Body Corporate 201036 v Whai Rawa Railway Lands LP
[2022] NZHC 700
•7 April 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-1168
[2022] NZHC 700
BETWEEN BODY CORPORATE 201036
Plaintiff
AND
WHAI RAWA RAILWAY LANDS LP
Defendant
Hearing: 10 March 2022 Appearances:
Jeanne Heatlie and Jonathan M Wood for the Plaintiff Davey Salmon QC and Steven Ma Ching for the Defendant
Judgment:
7 April 2022
JUDGMENT OF ASSOCIATE JUDGE C B TAYLOR
This judgment was delivered by me on 7 April 2022 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
………………………….
Registrar/Deputy Registrar
Solicitors:
Court One (Jeanne Heatlie/Jonathan Wood), Auckland, for the Plaintiff
LeeSalmonLong (Steven Ma Ching/Rachel Keane), Auckland, for the Defendant
Counsel:
Davey Salmon QC, Mills Lane, Auckland, for the Defendant
BODY CORPORATE 201036 v WHAI RAWA RAILWAY LANDS LP [2022] NZHC 700 [7 April 2022]
Introduction
[1] The plaintiff in this proceeding, Body Corporate 201036 (the Body Corporate) seeks declaratory relief to vary the amount of ground rent payable under a 125-year lease between the parties. The lease concerns the Parnell Terraces, located at the corner of Ronayne Street and the Strand in Parnell, Auckland.
[2] The defendant, Whai Rawa Railways Lands LP (Whai Rawa) seeks strike out and/or summary judgment on the basis that there is no basis in law for making the orders sought and that the sole cause of action cannot succeed.
Background
[3] This proceeding is about the Parnell Terraces. Whai Rawa is the present ground lessor of the Parnell Terraces; the Body Corporate is the present lessee.
[4] The ground lease is for a term of 150 years. It commenced on 2 August 1996, at a time when the land was undeveloped. The parties to the lease at that time agreed that the rent payable under the lease for the first 15 years would be 10 cents per annum.
[5] On 17 April 2000, a unit plan was deposited in respect of the leasehold interest in the land and it was subdivided into 81 units. The units were later developed into three-storey townhouses, arranged in six terraced blocks.
[6] Clause 3.3 of the lease provided for rent reviews to take place on the 15th anniversary of the lease’s commencement, and every seven years thereafter. The rent payable would be calculated at 6 per cent per annum of the value of the unimproved base land.
[7] Clause 3.3 requires the lessor to give written notice of the amount it considers to be the current market value of the base land, and for the lessee to give notice within 28 days if it disputes the lessor’s assessment.
[8] On 25 May 2018, Whai Rawa served a notice on the Body Corporate, advising that its assessment of the market value of the land at Parnell Terraces was $24,690,000
(plus GST). It advised the Body Corporate that it had 60 days to dispute this assessment.
[9] On 24 July 2018, the Body Corporate gave Whai Rawa notice that it disputed the assessment, saying instead that the land value was $18,350,000 (plus GST).
[10] After some discussions between the parties, the Body Corporate advised it was seeking a second valuation. On 13 November 2018, the Body Corporate advised that its valuer had assessed the value of the land at $21,460,000 (plus GST).
[11] Early the following month, the Body Corporate advised that it was taking steps to arrange a meeting of unit holders to consider a new rent rate, but that due to the Christmas period there would be difficulties in arranging that meeting. Whai Rawa agreed to extend the period for a response to 31 January 2019.
[12] On 18 December 2018, the Body Corporate told Whai Rawa that the unit holders had resolved to agree to a new rent rate using a land value of $22,925,500 (plus GST) — a midpoint between the parties’ respective valuations. As a result, the annual ground rental from 2 August 2018 was set at $1,375,530.
[13] On 2 October 2020, the Body Corporate manager wrote to Whai Rawa about payment of the ground rental. He advised that the Body Corporate had incurred significant legal costs in pursuing defaulting owners and was no longer in a position to do so. He also said that the Body Corporate intended to direct owners to pay rent directly to Whai Rawa and that the Body Corporate would likely leave recovery of any shortfalls to Whai Rawa.
[14] Two months later, the Body Corporate manager again wrote to Whai Rawa, advising that the Body Corporate had instructed him to cease collecting ground rent payments. He said the Body Corporate would transfer the share of ground rental received from unit holders to Whai Rawa. Whai Rawa responded on 22 December 2020, saying it was seeking advice on the matter and would be in touch in the New Year.
[15] By the end of February 2021, rent arrears stood at $117,110.57. On 15 March 2020, Whai Rawa wrote to the Body Corporate requesting payment of the rent arrears, noting that the Body Corporate was in breach of its duties under the Unit Titles Act 2010 (UTA) and requesting information about the way in which the Body Corporate was being run. Whai Rawa also indicated it was considering filing an application for the appointment of an administrator or cancellation of the unit plan.
[16] Shortly afterwards, the Body Corporate responded to Whai Rawa. It said that it had become too expensive for the Body Corporate to take action to recover unpaid levies from defaulting unit owners. It said it did not consider it was open to Whai Rawa to seek the appointment of an administrator or cancellation of the unit plan. It said that Whai Rawa was instead required to pursue unit holders individually for their share of the ground rental. It invited Whai Rawa to agree to prepayment of the balance of the lease at a reduced rate.
[17] Whai Rawa responded on 19 April 2021. It said it was unable to agree to prepayment of the balance of the lease at a reduced rate, given the terms upon which the land is held, and its obligations to its members.
[18] By July 2021, rent arrears had increased to $225,079.55. The Body Corporate had not responded to Whai Rawa’s requests for information at this time. On 5 July 2021, Whai Rawa applied to the High Court to appoint administrators to the Body Corporate. The Body Corporate opposed the application.
[19] The Body Corporate has filed these substantive proceedings seeking a declaration that the rental clause is harsh or unconscionable. Whai Rawa has applied to strike out the claim and/or for summary judgment against the plaintiff.
Application for strike out and/or summary judgment
Application
[20]Whai Rawa applies for orders:1
1 Application for strike out and/or summary judgment by the defendant dated 8 September 2021 at [1].
(a)In relation to the plaintiff’s sole cause of action against Whai Rawa contained in its Statement of Claim dated 8 June 2021:
(i)That the cause of action be struck out; and/or
(ii)That summary judgment be granted to the defendant in respect of the relief claimed in the plaintiff’s statement of claim;
(b)As to costs.
[21]The grounds on which the orders are sought are:2
(a)In respect of the sole cause of action in the plaintiff’s statement of claim (“harsh or unconscionable term of agreement”):
(i)The cause of action has no basis at law;
(ii)As a matter of fact, the term of the Lease is not harsh and unconscionable; and
(iii)As a matter of fact, the defendant has not exercised the power conferred by the Lease in a harsh and unconscionable manner;
(b)Accordingly, the plaintiff’s statement of claim discloses no reasonably arguable cause of action and/or case appropriate to the nature of the pleading.
(c)In the alternative, the sole cause of action in the plaintiff’s statement of claim cannot succeed.
(d)As set out in the affidavit of Bruce Neil Donnelly filed with this application.
Affidavit of Neil Bruce Donnelly dated 8 September 2021
[22] Mr Neil Donnelly, the General Manager, Property at Ngāti Whātua Ōrākei Whai Rawa Ltd, deposes that the purposes of the Ngāti Whātua Ōrākei Trust (the Trust) are to receive, manage, protect and govern the Trust’s assets on trust for the development of Ngāti Whātua Ōrākei. He says that in his role he is responsible for overseeing Whai Rawa’s property portfolio and implementing its development strategies. He has been involved with the Parnell Terraces matter since October 2020, when the Body Corporate’s manager wrote to Whai Rawa about payment of ground rental.3
2 At [2].
3 Affidavit of Neil Bruce Donnelly in support of application for strike out and/or summary judgment by the defendant dated 8 September 2021 at [5]–[8].
