SALTBURN HOLDINGS LIMITED v PENROSE LEASEHOLD LIMITED [2019] NZCA 127

SALTBURN HOLDINGS LIMITED v PENROSE LEASEHOLD LIMITED [2019] NZCA 127 [30 April 2019]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA665/2018[2019] NZCA 127BETWEEN SALTBURN HOLDINGS LIMITEDApplicantAND PENROSE LEASEHOLD LIMITEDRespondentCourt: French and Gilbert JJCounsel: D W Grove for ApplicantR B Stewart QC for RespondentJudgment:(On the papers)30 April 2019 at 11 amJUDGMENT OF THE COURTA The application for special leave to appeal under clause 5(6) of theSecond Schedule to the Arbitration Act 1996 is declined.B The applicant must pay the respondent costs for a standard application on aband A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by French J)Introduction[1] Saltburn Holdings Ltd wanted to appeal an arbitral award to the High Court.To do that it was required to identify a question of law arising out of the award andobtain leave to appeal from the High Court under cl 5(1)(c) of the second schedule tothe Arbitration Act 1996. It applied for leave but the application was declined byDowns J.1 Saltburn then sought to appeal Downs J's refusal of leave. The Judgehowever declined leave to bring that appeal,2 prompting Saltburn to seek special leavefrom this Court under cl 5(6) of the second schedule. It is that application which isthe subject of this judgment.[2] The notice of the application for special leave and the submissions filed bySaltburn indicated some confusion as to the scope of our jurisdiction under cl 5(6).Saltburn's notice of application for special leave for example purported to bean application for special leave to appeal to this Court against the arbitral award.[3] The relevant provisions of cl 5 are as follows:5 Appeals on questions of law(1) Notwithstanding anything in articles 5 or 34 of Schedule 1, any partymay appeal to the High Court on any question of law arising out of anaward—(a) if the parties have so agreed before the making of that award;or(b) with the consent of every other party given after the makingof that award; or(c) with the leave of the High Court.(2) The High Court shall not grant leave under subclause (1)(c) unless itconsiders that, having regard to all the circumstances,the determination of the question of law concerned could substantiallyaffect the rights of 1 or more of the parties.(3) The High Court may grant leave under subclause (1)(c) on suchconditions as it sees fit.(4) On the determination of an appeal under this clause, the High Courtmay, by order,—(a) confirm, vary, or set aside the award; or(b) remit the award, together with the High Court's opinion onthe question of law which was the subject of the appeal, tothe arbitral tribunal for reconsideration or, where a new1 Saltburn Holdings Ltd v Penrose Leasehold Ltd [2018] NZHC 1246 [First Decision of Downs J].2 Saltburn Holdings Ltd v Penrose Leasehold Ltd [2018] NZHC 2734[Second Decision ofDowns J].arbitral tribunal has been appointed, to that arbitral tribunalfor consideration,—and, where the award is remitted under paragraph (b), the arbitraltribunal shall, unless the order otherwise directs, make the award notlater than 3 months after the date of the order.(5) With the leave of the High Court, any party may appeal to the Courtof Appeal from any refusal of the High Court to grant leave or fromany determination of the High Court under this clause.(6) If the High Court refuses to grant leave to appeal under subclause (5),the Court of Appeal may grant special leave to appeal.[4] As those provisions make clear, under cl 5(6) it is not our task to determinewhether to grant leave to bring an appeal in this Court regarding the correctness ofthe arbitral award. We are dealing only with the issue of whether Saltburn should bepermitted to appeal against Downs J's refusal to grant leave to appeal tothe High Court. To put it another way, if we were to grant this application, the hearingthat would then subsequently take place in this Court would be limited to inquiringinto the correctness of Downs J's refusal to grant leave under cl 5(1)(c). A successfuloutcome in this Court for Saltburn from that hearing would be an order directingthe High Court to consider and determine an approved question of law. Contrary tothe notice of application, it would not be an order setting aside the arbitral award.Background[5] The arbitral award in dispute concerned