[2017] NZHC 1893 UNDER the Tax Administration Act 1994 IN

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV 2016-485-549 [2017] NZHC 1893 UNDER The Tax Administration Act 1994 IN THE MATTER of the Income Tax Act 2007 BETWEEN EASY PARK LIMITED Plaintiff AND THE COMMISSIONER OF INLAND REVENUE Defendant Hearing: 27-28 March 2017 Counsel: G Harley and R L Goss for Plaintiff A B Goosen and C Hollingsworth for Defendant Judgment: 10 August 2017 JUDGMENT OF ELLIS J [1] This case presents an old problem in a new context. The problem is the distinction between a receipt of a revenue nature and a receipt of a capital nature. The context is the receipt by the plaintiff, Easy Park Limited (Easy Park), of a lump sum in return for its agreement to accept the early surrender of a commercial lease. In other, similar, cases far greater judges than I have noted that the battleground on which they are fought is an intellectual minefield; the principles are elusive, analogies are treacherous, precedents appear to be but vague signposts pointing in different directions. The compass is said to be “judicial common sense”.1 But one thing is clear. The factual context is all-important. 1 My opening paragraph is taken unashamedly from the beginning of Templeman J’s judgment in Tucker v Granada Motorway Services Ltd [1977] 3 All ER 865 at 869. Its gist has been repeated in a number of the New Zealand appellate decisions which are discussed later in this judgment. EASY PARK LTD v THE COMMISSIONER OF INLAND REVENUE [2017] NZHC 1893 [10 August 2017] Facts [2] During the 1980s and 1990s Mr Herman Rockefeller was the Chief Financial Officer of Brierley Investments Limited (BIL). While working at BIL he met Victoria Lawson who was then the Chief Accountant. They later married. In 1999, after BIL’s fortunes had begun to wane, Mr and Mrs Rockefeller left the company. They moved to Melbourne during 2000. But through their New Zealand family trust interests they continued to be investors in New Zealand commercial rental property, held through various companies owned by those trusts.2 [3] One of these companies was Easy Park, which was incorporated in August 2002. Its directors were Mr Rockefeller, a Mr Ferguson and, from 1 May 2003, Ms Marlene Stirling. Ms Stirling had been the Treasurer and Financial Controller at BIL and was friends with the Rockefellers. Ms Stirling was the only witness called in this case. [4] Easy Park owns two commercial buildings in Wellington. The company purchased both buildings with leases already in place. The leasing of these buildings has always been Easy Park’s sole business activity. Easy Park has no employees and occupies no premises. Ms Stirling provided (and continues to provide) all the Rockefeller family companies with what is essentially a serviced office facility and she has responsibility for managing the leases. Bayleys Property Services provide the day to day management services for the properties. [5] One of the two buildings owned by Easy Park is situated on the Esplanade, Petone. It consists of a ground floor and five storeys. It was purchased by Easy Park in April 2003 for $3.5 million. It was fully tenanted at the date of purchase. The other is what used to be known as the Whitcoulls Building at 312 Lambton Quay. It is that building which is at the centre of the present dispute. It is necessary to say a little more about the circumstances of its acquisition by Easy Park, and the events which followed. 2 Currently, the companies own four commercial properties between them. Easy Park’s purchase of the Whitcoulls Building [6] The building is a four-storey building (including the ground floor, which is usually referred to as “level 1”). From the late 1880s the Head Office of the printer/stationer/bookseller business of Whitcombe and Tombs Limited had operated from the 312 Lambton Quay site. New premises were built there in 1907 and Whitcombe and Tombs and, later, its successor, Whitcoulls Group Limited (WGL) have continuously occupied the building until quite recently.3 [7] The building was substantially refurbished and strengthened during 1984 and 1985. [8] By agreement dated 28 June 2003 Easy Park purchased the Whitcoulls Building from WGL Retail Holdings Ltd for $7.7 million. Possession date was 28 August 2003. The sale and purchase agreement provided that levels 1, lA and 2, together with an annex, was subject to a lease dated 27 June 2003 between WGL Retail Holdings Ltd and WGL. The lease was for a term of 12 years and three months, running from 1 June 2003.4 [9] The annual rent payable under the lease was $966,012 semi-gross (Whitcoulls paid the insurance). That was regarded by Easy Park as an attractive (eleven per cent) yield with further potential if levels 3 and 4 could also be leased.5 [10] The evidence was that Easy Park’s decision to purchase was based on the rental yield, the desirability of the building itself, its location on Lambton Quay and the long term anchor tenancy agreement with Whitcoulls, which was then considered a blue chip company. Ms Stirling said, and I accept, that Easy Park would not have purchased the building in the absence of these key features. 