HAPPY ENOUGH LTD v. DIRECTOR OF LANDS

LDLR 5/2012

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND RESUMPTION APPLICATION NO 5 OF 2012

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J U D G M E N T
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Introduction and Background

1.  This is an application (“the Application”) taken out by the applicant for determination of the amount of compensation payable by the respondent under the Lands Resumption Ordinance, Cap 124 (“the LRO”) by reason of the resumption of Ground Floor including Mezzanine Floor, 13 Pei Ho Street, Sham Shui Po, Kowloon (1/4^th undivided share of and in Section L of New Kowloon Inland Lot No 49) (“the Property”).  The Property was reverted to the Government on 19 February 2011.

2.  The Property, situated at the junction of Pei Ho Street and Hai Tan Street, forms part of a 4-storey tenement block completed in 1953 (“the Building”). The Property was held under a Government lease of New Kowloon Inland Lot No 49 dated 29 January 1917 for a term of 75 years renewable for a further term of 24 years commencing on 1 July 1898 as further extended to 30 June 2047 (“the Government Lease”).The Government Lease contains, amongst other things, provisions prohibiting on the piece of land offensive trades being carried out without a license and confining users to be permitted: - 

“AND ALSO that he … shall not at any time during the said term use or allow to be used the said demised premises or any part thereof for any other purposes than for Reclamation building dwelling houses workshops factories or godowns or similar purposes without first obtained the licence or consent of His said Majesty, His Heirs, Successors, or Assigns, signified in writing by the Governor for the time being of the Colony of Hongkong…” (“the User Covenant”)

3.  According to the occupation permit issued by the Building Ordinance Office on 18 June 1953 (“the Occupation Permit”), the Building was permitted to be occupied and used for domestic purposes: -

“…Authorized Architect has certified…that the new building being four Chinese type houses at Pei Ho Street…on NKIL 49 RP comply in all respects with the provisions of the Building Ordinance (Chapter 123 of the Revised Edition 1950) and that they are structurally safe.  Permission is hereby granted to occupy and use the building for domestic purposes”.

4.  Mr Yim, counsel for the applicant, has outlined differences of the parties in terms of the market value of the Property as follows: -

	(a)	The applicant’s case is that assessment should be made on the basis that the existing use of the Property is shop.  The market value of the Property taking into account its development potential is assessed to be $25,500,000 by adopting the direct comparison method and $40,300,000 by adopting the residual method.  Alternatively, it is assessed to be $15,671,652by adopting the direct comparison method not taking into account the development value; and
	(b)	The respondent’s case is that the best use of the Property for the purpose of valuation as at the date of reversion was domestic unit.  The value of the Property is assessed to be $3,631,000 by adopting the direct comparison method, on the basis that the existing use of the Property was domestic as at the date of reversion.  Alternatively, the value of the Property is assessed to be $10,719,822 by adopting the direct comparison method, on the basis that the existing use of the Property is shop.  The respondent’s expert gave no comments on the applicant’s expert’s valuation of the Property taking into account its development potential arrived at by the direct comparison method, but rejected the valuation arrived at by the residual method.

Issues Arising

5.  It is not disputed that there are three main issues in the present case: -

	Issue 1:	whether shop use was permitted under the Government Lease;
		(i)	construction of the Government Lease and the Occupation Permit;
		(ii)	whether there was estoppel and / or waiver on the part of the Government; and
		(iii)	whether the applicant is entitled to compensation for shop use under section 12(b)of the LRO;
	Issue 2:	whether the market value of the Property should be assessed on the development potential basis; and if so, what was the market value of the Property assessed on that basis; and
	Issue 3:	what was the market value of the Property assessed on the Existing Use Value (the “EUV”) basis.

Issue 1:  Whether Shop Uses Permitted?

(i) Construction of the Government Lease and the Occupation Permit

6.  The Property was divided into five separate units carrying out different kind of trades.  The applicant has listed out the nature of the trade / business and suggested their categories according to land use: -

	(i)	one electrical and water engineering workshop (“the Engineering Workshop”) which fell within the definition of“workshops”;
	(ii)	two units occupied by a barber shop (“the Barber Shop”);
	(iii)	one other unit used for preparation, processing packaging, dispatching & cold storage of seafood (“the Seafood Store”) which was by nature a warehouse or godown; and
	(iv)	Storage ancillary to the guest house use on 1/F (“the Guest House Storage”) fell within the definition of “godowns”.

7.  It was submitted by Mr Yim that two of the five units namely (i) and (iv) above, constituting approximately 27.2% of the effective area of the entirety of the Property, are undoubtedly within the permitted user of the Government Lease.  It was further submitted by him that on first blush the user of the Barber Shop and the Seafood Store (constituting approximately 82.8% of the Effective Area of the entirety of the Property) might not be considered as within the permitted user of the Government Lease.  He however submitted that the Government Lease should be construed under the broad principles set out in New Mercury Holding Corporation v Secretary for Justice, unrep., CACV 73 & 74/2013, 15 April 2014:-

(a) when construing the terms of a land grant, the court can take into account the matrix of fact (that is, the objective surrounding circumstances known (or reasonably known) to both parties) at the time of the grant: see, for example, Gold Shine Investment v Secretary for Justice [2010] 1 HKC 212, 218; Investors Compensation Scheme Ltd v West Bromwich [1998] 1 WLR 896, 912; Jumbo King Ltd v Faithful Properties [1999] 4 HKC 707, 726; (b) the court shall have regard to the object and purpose of the term, which can be informed by the genesis, the background and the context: River Trade Terminal Co Ltd v Secretary for Justice (2005) 8 HKCFAR 95, 107 (para 34 to 36); (c)  the above are applicable to the construction of a lease: Woodfall’s Law of Landlord and Tenant (2012) Vol 1, para 11.007 and 11.008).

8.  Mr Yim submitted that the above principles support the construction that shop is within permitted use.  He drew the attention of this Tribunal on the following undisputed facts: -

	(1)	Long shop use since 1921: The development erected on NKIL 49 RP (i.e. Nos 1, 1A, 3, 3A, 5, 5A, 7, 9, 11 and 13 Pei Ho Street) and the lot across Pei Ho Street, NKIL 47 RP (i.e. Nos 6, 8, 10, 12 and 14 Pei Ho Street) in 1921 consisted of 15 one-storey shops and not residential units.
	(2)	Insufficient headroom for residential use: The Building was erected on NKIL 49 RP in 1953.  Under the Buildings Ordinance 1950 (“the 1950 Ordinance”), which was then in force, a domestic building’s lowest storey used or adapted to be used for human habitation must have a headroom of at least 11 feet (s.39 thereof), whereas the headroom of the Ground Floor of the Property was only 9.252 feet (2.82 meters ).
	(3)	Presence of cockloft: Further, under s.32 of the 1950 Ordinance, (i) a cockloft can only be erected on the ground floor of a domestic building; and (ii) no cockloft shall be erected in any storey or room which is used for sleeping purposes.  The combined effect of this is that the ground floor of a domestic building at the material time which had a cockloft could not, as a matter of law, be legally used for the purpose of human habitation (i.e. residential purpose).  In the case of the Property, it is common ground that there is a cockloft (also called Mezzanine Floor) above the Ground Floor.
	(4)	The Occupation Permit to be construed accordingly: The words “DOMESTIC PERMIT” and thewords“Permission is hereby granted to occupy and use the building for domestic purposes”on Permit No 191 issued by the Building Authority’s Office in 1953 must be construed accordingly.  They cannot trump the statutory definition of “domestic building” in the 1950 Ordinance.

9.  In fact, the broad principles in the construction of the Government Lease are not in great dispute between the parties.  Both parties relied on Lam VP’s judgment in New Mercury, Jumbo King Ltd v Faithful Properties Ltd [1999] 4 HKC 707 (per Lord Hoffman) and Fully Profit (Asia) Ltd v Secretary for Justice [2013] 6 HKC 374 (per the Chief Justice).

10.  The respondent’s position is that since shop was not listed as a permitted use in the Government Lease, the language is clear and unequivocal to mean that shop was not permitted under the Government Lease.  There is no question of ambiguity or confusion at all.  Further, it was submitted by Ms Wu, counsel for the respondent, that the relevant context to assist interpretation should include the fact that the Government is free as the landlord to reach an agreement with the tenant by way of express covenant to restrict the tenant’s freedom of the use of the land.  She relied on the decision of the Court of Final Appeal in Director of Lands v Yin Shuen Enterprises Ltd [2003] 2 HKC 490 stated at 500 (para. 19): -

“Two further considerations are relevant at this point.  First, the user covenants in the Crown leases are absolute.  They are not qualified by any requirement that the Crown’s consent is not to be unreasonably withheld; and the statute law of Hong Kong does not subject user covenants in leases to any such requirement.  Secondly, in deciding whether to grant or withhold its consent to a modification of the terms of a lease, the Government does not exercise a public law function but acts in its private capacity as landlord: see Hang Wah Chong Investment Co Ltd v A-G [1981] HKLR 336 (PC).  It thus has an absolute right if it chooses to demand a premium, however large, for granting a modification of the terms of the lease, or to withhold its consent altogether, however, unreasonably: see Tredegar (Viscount) v Harwood [1929] AC 72.”

What was the Existing Use at the Time of Resumption?

