NAM CHUN INVESTMENT CO LTD v. THE DIRECTOR OF LANDS

CACV 335/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 335 OF 2003

(ON APPEAL FROM LDLR 3 OF 2000)

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J U D G M E N T

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Hon Woo VP:

1. This is an appeal brought by the Director of Lands (“Director”) against the judgment of the Lands Tribunal given on 21 October 2003 in respect of the compensation payable by the Government to the applicant on the resumption of the applicant’s plots of land.

Background

2. The applicant was the registered owner of plots of land known as Lots Nos 828RP, 873RP, 874RP, 892, 894, 895, 896RP and 897 in DD 124 (“the subject land”) situated at Hung Shui Kiu, Yuen Long, New Territories.  The area of the subject land is 5,475.4 square metres.  It was held under a Block Crown Lease that had a restriction against converting the land into use for building purposes without prior approval of the Government.  The term of the applicant’s lease of the subject land was extended to 30 June 2047 under the New Territories Lease (Extension) Ordinance, Cap 150.  

3. The subject land, comprising two parcels in irregular shapes, was located on the west side of Hung Tin Road to the northwest of its junction with Castle Peak Road, in the western part of Yuen Long near Shek Po Tsuen, Hung Shui Kiu.  Vehicular access to and from the subject land was available via a slip road branching off from Hung Tin Road, a major thoroughfare serving the vicinity of the subject land.  The immediate neighbourhood was characterised by a number of temporary structures scattered amongst large patches of agricultural land. 

4. In June 1993, the subject land was zoned Residential (Group A) 1 (“R(A)1”) in the draft Ping Shan Development Permission Area Plan No DPA/YL-PS-1.  In September 1997, the subject land was zoned Residential (Group A) 3 (“R(A) 3”) in the Ping Shan Outline Zoning Plan (“OZP”) No S/YL-PS/2 (“OZP S/YL-PS/2”).  Under the OZP R(A)3 zoning, inter alia, the maximum building height was 19 storeys above podium, and agricultural use was not permitted. 

5. The subject land was resumed on 1 March 1999 by the Government pursuant to Government Notice No 293 dated 14 January 1999, gazetted and published on 22 January 1999.  

History of this litigation

6. The matter has come to this court on appeal from a judgment of the Lands Tribunal (Presiding Officer District Judge Yung and Member Mr C Y Lam) dated 21 October 2003 regarding the compensation payable by the Government to the applicant.  However, that was but the latest development within the litigation between these parties.

7. The applicant first made an application to the Lands Tribunal in 2001 for compensation in respect of the resumption of the subject land.  On 19 June 2001, the Lands Tribunal (Presiding Officer District Judge Chow and Member Mr W K Lo) gave judgment, holding that section 12(c) of the Lands Resumption Ordinance, Cap 124 (“LRO”) had no application to the case, and assessed the compensation payable to the applicant accordingly.

8. The Director appealed, in CACV 1636/2001.  The appeal was heard on 11 and 12 December 2001 together with CACV 376/2001 that related to a smaller piece of land in the Fanling / Sheung Shui area.  This court, differently constituted, dismissed the two appeals by its judgment of 15 January 2002.  The judgment has been reported under the title of Yin Shuen Enterprises Ltd & Anor v Director of Lands in [2002] 1 HKC 304.

9. The Director appealed to the Court of Final Appeal (“CFA”).  On 17 January 2003, the CFA gave judgment allowing the appeal and remitted both cases to the Lands Tribunal for it to reconsider the assessment of the compensation in each case on a full evaluation of all the evidence and in the light of the judgment.  I shall refer to the judgment of the CFA as “the CFA judgment” or “the CFA judgment in Yin Shuen”.

10. Pursuant to the CFA judgment, the Lands Tribunal (Presiding Officer Judge Yung and Member Mr C Y Lam) heard the parties with additional evidence, and judgment was handed down on 21 October 2003.  This is the judgment that is subject to the present appeal before us.

11. In the meantime, two appeals, namely CACV 439/2002 View Point Development Ltd v Secretary for Transport and CACV 64/2003 Best Firm Investment Ltd v Secretary for Transport,from the Lands Tribunal concerning the assessment of compensation for the resumption of agricultural land in Yuen Long were heard by this court, differently constituted.  The Court of Appeal (“CA”), differently constituted from the court in the present appeal, gave judgment on 24 December 2003 (unreported).  In that judgment, and I shall call it View Point, the CA considered the effect of the CFA judgment in Yin Shuen.  The relevance of View Point will become apparent.

Crux of the Lands Tribunal’s judgment of 21 October 2003

12. The Lands Tribunal heard the subject matter of the present appeal pursuant to the remission by the CFA.  The Tribunal was concerned with the true interpretation of the CFA judgment in Yin Shuen.  The key issue between the parties before the Tribunal was whether zoning or planning benefits of the subject land should be taken into account in assessing compensation.  Judge Yung interpreted the CFA judgment as excluding compensation for any “hope value”, namely the inflated price attributable to speculation on the Government’s removal of the restrictions to build in the lease, and speculation upon the Government charging a less than full premium on modification of the terms of the lease.  Judge Yung accepted the submission of the applicant that zoning or planning benefits of the subject land were associated with its intrinsic value, and thus should not be excluded from consideration in assessing the value of the subject land, and accordingly that an assessment with such benefits was not precluded by the CFA judgment.  It is to be noted that the Tribunal Member expressed reservation as to the appropriateness of the comparables adduced by the applicant, albeit these comparables were accepted by Judge Yung.  But in such event, the judge’s decision is taken as the decision of the Tribunal (see section 9(5) of the Lands Tribunal Ordinance, Cap 17).

13. Judge Yung expressly rejected the Director’s argument that whenever zoning or planning benefits were reflected in the price of the land, it would contain an element of speculation for which the Government need not compensate the claimant. 

