Economic logic bowed to legal rules in an unsuccessful challenge by Carey family’s Westhaven Investments to a ground lease rent review for their site in downtown Auckland’s Wynyard Quarter, with $2.6 million in dispute for a further eleven year’s rent.
Westhaven claimed new rents should be discounted to reflect the fact that when current ground leases expire in 2054 all improvements on the land pass to the lessor: Viaduct Harbour Holdings Ltd.
Investors behind Viaduct Harbour Holdings acquired large swathes of prime commercial land bordering Auckland harbour in the 1990s, from the then Auckland Harbour Board.
The area has been rejuvenated, with mixed-use commercial, residential and hospitality sectors.
Land is leased out on long-term leases, ensuring developers have sufficient time to recover a return on their capital invested as sites are redeveloped.
Westhaven Investments building on Westhaven Drive sits on a 72 year ground lease with just over thirty years to run. An eleven-year rent renewal came due in 2022.
Rent renewals for its lease are assessed on unimproved value of the land; the leased land is assumed to be a vacant lot.
For terminating ground leases where there is no contractual right to compensation for improvements made to the land, the day of reckoning comes at conclusion of the lease. The lessor collects what has been described as a windfall gain: buildings constructed on the land by lessees during term of the lease.
For lessee sales during term of the lease, value of a lessee’s right of occupation steadily reduces, eventually reducing to zero.
At an arbitration to settle the 2022 rent renewal, Westhaven Investments said new rents should be reduced to reflect what a prudent lessee would pay now to take over the lease, recognising the fateful day in 2054 when the lease terminates.
Westhaven offered $340,000 annual rent for the next eleven-year period; Viaduct Holdings wanted $540,000.
Arbitrators agreed with Viaduct, stating the $540,000 calculation was consistent with both terms of the lease and the intended purpose of the rent review.
Both sides previously agreed their arbitration would be ‘final and binding.’
Westhaven appealed to the High Court, claiming arbitrators made an ‘error of law.’
Ruling that the arbitrators were correct, Justice Becroft accepted that the wording and commercial setting of the lease counted against any discount.
Viaduct argued that if rent were to be discounted at the ‘back end’ because of the shortening lease term, it should logically have been higher at the ‘front end.’
Lessees should not get the benefit of a back-end reduction without earlier paying a higher amount at the front end, it said.
Westhaven Investments Ltd v. Viaduct Harbour Holdings Ltd – High Court (20.08.26)
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