Restaurant Brands Ltd v QST Ltd

[2021] NZHC 971

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2020-404-1957

[2021] NZHC 971

UNDER

Cl 5(1)(c) of Schedule 2 of 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:	11 February 2021
Appearances:	M Davies and P Comrie-Thomson for the Plaintiff L McEntegart and A Steel for the Defendant
Judgment:	4 May 2021

JUDGMENT OF HARLAND J

This judgment was delivered by me on 4 May 2021 at 2:30 pm Pursuant to Rule 11.5 High Court Rules

Registrar/Deputy Registrar Date………………………….

Counsel/Solicitors:

Meredith Connell, Auckland

L McEntegart, Barrister, Auckland A J Steel, Barrister, Auckland

Thompson Blackie Biddles, Auckland

RESTAURANT BRANDS LIMITED v QST LIMITED [2021] NZHC 971 [4 May 2021]

Introduction

[1]    The plaintiff and the defendant disagree about the proper interpretation of a rent review clause in a sublease between the defendant as landlord and the plaintiff as tenant and how this might apply to a valuation for rent review purposes. The dispute is the subject of arbitration. An interim award dated 16 September 2020 was made by the Arbitral Tribunal following its adoption of an expert opinion provided by the Honourable Rhys Harrison QC,1 which found for the defendant.

[2]The plaintiff applies for leave to appeal the interim award.

[3]The defendant opposes the application for leave.

[4]    I have concluded that the plaintiff’s application for leave to appeal should be dismissed. This judgment contains the reasons for that decision.

Legal principles

[5]    Under cl 5(1)(c) of Sch 2 to the Arbitration Act 1996, the plaintiff requires leave to appeal the interim award, which can only be granted if a question of law arises from it.

[6]    The threshold test to be applied by the Court is outlined in cl 5(2) of Sch 2 which provides:

The High Court shall not grant leave under subclause (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 1 or more of the parties.

[7]    If the statutory threshold is met, the Court retains a discretion as to whether or not to grant leave.

1      Appointed under cl 26 of Sch 1 to the Arbitration Act 1996.

[8]    The leading case is Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd in which the Court of Appeal listed the factors (referred as guidelines) to be considered on such an application.2 They are:3

(a)the strength of the challenge/nature of point of law (to be considered in a preliminary way, but described as the most important guideline);

(b)how the question arose before the arbitrator;

(c)the qualifications of the arbitrator;

(d)the importance of the dispute to the parties;

(e)the amount of money involved;

(f)the amount of delay involved in going through the Courts;

(g)whether the contract provides for the arbitral award to be final and binding; and

(h)whether the dispute before the arbitrator is international or domestic.

[9]    The Court’s task is to decide whether in light of the nature of the point of law and the factors to be considered, there is a sufficiently strong case to justify the grant of leave.4 As Brewer J observed in Telstraclear Ltd v Kordia Ltd:5

The task of the Court, in applying this law to the circumstances of the case, is not to decide the merits of the proposed appeal and on the result grant or withhold leave to appeal; it is simply to decide whether the case meets the required standard for appeal.

[10]   The defendant accepts that the threshold test has been met; however, it submits that the relevant guidelines cannot be satisfied to the extent required for leave to be granted.

2      Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (CA).

3 At [54].

4 At [57].

5      Telstraclear Ltd v Kordia Ltd HC Auckland CIV-2010-404-1168, 28 September 2010 at [9].

Background

[11]An overview of the background facts is now provided.

[12]   The defendant leases land in Quay Street, Central Auckland from Ngāti Whātua O Ōrakei Māori Trust Board and it subleases some of that land to the plaintiff, who operates a fast food business there.6 The parties’ interests in the land are therefore recorded in a headlease and a sublease. Prior to the sublease being entered into, the parties entered into an agreement to sublease the land.

