NAM CHUN INVESTMENT CO LTD v. THE DIRECTOR OF LANDS

LDLR 3 OF 2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LANDS RESUMPTION APPLICATION NO. 3 OF 2000

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J U D G M E N T

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H H Juge Yung:

1. The Applicant is seeking compensation for its land resumed by the Government under the Land Resumption Ordinance. This case was initially heard by H H Judge Chow together with Member Lo and it went on appeal to the Court of Appeal and finally to the Court of Final Appeal. The appeal of this case was heard together with another appeal from this Tribunal of a different panel. The same point of law was involved in these two Appeals. The Court of Final Appeal allowed the Government's appeal and remitted the case back with the direction that the compensation be reconsidered. At the previous hearing, in valuing the land resumed the Tribunal employed the method of comparing like with like adopting the comparables used by the Applicant's expert. The Government's expert Mr. Lau had asserted at the previous hearing that the open market prices of these comparables contained an element of hope value and for that reason considered those comparables inappropriate. At the previous hearing, the Tribunal ruled that Mr. Lau's evidence on hope value was irrelevant. The Court of Final Appeal held that this ruling was wrong and allowed the appeal on this ground with the direction to this Tribunal: "to reconsider the assessment of the compensation in each case on a full evaluation of all evidence and in the light of our judgment. "

2. While the Court of Final Appeal indicated clearly in its judgement that there should be no objection to the same panel re-considering the compensation, it also expressed a preference that it should be heard by a differently constituted Tribunal. However such preference was not so embodied in its perfected order for reasons unknown to us. However it must have been because of these remarks in the judgment of the Court of Final Appeal that HH Judge Chow rightly listed the hearing before us, as none of us being a constituent member of the original panel at the previous hearing.

3. Initially I had some doubt as to whether it is proper for parties to file further evidence. If the original panel were to re-consider the assessment, it would have been most undesirable to allow a party to re-open its case by adducing fresh and additional expert evidence. In any event it would not have been as of right for either party to do so and to do so is tantamount to have another bite of the cherry. As this is not the original panel, the reconsideration of assessment had to be by way of re-hearing. Apparently both parties made use of such opportunity of re-hearing the matter all over again to adduce fresh expert evidence to fortify their case in the light of the judgment of the Court of Final Appeal. Each party apparently had no objection to the other calling further and additional evidence and the listing Presiding Officer thought it proper to allow such course being adopted by the parties on setting the case down for hearing before us. That being the case I did not raise any query at the hearing.

4. The common grounds as have been ascertained at the very early stages are :

(1) on the true and correct interpretation of the Court of Final Appeal's direction to re-assess compensation, we are free to adopt whatever comparables appropriate on the evidence;

(2) the open market value of the land resumed is what the Applicant's expert arrived at using the method of comparing like with like and adopting his comparables.

5. There is only one main issue in dispute, namely, whether the Applicant should be compensated for the zoning or planning benefit of the subject land. Parties were poles apart in the interpretation of the judgment of the Court of Appeal in this regard. Mr. Miu for the Respondent argued that benefit wholly belonged to the Government which it had not disposed of when leasing the land with restrictions to build. Therefore if any price was paid on the expectation of the removal by the Government of the restrictions to build it must have contained a hope value or must have been inflated by speculative element. That being the case, he contended that the Applicant's comparables could not be used despite of the fact that they were otherwise suitable comparables. I understand that at the previous hearing the Respondent has abandoned their attempt to challenge the suitability of the Applicant's on other grounds. The Respondent has not revived this attempt at the hearing before us. The crux of the Respondent's contention was that no planning benefits of the subject land should be taken into consideration.

6. On the other hand Mr. Yu argues that the intrinsic value of the subject land with its planning benefit has value and should be taken into account when assessing compensation for the loss of the Applicant under the principle of equivalence. It should be noted that Mr. Yu is not arguing that the Applicant should be compensated for the pecuniary loss for losing the opportunity of fully utilising the development potential associated with the zoning and planning benefit. He is only contending that on the true and correct interpretation of the relevant statutory provisions in the light the judgment of the Court of Final Appeal, the intrinsic value of the land associated with zoning and planning benefit should not be excluded from consideration in assessing the value of the subject land. He submitted that it is not the Court of Final Appeal's view that planning benefit should not be taken into consideration. He argued that this point concerning zoning and planning benefit was clearly set out in the Respondent's Notice of Appeal and one would expect the Court of Final Appeal would have said so if their Lordships agreed with the contention of Respondent.

