RANK PROFIT INDUSTRIES LTD v. DIRECTOR OF LANDS

CACV 94/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 94 OF 2007

(ON APPEAL FROM HCAL NO. 126 OF 2005)

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JUDGMENT

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Hon Tang VP

Introduction

1.  The applicant became the owner of New Kowloon Inland Lot No. 6268 (“the Lot”) in 1998 when its tender was accepted by the government and the premium of $361 million paid.

2.  The special conditions under which the Lot was held required the applicant to build, inter alia, a public car park on the Lot to accommodate not less than 200 private cars, 100 goods vehicles and 20 motor cycles.

3.  The Lot was situated within what was described as Kowloon Bay industrial area (“KBIA”) in the explanatory statement to Ngau Tau Kok and Kowloon Bay draft Outline Zoning Plan (“OZP”) S/K13/9.

4.  Shortly after the applicant acquired the Lot, however, the government proposed to the Town Planning Board (“TPB”) that all lots previously zoned “Industrial” in the KBIA should be rezoned “Other Specified Uses” annotated “Business”.  The government also indicated that the Lands Department would process in parallel applications for common lease modifications of Industrial Lots zoned “Other Specified Uses” annotated “Business”.

5.  On 19 January 2001, the draft OZP S/K13/16 was published, rezoning the KBIA whereby all 50 odd lots previously restricted to industrial use were rezoned to “Other Specified Uses” annotated “Business”.

6.  On 25 September 2001, the applicant applied to the District Lands Office, Kowloon East for lease modification to omit the requirement for the public car parking spaces in the special conditions.

7.  Eventually, on 18 November 2005, modification of the lease was agreed on terms under which, inter alia, a modification premium of $771,780,000 was paid.  Earlier, the applicant had paid the sum of $11,833,200 as a lease extension premium.

8.  It is common ground that at all material times there was published government policy under which premiums for modification would be equivalent to the difference between the value of the land under previous conditions and its value under the modified conditions.  Since the value might fluctuate, if an offer for modification was not accepted within a stated time, a new offer, if made, may require a different premium.

9.  This appeal was heard together with CACV 125/2007.  CACV 125/2007 was the applicant’s appeal from the order of Deputy Judge Muttrie striking out its claim against the government in HCA 1076/2004 (“the High Court Action”).  The High Court Action was commenced on 6 May 2004.  In the High Court Action, the applicant sued the government in relation to the Lot, inter alia, for derogation from grant, arising out of the rezoning as well as the modification of leases which were or would be granted in relation to other lots in KBIA.  The judgment in CACV 125/2007 will be delivered at the same time as this judgment.

The challenged decisions

10.  In this judicial review, which was commenced on 12 October 2005, the applicant complained of two letters written by the Director of Lands (“the director”) to the applicant on 14 May 2005 and 2 August 2005 respectively (“the two decisions”).  They were letters offering terms for lease modification for the Lot.  These letters offered modification to the applicant on terms which were in accordance with published government policy.  However, they also required the applicant to discontinue the High Court Action and to reimburse government its costs in the High Court Action on the full indemnity basis.  These latter conditions, called extraneous conditions by the applicant, are the subject of the applicant’s complaint in these proceedings.  The conditions are extraneous in the sense that they could not be justified by the published government policy.

11.  In addition to the extraneous conditions the letter of 14 May 2005 to which was headed “Without prejudice” the offer required, inter alia:

(1) payment of the premium in the sum of $11,833,200 for the extension of the building covenant;

(2) payment of a premium for the proposed modification of $678,220,000;

(3) Acceptance of the offer and prepayment of the premium for building covenant extension as well as 10% of the agreed premium of the proposed modification and the balance of the administrative fee, on or before 27 May 2005.

12.  By letter dated 26 May 2005, M Y Wan and Associates Limited (land and development consultants) (“MYW”), acting on behalf of the applicant, replied saying that the extraneous conditions were unacceptable to the applicant, but that the applicant would pay the building covenant extension premium and the administrative fee under protest.

13.  By letter dated 23 June 2005, MYW wrote further, purporting to accept the basic terms without prejudice to the High Court Action and enclosed a cheque in a sum of $678,220,000 for payment of the lease modification premium.

