed annual escalator of a minimum of 9% a year

for the duration of the lease. 17 The decision to seek 9% or more as the fixed annual escalator for the term of the lease was not the result of market research. Rather, it was driven almost entirely by what Mr McFadden had determined would be necessary if a deal was to proceed, on a fully self-funded basis, within the parameters already outlined by Mr Hogg (including the need for some cash surplus to be thrown up by the transaction year by year). 58

50 Ex 51 at pars 10-14;T 1355. Ex 104 at ALP.004.0190-0200. 52 11351. 53 Ex 51 at pars 17-2 1; T 135 1. ' Ex 51 at par 21;T 1352-1353. 55 Ex51at par 30. 56 Ex 103 at par 58; T 2713-2715. " T2714-2716. 58 Mrs Morris, 1 1056-1057; Mr McKeon, T 1236-1237; Mr McFadden, T 1351-1354; Mr McCann, T 2714-2716, 2727-2728. Report of inquiry into the Centenary House Lease 39

Mr McCann received a copy of the AUSLIG lease on or about 22 August. 59

The decision to introduce the AUSLIG lease into the discussions between Mrs Morris and Mr Collins had been made earlier that month. 60

By early August 1991 negotiations with the relevant ACT and Commonwealth authorities concerning the land lease were proceeding well and seemed likely to come to fruition in the near future.

5.7 The 30 August 1991 meeting between Lend Lease and Mr Collins

A further meeting between Mr Collins and Mrs Morris, also attended by Mr McKeon and Mr McFadden, was held on 30 August 1991. Before that meeting Mrs Morris had a clear understanding from discussions with Mr McFadden that it was necessary to secure a 15-year lease and fixed annual escalators for the entire term of the lease if the Labor Party's requirements were to be met. Mr McFadden had also told her that an escalator of at least 9% was necessary to make the transaction attractive to a financier and to throw up a surplus for the Labor Party year by year. 61

Before the 30 August meeting, Mrs Morris prepared a handwritten note summarising the matters agreed at the meetings on 19 March and 3 July. 62 She also made handwritten notes of the discussions at the 30 August meeting. 63 It is clear from those notes and from subsequent actions by Mrs Morris and Mr Collins that at the meeting Mrs Morris had explained that, for the Labor Party to finance the proposal, it required annual escalators and net rents. Mr Collins said he was basically receptive to annual escalators, but he expressed some concern about fixing those escalators for as long as 15 years. He suggested that historical data on rent increases would be needed to give him some comfort about the adoption of a fixed escalator for such a long time. 64 He then agreed that the rate of escalation for the construction period, and the annual escalators for the 15-year term of the lease, should be negotiated and agreed between Mr McCann on behalf of the Labor Party and a valuer from the Australian Valuation Office on behalf of the Commonwealth.65

T2722-2723. 60 T2723; Ex at CH94.004.011 1. 61 1 1062. Indeed, in its letter dated 19 August 1991 to Mr Hogg, the Commonwealth Bank made it clear that its approval of finance for the project was conditional on the

rent being a net rent and the quantum of the rent escalating year by year at 9% compound, starting at $2,202,000 ($349.69 per square metre per annum): see Ex 120 at LEND. 015.0396. 62 Ex 33 at pars 29-36; Ex 5 at CH94.001.0081-0082. 63 The balance of Ex 5 at CH.94.001,0081-0082. 64 T1068, 65 T 1073. 40 Report ofInquiry into the Centenary House Lease

Lengthy discussions followed, intended to persuade Mr Collins of the benefits

of net rather than gross rents. Net rents were critical to the Labor Party because they would ensure that cash flows provided by the lease transaction were certain and that all contingencies were eliminated. These were very important matters for financiers. 66

It is clear from the evidence of all those present at the 30 August meeting that it was Mrs Morris who was pushing for net rents rather than gross rents and that Mr Collins was resisting that push. It was not Mr Collins who advocated net rents over gross rents and argued for them at this meeting. In particular, at this meeting Mr Collins did not use as a justification for adopting a net rent rather than a gross rent the argument that this would place the Commonwealth in a good position to manage the building aspects of its own tenancy. That had not occurred to him at the time. It is a justification which was advanced subsequent to the material events - sometimes by people who did not participate in those material events. 67

Similarly, the pressure for fixed annual escalators was coming from the Lend Lease representatives at the meeting. Mr Collins had reservations about such an approach. It is inaccurate to characterise what occurred at the meeting in relation to that proposal - or indeed what occurred at the meeting on 3 July 1991 in relation to this aspect as Mr Collins seeking fixed annual escalators because they provided certainty to the Commonwealth and eliminated the need for either the Property Group or the Audit Office to discuss rent reviews with John Curtin House Ltd. Again, to suggest that the introduction of fixed annual escalators into the transaction was either at the Commonwealth's behest or at least regarded as desirable by the Commonwealth in these negotiations is to portray the discussions inaccurately. That suggestion was introduced subsequently, as an ex post facto rationalisation of what had occurred. It did not enter or operate on Mr Collins' thinking at the time.

By the conclusion of the meeting, Mrs Morris understood that Mr Collins had agreed to those critical aspects of the transaction for which she had been contending that is, fixed annual escalations of the rent and net rents. 68

One of the Lend Lease representatives offered to prepare a draft letter of intent which the Property Group could use for the purpose of seeking the Audit Office's approval .69 Mrs Morris saw Lend Lease's assumption of the task of preparing a first draft of the letter of intent as a way of moving things forward "at the sort of pace we would have liked to have kept it moving"." It was also a way of keeping control of

the agenda and of ensuring that the terms of importance to Lend Lease were included in the letter of intent and that the letter was drawn in a way acceptable to

56 Ex 51 at pars 22-24. 67 For example, Mr Ferrari in a paper prepared for presentation to the Audit Office in September 1992 (Ex 5 at CH94.002.0 192); Statement of Mr Ferrari (Ex 32 at par 33). 68 T 1070. 69 Ex33at par 35. 70 T1071. Report of Inquiry into the Centenary House Lease 41

financiers and to the Labor Party. Mr Hogg needed the letter of intent so that he

could secure the Labor Party National Executive's final approval of the transaction at its meeting on 20 September.

Mrs Morris recorded in her note next to the word "Actions" :71

Net Rent/Gross Escalators Noel Comfort re historical rent growth - 10-20 yrs Penny John

Richard

Consid [sic] 10 year escalators in event not agree

At the top of the same note she also recorded "go in 9.75% to settle 9-9.5%". This last note appears to be a reference to a negotiating position for the long-term

escalator Mrs Morris believed should be adopted by Mr McCann in his discussions with the Commonwealth's valuer.

The result of this 30 August meeting was reported to the project review meeting held on 4 September. 72 It is clear from the minutes of the 4 September meeting that Lend Lease regarded the gathering and presentation of market information of a historical kind as support for what had already been agreed, rather than the source or determinant of what had already been agreed. Mr McCann conceded that the collection of historical market data was a justification exercise only. 73

5.8 The initial letter of intent

Mrs Morris sent Mr Collins a draft letter of intent on 9 September and indicated that a formal letter along the lines of the attached draft was required by 16 September so that the Labor Party National Executive could make a final decision as to whether or not to proceed. Mrs Morris instructed Mr Collins to send the formal letter to Mr McCann. 74

The draft letter of intent provided for a lease term of 15 years on terms and conditions aligned to the AUSLIG lease, as follows:

• net rental payments, with an opening rent of $280 per square metre net as at 1 January 1991 "escalated at 12% per annum compound to the commencement of the Commonwealth lease"

• rent to escalate at a fixed 9.75% a year over the 15-year term of the lease

• the Labor Party to contribute up to $400,000 towards the cost of the fit-out of the Commonwealth lease.

Ex 5 atCJj94.001.0081. 72 Ex 5 at CH94.004.01 12-0114. n T2723-2725. 74 Ex 25 at FREE. 004.0063-0066.

42 Report ofinquity into the Centenary House Lease

It also recorded that the parties expected outgoings would increase at 8% per annum

compound during the construction period.

Mrs Morris could not recall whether the AUSLIG lease was discussed at the meeting on 30 August, but she considered that reference to it should nevertheless be included in the letter of intent. 75

Mr Collins prepared a letter of intent and faxed it to Mrs Morris on 17 September; she then handed it to Mr McCann. 76 The letter followed Mrs Morris's draft closely, except that the specific rental escalators put forward by Mrs Morris were deleted. Instead, the letter provided for those escalators to be agreed between the lessor's and the lessee's valuers. Mr Collins' letter also incorporated a note which had not been included in Mrs Morris's draft, providing that the rent escalations should not exceed 9.75% and should be "based on rates of escalation already applied to similar Commonwealth leases in the ACT". Mr Collins could not recall having had any discussions about the terms of that note.77 He was unable to explain why he included the proposition that rent escalations ought to be based upon rates of escalation already applying to similar Commonwealth leases in the ACT. He conceded that he may not have realised that this could be viewed as aligning the rates of escalation to the AUSLIG lease. 78

In a letter dated 18 September from the ACT Department of the Environment, Land and Planning to Mr Hogg, the ACT Government made a formal offer to the Labor Party of the site on which Centenary House came ultimately to be constructed. 79

On 20 September the National Executive of the Labor Party resolved to proceed with the proposal .80

By late September, Lend Lease and the Labor Party were proceeding on the basis that the fixed annual escalator for the entire term of the proposed lease would be agreed at a figure somewhere between 9.00 and 9.75%.

7' T 1071-1072. Ex 5 at CH94.001.0083-0085. See Appendix Cat C.3. T707. 78 T708-709. 79 The formal letter and attachments: Ex 104 at ALP.003.0050. The offer was amended

slightly by a further letter of 18 September 1991. 80 The minutes of that meeting: Ex 5 at CH94.0120448-0453. The particular resolution of that meeting: Ex 5 at CH94.012.0452. ' The initial letter of intent put a maximum of 9.75% on the escalator. All the

calculations done up to that time in Lend Lease proceeded on the basis of 9% a year minimum. The feasibility studies presented to the Labor Party National Executive meeting held on 20 September 1991 proceeded on the basis that the escalator would be 9% a year.

Report of Inquiry into the Centenary House Lease 43

5.9

The 17 October 1991 meeting between Lend Lease and Mr Collins

A further meeting between Mrs Morris and Mr Collins also attended by Mr McKeon and Mr McFadden was held on 17 October. Again, Mrs Morris prepared a record of matters agreed at that meeting and sent it to Mr Collins, asking him to let her know if any matters had not been properly reflected in the record. Mr Collins did not seek to disagree with anything which had been recorded in that document. 82 Most of the discussion at the meeting related to variations necessary to the AUSLIG lease in order to reflect matters particular to the Labor Party proposal. There was also discussion about the need for Mr Collins to brief the Valuation Office in relation to rental escalators. 83 The AUSLIG lease had been carefully reviewed by Lend Lease (and possibly Mr McCann) before this meeting.

5.10 The request for valuation

Mr Robert Ireland of the Property Group wrote to Mr Graham Jeffress of the Valuation Office on 1 November. 84 He identified those commercial terms of the lease which had already been agreed between Lend Lease and Mr Collins, with the exception of the initial rent as at 1 January 1991 of $280 net per square metre per year. The letter made no mention of the letter of intent dated 17 September (which did include a reference to that rent); nor did it make any reference to the parameters and figures which had been discussed by Mrs Morris and Mr Collins concerning the two escalators.

The letter noted that the agreement "represents a major departure from the conventional gross lease agreement" and sought "comprehensive advice" of rentals and operating outgoings as at 1 January 1991, rent and outgoings escalators from 1 January 1991 to practical completion, and rent and outgoings escalators from practical completion for the term of the lease. It concluded:

Although this is not a financial lease it does effectively provide the owner with a predetermined return of his [sic] investment and this should be taken into account when you provide the valuation.

The proposal is that your office and McCann and Associates agree and advise on the above.

However, if you feel this office should be given other advice I would appreciate it prior to agreement being reached.

Mr Collins suggested to this Inquiry that the purpose of these paragraphs was to make the point that fixed increments of rent annually over 15 years might not be in the interests of the Commonwealth and to ask for professional advice about whether

12 Ex 5 at CH94.002.0078-0080. 83 See Mr McKeon's handwritten notes: Ex 104 at LEND. 002.0516-0518. 84 Ex 5 at CH94.002.0063-0064. See Appendix C at C.5.

44 Report oflnquiiy into the Centenary House Lease

that was a smart thing to do."' It was a very vague and indirect way of seeking that

advice. Mr Collins had reservations about fixing escalators over such a long period. However, although he might have sought the Valuation Office's advice about whether this was appropriate, he never evinced any significant resistance to the idea in his discussions with Mrs Morris. 86

Mr Collins explained that Mr Jeffress was not told of the agreed starting rental figure ($280 per square metre net) because it was not appropriate to tell a valuer what had already been agreed when the Property Group was seeking the valuer's advice in relation to suitable rental levels. 87

Mr Ireland faxed a copy of the valuation request to Mrs Morris on 6 November 1991.88 This was an unusual thing to do, and there does not appear to be any good reason for doing it. Mrs Morris explained her receipt of the valuation request on the basis that she had been pressing Mr Collins about what had been happening in relation to the escalators and had telephoned Mr Ireland to find out. She said her receipt of the letter was a consequence of that call. 89

5.11 The instructions given to Mr Jeffress

Mr Jeffress testified that Mr Collins had telephoned him about one or two days before he received the Property Group's instructions. He said he understood from his conversation with Mr Collins and from the instructions themselves that he was to advise the Property Group of the following:

• the fair market rent and likely quantum of operating outgoings of Centenary House as at 1 January 1991 on the assumption that it had then been built and substantially conformed to the building depicted in the architectural plans which were shown to him

• the appropriate construction period escalator

• the appropriate escalator to be included for the entire 15 -year term of the lease.

Mr Jeffress also understood that the Property Group wanted him to negotiate and agree with Mr McCann (on behalf of the owner) the rent, outgoings and quantum of the two escalators referred to in his instructions. 90 He testified that shortly after he received the instructions he telephoned either Mr Collins or

Mr Ireland and expressed concern about being asked to agree a rental escalation factor for as long as 15 years. Mr Collins denied having this conversation, and

85 T 700. 86 T712-713. 87 T 799. 88 Ex 33 at FREE.004.0244. 89 T1081. 90 Ex66at par 10. Report of Inquiry into the Centenary House Lease 45

Mr Ireland had no recollection of it. Mr Jeffress said that when he expressed his

concern he was told he was required to agree to the long-term escalator because the need for such a term had already been agreed between the parties and was non-negotiable. Mr Jeffress said he asked the officer to whom he spoke why it was that the Property Group had deviated from normal Commonwealth arrangements in the case of this transaction. The person to whom he spoke told him it was just the way the deal had been struck and repeated that it was non-negotiable. 9'

I am satisfied that some such conversation would have taken place. It is consistent with Mr Jeffress' view of the task he was required to perform and with his opinion as to the wisdom of the transaction. Mr Jeffress did not think he was in a position to reject the instructions he had been given, and in any event he probably did not have the grit necessary for someone in his position to do so.

The "recommendations" he made were not really recommendations at all: they were nothing more than his opinion of the boundary beyond which Mr McCann (for the owner) would not go. 92 What Mr Jeffress believed to be his task was to do the best he could to negotiate with Mr McCann to the point of resolution the matters specified in his instructions and to report to the Property Group on the outcome of those negotiations. He did not consider it was open to him to advise against the whole deal or to hold out for what he thought were appropriate terms at the risk of losing the deal (and thus the building). He was obliged to consummate the deal within the already agreed framework and to do so on the best terms he could negotiate. That is not a valuation opinion or a recommendation. 9 '

5.12 The two Jeffress-McCann meetings

The first meeting between Mr Jeffress and Mr McCann took place on or about 12 November 1991. It was held in the offices of McCann and Associates. Mr McFadden and Mr McKeon were also present. 94 At the meeting, Mr McCann argued that the construction period escalator should be 12.5% a year and that the lease term escalator should be 10% (or perhaps 11%). Mr Jeffress testified in this Inquiry that, when he sought to obtain some discount on Mr McCann's suggested long-term rate, Mr McCann had replied that, "At an escalator of less than 9% the project would not be viable to the developer and [would] not proceed ,.95 It is possible that this statement was made at the second meeting rather than the first, but I am satisfied that a statement to this effect was made,

' T 1829-1830. 92 1 1831-1832. See also T 2282-2283, 2285-2288 and 2291. 93 See Chapter 11. " T 10 in the 1994 Inquiry: Ex 5 at CH94.018.0024. 95 Ex 66 at par 23. 46 Report of in quiry into the Centenary House Lease

In his evidence to Commissioner Morling, Mr Jeffress testified that Mr McCann

had told him that if the long-term escalator were only 8% a year, the project would probably not be viable and might not proceed. 96

I am satisfied that Mr McCann conveyed to Mr Jeffress that, insofar as the long-term escalator was concerned, 9% was the minimum. However it may have been expressed, Mr McCann made it clear to Mr Jeffress that any attempt by him to negotiate the long-term escalator down to a figure below 9% might well bring down the whole transaction.

At the first meeting there was also a general discussion about the Centenary House project and the quality of the building. Mr McCann gave evidence that he provided to Mr Jeffress a copy of the schedules he had prepared showing historical rents in various parts of Canberra and that he explained the basis on which he had selected the buildings in those schedules as the best indicators of rental growth for the future in Canberra. 97

Mr McCann said that at the first meeting there was also discussion about the concept of a long-term fixed escalator and that Mr Jeffress did not express to him any concern about the concept. He said they discussed the historical figures referable to the period 1973 to 1991. He told Mr Jeffress the historical data suggested to him that the long-term escalator should be in the range of 10-11% a year. 98

Mr McCann recalled that Mr Jeffress did not agree to anything at the first

meeting other than that he would support a commencement rent as at 1 January 1991 of $280 per square metre per year net. Mr McCann provided this figure to Mr Jeffress at the meeting as the figure the parties had already agreed in any event.

Mr McCann said Mr Jeffress undertook to review the material provided to him on historical rental growth, to carry out his own research and to get back to him. 99 Mr McCann thought he had given Mr Jeffress a copy of the AUSLIG lease at this first meeting. Mr Jeffress had told Mr Graham Fenwick in 1994 he had not seen the AUSLIG lease before he wrote his report to the Property Group on 27 November

1991. Mr McCann's assertion that be had provided the AUSLIG lease to Mr Jeffress in early November 1991 was not made in either of the previous accounts he gave of what had occurred at the meetings he had with Mr Jeffress at that time. The evidence of Mr McCann in this Inquiry was not correct on this: the AUSLIG

lease was not provided to Mr Jeffress at any time before he completed his task; nor does he appear to have been told of its contents.

The second meeting took place about a week after the first. Mr McCann was again accompanied by Mr McFadden and Mr McKeon and again the meeting took

96 Ex 5 at CH94.005.0264. ' Ex 103 at par 6; Ex 5 atCH94.004.0172-0175. 98 Ibid at pars 87, 88. 99 Ibid at par 89. Report of Inquiry into the Centenary House Lease 47

place in the offices of McCann and Associates. The evidence was that early in the

meeting Mr Jeffress said he could not support Mr McCann's suggestion that the long-term fixed escalator be between 10% and 11 % a year. Mr Jeffress said he was not prepared to agree to an escalator greater than 9%

When it became clear to him that Mr McCann was apparently going to hold out for a long-term escalator of 10% a year,' °' Mr Jeffress offered market reviews at the sixth and tenth years on a ratchet basis so that the rent could not be lower than 9% more than the rent payable in the preceding peri od.°2 He was prepared to agree to an escalator of 10.5% from 1 January 1991 until the completion of construction. 103 There was some discussion about the schedules Mr McCann had previously provided to Mr Jeffress and to which Mr Jeffress had added on his own spreadsheet. 104

Mr McCann came to these two meetings fully armed with a complete

understanding of the position which had been reached between Mr Collins and Mrs Morris up to that time. Mr McFadden and Mr McKeon, who accompanied him, were also aware of that position. In contrast, Mr Jeffress had not been briefed on that position at all. Indeed, the letter of instruction was conspicuously inadequate,

in that it did not contain even a summary of the essential commercial terms which had already been agreed. Mr McCann had been provided with a copy of the AUSLIG lease but Mr Jeffress had not. Mr McCann had seen the letter of intent but Mr Jeffress had not. Mr Jeffress did not even know that Mr Collins had sent such a letter to Mr McCann. These circumstances placed Mr Jeffress at a serious disadvantage in his discussions and negotiations with Mr McCann.

It appears that after the second meeting Mr McCann went back to Mr Hogg and was instructed to agree to what had been arrived at between Mr McCann and Mr Jeffress. Mr McCann informed Mr Jeffress of this. Mr Jeffress then reported to the Property Group.

After the second meeting with Mr McCann, and before he wrote his report of 27 November, Mr Jeffress telephoned either Mr Collins or Mr Ireland and reported on the outcome of the two meetings he had had. He told the person to whom he spoke that the best he could achieve was a 9% long-term escalator with a ratchet

clause and a 10.5% a year construction period escalator. He was instructed by the person to whom he spoke on this occasion that, if in his opinion "that's the best outcome [he could] achieve", he was to incorporate those "recommendations" in his report. °5

100 Ibid at par 91. [01 Ex 66 at par 28. 02 Ex 103 at par 92. 103 Ibid at par 93. 104 Ex 5 at CH94.004.0176. 105 Ex 66 at pars 28-29. 48 Report of Inquiry into the Centenary House Lease

513 The Australian Valuation Office report

Mr Jeffress' report in response to the valuation request was faxed to Mr Collins on 27 November. 106 There are a number of unusual or anomalous aspects to the report:

• Notwithstanding that the request for valuation did not identify the starting rent as at 1 January 1991, the valuation was said to be based on the agreed rental rate of $280 per square metre net, "which has been suggested as the fair market rental rate ... as at 1 January 1991". Mr Collins did not believe that the

Property Group had provided those figures. 107 Mr Jeffress testified that Mr McCann had given him that information at one or other (probably the first) of the two meetings they had had.

• Notwithstanding that the request for valuation had specifically sought advice in relation to rents as at 1 January 1991, the valuation took $280 per square metre net as a given and simply confirmed it. No reference to comparable rents was made. No exposition of the reasoning which led to this "confirmation" was provided.

• The rental growth escalators recommended were the maximum rates to be negotiated, not rates which had been arrived at in the negotiations between Mr McCann and Mr Jeffress or which were themselves recommended.

• The recommendation by Mr Jeffress that there be a review to market at the end of the sixth and tenth years of the lease, with the rent to increase by the higher of market or 9%, was a recommendation which would benefit only the lessor and not the lessee. A valuer would not normally be expected to recommend the negotiation of a provision which would only be to the detriment of the client. However, Mr Jeffress had explained to Mr Collins or Mr Ireland by telephone that he had had to offer this in order to get Mr McCann to move downwards

from his position of 10% a year for the long-term escalator. This was also his evidence in this Inquiry.

This "recommendation" was nothing more than a note of the position which had by then been reached between Mr McCann and Mr Jeffress.

Lend Lease was apparently aware by 26 or 27 November that the Valuation Office would provide to the Property Group its response to the valuation request, and its representatives were ready to meet Mr Collins to confirm agreement on the

106 Ex 25 at DOFA.009.0155-0162; Ex 5 at CH94.002.0095-0103. The schedule of outgoings (CH94.002,0 103) was omitted from the initial transmission but forwarded later the same day. A copy of the report, including the schedule of outgoings, appears in Appendix C at C.7. 107 1729-730.

Report of Inquiry into the Centenary House Lease 49

escalators as soon as the response was received!

08 Such a meeting did occur, and

Mr Collins confirmed his agreement to the escalators recommended by Mr Jeffress as the maximum to be negotiated; he also confirmed his agreement to the review to market. Those terms were adopted because Mr Collins understood they were the terms Mr Jeffress had agreed with Mr McCann. 109

5.14 The letter of intent dated 3 December 1991 and the departure of Mr Collins

On 3 December the Property Group provided a further letter of intent confirming the agreed terms, including the escalators and the market review provisions." 0 From that point on Lend Lease and the Property Group treated the commercial terms as settled, even though no binding legal contract had yet been concluded. The terms were settled in principle at the commercial level. Further negotiations involved the solicitors for both sides and related to machinery matters, not to the wisdom of the central commercial terms as set out in the letter of 3 December.

Mr Collins retired in February 1992." After his departure, Mr Paul Ferrari became leader of Team 1, but Mr Ireland took over Mr Collins' duties, including responsibility for the final negotiation of the lease for the Audit Office.' 2 At that time Mr Ireland understood it "only remained to tidy up the formalities".

Mr Ferrari was aware in February 1992 that there was some indication that commercial rental growth rates were slowing in Canberra. He arranged a meeting with Mr Bruce Holden, General Manager ACT of the Property Group, and Mr Jeffress in order to check whether there had been any change in the property market which would cause Mr Jeffress to change his earlier "recommendations"." 3 Mr Ferrari saw no reason to seek to renegotiate the transaction because Mr Jeffress

had not expressed the view that things had significantly changed.' 4 Mr Ferrari did not take any pro-active or positive responsibility for concluding that the terms of the lease were reasonable or represented good value; he merely asked the valuer to confirm his earlier "recommendations".

Apart from that meeting, the Property Group gave no further consideration to the fundamental commercial terms of the lease save for responding to a query

Mr McKeon's handwritten notes of 26 November 1991 identify that he was to confirm escalators with Mr Collins, and his notes of 27 November record the meeting which took place with Mr Collins on that date and the escalators which had been agreed: Ex 104 at LEND.007.0086-0088, 109

Ex 25 at par 99;T 803.

Ex 5 at CH94.004.0169-0170. See Appendix C at C.8. " T543.

112 Ex89at par 47. 113 Ex32at par 29. 114 T 836, 1308-1309. 50 Report of Inquiry into the Centenary House Lease

from Ms Anne Kelly, a solicitor from the Australian Government Solicitor, who

raised the rental review provisions with Mr Ferrari and suggested, "Surely you could get a better deal than this". 115 Ms Kelly explained her query as arising from the fact that the provisions were unusual, and she wanted to be sure the client was happy with the agreement reached.' 6

Mr Ferrari gave evidence to the 1994 Inquiry that after Ms Kelly had raised the matter he consulted Mr Ireland and Mr Collins and then provided a rationale for the transaction to Ms Kelly and told her of the valuation advice received from Mr Jeffress.' 17 Ms Kelly did not consider it her role or within her expertise to query what she had been told any further."'

5.15 Conclusions

The following is what emerges from all these circumstances:

• There was no negotiation of the lease in the commonly understood sense involving give and take and compromise from previously stated positions by both sides. Rather, Lend Lease - largely in the person of Mrs Morris - simply identified in advance the required parameters of the lease and guided

Mr Collins towards agreement on those parameters.

• The only substantive discussions between Mrs Morris and Mr Collins as to the commercial terms of the lease were on 19 March, 3 July, 30 August and 17 October 1991. In the course of those meetings Mrs Morris moved Mr Collins in increments towards her desired position. In about July 1991, when Mr McFadden became involved, those desired parameters changed somewhat, but the progress of discussions was seamlessly diverted towards the amended parameters without demur from Mr Collins.

• The desired commercial parameters were not identified as a result of any communication from potential financiers about what was necessary to satisfy their commercial requirements. Rather, the parameters reflected Mr McFadden's assessment of what was necessary to present a risk-free proposal to financiers and to provide additional cash flow to John Curtin House

Ltd throughout the lease.

• Mr Collins was not the "fierce negotiator" Mr Ireland claimed he was when explaining the situation to the Minister for Administrative Services the following July. 1' 9 He had negligible experience in negotiating leases and was

115 Ex 5 at CH94.003.0370 at 0371. 116 T 341. 117 Ex 5 at CH94.004.0327 at par 13. 118 Ex 16 at pars 20-22. 119 Minute to the Minister for Administrative Services, 1 July 1992: Ex 5 at CH94.015.0185. Report of Inquiry into the Centenary House Lease 51

thoroughly out of his depth in relation to this lease and the dealings he had with

Mrs Morris, Mr McCann and Mr McFadden. He was inadequately supervised and not subject to proper controls. It was certainly unwise for Mr Collins to attend the meetings with Lend Lease on his own: he was generally outnumbered three to one.

• By contrast with those representing the Commonwealth, Mrs Morris and Mr McFadden were astute business people, very experienced in negotiation and property transactions, and they overwhelmed Mr Collins both in number and in force of personality. Mrs Morris in particular was adept at presenting the position she sought to achieve as a necessary position. She was also adept at appearing to be in a position of strength, notwithstanding the vulnerabilities of John Curtin House Ltd and Lend Lease.

• By reason of the limitations imposed on sites in the Parliamentary Triangle, the Commonwealth was effectively the only available or possible tenant for Centenary House. Despite Mr Taylor's arguments to the contrary, it was not essential for the Audit Office to be housed in the Parliamentary Triangle. Other accommodation allowing the Audit Office to consolidate all its staff in a single building had been available at the relevant time in Woden - the Sir Keith Campbell Centre (which Mr Taylor did not like) and the possibility of additional floors in Medibank House (a solution Mr Taylor would reluctantly have accepted) yet such an alternative was lost from sight. Mr Collins never understood the strength of the Commonwealth's bargaining position or, if he did, never took advantage of it.

• The whole tenor of the discussions between Mr Collins and Mr Jeffress and those negotiating on behalf of John Curtin House Ltd was that the agreed terms were necessary in order that the deal might go ahead. Such a proposition was in any event far from certain. John Curtin House Ltd will emerge at the end of the 15-year term with a building fully or almost fully paid for and having had the benefit of regular and significant surplus cash flow throughout the term. Mr McFadden conceded there was "plenty of capacity in this project to pay" the additional $400,000 fee negotiated by Lend Lease Development in December 1991.120 It would follow that there was plenty of scope for a strong negotiator to negotiate terms more favourable to the Commonwealth than those which were in fact achieved.

120 T 1434.

52 Report ofInquiry into the centenary House Lease

6

Political parties and ownership of office buildings

Since 1965, the Liberal Party of Australia has directly or indirectly owned the building known as RG Menzies House, which is at the corner of Blackall and Macquarie Streets in the Canberra suburb of Barton. The building was opened in 1965, and in 1994 it was enlarged and refurbished to its current state. It is a two-storey building with a total net lettable area of 845 square metres and 20 car spaces.

Menzies House has always been exclusively occupied by the Liberal Party and, in recent years, by the Menzies Research Centre as well. No part of the building has ever been leased to a third party. In particular, no part of it has been leased to the Commonwealth or a Commonwealth agency.

When the Australian Property Group advertised for expressions of interest in the provision of office accommodation in the Barton—Parkes—Forrest—Griffith area in late October 1990, the Liberal Party responded by registering its interest in providing 4220 square metres net lettable area for rental to the Commonwealth in a

new building it then had under consideration for a site at the corner of National Circuit and Brisbane Avenue, Barton.' In the event, however, the Liberal Party did not proceed to acquire that site and so did not proceed with any development on it.

Nonetheless, it is clear the Liberal Party considered that leasing to the Commonwealth space in a building it owned, at least at a time when it was not itself in government, was a legitimate transaction. It was no doubt aware that interests associated with the Australian Labor Party had leased space to the Commonwealth and to Commonwealth agencies in John Curtin House throughout the period from

1975 to 1990. The letter in which the Liberal Party expressed its interest in providing accommodation to the Commonwealth made clear that it had in mind doing so on market terms.

In his evidence to this Inquiry, Mr Robert Hogg (the former National Secretary of the Labor Party) said he thought the ACT Branch of the Liberal Party might have owned premises in the Territory which had, at one time or another, been leased to the Commonwealth .2 But he was not sure about this, and there was no other

evidence to suggest that it was the case. Mr Hogg was reasonably sure that the Democratic Labor Party had never owned property in Canberra which it had leased to the Commonwealth. 3

The proposed site was at Block 2, Section 16, Barton. The letter in which the Liberal Party expressed its interest was dated 13 November 1990: Ex 5 at CH94.014.0033. 2 T 1743-1744. T 1743-1744.

Report of Inquiry into the Centenary House Lease 53

For some period (the particulars of which are not apparent in the evidence), the

Australian Democrats owned a property at 10-12 Brisbane Avenue, Barton, a few doors from John Curtin House. There is no evidence that the Australian Democrats ever leased space to the Commonwealth in that building. Mr Hogg also told the Inquiry the Australian Democrats had had a further opportunity to develop land in Barton but had not proceeded to do so. He said they acquired the land then sold it at a profit. 4

In 1968, the Country Party of Australia (predecessor to the National Party of Australia) acquired land at 7 National Circuit, Barton, and had constructed on that land the first of two buildings known as John McEwen House. The site is on the corner of National Circuit and Blackall Street. The first John McEwen House was a single-storey brick building which provided carpeted, air-conditioned office space of a good standard for its time. The evidence does not make clear how much space was available in this building for leasing to third parties.

Space was leased to the Commonwealth in the old John McEwen House between 1973 and 1976. Pursuant to a lease entered into in 1983 and renewed from time to time thereafter, the Commonwealth again leased space there and continued to do so until at least April 1992. The rents paid were market rents and were reviewed to market periodically, either annually or biennially. 6

The old John McEwen House was demolished in 1995. It was replaced with a three-level building opened in November 1996, also called John McEwen House. The total net lettable area of the building is 2071.8 square metres; the space available for leasing to third parties is 1823 square metres. It would appear that space is available for leasing to third parties on all levels of the building. Only a small amount of space on Level 2 in the new building has ever been leased to the

' T 1743-1744. One lease was entered into. It provided accommodation for the Department of Administrative Services for a term of three years commencing on 8 September 1973. The leased premises had a net lettable area of about 500 square metres, and the yearly starting rent was $54,960. There was an option to renew for a further three years upon the giving of three months' notice in writing before the expiration of the initial term. The rent for the new term was to be such as might be agreed on or determined pursuant to an expert determination clause. The gross rate per square metre was $109.92 a year: Ex 120 at COMM. 025.0002-0010. The premises in question were occupied by the Department of Primary Industries and Energy. The gross rent in August 1988 was $203 a square metre a year. The gross rent as at February 1989 was $225.20 a square metre a year. The Australian Valuation Office expressed the opinion that the current fair market gross rental rate for the premises as at 1 February 1989 was $220 a square metre a year. In the context of renewal negotiations in early 1992, the parties agreed that the fair market gross rent for the premises at that time was $305 a square metre a year.

54 Report of Inquiry into the Centenary House Lease

Commonwealth: it was leased to the Department of Foreign Affairs and Trade

between March 1999 and October 2001 .

The Labor Party's John Curtin House is at 22 Brisbane Avenue, Barton, on the

corner of Macquarie Street and Brisbane Avenue. It is a three-storey good-quality office block with parking available underneath the building. The total net lettable area of the building (including areas formerly occupied by the Labor Party itself) is 4240.9 square metres. The building was completed in 1975. Between 1976 and

1998 seven leases were entered into between the owner or owners of the building and the Commonwealth whereby various Commonwealth authorities leased space in the building. 8 With the exception of two leases in 1998, all previous leases for a period exceeding three years provided for regular reviews to market, every two or three years.

It would appear that the building is now fully occupied by Commonwealth agencies pursuant to leases entered into in October 1998. Telstra Corporation Ltd also has a lease over a small portion of the land, on which there is a telecommunications tower for mobile phones.

The National Registration Authority, established by the Agricultural Veterinarian Chemicals (Administration) Act 1992, has occupied a little more than half of the building since 1998, taking up space on the ground and first floors. The first two rent reviews under the lease to that agency were biennial market reviews. Although the rent may not go down at either review, it cannot be increased above

5% more than the rent payable in the period preceding the review date. The last two reviews are annual. They are fixed reviews, being 4% over the rent payable for the preceding period.

The amount of space leased was 253.5 square metres net lettable area. The gross rent paid was $260 a square metre a year. One month's rent free was offered by way of incentive to the Commonwealth. 8 The first two of these leases are dated 7 December 1976. One of them was for a term

of three years commencing on 22 May 1975 and the other was for 10 years commencing on that date. The gross rent for office space under these leases appears to have been $76 a square metre a year. There was an option to renew in the longer

of the two leases. The third of the leases is dated 1 September 1978. Under this lease, premises were leased to the Commonwealth Savings Bank of Australia. The term was 10 years, also commencing on 22 May 1975. The gross rent appears to have been $88 a square metre a year. The fourth of the leases is dated 1 June 1988.

It was with the Australian National Airlines Commission and was for 10 years commencing on 1 June 1987. The gross rent was $234.10 a square metre a year. There was an option to renew. The fifth of the leases is dated 21 December 1990. It was for three years commencing on 22 November 1990 with an option to renew for a

further three years. It would appear that the gross rent was $280 a square metre a year. The sixth and seventh of the leases are both dated 9 October 1998. One is to the National Registration Authority for seven years and seven months commencing on 15 September 1998; the other is to the Australian Fisheries Management Authority for eight-and-a-half years commencing on 1 June 1998. The starting gross

rents were $220.00 and $217.99 a square metre a year respectively.

Report of Inquiry into the Centenary House Lease 55

The other lease is in favour of the Australian Fisheries Management Authority.

It is for the balance of the space in the building, on the second and third floors. The rent review mechanism is very similar to that for the Registration Authority, with the initial reviews being market reviews with a ceiling and the last three reviews being a fixed 4% a year. Each of the leases also identifies the initial rent payable should the option in each case be exercised. During any renewed period, the rent is

to escalate at fixed 4% a year.

From all of this the following conclusions can be drawn:

• The Liberal Party has never owned an office building in Canberra in which it leased out space to third parties. In 1990 and 1991 it looked at developing a site near the Centenary House site with a view to having such a building constructed and leasing out space therein to third parties, including the Commonwealth. The proposal did not proceed.

• The National Party (and in its former guise as the Country Party) has owned two buildings on the same site in Barton. Each building has been named John McEwen House. The first was built in 1968 and demolished in 1995; the second was completed in 1996 and still stands. Space in the buildings has been leased to third parties, including the Commonwealth. In the old building, the Commonwealth occupied space under one lease for nine years and under another for three years. Only a small amount of space has ever been taken up by the Commonwealth in the new building. Rents were at market rates and reviewed annually or biennially.

• The Democratic Labor Party never owned an office building in Canberra which it leased to the Commonwealth.

• The Australian Democrats did own an office building in Canberra at one stage, but there is no evidence that the party ever leased space to the Commonwealth.

• Since 1975 John Curtin House Ltd has leased space to third parties in John Curtin House. Many of the leases granted were to the Commonwealth or Commonwealth agencies, and most appear to have been negotiated and agreed (if not always formally entered into) during times when the Labor Party was in

power at the federal level (1972 to 1975 and 1983 to 1996). Rents were set at market rates and reviewed annually or biennially to market.

When leasing office premises to the Commonwealth, a political party and any associated company should take great care to act transparently, at arm's-length and on a market basis. Such arrangements are very likely to engender public controversy and political debate in the strongly adversarial context of politics in Australia. This is particularly so when the political party leasing premises to the Commonwealth is the party in government. There has long been a perception and perhaps more so now than 15 years ago - that decision making by some public servants is affected, consciously or subconsciously, by what they believe the party

in government wants to be the result. This perception might or might not be

56 Report of Inquiry into the Centenary House Lease

accurate, but it exists and it can be skilfully manipulated by opposition parties.

However, none of the political parties has adopted a position which goes so far as to contend that such arrangements should never be entered into. It seems that each of the major parties is, and has for some time been, prepared to countenance such transactions. There is no illegality involved in such transactions in themselves. The

real (and difficult) problem is with the public perception of them.

There was also a perception pervading the evidence in the 1994 Inquiry, and (to a lesser extent) in the present Inquiry, that "everybody does it ... it has always happened ..." That perception appears to have been, and to still be, widely held among public servants and politicians alike. The evidence shows, however, that it

does not quite reflect the true position. Only the Labor Party has leased commercial office space to the Commonwealth with any regularity and frequency. It has done so systematically in John Curtin House since 1975 and in Centenary House since 1993. With John Curtin House the terms of the leases were more closely tied to usual market transactions than was the case with the Centenary House lease. The

fact that a perception has persisted that leasing of office space to the Commonwealth by political parties is common, notwithstanding the true position, negates any suggestion of inappropriate conduct by the Labor Party in its decision to construct a large office building in the Parliamentary Triangle when in government and where the Commonwealth was necessarily the only available tenant.

This is discussed further in Chapter 15.

Report oflnquiry into the Centenary House Lease 57

3

4

5

7 The terms

The terms of the Crown lease of the land to John Curtin House Ltd and of the Centenary House lease must be considered against the background of conditions in the Canberra market from 1990 to 1992.

7.1 The Crown lease

The Crown lease is dated 9 April 1992. It was signed the day after the agreement for lease of Centenary House was signed. The Crown lease had been negotiated in 1990 and 1991 with a view to securing the land at the same time as the Commonwealth tenancy. Under the lease, the Commonwealth leased to John Curtin House Ltd Block 5 Section 22 Division of Barton ACT, that being an area of 6657 square metres and having the street address of 19 National Circuit, Barton, ACT.' The term of the land lease is 99 years beginning on 18 March 1992. The purpose clause in the tease provides that, subject to the overriding requirement that not less than 8% of the gross floor area of Centenary House be used and occupied

solely by the Australian Labor Party, Centenary House will be used only for offices for the National Secretariat of the Labor Party, offices for an approved association, or offices for the Commonwealth or Commonwealth agencies. 2 It is not to be used for retail or wholesale trading. The lease also provides that the gross floor area of

Centenary House when constructed will not be less than 6000 square metres or more than 7775 square metres. 3

The land is well located in the central part of the Barton office area. It is about one kilometre east of Parliament House, about four kilometres south of Civic, and close to major government and commercial office buildings. 4 The land is part of the Central National area (Barton), an area designated for national capital use according to the National Capital Plan. 5

The Crown lease was registered in Register Book Vol 1236 Fol 18 on 29 April 1992. It is a lease granted by the Commonwealth under the City Area Leases Act 1936. The precise boundaries of the parcel are delineated on Deposited Plan No 8023, deposited in the office of the Registrar of Titles in Canberra. A copy of the Crown lease is in Ex 65 at AVO.001.0080-0092. Crown lease at cl 4(e) and the definition of "approved association" in cl 1(b). See also cl 4(g).

Ibid at cl 4(f). It is opposite the National Press Club (and offices) and close to the office of the Motor Trades Association of Australia and the York Park development, which is occupied by the Department of Foreign Affairs and Trade.

Ex 99 at par 16.

Report oflnquiiy into the Centenary House Lease 59

The starting rent under the land lease was $158,000 a year.

6 By agreement with

the ACT Government's Department of the Environment, Land and Planning reached in May 1994, John Curtin House Ltd paid out its land rent commitment under the Crown lease by paying $1,725,526.19 to the ACT Government. 7 With that payment, John Curtin House Ltd effectively discharged its future liability for land rent for the balance of the 99-year term.

7.2 The building

Centenary House was completed in July 1993. It is a four-storey ferro-concrete building with a metal deck roof There is also a basement area with underground parking for 120 vehicles as well as storage and shower and washroom facilities. There are 28 additional on-site parking bays.

The building is air-conditioned and has smoke arrestors throughout. The ceilings are suspended, with recessed fluorescent lighting. Each storey has an open floor plan fitted out and subdivided to suit the occupants' needs. There are rows of supporting columns throughout the building. The ground floor is fitted out for two separate tenancies, with a central entrance vestibule and foyer. Access to the upper levels is gained by means of two lifts.

When completed, the building was of a high standard of construction and finish and could readily have been fitted out to suit the requirements of any office tenant commercial or government. Appendix D shows photographs of Centenary House.

73 The current occupants

The Audit Office occupies part of the ground floor and all of the first and second floors of Centenary House. Kellogg Brown & Root Pty Ltd occupies the top floor pursuant to a sublease from the Commonwealth dated 1 December 2002. This sublease was arranged by the Audit Office in order to generate some revenue to defray its own rent expenses: it is a sublease of part of the area originally leased to the Audit Office pursuant to the Centenary House lease. 9 The Labor Party occupies 570 square metres on the ground floor, as it has done since the building was opened in 1993.

6 Crown lease at ci 2(a)(i) and the definition of "minimum rent" in ci 1(i). Ex 105 atMACQ.012.0292-0293 (0277-0278, 0285). 8 Ex99at par 3l. 9 From late 1998 to late October 2002, the third floor had been occupied by another Commonwealth department (the Department of Communications, Information Technology and the Arts) pursuant to a formal sub-tenancy arrangement organised by the Audit Office. There have been no other sub-tenancy or sub-licence arrangements in the building. 60 Report of Inquiry into the Centenary House Lease

7.4

The formal lease documents

The Commonwealth signed the agreement for lease on 8 April 1992,10 and the solicitor for John Curtin House Ltd held it in escrow until certain matters then under discussion between that company and its financier, Macquarie Bank, had been finalised. The agreement became effective on 23 April 1992." Although the essential terms of the proposed transaction had been agreed in principle by early December 1991, no binding agreement arose until 23 April 1992.

Once signed and unconditionally delivered, the agreement for lease constituted a binding legal contract which obliged the Commonwealth to enter into a lease of most of the space in Centenary House on the teims set out in the document. It was described in the evidence as a "precommitment lease" or "precommitment agreement".

Mr Frank Egan, the independent valuer called as a witness by counsel assisting the Inquiry, said pre-commitment agreements were well-known and relatively common in Australia in 1991, 1992 and subsequently and were usually entered into in order to allow the construction, refurbishment or fit-out of commercial or industrial premises to occur in circumstances where all relevant parties the lessor, the lessee and the financiers knew that the lessor and lessee had bound themselves to a lease as soon as the building work was completed .' 2

This evidence from Mr Egan was not controversial, and it is accurate. There was nothing unusual, unreasonable or uncommercial in the Commonwealth and John Curtin House Ltd entering into a pre-commitment agreement in the case in question. It is clear from the terms of the agreement for lease that the parties expected it would take about 17 months from 23 April 1992 to construct Centenary House. 13

The agreement for lease provided that the rate per square metre per year to be used to derive the net rent for the office space at the commencement of the lease was to be calculated by taking the figure of $280 a square metre a year as at 1 January 1991 and increasing that figure by the addition of such sum as is arrived at by multiplying $280 by 10.5% a year, compounded at yearly rests for the period

1 January 1991 to the commencement date (as defined). 14 The rate per square metre

so derived was then to be multiplied by the net lettable area of the premises proposed to be leased. In the agreement for lease the net lettable area was to be measured in accordance with the BOMA rules and was to be no greater than

'° The agreement for lease is Ex 5 at CH94.015.0063; Statement of Ms Anne Kelly: Ex Sat CH94,005.0080 at par 4; diary extract of Ms Kelly: Ex 17 at EXH.017.0007. ' Ex 5 at CH94.005.0080 at par 4. 12 Ex99at par 37. 13 Agreement for lease, definitions of "commencement date" and "provisional commencement date" in cl 1.1. 14 Ibid at cl 8.1(a) and Annexure A (Ex 5 at CH94.015.0090 and CH94.015.0106) and the form of lease, which is Schedule 3 to the agreement for lease. Report of Inquiry into the Centenary House Lease 61

6500 square metres.

15 The basement car spaces were initially to cost $1000 each a year, and the on-site car parking bays were initially to cost $500 each a year. The cost of those spaces and bays was not to be escalated during the construction period. 16

Thus, the starting rent could be precisely quantified at all times from 23 April 1992, regardless of when the building was completed and when the Audit Office took up occupation. In addition, the Commonwealth bound itself contractually through the agreement for lease to the mechanisms for quantifying that starting rent, as just described.

Application of these terms in the agreement for lease resulted in a starting rent for the Audit Office of $367.95 a square metre a year net for the office space and $134,000 a year for the car spaces and bays. The actual starting rent, therefore, was $2,450,981.15,' paid for the year beginning 23 September 1993.

The agreement for lease provided that the initial term of the lease would be 15 years.' 8 It also provided for an option to renew. The option period was five years, to be exercised by no later than nine years and nine months into the initial term. 19 The agreement also required that the annual rent (including the component of that rent referrable to car spaces and car bays) be increased on 23 September each year, starting in 1994, to an amount 9% greater than the rent payable during the preceding year .20 This automatic fixed escalation of the rent was itself subject to a further review mechanism which could be activated only by the lessor and only on 23 September 1998 and 23 September 2003 during the initial term of the lease. It could also be activated on 23 September 2008 if the option to renew was exercised. This mechanism allowed the lessor, if it so desired, to seek to obtain a rent increase which was greater than 9% over the preceding year's rent. It provided that on each of the nominated dates the rent should be reviewed to market and thereafter be the

Ibid at ci 8.1(b) to 8.1(d) and Annexure A: Ex 5 at CH94.015.0090 and CH94.015.0106. BOMA is the Building Owners & Managers Association of Australia Ltd. 16 Ibid at ci 8(l)(e) and Annexure A: Ex 5 at CH94.015.0090. 17 Ex 2 and Ex 99 at pars 50, 51. See also the Centenary House lease (p 1). 18 Agreement for lease at ci 7, the definition of "lease" in ci 1.1 and item 3 in Schedule 1 to the form of lease which is Schedule 3 to the agreement for lease, and the definition of "term" in ci 2(1) of that form of lease: Ex 5 at CH94.015.0088-0089, C1194.015.0013 and CH94.015.0142. 19 Agreement for lease at ci 7, Annexure A, ci 34 and item 6 in Schedule I to the form of lease, which is Schedule 3 to the agreement for lease: Ex 5 at CF194.015.0088-0089, CH94.015.0106, CH94.015.0138-0139 and CH94.015.0142. 20 Agreement for lease at ci 7 and ci 4(2) of the proposed lease, which is Schedule 3 to the agreement for lease: Ex 5 at CH94.015.0088-0089 and CH94.015.01 14. 62 Report of Inquiry into the Centenary House Lease

greater of the market rent or that

sum which is 9% more than the previous year's

rent. 2

These market reviews could do nothing other than result in an increase in the

rent payable by the Audit Office. Furthermore, the new rent would be set at the market rate only if that resulted in a new rent which was more than 9% above the preceding year's rent.

