Ngati Whatua Ground Rent Battles continued….


Blog readers will recall earlier posts on the land down by the old railway station and around where Vector Arena sits.  This was purchased by Ngati Whatua over fifteen years ago and leased to various property development interests with a FIFTEEN YEAR rent free period.

Basically, the occupiers have grown quite used to this rent free business and seem to have priced their units and sub-leases as if it didn’t exist and wasn’t coming to an end.  Now that it has, in perfectly predictable fashion, Ngati Whatua would very kindly like some rent, thanks very much.

Cue also perfectly predictable outrage at the perfidious landlord actually wanting a return after a miserable fifteen years.

New Zealanders have never quite gotten their heads around leasehold land and always seem to regard the owner of the freehold as nothing but a leech on their “ownership”…..but I digress.

The NZ Herald this morning had a continuation piece as the test case arbitrations continue.  It seems that a number of tenants and body corporates (outside of those directly involved) are contributing to costs, as the big legal and valuation guns are all in evidence, as is the arbitrator Rob Fisher himself, a retired (but still relatively young) top calibre High Court judge.

One interesting element was arguments that years of railway use and resulting contamination, and the railway tunnel, degrade the value of the land.

Negative effects of traffic nuisance from a network of main arterial roading routes near the apartments and townhouses was (sic) also argued by the apartment and townhouse owners.

From where I’m sitting, the degrading value of contamination to an apartment building plonked on a massive and all-covering concrete slab seems non-existent, but arguments about the railway in terms of vibration and noise might have some traction.  The idea that living near main arterial routes harms residential city-dwellers more than it benefits (in terms of access to road and motorways for residents) is a fairly balanced one and it would surprise if the decision made more than a cursory nod to reductions for such elements.

The results of this arbitration obviously have huge implications for the rest of the owners and tenants on the Railway land, and will be of considerable interest to valuers and lawyers, given the calibre of the arbitrator.

Advertisements

About Ivan McIntosh

I am a partner of Carter Atmore Law...residing in City Road just off the busy thoroughfare of Symonds Street, Auckland, New Zealand....where we are specialist business & property development lawyers, working for both local and international clients. Proud husband to Joanna, and dad to two sons. Passionate rugby supporter. Email: imcintosh@calaw.co.nz Ph: 64 9 921 5026
This entry was posted in Banking & Finance, Commercial Property, Leases & Leasehold, Maori land, Property Law, Unit Titles and tagged , , , , . Bookmark the permalink.

10 Responses to Ngati Whatua Ground Rent Battles continued….

  1. Al Batross says:

    Richard,

    I’m deeply sorry for what you’re having to deal with here and it’s a situation that quite a few of us are locked into though each one’s details vary.

    For instance I’m also in an apartment on Ngati Whatua leasehold land but the terms of my lease are quite different to yours. I’d have thought that all apartment leaseholds under Ngati Whatua would have similar terms, but apparently not.

    Many of us enjoyed a full ‘ground rent holiday’ and paid nothing (except body corporate operational levies) until 2011, when the ground rent kicked in, whereas you appear to have been paying from the start of your purchase. This has surprised me. Our formula is 6% of land value whereas yours is 7.5%. The suggestion that you would be required to pay 20K per annum is horrific. It makes trying to sell and getting a half decent return almost impossible. Many of us are in a nasty trap with all this, investors showing very unwilling to take on a leasehold apartment for the obvious reasons. And I ask myself why should they, when there are a plenty of freehold apartments for sale which will give better return on their investment without the worry of the next rent review looming.

    but your situation sounds to me diabolical, made much more so by the lack of transparency, the lack of accurate information leading up to your decision to purchase. It appears that something has gone very wrong on the communication front at that time, and you’ve been left holding the baby. I can tell you that even as a resident of Auckland, and being on the spot here at time of purchase, I too had a heck of a time trying to elicit the full picture and was left in a state of confusion over the coming ground rent and what it would mean to me in dollar terms.

    As so often happens in life, one person’s misery is another’s delight:
    From the NZHerald 16 Oct, 2012 the following quote, “Ngati Whatua o Orakei Maori Trust Board said celebrations were held to mark the start of the flow of capital to the hapu and it expects about $15 million annually in leasehold payments, rising on five-yearly reviews.” And, “The big question now being asked of management is how can we double that again in the following decade.”