3 The name “Whitcoulls” reflected the merger of Whitcombe & Tombs with its main competitor, Coulls Somerville Wilke. 4 There were two rights of renewal, exercisable on 1 September 2015 and in 2021, with a final expiry date of 30 May 2023. 5 The then risk free rate of return on ten year Government stock was six per cent and the bank first mortgage rate was 7.8 per cent. Earthquake issues [11] In 2003 there were no identified earthquake concerns with the building. But the following year, the Building Act 2004 (the BA) introduced a new earthquake building code which required all Territorial Authorities to develop a policy for identifying, and dealing with, earthquake prone buildings. The term “earthquake prone” was defined to mean a building which fails to meet 34 per cent of the current New Building Standard (NBS). [12] In October 2007, Wellington City Council (WCC) wrote to Easy Park advising that its initial evaluation of the Whitcoulls Building had placed it at 11 per cent NBS and that it was would therefore be placed on the earthquake prone buildings register. The Council gave Easy Park six months to provide further information either confirming or disproving the building’s earthquake prone status. [13] In July 2008, Easy Park commissioned structural engineering company Clendon Burns and Park to do a detailed seismic assessment report. That report concluded that the building was at 16 per cent of the NBS. [14] Mr Rockefeller died in early 2010. [15] In March 2010, WCC issued Easy Park with a notice under section 124 of the BA, requiring the company either to demolish or strengthen the building by March 2015. In July 2010, the Council extended the deadline by which Easy Park had to demolish or strengthen the building to 2025. [16] Two months later, there was a major earthquake in Christchurch. Ms Stirling said that this brought home to Easy Park’s Board the need to strengthen the Lambton Quay property to at least 70 per cent NBS. Easy Park had preliminary discussions with WGL about the earthquake strengthening required. WGL supported the strengthening work but wanted to work with Easy Park around timeframes which, understandably, were of some importance to its retail business. [17] On 21 February 2011 Lifestyle Health & Fitness Centre (Wgtn) Ltd (Lifestyle Gym) entered a lease with Easy Park for levels 3 and 4 of the Whitcoulls Building. [18] On 22 February 2011 there was another significant earthquake in Christchurch. Whitcoulls’ administration and the lease surrender [19] A few days before the second Christchurch earthquake, WGL went into voluntary administration. [20] In May 2011 the WGL business was sold to Whitcoulls 2011 Limited (W2011), a company that was part of the James Pascoe Group. The lease of the Whitcoulls building was assigned to the new owners. [21] In June 2011 it was publicly announced that Whitcoulls’ Lambton Quay business would relocate to nearby premises at 226 Lambton Quay. Following this announcement there were discussions between Easy Park and the new owners about the lease which ultimately resulted in a Deed of Surrender dated 7 February 2012. The Deed was orthodox in form and required W2011 to pay to Easy Park $1.1 million, which was around a third of the rent that would otherwise have been payable over the remaining lease term of 3 years and 3 months (the surrender date was 30 June 2012). The key “surrender” clause provided: In consideration of the lessee agreeing to pay the surrender consideration to be paid by the lessee to the lessor under this deed, the lessee, with effect from the date of the surrender, surrenders and assigns to the lessor all the lessee’s interest under the lease and in the premises so that such interest merges in the lessor’s interest under the lease and in the premises and is extinguished and the lessor accepts such surrender. Subsequent events [22] In July 2011, prior to the conclusion of the surrender negotiations, Easy Park discussed marketing the premises with Bayleys’ commercial leasing team. The conclusion was that Easy Park would need to proceed with earthquake strengthening in order to attract a quality tenant. It was decided that before embarking on a marketing campaign Easy Park should commission Dunning Thornton (leading structural engineers in earthquake strengthening) to advise what would be required to strengthen the Whitcoulls Building to the required standard.

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