AND the ARBITRATION ACT Lessor G H BARTON & ANOR. Lessee AWARD OF A J FORBES QC AND J P LARMER (ARBITRATORS) Dated: 8 June 2011

Transcription

1 UNDER the PUBLIC BODIES LEASES ACT 1969 AND the ARBITRATION ACT 1996 IN THE MATTER BETWEEN of an arbitration pursuant to a second amended agreement as to terms of reference dated 7 April 2010 ASHBURTON DISTRICT COUNCIL Lessor AND G H BARTON & ANOR Lessee AWARD OF A J FORBES QC AND J P LARMER (ARBITRATORS) Dated: 8 June 2011 Arbitrators: A J Forbes QC P O Box 2929 Christchurch 8140 Solicitors: Buddle Findlay, Christchurch for the lessor Wynn Williams & Co, Christchurch for the lessee J P Larmer 370a Devon Street West New Plymouth 4310

2 2 INDEX 1. Second amended agreement as to the terms of reference, the parties and the leased property 3 2. Relevant provisions of the lease as to rent reviews: fair annual rent to be assessed 2.2 exclusion of improvements 3. Relevant principles stated in the Forbes 2000 award 6 page (i) (ii) (iii) (iv) (v) the hypothetical situation the prudent lessee s prospective land exclusive of improvements the rental assessment process and alternative valuation methodologies factors likely to influence the hypothetical lessee 4. Comment on various valuation methodologies referred to in The Proprietors of Parininihi Ki Waitotara Block v Gurthrie award Issue as to the higher limit of the ADC s valuation for Barton 1 in terms of the Act Schedule 1 cl Issue as to a lessor s interest value and LEI value Issue as to rentals agreed by negotiation in the context of the sale of a lessor s interest to the lessee Issue as to prior arbitral rental awards as evidence Issue as to the potential availability of ground water Issues as to the LEI state of the land, the climatic conditions and the development timeframe Issues as to the appropriate valuation methodologies and evidence that should be adopted Mr Cunneen s evidence 11.2 Mr Englebrecht s evidence 11.3 Mr Armstrong s evidence 11.4 Lessee s valuation evidence further general comments 11.5 ADC s rental agreements Award as to fair annual rental Costs and other matters 53

3 3 Mr W J Palmer and Ms Barbara Saegers for the lessor Messrs P F Whiteside and L K Cooney for the lessees Hearing: 20 April, June, 1-9 July, July, 6-7 September 1999 (held at the Canterbury Club, Cambridge Terrace, Christchurch and Chateau on the Park, Deans Avenue, Christchurch) Abbreviations Act Public Bodies Leases Act 1969 ADC Ashburton District Council (the lessor) arbitration agreement the second amended agreement as to terms of reference dated 7 April 2010 Barton 1 Barton 2 BPDC DCF Forbes 2000 award Lease LEI WDC the third seven year periodic rental review under the 21 year term of the lease for the period 1 March 2002 to 28 February 2009 the first seven year rental for the renewal term of 21 years under the lease for the period 1 March 2009 to 29 February 2016 Banks Peninsula District Council discounted cashflow analysis the arbitration award of A J Forbes QC in Banks Peninsula District Council v L K Cooney & Ors dated 19 January 2000 memorandum of lease dated 1 August 1998 between the ADC (the lessor) and G H & C S Barton (as the lessee) land exclusive of improvements Waimakariri District Council GST: All rental figures in this award are GST exclusive Second amended agreement as to terms of reference, the parties and the leased property 1. Austin John Forbes QC and John Patrick Larmer are appointed as the Arbitral Tribunal to determine the ground rental of a farm property situated at 30 Hackthorne Road (SH 72), Carew, Mid-Canterbury (approximately 30 kms west of Ashburton) pursuant to the arbitration agreement. 2. The lessor under the lease is the ADC. The lease is pursuant to the Act s11(b). The lessee is

4 4 George Howard Barton and Catherine Storey Barton. The area of the leased property, which is farmed, is agreed as being ha. 3. This property is in two blocks of 77 ha and 39 ha respectively about 1 km in part, separated by a freehold property owned by the lessee. The whole of the leased property and the freehold property have since 2007 been sub-leased by the lessee to Padleigh Dairies Limited for a term of eight and a half years. The property is utilised for dairy grazing in conjunction with the sublessee s dairy farming. Much of both blocks is irrigated from the Mayfield-Hinds Irrigation Scheme, but it is agreed that this is not a factor which is relevant to the LEI value of the property. 4. The lease is for a term of 21 years, with perpetual rights of renewal pursuant to cl C.3 and the Act. The rental for the previous rental period 1 March February 2002 was $3,450pa. 5. For determination in the arbitration is the fair annual rent payable: (i) (ii) on review at the third seven year period under the 21 year term of the lease, namely from 1 March 2002 to 28 February 2009 (Barton 1); and for the first seven year period under the renewal of the lease for 21 years, namely from 1 March 2009 to 29 February 2016 (Barton 2). Relevant provisions of the lease as to the rent payable and exclusion of improvements Fair annual rent to be assessed 6. The lease cl C.3 provides that it is granted pursuant to the Act s11(b) and that on the expiration of the term the lessee shall have the right to be granted, in accordance with the provisions of the Act Schedule 1, a renewal of the lease at a rent for the first seven years of the term of the renewal lease, to be determined in accordance with Schedule 1, for a term of 21 years and subject to the same provisions as in the lease, including the provision for renewal. 7. Schedule 1 cl 2 requires the lessor, before the expiry of the term of the lease or as soon thereafter as may be, to cause to be made a valuation of the fair annual rent of the land. 8. Clause C.3 provides that the rent for the subsequent periods of seven years for the term of the lease shall be determined in accordance with the Act s22. Section 22(2) similarly provides that the lessor shall cause a valuation to be made of the fair annual rent of the land for the next ensuing period of the term of the lease.

