Mandic v The Cornwall Trust Board (Inc) [2010] NZCA 576; (2011) 12 NZCPR 34 (3 December 2010)

Last Updated: 12 January 2012

IN THE COURT OF APPEAL OF NEW ZEALAND

CA787/2009 [2010] NZCA 576

BETWEEN LISA MARIE COLLEEN MANDIC AND STEPHEN NEIL DOHNT
Appellants

AND THE CORNWALL TRUST BOARD (INC)
Respondent

Hearing: 12 October 2010

Court: Glazebrook, Randerson and Harrison JJ

Counsel: B P Keene QC and J F Anderson for Appellants
M E Casey QC, J K Macrae and A F Buchanan for Respondent

Judgment: 3 December 2010 at 12.00 pm

JUDGMENT OF THE COURT

1. The appeal is dismissed.
2. The appellants must pay the respondent costs for a standard appeal on a band A basis and usual disbursements. We certify for two counsel.

____________________________________________________________________

REASONS OF THE COURT

(Given by Harrison J)

Introduction

[1] A group of lessees who are dissatisfied with the Cornwall Park Trust Board’s (the Board’s) application of an agreed formula for fixing ground rental on renewal of leases of residential land appeal against an adverse judgment delivered in the High Court at Auckland.[1]
[2] With one exception, Courtney J dismissed the lessees’ application for eight declarations against the Board.[2] While the lessees’ notice of appeal and written submissions challenged the Judge’s dismissal of the balance of the declarations, the lessees’ counsel, Mr Keene QC, limited the scope of appeal in oral argument to three declarations. This step had the effect of focusing the lessees’ appeal on what might have been realistically available by way of relief in the High Court.

Background

[3] In 1901 Sir John Logan Campbell transferred on trust to the Board a large area of open land near Epsom within a triangle formed by Manukau, Great South and Campbell Roads. The property, known as Cornwall Park, has since been farmed and maintained by the Board and is used by the general public for a range of recreational purposes.
[4] In 1908 Sir John transferred an additional 58 hectares of adjoining land to the Board on trust to provide revenue for the maintenance and development of Cornwall Park. Between 1910 and 1923, following subdivision of this land, the Board leased 115 residential sections to individual lessees at agreed ground rentals. In due course, the lessees constructed homes on and made associated improvements to their sections. The leases (known as Glasgow leases) are in standard form for terms of 21 years with perpetual rights of renewal reserved to the lessees. Mr Casey QC for the Board advises that all lessees have exercised that right at every renewal since inception.
[5] The leases provide for the ground rental payable by the lessee to be fixed on renewal for the full period of the renewed term. There are no rights of review. The rent is to be determined according to an agreed formula which requires valuers appointed separately by the Board and the lessee to make two separate valuations. One is of the gross or capital value of the fee simple of the property. The other is of the value of all substantial improvements of a permanent character made or acquired by the lessee. The net or residual value of the land is fixed by deducting the latter from the former. The annual ground rent is five per cent of that residual figure.
[6] This formula, which has the apparent benefit of simplicity, reflects the parties’ underlying economic interests. The Board grants a lessee the exclusive right of possession of a piece of land for a finite term. In exchange the lessee pays an agreed annual amount representing a fixed return of five per cent on the Board’s capital for that period. The lessee is entitled to use the land as his or her own and to make whatever improvements he or she deems fit – that has invariably been the erection of a dwelling with associated structures – coupled with right of perpetual renewal.
[7] In conformity with this division, the rent formula is structured to take fair account of the respective contributions of the Board and the lessee. Its objective is to ensure that each party takes the benefit of increases in value attributable to its input. Increases in the value of the land due to extrinsic factors are for the Board’s benefit; increases due to intrinsic factors, for which the lessee is responsible, go to his or her account. By excluding the value of improvements from the capital value to reach the residual value, the parties seek to ensure that the rent fixed on renewal does not include any component attributable to the lessees’ expenditure or resources.[3]
[8] The application of the formula is unlikely to generate disagreement when land prices remain stable. Where, however, the value of land inflates progressively over the term of the lease, as has occurred over the past 40 years, and where there is no right of periodic rent reviews, the Board’s true rate of return on its capital is eroded commensurately. The Board’s only opportunity to align the return on its capital with its actual value arises on renewal, often with dramatic results. For example, an arbitrator recently assessed the rent payable on renewal of a lease at $40,000 per annum, against the amount previously payable of $2,350 per annum.
[9] Mr Casey describes this and similar results as a natural economic function. However, many lessees see it differently, attributing at least part of the rent increases to what they believe is the Board’s erroneous application of the formula. A group of 72 lessees affected by the latest round of renewals (falling mainly within the period May 2005 to September 2012) applied to the High Court for declaratory relief relating to construction of the lease.
[10] We note that disputes between parties to long-term leasehold relationships are not new in this country. In chronological terms, the first major manifestation of a difference was an application by lessees of farm land under the West Coast Settlement Reserves Act 1892 for declaratory relief, which was determined adversely by a Full Court of the former Supreme Court in Cox v Public Trustee.[4] After World War II the Government appointed the former Chief Justice, Sir Michael Myers, to conduct a Commission of Inquiry into leases under the West Coast Settlement Reserves Act. The Commission’s comprehensive report was submitted on 8 March 1948.[5] At that stage, it was the lessors who were unhappy with the valuation process. Then, in 1992, Mr Anthony Lusk QC was appointed by the Government to inquire into leases granted by other parties in the eastern suburbs of Auckland, also Glasgow leases.[6]

