Rongotai Investments Ltd v Wellington City Council
[2022] NZHC 1665
•19 July 2022
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2019-485-430 [2022] NZHC 1665 IN THE MATTER OF An appeal against the 2007 decision of the Land Valuation Tribunal at Wellington BETWEEN RONGOTAI INVESTMENTS LTD and RONGOTAI ESTATES LTD
Appellant
AND WELLINGTON CITY COUNCIL
First Respondent
AND 2468 LTD, NZ CASH FLOW CONTROL LTD, WELLINGTON INTERNATIONAL AIRPORT LTD and BUNNINGS LTD (as
joined party) Second Respondents
AND
THE VALUER-GENERAL
Intervenor (in the 2007 Appeal)
Hearing: 1 June to 10 June 2021 and 20 to 23 September 2021 Counsel:
G Allan, T Mijatov and M Robertson for Rongotai Parties H L Higbee for Wellington City Council
L McEntegart and E H Wiessing for Bunnings Ltd K Sullivan and S Gazley for Other Lessees
S P Connolly and K Gaskill for Valuer-General
Judgment:
19 July 2022
JUDGMENT OF CULL J and MEMBER VM WINIATA
[2007 Rating Valuation Appeal]
AThe appeal is allowed.
BThe 2007 decision of the Land Valuation Tribunal is set aside.
RONGOTAI INVESTMENTS LTD and RONGOTAI ESTATES LTD v WELLINGTON CITY COUNCIL and
ORS [2022] NZHC 1665 [19 July 2022] [2007 Rating Valuation Appeal]
C The Tribunal erred in finding the Glasgow lease was a constraint on the owner’s estate and thereby making a five per cent deduction in land value.
DThe Tribunal erred in excluding comparable leasehold sales.
EThe values of the two subject properties for the 2007 rating year are set out at [159] of this judgment.
Table of Contents
Para No.
Background[3]
Agreed facts[3]
The 2007 Appeal[10]
Approach on appeal [18]
Statutory framework for land valuation for rating purposes[19]
The relevant legislation[19]
District valuation rolls[25]
Applicable principles on rating valuations [29]
The valuation approach[35]
Sales comparison approach[36]
Appeal grounds [43]
First issue: the application of s 21 of the Rating Valuations Act[44]
The Tribunal’s s 21 reasoning[47]
Parties’ positions[50]
Has s 21 overcome the effect of Radford in full?[53]
The purpose of the RVA [61]
Discussion [65]
Was s 21(1)(a) relevant to the Tribunal’s findings?[72] What is the meaning of “prevailing market conditions” in s 21(1)(b)?[79] Should any deduction have been made?[84]
Conclusion[88]
Second issue: Was the Tribunal wrongly influenced by the zone changes in the District Plan? [89]
The 2004 District Plan Change[95]
The Transitional Zone[96]
Prevailing market conditions[100]
Highest and best use[103]
The parties’ positions[104]
Discussion[106]
Third issue: Did the Tribunal err in finding that the transitional period of the District Plan made the impediment of the leases real and meaningful? [119] Fourth issue: Did the Tribunal err in omitting the leasehold sale comparisons in its valuation assessment? [125]
Ms Watson’s evidence[132]
Experts’ agreement on leasehold sales[136]
Best comparable sales[138]
Did the Tribunal err in omitting the leasehold sales comparisons? [147]
Analysis of comparable transactions[151] Conclusion[160]
Result [163]
Costs[168]
[1] This judgment concerns an appeal from the Land Valuation Tribunal (the Tribunal) determining the 2007 rating year objections over two freehold properties in Rongotai, Wellington (the 2007 decision).1 These properties are subject to 21-year perpetually renewable leases, known as “Glasgow leases”.
[2] This 2007 appeal was heard as part of a consolidated appeal with four appeals and cross-appeals brought by Rongotai Investments Ltd and Rongotai Estates Ltd (collectively “Rongotai”) against the Tribunal’s decisions in respect of the 2007, 2012, 2015 and 2018 rating year objections.2
Background
Agreed facts3
[3] Rongotai, the applicants in this proceeding, own the freehold estates of 28 properties located on Kingsford Smith Street and Tirangi Road, which are subject to leasehold interests. Wellington City Council (the Council) and Quotable Value New Zealand Ltd (QV) set the rating values for these properties every three years. Some of these rating values have a flow-on effect on the rent paid by the lessee owners, because the rental payable is reviewed every seven years based on the rating valuation at the relevant date.
[4] Rongotai appeared as an objector before the Tribunal in respect of all four rating years from 2007 to 2018. The other objectors and cross-appellants in the Tribunal hearings were the lessees of the land, subject to the Glasgow leases. Rongotai submit that in most cases the correct rating valuation should be higher than the value
1 NZ Cash Flow Control Ltd v Wellington City Council [2019] NZLVT 078 [the 2007 decision].
2 In addition to lodging its four appeals, Rongotai also filed judicial review proceedings in respect of the 2012 rating year hearing and the 2015 recusal application. The judicial review proceeding was heard consecutively following the appeals and is the subject of a separate decision.
3 The facts are taken from the parties agreed statement of facts.
determined by QV. Some lessees also objected, believing conversely (in most cases) that the correct rating valuation should be lower than the value set by QV. Different parties were involved in each round of objections, as not all parties objected to QV’s values for every rating year.
[5] The Council currently sets rating values every three years.4 This requires a revaluation of every rating unit in the district to ensure the roll represents values current as at the date of revaluation. QV, on behalf of the Council, begins this process by undertaking a mass appraisal of property values. The Council then reviews and bases its proposed ratings on this mass appraisal.5
[6] The Council’s proposed ratings are publicly notified, and there is an opportunity to object.6 The Council refers these objections to QV for review.7 QV considers these objections by undertaking a more specific analysis of the value of the property to which the objection has been made. Depending on the outcome of this analysis, the Council does or does not reset the rating valuation on each objection and this is publicly notified.
[7] Following QV’s valuation review, any dissatisfied parties can require the objections to be heard by the Tribunal,8 comprising a District Court Judge and two valuers.9 The hearing considers expert evidence as to value and a site inspection also takes place. The Tribunal forms its view on the value of the property at issue, which, if different from the Council’s rating value, becomes the new value.
[8] The 2007, 2012 and 2015 objections hearings were delayed for many years. In 2018, the files were transferred to the Environment Court and directions were made to timetable the objections to consecutive hearings with priority to be given to the allocation of hearing dates.10
4 Rating Valuations Act 1998, ss 7 and 9.
5 Rongotai Investments Ltd v Wellington City Council [2020] NZHC 543 at [2].
6 Rating Valuations Act, s 32.
7 Section 34.
8 Section 36.
9 Land Valuation Proceedings Act 1948, s 19(2).
10 Minute of Dwyer DCJ dated 11 July 2018.
[9] The Tribunal heard the 2007, 2012, 2015 and 2018 rating year objections over the course of four hearings from March 2019 to March 2020. In each of the four hearings, the Tribunal was constituted by the same three members.11
The 2007 Appeal
[10] This 2007 objection related to the rating revaluations of two properties only, namely 22 Kingsford Smith Street and 102 Tirangi Road, as at 1 September 2007.12 Those properties are situated within a development adjacent to Wellington Airport in the Rongotai area which is shown in Annexure A to this judgment.
[11] The parties to the 2007 rating year objections were Rongotai as owners/lessors of the subject properties, and NZ Cash Flow Control Ltd (NZCFC) and 2468 Ltd (2468), as lessees of the subject properties. The objections were heard by the Tribunal between 25 and 29 March 2019.
[12] The issues for determination before the Tribunal in respect of the 2007 objections were whether the presence of the Glasgow leases impaired the owner’s estate or interest in the properties and if so, whether s 21(1)(b) of the Rating Valuations Act 1998 (RVA) precluded the leases being taken into account.
[13] The Tribunal issued its decision in respect of those objections on 19 July 2019.13 The Tribunal concluded that the Glasgow leases were a constraint on the value of the land, because the owner’s ability to implement a change of use in the period of transition under the District Plan was limited by the terms of the Glasgow leases.14 Because the Glasgow lease arrangement is agreed between the parties there is some variability in return over the useable life of the buildings and their available uses which are governed by the District Plan. The Tribunal considered it was likely to have more impact when there is a marked change in re-zoning under the District Plan of the Rongotai land adjacent to the airport and the reuse of buildings by the airport itself.15
11 Judge J A Smith (Chair), E F Gordon (Member), and K G Stevenson (Acting Member).
12 For the 2007 rating year, objections were initially lodged against 30 titles that were subject to a QV valuation, but the majority of these objections were withdrawn or settled.
13 The 2007 decision, above n 1.
14 The Tribunal referred in particular to the period of transition under the District Scheme.
15 The 2007 decision, above n 1, at [67] and [68].
[14] The Tribunal found that “a prudent and a willing but not anxious seller and buyer” would recognise that Glasgow leases were an impediment and thus impaired the owner’s estate or interest.16 The Tribunal found that s 21(1)(b) of the RVA did not prevent any constraints created by the leases from being taken into account in appropriate cases. It therefore deducted the capital and land value of the relevant properties by five per cent for the impact of the Glasgow lease on the owner’s estate, as at the valuation date, during the transitional zone change in the District Plan. The Tribunal concluded that the land value of 102 Tirangi Road was $1,966,000 and 22 Kingsford Smith Street was $1,900,000.
[15] On 2 August 2019, Rongotai appealed the 2007 Tribunal decision to the High Court. On 20 and 21 August 2019, 2468 and NZCFC, respectively, lodged cross- appeals against the 2007 Decision.
[16] Although not a party in the Tribunal’s hearings, the Valuer-General was granted leave to intervene in the 2007 appeal hearing. He wished to be heard on the Tribunal’s application of s 21(1)(b) of the RVA, which he says was in error. Mr Higbee for the Council appeared to advise the Court that the Council abides this Court’s decision.
[17] Bunnings Ltd (Bunnings) was not an objector in the 2007 revaluation but was joined to this 2007 appeal as an interested party because of its interest in the s 21 RVA issue and its application to its 2012, 2015 and 2018 objections.
Approach on appeal
[18] Under s 26(1) of the Land Valuation Proceedings Act 1948 (LVPA), Tribunal decisions may be appealed to the High Court. Such appeals are by way of rehearing and the test is that articulated in Austin, Nichols & Co Inc v Stichting Lodestar:17
[5] The appeal court may or may not find the reasoning of the tribunal persuasive in its own terms. The tribunal may have had a particular advantage (such as technical expertise or the opportunity to assess the credibility of witnesses, where such assessment is important). In such a case the appeal court may rightly hesitate to conclude that findings of fact or fact and degree are wrong. It may take the view that it has no basis for rejecting the reasoning
16 At [62].
17 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [16] (footnotes omitted).
of the tribunal appealed from and that its decision should stand. But the extent of the consideration an appeal court exercising a general power of appeal gives to the decision appealed from is a matter for its judgment. An appeal court makes no error in approach simply because it pays little explicit attention to the reasons of the court or tribunal appealed from, if it comes to a different reasoned result. On general appeal, the appeal court has the responsibility of arriving at its own assessment of the merits of the case.