5 5 9. If an arbitration is necessary then the valuation shall be determined in accordance with Schedule 1 cls 7 to 11, which shall apply, with necessary modifications, as if the valuation was being made to determine the rent payable under a renewal lease. 10. So the consequence is that the same basis for the assessment of the rent is required for both Barton 1 and Barton 2 (the 2002 and the 2009 reviews respectively). Exclusion of improvements 11. The lease cl C.3 also provides that, pursuant to the Act Schedule 1 cl 3, for the subsequent periodic rent reviews no account shall be taken of the improvements on the land, defined as: All improvements now on the property and those erected or carried out hereafter by the Lessee his executors, administrators and assigns and it is agreed that the term improvements shall have the meaning ascribed thereto in the Valuation of the Land Act 1951 (sic) 12. The Valuation of Land Act was repealed in The definition of improvements was amended in 1970 but that amendment provided that it did not affect a lease or renewal of a lease entered into previously. So it is the original definition in the 1951 Act which is applicable, which was as follows: Improvements on land means all work done or material used at any time on or for the benefit of the land by the expenditure of capital or labour or by any owner or occupier thereof in so far as the effect of the work done or material used is to increase the value of the land and the benefit thereof is unexhausted at the time of valuation. 13. There is something of a complicating factor in that the reference to the exclusion of improvements in the lease cl C.3 strictly only applies to a periodic review for a subsequent period of seven years in the term of the lease in accordance with the Act s22. Clause C.3 has no express reference to the exclusion of improvements in regard to the assessment of the rent for the first seven years of a renewal lease. As stated, the rent for the first term of a renewal lease is, by s11(b), to be determined in accordance with the Act Schedule 1. Clause 3 of the Schedule, as to the valuation required to be made by the lessor at the time of the expiration of the term of the lease, provides as follows: 3. In making the said valuation no account shall be taken of the value of the following improvements on the said land: [Specifying, as the lessor thinks fit, the kinds of improvements, whether made during the term or any other time, which are not to be taken into account in the valuation of the rent]. 14. As is evident, there is no definition of improvements in the Schedule. However, Mr Palmer, counsel for the ADC as lessor, accepted that the same definition applied for Barton 2 (the 2009 review), ie for the first period of the renewal lease. That was a sensible and proper concession. As he submitted in his opening, this accords with the usual principles as to the

6 6 interpretations of contracts. It is accordingly not necessary to consider alternative definitions of improvements that might be said to be possibly applicable to Barton 2. As counsel also said, it is hard to conceive that the parties would have intended that a different definition of improvements should apply to the first period of the renewal lease, as against the subsequent periodic rent reviews during the term. 15. It is also to be noted that the definition in the lease cl C.3 refers to the exclusion of all improvements now on the property and those erected or carried out hereafter by the Lessee. It is further to be noted that in Schedule 1 cl 3 the reference is to no valuation being taken of the value of improvements on the said land. Again, Mr Palmer sensibly and properly conceded that this excluded any improvements under the land or improvements which enhanced the land but which were not physically on top of the land. 1 The Arbitral Tribunal does not consider that anything turns on these aspects of the definition in the present case and neither counsel contended otherwise. Relevant principles stated in the Forbes 2000 award 16. The Arbitral Tribunal considers that the following principles stated in the Forbes 2000 award are relevant to the present arbitration. The lease in issue in that award was also granted under the Act s11(b). There are a number of similarities as to the legal principles applicable and the appropriate valuation methodologies. These principles are supported by the authorities referred to in the Forbes 2000 award or as are noted. (i) The hypothetical situation 17. The assessment of a rental on a LEI basis is a hypothetical, not to say artificial, one. The required assessment bears little relation to the reality of the present-day condition of the leased property and the likely reality of the parties actually negotiating the rental for a lease of it. 18. The rent to be assessed is by reference to the hypothetical bargain which would be struck between a willing, informed but not anxious lessor and a willing, informed but not anxious lessee negotiating fresh at arm s length in the market at the respective review dates and on the terms of the lease. The lessor and lessee are deemed to be prudent people of business. The lessee in possession at the review dates, including where there is a right of renewal, is entitled to have the rent fixed at the amount which a hypothetical, willing lessee not in occupation would agree to pay. 19. The negotiations between the hypothetical parties are assumed to be conducted in the light of all the bargaining advantages and disadvantages which affect the property. It is assumed 1 This concession is consistent with the decision in Musson v Canterbury Regional Council (CA 35/03; ).