14. Judge Yung held that the Government expert, Mr Chan, had conceded that there was no evidence that the prices of the comparables adduced by the applicant were in fact inflated.  He also came to the view that Mr Chan’s evidence as to the speculative prices of the comparables was only his opinion which was no more than a bare assertion, and rejected the same.  Judge Yung adopted the said comparables, and made an award of compensation accordingly.

The grounds of appeal

15. A number of grounds of appeal are raised by the Director.  However, the key question of law to be decided by this court is whether, upon a proper construction of the CFA judgment, the intrinsic value of land associated with zoning or planning benefits is to be disregarded in the assessment of compensation under the LRO.  Our determination of this question goes to the root of the correctness of the Tribunal’s judgment. 

16. Whereas this court has had the advantage of the judgment of the CA in View Point, Judge Yung did not, since View Point was decided after his judgment now subject to appeal.

17. It is, however, convenient first to set out the relevant statutory provisions.  Section 10 of the LRO provides as follows:

“10.	Determination by Tribunal of compensation payable by Government
	(1)	The Tribunal shall determine the amount of compensation (if any) payable in respect of a claim submitted to it under section 6(3) or 8(2) on the basis of the loss or damage suffered by the claimant due to the resumption of the land specified in the claim.
	(2)	The Tribunal shall determine the compensation (if any) payable under subsection (1) on the basis of –
		(a)	the value of the land resumed and any buildings erected thereon at the date of resumption; .….”

18. Section 12 of the LRO provides:

“12.	Additional rules for determining compensation
	In the determination of the compensation to be paid under this Ordinance—
	(a)	no allowance shall be made on account of the resumption being compulsory;
	(aa)	no account shall be taken of the fact that the land lies within or is affected by any area, zone or district reserved or set apart for the purposes specified in section 4(1)(a), (c), (d), (e), (f), (g), (h) or (i) of the Town Planning Ordinance (Cap. 131);
	(b)	no compensation shall be given in respect of any use of the land which is not in accordance with the terms of the Government lease under which the land is held;
	(c)	no compensation shall be given in respect of any expectancy or probability of the grant or renewal or continuance, by the Government or by any person, of any licence, permission, lease or permit whatsoever:
		Provided that this paragraph shall not apply to any case in which the grant or renewal or continuance of any licence, permission, lease or permit could have been enforced as of right if the land in question had not been resumed; and
	(d)	subject to the provisions of section 11 and provisions of paragraphs (aa), (b) and (c) of this section, the value of the land resumed shall be taken to be the amount which the land if sold by a willing seller in the open market might be expected to realize.”

19. Since section 4(1) of the Town Planning Ordinance, Cap 131 is referred to in section 12(aa) of the LRO, it is also necessary for completeness to set out section 4, which reads as follows:

“4.	Contents of lay-out plans and powers of the Board
	(1)	The Board’s draft plans prepared under section 3(1)(a) for the lay-out of any such area may show or make provision for—
		(a)	streets, railways and other main communications;
		(b)	zones or districts set apart for use for residential, commercial, industrial or other specified uses;
		(c)	reserves for Government, institution or community purposes;
		(d)	parks, recreation grounds and similar open spaces;
		(e)	zones or districts set apart for undetermined uses;
		(f)	comprehensive development areas;
		(g)	country parks, coastal protection areas, sites of special scientific interest, green belts or other specified uses that promote conservation or protection of the environment;
		(h)	zones or districts set apart for use for village type development, agriculture or other specified rural uses;
		(i)	zones or districts set apart for use for open storage;
and any matter whatsoever may be shown or provided for or specified in or in respect of the plans by means of such diagrams, illustrations, notes or descriptive matter as the Board thinks appropriate, and any such diagrams, illustrations, notes and descriptive matter shall be part of the plans.
	(2)	The Board may recommend to the Chief Executive and council the resumption of any land that interferes with the lay-out of an area shown on a draft or a proved plan or on a master lay-out plan approved under section 4A; and resumption to avoid such interference shall be seemed to be resumption for a public purpose within the meaning of the Lands Resumption Ordinance (Cap. 124).
	(3)	Except in the case of resumption under the said Ordinance no compensation shall be paid to the proprietor or any person interested in any holding by reason of the fact that it lies within or is affected by any zone or district set apart under subsection 1(b).”

20. The CA in View Point comprised Le Pichon JA, who was also a member of the court in Yin Shuen whose judgment was reversed by the CFA.  In View Point, this court explained and identified the issues before it and the CFA in Yin Shuen in the following way:

“15.  … This court held that section 12(c) did not preclude compensation for the intrinsic value of the land with all its natural attributes which made it suitable for development.  Whilst there was a distinction between an expectancy or a probability that an interest in land may be acquired on the one hand and the potentiality of the land on the other, section 12(c) only affected the former, being restricted to matters relating to interests in land.  That did not mean that the lease terms were irrelevant but as the claimant’s comparables were true comparables in terms of lease conditions and restrictions, they were directly comparable and therefore the tribunal was entitled to have regard to them.

16.  The question before the Court of Final Appeal was therefore this:

‘… whether the compensation payable on resumption should reflect a price in excess of the value of the land subject to the restrictions if the evidence shows that purchasers are willing to pay such a price in the hope or expectation of obtaining a modification of the terms of the lease.  The question turns on the meaning and effect of s.12(c) of the Ordinance.’

See paragraph 5 of the judgment of Lord Millett NPJ (‘The Judgment’).”

