HUI SOONG NUI and Another v. DIRECTOR OF LANDS

HEADNOTE

Property law - Crown lands resumption - compensation for ground floor commercial premises - claim for $3,500,000 disputed by Crown who valued property at $1,310,000 - open market value determined under comparative method of valuation - any affect on value of earlier Comprehensive Redevelopment Area zoning or subsequent Resumption Scheme to be ignored - Held: Compensation of $1,800,000 awarded plus interest and costs.

IN THE LANDS TRIBUNAL OF HONG KONG

Crown Lands Resumption Reference No.13 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 Applicants as the Crown lessees of a one-quarter equal and undivided share of Kowloon Inland Lot No. 10945 situate at No. 9 Wang Cheung Street, Kowloon, Hong Kong.

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. The Applicants originally claimed compensation of $3,196,000 later increased to $3,500,000 but in their final submissions reduced to $2,902,000. The Respondent contended that the open market value was $1,310,000.

3. 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 Wang Cheung Street but extending also to Sui Lan Street, Mau Tau Kok Road, Pak Tai Street, San Shan Road and Pau Chung Street in Ma Tau Kok.

4. 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.

5. 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.

6. 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 any affect of those provisions on open market value. In Lam Kit v. Director of Lands CLR No.15/1994 we have recently dealt in full with those statutory provisions. We confirm that any affect of the CRA or the Resumption Scheme on value must be ignored.

7. The subject property comprised a ground floor shop and adjoining yard of a four storey building built in 1955. The shop area measured 424 square feet and the adjoining yard 182 square feet. Both Mr. F.C.Tam, BSc, ARICS, AHKIS, called by the Applicant and Mr. K.J.Healy, FRICS, FHKIS called by the Respondent relied on comparables outside the CRA. A major dispute between the valuers related to the reliability of their comparables and the scale of their adjustments.

8. Mr. Tam's original Rule 20 Report valuation of $3,196,00 was increased in a later supplementary Report to $3,500,000. In the Applicant's solicitors final written submissions the claim was reduced to $2,902,000.

Mr. Tam's Reports principally examined five comparables. All were either clearly superior to the subject property or so different in character as to require substantial adjustment.

9. On the basis of his original four comparables, Mr. Tam averaged the adjusted rates ranging from $5,895 to $8,228 per square foot, to arrive at a unit rate of $6,946 per square foot. The fifth comparable contained in his Supplementary Report led him to increase the unit rate to $7,560 for the ground floor building area of 424 square feet and allow one-fifth of that rate for the 180 square feet yard.

10. All of Mr. Tam's generally ground floor comparables were in superior locations requiring substantial adjustments. Comparable 1 on the ground floor of 78 Kowloon City Road was given a -15% location adjustment; Comparable 2, 10 Pak Tai Street -20%; Comparable 3, 16-26 Tam Kung Street -30%; Comparable 4, 48 Tam Kung Road -40%; and 20 San Shan Road -10%. The evidence supported even larger location adjustments for the first four comparables which immediately has the effect of reducing their reliability.

11. Comparable 3 clearly fails to provide any real evidence of value. It is a very small shop situate on the first floor of a shopping mall known as the Great Wall Shopping Centre. Comparable 5 although closer in character and location to the subject property, was twice sold for sums considerably higher than other sales outside the CRA. After being sold at $1.88 million on 8th July 1991 was resold on 6th November 1991 for $2.95 million. It appears that the adjacent public pavement area available for siting additional tables for this restaurant, may have influenced those prices.

12. We are satisfied it would be unsafe to give material weight to Comparable 5. At most it broadly indicates that higher values do exist outside but near the CRA. Mr. Tam's better first two comparables were originally adjusted to unit rates of $5,895 and $6,010 per square foot. Later these were reduced because of inaccurate measurements, to $5,832 and $5,277 per square foot respectively. These rates still require larger downward adjustments, if they are to be more accurately related to the subject property.

