Part 2: Background

The original subdivision consent and the condition on the agreed contribution for sewerage (2001-03)

2.1
In early 2001, the company sought to subdivide some land in Hone Heke Road in Kerikeri to create 72 lots. The company proposed that the subdivision would have its own sewerage disposal system and would not be connected to the Council’s reticulated sewerage system. At that time, the land that the company proposed to subdivide was not within the existing or proposed area of benefit of the Kerikeri sewerage system.

2.2
Mr Brown, on behalf of the company, began negotiating with the Council in late 2002 about connecting the lots to the Council’s reticulated system. At around the same time, a Council stormwater pipe from a neighbouring subdivision was discharging onto the land owned by the company. Mr Brown believed that the discharge was contaminating the company’s land, because the discharge included septic tank effluent, and that the Council was responsible for this. Mr Brown and Council staff discussed the discharge. Lawyers acting for Mr Brown wrote to the Council advising that the company would take legal action against the Council for damages.

2.3
In August 2003, after some months of inconclusive correspondence, the Council and Mr Brown both agreed to proceed on the basis that the company’s subdivision could be connected to the reticulated system at a rate of 12 lots in any year, subject to the company paying a contribution of $150,000 (the agreed contribution). The practical effect of the annual limit on connections was that the company could sell only 12 lots in any year. The 12-lot restriction was unusual. The Council’s usual practice when it was unsure whether a system would cope with an increased number of connections was to decline the connections.

2.4
Mr Brown told us that he believed that the connection to the Council’s system was an offer by the Council to avoid liability for the discharge. Documents show that the Council did not accept liability for any contamination and it specifically refused to take this into account when setting an appropriate contribution amount. It eventually accepted the sum of $150,000, but regarded this as lower than normal for that type of development. Although subsequent correspondence from Mr Brown shows that he has consistently maintained that this was an agreed settlement of his claim, documents from the Council make clear that this was not the basis on which it set the agreed contribution amount. Poor documentation and process has meant that these different perceptions have been able to persist.

2.5
The Council’s district plan at that time did not include any provisions for financial contributions. However, in some circumstances, councils are able to include conditions in resource consents that have a similar effect to financial contributions under the transitional provisions of the Resource Management Act 1991. We note that, despite the uncertain legal basis for the agreed contribution and the parties’ differing views on why the agreed contribution was set at $150,000, it is clear that the company agreed to pay this amount for the connections to the Council’s sewerage system.

2.6
The Council and Northland Regional Council granted subdivision consent to the company in December 2003. The consent contained a condition for sewerage connections that required the payment of “any contributions”. Although not expressed clearly, it appears that this referred to the agreed contribution. The Council and the company have operated on the basis that this condition created a legally binding obligation for the company to pay $150,000.

2.7
Although the subdivision consent stated that the company could create 72 lots, only 43 lots have been created to date. Titles were issued to the 43 lots on 1 July 2006.

Agreement to stagger the payment of the agreed contribution and rates remissions (2004-06)

Development contributions

2.8
Although the connection limit meant that only 12 lots could be sold in one year, the agreed contribution was due to be paid in full before titles to the lots could be issued (and, therefore, before any lots could be sold). In 2004, it appears that Mr Brown became concerned about the effect having to pay the agreed contribution in advance would have on the cash flow of the company. He negotiated again with the Council. Mr Brown and the Council reached a further agreement to treat the agreed contribution as development contributions. The development contributions would have to be paid when the houses built on the lots were connected to the Council’s system. This would spread the payments over time.

2.9
The intention of the agreement was that whoever owned the lot at the time it was connected to the Council’s sewerage system would pay the contribution, rather than the company paying the agreed contribution for the entire subdivision upfront. If the company owned the lot at the time of connection, it would pay the development contribution. If the company had sold the lot before it was connected, then the new owner would pay the development contribution at the time of connection.

2.10
Mr Brown told us that at no time did he agree that the company would pay development contributions as such. Instead, he agreed that the company would pay the $150,000 over time, based on the current connection fee. However, the documentation from the time does not support this view. A letter dated 19 March 2004 from the Council to Mr Brown, which is the primary record of the arrangement, states that:

You have now requested that instead of paying the agreed financial contribution, the subsequent owners of each lot be required to pay the sewerage contribution by way of a development contribution as set out in Council’s Development Contributions Policy adopted under the Local Government Act. The effect of this change would be to move the liability for the contribution from you, as the subdivider, to the owner at the time of building or connection to the sewerage services.

