EASE GOLD DEVELOPMENT LTD v. SECRETARY FOR TRANSPORT

LDMR 13/1999

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS REFERENCE APPLICATION NO. 13 OF 1999

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J U D G M E N T

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1 ． This is an application by the Applicant to the Lands Tribunal for determination of the amount of compensation payable under the Roads (Works, Use and Compensation) Ordinance ("Chapter 370"), due to the creation of rights of temporary occupation for the Lot No. 214 (Portion) and Lot 215 (Portion) in D. D. 103 in Yuen Long ("the suit lots"), the registered owner of which is the Applicant. By virtue of a gazette notice dated 17th August 1995, a right of temporary occupation for a period of 36 months was created under section 15 of Chapter 370. The said right was created in favour of the Government upon expiry of the gazette notice for a period of 3 months, i.e. the said right was created on 17th November 1995 and expired on 16th November 1995. The basis for assessing such compensation is, in accordance with paragraph 2(a)(ii) of Part II of the Schedule of Chapter 370, "the amount of an open market rent for claimant's interest in the land occupied during the period of the easement".

2. There is no dispute that comparables are to be used for the purpose of ascertaining the amount of compensation payable. The Respondent's comparables are "fish pond" comparables (see Appendix J(i) of Exhibit R2) and 7 additional comparables (see Exhibit A3). The Applicant has set out a table (Exhibit A3) to show a comparison of the Applicant's comparables and the Respondent's additional comparables. Save and except the part of the table relating to "Adjustment", the table is reproduced hereinbelow: -

Comparison Between Letting Comparables of Agricultural Lands For Open Storage used by AW & RAW

3. During the trial, the Applicant's expert, Mr. Lau, informed the Tribunal that the Applicant would no longer rely on Comparable 1. The task of this Tribunal is to decide which of the comparables possess attributes similar to those of the suit lots, so that they could be regarded as suitable comparables.

4. It is important to consider the matters a tenant would consider when deciding the amount of rental for the suit lots. No doubt he will put the land leased to its best possible use. In this respect he will take into account the area, the location, the lease conditions and the zoning of the suit lots. The suit lots were demised as agricultural ground under the Block Crown Lease for 75 years renewable for 24 years from 1st July 1898. They are being used as fish ponds. It is within an "Undetermined" zone which requires any private developments to obtain prior approval from the Town Planning Board for their intended uses.

4.1 The suit lots are situated on the east side of Castle Peak Road and north side of Kam Tin Road in an area known as Au Tau in Yuen Long District. Some of the land along both sides of the Castle Peak Road and Kam Tin Road, though of agricultural status, have been filled up and used for other uses and storage purposes. In 1991, the suit lots were within an area classified by the Town Planning Board for "open storage" purposes. If not for the planning restriction, the suit lots are suitable for open storage uses.

4.2 When the tenant agrees to take up the lease of the suit lots, with a view to making the best possible use of it, and bearing in mind all these factors in mind, he will contemplate the making of an application to the Town Planning Board for permission of the land to be applied for a better use, including "open storage" use because this user will generate a much bigger profit for him. With that perception, he agrees to pay a rental for the taking up of the lease of the suit lots. In other words, the rental he pays includes an element of that perception. On the other hand, the landlord will also try to maximize the best possible use of the land, so as to get the best possible rental. On this basis he agrees to let the suit lots to the tenant.

4.3 The Applicant's additional comparables can be adjudged against this criterion to see if they are appropriate comparables. The tenancy agreements of these sites (Comparables 2 to 7) contain a standard clause: -

"(六) 用途 ：該地段衹可作合法用途，若該用途有違反政府條例或遭受他人控訴時，乙方須立刻將該地段更改為合法用途，並保障及賠償甲方所涉及的損失。"

Before taking up a lease, of course, the tenant must have already decided what the site will be used for. In all these 6 comparables, the sites were eventually used for "open storage" use. But planning permission was not obtained at the time of tenancy creation. It must be that at the time of entering into the tenancy agreements, the tenants decided to use the sites for better uses, including "open storage" uses. But the tenancy agreements stipulated that the sites could only be used for lawful purposes. The reasonable inference which can be drawn is that at the time of entering into the tenancy agreements, they anticipated that they would apply to the Town Planning Board for approval of the intended uses of the site rented. On this basis, the Applicant's comparables are suitable comparables for the suit lots.