14.  By letter dated 30 June 2005, District Lands Officer, Kowloon East (“DLO/KE”), replied saying that the acceptance on 23 June 2005 was not a valid acceptance and was at most a counter offer.

15.  On 2 August 2005, DLO/KE wrote to MYW saying that the counter offer was not acceptable and that DLO/KE’s offer of 14 May 2005 was extended to 5 August 2005, subject to a revised premium of $715,490,000 and acceptance of the extraneous conditions, failing which enforcement action would be pursued.  Enforcement action was threatened because the applicant had not developed the Lot in accordance with the original conditions.

16.  By letter dated 5 August 2005, MYW on behalf of the applicant purported to accept the 2 August 2005 offer, without prejudice to the High Court Action and saying that the applicant would within 48 hours of DLO/KE’s acceptance, pay the premium of $715,490,000 and the sum of $145,000 being the balance of the administrative fee.

The application

17.  On 12 October 2005, the applicant applied for leave to apply for judicial review of the two decisions.

18.  On 19 October 2005, leave was granted.

19.  On 15 November 2005, the director wrote to MYW, offering modification without the extraneous conditions but the premium for the modification had been revised upwards to $771,780,000.

20.  On 18 November 2005, MYW wrote, accepting the offer of 15 November 2005, without prejudice to the applicant’s rights in the High Court Action and the application for the judicial review.

21.  The legal documentation of lease modification was completed in December 2005.

22.  On 30 December 2005, the Secretary for Justice applied to strike out the applicant’s writ and statement of claim in the High Court Action and dismiss the action.  On 27 March 2007, Deputy Judge Muttrie struck out the High Court Action.

23.  Hartmann J dismissed the application for judicial review on 2 March 2007.

The appeal

24.  Mr Neoh submitted that the following issues arise on this appeal:

(1) whether the director was exercising a public function susceptible to judicial review;

(2) whether the nature of the two decisions made them susceptible to judicial review;

(3) whether the application has become purely academic; and

(4) whether the two decisions involved any abuse of power.

25.  Mr Neoh accepted that unless issue (1) is decided in favour of the applicant, the application must fail.

26.  The learned judge dismissed the application on the ground that in negotiating the terms of modification of the lease agreement with the applicant and in putting forward offers of settlement, the director, as agent for government, was not exercising a public function.

27.  He said and I agree that in determining whether the director in this case acted in private or public domain, no single factor is determinative,

“82.   … As Lord Woolf CJ observed in Poplar Housing Association Ltd v. Donoghue [2001] 3 W.L.R. 183 at 202, para.66 :

‘While these are the most important factors in coming to our conclusion, it is desirable to step back and look at the situation as a whole.  As is the position on applications for judicial review, there is no clear demarcation line which can be drawn between public and private bodies and functions.  … the decision is very much one of fact and degree.’”

28.  Mr Benjamin Yu SC, appearing for the director, submitted that the law which is well settled and binding on this court is that in considering the modification of a lease, government’s position is identical to that of a private landlord.

29.  The principle was first authoritatively stated in Hang Wah Chong Investment Co. Ltd v A-G (PC) [1981] 1 WLR 1141, a judgment of the Privy Council on appeal from Hong Kong.  In that case, the director agreed to modification of lease conditions, regarding the type of building permitted to be built, demanding payment of a premium which the appellant considered to be excessive.  In dealing with the submission by the owner that the government when demanding the payment was acting in the public domain, Lord Edmund-Davies said:

“The various Conditions of Sale well illustrate the wide range of roles played by the Director in exercising his discretion.  As regards some of the conditions, the Director’s role may, almost certainly, be that of protector of the public interest.  The vital question is whether for the purposes of special conditions 6 and 7 he can properly be regarded as being entitled to act in his capacity of land agent for the Crown.  It is not open to serious doubt that those conditions relate directly to the landlord’s interests, economic and otherwise, and their Lordships conclude that the Director was entitled to act, and did act, in that role when granting his qualified approval to the applicants’ plans in 1976.  On that view, can it properly be said that it is for the Crown to establish the reasonableness of the demand for a premium?  In the light of Viscount Tredegar v. Harwood [1929] A.C.72, their Lordships are of the opinion that the question requires a negative answer.  … It is sufficient, for present purposes, simply to say that, the applicants’ seeking a concession from their landlords in relation to the development of land leased, the landlords were entitled to make the granting of that concession conditional upon the payment of a premium.”