11.  Mr Yim spent some length in his submissions to analyse the existing use of the 5 units to see whether any of them were in breach of the Government Lease.  The division of them has been set out in §6 above.  We are of the view that this is unnecessary because under s.12(d) of the LRO, existing use may not be relevant to the issue of assessment of compensation but the amount which the land if sold by a willing seller in the open market might be expected to realize in the light of sections 10-12 of the LRO.  In the circumstances, what is the permitted best-use is the question to be asked and to be answered when arguments on construction was dealt with.  The claim of the applicant was not premised solely on existing use but the best-use which is “shop”.  Further, there was no evidence tendered by either party for valuation on basis of workshop or warehouse / godown.  Evidence on valuation before this Tribunal from parties is either for shop or residential purpose.  We will therefore spend no time in analysing the existing uses in the 5 units separately.  Suffice to say that the Property had not been used for domestic purposes and had been in shop use in broad sense.

Whether Shop Use Permitted under the Government Lease?

12.  It is not disputed that shop was not mentioned as a permitted use in the Government Lease. We are of the view that those principles on interpretation and construction of a government lease as set out in New Mercury are applicable here.  The factual and legal background prevailing at the time of the Government Lease (January 1917) should be considered to understand the true meaning of “dwelling house”.  We find the Public Health and Buildings Ordinance 1903 (“the 1903 Ordinance”), the equivalence of the present date Buildings Ordinance Cap 123 at the time of grant, relevant.  Section 6(22) of the 1903 Ordinance provided that: -

““Domestic building” means any building constructed, used, or adapted to be used, wholly or partly, for human habitation, but does not include any building where caretakers only, not exceeding two in number, pass the night.” (emphasis added by this Tribunal”)

13.  Chu J., as she then was, also affirmed in The Incorporated Owners Of Wing Ming Industrial Centre v Mantex Supplies Company Limited HCA 1507/2007 (unreported) that cumulative effect of the activities and not their individual characteristics is important.  In §39, she said: -

“As for Portion B, the evidence is clear it is used for a variety of activities, ranging from office, retail showroom to workshop for production of samples and storage of products.  As in the case of Mexx Consolidated (Far East) Ltd v. Attorney General & Anor [1987] HKLR 1210,1215 & 1219 where there are both elements of user (i.e. commercial and industrial), it will be wrong to look at the activities in isolation. What is important is the cumulative effect of the activities and not their individual characteristics. In the present case, the cumulative effect of the activities on Portion as described in the affirmations and depicted in the photographs is that it is more in the nature of trading than industrial.”

14.  With the evidence before us, we find that the primary use of the Building was domestic, it thus falls within the ambit of “dwelling houses” in the Government Lease under its definition in s.6(22) of the 1903 Ordinance even if part of it was not so used. We are of the view that such interpretation has no contradiction with the dictum in Yin Shun as set out in §10 above.  On the question whether shop was permitted at the Property under the Government Lease, we accept the argument of Mr Yim that it was and it should be permitted so long as the primary part of the Building was used for residential purposes under the Government Lease if it was construed in the light of the definition 1903 Ordinance.

Whether Residential Use Must Exist in the Property Itself?

15.  The dispute is about how the requirement for “wholly or partly for human habitation” could be satisfied.  The applicant said that while all other 3 floors of the Building above ground floor were for domestic use, even if the Property was not for domestic use, the requirement was met (“the Vertical Dimension Argument”).  On the other hand, the respondent’s contention was that the Property itself must contain part for domestic purpose itself (“the Horizontal Dimension Argument”).

16.  In support of the Vertical Dimension Argument, the applicant first relied on Tsuen Wan Trade Association Education Foundation Limited v Chui Kam Ying, HCMP 1735/2011, 26 April 2012, per judgment of Poon J: -

“1. This is a vendor and purchaser summons concerning G/F, No 120, Nga Tsin Wai Road, Kowloon (“the Property” and “the Building” respectively). Requisition 2: absence of OP and permitted user of the Property 18. The defendant argued that there exists no OP show that the Property can be used for non-residential purposes. 19. Properly understood, this requisition cannot possibly be based on any missing OP.  For the Building Authority has confirmed that there was no record of any OP ever being issued. 21. In the Conditions of Exchange, reference was made to two domestic permits numbered 55/40 and 56/40 both dated 18 April 1940.  The defendant placed heavy reliance on the permits and argued that they show that the Property can be used for residential purpose only. 22. However, under the old Building Ordinance No 18 of 1935, which was applicable at the time, domestic building was defined as “any building constructed, used, or adapted to be used, wholly or partly, for human habitation”: section 4(15).  So even if two domestic permits had in fact been issued, it does not necessarily follow that the Property can be used for residential purpose only.  As confirmed by the Buildings Department, the Building was a pre-war building.  There is no evidence whatsoever that throughout its history of some 70 years, the Government had threatened to take any action because the Property had been used for non-residential purposes.  This inferentially but strongly shows that the Property can in fact be used for non-residential purposes legally.”

17.  To answer the question as to whether residential use must exist in the Property we say that the answer is in the negative.  We accept the submission of Mr Yim on the Vertical Dimension Agreement.  First because it was stated in the Occupation Permit that “Permission is hereby granted to occupy and use the building for domestic purposes”.  Secondly the definition in the 1950 Ordinance was for “domestic building”.  Thirdly we find the decision in Tsuen Wan Trade Association Education Foundation helpful.  It is therefore our judgment that the Building could be considered as a whole to see whether the requirement was satisfied.  Lastly, as we have accepted the argument of the applicant, we find that the Property itself was not designed for human habitation due to insufficient headroom and the presence of the Cockloft (see discussion in §§27 to 32 below).

Similar Purposes: Ejusdem Generis Principle

18.  The applicant’s case is that even if shop use does not fall within the ambit of the specific words “dwelling houses workshops factories or godowns”, it is caught by the general words “or similar purposes”.

19.  The respondent submitted that the expression “or similar purposes” should be construed bearing in mind the ejusdem generis rule of construction and against the above context: see §12-087 of Chitty on Contract, (Vol 1, 31st ed.) [R’s LoA No. 9]: -

“12-087           Ejusdem Generis Principle The so-called “rule” which is laid down with reference to the construction of statutes, namely, that where several words preceding a general word point to a confined meaning the general word shall not extend in its effect beyond subjects ejusdem generis (of the same class), applies in principle to the construction of contracts.  The principle depends on the assumed intention of the framer of the instrument, i.e. that the general words were only intended to guard against some accidental omission in the objects of the kind mentioned and were not intended to extend to objects of a wholly different kind. Indeed, this principle follows as a corollary of the principle that the whole contract is to be considered, being simply that every word shall be taken in conjunction with the words that accompany it.”

20.  In reply Mr Yim said that it should be borne in mind that ejusdem generis principle is no more than a guide to enable the court to arrive at the meaning of the parties.  The general words could not be restricted as the specific words form no discernible genus.  Unless a genus can be found the principle can have no application.  The specified things must possess some common and dominant feature.

21.  It was submitted on behalf of the applicant that in the User Covenant, the specific words “Reclamation [,] building dwelling houses [,] workshops [,] factories or godowns” cannot form a discernible genus.  “Reclamation” and “building dwelling houses [,] workshops [,] factories or godowns” are already two diverse purposes.  “Dwelling houses [,] workshops [,] factories or godowns” are also different buildings in character sharing no commonality.  In the absence of other indications to the contrary, the ejusdem generis principle has no application and the parties did not intend to restrict the general words “or similar purposes”.  There is no reason why shop use cannot be caught under the general words.  Mr Yim said that even if “dwelling houses [,] workshops [,] factories or godowns” form a genus, the applicant submits that given the diversity in terms of function of these buildings, it is hard to see why “or similar purposes” should be construed so narrowly to exclude shop use.

22.  After reading parties’ submissions and authorities referred to, we are of the view that “or similar purposes” can be widely construed.  The reason being that definition for “dwelling houses” under the 1903 and 1950 Ordinance was quite wide.  When the building was partly occupied or used for domestic purpose, it would satisfy the designated or designed use.  We are of the view that if the definition on “dwelling house” was so wide, the submission of Mr Yim that “or similar basis” should not be so narrowly construed to exclude “shop” use is acceptable.  One must bear in mind that at the time of the Government Lease, residential cum retail use was not unusual.  

Whether the Reverse Contra Proferentem Rule Applies?

23.  Neither party argued that the terms in Government Lease were not clear and unequivocal.  We do not find it necessary to determine on this issue.

Whether Shop Use Permitted under the Occupation Permit?

24.  It is not disputed that the use specified by the Occupation Permit issued on 18 June 1953 was for domestic purpose.  It was stated thereon that “permission is hereby granted to occupy and use the building for domestic purpose”.  The definition of “domestic building” remains the same in the 1950 Ordinance which was applicable at the time the Occupation Permit was issued as compared to the 1903 Ordinance.  The applicant adopted the same argument as those when dealing with the interpretation of the Government Lease; i.e. the 1950 Ordinance should be read when determining the true meaning of “domestic purpose”.  To put briefly, it was argued that the Occupation Permit must be construed in the context of prevailing provisions as it was issued under the 1950 Ordinance.  It was also the applicant’s case that when reading the 1950 Ordinance as background, the Occupation Permit would have allowed non-residential use at the Property.