The agreement for lease also required that the rent be a net rent. This meant that the Audit Office was to pay a specified percentage of the building's outgoings with that percentage to be quantified when the building was completed. The agreement also required the Audit Office to pay for the cost of cleaning its premises and for the cost of all electricity, gas and water used there .22

Pursuant to the agreement for lease, John Curtin House Ltd was also to provide the fit-out of the Audit Office's premises, at a cost of approximately $3,000,000. The company was to contribute items to that fit-out to a value of not less than $400,000, and the items contributed in this way were to remain the company's property. The contract relating to the fit-out was rather vague and not precisely worded: it left a great deal to the goodwill of the parties.

Finally, the agreement for lease required that the Audit Office's premises be re-carpeted during the initial term and that, in the event of the Commonwealth exercising its option to renew, the premises be refurbished soon after the commencement of the tenth year of the initial term. 23 Both of these covenants were expressed in general and vague language. There must be substantial doubt that either could have been enforced against an uncooperative lessor.

This summary of the commercial terms in the agreement for lease makes it apparent that all the crucial commercial terms of the lease transaction either were expressly described in the agreement for lease or were derived or calculated by reference to mechanisms expressly described in that document. After the agreement for lease became operative, the only variables left to be ascertained for inclusion in the lease itself were the matters referred to in clause 7.1 of the agreement. Of these, the most important items were as follows:

• the commencement date

• the initial annual rent

• the due date for the monthly instalments of rent

21 Agreement for lease at ci 7 and ci 4(3) and 4(4) of the proposed lease, which is Schedule 3 to the agreement for lease: Ex 5 at CH94.015.008841089 and C1194.015.0114-0 117. 22 Schedule 3 to the agreement for lease. 23 The re-carpeting covenant is ci 27 of Schedule 3 to the agreement for lease (Ex 5 at CH94.015.0134) and the refurbishment covenant is in ci 35 of that Schedule (Ex 5 at CH94.015.0139). L Report of Inquiry into the centenary House Lease 63

•

the net lettable area of the premises

• the lessee's percentage of outgoings.

All these items were specifically governed by the agreement for lease. The only items for which there was any potential for variation were the net lettable area of the Audit Office's premises and the lessee's percentage of outgoings. Calculation of these two items was nonetheless closely regulated by the provisions of the agreement. They were also linked each to the other.

In truth and in substance the completion of various items in the lease document was a mere formality and was governed by the agreement for lease itself. The substance of the lease transaction is embodied in the agreement for lease, although, of course, it was later formally and finally reflected in the lease itself.

7.5 The lease

The Commonwealth executed the lease contemplated by the agreement for lease on 13 October 1993.24 The lease provided for a starting net rent (including the cost of car spaces and car bays) of $2,450,981.15. The term of the lease is 15 years commencing on 23 September 1993; the lessee's percentage of outgoings is 91.7%; the total net lettable area of the building is 6867 square metres; and the total net lettable area of the premises leased to the Audit Office is 6297 square metres. The remaining terms are as provided for in the agreement for lease.

7.6 The Canberra market for good-quality office space in 1990 to 1992

There is disagreement in the evidence as to the state of the Canberra market for good-quality office space in 1990 to 1992 and in 1993 (leading up to September). As noted, counsel assisting the Inquiry called Mr Frank Egan as an expert witness. Mr Noel McCann, the property adviser to the Labor Party and to John Curtin House Ltd, also gave evidence. On this and other matters, the views of Mr Egan and Mr McCann differ, There is also other evidence relating to this question: I deal with that where it is relevant.

It is convenient to start with some observations about the evidence of Mr Egan and of Mr McCann and with the submissions made in connection with that evidence.

24 A copy of the lease is in Ex 5 at CH94.016.0042. One immaterial page is missing from this copy.

64 Report oflnqui?y into the Centenary House Lease

7.6.1 The evidence of Mr Egan

Mr Egan provided to the Inquiry a comprehensive report dealing with a number of matters relevant to the terms of reference . 25 This included evidence about the following:

• the state of the market for the leasing of good-quality office accommodation in the ACT in 1990, 1991 and early 1992 and in subsequent years

• the fair market rent for such accommodation in those years

• the fair market rent for space in Centenary House in those years

• whether or not the terms of the Centenary House lease were comparable with those for other leases entered into in 1991, 1992 and subsequently

• whether the terms of the Centenary House lease were improvident from the Commonwealth's perspective. 26

Mr Egan is a very experienced valuer and an expert in property matters generally. He has almost 50 years' experience as a valuer. For the past 30 or so years the Supreme Court of New South Wales has routinely appointed him as an arbitrator in valuation matters and as a referee in such matters. He has given expert

evidence in many cases. He has acted as a court-appointed expert in the New South Wales Land and Environment Court. He has been a long-standing member of the New South Wales Valuers' Registration Board; a member of the Real Estate Services Council's Valuers' Registration, Advisory, Educational and Disciplinary

Committees between 1990 and 1997; a delegate on behalf of New South Wales to the Divisional Board of the Australian Institute of Valuers for 10 years; and a past president of the New South Wales Division of the Australian Property Institute. 7

Mr Egan was a witness independent of the parties with an interest in this Inquiry. He was the only witness called who could be described as independent. Mr Graham Fenwick, who gave evidence to the 1994 Inquiry, was also a well-regarded valuer and independent of the parties; regrettably, he died on 19 May 2003.28 The weight of Mr Fenwick's 1994 evidence must be judged by reference to

his retainer, the terms of his testimony and the circumstances in which it was given matters to which I turn later.

25 Mr Egan's report, exhibits related thereto and documents referred to therein together form Ex 99. 26 The questions asked of Mr Egan are set out in Ex 99 at par 4. Originally, he had been asked to provided evidence about certain other matters. The fact that his

instructions changed is no criticism of Mr Egan or his evidence or anyone else. All parties had ample opportunity to cross-examine Mr Egan and to obtain his views on any matter they chose. Indeed, counsel for John Curtin House Ltd did question Mr Egan for all of one day, 29 October 2004, and called evidence from his client's

property consultant, Mr McCann. 27 Ex 98, curriculum vitae of Mr Egan. 28 Ex 87. Report of Inquiry into the Centenary House Lease 65

Mr Egan gave his evidence impartially as expert

evidence and it was clearly

identified as such. He had no interest in the issues before the Inquiry and did his best to provide expert assistance to it. He was appropriately qualified to give such evidence based upon his training and experience.

There was a sustained attack on that evidence by counsel for John Curtin House Ltd in submissions made on behalf of that company. The general submission made was that, to the extent that it reaches conclusions different from other evidence before this Inquiry (including evidence given in the 1994 Inquiry), Mr Egan's evidence:

• is based on hindsight

• is based almost wholly on personal beliefs or assertions

• expressly does not deal with the other evidence available to this Inquiry

• is based on assumptions without foundation in the evidence.

It was also submitted that, to the extent that Mr Egan identified data or reasoning to support his beliefs, he did not know whether the data were available in the Canberra marketplace in 1991, 1992 or 1994. In addition, the general criticism was made that Mr Egan had no experience of the Canberra market at the relevant time and had only a limited opportunity to investigate that market for the purposes of his report. This latter criticism can be disposed of immediately.

It is quite common for expert valuers to be called on to testify in relation to a market in which they have no previous experience. Although this is not quite the case with Mr Egan, it was the case with Mr Fenwick, who gave evidence after being retained directly by Commissioner Morling. Introducing Mr Fenwick on one of the occasions when he held a public hearing, Commissioner Morling announced that in his view it was preferable that the valuer retained by him for the purposes of providing expert assistance to him be wholly independent not only of the parties but also of the Canberra market itself. 29 That approach has merit.

Mr Egan acknowledged the difficulties posed for an expert in 2004 who is called on to answer questions about a period going back as far as 1973. As he said, a valuer confronted with such a task is reliant on statistics, information and opinions emanating from organisations which are generally regarded by valuers as reliable. 30 Difficult though the task might be, Mr Egan did not accept that it was impossible. In particular, when he came to consider the question of what the fair market rent in Barton was from time to time from 1990 onwards, he placed most reliance on primary market evidence in the form of rents actually achieved for office space there under fresh leases and renewals of existing leases. 3'

29 Lx 5 at CH94.019.0003-0004. 30 Ex99at par 77. H That primary evidence is tabulated in Ex R, forming part of Ex 99. 66 Report of Inquiry into the Centenary House Lease

As is apparent from a consideration of his report, Mr Egan also relied on

BOMA publications available in 1990 to 1993.32 Further, to some extent he relied on commercially available statistics published by CB Richard Ellis Global Research & Consulting in order to test the conclusions he drew from the primary evidence he had used. 33 Although in 1991 and 1992 these statistics might not have been available in precisely the same form in which they were provided to this Inquiry, it does seem that, because they are used by commercial parties and valuers alike and come from an organisation of good repute, they should be regarded as having some weight and should not be disregarded merely because they might not have existed in 1990, 1991 or 1992 in the form in which they were provided to this Inquiry. It was not suggested that the information provided by CB Richard Ellis Global Research & Consulting is unreliable. Mr McCann's criticism of the data as being merely "generic" is unhelpful. As I understand it, such data are commonly used by valuers,

particularly in order to discern trends and to gain an overall picture of a market.

The submission that Mr Egan' s evidence is nothing more than a statement of his own personal beliefs or assertions necessarily implies that the factual basis on which he based his opinion has not been established. His opinions were, however, based on evidence from a number of sources - identified primary rent sources ;34 other publications and research papers; 35 the statistics provided by CB Richard Ellis

Global Research & Consulting; 36 the statistics provided by Colliers Jardine; 37 his visits to Canberra; his perusal of newsletters from the time; and his own knowledge of economic conditions and the property market in Australia from time to time . 38 In addition, he was asked to make the following 10 assumptions:

1 that the Commonwealth did not exercise its option to renew the Centenary House lease 39

2 that, by arrangement with Kellogg Brown & Root Pty Ltd, the Audit Office had informal access without charge on an irregular basis to the large conference room on the third floor of Centenary House 40

3 that the sub-tenancy arrangements with the Department of Communications, Information Technology and the Arts and Kellogg were both arm's-length

32 Exs L, M, N, V, W, X and Y in Ex 99. I' Exs l,J and KinEx99. " Ex R and Ex S in Ex 99 and the BOMA publications in Exs L, M, N, V, W and X in Ex 99. 35 ExO,P,U,Y,Z and AAinEx99. 36 Ex I, J and K in Ex 99. 37 Ex BB in Ex 99. 38 Ex 99 at pars 66-71, 102-118, 149-150. 39 Ibid at par 59. ° Ibid at par 64. Report of Inquiry into the Centenary House Lease 67

arrangements made on the best terms reasonably available at the time they were

made 4 1

4 that the rents shown in Mr McCann's and Mr Jeffress' 1991 spreadsheets were accurate, in the sense that the spreadsheets accurately depicted the prevailing rents in the buildings and over the period referred to in those spreadsheets 42

5 that the Commonwealth Government had embarked on a policy of commercialisation of many government agencies and the market expected this economic rationalist approach to reduce the size of the Public Service over time 41

6 that, in March and April 1991, both the Commonwealth and the John Curtin House Ltd interests were working on the basis that, as at the date, outgoings in Centenary House would be running at $40 a square metre 44

7 that negotiations for the AUSLIG lease took place over a period commencing in late 1989 and concluding in the first instance in mid- i 990 41

8 that the original deal for the AUSLIG lease provided for rent reviews on a

biennial basis to market and that the deal was renegotiated in early 1991 to include fixed rent increments of 18.81% every two years in return for certain other incentives 46

9 that neither the Commonwealth's need for accommodation nor the Auditor-General's desire to be accommodated in the Parliamentary Triangle was so urgent and so pressing as to require a building and premises to be secured at all costs or to be secured at a premium over market 47

10 that the terms of the Centenary House lease sought by John Curtin House Ltd were dictated by its own financial needs and economic desires rather than by market factors or conditions. 48

Assumptions 11 and 2 are effectively agreed facts: no-one disputed either of them. Assumption 3 was established by the evidence of Mr Russell Coleman of the Audit Office. Assumption 4 was established by the evidence of Mr McCann and Mr Jeffress and, to some extent, by primary records the leases themselves. 49 Assumption 5 was made good by the estimates memoranda and the reasoning dealt with later in this section. Assumption 6 was established by the evidence of

41 Ibid at pars 65 and 72. 42 Ibid at pars 79-85 43 Ibid at par 117. 44 Ibidat par l31. 'Ibid atpar 177. 46 Ibid at par 177. ' Ibid at par 201. 48 Ibid at par 202. 49 See Chapter 6. 68 Report of Inquiry into the Centenary House Lease

Mr Jeffress and the terms of the letter of intent dated 17 September 1991.

Assumptions 7 and 8 were established by the evidence of Mr John McFadden of Lend Lease and the documentary evidence tendered in the present Inquiry concerning the AUSLIG lease. 5° Assumptions 9 and 10 are both conclusions I find follow from other evidence. Some of these matters are dealt with more fully later in

this chapter. The submission that Mr Egan's evidence is nothing more than a statement of his own personal beliefs or assertions is rejected.

Nor do I attach much weight to the criticism that Mr Egan did not embark on a detailed rebuttal of each and every piece of evidence presented to the 1994 Inquiry by Mr Fenwick and other witnesses representing the parties in that Inquiry. Mr Egan gave his evidence as requested, answering questions asked of him. If there was something about which one or more of the parties wished to challenge Mr Egan, that party (or those parties) should have brought that matter to his attention and challenged him. As far as the evidence of Mr Fenwick was concerned, I was left with the task of weighing that evidence against the evidence of Mr Egan, insofar as it conflicted with Mr Egan's evidence. Because of Mr Fenwick's death, I was compelled to approach that task without the benefit of any elucidation by Mr Fenwick of his views or any cross-examination or testing of those views in open hearing by experienced counsel. I have approached his evidence with these things in mind.

In addition to the general criticisms counsel for John Curtin House Ltd made of Mr Egan, specific criticisms of his evidence were advanced by them. 5 1 I have carefully considered each of the submissions concerning Mr Egan's evidence but do not specifically deal with all of them here. Rather, I deal with those I consider

demand my attention. This does not mean, however, that I have not had regard to the other submissions in formulating my views: on the contrary, I have taken them into account as and where appropriate.

Counsel for John Curtin House Ltd submitted that Mr Egan should have taken a • "straw poll" of valuers and people active in the property market in 1990 to 1992 in order to condense their views and summarise them in evidence to this Inquiry. J do not agree that it was necessary for Mr Egan to do so. Indeed, had he done so,

I would have attached little weight to his accounts of what he was told. In any event, it must be said that the recollections in 2004 of people dealing in the Canberra market in the early 1990s might be affected by hindsight and the passage of time. The more reliable sources of what was occurring then are statistics, publications and other contemporaneous records of facts and opinions expressed at the time in contexts which might be regarded as reliable as distinct from a litigious or quasi-litigious context.

Mr Egan stated in his report that he had been asked to assume that in mid-1989 the Commonwealth Government had embarked on a policy of commercialising

50 Ex 51, Ex 58 and Ex 59. 51 Submissions made on behalf of John Curtin House Ltd. pars 100-149. Report oflnquiry into the Centenary House Lease 69

many Commonwealth departments and authorities and that the market expected this

"economic rationalist" approach to reduce the size of the Public Service over time. 52 There is no doubt that the Commonwealth had embarked on such a policy. 53 It was submitted on behalf of John Curtin House Ltd that no evidence presented to this Inquiry supported the second part of the assumption Mr Egan was asked to make - that the size of the Public Service would or might reduce - and that such a

reduction is directly contradicted by other evidence. In support of that submission, reference was made to the evidence of Mr Malcolm Coleman, Mr Graham Jeffress and Mr McCann. The evidence of Mr Coleman and Mr Jeffress, if given any weight, does not contradict this part of the assumption. The evidence of

Mr McCann might well do: I deal with his evidence in the following section.

There is no doubt that from 1989 onwards the executive arm of government made strenuous efforts to make its public servants and those performing a traditional public servant's tasks more accountable for their activities and more efficient in performing them. The commercialisation of Public Service entities and the outsourcing of traditional Public Service activities were both evident by 1991. One question concerns whether or not, having regard to what was known by late 1991 and early 1992, it was reasonably foreseeable that one of the probable effects of this

policy approach was a reduction in the size of the Public Service and a potential reduction overall in the number of people performing the tasks traditionally carried out by that Service.

It matters not whether one or two individuals dealing in the market at the time actually foresaw these possibilities: what matters is whether they should have taken them into account. They should have. Mr McCann was cross-examined on this point.54 He said that, although there might be a slowing of growth in the Public Service at one time, there might also be an acceleration of that growth at another time and that history has proved that, generally speaking, there has never been a radical pruning of the Public Service within a short period. When pressed, he did accept that there "would be a range of views" on this, but that those were his views at the time.

If close regard is paid to the answers Mr McCann gave during this questioning, it is apparent that in 1991 and 1992 he did not give any real thought to what was likely to happen in the future in the light of the significant change in policy represented by the Government's 1989 announcements. Mr Egan's approach to this matter cannot be criticised. The reduction in the size of the Public Service was, after all, put to him as an assumption he was asked to make, and he dealt with it accordingly and appropriately.

52 Ex. 99at par ll7. 53 See Estimates Memoranda 1989/2: Ex 5 at CH94.003.0 177; 89/352: Ex 5 at CH94.012.0012; 1991/9: Ex 5 at CH94.007.0082; 1991/32: Appendix C at C.4. 14 T2763-2766.

70 Report of Inquiry into the Centenary House Lease

The next question concerned vacancy factors. Mr Egan testified that between

January 1990 and July 1992 Canberra vacancy factors had increased relatively significantly. He accepted that the absolute levels were still small by comparison with the rest of Australia at the time but that they did show a trend indicative of a slowing in the market. Mr McCann's evidence suggested that Mr Egan had misinterpreted the information he had, 15 and that Mr Egan had failed to take into account the impact of absorption and absorption rates '56 "absorption" being defined as the measure of the amount of space taken up over a particular period. But Mr Egan's approach to the use of vacancy factors is entirely in keeping with the approach taken by other valuers, such as Baillieu Knight Frank in its report of 9 December 1992.

According to the BOMA report for January 1992,58 the Canberra office market as at that time was characterised by the following:

• an increase in building vacancies for the preceding six months

• strong levels of absorption

• moderate levels of supply projected for the medium term

• high levels of pre-commitment for new developments. 59

The report's author also noted that the vacancy factor was marginally higher in A-grade premises (as defined in the report) and in certain suburban locations.

I agree with Mr McCann: absorption levels should be taken into account. However, even after taking into account that intelligence, the information Mr Egan referred to in his report on vacancy factors tended to suggest that the Canberra market was slowing in mid-to-late 1991 and early 1992, as he said. The fact that there was still demand for quality commercial office space at that time, as Mr McCann asserted, does not contradict the proposition advanced by Mr Egan. Further, Mr Egan referred to vacancy factors as but one indication of what he regarded as a slowing of the market. 60

Finally, the authors of the Baillieu Knight Frank report of 9 December 1992 expressed the view that, although the commercial office vacancy rate in Canberra remained exceptionally low in 1990 and 1991 in absolute terms, the recession in Australia during 1990 and 1991 resulted in a doubling in the Canberra rate, from a

55 Ex 102. 56 Ibid at pars 52-61. 17 See the Baillieu Knight Frank report, 9 December 1992 (Ex 5 at CH94.01 1.0080) and the 1993 and 1994 Stanton Hillier Parker valuations (Ex 113 at MACQ.033,0141- 0297). ExNinEx99. 59 Ibidatp3. 60 Ex99atpars 102-111. Report oflnquiiy into the Centenary House Lease 71

traditional low of around 1% to more than 2% and about

2.5% in January 1992.61

The authors said there were indications towards the latter part of 1991 that the rates of growth experienced in the 1980s could be pulled back in future years. Vacancy factors rose again between January and June 1992,62 then tapered a little over the next six or so months. 63 Mr McCann told Commissioner Morling that the relevant vacancy factor in Canberra as at July 1993 was 5%•64

Mr Egan was criticised for testifying that economic conditions generally have

an impact on the property market. Expressed generally, such a proposition must be self-evident. 65 The precise impact of the conditions at any given time and in any given market would, of course, need to be analysed and considered. But, if a valuation was being made immediately following the announcement of an important government initiative which could have a marked effect on the relevant market, it would be negligent of a valuer and poor valuation practice not to take that proposed initiative into account.

In his report Mr Egan gave careful consideration to the impact of such matters, including the impact of inflation and the recession of 1990 to 1992, and concluded:

In summary, by early 1991, the indications from the CPI numbers, the most recent vacancy factors, the then current long-term bond rates and rents themselves were that the market had slowed down and was very likely going to continue to slow. This was reflected in a lower rate of increase in rents during 1990 and a relatively significant increase in the vacancy factor over the same period. 66

Although Mr Egan was questioned about part of this conclusion, he was not seriously challenged in relation to the substance of it. In particular, he was not challenged about the inferences he drew from the primary information to which he referred that being the rents themselves.

Mr McCann accepted that, in 1991 and 1992, of the office buildings in Barton, the IBM Building was the most comparable with Centenary House. As he pointed out in his evidence, there had been a rent review as at October 1991 in that building, which had resulted in an increase in the rent payable from $299.33 a square metre a year to $325.00 a square metre a year. This was an increase of approximately 4% a year between October 1989 and October 1991.

Criticisms were also made of Mr Egan's evidence about the AUSLIG lease (of the Scrivener Building in Fern Hill Technology Park) and other leases the

61 Ex 5 at CH94.01 1.0079-0108, particularly at 0097. 62 ExVinEx99. 63 ExWinEx99. 14 Ex 5 at CH94.004.0309. This was the figure published by BOMA in its July 1993 update: Ex X in Ex 99. 65 See Kenny & Good v MGICA (1992) Ltd (1 999) 199 CLR 413 at [52] per McHugh J, with whom Gummow J agreed at [80]. See generally McHugh J at [48]—[56]. Followed in Manwelland Pty Ltd v Dames & Moore Ply Ltd [2001] QCA 436 at [19]. 66 Ex99at par ll6. 72 Report of Inquiry into the Centenary House Lease

Commonwealth entered into from time to time in which fixed annual or biennial

escalations of rent were agreed. These two matters are discussed in Chapter 9. The submissions in this regard do not constitute a successful attack on the value of Mr Egan's evidence generally.

It was submitted on behalf of John Curtin House Ltd that:

The only evidence before this Commission about the terms upon which any developer would have been willing to construct such a building [referring to a high-quality building in the Parliamentary Triangle] in 1991 and 1992 in Canberra is that of Mr McFadden. His evidence unequivocally supports the proposition that a new high quality building for the Commonwealth to occupy could not be obtained at that time on any terms more favourable to the Commonwealth than those upon which

JCH built Centenary House. 67

That submission is not accepted. First, there were 13 other expressions of interest lodged with the Australian Property Group in response to the advertisements it had placed at the end of October 1990. When the terms of those responses are fleshed out with follow-up correspondence, it is clear that none of those expressions of

interest involved a 15-year lease with fixed annual escalators let alone fixed annual escalators as high as 9%. Secondly, the two buildings originally identified by the Audit Office as suitable for its accommodation remained a viable proposition for the Commonwealth and did not involve terms such as those ultimately embodied

in the Centenary House lease. Thirdly, Mr McFadden's evidence does not go anywhere near as far as the submission would have me accept. Fourthly, as pointed out elsewhere in this report, there is no evidence of what the minimum financial and commercial terms for the construction of Centenary House itself actually were.

In summary, none of these more general criticisms affects the general reliability of Mr Egan's evidence, subject to weighing any contrary evidence on particular matters.

7.6.2 The evidence of Mr McCann

Mr McCann had for many years been retained by the Labor Party and John Curtin House Ltd to provide advice and to represent them at all material times from 1990 in respect of the Centenary House project. This brief initially led Mr McCann to conduct dealings on behalf of John Curtin House Ltd with the ACT Department of the Environment, Land and Planning and other relevant authorities, both by himself

and in company with personnel from the Lend Lease Property Group (notably Mr Richard McKeon) to secure the Crown lease on appropriate terms and in good time. Discussions concerning the Crown lease began in about May 1990 and were concluded by April 1992.

Subsequently, Mr McCann advised the Labor Party and John Curtin House Ltd about the contractual arrangements sought by Civil & Civic Pty Ltd and related

67 Submissions made on behalf of John Curtin House Ltd, par 135.

Report oflnquiiy into the Centenary House Lease 73

Lend Lease companies. He also took a general advisory role in the development of

the project. He liaised with Mr McKeon frequently. He dealt with Mrs Penelope Morris of Lend Lease regularly. From about July 1991 he dealt with Mr John McFadden of Lend Lease regularly. He attended most of the 1991 and 1992 Project Control Group meetings for the Centenary House project. He was a close and trusted adviser to Mr Robert Hogg (the Labor Party's National Secretary) for property matters in which the Labor Party and John Curtin House Ltd had an interest. He had occupied that position since about 1979.

Mr McCann had been employed by the New South Wales Valuer-General as a trainee valuer and then valuer from February 1965 to December 1973. In January 1974 he moved to Canberra. He has lived and worked in Canberra for the last 30 years and has done much valuation work there, especially between 1974 and the early 1990s. There is no doubt that in the period 1990 to 1994 Mr McCann was very familiar with the market for good-quality office accommodation in Canberra.

On behalf of the Labor Party and John Curtin House Ltd, Mr McCann had organised leases in John Curtin House, conducted rent reviews of those leases, and on one occasion organised the sale of a surplus building in Canberra. 68 He was qualified by training and experience to provide expert evidence in this Inquiry. He gave evidence and made submissions in the 1994 Inquiry, in his capacity as the property consultant to John Curtin House Ltd. Although counsel assisting called him as a witness in this Inquiry, his expert evidence was effectively led by John Curtin House Ltd, whose legal representatives helped him draft his first statement. 69

Although Mr McCann took issue with many aspects of Mr Egan's evidence, he did not disagree with the evidence Mr Egan gave about the state of the ACT market for good-quality office space from September 1993 to the present and about the fair market rents applicable in that market during that period. 70 John Curtin House Ltd conceded as much in its submissions .7 1 These matters are dealt with in Chapter 8.

Similarly, although there was a lively difference of opinion between Mr McCann and Mr Egan as to the state of the ACT market for good-quality office accommodation between 1990 and September 1993, Mr Egan did not strongly disagree with the parties' assessment, made in 1991, that the fair market net rent per

68 Ex 103 at pars 2-13;T2654-2661. 69 Ex 103. 70 Ex 99 at pars 156-172. None of this evidence drew any response from Mr McCann. .71 Submissions made on behalf of John Curtin House Ltd. par 109. 74 Report oflnquiy into the Centenary House Lease

square metre per year for the Audit Office tenancy was $280, judged as at 1 January

1991.72

The crucial differences between Mr Egan and Mr McCann concern the

following:

• whether the essential commercial terms of the Centenary House lease had any basis in the Canberra market in 1990, 1991 or 1992

• whether those terms were prudent from the Commonwealth's perspective

• whether the Canberra market for good-quality office space had slowed during 1991 and into early 1992

• whether it was reasonably foreseeable by late 1991 and early 1992 that, as a result of changes in government policies relating to the Public Service, first announced in 1989 and subsequently added to and clarified, there might well be diminished government demand in the future for office space and thus greater pressure on rents

• whether the AUSLIG lease of the Scrivener Building constituted a transaction against which the terms of the Centenary House lease might be assessed

• whether leases other than the AUSLIG lease were more suited to comparison with the Centenary House lease

• whether the terms of the Centenary House lease were commonly found in leases of office space in the ACT and elsewhere in Australia that had been entered into between 1973 and 1992

• whether the terms of the Centenary House lease were commonly found in leases of office space in the ACT and elsewhere in Australia that had been entered into at any other time

whether the rent review mechanisms in the Centenary adequate and appropriate from the Commonwealth's point 0

Insofar as Mr McCann's evidence on these matters is concerned,

said with caution. I do not reject all his evidence outright. I am, for the following reasons, among others:

I approach what he however, sceptical,

72 Mr Egan's conclusion was that, if one were to assess the net rent as at that date, a

figure of $265 a square metre a year would have been reasonable, but that $280 a square metre a year was not unreasonable or unjustifiable although "a little on the high side of reasonable": Ex 99 at pars 122-135. Mr McCann testified that he had probably advised Mr Hogg in 1991 that $280 was an appropriate net rent figure (T 2684-2685) and that in 1991 he believed it was an appropriate figure - and still

did so (T 2684). An advice written by Mr McCann in 1991 suggests that he thought $280 a square metre a year net was at the upper end of the range: Letter to John Curtin House Ltd, 30 May 1991: Ex 5 at CH94.004.0010.

Report of Inquiry into the Centenary House Lease 75

House lease were

f view.

• Mr McCann is not independent. He is unashamedly in the camp of John Curtin

House Ltd and the Labor Party. He has been their representative and adviser at all relevant times in relation to the property aspects of the Centenary house project. He has been their trusted adviser. He was also deeply involved in most of the events associated with the project during 1990 to 1993.

• At times in his evidence, Mr McCann adopted the position of advocate. 73 This

does not mean I cannot rely on anything he said; rather, it leads me to approach his evidence with caution.

• I also observed that Mr McCann was being less than frank and unduly combative at times during his evidence. He found it difficult to give evidence he saw as unhelpful to his clients and was somewhat unwilling to do so.

• As submitted by counsel assisting the Inquiry, Mr McCann made to Westpac Banking Corporation a false statement in relation to his role in the lease negotiations with the Property Group. He did not readily or immediately concede this but instead tried to find an explanation when none was available. 74

• Mr McCann testified during his evidence in this Inquiry that he had provided Mr Jeffress with a copy of the AUSLIG lease which constituted a substantial part of his justification for the terms of the Centenary House lease. He had not previously suggested that he had done this, in either the 1994 Inquiry or this Inquiry. Mr Jeffress had told Mr Fenwick in 1994 that he (Jeffress) had neither seen nor known of the AUSLIG lease at any time in 1991. It is most unlikely that Mr McCann would have provided that document to Mr Jeffress when he

73 For example, in this Inquiry Mr McCann continued to maintain that Centenary House had been "purpose built": Ex 102 at pars 103-116. That phrase was always used in a context which suggested that being purpose built added to the cost of the building and that it would not justify an increase in rent for any tenant other than the Audit Office. It is true that Mr McCann ultimately explained what he meant by the term in a technical sense, and the explanation was largely unexceptionable, focusing as it did on the fact that the Audit Office fit-out was arrived at after significant input from Audit Office personnel had been sought and obtained. Mr McCann reasoned (Ex 102 at par ill) that these steps taken by John Curtin House Ltd to meet the wishes of the Audit Office "did provide a substantial benefit to the ANAO which justified a rent for Centenary House at the higher end of market expectations". He conceded, though, that the building as constructed was suitable for any commercial or government tenant. He also conceded that the Audit Office fit-out had not affected the value of the building - up or down (T 2681-2682, 2742-2744). Mr McCann accepted that he had a conflict in being a witness as to the facts and also coming forward as an expert on behalf of John Curtin House Ltd (12758). He also accepted that at various times in the past (including in the 1994 Inquiry) he had unashamedly acted as an advocate for his clients: T 2750. 74 The statement was made in Mr McCann's 18 December 1991 letter to Westpac:

Ex 103 at ALP.006.0090-009 1. It was made in an endeavour to advance the interests of his clients at a time when the Centenary House project was threatened by Westpac's withdrawal as a potential financier for the project. See T 2740-2744.

76 Report of Inquiry into the Centenary House Lease

met him in November 1991: it would have undercut his claim for a

9.75%

escalator made at that time and might also have prompted Mr Jeffress to ask further questions. Mr McCann was wrong in this evidence. He had a motive to assert that he had provided a copy of the AUSLIG lease to Mr Jeffress to diminish the impact of the questioning he was undergoing, which was designed to establish that he was in a position of substantial advantage vis-à-vis Mr Jeffress, given what Mr McCann knew and what Mr Jeffress did not know .75

Mr McCann did not deliberately give false evidence in this Inquiry. However, as a witness he was in a position of serious conflict: he owes, and has for some time owed, duties to the Labor Party and to John Curtin House Ltd arising from his association as their adviser and agent. This includes a duty to advance their

interests as best he can in connection with matters that are the subject of his retainer. He was involved in devising and executing the strategy which led to the deal ultimately struck in relation to Centenary House. He probably felt he might be criticised for his part in those events. He had justified the transaction as reasonable to Commissioner Morling in the 1994 Inquiry and might consciously or unconsciously have felt he should maintain that position. He was obviously aware of his obligations to this Inquiry, both as a witness of fact and as an expert witness and no doubt felt he should discharge those obligations as best he could while

still trying to do his best for his clients. Mr McCann did try to fulfil his duties to this Inquiry, but he always had an eye to putting his best foot forward on behalf of the Labor Party and John Curtin House Ltd.

It is not uncommon for an expert witness who is not independent to present views he or she believes are truly his or her views when in truth they are slanted or influenced as a result of other factors in play, such as an association with one of the parties. Mr McCann expressed strong views about the state of the Canberra market between 1990 and 1992. His articulation of those views in 2004 was, however, heavily influenced by events which occurred between 1992 and the present as the result of his own position and his association with the Labor Party and John Curtin House Ltd, his clients. He has no doubt come to believe things were as he said, but I am satisfied that the picture he has presented in this Inquiry was not quite how he viewed matters then.

These are some of the reasons why courts, generally speaking, do not look favourably on expert evidence given by individuals with an interest in the outcome of the case and why courts prefer expert witnesses to be truly independent both of the parties and of the controversy.

7.6.3 The Canberra market in 1973 to 1991: some matters of history

Because Mr McCann relied on historical data in his dealings with Mr Jeffress and because he and John Curtin House Ltd also relied on such data in the 1994 Inquiry and again in this Inquiry, it is necessary to consider the matters of history referred to

75 T2735-2737.

Report of Inquiry into the Centenary House Lease 77

in his evidence and to understand how (if at all) they should be taken into account in

evaluating the state of the Canberra market in 1990 to 1992.

Before his first meeting with Mr Jeffress, which was on 12 November 1991, Mr McCann prepared spreadsheets containing information about rents achieved in the Canberra market and other economic data. These spreadsheets are reproduced in Appendix C. 76 Mr Jeffress condensed some of the rental information from Mr McCann's spreadsheets into a spreadsheet of his own and added to it in handwriting. 77

The commercial office buildings in Barton and covered in Mr McCann's spreadsheets were John Curtin House, the IBM Building and Industry House. Mr Jeffress added John McEwen House and Bligh House. Mr McCann testified that, to his recollection, there were "up to 10" office buildings in Barton which either had been leased or were available for rent in 1990 and 1991.78 Mr McCann and Mr Jeffress thus referred in their spreadsheets to five of the "up to 10" office buildings in Barton in 1990 and 1991. Mr McCann said that the remaining five or so buildings did not warrant consideration because they were "older buildings" and "even pre- 1970s". 79

John Curtin House and John McEwen House are discussed in Chapter 6. Both of these buildings were relatively old by 1991. As noted, Mr McCann accepted that in 1991 the IBM Building was the office building most comparable with Centenary House (as it was understood it would be when constructed)." The IBM Building had been completed in 1985. In 1991, Industry House was a modern building, having been completed in 1987, but Mr McCann thought "it wasn't a good outcome". 81 There is a little evidence about the age of and accommodation offered by Bligh House (now known as the SoftLaw Building), which was completed in 1978.82

The information recorded in Mr McCann's spreadsheets concerning the IBM Building related to one lease for 1985 to 1991. The evidence showed that the gross rent paid under that lease had been as follows:

• 1985 to 1987 $190.00 a square metre a year

• 1987 to 1989 $240.50 a square metre a year

• 1989 to 1991 $299.33 a square metre a year

• 1991 to 1993 $325.00 a square metre a year.

76 Ex 5 at CH94.004.0172-0175; Appendix C at C.6. ' Ex 5 at CH94.004.0 176. 78 T2770. 79 T 2770. 80 T2770-2771. T2770. 82 Ex99at par 83. 78 Report oflnquiry into the Centenary House Lease

These rents were fixed as at October in the years

1985, 1987, 1989 and 1991.83 This

information shows that, at each of the three biennial rent reviews of this lease, the gross rent was increased and that the first two increases represented annual increments in the rent of 12.51% and 11.56% respectively. The last review produced an annual increment of just on 4%; that is to say, on an average basis over the two years covered by it, the rent review of this lease in the IBM Building conducted as at October 1991 showed an annual increase in that rent of 4%.

The corresponding figures for Industry House show a similar picture, although the actual rents being paid in that building were somewhat lower (initially substantially lower) than those being paid in the IBM Building, and the last review produced a higher increment than did the last review in the IBM Building.

Mr McCann did not think Industry House and Bligh House were comparable with Centenary House, although he did use one of them in his discussions with Mr Jeffress. Notwithstanding this, in his dealings in 1991 with Mr Jeffress, in his evidence to Commissioner Morling and in his evidence in this Inquiry, Mr McCann contended that the rental statistics set out in his 1991 spreadsheets proved that, in the period from 1973 to 1991, there was a trend of continuous growth (meaning in nominal terms) in commercial office rents in Barton, and in Canberra generally, and that this growth was at an average long-term rate of more than 9% compounding.

Mr Egan accepted that all the rental evidence he saw supported the proposition that historically for some years preceding 1991 rents for commercial office space had increased. 84 But he observed accurately, in my view - that there was no consistently observable pattern or trend (long or short term) in the rate of growth in such rents.85 This much can be discerned from the historical evidence.

Mr McCann's reasoning in support of his contention that there is an observable long-term trend that rents for commercial office space had increased at a rate in excess of 9% a year is that it is legitimate to average the annual increases as proved by the data in his schedules by a simple arithmetic process. Mr Egan testified that this approach was flawed.86

I am not persuaded that a trend in the rate of growth in commercial rents in the Canberra market can be discerned from the rental information in Mr McCann's spreadsheets, as supplemented by Mr Jeffress. The sample of buildings and transactions is very small, and no consistent rate of movement in rents is

demonstrated. Furthermore, the choice of the period from 1973 to 1991 is entirely arbitrary. It was obviously dictated by the need to assess what was going to happen during a 15-year period in the future. Whether the period 1973 to 1991 was

83 See Mr McCann's spreadsheets in Appendix C at C.6; Ex 102 at pars 136-141, 168-169; T 2770-2771. 84 Ex 99 at par 98.

85

Ibid. 86 Ibid at pars 86, 87, 91-98.

Report of Inquiry into the Centenary House Lease 79

appropriate for that purpose is not clear. What would be required to justify any

conclusions about "long-term" trends is not the subject of any evidence:

Yet this is vital to any exercise in presenting trends over a 15-year period. To use the trends over the past 15 or so years in order to determine what will occur in the next 15 years is to assume a continuous economic cycle of 30 years. This is an unrealistic assumption when account is taken of what has happened in the last century in Australia. Data of this type are of very little value when attempting to forecast movements in commercial rents in the future for a period as long as 15 years. I return to this subject later in this chapter.

All that can be gleaned from the data is that the rents were as set out and that the increments were as set out. Section 7.6.4 discusses the use to which that information could sensibly and legitimately have been put in late 1991 and early 1992 in the context of the lease negotiations for Centenary House. Other evidence in the 1994 Inquiry and in this Inquiry is broadly consistent with the picture shown in the spreadsheets of Mr McCann and Mr Jeffress, but that evidence did not take the matter further. Nor did it provide a more solid foundation for any conclusion that a "trend" in the rate of growth in rents in the Canberra market might be discerned.

I conclude that commercial rents for good-quality office accommodation in Canberra, and Barton in particular, had consistently risen in the period from about the mid-i 970s until the end of 1990; that the rate at which such increments occurred (whether looking at Canberra generally or at Civic or Barton in particular) varied significantly throughout the period; and that, while the movements had always been upwards, no trend as to the long-term rate of such rental growth can in any meaningful sense be discerned from the data and evidence available.

7.6.4 The Canberra market in 1990 to 1992

In 1990 to 1992 the ACT market for office accommodation was segmented into the following geographical areas:

• Civic

• Barton—Parkes—Forrest

• the Northbourne Avenue corridor north of Civic, in the suburbs of Dickson, Lyneham, Turner and Braddon

• Woden Town Centre

• Belconnen Town Centre

• Tuggeranong

• West Deakin

• Campbell.

80 Report oflnquiry into the Centenary House Lease

There were other pockets of such accommodation in Bruce, Kingston, Griffith and

Manuka.87

Civic is the name of the central business, or "city", area. The Northbourne Avenue corridor is immediately to the north of Civic and adjacent to it. Both of these areas are north of Lake Burley Griffin. Barton, Parkes and Forrest are south of Lake Burley Griffin. Barton and Parkes are the core of the area east and north of

Parliament House colloquially known as the Parliamentary Triangle. In 1994, Mr McCann and others ranked Civic as the number one area for office accommodation and Barton as number two. 88 While Campbell and Deakin are relatively close to the centre of Canberra, Woden, Belconnen and Tuggeranong are all some distance away.

Whether one regards these geographical areas as segments of one market (the Canberra market) or as separate markets does not matter much. Each is separate and needs to be considered separately, bearing in mind at all times that the entire market in Canberra is generally affected by several common factors. For the purposes of the Inquiry, consideration should be given to the entire market, with particular emphasis on Barton and, to a lesser extent, Civic.

As noted, Mr Egan testified that by early 1991 there were indications that the Canberra market for the leasing of commercial office space had slowed and was very likely to continue to slow. Mr Egan was of the view that this "slowing" had manifested itself in a relatively significant increase in vacancy factors across the

market - and especially in Barton - and a lower rate of increase in rents negotiated during 1990 and early 1991. He said Australia was in recession from 1990 to 1992 and that this had affected all of the economy, including real estate. In his opinion, these economic circumstances followed the stock market crash of 1987, the sharp rises in interest rates, and the annual rates of inflation in 1987 to 1990 .89 He observed that many construction and developer companies had gone into

liquidation and that these circumstances had led to financiers being wary of commercial developments for office space. 90 He accepted that Canberra was not as affected as the rest of Australia by these circumstances, but he did not accept that it was or could be entirely insulated from them. Mr Egan's view was that a consideration of rents agreed in Canberra in 1990 and 1991 suggested that the rate of growth in rents generally in Canberra had slowed. 9' This view is confirmed by the documents produced by the Valuation Office in 1991 and 1992.92

87 Ex 99 at pars 72-75; Ex 102 at pars 128-130; the Baillieu Knight Frank report, 9 December 1992 (Ex 5 at CH94.01 1.0080 at 0095-0096). 88 Letter to Commissioner Morling, 11 July 1994: Ex 5 at CH94.004.0306-03 14. 89 Ex99at par ll6. 90 Ex 99 at pars 66-71, 98-119 (and the documents referred to therein). 91 Ex99atExR and ExsI,J,K and U. 92 Document "Historical Rentals by Locale": Ex 5 at CH94.003 .0158-0160. This showed in the main a significant slowing in the rate of growth in rents in the period 1990 to 1992. See also Ex 63 at AVO.0 11.0092. Report of Inquiry into the Centenary House Lease 81

The authors of the 9 December 1992 Baillieu Knight Frank report to the Audit

Office said the 1990 to 1991 recession had resulted in a doubling in the Canberra commercial office vacancy rate, from a traditional low of around 1% to more than 2% and reaching approximately 2.5% in January 1992. They also thought there were indications towards the latter part of 1991 that growth in rents was slowing. To these observable factors must be added the known facts concerning the Government's changes in policy towards the operation of the Public Service, as noted in Section 7.6.1.

Mr McCann disagreed with much of Mr Egan's evidence. He said in effect that no-one operating in the Canberra market in 1990 to 1992 thought there would be any major or structural change in the future (looking forward from that time) and that, whilst there might be fluctuations in the market, there was no reason for anyone to think (and he and others in the market at the time did not think) there would not continue to be growth in the quantum of commercial rents indefinitely, at least at 9% a year compound. He said no-one thought the size of the Public Service would be slashed as much as it was after 1996. 93

In essence, Mr McCann's evidence was that when an expert valuer is confronted

with the task of forecasting or predicting the future he or she is entitled to assume that the past will continue unless there is some reason obvious to all that a relevant and significant change is imminent. 94

In contrast, Mr Egan testified that any person making a forecast should give due consideration to all known relevant factors and matters and all future possibilities and likelihoods, then weigh them up. In his view, historical information is relevant, but it must be weighed in the mix and not be used presumptively, as suggested by Mr McCann. Mr Egan said:

Historical movements in rent levels are of limited value in forecasting the likely movements in future rentals. In principle, those historical movements could only be expected to be repeated if the economic and market conditions which led to the striking of those rents were closely replicated in the future. Generally speaking, it is almost impossible to forecast rent levels with any degree of confidence for more than the very short term - say 2 or 3 years forward. Beyond that period, such forecasting is essentially entirely speculative and cannot be regarded as able to be logically supportable or objectively ascertainable. 9 '

93 Ex 102 at pars 26-28, 40, 65-81, 120-121, 125, 144-146, 150, 190-193: 1 2763-2766. 94 Ex 102 at pars 25-26. 95 Ex 99 at par 97.

82 Report oflnqui,y into the Centenary House Lease

He added:

In my opinion, no reliable conclusions could have been drawn as to the future looking forward from late 1990, 1991, 1992, 1993 or 1994 by merely looking at this information as to the past. 96

Mr McCann testified that in his opinion valuers can and often do predict the future for a period of more than two to three years and that such an exercise was not speculative. 97 He said the most critical factor in the Canberra market in determining the availability of office space was supply and demand and the market for such space was demand driven. This was because the Commonwealth was the principal

tenant in Canberra - occupying about 80% of the available space and was thus in a position to direct the market. 98 Mr McCann said that the opening of Parliament House in 1988 had given impetus to development in Barton, 99 and that in 1991 he and other valuers operating in the Canberra market thought there would be strong demand long into the future for good-quality office accommodation for the Commonwealth in the Parliamentary Triangle.

Mr McCann agreed that the pillar supporting his view of the influence of supply and demand in the market in 1990 and 1991 was the proposition that there would be no change in government policy in relation to the way the Public Service performed its tasks and the size of the Public Service. He also said the ageing of the stock would be a factor. 100 He acknowledged that he was aware of the Government's 1989 policy of commercialisation of the Public Service,' 01 but he declined to accept that the potential impact of policy changes should have been taken into account. In attempting to rebut that suggestion, he resorted to relying on history. 102

Mr Fenwick considered the state of the market only up to and as at 1 January 1991 for the sole purpose of forming a view as to whether or not the agreed net rent rate of $280 fixed by reference to that date was supportable by market data. It is clear from his 27 July 1994 letter to Commissioner Morling that he believed he was not required to make a general market assessment in 1991 or early 1992 but was merely required to review the work of Mr Jeffress and come to a view about it, 103 The form of his letter makes it clear that Mr Fenwick conducted that review by reference to three essential matters:

• the base rent figure

• the escalators

• the rent review clauses.

96 Ex 99 at par 98. 97 Ex 102 at pars 29-39. 98 Ex 102 at pars 63-81. 99 Ex 102 at pars 73-75. 100 1 2761-2766 (especially at 1 2763). 101 1 2763. 102 T 2764-2765. 103 Ex 38 in the 1994 Inquiry: Ex 5 at CH94.005.0 184-0193. Report oflnquiiy into the Centenary House Lease 83

The evidence tendered in the 1994 Inquiry did not include the market material

Mr Fenwick relied on in assessing the base rent figure. All that is available is a general description of it. Under the heading "Escalators", Mr Fenwick expressed the conclusion that, on the basis of a "body of information on rental trends in Canberra" referred to generally, 104 he was of the view that rents were still increasing up to November 1991. He did not express any view about whether or not the rate of increase had slowed; nor did he express any view about what rates of increase could be discerned in the period 1990 to early 1992. The periods with which Mr Fenwick was dealing at this point are not at all clear, and they might have involved assessments (at least in some cases) only up to early 1991. In looking at the question of the escalators, although Mr Fenwick generally referred to "trends", he did not give any evidence to the effect that one could discern a trend in the rate of increase of rents over the 15 years to 1991 or indeed that one could discern any trend at all over that period.

Mr Fenwick approached the future by assuming that whatever could be gleaned from the past would continue into the future unless there was some clear indication available to him at the point of consideration that there would be a marked change in circumstances. This approach is similar to the one Mr McCann described in evidence in this Inquiry. In looking at the escalators in his letter to Commissioner Morling, what Mr Fenwick did was to assess the positions respectively taken by Mr McCann and Mr Jeffress in their negotiations concerning the escalators in November 1991. Regarding those negotiations for what they truly were, Mr Fenwick took the view that the result was "reasonable".

Mr Fenwick did not turn his mind at all to the question of whether or not it was appropriate for the Commonwealth to bind itself by way of a pre-commitment agreement executed on 8 April 1992 to a starting rent likely to become effective some 15 to 18 months later by reference to a rent fixed as at 1 January 1991 (some 15 months before) and escalated by a fixed percentage struck after negotiation in November 1991. He made no analysis and gave no thought to whether or not as at April 1992 it was appropriate for the Commonwealth to bind itself contractually to a year-by-year fixed rental increase of 9% compound over a term as long as 15 years beginning in late 1993. He proceeded on the basis that that structure was a given.

