Dragon House Investment Ltd. v. The Secretary for Transport

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No. LDMR 31 of 2000

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J U D G M E N T

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1. The applicant Dragon House International Limited was the registered owner of 3 plots of land located at Remaining Portion of Lot No. 1048, Lot No. 1058 and Section A of Lot No. 1060 in Demarcation District No. 120 (hereinafter refers to as "the Lots") at Tai Kiu, Yuen Long before their resumption for the West Rail Project. After the government had gone through all the necessary statutory procedures, the Lots were reverted to the HKSAR government on 16th January, 1999. As the Applicant could not come to any agreement with the Respondent on the correct amount of compensation to be awarded, the Applicant in these proceedings applied to this Tribunal for compensation to be assessed on the following heads:

(i) Compensation for open market value of Land Taken

(ii) Interest on compensation from 16th January 1999 to date of payment of compensation. AND

(iii) Professional Fee in accordance with the scale of Professional Charges for General Practice in Hong Kong (HKIS)

2. Both sides to the proceedings produced one expert surveyor witness to testify on the basis of how they came up with their different valuation. Mr. CHAN Cheung-kit the expert for the Applicant adopted the direct comparison method and relied on comparable sales of land of similar characteristics in order to arrive at the market value of the Lots under resumption. The comparable sales relied upon by Mr. CHAN all concerned plots of un-built agricultural land in Yuen Long and Hung Shui Kiu district. However, unlike the Lots which had been zoned for Comprehensive Development Area (CDA) purpose, those comparables used by Mr. CHAN were all zoned for Residential use (R) of different intensity. Mr. YEUNG Wai-man, the expert for the Respondent disagreed with such basis for valuation for it was his view that subsections (aa), (b) and (c) of section 12 of the Land Resumption Ordinance prohibited the Lands Tribunal from considering development potential embedded in those comparable sales of land subject to Residential zoning. As a result, Mr. YEUNG had only used 2 comparables consisted of fee paying public car parks held under short term government leases as basis for his valuation. It was hardly surprising that the valuations reached by two experts were very different from one another. Mr. CHAN said the Lots worth $3.93 million on reversion date while Mr. YEUNG opined that the Lots only worth $1.208 million. The Applicant was clearly at issue with the Respondent on how subsections (aa), (b) and (c) of section 12 should be applied to the present case.

(I) The Legal Issues:

3. Mr. Louis CHAN, Counsel for the Applicant submitted that although the Lots were zoned for CDA, the Tribunal should not take this into account when assessing the market value of the same. It was because section 12(aa) of the Lands Resumption Ordinance, Cap.124 Laws of Hong Kong direct the tribunal not to take into account certain kinds of negative zoning including the CDA zoning when making the assessment. The applicant therefore continued with the assessment process by assuming that the Lots, given its location, accessibility and neighbourhood land use, would be zoned for R use. In countering the Respondent's reliance on the explanatory note titled "Objects and Reasons" in the Bill which led to introduction of the then section 2(c) in 1922 (now section 12 (c) of the Land Resumption Ordinance), Mr. CHAN submitted that he did not accept that the Tribunal could look at such explanatory note for the meaning of section 12 (c ). He urged the Tribunal to follow the reasoning of Judge Cruden in the Suen Sun Yau and Director of Buildings and Lands [1991] HKDCLR 33 at 41

"The market reality is that purchasers are prepared to buy agricultural land with non-agricultural potential and accept the risk of obtaining the necessary change of user. Mr. MacNaughton agreed that this commonly, occurred in the market. It was for this very reason that he rejected Mr. Chan's six comparables of agricultural land, because they included an element over and above their value for agricultural use because of the purchaser's hope that he could obtain a change of user. On the evidence I am satisfied that Lot 22, because of its size and location, was suitable that a purchaser, fully aware of those risks, would be willing to pay above bare agricultural land market value for the land with that potentiality. Where land is compulsorily resumed, the owner is entitled to the present value of the land, including the advantage of those potentialities. (emphasis and underline added)

4. As an alternative argument, Mr. CHAN submitted that even if the Respondent's submission on the effect of section 12 (b) and (c) prevailed, such interpretation should give way to Article 105 of the Basic Law which came into effect after Hong Kong's reunification with China in1997. Article 105 thus provided:

"The Hong Kong Special Administrative Region shall, in accordance with law, protect the right of individuals and legal persons to the acquisition, use, disposal and inheritance of property and their right to compensation for lawful deprivation of their property.

