WONG WAN LEUNG AND OTHERS v. SECRETARY FOR TRANSPORT

Property law - resumption claim for land demised under former historical Cheung Chau Island land tenure system by sub-lessee from the Wong Wai Tsak Tong who held from the Crown under a Block Crown lease - Compensation claim of $765,000 for partial loss of building land for Crown road widening and drainage improvements - whether subject property was agricultural land or building land consideration of common user provisions, restrictive covenants and building covenants in Block Crown leases of New Territories land - Crown valued property, if agricultural land, at $152,136 and if building land at $187,000 - Held:

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JUDGMENT

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1. This consolidated application for compensation is made pursuant to Section 29(7) of the Roads (Works, Use and Compensation) Ordinance, Cap.370 ("the Ordinance") for the resumption of land situate at Cheung Chau Island, Hong Kong. The 1st Applicants are the Crown lessees of the land while the 2nd Applicant is the sub-lessee of part of the land.

2. The 1st Applicants filed their claim in respect of Lots 3, 5(Portion), 6, 7 R. P. (Portion), 10 R. P .(Portion), 10 Sec. (B. R. P.) Portion), 10 Sec. S. Ss. 1(Portion), 10 Sec. C. R. P. (Portion), 14 R. P. (Portion) and 1032 with the Tribunal on 12th April 1996 under M. R. No.5 of 1996. On 24th May 1996 the 2nd Applicant brought his claim for Lots 7 R. P. (Portion) 10 R. P. (Portion) and 10 Sec. C ss 1 (Portion) under M. R. No.7 of 1996. On 8th August 1996 the Respondent's summons for joining the 2nd Applicant to the prior proceedings was dismissed but an order on that date was made consolidating both proceedings.

3. In Suen sun-yau v. Director of Buildings and Lands [1991] HKDCLR 33, [1989-91] CPR 357, the unique system of land tenure, so far as Hong Kong is concerned, which until recently, affected most of the land at Cheung Chau Island, is described. We do not propose to repeat all of those details. It is is sufficent to record that Cheung Chau Island became part of the Colony of Hong Kong in 1898, under the New Territories Lease, 30 Laws of Hong Kong, Appendix IV, JI, However, unlike the rest of the New Territories, Crown leases were exceptionally not granted, direct to the lawful occupiers of the land.

4. The Crown instead adopted the alternative procedure of granting a Block Crown lease to the 1st Applicants. Tong who in turn, granted 5 yearly renewable leases to each lawful occupier, limited to the duration of the Block Crown lease. In Suen Sun-yau (supra) the Tribunal observed that the Tong, because of the nominal sub-lease rent, was in practice little more than the Crown's rent collection agent. The Tong, in those earlier consolidated proceedings, by consent, filed a notice of withdrawal, some months before the substantive hearing.

5. In the present consolidated proceedings, the Tong on 31st August 1996, accepted a payment by the Respondent of $6,783,001.50 in respect of Lots 5(Portion). 6, 14 R. P. (Portion) and 1032(Portion), which were not sub-leased to the 2nd Applicant. Notice of Withdrawal of the Tong's claim, in relation to its remaining Lots in M. R. No. 5 of 1996, which were sub-leased to the 2nd Applicant, was filed on 9th September 1996. The Tribunal is therefore no longer concerned, in this application, with the separate estate or interest of the Tong.

6. We record that so far as land tenure is concerned, that following years of differing views on the historical powers of the Tong as sole Crown lessee, the position of the sub-lessees and the value of their respective interests in the land, the Block Crown Lease (Cheung Chau) Ordinance Cap., 488, was enacted on 3rd August 1995.

7. In summary, under the new Ordinance, the sub-lessees from the Tong, are generally deemed to be Crown lessees, holding their land direct from the Crown. In practical terms, the Tong has ceased to be an intermediary. Section 12 gave the Tong until 3rd August 1996, to apply to the Lands Tribunal for compensation, for the termination of its interest under the 1905 Block Crown lease.

8. The 2nd Applicant's land which has been resumed, comprising Lots 7 R.P(Portion). 10 R. P. (Portion) and 10 Sec.C ss.1 (Portion), is located on either side of Tsan Tuen Road, Sai Wan, Cheung Chau Island. Notice of the resumption dated 16th December 1993, for the Cheung Chau Development Package 5 Site Formation and Improvement to Roads and Drains in Sai Wan, Cheung Chau Island, New Territories, was published in No.50 Volume CXXXV The Hong Hong Government Gazette on 17th December 1993 under G. N. 4580 of 1993.

