TSAN LUK YUK YIN v. THE SECRETARY FOR THE ENVIRONMENT, TRANSPORT AND WORKS

LDMR 3/2005

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS REFERENCE APPLICATION NO. 3 OF 2005

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J U D G M E N T

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Background

1. This is an application by the applicant for determination of compensation pursuant to sections 13, 27 and 29 of the Roads (Works, Use and Compensation) Ordinance, Cap. 370.  The applicant is the former registered owner of Lot Nos. 288, 289 and 293 in D.D. 313, Tai O, Lantau Island, New Territories, Hong Kong (“the Lots”).

2. Tai O is a traditional fishing village and village settlement area.  Apart from Lung Tin Estate, a public housing estate of nine 12-storey blocks, and Lung Hin Court, a Home Ownership Scheme housing comprising four 6-storey residential blocks, developments in the neighbourhood comprise mainly village type developments of two to three storeys.  It is also a popular tourist spot for both foreigners and residents of other parts of Hong Kong.  Public transport facilities between Tai O and Mui Wo such as franchised buses and taxis are available along Tai O Road, which is within 5 minutes walking distance from the Lots.  As at the date of resumption on 24 June 1997, apart from the highway access via Tung Chung, ferry service was provided between Mui Wo and Central.  The North Lantau Highway and the Tsing Ma Bridge which provide road connection to the Lantau Island from other parts of Hong Kong were only open in May 1997.  The MTR Tung Chung Line also came into operation in June 1998.  Though from Tung Chung to Tai O, it still takes more than 40 minutes to an hour by public transport.

3. The Lots, comprising building land and agricultural land, were held under a Block Government Lease in D.D. 313 for a term of 75 years commencing on 1 July 1898 renewable for a further term of 24 years less the last 3 days.  The lease was further extended to 30 June 2047 under the New Territories Leases (Extension) Ordinance, Cap 150.  By a Notice of Resumption dated 24 April 1997 registered in the Land Registry with memorial no. 244069, the Government resumed the Lots.  The Lots reverted to the Government, two months later, on 24 June 1997.

4. The Lots are located at a slightly inclined area close to the waterfront to the North East of Lung Tin Estate, Phase II.  Whilst the first phase of this public housing estate was completed in 1980, its second phase was completed in 1995 comprising, for instance, Tin Lee House (Block 8) and Tin Ning House (Block 9A & 9B) and four other blocks of low-rise buildings on the opposite side of Lung Tin Estate, Phase I which were converted to become part of Phase 20B of the Home Ownership Scheme which was put up for sale in 1999[1].  Incidentally, 85 flats at the 12-storey Tin Lee House, which was closest to the Lots and about 100 metres to their west, will also be converted into Home Ownership Scheme for sale as Tin Lee Court in June 2014[2].

5. On 20 November 2007, the Tribunal (differently constituted) handed down its judgment that a footpath straddling the Lots leading from Tai Ping Street in an area known as Yim Tin to another part of Tai O (“the Footpath”) was a public right of way which in effect traversed the middle of the Lots into two further longitudinal pieces, one facing a creek to the northeast and the other on the inward side of the shore overlooked by Tin Lee House.

6. The registered area of the Lots is summarized below:

D.D. No.	Lot No.	Registered Area	Resumed Area in equivalent*
313	288	0.30 ac (building land)	1,214.1 sq.m.
313	289	0.05 ac (building land) 0.05 ac (agricultural land)	202.3 sq.m. 202.3 sq.m.
313	293	0.04 ac (building land) 0.06 ac (agricultural land)	161.8 sq.m. 242.8 sq.m.
		Total:	2,023.3 sq.m.

* 1 acre ≈ 4,046.85 sq.m.

7. As can be seen from the aerial photo attached to this Judgment as Annex A[3], there were a series of structures scattering around the Lots and the vicinity, according to the valuation report previously produced by the former expert on behalf of the applicant dated 19 August 1998, there were temporary structures, small timber houses and squatters on the Lots as at the date of resumption.  The respondent also produced a series of photographs[4] of these structures taken on 24 April 1997.  According to a letter to the applicant’s former solicitors dated 13 March 1996, the structures there had been erected years ago and were the home for about 30 families[5].  The latter is not denied by the applicant.

The Law for Determining Compensation

8. According to section 27 of the Roads (Works, Use and Compensation) Ordinance and Part II of the Schedule thereto, the applicant's right to compensation in respect of the resumption of land is the right to recover from the Government a sum to be assessed on the basis “as if the claim were made under the Lands Resumption Ordinance (Cap. 124) for land resumed under that Ordinance”.  Section 10 of the Lands Resumption Ordinance provides for the rules for determination by the Lands Tribunal of compensation payable by the Government.

9. Further section 12 of the Lands Resumption Ordinance provides additional rules for determining compensation:

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

(a) no allowance shall be made on account of 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 Planning 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; and

(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.”

10. Thus by reference to the above, compensation based on the market value of the land reflecting its development potential is payable if the potential development is permitted by the existing user covenants of the Government lease or other title document involved.

The 2003 Scheme

11. As at the date of resumption, the then Regulation 19(2) of the Building (Planning) Regulations Cap. 123F (“Reg. 19(2)”) provided that :

“Where a site abuts on a street less than 4.5 m wide or does not abut on a street, the height of any building or buildings to be erected thereon and the maximum site coverage and plot ratio to be permitted in respect of such building or buildings shall be determined by the Building Authority.”

12. As the Lots were not abutting a street, pursuant to Reg. 19(2), the height of any building(s) to be erected thereon and the maximum site coverage and plot ratio in respect of such building(s) shall be determined by the Building Authority.  For the purpose of substantiating the open market value of the Lots, the applicant’s Authorized Person made an enquiry submission to the Building Authority on 31 July 2003[6] for a decision on the permissible plot ratio of the Lots.  In particular, the Building Authority was requested to confirm that “the development intensity of this hypothetical scheme would have been approvable as at the Date of Resumption”.  Eventually, on 5 December 2003[7], the Building Authority wrote to the Authorized Person, confirming that there was no objection to a scheme comprising, as later clarified on 3 August 2005[8], three 3-storey single family houses and three 3-storey apartment buildings with plot ratio of 1.256 and a site coverage of 42.024% along both sides of the Footpath (“The 2003 Scheme”).

