Infratil Infrastructure Property Limited v Viaduct Harbour Holdings Limited
[2015] NZHC 2533
•14 October 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-2259 [2015] NZHC 2533
BETWEEN INFRATIL INFRASTRUCTURE
PROPERTY LIMITED
Applicant
AND
VIADUCT HARBOUR HOLDINGS LIMITED
First Respondent
DEVELOPMENT AUCKLAND LIMITED
Second Respondent
TRAM LEASE LIMITED Third Respondent
Hearing: 12 October 2015 Counsel:
B N White for applicant
J A McKay for second respondent
L McEntegart and R E Schultz for third respondentJudgment:
14 October 2015
Reissued:
21 October 2015
JUDGMENT OF KATZ J
This judgment was delivered by me on 14 October 2015 at 3:00pm Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
Solicitors: Buddle Findlay, Auckland Chapman Tripp, Auckland LeeSalmonLong, Auckland
Counsel: L McEntegart, Auckland
INFRATIL INFRASTRUCTURE PROPERTY LIMITED v VIADUCT HARBOUR HOLDINGS LIMITED [2015] NZHC 2533 [14 October 2015]
Introduction
[1] Infratil Infrastructure Property Limited (“Infratil”) leases two properties in the Wynyard Quarter, Auckland, from1 Viaduct Harbour Holdings Limited (“Viaduct”). The properties are currently used as a bus depot site. The relevant leases are Glasgow leases. They provide for perpetually renewable 21 year terms, the most recent of which expired on 17 November 2014. The amount of rent payable under the lease for the next 21 year term is to be determined at a rent review
arbitration which is due to take place next month.
[2] Infratil has filed an originating application seeking, for the purposes of the arbitration, non-party discovery of:
(a) certain transaction documents from the second respondent
Development Auckland Limited (“Development Auckland”); and
(b)an arbitral award to which the third respondent, Tram Lease Limited, (“Tram Lease”) is a party. (Tram Lease has a common shareholding with Viaduct).
The non-party discovery application is opposed by the respondents.
[3] It was common ground that the relevant principles are those set out in r 8.21 of the High Court Rules and the decision of Kos J in Vector Gas Contracts Ltd v Contact Energy Ltd.2 In order to determine whether I should order discovery of the documents sought it is therefore necessary to determine the following issues:
(a) Are the documents sought relevant to the issues in the arbitration? (b) Is non-party discovery necessary?
(c) Is adequate confidentiality protection proposed?
1 The original version of this judgment incorrectly used the word “to” rather than “from” in this
sentence, and has accordingly been corrected pursuant to r 11.10 of the High Court Rules.
2 Vector Gas Contracts Ltd v Contact Energy Ltd [2014] NZHC 3171, [2015] 2 NZLR 670.
(d) Should non-party discovery orders be made and, if so, on what terms? [4] I will consider each issue in turn.
Are the documents sought relevant to the issues in the arbitration?
[5] The purpose of the arbitration is to determine the quantum of rent payable under the leases for the next 21 years. Infratil’s valuation expert, Gary Cheyne, deposes that ground rentals are primarily determined by comparing new rentals that have been agreed on comparable properties (referred to as the classical or comparative approach). The difficulty with this approach, however, is that there are very few new lettings of comparable properties in this case, so there is a dearth of market data. An alternative approach (referred to as the traditional approach) is to calculate the ground rental by multiplying the freehold value of the underlying land by a ground rental factor. This is based on the freehold market value of comparable properties.
Relevance of the Development Auckland transaction documents
[6] The transaction documents relate to other properties located in the Wynyard Quarter. Infratil understands that the first three properties in respect of which discovery is sought have been ground-leased as new lettings from Development Auckland to various parties. The fourth property has been advertised for sale or lease by Development Auckland and Infratil understands it may also have been leased.
[7] Development Auckland’s position is that any transaction documents relating to these properties are not relevant, because they relate to complex bespoke arrangements that reflect outcomes that are significantly different to an open market sale of land. In particular, Richard Aitken, Development Auckland’s director of capital partnering, deposed that:
The relevant arrangements are all complex, bespoke, and include a number of contractual and design requirements that reflect numerous essential and desired outcomes that [Development Auckland] sought to achieve as part of the master planning and development of the entire precinct. These were driven out of a number of foundation documents…and [Development Auckland’s] requirement that the development partners pay for related infrastructure, including laneways and public art contributions.
All of these features mean that these transactions were significantly different to an open market sale of land that may normally be used to provide evidence of open market transactions for rent review purposes.
