Miller v Flora Propertis Limited HC Christchurch CIV 2010-409-799
[2010] NZHC 1121
•11 June 2010
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV 2010-409-000799
BETWEEN PRUDENCE BARBARA DIANA MILLER, PETER LEONARD THOMPSON AND GARTH WARWICK ROUNTREE
Applicants
ANDFLORA PROPERTIES LIMITED First Respondent
ANDNGAI TAHU PROPERTY LIMITED Second Respondent
Hearing: 8 June 2010
Counsel: S P Rennie for Applicants
P M James for Respondents
Judgment: 11 June 2010
JUDGMENT OF FOGARTY J
[1] This is an application for discovery against a non-party. The subject of the dispute is the “fair market value” of 56 hectares of land which is itself about one- quarter of a land development project known as Prestons. The proposal is to subdivide rural land on the northern side of the conurbation of Christchurch by way of a private scheme change. The date of the valuation is to be 13 May 2009. At that time the application for a private scheme change to the Christchurch City Council had been made and was about to be publicly notified. Since then the application has been dismissed by the consent authority and is going on appeal to the Environment
Court.
[2] It is common ground that whatever the final meaning of the phrase “fair market value” the determination of the value as at 13 May 2009 will depend upon an assessment of the chance of the Prestons’ project achieving the necessary regulatory consents, and an estimate of the time to completion of the project from 13 May 2009.
[3] The valuer for the vendor assesses the fair market value of 13 May at $15.5 million odd. The valuer for the purchaser at $5 million.
[4] The valuers have not exchanged their reasons at this stage.
[5] An umpire has been appointed. The dispute is to be resolved by an umpire according to the provisions of the Arbitration Act 1996.
[6] The vendor now seeks non-discovery orders against the first and second respondents (for practical purposes Ngai Tahu Property) seeking:
Documents recording and/or supporting the expression of confidence about rezoning and documents relative to the proposed development including layout plans, costings and anticipated timeframes for the development.
[7] The vendors, the applicants in these proceedings, rely on the expansive test for relevance, for the purposes of discovery, contained in the Peruvian Guano decision, where Brett LJ said:[1]
[1] Compagnie Financiere et Commerciale du Pacifique v Peruvian Guano Co (1882) 11 QBD 55 (CA)
at 63.
It seems to me that every document relates to the matters in question in the action, which not only would be evidence upon any issue, but also which, it is reasonable to suppose, contains information which may – not which must
– either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary. I have put in
the words ‘either directly or ‘indirectly’, because, as it seems to me, a
document can properly be said to contain information which may enable the party requiring the affidavit either to advance his own case or to damage the
case of his adversary, if it is a document which may fairly lead him to a train
of inquiry, which may have either of these two consequences.
[8] Ngai Tahu Property is in partnership with an Auckland developer, CDL, and a major supermarket chain, Foodstuffs. They have formed a company, Prestons Road Limited, to develop the whole of the land of which the subject land is about
one-quarter. Ngai Tahu Property, through its wholly owned subsidiary, Flora, already owns a half interest in the subject land, and is entitled by way of a chain of agreements to purchase the remaining half interest based on the fair market value.
[9] Mr Rennie for the vendors argues:
It is reasonable to infer (from the nature of the parties, the proposed development, the steps they had taken towards exploiting the potentiality and their own public statements) that Ngai Tahu has in its possession and control documents relating to-
[a] The potentiality of the [subject] land;
[b] Consideration of the potentiality;
[c] The expressed confidence about rezoning and consideration of it;
[d] specific layout plans;
[e] Costings;
[f] Anticipated time-frames for the development.
...
Ngai Tahu have documents which are potently helpful to the issue for determination by the arbitrator but resists giving discovery. The order is therefore necessary.
[10] Flora and Ngai Tahu Property are not parties to the dispute to be resolved by the umpire. That is a family dispute. The subject land was a dairy farm owned by the late W R Hudson and his sister, Zoe. Zoe, who died some years ago, left her half share to her nephew, Michael Thompson, subject to a life tenancy in favour of Mr Hudson. Mr Hudson granted to Michael an option to buy his half share on fair market value terms. In the deed setting out these terms Mr Hudson is the grantor and Michael is the grantee. If Michael, the grantee, exercised his option the purchase price was to be one half of the fair market value of the subject land determined as at the date of Mr Hudson’s death. That date is 16 May 2009.
