The townhouse at Napier St is at the centre of the dispute between the parties. Photo / Supplied
The townhouse at Napier St is at the centre of the dispute between the parties. Photo / Supplied
A Freemans Bay resident went to the Appeal Court after trying to buy the leasehold land beneath his townhouse, where the land owner wanted $237,625 back-rent.
Timothy Eric Bruce Smith and Toni Adrianne Shaw bought a townhouse on Napier St between Ponsonby and the city. Although he and his formerpartner bought the residence, they don't own the land it stands on.
Smith told Herald he had bought the townhouse for just $155,000 in 2015 and had paid the $237,625 back rent last year.
Paros Property Trust owns the site and an annual leasehold fee is paid to occupy his place, the Appeal Court said in its decision.
Auckland Council values the property at $2 million: $1.8m for the 257sq m site, and $200,000 for the 77sq m townhouse.
Smith told the Herald he had paid the back rent last year.
The court decision said Smith and Shaw bought the townhouse when the leasehold rent fee was just $31,000 a year, but it's reviewed every seven years, and that term was scheduled to tick over three years after their purchase.
When the reset occurred in 2018 and Auckland's rapidly rising residential values were factored in, Paros put their land rent up to $81,375 a year.
So, between December 2017 and February 2018, Smith tried to negotiate with Paros, solely owned by Neil Christian, an experienced commercial landlord.
Smith, an accountant, wanted to buy the site from Christian's business and eliminate the need to pay the fast-rising annual leasehold fees. The lease has a clause which provides a right to freehold the property in certain circumstances and subject to certain conditions.
The townhouse at Napier St is at the centre of the dispute between the parties. Photo / Supplied
At issue in the case is the interpretation of the freeholding clause and whether it was legally engaged. The High Court earlier said that was "at the heart of this case".
Paros said the clause was not engaged, but Smith says it was.
Smith told Christian he had recently lost his job and his only options were to freehold the property or sell the leasehold interest - the townhouse. He indicated he was happy to offer Christian the townhouse for $155,000, but he found Christian's response "somewhat chilling".
He knew other lessees in the development had had to abandon their places through litigation and the rent review process, the High Court decision noted.
Christian's Paros didn't concede to selling the site, instead going to the High Court last year, demanding Smith pay the money owed in leasehold fees which he'd been withholding since the 2018 reset.
Unhappy with being denied the right to buy the land and charged back-rent, Smith went to the Appeal Court, representing himself against two lawyers: Liam McEntegart and Alec Steel acting for Paros.
Paros wanted $237,625 in back-rent - money it said Smith hasn't paid the land owner from 2018 for owning the townhouse on the land.
Paros said the money was owed in leasehold fees from November 2018 onwards, but Smith wasn't paying until the freeholding issues were resolved. Paros said the lease was invalid because Smith had given notice he wanted to buy the land.
Last year, Paros brought High Court proceedings seeking to recover that rent, but Smith opposed paying on the basis the lease had been cancelled, and he counter-claimed for a declaration the lease was cancelled.
The Appeal Court's September 21 decision sent the case back to the High Court to decide how much back-rent was owed to Paros.
Napier St is between Ponsonby and the city, in Freemans Bay. Photo / Google Maps
The court decision said the property was one of 30 terraced townhouses called Freemans Close, built by what was Auckland City Council in the 1970s.
The council kept ownership of the land. But in the 1990s, the council sold its interests to private buyers. Some were investors who bought the fee simple title under several of the townhouses.
Paros bought the land beneath Smith's townhouse in 2006 and demanded back-rent from Smith as well as Shaw. The land owner said Smith and Shaw were substantially in arrears in paying rent due under the lease.
But Smith and Shaw opposed the claim for rent on the basis the lease had been cancelled. The High Court decided the lease "remained on foot" and the two must pay $237,625 in back rent.
The Appeal Court ruled Smith was partially successful and the award of costs in the High Court must be revisited.
But the Appeal Court judges also said Smith's partial success was not due to any arguments he put forward "but stemmed from a legal issue identified by this court".
The High Court made observations about buying leasehold property.
"It is generally thought to be preferable to own a freehold rather than a leasehold interest in land. This is because a leasehold interest attracts the payment of rent for the use of the land, which is typically subject to review and the prospect of the rent increasing," the court said.
"In Auckland, where the price of land has increased exponentially, the payment of ground rent payable under such leases has also increased – sometimes dramatically," Justice Melanie Harland said last June.
Smith said when asked about the case today: "I naively entered into this lease. This judgment is over whether they have incorrectly determined the ground rent. I'm on this old former Auckland City Council lease."
He added: "I'm one of several lessees stuck with an extremely high annual leasehold rent. Several others have abandoned their leases and properties. I've been to hell and back. It's been a nightmare for the last five years."
Julie Wilson, a director of Brown Partners Lawyers for Paros, said her client welcomed the Court of Appeal's decision, which confirmed the High Court was correct in dismissing claims levelled against it by the lessees.
"However, because part of our client's claim is yet to be dealt with by the High Court, it would not be appropriate to comment further while the matter is still before that court," she said.
