The Northland Regional Council (NRC) could be forced to borrow or sell its assets to refund $14 million in invalid rates and penalties it collected from Kaipara ratepayers over five years.
Although the High Court has ruled NRC rates for 2011 to 2016 collected by the Kaipara District Council were not lawfully set or assessed, it did not have powers in judicial review proceedings to direct money already paid be refunded.
However, affected ratepayers can file legal action if NRC does not refund their rates and penalties.
NRC could seek a Validation Act to retrospectively legalise the rates, but that will have to wait until after the general election as Parliament has adjourned for the term.
The ruling by Justice Ailsa Duffy followed an application for judicial review by the Mangawhai Ratepayers and Residents' Association and its chairman, Bruce Rogan, and his wife, Heather, against NRC and KDC.
Mr Rogan said the judgment was a great victory for all ratepayers of not only Kaipara but Northland, and quite possibly throughout the country.
"It's a groundbreaking ruling which will send shockwaves to the entire government and local government because they are now on notice that the law has to be obeyed."
He said it was now up to those ratepayers who have paid their rates to demand they be refunded or seek judicial intervention.
NRC chairman Bill Shepherd said the ruling could have implications for local authorities nationally.
An affidavit filed in court by NRC chief executive Malcolm Nicholson said $14.4 million in rates was collected from Kaipara between July 1, 2011, and June 30, 2016.
The amount outstanding, including penalties, for the same period was $561,817.
He said refunding rates would be a complex as well as a costly exercise.
"To raise the funds to make the refund of the total rates collected, the council would have to consider selling some of its assets or liquidating its investment portfolio," Mr Nicholson said.
As the returns from these assets and investment were utilised to subsidise rates, he said either action would result in a significant increase in rates for the entire region.
Justice Duffy said NRC may have fallen victim to legislation that was less precise than it needed to be.
"Nonetheless, the NRC's error led to it abdicating its statutory responsibilities regarding rates by in effect unlawfully handing them over to the KDC," she said.
Mr Shepherd said at the heart of the case overall was NRC's use of KDC to collect rates on its behalf.
"There are definitely a number of important issues thrown up by - and lessons to be learned from - this case and council is now very carefully considering both High Court judgments and our options, including whether to appeal."
"Council is already seeking a change to the Rating Act to clarify the rating activities that can be undertaken on its behalf by a district council."