Chang Lan Sheng v. Attorney General

CACV000033/1967

IN THE SUPREME COURT OF HONG KONG

APPELLATE JURISDICTION

CIVIL APPEAL NO.33 OF 1967.

On Appeal from O.J. Action No.1382 of 1965)

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Coram: Rigby, S.P.J., Blair-Kerr, J. & Huggins, J.

Date of Judgment: 25 September 1968

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JUDGMENT

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Huggins, J:

1. I have had the advantage of reading the judgment of Mr. Justice Blair-Kerr and I entirely agree with the conclusion which he has reached. It is not an altogether easy case and it has not been made any easier by the prolixity of some of the arguments addressed to us on behalf of the respondent. I shall refer only to those points which appear to me to relate to the substance of the matter.

2. At the outset I ought perhaps to say a word on the vexed question which was aired when we were asked to inspect a file produced by a Government official. The learned trial judge declined to look at the file, but the respondent submitted that he was wrong. The basis upon which the courts should act when it is suggested that disclosure of official papers is contrary to the best interests of the state has now at last been established by Conway v. Rimmer⁽¹⁾, but difficulties may yet arise in deciding just how far the court's right of inspection should be carried. I have always been of the view that the courts must be jealous to ensure that their duty to give justice to a subject is not made impossible of fulfilment by reason of some wholly unjustified fear of damage to the interests of the state. But one must not be unrealistic and overlook the fact that the power of the courts to do justice is interdependent upon the ability of the Executive to perform its functions efficiently. The efficient carrying out of the executive function requires that a degree of secrecy should sometimes be afforded. I would not wish to go further than is necessary for the decision of this particular case and I see possible difficulties of definition if one grants a blanket protection to classes of documents such as "cabinet papers". At one point in his speech Lord Reid referred to "cabinet minutes", which is a rather more limited phrase. We have the affidavit of the Colonial Secretary and the certificate therein referred to indicates that the file in question here contains minutes of the nearest equivalent in Hong Kong to the British cabinet. The file may also contain other papers of an entirely different character and it might be that in another case we would have to inspect a file to see which of its contents we thought should be disclosed. Here, however, it has been made clear to us that the purpose of the application for disclosure is to reveal what decisions have been made affecting the land policy of the Government and the reasons for those decisions. I do not think we should consent to such disclosure and it follows that I think it unnecessary to inspect the file at all.

3. The first question which arises on the argument of counsel for the respondent is: has any fine or premium been demanded for the new lease to which the respondent was entitled upon his exercise of his option? With respect this seems to me to be putting the cart before the horse. He relied upon such cases as Miramar Hotel & Investment Co. Ltd. v. The Collector of Stamp Revenue⁽²⁾, where it was held that the court is not bound by the label which the parties attached to a sum of money which is payable under a lease. In my view those cases do not assist us in deciding the present case and they really beg the question which we have to answer. This lease expressly provides that no premium is to be paid for renewal and the Director was clearly well aware of that fact. He was concerned solely with the fixing of the rent and that is all he purports to have done. If the figure is excessive, so that the Collector of Stamp Revenue might have assessed duty on the basis that the premium was being paid in addition to rent (as in the Miramar Hotel Case⁽²⁾), it does not follow that what has been fixed is not a rent - a periodic payment reserved from the land demised: it merely means that the rent has not been fixed in accordance with the terms of the lease. It is clear (nor has the respondent sought to suggest otherwise) that the figure of $60,764 is greatly in excess of the zone Crown rent current at the material time. The zone Crown rent was fixed in 1952 and counsel for the respondent concedes that it would not be unreasonable for the Director to assess a rent which made allowance for the general increase in rents in the Colony since that date: he said that even a 100% increase might not have been opposed, but certainly it should be no more. If he be right then the rent fixed cannot be justified and it must be reduced. To say that the figure fixed must then include "a hidden premium" is to confuse the real issue.

4. It seems to me that there are two basic questions which have to be answered:

5. It has been urged upon us, as it was urged upon the trial judge, that the rent has not been fixed by the Director at all and that even if it was fixed by him it was not fairly and impartially fixed. The learned judge rejected these arguments and I think he was right. What the Director did was to adopt a formula for the assessment of rent, that formula containing an unknown, namely the estimated price per square foot of the land (or "premium") if it were offered on the open market for a term of 75 years at the zone Crown rent. This unknown was fixed by the Director, who then left the actual calculation to someone else. It seems to me unrealistic to say that the Director must himself do the calculation: certum est quod certum reddi potest.

6. But was the rent fairly and impartially fixed? First counsel for the respondent say that the Director wrongfully failed to hear representations on behalf of the respondent and second they say that he allowed matters of Government policy to colour his assessment. It has been submitted that the Director was, for the purposes of fixing this rent, either a "quasi-arbitrator" or a valuer and that whichever he was it was incumbent upon him in the circumstances to invite representations from the respondent. It is not, I think, contested that if the Director was an arbitrator or "quasi-arbitrator" he was under a duty to hear both sides, nor is it suggested that he did hear both sides. The appellant contends that the position of a person nominated in a contract to fix part of the consideration is not that of an arbitrator at all, since an arbitrator is a person appointed to do what otherwise the courts might have to do, namely to decide a dispute which has arisen between the parties. As I understand him Mr. Bernacchi for the respondent did not say that there was a dispute between the parties which would call for the services of an arbitrator, but rather that the Director must, since he himself says he is not an expert valuer, necessarily have been an arbitrator. I am well satisfied that the Director was not appointed as an arbitrator and that he was never intended to act as such. Undoubtedly the parties could have contracted for a reasonable rent and have provided that in the event of their failing to agree the Director should act as arbitrator. That is not what they did: they provided that the Director should fix the rent and no dispute arose or could have arisen until he had purported to do so. That does not, in my view, put him in the same class as a certifying architect (see Chambers v. Goldthorpe⁽³⁾) for the architect has to judge whether work has been done in accordance with the building contract. Whether or not the test for distinguishing between a valuer and an arbitrator as stated at 39 Halsbury (3rd ed.) 4 (para.6) is absolute, it is in my judgment sufficient for our purposes:

"...... an arbitrator is appointed to determine a certain matter, such as the price of goods, for the purpose of settling a dispute which has arisen between the parties, but ... a valuer is appointed to determine such a matter before any dispute has arisen and with the object of preventing any dispute."

I do not find it helpful to review the decided cases which fall on each side of the line. The fact that the Director was not an expert valuer might lead one to expect that he was not intended to act as a valuer, but I find nothing in the lease which leads me to think that the parties ever contemplated that the Director should act as an arbitrator, i.e. that he should exercise functions of a judicial character. It is true that the Director is not an expert valuer in the sense that he has a professional qualification as a valuer, but by virtue of his office he is a person who might be better equipped than most to fix a fair rent for premises leased from the Crown. If it be necessary to classify him at all I would think that he should be regarded as a valuer. If that be correct then this court should not interfere with his assessment unless it can be shown to be wrong: see per Lord Justice Denning in Dean v. Prince⁽⁴⁾. The learned trial judge thought that there was an error in the Director's mode of assessment but rejected the contention that he acted improperly and, indeed, found as a fact that he "acted quite impartially in fixing what he considered to be a fair and reasonable rent". The whole purpose was to leave the fixing of the rent in the hands of a man who was thought to be in a particularly good position to know what was a fair rent and it must have been intended that he should take advantage of that position, and of the experience, information and advice which it afforded him, in making his determination. The proviso did not refer to a fair and impartial fixing of the rent as indicating that there should be something in the nature of a judicial enquiry nor did it bar the Director from taking such advice as he might think necessary. Mr. Sanguinetti conceded that he was entitled to take advice but not, he said, from one of the parties. If the parties had appointed a professional man in private practice to fix the rent I cannot see that objection could properly have been taken to his consulting his assistants. I do not see that any different principle should apply where the parties choose to appoint a person who, although employed by one of them, is of such high standing that they are obviously satisfied he will be able to show that independence which will be necessary for the making of a fair decision. It is not the "fault" of the Director of Public Works that his assistants were also employed by one of the parties to the lease nor did the fact that they were so employed disentitle him from asking their advice.

7. I think a distinction must be drawn between what the Director did and hearing evidence or argument. I agree that even if he was a valuer he should not hear one side only, but that principle must be applied with due consideration to all the circumstances and in particular to the manifest intention of the parties. While sharing the doubts expressed by the learned judge as to the wisdom of appointing a Government official to fix the rent I am not persuaded that the Director did anything improper. Equally I cannot see why, once it is accepted that the Director was entitled to take advice, it should then follow that he was bound to accept any advice which was given to him, especially when there is reason to believe that the advisers may have been persuaded that their figures were not entirely logical in view of the other values in the vicinity. We are not here concerned with construing a statute but a business document and on a proper interpretation I think the words "fairly and impartially" were nothing more than an emphasis that the Director was to act for both sides: it is possible to be partial even in making a determination of "the fair and reasonable rental value", but the Director was to be impartial. I do not agree that for him to take into account what was the Government's policy was for him to act partially. Indeed, in circumstances where Government policy plays so large a part in determining the level of rents it seems to me that he would not have been doing his duty had he not considered it in so far as he thought it was material. It has not been shown that he gave undue weight to it.

8. That leaves the second of the basic questions, can the figure arrived at by the Director be said to be the fair and reasonable value of the ground at the date of the renewal? I attach no significance to the undoubted fact that the valuation was made several months before the actual date of the renewal, because if any error resulted (and none has been shown to have resulted) I have no doubt that it would have benefited rather than prejudiced the respondent.

9. Stripped of all the complications which it has been sought to engraft upon the case the issue is a short if difficult one, whether the parties who entered into the lease of 1936 intended that the rent which was to be assessed by the Director upon any exercise of the option to renew was to be a restricted "Crown" rent as contended for by the respondent. It is not in dispute that for upwards of a century the Government had made grants of land in return for payments based on the formula "high premium, low rent", a phrase which, during the course of the hearing, appeared to take on the nature of a magic incantation. In recent years Crown rents have been "zoned" but the change of name to "zone Crown rent" has not introduced any change in general policy because all along Crown rents have been based on an assessment of the relative demands for land in various parts of the Colony. From time to time there has been an all round increase in the range of Crown rents but at no time have they approached what would be economic rents for the land. It is argued for the respondents that when the parties contracted for re-assessment of the "rent" it was their manifest intention to refer to a comparable, restricted rent and not to an economic rent. Thus the respondent's argument rests upon a continuation of the Government policy enshrined in the formula "high premium, low rent" and requires us to construe the proviso in the lease as implying that the parties intended to contract on the basis that the policy would be continued. That requires that we should read the proviso as though the words requiring the assessment by the Director of Public Works of a rent which would represent "the fair and reasonable rental value of the ground at the date of ... renewal" meant the assessment of what is most easily described as a new "zone Crown rent". If that was really the intention it seems to me that the parties could very easily have said so in unmistakable terms. Granted that the policy of the Government in relation to land values had not changed for over a century it is a policy which, as it appears from the evidence, has been under fire for some time. Suppose that between 1936 and 1963 the policy had been changed, premiums abolished and zone Crown rents assessed at what were thought to be economic rents. Could the respondent still have contended that he was entitled to a "low" rent or would he have been harnessed to the zone Crown rent, as he now claims? He could have claimed the "low" rent only if it was an implied term of the lease that the Government policy would not be changed in this way and I cannot believe the Crown ever intended so to bind itself. If the policy had been changed what would have been the yard stick for assessing the "low" rent when there would ex hypothesi be no comparable rents? The respondent can, of course, say that since the Government policy has not in fact changed this question need not be answered, but I think the possibility that such difficulties might have arisen may properly be borne in mind when considering whether the parties are likely to have contemplated an assessment on the lines contended for by the respondent and I am not persuaded that they did so.