7 7 that neither party would overlook any ordinary business consideration likely to advantage or affect the property at the review dates. The notional lessee is presumed to have informed himself with regard to all the relevant factors affecting the property, including its potentialities. 20. The property is to be valued and the rent is to be set not merely by reference to the use to which it is being put at the time but also by reference to the uses to which it is reasonably capable of being put in the future, encapsulated in the highest and best use test. This will apply in particular in regard to the valuation of bare land on an LEI basis. 21. There is no actual LEI land on the Canterbury Plains and so there is no land which is truly comparable to land in the state required to be valued, although in the present arbitration there was evidence of small portions of land that were claimed to be reasonably comparable to LEI land. 22. The hypothetical exercise also requires that the notional parties would have had available to them all of the evidence and information which was presented in this arbitration. In the present case this evidence was extensive. It included evidence from some 10 expert witnesses. The reality must be that actual parties negotiating for the rent at each of the review dates would have had only a fraction of the detailed information provided by these expert witnesses and, as well, the substantial information provided by John Rooney, who is the Property Manager of the ADC. In addition there were comprehensive opening and closing submissions from counsel and reference to a considerable number of legal authorities and academic and other publications. 23. In the Arbitral Tribunal s view this consideration has the consequence that, generally speaking, we have not considered it to be necessary or even appropriate for us to enter into a precise and detailed analysis of the competing views of the relevant expert witnesses and the reasons for them. A more generalised assessment is likely to be reflective of the reality of the actual parties negotiating for the rent and, in particular, the prudent lessee s perspective. 24. All of the valuation methodologies contended for by the parties are to some extent unreliable in their application to the present case or they suffer from the dearth of evidence. Allied to this consideration, is that there was evidence adduced by the lessee, but not accepted by the lessor, that on a hypothetical development programme and associated DCF analysis no rental at all could economically be justified but nevertheless it was accepted on behalf of the lessee that the property in fact had a rental value as at each of the review dates. It was acknowledged that the market does not necessarily behave in purely economic terms. 25. Another aspect of the artificial exercise involved is that while the leased property is to be valued in its LEI state, ignoring all tangible and intangible improvements which it has

8 8 undergone, the surrounding infrastructure in the form of roads, community facilities and services, schools, proximity to facilities offered by nearby towns and the like are to be assumed to be in place. So the leased land is assumed to be an island in its LEI state devoid of any improvements but everything around it and relating to it is to be treated as being intact as at the respective review dates. The highest and best use of the land is likewise to be assessed on this basis 2. (ii) The prudent lessee s perspective 26. The authorities indicate that it is the perspective of the hypothetical lessee in particular which falls to be considered. It is assumed that this lessee has the alternative of taking a lease of another property. So the rental fixed must be one which would be acceptable to a hypothetical and willing lessee. A prudent lessee was described by the Court of Appeal in Grandalla Limited v Berben as being careful to avoid undesirable consequences; circumspect, discreet 3. It was also said 4 that the question is not so` much what rental would give the lessor proper interest upon the value of the land but rather what rental would a prudent lessee give for the land for the term and subject to the conditions of the lease. The rent is to be determined on the basis of the open market and one which is fair for the property. The court also stated that: accordingly, the valuer is to be concerned only with matters which would affect the mind and ultimately the judgement of the prudent lessee in making an offer of rental to the lessor. It is the motives which inspire such a hypothetical person, willing but not anxious, which are relevant. They include of course a consideration of the use to which the lessee may put the premises... Looking at the matter from a hypothetical willing but not anxious lessor s perspective, it is what that party can reasonably expect to be offered which must be assessed, not what that party would like to receive This is effectively a modern-day statement of what was said in the leading case of Wellington City Council v National Bank of New Zealand Properties Limited 6 that the umpire there: was only concerned with matters which would affect the mind and ultimately the judgment of the prudent lessee in making his offer to the landlord 28. In Feltex Limited v JBL Consolidated Limited 7 Henry J said 8 that a fair annual rent must 2 Cox v Public Trustee [1918] NZLR 95 (Full Court) per Hosking J at 99; Tetzner v Colonial Sugar Refining Company Ltd [1958] AC 50 (PC) per Lord Keith at 57; S&M Property Holdings Ltd [1993] 3 NZLR 189 (CA) at (CA 191/98; ) per Blanchard J at [8]. (This case is reported at [1999] 4 NZ Conv C 192,963. References in this award are to the unreported judgment in the bundle of authorities of the lessor dated tab 11.) 4 ibid at [8] 5 ibid at [7] 6 [1970] NZLR 660 (CA) per North P at 671. These statements as to the prudent lessee s perspective are also supported by the arbitration awards of Sir Ian Barker QC in The Proprietors of Parininihi Ki Waitotara Block at [36(d)] and Sir David Tompkins QC in The Whangarmoa Trust v The Whangarmoa Lessees Group at [143] 7 [1998] 1 NZLR 668