30.  More recently, in Director of Lands v Yin Shuen Enterprises Ltd and Anor [2003] 6 HKCFAR 1 at 14E, Lord Millett NPJ said, with the concurrence of the other members:

“Two further considerations are relevant at this point.  First, the user covenants in the Crown leases are absolute.  They are not qualified by any requirement that the Crown’s consent is not to be unreasonably withheld; and the statute law of Hong Kong does not subject user covenants in leases to any such requirement.  Secondly, in deciding whether to grant or withhold its consent to a modification of the terms of a lease, the Government does not exercise a public law function but acts in its private capacity as landlord: see Hang Wah Chong Investment Co Ltd v A-G [1981] HKLR 336 (PC). It thus has an absolute right if it chooses to demand a premium, however large, for granting a modification of the terms of the lease, or to withhold its consent altogether, however unreasonably: see Lord Tredegar v Harwood[1929] AC 72.”

31.  That was said in the context of the assessment of compensation on resumption under section 12 of the Lands Resumption Ordinance, Cap. 124, under which in assessing the open market value of the land no account was to be taken of any value which the land might have by reason of the probability, or expectancy, of obtaining any “licence, permission lease, or permit whatsoever” to which the claimant was not entitled as of right.  As Lord Millett said:

“50.   … But insofar as the intrinsic value of the land includes its development potential, it cannot be realised without a modification of the terms of the lease, and the prospect of obtaining such a modification falls squarely within the words of s.12(c).” at 23D.

32.  I cannot agree with Mr Neoh that Lord Millett’s dictum was not integral to the decision, since if the government in granting modification of leases acted in the public domain it might be said that the landowner had more than a mere expectation of modification.

33.  Earlier, in Raider Ltd v Secretary for Justice [2000] 3 HKCFAR 309, Bokhary PJ said at 313:

“It was established by the decision of the Privy Council on appeal from Hong Kong in Hang Wah Chong Investment Co Ltd v A-G [1981] HKLR 336 that the Government as lessor of Government land is just as entitled as a private landlord to name its price for any modification of the conditions on which land is held from it. …”

34.  Then in Ying Ho Co Ltd and Ors v Secretary for Justice [2005] 1 HKLRD 135 Ribeiro PJ when dealing with the argument that the Director’s discretion under a special condition which makes the design, disposition and height of any building to be erected on the land subject to the government’s prior approval in writing, (“the DDH clause”), must be subject to the limitation that such a contractual discretion may not be exercised in such a way as to defeat the reasonable or legitimate expectation of the parties, said at para. 102:

  “102.  However, the Government is not a fiduciary vis-à-vis the Developers in respect of the exercise of any discretion reserved to itself under the Conditions of Grant.  In that context, as was authoritatively decided in Hang Wah Chong Investment Co Ltd v A-G of Hong Kong [1981] HKLR 336, it acts in the capacity of landlord, entitled to exercise its powers for its own, that is, for the public’s benefit.”

35.  Mr Neoh, however, relied on Hong Kong and China Gas Co Ltd v Director of Lands [1997] 3 HKC 520 and Kam Lan Koon and Ors v Secretary for Justice [1999] 3 HKC 591 to show that the decision in Hang Wah Chong is not all embracing.

36.  The learned judge dealt with these authorities and said:

“59.   In Hong Kong and China Gas, Keith J held that the Director of Lands, in deciding whether to extend the lease of the Hong Kong and China Gas Company, had to look beyond the Government’s interests as landlord and – in that case – take into account a host of competing interests going to matters of public planning, land use and administration which, if only indirectly, would affect other leases in the area.  As such, the true nature of the function being exercised by him was not a private one under contract but a public one.