Thus, if the appellate court’s opinion is different from the Tribunal’s decision appealed from, then the decision under appeal is wrong in the only sense that matters, even if it was a conclusion on which minds might reasonably differ.18
Statutory framework for land valuation for rating purposes
The relevant legislation
[19] There are two statutes which have particular relevance to the issues in these appeals. They are the Local Government (Rating Act) 2002 (LGRA) and the RVA.
[20] The RVA prescribes the functions and powers of the Valuer-General19 and, as its long title suggests, it generally restates the law relating to the valuation of land for rating purposes.
[21] The LGRA on the other hand, provides local authorities with the powers to set, assess and collect rates. It specifies the basis on which rates may be set by local authorities, the procedure for setting rates and specifies who is liable to pay rates.
[22] All land is rateable unless a statute provides that it is non-rateable.20 Rates are assessed in respect of a “rating unit”21 and the ratepayer for a rating unit is liable to pay the rates that are due on the unit.22 It is necessary, therefore, to identify the relevant rating unit, the ratepayer for that rating unit and, where the rates are assessed by reference to rateable value, the rateable value of the rating unit.
18 At [16].
19 The Valuer-General is an independent statutory officer who regulates the rating valuation system in accordance with the RVA.
20 Local Government (Rating) Act 2002, s 7.
21 Section 43.
22 Section 12.
[23] For leasehold estates recorded in a certificate of title under s 12 of the Land Transfer Act 2017, leasehold records are excluded from the definition of “record of title” in s 5A of the RVA. They are not a separate rating unit over and above the freehold title.
[24] The “ratepayer” for a rating unit is the owner of the rating unit, or the lessee of the rating unit if certain criteria is met.23 There cannot be more than one ratepayer in respect of a rating unit.24 Importantly, regardless of whether the lessee or the owner of a rating unit is the ratepayer, there is no difference in the calculation of the valuation of the rating unit and the “land value”.
District valuation rolls
[25] Each territorial authority must prepare and maintain a district valuation roll and that must contain the information in respect of each rating unit required by the rating valuation rules.25 Each territorial authority must revise its district valuation roll at intervals no greater than three years by revaluing every rating unit to ensure the roll represents values current as at the date of revaluation.26 Those revaluations must comply with the rules made by the Valuer-General.27
[26] Sections 14 and 16 of the RVA require that any change in the valuation of a rating unit or any new valuation of a rating unit must preserve uniformity with existing roll values of comparable parcels of land.28 This statutory requirement reinforces that like parcels of land are to be valued on a like basis to ensure equity and consistency.
23 Section 11(1)(b): The lease must be i) registered under s 91 of the Land Transfer Act; ii) for a term (including renewals) of not less than 10 years); and iii) provides that the lessee must be entered in the rating information database and the district valuation role as the ratepayer.
24 A person other than the ratepayer may become liable for the rates where the ratepayer defaults in payment. LGRA, ss 12(2), 61 and 62. Or, it is an agreement between the parties to the lease that the lessee will be the ratepayer.
25 Rating Valuations Act, ss 7(1) and 7(2).
26 Section 9(1).
27 Section 9(2).
28 Sections 14(2)(a) and 16(3)(a).
[27] For the purposes of the RVA and the LGRA, the “rateable value” of land can either be the annual value of the land, the capital value of the land, or the land value of the land.29 Land value is defined in s 2 of the RVA as follows:
land value, in relation to any land, and subject to sections 20 and 21, means the sum that the owner’s estate or interest in the land, if unencumbered by any mortgage or other charge, might be expected to realise at the time of valuation if—
(a)offered for sale on such reasonable terms and conditions as a bona fide seller might be expected to impose; and
(b)no improvements had been made on the land
[28] The Tribunal’s findings on the valuation of the subject properties arose from the objections to the Council’s general revaluation of land and a valuer’s review undertaken by QV.
Applicable principles on rating valuations
[29] The previous approach to valuations under the Valuation of Land Act 1951 was canvassed by the Court of Appeal in Valuer-General v Mangatu Inc, where the Court crystallised the three crucial features of the statutory scheme.30
[30] First, the subject of the valuation is “the owner’s estate or interest” in the land.31 It is not a valuation of the “pure fee simple” free from any legal restrictions that in fact apply to the land, as it is a different inquiry.32
[31] Second, the valuation is made on the statutory premise that the owner will sell its estate or interest in the land, so practical difficulties in actual sales of obtaining agreement from individual owners and of obtaining the necessary quorum and agreement to sell as with Māori incorporations and trusts are not taken into account in the hypothetical valuation process.
29 Local Government (Ratings) Act, s 13(3).
30 Valuer-General v Mangatu Inc [1997] 3 NZLR 641 (CA).
31 At 649.
32 At 649.
[32] Third, the land value is the sum which the owner’s estate might be expected to realise if offered for sale on such reasonable terms as a bona fide seller might be expected to impose. The Court reinforced the well-known principle that the value is what a willing but not anxious seller would sell for and what a willing but not anxious buyer would be prepared to pay for the property.33
[33] In reinforcing that the owner’s interest that must be valued is the freehold interest, the question that then follows is whether there are any legal constraints on the use to which the land may be put, and whether those constraints would continue to apply to the land following a hypothetical sale. If there are legal constraints, the determination of land value must take them into account. This is the issue which the Tribunal dealt with in its 2007 decision, which is canvassed below.
[34] In Valuer-General v Addington Raceway Ltd, the Land Valuation Court articulated the principles applicable to the assessment of land value and how unimproved values are to be fixed. Those principles are still applicable and are as follows:34
(a)The land must be taken as bare and unimproved at the relevant date and as if no improvements had been made upon it.
(b)The unimproved value must be calculated as if held by a single owner and free from any lease or encumbrance.
(c)The use to which the land is put is immaterial.
(d)Subdivisional potential must be included.
(e)Town planning restrictions and the possibility of their removal must be taken into account.
33 At 649.
34 Valuer-General v Addington Raceway Ltd [1969] NZLR 327 (LVC), at 329–330.
(f)The land must be valued as if free from restrictions which do not bind the purchaser such as restrictive covenants in a lease.
The valuation approach
[35] Valuers assessing valuations for rating purposes are assisted by the LINZ Rating Revaluations Handbook (the Handbook), which includes examples of relevant market evidence that the Tribunal is also required to consider. The examples are designed to show that proposed values reflect prevailing market conditions and include the following:35
(a)confirmed sales;
(b)unconfirmed sales;
(c)rental evidence;
(d)asking prices, from real estate listings;
(e)commentary by valuation firms on changes in value levels;
(f)real estate commentary, for example days to sell, number of properties on the market and vacancy rates; and
(g)commentary on topics, such as pedestrian counts from Property Information NZ.
Sales comparison approach
[36] In each of the hearings under appeal, the Tribunal received expert evidence from registered valuers, who adopted the “sales comparison” approach to the valuation assessment in all appeals by agreement.
[37] The sales comparison approach is one of four basic valuation approaches.36 In Urban Valuation in New Zealand, the authoritative text on valuation in New Zealand, author RL Jefferies says that in the sales comparison approach:37
35 Toitū te whenua | Land Information New Zealand Rating Revaluations Handbook: LINZG30700
(31 March 2011) at 28.
36 The other three are the replacement approach, the investment approach and the development project approach.
37 Rodney L Jefferies Urban Valuation in New Zealand — Vol 1 (2nd ed, Land Institute of Valuers, Wellington, 1991) at 6-2.
… the valuer either by direct judgment or employing various techniques and levels of sophistication, interprets the evidence of past and current market sales transactions of comparable properties in terms of the characteristics of the subject property being valued, to derive an indicated market value at the effective date.
[38]He describes the approach as consisting of five basic steps. They are:38
1. Sales evidence and other data – information is collected, such as the physical attributes of the properties sold, and verified as to accuracy and their bona fides.
2. The most comparable sales are selected – of sufficient quantity to form a distinguishable market pattern.
3. The sales are analysed by some means – using units of comparison (such as per square metre or per hectare) or other advanced statistical techniques.
4. Evidence from the comparable sales is compared to the subject property – by means of an appropriate unit of comparison or other comparison technique “with adjustments for differences.”
5. The value of the subject property is then estimated – by the application of the appropriate comparison technique, to which the valuer then applies his or her professional experience and judgment in assessing whether this makes good sense and gives an adequate interpretation of the available market evidence.
[39] This is further described in our mathematical calculation judgment,39 and applied in all four appeal decisions.40
[40] The example provided in the Jefferies textbook involves one property of a single storeyed block of rental flats. Because there are numerous subject properties here, the sales comparison approach was adapted by the expert valuers and the Tribunal. The adaptation and methodology applied can be summarised as follows:
(a)They selected an exemplar or modal site, either actual or notional, for the location of the subject properties.
38 At 6-2 and 6-3.
39 Rongotai Investments Ltd v Land Valuation Tribunal [2022] NZHC 1664 [Mathematical calculation issue].
40 Rongotai Investments Ltd v Land Valuation Tribunal [2022] NZHC 1665 [2007 Rating Valuation Appeal]; Rongotai Investments Ltd v Land Valuation Tribunal [2022] NZHC 1666 [2012 Rating Valuation Appeal]; Rongotai Investments Ltd v Land Valuation Tribunal [2022] NZHC 1667 [2015 Rating Valuation Appeal]; and Rongotai Investments Ltd v Land Valuation Tribunal [2022] NZHC 1668 [2018 Rating Valuation Appeal].
(b)They selected comparable sales of properties which were as close as possible to the exemplar or modal site.
(c)They made adjustments to each comparable sale, where it differed in comparison to the modal site. For example, adjustments for location, zoning, physical characteristics and time.
(d)They then reconciled the comparable adjusted rates, by weighting the best comparable to determine and adopt a modal rate for the modal site.
(e)They then applied the modal rate to each of the subject properties to determine their land values. The modal rate is normally adjusted to reflect any variation where a subject lot differs to the modal site. For example, if a subject lot has a dual frontage, the modal rate would be adjusted upwards by an appropriate percentage to reflect that added feature of that particular subject lot.
[41] In making their selection of the comparable property sales by price, settlement date and physical features of the property, like location, zoning, shape and size, the valuers referred to their selection as a “basket” of comparable sales or comparables. The sales information relating to those comparable properties must derive from transactions that conform with the Handbook and the International Valuation Standards, which require that properties included in the basket of comparable properties should:41
(a)be an arm’s length transaction;
(b)have no special terms or circumstances that might affect price, such as concessions granted or elements of value available only to a specific purchaser; and
(c)have had proper and appropriate marketing.