Council has agreed to accede to your request which means that there will no longer be a requirement for you to pay the financial contribution for sewerage; instead the eventual owner will be required to pay a development contribution for sewerage at the time that they apply for connection to the Council services. It should be noted that the quantum of the contribution will be that which is set out in the Development Contributions Policy at the time the application is made.

2.11
There is some question about whether the Council was legally able to convert the agreed contribution to development contributions in this way. It is also unclear whether the Council could legally require the purchasers of these lots to pay these development contributions. However, the agreement was reached in good faith between the parties and transactions with purchasers have included an acknowledgement of an obligation to pay this charge. All parties appear to have been happy to proceed on this basis for some time.

Rates remissions

2.12
In 2006, the titles to the 43 lots in the subdivision were issued. This meant that all of the individual lots became rating units from 1 July 2006 and liable for rates. The Council had a policy on rates remission for lots created by multi-lot subdivision that were still owned by the developer. Under the policy, the developer did not have to pay the uniform annual general charge and some other targeted rates for three years. These targeted rates included rates for water, stormwater, and sewerage. However, the developer would still have to pay any other rates.

2.13
In 2004, when the Council and Mr Brown agreed that the owner of the lots at the time of connection would pay development contributions, they also discussed how the rates remission policy would apply to the company’s subdivision. The Council agreed that, because the company could connect and sell only 12 lots in any year, the three-year period in the rates remission policy would be gradually phased in at the rate of 12 lots each year. This meant that the three-year remission period would run from the time the lots were able to be connected.

2.14
The first 12 properties that were able to connect to the system in 2006 would be eligible for rates remission for the 2006/07, 2007/08, and 2008/09 rating years while they were still owned by the developer. The next 12 properties that were able to connect in 2007 would be eligible for rates remissions for the 2007/08, 2008/09, and 2009/10 rating years, and so on for the remaining lots.

2.15
Mr Brown, on behalf of the company, applied for the remission of rates on the lots in the subdivision in July 2006. The Council granted the remission, and it came into effect from 1 July 2006. Under the policy that then applied, this meant that the first 12 lots would become liable to pay full rates from 1 July 2009.

Changes to the development contributions and rates remissions policies (2009)

2.16
Mr Brown was elected as Mayor of the Council in October 2007. In 2009, the Council made changes to the development contributions and rates remissions policies. The changes affected the company’s subdivision.

2.17
At the time, we considered the effect of the Local Authorities (Members’ Interests) Act 1968 on Mr Brown’s ability to participate in the decision on the rates remission policies. We concluded that his interests in the various proposed rating decisions were effectively “interests in common with the public” because he was one of a number of commercial developers affected by the changes.

Development contributions

2.18
The change in 2009 increased the amounts set out in the development contributions policy. The development contributions payable for sewerage that applied to the lots in the company’s subdivision increased from $3,584 to $5,580 per lot.

Rates remissions

2.19
In 2009, the Council amended its rates remission policy for lots created by multi-lot subdivisions that were still owned by the developer, extending the period of rates remissions for certain types of rates from three to six years. This extension did not apply to rates for water, stormwater, or sewerage. The rationale was that rates to fund utility services such as water, stormwater, and sewerage services enhance the development potential of the land and that sewerage services enable subdivisions to be developed.

2.20
The effect on the company of the change to the rates remission policy was that, from 1 July 2009, any of the first 12 lots in the subdivision still owned by the developer would have the uniform annual general charge and other selected rates remitted for another three years, but the lots became liable for water and sewerage rates. This meant that the total amount of rates payable on those first 12 lots would increase in 2009 and would increase again in three years’ time when the remaining remissions expired. For the next 12 lots, the rates would increase from 1 July 2010 and again from 1 July 2013, and so on.

Payment of development contributions at a reduced rate by a purchaser of one lot

2.21
In 2004, the Council agreed with Mr Brown that the company or the purchaser of the lot would pay development contributions for sewerage at the time each lot was connected to the system, at the rate set out in the development contributions policy applying at the time of connection. In 2009, the rate payable increased from $3,584 to $5,580.

2.22
In July 2009, the company sold one of the lots. The company had not paid a development contribution because there was no building on the site and no connection to the Council system was then required. Under the arrangement between the Council and the company, the obligation to pay the development contribution fell on the purchaser, who would be required to pay it at the time of connection. We have not been able to check whether the sale and purchase agreement made this clear to the purchaser.