21. After referring to the parties’ arguments, the CA continued:

“19.  In our view, there can be little doubt that the Court of Final Appeal decided that section 12(c) excluded compensation for a tenant’s hope or prospect of obtaining a modification of the terms of the lease under which the land is held.  This is clear from paragraph 49 of the Judgment:

‘49.  With the sole exception of HH Judge Cruden’s observations in Suen Sun-yau v. Director of Buildings and Lands, therefore, s.12(c) has been consistently understood and applied in Hong Kong to exclude from the compensation payable on resumption of land held under a Crown lease any element which would reflect the speculative element in the value of the land referable to the prospect of obtaining a modification of the user covenant in the lease.  This is in accordance with the natural meaning of the section and the object which its introduction into the law of Hong Kong was intended to achieve.’

20.  ….

21.  Lord Millett NPJ considered that the question before the Court of Final Appeal was:

‘… whether HH Judge Cruden was correct in saying that in these circumstances the claimant is entitled to have compensation assessed on the basis of the open market value, or whether s.12(c) has the effect of excluding the speculative element in that value from the computation.’

The answer, to be found in paragraph 49 of the Judgment, was the overruling of Suen Sun-yau with the result that the “speculative element” in the open market value has to be excluded.  In the context, the “speculative element” could only have been referable to the “non-agricultural potential”, “an element over and above their value for agricultural use” and “the purchaser’s hope that he could obtain a change of user” mentioned in the passage cited from Suen Sun-yau.  That section 12(c) excludes development potential is reinforced by the following passage in paragraph 50:

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

22.  This is consistent with the underlying reasoning for section 12(c).  In the case of a Crown or Government lease, there would not appear to be any distinction in principle between a tenant's hope of obtaining a renewal of his lease with his hope of obtaining a modification of the terms of the user.  The provision gave effect to the true ratio of Lynch v The Corporation of the City of Glasgow (1904) 5F 1174 (Court of Session), namely, that the value of the land is to be equated with ‘the property taken’, the subject of compensation being the claimant’s estate and interest in the land.  By excluding compensation for the possibility of obtaining a modification of the terms of the lease under which the land was held, it went further than contemporary English law.  But that did no more than reflect ‘the principle that the value of the land was the value to the claimant, in whose hands its user was restricted, and not its value to the acquiring or resuming authority, in whose hands its user was unrestricted.’  See paragraph 25 of the Judgment.  It is equally consistent with article 105 of the Basic Law which requires compensation to be paid for ‘the property concerned’ i.e., the interest acquired, meaning the land for the duration of the Crown lease and subject to the user restrictions in the lease.  The corollary is that the development potential of the land remained vested in the Government and remained its property for which ‘it ought not to be required to pay.’  See paragraph 57 of the Judgment.

23.  We should mention that much was made of the fact that the Court of Final Appeal (in paragraph 50 of the Judgment) appeared to give recognition to the fact that the intrinsic value of the land included its development potential.  That would not appear to us to be a correct reading of what the Court of Final Appeal was saying.  Those observations were made in the context of this court’s observations in Yin Shuen regarding ‘the intrinsic value of the land “with all its potentialities”’.   It is clear from the earlier passages of the Judgment (particularly at paragraph 16) that Lord Millett regarded development potential as something ‘more than the intrinsic value of the land’.” (Emphasis added)

22. Mr Yu SC, for the applicant, asks us to interpret the CFA judgment in Yin Shuen in a different way.  He submits that two different and distinct questions were considered by the CFA in Yin Shuen, namely,

(1)	whether section 12(c) covers permission in the form of a modification of lease to remove the restricted user covenant; and
(2)	whether it is permissible to assess the value of the land with the benefit of zoning by using comparables which are subject to the same restrictions.

23. On the first question, Mr Yu agrees that the CA in View Point correctly construed the CFA judgment that section 12(c) excluded compensation for a lessee’s hope or prospect of obtaining a modification of the terms of the lease and that the “speculative element” could only have been referable to the hope that he would obtain a change of user.

24. Mr Yu contends, however, that the CFA’s holding relating to section 12(c) did not determine the appeal before it in Yin Shuen, because that holding did not deal with what Lord Millett regarded as the applicant’s “strongest argument that the claimant’s comparables were concerned with private sales of land which was also held under Crown Leases and subject to similar restrictions” (see paragraph 51 of the CFA judgment).  Indeed, contrary to this court’s view in View Point, Mr Yu argues that Lord Millett NPJ did not hold that compensation should be assessed on the basis that there was no planning benefit or that the subject land should be treated as if it would remain agricultural land for the remainder of the lease.  He refers to paragraph 27 of the CFA judgment for the proposition that Lord Millett recognised that planning benefit could not be said to belong wholly to the landlord and the landlord would be charging for his share of the benefit when it charged a full premium for modification of the lease terms from which planning benefit could be derived; it follows that the lessee’s share of the benefit would form part of the value of the land for which compensation is payable by the lessor.

25. It is, therefore, necessary to cite paragraph 27 of Lord Millett’s judgment for closer examination:

“27.  The Government’s right to charge the full value of the modification has not been and could not be challenged.  Its policy is informed by the philosophy which formerly underlay the ownership of land in Hong Kong.  While it remained a Crown Colony land in Hong Kong was regarded as belonging to the Crown, which parted with its ownership only for the duration of the lease and for the user specified in the lease.  Subject thereto, it remained the undisposed property of the Crown.  In granting a modification of the user covenants in the lease, therefore, the Crown in effect made a further disposal of the land for which it was entitled to charge full value.  In the case of a Crown lease, at least, no distinction in principle was seen between a tenant’s hope of obtaining a renewal of his lease and his hope of obtaining a modification of the terms of the lease.  In England, by contrast, where the vast majority of leases are granted by private landlords, user covenants are generally qualified so that the landlord cannot unreasonably refuse his consent to a change of use or make it conditional on the payment of a premium.  But even where the landlord can unreasonably withhold his consent, the right to make more beneficial use of the land during the currency of the term cannot be said to belong wholly to the landlord or wholly to the tenant, for the tenant cannot exercise the right without the consent of the landlord and the landlord cannot exercise it while the lease subsists.”

