MILLION-ADD DEVELOPMENT LTD AND ANOTHER v. SECRETARY FOR TRANSPORT

Property law - resumption compensation for 5 lots owned by related companies - whether corporate veil could be lifted for compensation to be determined on their joint development value or was each lot to be valued separately - discretionary bonus plot ratio grants - service lane requirements - owners original joint development value of $32,520,000, contrasted with separate development Crown valuation of $6,100,000 - unit rate dispute for commercial ground floors $25,000/$17,500-$18,500 psm and residential upper floors $17,500/$15,000 psm. - Held:

IN THE LANDS TRIBUNAL OF HONG KONG

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JUDGMENT

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1. This application for compensation is made under Sections 27 and 29 of the Roads (Works, Use and Compensation) Ordinance, Cap. 370 ("the Ordinance") for the resumption of the subject property variously owned by the Applicants being Lots 30, 32, 34, 36 and 38 in Demarcation District 6, Area 2, Tai Po Kau Hui Chik kai, situate at Tai Po, New Territories, Hong Kong.

2. The 1st Applicant was the owner of Lot 30 while the 2nd Applicant was the owner of Lots 32, 34, 36 and 38. These five contiguous lots, form a rectangular area of land, with frontages to Kau Hui Chik Street, near its intersection with Wang Tau Street. The Draft Tai Po Outline Zoning Plan No.S/T/P4 dated 14th April 1989, was the latest in a series of draft plans, which provided for the widening of both streets. The implementation of these proposals, if not achieved voluntarily, would have involved the resumption of parts of Lots 30, 32, 34 and 36 and the whole of Lot 38.

3. In addition, for the entire road widening to proceed, three small lots at the corner of Kau Hui Chik and Wang Tau Streets, owned by other parties, would have required to have been resumed. The road widening proposal would have resulted in Lot 36 then becoming a corner site, with consequential increased and potentially beneficial development rights.

4. Notice of resumption of the subject property together with other land, was published pursuant to Section 14 of the Ordinance, in No. 47 Volume CXXXI The Hong Hong Government Gazette on 24th November 1989 under G.N. 4108 of 1989. The subject land reverted to the Crown, three months later, on 24th February 1990. The Applicants originally claimed compensation in the sum of $32,520,000. The resumed land was valued in the Crown's Rule 20 report at $6,100,000

5. Before considering the valuation evidence and the parties final quantum positions in more detail, it is necessary to deal with a number of preliminary matters. These include whether the subject property was owned or controlled by common parties; whether its various lots could have been jointly developed; whether the subject property was a Class A or B site; if a Class A site whether it would have been awarded bonus plot ratio; and whether it would be necessary to provide a service lane for the proposed development.

Whether owned or controlled by common parties:

6. The majority of the subject lots had a complex history of ownership. The Tribunal is primarily concerned with the ownership position as at the resumption date, namely, 24th February 1990. It is undisputed that as at that date, the Applicants between them, owned all of the lots, making up the subject property. On the same date, Mr. Yiu Yan Che, his wife Madam Tsoi Kuen and his brothers Mr. Yiu Pang Wai and Mr. Yiu Shu Sum, beneficially were the controlling shareholders of both Applicant companies.

7. The Crown did not contest this position. It also conceded that the Applicants were entitled to have the five subject lots valued as an amalgamated site but only on what it described as a no-risks basis. The Crown submitted that on this basis the Applicants assertions of development intent were irrelevant. These submissions although directed at the development value of the subject property, were in part based on the historical ownership of the five lots, which will now be summarised.

Lot 30: This lot was owned by the 1st Applicant at resumption date. In 1979 it had been purchased by Dawkins Co. Ltd. ("Dawkins") and later under a mortgagee's power of sale, sold to the 1st Applicant on 6th November 1987. Dawkins featured prominently in the evidence. Two of the Yiu brothers had held the majority of shares in Dawkins but as a consequence of unresolved differences with the minority shareholder, Chang Wing Ming, the Company was on 17th July 1989, wound up. On that date its share capital of $10,000 was held as to 3,400 shares by Yiu Pang Wai, 3,300 shares by Yiu Yan Che and 3,300 shares by Chan Wing Ming.

Lots 32 and 34: Dawkins purchased these lots during 1978 and they were sold by its liquidator to the 2nd Applicant on 23rd February 1990. We record that this was one day before the resumption.

