Restaurant Brands Limited v QST Limited
[2024] NZHC 882
•19 April 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-001328
[2024] NZHC 882
UNDER cl 5(1)(c) of sch 2 to the Arbitration Act 1996 IN THE MATTER
of an application for leave to appeal against an arbitral award
BETWEEN
RESTAURANT BRANDS LIMITED
Plaintiff
AND
QST LIMITED
Defendant
Hearing: 9 November 2023 Appearances:
M T Davies and J M Phillips for Plaintiff L McEntegart and A J Steel for Defendant
Judgment:
19 April 2024
JUDGMENT OF VAN BOHEMEN J
This judgment was delivered by me on 19 April 2024 at 3:30 pm Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar Date……………………………..
Counsel/Solicitors:
Meredith Connell, Auckland Thompson Blackie Biddles, Auckland L McEntegart / A J Steel, Auckland
RESTAURANT BRANDS LTD v QST LTD [2024] NZHC 882 [19 April 2024]
Table of Contents
Key determinations in the Arbitral Award [5]
Proposed question on appeal [14]
Criteria for granting leave [17]
Relevant provisions of Sublease and Headlease [22]
Previous litigation history [23]
Judgment of Downs J [24]
Judgment of Gordon J [25]
First judgment of Harland J [26]
Second judgment of Harland J [31]
Judgment of Court of Appeal [32]
Mr Harrison’s opinion [33]
CA Judgment [39]
The Award [47]
Is the proposed question on appeal a question of law? [50]
Could determination of the question substantially affect the rights of the parties? [54]
Strength of the argument there has been an error of law [58]
Analysis [61]
Court of Appeal did not formulate a test for the valuations under cl 4.2 [66]
Exact location not required by cl 4.2 and not consistent with Court of Appeal analysis [70]
All three valuers valued the Subleased Land by total amount [75] Approach to valuation of common property land also contrary to cl 4.2 [79] Conclusions on whether it is seriously arguable that the Tribunal erred [82] Other considerations under the Doug Hood guidelines [84]
Result [88]
Costs [89]
[1] The plaintiff, Restaurant Brands Ltd (RBL), seeks leave to appeal, on a question of law, an interim award (the Award) of an arbitral tribunal (the Tribunal). The Tribunal was appointed to determine the annual rent payable by RBL to the defendant, QST Ltd, for the sublease of land in Quay Street, Auckland for the seven- year period commencing 2 August 2018, following a rent review carried out in accordance with a memorandum of sublease dated 14 April 1998 (the Sublease). QST, as sublessor, and RBL, as sublessee, are successor parties to the Sublease.
[2] The Sublease applies to parts of a larger area of land that QST leases from the Ngāti Whātua o Ōrākei Māori Trust Board under a headlease (the Headlease). The land to which the Headlease applies is subject to a unit title development under a unit plan that provides for a number of principal units and accessory units and areas of common property.
[3] The Sublease applies in respect of one principal unit, Unit C, and four accessory units, AU 5, AU 6, AU 7 and AU 8. Unit C is used as a KFC fast food restaurant. The accessory units are used for traffic circulation, parking and landscaping.
[4] Unit C and AU5, which surround Unit C on all four sides, are located midway between the Quay Street frontage and the rear of the site. AU6 and AU7 are located on the Quay Street frontage and north of Unit C/AU5. AU8 is located behind and south of Unit C/AU5 C. Unit C/AU5 and AU6, AU7 and AU8 are separated from each other by areas of common property.
Key determinations in the Arbitral Award
[5] Following a judgment of the Court of Appeal released in December 20211 and a hearing in June 2022, on 20 March 2023, the Tribunal issued the Award setting the rental under the Sublease for the seven-year period commencing 2 August 2018 as
$569,745.90 per annum plus lease outgoings and GST. That rental was based on an
1 Restaurant Brands Ltd v QST Ltd [2021] NZCA 680, (2021) 22 NZCPR 815 [CA Judgment].
assessed land value of $6,330,510 which was arrived at by applying a rate of $4,650 per square metre to an area of 1,361.4 square metres comprising:
(a)the area of the land subleased by RBL (the Sublease Land) —
942.2 square metres; and
(b)the percentage of the common area attributed to RBL under cl 4.2.2 of the Sublease — 419.15 square metres.
[6] The rate of $4,650 per square metre was reached by taking the average of the market rates for unimproved freehold land recommended by the three valuation experts who gave evidence for the parties. The Tribunal recorded that the three valuers agreed that the rates they had recommended were “within the margin” of valuation opinion.
[7] In reaching its decision, the Tribunal largely adopted the approach of the two valuation experts who gave evidence on behalf of QST, Mr Arthur Harris and Mr Reid Quinlan.
[8] Mr Harris and Mr Quinlan considered that the value of the land should be set by:
(a)determining the total area of land in Unit C and the accessory units as referred to in cl 4.2.1 of the Sublease — 942.2 square metres;
(b)determining the percentage of the common area attributed to RBL under cl 4.2.2 of the Sublease — 419.15 square metres; and
(c)applying their assessments of the market value of unimproved freehold land in the area — $4,700 per square metre in the case of Mr Harris;
$4,750 in the case of Mr Quinlan — to the combined total area of 1,361.4 square metres, which they assumed to be of a regular shape and to have a frontage to Quay Street.
[9]Under this valuation method:
(a)Mr Harris assessed the total land value to be used in setting the rental for the seven-year period from 2 August 2018 as being $6,398,580; and
(b)Mr Quinlan assessed the total land value to be used in setting the rental for the seven-year period from 2 August 2018 as being $6,465,000.
[10] The Tribunal did not accept the approach of the valuation expert who gave evidence on behalf of RBL, Ms Victoria Nettleship.
[11]Ms Nettleship considered that value of the land should be set by:
(a)determining the unimproved freehold value for each of the areas of land comprised in Unit C and the accessory units — 942.2 square metres, but making a deduction for the fact that the Unit C/AU5 and the other three accessory units are not contiguous;
(b)determining the unimproved freehold value for the percentage of common area attributed to RBL under cl 4.2.2 of the Sublease —
419.15 square metres, but taking into account the shape and usage of the common area; and
(c)adding those two figures together.