26. Mr Yu relies heavily on this paragraph to say that insofar as there is planning or zoning benefit in the land, it belongs to both the landlord and the tenant, and as such, the compensation awarded for the compulsory resumption of the land must take into account such planning or zoning benefit.

27. I do not agree.  That which Lord Millett dealt with in paragraph 27 of the CFA judgment, as stated, was the position “by contrast” in England and under the common law which he had summarised in paragraph 17 of the judgment.  However, Lord Millett noted in paragraph 19 of the judgment that the user covenants in the Crown Leases are absolute and that in deciding whether to grant or withhold its consent to a modification of the terms of the lease, the Government has an absolute right if it chooses to demand a premium, however large, for granting a modification of the terms of the lease, or to withhold its consent altogether however unreasonably.  Lord Millett also pointed out in paragraph 25 of the judgment that section 12(c) had no direct counterpart in the English statutes, and that section 12(c) excluded compensation for the possibility of obtaining a modification of the terms of the lease, and it went further than contemporary English law. 

28. Moreover, as cited by the CA in View Point, Lord Millett in paragraph 50 of the CFA judgment had stated clearly that:

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

29. In paragraph 57 of the CFA judgment, Lord Millett put the point in another way:

“The right to exploit the development potential of the land by using it as building land was not disposed of by the Crown and remains the property of the Government for which it ought not to be required to pay.”

30. Mr Yu also relies heavily on paragraphs 26, 53 and 54 of Lord Millett’s judgment in support of his argument that the “speculative element” is limited to purchasers of lands in the New Territories speculating on the Government not charging a full premium, referred to in paragraph 26 of Lord Millett’s judgment.  Mr Yu links this with paragraph 53 of the CFA judgment where Lord Millet described a perfect market:

“In a perfect market, of course, purchasers would pay a price which precisely reflected the prospects of obtaining a modification of the terms of the lease and the costs of obtaining it, including the payment of any premium; and the Government would charge a premium which exactly reflected the additional value would enure to the land as a result of the modification.  In such a market there would be no room for speculation.  The value of the land would be the same whether one took account of the prospects and costs of obtaining a modification or disregarded them, and s. 12(c) would have no effect.  But the market is not perfect.  Purchasers are prepared to pay prices which do not reflect the intrinsic value of the land, but contain a speculative element for which the Government ought not to be required to pay on resumption.”

31. While Lord Millett clearly referred to the possibility of Government charging a premium less than that which precisely reflected the additional value attributable to the modification of the lease, I am not persuaded that this was meant by Lord Millett to be the only “speculative element” possible.

32. On the second issue before the CFA, Mr Yu states, correctly in my view, that the CFA did not hold that the applicant’s comparables were irrelevant.  Indeed, Lord Millett’s conclusion (at paragraph 54) of the judgment was that:

“…. It does not follow that they [the claimant’s comparables] must be disregarded altogether; but they cannot stand without adjustment.”

33. In my view, this does not assist the applicant, because Judge Yung had clearly adopted an interpretation of the CFA judgment as not excluding compensation for the zoning or planning benefits of the subject land, which was contrary to the interpretation made by this court in View Point.  I consider that View Point is a correct decision and a correct interpretation of the CFA judgment in Yin Shuen.

Zoning under town planning

34. Mr Yu also urges us not to follow View Point.  He attempts to distinguish View Point by submitting that the land in question in that case was zoned “U” (Undetermined) with the result that counsel’s argument in that case on zoning or planning benefits must be rejected.

35. The argument seems to develop in this way.  Land which is zoned “U” is very different from the subject land which was zoned “R(A)3” because of the operation of section 12(aa) of the LRO.  Judge Yung had this to say:

“Section 12(d) permits the open market value as the basis for compensation subject to certain restrictions.  Matters specified in section 4(1)(a), (c), (d), (e), (f), (g), (h), (i) of the Town Planning Ordinance should be excluded from consideration.  Section 4(1)(b) was conspicuously omitted.  For these reasons, Mr Yu submits zoning and planning could be taken into account.”

36. Since section 4(1)(b) relates to “zones or districts set apart for use for residential, commercial, industrial or other specified uses” and thus the computation of compensation under section 12(aa) of the LRO does not preclude such zoning, in particular, the zoning of the subject land under “R(A)3” being taken into account, it is contended therefore that the Tribunal was correct in paying heed to the zoning and planning potential of the subject land as a residential lot.

37. I disagree.  While the Tribunal was entitled to take into account the zoning under section 4(1)(b) of the Town Planning Ordinance, it does not mean that it can order compensation for that zoning potential, because the subject land was restricted for agricultural use and the removal of that restriction would be a subject for the operation of section 12(c).

38. It is instructive to note the mischief to which section 12(aa) was directed.  In View Point, the CA alluded to it:

“30.  Section 12(aa) was enacted by way of amendment in 1973.  The mischief at which it was directed appears from the observations made by Mr Robson when he moved the second reading of the bill:

‘... the purpose of this bill is to ensure that land owners whose land is resumed under the Crown Lands Resumption Ordinance are awarded appropriate compensation in cases where the land in question is subject to restrictions imposed by an Outline Zoning Plan.’

In his speech in support of the motion, Mr Bray observed:

‘... when the bill was published it gave rise to considerable anxiety in the country as it was thought that the bill emphasized that compensation for agricultural land must be assessed without regard to the development potential of that land.  The bill has no bearing on this vexed problem...’

At the resumption of debate on second reading, Mr Szeto remarked that:

‘... [W]hile the chief aim of these Outline Zoning Plans is the improvement of the areas by increasing their present deficient provision in open space and sites for Government and community facilities, it has inevitably, as the law stands, given rise to anxiety and hardship of property owners whose land is affected. ...