[8] Development Auckland submitted that the transaction documents would not assist Infratil in ascertaining comparable market rentals in Auckland’s Wynyard Quarter because:
(a) The arrangements recorded in the documents reflect Development Auckland’s unique objectives as a Council Controlled Organisation, which are primarily focused on the revitalisation of the Wynyard Quarter for the benefit of all Aucklanders (and which do not equate with objectives primarily focused on financial gain);
(b)The complexity and structure of the underlying arrangements reflect numerous bespoke outcomes which are designed to achieve those broader objectives. The nature and extent of those arrangements are significantly different to those implemented in a typical open market transaction.
[9] Infratil submitted, on the other hand, that the nature of the agreements do not contain such significant differences such as to render the transaction documents unable to provide an indication of open market sale land values and rents. Mr Cheyne deposed that Development Auckland’s planning and development objectives are set out as guidelines and development restrictions in the Wynyard Quarter District Plan and accordingly, all open market lessees, lessors and developers are also bound by similar objectives. His evidence is that there is nothing unusual in this, given the intention to masterplan the Wynyard Precinct. Further, to the extent that the transaction documents depart from what would otherwise be expected in an open market arrangement, adjustments for such differences can be made.
[10] A number of cases have considered issues of relevance in a valuation or rent review context. In Modick RC Ltd v Mahoney, the Court of Appeal emphasised the
importance of valuers and umpires being able to refer to genuine market rents.3
Similarly, in Re Dickinson (a case regarding the rent review for premises in the Trust Bank Centre in Wellington) the lessee sought details of rental and collateral agreements that were subject to confidentiality clauses. Cooke P observed that:4
Such genuine market rentals are not always easy to discover, and when discovered they may be of great importance in assisting an umpire in carrying out his difficult task of assessment. ... Of course one infers as much without any detailed knowledge of the situation and without in any respect seeking to fetter him, but it is desirable that he should be able to get at the truth as to these allegedly comparable rentals. Plainly, details will be required such as the terms of collateral contracts offering side benefits and the like.
[11] I also note that the courts have observed that new lettings (as opposed to rents fixed by arbitration) should form the primary basis for rental comparison. For example, in Modick RC Limited v Mahoney Cooke P stated that:5
Figures fixed by arbitration or rent reviews as between captive parties are not necessarily a reliable guide, since they do not represent the unfettered play of market forces, but rather the arbitrators’ assessment (assuming that he has applied himself to the task correctly) of what market forces should produce. It is only a freely negotiated rent on a new letting that can confidently be taken to be truly comparable, provided of course that are also sufficient similarities in site and otherwise.
[12] Taking these principles into account, I accept Infratil’s submission that the transaction documents are relevant to the forthcoming rent review arbitration. They will provide potentially helpful information regarding the rental market for ground leases in the Wynyard Quarter. There appears to be scant evidence available that is directly comparable to the issues to be determined in this arbitration. Mr Cheyne’s evidence was that the only freely negotiated new lettings in the Wynyard Quarter are the new lettings with Development Auckland in respect of which third party discovery is sought. Mr Cheyne acknowledged that these do not appear to be for
21 year perpetually renewable terms, but rather are long term lease arrangements, potentially of 100 years or more. His evidence, however (which I accept) is that an expert valuer will be able to make appropriate adjustments to reflect such
differences. It therefore seems likely that the transaction documents will provide at
3 Modick RC Ltd v Mahoney [1992] 1 NZLR 150 (CA).
4 Re Dickinson [1992] 2 NZLR 43 (CA) at 47.
5 Modick RC Ltd v Mahoney, above n 2, at 155.
least some helpful market evidence of the operation of the current market for ground leases in the Wynyard Quarter, and the manner in which the present market divides risks, obligations, rights and responsibilities between lessor and lessee. I accept Mr Cheyne’s evidence that those risks, obligations, rights and responsibilities can be quantified and adjusted to the terms of the leases at issue in the arbitration.
[13] Any ultimate issues of relevance will, of course, be a matter for the arbitrators to determine, after the documents have been disclosed. I am satisfied, however, that the transaction documents meet the appropriate relevance threshold for non-party discovery purposes.
The Tram Lease arbitral award
[14] The Tram Lease v Wang arbitral award (“Tram Lease Award”) relates to a
2005 rent review of a Glasgow lease with a term of 21 years.