[23] Mr Donnelly says that Michael Rehm, the Body Corporate chair, filed an affidavit in the proceeding opposing the appointment of administrators to the Body Corporate. Mr Donnelly says Mr Rehm’s affidavit confirms the Body Corporate’s decision to stop levying unit holders for ground rental was part of a strategy to persuade Whai Rawa to re-negotiate its lease and consider a pre-paid rental at a reduced rate, even after Whai Rawa advised that this was not acceptable.4
[24] Mr Donnelly deposes that Whai Rawa does not know what the financial position of individual unit holders is, but in any event does not accept that any difficulties stem from the lease or that the 2018 rent review was harsh or oppressive.5
[25] Finally, Mr Donnelly deposes that the Body Corporate has not responded to Whai Rawa’s requests for documentation that would show the basis of its decision- making or financial position. He says Whai Rawa considers any financial issues of the Body Corporate to be primarily due to the significant weathertightness issues with the townhouses.6
Notice of opposition to application for strike out and/or summary judgment
[26]The Body Corporate opposes Whai Rawa’s application:7
Opposing the order for strike out
(a)The plaintiff at para 32 of its claim alleged that the Rental Clause is harsh or unconscionable, and/or the power conferred by the Rental Clause has been exercised by the defendant in a harsh or unconscionable manner arising from the particular facts and circumstances in sub-clauses (a) to (i);
(b)For the purpose of strike out, it must be assumed that these allegations will be made out by the plaintiff unless from the evidence it is plain that the pleaded fact cannot possibly be correct or be made out;
(c)Whether the rental clause will ultimately be found to be is harsh and unconscionable or the power conferred exercised in a harsh or unconscionable manner will need to be determined by a mix of factual and expert opinion evidence;
4 At [43]–[47].
5 At [48]–[53].
6 At [54]–[56].
7 Notice of opposition to the defendant’s application for striking out this proceeding or for summary judgment on the defence dated 11 October 2021 at [3].
(d)The defendant relies only on the fact that increased rental was agreed based on a review and valuations undertaken on the processes and formula in the lease- it is the formula on which the rental increase is calculated that is being challenged. The defendant provides no factual or expert evidence on the formula;
(e)Parliament has intervened to provide protection against harsh and unconscionable terms and exercise of powers under a lease in section 176 of the Unit Titles Act 2010 read together with section 78 of the Residential Tenancies Act 1986;
(f)The Courts have yet to deal with a remedy under these sections, it is in that sense a novel claim and inappropriate to strike out such claim.
Opposing the order for summary judgment in favour of the defendant
(g)The applicant as the defendant seeking summary judgment has not provided factual or expert opinion evidence to show that on its defence on the basis that the plaintiff cannot succeed in its claim;
(h)The defendant relies only on the fact that increased rental was agreed based on a review and valuations undertaken on the processes and formula in the lease- it is the formula on which the rental increase is calculated that is being challenged. The defendant provides no factual or expert evidence on the formula and so has not established that the Rental Clause incorporating such formula is not harsh and unconscionable;
(i)The plaintiff has filed opinion evidence that demonstrates that the Rental Clause is arguably harsh and unconscionable, the expert opinion evidence suggests that the formula for the calculation of rent increase in the lease extremely onerous and exploits the tenant;
(j)The plaintiff has an arguable case based on the factual and expert opinion evidence;
(k)Parliament has intervened to provide protection against harsh and unconscionable terms and exercise of powers under a lease in section 176 of the Unit Titles Act 2010 read together with section 78 of the Residential Tenancies Act 1986;
(l)The Courts have yet to deal with a remedy under these sections, it is in that sense a novel claim and inappropriate for summary judgement to be granted.
Affidavit of John McDermott dated 8 October 2021
[27] In an affidavit filed in support of the notice of opposition, Dr John McDermott, a highly credentialed economist, outlines his views on how the ground lease of the base land on which Parnell Terraces is constructed compares with similar financial assets. He deposes that he considers the terms of the ground lease to be particularly
onerous and exploitative of the tenant. He reaches that conclusion on the basis that the lease extracts from the tenant and provides returns to the landlord far in excess of any comparable asset in the market.8
[28] Dr McDermott says he considers the formula for calculation of the ground rent is onerous having regard to the risk and return to the landlord and the risk and return of a comparable asset in the market. He says an analysis of returns on comparable assets indicates the rent formula in the lease provides the landowner a “remarkable windfall”. For instance, risk-adjusted returns on the lease have been more than double the returns for most long-term bond yields, notwithstanding those bonds have performed very well in the market over the past decade.9
[29] Dr McDermott says that while windfall gains and losses do happen with financial contracts, parties usually have the right to extract themselves from ongoing losses. Here, however, the tenant is locked into a fixed rental rate of six per cent, with no self-correcting mechanism allowing the rent or returns to be market. As well, the lease’s ratchet clause means the rent or return to the landlord can be held artificially high. That being so, all the tenant can do is rely on the protections Parliament has put in place to protect parties from onerous contracts.10
Affidavit of Michael James Rehm dated 24 October 2021
[30] In a further affidavit filed in support of the notice of opposition, Mr Rehm deals with various matters relating to the base land and the lease. He deposes that the Body Corporate undertook a wholesale remediation of the complex from 2017 to 2019, including replacing all the exterior walls and roofs of the buildings. In April 2021, Opteon valued the buildings for a replacement value of $39,310,000.11
[31] Mr Rehm says the 2018 rent review saw the Body Corporate’s rent almost double. He says the Body Corporate engaged a number of consultants to ensure all
8 Affidavit of John McDermott in support of the notice of opposition to an application for summary judgment and/or strike out dated 8 October 2021 at [14].
9 At [24]–[47].
10 At [48]–[51].
11 Affidavit of Michael James Rehm in support of a notice of opposition to summary judgment/ strike out dated 24 October 2021 at [4]–[6].
relevant factors were taken into account in valuing the land. He says that the Body Corporate did all it could under the provisions of the lease to challenge the rent, but the owners nevertheless were faced with paying close to double what they had been paying the previous seven years.12
[32] It was against this background, Mr Rehm says, that the Body Corporate sought to alert Whai Rawa of the unsustainability of the lease and the rental increases. He says Whai Rawa did not entertain any of the Body Corporate’s proposals for resolution, leading the Body Corporate to challenge the fairness of the lease.13
[33] Mr Rehm says the rent will only continue to be ratcheted higher, and that the onerous rent increases have contributed to owners being unable to pay levies; the Body Corporate having to take enforcement action; forced sales of units; bankruptcy of some unit owners; and a significant decrease in the value of units. He says he fears more is to come if the Court does not provide relief.14
[34] Next, Mr Rehm says the Trust Board knew of, and supported, the development of a residential complex on the base land. He says it is likely the Trust Board, in granting the lease to the original developer, received close to the full freehold value of the land.15
[35] Mr Rehm says that in his 16 years as an owner and more than a decade as chair of the Body Corporate, the landlord has had no part to play in managing the land. He deposes that the Body Corporate manages and keeps in good order the complex outside of the units; is responsible for maintenance and repair under cl 5.1 of the lease and s 138 of the UTA; and levies and collects rent from owners and makes payment to Whai Rawa.16
12 At [7]–[12].
13 At [13]–[15].
14 At [16]–[34].
15 At [35]–[39].
16 At [40]–[42].
Affidavits in dispute
[36] Both parties seek to challenge the admissibility of certain affidavits filed in connection with the application.
[37] The Body Corporate challenges the admissibility of two of Whai Rawa’s reply affidavits: one of Mr Donnelly and one from a Mr Stephen Dunlop. In the alternative, it seeks leave to file affidavits in response — one from a valuer, Mr Mathew Taylor, and a further affidavit from Mr Rehm.
[38] Whai Rawa says its two reply affidavits are properly in reply, and that any further evidence from the Body Corporate would be inadmissible “reply to reply” evidence.
