In re Tuaana 91R2A, Arorangi [2013] CKLC 1; App373.2012 (19 April 2013)

IN THE HIGH COURT OF THE COOK ISLANDS
HELD AT RAROTONGA
(LAND DIVISION)
APPLICATION NO. 373/12

IN THE MATTER of Section 409B of the Cook Islands Act 1915 (as inserted by Section 2 of the Cook Islands Amendment Act 1978-79)

AND

IN THE MATTER of the land known as
TUAANA 91R2A, ARORANGI

AND

IN THE MATTER of an application to Determine Market Rental of land pursuant to a Deed of Lease dated 13th January 1987 (as Varied and Amended by a Deed executed by the Lessor on 19 December 2005 and by the Lessee 10 March 2006); by THOMASINA MURRAY
Applicant

Date of hearing: 15 April 2013

Counsel: Mr B Mason for the Applicant (Lessor)
Mr M Scowcroft for the Lessee

Date: 19 April 2013

RESERVED DECISION OF ISAAC J

Introduction

[1] This is an application to determine the market rental of Tuaana Section 91R2A, Arorangi pursuant to a deed of lease dated 13 January 1987 as varied and amended by a deed executed by the Lessor on 19 December 2005 of the Lessee 10 March 2006).

[2] The applicant is Thomasina Murray who is the sole owner of this land.

[3] In terms of the Deed of Variation the rental for 5 years from 1 October 2001 to 30 September 2006 as agreed to by the parties was $2000.

[4] The rental for the period for 5 years from 1 October 2011 is now due and despite some attempts at negotiation the parties cannot agree to the rental that should be paid.

[5] The applicant has now brought this application in terms of s 409B of the Cook Islands Act 1915 seeking the Court's assistance to determine the rental as at 1 October 2011.

[6] The application was heard on the 15th April 2013 and at that time submissions were presented by counsel for the applicant (Lessor) and counsel for the Lessee.

[7] It should be noted that while those submissions rely on prior written submission presented to the Court, in both cases counsel refined their respective positions in their oral presentations.

[8] The background to the present lease situation is not at issue. What is at issue are the appropriate comparable leases that should be used and the relevant factors which should be taken into account by the Court in determining the current market rental for this land.

Discussion

[9] At the commencement of the hearing I suggested that expert valuation evidence be obtained to recommend a market rental. This was not accepted by counsel and I was asked to proceed on the basis of counsel's submissions without any proper evidence. I will now do so.

[10] In relation to determining the rental for this land it was accepted that the starting point is the Deed of Lease itself. This provides as follows:

1. for and during the first 5 years of the said term an annual rental of ONE THOUSAND FIVE HUNDRED DOLLARS ($1500) payable always in advance.
   
2. for and during each succeeding period of 5 years of the said term annual rentals shall be agreed upon by the Lessor and the Lessee or failing agreement at such rentals to be based upon then current market rentals for comparable unimproved land of a similar value to the said land in its unimproved condition and the terms and conditions and provision of this Deed but to be not less than the annual rental payable for the preceding 5 years. Such rentals to be paid on the 1st day of October in each and every year of the said term.
   

[11] Firstly, it should be noted that the parties have failed to reach agreement. The final offers that were made as recorded in the written submissions ended with the Lessor offering $10,000 as an appropriate rental and the Lessee $2840. However in the submissions presented to the Court, counsel for the Lessor submitted that $4968 was an appropriate rental and counsel for the Lessee submitted that there should be no increase.

[12] The revised positions were arrived at by reference to the comparable leases relied on by each counsel and in doing so both counsel relied on the decision of Savage J in the Enuakura Section 205A No.1 Avarua case, application 375/2009. When referring to matters to consider in determining market rental Savage J stated:

"They are first, that looking at comparable properties and leases to gauge rental one must look at similarity in location, size and within the same rental bank. Secondly, to observe that some properties are not helpful for comparison because there is a trade off between the level of upfront payment for lease and the rental itself."

[13] I agree with these considerations and now examine the comparables given by each counsel bearing in mind the factors set out in the Enuakura case and other factors raised by both counsel as relevant to the present case.

[14] The comparisons used by the Lessor included:

1. Polynesian Rentals – This is vacant land in close proximity to the leased land but smaller being 894m2. The rental is $1000 per annum or $1.11 per square metre.
   
2. Onemaru – This is also vacant land and is also close to the leased land. It is 796m2 and the rental is $1250 per annum or $1.57 per square metre.
   