[13]   The sublease was entered into after a unit plan was deposited in relation to the headlease land and is dated 14 April 1998. It comprises a stratum estate in leasehold for a unit (Unit C) and accessory units (Accessory Units 5-8) and is for a period of 20 years with one right of renewal for another 20 years. The plaintiff gave notice to the defendant to renew the sublease on 15 April 2017 for the further term of 20 years.

[14]   The annual rental is to be reviewed every seven years. If there is a dispute about this, that dispute is to be referred to arbitration.7

[15]   The current seven-year rent review date fell due on 2 August 2018. The parties were unable to agree on the amount of the annual rental for the subleased land. Their dispute was therefore referred to arbitration.

[16]   An arbitrator was appointed.8 Various timetable directions were agreed upon to clarify what and how these matters might be dealt with. The defendant filed points of claim, the plaintiff filed points in response and the defendant filed points in reply.

[17]   The dispute relevant to this application concerns the interpretation of the combined operative rent review provisions, being cl 4.2 of the sublease and cl 3.3 of the headlease. The issue is whether or not the current “freehold market undeveloped

6      There are several entities recorded as parties in the documentation that are not the parties before the Court; however, there was no issue that the parties involved in this proceeding lawfully follow as successors to them.

7      Clause 14 of the headlease and cl 7.1 of the sublease.

8      There were various issues about the appointment of the initial arbitrator, but this is not relevant to the issue I need to determine.

block value”9 includes an assessment of the value of the stratum estate of the subleased land. If the latter, the plaintiff argues that various deductions (set out in paragraph 14 of the interim award) are justified which would lower the amount of rent payable by it to the defendant. The plaintiff estimates that the amount concerned is at least

$3.9 million over the remaining term of the sublease, because in addition to this rent review, there will be further rent reviews on 2 August 2025 and 2 August 2032. The actual difference in terms of this rent review period, however, would be $205,522 plus GST per annum.

[18]   The parties agreed to the arbitrator appointing a legal expert to provide an opinion on the interpretation issue. The Honourable Rhys Harrison QC, a former Court of Appeal Judge, was nominated by the plaintiff as being a suitable expert and the defendant agreed with this.

[19]   A hearing was convened for the legal issue to be argued. Prior to this, submissions by both parties were circulated.

[20]   The hearing took place on 10 August 2020 and was attended by the expert. Oral argument was advanced by both parties on the interpretation issue and counsel for the defendant also provided oral speaking notes further addressing his written submissions. In short, very detailed argument was presented at the hearing on the interpretation issue.

[21]   After the hearing, the expert sent an email to both counsel asking for their views on the following:

My question for Mark is this: if his argument is correct that “the Land” referred to in paragraph 4.2 of the sublease is the stratum estate of leasehold in a relevant units, how will a valuer determine the current freehold undeveloped market undeveloped block value of that stratum estate in leasehold and the proportionate share of the common property? On its face this formula is an oxymoron, but I would appreciate counsels’ views. Liam can comment on Mark’s response if necessary.

[22]   Counsel for the plaintiff responded essentially reiterating the argument he had presented at the hearing.   Counsel for the defendant in his response replicated the

9      The interpretation of this phrase was the subject of a previous High Court decision after leave was successfully obtained under the Arbitration Act: Restaurant Brands Ltd v QST Ltd [2017] NZHC

166. Gordon J determined the issue in favour of the defendant (QST). See also Restaurant Brands Ltd v QST Ltd [2016] NZHC 2226 (leave to appeal granted).

paragraphs from the submissions he had presented at the hearing dealing with the issue.

The interim award

[23]The expert outlined the issue upon which his opinion was based as follows:10

14.   The parties’ dispute arises from their conflicting interpretations of the combined operative rent review provisions, Cl 4.2 of the sublease and Cl 3.3 of the headlease. RBL’s Points of Response to QST’s Points of Claim identify what it asserts are the central elements of the review valuation as requiring:

(a)The determination of the current freehold market undeveloped block value of the Sublease Land, which is a stratum estate within the meaning of the UTA 2010.