[12]Purportedly on the basis of this valuation method, Ms Nettleship assessed:
(a)the value of the land in Unit C and the accessory units (942.2 square metre) to be $3,815,910, based on an assessment of the market value of unimproved freehold land in the area of $4,500 per square metre, but applying a discount of 10 per cent for fragmentation (lack of contiguity);
(b)the value of the percentage of common area attributed to RBL under cl
4.2.2 of the Sublease to be $271,612, based on a value of $3,240 per
square metre (as derived from the valuation of the area under the Headlease), but applying a discount of 80 per cent to take account of the shape and use of the land as common property; and
(c)the total land value to be used in setting the rental for the seven-year period from 2 August 2018 to be $4,087,522.
[13] The Tribunal held that the notion that the area identified in accordance with cl 4.2.2 of the Sublease was to be valued effectively as common property and that a deduction should be made for fragmentation of the land referred to in cl 4.2.1 was untenable.2
Proposed question on appeal
[14]RBL seeks leave to appeal the Award on the following question:
Did the Tribunal err as to the proper interpretation and application of clause 4.2 of the Sublease by failing to assess the current freehold market undeveloped block value of the two areas of land identified in clauses 4.2.1 and 4.2.2 of the Sublease, having regard to the exact locations and areas of the land identified by those clauses?
[15] RBL says that it is strongly arguable that the Tribunal misinterpreted and misapplied the requirements of cl 4.2 of the Sublease.
[16] QST opposes leave to appeal being granted. It submits that the appeal does not involve or give rise to a question of law, that its determination could not substantially affect the rights of the parties, that the Award is correct in law, and that there is no arguable case that the Tribunal erred in its approach.
Criteria for granting leave
[17] Under cl 5(1)(c) of sch 2 of the Arbitration Act 1996 (the Act), a party may appeal any question of law arising out of an award with the leave of the High Court.
2 Award at [11].
[18] Clause 5(10) of sch 2 provides that, for the purposes of the clause, “question of law”:
(a)includes an error of law that involves an incorrect interpretation of the applicable law …; 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.
[19] Clause 5(2) of sch 2 provides that the High Court shall not grant leave under cl 5(1)(c) unless it considers that, having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties.
[20] If the threshold is met, the Court retains a discretion as to whether to grant leave, having regard to the guidelines set out by a full court of the Court of Appeal in Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd.3 For present purposes, the relevant guidelines are:4
(a)the strength of the argument that there has been an error of law;
(b)how the question arose before the Tribunal;
(c)the importance of the dispute to the parties;
(d)the amount of money involved; and
(e)the delay involved in going through the Courts.
[21] Accordingly, I must assess whether the question that RBL wishes to take on appeal is a question of law, whether its determination could substantially affect the
3 Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (CA) [Doug Hood].
4 At [54].
rights of either or both of the parties and, subject to the answers to those questions, whether leave should be granted having regard to the guidelines in Doug Hood. Before considering those questions, it is necessary to set out the relevant provisions of the Sublease and Headlease and to consider what was said about those provisions in earlier decisions relating to the Sublease, and to consider the Award more fully.
Relevant provisions of Sublease and Headlease
[22] This is the third time RBL has sought to challenge an arbitral award relating to the review of rent for the land it leases from QST under the Sublease. As discussed below, the CA Judgment is of particular importance.5 I gratefully adopt, therefore, the description of key provisions of the Sublease and Headlease as set out by Kós P in that judgment:
Sublease
[7] The sublease, entered into after a unit plan was deposited in relation to the headlease, is dated 14 April 1998. The sublease comprises a stratum estate in leasehold for several units on the land. It is for a period of 20 years with one right of renewal for a further 20-year term. On 15 April 2017, the tenant gave notice to the landlord to renew the sublease.
[8] The annual rental is reviewed every seven years. The last rent review took place on 2 August 2018. However, the parties were unable to agree on the amount of the annual rental. They advanced different interpretations of the relevant rent review provisions in the sublease and the headlease.
[9] It is necessary to now set out some of the clauses of the sublease. We procced in order of appearance, starting with the recitals to the sublease.
[10] Recital A records the existence of the headlease, the sublessor landlord being the tenant under that instrument. Importantly, recital A establishes two defined terms of importance in the sublease: “the Headlease” and “the Headlease Land”. Recital B then goes on to state:
B The Sublessor has agreed to sublease that part of the Headlease Land as more particularly described in the First Schedule hereto (such subleased part being hereinafter referred to as “the Land”) and the Sublessee has agreed to take on sub-lease the Land at the rental and upon subject to the agreements covenants conditions and stipulations expressed or implied in this Deed.
[11] Then follows the “Operative Part” of the lease — following the recitals and preceding the schedules and execution. Clause 1 sets out interpretation provisions. It will suffice to set out cl 1.1 in part:
5 CA Judgment, above n 1.
1.1In this Deed unless the context otherwise requires, the following words and phrases shall have the following meanings, namely:
1.1.1“Agreement to Lease” means the Agreement to Lease dated 14 April 1997 between the Sublessor and the Sublessee.
…
1.1.3 The expressions “Land”, “Term”, “Commencement Date”, “Initial Annual Rental”, “Monthly Rental Amounts”, “Rent Payment Dates”, “Rent Commencement Date”, “Review Date”, “Use”, “Further Term”, “Renewal Date” and “Final Expiry Date” shall be interpreted by reference to the First Schedule hereto;
…
1.1.5 “Common Property” means the part of the Headlease Land shown as common property on the 1.1.5 Unit Plan;
In most instances a defined expression is said to mean something particular
— as in cls 1.1.1 and 1.1.5. But cl 1.1.3 provides for interpretation “by reference”.
[12] Clause 2 of the sublease is the demise provision — providing the landlord subleases to the tenant the Land for the term of the sublease at an annual rental and subject to review all as set out in the First Schedule. Clause 3 sets out rights of renewal and need not detain us.
[13] Clause 4.1 provides rent may be reviewed (by the landlord) on the review dates set out in the First Schedule (being 2 August 2011 and each seventh anniversary thereafter). Clause 4.2 of the sublease then provides:
4.2Subject to clause 4.3, on 2 August 2011 and each rent review date thereafter, the rental payable shall be 9% per annum of the current freehold market undeveloped block value (as defined in the Headlease) of:
4.2.1the Land; and
4.2.2that portion of the total area of the common property resulting from the formula A × C where:
B
A equals the unit entitlement of the Land; B equals the total of the unit entitlements; C equals the area of the common property.
