MAN KAM HUNG v.THE COMMISSIONER OF ESTATE DUTY

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ESTATE DUTY APPEAL

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JUDGMENT

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1. Man Lap Ping, alias Man Kai, died on 20th September 1982. The ground floor of No. 56 Tai Po Road, known as Shop A formed part of his estate. Section 13(5) of the Estate Duty Ordinance (Cap. 111) provides:

"The principal value of any property shall be estimated to be the price which, in the opinion of the Commissioner, such property would fetch if sold in the open market at the time of the death of the deceased."

Accepting the advice of the Commissioner of Rating and Valuation, the respondent, the Commissioner of Estate Duty, estimated the price of this property (the appeal site) as being $1.15m and included this value in his assessment of the value of the whole estate under section 14(15). Where a valuation underlying a section 14(15) assessment is disputed, an appeal lies to this Court under section 22(1). The appellant administrator has exercised this right. This Court's function now is to "determine" the amount of duty payable. Such duty is dependent upon the valuation, so the Court has to determine that also.

2. In making his estimation under section 18(5) the respondent acted upon the documents; upon the reports and valuations put before him by the appellant and the Commissioner of Rating and Valuation. The inquiry before this Court has been much more far reaching. I have had the benefit of oral evidence from four valuers: more extensive documentation: and a view of the appeal site and the principal comparables. In a very real sense therefore this appeal has been by way of re-hearing. It has been accepted before me that my function is to make a valuation upon the evidence laid before me. I do not think that Lui Dor v. Commissioner of Inland Revenue (1966) H.K.L.R. 358 is inconsistent with this if what is said at page 365 is read with page 360.

3. The valuation has to be made as at 20th September 1982. The Hong Kong property market was then in some disarray. I have been shown some statistics in the 1985 Property Review prepared by the Rating and Valuation Department. These are based upon returns from shops in the urban areas of Hong Kong, Kowloon and New Kowloon. They cannot simply be applied directly to this particular part of Shamshuipo, but they do give some useful background guidance.

4. I was told that the indices were the most useful figures. These suggest that property prices peaked in the third quarter of 1981 when the index was 156; and declined throughout 1982 when the quarterly figures respectively are 144 : 114 : 111 : 100. Rentals on the other hand behaved somewhat differently. They peaked in the second quarter of 1982, the last two quarters indices for that year being 193 and 196. Thereafter they continued to fall but much less steeply than prices. Indeed from early 1981 onwards the gap between the rental and prices indices became progressively larger, suggesting an increasing difficulty in relating the one to the other, and that as buyers were prepared to pay less they were demanding an increasing return on their money.

5. These general trends were punctuated or exacerbated (depending on view point) by Mrs. Thatcher's visit to Peking on 24th September 1982. The indices suggest an adverse effect on prices with a loss of 11 points in the last quarter; but not rentals which gained 3 points over the same period. The valuers who gave evidence were unanimous in regarding the effect on both as adverse, but gave widely differing and at times conflicting views on rates and timing. There was other evidence of wide spread doubt, uncertainty and dis-agreement in the market. Two of the selling prices of contemporary comparables selected by the appellant's valuers, were challenged at the time by the Rating and Valuation Department as being below market and were assessed for stamp duty at a higher figure. This therefore was a time when careful honest valuers could all too readily arrive at markedly different figures.

6. This difficulty in reading the market generally was aggravated by a particular local problem. All the valuers were agreed that the best guide to value was the apparent open market price of a comparable property sold at about this date. But no very obvious comparables existed. The selection of comparables, and the adjustment of figures derived therefrom to the appeal site, involved an exercise in judgment by each valuer. The use of percentage adjustments for different aspects of the property was an aid to comparison, but it did not convert into a science what was largely a subjective exercise, inevitably giving rise to differences of opinion.

7. I have little doubt that it was the combination of these two factors that has really led to this appeal, and produced a situation where the range of credible values may be somewhat larger than usual. Fortunately the guidance of authority is clear. Three citations suffice. In Duke of Buccleuch v. Inland Revenue Commissioners (1967) A. C. 506, 525, Lord Reid said that the problem was to "estimate what the property would probably have fetched on that particular day if it had then been exposed to sale no doubt after such advance publicity as would have been reasonable." Lord Morris said this at p.80: "The stipulation that an estimate must be made of the value which the property would fetch if sold in the open market does not, in my view, require an assumption that the highest possible price will be realised. It involves that an estimate should be made of the price which would be realised under the reasonable competitive conditions of an open market on a particular date."