a perpetually renewable lease to whichSaltburn and Penrose Holdings Ltd are parties: Penrose the lessor and Saltburnthe lessee. It is a type of lease called a Glasgow Lease and is regulated bythe Public Bodies Leases Act 1969.3[6] Saltburn had acquired the leasehold interest for a 21 year term renewable inperpetuity. The lease provided for an annual rent of $12,200 plus GST for the firstseven years and thereafter at such fair annual rents that might be determined at3 For a discussion of Glasgow Leases, see Mandic v Cornwall Park Trust [2011] NZSC 135, [2012]2 NZLR 194 at [25]–[27].seven year rent reviews. The fair annual rent for the last seven years of the 21 yearterm had been $45,500.[7] The 21 year term of the lease expired on 3 September 2016. Penrose obtaineda valuation that the fair annual rent for the first seven years of a new lease on the sameterms as the one which had expired was $55,000. Saltburn notified Penrose that it didnot accept the rent assessment and it did not wish to renew the lease.[8] The lease's renewal process is governed by certain terms derived from the firstand second schedules to the Public Bodies Leases Act. The relevant provisions meantthat when Saltburn decided it did not want to renew the lease, that triggereda requirement the lease be sold by public auction. The provisions also meant that forthe purposes of the auction, it was necessary to calculate what is referred to inthe second schedule as "the upset annual rent." Clause 10 of sch 2 states that the lease"shall be offered by the lessor by public auction at the upset annual rent" of the land"for the first [seven] years of the term of the lease".[9] A lot rides on the upset rent. Clause 20 of sch 2 provides that the vendor mustaccept the highest bid at the auction for the new lease but only if the bid is not lessthan the upset rent. If there is no bid equal to or greater than the upset rent, thenthe lessor is not required to sell and the land with all its improvements reverts tothe lessor.4 The outgoing lessee receives no payment or compensation in relation tothe improvements. Conversely if the auction does reach the upset rent, thenthe successful bidder and now the new lessee must pay the outgoing lessee the valueof the improvements.5 The outgoing lessee is entitled to bid at the auction and so ifthey were the successful bidder then obviously no payment would be required.[10] The value of the improvements in this case was agreed to be $730,000.[11] The parties could not agree on the calculation of the upset rent and the matterwent to arbitration.4 Public Bodies Leases Act 1969, sch 2, cl 21.5 Schedule 2, cls 11 and 12.[12] The arbitrator, Sir Ian Barker QC, held that "upset annual rent" operated asthe equivalent of a reserve price and was thus a synonym for the minimum fair annualrent which the lessor is prepared to accept at the auction for a new lease which includesall the other terms of the lease the old lessee has declined to renew.6 Thus, there wasno material difference between "upset annual rent" and "fair annual rent."[13] After reviewing the valuation evidence, the arbitrator fixed the upset rent at$53,600, which was only slightly less than the fair annual rent which it will be recalledwas $55,000.7[14] Saltburn considers that the figure of $53,600 is too high, putting it at risk ofthere being no successful bidder and thus losing compensation for its improvements.It wishes to submit the question what is meant by the phrase "upset annual rent" forconsideration to the High Court.Justice Downs's decision refusing the application under cl 5(1)(c) for leave toappeal to the High Court[15] As Downs J recognised, the principles a High Court judge should apply indetermining whether to grant an application for leave under cl 5(1)(c) are wellestablished, having been articulated by this Court in Gold and Resource Developments(NZ) Ltd v Doug Hood Ltd.8 In that case, this Court held that once the Judge hassatisfied themselves the proposed question is a question of law, he or she must thenconsider the following factors:9• the strength of the challenge/nature of point of law;• how the question arose before the arbitrators;• the qualification of the arbitrators;• the importance of the dispute to the parties;6 Saltburn Holdings Ltd v Penrose Leasehold Ltd (Partial Award) Ian Barker 18 December 2017[Arbitral Award] at [29].7 At [85].8 Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318.9 At 333–335.