[14] “Land” is again, but differently, defined in the First Schedule of the sublease as:
Land: A stratum estate of leasehold within the meaning of the Unit Titles Act in Principal Unit C and Accessory Units 5, 6, 7 and
8 on the Unit Plan comprised in Certificate of Title 116A/659 (North Auckland Registry).
The reader will now have noted that the “Land” to be valued pursuant to cl 4.2.1 is defined twice — once in recital B and again, somewhat differently, in the First Schedule.
[15] Clause 7 of the sublease incorporates all the provisions of the headlease into the sublease as if set out in full. So far as relevant, we now set it out:
7.1 All the provisions of the Headlease shall apply to and be deemed to be incorporated into this Sublease as if the same had been set out in full and as if;
…
7.1.2 All references in the Headlease to the premises leased under the Headlease were references to the Land;
…
7.1.4 Unless the context otherwise requires, the provisions of the Headlease shall apply only to the Land;
…
7.1.9 Where there is any inconsistency or conflict between the provisions of this Sublease and the provisions of the Headlease then the provisions of this Sublease shall prevail.
Headlease
[16] The headlease was entered into between the Ngāti Whātua O Ōrakei Māori Trust Board and the predecessor in title of the landlord, Magellan Orakei Ltd. It is dated 26 March 1997. We mention two clauses. First, in cl 1.1, land is defined thus:
“Land” means the land comprised and described in the Certificate of Title recorded on the front page of this Lease.
[17] Secondly, the rent review clause, cl 3.3, provides that the lessor (the Trust Board) may review the rental on the 15th anniversary of the commencement date (2 August 1996) and every seven years thereafter, “such reviewed rent to be 6% per annum of the current freehold market undeveloped, block value of the Land”. The clause goes on to provide a process for agreement or dispute resolution of these rent reviews. Clause 3.3(e) then provides:
(e)In determining the current freehold market undeveloped, block value of the Land, the arbitrators, umpire, or sole arbitrator (as the case may be) shall:
(i)be deemed to be acting as arbitrators in accordance with the provisions of the Arbitration Act 1908; and
(ii)disregard the value of any goodwill attributable to the business of the Lessee, and the value and existence of any improvements.
[18] The reader will have noted the timing of rent reviews under the headlease and sublease are in lockstep: 2 August 2011, and every seventh anniversary thereafter. Reviews are at the option of the landlord under each instrument and are ratcheted against reduction. The reader will also have noted the common underlying object of valuation in each instrument (“the current freehold market undeveloped block value (as defined in the Headlease)”) and the margin between a six per cent return for the headlessor and nine per cent for the sublessor.
Previous litigation history
[23] A number of the decisions given on earlier challenges by RBL are relevant to the current application. Those earlier decisions, some of which related to the previous rent review period, are as follows.
Judgment of Downs J
[24] On 21 September 2016, Downs J granted leave to RBL to appeal, on a question of law, the decision of an earlier arbitral tribunal determining the rent for the seven- year period commencing 2 August 2011, following the adoption of an expert opinion provided by former High Court Judge, Hon B J Paterson KC, on the interpretation of cl 4.2 of the Sublease.6 In that opinion, Mr Paterson did not accept the argument of RBL that all of the land to be valued under the Sublease (the Sublease Land and the area of common property identified in cl 4.2.2) was to be valued on the same basis as the land subject to the Headlease (the pass-through interpretation).
Judgment of Gordon J
[25] On 15 February 2017, Gordon J dismissed RBL’s appeal against the arbitral award determining the rent for the seven-year period commencing 2 August 2011.7 In her judgment, Gordon J:
(a)Summarised the pass-through interpretation as follows:
6 Restaurant Brands Ltd v QST Ltd [2016] NZHC 2226 [Downs J Judgment].
7 Restaurant Brands Ltd v QST Ltd [2017] NZHC 166 [Gordon J Judgment].
[18] RBL submits that the words “current freehold market undeveloped block value (as defined in the Headlease)” must refer to the actual, numerical value that is ascribed to the headlease land (the pass-through interpretation). It says that the sublease, by necessary implication, provides that the numerical value of the headlease land (per square metre) should be multiplied by the area of the sublease land (cl 4.2.1) plus the relevant proportion of the common property (cl 4.2.2) to give the final rental payable by the sublessee. …
(footnotes omitted)
(b)Rejected the pass-through interpretation advanced by RBL, noting:
[19] Clause 4.2 states that the sublessee is required to pay rental at 9% per annum of the “current freehold market undeveloped block value (as defined in the Headlease)” of the sublease land and common property. So, in order to determine the meaning of the term “current freehold market undeveloped block value”, cl 4.2 directs the reader to the relevant provisions of the headlease. Although “current freehold market undeveloped block value” is not a defined term in the headlease, I accept QST's submission that the term is effectively defined in cl 3.3 of the headlease. …
First judgment of Harland J
[26] On 4 May 2021, Harland J declined leave to RBL to appeal, on a question of law, an interim award by another arbitral tribunal relating to the determination of the rent for the seven-year period commencing 2 August 2018.8
[27] In that award, the tribunal adopted the conclusions in a report by an independent expert, former Court of Appeal Judge, Hon Rhys Harrison KC, on the correct approach to be adopted by the tribunal in determining the rent of the Sublease Land and the attributable portion of the common property under cl 4.2.2 of the Sublease.
[28] Mr Harrison’s report is considered more fully below. In brief, Mr Harrison rejected RBL’s argument that the valuation of the Sublease Land should take into account the leasehold estate to which it is subject under the unit plan.
8 Restaurant Brands Ltd v QST Ltd [2021] NZHC 971 [Harland J Judgment No 1].
[29]Mr Harrison summarised his conclusions as follows:
42.In summary, the direction inherent in Cl 4.2 requires the valuer when periodically reviewing the rent to assess the freehold value of the Sublease land by putting aside two things; first, the legal status of the sublessor’s interest in it and, second, the facts that the land has been physically developed both by site works and the construction of a building and by the deposit of a unit plan which effected the legal development that created the sublessor's leasehold interest.
