Nelson Historic Theatre Trust Board

[2014] NZHC 987

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

CIV 2013-442-317 [2014] NZHC 987

IN THE MATTER OF

the Charitable Trust Act 1957

and

IN THE MATTER OF

an application by THE NELSON HISTORIC THEATRE TRUST BOARD Applicant

On the papers
Judgment:	13 May 2014

JUDGMENT OF MALLON J

Introduction

[1]      The Nelson Historic Theatre Trust Board applies for the Court’s consent under s 21(1) of the Charitable Trusts Act 1957 to the transfer of the Nelson Theatre Royal to the Nelson City Council.  The cost of recent restoration work, combined with a lower than anticipated income from theatre hire, has led to a situation where the Trust does not have enough income to further maintain the Theatre.  It considers that the transfer of the Theatre to the Council is the best alternative because it will allow the continued fulfilment of the objects of the Trust and the ongoing protection of the Theatre.

[2]      The Council, the Nelson Repertory Society Inc and the Attorney-General have been served with this application.  The Council and the Society support it.  The Deputy Solicitor-General, on behalf of the Attorney-General,1  reports that she is

satisfied that the proposed sale is proper and can be approved by this Court.

1      Pursuant to delegation under s 9C of the Constitution Act 1986.

An application by THE NELSON HISTORIC THEATRE TRUST BOARD [2014] NZHC 987 [13 May 2014]

Background

[3]      The Theatre was built in 1878.  It is the oldest purpose-built theatre in New Zealand, still being used for its original purpose.   It is described as being a rare example of a nineteenth century theatre constructed from timber.  It sits on land of around 885 square metres at 78 Rutherford Street, Nelson.2   Between 1878 and 1994 it appears to have been privately owned.  In 1944 the Nelson Repertory Society Inc purchased the Theatre from its then owner, who was apparently proposing to turn it

into a joinery factory.

[4]      The Theatre was run down in the 1960s and 1970s.  Fundraising to restore it began in the late 1990s.   The Nelson Historic Theatre Trust was established on 1

August 2001 by the Nelson Repertory Society and concerned members of the Nelson performing  arts  community.    The Trust  was  incorporated  as  a  Board  under the Charitable Trusts Act 1957 on 23 August 2001.  Subsequently it was also registered as a charity under the Charities Act 2005.

[5]      The objects of the Trust under cl 3 of the Trust Deed (executed on 1 August

2001) are:

3.2To raise and administer funds for the restoration and refurbishment of the Theatre Royal, Rutherford Street, Nelson City, in a timely fashion and in accordance with such plans and specifications as may be adopted and referred to it by the Committee of Nelson Repertory Theatre Incorporated

3.3Following completion of the said restoration and refurbishment to undertake the preservation and maintenance of the Theatre Royal to a standard commensurate with its status as a heritage building and as a living working theatre.

[6]      The Trust has no assets other than the land, building, fixtures, fittings and chattels which comprise the theatre.  There is no power of sale in the Trust Deed.3

The Trust Deed provides that it may be wound up by application to the High Court. In the event of a surplus in a winding up, that is to be disposed of to the Nelson

Repertory Society.

2      Certificate of title number is CT NL9A/834.

3      Nelson solicitors who were involved in drafting the Deed in 2001 advised that the absence of a power of sale was an oversight.

[7]      The Trust’s ownership of the Theatre came about at the end of 2005.  At this time the Theatre was closed because such major maintenance work was needed that it was impossible for the Theatre to obtain a licence to operate. The ownership of the Theatre was transferred from the Nelson Repertory Society Inc to the Trust for consideration of $10, in order for the Trust to proceed with comprehensive fundraising and restoration.

[8]      Following the Theatre’s closure, the Trust ran a campaign to raise substantial funds for the restoration of the Theatre.   The restoration was carried out between

2008 and 2010.  The restoration was delayed by two years during which time the cost of building materials escalated beyond what was budgeted for.  All the donated funds were expended and additional funding was needed.  That funding was obtained in the middle of 2010 by way of two principal loans – a 20 year term loan of

$640,000 from the Nelson Building Society and a $1.5 million interest-free loan from the Council.  The Theatre is security for those loans.  The Trust also obtained a third loan but that has since been repaid.