(b)Accordingly, that measure must properly take into account, among other things:

(i)The applicable height restrictions imposed by the Unit Title Plan DP185696 (a lower limit of reduced level (RL) 1.35 with an upper limit of RL13.35) that restrict the highest and best use of the Sublease Land;

(ii)That the nature of an “accessory unit” under UTA 2010 restricts the highest and best use of Accessory Unit 5, 6, 7 and 8 (AU 5-8);

(iii)That the relevant Body Corporate Rules (Instrument D233951.4) restrict the highest and best use of AU 5-8 to carparking;

(iv)The direction of Cl 3.3 (ii) of the headlease that in determining the current freehold market undeveloped block value of the Land, the value of any goodwill attributable to the business of sublessee, and the value and existence of any improvements shall be disregarded.

…

15.        QST counters in its Points of Reply that the valuation required in terms of the sublease is an assessment of the freehold market undeveloped block value of the Sublease Land, not an assessment of the value of the stratum estate of the Sublease Land.

[24]   The expert then proceeded with his analysis. He commenced by outlining the principles of contractual interpretation that he considered applied. He then identified the parties’ competing arguments. In a nutshell, the plaintiff’s argument was that cl 4.2

10     “UTA” means the Unit Titles Act 2010.

of the sublease requires a valuation of the stratum estate of leasehold, whereas the defendant’s argument was that the assessment must be limited to the bare physical area or geographical square demised under the sublease, not the sublessee’s interest in that land.

[25]   The expert then addressed the nature of the lease by starting with the terms of the sublease. He considered that cl 4.2 introduces two assumptions of a fictional nature (not uncommon in ground lease cases), which were at the heart of the parties’ differences. He identified the two proprietary interests in the sublease land: one being the underlying fee simple or freehold estate vested in the Trust Board and the other being the leasehold interest or stratum estate vested in the defendant. He said:

There is no question that the rent review provision in the headlease limits the assessment to the value of the freehold estate alone. The question here is whether the companion review provision in the sublease qualifies or modifies that assessment by instructing the valuer to take into additional account the effect of the stratum estate created by the UTA 2010.

[26]   The expert then considered the provisions of cls A and B of the sublease and concluded that when read together with the relevant provisions of the agreement to lease, they:

... convey the parties’ common intention that, consistently with the headlease, the sublease is of the physical parcel of land shown as Lot 3 on the subdivision plan attached to the agreement and comprising 1063 square metres, which is the agreed defined “part” of the Headlease Land.

[27]   He noted that the headlease defines “the Land” as a fee simple estate in the land comprised in CT 109B/200, which was leased to the original lessee for a term of 150 years and as that provision was expressly incorporated in the sublease, it was required to be construed as such in the sublease.

[28]   The expert then explained his view that the reason the phrase “the Land” in the First Schedule of the sublease was described as a stratum estate was because that was the new legal description that applied to it on the deposit of the unit plan, which meant that “the Land” was to be interpreted by reference to but not defined by the First Schedule to the sublease. However, he noted that this did not affect the parties’ agreement to adopt the headlease definition of the land as being the agreed “part” of the total freehold area of the headlease land. He found that 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. He concluded:

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.

[29]   The expert considered that this conclusion was supported by the remaining provisions of the sublease, including:

(a)the reference to “common  property”  defined  within  the  sublease  (cl 1.1.5). The expert noted that the parties’ express adoption of the definition of “the headlease land” to define the common area was consistent with “an underlying intention to adopt a unified methodology to all elements of the rent review valuation exercise”. He further noted that “[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”;

(b)the use of the word “undeveloped” in the rent review formula.

