LAM KIT v. DIRECTOR OF LANDS

Lands Tribunal
Crown Lands Resumption Reference No. 15/1994

Property law - Crown lands resumption - compensation for ground floor commercial premises - claim for up to $5,506,000 disputed by Crown who valued property at $2,500,000 - law required any affect on value of the 1986 Comprehensive Redevelopment Area zoning or the subsequent Resumption Scheme to be ignored - open market value determined under comparative method of valuation with reference to the investment method as a check - Held: Compensation of $2,700,000 awarded plus interest and costs.

IN THE LANDS TRIBUNAL OF HONG KONG

Crown Lands Resumption Reference No.15 of 1994

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JUDGMENT

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1. This application for compensation under Section 6(2) of the Crown Lands Resumption Ordinance, Cap.124 is brought by the Applicant as the Crown lessee of a one-fifth equal and undivided share of the Remaining Portion of Subsection 2 of Section A of Kowloon Inland Lot 1267 comprising the Ground Floor and Cockloft of No. 107 Pau Chung Street, Kowloon, Hong Kong. The Crown lease was granted for a term of 75 years at a ground rent of $516 per annum from 18th December 1911 renewable for a further term of 75 years.

2. The subject property was resumed by the Crown pursuant to Section 3 of the Ordinance, under a Notice of Resumption dated 26th June 1992, published in Volume CXXXIV Hong Kong Government Gazette on 3rd July 1992 as G.N. No. 2264 of 1992. The subject property reverted to the Crown on 3rd October 1992. At the hearing the Applicant claimed $4,430,000. The Respondent's evidence was that the open market value was $2,350,000.

3. After the hearing, the Applicant on 6th March 1995 in a written submission, asserted that earlier evidence relating to the Respondent's Comparable No. 17 at No. 20 San Shan Road, Ground Floor, was limited to a sale on 8th July 1991 for $1.88 million. In fact there had been a later sale on 6th November 1991 for $2.95 million. On the new evidence, it was submitted that the value of the subject property was $5,506,000 or alternatively $4,583,000. On 27th March 1995 the Respondent informed the Tribunal that his valuer was prepared to revise his valuation up to $2,500,000.

4. The subject property was part of a major resumption of more than one hundred properties for the Hong Kong Housing Society's Urban Improvement Scheme, involving not only Pau Chung Street but extending to Mau Tau Kok Road, Pak Tai Street, San Shan Road, Sui Lun Street and Wang Cheung Street in Ma Tau Kok.

5. The substantial difference between the valuers, principally arose from their selection of comparables and consequential disputes over the appropriate adjustments necessary, to relate those comparables to the subject property. One factor raised in evidence, in respect of the subject property and some of the comparables, was the effect of the Urban Improvement Scheme.

6. As early as 10th October 1986, amendments to the Draft Ma Tau Kok Outline Zoning Plan S/K10/1, under the Town Planning Ordinance, Cap. 131, were published in the Hong Kong Government Gazette. The amendments designated the properties now being resumed as a Comprehensive Redevelopment Area ("CRA"). This limited owners to redeveloping their lots, in conjunction with adjoining owners, in accordance with the overall scheme.

7. When determining compensation for land resumed under the Crown Lands Resumption Ordinance, which is subject to certain specified provisions of the Town Planning Ordinance, Cap.131, the Tribunal may not take into account the affect of those provisions. Section 12 (aa) of the Crown Lands Resumption Ordinance expressly provides:

"12. In the determination of the compensation to be paid under this Ordinance -

(a) ...

(aa) no account shall be taken of the fact that the land lies within or is affected by any area, zone or district reserved or set apart for the purposes specified in section 4(1)(a) (c),(d),(e),(f),(g),(h) or (I) of the Town Planning Ordinance (Cap.131);"

Section 4(1)(f) refers to comprehensive development areas. Section 4A makes further provision for comprehensive development areas but without restricting the powers under Section 4.

8. The Tribunal in determining compensation may therefore not take into account any affect of the rezoning in 1986 which created the CRA, upon the open market value of the subject property. The limitation on single redevelopment must be ignored. The Applicant's valuer, Mr. F.C. Tam, Chartered Surveyor, stated that the CRA zoning reflected the fact that the area was ready for redevelopment. In his opinion if the area had not been compulsorily resumed, it would have been purchased by private redevelopers. The resumption had frustrated direct private development.

