New Zealand: The Roman Catholic Bishop of the Diocese of Christchurch v RFD Investments Ltd (in receivership) (in liquidation): compensation for land

Last Updated: 6 November 2015
Article by Helen Smith

The Roman Catholic Bishop of the Diocese of Christchurch v RFD Investments Ltd (in receivership) (in liquidation)

[2015] NZHC 2647

This judgment considers who is entitled to compensation for land which was compulsorily acquired for one of Christchurch's anchor projects.

Background

RFD Investments Ltd (in receivership) (in liquidation) (RFD) owned a building in Chancery Lane, in central Christchurch. Located within that building was the Holy Cross Chapel.

The land on which the building was built had previously been owned by the Roman Catholic Bishop of the Diocese of Christchurch (Bishop), and was transferred to RFD's predecessor in return for the grant of a leasehold interest in a unit title, where the Chapel would be located. The leasehold interest was for 999 years, at a rental of one dollar per annum.

The Memorandum of Lease considered what was to happen if the building was damaged or destroyed, and provided (at clause 25):

  1. " That in case the demised premises shall be damaged or destroyed... the lessor subject to the proviso following and to the obtaining of all necessary permits and consents shall forthwith with all reasonable speed repair and reinstate such damage or destruction...
  2. That if the lessor shall be unable to obtain the necessary consents and permits referred to in sub-clause (i) of this Clause 25 and shall be unable to repair and reinstate as aforesaid, then and in such case the lessor shall pay to the lessee a just and equitable part of the insurance moneys which have been received by the lessor such part to be based on the proportion that the floor area of the demised premises bears to the rentable floor area of the whole building."

The Holy Cross Chapel was substantially damaged but not destroyed by the earthquakes. However, when the blueprint for the rebuilding of Christchurch was drawn up, the site of the Chapel was in the middle of an area allocated for the construction of a new convention centre.

The land was formally designated for the anchor project in the Christchurch Central Recovery Plan, and the Christchurch Central Development Unit (CCDU) issued a notice of intention to acquire land to both RFD and the Bishop.

As a result of CCDU's notice, RFD decided that they could not repair the building, and settled with the building's insurer on an indemnity basis, for approximately $1.5 million. RFD then purported to settle with the Bishop by paying the Bishop 14% of the insurance payout (proportionate to the Chapel's size in relation to the entire building, as required by clause 25(iii)) and claimed that the Bishop had no further entitlements and the lease was no longer on foot.

If RFD's proposition is correct, it would be the sole entity entitled to the compensation to be paid by the Crown for the compulsory acquisition of the land. However if the Bishop's leasehold interest subsisted, the Bishop would be entitled to a share of the payment for the land. The amount of the Crown's payment was just over $9 million.

Is the leasehold interest at an end?

RFD claimed that either:

  • the leasehold interest was terminated under the lease when RFD determined that it was unable to repair and reinstate the building because it could not obtain the necessary consents and permits, and then paid a proportionate amount of the insurance proceeds to the Bishop; or
  • the lease was frustrated.

As frustration can only operate where the contract does not provide for what should happen in the circumstances, the High Court first needed to decide whether the lease made provision for this situation.

What does the leasehold interest include?

The Bishop's leasehold interest is for Unit A of the property, which was the Chapel. Through the Unit Titles Act, all people who have in interest in an individual unit also have a beneficial interest in the common property, which includes the land underneath the building. Justice Davidson confirmed that:

"As lessee of Unit A, the Bishop had a beneficial interest in the substratum as part of his leasehold stratum estate, in proportion to his interest in the whole premises."

The memorandum of lease

RFD's position is that the clause 25 of the lease deals with a situation where the building cannot be rebuilt, and that therefore in the absence of express wording to indicate that the lease is to continue, it must terminate. In contrast, the Bishop's view is that as clause 25 is silent as to the continuation or otherwise of the lease, the status quo should continue.

Justice Davidson said that:

"I reject the suggestion that the parties impliedly intended that the leasehold interest would terminate in the circumstances which engaged Clause 25(iii). The contract should not be taken as having tacitly concluded on the common understanding that the inability to obtain consent for repair work on the Chapel would terminate the lease. Rather, it is entirely logical and commercial to interpret Clause 25(iii) as simply providing the method by which the insurance money was to be allocated when indemnity cover was all that was available."

He went on to say that:

"Reasonable people would not expect that an event which simultaneously signals the end of occupation of both the freeholder and the leaseholder should be visited in its commercial effect entirely on the leaseholder, to the benefit of the freeholder."

Justice Davidson therefore decided that the lease should be interpreted as subsisting after the insurance payout.

Frustration

The findings on the lease meant that Davidson J was not required to deal with the issue of frustration. However he went on to consider whether the contract was frustrated, in case he was wrong in his original findings.

Justice Davidson noted that "long leases will be less easily frustrated than short leases", and that:

"A short impediment or an impediment the extent of which is uncertain may not terminate a long lease. After all, if the impeding event lasts for a relatively short part of the lease's duration, the parties' obligations cannot be said to be radically different if the event ends, and most of the lease term remains."

He went on to note that:

"The designation of the premises by the CCDU was not necessarily a permanent state of affairs. While the designation turned out to be an accurate indication that the premises would be acquired by the Crown, that was not certain at the time of designation or indeed at any point up until the Crown acquired the land. The inherently contingent nature of designation meant that it would have been speculative to say that the perpetual lease had been fundamentally altered or undermined at that point. If, for example, designation had been revoked and a subsequent consent application to repair the Chapel had been granted, the leasehold interest would have subsisted. It is incorrect for RFD to retrospectively say that designation effected frustration, because before the Crown acquisition, such a view would have been premature."

The fact that there was a mechanism in the Canterbury Earthquake Recovery Act to deal with compensation for properties with leases on them was also indicative.

"If designation of itself is sufficient to frustrate a lease, then no leasehold owner would be able to claim compensation under CERA. Section 59 would be redundant. Moreover, if compulsory acquisition was prefaced by the designation of some properties and was not so prefaced in respect of other properties, then only lessees in the latter category would receive compensation. The entitlement of a lessee to compensation for the loss of an interest would turn on whether the property was designated prior to being acquired, and thus a matter of chance. This approach to compensation would be untenable."

The result

Justice Davidson decided that the lease is not at an end. The notice of intention could not amount to frustration of the lease, and Davidson J decided that:

"The indemnity insurance payout simply reflected the Crown's notice of intention to acquire and spelt the end of occupancy by RFD and the Bishop but not the end of their respective property interests."

The Bishop should therefore be compensated for the compulsory acquisition of the leasehold interest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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