43.The valuation for rent review purposes proceeds on the fictional premise that the sublessor’s stratum estate has never existed, disregarding the nature of the sublessor’s ownership interest and focusing solely on the freehold status of the land itself. The same methodology excluding any assessment of developments or improvements would be applied on the head lease review. I am satisfied that it demonstrates the parties’ objective of symmetry between the two instruments, requiring a unitary approach to both valuation exercises on the shared premise of assessing only the undeveloped freehold value of the subject leased land.
[30] Harland J refused leave to appeal principally on the basis that she did not consider RBL had a strongly arguable case, or that there was a real doubt that the tribunal was wrong to have adopted Mr Harrison’s conclusions.9
Second judgment of Harland J
[31] On 16 July 2021, Harland J granted leave to RBL to appeal the Harland J Judgment No 1.10 Her Honour was persuaded that:11
… the correct approach to the interpretation issue (principles of contractual interpretation versus principles of land law) is an argument which for the purposes of this application is capable of bona fide and serious argument, and might be capable of being considered by the Court of Appeal as “strongly arguable” as opposed to “arguable”.
Judgment of Court of Appeal
[32] In the CA Judgment, on 16 December 2021, the Court of Appeal dismissed RBL’s appeal against the Harland J Judgment No 1.12 The CA Judgment is considered more fully below. The Court stated its conclusions as follows:
9 At [60]–[62] and [72].
10 Restaurant Brands Ltd v QST Ltd [2021] NZHC 1798..
11 At [17].
12 CA Judgment, above n 1.
[63] [Mr Harrison] characterised the tenant’s argument that the valuer should assess the freehold value of a leasehold estate — impaired as to value by development restrictions imposed under the unit plan subdivision — as an oxymoron. We agree; it is the consequence of a too-literal application of a defined term where doubt underlies the definition (because of double definition) and context demands analysis of the function of the words to resolve their meaning. It is here illogical to value the component parts of cl 4.2
— cls 4.2.1 and 4.2.2 — differently. It is also economically illogical, as we have just noted. The objective observer would be compelled to conclude that those component parts both define area, not a leasehold estate in one instance and a physical area in the other. …
[64] We therefore consider [Mr Harrison] was clearly right to conclude that cl 4.2 requires the valuer to assess the freehold value of the underlying land in its bare and undeveloped state, having regard to the exact locations and areas of the land identified in cls 4.2.1 and 4.2.2. We agree with Mr McEntegart’s submission that encumbrances on the leasehold estate attributable to the unit plan development do not form any part of that exercise. They are inconsistent with the natural and ordinary meaning of the words, and the evident economic objective of the parties inferred from the headlease and sublease, read together.
[65] The argument advanced for the tenant is ingenious. But in agreement with the Judge below, we consider it plainly wrong and not strongly arguable. It should not be given leave, and the award should stand.
Mr Harrison’s opinion
[33] Mr Harrison’s report was influential in the CA Judgment and is the basis of the Award that RBL seeks to challenge. For that reason, I set out key findings by Mr Harrison regarding the interpretation of cl 4.2 of the Sublease.
[34]On the nature of the Sublease and the effect of cl 4.2 Mr Harrison said:
25.… In the normal course, absent the express terms of Cl 4.2, the rent review would be conducted by taking account of a range of relevant factors affecting its highest and best use including of course the legal and physical status of the land and the nature of the lessor's legal interest in it. But Cl 4.2 introduces assumptions of a fictional nature to which both parties agreed and which, as Mr McEntegart emphasises, are not uncommon in ground rent leases. As I shall explain, this rent review provision is subject to two discrete fictions and the extent to which they apply is at the heart of the parties' difference.
[35] On the effect of the subdivision and the deposit of the unit plan, Mr Harrison said:
31. … the subdivision and creation of the new leasehold title for the subleased part on deposit of the unit plan did not affect the freehold existing status of the total land area or its definition for rent review purposes.
(footnote omitted)
[36] On the interpretation of the term “Land” for the purposes of the rent review, Mr Harrison said:
32.… I am satisfied that the agreed definition of the “Land" remained throughout solely as the physical area of freehold land being demised, unaffected by the stratum estate in leasehold created on deposit of the Unit Plan.
[37]On the reference to common property in cl 4.2.2, Mr Harrison said:
34.… [The land shown as common property on the Unit Plan] retained its existing freehold character as part of the Head Lease Land despite the unit plan subdivision. When valuing that discrete component separately from the Sublease Land, Cl 4.2 directs the valuer to take notice of the unit plan development for the purpose of using the sublessor's unit entitlement as the basis of the formula for calculating its pro rata freehold value. The parties’ express adoption of the definition of the Head Lease Land to define the common area is consistent with an underlying intention to adopt a unified methodology to all elements of the rent review valuation exercise. A direction requiring the valuer to value one physical element of the whole area according to a different formula from the other element is inconsistent with that common intention.
[38] On the nature of the valuation to be undertaken for the rent review, Mr Harrison said:
35.It follows that in my opinion Cl 4.2 directs the valuer to assess the freehold value of the land without considering any legal constraints attaching to the sublessor’s stratum estate in freehold. This view is supported by the use of the word "undeveloped" in the rent review formula. The term must take its colour from its context. Here it denotes the particular state of the freehold block of Sublease Land which the valuers are to use for review purposes. As at the date of execution of the sublease and in its "current” state at each review date, the Sublease Land has in fact been developed as a consequence of two related events. Nevertheless, the valuer is instructed by the parties to disregard those two events for the purpose of fixing the annual rent on each review date.
36.One event was the works carried out on the site by both parties to the agreement to sublease, which altered its essential undeveloped character. … The use of the word "undeveloped" also requires the valuer to exclude the value of the site works to be carried out by the sublessor, being construction of parking and access areas together with turning bays.
37.The other event was the deposit of the Unit Plan, effecting a subdivision of the Subleased land and creating the unit title development. … The deposit of the Unit Plan is statutorily recognised as a development, which changed the legal character of the land and necessarily its value. In the context of the rent review provision of this sublease, the land was undeveloped pending that event.
