China Light & Power Co. Ltd. v. Commissioner for Rating & Valuation

CACV000083/1994

IN THE COURT OF APPEAL

1994, Nos. 83, 101 & 167
(Civil)

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Coram : Hon. Power, V.-P., Mortimer & Godfrey, JJ.A.

Dates of hearing : 14, 15 and 16 December 1994

Date of handing down judgment : 15 February 1995

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J U D G M E N T

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Godfrey, J.A. :

1. This court is concerned, in these appeals, with questions of rating. The world of rating appears, to one unfamiliar with the arcana, to be cloud-cuckoo land, a world of virtual unreality from which real cuckoos are excluded (although it seems that permission to land will be granted to a cuckoo flying in from the real world if it can demonstrate that its presence in cloud-cuckoo land is essential, not merely accidental: see Dawkins (V.O.) v. Ash Brothers & Heaton Ltd [1969] AC 366 per Lord Pearce at p. 382B-C.) A valuation for rating purposes must be based on hypothetical, not real, facts. Nevertheless, the authorities establish that such a valuation is itself to be treated as a matter of fact, impeachable only if the person responsible for the valuation has fallen into some error of law in arriving at it. In the absence of error of law, this court is not entitled to interfere with the valuation.

2. It is against this background that these appeals fall to be considered.

3. The parties to the dispute are the Commissioner of Rating and Valuation ("the commissioner") and China Light and Power Co. Ltd. ("the ratepayer"); and the history of the dispute, stated shortly, is as follows.

4. The commissioner determined the rateable value of 6 tenements in the New Territories at $3,180 million. The determinations were included in the valuation list for the year which commenced on 1 April 1991. On 19 April 1991, the ratepayer served proposals on the commissioner, pursuant to s.37(1) of the Rating Ordinance, Cap. 116, to reduce the rateable values. The commissioner confirmed his original determinations. The ratepayer appealed to the Lands Tribunal, before which the tenements were all treated as owned and occupied by the ratepayer. They comprised 4 power stations known as Castle Peak A, Castle Peak B, Hok Un and Tsing Yi Power Stations and the transmission systems in the Urban and Regional Council areas. The parties were in dispute as to the proper rateable value of these tenements. There was also a related group of tenements with an undisputed rateable value (separately assessed) of some $74.2 million. By an order of 30 April 1994 (the first order") the Lands Tribunal fixed the rateable value of all the tenements at $2,000 million (inclusive of the $74.2 million). Both the ratepayer, and the commissioner, applied to the Lands Tribunal for a review of the first order, under the provisions in that behalf contained in s.11A(1) of the Lands Tribunal Ordinance, Cap. 17. By an order of 24 August 1994 ("the second order") the Lands Tribunal increased the rateable value to $2,020 million (inclusive of the $74.2 million). The second order contained the following paragraph 3:

"3. The prior judgment of the Tribunal dated 30 April 1994, except to the extent that it is varied by this review judgment, is otherwise confirmed".

5. This paragraph of the second order appears to be based on a misconception by the Lands Tribunal. The jurisdiction of the Lands Tribunal under s.11A(1) is a jurisdiction to "set aside, reverse, vary or confirm" the decision. It is, formally, only the decision which can be reviewed; not, as the Lands Tribunal appears to have thought, its reasons for arriving at its decision. The failure on the part of the Lands Tribunal to appreciate this has led to an argument in this court (lasting a whole day) as to the material which this court was entitled to consider on the hearing of the Commissioner's substantive appeal. What happened was that the Lands Tribunal, in making the second order, justified it by delivering a "judgment" (i.e., reasons for its decision) in which it purported formally to alter, in certain respects, the terms of the "judgment" (i.e., reasons for its decision) which it had delivered in support of the first order. The Lands Tribunal had no power to do this. It was entitled to say, in its second "judgment", whatever it liked about the contents of the first "judgment"; but it had no power to alter the terms of the first "judgment"; only to "set aside, reverse, vary or confirm" its original decision. This court is concerned only with the correctness or otherwise of the Lands Tribunal's ultimate decision, which is its decision as recorded in the second order. In deciding whether the Commissioner is entitled to impeach that decision, this court must take into account all the reasoning which the Lands Tribunal employed in arriving at it, that is to say, the reasons expressed in the "judgment" delivered by the Lands Tribunal in support of the first order and also those expressed in the "judgment" delivered by the Lands Tribunal in support of the second order (its ultimate order). At the conclusion of the argument on this part of the case, this court so indicated; and the Commissioner's substantive appeal proceeded on that basis. It is not, in my judgment, necessary to say anything further about the Commissioner's so-called "appeal" against what the Lands Tribunal purported to do when giving its reasons for the second order (its ultimate order) and including in the body of the second order the misconceived paragraph 3 to which I have referred.I can now turn to the Commissioner's substantive appeal.

