Knowing the form - Steven Edwards, the self-confessed Gooner who acted for his favourite team, tells us about the amazingly complex deals that lay behind the building of the Emirates Stadium
Arsenal has come a long way since 1866 when a group of workers at the Woolwich Arsenal Armaments factory decided to form a football team. It is now a member of the G14 group of elite football clubs, and in the past 10 years has notched up three league championships, four FA Cups and a place in the Champions League final.
All of which means Arsenal can claim to be one of the leading forces in European football. There is another league, however, where they have consistently lingered in the mid-table doldrums - the league of match day attendances. There are 10 teams in the Premiership whose stadiums are larger than Highbury, most notably Old Trafford, which can seat a colossal 67,000 fans. By contrast, Arsenal could squeeze 38,000 into its old ground. The difference is not merely the roar of the crowd but the ker-chings of the cash register. Manchester United earns £1m more for every home game at Old Trafford than Arsenal does at Highbury.
The problem is that Highbury is landlocked; there is no land available on any side on which it could build larger stands. This meant that the directors were faced with a choice of being constantly out-gunned by the European superclubs, or of leaving Highbury - but Islington council was determined to keep the team within its boundaries.
Disposing of the rubbish
The solution was found on a rubbish dump. The council owned an industrial estate just off the Holloway Road called Ashburton Grove. This is the place where Islington's bin lorries come to dump their loads. The council leased properties to businesses around the edge of the site, and located some of its own departments there.
Although the council was willing to sell the site to Arsenal, it could only do so under certain conditions. As a public body, it had obligations to the tax payers of Islington, and it also had to consider European regulations on the funding of private projects. So, before the deal could go ahead Arsenal would have to relocate all the businesses on the site. That meant negotiating with each of them. Some were quite happy to sell up and move on, but others would only sell if Arsenal found them somewhere else to go. Some did not wish to move at all. Therefore, in order to get vacant possession of Ashburton Grove, Arsenal had to start buying up properties elsewhere in Islington. The directors of Arsenal found that they were in charge of a property company that had embarked on a development of such complexity that few experienced developers would have taken it on.
The council's second condition was that its service providers on the site would be relocated with no interruption to the service. To relocate Islington's refuse disposal service, Arsenal had to build a state-of-the-art recycling centre off the nearby Caledonian Road.
The council's third condition was that the new stadium had to be part of the wider regeneration of the area. In addition to social facilities such as day care and health centres, the club will, when the scheme is completed, have provided more than 2000 homes, including social and key-worker housing.
A mountain of legal documents
As with Wembley, the construction contract started life as a JCT with contractor design
All these problems had to be overcome in order for Arsenal to arrive at the point at which most developers start off - simply owning a vacant site on which they could build. It took Arsenal four-and-a-half years and many millions of pounds to get to this point. The first two years were spent developing the planning application, including a compulsory purchase order. The next two-and-half were devoted to negotiating the legal documents to relocate the council's services and other businesses from the site. And all that had to be done before starting on the financial documents needed to borrow the money to fund the construction of the stadium.
For a lawyer, it is difficult to imagine a more complex and challenging project. It had it all. Planning, compulsory purchase (including a judicial review of the issue of the CPO), real estate, commercial, state aid, public procurement, litigation, dealings with every government office imaginable - and construction. All of this was carried out against the background of non-recourse financing, whereby the debt providers only had access to the anticipated cash flows that would be produced by the new stadium rather than the club and its assets.
The lump-sum, fixed-price contract
The construction contract was the key project document that enabled the club to raise the debt finance to construct the stadium on a non-recourse basis. As with Wembley, the construction contract started life as a JCT standard form with contractor design. As the financing developed, amendments were negotiated to convert it into a lump-sum, fixed-price, fixed-date "turnkey" contract where most of the construction and programme risk lay with the Sir Robert McAlpine, the contractor for the job. McAlpine was prepared to accept single-point responsibility for design and construction on the basis that, on the conversion of the contract from reimbursable to fixed price, the professional team was novated to it. The professional appointments had been signed in advance with the novation in mind to provide the contractor with recourse against the professionals in the event of a claim under the construction contract.
The employer's requirements were, generally, performance-based, although it was important to the club to specify and retain limited design control over areas such as the changing rooms and pitch.
In order to make the construction contract as simple as possible, we provided, in one contract, for the construction of the waste facility and the stadium (including two bridges spanning railway lines) with a fixed completion date and liquidated damages applicable to each. However, as the debt finance was realised on the basis of the stadium (rather than the waste facility which was transferred to the council), the liquidated damages applicable to the waste facility only needed to match the limited exposure the club had under the relocation arrangements.
Fixing the liquidated damages for the stadium was a challenge. To be enforceable, such damages need to be a genuine pre-estimate of the loss likely to be suffered as a result of delay. This was relatively easy in relation to the interest required to support the debt but more difficult in respect of the income the club would lose in the event of delay. This, of course, depended on whether the period of the delay occurred during the football season (where the loss in respect of each match played at Emirates as opposed to Highbury was significant) or after the season, where the loss of income to the club was negligible. The added complication was assessing the loss related to Highbury, as its conversion into flats (many of which have been pre-sold) cannot commence until the completion of the new stadium.
The main area of construction risk related to the erection of the two bridges spanning the railway lines and the pitch. Fixed possession dates had to be agreed with the railway authorities, with stiff penalties for disruption. There was also the risk of damage to infrastructure, all of which could only be achieved on an indemnity basis. It was to the credit to the contractor that it was so confident in its abilities that it accepted these risks. The pitch was procured using a subcontract package let by the contractor to maintain single-point responsibility.
The hard part is over. Construction is on schedule and, touching wood and crossing fingers, the stadium will be ready for the coming season. Arsenal have just completed the re-signing of Thierry Henry, and are already working on refinancing the loan through a bond, thereby saving millions of pounds in interest repayments. Soon we can start work on turning Highbury into luxury flats for Gooners with money to burn …
Steven Edwards is a partner at Slaughter and May