25.  We further take note of the argument put forward by the applicant saying that the Property itself was not constructed for human habitation because the headroom was insufficient for such purpose and the presence of a cockloft above it.  In such circumstances, it was submitted by Mr Yim that to permit human habitation would be in breach of the 1950 Ordinance.  Our discussion in detail on this could be seen in §§27 to 32 below.

26.  Assuming that the Building Authority when granting the Occupation Permit had inspected the Building against all approved general building plans and provisions in the 1950 Ordinance, we consider it suffice to say at this stage that the Building Authority could not have granted permission for human habitation in the Property by issuing the Occupation Permit for domestic purpose given the fact that there was insufficient headroom and presence of a cockloft (“the Cockloft”).  On the other hand, the Building Authority could not be flawed if the definition of “domestic building” under the 1950 Ordinance is taken into consideration, that is: when part of the Building was to be used for domestic purpose, it would fulfill the requirement.  The Building Authority were exercising their power according to the then prevailing statutes.

Clear Space for Headroom and Presence of Cockloft in Domestic Premises

27.  The applicant relied on the requirements or prohibitions set out in s.29 and s.32 of the 1950 Ordinance.  As far as s.29 is concerned, the applicant’s case in this regard is that the very construction design of the Property which provided headroom of 9.252 feet (2.82 meters) was not meant to accommodate human habitation.  It is not disputed that under the 1903 Ordinance and 1950 Ordinance, a clear space of not less than 12 feet and 11 feet respectively was required for any lowest storey used or adapted to be used for human habitation.  Further, according to Mr Yim, it was stipulated under s.32 of the 1950 Ordinance that no cockloft shall be erected in any storey or room which is used for sleeping purpose.

“Space to be left between floors 29.  In the case of every domestic building here-after erected, the lowest storey used or adapted to be used for human habitation shall contain a clear space of at least 11 feet, measured vertically and every upper storey shall contain a clear space of at least 10 feet measured vertically: Provided nevertheless that in the case of any caretakers’ quarters, servants’ quarters, kitchen and pantry a clear space of at least 9 feet measured vertically, and in the case of any bathroom, latrine and water closet, a clear space of at least 8 feet measured vertically shall be sufficient. Certain spaces not to be used for habitation 31.  No building or part of a building which has a clear space of less than 9 feet measured vertically shall be used for human habitation. 32.  (1) No cockloft shall be hereafter erected in any storey or room which is used for sleeping purposes nor shall a cockloft be erected in any storey of a domestic building other than the ground storey of such building.”

28.  The presence of the Cockloft was not disputed.  It is not disputed that the saleable area of the Cockloft was 21.55 m² while that of the Property was 58.54 m².  There was an entrance to the Cockloft from the staircase of the Building but not from inside of the Property.  The respondent said that since the size of the Cockloft was about half the size of the Ground Floor, a portion of the Ground Floor, about the size of 36.99m² had no Cockloft above it and the headroom of that portion of the Ground Floor should be 5.08 meters (i.e. 16.66 feet).  In that case, that portion would be capable of being used for human habitation.  Not only so, since the Property had a portion which was capable for human habitation, the whole of the Property should be able to do so.

29.  Mr Yim commented that such inference drawn by the respondent was without any evidential basis, in particular, not supported by any expert evidence.  It was said that Mr Patrick Lai (“Mr Lai”), the respondent’s expert, in his 1^st Expert Report when computing the effective floor area for the Property, having taken into consideration of headroom of the Property, had never worked out the effective floor area of different portions with different headroom.

30.  The headroom or clear space of the Property is under dispute.  It is however not disputed that at least 21.55m² of the Property was with headroom less than 11 feet.  Nevertheless, back to the legal context, s.29 of the 1950 Ordinance did not say it is good enough if part of the premises satisfied the headroom requirement but it said “the lowest storey used or adapted to be used for human habitation shall contain a clear space of at least 11 feet, measured vertically…”.  If Ms Wu’s argument were accepted the result may be odd in the sense that the burden of compliance would be on the occupant who would have to “sleep” or “live” in a place where there is sufficient headroom.  That could not be right.  Obviously, the purpose of the provision was to ensure that when a property was built for human habitation good hygienic condition must be complied with.  Ventilation must have been a consideration when the lowest floor was taken up for human habitation at a time when air-conditioning was unknown.  Higher headroom was therefore required.  We are of the opinion that if a substantial part of the Property could not satisfy s.29 of the 1950 Ordinance the Property was not designed for human habitation.

31.  Further, even if one tries to argue that this is the usual fashion of a ground floor premises to be taken as a home and a shop run by a family where the front portion would be taken as a shop and the family would be housed at the back (前舖後居), the situation would be absurd as a substantial portion which seemed to have higher headroom in the present case was positioned in the front and not at the back.

32.  To conclude we agree that the structural design of the Property was not for human habitation as the headroom of the Property or part thereof was below 11 feet.  The Cockloft was evidence pointing to the same fact that the Property was not for human habitation.

Public Health and Buildings Ordinance Prevailing at the Material Time

33.  Ms Wu submitted that under the 1903 Ordinance “exceptional building” was defined to mean: -

“…any public building, factory, work-shop, pawn-shop, or building intended for special uses, or any building of glass, iron or other material not provided for in this Ordinance, and includes any warehouse or godown and also the fire-places, kilns, furnaces, chimneys, flues and shafts of any bakery, opium boiling-house or factory [emphasis added]”

34.  Ms Wu submitted that as workshops, factories and godowns all belonged to the classification of “exceptional building” under 1903 Ordinance, the applicant’s purported interpretation of workshops, godowns and factories, i.e. to include the engineering workshop, the storage ancillary to the use of the guest house on 1^st Floor and the barber shops, would not be consistent with the definition and classification of “exceptional building” in the 1903 Ordinance.

35.  In reply, Mr Yim submitted that the term “exceptional building” used in the 1903 Ordinance was used as a kind of building control rather than user restriction – it only meant that if a building is an exceptional building, then it “shall be constructed with such precautions for the safety of the public as …  shall be approved by the Building Authority” (s.97 of the 1903 Ordinance). 

36.  On this topic, we agree with the observation of Mr Yim.  Further, as mentioned above, workshops / godowns were not pleaded to be the best-use by either party.  

37.  To sum up our discussion, we find that shop was not prohibited on proper construction of the Government Lease in particular the User Covenant.  It was supported when the User Covenant was construed taking into consideration relevant rules on interpretation and the prevailing provisions.  There was no breach on the Occupation Permit either.  The prevailing provisions on the definition of “domestic building” and the design of the Building gave support to our holding. The next sub-issue under Issue 1 is whether there was estoppel and / or waiver by acquiescence.

(ii) Whether there was Estoppel and / or Waiver

Estoppel by Convention

38.  The applicant takes estoppel by convention as an alternative position if the Tribunal does not find in its favour in the interpretation of the Government Lease.  It was submitted that the Government qua landlord / lessor will be estopped by the doctrine of estoppel by convention from denying that the Property could be used for non-domestic purpose.

39.  Mr Yim relied on Urban Renewal Authority v Agrila Limited, unrep., HCA 1582/2002, (29 November 2013), where Au J summarized the law relating to estoppel by convention as considered by Riberio PJ in Unruh v Seeberger (2007) 10 HKCFAR 31.  In essence, there are three elements which must be satisfied for an estoppel by convention to be raised: -

	(a)	the parties must enter into some legal relationship on the basis of a common assumption;
	(b)	it is unjust for a party to depart away from the said assumption; and
	(c)	the other party would suffer prejudice.

40.  Mr Yim submitted that to prove a prior common assumption, a party could rely on subsequent conducts to aid the construction of an agreement and its particular interpretation. (Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982] 1 QB 84 at 120C-122A, per Lord Denning MR)

41.  The applicant relied on a recommendation of the Tenancy Tribunal made on 10 November 1949 to the Governor-in-Council (“the Recommendation”) as proof of common assumption.  The Chairman / President of the then Tenancy Tribunal heard an application from the landlord of 2 stripes of land of which one was within the same lot of the Property.  Mr Yim produced the Recommendation including the records of the proceedings and related documents subsequently exchanged between the Colonial Secretary, the Director of Public Works and the Attorney General / Crown Solicitor (“the Public Records”) to establish the following events which, according to Mr Yim, had amounted to mutually manifested conduct of the Government as the landlord.  Such conduct evinced on a balance of probability that both parties had been acting on the common assumption that shop use is permitted under the Government Lease: -

