YIN SHUEN ENTERPRISES LTD. v. DIRECTOR OF LANDS

CACV 376/2001 AND
CACV 1636/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS. 376 OF 2001 AND 1636 OF 2001

(ON APPEAL FROM LANDS TRIBUNAL APPLICATION
NO. LDLR 5 OF 2000 AND LANDS RESUMPTION APPLICATION
NO. LDLR 3 OF 2000)

____________________

CACV 376/2001

____________________

____________________

J U D G M E N T

____________________

Hon Rogers VP:

1. These two appeals concern the amount of compensation which should be awarded in respect of lands which have been resumed under the Lands Resumption Ordinance, Cap. 124 (the "Ordinance"). Since similar issues were raised in these two appeals, they were heard together. At the conclusion of the hearing, this court said that it would give its reasons in writing, which we now do.

Background

2. The dispute in these cases turns upon whether the Lands Tribunal was correct in assessing the compensation payable to the applicants in respect of the resumption of their sites by taking the sales prices of comparable sites. It was said that those prices included a speculative element. The speculative element was generated by the fact that it might in the future be possible to use the land for building purposes, despite the provisions of the Block Crown Leases under which they were held. It was said that the prices of the comparable sites thus included what was called a "hope value". The argument on behalf of the Director was that section 12(c) of the Ordinance precluded an assessment being made which included a hope value and, hence, the basis of assessment was wrong.

3. The details of the calculation of the compensation are not directly in issue in these appeals. The facts of the cases may be briefly described as follows:

CACV 376 of 2001

The land in this appeal was some 1,236.9 square metres in the Fanling/Sheung Shui area. It was described as remaining portion of Lot No. 1629 in Demarcation District No. 91. We were shown a copy of the block Crown lease for that district and it contains two relevant clauses:

"AND FURTHER that the Lessee or any other person or persons shall not, nor will, during the continuance of this demise, use, exercise or follow, in or upon the said premises, or any part thereof, any noisy, noisome or offensive trade or business whatever, nor convert any ground hereby expressed to be demised as agricultural or garden ground into use for building purposes other than for the proper occupation of the same ground as agricultural or garden ground without the previous Licence of His said Majesty, His Heirs, Successors or Assigns, signified in writing by the Governor of the said Colony of Hongkong, or other person duly authorized in that behalf: AND FURTHER that the Lessee or any other person or persons shall not nor will at any time during the said term erect or construct any building or structure of any description on the said demised premises or any part thereof whether demised as agricultural or garden ground or otherwise without first having obtained the approval thereto of the Surveyor to His said Majesty, His Heirs, Successors or Assigns, or other person duly authorized by the Governor of the said Colony of Hongkong, in that behalf: AND ALSO that ..."

It would appear that the land has not been used for farming purposes for a very long time. Indeed, taking into account the types of permitted land use after the relevant lots were rezoned as "R(A)" (which do not include agricultural use), it is highly doubtful if the land can ever be used for farming again. The photographs which were included in the court bundle showed that the land has either been left unused or has been used for other non-agricultural purposes.

4. Originally the land was gazetted under the Town Planning Ordinance, Cap. 131 for government, institution or community use. On 27 February 1998, the draft Outline Zoning Plan No. S/FSS/7 was gazetted. The relevant lots were rezoned as residential "R(A)". Within the category of residential zoning there are different groupings namely R(A) to R(D). R(A) is high density and R(D) is low. On 16 October 1998, the Deputy Director of Lands caused a resumption notice to be gazetted under the heading "Resumption of Land for Fanling/Sheung Shui Development Site Formation and Servicing Works for Public Housing Development in Area 36 - Phase I Fanling, New Territories." The land was resumed in January 1999. Application was made to the Lands Tribunal for compensation in May 2000.

5. When the matter was heard before the Lands Tribunal the applicant claimed a sum of $10,120,000. That was calculated on the basis of $8,184 per square metre. The respondent put forward a price of $2,227,000. The Tribunal held that, even ignoring the zoning as R(A), the land was suitable for building purposes. It was so close to the fringe of several residential zones that, as Sheung Shui Town grew, the land was in any event likely to be rezoned, very likely as R(C)1.

6. The Tribunal had details of one sale of a lot which it considered was comparable. It adjusted the price downwards and in the judgment dated 14 February 2001 the Tribunal assessed the amount of compensation at $7,592,000.

CACV 1636/2001

The application in respect of this case related to two parcels of land in the western part of Yuen Long. The lots had a total area of 5,475.4 square metres. They were held under a similar block lease as that in respect of the first case, with similar covenants that no building was to be erected except buildings ancillary to agricultural purposes. The lots were close to trunk roads and also close to the central part of Hung Shui Kiu, a town between Tuen Mun and Yuen Long. Parts of the lots had been used for open storage.