Lot 36: The 1st Applicant purchased this lot on 19th March 1988 from the Administrator of the estate of the deceased then owner. Before settlement it was on 30th May 1988, resold by the 1st Applicant to the 2nd Applicant.

Lot 38: Dawkins purchased this lot in 1979 and after its liquidation, in exercise of the mortgagee's power of sale, it was sold to the 2nd Applicant on 22nd February 1990, two days before the land reverted to the Crown.

8. On this undisputed evidence, we find that as at the date of resumption, the 1st Applicant owned Lot 30 while the 2nd Applicant owned Lots 32, 34, 36 and 38. All the subject lots were therefore owned by one or other of the Applicants. We further find that both Applicant companies were under the control of the Yiu brothers.

9. During argument on ownership, the Tribunal referred Counsel to DHN Food Distributors Ltd v. Tower Hamlets London Borough Council [1976] 1 WLR 852, where the Court of Appeal lifted the corporate veil of related companies to enable compensation for the land compulsorily purchased, to be increased by an amount for disturbance. The Court of Appeal held that where a parent company was in a position to control subsidiary companies in every respect, the Court could pierce the corporate veil and treat the group as a single economic entity for the purpose of awarding compensation for disturbance.

10. We have found that the Applicant companies have similar shareholdings and that the Yiu brothers were in every respect able to control both companies. This entitles the Tribunal to pierce the corporate veil and look at the ownership realities, in accordance with the principle applied in the DHN Case. To cite from the judgment in that case of Lord Denning, at page 860:

"This group is virtually the same as a partnership in which all the three companies are partners. They should not be treated separately so as to be defeated on a technical point."

11. In the present case, the two Applicant companies are interrelated so we are not concerned with a parent and subsidiary company situation but the same principle is applicable. We are well satisfied that the Applicants under the control of the Yiu brothers and acting in concert, had the power to develop the amalgalmated site comprising five lots, to its optimum lawful potential.

Whether compensation should be determined on the basis of the development value of the five amalgamated lots:

12. We will now consider the development potential of the subject property. We confirm that Crown accepted that the Tribunal may take into account the development potential of the five lots. Both parties referred to Kwok Lee Sau-sang v. Director of Lands [1977] HKLTR 105 which is one of a number of cases, where the Tribunal has held that an owner is entitled to recover higher compensation for loss of development value where, on the evidence, that potential has been established.

13. The Applicants called Mr.Y.C.Yiu, Mr.D.B.M.Tam, chartered surveyor and its authorised person Mr. J.C.K. Chan, who is a civil engineer. The evidence established that the Yiu brothers, through various different company structures, had for many years been involved in a number of substantial Taipo developments. These included taking steps over a period of time, to assemble sufficent lots in the Kau Hui Chick Street locality, to produce an amalgamated site, for a new development.

14. The Crown submitted that in assessing the value of the amalgamated site, the Tribunal should not take into account the Applicants particular development proposals. This submission was based on two grounds. First, that the value of potentialities was to be objectively determined. Secondly, that any acts of an owner after notice of a resumption, which are liable to increase the burden of compensation, are to be ignored. The short answer to the first ground is that an owner's plans are relevant but not decisive to the objective determination of development value. The intentions of experienced developers and the opinions of their experts, will often include evidence, relevant to potentialities.

15. The second ground, it was submitted, represented an established principle of land compensation law. It was submitted that the relatively recent purchase of several of the lots, including two lots only one day and another two days before resumption, showed the real motive was an attempt to recover increased compensation. Various provisions of the Crown Lands Resumption Ordinance were cited, not all directly relevant to the instant facts, which were claimed to reflect this alleged principle.

16. Section 11(1) provides that the Tribunal may decline to make any compensation for additions or improvements made after the date of publication in the Gazette of intended resumption. It is common ground, as a matter of fact, that no such improvements, were carried out. Similarly, other common statutory exclusions such as unlawful user and expectancies of renewal, not enforceable as of right, do not arise on the present facts - Section 12 (b) and (c).

17. Counsel for the Crown cited as authority for this wider and for this Tribunal novel principle, an observation of Lord Lindley in Mercer v. Liverpool, St. Helen's and South Lancashire Railway Co [1904] AC 461. The claim was for injurious affection, for which compensation is not recoverable in Hong Kong, except where privately owned or leased sea-beds or foreshores are adversely affected by reclamations. After notice to treat for part of the owner's land was given during October 1891, he claimed compensation in January 1892. In October 1892, by agreement, he accepted compensation not only for the land taken but for all damage caused by severance and injurious affection, to his other land..