9. Mr. Tam believed that market values of existing properties would have increased, as the private sector competed to assemble larger development sites. However, he contended that in view of the likelihood of resumption, the area has been blighted with an adverse affect on values. Mr. R. A. Pendleton, Chartered Surveyor, who gave evidence for the Respondent, considered that the subject and adjacent properties were unlikely to have been redeveloped by the private sector. Development disincentives were not limited to the difficulty of assembling sites but increased by the fact that the majority of streets in the area were merely cul-de-sacs. In his opinion, pre-resumption transactions within the CRA, were not depressed because of its existence or by the threat of future resumption.

10. The possible affect of the CRA on value became of lesser importance, because both valuers sensibly went beyond the CRA, to find comparables clearly not affected by the CRA. However, so far as transactions within the CRA are concerned, if Mr. Tam is right, they would have to be adjusted upwards, in order to eliminate the affect of the CRA on market value. If Mr. Pendleton is right, then no such adjustments, would have to be made.

11. Moving on from the possible affect of the CRA, to the affect of the resumption scheme, the well established Pointe Gourde principle requires any increase or reduction in value wholly due to the scheme to be disregarded - Pointe Gourde Quarrying and Transport Co. v. Sub-Intendent of Crown Lands [1947] AC 565. The affect of a resumption scheme on market value is at least liable to occur from the date of formal public notification. In many cases it may occur even earlier, particularly where the likelihood of a future resumption is well known.

12. Quite apart from any affect on land value, resumed owners carrying on business on the resumed land, frequently suffer compensatable disturbance type losses, under Section 10(2)(d) before formal resumption notification. The basis of compensation for these pre-resumption losses is Section 10(1), which provides that an Applicant is entitled to receive compensation for the loss or damage suffered "due to the resumption." The present claim, we record, is limited to the Applicant's interest in the resumed land. There is no loss of profit or other disturbance based claim.

13. The Applicant asserted that the 1986 rezoning clearly raised the probability, that privately owned properties within the CRA, might in the future, be resumed to facilitate redevelopment. This probability, it was submitted, became a reality when notice of resumption was gazetted on 3rd July 1992. On this basis, the Applicant further submitted that the redevelopment area, including the subject property, had began to diminish in value from 1986, due to the probability of future resumption.

14. Where business or other disturbance losses are suffered in anticipation of a probable future resumption, the Tribunal has long taken the view that if such losses, in terms of Section 10(1), are "due to" the resumption, compensation may extend to before formal notice of the resumption - Lee Chun v. Director of Lands CLR 9/83; Chan Kwok Lam v. Director of Buildings and Lands CLR 1/87. This approach followed a long line of Scottish cases from Venables v. Department of Agriculture for Scotland [1932] SC 573 to Aberdeen City District Council v. Sim (1982) 264 EG 621. The Court of Appeal in Prasad v. Wolverhampton Borough Council [1983] 2 All ER 140, overruled prior English judgments which had limited compensation to post-compulsory acquisition order losses.

15. Any doubt as to correctness of the Tribunal merely requiring a causal and not necessarily a temporal relationship between the resumption and such losses, was removed by the Privy Council's judgment in Director of Lands and Buildings v. Shun Fung Ironworks Ltd PCA No.42/94. In that resumption the Governor's Section 3 Order was made on 15th October 1985; notice was served on the owner on 30th October 1985; the land reverted to the Crown on 30th July 1986; the owner was allowed to continue carrying on business on the land until 22nd August 1986 before finally vacating on 19th January 1987.

16. The Tribunal found that the threat of resumption became publicly known during 1981 and as a consequence the owner suffered losses from early in 1982. The Tribunal awarded compensation for this pre-resumption period, on the ground that such losses were due to the resumption, even though it only later became a reality. The Court of Appeal held that no compensation could be awarded for losses incurred before the 15th October 1985 Section 3 order.

