BOLITHO v WALTER ROBERT INVESTMENTS LIMITED [2022] NZHC 3596

BOLITHO v WALTER ROBERT INVESTMENTS LIMITED [2022] NZHC 3596 [21 December 2022]IN THE HIGH COURT OF NEW ZEALANDNELSON REGISTRYI TE KŌTI MATUA O AOTEAROAWHAKATŪ ROHECIV-2022-442-000025[2022] NZHC 3596UNDER The Arbitration Act 1996 and Part 26 of theHigh Court Rules 2016BETWEEN BENJAMIN COLIN BOLITHO and ANNACATHERINE BOLITHOAppellantsAND WALTER ROBERT INVESTMENTSLIMITEDRespondentHearing: 14 November 2022Appearances: B M Nathan and S Galbreath for AppellantsM R T Colthart and M J Logan for RespondentJudgment: 21 December 2022JUDGMENT OF GRICE JIntroduction[1] The appellants, Benjamin and Anna Bolitho,1 leased 14½ hectares of bareagricultural land from Benjamin's grandparents under a deed of lease entered into inJuly 2006 (the Lease). Mr and Mrs Bolitho (senior) had owned the land, known as the"Wells Block", for over 30 years. Until Benjamin and Anna took the Lease it had beenoperating as an apple orchard. However, by 2006 that was no longer economic and1 I use the appellants' forenames to distinguish them from their grandparents, to whom I refer as Mrand Mrs Bolitho (senior).the orchardist terminated the existing lease and the trees were removed. Improvementswere then made to the block to convert it to grape production.[2] Benjamin and Anna subsequently planted sauvignon blanc grapes on theproperty. They also owned and managed other vineyards in the area. The first vintagewas 2008 and grapes from the property formed part of a blend for a top label wine thatwon numerous awards.[3] The Lease was terminated in 2021, after the estate of Mr and Mrs Bolitho(senior) sold the property to a third party. In accordance with the Lease, Benjamin andAnna were entitled to a payment from the Lessors for the "improvements to the land".[4] An arbitrator was appointed by the parties to value the improvements,following the procedure set out in the Lease. The arbitral award by the arbitrator, anexperienced professional valuer, Mr Blue Hancock, was issued on 14 March 2022 (thearbitration award).[5] Benjamin and Anna appeal against that award, on the basis that the arbitratordid not correctly interpret the provision requiring him to provide a ruling on "the fairmarket value" of the improvements. They say as a result Mr Hancock undervaluedthe improvements.Grounds of appeal[6] Appeals against an arbitral determination are limited to appeals on questionsof law. Schedule 2 of the Arbitration Act 1996 provides at cl 5(10):5 Appeals on questions of law(10) For the purposes of this clause, question of law—(a) includes an error of law that involves an incorrectinterpretation of the applicable law (whether or not the errorappears on the record of the decision); but(b) does not include any question as to whether—(i) the award or any part of the award was supported byany evidence or any sufficient or substantialevidence; and(ii) the arbitral tribunal drew the correct factualinferences from the relevant primary facts.[7] In this case the appellants submit that the appeal concerns the interpretation ofthe term "fair market value" in the Lease. They do not challenge the facts upon whichthe valuation exercise was based, nor the valuation exercise itself. Rather, theappellants base their appeal on the arbitrator's interpretation of "fair market value"and the methodology he adopted as a result of that interpretation.[8] Mr Nathan for the appellants points to a number of cases indicating that thedebate about what is a question of law on the one hand and what is a question of factor a matter "involving questions of fact and law" on the other continues. He says thatthis appeal is based on an error made by Mr Hancock in contractual interpretation andthat, given the central importance of the factual matrix to the exercise, this involves aquestion which is a mixture of fact and law. Mr Nathan notes that the courts havepointed out that not all errors in interpretation are properly characterised as errors oflaw, but "[a] more nuanced approach is required to ensure that the identified error isnot in reality a challenge to factual inferences or sufficiency of evidence."2[9] The questions of law put forward for determination are:(a) whether or not the arbitrator erred in interpreting the Lease when hedetermined that the fair market value of all the Lessees' (theappellants') improvements, including but not limited to the trellises andgrapevines:(i) must take into account the highest and best use of the land;(ii) must take into account the Lessees' right under the Lease to usethe land for other agricultural purposes;2 Milk New Zealand (Shanghai) Co Ltd v Miraka Ltd [2019] NZHC 2713 at [59].