18. A little earlier, during June 1892, the owner had granted a 999 year lease of other nearby land. The assignee of the new lessee brought a claim for injurious affection. Counsel for the owner - interestingly Charles Cripps K.C., the future Lord Parmoor, appearing with a future Lord Chancellor - acknowledged that under English statutory law, after a notice to treat, an owner could not create any new interest to the prejudice of the railway promoters. We pause to observe that Hong Kong does not have a notice to treat procedure. Our Ordinance enables the holder of an estate or interest created after the Gazette notice but existing as at the date of resumption, to claim compensation for the value of his estate or interest, as at the later date.

19. The judgments in the House of Lords were principally concerned with a much narrower issue. The Lord Chancellor held that the sum earlier paid to the owner included and absolutely determined, compensation for injurious affection to all the remaining land owned by him at the date of the notice to treat. Lord MacNaghten was of the same opinion. In other words, the agreed compensation extended to the land later leased. The conclusions reached in these two judgments, in view of the clear factual situation, are unsurprising.

20. Only Lord Lindley referred to a broader ground that after notice to treat, an owner could not increase the quantum of compensation, by dealing with his land in a particular way. The only relevant statutory qualification in Hong Kong law, to the fundamental principle that there shall be no expropriation without compensation, is the limited improvements exclusion, in Section 11(b) of the Crown Lands Resumption Ordinance. We are satisfied that no wider principle, in the form adverted to by Lord Lindley, forms any part of the law of Hong Kong.

21. If between the date of notification and resumption, an owner buys adjoining land, any resulting marriage value, may increase the sum otherwise payable by way of compensation. We hold that any such enhanced value does not arise because of the scheme or the resumption but from the owner's decision to assemble the various lots. The only difference caused by the resumption, is that the increase in value is paid by the Crown, in replacement of the owner's option, to realise the same increase, by selling the assembled lots in the open market, to a purchaser from the private sector.

22. We also reject the Crown's submission that because Lots 32, 34 and 38 were purchased only one or two days before the date of resumption, the Applicants are not entitled to compensation for any resulting development value. Under Hong Kong law, a person buying land after the Gazette notice but before resumption, also buys the right to compensation. Unless during the interim period, the owner effects Section 11(b) non-repair additions or improvements, it matters not that he hopes his purchase will create marriage value and so increase compensation. On this compensation issue, the law is not concerned with subjective intent or motivation but with the fact of ownership, as at the date of resumption.

23. The Crown's submission on post-notification acts, is based on the fallacy exposed and rejected by the Privy Council in the modern landmark decision of Melwood Units Pty Ltd v. Commissioner of Main Roads [1979] AC 426. In that case, so well known to Counsel, Lord Russell of Killowen at page 434 observed:

"The Land Appeal Court purport to premise their assessment on the fact that the developer when it bought was aware that because of the commissioner's road project there was no prospect of a drive-in shopping centre other than for the far north land 25 acres. In so far as this indicates a view that, as a consequence, the value of the resumed land and the loss by severance of the south land is to be based on the hypothesis that they never had a potential as part of a 37 acre drive-in shopping centre, it discloses in their Lordships' opinion an error of law."

24. Lord Russell after referring to the long settled principle, restated in Pointe Gourde Quarrying and Transport Co. Ltd. v. Sub-Intendent of Crown Lands [1947] AC 565, that an owner cannot claim compensation for enhancement of the value of his land, caused by the resumption scheme, went on to declare that the principle applies in reverse. Accordingly, compensation is not to be reduced by any diminution caused by the scheme. On the facts before the Privy Council, Lord Russell emphasised:

"A resuming authority cannot by its project of resumption destroy the potential of the whole 37 acres for development as a drive in shopping centre, and then resume and sever on the basis that the destroyed potential never existed....Further as to the premise of the Land Appeal Court....if it is meant thereby that because the developer bought the land with knowledge he should not, on some principle, be allowed compensation except on the basis of what he knew, this would be doubly wrong: a person buying land buys with it the right for compensation and severance."

