Court rejects bid to change Glasgow lease rent-fixing valuations

The Supreme Court has rejected a new approach to rent-setting provisions under 21-year “Glasgow” leases despite a dissenting opinion from Chief Justice Sian Elias.

Lisa Marie Colleen Mandic and Stephen Neil Dohnt, who are lessees of land owned by the Cornwall Park Trust Board at Otahuri Cres, Greenlane in Auckland, originally sought a declaratory judgment from the High Court and later the Court of Appeal and Supreme Court that, if a 21-year lease restricts use of the land to a single dwelling, that it should be valued for rent purposes either as actually occupied by existing improvements or on the basis of its use for a single dwelling.

However, the trust board argued and the Supreme Court majority agreed, that the clause in the lease meant the valuation should be on 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 in the lease.

Glasgow leases are widely used in eastern Auckland by charitable organisations launched in the 19th and early 20th century, including the Cornwall Park Trust, the Melanesian Mission and the Anglican Church. Glasgow leases were chosen because they provided secure endowment income for charities but also facilitated development, helping people to do so without incurring capital costs of land acquisition.

Rapid rises in land values in the unpredictable Auckland property market have in more recent times made the 21-year lease method unpopular, because land rents can rise at an often unexpectedly sharp level.

One such rise came for lessees in 2005 when the Cornwall Park Trust Board re-valued some of its residential properties and proposed extremely high ground rent increases, which resulted by 2008 in 32 lessees seeking arbitration over the disputed rises. That led to this court case.

Compared to multi-unit development use?

The lessees had argued that when the land had not been developed in accordance with its highest and best use, the board’s valuation would produce a proportionately lower value for improvements than current depreciated replacement cost. They said a valuer might assess the unimproved value on the basis of a highest and best use involving a multi-unit development even though there might be only a single unit dwelling on the site.

However, the court said there was nothing to suggest the board had attempted to rely on highest and best use assessments that differed from the current uses to which the land is put. The court noted that the Property Law Act now meant a lessor’s consent to uses other than those specifically contemplated cannot be reasonably withheld.

In her dissenting opinion, Chief Justice Elias said the valuation should take into account the restriction in use to a single dwelling.

However, the majority of judges said that argument was not consistent with the leading case on leases, Cox, which had concluded that the lease was to be ignored for valuation purpose. “If the lease is to be ignored, how can restrictions provided for by the lease be taken into account?” they asked.

Ms Mandic and Mr Dohnt were ordered to pay the board costs of $15,000.