Whai Rawa’s submissions
[39] Mr Davey Salmon QC, for Whai Rawa, submits that the Court has no jurisdiction to vary the lease by way of declaratory relief. He submits the Body Corporate’s claim is not novel but is instead untenable and reliant on a flat misapplication of statutory provisions. He submits the dispute is not a “unit title dispute” within the meaning of the Residential Tenancies Act 1986 (RTA) but is instead a complaint about a commercial ground lease and its agreed mechanism for rent determination.17
[40] Mr Salmon says Parliament, in enacting the “harsh and unconscionable” provision in s 78(1)(f) of the RTA, did not intend to empower the Tenancy Tribunal to amend mechanisms for the agreement of rent in ground leases between arms’ length parties. Further, a conservative approach is warranted as a matter of policy. The claim should be struck out for want of jurisdiction.18
[41] Next, Mr Salmon submits that the rental clause is neither harsh nor unconscionable. That is a high standard, requiring conduct that is more than simply
17 Submissions for defendant in support of application for strike out and/or summary judgment dated 23 February 2022 at [8]–[15].
18 At [16]–[26].
unacceptable or unjust. Instead, there must be an intrusion on the rights of proprietors of the unit title development that is so against conscience as to justify the Court’s intervention. An agreed rental clause in a lease cannot satisfy this standard.19
[42] Mr Salmon submits that the rent for the rental period commencing 1 August 2018 was agreed between the parties in accordance with cl 3.3 of the lease. There can be nothing harsh or unconscionable in the parties, by agreement, applying an agreed rental formula in a lease. He submits Dr McDermott’s analysis is unrealistic and flawed, and that market realities differ considerably from the hypothetical scenarios Dr McDermott presents. Moreover, the risks of uncertainty were factored into the prices unitholders paid when purchasing their units.20
[43] The Body Corporate’s financial difficulties, Mr Salmon submits, do not make the rental amounts harsh or unconscionable. He says there is no basis to visit the consequences of a problematic weathertightness remediation on Whai Rawa by rewriting the lease.21
[44] Mr Salmon submits Mr Donnelly’s reply affidavit should be admitted. It is not, contrary to the Body Corporate’s submission, unqualified opinion evidence in reply to Dr McDermott. Rather, Mr Donnelly’s affidavit properly replies to the points raised in Mr Rehm’s affidavit.22
[45] Mr Salmon submits Mr Taylor’s evidence should not be admitted. It could have been adduced at the same time as Dr McDermott’s evidence. In any event, it does not take matters further.23
[46] Finally, Mr Salmon submits that Whai Rawa is obliged to ensure that assets are managed appropriately for Ngāti Whātua Ōrākei. The Body Corporate has chosen not to collect rent, and the fact that some of the current unitholders may be experiencing
19 At [27]–[33].
20 At [34]–[43].
21 At [44]–[49].
22 At [51]–[52].
23 At [53]–[54].
financial issues does not make the rent clause harsh or unconscionable. On those bases, the claim should be struck out or summary judgment entered for the defendant.24
Body Corporate’s submissions
[47] Ms Jeanne Heatlie, for the Body Corporate, submits that Whai Rawa has not shown that the Body Corporate’s claim cannot succeed. The Body Corporate’s claim is founded on the plain and unambiguous wording of legislation; the pleadings allege the jurisdictional facts on which the claim is founded; and the relevant factual allegations are either uncontested or unsupported by the evidence of an appropriately qualified expert. There is a real issue to be tried, and the claim ought to proceed to a full hearing.25
[48] Ms Heatlie submits the Court has the power to make the Body Corporate’s sought declaration under s 78(1)(a) and (f) of the RTA and s 176 of the UTA. She says the wording of those provisions is plain and unambiguous. She says s 171 of the UTA does not provide any reason to read down s 78 of the RTA, but rather supports the Body Corporate’s contention that it may apply for relief.26
[49] Ms Heatlie says the rent clause is harsh and unconscionable, as disclosed by Mr Rehm’s factual evidence and Dr McDermott and Mr Taylor’s expert evidence. She says the rent has doubled and the value of the units have plummeted as a result. She says the rent clause meets the legal threshold of harsh or oppressive, notwithstanding what might be argued to be industry practice. She says it is for the courts, not the industry, to set the standard. And she says whether the clause is unconscionable will need to be determined having regard to all relevant evidence in the case — something that cannot be done prior to discovery.27
[50] Ms Heatlie says the claim is not speculative or baseless. Instead, it is supported by independent expert evidence, which Whai Rawa has not been able to show is
24 At [55]–[56].
25 Submissions for the plaintiff opposing strike out/summary judgment dated 4 March 2022 at [3]– [4].
26 At [6]–[22].
27 At [23]–[27].
without foundation. The differences between the parties’ respective positions are unable to be resolved in an interlocutory proceeding.28
[51] Next, Ms Heatlie says the policy considerations identified by Whai Rawa are not the core consideration of modern statutory interpretation. In any event, policy considerations are more appropriately to be considered by the Court when exercising its discretion in the substantive matter. And, to the extent the Court should consider the policy rationales at this stage, they do not tell against the Body Corporate’s claim.29
[52] On the admissibility issues, Ms Heatlie submits Mr Dunlop’s evidence cannot address Dr McDermott’s evidence, as Mr Dunlop is not qualified to give an opinion on Dr McDermott’s economic analysis. Mr Taylor’s affidavit should be admitted as replying directly to Mr Dunlop’s valuation evidence. Procedural fairness permits the Body Corporate to respond to Mr Dunlop’s valuation evidence, as the Body Corporate could not have predicted what opinion evidence Whai Rawa would call to discharge its obligation in summary judgment.30
Legal principles
Strike out
[53]Rule 15.1 of the High Court Rules 2016 provides, relevantly:
15.1 Dismissing or staying all or part of proceeding
(1)The court may strike out all or part of a pleading if it—
(a)discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading[.]
[54]There are established criteria for strike out:31
28 At [30]–[38].
29 At [39]–[49].
30 At [51]–[56].
31 Attorney-General v Prince & Gardner [1998] 1 NZLR 262 (CA) at 267; and Couch v Attorney- General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].
(a)A strike out application proceeds on the assumption the pleaded facts are true, unless those pleaded facts are entirely speculative or without foundation.
(b)The cause of action or defence must be clearly untenable.
(c)The jurisdiction is to be exercised sparingly and only in clear cases.
(d)The jurisdiction is not excluded by the need to decide difficult questions of law.
(e)The Court should be slow to strike out a claim in any developing area of the law, perhaps particularly where a duty of care is alleged in a new situation.
Summary judgment
[55]Rule 12.2 of the High Court Rules provides, relevantly:
2.2 Judgment when there is no defence or when no cause of action can succeed
…
(2)The court may give judgment against a plaintiff if the defendant satisfies the court that none of the causes of action in the plaintiff’s statement of claim can succeed.
[56] As a general rule in determining summary judgment applications, the Court will refrain from attempting to resolve genuine conflicts of evidence or to assess the credibility of the parties’ statements in their affidavits. But that does not mean spurious defences or contrived factual conflicts are permitted to prevent judgment being obtained.32 A robust approach is to be taken, by which affidavits must have an aura of credibility.33
32 Andrew Beck and others (eds) McGechan on Procedure (online ed, Thomson Reuters) at [HR12.2.08], citing Attorney-General v Rakiura Holdings Ltd (1986) 1 PRNZ 12 (HC) at 14 and Pemberton v Chappell [1987] 1 NZLR 1 (CA).