When he gave his evidence, Mr Fenwick said he had learnt that in the period to July 1991 there had been reductions in the rate of increase in rentals . JO ' Similarly, he said other valuers to whom he had spoken for the purposes of his letter to Commissioner Morling had made it clear that their view was that the rate of increase in rents had slowed during 1991 and that those agents were predicting a decrease in the rate of rental growth going forward. 106 He also made it clear that he had been concentrating on the position up to the date of the valuation (that is to say, up to the

104 Ex 5 at CH94,005.0 187. 105 T 232 in the 1994 Inquiry: Ex 5 at CH94.019.0027. 106 T 233 in the 1994 Inquiry: Ex 5 at CH94.019.0028. 84 Report ofInquiry into the Centenary House Lease

end of November 1991) and that what he had been doing was reviewing the work of

Mr Jeffress. He did not know what the position was as at March or April 1992.' °

Mr Malcolm Coleman of the Australian Valuation Office gave evidence in both the 1994 Inquiry and this Inquiry. It became apparent during the course of his evidence in this Inquiry that he was not qualified to express any view about the Canberra market in 1990 to 1992 and that, when he had purported to do so both in

Senate hearings and in the 1994 Inquiry, he was doing so on the basis of information he had received from officers of the Valuation Office and the Property Group, rather than from his own knowledge and experience. 108 Notwithstanding this, Mr Coleman thought the market was starting to go off the boil by late 1991 109

In my opinion, between the beginning of 1990 and the middle of 1992 there was

a marked and relatively significant increase in vacancy factors in the Canberra market, especially during 1991 and 1992. This conclusion is borne out by a consideration of the BOMA reports covering that period, as interpreted by Mr Egan and the authors of the Baillieu Knight Frank report of 9 December 1992. It is also supported by vacancy rate figures included by Mr McCann in his 11 July 1994 letter to Commissioner Morling." ° These matters are discussed in more detail in

Section 7.6.1.

In coming to this conclusion, I paid due regard to Mr McCann's points about absorption factors and "churn" (the rotation by tenants from one building to another within the same market). However, even when those matters are taken into account, there was clear evidence that vacancy rates were climbing in the period referred to and had reached levels much higher than any level achieved for a considerable time

before 1990.

The evidence does demonstrate a slowing in the rate of increase in commercial rents in the Canberra market in 1991 and 1992, including in Barton, Mr Egan testified as to this. Mr McCann criticised Mr Egan's evidence by asserting that part of the material Mr Egan relied on was rental information from buildings which were

not comparable." However, the body of additional evidence already described tends to suggest that the rate of growth had begun to slow by the middle of 1991, and probably earlier, and that it was not at the level of 9% a year by late 1991. Mr Egan was correct when he testified that the economic circumstances confronting

the Canberra market from 1990 to 1992, while not as dire as perhaps in the rest of the country, were such that they were bound to have some effect on the likely future growth in rents in the rental market there.

107 T 235 in the 1994 Inquiry: Ex 5 at CH94.019.0030. See also T 236 in the 1994 Inquiry: Ex 5 at CH94.019.0031. los Ex 90; 1 2305-2320. 109 T 305-306 in the 1994 Inquiry: Ex 5 at CH94.019.0099-00100. Ito Ex 5 at C1194.004.0309. Ill The material is in Ex R as part of Ex 99. Report oflnquiiy into the Centenary House Lease 85

The next question is whether the known changes in government policies in

relation to the Public Service, as initially explained in 1989 and added to subsequently, should have been considered by valuers and those looking to assess the future of the Canberra leasing market as a potentially negative influence on that market. Mr McCann and Mr Fenwick took the view that there was a presumption that the past would continue indefinitely, unless there was some clear or real indication of the kind of change (described by Mr McCann as "structural") which should cause such people to question whether the past would in fact continue and whether account should be taken of that potential structural change. In my view, the approach taken by Mr McCann (and to some extent by Mr Fenwick) is untenable. I prefer the approach of Mr Egan, as reflected in his Statement and outlined in Section 7.6.1.I2

The starting point for Mr McCann's thesis is that there is a long-term trend in the Canberra market (demonstrated by historical data) that rental growth has proceeded and continues to proceed at a rate higher than 9% a year compound. That proposition is based on simple arithmetical averaging of certain limited data taken from the market in the period between 1973 and 1990. As pointed out elsewhere in this Report, Mr McCann gave no consideration to whether the selection of the data for that particular period was a sound basis for supporting this proposition a proposition essential to his analysis. The period and the data were obviously chosen because 15 years was the period of the proposed lease and the period and the data supported the position advocated by Mr McFadden, which required fixed annual escalations at the rate of at least 9% a year. For the reasons given, the starting point for Mr McCann's thesis is not made out. Such an approach is flawed and ought not to have been adopted.

Given that Mr McCann and others did know of the changes in policy expressed by the Commonwealth Government from 1989 onwards, the potential for that policy to affect the Commonwealth's demand for office space in Canberra (including in Barton) should have been taken into account as part of any responsible consideration of a lease transaction in 1991 to 1992 with a term of 15 years.

7.7 The reasonableness of the terms of the transaction judged as at April 1992

In considering the reasonableness of the terms of the transaction judged as at April 1992, regard must be had to all the essential commercial terms of the transaction taken together. Those terms are as follows:

• the fixing of the starting rent by reference to 1 January 1991

• the assessment that an appropriate starting net rent by reference to that date was $280 a square metre a year

112 Ex 99.

86 Report of Inquiry into the Centenary House Lease

• the formula whereby the starting rent was escalated at the rate of 10.5% a year

compound during the construction period, which was likely to be about 17 months, so that the lease would probably commence two-and-three-quarter years after 1 January 1991

• the 9% minimum fixed annual escalations

• the additional rent review to market, which could only result in an upward movement in the rent greater than 9% over the previous year's rent

• the fact that the rent was to be a net rent

• the covenant that the lessor would provide $400,000 towards the fit-out.

Mr Egan said he had never seen a lease where the starting rent was arrived at by means of the mechanism used in the case of the Centenary House lease. He said he had never seen a lease where the starting rent was fixed by reference to the market as it was perceived to have stood some two-and-three-quarter years before the date when the lease commenced and then escalated by a fixed and predetermined

percentage up to the date of the commencement of the lease. According to Mr Egan, such a provision had no basis in the Canberra market at the time.

Mr Fenwick testified' that the fixing of escalation factors in about November 1991, some four months or so before the agreement for lease was signed, was unusual.' 3 He said he had never before seen such a means of fixing a base rent for a property which would come onto the market some considerable time down the track. 114 He confirmed that it was common for parties to enter into a pre-

commitment agreement which involved a contractual obligation to fix the rent at the fair market rent as at the date the building was finished. He said that such rent could then be determined by agreement between the parties, arbitration or expert determination by valuers.' 5 Mr Fenwick said that negotiating the actual rental before the building had been finished increased the risk that the rent at the commencement of the lease might not represent market rent.' 6

Mr McCann somewhat reluctantly conceded that he had not seen a pre-commitment agreement where, at the time it was being negotiated, the starting rent, anticipated to cut in at least 18 months forward of that date, was being fixed by reference to a market rent nine months before. 117

The choice of 1 January 1991 as the date by which the starting rent under the lease transaction would be fixed has never been satisfactorily explained. The decision to focus on 1 January 1991 (as distinct from some later date) appears to have been made about the middle of 1991, probably shortly before Mrs Morris met

T 237 in the 1994 Inquiry: Ex 5 at CH94.019.0032. 114 T 214 in the 1994 Inquiry: Ex 5 at CH94.019.0008. Ibid. 116 T 214-215 in the 1994 Inquiry: Ex 5 at CH94.019.0008-0009. 117 12729-2730. Report ofInquiy into the Centenary House Lease 87

with Mr Dominic Collins of the Property Group on 3 July. It was suggested to

Mr McCann that 1 January 1991 was chosen because by the middle of 1991 he and the others on the lessor's side of things had come to the view that the market was slowing and that it would be in the interests of John Curtin House Ltd to fix the starting rent by reference to rents obtaining as at 1 January 1991 and to escalate them forward from that date. Mr McCann denied this."'

Mr Coleman and Mr Collins attempted to explain the selection of that date by asserting in the 1994 Inquiry that, when viewed as at November 1991, 1 January 1991 was the last date for which reliable information could be obtained. 119 None of the negotiators gave evidence that this was the reason for choosing that date at the time, and this explanation appears to have been advanced after the material events, in an ex post facto attempt to justify selection of the date. Mrs Morris and Mr Collins, who were the negotiators, testified that selection of the date was motivated by the parties' desire for certainty. But certainty could easily have been achieved by other more suitable means.

Theoretically, the selection of 1 January 1991 as the point by which the initial rental figure should be fixed might not have caused any great difficulty, provided that the escalation figure ultimately arrived at had more sensibly reflected all the factors in play in late 1991 or early 1992. I say "theoretically" because, as becomes apparent when I discuss the mechanism for annual escalations, the approach of starting with a precise figure as at one particular date and escalating it by reference to fixed escalation factors designed to operate for some time into the future is fraught with danger. The chances of that mechanism producing an actual starting rent as at the commencement of the lease which was in line with the market at that time are slim. If such a result was obtained, it would probably be a coincidence.

From the Commonwealth's perspective, there was no sensible reason for having proceeded on the basis of fixing the starting rent of the lease by reference to market rents obtaining as at 1 January 1991. The normal course would have been to fix a precise rent (without escalation) as at April 1992 (the date on which the agreement

for lease was signed) or to provide in that agreement for the starting rent to be determined by reference to the expected market as at the date of commencement of the lease to be determined by agreement between the parties, arbitration, or expert determination by valuers. This latter approach was the more usual.

Notwithstanding Mr McCann's denial, the only rational explanation for choosing 1 January 1991 is that the agents of John Curtin House Ltd (Lend Lease and Mr McCann) bad come to the view by then that the market was slowing, and that it would serve the interests of their client better if the starting rent were to be fixed by reference to a date early in 1991 and escalated at a rate determined by reference to historical data from a period ending in early 1991.

118 T2730. 119 T 304 in the 1994 Inquiry: Ex 5 at CH94.019.0098. 88 Report of Inquiry into the Centenary House Lease

The next question concerns the formula whereby the commencing rent so

determined was escalated by a predetermined rate in order to arrive at the rent for the commencement of the lease. The fixed escalator mechanism for the construction period was first discussed by the negotiators in March 1991 and agreed in further discussions on 3 July and 30 August of that year. The actual rate of escalation (10.5% a year) was fixed after negotiation between Mr McCann and Mr Jeffress in November 1991. At the time this negotiation took place, Mr McCann and Mr Jeffress must have known that Centenary House was unlikely to be completed before the middle of 1993, considering the probable construction time and the other matters still to be attended to before the parties became contractually bound. This meant that the period in respect of which that escalation factor would be operative would extend from 1 January 1991 to at least the middle of 1993 about two-and- a-half years.

Given that the market was slowing by mid-to-late 1991, and given the likely impact of the potential for changes in government policy going forward, for the Commonwealth to agree to an escalation mechanism of this kind to cover almost two years from the time of agreement, and to do so based fairly much on historical data alone, was very unwise. The strong likelihood at that time was that a rate of

10.5% a year applied over such a period would produce an over-market starting rent. It was imprudent for the Commonwealth officers dealing with the matter to agree to such a mechanism in these circumstances. And that strong likelihood became the reality.

Mr Fenwick said predicting the future was a very dangerous prospect, that it was "absolutely fraught with 20 Mr Brian Hurrell of the Valuation Office said he could not recall his office ever being asked to advise on or to negotiate fixed escalators into the future in a lease transaction. 121 Mr Hun -ell said in this Inquiry

that he had always been very cautious about market predictions and, as a qualified valuer, would only use them in circumstances when market evidence was available and supportive of his opinion. 122 He said "forecasting" was not a term that had ever been part of a valuer's repertoire.' 23

The next question concerns the 9% minimum fixed annual escalation throughout the 15-year term of the lease. As with the last two questions, there was in the Canberra market no transaction which could have supported such a term. The AUSLIG lease, which is discussed in Chapter 9, was a lease for 10 years, not 15 years. The fixed escalations of 8% in the MLC Tower lease at Woden operated

for only a short period (three years) and were then subject to adjustments to market with no ratchet clause. It is not to the point that leases might be identified which had fixed escalation clauses of 5% or less year by year for short periods and which then provided for market reviews (with or without a ratchet clause). The economic

120 T 257 in the 1994 Inquiry: Ex 5 at CH94.019.0051. 121 T 288-289 in the 1994 Inquiry: Ex 5 at CH94.019.0081-0082. 122 Ex 61 at par l2. 123 T 1570. Report of Inquiry into the Centenary House Lease 89

impact in the Centenary House case of the combination of the length of the term and

the size of the annual escalators is vastly different from the economic impact of short-term fixed escalations of 5% or less which were then subject to market review. Mr Egan testified as follows: 124

Whilst I have seen leases over the years where, from time to time, during the term of the lease, fixed rate escalations have been utilized to increase the rent, my experience has been that such an approach has been undertaken only in circumstances where the rate was relatively low (5% or less), the period during which the fixed rate escalation operated was relatively short (2 to 3 years) and the lease provided for an appropriate adjustment to market periodically (usually at the end of 2 or 3 years). Commonly, when such provisions were included in leases which I have seen, there was no ratchet clause.

I have never seen a lease which provided for a fixed rate of escalation of a magnitude equivalent to the one in the present case (9% a year) over a period as long as the initial term of the lease in the present case (15 years). Nor, in my experience, have I come across a lease which had the aforementioned provisions coupled with a capacity in the landlord to use the provisions for market review, at its sole discretion and only to procure a result which increased the rent but could not reduce it. In particular, I have never seen a lease where the effect of the ratchet clause was not only to preserve the existing rent as at the date of the market review, but to ensure that it increased at the rate of 9% over the prior year's rent. ' 25

Mr McCann challenged that evidence by mentioning leases in the Bums Centre in Canberra. But the terms of those leases are consistent with Mr Egan's evidence: the fixed rates of escalation are around 5% a year and for short periods. When questioned about this, Mr McCann agreed that, to his knowledge, there was no market transaction in Canberra or anywhere else with a fixed rate of escalation year by year of 9% over 15 years. 126

Mr Hurrell told Commissioner Morling that in late 1991 he was not aware of any leases in the Canberra market which had fixed rate escalation clauses in them.

Mr Fenwick told Commissioner Morling that, as far as his research had gone, the only other Commonwealth lease of space in Canberra with a 9% escalator for a reasonably lengthy period was the AUSLIG lease. 127 That lease, however, was not a lease for 15 years. For reasons explained in Chapter 9, the AUSLIG lease does not provide an appropriate basis in the market in 1991 or early 1992 for the Centenary House lease transaction.

No other transaction in that market up to that time had the particular rent review provisions which were included in the Centenary House lease.

24 Ex99atpars 194-195. 125 Ex 99 at pars 194-195. 126 T2759. 127 T 239 in the 1994 Inquiry: Ex 5 at Cl-194.019.0033. 90 Report ofInquiry into the Centenary House Lease

From the Commonwealth's perspective, the effect of the transaction was that, if

developments in rents in the Canberra market (especially in Barton) did not proceed at a rate roughly equivalent to the built-in fixed escalator of 9% a year compound, the Commonwealth would be disadvantaged because there was no capacity to adjust the rent back to the true market position. To enter into a transaction which contractually bound the Commonwealth to annual increases of the magnitude of 9%

for as long as 15 years was imprudent. It was tantamount to entering into a high-risk futures contract. That view is strengthened when consideration is given to the indications from about mid-1991 onwards that the market was slowing and might be affected by the announced changes in government policies towards the Public Service. In any event, for the Commonwealth to bind itself contractually to such terms in a market where government policy was so critical to the demand for office accommodation was itself imprudent.

The fact that the rent was to be net rather than gross did not of itself disadvantage the Commonwealth. Presumably, had rents been determined on a gross basis, the outgoings would have been escalated at 9% a year compound throughout the term of the lease. As matters stand, the Commonwealth is obliged to pay in the present case the actual cost of those outgoings and is thus tied to increases

which are actual rather than arbitrary. Provided that the starting rent was appropriate and clearly reflected the market at the commencement of the lease, the fact that rents were payable on a net rather than gross basis was not detrimental to the Commonwealth.

In his paper prepared in September 1992,128 Mr Paul Ferrari of the Property Group asserted that the real rent escalation year by year throughout the 15-year term of the lease was less than 129 In that context, he wrote that the value of the $400,000 fit-out contribution and what he described as an effective rent-free period of seven weeks while the tenant's fit-out was constructed amounted to a real reduction in the rent escalation of about 0.5% a year. 130 These assertions appear to be based on a calculation carried out by Mr Jeffress in June 1992 and given to

Mr Robert Ireland of the Property Group.' 3' The calculation is based on assumptions which are not entirely clear. However, it included figures which represent the $400,000 fit-out amortised at some unidentified rate over 10 years and a rent-free period valued at $226,153. The process of reasoning which underpinned

Mr Jeffress' calculation attributes most of the value to the rent-free period. Whether his calculations are right or wrong - and there is much to be said for the proposition that they are unsound it is clear that most of the claimed 0.5% a year effective reduction in the escalator flows from the value placed on the so-called

rent-free period. But there was no rent-free period. What had been agreed was that the fit-out would be constructed before the lease began to run and before the Audit Office obligation to pay rent arose. The calculation proceeds on a false basis. In

128 Ex 5 at CH94.002.0192-0209. 129 Ibid at CH94.002.0 194. 130 Ibid. '3' Ex 63 at AVO.01 1.0095. Report ofInquiry into the Centenary House Lease 91

addition, it appears to ignore the impact of time on the value of money. In any

event, the contribution to fit-out was of limited benefit to the Commonwealth in economic terms, as ownership of the fit-out provided remains with John Curtin House Ltd.

Mr Fenwick acknowledged that the Centenary House lease transaction, as struck, was very favourable to the lessor. 132

A number of factors were in play when the negotiations for the Centenary House lease took place.

In late 1990 and early 1991 the Commonwealth was investigating the possibility of acquiring further leased office space in the Parliamentary Triangle. Through the Property Group, it advertised for expressions of interest in providing accommodation in that area. Fourteen expressions of interest were obtained. The Commonwealth was in a powerful negotiating position in the Canberra market for such space, being the largest consumer of office accommodation and the largest occupant of such accommodation. So far as accommodation in the Parliamentary Triangle is concerned, the Commonwealth was in reality the only possible tenant of a large office building. And, as Mr McCann testified, the supply—demand equation was driven substantially by the demand side of the equation, which itself was largely a function of the needs and wishes of the Commonwealth.

In late 1990 and early 1991 the Auditor-General was anxious to relocate his entire operation to the Parliamentary Triangle. At the same time, Mr Hogg and the National Executive of the Labor Party were keen to acquire a new commercial office block in Canberra for leasing purposes in order to provide a more secure cash flow and future for the Labor Party's operations.

From the Commonwealth's perspective, neither the needs and desires of the Auditor-General nor those of any other Commonwealth agency were so great as to require the abandonment of ordinary principles and common sense in the negotiation of the transaction for the Centenary House lease.

7.8 Conclusion

I agree with Mr Egan that the Centenary House lease transaction had a number of features which, when taken together, produced an outcome and a transaction which were imprudent from the Commonwealth's perspective. 133 It was submitted that any such conclusion could be arrived at only as a result of applying hindsight to what occurred in 1991 to 1992. I disagree.

It was also submitted that minds might reasonably have differed as to the wisdom of the transaction. I disagree with this too. The transaction was plainly

132 T 248 in the 1994 Inquiry: Ex 5 at CH94.019.0042. 133 Ex 99 at par 203. 92 Report oflnquiry into the Centenary House Lease

imprudent on the part of the Commonwealth and was unduly generous to John

Curtin House Ltd at the time it was entered into. I have reached that conclusion after careful consideration of all of the matters discussed in this chapter. In particular, I gave due weight to the fact that the transaction was not supported by any other market transaction. The transaction was the result of superior negotiating skills on the part of Mrs Morris, other Lend Lease personnel and Mr McCann when compared with the negotiating skills of Mr Collins of the Property Group.

John Curtin House Ltd had been content in the past to accept conventional lease terms when leasing space in John Curtin House. The real impetus for the unusual terms achieved in the Centenary House case was the perceived needs of financiers coupled with Mr Hogg's wish to self-fund the development and to generate an

ongoing cash flow for the Labor Party. Those outcomes were ultimately achieved, but they were achieved at great cost to the Commonwealth, in that the rent it has paid for the Audit Office space in Centenary House has always been well over market and will probably remain so.

Report of Inquiry into the centenary House Lease 93

8

The fair market net rent for Centenary House from September 1993 to the present

8.1 September 1993

Mr Frank Egan testified that in his opinion the fair market net rent for good-quality office space in Barton in September 1993 was $290-300 a square metre a year. Mr Noel McCann did not dispute this assessment.'

The formal precis valuation report prepared by Mr Chris Byrne of Stanton Hillier Parker (NSW) Pty Ltd for Macquarie Bank Ltd on 11 June 19932 in which Mr Byrne valued Centenary House on a completed basis but as at that date for mortgage purposes - stated that the fair market net rent for office space in Centenary House in June 1993 was $287 a square metre a year. 3 Mr Byrne carried out a careful and detailed market analysis of comparable buildings in Barton and concluded:

Our research and analysis of the market in Barton indicates that there has been a considerable decline in the rate of rental growth during the last 2 years. This conclusion is based upon opinion from local agents and the results of reviews and new leases negotiated during 1993.

Mr Byrne said the rent agreed by the parties and reflected in the agreement for lease was "significantly above current market rental levels" and that this conclusion was supported by the rental analysis he had carried out and by the opinions of leasing agents who had been involved in lease negotiations during that period for comparable buildings in Barton! He added that, when account was also taken of information he had obtained about rents in the Civic area of Canberra, there was a general trend which showed that the rate of rental growth in the Canberra market was slowing. 6

In Mr Byrne's opinion, the fair market value of Centenary House at 11 June 1993 was $30 million. This was the figure produced by the capitalisation of net

Ex 99 at pars 156-159 (especially 159). 2 Ex 113 at MACQ.033.014 1. See Ex 113 at MACQ.033.0141 at 0158-0161, 0165 and Mr Byrne's "capitalisation of net income method" calculations using the "due rate method" (MACQ.033.0141 at

0174). " Ex 113 atMACQ.033.0161 (p l4of the report). This conclusion is to be found on p 2 of the executive summary in Ex 113 at MACQ.033.0141 at 0145.

6 Ibidat0161.

Report oflnquiry into the Centenary House Lease 95

income method he used . 7

ln his view, about $4 million of that $30 million was

attributable to the over-market portion of the rent agreed in the agreement for lease. In other words, by June 1993 the effect of what the parties had agreed was to produce a state of affairs whereby, according to Mr Byrne, the starting rent for the Audit Office tenancy was going to be between $70 and $80 a square metre over the then fair market net rent for space in Centenary House. This is a rent premium of between about 24% and 28%. Mr Byrne also thought the rent for the undercover car spaces was over market. He put a yearly rent of $750 a space on the car spaces and expressed the opinion that the rent for the on-site bays was in keeping with the market, at $500 a space a year.

Commissioner Morling did not have the opportunity to take account of Mr Byrne's views because Mr Byrne's report was not produced to the 1994 Inquiry. The valuation had been done for commercial purposes: it was required by Macquarie Bank under its lending arrangements with John Curtin House Ltd. No-one challenged its soundness. It appears to have been well researched, and it is wholly consistent with Mr Egan's views as to the fair market net rent for office space in Centenary House in September 1993.

Accordingly, I am satisfied that when the lease commenced in September 1993 the fair market net rent for office space in Centenary House was $290 a square metre a year. This figure is to be contrasted with the actual starting net rent in that month of $367.95 a square metre a year. The over-market or premium component of the starting net rent is $77.95: the net rent was 26.88% over market.

This unfortunate outcome was the result of applying the starting rent mechanism fixed in the agreement for lease. In particular, it was the result of the combination of two things:

• selecting 1 January 1991 as the date at which the initial market net rent figure would be assessed

• applying the fixed compounding escalator of 10.5% a year from that date until the date of commencement of the lease.

If $280 a square metre a year was close to the fair market net rent for space in Centenary House at 1 January 1991, it follows that the 26.88% over-market starting rent was almost entirely brought about by application of the fixed annual construction period escalator of 10.5% compound. The market did not move at anything like that rate between 1 January 1991 and September 1993. For all of that

7 The discounted cash flow method he used had led to an indicative value of some $36.3 million. Mr Byrne considered that the method had produced a figure which was not in keeping with general market perceptions and yield expectations for investment property in Canberra: Ex 113 at MACQ.0330.141 at 0168. Some of the assumptions made for the purposes of that method might have been wrong, or perhaps the method itself was less reliable in the case of Centenary House. Mr Byrne preferred the capitalisation of net income method in his 1993 valuation.

96 Report of Inquiry into the Centenary House Lease

period it seems to have moved by only about 3.5% (a little over 1% a year on

average).

Such a result could, and would, have been avoided entirely if in the agreement for lease the parties had agreed to fix the starting rent by reference to the market at the date of the commencement of the lease. Agreements to that effect were commonplace (even usual) and enforceable." This approach would have provided as much certainty as either party could reasonably have required. It would not, of course, have provided John Curtin House Ltd with a specific figure for the starting rent, which was known and contractually fixed in April 1992 when the company entered into all the relevant binding legal relationships including the loan arrangements with Macquarie Bank. At the very least, the officers charged with responsibility for concluding the lease transaction on behalf of the Commonwealth should have given careful consideration to the most appropriate way of determining a starting rent viewed as at April 1992, when the binding legal commitment for lease arose.

Mr McCann said that in his opinion the fair market net rent for Centenary House in April 1992 (had it been built by then) would have been $315 a square metre a year. 9 He did not give any reasons or offer any reasoning by reference to comparable rents in support of his opinion. His opinion is at variance with that of Mr Egan, who thought the fair market net rent for space in Centenary House in April 1992 would have been $295 a square metre a year. Mr Egan's opinion was based on a consideration of actual transactions in the market, and I prefer his opinion. Mr McCann's rent figure closely approximates $280 a square metre escalated from 1 January 1991 to the end of March 1992 at 10.5% a year. It is unlikely that this coincidence was fortuitous. No Commonwealth public servant

gave any real consideration in early 1992 to the wisdom of using the agreed starting rent mechanism. The impact of the formula for determining the starting rent, which had already been agreed in principle, was not revisited in any way.

8.2 1994to2004

8.2.1 1994

In June 1994, Mr Byrne carried out another valuation of Centenary House for Macquarie Bank,' ° in which he found that the rent the Commonwealth was paying at that time for the Audit Office space in Centenary House was again "significantly above current market rental levels"." He carried out his 1994 valuation using the

8 See the evidence of Mr Graham Fenwick at T 214-215 in the 1994 Inquiry: Ex 5 at CH94.0 19.0008-0009. Ex 102 at par 185. Ex 113 atMACQ.033.0219-0297. 11 1bidat0223.

Report ofInquin' into the Centenary House Lease 97

same methods he had used for his 1993 valuation, although he gave more weight to

the discounted cash flow method on this occasion. His analysis produced a figure of $290 a square metre a year as his opinion of the fair market net rental for the space occupied by the Audit Office. 12 He thought the fair market rent for the underground car spaces was $750 a year for each space and that for the on-site car bays was $500 a year for each bay. 13 The rent for the car spaces was thus also over market in

September 1994. Mr Byrne was of the opinion that, as at 30 June 1994, Centenary House was worth $32.5 million, of which approximately $6.18 million was attributable to the over-market rent. Once again, these views of Mr Byrne are consistent with those of Mr Egan.

I am satisfied that the fair market net rent for the office space occupied by the Audit Office in Centenary House in September 1994 was $290 a square metre a year. This means there was no growth, or only negligible growth, in rents in Barton for good-quality office space in the year from September 1993 to September 1994.

8.2.2 1995 to 2004

Mr Egan testified that the fair market net rent for the office space occupied by the Audit Office in Centenary House in the years beginning 1 September and ending 31 August between 1994 and 1998 was as follows: 14

• 1994 to 1995 - $295 a square metre a year

• 1995 to 1996 - $305 a square metre a year

• 1996t01997—$315a square metre ayear

• 1997 to 1998 - $260-270 a square metre a year.

These rates are to be compared with what the Commonwealth was actually paying for the Audit Office's accommodation in those years: 15

• 1994 to 1995 $401.07 a square metre a year

• 1995 to 1996 - $437.16 a square metre a year

• 1996 to 1997 —$476.51 a square metre a year

• 1997 to 1998 —$519.39 a square metre a year.

Thus, by September 1997 the Commonwealth was paying twice the fair market rent for the Audit Office space in Centenary House. Further, Mr Egan's evidence demonstrates that the Canberra market for good-quality office space had stagnated

12 Ex 113 at MACQ.033.0234-0219 at 0234-0236. 13 See his capitalisation of net income method calculations: Ex 113 at MACQ.033.0219 at 0248. '' Ex 99 at pars 160-163 and Table 10. ' See Ex2.

98 Report ofInquiry into the Centenary House Lease

by

1992. 16 It showed little or no growth in rents in 1993 and 1994 and then showed reductions for each of the next five years. It recovered slightly in 2000. Since then there has been little or no growth. This evidence of Mr Egan was not seriously challenged, and I accept it. It is reflected in the figures just shown.

The Audit Office arranged sub-tenancies of the top floor of Centenary House. The first was in favour of the Department of Communications, Information Technology and the Arts and covered the four years from December 1998 to late October 2002. The Department paid a gross rent. When converted to a net rent (by

assuming outgoings at $45 a square metre a year), the rent was as follows:

• December 1998 to March 2002 (3.5 years) - $215 a square metre a year

• March to October 2002 (8 months) $228 a square metre a year.

Mr Russell Coleman of the Audit Office gave detailed evidence of the negotiations which led to these arrangements with the Department. 17 This evidence was not challenged.

The second sub-tenancy was in favour of Kellogg Brown & Root Pty Ltd. That arrangement was struck after considerable negotiation, and it provided to the company a rent-free period and a reduced-rent period as incentives. Mr Egan analysed the sublease and summarised the effect of the underlying dealings given expression in it. 18 The sublease is for just over 5,75 years. Ignoring the impact of time on the value of money, and taking into account the rent-free and reduced-rent provisions, Mr Egan said that, looked at over the entire term of the lease, the company will pay an average of $312 a square metre a year gross. Allowing for outgoings at $45 a square metre a year, this is equivalent to an average net rent throughout the term of the sublease of $267 a square metre a year. ' 9

I am satisfied that each of these sub-tenancy arrangements made by the Audit Office was an arm's-length transaction arrived at after every effort was made to lease out the top floor of Centenary House on the best terms reasonably available at the time. 20

16 Ex 99 at pars 143-155 and 164-166; Ex I, Ex J, and Ex K in Ex 99. 17 Ex 23 at pars 37-54 and the documents referred to in those paragraphs; T 526-T 531. 18 Ex 99 at pars 62-65. 19 Ex 99 at par 170 and Table 12. 20 Mr Coleman also testified as to the efforts made in the latter half of 2002 to find a new tenant for that space: Ex 23 at pars 55-76 and the documents referred to in those paragraphs. This evidence was not challenged. Report oflnquii-y into the Centenary House Lease 99

8.2.3 Mr Egan's conclusion

After considering all the relevant material, Mr Egan concluded that the fair market net rent for the years 1998 to 2004 for the office space leased to the Audit Office pursuant to the Centenary House lease (excluding GST) was as follows: 2'

• 1998 to 1999 - $220 a square metre a year net

• 1999 to 2000— $220 a square metre a year net

• 2000 to 2001 $220 a square metre a year net

• 2001 to 2002 - $235 a square metre a year net

• 2002 to 2003 - $275 a square metre a year net

• 2003 to 2004 - $275 a square metre a year net.

This evidence was not challenged. Those figures are to be compared with the rates the Audit Office has actually paid for the office space: 22

• 1998 to 1999 —$566.14 a square metre a year

• 1999 to 2000 —$617.09 a square metre a year

• 2000 to 2001 - $672.63 a square metre a year

• 2001 to 2002 $733.16 a square metre a year

• 2002 to 2003 —$799.15 a square metre a year

• 2003 to 2004 —$791.88 a square metre a year

• 2004 to 2005— $863.15 a square metre a year.

8.3 2003 to 2008

GST became payable by the Audit Office for the years from and including September 2003. This has very slightly mitigated the effect of the fixed escalation provisions. 23 Nevertheless, the rent payable by the Audit Office for its office space for the years 2003 to 2008 (inclusive of GST) according to the lease has been and will be as follows:

• 2003 to 2004 —$871.07 a square metre a year

• 2004 to 2005 - $949.47 a square metre a year

21 Ex99atpars 167-172 and Table 13. 22 See Ex 2 and Ex 3 at SUMM.015.0008, 23 This is because John Curtin House Ltd can recover only the fixed sums agreed to in the lease, out of which it must pay GST. Part of the total payment made by the

Commonwealth (the Audit Office) is now GST. The Audit Office receives the benefit of an input tax credit for that amount.

100 Report of Inquiry into the Centenary House Lease

•

2005 to 2006 - $1034.92 a square metre a year

• 2006 to 2007— $1128.06 a square metre a year

• 2007 to 2008 —$1229.59 a square metre a year.

8.4 Conclusion

By September 2004, the Audit Office was paying over three times the fair market rent for its office space in Centenary House. It would appear that by the same date the rent for the car spaces and car bays was also substantially over market.

In the final year of the lease (2007 to 2008), the rent payable for the office space (inclusive of GST) will be $1229.59 a square metre a year. 24 That will translate into a total office rent component of $7,742,719.15.25 To that sum will need to be added $447,791.42 for car spaces and car bays, making a grand total of $8 ,190,510.57.26

The rent is a net rent, so it will also be necessary to add an appropriate amount for outgoings.

If the option to renew had been exercised in the tenth year which it was not the rent payable for the office space in the final year of the lease (as renewed and inclusive of GST), would have been $1891.87 a square metre a year. 27 That would have translated into a total office rental component of $11,913,133.16 .28 It would be necessary to add to that $688,982.61 for car spaces and car bays, making a grand total of $12,602,115.77.29 Again, because the rent is a net rent, it would be necessary to add an appropriate amount for outgoings.

24 Ex 2. 25 Ibid. 26 Ibid. 27 Ibid. 28 Ibid. 29 Ibid. Report of Inquiry into the centenary House Lease 101

9

Other leases

Two of this Inquiry's terms of reference, (b) and (h), direct me to consider leases beyond those referred to in submissions to or the Report of the 1994 Inquiry and to determine whether those leases would have provided a more appropriate basis for comparison and whether the Centenary House lease was in keeping with those arrangements.'

Insofar as terms of reference (b) and (h) raise what I have called "hindsight issues", they are dealt with in Chapter 19. In the present chapter I discuss a number of leases, including those referred to in Exhibit 106, which deals with most of the leases listed in a document officers of the Australian Property Group prepared in 1993; 2 J refer to this document as "the Property Group's escalator summary". John Curtin House Ltd sought to justify the Centenary House lease as being comparable with the leases identified in that document. But first a word about the document's provenance.

Mr Malcolm Coleman, the General Manager of the Australian Valuation Office, said he had "picked up" the Property Group's escalator summary and given it to Commissioner Morling, assuming it to be accurate because it had been prepared by the Property Group for the Senate Estimates Committee inquiring into the Centenary House lease .3 Mr Coleman took no responsibility for the document ;4 he did not check whether the information it contained was accurate; and he had no idea whether it was accurate.'

The document appears to have been prepared as the basis for a written answer to a question asked in the Senate whether there had been any other leases of 10 years or more that had fixed escalations without market reviews. 6 The answer was that the Property Group was aware of 25 such leases, and their geographical

distribution was identified .7 The Property Group's escalator summary is reproduced as Appendix F.

Term (b): "whether the Centenary House lease is in line with leasing arrangements, whenever made, of a comparable kind"; term (h): "whether the government leases referred to in submissions to the 1994 Inquiry, or in the Report of the 1994 Inquiry, for the purposes of comparison with the Centenary 1-louse lease provided a reasonable basis of comparison, and whether other leases, including non-government

leases, would have provided a more appropriate basis of comparison". 2 Ex 5 at CH94.012.0330. Exhibit 106 is a schedule of leases and information about the leases. It was prepared by this Inquiry's lawyers. T2332-2333.

12332. T 2338-2340, 2344, 2352-2353. 6 Ex 5 at CH94.012.0329. Ibid.

Report of Inquiry into the Centenary House Lease 103

Counsel for John Curtin House Ltd argued that all

25 leases do indeed have

characteristics which make them "directly comparable" with the Centenary House lease, in that they share "most and in some cases all" of the following characteristics:

• long terms generally of 10 years

• fixed escalators of anywhere from 6.0% to 9.5%

• a ratchet clause if there is a market review provision

• no reversion of ownership to the Commonwealth at the end of the lease

• a pre-commitment agreement. 8

At my request, John Curtin House Ltd produced copies of several of these leases to this Inquiry and supplied information about others. I am grateful for the company's assistance. Counsel assisting the Inquiry took all possible steps to obtain originals or, failing that, copies of the remaining leases, by having 21 notices to produce served on the parties to the leases and by making direct inquiries of those parties and others. Detailed and careful searches were carried out over several months. Every effort was made to obtain them all. 9

The leases which were not obtained are in any event of marginal relevance, if any at all, according to the Property Group's escalator summary. They are the leases for the Department of Social Security Computer Centre at Homebush (15 years, but no escalator), the executed lease for Department of Employment, Education and Training premises in Launceston (6% escalator), the leases for various Commonwealth agencies in Burnie (3% escalator), and another lease for Department of Employment, Education and Training premises in Mowbray in Launceston (4% escalator). 10 It is not suggested that the rent review provisions contained in any of those leases include or comprise a fixed percentage annual escalation factor of the order of 9%.

This chapter discusses the leases applying to Tuggeranong Office Park, AUSLTG (in the Scrivener Building), the MLC Tower in Woden, the remaining leases identified in the Property Group's escalator summary, and certain other leases specifically referred to in the submissions of John Curtin House Ltd.

8 Submissions at par 313. Counsel for John Curtin House Ltd submitted that this Inquiry was remiss in failing to use its powers to compel the production of these documents: Submissions at par 389(c). That complaint is ungenerous, and it should not have been made. 10 Hornebush is in western Sydney; the other buildings are in Tasmania.

104 Report ofInquiry into the Centenary House Lease

9.1

The Tuggeranong Office Park lease

The Commonwealth entered into the Tuggeranong Office Park lease in October 1989. The lease was included in the Property Group's escalator summary as a lease having a term of 15 years or more." It was one of only two leases said to have such a long term. The other was the lease of the Department of Social Security Computer Centre at Homebush. When read with care, the escalator summary does not suggest that the rent review provisions contained in the Tuggeranong Office Park lease included or comprised a fixed percentage annual escalation factor. That lease was nevertheless often mentioned in documents created for the discussion of the Centenary House lease as containing such an escalator factor and thus as a lease comparable with the Centenary House lease. It is usually described as a 25-year lease with a 10% fixed annual escalator for the first 10 years. 12

The Tuggeranong Office Park project involved the construction of a very large office complex at a cost of over $106 million. The net lettable area of the complex is 32,000 square metres. Financing of the project involved numerous agreements, to many of which the Commonwealth was a party, 13 The sublease of the complex to the Commonwealth was for a term of 25 years. It did not provide for rent to escalate by a fixed percentage at all: rather, the rent was to increase by reference to the market or the Consumer Price Index, whichever was the greater. 14 The Commonwealth did provide an indemnity in respect of repayment of the bonds issued to finance the transactjon,' 5 but the agreements also included provisions which effectively enabled the Commonwealth to acquire the complex at or before the termination of the lease for a nominal consideration. 16

The Tuggeranong Office Park lease is in no way comparable with the Centenary House lease. It does not have terms relevantly similar to the crucial commercial terms in the Centenary House lease, nor does it provide support for the reasonableness of the structure of the Centenary House lease.

John Curtin House Ltd submitted that the guarantee to bondholders given by the Commonwealth as part of the Tuggeranong Office Park lease transaction has the same effect as including in the lease a fixed percentage annual escalation factor of 10%. In part, that submission was based on evidence given by Mr John McFadden

of the Lend Lease Property Group. Mr McFadden's impression that such an escalator was included in this transaction is incorrect, and plainly so. The

' Ex 5 at CH94.012.330. 12 Examples of this are Mr J01111 McFadden's note (Ex 51 at MACQ.004.0 182) and the evidence of Mrs Penelope Morris (T 1063), Mr McFadden (1 1404, 1409), Mr Paul Ferrari (T 1320) and Mr Jeffress (T 1868). 13 Nineteen separate agreements were tendered in evidence at the present Inquiry: see Ex lii and Ex 112. 14 See sublease dated 10 December 1991: Ex 112 at PTA. O01.1045-1069, c13.8. ' Deed of indemnity dated 11 October 1989: Ex 112 at PTA.001.0291-0296. 16 Shareholders' deed dated 11 October 1989: Ex 112 at PTA.001.0885-0968 and pre-emption agreement dated 11 October 1989: Ex 112 at PTA.00 1 .0808-0820. Report of Inquiry into the Centenary House Lease 105

transaction does not include such a factor, whether one views the matter

narrowly that is, as a question merely of construing the relevant agreements or more broadly by taking into account the economic impact of the guarantee. The submission is rejected.

Nor is there any assistance for the submissions of John Curtin House Ltd in the fact that the term of the lease was for a substantial period. In essence, the transaction was a finance transaction which allowed the Commonwealth, at its option, to acquire the office complex for a nominal consideration after effectively paying for it through its lease payments and other arrangements. Far from being an example supporting the Centenary House lease transaction, it is an example of what perhaps would have been appropriate in relation to the Centenary House lease transaction, at least in one respect in that, given the levels of rent to be paid under that lease, the Commonwealth should have been able to acquire the building for a nominal consideration at the end of the initial 15-year term.

9.2 The AUSLIG lease

Although Mr Graham Jeffress of the Australian Valuation Office was not aware of it at the time he engaged in negotiations with Mr Noel McCann, John Curtin House Ltd's property adviser, and when he prepared his report in November 1991, the Lend Lease representatives had mentioned the AUSLIG lease to Mr Dominic Collins of the Australian Property Group in 1991, and it was available to be argued by them as a precedent for a fixed 9% escalator. There is no evidence that Mrs Penelope Morris did use the AUSLIG lease in this way. On the contrary, she seemed to be testing the water on the figures for escalators at higher levels. No doubt if Mr Collins or Mr Jeffress had really resisted the figures being sought by Mr McCann for the escalators, the Lend Lease personnel could and would have deployed the rent review mechanism in the AUSLIG lease to support the position for which they were contending.

The AUSLIG lease related to a building purpose built by Lend Lease for the Australian Surveying and Land Information Group. Subsequently named the Scrivener Building, it is situated in Fern Hill Technology Park, in suburban Canberra. Construction began after the Commonwealth entered into an agreement for lease on 23 July 1990,17 and the building was completed in mid-1991. It is a very different building from Centenary House, and it is located in an area very different from Barton.

The original commercial deal was embodied in an agreement for lease which provided for a starting net rent calculated by reference to $250 a square metre, escalated at 12% a year from 31 January 1991 to practical completion. During the currency of the lease the rent was to be reviewed to market at two-year intervals.

Ex 59 at FREE.006.0480.

106 Report of Inquiry into the Centenary House Lease

In November 1990, having been unable to find an investor to buy the building

within the time frame it wished, Lend Lease sought to renegotiate the lease term s 8 It proposed to the Property Group that, at the first three biennial market reviews, the rental increase be set at 9% a year, with a review to market in the eighth year. Lend Lease suggested that such an escalator would benefit the Commonwealth because rental increases in the previous five years had averaged 11.5% a year.

Lend Lease also offered further incentives to persuade the Property Group to renegotiate the agreement, among them a 2% reduction in the finance rate through the construction and fit-out period; a reduction in the initial rental, which it was suggested would save approximately $350,000 over the first eight years of the lease; and the payment of an amount equivalent to the first month's rent.' 9 In December

1990 the Property Group indicated it would accept those terms. 20 Lend Lease subsequently offered to fix the rent increase at year eight at 9% a year too and at the same time offered a further month's rental abatement. 2' In May 1991 the Commonwealth and Lend Lease executed a deed of variation of agreement for lease

incorporating the variations proposed, including the 9% a year fixed escalator for 10 years.

As can be seen, the terms of the AUSLIG lease were the result of a process of negotiation taking place after agreement to the commercial terms and the terms of the agreement for lease. Major incentives were provided in return for the Commonwealth's agreement to the 9% escalator over the term of the lease. In particular, the starting rent, which was to form the basis for subsequent escalations, was discounted and two months' rent was credited against the cost of the fit-out. Equally, although the initial agreement for lease followed a process of advertisement and expressions of interest, the final agreement was not negotiated in a "market" context.

The initial term of the AUSLTG lease is 10, not 15, years. The effect of the application of a fixed percentage rent escalator at a level as high as 9% a year over 10 years is much less than the effect of the application of such an escalator over 15 years. This conclusion is borne out by the financial models used for the Centenary House lease transaction itself. The extent of the difference is demonstrated by even a cursory review of the calculation of the yearly increases in rental for the Centenary House lease 12 and the cash flow document forming part of the final Macquarie Bank loan documentation. 23 Very early, Mrs Morris and Mr McCann (and others) realised that obtaining a 15-year lease, as distinct from a

10-year lease, was quite critical to constructing a satisfactory model for the

18 Statement of Mr McFadden: Ex 51 at pars 12 and 13. 19 Letter from Ms Lenehan of Lend Lease Development to Group: Ex 58 at LNDD.002.0273. 20 Fax from Mr Feneley to Ms Lenehan, 4 December 1990. 21 Letter from Ms Lenehan to Mr Feneley, 5 February 1991: 22 Ex 2. 23 Ex 117 atEXH.117.0083. Mr Feneley of the Property

Ex 58 at LNDD.002.0233. Ex 58 at LNDD,002.0109.

Report of Inquiry into the Centenary House Lease 107

Centenary House transaction. Mrs Morris raised the matter with Mr Collins at their

first meeting, in March 1991 *

The AUSLIG lease was not tendered in evidence in the 1994 Inquiry.

Mr Graham Fenwick, the valuer retained by Commissioner Morling, referred to it in his letter to the Commissioner dated 27 July 1994,24 but it is unclear whether he had actually read the lease or had simply been given a precis of it. He did not appear to know of the history of the transaction as it is summarised here. Curiously, the lease did not feature prominently in other evidence given at the 1994 Inquiry or in the submissions made to Commissioner Morling, although the Commissioner described it as lending support to the 9% escalator and as showing that such an escalator coupled with a relatively long lease of 10 years was thought to be a proper commercial transaction.25

The AUSLIG lease's terms concerning the escalation of rents were not made known to Mr Jeffress in 1991. Mr Collins was provided with a copy of the lease at some time in October 1991, but it is reasonably clear that he did not pass on to Mr Jeffress any knowledge he acquired of its terms. He gave no evidence that the terms of the lease influenced his attitude to a framework involving fixed annual escalators or to the particular figures finally chosen for each of those escalators in the Centenary House lease. This was definitely a "one-off' transaction and not representative of any market in Canberra in 1990 or 1991. It is an extremely flimsy foundation for any indication of the existence of a "market" for leases with fixed escalators at the level of 9% a year for 15 years.

9.3 The MLC Tower sublease at Woden

The MLC Life Ltd sublease to the Commonwealth of what appears to have been most of the MLC Tower at Woden was entered into on 21 December 1990. The term of the lease was 10 years commencing on 5 July 1989, with two option periods of five years each. The first year's rent was increased by 9% for the second year; the third year's rent was 8% above the second year's rent; and the fourth year's rent was 8% above the third year's rent. At the end of the fourth year, there was a market review designed to fix the rent for the fifth year (5 July 1993 - 4 July 1994) and the fixed annual escalators for the following three years. A similar review was to take place in relation to the last two years of the initial term. In fixing the annual percentage escalators, the valuers involved were to take into account the effect of the previous rent review in comparison with market rents during that previous period. There was no ratchet clause.

The rent review mechanisms embodied in the sublease for the MLC Tower at Woden are a far cry from the rigid mechanism found in the Centenary House lease. There is a capacity to adjust the rent by reference to the market - up or down. The

24 Ex 5 at CH94.005.0184 at 0188. 25 1994 Report at pars 4.26, 4.43. 108 Report of Inquiry into the Centenary House Lease

fixed annual percentage escalators adopted have application for only relatively short

periods and are then reviewed back to market. If anything, the terms of the MLC Tower sublease reflect an appreciation by the parties to the transaction that prudence requires the application of fixed annual percentage escalators for only relatively short periods and that the escalators be reviewed back to market regularly.

9.4 Other leases

Mr Malcolm Coleman gave evidence to Senate Estimates Committee D on behalf of the Valuation Office on 24 September 1993.26 Senator Warwick Parer asked him whether he had seen any lease to the Commonwealth for a lengthy term where the rent escalated at 9% year by year throughout the term, with the only opportunity to revert to market arising if the market was greater than 9% over the previous period's rent. Mr Coleman said he had never seen such a lease. 27 He added, however, that the Australian Taxation Office may have entered into similar leases "in more recent times".28 He also said that, as far as he was aware, the Valuation Office had never endorsed, recommended or advocated the use of a long-term lease annual escalator of 9% coupled with such a market review clause. 29 It was shortly after Mr Coleman gave that evidence that the Property Group's escalator summary was used as the basis for the written answer to the Senate stating that 25 leases of 10 years or longer with fixed escalators and no market review were entered into between September 1988 and September 1993.

When interviewed by Commissioner Morling for the first time on 21 June 1994, Mr Coleman was asked to provide the 1994 Inquiry with details of other leases in which there had been escalation clauses .30 He attended a public hearing of that Inquiry on 4 August to give evidence . 3' There is no indication in the transcript that he had provided the information Commissioner Morling sought by that date. However, among the material the Department of the Prime Minister and Cabinet produced to the present Inquiry as the record of the 1994 Inquiry was a bundle of papers with a handwritten cover sheet stating, "The attached documents were provided to the Inquiry by Mr Malcolm Coleman". 32 One document in the bundle is the formal answer to the Senate. Another is the Property Group's escalator

summary, marked "Confidential". 33 The bundle was not marked as an exhibit, and there is no indication that any part of it was tendered in the 1994 Inquiry. Commissioner Morling did not refer to the documents in the bundle in his Report.