[42] Once the “basket” is selected, the valuer then makes adjustments to the comparator sale prices to account for material differences between those properties
41 International Valuation Standards Council International Valuation Standards 2017 at [30].
and the subject properties, and to account for any market changes since the sale itself. Adjustments on those accounts may be positive or negative.
Appeal grounds
[43] Although there were many grounds of appeal and cross-appeal from NZCFC, 2468 and the Airport, at the appeal hearing before us, the parties refined their appeal grounds. We summarise these into four principal grounds of appeal, namely, whether the Tribunal erred:
(a)in making a deduction for the leasehold interest in the subject properties contrary to s 21(1)(b) and failing to consider s 21(1)(a) of the RVA (Valuer-General and Rongotai appeals);
(b)in being wrongly influenced by the zone changes in the District Plan (the lessees’ parties appeal);
(c)in finding that the transitional period of the District Plan made the impediment of the leases real and meaningful (Rongotai appeal); and
(d)in omitting the leasehold sale comparisons in its valuation assessment (Rongotai appeal).
First issue: the application of s 21 of the Rating Valuations Act
[44] All parties to this appeal addressed the application of s 21 of the RVA to the Glasgow leases over the subject properties as the principal legal issue in this appeal. This reflects the Tribunal’s focus in its decision, that s 21(1)(b) did not preclude Glasgow leases being taken into account as a constraint and therefore subject to a deduction in value.
[45] Both the Valuer-General and Rongotai raised the same challenges in relation to the Tribunal’s application of s 21 of the RVA. They contend that the Tribunal erred in:
(a)failing to have regard to s 21(1)(a); and
(b)finding that the Glasgow leases should be taken into account contrary to s 21(1)(b).
[46]It is helpful first to set s 21 of the RVA in full:
21 Value of land subject to lease
(1)For the purpose of determining under this Act the capital value or land value or annual value of a rating unit that is subject to a lease,—
(a)regard is to be had to the desirability for rating purposes of preserving uniformity with contemporaneous roll values of comparable parcels of land; and
(b)any lease provisions or circumstances particular to the property concerned that do not reflect the prevailing market conditions at the date of valuation are to be disregarded.
(2)This section applies for the purposes of determining valuations for the purposes of this Act and the Local Government (Rating) Act 2002 only, and is not intended to alter the definitions of the terms capital value and land value in the case of valuations made other than for rating purposes under any other Act or document.
The Tribunal’s s 21 reasoning
[47] The critical question that the Tribunal faced is whether s 21(1)(b) of the RVA prevents any adjustment for the Glasgow leases on the subject properties. In interpreting s 21(1)(b), the Tribunal found that particular lease provisions which reflect market conditions as at the date of valuation must be taken into account. The Tribunal noted that the Glasgow lease conditions of these subject leases were common to the Rongotai group and were typical of similar provisions throughout New Zealand.42 The Tribunal reasoned that aside from the general terms, periods of renewal or rental calculation, timing or procedures, “the lease payment calculation fixing payment quantum to a percentage of the rating value”43 did not represent the market rental at the time, was unusual and could lead to distortion. The Tribunal understood that s 21(1)(b) was separately intended to address that type of condition.
[48] In so finding, the Tribunal acknowledged the difficulty as to whether the “prevailing market” in s 21(1)(b) was intended to be “the local market” or “a wider
42 The 2007 decision, above n 1, at [81].
43 At [81].
district, regional or national market”.44 The Tribunal concluded that the particular terms as to the lease return do not reflect the prevailing market conditions in Wellington and further, that “they do not reflect regional or national market conditions”.45 Having considered that the restriction in s 21(1)(b) did not apply to these subject leases, the Tribunal found that the lease restricted the owner’s ability to use the land as the owner wished. The Tribunal said:46
[83] … It is the separation from occupation and decisions as to use and construction which affect value in this case, not the particular terms of the lease.
[84] This is not precluded by s 21(1)(b) anymore than other constraints such as those in Mangatu and Ngāti Whakaue. It is the owner's estate on interest which is limited. Some of the bundle of rights of ownership have been dispersed to the lessee including perpetual possession and occupation (subject to renewal) and also as to the use and construction over the site. We conclude these can affect value in transitional areas. Section 21(1)(b) does not prevent this being taken into account.
[49] On that basis, the Tribunal then concluded that the 1998 legislative changes to the RVA did not overcome the effect of Valuer-General v Radford and Co Ltd in full.47 We look at the legislative changes and their impact on Radford later in this judgment. The Tribunal considered it must take into account the impact on the owner’s estate or interest. It then held that if leases were to be irrelevant the section could have said so.48
Parties’ positions
[50] Both Rongotai and the Valuer-General submit that the Tribunal’s conclusion is inconsistent with the text of s 21, particularly when considered in light of its clear and express purpose. They also submit that it is inconsistent with the appellate authority in Rotorua District Council v Ngāti Whakaue Education Endowment Trust Board.49 The reason for the Valuer-General’s intervention is to challenge the Tribunal’s finding that s 21 “did not overcome the effect of Radford in full”.50 Both the Valuer-General
44 At [82].
45 At [82].
46 At [83]–[84] (footnotes omitted).
47 At [85], citing Valuer-General v Radford & Co Ltd [1993] 3 NZLR 721 (HC) [Radford].
48 At [85].
49 Rotorua District Council v Ngāti Whakaue Education Endowment Trust Board [2018] NZCA 143, [2018] NZAR 951.
50 The 2007 decision, above n 1, at [85].
and Rongotai submit that the Tribunal wrongly applied s 21(1)(a) of the RVA and erred by taking into account the leasehold interest in reducing the freehold land values of the two subject properties.
[51] Although the lessee parties, 2468, NZCFC and the Airport (joined as a party to the 2007 appeal), support the reasoning of the Tribunal with regard to its application of s 21 of the RVA, they submit that the five per cent deduction for the lease constraints was too low. Although Bunnings was not an objector or a party to the 2007 appeal, it also supports the Tribunal’s interpretation of s 21.51
[52] We disagree with the Tribunal’s conclusion. We set out our reasons under the following four headings.
(i)Has s 21 “overcome the effect of Radford in full”?
(ii)Was s 21(1)(a) relevant to the Tribunal’s findings?
(iii)What is the meaning of “prevailing market conditions” in s 21(1)(b)?
(iv)Should any deduction for Glasgow leases have been made?
Has s 21 overcome the effect of Radford in full?
[53] Radford 52 involved the valuation of an inner-city Wellington block of land with a shopping complex. Radford was the owner of the block of land and had granted leases for the retail shops. Radford objected to the valuation on the district valuation roll, where the capital value and the land value of Radford’s property were given the same value. Radford argued that the value on the district valuation roll should be reduced by an amount representing the burden of the leases.
[54] This argument succeeded both before the Land Valuation Tribunal and High Court on appeal. The High Court upheld the finding of the Land Valuation Tribunal,
51 Bunnings challenges the Tribunal’s 2012 decision in respect of its finding on the application of s 21 of the RVA to those 2012 revaluations.
52 Radford, above n 47.
that the land value should be reduced to reflect the burden of the leases, with the Court concluding that the reduction should be the estimated cost of obtaining a surrender of the leases:53
… what was required to be done was to value the owner’s interest, that is to say the freehold interest effected, as it was, by the existence of the leases. It was not a question of valuing the leases but valuing the fee simple and the effect of the leases on that having regard to the redevelopment purpose. In those circumstances, the principle adopted that it was, in effect, the cost of obtaining surrender and freeing the land for redevelopment …
[55] The High Court in Radford was influenced by the Land Valuation Court’s decision of Findlay v Valuer-General,54 which concerned the application of s 45 of the Valuation of Land Act 1951 (now repealed). Section 45 permitted any estate or interest in land to be separately entered on the district valuation roll and valued accordingly. We set out the relevant provision below:
45. (1) Where land is subject to a lease or in any other case where there are more interests therein and more owners than one, the united capital values, values of improvements, and unimproved values respectively of the interests of all the owners shall not be estimated at less than the capital value, values of improvements, and unimproved value of the land would be estimated [as] if held by a single owner in fee simple and free from any lease or encumbrance, anything to the contrary in this Act notwithstanding.
[56] The property owner in Findlay was the owner of a house property divided into two tenanted flats. The owner argued that the capital value of the property should be assessed at market value, as if sold as a tenanted property. The Land Valuation Court rejected her argument, interpreting s 45 to mean that land must be assessed with the full value of the unencumbered fee simple, unless the owner can show that she or he has divested themselves of a leasehold or other interest, which is capable of separate valuation.55 Because the property owner conceded that the tenancies on which she based her objections were not interests in land and had no assessable value, her objection failed.
53 At 729.
54 Findlay v Valuer-General [1954] NZLR 76 (HC).
55 At 81.
[57]The Court agreed with the observation of the Land Valuation Committee that:56
… it would be inequitable if owners of properties in which they themselves were residing should be asked to bear a substantially higher proportion of rates than absentee landlords, merely because, being themselves occupiers, they could notionally give vacant possession of their properties in the event of a hypothetical sale, and so in theory secure higher prices.
[58] In Radford, although noting that s 45 had been repealed and that there was divergent authority finding that a leasehold interest should not be taken into account, the High Court found that Findlay was still applicable and the repeal of s 45 did not change that. Greig J said:57
I think Archer J [in Findlay’s case] was correct in his view on the matter and I believe that the repeal of s 45 does not change that. The Act in all other respects remains the same and there are still the sections which I have referred to which, at least implicitly, acknowledge and recognise the need to take into account the leasehold interest.
[59] We accept that there is a critical difference in the treatment of leases in assessing the capital value of a property between the decision in Findlay and the decision in Radford, as the Valuer-General submits. In Findlay, the Court held that the lessees’ interests must be capable of separate assessment from the land and be separately rated. In all other respects, the value of land subject to a lease should be determined without regard to that lease. In Radford, however, the Court considered that the impact of a lease ought to be taken into account in determining the value of the land, regardless of whether the lessees’ interests were recorded on the roll and separately valued for rating purposes.
[60] The issue arose again in Diffey v Valuer-General.58 This case concerned the valuation of land that the Tribunal observed had been leased on very favourable terms to the lessor. The Tribunal followed Radford. The Tribunal held that there was no difference between taking into account the burden of the lease or its benefit and upheld the landowner’s objection that the rating valuation was too low. Because the rent was higher than the prevailing market rates, the Tribunal found this should result in an increase in valuation to account for the market rental for the remaining lease term. The
56 At 80.
57 Radford, above n 47, at 729.
58 Diffey v Valuer-General LVP 4/94, 8 May 1996 (LVT).
Tribunal emphasised Greig J’s view that the benefit or detriment of the leases should be taken into account:59
A bona fide seller offering for sale his freehold estate subject to these leases will realise or expect [to realise] a sum, which takes into account the benefit or detriment of these leases.