7. Both parties went into some length in dissecting the judgment of the Court of Final Appeal, took out here and there pieces that could be made use of and pieced them together to form their respective argument to support their case. It is amazing that they were able to reach different and opposite conclusions as to the views and intention of the Final Court of Appeal and both conclusions are equally convincing. However only one party can be right and the other one must have displayed remarkable ingenuity and ability in arguing his case.

8. The Court of Final Appeal allowed the Respondent's appeal on the ground that the evidence of hope value by the expert had been wrongly excluded as irrelevant and immaterial. Whether or not there was an element of hope value included in the prices is a matter of fact to be determined on the evidence. This is undisputedly the ratio decidendi of the judgement. Needless to say it is binding upon us. In the course of giving judgment the Court of Final Appeal expressed certain views. We are expressly directed to re-assess compensation in the light of the judgment and the judgment must include these views. Counsels had different interpretation of these views. If the views are necessary for the decision and therefore form part of the ratio decidendi it would have been binding upon us. If they are obiter, we do not see any good reasons to disagree with them particularly we are directed to re-assess compensation in the light of them. Therefore it would not be necessary for me to classify these views as obiter or otherwise. The correct approach is to reconcile these conflicting understandings of these views. It is difficult to believe conflicting views would have in fact given or intended by the Court of Final Appeal.

9. If the judgment of the Court of Appeal was read in full, Mr. Yu was right in submitting that the Court of Appeal did not go so far as contended by Mr. Miu that zoning and planning benefit should be disregarded. What is to be disregarded is that part of the inflated price which is attributable to speculating on the Government removing the restrictions to build. The ultimate question is whether the price is inflated. The intention of the purchaser is not conclusive. The analysis given by the Court of Final Appeal that there could be a speculative element in the prices of the Applicant's comparables are "reasons of judgment" (as described by Mr. Miu) for holding that it was wrong to exclude the assertion by the Respondent that those prices contained an element of hope value. The Court of Final Appeal did not say that those comparables cannot be used or the method of comparing like with like was inappropriate in this case or in any other similar case. It was spelt out clearly that only if the Government's contention was correct that those comparables could not be used without adjustment. The Court of Final Appeal gave an analysis of the way the speculation could take place, namely that people nowadays speculated on the Government charging a less premium on modification of the terms of the lease. Mr. Miu went so far as to argue that the Court of Final Appeal in fact found that those comparables must have contained a speculative element, and could not be used as comparables. He ventured an argument that these findings form part of reasons for judgment, even though they might be wrong the Applicant had no recourse. We do not have to deal with this proposition. As we indicated we had no reasons not to follow the dicta of the Court of Final Appeal, obiter or not. However, we are of the view that the Court of Final Appeal made no such findings in the comparables used by the Applicant. The Court of Final Appeal was of the view that speculation leading to inflated prices was a probability in the market and such probability could not be ignored. On the other the Court of Final Appeal did not generalise the situation to the extent that in every single transaction in agricultural land the purchaser has to pay a inflated price. Quite on the contrary it gave directions to us to make our own findings as to whether the contention of the Respondent was correct.

10. In its analysis of the property market, the Court of Final Appeal pinpointed the particular form of speculation, namely speculation on the Government not charging the full premium on the modification. No definition was given as to the meaning of full value. But implicitly it must be such an amount that when added to value of the land would equal to the value of building land.

11. In attempting to show the kind of speculation anticipated and explained in some details by the Court of Final Appeal in fact happened generally and therefore must have happened in the instant case, the Respondent led evidence of the practice of the Government charging premium on modification of terms. Mr. Chan however on being pressed had to concede there was no evidence that the prices of the comparables were in fact inflated. In particular, there was no evidence was led whether or not the land market was on the rise at the material time. It must be borne in mind that according to the analysis of the Court of Final Appeal the condition giving rise to speculation was the fact that the Government was lagging behind the market and the market was rising. No evidence was adduced nor assertion made that the land market was rising. At the material time the market for residential flats was in a slump. Even if I can take judicial notice of that which I doubt, there was no logic to infer that the land market was on the rise in contrast with the residential flats market. Of course I do not lose sight of the fact that the Court of Appeal was not generalising the speculation situation in the land market. Therefore, there could still be speculation leading to inflated prices in a falling market or stable market. It is a matter of evidence.