100. Lot 10 – This land is also vacant and close to the leased land. It is 813m2 and the rental is $1200 per annum or $1.47 per square metre.
     

The average for the rentals is $1.38 and when applied to the leased land, the rental would amount to $4968 which is an appropriate starting point.

[15] Counsel for the Lessor argues that these properties are good comparisons because they are all similar properties to the leased land and are in the same location. The major difference is the size and counsel acknowledges that the Court has in the past set a lower per meter rental for larger sections but that this factor is cancelled because large properties such as this are rare and are sought after for major developments.

[16] Counsel for the Lessee maintains these comparables are not appropriate. In respect to the Polynesian Rentals lease he submits that although the Court order was completed on 1/2/2013, the lease had not been signed and it was dangerous to use this as a comparison. He also maintains that the circumstances surrounding the negotiations were complex and the rental would have been the same if the land was $1000 or $5000.

[17] The negotiations between parties may affect the agreement reached between parties but they are not determinative to the Court in setting the rental. Also the fact that the Polynesian Rental lease has not been sealed does not change the order made by the Court. I therefore do not accept these are valid reasons not to use the Polynesian Rentals as a comparison.

[18] Counsel for the Lessee also submitted that Lot 10 was not a good comparison. The reasons included the difference in size between the two properties and that it was useful to use leases with similar rental provisions.

[19] In terms of the size issue, the properties are very different. The leased land is 3600m2 and by comparison Lot 10 is 813m2. Also although counsel for the Lessee did not make submissions as to the size of Polynesian Rentals or submissions in respect to Onemaru, the sizes of those leases are 894m2 and 796m2 respectively and therefore considerably smaller than the leased property.

[20] Counsel for the Lessor acknowledges that the Court has in the past set lower rates for larger sections but submits that large sections of this type are rare and are sought after for major developments. Also this lease property has a wide range of permitted uses including the building of unit titles.

[21] While economies of scale would normally have a larger rental it is of some significant that larger properties such as the leased land are rare in such locations. This land would have many uses and its size would not affect those uses. Therefore any deduction because of size would be small.

[22] In regard to using leases with similar rental provisions, counsel for the Lessee referred in particular to leases which contained provision for the Lessor to receive a percentage of income as well as rental.

[23] In the leased land and the examples given by the Lessee's counsel, namely the Seascape lease, and the Aroa lease, this was the case. Also in these two leases they were of a similar size to the leased land and therefore, in the submission of counsel for the Lessee, appropriate comparables. The Seascape lease received $1500 per annum or $0.32 per square metre in 2010 and the Aroa lease the rental in 2001 was $0.29 per square metre. Therefore, when applied to the leased property, the rentals would be $1152 and $1044 per annum respectively.

[24] Counsel for the Lessor submitted that these rentals were low and essentially peppercorn rentals because the properties received significant income from the percentage received from gross income. This was not the case for the present lease which although it had a percentage of income provision contained in the lease it had only received $284 since the Deed of Variation in 2005. Counsel for the Lessee maintains what is received is irrelevant as long as there is provision in the lease for this payment to occur.

[25] I do not agree. It is not comparing like with like. The Lessors of both Seascape and Aroa are virtually guaranteed a return on their leases irrespective of the rental which is agreed to. The present Lessors are not. They may have the percentage of income clause in their lease but have only received in the 5 years since the Deed of Variation $215.17 or approximately $43 per annum. By comparison the Seascape lessor received $22,800 per annum and the Aroa lessor $7000 per annum.

[26] As a consequence I do not consider the Seascape or Aroa lease are ideal comparisons to use. They may be a similar size but are not in the same location and are not vacant or in the same rental bank to use Savage J's terminology.

[27] Bearing in mind these arguments I prefer the comparables used by the Lessor as being vacant land in the same location and in the same rental bank. In terms of the size matter as stated I think any deduction would be small.

[28] As a result I accept the starting point submitted by counsel for the Lessor at $4968 with a deduction of 15% for the size difference in the comparables given. This would mean that the rental would be $4222.80 per annum.

[29] In terms of s 409B of the Cook Islands Act 1915 the market rental for Tuaana Section 91R2A for the period of 5 years from 1 October 2006 is fixed at $4222.80 per annum.

[30] A copy of this decision is to be sent to all parties.

Wilson Isaac, J

Editorial Note: Derived from the Court’s electronic records and believed to be correct and final.