LAI KIT LAU MUTUAL AID COMMITTEE v. COMMISSIONER OF RATING AND VALUATION

Rating - twofold basis of valuation - first conditions of hypothetical tenancy prevail over actual tenancy conditions but not over conditions of ownership - secondly the physical tenement must be valued on the basis of lawful uses within the same mode or character as the actual existing occupation - relevance of common law rebus sic stantibus principle - in exceptional circumstances where the actual tenant would be the only hypothetical tenant the actual rent is generally the best indicator of the market rent - Held: Rateable value of mutual aid committee room reduced from $19,200 to $4,560 - Sections 7(2)(5), 44 Rating Ordinance, Cap. 116.

IN THE LANDS TRIBUNAL OF HONG KONG

(Appellate Jurisdiction)

Rating Appeal No. 9 of 1984

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JUDGMENT

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1. The appellant is the tenant of The Hong Kong Housing Society under a written monthly tenancy agreement which commenced on the 1st day of September 1982 of a tenement known as Unit 111, 1st Floor, Lai Kit Lau, No. 38 Lai Tak Tsuen Road, Causeway Bay, Hong Kong. At the commencement of the tenancy the monthly rent was $185 exclusive of rates since when it has been inorcased to $380 per month exclusive of rates which amounts to an annual rent of $4,560 exclusive of rates.

2. On the 8th day of April 1984 the Commissioner of Rating and Valuation, pursuant to Section 26 of the Rating Ordinance, served notice of an interim valuation on the appellant under which he assessed the rateable value of the subject tenement at $19,200 as at the 1st day of April 1984. The appellant objected under Section 40 to that interim valuation on 28th March 1984. The Commissioner on the 29th day of May 1984 under Section 40, gave notice of his decision confirming his valuation of the rateable value of $19,200. On the 22nd day of June 1984 the appellant, pursuant to Section 42 appealed against that notice of decision to this Tribunal.

3. We have now heard evidence and submissions from both parties. The appellant submitted that the rateable value should be reduced to $4,560 being the annual rent actually paid. The Commissioner supported his original rateable value of $19,200. Blocks I, II, III and IV of Lai Kit Lau comprise four circular blocks each containing 27 floors. The subject tenement is situate On the 1st Floor of Block I. The tenements within those Blocks are, because of their circular shape, tapered. It is common ground that after these Blocks wore constructed in 1976 a number of the tapered bays in the lower floors, towards the rear of the Blocks facing the nearby steep hillside, were left open and not enclosed to form residential units. These open bays are designated in the occupation permit issued under the Buildings Ordinance dated the 27th day of January 1976 as play areas.

4. The Lai Kit Lau Mutual Aid Committee was formed in 1977 in respect of Block I. Mr. Yue Hui-kwong, by leave, represented and gave evidence for the appellant. Mr. Yue was a member of the original Committee formed in 1977, being elected Chairman in 1979, a position he still holds. He stated that at first the Committee met in vacant residential units within Block I and was also allowed by the Housing Society to use a small room in Block I for storage purposes. This storage room was too small in which to hold meetings.

5. In 1982 the appellant negotiated the present monthly tenancy with the Housing Society in respect of what was then an open bay used as a play area. The Society was responsible for constructing walls on the open sides of this particular bay and installed the necessary doors and windows. Thus the subject tenement was created from an open bay formerly used as a play area into the present Unit 111. It was common ground that the subject tenement is not supplied with water nor does it contain a toilet. The only access door is from the play area and not from the common passageway. The parties further agreed that the appellant principally uses the subject tenement as a meeting room and it also provides incidental storage facilities for the Committee's property.

6. Block I provides residential accommodation for 486 families of which 460 are members of the Committee. There are some shops on the ground floor. The membership fee is $2 per month. In addition, the Committee receives annually from the Government a grant of $2,000 towards its activities. Apart from keeping in close liaison with the Police in respect of security matters and with the Eastorn District Board, the Committee has a wide range of recreational, social and public service activities. These include arranging recreation for its members, organising functions to celebrate festivals and encouraging the registration of electors for District Board elections. The appellant also called Mr. C.K. Tong of the City and New Territories Administration, whose responsibilities include Causeway Bay and he stated that the appellant is a model Mutual Aid Committee. Mr. Yue stated that the appellant holds regular monthly meetings in the subject tenement and also holds additional meetings as and when required.

7. The grounds advanced by the appellant in support of the appeal was that the actual rent paid was only $4,560 per annum; the tenement is only used for meetings; there is no water supply; there are no toilet facilities; the appellant is a non-profit organisation whose public service role is recognised by Government support including the annual subsidy of $2,000; the tenancy agreement from the Housing Society in Clause 3(f) limits the use of the premises "for the sole purpose of a conference room of the Mutual Aid Committee".

8. The Commissioner opposed the appeal. The Commissioner stated that the actual rent of $380 per month was not the current market rent but a special concessional rate granted by the Housing Society and known as "welfare rent" which was currently calculated at the rate of $11 per square metre; that the subject tenement would without structural alteration be suitable for both office and storage purposes. The Commissioner had therefore considered current rents for 9 other tenements before arriving at the rateable value. These included offices, medical clinic, shop, home for the elderly, police unit and storage premises. The Commissioner also pointed out that the Rating Ordinance provided no concessional basis for valuing tenements used by Mutual Aid Committees. In any event, the Commissioner added the appellant could well afford any consequential rate increase but whatever the increase in rateable value this would be limited under the Government rate relief scheme to a maximum of 20%.

9. This appeal raisos fundamental rating principles which, if earlier developed by the common law, are now clearly enshrined in our Rating Ordinance. In particular this appeal highlights the fact that valuation of a tenement under the Rating Ordinance must be carried out on a twofold basis. First, the tenement is valued on the basis of a hypothetical statutory tenancy and not in respect of the actual tenancy agreement, if any, between landlord and tenant. Secondly, the tenement - as distinct from the terms of the tenancy agreement - is valued on the basis of its actual mode or character of occupation. The Commissioner must therefore assess the rateable valuation on the basis of a hypothetical tenancy but in relation to the actual physical tenement.

