COMMISSIONER OF RATING & VALUATION v. AGRILA LTD. AND OTHERS

FACV Nos. 1 and 2 of 2000 (Consolidated)

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FACV No. 1 of 2000

FINAL APPEAL NO. 1 OF 2000 (CIVIL)

(ON APPEAL FROM CACV NO. 107 OF 1999 )

(Consolidated with Final Appeal FACV No. 2 of 2000)

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J U D G M E N T

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Chief Justice Li :

1. I agree with the judgment of Sir Anthony Mason NPJ.

Mr Justice Bokhary PJ :

2. I agree with the judgment of Sir Anthony Mason NPJ.

Mr Justice Chan PJ :

3. I agree with the judgment of Sir Anthony Mason NPJ.

Mr Justice Litton NPJ :

4. I agree with the judgment of Sir Anthony Mason NPJ. I confine my remarks to the 59 development sites and will use the same abbreviations as in Sir Anthony Mason NPJ's judgment.

The artificiality of the statutory scheme

5. The difficulty springs, as I see it, from the artificiality inherent in ascertaining the "rateable value" for the purposes of the Rent Ordinance and Rent regulation 2. The statutory scheme piles fiction upon fiction. First, Rent regulation 2 requires the Commissioner to assess the rateable value for government rent purposes as if the land were a tenement liable for assessment to rates under the Rating Ordinance. Secondly, in making that assessment the Commissioner is required by s.7(2) of the Rating Ordinance to assume that the land is let from year to year. The second assumption flows necessarily from the first, having regard to the way the two Ordinances intermesh for the purposes of assessing the government rent payable.

The "hypothetical tenant from year to year"

6. The concept of the "hypothetical tenant from year to year" inherent in s.7(2) of the Rating Ordinance is modelled on the Parochial Assessment Act 1836 dealing with the assessment of hereditaments to poor rates in England. Section 1 of that Act provided for rates to be assessed "upon an estimate of the net annual value of the hereditaments ... that is to say of the rent at which the same might reasonably be expected to let from year to year ...". Under this regime all kinds of "hereditaments" have been assessed to rates when, normally, one would not have expected them to have been let at all : For instance, the pumping station and "outfall works" in London County Council v. The Churchwardens of Erith [1893] AC 562. Once it is determined that the hereditament is rateable then the authority responsible for making the assessment must simply do the best it can in applying the "hypothetical tenant" formula. This would not be easy in some cases, as Lord Herschell LC acknowledged in London County Council v. The Churchwardens of Erith at p.586 : There a central issue was whether, in the process of assessing the London County Council to rates, they as owners of the hereditaments could be treated as one of the hypothetical tenants. The answer given by the House of Lords was Yes.

The Commissioner's approach

7. As regards the 59 development sites in this case, the assessments required the Commissioner to apply the "hypothetical tenant from year to year" formula at "the relevant date" when those sites were in fact at different stages of development. For the sake of uniformity the Commissioner treated them all as unimproved sites. This favours the respondents and may well be the right approach. We have heard no arguments on this issue.

8. What is clear is that, in the assessment exercise, the Commissioner has in effect broken new ground. This was inevitable since, as is agreed by all, under rating law "a house in course of construction cannot be rated" (as per Lord Wilberforce in Dawkins (Valuation Officer) v. Ash Brothers and Heaton Ltd [1969] 2 AC 366 at 385-H) : There are accordingly no precedents to look to in circumstances such as these. This difficulty is inherent in the statutory formula laid down in Rent regulation 2 itself : "the rateable value of the leased land ... shall be ascertained as if the leased land were a tenement liable for assessment to rates under the Rating Ordinance". To arrive at the figure at which the site might have been let from year to year, it is legitimate to adopt different approaches, since the Rating Ordinance does not lay down how "the rent at which the tenement might reasonably be expected to let" in terms of s.7(2) is to be ascertained. If contested, this is essentially a matter of expert evidence. One method is, in effect, to imagine the site to have been bought by an owner at the relevant date and then to ask what kind of return that owner might reasonably have expected the site to yield from year to year. That would, in essence, represent the hypothetical "rent" in terms of s.7(2). This, as I understand it, is how the Commissioner made the assessment in this case. He adopted a two-stage process : (1) He asked himself what the owner might have paid for the site as a vacant site at the relevant date, bearing in mind all its characteristics (applying the rebus sic stantibus principle) : this was, in effect, the market value of the site. (2) Having done this he still had to reach an annual value, so he applied a decapitalization rate of 4% to reach the rateable value for government rent purposes.

The "preliminary questions of law"

9. The difficulty facing the Court of Appeal, and this Court, is that the Lands Tribunal did not deal fully with the respondents' appeals under s.26(1) of the Rent Ordinance. The Tribunal simply answered ten "preliminary questions of law" : The matter was left in the air as to whether, assuming that the answers were in the Commissioner's favour, his methodology in arriving at the rateable values for the sites (and hence the relevant entries in the Government Rent Roll) was unchallenged. The Court of Appeal, and this Court, have been left under the handicap of grappling with difficult and elusive concepts in a vacuum. This case demonstrates, once again, the dangers inherent in first instance tribunals seeking shortcuts by answering preliminary questions of law. I understand that this approach was by the agreement of the parties. In retrospect, this was regrettable. It would have been far better to have selected some sample cases and have them heard to their conclusion. If the Tribunal were to allow a particular appeal it would then have proceeded under s.27(1)(c) of the Rent Ordinance to direct the Commissioner to amend the Government Rent Roll in a specific manner. Proceeding thus, an appellate court would have been able to see with clarity where the true issues lie.

Conclusion

10. Having by our judgment restored the legal foundation for the entries in the Government Rent Roll, the appeals (except perhaps for those relating to the two agricultural sites where the core issue was whether they were exempt from government rent) will presumably resume in the Lands Tribunal.