9 9 represent the amount which the lessee can reasonably expect to pay for the rights and obligations which are undertaken in the lease. He cannot expect to receive the benefits without payment of a fair consideration for them. His Honour said that fairness required any relevant difference between the terms of two leases being compared to be allowed for. Only in that way can like be compared with like and overall fairness obtained. 29. In Sextant Holdings Limited v NZ Railways Corporation 9 Richardson said that fair did not open up a wider inquiry as to the personal circumstances of either party. His Honour said fair is often used in conjunction with market, eg fair market value. His Honour further said that it was implicit that in considering the rents of comparable premises the valuer should disregard or discount rents which are unfair in the sense of being the product of freak or special circumstances. However, the presence of fair is insufficient to displace the hypothetical market basis which is mandated by the rent review clause. 30. So the assessment of the fair annual rent does not point to the displacement of the hypothetical market basis for the assessment of the rent. The word fair is directed to what the hypothetical lessor and lessee could fairly be expected to pay and receive for the rights and obligations undertaken in the notional lease. That is, it is a fair rent for the land or the premises. 31. It follows from what Richardson J said in Sextant Holdings that comparable market evidence which is at the upper or lower limits, in terms of comparability, may need to be given less weight, if any, than that which is within the middle band. 32. That said, the Arbitral Tribunal treats these statements of principle as emphasising the perspective of the lessee, rather than indicating that the perspective of the lessor is irrelevant or is to be substantially discounted. 33. Indeed in Granadilla Blanchard J said 10, referring to Sextant Holdings, that Richardson and McKay J J in that case saw no difference between a prudent lessee test and one which posited a willing but not anxious lessor and a willing but not anxious lessee. Blanchard J further said: for every abstract prudent lessee there obviously must be an abstract willing but not anxious lessor who has the premises on offer and must be assumed to be willing to take a ground rent which a reasonable but prudent lessee thinks proper to give 34. Likewise, in Casata Limited v General Distributors Limited 11 the Arbitral Tribunal had said that there was no discernable difference between the prudent lessee test and the willing 8 at (1993) 3 Conv C 191,556 (CA), per Richardson J at 191, at [5] 11 [2005] 3 NZLR 156 (CA)

10 10 lessor/willing lessee test and that it had articulated the latter as assuming that the rent determined would be the maximum sum a lessee will pay and the least amount that the informed lessor will willingly accept. The Court of Appeal stated that this accorded with what the same court had said in Sextant Holdings. 35. The perspective of the hypothetical lessee is underpinned by the principle that the lessor leases the property for a return, by way of rent, which he is legally entitled to, irrespective of the success or failure of the lessee s business. Under this traditional model there is no partnership investment in the development of the land and the payment of rent is not to be viewed as some form of equitable division of the proceeds of that investment. So a lessor incurs no appreciable risk and for practical purposes the lessee takes all the risk and bears any uncertainty in prevailing economic conditions. 36. Also to be noted is that in his award in The Proprietors of Parininihi Ki Waitotara Block Sir Ian Barker QC referred 12, with express approval, to the award of Sir Trevor Henry in Re Te Aute Trust Board in That award dealt with assessing the ground rent of perpetual leases of farming properties in Hawkes Bay held under Glasgow leases. Sir Trevor said: The task which I have to perform is to place myself in the armchair of a prudent farmer who desires to renew his lease for a further period of 21 years and pay a fair rent. He is in possession of the land on which he is carrying on a farming business and he has, except for the Lessor s interest ascertained as earlier stated, the ownership of the improvements. In my view the prudent lessee ought to be one who can provide sufficient capital and finance to acquire assets essential to his business and also pay a fair rent for the further asset, namely, the land which he requires for his farming business. The assets which a prudent farmer ought then be able to supply for a farming business include the land for which he must reasonably expect to pay a fair rent. 37. It is evident that Sir Ian Barker QC saw this statement as indicating that the prudent lessee must be taken to have the financial resources with which to fund improvements and pay a fair price for the use of the land. (iii) Land exclusive of improvements 38. It is the lessor s fee simple interest in the land which is leased, but the rental valuation to be conducted is required to be on an LEI basis. However, this does not necessarily require having to attempt to value the land as it existed many years ago in its natural or native or virgin state but rather the requirement is to value the land as it would have been at the rent review dates, but without regard to the value of the improvements. An analogous term may be the unimproved value at the review dates. 39. While it was stated in the Forbes 2000 award that the arbitrator there did not consider it was 12 at [42] 13 [1980] LVC 792, reported in (1980) Valuers Journal 801

