Ashburton District Council owns 142 investment properties. Sixteen of them include rural land that excludes improvements (improvements are things like buildings, fences and pasture establishment). We refer to this as L.E.I. land.
The Council has 893 hectares of investment and L.E.I. land scattered throughout the district. As at 30 June 2014 the properties had a value of $36.6m. They return in excess of $1.1m in rental revenue each year. The average return is a stable but less than spectacular 3.2% p.a.
Back in June 2011 the Council came out on the right side of an important rent review decision made by an Arbitration Tribunal about one of these properties.
The arbitrated agreement had a confidentiality clause, which prohibited the parties disclosing the final award for a period of 3 years. That period expired after 8 June 2014.
The case concerned a 116 hectare farm property in Carew (approximately 30kms west of Ashburton), which the Council leases out.
The original lease was for a term of 21 years, with perpetual rights of renewal. The rent is reviewed every 7 years.
From 1995 to 2002 the rent was $30 a hectare p.a. In December 2001 the Council had the rental for the property revalued and set the rent at $84.76 a hectare for the next 7 year period (2002 to 2009). The Lessee's didn't agree with this and requested the rental be determined at arbitration.
A long delay followed between the parties reaching agreement on a suitable arbitrator and then in finalising the terms of reference for the Arbitration.
Eventually Austin Forbes QC and registered valuer John Larmer were appointed as the Arbitration Tribunal to determine the ground rental of the property. Because of the delay, they were also asked to determine the rental for the next 7 year period (2009 to 2016).
The Council's valuer adopted what is generally referred to as a 'traditional approach' which is a market based methodology where recent relevant freehold sales are analysed to determine a value of the land. They now valued the land at $131 a hectare for 2002 to 2009 ($15,250 p.a.) and at $196 a hectare for the 2009 to 2016 period ($22,747 p.a.).
The Lessee's valuer sought to establish the rental should be determined with reference only to production and costs of development. They valued the land at $55 a hectare for 2002 to 2009 ($6,392 p.a.) and $60 a hectare for 2009 to 2016 ($6,960 p.a.).
Prior to the main Arbitration hearing commencing the Council made an offer to settle the matter. This is referred to as a Calderbank offer. The offer was based on a reduced rental but retained the Council's valuation methodology. The Council offered $95 a hectare for 2002 to 2009 and $132 a hectare for 2009 to 2016. The offer was rejected by the Lessee's legal representatives.
The Arbitration hearing extended over 14 days. There were many issues and arguments presented. Nine expert witnesses gave evidence. Twenty three briefs of evidence were provided. The 8 June 2011 Arbitration Award is 54 pages long. The Award is strongly in favour of the Council's position in the arbitration. The Arbitrators mostly endorsed the approach taken by the Council and its experts and advisors on rental setting, valuation, technical farming and legal issues.
The Awards for the 2 arbitrated periods were: $108 per hectare for 2002 to 2009 ($12,550 p.a.) and $160 p.a. for 2009 to 2016 ($18,590 p.a.).
The Council incurred substantial costs with the case; $749,496 in legal fees, expert witness fees and a half share of Arbitration costs. After the release of the decision the Council applied for costs. Mr Forbes Q.C. determined the Lessee had to pay the Council $368,558. In making the decision he noted that the Calderbank offer had been rejected, but also that the precedence value of the actual Hearing Award as being of benefit to Council in future L.E.I. dealings. The nett cost to Council was therefore $380,938.
As expensive as this was, the decision is very helpful to the Council for future rent reviews. There is now a far higher degree of certainty around treatment of some of the many valuation and legal arguments raised by the Lessees.
View the Award
View the Supplementary Award of Costs