…
39.… the terms of Cl 4.2 expressly direct the valuer to disregard the two types of developments I have identified. It is a classical, in this case decisive, fiction of the type inherent in a ground rent lease. The valuer is required to assess the “...undeveloped freehold block value..." of the Sublease Land and proceed on the artificial premise that neither has occurred. That is because the sublessee, having obtained the exclusive right to the benefit of the leasehold interest in the Sublease Land, was entitled to develop it as it deemed fit.
40.The review provision expressly obliges the valuer to value the fee simple estate alone, assessing the freehold value of the land in its bare and undeveloped state. …
(footnotes omitted)
CA Judgment
[39] The Court of Appeal briefly summarised Mr Harrison’s opinion. It noted that Mr Harrison considered that the definition of Land remained, throughout the valuation process, solely as to the physical area of freehold land being demised, unaffected by the stratum estate in leasehold created on deposit of the unit plan. The Court also noted that Mr Harrison considered that the effect of cl 4.2 of the Sublease was to require valuation on the basis of the current freehold market value of two distinct areas. First, the area within the physical dimensions of the principal unit and the four accessory units; and secondly, a proportionate part of the total area of common property based on the unit owners’ beneficial entitlement in its shareholding in the body corporate. Mr Harrison had also considered that the valuation should be
undertaken without considering legal constraints attaching to the sublessor’s stratum estate in freehold.13
[40] The Court held that, in considering whether to grant RBL leave to appeal, Harland J had appropriately devoted most attention to the first Doug Hood guideline question — whether RBL had a strongly arguable case.14 It considered that the sole issue before it was whether Harland J had been right to find that RBL’s argument on the construction of the Sublease was not strongly arguable.15 That argument was that Mr Harrison had failed to give effect to the definition of Land in the First Schedule to the Sublease which, in RBL’s view, should have taken into consideration the substratum leasehold estate created by the unit plan to which the land was subject and the constraints on development imposed by the unit plan.
[41] The Court then considered the terms of the Sublease, having regard to the approach to contractual interpretation set out by the Supreme Court in Bathurst Resources Ltd v L & M Coal Holdings Ltd and Firm PI 1 Ltd v Zurich Australian Insurance Ltd.16 It noted that, in a passage approved in Bathurst Resources, the Supreme Court in Firm P I 1 had said that the proper approach to be taken is:17
… an objective one, the aim being to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”.
[42] The Court undertook its own analysis of how the Sublease was to be interpreted. Its focus was on the definitions of Land in Recital B and the First Schedule and how those definitions were to be applied in the interpretation of cl 4.2 of the Sublease. The Court made five points about the meaning of cl 4.2. Three are relevant to RBL’s current application, bearing in mind that the interpretation for which RBL is now contending for is very different from that considered by the Court of Appeal.
13 At [22].
14 At [26].
15 At [39].
16 Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696, [2021] NZCCLR 17; Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432.
17 CA Judgment, above n 1, at [46], citing Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 16, at [60].
[43] First, the Court considered that RBL’s focus on definition was “apt to distract” and, more fundamentally, RBL’s approach “was excessively literal in the face of inherent uncertainty”.18 Noting that the formula in cl 4.2 required the valuer to find the “current freehold market undeveloped block value” of the items in cls 4.2.1 and 4.2.2, the Court stated:19
… the function each item in cls 4.2.1 and 4.2.2 serves is likely to be the same, as each has to be valued according to its current freehold market undeveloped block value. The function of cl 4.2.2 is very plainly to define location and extent (that is, the area) of the common property.
[44] Having posed questions about whether an objective observer would consider the function of 4.2.1 would be any different, the Court stated:20
The difficulties perpetrated by these questions tend to suggest that the reference to the “Land” in cl 4.2.1 serves to identify that part of the relevant headleased land required to be valued (as if it were freehold land) in addition to the area of common property to be valued under cl 4.2.2.
[45] Secondly, the Court noted that the approach taken by RBL in its appeal before Gordon J in its pass-through interpretation worked by summing the physical areas of the Subleased Land in cl 4.2.1 and the pro rata proportion of the common property in cl 4.2.2.21 It stated that:22
… the common supposition underlying the arguments of both parties was that cls 4.2.1 and 4.2.2 served to identify the physical areas of land (by exact location and area) to which the rental formula in cl 4.2 must apply. That analysis underpinned, and was integral to, the decision of the Judge to answer the question of law before her in the negative. The judgment was not appealed to this Court. We do not think it is open to the tenant to now attack that reasoning collaterally, and in terms at odds with its argument at the time.
[46] Thirdly, the Court noted that the objective observer would bear in mind that the landlord under the Sublease is also a tenant under the Headlease. It observed:23
In short, the landlord stands between the rent reviews under each instrument. The rent review dates are identical, and the rent review formula is essentially the same, save for a three per cent margin protecting the landlord under the sublease. As the expert observed, that suggests an objective of symmetry
18 CA Judgment, above n 1, at [54].
19 At [57].
20 At [57].
21 At [58].
22 At [60].
23 At [62].
between the two instruments, “requiring a unitary approach to both valuation exercises on the shared premise of assessing only the undeveloped freehold value of the subject leased land”. We agree. An objective observer would, we think, be comprehensively puzzled at the potential impairment to the margin, and risk faced by the landlord, by the valuation of different subjects.
The Award
[47] Following the CA Judgment, the Tribunal issued the Award under appeal. After summarising the valuations and calculations of the three valuation experts and stating its conclusions on the value of the land and the rental to be paid by RBL, the Tribunal summarised the submissions of QST and RBL. In so doing, it set out in full passages from the opinion of Mr Harrison and from the CA Judgment addressing how cl 4.2 of the Sublease was to be interpreted, as referred to by Mr McEntegart, counsel for QST. The Tribunal also recorded Mr McEntegart's contention that the “fragmentation/common property dilution” was in stark contradiction to what Mr Harrison and the Court of Appeal had said about the valuation of the two areas identified in cls 4.2.1 and 4.2.2; namely, that the approach to valuation of each area should be the same.
[48] The Tribunal also recorded the submission of Mr Davies, counsel for RBL, that the approach adopted by Ms Nettleship in determining value, having regard to the exact locations and areas, applied the express directions of Mr Harrison and the Court of Appeal and that the approach taken by QST’s valuers was dependent on making assumptions as to location and shape.