9. The subject land reverted to the Crown on the 17th day of March 1994. This date precedes the coming into force on the 3rd day of August 1995, of the Block Crown Lease (Cheung Chau) Ordinance. The provisions of the new Ordinance are not retrospective. Accordingly, the new Ordinance does not affect the present claim for compensation.

10. The 2nd Applicant claimed compensation in the sum of $765,000. The Respondent's assessment of compensation was $152,136. These widely differing sums, reflected the Rule 20 expert reports of the parties respective chartered surveyors, who also gave oral evidence before the Tribunal. The 2nd Applicant called Mr. C.K.Chan ARICS. AHKIS, RPS(GP) while Mr. C.Y.Lam, B.Sc (Estate Management), Post-Graduate Dip. (Urban & Regional Planning), ARICS, Acting District Lands Officer (Islands) Lands Department, gave evidence for the Respondent.

11. The large valuation difference between the valuers, was in part due to their approach to the lawful user of the subject land. The 2nd Applicant's valuation was based on the land being lawfully available for building purposes. The Respondent's valuation was limited to the agricultural user of the land. The law is well settled that compensation on a resumption, is not necessarily limited, to the owner's actual existing use. An owner may not fully be utilising the land for it optimum lawful and reasonable use. In those cases, an owner is entitled to have compensation calculated, on the basis of the best use of the land - Cruden Land Compensation and Valuation Law in Hong Kong 54.

12. An owner's common law right to have compensation determined in accordance with the land's optimum use, is always subject to that optimum user being lawful. In this particular application, the relevant statutory user limitation is to be found in Section 12(b) of the Crown Lands Resumption Ordinance which provides:

The 2nd Applicant's user rights are the same as those granted to the 1st Applicants, under the Block Crown lease.

13. We record that the limitation contained in Section 12(c), prohibiting compensation being given for any expectancy or probability of the grant of a renewal, unless it could have been enforced as of right, does not arise on the instant facts. We also record that the Tribunal is not allowed to take into account, whether the land lies within or is affected by any area reserved or set apart for the purposes specified in the Town Planning Ordinance, Cap., 131, referred to Section 12 (aa) of the Crown Lands Resumption Ordinance. This provision applies by virtue of Item 1 of Part II of the Schedule to the Roads (Works, Use and Compensation) Ordinance.

14. On the important issue of the lawful user of the subject land, the provisions of the 1905 Block Crown lease, will therefore be decisive. The Block Crown lease follows the common form of other early Block Crown leases, for land in the New Territories. A Schedule provides important particulars, relating to separate lots within that part of a Demarcation District comprised in the Block Crown lease, usually owned by a number of different persons.

15. The body of the Block Crown lease is drafted without any numbered paragraphs and otherwise in now archaic form. The lease commences with the parties names and remorselessly continues in an uninterrupted narrative, through the demise, habendum, reddendum, reservations, tenant's covenants, landlord's covenants, provisoes and testimonium, until the attestation clause and Schedule are finally reached.

16. The extent and variety of land included in a Block Crown lease, are no doubt reasons why there is no express user covenant, affecting all of the land thereby demised, in the body of the lease. The body of the document, to the contrary, expressly recognises that the demise extends to several different classes of land. As has been judicially observed on a number of occasions, the majority of land in the New Territories at the turn of the century was, as a matter of fact, used for agricultural purposes.

17. One example of the recognition in Block Crown leases of these different classes of land, including nonagricultural land, is the imposition of restrictive covenants, limited to such parts of the land, as are demised only as agricultural or garden land. These restrictive covenants are generally drafted as provisoes.

18. The first such restrictive covenant is to be found in the second proviso, which declares "... in the event of any building being erected on any premises expressed to be demised as agricultural or garden ground the rent payable in respect of such premises shall be such sum as shall be specified in the licence for the erection of such building to be granted in manner hereinafter appearing:" Later there is a second similar restrictive covenant that a lessee shall not "... convert any ground hereby expressed to be demised as agricultural or garden ground into use for building purposes other than for the proper occupation of the same ground as agricultural or garden ground. without the previous Licence of His said Majesty..."