17. The Privy Council after a comprehensive review of the law and a consideration of the practical alternatives, by a majority, restored the Tribunal's finding. The Privy Council held that losses incurred in anticipation of resumption and because of the threat which resumption presented, are to be regarded as losses caused by the resumption. The Privy Council went on to elaborate this holding as follows:

"This involves giving the concept of causal connection an extended meaning, wide enough to embrace all such losses. To qualify for compensation a loss suffered post-resumption must satisfy the three conditions of being causally connected, not too remote, and not a loss which a reasonable person would have avoided. A loss sustained post-scheme and pre-resumption will not fail for lack of causal connection by reason only that the loss arose before resumption, provided it arose in anticipation of resumption and because of the threat which resumption presented. In the terms of the Resumption Ordinance, a pre-resumption loss which satisfies these criteria is as much "due to" the resumption as a post-resumption loss"

18. The Privy Council was factually dealing with Section 10(2)(d) losses but the judgment is also helpful in determining whether a fall in land value under Section 10(2)(a), before the date of resumption, caused merely by the threat of resumption, is similarly to be ignored. Although that issue is not directly before us we are satisfied, as a matter of statutory law, that such a fall should not be taken into account.

19. At common law the same conclusion may, of course, be arrived at by applying the Point Gourde principle. When applying that principle, it must always be borne in mind that, as Lord Denning MR observed in Wilson v. Liverpool City Council [1971] 1 WLR 302,309:

"A scheme is a progressive thing. It starts vague and known to few. It becomes more precise and better known as time goes on. Eventually it becomes precise and known to all."

In Hong Kong, in the majority of resumptions, this final precision will typically be reached upon the service and gazetting of the formal Notice of Resumption.

20. We confirm that we are not directly concerned with the affect of the resumption scheme on the subject property. However, the issue remains relevant if there were any diminution in value of the comparable properties within the CRA, after 10th October 1986 but before resumption on 3rd October 1992, due to the threat of resumption. The law is well settled, on both these statutory and common law grounds, that any such diminution should not be taken into account.

21. These holdings produce twofold consequences. First, any diminution in value since 1986, caused by the creation of the CRA, is to be ignored. Secondly, any diminution in value before 3rd October 1992 caused by the threat of resumption is also to be ignored. For completeness we should add, that any increase in value because of the CRA or resumption, should equally be ignored.

22. The Applicant asserted that the gazetting of the CRA must have had an adverse effect on property prices since 1986. Accordingly, transactions within the CRA were unreliable and should be given little weight. This was one factor which caused the Applicant's valuer, Mr. F.C. Tam, to go outside the CRA, to find more reliable comparables. The Respondent's valuer, Mr. R.A.Pendleton, although willing to rely on CRA comparables, also checked the position outside the CRA. One consequence of this approach, is to limit the importance of any affect on value of the CRA or the resumption scheme. A major consequential dispute between the two valuers concerned the areas, in which more reliable comparables, could be located.

23. Mr. Tam after concluding that transactions within the CRA were depressed in value, initially principally relied on eight comparables in the Mau Tau Kok Road area. Mr. Pendleton considered that eleven of twenty-four comparable transactions referred to in his Report were more useful. Three of these were within the CRA, namely two involving the subject property at No. 107 Pau Chung Street and the other relating to the adjoining property at No. 109 Pau Chung Street. In his opinion, there were no significant differences in value between transactions

within and outside the CRA. For this reason he was of the opinion that the best comparables were provided by the Pau Chung Street transactions.

24. Mr. Tam's Comparable 2 at Nos.420-424 Ma Tau Wei Road and Comparable 4 at Nos.1-11 Maidstone Road were a considerable distance from the subject property being on the far western side of Ma Tau Wei Road. This is a major arterial road of four lanes with a permanent dividing centre fence. Comparable 1 and 3 situate at the Great Wall Shopping Centre, Nos.16-26 Tam Kung Street and No. 48 Tam Kung Road, were closer to the subject property. Comparables 5,6,7 and 8 situate No. 96-110 Pau Chung Street, provided rental evidence of shops within the Sui Shing Centre, a more modern building, obliquely opposite the CRA.