[11] The relevant clause is 6(a) of the deed which is as follows:
6 Formation of contract
…
(a)The purchase price of the Grantor’s interest shall be established as follows at the date of the Grantor’s death. Two (2) registered public valuers (one appointed by the Grantor’s personal representatives and the other by the Grantee) and their umpire (if necessary) shall establish the fair market value of the whole fee simple estate in the land. The Grantor’s interest shall not be valued separately. The valuation shall be conducted in the manner provided for in the case of arbitration under the Arbitration Act 1996. Immediately the fair market value of the fee simple estate in the land more particularly described in Schedule A has been established then one half thereof plus Goods and Services Tax (if any) shall be the purchase price of the Grantor’s interest under this option.
[12] There is no doubt that when cl 6(a) was agreed to back in 2004 that the parties, “from their armchairs”, would have appreciated there were always going to be valuation difficulties. This is because the land was zoned rural yet obviously had a potential to be rezoned for subdivision. In such a situation it is not easy to identify market value. This is a valuation problem known across the world. Understanding the problem does not make it any easier to justly address it when providing for an option to purchase. Mr Rennie drew the Court’s attention to a neat summation of this classic problem. The following is a dictum from the administrative division of the Supreme Court, being a Court composed of Wild CJ and two lay members, being valuers, Mr N B Cooke, and Mr R J Maclachlan in the case Tawharanui Farm Ltd v Auckland Regional Authority [1976] 2 NZLR 230.
[13] The Court was considering a claim for compensation for land compulsorily acquired. The claimant was entitled to full compensation and the value of the land was to be taken to be the amount that the land, if sold on the open market by a willing seller, might be expected to realise. Against this test the Court took the opportunity to set out some basic principles, four of which are directly relevant here:
(4) Where land possesses unusual or unique features as regards its position or potentialities there will be no market value to guide the court which must, therefore, act as best it can from the materials before it, bearing in mind that the land is to be valued not merely by reference to the use to which it is being put at the specified date, but also by reference to the uses to which it is reasonably capable of being put in the future. In that connection, it is the possibilities of the land and not its realised possibilities that must be taken into consideration. The value of the potentiality must be ascertained on the materials available without indulging in feats of imagination: Vyricherla Narayana Gajapatiraju v Revenue Divisional Officer [1939] AC 302, 312; [1939] 2 All ER 317, 321.
(5) Where there is a question of approval of a development scheme, the court must consider the likelihood of that being given, in much the same way as it might have to estimate the probability of some restrictions on sale being removed (Re Whareroa 2E Block [1959] NZLR 7, 11-12; [1959] AC 1, 15).
(6) As to the effect on value of a requirement of planning permission, in
London Borough of Enfield v Lavender Garden Properties Ltd [1968]
2 All ER 401Diplock LJ said:
"In the ordinary way if land is sold on the open market by a willing seller the price which the buyer is prepared to pay depends on the use which he thinks he will be able to make of it. If the land is already the subject of planning permission he knows that he will be able, if he wishes, to make use of it in accordance with that permission. He may also have an expectation that he may be able to get planning permission for a more profitable use and in so far as that expectation is a serious one then the price which he is prepared to give for the land will be increased in order to allow for the chance, though not the certainty, of his being able to make the more profitable use of it" (ibid, 406).
(7) "It is not planning permission by itself which increases value. It is planning permission coupled with demand": Viscount Camrose v Basingstoke Corporation [1966] 1 WLR 1100, 1106; [1966] 3 All ER 161,
164, per Lord Denning MR. (at 235)
I note that Panckhurst J also relied on these provisions in Shepherd v Spencer HC TIM CIV 2009-476-000242 16 November 2009.
[14] It may be noticed that (4) includes the proposition that there will be no market value.
[15] Before me, there was some argument by counsel and discussion with the Court, as to why the qualifier “fair” appears in cl 6(a). Mr Rennie submitted that the word “fair” has some work to do but what work it has is a matter to be decided by the umpire in arbitration.
[16] Mr Rennie drew the Court’s attention to the fact that the concept of fair value arises in the Companies Act 1993, such as s 149 which prohibits a director of a company from acquiring shares at less than their fair value. He drew the Court’s attention to the case of Wong and Fong v Fong and Chong HC AK CIV 2009-404-
002469 16 December 2009, Keane J, who examined an issue as to the value of shares against a deed providing for a standard of assessing fair market value.
[17] I do not think it is wise to examine the test of fair market value in cl 6(a) against the test of fair value as it sometimes appears in instruments addressing minority interests in the shareholding of companies. Minority interests in shareholdings of companies pose issues of fairness in equity which can trump market value of the minority interests. The problem is complicated by the fiduciary obligation that directors owe to all shareholders not just to the majority blocks.