19. The drafting scheme of a Block Crown lease, is first to include covenants in the body of the lease which are generally applicable to all of the demised land. Secondly, the leases go on to include some restrictive provisions, which apply only to limited classes of the demised land namely, agricultural and garden ground. The scheme of the lease then continues by specifying in the Schedule, the serial number of the various lots within each Block lease and their other particulars.

20. These scheduled particulars include the area of each lot; its physical description; the name and address of the owner; the Crown rent; the class of land for which the rent is calculated; and other remarks relevant to the lots. as at the date of the execution of the lease. The body of the lease from its commencement itself emphasises the importance of the Schedule, when it expressly provides that it is between King Edward VII and "the several persons. ... whose names are set out in the schedule..."

21. The lease then demises "unto each lessee" the land "set out and described in the Schedule hereto opposite to the name of such lessee." Later the reddendum provides that each lessee shall pay "the sum stated in the Schedule hereto against the said Lot number ..."

22. Under Block Crown leases, drafted in this common form, it is therefore necessary to go the Schedule to ascertain these important particulars, relating to each separate lot. Turning to the Schedule, we find that Lots 7 and 10, were in 1905 still unsubdivided. Lot 7 is a relatively large lot, described as Waste, House and 2 Latrines. Under the "Crown Rent" column, the total rent for those three uses, therein particularised as ".93 W,H, 1st, 2 H 2nd" is $2.93 per annum. Lot 10 is described as a House. Under the "Crown Rent" column, the annual rent is $1 for this therein described "H 1st" class land.

23. We record that until 1983, the Crown had generally exercised its contractual powers as lessor of land in the New Territories, demised under Block Crown leases as agricultural or garden ground, on the assumption that a lessee was required to obtain a licence or other approval, not only for non-agricultural buildings, but also for non-agricultural storage. This assumption if, as a matter of law erroneous, at least for a time resulted in a degree of desirable land-use control, being exercised in the New Territories.

24. The Crown's long established licensing system, if misconceived, was so far as storage was concerned, rejected by the Court of Appeal in Attorney General v. Melhado Investment Ltd [1983] HKLR 327. The Crown had attempted to prohibit the unlicensed and otherwise unapproved use of agricutural land, for the storage of a large quantity of steel girders. The storage of the girders did not constitute a building. The Court of Appeal held that such storage was within the lawful agricultural user of the land and no licence or other approval from the Crown was required.

25. The Court of Appeal also took the opportunity to explain, that the "Description of Lot" column in the Schedule, did not further restrict the agricultural user of the land to those particular species of such user, entered against the number of each lot. The Court of Appeal held that this particular column was merely descriptive of the use of the land when the original survey was carried out. When considering the Judgment of the Court of Appeal and also its earlier judgment in Watford Construction Co. v. Secretary for the New Territories [1978] 410, it is important to recognise that in each, it was agreed by the parties, that the land had been demised for limited use as agricultural or garden ground.

26. In Melhado the restrictive covenant which the Court of Appeal found required a licence for any building, was in the same terms, as the second covenant, we have earlier set out in this judgment. The Court of Appeal held that the permitted agricultural user of the lots they were considering, was not to be limited only to the particular historical species of such user found during the original survey. Huggins, VP., at page 330 observed:

"It will have been observed that we have throughout assumed that, where the restrictive covenant in the Block Crown lease refers to ground "hereby expressed to be demised as agricultural cr garden ground" those words are appropriate to include ground demised as "padi" and "dry cultivation." The term "padi" is commonly used to describe not only the crop grown in padi field but also the field itself, "Dry cultivation", it is true, is not strictly descriptive of land but of a use to which land may be put, but we think it would be unjustifiable to construe those words in the present context otherwise than as intended to describe the land by reference to its existing use."

The Court of Appeal rejected the Crown's submission that where land was demised as agricultural land, its use was further limited to the particular agricultural use, specified under the "Description of Lot" column in the Schedule.

27. The issue before us is quite different for the present parties, do not agree that lawful user of the the subject land is limited to agricultural ground. Indeed, that issue is hotly disputed. The 2nd Applicant asserts the land may be used for building village type houses. The Respondent submits that it was demised. as agricultural land. Further, before houses could be built, a premium for change of user would have to be paid or a land exchange effected.

28. On this issue Melhado is not of direct assistance. However, by analogy, the Court of Appeal's holding, supports the proposition, that non-agricultural or building land, are words appropriate to include land demised as "house", "latrine" and also "waste" where, as here, the latter category is otherwise unrelated to agricultural use.

