Transform Minerals Ltd v Gordon Wright & Sons Ltd HC Auckland CIV 2010-409-1447

[2010] NZHC 2257

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2010-409-001447

BETWEEN  TRANSFORM MINERALS LIMITED Applicant

ANDGORDON WRIGHT & SONS LIMITED Respondent

Hearing:         29 October 2010

Counsel:         K Welsford and M T Thwaites for Applicant

B M Nathan for Respondent

Judgment:      14 December 2010

RESERVED JUDGMENT OF PANCKHURST J

Introduction

[1]      Bentonite is a type of clay.  It has a range of uses; including as a drilling mud in the oil industry, as a sealant in dam and pond lining systems, as a binder in stock foods and even as a component of skin care products.  Transform Minerals Limited mines bentonite in the Coalgate area, about 60 kilometres west of Christchurch.  Its mining area includes land which is leased from Gordon Wright & Sons Limited.

[2]      The lease was due for renewal in November 2009.  Transform did not give notice of its intention to take a 42 year renewal.   The lessor is opposed to the renewal.  The present application is pursuant to s264 of the Property Law Act 2007 (the Act) by which Transform seeks relief against the lessor’s refusal to enter into a

renewal.

TRANSFORM MINERALS LIMITED V GORDON WRIGHT & SONS LIMITED HC CHCH CIV-2010-409-

001447  14 December 2010

The history of the lease

[3]      The contractual arrangements which govern Transform’s mining rights are contained in a deed of licence and a memorandum of lease under the Land Transfer Act 1952.  The deed of licence was signed on 28 November 1967 between Gordon Wright and Canterbury Bentonite Limited.  Pursuant to its terms the company was granted an exclusive right to mine bentonite from the land, being an area of about

59 hectares contained in a number of titles.  The term of the licence was 42 years, with a right of renewal for a further such term should the lessee give written notice of its desire to renew at least three calendar months before expiration of the initial term.  Consideration for the licence comprised the payment of royalties calculated on the tonnes of bentonite processed by the company, with a minimum royalty payment in any one year of $200.

[4]      Other terms provided that the grantee could erect buildings and plant upon the land, have access as required for its mining operation and that:

after the completion of quarrying operations [the land would] be reinstated to its former condition as far as is reasonably practicable, the Grantee levelling the surface of the ground but without being bound to bring the same up to the level of the surrounding ground and the Grantee shall resoil and restore the surface to the extent originally existing and leave the same in a fit state for the conduct of agricultural and pastoral operations thereon as far as is reasonably practicable: (clause 5).

The licence reserved to the grantor, or his nominee, the right to carry out agricultural or pastoral farming on any parts of the land, and to fence the land for these purposes, provided this did not unreasonably interfere with the business of the grantee.

[5]      In August of the following year a memorandum of lease was also signed. Mr Darryl Wright, on behalf of the respondent, deposed that the lease was completed and registered at the request of the mortgagee “for legal reasons”.   Its terms mirror those contained in the licence, including that its term was for 42 years from 28

November 1967, with a right of renewal for a like term subject to the same notice requirement.

[6]      Subsequently Mr Gordon Wright incorporated the family company, Gordon Wright & Sons Limited.  Canterbury Bentonite Limited assigned the licence and the lease to OMYA New Zealand Limited, and later still this company assigned the mining rights to Transform.

[7]      In 2003 Gordon Wright & Sons Limited and OMYA were involved in an arbitration.  Their differences were resolved in a deed of settlement dated 14 April

2003.  In essence the settlement varied the licence arrangements in three respects:

(a)     the  royalty  rate  per  tonne  of  processed  bentonite  was  increased  to

$4.50, subject to a requirement for this figure to be increased in line with the consumer price index,

(b)the timing of the obligation upon the lessee to reinstate the land was redefined (a matter to which I will return shortly), and

(c)     the grantee agreed to “hold discussions with the Wrights” concerning which areas of the land were to be used for mining and to appoint a company representative to this intermediary role.

[8]      In  2007  Transform  took  an  assignment  of  the  licence  and  the  lease. Subsequently it was involved in hearings under the Resource Management Act 1991 in relation to a land use consent for its mining operation and also a consent to discharge contaminants (essentially dust) into the air.   It obtained both consents, subject  to  extensive  conditions;  and  in  relation  to  the  land  use  consent  such conditions were varied by the Environment Court in June 2009 following an appeal by one submitter.