(iii) must take into account the added value those improvements giveto the land;(iv) must adopt a standard market value approach based on sales ofvineyards, being sales of land and improvements together;(v) should not adopt a capitalised income approach based on theincome derived from the Lessees' improvements;(vi) should not take into account the income derived from the 2022harvest.[10] Mr Nathan indicated that the last point was abandoned. He conceded that thepoint was a matter of fact rather than law and was therefore outside the ambit of thisappeal.The Lease[11] The Lease between Benjamin and Anna as Lessees and Mr and Mrs Bolitho(senior) as Lessors was dated 28 July 2006. The Lease was prepared by a lawyer ongenerally commercially standard conditions. It provided:(a) Annual yearly rental of $36,000, plus GST. Rates and irrigation schemewater charges were to be payable by the Lessee. The rental was to bereviewed after five years and thereafter every three years with thereviewed rental to be equivalent to four per cent of the then rateableland value (ignoring all of the Lessees' improvements on the property).(b) The Lessor would clear the property and "work the land down flat"prior to commencement date.(c) The Lessee had: the right to develop the property as a vineyard or developit and use it for any other agricultural or horticultural use. Allimprovements erected on the property (including but notlimited to trellis's and grapevines) shall be and shall remainthe property of the Lessee.(d) The Lease could be terminated by either party on twelve months'notice. However, no such notice could be given within 15 years of thecommencement date, and any such notice would take effect after thecompletion of harvest of the then vintage of grapes.(e) Under cl 6 of the Lease, on termination of the Lease by the Lessor, theLessor agreed to purchase from the Lessee and the Lessee would agreeto sell to the Lessor: all of the Lessee's improvements then on the property(including but not limited to the trellis's and grape vines) at aprice to be agreed upon between [the parties] or failingagreement at a price to be determined by a single registeredvaluer if the parties can agree on such valuer but failingagreement each party shall appoint a registered valuer whoshall determine the market value of such improvements and ifsuch valuers cannot themselves reach agreement then theyshall appoint a third valuer whose ruling on the fair marketvalue shall bind the parties.(f) Also under cl 6, if the Lessee terminated the Lease: all the Lessee's improvements then on the property(including but not limited to the trellis's and grape vines[)],shall become the Lessor's improvements and the Lessor shallnot be required to purchase them nor pay any compensation.[12] The Lease was varied by a deed of variation of lease dated 5 July 2017. Thisvariation was as a result of the arrangements put in place for the sale of WaimeaEstates, a wine enterprise, in which the Bolitho family (or at least Mr and Mrs Bolitho(senior)) held an interest. The sale was to Booster Wine Group. That arrangemententailed Benjamin and Anna subleasing the Wells Block to Waimea Estates (Nelson)Ltd. The Lease was varied to provide a fixed term expiring 31 July 2021, so long asnotice was given by 30 June 2021. If notice was not given, the Lease would becomea periodic tenancy terminable on 12 months' notice. The termination clause in theoriginal Lease, cl 6, was not varied.[13] Following the deaths of Mr and Mrs Bolitho (senior), the Wells Block was soldon 1 June 2021 to Walter Robert Investments Ltd. On 28 June 2021, that company asLessor gave notice to Ben and Anna terminating the Lease from 31 July 2021. Thistriggered cl 6 of the Lease, the termination clause.[14] The parties were unable to agree on the price to be paid by the Lessor (by thistime Walter Robert Investments Ltd) for the improvements. The parties dulyappointed valuers under cl 6 of the Lease. The valuers could not agree. The partiesthen agreed to appoint Mr Hancock as arbitrator to finally determine the "fair marketvalue" of the improvements to be paid by the Lessor.3[15] The arbitration hearing took place on 17 and 24 February 2022. The partieswere legally represented at the hearing. Mr Hancock undertook a site visit as part ofthe arbitration.[16] Mr Hancock issued his determination on 14 March 2022 (the arbitrationaward), which the appellants have appealed.The arbitration award[17] The evidence put before the arbitrator included the evidence of the valuersappointed by each party, each of whom was cross-examined. Mr Baxendine was thevaluer for the Lessor and Mr Bennison was the valuer for the Lessee. Both werereferred to by the arbitrator as experienced valuers. Mr Hancock himself is aprofessional valuer with over 40 years' experience.