6. The Commissioner's first ground of appeal is that the Lands Tribunal, although directed by law to determine the rateable value of the tenements on the basis of a hypothetical tenancy from year to year, valued them instead on the basis of a finite tenancy of four years. There is no doubt that, as a matter of law, the Lands Tribunal was bound to determine the rateable values on the basis of a hypothetical tenancy from year to year; the only question is whether they did or did not do so. This apparently simple question is complicated by the consideration that the hypothetical tenant, although only a tenant from year to year, is to be supposed to have a reasonable prospect of continuing to be a tenant: see Reg. v. South Staffordshire Waterworks Co. (1885) 16 QBD 359. It is legitimate, in my judgment, to base the valuation on the footing of a reasonable prospect of the hypothetical tenant continuing to be a tenant, not simply in the abstract, but for some reasonable period of time, and I can see nothing wrong with the Lands Tribunal, as part of the process of valuation, making an assumption as to the duration of that reasonable period of time. It would not be legitimate for the Lands Tribunal to value the tenements on the footing that the hypothetical tenant had a term of, say, "x" years certain. But it would be legitimate for the Lands Tribunal to value the tenements on the footing of a tenancy from year to year, with a reasonable prospect that the tenancy would in fact continue for "x" years. In the instant case, the Lands Tribunal said this:

"On the issue of duration, we consider that on the evidence and consistent with the authority, it is open to the Tribunal to adopt the finite figure of four years. On that basis, we find that the probable duration of the yearly tenancy is four years".

7. This passage might have been more happily expressed. The reference to "a finite figure" was, I think, unfortunate. But reading the passage as a whole, I am left in no doubt that the Lands Tribunal was valuing the tenements, not on the basis of a term of four years certain, but, as it was entitled to do, on the basis of a yearly tenancy, being a tenancy which would probably continue for four years. The words "probable duration of a yearly tenancy" demonstrate, as I think, that the Lands Tribunal did not misdirect itself in this connection.

8. For these reasons, the Commissioner fails, in my judgment, to make good this first ground of appeal.

9. The Commissioner's second ground of appeal was this. The Lands Tribunal, says the Commissioner, erred in law in holding that when, factually, the market value of the assets of the tenant at the start of the tenancy had been assumed for the purposes of a so-called "profits method" valuation to be the book value, it was wrong in law to assume book value of the assets at the end of the period of tenancy; the Lands Tribunal ought to have held, says the Commissioner, that it was in the circumstances necessary that the assets at the end of the tenancy be valued in the same manner as at the start of the tenancy.

10. The Lands Tribunal did proceed in the manner on which the Commissioner now complains; but, in my judgment, it was entitled to do so. The point is a valuation point, not a legal point; and this approach was one which the Lands Tribunal was, in my judgment, perfectly entitled to adopt as a matter of valuation judgment. If it fell into error on the point (as to which I express no opinion) it was not an error of law.

11. The Commissioner's third ground of appeal is based on what it contends was a misapprehension on the part of the Lands Tribunal. The Tribunal said this:

"The parties were agreed that the appropriate rate of return was to be determined by calculating [the ratepayer's] weighted average cost of capital ("WACC") as at 1 July 1990."

It does appear that the parties' agreement may have been limited to the use of the WACC calculation only as a benchmark, a check on the level of return which could reasonably be expected by the hypothetical tenant; but I do not think this matters. The Lands Tribunal was entitled, as a matter of valuation judgment, to arrive at the appropriate rate of return by using WACC in the manner which it did, as a preferred, if not definitive, method of valuation.

12. The Commissioner's fourth ground of appeal is based on an allegation that the Lands Tribunal erred in law by failing to consider the return required by the hypothetical tenant as an operator; in particular that it ought to have taken into account the permitted return under the scheme of control under which the ratepayer operates and its actual return on capital. Again, these are valuation points and the approach of the Lands Tribunal does not, in my judgment, disclose any error of law.

13. For these reasons, I would dismiss the Commissioner's appeal, based as it is on grounds which cannot be supported. In these circumstances, the ratepayer does not seek to prosecute its own cross-appeal.

14. I propose therefore that the Commissioner's appeal no. 167 of 1994 be allowed to the extent that paragraph 3 of the order of the Lands Tribunal made on 24 August 1994 be set aside; that the Commissioner's appeal no. 83 of 1994 be dismissed; and that there be no order on the ratepayer's appeal no. 101 of 1994. I would further propose that there be no order as to the costs of the appeal no. 167 of 1994 and of the appeal no. 101 of 1994; and that the costs of the ratepayer of the appeal no. 83 of 1994 should be taxed and paid by the Commissioner to the ratepayer.

Mortimer, J.A. :

15. I agree with both the reasoning and the conclusions of Godfrey J.A. in the three appeals before us. I cannot usefully add anything of my own.

16. I also therefore would order that the Commissioner's appeal No. 167 of 1994 should be allowed to the extent that para.3 of the second order should be set aside.

17. I would dismiss the Commissioner's appeal No. 83 of 1994 and as the ratepayer did not pursue his appeal No. 101 of 1994, no order should be made upon it.

18. There should be orders nisi on costs as he proposes.

Power, V.P. :

19. I agree.

Representation:

Mr. William Glover, Q.C. & Mr. Anthony Wu (A.G.C.) for Commissioner for Rating & Valuation

Mr. Michael Fitzgerald, Q.C. & Mr. Nigel Kat (M/s Johnson Stokes & Masters) for China Light & Power Co. Ltd.