CAMERON PROPERTIES LIMITED v. DIRECTOR OF BUILDING DEVELOPMENT

Demolished Buildings (Re-development of Sites Ordinance, s.6(1) - application for approval to re-develop refused on ground land zoned for public open space under Town Planning Ordinance - incremental value - whether market value of property with vacant possession after service of re-development notice exceeds value of property in occupation before service of demolition order - principles of assessment.

IN THE LANDS TRIBUNAL OF HONG KONG

Demolished Buildings Appeal No. 1/85

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DECISION

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1. This is an appeal against the assessment by the Director of Building Development of an incremental value under sub-section (1) of section 6 of the Demolished Buildings (Re-development of Sites) Ordinance. The sub-section declares that (in respect of properties to which Part I of the Landlord and Tenant (Consolidation) Ordinance applies) the incremental value shall be the amount by which the market value of the property with vacant possession after the service of a re-development notice exceeds what was the value of the property in occupation prior to the service of an order for demolition.

2. The appellant acquired the property in question in 1977. In 1979 it applied for approval to re-develop. The application was refused on the ground that the property lay within an area which is zoned for public open space on Outline Zoning Plan No. 3/56B prepared under the Town Planning Ordinance. That plan, it would appear, had been deposited in the Land Office in 1972, but the land register contains no mention of outline zoning plans, which are therefore not apparent upon a normal search, although their existence - if they exist - can be ascertained by dint of rather more diligence than is needed to make an ordinary search of the land register. However, the applicant thereupon enquired of Government whether it was prepared to accept a surrender. It was not. The applicant then applied to the Town Planning Board for permission to re-develop. That application, too, failed, as did a consequential application to the board to review its decision. Correspondence on the subject of surrendering the property ensued, but came to naught. Mearnhile, on October 2nd, 1984, a demolition order was made, and the Director assessed the incremental value of the property at $34,000.

3. The appeal proceeds upon the basis that the Director misdirected himself in the matter inasmuch as in making the assessment he did not take into account the fact that the property could not be re-developed because it lies in an area zoned for public open space. The Director maintains that he did take that factor into account in making his assessment.

4. Mr. Peter Mark for the appellant submits that the property is unmarketable and that it must follow from that that there can be no incremental value. Further, that he valuation officer concerned, Mr. Hui Kin-hong, was wrong not to consider, as he admits he did not consider, other local legislation, in particular the provisions of the Town Planning Ordinance which relate to zoning. Finally, he complains that Mr. Hui has really assumed, rather than assessed, an incremental value.

5. Mr. Hui has given evidence. According to him the incremental value is based upon his opinion that the property is marketable. In aid of that he seeks to pray the fact that a number of comparables - similarly zoned - have changed hands in recent times. He maintains that there might be those who would buy such property with a view to eventually surrendering it to Government at a profit, and that "there could be other reasons which we don't know" for buying such property. He agrees that he cannot explain the reasons for the market for such property which he nevertheless insists exists. He says that even if only one in a thousand would buy such property he would still consider that it was marketable. With respect, we find most of this rather vague. However, Mr. Hui does agree with the tribunal that the "before" value of property which cannot be developed because of zoning is the capital value of rents paid by the tenants up to the time at which the property is surrendered to Government plus the reversionary value of the property, and that the "after" value is simply the reversionary value of the property. The reversionary value is the price which Government could be expected to pay, discounted over the time which is likely to elapse before a surrender is accepted by Government. Government could be expected to pay a price which did not take account of the zoning in the same way as any resumption by the Crown would have to disregard zoning in accordance with the provisions of the Crown Lands Resumption Ordinance.

6. We do not think that the comparables are really very significant, for, as we have said, the land register contains no mention of outline zoning plans, and an ill-informed purchaser might well buy such property without realizing that he could not re-develop it at all or dispose of it for perhaps many years. However, we do not discount the fact that the comparables may reflect the somewhat speculative value based on the income plus the reversionary value outlined earlier. We cannot be sure what manner of purchasers the purchasers of the comparables were, and we must not and do not speculate. We simply say that in our view these factors at least considerably weaken the evidential value of the comparables in this case.

7. Although Government would base its purchase price on the value for re-development, according to the policy outlined in a letter dated December 30th, 1976, from the Attorney-General to the President of the Hong Kong Law Society (of item 10 in the appellant's bundle) it does not undertake to purchase immediately. It might well be ten years before the property is surrendered. Therefore, due to the zoning .and the uncertainty attaching to the time which might elapse before Government will accept a surrender, the value of the site cannot be based upon any immediate re-development potential. With respect, Mr. Hui seems to have ignored these two factors. His would be an acceptable approach if Government worn to purchase on this basis as soon as the re-development notice was served, for then the value would simply be converted into money terms. But in Hong Kong there exists no statutory provision which requires Government to purchase as there does, e.g., in the United Kingdom.