Lease

[11] The lease materially provides (by cl 13) as follows:

(a) On the expiration by effluxion of time of the term hereby granted and thereafter at the expiration of each succeeding term to be granted to the Lessee or to the purchaser at any auction under the provisions hereinafter contained the outgoing Lessee shall have the right to obtain in accordance with the provisions hereinafter contained a new lease of the land hereby leased at a rent to be determined upon the basis of the valuation to be made in accordance with the said provisions for the term of twenty-one years computed from the expiration of the expiring term and subject to the same covenants and provisions as this lease as may be applicable to such new lease.

(b) Within twelve calendar months previous to the expiration by effluxion of time of the term hereby granted or such succeeding term as aforesaid two separate valuations shall be made namely a valuation of the then gross value of the fee simple of the land then included in the lease and also a valuation of all substantial improvements of a permanent character made or acquired by the Lessee and then in existence on the land.

(c) The said valuations shall be made by two indifferent persons as arbitrators one of them shall be appointed by the Lessors and the other by the Lessee and such arbitrators shall before commencing to make the valuations together appoint a third person who shall be an umpire as between them.

(d) The decision of the two arbitrators if they agree or of the umpire if the arbitrators do not agree or in such respects as they do not agree shall be binding on all parties.

(e) The duty of the umpire on reference to him of any question shall be to consider the respective valuations of the two arbitrators in the matter in which their valuations do not agree and then to make an independent and substantive valuation and the last mentioned valuation shall be the decision of the umpire 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 not less than the lower of the valuations made by the arbitrators respectively.

(f) The provisions herein contained for the making of valuations shall be deemed to be a submission to arbitration under and within the meaning of the Arbitration Act 1908 or any enactment for the time being in force in substitution therefore or amendment thereof and all the provisions of any such enactment shall so far as applicable apply accordingly.

(g) On every such arbitration each party shall pay his costs of such reference including the fees of the arbitrator appointed by him and all costs incidental to the appointment of the umpire and the fees of the umpire shall be paid equally by the parties to the arbitration.

(h) Before the expiration by effluxion of time of such term as aforesaid or if the valuation be not completed at an earlier period than two months before such expiration of the said term then within two calendar months of the decision of the arbitrators or umpire as the case may be and the giving of notice thereof to the Lessee the Lessee shall give notice in writing signed by [ ] or [ ] agent duly authorised in that behalf and delivered to the Lessors stating whether [ ] desires to have a renewed lease of the said land at an annual rental equal to five pounds per centum on the gross value of the land after deducting therefrom the value of the substantial improvements of a permanent character as fixed by the respective valuations as aforesaid.

(i) Any such notice may be given by the Lessee within the time aforesaid although the term hereby granted has already expired through effluxion of time and although the said valuation has not been made or notice thereof has not been given to the Lessee until after the expiration for the said term by the effluxion of time unless before the giving of such notice by the Lessee given up the possession of the land hereby leased or been duly ejected therefrom in pursuance of the judgment or order of any Court of competent jurisdiction or the land has been re-entered upon by the Lessors as hereinafter provided.