[9]      Both the lease, and licence, were to expire on 28 November 2009.  Notice of

Transform’s  intention  to  renew  was  not  given  three  months  prior  to  then.    On

4 December 2009 the Wrights’ solicitors gave written notice that the lease would expire 20 working days from receipt of their letter.  The letter also confirmed that the Wrights would not grant a renewal and called upon Transform to reinstate the land and to effect repairs to any lessor’s improvements.

[10]     On 8 December Transform’s solicitors replied stating that the failure to give notice of its intention to renew was an oversight on the company’s part.  A renewal was requested and the letter noted that Transform “stands ready to make the annual mineral royalty payment” which was then overdue.

[11]     Despite  further  correspondence  between  the  parties,  the  Wrights  were unmoved and, on 8 April 2010, a notice pursuant to s263 of the Act was served confirming their refusal to renew the lease.   On 6 July 2010 Transform filed the present originating application seeking relief against the lessor’s refusal to enter into a renewal.

[12]     At the hearing of that application on 29 October the deponents of several affidavits filed in support, and in opposition, to the application were cross-examined. In particular, a number of expert witnesses were questioned concerning aspects of the opinion evidence which they had provided.

The power to grant relief and the required approach to its exercise

[13]     The statutory scheme is contained in several sections of the Act.  Section 261 defines when relief against a lessor’s refusal to enter into a renewal may be sought, and by whom.  Section 262 prescribes how relief is to be sought, and requires that this is done no later than three months after notice of the refusal is given.

[14]     The power to grant relief is contained in s264 which relevantly provides:

Relief court may grant on application

(1)On an application under section 261, the court may grant relief against the refusal of the lessor to extend or renew the lease, or enter into a new lease, or transfer or assign the reversion, as the case may be.

(2)In particular, the court may – (a)   do either of the following:

(i)order the lessor to extend or renew the lease or enter into a new lease with the lessee, mortgagee, or receiver; or

(ii)  ...

(b)   grant relief under paragraph (a)(i) or (ii) on any conditions (if any)  as  to  expenses,  damages,  compensation,  or  any  other relevant matters that the court thinks fit.

Subsections (3) and (4) are not relevant in this instance.

[15]     The predecessor to s264 was s120 of the Property Law Act 1952.  The power to grant relief was expressed in these terms:

(4)The court, having regard to all the circumstances of the case, may grant or refuse relief as it thinks fit, and in particular may decree, order, or adjudge –

(a)   that the lessor shall grant to the lessee a renewal of his lease ... ;

[16]     The leading case as to the required approach to the exercise of the power contained in the previous section was Vince Bevan Ltd v Findgard Nominees Ltd.[1]

[1] Vince Bevan Ltd v Findgard Nominees Ltd [1973] 2 NZLR 290 (CA).

At p 297-8 Turner P said:

I think that this section in the Property Law Act, enacted as a remedial measure, should be construed as conferring upon the Court a very wide jurisdiction to do equity in relieving against refusals by lessors to renew leases.   In my opinion it would stultify the intention of the Legislature to construe this section so strictly.   All its provisions seem to me to indicate that Parliament intended that it should be applied largely.

At p 299 McCarthy J noted that the section applied regardless of expiry of the lease, failure to give notice of renewal and even where the lessor, in the meantime, had granted an interest to another.  Against this background he observed:

The obvious final intention of the legislature was to place the court in a position  to  do  what  it  thinks  fit  in  accordance  with  the  justice  of  the particular application.

[17]     In Sibrad Co Ltd v Kanters,[2] Asher J had occasion to consider the new s264. He said at [11] that the Court has the same broad unfettered discretion to grant relief that  existed  previously  and  at  [18]  adopted  observations  of  Richardson  J  in Weatherall Jewellers Ltd v J Hendry & Son Ltd [3] at p 8:

Clearly the Court has to do justice as between lessor and lessee having regard to all the circumstances of the case and so having regard to the relative prejudice occasioned to the lessor or lessee by the grant or refusal of relief and by any terms imposed under subs (5).

[2] Sibrad Co Ltd v Kanters (2008) 9 NZCPR 356.

[3] Weatherall Jewellers Ltd v J Hendry & Son Ltd CA135/83, 11 September 1984 at p8.