33 At [HR12.2.08], citing Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).
[57] The wording of r 12.2 (“may give judgment”) indicates a residual discretion in deciding whether to enter summary judgment. That approach applies equally to a defendant’s application under r 12.2(2).34
UTA and RTA
[58] The submissions of each of the parties (both written and oral) deal at length with the relevant sections of the UTA and RTA. It is therefore appropriate to set these statutory provisions out in full:
[59]Section 176 of the UTA provides, relevantly:
176 Certain provisions of Residential Tenancies Act 1986 to apply
(1)Part 3 of the Residential Tenancies Act 1986 applies with all necessary modifications in respect of the hearing and determination of a unit title dispute by a Tenancy Tribunal except the following sections:
(a)section 77 (which relates to the Tribunal’s jurisdiction):
(aa) section 78A (which relates to orders of the Tribunal relating to unlawful residential premises):
(ab)section 95A(1), (2), (3), and (6) (which relates to orders of the Tribunal for suppression of a party’s name or identifying particulars):
(b)section 106 (which relates to the enforcement of possession orders):
(ba) section 108(2B) (which relates to certain failures to comply with work orders):
(c)section 109 (which relates to unlawful acts and claims for exemplary damages):
(d)sections 109B to 109E (which relate to pecuniary penalties).
[60]Section 171 defines “unit title dispute”:
171 Jurisdiction of Tenancy Tribunals
(1)Except as provided in this section, a Tenancy Tribunal (a Tribunal) constituted under section 67 of the Residential Tenancies Act 1986 has jurisdiction to hear and determine all disputes arising between any
34 At [HR12.2.11].
persons of the kind listed in subsection (2) in relation to a unit title development (a unit title dispute).
(1A)To avoid doubt, and without limiting subsection (1), a unit title dispute may relate to a claim for unpaid levies
…
(2)The persons mentioned in subsection (1) are—
…
(d) a body corporate:
…
(k) a lessor of base land.
[61] Section 5 defines a “unit title development” as meaning “the individual units and the common property comprising a stratum estate”.
[62]Section 78 of the RTA provides, relevantly:
78 Orders of Tribunal
(1)Without limiting the generality of section 77 or the nature or extent of orders that the Tribunal may make in the exercise of its jurisdiction, the Tribunal may, in respect of any claim within its jurisdiction (but subject to section 78A, if that section applies), make 1 or more of the following orders:
(a)an order in the nature of a declaration, whether as to the status for the purposes of this Act of any premises or of any agreement or purported agreement, or as to the rights or obligations of any party, or otherwise:
…
(f)where it appears to the Tribunal that an agreement between the parties, or any term of any such agreement, is harsh or unconscionable, or that any power conferred by an agreement between them has been exercised in a harsh or unconscionable manner, an order varying the agreement, or setting it aside (either wholly or in part).
Detailed legal arguments
[63] Each of the parties has presented a detailed legal analysis of the relevant provisions of the UTA and RTA. These legal analyses are the nub of the issue as to
whether there is jurisdiction to make the declarations sought by the Body Corporate and therefore whether the plaintiff’s claim has a legal basis or not. Accordingly, I set out extracts from these arguments in some detail.
Defendant’s legal analysis of UTA and RTA
[64]Mr Salmon has presented the following legal analysis on behalf of Whai Rawa:
“16. … 78
Orders of Tribunal
(1)
Without limiting the generality of section 77 or the nature or extent of orders that the Tribunal may make in the exercise of its jurisdiction, the Tribunal may, in respect of any claim within its jurisdiction (but subject to section 78A, if that section applies), make 1 or more of the following orders …
(f)
where it appears to the Tribunal that an agreement between the parties or any term of any such agreement is harsh or unconscionable, or that any power conferred by an agreement between them has been exercised in a harsh or unconscionable
manner, an order varying the agreement, or setting it aside (either wholly or in part) …
17.The defendant does not accept that Parliament intended, [s 78(1)(f) of the RTA] to empower the Tribunal to amend mechanisms for the agreement of rent in ground leases between arms-length parties.
18.Section 171 of the UTA defines and establishes the jurisdiction of the Tribunal to hear unit title disputes. It is aimed at ensuring the Tribunal can hear a range of matters between a range of persons in subsection
(2) up to $50,000, where they relate to individual units or common property in a stratum estate. The section does not create a basis to vary lease terms.
19.Similarly, s78 of the RTA (above) enables the Tribunal to consider whether residential tenancy agreements between landlord and tenant were harsh or unconscionable. It is extended with necessary modifications to unit title disputes by virtue of falling in Part 3 of the RTA.
20.However, s78 is plainly not directed at the cost of rent, as the Tribunal’s jurisdiction to re-fix rent for a residential tenancy exists in s25 of the RTA.
21.Where the Tribunal is satisfied that rent payable or to become payable for the tenancy exceeds market rent by a substantial amount, it may order a reduction of rent. Section 25 exists under Part 2 of the RTA and is not extended to unit title disputes by s176 of the UTA.
22.Pursuant to s 176 of the UTA, Parliament has excluded the application of s77 of the RTA (dealing with the Tribunal’s jurisdiction) to unit title disputes. Section 77(2)(d) of the RTA, excluded by virtue of s 176 of the UTA, expressly refers to the ability for the Tribunal to make orders under s 25:
(2) Without limiting the generality of subsection (1), the Tribunal shall have jurisdiction to do the following things:
… (d) to determine whether any rent that is, or that was at any material time, being charged in respect of any tenancy for which this Act applies does or does not or did or did not exceed the market rent for that tenancy by a substantial amount, and, where the rent does or did exceed the market rent by a substantial amount, to make such order relating to the rent as it thinks just …
23.Had Parliament intended to extend the Tribunal’s power to review, and modify rent to commercial leases, it could have extended s25, or s77(2)(d) of the RTA. Using the variation power in s78 to reintroduce a market rent review would cut across Parliament’s intention to exclude s25 and s77(2)(d).
24.Finally, the following Tenancy Tribunal decisions are illustrative of the types of agreements considered under s78:
(a)An agreement to end a fixed tenancy early (not found to be harsh or unconscionable because there was no evidence of undue pressure of influence);35
(b)An alleged agreement between landlord and tenant as to how bond was to be distributed where there was a dispute over rubbish removal costs (not found to be harsh or unconscionable).36
[65] In oral submissions, Mr Salmon argued that further support for his contention that s 78(1) of the RTA was not intended to allow rewriting of rentals under a ground lease as follows:
(a)Under s 25(2) of the RTA (which deals with the ability of the Tenancy Tribunal to make an order reducing rent as noted in [22] of Mr Salmon’s submissions, set out at [64] above) an application must generally be made by the tenant within three months of the rent to which objection is taken being fixed. If the Body Corporate is correct in its application of s 78 to the ground lease, the rent could be
35 LAJ Rentals Trust v Severinsen [2019] NZTT Whangarei 4189332, 4185663.
36 Yu v Ollivee [2021] NZTT Tauranga 4271712, 4283543.
challenged 26 years after the rent formula was fixed between the parties.
(b)Sections 139 and 140 of the UTA would be otiose if the Body Corporate is correct that s 78 of the RTA could be used to challenge service contracts which are dealt with under these provisions. Mr Salmon points out that the powers given to the decision-maker in s 140(5) are only to cancel the relevant offending service contract, and application must be made within three years of the expiry of the relevant “control period” (as defined). He contends that the much wider powers the Body Corporate argues are available under s 78 are unlikely, given the Body Corporate postulates that the terms of the ground lease rent provisions can be rewritten (as opposed to the limited right of cancellation in s 140(5)), and there is no time limit to reopening the ground lease rent terms (as opposed to the three year time limit in s 140(4)). He contends that s 78 was not intended to have such extensive application.
Plaintiff ’s legal analysis of UTA and RTA
[66] Ms Heatlie has presented the following legal analysis on behalf of the Body Corporate:
Section 176 of the UTA
7.Section 176 makes only relevant parts of Part 3 of the RTA applicable to a unit title dispute. This includes section 78.
Section 78 of the RTA
8.Section 78 provides specifically for the type of orders that may be made by the Tribunal, including a declaration and consequential relief–
The Tribunal may, in respect of any claim within its jurisdiction (but subject to section 78A, if that section applies), make 1 or more of the following orders:
(a)an order in the nature of a declaration, whether as to the status for the purposes of this Act of any premises or of any agreement or purported agreement, or as to the rights of obligations of any party, or otherwise…
(f) where it appears to the Tribunal that an agreement between the parties, or any term of any such agreement, is harsh or unconscionable, or that any power conferred by an agreement between them has been exercised in a harsh or unconscionable manner, an order varying the agreement, or setting it aside (either wholly or in part) …
9.The words of the section are plain and unambiguous.