12. What remained of the evidence of Mr. Chan as to speculative prices of the comparables is only his opinion which is no more than a bare assertion. Sometimes, though it would be rare, the bare assertion of an expert might suffice, but not in this particular case. The issue is hotly disputed and the Government who is command of resources, means, and relevant data far more than the Applicant should undertake a comprehensive survey of the market or conduct some other analysis. At the very least they could have make an analysis on some of comparables if not all especially those for which premium had been made for conversion to building land. Furthermore Mr. Chan's understanding of speculative price is muddled. In effect whenever the purchaser had a profit-motive, Mr. Chan would regard him as a speculator. In all these circumstances, his bare assertion cannot be relied upon.

13. The crux of Mr. Miu's argument was that whenever zoning or planning benefit was reflected in the price of the land, it would contain an element of speculation for which the Government need not compensate the claimant. He used very interesting mathematical models and graphs to illustrate his points of argument. I do not find them useful at all. In words or in these models, he worked out the value of the land with building restrictions(say $x) without regard to zoning and planning benefit, subtracted the sum from the value of the building land($P(x) and obtained the full premium ( $P). He then argued if the purchaser paid for the land with building restrictions a price more than the value of the land with building restrictions say($x(y). After paying the full premium ($P), the costs of the building land would be ($P(x(y). Therefore the purchaser would suffer a loss of $y. To avert the loss he would endeavour to negotiate down the premium the Government would charge him. The whole point of his argument depends on the correctness or suitability of the valuation methods of the land with building restrictions. The correctness or suitability of the Respondent's methods of valuation method in this case was disputed. The argument by Mr. Miu was a circular one. In short he assumed the correctness or suitability before he set out to prove it.

14. The method of comparing like with like by the Applicant's valuer, Mr. Lau, is undisputedly a reliable method in arriving at the open market value of the subject land. In the instant case the only challenge to the comparables is that they were inflated by an hope value. The alternative methods as suggested by the Respondent's suffers the disadvantage of ignoring the intrinsic value associated with the zoning and planning benefit of the subject land. Mr. Miu's argument is of general application. If he is right, the compensation would have to be assessed by the alternative methods he suggested in every case and whenever the open market value exceeds the assessment by the Government, it would be alleged and proven it contains an hope value and cannot be used. We agree with Mr. Yu that this cannot be right. Mr. Yu gave an example in an English case to illustrate his point. A landowner could not practically derive any profit working his land or making use of the land. However because of its location it was essential to the neighbouring lands if they were to be developed. The location therefore carried its intrinsic value had a price which was over and above that could be worked out by the methods proposed by the Respondent. This is the one of the example. A piece of land may have intrinsic value of every kind which might be associated with zoning and planning benefits.

15. Section 12(d) permits the open market value as the basis for compensation subject to certain restrictions. Matters specified in section 4(1)(a), (c) ,(d),(e),(f),(g),(h),(i) of the Town Planning Ordinance should be excluded from consideration. Section 4(1)(b) was conspicuously omitted. For these reasons Mr. Yu submitted zoning and planning could be taken into account. This sub-section specifies zoning matters applicable to the Applicant's comparables and make them truly comparables as opposed to other comparables (subject to the possible existence of hope value if any). The Court of Final Appeal must have realised this and expressed the view clearly that even if their prices contained a hope value it did not follow that they should be disregarded. A fortiori, that they should be used if there is no evidence that their prices contained a hope value. In any event they were not challenged on other grounds.