11. I agree with the orders proposed in Sir Anthony Mason NPJ's judgment.

Sir Anthony Mason NPJ:

Introduction

12. These two consolidated appeals, the first by the Commissioner of Rating and Valuation ("the Commissioner"), the second by the 59 companies ("the respondents") which have been assessed to rent by the Commissioner, are brought from a decision of the Court of Appeal (Mayo JA, Keith JA and Ribeiro J). By its decision the Court of Appeal dealt with appeals by the Commissioner and the respondents from a decision of the Lands Tribunal consisting of answers given by the Tribunal to certain preliminary points of law which it had stated in appeals brought by the respondents against assessments to rent made by the Commissioner. The points of law were stated before the Tribunal embarked upon the hearing of evidence. So facts have not been found. The absence of findings presents problems in answering the questions.

13. The case concerns the assessment of rent during the period of construction and development only, payable by lessees of Government leases of land in course of development or redevelopment, though in some cases the development has not advanced beyond the erection of hoardings at the site. The respondents, who are the lessees of the relevant 59 development sites, acquired those sites after 27 May 1985 (when the Sino-British Joint Declaration was ratified) and before 1 July 1997 (when the exercise of Chinese sovereignty over Hong Kong was resumed). The sites may be conveniently divided into three categories, namely (i) development sites; (ii) redevelopment sites; and (iii) sites on agricultural land.

14. The 33 development sites were vacant areas which were acquired as new Government grants, surrenders and regrants or land exchanges for development purposes. The 24 redevelopment sites consisted of land acquired by the respondents for redevelopment, the old structures on the land having been demolished pending redevelopment. The two agricultural sites were acquired for future development, following a surrender and regrant.

15. The leases for the development sites were granted between 27 May 1985 and 30 June 1997. The redevelopment and agricultural sites were the subject of leases which were due to expire before 30 June 1997 but were extended to 30 June 2047 under s.6 of the New Territories Leases (Extension) Ordinance, Cap. 150 ("NTLEO"), except in one case where the lease was extended by agreement.

16. The Commissioner made the assessments under the Government Rent (Assessment and Collection) Ordinance, Cap. 515 ("the Rent Ordinance") and the Regulations ("the Rent regulations") which purported to be made under the Rent Ordinance. The Rent Ordinance came into operation on 30 May 1997. Its stated object was "to provide for the assessment and collection of rents on certain Government leases extending past 30 June 1997". The leases are those which extend beyond 30 June 1997 by virtue of grants or renewals made after 27 May 1985 pursuant to Annex III of the Joint Declaration. The Rent regulations came into force on 6 June 1997.

17. It is not disputed that by virtue of either s.3(a) or s.3(b) of the Rent Ordinance, that Ordinance applies to the leases under which all the sites in question are held. Section 3 of the Ordinance provides :-

The relevant leases all constitute "applicable leases" for the purposes of s.2 of the Rent Ordinance.

The dispute

18. At the end of June or early July 1997 each respondent received a demand note from the Commissioner, claiming Government rent in respect of the relevant site under the 1997 legislation. The sums demanded in the notes were substantial and were based on 3% of the rateable value of the relevant property. The respondents had previously been paying either a nominal rent (often an amount of $1,000.00) or no rent for the sites.

19. The respondents' challenge to the Commissioner's assessments arises mainly, though by no means solely, out of the relationship between the Rent Ordinance and the Rating Ordinance, Cap. 116. The Rent Ordinance employs the concept of "rateable value" as the basis for assessment for Government rent. The Rating Ordinance applies the same concept for the purpose of assessing a ratepayer's liability to rates. Although the two régimes are distinct and serve two different purposes, the Rent Ordinance applies the Rating Ordinance to the ascertainment of rateable values for rent purposes under the Rent Ordinance, subject to any specific provisions in the Rent Ordinance (s.8(2)). The consequence is that the assessment of Government rent is based upon valuation assumptions stated in s.7A(2) of the Rating Ordinance. This is now common ground between the parties.

20. It is also common ground between the parties that the relevant sites were not rateable under the Rating Ordinance. While under construction, the sites were not regarded, for rating law purposes, as being in rateable occupation.

21. The respondents claim that rent is not payable while the sites do not attract a liability for rates. The Commissioner contests this claim. The substance of the dispute concerns two main issues : (1) whether it is permissible to ascertain for the purposes of assessing Government rent under the Rent Ordinance a rateable value (other than nil) when that land is not liable for rates under the Rating Ordinance because it is not in rateable occupation; and (2) whether, in ascertaining rateable value for rent purposes, it is permissible to take into account the development potential of a vacant building site pending or during construction when the site is not liable for rates. The Commissioner contends for an affirmative answer to both questions. The respondents contend for negative answers.

Proceedings in the Lands Tribunal

22. When the matter came before the Lands Tribunal in the form of a consolidated hearing of the respondents' appeals, the parties agreed to a formulation of 10 preliminary points of law covering the three types of site in question. As Point 10 was disposed of by agreement, the first nine Points only were argued and dealt with by the Court of Appeal. Points 1 to 4 relate to the development sites, Points 5 to 7 relate to the redevelopment sites and Points 8 and 9 to the sites on agricultural land.

23. Points 3, 6 and 9 raise questions relating to the Basic Law. The other points relate to rateability, rateable value and valuation. They raise questions of construction of the statutory provisions and questions of ultra vires.

24. The Tribunal answered Point 1 (the first issue stated above) by holding that the Commissioner could ascertain the rateable value of leased land even if the land was not liable to assessment under the Rating Ordinance. Although the Tribunal's answer to Point 4 relating to the valuation of development sites (the second issue stated above) is not entirely clear, the Tribunal stated in its reasons that the developer's intention to develop the land is not a consideration relevant to the making of a valuation under s.8 of the Rent Ordinance.