10. What the Director was trying to do was to assess the rent which could have been obtained in the open market. He could not do this by reference to similar rents owing to the established practice relating to grants of land in the Colony. Under that practice purchasers compete by bidding a lump sum for the grant of a term at the zone Crown rent. The Director therefore sought to reach an equivalent figure to the market rent by estimating what a willing purchaser would have paid for a similar term at the zone Crown rent and then adding the zone Crown rent. The respondent says that thereby he has introduced into the rent what is in effect a hidden premium, which is contrary to the spirit of the lease. This contention is based on the fact that when the new lease was granted in 1936 a premium of $1,238.38 was paid. It is common ground that the premium was assessed in accordance with the established Government policy and that the grantee was so informed. It is also admitted by the appellant that the premium was assessed on the basis that the option for a renewal of the lease would be exercised. That the respondent submits, therefore, is that, having regard to the history of Crown grants, the premium then paid was in effect the purchase price of a lease of 102 years: thus when the rent came to be fixed in 1963 it should have been fixed on the basis that the land was encumbered with a sitting tenant whereas in fact the Director based his calculation on what would have been obtained had the land been put up for auction in the usual way. I find no justification for this criticism and it seems to me that it disregards the very nature of an option to renew. Naturally the degree of possibility, or even probability, that an option will be exercised is likely to affect the price which a grantee will be willing to pay for it and where the probability is high the grantor may well, as here, treat it as a certainty. However, the method the Crown chose to adopt in fixing the 1936 premium seems to me irrelevant: it may have been a good method or a bad method but what the premium was being paid for remained the same. In this case there necessarily existed a possibility, however slight, that the grantee would not exercise the option. Consequently, the premium could at most represent only (a) a capitalized part of the rent for 27 years and (b) the price of the option. Mr. Bernacchi seemed to suggest that the Director was treating the 1936 premium as containing both possible elements but, while I do not think this is material, in my view there is nothing to show that it represents anything more than the mere price of the option. Indeed, it was perhaps not the whole price of the option, for the rent for the remaining 27 years of the original 75 year term was also increased. "The fair and reasonable rental value of the ground" must, as I see it, be construed as meaning precisely what it says and the provision that the grant must be "without payment of any fine or premium" is satisfied if no lump sum is payable at the time of renewal in diminution of the rent. The fact that in the long run the plaintiff will be no better off than someone who had to "purchase" a term of 75 years from 1963 instead of exercising an option to renew seems to me irrelevant, nor can the rent fixed fairly be said to include "a hidden premium".

11. As I have said, the Director's calculation was based on what he thought the purchaser of a term of 75 years would have been willing to pay in 1963. It was contended that in arriving at his starting figure the Director did not consider matters which he ought to have considered, but I am not persuaded that he failed to consider anything which was relevant. The fact that a premium was paid in 1936 for the option to renew could not affect the rent which a purchaser would pay for a subsequent lease, nor could expenditure on rates, water, electricity or taxes affect the estimate of potential rental income. The fact that there was a building covenant in the lease could not, having regard to the terms of that covenant, affect the matter. It was not a restrictive covenant and clearly anyone contemplating taking a lease of this land in 1963 would do so with an eye to its potential for development. It would in my view have been quite wrong for the Director to assess a rent on assumption that the character of the area had not changed and would not change further.

12. The only atter which gave me any real anxiety was the argument that the Director's valuation included interest upon interest, with the result that he reached an improperly inflated figure. As I now understand it the fallacy here is in not appreciating the significance of Parry's Valuation Tables. I accept that these are designed to provide an annual sum made up of (a) 5% simple interest on the capital sum (a rate of interest which the learned judge appears to have found was a reasonable basis for valuation purposes) and (b) a sinking fund which will yield the capital sum over the relevant period at compound interest. If that be correct it seems to me that there is nothing inflated about the figure produced by use of the Tables. Mr. Bernacchi says that the Crown will get back twice. A sinking fund is designed to protect the landlord against the destruction of a wasting asset such as buildings and it is clear that in the present case we are concerned only with the rental value of the ground. The argument seems to be, therefore, that the valuation is in some way based upon the value of the buildings. That would be so if the calculation were not based on the "purchase price" of a leasehold rather than the purchase price of a freehold. The figure of $1,234,859.- to which the multiplier is applied is the premium which a willing "purchaser" would have paid for the term of 75 years, at the end of which the land would equally have reverted to the Crown. The rent in fact fixed by the Director was slightly less than the figure obtained by direct application of the Tables using 5% as the rate of simple interest, but that was due to the fact that the Tables are based on the assumption that the annual payment is to be made in arrears whereas under this lease the rent was payable half yearly in advance.

13. The learned judge construed the proviso as requiring that the rent to be fixed should be "restricted" to a fair and reasonable rental and concluded that that restricted him from fixing the best rent which the landlord could obtain in the open market, that is the full market rental value". He referred to John Kay Ltd. v. Kay⁽⁵⁾ and I hope I am not misconstruing the judgment when I say that it seems to me the Solicitor General is right when he says the judge thought himself bound by that case to hold that the rent fixed must be a rent below the open market rent. What he said was that "in all the circumstances, as was thought in Kay's Case⁽⁵⁾, that (sic) a reasonable rent, would be some rent below the open market rent". However, that case seems to me, with respect, to be dealing with an entirely different type of assessment and to be of no real assistance to us: the assumption is being made that the intention of the parties in including the words which we have been called upon to construe was the same as the intention of legislature in enacting s.12 of the Leasehold Property (Temporary Provisions) Act 1951. This is an assumption which does not appear to me to be justified but rather to be contrary to the indications contained in the proviso.

14. Mr. Sanguinetti has submitted that the assessment is wrong because on the face of it the Director has added the zone Crown rent as an element in the final figure: it is argued that the market value should include the zone Crown rent. Here again, it seems to me, one must not lose sight of the difficulty that the Director found himself in in having to base his whole calculation on what a willing "purchaser" would have paid in 1963, i.e. a zone Crown rent and a premium.

15. Mr. Justice Blair-Kerr has gone at length into the method of calculation adopted by the Director and the attacks that have been made upon it. I do not think any useful purpose would be served by my reproducing all the figures and it is sufficient for me to say that I am not persuaded the rent fixed by the Director was unfair or unreasonable. Accordingly I agree that the appeal should be allowed.

25th September 1968.

(1) (1968) 1 All E.R. 874

(2) (1961) H.K.L.R. 673.

(3) (1901) 1 K.B.D. 624

(4) (1954) 1 All E.R. 749, 758.

(5) (1952) 1 All E.R. 813

IN THE SUPREME COURT OF HONG KONG

(APPELLATE JURISDICTION)

CIVIL APPEAL NO. 33 OF 1967

(On appeal from Original Jurisdiction Action No. 1382 of 1965)

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Coram: Rigby, Blair-Kerr & Huggins, JJ.

Date of Judgment: 25 September 1968

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JUDGMENT

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Rigby, S.P.J.:

16. I have read, re-read, and read yet again, the judgments prepared by my brothers Blair-Kerr and Huggins, JJ for the purposes of this appeal. I agree with the conclusions they have reached that this appeal should be allowed and I do not consider that any useful purpose would be served by my delivering a further supplementary judgment to the lengthy and comprehensive judgment of Blair-Kerr, J.

IN THE SUPREME COURT OF HONG KONG

(Appellate Jurisdiction)

CIVIL APPEAL NO. 33 OF 1967

(On appeal from Original Jurisdiction Action No. 1382 of 1965)

Date of Judgment: 25 September 1968

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JUDGMENT

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Blair-Kerr J:

17. On 3rd October 1888, the Crown demised to one John D. Humphreys, 105,618 square feet of land bounded on three sides by Granville Road, Carnarvon Road and Cameron Road, Kowloon, and registered in the Land Office as Kowloon Inland Lot No. 539, for the term of 75 years commencing from 24th June 1888, the consideration being a premium of $528 which was paid upon the execution of the lease and an annual rent of $484. In the course of time this lot was split up into a number of sections; and in 1936, the lessees of the various sections came to some arrangement with Government whereby Government re-entered on the land and issued a new lease to the lessee of each section. Some of the lessees accepted Government's offer of a "non-renewable" 75-year lease as from 24th June 1888; the remainder asked for, and were given, a similar lease but "renewable", that is to say it contained a clause giving the lessee the option to renew the lease for a further term of 75 years.

18. The land with which we are concerned in this case is section Q, an area of 3,293 square feet situated at the junction of Carnarvon Road and Salisbury Avenue. This section is now registered as Kowloon Inland Lot No.3793. In 1924 the plaintiff's predecessor in title, Madam Maria Chu de Yau, purchased the residue of the term for $35000. In 1936 she surrendered her lease of section Q to the Crown; and she was given a new lease for seventy five years as from 24th June 1888, with an option to renew for a further term of 75 years. It is not in dispute that she paid a premium of $1,238.38 although the lease makes no mention of this fact. The rent was increased from $19.74 per annum to $76 per annum for the remaining twenty seven years of the term. The proviso in the lease which gave Madam Maria Chu de Yau the option to renew, reads:-

"... it is hereby further agreed and declared that the lessee shall, on the expiration of the term hereby granted be entitled to a renewed lease of the premises hereby expressed to be demised for a further term of seventy five years without payment of any fine or premium therefor and at the rent hereinafter mentioned; and that His said Majesty will at the request and cost of the said lessee grant unto him or them on the expiration of the term hereby granted a new lease of the said premises for the term of seventy five years at such rent as shall be fairly and impartially fixed by (the Director of Public Works) as the fair and reasonable rental value of the ground at the date of such renewal ...........".

19. On 27th January 1948, Madam Chu de Yau in consideration of the sum of $80,000 assigned to the plaintiff the residue of the term of 75 years due to expire on 23rd June 1963 together with the right of renewal. The plaintiff exercised his option in February 1963; but it was not till 2nd December 1964 that he was informed that the rent in respect of the renewed lease had been fixed at $60,764 per annum.