60.    In Kam Lan Koon and Others v. Secretary for Justice [1999] 3 HKC 591, the Court of Appeal approved of this approach.  The relevant portion of the headnote reads :

‘The Government in exercising rights in respect of leases was exercising the same powers as an ordinary landlord.  For the most part, decisions made in this regard were not judicially reviewable.  However, the policy statement expressed the Government’s policy.  Those affected had a legitimate right to expect the implementation of the Government policy in relation to the extension of leases.  To this extent, the decision to extend leases for special purposes in the New Territories was not simply a decision of a private landlord but was one which the Director of Lands took as part of his public function.  Any such decision was amenable to judicial review.’”

61.    As will be seen from the headnote, the Court of Appeal took into account the fact that Government had published an extensive policy document dealing with the introduction of new legislation concerning leases in the New Territories, the lease in question in the judgment being very much subject to what was proclaimed in the policy document.

62.    In my opinion, in the light of the jurisprudence to which I have referred, attempting to determine when, even though acting on the basis of contract, Government performs a private or public function can be an elusive task.  On occasions – such as the present – the task cannot be avoided.  But, by way of a general comment, administrative law, in my opinion, is better served by some degree of certainty.  The more will-o-the-wisp the task of identification, the greater the uncertainty for all parties involved.  Whatever the position may be in other jurisdictions, it seems to me that a degree of certainty has been brought into our law by the adoption of what I will call ‘the Hang Wah Chong principle’ and its consolidation in our jurisprudence.  And while obviously on each occasion the true nature of a function must be identified, I am not permitted to undermine that degree of certainty.”

37.  Hong Kong and China Gas and Kam Lan Koon were concerned with the renewal of leases for special purposes, and not about modification of lease.  Here we are concerned with the modification of leases.  Hang Wah Chong and the subsequent decisions of the Court of Final Appeal have settled the issue.

38.  Moreover, I am in full agreement with the learned judge that nothing should be done to undermine the certainty that in the modification of leases, the government acts in a private capacity and is not subject to judicial review.  And that applies to the decision whether or not to grant modification as well as its price.

39.  Mr Neoh submitted that the learned judge had not fully appreciated the applicant’s case.  He submitted that it has never been the applicant’s case that the government may not charge a premium fully reflective of the value of the modification.  The applicant said that in charging a premium, the government must abide by the policies and procedures it has promulgated to the public.  If the government deviates from such policies and procedures and charges discretionary premiums, it is subject to the supervisory jurisdiction of the court.  With respect, I do not believe the learned judge had failed to fully appreciate the applicant’s case.

40.  The learned judge recorded:

“74.   … in respect of the level of premiums to be charged for modifying land leases, in 1997 Government published a policy document entitled ‘Provisional Legislative Council Brief - Land Leases and Related Matters’.  In that document, Government held out that, in accordance with the provisions of the Joint Declaration, premiums for modification would be equivalent to the difference between the value of the land under the previous conditions and its value under the modified conditions.  The policy was, in fact, in line with long-established Government practice.  But Mr Neoh made the point that now it was published policy and, as such, public policy.  Government, he said, had chosen to take an established but nevertheless internal practice and place it in the public arena.” (Emphasis added)

41.  Mr Neoh submitted that there is at least a legitimate expectation that the government would act in accordance with such policy and that insofar as the government had purported to attach the extraneous conditions, the decision was reviewable.

42.  I do not agree.  For good management, one might expect an owner of a large estate to have policies regarding modification of leases.  One might also expect such an owner to make its policy known to its tenants, if only to reduce the number of meaningless applications.  So in having a policy and publishing it, the government was doing no more than what one would expect a private landlord to do.  Furthermore, it is probable that the government also has policies regarding circumstances under which modification of lease might be granted.  Thus, if Mr Neoh is right, one might also argue that the government’s decision whether or not to grant modification might also be reviewable.  But the authorities which are binding on us say such decisions are not reviewable.

43.  Mr Neoh also relied on what he described as the public law elements, for example:

“(1)   The constitutional underpinning by Annex III of the Joint Declaration and Article 7 of the Basic Law.”

44.  Article 7 of the Basic Law provides:

“The land and natural resources within the Hong Kong Special Administrative Region shall be State property. The Government of the Hong Kong Special Administrative Region shall be responsible for their management, use and development and for their lease or grant to individuals, legal persons or organizations for use or development. The revenues derived therefrom shall be exclusively at the disposal of the government of the Region.”