[15] Infratil is already in possession of a copy of the Tram Lease Award. Tram Lease’s evidence is that it has never consented to disclosure of the award. It is therefore possible that confidentiality has been breached by one of the experts who were involved in that arbitration, or someone else who was involved in the process. To meet any confidentiality concerns, Infratil seeks non-party discovery of a copy of the award from Tram Lease.
[16] Infratil did not submit that the Tram Lease Award is relevant because it relates to a comparable property, as apparently it does not. Rather, Infratil says that it wishes to refer to the rental factor that was determined in that case. (The rental factor links the rent to a fixed percentage of the value of the land). Mr Cheyne’s evidence was that rent review awards relating to 21 year term Glasgow leases in Central Auckland are uncommon. Only one to two 21 year perpetual leases come up for renewal each year. The Tram Lease award may therefore provide a helpful precedent.
[17] I have not been persuaded that the Tram Lease Award is sufficiently relevant to justify an order for non-party discovery. The Tram Lease arbitration was in respect of a relatively small site (much smaller than the sites involved in the current
dispute) in Newmarket, Auckland. The rent review for that site was conducted by a sole arbitrator. It apparently did not involve legal counsel, but was conducted solely by expert valuers. The two valuers agreed the appropriate rental factor between themselves, so ultimately the arbitrator was not required to determine that issue, but just adopted the agreed rental factor.
[18] In such circumstances the Tram Lease Award appears to be of limited precedent value. I note Cooke P’s observations in Modick that figures fixed by arbitration or rent reviews as between captive parties are a much less reliable guide than a freely negotiated rent.6 Further, the Tram Lease arbitral award will simply show the rental factor that two expert valuers agreed was appropriate in a relatively small arbitration, conducted a decade ago, in respect of a very different (and much smaller) site in a different location.
Is non-party discovery necessary?
[19] The order for discovery must be “necessary”.7 In Vector Gas, Kós J held that in order to establish necessity the applicant needed to establish that:8
… other sources of evidence are unlikely to be sufficient because they are materially incomplete or unreliable. And that the documents sought may make a real difference, and are not merely marginal.
[20] In determining necessity, the discovery sought need not, however, be the only source of evidence available to an applicant:9
... necessity here does not require re-examination of the appropriateness of non-party discovery of sensitive market pricing information in private arbitrations generally. That argument was lost long ago, and this is not the occasion or place to revisit it. But it does require the Court to have a reasonably strong sense that non-party discovery of this kind and extent is necessary.
[21] In assessing whether the market information sought in Vector Gas was necessary, the Court considered that, although the applicants had access to a
substantial amount of market data through their market position, the information was
6 Modick RC Ltd v Mahoney, above n 2, at 155.
7 Vector Gas Contracts Ltd v Contact Energy Ltd, above n 1, at [30].
8 At [30] and [59].
9 At [59].
materially incomplete as it “did not comprise the relevant market, but simply a substantial section of it”.10
[22] Development Auckland submitted that discovery of the transaction documents in this case is not necessary for the determination of the arbitration. In particular, it submitted that Infratil’s evidence fell short of establishing that the market evidence that is already available to it is inadequate and why access to the documents is likely to make a material difference to its ability to ascertain comparable market rentals.
[23] A copy of Infratil’s list of documents in the arbitration was handed up at the hearing. Counsel for Development Auckland noted that 16 properties were listed, in respect of which relevant documents are apparently available. (It is not clear from the list, however, precisely what documents are available in relation to each property). Counsel for Infratil noted, on the other hand, that only one of the
16 properties listed is located in the Wynyard Quarter, with two others being located nearby.
[24] I am satisfied that discovery of the transaction documents is necessary in the circumstances, notwithstanding that Infratil has evidence available to it regarding a number of other sites. I accept Infratil’s submission that this rent review arbitration is relatively unusual in that it relates to:
(a) the rent review of two 21 year perpetually renewable leases, which are uncommon; and
(b) a large, 1.8 hectare block of development land located in the Wynyard
Quarter, which is also uncommon.
[25] Partly due to these particular features, there is a paucity of evidence available that is directly comparable to the issues to be determined in this arbitration. It is therefore necessary to cast the information net slightly wider in the search for relevant information. I have already held that the transaction documents, which
relate to freely negotiated new lettings in the Wynyard Quarter, are relevant. Infratil, however, currently has little or no evidence available to it of freely negotiated new lettings in the Wynyard Quarter. If non-party discovery of the transaction documents is not ordered, Infratil will not be able to obtain copies of documents that I have found to be relevant. Cooke P in Dickinson observed that there is a public interest in
seeing commercial premises let and not for unrealistically high rental levels.11 In
balancing the competing interests, the Court of Appeal in Dickinson unanimously held:12
There is a public interest in an open market unless special circumstances exist. In my view it is important to get to the truth of comparable rentals where available so that proper rent levels are fixed.