20. Briefly stated, the plaintiff's case is that the Director of Public Works (hereinafter referred to as "the Director") has not fixed the rent in accordance with the proviso in the 1936 lease; that although the figure of $60,764 is labelled rent, it in fact includes an element of hidden "premium"; that this is contrary to the terms of the proviso which stipulates that no fine or premium shall be payable; that the rent fixed is not fair and reasonable because, according to the plaintiff, the premium which Madam Chu de Yau paid was calculated on the basis that the option to renew would be exercised in 1936 and that in fact the premium of $1,238.38 paid by her was capitalised rent in respect of the whole period of 102 years which the parties had in contemplation in 1936; that the Director has not acted impartially; that, in any event, the figure of $60,764 per annum is exorbitantly high; and that, in all the circumstances, the Director ought to have fixed the rent at $378 per annum.

21. Some aspects of the history of land alienation in Hong Kong which appear to be pertiment as a background to the issues raised in this case are touched upon in two documents which were admitted in evidence in the court below. The first is a memorandum dated 7th August 1956 by a Mr. R.C. Clarke who was then Assistant Superintendent of Crown Lands. This memorandum reads in part:-

"This memorandum deals with the disposal of Crown land and provides information showing how the practice arose of disposing of land at a low or practically nominal Crown rent ....................................................................................................................Royal Instructions ...... dated 5th April 1843 with reference to the disposable of Crown lands direct as follows:-

'And it is Our further Will and Pleasure that no such lands shall be sold or let except at public auctions; and that at every such public auction, the lands to be then sold or let, be put up at a reserved, or minimum price equal to the fair reasonable price and value or annual rent thereof.'

...........................................................................................................

22. The second document is a memorandum written some years ago by a Mr. Lyons, at present Senior Estate Surveyor in the Crown Lands and Surveys Office, which is a sub-department of the Public Works Department. Mr. Lyons' memorandum reads in part:-

23. It is notorious that the population of Hong Kong has increased from approximately 1.5 million in 1949 to just under 4 millions in 1966. Owing to the scarcity of accommodation in the urban area, land values have greatly increased; and Building Regulations have been relaxed to enable developers to erect multi-storey blocks. The "boom" in land development in the late 1950's and early 1960's may be judged from the following figures taken from the Government Annual Report for 1967. At page 330, there is a statement of the total amounts of premium received by Government upon "sales" of 75-year leases of Crown land. The figures do not include sales in respect of which premia were paid by instalments. Starting from 1946, the approximate figures are:-

It is estimated (p.292 of the Report) that premia for the year 1967-68 will total $75 million.

24. On 8th February 1965, there was a "run" on certain banks in Hong Kong. Public confidence in those banks was shaken to the core. A financial crisis ensued. Land values dropped considerably; and such values have not yet returned to their 1963 level. Mr. Lyons said that whereas the premium payable in 1963 on a 75-year lease of KIL 3793 was estimated at $375 per square foot, the corresponding figure in February 1967 (when he gave evidence in the court below) would be between $325 and $350 per square foot.

25. This is the background to the issues raised in the appeal now before this Court.

26. On the 6th June 1936, the Land Office wrote to Madam Chu De Yau's agent informing him of the terms on which Government proposed to grant the new lease. The letter reads in part:-

27. Madam Chu de Yau's agent asked for a copy of the Valuation and Resumption Officer's Report; and this was forwarded to him by the Land Officer on 8th July, 1936. So far as applicable to Section Q of K.I.L. 539, it reads:-

= $76 p.a. - - - -

28. This method of calculation was, according to Mr. Lyons, apparently based on a method of calculation set out in a minute written by a Mr. Kirk on 2nd April, 1926 in a Public Works Department file. This latter minute deals with a purely hypothetical case; and it reads:-

29. When exactly the expression "Zone Crown Rent" was introduced is not clear; but, according to the evidence, many years ago it was decided by the Governor-in-Council that the Colony should be divided into zones and that there should be a standard Crown Rent in respect of all land within each zone. For example in Tsimshatsui, Kowloon (the area within which the plaintiff's property is situated) the Zone Crown Rent in 1936 was $1,000 per acre. In 1948, the figure was raised to $5,000 per acre; and that is the Zone Crown Rent for land in Tsimshatsui to-day. According to a map produced in evidence, the present Zone Crown Rent for Yaumati is $4,000 per acre; and for Mongkok it is $3,000 per acre; it is $2,000 per acre for King's Park, and $1,000 for Kowloon Tong; and so on.

30. There appears to be no doubt at all that the figures for Zone Crown Rent fixed by the Governor-in-Council from time to time bear no relation at all to the total consideration in respect of a 'sale' of a 75-year lease of land in Hong Kong. For example there was produced in evidence a copy of the Particulars and Conditions of Sale in respect of a sale of a lease for 75 years of 12,740 square feet in To Kwa Wan Reclamation, Kowloon by public auction on 13th March 1967. According to the map, the Zone Crown Rent for To Kwa Wan is $1,600 per acre. As regards this particular sale the upset price was $855,000. The Zone Crown rent is $468 per annum. What has been happening for many years is that 75-year leases of Crown land have been put up for auction at an upset or minimum "price" or "premium". This sum is invariably paid at the time of the sale; and the only apparent reason for retaining the system whereby a lessee, having paid by far the greater portion of the consideration for his lease at the commencement of the term, continues to make the very small annual payments labelled "Zone Crown Rent" is so that the essential feature of the leasehold system may be maintained.

31. Certain minutes from a Public Works Department file relating to the fixing of the rental value of the plaintiff's land in 1963 were produced. They read as follows:-

M.1

M.2

M.4

M.5

M.6

M.7

32. On the 10th August 1964, the Superintendent Crown Lands & Surveys Office forwarded to the plaintiff's solicitors a memorandum which conveyed the Director's decision that in the case of all "renewable" leases if the lessee opted for a second term the reassessed rental value of the ground would be calculated on the basis of the full market value of the land decapitalised over the whole renewal period of 75 years with interest at 5% per annum. However, the lessee was given a further option to limit re-development to an agreed level, in which case the total consideration for the renewed term would be calculated on some figure below the full market value. The memorandum reads in part:-

"At the time of expiry of the term granted by a 75-year renewable lease, the lessee, under the terms of his lease, has a right to renewal for a further term of 75 years at a reassessed Crown rent which, as stated in such lease, 'shall, in the opinion of the Director of Public Works, be a fair and reasonable rent for the ground.' The Director of Public Works, in accordance with legal advice, has related such reassessment of Crown Rent to the full market value of the land (excluding buildings) as restricted by the terms of the lease, at the date of renewal. The reassessed annual Crown rent is therefore computed on the basis of such full market value decapitalised over the whole renewal period of 75 years with interest at 5% per annum, to which an addition is made in respect of the zone Crown rent applicable to the area of the land subject to the renewal."

33. The memorandum proceeded to offer the plaintiff a choice of:

and the memorandum continued thus:-

34. By letter dated 14th October 1964 to the Superintendent, Crown Lands and Surveys, the plaintiff's solicitors enquired what would be the amount of rent payable under (a) the legal option and (b) a regrant restricting the lot to its present development, in view of the fact that the plaintiff had only recently erected a new building on the premises. On 2nd December 1964, the Superintendent replied as follows:-

".....................................as your clients have only just completed the redevelopment of the lot, the restricted and the full Crown rent will be the same and the figure is $60,764 per annum."

35. The plaintiff had redeveloped the land since 1948. In 1952, he demolished the old two-storey building and erected ...(illegible) a five-storey building at a cost of $250,000; and in 1961/62 he submitted plans to the Building Authority for a ten-storey building. Demolition of the five-storey building was completed shortly before 23rd June 1963. The erection of the ten-storey building was completed in 1964 at a cost of $830,000; and the occupation permit issued by the Building Authority is dated 5th June 1964.

36. On 23rd October 1964, the Superintendent of Crown Lands and Surveys asked the Commissioner of Rating & Valuation to supply details of the rents passing in respect of the plaintiff's property (which had now been re-numbered "45-47 Carnarvon Road"); and on 18th November 1964, the Commissioner of Rating & Valuation replied thus:-

From the above, it would appear that there are at least two shops on the ground floor of the building, one of which had been let at $15,000 per month on 10th July 1964. It also appears that the whole of the first floor had been let on 10th July for $8,000 per month; that the remaining floors are residential; and that on each floor there are three flats (24 in all) of which 5 had been let on 10th July 1964. The rents from such portions of the building as had been let totalled slightly under $27,000 per month. Assuming that the other shop could be let for $15,000 per month and that the remaining flats (B on the 2nd floor, A, B, and C on the 3rd, 4th and 5th floors, A on the 6th floor, A and C on the 7th floor, and A, B & C on the 8th and 9th floors) had been let at approximately the rents of the flats which had been let, the total rents from the entire Building - if maintained at the July 1964 level and on the basis of full occupation - would appear to amount to $56,700. If there are 3 shops on the ground floor, and each were let at $15,000 per month, the total rent for the whole building would be $71,700.

37. The question of how much rent the building was capable of producing was not fully explored at the trial. The plaintiff gave some evidence that his monthly rents had never exceeded $25,000; and no witnesses were called from the Rating & Valuation Department to testify to the state of the letting in February 1967 when the trial of this action commenced. If we assume that the plaintiff would receive on an average $25,000 per month by way of rent from his tenants, he would be receiving four times as much rent as his landlord is now asking him to pay (i.e. receiving $300,000 per annum and paying his landlord $60,764). If we take $36,000 as the average monthly rent received by him ($432,000 per year) he would then be receiving seven times as much rent as his landlord is now asking him to pay. And if he were to receive $56,700 per month from his tenants ($680,000 per annum) he would be receiving eleven times as much rent as his landlord is now asking him to pay.

38. The plaintiff's submission is that throughout the whole period of the renewed lease (1963-2038) the rent which he should pay to the Crown is $378 per annum. If, during those years, he were to receive $300,000 per annum from his tenants, he would be receiving 800 times as much rent as he were be paying to his landlord. And if he were to receive from his tenants $680,000 per year and the Crown rent were fixed at $578 per year, the ratio would be 1800:1.

39. Reverting to the position in 1936, according to the Report by the Valuation & Resumption Officer, the Crown lessee's gross income from the land was then estimated to be $1,440 per annum. The Crown rent being then $76 per annum, the ratio appears to have been 19:1.

40. Mr. Lyons was one of the valuation experts on whose advice the Director relied. In regard to the assessment of $60,764, Mr. Lyons said in evidence:-

Mr. Lyons then proceeded to consider the figure of $60,764 from the plaintiff's point of view. He said:-

41. In cross-examination, Mr. Lyons was asked why he made no allowance in his valuation for rates, water charges, electricity, profits tax, etc. His answer was:

"They have nothing to do with it. Electricity is not a question of valuation. It is purely for the lessee. The question of rates and similar charges I had assumed were paid by tenants. As far as business profits tax is concerned, tax, being a general imposition by Government, is never considered as a deduction to arrive at a correct valuation.

