Success for Synlait in the Supreme Court
Success for Synlait in the Supreme Court
Tuesday 15 June, 2021
In our June 2019 edition of Legal Brief, we commented on the then recently released Court of Appeal decision relating to the modification of land covenants on the site of Synlait Milk’s Pōkeno factory (the CA found against Synlait). And in our December 2019 edition of Legal Brief, we confirmed that the Supreme Court had granted Synlait leave to appeal the Court of Appeal’s decision.
After the Supreme Court hearing in 2020, the media reported that the parties had reached a private settlement. We watched with interest, hoping the Supreme Court would deliver a decision despite the settlement, due to the importance of the issues at hand. Pōkeno, like many other parts of the Waikato, has undergone significant growth and development and changes to zoning since the covenants were established in 2000. We are seeing an increased use of section 317 of the Property Law Act 2007 (s 317) by developers arguing that zoning and other changes should allow them to modify or extinguish land covenants and easements.
The Supreme Court decision was released shortly before Christmas last year. Interestingly, a notice of discontinuance had been filed once settlement was reached. Nevertheless, the Court decided to deliver its judgement as the matters raised by the case are of general importance. The Court’s view differed in many respects from the more conservative decision of the Court of Appeal.
A quick recap:
- Synlait had built a $250M milk factory in compliance with local planning requirements, but in breach of the restrictive land covenants on its property. Those covenants in favour of New Zealand Industrial Park Limited (NZIPL) were designed to restrict development and activity which might impact the establishment and operation of its adjoining (although never established) basalt quarry.
- The case addresses the interface between the RMA and private property rights.
- In 2018, the High Court granted an application to extinguish the land covenants. Synlait then took title to the land.
- NZIPL appealed to the Court of Appeal of 2019 which ruled that the land covenants be reinstated, meaning the plant was constructed in breach of covenants which prevented use of the land for a dairy factory. The Court’s decision took a somewhat conservative approach.
- Synlait then appealed to the Supreme Court. The issue on appeal was whether the covenants should be modified under s 317 to remove or extinguish the restrictive covenants. Synlait was successful in its appeal.
The Supreme Court
The Court took a markedly different, and less conservative approach, to the Court of Appeal. It found three of the grounds under s 317(1) were met. We summarise each point below:
1. Would NZIPL suffer substantial injury?
- NZIPL submitted that the presence of the factory would make it more difficult to obtain resource consent for its quarry, and it would therefore substantially injure NZIPL.
- The Court considered the planning implications of removing the covenants, including the environment and the likelihood of NZIPL establishing a quarry:
- There was uncertainty whether NZIPL would ever establish a quarry;
- Obtaining a resource consent for a quarry would be difficult, given the encroaching residential development (a sign of the growth and changing face of Pōkeno). Other dairy factories were also in close proximity;
- If no resource consent application were made, there would be no substantial injury to NZIPL;
- The nature of the orders sought meant Synlait would not be able to complain about NZIPL’s quarrying activities, if a quarry were ever established;
- The presence of the Synlait factory would make little difference to the chance of obtaining resource consent.
- Decision: because consent for a quarry was unlikely, would be difficult to obtain, and the factory would have little impact on the quarry, there was no substantial injury to NZIPL.
2. Was there a change in the character of the neighbourhood (change in circumstances since its creation)?
- There have been significant zoning changes to the burdened land since the covenants were entered into. Those zoning changes rendered the land uses in the covenants (such as grazing, lifestyle farming and forestry) to be inconsistent with the new zoning provisions. Effectively, Synlait would require resource consent to undertake the land uses secured by the covenants as these are now non-complying activities under the Operative District Plan.
- The Court of Appeal found that despite the changes in zoning and growth to the area, the covenants were intended to last 200 years so the changes in zoning did not change the burden on the Synlait land. The Supreme Court found it was irrelevant that the neighbouring areas were not subject to the covenant. The issue was whether the changes in the neighbourhood justified modifying the covenant.
- Parts of the burdened and benefited land had been amalgamated. Synlait’s land and other land around the quarry is now part of a major industrial park. Its land is also rated according to its increased value by its proximity to residential area and the population has seen substantial growth. There were new residential areas, industrial zoning, and manufacturing activities, which demonstrated the significant change to the neighbourhood.
- Decision: the covenant ought to be modified because of a change in the character of the neighbourhood.
3. Would the continuation of the covenant impede the reasonable use of the Synlait land?
- The Supreme Court considered whether the continuation of the covenant in its current form would impede the reasonable use of the burdened land (Synlait’s land) in a different way/extent from what could be reasonably foreseen when the covenant was created.
- Evidence was presented on the substantial development and zoning changes that have occurred to Pōkeno and the area surrounding the quarry (highlighted above). These had not been reasonably foreseeable when the covenants were created in 2000.
- Decision: continuation of the covenants in their current form would impede Synlait’s reasonable use of the land.
The Supreme Court found there was no reason to decline Synlait’s application to modify the covenants. The Court would have allowed the appeal and modified the covenants by deleting the clause from the covenants that restricted the use of Synlait’s land to lifestyle farming, grazing and forestry activities. The Court’s views provided a significant departure from the more conservative approach adopted by the Court of Appeal.
RMA / contract highlights
The Supreme Court commented on Synlait’s application to adduce additional planning evidence, including on the possibility of rezoning the area to residential land. This highlights the contrast between planning/zoning changes as areas open up for residential and other development , and the application of covenants that seek to restrict such change.
On the relationship of the restrictive covenant and zoning the Court commented:
“…on its own, a zoning change is unlikely to amount to a change in the character of a neighbourhood. If that were not the case, there is a risk of undermining the purpose of covenants designed to resist zoning changes”.
The Court also noted that Synlait faced an issue arising out of the inconsistency between the activities permitted by the covenant versus those permitted under the zoning changes:
“…Now that the zoning changes have occurred, the activities that are permitted on the burdened land are no longer permitted under the zoning, so that it would now be necessary to obtain resource consent for grazing or forestry operations. In the absence of such a consent, the covenants would prevent the burdened land being used at all.”
The Court then commented on the origins of s 317, and its predecessor ss 126G and 127 of the Property Law Act 1952. Synlait argued the Court of Appeal had been too conservative in its approach. The Court discussed the progressive broadening of orders being made under s 317. It commented:
“There is a circularity about saying that property rights must be protected from the exercise of the power conferred by s 317 when the fundamental premise of the section is that those property rights are liable to be modified or extinguished.”
The decision continues to highlight the tension that exists between private property arrangements and the RMA. While the RMA cannot be used to override the terms of registered covenants, covenants can be used restrictively to override the RMA. However, the case does highlight that when significant zoning changes generate the expected flow-on effects, such as changing the character of a neighbourhood, there may be sufficient grounds to justify extinguishing the unwanted and outdated terms of a restrictive covenant. In a roundabout way, the tools of the RMA can have the effect of diminishing the intent and use of a covenant, in turn provoking the decision whether to extinguish it. However, before relying on the effects of a significant zoning change to extinguish or change a covenant, at least one of the grounds of s317 is still required to be made out. A court would then need to consider whether it should exercise discretion to modify the restrictive covenants.
The case also demonstrates how developers can use the RMA to their advantage, by assembling evidence, as Synlait did, to establish the changing face of a neighbourhood and unforeseen development/zoning changes to support their application under s 317 to modify or extinguish covenants. But if an application is unsuccessful, those restrictive covenants will continue to take precedence over the RMA (including zoning changes).
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