7. In December 1992, there was a layout plan. On 18 June 1993 a draft development plan was gazetted by the Town Planning Board. That draft development plan showed the relevant site to be classed as Residential Group A suitable for flats. In the explanatory statement which was attached to that development plan, the relevant site was referred to as being zoned for development to be developed by the Hong Kong Housing Society. It was said that the development could enhance the role of Hung Shui Kiu as a district centre and improve the housing conditions of the lower income group in the area. That explanatory statement, however, had no statutory force.

8. In June 1996, the draft Ping Shan Outline Zoning Plan was gazetted. In September 1997, the Ping Shan Outline Zoning Plan was gazetted. This, like the 1996 draft plan, showed the relevant site as residential R(A)1. On 14 January 1999, the resumption notice was gazetted. It was headed "Resumption of Land for Yuen Long - Tuen Mun Corridor Public Housing Development in Area 13 in Hung Shui Kiu Yuen Long, New Territories." The land was resumed on 1 March 1999 and in February 2001 application was made to the Lands Tribunal for compensation. The amount claimed by the applicant was $62,300,000. The respondent raised similar arguments as in the other case and sought a valuation at $10,987,000. In the result the Tribunal ordered compensation in the sum of $57,495,000. Again in respect of this land, the Tribunal held that as development of adjacent land took place, the lots would also be ripe for development. The lots were close to trunk roads and close to the centre of Hung Shui Kiu. Even ignoring entirely the scheme underlying the resumption the land had potential for medium density residential development. The valuation was based on sales of lots which the Tribunal considered were comparable on that basis.

Assessment of compensation payable

9. The manner of assessment of compensation for land which is resumed under the Lands Resumption Ordinance is laid down in the Ordinance itself. Under section 10(1) it is provided that:

"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."

10. Section 10(2) specifies the 5 bases upon which the Tribunal shall determine the compensation under section 10(1). The relevant provision as regards these cases is contained in sub-subsection (a) namely "the value of the land resumed and any buildings erected thereon at the date of resumption". Although the other bases in section 10(2) upon which compensation may be determined are irrelevant from the point of view that the applicants based no claim thereon, in my view, they may throw light upon the scheme of the provisions relating to compensation and in particular the effect to be given to section 12(c). The other bases upon which compensation may be determined are the value of any easement or other right in the land resumed "owned, held or enjoyed by the claimant"; the amount of loss which has been suffered by the claimant because the resumed land has been severed from other land of the claimant. The remaining bases for the calculation of compensation are loss or damage to a business which has had to be moved and the costs and expenses incurred in moving from the resumed land.

11. The provisions of section 11 of the Ordinance are not directly in point as regards these cases. They relate to matters which may be taken into account when assessing the value of the land resumed or any buildings. In essence they are matters which may be taken into account in assessing compensation on the basis set out in section 10(2)(a).

12. Section 12 has been the focus of attention during the hearing. That reads:

"12. Additional rules for determining compensation

In the determination of the compensation to be paid under this Ordinance- (Amended 5 of 1924 s. 30)

(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); (Added 32 of 1973 s. 2. Amended 2 of 1988 s. 8(2); 4 of 1991 s. 9)

(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; (Amended 29 of 1998 s. 105)

(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: (Amended 29 of 1998 s. 105)

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. (Amended 5 of 1924 s. 30; 32 of 1973 s. 2; 5 of 1984 s. 6)"

13. Before turning to the provisions of section 12(c) upon which the case for the Director of Lands primarily turned, it is pertinent to note that section 12(d) lays down the primary basis for assessment as being the amount which a willing seller and a willing buyer could be expected to agree.

14. Mr Tang SC's argument, on behalf of the Director of Lands, focused on section 12(c). It was said that because the land in question in both cases was subject to the covenant not to use the land for building purposes that was a covenant which ran with the land. As such it bound both the owners of the land and their assigns. If the owner of the land wished to erect a building thereon, he would need either a licence or a permit to do so. Insofar as the land in question was valued at a rate higher than that appropriate for agricultural use that must be because it was contemplated that the land might be used for building purposes. Since it could not be used for building purposes other than after a variation of the terms upon which the land were leased, underlying that increase in value was an expectancy that a licence or permission to build would be granted. Since section 12(c) prohibited compensation being given in respect of any expectancy that a licence or permission would be given, the assessment of compensation had to be on the basis of the value of land as agricultural land.