[49] After recapitulating and commenting on some of its exchanges with the expert valuers, the Tribunal recorded its conclusions. In summary, these were:
(a)Mr Harrison’s opinion and the CA Judgment stated that the unit plan plays no part in the valuation of the land and the CA Judgment confirmed the utility of the land value approach between the Headlease and the Sublease valuations of “current freehold market undeveloped block value”.
(b)To the Tribunal’s knowledge, there had never been a suggestion in any valuation involving unit title property of a separate sum for common
property. The value of common property is contained in defined units, either principal or accessory. In addition, to identify a value of common property separately would be an exercise in hypothetical adjustments because no market exists for such land.
(c)Ms Nettleship’s adjustment for fragmentation of the land value for Unit C and the accessory units, and her application of a value of 10 per cent of the Headlease value for the common area land were not supported by sales or other transactional evidence and appeared not to be supported by Mr Harrison’s opinion or the CA judgment.
(d)The same land value should be applied over the land identified in cl
4.2.1 and that identified in cl 4.2.2, based on averaging the land values assessed for a hypothetical regular-shaped lot.
(e)The appropriate result is:
(i) a land value of 1361.42 m2 @ $4,650 m2 = $6,330,510; and
(ii) a rental of $569,745.90 per annum.
Is the proposed question on appeal a question of law?
[50] The question as framed by RBL concerns the interpretation and application of cl 4.2 of the Sublease. Ostensibly, that is a question of law as confirmed by cl 15(10)(a) of sch 2 of the Act. However, the focus of the question is on whether the Tribunal correctly assessed the current freehold market undeveloped block value of the two areas of land identified in cls 4.2.1 and 4.2.2 of the Sublease, having regard to the exact locations and areas of the land identified by those clauses.
[51] Mr McEntegart submits that the Tribunal’s determination was quintessentially one of valuation involving the assessment of valuation evidence and the drawing of factual inferences from findings of primary fact, which are not questions of law.
[52] That submission is strongly resisted by Mr Davies, who submits that the question is clearly one of law because it concerns the proper interpretation and application of contractual directions in cl 4.2 of the Sublease.
[53] I consider it is unnecessary to spend a lot of time on this issue, the answer to which is evident. It is clear that the key issue in contention is whether the Tribunal correctly applied the findings of Mr Harrison and the Court of Appeal about the interpretation of cl 4.2, particularly having regard to the statement at [64] of the CA Judgment that cl 4.2 requires the valuer to assess the freehold value of the underlying land in its bare and undeveloped state, having regard to the exact locations and areas of the land identified in cls 4.2.1 and 4.2. Whether the Tribunal followed that expert guidance and Court direction on the interpretation of the relevant contractual provisions is clearly a question of law.
Could determination of the question substantially affect the rights of the parties?
[54] Mr McEntegart submits that determination of the question would not substantially affect the rights of the parties because, even if it is accepted that the question is one of law, the findings made by the Tribunal on the evidence before it would mandate much the same answer.
[55] Mr Davies submits that the proper interpretation and application of cl 4.2 will heavily influence the outcome of the present rent review and two further rent reviews in 2025 and 2032. He notes that Mr Grant Mahoney, the National Property Manager for RBL, has sworn an affidavit stating that, over the period 2018 to 2037, and depending on the ultimate outcome of any rent review, the difference in rental between the approach taken by the Tribunal and that contended for by RBL would be likely to exceed $3,800,000 plus GST.
[56] As with the previous issue, it is unnecessary to spend a lot of time on this question. It is evident that the outcome of the appeal could have a substantial effect on the rental owed by RBL under the Sublease if the Court were to find that the Tribunal erred in its interpretation of cl 4.2. The fact the Tribunal held that there was no valuation evidence to support the approach taken by Ms Nettleship does not
preclude a finding that the approach she advocated for, or some other valuation approach, is required on a correct interpretation of the clause.
[57] I am satisfied, therefore, that the threshold in cl 5(2) of sch 2 of the Act is met and that the determination of the question of law framed by RBL could substantially affect the rights of RBL. Accordingly, the central question is whether leave to appeal should be granted, having regard to the relevant guidelines in Doug Hood, in particular, whether RBL has a strongly arguable case.
Strength of the argument there has been an error of law
[58]Mr Davies contends that the Tribunal erred in two principal respects:
(a)The Tribunal valued the Sublease Land and the area of common property attributable to RBL under cl 4.2.2 on the basis of what Mr Davies calls “the hypothetical lot approach”, based on a hypothetical, single, regular shaped lot with frontage to Quay Street. Mr Davies says this approach is inconsistent with the directions of Mr Harrison and the Court of Appeal, which require the two areas of land to be valued having regard to their exact locations and areas, which Mr Davies calls “the exact locations and areas approach”.
(b)The Tribunal found that the exact locations and areas approach was impermissible because it relied on the unit plan. Mr Davies says the exact locations and areas approach refers to the unit plan only to determine the locations and areas of the components of the valuation, and that Ms Nettleship did not value the stratum estate.
[59] Mr Davies says that the Tribunal was plainly influenced by the difficulties it perceived in applying the exact locations and areas approach but submits that perceived difficulties in its application do not justify ignoring the requirements of the Sublease.
[60] Mr McEntegart says it is clear from the CA Judgment that the Court of Appeal did not direct that the valuation be undertaken in the manner contended for by RBL,
that Ms Nettleship’s valuations are contrary to Mr Harrison’s opinion and the CA Judgment, and that it is axiomatic that a valuation of undeveloped freehold land may not be enhanced or constrained by its existing use. He also says that Ms Nettleship’s valuation of the land identified in cl 4.2.2 ignores the objective symmetry between the Headlease and the Sublease discussed by the Court of Appeal and that there is nothing in the Sublease that permits that land to be valued in the manner adopted by Ms Nettleship.
Analysis
[61] The strongest aspect of the RBL argument is that the Court of Appeal used the phrase “exact location and area” / “exact locations and areas” in two passages in its judgment as follows:
(a)at [60], when recording the common supposition underlying the positions of the parties in the appeal before Gordon J; and
(b)at [64], when stating that Mr Harrison was clearly right to conclude that cl 4.2 requires the valuer to assess the freehold value of the underlying land in its bare and undeveloped state, having regard to the exact locations and areas of the land identified in cls 4.2.1 and 4.2.2.