[18] The arbitration award set out the background and recorded that the Lease hadbeen set up "to provide a passive income to the grandparents while also providing along-term investment opportunity for the Lessees".[19] Mr Hancock noted the definition of "market value" put forward byMr Bennison for the Lessor as defined by International Valuation Standards (IVS) as:3 At Mr Hancock's request, the parties agreed to appoint Mr Hancock as an arbitrator rather than anexpert valuer. No issue arises with this appointment. the estimated amount for which an asset or liability should exchange on thevaluation date between a willing buyer and willing seller in an arm's-lengthtransaction, after proper marketing and where the parties had each actedknowledgeably, prudently and without compulsion.[20] The arbitrator went on to set out the "pertinent sections of" the conceptualframework of the IVS definition of "market value" as follows:(d) "Between a willing buyer" refers to one who is motivated, but notcompelled to buy. This buyer is neither over eager nor determined to buy [at]any price. This buyer is also one who purchases in accordance with therealities of the current market and with current market expectations, ratherthan in relation to an imaginary or hypothetical market that cannot bedemonstrated or anticipated to exist. The assumed buyer would not pay ahigher price than the market requires, the present owner is included amongstthose who constitute "the market".[21] In this respect, as the arbitrator went on to state:21. It would appear that the Lessor is being compelled to buy but is notmotivated. If the Lessee is considered to constitute the market, thenthrough their valuation submissions are saying that the improvementsare valuable to them and they would pay the sum of $842,000 forthem.(e) "And a willing seller" is neither an overeager nor a forced sellerprepared to sell at any price, nor one prepared to hold out for a pricenot considered reasonable in the current market. The willing seller ismotivated to sell the asset at market terms for the best price obtainableon the open market after proper marketing, whatever that price maybe. The factual circumstances of the actual owner are not part of thisconsideration because the willing seller is a hypothetical owner.22. The Lessee is being compelled to sell under the terms of the lease andthe termination triggered by the Lessor. The Lessee is not able toproperly market the asset, and therefore test the market to achieve thebest price obtainable. It cannot be determined that they are a willingseller.(f) "In an arm's-length transaction" is one between parties who donot have a particular or special relationship. E.g. parent andsubsidiary companies or landlord and tenant, that may make the pricelevel uncharacteristic of the market or inflated. A market valuetransaction is presumed to be between unrelated parties, each actingindependently.23. This clearly does not meet the definition of an arm's-lengthtransaction.24. The second part of Clause 6 is for registered valuers to determine themarket value of such improvements. This part of the clause, if read inisolation to the balance of the clause, which I do not believe it can be,would be a very straight forward determination of: - the value theimprovements give to the land.25. When undertaking a market value, valuers would, as is mandatory, befollowing the concepts of market value and highest and best use asdetailed under IVS 104 Bases of Value, 140 Premise of Value –Highest and Best Use.The highest and best use is the use of an asset that maximises itspotential and that is possible, legally permissible and financiallyfeasible. The highest and best use may be for a continuation of anasset's existing use or for some alternative use. This is determined bythe use that the market participant would have in mind for the assetwhen formulating the price that it would be willing to bid.26. The third part of clause 6 is the role of the arbitrator to rule on the fairmarket value that shall bind the parties.