Muir v Tieu [2016] NZHC 422 (11 March 2016)

Last Updated: 12 April 2016

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-923 [2016] NZHC 422

UNDER	the Arbitration Act 1996
IN THE MATTER OF	An Arbitration
BETWEEN	GLENYS MUIR Plaintiff
AND	LUONG THANG TIEU AND LE LAM TIEU Defendants

Hearing:	8 March 2016
Appearances:	J Carter for the Plaintiff G Kohler QC for the Defendants
Judgment:	11 March 2016

_{JUDGMENT OF MUIR J}

This judgment was delivered by me on Friday 11 March 2016 at 5.00 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date:...............................

Counsel:

J Carter, Carters Law, Auckland

G Kohler QC, Barrister, Auckland

Solicitors:

G Brown-Haysom, BT Law, Papatoetoe

MUIR v TIEU [2016] NZHC 422 [11 March 2016]

Introduction

[1] The appellant appeals on a point of law from an award of the Honourable Barry Paterson QC dated 27 February 2015.¹ The appeal traverses familiar ground in terms of whether a lessee under a Glasgow Lease is, on review, liable to pay a rental reflecting development potential inherent in the fee simple. The question submitted for the Court’s consideration is in the following terms:

Does clause 11.2 of the lease between the parties, properly construed, require the valuation of the “fee simple of the land included in this lease thereby demised” to be made (i) on the basis of the restriction on subdivision of the land in clause 5 of the lease or, as the arbitrator held (ii) ignoring that restriction?

[2] Although Mr Kohler QC for the lessor suggested that this question bore some of the hallmarks of a general appeal, he submitted that the thrust of the appellant’s case was nevertheless reasonably clear and did not take the point further.

[3] I proceed to consider the question posed which in terms of the appellant’s

written submissions raised two issues namely:

(a) Whether the arbitrator ought to have held that the Supreme Court’s decision in Mandic v Cornwall Park Trust Board (Inc)² was decided per incuriam; or

(b) Whether Mandic could be appropriately distinguished.

[4] In oral submissions Mr Carter did not press the first ground. His concession in that respect was inevitable. The arbitrator was as bound by Mandic as I am. The doctrine of stare decisis governs the position.³ Accordingly the case focused on

_{whether Mandic should have been distinguished by the arbitrator.}

¹ _{Arbitration Act 1996, sch 2 art 5(1)(a).}

² _{Mandic v The Cornwall Park Trust Board (Inc) [2011] NZSC 135, [2012] 2 NZLR 194.}

³ See Dustan v Weathertight Homes Resolution Service HC Auckland CIV-2006-404-276, 25 May

2006, at [13].

The lease

[5] The lease is for 21 years perpetually renewable with the rent calculated as a percentage of the sum established pursuant to a stipulated valuation exercise. As such it is a species of what is commonly referred to as a “Glasgow Lease”.

[6] In Mandic the Supreme Court identified such leases as:⁴

... in economic substance, a bond which is revalorised every 14 or 21 years and secured against the demised land.

[7] The provisions which were key in the context of the arbitration were added by way of a variation of lease dated 4 May 2007 which incorporated a new clause 11.

[8] Clauses 11.2 and 11.3 featured prominently in the argument. They are in terms:

11.2 Not earlier than nine calendar months and not later than three calendar months before the expiry by effluxion of the time of the term of the lease hereby granted, or as soon thereafter as may be, the lessor shall cause a valuation to be made by a person whom the lessor reasonably believes to be competent to make the valuation of the fee simple of the land included in this lease thereby demised, so that the rent so valued shall be uniform throughout the whole term of the renewal lease.

11.3 The annual rental payable under a renewal lease of the land hereby demised shall be fixed at 5 per cent per annum of the fee simple value as fixed in accordance with the provisions of this lease.

[9] Clause 11.4 in turn provides that the valuation is to take no account of the value of improvements on the land and clauses 11.5 – 11.12 set out in detail the machinery relating to the lessor’s notice of revaluation and any subsequent arbitration.

[10] The lease also contains a number of restrictions on use and/or the purpose to which the demised land can be put. Clause 3 proscribes the lessee from carrying on an offensive trade. Clause 4 prevents the lessee from assigning or subletting

_{“without leave”. Significantly, Clause 5 provides:}

⁴ Mandic v The Cornwall Park Trust Board (Inc) above n 2 at [25].