[62] In fact, neither Gordon J nor Mr Harrison used either phrase. On analysis, it is apparent that the Court of Appeal was adding its own gloss to its discussion of the issues being considered by Gordon J and Mr Harrison. And, at least as far as the Gordon J Judgment is concerned, in my respectful opinion, the Court of Appeal was wrong in its summary of that position. While the common supposition of the parties in the appeal before Gordon J was that the values of the two distinct areas of land identified in cls 4.2.1 and 4.2.2 were to be summed or added together, RBL’s position at that time was not that the two areas of land had to be valued in their exact locations and areas.
[63] To the contrary, and as Gordon J recorded at [56] of her judgment, RBL’s position was that the only factor to be taken into account in determining the value of the Sublease Land and the area of common property attributable to RBL was its
relative area in comparison to the Headlease land. As Gordon J went on to observe, the effect of that approach was that every square metre of the Headlease land was deemed to be of equal value, “so that two units of equal area will be deemed to have exactly the same value, irrespective of their dimensions or other attributes.”24 In other words, on that approach, the exact location and dimensions of Unit C and the accessory units within the Headlease land were immaterial.
[64] The principal issue before Mr Harrison was whether the valuation of the current freehold undeveloped block value of the Sublease Land should take into account the substratum estate brought about by the subdivision and the unit plan development. In answering that question, Mr Harrison said the valuation had to be carried out on the basis of two fictions: that there had been no development of the land and no subdivision and unit development. In other words, the approach directed by Mr Harrison was focused on the character of the land to be valued rather than on whether it had to be valued in its exact locations and areas.
[65] The question that arises, therefore, is whether it is seriously arguable that, in adding those glosses, the Court of Appeal was intending to impose on the valuation of the Sublease Land and the area of common property attributable to RBL that it must be valued according to its exact location and area as identified in the unit plan. For the reasons that follow, I am satisfied that that proposition is not seriously arguable.
Court of Appeal did not formulate a test for the valuations under cl 4.2
[66] As discussed above, the Court of Appeal’s use of the phrases “exact location(s) and area(s)” was in response to interpretations being advanced by RBL. The question before the Court of Appeal was whether it was seriously arguable that Mr Harrison was wrong not to have accepted RBL’s argument that the valuation of the Sublease Land was to take into account the substratum estate brought about by the subdivision and the unit plan development. Inherent in that proposition was that the land identified in cl 4.2.1 was to be identified on a different basis from the land identified in cl 4.2.2.
24 Gordon J Judgment, above n 7, at [57].
[67] When considering how cl 4.2.1 is to be interpreted, both Mr Harrison and the Court of Appeal considered that it was clear that the common property land identified in cl 4.2.2 retained its freehold character for valuation purposes and that it was unlikely that it had been intended that the land identified in cl 4.2.1 would be valued on a different basis. The Court of Appeal’s reference to Gordon J’s judgment was made in that context. Its purpose was to note, in its own terms, that “we have been here before” in the appeal before Gordon J.25 While, as I have noted, RBL’s position in that appeal was not that the land was to be valued by reference to its exact location and area, it was certainly RBL’s position in that appeal that the Sublease Land and the land identified in cl 4.2.2 were to be valued on the same pass-through basis.
[68] The Court of Appeal’s gloss in adding, in parentheses, “by exact location and area” was not required for that analysis and is in the nature of additional comment rather than forming part of the Court’s reasoning. Similarly, in adding the words “having regard to the exact locations and areas of the land identified in cl 4.2.1 and 4.2.2” in its summary of Mr Harrison’s principal finding, the Court of Appeal was adding words that Mr Harrison did not use.26 Nor, as discussed below, did the Court of Appeal use the phrase “exact location(s) and area(s)” in undertaking its own analysis of cl 4.2.
[69] For these reasons, I am satisfied that, in using the phrase “exact location(s) and area(s)”, the Court of Appeal was not formulating a test for how a valuation under cl 4.2 is to be carried out.
Exact location not required by cl 4.2 and not consistent with Court of Appeal analysis
[70] As discussed by Mr Harrison and the Court of Appeal, the principal direction in cl 4.2 is that the Sublease Land and the area of common property attributable to RBL in accordance with cl 4.2.2 are to be valued at the “current market undeveloped block value” – a term common to the Headlease and the Sublease. Although “block value” is not defined, it is reasonably clear in the context of the Headlease that it means the area of land contained in the Certificate of Title that is the subject of the Headlease,
25 CA Judgment, above n 1, at [58].
26 At [64].
taken as a whole. What it means in the context of the Sublease, which is for specific areas of land in a unit development that has to be set aside when undertaking the valuation exercise, is less obvious. However, I consider that Mr Harrison and the Court of Appeal effectively addressed that issue when considering how cl 4.2.1 is to be interpreted, albeit in the context of addressing the very different argument then being run by RBL.
[71] As already discussed, both Mr Harrison and the Court of Appeal took guidance from cl 4.2.2 when considering how cl 4.2.1 is to be interpreted and considered that the same approach should be taken to valuing the areas of land identified under the two clauses. At [57] of the CA Judgment, the Court of Appeal set out what I consider to be the guiding considerations in the valuation exercise:
(a)Clause 4.2.2 defines what the Court of Appeal said are the “location and extent (that is, the area) of the common property”.
(b)Clause 4.2.1 identifies the relevant headleased land required to be valued.
[72] The Court did not use the term “exact” in either context. Clearly, when valuing the common property, there must be exactness as to the amount of land to be valued. But, since the purpose of the formula in cl 4.2.2 is to derive the “portion” of the common property to be valued, there can be no exactness as to location beyond the fact that it is a part of land identified as common property in the unit plan. To the extent that cl 4.2.2 identifies the location of the relevant land, this merely serves the purpose of aggregating the amount of the total Headlease Land to be valued. On the basis of the formula, any part of the common property has the same value as any other part. It follows that, in the context of cl 4.2.2, location and extent simply mean “area” as the Court of Appeal said; that is, the amount of the common property to be valued.