25. In relation to redevelopment sites, the Tribunal answered Point 7 (again going to the second issue stated above) in the same way that it had answered Point 4 in relation to development sites.

26. In relation to the agricultural sites, the Tribunal held that the Commissioner is required or empowered by s.8 or s.18(3) of the Rent Ordinance to ascertain the rateable value of land that is exempt from assessment to rates under s.36 of the Rating Ordinance (answer to Point 8). Of the Basic Law questions, the Tribunal answered only one (Point 6) in favour of the respondents.

The Court of Appeal

27. The Court of Appeal upheld the respondents' cross-appeal from the decision of the Tribunal. The Court was unanimous in answering the Points except in so far as Mayo JA declined to answer Points 2, 3 and 6. Keith JA and Ribeiro J answered all Points. The Court awarded the costs of the appeal to the respondents.

28. The Court of Appeal affirmed the answers given by the Tribunal to Points 3, 4, 5, 7 and 9, but gave different answers to Points 1, 2, 6 and 8. The Court of Appeal held that the Commissioner was not authorised by s.8 of the Rent Ordinance or Rent regulation 2 to ascertain the rateable value of leased land before or during development otherwise than in accordance with sections 7 and 7A of the Rating Ordinance whether or not the land was liable to assessment under the Rating Ordinance. Moreover, the Court, in relation to Point 2, went on to hold that, if the Commissioner was so authorised, as the Tribunal had held, regulation 2 was ultra vires.

29. The Court answered the Basic Law questions in favour of the Commissioner. The Court answered Point 8 by holding that the Commissioner was not required or empowered by s.8 and/or s.18(3) of the Rent Ordinance to ascertain the rateable value of land that is exempt from assessment to rates under s.36 of the Rating Ordinance.

30. In the result the Commissioner appeals from the decision of the Court of Appeal to this Court while the respondents' appeal relates to Points 3, 6 and 9 which concern the Basic Law questions.

The issues

31. The issues raised by the nine Points in the order in which they are stated involve the following matters :

32. It is convenient to consider these issues in a different order, leaving the issues relating to the Basic Law to the end. I begin with the construction of Rent regulation 2.

Construction of Rent regulation 2

33. Regulation 2 provides as follows :

34. Rent regulation 3, unlike regulation 2, is directed to leased land where part of the land has been developed by the completion of a building and the remainder of the site is vacant. Under regulation 3 the Commissioner is entitled to determine a rateable value for the whole site by aggregating (a) the rateable value of the developed part pursuant to an interim valuation and (b) the rateable value of the undeveloped part determined in accordance with regulation 2.

35. Rent regulation 4 is important. It applies to sites upon which a building has been erected during the term of the lease, the building has been demolished but redevelopment has not been completed. The rateable value is to be the aggregate of the "last ascertained" rateable values (what is known as "the LARV") of all the tenements in the demolished building immediately before its demolition. These values are taken from the Government Rent Roll unless no value is entered in the Rent Roll when the value is taken from the Valuation List.

36. Rent regulation 5 modifies the operation of Rent regulation 4 in the case of sites where part has been redeveloped and the redevelopment of the remainder is to be completed.

37. "Development" is defined by regulation 1 to mean "the construction wholly or partly [on the leased land] of a new building at any time after the land is leased under the lease".

38. "Redevelopment" is defined to mean "a development after a previous development of the land".

39. Section 6(1) of the Rent Ordinance requires lessees to pay to the Commissioner "an annual rent of an amount equal to 3% of the rateable value of the land leased". Section 6(2) imposes covenants to pay Government rent as assessed "under and in accordance with this Ordinance" on the basis that the rateable value is defined and ascertained "under and in accordance with this Ordinance", that is the Rent Ordinance not the Rating Ordinance. And it is the Rent Ordinance that governs "corrections, alterations and variations of rateable values".

40. The definition of "rateable value" for the purposes of the Rent Ordinance is contained in s.2 of that Ordinance. The expression means :

It seems that para. (a) above relates to the case of an "identical tenement", that is "a tenement the entry for which in the Government Rent Roll is identical to an entry in the Valuation List" (see definition of "identical tenement" in s.2). Paragraph (b) then relates to other leases to which the Rent Ordinance applies. Under that Ordinance, the Commissioner is obliged to maintain the Government Rent Roll listing all properties comprised in leases to which that Ordinance applies. Under the Rating Ordinance, he is obliged to maintain the Valuation List recording all properties liable to be rated.

41. The rateable value for rent purposes of land leased or of any tenement comprised in land leased is to be ascertained by reference to its rateable value as set out in the Government Rent Roll and that rateable value shall be regarded as the rateable value of the land leased or the tenement (Rent Ordinance s.7(2)).

42. Section 8(1) authorises the Commissioner to value land leased or a tenement comprised in such land in order to ascertain its rateable value. Section 8(2) then provides that the Rating Ordinance :

43. These provisions led the Court of Appeal to the conclusion which, with respect, was correct, namely that, in the absence of a specific provision to the contrary in the Rent Ordinance, it is to the Rating Ordinance that the Commissioner must look when ascertaining for Rent Ordinance purposes the rateable value of land leased. The Court of Appeal then regarded Rent regulation 2 as requiring that the rateable value of relevant leased land, at any time before any part of it is developed, should be ascertained in accordance with the Rating Ordinance. Ribeiro J acknowledged that this construction rendered regulation 2 nugatory and ineffective but considered that the Court's construction was mandated by language the meaning of which was clear.