25. These principles enunciated by the Privy Council have frequently been applied by this Tribunal. For example in CG & L Investment Ltd v. Director of Lands [1980-82] CPR 204, the Tribunal held that whether the applicant knew of the likelihood of resumption at the date of purchase was not relevant to the issue of compensation. Similarly, in Hofei Estates Ltd v. Secretary for City and New Territories Administration [1980-82] CPR 1, it was held that any diminution in value caused by the scheme, was to be disregarded, even if the applicant knew of the proposed resumption, when the land was purchased.

26. We therefore hold that the fact that Lots 32 and 34 were purchased only one day and Lot 38 two days, before the date of resumption, is irrelevant to the issue of compensation. In assessing development value, those three lots, together with the remaining earlier purchased two lots, may be valued as an amalgamated site, under the control of common owners. This finding relieves us of the necessity to consider further the prior ownership of the lots by Dawkins, in which the Yiu brothers held a controlling interest. Dawkins had purchased these lots in 1978 and 1979 but after it was wound up in 1989, they were respectively resold by the liquidator and a bank mortgagee to the 2nd Applicant shortly before resumption.

27. On the facts the Yiu brothers were major and experienced land developers in Tai Po. They had through various companies, one of which included a minority shareholder, purchased all five lots before notification of the resumption. However, problems with the minority shareholder in Dawkins, resulted in the loss of Lots 32, 34 and 38 and later led to them being re-purchased through another Company. After the subject property was resumed the Applicants or the Yiu brothers, had also unsuccessfully attempted to re-purchase the balance of the five lots, not required for road widening, from the Crown.

28. Historically the road widening proposals go back at least to 1976, when a Tai Po Layout Plan was issued by the then Public Works Department, which included the widening of Kau Hui Chick Street similar to the later plans, which culminated in the present resumption. Similar plans were issued on 4th August 1982 and 6th January 1989. These Plans, although authorised by the Town Planning Ordinance, are not by themselves enforceable. They are accurately endorsed with the notice that they have no statutory effect but are a guide to development which Government wishes to encourage.

29. The proposals shown on those plans, included taking the whole of Lot 38 and the front portions of Lots 30, 32, 34 and 36 for road widening. They included the three small lots abutting the northern boundary of Lot 38 with frontages to Wang Tau Street. The present resumption also included those three lots, resulting in the residue of Lots 30, 32, 34 and 36, if amalgamated, forming a new corner site to Kau Hui Chick and Wang Tau Streets.

30. To complete the historical background, if the owner of the subject property, after the Layout Plans were issued, had wished to redevelop, the probabilities are that voluntary negotiations with Government, would have avoided new buildings on the front portions shown as being required in the future for road widening. Typically, the lots would have been surrendered with regrants of the residue together with the award of bonus plot ratios. None of these steps were taken before resumption. If the post-resumption efforts to re-purchase had been successful, the Applicants would have further benefitted from the residue of their orginal lots not merely fronting Kau Hui Chik Street but now also forming a corner site to Wang Tau Street.

Development Value:

31. On the findings so far made the Applicants are entitled to compensation, equal to the development value of the amalgamated site. Under the Crown lease the lawful user of the subject property is for building land. The optimum development of the land is controlled by the Buildings Ordinance, Cap.123. An initial development dispute between the parties, was whether the subject property under the Buildings Ordinance was a Class A or Class B site.

32. The Applicants at first asserted that the subject property comprised a Class B site but later conceded it was only Class A site. Regulation 2 of the Building (Planning) Regulations defines a Class B site as a corner site abutting 2 streets neither of which is less than 4.5 metres wide. Class A sites abut only one street and are subject to more restrictive development conditions.

33. The Applicants later sensibly accepted the Crown's contention that the subject property was a Class A site. The subject property only later became a Class B site as a consequence of the resumption. The enhanced value of that altered status is excluded from any assessment of compensation under the Pointe Gourde principle. We are satisfied the subject property is a Class A site. If its status had continued to be disputed, we would have so held.

Bonus plot ratio:

34. However, it remained hotly disputed whether the Applicants would have been entitled to a bonus plot ratio for their Class A site. The Applicants claimed that if the lots had not been resumed they would, upon surrendering part of the subject property to comply with the non-enforceable Layout Plans, have been granted bonus plot ratio by the Building Authority.

35. Counsel for the Applicants submitted where an owner voluntarily surrendered part of his land to comply with a Layout Plan, it was the established practice of the Crown to grant in exchange bonus plot ratio. It was pointed out that the Yiu brothers in 1982, when they redeveloped the nearby No.4 to No.20 Kau Hui Chik Street, had been granted bonus plot ratio in exchange for surrendering the front portions for road widening. Similar bonus plot ratio had been granted, for the same reason, to the developer of Nos. 2A and 2B, Kau Hui Chik Street.

