Hofei Estates Ltd v. Secretary for City and New Territories Administration

LDLR000001/1982

Crown lands resumption - compensation - any enhanced or diminished value of the land due entirely to public work requiring resumption to be disregarded - status of "Building and Garden" land - effect of layout plans on value - circumstances where valuation by residual method appropriate - whether adjustments to comparables should be by sequential or aggregate methods - factors which should be allowed by end-deduction and not by adjustment - Sections 6, 10, 11, 12 Crown Lands Resumption Ordinance Cap. 124

IN THE LANDS TRIBUNAL OF HONG KONG

Coram: TRIBUNAL: His Honour Judge Cruden, Presiding Officer, M.W. Phillips, Esq., and H.M. Leung, Esq., Members.

Date of Judgment: 30 November 1982

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JUDGMENT

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1. The applicant is the former registered lessee from the Crown of Lot 796 in Demarcation District No. 131, Tuen Mun, New Territories. On the 19th day of December, 1980 notice was published in No. 51 Volume CXXII Hona Kong Gazette under Government Notice 3984, pursuant to Section 4 of the Crown Lands Resumption Ordinance, Cap. 124, that the Governor in Council had decided that Lot 796 was required for a public purpose and that he had ordered that Lot 796 was to be resumed and revert to the Crown on the expiration of 3 months from the date of the affixing of the notice to the land. The notice was affixed to the land on the 22nd day of December, 1980. Lot 796 therefore was resumed and reverted to the Crown on the 23rd day of March, 1981.

2. The Crown made an offer of compensation under Section 6(1)(a) which was rejected. The applicant now applies to this Tribunal, pursuant to Section 6(3)(a), for the amount of the compensation to be determined. The applicant's valuer valued the property at $32,500,000. The Crown disputes that valuation and puts forward a lower valuation of $20,340,000.

3. Before proceeding to consider the valuation evidence we will refer to three preliminary matters. First, in determining the compensation payable we must do so on the basis of the principles set out in Sections 10, 11 and 12. Secondly, that in accordance with the decision of the Privy Council in Pointe Gourds Quarrying and Transport Co. Ltd. v. Sub-Intendent of Crown Lands (1947) A.C. 565 we must disregard, in assessing compensation, any enhanced value entirely due to the scheme underlying the resumption. Conversely, we equally disregard any diminution in the value of land caused by the scheme notwithstanding if the applicant knew of the proposed resumption when it purchased the property- Melwood Units Pty. Ltd. v. Commissioner of Main Roads (1979) A.C. 426.

4. Thirdly, before the applicant instituted these proceedings it commenced proceedings by way of originating summons in the High Court seeking declarations determining the status of the property - Hofei Estates Ltd. v. Attorney-General MP No. 386/1981. Judgment was delivered by Jackson-Lipkin J. on the 23rd day of October, 1981. The need for those proceedings arose from the nature of the original lease o￡ the property from the Crown and the subsequent history of the title documents.

5. The Crown sold the lease of Lot 796 by public auction on the 30th day of December 1931. At the auction it was designated as Lot 5 and sold together with 6 other lots. The property was sold as a "Building and Garden Lot" subject to the General Conditions of Sale published in Government Notification No. 570 of 1924 as amended by Government Notification No. 470 of 1931 and subject further to Special Conditions No. 1(b) and (c). Due either to passage of time or the Second World War important parts of the original documents of sale are missing.

6. After argument in the High Court when the applicant submitted that there was no difference between "building" lots and "building and garden" lots, it was held that the legal status of Lot 796 is that of Building and Garden land. The originating summons sought several consequential declarations. One of those, which is very relevant to the present application, related to the maximum coverage permitted on the land. The High Court judgment on the originating summons was extempore and we have paused to consider the precise terms of the declaration finally made. We were obliged to do so for some complications arise from the fact that the last 3¹/₂ pages of the record of delivery of the oral judgment, relate to the dialogue that ensued between the Court and Counsel, as to the final form of the declarations and other matters. To remove any possible doubt we bespoke and have perused the file of the High Court proceedings in the hope that the judgment including the declarations may have been formally drawn up and sealed. This appears not to have been done.