25. When Mr. Pendleton went outside the CRA, he found Comparables 14,15,16 and 19 in the so-called Thirteen Streets area, including Pang Ching Street and Ying Yeung Street, most reliable. He also considered Comparable 17 at No. 20 San Shan Road immediately opposite the the CRA and also a more distant Comparable 7 at 19-25 Cheung Ning Street.

26. We are satisfied that Mr. Tam's comparables are all superior to the subject property. Further, several are different type of properties and generally very much smaller. Mr. Tam recognised these differences and was obliged to make substantial but arguably still inadequate adjustments. However, even many of the existing adjustments are so large, that they already have the effect of reducing if not destroying their value as comparables.

27. Mr. Pendleton's Thirteen Streets comparables are closer in kind to the subject property. Although having the advantage of fronting through streets, these are narrow and limited to one-way traffic. We share Mr. Pendleton's view that values in the Thirteen Streets are lower than in Pau Chung Street Street. However, the differences are sufficently small to permit reasonably reliable adjustments.

28. Mr. Pendleton initially viewed his Comparable 17, No. 20 San Shan Road, immediately opposite the CRA as being of considerable assistance. He described it as one of his eleven most useful comparables. In his Report he stated it was a low class restuarant in a not busy street similar in trading potential to the subject property. At the hearing the evidence was that it had been sold on 8th July 1991 for $1.88 million. Mr. Tam placed considerable weight on this transaction when it was brought to his attention.

29. Mr. Pendelton arrived at an adjusted unit rate of $55,956 per square metres for his Comparable 17. This was higher than his remaining ten comparables. Further, this rate was considerably higher than the rates for the CRA comparables. He was unable to find any evidence to establish it was not an arms length transaction. Mr. Pendleton next assumed that the availability of an adjacent public pavement area, for siting extra outdoor tables, would have increased the property's value. Further the transaction may have included the sale of the restaurant business as a going concern.

30. Mr. Tam's Comparable 1, a very small 48 square foot shop on the first floor of a retail complex, is an example of the excessive adjustments he was obliged to make in an attempt to relate his very different and more valuable comparables, to the subject property. Mr. Tam was obliged to make unanalysed adjustments of 40% to 50%, to arrive at a unit rate of $8,000 per square foot or about $86,000 per square metre, for the subject property.

31. The area of the subject property comprised a ground floor area of about 500 square feet (46.4 square metres); a yard of 170 square feet (15.8 square metres); and a cockloft of 179 square feet (16.6 square metres). On the basis of these adjustments Mr. Tam, in his amended Rule 20 Report, arrived at a market value of $4,430,000.

32. Mr. Pendleton reliance's on the Thirteen Sreeet comparables included a 13% adjustment for the superior location of the subject property. Time adjustments varied for Comparable 14 (May/92) of 4%; Comparable 15 (March/92) 15%; Comparable 16 (February/92) 19%; and Comparable 19 (July 1991) 40%.

33. These adjusted units rates respectively produced figures for those comparables of $ $47,580 per square metre ($4420 per square foot); $42,587 per square metre($3950 per square foot); $39,381 per square metre( $3660 per square foot); $31,659 per square metre ($2940 per square foot). Mr. Tam adopted a rate of 1/8 for yards and 1/3 for cocklofts. Mr. Pendleton used 1/10 for yards and 1/4 for cocklofts. We propose to apply a rate of 1/8 for yards and 1/4 for cocklofts. These rates reduce the analysed rates to slightly lower figures.

34. Mr. Pendleton considered these generally higher rates confirmed the range of $25,000 per square metre ($2350 square foot) to $37,612 per square metre ($3500 per square foot) he had arrived on the basis of the sales of No. 107 and No. 109 Pau Chung Street within the CRA. However, because he considered the CRA had not affected value he made no allowance for its existence.

35. The calculations are also open to several other direct criticisms. First, the time adjustments of +40%, +52% and +62% are extremely large. Secondly, all three comparables should be approached with caution for they are within the CRA. Thirdly, the wide range of those adjusted rates, fails to narrow them down to a clearly reliable figure.

36. Mr. Pendleton, at the hearing on this evidence, adopted for the subject property a unit rate of $45,000 per square metre ($4200 per square foot). To the extent that Mr. Pendleton relied on the Thirteen Street comparables, he failed to make allowance, in favour of the subject property, for its more valuable corner location and the existence of the rear lane.

