REASONS OF THE COURT

(Given by French J)

Introduction

[1] Saltburn Holdings Ltd wanted to appeal an arbitral award to the High Court. To do that it was required to identify a question of law arising out of the award and obtain leave to appeal from the High Court under cl 5(1)(c) of the second schedule to the Arbitration Act 1996. It applied for leave but the application was declined by Downs J.[1] Saltburn then sought to appeal Downs J’s refusal of leave. The Judge however declined leave to bring that appeal,[2] prompting Saltburn to seek special leave from this Court under cl 5(6) of the second schedule. It is that application which is the subject of this judgment.

[2] The notice of the application for special leave and the submissions filed by Saltburn indicated some confusion as to the scope of our jurisdiction under cl 5(6). Saltburn’s notice of application for special leave for example purported to be an application for special leave to appeal to this Court against the arbitral award.

[3] The relevant provisions of cl 5 are as follows:

5 Appeals on questions of law

(1) Notwithstanding anything in articles 5 or 34 of Schedule 1, any party may appeal to the High Court on any question of law arising out of an award—

(a) if the parties have so agreed before the making of that award; or

(b) with the consent of every other party given after the making of that award; or

(c) with the leave of the High Court.

(2) The High Court shall not grant leave under subclause (1)(c) unless it considers that, having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of 1 or more of the parties.

(3) The High Court may grant leave under subclause (1)(c) on such conditions as it sees fit.

(4) On the determination of an appeal under this clause, the High Court may, by order,—

(a) confirm, vary, or set aside the award; or

(b) remit the award, together with the High Court’s opinion on the question of law which was the subject of the appeal, to the arbitral tribunal for reconsideration or, where a new arbitral tribunal has been appointed, to that arbitral tribunal for consideration,—

and, where the award is remitted under paragraph (b), the arbitral tribunal shall, unless the order otherwise directs, make the award not later than 3 months after the date of the order.

(5) With the leave of the High Court, any party may appeal to the Court of Appeal from any refusal of the High Court to grant leave or from any determination of the High Court under this clause.

(6) If the High Court refuses to grant leave to appeal under subclause (5), the Court of Appeal may grant special leave to appeal.

...

[4] As those provisions make clear, under cl 5(6) it is not our task to determine whether to grant leave to bring an appeal in this Court regarding the correctness of the arbitral award. We are dealing only with the issue of whether Saltburn should be permitted to appeal against Downs J’s refusal to grant leave to appeal to the High Court. To put it another way, if we were to grant this application, the hearing that would then subsequently take place in this Court would be limited to inquiring into the correctness of Downs J’s refusal to grant leave under cl 5(1)(c). A successful outcome in this Court for Saltburn from that hearing would be an order directing the High Court to consider and determine an approved question of law. Contrary to the notice of application, it would not be an order setting aside the arbitral award.

Background

[5] The arbitral award in dispute concerned a perpetually renewable lease to which Saltburn and Penrose Holdings Ltd are parties: Penrose the lessor and Saltburn the lessee. It is a type of lease called a Glasgow Lease and is regulated by the Public Bodies Leases Act 1969.[3]

[6] Saltburn had acquired the leasehold interest for a 21 year term renewable in perpetuity. The lease provided for an annual rent of $12,200 plus GST for the first seven years and thereafter at such fair annual rents that might be determined at seven year rent reviews. The fair annual rent for the last seven years of the 21 year term had been $45,500.

[7] The 21 year term of the lease expired on 3 September 2016. Penrose obtained a valuation that the fair annual rent for the first seven years of a new lease on the same terms as the one which had expired was $55,000. Saltburn notified Penrose that it did not accept the rent assessment and it did not wish to renew the lease.

[8] The lease’s renewal process is governed by certain terms derived from the first and second schedules to the Public Bodies Leases Act. The relevant provisions meant that when Saltburn decided it did not want to renew the lease, that triggered a requirement the lease be sold by public auction. The provisions also meant that for the purposes of the auction, it was necessary to calculate what is referred to in the second schedule as “the upset annual rent.” Clause 10 of sch 2 states that the lease “shall be offered by the lessor by public auction at the upset annual rent” of the land “for the first [seven] years of the term of the lease”.

[9] A lot rides on the upset rent. Clause 20 of sch 2 provides that the vendor must accept the highest bid at the auction for the new lease but only if the bid is not less than the upset rent. If there is no bid equal to or greater than the upset rent, then the lessor is not required to sell and the land with all its improvements reverts to the lessor.[4] The outgoing lessee receives no payment or compensation in relation to the improvements. Conversely if the auction does reach the upset rent, then the successful bidder and now the new lessee must pay the outgoing lessee the value of the improvements.[5] The outgoing lessee is entitled to bid at the auction and so if they were the successful bidder then obviously no payment would be required.

[10] The value of the improvements in this case was agreed to be $730,000.