29. The proper construction of a lease, requires the whole of its contents, including any schedule, to be considered in its overall context. The historically merely descriptive reference, to the subject land in the Schedule for Lot 7 is Waste, House and 2 Latrines while Lot 10 is solely described as House. These words, if merely descriptive, would be more consistent with a demise for non-agricultural than for agricultural use. Indeed, if the evidence went no further it would arguably support a holding that such land could, under the lease, lawfully be used for building purposes.

30. However, the evidence does go beyond merely the contents of the "Description" column. In the absence of an express user covenant, a material and important indication of the contractually permitted user under a Block Crown lease, is the "Crown Rent" column of the Schedule. This column is more extensive than its mere heading. In addition to prescribing the rent payable for each lot, it specifies the Class of land within each lot. The rent for each lot varies according to Class. The highest unit rent is for Class 1 land, which includes House land and other major building land. Class 2 land includes minor buildings. The lowest rent is for Class 3 land, which principally includes agricultural and garden ground.

31. In Niceboard Development Ltd. v. China Light & Power Co. Ltd [1994] HKDCLR 69, a 1906 Block Crown lease, was in similar terms to the present lease, except the Schedule categorised the whole of the relevant lot as Class 3 land. The parties agreed this indicated the land was originally demised as agricultural and garden ground. In the 1930s a change of use of part of the lot was approved but the modification document could not be found and was probably destroyed during the 2nd World War. A later Deed Poll, referred to that portion of the land as "Class H land." On a Review, further evidence showed that the Crown Rent Roll for the Class 3 land of originally 5.7 acres, had been amended in 1935, to comprise .01 acres of H Class land and 5.69 acres of Class 3 land.

32. The Tribunal was informed that while other classes of land attracted different rents, a rent of $1 per 0.01 acres was charged for both House and Building land. These terms were at times used in the Roll interchangeably. An Advisory and Conveyancing Office, Department of Lands, solicitor gave evidence, that in the absence of primary documents or other evidence, an "H" annotation in the Crown Rent Roll, may be interpreted as permitting the user of the land to extend to general building purposes.

33. On the basis of the contents of this particular Block Crown lease and in the light of the relevant authorities, we find that the subject land in the remaining portions of Lots 7 and 10, was not demised as agricultural and garden ground. Accordingly, it is not subject to the two already referred to restrictive agricultural user covenants.

34. Counsel for the Crown went on to submit, that the later penultimate covenant, which unlike the earlier restrictive covenants, extends to non-agricultural land, also imposes a restriction on user. The covenant provides:

35. This covenant is, prima facie, a building and not a user covenant. The covenant requires the prior approval of the Surveyor to the erection of a building on any land demised under the Block Crown lease. After many changes in title, the current holder of the equivalent office of Surveyor, is the Director of Buildings. The Director, as the Buildings Authority under the Buildings Ordinance, Cap.,123, also has statutory powers, which require his prior approval, before buildings are erected.

36. Another indication that the covenant is not a restrictive user covenant, is that it applies to all permitted users under the lease. This is achieved by employing the words "...whether demised as agricultural or garden ground or otherwise..." These words may be contrasted with the earlier restrictive covenants, applying only to agricultural and garden ground. The prior covenant prohibiting non-agricultural buildings being erected on agricultural and garden ground, without a licence, would have been unnecessary and mere surplusage, if the latter provision, was not merely a building but also a user covenant.

37. The two earlier restrictive covenants, affecting the user of land demised as agricultural or garden ground, significantly require a "Licence" from the Crown, before any non-agricultural buildings may be erected, in which event "the rent may also be increased. The later penultimate covenant, does not provide for any "Licence" or increase in rent but merely for "approval" by the Surveyor. As a matter of conveyancing practice, the quite different terminology, is consistent with the prior covenants importantly involving lawful user, but the latter covenant being limited to building approval.

38. This construction also accords with Crown practice, explained in the letter of the Registrar General, dated 3rd April 1987, referred to in Niceboard, at page 81, in which he considered that the latter covenant only controlled design related matters and not user. However, Crown Counsel before us, strongly submitted that this penultimate covenant, is a user covenant. In support, Counsel cited an observation of Huggins VP., in Melhado, at page 329, where he refers to the prior judgment of Watford, in these terms:

"The only conclusion reached which is germane to the present case was that the description of the land in the schedule was what it purported to be - merely a description - and was not to be construed as, of itself, limiting the use which could lawfully be made of the land: the limitation on use was imposed by the covenant against building without a licence."