[9]      The Theatre reopened for business on 1 June 2010.   Since that time the Theatre has struggled financially. Although there has been higher use than originally envisaged, the Theatre’s hire income has been lower than anticipated due to the high proportion of “community hires”.4    The interest payments on the Nelson Building Society loan are $45,280 a year.  These payments are a drain on the Trust’s funds. There are insufficient surplus funds to enable any capital repayments on either that loan  or the Council  loan.   The Trust  also  cannot  afford  any further  significant maintenance.   In the last financial year ending 31 March 2013 the Trust’s net loss

was $130,802 and its current liabilities exceeded its current assets by $145,544.

[10]     By early 2011 the trustees of the Trust were becoming increasingly concerned about servicing the debt, maintaining the Theatre and ensuring its ongoing viability. The Trust discussed the issue informally with the representatives of the Council.  At the Council’s request, a chartered accountant prepared a due diligence report on the

Theatre in 2011.   The accountant concluded that the Theatre would struggle to be

4      Community hires are charged at a lower rate than professional hires.  The Trust anticipated that community hires would make up around 60 per cent of hires, whereas they now approach around

80 per cent.

financially viable without Council and community support. Since that report the Council has provided an annual grant of $100,000, which accounts for more than one-third of the Theatre’s operating revenue.

[11]     On 20 September 2013 the Nelson Building Society agreed to an extension of the Theatre’s overdraft to December 2013 in anticipation of a decision being made about the Theatre’s future viability.   It noted that if the Council was to cease its financial support, the Theatre would be in danger of insolvent trading.  In that event, it would be forced to withdraw its loan funding and force a mortgagee sale.

[12]     On  21  October  2013  the chartered  accountant  updated  his  due diligence report.  He concluded that “[t]his organisation is insolvent and relies on the goodwill of the Nelson Building Society to operate”.

[13]     The Trust has exhausted alternative funding options.   The Council is not prepared to contribute more funds without greater control, or to take on the role of trustee under the current Trust.  The Trust has approached other charities, but they are not in a position to assist.  Previous donors have also been approached but no funding was secured from these efforts.  A trust has also been approached but again without success.   A third mortgage is regarded as impossible given current debt levels.

[14]     The trustees believe that the best prospect for preserving the Theatre and honouring the spirit and objectives of the Trust is for the Theatre to be transferred to the Council and for the Trust to come to an end.  From the Council’s perspective this accords with its intention to secure the future of significant arts infrastructure, including the Theatre.5    The Council’s intention, upon acquiring the Theatre, is to

discharge the Trust’s debt,6  and establish a new and independent entity to lease the

Theatre from the Council and manage and operate it.7   Two of the current trustees of

5      See the Nelson Tasman Regional Arts Strategy developed by the Council in 2009 which has as one of its key actions “Initiate a process to examine ways of securing the future of significant arts  infrastructure,  including  the  ...  Theatre  Royal  which  [is]  currently  held  in  private ownership”.

6      The debt is currently at $2.1 million.

7      The Council’s proposal is set out in a Heads of Agreement between the Council, the Theatre and the Nelson School of Music. The debt is not $2.6 million as noted in the Heads of Agreement, but is $2.1 million.

the Trust would sit on an appointments committee for the new entity.  A Community Contract would be entered into between the new entity and the Council, containing the  community  outcomes  the  Council  would  expect  to  be  delivered  from  the Theatre.8    The Theatre would also continue to be protected as a heritage building under the Nelson Resource Management Plan.9 The Chief Executive of the Council, Ms Hadley, says that she will also recommend that the Theatre be added to the list of

strategic assets in the Council’s Significance Policy so that any significant changes are subject to the decision-making provisions in s 76 of the Local Government Act

2002.

Requirement for Court’s consent

[15]     Section 21(1)(b) of the Charitable Trusts Act 1957 provides:

(1)       Without restricting the powers that are or may be conferred on any Board by or under the Trustee Act 1956 or this Act or any other Act or otherwise howsoever, it is hereby declared that any Board may,—

...