[26] There is a significant sum at stake for Infratil in this arbitration. It only has one opportunity, for the next 21 year period, to put forward the best evidence it can. Without the transaction documents there will potentially be a lacuna in Infratil’s evidence, which will then be materially incomplete in relation to information regarding freely negotiated new lettings in the Wynyard Quarter precinct.
The Tram Lease arbitral award
[27] Given that I have found that the Tram Lease arbitral award is not relevant, it is not necessary for me to determine whether it is “necessary” to discovery it. I note, however, that the issue is far from straightforward in circumstances where Infratil already has a copy of the award, albeit one that may have been (presumably inadvertently) obtained by it as a result of breach of confidence by another party.
Is adequate confidentiality protection proposed?
[28] The transaction documents contain at least some confidential and commercially sensitive information. Confidentiality is not necessarily a barrier to non-party discovery, however, where satisfactory arrangements exist to ensure
commercially sensitive information is sufficiently protected.13
11 Re Dickinson, above n 3, at 47.
12 Re Dickinson, above n 3, at 49.
[29] Infratil annexed a proposed confidentiality protocol to its application. Development Auckland agreed that the draft confidentiality protocol would be sufficient to protect the confidentiality of the transaction documents, subject to a minor amendment to one sub-paragraph, for the sake of clarity.
[30] In relation to the application to disclose the Tram Lease arbitral award, Infratil and Tram Lease both made extensive submissions regarding the effect of s 14 of the Arbitration Act 1996 (in its 2005 form, which differs significantly from the current wording). That section, as at 2005 and unless otherwise agreed by the parties, relevantly provided that an arbitration agreement is deemed to provide that the parties shall not publish, disclose, or communicate any information relating to arbitral proceedings under the agreement, or to an award made in those proceedings. Tram Lease submitted that s 14 either:
(a) absolutely prohibited disclosure of an arbitral award without the parties’ consent (consequently depriving this Court of any jurisdiction to make the non-party discovery order sought); or, alternatively
(b)at the very least, provided strong policy reasons for the Court to exercise its discretion against ordering disclosure of an arbitral award.
[31] Given that I have concluded that the Tram Lease arbitral award is not sufficiently relevant to justify a non-party discovery order, it is not necessary for me to determine this issue. For completeness, however, I note that I was not persuaded that s 14 of the Act (as at 2005), correctly interpreted, deprives this court of the jurisdiction to order non-party discovery of an arbitral award in an appropriate case. In terms of policy factors, however, the fact that the arbitration process is intended to be confidential to the parties is a matter that would clearly need to be weighed in the overall exercise of the court’s discretion.
Should non-party discovery orders be made?
[32] I have concluded that the Development Auckland transaction documents are relevant, that their discovery is necessary and that their confidentiality will be
adequately protected by the proposed confidentiality protocol. It necessarily follows that they should be discovered.
[33] In respect of the Tram Lease arbitral award, I have concluded that it is not sufficiently relevant to justify an order for non-party discovery.
Result
[34] I order that:
(a) Development Auckland is to forthwith provide Infratil with copies of any of those documents listed in Schedule 1 of the originating application that are already in the possession of its solicitors.
(b)Development Auckland is to file and serve upon Infratil, within seven days, an affidavit listing those documents falling within the categories listed in Schedule 1 that are or have been in its control and, if they have been but are no longer in its control, when it parted from them and what became of them.
(c) Development Auckland is to make the documents specified in the affidavit and within its control available for inspection by Infratil, in accordance with r 8.27 of the High Court Rules and Part 2 of Schedule 9 to the Rules.
(d)The parties are to comply with the confidentiality protocol attached to the originating application. For the avoidance of doubt, each partner or staff member of Buddle Findlay who is given access to the discovered documents is to sign an individual undertaking.
(e) That Infratil pay Development Auckland and Tram Lease’s costs of
this application on a 2B basis.
(f) That Infratil pay Development Auckland’s reasonable costs of
complying with the non-party discovery orders made against it.
(g)That the affidavit of Gary Michael Cheyne, sworn 8 October 2015, is sealed, on the grounds of commercial sensitivity and is not to be searched or copied without leave of a Judge, and that the Court file be
noted accordingly.
Katz J
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