The hypothetical tenancy

10. The general rules for the ascertainment of the rateable value in Hong Kong are set out in Sections 7 and 7A of the Rating Ordinance. The well established rating concept of the hypothetical tenancy has its statutory basis in Section 7(2) which provides:

11. It follows from these provisions that in relation to all the matters referred to in Section 7(2) the tenancy is to be based on these statutory hypotheses and not on the actual provisions on those same matters which may be contained in the tenement's current tenancy agreement. The actual contractual provisions of the tenancy agreement are irrelevant. The statutory hypotheses are relevant. The formula "the rent at which the tenement might reasonably be expected to be let" invokes the market rent principle. The Commissioner must ascertain the market rent and heaving done so use that market rent and not the actual rent as the basis of valuation. In ascertaining that market rent he should, of course, take into account the actual rent but only as one element of the market. However, having ascertained the market rent that becomes the only relevant rent and - except in the rare case where there would be no other tenant in the market - the actual rent is irrelevant. Similarly, the hypothetical duration of "from year to year" and not the actual duration of the current tenancy is relevant. The incidence for rates, taxes, repairs, insurance and other expenses is again not that provided in the actual tenancy agreement but in accordance with the statutory hypothetical provisions.

12. The reason for the statutory hypothetical tenancy rather than the actual tenancy, being the basis of assessment, is clear enough. If the valuation was to be on the basis of the actual tenancy the parties could draft tenancy agreements so as to affect the assessment of the rateable value for their tenement. This could alter the incidence of rates and make it impossible for any fair valuation of tenements to be carried out. Relativity would be lost. The existing equitable basis for collecting rates would not exist. Rating valuations would be a fertile field for abuse and manipulation. The concept of the hypothetical tenancy prevents all these dangers.

13. The objective ascertainment of the rateable value on the basis of the hypothetical tenancy also means that the ability of the ratepayer to meet the rates assessed on the basis of the rateable value is generally not relevant. Nor is the status of the ratepayer. Therefore the fact that the appellant discharges a public and community service or only has to pay a concessional rate is not relevant. The Government has, under Section 36, provided for certain tenements to be exempt from rates. The Rating (Miscellaneous Exemptions) Order L.N. 185/81 declares certain tenements including those used for public religious worship to be exempt from payment of rates but there is no exemption for Mutual Aid Committees.

14. The hypothetical tenancy does not include any consideration of the financial resources of the tenant nor is that a consideration of the Ordinance elsewhere. Any actual limited income of the tenant or an apparent potential to increase that income, is irrelevant other than in the exceptional case where there is no other tenant in the market. Similarly, the recent innovation that assessments for rates following any increase in rateable value are limited to a maximum of 20% under the Government's rate relief scheme is irrelevant - Section 19 Rating Ordinance and No. 20 Volume CXXVI "Hong Kong Government Gazette" L.N. 128/84. That relief is a separate and subsequent matter.

15. The application of the hypothetical tenancy also means that any restrictive or other conditions in the actual tenancy agreement are irrelevant if their only basis is the mutual agreement of landlord and tenant. The restriction on actual user for the purposes of the appellant's conference room, if it only arises as a bilateral contractual condition between landlord and tenant, would be disregarded as a restriction on user for the purposes of the hypothetical tenancy. If, however, that restriction merely corresponds with an existing condition of the landlord's ownership of the tenement it must be taken into account. However, it would strictly be taken into account as a condition of ownership not as a condition of tenancy. For the user restriction does not originate from any agreement between landlord and tenant but stems from and complies with an existing condition of ownership.

16. So it is on this basis that the hypothetical tenancy conditions apply to every tenement. Where there is a tenancy agreement, the hypothetical conditions prevail over the actual contractual conditions. In the case of some tenements the owner will be in personal occupation so there will be no actual tenancy agreement. In such cases for rating purposes the tenement is deemed to be let on the basis of the hypothetical tenancy.  But the hypothetical tenancy is always subject to any restrictive conditions of ownership where non-compliance with those conditions would be unlawful. Those actual conditions of ownership prevail over the hypothetical tenancy conditions.

17. A11 this is tolerably clear but unfortunately some confusion has developed, in Hong Kong, as to the extent of the application of the hypothetical tenancy.  One reason for this confusion is probably the different basis on which land is held in Hong Kong from the Crown compared with elsewhere. In Hong Kong most rateable land is granted to the owners by the Crown under Crown lease. In other countries, where the rating concept of the hypothetical tenancy also applies, some and often most of the land is held in fee simple. There is far less possibility of the concept of the hypothetical tenancy being misapplied in relation to conditions of ownership, where land is freehold, compared to where it is all leasehold.

18. Where land is held from the Crown on freehold title the only actual tenancy agreements are from the holder of the freehold title, or some person claiming under him, to a tenant. In Hong Kong most rateable tenements are held from the Crown on leasehold tenure only. Where the Crown lessee grants a tenancy to a third party it is subject, as a matter of law, to any restrictions on user which may be imposed under the Crown lease whether or not they are included in the tenancy agreement. The Crown lessee may also and customarily does impose in the tenancy agreement additional user restrictions. The hypothetical tenancy will prevail over those additional user restrictions but cannot prevail over those which are imposed solely to ensure compliance with the conditions of ownership in the Crown lease.

19. There have been cases in Hong Kong where the conditions of the hypothetical tenancy have been wrongly applied, perhaps because of confusion arising from this fundamental difference in land tenure, to prevail over the very different conditions of ownership. For example in Hop Tang-fat v. Commissioner of Rating and Valuation (1978) HKLTLR 287 the Tribunal considered an appeal where the subject tenement was held from the Crown under a licence at an annual fee of $10 terminable upon 3 months notice. The licence restricted the user of the tenement to a welfare centre. The Tribunal properly invoked the statutory conditions of the hypothetical tenancy in determining a rateable value based on a market rent for a tenancy of the tenement from year to year. However, the Tribunal also accepted that because of the hypothetical tenancy conditions, it was obliged to disregard the user restriction in the Crown licence.

20. In view of the fundamental distinction between on the one hand ownership of land and on the other hand the grant of a tenancy by the owner to a third party, it is important that the conditions of the hypothetical tenancy should only be applied and prevail over the conditions of the actual tenancy and not over conditions of ownership. We agree with the Tribunal's ultimate conclusion in that case but, with respect, disagree with the route it followed in reaching that conclusion. The Tribunal rightly applied the conditions of the hypothetical tenancy to the tenement. This step has to be taken in every rating valuation. There was no actual tenancy agreement as the land was occupied by the owner under the licence. In applying the hypothetical tenancy conditions, the Tribunal observed that they prevailed over the conditions of the Crown licence under which the ratepayer was in possession as owner. For that reason it held that the licence condition restricting the user of the tenement to a welfare centre had to be ignored. The Crown had issued a licence rather than a lease to the ratepayer, the original occupant thereunder.