8. In Re Hayes Will Trusts (1971) 1 W.L.R. 758 Ungoed-Thomas J. commented specifically upon ranges of values. Having pointed out that the much quoted phrase "best price" used by Sankey J. in Earl of Ellesmere v. Inland Revenue Commissioners (1918) 2 K.B. 735, 740 was used in the context of method of sale not bid price went on: "It has been established time and again in these courts, but there is a range of price, in some circumstances wide, which competent valuers would recognise as the price which 'property would fetch if sold in the open market'. Neither the section, nor Sankey J. requires that the top price of that range should be the price fixed for estate duty. That price together with the lowest price in the range may be expected to be the least likely price within the range to be obtained from the open market. The most likely price .... would presumably be the mean price."

9. The first issue on the valuer's evidence was whether the appeal site should be looked at as a whole, or in three parts, and how the court should view unauthorised alterations and additions to the property. By way of explanation it is necessary to refer briefly to the history of the property. It was built in 1968. An extract from the plans then approved showed the ground floor shaped like a right-angled triangle. Its base, the main shop front, faced Tai Po Road. Its hypotenuse faced an unnamed scavenging lane leading ultimately to Sai Yeung Choi Street. At the Tai Po Road end of this lane there was a small return frontage, but there was no other opening onto the lane apart from this. Behind the shop the plan shows toilets, rooms apparently intended for storage, and an open rear yard.

10. In the following respects the present lay out of the site is totally different:

11. It is common ground between the parties that no part of this transformation of the premises has been properly authorised. But no steps have been taken to enforce the convenants in the lease, and no enforcement action has been taken by the Building Ordinance Office. A number of pronouncements upon Building Ordinance Office policy since August 1975 were put before me. These suggest that the executive now ignores anything done before that date unless it gives rise to "an obvious and immediate danger to life and limb. " It would appear that the adjectives need particular emphasis. The only circumstance in which the unauthorised nature of changes of user is directly material is for the assessment of compensation under the Crown Lands Resumption Ordinance (Cap. 124) which contains a specific exclusion of such value in section 12(b). The MTR Resumption Ordinance (Cap. 276) is to like effect.

12. The appellant, with the support of one of his valuers, Mr. Cheung Ping Keung invites me to value the premises as a whole; not as they are but as they should be; and to attribute no value to these alterations. This they say, without apparent dispute, is how they would be valued for banks and mortgagees. The speculative buyers should be regarded as special and the speculative element in any buyers' price ignored. It is quite wrong to permit the executive to ignore the law and breaches of the law when it suited it for the purposes of estate duty and rating, but to take advantage of it for the purpose of assessing its own buying price.

13. I have considerable sympathy with this submission. But this is a court of law not morals and I am constrained to reject it as ill-founded in law. I have to consider the "open market". The evidence here is all one way. This situation is regrettably common place. Structures with unauthorised additions or alterations are marketable: they are regularly put upon the market and bought. They are bought as they stand, but the price is likely to reflect both the existence of the unauthorised additions or alterations and the risk of enforcement. The words of Rowlatt J. in Mann v. Nash 16 Tax Cases 523, cited with approval by the full bench in Re Compensation Board Ex Parte Attorney General (1971) H.K.L.R. 338, 348 are directly applicable. He said "the state is ...... taxing the individual with reference to certain facts". The facts here established an open market for a property like the appeal site as it is. It exists in three parts, and I think it falls to be valued in three parts. Indeed I think it is exceedingly difficult and artificial to try to value it as a whole.

The Front Shop

14. This is the main area of dispute. Each valuer followed a similar path. He:-

15. Their results can be tabulated as follows:-

As Mr. Cheung had valued the property primary as a whole, these comparable adjustments for the front shop alone were made ex tempore in the witness box.

16. The first problem is to identify the most suitable comparables and to resolve an issue which there arose between the District Valuer and the appellant's valuers. Comparable 1 was the District valuer's prime comparable for the front shop, supported by Nos. 130 and 132 Ap Liu Street for the front shop and by No. 175 Tai Nan Street for the whole site. All these comparables lay in an area bounded approximately by Nam Cheong Street, Boundary Street and Cheung Sha Wan Road which is now dominated by wholesalers of textiles and associated products. Unlike retail shops in the surrounding areas, including the appeal site, which rely largely upon local trade, the textiles customers tend to come from farther away. By reason of this association it was common ground that the properties in this enclave have acquired an enhanced value, what was described as an attached good will. This emerged from a comparison of sale prices arising in and outside this area. In these circumstances the appellant's valuers all contended that comparable 1 was not a true comparable at all; or alternatively if it was sought to be used as a comparable its value had to be substantially discounted in the manner suggested by Mr. Cheung.