39. The Crown's submission suffers from a not uncommon erroneous extension of the Court of Appeal's judgment in Melhado. The judgment neither referred to nor expressly considered the nature of the Building Covenant. This misconception by Crown Counsel, shared by some other parties in previous cases, perhaps makes it desirable to consider the ratio decidendi of Melhado in more depth.

40. First, the agreed user in that case was limited to agricultural or garden ground. Secondly, the covenant referred to by Huggins VP., was the second restrictive covenant limited to agricultural or garden ground and not the Building Covenant, which applies to all demised land. Thirdly, the narrow issue before the Court of Appeal was whether the undisputed restricted agricultural or garden user, was further limited by the species of such use, listed in the "Description of Lot" column in the Schedule.

41. The Crown attacked the Lessee's sub-lease of the land for storage of steel, as being in breach of the alleged scheduled user limitation of the land for padi and dry cultivation. The Court of Appeal held that the description column, of itself, did not impose a further restriction on user and that storage of steel was within the permitted agricultural or garden user. The Court of Appeal therefore upheld the owner's submission for the wider construction of the relevant user provisions.

42. More importantly, the Court of Appeal did not have to consider, whether non-agricultural user, permitted buildings to be erected contractually as of right, subject to the Director of Buildings approving - as distinct from licensing - their design and other related building, structural and safety aspects. The Court of Appeal did not have to consider the meaning of the Building Covenant or its relationship to the prior restrictive covenants. Any observations on that very different issue, which now arises before us, would necessarily have been obiter.

43. We also remind ourselves that subsequently in 1984, a later Court of Appeal in China Light & Power Co. Ltd v. Chow Chi Keung [1983-1985] CPR 661, also presided over by Huggins, VP., considered the same covenants. In the judgment delivered by Barker, JA., he dealt with the owner's submision that the latter covenant was a building and not a user covenant, in these words:

"... it is unnecessary for me to express any opinion as to the construction of the second negative covenant. I merely record without comment the argument for the owner which was that the Surveyor's approval was concerned, and concerned only, with matters of design or style of the buildings, since to construe it otherwise would involve the owner in obtaining two permissions to erect residential buildings."

44. Huggins V.P., agreed with the judgment of Barker, JA. Apart from voicing a valuation doubt, so far as the lease was concerned, his judgment is limited to a reference to the same first covenant, he had earlier considered in Melhado. The other member of the Court, Yang, JA, as he was then, was content to agree with the other two judgments.

45. These judgments support a narrower rather than a wider ratio of the Court of Appeal's judgment in Melhado. The judgment was delivered on 13th March 1983. The judgment in Chow Chi-keung was delivered just under nine months later on 11th January 1984. We consider it unlikely, when both Courts of Appeal were presided over by Huggins, VP., that the latter Court in Chow Chi-keung, would have left open whether the second covenant was only a building covenant, if that issue had already been decided or formed part of the ratio, in its prior Melhado judgment.

46. In accordance with settled principles of stare decisis, we hold that we may properly determine the nature of the second covenant. In Niceboard at pages 80 to 82, the Tribunal held that the second covenant was a building and not a user covenant. After considering further submissions in the present application, we see no reason to depart from the Tribunal's earlier conclusion. We continue to share the view that the penultimate covenant, is not a user covenant but a Building Covenant.

47. We hold that the lawful user of the subject property is building land on which houses may, as a matter of right, lawfully be erected. The land is not agricultural or garden ground. The 2nd Applicant would therefore have been entitled to have erected houses on this non-agricultural building land. Mr. Chan's valuation of $765,000 was arrived at on the rather different basis that the land had the potential, to be developed for Village Type Housing.

48. Although Mr. Lam, in his Rule 20 Report, had not valued the land on an alternative building land basis, he helpfully considered this alternative, when he gave evidence. He stated that if he were to value the subject property as building land, he would have increased his agricultural user valuation of $152,136, to the modestly larger sum of $187,000.