Such compensation shall correspond to the real value of the property concerned at the time and shall be freely convertible and paid without undue delay."

5. Since such interpretation was inconsistent with the Basic Law, submitted Mr. CHAN, the Applicant should be compensated with the "real value" of the Lots to be calculated in the way as suggested by the Applicant's expert.

6. The Respondent's Counsel Mr. Andrew CHEUNG's submission was that the "development potential" of a piece of agricultural land was not to be compensated upon requisition by the government of such land. As his argument concerned mainly the interpretation of the various subsections of section12 of Land Resumption Ordinance, Cap. 124, they are reproduced below for analysis:

"12 Additional rules for determining compensation

In the determination of the compensation to be paid under this Ordinance-

(a) No allowanceshall be made on account to the resumption being compulsory.

(aa) no account shall be taken of the fact that the land lies within or is affected by any area, zone or district reserved or set apart for the purposes specified in section 4(1)a,(c),(d),(e),(f),(g),(h) or (i) of the Town Planing Ordinance, (Cap. 131).........

(b) 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.

(c) no compensation shall be given in respect of any expectancy or probability of the grant or renewal or continuance, by the Government or by any person, of any licence, permission, lease or permit whatsoever:

Provided that this paragraph shall not apply to any case in which the grant or renewal or continuance of any licence, permission, lease or permit could have been enforced as of right if the land in question had not been resumed;"

(d) subject to the provisions of section 11 and to the provisions of paragraphs (aa), (b) and (c) of this section, the value of the land resumed shall be taken to be the amount which the land if sold by a willing seller in the open market might be expected to realize.

7. The starting point, submitted Mr. CHEUNG, was that the Lots were agricultural land with no building. By virtue of subsection (b) even if there were buildings on it, the value represented by such buildings would not be compensated for the same were built in contravention of the then block crown lease. Subsection (c) on the other hand dealt with the potential value for development of a piece of resumed land. While in reality, purchasers in the open market would be prepared to pay more for the possibility of making a successful application to the relevant authority for altering the terms in the government lease to allow building to be erected, this portion of the market value should be disregarded by the Lands Tribunal when arriving at its assessment on the market value. Mr. CHEUNG urged us to look at the "Objects and Reasons" attached to the bill introducing the relevant subsection (c) to the then Crown Lands Resumption Ordinance in 1922 which were made out in the following terms:

"(1) The object of this Ordinance is to make it clear that in resumptions under the Crown Lands Resumptions Ordinance no compensation is to be awarded in respect of mere expectancies or probabilities. For example, the owner of agricultural land held under a Crown Lease which prohibits the erection of buildings except with the licence of the Crown is not to receive any compensation with respect to the possibility that such a licence might at some time have been obtained if the land had not been resumed. This principle is not new as it is in force under the Lands Clauses Consolidation Acts in England, and it seems only reasonable that the community should not have to pay for a mere possibility of this kind which the claimant could never have enforced.

(2) The reason for the amendments of Ordinance No. 14 of 1921 on this point is that that Ordinance laid down as a general rule that the basis of compensation should be the market value of the land, and it appears to be the case that speculators, in the case of agricultural land for instance, are often prepared to pay more than the value of land for agricultural purposes in the hope that they may be allowed to convert it into building land. The claimant in such a case would no doubt argue that the speculator's price formed or was evidence of a market price above the real value of the land as agricultural land. This position is all the more likely to arose in a district which is about to be developed by the Government for building purposes, and if the above argument were to prevail the result would be that the community would have to pay a very much increased price for the land, although this increased price was based solely on the mere possibility of conversion which the Government have absolute discretion to refuse. The effect would be to make development more expensive and to raise the rents on the developed property, and it might even have the effect of checking development altogether in a particular district.