36. Counsel for the Crown correctly submitted that the grant by the Building Authority of bonus plot ratio was discretionary. He further submitted that on the present facts it was unlikely. Although discretionary, the common exercise of that discretion, is indicated by the detailed provisions of Regulation 22 of the Building (Planning) Regulations, which is headed "Permitted site coverage and plot ratio may be exceeded in certain cases."

37. Among the stipulated circumstances for the exercise of the discretion, is where part of a lot is acquired by agreement for street widening. The Building Authority may in terms of Regulation 22(2), permit a building to be erected on the remainder of the lot, to exceed the permitted site coverage by the therein specified percentage. The Applicants emphasised that whenever redevelopment had earlier occurred in Kau Hui Chik Street, surrenders for road widening had been accepted and bonus plot ratios granted, in terms of Regulation 22.

38. The evidence of several of the expert witnesses referred to the bonus plot ratio issue. The Applicants consulting engineer, Mr. Jackie C.K.Chan, BE, MIE (Aust), MICE, FHKIE, who is an authorised person under the Buildings Ordinance, gave evidence on this issue. He had been responsible for the plans and the buildings earlier erected at Nos.4-20 Kau Hui Chick Street. He stated that in accordance with layout plan practice, the new buildings were set back, the front portions of the lots surrendered and in exchange bonus plot ratios were granted. This practice was also confirmed by Mr. Tam, the Applicants chartered surveyor.

39. The valuation of the Crown's chartered surveyor, Mr. H.W.Law, ARCS, AHKIS, made no allowance for any bonus plot ratio, as he considered that it was excluded by Section 12(c) of the Crown Lands Resumption Ordinance as being a grant or expectancy which could not be enforced as of right. Section 12(c) provides that:

40. This provision is typically applied where an estate or interest limited in duration, is subject to a form of renewal, not enforceable as of right. In such cases compensation is limited to the enforceable initial duration. Counsel for the Applicants submitted that it has no wider application and is not relevant to plot ratios for building development schemes.

41. Counsel for the Crown submitted it is of wider application and was properly invoked by Mr Law. The Tribunal was referred to Director of Lands and Survey v. Universal Patents & Industrial Designs Ltd [1977] HKLTR 81, as an example of its wider application. In that case the development value claimed, was dependent on altering the location of a registered right of way, over part of the land. This alteration would have required the permission of all the owners of the dominant tenements.

42. The Tribunal held that the claimant's risk of obtaining those necessary permissions, was caught by Section 12(c). Higher compensation could therefore not be assessed on any expectancy or probability of obtaining those permissions. We are satisfied that Section 12(c) is wider than Counsel for the Applicants contended. It remains to determine if it is as wide as Counsel for the Crown asserts.

43. Section 12 (c) is expressly concerned, in our view significantly, with grants or renewals of any licence, permission, lease or permit in relation to "the land in question" being resumed. Where resumed land is subject to an easement, it directly affects the the nature of the claimants estate or interest of the land and will usually have negative valuation consequences.

44. However, building or construction requirements under the Buildings Ordinance do not, as a matter of property law, affect an estate or interest in the land or otherwise go to title. The similar distinction between user covenants and building covenants in Crown leases, has frequently been referred to by the Tribunal in relation to both Section 12(b) and (c). In the light of these well settled fundamental principles, we are satisfied that the exercise of the Building Authority's discretion under Regulation 22, is not an expectancy or probability within the meaning of Section 12(c).

45. We are reinforced in arriving at that holding by the Court of Appeal's judgment in Ching Chun-kau v. Director of Lands & Survey [1978] HKLTLR 216. The Crown lease, limited to dairy farm use, had on resumption an unexpired residue of 22 years. Under the Public Health (Animal and Birds) Ordinance, Cap.139, the owner was required to obtain an annual dairy licence. The Court of Appeal held the Tribunal had erred in assessing compensation only over the remaining 6 months of the dairy licence, instead of the 22 years residue of the resumed Crown lease.

46. The Court of Appeal's holding that "licence" in Section 12(c) is related to an estate or interest in land and did not extend to a "dairy licence", supports our view that the rest of the sub-section, is also concerned with permissions, leases or permits, directly affecting an estate or interest in the resumed land. The compensatory exclusionary provisions of Section 12(c) similarly do not extend, to the exercise by the Building Authority of his discretion under the Buildings Ordinance or its subsidiary legislation.