17. It is a fact that the District Valuer's various adjustments leading first to his basic and then to his final adjusted rate made no allowance for this area enhancement. But he argued that a rental comparison showed this to be unnecessary. From 1st November 1982 the front shop was let for (effectively) five years at $7,800 a month inclusive. From 15th April 1983 comparable 1 was let for three years at $9,000 a month inclusive. After apportioning this rental between the shop and a cockloft, and adding 8½% by way of time adjustment, the District Valuer derived a unit rental for the comparable that was lower than that for the front shop.

18. I am not convinced by this. The difference between this textile area and its surrounds is obvious to the eye and demonstrated by the unit prices obtained. Such direct evidence is not readily displaced. Rental levels are derivative evidence of value and in some market condition they may provide useful evidence. But market conditions at this time were very confused: rents and prices were drawing progessively apart; and the necessary time adjustments are exceedingly difficult to estimate accurately. Further rentals can vary for reasons unconnected with value. I therefore think that comparable 1 can only be accepted as such, after some substantial adjustment is made for its location in this area, and that one has to seek a true retail comparable from outside the area.

19. I am not particularly impressed by the claims of comparables 2 and 6. Comparable No. 5 is closest to the appeal site and has some characteristics in common with it. It was one of those "revalued" for stamp duty purposes: the actual price of $1.425m being increased to $1.8m. This still produces a unit rate which seems comparatively modest. But none of the valuers offered any detailed comparison between it and the front shop and I am ill-disposed to originate one myself.

20. This leaves Nos. 3 and 4, the adjoining premises 9 and 11 Un Chau Street. Both were sold on 1st October 1982 for $1.45m. No. 9 had 69.5m² of accommodation plus a yard; 5 metres frontage; and produces a unit rate of $19,360m². No. 11 occupies 81.5m²; has a yard and 3.6m of frontage; and produces a unit rate of $17,349m². Both were accepted as comparables for the front shop by the appellant's valuers, Mr. Man and Mr. Cheung producing detailed comparison. But on account of size alone they were rejected by the District Valuer as comparable to the front shop. He regarded them as comparable only to the whole premises and was prepared to produce a comparison on this basis only.

21. At first sight Mr. Man's and Ms. Cheung's views appear widely divergent. Mr. Cheung added 20% to his comparable figure; whereas Mr. Man deducted 25% from his. But this was very largely explained by differences in method which produced the different starting figures of $19,360m² and $25,000m². They took opposing views on time. This is an adjustment I am minded to regard either as unnecessary for the very short period involved, or as to be so speculative as to be unreliable. If this adjustment is taken out, Mr. Cheung's calculated adjusted figure for the front shop becomes $787,564 and Mr. Man's $808,000.

22. Guided by the authorities to which I have referred, and taking all these elements into account as best I can, my estimate is that this front shop on 20th September 1982 would have realised $800,000.

Rear Shop

23. Although there were considerable variations in underlying detail, especially over the proper relationship between the rear shop and the most popular comparable Shop 12, 80 Tai Po Road, and over the valuation of the covered yard, the ultimate range of values as a whole was much smaller. The figures were Mr. Cheung - $254,680: Mr. Man - $244,368: Mr. Chu - $235,900 District Valuer - $265,000. This shop was the product of unauthorised alterations and additions. The risk factor from this must, I think, have had some impact upon the market and in the circumstances I do not think that I can do more than adopt a mean figure of $250,000 as my valuation.

Wall Shop

24. This is pure speculation. I am attracted by Mr. Man's estimate of 4/5 years purchase and take a figure of $30,000.

25. Looking at each existing unit separately I therefore arrive at a total valuation of 8800,000 plus $250,000 plus $30,000 i.e. a total of $1.08m. If, as I think, three different purchasers would have paid these separate prices, I can see no reason for giving any quantity allowance to some notional single purchaser. $1.08m accordingly represents my valuation of this property for estate duty purposes.