26 Senate, Hansard, 24 September 1993, Estimates Committee D, pp D 290-301. 27 Ibid at D 294, 28 Ibid. 29 Ibid at D 296, 30 1 19 in the 1994 Inquiry: Ex 5 at CH94.018.033. 31 1299-309 in the 1994 Inquiry: Ex 5 at CH94.019.0093-0094. 32 Ex 5 at CH94.012.0328. 33 Ex 5 at CH94.012.0330. Report oflnquhy into the Centenary House Lease 109

None of the leases identified in the escalator summary appears to have been

tendered as an exhibit in the 1994 Inquiry.

John Curtin House Ltd sought to defend the Property Group's escalator summary whilst accepting that it does contain errors. Since it is the leases themselves which help to establish the market at the relevant time, rather than a mistaken summary of them made after the event, the accuracy of the escalator summary is not to the point. 34 Before leaving the document, however, it is necessary if only to ensure that it is not used as a convenient summary of the leases themselves to refer briefly to information in the document which is either inaccurate or at the least misleading.

• The AUSLIG lease does not contain a fixed percentage annual escalation provision. Rather, it requires the payment of specified sums by way of rent which, when examined closely, reveal that the particular rent figures have been increased by a factor of 18.81% every second year, or 9% a year.

• There is no fixed periodic escalator in the AMEP Bankstown lease.

• There is no fixed annual percentage rent escalator in the Australian Taxation Office Newcastle lease; rather, it is a biennial market review.

• The Australian Taxation Office Bankstown lease does not provide for any market review in the initial ter i, as suggested in the Property Group's escalator summary. Such a provision does exist in relation to the first renewed term but not the second.

• The information about the Australian Taxation Office Hurstville lease does not mention that, in each of the renewal periods, there is a biennial market review provision, not a fixed annual percentage escalator.

• The reference to the NCA lease in Sydney ignores the very substantial incentive granted by the lessor to the NCA by way of an initial 18-months rent-free period.

• The observations made in respect of Nauru House, whilst literally correct, are apt to mislead. In particular, it is important to note that there was to be no increase in the rent at all for the first five years of the lease and only small increases thereafter.

• The commentary in relation to 443 Queen Street ignores the very substantial initial rent-free period of two years and two months, and it positively misstates the percentage increases thereafter for some of the leases, which were 4% a year, not the 6% stated in the document in relation to one rent period.

• The last rent increase in the DVA 10 Eagle Street lease was applicable for three, not four, years.

14 Submissions of John Curtin House Ltd at par 312.

110 Report of Inquiry into the Centenary House Lease

•

The commentary in respect of DSS 225 St George's Terrace is apt to mislead. The initial five-year rent is fixed at a level which does not increase at all at any time during that period.

The Property Group's escalator summary also fails to make clear that, in many cases, the fixed annual escalation provisions are either reduced or removed in the renewal periods.

In this Inquiry the leases themselves were tendered as Exhibits 78, 79, 83, 84, 107-110 and part of Exhibit 120. As noted, Exhibit 106 is a schedule containing relevant details of the leases. Synopses of most of the leases are in Appendix E.

Of the leases listed in Exhibit 106, only seven were entered into before April 1992. Of those seven, only four contain any fixed periodic percentage rental escalation factor, and only two of the four have fixed percentage annual escalators. 35 These are at 8% a year. The third has a biennial percentage escalator but at a much lower level (about 4% a year), 36 and the fourth has a substantial upfront rent-free period of two years, a further period of four years where no increase in rent was applicable, and only minor increases in subsequent years. 7

Although these transactions appeared to have been entered into before April 1992, they were not put forward in the negotiations for the Centenary House lease as precedents for the terms ultimately agreed. Only one of them was a lease for the Australian Taxation Office (its premises in Newcastle), and that lease did not include any form of fixed periodic percentage escalator. Three of the seven leases were for the Department of Social Security, and only one of those had a fixed

annual percentage rent escalation factor incorporated in its rent review provisions.

The existence of two leases entered into before April 1992 containing fixed annual percentage rental escalator factors in the rent review provisions does not provide any foundation for the proposition that such a term in the Centenary House lease was based on market conditions or was within market parameters. These transactions did not relate to premises in Canberra and were for 10-year terms only. They appear to have been unusual rather than commonplace. In any event, the negotiators did not rely on them in any of the discussions concerning the Centenary House lease.

Of the 15 remaining leases referred to in Exhibit 106, only six have fixed annual percentage rental escalators of 7% or more in their rent review provisions, and these are all for premises occupied by the Australian Taxation Office . 3' The significance of this fact is demonstrated by the evidence of Mr Coleman that, when the Taxation Office sought to enter into a transaction with such a fixed percentage annual rent escalator mechanism in Adelaide, one of his subordinates in the Valuation Office

35 Leases 3 and 4 in Appendix E. 36 Lease 5 in Appendix E. 37 Lease 6 in Appendix E. 38 Leases 8, 10, 13, 14, 19 in Appendix E. Report ofInquiy into the Centenary House Lease 111

brought the matter to his attention, suggesting that the proposed agreement was

unwise. 39 It appears that in the 1990s the Taxation Office pursued a program of acquiring premises in suburban and regional areas under considerable time pressure and perhaps without paying due attention to the impact of such provisions.

Each lease in the Taxation Office group referred to in Appendix E (other than the lease for the Newcastle office) was entered into after the Centenary House lease and may well have been influenced by the terms of that lease. Each was also entered into at a time when the Taxation Office had considerable autonomy in selecting premises and engaging in lease transactions. The transactions do not appear to have been undertaken by the Property Group; nor do they appear to reflect any considered or coordinated approach on the part of the Commonwealth.

It can be seen from Appendix E that there are other leases in Exhibit 106 where the parties used the mechanism of fixed periodic percentage escalators. In some cases these provisions adopted such escalators on a two-yearly basis or at a level lower than 7% or in combination with market reviews or rent-free periods. These transactions do not provide any precedent or comparable transaction where the fixed escalators were as high as 9% (let alone 10.5%) and where the escalator is to be rigidly applied year in year out for 15 years, without any possibility of an adjustment to market.

The rent review provisions in the remaining leases summarised in Appendix E but not already the subject of comment in this chapter fail to support the proposition that the Commonwealth (or, indeed, any other party) routinely or commonly entered into leases of premises on terms which included a fixed annual percentage rent escalator of the kind found in the Centenary House lease. Some do have percentage escalators but they are fixed at a level significantly below 9%, and they are often coupled with substantial incentives or economic benefits in the form of rent-free periods or periods during the term of the lease where there is no increase in rent.

Of the 22 leases summarised in Appendix E, only three are for a term longer than 10 years, 18 are for 10 years, and the term of one is not identified in the details available.

The argument put on behalf of John Curtin House Ltd, that all 25 leases referred to in the Property Group's escalator summary shared "most and in some cases all" of the characteristics of the Centenary House lease, is not made out. 40 In particular, the argument is not made out in relation to the fixed escalators of anywhere from 6.0% to 9.5% and the pre-commitment agreement. There is a suggestion in relation to some of the transactions that a pre-commitment agreement had been signed, but that circumstance was not established in every case or even in most of the cases.

T2341-2342. 40 The lease characteristics identified, and listed at the beginning of this chapter, were long terms - generally of 10 years; fixed escalators of anywhere from 6.0% to 9.5%; a ratchet clause if there is a market review provision; no reversion of ownership to

the Commonwealth at the end of the lease; and a pre-commitment agreement.

112 Report of Inquiry into the Centenary House Lease

The argument appears to have been based to some extent on the Property Group's

escalation summary, which is inaccurate and exaggerated.

The only evidence, in either the 1994 Inquiry or this Inquiry, of leases to the Commonwealth with a rent review mechanism consisting of or including a fixed annual escalator of 9% or more are the AUSLIG lease and the DSS Bridgewater lease.

The AUSLIG lease is discussed in Section 9.2 and, as noted there, provides an extremely flimsy foundation for any indication of a "market" for leases with fixed escalators. The DSS Bridgewater lease is for a relatively small space (654.5 square metres) and involves a relatively small annual rent. The circumstances in which that particular rent review mechanism was agreed were not ascertained. This Inquiry's terms of reference are directed to a consideration principally of the Canberra market, and the return from investigating the leases elsewhere which were nominated was of

so little value that it was not within either the time or the resources available to this Inquiry to proceed with any further investigation of them.

There are two leases in the Burns Centre, at 28 National Circuit in Forrest, ACT, which contain rent review provisions requiring the rent to be increased year by year by a fixed annual percentage escalator of 6%. The term of the leases is six years. At the end of the third year the lessor is entitled to a market review, and the rent fixed in that review becomes the new rent if it is greater than 6% more than the previous year's rent. These two leases demonstrate that the Commonwealth, either directly or through a Commonwealth agency, was prepared to enter into a lease in Canberra on those terms in July 1992. They postdate the Centenary House lease and may well have been influenced to some extent by the teirns of that lease. In any event, they are for much shorter terms than all the leases already discussed in this chapter, and the fixed percentage annual escalator is significantly lower than the 9%

found in the Centenary House lease.

9.5 Conclusion

Only one long-term lease was found which had a rent review mechanism involving the rigid application of fixed periodic escalators over the entire term of the lease entered into in respect of premises in Canberra before April 1992, when the

Centenary House agreement for lease was signed. It is the AUSLIG lease in which, not coincidentally, the Lend Lease Property Group was involved.

It is significant that only one such lease could be found, despite a great deal of effort directed at locating other similar leases not just by the Inquiry's lawyers and staff, but also by the lawyers and consultants for John Curtin House Ltd, which had an obvious interest in bringing to the Inquiry's attention every lease having a rent review mechanism of the relevant kind.

Mr Noel McCann, John Curtin House Ltd's property adviser and involved in the negotiations for the Centenary House lease, agreed in his evidence in this Inquiry

Report of Inquiry into the Centenary House Lease 113

that to his knowledge there was at that time no market transaction in Canberra or

anywhere else with a fixed annual escalator of 9% over 15 years. The evidence in this Inquiry demonstrates that the terms of the Centenary House lease are not justified by any market transaction.

There is no doubt that in a perfect world a developer would want to include an agreement by a blue-chip tenant to enter into a long-term lease with substantial annual fixed rental escalations in any proposition for a financier - whether during 1990 to 1992 or at any other time. However ideal such terms might be, usually the identity of the tenant and the terms the tenant will accept are matters dictated by the leasing market itself, rather than by the actual or perceived requirements of financiers. Whilst such requirements may well be relevant to a developer's capacity to proceed with a particular project, they are not the sole determinant of the commercial terms parties can or might agree to in commercial lease transactions. Financiers' requirements or wishes are but one of the many factors in the mix.

114 Report of Inquiry into the Centenary House Lease

10

Whether the Australian Property Group acted appropriately

Whether the Australian Property Group acted appropriately in its negotiation of the Centenary House lease must be considered in relation to three areas: the conduct of the negotiations themselves, the Property Group's communications with the Audit Office, and its dealings with other agencies.

10.1 The conduct of the negotiations

10.1.1 Mr Dominic Collins

My conclusions about Mr Collins' conduct of the negotiations are generally incorporated in Chapter 5. In summary, Mr Collins was inexperienced, out of his depth, inadequately supervised, and not subject to proper controls. He was also unwise to have attended meetings with the Lend Lease Property Group

representatives alone; he was outnumbered in those meetings.

Mr Collins never understood the strength of the Commonwealth's position as a tenant in the Canberra area - and more particularly in the Parliamentary Triangle - or, if he did, he failed to take advantage of that strength. A strong negotiator is likely to have achieved terms more favourable to the Commonwealth than those which were in fact achieved. But Mr Collins was not a strong negotiator, and he allowed himself to be guided by degrees to the position sought by Lend

Lease.

10.1.2 Mr Robert Ireland

Mr Ireland should have been more involved in the negotiations, but he did not seek to take any active role in relation to them as long as Mr Collins remained with the Property Group. Once Mr Collins had left and Mr Ireland was assigned greater responsibility for the lease negotiations, he failed to question any of the terms of the

lease.

Mr Ireland was responsible for the preparation of a minute to Mr Bruce Holden, the Property Group's State Manager, ACT Office, seeking authorisation to enter into the lease in accordance with the Lands Acquisition Act 1989.' Although the appendix to that minute identified the 10.5% escalation to practical completion and

the 9% escalation during the currency of the lease, Mr Ireland calculated the item "Total Rent for Term" without taking either escalation into account. He explained

Ex 5 at CH94.008.0 127 dated 6 April 1992.

Report of Inquiry into the Centenary House Lease 115

his failure to include the escalation to commencement on the basis that he had not

known what the commencement date would be. 2

The appendix itself identified an anticipated commencement date. 3 Alternatively, Mr Ireland was at the time in close contact with Ms Anne Kelly, from the Australian Government Solicitor's office, in relation to the final negotiations for the form of the lease, and he could have contacted her for further information about the anticipated commencement date. In either case, it would have been a simple thing to have made an estimate of the total rent for the lease on the basis of the anticipated commencement date. By failing to do this, Mr Ireland underestimated the total expenditure under the lease by some 60%. He conceded that this was a "pretty significant" mistake. 4

10.1.3 Mr Paul Ferrari

Mr Ferrari took the precaution of meeting Mr Graham Jeffress of the Australian Valuation Office to confirm his valuation advice, 5 but he took no pro-active or positive responsibility for concluding that the terms of the lease were reasonable or good value. He also approved Mr Ireland's minute to Mr Holden, but his review was limited to considering whether there was any reason to disagree with the recommendation. 6 This was not a review at all.

10.2 Communications with the Audit Office

The introduction of Centenary House to the Audit Office is dealt with in Chapter 2. Mr Michael Jacobs, the Deputy Auditor-General, said in evidence to this Inquiry that he had expected information about the terms of the proposed lease would come from the Property Group in the normal course, when it became available to the Group.' This expectation was a reasonable one, but it was not met. Although the Property Group and the Audit Office were in regular communication in relation to various aspects of the proposed lease, a fully frank disclosure of the progress of the negotiations was not provided at any time.

Mr Collins sent a letter to the Audit Office on 23 August 1991 8 saying that he was at that time looking at a number of options concerning the rental level

2 12261. 1 June 1993: Ex 5 at CH94.008.0 129. 12262. See Section 5.14. 6 T851-854.

T262-263. Ex 5 at CH94.002.0038 (endorsed "not on ANAO's files"). Although this letter was not found in the files of the Audit Office, documents found in the Property Group's files establish that the letter was faxed to the Audit Office on 26 August 1991: Ex 26 at DOFA.009.0223 0 1.

116 Report ofInquiry into the Centenary House Lease

determination and that he would seek the Audit Office's agreement before making

any commitment. The options included gross or net rents and fixed escalations or market reviews. This letter is inconsistent with discussions Mr Collins had already had with Mrs Penny Morris of Lend Lease. Mr Collins was unable to explain why he had not revealed to the Audit Office in his letter the matters he had already agreed in principle with Mrs Morris to a great degree of finality. 9

Mr Collins told the 1994 Inquiry he had explained to Mr John Meert and "other ANAO senior executives" the difference between the options identified in this letter of 23 August 1991; he said he had also explained the various terms and conditions "clause by clause" to Mr Jacobs, using the AUSLIG lease as a basis for discussion.' ° None of the Audit Office senior executives who gave evidence to this Inquiry could

recall any such discussion. It is very unlikely that Mr Collins could have spoken to these people without there being some record of the conversation. None has been found. His evidence is unrealistic, and it is rejected.

Mr Collins does appear to have provided the Audit Office with a copy of the draft letter of intent prepared in September 1991; 11 it has been found in the Audit Office files but without any of the usual annotations to show who (if anyone) had read it. Mr Gerard McGrory (of the Audit Office's Administrative Services division) recalled having seen it, but he had paid no regard to the rental provisions since he was not concerned with that issue. 12 The draft letter of intent, however, has blanks in place of the fixed escalators and it omits a paragraph in the letter which was later sent to the owner's valuer indicating that the escalators would be limited to

9.75% and fixed by the two parties' valuers. 13 The draft was provided without any explanation or indication of the likely size of the escalators referred to. These omissions constitute significant lapses by Mr Collins from an appropriate standard of candour in his communications with the Audit Office and no doubt explain why so little attention was paid to the draft in the Audit Office.

Mr Ireland sought Audit Office authorisation to commit expenditure in obtaining valuation advice, stating that it was proposed to request "comprehensive valuation advice". 14 The request sent to the Valuation Office cannot fairly be so described.' 5 A copy of this request was provided to the Audit Office only when a

direct question was asked as to the proposed terms of the lease. The letter was neither a forthright nor an illuminating response to that question. In particular, it failed to identify the rent as at 1 January 1991 - which had already been agreed,

T656-657,669. 10 Mr Collins' Statement to the 1994 Inquiry: Ex 5 at CH94.004.0351 at pars 12, 13. The AUSLIG lease is described in some detail in Chapter 9. Ex 5 at CH94.002.0042. 1" Ex8at par 24. ' Ex 5 at CH94.001.0083 at 0085. 14 Letter from Mr Ireland to Mr Bar-wood, 21 October 1991: Ex 5 at CH94.002.0055, ' See Section 10.3.1.

Report of Inquiry into the Centenary House Lease 117

although not communicated to the Valuation Office

or to give any indication of

the likely level of the escalators.

Mr Collins insisted to the 1994 Inquiry that he had handed over to the Audit Office a copy of Mr Jeffress' valuation. 16 He maintained that assertion before this Inquiry, but with somewhat less vehemence. 17 Although a copy of the valuation was found in the Audit Office files, none of the Audit Office staff who gave evidence before this Inquiry could recall seeing it, and there is nothing in the very extensive documentation available to this Inquiry which provides any evidence that the document was in fact provided to the Audit Office before the agreement for lease was signed.

For various reasons, 18 the absence of a document in the Audit Office's files cannot always be taken as necessarily indicative that it had not been received by the Audit Office; nor can the presence of a document within those files indicate whether it was received in the usual course. Nevertheless, and notwithstanding Mr Collins' assertion to the 1994 Inquiry that he had a practice of handing documents over at meetings,19 the documents in the files maintained by both the Audit Office and the Property Group suggest that he was not in the habit of doing so without a covering letter or other record. The absence of any such record in the files of either the Audit Office or the Property Group makes it doubtful that the valuation was handed over at any time before the agreement for lease was signed. It would certainly have been poor practice on Mr Collins' part to deliver such a significant document to the Audit Office without a covering letter explaining its significance.

Nor is there anything to suggest that the Audit Office ever received a copy of the final letter of intent of 3 December 1991 the one revealing all the essential terms of the lease which had been agreed before the agreement for lease was signed. Again, failure to provide a copy of that document to the Audit Office reflects poorly on both Mr Collins and Mr Ireland.

In summary, the Property Group failed to communicate adequately to the Audit Office the progress of negotiations and the terms finally agreed. The terms under negotiation should have been fully explained in writing at each significant stage, and approval should have been obtained before any agreement was reached,

Mr Collins did not do this. Such communication of the terms under discussion as did take place was indirect and unilluminating. At no stage did Mr Collins or anyone in the Property Group obtain the Audit Office's informed agreement to the commercial terms of the Centenary House lease.

16 T 504 in the 1994 Inquiry: Ex 5 at CH94.019.0310. ' Ex25at par 95. ' At least one original file has been destroyed (see Ex 30). Some of the files were restructured even before the 1994 Inquiry (Ex 12 bears three sets of folio numbers). See also the evidence of Mr Jacobs at T 270-273. 19 Mr Collins' Statement to the 1994 Inquiry: Ex 5 at CH94.004.0351 at pars 10, 19, 20. 118 Report oflnquiry into the Centenary House Lease

10.3 Dealings with other agencies

10.3.1 The Australian Valuation Office

The deficiencies in Mr Collins' communication with Mr Jeffress are discussed in Chapter 5. The conclusion to be drawn from the terms in which Mr Jeffress was instructed to make his "valuation" (drafted by Mr Ireland at the direction of Mr Collins)20 is that Mr Collins was not looking for an objective review of the terms he had negotiated. By the time Mr Jeffress was brought into the picture, Mr Collins had already agreed to all the commercial terms of the lease other than the precise level of the escalators. He had agreed that the escalators should reflect historical levels of rental growth in Canberra, and he had effectively agreed that the AUSLIG lease might be used as a basis for the Centenary House lease.

The role Mr Collins left for Mr Jeffress was extremely narrow. It was not to give his own valuation of the lease; rather, it was to negotiate on behalf of the Commonwealth with the owner's valuer to achieve the best he could do. That is not a valuation by the Valuation Office. A proper valuation - one expressing the valuer's genuine opinion might demonstrate that the proposed terms reached by negotiation are unreasonable, but that is why a valuation from the Valuation Office is required. There was no chance of such a valuation being produced in this case.

In his valuation request, Mr Collins sought to suggest that he was asking Mr Jeffress to give him his own valuation. The invitation at the end of the letter to advise whether the terms were appropriate could scarcely have been more vague or less direct. It is not surprising that Mr Jeffress understood that he was not expected to query the reasonableness of the terms which resulted from his best efforts in the

negotiations with the owner's valuer.

10.3.2 Minute to the Minister for Administrative Services

In response to Senator Parer's 15 January 1992 press release 21 , a ministerial minute dated 16 January 1992 was prepared and signed by Mr Collins and Ms Jane Wolfe, then Acting General Manager of the Property Group. 22 The briefing note attached to the minute identified the 15-year term of the lease and stated that the rents were

net rents and that the base rental would be $280 per square metre net as at 1 January 1991. Neither the minute nor the briefing note referred to the rent escalators. This is an important omission because the press release, although it referred to yearly escalations, did not mention that they were 9% a year. It attacked the proposed

lease mainly because of its length and its provision for the Commonwealth to be responsible for all outgoings. 23 Mr Collins denied that the omission of any

20 Ex 5 at CH94.002.0063. 21 See Appendix C at C.9. 22 Ibid at CH94.015.0012. 23 Ibid at CH94.002.01 13. Report oflnquiiy into the Centenary House Lease 119

reference to the escalators being 10.5% and 9% was deliberate , 24 but there is no

logical explanation for that omission other than that there was sensitivity on his part to their disclosure to the Minister, who had to reply to Senator Parer's criticism of the lease. It would certainly have made the Minister's task more difficult had he known of the apparently high escalators agreed. The omission was neither an oversight nor a mistake.

When Mr Ireland was asked for a summary of the lease terms and conditions in June 1992, be provided a two-page summary in which the existence of the 9% a year rental review was given due prominence. He had no difficulty describing the terms of the lease in a succinct document. 25

10.3.3 Australian Estate Management

It was necessary to obtain Australian Estate Management's approval for the Audit Office's move to the proposed new building. For this purpose, Mr Ireland prepared a minute addressed to Mr Simon Millar, the Property Group's Customer Services Manager responsible for servicing Australian Estate Management, 26 In that minute Mr Ireland also omitted reference to the escalation provisions in the proposed lease. He asserted that the lease "will not adversely affect the Commonwealth's economic interest by establishing new bench marks".

The reference to the establishment of new benchmarks reflects the approach to requests for new lease approvals agreed between the Property Group, Australian Estate Management and the Department of Finance in December 1991 •27 The agreed approach was that a new lease for a Commonwealth agency should be approved only if it "does not result in a negative impact on the use of Commonwealth space and it does not set an above market benchmark which is contrary to the Commonwealth's interests" . 28 Mr Ireland's failure to refer to the fixed escalation provisions in the minute to Australian Estate Management seeking approval of the proposed Centenary House lease comprehensively obscured the extent to which the lease agreement had the potential to set new benchmarks.

In relation to this minute, as in relation to the minute to the Minister which was prepared at about the same time and was in similar terms, 29 these omissions were not the result of an oversight or a mistake.

24 T 742. 25 Ex 5 at CF194.002.0212, 26 Ibid at CH94008.0054. 27 As recorded in an internal minute signed by Mr Holden (State Manager, ACT) of the Property Group dated December 1991 (Ex 120 at DOFA.049.0055) and a minute from Mr Holden to Mr Richard Williams of Australian Estate Management dated 12 December 1991 (Ex 120 at DOFA.049.0076). 28 Ex 120 at DOFA.049.0055 at 0056. 29 See Section 10.3.2. 120 Report ofInquiry into the centenary House Lease

11

Whether the Valuation Office acted appropriately

Mr Robert Ireland of the Australian Property Group instructed Mr Graham Jeffress of the Australian Valuation Office to provide advice about the proposed lease of Centenary House.' The Property Group did not, as might be thought appropriate, seek advice about suitable terms for the lease as a whole. It restricted the advice sought to three terms the rent and operating outgoings for accommodation of the type to be constructed as at 1 January 1991; the escalator to be applied to that rent for the duration of the construction phase until the date of practical completion; and the escalator to be applied to the rent as so escalated at the commencement of the lease for the term of the lease.

Mr Ireland's letter to Mr Jeffress did not do the following:

• mention the existence, provenance or terms of the letter of intent written by Mr Dominic Collins, on behalf of the Commonwealth, to Mr Noel McCann, on behalf of John Curtin House Ltd, on 17 September 1991

• give a true and fair synopsis of the stage negotiations for the proposed lease had reached; indeed, a reader in the position of Mr Jeffress might well have thought matters had not progressed anywhere near as far as they had and that negotiations were still at an early stage

• mention that Mr Collins had already agreed at the level of principle that

- the starting point for calculating the commencement rent under the proposed lease was to be 1 January 1991

- the net rent as at that date was to be fixed at $280 a square metre a year

• mention that discussions about the escalators had already been held between Mr Collins and the Lend Lease Property Group and that, although no agreement had been reached, Mrs Penelope Morris of Lend Lease had sought a construction period escalator of 12% cumulative a year and a lease term escalator of 9.75% cumulative a year and that Mr Collins had required that the lease term escalator not exceed 9.75% a year.

Either Mr Collins or Mr Ireland told Mr Jeffress after the initial instructions were given that the other terms of the lease agreed with Mrs Morris such as the length of the term, the inclusion of fixed annual escalators, and the ratchet clause were necessary for the deal to go ahead and were non-negotiable. During the

negotiations between Mr Jeffress and Mr McCann, it was made clear to Mr Jeffress

Letter, 1 November 1991, reproduced in Appendix Cat C.5.

Report of Inquiry into the Centenary House Lease 121

that any attempt on his part to negotiate the escalator for the term of the lease below

9% might well bring down the whole transaction. 2 These limitations imposed on Mr Jeffress restricted the Valuation Office's capacity to perform its proper function.

It was the Property Group's practice in 1991 to obtain formal written advice from the Valuation Office before negotiating the sale, purchase or rental of office accommodation for the Commonwealth. This usually occurred relatively early in the process, so that the Property Group negotiators would be properly briefed on the relevant market before conducting any substantive negotiations referable to a particular transaction.3

This practice was not adhered to in the case of the proposed Centenary House lease. Rather, Mr Collins discussed the commercial terms of the proposed transaction with Mrs Morris and other Lend Lease personnel at four separate meetings over a period of seven to eight months during 1991, without any reference of the matter to the Valuation Office. It was only at the very end of those discussions, at a time when everything except the size of the two rent escalators had been agreed in principle, that the Valuation Office was consulted and then not for advice but rather to act as the Commonwealth's negotiator in relation to the two escalators. By the time he delivered his report, Mr Jeffress had become aware of the details of the commercial deal but not the 12% construction period escalator sought by Mrs Morris or the 9.75% limitation Mr Collins had imposed on the lease term escalator.

As Mr Brian Hurrell, Regional Manager of the ACT Branch of the Property Group, made clear in his evidence to the 1994 Inquiry, 4 the instructions given to the Valuation Office in the Centenary House case were unique. Mr Jeffress reacted to those instructions by making telephone calls expressing his concern, as discussed in Sections 5.11 and 5.12. He should, however, have done more. The reservations Mr Jeffress quite properly had about the structure of the transaction and the instructions he had received should have led him to do the following:

• record his concerns clearly in writing, both to his superiors at the Valuation Office and to the Property Group

• either decline to act as the Property Group's negotiator or, if he decided to accept the role, do so on the basis that he would do his best in the negotiations but depending upon the extent of his success would advise the Property Group in his report that the transaction was not in the interests of the Commonwealth and was imprudent.

Mr Jeffress did not do this. His report was presented as a "valuation" when in truth it was nothing more than his opinion of the limit beyond which Mr McCann would

2 See Chapter 5. Mr Hoy at T 291; Mr Collins at T 626, 631, 641-642. T 288-289 in the 1994 Inquiry: Ex 5 at CH94.019.0081-0082.

122 Report of Inquiry into the Centenary House Lease

not go. It was certainly not, as it should have been, his view of what the appropriate

terms of the lease, taken as a whole, should be.'

To have presented the outcome of his negotiations as a valuation compounded Mr Jeffress' failure to take a stand about the role he was asked to play when he received such unique instructions. By failing to take a stand, Mr Jeffress allowed his "valuations" to be described, both in the bureaucracy and later in public, as having sanctioned the structure and terms of the transaction. That is not an accurate description of his work, and his evidence to this Inquiry demonstrates this. He said that, standing away from the negotiations in which he had participated, to have

agreed to a fixed escalator of 9% for a 15-year term "would not have been reasonable".6

T 1831-1832, 1857, 1859-1861, 2288-2289. 6 T2288-2289.

Report oflnquiiy into the Centenary House Lease 123

12

Whether the Audit Office acted appropriately

The background to the Audit Office's commitment to the Centenary House lease is described in Chapter 2. The course of the negotiations by which the Australian Property Group agreed on the commercial terms of the lease is described in Chapter 5. The obligations of the Auditor-General and his staff in relation to the lease are described in Chapter 4.

In considering the conduct of the Auditor-General, Mr John Taylor, and his officers, it is necessary to be mindful of the changes to the procedures for the provision of and payment for accommodation for government agencies which were occurring at the time of the Centenary House lease negotiations.' As a consequence of these changes, officers of the Australian National Audit Office who had little familiarity with property transactions or commercial leasing would justifiably rely to a large extent on the expertise of the Australian Property Group, to which the Audit Office was tied for real estate transactions in the ACT. 2

Primary responsibility for negotiating a lease on reasonable commercial terms and for obtaining informed approval of the terms from the client (in this case the Audit Office) lay with the Property Group. The Audit Office had no responsibility for the negotiations. As noted in Chapter 4, however, the Audit Office was obliged by regulation to take steps to confirm that the Commonwealth received value for expenditure and that the Audit Office could afford the lease.'

So far as obtaining value for expenditure is concerned, the Audit Office probably needed to have done no more in the circumstances than ask the Property Group to confirm that the lease did represent value for expenditure. This question was never asked, but the Audit Office had been informed that "comprehensive valuation advice" would be obtained, and it is reasonably apparent that the Property Group would have responded affirmatively had it been asked whether the lease

represented value for expenditure.

The area where the Audit Office needed to be actively involved, both in assessing the proposed terms of the lease and in communicating with the Department of Finance, was in determining whether the Office would be able to afford the lease. It was aware that if the rent payable under the lease exceeded its

See Chapter 4. 2 Estimates Memorandum 1991/9 (Ex 5 at C1194.013.0 160 at 0164); Estimates Memorandum 1991/32 at par 2 (see Appendix C at C.4). Finance Regulations, r 44B.

Report oflnquiiy into the centenary House Lease 125

property operating expenses allocation it would have to cut expenditure on

discretionary items such as performance auditing. 4

Consideration of the extent to which the Audit Office acted appropriately in determining whether it could afford the lease requires separate examination of the conduct of Mr Taylor and that of his officers.

12.1 Mr John Taylor

Mr Taylor agreed that throughout 1989 and 1990 he had raised the question of accommodation for the Audit Office on every occasion he thought he could reasonably raise it, since he did not regard Medibank House in Woden as suitable. Each time he raised the question he referred to recommendation 78 of the Joint Committee of Public Accounts in its Report 296 that the Audit Office move to the Parliamentary Triangle.' He agreed that he was a resolute individual and that, as at 1990, he "would have put as much pressure on whomever [he] could to overcome th[e] executive government's opposition to the relocation of the Audit Office into the Barton Area". 6

Mr Taylor was very determined to achieve his object of having the Audit Office accommodated in the Parliamentary Triangle. This determination overrode prudence. Mr Taylor took a somewhat lofty view of his responsibilities. He understood that the Audit Office was required to use the services of the Property Group in relation to property transactions in the ACT, and he assumed that the Property Group, which was being paid a fee for its services, was providing appropriate advice in relation to the proposed lease. Throughout the lease negotiations, he continued to assume that the Property Group was acting in the Audit Office's interests and that the Property Group would satisfy itself, either by advice from the Australian Valuation Office or otherwise, that the terms of the lease were reasonable. He did not, in all those circumstances, consider it necessary to be involved in negotiating the terms of the lease or assessing their reasonableness . 7

His attitude was that those who were expert in the property and finance areas would alert him if there was any problem. 8 He took the view that his subordinates in the Office had roles to play in relation to the lease negotiations, and he expected them to do theirjob. 9 He maintained this attitude when giving evidence to the 1994 Inquiry. He said then that, even in hindsight, if he had been told at the time what the escalators were in the lease he would not have immediately investigated the reasonableness of the terms, since the experts would have made sure that the Audit

Mr John Meert, T 103. T362. 6 T408. ' Statement, Ex 19 at par 49. See also T 474, 8 T369. 1374. 126 Report oflnquiiy into the Centenary House Lease

Office was being treated fairly and that "the money would flow" from "an agreed

result".' ° Shortly after giving that evidence, however, Mr Taylor did concede that "we would have been insane" to have entered into the lease if he had known of the implications of the 1% deflator subsequently adopted by the Department of Finance."

Mr Taylor's reliance entirely on his subordinates to see that the proposed move was properly executed was inappropriate. Nor was it sufficient for him to give a general delegation of responsibility for the corporate area of the Audit Office to Mr Michael Jacobs, the Deputy Auditor-General. 12 Mr Taylor saw no need to designate anyone in the Audit Office to oversee the negotiations: he assumed that the Property Group was looking after the Audit Office's interests, although he did say that he would not have stopped anyone from performing such a function.' 3 He thought this was sufficient. It was not.

As Auditor-General, Mr Taylor was the person with specific responsibility for making arrangements for the implementation of r 44B of the Finance Regulations under the Audit Act 1901 so far as the Audit Office was concerned. ' 4 Delegating responsibility for the corporate area to his Deputy did not relieve him of his own responsibility for ensuring not only that the proper arrangements were made but also that the arrangements made were working properly.

Mr Taylor's counsel submitted that it was never suggested to Mr Taylor during this Inquiry that he was or ought to have been aware of r 44B.' 5 Insofar as the submission suggests that Mr Taylor was not aware of it, the submission is a surprising one. He had worked with the Audit Act for some years. As Auditor-General, he had a duty to acquaint himself with the obligations it imposed on his own position. If he was not aware of r 44B, he had failed to perform that duty.

Counsel also submitted that any suggestion that Mr Taylor should have concerned himself directly with the proposed terms of the lease and the Audit Office's capacity to fund the rent payable under the lease would imply that Mr Taylor was required to "make a personal assessment of all the ANAO's leasing arrangements throughout Australia (as well as a multitude of other financial and administrative matters)". 16 No such suggestion is made. The responsibility r 44B

10 T 133 in the 1994 Inquiry: Ex 5 at CH94.018.0150. ' T 137 in the 1994 Inquiry: Ex 5 at CH94.018.0154. 12 T372. 13 T374-375. 14 Section 2AB(l) of the Audit Act (as in force in 1992) imposed responsibility for making appropriate arrangements for implementing the provisions of the regulations on the Secretary of a Department. By virtue of s 2AB(2) of the Audit Act and s 25(4) of the Public Service Act 1922 (as in force in 1992), the Auditor-General was treated as the Secretary of the Audit Office. 15 Submissions on behalf of Mr Taylor at par 68. 16 Ibidat par 33. Report of Inquiry into the centenary House Lease 127

imposes on the Auditor-General does not mean that he must involve himself in the

day-to-day implementation of the regulation's requirements.

What it does mean is that while the Centenary House lease was being negotiated Mr Taylor should from time to time have spoken to the person designated to be in charge of r 44B 's implementation to keep himself informed of the progress of the negotiations by obtaining some idea of the likely lease terms and their financial consequences for the Audit Office. No specific timetable for this to happen could be laid down. But what the duty imposed on Mr Taylor also means is that, when a serious question was raised as to the Audit Office's capacity to afford the proposed lease, he should have investigated the matter, to satisfy himself more directly that the arrangements made were in fact working and there was a satisfactory answer to that question.

Such an occasion arose when Senator Warwick Parer alleged that the proposed terms of the lease were "incredibly generous" to the landlord. This was before the agreement for lease was signed and before the Commonwealth had committed itself to any binding obligation. The proposed lease involved substantial expenditure. If, as appears to be the case, the Audit Office was ignorant of the terms of the lease, that was the time to insist on a full revelation by the Property Group of those terms. By this time, the final letter of intent the one revealing all the essential terms of the lease which had been agreed had been sent by the Property Group to the owner's valuer. There is nothing to suggest that a copy of it had been sent to the Audit office, 17 but the information which should have been sought was readily available in that letter to be given by the Property Group in answer to an insistent demand, Mr Taylor did not insist on such an answer.

Mr Taylor's discharge of his duties was not sufficient, particularly when Senator Parer came on the scene. Mr Taylor continued to believe that whatever deal was achieved would be paid through the normal government processes. That belief should have been displaced by the terms of Estimates Memorandum 1991/32, issued on 17 October 1991.19 Although he accepted that the memorandum had made a substantial change in the financial arrangements, he assumed that, provided the Property Group had approved of the reasonableness of the lease's terms, the Audit Office would be properly funded . 2° In this respect, Mr Taylor shared the misunderstanding by his senior officers of the information given to the Audit Office by the Department of Finance from June 1991 onwards. 21

Mr Taylor's dismissal of Senator Parer's assertions as "politics" was an inadequate response to the question raised. 22 He should have investigated the matter more fully. Despite his apparent distaste for involving himself in such detail, he had

17 See Chapter 10. 18 T 424. See also Ex 5 at CH94.004.0248 at 0256-0257. 19 See Chapter 4. 20 T369. 21 See Section 12.2.2. 22 T485. 128 Report ofInquiry into the Centenary House Lease

not hesitated to become involved in the negotiations when he saw obstacles in the

way of the Audit Office's move to Centenary House. He did this on at least four occasions:

• He contacted the Property Group himself in February 1991 when no progress appeared to have been made in the negotiations since the end of the previous November, and he wanted to ensure the allocation of the Lend Lease site to the Audit Office. 23 His interest, however, was in the progress of the negotiations,

not their detail.

• He wrote directly to Senator Parer in relation to the Sydney Morning Herald suggestion that, following the press release, the Audit Office was "enraged" and that its "knives were out" for the Senator , 24 but he did not refer to the reasonableness of the proposed terms.

• He dealt directly with Mr Noel Tanzer, Secretary of the Department of Administrative Services, in relation to Australian Estate Management's refusal to approve the proposed move. The point in question there had nothing to do with the reasonableness of the terms.

• Finally, he entered into direct discussions and communications with Mr Ralph Willis and Mr Stephen Sedgwick, respectively the Minister for Finance and the Secretary of the Department of Finance, in order to finalise the resource agreement in February 1992. The complaints he made did not relate to the terms of the lease.

Mr Taylor's counsel submitted that on these occasions Mr Taylor was simply responding to matters which had been brought to his attention .2' That appears to be partly true in relation to Australian Estate Management's refusal to approve the lease, but it is by no means clear that Mr Taylor's other interventions had been merely at the request of subordinates.

Senator Parer's press release raised a very serious question about the reasonableness of the terms of the lease and thus about the Audit Office's capacity to afford the lease. Mr Taylor's failure to investigate whether there was an answer to that question contributed to the Audit Office's failure to act appropriately in relation to the Centenary House lease.

23 T 439-440; see also Ex 5 at CH94.014.0090. 24 Ex 5 at CH94.002.0 120. 25 Submissions on behalf of Mr Taylor at par 56. Report of Inquiry into the Centenary House Lease 129

12.2 Other members of the Audit Office

12.2.1 Failure to obtain information about the terms of the lease

The officers in the Audit Office who were responsible for the financial aspects of the lease were Mr Michael Jacobs (the Deputy Auditor-General), Mr Robert Morison (Senior Director of Financial Administration), Mr Frank Campbell (Finance Officer) and Mr John Meert (Executive Director, Support Branch).

The first three of these officers gave evidence that they were not aware of the terms of the lease. 26 Only Mr Meert said he had been aware of the terms before the agreement for lease was signed. 27 As recorded in Chapter 2, however, Mr Meert was mistaken in that evidence. The Audit Office did not become aware of the proposed terms of the lease before the Commonwealth formally committed to it through the agreement for lease.

Permitting the Audit Office to enter into a 15-year lease without knowledge of the terms of that lease was not prudent. Moreover, although Mr Dominic Collins and the Property Group were at fault for not informing the Audit Office of the terms, the Audit Office was under an obligation to ensure that it could afford the lease and so should have insisted on the necessary information being supplied. The fact that in the few communications the Audit Office received from the Property Group there were some references to an annual escalation of the rent should have alerted these officers. Their failure to make inquiries and to insist on a reply when none was forthcoming from the Property Group contributed to the Audit Office's failure to act appropriately in relation to the Centenary House lease.

12.2.2 An assumption that the lease would be fully funded

Mr Meert and Mr Jacobs gave evidence that they had assumed the Audit Office's budget would be increased each year to reflect the rent payable under the lease. 28 Such an assumption is puzzling in view of the Department of Finance's many warnings that this would not be the case, and it would have been quickly corrected had any inquiry been made of the Department. The Department made it clear that the Audit Office's property operating expenses budget would be increased only by a

fixed deflator and that the Audit Office would be required to fund from other sources any rent increases in excess of market rates.

Mr Morison and Mr Campbell were explicitly told at a meeting with the Department of Finance on 25 June 1991 that a fixed deflator would be applied.

26 Mr Jacobs, T 202. Mr Morison, Ex 7 at pars 44-45; T 150. Mr Campbell, Ex 9 at par 20. 27 Tll9. 28 Mr Meert, Ex 4 at pars 29-30; T 89, 119. Mr Jacobs, T 203-204. 130 Report ofInquiry into the Centenary House Lease

Given the circumstances in which that comment was apparently made,

29 they might

be excused for not absorbing the significance of the warning at the time. They were not provided with a copy of the note of the meeting. But they and their superiors should have been familiar with the proposed policies (relating to incorporation of property operating expenses into running costs) which made provision for the fixed deflator, 30 considering that each of them would have been expected to have a role in managing the Audit Office budget when those new policies came into force.

In December 1991, the documents outlining and explaining the proposed financial policies were circulated for discussion. 31 The deflator was to be used in price adjusting the property costs component of all agencies' budgets including rent.32 It is clear that this new index was an Australia -wide one. The reference to market rates was thus intended to refer to an Australia-wide market. In the same document, and immediately following the reference to the deflator, there was a provision that, where the preponderance of an agency's rental costs were in a single lease or a particular location, the agency could elect to exclude leases from automatic price adjustment. Rent reviews would be granted in full, with the price for this protection being "close Finance scrutiny" at lease renewal. 33 Nothing was done to investigate the application of this provision to the Centenary House lease.

A number of other communications from the Department of Finance ought to have served to warn the Audit Office that it could not take for granted the continued funding of any lease it might enter into.

Mr Morison of the Audit Office spoke to Mr Alan Pearson and Mr Eddy Wojcik of the Department of Finance on 15 July 1991. When the suggestion that the Audit Office's move might be funded by a resource agreement was raised, Mr Morison was advised:

we would be funded at a fixed amount per year adjusted for price movements less efficiency dividends. The ANAO would be free to make its own decisions regarding accommodation and be responsible for the consequences

Although nothing was said to make it clear that the adjustment for price movements would be limited to a fixed Australia-wide deflator with no allowance for variations between the Canberra market and the market in Australia generally, the warning that

29 A note of the meeting made by Mr Turner of the Department of Finance (see Appendix C at C.l) placed the comment at a point in the meeting described by Mr Campbell as a "lengthy and dismal preamble": T 168. See also Chapter 13. ° As outlined in a discussion paper circulated in October 1990: Ex 5 at

CH94.012.0028. See also Ex 5 at CH94.012.0173, a document circulated in December 1991; and Chapter 4. ' See Chapter 4, 32 Ex 5 at CH94.012.0173 at 0178. 33 Ibid. 14 The conversations were recorded by Mr Morison: Ex 5 at CH94.002.0025. Report ofInquii' into the Centenary House Lease 131

the Audit Office would not receive supplementation to match whatever rent it

agreed to pay was clear.

Mr Morison reported to the Acting Deputy Auditor-General that "[Executive Support] Branch is checking that we can afford to borrow funds from future years to fund a 1992-1993 move"." Those investigations did not include any consideration of the impact of any fixed deflator whether Australia-wide or fixed by reference to the Canberra market. 36

The Audit Office concluded that it could afford the move. It told the Department of Finance that it was willing to enter into a resource agreement and that "[t]he funding implications of such an agreement are understood and accepted". 37 The Audit Office also stated:

The ANAO is now in the situation whereby immediate commitment to Section 22 could provide the necessary savings in the longer term to fund the resource agreement without excessive risk to our audit program ... the Auditor-General remains firmly of the view that such a move would be in the best interests of the operations and efficiencies of the ANAO.

The response from the Department of Finance included a warning: "To the extent that there is a shortfall in existing appropriations and forward estimates ANAO will be required to fund the difference"."

The first draft of the resource agreement was provided to the Audit Office on 2 December 199 and it included the following provision:

It is further agreed that should the lease costs escalate at a rate greater than market rates, in the context of the mandate where auditees are obliged to use ANAO services, it would not be reasonable to pass on the full increase in costs, particularly as the ANAO and [the Department of Finance] acknowledge that the relocation appears justified on economic grounds. The ANAO agrees that to the extent that lease costs increase at a rate greater than market rates it will absorb the difference.

A further warning was provided directly to Mr Taylor in correspondence in February 1992 from Mr Sedgwick:

Any increase in costs in the proposal genuinely outside the control of the ANAO shall be met through the normal fee structure developed by ANAO for audit fee charging ... This agreement does not extend to arrangements in the accommodation contract which exceed the accepted ... norms for

15 Minute dated 23 July 1991: Ex 5 at CH94.002.0026. 36 The results are recorded in a minute from Mr John Barwood to Mr Morison, 1 August 1991: Ex 5 at CH94.002.0028. 37 Letter from Mr Jacobs to the Department of Finance, 9 August 1991: Ex 5 at CH94.002.0032 38 Letter from Mr Ian McPhee to Mr Jacobs, 13 August 1991: Ex 5 at CH94.002.0033. Ex 5 at CH94.002.0 105. 132 Report of Inquiry into the Centenary House Lease

accommodation standards and fitout, or for any possible arrangements

which allow rent revisions to exceed market rates.40

Mr Sedgwick said in his evidence to this Inquiry that "it was a corollary of all of the understandings recorded in that letter that the Audit Office was expected to abide by the constraints imposed under the current and, down the track, the proposed arrangements,, 41

After Mr Taylor had given "in principle" agreement to the proposal, 42 Mr Sedgwick responded with a further "word of warning":

In agreeing an amount to be borrowed for accommodation, one of our stated concerns has been whether the ANAO could realistically repay the amount at the appropriate interest rate and teriii. This is really the test, if you like, as to whether the project is cost effective - the ability of the ANAO to repay being dependent on real savings being achievable.43

He explicitly referred to the proposed policy for the incorporation of property operating expenses into running costs.

The Audit Office and the Department of Finance signed the resource agreement 44

on 27 March 1992. The agreement contained the following paragraph:

10. To the extent that the arrangements in the accommodation contract fall within the accepted (by the Australian Estate Manager) norms for accommodation standards and fitout, and within rent revisions that do not exceed market rates, the ANAO will recover that proportion of the related Property Operating Expenses that relates to financial statement auditing through the normal fee structure developed by the ANAO. Any borrowing will be recouped over the period of the repayments rather than in the year the borrowing was utilised.45

In his evidence to this Inquiry, Mr Meert said he had understood that whatever rent was negotiated by the Property Group would be a market rent. 46 He said he had assumed that the rent, if it were negotiated in a market environment and reflected the market, would be met by an appropriation. 47 He also asserted that, if the experts

transacted the property arrangements in the open market, by definition the rent payable under the lease had to be a market rent .48 This conclusion does not reflect a proper or critical consideration of what had been intended by the use of the term "market rates" in the resource agreement or in the correspondence preceding it.

40 Letter from Mr Sedgwick, 11 February 1992: Ex 5 at CH94.0020147. 41 Statement of Mr Sedgwick, Ex 95 at par 32. 42 Letter from Mr Taylor to Mr Sedgwick, 12 February 1992: Ex 5 at CH94.002.0149. 43 Letter from Mr Sedgwick to Mr Taylor, 14 February 1992: Ex 5 at CH94.002.0151. 44 See Appendix C at C.10. 45 The emphasis has been added to the quotation. 46 Ex 4 at pars 29-30. 47 T 89. 48 T 122. Report of Inquiry into the Centenary House Lease 133

Mr Jacobs gave evidence to this Inquiry that from the Audit Office's

perspective by which he meant the perspective of the Auditor-General and senior management as represented on the Audit Office Management Committee - the expenditure required under the lease transaction for Centenary House would be fully funded by the Commonwealth and that the property operating expenses in the Audit Office appropriation would be adequate to meet the arrangements negotiated by the Property Group. 49

Before the change in the financial arrangements, there had been allocated in the parliamentary appropriations for the Audit Office sufficient funds year by year to meet the Office's property operating expenses. During the negotiations in relation to the Centenary House lease, the Audit Office continued to assume that this would persist into the foreseeable future. 50

Such an assumption did not sit comfortably with the information the Department of Finance gave the Audit Office from June 1991 onwards - not just at the meeting on 25 June 1991 but also in the numerous subsequent references to increases being limited to market rates. The documents circulated for discussion in December 1991 had made it clear that the reference to market rates was to an Australia-wide market, not a Canberra market. It may be that those documents, which had a certain sensitivity, were not given to everyone in the various agencies to read, but they must have been read by the agency officers responsible for financial management. There should have been no confusion in the minds of those officers as to the intended meaning of the term. No such confusion, however, justified Mr Meert's evidence that whatever rent was negotiated would be a market

rent.

