PENNY’S BAY INVESTMENT COMPANY LTD v. DIRECTOR OF LANDS

LDMR 23/1999

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS REFERENCE APPLICATION NO. 23 OF 1999

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LDMR 1/2005

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS REFERENCE APPLICATION NO. 1 OF 2005

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D E C I S I O N

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Background

1. This is the cross application for leave to appeal by the parties in this case against the judgment handed down by this Tribunal on 15 October 2014 (“Main Judgment”).  We shall adopt the same abbreviations used in the Main Judgment.

2. In the Main Judgment, we have found that Lot 22 can be used for shipbuilding and mid-stream operation before the extinguishment of its marine rights (“Before Value”).  The Before Value is enhanced by the prospect of the Container Terminal Scheme going ahead.  It is also our finding that after the marine rights being extinguished with more certainty that the Container Terminal Scheme would go ahead, Lot 22 can be used for industrial purpose, which is the highest and best use when compared to the mid-stream use (“After Value”).

3. It is our conclusion that since the Before Value is in excess of the After Value, the applicant is entitled to receive compensation for the extinguishment of its marine rights in the sum of $10,952,500.

Leave to Appeal

4. Section 11(2) of the Lands Tribunal Ordinance (“LTO”) provides that :

“Subject to section 11AA and the provisions of any Ordinance relating to appeals from the Tribunal, any party to proceedings before the Tribunal may appeal to the Court of Appeal against a judgment, order or decision of the Tribunal on the ground that such judgment, order or decision is erroneous in point of law.”

5. Section 11AA(6) of the LTO provides that :

“(6) Leave to appeal shall not be granted unless the Tribunal, the Court of Appeal or the registrar hearing the application for leave is satisfied that –

(a) the appeal has a reasonable prospect of success; or

(b) there is some other reason in the interests of justice why the appeal should be heard.”

6. Reasonable prospect of success involves the notion that the prospects of succeeding must be “reasonable” and therefore more than “fanciful” without having to be “probable” (SMSE v KL [2009] 4 HKLRD 125 at §17).  And if a finding of facts “is perverse or irrational; or there was no evidence to support it, or it was made by reference to irrelevant factors or without regard to relevant factors”, the decision may be quashed (Edwards v Bairstow [1956] AC 14).

7. Bearing in mind these legal principles, we shall deal with each ground of appeal raised by the parties in seriatim.

Applicant’s Application

Ground 1

8. This Tribunal erred in adopting inconsistent approach in reflecting the uncertainty as to whether the Container Terminal Scheme might proceed in the Before and After Value.  Whilst the Tribunal accepted that there is a risk factor in the Before Value to reflect the uncertainty inherent in the factual expectation as to whether the Container Terminal Scheme might proceed at all, it had failed to do the same in the After Value when the Tribunal also acknowledged that there was still remained a degree of uncertainty for the scheme not proceeding at all. 

9. The Tribunal erred in law in holding that artificial assumption about marine rights had any impact, or even significant impact upon the factual expectation as to whether the Container Terminal Scheme might proceed at all.

10. It is beyond argument that this Tribunal had not applied the same formula to reflect the uncertainty inherent in the factual expectation as to whether the Container Terminal Scheme would proceed in the Before and After Value.  This Tribunal has given 50% discount to the hope value in the Before Value to reflect the uncertainty whilst there is none awarded in the After Value.  This is because as one can see from Section F.(7) and H.(4) to H.(6) of the Main Judgment, it is the finding of this Tribunal that since the marine access had already extinguished, the only uncertainty in the After Value is the delay involved, hence there is no hope value to be reflected in the After Value and the formula adopted in the Before Value is not applicable.

11. Having said so, we do agree that Ground 1 raised by the applicant did involve a legal issue as to whether the artificial legal assumption about marine rights had any impact upon the factual expectation which cannot be said to be without any reasonable prospect of success.  Leave to appeal should be granted under this ground.

Ground 2

12. The Tribunal’s findings that the Container Terminal Scheme and its associated roadworks were expected to proceed is perverse.  The Tribunal failed to take into account the industry view back in 1995 which is not in dispute but instead based on the pure speculation that all the factors relied upon by the applicant should have been considered by the Government before the proposal was first published in 1994 and that the Government and the Governor in Council should have already approved in principle to proceed with the Container Terminal Scheme.