[18]     Asher  J  at  [19]  then  listed  relevant  factors  to  be  taken  into  account  in exercising the discretion, being:

(a)     Reasons for the failure to give notice, e.g.: Whether the failure to renew was inadvertent.

(b)     Whether the cause of the default was due to any action of the landlord. (c)    The lessee’s conduct, in particular whether it has complied with all

conditions and covenants and has been a good tenant. (d)     The prejudice to the lessee if the relief is not granted. (e)     The prejudice to the lessor if the relief is granted.

(f)     The lessor’s motivation for the refusal to renew and understanding of the lessee’s intentions.

(g)     The interests of third parties and how they may be affected by any order.

I gratefully adopt this summary of relevant factors, as did counsel in the course of marshalling their arguments.

The rival contentions

[19]     The   arguments   advanced   by   Ms   Welsford   on   behalf   of   Transform conveniently fall under three heads:

(a)     That the failure to give notice of renewal was obviously an oversight, particularly given the resources which Transform had expended in obtaining the land use and discharge consents which enabled a significant increase in the scale of its mining operation.

(b)That contrary to the contentions made by the Wrights, Transform had been a good tenant in that it had complied with its obligations as lessee and, to the extent there were failings, these were not significant in nature.

(c)   That non-renewal of the lease would occasion major prejudice to Transform, given that it would be unable to mine a major resource for an extended period; whereas a renewal would not cause the Wrights any significant prejudice over and above that entailed in a continuation of the lease for a further term.

[20]     Mr Nathan’s arguments in opposition to a renewal likewise involved three principal contentions:

(a)That Transform has not been a good tenant in that it has been dilatory in making payment of the default royalty amount of $5,000 per annum and, more importantly, in relation to its obligation to reinstate the land after quarrying had ceased.

(b)That non-renewal would not significantly prejudice Transform because it has access to a major reserve of bentonite on neighbouring land mined under the Broughton royalty, and this reserve was more than adequate to satisfy the Company’s needs for the next four decades.

(c)That on the other hand a renewal of the lease would prejudice the Wrights in that the likelihood was they would continue to receive only the minimum payment due under the lease of $5,000 per year, when the land should now be reinstated to produce a better return from a pastoral or alternative use.

Evaluation: should relief be granted?

[21]     I shall endeavour to answer this question by reference to the factors identified by Asher J, but not necessarily in the same order.   As the above summary of the arguments of counsel demonstrates, this case requires a focus upon three or four key aspects.   Other relevant considerations are essentially neutral and I shall refer to these first.

Reasons for the failure: the lessor’s conduct and motivation: the interests of third parties

[22]     I am in no doubt that Transform’s failure to give notice of its intention to renew the lease was inadvertent.  Mr Phillip Lundy, a director of Transform and the manager of its mining operation, described the failure as an oversight.  He referred to expenditure of over $300,000 on legal and consulting fees since Transform acquired the mining rights in 2007.   A substantial part of this expenditure was incurred in relation to the resource consent hearings in 2007-2009.  I accept it is unthinkable that Transform incurred this expenditure, yet did not intend to renew its lease from the Wrights.

[23]     I find there is nothing to criticise in relation to the Wrights’ conduct, and motivation, in opposing the present application.  The family must have been aware that Transform intended to renew the lease for a further term.   The Company, in February 2007, made a submission in opposition to Transform’s resource consent applications.     Transform  employs  about  10  people,  as  well  as  independent contractors, in its mining operation.   I think the Wrights must have known that Transform would wish to renew the lease, but they were content to stand by while the  date  for  giving  notice  and  the  expiry  of  the  lease  passed.     This  was understandable given the family’s concerns about their tenant’s performance and their perception as to the likely future course of events.

[24]     With regard to the interests of third parties, the employees of Transform, and the independent contractors engaged by the Company, are parties who are likely to be affected by renewal of the lease, or not.  However, as will become apparent when I turn to the question of prejudice, whether the lease is renewed may not in fact affect the position of these parties.  In short, the availability of the Broughton royalty is of such significance to Transform that its mining operation may not be greatly affected in the event of non-renewal.

[25]     Accordingly,   the   above   factors   which   I   have   grouped   together   for convenience, are either neutral, or in the case of the impact upon third parties depend upon an assessment to be made shortly in another context.

