“Careful and reasonable”: New Zealand Dispute Resolution Centre welcomes High Court finding on rent-review arbitral award  

The High Court (the Court) has declined an application to set aside an arbitral award administered by the New Zealand Dispute Resolution Centre ( NZDRC) and decided by one of its arbitrators, Catherine Green. The decision, A & H (Kumeu) Ltd v Kumeu Playschool Ltd, is noteworthy. [1] The Court did not just uphold the award because setting it aside is difficult. Rather, the Court commended the award for its numerical literacy, making note of the arbitrator’s understanding of the mathematical basis of the dispute. The Court also emphatically agreed with the arbitrator’s interpretation of a key clause in the parties’ lease agreement.
Author(s): Alexander Lyall

Background

A landlord, Kumeu Playschool Limited, and its tenant, A & H (Kumeu) Limited, fell into disagreement during their annual rent review. The parties had different views about how the review was to work.   The parties’ lease agreement contained Clause 2.1(ii):  
The new annual rent shall be the annual rent payable by the Tenant immediately prior to the relevant review date increased by the amount of the proportionate increase in the Consumer Price Index (all groups) during the period which corresponds as nearly as possible to the immediately prior twelve month period.
The Consumer Price Index (CPI) 
Central to the dispute were the mechanics of the Consumer Price Index (CPI).[2] The tenant argued that the review was to discuss the rent change in terms of a percentage. The landlord disagreed.

The award

The arbitrator made a finding on how the rent review formula should be operated, preferring the landlord’s reading of it: 

where the inputs ‘C’ and ‘D’ are the CPI index numbers. Accordingly, the new rent ‘A’ equates to $307,168.27, calculated as follows:  

A= B x (C/D), where:  

A= the CPI reviewed rent  

B = the annual rent payable before the review date  

C = CPI (index) for the quarter year immediately before the relevant review date  

D = CPI (index) for the quarter year before the last review date  

ie, $307,168.27 = $286,486.12 X (1203/1122) 

Interpretation of clause 2.1(ii) 

For the above formula to be correct, clause 2.1(ii) had to be read a particular way. The arbitrator gave her reasons for preferring the landlord’s reading: 

  • The clause only referred to the previous 12-month period. It would be a strained interpretation of the clause if the word “proportionate” also required consideration of the 12 months prior.  
  • The tenant’s approach to the formula was not mathematically workable.  
  • The tenant’s interpretation was uncommercial. In fact, it would have led to a rent increase in 2021 that was higher than it actually was.   
Notice for correction 

After the arbitrator issued the award, the tenant sent a “notice for correction” under sch 1, art 33 of the Act. The arbitrator declined the request for correction because the correction went beyond a request for correction of an arithmetical error and went to the heart of the award.  

The Court explains how the arbitrator got it right

The appeal  

The tenant appealed to the Court under sch 1, art 34(2) of the Arbitration Act 1996 (the Act). Under art 34(2), the Court can set aside an award if there are quality issues.  

The tenant argued that the arbitrator: 

  1. breached natural justice by not considering the “correction”; 
  2. dealt with issues that were not included within the referral to arbitration; and 
  3. decided in a way that conflicted with public policy.  

The Court found that: 

  1. A “notice for correction” is designed for minor errors such as basic arithmetic mistakes or for grammar errors. In other words, “simple, uncontested and obvious mistakes.” However, the tenant’s notice was improperly used to invite the arbitrator to consider the underlying matter again. In any event, the arbitrator had correctly treated the CPI as index numbers, not as a percentage.  
  2. The agreed issue at arbitration was the proper interpretation of the rent review clause. The tenant made arguments to this point, and that was precisely what the arbitrator had considered.  
  3. The Court did not address the tenant’s public policy argument in detail as the tenant had not established a fundamental requirement – it needed to establish that the award was wrong. However, the Court stressed that it was not.   

The Court agreed with the arbitrator about the mechanics of the formula and the sum produced. The Court stressed that the CPI was not to be expressed as a percentage. The arbitrator understood this despite the tenant’s insistence otherwise. As the Court reiterated, “the arbitrator treated the mathematics correctly. It was her decision to make, and in my view, she made it carefully and reasonably.”  

Conclusion – NZDRC understands commercial leases

A & H (Kumeu) Ltd v Kumeu Playschool Ltd underscores the importance of having an arbitrator who understands the underlying issues in commercial lease disputes.   This is an area that NZDRC has experience in. NZDRC offers a range of property-related dispute resolution schemes. The purpose is simple – allow parties to have their dispute heard in a way that is private, swift (relative to the courts) and cost-efficient.  

References

[1] A & H (Kumeu) Ltd v Kumeu Playschool Ltd [2025] NZHC 843.

[2] The CPI measures the prices of the consumer items New Zealand households buy and is published quarterly by Reserve Bank of New Zealand.

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