7. After further consideration, we understand the High Court to have made the following declaration as to coverage:

"

that building development of the site to a maximum coverage of 66.6% was permitted by the Conditions of Sale so long as there remains a garden after compliance with other applicable restrictions on development at the date of resumption if any."

8. The parties agreed that any development in terms of that declaration would also be limited to a maximum of two-storey development. However, the property is not subject to any minimum front and rear space requirements which commonly restrict Building lots. This would allow for a maximum plot ratio of 1.33. The property comprises an area of 2.3 acres or about 9307.8 square metres.

9. Turning to the valuers evidence, both Mr. Doran for the applicant and Mr. Yu for the respondent, arrived at their final valuations principally on the basis of the following two properties, which they selected as the best available comparables:

COMPARABLE NO. 1:

COMPARABLE NO.2:

10. These comparables are a considerable distance from the subject property and from each other. The subject property, unlike the comparables, is within the Tuen Mun Layout Plan. Generally most properties within a layout plan are ultimately resumed by the Crown. Upon resumption the practice in the New Territories is for the Government, in addition to paying for the value of the land to make an ex-gratia payment to the person whose property is being resumed.

11. The result of this practice is that the total sums received by a resumed property owner are in excess of the value of the property. Accordingly, evidence of sales of properties inside development layouts are to be treated with caution as they are generally distorted by the resumption policy.

12. In addition, upon a property coming within a layout plan increased dealing in such properties often occurs between that date and the date a property is formally resumed. The prices during this interim period are liable to be stimulated by the anticipated final payments which will be received for the property from Government. For this reason both valuers deliberately searched for comparables beyond the Tuen Mun Layout Plan in an attempt to eliminate the effect the prospect of resumption would have had on dealings within the layout plan. Both comparables are outside the layout plan.

13. The effect on the value of a property when it comes within a layout plan also reduces the weight we otherwise may have given to the purchase price paid by the applicant for the property. The applicant purchased the property on the 10th of December 1982 for $15.7 million. This was only 9 days before notice of resumption was published in the Hong Kong Gazette. Furthermore the uncertainty relating to the precise status of the land had yet to be determined by the High Court. In these circumstances we accept the valuers view that the purchase price is of interest but of relatively little weight in determining value.

14. Unfortunately, the comparables were not only in different localities, but were also very much smaller than the subject property, have varying development costs and contained other differences. Thses major differences obliged both valuers to make substantial adjustments to the comparables to relate them, for valuation purposes, to the subject property. The adjustments actually made were mostly subjective and unsupported by any detailed analysis.

15. In these circumstances a better approach would have been to have used the residual method. The adoption of the residual method would have enabled the valuers to have tested the value of the subject property in terms of optimum development in relation to cost and reasonable profit margins.

16. We are satisfied that evidence was available from the comparables and elsewhere; for reasonably accurate assessments to have been made by the residual method. Furthermore this is the method more likely to be adopted by a reasonable prospective purchaser of this type of property.

17. We appreciate that caution must be exercised before adopting the residual method. However, provided the variables used are supported by evidence in the market, it has many advantages. Certainly on the facts of this particular application, the residual method would have allowed for a better comparison between the subject property and the comparables. For each could have been compared in relation to its optimum development. In the absence of evidence adduced before us enabling the residual method to be applied, we are obliged to arrive at a valuation based largely on unsupported percentage adjustments to comparables which, quite apart from other differences, are too dissimilar in size and development potential, for direct comparision.

18. However, it is to that task we must now turn. Here immediately we are faced with a difference in approach between the valuers. While both based their valuations on comparables, they adopted a different technique in making adjustments to those comparables. Mr. Doran adopted the sequential method. In other words from the sale price of each comparable he then proceeded to make a series of percentage adjustments in sequence. Each sequential adjustment was made to the sale price as increased or reduced by the prior sequential adjustments. He coupled this sequential method with certain end deductions for amounts which would remain constant. Mr. Yu preferred the aggregate method. Namely, he aggregated or totalled his various percentage adjustments. The sum of those adjustments, was then applied to the sale price, as one overall percentage. Initially he had made no end deductions. However, he later modified his final figure to allow for an agreed and deduction of $2,000,000 for the adverse effect of certain graves on the value of the subject property.

