SILK Logistics is terminating its agreement for lease of a site in Kemps Creek NSW, where it intended to build new company warehouses.

The ASX-listed company announced in November 2021 that it had entered a contract to acquire the 11-hectare greenfield site for a cash consideration of $58 million.

Then, in April 2022, Silk novated the land purchase contract to asset manager ESR Australia and entered into an agreement for lease, under which it held the right to enter a 10 year lease for purpose-built warehouses on the Kemps Creek site.

According to Silk’s 2022 annual report, the Kemps Creek site would enable the establishment of a new Silk logistics hub in New South Wales and create increased warehouse capacity at reduced operating costs.  

The agreement was subject to satisfaction on a number of conditions, including ESR acquiring the land which was the subject of the novation, together with adjacent land and planning, building and development approvals.

Silk noted the agreement for lease could be terminated if the final proposed cost of the building works exceeded a prescribed amount, and if the parties could not agree to new proposed costs – referred to as a commercial position.

Silk has confirmed in an announcement to the ASX that the parties were unable to satisfy all the lease conditions and agree on a revised commercial position.

The company has chosen to terminate the agreement and, as a consequence, forego likely future lease incentives of up to $28.88 million.

Future lease incentives would have been recognised over the term of the property leases which were expected to commence in the 2025 financial year.

“Stepping away from the Kemps Creek development, whilst disappointing, does allow the company to adapt to the current market conditions and mitigate any exposure to escalating construction and property costs,” Silk CEO Brendan Boyd said.

“We retain a robust and fit-for-purpose property portfolio in NSW and nationally and will continue to investigate new property opportunities as and when needed to support Silk’s growing customer base.”

There are no termination costs payable by Silk under the agreement, the company said.

It said there would be no financial impact to the reported FY 2023 trading result nor the anticipated group result for FY 2024.