44. In this Court the respondents submit that this construction of the regulation is correct, substantially for the reasons given by Ribeiro J. On the other hand, the Commissioner submits that the Court of Appeal erred in failing to distinguish between the concepts of rateability and rateable value. But for this error, according to the argument, the Court of Appeal would have adopted the Commissioner's construction of the regulation, namely that rateable value is to be ascertained as if the leased land were liable for rates under the Rating Ordinance.

45. The distinction between the rateability of a property (rateable occupation) and its rateable value is fundamental to the law of rating, a matter which Mr Michael FitzGerald QC for the respondents conceded in argument. Only if a property is rateable, is it necessary to ascertain its rateable value. If it has rateable value, then an assessment of the amount of the rates payable in respect of the property must be made.

46. The unit of assessment for rating purposes in Hong Kong is the "tenement" which is defined by the Rating Ordinance as meaning :

47. The decision in Yiu Lian Machinery Repairing Works v. Commissioner of Rating and Valuation [1982] HKDCLR 32 at 39 established that a tenement is not in rateable occupation unless the four requirements for rateable occupation in English law are satisfied. They are :-

See John Laing & Son Ltd v. Kingswood Assessment Area Committee [1949] 1 KB 344; London County Council v. Wilkins (Valuation Officer) [1957] AC 362.

48. Another fundamental proposition of rating law, as stated by Lord Radcliffe, is that :

(London County Council v. Wilkins at 380). What is important for present purposes is that the statement expresses the proposition in terms of rateability of the property, not in terms of rateable value. The proposition explains why development sites in Hong Kong have not been rated.

49. Viewed in the light of these well-established principles of rating law, the purpose of regulation 2 seems to be reasonably clear. It is to overcome the problem that building sites are not rateable tenements for the purposes of the Rating Ordinance. The regulation achieves this purpose by providing that the rateable value of the leased land before any part of it is developed shall be ascertained "as if the leased land were a tenement liable for assessment to rates under the Rating Ordinance". The regulation says nothing about how the rateable value is to be ascertained. That function remains to be dealt with, as s.8(2) of the Rent Ordinance prescribes, in accordance with sections 7 and 7A of the Rating Ordinance. The regulation makes no attempt to displace the operation of these sections. So the preferable meaning to be given to the words quoted above is that they require the rateable value of the leased land to be ascertained on the assumption that it is a rateable tenement.

50. This meaning enables the regulation to have an effective operation and overcomes the point, acknowledged by Ribeiro J, that on the Court of Appeal's construction the regulation is nugatory and of no effect.

51. This interpretation is strongly supported by the history of the relevant legislation relating to leases granted or renewed before July 1997 and of the legislative history of regulation 2. The history of the relevant legislation begins with the Crown Leases Ordinance, Cap. 40 (now re-titled the Government Leases Ordinance), takes in Annex III of the Joint Declaration in 1984, the Rent Conditions contained in the new leases granted between 27 May 1985 (when the Joint Declaration took effect) and 1 July 1997, the NTLEO, the Basic Law and ends with the Rent Ordinance and the Rent regulations.

Crown Leases Ordinance, Cap. 40

52. In 1973, a large number of leases mainly in New Kowloon and some in the New Territories which contained a right of renewal were due to expire on 1 July 1973. In some cases the right had not yet been exercised. In other cases, the leases were owned by different persons in undivided shares thus making it difficult for these leases to be renewed individually.

53. The Crown Leases Ordinance deemed the right of renewal in these leases to have been exercised or new leases to have been granted on the same covenants and conditions as contained in the expired leases save and except the covenant to pay Crown rent and the proviso for renewal. Section 9(1) provides that the new Crown rent shall be an amount equal to 3% of the rateable value of the lease (s.9(1)) which is, for the purpose of Crown rent, the rateable value set out in the list declared under s.13 of the Rating Ordinance (s.9(2)).

54. Although the Ordinance refers to the rateable value as set out in the Valuation List under the Rating Ordinance, this rent régime is distinct from that under the Rating Ordinance because (i) there is a departure for some leases (which would include redevelopment sites) in that the last ascertained rateable value (LARV) shall be taken as the rateable value (s.9(3) and (7)) and (ii) it is provided that where no rateable value has been ascertained under the Rating Ordinance whether by reason of exemption or otherwise (which would be the situation for development sites and some agricultural sites), the Commissioner shall ascertain the rateable value "as if the same were assessable to rates under the Rating Ordinance" (s.9(6)), these words being very similar to the language of Rent regulation 2.

55. The Ordinance has not been applied to development sites. We have been informed that the leases affected by this ordinance had already been developed by the time of the renewal or were subject to planning restrictions.

Joint Declaration

56. To allay the very considerable anxiety which existed about the grant and renewal of leases which might extend beyond 30 June 1997, and the possibility that substantial additional premiums might be imposed after that date on such leases, Annex III to the Joint Declaration contained certain provisions. They allow for the extension of non-renewable leases without premium and the granting of new leases at a premium and a nominal rent for terms expiring not later than 30 June 2047. Lessees were, however, required to pay, from the date of extension for the renewed leases or 1 July 1997 for new leases, an annual rent equal to 3% of the rateable value of the leases adjusted in step with changes in the rateable value in future. (See paragraphs 1 to 3)

57. Paragraph 57 of the Explanatory Notes in the White Paper (26 September 1984) relating to the Joint Declaration states that "the concept of charging a rent on the basis of rateable values follows that used since 1973 to fix rents on the renewal of leases". The reference obviously is to the régime under the Crown Leases Ordinance.