13. Mr. Healy referred to fourteen comparables. However, five of these were within the CRA and he properly considered that they must be treated with caution. Initially he was of the opinion the best guide to the market was provided by his Comparables 1, 3 and 5 which were within the Thirteen Streets area. He also listed Comparable 2 but this property was located on the harbour front with no vehicular acess. Under cross-examination he agreed that it was not a useful comparable. He was content to base his valuation principally on Comparables 1, 3 and 5 situate at No. 9 Pang Ching Street, 21 Ying Yeung Street and 19 Ying Yeung Street all within the Thirteen Streets area.

14. Mr. Healy's adjustment for location to these comparables, which reflected unit rates of close to $3,000 per square foot, was -15% for what he described as vehicular access. He also adjusted upwards for time from between 8% and 13.5%. This produced adjusted unit rates of $2,981, $2,888 and $2,923. The Tribunal in Lam Kit v. Director of Lands (supra) also considered the application of the Thirteen Street comparables to resumed properties within the CRA. It accepted the Respondent's then valuer's opinion that the Thirteen Streets were generally inferior to Pau Chung Street. We also find that so far as development potential is concerned, the CRA locality is slightly superior to the Thirteen Streets area.

15. In that earlier case the Respondent's valuer made a +13% adjustment for location to support his original valuation of $2,350,000 which was later increased to $2,500,000. The Tribunal also held that he omitted to make three further adjustments in favour of a Pau Chung Street property compared to the Thirteen Streets area. No detailed analysis of Wang Cheung Street was made.

16. Mr. Healy's vehicular access adjustment was based on the fact that the Thirteen Streets are through streets while Wang Cheung Street is a cul-de-sac. If that were the only difference, no doubt it would be strongly arguable that merely this single adjustment was appropriate. However, there are a number of other differences, some of a narrower and some of a broader nature, which must also be assessed.

17. The Thirteen Streets while through streets are very narrow, one-way and not serviced by rear lanes. Wang Cheung Street although a cul-de-sac, is two-way and has a full street width of 7.5 metres compared to the Thirteen Streets which are about 5.5 metres wide. Further, Wang Cheung Street is serviced along both sides and at the cul-de-sac end by rear lanes. We accept that because of its cul-de-sac nature, Wang Cheung Street is inferior to CRA through roads such as Pau Chung Street. The same finding does not necessarily apply to any direct comparision between Wang Cheung Street and the Thirteen Streets.

18. The sole physical factor which favours the Thirteen Streets is that they are through streets. On the other hand, they are only one-way, extremely narrow and not serviced by any rear lanes. These latter factors if not outweighing, at least go a considerable way, to counterbalancing a through-way advantage. So far as the physical character of all these streets are concerned, their respective comparative advantages are probably largely balanced by their disadvantages.

19. However, the location of the CRA , after disregarding its zoning under the Town Planning Ordinance, has better potential for redevelopment than the Thirteen Streets area. We confirm that we have wholly ignored any affect on value of the CRA zoning in coming to this conclusion. We find that the CRA locality, including Wang Cheung Street, is slightly superior to any of the Thirteen Streets. If Mr. Healy's comparables are approached on this basis, with adjustment for the time factor only, they produce unit rates of $3,460, $3,330 and $3,370 per square foot. After an allowance for location, they would become marginally higher.

20. Turning to broader considerations, the larger area within which the CRA is situated, bounded by Sung Wong Toi Road, Mau Tau Chung Road, Kowloon City Road and Mau Tau Kok Road, is generally more valuable than the adjacent area separated to the East by Kowloon City Road within which the Thirteen Streets are situated. The predominate motor repair garage use of the Thirteen Streets and the rents achieved, appear to be the consequence of market forces.

21. On the other hand, the areas adjacent to the CRA are generally superior, with a more retail activity, as indicated by Mr. Tam's comparables. The smaller area within the CRA is of lesser value. However, we share the Tribunal's view expressed in Lam Kit v. Director of Lands(supra)that the better CRA streets such as Pau Chung Street are superior in value to the Thirteen Streets. We also share the conclusion that the limitations on development imposed by the CRA in 1986 have adversely affected use and reduced market value.

