Rent fixing procedures

Rent Fixing ProceduresSynopsis by John Larmer

1. The fee simple or freehold land is owned by PKW and ground rent is payable on the basis that the land is in an assumed unimproved state. That is, all improvements both on and to the land are disregarded.These improvements are lessee assets which, along with a right of perpetual occupation, make up the lessee interest in the developed property.

2. The unimproved value concept is the market value of the land without improvements but set within the actual environment and infrastructure that exists in the locality.  This includes the developed nature of all other properties with only the subject land being treated as unimproved.  Over 100 years of case law and judicial decisions underpins the approach taken to assessing unimproved value.

3. There were three different classes of West Coast Settlement Reserve land prior to it being broken in for farming:

a) Open Country - originally covered in flax and fern that was relatively easy to break in. Therefore, the value of the improvements is less and the lessor's relative interest is greater than the lessees'.

b) Light Bush - intermediate original cover.

c) Heavy Bush - originally dense bush and/or swamp land that was very difficult and costly to break in for farming. The lessees interest in this class of land is greater than that of the preceeding two.

This original cover on each lease title is taken into consideration when assessing the lessor's interest and setting the rent. 

4. Rents are reviewed at seven year intervals  although the lease term is for 21 years (with perpetual rights of renewal).  Within six months before and 12 months after the review date lessor or lessee may give notice in writing of the “fair annual rent” for the next seven year period.   

5. Generally the lessor would give notice of a rent increase and, if there is no response within three months, then that will be the new rent.  If objection is received within the three months period, and the parties cannot agree on the new annual rent, then dispute resolution procedures apply. 

6. The Maori Reserved Land Act provides for settlement by negotiation between the parties or, failing this, by mediation.  The parties valuers would be expected to have already mediated differences or obtained a third valuer review, making direct lessee/lessor agreement via mediation unlikely. 

7. Failing agreement at mediation arbitration must occur – there is no recourse to the Courts.  The determination of the arbitrator – after hearing evidence and submissions – is binding on the parties.  Arbitral proceedings for ground rent reviews present difficulties and can be prohibitively expensive for lessees unless acting as a cohesive group, due to the significant expert and legal costs involved.  The 2003 West Coast Lease rent reviews were settled by arbitration at substantial cost despite the respective experts retained agreeing on a considerable amount of information.  However, the subsequent Award did clarify important legal and valuation principles and assisted settlement of the subsequent 2010 rent review by agreement. 

8. For the 2003 ,2010 and 2017 rent reviews the Lessees Association and PKW Board  agreed not to follow the statutory process and mandated their appointed valuers to instead liaise throughout the rent review process.  This involved jointly inspecting each lease and seeking agreement as experts on data and judgements fundamental to the fixing of a rent for unimproved land.  To derive a ground rent, agreement is first sought on freehold capital and land values, plus the extent and value of developmental and structural improvements.  Finally, the valuers attempt to agree on the unimproved value of the land with all factors relevant to land assessment being considered.   

9. The lack of directly comparable ground rents requires a traditional approach to rent setting which is the application of a rental rate to the unimproved value.  Although a collegial approach does not guarantee valuer agreement will be reached, it does ensure that technical disagreements and opinion differences are dealt with in a cost effective way, with recourse to a third expert if necessary.  Unimproved value assessment is an extremely difficult concept requiring considerable time and expense to determine at an arbitral hearing.  

10. The collegial approach adopted for the last three rent reviews has been relatively cost effective.  Each lessee is billed for the valuation process directly, the resources of the Association being called upon where agreement is not reached, where legal or additional expert assistance is required, or where there is recourse to a hearing.   

11. The next rent review for most leases is 1 January 2024, but about 20% of the West Coast leases in Taranaki are out-of-sequence with some reviews being due prior to that date, and some after.