11 11 necessary to go further and endeavour to notionally recreate the ground cover or other features which the land might have had at any given prior time, such as some primeval time or when it was first the subject of European settlement or cultivation and nor was there any need or, indeed, logic in adopting that date as the time for the assessment of the LEI value, that should not be taken to mean, at least in regard to the present arbitration, that the existence and type of the ground cover and the state and fertility of the soil before any improvements to the land were effected is not relevant. Further reference is made to this issue in the consideration of what is meant in the present case, having regard to the evidence, of the state of the LEI. (iv) The rental assessment process and alternative valuation methodologies 40. In the present arbitration there was considerable evidence produced as being comparable market evidence. Further reference is made to this. Clearly enough, the best comparable evidence would be that in the form of new lettings of farm properties in their LEI state but, clearly enough also, such evidence is never going to be available today. So alternative market evidence and valuation methodologies must necessarily be adopted or considered. Ultimately, the appropriate valuation methodologies and the assessment of the relevant circumstances and the weight to be given to them is a matter for the Arbitral Tribunal. It is unlikely that any one valuation approach is going to be conclusive, although we refer further to the traditional methodology as being the predominant one which is adopted for ground rental assessments, with assistance from the classic and other methodologies where practicable. 41. Nor should a particular valuation method that has validity be ruled out because it is unlikely to have been present in the hypothetical parties minds. The analysis is not as to what evidence the parties are presumed to have intended should be relied upon or admitted but rather what they intended should be measured, namely the fair annual rent. Comparable evidence has to be considered in terms of whether it is relevant and, if it is, what weight should be given to it and the extent to which it is required to be adjusted to make it truly comparable to the leased property. Comparable market evidence is used in valuations because evidence derived from past transactions is assumed to demonstrate how the market behaved in actual transactions, which will usually reflect the bargaining advantages and disadvantages of the parties to them, since they are facts of the marketplace. While it is clear that usually the most cogent evidence will be comparable lettings, duly adjusted 14. If, as in the present arbitration, there is a lack of evidence of comparable new open-market, perpetually-renewable lettings then only limited weight, if any, can be placed on the classic approach. Otherwise, resort can, and indeed must, be had to other approaches. Other 14 Confirmed in Granadilla, fn 3 above, per Blanchard J at [15]

12 12 approaches may also provide a cross-check on any primary method adopted. These considerations were summarised helpfully in the award of Sir David Tompkins QC in Whangamoa Trust v The Whangamoa Lessees Group 15. Sir David also referred to the principles as to the prudent lessee s perspective referred to at [26] ff above, citing Grandilla and Sextant Holdings. 42. It is tolerably clear that the assessment of unimproved values is very much a matter of opinion which can be subject to a wide range of error and uncertainty. In Valuer-General v Johnston 16 Judge Archer pointed out 17 that when presented with conflicting valuations by capable valuers a court (or arbitrator) is seldom able to accept either valuation in its entirety and is unable to avoid a decision that suggests a measure of compromise. This is a material observation in the present arbitration. Likewise, in Boatpark Limited v Hutchinson 18 Thomas J referred 19 to the normal approach being for the valuer to select the most reliable method of valuing the property and then, if possible, to verify this by reference to other methods, saying at times the valuation may represent a collage of approaches. However, we do not consider that these observations preclude the adoption of a particular approach if this is considered to be appropriate. 43. The traditional methodology determines a market value for the property in its LEI state from comparable recent sales of improved properties and applies to this a percentage, or rental rate, to arrive the rent to be paid. It is relevant to the present arbitration that the Court of Appeal said in Granadilla 20 that this approach may have become the predominant method of fixing ground rents on the renewals of perpetual leases 21. Specifically, in a case such as the present the traditional approach requires the residual LEI value to be derived from an analysis of comparable sales of improved properties. While it must at all times be remembered that it is the rental of the land in its LEI state that falls to be determined, the traditional method is likely to be available as a valuable cross-check at the very least. Both the classic and traditional methods have the attribute of being market-based. 44. The main concern with the traditional approach for the purpose of assessing LEI rental values is that it is dependent upon the analysis of the value of the improvements of the comparable sales. In the absence of actual LEI sales evidence this approach is necessarily 15 fn 6 above 16 (1968) LVC at [895] 18 [1999] 2 NZLR 74 (CA) 19 at [84] 20 fn 3 above 21 per Blanchard J at [7]. At [14] [150] His Honour further said that the traditional approach is settled valuation practice, it had been adopted in Wellington City Council v National Bank of New Zealand Properties Ltd (fn 6) and that in the present case the umpire felt that he had little realistic choice of approach that he must apply the traditional approach, that this approach is available to a valuer where there is insufficient market evidence of comparable lettings and is often used and that it provides a method of checking an assessment made by reference to such lettings.