42. One of the many arguments advanced on behalf of the plaintiff in the court below, and on this appeal, was that the Director (Mr. A.M.J. Wright) did not personally fix the rental value of the ground as required by the proviso to the lease. I do not think that there is anything in this point. The trial judge accepted Mr. Lyons' evidence that he and the Director fixed the rent together. The memorandum sent to the plaintiff under cover of the letter of 10th August, 1964 indicates that the formula for computing reassessed rental value from the capital value of the lease was a general one. It was not worked out for the purpose of computing the reassessed rent of the lease of K.I.L. 3793 only. It is clear from the letter that in all similar circumstances in which the rent has to be reassessed this will be done on the basis of the full market value decapitalised over the whole renewal period of 75 years with interest at 5% per annum. There is no doubt at all that Mr. Wright had approved of this formula on the advice of his experts; and in dealing with the renewal of the plaintiff's lease he fixed the capital value at $375 per square foot. The mere fact that in doing so he overruled the advice of his subordinates thus necessitating a further routine mathematical calculation does not make any material difference. In my view Mr. Wright personally fixed the rental value of the ground.

43. Of course, counsel for the plaintiff's main submission was that if the Director did fix the rental value of the ground, he did not do so in accordance with the proviso in the 1936 lease which states that the lessee shall be entitled to a renewed lease of 75 years "without payment of any fine or premium". Counsel argued that the words "fine or premium" as used in the proviso mean the "price" for which a 75-year lease would be sold to a successful bidder at a public auction (which is by far the greater proportion of the total consideration for a 75-year lease); that in 1936 the parties acted on the assumption that the lessee, or his successor-in-title, would, in 1963, opt for a further term of 75 years; and that the plaintiff having opted for a second term, is now entitled to a new 75-year lease in respect of the period 1963-2038, the only consideration being the nominal Zone Crown rent - at present $378 per annum.

44. Counsel placed great reliance on the report by the Valuation and Resumption Officer, particularly on the fact that in working out what he called "the renewal premium", this officer calculated the value of "the proposed lease" using a multiplier apparently obtained from valuation tables and by taking "the years purchase at 7% for, say, perpetuity". From that, counsel argues that the parties must have contracted on the basis that the option would be exercised and that the sum of $1,238.38 paid by Madam Chu De Yau in 1936 was the whole consideration for the second term of 75-years other than the nominal Zone Crown rent; or putting it another way, that in 1936 the lessee "bought" a lease of the land for 102 years (i.e. from 1936-2038) - not merely the residue of the term expiring in 1963 (27 years) with an option to renew.

45. I am in some doubt as to how far this court is at liberty to look at minutes written on Public Works Department files and letters written in 1925 and 1936 by persons not called as witnesses in order to interpret the meaning of the words "without fine or premium" in the proviso of the 1936 lease. The Crown gave very full discovery. The Solicitor General's attitude was that the court might make such use of all these minutes and letters as it thought fit in determining whether the rental value of the ground as fixed by the Director was a fair and reasonable one. The attitude of Counsel for the plaintiff was that it was open to the Court to look at what he described as "the antecedent circumstances" for any purpose. This seemed to me to be tantamount to suggesting that the terms of the contract between the parties should be interpreted in the light of statements made in those minutes and letters which stood untested in any way by the viva voce evidence of their authors. Indeed, that the minutes should really form part of the contract between the parties.

46. I have the gravest doubts as to whether it is open to this court to approach this question in the way suggested by counsel for the plaintiff. Even if we felt we were free to go outside the written agreement between the parties, we have no knowledge of the qualifications of the persons who wrote the minutes on the Public Works Department files or the qualifications of the 1936 Valuation and Resumption Officer. We have no reason to think that the minutes were communicated to Madam Chu De Yau. All we know is that the Valuation and Resumption Officer's report was sent to her agent. She is now an old lady of 95, permanently hospitalised; and a short statement signed by her in St. Teresa's hospital was placed before the judge. In it she states:-

"............... the Crown ............... offered a new Crown Lease .................... with a right of renewal for a further term of 75 years ......... It was a condition of the said offer that I be required to pay a premium and a revised higher Crown rent .......... "

She does not say what she understood by the word "premium" or for precisely what purpose she paid it.

47. In 1936, the parties could not have known whether the lessee would, or would not, opt for a second term; and I see no reason why we should assume that the parties acted on the assumption that the option would be exercised in 1963. The proviso gave the lessee an option to renew; and it means what it says. The lessee could either opt for a further term, or not, as he chose.

48. Furthermore, I am not prepared to deduce from the method of calculation adopted by the Valuation and Resumption Officer that the parties had in mind a period of 102 years and not 27 years. As the learned Solicitor General said, the 1936 lease could have been drawn differently, it could have been for the term of 102 years with "a premium" calculated on that basis and with an option to the lessee to surrender his lease in, say, 1963. If the lease had been in that form, the plaintiff could have logically argued as he has done in this case. It is sufficient to say that the lease was not drawn in that way.

49. Clearly what the parties had in mind in 1936 when the sum of $1,238.38 was calculated was the option to renew. An option is a thing of value to a lessee. For one thing he knows that if he exercises his option there is no question of his having to rebid for a further term at a public auction; and there is no danger of any buildings on the land reverting to the Crown in accordance with the terms of the lease. But how was the value of such a thing to be quantified? One cannot look into the future. In 1936 no one could have foretold what such an option would be worth to the lessee in 1963. It may be that the method of quantification of the option, adopted by persons of whose qualifications as valuers we know nothing, may seem a little strange; but to those who had the job to do, it is not unreasonable to suppose that some calculation based on a profit factor must have seemed to them as logical as any.

50. In my view no part of the consideration for the lease for the period 1963-2038, for which the lessee might in 1963 have opted, was included in the sum of $1,238.38 paid by Madam Chu De Yau in 1936. This sum of $1,238.38 was the price of the option, and nothing more.

51. For a hundred years or more leases of land have been "sold" by public auction in Hong Kong; and people have come to think of such leases in terms of what "price" they would have to pay for them at a public auction. The principal factor determining the price is public demand; and, in 1963, when the Director fixed the capital value of a 75-year lease of K.I.L.3793 at $375 per square foot, he did so because he was well aware of the prices paid in recent years by willing purchasers of leases of land in all districts of Hong Kong. He also considered the value of leases of neighbouring land in the Tsim Sha Tsui area at that time; and $375 per square foot was his estimate of what a willing purchaser would have paid for a 75-year lease if the land had been auctioned in 1963. The plaintiff has not challenged the correctness of the Director's assessment of the capital value in 1963 of a 75-year lease of KIL.3793, namely, $375 per square foot or $1,234,875 for the whole area of 3,293 square feet.

52. Now, if a purchaser of a lease of land for 75 years would have been willing, at the commencement of the term, to pay a purchase price based on $375 per square foot, he would obviously have been prepared to pay more if the total consideration had been spread over the 75-year term and he had been required to pay only an annual periodic sum. In other words the lease is worth more to him than $375 per square foot in terms of hard cash if spread over 75 years. I think the learned Solicitor General put the point very succinctly thus:-

"The correct way of looking at this matter is to say to oneself: 'What annual periodic payment would the willing lessee have offered in competition with the willing purchaser of the assignment who was prepared to offer $375 per square foot?' A willing lessee would know very well that a landlord would be only too happy to take that lump sum, viz $375 per square foot, and put it to work; and therefore the willing lessee must offer by way of rent each year a figure which shall compensate the landlord for not getting the lump sum. If the willing lessee finds that $375 per square foot is the market value of the assignment of the Crown lease, i.e. someone in the open market is prepared to buy at that figure, then the figure for rent must have an interest figure added on in order that the rental value be of the same equivalent value."

If the willing purchaser of the 75-year lease in 1963 would have been prepared to pay $1,234,875 at the commencement of the lease, the willing lessee who wished to pay a fixed annual rent and who wished to compete with the willing purchaser, would take into consideration that the landlord would not allow this $1,234,875 to lie idle. The lessee would assume that the landlord ...(illegible) put the money to use at once, and for the whole period of 75 years, that is to say, that the landlord would invest the money. Mr. Lyons' calculations assume an interest return of 5% - a very modest figure for Hong Kong; and $1,234,875 invested at 5% would earn annually $61,744 simple interest - which is $980 per year more than the annual reassessed rent actually fixed by the Director.

53. Counsel for the plaintiff submitted that the figure $60,764 contained an element of compound interest. He went on to state that $1 million, if invested at compound interest, would accumulate to $45 million at the end of 74 years. I must confess I failed to understand what relevance this second statement had to the problem now before the court. The question is not whether Government could take the purchase price payable at the commencement of the term, put it in a Bank, and allow it to accumulate to $45 million in 74 years. The question is: Is $60,764 a fair and reasonable annual rent of the ground assuming that the capital value of $1,234,875 would be due and payable at the commencement of the term? Of course, the whole of Mr. Lyons' calculations depend on whether one views the $1,234,875 as being the 'price' which would be due and payable at the commencement of the term if a lease of 75 years had been auctioned, or whether one regards the $1,234,875 as being largely an advance of rent. If one takes the latter view, Government should logically pay the lessee interest on the rent so advanced by him. But, having regard to the history of the leasehold system as it has developed in Hongkong and in particular to the fact that for over a hundred years leases of land have been "sold" in exactly the same way as a grant in perpetuity, it seems to me that one must consider the 'price' or 'premium' as something due and payable by the lessee the moment the hammer fall at the auction.

54. On the assumption that that is the correct view, I do not see how Mr. Lyons' figures can be challenged. Parry's valuation tables, which are constantly used by valuation experts, are apparently designed to provide an annual sum which is made up of two elements:-

Therefore the multiplier provided by Parry's tables is made up of:-

55. These figures can be checked in this way. The reciprocal of 0.0013216 is obtained by dividing it into 1; and this produces 756.654. Using this reciprocal as a multiplier on the annual "sinking fund" figure of $1,632, produces the original capital sum of $1,234,859.

56. From these figures, it seems that by far the greater proportion of interest earned is simple interest i.e. always assuming that the $1,234,859, being the capital value in 1963 of a 75 year lease of K.I.L. 3793 is regarded as being due and payable at the commencement of the term.