45.  The government’s right to lease land is derived from Article 7.  This is not different from, say, the vesting of land in the New Territories in the government by the New Territories Ordinance.  That would not make the grant or modification of leases reviewable.

46.  Mr Neoh also relied on the following:

“(2)   Approved Government policy and procedures which provide that, inter alia, once an application for modification is received, the Government must follow prescribed procedures including a timetable and also the basis of premium assessment is on the ‘before and after value’ of the land in question:

(a) Lands Department Practice Note Issue No. APSS 5/96 dated October 1996 [3/2/27-29];

(b) Provisional Legislative Council Brief - land leases and related matters dated 15^th July 1997 [3/5/58-62];

(c) Lands Department Practice Note Issue No. APSS 2/99 dated 24^th March 1999 [4/13/418-423];

(d) Lands Department Practice Note Issue No. 2/2001 dated 23^rd February 2001 [4/20/558]

(3) Every lessee of the Government’s therefore has a legitimate expectation that he would be treated fairly in accordance with the established procedures and policies on lease modification.

(4) The modification of conditions in Government leases are to be decided upon good public policy considerations and not just private considerations, such as those relevant to a private landlord.

(5) The need or otherwise for the construction of a public car park on the Lot does affect the public.

(6) The Director had to balance between the interest of the bona fide need for goods vehicle parking spaces of the lessees of the remaining industrial lots within KBIA and their visitors, etc. and the Appt’s interest.

(7) Appt’s application for lease modification was processed by the Director only after the relevant Government departments had been consulted and then indicated their consent to the application. Only then would the application be considered by the District Lands Conference.

(8) The application was prompted by an invitation on the part of the Director in furtherance of the policies under the new draft Outline Zoning Plan. [4/23/565-575]

(9) There are Performance Pledges for processing applications for lease modifications [5/80/908-913].

(10)   The policy objective of shortening the time for processing such applications and making the decision-making process more open and accountable.”

47.  It is true that modification would be granted only after the relevant government departments have been consulted and indicated their consent to the application.  But, even in the absence of binding authorities, I would not agree that this is sufficient, when taken with all other relevant circumstances, to make modification of leases reviewable.  As Ribeiro PJ pointed out in Ying Ho, the government, when it acts in the capacity of a landlord, is entitled to exercise its powers for the public’s benefit.  Performance pledges and open and accountable decision making process are conducive to greater efficiency, and serve the public interest.  The consultation of the relevant government departments is consistent with the exercise of its powers as landlord for the public’s benefit.  Indeed, I would go further and suggest that an enlightened landlord would not overlook the long term interests of its estate in the pursuit of short term benefits.  Thus one would expect him e.g. to lay out his estate properly, ensure that there is proper transportation to supply the needs of estate.  That being the case, I can see no reason why a private landlord might not grant leases to serve particular purposes, including, e.g. leases for public car parks.

48.  So, even if the applicant’s application for modification was prompted by the government and granted because there was no longer any planning need for a public car park, I cannot see how that should make the modification process reviewable.

49.  Mr Neoh relied on R (on the application of Molinaro) v Royal Borough of Kensington and Chelsea, unreported, [2001] EWHC Admin 896, 29 October 2001 where the local authority, the landlord, refused consent to change the purpose for which the premises could be used.  In particular, he relied on the following dictum of Elias J in rejecting the argument that the claims advanced are similarly private law claims:

“[63] In my judgment, this argument is wholly unsustainable, at least in respect of the first two claims.  Manifestly, the Council was not simply acting as a private body when it sought to give effect to its planning policy through the contract.  Again, the decision not to permit a change of use, albeit one involving the exercise of discretion under a contract, was taken for the purpose of giving effect to its planning objectives.”