The purpose of the RVA
[61] The RVA was promulgated and came into force on 1 July 1998, with the effect of reforming and restating the law relating to land valuation. Of particular importance is the Explanatory Note to the Rating Valuations Bill, which stated that cl 21 of the Bill (now s 21 of the RVA) “was intended to overcome the results of the decision of the High Court in Valuer-General v Radford & Co Ltd … [and] the Wellington Land Valuation Tribunal in Diffey v Valuer-General”. The Explanatory Note specifically referred to both of these cases in describing the purpose of cl 21:60
In those cases, the Court and the Tribunal required the valuation of the properties concerned to have regard to, in one case, the need to buy tenants’ out of their leases and in the other, the fact that the land was subject to a long term lease that guaranteed rents that were well above market values. The clause now provides that… any unusual lease provisions or circumstances are to be disregarded where they are peculiar to the property concerned and do not normally pertain to properties of an otherwise similar nature.
[62] Following the enactment of the RVA, two decisions have considered the effect of s 21.
[63] The first is Westpark Marina Ltd v Auckland Council.61 This case concerned objections to the rateable value of twelve parcels of land situated in the Waitemata Harbour. In terms of s 21, it was argued that the absence of comparable parcels of marina land meant there were no relevant “prevailing market conditions” for the lease provisions to be assessed against (s 21(1)(b)), nor any need to preserve uniformity with contemporaneous roll values (s 21(1)(a)) and accordingly the valuation should reflect the lease conditions. The Tribunal rejected this argument, finding that s 21 prevented the leases from being taken into account. On appeal, the High Court traversed the
59 At 5.
60 Rating Valuations Bill 1998 (113-1) (explanatory note) at iv.
61 Westpark Marina Ltd v Auckland Council [2012] NZHC 623, [2012] NZAR 619.
decisions of Radford, Findlay and Diffey,62 overturned the Tribunal’s findings, and held that s 21 did not require the leases over the unique marina land to be ignored.63 Ultimately, the Court found that s 21 was “something of a red herring” because the leases in question did not make a difference to the appropriate valuation of the marina land.64
[64] The second is the Court of Appeal’s decision in Rotorua District Council v Ngāti Whakaue Education Endowment Trust Board.65 There, the subject land was inalienable land owned by the Ngāti Whakaue Trust, by virtue of the Reserves and Other Lands Disposal Act 1995. The land was leased on perpetually renewable terms.
Discussion
[65] In finding that it must take into account the impact of leases on the owner’s estate or interest, the Tribunal reasoned that if leases were to be irrelevant, s 21 could have said so. In the same vein, the Tribunal considered that if standard provisions of leases were to be irrelevant to any valuation, the wording of s 21(1)(b) could have been changed. It was on that basis, that the Tribunal concluded that the changes to the RVA in 1998 did not overcome the effect of Radford in full.
[66] The Tribunal also relied on the fact that constraints were upheld in Ngāti Whakaue and Mangatu.66 This too was flawed in our view. The constraints in each of Ngāti Whakaue and Mangatu were imposed by statute. Both the High Court and the Court of Appeal in Ngāti Whakaue acknowledged this distinction, for example, when finding that s 21(1)(b) was not intended to nullify the cases relating to statutorily inalienable land. In Mangatu, the Court of Appeal held that the significant constraints on any sale of Māori freehold land under the Te Ture Whenua Māori Act 1993 had to be taken into account in determining land value. The reliance on Mangatu in any case is perplexing, given leasehold interests were not in issue in that case. Ultimately, the Tribunal found that the constraints on Rongotai’s ability to enter into possession and
62 At [33]–[40].
63 At [43].
64 At [49].
65 Rotorua District Council v Ngāti Whakaue Education Endowment Trust Board, above n 49.
66 The 2007 decision, above n 1, at [84].
change the use of the land are the same constraints that were at issue in Radford and, as in Radford, arise as a result of the particular lease.
[67] The current provision in s 10 of the Legislation Act 2019 makes it clear that the purposive approach to statutory interpretation should be used. The purposive approach is described in simple terms:
(1)The meaning of legislation must be ascertained from its text and in the light of its purpose and its context.
[68] The Legislation Act ensures that the approach applies “whether or not the legislation’s purpose is stated in the legislation.”67 In this case, the purpose of s 21 was made clear in the explanatory note of the Rating Valuations Bill 1998. The express purpose was to nullify and overcome the decisions of the High Court in Radford and Diffey.
[69] We accept the submission of the Valuer-General that the explanatory note emphasised that the terms “capital value” and “land value” are to be subject to s 21. The statute must be interpreted with the express purpose in mind. We uphold the Valuer-General’s submission that the correct approach under s 21 of the RVA to determine land valuation subject to a lease does not involve an enquiry into the terms of the particular lease or whether those particular lease terms have a positive or a negative effect on the value. Applying the purposive approach therefore, s 21 was enacted to overcome the results of both Radford and Diffey, as was expressly explained on the introduction of the Rating Valuations Bill. Section 21, therefore, applies only for rating purposes, not for any “purpose behind the roll valuations” as the Tribunal found in Diffey.68
[70] We note the High Court in Radford felt constrained to apply the legislation, as it then was, to take into account lease provisions, but did so in the absence of any legislative restraint. In Westpark Marina Ltd v Auckland Council,69 the critical finding was that marina land is unique and there was not a “prevailing market” to be
67 Legislation Act 2019, s 10(2). See also Ross Carter (ed) Burrows and Carter Statute Law in New Zealand (6th ed, LexisNexis, Wellington, 2021) at 286–301.
68 Diffey v Valuer-General, above n 58, at 2.
69 Westpark Marina Ltd v Auckland Council, above n 61.
considered. If one did, it must consist of other leases over other marina land. The lease terms over the marina land, therefore, were in fact reflective of the prevailing market and s 21 of the RVA did not operate to prevent the leases being taken into account for rating valuation purpose. Ngāti Whakaue was decided under the RVA and is distinguishable, because the constraints on the inalienability of land was imposed by statute. We distinguish Ngāti Whakaue accordingly.
[71] We consider that the Tribunal has erred in making a distinction between occupation, and the use and potential construction of the land, relying on the authority of Radford, which the Tribunal has attempted to preserve in part. In doing so, the Tribunal has acted contrary to the express purpose of the enactment of s 21 of the RVA, which was to nullify the effects of Radford and Diffey.
Was s 21(1)(a) relevant to the Tribunal’s findings?
[72] In reaching its findings, the Tribunal did not refer at all to s 21(1)(a). Section 21(1)(a) requires that regard must be had to the desirability for rating purposes of preserving uniformity with values of comparable parcels of land.
[73] As noted above, the Court in Findlay emphasised there must be an equitable basis for rates assessments and land valuations conducted for that purpose. The Court noted that it would be inequitable for two identical parcels of land to be given different rating valuations, because one was owner-occupied and the other was leased to a third party.70
[74] The Valuer-General submits that the above observation illustrates the critical difference between the statutory exercise of valuing land for rating purposes and a determination of the true “market value” of the land. The purpose of rating valuations, he submits, is to achieve an equitable rating system as between ratepayers and so excludes certain factors from the valuer’s consideration, despite the fact that they may be taken into account in determining the true market value. The valuation regime for rating purposes is not intended to result in such differences and the Valuer-General submits this is the principle reflected in s 21(1)(a) of the RVA. The Explanatory Note
70 Findlay, above n 54, at 80.
to the Rating Valuations Bill specifically referred to the desirability for rating purposes of preserving uniformity with contemporaneous roll values of comparable parcels of land. It also emphasised that s 21 was to apply for the purpose of determining valuations for rating purposes only.
[75] We accept the Valuer-General’s submission that s 21(1)(a) is an expression of the policy of rating valuations, that the equitable valuation objective is served by ensuring consistency among parcels of land, unaffected by the particular leasehold arrangements from time to time. We consider that s 21(1)(a) should be read together with paragraph (b), informing the latter’s interpretation. Such an approach supports an expansive interpretation of paragraph (b), as the Court of Appeal adopted in Ngāti Whakaue, when it reinforced that the valuer should disregard any lease provisions particular to the property concerned, or any circumstances particular to the property arising by reason of its lease status.
[76] We find that the Tribunal erred in omitting s 21(1)(a) from its consideration. As a result of that omission, the Tribunal went on to consider the lessee’s interest and occupation of the property compared with the use and construction which affected the value of the subject properties. This is contrary to the purpose of the Act and the enactment of s 21, that the consideration of the need to buy tenants out of leases and land subject to long term leases was expressly restricted by the enactment of s 21.
[77] We also find that the Tribunal erred by failing to consider the effect of inconsistency. This was illustrated by the example of two identical neighbouring parcels of land having different land values, where one had a lease and the other was owner-occupied. In failing to do so, the Tribunal overlooked the express purpose of s 21, which was to avoid inconsistencies arising.
[78] The Tribunal’s consideration of the leaseholder’s occupation and registered interest in the properties was not relevant to its consideration of the application of s 21 of the RVA.
What is the meaning of “prevailing market conditions” in s 21(1)(b)?
[79] The Tribunal expressed its difficulty over whether the market referred to in s 21(1)(b) is intended to be the local market or a wider district, regional or national market. It concluded that the particular terms of the Glasgow leases did not reflect the prevailing market conditions in Wellington at the relevant time and did not reflect regional or national market conditions.71 The Tribunal’s justification for its conclusion is that it considered that the linking of a return to a fixed percentage that did not represent the market rental at the time was unusual and could lead to distortion.72 On that basis, the Tribunal found that s 21(1)(b) was deliberately intended to address that type of condition. We disagree. Section 21(1)(b) is not concerned with particular lease provisions or circumstances. In fact, s 21(1)(b) states the opposite. If the conditions are particular and non-prevailing, they are to be ignored.
[80] Although the term “prevailing market conditions” is not defined in the RVA, the Explanatory Note to the Bill made the intent behind s 21 clear. Any unusual lease provisions or circumstances are to be disregarded where they are peculiar to the property concerned and do not normally pertain to properties of an otherwise similar nature. That explanation, of course, relates to s 21(1)(b), which is the secondary part of s 21. It must be read together with s 21(1)(a) to preserve uniformity with contemporaneous roll values of comparable parcels of land. The “prevailing market conditions” therefore, exclude lease provisions or circumstances particular to a property and which are not prevalent in properties of an otherwise similar nature.
[81] In the area of Rongotai under consideration, the properties subject to Glasgow leases sit alongside properties which are freehold land. In our view, those parcels of land, in Kingsford Smith Street and McGregor Street, surround and are adjacent to the Rongotai leasehold properties. On a map of the relevant property sites, (annexed as
A) the Bunnings site from 28–48 Kingsford Smith Street, the property abutting McGregor Street, being 55–61 Kingsford Smith Street, 142 Lyall Parade and 138 Tirangi Road, together with 13 Kingsford Smith Street are all freehold properties. From the configuration on the map, they are within the same area of the comparable
71 The 2007 decision, at [79].
72 At [82].
parcels of land stretching from Tirangi Road to Lyall Parade. Thus, in the immediate vicinity of the subject properties and on Rongotai Road there is a mix of both freehold and leasehold properties.