[22] The arbitrator then went on to consider how the arbitration clause in the Leaseshould be interpreted as a matter of contractual interpretation. He concluded that theparties were intending that:28. they would receive what was fair when the lease came to an endthat is it would not be constrained by any particular interpretation ofwords. That is the parties would not envisage that with the expiry ofthe lease the plants and vines would be considered as no more thanchattels for removal. Alternately a higher and better use for the landwould not require the Lessor to pay a value based on the economicreturn of the Vineyard, when to achieve that higher and better use allvineyard improvements would be removed. Or in the words of IVSThis buyer is also one who purchases in accordance with the realitiesof the current market and with current market expectations.29. The concept of willing buyer, willing seller is explored by Prichard Jin Drexel v Jacobsen Holdings Ltd. Where it is eloquently put theparameters of a willing buyer, willing seller are: - friendly negotiationbetween fair-minded people who were in the situation in which theparties found themselves and who were willing to consider all factorsbenefit or detriment to either side.Analysis[23] The arbitrator made no error in setting out the legal position and approach tointerpretation insofar as it was relevant to the clause under consideration. As wasapparent from the clause in the context of the Lease as varied, the arbitrator wasrequired to carry out an assessment of the "fair market value". That introducedwell-established valuation concepts and approaches to the subject property, bearing inmind that it was to be a "fair" market value as opposed to just a straight "market value".[24] He then went on to apply the relevant approaches to valuation to the particularproperty and circumstances. The appellants submit that they are not challenging thefacts on which the valuation exercise was based, nor the valuation exercise itself, butrather the arbitrator's interpretation of "fair market value" and the methodology headopted as a result of that interpretation. For those reasons the appellants say that thequestions posed are questions of law, not questions of fact. However, that is not thecase. The arbitrator has adopted well-accepted valuation methodologies andcross-checked them. He has adopted a combination of approaches to reach hisdetermination. The arbitrator was entitled to apply such methodologies as he thoughtappropriate to the case.[25] The questions as formulated by the appellants are directed towards theapplication by the arbitrator of the valuation methodology to the subject property.Those issues were squarely for determination by the valuer.[26] Nor did the arbitrator make any error of law in his application of valuationmethodologies and principles to the property and evidence before him. All of thefindings that the arbitration made in the course of his award were matters for him. Inparticular, the arbitrator:(a) Used the accepted valuation principles surrounding assessment of "fairmarket value", which included application of the "highest and best use"principle. That is the use of an asset that maximises its potential andthat is possible in the circumstances. This approach ensures that themarket is considered. A market participant would have that "highestand best use" in mind for the asset when formulating what price itwould bid. In this case, the highest and best use of the land at the timethe Lease was terminated, as was apparently acknowledged by all thevaluers, was not for growing grapes but rather for growing apples. It isapparent the situation had changed from that earlier position when theLease was entered into and the market conditions at that time dictatedthat apples be replaced by grapes.(b) Applied a discount to the land value to more realistically approximatethat which would be payable on the market, rather than the priceactually paid in this case by a neighbour, who paid above market valuefor subjective reasons.(c) Added an uplift to the value of improvements to take into account thefact that part of the Wells Block would continue to be used for grapegrowing for various periods of time due to a designation over part ofthe property which would likely delay its development for other uses.(d) Applied a number of different methodologies and approaches tovaluation, which he then cross-checked against each other. The primarymethods he used were the market comparison approach and a checkagainst the income/market capitalisation approach. This approach wasopen to him.