21. A Crown licence is not, any more than a Crown lease, equivalent to a tenancy agreement between landlord and tenant. Nor is it subservient to the hypothetical tenancy as an actual tenancy agreement is subservient to the hypothetical tenancy. To the contrary the hypothetical tenancy - as is the case with an actual tenancy- is necessarily limited to such uses as are lawful under the Crown grant whether it be by way of lease or licence. We therefore respectfully disagree that the user restriction in the Crown licence was to be disregarded. Instead the hypothetical tenancy should have been valued subject to that user restriction.

22. So in our view the Tribunal wrongly applied the hypothetical conditions of tenancy to the conditions of ownership of the land. Section 7 only provides for the hypothetical tenancy conditions to prevail over the actual tenancy conditions. The Tribunal purported to elevate and extend those statutory conditions from hypothetical conditions of the tenancy to hypothetical conditions of ownership. Section 7 does not go that far. It does not affect any conditions of ownership. The practical valuation effect of user restrictions in a Crown lease or licence, is to reduce the number of hypothetical tenants to those who would use the tenement for purposes permitted by the Crown lease or licence.

23. In the present case the conditions of the Crown lease of Inland Lot No. 8200 on which the subject tenement is situated were produced as Exhibit R. 8. Special Condition 2 of the Crown lease restricts the use of the land for the erection of not less than 2,500 flats "and such offices, shops, kindergartens, community facilities and kerosene stores as may be approved by the Government". Clause 2(b) positively prohibits the use of any building erected on Inland Lot No. 8200 for any other purpose. The area now occupied by the subject tenement was originally designated as a play area.

24. The use of the subject tenement as a committee room for a mutual aid committee is another community use and we infer that such use has been approved by the Government whose subsidy to the appellant is based on accounts which include the rent and rates for the subject tenement. If the subject tenement were to be converted to any alternative use such as shops or offices, Government approval would be required. There was no evidence that Government approval had or would be granted.

25. Under the Crown lease the use of the subject tenement, originally designated as a play area, is now lawfully being used for the alternative community use of a committee room for the Mutual Aid Committee. In these circumstances the hypothetical tenancy has to be applied to a tenement whose use is subject to the condition of ownership that it be used only for the purpose of a particular community use, namely as a play area or committee room.

26. We have pointed out that in Hop Tang-fat v. Commissioner of Rating and Valuation there was in fact no tenancy agreement and that the rateable value should still have been determined by applying the hypothetical conditions of tenancy to the tenement subject to the condition of ownership that the tenement could only lawfully be let as a welfare centre. We have not overlooked the fact that the licence was terminable on 3 months notice. However, it would not have been unlawful for the owner to have let the premises from year to year. If during such a tenancy its ownership was terminated it may have been liable in damages to the tenant. However, it was lawful for the owner to grant such a tenancy. Whether the owner was willing to do so and run the risk of a claim for damages from the tenant if the Crown terminated the owner's rights, was a decision for the owner. The user restriction imposed on the owner was quite different. If the tenement were put to any other use, whether by the owner or by a tenant, that other use was unlawful. On the other hand the letting of the tenement from year to year would not have been unlawful.

27. In the present case there is an actual tenancy agreement. The hypothetical conditions of tenancy must prevail over the actual conditions of rent, duration and the other kinds of tenancy conditions mentioned in Section 7(2). However, when the tenement is valued for rating purposes, the hypothetical tenancy must be valued subject to the user restrictions imposed in the Crown lease but disregarding any other restrictive conditions merely contractually agreed to by the landlord and tenant in the tenancy agreement. This is consistent with the opinions expressed in Ryde, page 446 and 'Encyclopedia of Rating Law and Practice' 2-065. Both state that the hypothetical tenancy makes private contractual arrangements irrelevant. But statutory restrictions attached to the hereditament are relevant. In Hong Kong conditions of ownership imposed by the Crown are, by analogy with the same principles, also relevant.

28. The conditions of the hypothetical tenancy therefore prevail over the conditions of the actual tenancy. However, the hypothetical tenancy is equally subject, as the actual tenancy agreement, to any conditions of ownership which restrict lawful user. Here there is such a restriction on the landlord as owner in its capacity as Crown lessee. That condition of ownership restricts the user of the subject tenement to a play area or as we confirm we are prepared to infer, for a mutual aid committee room. The hypothetical tenancy is therefore to be limited to such restricted uses.

The subsisting mode or character of occupation

29. Turning to the nature of the tenement as distinct from the nature of the tenancy, we find that Section 7(5) moves from the hypothetical world created by Section 7(2) to the real world of the actual tenement. The statutory assumptions thus cease being hypothetical and become real:-

30. There is therefore a clear statutory dichotomy between the hypothetical and objective terms of the tenancy and the real and subjective physical state of the tenement. Difficulties have arisen in respect of the second limb of this division relating to the words "mode or character of occupation".

31. The effect of these words is that the tenement to be valued must physically be of the same mode or character as the actual tenement. The valuer must consider not merely rents for the actual use to which the tenement is put but also rents for uses within that same mode or character. This is generally wider than the existing use but the basis remains actual and not hypothetical. Whether a particular use falls within the same mode or character as the actual use is a question of fact and will vary with the facts of each case.

32. In the present case the mode or character of use criteria are farther subject to the condition of ownership imposed by the Crown lease that the subject tenement may only be used for community purposes as a play area or as a committee room for a mutual aid committee. On this basis because of the conditions of ownership it is unnecessary for us to consider any other use which might otherwise fall within the same mode or character as the existing permitted use as a committee room or play area. This approach considerably simplifice the valuation exercise and would leave us merely to determine the rateable value by ascertaining the market rent in accordance with the hypothetical conditions of tenancy for a tenement restricted to such limited community purposes.