15. Attractive though this submission is in its simplicity, it seems to me that there are two immediate difficulties with it. It fails to acknowledge the intrinsic value of land which, no doubt, varies from lot to lot and it fails to appreciate the realities of the commercial world to which section 12(d) requires observance. Taken to its logical extreme, this submission may have the result that the relevant lots should be worth virtually nothing because, bearing in mind the types of land use permitted by zone "R(C)", they cannot be put to any real use without first obtaining same kind of variation, permit and/or waiver from government.

16. Mr Yu SC, on behalf of the applicants, put his case on the basis that the land may have attributes which would give it a potential. That potential gave the land a value which was different in nature from an expectancy or a probability that a licence or permission may be granted. Although, it may seem a narrow distinction, as I shall endeavour to explain, it appears to me to be a real and correct one. As will become apparent, the distinction between an expectancy or a probability that an interest in land may be acquired on the one hand and the potentiality of the land on the other is one that has always been recognised in interpreting legislation relating to compensation in common law countries; it has been consistently recognised and applied in Hong Kong and is not affected by anything in the Land Resumption Ordinance.

Section 12(c)

17. The argument in this case revolved around the meaning of section 12(c) of the Ordinance. The first point to be noted in relation to section 12(c) of the Ordinance is that it relates to what might be globally referred to as interests in land. Our attention was drawn to the decisions of the Lands Tribunal and the Court of Appeal in Ching Chun Kau v Director of Lands & Survey [1978] LTLR 190 and 216 respectively. The point was made quite succinctly by Pickering JA at page 221 where, in relation to the word "licence", he said that it had been correctly conceded in the Court of Appeal that the word "licence" in the subsection connoted an interest in land.

18. The case involved compensation in respect of land which had been resumed which had been used as a dairy farm. It was necessary to obtain a licence, which was renewable annually, in order for a dairy farm to be operated. The Lands Tribunal included H H Judge Power as President, as he then was, and the highly distinguished lawyer DAL Wright as an additional member. It had held that, because the continued operation of a dairy farm on the land in question required the annual renewal of the licence, no compensation could be given in respect of the probability or expectancy that the licence would be renewed, because section 12(c) would prevent it. It was in that context that Pickering JA made that statement in relation to the word "licence". Indeed, Huggins JA made the same point in a slightly different way by saying that section 12(c) did not apply to a situation where a licence to operate a dairy farm was required. He said that what was being sought was compensation in respect of an unexpired term of the lease in relation to the land in question.

19. This view, that the ambit of section 12(c) is restricted to matters relating to interests in land, has been applied in subsequent decisions: see for example Million-Add Development Ltd v Secretary for Transport [1997] CPR 316 at 326-8.

20. Mr Tang SC, on behalf of the Director of Lands, argued that even if section 12(c) related to interests in land a restriction of the type referred to above in the lease was an interest in land. If the restriction were to be removed that would be granting an interest in land. For the purposes of the present case I consider it is unnecessary to decide the point. I incline to the view that a restrictive covenant in a lease is an interest in land. Hence, for the purposes of this case, I approach the matter on the basis that the grant or removal of a restrictive covenant in a lease should be regarded as an interest in land. For reasons which will become apparent, in my view, it does not alter the outcome of this case.

21. On the face of the matter I consider that the applicants' approach is correct. Section 10(1) requires the loss to be assessed. Section 10(2)(a) requires the compensation to be determined on the basis of the value of the land. Section 12 (d) requires the value to be taken as the amount that would be agreed between a willing buyer and willing seller. The best way of assessing compensation in accordance with these provisions is to take the amount of comparables as the starting point for the assessment. If the comparables taken are true comparables in terms of lease conditions and town planning orders, they will produce a result which reflects the value required to be taken under section 12(d). Of course, if the so-called comparable sales had been on the basis that there would be a modification of the lease conditions, that might be different. But that was not alleged to have been so.

22. Neither is there any suggestion that the tribunal had been asked to award compensation on any basis other than the value of the land. Specifically, compensation had not been asked for on the basis of an expectancy or probability that there would be a modification of the lease nor was it sought on the basis that the land should be treated as being sold as building land. When section 10(2) is considered, it can be seen that there are 5 bases on which compensation can be determined. Insofar as sections 10(2)(a) and (b) are relevant, that is the value of the relevant interest at the date of the resumption. What section 12(c) makes clear is that the value of a future interest cannot be the basis of an assessment of compensation.

Use of comparables Hong Kong

23. The assessment of the value of land which has been resumed by reference to comparable lots is consistent with the way in which compensation has been assessed in Hong Kong under the Ordinance. Indeed, this has been the position in circumstances where land which has a restricted use under the terms of what was previously a Crown lease and is now a Government lease and where the land has a foreseeable potential for development. In those circumstances it has been said that the price of the sales of the land has had included in it a 'hope value'.