Rent Conditions (Type 1)

58. New leases were granted between 27 May 1985 and 1 July 1997. They included leases of the 33 development sites. In order to give effect to the provisions in Annex III, new Rent Conditions relating to the payment of Government rent were introduced in the new leases. Rent Conditions (Type 1) were similar to some of the provisions in the Crown Leases Ordinance. For example, under Condition 1 an annual rent in an amount equal to 3% of the rateable value of the lease is payable, such rateable value shall be the rateable value as set out in the list under the Rating Ordinance. For leases where no rateable value has been ascertained (which covers development sites and sites exempted from rates), Condition 1(d)(iv) makes provision similar to s.9(6) of the Crown Leases Ordinance and Rent regulation 2. For redevelopment sites and partially developed sites, Condition 1(d)(v) and (vi) applies the LARV formula.

59. These Rent Conditions had been approved by the Land Commission set up by the two Governments under paragraph 7 of Annex III.

NTLEO

60. In 1988 the NTLEO extended leases in the New Territories for a period expiring not beyond 30 June 2047 and, in accordance with the Joint Declaration, without the payment of additional premium, at an annual rent equal to 3% of the rateable value of the lease (s.8(1)). These extended leases include 23 of the 24 redevelopment sites, the other redevelopment site being an agreed extension. These extended leases also included the two agricultural sites.

61. Section 8(2) goes further than the Crown Leases Ordinance by providing that the rateable value of the land leased may also include any rateable value specified in a valuation made under regulations made under the NTLEO. Section 8(6) of NTLEO (like s.8(2) of the Rent Ordinance) provides that, subject to this ordinance, the Rating Ordinance shall apply to the assessment of rateable value under that ordinance.

62. No regulation had been made under the NTLEO as it was considered unnecessary in view of the new régime provided for by the Joint Declaration and the Basic Law and the Rent Ordinance enacted to implement the same.

Basic Law 1990

63. The Basic Law was promulgated in April 1990. It gives effect to the policies enshrined in the Joint Declaration. Article 120 and 121 reflect paragraphs 1 to 3 of the Annex III of the Joint Declaration with regard to the renewal and granting of leases and the payment of annual rent.

The Rent Ordinance and Regulations 1997

64. The Rent Ordinance was enacted in order to implement the policy in the Basic Law (endorsing the Joint Declaration) for the payment of Government rent for applicable leases. The Ordinance provides a more uniform "code" for this purpose. The Ordinance in effect applies to leases extended under the NTLEO and new leases granted after the Joint Declaration containing the new Rent Conditions. The new code replaces the relevant provisions in the NTLEO and the Rent Conditions. The NTLEO provisions relating to the new rent (Part III) and the regulation making power in s.11(a) to (h) and (j) were repealed (Rent Ordinance, sections 57 and 58). The Rent Conditions introduced since 1985 (set out in the Schedule to the Rent Ordinance) were overridden (Rent Ordinance s.37(1)).

65. The provisions in the Rent Ordinance and Rent regulations are substantially similar to those in the Rent Conditions and NTLEO.

Conclusions from the legislative history leading to the Rent Ordinance

66. The following comments arising from this history support the construction already given to Rent regulation 2 :

The legislative history of the Rent Ordinance and Rent regulation 2

67. On the second reading of the Bill, the Secretary for Planning, Environment and Lands made the following points :

68. The Rent regulations were considered by the Legislative Council when the Bill was under consideration and before it was passed. The Honourable Ronald Arculli, (member elected by the Real Estate and Construction Functional Constituency), introduced a proposed amendment to the regulation to the effect that the rateable value for rent purposes shall be assessed "in accordance with sections 7 and 7A of the Rating Ordinance". He stated that the regulation, in making a lease giving rise to no rateable occupation (thus not liable to assessment of rates) liable to assessment of rates, would create a new concept in rating law and would be inconsistent with the Joint Declaration and the Basic Law and would be unfair.

69. In response, the Secretary made 3 basic points. First, the purpose of regulation 2 was to enable the assessment of rateable value to determine the amount of Government rent payable as required by the Joint Declaration and the Basic Law. Regulation 2 was closely modelled on the Rent Conditions which had been approved by the Land Commission (set up by the Joint Declaration). There was no inconsistency with the Joint Declaration and the Basic Law.

70. Secondly, although for rating purposes, no rateable value is ascribed to a newly granted site prior to completion of its development as there is no rateable occupation of construction sites, a rateable value must still be ascertained for rent purposes. Even if the proposed amendment was passed, the Government would still dispute the proposition that because there was no rateable occupation for a newly granted lease prior to completion of its development there could be no rateable value for rent purposes.

71. Thirdly, regulation 2 was modelled on the Rent Conditions of newly granted leases and this was known to those lessees at the time of grant. There were provisions in the regulations, not provided for in the Rent Conditions for any objection against the Commissioner's assessment and an appeal to the Lands Tribunal. There was no unfairness to the lessees.

72. The rejection of the proposed amendment by the legislature indicates that regulation 2 was understood to mean that even where land subject to a lease is not assessable to rates under the Rating Ordinance because there is no rateable occupation, it would still be assessable for the purpose of Government rent and that it was the legislature's intention so to provide.

73. It is legitimate to take account of the legislature's awareness and approval of regulations 2, 3, 4 and 5 when it considered the provisions in the Bill which ultimately became sections 8(2) and 34(1). See Hanlon v. Law Society [1981] AC 124 at 194; Elvira Vergara v. Attorney-General of Hong Kong [1988] 1 WLR 919; Deposit Protection Board v. Barclays Bank plc [1994] 2 AC 367).

74. The legislative history strongly confirms the meaning already placed on s.8(2) and regulation 2 as well as s.34(1) which is to be discussed shortly. Treating the regulation as ambiguous, it is legitimate to have recourse to the legislative history in conformity with Pepper v. Hart [1993] AC 593. The statements made by the Secretary who may be regarded as the promoter of the Bill and the regulations are clear. The rejection of the Honourable Ronald Arculli's amendment speaks for itself.