... No one likes to see his land changed out of his control from residential or commercial use to that for public open space, since the latter has no commercial value.  A grievance exists as the law stands when the Compensation Board can have regard only to the future permitted use of the land.  In view of the large number of resumptions that are to be effected in the immediate future, it is important, Sir, to remove this sense of grievance, and the bill therefore has my support.’

As Judge Cruden explained in his book at page 80, section 12(aa) prevents the Town Planning Ordinance from being used to rezone or otherwise blight land so as to reduce the compensation payable on a later resumption.”

39. It seems to me that the mischief aimed at by the introduction of section 12(aa) was not to affect the value of land by reason of the rezoning of it from the uses provided for in section 4(1)(b) of the Town Planning Ordinance to other uses that would reduce its value. 

40. The point raised by Mr Yu similarly was made by leading counsel for the claimant in View Point.  The response of the CA in that case, with which I agree, was as follows:

“31. … Whether or not section 12(aa) applies at all would depend on whether the land was ‘affected’ by any area, zone or district set apart for use for residential, commercial, industrial or other specified users.  That has to be a question of fact for determination by the tribunal.  Assuming, for present purposes, that it were so ‘affected’ , its relevance for compensation purposes would depend on the use (existing or potential) to which the land could be put.  As explained in Cruden’s Land Compensation (at page 95) :

‘The basis of compensation is that the owner receives the equivalent cash value of the land resumed.  The determination of that value necessarily requires the use of the land to be taken into account.  The resumed owner is at least entitled to compensation for the land valued on its existing use.  There may be cases where the owner is not fully utilising the land.  The land may be capable of being used for alternative purposes, which would attract a higher market value.

The law is well settled that compensation is to be determined not necessarily on the actual use but on the basis of the best use to which the land may reasonably be put.’

32.  Mr Miu submitted that where the potential use is non-residential, zoning has little relevance.  It would not enhance the value of the land for non-residential use.  We agree.  In our view it is for this reason that section 12(aa) is of no assistance to the applicant’s case.  What falls to be excluded by section 12(c) cannot be re-introduced and taken into consideration via section 12(aa).  That was not the reason why section 12(aa) was enacted.  The legislature could not have intended the two subsections which are of equal ‘standing’ should cancel each other out.” (Emphasis added)

41. This disposes of Mr Yu’s arguments that View Point is distinguishable, and that the subject land being zoned “R(A)3” thus would entitle the Tribunal to award compensation based on that zoning.  Section 12(aa) simply means that the lower-value zoning of the land shall not affect the compensation payable, which is to protect the lessee, but it is not to increase the value of the land because of a higher-value zoning if the use of the land under such zoning is not within one of the users allowed by the lease itself, but requires modification. 

Comparables

42. While is true that the CFA in Yin Shuen did not rule that the comparables adduced by the applicant, ie the open market prices of lots of lands in the near vicinity of the subject land with similar agricultural user restrictions and residential in zoning, must be disregarded, the CFA held that these comparables could not stand without adjustment.  In his judgment, Judge Yung said:

“14.  The method of comparing like with like by the Applicant’s valuer, Mr. Lau, is undisputedly a reliable method in arriving at the open market value of the subject land.  In the instant case the only challenge to the comparables is that they were inflated by an hope value.  The alternative methods as suggested by the Respondent’s suffers the disadvantage of ignoring the intrinsic value associated with the zoning and planning benefit of the subject land.”

43. Judge Yung was attracted to adopt the applicant’s comparables because they were “comparing like with like”, but in my view he erred in failing to exclude the zoning or planning benefits that were included in these comparables.  Put in this light, the opinion of Mr Chan, the Government’s expert, that the applicant’s comparables included speculative prices, could not be “no more than a bare assertion”, as described by Judge Yung. 

44. As the applicant’s comparables admittedly included zoning or planning benefits, Judge Yung should have disregarded them unless he was satisfied that the prices paid for the comparables were adjusted properly by excluding the additional value arising out of or derived from such benefits.  

Burden of proof

45. The question of the appropriateness of the applicant’s comparables also relates to the question of the burden of proof.  On this subject, this court in View Point had the following to say:

“28.  Much importance was attached to the comment (at paragraph 54 of the Judgment [of the CFA]) that the claimants’ comparables which had been challenged as containing a speculative element were not to be discarded altogether although ‘they cannot stand without adjustment’.  We do not understand that comment to be casting a burden on the respondent to identify and quantify the speculative part of the prices of the comparables.  It goes without saying that the respondent has the evidential burden of making good its challenge, i.e. it has to establish, on a balance of probabilities, that a speculative element was embedded in the comparables.  That can be done in a number of ways and in this regard, it is to be noted that the comparative method of valuation whilst considered the best method is only one of several valuation methods : other methods include the investment method and the residual method.  See Cruden, Land Compensation and Valuation Law in Hong Kong, 2^nd Ed. at pp 526-534.  These alternative methods may well provide a useful means of cross-checking a valuation.  But the point being made in paragraph 54 of the Judgment was that the tribunal should have, but did not, evaluate the evidence on the issue whether a speculative element was embedded in the comparables.  Rather, it ruled the evidence submitted by the respondent as irrelevant.  This explains the remittance to the tribunal directed by the Court of Final Appeal in paragraph 59 : namely to reconsider the assessment of the compensation in each case on a full evaluation of all the evidence and in the light of the Judgment.  If that evidential burden is discharged, it would follow that the claimant’s comparables would require adjustment.  It would then be for the claimant to show, on a balance of probabilities, what adjustments would factor out the development potential shown to be embedded in its comparables.”