24. A succinct statement in that regard is to be found in the decision of Judge Cruden sitting as the presiding officer of the Lands Tribunal in the case of Suen Sun-yau v Director of Buildings and Lands [1991] HKDCLR 33 at 41. The case concerned the resumption of agricultural land which was suitable for building use. At page 41A-D Judge Cruden said:

"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 for residential use. I appreciate any purchaser would require to obtain Crown approval for any change of use; probably have to pay a premium; and comply with other conditions. However, I am equally satisfied 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."

25. Similarly in the case of Cheung Lai-wan and others v Director of Public Works [1977] LTLR, the Lands Tribunal expressed this same view. The Tribunal on that occasion included Judge Power as President as well as Mr Lyons and DAL Wright. In the Decision dated 14 January 1977, the Tribunal referred to United Kingdom authorities in relation to the fundamentals of the basis of valuation. At page 17 it said:

"These authorities establish that if it is shown that a property has an added value on the open market because of the likelihood that it will be incorporated into a scheme of redevelopment then this added value must be taken into account when compensation is being assessed."

26. In that case the Tribunal was not satisfied on the facts that there was a potentiality which should be taken into account. It appears from page 20 of the report that the Tribunal was, in any event, concerned that proper comparables had not been provided on which any assessment could be made.

27. The fact that potentialities have been taken into account in assessing the value of land was referred to in the Report of the Special Committee on Compensation and Betterment, which was published in 1992. The Committee had been set up in July 1991 under the chairmanship of JR Todd to consider and make recommendations on "the questions of compensation and betterment in the Comprehensive Review of the Town Planning Ordinance": see the letter dated 11 March 1992 to Lord Wilson, the then Governor of Hong Kong from the Special Committee.

28. At pages 26-27, under the general headings "The Position in Hong Kong. Crown Lands Resumption Ordinance", the report read as follows:

"2.6 As the Ordinance sets out only basic provisions they have had to be reinforced by common law principles. The main ones which have been applied are:

...

(e) where the resumed land has development potential, the owner is entitled to have the value of his land assessed to include the development value;

(f) the owner is entitled to have the land valued under its highest and best use;

...

2.7 We have set out these points in detail as it is apparent that some of those who have made submissions have interpreted the position solely in terms of the wording of the Ordinance and have not taken account of how the legislation has been interpreted which is significantly more liberal to owners."

29. In Land Compensation and Valuation Law in Hong Kong, 2nd Edition, Cruden said at page 100-101:

"Section 12(c) is solely concerned with excluding compensation for any expectancy or probability of the grant or of any renewal of a lease or similar possessory grant which cannot be enforced as of right. It does not extend to excluding any expectancy or probability of future development value."

30. Before concluding references to the approach in Hong Kong decisions relating to assessment of the value of land which has potentialities, I would make reference to two decisions which have featured significantly in the argument.

31. The Court of Appeal decision in Ching Chun-kau v Director of Lands and Survey has already been noted. The composition of the Lands Tribunal on that occasion was the same as in the Cheung Lai-wan case which had been decided six months earlier. The Lands Tribunal in the Ching case considered that the value of the land resumed to the applicant had been dependent upon the renewal of the licence to run a dairy farm. That was an administrative licence. As already observed, the Court of Appeal held that section 12(c) of the Ordinance had no application to such licences. Nothing that was said by the Lands Tribunal in this decision affected or detracted from what the same Tribunal had said six months earlier, because potentialities were not in issue. Indeed, the Court of Appeal remitted the matter to the Lands Tribunal for reconsideration of the applicant's case.

32. Another case to which considerable reference was made in the course of argument is the decision of the Lands Tribunal in Watford Construction Co Ltd v Secretary for the New Territories [1978] HKLTLR 253. As it happened, this decision was dated 11 July 1997, i.e. the day before the Tribunal's decision in the Ching case. Judge Power was President although the composition was otherwise different from that in the other two cases. The land in question appeared to have been demised as agricultural land. It had been leased by the previous owner to the Secretary of State for Defence for use by the Army. That use had come to an end. On at least part of the land there were buildings of the Nissen hut variety. The land was resumed by the Government for use as the site of a police training school. The previous owner had sold the land to the claimant for $5.16 per sq. ft.

