Actual and reasonable costs principles
Actual and reasonable costs principles
Thursday 23 November, 2017
Local authorities when levying additional charges pursuant to Section 36 of the Resource Management Act 1991 (RMA) must ensure that those charges reflect the actual and reasonable costs in relation to the activity. We review a recent High Court decision – Porirua City Council v Ellis  NZHC 784 – where the Court upheld an Environment Court decision to substantially reduce charges payable to the Council from $78,357.36 to $49,687.72 (GST inclusive).
This case involved a retrospective resource consent granted to café owner Darryl Ellis for an extension to his café premises, an increase in the capacity of the café and an enlargement of the carpark. The consent application was publicly notified and Council received 285 submissions on the application, with 61 of those in full or partial opposition. The application was heard by an independent commissioner (Consent Commissioner) in November 2014 and the consent granted in January 2015. A month later Mr Ellis received an invoice from Council for $74,217.36 (excluding the fixed charge of $4,140 he had already paid). The total cost of the two invoices sent to Mr Ellis for processing the application came to $78,357.36.
Mr Ellis objected to these costs on the grounds that they were unreasonable, unjustified and disproportionate under section 357B of the RMA, and sought a reduction of at least 50 per cent to the total amount of charges levied. A Council appointed independent commissioner considered this objection (Costs Commissioner) and accepted a recommendation to reduce the charges by a sum of $777.75. Mr Ellis appealed the decision of the Costs Commissioner to the Environment Court.
The Environment Court Decision
The Court started by setting out the statutory basis on which charges can be levied under the RMA and then canvassed the time and costs spent by Council staff, consultants and the Consent Commissioner on processing the application. The correct approach, adopted by the Court, for fixing an additional charge under s 36(4) of the RMA is as follows:
- What are Council’s actual costs incurred in relation to the activity (including costs charged to it by external consultants)?
- Are those costs reasonable in relation to the activity, that is, do they meet the s 36(4)(a) threshold?
- Are those costs satisfied by the fixed charge?
- If not, what “additional charge” should be levied to recover the balance of the actual and reasonable costs?
- Can that person who initiated the activity be required to pay that charge because they satisfy one of the criteria in section 36(4)(b)?
- Is it a case where, in the exercise of the local authority’s absolute discretion under section 36(5), either the whole or part of the fixed charge or the additional charge should be remitted? (Hill Country Corp Ltd v Hastings District Council  NZRMA 539 (HC))
The Court found when looking at the charges levied for the Council officers’ time, the traffic engineer’s costs and the Consent Commissioner’s costs, that each charge should be reduced to what the Court deemed was a “reasonable charge”. In the case of the Consent Commissioner’s costs this was a 70 per cent reduction in the original charge.
It found that Council’s application of a blanket charge out rate for staff time was not the correct approach to section 36. Rather, the charge out rate should have been lowered to reflect the skill required.
The Court reduced the total amount charged by Council by approximately $30,000, to a figure that it found reasonable ($49,687.72). The Court justified the reduction in costs on the basis that Council had allowed the costs to escalate to a level that was clearly not commensurate with the scale and effects of the proposal and had failed to notify Mr Ellis of an estimate of the increasing magnitude of costs.
High Court Decision
The Council appealed the Environment Court’s decision to the High Court on the basis that the Environment Court made three errors of law:
- Misapplication of section 36 of the RMA;
- Irrelevant considerations; and
- Unsupported evidential findings.
The High Court examined the law closely and highlighted that the “sole purpose of an additional charge is ‘to recover the reasonable costs incurred by the local authority in respect of the activity to which the charge relates’.”
The High Court upheld the Environment Court’s approach to the assessment of costs, and reiterated that Council must ensure that the costs are reasonable and reflect a commensurate fee for the size and extent of the benefit obtained by the applicant. Moreover, the decision reached by the Environment Court was entirely within its jurisdiction and the matters to be considered pursuant to section 36.
In light of this decision, when processing resource consent applications, we recommend Councils keep a diligent record of the costs incurred and ensure that where costs are predicted to escalate, the applicant is given regular updated estimates throughout the process. Some practical steps that Councils could adopt to minimise the likelihood of a costs objection include:
- ensuring that all costs invoiced are related to the application and are not unreasonable when considering the nature and scope of issues to be addressed;
- periodic checks or audits of amounts charged, particularly those for commissioners, planning officers and experts;
- ensuring that significant administrative tasks are delegated to the most suitable and cost effective member of staff;
- adopting a pre warning approach if high level costs are expected, particularly if no estimate is provided;
- reviewing the application in its overall circumstances by taking into account scale and overall process costs in relation to other similar notified hearings.
Please contact Bridget Parham if you want to learn more about the issues discussed in this article.