(j) Any such notice by the Lessee of desire to have a new lease shall be deemed to constitute a contract between the Lessors and the Lessee for the granting and acceptance of a new lease at the rent fixed and determined upon the basis aforesaid and for the term and subject to such of the covenants and provisions as are herein contained including the provisions herein contained for valuations and for the right to a new lease at such valuation of rent made and determined as aforesaid or the offer of a new lease for sale by auction and all clauses auxiliary or in relation thereto.

(Emphasis added.)

Declaratory relief

[12] Before dealing with the extant declarations, we must emphasise the limited availability of declaratory relief. The lessees applied to the High Court under s 3 of the Declaratory Judgments Act 1908, which materially provides:

Where any person has done or desires to do any act the validity, legality or effect of which depends on the construction or validity of any ... agreement made or evidenced by writing, or ...

Where any person claims to have acquired any right under any such ... agreement, ... or to be in any other manner interested in the construction or validity thereof, –

such person may apply to the High Court by originating summons ... for a declaratory order determining any question as to the construction or validity of such ... agreement ... or of any part thereof.

[13] While the Court possesses a wide jurisdiction under this section, the declaratory orders sought must nevertheless relate to the construction or validity of one of the listed types of documents.[7] In order to satisfy this threshold, an applicant will normally have to establish the existence of a genuine dispute or a lis. There will usually be an actual controversy between the parties which cannot be more appropriately determined in another forum, such as by arbitration.
[14] If jurisdiction is established, the Court will not exercise its discretion to grant a declaration without a proper factual context, and will generally refuse to deal with mixed questions of law and fact or disputes of fact in an application under s 3.[8] It is not sufficient to seek guidance for the future, on hypothetical facts, or where the dispute is of no practical significance. Nor is it appropriate for a Court to decide an issue in a vacuum. Also, within the discretionary realm, declaratory relief is unlikely to be granted when it will not serve any useful purpose.[9]
[15] As this Court observed in New Zealand Insurance Co Ltd v Prudential Assurance Co Ltd:[10]

The jurisdiction to make orders under the Declaratory Judgments Act is wholly discretionary. The cases defining the attitude of the courts in the exercise of that discretion are numerous ... and they establish certain guidelines will generally be followed. The Court will not answer purely abstract questions in anticipation of an actual controversy. It will not deal with mixed questions of fact and law. The procedure is designed to provide a speedy and inexpensive method of obtaining a judicial interpretation where the matter in dispute cannot conveniently be brought before the Court in its ordinary jurisdiction and where a declaratory judgment would be appropriate relief. But the procedure should not be adopted where the party who institutes them can without real difficulty have the matter in dispute disposed of in an ordinary action.

[16] Our statements of principle may seem elementary. But they are necessary because, as we shall explain, much of the relief sought is beyond the proper scope of declaratory proceedings. This point is illustrated by the extensive valuation evidence produced by both sides in the High Court. A total of seven briefs were filed by valuers: three for the lessees and four for the Board. There was no cross-examination. An interim award by Mr Ian Gribble, an experienced valuer, delivered on 21 November 2006 (known as the Carter Award) was also tendered.
[17] One of the lessees’ valuers is Mr J P Larmer. His opinions served as a platform for much of Mr Keene’s argument, directly and indirectly. Mr Larmer is an experienced valuer who is particularly familiar with Glasgow leases. He attributes cl 13 of these leases and its formula to social conditions prevailing a century ago. There was then a scarcity of land but a relative abundance of labour and individuals with the ability to develop land. Accordingly, these types of lease provisions were designed to attract lessees who could improve the land and obtain the reward of the rising value caused by their efforts. Cost was then the appropriate method for valuing improvements.
[18] In Mr Larmer’s opinion, the valuation concept found in Glasgow leases in which the value of land is the residual after allowing for improvements is outdated; now, he says, it is much more difficult to separate the ownership of the land and improvements. Mr Larmer concludes that:

Broadly speaking, the concepts of separately derived improvement valuations with land as the residual [have] long since fallen away because the emphasis has become the market value of improved land and market value of unimproved land. It is only when rent reviews or lease renewals are being undertaken for leases in a form such as the Cornwall Park lease that an approach to assessing all improvements so that these can excluded from rental consideration (ie land as the residual) has to be addressed. The unfamiliarity with the required concepts is therefore to be expected to some extent as these leasing arrangements have been left in a “time warp” in relation to all other valuation exercises carried out in a modern economy.