16. The final question to be asked is whether under all circumstances on the balance of probability it can be inferred that the prices of at least some of the comparables were inflated beyond their true values. In the course of hearing, Mr. Lau on the request of our learned Member supplied certain information relating to some isolated transactions involving modification of terms of the leases and sale prices of auctioned land. However, the parties did not seek to use this information. No argument was made in respect of them and they have not been referred to in any way by the witnesses or by counsels in their submissions. Under these circumstances, I do not think that any use can be made of it. In any event the fact the prices of certain auctioned building lands in other district had much a lower price cannot throw light on whether or not the comparables used by the Applicant in fact contained any hope value. First of all it is not certain whether they are suitable comparables. It has never been the argument or the case of the Respondent that the Applicant's comparables carries a price higher or much higher than comparable auctioned building land and therefore the prices must have been inflated beyond its true value. If put forward, this argument is unanswerable and must have been obvious to its advisers. If the Respondent has seen it proper, appropriate and viable to do so, they would have and should have adduced the evidence at the hearing or referring to it in the evidence of its expert after the information was tendered. Secondly, it may raise more questions than it can answer before it can be used as comparables. For example, it is reasonable to assume the Government would not charge a premium when giving permission to build higher than the price of comparable building lands. Subtracting this premium from the prices from the open market value of subject land, the resulting figure is still much higher than the true value contended for by the Respondent. This tends to show the approach is incorrect. It is no surprise that Mr. Chan, the valuation expert of the Government, did not seek to make use this additional information. It would a slap in the face of the advisers of the Respondent if it is alleged they for any reason omitted to use this particular information or similar approach at the hearing. Furthermore the open market value of the subject land is not in issue. For all these reasons I do not think it justified to make use of this information.

17. When a purchaser buys a piece of agricultural land with a view to obtain a permission to build, the price he pays does not necessarily exceed the value of the land. He must have in his mind that he has to pay a premium in future on modification of lease terms, of course, the lesser the premium the better. The same can be said to open market price he is will to pay. The purchaser need not be the one who develops the land. Different developers have different capability and ability of making profits. Their profit margins vary with their ability, with the intrinsic values of the land and with other things. If they have to pay for a piece of land over and above the real value, the excess can be absorbed by the profit margin and not necessarily by hoping the Government to charge a lesser premium. The more optimistic the developers are, the greater would be the expected profits in some years to come when they launch their flats in the market. Perhaps this is the time lag the Court of Final Appeal had in mind. This is undoubtedly true in the property market in Hong Kong and everywhere else. This excess over the real value of the property in any event should not be compensated for. However it does not follow that the developers have to pay more than the true value of the land in every case although they can afford to and are so motivated. The ultimate acid test is whether there is such evidence that the purchasers of the comparables in fact paid a price more than the real value of the land.

18. Mr. Chan, the expert for the Respondent contended that the comparables used by the Applicant contained an element of hope value and should not be used. No evidence was given or what allowance or adjustment should be given for any of these comparables. He did not even see there was a ghost descending the stairs, but assumed there was one because he believed there should always be a ghost descending the stairs of the property market. Indeed he admitted that the hope value in these comparables cannot be quantified. Nor was there evidence that the any of the purchasers of the Applicant's comparables in fact paid an inflated price in the expectation that the Government would not charge a full premium on modification of terms or paid an inflated price for any reasons.

19. Under these circumstances, the Applicant should be compensated on the basis that the unit rate of the subject land is $12,000/m². The Applicant's adduced further evidence as to capitalisation rate and which is accepted. It is not in dispute that the rental of $33,000 is secure and below market rate. Except for these items the compensation arrived is the same as that in the previous hearing.

20. The details of the compensation are as follows:

Valuation of resumed Lots
a.	Tenanted Area
	Term
	Monthly Rent		$33,000
	Rate and Govt Rent @ 8%		$2,640
	Net rent		$30,360
	12 months		12
	Net annual income		$364,320
	YP @ 7.5% for 1.75 yrs		1.584
	Term Interest		$577,083
	Reversion
	Tenancy area resumed		4,056.11 m2
	OMV (VP value)		$12,000/m2
			$48,673,320
	PV @ 12.9% for 1.75 yrs		0.8087
	Reversionary interest		$39,362,113
	Market value of interest in Tenancy Area		$39,939,196
b.	Untenanted Area
	Untenanted area resumed		1,419.29m2
	OMV (VP value)		$12,000/m2
	Market value of interest in Untenanted Area		$17,031,480
	Open market value of resumed Lots		$56,970,676
	say		$56,970,000
			==========

21. An order for compensation is to be made in the sum of $56,970,00 and there also be a order nisi for costs in favour of the Applicant on High Court Scale to be taxed if not agreed.

Member Lam:

22. I have reservation to the above decision. I have a few observations on the evidence produced, particularly, those in Exhibit A6. I have also made an analysis of the data therein displayed.