	(a)	The development erected on NKIL 49 RP (i.e. Nos 1, 1A, 3, 3A, 5, 5A, 7, 9, 11 and 13 Pei Ho Street) and the lot across the street NKIL 47 RP (i.e. Nos. 6, 8, 10, 12 and 14 Pei Ho Street) in 1921 consisted of 15 one-storey shops.
	(b)	Such use remained up till 1948, when the landlord made an application to the Tenancy Tribunal under s.32 of the Landlord and Tenant Ordinance (the “L/T Ordinance”) 1947 for the exclusion of the premises from the further application of the L/T Ordinance.
	(c)	The application was heard in October 1949 by the Tenancy Tribunal, the President upon conclusion of the hearing, exercised his power under s.32 of the L/T Ordinance by recommending to the Governor in Council on 10 November 1949 that the premises concerned be excluded from further application of the L/T Ordinance.
	(d)	From the Public Records, in particular the Recommendation, there were building plans for the proposed development, comprising 10 four-storey buildings on NKIL 49 RP and 5 four-storey buildings on NKIL 47 RP which had included the buildings named in the occupation permit dated 18 June 1953, had in fact been approved in June 1949.  However, as at December 1949 the proposed development had not yet commenced, apparently due to the refusal of some tenants to accept the landlord’s offer of alternative accommodation during the construction period with a return to the new premises upon completion.
	(e)	Notwithstanding that, as could be seen from the Public Records, there is no doubt that such building plans were for buildings with shops at the ground floor and residential tenements at the upper three floors.
	(f)	The Recommendation of the Tenancy Tribunal and the Petition submitted by the tenants to the Governor-in-Council were apparently carefully considered by the Government and the Executive Council before the Executive Council made its decision on 28 March 1950 to order that the premises should be excluded from the further application of the L/T Ordinance.
	(g)	On 28 March 1950 the Governor-in-Council ordered that the premises be excluded from the further application of the Ordinance.
	(h)	Nowhere in the Recommendation of the Tenancy Tribunal or in the Executive Council Memorandum referred or alluded to the use of the premises as shops as being in breach of the Government leases for NKIL 47 and NKIL 49 (including the Government Lease).  On the contrary, in the Public Records there were express and clear references to (i) the hitherto use of the then existing premises as shops; and (ii) the proposed future use of the premises as shops.
	(i)	Ever since the said Building was built in 1953, there had been no lease enforcement action for any alleged breach of the user clause in the Government Lease.

42.  Ms Wu, submitted that the applicant had failed to show as a matter of evidence how and why the above matters could establish that there had been a “common assumption” between the applicant and the Government.

43.  She said it can be seen from the Public Records that: -

	(1)	The subject matter of the Public Records relied on by the applicant never concerned the user restriction of the Government lease;
	(2)	The Government had never been made a party to the application to the Tenancy Tribunal;
	(3)	The application was heard by the Tenancy Tribunal in October 1949, but it had not been engaged to make any determination in relation to the Government Lease at all; and
	(4)	The order made on 28 March 1950 by the Governor in Council had nothing to do with the Government Lease at all.

44.  In reply, Mr Yim contended that the applicant accepted that the Public Records mainly concerned a dispute between a landlord and his tenants but not the determination of the Government Lease.  The significance of the Public Records however is that: -

	(i)	they showed that the Property had all along been engaged as shop use and it is obvious that the Government had been acting on such assumption during the course of dealings with the landlord; and
	(ii)	additionally, the Tenancy Tribunal expressly acknowledged that the Property was engaged in shop use.  The Government was fully aware of such shop use.

45.  Mr Yim further submitted that for the above reasons, whether the Government was or was not a party to the application for exclusion is beside the point. The events evident in the Public Records as cited in §41 showed that, by the mutually manifest conduct of the Government and landlord, there had all along been a common assumption that shop use is permitted under the Government Lease.  Mr Yim went on to argue that the Government was involved during the process where the Recommendation was subject to petition and review, and was fully aware of the shop use.  As the Government made no objection to such shop use during the course of the correspondence and even made the order in March 1950 refusing the petition, the Government must have acted on the assumption that shop use was permitted under the Government Lease.

46.  Ms Wu did not raise the point whether “shop” mentioned in the Public Records meant shop in its ordinary meaning, i.e., commercial and retail purpose or it being a description in its widest sense denoting non-domestic use in the single story building including godowns and workshops.

47.  We have read and considered the Public Records.  After taking a closer look at the nature of business being carried out in those single story buildings, we are of the view that no doubt some were used for retail purpose while some might have been used as workshops.  We are also of the view that the unit relating to the trade of sewing machine might be a shop for selling the same as it would be unlikely that the small unit was a factory for the manufacturing sewing machines.  The Chinese doctor which should be akin to a clinic these day was on balance a shop.  In fact we have made finding on same set of facts in LDLR 2/2013 concerning a ground floor unit within the same lot in this application.  At §83 we said that: -

“Mr Suen said that those “shops” in the single-storied structures were not really shops upon taking a closer look.  The business being run thereat included advertising, medicial oil, sewing machines, confectioner & tobacconist, Chinese doctor and ironmonger.  He said they could well be workshops which were permitted by the Government Lease.  We are of the view that from its name, for example, ironmonger, a dealer in metal utensils, a hardware merchant, we accept that it was more likely to be a shop.  Chinese doctor was held not to be a workshop by Chu J as she then was in The Incorporated Owners Of Ming Ming Industrial Centre v Mantex Supplies Company Limited and Others HCA 1505/2007.  Chu J’s finding was based on the presence of several consultation rooms with only a few pots to made medicine soup. Further the business registration was for Chinese medical clinic.  We also accept that the Chinese doctor, a medical clinic in the present day, rendering medical service and retail of Chinese medicine was a shop but not a godown.  These are sufficient examples of shop use as reflected in the TT Recommendation.  That extended the period of continuous breach to as early as 1935 at least and therefore adding another 20 years to shop use for about 75 years in total.”

48.  Another question we have to decide is that since the Director of Public Works, as appeared from the Public Records, did not disapprove shop use at ground floors in the course of giving its opinion, did it mean that both parties had been acting on the common assumption that shop use is permitted under the Government Lease as suggested by Mr Yim.

49.  We notice that the Director of Public Works were both the land agent and the Building Authority in 1949 as decided in Hang Wah Chong Investment Co v Attorney-General [1981] HKLR 336 (PC) and he had many roles to play.  One being the land agent in its private capacity and the other being the Building Authority exercising a public law function.  As far as what could be seen in the Memorandum dated 28 December 1949 sent to Deputy Colonial Secretary, it was more probable than not that the Memorandum was submitted by an official of the Director of Public Works carrying out duties relating to those of the Building Authority because the focus of the Memorandum was (1) to report that the approved building plans in relation to the two lots, namely Lots 49 and 47 had been lapsed because nothing had been done within 6 months time; (2) to point out the effect of the proposed development from one-storey buildings to four-storey tenements whereby the density would double that of the Abercombie Report but it was said that that was usual; and (3) to suggest that the redevelopment should be done by two phases and temporary accommodation should be provided for the persons to be dispersed.  Plans of Existing Drawings were attached to the Memorandum.  From the above it was more probable than not that the Director of Public Works was not acting as the land agent.  Scrutinizing building plans and some early town planning responsibilities were performed by Director of Public Works as the Building Authority.  To follow the dictum in Hang Wah Chong the act of the Building Authority would not be binding on the Director as land agent.  This observation has been applied in a number of  cases that followed.  For example, Gold Shineand Yin Shuen.

50.  In light of the above findings we are of the view that since the Building Authority had not been party to the Government Lease,it could not therefore be said that there existed any common assumption between the parties, the lessor and lessee in the present situation.

51.  Further, we are of the view that the Government, represented by the Director of Lands since 1980, must be acting as the landlord in its private capacity as at the time when resumption is taking place.  It follows that when the building plans were approved for shop use in 1949 or later in 1950s by the Building Authority, such acts could not be binding on the land agent with a consequence affecting his interest.  In such circumstances, we are of the view that common assumption could not be established through the role played by the Director of Public Works as revealed from the Public Records.

Waiverby Acquiescence

52.  The applicant takes waiver by acquiescence as its alternative case.  It was submitted that the Government had waived / abandoned the User Covenant by acquiescence over the long period of years.

53.  Ms Wu opposed to such submission and went further to submit that even if there was waiver established, it might have been a waiver of the breach of the user restriction in the Government lease but not waiver of the express covenant itself.

54.  Relying further on Chinachem Investment Co Ltd v Chung Wah Weaving and Dyeing Factory Ltd [1978] HKLR 83 and Expressluck Development Ltd v SJ (HCMP 1432/2005) Ms Wu submitted that although the ambit of the waiver in a given situation is one of construction, the following principles are relevant: -

	(1)	there is a clear distinction between waiver of a breach of the covenant and waiver of the covenant itself; and
	(2)	waiver of a covenant cannot be lightly inferred.  It can be, but only where the conduct of the grantor is sufficiently clear and unambiguous that it would be inherently unfair for him to be permitted to go back on his word, either actually spoken or derived from his conduct.

55.  Ms Wu contended that “the highest that the applicant could perhaps put its case is that the Government might have waived the breach of the user restriction in the Government lease.  It however is not open to the applicant to argue waiver of the express covenant in the Government lease altogether.”  She cited Cheung JA’s speech at §23 of Favourable Issue Co Ltd v Secretary for Justice, unrep., CACV 254/2012, 22 November 2013, in which Lord Clyde’s speech in Real Honest Investment Ltd v AG [1997] 2 HKC 436 at 440 was quoted.

56.  Although Mr Yim had no argument on the principle set out, he submitted that Real Honest Investment Ltd was not directly applicable to the present case because it concerned the issue on whether the Government had expressly waived the restrictive covenant in her letter to the owner in 1948.  The applicant’s case here is that the Government had impliedly waived the User Covenant by its act or omission to act.