The 2009 Scheme

13. Since the Lands Tribunal determined that the Footpath was a public right of way by prescription in its ruling dated 20 November 2007, the applicant instructed another Authorized Person to submit to the Building Authority a revised hypothetical building scheme for consideration on 13 February 2008[9]. The revised scheme would “retain all existing natural features and landscape” while “all previous design parameters and essential provisions such as plot ratio, site coverage, density and access for rescue ladder/ appliances were by and large maintained”.  

14. However, by a letter dated 24 December 2008[10] (“the 2008 letter”), the Building Authority replied inter alia, that “[p]re-submission enquiries solely related to compensation claims, hypothetical schemes and academic exercise would not normally be entertained by Buildings Department.”

15. The Authorized Person further amended the revised hypothetical building proposal based on various technical issues raised by the Building Authority prior to the 2008 Letter and came up with a scheme comprising six 3-storey single family houses each with private swimming pool on top and one 3-storey apartment building also with swimming pool on top yielding a plot ratio of 1.264 and a site coverage of 42.143% (“the 2009 Scheme”).

16. In view of the stance taken by the Building Authority as stated in the 2008 letter, the applicant engaged Professor Barnabas Chung (“Professor Chung”), former Chief Building Surveyor of the Buildings Department, to give his opinion on the feasibility of the 2009 Scheme.  Also, for the purpose of determining the feasibility in assessing compensation as a result of the resumption, Professor Chung and Mr Chan Shu-kwong (“Mr SK Chan”) a senior building surveyor with the Buildings Department and the expert on behalf of the respondent, produced a joint statement dated 13 December 2013[11] confirming, inter alia, that:

(a)  The 2009 Scheme involved no significant change in the road serving the Lots and no increase in the total number of residential units as compared with the 2003 Scheme;

(b)  Both the site coverage and plot ratio of the 2009 Scheme were only very marginally in excess of those of the 2003 Scheme noting that the differences for the site coverage and plot ratio were 0.119% and 0.008 respectively, which could be deemed infinitesimal;

(c)  The 2009 Scheme was not formally submitted to the Building Authority.  However, upon receipt of an enquiry from the Lands Department in July 2012, the Building Authority advised the Lands Department in September 2012 that the maximum plot ratio and site coverage of the 2009 Scheme should not be more than that as determined for the 2003 Scheme.  Otherwise, the 2009 Scheme would have been acceptable under the then Building (Planning) Regulation 19(2) as at the date of resumption of the Lots.

17. Facts stated above are either not in dispute or undisputable between the parties. 

18. The applicants contends that the compensation should be assessed based on the 2009 Scheme, a villa type development on the Lots which commands a market value of $78,606,000 at the date of the resumption.  The respondent, on the other hand argued that villa type development is not feasible on the Lots and instead an ordinary New Territories Exempted Houses (“NTEH”) form of development should be the optimal development for the purpose of assessing the value of the resumed Lots, hence the amount of compensation should be in the amount of $20,600,000.

Agreed Issues

19. The following are the agreed issues for determination in the present application:

(a)  Whether (i) a villa type development or (ii) an ordinary New Territories Exempted Houses (“NTEH”) form of development, is the optimal development for the purpose of assessing the value of the Lots as at the date of resumption?

(b)  If a villa type development is the optimum form of development for the purpose of assessing the value of the Lots as at the date of resumption, whether the 2009 Scheme is, in principle, to be considered a feasible scheme of development for such purpose as at the date of resumption?

(c)  Whether, in assessing the value of the Lots as at the date of resumption, one should apply (i) the direct comparison method, or (ii) the residual valuation method, having regard to the relevant information and materials which are available for carrying out the assessment?

(d)  What is the open market value of the Lots as at the date of resumption?

20. Mr Anderson Chow (“Mr Chow”), Senior Counsel for the applicant, had confirmed that should the Tribunal found NTEH to be the optimal form of development for the Lots, the valuation of $20,600,000 provided by Mr David Nicholas Faulkner (“Mr Faulkner”) is not being challenged and is accepted by the applicant.

The Evidence

21. For the purpose of the present application, the applicant and the respondent have produced the following expert reports on building surveying issue in relation to the development potential of the Lots:

(a)  Expert report dated 5 November 2009 by Professor Chung[12];

(b)  Expert report dated 31 October 2012 by Mr SK Chan[13];

(c)  Supplementary expert report dated 28 December 2012 by Professor Chung[14].

22. In addition, Professor Chung and Mr SK Chan have prepared a joint statement dated 13 December 2013 setting out the areas of agreement and disagreement[15].

23. The applicant and the respondent have also produced the following expert reports on valuation:

Prepared in relation to the 2003 Scheme

(1)  expert report dated 16 November 2005 by Mr Alnwick Chan (“Mr A Chan) for the applicant[16];

(2)  expert report dated 21 July 2006 by Mr Faulkner for the respondent[17];

(3)  supplementary expert report dated 19 September 2006 by Mr A Chan[18];

(4)  supplementary expert report dated 31 August 2006 by Mr Faulkner[19];

Prepared in relation to the 2009 Scheme

(5)  supplementary expert report dated 28 December 2009 by Mr A Chan[20];

(6)  supplementary expert report dated 1 November 2012 by Mr Faulkner[21];

(7)  rebuttal report dated 28 December 2012 by Mr A Chan[22].

24. Mr A Chan and Mr Faulkner have also prepared a joint statement dated 3 December 2013 setting out the areas of agreement and disagreement[23].

25. All the above experts were called at trial to give evidence.  The applicant also called Mr Thomas Hing Kwong Tsang (“Mr Tsang”) to testify for and on behalf of the applicant as a factual witness.

Villa Type Development

26. Mr Chow submits that the Lots were basically building lands and prior to the resumption, the applicant had the legal right to build houses thereon.  Mr Chow also submits that compensation should be assessed by reference to the optimal form of development, ie a development which would produce the highest land value.  Citing the Lands Tribunal decision in Million-Add Development Limited v. Secretary for Transport [1997] CPR 316, at 321F-G, Mr Chow submits that in the present case, the potentiality of further development is clearly evidenced by the Building Authority’s approval of the 2003 Scheme.

