A bitter battle has ended, with a Ngāti Whātua Ōrākei subsidiary winning an Appeal Court case to stop Parnell tenants challenging their ground rent.
The issue is one of many similar arguments over recent years after Ngāti Whātua offered to lease its Treaty settlement land in the central city to developers at peppercorn rentals for many years before setting market rentals.
But when the time came for those rentals to be set, many apartment owners who bought their units from developers were horrified by their new ground rentals, which were had grown sharply with the land value. Most of these disputes have since been settled in mediation or arbitration.
However, the Parnell Terraces apartment complex of six three-storey blocks of residential terraced homes was less easy to resolve after ground rents doubled as its body corporate also discovered major leaky building issues. The leaky issue was discovered in 2008 but didn’t get a code of compliance from Auckland Council for significant repairs until 2019.
Those events culminated in many apartment owners failing to pay their ground rent to the body corporate, which is the legal lessee of the land.
As a result, an extraordinary meeting of the 81 owners, who are all part of the body corporate, agreed that they would individually pay their ground rent to Whai Rawa Railway Lands, a subsidiary of Ngāti Whātua, so as to discharge each owner’s obligation as a deemed guarantor under the lease.
Substantial arrears accrued
But Whai Rawa protested this development. Rental returns to Whai Rawa dwindled and substantial arrears accrued. It told the body corporate it was considering both the appointment of an administrator and cancellation of the unit plan. The body corporate disputed Whai Rawa’s right to take these steps and suggested various ways it said the impasse over the payment of rental could be overcome.
The body corporate remained liable to Whai Rawa as lessee under the lease. But it was concerned that, if it were forced to continue paying the ground rent fixed under the lease, it would implode in the short to medium term and unit owners could ultimately suffer significant losses.
That ended the parties up in the High Court where the body corporate argued Whai Rawa’s rent clause was harsh or unconscionable and convinced Associate Judge Clive Taylor that there was a case to argue.
It argued the original parties to the lease, when it was entered into, anticipated that the land would be developed but did not consider whether the rental would be fair to those on whom the obligation to pay would ultimately fall. The 15-year rent free period had enticed members of the public to buy units in the Parnell Terraces. They could not reasonably have ascertained the fairness or otherwise of the rental formula in the lease or predicted the increase in the value of the base land.
Market value ‘depressed’
The ground rent had already doubled in the seven years between the first two rent reviews. The market value of the Parnell Terrace units had, as a result of the “onerous” ground rent, been significantly depressed compared to the market value of similar freehold properties and owners were unable to leverage their units to obtain appropriate or any funding from banks or financiers, it told the court.
The first rent review’s outcome in 2013 saw the ground rent fixed at $740,670 (plus GST, if any), an average $9,144 (plus GST, if any) per unit per year. The second rent review resulted in the ground rent being fixed in 2019 at $1,375,530 (plus GST, if any) per year, an average of $16,981 (plus GST, if any) per unit per year.
The body corporate asked the High Court to set aside the rental clause or vary it to provide for a peppercorn rental; or varied to provide for a rental commensurate to a risk-free rate of return on a comparable investment or what the court deemed appropriate.
Whai Rawa argued the lease and the rent review process were not harsh or unconscionable; it was not a party to the sale and purchase transactions between the developer and the unit owners, nor the transactions involving subsequent purchasers. The lease had been negotiated between it and the lessee’s predecessor in title as commercial parties at arm’s length.
Whai Rawa said it was not obliged to consider the fairness of the rental clause, or the position of down-stream buyers. The terms of the lease relating to the determination of the ground rental were “market standard for ground leases and well understood by market participants”.
‘Statutory interpretation’
It said unit owners knew, or ought to have known, the terms of the lease, including the terms of the rental clause, when they acquired their units. Ground rental had been charged and reviewed in accordance with the lease and, in each case, set by agreement between the parties, after negotiation. When the ground rental was reviewed in 2011 to 2013 and again in 2018 to 2019, the body corporate and its members did not claim that the application of the lease was harsh or unconscionable. The body corporate and its members had unanimously approved the current ground rental with the benefit of independent valuation advice.
Whai Rawa alleged that the body corporate’s claim disclosed no reasonably arguable cause of action or the cause of action relied on by the body corporate could not succeed. Auckland High Court Associate Judge Taylor declined to strike out the body corporate’s statement of claim and dismissed Whai Rawa’s applications for strike out and summary judgment.
Whai Rawa then sought Appeal Court leave to appeal and succeeded.
Justice Edwin Wylie, Justice Cameron Mander and Justice Pheroze Jagose today said they were satisfied the High Court had no jurisdiction to grant any of the declarations sought by the body corporate in its proceeding.
“The issue is purely one of statutory interpretation and whatever the facts proved or arguments and policy consideration advanced at trial, the body corporate’s case is, in our view, bound to fail,” the judgment written by Justice Wylie said.
“There is no reasonably arguable cause of action disclosed by the proceeding, or case appropriate to the nature of the pleading. Accordingly, we allow the appeal and strike out the body corporate’s proceeding.”