[30]   The expert then expressly acknowledged the two types of development that had occurred on the site, which were:

(a)the works done by both parties to the agreement to the sublease which altered its essential undeveloped characteristic, namely the development of buildings and structures on the site. The expert referred to cl 3.3.3(e) of the headlease which he said excludes the erection of “buildings, structures, erections or any other items whatsoever on the Land” from the valuation exercise. The expert considered that this exclusion was consistent with the orthodox operation of a ground rent lease “as a demise of bare land undeveloped by improvement by building”;

(b)the deposit of the unit plan effecting a subdivision of the sublease land and creating the unit title development. The expert noted that it was

only as a result of this step that the stratum estate in leasehold in the sublease land came into legal being. However, he noted that in the context of the rent review provision of the sublease, the land was undeveloped pending that event.

[31]In relation to these legal fictions the expert said:11

39.   However, 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.   … It is not conceptually possible to value a fee simple estate on the basis of encumbrances attributable to a legal estate of a different nature which is excluded from the valuation exercise. These limitations on the highest and best use of the land are an incident of the development constituting the sublessor’s leasehold interest; they are not an incident of or related to its freehold status.

[32]And further, in recording his agreement with counsel for the defendant, he said:

41. the sole purpose of a ground rent lease as encapsulated in Cl 4.2 is to

derive the value of the subject land free of the impact of any benefit or detriment attributable to the parties’ capital expenditure. The inclusion of a direction to the valuer to assess the undeveloped freehold block value is decisive against RBL’s proposition.

[33]   In summary, the expert concluded that cl 4.2 requires the valuer to assess the freehold value of the sublease land by putting aside two things:

(a)the legal status of the sublessor’s interest in it; and

(b)the fact 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.

11     The expert referred to S & M Property Holdings Ltd v Waterloo Investments Ltd [1999] 3 NZLR 189 (CA) at [73].

[34]   For rent review purposes, the expert noted that the valuation had to proceed on the fictional premise that the sublessor’s stratum estate had never existed, it had to disregard the nature of the sublessor’s ownership interest and it had to focus solely on the freehold status of the land itself. This methodology would also be applied on the headlease review which he considered demonstrated 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”.

[35]After reaching this conclusion the expert made the following observation:

It is appropriate to conclude by observing that the interrelationship of the various contractual provisions is complex and not free from doubt, and that the ingenuity of Mr Davies’ argument has caused me to reflect carefully on the correct interpretation of the rent review provisions. Ultimately, however, I am satisfied that it cannot prevail against the express contractual wording and that the orthodoxy of Mr McEntegart’s counter argument must prevail.

[36]   The  arbitrator  adopted  the  expert’s  opinion  as  the  interim  award   on   16 September 2020.

Summary of arguments

[37]   In its notice for leave to appeal, the plaintiff described the question of law arising out of the award as follows:

Did the expert and the Tribunal err in terms of the proper interpretation of clause 4.2 of the sublease by failing to give effect to the contractual definition of “Land” as contained in the First Schedule of the sublease?

[38]   The plaintiff submits that cl 4.2 of the sublease requires a valuation of the “current freehold market undeveloped block of value” (as defined in the headlease) of “the Land” in accordance with the contractual definition of that term as contained in the First Schedule of the sublease.

[39]The grounds for the application are as follows:

(a)It is strongly arguable that the opinion provided by the expert which the Tribunal adopted misinterpreted the sublease and misapplied the principles of contractual interpretation in respect of cl 4.2 by:

(i)erroneously failing to give effect to the contractual definition of “the Land” contained in the First Schedule of the sublease; and

(ii)erroneously failing to apply the interpretation of “current freehold market undeveloped block value” in accordance with the High Court’s judgment in Restaurant Brands Ltd v QST Ltd;12

(b)The question of law is of general importance, as neighbouring properties are subleased by the defendant to other parties with the same or similar rent review terms;

(c)The amount of money involved is significant;

(d)Any delay will be relatively insignificant and should not be a factor against granting leave; and

(e)The arbitration agreement does not provide for the award to be final and binding.