19. We had the assistance of hearing the opinions of the valuers and the submissions of Counsel on the advantages and disadvantages of both sequential and aggregate adjustments. We are inclined to accept the submissions of the respondent, that usually it will not really matter which method is used, provided the adjustments are supported by analysis which adopts the acme approach. In many cases the aggregate method will be simpler to apply and tend to be more accurate. For the accuracy of the sequential method can depend on the order in which each particular adjustment is made. It also relies on analysis which can only be arrived at once a series of adjustments have already been completed.

20. The major criticisms by the applicant of the aggregate method, were that it is negative and can produce absurd final figures. In particular it was demonstrated that, under the aggregate method, it is possible for a particular property to end up as a minus figure. That apparent absurdity is impossible under the sequential method. However, such a result is not fatal to the aggregate method. A final minus figure simply supports the contention that, for the purpose for which the property was compared, it is not a viable proposition. It would then be necessary for an owner or developer to consider other permitted alternatives which might give the property a positive value. In an exceptional case, at worst, a property might have to be written off as a liability if the expenditure necessary to make it saleable or realisable were greater than the estimated realisation.

21. Rarely will a subject property and the comparables be identical. To overcome differences adjustments, whether made by the aggregate or sequential method, enable a valuer to relate a comparable to a subject property. The determination of the amount of those adjustments will invariably not be capable of scientific proof but will depend on the skill and experience of the valuer. At least, in part, it will be an empirical exercise. Conversely, in some cases a necessary adjustment will be able to be ascertained precisely. Where that is the position or where the amount of an adjustment is agreed, the better alternative procedure will be to make allowance for such an item, not by percentage adjustment, but by end deduction. Where actual costs or amounts for other items - which will not vary in relation to the comparables - can be assessed accurately and not merely in percentage terms, a greater degree of accuracy results if such sums are allowed for directly as end deductions.

22. We will now consider the evidence in respect of the two comparables together with the adjustments the valuers considered were necessary to relate them to the subject property. The sale price of Comparable No. 1 with vacant possession was $18,000.000. However, payment was not made on taking possession the purchaser being allowed to spread payment over a period of 3 months. We are prepared to accept Mr. Yu's deduction of 3.4% for this concession. This reduction produces a cash equivalent price of $17,400,000. On that sum the unit rate for the 3745 square metres of Comparable No. 1 is $4,646 per square metre.

23. Comparable No. 1 is on a side road some distance from its junction with Castle Peak Road. Both valuers agreed its location was inferior to the subject property. Mr. Doran considered the location of the subject property to be 20% better. Mr. Yu, influenced by the number of banks and shops at Hung Shui Kiu, which is a village 10 minutes walk from this Comparable, allowed 5%. On the evidence we find that the location of the subject property is 10% better then Comparable No. 1.

24. To reflect the difference in scale of potential development, Mr. Yu deducted 9.5% in favour of Comparable No. 1. Mr. Doran deducted 10%. We allow 10%. Comparable No. 1 was sold with vacant possession and Mr. Yu considered a allowance of 14.2% in favour of this Comparable was necessary. Mr. Doran preferred to make an end deduction for tenants compensation as a liability attaching to the subject property. We agree that this item is better dealt with by way of end deduction.

25. A lesser density of development is permitted for Comparable No. 1. This comparable is limited to throe stories on a site coverage of 40%. Both valuers agreed that the maximum potential development for Comparable No. 1 would be more attractive than the maximum permitted development at the subject property. Mr. Yu allowed 20%. Mr. Doran 25%. The latter went on to express concern in using an unanalysed deduction in excess of 10%. However, he pointed out that an increase of 25% would only represent an increase of about 10% in house prices. We allow an adjustment of 25%.

26. After taking into account all these adjustments the resultant adjustment for Comparable. No. 1 is 75% of $4,646 per square metre which equals $3,485 per square metre.

27. When Comparable No. 2 was sold it had two single storey buildings but the site is how cleared. Mr. Doran discounted the sale price of $6,922,240 by $750 per square metre for the 255.5 square metres comprising the garden extension which is not avaliable for calculating coverage limitations. This calculation was not challenged by the respondent and is accepted by this Tribunal. The premium for the garden extension paid in 1975 was $8,250. The adjusted price for the remaining building land is about $6.73 million which produces a rate of about $3,350 per square metre for Lot 2567 of 2009.7 square metres.