10.Neither the Tribunal or the courts have the power in a unit title dispute to make orders contemplated in section 25 and 77(2)(d). These sections deal specifically with residential tenancy agreements which are substantially in excess of market rental. The body corporate’s claim is not founded on this power. Whai Rawa’s submission that the plaintiff’s experts do not present proposed evidence of market rental (at para 38) is misguided. The body corporate contends that the rental term in the ground lease is harsh or unconscionable as contemplated in section 78 of the RTA. This is a different jurisdictional requirement and the powers under section 25 and section 77(2)(d) are engaged in different circumstances.
11.Whai Rawa nevertheless suggests that by excluding these sections from body corporate disputes, Parliament could not have intended lease agreements of any sort to be capable of challenge by a body corporate. This is in spite of the plain wording of section 78 which uses the word agreement. Applying its plain meaning, it should be construed in the widest sense unless expressly restricted in the Act. It is not. There is also nothing inconsistent with section 78 applying to agreements, including ground leases. This is consistent with the UTA’s general application.
Section 171 of the UTA
12.Section 171 of the UTA provides:
Except as provided in this section, a Tenancy Tribunal (a Tribunal) constituted under section 67 of the Residential Tenancies Act 1986 has jurisdiction to hear and determine all disputes arising between any persons of the kind listed in subsection (2) in relation to a unit title development (a unit title dispute).
13.Whai Rawa says this section provides a further reason to read section 78 down. It says unit title disputes are confined to disputes about units or common property, and cannot incorporate disputes relating to leases of the base land. The section needs to be considered in the context of the RTA and its general application to residential tenancies. Section 171 extends the Tribunal’s jurisdiction to unit title disputes that are not founded on a residential tenancy agreement. This is not a restriction of its powers.
14.The Tribunal decisions referred to by Whai Rawa in support of this contention relate to its jurisdiction in relation to residential tenancy agreements. There are a myriad of decisions dealing with unit title
disputes, including agreements other than residential tenancy agreements.37
15.Significantly, section 171(3A) makes it plain that section 171 does not limit the powers of the Tribunal in relation to unit title disputes:
Without limiting the provisions of the Residential Tenancies Act 1986 that apply to a Tenancy Tribunal by virtue of section 176 of this Act, a Tenancy Tribunal may, in relation to a unit title dispute within its jurisdiction under this section, do any of the following:
(a)order any party to do anything necessary to remedy a breach by that party of an obligation arising under this Act, the body corporate operational rules, or any agreement that is binding on the party and relevant to the unit title dispute:
(b)order any party to refrain from doing anything that would constitute a breach of an obligation arising under this Act, the body corporate operational rules, or any agreement that is binding on the party and relevant to the unit title dispute:
(c)make any supplementary orders of a consequential or ancillary nature necessary to exercise or perfect the exercise of any of its jurisdiction.
16.Section 171(2) moreover specifically contemplates the parties to a unit title dispute to include bodies corporate and lessors of base land.38 It is difficult to conceive of a dispute involving a lessor of the base land that is not founded on the terms of the ground lease.
17.The definition of unit title development is not as Whai Rawa suggests confined to units and common property. The definition is wider:
The individual units and the common property comprising a stratum estate.39
18.Section 18 of the UTA deals with the composition of a stratum estate which include a stratum in leasehold.40
19.The purpose of the UTA is also relevant to the interpretation of section
171. The purpose is contained in section 3. The purpose extends to the ownership and management of land and buildings and not merely their physical integrity:
37 For example, Fentonby v Classic Holidays Limited [2021] NZTT Dunedin 9031701 (a management contract); Body Corporate 41496 v Eastasi Properties Limited [2021] NZTT Wellington 9030421 (a building contract); Stent v Body Corporate 324525 [2019] NZTT Auckland 9010221 (a conduct and distribution agreement).
38 Section 171(2) of the Unit Titles Act 2010.
39 Section 5 of the Unit Titles Act.
40 Section 18 of the Unit Titles Act.
3.The purpose of this Act is to provide a legal framework for the ownership and management of land and associated buildings and facilities on a socially and economically sustainable basis by communities of individual owners and, in particular, --
(a)to allow for the subdivision of land and buildings into unit title developments comprising units that are owned in stratum estate in freehold or stratum estate in leasehold or licence by unit owners, and common property that is owned by the body corporate on behalf of the unit owners; and
(b)to create bodies corporate which comprise all unit owners in a development, to operate and manage unit title developments; and
(c)to establish a flexible and responsive régime for the governance of unit title developments; and
(d)to protect the integrity of the development as a whole.
20.The sustainability of the ground lease is integral to the ownership structure and sustainability of the development as a whole.
21.The use of the words all disputes and in relation to in section 171 also expand rather than confine the application of the section, In Wheeldon,41 the Court of Appeal in a different context dealt with the expansive meaning of the similar phrase – relate to a unit – extending beyond the physical unit and incorporating economic implications:
[53] The ordinary meaning of “relate to” is “have reference to; concern”. This ordinary meaning is reflected in Harrison J’s statement in Young v Body Corporate 120066 that “[s]omething is incidental if it naturally attaches or is causally relevant to something else. The phrase ‘relate to’ has a similar meaning of reference to or concern with.”
[54] …
22.Read in context and having regard to the plain words and purpose of the Act, supports the body corporate’s contention that it may apply for relief in the circumstances of this case.
Policy considerations
[67] Both the submissions for the defendant and for the plaintiff put forward policy considerations they respectively say apply to the interpretation of the relevant sections of the UTA and the RTA.
41 Wheeldon v Body Corporate 342525 [2016] NZCA 247, (2016) 17 NZCPR 353.
Defendant’s submissions on policy
[68] Mr Salmon made the following submissions in relation to the policy of the relevant legislation:
Policy considerations
25.As a matter of policy, a conservative approach is warranted:
(a)The courts ought to be slow to interfere with contractual bargains reached between consenting parties at arms-length. In this case, relief would result in a windfall benefit for unitholders, who purchased their units subject to the lease terms.
(b)Permitting parties to ground leases to apply to the Tenancy Tribunal (or Courts) to vary rent outside of agreed mechanisms would be contrary to existing practice, commercial certainty and cut across longstanding terms between arms-length contracting parties. An extension would impact commercial and ground leases throughout New Zealand.
(c)Section 24 of the RTA and the power to vary rent exists because of the vulnerability of residential tenants, who are usually price-takers. That vulnerability does not exist for commercial parties, investors, and owner-occupiers who are able to conduct due diligence and assess lease terms prior to purchase.
(d)Frequently (and indeed in this case) the present residential use of the site post-dates the entry into the ground lease and is without the (need for) consent of the ground lessor. It would be perverse if a ground lessee’s decision to undertake a residential development functioned to retrospectively infect a commercial ground lease with RTA protections that did not apply at the outset.
26.The provisions of the RTA do not properly extend to this dispute. The claim should be struck out for want of jurisdiction.
Plaintiff ’s submissions on policy
[69]Ms Heatlie’s submissions on the policy issues can be summarised as follows:
39.Wider policy considerations of the type referred to by Whai Rawa are not the core consideration of modern statutory interpretation. The approach to statutory interpretation was summarised by the Supreme Court in Fonterra:42
42 Commerce Commission v Fonterra Co-operative Group Ltd [2007] NZSC 36, [2007] 3 NZLR 767 at [22].
It is necessary to bear in mind that s 5 of the Interpretation Act 1999 makes text and purpose the key drivers of statutory interpretation. The meaning of an enactment must be ascertained from its text and in the light of its purpose. Even if the meaning of the text may appear plain in isolation of purpose, that meaning should always be cross-checked against purpose in order to observe the dual requirements of s
5. In determining purpose the Court must obviously have regard to both the immediate and the general legislative context. Of relevance too may be the social, commercial or other objective of the enactment.