57.  Mr Yim relied further on the following authorities where the court held that there was waiver of a covenant (instead of waiver of a beach of the covenant).  Broadly speaking, notorious and avowed acquiescence for a long course of usage wholly inconsistent with the continuance of a covenant were said to have amounted to an abandonment / a waiver of the covenant: -

	(1)	Gibson v. Doeg (1857) 2 H & N 615;
	(2)	In re Summerson [1900] 1 Ch.112;
	(3)	Hepworth v. Pickles [1900] 1 Ch.108;
	(4)	Fairfax Ltd v Attorney General, unrep., CACV 114/1995, 30 June 1995;
	(5)	Fairfax Ltd v Attorney General [1997] HKLRD 243 (the Privy Council affirming the Court of Appeal’s decision).

58.  The respondent did not argue much on the principles set out in the above cases but said that they are fact sensitive.  We are not prepared to analyse each and every of them except Fairfax as we found that the situation therein is more similar to the present application.

59.  The facts in Fairfax Ltd v Attorney General, unrep., CACV 114/1995, (30 June 1995) are these.  The Crown lease of Inland Lot 757 contained, inter alia, a covenant which restricted the development of the land to “the erection of one or more villa residences only”.  Over a period of at least 40 years, multi-storey blocks have been built over virtually the whole of Lot 757, amounting to an area of 2½ acres.  The above mentioned English authorities were considered by the Court of Appeal.  Godfrey J.A. applied Gibson v Doeg and Hepworth v Pickles and held that there had been an abandonment / a waiver of the restrictive covenant on the part of the Crown (p.6 of the judgment).  The decision was upheld by Judicial Committee of the Privy Council.  Lord Browne-Wilkinson held at p.246D of the judgment that the Court of Appeal was correct in finding that this was “the clearest possible case of abandonment”.  It was held that “in the absence of any explanation the only possible inference… is that everyone, including the Crown, must have been aware of those facts”.

60.  The applicant submits that, if the user of the shops on the Property was inconsistent with the User Covenant, such use had been open and notorious for at least 93 years since 1921 without any interference from the Government.  Mr Yim drew the attention of the Tribunal the following matters: -

	(1)	In 1917, the Government Lease was granted;
	(2)	In 1921, 15 one-storey shops were erected on NKIL 49 RP (i.e. Nos 1, 1A, 3, 3A, 5, 5A, 7, 9, 11 and 13 Pei Ho Street) and the lot across the street NKIL 47 RP (i.e. Nos 6, 8, 10, 12 and 14 Pei Ho Street);
	(3)	In 1949, the landlord sought to redevelop the two lots by building 3 more storeys on top of the one-storey shops, and the ground floors were to remain as shop use.  The building plans for the proposed redevelopment were approved by the Building Authority in June 1949;
	(4)	In 1953, the relevant section of Pei Ho Street was redeveloped;
	(5)	No enforcement action of the User Covenant has ever been taken by the Government; and
	(6)	During the redevelopment, the landlord has never applied to the Government for any modification of lease.  Yet the Government raised no objection and approved the plans, nor did the Government demand any premium for modification of lease.

61.  Mr Yim said that from the matters stated above, the only possible inference to be drawn is that the Government had been fully aware of the user of the shops on the Property, yet acquiesced from enforcing the User Covenant, or acted inconsistently with the User Covenant.  He said that the Government’s acquiescence in the present case is even more notorious and avowed than that in Fairfax, in that: -

	(1)	In Fairfax, the District Lands Office once informed Fairfax’s architect that its proposed plans were in breach of lease conditions (see p.3 of Fairfax Ltd v Attorney General, unrep., CACV 114/1995, 30 June 1995); while in the present case, the Government had never informed the landlord that its proposed plans for redevelopment were in breach of the Government Lease, and even approved them; and
	(2)	The period of breach in Fairfax is around 40 years; while in the present case it is around 93 years.

62.  By reason of the above, the applicant submitted that the Government’s conduct was sufficiently clear and unambiguous that it would be inherently unfair for the Government to be permitted to go back on her word.

63.  The applicant distinguished the present case from Expressluck Development Ltd v Secretary for Justice, unrep., HCMP 1432/2005, 26 July 2007 in which Deputy High Court Judge Gill held that there had been a waiver of the breach but not the covenant itself.  It was his finding that the Director of Lands had turned a blind eye to the breach but not the covenant itself.  The applicant submitted that the present situation is not where the Government only waived the breach but not the covenant itself.  The present case can be distinguished from Expressluck Development Ltd, in that: -

	(1)	The landlord never applied to the Government for any modification of lease;
	(2)	The Government never requested any modification of lease; and
	(3)	The Government had never rejected the landlord’s redevelopment plans and in fact approved them.

64.  As mentioned, we have read the authorities cited by Mr Yim.  We noticed that the there was no dispute as to the principles that could be gleaned from the authorities.  We find the circumstances of the present case similar to those set out in Fairfax. In Fairfax, there were, between 1957 to 1992, a number of apartment buildings erected with the height ranging from 3 to 25 stories which was clearly in breach of the covenant.  From such facts, their Lordships upheld the finding of the Court of Appeal that “in the circumstances, the Crown must be presumed to have released or abandoned the covenant”. 

65.  The Judicial Committee’s finding in Fairfax was made on the basis that the case was not concerned only with what was going on at the plaintiff’s site, it was held that the conduct by the Crown inconsistent with its continuing reliance upon the covenant in relation to all parts of the lot was relevant to the question whether the Crown had abandoned the covenant.  In that case, the main development took place after 1945 whereas the lease was dated back to 1862. 

66.  In gist, features most relevant to the holding of their Lordships are: -

	(i)	there were open and notorious breaches involving over a period of 40 years without enforcement action; and
	(ii)	breaches involved 18 developments in the same lot.

67.  In the present case not only the Property had been used as shop after development in early 1950s, but at least all ground floor units of the other 9 buildings mentioned in the Recommendation, namely, Nos 1, 1A, 3, 3A, 5, 5A, 7, 9, 11 and 13 Pei Ho Street) eventually used ground floor as shops.  In fact, same happened to the 5 one-storey buildings in NKIL 47 RP across Pei Ho Street, (i.e. Nos 6, 8, 10, 12 and 14 Pei Ho Street).  From the decision of the Tenancy Tribunal, the same stretch of Pei Ho Street had been used as shops since 1921.  Even if we take that the word “shop” used in the Public records in its broadest sense to include workshops or godowns, there were commercial users, for example the Ironmonger at No 13 since 1935 and a Chinese Doctor at No 11 since 1943.  It has been 75 years from 1935 to 2011.

68.  Moreover, we have viewed evidence produced in LDLR 2/2013.  Judgment was handed down on 3 November 2015 that there were other buildings facing Hai Tan Street in the same lot under the same Government Lease.  It was not disputed in LDLR 2/2013 that at least 5 of those buildings in Hai Tan Street had been using their ground floor units as shops for about 50 years.  That means, in two sections of NKIL 49, there were at least 10 such ground floor units being used as shops which was allegedly in breach of the User Clause for 75 years and 5 for 50 years.

69.  We agree that Expressluck should be distinguished because of the reasons given by Mr Yim and further we noticed that the Director of Lands had at one stage announced their stance that the breach would not be tolerated in that case.  By issuing this warning letter, it was clear that the Director of Lands was minded to enforce the lease although in the end for reasons not explored, enforcement action was not taken.  We are of the view that on this point alone and the evidence before us, Expressluck should not be applied in the present case when there had never been any warning whatsoever issued.

70.  In §85 of our judgment on LDLR 2/2013, we said that “We notice that the long use of Ground Floor and those ground floors in the vicinity bring the circumstances of the present case close to those in Fairfax although we agree that the magnitude of the breach as could be seen from evidence before us could not match that established in Fairfax in a sense that Fairfax involved 18 developments breaching the height restrictions in the same lot.  Fairfax however did not lay down the minimum level of breach for acquiescence or waiver of the covenant to be established.  Fairfax is as the Court of Appeal said “the clearest possible case of abandonment”.”

(iii)  Operation of s.12 (b) of the LRO

71.  The is the last sub-issue under Issue 1.  We come to same conclusion as we did in LDLR 2/2013 on whether compensation would be barred by operation of s.12(b) of the LRO.  We hold the same view which we expressed in LDLR2/2013 that if it is found that there was an abandonment of the restrictive covenant by acquiescence or waiver on the part of the Government, it could not be said that shop use is within the “use of land which is not in accordance with the terms of the Government lease under which the land is held” thereunder.  In the circumstances, the respondent cannot rely on the provision to say “no compensation shall be given”.

72.  From the above analysis on the magnitude and duration of the alleged breach, we say that it would be odd and unrealistic for the Government to say that they had no knowledge of shop use at the Property for not less than 75 years.  When there was no evidence put before us that enforcement action had been taken for such breach against the owner in Lot 49, nor any owners in the neighbouring lots committing same breach, we are of the view that the applicant has established to our satisfaction that the Government had abandoned altogether its rights under the Government Lease as opposed to having acquiesced only in taking enforcement action.  We are satisfied that it is established that the Government had abandoned the covenant as in the case of Fairfax, equity requires that the applicant be awarded compensation according to the acquiesced use.

