Saltburn Holdings Limited v Penrose Leasehold Limited

[2018] NZHC 1246

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-000374

[2018] NZHC 1246

IN THE MATTER

of an appeal under the Arbitration Act 1996

BETWEEN

SALTBURN HOLDINGS LIMITED
Applicant

AND

PENROSE LEASEHOLD LIMITED

Respondent

Hearing:

28 May 2018

Counsel:

DW Grove for Applicant

RB Stewart QC for Respondent

Judgment:

31 May 2018

JUDGMENT OF DOWNS J

This judgment was delivered by me on Thursday, 31 May 2018 at 11 am pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel:

Foy & Halse, Auckland.

Burton Partners, Auckland. RB Stewart QC, Auckland. DW Grove, Auckland.

SALTBURN HOLDINGS LTD v PENROSE LEASEHOLD LTD [2018] NZHC 1246 [31 May 2018]

The proposed appeal

[1]                 Saltburn Holdings Ltd (“Saltburn”) is the lessee of a “Glasgow lease”, a species of lease:

(a)With a 21-year term, renewable in perpetuity.

(b)For which rent is calculated fairly—“fair annual rent”—without reference to the value of improvements to the land.

(c)Involving a public auction for the leasehold if the lessee does not wish to renew the lease (at the expiry of the term) on the fair annual rent, but at which the lessee may also bid.

(d)Requiring payment by a new lessee of the value of improvements to the outgoing lessee (via the lessor).

[2]                 Saltburn does not wish to renew its lease with Penrose Leasehold Ltd (“Penrose”) on the fair annual rental of $55,000.1 So, there needs to be an auction.

[3]                 The proposed appeal concerns [1](c) and less directly, [1](d). To elaborate, “upset annual rent” must be calculated for the auction. If no one buys the lease at the auction at a rental equal to or above the upset annual rent; the land, its buildings and improvements revert absolutely to the lessor. And, the outgoing lessee receives no payment in relation to improvements.

[4]                 The   matter   went   to   arbitration.    The   Arbitrator,   the   Honourable    Sir Ian Barker QC, concluded upset annual rent was synonymous for the minimum fair annual rent the lessor was prepared to accept at auction.  In short, the reserve.  Sir Ian settled on a figure of $53,600, so a little less than the fair annual rent.

1      Rent is renewable every seven years. The previous rent was $45,500. Saltburn sublets or has sublet the premises for $90,000 per annum. Saltburn became the lessee on 4 September 1995. The lease expired on 3 September 2016.

[5]                 Saltburn contends the Arbitrator erred on a question of law. It considers the upset annual rent much too high, so there is a risk it may receive no payment as outgoing lessee. It seeks leave to appeal to this Court.

[6]                 A full Court of the Court of Appeal has emphasised the desirability of a “short judgment” in this context.2 This decision respects that exhortation. Background is discussed as necessary under each of the applicable considerations identified by that Court.3

Analysis

A question of law?

[7]                 An appeal against an arbitral award is permissible only if a question of law arises out of the award.4 The jurisdictional threshold is met: what is meant by the phrase “upset annual rent” is such a question. That is how Sir Ian approached the point. And, as the Supreme Court of Canada has observed, “questions of law are questions about what the correct legal test is”.5

Strength of challenge and nature of the point

[8]                 Saltburn contends hitherto orthodox approaches to valuation should not be used to assess upset annual rent; instead, a “very different valuation exercise [is] required”.

[9]                 Saltburn argues “subjective factors” enter the mix, which would necessarily produce a lower figure than that arrived at by Sir Ian. These include the obligation on a new lessee to pay for the value of improvements (in this case, $730,000); the “unattractive terms of the lease”; and other disadvantages applicable to the site.6

2      Gold & Resource Developments (New Zealand) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 at [59].

3      As established in Gold & Resource Developments, in turn directed at cl 5(2) of Schedule 2 of the Arbitration Act 1996, which provides: The High Court shall not grant leave under subclause (1)(c) unless it considers that, having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties.

4      Arbitration Act 1996, cl 5(1)(c) of Schedule 2.

5      Canada (Director of Investigation and Research) v Southam Inc [1997] 1 SCR 748 (SCC) at [35].

6      The site used to be rocky and steep. It was “largely levelled” by 1978, and so before Saltburn became lessee (in 1995).

Saltburn emphasises the exercise is to identify a reserve price for a Glasgow lease, a type of lease often unattractive to lessees.

[10]These arguments have little prospect of success.

[11]             First, as Sir Ian observed, the term “upset” is clearly used with reference to an auction, and hence natural usage supports the interpretation of a figure “below which the lessor will not sell”.

[12]             Second, the terms of the lease and related provisions support Sir Ian’s conclusion upset annual rent is synonymous with fair annual rent. Clause 18 of the lease provides the lease is granted under s 7(1)(g) of the Public Bodies Leases Act 1969 (the Act), and at the expiry of the 21-year term the lessee may either:

(a)Accept a renewal of the term in accordance with Schedule 1 to the Act, including determination of the fair annual rental under that schedule.

(b)Or, have a new lease offered for sale by auction in accordance with Schedule 2 to that Act.

