Lai Yu v. The Director of Lands

LDLR6/1999

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDLR No. 6 of 1999

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JUDGMENT

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Background

1. The Applicant was the owner of Lot No. 3719 Section J Subsection 2 Section B in Demarcation District No. 104 ("the subject lot"). The subject lot was resumed by the Government under the Lands Resumption Ordinance, Cap 124 ("the Ordinance") for the implementation of the Government project known as North West New Territories Development - Main Drainage Channels for Ngau Tam Mei, Phase I. The resumption notice (G.N. 3320) dated 10 June 1999 was gazetted on 17 June 1999. The subject lot reverted to the Government on 22 September 1999.

2. Compensation was offered by the Government to the Applicant on 4 August 1999 and 11 October 1999. The offer was not accepted by the Applicant who subsequently applied to the Lands Tribunal on 3 November 1999 under Section 6(2) of the Ordinance for determination of the amount of compensation payable in respect of the resumption of the subject lot. The Applicant claimed compensation based on the market value of $220 per square foot of the subject lot, or any rate higher than the Government's offer of $138 per square foot. However, the Applicant did not provide any evidence to substantiate his claim.

3. The Government filed a notice of opposition on 10 December 1999 on the ground that the claim by the Applicant was excessive. Expert reports were filed and exchanged by the parties following a call-over hearing held on 22 December 1999. The only dispute between the parties was on the quantum of compensation.

Subject lot

4. It was common ground that the site area of the subject lot was 930.7 sq. m. The whole lot was resumed by the Government in this resumption exercise.

5. The subject lot was situated to the south of Fairview Park Boulevard. It was rectangular in shape and accessible by motor vehicle via Castle Peak Road, Fairview Park Boulevard and Kam Pok Road, a private access road. Prior to the reversion, the lot had been used for open storage purpose.

Basis of Valuation

Under Section 10 of the Ordinance,

"the Tribunal shall determine the amount of compensation (if any) payable in respect of a claim submitted to it under section 6(3) or 8(2) on the basis of the loss or damage suffered by the claimant due to the resumption of the land specified in the claim."

6. Also, Section 12 of the Ordinance set out certain additional rules for determining compensation. In particular, Section 12(b) provides: -

"no compensation shall be given in respect of any use of the land which is not in accordance with the terms of the Government lease under which the land is held."

7. The value of the land resumed is defined under Section 12(d) as to be:-

"...the amount which the land if sold by a willing seller in the open market might be expected to realise."

8. Therefore, the valuation is based on the open market value of the subject lot as at 22 September 1999.

Method of Valuation

9. Both parties used the direct comparison method of valuation to arrive at the value of the subject site. The expert witnesses for both parties researched sales of agricultural lots in the New Territories. After carrying out further research and analysis of the comparables, the experts chose the comparables that they considered to be relevant for the subject lot. Adjustments to these comparables in terms of percentages were made to reflect the differences between the comparables and the subject lot. These percentages were aggregated to give an overall percentage adjustment for each comparable. Finally, each expert witness arrived at an appropriate adjusted unit rate for the valuation of the subject lot by taking the arithmetic average of the adjusted unit rates of their chosen comparables.

10. The methodology adopted by the experts were proper and in order.

11. The expert surveyor for the Applicant, Mr. Wayne W. K. Lee, ARICS, AHKIS assembled and analysed eight comparable sales of agricultural lots and concluded that four out of these eight comparables were the suitable comparables. On the other hand, Mr. Tong Yau-Sing, ARICS, AHKIS, RPS, the expert surveyor for the Respondent collated and analysed twelve comparables that are entirely different from the Applicant's comparables. Mr. Tong decided that five of his comparables were more relevant for the assessment of the value of the subject lot.

Applicant's evidence and submission

12. In his written valuation report (Exhibit A-1), Mr. Lee determined the open market value of the subject lot as at the relevant date to be $2,560,000. All his comparables were in D.D. 104, the same Demarcation District as the subject lot. He adopted his comparable nos. 1, 2, 3, 4 as the relevant comparables. They were sold at unit rates of between $2,260 and $3,592 per sq.m. After making adjustments in respect of size, accessibility, zoning and timing of sales, the details of which are shown in page 8 of Exhibit A-1, he arrived at the adjusted unit rates for these four comparables. They ranged between $2,362 and $3,689 per sq.m. He finally adopted the average of these adjusted unit rates, or $2,757 per sq. m. as to be the applicable unit rate for the valuation of the subject lot. On this basis, Mr. Lee estimated that the open market value of the subject lot was $2,560,000.