37. Mr.Pendeleton's unit rate also does not give any weight to the evidence relating to his Comparable 17 situate at No. 20 San Shan Road. It is a ground floor restaurant immediately opposite the CRA and not far from the junction of San Shan Road and Pau Chung Street. Mr. Pendleton considered it had similar trading potential to the subject property and No.109 Pau Chung Street. So far as location is concerned, it is a far better comparable than both the Mau Tau Wai Road comparables of Mr. Tam and and Mr. Pendleton's Thirteen Streets comparables. This is accurately reflected in the latter's modest -2% adjustment for location.

38. Despite the similarities of Comparable 17 to the subject property, because of the possibility of the existence of the two adverse factors earlier mentioned, Mr. Pendleton considered it unreliable. Although, his adjusted rate of $55,956 per square metre might have been interpreted as indicating that zoning had depressed CRA values, he preferred to infer that the sale exceeded the open market value.

39. We confirm that after the hearing the Applicant by way of written submission, informed the Tribunal that Comparable 17 was later resold closer to the valuation date, for $2.95 million on 6th November 1991. This led Mr. Tam to increase his earlier unit rate of $8,000 per square foot and valuation of $4,430,000 to a unit rate of $107,610 per square metre (about $10,000 per square foot) and a valuation of $5,506,000.

This huge increase is simply not supported by the remaining relevant comparables.

40. The new evidence caused Mr.Pendleton to increase his valuation by $150,000 to $2,500,000. We were not informed how the increased $150,000 was calculated. Clearly some some weight has been given to the increase in value of this comparable. Mr. Pendleton's revised valuation produces an increased unit rate of about $50,000 per square metre ($4650 per square foot), after allowing for the yard, cockloft and existing lease.

41. In considering the appropriate unit rate to adopt, we have also taken into account the additional comparable at No. 182 Pau Chung Street contained in Mr. Pendelton's supplementary Report. This property is situate in the Mau Tau Kok Road market area. It was sold in March 1994 for $3.2 million which produces a unit rate of about $60,000 per square metre ($5,575 per square foot). Although this comparable is near the CRA, we accept that it may be in a better location than the subject property.

42. A major difference in the approach of the valuers was their view of the effect of the CRA. Mr. Tam considered that since 1985 the CRA had blighted values within its boundaries. Mr. Pendleton appeared to conclude that it had not reduced values. The 1986 CRA zoning provides evidence that in the view of the Crown and Housing Society, the area was ripe for redevelopment. The rezoning prohibited single redevelopment. Further, even if owners agreed to a joint development, they were restricted to redeveloping in accordance with the overall scheme.

43. We appreciate that from a planning viewpoint a comprehensive development may have been desirable. However, in Hong Kong the action of one owner redeveloping a site, has often provided the impetus for surrounding sites, to be privately redeveloped. In fact from 1986 the CRA prohibited any such redevelopment. In those circumstances, the prohibition could reasonably be expected, to have an adverse effect on value.

44. Mr. Pendleton referred to three transactions within the CRA at Nos. 107 and 109 Peng Chau Street with unit rates of $17,648, $18,507 and $24,745 per square metre. In his opinion, after adjustment, these values were in line with comparables outside the CRA. However, he reached that conclusion by rejecting any adverse affect of the CRA and by finding that even nearby comparables outside the CRA were, for a variety of reasons, far superior.

45. For example, Comparables 20 and 21 were in Mau Tau Kok Road, immediately opposite the CRA. After making large location adjustments of 40% and 42%, his adjusted rates come out at higher rates of $46,437 and $37,870 per square metre. These two Comparables are on the superior market side of Mau Tau Kok Road but the location allowances still appear excessive. Indeed, if they are accurate, they raise doubts as to the suitability of those properties as comparables. Yet so far as location is concerned, they are close to the subject property and even closer to other properties within the CRA.

46. Mr. Pendleton's newer comparable at No.182 Pau Chung Street was outside the CRA and also enjoyed the advantage of a local market. The unadjusted unit rate was $60,139 per square metre. To support his view that the CRA had not had an adverse affect on value, Mr. Pendleton was obliged to make a large -27% location adjustment and also a -25% time adjustment, to reach an adjusted rate of $33,077 per square metre.