46. I entirely agree with the passage.  In a claim of compensation for land resumed by the Government, the legal burden rests with the claimant to make good what he claims, and if he produces comparables for the use of the Tribunal, he has the legal burden to prove on the balance of probabilities that the comparables are at arms’ length, and are reliable and appropriate for use by the Tribunal.  If the Government alleges that the comparables are inappropriate, or have included any additional value that should not be compensated, it has the evidential burden of making good its challenge.  However, it can do so by a number of valuation methods, as mentioned in the foregoing passage.  It has no burden to quantify the added value as embedded in the comparables, let alone identifying the reasons for such added value within the comparables.  If that evidential burden is discharged, the claimant’s comparables would require adjustment and it would be for the claimant to prove, on the balance of probabilities, what adjustments would need to be made for the comparables to be used by the Tribunal.  

47. In the present case, there was ample evidence before the Tribunal of the speculative element included in the comparables of the applicant, since Mr Lau, the applicant’s expert, accepted that the prices of the comparables reflected the benefit of planning or zoning, and that the planning or zoning benefit could not be realised without lease modification. 

48. In my judgment, confusion was caused at the hearing before the Tribunal by the use of various terms such as hope value, speculative element, intrinsic value, inflated value, development potential and planning or zoning benefits, and the failure to define the exact ambit or limit of each of these terms.

49. Before the Tribunal, the applicant accepted that there was a substantial price difference between land which had been zoned residential and land which had been zoned agricultural.  The term “planning or zoning benefit” was used to describe the potential benefit or value of land which was zoned residential.  The applicant’s expert described “speculative element” as something apart from this “planning or zoning benefit”.  The Government’s expert, Mr Chan, was asked to identify the additional speculative element, which he failed to do.  This led to Judge Yung’s comment that “Mr Chan on being pressed had to concede there was no evidence that the prices of the comparables was in fact inflated”.  Understood in the proper context, Mr Chan’s concession did not amount to, and should not have been treated as amounting to, an admission that the applicant’s comparables were without any “speculative element” or were not inflated. 

Fresh evidence and legitimate expectation

50. By a Notice of Motion dated 20 October 2004, which was filed less than a week before the date fixed for the hearing of this appeal, the applicant sought leave from this court to admit fresh evidence in support of a Respondent’s Notice proposed to be served out of time.  This notice sought to argue that if, contrary to the judgment of the Tribunal, section 12(c) of the LRO has the effect of conferring on Government all the planning benefits in the subject land during the term of the Government lease held by the applicant, then the applicant would rely on the Government’s unequivocal representation or promise made to the Heung Yee Kuk that it would take steps to cause section 12(c) of the Crown Lands Resumption Ordinance (then Cap 124, the predecessor of the LRO) to be repealed.  It was asserted that this had given rise to a legitimate expectation on the part of the applicant that the Government would not rely on section 12(c) to seek a reduction of the amount of compensation assessed on the basis of the amount which the land, if sold by a willing seller in the open market, might be expected to realise.  Alternatively, it was asserted that section 12(c) would be inconsistent with article 105 of the Basic Law and should be construed with such modifications, adaptations, limitations, and exceptions as may be necessary so as not to contravene article 105.

51. The application was supported by two affirmations of Ho Kwan Yiu, solicitor acting for the applicant, and an affidavit of Denis C Bray.  An additional affirmation of Mr Ho was filed during the course of the hearing.

52. After hearing Mr Yu, we dismissed the Notice of Motion with costs.  My reasons appear below.

53. Mr Ho’s two affirmations give a brief history of the litigation between the parties, and explain that because the applicant was aggrieved by the Government’s persistence in appealing the Lands Tribunal decisions, on 5 December 2003 it wrote to the Heung Yee Kuk to lodge the complaint.  As a result, the Heung Yee Kuk wrote on 2 January 2004 to the Chief Executive of HKSAR referring to the applicant’s complaint and also to the Government’s “agreement” to have section 12(c) repealed.  In the letter to the Chief Executive, the applicant’s complaint letter dated 5 December 2003 together with the “confidential” minutes of the 6^th meeting of the Joint Working Group on Letters B System held on 24 November 1982, as well as the “restricted” minutes of the 1^st meeting of the Land Liaison Committee Working Group held on 11 April 1986, were enclosed.  These minutes show that the Government at the two meetings, especially the later meeting in 1986, had taken the stance that section 12(c) should be repealed.  However it appears that a pre-condition of the suggested repeal of section 12(c) was that the scheme of ex gratia compensation that had been made by the Government for the resumption of Government land correspondingly had to be cancelled.  It also appears that in the 1986 meeting, no agreement or consensus was reached regarding such pre-condition.  The minutes concluded with the following:

“Mr Man … said that issues such as the differences in understanding of terms ex-gratia, and other matters still remain to be resolved.  At that juncture, Members agreed to adjourn the meeting to consider their respective position further.”

54. A few points should be noted.  First, the “legitimate expectation” issue had never been raised before.  It had not been considered at any hearing prior to its being raised before this court, and we were asked to deal with it as at first instance, and thus we would not have any first instance decision upon the evaluation of the related evidence and the relevant points of law for our assistance. 

55. Secondly, the applicant must have known that the Heung Yee Kuk had responded to its complaint by writing to the Chief Executive in early January 2004.  Mr Ho’s two affirmations state the time that he was supplied with copies of the minutes of the two meetings as referable to the time when the Heung Yee Kuk wrote to the Chief Executive.  The long delay of over nine months between early January 2004 and 20 October 2004 when the Notice of Motion was taken out to introduce the fresh evidence, as well as the Respondent’s Notice, had not been touched upon until the third affirmation of Mr Ho filed during the hearing before us.  This affirmation explained that the Kuk was making enquiry with the Secretary for Justice on the subject, who only gave a holding reply in April 2004, and that there were discussions between Mr Ho and the Director and his deputy at a dinner party later in the month.  As no substantive reply was forthcoming from the Chief Executive or the Secretary for Justice, “in the light of the imminent appeal hearing, I instructed Counsel to prepare the Notice of Motion to seek leave to file the Respondent’s Notice and to adduce fresh evidence to the court.”  Even with this late explanation, there was no information as to when counsel was instructed and why no intimation of the steps to be taken in this appeal had been promptly made to the respondent or the Secretary for Justice.