49. Mr Lam also stated that so far as statutory building approvals were concerned, an owner of building land in Cheung Chau, would not necessarily be subject to the provisions of the Building Ordinance. If an owner merely wished to build village type houses, he would only have to comply with the less stringent provisions of the Buildings Ordinance (Application to the New Territories) Ordinance, Cap.121

50. We will now proceed to determine, as at 17th March 1994, the open market value of the subject property, upon which houses could, as a matter of right, have been erected. We confirm that the determination of the open market value, in this particular case, is not reduced or otherwise affected, by the provisions of Section 12(b) or (c) of the Crown Lands Resumption Ordinance.

51. Despite the clear legal basis for the determination of compensation, the Tribunal is immediately faced with the difficulty that each surveyor erred, in varying degree, in his application of the law. Mr. Chan at page 8 of his Report, stated that he searched for comparables of agricultural land, that had potential for Village Type Development. At page 50 he records, that all of his seven comparables are of agricultural land, zoned for Village Type Development. He also commented that the Tribunal had held that agricultural land, may have an element of development value.

52. Mr. Lam also limited his search to agricultural land observing at page 10 of his Report, that agricultural land in a Village Zone, can command as much as ten times more than other agricultural land. This higher price, in his opinion, reflected the potential for being developed for New Territories Exempted House purposes; lower priced agricultural land reflected unrelieved Block Crown lease user restrictions. In his opinion, any higher valuation of Lot 7 R.P. for building purposes, assumed a land exchange, involving payment of a premium, for the difference between agricultural and building land.

53. We are obliged to repeat that the relevant lawful user, is for building and not agricultural land. The Applicant was entitled, as of right, to erect houses without any land exchange or payment of premium. Nor was the owner obliged, unless it was to his advantage, to fall back on the concessionary New Territories Exempted Village Type Houses provisions. Further, the owner's user rights were not limited by any Village Type Development Zoning.

54. Section 12(aa) of the Crown Lands Resumption Ordinance, provides that no account is to be taken of the fact that the resumed land, lies within any zone set apart apart for village type developments. We accept Mr. Lam's opinion that agricultural land on which exempted houses may be erected, will usually have a higher value, than other agricultural land. In the absence of special or other circumstances, building land could be expected to have an even higher value. On this crucial valuation issue, the evidence was minimal. The parties primary approach, should have been to value the subject property as building land.

55. So far as the legal nature of the subject property was concerned, it was not necessary to consider the potentiality of agricultural land for development. The owner's option to build houses was an actual and not merely a potential right. The obligation to comply with the building covenant and statutory building controls, or alternatively to obtain a Certificate of Exemption under the Buildings Ordinance (Application to the New Territories) Ordinance, would have been directly relevant, only if compensation were claimed on a development basis.

56. If all the comparables were of building land on Cheung Chau Island, probably no major valuation issues would have arisen. Mr. Chan may well have accurately explained their surprising absence, when he observed that the only recently resolved Wong Wai Tsak Tong dispute, had resulted in property transactions being rare, during the relevant period.

57. Before proceeding to consider in more detail the comparable method approach of both surveyors, it is necessary to deal with another methodology problem. Although both valuers principally adopted the comparable method, they disputed the number of houses which but for the resumption could have been built on the western area of Lot 7 R.P. After the resumption, they were agreed that only two exempted houses, could have been built.

58. As to the type of house that could have been constructed, their valuations were based on the self-imposed limitation of the exempted houses specification in Part I of the Schedule to the Buildings Ordinance (Application to New Territories) Ordinance. Mr. Chan asserted that three such houses could have been built before resumption. Mr. Lam stated that only two could have been built.

59. Mr. Lam initially incorrectly excluded that part of the lot which had for some years been used for access by members of the public but remained in the sub-lease of the 2nd Applicant. Mr. Chan reminded the Tribunal that the scheduled specifications only imposed maximum and not minimum areas. An owner might choose to build three slightly smaller houses. The evidence of both surveyors on the number of houses which could have been built, prior to resumption, was in a number of respects, incomplete and unsatisfactory.

60. An owner is entitled to compensation for the lawful optimum development value of his land - Cruden, page 55. However, where development value is claimed, it will normally be necessary for a residual valuation to be carried out. Indeed, in the majority of cases, the Tribunal will be unable to determine development value, without the assistance of a residual valuation.

61. Whatever the valuation method chosen, a dispute may often arise between parties as to the extent of a hypothetical development. This was precisely the nature of an important dispute, between the present two surveyors, relating to the number of houses which, before resumption, could lawfully have been erected. Where that occurs, then at least in the case of larger areas of building land, it will normally be desirable for the parties to call an architect, other authorised person or an officer of the Buildings Department, to give expert evidence on the likely maximum permitted development.

