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

SALTBURN HOLDINGS LTD v PENROSE LEASEHOLD LTD [2018] NZHC 1246 [31 May 2018]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2018-404-000374[2018] NZHC 1246IN THE MATTER of an appeal under the Arbitration Act 1996BETWEEN SALTBURN HOLDINGS LIMITEDApplicantAND PENROSE LEASEHOLD LIMITEDRespondentHearing: 28 May 2018Counsel: DW Grove for ApplicantRB Stewart QC for RespondentJudgment: 31 May 2018JUDGMENT OF DOWNS JThis judgment was delivered by me on Thursday, 31 May 2018 at 11 ampursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors/Counsel:Foy & Halse, Auckland.Burton Partners, Auckland.RB Stewart QC, Auckland.DW Grove, Auckland.The proposed appeal[1] Saltburn Holdings Ltd ("Saltburn") is the lessee of a "Glasgow lease", aspecies of lease:(a) With a 21-year term, renewable in perpetuity.(b) For which rent is calculated fairly—"fair annual rent"—withoutreference to the value of improvements to the land.(c) Involving a public auction for the leasehold if the lessee does not wishto renew the lease (at the expiry of the term) on the fair annual rent, butat which the lessee may also bid.(d) Requiring payment by a new lessee of the value of improvements to theoutgoing 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 theauction at a rental equal to or above the upset annual rent; the land, its buildings andimprovements revert absolutely to the lessor. And, the outgoing lessee receives nopayment in relation to improvements.[4] The matter went to arbitration. The Arbitrator, the HonourableSir Ian Barker QC, concluded upset annual rent was synonymous for the minimumfair 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 hassublet 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 theupset annual rent much too high, so there is a risk it may receive no payment asoutgoing lessee. It seeks leave to appeal to this Court.[6] A full Court of the Court of Appeal has emphasised the desirability of a "shortjudgment" in this context.2 This decision respects that exhortation. Background isdiscussed as necessary under each of the applicable considerations identified by thatCourt.3AnalysisA question of law?[7] An appeal against an arbitral award is permissible only if a question of lawarises out of the award.4 The jurisdictional threshold is met: what is meant by thephrase "upset annual rent" is such a question. That is how Sir Ian approached thepoint. And, as the Supreme Court of Canada has observed, "questions of law arequestions about what the correct legal test is".5Strength of challenge and nature of the point[8] Saltburn contends hitherto orthodox approaches to valuation should not beused to assess upset annual rent; instead, a "very different valuation exercise [is]required".[9] Saltburn argues "subjective factors" enter the mix, which would necessarilyproduce a lower figure than that arrived at by Sir Ian. These include the obligation ona 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.62 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 theArbitration 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 questionof 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 Saltburnbecame lessee (in 1995).Saltburn emphasises the exercise is to identify a reserve price for a Glasgow lease, atype 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 anauction, and hence natural usage supports the interpretation of a figure "below whichthe lessor will not sell".[12] Second, the terms of the lease and related provisions support Sir Ian'sconclusion upset annual rent is synonymous with fair annual rent. Clause 18 of thelease provides the lease is granted under s 7(1)(g) of the Public Bodies Leases Act1969 (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 withSchedule 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 asaforesaid". In context, the phrase must refer to cl 1 of the same schedule by whichfair annual rent is determined, because that schedule contains no earlier reference toupset 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". Itis inherently improbable a lessor would nominate a rental below the minimumacceptable to it, particularly when the upset rent must endure for at least a seven-yearterm.7 Schedule 2 later refers to "upset annual ground rent", which is clearly intended to be synonymouswith "upset annual rent"; see cls 20 and 21.[15] Fourth, Sir Ian and Mr Peter Mahoney, the very experienced valuer appointedto assist Sir Ian, adopted valuation methodology identified in Cox v Public Trustee,8and recently endorsed by the Supreme Court in Mandic v Cornwall Park Trust Boardin the context of Glasgow leases.9[16] Fifth, Saltburn's proposed methodology would introduce uncertainty to the lawby requiring an unprecedented and sui generis approach. It would also require Courtsto re-enter the arena of rent prescription when attendant principle is well known, andvaluation methodology a matter of fact at arbitration.[17] Sixth, contrary to Saltburn's submission, this is not a case in which it wouldnecessarily suffer significant injustice if it received no payment for improvements inconsequence of no new entrant at auction. Payment in this context has been describedas "a limited possibility",10 which in turn reflects the lessee does "not in fact own theimprovements they have paid for".11 All the lessee owns is "a term of years in the landand improvements".12[18] Moreover, in Mandic v Cornwall Park Trust Board, the majority of theSupreme 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 intendedto 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 ofJustice, Mr Anthony Lusk QC was not able to identify a single example of the auctionprocess in 55 years.15 The parties found one—in 1949.16 The recent case of8 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 upsetrent; no purchaser emerged at auction.17How the question arose before the Arbitrator[20] Saltburn contends the significance of the point emerged only during theprocess. That is in part correct; Sir Ian observed the parties were a "little vague as tothe 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. Hisdecision 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 atauction.[24] The rent increase causative of Saltburn's decision not to renew the lease ismodest: $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 lattersupports it. That said, Saltburn does not have a right to the $730,000; see theobservations 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 tellagainst leave or are otherwise neutral, save for Saltburn's interest in the appeal andamount at stake. But even these are qualified for the reasons expressed above. Thecase is likely a "one-off"; this appears to be the third auction of a Glasgow lease in 80years. Significantly, there is little prospect of appellate reversal; Saltburn's case is notstrong. 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 isencouraged. If this proves impossible, the parties may file and serve memoranda ofnot 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 issueabout Saltburn's representation with Sir Ian or me. I record as much for completenessonly...Downs J