28. While the date of the sale of Comparable No. 1 was only 4 days after the date of the resumption of the subject property, the date of the sale of Comparable No. 2 was just over 6 months earlier. Mr. Yu thought no time adjustment was necessary, for his research did not suggest any movement in this district's values over this period. Mr. Doran, basing his opinion largely on experience rather than analysis, made for this factor an allowance of 25% in favour of the subject property. We recognise that he also supported his opinion that prices had risen by 25% over that 6 month period, by referring to Chart "W". Chart "W" is issued periodically by the Crown. It is a record of New Territories premix to be applied to Letter A/B exchanges. The Chart "W" produced was Issue No. 22 and covered the period from January 1960 to June 1982. This chart, used for Letter A/B redemptions, is updated from time to time to reflect the actual land sales in the New Territories.

29. However, form the evidence it was clear that the quarterly periods referred to in the chart relate not entirely to the periods in which the transactions were effected but subsequently after details of those transactions were obtained. This timelag in the compilation of the chart makes it far less than definitive. In the light of the evidence we allow in favour of the subject property 10% for the time factor.

30. The scale of development for Comparable No. 2 is smaller than for the subject property and even smaller than for Comparable No. 1. Here again we will make an allowance in favour of the comparable of 10%. As to density, Mr. Yu made no allowance as between the subject premises and Comparable No. 2. Mr. Doran was prepared to makes a small 5% allowance in favour of the Comparable No.2. The maximum permitted plot ratio of the subject property is 1.33. Both valuers agree that a project up to that ratio would result in a very congested and unattractive development. Mr. Doran considered a more desirable objective would be a lower plot ratio of 1.1. Mr. Yu produced a plan of the subject property with a development based on a 1.26 plot ratio. This evidence indicated that even with a plot ratio of 1.0 there would belittle room between houses restricted vehicular access and minimal garden areas. Development of Comparable No. 2 would also be limited to two stories. We are not satisfied comparing the subject property and Comparable No. 2 that any significantly different density would be achieved at either property by a reasonably prudent developer. We therefore propose to follow Mr. Yu's approach and make no allowance for any difference in density.

31. These adjustments give a rate for Comparable No. 2 of $3,350. We have already arrived at an adjusted rate for Comparable No. 1 of $3,485. In the light of these two adjusted rates we consider that the appropriate rate for the subject property is in the region of $3,400. Applying that rate to the 9,307.8, say 9,308 square metres of the subject property, produces the sum of $31,647,000, which we will round up to $31,650,000.

32. Finally we turn to consider the end deductions to be made to that $31,650,000. The subject property includes several graves which, it was agreed by the parties, would inhibit development. It was further agreed that the allowance for this factor was $2,000,000. We allow that sum by way of end deduction. The applicant's valuer estimated that the additional infrastructure costs for the subject property would be $3,000,000. The applicant also called Mr. Haffner, a registered architect, who calculated those additional infrastructure costs at $2,800,000. We accept the latter figure. The remaining item arises from the fact that at the date of resumption the subject property was occupied by a large number of the applicant's tenants. The applicant allowed $800,000 for tenants compensation and related clearance costs. The respondent pointed out that upon resuming the subject property it had in fact paid to tenants $1,150,000 compensation. In reply the applicant submitted that may have been generous compensation and that in any event more persons were paid compensation than appeared on the applicant's list of tenants. We will allow $900,000 for this item.

33. In the result we determin compensation at $26,000,000 made up as follows:

1. Value of 9308 square metres at $3,400 per square metre $31,650,000

2. LESS:

34. The sum of $26,000,000 shall be paid to the applicant within one month and shall bear interest in terms of Section 17(3) of the Crown Land Resumption Ordinance from the 23rd day of March 1981 to the date of payment. The applicant is entitled to it costs to be taxed, if not agreed, in accordance with the Supreme Court scale pursuant to the R.S.C.62. Certificate for two counsel.

DATED this 30th day of November 1982.

Representation:

Mr. D. Chang, Q.C. with him Miss M.Yuen instructed by Johnson, Stokes & Master for the applicant.

Mr. T. Tristram, Senior Crown Counsel, for the respondent.