Mandic v The Cornwall Park Trust Board (Inc.)

JurisdictionNew Zealand
CourtSupreme Court
JudgeElias CJ,Blanchard,Tipping,McGrath,William Young JJ
Judgment Date11 November 2011
Neutral Citation[2011] NZSC 135
Date11 November 2011
Docket NumberSC 4/2011

[2011] NZSC 135

IN THE SUPREME COURT OF NEW ZEALAND

Court:

Elias CJ, Blanchard, Tipping, McGrath and William Young JJ

SC 4/2011

BETWEEN
Lisa Marie Colleen Mandic And Stephen Neil Dohnt
Appellants
and
The Cornwall Park Trust Board (Inc)
Respondent
Counsel:

E St John and K M Quinn for Appellants

M E Casey QC, J K MacRae and A F Buchanan forRespondent

Appeal from Court of Appeal's dismissal of appellants' appeal concerning valuation under a lease renewal — appellants held perpetually renewable 21 year leases (Glasgow leases) — correct approach of valuing gross value of fee simple and substantial improvements as provided for in the lease — whether improvements were to be valued on an added—value basis — whether assessment of gross value was constrained by use restrictions under lease — whether the required valuations were constrained by the state of the land as occupied by improvements.

The issues on appeal were: whether improvements were to be valued on an added-value basis, and if so, whether the subtraction methodology could be used; whether the assessment of gross value was constrained by use restrictions under the lease; and whether the required valuations were constrained by the state of the land as occupied by improvements.

Held: Under the rent formula, the sum of the value of improvements and the residual value of the land for rent-fixing purposes equated to the gross value. There could be market evidence which provided direct evidence of the residual value. That evidence would also inform the assessment of the value of the improvements. The valuer could also be expected to assess the current depreciated replacement cost of the improvements. Therefore, where there was limited or no direct market evidence in relation to unimproved land and the land had been developed in accordance with its highest and best use, the valuer might rely primarily on that current depreciated replacement cost.

An integrated consideration was required, which would involve both a current depreciated replacement cost analysis and an assessment of the value of the land as if unimproved. There was no reason why a valuer should not envisage the land as if unimproved and attribute a value to it in that state. The fact that residual value would usually be the value the land would have if unimproved was a logical corollary of the application of the formula and the added-value approach.

On the fundamental question of whether the added-value approach was correct, there was no legitimate basis on which Cox could be distinguished, as the rent fixing provisions in the leases in that case were materially identical to those in the current case. Cox had been relied on in many subsequent cases and was always accepted as correct. It would be unacceptably destablilising if a different approach was now adopted.

Moreover, a different approach was not favoured. Improvements could usually could not be sold otherwise than as an integral but undiscriminated part of the land to which they were attached. Logically they had no value beyond the extent to which they enhanced what would have been the value of the land if they were not there. The purpose of subtracting the value of the improvements was to prevent lessees paying rent on value they had created. The added-value approach was consistent with that purpose.

As a necessary corollary of accepting the added-value approach, there had to be an assumed state of the property to which the improvements could be said to have added value. This could only be the state of the unimproved land. The value of the land was necessarily the difference between the gross value of the land and its value as if unimproved. Given this, it was difficult to see why improvements should not where appropriate, be valued by subtraction.

User restrictions should not be taken into account when determining the gross value of the fee simple. What was required was a valuation of the land in terms of its exchange value, rather than a valuation of its use to the lessees. As a matter of plain English it was difficult to construe the phrase “gross value of the fee simple of the land” as incorporating restrictions on use provided for in a lease. Moreover, Cox was clear that the existence of the lease was to be ignored. As Cox was settled law, it would be wrong to take a different approach.

