TAI PING RESTAURANT LTD v. DIRECTOR OF LANDS

LDLR 1/2013

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LANDS RESUMPTION APPLICATION NO 1 OF 2013

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DECISION

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Background

1.  The application for determination of compensation pursuant to section 10(2)(a) of the Lands Resumption Ordinance, Cap 124 (“the Ordinance”) was decided by this tribunal on 8 December 2014.  It was ordered that the respondent do pay the applicant compensation in the sum of $70,650,000 and the matters of professional fees, interest and costs be adjourned to a date to be fixed, with liberty to apply for any other ancillary and consequential matters.

2.  Since the parties could not resolve the claim for interest by agreement, they have consented for this to be decided by the tribunal through written submissions.  It is not disputed that a provisional payment of $61,076,000 was offered by the respondent and accepted by the applicant on 8 March 2013, and the balance in the sum of $9,574,000 was paid by the respondent on 27 January 2015.  In the interim, interest on the provisional payment in the sum of $208.9 was also paid by the respondent on 26 March 2013.

3.  The issues in dispute are (1) whether the tribunal is entitled to award interest on the provisional payment; and (2) the interest rate to be applied in the present case.

Issue 1 - Interest on the Provisional Payment

4.  Mr Pao, counsel for the respondent, contended that the interest with respect to the provisional payment from the date of resumption on 3 November 2012 to the date of payment on 8 March 2013 is specifically governed by the agreement executed by the parties on 8 March 2013 (“the Agreement”).  The tribunal has no jurisdiction to award interest on the provisional payment because the Agreement had set out the agreed interest rate and binds the parties as a matter of contract. 

5.  Mr Pao submitted that the Agreement was entered into by the parties voluntarily. Under section 16A(1)(a) and (b) of the Ordinance, it is a matter for the respondent as to whether to offer a provisional payment, and it is also a matter for the applicant whether to accept that offer.  Since the applicant has elected to accept the provisional payment, on the basis of the interest rate set out in the Agreement, the applicant is not entitled to a make a claim for a higher interest to be awarded by the tribunal.

6.  Further, Mr Pao submitted that the general power for the tribunal to award interest on compensation on a determination under section 17(3) is made expressly subject to section 16A(3) which deals with provisional payment pending the determination of compensation, and the combined effect of these two sections of the Ordinance is that the tribunal only has power to award interest with respect to the “amount thereof so reduced” by the provisional payment (“the Respondent’s Interpretation”).  This means that the tribunal only has power to determine the rate of interest applicable to the balance $9,574,000 and simply has no jurisdiction to award interest on the provisional payment. Mr Pao contended that it is a matter of basic statutory interpretation.

7.  Sections 16A(3) and 17(3) of the Ordinance provide that : -

“Where the amount of compensation payable by virtue of a determination of the Lands Tribunal under this Ordinance is reduced under subsection (2) by the amount of any payment under subsection (1), such compensation shall not as from the date on which the payment is made bear interest except on the amount thereof as so reduced.” - section 16A(3) (emphasis added by the respondent)

“Subject to section 16A(3), any sum of money payable as compensation by virtue of a determination of the Lands Tribunal or an agreement under this Ordinance shall bear interest from the date of resumption of the land until the expiration of the time specified in the notice referred to in subsection (2)......” - section 17(3)

8.  Mr Pao submitted that, on a plain and natural statutory interpretation, the application of section 16A(3) is as follows; -

(1)  “such compensation” – ($70,650,000)

(2)  “shall not as from the date provisional payment is made” – (8 March 2013)

(3)  “bear interest except on the amount thereof as so reduced” – ($9,574,000)

9.  Mr Pao also invited this tribunal not to follow the recent decision in Eltron Development Ltd v Director of Lands, LDLR 4/2013, 28 January 2016, in which Member Pang has ruled against the respondent in a similar dispute of another resumption case, because of the following five reasons: -

(1)  Eltron Development had no analysis as to whether the tribunal has jurisdiction to award interest on the provisional payment.

(2)  Eltron Development erred in approaching the matter from the perspective of contract law but the critical issue is not one of contract law.  The critical element is the payment itself.  If it is established that payment has been made, section 16A(3) extinguishes the bearing of interest on the provisional payment as from the date when it was made.

(3)  Nothing in section 16A(3) makes the exclusion of the bearing of interest conditional upon the terms of the actual agreement executed, but once payment is made that is the end of the inquiry for the exclusion of interest under section 16A(3).

(4)  It is clear from the conduct of the parties in this case that the applicant did accept and did agree the rate of interest and did accept the interest payment on 26 March 2013.

(5)  Eltron Development failed to appreciate the effect of the opening words of section 17(3) which restricts the general power to award interest on compensation and appeared to have overlooked the fact that such general power is specifically made subject to the exception in section 16A(3).

10.  The respondent, represented by another counsel, has applied for leave to appeal the decision of Eltron Development, but in the summons has argued over the interest rate only and not the jurisdiction of the tribunal to award interest on the provisional payment.  In any event, this was refused by Member Pang on 18 May 2016.