47. In the case of his Comparable 17, a similar distance from the CRA, but much closer to the subject property he reasonably made a small -2% location adjustment. After a time adjustment of +35% he arrived at his adjusted rate of $55,956. The subsequently revealed later sale at $2.95 million negated the possibility of the earlier sale not been at arms length. On the evidence there should also have been adjustments in favour of the subject property for corner influence and access to the rear alley.

48. Adopting adjustments for the latter sale of -2% for location and +30% for time produces a unit rate of $84,549 per square metre. Whether those sales included the restaurant business as a going concern remains a matter of speculation. Any deduction for the pavement factor can only be calculated in broad terms. If 25% is deducted for the table factor, the more recent sale would produce a unit rate of $63,412 per square metre while a 30% deduction would produce $59,885 per square metre.

49. The evidence more strongly supports the likelihood that the CRA has had an adverse affect on value. We find that the CRA has had an adverse affect on value within the CRA. We confirm that further allowances have to be made for corner influence and rear alley access. When all these factors are taken into account we consider the appropriate unit rate to be in the region of $50,000 to $55,000 per square metre.

50. We have reviewed the whole of the comparable evidence in the light of these findings. After doing so, under the comparative method, we arrive at a unit rate of $53,000 per square metre.

51. Both valuers also carried out investment valuations, to check their primary comparative valuations. Mr. Pendleton considerably qualified his use of the investent method when he stated that his direct comparision was more reliable. We share that view but are obliged to both valuers for the useful exercise of going on to carry out investment calculations.

52. Mr. Tam's investment calculations were based on a capitalisation rate of 10%. These calculations produced rental unit rates of $7,968 to $11,400 per square foot. This range supported his earlier comparative method unit rate of $8,000 per square foot. Although Mr. Pendleton agreed that yields in Kowloon were generally around 9%, he considered that for this locality, the proper rate was 8%. Because the existing lease was well secured at a below market rent, he lowered the capitalisation rate to 6% for the existing lease. After using these lower rates and a market rent of $168,000 per annum, Mr Pendleton arrived at an investment value of $2.08 million.

53. The large number of relevant comparables enables the open market value of the subject property to be reasonably accurately directly determined by the Comparative Method. On the facts of this application, as at least one of the valuers recognised, the investment results are less reliable. Mr. Pendleton's investment valuation appears to indicate that the rental value has been affected by zoning. However, these calculations are only of peripheral importance and we do not propose to examine them in any further depth.

Adopting a unit rate of $53,000 per square metre, we determine the open market value of the subject property as follows:

Ground floor:
	46.4 square metres @ $53,000	= 2,459,200
Yard:
	15.8 square metres @ 1/8 rate	= 104,675
Cockloft:
	16.6 square metres @ 1/4 rate	= 219,950
		2,783,825
	Deferred for 10 months 12 days @ 9% (x .928) say,	=$2,583,000
		===========

54. The lease was from 3rd October 1992 to 15th August 1993 at a rent of $12,200 per month (inclusive of rates). If rates of, say $550 per month, are deducted that leaves a net rent of $11,650 per month. The lease was well secured with a below market rent. We will adopt a 6% capitalisation rate. On this basis the valuation, inclusive of the lease, is as follows:

Net rent $11,650 per month for 10 instalments at 6% per annum ($11,650 x 9.7304)	= 113,360
Plus 12 days rent (3-15 October 92)	= 4,510
Value of current lease, say	= 117,870
SAY	118,000
Plus reversion	= 2,583,000
Total open market value,say	$2,700,000
	============

55. We therefore determine compensation in the sum of $2,700,000. Leave to both parties is reserved to apply for the rate of interest, if not agreed, to be determined under Section 17(3A) of the Crown Lands Resumption Ordinance. There will also be an order nisi that the Respondent pay the Applicant's costs on the High Court party and party scale to be taxed if not agreed; to become absolute. unless, within 14 days, application is made to the contrary. Liberty to apply is also reserved for any other consequential matters.

Dated this 5th day of May 1995.