27. Whereas the Lands Tribunal held in Million-Add Development Limited (supra) that the owner’s plans were relevant but not decisive to the objective determination of the development value, the applicant considers the differences between the 2009 Scheme and the 2003 Scheme were only marginal in terms of site coverage and plot ratio, or indeed “infinitesimal” by reference to the joint statement by Professor Chung and Mr SK Chan dated 13 December 2013; hence the 2009 Scheme should be the optimal form of development.

28. Mr Y C Mok (“Mr Mok”) for the respondent submitted that the applicant failed to prove that there is a demand for this villa type development in Tai O and there is also uncertainty as to whether the 2009 Scheme would be approved by the Building Authority as well as the uncertainty created by the existence of numerous trespassers on the date of resumption.  

 Demand

29. In Halpern & Others v. Greater London Authority [2014] UKUT 0116 (LC) (ACQ/274/2010, unreported judgment dated 18 March 2014)where the Lands Chamber of the Upper Tribunal was dealing with a claim for compensation under compulsory purchase, it had the following remark at§42 of its judgment:

“… there is an important distinction between what is claimable in principle and what can be proved on the evidence in any particular case. In every case the claimant has to prove on the balance of probabilities that he has suffered the losses in respect of which he is claiming. The Tribunal can only reach a conclusion in his favour on the basis of credible and admissible evidence.”

30. Thus in determining the optimal development of the Lots, other factors are relevant.  As stated in the judgment of Million-Add Development Limited case, supra “that an owner's plans are relevant but not decisive to the objective determination of development value.  The intentions of experienced developers and the opinions of their experts will often include evidence, relevant to potentialities.” (at page 322)

31. In Leung Lai-sheung & another v Director of Lands & Survey [1977] HKLTLR 131 at 132:

“The claimants sought compensation upon the basis of the redevelopment potential of the sites. Mr Simon Kwan… who was the expert called by the claimants, suggested that the redevelopment potential was for a wholly commercial six storey building upon each site. Mr Kwan failed to convince the Tribunal that a wholly commercial building would be a viable commercial proposition in this area of Hollywood Road. He was unable to point to any such development in the immediate area and, having considered all of the evidence, the Tribunal is satisfied that the real potential for development lay in a commercial/residential building… It is no doubt true that a wholly commercial building if it could be readily sold or let would produce a greater financial return to the owner than would a commercial/residential development; however it has not been shown that it could be sold or let and, indeed, the view of the Tribunal is that this location would not support such a building.” (underline added)

32. Mr Mok also cited an Australian case Constantino and Maric v. Roads and Traffic Agnecy [2006] NSWLEC 248 (30165 of 2003, unreported judgment dated 30 May 2006) in which the planning experts had provided conflicting advices in relation to the lands compulsorily acquired. Pain J cited, inter alia, at para. 23, the following passage from Bautocivh v The Minister administering the Environmental Planning and Assessment Act [2004]  NSWLEC 389 on the role of the court in such situations:

“… the Court’s role is not to determine what would have been approved, but rather to decide how the hypothetical purchaser acting prudently after obtaining the advice of relevant experts familiar with the experience in developments of residential subdivisions, would have assessed the potential for the development of the subject land.”

Then at para. 70 of the judgment, Pain J rejected two of the development models on the basis that he did not consider a prudent hypothetical purchaser would consider the demand for those two development models could be assumed.

33. From the authorities cited above, demand of the development model suggested is apparently a factor which is relevant to the consideration of potentialities.  In Nam Chun Investment Co Ltd v Director of Lands [2005] 1 HKC 390 at 406E-H, the Court of Appeal had the following remark:

“the legal burden rests with the claimant to make good what he claims, and if he produces comparables for the use of the tribunal, he has the legal burden to prove on the balance of probabilities that the comparables are …reliable and appropriate for use by the tribunal…”

34. It is the applicant’s case that as at the date of resumption on 24 June 1997 it was the heyday of the property market in Hong Kong.  Mr A Chan argued that since the bidding of the Cheung Sha site was enthusiastic, developers would equally be interested in the Lots.  Nevertheless, Mr A Chan admitted that there are differences between the Lots and the Cheung Sha site in terms of location, environment and accessibility.  However, more differences between the Lots and the Cheung Sha site can be discerned from the table at para. 10.3 of Mr A Chan’s Supplemental expert report dated 28 December 2009[24]:

	The Cheung Sha  site	The Lots (based on the 2009 Scheme)
Location:	Cheung Sha, Lantau Island	Tai O, Lantau Island
Site Area:	2,240 sq m	2,023 sq m
User:	Private Residential	Private Residential
Maximum GFA:	896 sq m	2,558.034 sq m
Maximum Site Coverage:	20%	42.143%
Maximum Plot Ratio:	0.4	1.264
Maximum no. of Units:	12	9 (as proposed)
Height:	7.6 metres above mean formation level and not exceeding 2 storeys	Approximately 10.2 metres and 3 storeys
Parking Spaces:	Not more than one space for every two residential units	Not available on site

35. In respect of the feasibility of the 2009 Scheme, Mr Faulkner has, inter alia, the following comments in his Supplementary Report dated 1 November 2012[25]:

(a)  “(The 2009 Scheme) is not compatible with the location characteristics of Tai O and the physical attributes of the Subject Property ….

And in “Valuation of Development in Hong Kong (pp.4) (Second Edition) written by Philip J. Roberts & Johnny C.P. Siu, it mentioned that:-

“The value of development land depends upon a combination of many factors, the most important of which are the type of building that may lawfully be erected on the site, the demand that exists for accommodation in that building in its particular location, the permissible gross floor area of that building in its particular location, the permissible gross floor area of that building, its quality and hence the cost of its erection, and the supply of competing accommodation in the neighbourhood. For example, in urban areas the plot ratio of a commercial building would be much larger than that of a residential building. If the site is in an area, however, where little demand exists for offices or other commercial uses, a smaller residential building would be more profitable, and hence, that is the type of development which would be likely to take place.

… it is clear that the demand and marketability of the proposed development are always the primary concerns in determining what to build on site.”