[11] The parties could not agree on the calculation of the upset rent and the matter went to arbitration.

[12] The arbitrator, Sir Ian Barker QC, held that “upset annual rent” operated as the equivalent of a reserve price and was thus a synonym for the minimum fair annual rent which the lessor is prepared to accept at the auction for a new lease which includes all the other terms of the lease the old lessee has declined to renew.[6] Thus, there was no material difference between “upset annual rent” and “fair annual rent.”

[13] After reviewing the valuation evidence, the arbitrator fixed the upset rent at $53,600, which was only slightly less than the fair annual rent which it will be recalled was $55,000.[7]

[14] Saltburn considers that the figure of $53,600 is too high, putting it at risk of there being no successful bidder and thus losing compensation for its improvements. It wishes to submit the question what is meant by the phrase “upset annual rent” for consideration to the High Court.

Justice Downs’s decision refusing the application under cl 5(1)(c) for leave to appeal to the High Court

[15] As Downs J recognised, the principles a High Court judge should apply in determining whether to grant an application for leave under cl 5(1)(c) are well established, having been articulated by this Court in Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd.[8] In that case, this Court held that once the Judge has satisfied themselves the proposed question is a question of law, he or she must then consider the following factors:[9]

* the strength of the challenge/nature of point of law;

* how the question arose before the arbitrators;

* the qualification of the arbitrators;

* the importance of the dispute to the parties;

* the amount of money involved;

* the amount of delay involved in going through the courts;

* whether the contract provides for the arbitral award to be final and binding; and

* whether the dispute is international or domestic.

[16] In this case, Downs J accepted that Saltburn’s proposed question was a question of law. However, he found that most considerations told against leave or were of neutral value.[10] These included that the case was likely a “one-off”, this being only the third auction of a Glasgow Lease in 80 years.[11] Saltburn’s case challenging the arbitral award was weak and there was little prospect of appellate reversal. Saltburn was advocating that hitherto orthodox approaches to valuation should not be used to assess upset annual rent. But the approach adopted by the arbitrator was in accord with authority,[12] and supported by the weight of the valuation evidence before him.

[17] Further, although the dispute was significant to Saltburn, the rent increase that led to its decision not to renew was modest and it did not in fact own the improvements.[13] The arbitrator was a qualified and highly experienced lawyer and the valuer appointed to assist him was similarly very experienced.[14] Clause 7 of sch 2 of the Public Bodies Lease Act contemplated the arbitration process as binding and although the significance of the upset rent point only emerged during the arbitration process, by the time of the arbitration hearing the assessment of upset rent was paramount.[15]

[18] In the view of Downs J, the mix of factors “is clear”.[16] Leave should not be granted.[17]

[19] The Judge re-affirmed these reasons in his subsequent decision under cl 5(5) refusing leave to appeal to this Court against his cl 5(1)(c) decision.[18]

The application for leave before us under cl 5 (6)

Analysis

[20] In Downer Construction (New Zealand) Ltd v Silverfield Developments Ltd it was held that this Court should only grant special leave under cl 5(6) where satisfied the proposed appeal raises some question of law or fact capable of bona fide and serious argument in a case involving some interest, public or private, of sufficient importance to outweigh the cost and delay of the further appeal.[19]

[21] The primary contention which Saltburn wishes to advance on its proposed appeal in this Court is that Downs J was wrong to assess its substantive case as weak and a “one-off.” According to Saltburn, the issues it wants to raise in the High Court have real merit. Moreover, they are issues that are not confined to “upset rent” and auctions of Glasgow Leases. Rather they apply to the calculation of fair annual rent generally and therefore are of general or public importance.

[22] Our sense is that Saltburn’s substantive case appears to have evolved since Downs J’s decision from being a case about the meaning of “upset annual rent” as that phrase appears in the Public Bodies Leases Act to a much wider argument about valuation methodology setting fair annual rent and fair market rent. More specifically, it appears to be an argument about the calculation of the rental factor to be applied to the nominal freehold land value in order to arrive at a fair annual rent.

[23] Arguments about valuation methodology were certainly advanced in the High Court but it is clear from Downs J’s judgment he understood those arguments to be advanced in the context of a central argument that “upset rent” was not to be equated with “fair annual rent” and that accordingly a different more subjective valuation exercise was required.