13. The industry view had been considered by this Tribunal in §112-118 of the Main Judgment and the findings at §114 are not speculation but are reasonable inferences to be drawn from the fact that the proposal was being published and authorized.  We do not agree that such a finding of fact is in any way perverse and amounts to an error in law.

14. We found the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard. Leave to appeal under this ground is refused.

Ground 3 and 4

15. The Tribunal failed to give full and proper recognition to the intent and effect of the Before-assumption about marine rights in the Before Value and adopted the value of Industrial Development which wholly dependent upon the existence of road access, ie a Before Value for the Godown/Industrial Area based on a new use without marine access, contrary to its own findings in §26 of the Main Judgment. 

16. The Tribunal has not considered or discussed at all or in any details the applicant’s case on its Scenario 3 which assessed the Godown/Industrial Area with marine access and reflect the enhancement value arising from the anticipated road access brought by the expectation of road access without detracting from the Before-assumption about marine rights.

17. The Tribunal has already considered the new use of Lot 22 with marine access (i.e. mid-stream use value) but the Tribunal has also considered the expectation which the prospective purchaser would have in mind to reflect the enhancement value if the OZP and the Container Terminal Scheme were to proceed.

18. In the formula P=[(H-L)xR]+L adopted at §408 of the Main Judgment,  L is the value of the subject property for mid-stream use with marine access whilst the value of the subject property with the expectation of the Container Terminal Scheme going ahead is H. The difference between L and H reflects the enhancement value resulted from the anticipated road access brought by the Container Terminal Scheme.

19. Having said so, we do agree that Ground 3-4 raised by the applicant did involve a legal issue as to the interpretation of the CFA Judgment in assessing the enhancement value which cannot be said to be without any reasonable prospect of success.  Leave to appeal should be granted under this ground.

Ground 5

20. The Tribunal erred in its adjustment made to the NKML Comparables in relation to the Lease Term Adjustment by first performing a time adjustment and then applying the 1995 Yield.  This has in effect applied statistical data which were indices for capital values to the leases.

21. Yield reflects the investment return in the market.  A 1993 Yield does not reflect the situation in 1995 so a time adjustment must be performed before applying the 1995 Yield.  We found the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard.  Leave to appeal under this ground is refused. 

Ground 6

22. The Tribunal failed to consider the rental value suggested by the applicant’s industry expert Kong.

23. It is not a must that this Tribunal has to accept the rental value suggested by Kong when such evidence is not being challenged by the respondent.  This Tribunal has adopted the unit rate derived from the STT Comparables which are transaction prices that the Tribunal found to be more reliable.

24. We found the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard. Leave to appeal under this ground is refused. 

Ground 7

25. The Tribunal erred in making a -35% adjustment on account of Height Restriction when the evidence showed that the operation contemplated on Lot 22 would be on the basis of ‘3 tiers’ and the Tribunal wrongly assumed or speculated that having a higher height restriction would be of substantial benefit.

26. This attacks our findings at §243-245 of the Main Judgment.  As found at §244, AW also admitted that 8 layers of containers are possible for the storage of empty containers.  With the height restriction, Lot 22 must be disadvantaged in the storage of, at least, empty containers.  With a higher height restrictions allowed, it allows more flexibility for the operators and can be considered a benefit.

27. We found this is just a matter of opinion and the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard.  Leave to appeal under this ground is refused. 

Ground 8

28. The Tribunal erred in making a -20% adjustment on account of Quay Length based on the wrong assumption or speculation that having a more than optimal quay length would be of substantial benefit.  The fact that the quay length can be split into 3 should not be a disadvantage which warranted a downward adjustment.

29. We found this is just a matter of opinion and the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard.  Leave to appeal under this ground is refused. 

Ground 9

30. The Tribunal erred in making a -41% adjustment on account of Location and an additional -15% adjustment on account of Remoteness which is wrong in principle and against the evidence.

31. We found this is just a matter of opinion and the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard.  Leave to appeal under this ground is refused. 

Ground 10 and 11

32. The Tribunal erred in finding that the KCTL Comparables are appropriate comparables ignoring all matters and contentions raised by the applicant.  And the Tribunal proceeded on the erroneous basis that the only difference between Lot 22 and the KCTL Comparables was location, lack of road access and time.  The Tribunal also speculated that the KCTL Comparables were conducted on the basis that the bidder would consider that marine rights would continue undisturbed for the entire 50 year lease.

33. We found this is just a matter of opinion and the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard.  Leave to appeal under this ground is refused. 