(3) The intention of this bill, therefore, is to provide that the rule of taking the market price as the basis of compensation is to be subject to the further rule that no compensation is to be given in respect of such mere probabilities."

8. Mr CHEUNG also argued that even the Tribunal should not take into account the CDA zoning of the Lots, this did not mean that the Tribunal then should treat the Lots as having R zoning when assessing their market value.

(II) Our Decision on the Legal Issues:

9. In our judgment, the "Objects and Reasons" attached to a bill is only one piece of evidence to look at when a court of law interpreting a statutory provision trying to ascertain the legislative intent behind the Legislature when it passed the said provision. More importantly, the interpreting court should also have to look at how the provision had been applied and interpreted by the other courts of law previously and their reasons given in those instances of application. The Suen Sun Yau's case in our view was clear authority that section 12(c) had no application to the present value of the land being resumed. Such present value was the real value of the land concerned and we could not see why the government should pay less when Article 105 was in force on the date of resumption. We further hold that as section 12(aa) tells us not to take into account the CDA zoning of the Lots, we should approach the valuation process of the lot by assuming that it is a no zone world. We should then consider the location, accessibility and the surrounding environment of the Lots and find out the real present value of the lots. In the end, we are convinced that the Lots were suitable in being developed into some kind of building lots in future subject to the owner's obtaining the necessary approval for change of user. We shall bear this in mind when we embark upon the actual valuation process.

(III) Agreement and differences between the parties on the valuation of the Lots

10. Regarding the valuation of the Lots in this application, the two parties had agreed on the following:

(a) The relevant date of valuation of the lots was 16 January 1999, being the date of reversion of the Lots;

(b) The Lots, the Remaining Portion of Lot No. 1048, Lot 1058 and Lot 1060 Section A in Demarcation District had respectively the areas of 140.1 sq. m., 80.9 sq. m. and 80.9 sq. m., making a total of 301.9 sq. m.;

(c) The Lots were agricultural land held under Block Government Lease ;

(d) The best method of valuation for the Lots was the direct comparison method.

11. However, because of the difference in the interpretation of the law relating to the resumption of the Lots, the expert surveyors called by the parties had significant differences in the basic assumptions of the highest and best use of the Lots and hence their choice of comparables. The Applicant submitted that Section 12(b) "does not warrant the exclusion of appropriate comparables which clearly reflect what the market was prepared to pay for the Subject Site. Like case should be compared with like." On this basis, Mr. CHAN, the expert called by the Applicant considered that the highest and best use of the Lots was as land with potential for residential development. He therefore in his valuation of the Lots used comparable sales of agricultural land that also had potential for residential development which were similar to the Lots. On the other hand, the Respondent submitted that the Ordinance required the Tribunal, unlike the market, to disregard any "development potential" of the land based on an intended use that would be contrary to the provisions of the Government lease. Therefore, Mr. YEUNG, the expert called by the Respondent rejected the Applicant's comparables. He argued that since the highest and best of the land was as a site for open car parking use, the Tribunal should use his comparable rents of similar agricultural land used for open car parking use as the basis of comparison. He multiplied his estimated market rent for the Lots, at a rate of $400 per sq. per annum by the reciprocal of his estimated yield of 10% for the assumed open car parking use in arriving at the market value for the Lots.

(IV) Choice of comparables by the Tribunal

12. In light of our determination of the legal issues raised by the parties, we decide that the highest and best use of the Lots should be as land with potential for residential development. Furthermore, as stated earlier in this Judgment, we are convinced from our findings of facts that the Lots, given their actual location, accessibility and surrounding environment at the relevant date of valuation, are suitable in being developed into some kind of building lots in the future. We therefore find that the comparables used by Mr. CHAN are obviously much more suitable and preferred by us in the valuation of the Lots.