Was Transform a good tenant?

[26]     Two main criticisms were advanced by the Wrights.   The first was that Transform was dilatory in payment of even the minimum royalty amount, $5,000, which was payable in equal parts within one month of 30 June and 31 December.  In his first affidavit Mr Lundy acknowledged that he was unaware of these payment dates, as he understood that payment was to be made at the end of each financial year.   He further observed that no demand for payment was made but that the situation had been rectified by the time he swore his affidavit in June 2010.  He also made this observation:

Had bentonite been mined then the royalty payments due to the respondent would have been much higher and, I believe, their payment would have been a higher priority for both the applicant and the respondent.

It  does  seem  to  me that  both  parties  adopted  a  relaxed  attitude  with  regard  to payment of the minimum royalty amount.   That said, the obligation rested with Transform  and  one  might  have  expected  that  the  Company  would  have  put  a payment mechanism in place.  Clearly, it did not.

[27]     The second and more significant complaint concerned an alleged failure by Transform to reinstate the land at the conclusion of quarrying.   This is a more complicated issue.  Parts of the approximately 59 hectares covered by the lease have been mined at various times since about 1967.   The land comprises an irregular square block, the northern-most boundary of which is at the height of the Harper Hills.   Hence, the block slopes down from the hills in a generally south-easterly direction.

[28]     Since it acquired the mining rights from OMYA in 2006 Transform has not undertaken mining activity on the Wrights’ land.  Mining has occurred close to the western boundary, but on land comprising part of the Broughton royalty.  The only use made of the Wrights’ land has been for the stockpiling overburden, which has been stored following its removal from the neighbouring property.

[29]     The issue of reinstatement of the land has obviously been a source of concern for some time.  The affidavit evidence refers to work which was undertaken in 2002 by OMYA, when contractors were engaged to reinstate what was referred to as a “quarry site” of about 15 hectares.   Heavy machinery was used to level the land, which, after ploughing and disking, was sown in grass.  However, this area has now reverted to gorse.   Transform asserts that the Wrights’ failure to care for the land resulted in its reversion to its present state.  Mr Darryl Wright rejects this criticism. He deposed that “the area of land regrassed is impracticable for grazing, in terms of its access particularly and it only forms a small portion of the entire area of land which is the subject of the lease”.  Mr Lundy retorted that 15 hectares was 25 per cent of the leased area.

[30]    The settlement reached between OMYA and the Wrights in 2003 in an arbitration context, included in cl 12 an agreement that any claims of the Wrights concerned with OMYA’s restoration obligations under the licence “may be brought upon or following, but not before the cessation of quarrying operations on the Wrights’  land”.    It  seems  this  clause was  intended  to  clarify that  the  Wrights’ entitlement to bring claims against the lessee at some future date.   Despite the inclusion of this term, it seems to me that there is still room for a difference of view as to when a cessation of quarrying operations occurs.  Transform maintains that it will mine the Wrights’ land again in the future, and hence that its obligation to reinstate  has  not  been  triggered.    The  Wrights  consider  that  as  mining has  not occurred on their land for several years, quarrying has ceased and reinstatement should have begun already.

[31]     The nature of bentonitic soils is also a live issue.   Dr Craig Ross, a soil scientist, and Mr David Bell, an engineering geologist, provided expert evidence concerning this aspect for the respondent, and the applicant, respectively.  Mr Bell in para 27 of his affidavit said:

...  It is important to note that bentonitic soils have low sheer strength, are prone to slumping under natural conditions, and retain significant moisture due to the expansive clay minerals present.   As such, the landscapes that develop on bentonitic soils are hummocky, as Dr Ross has [observed]. Ongoing slow movements (which are known as “flow” or “creep”), are expected to occur on a seasonal basis.

28.  Geotechnically,  bentonitic  soils  are  amongst  the  most  difficult  to manage,  and  the  high  moisture  retention  affects  the  ability  to  move machinery on them.  Bentonitic soil typically has a low fertility and is not easy to cultivate.

Dr  Ross,  when  cross-examined,  seemed  to  agree  with  this  description  of  the problems associated with the soil type.