33. If the Lands Tribunal in Ho Tang-fat v. Commissioner of Rating and Valuation had followed this approach it need only have considered market rents for welfare centres. Instead it went on to consider the rebus sic stantibus principle. Under that common law doctrine it held that the tenement had to be valued solely on the basis of welfare centre user. In our view the restrictive condition of ownership alone, made it unnecessary to consider or apply that principle. Further, as we will elaborate later, we do not consider it is in any event necessary to consider that common law principle in Hong Kong.

34. The Commissioner's opposition to the present appeal was advanced on the basis that all contractual restrictions on user were to be ignored and that the market rent was to be ascertained by reference to other uses which were within the same mode or character. In the Commissioner's submission it was proper for us to consider the rents for offices, medical clinics, a home for the elderly, a neighbourhood police post and for storage. A number of existing rents for such other uses were advanced as comparables. In the Commissioner's view such comparables were within the same mode or character as the subject tenement. We appreciate that the Commissioner's approach may well have been influenced by the Tribunal's earlier decision in Ho Tan-fat v. Commissioner of Rating and Valuation.

35. We have already held that it is wrong to disregard the user restrictions imposed by the Crown lease. On that basis the proper approach is to proceed forthwith to determine the rateable value of the subject tenement on the basis that it may only be lawfully used for the already stated community purposes. If we are wrong in that approach and Ho Tang-fat v. Commissioner of Rating and Valuation was rightly decided, then we would have to go on and determine, before we could assess the market rent, which other uses are within the same mode or character as the existing community uses. For only after that determination could we decide which other market rents were relevant.

36. The Commissioner's evidence and submissions proceeded solely on this alternative basis. In the circumstances it is therefore proper that we should consider that evidence and those submissions. Under this alternative the different issue arises whether the existing uses of the Commissioner's comparables fall within the same mode or character of use as the subject tenement. In addition to Hop Tang-fat v. Commissioner of Rating and Valuation, we were referred to a number of English rating cases concerned with the equivalent position which arises in England.

37. We note that while our Section 7(5) refers to the subsisting "mode or character of occupation" Section 20(2) of the English Rating Act 1967 refers to the "mode or category of occupation". We appreciate that it is etymologically arguable that strictly the words "character" and "category" are certainly not synonymous and in different circumstances each may have a wider meaning than the other. Volume II 'Oxford English Dictionary' 180 defines "category", inter alia, as "A term given to general classes of terms, things or nations" and as "A class or division of any general scheme of classification". "Character'' generally has a wider meaning and is defined at page 281 as "To describe the qualities of, to delineate, describe". Volume VI at page 567 defines "mode" as "A particular form, manner of variety". For present purposes it is sufficient for us to hold that the Hong Kong statutory term "mode or character" is as wide as the equivalent English "mode or category" provision. In considering the English cases we remind ourselves that in England the rating unit of assessment is the "hereditament" while in Hong Kong it is the "tenement".

38. A troublesome feature of all the cases cited is the undue importance given to the common law principle rebus sic stantibus. That principle required a tenement to be valued in its existing state and not on the basis of a different state into which the tenement might be changed. It was developed by the common law before the words "mode or category" were enacted in England. The English and Hong Kong statutory provisions reflect that principle. We do not need to determine whether the statutory provisions have wholly replaced or abolished the common law. English practice is certainly to the contrary. What is clear is that even if the rebus sic stantibus principle has survived, it only exists subject to the statutory provisions which clearly have primacy over the common law principle. At least in Hong Kong, it is to the statutory mode and character provisions, that the Tribunal must look.

39. The proper approach in Hong Kong is to apply the statutory "mode or character" criteria. The application of that statutory test should finally dispose of any dispute without the necessity to go on to consider the rebus sic stantibus principle. Yet it is surprising to find many recent rating cases dwelling principally on the common law principle and some do not even refer to the appropriate statutory provision. Indeed in some English cases the overwhelming attention paid to the common law principle has led to findings in some cases wider and in others narrower, than the English statutory mode or category test. In this confusing situation we would observe that the fact that the common law principle is expressed in Latin does not endow it with a strength, currency or legitimacy it would not otherwise possess.

40. In Ho Tang-fat v. Commissioner of Rating and Valuation the Lands Tribunal considered the rebus sic stantibus principle at length and referred to nearly all the English cases which were cited to us on the present appeal. Curiously, the Tribunal never once referred to our Section 7(5) concept of "mode or character" which we would have expected to have dominated proceedings although there is passing reference to the English statutory concept of "mode or category".

41. There is considerable similarity between the facts of that case and the present appeal. Ho Tang-fat was the Chairman of the Model Village Residents Welfare Association of Kowloon Tong. The Association held a licence from the Crown at an annual fee of $10 terminable upon 3 months notice by the Director of Public Works on which was erected the Association's office and community hall. The licence from the Crown limited the use of the land for the purpose of a welfare centre. The Commissioner of Rating and Valuation assessed the rateable value of the tenement created by the licence at $15,600. The Association appealed. After holding that the licence's restrictive user condition was irrelevant and the tenement had to be valued upon the basis of the hypothetical tenancy, the Tribunal went on to consider the valuation evidence.

42. The Commissioner had based his valuation on the valuations of a nearby workshop and parking space. The Commissioner's evidence was that the Association's buildings comprised a simple corrugated iron structure with a concrete floor which would be suitable for a number of industrial uses and could properly be compared with a workshop and possibly also with a dwelling-house.

43. Without considering whether those uses were, in terms of Section 7(5), within the same mode or character, the Lands Tribunal rejected the Commissioner's approach as contrary to the rebus sic stantibus principle. The Tribunal was prepared to accept that the distinction between modes of use in Hong Kong may be less clear than elsewhere due to the frequent multi-use of buildings for domestic, factory, shop and other uses. Nevertheless it concluded, page 295:

"However, in the present case, the subject tenement is being used solely as a community hall and no evidence was placed before us in this hearing to show a demand in this area for such premises for factory use. It must, therefore, be rated upon the basis that it falls into the category of use indicated above. "

44. The Lands Tribunal having held that the tenement had to be valued as a community hall, considered that the valuations for workshops and parking spaces were of no assistance. The only evidence of rents for community halls, was the rent actually being paid by the appellant. The Tribunal held this was therefore an exceptional case where the actual tenant was the only possible hypothetical tenant. Again because of this exceptional position, the ability of the actual tenant to pay rates was also relevant. After considering all these matters the Tribunal upheld the appeal and reduced the rateable value from $15,600 to $7,200.