[18] What is clear is that in the context of this deed “fair” is a qualifier of “market value”. It may simply be an acknowledgment of the inevitability that on one view of it there strictly is no market value in such a situation and the task of the valuers and the umpire is to come up with the next best value as closely as possible defined by considering market value. There will be a question for the umpire to what extent fairness might include having regard to the relationship between the grantor and the grantee.
[19] I agree that it is not a function of this Court in this application to resolve the function of the qualifier “fair” to “fair market value”. That said, it is, however, clear that the standard is principally intended to be objective. It has a core of objectivity about it. That is embedded in the concept of market value. This is only to be expected. It is a natural standard to be applied in the circumstance. It is reinforced by the selection of valuers to be the advocates for each party. It is reinforced by the statement that the task is not one of assessing the value of the half interest. It is assessing the value of the subject land in fee simple.
[20] In 2006 Michael agreed to sell all his interest in the land under Zoe’s will to Flora for $3.1 million with a bonus element of $300,000 payable in certain circumstances. This agreement also provided for Michael to transfer his rights under the option from Mr Hudson to Flora so that finally Flora could acquire the whole fee simple estate in the land. Flora is a bare trustee for Ngai Tahu Property. Michael also granted Flora an enduring power of attorney which permits the representatives of Ngai Tahu Property to stand in the shoes of Michael in relation to the exercise of the option in settling the purchase price as between Michael and the estate of Mr Hudson.
[21] The option has been exercised and cl 6(a) is engaged. Valuers for the grantor and grantee were unable to agree the fair market value. The parties then agreed to refer the issue for determination by Mr Barraclough acting as a single arbitrator under the Arbitration Act. The valuers refined the issue and agreed the hypothetical subdivision method with a chance of a zoning change was appropriate. For the estate, Mr Saunders, has assessed the fair market value at $15.685 million while for the grantee, Mr Sellars, has assessed it at $4.76 million. The reason for the significant division is the different assessments of a chance of a zoning change and the time for such rezoning to be achieved.
[22] It is in this context that Flora and Ngai Tahu Property are non-parties. They are in fact the effective litigants against the estate as to establishing the fair market value, but they are not directly the parties inasmuch as they are not the grantee. Rather, they have the power to exercise the rights of the grantee.
[23] Counsel are agreed that whether or not there can be discovery of Ngai Tahu Property’s documents is governed by High Court r 8.26. The relevant parts of this rule are sub-rule (1) and (4) which I set out:
8.26 Order for particular discovery against non-party after proceeding commenced
(1) This rule applies if it appears to a Judge that a person who is not a party to a proceeding may be or may have been in the control of 1 or more documents or a group of documents that the person would have had to discover if the person were a party to the proceeding.
…
(4) The Judge may not make an order under this rule unless satisfied that the order is necessary at the time when the order is made.
[24] It seems reasonably settled that in this context “necessary” means “reasonably necessary”. See Baby Hammock Co Limited v A J Park Law HC AK CIV 2008-404-3581 24 March 2010 at [10].
The degree of relevance of Ngai Tahu Property’s documents
[25] The principal argument against discovery is that it is not necessary. But before I examine that proposition I begin by considering whether or not Ngai Tahu Property is likely to hold documents which relate to the matters in question, which can be said to contain information which may enable the party requiring the affidavit either to advance his own case or damage the case of his adversary or is a document which may fairly lead him to a train of enquiry which may have either of those two consequences.
[26] There is no doubt that Ngai Tahu Property, CDL, Foodstuffs, and their joint venture entity, Prestons, will either severally or jointly hold numerous documents relating to the Prestons project including this subject land. These documents are likely to be surveyors and engineers’ reports on the most profitable subdivision of the property and efficient delivery of necessary services. There are also likely to be reports from planners/resource managers as to the case for a private scheme change and the likelihood of approval either at first instance or on appeal. There will be reports commissioned to financers. There will be business plans. There will also likely be valuations in support of business cases and/or financing proposals. Many of these documents will predate May 2009.
[27] It is by no means clear, however, that any of this material would be evidence admissible before the umpire. Normally none of these internal reports would be publicly available as they naturally have commercial confidentiality. Much of the information, however, contained in these reports, or most of it, will be publicly available. Valuers would normally do a hypothetical subdivision of the whole block of land which constitutes the Prestons project in order to assist identifying the value of the northern quarter, being the subject land. But they do these exercises, often with expert assistance, without access to private commercially sensitive similar materials.