Ground 12

34. The Tribunal erred in rejecting the evidence of Kong on a false premise and speculated there were hidden reasons rendering Lot 22 unattractive and wrongly assumed that the owners of Lot 22 were keen to lease out the lot.

35. As stated in §331 of the Main Judgment, this Tribunal came to the conclusion that there were hidden reason because “the owner was willing to accept a rental substantially below the rental of $8/sq ft which Kong believed to be the market rental”. This is a reasonable inference to be drawn from the evidence.  And the fact that there were the China Merchants’ offer to lease the Lot and upon the falling through of it, another tenancy agreement with the CLP, this Tribunal is entitled to come to the conclusion that the owners were keen to lease out the Lot.

36. We found the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard. Leave to appeal under this ground is refused.

Ground 13

37. The Tribunal erred in not valuing the Non-Shipbuilding Area at a rate at least no less than the properly adjusted rate for the Shipbuilding Area since the Non-Shipbuilding Area is found to be capable for use for ship repairing purpose.

38. By the Non-Shipbuilding Area, this is termed as the Industrial/Godown Area of Lot 22 in the Main Judgment.  It is never the parties’ case that the Industrial/Godown Area can be used for ship-repairing purpose and should be valued as such.  The applicant and the respondent have contended that the optimum use of the Industrial/Godown Area should be for mid-stream and industrial developments respectively.  In any event, it is the finding of this Tribunal that the optimal use of the Industrial/Godown Area is mid-stream use.

39. Furthermore, it is our findings at §176 of the Main Judgment that most of the comparables were less than 64,583.4 sq ft and it is unlikely and unreasonable that the entire remaining lot of over 1,725,000 sq ft at Lot 22 will be used for ship repairing purpose.  Taking into account the marketability and the unreasonably large in area for ship repairing use, it is not reasonable to apply the rate for the Shipbuilding Area on the remaining portion of Lot 22.

40. We found the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard. Leave to appeal under this ground is refused.

Ground 14

41. The Tribunal erred in failing to take into account the set up costs for covered or warehoused storage based on the wrong assumption that there was no evidence adduced.

42. It is not the finding of this Tribunal that the set up costs need not be taken into account because there was no evidence in this regard.  Instead it is the finding of this Tribunal at §228 of the Main Judgment that the mid-stream use is for open storage so no covered or warehouse storage is involved, hence no set up costs is required to be considered. 

43. We found this is just a matter of opinion and the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard.  Leave to appeal under this ground is refused.

Respondent’s Application

Ground 1

44. This Tribunal erred in failing to make allowance for a period of demolition of unauthorized structures on Lot 22 based on the finding that such demolition could take place whilst construction work commenced on the unbuilt areas of Lot 22.  However, this is inconsistent with the findings of the Tribunal that the construction of industrial structure on the unbuilt area was not expected to commence for some years after the valuation date.  Under such circumstances, it does not make sense to say that there should be no period allowed for the demolition.

45. Since it is the finding by this Tribunal that there should be a deferment of 6 years in the construction work to commence, no additional period of demolition is required.

46. We found this is just a matter of opinion and the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard.  Leave to appeal under this ground is refused.

Ground 2

47. The Tribunal erred in adopting a wrong figure in the assessment of demolition costs.  Whilst the Tribunal accepted the estimate of demolition costs of $11,091,798 suggested by Mok (the respondent’s expert), the Tribunal had adopted a figure of $8,049,200 without any apparent addition for professional fees or development profit.

48. The Tribunal admitted that we made a mistake for not accounting for professional fees of 6% and development profit of 30% in §345 and leave to appeal should be granted.

49. If professional fee and development profit is taken into account, the value of Lot 22 for mid-stream use will be as follow:

(a)	Shipyard Value 285,000 sq ft @751.6/sq ft	$214,206,000
(b)	Mid-stream Use 1,725,000 sq ft @200/sq ft	$345,000,000
		$559,206,000
Less	Demolition Costs (excluding canteen as only illegal structures would be demolished)	$11,091,798
	$8,049,200
	Fee @6%                             x1.06
	Development Profit @30%    x1.3
		$548,114,202
		Say $548,114,000

50. For the benefit of the appeal hearing, the following figures in the respective paragraphs of the Main Judgment stated below would also be affected:

§408 So, applying the assessed figures to the formula:

P =  [(H-L) x R] + L

P =  [($841,828,000 - $548,114,000) x 0.5] + $548,114,000

P =  $293,714,000 x 0.5 + $548,114,000

P =  $694,971,000

The Before Value of Lot 22 is $694,971,000.

