Bolitho v Walter Robert Investments Limited
[2022] NZHC 3596
•21 December 2022
IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY
I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE
CIV-2022-442-000025
[2022] NZHC 3596
UNDER The Arbitration Act 1996 and Part 26 of the High Court Rules 2016 BETWEEN
BENJAMIN COLIN BOLITHO and ANNA CATHERINE BOLITHO
Appellants
AND
WALTER ROBERT INVESTMENTS LIMITED
Respondent
Hearing: 14 November 2022 Appearances:
B M Nathan and S Galbreath for Appellants
M R T Colthart and M J Logan for Respondent
Judgment:
21 December 2022
JUDGMENT OF GRICE J
Introduction
[1] The appellants, Benjamin and Anna Bolitho,1 leased 14½ hectares of bare agricultural land from Benjamin’s grandparents under a deed of lease entered into in July 2006 (the Lease). Mr and Mrs Bolitho (senior) had owned the land, known as the “Wells Block”, for over 30 years. Until Benjamin and Anna took the Lease it had been operating as an apple orchard. However, by 2006 that was no longer economic and
1 I use the appellants’ forenames to distinguish them from their grandparents, to whom I refer as Mr and Mrs Bolitho (senior).
BOLITHO v WALTER ROBERT INVESTMENTS LIMITED [2022] NZHC 3596 [21 December 2022]
the orchardist terminated the existing lease and the trees were removed. Improvements were then made to the block to convert it to grape production.
[2] Benjamin and Anna subsequently planted sauvignon blanc grapes on the property. They also owned and managed other vineyards in the area. The first vintage was 2008 and grapes from the property formed part of a blend for a top label wine that won numerous awards.
[3] The Lease was terminated in 2021, after the estate of Mr and Mrs Bolitho (senior) sold the property to a third party. In accordance with the Lease, Benjamin and Anna were entitled to a payment from the Lessors for the “improvements to the land”.
[4] An arbitrator was appointed by the parties to value the improvements, following the procedure set out in the Lease. The arbitral award by the arbitrator, an experienced professional valuer, Mr Blue Hancock, was issued on 14 March 2022 (the arbitration award).
[5] Benjamin and Anna appeal against that award, on the basis that the arbitrator did not correctly interpret the provision requiring him to provide a ruling on “the fair market value” of the improvements. They say as a result Mr Hancock undervalued the improvements.
Grounds of appeal
[6] Appeals against an arbitral determination are limited to appeals on questions of law. Schedule 2 of the Arbitration Act 1996 provides at cl 5(10):
5 Appeals on questions of law
…
(10)For the purposes of this clause, question of law—
(a)includes an error of law that involves an incorrect interpretation of the applicable law (whether or not the error appears on the record of the decision); but
(b)does not include any question as to whether—
(i)the award or any part of the award was supported by any evidence or any sufficient or substantial evidence; and
(ii)the arbitral tribunal drew the correct factual inferences from the relevant primary facts.
[7] In this case the appellants submit that the appeal concerns the interpretation of the term “fair market value” in the Lease. They do not challenge the facts upon which the valuation exercise was based, nor the valuation exercise itself. Rather, the appellants base their appeal on the arbitrator’s interpretation of “fair market value” and the methodology he adopted as a result of that interpretation.
[8] Mr Nathan for the appellants points to a number of cases indicating that the debate about what is a question of law on the one hand and what is a question of fact or a matter “involving questions of fact and law” on the other continues. He says that this appeal is based on an error made by Mr Hancock in contractual interpretation and that, given the central importance of the factual matrix to the exercise, this involves a question which is a mixture of fact and law. Mr Nathan notes that the courts have pointed out that not all errors in interpretation are properly characterised as errors of law, but “[a] more nuanced approach is required to ensure that the identified error is not in reality a challenge to factual inferences or sufficiency of evidence.”2
[9]The questions of law put forward for determination are:
(a)whether or not the arbitrator erred in interpreting the Lease when he determined that the fair market value of all the Lessees’ (the appellants’) improvements, including but not limited to the trellises and grapevines:
(i)must take into account the highest and best use of the land;
(ii)must take into account the Lessees’ right under the Lease to use the land for other agricultural purposes;
2 Milk New Zealand (Shanghai) Co Ltd v Miraka Ltd [2019] NZHC 2713 at [59].
(iii)must take into account the added value those improvements give to the land;
(iv)must adopt a standard market value approach based on sales of vineyards, being sales of land and improvements together;
(v)should not adopt a capitalised income approach based on the income derived from the Lessees’ improvements;
(vi)should not take into account the income derived from the 2022 harvest.
[10] Mr Nathan indicated that the last point was abandoned. He conceded that the point was a matter of fact rather than law and was therefore outside the ambit of this appeal.