57. In regard to Mr. Lyons' estimate of the net rental value of the building which could be erected on the land counsel for the plaintiff submitted that $36,000 per month was too high a figure. Apart from the letter of 18th November, 1964 from the Commissioner of Rating and Valuation, the only evidence on this aspect was given by the plaintiff himself in regard to his lettings over a short per iod. It is not clear whether the learned judge even accepted this evidence; but, in my view, it is immaterial to this case whether he did so or not. It seems to me that potential earnings from land cannot depend upon the oral evidence of individual lessees in regard to their alleged actual earnings. If the plaintiff had chosen not to develop the land at all, that is his privilege. The Director was concerned with the potential value of the land, not the actual earnings as alleged by the plaintiff. In any event, it does not appear that the two experts called by the plaintiff considered that $36,000 was an unreasonable figure; and if anything may be deduced from the letter of 18th November, 1964 from the Commissioner of Rating and Valuation, Mr. Lyons' estimate of $36,000 appears to be on the conservative side.

58. One point in Mr. Lyons' calculations seems to call for scrutiny. He says:-

".............. the lessee must provide for an annual sinking fund on the capital he has invested in the land and this sinking fund taken at 5% compound interest amounts to $1,732 per annum, which deducted from the actual income quoted leaves the lessee $317,505. Thus on an investment of $1,310,000 the lessee can expect a return of $317,500 per annum after allowing for a sinking fund to recoup his capital at the end of the term, and for payment of the proposed rent. This is a return of 24.2% which cannot be considered unreasonable by any means."

A return of 24.2% on an investment is a handsome return. On the other hand, if the words "...............a sinking fund to recoup his capital at the end of the term" that the sinking fund is worked out on the basis that the plaintiff will get the capital invested by him back in 75 years, I do not think that this would appeal to any developer in Hong Kong today. It was put to Mr. Lyons that land developers expected to get their capital back in 5 years; and his answer was: "My own figure is 10 - 12 years". It would appear therefore that his calculations were actually made on that basis, although in calculating his estimated gross capital value, he used a figure of 9 years purchase.

59. Even so, when I think of all the cases which have come before me over the last 22 years in Hong Kong, I would, myself, have put the figure much lower than 10 - 12 years. In 1950 I remember presiding over certain exemption applications in the Tenancy Tribunal in which the applicants, in describing how they proposed to redevelop the land, informed the Tribunal that they expected to get their capital back in 2 1/2 to 3 years. One developer, as I recall, told me that he expected to get back half his capital outlay in the form of "Key money" from the first set of tenants. I apprehend that "key money" is not something which is reported to the Commissioner of Rating and Valuation.

60. It depends, of course, how one interprets the expression "getting one's capital back". Not only does Mr. Lyons estimate that the plaintiff's annual profit on his investment will be 24.2%, but in arriving at the figure of $1,259,000 as the net value of the land, Mr. Lyons said that he had deducted $375,000 in respect of what he called "developers' risk and profit". Therefore, looking at Mr. Lyons' evidence as a whole, it would appear that the plaintiff will "get back his capital" in less than four years.

61. The plaintiff's next submission was this: that in fixing the rental value of the land, the Director failed to take into account that the building covenant in the 1936 lease required the lessees to maintain on the land a building of the value of $7,000 only; that in fixing the Crown Rent at $60,764 per annum, the Director was, in effect, forcing the plaintiff to erect a multi-storey building; and that it was wrong that, upon his opting for a renewal of the lease, the plaintiff should be forced to develop his land to the maximum.

62. I do not agree with this submission. The Director's duty was to fix the rental value of the land at the date of the renewal of the lease. The rental value of the land must be based on the profits which may be made out of the land; and in 1963, and indeed today, the profits which may be made out of land in the Tsim Sha Tsui district of Kowloon were, and are, very great. The covenant in the plaintiff's lease was not a factor to be considered in ascertaining such rental value; and furthermore the extent to which the plaintiff chooses to develop the land is entirely a matter for him.

63. Although the plaintiff did not dispute that the capital value of a 75-year lease of KIL 3793 in 1963 was $375 per square foot, he argued that the Director was precluded from valuing the land on this basis in April 1963 because in February 1963 the plaintiff had exercised his option and therefore he was in as good a position as if he had been given a lease for 75 years; that the land was therefore "encumbered"; that all that the Crown had to sell was the reversion; and that, in the circumstances, all the Crown was entitled to was the zone Crown rent plus a few hundred dollars for the reversion.

64. I do not think there is any substance in this argument. Undoubtedly the Crown would, at the end of the 75-year term, be entitled to the reversion; but they are entitled to the rental value of the land in the meantime; and, as I have already said, I think the Crown are correct in their submission that the proper way to look at the matter is to ask oneself what a willing purchaser would have been prepared to pay for an assignment of the lease in 1963. That establishes the value of the 75-year term. One should then ask oneself what a willing lessee would offer as rent in order to compete with a willing purchaser who has offered $1,234,875. In arguing thus, the Crown do not suggest that in April 1963 they were in a position to sell the lease to someone other than the plaintiff. But nevertheless in 1963 the Director's duty was to determine "the rental value of the ground," not the value of the reversion. The Crown had, during the term of the lease, the right to receive the rental value of the ground; and the rental value of the ground is based on the profits which can be made out of the ground. The learned judge deals with that argument in this way:-

"If one uses the value of land as a basis for fixing rent for a term of 75 years, the lease being from A to B it seems to me to be incorrect to say that the land has no value, except for its reversion, on account of it being encumbered for 75 years, and it is similar to saying that when A sells an apple to B, the price of the apple having to be fixed according to its value, that the apple has no value to A or anyone else because it has been sold to B, and that therefore A should get no price for the apple. On the other hand, if one says that the only value of the land (apart from its remote reversion) is the rent reserved under the lease, that is the very thing that one is trying to assess from the value of the land, and if it is said that the land (except for the remote reversion) has no value apart from the rent, the land being encumbered, no logical progress is made. If A leases land to B, and the rent is to be assessed based on the value of the land system, (sic.) in my opinion one has to take the value of the land as though it were not encumbered by the lease to B in order to work out the rent under the lease."

65. I agree.

66. As previously stated, the 105,618 square feet originally leased to John D. Humphreys in 1888 became split up into a number of sections; and in 1936 the lessees of those sections were each given a new lease. Some of the leases were "non-renewable"; and some were "renewable". The plaintiff and defendant each submitted a schedule giving details of a number of regrants and renewals in respect of properties in the Granville Road/ Carnarvon Road area, some of which formed part of the 1888 lease in favour of John D. Humphreys. The following is based on information contained in the plaintiff's schedule. The leases in question were all "non-renewable":-

67. The following are details extracted from the defendant's schedule. The leases of the properties included in this schedule all expired on 23rd June, 1963 and they were "renewable"; two of the lessees accepted the so-called "option (a)" contained in the memorandum of 10th August, 1964, that is to say they accepted the reassessed annual rent which had been calculated on the basis of full market value decapitalised over the whole renewal period of 75 years at 5% per annum. The remainder negotiated with Government, and they were given renewed terms based on the so-called "option (b)" in the memorandum, that is to say their rent was calculated on the understanding that development would be restricted to some agreed level short of full development. The defendant's schedule gives the following details;-

68. Some of the figures in the plaintiff's schedule are no indication of present-day land values in Tsimshatsui because the regrants were made over 10 years ago. Nevertheless, they do show how land values have increased in recent years:-

41/43 Carnarvon Road (K.I.L. 6394)

69. In this case the premium payable in 1953 works out at only $20 per square foot.

20B Carnarvon Road (K.I.L. 6709)

70. In this case the premium payable in 1956 works out at $34 per square foot; and payment of the $49,545 was spread over the whole period of the renewed lease; that is to say at the end of the term (viz. in the year 2031) the lessee shall have paid by way of premium $181,650.

39 Carnarvon Road (K.I.L. 7325)

71. In this case the $75,338 premium payable in 1957 works out at $52 per square foot. It is payable by 74 instalments of $3,684 per year. Therefore, by the year 2031 the lessee shall have paid by way of premium (and interest thereon) $272,616.

18/18A Carnarvon Road. (K.I.L. 7290)

72. In this case the $168,290 premium payable in 1957 works out at approximately $50 per square foot. It is payable by 75 instalments of $8,230 per annum. Therefore by the year 2032, the lessee shall have paid by way of premium (and interest thereon) $617,150.

51 Carnarvon Road (K.I.L. 7909)

73. In this case the $66,955 premium payable in 1958 works out at approximately $70 per square foot. It is payable by 80 instalments of $3,351 per year. Therefore by the year 2038, the lessee shall have paid $268,080 by way of premium and interest thereon.

16 Carnarvon Road (K.I.L. 7990)

74. In this case the $128,819 premium payable in 1960 works out at $94 per square foot. It is payable by 75 instalments of $6,299. Therefore, by the year 2035, the lessee shall have paid $472,425 by way of premium and interest thereon.

53 Carnarvon Road. (K.I.L. 8261)

75. In this case the $196,006 premium paid in 1962 works out at $185 per square foot.

59/61 Carnarvon Road. (K.I.L. 8645)

76. In this case the $389,204 premium payable in January 1963 works out at $165 per square foot. It is payable by 21 instalments of $40,804. Therefore by the year 1983 the lessee shall have paid $856,884, or approximately $350 per square foot.

55 Carnarvon Road (K.I.L. 8826)

77. In this case the $154,462 premium paid in 1963 works out at $188 per square foot.

57 Carnarvon Road (K.I.L. 9046)

78. In this case the $171,200 premium payable in 1963 works out at $206 per square foot. It is payable by 21 instalments of $17,890 per year. Therefore by the year 1983, the lessee shall have paid $375,690, or $450 per square foot.

7B and 7C Salisbury Avenue

79. In this case the $505,000 payable in 1964 works out at $136 per square foot. It is payable by 21 instalments of $52,975 per year. Therefore by 1985 the lessee shall have paid $1,112,475, or approximately $300 per square foot.

80. The reassessed annual rental value of the plaintiff's land, viz. $60,764 per annum, works out at $18.50 per square foot per annum. It would appear that there are only two properties in the defendant's schedule which are of any use for purposes of comparison, viz. 49 Carnarvon Road and 3 Salisbury Avenue. In each of these two cases, the lessee agreed to pay a reassessed monthly rental calculated from the full market value of the land. The remaining figures would appear to be useless for purposes of comparison with the rent fixed for the plaintiff's property. None of the lessees gave evidence; but it seems to be common ground that they agreed to restrict development in some way in accordance with the "option (b)" contained in the memorandum of 10th August 1964, and that each case was dealt with on its own merits. In those cases there was no question of fixing a full capital value of the land and then decapitalising in order to fix the annual rental.

81. As regards 3 Salisbury Avenue, the learned judge has found that this is a less valuable site. From the map, it appears to be situated in a side lane at the end of Salisbury Avenue. The evidence appears to support the view that, having regard to its location, $200 per square foot capital value (or $9.80 per square foot per annum decapitalised rental value) was fair and reasonable in the circumstances.

