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Perpetual leases -- a unique form of land tenure

WHO OWNS THE HIGH COUNTRY?



Lake Middleton (centre) is a small kettle lake close to the shores of Lake Ohau in the Waitaki District. Photo copyright: Norman Mackay

About 3.5 million ha of the high country is in Crown-owned conservation estate. Most of the rest is farmed – about 500,000 ha is freehold land and about 2 million ha is Crown perpetual lease.

How many leases are there?

In January 2002, there were 303 perpetual leases covering 2.17 million hectares. By the end of March 2008, 54 of these properties had completed tenure review and four had been bought outright by the Crown, leaving 245 properties in perpetual leasehold title. 

Do farmers pay fair rents for their farms? 

Farmers pay an annual rental for their perpetual lease, which is reviewed every 11 years. The lease itself is renewed every 33 years.

The annual rentals are fixed by law at between 1.5 - 2 per cent of the value of the land exclusive of improvements. This is a lower percentage than normally applies to leases of commercial or residential properties. It is similar to the percentage that applies to privately owned farmland leased on the open market.

Of course, when an 11-year term nears its end, the rent may be low relative to the current value of the farm. But this is definitely not the case after an 11-year review, when increases in land values are fully reflected in the rents paid by farmers. Between 2002 and 2006, there was an average 497% increase in rents on reviewed farms, despite falling farm incomes in that period.

In 2005 the expert Armstrong Committee was asked by the government to review whether rents charged for high country perpetual leases were fair to the Crown and the lessee. Because of the perception that rents were too low, the committee was also asked to consider whether “market rents” should be introduced.

In its report, the committee concluded that during recent reviews, rents of many properties were set too high. It recommended that rents for perpetual leases should be reviewed annually and be based on the value of the property for pastoral farming.

The previous Labour-led Government rejected the Armstrong Committee's findings despite promising to honour them when the report was commissioned. Instead, it reinterpreted the law so that it can set large and unaffordable rentals.  This interpretation is being challenged in a test case heard by the Land Valuation Tribunal, Dunedin, in October and November 2008. The tribunal has reserved its decision

Why are there so many leases?

Crown perpetual leases give farmers security of tenure and a major financial stake in their land. They were created by the government to encourage increased production and better stewardship of the land. Photo copyright: Antonia Steeg

Land in the High Country has been leased by the Crown to farmers since the early 1850s.

In the early days, the government preferred farmers to hold leases or grazing licenses, because it meant that they invested in stock rather than land, thereby resulting in more rapid economic growth. It also allowed the Crown to have a say in the management of country which was prone to erosion.

The downside of the leases and licences used by the Crown at the time was that they gave the farmer no right of renewal. No bank would lend a farmer money to invest in good fences, fertiliser, grass seed or other improvements if these became the property of the Crown at the end of the term of the lease.

This would have not mattered if the Crown had been a responsible landlord. But successive governments did not see investment in these properties as a priority.

As a result, by the 1940s much of the high country was depleted – a process made worse by plagues of rabbits. The loss of vegetation was leading to accelerated erosion and downstream there was a growing fear of floods.

In 1948 the then Labour Government decided the best way to restore the High Country productively and environmentally was to give farmers an economic stake in the land they farmed.

The tool for achieving this change was the perpetual Crown Pastoral Lease. These innovative leases gave farmers exclusive occupancy rights to their property, as well as a perpetual right of renewal.

In addition, the government worked with farmers to improve productivity and to protect the environment. Catchment Boards – the forerunners of today’s Regional Councils – helped farmers with ‘run plans’ and farm management advice. The Tussock Grasslands & Mountain Lands Institute provided important research backing. 

Perpetual leases – good wine turns sour

With secure title, and support from the government, farmers invested heavily in sustainable management systems. Production increased and the landscape recovered.

The success of this approach is reflected today in New Zealand's iconic Merino wool industry and in the health of our tussock grasslands.

But for modern farmers who run complex businesses in a rapidly changing world, a perpetual lease can be very limiting. Although the lease is registered on the land title and has a legal status that is very similar to freehold, farmers are allowed to use their land only for pastoral farming.

Tourism and other possible business ventures are only allowed with the permission of the Crown, which normally charges an annual concession fee based on the earnings from the business. The need to get permission even extends to many normal farming activities, like applying fertiliser, sowing grass seed and cultivation.

These restrictions may have been appropriate when the leases were created. At the time, the Crown had a vision for the high country in which farmers played a vital part, and there was no Resource Management Act to protect the environment.

But times have changed. The vision shared by farmers and the government was lost in the economic reforms of the 1980s and from 2002 to 2008, the relationship between the Crown (as lessor) and farmers (as lessees) completely broke down.

Instead of being valued for their contribution to the economy and the environment farmers were seen by the Labour-led government as obstacles to be overcome in pursuit its own High Country agenda. This experience means many High Country farmers who were previously happy to continue with a Crown perpetual lease would now like to freehold their properties using the tenure review process.

However, from 2007 the Labour-led government made this as difficult as it could, while adopting a number of measures designed to devalue leasehold properties, reduce farm incomes and break farmer resolve.