40.Further, the type of policy considerations Whai Rawa refer to are not within the purview of interpretation of the legislation per se. They are more appropriately to be considered by the Court when exercising its discretion in the substantive matter.43 We nevertheless briefly canvas the policy considerations advanced by Whai Rawa.
The Courts should be slow to intervene in contractual bargains - Intervention in ground leases is contrary to existing practice and commercial certainty, and impact other ground leases.
41.While the court may be slow to intervene in what may be a bad bargain, where it has the ability it should intervene and protect parties from terms in a contract that are harsh or unconscionable.
42.Industry practice is not the benchmark. As is evident from Bartle simply following industry practice will not immunise a party to a contract where such terms or conduct amount to a breach of reasonable standards of commercial practice.
A variation of the lease will create a windfall to the body corporate
43.There is no basis to suggest this will be the case. Any consequential orders to be made will be considered by the Court. The Court will ultimately decide the appropriate variation to the lease, if any. The evidence of Dr McDermott is to the opposite effect (at paragraphs 40 to 47). In 1997, when this lease was created, the lessor obtained the prevailing risk free rate of return. Due to the rise in the value of the land without any correcting mechanism, Whai Rawa has in fact obtained the windfall when compared with what an expert considers a comparable asset class.
Section 25 of the RTA and power to vary rent is for the protection of residential tenants who are vulnerable
44.Section 25 is not the section that is engaged. Section 78 is, and it is engaged in different circumstances.
45.Members of bodies corporate are in many cases not commercial parties but individual homeowners. Be that as it may, any party entering into a purchase of a unit would not have the ability to conduct
43 Wright v Chief Executive of the Ministry of Fisheries HC Auckland CP662-IM00, 4 April 2001 per Hammond J at [35] and [36].
the type of due diligence that would inform them of the potential implications of the rental formula in the lease. Such process would necessarily need to include:
(a)As an original purchaser, or purchaser during the rent-free period, a valuation of the base land;
(b)As a subsequent purchaser, an assessment of the likely fluctuations in the value of the base land at each rent review. Such assessment would require extensive economic forecasting by an experienced expert.
46.Mr Rehm in his evidence deals with the nature and exten[t] of the investigation and valuation process of the base land as part of the rent review. As a matter of logic, no prospective purchaser could be expected to have undertaken such valuation as part of their due diligence.
47.Mr Taylor also does not believe that the purchasers of the units would have understood the implications of the rent formula or considered it necessary to discount the purchase price. …
48.There is also no evidence to suggest that prospective purchasers would have had any empirical information available to them to make an informed decision on the rental increases that could be expected. There was no public record of the value of the base land until 2013, when the lease variation as a result of the first rent review was registered. Mr Rehm in his evidence explains that the base land is not subject to rates and no available public record of the value outside the rent review documents registered from 2013. Being the first rent review, there was also no history or benchmark for prospective purchasers to assess the rate at which the land value ad increased since the inception of the lease. The first trend that was available was after the second rent review in 2019.
Residential use is of the development on the base land frequently (and in this case) occurs without the consent of the lessor
49.The application of s 78 to unit title developments is not restricted to particular types of developments. It applies for all unit title developments, irrespective of use. The lessor was also aware of and supportive of the proposed residential development. Indeed, the leases were granted pursuant to the land being rezoned to permit within it residential developments.
Is the rental clause harsh or unconscionable?
Submissions by the defendant
[70] Mr Salmon submits that even if there is jurisdiction for the Tenancy Tribunal to review the ground lease rent under s 78 of the RTA, he submits as a matter of fact the rental clause is not “harsh or unconscionable” and has not been applied in a
“harsh or unconscionable” manner by Whai Rawa. Extracts from his submissions are set out below:
28. The term “harsh or unconscionable” in a statutory context involves a very high standard. The term was examined by Woolford J in Body Corporate 396711 v Sentinel Management Ltd [2012] NZHC 1957 when considering whether to terminate a management agreement under s 140(5) of the UTA.44 The Court considered that it went beyond historical equitable concepts45.
29. …
30.Woolford J commented on the standard of “unconscionability” as follows:46
This is a high standard and one to be exercised judicially but it is not the same as any of the equitable standards mentioned above. In this respect the conduct must be more than unacceptable, unreasonable, unjust or unfair. There must be an intrusion on the rights of proprietors or on the functioning of the unit title development that can be regarded, when seen through the eyes of society as a whole, as so against conscience as to justify the Court’s intervention. Simple unfairness, unreasonableness or commercial unsoundness will not suffice, something like “moral obloquy” or outrageousness comes closer to expressing the nature of the reaction and the view that the Court must take of the transaction in order to justify relief.
31.The enquiry does not focus on the personal financial or other circumstances of the plaintiff. Conduct triggering the Court’s discretion cannot merely be “unacceptable”, “unreasonable”, “unjust” or “unfair”, or “commercially unsound”. The conduct must involve a knowing and oppressive contravention of reasonable standards of commercial practice or conduct that would invoke a reaction of moral outrage from the Court.
32.The parties following an agreed rental clause in a lease that unitholders knew of when they purchased units does not satisfy this.
33. …
Current rental was set by agreement
34.Mr Donnelly’s evidence confirms that the rent for the rental period commencing 1 August 2018 was agreed between the parties in accordance with clause 3.3 of the lease following a short negotiation. He confirms:
44 This section does not relate to the present proceeding – it provides jurisdiction to make an order terminating a services contract, to which a body corporate is party, entered into before the end of the control period for the unit title development concerned.
45 Body Corporate 396711 v Sentinel Management Ltd [2012] NZHC 1957 at [247]–[248].
46 At [253].
(a)The lease was for 150 years, including a 15-year peppercorn rental, after which rent was set at 6% of the freehold value of the unimproved land at 7 yearly reviews.
(b)The Body Corporate passed a unanimous resolution approving the 2018 rent after receiving valuation advice from Mathew Taylor of Gribble Churton Taylor. It had the opportunity to seek to challenge the rental by arbitration under the lease if it wished to do so. The Body Corporate did not challenge the rental, agreeing to “split the difference” between the two parties’ valuations.
35.There is nothing harsh or unconscionable in both parties, by agreement, applying the agreed rental formula in the lease.
There is no evidence that the rent is beyond market rates
36.Dr McDermott’s evidence advances an economic analysis that attempts to equate the lease with government treasury bonds. His calculations treat volatility in returns as the sole measure of risk, assume the lease had no risk, and boldly suggest the lease had lower risk than government bonds. The analysis is unrealistic and flawed.
37.Mr Dunlop, a registered valuer with significant experience in rental reviews, disagrees with Dr McDermott’s views. He confirms that fixed rental rates are prevalent, the rental clause reflects what are usual rental terms for the type of property, and that the market reality is considerably different to the hypothetical scenarios presented by Dr McDermott. He says the analysis from Dr McDermott simply fails to consider real risks and costs associated with the lease.
38.Further, Dr McDermott is not a valuer; he does not present proposed market rental. His theoretical analysis of potential returns if the leases were to be equalised with government bonds does not demonstrate that the rental is harsh or unconscionable. …
39. …
Risks of uncertainty were reflected in unit prices
40.Dr McDermott has failed to take into account that unitholders, when purchasing their unit, must be expected to have factored the lease terms and uncertainty into the price they were willing to pay. Uncertainty about rent would, all things equal, result in the leasehold interest costing less. In economic terms, this is like any purchase (e.g., sensible purchasers consider risks and whether what they may buy is worth what they will pay).
41.Indeed, there is no evidence that any individual purchases were at over-value. The purchases were transactions to which Whai Rawa was not a party. It had no influence over what individual unitholders chose to pay.