[13]             Both options require exclusion of improvements in the calculation of rent. Clause 10 of Schedule 2 refers to the upset annual rent being “determined as aforesaid”. In context, the phrase must refer to cl 1 of the same schedule by which fair annual rent is determined, because that schedule contains no earlier reference to upset annual rent. Hence Sir Ian’s conclusion “there is no material difference between ‘upset rental’ and ‘fair annual rental’”.7

[14]             Third, as Sir Ian also observed, “Commercial common sense must apply”. It is inherently improbable a lessor would nominate a rental below the minimum acceptable to it, particularly when the upset rent must endure for at least a seven-year term.

7      Schedule 2 later refers to “upset annual ground rent”, which is clearly intended to be synonymous with “upset annual rent”; see cls 20 and 21.

[15]             Fourth, Sir Ian and Mr Peter Mahoney, the very experienced valuer appointed to assist Sir Ian, adopted valuation methodology identified in Cox v Public Trustee,8 and recently endorsed by the Supreme Court in Mandic v Cornwall Park Trust Board in the context of Glasgow leases.9

[16]             Fifth, Saltburn’s proposed methodology would introduce uncertainty to the law by requiring an unprecedented and sui generis approach. It would also require Courts to re-enter the arena of rent prescription when attendant principle is well known, and valuation methodology a matter of fact at arbitration.

[17]             Sixth, contrary to Saltburn’s submission, this is not a case in which it would necessarily suffer significant injustice if it received no payment for improvements in consequence of no new entrant at auction. Payment in this context has been described as “a limited possibility”,10 which in turn reflects the lessee does “not in fact own the improvements they have paid for”.11 All the lessee owns is “a term of years in the land and improvements”.12

[18]             Moreover, in Mandic v Cornwall Park Trust Board, the majority of the Supreme Court recognised “there may be no purchaser at the upset rental … [because] the upset rental may not meet the market”; “the rent fixing process was not intended to provide a fair rental formula for the existence and terms of the lease”.13

[19]             The point is also likely to be “one-off”.14 In his 1993 report to the Minister of Justice, Mr Anthony Lusk QC was not able to identify a single example of the auction process in 55 years.15 The parties found one—in 1949.16 The recent case of

8      Cox v Public Trustee [1918] NZLR 95.

9      Mandic v Cornwall Park Trust Board [2011] NZSC 135, [2012] 2 NZLR 194.

10     Anthony Lusk QC Ministerial Inquiry into Certain Perpetually Renewable Leases in Auckland

(1993) at 8.39.

11     At 13.21.

12     At 13.21 (emphasis added).

13     Mandic v Cornwall Park Trust Board, above n 9 at [79](a).

14     Gold & Resource Developments (New Zealand) Ltd v Doug Hood Ltd, above n 2, at [54](1).

15     Anthony Lusk QC Ministerial Inquiry into Certain Perpetually Renewable Leases in Auckland

(1993) at 12.12.

16     In re a lease, Tauranga Borough to Commercial Bank of Australia Ltd [1950] NZLR 154.

Cornwall Park Trust Board v Chen concerned the lessee’s liability for backdated upset rent; no purchaser emerged at auction.17

How the question arose before the Arbitrator

[20]             Saltburn contends the significance of the point emerged only during the process. That is in part correct; Sir Ian observed the parties were a “little vague as to the exact matter to be determined”. However, by the time of the arbitration hearing, assessment of upset rent was paramount. It follows this consideration cuts both ways.

The qualifications of the Arbitrator

[21]             Sir Ian is, of course, legally qualified. And well versed in this area. His decision is comprehensive.

[22]As observed, Mr Mahoney is a very experienced valuer.

The importance of the dispute to the parties and amount of money involved

[23]             The dispute is significant to Saltburn, largely because of what may happen at auction.

[24]             The rent increase causative of Saltburn’s decision not to renew the lease is modest: $9,500 per annum. But, if a new lessee does not buy the lease at auction, Saltburn will not receive $730,000. The former counts against leave; the latter supports it. That said, Saltburn does not have a right to the $730,000; see the observations at [17]–[18]. Overall, the mix provides qualified support for leave.

Whether the contract provides for the arbitral award to be final and binding

[25]             Clause 7 of Schedule 2 to the Act envisages the arbitration process as binding. This counts against leave.

17     Cornwall Park Trust Board v Chen [2014] NZHC 2465.

Conclusion

[26]             The proposed appeal involves a question of law. Most considerations tell against leave or are otherwise neutral, save for Saltburn’s interest in the appeal and amount at stake. But even these are qualified for the reasons expressed above. The case is likely a “one-off”; this appears to be the third auction of a Glasgow lease in 80 years. Significantly, there is little prospect of appellate reversal; Saltburn’s case is not strong. Overall, the mix is clear. Leave should not be granted.

[27]The application is dismissed.

Costs

[28]             There is no obvious reason why Penrose should not have costs. Agreement is encouraged. If this proves impossible, the parties may file and serve memoranda of not more than five pages:

(a)Saltburn by Thursday, 21 June 2018;

(b)Penrose by Thursday, 28 June 2018.

Postscript

[29]             Counsel for  Saltburn,  Mr  Grove,  is  a  director  of  that  company.  And,  Mr Grove’s father was a witness at the arbitration hearing. Penrose raised no issue about Saltburn’s representation with Sir Ian or me. I record as much for completeness only.

……………………………..

Downs J