    You can see the full article here: http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10840695

    So the outlook for those caught in the net is rather bleak. I’m now resigned to taking a huge loss when/if I can ever sell and have prepared myself to virtually give away my apartment and lose a lifetime’s savings because of all this.

    I don’t know how things have been for you since you wrote here, and whether you were able to make any headway with what you were considering, so an update would be appreciated.

    • Richard says:

      Al, thanks for your response. There aren’t too many specific updates that I can disclose, partly because my situation will likely result in a court action and I wouldn’t want to cloud anything in relation to that.

      I have gathered information from other sources regarding the way that the contracts were implemented although it’s actually quite difficult to confirm some of the details. The impression that I have for the Scene Apartments is that the contract stated that 50% of the purchase rent was an advance payment for ground rent but this payment didn’t actually go to the freeholder, Ngati Whatua. It also appears that the annual ground rent paid for the last 8 years has not gone to Ngati Whatua and I had heard that only 5% of the 7.5% ground rent calculation is going to Ngati Whatua. If that is all correct then I personally believe that Ngati Whatua is being perfectly reasonable in claiming 5% of the undeveloped block value in annual ground rent. The issue is what happened to the other ‘ground rent’ payments that have been, and will be, paid out.

      Various people I’ve spoken to have basically reached the conclusion, rightly or wrongly, that they were misled during the purchase process but that they have little recourse in the matter. Taking the matter to the High Court is ridiculously expensive and very risky given that any likely defendant will almost certainly have much greater resources and a vested interest in avoiding a decision that could open the flood gates for further cases. Depending upon who the action is against, there’s also the chance that you don’t receive a cent even if you win – the defendant may simply close down and disappear. Anyone who consciously sets out to misrepresent a contract for financial gain, and I’m not saying that that was the case here, will also have the foresight to close down the chance of any monies being recovered.

      What I would say to anyone who has similar concerns and is looking for redress is to make sure that you start with as much information is possible. For all parties involved in your purchase, gather as much information as possible, potentially through a formal request under the Privacy Act, Depending upon your personal circumstances you may have had a reasonable expectation that one of the professionals involved in your purchase would have highlighted the implications of some of the more covertly worded aspects of the contract. If you even had discussions with any other third party during the sales process then it may even be worth documenting what their involvement was and what they told you, even if you didn’t have a formal commercial relationship with them (it may be worth looking at Collateral Contract Law and having someone evaluate if it’s even remotely relevant in such a case). I have no law qualifications and these are simply self researched observations, so take them as such and do your own research, or better still engage a qualified person to do it for you. The important point is that you may find redress in the least likely place, you just have to keep looking. If I was in a cynical mood I may say that the law is less about right and wrong and justice but more about who has the greatest ability to manipulate potentially unclear legislation to best suit their needs.

      Sorry for not having anything of any real value at this stage!!!

  2. paul says:

    Hi Richard,
    I wonder is there is a legal avenue owners of these apartments can pursue ie class action against the NZ solicitors involved where there was a gross (almost blatant) mis-communication regarding the ground rent situation (15 year rent free agreement) and the current proposed increase.

    My feeling though is that it seems unethical for Ngati Whatua to try and recoup 15 years worth of lost rental income over the immediate next and coming years from the current occupiers considering that the majority of these owners haven’t been on the land in question for the full 15 years?

    Anyways I sympathize with your situation and can assure you that you were not the only one to have had full disclosure with-held from you.

    BTW – have you heard of Kelvin Horspool and the Scene 3 support group he has set up for its owners?

    • Richard says:

      Thanks Paul. It’s actually god timing as I’ve recently gathered together all the original documentation and asked my original solicitors to provide me with copies of what they have. I don’t know if there is a legal case worth fighting but I’ll try approaching some solicitors and see what they say.

      What I’m not going to do right now is accuse anybody of anything or even infer that there was any wrongdoing – I’ll leave the solicitors to interpret the rule of law. As for ethics, we’ll just have to judge those for themselves. I’ve pulled together my contact with my agent, the documentation from the solicitor and the sales agreement itself. It would be interesting to see if this is consistent with other people’s experiences and if anyone else has explored the option of litigation against any party. I’m not going to refer to any individual or organisation here, as I don’t believe that it’s relevant to do so.