[40]The defendant opposes.  It submits:

(a)The plaintiff does not have a strongly arguable case in respect of the asserted question of law arising out of the interim award:

(i)Clause 4.2 of the sublease mandates valuation of the “current freehold market undeveloped block value” of “the Land” which

12     Restaurant Brands Ltd v QST Ltd, above n 9, at [42] per Gordon J.

is to be carried out under the sublease (in terms of Restaurant Brands Ltd v QST Ltd);13

(ii)“The Land” in terms of cl 4.2 is properly interpreted to mean a fictional bare freehold block of land, unencumbered by any development or qualification, rather than a valuation of the stratum estate, taking into account restrictions in the unit plan;

(iii)The rent review formula in cl 4.2 directs a valuation of the “current freehold market undeveloped block value” of “the Land”, which is inconsistent with a definition of “the Land” as other than a fictional bare freehold block;

(iv)The interpretation issue raised by the plaintiff was fully argued in written submissions and at an oral hearing at which both parties were represented and which was the subject of a fully reasoned expert report by a former Court of Appeal Judge;

(b)While the arbitrator was not legally qualified, the expert was appointed by reason of his legal qualifications and experience.

Analysis of the guidelines to this case

[41]   I now address each of the relevant guidelines in Gold and Resource Developments.14

Does the plaintiff have a strongly arguable case? (Guideline 1)

[42]   Counsel agreed that this was a case where the test that should apply is the “strongly arguable” test rather than the “very strongly arguable” test. I agree. This test has earlier been described in the context of rent review cases with ongoing impact as requiring “a strong prima facie case of error” to be shown,15 which in Gold and

13     Restaurant Brands Ltd v QST Ltd, above n 9, per Gordon J.

14     Gold and Resource Developments, above n 2, at [54].

15     Ipswich Borough Council v Fisons Plc [1990] 1 Ch 709 (CA) at 724.

Resource Developments was described as “practically indistinguishable” from “real doubt that the arbitrator was wrong”.16

[43]   As to “how strong is strong”, Gold and Resource Developments cited with approval a passage from Ipswich Borough Council v Fisons PLC as follows:17

So how strong is strong? No meter can be implied or indeed devised. It is a matter of relative values. If the chosen arbitrator is a lawyer and the problem is purely one of construction, the parties must be assumed to have had good reason for relying on his expertise and presumption in favour of finality or, to put it another way round, the strength needed to rebut it will be greater.

The plaintiff ’s argument

[44]   Counsel for the plaintiff, Mr Davies, raises three principal arguments in its application for leave relevant to this guideline.

[45]   First of all, Mr Davies submits it is strongly arguable that the expert erred in failing to apply the meaning of “the Land” from the First Schedule. He submits:

(a)The expert applied a completely different definition of “the Land” which placed undue reliance on recitals to the sublease and the agreement to lease. This offends against principles of contractual interpretation that “the text remains centrally important”,18 and that a clear defined term must be applied19 and will take priority over a recital to the contract;20

(b)The distinction between “shall be interpreted by reference to” and “defined by reference to” is very fine. The sublease contains no words indicating “the Land” means something other than the First Schedule definition. It is highly questionable that “the Land” can have one meaning under cl 4.2 and another for other parts of the sublease;

16     Gold and Resource Developments, above n 2, at [48].

17     Ipswich Borough Council, above n 15, at 724 as cited in Gold and Resource Developments, above n 2, at [31].

18     Firm Pl 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [63].

19 T&N Ltd v Royal & Sun Alliance plc [2003] EWHC 1016 (Ch), [2003] 2 All ER (Comm) 939 at [226]; and Lakes International Golf Management Ltd v Vincent [2017] NZSC 99, [2017] 1 NZLR 935 at [28].