13 13 dependent on the residual analysis of sales of comparable improved or semi-improved properties. The sensitivity to the assessed value of improvements will be obviously greater in regard to sales of developed properties, as against sales of bare land. The valuation of invisible improvements to the land, such as clearing, stumping and cultivation, can make the task difficult, but that is what a valuer must do under this approach which, as we have said, is the predominant one adopted for ground rental assessments. 45. Other approaches, including that which was relied upon the lessee in the present arbitration, involve an economic or productive valuation approach based on the assessed economic return the lessee could derive from the land, supported by a hypothetical development programme and DCF analysis. In the present case any productive valuation approach will be dependent, in particular, on the assumptions made as to the availability of underground water for irrigation and the timeframe within which the land could reach productive and economic levels respectively from its assumed LEI state. The lessee asserted that a prudent lessee would be primarily influenced as to the rent he would be willing to pay by the economic return that could be expected to be derived from the land, rather than an assessment based on the traditional approach. The lessee relied on stock unit returns as being likely to be more important to a prudent lessee than the traditional approach. While the Arbitral Tribunal agrees that a productive valuation approach can be considered as a cross-check, we do not consider that it is appropriate for it to be relied upon as the primary approach in the present arbitration. 46. Any economic or productive valuation approach for the purpose of assessing LEI rental values, involving as it does projections as to the future return from the land, is also likely to be very sensitive to the assumptions made in the adopted sums for varying categories of income or expenditure There is authority 23 to support that regard may be had to freeholding valuations (or sales) of comparable developed properties, provided these are time adjusted to allow for inflation. But even if time adjusted such sales should not be preferred to evidence derived from open market sales, particularly of under-developed properties. 24 Further reference is made to this. 48. There is also an issue as to the weight to be given to other rentals negotiated in respect of leases under the Act and a further issue as to the weight to be given to the assessed LEI value analysed from sales of developed freehold land under the traditional approach. 49. There was no dispute in the present arbitration that the property is to be valued and the rent 22 This point was referred to in Allan v Valuer-General (1944) 8 MCD 457, a case concerned with an LEI valuation 23 Commissioner of Crown Lands v Lee [1980] LVC 163 (Davison C J and Messrs R MacLachland and R Frizzell) 24 ibid

14 14 is to be fixed not merely by reference to the use to which it is being put at the time but also by reference to the uses to which it is reasonably capable of being put in the future. This is encapsulated in the highest and best use test. 25 We have previously referred to this. Both Bob Englebrecht and Donn Armstrong, the lessee s valuer witnesses in the present arbitration, relied on a productive valuation approach in their valuations prepared for the Forbes 2000 award, but there they also relied on the traditional method as well, as a crosscheck. We note that in the present case they did not carry out such a cross check, at least in any substantial way. Mr Armstrong, in particular, took the view that an LEI value was incapable of being robustly assessed. He was critical of residual analysis in principle. This is referred to further. 50. An LEI valuation of course requires an assessment of the potential of the land. That is part of the platform that the lessor provides. But it is equally important to recognise that it is the lessee who, at his cost and risk, fulfils that potential. 51. In assessing the potential for the availability of underground water, for example, it is the potential that forms part of the LEI. It is not to be assumed that it does in fact have access to underground water or that this has been realised. That would be quite wrong. The potential of the land is realised through its highest and best use. 52. In the Forbes 2000 award the relevance to the rental valuation of the existence of the Ashburton-Lyndhurst Irrigation Scheme was the single most important issue. As stated, this aspect was not an issue in the present arbitration. It was accepted by the ADC that the existence of the Mayfield-Hinds Irrigation Scheme and the fact that the leased property is in fact irrigated by it is to be disregarded, following the conclusion that was reached in the Forbes 2000 award. What is important in the present arbitration, however, is the extent of the potential availability of underground water for irrigation. So a significant difference from the situation in the Forbes 2000 award is that there it was held that the land in its LEI state was to be assumed not have the potential to be irrigated. 53. There is also an issue as to the development timeframe for LEI land to be brought up to productive and economic levels. Allied to this is the cost of developing unimproved land by the most economical means available. This is also relevant to the valuation of the land in its LEI state, including allowance for the time value of the money invested for the land to reach a productive level at its highest and best use. The evidence of the expert witnesses on these issues varied considerably. (v) Factors likely to influence the hypothetical lessee 25 See Sextant Holdings, fn 9 above per Richardson J at 191,560. This was also confirmed in S & M Property Holdings Limited v Waterloss Investments Limited [1999] 2 NZLR 189 (CA) per Blanchard and Thomas JJ at 200, where the highest and best use approach was regarded as being part of a hypothetical exercise which is undertaken in order to arrive at the valuation of bare land

15 In the Forbes 2000 award several factors were emphasised as being more important or deserving greater weight than others in the determination of the rental valuations at the relevant review dates. Most of these are considered to be material in the present arbitration as well. 55. First, as already noted, the hypothetical (or notional) lessee is likely to be careful and circumspect, particularly in regard to risk or factors affecting the rental or the development of the land. 56. Secondly, the lessee would be likely to have regard in particular to any market evidence of comparable new lettings or rentals fixed on review under comparable leases, in particular leases under the Act, appropriately adjusted to derive an LEI rental rate. 57. Thirdly, the lessee may see as relevant and so give some weight to the LEI rental rates derived from the analysed freeholding sales of comparable leases under the Act, in particular those involving the same lessor. The lessee could be influenced by what unimproved values the lessor had agreed to in such sales. We refer to this further, in particular to the caution with which such evidence needs to be treated. 58. Fourthly, the lessee would have regard to the uses to which the land in its LEI state could reasonably be capable of being put in the future. In that state the land would be relatively depleted. The lessee would consider all relevant costs and risks, whether economic, climatic or otherwise. Although in the present arbitration the evidence as to the likelihood of doing so varied, the lessee could, with advice, make an economic or productive valuation analysis as to what rental he could afford to pay and what the return from the land would reasonably be likely to be able to be achieved. In that regard comparative stock unit rates for the land as developed could be considered, although again in the present arbitration the evidence as to this varied, particularly in respect of land suitable for dairying or dairy support farming. Such analysis would very likely be affected by the assumed timeframe for the productive development of the land. Although the initial stocking rate for LEI land would be very low, we consider that of more importance to the hypothetical lessee would be the potential developed productivity of the land, assessed against the costs and time involved to reach an economic, developed state. 59. Fifthly, the lessee would not expect that the rent paid would give the lessor a greater return in percentage terms than the likely return to the lessee from his use of the land, when it is the lessee who will be carrying virtually all of the risk in that regard. 60. Sixthly, the lessee would be likely to have regard to other market evidence in the form of residual LEI values and rental rates derived from the analysed sales of comparable, improved or semi-improved properties. In that regard any bare land sales would be likely to be more