11.  With respect to Mr Pao, I agree to the analyses of Member Pang and consider that the present case which is similar to Eltron Development could follow the reasons for decision in it.  I also accept the submissions of Mr Miu, counsel for the applicant, that the applicant has not given up its right to argue over the interest on the provisional payment.  All the Agreement, the offer letter dated 30 November 2012 made by the Lands Department and the Acceptance Letter “B” duly signed and returned by the applicant have stated that the acceptance of the provisional payment by the applicant was “without prejudice” to any claim the applicant might have under the Ordinance.

12.  Further, I disagree to the Respondent’s Interpretation that section 16A(3) extinguishes the bearing of interest on the provisional payment as from the date when it was made.  If one looks at the Ordinance broadly instead of the wording in sections 16A(3) and 17(3) only, the provisional payment mentioned in section 16A(3) in fact refers to section 16A(2), which has specifically stated that “Any payment made by the Authority ...... shall be without prejudice to the claim or the submission thereof to, or the determination thereof by, the Lands Tribunal under this Ordinance”.

13.  I also agree with Mr Miu that the Respondent’s Interpretation, which would limit the right of claimant to argue over interest on provisional payment before the tribunal, could be unfair to the claimant, particularly when the claimant would need the provisional payment in advance of settlement of all the claims. Although a claimant would have the choice to accept, or not to accept, the provisional payment offered by the acquiring authority, a claimant is to a great extent passive in the resumption.  In the present case, Mr Miu submitted that the provisional payment was required / used by the applicant to discharge the outstanding principal and interest on the mortgage loan of the property.

Issue 2 - Interest Rate

14.  The applicant relies on the decision in Happy Dragon Restaurant Ltd v Director of Lands, LDLR 17 of 2006, 20 January 2014 and submitted that the interest rate should be set at prime rate + 1%, which is a long established practice, and the party who seeks to challenge this has the burden of adducing evidence to displace that presumption: -

“57. As held in The Hong Kong Electric Co Ltd v Commissioner of Rating and Valuation, supra, the practice of awarding interest at Prime +1% amounts to no more than a presumption which can be displaced if is application would be “substantially unfair either to one party or the other”. The burden of displacing this presumption lies on the party seeking to displace it, but we find no evidence from the respondent to displace such a presumption ......”

15.  The respondent submitted that the rate of interest should be either (i) the 24-hour call rate; (ii) 1.5%; or (iii) in any event, not higher than 2.5% per annum. 

16.  Section 16A(1A) of the Ordinance provides that the minimum rate of interest payable on a provisional payment cannot be lower than the 24-hour call rate.  In any event, the Agreement stated that the interest rate on the provisional payment would be determined by the respondent having regard to the 24-hour call rate.  On the other hand, 1.5% follows the approach articulated in the report by the United Kingdom Law Reform Commission on “Pre-Judgment Interest on Debts and Damages” published in 2004 where it was recommended that the interest rate on pre-judgment interest should be set at the Bank of England Base Rate plus 1% with the Court given a discretion to depart from that for good reason, whilst 2.5% is the interest rate determined in Libertarian Investments Ltd v Thomas Alexej Hall (2013) 16 HKCFAR 681 and Waddington Ltd v Chan Chun Hoo Thomas & Ors (No 2) [2014] 4 HKC 356.

17.  Mr Pao contended that the interest rate of prime rate + 1% is excessive having regard to the low interest rate environment in Hong Kong from the date of resumption onwards.  Mr Pao submitted that the decision in Eltron Development did not consider the effect of decisions including Tajudin Sunny v Bank of America, NA (No 2) [2015] 5 HKC 202 where courts have declined to award interest at prime rate + 1% on the basis of the low interest rate environment in Hong Kong.  Further, in Libertarian Investments Ltd and Waddington, the Court did not require specific evidence of the low interest rate environment in Hong Kong.

18.  However, after the parties filed the written reply to the submissions on 25 April 2016, the cross-appeal in relation to the pre-judgment interest rate decided in both Tadjudin Sunny and Waddington were allowed by the Court of Appeal on 20 May 2016 and 18 May 2016 respectively, and the pre-judgment interest rates in both cases were substituted the rate of HSBC best lending rate + 1%.

19.  The Court of Appeal stated in Tadjudin Sunny that: -

"179.  ...... With respect to the judge, we are of the view that having regard to the long standing practice of taking 1% over prime as the starting point for the award of pre-judgment interest, any suggestion that this starting point should be changed is something that should be considered only where there is evidence before the court to support such a change.  It is, with respect, not satisfactory to proceed on the basis of the impressions (however well founded they may turn out to be) of the individual judge.  In the present case, there was simply no evidence to support the suggestions that prime plus 1% was no longer an appropriate point from which to start.  On this basis alone, we would be minded to interfere with the judge’s award of pre-judgment interest.”

