The process whereby businessman John Jefferis negotiated a cut-price deal to take over Government-owned Stonington Beach Hotel was substantially more lucrative than that originally agreed, according to Auditor General Larry Dennis who claimed the deal was unfair and should have been retendered.

The deal Mr. Jefferis secured after he was selected was “considerably more beneficial” to him than the tender document specified and might put off future bidders for Government contracts if they don't think the process is open and fair, said Mr. Dennis.

He said because the lease signed by Mr. Jefferis was so drastically different from that agreed in the tendering document when he was selected, it should have been put out to tender again.

The Auditor's report confirms in detail a Royal Gazette story last July which revealed that after Mr. Jefferis was selected ahead of other bidders to take over the Government-owned hotel, he renegotiated the terms to:

Double the length of the lease from the agreed 21 years to 50 years;

Drastically reduce the amount of rent to Government;

Acquire an extra 1.9 acre plot of oceanfront land with two cottages which was not on the table;

Get permission to build condominiums which can be sold on at a handsome profit.

In a hard-hitting report, Mr. Dennis has found the deal Mr. Jefferis's company Coco Reef Resorts Limited eventually secured from a committee reporting to the Ministry of Tourism was substantially more advantageous to him, and that it does not meet the criteria of a fair and open letting process.

He said the lease seemed to take account of Mr. Jefferis spending $12.9 million upgrading the beachfront property, but Mr. Dennis points out this includes the cost of building 30 villa suites that can be converted to condominiums and sold on.

But Mr. Dennis said he has taken legal advice which showed the lease could not allow Mr. Jefferis's company to sell on the condominiums.

“The lease that was eventually executed was so materially different from the Heads of Terms that was the basis for proposals requested from short-listed bidders, the tendering process was effectively compromised,” Mr. Dennis reports.

“Furthermore, lack of definitions and apparent omissions in the lease document are causing, and may well cause in the future, problems with the administration of the lease.” Mr. Dennis said while it was reasonable to have some differences between a final lease and the Heads of Terms, in the Stonington case “the differences outlined are so numerous, and their impact so financially material, that the lease is a substantially different product from that envisaged by the Heads of Terms.

“In several respects, particularly the additional ocean-front and woodland reserve lands, the much reduced rents, the longer lease term, and the right to develop and sell condominiums, the lease is considerably more beneficial to Coco Reef than envisaged in the Heads of Terms.

“In my view, if the Ministry of Tourism believed (which it obviously did) that the final lease represents a satisfactory arrangement, it should have re-sought tenders using new Heads of Terms reflecting the arrangement.

“For these reasons, I do not believe that the lease letting meets the test of fair, open and without restrictive practice envisioned by Financial Instructions.

“If bidders on Government contracts are not satisfied that their bids are treated in a fair and open manner, they may not in future waste time and money submitting bids. This may lead to reduced competition and higher Government costs.”

Mr. Jefferis was selected by a Government committee to run Stonington in December, 2002 after the hotel was transferred from the Department of Education to the Department of Tourism.

Mr. Dennis said the Stonington saga perfectly illustrated a problem he highlighted in his report last year, when he stated: “There is a worrying tendency in some parts of Government when letting material contracts for the procurement of goods and services to change the tendering criteria after the selection is made.”

Tourism Minister Renee Webb said the report was “erroneous” and she would be making a full statement next week, but she said Government should be thanked for getting a top hotelier to transform the loss-making property into a tourist asset.

But Opposition Leader Grant Gibbons said the way Mr. Jefferis managed to renegotiate the lease so favourably was “extraordinary” and the taxpayer deserved a full explanation.

And he described Government's defence of its actions as “weak” and incredible.

On the eventual lease allowing Mr. Jefferis's company to return all land except condominiums, Mr. Dennis writes: “I have obtained legal advice that the lease cannot confer on Coco Reef the right to sell condominium freehold in the property.

“That at the end of the 50-year lease the property will revert to the landlord (Government). It is unclear, therefore, why this provision is in the lease.”

Government responded that the words “sale” and “condominiums” were “inappropriate because Coco Reef does not own the freehold”.

The rent agreement Coco Reef eventually negotiated “does not commit it to perform specified or other capital improvements, so there is uncertainty as to enforceability,” the Auditor wrote.

The lease also does not address how much rent will be paid in years 22 through to 50 but the assumption to be used “look to be favourable to the tenant”.

The Heads of Terms called for the successful bidder to maintain insurance but the eventual lease lands Government with this bill.

In Mr. Dennis's report, Government responded: “This was deliberate in drawing up the lease but what is missing is the tenant's contribution for same. It is also understood that this will be one of the points revisited when responsibility for the hotel transferred to the Ministry of Tourism (at the end of the lease).

The Heads of Terms said there should be a $600,000 performance bond, but there is no mention of this in the lease.

Government said a major benefit to taxpayers would be that Coco Reef would train staff at Mr. Jefferis' other hotel in Tobago.

Mr. Dennis notes that this training offer from Mr. Jefferis “clinched” the deal, yet it is not even mentioned in the lease.

The lease also makes no mention of penalties if Coco Reef do not meet their commitments. “So, should Coco Reef, a limited liability organisation with a share capital of $12,000 experience financial difficulties and default on payment, loss to Government could be substantial,” wrote Mr. Dennis.

Government guidelines assert that contracts this size have to be vetted by the Attorney General's Department before signing, but Mr. Dennis said he wrote to the AG's Chambers in March seeking the information had heard nothing back.

Government responded that someone from the AG's Chambers was on the Transition Committee overseeing the hotel moving from Bermuda College to Tourism, so Chambers helped develop the lease.

Ms Webb said yesterday: “I am surprised at the erroneous information in this report. Next week there will be a Ministerial statement outlining the facts, because there is a lot of fiction.

“The Ministry of Tourism did not take responsibility from Bermuda College for the tendering process. The lease was drafted and put out to tender by Bermuda College. When we made the award to Coco Reef there were a number of discoveries made. As an example, the electricity had to be separated from the College, and the telephone system. Government took a hotel that for the last 20 years was a drain on the public purse and tried to rectify that situation. Mr. Jefferis invested millions of dollars that Government would have had to invest in a losing entity.

“We decided not to invest in a hotel that was losing money and decided to get a hotelier with expertise in to invest in the hotel. The hotel is now a product we all in Bermuda can be proud of.

“It is a fact we had to negotiate the terms of the lease, but that is to be expected given the magnitude of the project.

“The lease we ended up with was significantly different because of the negotiating process and we kept finding problems. The selection committee renegotiated to the best of their ability.”

Dr. Gibbons said: “The community certainly deserve a very full explanation from Government as to how the original terms as set out in the tender document could have changed so substantially in the eventual lease that was signed by Mr. Jefferis and Coco Reef.

“The explanation given in the Auditor General's report by the Ministry of Tourism is weak and totally inadequate.

“It is very clear that no one was looking out for the interests of the taxpayer in this and to have the terms so favourably changed for Mr. Jefferis after the tender is really quite extraordinary.”

Mr. Jefferis was off Island yesterday and was also not in his property in Tobago, so could not be reached for comment.