(e) Rejected the proposition that the improvements could only be valuedon a removal value which was advanced by the Lessor. That wasfounded on an argument, relying on IVS 300 and the asset standard forthe valuation of plant and equipment, that the improvements were onlyworth the amount they would get once removed from the land becauseupon termination of the Lease the Lessee did not have any further rightsto the use of the land. This was predicated on the improvements nolonger being required because the use of the land was to change.However, the arbitrator was not persuaded that it would have been inthe minds of the parties when entering the Lease that this would be theapproach to market valuation of improvements. That was open to thearbitrator as he was required to undertake a fair market value.(f) Carried out a market analysis and concluded that Mr Baxendine for theLessor had inappropriately included sales from outside the region whenthere was directly comparable evidence within the locality.4 The threecomparative sites included one site where there was "some conjectureas to if the grapes will be removed" given the purchaser was a berryfruit grower.(g) The other market valuations the arbitrator relied on involved landwhich had been sold to be used for conversion to nursery production ormarket gardening. Those properties were all within the region. Heincluded the subject property which was sold for $2.7 million (landonly) and subject to a delay in occupation due to the Lease occupation.He noted this was to an adjoining owner and for the land only, and thatit sold by way of open tender at a price he understood to be"significantly above the under bidders".(h) Noted that there had been a contest between the two valuers about thestate of health of the vines and the effect that would have on thevaluation. Mr Hancock viewed the site. The Lessor's expert had said50 per cent of the vines were affected with a trunk disease, while theLessee's expert submitted there was no more than two to three per centinfected with the trunk disease. Mr Hancock, having inspected thevines, came to the conclusion that the trunk disease was comparablewith what would be found in similar age sauvignon blanc vineyards inthe Nelson region. This was a factual finding for the arbitrator.(i) Assessed the expert evidence called on behalf of the Lessee in relationto the vineyard production and concluded that the sustainableproduction level was between 12 and 13 tonnes per hectare. This wasanother factual finding for the arbitrator.(j) Considered the income approach advanced by the Lessee and pointedout a number of errors in the Lessee's valuer's calculation, including4 Mr Baxendine had included market comparisons with properties sold in Marlborough. However,it appears the sale prices in that region are higher for land planted in grapes than they are in theNelson region.the failure to provide for a notional dwelling site (which removed aminimum of 5,600 square metres from production) as well as allowancenecessary for any access driveways to that site. The arbitrator alsopointed out Mr Baxendine had omitted to do his calculations based onthe net area inside the legal boundary of 13.19 hectares, having alsoincluded land outside the boundary, and rejected Mr Baxendine's useof the under bidder's bid rather than the final sale price of the land of$2.7 million. The arbitrator then discounted that price to account forthe adjoining owner's influence, which he assessed at five per cent.This had the effect of increasing the value of the improvements. Againthis was a factual finding for the arbitrator.Conclusion[27] Mr Hancock made no errors of law in his award. Valuation is an art, not ascience. As is apparent from the above summary, the assessment of the "fair marketvalue" as was required by cl 6 of the Lease was intensely fact- and property-specific.The award required consideration of the evidence and the application of specialistexpertise and experience.[28] Mr Hancock is a very experienced valuer. He approached his determinationappropriately, applying the correct interpretation of the termination clause. He used anumber of approaches in reaching his determination and applied cross-checks to hisvaluation assessment. He took into account the evidence before him, including eachof the party's valuer's reports, and also viewed the property.[29] The award presents a careful and appropriate analysis with reasons for thefindings clearly outlined. No errors of law are apparent.[30] The appeal is dismissed.Costs[31] Counsel indicated that costs should follow the event on a 2B basis.Accordingly, I award costs, together with reasonable disbursements, including traveland accommodation, in favour of the respondent. I also certify for second counsel.[32] If any issues arise from those orders, either party should file a memorandumwithin five days of the date of this decision.____________________Grice JSolicitors:Duncan Cotterill, NelsonMark Colthart Barrister, Downtown AucklandPitt & Moore, Nelson