4.4 The Respondent's Counsel, Mr. Miu, submitted that even if the Land Resumption Ordinance ("Chapter 124") principles were applicable, it would still be inappropriate to use as comparables where use as open storage without Section 16 approval is illegal. There is no evidence whatsoever that the landlords and the tenants of the Applicant's comparable sites agreed that the sites would be used for illegal purposes. If the tenants used the sites illegally during the term of the tenancy, that was a matter for which they were solely responsible. It had nothing to do with the landlord. The Tribunal is unable to find any illegality from the tenancy agreements of these comparables, and the Respondent's submission is dismissed.

4.5 The Respondent's expert, Mr. Tsui, opined that since the suit lots were zoned "Undetermined" on the draft Kam Tin North Outline Zoning Plan, and no planning permission was granted under Section 16 of the Town Planning Ordinance (Cap. 131) and the existing use of the suit lots under Cap. 131 was pond, thus the optimal lawful use of the Land at the material time was "pond" use. As such, reference by the Applicant to the rental comparables for open storage is not correct. On a like-with-like basis, direct comparison with those rental comparables for fish pond use is the best valuation method in assessing the open market rent of the suit lots. He listed out in his valuation report dated 5th May 2000 (Exhibit R2) 8 comparables (Appendix J(i)). But Mr. Tsui has failed to take into account the market reality. When taking up a lease, a tenant will consider making the best possible use of the land, and to this end he may contemplate the making of an application to the Town Planning Board for the requisite permission for the said use, and such contemplation is reflected in the rental he pays.

5. The Respondent's Comparables R1 and R2 were used as open agricultural land. There is no evidence that they were leased for any other purposes other then agricultural use. In this regard they can be considered as suitable comparables. But no evidence has been adduced in respect of the actual terms of the tenancy. Thus there is no evidence upon which an inference can be drawn that at the time of entering into the tenancy agreements, the tenants contemplated the making of any application to the Town Planning Board. In this regard they are less suitable as comparables than the Applicant's comparables. In any event for reasons hereinafter they were discarded as appropriate comparables. For the same reason, the Respondent's "fist pond" comparables are rejected as suitable comparables because the sites in question were specifically let as "fish ponds" and the tenants did not contemplate the making of any application to the Town Planning Board in respect of the use of the leased sites.

6. It appears that the Respondent's Comparables R3 to R7 were let for a specific purpose, namely open storage (container) purpose. Approval under Section 16 of the Town Planning Ordinance is required. But the suit sites could not be let for such a purpose because they were within an "Undetermined" zone. In the premises, Comparables R3 to R7 are not suitable comparables.

7. In conclusion, the assessment of the open market rental of the suit lots must therefore be made subject to the zoning in force at the effective date the right of temporary occupation of the suit lots was created, i.e. the zoning of "Undetermined".

8. In paragraph (x) of the Notes to the Kam Tin North Outline Zoning Plan No. S/YL-KLN/1 exhibited under Section 5 of the Town Planning Ordinance on 17.6.1994, it has been so stated that in the "Undetermined" zone, any use or development except those listed in paragraphs (v)(a) to (v)(i) and (vi)(a) requires permission of the Town Planning Board. Such use or development referred to in paragraphs (v)(a) to (v)(i) and (vi)(a) are reproduced hereunder: -

(a) Maintenance, repair or demolition of a building;

(b) Construction, provision, maintenance or repair of public utility pipelines, electricity masts, lamp poles, telephone booths, bus stops or lay-bys, public light bus stops, taxi-ranks, rain shelters, footpaths, cycle tracks, amenity areas and sitting out areas;

(c) Maintenance or repair of roads, service lanes, rail tracks, footbridges, subways, watercourses, plant nurseries, parks and gardens, playgrounds/playing fields, pedestrian areas, nullahs, sewers and drains;

(d) Geotechnical works, local public works, road works, sewage works, drainage works, environmental improvement works, marine related facilities and waterworks installation excluding service reservoir carried out by government departments;

(e) Rebuilding of New Territories Exempted House;

(f) Replacement of an existing building for domestic purpose i.e. a domestic building which is in existence on the date of the first publication in the Gazette of the Notice of the interim development permission plan, by a New Territories Exempted House;

(g) Use within the curtilage of a house of any purpose incidental to the enjoyment of the house;

(h) Provision, maintenance or repair of a grave of an indigenous New Territories villager or a locally based fisherman and his family members for which permission has been obtained from the Director of Lands or the appropriate District Office;

(i) In any area shown as "Road": central divider, driveway, elevated road, on-street car park, cycle park, rail station and stop, footbridge, rail track, road tunnel, subway and footpath; and

(vi)(a) Except in area zoned "Conservation Area", temporary use or development of any land or building not exceeding a period of two months is always permitted and no planning permission is required provided that no site formation (filling or excavation) is carried out and that the use or development is a use or development specified below: -

"Structures for carnivals, fairs, film shooting on locations, festival celebrations, religious functions or sports events."