82. However, 49 Carnarvon Road may undoubtedly be used for purposes of comparison. This property is a corner property situated at the junction of Salisbury Avenue and Carnarvon Road on the North side of Salisbury Avenue. The plaintiff's property is directly opposite 49 Carnarvon Road on the south side of Salisbury Avenue; and it is also a corner property. Clearly, both properties are valuable. The capital value of a 75-year lease of 49 Carnarvon Road was also fixed at $375 per square foot; and the rental value of the ground was calculated by the same method as was adopted in the case of the plaintiff's property.

83. There was evidence that the developer who had built the multistorey block on No.49 Carnarvon Road had "sold" many of the flats before the building was completed; and it was submitted by Counsel for the plaintiff that he must have been under a certain amount of pressure to agree what he considered to be a very high rental value of the ground viz. $59,767. However, the question is whether the rental value of the ground is fair and reasonable - not whether the lessee disliked paying so much. It is not surprising that lessees who, for many years, had been paying a few dollars per month for valuable property would object to any attempt to bring the rental value of the ground up to some figure based on the full market value.

84. The original rents of the properties shown in the plaintiff's schedule appear to be ridiculously low by modern standards. It seems incredible today that for years and years the rent of each of these valuable properties was only a few dollars per month. But what is also very obvious from the plaintiff's schedule is that during the last 10 years lessees have been getting most favourable terms on certain regrants. Take 18/18A Carnarvon Road (KIL 7290) - an area of 3380 square feet at the junction of Cameron Road and Carnarvon Road. Upon the regrant of this property in October 1957, the premium worked out at $50 per square foot. If the plaintiff's property was worth $375 per square foot in 1963, it is difficult to see how 18/18A Carnarvon Road could possibly be worth less. 41/43 Carnarvon Road (KIL 6394) is a much smaller plot of land and its redevelopment potential is less. But it is also situated on the corner of Carnarvon Road and Cameron Road, opposite 18/18A Carnarvon Road. The premium payable in 1953 was only $20 per square foot. On the other hand, in the case of 53 Carnarvon Road, which is situated at the corner of Carnarvon Road and Cranville Road at the northwest corner of the block bounded by Granville Road/Carnarvon Road/Cameron Road, although it is much smaller than KIL 6394, the premium on the 1962 regrant worked out at $185 per square foot. It is only if one adds up what the lessee shall have paid in 21 years time that the total figure works out at $350 per square foot.

85. But even in 1963 lessees appear to have been getting bargains. 59/61 Carnarvon Road (KIL 8645) is situated on the corner of Carnarvon Road and Kimberley Road. The premium on the regrant in January 1963 worked out at $165 per square foot.

86. What appears to emerge from the whole of the evidence is that about the beginning of 1963, the Hong Kong Government realised that the public (as represented by Government) was not getting its fair share of rising property values; that the land valuation experts in the Crown Lands & Surveys Office were asked to advise; that a "regrant conference" was held; that the whole question of land values was thoroughly discussed; and that it was decided, (probably for the first time in the history of Hong Kong) that in future land values would be worked out strictly in accordance with generally accepted land valuation principles. Naturally, Crown lessees, who had been making fortunes out of land for years, did not like it; and to make matters worse for them, there was the temporary fall in land values in 1965.

87. But can it be said that, having regard to all the circumstances, (including the probable depreciation in the value of money over the next 75 years) $60,764 is not a fair and reasonable figure?

88. What the plaintiff and his successors shall have paid at the end of 75 years may be easily calculated by multiplying $60,764 by 75 which gives a total of $4,557,300. If the land had been auctioned to some other person, the premium payable would have been $1,234,859 and the lessee and his successors would then have paid Zone Crown Rent of $378 per year for 75 years, making a total consideration of $1,234,859 plus $28,450 i.e. $1,263,309.

89. During the hearing of the appeal, counsel for the plaintiff complained that his client had not been given the opportunity of paying the $1,234,859 being the premium for a lease for 75 years calculated on the basis of $375 per square foot. The answer to that would appear to be that from the beginning the plaintiff has maintained that he is entitled to a renewed lease of the land for 75 years in consideration of the annual zone Crown rent applicable viz. $378 per year. He has never offered to pay $1,234,859 as the capitalised value of the 75-year lease. But, if he ever did offer to do so, the Crown could hardly refuse his offer.

90. Another submission made by counsel for the plaintiff was that the Director failed to take account of the fact that the lease of the whole of New Kowloon and the New Territories ends in 1997, and that this would materially affect the position of lessees in the remainder of the Colony. I do not think that the Director erred in apparently failing to take account of this. No one can possibly say today what the position of New Kowloon and the New Territories will be in 29 years from now.

91. The last group of submissions made on behalf of the plaintiff may be summarized thus: that in carrying out his duties under the proviso the Director was in the position of an arbitrator or quasi arbitrator; that he did not give the plaintiff an opportunity of being heard before the rent was fixed; and that consequently the Director's decision is a nullity; alternatively that if the Director was not an arbitrator, he must be regarded as a valuer because there is no intermediate position he could have held; but that he was not in fact an expert valuer; and therefore he should not have undertaken the job of valuation; that having undertaken the job he wrongly overruled the opinion of his experts and fixed the capital value of the land at a higher figure than Mr. Lyons and Mr. Hughes had originally suggested that it should be fixed; that he allowed himself to be improperly influenced by Government policy as appears from the various minutes before the court; and finally that his valuation is so excessively high any way that he must have acted on some wrong principle and that this court should accordingly set it aside.

92. I found it rather difficult to follow the logic of the argument that if the Director was not an arbitrator he must be regarded as a valuer but that he was not a valuer because he said he was not an expert in valuation but that nevertheless he was wrong in overruling his experts and ought to have been an expert himself etc! As the Solicitor-General said, the parties to this contract were at liberty to appoint anyone they liked to fix the reassessed rental value of the land; and if they had chosen someone who had no knowledge of land valuation his valuation could not have been impeached on the ground that he was not an expert in land valuation. On the other hand it is equally difficult to see how a person ignorant of the principles of land valuation could be criticised for taking advice from experts before roaching an honest conclusion.

93. Be that as it may, Mr. Wright was by no means without professional qualifications. He told the court that in addition to being an associate of the Royal Institute of British Architects, he was a Fellow of the Royal Institution of Chartered Surveyors. Mr. Lyons who is Senior Estate Surveyor in the Crown Lands & Surveys Office: said that he was a Bachelor of Science in Estate Management (London), a Fellow of the Royal Institution of Chartered Surveyors, a Fellow of the Chartered Surveyors & Estate Agents' Institute, and a Fellow of the Institute of Arbitrators. It is not known what are the professional qualifications of the other officers employed in the Crown Lands & Surveys Office who dealt with KIL 3793 and whose advice was available to Mr. Wright.

94. Mr. Wright did not profess to be an expert valuer; but it is quite obvious from his qualifications and from the fact that he has been head of the Public Works Department for a number of years, that he knows a great deal about land values in Hongkong; and clearly in the Crown Lands & Surveys Office he had available to him the advice of a number of highly qualified surveyors. This sub-department has been concerned with the valuation and alienation of Crown land for over 100 years.

95. In support of his contention that the Director was either an arbitrator or quasi-arbitrator, counsel for the plaintiff relied upon the decision of the Court of Appeal in Chambers v. Goldthorpe⁽¹⁾. The question in that case was whether an architect employed for reward by a building owner to ascertain the amount due to the contractor and to certify the same under the contract, occupied the position of an arbitrator and therefore not liable to an action by the building owner for negligence in the exercise of those functions. At p.638 Collins C.J. said:-

"What then, is the position of an architect who, under a contract such as that here in question, has to give a certificate, which is to be final and binding, not only on his employer, but also on the other party to this contract? Can he address himself to his duty in the matter of giving that certificate free from any obligation towards that other party, or is he placed in a position in which it is his duty to exercise his judgment impartially as between the parties to the contract? It appears to me that he is placed in the last-mentioned position. That being so, the case seems to come exactly within the law as laid down in Stevenson v. Watson⁽²⁾ ....................... Lord Coleridge C.J. ........................ laid down the law as being that, when a matter is left by two parties to the judgment of a third, who is to determine their rights, and the task of so doing is not a mere matter of arithmetic but involves skill and knowledge, he is in the position of a quasi arbitrator, and no action will lie against him ......................................................"

96. An arbitration is defined in Halsbury's Laws of England (3rd Ed.) Vol.2, p.2, as follows:-

"An arbitration is a reference of a dispute or difference between not less than two parties for determination, after hearing both sides in a judicial manner, by a person or persons other than a court of competent jurisdiction."

Cases which have come before the courts have frequently involved architects and engineers engaged by building owners under a building contract. The law is stated in Halsbury (3rd Ed.) Vol.39, p.521, thus:-

97. A valuer is defined in Halsbury (3rd Ed.) Vol.39, p.1, as:-

"......... a person who sets a price upon or who estimates the worth or the value of property."

At page 4, the learned editors say:-

"The distinction between valuation and arbitration is usually expressed by saying that an arbitrator is appointed to determine a certain matter, such as the price of goods, for the purpose of settling a dispute which has arisen between the parties, but that a valuer is appointed to determine such a matter before any dispute has arisen with the object of preventing any dispute. There is much authority in support of that view, but it may be doubted whether it can be accepted as an absolute test. It is necessary to consider what task the person appointed undertakes to perform, the nature of the matters submitted to him, and whether the parties agree to be bound by his decision. If he is appointed to value the property using only his eyes, his knowledge and his skill, he is a valuer or in certain circumstances, a quasi-arbitrator; if on the other hand he is appointed to hear the parties and any evidence they may call and then determine the matter, he is acting judicially and is an arbitrator. When the parties appoint a person to determine the value of anything according to his own experience, knowledge and skill, and agree to abide by his decision that person is a quasi-arbitrator."

98. In In re Carus-Wilson v. Greene⁽³⁾ on a sale of land it was provided that the purchaser should pay for the timber on the land; that each party should appoint a valuer; that the valuers, before they proceeded to act, should appoint an umpire; and that if the valuers disagreed the umpire should value the timber. Lord Esher said (p.9):-

"The question here is whether the umpire was merely a valuer substituted for the valuers originally appointed by the parties in a certain event, or an arbitrator. If it appears from the terms of the agreement by which a matter is submitted to a person's decision, that the intention of the parties was that he should hold an inquiry in the nature of a judicial inquiry, and hear the respective cases of the parties, and decide upon evidence laid before him, then the case is one of an arbitration. The intention in such cases is that there shall be a judicial inquiry worked out in a judicial manner. On the other hand there are cases in which a person is appointed to ascertain some matter for the purpose of preventing differences from arising, not of settling them when they have arisen, and when the case is not one of arbitration but of a mere valuation. There may be cases of an intermediate kind, when, though a person is appointed to settle disputes that have arisen, still it is not intended that he shall be bound to hear evidence and argument. In such cases it may be often difficult to say whether he is intended to be an arbitrator or to exercise some function other than that of an arbitrator. Such cases must be determined each according to the particular circumstances. I think that this case was clearly not one of arbitration, and that it falls within the class of cases where a person is appointed to determine a certain matter, such as the price of goods, not for the purpose of settling a dispute which has arisen, but of preventing any dispute."