(b)  “Tai O used to be an old fishing village ….As at the date of resumption, the village was mostly occupied by dilapidated stilt houses with squatter licenses and village-type houses. Other than these two types of dwelling house, there were only two residential development, namely Lung Tin Estate ... and Lung Hin Court. In view of the decaying built environment of Tai O where the neighboring properties were deteriorated squatter and village-type houses as at the date resumption, the Revised Scheme proposed by Mr Chan would be unsuitable for this location.”

(c)  “…. There had been no villa-type development in Tai O as at the date of resumption. This remains the case now even after a lapse of 15 years from the resumption date despite a series of infrastructure improvements and new town developments on Lantau Island during the past decade. According to the government records, no occupation permits (OP) have been issued by the Buildings Department for villa-type development or non-NTEH-type house in Tai O from the 1980s up to now and no land grant for such kind of development has been granted by the Lands Department since the 1980s.”

(d)  “The accessibility of Tai O was limited and restricted as at the date of resumption. It could only be reached by limited bus and ferry services from only a few places. I am of the view that the geographical location of Tai O, with deficient transportation and infrastructural support and back-up, would discourage the establishment of high-end villa type development in the locality.”

(e)  “(The Lots were) fragmented and irregular-shaped site covered by shabby structures and (were) occupied by trespassers. It would further be required to be dissected into four fairly odd-shaped sections given the Lands Tribunal’s decision dated 20 November 2007… It is undeniable that the public right of way running through (the Lots) would detrimentally impact on the degree of spaciousness, privacy and exclusivity of the proposed development on site and would render it not commensurate with the criteria of a high-quality development.”

(f)  “… the provision of direct vehicular access and car-parking facilities is indispensible to a luxury-type residential development. However, there is no vehicular access in (the 2009 Scheme) and only a public car park (for 16 spaces) is available at a distance (about 700 metres).”

36. Mr A Chan, in his Rebuttal Report dated 28 December 2012, stated his responses which include, inter alia, the following[26]:

(a)  “…the hypothetical Revised Scheme will not come into the market until completion in say end 1999 when all the transportation infrastructures serving Lantau Island would have been completed.  Developers/purchasers do consider the future site potentials especially when these added site advantages brought about by the infrastructure projects are confirmed as at 24 June 1997.”

(b)  “The Property, if not the only one, is one of the scarce supply of building land of such a scale that can accommodate a comparatively comprehensive development within Tai O. Accounting for its advantageous large site area, compatible lease restrictions and no planning control, the Property in fact commands high development flexibility. There is no reason that NTEH which has a restricted floor plate, restricted ceiling height, restricted roof over area and inferior image is the only solution.”

(c)  “Mr Faulkner pointed out the lack of new villa type developments at Tai O. I reckon the Lack of villa type development is not due to limited demand but due to limited or no supply….. Building lots within Tai O are generally of fragmented lots of small site areas that cannot accommodate villa type development.” He then quoted Tung Chung as an example where “Tung Chung was a new town with very little attractions” when Government sold a lot of land for the development of the new town. “This has demonstrated that developers look at not only the current local demand, but also the future potential of the apartments/houses when they are completed.”

(d)  “With improved accessibility to Lantau Island, the attraction to people wishing to set up their home on the island was substantially enhanced. The Chek Lap Kok International Airport was not far from completion in mid 1997. The island also became a convenient home location for airline staff and airport related personnel.”

(e)  “The Revised Scheme is comprised of 6 dwelling houses and 1 apartment block. Out of the six houses, five of them are purposely planned to face the creek with the aim of minimizing the potential disturbance arising from the right of way (“the ROW”). The gardens area will be planted with shrubs and trees and fence walls to maintain the privacy. There is no reason why the owners cannot fence their own garden so long the fence walls do not conflict with the ROW.”

(f)  “Carparking in rural area in the New Territories should not give rise to any serious problem and therefore Mr. Faulkner’s argument on lack of public carpark in Tai O is not agreed. Parking of vehicle in the vicinity of the proposed estate cannot be ruled out. It is actually the village custom respected by the authority.”

37. We are however not convinced that the responses of Mr A Chan have sufficiently disposed of the queries raised by Mr Faulkner stated above. Firstly, we agree with Mr Faulkner that if there be sufficient demand, supply will somehow come into place.  As rightly pointed out by Mr Mok for the respondent, not only the Government is in the position to supply land to cater for the demand, if there be any, private landowners/developers, in response to a ready market, would try to amalgamate land and apply for a surrender and re-grant, if needed, from Government.  This was not disputed by Mr A Chan during cross-examination.  Indeed in Director of Lands v. Yin Shuen Enterprises Limited & another [2003] 2 HKLRD 399, it was said at §26 that:

“Urban development is nowadays usually left to private developers, who seek any necessary modification of the terms of their lease, rather than undertaken by the Government after resumption. ”

38. The problem that building lots in Tai O are generally fragmented lots of small site areas should not be a hurdle for villa type development in time.  The fact is there is no villa-type development in Tai O even after a lapse of 16 years from the resumption date.  During cross-examination, Mr Faulkner admitted that there is no NTEH development in Tai O for past years as well but as he said in response, his proposal of NTEH development conforms with the surrounding environment that a prudent purchaser or developer is more ready to assume. On the other hand, the fact that there is no NTEH development in Tai O for past years also supports Mr Faulkner’s argument that the built environment of Tai O was decaying.  This would further discourage any developer in putting forward a high quality villa-type development like the 2003 Scheme or the 2009 Scheme.

39. At trial, we also pointed out to Mr A Chan that his theory may not stand because the history of Lung Tin Estate tells that the district of Tai O is not even favoured by people of lesser income means as vacancy had stayed at some 40% leading to the recent conversion of one block, Tin Lee House, into part of a Home Ownership Scheme for sale. The remaining 15 flats at Lung Hin Court were sold in mid 2010[27].  Of course, Mr Chow for the applicant submitted that this should be regarded as a different market. Be that as it may, but even after a lapse of 16 years from the resumption date, Tai O has not become “a convenient home location for airline staff and airport related personnel”.  This is a fact one cannot ignore which is relevant in our consideration.