§480  The amount of compensation is the amount of Before Valuation in excess of After Valuation.

Before Valuation	$694,971,000
After Valuation	$685,540,000
Amount of Compensation	$9,431,000

Ground 3

51. The Tribunal erred in making no downward adjustment for the limited use within the shipyard area based on the incorrect factual premise that ship repairing use as well as godown use can occur at the same time at the remaining portion of Lot 22.

52. Ship repairing and godown uses are permitted uses under the lease condition.  Taking into account the huge size of the remaining portion of Lot 22, the Tribunal cannot exclude the possibility that both uses can practically occur at the same time. As the optimum use of the site was found to be mid-stream uses for open storage , it is possible that the occupier can use part of the remaining portion which is adjacent to shipbuilding area with marine frontage for ship repairing, if necessary.   With this flexibility for using portion of the remaining lot for ship repairing use, whenever necessary, we do not think there is a need to make any adjustment for the limited use within the Shipyard Area.   

53. We found this is just a matter of opinion and the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard.  Leave to appeal under this ground is refused.

Ground 4

54. The Tribunal erred in finding that the stacking of containers in the open air as part of their transit was a godown use in line with Special Condition 3(a).

55. We accept this ground involved the interpretation of the terms of the Special Condition which is a point of law and leave to appeal should be given for the same to be considered by the Court of Appeal.

Ground 5

56. The Tribunal erred in adopting a unit rate of $1,200/sq ft for open storage use whilst it is found by AW (applicant’s expert) and accepted by the Tribunal that the godown use is for open storage use and the unit rate for such use should be $1,000 only.

57. As we have found in §227-229 of the Main Judgment, we should consider the optimum use and this explains why we pick the higher figure of $1,200/sq ft in the assessment.

58. We found this is just a matter of opinion and the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard.  Leave to appeal under this ground is refused.

Ground 6

59. The Tribunal erred in failing to make a downward adjustment of 20% on the length of quay for the KCTL Comparables which, like Lot 22, had quay lengths which were satisfactory by reference to the optimum standard.

60. The Tribunal agreed that adjustment should be made on the length of quay for the KCTL comparables to reflect the optimum standard.  As the valuers of both parties have not touched on the quay length of KCTL comparables, the Tribunal has not clearly stated in the judgment that a downward adjustment should be made on KCTL479 and an upward adjustment should be made on KCTL481 to reflect the optimum standard of quay length.  Actually, on the Layout Plan (page 2145-2147 of Bundle E1), the quay length of KCTL479 is better than that of Lot 22, so a downward adjustment is needed.  However, the shape and quay length of KCTL481 is poorer than that of Lot 22, an upward adjustment is needed. 

61. To be clear, the adjustment table on §305 of the MainJudgment should be as follows:

Lot No	Adjusted Unit Rate	Adjustment	Revised unit rate
KCTL481	159	+30%	207
KCTL479	240	-20%	192

62. The average unit rate was about $199.5/sq ft.

63. The Tribunal agreed that the judgment on this section is unclear, however this does not affect the resultant figure of unit rate adopted for assessment of the KCTL Comparables. 

64. We found this is just a matter of opinion and the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard.  Leave to appeal under this ground is refused.

Ground 7

65. The Tribunal erred in failing to make equivalent deferment of 2 years to the KCTL Comparables for the time needed to prepare the ground at Lot 22 for godown use as it had done for the STT Comparables.

66. This Tribunal agreed that there should be no deferment for the STT Comparables as well as for the KCTL Comparables.  The Tribunal has clearly stated in §229 of the Main Judgment that the STT comparables are for open storage purpose and AW has also not reflected any superstructure to be erected.  As no superstructure is erected and no deferment is necessary for STTs, the Tribunal, as stated in §229, took the highest value as the optimum development (i.e. $1,200/sq ft).   

67. Since the KCTL Comparables are being found to be the appropriate comparables, the fact that no deferment made cannot be considered an error and would not affect the end figure found by this Tribunal.

68. We found this is just a matter of opinion and the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard.  Leave to appeal under this ground is refused.

Ground 8

69. The Tribunal erred in finding that there will be a compensation for the resumption of land for the construction of a road to link Penny’s Bay area and the proposed North Lantau highway.  Such a finding is inconsistent with the declaration made by the CFA that in the Before Value, it is based on the assumption that Lot 22 enjoyed access to the sea as it had done up to the valuation date.  With the marine rights remained, no container port would or could have been built and no road would have been constructed.