The validity of Rent regulation 2

75. Point 2 raises a question as to the validity of Rent regulation 2. The question was raised partly on the footing that the regulation might be construed in such a way as to authorise a departure from the principles prescribed by sections 7 and 7A of the Rating Ordinance for the ascertainment of rateable value. On the construction already given to the regulation it is valid. It involves no departure at all from sections 7 and 7A which are concerned with ascertaining the rateable value of tenements to be included in the Valuation List, that is, tenements subject to rateable occupation. The regulation deems rateability and proceeds on the footing that the two sections will apply to the ascertainment of rateable value, subject to specific provision to the contrary (Rent Ordinance, s.8(2)).

76. Regulation 2 is authorised by the regulation-making power in s.34(1) which extends to enabling rateable values to be ascertained for (a) "land, including interests held under applicable leases" and (g) "new grant lots arising out of an applicable lease". The regulation is also authorised by s.34(1)(m) which extends to the making of regulations for "generally the better carrying out of the provisions and purposes of this Ordinance".

77. Had the regulation been construed as the Court of Appeal construed it, then the question would have arisen whether the regulation and/or s.34 of the Rent Ordinance constitute a "specific provision" or "specific provisions" within the meaning of s.8(2). Although this question does not now arise, my view is that the reference to "this Ordinance" in s.8(2) should be construed to include a regulation made under the Ordinance (see the definition of "Ordinance" in the Interpretation and General Clauses Ordinance, Cap. 1, s.3) and s.34 and regulation 2 constitute a specific provision or provisions.

78. A point not examined in the Court of Appeal is that s.37(1)(a) of the Rent Ordinance provides that, subject to para. (b), the Ordinance and regulations override the covenants and conditions in an applicable lease that are to the like effect of the covenants and conditions in Parts I and II of the Schedule. The Rent Conditions are of this class. Section 37(3) then provides that to the extent that an applicable lease is not overridden under s.37, the lease remains in full force and effect. If relevant provisions in the Rent Ordinance and regulations were invalid, the Rent Conditions would continue in operation.

Whether, in making a valuation under s.8 of the Rent Ordinance of leased land (being a development site) before or during development, the Commissioner is required or authorised to take into account the likelihood at the relevant date of development being carried out?

79. This question, which Point 4 sought to raise, is the main bone of contention in this case. The question centres on sections 7 and 7A(2) of the Rating Ordinance.

80. Before referring to these provisions, I should refer to the Commissioner's method of valuation. It involves two main elements :-

Mr David Holgate QC for the Commissioner informs us that the Commissioner has taken the lowest rate of return on the figures available to him. This, it is claimed, produces a fair value at the beginning of the construction process and any increase in value as construction progresses is disregarded.

81. Section 7 provides :-

82. Section 7A(2) provides :-

83. Section 7(2) of the Rating Ordinance requires the Commissioner to determine hypothetically "the rent at which the tenement might reasonably be expected to let, from year to year" on the assumptions expressly prescribed about which there is no dispute in this case.

84. Section 7A(2) prescribes certain further assumptions which must be made in ascertaining the rateable value of any tenement. Much of the argument has focussed on assumptions (a) and (b) in s.7A(2). But it is common ground that the sub-section, particularly (a) and (b), incorporates the basic rating law principle, rebus sic stantibus.

85. The Court of Appeal, influenced by the approach which it had taken to the construction of Rent regulation 2, concluded that intended development could not be taken into account. Their Lordships considered that the rebus principle precluded taking account of the previous condition of the land "or of its intended future state, for example, after completion of its intended development or redevelopment" (per Ribeiro J).

86. The Court of Appeal relied on Lord Wilberforce's statement "a house in course of construction cannot be rated" (Dawkins (Valuation Officer) v. Ash Bros and Heaton [1969] 2 AC 366 at 385). Ribeiro J then went on to say "This is because a site being developed is not regarded as susceptible to beneficial occupation". Susceptibility to beneficial occupation is, however, a criterion for determining whether land is rateable (ie. is in rateable occupation). It is not a relevant consideration in arriving at the rateable value. Once rateability is established, as it is by regulation 2, the Commissioner must look to s.7A(2) which incorporates the rebus principle, in the absence of a specific provision to the contrary, and do the best he can to arrive at a rateable value.

87. Although the Court of Appeal again did not distinguish between the two concepts of rateability and rateable value, the respondents sought to support the Court of Appeal's conclusion on this point. The respondents relied upon Arbuckle Smith & Co. Ltd v. Greenock Corporation [1960] AC 813, where it was decided that the occupation was not rateable either because it was not in actual occupation (the view which seems to have been favoured in Kennet DC v. British Telecommunications [1983] RA 43) or not in beneficial occupation. In any event, Arbuckle deals with rateable occupation not rateable value. Mr FitzGerald QC acknowledged in argument that it is not permissible to transfer the rateability concept into the ascertainment of rateable value. Nonetheless he argued that it is legitimate to apply Lord Wilberforce's statement quoted above. Although Dawkins was a case about rateable value not rateable occupation, that statement is, however, expressed in terms that relate to rateable occupation.

88. Moreover, the decision in Dawkins was that, as there was a sufficient probability of demolition within a year by the local authority under an existing demolition order to affect the mind of a hypothetical tenant and so to reduce the rent he would pay, the decision of the Tribunal to take that fact into account was correct. Despite the emphasis on the existing state of the property in the rebus principle (compare the emphasis in assumptions (a), (b) and (c) of s.7A(2) on the time "the list comes into force"), it was permissible to have regard to future demolition because it was a factor which would influence the mind of a hypothetical tenant. Lord Wilberforce pointed out (at 386) that any occupier would take into account, not only any immediately actual defects or disadvantages (such as planning restrictions) but disadvantages or advantages which he can see coming. See also at 393, per Lord Pearson ("There is, in this case, a present probability of a future happening").