33. The evidence as to the value of the land appears to have been highly unsatisfactory and was the subject of considerable criticism by the Tribunal. On the part of the applicant the only evidence given was from a Mr Tsui who claimed to have purchased the land from the claimant at auction for a price of $17.20 per sq. ft. The Lands Tribunal did not accept Mr Tsui's evidence and held that he was not a witness of truth. No doubt the parties made submissions in circumstances where they were unaware of the unacceptability of Mr Tsui's evidence. The contention on behalf of the applicant had been that the Lands Tribunal should ascertain the value of the land if sold in the open market and that "if the element of expectancy or probability can be identified or quantified" section 12(c) would then come into play. It is not entirely clear from the report whether it was being argued that the expectancy or probability related to a change in the restrictive covenant in the lease or on the other hand to some administrative permission or licence. It appears that at least part of the argument on behalf of the applicant had been that there had been no restriction in the lease confining the use of the land to agricultural purposes.

34. Be that as it may, it was in the context of that approach to section 12(c) that the Tribunal said that it could not accede to the argument that required such a two-stage process of first ascertaining the open market value and then quantifying and deducting the expectancy or probability factor. After saying that, at page 260 the Tribunal said:

"This may, in certain cases, be a proper and useful approach but the Tribunal can see nothing in s.12 that would prevent it from approaching the valuation of land restricted to agricultural use by using the sales of comparable land which is similarly restricted. Indeed, in the present case, the Tribunal is satisfied not only that this is a proper and permitted approach under s.12 but also that it is the approach to the problem of valuation most likely to result in a correct valuation."

35. That statement would be consistent with an approach which would permit the Tribunal to take as a guideline the sales prices of comparable lots, even thought the sales prices had built into them an increased value because the land had attributes or potentialities which might only have been realised upon the variation of the lease.

36. The evidence on behalf of the government had been contained in two lists of comparable sales of agricultural land. The Part A list consisted of sales of land which was used solely for agricultural purposes. The Part B list consisted of sales of land where usages other than agriculture were found on the sites. The government witness had excluded the comparables set out in Part B. At the foot of page 260 the Tribunal indicated that the government witness had been correct in so doing because the sites in Part B appeared to have contained elements which would have made them suspect as comparables for land restricted to agricultural use. It was noted that the government's witness considered that the high values obtained in some of the Part B transactions reflected presence of elements of speculation and expectancy of development in view of the close proximity of those lands to the market town of Shek Wu Hui. The Tribunal said that it had been correct not to use such sites as comparables because they appeared to have contained elements which would have made them suspect as comparables for land restricted to agricultural use. It went on however to say that it considered that it might have been assisted if some of the Part B transactions had been the subject of more detailed analysis. It is noteworthy also that in respect of the Part A comparables, i.e. those where there had only been agricultural use, the government witness had recognized that the location and accessibility of the lots and in particular their closeness to Shek Wu Hui was a factor which affected the price obtained for the land.

37. There is no indication in the decision that the land in question had potentialities and, indeed, the argument on behalf of the applicant does not appear to have been put in that way. Hence, it seems that the decision in this case, turned on the facts. The Tribunal did not depart from what it had said in the Cheung Lai-wan case. Indeed, the passage quoted above gave a clear indication that had relevant comparables included land which had potentialities those would have been used in assessing compensation.

The common law position

38. The view adopted in the Suen Sun-yau case appears to accord with the view taken in common law jurisdictions in relation to the assessment of compensation for compulsory acquisition. Our attention was drawn to Cripps on Compulsory Acquisition of Land 11th Edition [1962]. At paragraph 4-007 the general rule is stated that:

"4-007 A mere expectancy, however reasonable, of renewal of a lease could not be taken into account in assessing compensation. That situation prevailed even if the claimant had expended money on the land which was taken."

39. Significantly as regards this case, paragraph 4-012 reads:

"Potentialities to be included. All potentialities of the land must be taken into account as part of the value to the owner, but such potentialities must be considered as possibilities and not as realised in the hands of the purchaser so as to be in effect the value to the purchaser. The potentiality is not excluded from the value by reason of the requirement of the statutory powers, or because there is only one particular purchaser; but restrictions on the enjoyment of the land must be taken into account. The possibility of the removal of restrictions, however, must be taken into account."