22. The actual widespread use of areas within the CRA such as Wang Cheung street for workshop and repair garages, is not therefore solely caused by market forces. However, we reject the claim that if the area had not been restrictively rezoned in 1986, there would have been any significant retail or commercial developments, in Wang Cheung Street.

23. There would equally not have been any significant filtering of Mau Tau Kok retail businesses into Wang Cheung Street. We appreciate that Mr. Tam's Hau Fook Street analogy in Tsimshatsui, was not directly used for valuation purposes but merely as an example of possible urban development. We consider that, even on a much more modest scale, Wang Cheung Street was unlikely to enjoy any similar benefits.

24. Therefore while some allowance must be made for the adverse affect of the CRA on value, on the evidence it will be far less that Mr. Tam claimed. Returning to Mr. Healy's Thirteen Street comparables they were within a relatively narrow range. So far as time is concered the most recent was the Comparable 1 sale effected on 29th May 1992. When adjusted for time to the resumption date of 3rd October 1992, by Mr. Healy's +8% allowance, it results in an adjusted unit rate for this comparable of about $3,460 per square foot. The other time adjusted comparables at $3,330 and $3,370 per square foot, suggest that roughly 2% per month is a little on the low side. A rate of about $3,500 per square foot would appear to be more accurate.

25. It remains to make allowance for the better location CRA locality. On the evidence this can only be approached in broad terms. If 10% were allowed it would increase the latter unit rate to $3,850 per square foot. This may be contrasted with the unit rate of Mr. Tam's best comparable which we have already held was excessively highly calculated at $5,832 per square foot.

26. When we review all this evidence, we find that the cul-de-sac nature of Wang Cheung Street supports varying values depending on the location of a property within the street. In the absence of any special features affecting a particular property, for those near the entrance of Wang Cheung Street at its junction with Pau Chung Street, a slightly higher unit rate of $4,300 per square foot would be appropriate. On the evidence, properties towards the middle of the street would have a lower value in the region of $4,000 per square foot and those at the end would decline to about $3,750 per square foot.

27. We are satisfied that the subject property, being towards the middle of the street, would for the area covered by buildings, have an open market value of about $4,000 per square foot. Mr. Tam adopted a 1/5 rate for the remaining yard area compared with Mr. Healy's 1/6 rate. We prefer a more appropriate 1/8 rate. On a vacant possession basis, this results in the sum of $1,800,000, made up as follows:

Ground floor:
	424 square feet @ $4,000 =	1,696,000
Yard:
	182 square feet @ 1/8 rate =	91,000
		1,787,000
	SAY,	$1,800,000

28. In this application only two months remained before the expiration of the current lease. We affirm the view expressed in Ngai Kai Suen v. Director of Lands CLR No.2/94, that for a resumption valuation, it is an unrealistic exercise to capitalise such limited residues. Deferment periods are equally artificial and unnecessary.

29. Mr. Healy deferred his capital value at 10% for the unexpired two months of the current lease. Mr. Tam used a deferral rate of 9% for a comparable analysis and a 10% capitalistion rate in his alternative investment method valuation. If adjustment for the lease were required in settlement negotiations, it would probably be minimal. In recent other cases the Tribunal has used 9% as a deferral rate but adopted a 6% rate for any remaining residue of a lease.

30. If those twofold rates are used the unexpired lease would be valued at $13,500 resulting in the following valuation:

$1,800,000 x .98516 = $13,500 + $1,773,300 = SAY =

$1,773,300 $1,786,800 $1,787,000

31. This exercise only results in a $13,000 or 0.7% difference in a valuation of $1,800,000. In a valuation of this size, a difference of less than 1% is negligible. We therefore propose to leave our primary calculation of $1,800,000 unchanged.

32. We therefore determine compensation in the sum of $1,800,000. Leave is reserved to apply for the rate of interest, if not agreed, to be determined by the Tribunal 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 11th day of May 1995.