9. Open Storage is none of the above usages. If the Applicant indeed wishes to use the suit lots for the said purpose of open storage, prior permission from the Town Planning Board is necessary and such permission cannot be expected to be given as a matter of course in view of the Town Planning Board Guidelines on Application for Open Storage Uses up-dated in November, 1994 and further up-dated on 22.10.2001. The availability of such permission to the Applicant is uncertain and even if permission is given, the precise conditions laid down by the Board for compliance are uncertain. The permission given by the Town Planning Board in July 1998 for Open Storage of Vehicles and the conditions stipulated thereto for compliance cannot be taken as applicable in the case of February 1996 when the situation of the suit lots and/or their surrounding areas might be quite different (even if the permission and the conditions stipulated thereto were to be applicable in the case of February 1996, the Applicant's expert witness had only prepared a cost estimate in part meeting the requirements set out in the Town Planning Board's permission letter).

10. Following on from the above, it is inappropriate to include for valuation purpose, those comparables provided by either Messrs Lau and Tsui, which were leased for a purpose designated under their respective tenancy agreements or agreed orally at the time of creation of the tenancies, dissimilar to such usage permitted under the grant conditions of and conforming to the zoning set down under the Town Planning Ordinance for the suit lots.

11. Nevertheless, the arguments put forth by the Applicant's Counsel in paragraph 15 of his final submission cannot in principle be regarded as totally wrong. Indeed, the annual rental income derivable from the suit lots for any particular year or years is a fraction of the full value obtainable, but it should be noted that the annuity (i.e. the annual rental income) is in reality not always the same every year as the physical environment in which the suit lots are located, and the business environment at the date of valuation through to the end of the residual term of the suit lots are not always the same. Multiplying the rental income for a particular year by the number of years in the remaining term of the suit lots to arrive at the full value of the suit lots as most valuers have been doing, is on the assumption that the annuity is the same every year ignoring the fluctuation that may arise from time to time due to the ever-changing physical and business environments.

12. The desirable approach nevertheless, is to add up the annuities instead of by multiplying the rental income of a particular year, but unfortunately, no valuer is able to predict the ever-changing physical and business environments and therefore, the method in use by most valuers is acknowledged for the purpose of assessing the full value. It should not thus be taken to infer that assessing the annual rental income for the temporary occupation of the suit lots under Chapter 370 must follow the same methodology (i.e. ignoring the existing zoning of the suit lots) adopted under Chapter 124 because failing to so follow will result in the full value of the suit lots assessed under Chapter 124 being different from that assessed by multiplying the annual rental income assessed under Chapter 370, by the number of years that remain in the residual term of the suit lots. Apart from the practical hurdle of the unpredictable physical and business environments, ignoring the zoning as prescribed under Chapter 124 in assessing the value of landed properties perhaps serves to circumvent the problem of betterment and worsenment brought about by zoning. The need to circumvent is based on the rationale that the affected landowners should not be compensated for a windfall that is not attributable to their own efforts or be punished for something not due to their laziness and mistakes. Moreover, by virtue of its composition, the Town Planning Board cannot be regarded as absolutely independent from the influence of Government which is the initiator of the land resumption scheme. Ignoring the zoning provides the affected landowners with a kind of safeguard that any attempts by the Government to influence the zoning to their disadvantage because of the land resumption scheme are kept to the minimum.

13. In the case of assessing the rent for the temporary occupation of the suit lots under Chapter 370, it is unrealistic to divide the total value assessed under Chapter 124, of the suit lots by the number of years that remain in their residual term. Not only on the ground indicated in the foregoing paragraph, but it is also because a law abiding tenant would not be so unrealistic as to lease the suit lots for a short term of three years for a purpose that is not within the bounds permitted by the legal framework, in particular, the prevailing zoning set down by the Town Planning Ordinance.

14. Considering the above, it is not anomalous to assess the rental of the suit lots for fishpond purpose, i.e. their existing use as at the date whereupon the Government created the right of temporary occupation under Chapter 370. In this regard, Mr. Lau advised that the appropriate rental rate be $2.9 per sq. m. per annum and Mr Tsui is not prepared to challenge such suggestion. The Tribunal's assessment therefore is: -

15. The Tribunal, however, noted that the tenant may perhaps, be willing to pay an extra sum for leasing the suit lots because of the likelihood of obtaining permission from the Town Planning Board or other government departments for a more favourable usage than the existing one. His/her willingness to pay the extra sum is not based on the factor that the lots are indeed known to everyone suitable for a more favourably usage and therefore the Town Planning Board approval is definitely forthcoming as a matter of course. He/she is willing to pay because having assessed the physical attributes of the lots, he/she finds that there is such likelihood. In other words, he/she pays for the potentiality and bears the risk of failing to obtain the approval. Therefore, such rental payment is a market rental payment given for the present status of the suit lots.