The required valuations were not constrained by the state of the land as occupied by improvements. Although there was no authority directly on point in the context of rent fixing clauses corresponding exactly to those in this case, authority in relation to other forms of ground leases supported the view that the existence of buildings on a site was to be disregarded when assessing land value. This was the correct approach given the terms and overall scheme and purpose of the leases. In applying the added-value approach, it was clearly the net value enhancement of the improvements which provided the measure of their value.

Appeal dismissed.

JUDGMENT OF THE COURT
  • A The appeal is dismissed.

  • B The appellants are to pay the respondent costs of $15,000 and reasonable disbursements in connection with this appeal, as fixed by the Registrar if necessary.

REASONS

Para No

Elias CJ

[1]

Blanchard, Tipping, McGrath and William Young JJ

[24]

1

The appeal concerns the correct application of the rent-setting provision on renewal at 21-year intervals of a perpetual lease first granted by the Cornwall Park Trust Board as lessor in 1910. The lease restricts use of the land contained in the lease to a single dwelling, unless the lessor waives the restriction at the request of the lessee. 1 Upon expiry of each 21-year term the lessee has the right to accept a renewed lease on the same covenants and provisions and on the basis of an annual rental of five per cent “on the gross value of the land after deducting therefrom the value of the substantial improvements of a permanent character”. 2 The gross value of the land and the value of the permanent improvements are as established by separate valuers for the parties and an umpire, according to the method specified in cl 13(b) of the lease agreement:

(b) … 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.

2

The lessees applied to the High Court for declarations that the effect of cl 13 of the lease is to arrive at a residual value for the land (to which the annual rental of five per cent applies) either as actually occupied by existing improvements on the land or on the basis of its use for a single dwelling. The lessor contended, rather, that the residual value specified by cl 13 is the unimproved value of the bare land according to its highest and best use, unconstrained by either existing development on the land or by the restriction on its use contained in the lease (although the restrictions in the lease had been taken into account by its valuers in previous rental reviews). Courtney J in the High Court found in favour of the lessor. 3 The Court of Appeal dismissed an appeal by the lessees. 4 On further appeal to this Court, the lessees argue that the residual value specified in cl 13 must take into account the existing development on the land and the restriction on its use contained in the lease. They also criticise the methodology adopted by the valuers for the lessor, which they say wrongly attempts a valuation of the land as if unimproved, rather than following the approach required by the lease of deducting the value of improvements from the gross value of the land to reach the residual value on which rent is set.

3

I have had the advantage of reading in draft the reasons of William Young J. I agree with his conclusions that the appeal does not turn on the approach taken to valuation, if the prescribed formula is fulfilled. I agree also with William Young J's conclusions that existing development of each site does not constrain the gross value of the fee simple or the residual value reached when the value of improvements is deducted from the gross value. I differ from the reasons given by the other members of the Court, however, in taking the view that the restriction on the use of the land contained in the lease is a relevant consideration in fixing the gross value of the fee simple of the land and the residual value reached after deduction of the value of improvements. The agreement between the parties to the lease that use of the land is restricted to a single dwelling is the context in which the rent-setting provisions are to be interpreted. I do not agree that the reasoning in Cox v Public Trustee5 suggests that such restriction is properly to be treated as irrelevant to the valuation. I explain why I reach these conclusions in what follows.

4

First, however, it is necessary to express disagreement with views expressed in the Court of Appeal about the jurisdiction under the Declaratory Judgments Act 1908. 6 Although its observations were not, in the end, material to the outcome there and do not affect the appeal to this Court, they may create difficulties in application of the Act in future cases if not corrected.

The jurisdiction under the Declaratory Judgments Act 1908
5

The case came before the High Court on application by the lessees for declaratory judgment under s 3 of the Declaratory Judgments Act. The lessor, while opposing the interpretation contended for by the lessees, did not object to the form of the proceedings in the High Court or in the Court of Appeal. Despite that, and although it dealt with the substantive points of interpretation, the Court of Appeal prefaced its determination with observations about the scope of the jurisdiction under the Declaratory Judgements Act,...

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