20 T&N Ltd, above n 19, at [526].

(c)The headlease is not incorporated into the sublease.   The effect of     cl 7.1.2 (“All references in the Headlease… were references to the Land”) is that the reference to “the Land” is to “the Land” as defined in the First Schedule of the sublease. Further, cl 2.1 emphasises the centrality of the First Schedule definition: “The Sublessor hereby subleases to the Sublessee and the Sublessee hereby takes on sublease from the Sublessor the Land for the Term commencing on the Commencement Date at the Annual Rental… all as set out in the First Schedule. Moreover, cl 7.1.9 directs that in the case of inconsistency between the headlease and sublease, the provisions of the sublease prevail; and

(d)The initial lease made no reference to a stratum estate because at that stage the unit plan had not been deposited.

[46]   Next, Mr Davies submits it is strongly arguable that the expert failed to apply the definition of “current freehold market undeveloped block value” previously settled by the High Court (which binds the Tribunal). Gordon J held that cl 3.3(e) of the headlease requires the valuer to “disregard the value of any goodwill… [and] of any Improvements”.21 “Improvements” means “buildings, structures, erections or other items whatsoever on the Land…”.22 Mr Davies submits this definition does not refer to non-physical aspects like the unit plan so they are not excluded from the valuation.

[47]   Mr Davies further submits that the expert erred in stating that it is impossible to value a fee simple estate, taking into account encumbrances resulting from the deposit of the unit plan. It submits such a valuation is possible and the valuers would approach their task in the same way they would in relation to any other development restrictions pertaining to “the Land” (for example, when height restrictions are imposed on any development under the Unit Titles Act 2010). Mr Davies submits that even under classical ground leases such matters relating to the land are properly taken into account.   Further, he submits that it is inappropriate to alter the terms of the

21     Restaurant Brands Ltd v QST Ltd, above n 9, at [19].

22     Clause 1.1 of the headlease.

sublease because they may not fit perfectly within the confines of a classical ground lease.

[48]   Finally, Mr Davies highlights the expert’s comment that the interpretation is “not free from doubt” and reiterates that the test for leave is “real doubt” about the arbitrator’s decision.

The defendant’s argument

[49]   Counsel for the defendant, Mr McEntegart, highlights four aspects which he says were raised before the expert which support the defendant’s position that the question of law is inarguable.

[50]   First, Mr McEntegart submits that a construct which purports to require ascertainment of the current freehold undeveloped market value of a stratum estate in leasehold makes no sense. Mr McEntegart highlights that this was the basis of the question the expert asked of the parties after the hearing referred to above. He describes the expert’s conclusion at paragraph 40 dealing with this issue as “unexceptionable”.

[51]   Next, Mr McEntegart submits that the plaintiff agreed to sublease part of the headlease land, which is expressed as being the demise of a freehold estate. The evolution of the legal description of the sublease land from its freehold description in the initial lease (attached to the agreement to lease) through to the description in the final lease could not, and Mr McEntegart argues it did not, change the agreed definition of “the Land” from “the physical area of freehold land being demised, unaffected by the stratum estate in leasehold created on deposit of the Unit Plan”. This was addressed by the expert at paragraph 32 of his report.

[52]   Mr McEntegart further submits that the assessment of “current freehold undeveloped block value” is required per cl 4.2 of the sublease, not only in respect of “the Land” but also in respect of a proportion of the common property. Mr McEntegart highlights the expert’s conclusion at paragraph 34 that to require a valuer “to value one physical element of the whole area according to a different formula from the other

element” would be inconsistent with that common intention. Mr McEntegart describes this conclusion as “irrefutable”.

[53]   Finally, Mr McEntegart submits that the expert correctly concluded that the interpretation of cl 4.2 of the sublease was supported by the use of the word “undeveloped” in the rent review formula. He notes that the expert accepted his submissions that the deposit of the unit plan represents a form of development of the sublease land changing its value from what it was as undeveloped land (otherwise there would be no point in doing it) and as such, its impact plays no part in an undeveloped freehold land valuation. Mr McEntegart submits that nothing in the reasoning referred to by the plaintiff or in the wording of the clauses referred to confines “undeveloped” to a physical manifestation.