40. On the other hand, the development of Tung Chung as referred to by Mr A Chan is all the more a different market because as at the date of resumption, the Government’s intention to develop Tung Chung into a new town with sophisticated infrastructure is manifested[28] whereas Tai O and more particularly the Lots were not covered by any planning, not to mention any modern infrastructure.  We agree that developers would look at not only the current local demand, but also the future development potential of the land in question.  Nonetheless, we find the future development potential of the Lots as at the date of resumption was clouded with many uncertainties.

41. Also, by reference to the aerial photo at Annex A, the right of way pierced through right into the heart of the Lots. Despite what Mr A Chan said in §36(e) above, its advantageous large site area and development flexibility would have been lost.

42. We agree that the demand for any particular type of development on the Lots can only be inferred from the surrounding circumstances. Bearing in the mind also the characteristic and environs of the Lots as at the date of resumption with temporary structures, small timber houses and squatters around, we consider, on a balance of probabilities, that it is more likely than not demand was not in place at the Lots for the luxury villa-type development like the 2009 Scheme as at the date of resumption.

43. In Siu Sau kuen v. The Director of Lands, CACV 180/2012 (unreported,  dated 31 July 2013), the Court of Appeal had tried to restate the test in identifying the development potential of the land resumed for the purpose of determining compensation. As §34 the test was put as:

“Whether, on a balance of probabilities, the evidence discloses that, as at the date of resumption, redevelopment of the property resumed was likely. Such likelihood may be demonstrated by:

(i) …., or

(ii) evidence of redevelopment in the vicinity of the resumed property (whether accompanied by evidence of redevelopment plans for the resumed property or not), so long as such evidence of redevelopment in the vicinity supports a finding that redevelopment on its own or merger of the resumed property with other properties giving rise to a viable redevelopment scheme was likely within a reasonably foreseeable time scale.”

The applicant fails in discharging his burden of proof that a villa-type development like the 2003 Scheme or the 2009 Scheme was an optimal development as at the date of resumption.

44. Further, by applying the Bwllfa principle which derives its name from the House of Lords judgment in Bwllfa and Merthyr Dare Stream Collieries (1891) Ltd v. Pontypridd Waterworks Co [1903] AC 426, our view above is strengthened by the fact that there is no villa-type development in Tai O even after a lapse of 16 years from the resumption date. In this House of Lords case, a compensation claim required an estimate to be made of future profit. By the time the dispute reached arbitration, profits had soared and actual figures and not mere estimates were available. The House of Lords held that the actual figures were admissible. Lord MacNaghten declared at p 431:

“In order to enable (the arbitrator) to come to a just and true conclusion it is his duty, I think, to avail himself of all information at hand at the time of making his award which may be laid before him. Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark?”

Uncertainty as to Reg. 19(2)

45. It is not in dispute that the building density of any villa type development on the Lots which do not abut on a street, required the prior determination by the Building Authority.  It is the contention of the respondent that the 2009 Scheme has never been submitted to the Building Authority for the determination under Reg. 19(2), hence the building density remained an unknown fact.  No professional adviser would be able to tell whether the 2009 Scheme or any villa type development of any building density would be permitted on the Lots.  This uncertainty should have discouraged any hypothetical purchasers from purchasing the Lot at the level of the 2009 Scheme or for a villa type development.  It is not for the Tribunal to determine what would have been the Building Authority’s determination but rather to decide how the hypothetical purchaser would have assessed the development potential of the Lots on the date of resumption.

46. The applicant, on the other hand, submitted that the Tribunal is entitled to consider if, on the balance of probabilities, the 2009 Scheme would have been approvable as at the date of resumption.  Since the 2003 Scheme has been approved by the Building Authority, there is simply no reason why the 2009 Scheme would not have been approvable in view of the following agreed evidence :

(a)  The Building Authority would consider all material factors holistically;

(b)  The 2009 Scheme has satisfied all the fundamental issues which should have been considered under Reg. 19(2); and

(c)  The site coverage and plot ratio of the 2009 Scheme were only very marginally in excess of those of the 2003 Scheme which both Professor Chung and Mr SK Chan considered to be “infinitesimal”.

47. Having heard the evidence of Professor Chung and Mr SK Chan, we find, particularly from their joint statement dated 13 December 2013 as stated in §16 above, that the 2009 Scheme would have been acceptable under Reg. 19(2) as at the date of resumption of the Lots.  The 2003 Scheme has been approved by the Building Authority and the differences for site coverage and plot ratio between the 2003 Scheme and the 2009 Scheme are deemed infinitesimal, there is no reason to suspect that the Building Authority is unlikely to approve the 2009 Scheme.  We take the evidence that the restriction on development intensity was only given by the Buildings Department in a meeting with the Lands Department in July 2012 in anticipation of the hearing for the purpose of determining the compensation payable. The objection by the Building Authority against the marginal increase in intensity is not supported on any ground lest the captioned resumption which however should not be taken into account under the Pointe Gourde principle[29]. We consider a villa type development in the form of the 2009 Scheme was an approvable development at the date of resumption.

48. Having said so, we agree with Mr Faulkner that because of the requirement under Reg. 19(2) and the approval of the Building Authority is required, there stands some uncertainty as to the development potential of the Lots[30].  This can be demonstrated by the different position taken by the surveyors for the applicant.  For instance, in the initial claim for compensation by Mr A Chan’s predecessor submitted on 25 November 2002, the development potential relied on was mere 1,026 sq m (or a plot ratio of 0.507)[31] which indicated a substantial difference from the 2003 Scheme and 2009 Scheme .  

49. The House of Lords in the judgment of Transport for London v. Spirerose Limited [2009] 1 WLR 1797 referred, for instance, to a valuation principle as contained in Johnson, Davies and Shapiro, Modern Methods of Valuation of Land, Houses and Building, 9^th ed (2000):

“… As the hope (for getting permission) crystallises into reasonable certainty of a permission at some stage, a valuation can be attempted based on the potential development value deferred for the anticipated period until permission will be forthcoming, but with some end deduction to reflect the lack of certainty. Indeed, since most developers will buy only when permission is certain …. any sale in the period of uncertainty will probably require a significant discount on what might otherwise appear to be the full (development) value.”[32]

50. Mr A Chan admitted he had not applied such a discount, significant or otherwise in his valuation to reflect (i) the time required for the Reg. 19(2) determination, and (ii) the uncertainty on the extent of the development intensity to be determined by the Building Authority.  We found these uncertainties should be factored in the assessment even though the 2009 Scheme is considered an approvable development at the date of the resumption.