16. Therefore, in assessing the open market rent of the suit lots, the additional comparables that should be taken into consideration are Comparables 2 to 7 and R1 and R2 on Exhibit A3. However, in the course of analysing the data in relation to R1 and R2, the Tribunal found that R1 and R2 being transactions taken place more than one year after the relevant valuation date were not provided with data on the rental market movement 12 to 18 months later than the relevant valuation date. This defeats the Tribunal's effort in its attempt to adjust their rental values due to time difference. By the way, it is also not so appropriate to include a transaction that has taken place for more than six months from the relevant valuation date unless the number of transactions is so scarce as to warrant its inclusion. As a result, R1 and R2 have been discarded.

17. The opinions of the two expert witnesses, i.e. Messrs Lau and Tsui, in regard to the above comparables, in quite many places, are in extreme divergence. The Tribunal's consideration on their views are as follows: -

(a) Adjustment for Location

The Tribunal held the view that the suit lots located to the east of Yuen Long town should not be regarded as better than Comparables 2 to 7 which are all located to the west of the town at more or less the same distance as the suit lots from the town. In term of their distance from the Kowloon urban hub, neither the suit lots nor Comparables 2 to 7 are more advantageous than the other. Therefore, the Tribunal disagreed that adjustment in rental be allowed as against the view of Messrs Lau and Tsui.

(b) Adjustment for Access

Having heard the views of Messrs Lau and Tsui in open court and examined the relevant Survey Plans (or part plans) produced, the Tribunal held the view that the access of Comparables 2 and 3 are quite similar to that in respect of the suit lots; Comparables 4, 6 and 7 do enjoy a even much better access whereas Comparable 5 which is land locked and has to gain access through other privately owned properties, should in no way be regarded as better or similar, but worse.

(c) Adjustment for Quantum

The Tribunal does not feel the need to make rental adjustment on account of lot size in the present case. The optimum size of lot depends on the precise usage. If the tenant's intention in respect of the precise usage has not been made known at the time the tenancy was created, it is risky to assume that the intended usage is all for open storage of the same kind of goods. A supermarket may need a floor area of 10,000 sq. ft. in order to be of efficiency in operation. A neighbourhood store selling a limited range of daily necessaries may need only 1,000 sq. ft. and therefore, any size in excess of 1,000 sq. ft. should command a smaller unit rent than that of the first 1,000 sq. ft. Similarly, a site for storage of scraped vehicles should have a site size requirement much bigger than that for storage of usual consumer goods. In the absence of information on the final precise usage, any adjustment made purely based on the fact that the suit lots are much larger in size than Comparable 2 to 7 tends to be biased.

(d) Adjustment for Time

The Tribunal noted the adjustments made by Messrs Lau and Tsui are not of significant divergence. The Tribunal does not consider either of them is unreasonable and is prepared to take the average of the two adjustments to arrive at the total adjustment quantum of each comparables.

(e) Adjustment for Security of Tenure

The Tribunal noted that Mr. Lau made no adjustment for a tenure shorter than 3 years, of Comparables 2 to 7 whereas Mr. Tsui did. Obviously, Mr. Lau did not feel it justified to do so due to the shorter term being fallen short by only 6 months to one year and two months. The Tribunal does think it otherwise as the short-fall is 1/6th to 1/3rd of the full three years term though 6 months to one year in absolute term are not long durations. On the basis of Mr. Tsui's award of 3% for 6 months, the award for one year and two months should be 7%, for one year, 6% and for 10 months, 5%.

(f) Adjustment for User

The Tribunal noted that Messrs Lau and Tsui gave no adjustment under the heading of user. The Tribunal agrees with such as the suit lots and Comparables A2 to A7 are all similarly demised under the Block Crown Lease for agricultural purposes. Albeit such usage being considered descriptive in nature by the Court of Appeal in the case of Attorney General v. Melhado Investment Ltd [1983] HKLR 327, they are under no different terms stipulated under the Block Crown Lease for which they are demised. Although the suit lots and Comparables 2 to 7 may be capable of being put for various better usage than agriculture including the usage of fish pond, by submitting applications to the Town Planning Board for approval, such approval has not been obtained at the time the tenancies were created. The likelihood of obtaining such approval depends on their physical attributes and the rental paid by the respective tenants reflected their differing physical attributes.