Analysis

[54]   On the issue of whether the expert failed to apply the First Schedule definition of “the Land”, I observe that he considered the sublease to be “part” of the headlease land. He noted that land is a fee simple estate under the headlease, which is expressly incorporated in the sublease and he considered that the First Schedule definition of “the Land” did not change the underlying freehold status of the land. The challenge by the plaintiff is that where a term is clearly defined, that is the ordinary meaning that should be applied, and that meaning should prevail over recitals to a contract and other extrinsic materials. I accept that this is an arguable point and likely the plaintiff’s strongest argument. As the expert noted, “the interrelationship of the various contractual provisions is complex and not free from doubt.”

[55]   On the related issue of whether the headlease is incorporated into the sublease, the expert considered that it was. The challenge by the plaintiff is that the headlease is not so incorporated and that the provisions of the sublease prevail. I accept that this is also an arguable point.

[56]   On the issue of whether the expert failed to apply Gordon J’s definition of “current freehold market undeveloped block value”, I am not satisfied that he did. The expert noted the finding and the impact of it on the valuation exercise at paragraph 20 of his report, but noted that Gordon J was deciding a different issue from the one

before him and observed, correctly in my view, that the plaintiff’s argument in that case was broadly consistent with the defendant’s position on the issue before him.

[57]   On the issue of whether it is possible to value a fee simple estate, taking into account encumbrances resulting from the deposit of the unit plan, the expert concluded that it is not conceptually possible to do so. The challenge by the plaintiff is that it is possible: the land can be valued in the same way as any other development restrictions pertaining to “the Land” (for example, certain height restrictions are imposed on any development under the Unit Titles Act). In my view, this argument ignores the fundamental nature of the estate in the land being valued. I am not persuaded that this point is strongly arguable.

[58]   Significantly, all of the plaintiff’s arguments were fully rehearsed before the expert and in the end, the expert favoured what he described as the more “orthodox” approach advanced by the defendant over the “ingenuity” of the argument advanced by the plaintiff.

[59]   I must ask myself whether the plaintiff has a strongly arguable case or in other words, whether there is real doubt that the arbitrator was wrong. In this case, as the arbitrator adopted the expert’s findings, the question is whether the expert was wrong.

[60]   In my view, the expert’s analysis is highly persuasive, particularly his findings that:

(a)on a close reading of the sublease and headlease together, “the Land” in the sublease refers to part of the headlease land, which is freehold land;

(b)the “stratum estate” definition under the First Schedule was necessary to include because the unit plan deposit created a new interest in the land; and

(c)it is impossible to value a freehold estate in terms of encumbrances relating to a leasehold estate, which is a different type of estate.

[61]These findings are consistent with the following first principles of land law:

(a)a lease is the demise of both the lessor’s interest in the land and the physical area of land itself;

(b)leasehold and freehold estates are fundamentally different types of estates, with different bundles of rights attached. They may exist simultaneously over the same physical area of land; and

(c)the creation of a new leasehold title for part of the land does not affect the existing freehold state of the total land area.

[62]   Thus, I am far from persuaded that there is real doubt that the expert was wrong. He was simply not persuaded that the plaintiff’s argument should prevail.

[63] I have referred to the expert’s concluding observation at [35] above. Mr Davies places some weight on this, submitting that it supports the argument that the point of law is strongly arguable. I disagree. In my view, the observation simply reflects the novelty of Mr Davies’ argument when viewed against the orthodox principles that apply to the interests in land involved in this case and the care taken by the expert to carefully and thoroughly consider the points raised on the plaintiff’s behalf. The expert’s finding was that these principles underpin the argument about contractual interpretation. Certainly, the opinion of the expert was that the analysis of the interest in the land devolved under the headlease could not be ignored simply by reference to the contractual provisions of the sublease.