Uncertainty as to Trespassers

51. It is also not in dispute that there were trespassers present on the Lots at the date of resumption.  It was stated in the report dated 19 August 1998 prepared by C Y Leung & Company Limited who then acted for the applicant that “There were temporary structures, small timber houses and squatters at the date of reversion. As informed by our client, the subject lots had not been leased to anyone ever since our client acquired the property on 1 September 1981 and the occupiers are considered as trespassers.”[33]

52. It is submitted by the respondent that there is the uncertainty as to the time for the removal of the trespassers as well as uncertainty as to whether they could be removed at all.  Mr Tsang gave evidence that the Lots had been kept within his family for a long time at least from 1969, ie more than 20 years prior to the date of resumption and the family was unable to tell when the trespassing had first begun.  The respondent contends that this posed a real risk to the hypothetical potential purchaser which Mr A Chan also accepts that he would be unable to quantify such risk of uncertainty in terms of value.

53. The applicant rebutted that despite the allegation of some 30 families staying there as alerted by the Island District Office in the letter dated 13 March 1996, Mr Tsang gave evidence that no further claim was received from any alleged trespassers after his then solicitors met the trespassers once or twice.

54. We accept the evidence of Mr Tsang which is not shaken that there was no claim ever received from any alleged trespassers.  We would not speculate as to the reason for the nil claims from these trespassers, be it due to subsequent clearance by the Government according to its prevailing clearance policy or not.  However, having regard to the 30 demand letters put forward by the respondent[34] and to Annex A which tends to show the significance of trespassing, we agree with the respondent that not an insignificant discount had to be allowed in the valuation for the costs and time of clearance.

55. Again Mr A Chan failed to do so in his valuation.

Conclusion on Villa Type Development

56. Having considered the above argument, we are not satisfied that the villa-type development proposed by the applicant is the optimal development for the Lots since the applicant had failed to show that there is the demand for it.  And even if we are wrong on this, should the villa type development be the optimal development, substantial discount should be considered in view of the uncertainty as to the development potential as well as in evicting all trespassers.

Village-type Development

57. On the other hand, Mr Faulkner in his reports dated 21 July 2006 and 31 August 2006 considered that the Lots can be at best developed into a comprehensive NTEH residential development with a total Gross Floor Area of about 3,935.49 square metres (ie a plot ratio about 1.9451) which comprises 15 3-storey NTEHs on Lot No. 288, 4 3-storey NTEHs on Lot No. 289 and 3 3-storey NTEHs on Lot No. 293[35] (ie a total of 22 NTEHs on the Lots).  During cross-examination, Mr Faulkner confirmed once again this would be the development yielding the highest and best use of the Lots taking into account the surrounding environment and characteristics.

58. The applicant contends that the NTEH development is not the optimal development for the Lots. But as we have formed the view that the villa type development like the 2009 Scheme had not been proved by the applicant to be the optimal development, we agree with the respondent that the NTEH proposed by Mr Faulkner would be acceptable in light of the established village surroundings.

59. As stated above, the applicant concedes that if a NTEH development is held to be optimal for the Lots, he would not challenge the residual valuation of HK$20,600,000 provided by Mr Faulkner. Whilst our ruling on the optimal development above might have disposed of the matter, we proceed to deal with the valuation of the Lots on the basis of the 2009 Scheme proposed by Mr A Chan.

Cheung Sha Comparable

60. On the basis of the 2009 Scheme which he termed “a very unique low density high quality development” in his supplemental report dated 28 December 2009[36], Mr A Chan has provided his opinion of the market value of the Lots as at the date of resumption.  He adopts the direct comparative method of valuation by reference to a public auction of a site in Cheung Sha, being Lot 244 in DD 331 (“the Cheung Sha site”) on 3 June 1997 sold for $40 million or an accommodation value (“AV”) of $44,643 per sq metre.

61. In order to quantify the difference in land value between the Lots and the Cheung Sha site due to the differences in location, environment and accessibility, Mr A Chan has compared the data derived from the sale and purchase transactions of the village type developments in Tai O and Cheung Sha which difference he found to be 17%. Furthermore, as the difference in the sale price of the NTEH village type properties in Tai O and Cheung Sha does not equate to the difference in the AV, the residual valuation method has been adopted for the purpose of deducing the difference in the AV between the Lots and the Cheung Sha site[37]:

		Tai O		Cheung Sha	% Diff
Unit Sale Price (/sq m gross)		$15,600		$18,800	-17%
PV@ 10.75% for 1.5 years	x)	0.858	x)	0.858
	(A)	$13,385	(A)	$16,130
Unit Construction Cost (/sq m gross)		$6,500		$6,500
Profit @20% on costs	x)	1.20	x)	1.20
		$7,800		$7,800
	x)	0.9263	x)	0.9263
	(B)	$7,225	(B)	$7,225
(A)– (B)		$6,160		$8,905
Less Profit@ 20%	÷	1.20	÷	1.20
AV(/sq m)		$5,133		$7,421	-30%

62. With this difference of 30%, Mr A Chan proceeded to assess the market value for the purpose of compensation as follows[38]:

	Villa	Flat
AV of the Cheung Sha site (per sq m)	$44,643
Overall adjustment for the locational (including environmental and accessibility) factor	-30%	-40%
AV applicable to the Lots (per sq m)	$31,250	$26,785
Potential GFA of the Lots (sq m)	2,259.609	298.425
Open Market Value of the Lots	$70,612,781	$7,993,313
	Total:	$78,606,094
	Say	$78,606,000
Overall AV(per sq m):		$30,729

63. Following Mr A Chan’s approach, Mr Faulkner had attempted to assign adjustments to the different factors between the Lots and the Cheung Sha site as follows[39]:

Adjustment Factor	Adjustment Rate
Location/accessibility	-30%
View	-20%
Site Condition (ie occupation by trespassers)	-10%
Development Density	-5%
Site Layout & Shape	-3%
Public right of way cutting through	-5%
Quality/ Type of the Proposed Development	-15%
Total:	-88%

64. It is the contention of the respondent that the Cheung Sha comparable is not an appropriate comparable and the way Mr A Chan derived the AV of the Lots is fundamentally wrong.