42.Further, given that the purchasers would have factored the lease terms into their price, it cannot be said that the rental clause has been
exercised in a harsh or unconscionable manner. Granting relief would penalise Whai Rawa for the pricing decisions of individual unitholders in transactions in which it was neither a party nor involved.
43. …
Financial difficulties do not make rental harsh or unconscionable
44.Mr Rehm asserts that the Body Corporate is having difficulties paying rental and that this has led to bankruptcies and enforcement action.
45.He does not claim to be in financial difficulty personally, and there are no other unitholders who have given evidence of difficulties. Mr Rehm’s evidence about the likelihood of future difficulties and bankruptcies appears to be speculation or unqualified opinion, and does not demonstrate the rental clause is harsh or unconscionable. Even if some unitholders have difficult personal circumstances, an enquiry should not focus on whether individual unitholders are content with the price or can afford to pay it.
46. …
47. …
Submissions by the plaintiff
[71] Relevant extracts from Ms Heatlie’s submissions as to whether the rental clause is harsh or unconscionable are:
24.The test that the Court will apply at trial is objective.47 Whai Rawa is right to say (para 31) that the owners’ personal financial or other circumstances are not relevant to a determination of whether the terms of the lease are harsh or unconscionable. Nor are they pleaded. What is pleaded and relevant to the enquiry is the fact that rental has doubled and the value of units plummeted as a result of the increased rental.
Test of harshness
25.The Supreme Court in Bartle identified the test for harsh (or oppressive) as wider than the equitable doctrine of unconscionability and incudes circumstances where there is a breach of reasonable standards of commercial practice even when a party is subjectively blameless and simply following industry practice.48 It therefore seems terms will be considered harsh if they are found to be unacceptable, unreasonable, unjust or unfair.49 However, the Supreme Court considered that, even if the terms did not breach standards of reasonable commercial practice, such terms could, nevertheless, still be considered harsh or oppressive where facts or circumstances
47 GM Custodians v Bartle [2010] NZSC 146, [2011] 2 NZLR 31 at [46].
48 At [46].
49 Body Corporate 396711 v Sentinel Management Ltd, above n 45, at [253].
known to one of the parties would make the otherwise reasonable practice oppressive.
26.The fact that Mr Dunlop in his evidence considers the lease to be a “standard lease” entered into by commercial parties at arm’s length is therefore irrelevant to the assessment. As is the fact that the lease may be consistent with other ground leases. As the Supreme Court said in Bartle - it is for the courts rather than the industry to set the standard. The body corporate, in any event, contests the fact that parties were truly at arm’s length. Discovery has not yet been provided and the body corporate can only refer to publicly available documents which suggest a closer relationship between the original parties to the lease.50
27.Even if a Court were ultimately to be persuaded that the ground lease is not in contravention of reasonable standards of commercial practice, it would still be necessary to enquire whether Whai Rawa (or its predecessor) was aware that the rental formula could become oppressive to the owners if the value of the base land rose without any mechanism to account for other market conditions. This is particularly relevant in circumstances where Whai Rawa is protected by the ratchet clause from the effect of a decrease in land value.
Test of unconscionability
28.Unconscionability will require something more than mere unfairness, in the words of Woolford J in Sentinel, unconscionability will require some degree of moral outrage. That is a fact-driven enquiry. This will ultimately need careful assessment having regard to all the relevant evidence in this case. There is no shortcut to such process at this stage of the proceeding prior to discovery.
29. …
30. …
The claim is supported by independent expert evidence- it is not speculative or without foundation
31.The body corporate alleges in its claim that the formula in terms of which the rent if calculated is harsh or unconscionable. The formula in issue is (Clause 3 of the Lease):
Annual Rent = 6% X value of the unimproved base land.
32.It has independent expert evidence which supports such allegation in the claim. At para 14 of his affidavit, Dr McDermott provides a summary of his assessment of the formula:
Having considered the terms of the ground lease and economic environment in which it exists, I am of the view that it is particularly onerous and what I would consider exploitative of the tenant in that it extracts from the tenant and
50 Affidavit of Michael James Rehm in support of a notice of opposition to summary judgment/strike out, above n 11, at [36].
provides returns to the landlord far in excess of any comparable assets in the market.
33.The expert evidence is entirely consistent with the pleaded facts. The evidence of Whai Rawa [does not] go as far as showing Dr McDermott’s views are baseless or without foundation. This Court has before it a difference of opinion. Those differences are not able to be resolved in an interlocutory proceeding.
The claim is not baseless
34. …
35. …
36.The body corporate and Whai Rawa at the last review agreed the value of the base land. The land value is not in issue in the body corporate’s claim. It is the formula, and in particular the fixed rate of 6% of land value that determines the rent, that is in issue.
37.Dr McDermott explains why in his expert opinion he considers the formula erroneous:
49.The tenant here is locked into a fixed rental rate of 6 per cent of the land value. The lease has no self-correcting mechanism to allow the rent or returns to be marketed.
50.The situation is exacerbated by the increasing land value and the ratchet clause which negates the lease’s sole market- adjustment mechanism if market land values fall between rent reviews, in such circumstances the lease disregards the market conditions and the rent or return to the landlord is held artificially high.
38.Mr Taylor explains why in his expert opinion the rent review provisions in the lease do not provide adequate protection to the body corporate:
20.Mr Dunlop considers that the rent review provisions of the lease provide an adequate and appropriate mechanism to assess ground rent. I disagree. The fixed rental return, subject to no fluctuation to take account of market conditions, heavily favours the lessor.
…
35.I would agree with Mr McDermott that the rental formula in the lease prevents market-based adjustments.
Analysis
Detailed legal arguments regarding the interpretation of the UTA and the RTA
[72] There is considerable force in Mr Salmon’s arguments regarding the correct interpretation of the UTA and the RTA as set out at [64] and [65] above. In particular:
(a)The definition of “unit title dispute” relates to a “unit title development” which is defined as “the individual units and the common property comprising a stratum estate”. On the plain words of the definition it is hard to see how an issue in respect of a ground lease between the lessor of the base land and the body corporate as lessee is a dispute in relation to the individual units or the common property, both of which pertain only to the level of the leasehold stratum estate and do not relate to the underlying base land.
(b)Given the RTA has specific regimes for dealing with adjustments where rent in residential tenancies is substantially in excess of market rent, and a different regime for cancellation of onerous service contracts imposed on the body corporate by developers during the control period, it seems unlikely that such wide powers are conferred on the Tribunal under s 78(f) of the RTA as are contended by the Body Corporate. As Mr Salmon has pointed out, the regime to challenge residential tenancy agreements that are substantially in excess of market is specifically excluded from being implied into the UTA by s 176 of the UTA.
(c)The regime to challenge residential tenancy rents that are substantially in excess of market and to challenge onerous service contracts both have time limits as to when an application to challenge the relevant tenancy agreement or service contract can be made. In Mr Salmon’s submission, a wide open power under s 78(f) to challenge the rent clause in a commercial lease of base land at any time would seem to be unlikely to have been Parliament’s intention when implying s 78 of the RTA into the UTA.
[73] Having said this, this issue is not free from doubt. As Ms Heatlie submitted, s 171(2)(k) includes as a potential party to a “unit title dispute” a “lessor of base land”. Ms Heatlie made the point that it is hard to see a dispute involving the lessor of base land underlying unit title development other than an issue relating to the ground lease.
[74] In Ms Heatlie’s submission, the Body Corporate’s claim is under s 78 and does not engage ss 24 and 77(d) of the RTA. Ms Heatlie submits that ss 24 and 77(d) apply to residential tenancies, and while those sections were excluded from being implied into the UTA by virtue of s 176, that is not fatal to the Body Corporate’s claim as it is not intended that these sections are engaged. Instead, s 78 is engaged.
[75] Ms Heatlie also makes the point that when the purpose of the UTA is examined, there is an intention to protect the integrity of the unit title development as a whole. This suggests the purpose of the UTA could encompass issues with the ground lease rental which impacts the integrity of the unit title development.