45. In England during the past 30 years there has been a surprising diversity of opinion on the question of what other uses fall within the same mode or category as an existing use. 'Ryde on Rating' (13th Edn.) 451 records that at least until 1956 some rating valuations in England were wrongly carried out on the basis that a tenement could be valued as available for any use permitted by law. That approach was wrong. Apart from common law principles it disregarded the narrower statutory same mode or category restriction.

46. The English decisions may be divided into two groups. The first and larger group adopts the narrower view that only other uses within the same mode or category as the existing use may be taken into account. Hence an alternative use which requires structural alterations or a planning permission in respect of the subject hereditament is not relevant. The second and smaller group of cases takes a wider view and holds that any alternative use, even involving structural alterations or the necessity to obtain a planning permission is relevant if, in the market, it would be economically viable.

47. Dealing with the first group of cases it was widely accepted that the judgment of the Lands Tribunal in Fir Mill v. Royton Urban District Council (1960) 7 R.R.C. 171, 185 correctly restated the position in England. The judgment observes that rating valuations are effected on two assumptions. After dealing with the first assumption, namely the hypothetical tenancy, it went on to consider the second assumption in these terms:-

"The second assumption ... is that the mode or category of occupation by the hypothetical tenant must be conceived as the same mode or category as that of the actual occupier. A dwelling-house must be assessed as a dwelling-house; a shop as a shop, but not as any particular kind of shop; a factory as a factory, but not as any particular kind of factory.

48. In other words, when moving from the hypothetical tenancy to value the actual tenement, the valuer mast not merely consider rents for the actual use but must also consider the demand for tenements for other uses within the same mode or character as the actual use. These paramaters, while wider than mere actual use, are much narrower than any lawful use or any use than may be economically viable.

49. This English decision, while narrower than some previous Lands Tribunal decisions, merely reflected earlier higher judicial pronouncements. For example when the House of Lords considered this issue in Townley Mill C. Ltd. v. Oldham Assessment Committee (1937) A.C. 419, Lord Maughnan declared:-

"There was thus a hypothetical tenancy and a hypothetical rent, but I think a real and concrete hereditament ... The hypothetical rent which the tenant could give was estimated with reference to the hereditament in its actual physical condition (rebus sic stantibus), and a continuance of the existing state of thins was prima facie to be presumed. "

50. A more recent English example of the same principle is London Transport Executive v. Croydon London Borough Council (1974) R.A. 225 where it was held that an alternative use, which required a planning permission not enjoyed by the subject hereditament, was not within the same mode or category as the existing use.

51. Turning to the second group of cases, which adopt a wider view, we were referred to Midland Bank Ltd. v. Lanham (1978) 246 rotates Gazette 1017. After a comprehensive survey of English law the Tribunal observed, 1120:-

"... in valuing for rating purposes it is necessary to take the hereditament as if stands rebus sic stantibus; that the value as thus restricted must relate to the hereditament in its existing physical state; and that the use of the hereditament must be taken to be within the same mode or category as the existing use. "

That summary, which adopted Counsel's submissions, accorded with the principles to be found in the first group of cases but was only accepted by the Tribunal "so far as it goes". The Tribunal did not consider those submissions went far enough and was prepared to extend the actual nature of the relevant kinds of hereditament to include the following:-

"Finally, all alternative uses to which the hereditament could be put in the real world, and which would be in the minds of competing bidders in the market, are to be taken as being within the same mode or category, where the existence of such competition can be established by evidence. "

52. In our view the latter observations by the Tribunal are erroneous. They in fact deem certain uses to be in the same mode or category as the subject hereditament which are not in fact in the same mode or category. If that decision represented the law it would make the English "mode or category" and our "mode or character" provisions, largely meaningless. Valuers would be allowed to take into account any alternative use, even if it fundamentally changed the existing mode or category or character, provided the cost of the necessary structural or other alterations still made it economic to pay a higher rent for that tenement, than would be paid by bidders wanting to use the tenement only for its original mode.

53. The Lands Tribunal's starting point in Midland Bank Ltd. v. Lanham, it may be noted, was the rebus sic stantibus principle. With respect, the Tribunal's starting and finishing point should have been the statutory "mode or category" restriction. The decision clearly goes far beyond previous decisions. More importantly, it ignores the statutory "mode or category" restrictions. The Tribunal in effect decided that all economic alternative uses are to be deemed to he within the same mode or category as the existing use, even though they might not otherwise be within that same mode or category. To the contrary the statutory provisions only permit the statement of a much narrower proposition. Using similar phraselogy to the Tribunal, the narrower statement could only go this far:-

"All alternative uses to which the hereditament in its existing state could be put to in the real world and which would be in the minds of competing bidders in the market provided such alternative uses are within the same mode or category as the existing use and subject further to the existence of such competition being established by evidence. "

54. These two alternative statements are fundamentally different. The first statement of the Tribunal is not limited by the statutory existing mode or category but solely by economic viability. The second statement is limited, in accordance with statute law, to the existing mode or category. England's Rating Act and Hong Kong's Rating Ordinance, clearly prohibit the existing mode being extended to uses under other modes. Certainly there is no express statutory authority for them to be extended simply because an alternative use, under another mode, might be economically viable.

55. In Ho Tang-fat v. Commissioner of Rating and Valuation the Tribunal considered that Midland Bank Ltd. v. Lanham went beyond what had previously been the law in England and was in any event obiter concluding at page 294:

"We find ourselves unable to accept that this statement of the law, in its wider implications, is correct. "

After making that statement, with which we respectfully agree, the Tribunal seems to have departed from that conclusion when later it stated:-

"However, in the present case the subject tenement is being used solely as a community hall and no evidence was placed before us in this hearing to show a demand in this area for such premises for factory use. "

56. If from the latter statement it is to be implied that if there were evidence of a demand for factory use, that rental evidence would thereupon become relevant, we would disagree. The proper approach is first to consider the actual community hall use as establishing the mode or character for the purposes of Section 7. If there is evidence of demand by factories for industrial purposes at a higher rent the second step is to determine whether factory use falls within the same mode or character of use as a community hall. If it does not, then no matter how strong the evidence of higher rents for factory use, it would be irrelevant. Such evidence would only become relevant if it were previously determined that factory use fell within the same mode or character as community hall use.