[32]     Dr Ross described the state of the land as one dominated by overburden dumps, access tracks and significant areas affected by previous quarrying operations. In  the  result,  he  considered  that  the  land  was  not  presently  safe  for  use  by agricultural machinery, nor could it be cultivated because of its instability, wet areas and the presence of scattered basalt boulders.  He produced photographic evidence of slumping, erosion and cracks or fissures in the land.  Soil tests confirmed that the

natural soil types were of poor fertility, while the soil in the overburden dumps was of poorer fertility still.  He considered that no part of the land had been reinstated to a fit state for pastoral use.   Indeed, Dr Ross concluded that “the most appropriate land use for the property ... would be afforestation with pines on the drier parts of the landscape and trees tolerant of wet soils, such as poplars and alders, in the wet hollows”.  Finally, he described the dominant cover of the land as gorse, with “only scattered areas of low fertility [and] poorly producing pasture”.

[33]     Mr Bell is a lecturer in engineering geology at the University of Canterbury, and also a consultant through a company of which he is the sole director.   In the latter capacity he advised OMYA during its tenure of the land, and he has continued in this role since Transform acquired the mining rights.  He provided expert evidence in the course of the resource consent process which was begun by OMYA, but seen to fruition by Transform.

[34]     Mr Bell, in my view, differed in relation to some of Dr Ross’s assessments. He considered:

(a)That a “down dip” mining method, must be employed in mining for bentonite on the Wrights’ land and on the Broughton royalty.   This method requires that mining commences at the highest point on the land, with a mine floor successively stepped down the slope of the land to facilitate a staged extraction.  This methodology, in Mr Bell’s view, precludes progressive rehabilitation of the land.

(b)Mr Bell attributes some of the problems which affect the Wrights’ block to “the mere presence of bentonite”.  In short, he considers that the soil type is prone to movement, or creep, even in the absence of mining operations.   Given that to date mining has only occurred in several discrete pit areas, many of the adverse features of the landscape he attributes to natural causes.

(c)To the extent that the land is disfigured by the presence of overburden dumps, Mr Bell regards this as a necessary incident of mining operations.   However, he is of the view that when mining ceases reinstatement will occur.  He disputes that Transform has failed to strip

and store top and subsoil for replacement on the land in due course.  To do this, he notes, is a condition of the land use consent, and is also the subject  of  specification  in  the mining operation  manual  which  was compiled under advice from his consulting company.

[35]     I do not think it is possible for me to fully resolve whether Transform has complied with the reinstatement requirement in the present context.   There are a number of difficulties.  The lease has run for over 40 years.  Three different entities have conducted the mining operation during that time.  The reinstatement clause in the lease, clause 4 (which is not materially different to the comparable clause in the licence, quoted at [4]), is vague as to when the obligation to reinstate is triggered. The words used, that “the lessee shall after the completion of quarrying operations

...” reinstate the land, are susceptible of varying interpretations.

[36]     Clause 12 of the deed of settlement was obviously intended to clarify the reinstatement obligation.  It provided:

The parties agree that any claims of the Wrights concerned with OMYA’s compliance of its obligations pursuant to clause 5 of the Deed of Licence dated 28 November 1967 (in relation to OMYA’s obligation to restore land opened up by it in the course of mining), may be brought upon or following, but not before the cessation of quarrying operations on the Wrights’ land.

Whether the clause was intended to affect the limitation period for “any claims of the

Wrights”, or to better define the timing of the lessee’s obligation, is unclear.

[37]     I am, however, satisfied of two matters.   Transform has not in my view demonstrated a positive disregard of its obligation to reinstate the land.  I think its management genuinely consider the obligation is yet to be triggered.  That said, there also remains considerable scope for further controversy concerning due performance of the reinstatement obligation.  The evidence of Dr Ross and Mr Bell suggests as much.  I note that the conditions which attach to the new land use consent extend to reinstatement of the land.   Transform is required to submit an annual plan which contains a three year indicative mining operations outline.  In addition, there is the requirement for a mine operations manual, which includes:

Short and long term Land Restoration Practices and Protocols including recontouring, topsoiling, and revegetation which may include the natural establishment of native vegetation (condition 9(f)).

Conditions 15-16 deal with “Topsoil and Exposed Earth”, conditions 17-20 with “Overburden Management” and conditions 21-22 with “Pit Management”.   My impression is that the reinstatement requirement contained in the lease and licence is considerably fleshed-out by the conditions which attach to the land use consent. Transform must also provide a performance bond of $30,000, at least when its production of bentonite reaches a prescribed level.   The Wrights are to be served with a copy of the annual plan, and through this proceeding they are privy to the mine operations manual.