65. Cheung Sha is a popular residential and resort housing area on the southern side of the Lantau Island, relatively close to a beach and ferry pier and offers seaview whereas Tai O is a tourist village located on the northwestern side of the Lantau Island with no non-village development save for Lung Tin Estate and Lung Hin Court.  Mr A Chan also acknowledges that there are differences between the Lots and the Cheung Sha site in terms of location, environment and accessibility.

66. Indeed, by reference to the table of differences between the Lots and the Cheung Sha site as stated at §34 above, one can easily discern that the Cheung Sha site is not a comparable to the Lots at all particularly in terms of its development density (when a plot ratio of 0.4 is compared with that of 1.264 before accounting for the space taken up by the public right of way).  As Mr A Chan acknowledged in his Supplemental Report dated 28 December 2009 at paragraph 12.1: “Cheung Sha is a residential and resort housing area, relatively close to a beach and ferry pier and offers sea view, whereas Tai O is a tourist village (where there is no non-village development except some subsidized housing developments) and the living environment is generally inferior.”[40]  Using the same term propounded by Mr Chow in explaining away the demand for the 2009 Scheme from that of the Lung Tin Estate, the Lots and the Cheung Sha site cater for different markets.  There is no evidence at all that Tai O or more particularly the Lots would share the same market sentiment in the Cheung Sha site as at the date of resumption. In this regard, we also bear in mind that the general market sentiment in Hong Kong has already passed not only the enthusiasm demonstrated in 1997 but also the recent years.

67. While we appreciate that the various adjustment rates adopted by Mr Faulkner are subject to dispute, we agree that the various factors require not insignificant adjustments.  That is, Mr A Chan failed to consider other important factors of adjustments apart from location, environment and accessibility and his adjustments for the latter factors by conducting a residual analysis in §61 above are inadequate.

68. Mr A Chan had stated in his Rebuttal Report dated 28 December 2012[41] that he “acknowledge there are locational difference between Cheung Sha and Tai O but there is no evidence to suggest Tai O cannot accommodate a villa type development if the sale price offered is commensurate with the characteristics of the product, including quality and location.”  Yet in §61 above, in order to quantify the difference in land value between the Lots and the Cheung Sha site due to the differences in location, environment and accessibility, Mr A Chan has compared the data derived from the sale and purchase transactions of the village type developments in Tai O and Cheung Sha which difference he found to be 17%.  He then proceeded with a residual valuation for the purpose of deducing the difference in the AV between the Lots and the Cheung Sha site.

69. At best, by doing this exercise, Mr A Chan was able to find the difference in AV of land for NTEH development but not the AV of land for villa-type development unless, as pointed out by this Tribunal at trial, Mr A Chan had made a very important assumption that the price differential between villa-type development and NTEHs in Tai O and Cheung Sha would be the same.  Such assumption cannot be supported if the sale price of a villa type development in Tai O has to “commensurate with the characteristics of the product, including quality and location.”

70. Taking into account the shabby environment in Tai O, for example, if the price differentials between the two types of developments in Tai O are smaller than those in Cheung Sha, the AV adjustments will be larger than 30%.  During cross-examination, Mr A Chan tried to argue that his selection of the NTEH comparables in the two areas had already reflected the differences in other attributes including view, privacy and intensity. We are however not persuaded this is the case by reference to the table of differences between the Lots and the Cheung Sha site as stated at §34 above.

71. We also pointed out that Mr A Chan has not taken into account the lack of carparking on the Lots. During re-examination, he explained that the amount of adjustment should not be significant because carparking at the Cheung Sha site is restricted to “not more than one space for every two residential units”, ie half of the residential units do not have carparking on site as well.  However, Mr A Chan conceded that some $50,000-$100,000 had to be allowed presumably for each space.  We are however not interested in the actual quantum of allowance; what we are concerned is the character and development intensity of the Lot vis-à-vis the Cheung Sha site is completely different.

72. We find in any event that the Lots and the Cheung Sha site are too different to be considered for any comparable value; otherwise we are not comparing like with like.  We found the Cheung Sha site is not a suitable comparable to be adopted in this case for the Lots and the assessment by Mr A Chan is also fundamentally flawed.

The Lamma Site

73. Mr A Chan then cross-checked his valuation with the result of another Government auction in respect of Lot 866 in DD 1, Ngau Kau Wan on Lamma Island (“the Lamma site”) held on 27 August 1997, ie two months after the date of resumption.  Again the particulars of the Lamma site as compared with the Lots are summarized below:

	The Lamma site	The Lots (based on the 2009 Scheme)
Site Area:	3,920 sq m	2,023 sq m
User:	Private Residential	Private Residential
Maximum GFA:	2,352 sq m	2,558.034 sq m
Maximum Site Coverage:	30%	42.143%
Maximum Plot Ratio:	0.6	1.264
Maximum no. of Units:	34	9 (as proposed)
Height:	Not exceeding 17m above HKPD and 3 storeys	Approximately 10.2 metres and 3 storeys
Parking Spaces:	Not available on Lamma Island	Not available on site

74. Mr A Chan considered the AV for the Lamma site, ie $27,211, which is about 11.4% less than the assessed overall AV for the Lots supported his valuation.  Likewise, save for the issue on the provision of parking spaces, we find most of the criticisms against adopting the Cheung Sha site as comparable similarly apply here.  Apart from the significant difference in development intensity and in location, Mr A Chan failed to apply adjustment to the different factors raised by Mr Faulkner as well as allowed discount for uncertainty in development potential and for the trespassers.  We found the Lamma comparable is also not a suitable comparable to be adopted in this case.

Valuation Method

75. Certainly, based on his assumption of the 2009 Scheme, Mr A Chan assessed the market value of the Lots by the Direct Comparison Method, criticizing on the other hand “the deficiency of residual valuation and the improper use of this method by Mr Faulkner”.  On the other hand, Mr Faulkner opined that since “the Cheung Sha site is the sole comparable which may not truly affect the market perception and the substantial adjustment is large in magnitude”, he maintained that the residual valuation method is the most appropriate method in assessing the market value of the Lots.