• the amount of money involved;• the amount of delay involved in going through the courts;• whether the contract provides for the arbitral award to be final andbinding; and• whether the dispute is international or domestic.[16] In this case, Downs J accepted that Saltburn's proposed question wasa question of law. However, he found that most considerations told against leave orwere of neutral value.10 These included that the case was likely a "one-off", this beingonly the third auction of a Glasgow Lease in 80 years.11 Saltburn's case challengingthe arbitral award was weak and there was little prospect of appellate reversal.Saltburn was advocating that hitherto orthodox approaches to valuation should not beused to assess upset annual rent. But the approach adopted by the arbitrator was inaccord with authority,12 and supported by the weight of the valuation evidence beforehim.[17] Further, although the dispute was significant to Saltburn, the rent increase thatled to its decision not to renew was modest and it did not in fact ownthe improvements.13 The arbitrator was a qualified and highly experienced lawyer andthe valuer appointed to assist him was similarly very experienced.14 Clause 7 of sch 2of the Public Bodies Lease Act contemplated the arbitration process as binding andalthough the significance of the upset rent point only emerged during the arbitrationprocess, by the time of the arbitration hearing the assessment of upset rent wasparamount.15[18] In the view of Downs J, the mix of factors "is clear".16 Leave should not begranted.1710 First Decision of Downs J, above n 1, at [26].11 At [26].12 At [15] citing Cox v Public Trustee [1918] NZLR 95 (SC).13 At [17]–[18] and [24].14 At [21]–[22].15 At [20] and [25].16 At [26].17 At [26].[19] The Judge re-affirmed these reasons in his subsequent decision under cl 5(5)refusing leave to appeal to this Court against his cl 5(1)(c) decision.18The application for leave before us under cl 5 (6)Analysis[20] In Downer Construction (New Zealand) Ltd v Silverfield Developments Ltd itwas held that this Court should only grant special leave under cl 5(6) where satisfiedthe proposed appeal raises some question of law or fact capable of bona fide andserious argument in a case involving some interest, public or private, of sufficientimportance to outweigh the cost and delay of the further appeal.19[21] The primary contention which Saltburn wishes to advance on its proposedappeal in this Court is that Downs J was wrong to assess its substantive case as weakand a "one-off." According to Saltburn, the issues it wants to raise in the High Courthave real merit. Moreover, they are issues that are not confined to "upset rent" andauctions of Glasgow Leases. Rather they apply to the calculation of fair annual rentgenerally and therefore are of general or public importance.[22] Our sense is that Saltburn's substantive case appears to have evolved sinceDowns J's decision from being a case about the meaning of "upset annual rent" as thatphrase appears in the Public Bodies Leases Act to a much wider argument aboutvaluation methodology setting fair annual rent and fair market rent. More specifically,it appears to be an argument about the calculation of the rental factor to be applied tothe nominal freehold land value in order to arrive at a fair annual rent.[23] Arguments about valuation methodology were certainly advanced inthe High Court but it is clear from Downs J's judgment he understood those argumentsto be advanced in the context of a central argument that "upset rent" was not to beequated with "fair annual rent" and that accordingly a different more subjectivevaluation exercise was required.18 Second Decision of Downs J, above n 2, at [2].19 Downer Construction (New Zealand) Ltd v Silverfield Developments Ltd [2007] NZCA 355,[2008] 2 NZLR 591 at [33].