Issue 2:  Development Potential within a Reasonable Foreseeable Time Scale

73.  It is the case of the applicant that there was development potential as at the date of resumption and that market value of the Property can be assessed on that basis.

74.  The applicant relied on the guidelines set out by Fok J in Siu Sau Kuen v Director of Lands, LDLR 1/2010, 9 March 2012.  The applicant’s case on development value was that, as at the date of resumption, there was evidence of redevelopment in the vicinity of the Property which supports, on a balance of probabilities, a finding that redevelopment on its own or merger of the Property with other properties giving rise to a viable redevelopment scheme was likely within a reasonably foreseeable time scale (limb (ii) of Siu Sau Kuen (CA)).

75.  1^st Expert Report of Mr Wayne Lee (“Mr Lee”), the applicant’s expert, was produced to prove redevelopment in the vicinity of the Property as at the date of resumption.  In particular, from 2005 to 2012, there were: -

	(a)	suspected acquisition transactions in three sites in the immediate vicinity of the Property: -
		(i)	No 332 Tung Chau Street;
		(ii)	Nos 204-214 Tung Chau Street;
		(iii)	Nos 1-19 Nam Cheong Street.
	(b)	transactions in relation to two URA Demand-Led Schemes in the immediate vicinity of the Property;
	(c)	suspected acquisition transactions in two sites in the vicinity of the Property: -
		(i)	Nos 53-59 Berwick Street;
		(ii)	Nam Cheong Street / Berwick Street / Yiu Tung Street. (“NBY Area”)

76.  On the other hand, by way of contrast, there was no suspected acquisition transaction in properties / sites within the subject URA Scheme.  This, as submitted by Mr Yim, is due to the “sterilization effect” of the subject URA Scheme.  It was submitted that such suspected acquisition transactions are hallmarks of purchases by one single developer who made the purchases, on a balance of probabilities, for the purpose of redevelopment.  Mr Lee said that where development value, if any, could well be brought about by the operation of the market if there had been no scheme, the development value has to be taken into account in the valuation.

77.  The respondent in reply submitted that first the applicant was the registered owner of only one unit, namely the Property, being Ground Floor including Mezzanine Floor of a 4-storey building on No 13 Pei Ho Street.  Neither did the applicant hold any properties in any other buildings in Pei Ho Street constituting the hypothetical site as at the date of resumption.  Ms Fung, factual witness of the applicant, has accepted that the applicant was not in a position to control any other owners as at the date of resumption.  In such circumstances it could not be said with certainty that the hypothetical development on hypothetical site would be viable.

78.  The respondent further submitted that the applicant had failed to satisfy the second limb of the tests laid down in Siu Sau Kuen.  Ms Wu criticized the applicant’s case in this regard for their relying on the so-called suspected acquisition transactions which were, on a balance of probabilities, for the purpose of redevelopment.  Ms Wu submitted that the respondent would not accept that the developments to the north of Tai Po Road to be considered as “in the vicinity” of the Property.  The respondent, on the other hand, accepts Tung Chau Street and Hai Tan Street to be “in the vicinity” of the Property.  Ms Wu invited this Tribunal to find, with the benefit of the site inspection, that those developments to the north of Tai Po Road including the NBY Area are having different characteristics and neighbourhood from Pei Ho Street.

79.  Ms Wu adopted the opinion of Mr Lai that there is no hard and fast rule in determining the meaning of “in the vicinity”.  Physical / geographical distance is not the only concern.  The characteristics of the neighbourhood should also be explored.  She emphasized that Mr Lai had properly taken into account the availability of transport and shopping facilities.  Further, she said there should not be any argument in the exclusion of Nam Cheong Street as Mr Lee accepted in cross examination that Comparable G2 at Ground Floor of No 137 Nam Cheong Street was not an appropriate comparable.  The same should also be said of Berwick Street in view of its proximity with No 137 Nam Cheong Street.

80.  Ms Wu finally submitted that in the event that the Tribunal accepts Mr Lai’s evidence in this respect, only those activities or transactions taken place along Tung Chau Street and Hai Tan Street should be considered as evidence.  Further or alternatively, even if those development to the north of Tai Po Road including the NBY Area and Tung Chau Street / Hai Tan Street are also included as contended by the applicant, the respondent submitted that, the applicant has failed to show why and how, as at the date of resumption, redevelopment in these areas would support a finding that redevelopment of the Property on the basis of merger with 1^st Floor, 2^nd Floor and 3^rd Floor with Roof of No 13 and all units of Nos 3A, 5, 5A, 7, 9 and 11 Pei Ho Street, giving rise to the hypothetical development, was likely within a reasonably foreseeable time scale.

81.  The respondent yet further submitted that the applicant’s case is untenable as a matter of evidence.  Ms Wu referred to evidence of Mr Lee that while the majority of redevelopments in Hong Kong is carried out by private developers, there is, however, no evidence to show their interest in redeveloping Pei Ho Street.  Ms Fung told this Tribunal that she had previously received calls enquiring purchase of the Property for redevelopment but even if her evidence is accepted, none had been materialized or had actually taken place.  Further, Mr Lee accepted in cross-examination that he was not aware of any redevelopment being undertaken at the hypothetical site at Nos 3A, 5, 5A, 7, 9, 11 and 13 Pei Ho Street, whether before the date of resumption or, even taking into account Mr Lee’s alleged sterilization effect of the Scheme, before February 2006, when the commencement of the Scheme was announced.

82.  Ms Wu added that, to the contrary, in Mr Lee’s expression, “the footprints of private developers” could only be seen elsewhere other than Pei Ho Street.  Decisions of private developers are driven by commercial considerations and interests.  Their decisions on not redeveloping Pei Ho Street but other areas are self-explanatory of their preferences.  Mr Lee said that when considering the question of development potential, considerations should be given to the age and physical condition of a building and the relevant Outline Zoning Plan etc. In his opinion, any building with the same physical attributes of, and sharing the same town planning considerations as the Property shall all have development potential.  On this basis, it is also his opinion that the entire Sham Shui Po area shall have development potential.  According to Ms Wu the rhetorical question to be asked is, if this is the case, why only some areas in Sham Shui Po have been redeveloped but not the others?

83.  Premised on the above, Ms Wu argued that the applicant had failed to prove that as at the date of resumption the hypothetical development on the hypothetical site was likely within a reasonably foreseeable time scale.  Mr Lee’s assessment of $40,300,000, on basis of the development potential of the Property, should be discarded, even on the assumption that shop use was permitted under the Government lease.

84.  The parties have no argument on the guidelines as reinstated by Fok J in Siu Sau Kuen. The applicant is not relying on the first limb either.  Gleaning from evidence produced and their submissions, the dispute is mainly on what “in the vicinity” really means.  We are of the view that, having the benefit of a site inspection and as shown on the location plan, the NBY Area is geographically away, more than 10 blocks, from the Property which is situated at Pei Ho Street.  Apart from the geographic distance, we are of the view that they are of different characteristics.  Such differences include business potential, pedestrian / traffic flow, environment, neighbourhood and etc.

85.  In any event, we also agree with Ms Wu that there is no acceptable evidence that the Property being one unit only of a 4-storey building could merge with the other units in the same building and the adjacent buildings within a reasonable time scale.  Mr Lee’s rationale cannot answer the question why some transaction prices of units in nearby aged buildings, such as some of the comparables submitted by both Mr Lee and Mr Lai, did not reflect the said development value as claimed by Mr Lee.

86.  From the above, we are of the opinion that the applicant has failed to prove their case in this regard according to the tests mentioned.  We are also of the opinion that the applicant has also failed to prove in a no-scheme world as at the date of resumption that the Property had development potential for site assembly with other units in the same building and the adjacent buildings within a reasonable foreseeable time scale.  There were some redevelopments in the district does not mean that the Property should have immediate development potential if there was no URA scheme.  In fact, there is no evidence that except for some enquiries as recorded by the respondent there were redevelopment activities that would involve the Property before and after the announcement of the URA scheme in 2006.

What was the Market Value of the Property on the Development Basis?

87.  After taking into account the development potential of the Property and in a no-scheme world, Mr Lee assessed the value of the Property to be $25,500,000 by adopting the direct comparison method and $40,300,000 by adopting the residual method.

88.  On the other hand, Mr Lai refused to comment on Mr Lee’s valuation of the Property taking into account its development potential arrived at by the direct comparison method, and rejected the valuation arrived at by the residual method.

Residual Valuation Method

89.  In his 1^st Expert Report, Mr Lee has set out in detail the reasons why in his opinion the residual method should be adopted in the present case.  He considered that the recorded transaction prices of the comparables in the direct comparison method might not often represent their actual transaction prices. He said that there was evidence suggesting that the discrepancy between the actual and recorded transaction prices, and part of the actual transaction price might be hidden in the conveyancing practice and was not shown in the recorded transaction price.

90.  Mr Yim submitted that market valuation of the Property on the development basis could be arrived at by the residual valuation method.  According to Dr Cruden (Land Compensation & Valuation Law in Hong Kong, 3^rd edition, pp. 616-617): -

	(a)	the residual method has continued to be used in the majority of claims where the Lands Tribunal has determined compensation on a development value basis;
	(b)	in Shun Fung Iron Works Ltd. v Director of Buildings and Lands [1995] 2 HKLR 311 at 402, the Tribunal affirmed its acceptability when it is accompanied by adequate supporting analysis; and
	(c)	in the case of land suitable for development, where comparables are inadequate, the residual method may be used as the principal method of valuation.