57. A consideration of the facts in Midland Bank Ltd. v. Lanham shows that its wider statement in respect of alternative uses was obiter. The Midland Bank had over a period leased areas in 5 floors of one building. Of those 5 floors the basement and the ground floor were used as bank premises and the balance as a bank training school. The whole area was valued for rating purposes on an office basis, resulting in a valuation of $181,000. The Bank contended that if two of the floors, used solely by the training school, were valued as a training school the rateable value should be $I56,000. In supporting the higher value it was submitted that previously the whole building had been let as offices. The Bank pointed out that a new planning permission would be necessary to return the two floors from training school to offices.

58. The Valuation Officer stated that any hypothetical tenant could reasonably anticipate that an application for change of use would be successful. Accordingly, it was submitted, office rentals were the best evidence of value. The Tribunal did not consider the necessity to obtain planning permission was fatal to the hereditament being valued on an office basis. It considered that whether in reality the necessity of a planning permission would cause potential office tenants not to bid for the hereditament, was a matter of evidence. The Tribunal held that for rating purposes there was no physical difference between the office floors and the floors of the training school. The Tribunal further noted that when the hereditament was first leased, the Bark negotiated a rent based wholly on office rentals.

59. If the Tribunal were to apply the wider principle of law it had earlier ventured, the whole building would be valued on an office basis at $181,000. After referring to the difficulty of "applying the general propositions of law to the facts" the Tribunal was also clearly troubled by the form of the agreed valuations. In the event it held that the two disputed training school floors were to be valued on the lower unit rate for training schools and the rateable value was reduced to $156,000. The Tribunal seems to have been assisted in reaching this conclusion by its finding, at page 1121, that the effect of the Valuation Officer's evidence was that there would be no competing bids from office tenants but only from training schools. Although this was the same Valuation Officer whose evidence was recorded by the Tribunal, at page 1018, as being that the best evidence of value for the training school floors was office rentals.

60. Apart from the wider statement of law in Midland Bank Ltd. v. Lanham being obiter we note that it was the decision of a Member sitting alone. The two other English Lands Tribunal decisions to which we have referred, Fir Mill v. Royton Urban District Council and London Transport Executive v. Croydon London Borough Council, which support the narrower statement of the law, were both cases where the Lands Tribunal comprised the President and either one or two Members. The larger Tribunal in the latter case, comprising the President, Sir Douglas Franks, Q.C. and a Member Mr. W.H. Rees, rejected the proposition that the increment of value attributable to a possible alternative use which required a planning permission was within the same mode or category of use as the subject hereditament.

61. After stating that it would be most unfortunate if, as a matter of rating law, a Tribunal had to consider the possible grant of a planning permission, it went on to declare:

"... we are satisfied that is not the law. We are satisfied that the practice which has stood for many years, from time immemorial in rating experience, of regarding the existing use as the only use to be valued is the right one. In our view the law has been correctedly stated in Armour on Valuation for Rating (4th Edn.) at p.299, that, so long as the proprietor makes a beneficial use of his property, the assessor has nothing to do with whether it might have been turned to other and more lucrative purposes. In our view that is the law of England and we think it was rather understated in the Lands Tribunal case of Fir Mill Ltd. v. Royton Urban District Council. "

62. Applying these principles to the facts it held that bus garages were to be valued only as bus garages producing a lower valuation of £10,500 and £19,250 and not or the basis of higher rentals for warehouses or transport depots of £16,000 end £26,750 respectively. This decision is strictly even narrower than Fir Mill Ltd. v. Royton Urban District Council. For the Tribunal was prepared to consider only existing actual use and not other uses within the same mode or category.

63. This is a typical example of a Tribunal coming to a decision narrower or wider than the statutory test as a consequence of being solely or principally concerned with the rebus sic stantibus principle instead of with the statutory mode or category provisions. The Tribunal in the light of the common law principle regarded "the existing use as the only use to be valued". If the Tribunal had instead looked to Section 20 of the English Rating Act, it surely would have recognised at once that the proper test was not as narrow as existing use but was rather wider, namely that the relevant valuation factors included any uses within the same mode or category as the existing use. However, while that decision may be rather narrower than the statutory test, it certainly rejects the more liberal approach in Midland Bank Ltd. v. Lanham which was very much wider than the statutory test.

64. That wider principle, suggested but not applied, in Midland Bank Ltd. v. Lanham was later applied by a Member sitting alone in S. & P. Jackson (Manchester) Ltd. v. Hill (1980) R.A. 195. A warehouse hereditament was valued on the basis of adjoining shop rents. However, apart from a narrower front door the warehouse, which had earlier been a shop, shared all the other physical characteristics of the adjoining shops. This was a case where, on the facts, the description of the actual use exaggerated its minor physical difference with the comparables. The decision would have fallen within the narrower mode and category test, had it not been that a planning permission would have been required before the warehouse could have been used as a shop.

65. The Tribunal did not expressly make a finding on the planning permission requirement but we infer that it accepted the Valuation Officer's evidence that "the granting of a planning permission was a foregone conclusion". Only the willingness to assume the grant of a planning permission conflicts with the cases supporting a narrower approach and in particular London Transport Executive v. Croydon London Borough Council. We recognise that town planning requirements in England are different to Hong Kong's but confirm that we share the view of those English decisions which have held that if an alternative use requires the grant of a planning permission it is not within the same mode or character as the existing use.

66. In Hong Kong town planing restrictions are minimal and more elementary. However, by analogy, the English cases are also relevant to the more common position which arises in Hong Kong, relating to alternative use, which may occur in respect of conditions of ownership imposed in a Crown lease. No doubt one of the reasons for the slow development of town planning is that the Government, as lessor of nearly all of the land in Hong Kong, can control use through conditions imposed in Crown leases. In these circumstances the user restrictions in Crown leases have in practice some similarity to town planning restrictions in England. For rating purposes there is no material difference between a Crown lessee having to obtain a waiver from the Crown as lessor than the necessity of a property owner in England to obtain a planning permission.

67. In this appeal the Housing Society, as owner of the subject tenement, holds the property subject to the conditions of ownership imposed by the Crown lease. These included, as we have already recorded, the restriction of the use of the area now occupied by the subject tenement to community use as a play area. Since the grant of the lease we accept the Crown has approved the alternative present community use of the subject tenement as a committee room for the mutual aid committee. We are aware that the Crown may similarly waive strict compliance with user restrictions in Crown leases and consent to alternative uses.