[24] In his decision, the arbitrator accepted that in determining the fair annual rentpayable for a leasehold property, it was recognised valuation practice to considerthe rent on two principal approaches, namely the "classical approach" andthe "traditional approach".20[25] The classical approach which is the primary approach requires reference toother known and confirmed market rentals. The traditional approach is based onan assessment of the underlying freehold land value and the application of a rental ratewhich will have regard to the terms and conditions of the lease. On the evidence beforehim, the valuer appointed to assist the Tribunal adopted the traditional approachbecause of the absence of a sufficient number of truly comparable market rentals. Heconsidered the unimproved freehold land value should be fixed at $822,000 anda rental factor of 6.5 per cent adopted, arriving at the fair annual rent of $53,430. Thiswas accepted by the arbitrator.21[26] As we understand it, Saltburn's main complaint now is that the rental rate usedby the arbitrator of 6.5 per cent was fixed by reference to a prescribed formula whichwas a wrong approach to fair annual rent for the type of lease at issue in this case.22Saltburn acknowledges that the approach the arbitrator followed is an established one,endorsed by modern decisions of this Court, but according to Saltburn it isconceptually wrong and contrary to the 1912 decision Drapery and General ImportingCo of New Zealand (Ltd) v Mayor of Wellington.23[27] Saltburn argues that the correct approach mandated by Drapery is to set fairannual rent by reference to the terms of the lease, and to factor in the costs ofdeveloping the land and expected returns. The percentage has to be calculated so asto be able to convert the notional market value of the unimproved land into a figurewhich encompasses all those factors. Otherwise, if the percentage is not so calculated,the resulting figure will not comprise a fair annual rent.20 Arbitral Award, above n 6, at [71].21 At [72].22 It would have been acceptable for the type of Glasgow Lease in Mandic v Cornwall Park Trust,above n 3, but not the lease in this case. The arbitrator should not therefore have relied on Mandic.23 Drapery and General Importing Co of New Zealand (Ltd) v Mayor, Etc, of Wellington (1912) 31NZLR 598.[28] Like Downs J, we consider the challenge to the arbitrator's decision equatingupset rent with fair annual rent to be weak. The arbitrator's decision is supported bythe wording of various provisions in the schedules and relevant case law as well ascommercial common sense. As the arbitrator pointed out, no vendor would nominatea figure that was less than fair annual rent because the figure represented by the upsetrent endures for the whole term of the rental period.24[29] In our view, even if this Court were prepared to entertain the new argumentsand allow a reformulation of the proposed question of law, they too are fraught withdifficulties. As both the arbitrator and Downs J pointed out, the appropriate methodof valuation to be used in any given situation is a matter of fact, not law.25 Further allthree valuers called to give evidence, including the valuer called by Saltburn itself,relied principally on the traditional method and all three adopted a rate of 6.5 per cent.As already mentioned, that approach and the figure of 6.5 per cent was also endorsedby the valuer appointed to assist the arbitrator. The approach is an established one andconsistent with the weight of authority.[30] We also regard Downs J's treatments of the other relevant considerations to betaken into account under cl 5(1)(c) as compelling. We note too that further delay ofan appeal in this Court and then in the High Court would be highly prejudicial toPenrose who has been left in limbo since September 2016. Its lessee has departed andit has not been able to undertake the auction.[31] In all those circumstances, we consider Saltburn has little chance of persuadingthis Court that Downs J was wrong to refuse leave.Result[32] The application for special leave to appeal is accordingly declined.24 Arbitral Award, above n 6, at [30].25 At [71]; and First Decision of Downs J, above n 1, at [16].[33] There is no reason why costs should not follow the event and we accordinglyorder Saltburn to pay Penrose costs for a standard application on a band A basis andusual disbursements.[34] Finally, for completeness, we record that Saltburn also purported to apply forspecial leave to appeal a separate arbitral award made by the arbitrator, Sir Ian Barker,in this dispute dealing with costs. However, our understanding is that the costs awardhas never been the subject of an application to the High Court for leave under cl5(1)(c).That being so we have no jurisdiction.Solicitors:Foy & Halse, Auckland for ApplicantBurton Partners, Auckland for Respondent