40. Reference can also be made to some of the decisions. One of the early statements of the law is contained in the advice of the Privy Council delivered by Lord Dunedin in Cedars Rapids Manufacturing & Power Co. v Lacoste [1914] AC 569 at 576. He refers to the principles upon which compensation for land taken is to be awarded being the same in Canada as in England. He refers to the judgments of Vaughan Williams & Fletcher Moulton LJJ in the case of Re Lucas & Chesterfield Gas & Water Board [1909] 1 KB 16 as being exemplary with regard to the position with which the law was exhaustively and accurately portrayed. He refers to two basic propositions. The first being that the value to be paid was the value to the owner as it existed the date of taking and not the value to the taker. The second was that the value to the owner consisted in all advantages which the land possesses, present or future, but it is the present value alone of such advantages that falls to be determined. Significantly he went on to say:

"Where, therefore the element of value over and above the bare value of the ground itself (commonly spoken of as the agricultural value) consists in adaptability for a certain undertaking (though adaptability, as pointed out by Fletcher Moulton L.J. in the case cited, is really rather an unfortunate expression) the value is not a proportional part of the assumed value of the whole undertaking, but is merely the price, enhanced above the bare value of the ground which possible intended undertakers would give. That price must be tested by the imaginary market which would have ruled had the land been exposed for sale before any undertakers had secured the powers, or acquired the other subjects which made the undertaking as a whole a realized possibility."

41. I would mention two further statements of the law. First by Eve J in his decision in Re South Eastern Railway Company and London County Council's Contract [1915] 1 Ch 252 at 258. In the course of his judgment he enumerated the principles involved in assessing compensation for compulsory acquisition. They were as follows:

(1) The value to be ascertained is the value to the vendor, not its value to the purchaser; (2) in fixing the value to the vendor all restrictions imposed on the user and enjoyment of the land in his hands are to be taken into account, but the possibility of such restrictions being modified or removed for his benefit is not to be overlooked; (3) market price is not a conclusive test of real value; (4) increase in value consequent on the execution of the undertaking for or in connection with which the purchase is made must be disregarded; (5) the value to be ascertained is the price to be paid for the for the land with all its potentialities and with all the use made of it by the vendor; ..."

42. Finally I would refer to the advice of the Privy Council in the case of Maori Trustee v Ministry of Works [1959] AC 1. The advice was delivered by Lord Keith of Avonholm. He expressed much the same sentiments. From page 13 to the end of the report he explained the need to quantify the potentiality of the property. In doing so he referred to a number of previous decisions and judgments including that of Dixon CJ in Turner v Minister of Public Instruction (1956) 95 CLR 245 at 269 and the speech of Lord Dunedin in Corrie v MacDermott [1914] AC 1056 at 1064.

43. Thus, at common law, the position is that the person entitled to compensation is entitled to have that compensation assessed on the basis of the value of the land resumed or taken. That value would include the attributes of the land which would give it its potentialities. Almost by definition no two lots of land can have the same attributes. The attributes or potentialities of the land are to be distinguished from the rights or interests in the land possessed by the person seeking compensation. If the person seeking compensation only has a limited interest in terms of years he may not claim compensation on the basis that his term of years may be extended: see for example the well known case of Mrs Mary Lynch v The Corporation of the City of Glasgow (1904) 5 F. 1174 (Court of Session). On the same principle, if the interest is otherwise limited, for example if there is a restrictive covenant which prevents the use of the land in a manner which would exploit the potentialities thereof, the owner of the land cannot claim compensation on the basis that restrictive covenant is removed. Nevertheless the land retains its potentialities and, as the authorities have shown, those potentialities must be taken into account together with the likelihood and possible costs of realising them.

Section 12(c)

44. I do not consider that the enactment of section 12(c) of the Ordinance alters in any way the law as developed in other common law jurisdictions. As the Court of Appeal has previously held, this section relates to interests in land. In referring to expectancy and probabilities of the acquisitions of such interests the subsection reflects the principles which have always been applied.

The present cases

45. Turning to the facts of the present cases, as has already been noted, the lots of land had their own attributes. Those attributes were, for example, related to the proximity of the land in the first case to Sheung Shui and the convenience of the land having regard to nearby roads and highways. In relation to the land involved in the second appeal again it was close to the central part of Hung Shui Kiu and was, again, conveniently located for major roads.

46. In relation to the potentialities of the land the effect of the Town Planning Ordinance Cap 131 cannot be overlooked. Land use is now controlled by means of town plans, the development permission area plans and the outlying zoning plans. Plans produced under the Town Planning Ordinance have statutory force. It is perhaps pertinent to note, also, that this statutory planning system was extended to cover the New Territories from 1991.

47. As already stated above, under section 12(aa) of the Lands Resumption Ordinance "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". It is noteworthy that omitted from that list is section 4(1)(b). Interestingly it is that subsection which relates to zones or districts set apart for residential use.

48. Indeed, section 4 of the Town Planning Ordinance is of some interest since under subsection (2) it is provided that the Board may recommend to the Chief Executive the resumption of any land which interferes with the layout of an area shown on a draft or approved plan or a master layout plan. In those circumstances the resumption would be treated as being a resumption for a public purpose within the meaning of the Land Resumption Ordinance. Subsection (3) reads:

"Except in the case of resumption under the said Ordinance no compensation shall be paid to the proprietor or any person interested in any holding by reason of the fact that it lies within or is affected by any zone or district set apart under subsection (1)(b)."

