Hong Kong Aircraft Engineering Co Ltd v. Commissioner of Rating & Valuation

LDRA000053/1985

Rating - ratable value of aircraft maintenance depot comprising a large multi-building complex within the boundaries of the Hong Kong Airport - benefit derived from the use of the adjoining apron area, whether or not it involves exclusive use, may properly be taken into account in the assessment - the cost of the statutory requirement to provide a high standard of security arrangements is also to be allowed - account should be taken of the fact that the appellant is the only likely hypothetical tenant in the market - sections 7 and 7A Rating Ordinance, Cap. 116.

IN THE LANDS TRIBUNAL OF HONG KONG

Rating Appeal No. 53/85

TRIBUNAL: His Honor D.J. Leonard, Presiding Officer and M.W. Phillips, Esq., Member

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DECISION

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1. This is an appeal by the Hong Kong Aircraft Engineering Company Limited (the Appellant) against a decision of the Commissioner of Rating and Valuation (the Respondent).

2. On the first of March 1984, following the revaluation of all rated tenements, the Respondent gave notice to the Appellant that the rateable value of the subject tenement, which we shall describe below, would be $33,600,000.00 with effect from the let of April 1984. The Appellant made a proposal to alter the valuation list and as a result the Respondent signed a notice of decision specifying that the rateable value would be reduced to $32,820,000. It is the appellant's appeal against that decision with which we are concerned. The figure put forward by the Appellant's value in his Rule 18 Statement (Exhibit A1) was $18,720,000.

The Subject Tenement

3. This comprises a large, multi- building industrial complex situated within the boundaries of Hong Kong Airport. The premises are within the secure area of the airport and access to the buildings nay be gained both from Concorde Road, which is outside the secure area, and from "airside" which is the term used to describe the operational area in which the aircraft are to be found.

4. We were told that the Appellant has maintained an aircraft maintenance depot on the site since 1962. The site area (excluding the apron area) is 56,690 square metres. It is the only place in Hong Kong where the work of aircraft maintenance and repair is carried out on a commercial basis.

5. The Appellant's work in Hong Kong (it carries out work overseas also) is of three types :

1.    Line/ramp maintenance designed to ensure the air-worthiness of an aircraft for its next flight. This service is used by all aircraft using the airport except those of Swissair, Pan Am, Flying Tigers and JAL and possibly British Caledonian, which provide their own line/ramp maintenance.

6. This type of work is a major contributor to the Appellant's profits, to the extent of about 45%. It must exist at all airports.

2.    Base maintenance. This involves the periodic serving of aircraft, mainly those belonging to Cathay Pacific, described by the Appellant as Hong Kong's demestis airline, which happens to be an associate company of the Appellant, both being part of the Swire Group. Other airlines have service facilities in their home base airports.

3.    The overhaul and refitting of aircraft. According to the Appellant, and we accept it, the provision of a comprehensive aircraft maintenance service is essential for the efficient operation of the airport and it is something which Cathay Pacific could not do without. The subject tenement and the maintenance apron next to it, is the only place where such services can be performed. The Appellant is the only company in Hong Kong providing such a service.

7. There is no dispute between the parties as to the form and substance of the various structures on the tenement. The areas of the open spaces there, some of which are used for car parking and open storage, are agreed.

8. The subject tenement is hot let under one lease. Part of it consists of New Kowloon Inland Lot (NKIL) 5058 which was let to the Appellant by the Crown by a lease dated 31st March 1965 for a term of ten years from 1st April 1962, renewable for a further ten years. By a lease dated the 6th June 1973, the term was extended for ten years from 31st March 1972. The area of land let was increased, as was the rent. The area of NKIL 5058 was further extended by an agreement dated 11th August 1976. Copies of the two leases and of the agreement were produced as part of Exhibit A6.

9. Another part of the subject tenement is NKIL No. 5241, held under an "Agreement and Conditions of Grant" (Exhibit A10) dated 11th April 1969, the term being 20 years from 31st March 1962 with the option of renewal for a further term expiring on 28th June 1997.

10. Part of the subject tenement, NKIL No. 5784 is held under an "Agreement and Conditions of Grant" dated 23rd June 1981, (Exhibit All) for the residue of a term of 99 years less three days from 1st July 1898.