THE Lessees will not cut up or subdivide the said land into building lots or in any manner whatever or create or dedicate any lane street or right of way thereover without having first obtained the express consent in writing of the Board for that purpose and such consent may be arbitrarily refused.

[11] Mr Carter described this as a restriction not on use but on title, precluding, he said, the lessee from any unit development or cross-lease otherwise possible in respect of the leasehold estate.

The award

[12] The arbitrator considered the application of Mandic at [6] – [19] of his award. He noted the appellant’s submission (repeated in it its written submissions in this case) that the majority in Mandic had erred in following Cox v Public Trustee⁵ and that he should treat Mandic as having been decided per incuriam as it ignored other relevant cases, in particular The Drapery and General Importing Company of New Zealand (Limited) v The Mayor of Wellington (DIC).⁶ He recorded the appellant’s alternative submission that the present case could be distinguished from Mandic.

[13] He noted the Supreme Court in Mandic had been confronted with a similar submission to that made on behalf of the lessee in this case, namely that it would be wrong to value the land on the basis of a multi-unit development where the lease restricts the use of the land to a single unit dwelling. He held that the majority in Mandic did not ignore the DIC decision because they accepted that where a rent fixing provision in lease is in general terms (for instance providing for a “fair rent”) the valuer must assess a rent which reflects the terms of the lease. He noted, however, that the rent review formula in Mandic and in the present case was different from the DIC formula and that the mandate was not to fix a “fair rent” but to “fix a land value on which a rent at five per cent of such value is to be fixed”. He therefore held that the “presumption of reality” which applies in fair rent reviews such as in the DIC case did not apply to the present case and that the parties were to be taken as having agreed that the lessor was to get a specified return on the land

_value.

⁵ _{Cox v Public Trustee [1918] NZLR 95 (SC).}

⁶ The Drapery and General Importing Company of New Zealand (Limited) v The Mayor of

Wellington (1912) 31 NZLR 598 (CA).

[14] He held that there was no material difference between the requirement in Mandic to assess a return on the “gross value of the fee simple” and the requirement in the present case to make an assessment on the “fee simple value”. On either wording the obligation was to ignore the terms of the lease. He noted that what he termed the “overriding reason[s] for the Mandic decision” were the Supreme Court’s

belief that the position had been long settled by Cox⁷ and was consistent with the

terms of the particular leases in issue.

The plaintiff ’s arguments

[15] Having abandoned his attack on Mandic (at least before this Court) Mr Carter confined himself to attempts to distinguish it. He advanced two alternative bases namely that:

(a) on a proper construction, clauses 11.2 and 11.3 necessitated that all the terms of the demise (including the subdivision restriction) be taken into account in assessing the value of the fee simple; and

(b) that the restrictions in clause 5 were restrictions going to title and not use, as was the case in Mandic.

[16] As to the first basis, Mr Carter relied on:

(a) the requirement in clause 11.2 to, “make the valuation of the fee simple of the land included in this lease thereby demised, ...” (emphasis added); and

(b) the requirement in clause 11.3 to fix the rental at five per cent of the fee simple value as “fixed in accordance with the provisions of this lease” (emphasis added).

[17] As to the second basis, Mr Carter referred to Mandic at [75] where the majority said that they were not required to review authorities from other

_{jurisdictions because, inter alia, the restrictions in the lease were of “limited}

⁷ Cox v Public Trustee above n 5.

relevance”. In the following paragraph that limited relevance was explained by

reference to the Court seeing,

... no likelihood of the Trust Board advancing valuation assessments based on such highest and best uses and then being able successfully to prevent lessees using the demised land for such purposes. We are accordingly not persuaded that the lease restrictions are practically material in the way in which the lessees contend.

[18] Mr Carter contrasted the user “use restrictions” in the Mandic⁸ lease which he said were, on their face, subject to ss 226 to 228 of the Property Law Act 2007 and title restrictions which he said could only be considered in the context of s 224.

[19] In relation to s 224 he submitted that clause 5 of the lease precluded its application because of its reference to the fact that consent “may be arbitrarily refused”. He submitted that this represented “context” which, in terms of s 224, “otherwise require[d]” that the section have no application. In the result he said, one of the key pillars on which the Supreme Court based its judgment was not present in this case.