56. Thirdly, although it appears in the minutes of the two meetings that at that time the Government stance was to repeal section 12(c), the question of the pre-condition of cancellation of the ex gratia compensation scheme clearly had not been resolved.  The evidence is far from sufficient to establish that as at present the pre-condition has been satisfied, and thus that the Government is obliged to have section 12(c) repealed.  

57. Fourthly, according to Mr Ho’s admission as to the timing when he was supplied with the said minutes, the applicant appeared not to have any knowledge of the minutes of the two meetings until at earliest the beginning of this year, and that the minutes of the two meetings were apparently confidential documents which had never been published; indeed, it would have been surprising if the applicant had known of the representation when it bought the subject land in 1978, or when the subject land was resumed by the Government in 1999.

58. Fifthly, if the applicant were allowed to raise the issue before us now, it would simultaneously have overcome two procedural hurdles of the promptness and time-limit prescribed for an Order 53 application to be made, and also the time-limit under Order 59, rule 6 for a Respondent’s Notice to be served.  The time limits of the rules of the court are to be observed: see Ratnam v Cumarasamy [1965] 1 WLR 8 PC, Rivici v Prentice Hall Inc [1969] 1 WLR 157.  In this context, it is notable that the delay between May and 20 October 2004 in raising the respondent’s notice has not been fully explained. 

59. Last, and perhaps the weightiest point, the representation of the Government was made in meetings of working groups.  The minutes were either confidential or their circulation was restricted.  This put the whole scene into a proper context.  The representation formed part of frank discussions between Government members and the Kuk members of the working groups and could not properly be regarded as a representation or promise made by the Government to the Kuk, the persons whom the Kuk represented (whoever they might be) or the public.  The minutes were expressly not for publication generally.  As such, whatever representations were made during the meetings cannot justifiably form the basis for giving rise to a “legitimate expectation” on the part of the applicant.

60. For these reasons, I was not disposed to grant leave for extending the time for the Respondent’s Notice to be served.

61. The Respondent’s Notice and the application to adduce the fresh evidence struck me as a last-ditch effort, an ambush almost, to salvage what had been anticipated as a failing opposition to this appeal arising from View Point.  By an affirmation of Tam Che Wai Raymond, Senior Government Counsel, made on 25 October 2004, minutes of the Resumption Working Group of the Land Policy Liaison Committee meeting held on 22 January 1996 are exhibited.  These minutes show that the Lands Department informed the Heung Yee Kuk members present at the meeting that “after very careful consideration, the Administration had come to the view that there was insufficient justification for repealing section 12(c)”, and explanations were also given.  A letter dated 5 March 1996 was also sent by the Lands Department to the Chairman and Vice-Chairman of the Heung Yee Kuk formally informing them of the Government’s view that there was insufficient justification for repealing section 12(c), as already communicated to the Kuk members present at that meeting.

62. I consider that the second condition of Ladd v Marshall [1954] 1 WLR 1489 is not satisfied.  Even though the minutes of the two meetings held in 1982 and 1986 are true, as implicitly admitted by the affirmation of Mr Tam, it does not have an important influence on the outcome of the case because the “agreement” to repeal section 12(c) was conditional and the pre-condition had apparently not been fulfilled, whilst the minutes of 1996 meeting show that “agreement” had, to say the least, been retracted.  In my judgment, the proposed fresh evidence as contained in the 1982 and 1986 minutes is not sufficient to lay a foundation for giving rise to a “legitimate expectation” as a defence to the Government’s reliance upon section 12(c).

63. Mr Bray’s affidavit does not touch upon the issue of legitimate expectation.  He merely talks about the “derisory” compensation payable for land resumed by the Government because of the operation of section 12(c), as opposed to “a more realistic cash compensation, on an ex gratia basis, calculated in relation to actual prices paid in private sales” and that “resumptions strictly based on section 12(c) had never been enforced on a substantial scale”.  It seems to me that this last deposed to fact, as well as the discussion of the Government’s “agreement” to have section 12(c) repealed in the minutes of the earlier two meetings, serves to demonstrate that the interpretation of section 12(c) by the CFA in Yin Shuen, and by this court in View Point, tallied with the understanding of the Government officials as well as members of the Kuk who participated in those meetings.  And once again, apart from the fact that Mr Bray was approached “recently”, there has been no explanation as to why his affidavit came so late, when the judgment in View Point was given in December 2003, and the materials purportedly supporting the argument of “legitimate expectation” were available in early January 2004.

64. Moreover, permitting fresh evidence to be admitted would be prejudicial to the respondent, without providing it a full opportunity to respond by way of evidence.  If time be given to the respondent to file further evidence, it would place this court into the invidious position of having to hear the evidence adduced by both sides as at first instance with the corresponding difficulty, and possibly embarrassment, of having three judges to decide on factual disputes, and perhaps even upon the credibility of witnesses.   

65. The proposed Respondent’s Notice also attempts to rely on article 105 of the Basic Law, the relevant parts of which read:

“The Hong Kong Special Administrative Region shall, in accordance with law, protect the right of individuals and legal persons to the acquisition, use, disposal and inheritance of property and their right to compensation for lawful deprivation of their property.

Such compensation shall correspond to the real value of the property concerned at the time and shall be freely convertible and paid without undue delay.” 