Mr Jacobs claimed he understood the Department of Finance's warning - that to the extent that there was a shortfall in existing appropriations and forward estimates the Audit Office would be required to fund the difference as relating entirely to relocation costs. 5' There is no discernible support for such a restricted interpretation. Mr Jacobs conceded it was part of his obligation to ensure that the Audit Office was not paying above-market rent. 52 He misinterpreted the warning.

In December 1990, Ms Fay Obst (a project officer with the Property Group) had sent to the Audit Office a fax headed "Funding for Barton Projects", 53 recording that, before approaching the Department of Finance, the Audit Office needed to examine the actual costs, including rental levels. She continued:

We are hoping that we could maintain the costs within the level of [property operating expenses] allocated to ANAO allowing for normal

49 T 203-204. ° T208. 51 Letter from Mr McPhee to Mr Jacobs, 13 August 1991: Ex 5 at CH94.002.0033. 52 T244. 53 Fax from Ms Obst to Mr Cohn Whittaker, 19 December 1990: Ex 5 at CH94.001.0293. 134 Report oflnquiiy into the Centenary House Lease

increases which would occur regardless of where your office is located.

This will become clearer after we have had further discussions with the developer in January 1991.

Mr Jacobs relied on this rather vaguely stated hope as an indication from the Property Group that the move to Barton would be covered by the property operating expenses forward estimates. 54 Whatever the position might have been in December 1990, there was no basis for assuming that - after the change in financial arrangements notified in October 1991 - such an approach was still appropriate in April 1992 or that it was open to the Audit Office to rely on it as applicable. There is no evidence of any examination, either in the Property Group or in the Audit Office, of whether the escalators allowed for under the lease constituted a "normal increase which would occur regardless of where the Audit Office is located". What may have been normal for increases in the Parliamentary Triangle was not normal for increases in Woden. The fax constituted a very flimsy foundation for any such assumption.

Mr Jacobs' expectation, that information about the terms of the proposed lease would come from the Property Group when it became available ,55 may have been reasonable as long as it was apparent that the terms were still under discussion It ceased to be reasonable when it became clear that an agreement for lease was about to be signed and no such information had been provided.

None of the explanations Mr Jacobs and Mr Meert offered for their failure to realise that there was a serious risk that the rent payable under the proposed lease would exceed the Audit Office's property operating expenses allocation is persuasive when analysed critically.

As noted, the Audit Office did not possess any particular expertise in property transactions or commercial leasing at the time of the change in financial arrangements. Nevertheless, the Office failed to ask a number of obvious questions and failed to bring together the information available to it from a number of sources.

It failed to insist on being informed of the terms of the proposed lease, and this led to a failure to conduct any proper assessment of the lease's financial consequences in particular, the way in which the escalators would operate in the context of the new financial arrangements (both in force and proposed). This was a serious shortcoming on the part of the Audit Office.

The most likely explanation for these failures is that the various officers in the Audit Office who were involved, knowing well Mr Taylor's determination to have the Audit Office accommodated in the Parliamentary Triangle, were dissuaded by that knowledge from adopting a suitably cautious approach to the Centenary House proposal.

54 T 257, 285-286. T262-263.

Report oflnqui,y into the Centenary House Lease 135

13

Whether the Department of Finance acted appropriately

Chapter 4 describes the functions and responsibility of the Department of Finance in relation to the Centenary House lease, as determined by government policy in 1991 and 1992. This chapter examines whether the Department satisfactorily performed those functions and honoured its obligations.

13.1 The Department's response to the Audit Office proposal

Throughout the Department of Finance's files relating to the Audit Office, there are many expressions of opinion by a number of officers opposed to the Audit Office's wish to be accommodated in the Parliamentary Triangle.' This attitude was reflected in the document drafted in the Department in response to Recommendation 78 of Joint Committee of Public Accounts Report 296. The Department argued that that recommendation was not supported by any detailed justification either that all sections of the Audit Office needed to be in a single building or that the single building should be in the Parliamentary Triangle. It was suggested that the Audit Office's claim to be located near Parliament so as to allow its officers ready access to parliamentarians and the executive government was not strong. It was also noted that a large section of the Audit Office had already been

located in Tasman House in Civic on a 10-year lease. 3

In the first half of 1991 the then Secretary of the Department of Finance, Dr Michael Keating, said he doubted that the Department would ever support the Audit Office proposal. 4 That attitude was noted by his subordinates. 5

As late as 25 June 1991, officers of the Department expressed the view that the Government did not support the relocation of the Audit Office to a new building in the Parliamentary Triangle and was not convinced that such a move was justified .6

In evidence to this Inquiry, Mr Ian McPhee, who was First Assistant Secretary of the Financial Management Division of the Department in 1991, said that in his opinion Dr Keating's attitude was not to be taken as a final indication of the

Ex 74 at DOFA.091.0007, Ex 68 at DOFA.083.01 11 and Ex 39 at DOFA.081.0001. 2 "The Australian Audit Office plan for a new building either within the Parliamentary Triangle or on State Circle adjacent to the new Parliament House, and that the building be called Audit House". See, generally, Chapter 2.

' Ex 101.

Ex 69 at DOFA.088,0189. Ex 82 at DOFA.088.0101 and DOFA 088.0100. 6 See Mr Turner's note of the meeting with the Audit Office on 25 June 1991: Appendix C at C. 1.

Report oflnquiiy into the Centenary House Lease 137

Department's position on the matter but that the Secretary's subordinates

understood from his comments that a strong argument would need to be mounted in order to persuade him that the Audit Office move should be approved. 7

Mr McPhee's own attitude was more accommodating. 8 His view was that the Department should be amenable to any proposal which could be justified on economic grounds. He said this was why the Department suggested a resource agreement whereby the Audit Office carried the risks of the move proving more expensive than anticipated.

Mr McPhee acknowledged that the Department had an expectation that the assumptions on which the Audit Office proposed to proceed with the lease would probably prove incorrect and that the Department considered it likely that the Audit Office would to some degree have to fund its rent commitment from other sources in the future. 9 But no-one in the Department had any expectation that the shortfall in the Audit Office's funding in relation to the lease would be as great as it proved to be. Mr McPhee agreed that the Department did not foresee the size of the problem which eventually arose, both because it was not aware of the rent escalation provisions and because it did not realise in March 1992 that the deflator to be

applied to property operating expenses budgets would be as low as 1%. 10

One question to be determined is whether the opposition to the proposed move

expressed in the Department in particular, by the Secretary affected the Department's consideration of the Audit Office's proposed move. Before examining that question, it is necessary to outline the Department's actual involvement in approving the proposed move.

13.2 The conduct of the Department

13.2.1 Initial contact

The Audit Office contacted the Department shortly after the decision had been taken to pursue the Lend Lease proposal.' 1 In this and in subsequent preliminary communications through the first half of 1991, the Department sought details from the Audit Office, including a frill costing of its proposal. 12

On 11 June 1991, the Audit Office wrote to the Department with costings for the proposed move to Barton and sought approval for that move pursuant to the

T 1975-1976. 8 T 1971; T 1975; T 1987; T 2006-2007; Statement of Ian McPhee: Ex 67 at par 22. T 1999-2000. '° T2000.

Ex 69 at DOFA.088.021 1. 12 Ex 82 at DOFA.088.0199; Ex 69 at DOFA.088.0 195 and DOFA.088.0181; Ex 82 at DOFA.088.0100; and Ex 5 at CH94.009.0299.

138 Report of Inquiry into the Centenary House Lease

Works Technical New Policy procedure.

13

It also sought an appropriate allocation

of funds for that move. The costings suggested that the move would be self-funding over a period of 10 years but, as noted in Chapter 2, made no allowance for rental increases. The proposal was obviously flawed because it made no such allowance.

13.2.2 The 25 June 1991 meeting

On 25 June 1991, officers of the Department and officers of the Audit Office met to discuss the Audit Office Works Technical New Policy application, made in the Office's letter of 11 June 1991. Mr Wayne Turner, an assistant director in the Financial Management Division of the Department, rnade notes at the meeting and subsequently produced a typewritten record on which Mr Eddy Wojcik, a director in that Division, made some further handwritten annotations. 14 Mr Turner's note contains the following statements:

comments were provided on the current markets and the tactics that real estate agents are taking to gain business

the fact that lease contracts needed close scrutiny as some involve escalating rent in later years

fixed rates of increases may be dangerous

the wording of rent reviews needs to be watched.

The note also records:

Mr Wojcik also mentioned that under [property operating expenses] into Running Costs the Lease amounts would be subject to a deflator and the ANAO would be expected to live within the estimates. If ANAO wanted property that was more costly it would be expected to meet the costs from

its existing Running Costs, borrowing from future years where necessary, and would not be encouraged to come to the Budget for supplementation.

Mr Wojcik had opened the meeting by suggesting that the Audit Office's proposals concerning accommodation in Sydney and Brisbane, which were also dealt with in the letter of 11 June, be considered before looking at Canberra. It is clear that the quoted remarks made by Mr Wojcik were not expressly directed at the Canberra proposal and probably would not have been seen as being so directed by the Audit officers present. Such an impression would have been reinforced by the

reference to the tactics of "Real Estate Agents", which would not have been relevant in the context of Commonwealth accommodation in Canberra.

Of those present at the meeting of 25 June 1991 who gave evidence to this Inquiry, only Mr Wojcik of the Department and Mr Frank Campbell of the Audit Office had any recollection of the meeting. When shown the note and asked

13 Ex 5 at CH94.002.0002. 14 See Appendix C at C.1. Report oflnquiiy into the Centenary House Lease 139

whether he had any recollection of those matters being outlined at a meeting he

attended with Mr Robert Morison and Mr Wojcik, Mr Campbell responded: 15

Not specifically, although I do recall Mr Wojcik had a rather lengthy and dismal preamble to the meeting. I recall that, but I don't recall these specific dot points as issues, whether they were somehow in that extensive preamble that Mr Wojcik opened the meeting with.

Mr Campbell agreed that what he had been saying was that "there was a bit of a long lecture from the Department of Finance which might have had some of these thoughts sprinkled through" and "because it was long and dismal ... we weren't hanging on every word".

He indicated that, if information had been raised at the meeting as "general information points" which were not specifically related to the Audit Office's accommodation requirements, he might not have passed that information on to his superiors, including Mr John Meert, the Executive Director of the Audit Office's Support Branch. On the other hand, matters the Department had raised as a specific point of concern would have been conveyed to Mr Meert.' 6

Mr Turner recalled that Mr Wojcik had a practice of providing this sort of overview at the commencement of meetings relating to accommodation proposals.' 7

The Department officers present at the meeting cannot be faulted for providing this information, even by way of a lengthy and dismal preamble to the substantive discussions. A query must, however, remain about the extent to which it was appropriate for the Department to rely on oral statements made at a meeting - and not confirmed in writing as constituting fair warning to the Audit Office either:

• of the need to be wary in the negotiation of rent reviews and in particular the dangers of fixed rates of increase

or

• that in future property operating expenses would be subject to a fixed deflator.

Mr Turner's record of the meeting was circulated within the Department of Finance but was not passed to the Audit Office.

Mr Campbell's distinction between "general information points" and "specific points of concern" relating to Audit Office requirements is a valid one. Mr Turner's note also indicates, however, that there was discussion - specifically in relation to the Canberra proposal of the possibility that rent reviews based on existing market rates in Barton might cause the rent to "skyrocket". 18 There is no record of Mr Campbell passing this information on to his superiors.

' T 168. 16 T 169. 17 Ex36atpar 18;T 1130. 8 See also Mr Wojcik's Statement: Ex 80 at par 27. 140 Report of Inquiry into the Centenary House Lease

It is also apparent from the note that the Department officers present at the

meeting were aware that the proposal would involve a "pre-commitment lease" that is, an agreement for lease. These officers accepted that such an agreement could have the consequence that the rent payable under the lease would be greater than market rent.' 9 This realisation should have been sufficient to trigger a specific expression of concern, particularly when the Department subsequently offered to allow the move to proceed pursuant to a resource agreement.

13.2.3 The resource agreement proposal

The Department of Finance's immediate response to the Audit Office application for funds was that it would not support the Office's proposed move in Canberra; 20 this response was communicated to the Audit Office . 2' A short time later, however, the Department proposed that the Audit Office move be financed by means of a

resource agreement. This proposal was raised in discussions between the Department and Mr Morison of the Audit Office on 15 July 1991.22 Mr Morison recorded that the offer of a resource agreement was accompanied by an explicit warning that the Audit Office would be funded for a fixed amount adjusted for price movements and would be responsible for the consequences of its decisions. 23

In recommending the resource agreement to the Secretary of the Department on the basis of the Audit Office assumptions, Mr McPhee expressed scepticism about those assumptions. His view was as follows:

• Rental costs for the refurbished Medibank House in Woden would not be the same as the rental at Section 22 in Barton. Rather, there would be a substantial differential in the order of 10-25%.

• The proposition that no suitable alternative accommodation was likely to become available was doubtful.

• It would not be the case that the rent in Barton would increase at the same rate as rent in Woden in the next 10 years. Rather, it was likely to increase at a higher rate.

Mr McPhee recommended the resource agreement on the basis that, if the Audit Office figures proved inaccurate, the risk "should rest primarily with the Office and not the Budget". 24

19 Mr Turner, T 1116; Mr McPhee, T 1708; Mr Joyce, T 2488-2490, 20 This is the conclusion expressed in the minute. 21 The Department of Finance's opposition to the move is recorded in a minute from Ms Fay Obst of the Property Group to Mr John Barwood of the Audit Office, 4 July 1991: Ex 5 at CH94.002.0018. 22 Ex 5 at CH94.002.0025. 23 This warning is discussed in Section 12.2.2. 24 Ex 5 at CH94.010.0068 at 0070. Report of Inquiry into the Centenary House Lease 141

On spreadsheets attached to this document, the Department calculated the cost

of the move over 10 years using three different sets of assumptions, identified as the assumptions of the Department, the Property Group and the Audit Office. These spreadsheets and the last page of the minute to the Secretary that is, the page containing the recommendation but not the pages in which Mr McPhee expressed his scepticism - were faxed to the Audit Office. 25

Even the spreadsheet calculated using the Department's assumptions ignored the possibility of future rent increases. This was probably because the purpose of the spreadsheets was to compare the costs of two options - stay at Medibank or move to Barton - and, in the absence of information about future rental escalation, the spreadsheets were prepared on the basis that rents would rise at the same rate in Barton and Woden and the relative costs of the proposals would not be affected by any future rent increases. 26 By doing so, the Department lost an opportunity to make it clear to the Audit Office that it should consider the effect of future increases in rent. Of course, neither the Audit Office nor the Department was aware at this stage of any specific proposals concerning rent escalations.

13.2.4 Further correspondence and cautions: August to October 1991

In August 1991 Mr McPhee provided a further caution to the Audit Office in the following terms: "to the extent that there is a shortfall in the existing appropriations and forward Estimates, the Audit Office would be required to fund the difference" .27 He did not, however, alert the Audit Office to any particular risk.

When responding to concerns the Audit Office had expressed about limitations the proposed resource agreement would impose on audit fees, Mr Alan Pearson, an Assistant Secretary in the Financial Management Division of the Department of Finance stated on 18 October: 28

The repayment of [the borrowed] amount plus, any interest component should be met from reduced property operating expenses (lower total rent). To this extent auditee fees should only be affected marginally by the move. However, should the proposal escalate in costs, in the context of the mandate where auditees are required to use your services, it would

not be reasonable to pass on the increased costs, particularly as the [Audit Office] has acknowledged that the decision to relocate is justified on economic grounds. We need to be satisfied that proper safeguards exist to prevent excessive requirements creeping into the specifications and that rental costs are well controlled.

25 Ex 36 at ANAO.019.0089. 26 Both Mr McPhee and Mr Wojcik accepted this explanation: T 1701, 2071, 2095. 27 In a letter dated 13 August 1991 responding to the Audit Office's confirmation that it was prepared to enter into a resource agreement: Ex 5 at CH94.002.0033. 28 Ex 5 at CH94.002.0052 at 0053. 142 Report of Inquiry into the Centenary House Lease

In communicating Mr Pearson's letter to Mr Michael Jacobs, the Deputy

Auditor-General, Mr Meert said of the Department's concern about rental costs being controlled: 29

there are a number of safeguards in the system which should protect us against unrealistic rental increases. As you know, [the Department of Administrative Services, referring to the Property Group] is looking after our interests on our proposed move to Barton.

This proposition was not communicated to the Department of Finance. Nor was the Department's concern communicated to the Property Group.

13.2.5 The first draft of the resource agreement: December 1991

The Department provided the first draft of the resource agreement to the Audit

Office on 2 December 1991. The draft included the following clause :30

5. It is further agreed that should the lease costs escalate at a rate greater than market rates, in the context of the mandate where the auditees are obliged to use ANAO services, it would not be reasonable to pass on the full increase in costs, particularly as the ANAO and DoF acknowledge that the relocation appears justified on economic grounds. The ANAO agrees that to the extent that lease costs increase at a rate greater than market rates it will absorb the difference.

There appears to have been some discussion in the Department about the wording of this clause. A draft found in the Department's files suggests that the last sentence was initially intended to include a limit on the rate of rental increase or a specific reference to the office rent index or the deflator. 3' Mr Wojcik explained that he considered "market rate" to be a reference to the deflator but agreed that it could have been expressed more explicitly. 32

If the Department's intention was to ensure that the Audit Office was aware that it would not receive supplementation from the Commonwealth budget for rent increases greater than the deflator, that proposition should have been much more clearly expressed.

At the same time, anyone required to consider this draft clause in the context of the proposed Centenary House lease - providing for a 9% fixed annual escalator for 15 years with market reviews on a ratchet basis should necessarily have seen a real possibility that the rent might increase in excess of the market (however interpreted) and that the Audit Office would be left to "absorb the difference".

29 Ex 5 at CH94.002.0059 at 0061. 30 Ex 5 at CH94.002.0105 at 0107. The emphasis has been added to the quotation. 31 Ex 69 at DOFA.087.0042 at 0043. 32 T 2149-2154. Report of Inquiry into the Centenary House Lease 143

13.2.6 The 16 January 1992 meeting and the Canberra Times

article

A meeting between the Department of Finance and the Audit Office to discuss additional estimates was scheduled for 16 January 1992. That morning an article entitled "ALP in Rent Rort, says Opposition" appeared in the Canberra Times. Having seen the article, Mr Brian Cooney, the Director of the Department's Defence and Government Division - the Division with responsibility for financial oversight of Australian Estate Management contacted either Mr Pearson or Mr Wojcik and inquired whether they had seen anything from Australian Estate Management in relation to the lease. Having been told they had not, Mr Cooney contacted Australian Estate Management and was informed that it had not received any communication relating to the Audit Office proposal. 33

Mr Cooney was invited to attend the meeting with the Audit Office. Two documents refer to what was said at this meeting. On a copy of the Canberra Times article '34 Mr Cooney noted that he "pointed out this clipping to FM Div (Mr Pearson) and Mr Meert (ANAO) and suggested that the claim of incredibly generous conditions would need to be addressed. Mr Meert considered our concerns to be misguided". in a note for file , 35 Mr Turner recorded:

The article in the Canberra Times of today's date ... was produced and comments were sought from the ANAO officers; Mr Meert advised that ANAO had not made any agreements and that ANAO are only interested in the benefits to the Commonwealth on their relocation and not in any benefits to Lend Lease.

Brian Cooney said that AEM will have to vet the proposal before there is any agreement between parties but the AEM knows nothing of a proposal in this case. APG will require a piece of paper from the AEM to satisfy the requirements of acquisition of buildings/leases in the ACT. [Mr Meert] advised that the APG is providing a service for the ANAO and

he is displeased that AEM is not aware of the situation and therefore concerned with the quality of service being provided. He also said that the newspaper article was Politicising by the Liberals and means nothing [the Department of Administrative Services] will be providing a

Ministerial or Press Release on the matter.

The Department of Finance submitted to the 1994 Inquiry that Mr Meert had advised it that the lease details were none of the Department's business. 36 There is no support in any of the contemporaneous documents for that submission. No witness present at the meeting suggested to this Inquiry that these words were used.

Rather, Mr Cooney told this Inquiry that his note "Mr Meert considered our concerns to be misguided" was probably a summary of the tone of the discussions rather than the words actually spoken by Mr Meert. 37

33 Ex 76 at pars 6-7. 34 Ex 69 at DOFA.087.0032. Ibid at DOFA.087.0027. 36 Ex 5 at CH94.003,0347. 3' Ex76at par 19. 144 Report of Inquiry into the Centenary House Lease

In correspondence with this Inquiry,

38 Mr Meert did not seek to dispute

Mr Cooney's version of events. It seems clear that the words "none of your business" and "misguided" were not used, although the tone of the discussions was to that effect. This is consistent with the view held in January 1992 by both the Department and the Audit Office that, provided Australian Estate Management gave approval to the proposal and the Audit Office could meet the costs out of its budget, the Audit Office was entitled to enter into the lease whether or not it had the Department's approval . 39 This attitude was not consistent with the requirements of Estimates Memorandum 1991/32,40 which are discussed in Chapter 4.

13.2.7 Finalisation of the resource agreement and further cautions: February 1992

Following a meeting between Mr Ralph Willis, the Minister for Finance, and Mr John Taylor, the Auditor-General, on 6 February 1992, officers in the Department drafted a ministerial minute providing additional information about the proposed resource agreement . 41 No signed copy of the minute was produced to this Inquiry, and it seems likely that the document found in the files produced to this Inquiry is a draft minute which was never finalised. Nevertheless, the minute contains possibly significant comments when considering the attitude of Mr McPhee and Mr Pearson, the officers whose names appear on it:

3. From the outset we have indicated our support for a proposal that could be shown to be a cost/effective solution to the ANAO' [sic] accommodation requirement; that was consistent with Cabinet and other guidelines and that was satisfactory to the planning agencies involved in overall accommodation issues (the National Capital Planning Authority and the Australian Estate Manager [sic] (AEM)).

4. Our detailed analysis of the costings showed that, with ANAO receiving an additional appropriation of $2,75m in 1992/93 to enter an arrangement for section 22, the overall property operating expenses would reduce on an annual basis such that the proposal was cost/effective. (This came about because of rationalisation of existing accommodation holdings).

Two propositions emerge from these comments:

• The Department officers sought to convey a willingness to assist the Audit Office in its wish to move to Barton.

• Mr McPhee and Mr Pearson did not disclaim responsibility for the assessment of the costings; rather, they expressly indicated that the Department had undertaken "detailed analysis" showing that the overall property operating expenses "would reduce" and that the proposal was "cost/effective".

38 Ex 77. 39 T 2110,2141-2142; Ex 76 at par 20; Ex 77. 40 Appendix C at C.4. 41 Ex 104 at DOFA.029.0066. Report oflnquiiy into the centenary House Lease 145

The cautions expressed in the February 1992 correspondence between

Mr Stephen Sedgwick (by then Secretary of the Department) and Mr Taylor and in the resource agreement itself are discussed in Chapter 12.

13.2.8 Conclusion in relation to the Department's conduct

At no time did the Department of Finance explicitly bring the following to the attention of the Audit Office:

• the fact that property operating expenses would increase by only a relatively small and simple fixed deflator which would be determined by reference to price increases across the whole of Australia

• the need for the Audit Office to obtain express approval for an exemption from that regime if it wanted to be protected against the possibility that the property operating expenses deflator would not keep pace with the escalation of rent under the Centenary House lease.

The need to inform the Audit Office of these matters might not have been apparent in the circumstances at the time but, had there been complete transparency in the dealings between the various government agencies, the Audit Office would not have been caught out in the way it was when the fixed deflator (of only 1%) was applied to property operating expenses in 1993-94. Had the Department been apprised of the terms of the proposed lease, and had the Audit Office been given unambiguous notification of the fact it would only receive budget increases in line with a fixed Australia-wide deflator which was likely in the short term to be significantly less than 9% a year, the Centenary House lease is unlikely to have been entered into with the rent and rent review provisions that were ultimately agreed. As Mr Taylor conceded in the 1994 Inquiry, it "would have been insane to have entered into [the] lease" if he had known of this. 42

If the Department had been aware of the existence of the long-term 9% annual escalation factor, it is likely that it would have been made very clear to the Audit Office that its property expenses budget would be increased only in line with the deflator and that the deflator would, in the short term at least, probably be much less than 9%.

Had the Audit Office been aware of (or had it had drawn unambiguously to its attention) the likely discrepancy between an Australia-wide deflator and the 9% escalation allowed for in the lease, it is unlikely that it would have agreed to enter into the lease without first seeking agreement from the Department of Finance to provide supplementation of its property operating expenses budget in line with the 9% annual escalator.

It is, however, reasonably clear that in early 1992 the Department would not have given any guarantee to the Audit Office that it would match the fixed 9%

42 T 137 in the 1994 Inquiry: Ex 5 at CH94.018.0154.

146 Report ofInquiry into the Centenary House Lease

annual escalator in the Centenary House lease. The Department of Employment,

Education and Training had, shortly after this time, sought from the Department of Finance a guarantee of supplementation of its budget to match a fixed rent escalator of 6.7%. The Department of Finance declined to give that guarantee and the proposal did not proceed .43

13.3 Whether the Department properly fulfilled its role under Estimates Memorandum 1991/32

Mr McPhee, the most senior officer directly involved in the consideration of the Audit Office proposal, told this Inquiry it was not the Department of Finance's responsibility to vet the lease; 44 he also said the Department never expressed a view on the merits of the transaction and neither had an obligation nor felt any reason to do s0. 45 Mr Wojcik gave evidence to the same effect .46 Mr McPhee said he considered that his Department had taken all reasonable steps to ensure that the Audit Office understood the implications for it under the new funding arrangements

for its entry into the Centenary House lease, but he noted that the Audit Office was "a key institution, who audit the financial framework day in, day out" and he queried how far it should have been necessary for the Department to explain these matters to it.47

Mr McPhee also suggested that, because the Department had agreed to the Audit Office proceeding by way of a resource agreement effectively bringing forward the proposed new arrangements - that agreement itself was sufficient "agreement by Finance" to comply with the requirements of Estimates

Memorandum 1991/32.48

In one sense, it could be said that the requirements of Estimates Memorandum 1991/32 were fulfilled in that the Department did agree to the Audit Office committing to the Centenary House lease. But that approach appears to contradict the spirit and substance of the Memorandum. There would be no point in requiring the Department of Finance to approve a change of accommodation if it was not also

required to satisfy itself that the new lease was unlikely to affect the Commonwealth budget detrimentally. Simply telling an agency it must take the risk of costs proving to be greater than anticipated does not constitute fulfilment of that obligation.

Mr McPhee's comment - that, of anyone, the Audit Office should have known what it was doing would be justified if the Department's role had been merely that of a consultant. But the Department's role was much more than that: it was "to

43 Ex 5 at CH94.012.021 1, CH94.012.0282 and CH94.018.0171. 44 1 2000. 45 12001. 46 T 2140-2142. 47 T 1996-1997; see also T 1684, 1965-1966. 48 1 1686-1687. Report of Inquiry into the Centenary House Lease 147

require [the Audit Office] to establish, in the interest of the Commonwealth, that

[the Audit Office] was in a position to service both the lease and any borrowings made against future appropriations ,.49 The Department of Finance saw itself as being responsible for budgetary integrity. 50 Budgetary integrity is not protected or maintained if agencies can, on behalf of the Commonwealth, enter into commitments they cannot afford.

Although Mr Sedgwick told this Inquiry he did not have any expectation that the Audit Office was underestimating the cost of the proposed move, among the staff of the Department responsible for the bulk of the negotiations relating to the resource agreement and the detailed analysis of the figures provided by the Audit Office there was an expectation that the Audit Office's assumptions about the likely rent payable in Barton were unduly optimistic. The attitude of these officers (Messrs McPhee, Pearson, Wojcik and Turner) was that this was a matter for the Audit Office. If the Audit Office wanted to take that risk, that was its own decision, but it would have to live with the consequences. 5' These officers fully expected that those "consequences" might well include substantial funding difficulties for the Audit Office in the future.

The evidence tendered to this Inquiry does not establish that any officer of the Department of Finance set out to teach the Audit Office a lesson. Nor can it be concluded that key officers' opposition to the proposed move was directly the cause of any reticence on the part of the Department in seeking to review the terms of the lease. That opposition might nevertheless have contributed to a degree of defensiveness on the part of the Audit Office which prevented the lease terms being fully disclosed and analysed by either the Department or the Audit Office.

The approach taken by each of the Department and the Audit Office was unfortunate, and each of them is responsible for the failure to investigate the Centenary House lease before the agreement for lease was signed.

The Department of Finance failed to confirm that the Audit Office could meet future rentals in its forward estimates or likely future appropriations, with or without the resource agreement. The Department therefore did not fulfil the role it identified for itself in its submission to the 1994 Inquiry or the role laid down in Estimates Memorandum 1991/32. The failures of the Audit Office are discussed in Chapter 12.

The Department's officers were of course unaware of the proposed terms of the Centenary House lease at any time before the agreement for lease was signed. In

49 Submissions by Department of Finance to the 1994 Inquiry at par 52; Ex 5 at CH94.003.0301 at 0314. ° Submissions by Department of Finance and Administration to this Inquiry at pp 3, 5. 51 See Mr McPhee, T 1999-2000; Mr Wojcik, T 2099-2100, 2110. 148 Report of Inquiry into the Centenary House Lease

particular, none of those officers was aware of the provisions for fixed escalators.

5 2

Mr Wojcik asserted that the Department had asked "on numerous occasions what the terms of the lease were, and we never had any satisfaction". 13 On the other hand, Mr McPhee never asked because in his view it was not the province of the Department to express a view on the merits of the transaction. 54 Mr Dominic Collins of the Australian Property Group gave evidence that the Department of Finance never asked to see the terms of the lease," although the Department would not be expected to go directly to the Property Group.

If the Department of Finance had made frequent requests to see the terms of the proposed lease and those requests had been rejected, some record of such requests and rejections would have appeared in the Department's files. No such record appears. I do not accept the assertion that numerous requests were made. On the other hand, it is likely that some oral request was made and not answered. This was

no doubt because the Audit Office itself did not know the terms. Had the Department insisted on being told the proposed terms, the Audit Office would have been compelled to ascertain those terms. Had such disclosure occurred, the prospects of the Department approving, or of the Audit Office accepting, the proposed lease on the terms agreed between Mr Collins and Lend Lease would have been slim indeed.

The Department of Finance adopted something of a fence-sitting posture in relation to the transaction. On one hand, it interested itself to some extent: it made general observations, issued general warnings and cautions, and ran its eye over the proposals submitted to it both in the context of the proposed resource agreement and

otherwise. On the other hand, it never asserted that its formal approval of the transaction was required, and it never reviewed the whole transaction from a commercial or funding perspective. Had it done either of these things, the commercial terms of the deal would inevitably have been uncovered and scrutinised by both the Audit Office and the Department. In that event, the likely discrepancy between the increases in rent in the lease and the increases in rent allowed to the Audit Office in the budget would have been revealed. In turn, that revelation would undoubtedly have led at least some of the public servants involved to come to two

realisations that the transaction was not going to be appropriately funded in the future from the Audit Office's point of view and that the transaction was improvident from the Commonwealth's point of view.

52 Mr McPhee, T 1681, 1962-1963; Mr Cooney, T 2029; Mr Wojcik, 1 2110. This evidence is confirmed by a letter from Mr Cooney to Mr Gary Punch, Chairman of the Joint Committee of Public Accounts, 2 June 1992 (Ex 69 at DOFA.084.0040), and comments from Messrs McPhee, Pearson and Turner on a draft of that letter (Ex 69 at DOFA.084.0 102). 53 T2llO. " T2001. T 748.

Report ofinquiry into the Centenary House Lease 149

14

Whether Australian Estate Management acted appropriately

The need for Australian Estate Management to be consulted in relation to the lease is described in Section 4.3.2.

On 16 and 20 January 1992, Mr Robert Ireland of the Australian Property Group wrote to Mr Simon Millar, the Property Group's Customer Services Manager responsible for servicing Australian Estate Management, and to Mr Richard Williams of Australian Estate Management, seeking Australian Estate Management's approval for the Audit Office relocation to Barton.'

Mr Pat McQuin (Regional Estate Manager, ACT, of Australian Estate Management) replied to Mr Millar, complaining at length about the service his organisation was receiving from the Property Group. Mr McQuin's concern was that, in his view, the Property Group had not been marketing the York Park project properly. 2 That project aimed to provide 46,000 square metres in a proposed Barton complex. In relation to the Audit Office proposal, Mr McQuin stated:

Your formal advice to us on the ANAO proposal will no doubt be forthcoming. At that time I expect to formally advise you, for conveyance to ANAO, that as indicated some time ago to APG, we would expect them to occupy the York Park offices. In anticipation of that I would advise you

now to inform ANAO's account manager, that AEM approval will not be forthcoming.

Notwithstanding the view put by Mr Ireland in his concluding paragraph, I have this afternoon confirmed that DOF will not provide ANAO with the resources for the pre-commitment without our written consent. They would also suggest that ANAO occupy the York Park Offices.

When Mr Dominic Collins of the Property Group heard of this response, 3 he informed Mr John Taylor, the Auditor-General, and his letter continued :4

As you know the Department of Finance is refusing to discuss funding of fitout of the new premises until the Australian Estate Manager has endorsed the relocation. As I have been led to believe from information emanating from the Department of Finance the purpose of this endorsement is to ensure that Commonwealth owned buildings do not remain vacant while leases of privately owned buildings are being taken out. There is no vacant Commonwealth owned space at the quantum you

require available in Barton or surrounding areas

Ex 5 at CH94.015.0007 and C1194.008.0061. 2 Letter dated 21 January 1992: Ex 5 at CH94.01 5.0022. Minute from Mr Millar to Mr Collins, 24 January 1992: Ex 5 at CH94.002.0123. ' Ex 5 at CH94.002.0 124.

Report of inquiry into the Centenary House Lease 151

The Australian Estate Manager now wants to use your office

accommodation needs as part justification for the construction of a major office complex on York Park.

Mr Collins noted that in its most recent budget deliberations Cabinet had rejected the York Park proposal and that there was no indication the situation would change in the next budget. He suggested that, even if the Government were to agree that the York Park proposal should proceed, the complex would not be ready for occupation until early 1996. Mr Collins concluded:

Such a scenario would require the Audit Office to temporarily relocate to other premises as the owners of Medibank have let a contract for the refurbishment which would commence at the latest in mid 1994. It would also mean that the Audit Office would remain in poor quality accommodation for at least another four years.

A chronology of events relating to the accommodation needs of the Audit Office was attached, and Mr Collins suggested that Mr Taylor take the issue up through "other avenues".

A day or so later, Mr Millar informed Australian Estate Management that the requested report on the Audit Office's proposed move would not be prepared because "as you have already made up your mind on this particular issue I cannot in all consciousness [sic] commit publicly-funded resources to prepare a meaningless report to AEM". 5

Meanwhile, Mr Taylor, in response to Mr Collins' letter, had telephoned Mr Noel Tanzer, the Secretary of the Department of Administrative Services, 6 asking him to intervene and making it clear that if necessary he would take the matter to the Prime Minister. 7 Mr Tanzer asked Mr Anthony Hillier, the Department of Administrative Services' Executive General Manager with responsibility for Australian Estate Management,' to look into the matter.

Mr Hillier discussed the matter with officers from Australian Estate Management and was advised that their reluctance to approve the move stemmed from their wish to test the level of the Audit Office's interest in occupying the complex proposed for York Park. Mr Hillier reported to Mr Tanzer that the refusal appeared "motivated at least in part by AEM's dissatisfaction with the service they

received from APG". 9 He noted that discussions between the Audit Office and the Department of Finance in connection with a resource agreement were currently being held, that the Audit Office could scarcely be regarded as a major occupier, and that "the project will not stand or fall on ANAO's level of interest in moving in,,.

Minute, 24 January 1992: Ex 5 at Cl- I94,015.0025. 6 Exl9at par 42. ' T509.

Ex 120 atANAO.006.0685. Minute from Mr Hillier to Mr Tanzer, 28 January 1992: Ex 5 at CH94.002.0128.

152 Report ofInquiry into the Centenary House Lease

Mr Hillier suggested that the Department of Administrative Services should

advise the Department of Finance that:

we do not see the ANAO as pivotal to the York Park proposal and therefore see no reason why they should not proceed with the lease at Barton. A move by ANAO from one private lease to another in about 15 months time will not impact adversely on the existing, or proposed, owned estate in the ACT.

He recommended that Mr Tanzer advise the Auditor-General that:

DAS is not opposing ANAO's move to Barton, does not see the ANAO as the critical tenant for the York Park building, and unless the Auditor-General wants to wait and see if York Park is approved in the Budget we will support an immediate commitment to the Barton Lease.

Mr Tanzer passed that message to Mr Taylor and faxed to him a copy of Mr Hillier's report.' ° Mr Tanzer also suggested to Mr Hillier that "we make our position as you have stated it in this minute abundantly clear to [the Department of Finance] lest there be any confusion"."

On 30 January 1992, Mr Collins wrote to Mr Millar seeking reconsideration of Australian Estate Management's refusal of consent. 12 He told Mr Millar that the Audit Office had incurred considerable costs on the proposal and that its current landlord at the Medibank Building in Woden was about to refurbish the Building; He suggested that the Audit Office would not be able to remain there after its lease expired. By this time Mr Taylor had been informed that Australian Estate Management's opposition would be withdrawn.

Formal notification of Australian Estate Management's approval of the Audit Office's proposed move was provided to Mr John Meert of the Audit Office by letter dated 30 January 1992 and copied to the Department of Finance. 13 Mr Williams of Australian Estate Management explained:

Regrettably I understand that the timing of your own requirements for alternative accommodation, plus the advanced stage of your negotiations, may prevent your consideration of York Park.

Given your space requirements ANAO would not be an anchor tenant for York Park and hence it would not be pivotal to that project's approval by Government. Accordingly, AEM will not withhold support for your commitment for the proposed Barton lease.

Australian Estate Management's approval of the proposed lease did not follow the usual course. This was not the result of any aspect of the proposed lease itself. Rather, it arose because Australian Estate Management sought to use the Audit

'° Ex 12atANAO.014.0242. This is the handwritten annotation on the previous document. A typescript of that annotation appears in Ex 5 at CH94.008.0072. 12 Ex 5 at CH94.008.0088. 13 Ex 5 at CH94.002.0 136.

Report of Inquiry into the Centenary House Lease 153

Office's desire for accommodation in the Parliamentary Triangle to advance the

case for approval of its own new building at York Park. This was not appropriate, as the senior executives in the Department of Administrative Services acknowledged when they correctly overrode Australian Estate Management's initial decision.

It was unreasonable to withhold consent for that reason: the York Park project was too remote, and the Audit Office's accommodation needs too small in comparison with the proposed size of the project, to demonstrate any need to protect the Commonwealth estate by withholding consent. This was very apparent from the material supplied with the request for consent. Mr Williams' letter reversing the refusal of consent contained nothing new.

When Mr Ireland sought Australian Estate Management's approval for the Centenary House lease he omitted any reference to the escalation provisions in the proposed lease. As a result, Australian Estate Management was unable to consider whether the terms of the lease would establish new benchmarks above existing markets, as the agency was required to. 14 Its compliance with that requirement might well have led to an independent examination of the reasonableness of those terms. The blame for that non-compliance, however, must be laid at the feet of both Australian Estate Management and the Property Group - Australian Estate Management for prematurely withholding consent to the lease for an unsustainable reason, leading to the Property Group's refusal to provide the formal advice required (following its earlier omission to provide proper details of the proposed lease); and Australian Estate Management in addition for not insisting on the supply of a formal advice with those details when it was persuaded by senior executives in its Department that its previous stand had been wrong.

It is unnecessary to reach any conclusion as to whether the friction between Australian Estate Management and the Property Group resulted from a low standard of service delivered by the Property Group.

14 See Section 10.3.3.

154 Report of Inquiry into the Centenary House Lease

15

Whether John Curtin House Ltd or the Australian Labor Party should be criticised

In the 1994 Inquiry Commissioner Morling was directed to inquire into whether "the processes followed by the Australian National Audit Office, the Australian Property Group, the Australian Valuation Office and the landlord" resulted in any party to the Centenary House lease obtaining "unfair and/or above market

commercial advantage from any aspect of the arrangement".'

The relevant term of reference for this Inquiry is more generally expressed as a direction to inquire into whether the Commonwealth agencies "gave or received appropriate advice" in relation to the Centenary House lease before it was entered into.' Unlike Commissioner Morling, I am not directed to investigate whether the processes followed by the landlord, John Curtin House Ltd, resulted in it obtaining unfair and/or above-market commercial advantage in the lease. This omission must be taken to have been deliberate.

Nevertheless, in the circumstances outlined in Appendix A, it is appropriate that I do state that no such criticism should be levelled at the conduct of John Curtin House Ltd or the Australian Labor Party.

The lease was negotiated with the Commonwealth on the company's behalf by representatives of the Lend Lease Property Group and at arm's-length. The company obtained an exceptionally beneficial result from the negotiations, and the lease is indeed very generous to it. The rent has at all times been above market, but that advantage was not achieved as a result of any conduct, on the part of John Curtin House Ltd or its representatives, which denied to the Commonwealth an equal opportunity to obtain its own advantage.

John Curtin House Ltd and Lend Lease were entitled to assume in the negotiations for the lease that the Commonwealth was capable of looking after its own interests. The fact that those entrusted with protecting the Commonwealth's interests failed in that task is neither the fault nor the responsibility of the company or those who acted on its behalf.

On the basis of the extensive material before this Inquiry, it is my opinion that no conduct on the part of John Curtin House Ltd was unconscionable or constituted undue influence, unfair pressure or unfair tactics such as might in another context amount to conduct warranting statutory or equitable relief. Criticism is expressed of the conduct of Mrs Penelope Morris of Lend Lease in relation to the offer to pay $50,000 to the Property Group, but that conduct had no effect on the result achieved

1994 Inquiry term of reference (ii) - see Appendix B. 2 This (2004) Inquiry's term of reference (e).

Report of Inquiry into the Centenary House Lease 155

in the negotiations. The same opinion can therefore be expressed in relation to the

representatives of Lend Lease.

John Curtin House Ltd and Mr Robert Hogg, the National Secretary of the Australian Labor Party and a director of the company, were conscious at all times of the sensitivity inherent in leasing to the Commonwealth premises owned by a company associated with a political party, and they were at pains to ensure that no Labor Party members of parliament were involved in the discussions within the company. After the National Executive of the Party approved the general plan to expand its asset base by constructing a new building in Canberra, Mr Hogg was delegated the power to make all day-to-day decisions in connection with the project, leaving it to the board of John Curtin House Ltd to make final decisions affecting the company.3 The intention was to isolate the National Executive, which included the four parliamentary party leaders, and to separate all parliamentarians from the day-to-day decision making to avoid any perception of a conflict of interest. 4 To a large extent this was achieved, although it is clear that the final say whether the project would proceed rested with the Labor Party's National Executive, not the directors of John Curtin House Ltd. After the plan had been investigated and the negotiations in relation to the lease were complete (the escalators had yet to be determined by the valuers), the meeting of the National Executive which resolved to proceed with the project did include the parliamentary members, including the Prime Minister. 5 The National Executive was aware at all times of the essential ingredients of the lease transaction.

There was no evidence before this Inquiry or the 1994 Inquiry that any Labor politician or executive exercised any undue or improper pressure, tactics or influence over any public servant who had involvement with the transaction. Nor is there any solid foundation in the evidence to justify a finding that any of those public servants acted in an inappropriate fashion calculated to please his or her political masters with an eye to the fact that the transaction was significant for the

future of the Labor Party which, of course, was then in government.

The Audit Office's attempts to renegotiate or vary the terms of the lease are described in Chapter 16. The directors of John Curtin House Ltd sought and obtained appropriate legal and financial advice about whether it was open to the company to enter into further negotiations. The conclusion stated in Chapter 16 is that the company was prevented by its contracts with the financiers of the Centenary House project from varying the terms of the lease in such a way as to reduce the rent.

Statement by Mr Hogg: Ex 70 at par 14. T 1752, 1754-1756. T 1791-1792.

156 Report of Inquiry into the Centenary House Lease

2

3

4

16 Misleading statements

Term of reference (g) directs me to investigate whether, in the light of any new information elicited, any person "involved" made a misleading statement in relation to the Centenary House lease or any proposal since 1994 to renegotiate or vary the lease.

16.1 Negotiations for the lease

No information was elicited which suggested that a misleading statement was made by any person in the course of the negotiations for the Centenary House lease.'

16.2 Proposals to renegotiate or vary the lease

16.2.1 The proposals

Requests to renegotiate or vary the lease have been made by the Australian National Audit Office to John Curtin House Ltd on a regular basis since at least 1997.2 The first request for a variation of the lease appears to have been made in 1997. The request itself was not produced to this Inquiry, but the response was that "John Curtin House Limited does not wish to vary the current sublease arrangements of Centenary House with the Commonwealth of Australia" .3

The Audit Office made a further request to John Curtin House Ltd in February 2001 . The response in April of that year noted that the directors had discussed the matters raised by the Audit Office and understood its budgetary difficulties but continued:

It would, however, be extremely difficult for John Curtin House Limited to renegotiate the terms of the lease. As you may be aware the company's mortgagee, Macquarie Bank Limited, was heavily involved in the original

As discussed in Chapter 10, Mr Dominic Collins and Mr Robert Ireland produced documents (the ministerial minute of 16 January 1992; the minute of 16 January 1992 to Mr Millar of the Property Group seeking Australian Estate Management's approval of the lease; and the minute of 6 April 1992 seeking authorisation of the

lease under the Lands Acquisition Act) which were misleading. A history of the requests is given in Mr Russell Coleman's Statement to this Inquiry: Ex 23. Letter from McCann and Associates to the Audit Office, 14 August 1997: Ex 23 at ANAO.019. 1271.

Letter from Mr Coleman to Mr Paul Wilkinson, Secretary of John Curtin House Ltd, 15 February 2001: Ex 23 at ANAO.020.0812.

Report ofInquiry into the Centenary House Lease 157

lease negotiations and the structure of the borrowing was based on the

certainty of the future cash flow generated by the agreed fixed rental increases. Any variation to the rentals would create difficulties for the company in meeting its obligations to the mortgagee.

In these circumstances, the directors do not believe that they can responsibly, at this point in time, assist you with your difficulties .5

The next request was made in March 2002.6 Mr Russell Coleman of the Audit Office asked that the situation be brought to the attention of the directors again, with a "view to exploring opportunities to minimise the ANAO's future lease

obligations". In response, Mr Paul Wilkinson, the John Curtin House Ltd company secretary, reiterated the reasons given in 2001 and confirmed that "the directors have considered your request and that they cannot responsibly assist you at this time" 7

The issue was raised at a meeting between the Audit Office and John Curtin

House Ltd in April 2003 when discussing whether the Audit Office would exercise the option under the lease. 8 The Audit Office indicated that it could only exercise the option if the lease were varied, and Mr Wilkinson responded that "existing finance arrangements do not allow the company to agree to more favourable lease arrangements".

Mr Coleman made a further request for review of the rent in March 2004, to which Mr Tim Gartrell, by then the company secretary, responded:

In reliance upon the lease, John Curtin House Limited entered into financial commitments, which it would breach if it were to accede to your request. The directors may also be in breach of their fiduciary duties to the company and their obligations under the Corporations Act. 10

16.2.2 Were any misleading statements made by any person involved in those proposals?

The issues

No-one suggested to the Inquiry that any misleading statements were made by any person involved in making the Audit Office's repeated requests for renegotiation of the rents payable under the Centenary House lease.

Letter from Mr Wilkinson to the Audit Office, 3 April 2001: Ex 23 at ANAO.020.0796. Letter from Mr Coleman to John Curtin House Ltd, 8 March 2002: Ex 23 at ANAO.020.0773. Letter from Mr Wilkinson to Mr Coleman, 28 August 2002: Ex 23 at ANAO.020.0723; confirmed by letter, 18 September 2002: Ex 23 at ANAO.020.0721. 8 Ex23at par 21. ' Letter from Mr Coleman to John Curtin House Ltd, 5 March 2004: Ex 23 at

ANAO.021,0770. 10 Letter from Mr Gartrell to the Audit Office, 21 May 2004: Ex 23 at ANAO.02 1.0768.

158 Report of Inquiry into the Centenary House Lease

The responses

by John Curtin House Ltd to those requests would have been misleading in three circumstances:

• if the agreements between the company and its financiers permitted the company to alter the terms of the lease to reduce the rentals

• if the rentals could have been varied without creating difficulties for the company in meeting its obligations to its mortgagee(s)

• if the directors of the company did not reasonably understand that they could have been in breach of their fiduciary duties to the company and their obligations under the Corporations Act 2001 if they agreed to reduce the company's entitlements under the lease.

16.2.3 Obligations under finance agreements

Among the financing documents executed between Macquarie Bank Ltd and John Curtin House Ltd in April 1992 were a mortgage of the Crown lease in respect of the land in Barton," a mortgage of contractual rights, 12 and a loan agreement .' 3 Together, these documents prohibited the company from varying the Centenary House lease, doing anything which could result in a lessening of the value of the lease, 14 or waiving any rights in connection with the lease. 15 A variation of the rentals payable by the Audit Office under the lease would have breached each of these prohibitions.

A deed of loan variation between Macquarie Bank Ltd and the company was executed in August 1997.' 6 The deed provided for a different repayment schedule but did not change any of the terms restricting the company's capacity to vary the lease.