16 16 influential than those with physical improvements. 61. Finally, in the present arbitration the potential to irrigate the property from groundwater sources would be likely to be a significant consideration for the lessee. Further reference is made to this. Comment on various valuation methodologies referred to in The Proprietors of Parininihi Ki Waitotara Block v Guthrie award In this award Sir Ian Barker QC, dealing with Maori reserved land in Taranaki, said that drawbacks can exist in relying too heavily on rentals under other perpetual leases, even with appropriate adjustments. There needs to be sufficient points of similarity, particularly in terms of location, the type of farming operation and the term of the lease. 63. However Sir Ian, in relation to comparables referred to in that arbitration, did not consider that a rent fixing process, involving some 10 lessees situated on the West Coast who had apparently not taken the advice of a valuer before agreeing to the rental proposed by the lessor, should for that reason be dismissed. He said he did not consider that they would be likely to be so confused about their rights that they passively accepted their lessor s assessment. This consideration is relevant to the present arbitration 64. Sir Ian considered that he was driven to apply the traditional approach in his award. He had to put himself in the armchair of the prudent lessee to determine what percentage rate of the lessor s unimproved value of the land may fairly be offered for the next rental period. 65. Sir Ian cited 27, with implicit approval, what Sir Ronald Davison QC said in his 1992 arbitration award in Melanesian Mission Trust Board v Clayton Cross as to the rental rate (referred to by him as the rental factor ). Disapproval was made of a simplistic, mechanical application of the rental factor formula because this does not necessarily reflect the rental that a prudent lessee might pay in a particular lease. 66. Sir Ronald said: the rental factor is arrived at by determining a figure which over the term of the lease will return a rental commensurate with the yield of alternative forms of interest-bearing investments, such as mortgage and Government Stock, taking into account perceived trends and inflation, but making due allowance for the better security afforded by the ownership of real property. The advantages of owning land as an investment are such that the rental rate is invariably below the ruling rates of interest on other investments. 67. Sir Ronald also said that the hypothetical lessee has no control over the unimproved land value, in the sense that he cannot adjust that valuation. The only element available to him, in 26 fn 6 above 27 at [22]

17 17 order that his decision might reflect such matters as he considers have a bearing on the rent he is prepared to pay, is the rental factor which is applied to the land value. Sir Ronald criticised numerous valuations which he had seen in awards which treated the ground rental calculation virtually as a matter of rote, by taking the unimproved land value and then by applying a rental factor which is determined to a great extent by the historical trends which are reflected over the years. Sir Ronald further said: the valuer must be astute to determine whether or not there exist at the relevant date influences, conditions, or matters which would have the effect of causing a prudent lessee to assess a factor different from that arrived at on a simply mechanical basis. Put shortly, the rental valuation on this approach needs to take all matters into account and not simply apply a mechanical formula. 68. Sir Ian Barker QC said 28 that this justified the value of standing back before fixing a rate based on adjustments from alleged comparables. 69. It is to be noted, however, that the arbitration referred to was to determine fair annual rents in a situation where the rental values had been agreed, the parties had accepted that the traditional approach was the most relevant and the evidence was therefore focused on the appropriate rental rate to be applied. In contrast, in the present arbitration, although there was no agreement on background value levels or other matters, except as to the LEI state of the land for Barton 1, the rental rates to be applied to the assessed LEI values under the traditional approach were effectively not disputed because the lessee s valuers did not rely on that approach and they did not seriously challenge the rental rates adopted by the ADC s valuer, Paul Cunneen. In applying the traditional methodology Mr Cunneen recognised, in our view correctly, that increasing land values between Barton 1 (March 2002) and Barton 2 (March 2009) required that there be a decrease in the rental rate as a percentage of LEI value. Issue as to the higher limit of the ADC s rental valuation in Barton 1 in terms of the Act Schedule 1 cl This issue advises in regard to Barton 1. The Act Schedule 1 cl 10 is applicable to both Barton 1 and 2. Schedule 1 cl 2 provides that before the expiry of the term of the lease (and this also applies for a periodic rent review, pursuant to the lease cl C.3) or as soon thereafter as may be the lessor shall cause a valuation to be made by a person whom he reasonably believed to be competent to make the valuation of the the fair annual rent of the land. Cl 5 gives the lessee the option, if he disputes the lessor s valuation, of requiring the rent to be determined by arbitration. 71. Cl 7 provides that if the rent is to be determined by arbitration then: that valuation shall be made by two persons as arbitrators, each person being reasonably believed by the 28 at [43]