(g) Adjustment for Non-building Area

The Tribunal noted that neither Messrs Lau and Tsui had given adjustments in this aspect. This is agreeable to the Tribunal as the need does not arise.

(h) Adjustment for Special Interest

Again, the Tribunal agreed with Mr Lau that no adjustment is necessary as there is no proof adduced that any of the tenants took up the tenancies because of special interest.

(i) Adjustment for Potential Flooding Problem

Mr. Tsui held the view that the North and Yuen Long districts are known to be areas generally susceptible to flooding. With the presence of a river and flood prevention works done in the vicinity, the suit lots were considered susceptible to flooding whereas there is no track record of flooding in the area to the west of Yuen Long town. The Tribunal held the view that the presence of a river and flood prevention works is no evidence of the suit lots being susceptible to flooding and therefore, dismissed that adjustment be given for Comparables 2 to 7.

(j) Adjustment for Land Formation Works

Comparables 2 to 7 are flat land served with existing track either paved or unpaved. The suit lots were fishponds as at the date of valuation, and should require filling up to a level before capable of being used for purposes other than fish farming. Formation of access to link with an existing haul road to the east is also necessary. The filling up of the fishponds and construction of access should require the approval from certain government departments. Thereafter, it should be followed by the hiring of contractor to implement the required works and engaging agents to market the leasing out. Mr. Lau advised the Tribunal that the cost of works based on the information from Levette & Bailey, a quantity surveyor in private practice, is about $16 per sq. m. Though he confessed in open court that he had no previous experience for obtaining the required approval from the concerned government departments, he estimated the time required including implementation of the works in question could all be completed within two months' time. Mr. Tsui advised the Tribunal that it might take six months just for obtaining the approval from the concerned government departments. The Tribunal considered that six months probably are the modest estimation prior to the suit lots being capable of generating any rent.

18. As to the cost of land formation, the Tribunal noted from the maps and survey plans produced that the suit lots are located in a relatively flat area where hill for obtaining fill materials is not found within miles. The fill materials therefore, have to be obtained from outside the district and may even be from the nearby Pearl River estuary. Even if hill is found in the same district, owing to environmental protection or geotechnical reason, the permission to excavate the hill may highly unlikely be forthcoming at ease. According to the same document from Levette & Bailey provided by Mr. Lau to the Tribunal, the cost of filling up the fish ponds by fill materials obtained outside the district is in the range of $35 to $45 per sq. m. The Tribunal does not consider the cost at $40 per sq. m. unreasonable.

19. Given the above views, the Tribunal has tabulated its adjustments and calculated the adjusted unit rent for Comparables 2 to 7 as follows: -

20. The adjusted rents above worked out fall within the range of $60 to $166 per sq. m. with four around $60 to $70 per sq. m. and two above $130 per sq. m. Given the wide dispersion of the rental values and lack of useful data for analysis, it is difficult to ascertain any one or ones that is/are out of the market tone and therefore, should be excluded. As such, the prudent way is to average them so as to minimize the risk of being wrong in the selection of the right value or values. The average of the six rentals is $93.33 per sq. m. per annum and rounded down to the nearest dollar, say, $93 per sq. m. per annum. The annual rent that should be paid by the Respondent is as follows: -

First Year
	Affected Area in sq. m.	31706.9
	Rent @ $93 per sq. m	$93
		__________
	Annual Rent	$2,948,741.70
Less
	Rent for the first six months due to site formation etc.	x (1-6/12)
	Net Rent Payable	$1,474,370.85
	Say,	$1,474,000.00
Second Year
	Rent Payable	$2,948,741.70
	Say,	$2,948,000.00
Third Year
	Rent Payable	$2,948,741.70
	Say,	$2,948,000.00

21. If the rent for three years is to be paid in one lump sum, the Present Value of the rent above for the second and third year at the appropriate respective prime bank rates for time deposit at similar amount and duration should be ascertained. In the absence of evidence in this aspect from both the Applicant and Respondent, the Tribunal assumed that the three sums above stated would be paid in one go.

22. Orders

We order that the Respondent do pay the Applicant the first year rent in the sum of $1,474,000.00 and the rent for the second and third year each in the sum of $2,948,000.00. The matters of professional fees, interest and costs be adjourned to a date to be fixed by the Assistant Registrar, with liberty to apply for any other ancillary and consequential matters.