13. In the final submission, Mr. Anthony P.W. Cheung, the counsel for the Applicant produced, on behalf of Mr. Lee, a written analysis of Mr. Tong's comparables. Mr. Lee opined in that submitted analysis that the average of the adjusted unit rates of the Respondent's Comparables Nos. 6, 8, 10, 11 and 12, on the basis of Mr. Lee's suggested adjustments, would be about $2,110 per sq.m. The details of Mr. Lee's work together with the respective figures adopted by Mr. Tong and the Tribunal will be tabulated in the table below under the heading "Adjustments of the chosen comparables".

14. The Applicant submitted that the Tribunal should adopt the valuation prepared by Mr. Lee. However, should the Tribunal determine that the Respondent's Comparables Nos. 6, 8, 10, 11 and 12 were preferred to the Applicant's Comparables Nos. 1, 2, 3 and 4, the Applicant submitted that the Tribunal should then adopt Mr. Lee's estimated unit rate of $2,110 per sq.m. Mr. Cheung further added that if Mr. Lee's Comparable No. 1 were to be excluded (which was in fact admitted by Mr. Lee during the cross examination), the average of the adjusted unit rates of Mr. Lee's other comparables was also in the region of two thousand something dollars. Therefore, the difference between Mr. Lee's estimate, based on the Respondent's comparables and Mr. Lee's estimate based on his own comparables (apart from his Comparable No. 1) was not too far apart. The Applicant further commented that the differences between the evidence of Mr. Lee and Mr. Tong were mostly matters of personal opinion.

15. In the final submission, the Applicant criticised that the supplementary adjustment table produced by Mr. Tong was "tailor-made" to fit in with Mr. Tong's adopted unit rate of $1,800 per sq. m. The Respondent also pointed out there were differences between the town planning status of the subject lot and those of the Respondent's Comparables Nos. 8, 11 and 12. All these comparables had town planning permissions that were conditional in nature. The owners of these comparables would necessarily incur professional fees in obtaining the town planning permissions. Therefore, Mr. Tong's unit rates should be adjusted further to reflect the differences between these comparables and the subject lot. However, Mr. Cheung for the Applicant admitted that since he was not a valuer by profession, he was not certain of the adjustments that should be made to reflect this particular factor. He urged the Tribunal to make a decision in this regard.

Respondent's evidence and submission

16. The expert surveyor for the Respondent, Mr. Tong, produced his written valuation report and a supplementary document which included a table setting out Mr. Tong's adjustments of his chosen Comparables Nos. 6, 8, 10, 11 and 12 as well as copies of location plans and photographs of the comparables. These were marked as Exhibits R-1 and R-2.

17. Mr. Tong extended his search further afield, to include all transactions of agricultural land in Yuen Long District during the period from August 1999 to September 1999. He assembled altogether twelve sales and he then carried out inspection and further research of these comparables. After taking into account the existing and permitted user of the comparable lots and the availability of vehicular access, Mr. Tong discarded seven of his comparables, leaving five comparables as to be the good comparables. They were Comparable Nos. 6, 8, 10, 11 and 12.

18. In his written valuation report (Exhibit R-1), Mr. Tong did not attach the detailed adjustments of these chosen good comparables. He only concluded in the report that "having regard to the conditions of the subject lot... I would consider it reasonable to adopt a sale price of $1,800/m2 for the assessment of the open market value of the subject lot." Before the hearing, Mr. Tong produced Exhibit R-2 which contained the detailed adjustments of his chosen comparables. The Applicant suggested that Mr. Tong had in fact "tailor-made" his valuation, arriving at the final unit rate estimate of $1,800/m2 following which a table was prepared to justify this estimate. Mr. Tong disputed this criticism and admitted that he had kept the table of analysis in his working file but did not produce it with the original report.

19. In Hong Kong, it used to be the case that professional surveyors did not elaborate the methodology and the detailed workings to their clients when submitting their valuation report. It is observed that this is no longer common in today's market where the clients in obtaining professional advice from all types of professionals are increasingly more demanding. As a result, professional reports including valuation reports have become more and more detailed. In the case of valuation reports for ligitation purpose, including the reports submitted to the Tribunal, it is of absolute importance that the writer of the report must include all the primary data and the analysis so that the other party and the Tribunal have the necessary information for their perusal. In the present case, the Tribunal is satisfied that Mr. Tong simply omitted to put his working table of adjustment in Exhibit A-1. There is no evidence that Mr. Tong tailor-made the table, as alleged by the Respondent.