66. The point that section 12(c) is inconsistent with article 105 had been raised by the applicants before the CFA in Yin Shuen, which dismissed the point by stating:

“56.  Two points call for comment.  First, art. 105 does not require compensation to be based on the open market value of the property concerned but on its ‘real value’.  In general, property is worth what it will fetch, and its open market value reflects its real value.  But as the Courts of Hong Kong have repeatedly emphasised, this is not always the case.  Sometimes the market is prepared to pay a speculative price which exceeds the true value of the property and reflects an element for which the resuming authority ought not be required to pay.  There is nothing in art. 105 which requires it to do so.

57.  Secondly, compensation is only required to be paid for ‘the property concerned’, that is to say for the interest acquired.  In the present case, that means for the land for the duration of the Crown lease and subject to the user restrictions in the lease.  The right to exploit the development potential of the land by using it as building land was not disposed of by the Crown and remains the property of the Government for which it ought not to be required to pay.  If the claimant’s argument is correct, then the Government’s practice in charging a full premium on modification of the terms of a Crown lease is also open to challenge under the Basic Law; and I do not consider that that is right.”

67. Looked at in the round, this court had no hesitation in refusing leave for the Respondent’s Notice to be admitted at such a late stage. 

Conclusion

68. For the foregoing reasons, I would allow the appeal and remit the assessment of compensation to be made by the Tribunal, differently constituted, which should take into account that the intrinsic value of the subject land should not include “zoning or planning benefits” as explained by this court in View Point, and in this judgment.  The Tribunal re-hearing this matter should also take into account the burden of proof of the parties as enunciated in View Point and this judgment.  

69. I would also make an order nisi that the applicant is to pay the costs here and below.

Hon Yuen JA:

70. I have had the benefit of reading in draft the judgment of the Vice-President and agree with it and the order that he proposes to make.  I would only add the following observations.

71. I am prepared to accept that in the “no-resumption world”, a valuer assessing the open market value of the land would give value for the factor that the land lies in a Residential (Group A)3 zone as that zoning would be of benefit in the development of the land as building land.  If, prior to resumption, the terms of the lease had already been modified to permit building on the land, the zoning benefit might well have enhanced the intrinsic value of building land.

72. However, the situation in the present case is that the lease had not been modified at the time of resumption, and the Court of Final Appeal has held that s.12(c) Lands Resumption Ordinance stipulates that in assessing compensation, the expectancy or probability of obtaining a modification of the terms of the lease is not to be taken into account.  Consequently, as far as use of the land is concerned, compensation is to be assessed on the basis of agricultural, or non-building, use. 

73. The question then is: what benefit could residential zoning give to agricultural or non-building land?  None has been shown.  The benefit of that zoning is parasitic upon the development of the land as building land.  If the land cannot be used as building land at the time of resumption, and no account can be taken of the prospect of a modification to develop it into building land, I do not see the relevance of residential zoning in the compensation exercise.  If the land use does not (and cannot be modified to) allow building, then the fact that the land lies in a residential zone does not produce any value.  Consequently, if a similar zoning benefit has featured in the valuation of any comparables, then an adjustment would be necessary to exclude the value added by reason of this feature, because for the resumed land, it is a benefit that cannot be realized without a modification, and (as resumption has occurred before modification) it is a “benefit” that can never be realized.

74. Mr Yu SC for the applicant submitted that the effect of the Court of Final Appeal’s judgment was that s.12(c) had the effect of only excluding compensation for the speculative element in the open market value of land, which he refers to as “development potential”.  I do not think that is correct.  As I understand the judgment of the Court of Final Appeal, the reference to the speculative element explained the need for s.12(c), because it might have been contended as a matter of pure analysis that there would be no difference in the net value of the land before and after modification since the Government charges a full premium.  The Court of Final Appeal explained how in reality, a speculative element remains even though the Government charges a full premium.

75. Mr Yu then asked this court to draw a dividing line between “intrinsic value” and “development potential” and submitted that the former belonged to the lessee and the latter belonged to the Government.  He submitted that a zoning benefit fell within “intrinsic value” and thus should be included in the valuation exercise for compensation.

76. With respect to Mr Yu, I do not think that the valuation exercise can be as simple as he suggests.   First, the term “intrinsic value” is in my view best understood as meaning simply the value of the land with all its existing attributes - excluding of course any attributes of the lessee personally (e.g. the possession of a dairy licence as in Ching Chun Kau) - for which compensation is to be assessed subject to s.12. 

77. Further and more importantly, I think one has to consider the nature of the feature in question to see if it would - or would not - give rise to value.  A qualitative analysis of the feature is required in the valuation.  In my view, if the value of the feature (residential zoning) is parasitic upon modification, the mere fact that it is an attribute of the land (rather than of the lessee personally) does not entitle the applicant to compensation.  The wide words used in s.12(c) are: “no compensation shall be given in respect of any expectancy or probability of the grant ... by the Government ... of any ... permission, ... or permit whatsoever”.  It would in my view be artificial to award compensation for residential zoning of non-building land, as there could never be residences on land which cannot be built upon, and no willing purchaser on the open market would give value for the zoning itself.

Hon Stone J:

78. I have read in draft, and agree with, the judgment of the Vice President and that of Madam Justice Yuen.  I too agree with the order proposed.

79. I would add that in the context of the argument about ‘legitimate expectation’ it seems extraordinary for it to be argued that the content of confidential meetings in the early and mid-1980’s, about which the respondent knew nothing until some twenty years later, can be said to found a ‘legitimate expectation’, as now belatedly is claimed.

80. It is self-evident in this case that there can have been no element of ‘detrimental reliance’ which, at least in the vast majority of cases, in my view must be a present and necessary element when the court is prepared to find unfairness in the defeating of a ‘legitimate expectation’.