Cabinet agreed to a new system for charging rent for Crown pastoral leases, based on the earning capacity of the lease, on 2 August 2010. An associated policy on pastoral lease back rents was also approved by Cabinet. Read the Government's announcement (links to Beehive website).
Legislation will be drafted to implement the policy, and the Government hopes to introduce a Bill into the House later in 2010.
Questions & answers
- What is a Crown pastoral lease?
- Crown pastoral leases were established under the Land Act 1948. Various blocks of pastoral land in the South Island were leased in a largely unimproved state to lessees, as a platform for development. As such, lessees own the value of all improvements to that land. The leases are perpetually renewable, and can be sold on the open market. This arrangement means that pastoral leases are unlike other Crown-owned land.
The lease is a property right and the basic principles of the legislation and these lease agreements cannot be overridden or dismissed without appropriate compensation to the lessee. - How many leases are there?
- There are 231 pastoral leases, the majority of which are in Canterbury and Central Otago. This represents around 1.6 million hectares of pastoral land.
- How is rent set under the current system?
- Between 1948 and 1979, rents were calculated on a fixed rate per stock unit. However, by the 1970s concerns arose that rents based on the fixed rate were not tracking inflation, which had begun to increase rapidly (as had land values).
Since 1979, rent has been based on a fixed percentage of the value of the land exclusive of improvements (VLEI). Rent is calculated at 2.25 per cent of VLEI. Lessees receive a discount for prompt payment resulting in a net payment of 2 per cent of VLEI. Rent is reviewed every eleven years. - Why did the Crown pastoral lease rent setting policy need to be reviewed?
- The land value method currently used to calculate rents is complicated and costly, and often produces disputes over both the process followed and the results.
The notion of value of the land exclusive of improvements (VLEI) is hard to apply in practice because it is inherently uncertain, does not lead directly to a simple valuation method, and responds poorly to changes in the context in which it is applied.
(For further information on VLEI see the Report to South Island High Country Ministers: earning capacity rents for Crown pastoral leases (PDF 797KB)).
The new rent system stems from the Government’s strategic direction for Crown pastoral land, which was announced in 2009. An aim of the strategic direction is that Crown pastoral land is put to its best use for economic, environmental, and cultural purposes. One of the objectives for Crown pastoral land is that lessees will be charged rent on the basis of the earning capacity of the property.
The intended outcome of establishing a new rent-setting methodology is to provide a result that is fair to both the lessor and the lessee, reduces the amount of dispute, and is simpler to administer. - Why have there been disputes?
- Previously rent took account of the intrinsic amenity values present on many leases. These values, which do not directly relate to pastoral farming, resulted in significant increases in rent over and above the productive capacity of the lease.
As a result 113 lessees have appealed their rental assessments to the Land Valuation Tribunal. In an attempt to resolve the issues, the Crown and the High Country Accord agreed to take a test case to the Land Valuation Tribunal using Minaret Station as an example.
The Land Valuation Tribunal, which delivered its decision in July 2009, found that intrinsic amenity values do not form part of the rental equation. The Crown has accepted that intrinsic amenity values will not be taken into account when setting rent. To further clarify technical aspects of the decision (which only relates to the current land value system), the Crown lodged a partial appeal. The Crown is presently considering the future of the appeal.
Regardless of the outcome of the appeal, without change, the current system would remain complicated and costly and continue to produce disputes. - What will happen to the other cases before the Land Valuation Tribunal?
- Lessees currently disputing their rents will be able to opt to have their disputed rents set under the new system. Lessees who choose not to opt in will be able to continue with the Land Valuation Tribunal process.
- How does the proposed rent setting system differ from the current system?
- The new system sets rents by capturing the productive capacity of the leased land in stock units and assessing the current value of those stock units using objective data about the current economics of high country farming.
The proposed system has been designed to preserve the balance of current property rights between the Crown and the lessee. Because the new system is more objective, there should be fewer disputes over rent.
It will also be less expensive and simpler to administer. - What impact will the new system have on the revenue from rents?
- The Government expects that revenue from rents will be roughly the same as under the old system. The new system will achieve fair rents to the Crown and lessees at significantly less cost and with fewer disputes. This will allow farmers to get on with the business of farming.
- When will the system come into force?
- Cabinet has approved the policy, and the next step is to begin drafting the legislation. The Government hopes to introduce a Bill into the house by the end of 2010.
- Who has been consulted in the development of the new rent setting system?
- Members of the public and other organisations will be able to comment on the Bill during the select committee process after the Bill’s first reading in the House.
Lessees have been consulted as a collective, represented by the High Country Accord, and their views have been taken into account in the development of the new system. The new policy has been developed jointly by Land Information New Zealand and the Ministry of Agriculture and Forestry. - How will the new rent system impact on land use and development in the South Island high country?
- The rate at which rentals are charged is a confined issue with no significant effect on other aspects of the lease agreement.
The development of a new earning capacity based rent setting methodology is not linked to issues relating to the management of high country land. - What is back rent?
- Some leaseholders will have significant rent arrears (back rent) due because of the time taken to resolve the rental disputes since their last 11-yearly rent review.
- How will back rent be dealt with?
- There are cases where the immediate payment of back rent would unduly impact on a lessee’s cashflow and the ability to maintain the lease in accordance with good husbandry. In these cases, the Commissioner of Crown Lands is authorised to collect the back rent over a period of up to five years.
Time payment agreements will be charged interest at the Official Cash Rate. If lessees sell their leases they will be required to pay back rent immediately. - What is the High Country Accord?
- The High Country Accord is a trust representing most lessees who lease Crown pastoral land. The Accord was formed in 2002 to support tenure review outcomes under the Crown Pastoral Land Act 1998, and they advise lessees on matters affecting pastoral leases.
- What will be the process for dispute resolution?
- The Bill contains a carefully designed dispute resolution system. The system sets up a cooperative approach to assessing carrying capacities of pastoral leases. Expert assessors acting for the Crown and lessee will try in good faith to reach agreement.
If the Crown and lessee's assessors don't agree, there will be mediation, and if that doesn't work an expert determiner will fix the carrying capacity.
The new system will be much quicker and cheaper than the current mechanism which requires an appeal to the Land Valuation Tribunal. -
Associated documents
Rent
Back rent
ECR Communications to Leaseholders