20. Again, the details of Mr. Tong's adjustments will be tabulated below under the heading "Adjustments of comparables". From Exhibit R-2, Mr. Tong's Comparable Nos. 6, 8, 10, 11 and 12 had unit rates of between $1,428 and $2,153 per sq.m. Mr. Tong applied overall adjustments of between -7% and +17% to these comparables, arriving at adjusted unit rates of between $1,671 and $2,002 per sq.m. The average of these unit rates was $1,789 per sq.m. to which Mr. Tong rounded to $1,800 per sq.m. He applied this unit rate to the area of the subject lot and assessed the open market value of the subject lot, and therefore the compensation payable, to be $1,676,000.

21. The Respondent in the final submission submitted that in this valuation using comparison method, one should compare "like with like". Therefore, the subject lot, being agricultural land with permitted user for open storage, should only be compared with similar agricultural land that could be used for similar purpose. On this basis, the Applicant's four chosen comparables should be rejected in its entirety as they were not being used and were not permitted to be used for open storage as at their respective dates of transactions. There were other reasons for rejecting the Applicant's valuation as well.

22. As the Applicant's expert agreed to discard his Comparable No. 1 during the cross examination, this would not be discussed further. As for Mr. Lee's Comparable No. 2, the Respondent submitted that it was being used as "open space, garden and vehicular access" by the occupier of adjoining domestic structure. For Mr. Lee's Comparable No. 3, the Respondent submitted that there was a substantial domestic structure on site, as evidenced by the photograph taken and produced (see Exhibit R-3) by Mr. Tong. The Respondent submitted that the transaction price should have reflected the value of the structure, instead of the value of the open land alone. Finally for Mr. Lee's Comparable No. 4, the Respondent submitted that they were being formed for small house development and as such should have reflected the value for such development.

23. The Respondent also submitted that it would be more appropriate to use comparables that were close to the date of valuation. Mr. Tong restricted the comparables to those transacted in August and September 1999. Although further research show that for the Respondent's Comparable No. 10 and 11, there were earlier agreement dates of 30 July 1999 and 28 May 2000 respectively (see Exhibit-2). They were still within a short span of time from the relevant date of valuation. As such, no time adjustment was required. On the other hand, the Applicant sought to adjust the time of sales of his comparables by using the Government's ex-gratia compensation rates. The Respondent submitted that this was not acceptable as these rates were in respect of all agricultural land in the New Territories and bear no specific relationship to the value of the agricultural land in Yuen Long.

24. The Respondent also disagreed with Mr. Lee over the issue of whether adjustments had to be made regarding the existence of the mutual grant of right of way over the subject lot. Although the Respondent acknowledged that the said mutual grant of right of way affected the subject lot as well as the much larger surrounding area, the other lot owners could enforce the covenant against the owner of the subject lot. As such, there was the risks that the owners of the subject lot could not enjoy the exclusive use of the entire area of the lot in the future. Since these encumbrances did not exist in the lease conditions of the comparable lots, the Respondent submitted that a downward adjustment to reflect the disadvantages associated with the encumbrance was warranted.

25. The Respondent further challenged Mr. Lee's suggested adjustment to his Comparable No. 2 on the basis of the superior zoning of that comparable. It was noted that Mr. Lee explained that what he accounted for was not the zoning as such but the better environment of the comparable lot. The Respondent still considered this to be not an appropriate adjustment because under Section 12(aa) of the Ordinance, no account should be taken of the zoning of the lot in assessing the compensation.

26. In the final analysis, the Respondent submitted that the comparables chosen by Mr. Tong were relevant to the valuation of the subject lot. All Mr. Tong's comparables were used for open storage purpose and all were directly accessible by vehicles. Furthermore, all these comparable sales were transacted close to the relevant date of valuation. Therefore, Mr. Tong's valuation should be adopted without any modification by the Tribunal.

27. Summing up, the main differences in the experts' valuation are their choice of comparables and the adjustments. The Tribunal has first to find out which comparables are more relevant for this valuation.

Choice of comparables

28. The Tribunal accepts the evidence and arguments of the Respondent and agrees that the Applicant's four comparables should not be adopted as comparables in this valuation exercise. The reasons given by the Respondent were evidently clear and convincing. During the hearing, Mr. Tong, the expert for the Respondent produced a document (Exhibit R-3) which commented on Mr. Lee's Valuation Report. This document contained photographs, and clearly marked location plans that show that the Applicant's four comparables were not being used for open storage. The Tribunal was left with no doubt that the Applicant's comparables should be rejected.

29. Regarding the party's basic criteria in the choice of comparables, the Applicant suggested that Mr. Cheung had confined his search to the sales in the locality of D.D. 104, the same Demarcation District of the subject lot while Mr. Tong's search had covered a larger part of the New Territories, restricting the sales that took place around the relevant date, in between May 1999 and September 1999.