70. We agree that this is plainly a point of law depending on the construction and application of the CFA Judgment and we cannot say that there is no reasonable prospect of success in the appeal.  So leave should be granted in this regard.

Ground 9

71. The Tribunal erred in adopting the higher value between a combined shipyard and godown value on the assumption that the Container Terminal Scheme did go ahead and on the assumption that it did not go ahead.  Given the uncertainty between the 2 different scenarios, the finding that the purchaser would pitch his bid on the higher value is erroneous without basis.

72. The term, Market Value, as defined by the International Valuation Standard and followed by the Hong Kong Institute of Surveyors is “the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion.”  Whether the prospective purchaser would pitch his bid on the higher value or on the lower value depends on whether it is a buyer market or a seller market.  As at 1995, the market was going up and the vendor had a larger bargaining power and it is unlikely that the owner would accept a lower value between 2 different scenarios.  That is why the Tribunal has decided to take the higher value between a combined shipyard and godown value. 

73. We found this is just a matter of opinion and the applicant had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard.  Leave to appeal under this ground is therefore refused.

Ground 10

74. The Tribunal erred in failing to reflect the existence of the sub-tenancy of Cheoy Lee Shipyards Limited in the valuation of the mid-stream use on the assumption that the Container Terminal Scheme would go ahead whilst such factor had been taken into account in the assessment of the mid-stream use value on the assumption that the Container Terminal Scheme would not go ahead.

75. The Tribunal stated clearly at §343 of the Main Judgment that assuming the Container Terminal Scheme goes ahead, the area would be developed in accordance with the OZP. Therefore, in our assessment, we have taken account of the area to be resumed for road purpose, the area zoned for GI/C etc.  The most important thing is the marine frontage should be resumed for Container Terminal Scheme and the sub-tenancy should be terminated and a 3-month notice is required.

76. However, if the Container Terminal Scheme does not go ahead as stated in §345 of the Main Judgment, the sub-tenant can continue to operate its shipbuilding use on the shipyard area and the remaining portion will be used for mid-stream purpose.  Therefore, no deferment is required.  This explains why there had been a different treatment as suggested by the respondent.

77. We found the respondent had failed to establish any reasonable prospect of success or there is any reason in the interests of justice that this ground should be heard. Leave to appeal under this ground is refused.

Ground 11

78. The Respondent contended that for the reasons submitted above, the value of Lot 22 for mid-stream use found at §345 of the Main Judgment is faulted.

79. This is just a catch all ground and the reasons behind this had already been dealt with above under respective grounds.

Ground 12

80. The Tribunal erred in its finding of the ultimate Before Value based on a radical misconception of law and was fundamentally contrary to the declaration stated by the CFA, namely the Before Value found is based primarily on the prospect of an industrial development of the non-shipyard area of Lot 22 with a 50% discount for the uncertainty. 

81. The reason for our findings is based on the requirement stated in the CFA Judgment that prospect of new uses of the land would have entered into the valuation both with and without access to the sea. 

82. Having said so, we agree that this point involved a point of law which cannot be said that there is no reasonable prospect of success on appeal, so leave should be granted.

Ground 13

83. The Tribunal erred in finding that in the After Value, the reclamation work and the Container Terminal Scheme or the construction of the linked road had not even commenced. This is inconsistent with the CFA Judgment which declared that the reclamation must be taken to have been completed by the valuation date.  The Tribunal also erred in speculating as to the timing and the uncertainty of the Container Terminal Scheme which is specifically disallowed in the CFA Judgment (at §41).

84. We agree that this involved a point of law concerning the interpretation of the CFA Judgment and one which may arguably have a reasonable prospect of success, hence leave should be granted. 

Conclusion

85. According to Section 11AA(5) of the LTO, “leave to appeal may be granted in respect of a particular issue arising out of the judgment, order or decision”.  Hence, we made the following orders :

(a) Leave to appeal is granted to the applicant on Ground 1, 3 and 4 stated in the Grounds of Appeal whilst leave to appeal on all other grounds are dismissed. 

(b) Leave to appeal is granted to the respondent on Ground 2, 4, 8, 12 and 13 stated in the Grounds of Appeal whilst leave to appeal on all other grounds are dismissed.

(c) Costs of this application for leave to appeal be costs in the cause of the appeal.