68. We can take judicial notice of the fact that where permission for a different use is granted the Government frequently charges a waiver fee based on the higher rental value of the premises resulting from the change of use. For example in Chan Kwok-kwan v. Chan Cheong-wai (1980) H.K.L.R. 450 the Court of Appeal considered a large residential property in Blue Pool Road in which certain parking areas had been designated in the Crown lease as carports. One of these areas had been converted into a grocer's store with domestic quarters at the rear. The landlord charged a rent of $1,200 per month for the premises. The Government was prepared to agree to this change of use under the Crown lease subject to a waiver fee of $26,000 per annum being paid by the Crown lessee for this change of use.

69. If an alternative use of a tenement can only be adopted subject to obtaining a grant of waiver from the Government, then that alternative use is not within the same mode or character as the existing use. By analogy we follow the first group of English cases that it is not for the Lands Tribunal, in the application of rating law, to speculate whether a waiver would be granted. If we were to so speculate, then our task would be infinitely more difficult and hazardous than in England. For in England planning permissions are granted according to law and disputes are resolved by the judicial process. The grant of a planning principle is made in accordance with legal principles and to that extent the outcome is predictable. However, in Hong Kong the grant of a waiver is a purely administrative act by the Government. If any dispute arises it is not judicially resolves nor are any administrative decisions on an application for waiver judicially reviewable.

70. For all these reasons we are satisfied that in considering the mode or character of use of the subject tenement, we are not allowed to consider other uses which require a Crown waiver under the Crown lease, as being uses within the subsisting mode or character of occupation. On the present facts the narrow question arises whether an occupation of the subject tenement, for office or storage purposes, is within the same mode or character as the subsisting occupation of the tenement as a committee room for the purposes of a mutual aid committee.

71. We are not concerned with whether it would be economically viable to change the subsisting use into office or storage purposes. That is a totally different question and invokes very different criteria.  If offices and storage are not at present within the same mode or character as committee rooms, they must be disregarded.

72. Against this background we hold, in the alternative, that the demand by the hypothetical tenants which has to be taken into account is that which would be created by those who would be competing in the market for tenements falling within the mode or character of community facilities used for the purpose of a committee room.

The rateable value

73. The valuation method to determine the rateable value therefore remains the same under each of our two alternative conclusions on the law. We have first held that, as the application of the hypothetical tenancy is subject to the conditions in the Crown lease, the nature of the tenement to be valued is for the community purpose of a mutual aid committee room. Alternatively if the restriction on user in the Crown lease were to be disregarded, we would still hold, but by an alternative route, that the mode or character of use of the subject tenement is limited to a community purpose, namely as a mutual aid committee room.

74. The market rent for such a committee room let from year to year must be determined in accordance with the other statutory conditions imposed by Section 7. The only evidence of actual rents for such committee rooms is the rent for the subject tenement based on a unit rate of $11 per square metre and the rent of a similar committee room at Lai Tak Tsuen which is also the subject of appeal - Tsuen Wing Lau Mutual Aid Committee v. Commissioner of Rating and Valuation R.A. No. 10/84. The rent of the latter committee room, under another tenancy agreement from the Housing Society, was also based as $11 per square metre.

75. The letter produced from the Housing Society - Exhibit R.4 described the actual rent for the subject tenement as the Society's:-

"... standard welfare rent for all Mutual Aid Commidttee offices in the Society's rental estates. This rent bears no relation to the market rental of the premises ... the current standard welfare rent is $11.m² ..."

76. The remaining evidence was that of the Commissioner's witness Mr. Y.B. Chu, A.R.I.C.S. Acting Senior Valuer of Housing Estates Division, Rating and Valuation Department. After considering the comparables set out in his Valuation Report - Exhibit R.1 - he concluded that the actual rent was below the market rent. The market rent for the subject tenement, in his opinion, was $45 per square metre. A similar welfare rent was paid by the tenant who conducted the home for the elderly in Block IV.

77. We recognise that the Government and subvented bodies such as the Housing Society may charge charitable and other institutions rents which are below market value. Where they do so the lower rent is usually granted as a matter of policy and no doubt is in the public interest. However, in such cases where a lower rent is granted there is no direct benefit to the Government or the subverted body. The only direct benefit is enjoyed by the institution permitted to pay the lower rent.

78. The position of a Mutual Aid Committee is significantly different. The Mutual Aid Committee's landlord may consider that it is charging a lower rent than the market rent it receives under its domestic and commercial tenancies. However, the only direct benefit it receives from domestic and commercial tenants is the rent they pay. On the other hand the existence and encouragement of the voluntary Mutual Aid Committees is to the direct advantage of the Housing Society in its capacity as owner and landlord. The maintenance of law and order and the encouragement of high standards of conduct and cleanliness by residents are among the priorities of the Housing Society. These are the very same matters which concern Mutual Aid Committees. Unlike other tenancies, the Housing Society therefore receives benefits from Mutual Aid Committee tenants, in addition to the actual rent paid. We are therefore satisfied that even if the subject tenement could lawfully be used for other purposes and those other purposes were within the same mode and character as the subsisting use, the landlord would probably be willing to grant a tenancy to a Mutual Aid Committee at a lower rent than it would to other potential tenants in the market.

79. The lower rent charged to a Mutual Aid Committee may equally represent a market rent for tenants in that category as a higher rent for the same premises might for other tenants. The difference between the two rents could be quantified as the non-financial benefit enjoyed by the landlord. The fact that the Housing Society states that the actual rent bears no relation to the market rent for other uses does not of itself establish that the actual rent is below the market rent for a mutual aid committee room.

80. We also accept that before the play area was converted into the committee room it did not produce any rental income for the landlord. We are satisfied that if the subject tenement were not let to the appellant it would not otherwise have produced any rental income for the Housing Society. The subject tenement, although on a floor containing rent producing domestic tenements, was never previously a domestic unit but a non-rent producing recreational bay.