47. Therefore whether development value in this case should be assessed on a bonus plot ratio basis, falls to be determined on the evidence. The burden is on the Applicants to prove that it is more probable than not, that the Building Authority would have exercised his Regulation 22(2) discretion, in their favour. Mr. Chan was confident that the Building Authority would follow normal practice and grant the bonus plot ratio. Under cross-examination he remained emphatic that once the front portion were surrendered, the bonus would be granted. The only qualification in his evidence was not to the grant but to its timing.

48. The Respondent's expert witness on this issue was Mr. Patrick Tsui, a Senior Building Surveyor of the Buildings Department. When Acting Chief Building Surveyor in 1996, he had considered the notional plans on which Mr. Law's valuation was based. Those plans for a Class A site, without bonus plot ratio, were acceptable to the Building Authority. He knew that the Chief Building Surveyor, later stated that the subject property was not a Class B site and in February 1990 would not have been considered for bonus plot ratio.

49. On the plot ratio issue, Mr. Law stated that bonus would not have been granted in February 1990, because by then it was proposed to complete the road widening by resumption. We inferred that he considered that by then the resumption, had overtaken acceptance of any voluntary surrenders. He also based his opinion on the fact that the three Wang Tau Street lots were in other ownership and if not already surrendered or resumed, would have prevented the road widening being completed.

50. Mr. Tsui agreed that building plans complying with the Layout Plan, would be approved. He further agreed that if a surrender was accepted, bonus plot ratio would be granted. We find on the undisputed expert evidence, that the established practice was that where the Crown accepts a surrender, bonus plot ratio is granted.

51. In this case the crucial issue is whether the Crown would have accepted a surrender. The historical evidence was that in the past it had accepted surrenders, if in accordance with the Layout Plan proposals. These surrenders were accepted on a piecemeal basis, even if because of other unsurrendered or unresumed properties, they did not enable the entire road widening proposal to be completed.

52. After considering the whole of the evidence, we find that any refusal in 1990 to accept a surrender, would have been because the prior voluntary surrender practice, had been overtaken by the resumption publicly notified in 1989. In assessing compensation, we are obliged to ignore the road widening resumption scheme. We are satisfied, that in the hypothetical no-resumption world, it would have been more probable than not, that a surrender of the Layout Plan affected portions of Lots 30, 32, 34, 36 and 38 would have been accepted. We therefore hold, that development value is to be determined, on a bonus plot ratio basis.

Whether development site area to include a service lane:

53. The Applicants proposed development included a main building and a separate ancillary building to house a transformer and switch room. Counsel for the Crown submitted that under Regulation 28 of the Building (Planning) Regulations, the existence of these two buildings required the provision on the site, of a service lane, comprising 51 square metres.

54. Counsel accepted that under Regulation 28(1) (c) the Building Authority had power to grant an exemption. Further, on Mr. Tsui's evidence he conceded that such an exemption would probably be granted because the ancillary building exclusively housed utilities. However, the Crown again attempted to rely on Section 12(c), as preventing the Tribunal, taking any such exemption into account.

55. The Section 12(c) objection must fail on the same grounds already held in respect of the Building Authority's Regulation 22(2) discretion. We also accept the Applicants submisssion, that the same utilities could also have been included in the main building, without any need for an ancillary building. For these reasons, we hold that the site does not have to provide 51 square metres or any other area, for service lane purposes.

Valuation:

56. The subject property therefore requires to be valued as a Class A site with bonus plot ratio but without the necessity to provide a service lane. Both surveyors attempted to assess the development value of the subject property, by carrying out residual method valuations. On the facts of this application, we agree that was the proper valuation method to adopt.

57. We confirm that Mr. Tam, the Applicants surveyor, in his first Rule 20 Report dated 20th August 1996, arrived at a valuation of $30,400,000. This was based on a joint development to produce a composite commercial and residential building of 25 storeys. After considering the Crown's Rule 20 Report, he filed a supplementary Report. This contained joint development residual valuations for a Class A site without bonus plot ratio of $19.99 million and with bonus plot ratio of $24.18 million.