“181.  Moreover, we do not think that either Libertarian or Waddington would provide support the judge’s conclusions in this case. Libertarian was a case where the subject matter of the claim was investments denominated in sterling. The relevant rate of interest to consider was therefore that pertaining in the UK. The choice of a rate fixed by reference to the Bank of England base rate, which would be appropriate in the circumstances of that case, does not in our view provide support for a switch from prime rate to HIBOR in Hong Kong......”

“183.  That is not to say that there may not be a case in the future in which the necessary evidential foundation (which might, for example, consist of banking evidence as to the manner in which rates for unsecured lending are fixed, that shows clearly that prime rate is no longer, or very rarely used as a starting point) will be laid for a consideration of whether or not the time has come to move away from prime rate plus 1% as the starting point for the awarding of pre-judgment interest. However, that is not this case.”

20.  The Court of Appeal stated in Waddington that: -

"180.  With respect to the judge, we are satisfied that this was not an appropriate case to depart from the conventional practice of awarding pre-judgment interest at a rate of 1% over prime.”

“181.  We agree with Mr Yu that Libertarian does not support the judge’s conclusion in this case, as it was a case in which the claim was denominated in sterling, making the relevant rate of interest to consider that which would have been available in the United Kingdom. It is not relevant to the position of a Hong Kong party who would have to borrow in Hong Kong. For the same reason, consideration of the United Kingdom Law Reform Commission’s recommendations is also inappropriate.”

183.  So far as general interest rate levels are concerned, which it is fair to say that the evidence may support the suggestion that many interest rates have declined to low levels in recent years, the fact is that the HSBC Best Lending Rate, which is the commonly adopted proxy for prime rate had remained at comparatively high levels over that period.  The continued publication of this rate suggests that it is still in use for the purpose of fixing lending rates, and cannot be regarded as having been supplanted by HIBOR for such purposes.”

“We therefore do not think that the material available to the judge could justify his view that 1% above prime rate is longer the appropriate standard to use for awarding pre-judgment interest generally, or that such material justified a departure from the conventional rate in this case......”

“186.  That is not to say that there may not, in the future, arise a case in which the necessary evidential foundation will be laid for a consideration of whether or not the time has come to move away from prime rate plus 1% as the starting point for pre-judgment interest. But this is not such a case.”

21.  The extracts in the above paragraph are self-explanatory.  In the present case, the respondent has just mentioned the low interest rate environment in Hong Kong from the date of resumption onwards but has not submitted other evidence to support a change from the conventional practice of taking 1% over prime as the starting point for the award of pre-judgment interest. 

22.  The Court of Appeal has distinguished that Libertarian is not relevant to the position of a Hong Kong party who would have to borrow in Hong Kong and consideration of the United Kingdom Law Reform Commission’s recommendations is also inappropriate.  Further, the 24-hour call rate in section 16A(1A) of the Ordinance is the minimum rate only, and same as the reasons for decision in Eltron Development and in view of my findings in §11 above, I consider that the applicant is not bound by the Agreement to receive interest at 24-hour call rate only.

Conclusion

23.  I agree to the applicant’s submissions that the applicant has not given up its right to argue over the interest on the provisional payment and the tribunal has the jurisdiction to determine the interest of the provisional payment too.  In addition, since there is no evidence in the present case which could support a change from the conventional practice of awarding pre-judgment interest rate at prime rate plus 1%, I consider that the pre-judgment interest rate in the present case should be fixed at 1% above prime rate. 

24.  There are currently two besting lending rates in Hong Kong, but the parties have not made any submissions in this regard.  Anyway, since the HSBC best lending rate is the commonly adopted proxy for prime rate in the market and the judgments in both Tadjudin Sunny and Waddington also based on the HSBC best lending rate, I consider that it is appropriate to adopt the HSBC best lending rate as the prime rate in the present case.

25.  There is no reason why costs should not follow the event. I make a costs order nisi that the respondent do pay the applicant the costs of this application with certificate for counsel to be taxed on High Court Scale if not agreed.

Orders

26.  Accordingly, I order that : -

(1)  The respondent do pay the applicant interest on the sum of $61,076,000 (being the provisional payment made under section 16A of the Ordinance) from the date of reversion (i.e. 3 November 2012) to the date of payment (i.e. 8 March 2013) at the rate of 1% above the HSBC’s prevailing best lending rate ;

(2)  The respondent do pay the applicant interest on the sum of $9,574,000 (being the balance of the statutory compensation under the Ordinance) from the date of reversion (i.e. 3 November 2012) to the date of judgment (i.e. 8 December 2014) at the rate of 1% above the HSBC’s prevailing best lending rate and thereafter at judgment rate until payment (i.e. 27 January 2015);

(3)  Credit be given to the interests which had previously been paid by the respondent to the applicant (if any); and

(4)  A costs order nisi that the respondent do pay the applicant the costs of this application with certificate for counsel to be taxed on High Court Scale if not agreed and this costs order be made absolute after 14 days if no application to vary it.