23. From the North-west N.T. auction sales (all provided by Mr. Lau and within a few months from the Resumption Date), I observed that the Accommodation Value of TSWTL 27 in Tin Shui Wai is only $7,450 per sq. m. and further from the four lease modification cases (also provided by Mr. Lau), the premium payable is in the range of $5,070 per sq. m. to $7,700 per sq. m. I considered that the second lease modification case being residential development within a CR zone, is obviously the most suitable for the Tribunal's reference in relation to the other three, which are all within Zone R(C) and therefore, its premium at Accommodation Value of $6,360 per sq. m. is meaningful for the purpose of testing the validity of the two parties' arguments.

24. Converting the assessed land value of the subject lot (i.e. $12,000 per sq. m.) into Accommodation Value by dividing it by the approximate Plot Ratio of 2.9 (i.e. the total permitted GFA for Zone R (A)3 divided by the area of the zone), I arrived at an Accommodation Value of $4,100 per sq. m. This, in my view, gives an indication that the price payable for the agricultural land within the zone after lease modification by far exceeds the auction land price and it should still exceed the auction land price even though whatever reasonable adjustments were to be made to account for the very minor difference in physical attributes.

25. I also considered that the auction land prices provided are beyond doubt relevant in term of transaction timing and suitable for comparison in term of location and land use zoning. I dismissed the possibility that some of the sales might have been concealed so as to distort the full picture of the market as the government publicizes the auction statistics from time to time. I agreed that the lease modification cases provided by Mr. Lau might be part of the over-all lease modifications concluded in North-west N.T. This, however, should not give rise to grave concern as to the comprehensiveness. I considered that the second case does provide useful information because of its CR zone and proximity to the subject lot and therefore, it does serve to indicate the usual level of premium acceptable to the developer and the government.

26. Back to the formula for calculating premium, I considered that it is well known to all developers. The formula has made it very clear that the premium is derived by subtracting the agricultural land value from the building land value. I noted the advice of the two parties that this formula is contained in a policy practice note open to the public. I am of the view that there should not be any controversies as to whether the value of zoning, if any, should go to the developer or government. By this formula, it is quite clear that it belongs to the government (if there is such value), as it is a lease modification where only the agricultural user stipulated in the lease would be taken into account. The zoning element is not part of the formula and no value has been given for it so that such value needs to be added to or subtracted from any other values involved. It is relevant to the lease modification only because firstly, the user in the lease after modification must be the same as the zoning, and secondly, with the benefit of a land use zoning permitting building development, the government is obliged to process the developer's lease modification application. That being the case, I concluded that the amount paid by a developer in excess of the auction land price is not paid because of the zoning but something meaningful to the developer himself.

27. On the valuation side, I considered that both the government and the developer do not tend to diverge significantly on the agricultural land value but do in the building land value. I understood that the government is bounded by the rule of assessing the building land value prevailing around the time of lease modification. The government is so bounded because she does not need to be lucrative but fair. The developer, whilst accepts such rule applicable in lease modification, in reality, bases on his assessed future market price (for finished units) in deciding whether the premium calculated by government should be accepted or not. I disagreed to Mr. Lau's opinion that if the market will go down, the developer will be charged a lower premium. I viewed that this argument is untrue because the government do not bother with the market position two or three years later but around the time of lease modification. So long as the prevailing market is not falling, the premium charged will not be less. Contrary to this stance, the developer needs to assess the future market two to three years later when the development is about to complete. The developer's assessment on the future market is absolutely a kind of speculation for he has a chance of getting it either right or wrong. This speculation has an impact on the level of premium acceptable to the developer. If the developer considers that the market will soar two or three years later, he will simply forget government's calculation and pay a bit more than the agricultural land value so long his assessed profit margin is great enough to cover the extra sum payable. If the market will slump, the developer will stop making lease modification applications and cease buying the agricultural land at a price above the agricultural land value. This phenomenon explains as to why in the period where the property market booms, developers will rush to put in applications for lease modification but in the case of a decline, developers will refrain at all from applying (refer to statistics released publicly by the Lands Department for the last few years).

28. The property market started to slump since late 1998. In early 1999 when the resumption in question took place, it was not the consensus that a major re-shuffle of the market to such an extent as we all have seen today would have undergone. The consensus appeared that it would resume thriving very soon. I was of the view that an extra sum above the agricultural land value was paid for buying the subject agricultural land in anticipation of a greater profit margin that would be resulted from a thriving market two or three years later.