99. It was the Public Works Department of the Hong Kong Government which conducted the negotiations with Madam Chu de Yau in 1936; and she apparently agreed that in the event of her, or her successors-in-title, opting for a further term, the head of that Department, a servant of the lessor, should fix the rental value of the ground to be leased.

100. There is nothing in the proviso about holding an inquiry or hearing evidence and arguments; and in opting for a further term, the plaintiff gave the Director no indication that he wished to be heard. Counsel for the plaintiff submitted that the necessity to hear evidence and arguments from both sides is implicit because the proviso enjoins the Director to perform his duties "impartially". I do not think that the phraseology used in the proviso supports the plaintiff's contention. The Director's function was clearly to fix, i.e. to value, the rental value of the ground using all the skill and knowledge which was available to him in his department; and even if one regards him as a quasi-arbitrator, I do not think that the parties envisaged that he should fix the rent only after hearing evidence or arguments from the lessee. As Goddard L.J. said in Finnegan v. Allen⁽⁴⁾:-

"It is frequently found in commercial contracts that a question of quality is to be submitted to Mr. A.B. ................ People do not as a rule mean by that that the person to whom the matter is submitted is to sit as an arbitrator, to hear parties and to hear witnesses as an arbitrator, if he is a true arbitrator, must do. If it is intended that he, being an expert in the trade, should look at a sample on which the goods were sold and look at a sample of the goods delivered and say that there is to be an allowance of so much per lb. or so much per ton ................... that person is perhaps a quasi-arbitrator or you might say that he is an arbitrator; but he is an arbitrator of a particular sort and it is not intended that there should be the same judicial proceeding on his part as there would be in the case of an arbitrator appointed under a formal submission, where the parties clearly intend that he is to hear witnesses, hear arguments and so forth."

101. When put in that way it matters little whether one describes the Director as a valuer or as a quasi-arbitrator. He was not, in my view, under any obligation to hear evidence or arguments before fixing the rental value of the ground. One does not have to act judicially in order to act impartially. On the Executive side of Government, departments take hundreds of decisions every day on matters which involve a conflict of interest as between two members of the public or as between a member of the public and the public as a whole as represented by Government. I do not agree that the word "impartial" in the proviso implies that the Director had to act judicially.

102. In Dean v. Prince & Others⁽⁵⁾ the circumstances in which a court may interfere with the decision of a valuer were summarised by Denning L.J. in these words:-

"It can be impeached not only for fraud, but also for miscarriage. That was made clear by Sir John Romilly M.R. in Collier v. Mason. For instance if the expert added up his figures wrongly, or took something into account which he ought not to have taken into account, or conversely, or interpreted the agreement wrongly, or proceeded on some erroneous principle - in all these cases, the court will interfere. Even if the court cannot point to the actual error, nevertheless, if the figure itself is so extravagantly large or so inadequately small that the only conclusion is that he must have gone wrong somewhere, then the court will interfere in much the same way as the Court of Appeal will interfere with an award of damages if it is a wholly erroneous estimate. These cases about valuers bear some analogy with the cases on domestic tribunals, except, of course, that there need not be a hearing. On matters of opinion, the courts will not interfere, but for mistake of jurisdiction or of principle, and, for mistake of law, including interpretation of documents, and for miscarriage of justice, the courts will interfere."

103. It is common knowledge that the Director is, by virtue of his office, an official member of the Executive Council. The function of that Council is to advise the Governor on matters of policy. In matters within the sphere of the Public Works Department (which includes land valuation and land alienation) it is the Director to whom the Governor would look particularly for advice on such matters. Obviously, the Director is familiar with all aspects of policy in relation to land valuation and land alienation; and to suggest that in carrying out his duties under the proviso he ought to have banished from his mind all knowledge of Government policy and to have made some sort of declaration to this effect on the files after the fashion of a judge who states in his judgment that he has disregarded certain evidence which he has ruled to be inadmissible, seems to me to be adopting an approach far removed from what the parties had in contemplation when they signed this contract in 1936.

104. On the other hand, I can find nothing in the evidence to support the view that he allowed his knowledge of Government policy to overawe him and influence him to such an extent that he failed to fix the rental value of the ground fairly and reasonably. It appears from the memorandum sent to the plaintiff on 10th August, 1964 that in the case of "renewable" leases, a general decision had been taken to relate the reassessed rent to the full market value of the land and to calculate it on the basis of such full market value decapitalised over the whole renewed period of 75 years with interest at 5% per annum. It is not known whether he took that general decision alone and then reported to Government what he had done or whether there was a "regrant conference" at which a number of Government departments (including perhaps the Colonial Secretariat) were represented. But whether one regards this decision as having been made as a result of Government policy or not, it was a decision which affected, and will affect, equally all holders of "renewable" leases. It was a decision which was based on sound advice from expert valuers of land in the Crown Lands and Surveys Office; and I can see nothing unfair in the fact that the Director either made this general decision himself or concurred in the making of it after discussing it with the representatives of other departments.

105. The variable is the figure to be fixed in each case in respect of the capital value of the land: It may well be that it is a matter of general policy that the Director shall, in all cases, fix the capital value at such a figure as experience has shown the willing purchaser at an auction would offer. But it cannot be said that there is anything inherently unfair in this. On the contrary, it seems to me to be eminently fair that the capital value should be fixed at such a figure as, experience has shown, a willing purchaser would pay for the land if it were offered for sale at a public auction. The price then is controlled by the market i.e. by the public. It is not fixed in accordance with the caprice of some individual; and in this case it is significant that the plaintiff does not challenge the fairness of the figure $375 per square foot.

106. As regards the interest figure of 5%, if one assumes that the "price" or "premium" in respect of a sale of a 75-year lease is something due and payable at the commencement of the lease, 5% interest on any deferred payments of that premium is a very low rate of interest for Hong Kong. The normal rate of interest awarded by the courts is 8%; and it is probably common knowledge that in Hong Kong during the last 15 years or so, a very common rate of interest on money lent on a first mortgage of land has been 1.2% per month, or 14% per annum.

107. The crux of the learned judge's decision is contained in two passages in his judgment. In the first passage he says:-

"It is to be noted that the proviso does not state that the full market rental value is to be fixed, which could easily have been stated if that were the intention, but the rent is restricted to being a fair and reasonable rental, and it thus seems to me that the Director is thereby restricted from fixing the best rent which the defendant could obtain in the open market, that is the full market rental value and is restricted to fixing a fair and reasonable rent. In contrast, the proviso in the lease which immediately precedes the relevant proviso, and which deals with resumption and payment of compensation, states:-

It is to be noted that it does not state that 'fair and reasonable' compensation is to be paid, but that 'full and fair' compensation is to be paid."

The learned judge appears to have found support for his view in the decision of the Court of Appeal in John Kay Ltd. v. Kay and Another⁽⁶⁾ because he concludes this part of his judgment with these words:-

"...... I think that, in all the circumstances, as was thought in Kay's (6) case, a reasonable rent would be some rent below the open market rent."

In Kay's⁽⁶⁾ case, the Court of Appeal was concerned with the Leasehold Property (Temporary Provisions) Act, 1951, the long title of which reads:-

"An Act to make temporary provision for the protection of occupiers of residential property against the coming to an end of long leases, and for the renewal of tenancies of shops; and for purposes connected with the matters aforesaid."

S.12(1) reads:-

At p.816, the Master of the Rolls said:-

"The landlords here could obtain in respect of 15 St. Stephens Street a tenant willing to pay for a term of twenty-one years a rent of ?50 and a premium of ?,500, and that might be said, at any rate with some show of justice, to be the present market value of the premises. The phrase 'economic rent' has been used during the argument, but I prefer to avoid it since the phrase has, in some contexts and to economists, as I believe, a particular and technical significance. The market value of certain premises is one thing, and, as I read this Act, it seems to me that the reasonable rent may be something different. The reasonable rent seems to be a rent arrived at by applying the subjective test of what the judge thinks is right and fair, as distinct, for example, from the objective test of what the evidence shows is the market value."

At p.821 Jenkins L.J. said:-

108. It seems to me that if the Director's duty under the proviso was simply to form an honest opinion as to what was a fair and reasonable rent, in the absence of any suggestion of bad faith on his part, it is doubtful whether this court would have jurisdiction to review his decision. However, this question did not really arise on the appeal which was argued on the basis that the correct approach was an objective one, the question being: did the Director fix what this court considers to be a fair and reasonable rental value of the ground.

109. In my view the position of a judge considering an application under s.12(1) of the Leasehold Property (Temporary Provisions) Act 1951, is very different from the position of the Director under the proviso in the plaintiff's lease. The whole object of the 1951 English Act was to fix rents payable by a certain class of tenants below what was regarded by the legislature as inflated rents by reason of scarcity. On the other hand, there appears to be nothing in the proviso to suggest that in 1936 the parties contemplated that Crown lessees should be protected against rising land values and exorbitant demands for rent on the part of the Crown. The cry in Hong Kong during the last twenty years has been that there should be more legislation to protect the tenants of those Crown lessees against, what the tenants say are, rapacious landlords taking full advantage of the rising property market. Unquestionably, there has been a tremendous increase in land values in the post-war years; and many landlords have made fortunes out of land. But, in my view, Kay's (6) case is not an authority for the proposition that in fixing the rental value of the ground, some figure lower than the full market value of the ground was contemplated by the parties to this lease. The Director's duty was not to fix what he thought was "a fair rent"; his duty was to fix "a fair and reasonable rental value of the ground"; and why should that not be fixed on the basis of full market value? How can it be argued that in Hong Kong something fixed on the basis of the open market value is unfair or unreasonable? With respect to the learned trial judge the fact that the word "full" occurs in one proviso in the lease and not in another does not appear to me to be material.

110. The second passage from the judgment to which I would refer reads:-

"...... it having been agreed that the lessee was to pay no fine or premium, it seems to me to be hardly fair (or for that matter reasonable) to so fix the rent that the plaintiff should be made to pay the same figure of money as if he had to pay a fine or premium."

Although the learned judge found that the figure $60,764 fixed by the Director was rent and that it did not contain any element of what counsel for the plaintiff described as "hidden premium", nevertheless, it would appear from the above passage that the learned judge must have considered that the figure fixed by the Director did contain an element of "hidden premium". As this appears to have been his view, I would have thought that he would then have come to the conclusion that the rental value of the ground payable by the plaintiff should be the Zone Crown Rent only, as is claimed by the plaintiff. But, instead, he simply makes a declaration that the rent had not been fixed as required by the lease.