[19] Mr Larmer’s evidence generated a dispute about whether valuers engaged by the Board to undertake the cl 13 valuation exercise, and at least one arbitrator, were in fact adopting the correct methodology as specified in the lease. The Board responded. However, that dispute cannot properly be resolved in this proceeding. It is fundamental, as both parties accept, that the valuers must adhere to the agreed formula. This basic tenet cannot vary with the effluxion of time. While valuation practice may change over time, the declaratory judgment procedure is not an appropriate vehicle to resolve differences of approach in this respect. The better course is for a dissatisfied lessee to appeal against or review a particular award, enabling valuation differences to be tested in a specific factual context.
[20] However, the Board has not taken this objection; and now that the proceeding has reached this stage we will attempt to assist the parties within the confines imposed by the Declaratory Judgments Act and the principles governing the Court’s discretion.
[21] We shall consider each of the surviving declarations.

Declaration (1)

[22] First, the lessees seek a declaration that:

The two separate valuations under clause 13(b) of the lease (respectively Gross Valuation and Improvements Valuation) are required to be derived independently of each other.

[23] We can deal with this declaration shortly. As we have noted, cl 13(b) requires each separately appointed valuer to make separate valuations of the gross value of the fee simple and of the lessees’ improvements. As Courtney J observed:[11]

It is undisputed that the purpose of valuing improvements separately from the land value and charging rent on the land value only is to recognise the respective interests of the lessor and the lessee. The valuation process provides a mechanism by which the lessees’ contribution to the gross value of the property can be taken out of the equation so that he or she is not paying twice over when the ground rent is calculated. Conversely, the landlord is entitled to have the benefit of any value and any increase in value in the land that has not come about through the lessees’ efforts in permanently improving the land.

[24] Clause 13(b) directs that two valuations “shall be made” by each valuer. The word “derived” does not feature. Nevertheless, Mr Keene originally submitted that it is to be read into the phrase “two separate valuations”, which is to be taken as meaning that neither valuation is derived from nor influenced by the other. Mr Larmer propounded a similar opinion.
[25] It appears from Courtney J’s judgment that this submission was designed to provide the foundation for an argument that, because improvements cannot be derived from the valuation of the gross value which is itself fixed on a market basis, and because there is no market for improvements, they must by default be valued by reference to their cost.[12] The Judge rejected this proposition, adopting this Court’s discussion of ‘improvements’ in Cox as well as historical and current legislation, current valuation theory and the auction provisions contained in the lease.[13]
[26] In this Court Mr Keene submitted that improvements should be valued as a matter of course according to international accounting standards for non-traded assets. He relies on IVG8 of the Valuation Standards and International Guidance for the Institute of Valuers, which provides background and assistance to users and preparers of valuation reports in the interpretation of the meaning and application of “depreciated replacement cost”. Clause 3 sets out relevant definitions, including:

3.2 Specialised Property. Property that is rarely, if ever, sold in the market, except by way of a sale of the business or entity part, due to the uniqueness arising from its specialised nature and design, its configuration, size, location, or otherwise.

Clause 5 is entitled “Guidance”. According to Mr Keene, the relevant valuation technique in the standard is:

5.3 In the absence of direct market evidence, depreciated replacement cost is regarded as an acceptable method of assessing the value of specialised assets but the methodology must incorporate market observations by the Valuer with regard to land value, current costs, and depreciation rates. The methodology is based on the same theoretical transaction between rational informed parties as the Market Value concept.