2.23
When the purchaser applied for a building consent, the Council told her in a letter that a development contribution for sewerage would be payable at the rate then applicable. However, it appears that this letter was sent to the purchaser’s agent and that this information may not have been communicated to her. She later applied for a Code Compliance Certificate. The Council refused to issue it until the development contribution had been paid.

2.24
The purchaser discussed the issue with Council staff and wrote to the Council, saying that Mr Brown had told her that all contributions had been paid. As a result, the Council agreed to reduce the contribution payable by the purchaser to the level set in the development contributions policy that applied before July 2009.

2.25
Council staff told us that Mr Brown challenged them about this decision, and told them that he had told the purchaser that she would have to pay the development contribution for sewerage.

Rates charged for 2009/10 and 2010/11

2.26
At the start of the 2009/10 rating year, eight of the 43 lots had been sold. The rates remission policy did not apply to the lots once they had been sold to a new owner. The company still owned four of the 12 properties that were able to be connected in 2006. These four had been receiving rates remissions for three years. At 1 July 2009, they became liable for water and sewerage rates. This meant that the amount of rates to be paid on those lots should have increased for the first time in the 2009/10 rating year.

2.27
The Council mistakenly did not include this change in the rates assessments notices and rates invoices issued to the company for the four lots in the 2009/10 rating year. This meant that the rates payable, as set out in the rates assessment notice on those four lots, were essentially the same as the previous year but included the increases that applied to the whole district. The Council realised the error early in the 2010/11 rating year but could correct it and charge the increased rates for those four lots only for that rating year. It could not correct the mistake for the previous year and so the mistake benefitted the company.

2.28
When the Council issued rates assessment notices for the 2010/11 rating year for the lots in the subdivision, the rates increased for 16 of the lots (the four from the previous year and the 12 lots that lost their remission of water and sewerage rates in 2010). This was when Mr Brown noticed that the rates on lots in the subdivision had increased. He began to question the reasons for the increases and started to withhold payments.

2.29
In August 2010, Mr Brown asked Council staff to explain why the company’s rates had increased. Council staff told us that they looked into this issue and discovered that not all the remissions that Mr Brown’s properties were eligible for were recorded on the rates assessments and invoices. Council staff reprocessed the rates assessments and invoices with the correct remissions applied. In October 2010, Council staff sent Mr Brown a schedule showing the changes that had been made. He again queried the increase in his rates. Council staff told him that the increases were due to the level of rates remissions decreasing in line with Council policy. Mr Brown again queried the increase with Council staff and told them that the policy they had applied was not what the Council had agreed to.

2.30
Council staff told us that, from October 2010, they had many discussions with Mr Brown about the company’s rates, but he remained of the view that the Council was rating the company incorrectly. The company did not pay the rates owing to the Council for the lots in the subdivision as well as those for other properties.

2.31
Council staff met with Mr Richard Ayton, a partner of Law North, in an attempt to resolve the issues. Law North had acted for Mr Brown and for the Council on different matters in the past. In this matter, Law North was not acting for the Council or Mr Brown, and Mr Ayton reaffirmed this at the start of the meeting. The meeting had been arranged in the hope that Mr Ayton might be able to explain the Council’s position to Mr Brown. Mr Brown had drafted a letter about the issues in dispute that he wanted Law North to send to the Council on his behalf. We understand that Law North declined to do this. However, Mr Brown gave the letter to the Council anyway, without changing it. Its status was unclear because it was still written as if it were a letter from Law North. This created some confusion until Law North clarified that it did not act for Mr Brown.

2.32
In September 2011, the Council’s lawyers, Kensington Swan, sent Mr Brown a letter setting out the rates that the Council considered the company was liable to pay, and seeking confirmation from Mr Brown that the company would pay them. The letter also set out the Council’s view that the 2004 agreement to convert the agreed contribution into development contributions to be paid over time was inconsistent with the rules on development contributions and was not operating satisfactorily. The letter formally advised that the Council had decided to end this arrangement and that it now required payment of the agreed contribution of $150,000 (less any amounts already received as development contributions). The letter asked the company to make a formal arrangement to pay this sum.

2.33
In September 2011, Mr Brown paid most of the rates owing on his properties and those of the company for the 2009/10 rating year and 2010/11 rating year. He did not pay the sewerage rates for all properties for either year or any penalties. Nor did he pay the balance of the agreed contribution. Instead, Mr Brown approached the Auditor-General to ask us to carry out a review and provide some assurance over how the Council was administering the company’s rates and the amounts being charged. At around the same time the Council also asked if we could assist.