58. The Rule 20 Report of the Crown's surveyor Mr. Law, dated 22nd August 1996, arrived at a total value of $6,100,000. Mr. Law treated each lot as separately developed Class A sites, without any bonus plot ratio. In his Report he valued Lot 30 at $1.48 million, Lots 32 and 34 at $2.55 million, Lot 36 at $1.23 million and Lot 38 at $0.84 million.

59. Despite these major differences as to the notional development and the availability of bonus plot ratio, their valuation approach and residual method format were similar. Mr. Tam adopted 15% for developers and builders profit, $25,000 per square metre for ground floor shops and $17,500 per square metre for high rise residential flats with lift service. Mr. Law allowed 20% for profit and $17,500 to $18,500 per square metre, for ground floor shops. He divided the residential flats into low rise without lift service at $11,000 per square metre and high rise with lift service at $15,000 per square metre.

Developers and builders profit

60. The difference between the parties is the Applicants 15% and the Crown's $20%. Mr. Tam conceded that 20% is the more traditional allowance. However, in his opinion current high levels of competition are causing developers to accept lower figures down to 15%. The relevant date for determining market profit levels, goes back to 24th February 1990. On the evidence we are not satisfied that we should do other than allow the conventional rate of 20%.

Ground floor shops

61. The competing valuations are $25,000 per square metre and from $17,500 to $18,500 per square metre. In terms of location and date it was agreed the nearby Mei Lee Building, was the best comparable with an unadjusted unit rate of $17,190 per square metre. However, inferior access and other negative factors, would require substantial upward adjustments, if this comparable were to be used.

62. These difficulties led Mr. Tam to prefer two ground floor shops in Tai Po Hui, namely Shop C, Fu King Building, 14 On Fu Road and No. 25 Tsing Yuen Street. The unit prices of these two shops were $32,293 and $34,104 respectively. Mr. Tam recognised that business activity in Tai Po Hui is generally better than in Kau Hui. Mr. Tam on the basis of his knowledge of the area made an unanalysed adjustment for location, to arrive at what he described as a spot valuation of $25,000 per square metre. This represented a downward adjustment in the region of 25%.

63. Mr. Law considered an extensive list of 16 shop comparables. These included 10 shops in Windfield Garden, Greenery Plaza and Tai Wo Centre with prices ranging from $19,199 to $40,179 per square metre. In his opinion these were not dircectly relevant, because they enjoyed superior locations to the subject property. Lower unit price ranges from $19,953 to $21,151 were produced by four shops in Tai Po Hui but he considered these enjoyed a more favourable pedestrian flow than the subject lots. We record that it is the pedestrian flows past the joint development, on the assumption it was completed on 20th February 1990, which have to be considered.

64. Mr. Law finally selected the Shop 4, at the rear of Mei Lee Building, as his best comparable. On the basis of an old survey map, he believed that in 1990 there was proper vehicular access to the rear of the building, where the shop comparable is situated. However, he accepted its location was inferior to the subject property, for which he made an upward adjustment of 8%. All the other evidence was that the comparable did not have in 1990, nor does it even yet enjoy, full vehicular access.

65. We accept the contrary evidence as to poor access. We also find that the existence of the large public toilet building, near the rear of the Mei Lee Building, would probably have a negative effect on the comparable's commercial market value. Mr. Law's modest adjustment of 8% is in these circumstances inadequate. At the same time we recognise the difficulty of making a more accurate adjustment and the unreliability inherent in larger adjustments.

66. Yet as to location and time, Shop 4 of the Mei Ling Lee Building, is the best comparable. In broad terms, if it is assumed to have a value of 75% to 80% of the subject property shops, that would produce adjusted unit rates of from $22,920 to $21,488 per square metre. These rates are only sligntly higher, than the surveyors comparables for relatively quiet areas of Tai Po Hui, which are in the region of $20,000 to $21,000 per square metre. The majority of those comparables may well be slighty inferior to the proposed shops.

67. We are satisfied the evidence supports a unit value for the new shops in the region of $21,000 to $23,000 per square metre. On this finding we propose for the purpose of the residual valuation, to adopt a unit value for the subject property ground floor shops of $22,000 per square metre

68. The first floor was also to be used for commecial purposes. For this floor, we will follow Mr. Tam's approach by adopting 50% of the ground floor rate, rather than Mr. Law's more generous and slightly higher rate of just over 54%. The lower percentage, produces for the first floor, a unit rate of $11,000 per square metre.