8. Mr. Hui agrees that were it not for the zoning the value of the property before the demolition order was served would be based on its value as a cleared site less the cost of demolition and the amount of compensation which it could be anticipated would have to be paid to the protected tenants in accordance with the provisions of section 4 of the Landlord and Tenant (Consolidation) Ordinance. Normally, if the owner is served with a demolition order he will have to demolish the building, and will be left with the cleared site. After allowing for possible delays in obtaining approvals and evicting tenants the difference in value is basically the amount of compensation which it is anticipated would be paid to the protected tenants. This would be the incremental value or the difference between the value of the premises tenanted and the value with vacant possession. Section 5 provides that Part I of the Landlord and Tenant (Consolidation) Ordinance ceases to apply when a re-development notice is served.

9. We do not, with respect, agree with Mr. Mark when he says that there is no market for the instant property, although if there was full knowledge of the situation that would undoubtedly make it difficult to sell. But, as Mr. Hui says there may be some who might be willing to purchase. We can only consider the value from the point of view of one who is fully cognisant of all matters appertaining to value. We prefer to look at the question of value from the point of view of the value to an owner in the same situation as that in which the appellant now finds himself.

10. With the zoning as open space the re-development potential is removed. The value can then only be based on the rental income plus the reversionary value based on the price which Government will eventually pay. That is the annual rent permitted under Part I of the Landlord and Tenant (Consolidation) Ordinance capitalized for the period during which the income could be expected to continue, or at best up to the time at which Government accepts a surrender, plus the present value of the price to be paid by Government, which, as Mr. Hui pointed out, ignores the zoning and treats the site as susceptible of re-development.

11. If A is the annual rent and YP represents the years' purchase (or multiplier reflecting the appropriate rate of interest for the number of years during which the income is expected to continue), then the capital value of the rents is A x YP. If the price which Government will eventually pay is P, it has to be deferred for the period during which it is left in the owner's hands. That is, the reversionary value is P x the present value for the period at the appropriate rate of interest, i.e., the PV of P. The "before" value is therefore (A×x YP) + PV of P. If a demolition order is made, the capitalized rental value is lost, i.e., (A ×YP) is removed, and the cost of demolition is incurred, say D. The order removes the Protected tenants. If T represents the value of the tenants' interests, then the "after" value is (PV of P+T+D) - D.

12. In other words, the value to the owner has been decreased by the value of the expected rental income and cost occasioned by demolition, although P has been increased by T + D because Government can now be expected to purchase a cleared site due to the eviction of the tenants with the loss of the protection of Part I of the landlord and Tenant (Consolidation) Ordinance. The value after the service of the re-development notice therefore does not exceed the value before the service of the demolition order. In fact it is much more likely to be less, so that the incremental value is really a minus quantity.

13. To give an example, for the purpose of which we have used hypothetical figures, which, however, we think should be somewhere in the region of those which would apply in such a case as this. Net rent permitted under Part I of the landlord and Tenant (Consolidation) Ordinance, say $3,000 a month

$3,000 × 12 = $36,000 a year

Assuming that Government will purchase in approximately 8 years

Years' purchase, 8 years at, say 12% is 5

Cost of demolition, say $20,000

Tenants' compensation, say $30,000

Site value

999 years' unrestricted lease

Say $10,000 p.m.²

Site area 49.7 m.²

Value 49.7 m² × $10,000 = (say) $500,000

(Government is expected to purchase subject to tenancies. Price assumes that the cost of demolition will also have to be incurred)

Present value for 8 years at, say 9% is .5

"Before" value

Capitalized net rents for 8 years @ 12%

$36,000 × 5 = $180,000

Reversionary value

Value subject to tenancies $500,000

Deferred 8 years @ 9%

$500,000 × .5 = $250,000

Value of rental income + reversionary value $430,000

"After" value

Value of rental income is removed

Protection of Part I of the Landlord and Tenant (Consolidation) Ordinance ceases and tenants are evicted

$500,000 is the value subject to tenancies

Now the value will be $550,000 as a cleared site. The owner will also have to pay the cost of demolition immediately.

Reversionary value

Value as a cleared site is $550,000

Deferred 8 years @ 9%

$550,000 × .5 = $275,000

Demolition cost $20,000

Reversionary value less demolition cost $255,000

"Before" value is $430,000

"After" value is $255,000

Incremental value is minus $175,000

14. In conclusion we would just say this. There could be two factors which would alter this result. One is that Government might purchase earlier than it otherwise might once a demolition order has been served. The other is that the "before" value might be based on the assumption that the income from the tenants will continue for only a short time because of the imminence of a demolition order. However, nothing which has been canvassed before us indicates that Government will purchase earlier than it might otherwise do once a demolition order has been served, rather the contrary, and we think it right to approach the matter on the basis that it probably will not. And we do not know what was the state of the building in question prior to the service of the demolition order. If there is no prior outward sign of deterioration, or if the reason for the demolition order is a fire or some other natural calamity, the "before" value of the property in an undamaged state would reflect the value of a rental income which could be expected to continua indefinitely. But if the building is run-down the likelihood of it becoming dangerous could influence the value adversely. As to this, in the absence of any evidence one way or the other, we think it right to approach the matter on the basis that it is not to be regarded as liable to become dangerous and that the owner can reasonably expect it to go on producing rental income until Government agrees to purchase it.

15. The appeal is therefore allowed, for, as we hold, the value after the service of the re-development notice does not exceed the value before the service of the demolition order.

16. Costs to the appellant to be taxed on the upper District Court scale if not agreed.

17. Dated this 25th day of June, 1985.