[27] However, as is plain from their words, these standards apply in a very different context; they are designed to deal with assets which are rarely sold because they are inherently or by nature unique. Mr Keene emphasised that the lessees’ substantial improvements divorced from any interest in the land are rarely if ever sold. That is not the point: the lessees’ improvements are not unique but are in common supply and use, and are frequently sold by lessees in conjunction with their interests in the land. And as Courtney J observed, the absence of sales data to support a market valuation of the improvements as a standalone or discrete item does not preclude such a valuation being undertaken including where appropriate by reference to cost but not as the exclusive criterion.[14]
[28] In reply Mr Keene accepted Courtney J’s finding that a valuer cannot make his or her separate improvements valuation in isolation from the gross value valuation. His concession was proper. As Mr Casey submits, the word “separate” in this context means apart from but does not mean wholly unrelated to. The valuer must carry out two distinct or discrete exercises. But that does not mean that, when undertaking one, he or she is bound to shut out or disregard the other.
[29] To the contrary, we are satisfied that for the purposes of the cl 13 exercise improvements must be considered as part of the composite whole. It would not be possible to value the improvements accurately otherwise. In order to qualify as an improvement, an item of labour or materials must by its very nature enhance or add to the financial value of a property; whether a particular item actually adds value is, of course, a factual question to be assessed by a valuer in exercising his or her judgement. The question cannot be determined in isolation from an assessment of total market value.
[30] In Cox the rental formula on renewal was materially identical to cl 13. One provision in the lease directed that the value of the fee simple of the land be ascertained as one item; and the value of all improvements of the kind mentioned then in existence on the land be fixed as the other item. Another provision directed that, for the purpose of ascertaining the new rent, the value of the improvements was to be deducted from the “gross value of the lands”. In summary, this Court concluded that:

(a) the value of the fee simple was manifestly the total or capital value of the lands inclusive of substantial improvements and, in valuing the fee simple, the land with the improvements had to be dealt with as a whole;

(b) if the value of the fee simple meant its value without the value of substantial improvements, then the provision for deducting the value of substantial improvements from the gross value would be idle – the value of the substantial improvements would be added only to be deducted; and

(c) accordingly, in valuing the improvements for the purposes of the leases, a valuer would have to consider the value, if any, they added to the land in an absolutely unimproved state. One possible element or test of their value was considered to be what a new tenant would give for them if the existing tenant did not renew.[15]

[31] While Mr Keene seeks to distinguish Cox’s conclusion as obiter, we are satisfied that it is a correct statement of the law which applies here.
[32] In our judgment cl 13(b) does not justify a limitation on the valuers’ responsibilities of the type postulated by declaration (1).

Declarations (2) and (4)

[33] Secondly, the lessees seek declarations that:

(2) The figure derived from deducting the improvements valuation from the gross valuation pursuant to cl 13(h) is not necessarily always equivalent to an assessment of the freehold value of the land as though it were vacant and unimproved.

(Emphasis added.)

(4) The improvements valuation has no reference to and is not derived from the value of the land (whether that be the subject land, or other land, and whether improved or vacant).

[34] The lessees’ challenge on this aspect apparently emanates from Courtney J’s conclusion that “... the terms of the lease do mean that the residual value on which ground rent is paid is the equivalent of the unimproved value of the land...”.[16] However, as we shall explain, that conclusion addressed Mr Keene’s submission, made in apparently absolute terms, that the residual value cannot be equated with the unimproved value as that phrase is commonly understood by valuers.[17]
[35] Mr Keene accepts that declarations (2) and (4), with the highlighted amendment to declaration (2), are materially the same. We have real reservations about whether these issues are suitable for declaratory judgment proceedings because they do not raise a question about the construction of the lease. Rather, they provide the foundation for Mr Keene’s submission that the Board’s valuers, in fact, have incorrectly applied the formula.
[36] Mr Keene submits that the rent fixing scheme according to the formula is clear, expressed by this equation (GV (gross) – IV (improvements) = R (residual)); and that the equation does not allow a valuer to start from a premise that the residual equals the bare land value, then compute the value of improvements by subtracting that bare land value from the gross value. He says that Courtney J’s conclusion[18] that the residual value on which ground rent is paid is the equivalent of unimproved value (UV) endorses an impermissible reasoning process. Mr Keene submits that this approach means the residual value is not calculated from two separately assessed values as provided by the lease; instead, it is assumed that the residual and unimproved values will always equate. He describes this reasoning as entirely circular, and invalidating the agreed starting point of the gross value of the land.
[37] In this respect, Mr Keene is apparently relying on Mr Larmer’s generalised criticism of the Board and its valuers that:

A ‘residual approach’ to improvements under which ‘the bare land’ value deduced from market data enjoys precedence over separately valued improvements is the reverse of the approach described in the lease. Yet it appears to have been adopted by valuation professionals as a virtual default position notwithstanding the lease terms. It is the approach advanced by the Trust Board and its valuers in the Carter arbitration and ultimately given primacy by the arbitrator.