The loan was refinanced in January 2003; the Macquarie Bank mortgages were discharged and a new mortgage was granted to Westpac Banking Corporation. 17 The new mortgage prohibits the company from changing the Centenary House lease or waiving any of its terms. 18 A business finance agreement with Westpac, executed as part of the refinancing,' 9 also requires the company to ensure that the loan— valuation ratio does not at any time exceed 80% and that the interest cover ratio (of

11 Ex 117 atALP.020.000l. 12 Ex 117 atALP.020.0087. 13 Ex 117 at ALP.020.0039. '4 Mortgage of the Crown lease, cl 5.2. 15 Mortgage of contractual rights, ci 4.1. 16 Ex 117 at ALP. 020.0124. '7 Ex 117 at ALP.020.020 1. 18 Ex 117 at ALP.020.0213. '9 Ex 117 at ALP.020.0235. Report oflnquiry into the Centenary House Lease 159

income received to interest payable or accrued) does not at any time fall below

2.5 1 20

Advice concerning the advisability of varying the rent

The directors of John Curtin House Ltd very properly sought advice in relation to their position. At a meeting of the directors in March 2001 , 21 Mr Allan Wylucki of

McCann and Associates advised them that "If the rental structure were to change significantly then this would have a dramatic impact on the value of Centenary House" and that "McCann and Associates could not recommend to John Curtin House Limited entering into negotiations today to amend the lease covenants in

particular, with respect to the annual rental". 22

At a meeting of the directors on 6 September 2002, it was resolved that:

given the Company's current financial position, its existing financial commitments to Macquarie Bank which are based on the pattern and certainty of lease receipts, a reduction of rent would be irresponsible. 23

In October 2002 KPMG advised the company that, because the loan repayments were scheduled to increase over the balance of the lease, the increase in rentals resulting from the application of the 9% escalation clause would not result in a substantial increase in available funds. 24

In December 2003 PricewaterhouseCoopers advised the company that a reduction in the Audit Office rent was likely to breach the covenants in the Westpac finance documentation. 25

Advice about the directors' legal obligations

The directors resolved in April 2004 to "seek further advice regarding the Directors' duties and responsibilities in respect to company law, the lease and the mortgage". 26

The company's solicitor, Mr Michael Higgins, advised the company that it would not have the right to vary the terms of the lease without Westpac's consent. 27 He referred to the duties of directors to act in a bona fide way in the interests of the company as a whole and to exercise their powers for the purpose for which they were conferred. Mr Higgins pointed to Clause 2(d) of the company's Memorandum

20 "Property Finance Schedule Property Investment", attached to the Agreement, cl 2.3: Ex 117 at ALP.020.023 5 at 0261, 0265. 2] Minutes of meeting of directors of John Curtin House Ltd, 15 March 2001: Ex 117 at ALP.020.0144. 22 Letter from McCann and Associates to Mr Wilkinson, 8 March 2001: Ex 117 at

ALP.020.0140. 23 HTGG.011.0233 at 0234. 24 Ex 119 atALP.020.0155 at0177. 25 Ex 119 at ALP. 020.0297 at 0303. 26

Minutes of meeting of directors, 6 April 2004; Ex 117 at ALP.020.0353. 27 Letter from Higgins Solicitors to the directors of John Curtin House Ltd, 20 May 2004; Ex 117 at ALP.020.0354.

160 Report of Inquiry into the Centenary House Lease

of Association, which provides that one of the company's purposes is "To render all

such assistance as may be practicable for the Company to provide ... in any manner whatsoever which seems to the Company to further the interest and/or objects of the Australian Labor Party". He advised:

It would therefore be possible for the directors to act in a way which did not necessarily result in the best commercial outcome if that outcome was nevertheless in the best interests of the ALP.

That is not, however, the end of the matter and the directors are also required to consider the interests of the creditors and to ensure that the company does not place itself in a position of insolvent trading.

It would therefore be in breach of the directors' duties under the Corporations Act if they were to act in a way which placed the ongoing solvency of the company in jeopardy.

In any event, the directors might well conclude that it was contrary to the interests of the ALP and thus the purposes of the company and in particular Clause 2(d) if they were to take any action that would cut off such cash flow to the ALP as currently exists from the lease.

16.3 Conclusion

John Curtin House Ltd sought and received appropriate advice as to its responsibilities. I am satisfied that the company was, under the terms of its contracts with Macquarie Bank and Westpac, prevented from varying the terms of the lease or making any commitment to reduce rent under the lease without the consent of the relevant bank. There is no reason to conclude that either bank would have consented to such a variation had that consent been sought.

No person involved in the proposals for renegotiation or variation of the Centenary House lease made a misleading statement in relation to those proposals.

Report of Inquiry into the Centenary House Lease 161

17 The offer to pay $50,000

The term of reference dealing with payments or inducements offered in relation to the Centenary House lease directs me to inquire into:

whether, in light of any new information that is elicited, there were payments or inducements offered in relation to the Centenary House lease which raise issues of impropriety, and whether further examination of witnesses or documents by the 1994 Inquiry may have identified such issues;

Lend Lease, and the employees and former employees represented by the same counsel,' submitted that this term of reference imposes two limitations on my task:

• I must be satisfied that any new information now available materially affects the determination of whether there were payments or inducements and that such new information raises issues of impropriety.

• Even if I am satisfied of those two matters, I am not permitted to determine whether such payments or inducements were in fact improper. 2

These submissions are rejected. I deal with the two elements of the first suggested limitation in reverse order.

The term of reference does not require that the new information raise issues of impropriety. It is the payments or inducements which must raise such issues. The misinterpretation put forward appears to have arisen from a misquotation of the term of reference in the relevant submission, in that the verb "raise" has become "raises" thereby suggesting that the subject of the verb is the new information

(singular) rather than the payments or inducements (plural). The 1994 Inquiry proceeded on the basis that the investigation was into the propriety of a particular offer of payment made. 3 There is no basis for adopting a different approach in this Inquiry.

Nor does the term of reference assert that the new information must materially affect the determination before I am able to make my own determination. I am merely required to make that determination in the light of the new information which is now available. Moreover, the expression "new information" is not

restricted, as the argument appears to assume, to documentary material brought into existence before the 1994 Inquiry but not put before Commissioner Morling. It includes oral evidence given in this Inquiry which was elicited by counsel, be it counsel assisting me or counsel appearing for a witness or party. In any event, I am

Mrs Penelope Morris, Mr Richard McKeon, Mr Glen Nicholson and Mr John McFadden. 2 Lend Lease Submission at pars 59-60. ' 1994 Report at par 3.l. Report of inquiry into the centenary House Lease 163

satisfied that a concession made by Mrs Penelope Morris when questioned by

counsel assisting me - that to have made a particular offer of payment even as compensation before the terms of the deal had been struck would have been seen as an inducement and therefore improper - is sufficiently material to satisfy the first restriction Lend Lease seeks to impose on my task. 4

The second restriction, if accepted, would result in a finding merely that there was new information which would materially affect the determination of whether there were payments or inducements which give rise to issues of impropriety requiring yet another investigation of whether the payments or inducements were in fact improper. Two Royal Commissions concerning the circumstances surrounding the Centenary House lease are surely sufficient. The interpretation for which Lend Lease argued could not have been intended by the Government when advising the Governor-General to appoint me to conduct this Inquiry.

I turn now to consider this term of reference. There is no evidence of any payment made which gives rise to any issue of impropriety. The one offer of payment raising an issue of impropriety was the offer by Lend Lease to pay a "fee" of $50,000 to the Australian Property Group.

The parties concerned agree on very little about this offer. The only matters which are agreed are that Mrs Morris (on behalf of Lend Lease, which was acting for John Curtin House Ltd) offered to Mr Dominic Collins (on behalf of the Property Group) a "fee" of $50,000 and that no such fee was ever paid. There is dispute about when the offer was made, who was present at the time it was made or subsequently discussed by Mrs Morris and Mr Collins, whether Mr Collins accepted or rejected the offer, what the fee related to, and what it was that the Property Group was expected to do with the money.

Mrs Morris asserts that, in September 1991 and shortly after the Property Group had produced a letter of intent to lease Centenary House, she offered an unstated amount of "compensation" to the Property Group for the work it had done in connection with an earlier, uncompleted part of the negotiations the "heads of agreement" proposal, whereby for an agreed fee the Commonwealth was to assume the task and the risk of finding tenants for Centenary House when built. Mr Collins

had not rejected the suggestion but had said he would give the offer some thought. He had subsequently responded that reasonable compensation for the Property Group would be in the vicinity of $45,000 to $5 0,000.5 Mrs Morris agreed that to have made the offer even as compensation before the terms of the deal had been struck would have been seen as an inducement and therefore inappropriate and a wholly and utterly improper thing to do.'

" This is a substantially greater concession than was made in the 1994 Inquiry: Ex 5 at CH94.018.0060. Statement to 1994 Inquiry at par 41; present Inquiry at T 1013-1016, 1084. 6 T 1016, 1084.

164 Report of Inquiry into the Centenary House Lease

Mr Collins asserts that a payment of $50,000 was offered at a meeting with

Mrs Morris, most probably held at the office of Civil & Civic (a Lend Lease company) in Canberra, and that the proposed payment was described as a commission for having formally committed a tenant for Centenary House before its construction. This meeting could possibly have been earlier in 1991, but Mr Collins cannot now say when it was. He had immediately rejected the notion of such a commission as being inappropriate because it raised a conflict of interest with the Property Group's duty to its client it would be serving two masters but he had suggested that such a payment could be put towards the Audit Office's fit-out costs. 7

The version put forward by Mrs Morris is inconsistent not only with the evidence of Mr Collins but also with other evidence the contemporaneous description Mrs Morris herself gave to the proposed payment, under the heading "Possible Inducements", as a possible "agency commission" to the Property Group

(albeit placed in quotation marks);' the note made by Mr Richard McKeon (of Lend Lease) in March 1991 recording the possibility of an "incentive to APG up to only $50,000" ;9 the recollection of Mr Noel McCann (the property adviser to John Curtin House Ltd) that the fee was by way of an inducement and that it was intended to represent the fee the Audit Office would otherwise have been obliged to pay the Property Group;' ° the interpretation placed on the payment by Mr Robert Hogg (director of John Curtin House Ltd and responsible for the Centenary House project) that it would have been an inducement;" and Mr Hogg's two contemporaneous notes that the payment to the Property Group was intended as a contribution to the cost of the Audit Office fit-out.' 2

Mr McKeon, a Civil & Civic manager who was a member of the Centenary House Project Control Group, gave evidence of being present at a meeting between Mrs Morris and Mr Collins when the $50,000 offer was discussed, but he had no specific recollection of when the discussion took place or the stated purpose of the offer or the reaction by Mr Collins to that offer. The most he could say was that the fact that the amount of $50,000 had been included in the costing of the project from September 1991 indicated that Mr Collins had accepted the offer.' 3

Lend Lease submitted that the evidence of the fee being incorporated in the "commercial analyses" prepared by Mr McKeon throughout the period October 1991 to February 1992 demonstrates that Mr McKeon (and by inference Mrs Morris) had understood throughout this period that the offer of a fee had been

T 598-601, 605, 2436-2437. 8 Ex 5 at CH94.001.0066; T 1013-1014. Ex 120 at LEND.011.0010. The note was made on 19 March 1991 before a meeting between Mr Collins and Lend Lease.

10 T 2694, 2700-2702. 11 T1820-1821. 12 Ex 70 at par 24(d): ALP.005.0087; ALP.006.0223. ' T 1253-1254. Report oflnqui,y into the Centenary House Lease 165

accepted by Mr Collins.

14 But the inclusion of the fee during that period is equally consistent with Mr Collins' evidence that he had immediately refused the offer but suggested that it be put towards the cost of the tenant's fit-out. It does not take the matter any further.

Mr McKeon told Mr Paul Ferrari, when the latter was investigating the purpose of the $50,000 offer in July 1992, that Mr Collins had said the Property Group could have only one master and "hence no fee [was] due" and that the payment had "nothing to do with finalising the negotiat [sic] as far as either Dom Collins or Audit are concerned". Mr Ferrari produced an apparently contemporaneous handwritten note of his conversation with Mr McKeon. 15 This note strongly supports the evidence Mr Collins gave of his rejection of the offer, but Lend Lease submitted that, in the light of the note Mr Ferrari made, the conversation is equally consistent with an initial acceptance and subsequent rejection. 16 The relevant part of the note read as follows:

Richard McKeon When discussion first started P Morris talking to Dom Collins re concept would APG accept tenancy risk - to reflect that risk LL/C&C might pay a fee At next stage - response to advertisement Q raised was there still an APG fee involved (50000 mentioned) - as negotiation continued Dorn Collins made clear to LL/CC that APG

could only have 1 master & hence no fee due"

However, an interpretation of this note as supporting an early acceptance and a subsequent rejection of the offer by Mr Collins late in the piece would be inconsistent with the proposition maintained by Mrs Morris and Lend Lease that the offer was not made much earlier that year when the heads of agreement proposal was abandoned but was instead made in September.' 8

The version given by Mr Collins was not recorded in any contemporaneous document in the Property Group, but in July 1992, when Mr Ferrari questioned him about the purpose of the offer, his version was consistent with his evidence in both the 1994 Inquiry and the present Inquiry. It is true that this was after the agreement for lease had been signed and after the reasonableness of the terms of the proposed lease had become a public issue.' 9 The absence of any contemporaneous note by

14 Submission at pars 87-90. 15 Ex 32, Statement to this Inquiry at par 43: WITS.018.0001 at 0011-00 12. The note was recorded in an A4-sized notepad used by Mr Ferrari to record matters such as conversations. Mr Ferrari gave evidence that a note of another conversation recorded

in his notepads had been made "as the conversation took place": 1 869. 16 Submission at pars 111-112. This transcription was checked against the original document (Ex 50). 18 T 44 in the 1994 Inquiry: Ex 5 at CH94.018.0059; T 1084; Lend Lease Submission at

par 89. 19 Senator Parer's press release and the brief flurry of media comment which followed are described in Appendix A.

166 Report oflnquiry into the Centenary House Lease

Mr Collins does not, however, carry any suspicious overtones where he is

concerned: he appears to have kept few records, and he failed to inform the Audit Office of many of the most basic terms of the lease before the agreement was signed .20 His version of the $50,000 offer explains how Mr Hogg viewed the payment as intended as a contribution to the cost of the Audit Office fit-out.

I accept the evidence of Mr Collins in preference to that of Mrs Morris in relation to the nature of the $50,000 offer, his immediate rejection of that offer and the suggestion that the payment could be put towards the cost of the fit-out. In those circumstances it matters not whether Mr McKeon was present during the discussion (or discussions) of the proposed payment. The contemporaneous documentary

evidence shows that the proposed payment was clearly intended as an incentive or inducement to the Property Group; I deal with that in a moment. The remaining issue concerns just when the offer was made.

Mr Collins gave evidence that the offer was made at a meeting with Mrs Morris at the office of Civil & Civic in Canberra. Mrs Morris did not suggest otherwise. She agreed that the only substantive discussions she had with Mr Collins took place on 19 March, 3 July, 30 August and 17 October 1991.21 Her evidence was that this

particular conversation nevertheless took place in September 1991, shortly after the initial letter of intent had been produced. The letter of intent was dated 17 September, 22 and it was delivered to Mrs Morris on that day, during a Centenary House project review meeting. 23 Mrs Morris has no record of any meeting which took place with Mr Collins between that date and the meeting of the Labor Party National Finance Committee on 19 September, when the project feasibility report was presented. 24 This document contains the first reference to the $50,000 offer in

the project costing details.

It would seem, therefore, that the offer was probably made at the 30 August meeting that is, before the initial letter of intent was provided. The absence of

20 See Chapter 10, 21 T 1089. 22 Ex 5 at CH94.001 .0083. 23 This a different body from the Project Control Group but the two bodies have some common members. Ex 27 at DOFA.009.0183. 24 Ex 5 at CH94.004.0039 at 0061. The reference to the offer appears as: Add Letting Up Cost @ (A.P.G. agreed @ $50,000 but adopt contingent sum) ... $250,000 In its context, the reference to "agreed" was intended to mean agreed within the Lend Lease project team, not between Mrs Morris and Mr Collins. Lend Lease submitted (Submission at par 86) that the absence of any reference to this fee in a draft of that project feasibility report - produced during September 1991 - suggests the offer could not have been made until September. The draft (Ex 120 at FREE.004.0076) is merely a copy of an earlier version produced in May 1991 (Ex 5 at CH94.004.0014) with some minor handwritten amendments. The inference for which Lend Lease argued depends on the unproved assumption that the September draft was based on up-to-date knowledge of the situation on the part of the person who made the draft. I am not prepared to make that assumption. Report of Inquiry into the Centenary House Lease 167

any reference to the payment offer in the notes Mrs Morris kept of that meeting is

consistent with a consciousness that the offer before receipt of the letter of intent was inappropriate. In my view, however, it is unnecessary to determine precisely when this event occurred. That is because the initial letter of intent the Property Group provided on 17 September left two vital issues open to be determined the escalation of the rent agreed as at 1 January 1991 to the date on which the lease was to commence; and the yearly cumulative escalation of the rent after commencement. The final letter of intent, which included all the agreed terms, was dated 3 December 1991 25

Mrs Morris suggested that these two matters were to be resolved by the

valuers '26 so it was not inappropriate to have offered the inducement at that stage. But it was the Property Group (through Mr Collins) which had to instruct the Australian Valuation Office as to the position reached in the negotiations between the parties and what the Valuation Office's role was expected to be. The instructions given to the Valuation Office were that it was to negotiate with Mr McCann for the best deal available, rather than (as might be thought to be usual) to give a valuation. 27 The fact that the inducement was offered prior to the resolution of these two escalators whether or not the inducement affected the instructions which were given therefore made it inappropriate and, to use the words Mrs Morris herself accepted, wholly and utterly improper.

Quite apart from her concession that the offer of an inducement before the terms of the deal had been struck would warrant that description, Mrs Morris must have known from her background in the Public Service that even accepting lunch or tickets to the football in this situation was regarded as inappropriate . 28 The fact that the payment was offered to the entity of the Property Group rather than to a member of it removes any suggestion that it was an attempted bribe, but it does not remove its impropriety.

As for the other members of the Project Control Group, only Mr McKeon could be said to have been a party to the offer since he claims to have been present when it was made. Although he does not appear to have had any background in the Public Service, his employer regularly dealt with the Public Service in the ACT and, if indeed he was present when it was made, he should have known that the offer was inappropriate.

From his contemporaneous notes, Mr Hogg obviously did not know the true nature of the offer. His evidence was that, once the proposed payment became an item to be dealt with, he would have investigated its purpose and reasoning before agreeing to it. 29 I accept that evidence. There is no evidence that he knew the offer

25 Ex 5 at CH94.004.0169. See Appendix C at C.8. 26 T 1084-1085. 27 See Section 10.3.1. 28 T 305. 29 T 1821. 168 Report oflnqui,y into the Centenary House Lease

was being made before the two vital issues in the lease had been resolved. The

same can be said of Mr McCann.

Term of reference (f) asks whether further examination of witnesses or documents by the 1994 Inquiry may have identified this issue of impropriety. The short answer is that such further examination would have disclosed the issue of impropriety if it had not already become apparent.

Commissioner Morling held that the nature of the offer was an "agency commission of $50 000 to the APG should the Commonwealth enter into a lease of Centenary House". 30 The initial letter of intent (which left two vital issues open to be determined) was dated 17 September 1991.31 Commissioner Morling accepted that the offer was made "in September 1991,32 and he noted that Mrs Morris claimed that the offer had been made before 20 September, 33 the date of the Labor Party National Executive meeting at which the project feasibility report which made the first reference to the letting-up cost of $50,000 was presented. 14

Mrs Morris had given evidence in the 1994 Inquiry that it would have been "totally inappropriate" for an offer of compensation to have been made at a time when they were still negotiating "the deal through the expression of interest". 35 This evidence is not referred to in the relevant section of the 1994 Report. No

question appears to have been asked of Mrs Morris as to whether the offer "in September" had been before or after the initial letter of intent, but the real issue was - and is - whether it was before the final letter of intent which included all of the agreed terms (dated 3 December 1991).36 If the offer had been made "in

September", it obviously was before that letter. Commissioner Morling accepted that Mrs Morris "did not perceive the impropriety of making the offer in the form which she did". 37 That is where we differ in our findings.

30 1994 Report at par 3.8. 31 Ibid at par 2.64. 32 1bidat par 3.6. 33 1994 Report at par 3.2. 34 Ibid at par 2.65. 35 T 44 in the 1994 Inquiry: Ex 5 at CH94.018.0059. 36 Ex 5 at CH94.002.0 108. 37 1994 Report at par 3.10. Report oflnqui,y into the Centenary House Lease 169

18 The

1994 Inquiry

I am directed by this Inquiry's terms of reference to consider the following: • whether the 1994 Inquiry's terms of reference could have been better designed to enable information relevant to the Centenary House lease to be elicited'

• whether the resources provided to the 1994 Inquiry, the absence of counsel assisting, or the particular processes adopted adversely affected that Inquiry

• whether further examination of witnesses or documents by the 1994 Inquiry might have identified issues of impropriety relating to payments or inducements offered in relation to the Centenary House lease. 3

These terms arise for my consideration only where I have reached conclusions significantly different from those reached by Commissioner Morling. The conclusions I have reached are significantly different in a number of areas, in that I have found as follows:

• The 10.5% construction period escalator and the 9% annual rent escalator during the terni of the lease were imprudent and did not represent value for expenditure. 4

• The officers of the Australian Property Group and the Australian National Audit Office failed to fulfil their duties competently, and Mr John Taylor, the Auditor-General, failed to comply with his obligations pursuant to s 2AB of the Audit Act 1901 and r 44B of the Finance Regulations. 5

• The Property Group failed to give appropriate advice to the Audit Office. 6

• Mr Graham Jeffress of the Australian Valuation Office failed to provide appropriate advice in relation to the proposed lease .7

• The Department of Finance did not fulfil the role it was required to perform pursuant to government policy and therefore also failed to give appropriate advice to the Audit Office. 8

1 Term of reference (c). - Term of reference (d). Term of reference (f). I am also asked by term of reference (h) to examine whether the various leases considered by the 1994 Inquiry provided a reasonable basis for

comparison with the Centenary House lease: I do this in Chapter 9. See Chapter 7. See Chapters 5, 10 and 12— I Sec Chapter 10. See Chapter 11. 8 See Chapter 13.

Report of Inquiry into the Centenary House Lease 171

• Mrs Penelope Morris of the Lend Lease Property Group did perceive the

impropriety of the offer of $50,000 made to the Australian Property Group at the time she made it. 9

The discussion of these matters in earlier chapters of this Report demonstrates that my different conclusions were reached in each case on the basis of a much greater amount of material than was before Commissioner Morling and with the benefit of the different perspective the additional evidence cast on those matters. The additional material included, in particular, the substantially more detailed evidence of the course of negotiations between Mr Dominic Collins of the Property Group and Mrs Morris and other representatives of Lend Lease, the valuation report prepared by Mr Chris Byrne of Stanton Hillier Parker (NSW) Pty Ltd for Macquarie Bank Ltd in June 1993,10 and the valuation evidence of Mr Frank Egan. But there was more.

The 1994 Inquiry's terms of reference were, if anything, wider than this Inquiry's terms of reference so far as they related to the negotiations for the Centenary House lease. None of the conclusions I have reached in relation to these matters would have fallen outside the 1994 Inquiry's terms of reference.

The original terms of reference were agreed between Mr Taylor and Mr Stephen Sedgwick of the Department of Finance in February 1994 for the purposes of the inquiry to investigate the Centenary House lease established by Mr Taylor pursuant to the Audit Act 1901.11 When that inquiry failed to proceed, Commissioner Morling was appointed with the same terms of reference, after he had been asked to indicate whether they were appropriate.' 2

The 1994 Inquiry's terms of reference did not inhibit Commissioner Morling from obtaining the additional evidence this Inquiry obtained.

It is clear from the discussions Commissioner Morling had with the Department of Finance before the 1994 Inquiry was established that it was his suggestion that the Inquiry be conducted without counsel assisting him. 13 It was also with his agreement that he was provided with the part-time services of a former senior public servant, Mr Graham Glenn, as the sole resource to assist him in his investigation and with specialised advice. 14 There is no suggestion in the evidence that, if Commissioner Morling had sought further resources (including counsel to assist him), those resources would not have been provided.

See Chapter l7. '° Ex 113 atMACQ.033.0141. ' Ex 95 at ANAO.018.0399. 12 Ex 95 at DOFA.066.001 1. 13 Ex 92; Mr Sedgwick's Statement: Ex 95 at par ii. 14 Ex 95 at par 12; letter from Mr Sedgwick to Commissioner Morling, 4 May 1994: Ex 95 at DOFA.066.0 11. In addition to the part-time services of Mr Glenn, a part-time office manager and funding for necessary stenographic support were provided: Ex 95 at DOFA.063.0035. 172 Report ofInquiry into the centenary House Lease

It was Commissioner Morling's decision to conduct the Inquiry "quickly and

with a minimum of legal input not along the lines of a traditional Royal Commission".15 He did not envisage that it would be necessary for him to exercise the power to compel the production of evidence and documents,, 16 and that power was regarded by everyone as merely being held in reserve. 17

Commissioner Morling sent a letter to those he considered to be interested parties, inviting written submissions. 18 No compulsory processes were used to obtain either the production of documents or the attendance of witnesses. 19 All witnesses whom Commissioner Morling wished to give evidence did so voluntarily, and any specific documents he wished to see were produced voluntarily. 20

During the hearings before Commissioner Morling, John Curtin House Ltd, the Department of Administrative Services and the Audit Office were represented by counsel. The Department of Finance had officers present but did not take an active role beyond presenting evidence and a written submission. Counsel for the Department of Administrative Services represented both the Property Group and the Valuation Office. Lend Lease and its employees were represented by counsel, but their involvement was essentially limited to issues surrounding the offer to pay $50,000 to the Property Group. Mr David Connolly MP and Senator Ian Campbell, two members of the Liberal Party of Australia (then in opposition), were permitted to take part in the proceedings as interested parties. They were unrepresented, but they did cross-examine some witnesses.

The very marked impression gained from the proceedings in the 1994 Inquiry is that it was in the interests of all the parties (other than the unrepresented parliamentarians) to demonstrate that the Centenary House lease had been properly negotiated and represented a prudent transaction offering value to the Commonwealth for expenditure. The extent to which there was unanimity between all the parties (except the two parliamentarians) is strikingly apparent from the

Audit Office's Submission:

The ANAO submits that no party obtained unfair or above market commercial advantage as a result of the terms of the lease. The ANAO refers the Commissioner to the report of Baillieu Knight Frank dated 9 December 1992 and to the report by Mr Graham Fenwick dated 27 July 1994 in which he concludes that the AVO valuer instructed by APG

15 Minute of meeting held in May 1994 between Commissioner Morling and the heads and senior staff of the relevant government departments and agencies: Ex 93 at DOFA.044.0206.

16 Ex 95 at DOFA.066.01 I and DOFA.044.0206; Mr Sedgwick's Statement: Ex 95 at pars 10-11. See, for example, Ex 95 at DOFA.063.0073; Ex 95 at DOFA.066.0011.

18 Letter to Lend Lease: Ex 120 at FREE.016.00050007. 19 Statement of Mr Graham Glenn: Ex 93 at par 18. 20 Ibid at pars 19-20. Report oflnquiy into the Centenary House Lease 173

followed proper procedures in arriving at his opinions, that he was

aware of relevant market transactions, that he applied that market evidence to his valuations and that the market at the time supported his opinions and that he was justified in adopting a base rental of $280.00 per square metre p.a. and that the escalation factors applied thereto were appropriate.2'

Whilst the ANAO considers, with the benefit of hindsight, that fuller discussions and consideration with it may have been beneficial, the ANAO does not consider the breakdowns in communication represented a failure by the APG to obtain best value for the Commonwealth when negotiating the Centenary House lease.22

It is submitted that ... the evidence shows that the lease terms represent fair market value and were commercially acceptable.23

The two parliamentarians did dispute that approach, but they did not have access to the documents this Inquiry obtained, and they did not have the legal skills to challenge evidence given by those supporting a united front. They were not effective contradictors.

Commissioner Morling's approach appears to have been guided largely by the submissions filed by the parties in response to his initial letter. 24

His review of

documents also seems to have been confined to documents the parties had provided or which he had specifically identified and requested.

Lend Lease did not provide any submission in response to Commissioner Morling's invitation. Rather, its solicitor informed him that Civil & Civic Pty Ltd (a Lend Lease company) held a large amount of documentation relating to various aspects of the Centenary House project and suggested that "it would not be in either the Inquiry's or Civil & Civic's interest for an unfocussed review to be made of those documents". Lend Lease's solicitor invited the Commissioner to identify particular documents he wished to see when their relevance had "become apparent from information submtted [sic] by the government parties involved". 25

Commissioner Morling asked only that he receive written statements from Mrs Morris and Mr Richard McKeon (the project manager for Civil & Civic) in relation to the offer to pay $50,000 to the Property Group. 26 Use of the power to

21 Submission, 16 August 1994: Ex 5 at CH94.005.0357 at 0359. 22 Ibid at 0364. 23 Ibid at 0365. 24 T 5 in the 1994 Inquiry: Ex 5 at CI-I94.018.0006. 25 Letter from Freehill Hollingdale & Page to Commissioner Morling, 27 May 1994: Ex 120 at FREE.0 16.000 1. 26 See file note of discussion between Mr Daniel Moulis of Freehills and Commissioner Morling, 16 June 1994: Ex 120 at FREE.016.0033 and Certification of Response to Notice to Produce issued to Freehills: Ex 120 at FREE.016.0003-0004. 174 Report of Inquiry into the Centenary House Lease

compel Lend Lease to produce documents when this somewhat disingenuous

remark was made by the company's solicitor would have started the trail to the true genesis of the terms of the lease, as now revealed by the use of that power. It would also have assisted greatly in relation to the offer to pay $50,000 to the Property Group. None of this information was supplied to Commissioner Morling when Mrs Morris and Mr McKeon gave evidence. This was understandable in view of the

limited issue on which Commissioner Morling had sought their assistance.

This Inquiry examined in detail documents obtained as a result of Notices to Produce to Lend Lease, the Australian Labor Party, McCann and Associates and Macquarie Bank which had not been provided to Commissioner Morling pursuant to the voluntary process adopted. This Inquiry also heard more detailed evidence from a number of witnesses who gave evidence before Commissioner Morling, 27 and from other witnesses, such as Mr John McFadden, whose role was not made apparent to Commissioner Morling. Mr McFadden did not give evidence in that

Inquiry, and his file containing, as it did, many documents which offered a full understanding of what took place was not produced to Commissioner Morling pursuant to the voluntary process adopted.

Use of a more adversarial procedure in this Inquiry in order to test the apparently common front presented by the parties in 1994 produced a much more detailed picture of the course of the negotiations. It demonstrated that the impression successfully conveyed to Commissioner Morling of a market-determined transaction was incorrect and misleading.

It is understandable that, with the limited resources obtained and the absence of counsel assisting, conducting the 1994 Inquiry in the same way would have placed an immense burden on the Commissioner: to be responsible for investigating and obtaining the evidence, testing it, and then deciding what the result should be is not usually a wise procedure for any one person. In very properly seeking to ensure that, by descending into the arena, his vision did not become clouded by the dust of • conflict,25 Commissioner Morling might not have dealt with some issues as fully as

counsel assisting him would have.

It is clear that, without counsel assisting and much greater administrative assistance, Commissioner Morling was unlikely to have been able to obtain or manage the volume of documentation obtained by this Inquiry. Seventy-nine Notices to Produce were issued to 45 separate entities and in excess of 80,000 pages

of documents were produced. Counsel assisting this Inquiry and its legal staff sifted that evidence and reduced the documentation tendered in evidence to manageable proportions.

27 For example, Mr Collins' and Mrs Morris' oral evidence at the 1994 Inquiry occupied 34 and 15 pages respectively of the transcript. At this inquiry Mr Collins' evidence occupied 291 pages and Mrs Morris' evidence 224 pages. 28 Yuill v Yuill [1945] P 15 at 20; Jones v National Coal Board [1957] 2 QB 55 at 63.

Report of Inquiry into the Centenary House Lease 175

It is also clear that counsel assisting this Inquiry engaged in a much more

thorough, critical and sceptical examination of witnesses than it would have been reasonably possible for Commissioner Morling to have achieved with only the help of an unqualified administrative assistant. 29 With the exception of the unrepresented opposition parliamentarians, none of the parties appearing before Commissioner Morling had any interest in seeking to criticise the terms on which the Centenary House lease had been negotiated. 30

I readily acknowledge Commissioner Morling's considerable expertise and experience in valuation matters. However, I do not accept, as counsel for John Curtin House Ltd submitted, that Commissioner Morling's expertise informed and justified his decision to proceed informally. 31 An informal inquiry may well be appropriate for the few Royal Commissions where there are no real questions of fact to be determined. Had the 1994 Inquiry involved no more than technical or legal issues relating to commercial lease valuations and practices, an informal investigation by a person of Commissioner Morling's acknowledged expertise in that field might well have been appropriate.

It is impossible to speculate whether, if Commissioner Morling had had counsel assisting him or had adopted a different approach to obtaining evidence, he would necessarily have reached different conclusions. 32 Nevertheless, I am satisfied that the resources provided to the 1994 Inquiry, the absence of counsel assisting it and the particular processes adopted resulted in a much smaller amount of relevant material being discovered and that the absence of that material from the 1994 Inquiry did adversely affect it in that its investigation was, as a consequence, not as complete as it could have been and the outcome did not still the disquiet the Centenary House lease had created.

29 There may also be some question as to whether it would be appropriate for a Royal Commissioner to conduct an inquiry in that way. ° This is not to suggest, as the Department of Finance and Administration interpreted the submissions of counsel assisting, that officers of the Department of

Administrative Services sought to mislead or misinform Commissioner Morling (Submission of the Department of Finance & Administration at p 9). Rather, it is a simple recognition that nobody in the Department of Administrative Services, the Property Group or the Valuation Office had any reason to take a critical view of the course of negotiations or the terms of the lease. 31 Submissions on behalf of John Curtin House Ltd at pars 368, 373. 32 took the view in this Inquiry that it would not be appropriate to ascertain from

Commissioner Morling his reasons for conducting the 1994 Inquiry in the way he did or what he would have done in the light of the additional evidence before this Inquiry. A Royal Commissioner is granted the same protection and immunity as a justice of the High Court: Royal Commissions Act 1902, s 7(1). That immunity means that a Royal Commissioner may not be compelled to disclose the deliberative processes which led to any decision reached during the course of an inquiry under that statute. The law relating to that immunity is reviewed and discussed in the Decision on Judicial Immunity Against Disclosure I gave on 20 October 2004.

176 Report of Inquiry into the Centenary House Lease

This is not intended as a criticism of Commissioner Morling, who (as would be

expected) had a clear grasp of commercial lease valuations and practices. But the absence of any counsel assisting him, and his decision not to compel the production of documents from Lend Lease, the financiers or the relevant government agencies, means that his responses to the terms of reference were based on considerably less material than would have been available to him had he chosen to pursue Lend Lease's documents and the government files, instead of being content with the material everyone had decided to provide to him.

The further examination of witnesses and documents in this Inquiry did indeed allow for the conclusion of impropriety I reach in Chapter 17 that Mrs Morris did perceive the impropriety of the offer of $50,000 to the Property Group at the time she made it. Had such examination also taken place in the 1994 Inquiry, it would similarly have revealed this fact.

In summary, my conclusions in connection with terms of reference (c), (d) and (f) are as follows:

o The terms of reference for the 1994 Inquiry did not need to have been better designed to enable information relevant to the Centenary House lease to be elicited.

• The absence of counsel assisting and the particular processes adopted in that Inquiry did adversely affect that Inquiry.

• Further examination of witnesses and documents by the 1994 Inquiry would have led to identification of the impropriety relating to the offer to pay $50,000 to the Property Group discussed in Chapter 17 of this Report.

Report of Inquiry into the Centenary House Lease 177

19 Hindsight

Terms of reference (a) and (b) direct me to consider whether movements and trends in commercial rates and leasing arrangements since the 1994 Inquiry, or any other matters, cast new light on the findings of that Inquiry, and whether the Centenary House lease is in line with leasing arrangements, whenever made, of a comparable

kind.

In Chapter 8, findings are made as to the fair market rent for Centenary House in the period 1993 to 2004; the findings reflect the state of the market in Canberra, especially in Barton, during those years. The following broad conclusions can be drawn from the movements in rents which occurred in the many leases reviewed by Mr Frank Egan, the independent valuer retained by this Inquiry:'

• In the years 1993 to 1995, there was very little or no upward movement in rents.

• In the years 1995 to 1999, there was no upward movement in rents and, in most of the years in this period, market rents were reduced in some cases as much as 12% a year.

• In the year 2000, there was a general increase in rents achieved.

• Since 2000, there have been increases but only to a small extent - 2% to 3% a year.

These conclusions are supported by the more general statistics provided by CB Richard Ellis Global Research & Consulting, 2 and by Colliers Jardine,' referred to in Chapter 7.

It is plain that, with the exception of perhaps 2000, in no year since 1991 have market rents for good-quality office accommodation in Canberra generally or in Barton risen by anything like 9%. Nor did those rents rise in the period 1991 to 2004, viewed as a whole, by an amount equivalent to 9% a year compound. The actuality has been spectacularly below the outcome for which the Commonwealth

had contracted in the Centenary House lease.

However, the question of whether the Centenary House lease transaction was prudent or reasonable from the Commonwealth's perspective must be judged as at early April 1992, having regard to facts, matters and circumstances known or reasonably expected to occur when viewed as at that date. That question is considered in Chapters 4 to 9. It is vital that hindsight not be substituted for foresight.

I ExRinEx99. 2 Ex 1, Ex J and Ex K in Ex 99. ExBBinEx99. Report of Inquiry into the Centenary House Lease 179

The evidence in the present Inquiry demonstrates that the Commonwealth's

contractual obligation in the Centenary House lease to pay rent in accordance with the lease's escalation provisions and market review provisions has resulted in a continuous and unchanging state of affairs whereby the Commonwealth has paid rent at a level substantially above the fair market rent for the Audit Office premises.

This fact, of itself and viewed in isolation, does not cast any new light on the findings of the 1994 Inquiry. It was almost certainly the case that, contrary to some of the evidence given in that Inquiry, the writing was already on the wall by mid to late 1994, but Commissioner Morling was not required to express, and did not express, any conclusions about the 1994 position.

Chapter 18 considers specific aspects of the 1994 Inquiry. Insofar as those matters are concerned, I have concluded that the evidence referred to and discussed in that chapter caused me to come to a view that differs from some of the views expressed by Commissioner Morling in 1994. In that sense, those matters have "cast new light on the findings of that Inquiry".

In relation to term of reference (b), the other leases tendered in evidence as being comparable with or a basis for the Centenary House lease are considered in detail in Chapter 9. As is clear from the conclusions reached, the Centenary House lease had no basis in any market transaction entered into before April 1992.

An analysis of subsequent transactions cannot assist in determining whether the Centenary House lease was market based. However, even if such transactions are considered, very few of them lend even slight support to the argument that the relevant market regarded the commercial arrangements embodied in the Centenary House lease as acceptable at any time.

What must not be lost sight of is the degree to which the Centenary House lease influenced subsequent leases, if at all. It is extremely likely that the Lend Lease Property Group, for example, would have used that lease as an indication of a rising market. But it is not possible to express any certainty about its effect. It remains a possibility that it did have some effect on subsequent leases.

To use the language of term of reference (b), the Centenary House lease is not "in line with" the vast majority of leasing arrangements of a comparable kind, whenever made.

180 Report of Inquiry into the Centenary House Lease

20

Other issues of concern

Chapter 4 discusses the approvals required for leases such as the Centenary House lease. Although the power to approve a lease under the Lands Acquisition Act 1989 had been delegated to the Australian Property Group's State Manager, ACT, the size of the Centenary House transaction, the identity of the lessor and the unusual nature of the lease's terms combined to make the transaction a matter which should have

been referred for ministerial approval - even on the basis of the erroneous statement of the total rent for the period of the lease in the minute prepared for approval by the State Manager, Mr Bruce Holden, who was on secondment to the Property Group at that time.

Mr Robert Ireland made two serious errors in calculating the total rent involved in the lease. The first was that he used the rent agreed to have been appropriate as at 1 January 1991 as the starting rent for the lease, instead of escalating it at 10.5% to the estimated commencement date. The second error was that he calculated the rent during the term Of the lease without escalating the starting rent at 9% compound over the 15-year term. The total rent was identified as $28,050,000, when it should have been just under $72 million.' This points to a serious shortcoming in the. approval process in operation at the time.

The Property Group was sold off to outside commercial interests in 1997,2 so there is little utility in making suggestions for how that organisation might improve its procedures.

It is nevertheless important to make the point that there was no guideline or legislative requirement imposed on the Commonwealth's decision makers in the Centenary House lease transaction to stand back from the transaction, once it had been agreed in principle, and to test the wisdom of it against the alternative of the Commonwealth itself acquiring an appropriate site in the Parliamentary Triangle and constructing a building of the size and quality of Centenary House.

The evidence is that the land cost and the construction and fit-out cost were expected to come to a total of about $20 million. A suitably qualified public servant or consultant to the Commonwealth should have been appointed to weigh up the relevant considerations and costs of proceeding by way of long-term lease from John Curtin House Ltd as opposed to the Commonwealth acquiring and developing a site itself. This person should have been required to report to the Minister in accordance with strict guidelines providing for when such a report is necessary.

The appendix to the minute referred to the two escalators but gave no indication of their application to the total rent shown. The actual figure is $71,963,057.67. 2 Letter from United KFPW Pty Ltd, 28 July 2004: Ex 120 at SUMM.019.000I.

Report of Inquiry into the Centenary House Lease 181

Although it was Australian Estate Management's responsibility to consider

whether the Audit Office's accommodation needs would be better and more appropriately met by a Commonwealth-owned building, this filter was not sufficient. In future, a more stringent evaluation of proposals such as the Centenary House lease should be required at ministerial level.

The proposal for the Centenary House lease was, at least in part, the result of a tension existing in 1991 and 1992 (and possibly still existing) between the following policies of government and market conditions:

• government's reluctance to commit expenditure to the construction of its own buildings

• the construction and finance industries' reluctance to build or finance the building of office accommodation - particularly in Canberra, where the Commonwealth is the major tenant - without a guaranteed return, which can generally only be assured by means of a pre-construction commitment by the Commonwealth to high or ever-increasing rents

• the government policies restraining increases in agencies' property expense budgets by reference to movements in market rentals across the whole country.

All other matters of concern are dealt with in the foregoing chapters.

182 Report of1nquiy into the Centenary House Lease

Appendixes

Appendix A Appendix B

Appendix C

Appendix D

Appendix B

Appendix F

Appendix G

Appendix H

Public discussion of the Centenary House lease 185

The 1994 Inquiry: terms of reference and findings 195

Documents 201

Photographs of Centenary House 235

Synopses of leases ....237

Schedule of leases prepared by the Property Group 259

A roadmap to the Report 261

The 2004 Inquiry 263

Appendix A

Public discussion of the Centenary House lease

There has been public discussion of the Centenary House lease in Parliament and the media from time to time since early 1992, when Liberal Senator Warwick Parer invited public scrutiny of the matter by issuing a media release entitled Labor 's Fifteen Year Rort. 1 The release received some publicity the next day in the Canberra Times.2

The lease has been regarded as newsworthy primarily because Centenary House is owned by John Curtin House Ltd, a company associated with the Australian Labor Party, and the premises were leased to the Commonwealth (for the use of the Australian National Audit Office) for what has been alleged to be an excessive rental, at a time when the Labor Party was in government. The possible political implications of these circumstances have led the Liberal—National Coalition to resurrect the matter a number of times. On two occasions when the matter was raised, during 1993 and 1994 and in 2004, the publicity given to the discussion was followed by the establishment of an inquiry into the circumstances surrounding the lease pursuant to the Royal Commissions Act 1902.

According to statements in the media and in Parliament, the genesis of the Centenary House lease was the financial pressure in the early 1990s on both major political parties (the Labor Party and the Liberal Party) following four federal elections between 1983 and 1990. Both parties were looking for ways to supplement their normal sources of income. In 1990 the Labor Party's National Secretary, Mr Robert Hogg, and the Liberal Party's Federal Director, Mr Andrew Robb, were quoted by the Sydney Morning Herald as saying their parties were looking at vacant sites in the Parliamentary Triangle with an eye to building bigger premises which could partly be let in order to generate income. 4

This Sydney Morning Herald report prompted a question in the ACT Legislative Assembly as to whether it was appropriate for ACT taxpayers to be supporting "campaign headquarters" for a major political party, 5 but the issue was not pursued. Nor does the question appear to have been reported in the media.

Senator Parer's media release was published when the negotiations for the lease of Centenary House were close to being finalised. The media release identified the Audit Office as the likely tenant, the length of the proposed lease, and the existence

15 January 1992 see Appendix C at C.9. 2 "ALP in rent rort, says Opposition", Canberra Times, 16 January 1992, p 3. The elections were held on 5 March 1983, 1 December 1984, 11 July 1987 and 24 March 1990.

"ALP and Libs look to greener pastures", Sydney Morning Herald, 22 October 1990, PS. ACT Legislative Assembly, Hansard, 24 October 1990, pp 4049-4050.

Report of Inquiry into the Centenary House Lease 185

of an unidentified yearly rent escalation clause. It was issued during the

parliamentary Summer recess and reported only in the Canberra Times, although it also attracted a critical, if jocular, reference in the Sydney Morning Herald two days later.6 Senator Parer himself raised the Centenary House lease during a Senate Estimates Committee hearing in April 1992. He asked officers of the Department of Administrative Services whether negotiations for the lease were still proceeding and was informed that they were.

The same issue was raised in Parliament on a number of occasions during the months following the signing of the agreement for a lease of Centenary House to the Commonwealth, dated 23 April 1992. Over about six hours during three days in May and June 1992, Liberal Senator Bronwyn Bishop questioned the then Government about the issue. 8 On 16 June, Senator Parer moved that the whole matter be referred to the Senate Standing Committee on Finance and Public Administration for inquiry. The motion was lost. 9 Media reporting of these events was perfunctory.

On 25 June 1992, Senator Bishop followed up with a further question in the Senate,' ° and later that day she tabled a report which had been commissioned by the Liberal Party from Price Waterhouse on comparable leasing arrangements in the ACT. In the report the Centenary House lease was described as being "extremely generous" to its owner." The claim by Senator Bishop that the Labor Party stood to gain a capital profit of $58 million during the lease was reported in at least one newspaper; 12 the claim was publicly denied by Mr Hogg on behalf of the Labor Party, who said the argument was "based on wrong facts, and the rest of it is therefore fallacious". 13

When Parliament resumed after its 1992 Winter recess, the Commonwealth Auditor-General, Mr John Taylor, appeared before Senate Estimates Committee B and, when questioned about the Audit Office's move to Centenary House, expressed his frustration at the delays by the Government in strengthening his independence .' 4 He asserted that, by the time he agreed to move into the new premises, the choice had been either move in or the Audit Office would not get its own premises consolidating all its staff. 15 He added that the Labor Party's ownership of the

6 "With Eggleton all over his face", "Stay in Touch" column, Sydney Morning Herald, 18 January 1992, p 24. Senate, Hansard, 2 April 1992, Estimates Committee D, p 6. S Senate, Hansard, 27 May 1992, pp 2729-2730; 28 May 1992, pp 2867-2887, 3000, 3957-3964; 1 June 1992, pp 3166-3168, 3192-3203. Senate, Hansard, 16 June 1992, Standing Committee on Finance and Public Administration, p 3679. '° Senate, Hansard, 25 June 1992, p 4595. ' Senate, Hansard, 25 June 1992, p 4620. 12 "ALP set to get $58m profit, say Libs", Sydney Morning Herald, 26 June 1992, p 5. " "Hogg rejects rumours of $58 million windfall", Australian, 27 June 1992, p 5. 14 Senate, Hansard, Estimates Committee B, 22 September 1992, p B2 10. ' Ibid,pB221. 186 Report of Inquiry into the Centenary House Lease

building was not of itself a problem, so long as there was a total separation within

the building. 16 He rejected the conclusions of the Price Waterhouse report, saying that he had received advice from two government agencies the Australian Property Group and the Australian Valuation Office that the Centenary House lease was not biased in favour of the owner. 17 Other Audit Office officers expressed confidence that the lease represented "good value" and asserted that the 9% annual escalation clause had in fact been negotiated down from a higher figure. 18

The media do not appear to have reported any of these statements, but two months later the Sydney Morning Herald published an interview with Mr Taylor, in which he was reported as saying that, because the Government had failed to give his office its full backing, he could "no longer guarantee the safety of the public

purse'

Three days before the federal election in March 1993, a member of the Coalition front bench in the House of Representatives, Mr Peter Reith, promised an "immediate examination of the internal government records" concerning the Centenary House lease should the Coalition gain office? ° On the day before the

election, the Sydney Morning Herald published a feature article, "Labor's nice little earner", based on a Baillieu Knight Frank report commissioned by the Audit Office. 2'

Centenary House was officially opened by the Prime Minister, Mr Paul Keating, three months after the election. The Age made extensive reference to the controversy surrounding the lease in its report of the opening ceremony. 22 The Canberra Times, the Australian and the Sydney Morning Herald all ignored the matter in their reports. 23

In September 1993, in Senate Estimates Committee D, Senators Bishop and Parer questioned the Auditor-General about the Centenary House lease. 24 Mr Taylor said the Department of Arts and Administrative Services had placed him in a predicament by agreeing to the 9% rent escalation clause (of which he had been

16 Ibid,pB22l. 17 Ibid, p B220. 18 Ibid. p B227. 19 "Govt risking scandal, auditor warns", Sydney Morning Herald, 21 November 1992, p2. 20 "Libs charge ALP with 'property scam' at HQ", Canberra Times, 10 March 1993, p 1 21 Sydney Morning Herald, 12 March 1993, p 11. 22 "PM opens Labor's new HQ", Age, 19 June 1993, p 3. 23 "Combe comes in from the cold at ALP's new non-pastiche headquarters", Canberra Times, 19 June 1993, p 3; "Combe a mate again after 10 years in the cold", Australian, 19 June 1993, p 3; "Old faces grace ALP opening", Sydney Morning Herald, 19 June 1993,p 5. 24 Senate, Hansard, 2 September 1993, Estimates Committee D, pp D250-253, D272-279. Report of Inquiry into the Centenary House Lease 187

unaware when the lease was entered into by the Commonwealth), whereas the

Department of Finance thought the appropriate increase in rental should have been only 1%.25 The Audit Office would therefore face an "absolutely disastrous" financial squeeze and be unable to fund its activities in two years' time, he said, unless the Government provided extra funds. 26 He also said that at the time the

lease was entered into he did not know it included a ratchet clause: "I thought I was as safe as a bank".27

This evidence received considerable media attention. The following weekend, the Sun-Herald published an article under the heading "ALP deal cripples Audit Office".28 The Monday after that, the ABC's 7.30 Report telecast excerpts of Senator Bishop questioning Mr Taylor during the previous week's Committee hearing.29 Two weeks later, in an editorial the Sydney Morning Herald called for an independent inquiry to examine the whole matter - in particular, the impact the lease would have on the Auditor-General's operations in the future. 3°

Senate Estimates Committee D returned to the issue later the same month, when officers of the Valuation Office were questioned. Mr Malcolm Coleman defended the lease as being in line with market conditions at the time, 31 quoting extensively from reports prepared by his office, the Property Group and a number of non-government real estate organisations. He sought to make it clear that negotiation of the actual lease was the responsibility of the Property Group and that his office had merely advised on the rent component. 32

In October, another member of the Coalition front bench, Mr Peter Costello, raised the issue in the House of Representatives, asserting that "the Minister for Finance is fiddling, audits are burning and the Labor Party is profiting. The situation stinks" .33 In November, it was reported in the media that the Auditor-General had himself set up an independent inquiry, chaired by the Auditor-General of South Australia, but that the Government was unhappy with aspects of that

inquiry, including the appointment of an "outsider" to conduct it. 34

On 9 November 1993, members of Senate Estimates Committee D questioned officers of Australian Estate Management, the Property Group, the Valuation Office

25 Ibid, p D273. 26 Ibid, pD276. 27 Ibid. p D274. 28 Sun-Herald, 5 September 1993, p 5. 29 ABC Television, 6 September 1993. 30 "The ALP as landlord", Sydney Morning Herald, Editorial, 20 September 1993, p 12. 31 Senate, Hansard, 24 September 1993, Estimates Committee D, p D293-298. 32 Ibid, p D297. 33 House of Representatives, Hansard, 5 October 1993, p 1645. 34 "Minister accused of interfering in inquiry", Sydney Morning Herald, 6 November 1993, p 7; "Red ink, red faces, red rag", Sydney Morning Herald, 6 November 1993, p 35. 188 Report of Inquiry into the Centenary House Lease

and the Audit Office about the process which had led to the lease.