81. Turning to the Commissioner's comparables we note that Comparables Nos. 1, 2 and 3 were self-contained offices with their own separate toilets situate on the 7th an 22nd floors of a now office tower block built in 1983 at 6-8 Tsing Fung Street, Causeway Bay. Tsing Fung Street connects Hing Fat Street, which adjoins Victoria Park, to King's Road. Apart from being an exclusive office block the location of these comparables is in a busy urban area in which there is a mixture of retail, office, factory and domestic premises. This is a very different locality to the subject tenement in suburban Lai Tak Tsuen which is a predominately domestic suburb off Tai Hang Road. The office comparables are not within the same mode or character as the subject tenement.

82. However, the Commissioner calculated his unit rate of $45 per square metre solely upon these office comparables after making adjustments for locality, layout, age and for lack of toilet and water facilities. Even if the offices were within the same mode or character we would still have been unable to give those comparables any real weight. For the locality and demand factors are so very different that the adjustments that would have had to be made, even if accompanied by proper detailed analysis, would have had to be so great as to make them of little evidential value. In fact no detailed analysis was produced.

83. The unsuitability of these comparables, if for similar reasons, is even greater than was the case of the unsuitable comparables we referred to in the Tribunal's earlier decision of Chan Kwai Sim v. Commissioner of Rating and Valuation R.A. No. 1/83. In view of the comprehensive rental information available to the Commissioner we hope that in future research will, in the appropriate cases, produce better comparables.

84. Comparables 5 is a shop and Comparable 7 is a police unit both on the ground floor of Block IV. They do not suffer from the situation and locality shortcomings of the office comparables. However, they occupy ground floor premises in a 27 floor building in which non-residential uses are limited to the ground floor. Unlike the subject tenement they both have toilet and water facilities. Our inspection of these comparables and the subject tenement confirms our initial inclination that these two comparables are also not in the same mode or character as the subject tenement.

85. The remaining comparables No. 8 and 9 were rented for storage. Comparable No. 8 was Unit 215 in Lai Kok Estate, Cheung Sha Wan with an area of 22.4 square metros used for storage purposes. Comparable No. 9 was a similar small area of 23.8 square metres also used for storage but situate at Sha Kok Estate, Shatin. These two comparables, both far distant in Kowloon, are of little assistance. On our inspection we were shown a similar smaller sized storage tenement, in Block V, which had not been cited in evidence as a comparable but it was vacant and unused.

86. In the subsequent appeal, Tsuen Wing Lau Mutual Aid Committee v. Commissioner of Rating and Valuation, the Commissioner produced evidence of three other premises let for storage at 2A and 16 Lai Tak Tsuen Road. These latter three comparables included two premises on the ground and 1st floor used by the Housing Society for storage in relation to the maintenance of the estate and also premises on the 1st floor let by the Housing Society to the estate clearing contractor. However, these comparables are not evidence of any general demand for storage at Lai Tak Tsuen. The use of these three comparables is for purposes incidental to the Housing Society's responsibility as owner of the estate. In our view, there is no general demand for storage in this predominately residential estate situate in a suburban and not urban, commercial, retail or industrial locality.

87. We would also observe that the other storage comparables and Comparable No. 4, being the medical clinic on the 1st Floor of Block V, are used full-time for storage and medical clinic purposes respectively. The subject tenement, while available on a full-time basis, is only used intermittently for meetings. A potential tenant would, because of this infrequent use, be unwilling to pay as high a rent as if he were going to use the tenement continuously.

88. If the landlord were unable to attract anyone other than such a tenant, any agreement reached will probably be based on the amount of time the tenement is likely to  be used. The market rent for storage or a medical clinic, which are used on a full-time basis is, as indicated by the comparables, in the region of $53 to $54 per square metre. The committee room, by way of comparison, may only be used for, say, one-quarter of such full-time use. On the basis of that lesser use an equivalent unit rate would be about $13 per square metre. We would emphasise that this is a purely theoretical approach with the amount of actual use unknown. However, subject to these reservations, it does tend to support the view that $11 per square metre may well be the market rent for committee room use.

89. The storage areas, cleaning contractors premises and medical clinic were also on a first floor, namely 1st Floor, Block V. However, their physical location was different not only in degree but in kind from the 1st floor situation of the subject tenement in Block I. The subject tenement is on a floor, the balance of which is used for domestic premises and play areas. It is clearly within a predominately domestic area. On the other hand, the three non-domestic comparables in Block V are situated in a separate self-contained non-residential area isolated from the domestic premises in Block V.

90. We are satisfied that all these non-domestic premises are not in the same mode or character of occupation as the subject tenement. If we were of the opinion that all or some of those other uses were within the same mode or category, we would then have had to go on to determine whether there was any demand in the market for further such premises in this locality. On the evidence no such demand is established. All the evidence points to the fact that any demand is already fully met.

91. Finally in turning to determine the market rent we remind ourselves, as was pointed out in Ho Tang-fat v. Commissioner of Rating anal Valuation that where the existing occupant would be the only hypothetical tenant in the market, the rent he is paying is the best evidence of market rent. Further, in determining the market rent on the basis of such evidence, it is open to us to take into account the occupant's ability to pay that rent or a higher rent.

92. We are unable to accept the Commissioner's valuation calculated on a unit rate of $45 per square metre for it is based on comparables which for the reasons given are rejected. The actual rent of $11 per square metre has been attacked by the Commissioner as a concessional below market rent. That may well be true in the case of those welfare tenancies where the Housing Society receives no direct benefit from the tenant other than rent. In the case of mutual aid committees, as we have pointed out, that is not the case for the Housing Society receives, by virtue of the tenancy, direct benefits back from the tenant in addition to the rent paid.

93. The actual rent can arguably be supported as the market rent on several grounds but we do not need further to pursue that question. For this is clearly a case where, on the facts, the actual tenant is the only hypothetical tenant. The appellant has the ability to pay the actual rent but on the financial evidence disclosed does not have the present ability to pay a materially higher rent. Certainly it would presently be unable to pay an annual rent of $19,200. These are among the relevant market factors we have taken into account. In these exceptional circumstances the actual rent is necessarily the best evidence of the market rent.

94. We therefore uphold the appeal and reduce the rateable value of the subject tenement from $19,200 down to $4,560. We direct the Collector of Rates, in terms of Section 44(1)(c), to amend the valuation list accordingly. If any refund of rates is consequentially payable we further direct the Collector to arrange payment of such refund forthwith. Liberty to apply in respect of any other consequential matters is reserved.

DATED this 15th day of October 1984.