[38]     But,  it  seems  to  me  that  reinstatement  of  the  land  remains  a  dynamic problem.   In particular, scope remains for doubt and dispute concerning when Transform is obliged to restore the land, in whole or in part.

Would Transform be prejudiced absent a renewal?

[39]     To appreciate this aspect some further details of the present mining operation must be described.

[40]     The Broughton royalty covers an area of land as large as, or larger, than the Wright block.   In 1980 a Mr Broughton sold the fee simple title to the land, but reserved the mining rights to himself.  These rights are now held by his daughter. She has assigned the mining rights to Transform, until 2031.  The land has been sub- divided,  with  the  result  that  there  are  now  several  owners  of  the  land  which comprises the Broughton royalty area.

[41]     The rights  of  the several  land  owners  are limited.    They may carry out agricultural or pastoral farming on the land, but subject to a requirement that such farming activities do not interfere with Transform’s mining operation.  Their rights are akin to those of the Wright family, who likewise may farm their land subject to non-interference.

[42]     The  high  quality  bentonite  reserve  presently  available  to  Transform  is estimated to total 10 million tonnes.   The reserve is split between the two royalty areas about equally.   The evidence does not disclose the exact extent of mining operations in the years from the late 1960s to the year 2000.  My impression is that mining has generally been conducted on a modest scale, and not necessarily continuously.

[43]     Mining has not occurred on the Wrights’ land since about 2002 or 2003. Since Transform acquired the mining rights market conditions have been difficult. In re-examination Mr Lundy said this:

OMYA sold the business ... because of the loss of business.  At that time the maximum material extracted was 9000 dry tonnes out of the plant in a year and typically 6000.   When I purchased the business in 2006 we had one customer left, well two main customers and a couple of little ones and the amount was 900 tonnes per annum.  In the last three years we’ve managed to claw business back.  We’re now producing around 4000 tonnes per annum, close to it, but it’s taken three years to get to that point and we’re still trying to get more business again, so it’s been extremely tough.

[44]     Although the land use consent allows Transform to mine 33,300 bench cubic metres per annum, the projected production for 2010, 2011 and 2012 is 6,000 tonnes,

7,500 tonnes and 9,000 tonnes, respectively.  However, these targets are expressed on a “dry weight” basis.  This I understand to be after processing and, as the term implies, when the bentonite is dry.  The annual plan also confirms that mining for the next three years will be confined to the Broughton royalty area.

[45]     In  cross-examination  Mr  Lundy was  asked when  he  expected  Transform would again mine the Wrights’ land.  He indicated that within 10 years he expected this to occur, but added that the development of a long-term plan was still underway. To further questions he accepted that it could be 15, or even 20 years, before mining resumed.   While the royalty rate under the Wrights’ lease is $4.50 per tonne of processed bentonite, the comparable figure under the Broughton royalty is $2.50.

[46]     Given that the total reserve is almost 10 million metres, of which about half is situated within the Broughton royalty, the respondent’s case is that at the current rate of extraction the Broughton reserve is more than adequate to satisfy Transform’s

likely needs well beyond the next 42 years.  Mr Lundy was questioned concerning what impact non-renewal of the lease would have for Transform:

Q.   If  you  couldn’t  mine  on  the  Wrights’  property,  the  mining  would continue as it is now wouldn’t it?

A.   Yes.

Q.    Those people that you employ wouldn’t be affected as a result?

A.   Ah,  no,  I,  I  shouldn’t  think  so.    I  mean  it  could  make  conditions tougher.

Q.    It would be more or less business as usual though isn’t it? A.  Ah, yeah but it, it’s still not part of the long-term plan.

Q.    It wouldn’t affect your access into the Broughton royalty would it?

A.   Ah,  it,  it  would,  yeah  it  would,  it  would  impact  on  our  current operations, yeah, it would in terms of, of our top-down method.   It removes it.