13. Mr. CHAN had in his Proof of Evidence report dated 30 October 2000 (bundle of expert report, page 109 to 208I) identified and analysed nine agricultural land sales comparables in Yuen Long and other district nearby. They were all zoned "residential" and transacted between February 1998 and February 1999, close to the relevant valuation date. Mr. CHAN considered that these comparables were relevant in terms of physical environment and time, with the exception of Comparable C(2) which was subject to a Short Term Waiver and Comparable C(8) of which the sale price was out of norm. Mr. CHAN after discarding the latter two comparables, compared and adjusted the 7 remaining comparables with reference to the Lots on various factors of accessibility, location, quantum and town plan zoning. Mr. CHAN at the end adopted the average of the after adjusted unit rates of these comparables, at about $12,400 per sq. m. as the appropriate unit rate for valuing the Lots. The details of the comparables used by Mr. CHAN are summarised below:

14. On the other hand, Mr. YEUNG also commented and adjusted all the 7 comparables that had been analysed and relied upon by Mr. CHAN, "on the assumption that development potential is to be reflected in resumption compensation." He calculated that the average of the after-adjusted unit rates of the 7 comparables used by Mr. CHAN was about $6,976 per sq. m. In addition, Mr. YEUNG collected three other comparables "as reference to try to establish the more likely mode of development of the subject lots." In the final analysis, Mr. YEUNG considered that the Lots should fetch a unit rate of $7,000 per sq. m. in the open market based on the above stated assumption. The three additional comparables quoted by Mr. YEUNG were:

15. We find that the three additional comparables of agricultural land quoted by Mr. YEUNG are not relevant comparables because they, unlike the Lots, do not have similar potential for residential development by virtue of their location and zoning. Therefore, we will only concentrate on the 7 comparables used by the Applicant below.

(VI) Adjustments of the comparables by the Tribunal

16. We summed up below the adjustments of the comparables suggested by the two experts called by the parties: -

17. The differences in opinion between the two experts were very great and the total adjustments to the comparables proposed by both experts were substantial too. The total adjustments made by Mr. CHAN, the Applicant's expert ranged between +18% for C(6) and +32 for C(3) and C(9). On the other hand, the total adjustments suggested by Mr. YEUNG were between -48% for C(3) and -3% for C(4). Therefore, it was Mr. CHAN's opinion that all in all, the Lots were superior to all the comparables as a result of which overall upward adjustments for all the comparables were warranted. This was contrary to the view of Mr. YEUNG who opined that the Lots were inferior to all the comparables so that overall downward adjustments for all the comparables were required.

18. The experts had only agreed on the same percentages of adjustments to all the comparables for the factor of accessibility. Otherwise, they differed in their adjustments for all the other factors. We will consider all these factors of adjustment proposed by the experts in sequence below.

Time

19. Mr. CHAN suggested that "as the transaction dates of the comparables are very close to the reversion date of 16/1/1999, no time adjustment is considered necessary." Mr. YEUNG disagreed and opined that "time adjustment is necessary because some of the comparables were transacted almost nine months before the resumption date. During which period the property market experienced substantial adjustment as a result of the financial turmoil in Asia since late 1997. Owing to the fact that price trend/index specifically for agricultural land is not available, reference is made to the data in Hong Kong Property Review 2000 published by Rating and Valuation Department."

20. As we stated in the Judgement of Yin Shuen Enterprises Limited v Director of Lands (LDLR 5/2000) delivered on 14 February 2001, "there have always been debates among valuation surveyors on the appropriateness of using price index of completed residential premises or other indices as a reference for adjusting agricultural land transactions for their time differences. This is because in Hong Kong, the transactions in agricultural land are so limited in number and fluctuated in frequency that there is no published index on their values over time. Hence, a handy index for valuers who wish to time index their analysed transactions is simply not available." We decided in that case that in the absence of a proper price index, the price index of completed private domestic premises prepared by the Rating & Valuation Department was preferred to the Government's gazetted index of compensation rates.

21. Mr. CHAN criticised Mr. Yeung for applying rigidly to the comparables the percentage differences as shown in the Rating & Valuation Department's published quarterly price index. For example, Mr. CHAN pointed out that for C(4) which was transacted on 8 July 1998, Mr. YEUNG gave no time adjustment for it. Therefore, it was absurd to find that a substantial adjustment of 18% was given by Mr. YEUNG for C(1), the transaction date of which was less than 2 months away from that of C(4). Mr. CHAN suggested that as all the comparables were transacted within a short time range of between May 1998 and February 1999, their unit rates were quite close to one another and the market did not fluctuate during the said period, the Tribunal should not give any time adjustment for all the comparables.