The three arguments were:

  “[19] … First, they say that the permitted user clause was invalid because the effect was to restrict the rent that could be obtained for the premises contrary to s 123(2) of the Local Government Act 1972. Second, the claimant submits that the decision to refuse to amend the terms of the lease (or to agree to a surrender and regrant on new terms) was unlawful. In reaching the decision not to permit the claimant to use the premises as a restaurant with the consequential financial benefits that would thereby have resulted to the local authority, the Council has acted, it is submitted, in breach of its fiduciary duties and irrationally. Third, it is said that by its correspondence the Council created a legitimate expectation that the claimant would have his application for a claim of use considered without the Council having regard to its own planning policies as set out in the Neighbourhood Use Policy.  The Council, it is said, was leading the claimant to believe that the only issue would be whether the change of use was reasonable.”

50.  But I believe the ratio of Elias J’s judgment is to be found in the following passage:

“[65] In my view, the fact that a local authority is exercising a statutory function ought to be sufficient to justify the decision itself being subject in principle to judicial review if it is alleged that the power has been abused.”

51.  In coming to his conclusion Elias J relied on, for example, Wheeler v Leicester City Council [1985] AC 1054 and Wandsworth London Borough Council v Winder [1985] AC 461, both of which involved the exercise of statutory powers.

52.  Wheeler was concerned with the decision of the city council to ban the Leicester Football Club from using the Welford Road Recreation Ground for its rugby matches for 12 months because the club had taken a touring side to South Africa notwithstanding the policy of apartheid there.  The council held and administered the Recreation Ground pursuant to various statutory provisions including section 10 of the Open Spaces Act 1906 in trust to allow, and with a view to, the enjoyment thereof by the public as an open space.  Under section 56 of the Public Health Act 1925 which empowered the council to make charges for the use of football pitches and under section 52(2) of that Act to permit the exclusive use by any club of such a pitch.

53.  Wandsworth London Borough Council was concerned with increases of rent under the Housing Act 1957 and the issue was whether the resolutions to raise rent and notices of increase were ultra vires and void.

54.  In Royal Borough of Kensington and Chelsea, Elias J distinguished R. v The Lord Chancellor, ex parte Hibbit and Saunders (a firm) and another [1993] COD 326, The Times 12 March 1993, the contract for law reporting services case, in these words:

“In that case the Divisional Court held that although the Lord Chancellor’s Department had acted unfairly in the tendering process it adopted in relation to a proposed contract for certain court reporting services, its decision was not amenable to judicial review.  However, the power to contract was not there conferred by statute.  The Lord Chancellor’s Department was exercising a common law power.”

55.  It is clear in my view that Elias J’s decision can be explained on the narrow basis that the Royal Borough of Kensington and Chelsea was exercising statutory functions.  In any event, I do not find the decision to be of assistance since any such decision “is very much one of fact and degree”.

Other issues

56.  I will deal with the remaining issues briefly since the application must be dismissed.

57.  On issue (2), namely, whether the nature of the two decisions made them susceptible to judicial review, the learned judge held that the decisions were not decisions subject to judicial review because they were not decisive; they did not finally determine anything; they were intermediate steps, and that the applicant itself also continue to negotiate, that is, to respond to the government’s two offers with what amounted to a counter offer.

58.  If Mr Neoh were right that the inclusion of the extraneous conditions is reviewable, I would regard the decisions to be reviewable since but for the inclusion of the extraneous conditions the applicant would have accepted the offer made.  Instead, the applicant had to pay a higher premium.  The decisions were decisive in the sense that they were each offers which were capable of being accepted.  If the applicant was entitled to expect that an offer when made should be made in accordance with the published policy of the government, then I am of the view that it was entitled to a declaration that neither offer should have contained any extraneous condition.

59.  Nor would I agree that the fact that modification had been granted and the premium paid made the matter academic since if the government had been wrong to have included the extraneous conditions such that the applicant had lost the opportunity of accepting the first or second offer and a declaration to that effect was made, I would presume that such a declaration would have had an effect on the government.

60.  However, these issues are truly academic since the decisions are not reviewable.  Mr Neoh also agreed that for the reasons given by the learned judge, I need not deal with the substantive challenges raised by the applicant.

61.  I would dismiss the appeal.

Hon Le Pichon JA:

62.  I agree with the judgment of Tang VP.

Hon Sakhrani J:

63.  I agree with the judgment of Tang VP.

Hon Tang VP:

64.  The appeal is dismissed.  We also make an order nisi that the respondent is to have the costs of the appeal, such costs to be taxed if not agreed.