The defendants’ arguments

[20] Mr Kohler supported the award. He referred in detail to the several authorities collected in Mandic⁹ which, in addition to Cox,¹⁰ underscored the consistency of the New Zealand jurisprudence applied by the Supreme Court. He submitted that the essential finding in Mandic (consistent with Cox) was that the valuation formula was addressed, not to the value of the lessor’s interest, but to the value of the land and that this reasoning was as much applicable to a restriction on subdivision as it was to the single dwelling use restriction in Mandic.

[21] In terms of clauses 11.2 and 11.3 Mr Kohler rejected the subtleties of Mr Carter’s proposed distinction. He submitted that the reference to the land “... thereby demised” in clause 11.2 did no more than mandate valuation of “the fee

_{simple of the land demised by the lease”.}

⁸ _{Mandic v The Cornwall Park Trust Board (Inc) above n 2 at footnote 94..}

⁹ _{At [94].}

¹⁰ Cox v Public Trustee, above n 5.

[22] In terms of clause 11.3, he said that the words relied on by the appellant simply referenced the “process” or “methodology” to be adopted by the lessor and subsequently by the valuers. They did not, he submitted, import into the valuation exercise either a requirement to value the lessor’s interest or notions of “fair value”. If that had been the drafter’s intention then, Mr Kohler said, it would have been stated clearly and unambiguously.

[23] Finally, in relation to the s 224 Property Law Act 2007 point Mr Kohler submitted:

(a) The Supreme Court’s observations about the limited relevance of the restrictions simply reinforced a conclusion otherwise reached based on longstanding jurisprudence and proper construction of the lease and, that irrespective of ss 226 – 228, the Court would have reached the same conclusion.

(b) In any event s 224 applied and was not precluded by the clause 5 provision to the effect that consent to subdivision “may be arbitrarily refused”.

Discussion

[24] I accept the respondents’ argument that the Supreme Court intended Mandic¹¹ to apply to Glasgow Leases generally, not simply those of the Cornwall Park Trust Board, or leases with the precise wording of that in Mandic itself. That appears from the majority’s discussion under the heading “Background” at paragraphs [25] – [27].

[25] The relevant reasoning in Mandic is at paragraphs [70] – [79] under the heading “Is the assessment of gross value constrained by use restrictions under the lease?” Significantly, the Court held:¹²

The valuation formula is addressed to the value of the land and not the lessor’s interest, and the lessees do not seriously dispute this.

¹¹ _{Mandic v The Cornwall Park Trust Board (Inc) above n 2.}

¹² At [74].

[26] That position was contrasted with cases where the rent fixing provision in the lease was described as being “in general terms (for instance providing for a “fair rent”)” and where “the valuer must assess a rent which reflects the terms of the lease”.¹³ But the rent fixing formula in Mandic was not of that character. It was in the words of the Court:

[73] ... intended to provide the lessor with an annual return based on the value of the land. The fairness of this return (five per cent of the residual) in the context of the lease as a whole, including all restrictions imposed on the lessees, must be taken to have been settled when the leases were first taken up.

[27] The argument advanced in Mandic was essentially the same as that advanced in the present case as the following extract records:

[74] Mr St John’s primary argument was not that all these alternatives be taken into account (as would be required on the valuation of a leasehold interest) but only those which impose restrictions on the practical ability of the lessees to use the land to its best advantage. The spectre which he raised was of lessees being required to pay rent assessed against a hypothetical highest and best use which was not in fact permitted under the lease. Mr St John was able to take us to cases from other jurisdictions in which rental assessment provisions in long-term ground leases based around land valuations had been applied in a way which factors in such lease restrictions.

[28] The Court responded to this argument at [75] in terms:

We see no need to review the cases referred to by Mr St John. This is because we think that the issue is controlled by: (a) the limited relevance of the restrictions; (b) the terms of the particular leases in issue; and (c) Cox.

[29] The Court then recorded with approval the Trust Board’s argument in terms

that:

... The language and structure of clause 13 are against the argument advanced by the lessees. As a matter of simple English it is extremely difficult to construe the phrase “gross value of the fee simple of the land” as incorporating restrictions on use provided for in a lease. The structure of the clause with its “provision for the deduction of the value of improvements from that gross value” does not expressly contemplate any further step at which lease restrictions might become relevant.

_{[30] Finally and on a basis expressed as “most importantly” the majority held that:}

¹³ Mandic v The Cornwall Park Trust Board (Inc) above n 2 at [73].