Section 4(3), thus, specifically contemplates the possibility of compensation being paid under the Lands Resumption Ordinance where land is resumed after it has been set apart for inter alia residential use.

49. The practical reality in the present cases is that although the lots of land were restricted to agricultural use under the terms of the original Crown lease, their future use as agricultural land was by no means assured. It appears that the land could have been used for open storage but that, eventually, it was more likely to be used for housing. In this context, our attention was drawn to the now formalized process for applying for exchange of land and for modification of lease conditions.

50. By taking the value of comparable sites which were similarly restricted, I consider that, in both cases under appeal, the Lands Tribunal approached the matter on the correct basis. The applicants were entitled to have the value of their land assessed on the basis which included recognition of the attributes which the land had. As has been said in many cases before, probably the most satisfactory way of assessing that value is to take the sales prices of comparable sites which have similar attributes: that would probably result in the most satisfactory way of assessing the various factors which need to be assessed where the land has unrealized potentialities.

Explanatory Memorandum and Statements made on the introduction of section 12(c)

51. In the course of his argument, Mr Tang placed great stress upon the Explanatory Memorandum which accompanied the Bill in 1922 which introduced section 12(c). What was stated in the explanatory memorandum was reflected in the speech of the Attorney General on the introduction of the Bill. Initially it was suggested that the explanatory memorandum of a bill might have a different position to statements made on the introduction of a bill and might be admissible as a matter of construction even though such oral statements were not. As it transpired, that argument was not pursued.

52. I should state at the outset that I do not consider that it is permissible in this case to give consideration either to the explanatory memorandum or any statement made by the Attorney General in 1922. I do not consider that there is any ambiguity or difficulty in construction leading to obscurity which would make resort to extrinsic material permissible in accordance with the principles laid down in Pepper v Hart [1993] AC 593. Nor do I consider that the statements sought to be relied upon help in the construction of section 12(c). It is, therefore, with some hesitation that I even go on to consider the statement. Before doing so I would emphasize that, particularly in relation to a provision which was enacted 80 years ago, extreme care must be taken. In the course of the judgment Chan King Wan and another v Honest Scaffold General Contractor [2001] HKEC 159, I demonstrated that the whole history, even including that of the amendment, needs to be carefully considered.

53. The Crown Lands Resumption Ordinance was enacted in 1900 following previous legislation. There were a series of amendments before 1922. Having looked at some of the bills and other records that are available in relation to those amendments the manner of their introduction does not instil any confidence that the Legislative Council of those days considered the amendments in any depth. Many of them were contained in bills introducing amendments to a number of quite different ordinances.

54. The statement in the explanatory memorandum is under the rubric "Objects and Reasons". It reads:

"1. The object of this Ordinance is to make it clear that in resumptions under the Crown Lands Resumptions Ordinances 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 amendment of Ordinance No.14 of 1921 on this point is that the 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 the of the land for agricultural purposes in the hope that they may be allowed to convert it into building land. The claimants 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 arise 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.

4. For convenience, the whole of section 2 of Ordinance No. 14 of 1921 is to be repealed and re-enacted but practically the only part of the substituted section which is new is paragraph (c)."

55. The circumstances in Hong Kong 80 years ago were clearly very different from those prevailing now. 80 years ago there was no town planning and no Town Planning Ordinance. There was, apparently, no recognised system of premiums payable for removal of restrictions in Crown leases. Indeed, the New Territories was undoubtedly a very different place from that which it is now. It was then clearly intensely rural.

56. Section 10 of the Crown Land Resumption Ordinance as it existed in 1922 would appear to have read:-

"10. Any Board when constituted shall have the following powers and authorities:-

(1) To determine the compensation to be paid in respect of such resumption or in respect of the extinction of any right or easement caused by such resumption, regard being had not only to the value of the land taken and any buildings thereon but also to any damage or injury resulting to the owner of the land resumed by reason of the severance of such land from other land of such owner contiguous thereto and to a award compensation in respect of such resumption or extinction to all persons claiming compensation to whom the Board may find compensation to be due;

..."

57. Thus the section, although similar to the present section 10, was framed differently. The key words of section 10(1) were that compensation was to be given in respect of resumption of the land or extinction of any right or easement. The words resumption and extinction appeared both at the beginning and end of the subsection. Looked at in that context the meaning of the new provision meant that no compensation would be given in respect of any expected or probable interests in land that might be obtained in the future. Valuation of the interest in the land based on the land's attributes was therefore not affected.