[82] As to whether the term “market” is intended to be the local market or a wider district as the Tribunal queried, we consider that the approach of the valuers in assessing comparable property sales in the Wellington areas, such as Rongotai Road, the surrounding Miramar/Rongotai area, Rintoul Street, Adelaide Road, Glover Street and Kaiwharawhara Road is indicative of the wider Wellington market and is correct.
[83] In our view, the Glasgow leases on the Rongotai properties do not reflect the prevailing market, which even as the Tribunal itself concluded, includes industrial, commercial and retail elements.73 We are satisfied, therefore, that the Glasgow lease provisions do not reflect prevailing market conditions and are to be disregarded, as being peculiar to the properties concerned, and do not pertain to properties of an otherwise similar nature.
Should any deduction have been made?
[84] In summary, the Tribunal has erred by taking into account an adjustment for the Glasgow leases over the subject Rongotai properties contrary to ss 21(1)(a) and (b) for the above three reasons, namely: the Tribunal failed to take into account s 21(1)(a) to preserve uniformity with values of comparable parcels of land; it took into account the particular terms of the Glasgow leases contrary to s 21(1)(b); and followed in part Radford, an authority expressly nullified by s 21 of the RVA.
[85] It follows from the above, that no deduction should have been made to allow for Glasgow leases. There is no evidence that we could find to support the Tribunal’s deduction of five per cent. In finding that there should be a deduction, the Tribunal focussed on the owner being unable to undertake a renovation of the site by removing the building or reconfiguring its operation. The Tribunal also found that the lessees retain control over the use of the site. The Tribunal noted that the buildings had not yet reached the end of their economic life and there appeared to have been little
73 The 2007 decision, above n 1, at [15]–[26].
incentive on the lessee to undertake reconfiguration at their own expense.74 On that basis, the Tribunal made a negative adjustment for the leases. In our view, the Glasgow lease is irrelevant to a valuation of the unencumbered freehold land value.
[86] Mr Blucher acknowledged that there is a benefit deriving from certainty of long-term lease tenure with an accrual of an increase of capital value of the underlying land. Those are benefits that accrue to the lessor as the landowner, when the cost of development must be met by the lessee. Ms Watson also acknowledged the advantage of a Glasgow lessor not having responsibility for property development and maintenance. She acknowledged the guaranteed rental stream for a very limited cost of collection and described it as a passive investment: “you don’t have to do a lot to get it”. The Tribunal has overlooked the potential benefit or value to the landowner of these Glasgow leases with their 21 year renewals in perpetuity.
[87] It follows that we also reject the lessees’ cross-appeal that a greater deduction should have been made because the difference between the lessors’ interest and the fee simple interest was in the range of 25–30 per cent, as it is again contrary to the purpose of s 21 of the RVA. The valuation is of the owner/lessor’s freehold interest. The value of the lessees’ interest is to be disregarded under s 21 RVA.
Conclusion
[88] We consider the Tribunal erred in its application of s 21 of the RVA and, in doing so, erred by making a five per cent reduction in value for the Glasgow leasehold interests over the subject properties.
Second issue: Was the Tribunal wrongly influenced by the zone changes in the District Plan?
[89] The second issue concerns whether the Tribunal was wrongly influenced by the change in the District Plan. We record that this issue did not absorb much of the hearing time. The main focus was on the Tribunal’s application of s 21 of the RVA and whether the leasehold sales should have been included as comparators. However, the Tribunal’s view of the change in the District Plan was one of its considerations in
74 At [60]–[61].
reaching its valuation decision and was influential in its finding on Glasgow leases being a real impediment to the owner’s interests. The latter point is dealt with under issue three.
[90] Although the Tribunal framed the issue as being whether or not the constraints introduced by a Glasgow lease affected the estate of a freehold owner,75 it took into account a number of factors. They were the background development of the Rongotai industrial area, the 2004 District Plan change and the transitional zone of mixed use of industrial and the potential for a wider range of activities such as retail and associated film industry activities in the Rongotai area. From that background, the Tribunal assessed the prevailing market conditions and the areas identified for comparative purposes.76
[91] From the Tribunal’s summary,77 the Rongotai area was originally part of a reclamation for Wellington Airport, with much of the land, including the surrounding area, becoming vested in the airport. The Council, in divesting its interests in the airport, created the Rongotai industrial area. Some of the area, on the east side of Tirangi Road, appears to have originally been part of the Wellington Airport land. The west side appears to have been created largely as Glasgow leases, with several of the properties being freehold. Of relevance to this proceeding, the block bounded by Tirangi Road, Kingsford Smith Street and McGregor Street is largely comprised of properties subject to Glasgow leases.
[92] The right of the owner in relation to control of construction or other activities on the site relates to consent not being unreasonably refused to a lessee request. After the initial lease period, the terms of the perpetual lease, as described by the Tribunal, provide “payment for ground lease will be on the basis of a five per cent return on the land value established by rating valuation”.78
[93] Most of the lessees holding perpetual leases have either constructed a building and subleased it, or otherwise constructed a building and occupied it themselves for
75 The 2007 decision, above n 1, at [10].
76 At [27].
77 At [15]–[19].
78 At [17].
some period of time. The Tribunal understood that, as at 2007, most of the sections in the block had buildings on them, many of them with close to or at 100 per cent coverage of the site. The Tribunal understood that the area had typically been used for industrial purposes, including storage and warehousing activities, with some level of manufacture.79
[94] The block of land owned by the airport to the east of Tirangi Road was used prior to 2004 partly as airport areas for aeroclubs and parking spaces for planes and partly as a large warehousing facility for Woolworths.80
The 2004 District Plan Change
[95] Prior to 2004, the Rongotai area was predominantly industrial zoning, used for activities such as storage, warehousing and some level of manufacture. In 2004, a change to the District Plan introduced a zoning change allowing for more mixed-use activity, including commercial and retail activity, in the Rongotai area. These changes primarily arose from Wellington airport’s bulk retail park. The airport altered the former Woolworths building to a retail outlet initially with the Warehouse and others in occupation. In 2005–2006, a new building was built to the rear of the site in Tirangi Road, which housed a number of “big-box retailers” such as Kathmandu, Dick Smith and some others. The Tribunal records that by 2007 “it was clear that this retail precinct was successful and was an attractant to Wellington residents because of the large format retail”.81 The Tribunal acknowledged that the retail activity would have increased the traffic level and general activity in this area.82
The Transitional Zone
[96] The Tribunal was satisfied that as at September 2007, the rating revaluation date, the new mixed zoning gave the potential for a wider range of activities in the Rongotai area. From the evidence before the Tribunal, it was satisfied that retailers
79 At [18].
80 At [19].
81 At [22].
82 At [22].
such as Foodstuffs and Countdown were looking for appropriate sites in the Wellington area, particularly the Newtown, Kilbirnie and Rongotai areas.83
[97] The Tribunal specifically noted that the evidence of all of the valuers was agreed that as at September 2007, Countdown was looking for a site in the Rongotai area and Foodstuffs and looked to establish a site in Kilbirnie for Pak’n Save. The Tribunal recorded that Foodstuffs was seeking to avoid Countdown setting up close to it and accordingly purchased two leasehold interests in the Rongotai block in a relatively central position.84
[98] The Tribunal records that at the same time, Bunnings acquired the Glasgow lease interests in properties to the west of Kingsford Smith Street.85 Some of the Glasgow leases were subject to subleases and at 1 September 2007, Bunnings had not entered into occupation of any of the particular sites.
[99] The Tribunal noted there was wider interest in the area by Peter Jackson’s film making entities, particularly in the Miramar area but there was no evidence to suggest there was any direct interest in the subject properties in the Rongotai area. Nevertheless, the activities in the local market were displaced by the associated film industry activities.86
Prevailing market conditions
[100] The Tribunal heard extensive valuation evidence, with expert valuers called by each party.87 The respective valuations and the adopted valuation methodology is canvassed below.88 For present purposes, the valuers’ joint statement from their experts’ conference on the property market and general trends in Rongotai is relevant to resolving the issues regarding the District Plan change. Drawing on the joint statement of the experts, the Tribunal notes that there was a significant impact in the Rongotai locality being a change of use from industrial to retail/suburban commercial.
83 At [23].
84 At [24].
85 At [25].
86 At [26].
87 For Rongotai, Mr Horsley, Mr Butchers and Mr Chung; for 2468, Mr Wall and Mr Spencer (a factual witness); for NZCFC, Mr Blucher; and for QV, Ms Watson.
88 See the fourth issue below.
As the Tribunal records, the valuers “generally agreed that the market peaked in late 2007 to early 2008” and there were no signs that the market had peaked as at 1 September 2007.89 The Tribunal was left in no doubt that the market had undergone significant increase in value in the period to 1 September 2007.90
[101] In recording that the zoning for both of the subject properties under objection, the Tribunal noted that the sites were zoned “suburban centre” under the Council’s District Plan, with the objectives of that zone being to encourage most activities, providing that they comply with the conditions identified for specific suburban centres.91
[102] The Tribunal records that all valuers agreed that the zoning of this land would allow a wide range of industrial/commercial activity appropriate to the location.92 We note further that in their joint statement, the valuers all agreed that Rongotai as a specific locality was experiencing greater growth between 2004–2007 than the rest of the market owing to the evolving change of use occurring in the area (industrial to retail). They also agreed that growth rates in the eastern suburbs area are more relevant than those from the boarder Wellington region. The Tribunal noted that the valuers also agreed that a uniform growth rate that is applied for a long period of say two to three years may not accurately reflect the rates for the shorter intervening periods.93
Highest and best use
[103] The Tribunal accepted the view of Rongotai’s valuers’ that the buildings on the subject properties were at the end of their economic life and that the highest and best use for the subject sites were their redevelopment land value. The Tribunal agreed with the lessees’ valuers, Mr Wall and Mr Blucher, that in light of this, the land value would equate to the capital value.94 The Tribunal said further, that in each case only moderate incomes are likely to be achieved from the existing improvements that have potential to contribute to demolition costs.95 The Tribunal noted that this is reflected
89 The 2007 decision, above n 1, at [34].
90 At [27].
91 At [35]–[39].
92 At [38].
93 At [40].
94 At [44].
95 At [44].
in the agreement reached among the experts that there is no allowance for improvements not withstanding that there is still buildings on the site.96
The parties’ positions
[104] Rongotai accepts the Tribunal’s assessment of the prevailing market conditions as at 1 September 2007 and that the properties fell within a “transitional zone” in that there was potential for a wider range of activities in the Rongotai area. Counsel referred to supermarkets and film making activities as examples. Rongotai agrees with the Tribunal’s view that market conditions at the time were positive but challenge the ultimate value for the properties reached by the Tribunal.