The Lease
[11] The Lease between Benjamin and Anna as Lessees and Mr and Mrs Bolitho (senior) as Lessors was dated 28 July 2006. The Lease was prepared by a lawyer on generally commercially standard conditions. It provided:
(a)Annual yearly rental of $36,000, plus GST. Rates and irrigation scheme water charges were to be payable by the Lessee. The rental was to be reviewed after five years and thereafter every three years with the reviewed rental to be equivalent to four per cent of the then rateable land value (ignoring all of the Lessees’ improvements on the property).
(b)The Lessor would clear the property and “work the land down flat” prior to commencement date.
(c)The Lessee had:
… the right to develop the property as a vineyard or develop it and use it for any other agricultural or horticultural use. All improvements erected on the property (including but not
limited to trellis’s and grapevines) shall be and shall remain the property of the Lessee.
(d)The Lease could be terminated by either party on twelve months’ notice. However, no such notice could be given within 15 years of the commencement date, and any such notice would take effect after the completion of harvest of the then vintage of grapes.
(e)Under cl 6 of the Lease, on termination of the Lease by the Lessor, the Lessor agreed to purchase from the Lessee and the Lessee would agree to sell to the Lessor:
… all of the Lessee’s improvements then on the property (including but not limited to the trellis’s and grape vines) at a price to be agreed upon between [the parties] or failing agreement at a price to be determined by a single registered valuer if the parties can agree on such valuer but failing agreement each party shall appoint a registered valuer who shall determine the market value of such improvements and if such valuers cannot themselves reach agreement then they shall appoint a third valuer whose ruling on the fair market value shall bind the parties.
(f)Also under cl 6, if the Lessee terminated the Lease:
… all the Lessee’s improvements then on the property (including but not limited to the trellis’s and grape vines[)], shall become the Lessor’s improvements and the Lessor shall not be required to purchase them nor pay any compensation.
[12] The Lease was varied by a deed of variation of lease dated 5 July 2017. This variation was as a result of the arrangements put in place for the sale of Waimea Estates, a wine enterprise, in which the Bolitho family (or at least Mr and Mrs Bolitho (senior)) held an interest. The sale was to Booster Wine Group. That arrangement entailed Benjamin and Anna subleasing the Wells Block to Waimea Estates (Nelson) Ltd. The Lease was varied to provide a fixed term expiring 31 July 2021, so long as notice was given by 30 June 2021. If notice was not given, the Lease would become a periodic tenancy terminable on 12 months’ notice. The termination clause in the original Lease, cl 6, was not varied.
[13] Following the deaths of Mr and Mrs Bolitho (senior), the Wells Block was sold on 1 June 2021 to Walter Robert Investments Ltd. On 28 June 2021, that company as Lessor gave notice to Ben and Anna terminating the Lease from 31 July 2021. This triggered cl 6 of the Lease, the termination clause.
[14] The parties were unable to agree on the price to be paid by the Lessor (by this time Walter Robert Investments Ltd) for the improvements. The parties duly appointed valuers under cl 6 of the Lease. The valuers could not agree. The parties then agreed to appoint Mr Hancock as arbitrator to finally determine the “fair market value” of the improvements to be paid by the Lessor.3
[15] The arbitration hearing took place on 17 and 24 February 2022. The parties were legally represented at the hearing. Mr Hancock undertook a site visit as part of the arbitration.
[16] Mr Hancock issued his determination on 14 March 2022 (the arbitration award), which the appellants have appealed.
The arbitration award
[17] The evidence put before the arbitrator included the evidence of the valuers appointed by each party, each of whom was cross-examined. Mr Baxendine was the valuer for the Lessor and Mr Bennison was the valuer for the Lessee. Both were referred to by the arbitrator as experienced valuers. Mr Hancock himself is a professional valuer with over 40 years’ experience.
[18] The arbitration award set out the background and recorded that the Lease had been set up “to provide a passive income to the grandparents while also providing a long-term investment opportunity for the Lessees”.
[19] Mr Hancock noted the definition of “market value” put forward by Mr Bennison for the Lessor as defined by International Valuation Standards (IVS) as:
3 At Mr Hancock’s request, the parties agreed to appoint Mr Hancock as an arbitrator rather than an expert valuer. No issue arises with this appointment.
… the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and willing seller in an arm’s-length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
[20] The arbitrator went on to set out the “pertinent sections of” the conceptual framework of the IVS definition of “market value” as follows:
(d) “Between a willing buyer” refers to one who is motivated, but not compelled to buy. This buyer is neither over eager nor determined to buy [at] any price. This buyer is also one who purchases in accordance with the realities of the current market and with current market expectations, rather than in relation to an imaginary or hypothetical market that cannot be demonstrated or anticipated to exist. The assumed buyer would not pay a higher price than the market requires, the present owner is included amongst those who constitute “the market”.