89. Dawkins is an answer to the main thrust of the respondents' case that s.7A(2)(a) and the rebus principle require that the valuation must be based on an actual tenement in its existing state. The point is that, although the rebus principle requires the tenement to be valued as in fact it is, the valuer must consider :

(Robinson Brothers (Brewers) Ltd v. Houghton and Chester-le-Street Assessment Committee [1937] 2 KB 445 at 468-469, per Scott LJ).

90. The rationale for this approach to valuation lies in the hypothetical yearly tenancy which is the basis of the valuation exercise. The letting is at an open market rent (Warren Chow v. Commissioner of Rating and Valuation [1977] HKLTLR 277). Further, it is accepted that a yearly tenancy is of indefinite duration and that the possibility of a longer (or of a shorter) duration must be taken into account by the valuer (Dawkins, at 383-384, 385-386).

91. It was recognition of the fact that the hypothetical tenant cannot become the owner of the premises and that he cannot obtain a lease for a term of years that played a part in the valuation of a car factory, based on the assumed duration of a yearly tenancy for 50 years, upheld by the English Court of Appeal in Humber Ltd v. Jones (Valuation Officer) (1960) 53 R & IT 293 at 295-296. It is open to the Lands Tribunal to adopt a finite figure for the duration of the tenancy (China Light & Power Co. Ltd v. Commissioner for Rating and Valuation [1996] RA 475 (where a finite duration of four years was upheld)).

92. The fact that occupation of a construction site does not enable a hypothetical tenant to make a profit during the construction period does not mean that the property has no rateable value. Occupation of the site may nevertheless be valuable and command a significant rent (London County Council v. Erith [1893] AC 562 at 591). So, in Consett Iron Co. Ltd v. Assessment Committee for North Western Area of Durham [1931] AC 396, which concerned a loss-making mine, it was held that it was permissible to have regard to a future change in market conditions which would make the mine profitable. The prospect of continuation of the tenancy for a number of years enabled the Tribunal to have regard to the prospect of profits in later years and set them off against losses in earlier years.

93. If there is a sufficient likelihood of a change of use of the property as would affect the mind of a hypothetical tenant and alter the rent he would pay for it in its existing state, that is a matter to be taken into account in the valuation. And the current occupier is to be regarded as a party who might become the hypothetical tenant (London County Council v. Erith).

94. It follows that, in ascertaining the rateable value of the sites, it is permissible to have regard to their character as development sites for that is an intrinsic characteristic of each property. Having regard to that characteristic entails taking account of the likelihood of development taking place and proceeding to completion. But this does not mean that the sites should be valued as completed developments. Nor does it mean that either of the Commissioner's methods of valuation or what has been described as "the contractor's method" of valuation should be adopted. The appropriate mode of valuation, apart from what is prescribed by relevant principles of law, is a matter for the Lands Tribunal to determine. It is not for this Court to express an opinion about valuation or about the appropriateness of any method of valuation.

95. In these cases much will depend on the estimated duration of a yearly tenancy which the hypothetical tenant might secure. It might be sufficiently long to allow for completion of the relevant development, so that the hypothetical tenancy would extend eventually to such a situation.

96. This conclusion entails the rejection of two arguments advanced by the respondents to support a contrary conclusion. The first argument is that because the development sites are not rateable for rating purposes their rateable value must be nil. This argument fails to give effect to regulation 2. Further, development and redevelopment sites in Hong Kong are either not entered in or are deleted from the Valuation List (as the case may be) under the Rating Ordinance. Consequently no rateable value is ascertained for them under that Ordinance for rating purposes. They are not assessed as having nil value.

97. The second argument is that the word "tenement" as defined in s.2 of the Rent Ordinance imposes a limitation on the what can be taken into account in the valuation. It is suggested that the word confines the valuation exercise to a consideration of the site as a development site but excludes consideration by a hypothetical tenant of the possibility that it might be transformed from a site in course of development to a completed development. This argument is correct only for "identical tenements" under the Rent Ordinance. An "identical tenement" only exists where the entry in the Rent Roll and the Valuation List is identical (s.2), in which event the rateable value in the Roll must follow that in the List. In the principal operative provisions of that Ordinance dealing with rateable value, the reference is to "land leased" not "tenement" except where the value is expressed to be in terms of the aggregate value of "tenements" (see sections 7(1), (2), 8(1)).

98. The answer to the question which I have posed should be answered in the affirmative. The terms of Point 4, which seek to raise this question, are unsatisfactory. The answer to Point 4 should be in the form ultimately advocated by the Commissioner and adopted at the end of these reasons for judgment as the answer to Point 4.

Whether Rent regulations 4 and 5 are ultra vires

99. Rent regulations 4 and 5 prescribe the application of the LARV formula for the ascertainment of the rateable value of land leased (a) where a building has been demolished land is to be replaced by a new development (regulation 4) and (b) where a building is demolished and part of the land is then redeveloped (regulation 5). In the case of (b) regulation 5 applies the LARV formula to the part of the land that has not been redeveloped.

100. It is because the application of the LARV formula prescribes the ascertainment of the rateable value of a building which no longer exists that the respondents submit the regulations depart from the requirements of s.7A(2)(a) and (b) and are ultra vires s.34 of the Rent Ordinance. Keith JA and Ribeiro J held that the section lacked the specificity to satisfy the concluding words of s.8(2) of the Rent Ordinance. Mayo JA considered that s.34 did not authorise regulations which are inconsistent with sections 7 and 7A(2) of the Rating Ordinance.