76. That the residual method of valuation suffers a series of subjective assumptions is well known in the valuation sector.  The Lands Tribunal has repeatedly stressed its reluctance to use this valuation method.  Its continued enforced use on many other occasions does not mean that its faults are any the less; it remains a valuation method of last resort which is inherently very sensitive to even small changes in the input variables[42].  

77. While we agree that the direct comparison method is usually the best method in valuation, we agree with Mr Faulkner that it is generally not a good approach to carry out any valuation by direct comparison method using a single comparable[43].  This is particularly the case as we found above that this single comparable, ie the Cheung Sha site should not be regarded as comparable at all. And the criticism by Mr A Chan against Mr Faulkner’s approach is also applicable to Mr A Chan’s adoption of a residual valuation for the purpose of deducing the difference in the AV between the Lots and the Cheung Sha site.

78. In Tin Kung Investment Limited v. Secretary for Transport, LDRW 16 of 2001 (unreported, dated 29 June 2004), the Tribunal raised concern about the many variables and quantum of adjustments required in the comparison exercise:

“Putting before anyone these statistics, there must be the concern whether the Comparables selected for valuation are indeed suitable for comparison. Making adjustment to compensate for the difference between two properties is not a perfect and effective valuation tool. What the experts have built in the valuation formula are largely subjective views (and such formula may be manipulated to arrive at an intended result). The subjective views tend to cause error, the risk of which goes in proportion to the quantum of adjustment made. Its application therefore is with limitation. It is suitable for use only if the two properties are in great similar but in minor place different. In the case where a large number of factors and amount of adjustment as the above are applied in the valuation, the risk of getting the valuation wrong is high. If this fundamental principle of application is not observed, the price of a commercial property in a central business area can be absurdly taken to find out the value of a piece of farmland in the green belt zone through adjustments. The great total number of factors/amount of adjustment adopted is a sheer indication of the unsuitability of a property for use for comparison to the other. In this regard, the Respondent's counsel has rightly quoted HH Judge Cruden's view in his book entitled "Land Compensation and Valuation Law in Hong Kong.”

79. While similar criticism may be directed towards using the auction result of the Lamma site, we consider the most appropriate valuation method in determining the market value of the Lots is the residual method.  We agree that where adequate comparables exist, the Direct Comparison Method is to be preferred but this is not the case here.  In Hofei Estates Limited v. Secretary for City and New Territories Administration [1980-82] CPR 486, although the valuation surveyors from both sides valued the development land resumed solely by the comparative method, the Lands Tribunal observed that the substantial number of adjustments necessary under direct comparison method reduced the quality of the valuations.  It remarked at §15 of the judgment that:

“In these circumstances a better approach would have been to have used the residual method. The adoption of the residual method would have enabled the valuers to have tested the value of the subject property in terms of optimum development in relation to cost and reasonable profit margins.”

Conclusion

80. Since we have already ruled out the 2009 Scheme to be the optimal development of the Lots, we agree with Mr Faulkner that the highest and best use of the Lots as at the date of resumption should be based on NTEH development.  In this regard, we note the proposed development layout and scale of development in terms of GFA, number of storeys, building height, etc are agreed by Mr A Chan as well in their joint statement dated 3 December 2013. Mr Chow for the applicant also concedes that if the Tribunal adopts the NTEH development as the optimal development for the purpose of assessing the value of the Lots as at the date of resumption, the valuation by Mr Faulkner in the sum of $20,600,000 is agreeable as the market value of the Lots.

Orders

81. Accordingly, we order that the respondent do pay the applicant compensation for the Lots in the sum of $20,600,000.  The matters of professional fees, interest and costs shall be adjourned to a date to be fixed, with liberty to apply for any other ancillary and consequential matters.

82. It remains for us to thank Counsel for their invaluable assistance.

Annex A

[1]  See http://www.housingauthority.gov.hk/en/about-us/news-centre/press-releases/index.html?key=1581

[2] See http://www.info.gov.hk/gia/general/201403/24/P201403240406.htm

[3] See Bundle D/242

[4] See Bundle E/93-99

[5] See Bundle B/197

[6] See Bundle D/91-109

[7] See Bundle D/113

[8] See Bundle D/209

[9] See Bundle D/210-211

[10] See Bundle D/231

[11] See Bundle A/111-113

[12] See Bundle C/52-61

[13] See Bundle C/80-89

[14] See Bundle C/144-147

[15] See Bundle A/111-113

[16] See Bundle C/1-20

[17] See Bundle C/21-35

[18] See Bundle C/36-43

[19] See Bundle C/44-51

[20] See Bundle C/62-79

[21] See Bundle C/90-124

[22] See Bundle C/125-143

[23] See Bundle A/110

[24] See Bundle C/73

[25] See Bundle C/97-109

[26] See Bundle C/129-132

[27] See pp 7 & 11 of Exhibit A1

[28] See Bundle C/131

[29] This principle, whose derives its nomenclature from the Privy Council decision in Pointe Gourde Quarrying and Transport Co Ltd v. Sub-Intendent of Crown Lands [1947] AC 565 (which was referred to in Waters & Ors v. Welsh Development Agency [2004] 1 WLR 1304 cited to this Tribunal by Mr Chow), is any increase (or in the present case decrease) in value wholly due to resumption is to be disregarded.

[30] See Bundle C/116

[31] See Bundle B/128

[32] See, for example, §72 of the judgment.

[33] See Bundle B/029

[34] See Bundle E/6-91

[35] See Bundle C/27 & C/47

[36] See Bundle C/67

[37] See Bundle C/77

[38] See Bundle C/78

[39] See Bundle C/34 & C/117

[40] See Bundle C/75

[41] See Bundle C/132

[42] See for instance Director of Lands and Survey v. Fung Ping Chung [1977] HKLTLR 37

[43] See for instance John James Toohey v. Hero Plaza Limited, LDNT 60/1999 (unreported, dated 8 July 2000) and Forsyth v Banbury Investments Ltd. [2000] 3 HKLRD 834