(b)       Notwithstanding  any  trusts  that  may  affect  its  property,  sell  or exchange any part of its property for any purpose upon such terms as it deems expedient:

Provided that no property subject to any trust shall be sold or exchanged  in  exercise  of the  power  conferred  by this  paragraph without the consent of the Court in any case where it is of the essence of the trust that the particular property should be used for the purpose of the trust

[16]     The Trust says that the consent of the Court is necessary because it is the “essence of the trust” that the Theatre building be used for the purposes of the Trust. The Deputy Solicitor-General, for the Attorney-General, agrees with this view.   I also agree with this view.   Although the Trust was established before it acquired ownership of the Theatre, its objects are entirely focussed on the Theatre.  The Trust exists to raise and administer funds for the Theatre’s restoration, refurbishment,

preservation and maintenance.  If the Theatre does not exist those objects cannot be

8      See the Heads of Agreement, cl 5.

9      The Theatre is a Group A listed heritage building, which means that it is afforded the greatest protection.  The whole or partial demolition or removal of the building will not be consented to unless the applicant can demonstrate to the satisfaction of the Council that the building meets certain criteria set out in the Nelson Resource Management Plan.

given effect.   It is the essence of the Trust (or to put it another way, the essential feature of the Trust) that the Theatre be used for the purposes of the Trust’s objects (funds raised for and applied to the Theatre).   The Theatre being the focus of the Trust, and the Trust now owning that asset, its disposal is properly the subject of Court scrutiny. The application is therefore properly brought.

Should consent be given

[17]     In the absence of available alternative funding, the options for the Trust if consent is not given are:

(a)       an application to vary the trust;

(b)      an application for consent to sell to someone else; or

(c)       an application to wind up the trust, with a sale to someone else.

[18]     The first option will not assist.  As counsel for the Trust says, if the purpose were simply to promote a living theatre in Nelson, then a variation allowing the Trust to sell the Theatre and purchase a smaller facility, or to support other theatrical endeavours, might have been possible.  But the objects of the Trust are specifically focussed on protecting a single building, the Theatre.   The problem is not one of unsuitable purposes or powers but is one of liquidity.

[19]     The second or third possibilities do not assist either.  Any such sale may be pursuant to a forced mortgagee sale.  Whether it is or not, a private buyer may not wish to maintain the building as a working theatre.   The Council’s funding, size organisational skills and accountability to the public, are seen as placing the Council in a position to seek to ensure the continued protection of the Theatre as a working theatre.

[20]     Sale of the Theatre to the Council is likely to see the Trust come to an end. However the trustees are exploring how it might be able to continue, for example in a liaison role between users of the Theatre and the new theatre entity.   The Trust

considers that this application cannot await the outcome of such discussions because of the difficult financial position and the prospect of a mortgagee sale.

[21]     I therefore accept that, even though it may mean the end of the Trust, the sale of the Theatre to the Council is in the circumstances the best way to honour the spirit and intention of the Trust.  The Council will have contractual obligations under the proposed Heads of Agreement and the theatre building itself will continue to be protected as a heritage building under the Nelson Resource Management Plan.  It is also intended that the Theatre will be added to the Council’s list of strategic assets, which would provide further protection.   These arrangements have not yet been formalised but the Trust is satisfied with what is proposed and is working closing with the Council.

[22]     The proposed consideration to be paid by the Council is that it will take on the outstanding debt of $2.1 million.  This contrasts with a value of the property of around $6.6 million as indicated by the financial statements and the Nelson Strategic Long Term Plan.   I am informed by counsel, however, that this value reflects the refurbishment costs rather than being an accurate reflection of market value and that it is difficult to determine an accurate market value due to the specialised nature of the building, the restrictions on it and the limited size of the local market.  The Trust also acknowledges the significant financial support provided by the Council both by way of loan funding during the refurbishment project and subsequently by way of significant ongoing operating funding grants.

[23]     The Deputy Solicitor-General is satisfied that the proposed sale is proper and can be approved.   The Council and the Nelson Repertory Society Inc support the sale.  In light of the unanimous support from those affected by the application, that there is no concern from any relevant party about the consideration for the sale or as to whether the proposed arrangements need to be formalised in  advance of the Court’s consent, and that the sale will best honour the spirit and intention of the Trust I am satisfied that consent should be given.

Result

[24]     The application is granted.    The Court give its consent to the sale by the applicant  of  the  land,  buildings,  fixtures,  fittings  and  chattels  situated  at  78

Rutherford Street, Nelson, to the Nelson City Council.

Mallon J