111. The proviso stipulates that the lessee "shall .......... be entitled to a renewed lease .......... for a further term of seventy-five years without payment of any fine or premium therefor and ......................................... at such rent as shall be fairly and impartially fixed by (the Director) as the fair and reasonable rental value of the ground at the date of such renewal". According to the plaintiff the fair and reasonable rental value of the ground (if fixed by the Director fairly and impartially) should be the nominal Zone Crown rent of $378 (which works out at 11 cents per square foot) because, he says, in arriving at this fair and reasonable rental value the Director ought to have interpreted the words "without fine or premium" as implying that the plaintiff should be given credit for the very large sum which he would have had to pay as a premium if he had had to bid for it in 1963 at a public auction.

112. If the plaintiff's submission is correct, it is indeed surprising that the proviso does not simply say that the rent for the renewed lease would be the Zone Crown rent; and if the words "fair and reasonable rental value of the ground" are synonymous with "Zone Crown rent", why did the parties take the trouble to appoint the head of the Public Works Department to carry out a simple mathematical calculation which could be done by any clerk? What was the necessity for the words "fairly and impartially" in the proviso? There would then be no room for unfairness or partiality because everyone knows what is the Zone Crown rent per acre at any given time. Indeed the lessee could have worked it out himself.

113. In my view the words "without payment of any fine or premium" do not qualify the plain meaning of the words "rental value of the ground"; and I see nothing unfair or unreasonable in the fact that in 1963 the Director fixed the rental value of the plaintiff's ground on the basis of full market value decapitalised over the whole renewal period of 75 years at 5%.

114. What, then, is the meaning of the words "without fine or premium"?

115. The word "premium" has a variety of meanings, and it has been judicially noticed in a number of English cases. For example in King v. the Earl of Cadogan⁽⁷⁾ Warrington L.J. said:-

"Now the legislature in expressing its intention has chosen to use two words - 'rent' and 'premium' - both of which in connection with leases have perfectly well-known legal meanings. I need not say anything about the word 'rent', but 'premium' as I understand it used as it frequently is in legal documents, means a cash payment made to the lessor, and representing or supposed to represent, the capital value of the difference between the actual rent and the best rent that might otherwise be obtained. It is a very familiar expression to everybody who knows the forms and powers of granting leases. It is in fact the purchase money which the tenant pays for the benefit which he gets under the lease."

In Hill v. Booth,⁽⁸⁾ Scrutton L.J. said:-

"Ordinarily a premium is paid to obtain a lease ................................................. the premium is payable for the grant of the lease .................................................... why the premium is described in the lease as 'reserved' I do not understand. It is not a reservation in any way. A reservation technically is the grant out of the subject matter conveyed of something not previously existing, as a rent or an easement. This in my view is not a grant out of the land and buildings; it is a separate personal covenant to pay the premium because the lease has been granted."

In the 26th Edition of Woodfall on Landlord & Tenant the following passage occurs at p.329 (para.759):-

"A fine or premium given by the lessee to the lessor at the time of taking or renewing a lease has been said to be in the nature of a fore-hand rent and has to be considered as an improved rent. Its true nature is, however, that it is a sum paid for the granting of the lease, even though it may be made payable by instalments."

In Hong Kong the word "premium" occurs in s.11(1) of the Landlord & Tenant Ordinance. This section makes it an offence to:-

"... demand or receive any consideration ........... whether by way of rent, fine, premium or otherwise, for the grant ............... renewal ......... of any tenancy;"

that is to say any tenancy to which the Ordinance applies. And, as I have said, the price for which a lease of land is sold at a public auction is termed a premium.

116. In my view the words "without payment of any fine or premium therefore" in the proviso of this lease do not mean that in the event of the lessee opting for a new term he would be given full credit for the "price" or "premium" which a purchaser at an auction in 1963 might be expected to have to pay, so that the lessee's only obligation to his landlord during the next 75 years would be the payment of nominal Zone Crown rent annually. I do not think for a moment that this was what was in the contemplation of the parties. What the parties primarily had in mind in 1936 was the price of the option, and, in my view, the words "without payment of any fine or premium therefor" refer to the granting of the new lease and imply that no further fine or premium for the exercise of the option shall be payable by the lessee.

117. If, on the other hand, the word premium is to be taken as including also the "price" which is ordinarily paid for a lease at a public auction, then, in the context of the proviso looked at as a whole, it can only mean that upon the lessee opting for a second term there were to be no demands on the part of the Crown for payment of the full capital value of the lease at the commencement of the lease as in the case of a sale by public auction. This, too, could be a thing of considerable value to a lessee. If at the time of the renewal he happened to be spending large sums on redevelopment, he might find it impossible to raise sufficient funds to pay a sum equivalent to the premium which he would have had to pay if he had had to bid for the renewed term at a public auction. Be that as it may, I am satisfied that it was never the intention of the parties that the words "without payment of any fine or premium" should be interpreted in such a way as to result in the expression "rental value of the ground" being synonymous with "Zone Crown rent".

118. If this is the correct view, there is really no difference between the position of a holder of a non-renewable lease and the holder of a lease containing an option to renew except that in the case of the former the lessee pays the "price" of the lease at the commencement of the term and in the case of the latter the consideration is spread over the whole period of the term, the annual payments being calculated on the basis of the full market value decapitalised over the whole renewal period of 75 years.

119. There is one final question which has to be considered. By notice dated 30th January 1967, the plaintiff required the defendant to produce the Government file numbered L.S.O.5296/53 which was referred to by the Superintendent Crown Lands & Surveys (Mr. Hughes) in his minute of 28th March 1963 addressed to the Director. The plaintiff's object, of course, was to force the Crown to disclose decisions of the Executive Council and other highly confidential matters affecting land alienation and/or land valuation. On 1st July 1967 the Colonial Secretary signed a certificate in the following terms:-

120. On 2nd February 1967 the Colonial Secretary swore an affidavit as follows:-

121. In regard to this claim of privilege, on 3rd February 1967 the trial judge ruled as follows:-

122. Of course, the learned trial judge dealt with this question in accordance with the law as it stood prior to the decision of the House of Lords in Conway v. Rimmer⁽⁹⁾; and the question which arose on the appeal was whether we should now look at file L.S.O.5296/53 in order to decide whether the contents thereof should be disclosed.

123. There are a number of passages from the judgments in Conway v. Rimmer⁽⁹⁾ which appear to be relevant on the question whether this Court should even look at that file. Turning first to the judgment of Lord Reid. At p.882, he said:-

"A minister's certificate may be given on one or other of two grounds either because it would be against the public interest to disclose the contents of the particular document or documents in question or because the document belongs to a class of documents which ought to be withheld whether or not there is anything in the particular document in question disclosure of which would be against the public interest. It does not appear that any serious difficulties have arisen or are likely to arise with regard to the first class. However wide the power of the Court may be held to be cases would be rare in which it would be proper to question the view of the responsible Minister that it would be contrary to the public interest to make public the contents of a particular document."

Another passage from the judgment of Lord Reid (p.888) is as follows:-

"...... there are certain classes of documents which ought not to be disclosed whatever their content may be. Virtually everyone agrees that Cabinet minutes and the like ought not to be disclosed until such time as they are only of historical interest ...... the most important reason is that such disclosure would create or fan ill-informed or captious public or political criticism. The business of Government is difficult enough as it is and no government could contemplate with equanimity the inner workings of the government machine being exposed to the gaze of those ready to criticise without adequate knowledge of the background and perhaps with some axe to grind and that must in my view also apply to all documents concerned with policy-making within departments including it may be minutes and the like by quite junior officials and correspondence with outside bodies."

At page 900 Lord Morris of Borth-y-Gest said:-

"The inherent power of the court must include a power to ask for a clarification or an amplification of an objection to production though the court will be careful not to impose a requirement which could only be met by divulging the very matters to which the objection related. The power of the court must also include the power to examine documents privately, a power, I think, which in practice should be sparingly exercised............"

At page 905/6, Lord Hodson said:-

".... documents exemplified by cabinet minutes are to be treated, I think, as cases to which Crown privilege can be properly applied as a class without the necessity of the documents being considered individually. The documents in this case, class documents though they be, are in a different category, seeking protection not as state documents of political or strategic importance but as requiring protection on the ground that 'candour' must be ensured."

Lord Pearce, at p.907, said:-

"Although private inspection may not be desirable as a general rule, when it can be avoided, the court has the power and should clearly use it where necessary."

And finally at p.910, Lord Pearce said:-

"Obviously production would never be ordered of fairly wide classes of documents at a high level. To take an extreme case, production would never be ordered of Cabinet correspondence letters or reports on appointments to office of importance and the like."

124. The Executive Council is the Hongkong equivalent of the British Cabinet; and in my view the approach of the Hongkong courts to disclosure of the minutes of the Executive Council should be the same as the approach of the British courts to disclosure of cabinet minutes. Such minutes clearly fall within a class of documents which, irrespective of their content, should not be disclosed to public gaze. The same applies to all documents concerned with policy-making within departments including, as Lord Reid says, minutes and the like by quite junior officials. There is a vast difference between documents of this sort and, say, a routine report on a junior police officer - which was the subject matter of the issue raised in Conway v. Rimmer.⁽⁹⁾

125. In his certificate of 1st February 1967 the Colonial Secretary put his objection to disclosure on a "class" basis; but in his affidavit he takes the matter one stage further. He says that this particular file includes legal opinions, minutes of Executive Council meetings and policy matters of a highly confidential nature and that it would be against the public interest to disclose those actual documents and minutes.

126. The cases must be rare in which the courts of this Colony would question the Colonial Secretary's view on such a matter. As Lord Reid says, the business of Government is difficult enough as it is, and "No government could contemplate with equanimity the inner workings of the government machine being exposed to the gaze of those ready to criticize without adequate knowledge of the background and perhaps with some axe to grind".

127. The observations of Lord Pearce and Lord Morris should also be borne in mind viz. that private inspection by the court is not desirable as a general rule and that in practice the court's power to inspect should be sparingly exercised. In my view no useful purpose would be served by our looking at file LSO 5296/53. I have not looked at it; and I do not propose to do so. My judgment is based on the evidence which was before the trial judge.

128. In my view the Director fixed the rental value of the ground fairly and impartially in accordance with the proviso in the lease; and for the above reasons, I think that the appeal should be allowed and that the declaration made in the court below should be reversed.

Representation:

...(illegible) for Appellant ...(illegible)

...(illegible)

(Judgments handed down).

(1) (1901) 1 K.B.624.

(2) 4 C.P.D.148.

(3) (1886) 18 QBD p.7.

(4) (1943) 1 A.E.R.493 at 500.

(5) (1954) 1 AER 749 at 758-9.

(6) (1952) 1 A.E.R. 813.

(7) (1915) 3 K.B. 485 at 492.

(8) (1930) 1 K.B. 387.

(9) (1968) 1 A.E.R.874.