Q.    The business, though, would still be able to continue? A.       Ah, yeah I would hope.

Q.   Because currently the only purpose for which you use the Wrights’ land is to put the overburden?

A.    That’s correct at the moment, yes.

[47]     The major impact on Transform’s current operation would be in relation to storage of overburden.  The present site of mining is close to the border between the two royalty areas.  In general terms, the Broughton royalty lies to the eastern side of the Wrights’ land and the two blocks are adjoined.   Overburden is stripped by an independent  contractor.     The  stripping  ratio  is  about  three  cubic  metres  of overburden to each cubic metre of mined bentonite, although this ratio is highly variable.  At present, the overburden is taken across the boundary and stockpiled on the Wrights’ property.

[48]     In his affidavit evidence Mr Lundy stated that the Wrights’ lease conferred an exclusive right to mine a resource which was “far from depleted”.  He said that, in the event of non-renewal, Transform would lose approximately half the bentonite available to it.  This bentonite, together with its proximity to Transform’s processing plant at Coalgate, meant that “from [Transform’s] perspective, this land (together with the adjacent land which it has a licence to mine) is unique”.   The resource consents, obtained at considerable expense, contemplated mining both royalty areas.

On  this  basis,  Mr Lundy  contended  that  non-renewal  would  be  prejudicial  to

Transform, whereas there would be no “significant prejudice” caused to the Wrights.

[49]     These, then, are the relevant considerations and the contentions made with reference to them.  I shall now assess prejudice from the lessor’s perspective so that relative prejudice can be balanced.

Would the Wrights be prejudiced by a renewal?

[50]     The prejudice said to be suffered by the Wrights was two-fold.   First, the family contends that the present situation in relation to the lease is wholly unsatisfactory.  Their land has not been mined for several years.  It is scarred by both historic and recent overburden stockpiles.   The land is in a poor condition and covered in gorse to a major extent.  They are unable to farm the land both on account of its condition and because of the present mining-related activity, as well as the uncertainty as to future mining activity.  Given the extent of the bentonite reserve available from the Broughton royalty, together with the more favourable royalty rate, there is considerable uncertainty as to the likelihood, and level of mining activity on the  land  in  the  future.    The  uncertainty  as  to  what  constitutes  a  “cessation  of quarrying operations” means that when Transform’s obligation to reinstate the land arises is effectively an unknown.  In the meantime, the default amount of $5,000 per annum is an uneconomic return from a 59 hectare block.

[51]     Second, the family Company adduced evidence from Mr David Montgomery concerning the potential farming return from the land.   Mr Montgomery is an experienced farm management consultant and valuer.   He was asked to assess the likely cost of reinstating the land, the feasibility of doing so and what return could be obtained from the land, including from uses other than farming.

[52]     Mr  Montgomery assessed  that  reinstatement  would  cost  between  $1,340-

$1,500 per hectare, or up to $85,500 in terms of total expenditure.  This would cover gorse clearance through to pasture re-establishment, including the provision of fencing, accessways and stock water facilities.   He described this cost as “prohibitive”.

[53]     Assuming  reinstatement  of  the  land,  Mr  Montgomery  considered  that  it would be best suited to livestock grazing, but that the carrying capacity would be low and good farming practices would have to be followed to avoid gorse reversion. Alternatively,  he  favoured  the  planting  of  pine  trees  because  the  deep  rooting systems  of  these  would  help  prevent  land  instability  and  erosion.     Finally, Mr Montgomery expressed the opinion that the land, if fully developed for farming purposes,  would  have  a  likely lease  value  of  $14,000-$15,000  per  annum.    He described the current return of $5,000 as “negligible”.  Mr Nathan relied upon this evidence as demonstrating the extent of the present problems in relation to the land, the issues associated with its reinstatement and the potential for a rather better return if mining ceased and the land was returned to pasture (or perhaps forestation).

[54]     Ms  Welsford  argued  that,  upon  analysis,  the  respondent’s  complaints reflected dissatisfaction with the terms of the bargain into which Gordon Wright had entered in the late 1960s.  The licence and lease conferred exclusive mining rights upon the licensee/lessee.   The contractual  arrangement was very long term.   A necessary incident of quarry mining is the removal and stockpiling of overburden. The obligation to reinstate the land was always defined as conditional upon the completion of quarrying operations.  The minimum royalty payment was a term of the arrangement from inception.  The existence of this term suggested that the parties contemplated that minimal mining activity may occur in some years, or even none at all.  If the Wrights maintain that Transform is presently in default of its obligation to reinstate the land, they should invoke cl 16 of the lease - by which any dispute between the parties may be referred to arbitration.