18 18 party appointing him to be competent to make the valuation, one of whom shall be appointed by the lessor and the other by the lessee 72. Cl 8 provides that the arbitrators, before commencing to make their valuation, shall appoint a third person, who shall be an umpire as between them. In the present case the parties have agreed that the Arbitral Tribunal shall act in the role of the umpire, it having been agreed that the arbitrators originally appointed by the parties respectively would resign, as they did. 73. Importantly, cl 10 provides that the duty of the umpire (in the present case the Arbitral Tribunal) shall be to consider the respective valuations of the two arbitrators in the matters in which their valuations do not agree. This clause then provides: but in giving his decision on any question so referred to him the Umpire shall in every case be bound to make a valuation not exceeding the higher and no less in the lower of the valuations made by the arbitrators respectively. 74. It is evident that the upper (or lower) limit imposed by cl 10 which is binding on a party only applies to a valuation carried out by an arbitrator appointed as such by that party pursuant to cl 7. The valuation obtained by the lessor under s22(2) (a) or the Schedule 1 cl 2 does not qualify. 75. During the course of the hearing Mr Englebrecht, the lessee s valuer witness for Barton 1, produced a QV Valuations report dated 7 December 2001 prepared by Allan Chisnall for the 2002 review (Barton 1). That assessment was a rental of $9,850. The valuation was in the form of a report and a certificate described as being under the Act. The certificate referred to the valuation basis being LEI and that the purpose of the valuation was to fix the annual rent for the third seven year period of the 21 year term commencing on 1 March The report said that it was prepared following a letter from the ADC dated 9 October That this was the upper limit for Barton 1 which the ADC was bound by was a point which had not previously been raised. It was agreed it would be dealt with in closing submissions. A separate bundle of documents relating to this issue (referred to as the Preliminary Issue Bundle) was compiled by counsel for the ADC. 77. The relevant narrative is that on 13 December 2001 the solicitors then acting for the ADC (Reed & Co) supplied the certificate (but not the valuation report) of Mr Chisnall to the solicitors acting for the lessee (Nicoll Cooney & Co). In this the ADC proposed that the rent from the March 2002 review (ie the seven year period from 1 March 2002) would be as assessed by Mr Chisnall. It is clear from this letter that this was a step being taken pursuant to Schedule 1 cl 2, not cl On 18 December 2001 Nicoll Cooney & Co advised that the lessee required the rent to be

19 19 determined by arbitration, which the lessee was entitled to do pursuant to cl 5. This is a step required to be taken before the parties appoint their arbitrators. 79. Nicoll Cooney & Co s letter of 18 December 2001 sought confirmation that the ADC had formally appointed Mr Chisnall as valuer/arbitrator. The implication is that it was not known whether that had occurred at that stage. 80. On 19 December 2001 Reed & Co said in a letter to the ADC that presumably, Mr Allan Chisnall of Quotable Value NZ will act as the District Council s Valuer / Arbitrator. This indicates that Mr Chisnall had not in fact been appointed as arbitrator at that stage. 81. On 1 February 2002 Reed & Co advised Nicoll Cooney & Co that the lessee s valuer / arbitrator (ie Mr Engelbrecht) was quite aware from a letter dated 21 December 2001 from Mr Chisnall advising of his appointment as an Arbitrator. This is the first indication that Mr Chisnall had in fact been appointed as the ADC s arbitrator. This was taken to have been confirmed in his letter of 21 December 2001, although that letter did not in fact expressly say this. 82. Thereafter correspondence between Mr Chisnall and Mr Englebrecht followed, with a view to Reed & Co preparing a document for the appointment of a third arbitrator (presumably meaning an umpire) by them respectively. 83. The Arbitral Tribunal is satisfied that the ADC is not bound by Mr Chisnall s assessed rental of $9,850 provided in his report dated 7 December 2001 and his accompanying certificate. At that point he had not been appointed as the ADC s arbitrator. Accordingly, we agree that the upper rental limit for Barton 1 which is binding on the ADC pursuant to cl 10 is the rental assessed by Mr Cunneen in his valuation report dated 19 September 2007, namely $15,250. This was confirmed by counsel for the ADC in his opening. 84. To complete the picture, we confirm that the ADC s upper limit for Barton 2 fixed by Mr Cunneen was $22,747. The lessee s lower limit fixed by Mr Englebrecht for Barton 1 was $4,045 and by Mr Armstrong for Barton 2 $6,960. Issue as to a lessor s interest value and LEI value 85. Reference has been made to the Commissioner of Crown Lands v Lee 29 that regard may be had to freeholding valuations (or sales) of comparable developed properties, appropriately adjusted. In Lee the lessee of land subject to a Crown lease sought to freehold it based on the value of the LEI. The court held that the Land Valuation Tribunal had not erred in having regard to other freeholding valuations in the locality, provided that they were time adjusted to allow for inflation. But the tribunal had fixed this value having regard to only one sale of a local 29 fn 23 above