91.  We agree that if there was development potential within a foreseeable time scale that follows the Siu Sau Kuen’s tests, the residual valuation method may be adopted in the market valuation of the Property, depending on whether or not relevant site comparables are adequate.  However, since the applicant has failed to prove its case in this regard, we agree with the respondent that market valuation arrived at by the residual method should be rejected in the present case.

Direct Comparison Method

92.  Mr Lee adopted the view of the Lands Tribunal in Siu Sau Kuen that “If the Property had any development value, it would be reflected in the comparables”.  He considered that the properties within the subject area were likely to be acquired for development by private developers if there was no scheme proposed by the URA and resumption by the Government.  He identified the NBY Area, where acquisitions by private developers were in progress, and compared the Property with the transactions in the NBY Area.

93.  Mr Lai considered that there was no point for him to comment on this assessment, because Mr Lee has submitted that such application of the direct comparison method might have understated the market value and Mr Lee has not adopted this assessment in his conclusion too.

94.  We agree if the Property had any development value, it would be reflected in the comparables. Even if the assessment of development value by the residual method (and / or direct comparison with site transaction) is rejected, the development value if any could be reflected in the direct comparison with transactions of individual unit.  The transaction prices of individual unit in aged building may sometimes have already reflected the development value in addition to the value for existing use.  

95.  We agree the transactions within the NBY Area would reflect the development value.  However, we do not agree that they are the relevant comparables in the valuation of the Property.  The NBY Area has different characteristics and is far away from the Property.  It is reflected on the location plan and has also been revealed upon the joint site inspection.  Although Mr Lee argued that the NBY Area and the subject scheme area bore more or less same characteristics of a secondary back street and the properties in both areas were of similar type, age and physical conditions, we consider that they shared some characteristics only, which are common for aged properties in established residential areas.

96.  There are other comparables selected by the parties, which are aged properties and are close to the Property too, though they are situated in taller buildings with 5 or more storeys high.  If the Property would have development value, we consider that the development value would have already been reflected, at least partly, in these comparables in the immediate vicinity.  If we follow the logic of Mr Lee, transaction prices of most of the aged properties in the districts of Sham Shui Po and Cheung Sha Wan (“the Districts”) as at the valuation date would be similar to the transaction prices in the NBY Area.  We consider that such inference should not be the truth in the market.

97.  We consider that the site assembly in the NBY Area might not occur at the same or similar scale and time in other areas of the Districts, even if they were close to the NBY Area.  Although we agree that the NBY Area around the valuation date appeared to be ripe for site assembly and therefore there were acquisition of many units within a period which might push up the transaction price and / or reflect greater extent of development value, it is no evidence to infer that as at the valuation date other aged properties in the Districts were also ripe for such acquisition.

98.  No doubt most of the aged properties in the Districts would be suitable for development because redevelopment would generally increase development density, but not all the aged properties were ripe for immediate acquisition in group as at the valuation date.  Site assembly would take time and at different stages of site assembly acquisition prices may be different.  Although development value may be reflected in the acquisition prices but the extent of development value in the acquisition prices in each stage of site assembly may also be different in each case depending on individual circumstances.  There are neither general rules in this regard nor any predictable model on time and price for acquisition. 

99.  Although a seller may insist on a price that would reflect most of the proportional development value or even a price higher than the proportional development value, this seller may not be the willing seller under the definition of market value.  According to International Valuation Standards, “A willing seller is neither an over eager nor a forced seller prepared to sell at any price, nor one prepared to hold out for a price not considered reasonable in the current market.  The willing seller is motivated to sell the asset at market terms for the best price attainable in the open market after proper marketing, whatever that price may be.  The factual circumstances of the actual owner is of little weight in our consideration as a willing seller is after all a hypothetical owner.”

100.  We are of the view that the applicant has failed to prove that what had happened in the NBY Area would also reasonably happen in the subject scheme area as at the valuation date.  In our judgment, we find Mr Lee’s opinion that aged properties in the Districts would have development value as that in the NBY Area; and that it was the sterilization effects of the scheme which turned private developers away, not persuasive as it was not supported by concrete evidence.

101.  We have no objection to adopt the direct comparison method to assess the market value on the development potential basis where appropriate.  In the present case however, we say that transactions in the NBY Area are not relevant comparables.  We consider that in a no scheme world as at the valuation date the NBY Area and subject area were at quite different stages of site assembly if any.

Issue 3:  Market Value of the Property Assessed on the EUV Basis

The Evidence on Valuation

102.  The parties have produced the following expert reports and documents on valuation: -

103.  The parties have submitted a Joint Expert Statement on Matters Agreed and Disagreed dated 14 November 2014 and a Joint Statement of the Agreed Facts dated 9 December 2014.  The respondent has also submitted a letter dated 29 December 2014 in relation to vehicle parking restrictions near the Property.

104.  We have made site visit and external inspection to the Property and the comparables together with the parties and their experts on 25 November 2014.  After the inspection, the applicant has submitted an inspection bundle with a location plan, photos, floor plans and commentaries of the comparables on 26 November 2014.  It is not disputed that valuation of the Property would take into account the environment including the pedestrian flow had there been no URA Scheme.

105.  At the trial, the parties had further submitted photos, location plans, floor plans and a schedule of saleable area and headroom of the Property, which were marked as their respective exhibits.

The Disputes on EUV Valuation

106.  Following our determination on legal issues, (i.e. that the Ground Floor being permitted for shop use and that the applicant had failed to prove development potential in accordance with the Siu Sau Kuen’s tests), we have determined from valuation viewpoint the inapplicability of the transactions in the NBY Area for assessment of market value on the development potential basis.  The remaining arguments on valuationare choices of and adjustments for shop comparables for assessment of existing use value.

107.  We have commented in §94 above that the transaction prices of individual unit in aged building may sometimes have already reflected development value in addition to the value for existing use.  Nevertheless, the development value if any cannot be separated from the existing use value easily and scientifically unless there is sufficient transaction data available for analysis, which may not exist in the market most of the time.  In our determination of the market value below by direct comparison with transactions of individual unit, we shall consider the whole of the value of a suitable comparable although we refer to it as existing use value only.

108.  We shall also determine in §§130 to 137 below the market value of the Property for existing use as residential premises, as an alternative if we were wrong in finding that the Property should be valued as a shop.  Mr Lee has not valued the Property as residential premises but he has analyzed residential comparables for valuation of upper floor residential units.  In our judgment, we take into consideration the comments of Mr Lee and review the valuation of Mr Lai.

Choice of Shop Comparables

109.  Mr Lai proposed 6 shop comparables, while Mr Lee after his amendments to the report adopted 11 shop comparables including the 6 shop comparables proposed by Mr Lai. 

110.  Mr Lai considered that the other 5 shop comparables proposed by Mr Lee are not suitable for direct comparison.  It is because Comparable G5 (Ground Floor of 28-30 Pei Ho Street) was a transaction involving a sale and lease back arrangement and therefore could not be regarded as market price.  Further Comparables G1 (Ground Floor and Cockloft of 129 Pei Ho Street), G2 (Ground Floor of 137 Nam Cheong Street), G4 (Ground Floor and Flat Roof on 1^st Floor of 161 Ki Lung Street) and G7 (Ground Floor of 106 Nam Cheong Street) are far away from the Property and were situated in areas with different characters.

111.  During cross-examination, Mr Lee accepted that Comparables G1 and G4 are not suitable comparables.  In any event, we agree with Mr Lai’s observation that Comparables G1, G2, G4 and G7 are far away from the Property with different characters and are not suitable comparables in the valuation.  We also consider that the sale and lease back arrangement might affect the transaction price of Comparable G5.  Hence, since there are other relevant comparables for selection, we decide not to take it for comparison, although it is close to the Property.

112.  In our judgment on LDLR 2/2013, we have discarded the use of Comparable RS3 (Shop on Ground Floor (including the A/C Plant Room therefor on the Flat Roof), Oceanic View, 218 Tung Chau Street) proposed by Mr Lai.  In the present valuation, we also consider that it not a suitable comparable because this section of Tung Chau Street has characters different from those of the Property.

113.  In the present valuation, we have a total of 5 shop comparables, namely Comparables RS1 (Ground Floor of 165 Yee Kuk Street), RS2 (Shop 1 on Ground Floor, Ever Rich Mansion, 48 Pei Ho Street), RS4/G3 (Ground Floor of 190 Hai Tan Street), RS5 (Shop 1 on Ground Floor with the yard thereof, Kam Yuu House, 156 Yee Kuk Street) and RS6/G6 (Shop C on Ground Floor including Cockloft therein, Wing Kee Mansion, 196-202A Hai Tan Street).  Comparable RS2 is a new comparable that had not been analysed in LDLR 2/2013.  Comparables RS4/G3 and RS6/G6 were proposed by both Mr Lee and Mr Lai in their respective 1^st expert report.