      The first thing to point out is that I’m not sure where the reference to any rent-free period comes from, I’ve been paying ground rent from day one. During the initial discussion with the agent I was told that the ground rent for the most expensive (700k) apartments was $1,400 a year and that this was reviewed on a 7 year basis but that it could not change dramatically as it was based on a prescribed formula. This was based on information that the agent received from the vendor. We specifically discussed the yield on the property based on these values, as a significant increase in any of the associated costs would have meant that the property was not a viable investment.

      The agent introduced me to a solicitor who handled the purchase. I asked the solicitor if there were any issues with the leasehold and was told that it was standard. The solicitor provided an executive summary of the sale agreement in which they highlighted that the rent was reviewed every 7 years and that the rent schedule was attached to the sales agreement. They separately stated that “the term expires on 1st August 2146 and the rental is shown as $1,400 pa”.

      The sales agreement indicates that 50% of the purchase price (350k in the most expensive case) was “payable to the Grantor of Apartment Lease being the Prepaid Rent”. I’m assuming that the Grantor is ultimately the freeholder in this case but it’s difficult to identify the exact entity.

      The sale agreement also defines Annual Rent “as set out in Schedule 4 of this agreement shall equal 7.5% of the current freehold market undeveloped block value of the land”. For the most expensive apartments the rent is shown in Schedule 4 as $1,400. The inference in the way that this is worded, as backed up by the agent, was that the $1,400 rent was calculated on the 7.5% basis. One would then assume that the rent would only change by the same level as the underlying land value.

      It’s only through the management committee of the apartment block that I actually heard that the ground rent review would likely result in ground rent around $20k pa that I actually realised that there was an issue. At that point I also found that the apartment value for the more expensive apartments had halved to $350k, which is a fair reflection of the value with such excessive ground rent.

      From a personal perspective I find the definition of Annual Rent to be very misleading. There is a clear inference that the annual rent of $1,400 is derived from the stated calculation, there is absolutely no indication that the $1,400 rent is reduced in any way and there’s no attempt to qualify or quantify the values in the rental formula. I can’t see any legitimate reason to structure the rental payment in this way and if the projected rent had been communicated during the sales process it is certain that the apartments would not have sold at their advertised prices.

      When I approached my solicitor for copies of their documentation relating to the purchase they sent me copies of the three official documents that I signed and stated that if I needed anything else I would need to indicate which specific documents. Interestingly they also immediately stated that they were not involved in any due diligence on the property. I’m not sure how this fits with what I asked them for at the time or the $1,500 that they charged but it may be that mine is not the first query of this type that they’ve had and they’re looking to distance themselves as far as possible. I asked for a copy of the documentation that confirmed that they were not required to carry out due diligence but, a week later, I still haven’t heard anything. Luckily I was able to dig out all my correspondence with them relating to this, so don’t need to try and force things out of them. In an ideal world the solicitor would have picked up on the issue with the ground rent but I can understand why they might not, as the implications are so buried, but ultimately I was paying them to review the documents, so would have hoped for better. It does highlight that it’ll be an uphill struggle making any progress with this.

      What I’m trying to do now is find a solicitor to review my documentation to establish if there is any case. If anyone has any experience of this or is able to recommend a good solicitor then I’d be very grateful.

      • paul says:

        Hi Richard,

        To be honest, I also naively put too much trust in my solicitor in regards to performing the due diligence required when purchasing a property asset. Live and learn I guess.

        Richard, although we almost certainly used different solicitors for the settlement, If there is any documentation/information that you might need to further your pursuit,let me know and I’ll see what I have.

        Also if this is more appropriate for a more private forum, you can contact me on lucaspaul@gmail.com

        ta
        paul

      • Richard,

        I apologise for the self-serving nature of this post, but this type of matter is entirely within my firm’s purview as property specialists, if you wished to instruct us. My email is imcintosh@calaw.co.nz.