11. It will be seen from the foregoing that at the relevant date the lease on NKIL No. 5058 had expired, as had also the "Agreement and Conditions of Grant" in relation to NKIL No. 5241. At the time of the hearing of this appeal, negotiations were proceeding over the draft of a proposed new lease on NKIL No. 5058. The draft lease appears in Exhibit Al.

The Apron

12. Between the land and buildings occupied by the Appellant and the main operational part of the airport lies an open area of concrete known as the aircraft maintenance apron which is under the control of the Director of Civil Aviation, who levies parking charges on aircraft parked there. He has also used it to park an impounded aircraft. Dragonair and the Royal Air Force regularly park aircraft on the apron. Other airlines may use it to park and service aircraft.

13. The Appellant enjoys certain limited rights over the apron area, partly under the expired lease of NKIL No. 5058, partly under a tenancy agreement and partly under a licence. In order "to describe those rights it is necessary to divide the apron notionally into three parts. As did the Appellant, we shall call them areas (a), (b) and (c).

Area (a)

14. This consists of four separate areas, a total of some 2000 square metre's, let by tenancy agreement No. KX 813 (Exhibit A7) for a term of one year from 1st November 1980 at a rent of $400,000 per annum and thereafter quarterly, for use for open parking of serviceable ramp handling service vehicles and open storage of serviceable equipment used in connection with aircraft maintenance works only. This area must be rateable. It was formerly rated separately but we were told oh behalf of the Respondent that it was now to be regarded as part of the subject tenement. It is our impression, however, that the land covered by this tenancy agreement was not considered by either party as part of the tenement until the tenancy agreement came to light at the hearing. We are satisfied that it is occupied and used as part of the Appellant's overall operation and may be treated as part of the tenement.

Area(b)

15. This area was the subject of a licence agreement (Exhibit A12) dated the 24th August 1971. It was expressed to be about 122,000 square feet in area and the agreed annual licence fee was $200,000. It was subsequently expressed to be 11680 square metres and a fee of $1,090,297063, later reduced to $788,400, was agreed (see also Exh. A12). The licence is expressed as "licence and permission in common with all other persons so authorised to enter and go upon the said apron area with or without tractors of other towing lifting carrying or servicing equipment for the purpose of towing aircraft thereover to its premises or for carrying out minor repairs to or servicing aircraft thereon standing but so as not to interfere with the ordinary use of the said apron area by the said Director in the operation of Hong Kong Airport and reserving to the said Director the right to clear and keep cleared the said apron area of all aircraft machinery and personnel for and during any period of time and for any purpose which the said Director at his sole and absolute discretion may consider necessary to deal with any emergency without payment of any compensation to the licensee."

16. It is conceded by the Respondent that the part of the apron to which the licence relates is not rateable as part of the subject tenement. He contends, however, that the existence of the licence enhances the value of the tenement. The Appellant points out, on the other hand, that an annual licence fee is payable and argues that a prospective tenant bidding for the tenement would take into account the fact that area (b) is available, but available at a cost. Mr. Noffke said in cross-examination that it had been a mistake not to include in the valuation the benefit of the use of this area.

17. It is clear that in the minds of the parties the licence was linked to the tenure of NKIL 5241. Cause (2) on page 2 of the licence is in the following terms :

"The Licensee shall not use or allow to be used the said apron area other than for the purposes hereinbefore specified in association with the permitted use of the said New Kowloon Inland Lot No. 5241."

Area (c)

18. This apron area is dealt with in the lease of HKIL 5053, which lot forms part of the subject tenement. Clause 4(1) of the lease (Exhibit A6) creates a licence in terms virtually identical to those quoted above in relation to Area (b). A rent is reserved in the lease there is no provision for a separate consideration for the licence.

19. The Respondent concedes that Area (c) is not rateable as part of the subject tenement but contends that to a prospective tenant bidding for the subject tenement, the value of the licence to use area (c) would enhance the value of the tenement.

The issues in the Appeal

1. The General Valuation

20. The tenement is unique in Hong Kong in terms of the types and sizes of the structures there. There are no rental comparables for the aircraft hangars and there are no direct rental comparables for many of the buildings which are in specialized use. Both parties initially carried out the valuation exercise by looking at the rentals of other premises and making adjustments in order to apply them to the various structures within the tenement. The object of the exercise was to determine the rateable value of the subject tenement as at the 1st July, 1983.

