The government announcement this week that it has control of the Hilton hotel by virtue of re-possessing the property and thereby the building on it, follows a long dispute between local and foreign shareholders since the inception in 1984.
It all began in the early 1980s when businessman Cornel Perera approached the government with the idea of bringing over the Hilton hotel with Japanese firms putting in the money. On February 7, 1984, the Urban Development Authority (UDA) signed an agreement with Mr Perera to lease out a seven acre plot of land at Echelon Square in Fort for Rs 136 million where the Hilton is now located. The deal was criticized by the opposition parties at the time as not being transparent and conducted in secrecy.
|The Hilton Hotel
A week later on February 15, Mr Perera’s Cornel & Co in turn sub-leased the premises to Hotel Developers Lanka Ltd (HDL) for almost double that amount – Rs 250 million. Both leases were for 99 years. The latter deal was settled in issuing 25 million shares of the company to Cornel in lieu of payment. Subsequently, he purchased another 300,000 shares in the company and raised his stake to 51%.
HDL had two foreign collaborators – Mitsui & Co and Taisei Corporation of Japan which in addition to the equity investment also had agreements to construct and furnish the hotel. It provided a syndicated loan of YEN 12.3 billion to finance the project. The government agreed to give a guarantee as to the loan repayment obligations. Cornel (Co.) then transferred its 51% stake to the government under a share transfer agreement.
However Cornel & Co paid only Rs 27 million to the UDA which was only 20 % of the value of the lease rental payable to UDA i.e 20% of Rs 136 million. The balance was to be paid in 33 interest free installments but this was never ever paid (since 1987). As a result, the land reverted back to the State through Deed 673 and 674 when in August 1999, Cornel surrendered the land back to the state and the lease agreement was repudiated.Although this was not formally announced, it meant HDL and Cornel didn’t have any ownership or right to the land. However no other action followed despite the ownership now being in dispute – with the hotel company continuing to function without any hindrance.
Another issue that has dogged HDL, according to industry analysts, is that the management fees agreed to with Hilton is too high and above market rates. The 1984 management agreement with the Hilton entitles it to 31 % of the Gross Operating Profit (totaling some Rs 188 million in 2010) while the Hilton’s fee to manage the JAIC (Hilton) is only 12 % of GOP.
The five main shareholders of the company are Government of Sri Lanka 65 %, Mitsui 13 %, Taisei 13 %, Takashimaya Co 1.2 % with the rest held by Cornel and the public. The company is listed in the Colombo Stock Exchange but has failed to submit accounts since 1990.
Industry analysts said the hotel desperately needs refurbishment and an upgrade to keep in line with other top five star properties in Colombo with the Taj planning a $40 million upgrade. However the hotel company cannot proceed due to pending legal cases and lack of funds.
There are seven cases involving the hotel. The first one was filed by Cornel against Mitsui and Taisei in the District Court; the second in the Supreme Court between the same parties; the third in the High Court involving the same parties; the fourth by Nihal Sri Ameresekere to wind-up HDL, the fifth by Mr Ameresekere against Minister G.L. Peiris; the sixth by HDL against Mr Ameresekere and the final one by HDL against the Municipality over revenue issues. All cases are pending and not finalized.