[105] The lessees, however, raised a number of grounds on appeal challenging the Tribunal’s finding that there was a change of use from industrial to retail/suburban commercial and a move to retail and large format retail at the subject sites. They contest that redevelopment for retail was the highest and best use, among other aspects of the Tribunal’s view of the expert evidence. At the hearing, Mr Sullivan as Counsel for the lessees concentrated on their main issue, being the Tribunal’s focus “entirely on a change to retail use and how that influenced the valuation”. Although accepting that the District Plan change was relevant in 2007, the lessees submit it was wrong that the QV valuer, Ms Watson and the Rongotai valuers treated the planning issues as if there was no difference between Rongotai and Newtown, Kilbirnie and Tawa.
Discussion
[106] Turning then to the lessees’ main contention, under this issue, we consider whether the Tribunal’s decision predominantly focussed on a change to retail use and whether that influenced the valuation.
[107] The focus of Mr Sullivan’s submission was that the Tribunal took the “highest and best use” to an extreme in its 2007 decision, when he says there was no foundation for a finding that intensive retail use was the basis upon which 102 Tirangi Road and 22 Kingsford Smith Street properties should be valued. He submits this was a
96 At [45].
traditional industrial area, which was transitioning into a mixed-use area. This was accepted by QV and by other valuers. The potential for retail had been factored into the valuations of Mr Blucher and Mr Wall for the lessee parties and Ms Watson for QV applied a premium in respect of her valuation. Mr Sullivan contends that the Tribunal should have considered the matter conservatively, “back out a few adjustments that Ms Watson had made with information she gathered years after the sales comparator” and reduced the valuations of $950/m2 and $1,100/m2. The lessees’ submit the rating valuation should be reduced to a modal value of no greater than $800/m2.
[108] The lessees submit that the Tribunal overlooked the evidence proving that Rongotai should not be valued as an established retail area in 2007. The basis for the Tribunal’s error, in the lessees’ contention, is that although Ms Watson referred in her evidence to “retail potential”, QV valued the properties as at 2007 as if it was a retail and commercial area, not just a bulk retail area. From the lessees’ position, the Tribunal was entitled to recognise that the airport retail park was a significant development to large format retail which increased traffic to the area, but the Tribunal erred in finding supermarkets were looking to establish a site in the central block of the Rongotai area and the influences of Bunnings and Peter Jackson. The lessees allege there was no evidence to demonstrate knowledge in the market about Bunnings, which began confidentially buying leasehold properties from March 2007 or that a supermarket was ever seeking to establish in the Rongotai area. Similarly, the lessees’ say that any activity by Mr Jackson could not be used to justify a transition to retail.
[109] The High Court in Hall v Chief Executive of Land Information New Zealand, explained further that what is being assessed is the price the property would sell for on the open market, under the normal conditions applicable in the market for the type and location of the property being valued.97 The Court affirmed that the hypothetical purchaser is assumed to be purchasing the property for its “highest and best use”, resulting in the highest value of the property being valued.98 The Court defines “best use” as a probable use, given what is physically possible, appropriately justifiable,
97 Hall v Chief Executive of Land Information New Zealand [2014] NZAR 749 (HC) at [31].
98 At [36].
legally permissible and financially feasible, quoting from the International Valuation Standards adopted by the New Zealand Institute of Valuers.99
[110] We are unable to uphold the lessees’ submissions. The Tribunal placed in context for the purposes of the hearing, that the 2007 revaluation took place at a time of anticipated change within the Rongotai area towards a greater mix of commercial/retail activity within a strong period of development, just prior to the global financial crisis which took effect in New Zealand in 2008.100 As at September 2007, the Tribunal was satisfied “that the new mixed zoning had brought attention to the potential for a wider range of activities in the Rongotai area”.101 The Tribunal, in preferring the analysis of freehold sales evidence by the Rongotai valuers and Ms Watson, considered that not enough weight was placed on “the commercial potential” by the lessees’ valuers when making their adjustments and completing their assessments.102
[111] In Valuer-General v Tepene Table Lands Ltd, the Valuation Court held that farmland with substantial potential for subdivision along a coastline should be valued not merely by reference to the use to which it was being put, but also by reference to the uses to which it was reasonably capable of being put in the future.103 Zoning in that case was no more than a useful aid but the possibility of obtaining subdivision consent at a foreseeable future time was a relevant factor in considering the potential of the property.104
[112] The Court described potential use as one which has not yet occurred but could occur in the foreseeable future.105 The use can be a mere possibility but must be a real one before it can be said to give rise to potential value. It is not necessary that the use will definitely occur. Thus, potential use means a use which is a realistic possibility in the foreseeable future. Although Mr McEntegart for Bunnings submits that this case does not assist for rating valuations every three years, we are satisfied that the Tribunal
99 At [36].
100 At [3].
101 At [23].
102 At [52].
103 Valuer-General v Tepene Table Lands Ltd [1993] 2 NZLR 336 (HC).
104 At 342, citing Tawharanui Farm Ltd v Auckland Regional Authority [1976] 2 NZLR 230 (HC).
105 At 344.
did not err by assessing the revaluation at a time of “anticipated change within this area towards a greater mix of commercial/retail activity”.106
[113] In our view, the Tribunal in tracing the development of growth in the Rongotai area was careful to avoid the benefit of hindsight in undertaking a valuation of these properties.107 It was in no doubt that the market had undergone significant increase in value by 1 September 2007 because of the type of activity areas that had been rezoned to mixed use.108 Such a finding was open to the Tribunal. We reject, therefore, the lessees’ submission that the Tribunal’s decision valued Rongotai as “an established retail area” as Mr Sullivan submits.
[114] We also reject the submission that the Bunnings’ acquisition of leasehold properties was confidential and should not be used. That evidence was indicative of the potential use. Further, the sale was known about more generally, as Mr Wall acknowledged in evidence. The acquisition of properties for aggregation was indicative of the intended potential future use.
[115] Similarly, Foodstuffs’ purchase of two leasehold titles in the central block, boarded by Kingsford Smith Street and Tirangi Road, was evidence of changing use. Mr Wall in cross-examination agreed that Foodstuffs anticipated Countdown “would acquire sites” and he accepted that Foodstuffs were successful in blocking Countdown but qualified it by saying Countdown had not turned up.
[116] The Tribunal also heard evidence from the valuers, Messrs Horsley and Blucher, that Peter Jackson’s interests were dominant in Miramar, that purchases in Miramar affected prices in Rongotai, and that because Wellington is very confined, with not much vacant land of the size required for supermarkets or Bunnings, those operations are forced to aggregate smaller lots.
[117] From the evidence before the Tribunal and the Tribunal’s decision, we consider the Tribunal did not err by taking into account the transitional zoning and the changes in the District Plan. The valuers had all given evidence on the peak of the property
106 The 2007 decision, above n 1, at [3].
107 At [4].
108 At [27].
market and the general trends in Rongotai, including changing uses and greater growth in the Rongotai area. The Tribunal was careful to restrict its assessment to the change of use from industrial to retail/suburban commercial109 and the potential for a wider range of activities in the Rongotai area including commercial potential.110 The Tribunal accepted from the valuation evidence that the highest and best use of these sites is redevelopment and thus the land value would equate to the capital value. We do not accept that the Tribunal valued the subject properties in Rongotai as “an established retail area”.
[118] We turn then to consider whether the Tribunal erred in finding that the inability of the owner to enter into possession of change the land use upon major rezoning because a Glasgow lease prevents the highest and best use of the properties was in error.
Third issue: Did the Tribunal err in finding that the transitional period of the District Plan made the impediment of the leases real and meaningful?
[119] The Tribunal concluded that as at the date of valuation in 2007, the owner’s ability to implement the change of use under the District Plan from industrial to retail was impeded by the Glasgow leases. Although the change of use was not new and there was a period of transition, the Tribunal considered there was uncertainty as to the effect of the leases on land values. The properties were valued at their highest and best use but the Tribunal found that as at 2007, the impediment of the Glasgow lease was “real and meaningful.”111
[120] The experts assessed the sites on the basis of highest and best use with a clear movement towards retail rather than industrial activity.112 In saying that, certain impediments were considered to constrain this move, such as the age and condition of the buildings, the configuration of the buildings, poor parking and the control of the lessee over the sites by virtue of the Glasgow lease.
109 At [84].
110 At [23] and [52].
111 At [67].
112 At [55].
[121] The Tribunal considered these impediments would be recognised by any prudent and willing but not anxious seller and buyer, meaning there would be a transitional period before the highest and best use of the land, such as retail could or would be realised.
[122] We disagree with the Tribunal’s finding that the impediments are real and meaningful. We have found the Tribunal erred in its application of s 21(1)(b). In addition, the Tribunal has erred in its view of the effects of the zoning transition period. Its focus was on the owner’s ability to implement changes from industrial to retail, but it is not the owner-lessor’s ability to develop or construct buildings. Under the Glasgow lease, it is the lessee who has control of the site.
[123] If a lessee wishes to make a change in use from industrial to retail, such change is not prohibited but is a discretionary use requiring resource consent. It is a matter of logic, in our view, that the change in the use of the Rongotai land from industrial to retail will inevitably result in an increase in value.113 The valuers accepted that this would be the case, subject to the prevailing market conditions.
[124] Although the control of the land is with the lessee, the transitional period does not prohibit the lessee from moving to such a change. The lease does not prohibit the use of the land, barring any restrictive use clause in the lease. It is the District Plan which controls the use. We do not uphold the Tribunal’s finding that the Glasgow leases are a real and meaningful impediment.
Fourth issue: Did the Tribunal err in omitting the leasehold sale comparisons in its valuation assessment?
[125] Rongotai submits that the Tribunal erred by failing to consider the comparable sales of leasehold interests, which were in the immediate vicinity of the subject properties. The lessees support the Tribunal’s approach in omitting the leasehold sales.
113 Although resource consent may be required, the cost of obtaining that consent will likely be offset by the increase in use of the land from industrial to retail and a consequential increase in value.
[126] At their experts’ conference, the valuers agreed on a list of 10 comparable freehold sales. Not all of those sales were used by each valuer respectively but of the 10 sales, the best comparable was considered to be 232 Rongotai Road.114
[127] However, there was a paucity of freehold sales within the Rongotai area, with the majority of comparable freehold sales analysed some distance from the subject properties. Rongotai submits that there were only three proximate freehold sales in the Tribunal’s “basket” of comparable sales: 7 McGregor Street, 232 Rongotai Road and (in Kilbirnie) 50 Tacy Street. All of the Tribunal’s other freehold sales were either in Miramar, Newtown, or as far away as Ngauranga and Kaiwharawhara. Mr Allan for Rongotai submits that seven of the 10 freehold sales were significantly adjusted for location.