35 Australian

Estate Management revealed it had initially withheld approval of the Audit Office proposal to move to Centenary House because it had preferred that the Audit Office move into York Park (a proposed Commonwealth development in the Parliamentary Triangle), but that this decision had been reversed when it became clear that completion of that development would come too late for the Audit Office's purposes. The Property Group defended the Centenary House lease, saying the escalation clause had been negotiated down from 12% to 9% and that 9% was in line with the market at the time. The inclusion of a rental escalation clause was defended as ensuring that there would be no political ramifications every time there was a rent review. The Property Group's view was that the lease represented good value for the Commonwealth over its full term. It did, however, concede that there was only one other Commonwealth lease in the ACT with a fixed 9% escalation clause at the time and none for a period as long as 15 years. It was claimed by the Property Group that at all "material" times the Audit Office was aware that the

lessor of the premises was the Labor Party, although the absence of any reference to that fact in the correspondence could not be accounted for. The Valuation Office was questioned as to the basis on which the annual 9% cumulative rental increase had been reached.

The Auditor-General also appeared before the Committee. 36 He told the Committee that his office had not known that Centenary House was owned by the Labor Party until March 1991 and that the Property Group had delayed telling his office of this involvement. He had been unable to find any evidence that his office

had been informed that there was a fixed 9% rent escalation until after the Commonwealth had been committed to the lease. There was only sporadic media reporting of this Senate Estimates Committee hearing, although the Sydney Morning Herald supported the Auditor-General's call for an independent chairman of any

inquiry. 37

On 6 December 1993, the Committee tabled its report in the Senate . 38 The majority report that of the government (Labor Party) members concluded that, on the basis of the evidence before the Committee, the "allegations and imputations of impropriety (or worse) cannot be substantiated". It did add that there were "questions of serious moment [which] remain unresolved":

[T]he current state of this matter leaves serious allegations standing against the conduct and professionalism of the Australian Property Group

31 Senate, Hansard, 9 November 1993, Estimates Committee D, pp D433-491, D499-522. 36 Senate, Hansard, 9 November 1993, Estimates Committee D, p D483-510. 37 "Canberra's red ink affair", Sydney Morning Herald, Editorial, 15 November 1993, p 12. 38 Senate Estimates Committees A, B, C, D, E & F, Reports to the Senate on Departmental Estimates for the Year 1993-94 and Expenditure under the Advance to the Minister for Finance for 1992-93, Parliamentary Papers No 456 of 1993, pp 129-140. Report of Inquiry into the centenary House Lease 189

and the Australian Valuation Office. Equally, it leaves serious questions

relating to the Australian National Audit Office's management of the move to new accommodation and so has the potential to detract from the credibility of this important institution.

The majority report recommended that an inquiry be conducted jointly by three independent individuals the Auditor-General of South Australia, the Audit Office's statutory Independent Auditor, and a third independent person. The minority report - that of the opposition (Coalition) members also concluded that the evidence raised serious questions about the competence and professionalism of the two government agencies responsible for negotiating the Centenary House lease, but it favoured a wide-ranging inquiry by an investigator appointed by a Senate standing committee with the assistance of counsel . 39 There appears to have been no media interest in this report.

Only a few questions about the lease were asked in both chambers of Parliament during the first part of l994; ° these were followed by limited media coverage concerned mainly with the difficulties the Government was experiencing in having the inquiry that had been set up by the Auditor-General at the end of 1993 begin its work. These difficulties were effectively overcome when, on 9 May 1994, Mr Kim Beazley, the then Minister for Finance, announced there was to be a Royal Commission into the circumstances surrounding the lease and that it was to be conducted by the Hon Trevor Morling QC. Certain aspects of the subsequent proceedings of that Royal Commission attracted some media attention for

example, the Auditor-General's continuing disagreements with the Government, 41 possible breaches by the Audit Office of government regulations, 42 and the propriety of a payment of $50,000 proffered by the builder (the Lend Lease Property Group) .43 There was no substantial reference in Parliament to the proceedings before the Royal Commission until after Commissioner Morling's report was tabled on 25 October 1994. On 8 December 1994, Mrs Bishop, by then a member of the House of Representatives, told the House that "the problem with Centenary House remains precisely the same". 44

Between December 1994 and November 2000, there appears to have been no reference to the Centenary House lease in Parliament or in the media, notwithstanding the change of government in March 1996 and the 1993 pre-election promise by Mr Reith of an "immediate examination of the internal government records" should the Coalition win office.

39 Ibid,pp 141-150. 40 Senate, Hansard, 23-24 March 1994, pp 2067, 2216; House of Representatives, Hansard, 24 March 1994, p 21 17. 41 "Auditor's rift with Willis highlighted", Canberra Times, 21 June 1994, p 5. 42 "Lease may be breach of rules", Sydney Morning Herald, 22 June 1994, p 7. 43 "APG was offered $50,000 commission, inquiry told", Canberra Times, 23 June 1994, p 4; "ALP offered cash for tenant: witness", Sydney Morning Herald, 23 June 1994 ,p 3. 44 House of Representatives, Hansard, 8 December 1994, p 4313. 190 Report of Inquiry into the Centenary House Lease

Almost four years after the change in government, on 22 November 2000,

Liberal Senator George Brandis raised the matter of the Centenary House lease during a committee meeting in the Senate, when it was disclosed that the top floor of Centenary House had been sublet to the Department of Communications, Information Technology and the Arts at a rent of $260 per square metre, whereas the Audit Office was then paying a rent of $583.30 per square metre to John Curtin House Ltd for that floor. 45 There does not appear to have been any media reporting of this development.

On 30 May 2001, Senator Brandis questioned the Department of Finance officers appearing before the Senate Finance and Public Administration Legislation Committee. He was told that John Curtin House Ltd had declined to renegotiate the Centenary House lease and that from September that year the Audit Office would be paying $750 per square metre, whereas the market rate for premium space in Canberra at that time was only $215 per square metre. 46 A fortnight later, the Sydney Morning Herald published an article entitled "ALP rakes in 3 times the

market rate" .47 The following day, Senator Eric Abetz, Special Minister for State, released a press statement which was based on the material the Committee had heard, 48 but it does not appear to have been reported in the media.

On 19 February 2002, Senator Brandis again questioned Department of Finance officers appearing before the same Senate Committee . 49 He was informed that both the Australian Government Solicitor and a private legal firm had concluded there would be no net benefit to the Commonwealth by moving the Audit Office out of Centenary House. Senator Brandis said that by September 2002 the Audit Office would be paying "something approaching four times" the market rate for its

premises. There were no media reports of this. Later that year, a number of Coalition Ministers - mainly Mr Tony Abbott (the Minister for Employment and Workplace Relations) and Senator Abetz answered questions about the Centenary House lease from their Coalition colleagues in the House of

Representatives and the Senate. 50 This attracted almost no media interest.

In February and May 2003, Senator Brandis continued to ask questions in the Senate Finance and Public Administration Legislation Committee, drawing attention to the difference between the rent then being paid by the Audit Office for Centenary

45 Senate, Hansard, 22 November 2000, Finance and Public Administration Legislation Committee, pp 49-52, 46 Senate, Hansard, 30 May 2001, Finance and Public Administration Legislation Committee, pp 379-389. 47 Sydney Morning Herald, 14 June 2001, p 6. 48 Press statement by Senator Eric Abetz, Special Minister for State, "Labor rent rort costs taxpayers millions", 15 June 2001. ' Senate, Hansard, 19 February 2002, Finance and Public Administration Legislation Committee, pp 158-162. ° House of Representatives, Hansard, 23 September 2002, pp 6964-6965, and 26 September 2002, p 7395; Senate, Hansard, 23 September 2002, pp 4608-4609 and 26 September 2002, pp 4995-4996. Report of Inquiry into the Centenary House Lease 191

House ($799.15 per square metre) and the rent being paid for comparable premises

in Canberra ($260 to $340 per square metre) . 5' Again, these questions attracted no discernible media interest. From June to September 2003, the Coalition Government was at times subjected to hostile parliamentary and media criticism concerning two matters the exercise of ministerial discretion in the issuing of residence visas and the propriety of the Government's decision to impose an excise on ethanol for fuel and pay an equivalent rebate to domestic producers, which would help protect the local business of the Manildra Company group. Coalition Ministers responded in part with repeated criticism of the benefits the Centenary [louse lease was providing for the Labor Party. 52 Although there was considerable media publicity about both the visa and the ethanol matters, the criticism of the Centenary House lease was not reported.

Two days after the change in the leadership of the Labor Party at the end of 2003, in answer to a question from Senator Brandis, Senator Abetz formally challenged Mr Mark Latham, the new Leader of the Opposition, to renegotiate the Centenary House lease. He also tabled a copy of a letter he had sent earlier that day to Mr Latham requesting such a renegotiation. 13 After the Christmas recess, and following the publicity early in 2004 about the Government's acceptance of Mr Latham's proposal to reform the parliamentary superannuation scheme, Coalition members again asked questions about the Centenary House lease, 54 and the matter once more started to attract media interest. 55

' Senate, Hansard, Finance and Public Legislation Committee, 10 February 2003, pp 145-147; 27 May 2003, pp 302-305; 29 May 2003, pp 657-658. 52 Senate, Hansard, 17 June 2003, p 11,638; 19 June 2003, pp 11,996-11,997, 12,009- 12,011; 14 August 2003, pp 13,659-13,660; 18 September 2003, pp 15,571-15,572; House of Representatives, Hansard, 17 September 2003, p 20,306; 18 September 2003, pp 20,507-20,509. 53 Letter sent 4 December 2003, referred to in media release by Senator Abetz, "Exposed: Labor's $7,000 a day rort", 17 February 2004. 54 House of Representatives, Hansard, 17 February 2004, p 24,913; 19 February 2004, p25,304. 55 For example, Alan Ramsay, "A chronic pox on Labor's house", Sydney Morning Herald, 21 February 2004, by Alan Ramsay, p 13; Sunday program, Channel Nine network, 22 February 2004, Attorney-General Mr Philip Ruddock interviewed by Laurie Oakes. 192 Report of inquiry into the Centenary House Lease

Questions were asked in Parliament throughout March 2004 and again in May.

56

The questions were directed mainly to Mr Abbott, who described the terms of the Centenary House lease in terms such as "a smash and grab raid on the Australian taxpayer", "an obscene monument to political greed", "the rent rort rip-off', "Labor gets the goldmine, the taxpayers get the shaft", "the rolled-gold rip-off', "the lease fleece" and "the Mt Rushmore of rip-offs". These replies attracted some media attention .57 On 25 May, Senator Brandis raised the matter of the current rental being paid under the lease in the Finance and Administration Committee and was informed that it was $791.88 per square metre but from September would rise to $863.15 per square metre.58

Earlier, on 4 March 2004, the Senate had passed without opposition a motion by Australian Democrats Senator Andrew Murray calling on the Government:

to appoint a member, or a retired member, of the judiciary to review the findings of the Royal Commission of Inquiry into Leasing by the Commonwealth of Accommodation in Centenary House, conducted by the Honourable TR Morling, QC in 1994, in the light of later evidence,

particularly with regard to movements and trends in commercial rates and 59 leasing arrangements since 1994. On 20 June 2004, the Attorney-General announced the decision to establish another Royal Commission into the Centenary House lease. 6° There was almost no media interest in the Inquiry before the public hearings began and only sporadic

interest during the Inquiry itself.

56 Senate, Hansard, 2 March 2004, p 20,542; 3 March 2004, pp 20,700-20,702; 8 March 2004, pp 20,948-20,949; 11 March 2004, pp 21,394-21,396; House of Representatives, Hansard, 1 March 2004, pp 25,403-25,405; 2 March 2004, pp 25,525-25,529; 3 March 2004, pp 25,777-25,778; 4 March 2004, pp 26,035-26,036; 8 March 2004 pp 26,158-26,159; 9 March 2004, pp 26,276-26,277;

10 March 2004, pp 26,447-26,448; 11 March 2004, pp 26,650-26,651; 23 March 2004, pp 26,911-26,913; 24 March 2004, pp 27,082-27,083; 25 March 2004, pp 27,288-27,289; 30 March 2004, pp 27,554-27,555. House of Representatives, Hansard, 13 May 2004, p 28,665. 57 For example, "ALP accused of stealing and extortion", Canberra Times, 18 February

2004, p 4; "The Centenary House scandal", crikey.com.au , 11 February 2004; "Not the final Curtin", Age, 4 March 2004, p 4; ABC Radio National, The World Today, 4 March 2004. 58 Senate, Hansard, 25 May 2004, Finance and Public Administration Legislation

Committee, pp 40-43. 59 Senate, Hansard, 4 March 2004, pp 20,786-20,787. 60 Inquiry to Examine Centenary House Lease, Press release by the Attorney-General, Mr Philip Ruddock, 20 June 2004. Report of Inquiry into the Centenary House Lease 193

Appendix B

The 1994 Inquiry: terms of reference and findings

Terms of reference

On 16 May 1994, the Hon Trevor Morling QC was appointed pursuant to the Royal Commissions Act 1902 to inquire into the following:'

(a) the role of the Australian National Audit Office, the Australian Property Group, the Australian Valuation Office, the Australian Estate Manager, the Department of Finance and any other agency considered relevant, in the lease of Centenary House to the Commonwealth, and in particular, addressing the following matters:

(i) the appropriateness of tender and selection processes followed in identifying suitable accommodation for the Australian National Audit Office, with specific reference to the selection of Centenary House;

(ii) whether the processes followed by the Australian National Audit Office, the Australian Property Group, the Australian Valuation Office and the landlord, individually and collectively, resulted at that time, or at any time might result, in any party to the lease for Centenary House obtaining unfair and/or above market commercial advantage from any aspect of the arrangement;

(iii) whether the instructions of the Australian National Audit Office to the Australian Property Group, as regards the accommodation options, enabled the Property Group to test a sufficiently wide market so as to enable the Australian

Property Group to pursue a truly competitive lease arrangement;

(iv) whether all the Commonwealth agencies concerned acted in accordance with the Government policies applying at the time;

(v) whether the Australian Property Group, as the Commonwealth property agent, fulfilled its responsibility to the Australian National Audit Office, including in relation to the establishment of the lease terms;

(vi) whether, taking into account the nature and effect of the resource agreement between the Australian National Audit Office and the Department of Finance in relation to the financing of the lease, appropriate steps were taken by the

Letters Patent witnessed by the Governor-General and entered in the Register of Patents, 16 May 1994.

Report of Inquiry into the Centenary House Lease 195

Australian National Audit Office and the Department to

ensure that the Australian National Audit Office could • fund the lease commitments on Centenary House and meet its other obligations;

(vii) whether all of the Commonwealth agencies involved acted in the best interests of the Commonwealth, including so as to achieve value for money;

(viii) the longer term funding implications for the Australian National Audit Office of the Centenary House lease;

(ix) the options available for action in relation to the funding of the Centenary House lease; and

(x) any other matters considered relevant to the public interest in the matter; and

(b) whether any changes to existing arrangements are necessary or desirable to avoid similar occurrences in the future.

Findings

On 25 October 1994 Commissioner Morling presented to the Governor-General the Report of his Inquiry. In broad terms, he made the following findings:

(1) The terms of the Centenary House lease were reasonable and not unduly generous to the lessor.' They resulted from arm's length negotiations between the lessor and the Australian Property Group on behalf of the Commonwealth and after advice had been received from the Australian Valuation Office. 3

(2) No party to the lease of Centenary House obtained unfair or above-market commercial advantage from the lease. 4

(3) As to individual terms of the lease considered:

(a) The length of its term, although longer than most leases taken by the Commonwealth, was not disadvantageous to the Commonwealth in the circumstances. 5

(b) The base rent was a fair market rental for a building such as Centenary House. 6

2 Report of the Royal Commission of Inquiry into the Leasing by the Commonwealth of Accommodation in Centenary House (The Hon Trevor Morling QC, Commissioner, AGPS, Canberra), Summary, par 2; text, Chapter 3. 1994 Inquiry Report, Summary, par 2; text, pars 4.1,43-51. Ibid, Summary, par 6; text, par 11.1. Ibid, Summary, par 3(a); text, pars 4.12-15. 6 Ibid, Summary, par 3(b); text, pars 4.16-21.

196 Report of Inquiry into the Centenary House Lease

(c) The rent escalation factor to the date of occupation

(10.5%) and the

rent escalation factor for the annual rent thereafter (9%) were well supported by historical rent movements. 7 In the short term, the 9% annual rental escalation factor proved advantageous to the lessor, but this will not necessarily prove to be the case in the long tenTh 8

(d) The rent review clause, although on its face generous to the lessor, was not unreasonable when considered with the 9% annual rent escalation clause; it was neither unduly generous to the lessor nor disadvantageous to the Commonwealth. 9

(e) The contribution by the lessor of $400,000 to the lessee's costs of fit-out operated in favour of the Commonwealth and effectively reduced the annual rent escalation by about 0.5% per annum.' °

(4) There was no evidence to suggest that any of the Commonwealth officers who took part in the negotiations for the lease did not carry out their duties with competence and integrity." All Commonwealth agencies involved acted in the best interests of the Commonwealth. 12 The Commonwealth did

not fail to achieve value for the money it expended, or is likely in the future to expend, on the lease. 13 The Australian National Audit Office could have occupied less expensive accommodation elsewhere, but such 14

accommodation would not have been as suitable for its

However, the Audit Office failed to give sufficient attention to the funding of future rent payable under the lease. 15 In the events which happened, the Audit Office (although justified in seeking to move to more suitable premises) did not take all appropriate steps to ensure that it could fund its

commitment under the lease and meet its other obligations. 16 The Audit

Office should have given more attention to its ability to fund future rent payable under the lease should the rent escalate beyond the funds which would become available to it under the new financial arrangements for the payment of rent of which it had received notice. 17 The Audit Office had

incorrectly assumed that any increase in its costs of accommodation in a suitable building at market rental would be funded by an appropriate adjustment to its annual appropriation under the new property

(5)

7 Ibid, Summary, par 8 Ibid, Summary, par Ibid, Summary, par '° Ibid, Summary, par Ibid. Summary, par 12 Ibid, Summary, par 13 Ibid. Summary, par 14 Ibid, Summary, par ' Ibid. Text, par 6.1. 16 Ibid, Summary, par 17 Ibid, Summary, par 3(c); text, pars 4.22-36.

4; text, pars 4.36, 36. 3(d); text, pars 4.37-41. 3(e); text, par 4.42. 5.

15; text, par 12.1. 15; text, par 12.3. 16; text, pars 12.4-8.

10; text, par 6.18. 7; text, pars 6.13-16

Report oflnquiiy into the Centenary House Lease 197

arrangements.' 8

The Audit Office did not seek exemption from the new property arrangements, as it could have, and did not involve the Department of Finance in the process of deciding the rent. 19 Although the Audit Office calculated that it could effect considerable efficiencies by moving to Centenary House, it did not appear to have considered whether it could have effected similar efficiencies by moving to less expensive premises which were available.20

(6) The Department of Finance did not take steps to ascertain what the new rental arrangements would be in relation to Centenary House. 2'

(7) The Audit Office's budget for its property operating expenses will be insufficient to fund its total lease obligations as from 1995-96, and the shortfall will increase markedly during the term of the lease. It will have to curtail its audit activities unless it can greatly reduce its operating costs or obtain additional fundrng:' The Department of Finance and the Audit Office should work together to reach an agreed position on the existing levels of funding commitments against funding requirements. It is important that the Auditor-General's capacity to perform his statutory functions should not be impaired. 23

(8) The Audit Office gave adequate instructions to the Property Group in relation to its accommodation. needs. 24 There was nothing inappropriate in the tender and selection processes followed in identifying suitable accommodation for the Audit Office; the fact that Centenary House was owned by interests associated with the Australian Labor Party did not make it unsuitable to be occupied by the Audit Office. 25

(9) The Property Group gave appropriate advice and fulfilled its responsibilities to the Audit Office regarding the leasing of Centenary House. There was, however, a lack of formality in the advice it gave the Audit Office as to the terms of the lease. 26

(10) There was a failure to comply with s 40(3) of the Lands Acquisition Act 1989, which required a statement describing details of the Centenary House lease to be laid before each House of the Parliament within a particular time, but this failure was inconsequential. 27 There was a possible technical

18 Ibid. Summary, par 7; text, par 5.12. 19 Ibid, Summary, par 9; text, pars 6.11-12. 20 Ibid, Summary, par 17; text, pars 6.22, 12.4-8. 21 Ibid. Summary, par 7; text, par 6.16. 22 Ibid, Summary, par 19; text, par 14.2. 23 Ibid. Summary, par 20; text, pars 14,5-6. 24 Ibid, Summary, par 11; text, par 7.20. 25 Ibid, Summary, par 12; text, par 8.5. 26 Ibid, Summary, par 14; text, pars 10.5-6. 27 Ibid, Summary, par 18; text, par 13.18. 198 Report of Inquiry into the Centenary House Lease

breach of r 44B(d)(iii) of the Finance Regulations, but the application of

r 44113 to future commitments under long-term contracts is not clear. Consideration should be given to amending the regulation to make the responsibilities it imposes clearer .21 Otherwise, no party acted in breach of government policies as reflected in Commonwealth legislation and regulations. 29

(11) The offer made by the representative of John Curtin House Ltd (as the lessor of Centenary House) to the Property Group to pay $50,000 was intended to be in the nature of an agency commission, and it was declined. It should not have been offered to the Property Group, but it had not been intended to benefit any Commonwealth officer. 30

(12) The Property Group should make provision in its procedures to ensure that its clients are made aware of the name of the prospective lessor at an early stage of negotiations for a lease, since there may be other Commonwealth agencies (for example, the Australian Electoral Commission) which would

regard their occupation of property owned by a political party as inappropriate. 3'

(13) The Department of Administrative Services should address the problem that the Property Group may have a conflict of interest in attempting to serve both Australian Estate Management as landlord and a Commonwealth agency as a tenant. 32

(14) The Commonwealth should consider whether it can take any action to promote more favourable market conditions so far as the provision of office accommodation in Canberra is concerned. 33

(15) The Property Group and the Valuation Office should consider improving the mechanism for resolving disputes as to rent reviews under leases containing rent review clauses. 34

28 Ibid, Summary, par 23; text, par 13.10. 29 Ibid, Summary, par 23; text, Chap 13. 30 Ibid, Summary, par 1; text, pars 3.8-9. 31 Ibid, Summary, par 21; text, par 15.8. 32 Ibid, Summary, par 22; text, par 15.10. u Ibid, Summary, par 24; text, par 16.6. 34 Ibid, Summary, par 25; text, par 16.7. Report of Inquiry into the Centenary House Lease 199

Appendix C Documents

The following documents were provided to the 1994 Inquiry:

C-1 Mr Turner's file note of meeting held on 25 June 1991

C.2 Mr McFadden's "Opportunity Analysis" document dated July 1991

C.3 Letter from Mr Collins (Australian Property Group) to Mr McCann (McCann and Associates) dated 17 September 1991

CA Estimates Memorandum 1991/32 issued 17 October 1991

C.5 Letter from Mr Ireland (Australian Property Group) to Mr Jeffress (Australian Valuation Office) dated 1 November 1991

C.6 Mr McCann's spreadsheets containing rent information and handwritten information added by Mr Jeffress

C.7 Valuation report prepared by Mr Jeffress (Australian Valuation Office) dated 27 November 1991

C.8 Letter of intent from Mr Ireland (Australian Property Group) to Mr McCann dated 3 December 1991

C.9 Senator Parer's press release dated 15 January 1992

C.10 Resource agreement between the Audit Office and the Department of Finance dated 27 March 1991

Report of Inquiry into the Centenary House Lease 201

C.1 Mr Turner's file note of meeting held on 25 June 1991

Mr Pe- .n Mr'ee

ANAO WPNP - MEETING 25 JUNE 1991

The following officers attended a meeting at Medibanic House Woden to discuss the ANAO WTNP memorandum:

Eddy Wojcik Ian Joyce (D&G) Wayne Turner (FM) Libby Kalis (FM)

Bob Morison (ANAO) Frank Campbell (ANAO).

Mr Wojcik opened the meeting by suggesting that we consider the Sydney and Brisbane proposals before looking at the Canberra matter.

First, some comments were provided on the current markets and the tactics that real estate agents are taking to gain business:

the provision of free fitout, rent free periods etc. the fact that lease contracts needed close scrutiny as some involve escalating rent in later years - some rents may be tied to "market rates" on review, some are "subject to negotiation" or are subject to growth in future years; some agreements have 'secret' clauses; fixed rates of increases may be dangerous; the wording of rent reviews needs to be watched.

Mr Wojcik also mentioned that under POE into Running Costs the Lease amounts would be subject to a deflator and the ANAO would be expected to live within the estimates. If ANAO wanted property that was more costly it would be expected to meet the cost from its existing Running Costs, borrowing from future years where necessary, and would not be encouraged to come to the Budget for supplementation. 1:2. P,4 Lft ave/I AO

202 Report of Inquiry into the Centenary House Lease

C.1

Mr Turner's file note of meeting held on 25 June 1991 (page 2)

Sydney

The figures provided by ANAO were discussed. The move by ANAO is a forced move as the owner will not be extending the lease.

The costings provided show a favourable position for ANAO; the free rent and free fitout add to the -vl" --Uj favoprability of the poposal. ANAO were advised that the Sydney matter would not be required to

proceed through WTNP as there was no net requirement for funds - ANAO were asked, however, to examine any proposed leases closely as it was in their interests to avoid 'unforseen' large obligation in the longer term.

Brisbane

The Brisbane proposal involves an increased cost to the Budget. ANAO appear to favour a more suitable location which will include: located with auditees;

better standard of accommodation ie ACS standards; two year rent free and $180,000 worth of fitout; better access to the building.

The new rental would seem around 47% increase on the existing location is (207,000-134,000)/134,000.

ANAO were advised that we would like to see any report done on the condition of the building to determine if the Budget might fund the move, otherwise we would favour funding via absorption within Running Costs.

Canberra

The ANAO officers were advised that the issue of the proposed move from Medibank House to another building would be one that would need to proceed through the New Policy process; this was based on the presumption that the building would be built with the intention of the owner recovering the building costs, by way of the rentals, in the first few years eg 7-10 years. The ANAO would enter into a precomitment lease. Also it was thought that any proposed move by Commonwealth agencies into new buildings and/or buildings in the area of the Parliament would be preferred to be considered by the Government; the ANAO situation was discussed in the Sheridan review - the Government's response was that there was no compelling reasons why the ANAO should be located in the Parliamentary area.

203 Report of Inquiry into the Centenary House Lease

o

LV r .5

, -j

V.

4v 3-1- ;.s pflJ

C.1 Mr Turner's file note of meeting held on 25 June 1991 (page 3)

Vi

ANAO clarified the position with the Section 22 proposal; the ALP and ACTU were arranging the building of an ALP HQ and want a tenant that will be likely to reside in the accommodation for a long period. The land apparently belongs to the ACT and we were shown a brochure with a sketch of the proposed building. The ALP and ACTJ would locate in a small portion of the accommodation and the ANAO would have about 6,000sqm.

The assumed rentals which ANAO used ($320 sqm) were provided by APG but seemed on the low side for this location and ANAO were asked to examine the matter to see if a revised estimate should be used and also to determine the basis of increases on rent reviews. If the rent reviews were to be based on the existing market rates then the rental could skyrocket as property rental rates around the area are high compared to Medibank House and would be expected to remain higher than the Woden area.

ANAO were asked whether DEET were likely to leave the Medibank Rouse thus giving ANAO occupation of the whole building -. ANAO advised that DEET personnel, although they work on the lower floors, do have to access ANAO areas to get to the amenity areas; they said DEET would not be leaving as they had their computer installation in the building. Mr Joyce thought it strange that the owner would not have offered DEET an arrangement to vacate so that he could be assured that the ANAO would stay. Also, there is other available office space in the area that might be suitable for DEET.

Mr Joyce undertook to provide details, for FAES Section, of market rents for other buildings around the Section 22 area.

ANAO MEMO OF 27 June 1991

ANAO provided further details of the WTNP request in a abetter' format; although the memo contained a few typos (the typos and miscalculations were corrected in yet another memo of 28 June). The memos indicate that the Sydney proposal is a slight reduction in cost ($7,000pa POE Current), the Bisbane proposal an increase ($75,000pa POE Current) and the Canberra proposal a reduction in costs ($361,000pa POE Current). The costings of the leases for Section 22, however, were maintained at the assumed rental of $320 per square metre per annum; no indication was provided that they had taken the issue any further with APC.

Ii

204 Report of inquiry into the Centenary House Lease

C.1

Mr Turner's file note of meeting held on 25 June 1991 (page 4)

S2 61

I

On 2 July Mr Joyce provided a figure for the NCPA rental on Brisbane Avenue ($340). He said a rent review was done in March 1991. He would expect that other locations around the area would be similar and advised that he expected that the Woden area would be lower than the $320 suggested by ANAO. He may provide one other rental figure for the Barton area in the near future.

The simulation indicates that the lease payments for the Section 22 location could be substantially (over P a quarter of $1 million ongoing) greater than the existing costs of ANAO accommodation in Canberra. Likewise, if existing rents of the ANAO existing Canberra accommodation and the S.22 rent of $340sqn rose by the same rate per annum, the cost effectiveness result would be similar (ie negative).

Also, it should be noted that the ANAO did not include the capital costs of current and proposed Canberra accommodation in the spreadsheets included in their memo; the effects of the capital costs have been included in the attached spreadsheets based on the information provide(.in the ANAO various memos.

The spreadsheets show that the proposal to relocate to accommodation in Section 22, Barton is highly unlikely to be cost effective notwithstanding the reduction in space involved in the proposal.

I.-Pre sent Value analysis of the options has been present" the spieadsheet using a discount rate of 10%. -

The simulation on the attached spreadsheets

assumes a higher rental for the Barton area compared to the Woden area; the information that we have is that the rental for Medibank House is expected to be $2705qm for the upper floors and in the Barton area rentals are around $340sgxn. Estimates used in the simulation, therefore, for Medibank House range from $270sqm in 1991-92 to $320sqm beginning in 1993-94. For S.22 the rentals used are $340sqm in 1992-93 and $400sqm starting in 1993-94.

Report of Inquiry into the Centenary House Lease 205

C.1

Mr Turner's file note of meeting held on 25 June 1991 (page 5)

I recommend that the Mr McPhee brief the Secretary in terms of the attached draft which favours the Sydney and Brisbane proposals but does not support the Canberra proposal.

Wayne Turner FAES Section July 1991

206 Report of Inquiry into the Centenary House Lease

C.2

Mr McFadden's "Opportunity Analysis" document dated July 1991

LEND LEASE DEVELOPMENT

A!l' BUILDiNG, BARTQN

OPFORTLJNlTYANAySIS

July 1991

jC OMMERCIAL POTE1J. IN A TMGOOP' MARKET

Potential sale value L.ss development costs

Lass Land

2, CURRENT STATUS

$25.Om $18.0m

$ 7.0m $ 25xn(to ALP)

$ 45m

• Tenant identified • Land rent can be paid le no capital outlay • ALP must borrow to develop or seek equity partners • ALP has John Curtin House as an asset • Pro1.ieLty market is bad - investors out of market • Now is not time to sell • Difficult for developer to realise profit

L ALP DEVELOPMENT CRERIALssumptipns)

• ALP are an owner builder • ALP don't have to pay for land or development profit • ALP seeking income producing property ie a good cash flow • ALP wish to retain ownership long term (100% equity) • ALP do not wish to sell the property for development profit on completion

of construction • ALP do not wish to sell for capital gain in the next 10-15 years • ALP do wish to develop a property which will retain its value and demonstrate potential for capital gain • ALP wish the project to be fully self supporting financially • ALP can use property as security for finance raising

Report oflnquin.' into the Centenary House Lease 207

C.2

Mr McFadden's "Opportunity Analysis" document dated July 1991 (page 2)

LEND LEASE DEVELOPMENT

A. GOVERNMENT NEEDS

• Government wants new development • Government has no capital expenditure funds • Government will do structured arrangements

FINANCING 01`1LITh1S

• Negotiate a fixed rental growth agreement with the Government - 15 years

- 9% growth

- option to renew

• Secure development funding against fixed Commonwealth guaranteed cashflow • Provide first mortgage and cash flow as security • Note: initial borrowings are 70% of asset value satisfactory to financiers • Pay land rent only • Decide on interest only or principal and interest payments

Option 1- Interest Only

Interest capitalised for 3 years Positive cash flow after 3 years giving annual income to ALP Effectively uses equity in development Excellent capital growth prospects Capital growth will support future financing

Option 2- Principal/Interest Payments

• 14 years to write down debt • No income to ALP for 14 years • Equity in building not used effectively • Excellent capital growth prospects • Not recommended

DEVELOPMENTJ{ISKS TO BE COVERED

• Construction cost risk • Construction finance rate • Commonwealth lease execution - subject to building completion • Investment finance rate

- agree in 18 months - or hedge now

Finance raising costs

208 Report of Inquiry into the Centenary House Lease

AUSTRALIA N PROPERTY

17 September 1991

Mr Noel McCann McCann and Associates GPO Box 1217 CANBERRA ACT 2601

Dear Sir

LETTER OF INTENT PROPOSED NEW ALP DEVELOPMENT, BARTON ACT

The purpose of this letter is to express the intent of the Commonwealth 10 take up space in the proposed new development as referenced below, subject to the broad parameters and conditions as also outlined below, being satisfied. In the event that satisfactory negotiations can be concluded over the next few months, the Commonwealth will enter into a formal precommitment to lease, by mid to end January 1992,

: New ALP Headquarters Development at Section 22 National Circuit, Barton

: John Curtin House Pty Limited

In accordance with the Commonwealth Office Accommodation Standards or as may be mutually modified in agreement between the ALP and the Commonwealth.

Development to be completed, including fitout, to the satisfaction of Commonwealth standards, at a date to be mutually agreed by the ALP and the Commonwealth.

Fitout to Commonwealth specifications to be Integrated and coordinated as part of the overall development and completed and fully commissioned prior to occupancy by the

Commonwealth.

Development

Developer

Scope of Development

Completion of Development

Rout

A CCOMMODA nON SERVICES I I I Atinp Sww Ci,brrj GPO Bo., iO Carit,cm ACT 2OI Pho O6} 215 3000 Fa (0I '5 2 434

PA

Service is Our Business Oparirn n Srr' ce

C.3 Letter from Mr Collins (Australian Property Group) to Mr McCann

(McCann and Associates) dated 17 September 1991

Report a Inqui y into the Centenary House Lease 209

C.3

Letter from Mr Collins (Australian Property Group) to Mr McCann (McCann and Associates) dated 17 September 1991 (page 2)

.2.

All the demised area of the development (measured as per SOMA 1989 Measurement Method) including all basement and onsite parking, except for the area shown on the sketch plans for occupancy and car parking by the ALP, representing for the Commonwealth approximately 6,000 square metres of nett lettable space, 128 basement car spaces and 25 orisite car spaces.

Other Car Parkfng The provision of at least a further 35 car parking spaces provided concurrently as part of thO development in adjacent Darting Street.

As from final completion of the building and fitoul or from practical completion of the building in the event that fitcut has been delayed by the Commonwealth

15 years from commencement of lease by the Commonwealth with a further 1 x 5 year option exercisable at Year 10 subject to a certain pre— agreed level of building refurbishment being undertaken by the building owner at Year 10.

Lease terms and conditions to essentially align with the form and content as covered in the Lease by the Commonwealth over premises in Fernhill Park Bruce, for AUSUG.

Rental payments for all of the Commonwealth's area to be on the basis of net rents with the Commonwealth being separately responsible for payment of the lessor's normal operating

oulgoings, excluding those attributable to the ALP occupancy. The Commonwealth will not be responsible for structural repairs.

: $260 per square metre net as at 1 January 1991 escalated at a level per annum compound to the commencement of the Commonwealth lease, as agreed between the lessors and the lessee's nominated valuers.

Commonwealth responsible for lessors normal operating outgoings over the area of its lease. Anticipated at $40 per square metre as at 1 January 1991 and escalating at 8% compound to the commencement of the Commonwealth

lease.

Rental payments and lessors outgoings payments by the Commonwealth to commence on a monthly in advance basis as of commencement of lease by the Commonwealth.

Commonwealth Lease

Lease Commencement

Lease Term

Lease Structure

Net Rents

Opening Rent

Outgoings

Rent Commencement

210 Report of Inquiry into the Centenary House Lease

C.3

Letter from Mr Collins (Australian Property Group) to Mr McCann (McCann and Associates) dated 17 September 1991 (page 3)

.3.

Rent Escalation : Rent to escalate at a fixed % per annum

over the 15 year term certain of the lease.

Car Park Rants : Opening rentals as at commencement of

Commonwealth lease for basement and onsite car parks to be $1,000 and $500 per car space per annum respectively and then escalated annually at __% for 15 years.

Owner Contribution to Fflouf Cost: ALP to contribute up to $0 .4m towards the cost of fitout of the Commonwealth lease.

Note: Rant escalations to be determined by the lessors and lessee's valuers and not to exceed 9.75% and to be based on rates of escalation already applying to similar Commonwealth leases in the ACT. All rental increases are on absolute net (base) rants.

In addition to the above, the Commonwealth would want to be able to satisfy itself that the building contractor had the necessary experience, financial capacity and backing to complete the development, and to the quality and standard required by the Commonwealth.

Yours faithfully

MINIC COLLINS

Report oflnquiiy into the Centenary House Lease 211

C.4

Estimates Memorandum 1991/32 issued 17 October 1991

- ATJSTALIJ,

Reference:

Contact Officer: Bran Cooney Tephone: (06) 263 35 ,59

-

DEPARTMENT OF FINANCE

Newlands Street, Pa1ces, ACT. 2600 Telephone: Canberra (06) 263 2222 Telex: 62630 Fax: (06) 273 3321

ESTIMATES MEMORANDUM 1991/32

TO ALL DEPARTMENT AND AGENCIES

REVISED ACCOMMODATION ARRANGEMENTS

PURPOSE

To advise agencies of arrangements for untying from the Australian Property Group (APG) for arranging leases outside of the Australian Capital Territory, the process for leasing within the ACT, and the role of Finance in property administration.

BACKGROUND

2. Estimates Memorandum 1991/9 advised that agencies would be untied from a range of DAS common service providers, including untying from APG for leasing and property management outside the Australian Capital Territory. Within the ACT, agencies must still use DAS agencies for property matters.

DAS PROPERTY AGENCIES

3. DAS has now two distinct agencies dealing with domestic property issues. As Government ownership and advisory roles were considered incompatible with the client focused real estate business, DAS has separated them through the creation of Australian Estate Manage -ment (AEM) within the Government Services Program.

4. AEM acts as landlord and asset manager for the Commonwealth-owned office estate for which it has property management responsibility, and in a more limited way for the industrial and special purpose estate for which property management responsibility lies with the tenant agency. AEM also maintains respons- ibility for the Lands Acquisition Act 1989 (LAA).

5. The Australian Property Group (APG) remains a com-mercialised property agent providing a range of property services to agencies on a fee for service basis.

212 Report of Inquiry into the CentenaiT House Lease

C.4

Estimates Memorandum 1991/32 issued 17 October 1991 (page 2)

ACT ARRANGEMENTS

6. In the ACT the Commonwealth holds a dominant position in the office accommodation market. It is not only the major tenant, it is also the planner, marketer of national land, building developer, and landlord of office and special purpose property. The ACT is also the only office market in Australia where the Commonwealth is bound by planning authorities through the National Capital Plan. These points make the ACT a unique market.

7. Government has decided, therefore, that the ACT will remain a controlled environment. Agencies are therefore required to

demonstrate that any accommodation proposal complies with the National Capital Plan as applicable to developments or leasing upon either Territory or National Land; and

obtain from APG advice on the controlled office environment set by AEM relating to the owned estate and new leases in the ACT.

Before any accommodation proposal is adopted, APG will certify that all these requirements have been met.

DELEGATIONS

a. The Minister for Administrative Services is considering issuing delegations under the LAA to give effect to the APG untying decision. Departments will be advised by AEN directly when the delegations have been finalised. Until then, agencies subject to the LAA will need to continue to use the Department of Administrative services to negotiate leases, etc. Agencies will remain tied for acquisitions and disposals of freehold property and, in the ACT, for all property dealings (Estimates Memorandum 1991/9 refers),

FINANCE CONTROL OF POE APPROPRIATIONS

9. We understand from some agencies, that they have gained the impression that untying from APG implies that they are also free from Finance overview of their property operating expenses (POE) resources. This is not the case.

10. The devolution of POE to departments is to be completed in two stages. stage i involved the movement of POE appropria-tions from DAS to each Budget-dependent agency as separate appropriations, stage 2 will see these separate appropriations merged into agencies' running costs.

Report of Inquiry into the Centenary House Lease 213

C.4

Estimates Memorandum 1991/32 issued 17 October 1991 (page 3)

11. The Secretary of Finance wrote to all Departmental Secretaries on 4 August 1989 outlining the transition arrangement:

stage i will allow time for verify property details and admini stration.

departments (and to come to grips Finance) to with property

- To varying degrees this information is developed, as evidenced by the general ture of POE allocations in 1989-90 and

still being undarexpendi- 1990-91.

In stage 1, departmental managers will gain limited control over POE funds.

However, departments will not be able to improve their accommodation during stage 1 without agreement by Finance.

Departmental managers will not be able, at their discre- tion, to swap POE funds for running costs funds until stage 2 is complete.

12. The Secretary also advised that until stage 2, depart-mental managers will not be able to decide their accommodation requirements and pay for them from within an overall allocation of property/ running costs resources. Stage 2 will not be implemented until stage 1 is complete and will involve a

property scrutiny and resource agreement. Reaching agreements with Finance on ACT property matters does not obviate the need to also seek authority from the AEM (via APG client Manager) to such proposals.

13. Issues to be addressed in stage 2 include the extent to which the figures determined in stage 1 should be incorporated in each department's overall running costs. This will not be easily dealt with and will need to be considered by Ministers. Arrangements for the second stage of the process, ie untying POE from Finance control, are being developed. Initial consul-tations with agencies conducted in late 1990 are expected to be reflected in a draft Cabinet submission during 1991 on incorpo-rating POE into running costs.

SUMMARY

14. The 1989-90 and 1990-91 POE results suggest POE appropri-ations are currently overproviding resources. Significant incentives are also being offered in the current market. Accordingly, agencies will need to continue to seek approval from Finance to change accommodation arrangements even where no additional outlays are involved. Property resource agreements will only be concluded after the adequacy of existing POE resources is assessed.

--I-

D.L. Sainabu A/g First Assistant Secretary Defence and Government Division 17 october 1991

214 Report of Inquiry into the C'enlenaty House Lease

C.5

Letter from Mr Ireland (Australian Property Group) to Mr Jeffress (Australian Valuation Office) dated 1 November 1991

A USTRALIAN PROPER fl'

The General Manager Australian Valuation Office 490 Northbourrie Ave CANBERRA ACT 2602

Attn: Mr Graham Jeffress

RELOC.AIO11 or 12HE A33TRALI1.N NATIONAL AUDIT OFFICE O BARTON ACT

The Australian National Audit Office has expressed an interest in relocating to the proposed new ALP Headquarters building to be constructed on section 22, National Circuit, Barton.

Approximately 6,000m2 of office space, 128 basement and 25 on-site car parking spaces would be available. The building will be completed by the end of 1992 or early 1993 and constructed in accordance with the Commonwealth Office Accommodation standards. The lease term will be for iS years with an option to renew for a further period of 5 years. This option may be exercised in year 10 following agreement on a level of building refurbishment to be undertaken by the building owner in year 10.

Rental payments would be on the basis of net rents with the Commonwealth being separately responsible for payment of the lessor's normal operating outgoings attributable to the INAO tenancy. Outgoings identified as being the Commonwealth's responsibility include:

• management costs insurance premiums • payments to public utilities • rates & taxes

• payments to associations • maintain and repair the premises, surrounds and plant including air-conditioning, ventilation, lifts, escalators, plate glass, heating, lighting, electrical and plumbing

fumigation, disinfecting and pest extermination - costs associated with common areas. including energy, cleaning, fire protection, security, insurance, management costs, statutory charges, and repairs and maintenance.

The Owner will be responsible for major structural detects and rent can abate if this occurs.

ACCOMMODATION SERVICES I Alng* 5tyee Cberra' GPO Rox 1920 Canbtru ACT 20 )eie (0) 275 3000 Fax C06 275 3549, 2 75 4324

IWANNOW SerMct is Our Busine ss

Dp2TlITr1't of Ad irtivt Srvicts

Report of Inquiry into the Centenary House Lease

215

C.5 Letter from Mr Ireland

(Australian Property Group) to Mr Jeffress

(Australian Valuation Office) dated 1 November 1991 (page 2)

Rentals will escalate at a fixed percentage per annum over the term of the lease.

Given that such an agreement represents a major departure from the conventional gross lease agreement it would be appreciated if your Office would provide Australian Property with comprehensive advice of:

rentals and operating outgoings for the accommodation and car parking spaces as at I January 1991 rent and outgoings escalators from 1 January 1991 to the practical completion date

rent and outgcngs escalators from practical completion for the term of the lease.

Although this is not a financial lease it does effectively provide the owner with a predetermined return of his investment and, this should be taken into account when you provide the valuation.

The proposal is that your office and McCann and Associates agree and advise on the above.

However, if you feel this office should be given other advice I would appreciate it prior to agreement being reached.