My experience is that this effective reversal of the steps required under the lease “squeezes” the improvement value. That is, an approach which assesses the gross value including improvements and then separately, the unimproved value (each referenced to the market) causes the improvement value as the residual to reduce compared to applying the formula set out in the Cornwall Park leases.

[38] Mr Keene illustrated his submission by reference to the Carter Award. There, he says, the two valuers differed only minutely (less than five per cent) on the gross value of the fee simple but differed by 59 per cent on the improvements valuation. (That submission is not strictly correct. The valuers for the Board and the lessee fixed the gross value of the fee simple at $1.85 million and $1.77 million respectively. Their improvement valuations were $950,000 and $1.203 million respectively. The 59 per cent differential was reflected in their respective calculations of the ground rental at $45,000 and $28,350 per annum.) Mr Keene submits that this differential is well outside the normal margin of professional difference, indicating the application of different principles on each side.
[39] To this point, Mr Keene’s proposition is uncontroversial except for his interpretation of Courtney J’s conclusion. The formula self evidently requires a valuer to start by making either or both of the discrete valuations of gross value and improvements before deducting the latter from the former to yield the residual value. Mr Casey accepts that a valuer cannot start with unimproved value.
[40] However, we should add that, consistently with best practice, a valuer who has calculated the residual value according to the formula is entitled to take into account the unimproved value as a means of verifying the result. The residual and unimproved values may frequently be the same. As Mr Casey observes, the lease does not exclude this result providing the valuer has correctly applied the formula.
[41] This observation brings us to what appears to be the underlying purpose of Mr Keene’s argument. He submitted in the High Court, as he did before us, that the Board’s valuers have calculated ground rent as if the land were vacant and unimproved. This approach is, he says, contrary to the correct interpretation of the lease and results from the valuer’s view of the residual figure on which ground rent is charged as being the same as the bare or unimproved value. It was this submission which Courtney J rejected in unequivocal terms.[19]
[42] However, as Mr Keene himself observes, the lease does not use the phrase “unimproved value”. Similarly, in Cox’s case, neither the relevant statute nor the lease referred to “unimproved value”. But the Court noted that the phrase was used there in the questions submitted for declaratory relief to denote the difference between the capital value of the land and the value of substantial improvements of a permanent kind in existence at the date of valuation, which it said was not the usual sense of the term.[20] In Cox the Court nevertheless held that in the context of the subject leases the unimproved value was the value at the date of valuation of the land in its natural state as for the time being affected by extrinsic circumstances but not by any improvements.[21]
[43] The ground rent payable under these leases is calculated as a percentage of the residue following deduction of the improvements valuation from the capital value of the fee simple. Depending on the circumstances, that exercise may yield an amount equal to the value of the land as if it were vacant and unimproved. But it will not necessarily always have that result. While Courtney J’s judgment[22] must be modified to that extent, we do not consider it is necessary to make any formal declarations.

Declaration (3)

[44] Thirdly, the lessees seek a declaration that:

(3) The gross valuation is limited by any restrictions arising from:

(a) current zoning and town planning requirements applying to the property;

(b) the state of land as occupied by the improvements;

(c) user restrictions under the lease.