[128] Given the lack of proximate comparable freehold sales, Rongotai submits that the following 12 leasehold sales, which were in the same streets as the subject properties, should have been included. For completeness, the freehold and leasehold sales properties are as follows:
Freehold Sales 1 147 – 159 Adelaide Road 2 182 Adelaide Road (corner John and Hanson Streets) 3 15 Glover St 4 53 – 55 Kaiwharawhara Road 5 7 McGregor Street 6 30 Mirimar Avenue 7 140 Park Road 8 108 Rintoul Street 9 232 Rongotai Road 10 59 Tacy Street Leasehold Sales 1 5 Kingsford Smith Street 2 24 Kingsford Smith Street 3 25 Kingsford Smith Street & 108 Tirangi Road 4 28 Kingsford Smith Street
114 232 Rongotai Street sold pre and post the September 2007 revaluation date. It sold in December 2006 for $615,000 and again in May 2008 for $927,000 indicating respective $/m2 rates of
$820/m2 and $1236/m2, the average of the two being $1028/m2. This sale is in relative close proximity to the subject properties although is much smaller in land area (750m2). The Tribunal noted it contained an older low stud building and was considered inferior with no immediate retail potential at valuation date: at [46].
5 29 Kingsford Smith Street & 120 Tirangi Road 6 32 Kingsford Smith Street 7 35 – 51 Kingsford Smith Street 8 36 – 46 Kingsford Smith Street & 52 - 54 Tirangi Road 9 47 Kingsford Smith Street 10 56 – 58 Kingsford Smith Street 11 114 - 118 Tirangi Road 12 126 Tirangi Road
[129] The lessees submit that Mr Chung’s leasehold analysis on behalf of Rongotai was inconsistent with his contemporaneous valuations. They say by calculation of a proxy freehold value by reference to his leasehold valuations of the Bunnings’ site differed wildly in range, but altering the inputs in his rental assessments and was correctly treated with caution by the Tribunal and was not need to determine underlying freehold value.
[130] The Tribunal excluded the analysis of leasehold sales and omitted them from its revaluation assessment. The Tribunal noted that Mr Chung, expert valuer for Rongotai, placed some emphasis on the inclusion of leasehold sales, which the Tribunal interpreted as his approach in the absence of proximate freehold evidence.115 However, the Tribunal agreed with Ms Watson’s views that “analysis of leasehold transactions is fraught with pitfalls due to the number of assumptions and inputs that are required”.116 The Tribunal noted the leasehold transactions and in particular the purchases by Bunnings but rejected them in favour of the freehold sales “as being comparable properties agreed at the expert conference and viewed by the Tribunal”.117
[131] We consider that the Tribunal’s approach was in error in three respects: it misconstrued Ms Watson’s evidence in its entirety; it overlooked that the experts jointly agreed that the Rongotai leasehold sales were part of the market and were relevant; and as a result the best comparable sales were not considered.
115 At [32] and [51].
116 At [51].
117 At [51].
Ms Watson’s evidence
[132] Ms Watson took into account freehold sales and leasehold sales. She gave evidence that attempting to analyse transactions to a hypothetical freehold equivalent rate is fraught with pitfalls due to the number of assumptions and inputs that are required. Noting that it is not a practice that she would place significant weight on, due to the fact that the lessee is not purchasing an interest in the land but purchasing the right to occupy the land in perpetuity, she was nevertheless of the view that it was a reasonable additional step to undertake in the Rongotai location, when the availability of freehold sales evidence was extremely limited. Ms Watson notes that the number of leasehold sales was a reasonable number.
[133] For that reason, Ms Watson did take them into account, setting out in two discrete tables the freehold transactions and the leasehold transactions from 2004 to 2007 when valuing the two subject properties.
[134] Ms Watson took into account nine leasehold sales (all in Rongotai), which are set out below in Mr Chung’s table under the next sub-issue heading. In her tabulated comparable sales information (table five) she notes that three historic comparables, namely 9–11 Tauhinu Street and 53 Kingsford Smith Street (sold in January 2004 and June 2004 respectively), have been included for reference purposes only given the significant time adjustment required to make them relevant. Ms Watson also included a number of non-eastern suburb sales including 147–159 Adelaide Road, Glover Street and Kaiwharawhara sales.
[135] Ms Watson’s belief, recorded in the joint statement of experts, is that leasehold sales are secondary but relevant and she has reflected hypothetical freehold equivalent analysis in her assessments. The Tribunal in reaching its decision to exclude leasehold sales overlooked the fact that Ms Watson believed they were relevant.
Experts’ agreement on leasehold sales
[136] In the joint statement of experts, the valuers agreed that the various leasehold sales in Rongotai were part of the market and had relevance. The statement acknowledges that three valuers, Mr Chung, Ms Watson and Mr Horsley, had
undertaken analyses to derive freehold land rates from the leasehold sales for comparative purposes. It further records that Mr Chung analysed 11 leasehold sales (between 2004 and 2007) and considers they are relevant, particularly for the 2007 land valuations, given the lack of freehold sales. The statement notes that there is only one Rongotai sale in 2006 and 232 Rongotai Road in 2007. Mr Horsley is recorded as noting that Bunnings demolished all improvements, so they had no value.
[137] The valuers agreed “that a freehold land rate should, in principle, be higher than a leasehold rate (all other things equal)”. The terms of the leases and current market conditions will affect the extent of this difference. Although only three of the valuers undertook a leasehold analysis to derive freehold land rates for comparator purposes, the Tribunal ignored the fact that the valuers agreed that the various leasehold sales in Rongotai were part of the market and were relevant.
Best comparable sales
[138] The valuers had agreed that the appropriate valuation methodology is the “comparable sales” approach. The valuers agreed further that the following comprised comparable sales:
(a)Freehold sales (bona fide) is the primary approach, preferably vacant or where the existing improvements are considered to add limited value to the land owing to scale, conditions, age, economic life is the best.
(b)Leasehold sales (all valuers considered them but in differing degrees).
(c)A hypothetical developments/feasibility approach was supported by two valuers. It was considered by one but not in evidence, two valuers did not use it, and one appeared to use it as rebuttal as a secondary approach due to the number of inputs and assumptions.
(d)An improved sales analysis to derive an underlying land value (one valuer used this to limited extent).
(e)An indexing approach was not required in the current circumstances and not used.
[139] In looking at the actual comparable sales data, the valuers agreed that separate “baskets of evidence” exist for the 2004 and 2007 valuations. The comparables for the 2007 valuations, which were not used by each valuer, included the 10 freehold sales at [128] above and Rongotai leasehold sales between 2005–2007. The joint statement noted that the comparables for 2007 valuations were not all used by each valuer.
[140] Mr Horsley, the valuer for Rongotai, included in his valuation nine leasehold interest transactions to reach a freehold equivalent land value over the period November 2004 to August 2007. He noted that the range was from $842/m2 up to
$1,814/m2. Deleting the lowest and highest sales, he focussed on a tighter band of between $1,181/m2 to $1,730/m2. From that, he adopted a rate of $1,090/m2 for 22 Kingsford Smith Street and $1,430/m2 including an allowance for the benefit of a corner, for 102–106 Tirangi Road. Included in the nine leasehold sales transaction was 24–26 Kingsford Smith Street, which was a freehold purchase by Rongotai and the lease and sale of leasehold to Bunnings.
[141] In the joint experts’ statement, the valuers agreed that either the transaction was not bona fide or the transaction should be treated with caution. All valuers noted the sale but placed limited or no weight on this transaction. Similarly, the valuers considered 140 Park Road should be treated with caution because of the “Jackson” influence as an adjoining/neighbour owner, which was the concern principally of Mr Blucher for the lessees. We note Park Road is not included in Mr Horsley’s comparative sale transaction list.
[142] The Tribunal did not reconcile the differences among the experts after hearing the evidence on including leasehold sales in the comparable sales basket, preferring instead to adopt Ms Watson’s sentiments that analysis of leasehold transactions is fraught with pitfalls due to the number of assumptions and inputs that are required. As noted, this overlooked the fact that Ms Watson had taken them into account, as had all the valuers, except Mr Wall.118 Having reviewed the evidence of the valuers, noting
118 Mr Wall was not in attendance at the experts’ conference. Mr Wall’s opinion was that sales of leasehold interests should be analysed, but if the result of that analysis is inconclusive or illogical, freehold land sales should take precedence. He found that in this case improved leasehold sales
the sales transactions and the impact of transitional zoning in this case, the Tribunal ultimately concluded that they were not convinced that Rongotai or the lessee parties had successfully challenged the values adopted by QV as at September 2007. On that basis, the Tribunal adopted as its starting point the 2007 roll valuation assessments for 102 Tirangi Road at $2,070,000 and for 22 Kingsford Smith Street at $2,000,000. The Tribunal recorded that the Member valuers on the Tribunal were hampered in establishing a clear adjustment by lack of comparative evidence.
[143] The Tribunal then made a deduction of five per cent for the constraint on the owner’s estate by the presence of the Glasgow leases, which we have determined was contrary to s 21 of the RVA.
[144] Following the expert conference, Mr Blucher, the valuer for the lessees agreed to conduct an analysis of leasehold sales to derive a freehold land rate and provided his analysis for the hearing before the Tribunal. Mr Sullivan submits that Mr Blucher’s conclusion shows that there is a significant range of valuers and rates from $433 to
$1,363 which he submits is “well beyond an acceptable margin”.
[145] It appears from his brief of evidence, that Mr Blucher deposed that the valuation and analysis of leasehold sales is “fraught with difficulty and often leads to disputes”. The complexity, extent of variables and assumptions made significantly reduces the reliability of that analysis”. He concludes by stating that “rarely does the sum of the leasehold interests equate to the fee simple interest” and in many cases, he believes market evidence strongly supports the view that “the sum of the interests in many cases generally exceeds the freehold value and from time to time may be less than the freehold value”. Both Mr Blucher and in his submissions, Mr Sullivan, rely on the International Valuation Guidance Note No 2 (guideline), valuation of lease interest, where at [1.4] it states that:119
In no circumstances is it considered proper to value different property interests in the same piece of real estate separately and then to aggregate their values as in indication of the real estates total value. Lease contracts establish unique legal estates that are different from fee simple, or freehold, ownership.
analysis was unreliable in Rongotai and relied on freehold sales as providing “sufficient market evidence” to correctly assess the rating value of the subject property.
119 International Valuation Guidance Note number two, valuation of lease interest, revised 2007.
[146] We note that the sales comparison approach including leasehold comparable properties is a different concept than that suggested by the guideline. However, this is not an exercise of aggregating leasehold and freehold interests but rather a comparison of leasehold transactions, with appropriate adjustments. They are a secondary consideration, to obtain the relevant freehold value in the absence of adequate freehold comparable sales. We consider the reliance on the above guidelines here is misplaced.
Did the Tribunal err in omitting the leasehold sales comparisons?
[147] All the Valuers considered both freehold and leasehold sales. A summary of the valuers’ analyses is as follows:
(a)Mr Horsley has summarised leasehold sales in Rongotai between 2004 to 2007 to derive a freehold equivalent value (FEV). The leasehold sales he analysed produced an average rate of $1,456/m2. After considering both freehold and leasehold sales, Mr Horsley adopted a rate for the Kingsford Smith Street and Tirangi Road properties of
$1,090/m2 to $1,430/m2 respectively.