[28] Experienced valuers will readily understand the potential of this land, and know the range of developers in May of 2009 capable of exploiting that potential.
[29] The significant differences between the reports that would be prepared by valuers retained under cl 6(a) versus the consultants, including valuers, retained by Ngai Tahu Property or its associates are likely to be in the opinions rather than in the data. Second, the Ngai Tahu Property documents are likely to give some indication of the range of values that Ngai Tahu Property and/or Prestons place on the land on a per hectare basis and/or according to the blocks. For example, the subject land is at the northern end of the block and there may be a policy of staged subdivision.
[30] Such Ngai Tahu Property documents may, however, identify efficiencies in the plan of the subdivision or the provision of its infrastructure that might not be detected by the valuers. In that sense access to work done by other professionals or peers may assist valuers’ analysis in the arbitration. In that sense documents held by Ngai Tahu Property might lead the valuers on to a further train of enquiry say in the hypothetical subdivision analysis. That is the limit of their possible relevance.
Reasonably necessary for non-party discovery
[31] As already noted the principal argument of Mr James for the respondents against non-party discovery is that it is not reasonably necessary. He relied also on some dicta by Barker J in T D Haulage Ltd v New Zealand Railways Corporation (1986) 1 PRNZ 668:
In T D Haulage Ltd v M K Hunt Foundation Ltd (1986) 1 PRNZ 668 on page 10, Barker J considered whether making an order for discover (sic) was “necessary”. He cited Scientific Research Council v Nasse (1980) AC 1028 at 1085:
“Discovery of confidential reports sought by one party and objected to by the other should not be ordered when the same information can be obtained from other sources which are not confidential and which do not contain sensitive material.”
The court or tribunal always has discretion to refuse to order discovery where it would operate oppressively. Oppression could occur… if the information is private and could be obtained in another way without infringing privacy.
Barker J stated at 11 that the English cases based upon Order 24, Rule 13(1) which uses the wording “unless the court is of the opinion that the order is necessary…” are applicable in New Zealand and said:
“The English cases require the court to consider whether there are other ways for an applicant to obtain the private information and if there is no other way for the plaintiff to acquire the information
[32] Mr James argued that the only legitimate purpose for discovery of these non- parties is to access information needed for the arbitration, yet this information was in the public arena and would normally be accessed by valuers according to their ordinary methodologies without the need for access to Ngai Tahu Property’s files.
[33] I think these reasons of Barker J are highly relevant to this case. The applicant is seeking to get access to the fruits of confidential opinions expressed by professionals having worked on publicly available information. These opinions would be used as a proxy to the state of mind of Ngai Tahu Property and to inferences as to how much it would be prepared to pay. As I have said already, such private information is not used by valuers as a proxy for market value. Such opinions could not be directly presented to the umpire except by calling the opinion makers as witnesses. Inasmuch as the opinions are based on fact those facts can be obtained from public sources without the need for non-party discovery.
[34] The only way I think it could be argued that it is necessary for the grantee to have access to the internal papers of Ngai Tahu Property is on the grounds that the valuer might thereby get access to better quality analysis of the potential efficiencies either by subdivision design or methods of installation of infrastructure which would indicate that the subdivision is likely to be more profitable than the valuers’ own estimates. That is speculative. It is fishing. I do not think that that is a sufficient reason to make non-party discovery reasonably necessary.
[35] Such discovery has to be considered also against the confusion it is likely to cause to the arbitration process. Valuations of these types of properties are always inherently difficult. That is why the Supreme Court, as this Court was called, said in Tawharanui Farm, that there is in a sense no market value. Frequently, competent valuers can only come up with a range of values.
[36] There is no right value here. The umpire will inevitably have to choose the fair market value from a range. It is in that sense inevitably a broad brush exercise.
As the parties have already identified it is more likely to be based on two critical factors: the chances of success; and, the time. The first factor is obvious, to be resolved by a judgment. The second factor nods to the well known fact that the holding cost associated with a purchase ahead of subdivision is often critical to its profitability.
[37] For all these reasons I do not think it is reasonably necessary for there to be third party discovery in this case.
[38] The application is dismissed. The respondents are entitled to costs to be calculated on a 2B basis. If the parties cannot agree costs then I will receive submissions limited to no more than five pages, which have been exchanged in draft in advance. I will then decide costs on the papers.
Solicitors:
Rhodes & Co, Christchurch, for Applicants
Saunders & Co, Christchurch, for Respondents
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