30. For valuation of agricultural land for open storage purpose, this Tribunal agrees with the basic criteria adopted by Mr. Tong. Unlike properties such as retail shops for which the exact location are of paramount importance, the value of open storage land will not be so location-sensitive. On the other hand, it is difficult to adjust for the differences in the timing of sales of properties, particularly so for agricultural land where the number of transactions are scarce. It is normally difficult to have sufficient data of sales of similar agricultural land for the compilation of an index of price over time, such as those compiled for domestic or commercial properties.

31. The Applicant did not raise any objection to the Respondent's chosen comparables nos. 6, 8, 10, 11 and 12. The Respondent's main criticism of Mr. Tong's valuation was in his adjustments. These will be discussed in more details below.

32. Adjustments of the chosen comparables

33. The Respondent's chosen Comparables (Nos. 6, 8, 10, 11 and 12) and their adjustments, the Applicant's adjustments of these comparables as well as the Tribunal's determination of the quantum of adjustments for these comparables are tabulated in the table below:

Each of the factor of adjustment is discussed below:

Location

34. This is the factor of adjustment that drew most differences between the parties. The Tribunal finds that both parties were too extreme in their assessments of the appropriate percentage of adjustments. At the end, the Tribunal adopts adjustment rates somewhat in between the parties' adjustment percentages.

Access

35. The parties agreed on the quantum of adjustments for Comparables Nos. 6 and 12. As for Comparables Nos. 8 and 11, the Tribunal agrees with the Applicant that upward adjustments, though to a lesser extent, are warranted as the access to these comparables are inferior. No adjustment is required for Comparable No. 10.

Shape

36. Both parties adopted +10% adjustment for Comparable no. 6 which has an irregular shape. This is accepted by the Tribunal. Similarly, for Comparable No. 12 which has an elongated shape, the Applicant suggested an upward adjustment of +5%, and Respondent, +7%. The Tribunal adopts +5%

Size

37. The parties agreed on the percentages of adjustments. These are accepted by the Tribunal as to be appropriate.

Right of Way

38. The subject lot was subject to a Deed of Mutual Grant of Rights of Way registered by Memorial No. 150495 on 10 May 1964 in the Land Registry. According to the evidence of Mr. Tong, his site inspection revealed that a private road had been formed on the nearby lots pursuant to the said Deed. The private road had since been used by other owners for a long time, but the Applicant of the subject lot was using the whole of the subject lot including the right of way area for open storage purpose. Mr. Tong opined that, notwithstanding the said Deed, the right of way through the subject lot was not actually used by other owners before the reversion. The Applicant therefore enjoyed the use of the whole lot at the time of reversion. This observation was not disputed by the Applicant's expert witness. However, the Applicant refuted the Respondent's evidence that upward adjustments of 5% should be applied to each comparable, which did not have a similar right of way encumbrance. The expert for the Applicant, Mr. Lee, opined that the sale prices of agricultural land subject to similar encumbrances were not adversely affected by such encumbrances. He therefore was of the view that such downward adjustment would be unnecessary.

39. The Tribunal decides that an adjustment of +5% to the comparables to reflect this encumbrance, which affects approximately 10% of the area of the subject lot, is appropriate.

Effect of Overhead Power Line

40. Both agreed that upward adjustments were warranted. The Tribunal accepts the Applicant's +5% estimate.

Timing

41. No adjustment of timing of Respondent's comparables were proposed. In view of the closeness of the dates of agreement/dates of transactions and the relevant date, the Tribunal agrees that no adjustment is needed.

Tribunal's valuation

42. Based on the various adjustments that have been determined to be appropriate, the Respondent's Comparables Nos. 6, 8, 10, 11 and 12 are analysed by the Tribunal as follows:-

43. Applying the average of the adjusted unit rates of the above chosen comparables to the area of the subject lot, 930.7 sq.m., gives a figure of $1,768,330. This is rounded off to $1,770,000. This is the Tribunal's assessment of the open market value of the subject lot as at the relevant date and shall also be the compensation amount payable to the Respondent.

Order

44. Accordingly, the Respondent is ordered to pay the Applicant compensation in the sum of $1,770,000 plus interests. Leave is reserved to apply for the rate of interest, if not agreed, to be determined under section 17(3A) of the Lands Resumption Ordinance, Cap. 124. There will also be an order nisi that the Respondent pay the Applicant's costs on the High Court party and party scale with certificate for counsel, to be taxed if not agreed, to be made absolute unless application is made by either party within 21 days for another order in place thereof. Liberty to apply is also reserved for ancillary and consequential matters.

Dated this 10th day of May 2000.