Office buildings — Occupation by government departments — Terms of occupation recorded informally — Privatisation — Leases formalised — Agreement for upwards/downwards rent reviews — Landlord arguing that rent reviews should be upwards only (“ratchet”) — Privy Council holding that rent review without ratchet was “on arms’ length commercial terms” — Appeal dismissed
The State Insurance Office (SIO), an agency of the Crown in right of New Zealand, was privatised in 1990. On June 28 1990, the appointed day under the State Insurance Act 1990, its assets vested in a government held company. At the same time the government sold the shares in the company to Norwich. Among the assets were a number of office buildings occupied in whole or in part by government departments. Few, if any, of those occupancies were the subject of formal leases. The terms of occupation were recorded informally in correspondence. The government agreed with Norwich to formalise those arrangements.
A dispute arose concerning the terms of the lease (which the Crown was obliged by clause 3.4 of the lease to procure) to be executed in respect of a part of the State Building in Wellington occupied by the Department of Internal Affairs. The terms had been negotiated between SIO and the State Services Commission (SSC) on behalf of the department while the building was under construction between 1981 and 1985. The term was to be 23 years from January 1 1985 at an initial annual rent of NZ$662,066 with rent reviews after the first three years and at intervals of four years thereafter. A question arose whether rent reviews should be upwards only (“a ratchet”). SIO wanted a ratchet because their standard form of lease contained one. SSC found it totally unacceptable and SIO and SSC eventually agreed that provided the rent did not fall to less than it had been at the commencement of the lease, reviews could be upwards or downwards. At the first rent review it was agreed that the annual rent from January 1 1988 should be NZ$1,911,000. The lease tendered by the Crown reflected the agreement between SIO and SSC and did not include a ratchet. Norwich said that such a lease would not be “on arms’ length commercial terms” as required by clause 3.4.
Held The appeal was dismissed.
1. A lease “on arms’ length commercial terms” was not the same as a lease on terms usually adopted in leases for similar tenancies.
2. The phrase “on arms’ length commercial terms” was not intended to provide a touchstone by which each clause in the lease could be tested in isolation. The intention was that the terms of the lease, taken as a whole and including the rent and term, should be such as would have been negotiated between commercial parties bargaining at arms’ length.
3. Once the terms of the lease were looked at as a whole, it seemed that there were no grounds for regarding them as anything other than arms’ length commercial terms. They had in fact negotiated as if between parties at arms’ length and there was no evidence that any uncommercial concession had been made. In those circumstances there was nothing to displace the prima facie assumption that the formalised leases should incorporate the terms actually agreed.
Dr G P Barton QC and Chris F Finlayson (both of the New Zealand Bar) (instructed by Alan Taylor & Co) appeared for Norwich; Mary Scholtens and Chris Mathieson (both of the New Zealand Bar) (instructed by Moon Beever) appeared for the Crown.