Residential flats

69. We have already held that the hypothetical optimum development will be a composite single building, on an amalgamated site. These findings, contrary to the Crown's single lot valuation assumptions, will result in a high rise building, with lift service to all of the floors of the residential flats. This reduces the surveyors original differences to Mr. Tam's $17,500 per square metre and Mr. Law's $15,000 per square metre.

70. Mr Tam's Reports contain particulars which support average prices for 29 sales from Full Scene Garden of $15,987 per square metre; 16 sales from Greenery Plaza of $16,401 per square metre; 24 sales from Wing Fai Garden of $16,451 per square metre; and 21 sales from Tai Wo Centre of $17,570 per square metre. Mr. Tam considered Tai Wo Centre the best comparable, before arriving at his unit rate of $17,500 per square metre.

71. Mr. Law gave more importance to 7 sales from Evergreen Court ranging from $15,171 to $15,836 per square metre; 3 sales from Full Scene Garden from $14,957 to $15,384 per square metre; 2 sales from Greenery Plaza of $$14,560 and $16,768 per square metre and 3 sales from Tai Wo Centre from $16,232 to $18,297 per square metre. After considering these sales figures, he adopted a unit rate of $15,000 for his residual valuation.

72. The surveyors carried out a comprehensive search for residential comparables and as a consequence the Tribunal has the advantage of substantial market sales evidence. The only sales which proved difficult to analyse were those in Evergreen Court. These included the lowest sales range from $15,171 to $15,836 per square metre. There were a number of factors affecting Evergreen Court, which did not arise in respect of the other comparable developments.

73. Evergreen Court flats had lower ceiling heights and were near a petrol filling station, while its particular comparables comprised pre-sale transcations. The flats stud or ceiling heights were about 1 foot lower than the other comparables. This reduced the interior spaciousness of each flat. The petrol filling station while situated next to the development, was well screened and would only potentially affect flats on one side of the development. Importantly, its existence did not appear to have produced major comparative differences between market transactions within Evergreen Court.

74. Mr. Tam's Evergreen Court upward adjustments of nearly 10% for pre-sales and 6% for the other two factors, produced an adjusted unit rate of $17,500 per square metre. The Crown disputed the alleged inferiority of Evergreen Court and submitted that its benefits cancelled out its detriments. If net upward adjustments were necessary, it was submitted, they should be small. We are satisfied that to the extent that different ceiling heights and the filling station were negative factors, they could with reasonable accuracy, have been dealt with by appropriate adjustments.

75. However, the pre-sale transactions raise more complex matters. Any proper analysis would have to take into account a variety of factors, several of which would not easily be quantified. Allowance would have to be made for loss of interest on pre-payments; uncertainties over quality and completion dates; and varying market conditions over the relevant period. On the other hand, despite these important qualifications, the comparables represent actual market transactions.

76. We consider it extremely difficult to make reliable adjustments for the presale factors, which significantly distinguish Evergreen Court, from the other comparable developments. We confirm that the latter are available in relative abundance. In all these circumstances, we propose to give principal weight to the other comparables. We accept as reliable the following average sale prices in Mr. Tam's supplementary Report:

77. We are satisfied that the lack of legal vehicular access to Full Scene Garden and the nearby temple, would decrease its comparative value. We are equally satisfied that Tai Wo Centre, with its car park, shopping facilities and proximity to Tai Wo Railway Station, is superior to the proposed subject property development. The subject property development would correspond more closely, to the residential flats in Greenery Plaza and Wing Fai Garden. In the light of all these factors, we assess the value of the proposed residential flats for the subject property, at $16,500 per square metre.

Other residual valuation elements

78. Both surveyors adopted a rate of interest of 11.5% per annum, allowed professional fees calculated on 6% of the construction costs and agreed on a period of 6 months for site clearance and $115,417 for demolition costs and tenants compensation. The Applicants construction costs of $3,750 per square metre of gross floor area and 2 year construction period, were not seriously disputed. We accept those calculations were sound and the amounts and figures are reasonable.

Residual valuation

79. On these findings under the residual method, we value the subject property at $19,200,000, calculated as follows:

GROSS DEVELOPMENT VALUE:

LESS COSTS:

Gross Floor Area

80. Accordingly we award the Applicants compensation in the sum of $19,200,000. There will be an order nisi that the Respondent pay the Applicants costs on the High Court Scale; to be taxed if not agreed together with a Certificate for two Counsel. Liberty to apply is also reserved for interest, apportionment and any other consequential matters.

DATED this 4th day of February 1997.