58. How the compensation was in fact calculated in the early part of the last century is not entirely clear. It is interesting to note that the amendments introduced in 1921 were to introduce what are now subsections 12(a), (b) and (d). Those, which are now 12(a) and (d) were modelled upon sections 2(1) and (2) of the Acquisition of Land (Assessment of Compensation) Act 1919. That corresponding to section 12(b) had a similar effect to section 2(4) of the Act. In the explanatory memorandum to the 1921 bill it was stated under Objects and Reasons that:

"1. This bill contains the three following main provisions:-

(a) The customary 10% allowance for compulsory acquisition is to be abolished.

(b) The compensation is to be based on the amount which the property would fetch in the open market if sold by a willing seller.

(c) No compensation is to be given in respect of any use of the land which is not in accordance with the terms of the crown lease under which the land is held."

59. The reference to the 10% allowance is of some interest since the way the law has developed in other jurisdictions and the present statutory provisions in Hong Kong leave no scope for it.

60. Insofar as the explanatory memorandum for the 1922 amendments alludes to the fact that the principle was not new and was in force under the Lands Clauses Consolidation Acts, as has already been explained at some length, the way section 12, and in particular section 12(c), has been construed has been entirely in accordance with the common law. Whereas it is entirely consistent with that not to grant compensation on the basis that the use of the land is use which is contrary to restrictions in the Government lease, the explanatory memorandum does not say that the natural attributes of the site giving it its potentialities, whether they be convenience of access or other attributes, should not be included as part of the value of the land in question.

Article 105 of the Basic Law

61. The first two paragraphs of Article 105 of the Basic Law reads as follows:

"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."

62. In view of the conclusion to which I have already come it is unnecessary to make any further observation in relation to the arguments which had been advanced based on this provision. Those arguments were on the basis that section 12(c) required the value of any lot to exclude any potentialities which that lot may have. Since that is not my interpretation of the legislation, it becomes unnecessary to consider whether Article 105 precludes such an interpretation. In my view, however, Article 105 requires a real or proper value to be given in respect of any compulsory acquisition. It is a section of broad meaning. It precludes compensation being assessed on an arbitrary or unrealistic basis. It would seem difficult to reconcile Article 105 with any notion that the value of property could be assessed on a basis which did not incorporate the natural attributes of the land in question.

The Pointe Gourde principle

63. Finally, brief mention should be made of the fact that it was the appellant's contention that in respect of the second case, the Tribunal had erred in coming to its conclusion as to the value of the land by failing to ignore the residential zoning introduced by the Ping Shan Outlying Zoning Plan. It was said that in doing so the Tribunal had breached what is referred to as the Pointe Gourde principle.

64. That principle takes its name from the case of Pointe Gourde Quarrying and Transport Co Ltd v. Sub-intendent of Crown Lands [1947] AC 565. Citing point (4) in the summary of the law by Eve J. in South Eastern Railway Company v London County Council's Contract quoted above, Lord MacDermott giving the advice of the Privy Council said at page 572 of the report:

"It is well settled that compensation for the compulsory acquisition of land cannot include an increase in value which is entirely due to the scheme underlying the acquisition."

65. The appellant's point was that the notes to the draft outlying zoning plan and the draft Ping Shan development permission area plan which had been issued in 1993 showed that the area had been earmarked for development by the Hong Kong Housing Society. Although, the outlying zoning plan and the draft development permission area plan had statutory effect, the Explanatory Statement which contained the reference to the use to be made of the land does not have statutory effect. The latter only relates to possible Government intention which can be changed without notice.

66. It would seem that, as such, the Lands Tribunal was not only entitled to, but correct in reaching, the conclusion that the compulsory resumption scheme which took effect by the gazetting of the Resumption Notice in January 1999 started much later than the zoning exercise of the 'Ping Shan' area. The Lands Tribunal was therefore correct in saying that the Resumption Scheme was plainly independent of the zoning exercise. Whereas, therefore, under the Pointe Gourde principle, the Tribunal had to ignore the effect of the scheme underlying the resumption, the rezoning exercise was quite different.

67. Moreover, it is clear from page 10 of the judgment that the Tribunal reached the conclusion that the lots in question had potential for medium density residential development and would be ripe for development in the future. This conclusion had nothing to do with the scheme underlying the resumption.

68. In my view there is no basis for interfering with the Tribunal's findings of fact in this regard.

Conclusion

69. In conclusion, therefore, I consider that these appeals should be dismissed. There should be an order nisi for costs in favour of the respective applicants.

Hon Le Pichon JA:

70. I agree.

Hon Chung J:

71. I agree and have nothing to add.