[64]   I am not required to determine the merits of the proposed appeal points on this application; all I am required to do is to decide whether the plaintiff has a strongly arguable case. In my view, the appeal points, even if arguable, are not strongly arguable.

How the question arose before the arbitrator, qualifications of the arbitrator (Guidelines 2 and 3)

[65]   The assessment of these guidelines is relatively straightforward. Even though the arbitrator was not legally qualified, the expert clearly was. The parties agreed to the appointment of a legal expert; the expert chosen was proposed by the plaintiff and the defendant agreed with that choice. The joint recommendation was then passed on to the arbitrator who then appointed the expert.

[66]   Given that the expert was being asked to give an opinion on the interpretation issue which was the point of the interim hearing and the parties had chosen the expert, they must have contemplated that his interpretation was likely to be accepted by the arbitrator. In this respect, there was a risk involved for both parties given that the expert’s report would always result in one argument being favoured over the other.

[67]   In my view, these matters count against the granting of leave because as the Court of Appeal observed in Gold and Resource Developments, where the parties have chosen to submit their dispute to arbitration rather than asking the Court to determine it “they should generally be held to their choice”.23 Further, the overarching policy of the Act is to “favour finality, certainty and party autonomy” over “a wider scope for judicial review of arbitral awards for error of law”.24

The importance of the dispute, amount of money involved and delay (Guidelines 4, 5 and 6)

[68]   It is accepted by the defendant that these factors are relevant and tend to support the granting of leave. The determination of the legal point is relevant not only to the defendant but to at least one other lessee as well.

[69]   Although the dispute is important to both parties and at least one other party, it does not seem to me to involve a matter of general importance because it concerns the interpretation of specific contractual documents.

23     Gold and Resource Developments, above n 2, at [54](2).

24     At [51]–[52].

[70]   The amount of money involved in the dispute has however caused me to pause. Although expressed at potentially $3.9 million over the term of the sublease, a better way to express it, in my view, is by reference to its value on an annual basis. Based on the figures provided in Mr Mahoney’s affidavit this amounts to $205,522 plus GST per annum or a monthly amount of just over $17,000 plus GST. By anyone’s standards, this is a reasonably significant amount of money. Bearing in mind that there is at least one other lessee who is likely to be directly impacted by the interim award, I agree that this factor favours the granting of leave.

Whether the contract provides for the arbitral award to be final and binding (Guideline 8)

[71]    The contract does not provide for the award to be final and binding. Unlike the Telstraclear case where there was such a clause and the Court determined that this was a significant factor weighing against the application for leave, that situation does not arise in this case. In my view, this is a neutral factor in this case.

Conclusion

[72]   In balancing the guideline factors referred to in Gold and Resource Developments, I give greatest weight (as I am bound to do) to the strength of the plaintiff’s legal argument.  I have determined  that  although  the points raised  by  Mr Davies are arguable, I do not assess them as strongly arguable.

[73]   In relation to the remaining factors, the amount of money involved is in my judgment the only factor that ought to be given significant weight.

[74]   When I look at matters in the round, I am not persuaded that leave ought to be granted to appeal the interim award to the High Court. In my view, the case was fully and well argued by all parties in front of a very experienced and knowledgeable expert whom the parties had agreed would be an appropriate person to determine the interpretation issue. This is a case where the parties should be held to their choice of arbitration as the preferred manner for the resolution of their dispute.

Result

[75]The application for leave to appeal is declined.

[76]   The respondent is entitled to costs. My initial view is that these ought to be awarded on a 2B basis. If either party disagrees with this indication, they are to file a memorandum outlining their position within 14 working days of receipt of this judgment. The need for reply can be addressed if any memorandum is filed. In the event that no memoranda are received, my initial indication as to costs being awarded on a 2B basis will stand.

Harland J