[21]In this respect, as the arbitrator went on to state:
21.It would appear that the Lessor is being compelled to buy but is not motivated. If the Lessee is considered to constitute the market, then through their valuation submissions are saying that the improvements are valuable to them and they would pay the sum of $842,000 for them.
(e) “And a willing seller” is neither an overeager nor a forced seller prepared to sell at any price, nor one prepared to hold out for a price not considered reasonable in the current market. The willing seller is motivated to sell the asset at market terms for the best price obtainable on the open market after proper marketing, whatever that price may be. The factual circumstances of the actual owner are not part of this consideration because the willing seller is a hypothetical owner.
22.The Lessee is being compelled to sell under the terms of the lease and the termination triggered by the Lessor. The Lessee is not able to properly market the asset, and therefore test the market to achieve the best price obtainable. It cannot be determined that they are a willing seller.
(f) “In an arm’s-length transaction” is one between parties who do not have a particular or special relationship. E.g. parent and subsidiary companies or landlord and tenant, that may make the price level uncharacteristic of the market or inflated. A market value transaction is presumed to be between unrelated parties, each acting independently.
23.This clearly does not meet the definition of an arm’s-length transaction.
24.The second part of Clause 6 is for registered valuers to determine the market value of such improvements. This part of the clause, if read in isolation to the balance of the clause, which I do not believe it can be,
would be a very straight forward determination of: - the value the improvements give to the land.
25.When undertaking a market value, valuers would, as is mandatory, be following the concepts of market value and highest and best use as detailed under IVS 104 Bases of Value, 140 Premise of Value – Highest and Best Use.
The highest and best use is the use of an asset that maximises its potential and that is possible, legally permissible and financially feasible. The highest and best use may be for a continuation of an asset’s existing use or for some alternative use. This is determined by the use that the market participant would have in mind for the asset when formulating the price that it would be willing to bid.
26.The third part of clause 6 is the role of the arbitrator to rule on the fair market value that shall bind the parties.
[22] The arbitrator then went on to consider how the arbitration clause in the Lease should be interpreted as a matter of contractual interpretation. He concluded that the parties were intending that:
28.… they would receive what was fair when the lease came to an end that is it would not be constrained by any particular interpretation of words. That is the parties would not envisage that with the expiry of the lease the plants and vines would be considered as no more than chattels for removal. Alternately a higher and better use for the land would not require the Lessor to pay a value based on the economic return of the Vineyard, when to achieve that higher and better use all vineyard improvements would be removed. Or in the words of IVS This buyer is also one who purchases in accordance with the realities of the current market and with current market expectations.
29.The concept of willing buyer, willing seller is explored by Prichard J in Drexel v Jacobsen Holdings Ltd. Where it is eloquently put the parameters of a willing buyer, willing seller are: - friendly negotiation between fair-minded people who were in the situation in which the parties found themselves and who were willing to consider all factors benefit or detriment to either side.
Analysis
[23] The arbitrator made no error in setting out the legal position and approach to interpretation insofar as it was relevant to the clause under consideration. As was apparent from the clause in the context of the Lease as varied, the arbitrator was required to carry out an assessment of the “fair market value”. That introduced well-established valuation concepts and approaches to the subject property, bearing in mind that it was to be a “fair” market value as opposed to just a straight “market value”.
[24] He then went on to apply the relevant approaches to valuation to the particular property and circumstances. The appellants submit that they are not challenging the facts on which the valuation exercise was based, nor the valuation exercise itself, but rather the arbitrator's interpretation of “fair market value” and the methodology he adopted as a result of that interpretation. For those reasons the appellants say that the questions posed are questions of law, not questions of fact. However, that is not the case. The arbitrator has adopted well-accepted valuation methodologies and cross-checked them. He has adopted a combination of approaches to reach his determination. The arbitrator was entitled to apply such methodologies as he thought appropriate to the case.
[25] The questions as formulated by the appellants are directed towards the application by the arbitrator of the valuation methodology to the subject property. Those issues were squarely for determination by the valuer.
[26] Nor did the arbitrator make any error of law in his application of valuation methodologies and principles to the property and evidence before him. All of the findings that the arbitration made in the course of his award were matters for him. In particular, the arbitrator:
(a)Used the accepted valuation principles surrounding assessment of “fair market value”, which included application of the “highest and best use” principle. That is the use of an asset that maximises its potential and that is possible in the circumstances. This approach ensures that the market is considered. A market participant would have that “highest and best use” in mind for the asset when formulating what price it would bid. In this case, the highest and best use of the land at the time the Lease was terminated, as was apparently acknowledged by all the valuers, was not for growing grapes but rather for growing apples. It is apparent the situation had changed from that earlier position when the Lease was entered into and the market conditions at that time dictated that apples be replaced by grapes.