[55]     Counsel  also  relied  upon  a  number  of  authorities  which  highlight  that prejudice, in the sense that renewal will deny the lessor the right (conferred under the lease) to take possession of the land, is not relevant to the present determination.  For example, in Ponsonby Mall Trust Ltd v NZ Food Industries Ltd,[4]  Asher J said at [47]:

[4] Ponsonby Mall Trust Ltd v NZ Food Industries Ltd (2005) 7 NZCPR 48.

...  the whole purpose of the s 120 discretion is to stop landlords being able to take advantage of a lessee’s mistake.  If the plaintiff trusts’ submission is right, it means that s 120 becomes a meaningless remedy, or at least a

remedy that will be seldom invoked.  As a matter of common sense, lessors are unlikely to resist renewal, unless they can see a commercial advantage to themselves  in  the  lease  terminating.     If  the  inability  to  exploit  that commercial advantage is seen as prejudice which the lessor can raise to stop the granting of relief, relief will seldom be granted.  This is not the way in which the New Zealand Courts have approached the discretion over the years.

The Judge later added that “[t]he question is whether, apart from the deprivation of the right to possession, the lessor would be otherwise prejudiced if relief was granted to the lessee” (at [49] emphasis added).

[56]     I accept the existence and correctness of this principle.  Does it apply in the circumstances of this case?  The Wrights do seek possession of their land in the hope they may be able to obtain a better economic return from it.  But, I think, they are also motivated by other concerns, as well.   The future is beset with uncertainty. Whether, and when, the land may be mined again is unclear.  In the meantime the land is in a poor and deteriorating state, on account of slippage and erosion, together with gorse infestation.  Mr Nathan submitted that this cluster of concerns placed this case apart from those of the kind discussed in Ponsonby Mall.

Conclusion

[57]     This  case  is  quite  finely  balanced.    However,  in  my view  Transform  is entitled to an order for renewal pursuant to s264(2)(a)(i).  I can state the reasons for this conclusion quite briefly.

[58]     Decisions  of  this  kind are  fact  specific.    In  this  case  I consider  that  an assessment of relative prejudice is the determinative factor.  Transform, in my view, will suffer greater prejudice in the absence of a renewal, than will the Wrights if a renewal is granted.

[59]     Upon  acquiring  both  the  Broughton  royalty  and  the  Wrights’  lease, Transform gained rights to a vast bentonite reserve.   The Company has expended considerable capital in obtaining the resource consents required to enable it to exploit the bentonite reserve.   It employs a number of people, and also provides work to independent   contractors.      Although,   as   Mr   Lundy   candidly   acknowledged,

Transform could continue to operate without a renewal of the Wrights’ lease, this would limit the scope and flexibility of the mining operation.  While Transform has been dilatory in the performance of its payment obligations under the lease to date, I do not consider this problem will persist.  Despite the difficulties which clearly exist in relation to the issue of reinstatement of the land, I am not persuaded that these problems support a finding that Transform is a bad tenant and that it should be denied a renewal of the lease on that account.

[60]     The starting-point in assessing prejudice from the lessor’s perspective, is the quality of the land itself.  The evidence shows that the land is inherently unstable, of inferior fertility and that it is only suited to low intensity pastoral use, or forestation. Moreover, the land condition is presently compromised, following four decades of limited mining usage.  Some level of doubt exists concerning whether the land can be successfully reinstated, particularly for pastoral use.   Even if it can be, the anticipated economic return from the land is modest.  Despite the uncertainties, the potential for significantly increased royalty payments to be in the future remains. Finally, the conditions which attach to Transform’s land use consent, provide better assurance that effective reinstatement of the land is likely to occur in the future, albeit in the long term.

[61]     Risk was inherent in concluding a lease for a term of 42 years, with a similar right of renewal.  In large measure the concerns, or prejudice, to which the Wrights point represent the materialisation of risks of a type to which the lessor was always exposed given the terms of the lease.   It follows, in my view, that an order for renewal of the lease is appropriate.

Result

[62]     Transform is entitled to an order for renewal of the lease for a further term. Costs must follow the event, calculated on a 2B basis.

Solicitors:

Lane Neave, PO Box 13149, Christchurch for Applicant

White Fox & Jones, PO Box 1353, Christchurch for Respondent