62. In the present application, no residual valuations were carried out. No authorised persons or other building experts were called. The limited and disputed evidence of the two surveyors, on permitted development, renders it too speculative for the Tribunal to find whether, before resumption, two or three houses could have been erected, on this part of the subject property. It follows that the 2nd Applicant has failed to discharge the burden placed on him, if he wished to establish, a higher development value.

63. We are therefore obliged to determine the open market value of the subject property as building land, on the limited basis of the comparable sales evidence. The particular location of the subject property on Cheung Chau Island is important. It is situated in the locality known as Sai Wan, towards the south-western end of Cheung Chau Island, which faces the Chi Ma Wan peninsula of Lantau Island.

64. The subject property comprises vacant land on either side of Tsan Tuen Road, which is a main road in the area. Part of Lot 7 R.P. is on the western side of Tsan Tuen Road. The balance of Lot 7 R. P., owned by the 2nd Applicant, together with Lots 10 R.P. (Portion) and 10 Sec.C ss.1 (Portion) adjoin the opposite eastern side of Tsan Tuen Road.

65. Regular ferry services from Cheung Chau to Hong Kong Island, leave from the main pier, situate at Cheung Chau Praya. The principal form of transport from Sai Wan to the main pier is by a Kai To ferry, which takes about 7 minutes. The onward ferry journey to Central, Hong Kong Island, involves another 30 minutes by hover craft, or 55 minutes by ferry. The Sai Wan ferry pier, from which the Kai To service departs, is within about 5 minutes walking distance, from the subject property.

66. Mr. Chan, faced with an absence of Cheung Chau comparables, considered the best available comparables were to be found in the vicinity of Yung Shue Wan, Lamma Island. In general terms he found that property values in Cheung Chau were 20% to 25% higher than on Lamma Island. Similar residential units of 65 square metres ranged from $1.2 to $1.5 million in Yung Shue Wan, compared to $1.5 to $1.8 million on Cheung Chau. The ferry service from Yung Shue Wan to Central, he stated, takes about 40 minutes but is less frequent than the Cheung Chau service and there is no hover craft.

67. Mr. Chan's seven Lamma Island comparables were all of agricultural land at Yung Shue Wan but zoned for Village Type development. In his opinion, Comparables 2, 3, 4 and 7, being closer to the ferry pier, were the more reliable. He selected Comparable 3, with a transaction date of 15th March 1994, only two days earlier than the present relevant date for determining compensation of 17th March 1994, as his best comparable.

68. After considering the wide unadjusted range of from $1,030 to $5,189 per square metre, for his seven comparables, Mr. Chan adopted the unit rate for Comparable 3 of of $3,945 per square metre. He then made an upward adjustment of 20% for the higher value of land in Cheung Chau, to arrive at an adjusted unit rate of $4,745 per square metre. Mr. Chan applied that rate to Lots 7 and part of Lot 10. However, as the remaining Lot 10 Sec.C R. P. (Portion) had no development potential he reduced its rate to $475 per square metre. These rates produced his final valuation of $765,000.

69. Mr. Lam attempted to deal with the absence of Cheung Chau comparables near the relevant date, by going back 14 to 35 months, to four very dated transactions. Mr. Lam limited his Rule 20 Valuation Report to agricultural land. including open storage use. These comparables ranged from $269 per square metre for a remote lot. zoned for open space. to a high of $5,651 per square metre, for a village zoned house, in central Cheung Chau.

70. Mr Lam's approach led him to arrive at an open storage rate of $800 per square metre, which became the basis of his valuation of $152,136. When he gave evidence, Mr. Lam was invited to give his valuation for the subject property, using the Lamma Island comparables. He preferred Comparables 4, 5 and 6, as they were more distant from the Yung Shue Wan ferry. This was in part to allow for the inferior location of the subject property, which he emphasised, was only accessible to the Cheung Chau main pier, by Kai To ferry. Mr Lam made a further 20% location allowance, to arrive at a building land unit rate of $1,053 per square metre. This led him to increase his agricultural valuation of $156,136, to $187,000 for building land.