101. The Commissioner's first answer to the ultra vires argument is that there is no inconsistency with the Rating Ordinance because a redevelopment site is not in rateable occupation and would be deleted from the Valuation List. It would, however, remain in the Government Rent Roll for the purposes of Government rent. The argument does not deny, however, that there is a departure from the provisions of sections 7 and 7A relating to the ascertainment of rateable value.

102. Nevertheless, in my view, Rent regulations 4 and 5 are authorised by sections 34(1)(a), (b) and (f) and 37(1). Section 34(1)(a), (b) and (f) enables regulations to be made for ascertaining rateable value in three situations. Section 34(1)(f) is directed to the situation where there has been development or partial development or redevelopment or partial redevelopment of land. Although the respondents argued that the tense of this provision precluded its use in this case, the argument is without merit. Consistently with the reasons given for upholding the validity of regulation 2, s.34 and the regulations are sufficiently specific to satisfy s.8(2).

Whether the Commissioner is required or authorised by s.8 and/or s.18(3) of the Rent Ordinance to ascertain the rateable value of land that is exempt from assessment to rates under s.36 of the Rating Ordinance

103. Section 36(1)(a) of the Rating Ordinance exempts agricultural land from assessment to rates. It is therefore not included in the Valuation List and no rateable value for the land appears in the List. Nonetheless, though exempt from rating, the land can be entered in the Government Rent Roll (Rent Ordinance, s.18(3)).

104. Contrary to the view taken in the Court of Appeal, a number of categories of exemption in s.36 of the Rating Ordinance will alter over time. A property which is rateable may cease to be rateable in which event it will be deleted from the List and may be included in the Roll under s.18(3). The Commissioner is therefore authorised to ascertain a rateable value for land which is exempt from rating.

105. The only lands for which the Commissioner cannot ascertain a rateable value under the Rating Ordinance are those exempted from liability to pay rent (Rent Ordinance, sections 4 and 11(2)).

The Basic Law Questions

106. It is convenient to deal with the three questions together. The first is :

107. This question relates to the 33 development sites the subject of new grants made since 27 May 1985 and extending beyond 30 June 1997 to 30 June 2047. These leases contained the Rent Conditions now replaced by regulation 2 (development) and regulation 3 (partial redevelopment).

108. This question relates to the 24 redevelopment sites the subject of 23 leases granted before 27 May 1985 extended by NTLEO to 30 June 2047 and one urban site extended by Government Lease Extension to 30 June 2047. These leases incorporated 3% of rateable value and LARV provisions, the Rent Conditions having been replaced by regulations 4 (redevelopment) and 5 (partial redevelopment).

109. This question relates to two agricultural sites subject to leases expiring on 27 June 1997 with no right of renewal but extended by NTLEO.

110. The Court of Appeal answered the three questions in favour of validity, though concluding that it was not necessary to answer question (3) because, in the light of the way in which it was formulated in Point 3, it did not arise. The basis of the Court's view was expressed by Ribeiro J in these words :

111. Article 121 of the Basic Law provides :

112. Article 8 provides :

113. The respondents submit that the reference to "the rateable value" in Article 121 must mean "the rateable value" of the property within the meaning of the Rating Ordinance. In the absence of the Hong Kong history of legislation relating to leases (which has already been related) and Annex III to the Joint Declaration, it might well be said for the view that a reference to "the rateable value" means "the rateable value for rating purposes". In the light of that history, however, a very different context emerges. The antecedent legislation, the Rent Conditions and the Joint Declaration show that the concept of "rateable value" was understood in two senses, one signifying a value for rent purposes, the other a value for rating purposes. The history also shows that, although the concept employed for rent purposes made use of the rateable value assessed for rating purposes, the former was not exclusively tied to the latter. Rateable value for rent purposes was ascertained where no rateable value existed for rating purposes and, where the LARV formula was applicable, the rateable value for rating purposes was disregarded.

114. In these circumstances, Article 121 cannot be construed as if it referred to rateable value in the fixed and limited sense provided for in the Rating Ordinance. The expression must be understood as extending at least to the ways in which rateable value had been employed for Government rent purposes. Indeed, it may well be that the concept as expressed in a constitutional instrument like the Basic Law should be read more widely. Just how widely is not a matter which the Court needs to explore on this occasion. The history assists in demonstrating that the Rent Ordinance and regulations were intended to and do give effect to the relevant provisions of the Basic Law which is itself to be interpreted in the light of the Joint Declaration.

115. The respondents' submission seeks to incorporate in the Basic Law sections 7 and 7A of the Rating Ordinance along with the rebus principle. The effect would be to make them unalterable except by amendment of the Basic Law. It is not an acceptable approach to a constitutional instrument to interpret it in such a rigid fashion leaving the legislature with no discretion in relation to a matter which, in its very nature, may require legislative change from time to time, unless the constitutional language is compelling.

116. There is, accordingly, no inconsistency between s.8, regulations 2, 4 and 5 and the Basic Law. And in view of the interpretation already given to Article 121 and sections 8 and 18(3) of the Rent Ordinance in their application to land exempt from rates under s.36 of the Rating Ordinance, there is no conflict between these provisions of the Rent Ordinance and the Basic Law.

117. In the result, the Points should be answered as follows :

Conclusion

118. In my judgment the result must be as follows.

119. The Commissioner's appeal is allowed and the respondents' appeal is dismissed. The respondents are to pay the Commissioner's costs of the appeals.

120. The orders made (including the answers given) by the Court of Appeal are set aside. In lieu thereof the Points are answered as above and the respondents are to pay the appellant's costs in the Court of Appeal.

Chief Justice Li:

121. The Court unanimously makes the various orders set out above under the heading "Conclusion" in the judgment of Sir Anthony Mason NPJ.