22. We adhere to our opinion in the "Yin Shuen" case and decide that in the present case, there is no reason to abandon the use of the Rating & Valuation Department's published price index for residential premises as the basis of time adjustment. This is especially so in light of the differences in the opinion of the two experts on the market performance covering the reversion date and the dates of transactions of the comparables. As to the absurdity in the percentage adjustments caused by the availability of index on a quarterly basis only, the Tribunal decides to assume, as most valuers do, that for the 3-months period between any two indices, that the market rises or falls gradually during the said period, depending on the figures. We also assume that the figure for each quarter published by the Rating & Valuation Department is the figure at the mid point of the respective quarter. On these assumptions, we have set out the Department's index and our estimated figures:

Year and quarter	Month	From published index	Estimated figure for the intervening months
1998, 2nd Quarter	April May June	-- 321	-- 302.4
1998, 3rd Quarter	July August September	-- 265 --	283.8 262.7
1998, 4th Quarter	October November December	-- 258 --	260.4 260
1999, 1st Quarter	January February March	-- 264 --	262

23. Based on the above, we have estimated the following percentage time adjustments for the comparables:

C(1)	C(3)	C(4)	C(5)	C(6)	C(7)	C(9)
-18%	-13%	-8%	-1%	+2%	+1%	-1%0

Accessibility

24. The two experts agreed on the percentage of adjustment in respect of this factor for all 7 comparables. The Tribunal accepts to use their agreed figures.

Location

25. Mr. CHAN opined that "C(1) and C(4) are located at Fui Sha Wai just to the west of Yuen Long Town, whereas C(7) is located at Tai Kei Leng just to the south of Yuen Long Town. Yet, the surrounding environment of both areas is mainly rural in character. A +5% adjustment is considered reasonable." On the other hand, Mr. CHAN said that "C(3), C(5), C(6) and C(9) are situated in Hung Shui Kiu, which is only a developing area. Tai Kiu is considered to be a superior location to Hung Shui Kiu. A +10% adjustment is therefore made."

26. Mr. YEUNG considered that when compared with the Lots, "the general location of Fui Sha Wai and Hung Shui Kiu is similar in terms of residential development". He also differed from Mr. CHAN and considered Tai Kei Leng for C(7) to be a better location for residential development than Tai Kiu.

27. We concur with the Respondent in the adjustments for this factor. That is, for all the comparables, a +5% upward adjustment is reasonable while for C(7), a -5% downward adjustment is adopted.

Quantum

28. Mr. CHAN opined that upward adjustments should be made to C(3), C(6), C(7) and C(9) because they are larger in size than the combined areas of the Lots. On the other hand, Mr. YEUNG argued that as the comparable lots were to be used ultimately for residential development, developers would try to shorten the amalgamation period in order to less risk and cost. He therefore considered that contrary to the traditional theory, the unit price of agricultural land would increase with its size. However, he accepted that "such projection however is not linear especially in the present bearish market when cash is king. Until certain level when the sum of money is sufficiently substantial, developers could regain their bargaining power and the unit rate could then be lowered."

29. We consider that the hypothesis put forward by Mr. YEUNG, though not entirely new to the Tribunal, has not been well established and accepted in the market. Since Mr. YEUNG was unable to verify his hypothesis, we are inclined to accept the more traditional hypothesis adopted by Mr. CHAN, and hence his adjustments to the comparables as well. They are summed up below:

C(1)	C(3)	C(4)	C(5)	C(6)	C(7)	C(9)
0	+2%	0	0	+5%	+2%	+2%

Town Plan Zoning

30. Mr. CHAN opined that in general, "agricultural land that is subject to a town plan zoning that permits a higher plot ratio normally fetch a higher price. Mr. CHAN also gave evidence that in his opinion, if the Lots were not zoned "CDA", it would have been zoned "R(A)". And, in his valuation, Mr. CHAN further assumed that the "originally designated development intensity of CDA zoning (i.e. domestic plot ratio of 5 and non-domestic plot ratio of 9.5) applied." Mr. CHAN therefore made upward adjustments to all the comparables, with the exception of C(6), since they all had zonings which permitted a higher plot ratio than the Applicant's assumed zoning for the Lots. The percentage of his adjustments to the comparables varied, depending on the differences between the maximum plot ratio assumed for the Lots and those of the comparables.