[73] Similarly, when valuing the land identified in cl 4.2.1, there must be exactness as to the amount of land to be valued. In accordance with Recital B, it is the amount of land subleased to RBL as contained in Unit C and the accessory units. As with cl 4.2.2, the unit plan identifies the amount of land to be valued. But that is its only
purpose. It would not be consistent with Mr Harrison’s opinion or the CA Judgment then to value the area of Sublease Land as if it had been subdivided into lots, even leaving aside the substratum estate. That would not be valuing the land in its undeveloped state, bearing in mind that Mr Harrison said that the subdivision brought about by the unit plan was to be disregarded.
[74] I consider, therefore, that, in order to arrive at the current market undeveloped block value of the Subleased Land, it is necessary to value the total amount of the land covered by the clause in the same way that the area of the common property is valued as to its total amount under cl 4.2.2.
All three valuers valued the Subleased Land by total amount
[75] It is clear that Mr Harris and Mr Quinlan valued the Sublease Land by valuing the total amount of the land identified by cl 4.2.1. While Mr Davies suggests they did something illegitimate by assuming that the land was of a regular shape and had frontage to Quay Street, these assumptions were made for the purpose of ensuring like for like comparison with other properties in order to arrive at the market value. There is nothing illegitimate or inappropriate in making those assumptions, which are standard valuation techniques. That is confirmed by the fact that all three valuers arrived at land values that were very close to each other and all agreed that the three values were “within the margin” of valuation opinion.
[76] This underlines an important point; namely, that Ms Nettleship arrived at that value of the Sublease Land by making the same assumptions and valuing the land on the same basis as Mr Harris and Mr Reid. While claiming to have valued the Sublease Land by exact area and location, Ms Nettleship did not value the Sublease Land as comprising four different lots (Unit C/AU5 and AU6, AU7 and AU8). Rather, she valued the land as a single block and then applied a discount of 10 per cent for fragmentation based on her own judgement and without evidence of that approach being used in other valuations.
[77] Ms Nettleship did not, therefore, value the Sublease Land by reference to its exact locations and areas. If she had done so, she would have valued each of the four lots individually. But to have done that would have been to value the Subleased Land
on the basis of the unit plan subdivision which, as Mr Harrison said, and the Court of Appeal confirmed, would not have been consistent with cl 4.2. However, the discount that Ms Nettleship applied for fragmentation was, in substance, a proxy for the subdivision and, therefore, is itself inconsistent with cl 4.2.
[78] For these reasons, I consider that the exact locations and areas approach advocated for by Mr Davies, and the valuation arrived at by Ms Nettleship by way of discount, are not only not what the Court of Appeal directed but are contrary to those directions as they apply to the Sublease Land.
Approach to valuation of common property land also contrary to cl 4.2
[79] Ms Nettleship’s approach to valuing the common property land identified in cl 4.2.2 is also contrary to the valuation directed by cl 4.2 and the directions of Mr Harrison and the Court of Appeal.
[80]As already discussed, Mr Harrison and the Court of Appeal agreed that:
(a)the land identified in cl 4.2.2 retained its freehold character despite the Unit Plan subdivision;
(b)cl 4.2 obliges the valuer to value the fee simple estate alone, assessing the freehold value of the land in its bare and undeveloped state and without consideration of encumbrances attributable to another estate of a different nature which is excluded from consideration;
(c)there should be a unified methodology to all aspects of the rent review valuation exercise and a direction to the valuer to value one physical element of the area according to a different formula is inconsistent with that common intention; and
(d)there is an objective of symmetry between the Headlease and the Sublease which requires a unitary approach to both valuation exercises on the shared premise of assessing only the undeveloped freehold block value of the subject leased land.
[81] Ms Nettleship’s valuation approach is inconsistent with each of those directions because:
(a)it does not respect the continuing freehold character of the land comprising the common property;
(b)it values the land on the basis of its status under the different estates established by the unit plan, under which it has been declared common property;
(c)it values the land identified in cl 4.2.2 on a different basis from the land identified in cl 4.2.1; and
(d)it values the land identified in cl 4.2.2 on an entirely different basis from the valuation of that land under the Headlease.
Conclusions on whether it is seriously arguable that the Tribunal erred
[82] It is plain, therefore, that it is not seriously arguable that the Tribunal erred by not adopting the exact location and areas approach contended for by Mr Davies or, to the extent that her approach differs from that contended for by Mr Davies, by not adopting the approach taken by Ms Nettleship in her valuation.
[83] It is apparent that this application is yet another example of RBL and its advisors engaging in an “excessively literal” approach.27 This time, RBL has seized on words used in the CA Judgment that were not part of the Court’s analysis of how cl 4.2 is to be interpreted and has sought to apply them in ways that are not consistent with the opinion of Mr Harrison, which the Court of Appeal endorsed, with the Court of Appeal’s own analysis or with the two other valuation approaches previously advanced, unsuccessfully, by RBL.
27 CA Judgment, above n 1, at [54].
Other considerations under the Doug Hood guidelines
[84] Given that RBL has failed to establish that the case it wishes to make is seriously arguable, there is little to be gained by detailed consideration of the other Doug Hood guidelines.
For completeness, however, I record the following.
[86] I accept that the considerations of how the question arose before the Tribunal, the importance of the dispute to the parties and the amount of money involved all count in favour of leave being granted. However, those considerations are more than offset by the fact that this is the third time RBL has sought to challenge aspects of the process by which land it has subleased from QST should be valued in an effort to reduce the rental to which it would otherwise have been subject. On each occasion, RBL has not just been unsuccessful. It has failed signally.
[87] That reality, coupled with my finding that RBL does not have a seriously arguable case and the delay involved in going through the courts, satisfy me that there is no case for granting leave to appeal.
Result
[88] RBL’s application for leave to appeal the Award on a question of law is dismissed.
Costs
[89] As the successful party, QST is entitled to costs. Ordinarily, I would order costs on a 2B basis and direct the parties to try to agree costs between them. However, in case QST wishes to seek costs on some other basis, or the parties are unable to agree, I reserve leave to:
(a)QST to apply for costs on some other basis;
b) RBL to reply to any such application; and
(b)both parties to file memoranda of no more than five pages if they are unable to agree costs on a 2B basis.
G J van Bohemen J
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