        Regards
        Ivan McIntosh

  3. Richard says:

    I can appreciate why it looks as though the leaseholders are being unreasonable in resisting the upcoming rent increases but the issue, from my experience at least, is that the apartment buyers were misled in the early stages. When I did my research I checked out every likely expense asociated with the property that I purchased and was told that the ground rent was $1,400 a year and was guaranteed not to increase for a certain period and then would only be increased by a market controlled rate. I never saw any reference to Ngati Whatua at any stage (and I don’t believe that they are at fault here). To this date I’ve never had any formal documentation relating to the leasehold review. I am UK based and paid a large Auckland legal firm to handle the purchase and they never highlighted any issues with the leasehold (which I know the UK firm that I deal with would have done) but this may just be that legal firms have a different remit to UK legal firms in these cases.

    I know that I would never have considered purchasing a property at that price if I had known the situation regarding the leasehold. It is usual in the UK to have a ‘pepper-corn’ rent on a leasehold, presumably with the initial payments to the freeholder making the deal viable for them, and it did look as though these properties were dressed to appear like that. The footprint of the building relative to the total square footage within that building would be crucial to deciding how viable leashold properties would be in any given location and these commercial factors seems to have been overlooked by the developers who simply seem to have focused on getting out before the problems arose. Even the more conservative estimates for some of the apartments have a million dollar plus price tag for a 99 year lease on a property that would would be lucky to have an equivalent freehold value of $750k – these figures simply do not stack up regardless of the theoretical value of the total development site. Any leasehold figures need to reflect the prevailing leasehold market rates and not an arbitrary rate based on the total potential development site – the density of development was agreed by the developers and Ngati Whatua and they should also be responsible for any shortfall in land returns experienced as a result of that.

    • Richard,

      I suspected as much, but have no actual knowledge of what people were or weren’t told so left that sort of speculation out of it. I get somewhat irritated…and that comes across in the post…about the tone of newspaper articles tending to emphasis the greedy landlord stereotype.

      Your point about the cumulative value of the rent vs value of the apartment is, I think, a weak one. That’s a million dollars over 99 years…the vast majority of which is really just “interest” on the landlords investment in the freehold at 6%, not that high a rate in NZ historically. There’s nothing hidden about the valuation of the ground rent and how it works..it’s all in the lease. I am a little disappointed you didn’t get a better run down before purchasing though. As you say, if these things had been properly pointed out you would not have purchased. I have real trouble understanding why people buy this kind of leasehold because it is, in my perception, nearly always initially sold at a gross overvalue.

      • Richard says:

        Thanks for the reply Ivan. Firstly, I’ve got to say that I did make a terrible investment decision buying the apartment that I did – it’s my mistake and ultimately I’m the one who’ll have to live with it. An element of the problem possibly arises from the fact of being a UK buyer partly drawn to New Zealand because it is presented as being very stable and having a legal and commercial structure very similar to the UK (and to the greater extent I’m sure that it is). Leasehold in the UK, London in particular, is very common and legislation has evolved over the past couple of decades to improve the rights of leaseholders.

        With any purchase you have to do research and carry out due diligence and, because I was overseas, I engaged an independent consultant who specialised in helping overseas purchasers select and buy a property (including all the financial and legal aspects). I went through all the literature from the developer and specifically asked the agent to provide a breakdown of all proposed costs associated with the property including rates, water, service charge and ground rent. Ground rent was stated as $1,600 and when I enquired as to how and when it could rise I was told that there were controls to prevent it rising outside of prevailing market rates. The value of the property was discussed on the basis of the projected yield using these figures. I then had an independent valuation done and engaged a firm of solicitors to act for me, neither of whom raised any issue with the valuation or lease details. This is where the difference probably comes in – in the UK my solicitor (conveyancer) would highlight any possible issues associated with the purchase (I may just have been lucky with my solicitors here). The solicitor had me sign a purchase agreement and a ‘Deed of Convenant of Transfer of Lease’ (which doesn’t mention the lease arrangements) and never provided me with a copy of the lease (an oversight on my part of course). To this day I’ve never seen any official documentation of these lease arrangements, only information that’s been passed on by the Body Corporate of the building.

        Basically my due diligence failed, despite my best efforts, and ultimately it’s a case that you don’t know what you don’t know. Apartments that were valued at $700k are now going for $350k because the details of the lease have become common knowledge. I am aggrieved by what’s happened but ultimately I’m going to have to take it on the chin and try to absorb the loss. I’m disappointed though that such a situation can be allowed to arise and the process would be much improved if there was a need to formally communicate (and have signed off) the key aspects of a property purchase.

  4. Joe says:

    Have the results of the arbitration been published?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s