(b)Ms Watson considered a similar number of freehold and leasehold sales. She analysed rates for the freehold sales which ranged between
$640/m2 to $1,814/m2 for Kingsford Smith Street and $853/m2 to
$1,503/m2 for Tirangi Road. Her analysed FEV rates for the leasehold sales produced an average of $1,083/m2 for Kingsford Smith Street and an average of $1,341/m2 for Tirangi Road. Ms Watson adopted the rate of $943/m2 for the Kingsford Smith Street property and $1,100/m2 for the Tirangi Road property.
(c)Mr Chung considered both freehold and leasehold sales. His analysed rates for the freehold sales (excluding 24–26 Kingsford Smith Street) ranged between $900/m2 to $1,000/m2. His analysed rates for the leasehold sales (excluding 24–26 Kingsford Smith Street) produced an average of $1,050/m2. All of his analysed leasehold sales are good comparables in regard to sale date and of course location.
(d)Mr Butchers considered both freehold and leasehold sales of which he considers both useful. He notes freehold sales are limited. His analysed rates for the leasehold sales produced an average of $719/m2. However if you remove the outliers, small and large lots and 24–26 Kingsford Smith Street, his analysed sales produce an average of $782/m2. The end rates (after considering both freehold and leasehold sales) adopted for the Kingsford Smith Street and Tirangi Road properties were
$1,070/m2 to $1, 177/m2 respectively.
(e)Mr Blucher notes there is a paucity of freehold land sales. He used a number of different approaches including freehold sales in other areas, the Rongotai leasehold sales and the residual land value approach, together with a ‘right to occupy’ approach. The ‘right to occupy’ approach is essentially the FEV approach. Mr Blucher says this is a proxy to determine FEV where there are fewer market variables to consider. His freehold sale approach produces an average of $751/m2. His residual land value approach produces an average of $727/m2. His leasehold sale/right to occupy approach (excluding 24–26 Kingsford Smith Street) produces an average of $779/m2.
[148] If the outlier property at 24–26 Kingsford Smith Street is removed and sales of property similar in size to the subject lots and the 2007 sales, the two best comparables are the Bunnings’ sales which have a range of $797/m2 to $1,121/m2 or an average of $959/m2. The above valuers’ rates can be summarised:
Valuer 22 Kingsford Smith Street 102 Tirangi Road I Horsley $1,090/m2 $,1430/m2 Ms Watson $953/m2 $1,100/m2 K Butchers $1,070/m2 $1,177/m2 Valuer Leasehold Sales Freehold Sales R Chung $900/m2 to $1,200/m2 $900/m2 to $1,000/m2 P Blucher $879/m2 $751/m2
[149] The Tribunal set out the respective valuations (rounded to the nearest ,000) and that appears as follows:120
Valuer 102 Tirangi Road 22 Kingsford Smith Street Value
$/m2
Value
$/m2
QV
$2,070,000
$1,100/m2
$2,000,000
$953/m2
I Horsley
$2,445,300
$1,300/m2
$2,285,000
$1,090/m2
P Butchers
$2,210,000
$1,177/m2
$2,240,000
$1,070/m2
R Chung
$2,250,000
$1,200/m2
$2,200,000
$1,050/m2
Ms Watson
$2,100,000
$1,155/m2
$2,000,000
$950/m2
D Wall
$1,408,000
$748/m2
Not shown
Not shown
K Blucher
Not shown
Not shown
$1,575,000
$750/m2
[150] In presenting this table, we are conscious that Mr Horsley’s rate per square metre for 102 Tirangi Road was $1,430, not $1,300/m2 as is recorded in the 2007 Tribunal decision.
Analysis of comparable transactions
[151] We have given careful consideration to the sales comparison approach to valuation, the details of the sale transactions both leasehold and freehold, and reviewed the evidence of the valuers in respect of their use of leasehold sales as comparators.
[152] In the International Valuation Standards, the sales comparison approach, being the method that the expert valuers in this case agreed was appropriate, “utilises information on transactions involving assets that are the same or similar to the subject asset to arrive at an indication of value.”121 The standards provide that if few recent transactions have occurred:122
the valuer may consider the prices of identical or similar assets that are listed or offered for sale, provided the relevance of this information is clearly established, critically analysed and documented. This is sometimes referred to as the comparable listing method and should not be used as the sole
120 The 2007 decision, above n 1, at [29].
121 International Valuation Standards, above n 41, at [30.1].
122 At [30.3].
indication of value but can be appropriate for consideration together with other methods.
[153] Most importantly, the comparable sales method can use a variety of different comparable evidence also known as units of comparison, which form the basis of the comparison.123 For example:124
a few of the many common units of comparison used for real property interests include price per square foot (or per square meter), rent per square foot (or per square meter) and capitalisation rates … units of comparison used by participants can differ between asset classes and across industries and geographies.
[154] As already noted above, Mr Blucher adopted the right to occupy methodology, unlike the other valuers. We also record that Mr Blucher’s valuation excluded the Bunnings leasehold sale and the freehold sale of 24–26 Kingsford Smith Street to the Rongotai parties (RIL).
[155] Mr Sullivan was critical of Mr Chung’s analysis, submitting that it was flawed because it included such sales and that there was no basis for his challenge to Mr Blucher’s 60 per cent adjustment for the right to occupy.
[156] The Tribunal took into account the freehold properties, some of which were situated in Ngauranga Gorge, Kaiwharawhara Road, Tacy Street (near Cobham Drive), Adelaide Road and McGregor Street together with 232 Rongotai Road. We consider the comparative sales taken into account by the Tribunal125 are all some distance from the subject properties and the Tribunal did not factor in leasehold transactions, which were more relevant in terms of time, location and area.
[157] We consider the Tribunal erred, therefore, in failing to take into account the leasehold sales. Ms Watson’s evidence, on which the Tribunal relied, favoured leasehold sales being taken into account because of the paucity of freehold sales. However, she said they should be adjusted as they were secondary to the primary freehold transaction. Nevertheless, they were relevant.
123 At [30.4].
124 At [30.4].
125 The 2007 decision, above n 1, at [33].
[158] We summarise the evidence on leasehold and freehold comparator sales as follows:
(a)All valuers have considered leasehold sales with varying degrees of reliance.
(b)To establish the FEV from the leasehold sales the approach is the same but the key difference in the resulting rates from all valuers to Bluchers is the ‘multiplier’ used to convert the leasehold sale price to a freehold sale price or FEV. Mr Blucher mentions the percentage right to occupy can be as low as 10% to 40% and at times in excess of 50%. A Bunnings’ sale reflected a 61% percentage. Mr Blucher used 61% in his calculations. Had he adopted a more weighted average of 40% his leasehold sales would be higher. Mr Horsley, on the other hand, believed a proportion of freehold land value paid for the right of renewal, was between 10% to 40%. It would appear to be 40% in his analysis.
(c)The average of all the valuers’ leasehold sales analyses between their high and low figures is $719/m2 to $1,456/m2, with an average of
$1,011/m2.
(d)In the 2007 Tribunal decision, the valuers assessed values for both 102 Tirangi Road and 22 Kingsford Smith Street126 as:
The $/m2 rates for 102 Tirangi Road ranged from $748/m2 to
$1,300/m2. The average being $1,113/m2 (rounded) $1,100/m2.
(ii)The $/m2 rates for 22 Kingsford Smith Street ranged from
$750/m2 to $1,090/m2. The average being $977/m2 (rounded)
$980/m2.
126 At [29].
[159] After considering the range of freehold sale rates used by the Tribunal127 and also the leasehold sales used by all valuers, we find the following rates apply to the two properties:
Property Valuation
Date
Land Area Rate $/m2 Land Value
(rounded)
102 Tirangi Rd Sept 2007 1881 m2 $1,100/m2 $2,069,000 22 Kingsford Smith Street Sept 2007 2098 m2 $1,000/m2 $2,098,000
Conclusion
[160] The Tribunal erred in finding the Glasgow lease was a constraint on the owner’s estate and thereby making a five per cent deduction in the land value.
[161] The Tribunal did not err in taking into account the transitional zone changes under the District Plan, in assessing the potential future change of use from industrial to retail.
[162] The Tribunal erred in excluding comparable leasehold sales. We find the land values for 102 Tirangi Road and 22 Kingsford Smith Street is $2,069,000 and
$2,098,000 respectively.
Result
[163]The appeal is allowed.
[164]The 2007 decision of the Land Valuation Tribunal is set aside.
[165] The Tribunal erred in finding the Glasgow lease was a constraint on the owner’s estate and thereby making a five per cent deduction in land value.
[166]The Tribunal erred in excluding comparable leasehold sales.
127 At [29].
[167]The values of the two subject properties for the 2007 rating year are set out at
[159] of this judgment.
Costs
[168] The parties seek clarification on the ability of the Tribunal to award costs under the Rating Valuations Act 1998 (RVA). The Tribunal reserved the matter of costs in each of the 2007, 2012, 2015 and 2018 objections.128 The Tribunal noted that the extent to which the Tribunal can award costs on rating valuation cases is unclear, and suggested this question should be referred to the High Court for consideration on the appeals, before being remitted back to the Tribunal for arguments as to quantum.
[169] We have not heard full argument by Counsel on the cost jurisdiction in the Tribunal. We observe that the language of s 38(4) of the RVA is prescriptive and clear, providing a narrow ambit under which costs can be awarded. However, this is merely an observation. We consider that determination of this matter should await full argument.
[170] We have discussed the issue of costs generally and in this jurisdiction more fully in our 2012 appeal judgment.129 Under s 37A of the LVPA this Court may award costs on appeal. We indicated that this may be a case where costs lie where they fall. However, if any of the parties seek costs, Counsel are to file memoranda of no more than five pages as to whether they wish to be heard on the costs issue within 20 days of the date of this decision. Further directions will then follow.
……………………………………
Cull J and Member VM Winiata
128 Rongotai Investments Ltd v Wellington City Council [2010] NZLVT 009 at [15]. In both 2007 and 2012, the Tribunal invited Counsel to submit applications for costs. However, in both the 2015 decision and the 2018 decision, the Tribunal recognised costs under the RVA as “problematic” and sought to defer the issue of a costs award to this Court.
129 Rongotai Investments Ltd v Wellington City Council [2022] NZHC 1666 at [111]–[121].
Solicitors:
Morrison Kent, Wellington, for Rongotai Parties Simpson Grierson, Wellington, for Bunnings Ltd Crown Law Office, Wellington, for Valuer-General Solicitors for Other Lessees:
Lane Neave, Christchurch, for Wellington International Airport Ltd and 2468 Ltd PCW Law, Auckland, for NZ Cash Flow Control Ltd
Annexure A
Rongotai area map showing subject site area for all decisions
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