16111,e~

(Robert Ireland) 'November 1991

216 Report of Inquiry into the Centenary House Lease

p

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RENTALS2 .XLS

YEAR CPI Index Annual Annual 90 Annual BOMA

Numbers Change Cumulative Day Bank Cumulative Total Average Bill Rate Average Vacancy Rate

1973 165.6 6.40%

1974 187.1 12.98% 12.98% 18.80% 12.60%

1975 216.2 15.55% 14.27% 8.80% 11.33%

1976 245.6 13.60% 14.04% 10.50% 11.13%

1977 279.2 13.68% 13.95% 11.10% 11.12%

1978 304.5 9.06% 12.98% 10.80% 11.07%

1979 329.3 8.14% 12.17% 10.40% 10.97%

1980 364.5 10.69% 11.96% 13.90% 11.34% -

1981 400 9.74% 11.68% 15.70% 11.82%

1982 442.7 10.68% 11.57% 18.60% 12.50%

1983 495.9 12.02% 11.61% 14.30% 12.66%

1984 529.2 6.72% 11.17% 12.90% 12.68%

1985 555.1 4.89% 10.65% 15.80% 12.92%

1966 603.1 8.65% 10.49% 14.60% 13.04%

1987 653.6 8.37% 10.34% 13.60% 13.08% 0.93%

1988 698.9 6.93% 10.11% 13.10% 13.08% 1.14%

1989 745.4 6.65% 9.90% 18.40% 13.39% 0.90%

1990 800.8 7.43% 9.75% 15.00% 13.48% 1.82%

1991 i841.5 5.08% 9.49% 10.40% 13.32% 2.40%

1992

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Page 2

CITY - WODEN - BARTON RENTAL GROWTH ANALYSIS Barton Woden

YEAR Industry Annual Average John Annual Average IBM Annual Average MLC Annual Average House PA Growth Long term Curtin PA Growth Long term PA Growth Long term Tower PA Growth Long term RAT Growth PA HOuse RAT Growth PA ART Growth PA RAT Growth PA

1973 1974 1975 $76.00

1976 $73.20

1977 1978 $82.00 2.57% 2.57%

1979 $85.65 5.38% 5.38%

1980 1981 $103.00 7.90% 5.20%

1982 $121.50 12.36% 8.91%

1983 1984 $145.00 12.08% 7.44% -

1985 $190.00 $168.00 11.41% 9.67%

1986 $180.00 11.42% 8.15%

1987 $187.00 $240.50 12.51% 12.51% $190.00 6.35% 9.06%

1988 $205.00 6.72% 7.93%

1989 $246.00 14.70% 14.70% $299.33 11.56% 12.03% $250.00 14.71% 9.91%

1990 $280.00 16.87% 9.08% $272.50 9.00% 9.84%

1991 $315.00 13.16% 13.92% $294.30 8.00% 9.72%

1992 1 $317.84 8.00% 9.61%

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City

TEAR Citibank Annual Average custom Annual Average Wales Annual Average PA Growth Long term Credit PA Growth Long term Centro PA Growth Long term RAT Growth PA RRT Growth PA ART Growth PA

1973 $68.00

1974 1975 1

1976 $81.00 6.00% 6.00%

1977 1978 $88.80

1979 $90.00 3.57% 4.78%

1980 1981 $112.00 8.04% 8.04%

1982 $140.00 1983 $127.00 8.99% 6.45%

1984 $175.00 11.80% 11.80% $153.50 11.08% 9.55%

1985 $178.00 18.39% 8.35%

1986 $210.00 9.54% 10.67% $185.00 9.78% 9.61%

1987 $209.50 8.49% 8.37%

1988 $255.00 10.19% 10.51% $218.00 8.55% 9.40%

1989 $320.00 23.89% 10.16%

1990 $330.00 13.761C 11.31% $285.00 14.34% 10.21%

1991 1992

Page 3

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YEAR National Annual Average Colonial Annual Average Macarthur Annual Average Mutual PA Growth _Long term Mutual PA Growth Long term House PA Growth Long term RRT Growth PA ART Growth PA ART Growth PA

1973 1974 1975 $51.13

1976 1977 1978 $73.50 12.86% 12.86%

1979 1980 1981 $101.50 11.36% 12.11%

1982 1983 1984 $185.00 $144.00 12.37% 12.19%

1985 1966 $218.00 8.55% 8.55% $206.00 $176.00 10.55% 11.89%

1987 1988 $255.00 8.15% 8.35% $235.00 6.81% 6.81% $209.00 8.97% 11.44%

1989 1990 $330.00 13.76% 10.13% $300.00 12.99% 9.85% $250.00 9.37% 11.16%

1991 1992

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oowra AKALTSIS

90 Annual I DOMP.

2* Dank Cuarnlsti.* Total HL1I Annual % I$6Z*.!T9TTT1TTP Av*rag. Cuotom Annual AV*r*. 0 sill 8*60 Average VC*fl Rate Ta..r .8 Crout %.on. tars PA Growth Z.OJI CCL Cr.dj.t PA Growth Lon. tots RRT 0TT!.'. Go&th PA RO1D Oroiitli 2%

1973 %1.Wi Wtfl

19141 187.1 It1pWTT18-H-L11 12.60%

197S )TWLW1-118w8Z1 -I1a88k

1916 11.13% $73.20 $81.00 6.001 6.001

1977 UiW1flp141 11.10% 11.12%

1978 1I1I11P1T1 10.00% 11.07V

19791 329.3CL1 12.11% 10.40% 10.97% $85.65 S.39%.W8& $90.00 357% 479%

1980 13.90% 1134%

1981 400 9.74%IWiT8Wffl 11.824 1982 642.7 10.68%I.fl 18.601 12.501 $121.50 12.34% 0.811 5140.00 I

1983 495.9 12.02% 11.61% 14.30% 12.661 $127.00 8.991 6.45%

3.984 12.68% 3171.00 11.60% 11.80%

1981 555.1 4.8910W.1LWI.I1 12.921 5-168.00 11.41% 9.671k $178.00 19.39% 8.351

1986 603.1 8.45%I.W%I1E19% 13.04% $210.00 9.54% 30.67%

1987 653.6 0.37 10.34%1F9 13.00% 0.93% $190.00 6.35% 9.061k __________ $709,50 8_491 6.31% % 1968 1.1IWfl 10.11% 13.101 13.08 1.14% $735.00 I1I1 10.51% 1969 71.W1W1.1I WIF8 18.401 13.39% 0.90%' $320.00 23.59% 20.14% 1990 800.8 7.43% 11%1fl 13.40% 1.82% $330.00 13.76% 11.31% 1991 841.5 5.081 9.491 10.401 13.32% 2.40%- - 9A 9:Z7rO

lndu.ttT Annual Average John Annual Average J0 44i%7f 4vcioqt. '510 Anlou&t .Av.rag.

PA Gt0Vt.h Long tots Curtis PA Growth Long tots WJ* PA. i?.sjoh 5, /A. ,ipsI Ly #.o PA ooth Long tars

JORP Growth PA Halo.. ART Growth PA (I 6r : ''s ger Cthoo(fl4 iuol c2rowth PA 1913 .- 1974 1975 $74.901977 --- $02.00 2.571 2.57%19 0 1979 I -vo _________ 1.L - -- -. 1981 $103.00 7.901 5.20%1983 -- I89 I5-IZ 1984 $145.00 12.0et 7.44 198 - *I0.0 I09 1904 • $190.00 1901 $180.00 11.42% 8.151 1u34 - 1988 5181.00 2p -o% - q.q __________ 5240.50 12.51% 12.51% 198 $205.00 6.721 7.93% %).00 15 tO5t. 199: $246.00 14.70% 14.70k 2z5-o° c\.3 - $299.33 11.56% 12.03% $28000 14.87% 9.081 L1)OO 10-44 to. - 1991 2315.00 13.168 13.921 - -

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C.7 Valuation report prepared by Mr Jeffress (Australian Valuation Office)

dated 27 November 1991

AV -Zr

VALUATION REPORT

AUSTRALIAN LABOR PARTY OFFICE REDEVELOPMENT

SECTION 22 BARTON

INSTRUCTIONS: In accordance with the request from Australian Property to provide:

1. Rentals and operating outgoings as at 1 January 1991 payable by the Commonwealth in respect of the accommodation and carparking within the building to be erected on the above site.

2. Rent and outgoings escalators from 1 January 1991 to the practical completion date of the building which is estimated as being April 1993.,

3. Rent and outgoings escalators from the date of practical completion of the building for the. term. of the lease.

DATE OF VALUATION:

LESSOR

LESSEE:

1 January 1991.

The Australian Labor Party

The National Audit Office

222 Report of Inquiry into the Centenary House Lease

C.7

Valuation report prepared by Mr Jeffress (Australian Valuation Office) dated 27 November 1991 (page 2)

-2-

SUBJECT TENANCY: The Commonwealth has been offered part of the ground floor and all of the first, second and third floors within the proposed

building.

In addition, it is intended that the Commonwealth will take up 128 basement carbays and 25 on-site car parking spaces.

AREA OF TENANCY:

LEASE DETAILS:

Approximately 6,000 square metres of office space plus the car accommodation.

Current Rent: N/A

LOCATION:

DESCRIPTION OF IMPROVEMENTS:

$280 per square metre (net) per annum for the office accommodation $1,000 pa each for the secured carbays. $500 pa each for the on-site car parking spaces..

Fifteen years with an option for a further five years.

Annually at a predetermined escalator..

The Commonwealth will be responsible for payment of the lessor's normal operating outgoings attributable to the Australian National Audit Office's tenancy.

The subject site is located on the corner of National Circuit and Darling Street in Barton.

The improvements to be erected on the site will comprise an office building which will have a ground floor, three upper floors and a basement of reinforced concrete frame construction. The office accommodation levels have double glazed windows in

Commencement Rent

Term of Lease:

Review Period:

Oijtgoins:

Report of Inquiry into the Centenary House Lease 223

C.7

Valuation report prepared by Mr Jeifress (Australian Valuation Office) dated 27 November 1991 (page 3)

-3-

aluminium frames and lightweight metal roof cladding on a structural steel roof frame.

DESCRIPTION OF TENANCY:

VALUATION:

The subject accommodation will be carpeted and air conditioned office space of a good standard. It will have slab to ceiling double glazed windows and suspended acoustic tile ceilings incorporating recessed flourescent lighting and return air slots. Male and female toilets and a tea room on each floor. Male and female showers will be provided in the basement area.

Access to the upper floors is by way of two passenger lifts which also serve the secured basement carparking area.

The subject tenancy will be completely independant of the remaining accommodation within the building. Access to each level will be able to be controlled by the Commonwealth tenant due to the lift lobby being within the subject tenancy area.

The recommendations made in this report are based on the following rental rates which have been suggested as the fair market rental rates in respect of the subject office accommodation as at 1 January 1991.

Office accommodation approximately 6,000m2 @ $280/m2 pa (net) Basement carparking 128 secured spaces $1,000/pa each On-site car parking 25 spaces

@ $500/pa each

(a) The rental is exclusive of cleaning, tenant' power and telephones.

(b) The lease will be generally on normal terms and conditions.

(C) The lease term will be 15 years with option for a further terms of 5 years subject to the same terms and conditions except for rental which will escalate annually at an agreed rate.

(d) The rental is to be net with the

224 Report of Inquiry into the centenary House Lease

C.7

Valuation report prepared by Mr Jeifress (Australian Valuation Office) dated 27 November 1991 (page 4)

-4-

lessee liable for lessor's normal operating outgoings attributable to the Commonwealth's tenancy.

(a) It is assumed that the area will be measured in accordance with the BOM Code.

LONG TERM RENTAL GROWTH

In determining a rental escalator for the proposed lease, historical records of rental movements within the main commercial areas of Canberra have been examined.

An examination of rental movements over the last 15 years in the Barton area, the City and the Woden Town Centre has shown long term annual rental growth rates of between 9.08% to 10.51% in the Barton area a'nd 10.16% to 10.66% in the City area. The long term rental growth in the Woden Town Centre from 1976 to 1987 was indicated at 9.06%.

Other considerations in establishing a long term rental escalator for the subject lease is the supply and demand for office accommodation in Canberra and in particular

the Barton area. The proposed development of the York Park complex will provide an additional 46,000 square metres of office space when completed.

However, the uncertainty of the commencement date of this project together with the need to use most of the accommodation in the new building as staging-space for the occupants of the Treasury Building and the Administration Building, (which are to be refurbished), suggests that the impact of the provision of this additional accommodation would probably not be felt for eight to ten years.

The planned redevelopment of the Commerce House site in Brisbane Avenue is the only other known private office development project in the Barton area.

As supply and demand are the most critical factors affecting rental growth rates and assuming that any possible change in government policy does greatly alter the current growth of the public service located

225 Report of Inquiry into the Centenary House Lease

C.7 Valuation report prepared by Mr Jeffress (Australian Valuation Office)

dated 27 November 1991 (page 5)

-5.-

in Canberra, it is difficult to envisage that the existing long term rental trends will not continue.

SHORT TERM RENTAL GROWTH

At 1 January 1991 rentals negotiated over a two year period in the City and in Barton were showing anual rental growth rates of around 12.5% to 13.75%.

Since January this year these rates have dropped to a present rate of around 10.5% to 11%.

RECOMENDATIQN: It is recommended that rental growth escalators be negotiated at rates not exceeding the following:

For the period 1 January 1991 to the date of practical completion of the building 10.5%

For 15 years from the date of practical completion of the building 9.0%

It is further recommended that a review to market should also be held at the end of the sixth year and the tenth year of the lease with the lessee paying the rental escalatated at the agreed rate at those dates or the market rent whichever is the greater.

Rentals will be calculated at the agreed rate of escalation at the end of the other years.

OUTGOINGS:

DISCLAIMER:

A table of estimated building outgoings to be the responsibility of the Commonwealth under the terms of the proposed lease is appended.

This valuation is for the exclusive use of Australian Property and its instructing clie.it and is not to be used by any other party for any other purpose.

Neither the whole nor any part of this valuation report or any reference thereto may be included in any published document, circular or statement, nor published in part

226 Report oflnquiiy into the Centenary House Lease

ffress A.V.L.E. (Val)

Valuation Office Au s t

C.7 Valuation report prepared by Mr Jeffress (Australian Valuation Office) dated 27 November 1991 (page 6)

-6-

nor in full in any way without written approval of the Australian Valuation Office of the form and context in which it will appear

Notwithstanding the foregoing Australian Property has the right to make the Valuation Report available to its instructing Client but in the event that it does communicate to any other third party the whole or any part of this valuation it shall also communicate to the third party the full terms as stated under this disclaimer and further agrees to indemnify

the Australian Valuation Office in the event of any failure to do so.

227 Report of Inquiry into the Cenlena'y House Lease

C.7 Valuation report prepared by Mr Jeffress (Australian Valuation Office)

dated 27 November 1991 (page 7)

ALP BUILDING - SECTION 22 BARTON

OUTGOINGS - Tenancy area approxImately 6.000 scivare metres

STATUTORY CHARGES General rates $2.014 @ 1.312 $26,240

Water rates $200

Sewerage rates $10,000

Land tax $2.OM 9 1.0c $20,000

AIR CONDITIONING Service contract NLA 9 $4.00/m2 $24,000

LIFTS Service contract

10 stops @ $1,200/stop $12,000

FIRE PROTECTION Service contract NLA @ $1.00/m2 $6,000

REPAIRS AND MAINTENANCE NL 9 $2.50fm2 $15,000

ENERGY CHARGES Common area airconditioning and lifts $90,000

INSURANCE Total cover $15,000

SECURITY NLA 9 $1.00/m2 $6,000

CLEANING Common areas and

windows $5,500

MANAGEMENT 9 1.5% $27,300

TOTAL ANNUAL OUTGOINGS ATRIBUTABE TO THE COMMONWEALTH'S SPACE: $257,240

228 Reporl o/Inquiy into the Centenary 1-louse Lease

C.8

Letter of intent from Mr Ireland (Australian Property Group) to Mr McCann dated 3 December 1991

.a = E E

AUSTRALIAN PROPERTY

Mr Noel McCann McCann and Associates GPO Box 1217 CANBERRA ACT 2601

Dear Noel,

LP DVLOPNT - SECTION 22 B ARTON

Further to our discussions of Wednesday last I wish to confirm that subject to the granting of statutory approval and finalisation of the sublease terms and conditions the Commonwealth would be prepared to enter into a lease agreement over the proposed premises according to the following:

Base rental rates as at 1 January 1991 being:

-approxisate1y 6,000m2 of office accommodation at $280/rn pa (net) -128 Secured basement car parking bays at $1,000 pa each -25 on site car parking bays at $500 pa each

• The rental is exclusive of cleaning, tenant power and telephones.

• The lease will generally be on normal terms and conditions.

• The lease term will be 15 years with an option for a further term of 5 years subject to the same terms and conditions except for rental which will escalate annually at an agreed rate.

• The rental is to be net with the sublessee liable for the sublessor's normal operating outgoings attributable to the Commonwealth's tenancy.

The area will be measured in accordance with the BOMA code.

With respect to determining the rental escalators for the proposed building the Commonwealth would accept the following:

• for the period 1 January 1991 to the date of practical completion of the building an escalator of 10.5% pa.

• for 15 years from the date of practical completion of the building 9.0% pa.

-/ 2

A CCOMAIODA liON SERVICES Ill Alinga Street Canberra GPO Box 1 92D Canberra ACT 264 Phone(06)27530M Fax(06)77535 49, 2754324

PAS

Servicc is Our Business IDcpartment of Adniinisrretive Sricei

Report of Inquiry into the Centenary House Lease 229

C.8 Letter of intent from Mr Ireland (Australian Property Group) to

Mr McCann dated 3 December 1991 (page 2)

A review to market be held at the end of the sixth and tenth years of the lease with the sublessee paying the rental escalated at the agreed rate at those dates or the market rent which ever is greater. Rentals will be calculated at the agreed rate of escalation at the end of the other years.

Should the Commonwealth elect to exercise its option at year ten then the sublessor will undertake a refurbishment of the premises to a standard applicable to Commonwealth standards applying at that time.

The sublessor will provide the sublessee with performance standards for all major plant and equipment and manufacturers recommended maintenance programs for the life of such plant and equipment. All major plant and equipment must have a life span of the term certain of the lease.

We trust the above meets your requirements and we look forward to your acceptance.

Yours faithfully,

(Robert Ireland

3December 191

230 Report of Inquiry into the centenary House Lease

MEDIA RELEASE

C.9 Senator Parer's press release dated 15 January 1992

SENATOR WARWICK PARER LIBERAL SENATOR FOR QUEENSLAND SHADOW MINISTER FOR ADMINISTRATIVE SERVICES LOCAL GOVERNMENT AND THE A.C.T.

Labor's Fifteen Year Rort

The Federal Labor Government is progressing plans to use taxpayers money to prop up an Australian Labor Party commercial property development project in Canberra.

The Government is pressuring the Australian National Audit Office to relocate to the new ALP Headquarters building at Barton when it is completed at the end of the year.

The proposed leasing agreement for the Audit Office gives incredibly generous conditions to the Labor Party landlords.

The proposal includes a 15 year lease with the Audit Office - ultimately the hapless taxpayer - paying all outgoings with the yearly escalations which guarantee the ALP a pre-determined real rate of return/income till the year 2008.

It is totally unacceptable that the Government should even contemplate an arrangement whereby taxpayers money is used for the benefit of the Labor Party.

Obviously the Federal Labor Party had learnt nothing from WA Inc.

This failed Labor Government is prepared to turn a blind eye to the issues of conflict of interest, probity and honesty in order to prop up its bankrupt political wing.

Now that this appalling rort is exposed the Minister for Administrative Services, Senator Bolkus, must publicly advise Australian Property to cease all further negotiations with the ALP.

This is the same Minister who banned political advertisements on radio and television during election campaigns because he and his Government falsely claimed it could lead to corruption.

Copy of supporting documentation is available on request from Senator Parer.

For further information, telephone (B) 07 864 8413 or (AH) 07 343 3172 15 January 1992

Report of Inquiry into the Centenary House Lease 231

C.10 Resource agreement between the Audit Office and the Department of

Finance dated 27 March 1991

AGREEMENT BETWEEN THE AUSTRALIAN NATIONAL AUDIT OFFICE (ANAO) AND THE DEPARTMENT OF FINANCE ACCOMMODATION IN CANBERRA

1. This Agreement details the terms and conditions for the funding of the ANAO's accommodation move in Canberra to Section 22, Barton. It formalises agreements previously reached through the interchange of correspondence and meetings of officers from the Department of Finance (DOF) and the ANAO.

2. The purpose of this Agreement is to allow the ANAO to fit out and occupy leased premises in Section 22, Barton.

3. An appropriation of $2.6m will be supported in the 199293 Budget for the fitout of the Barton accommodation. This matches the $2.6m that was originally made available for the fitout of new premises following the forced eviction from the Silverton Building.

4. The ANAO may 'borrow' in 1992-93 or 1993-94 amounts that will not total more than $2.75m.

5. Any amounts borrowed will be repaid over seven years at a fixed rate of interest of 10.07% per annum. The repayment of amounts borrowed, plus interest, will be by way of a reduction in the ANAO's Property Operating Expenses (POE) for a period of seven years subsequent to the years the borrowings were made.

6. Following full repayment of the additional appropriation and interest, any ongoing savings in total Property Operating Expenses (subject to any changes that may occur after the date of this Agreement) will be shared 50:50 between the ANAO and the Budget.

7. Where the ANAO adopts a strategy to provide accommodation for less than 100% of its staff at a particular location the resulting savings will be made available to the ANAO. In these circumstances, where there are minimi navir.gs attributable to other accommodation rationalisation measures, the ANAO will receive the full benefits of its new strategy.

8. The ANAO's Property Operating Expenses funding arrangements developed az rscurce agreements in the context of transferring Property Operating Expenses into Running Costs will have regard to the principle set out in clause 7. The agreement reached here with regard to funding Canberra accommodation will not be re-opened in that context.

232 Report of Inquiry /1110 the Centenary House Lease

Department of Finance

C.10 Resource agreement between the Audit Office and the Department of

Finance dated 27 March 1991 (page 2)

2.

9. The ANAO has advised the Australian Property Group (APG) of the Department of Administrative Services of the anticipated vacancy of its ACT accommodation in the Medibank Building in Woden, Tasman House in Civic and the Treasury Building in Parkes. Any costs arising from the tenancy of these buildings when they

become unoccupied following the co-location in Section 22, Barton have been taken into account in calculating the amount to be borrowed. To the extent that costs of non-occupancy of these

buildings exceed $1.010m (the amount contained in the calculation of the borrowing) the additional requirements will be provided by way of further borrowing subject to the terms of clause 5.

10. To the extent that the arrangements in the accommodation contract fall within the accepted (by the Australian Estate Manager) norms for accommodation standards and fitout, and within rent revisions that do not exceed market rates, the ANAO will recover that proportion of the related Property Operating

Expenses that relates to financial statement auditing through the normal fee structure developed by the ANAO. Any borrowing will be recouped over the period of the repayments rather than in the year the borrowing was utilised.

11. Would you please signify your acceptance of this Agreement by signing both copies in the place provided and returning a copy to the relevant DoF contact officer.

Australian National Audit Office

27 MAR 1992 27 MAR 1992

233 Report of Inquiry into the Centenary House Lease

Appendix D Photographs of Centenary House

Centenary House from National Circuit, looking south-west

Centenary House from National Circuit, looking north-west

Report ofInquiry into the Centenary House Lease 235

Appendix E

Synopses of leases

Lease I

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

Description on CH94.012.0330

107 at COMM.017.0099-0105

October 1988

Amisco Pty Limited

Commonwealth of Australia

36-38 Raymond Street Bankstown NSW

Offices and car spaces

Not available

10 years commencing 1 August 1988

One renewal of five years

• Every two years as agreed or to market as determined by expert valuation

• Review can only be instigated by the lessor

• Ordinary ratchet clause

AMEP Bankstown

Report of Inquiry into the Centenary House Lease 237

Lease 2

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

Description on CH94.0 12.0330

107 at COMM.022.0001-001 I

23 June 1989

Tavolan Pty Limited

Commonwealth of Australia

266 King Street Newcastle NSW (the Newcastle Tax Office)

Offices, storage and car spaces

Not available

10 years commencing 1 May 1989

One renewal of 10 years

• Every two years as agreed or to market as determined by expert valuation.

• Review can only be instigated by the lessor

• Ordinary ratchet clause

ATO Newcastle

238 Report of Inquiry into the Centenary House Lease

Lease 3

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

Description on CH94M12.0330

107 at NMM.001.0001-0010

24 July 1989

Copeland Mercantile Ventures Pty Limited

Commonwealth of Australia

13A Union Street Pyrmont NSW

Offices and warehouse accommodation (National Maritime Museum)

4378 square metres

10 years commencing 1 June 1989

No option agreed

• At the end of the first, third, fifth, seventh and ninth years the greater of the rent that would be produced by the application of a fixed annual increase at the rate of 8% a year compound or by reference to the Consumer Price Index

• At the end of the second, fourth, sixth and eighth years - as agreed or to market as determined by expert valuation

• The even-year rent reviews can be instigated only by the lessor

• At no rent review can the rent go downwards and, in the case of market reviews, the rent must be increased in each of those years by at least 8% over the rent for the preceding period

• Extraordinary ratchet clause

National Maritime Museum, Pyrmont

Report ofInquiry into the Centenary House Lease 239

Lease 4

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

Description on CH94.012.0330

84 and 107 at EXH.084.0001-0012

11 October 1989

Action Investments Pty Limited

Commonwealth of Australia

Comma! NSW

Offices and car spaces

1065 square metres

10 years commencing 1 December 1987

One renewal of 10 years

• Initial term fixed annual increases at the rate of 8% a year compound subject to the capacity at the end of the fifth year for the rent to be reviewed as agreed or to market as determined by expert valuation if such review produces a rent greater than the rent that would otherwise apply by the application of the fixed annual escalator

• Initial term ordinary ratchet clause in respect of the single market review

• Renewal term - same provisions apply

DSS Corrimal

240 Report ofinquiry into the centenary House Lease

Lease 5

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

Description on CH94.012.0330

107 at NOHS.001.0007-0050

25 February 1991

Advance Bank Australia Limited

National Occupational Health and Safety Commission

92-94 Parramatta Road Camperdown NSW

Offices, laboratories, storage and car spaces

6676.6 square metres

10 years commencing 21 November 1990

One renewal of 10 years

• Initial term - Consumer Price Index after the second, fourth and eighth years subject to:

- market review as agreed or determined by expert valuation at the end of the sixth year

a minimum biennial increase of 8% (about 4% a year) at each review date other than the review to be held at the end of the sixth year

• Renewal term commencement rent is last rent under old lease escalated up to the commencement and Consumer Price Index after the second, fourth and eighth years subject to the same overrides

• Ordinary ratchet clause

WorkSafe Camperdown

Report of Inquiry into the Centenary House Lease 241

Lease 6

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

Description on CH94.012.0330

108 at DFCS.001.0044-0129

10 December 1991

Ryssal Three Pty Limited

Commonwealth of Australia

Levels 19-22, 300 La Trobe Street Melbourne Vie

Offices and car spaces

6133 square metres

12 years commencing 19 December 1991

Two renewals each of four years

• Last two years rent free

• Years I to 4— fixed at starting rent ($290 a square metre a year); no increase during this period

• Years 5 and 6— fixed at predetermined reviewed rent ($335 a square metre a year), which is 15.5 1% over the starting rent at Year I (that is, about 3.25% a year compound); no

increase during this period

• Years 7 to 10— biennial increases at the rate of 7.5% a year compound

• First renewal term - at commencement and at the end of Year 2, previous rent or market, whichever is greater

• Second renewal term - at commencement and at the end of Year 2, previous rent or market, whichever is greater

DSS 300 La Trobe Street

242 Report ofinquiry into the Centenary House Lease

Lease 7

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

Description on CH94.012.0330

107 at COMM.017.0106-0116

23 December 1991

Zoomview Pty Limited

Commonwealth of Australia

19-27 Devlin Street Ryde NSW

Offices and car spaces

Not available

10 years commencing 31 July 1991

Two further terms of four years each

• At the end of Year 1 15% fixed increase over rent for Year 1

• Thereafter - Consumer Price Index annually or every two years as agreed or to market as determined by expert valuation

• Biennial reviews can only be instigated by the lessor

• In renewal periods same provisions apply

• Ordinary ratchet clause

DSS Ryde

Report of Inquiry into the Centenary House Lease 243

Lease 8

79 at EXH.079.0001-0036 and 107 at COMM.017.0117-0152

12 May 1992

Meredith Projects Ply Limited

Commonwealth of Australia

2-14 Meredith Street and 29-31 Marion Street Bankstown NSW (the Meredith Street Taxation Office)

Offices, storage and car spaces

15,000 square metres

10 years commencing 28 April 1992

Two renewals of five years each

• Initial term fixed annual increases at the rate of 8% a year compound

• First renewed term fixed annual increases at the rate of 8% a year compound or such rent as may be agreed or determined by expert valuers as the market rent

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

• Second renewed term - commencement rent is to be market rental as agreed or determined by an expert valuer and thereafter reviewed biennially to market as agreed or as determined by an expert valuer

Description on CH94.0120330 ATO Bankstown

244 Report of inquiry into the Centenary House Lease

Lease 9

Ex No

Date of the sublease

Sublessor

Sublessee

Address of premises

Type of premises

Area of premises

Term of sublease

Option details

Rent review provisions

Description on CH94.012.0330

110 at COMM.019.0001-0255

3 September 1992

Australian City Properties Limited

Commonwealth of Australia

225 St Georges Terrace Perth WA (Levels 14-16 St George's Square)

Offices and car spaces

3402.5 square metres.

10 years commencing 1 September 1992

Two renewals of three years each

• Fixed at specified rate for Years I to 5 ($250 a square metre a year); no increase during this period

• Years 6 to 10 of the initial term - fixed annual increases at the rate of 5% a year compound

• First renewed term one review at the end of the eleventh year to market

• Second renewed term one review at the end of the fourteenth year to market

DSS 225 St George's Terrace

Report of Inquiry into the Centenary House Lease 245

Lease 10

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

Description on CH94.012.0330

78 and 109 at EXH.078.0001-0076

2 February 1993

Hansen Yuncken Pty Limited

Commonwealth of Australia

200 Collins Street Hobart Tas

Offices, storage, terrace and car spaces

11,110 square metres of office space and some incidental storage and terrace space

10 years commencing 5 September 1992

Two renewals of five years each

• Initial term fixed annual increases at the rate of 8% a year compound

• First and second renewed terms fixed annual increases at the rate of 4% a year compound

ATO 200 Collins Street, Hobart

246 Report of Inquiry into the Centenary House Lease

Lease 11

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

Description on CH94.012.0330

109 at COMM. 017.0191-0265

8 February 1993

W.B.K. Pty Limited

Commonwealth of Australia

Levels 1, 3, 4 and 5, part of the plaza level and the rooftop of the building known as 443 Queen Street Brisbane QId

Offices and car spaces

4558 square metres

10 years commencing 1 January 1993

One renewal of three years

• Rent free for the first two years and two months

• Rent fixed at a specified rent for the whole of the next one year and 10 months; no increase during this period

• Years 5 to 10 fixed annual increases at the rate of 4% a year compound commencing with a rent 4% greater than the rent payable for Year 4

• Renewed term - market rent at commencement of term or prior rent and fixed annual increases at the rate of 4% a year compound for the next two years with ordinary ratchet clause

DSS 433 Queen Street

Report of Inquiry into the Centenary House Lease 247

Lease 12

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

Description on CH94.012.0330

Ex 120 at COMM. 024.0001-0041

30 June 1993

Tapana Pty Limited

Commonwealth of Australia

Alexander House, Green Point Road Bridgewater Tas

Offices and car spaces

654.5 square metres

10 years commencing 24 September 1991

Two renewals of five years each

• Initial term - the greater of Consumer Price Index—adjusted or fixed annual increases at the rate of 9.5% a year compound

• Renewed terms commencement rent will be the same as the finishing rent for the preceding term and increased thereafter as for the initial term

DEET/DSS Bridgewater

248 Report of Inquiry into the Centenary House Lease

Lease 13

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

Description on CH94.012.0330

83 and 109 atEXH.083.0001-0055

31 January 1994

Celestial Pty Limited

Commonwealth of Australia

91 Waymouth Street Adelaide SA

Offices, storage and car spaces

17,878 square metres

10 years commencing 6 December 1993

Two renewals of five years each

• Initial term - fixed annual increases at the rate of 7% a year for premium rent and 8% a year for base rent compound up to the beginning of the eighth year

• Thereafter including in any renewed terms - biennial reviews to market for the base rent and

7% over the prior period for the premium rent, save that the premium rent shall not be payable at all during either of the renewed terms

• Ordinary ratchet clause for market reviews

ATO Waymouth Street

Report of Inquiry into the Centenary House Lease 249

Lease 14

Ex No 107 at ATO.001.0077-00151

Date of lease 29 April 1994

Lessor Easthill Pty Limited

Lessee Commonwealth of Australia

Address of premises Australian Taxation Office Wollongong NSW

Type of premises Offices, storage and car spaces

Area of premises 6100 square metres

Term of lease 10 years commencing 24 January 1994

Option details Two renewals of five years each

Rent review provisions • Initial and renewed terms fixed annual increases at the rate of 7% a year compound

Description on CH94.012.0330 ATO Wollongong

250 Report oflnquiry into the Centenary House Lease

Lease 15

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

109 at COMMM18.0001-0089

8 June 1994

Australian Mutual Provident Society

Commonwealth of Australia

10 Eagle Street Brisbane QId

Offices and car spaces

8541 square metres

10 years commencing 1 November 1993

One renewal of five years

• Initial term

Years 2 to 5 fixed annual increases at the rate of 4% a year compound

Years 6 to 7 fixed annual increases at the rate of 7% a year compound

Description on CH94.012.0330

- Years 8 to 10 fixed annual increases at the rate of 8% a year compound

• Renewed term commencement rent to be the greater of market rent or that amount which is 8% over the preceding year's rent, with similar mechanisms for increase for the balance of the

renewed term

DVA 10 Eagle Street

Report of Inquiry into the Centenary House Lease 251

Lease 16

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

Description on C1194.012.0330

107 at ATO.00 1.000 1-0076

1 July 1994

Hawktrail Pty Limited

Commonwealth of Australia

Australian Taxation Office cnr Woniora Road and Greenbank Street Hurstville NSW

14,700 square metres

Offices, storage and car spaces

10 years commencing 1 July 1994

Two renewals of five years each

• Initial term fixed annual increases at the rate of 6.25% a year compound

• Renewed terms - commencement rents to be the greater of the finishing rent under the preceding term or market and thereafter to be reviewed biennially as agreed or to market with ordinary ratchet clause preventing rent from going below the rent for Year 10 of the initial term

ATO Hurstville

252 Report of Inquiry into the Centenary House Lease

Lease 17

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

108 at AIR.001.0002-0106

4 August 1994

Nauru Phosphate Royalties Trust

Commonwealth of Australia

Nauru House 80 Collins Street Melbourne Vie (Levels 33-40 and part of Level 41)

Offices

9021 square metres

10 years commencing 1 July 1993

One renewal of five years

• Initial term

- Years 1 to 5 fixed at a specified rent with no increase throughout the period

Years 6 to 7 increased by 8% over the rent for the preceding period (about 3.8% a year)

Years 8 to 9 increased by 10% over the rent for the preceding period (about 4.8% a year)

Year 10 - increased 12% over the rent for the preceding period (about 5.8% a year)

• Renewed term - the greater of the preceding period's rent or market rent at Years 1, 3 and 5

Description on CH94.012.0330 Industrial Registrar Nauru House

Report of inquiry into the centenary House Lease 253

Lease 18

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

Description on CH94.012.0330

109 at DFCS.001.0005-0043

9 November 1994

Thomco (No 100 1) Pty Limited

Commonwealth of Australia

23 High Street Gawler SA

Offices

1400 square metres

10 years commencing 27 August 1994

Two renewals of five years each

• Initial term fixed biennial increases at the rate of 8% (about 4% a year) compound

• Renewed terms commencement rent to market or prior rent at discretion of lessor, thereafter biennial reviews as agreed or to market but only to be instigated at the discretion of the lessor

• No ratchet clause

DSS Gawler

254 Report of inquiry into the Centenary House Lease

Lease 19

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

Description on CH94.012.0330

109 at COMM. 018.0149-0189

16 May 1995

The Church of England Collegiate School of Saint Peter

Commonwealth of Australia

Cnr of Pulteney and Flinders Streets Adelaide SA

Offices, storage and car spaces

17,500 square metres

10 years commencing 1 June 1993

Two renewals of five years each

• Initial term fixed annual increases at the rate of 8% a year compound

• Renewed terms annual or biennial reviews to market with ordinary ratchet clause

ATO Pulteney Street

Report of Inquiry into the Centenary House Lease 255

Lease 20

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

107 at COMM. 023.0001-0032

24 May 1995

The Electricity Commission of New South Wales

Commonwealth of Australia

The Pacific Power Building cnr Park and Elizabeth Streets Sydney NSW (Levels 1-5)

Offices and car spaces

Not available

12 years commencing 1 September 1993

Two renewals of five years each

• First 18 months of initial term rent free

• Initial term after rent-free period fixed annual increases at the rate of 4% a year compound

• Renewed terms market at commencement of term and fixed annual increases at the rate of 4% a year compound thereafter with ordinary ratchet clause

Description on CH94.012.0330 NCA Hyde Park Tower Sydney

256 Report of Inquiry into the Centenary House Lease

Lease 21

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

108 at ASIC.001.000I-0065

23 April 1996

Enwerd Pty Limited and Anor

Australian Securities Commission

Grey Street, Traralgon Vic

Offices and car spaces

8000 square metres

15 years commencing 22 March 1993

Two renewals of five years each

• Initial term fixed biennial increases at the rate of 10.25% (5% a year) subject to the entitlement of the lessor to seek to have the rent reviewed to market on no more than three occasions during the initial term and subject further to the lessee

having a similar right on no more than one occasion during the initial term with an ordinary ratchet clause in the event that a market review is initiated

• Renewed terms commencement rent is to be the same as the finishing rent under the previous lease or fixed in accordance with the terms reflected in the initial lease for rent review

Description on CR94.0 12.0330 ASC Taralgon [sic]

Report oflnquiiy into the Centenary House Lease 257

Lease 22

Ex No

Date of lease

Lessor

Lessee

Address of premises

Type of premises

Area of premises

Term of lease

Option details

Rent review provisions

Description on CH94.012.0330

109 at DEWR.001.0002-0065

Not available

Brasco Pty Limited

Commonwealth of Australia

102-104 Cameron Street Launceston Tas

Office and car spaces

Not available

Not available

Not available

Fixed periodical escalations or market, whichever is the greater (the exhibit does not disclose the periods in relation to which the fixed factors are to be applied)

DEET Launceston

258 Report of Inquiry into the Centenary House Lease

Appendix F

Schedule of leases prepared by the Property Group

CONFIDENTIAL

Leases for terma of 10 years or more

* DSS headquarters, ACT Tuggeranong -25 years 'zT NSW -• - C

C

•A- .

Lea=s 10 1Gyeaaiore with fixed escalations but wtUout market reviews . DSS mpute centre, Hom€bush -15 years

ACT • Scrhmner Building, Fernhifl Park (2-yearly - 9%pa) • Barron Place, Queanbeyan (OPI)

NSW • Worksate, Campnrdawn (2-yearly -8%: iplard market review at year 6) • AMEP. Bankslown (annual - grear of CPI or arithmetic formula) • DSS Conimal (annual - greater of 8% or market) • DSS Rydo (CPI annually)

• ATO, Newcastle (6 0/6 pa) • ATO, Bankatown (annual - greater of 8% or market) a ATO. Huistvlffe(625%pa). • ATO Wollongong (7% pa) • NCA. Hyde Park Tower, Sydney (4% pa) • National Maritime Museum, Pyrmont (greater of market, CPt or 8% annually)

VIC • Industrial Registrar, Nauru Hottas (Itxed for 4 yaara .4- at year.; + 1O t year 7 -4-12(-. t year 9) • DSS, 300 LaTrobo Street ($290 for 4 yea-re, $335 for next 2 years, + 7% for next 4 years

rent free for years ll and 12) ASO, TnrIgon (2-yearly at 5%a)

QLD • DSS, 443 Queen Street (fixed for 2 years, + 6% years 3 and 4,+ 41X-pa years S to 10) • QVA,10 Eagle Street (4% pa for first 4 years, 7% pa for na)d 2 years, 8% pa for next 4 years)

k

SA a ATO, Pulteney Street (B44jO a D$S; c3awler (4 1 16pa)

WA " DSS, 225 St Georges Terrace (fixed for 5 years then 5a)

TAS -

• DEET, Launoestofl (6 0/opa)

•

DEET/DSS, B4dgewat0r (9.5%a) •

CRSAEGHHLGM A Ao,DEET, Bumle (3%pa) • DEET, Mowbray (4%pa) • ATO, 200 Collins Street. Hobart my-pa) ?

!A L

Report 0/inquiry into the Centenary House Lease 259

Appendix G A roadmap to the Report

The terms of reference do not always follow a logical order. They are discussed in a different order and in various chapters of the Report. This appendix provides for the reader who does not wish to read the Report in the intended order a guide to the main chapters where each term of reference is discussed.

Chapter 19 discusses term of reference (a) whether movements and trends in commercial rates and leasing arrangements since the 1994 Inquiry, or any other matters, cast new light on the findings of that Inquiry.

Chapters 7, 9 and 19 discuss term of reference (b) whether the Centenary House lease is in line with leasing arrangements, whenever made, of a comparable kind.

Chapter 18 discusses term of reference (c) - whether the terms of reference of the 1994 Inquiry could have been better designed to enable information relevant to the Centenary House lease to be elicited. It also deals with term of reference (d) whether the resources provided to the 1994 Inquiry, the absence of counsel assisting, or the particular processes adopted adversely affected that Inquiry.

Chapters 10 to 14 discuss term of reference (e) whether Commonwealth agencies gave or received appropriate advice in relation to the Centenary House lease before it was entered into, including in relation to the term of the lease; the effect of the rent escalation provisions in the lease; whether there was an adequate market review mechanism in the lease; market conditions; and other relevant matters.

Chapter 17 discusses term of reference (I) whether, in light of any new information that is elicited, there were payments or inducements offered in relation to the Centenary House lease which raise issues of impropriety, and whether further examination of witnesses or documents by the 1994 Inquiry may have identified such issues.

Chapter 16 discusses term of reference (g) whether, in light of any new information that is elicited, any person involved made a misleading statement in relation to the Centenary House lease or any proposal since 1994 to renegotiate or vary the lease.

Chapter 9 discusses term of reference (h) whether the government leases referred to in submissions in the 1994 Inquiry, or in the Report of the 1994 Inquiry, for the purposes of comparison with the Centenary House lease provided a reasonable basis of comparison, and whether other leases, including non-government leases, would have provided a more appropriate basis of comparison.

Report ofInquiry into the Centenary House Lease 261

Chapter 20 discusses term of reference

(1) whether there exist any other

issues of concern in relation to the Centenary House lease.

262 Report ofInquiry into the Centenary House Lease

Appendix H

The 2004 Inquiry

The Inquiry into the Centenary House Lease was announced by the Attorney-General, Mr Philip Ruddock MP, on 20 June 2004. Letters Patent were issued on 24 June, with additional Letters Patent being issued on 29 September and 26 November extending the reporting date ultimately to 6 December.

Ms Sheila Butler, a former Commonwealth officer with experience in the administration of Royal Commissions, was engaged as Executive Officer on 1 July.

During the first week in July, and after consulting a number of counsel, I selected Mr Lindsay Foster SC and Mr David Robertson to assist me in the Inquiry. The Attorney-General duly appointed them counsel assisting the Inquiry, in accordance with s 6FA of the Royal Commissions Act 1902.

The Attorney-General's Department suggested that independent solicitors be retained to assist the Inquiry because the Office of the Australian Government Solicitor had played a small part in the negotiations for the Centenary House lease. Expressions of interest were sought from a number of Sydney legal firms, and I selected Sparke Helmore Lawyers from among those expressing interest. Ms Susan Bennett and Mr Roman Jewell became the solicitors for the Inquiry.

The hearing and the submissions

A preliminary hearing took place on 13 July to hear applications for leave to appear from persons claiming a legitimate interest in the terms of reference. The hearing itself began on 9 August.'

By agreement with the Administrative Appeals Tribunal, two hearing rooms at its premises at 55 Market Street, Sydney, were combined to form a suitable courtroom for the hearing. 2 An electronic database with sophisticated search facilities was set up to ensure that all material obtained by the Inquiry could be displayed on screens in the courtroom. This was combined with a real-time transcript. The courtroom equipment was reproduced in the Inquiry's offices, which were in the same building. The parties were regularly provided with updated CD-ROMs containing all documents tendered in evidence for use away from the

Public notices were published on 6 July (advising the public of the terms of reference and the date of the preliminary hearing), 10 July (asking for information to be provided to the Inquiry) and 28 and 30 July (advising the public of the start of the public hearing). Mr Graham Millar, a former Commonwealth officer with experience of Royal Commissions, secured the premises in negotiations with the Administrative Appeals Tribunal

Report oflnquiry into the Centenary House Lease 263

courtroom. The parties were permitted on request to examine files produced in

answer to notices to produ

All material produced in response to notices to produce was returned at the end of the Inquiry.

The Inquiry sat for 36 days between 9 August and 29 October, Thirty witnesses were called, and the statements of two more witnesses were received without oral evidence by agreement with counsel for the parties. The following witnesses gave oral evidence.

John Barwood Audit Office Graham Jeffress Valuation Office

Frank Campbell Audit Office Ian Joyce Department of Finance

Malcolm Coleman Valuation 'T Anne Kelly Australian Government Solicitor

Russell Coleman Audit Office Noel McCann Lessor's property adviser

Dominic Collins Property C John McFadden Lend Lease

Brian Cooney Department : Gerard McGrory Audit Office

Frank Egan Independent valuer Richard McKeon Lend Lease

Paul Ferrari Property Group Ian McPhee Department of Finance

Noelene Garner Property Group John Meert Audit Office

Graham Glenn 1994 Inquiry administrator Robert Morison Audit Office

Robert Hogg John Curtin House Ltd Penelope Morris Lend Lease

Rex Hoy Property Group Glen Nicholson Lend Lease

Brian Hurrell Valuation Office John Taylor Auditor-General

Robert Ireland Property Group Wayne Turner Department of Finance

Michael Jacobs Audit Office Eddy Wojcik Department of Finance

The two statements received by agreement without oral evidence were those of Mr Stephen Sedgwick (Departr nt of Finance) and Mrs Fay Robinson-Obst (Australian Property Group).

By agreement with those apr earing, final submissions were made in writing. 3 Submissions were received from tue following:

• Counsel assisting the Inquiry

• Bovis Lend Lease Pty Ltd

• John Curtin House Ltd

• Mr Paul Ferrari

On 22 October and 3 November, directions were issued fixing a timetable for the filing of submissions from the parties and persons claiming a legitimate interest in the terms of reference.

264 Report of Inquiry into the Centenaiy House Lease

• Mr John Meert

• Mr John Taylor.

(Counsel for the Commonwealth appeared during the hearing and filed submissions in support of the Commonwealth's claims for public interest immunity and judicial immunity against disclosure.)

Appearances

The parties granted leave to appear, the witnesses granted leave to have legal representation and their legal representatives were as follows.

Counsel Solicitors

Lindsay Foster SC David Robertson

Steven Finch SC Robert Beech-Jones

John Sackar QC Tony Payne

Henry Burmester AO QC Tom Howe

Peter Ward, Solicitor

John Sackar QC Tony Payne

Tony McInerney

Steven Finch SC Robert Beech-Jones

Robert Beech-Jones

Robert Beech-Jones

Robert Beech-Jones

Peter Braham

Assisting the Inquiry

Parties

Bovis Lend Lease

John Curtin House

Commonwealth of Australia (intervening on immunity claims)

Witnesses

Paul Ferrari Property Group

Robert Hogg John Curtin House

Graham Jeff ress Valuation Office

Penelope Morris Lend Lease

John McFadden Lend Lease

Richard McKeon Civil & Civic

Glen Nicholson Civil & Civic

John Taylor Auditor-General

Sparke Helmore Lawyers Susan Bennett and Roman Jewell

Freehills Daniel Moulis

Higgins Solicitors, Canberra Michael Higgins

Australian Government Solicitor

Blake Dawson Waldron, Canberra

Higgins Solicitors, Canberra Michael Higgins

Phillips Fox James Berg

Freehills Daniel Moulis

Freehills Daniel Moulis

Freehills Daniel Moulis

Freehills Daniel Moulis

Corrs Chambers Westgarth Frank Lawson

Report of Inquiry into the Centenary House Lease 265

The website

The Inquiry's website was hosted by the Attorney-General's Department. The site shows the terms of reference, public information notices, hearing times, locations and other information. The daily transcript was posted on the site, each day's transcript being available the following morning. The six decisions on public interest immunity, the decision on judicial immunity against disclosure and the various directions made were also posted. This Report will be posted after it has been tabled in Parliament. The site will continue to be available after the conclusion of the Inquiry through the website of the Attorney-General's Department .

Acknowledgments

Many people assisted me in this Inquiry. They formed part of a close team, and they worked with enthusiasm and goodwill. It was a pleasure to be part of such a team, and I am grateful to every one of them for the cheerful assistance they gave.

Sheila Butler, the Executive Officer, ran a tight but happy ship, and she protected me from the worries associated with the Inquiry's budget which I was surprised to learn was my responsibility. I record my thanks for her willing support.

Special gratitude must be expressed to the legal team, who worked exceedingly long hours with expertise and dedication. My particular thanks are due to Lindsay Foster SC, without whose industry and tenacity this Inquiry would not have been able to explore the issues as thoroughly as it did.

The following individuals worked on the Inquiry for all or part of its term. The greatest number of staff at any time, excluding Australia, was fifteen.

Executive Officer

Sheila Butler

Legal team

Lindsay Foster SC Senior counsel assisting David Robertson Junior counsel assisting

Sparke Helmore Lawyers

Susan Bennett Senior solicitor Roman Jewell Junior Solicitor

266 Report of Inquiry into the Centenary House Lease

Secretariat

Jenny-Lee Collins Allison McKellar Nicole Evans Luke Manderson Michelle Sabatier

Sue Sutton Jacqueline Warr Parmj it Rai Janette Fyfe Amanda Carter Kali Ressom Joelle Girard

Office Manager Receptionist Paralegal Paralegal Paralegal Administrative support Administrative support Typist Typist Typist Clerical support

Hearing room officer

Media liaison

Scott Milson

Report editing and design

Chris Pine Julie Hamilton Debbie Phillips

Australia Pty Ltd

Rebecca Grant Neeraj Chand Priscilla Chehab Garth Holmes

Lynda Ryan Sally Hicks Karyn Semler

Project Manager Assistant Project Manager Hearing room operator Software support (Wandalan Pty Ltd) Software support (Wandalan Pty Ltd) Transcriber Transcriber

Report of Inquiry into the centenary House Lease 267

Report of the Inquiry

into the

Centenary House Lease

In June 2004 the Commonwealth Government established an Inquiry into the Lease of Centenary House in Barton in the Australian Capital Territory. The Hon David Hunt AO QC was appointed to conduct the Inquiry.

In April 1992 the Commonwealth agreed to Lease Centenary House - a building which was to be constructed by John Curtin House Ltd, a company associated with the Australian Labor Party - for 15 years. Centenary House was occupied by the Australian National Audit Office in June 1993.

In 1994 the Royal Commission into Leasing by

the Commonwealth of Accommodation in Centenary House was conducted by the Hon Trevor Morling QC. In March 2004, the Senate passed a motion calling on the Government to review the findings of that Royal Commission.

Commissioner Hunt presented the report of his Inquiry in December 2004.

I r

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

PARLIAMENTARY

PAPER No. 26 of 2005 ORDERED TO BE PRINTED ISSN 0727-4181