[45] We shall deal with the three separate elements of the declaration in the same order.
[46] On declaration 3(a), Courtney J found in the lessees’ favour on this component. The Board does not cross-appeal. It is unnecessary for us to address this declaration further.
[47] Declaration 3(b) effectively continues the theme of Mr Keene’s submission in support of declarations (2) and (4). He says that in practice the Board’s valuers have approached valuation of the fee simple by valuing the bare land component as if it were vacant and according to its highest and best use, treating the improvements not only as non-existent but as if they never existed. He says this approach denies the reality that the land is not vacant and, because of the terms of the lease, is unlikely ever to become vacant; and when performing the cl 13 requirements an arbitrator or umpire has no mandate to ignore the existence of the improvements and ascertain a land value which takes account of all potential uses of the land.
[48] In our judgment, Mr Keene’s submission is not consistent with the terms of the lease. In summary, each lease comes to an end at the expiry of its 21 year term. However, the lessee retains a contractual right to renew on the existing terms subject to agreement on or determination of ground rent. As Courtney J pointed out, the purpose of the valuation process is to fix the notional value of the lessors’ reversionary interest and the lessees’ leasehold interest. This objective would be undermined if the occupied state of the land were taken into account.[23] In S & M Property Holdings this Court described the division between the interests as fundamental.[24] That is the reason why the existence of the lease must be ignored.[25]
[49] Mr Keene sought to distinguish or circumvent the effect of this principle by relying on what he says was the parties’ mutual intention to renew the lease. While that is true in practice, it does not alter the legal position. Each lease comes to an end on expiry of its renewed period; it is thereafter renewed at the lessees’ option. Accordingly, the valuations may be conducted by reference solely to the respective interests of each party at the date of termination, and in the Board’s case by reference to the highest and best use of the land as if it were vacant.
[50] Accordingly we decline to make declaration 3(b).
[51] As for declaration 3(c), the same reasoning applies. We endorse Courtney J’s conclusion as follows:[26]

The leaseholders’ argument ignores the very nature of the leasehold interest and the purpose of the valuation process, which is the notional separation of the lessee’s and lessor’s interests. With the exception of the fencing covenant said to be registered on the fee simple (but which actually does not appear in the lease) none of the restrictions relied on affect the fee simple at all. They affect only the lessee and they would cease to exist if the lease was not renewed and the land reverted to the lessor. Further, since some obligations (e.g. to maintain and to insure) require payment by the lessee, there is no reason to distinguish them from the payment of the rental which Mr Keene submitted was something to be put aside from the valuation of the fee simple. I therefore conclude that restrictions under the lease are not to be taken into account.

Result

[52] The lessees’ appeal is dismissed.
[53] The lessees must pay the Board’s costs for a standard appeal on a band A basis and usual disbursements. We certify for two counsel.

Solicitors:
DLA Phillips Fox, Auckland for Respondent

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[1] Mandic v Cornwall Park Trust Board (2009) 10 NZCPR 790.
[2] See [79].

[3] See generally Cox v Public Trustee [1918] NZLR 95 (SC) at 99 and S & M Property Holdings Ltd v Waterloo Investments Ltd [1993] 3 NZLR 189 (CA) at [72]–[73].
[4] Cox v Public Trustee [1918] NZLR 95.

[5] Sir Michael Myers, Hanara Reedy and Albert Samuel Royal Commission on Leases under the West Coast Settlement Reserves Act 1892 (1948).

[6] See report of Anthony Lusk QC Ministerial Inquiry into Certain Perpetually Renewable Leases in Auckland (1993).

[7] See David Ellis Sim’s Court Practice (online looseleaf ed, LexisNexis) at [DJA3.5] and the authorities discussed there.

[8] Declaratory Judgments Act 1908, s 10; see generally Omaha Beach Residents Society (Inc) v GNS Trust Ltd and Townsend Brooker Ltd [2010] NZCA 413 at [35]–[48] and Sim’s Court Practice at [DJA1.4] and [DJA10.7].

[9] See the discussion of principles informing the exercise of the discretion to grant declaratory relief in Zamir and Woolf The Declaratory Judgment (3rd ed, Sweet & Maxwell, London, 2002) at ch 4.

[10] New Zealand Insurance Co Ltd v Prudential Assurance Co Ltd [1976] 1 NZLR 84 at 85 per McCarthy P.

[11] At [16]. See also S & M Property Holdings Ltd at [72]–[73].

[12] At [38].
[13] At [39]–[47] and [78].
[14] At [64] and [65].
[15] Cox at 100.
[16] At [22].
[17] See below at [41]–[43].
[18] At [22].

[19] At [22].
[20] Cox at 99.
[21] At 103.
[22] At [22].
[23] At [15] and [36].

[24] S & M Property Holdings at [73].
[25] Cox at 101.

[26] At [36].