71. Mr. Lam took care to make his valuation, expressly subject to a caveat, for any deduction which might become necessary, if the Tong were awarded separate compensation for its interest in the same land. We confirm that on 9th September 1996, the Tong withdrew its application for compensation for this particular land. The consent order in these consolidated proceedings in favour of the Tong, for $6,783,001.50, was for other land. We are unaware of any collateral terms of the withdrawal. In accordance with our approach in Suen sun-yau (supra), we remain unsatisfied that the Tong's interest. where land is subleased, is other than minimal. We do not propose, to make any deduction from any compensation to be awarded to the 2nd Applicant, for any interest of the Tong.

72. We are satisfied that the best evidence of value, is provided by the Lamma Island comparables. These fall into two groups. Comparables 1, 2, 3 and 7, which are closer to the ferry pier, all have much higher units rates than the more distant Comparables 4, 5 and 6. We do not propose further to consider Comparable 2, because its very high rate of $5,189 per square metre, indicates it was probably a transaction out of line with general market levels.

73. We do not accept Mr. Chan's opinion that the higher value Comparables 1, 2 and 3, should be given more weight, than the more distant lots. To equate the short distance of these lots from the Lamma Island pier, with the shorter distance of the subject property from the Sai Wan pier, is a superficial comparision. The time and inconvenience involved, for a trip from Sai Wan by Kai To to the Cheung Chau Praya Pier, also has to be considered.

74. We prefer Mr. Lam's approach that locational valuation differences are more likely to be affected by the overall distance between a property and Hong Kong Island ferry service pier to Central. The location plans indicate that the distance between the subject property and the Cheung Chau Praya pier is about 1.25 km. The six Lamma Island comparative distances, range from 0.5 km for Comparable 1, to 1 km for the most distant Comparable 6.

75. The Kai To ferry suffers from the disadvantage that it closes earlier than the Cheung Chau-Hong Kong- Island ferry service. We have take into account that the shorter Lamma Island distances have to be covered by foot while the longer part of the Sai Wan journey may be completed, during its operating hours, by the Kai To ferry. Perhaps, the inconvenience of Sai Wan residents having to change ferries, is in part counter balanced by the shorter walking distance. However, we are well satisfied that more weight should be given to the three distant Lamma Island comparables, namely Comparables 4, 5 and 6.

76. Turning to the issue of detailed adjustments, we agree with both surveyors, that no time or size adjustments require to be made. On this basis, Comparables 5 and 6 produce unadjusted rates of $1,384 and $1,236 per square metre. The unit rate for Comparable 4 is complicated by the fact, as Mr. Chan pointed out, that only about half of its total area is capable of development. A unit rate calculated on this lesser area would amount to about $2,060 per square metre. The latter sum would require a modest downward adjustment to allow for the reduced residual value of the undeveloped area and a larger downward adjustment for location. This is necessary because Comparable 4 is closer to the pier than the other more distant comparables.

77. We consider that the necessary cumulative downward adjustments for Comparable 3, would be in the region of 15%. This produces an adopted unit rate for Comparable 3 of $1,751 per square metre compared to the unadjusted unit rates, for Comparables 5 and 6, of $1,384 and $1,236 per square metre respectively. We consider, that in the present circumstances these three unit rates may properly be averaged. They produce a unit rate of $1,457, which we round up to $1,500 per square metre.

78. We have next considered whether any upward adjustment requires to be made for the fact that all of the comparables are of agricultural land, if zoned for Village Type development. The legal distinction between these classes of land is important. In the majority of cases it will directly affect market values. Building land will generally have a higher market value than Village Type development zoned agricultural land.

79. However, in this particular case, the very small lots, are unlikely to benefit from being developed under the Buildings Ordinance. They would probably enjoy a similar high open market value, if their owner elected instead to build exempted houses, in compliance with the provisions of the Buildings Ordinance (Application to New Territories) Ordinance. We have therefore concluded, if exceptionally, that no further adjustment is necessary, to reflect the difference in lawful contractual user.

80. Finally, although disputed by Mr. Lam, we accept Mr. Chan's 20% allowance for Cheung Chau's generally higher land values. Our earlier arrived at unit rate of $1,500 therefore requires to be increased by 20% to $1,800. This produces a total open market value for the subject property of $290,214, made up as follows:

81. We accordingly award the 2nd Applicant compensation in the sum of $290,214. There will be an order nisi that the Respondent pay the 2nd Applicant's costs on the High Court Scale; to be taxed if not agreed. Liberty to apply is reserved for interest and any other consequential matters.

DATED this 31st day of October 1996.

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