114.  The areas and details of the 5shop comparables as selected above for valuation were agreed by both experts in their joint statement.  Nevertheless, we note that the respective headroom as agreed for Comparables RS4/G3 and RS6/G6 was different from the determination in LDLR 2/2013, albeit with only a small difference.  In the present valuation, we accept the headroom as agreed between the parties for Comparable RS6/G6, but would adopt the headroom (i.e. 4.88 meters with 3.43 meters under cockloft) as decided for Comparable RS4/G3 in LDLR 2/2013, which had been fully argued.

Adjustments for Shop Comparables

115.  Both parties agreed that shop comparables have to be adjusted for location, clear frontage, size / quantum and time.  It is not disputed that the adjustment for clear frontage should be taken at the rate of 2% per 1-meter difference; the adjustment for size / quantum at the rate of 1% per 4 square meter difference; and the time adjustment be based on the Private Retail Price Indices published by the Rating and Valuation Department.

116.  The parties disagreed on some adjustment rates for location.  In addition, while Mr Lee proposed an additional adjustment for return frontage, Mr Lai proposed an additional adjustment for headroom.

Adjustment for location

117.  The experts have proposed different adjustment rates for location as follows: -

Comparable	Mr Lee	Mr Lai
RS1	35%	5%
RS2	10%	-25%
RS4/G3	15%	15%
RS5	20%	5%
RS6/G6	15%	15%

118.  We agree to make an adjustment for location at 15% to Comparables RS4/G3 and RS6/G6, which are located on the northeastern side of Hai Tan Street in between its junctions with Pei Ho Street and Kweilin Street.  This is not disputed between the parties.

119.  Mr Lee considered that the location of Comparable RS1 on the southwestern side of Yee Kuk Street in between its junctions with Pei Ho Street and Nam Cheong Street, the location of Comparable RS2 on the southeastern side of Pei Ho Street close to its junction with Lai Chi Kok Road, and the location of Comparable RS5 on the northeastern side of Yee Kuk Street in between its junctions with Pei Ho Street and Kweilin Street are all inferior to the location of the Property and therefore has proposed upward adjustment at rates of 35%, 10% and 20% respectively.

120.  Mr Lai agreed that the location of Comparables RS1 and RS5 are inferior to the location of the Property but he proposed a lesser upward adjustment rate at 5% only to each of them.  Nevertheless, Mr Lai proposed a downward adjustment at 25% to Comparable R2 to reflect its better location.

121.  We, with the benefit of site inspection together with the parties, agree with Mr Lai that the location of Comparable R2 with heavier pedestrian flow and more diversified trades because of its close proximity to Lai Chi Kok Road is better than that of the Property, and would justify a downward adjustment at 25%.  However, we consider that the location of Comparable R1 is similar to that of Comparables RS4/G3 and RS6/G6 and should have an upward adjustment at 15%; and the location of Comparable R5 is better than that of Comparables RS4/G3 and RS6/G6 and should have an upward adjustment at 8%, when they are compared with the location of the Property.

Adjustment for return frontage

122.  Mr Lee submitted that the return frontage of the Property being located at the focal point of two converging traffic crossing would draw two streams of pedestrian flow, which would not be enjoyed by a shop of equal frontage width but having it confined to one single-frontage commanding one stream of pedestrian flow only. Mr Lee proposed an upward adjustment for return frontage at 15% to all comparables in addition to the adjustment for frontage.

123.  The respondent disagreed and submitted that Mr Lee has double counted by including adjustments for both frontage and return frontage.  While Mr Lee has contended that the adjustment for frontage should have taken account of “exposure” and “visibility”, Mr Lai explained that the return frontage does not necessarily result in additional pedestrian flow depending on location of the return frontage, and any additional pedestrian flow as contended by Mr Lee should have been sufficiently dealt with under the adjustment for location.

124.  We agree with the observation of Mr Lai and consider that the adjustments for location in this instance have already considered the return frontage of the Property and its effects on value, otherwise another set of adjustment rates for location should be adopted in the valuation.

Adjustment for headroom

125.  While Mr Lee has made no adjustment for headroom, Mr Lai proposed an adjustment at the rate of 2% per 1-meter difference, except for Comparable RS6/G6 that would justify an overall upward adjustment at 2%.  Mr Lai also proposed 2% downward adjustment to those comparables without cockloft.

126.  Although a mechanical adjustment for headroom at the rate of 5% per 1-meter difference was accepted in LDLR 2/2013, we consider in the present valuation that such mechanical adjustment may not be able to reflect all factors in this connection.  While change in headroom may not change the value proportionally, the effects of change on cockloft and ground floor may also be different in each case depending on individual circumstances. 

127.  In the present valuation, we consider that it is appropriate to make downward adjustments at 8% and 3% to Comparables RS1 and RS2 respectively to reflect their higher headroom on ground floor; nil adjustment to Comparable RS4/G3 because it has a higher headroom on ground floor but a lower headroom on cockloft and an overall lower headroom too; nil adjustment to Comparable G5 because it has a slightly higher headroom on ground floor only; and nil adjustment to Comparable RS6/G6 because it has a lower headroom on ground floor but a higher headroom on cockloft and an overall higher headroom too.

Market Valuation as Shop Premises

128.  By adopting the adjustments as suggested in the above discussions, the valuation of the Property as shop premises is listed in the Appendix of this judgment.  The average of the adjusted unit rates is166,268 per square meters and the value of the Property as shop premises would be assessed at $166,268 x 65.93 square meters = $10,962,049, say $10,960,000.

129.  Both Mr Lee and Mr Lai have valued the Property on vacant possession basis.  We accept this and would not consider the then tenancies in the valuation because they might have included use of unauthorized structures and extensions.

Choice of Residential Comparables

130.  Mr Lai proposed 9 residential comparables, which are the same as those proposed by him also in LDLR 2/2013.  In our judgment on LDLR 2/2013, we have rejected Comparable 3 (2^nd Floor of 167 Yee Kuk Street) and Comparable 4 (4^th Floor of 167 Yee Kuk Street) because of their proximity to a refuse collection point, and Comparable 5 (6^th Floor of Pei Ho Street) because it is a corner flat with double frontage.  In the present valuation, we decide not to accept Comparables 3 and 4 because of the same reason.  However, we accept Comparable 5 because the Property has a similar character with double frontage.

131.  Since there is sufficient number of comparables for the valuation, we decide not to consider the comparables proposed by Mr Lee, which were adopted by him for valuation of upper floor residential units only, not the Property.  In any event, we note that some of Mr Lee’s residential comparables were completed in 1970s and 1990s, which are not relevant comparables in the present valuation.

132.  On the other hand, Mr Yim submitted that there was no such market at the material time in the area for ground floor domestic properties.  Although we agree that at the material time there might not be any transaction of ground floor domestic properties in the area, it is unreasonable to conclude that there was no such market and leaving aside the legal issues, valuation on hypothetical basis could not be carried out.  There are in fact domestic properties on ground floor in some urban areas.

133.  The areas and details of the 7 residential comparables as selected above for the valuation were agreed by both experts in their joint statement.

Adjustments for Residential Comparables

134.  We accept the adjustments for residential comparables proposed by Mr Lai, which are basically the same as those decided by the Tribunal in LDLR2/2013.  Mr Lai proposed (i) nil adjustment for location; (ii) an adjustment for floor level at 2% per floor and an additional downward adjustment at 4% to reflect the better privacy of the comparables on upper floor; (iii) an adjustment for building age at 0.5% per year; (iv) an adjustment for time in accordance with the Private Domestic Price Indices (Class C) published by Rating and Valuation Department; (v) an adjustment for size at 1% per every 5 square meters; and (vi) an adjustment for orientation at 2% to reflect the better southeast and southwest facing aspects if any.  In addition to the adjustment for orientation, Mr Lai also proposed an adjustment for view at 10% to reflect the better double facing aspects of the Property, which we agree.

135.  Mr Lee disagreed with the adjustment for time in accordance with the Private Domestic Price Indices (Class C).  This had been discussed in §§167-168 of LDLR2/2013 and was accepted by thisTribunal.  We consider that the selection of indices for time adjustment could be based on size of the subject if a valuer makes an adjustment for time after adjustments for other factors.

Market Valuation as Residential Premises

136.  By adopting 9 residential comparables in the valuation, Mr Lai derived an average adjusted unit rate at $51,101 per square meters[1]. Nevertheless, if we exclude Comparables 3 and 4 in the assessment, the average adjusted unit rate would be $53,580 per square meters.  If we further exclude the highest (Comparable 6) and the lowest (Comparable 2) adjusted unit rates, the average adjusted unit rate would then be $54,129 per square meters, and the value of the Property as residential premiseswould be assessed at $54,129 x 71.05 square meters = $3,845,865, say $3,846,000.

137.  Mr Lai submitted that since the Property was then let for non-domestic purposes, the rents receivable under the then tenancies should be disregarded in the valuation of the Property as residential premises.  We agree not to consider the then tenancies in the assessment and that compensation could be based on the valuation on vacant possession basis.

Conclusion

138.  We determine the value of the Property as shop should be, for the purpose of section 10(2)(a) of the LRO, in the sum of $10,960,000.  If we were wrong the value should be $3,846,000 as domestic unit.

Orders

139.  Accordingly, we order that the respondent do pay the applicant compensation for the Property in the sum of $10,960,000.

140.  The matters of professional fees, interest, costs and any other ancillary and consequential matters shall be adjourned to a date to be fixed by parties in consultation with counsel’s diaries if it needs be.