[76] Ms Heatlie also points to authority that matters which “relate to” a unit title development should be widely construed to include relating to the unit title development economically as well as physically.
[77] The arguments put forward by the plaintiff, while they have some significant hurdles to overcome, are not speculative or baseless. In conclusion, I am of the view that the scope of s 78 of the RTA as imported into the UTA needs to be determined at a substantive hearing and is not suitable to be resolved in a strike out or summary judgment context.
Policy considerations
[78] I have set out at [68] and [69] above the respective submissions on behalf of the defendant and the plaintiff in relation to the policy considerations which should be taken into account in the interpretation of the relevant sections of the UTA and the RTA.
[79] In my view, these are clearly not matters which can be resolved in the context of a strike out/summary judgment application. They need to be considered as part of a
substantive hearing and I do not express any view on the relative strengths of the policy arguments respectively put forward by the parties.
Is the rent clause in the ground lease “harsh or unconscionable”?
[80] Mr Salmon submits that even if the Tribunal does have jurisdiction under s 78 of the RTA to deal with a rent clause in the ground lease between Whai Rawa and Body Corporate, as a matter of fact the clause is not harsh or unconscionable and has not been applied in a harsh or unconscionable manner by Whai Rawa. Submissions in this respect are set out at [70] above. He makes the following submissions:
(a)In order to be “unconscionable”, the relevant provision must be more than unfair, unreasonable or commercially unsound and must involve a “moral obloquy” or outrageousness which obliges the Court to intervene.
(b)The current rental is set by agreement in the lease by implementing cl 3.3 of the lease and there is nothing harsh or unconscionable when both parties, by agreement, apply the agreed rental formula in the lease.
(c)There is no evidence that the rent is beyond market rates. Mr Salmon, during his oral submission, criticised the evidence of Dr McDermott in a number of places, indicating that the comparison Dr McDermott had drawn between the lease and Treasury bonds was seriously flawed in a number of respects. Mr Salmon supported his submission by referring to the evidence of Mr Dunlop, which confirmed that the fixed rental rates are prevalent, the rental clause reflects what is usual for rental in terms of this type of property, and the market reality is considerably different from the hypothetical scenarios presented by Dr McDermott. He says the analysis from Dr McDermott simply fails to consider the real risks and costs associated with the lease.
(d)The uncertainty relating to rental reviews under the ground lease would have been reflected in unit prices and that purchasers would have factored the lease terms into the price they would have paid for the
units. Therefore it cannot be said that the rental clause has been exercised in a harsh or unconscionable manner.
(e)The fact that the Body Corporate was having difficulties paying the rental, and this may have led to bankruptcies and enforcement action does not make the rental clause harsh or unconscionable.
[81] Ms Heatlie submits that the test of whether the clause is harsh or unconscionable is objective. In her submission, she points out that in the decision of Bartle, the test for “harsh” (or “oppressive”) is wider than the equitable doctrine of “unconscionability” and includes circumstances where a breach of reasonable standards of commercial practice occurs, even when a party is subjectively blameless and simply follows industry practice.51 Ms Heatlie submits that it is irrelevant that Mr Dunlop, in his evidence, considers the lease to be a “standard lease”, entered into by commercial parties at arm’s-length. The Court in the Bartle decision said that it is for the courts rather than the industry to set the standard.
[82] She also submits that the Body Corporate contests the fact that the parties to the lease when it was entered into were truly at arm’s-length, and this aspect of the Body Corporate’s claim will be assisted by discovery.
[83] In my view, while the submissions for the defendant heavily criticised Dr McDermott’s evidence as seriously flawed, the issue as to whether the rental clause in the lease is harsh or unconscionable, or if it has been applied by Whai Rawa in a harsh or unconscionable manner, requires a substantive hearing with a full contest of expert evidence.
[84] In addition, if the plaintiff maintains its challenge to the original parties to the lease not being truly arm’s-length, then this aspect of “harshness or unconscionability” will require discovery to be undertaken.
51 GE Custodians v Bartle, above n 47, at [46].
Conclusions
[85] Turning back now to the relevant principles for strike out or summary judgment in favour of the defendant, I am of the view that both applications should be dismissed.
[86] Ms Heatlie submits that pleaded allegations of harshness or unconscionability should be assumed to be true unless:
(a)they are speculative and without foundation; or
(b)they are utterly baseless on the evidence.
[87] Ms Heatlie submits that the claim is not baseless and is not speculative or without foundation. The Body Corporate alleges in its claim that the formula in terms of which the rent is calculated is harsh or unconscionable, not the rent set by agreement pursuant to cl 3.3. Mr Heatlie submits that the claim is supported by expert evidence of Dr McDermott which has not been refuted by other evidence produced by Whai Rawa. While the evidence of Dr McDermott has been criticised in the submissions on behalf of Whai Rawa, those criticisms do not go as far as showing Dr McDermott’s views are baseless or without foundation. Ms Heatlie submits the Court has before it a difference of opinion and those differences are not able to be resolved in interlocutory strike out proceedings or summary judgment proceedings. I agree with Ms Heatlie’s submissions in this respect.
[88] Ms Heatlie also contends that the proposition advanced on behalf of Whai Rawa, that purchasers of units would have been aware of the terms of the lease and have factored this into their purchase price of the units, is not likely to be correct. Her submission is that for a purchaser of a unit to have understood, and be able to calculate effectively the changes in the ground lease rental and apply this in the calculation of the purchase price of the units, is unrealistic. I am inclined to agree with this view.
Affidavits in dispute
[89] As noted at [36] to [38] above, both parties challenge the admissibility of certain affidavits filed in connection with the application.
[90] The Body Corporate alleges that Mr Donnelly’s affidavit dated 26 November 2021 is not a reply to Dr McDermott’s evidence or the factual evidence of Mr Rehm. Ms Heatlie submits that Mr Donnelly’s affidavit is to supplement the evidence he has already given in support of the strike out/summary judgment application, and should have all been filed in support of the application. The Body Corporate also alleges Mr Dunlop’s affidavit is not in reply to Dr McDermott’s evidence or that of Mr Rehm. The Body Corporate submits that Mr Dunlop is a registered valuer and not qualified to reply to Dr McDermott.
[91] Whai Rawa, on the other hand, objects to the Body Corporate’s evidence from Mr Taylor, a registered valuer, in his affidavit dated 15 December 2021. Whai Rawa contend that it repeats matters already addressed by Dr McDermott and Mr Rehm, or contains evidence that it could reasonably have been expected to provide with its notice of opposition. The Body Corporate contend it is in reply to Mr Donnelly and Mr Dunlop’s affidavits referred to at [90] above.
[92] Having reviewed the relevant affidavits, I will allow the affidavits of Mr Donnelly and Mr Dunlop filed in support of the application, and I will also allow the affidavit of Mr Taylor.
Result
[93]In my judgment:
(a)as to the legal interpretation of the relevant provisions of the UTA and the RTA, while the arguments lean in favour of Mr Salmon’s submissions, the issue is not free from doubt and needs to be fully tested at a substantive hearing;
(b)if the jurisdictional argument is determined in favour of the Body Corporate, whether the formula in the rental clause is harsh or unconscionable needs to be fully tested in a substantive proceeding. There is expert evidence before the Court as to the plaintiff’s view, and this issue is unable to be resolved without hearing opposing views; and
(c)the Body Corporate claims that the issue of whether the lease was entered into between truly arm’s-length parties goes to the issue of whether the rental clause in the lease is harsh or unconscionable. This issue needs to be dealt with through discovery as part of the substantive proceeding.
Orders
[94] The defendant has not established that the plaintiff’s claims are speculative and without foundation, nor that they are utterly baseless on the evidence. Nor has it shown that the plaintiff’s cause of action is untenable.
[95] I therefore order that the application for strike out is dismissed and the application for summary judgment is dismissed.
[96]Costs are awarded to the plaintiff on a 2B basis.
…………………………….. Associate Judge Taylor
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