[78] ... as the passage cited at [51] above shows, the Court in Cox was clear that the existence of the lease was to be ignored. This approach has subsequently been consistently taken in New Zealand in relation to clauses similar to clause 13. Given that Cox can fairly be taken to have settled the law in New Zealand on this point, it would be wrong for us to take a different approach.

[31] The majority therefore relied on longstanding cases to focus the inquiry on the value of the land as opposed to the lessor’s interest and, in the absence of a “fair value” or equivalent formula, rejected importation of use restrictions in the lease into the valuation exercise.

[32] In my view there is no material difference between the provisions in Mandic and those in the present case. I agree with the arbitrator that the “gross value of the fee simple” formula in Mandic and “the fee simple value” referred to in the present case are practically equivalent. On the principles as set out in Cox and applied in Mandic the arbitrator was accordingly obliged to ignore the terms of the lease.

[33] I do not accept that the particular words relied on by the appellants in clauses

11.2 and 11.3 of the lease assist them in distinguishing Mandic. In terms of 11.2: (a) The valuation is to be of the fee simple.

(b) The fee simple is of the land “included in this lease thereby demised”.

[34] I do not see the words “included in this lease thereby demised” as producing any different result than if the reference had simply been to the “fee simple of the land hereby demised”. The phrasing is awkward and in part otiose. But it was not, in my view, intended to invoke, as a qualification to fee simple value, the restrictions in the lease. Nor does it, in my view, convert the assessment into one based on “a fair rental value”. I accept the respondents’ submission that the words simply identify the land to be valued as the land identified in the lease – no more nor less.

[35] I accept also the respondents’ submission that the phrase “in accordance with the provisions of this lease” as it appears in clause 11.3, it is simply intended as a reference to the provisions in the lease that provide for the fixing of the rental, that is in particular, clauses 11.1, 11.2, and 11.4 – 11.11. Again it is not a provision which,

in my view, provides for the lessor’s interest in the land as opposed to the fee simple interest to be valued, being the key distinction drawn by the majority in Mandic at [74].¹⁴

[36] Nor do I consider there to be any material difference between the restrictions on use considered in Mandic and what Mr Carter describes as the restriction on title created by clause 5. In any analysis which focuses on the value of the fee simple as opposed to the lessor’s interest and which ignores the existence of the lease as a whole, such a technical distinction would be irrelevant. Nor is there any indication in the majority’s judgment in Mandic that it intended its reasoning to be limited to a use restriction or, as Mr Kohler says, to elevate “use” to a “term of art”.

[37] In terms of practical outcome the use restriction in Mandic – to use as a single dwelling, and the so-called “title” restriction in the present case – not to subdivide – will, in most cases, produce a practically equivalent outcome and both, it seems to me, are equally irrelevant in a process which ignores the lessors’ interest.

[38] It is correct that s 225 of the Property Law Act refers in subs (1)(d) to a change of use as opposed to a change in title arrangements and that this section is unlikely therefore to apply to clause 5 in the lease. If that is the case then the lessee may only look to s 224 for relief from that clause. But even if s 224 did not apply I would not see that as altering the outcome for the reasons given by the arbitrator in paragraph [19] of his award, namely that in his words “the overriding reason[s]” for the Mandic decision were its consistency with Cox and its adherence to the language and structure of a clause which directed valuation of the fee simple interest. I agree with Mr Kohler that the Court’s observations at [76] can be seen simply as reinforcing that primary analysis.

[39] Whether a provision allowing consent to be arbitrarily refused means that “the context otherwise requires” for the purposes of s 224(1) is, in my view, better addressed in a case where that issue is determinative. For the purposes of the

_{relationship between these parties it is sufficient to record Mr Kohler’s position on}

¹⁴ Mandic v The Cornwall Park Trust Board (Inc) above n 2.

behalf of the lessor that clause 5 of the lease is subject to the deemed requirements in s 224(i)(a) and (b).

Result

[40] I find that the arbitrator was correct in requiring the valuation of the “fee simple” of the land included in the lease thereby “demised” to be made on a basis ignoring the restriction on subdivision of the land in clause 5 of the lease.

[41] I award costs to the defendant on a 2B basis.

[42] In the absence of agreement as to quantum memoranda may be filed. They are to be exchanged in advance so as to limit areas of difference.

Muir J