[24] In his decision, the arbitrator accepted that in determining the fair annual rent payable for a leasehold property, it was recognised valuation practice to consider the rent on two principal approaches, namely the “classical approach” and the “traditional approach”.[20]

[25] The classical approach which is the primary approach requires reference to other known and confirmed market rentals. The traditional approach is based on an assessment of the underlying freehold land value and the application of a rental rate which will have regard to the terms and conditions of the lease. On the evidence before him, the valuer appointed to assist the Tribunal adopted the traditional approach because of the absence of a sufficient number of truly comparable market rentals. He considered the unimproved freehold land value should be fixed at $822,000 and a rental factor of 6.5 per cent adopted, arriving at the fair annual rent of $53,430. This was accepted by the arbitrator.[21]

[26] As we understand it, Saltburn’s main complaint now is that the rental rate used by the arbitrator of 6.5 per cent was fixed by reference to a prescribed formula which was a wrong approach to fair annual rent for the type of lease at issue in this case.[22] Saltburn acknowledges that the approach the arbitrator followed is an established one, endorsed by modern decisions of this Court, but according to Saltburn it is conceptually wrong and contrary to the 1912 decision Drapery and General Importing Co of New Zealand (Ltd) v Mayor of Wellington.[23]

[27] Saltburn argues that the correct approach mandated by Drapery is to set fair annual rent by reference to the terms of the lease, and to factor in the costs of developing the land and expected returns. The percentage has to be calculated so as to be able to convert the notional market value of the unimproved land into a figure which encompasses all those factors. Otherwise, if the percentage is not so calculated, the resulting figure will not comprise a fair annual rent.

[28] Like Downs J, we consider the challenge to the arbitrator’s decision equating upset rent with fair annual rent to be weak. The arbitrator’s decision is supported by the wording of various provisions in the schedules and relevant case law as well as commercial common sense. As the arbitrator pointed out, no vendor would nominate a figure that was less than fair annual rent because the figure represented by the upset rent endures for the whole term of the rental period.[24]

[29] In our view, even if this Court were prepared to entertain the new arguments and allow a reformulation of the proposed question of law, they too are fraught with difficulties. As both the arbitrator and Downs J pointed out, the appropriate method of valuation to be used in any given situation is a matter of fact, not law.[25] Further all three valuers called to give evidence, including the valuer called by Saltburn itself, relied principally on the traditional method and all three adopted a rate of 6.5 per cent. As already mentioned, that approach and the figure of 6.5 per cent was also endorsed by the valuer appointed to assist the arbitrator. The approach is an established one and consistent with the weight of authority.

[30] We also regard Downs J’s treatments of the other relevant considerations to be taken into account under cl 5(1)(c) as compelling. We note too that further delay of an appeal in this Court and then in the High Court would be highly prejudicial to Penrose who has been left in limbo since September 2016. Its lessee has departed and it has not been able to undertake the auction.

[31] In all those circumstances, we consider Saltburn has little chance of persuading this Court that Downs J was wrong to refuse leave.

Result

[32] The application for special leave to appeal is accordingly declined.

[33] There is no reason why costs should not follow the event and we accordingly order Saltburn to pay Penrose costs for a standard application on a band A basis and usual disbursements.

[34] Finally, for completeness, we record that Saltburn also purported to apply for special leave to appeal a separate arbitral award made by the arbitrator, Sir Ian Barker, in this dispute dealing with costs. However, our understanding is that the costs award has never been the subject of an application to the High Court for leave under cl5(1)(c). That being so we have no jurisdiction.

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-------------------------- [1] Saltburn Holdings Ltd v Penrose Leasehold Ltd [2018] NZHC 1246 [First Decision of Downs J]. [2] Saltburn Holdings Ltd v Penrose Leasehold Ltd [2018] NZHC 2734[Second Decision of Downs J]. [3] For a discussion of Glasgow Leases, see Mandic v Cornwall Park Trust [2011] NZSC 135, [2012] 2 NZLR 194 at [25]–[27]. [4] Public Bodies Leases Act 1969, sch 2, cl 21. [5] Schedule 2, cls 11 and 12. [6] Saltburn Holdings Ltd v Penrose Leasehold Ltd (Partial Award) Ian Barker 18 December 2017 [Arbitral Award] at [29]. [7] At [85]. [8] Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] NZCA 131; [2000] 3 NZLR 318. [9] At 333–335. [10] First Decision of Downs J, above n 1, at [26]. [11] At [26]. [12] At [15] citing Cox v Public Trustee [1918] NZGazLawRp 1; [1918] NZLR 95 (SC). [13] At [17]–[18] and [24]. [14] At [21]–[22]. [15] At [20] and [25]. [16] At [26]. [17] At [26]. [18] Second Decision of Downs J, above n 2, at [2]. [19] Downer Construction (New Zealand) Ltd v Silverfield Developments Ltd [2007] NZCA 355, [2008] 2 NZLR 591 at [33]. [20] Arbitral Award, above n 6, at [71]. [21] At [72]. [22] It would have been acceptable for the type of Glasgow Lease in Mandic v Cornwall Park Trust, above n 3, but not the lease in this case. The arbitrator should not therefore have relied on Mandic. [23] Drapery and General Importing Co of New Zealand (Ltd) v Mayor, Etc, of Wellington (1912) 31 NZLR 598. [24] Arbitral Award, above n 6, at [30]. [25] At [71]; and First Decision of Downs J, above n 1, at [16].