31. Mr. YEUNG agreed with Mr. CHAN that the Lots were suitable for residential development. However, he questioned whether the Lots were suitable for residential development of that high plot ratio as assumed by the Applicant, or just for low-rise village type development. He opined that the Tribunal should assume that "the development potential of the subject lots would be somewhat between high-rise residential development and low-rise village type development."

32. We decide that this is a matter which can be decided upon after reviewing the actual geographical situation of the Lots and their surroundings. The Lots were situated in Tai Kiu, a village south of On Ning Road, the northern main road of the Yuen Long Town proper.

33. We are required by virtue of the "CDA" zoning of the Lots to determine a zoning which is most suitable to the Lots, having regard to its location, characteristics and surrounding environment. We are satisfied that given the actual location of the Lots and the surrounding environment, the most probable zoning would be "R(A)", but not village type development.

34. We therefore agree with Mr. CHAN on the assumed zoning for the Lots, for the purpose of this valuation exercise. However, we consider Mr. CHAN's quantum of adjustments to be excessive. We also agree with him on the direction of adjustments. We decide to substitute his proposed adjustments by the following figures:

C(1)	C(3)	C(4)	C(5)	C(6)	C(7)	C(9)
+10%	+5%	+10%	+5%	0	+2.5%	+5%

Readiness for development

35. This is an adjustment factor that Mr. YEUNG considered to be important for the valuation of agricultural land with development potential.

Mr. YEUNG gave evidence that according to his research, apart from the four comparables at Hung Shui Kiu used by Mr. CHAN, there were more than 20 additional sales within the same locality of Hung Shui Kiu, all falling within either a R(A)2 zone or a R(B)2 zone. Mr. YEUNG opined that given the substantial size of these merged sites at Hung Shui Kiu, the transaction prices of these comparables (C(3), C(5), C(6) and C(9)) should have already reflected their readiness for residential development. On the other hand, Mr. YEUNG considered that the subject Lots are very different in nature from these Hung Shui Kiu transactions. As a result, he submitted that adjustments should be made to these comparables to reflect the very different stages of development process of the subject Lots as against these Hung Shui Kiu comparables. He suggested a downward adjustment of -25% was warranted.

36. The Applicant objected to these adjustments. The Applicant denied that there was any evidence that the developers at Hung Shui Kiu were at the end of their purchases.

37. We agree with the Applicant that the Respondent failed to produce sufficient evidence that for some of the comparables, they are at different stages of the development process and that the latter has in turn a direct bearing on the "readiness for development" factor which in turn affects the price a prospective purchaser pays for the land concerned. We therefore decide not to allow for this factor of adjustment in this valuation.

(VII) Determination of the open market value of the Lots

38. Adopting all the adjustments as detailed above, the unit rates of the Applicant's 7 comparables have been adjusted to give an after-adjusted unit rate for each comparable. The adjustment are summed up below:

39. The after-adjusted rates of the comparbles vary a great deal, ranging from $7,401 for C(4) to $13,622 for C(6). We note that both experts calculated the arithmetic average of the after-adjusted unit rates and adopted that average figure as the basis for valuing the subject Lots. We are prepared to accept the same approach. We find that the average of our after-adjusted unit rates for the comparables is $10,715. Applying this average unit rate of $10,715 to the combined site area of the Lots of 301.9 sq. m. gives a figure of $3,234,859 as to be the market value of the Land Taken. We round off this to $3,235,000.

(VIII) Orders

40. Accordingly we order that the Respondent pays the Applicant compensation in the sum of $3,225,000.

41. 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 pays 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. Libery to apply is also reserved for ancillary and consequential matter.