(b)Applied a discount to the land value to more realistically approximate that which would be payable on the market, rather than the price actually paid in this case by a neighbour, who paid above market value for subjective reasons.
(c)Added an uplift to the value of improvements to take into account the fact that part of the Wells Block would continue to be used for grape growing for various periods of time due to a designation over part of the property which would likely delay its development for other uses.
(d)Applied a number of different methodologies and approaches to valuation, which he then cross-checked against each other. The primary methods he used were the market comparison approach and a check against the income/market capitalisation approach. This approach was open to him.
(e)Rejected the proposition that the improvements could only be valued on a removal value which was advanced by the Lessor. That was founded on an argument, relying on IVS 300 and the asset standard for the valuation of plant and equipment, that the improvements were only worth the amount they would get once removed from the land because upon termination of the Lease the Lessee did not have any further rights to the use of the land. This was predicated on the improvements no longer being required because the use of the land was to change. However, the arbitrator was not persuaded that it would have been in the minds of the parties when entering the Lease that this would be the approach to market valuation of improvements. That was open to the arbitrator as he was required to undertake a fair market value.
(f)Carried out a market analysis and concluded that Mr Baxendine for the Lessor had inappropriately included sales from outside the region when
there was directly comparable evidence within the locality.4 The three comparative sites included one site where there was “some conjecture as to if the grapes will be removed” given the purchaser was a berry fruit grower.
(g)The other market valuations the arbitrator relied on involved land which had been sold to be used for conversion to nursery production or market gardening. Those properties were all within the region. He included the subject property which was sold for $2.7 million (land only) and subject to a delay in occupation due to the Lease occupation. He noted this was to an adjoining owner and for the land only, and that it sold by way of open tender at a price he understood to be “significantly above the under bidders”.
(h)Noted that there had been a contest between the two valuers about the state of health of the vines and the effect that would have on the valuation. Mr Hancock viewed the site. The Lessor’s expert had said 50 per cent of the vines were affected with a trunk disease, while the Lessee’s expert submitted there was no more than two to three per cent infected with the trunk disease. Mr Hancock, having inspected the vines, came to the conclusion that the trunk disease was comparable with what would be found in similar age sauvignon blanc vineyards in the Nelson region. This was a factual finding for the arbitrator.
(i)Assessed the expert evidence called on behalf of the Lessee in relation to the vineyard production and concluded that the sustainable production level was between 12 and 13 tonnes per hectare. This was another factual finding for the arbitrator.
(j)Considered the income approach advanced by the Lessee and pointed out a number of errors in the Lessee’s valuer’s calculation, including
4 Mr Baxendine had included market comparisons with properties sold in Marlborough. However, it appears the sale prices in that region are higher for land planted in grapes than they are in the Nelson region.
the failure to provide for a notional dwelling site (which removed a minimum of 5,600 square metres from production) as well as allowance necessary for any access driveways to that site. The arbitrator also pointed out Mr Baxendine had omitted to do his calculations based on the net area inside the legal boundary of 13.19 hectares, having also included land outside the boundary, and rejected Mr Baxendine’s use of the under bidder’s bid rather than the final sale price of the land of
$2.7 million. The arbitrator then discounted that price to account for the adjoining owner’s influence, which he assessed at five per cent. This had the effect of increasing the value of the improvements. Again this was a factual finding for the arbitrator.
Conclusion
[27] Mr Hancock made no errors of law in his award. Valuation is an art, not a science. As is apparent from the above summary, the assessment of the “fair market value” as was required by cl 6 of the Lease was intensely fact- and property-specific. The award required consideration of the evidence and the application of specialist expertise and experience.
[28] Mr Hancock is a very experienced valuer. He approached his determination appropriately, applying the correct interpretation of the termination clause. He used a number of approaches in reaching his determination and applied cross-checks to his valuation assessment. He took into account the evidence before him, including each of the party’s valuer’s reports, and also viewed the property.
[29] The award presents a careful and appropriate analysis with reasons for the findings clearly outlined. No errors of law are apparent.
[30]The appeal is dismissed.
Costs
[31] Counsel indicated that costs should follow the event on a 2B basis. Accordingly, I award costs, together with reasonable disbursements, including travel and accommodation, in favour of the respondent. I also certify for second counsel.
[32] If any issues arise from those orders, either party should file a memorandum within five days of the date of this decision.
Grice J
Solicitors:
Duncan Cotterill, Nelson
Mark Colthart Barrister, Downtown Auckland Pitt & Moore, Nelson
0
1
0