21. It is provided in section 7(2) of the Rating Ordinance that

"the rateable value of premises shall be an amount equal to the rent at which the premises might reasonably be expected to let, from year to year, if -

22. Section 7A(4) of the Rating Ordinance provides that, for a tenement in respect of which a proposal has been made,

"the rateable value ... shall be the value which would have been ascribed thereto on the relevant date on the assumption that at that date -

23. The relevant date, designated under section 11(1) of the Rating Ordinance, is 1 July 1983 (GN 2412 of 1983). The date referred to in (a) (b) & (c) is for the purposes of this appeal, the 1st April 1984.

24. Mr. Kenneth Kwok was called by the Appellant as an expert witness. He is an Associate of the Royal Institution of Chartered Surveyors and an Associate of the Hong Kong Institute of Surveyors. He is an estate manager of Swire Properties Ltd. Since 1975 he has been responsible for managing industrial properties owned by that company and advising other Swire Group Companies on matters relating to land. He has been closely involved in negotiations between the Appellant and the Hong Kong Government for the renewal of the lease of NKIL 5058.

25. The same reference numbers for the various areas and buildings valued have been used by both parties. Mr. Kwok's schedule is to be found at pages 21-23 inclusive of his proof of evidence filed under Rule 18 and marked as Exhibit A1. The Respondent's schedule is at Appendix D to Exhibit R1.

26. On the issue of basic rates, subject to arguments about adjustments, the parties had by the time of the appeal hearing agreed a figure of $2.95 million for the items listed as numbers 1 to 39 (ground floor) inclusive and 40 to 47 inclusive. There was a dispute over the upper floors of the Main Block, item 39(a) on Mr. Kwok's list (Exhibit A1 page 22). The agreed basic rates took no account of the use by the Appellant of the Aircraft Maintenance Apron (item 48). As we have said, it was conceded by the Respondent that the apron was not part of the subject tenement and was not rateable as such.

27. So far as adjustments to basic rates were concerned, the following matters were in dispute.

28. We shall now proceed to deal with the issues one by one.

29. The basic rate for item 39(a), i.e. the upper floors of the Main Block.

30. A description and photograph of the Main Block may be found at page 131 of Exhibit A1.

31. It is a five-storey office building built in 1961. The ceiling heights for the first and second floors are 4.1 metres. Those for the third and fourth floors are 3.5 metros. The building is centrally airconditioned and contains lifts, but according to the Appellant it is suffering wear and tear and obsolescence due to its age, design and construction. Mr. Kwok made detailed criticisms of the lifts and airconditioning arrangements in his evidence.

32. On the basis of the listed comparables, the Respondent put a basic rate of $50 per square metro en the let to 4th floors. The Appellant argued for $40 per square metre.

33. Expert evidence was given on behalf of the Respondent by Mr. C. Noffke, who is a Fellow of the Hong Kong Institute of Surveyors and an Associate of the New Zealand Institute of Valuers. He is Senior Valuer in charge of the Special Properties Division of the Rating and Valuation Department of the Hong Kong Government.

34. Mr. Noffke set out his comparables of office rentals at Appendix I to his Valuation Report (Exhibit R1). The first six of his nine comparables are in either the Apron Services Complex (I₁) or the Air Cargo Terminal Office Building (I₂), both of which are at the airport and Government owned. Rental reviews are conducted annually and implemented from the 1st June. Mr. Noffke said that the most indicative rentals, therefore, are those after lot June 1983, which show a monthly rent of $70.00 per square metre. He added, however, that these rents, having been recommended some six months previously, may be regarded as lagging behind the market, which was falling at the time. Departmental indices showed a fall of 8.5% from the fourth quarter of 1982 to the second quarter of 1983, so he reduced the rents of $70.00 by 8.5% to $64.00 per square metre.

35. It was conceded that the rents for the comparables in I₁ and I₂ were not negotiated but were arbitrarily set by the Government on a "take it or leave it" basis and it appears that some offices were left vacant. The Appellant therefore suggested that the rents were suspect. Mr. Noffke said that he understood that the reason why not all the space in I₁ was taken was that access to the first floor could only be gained from "airside". The Air Cargo Terminal Office Building was almost fully let.

36. It was pointed out on behalf of the Appellant that the Respondent's departmental indices for office rentals showed a fall of 25% from the second quarter of 1982 to the second quarter of 1983. If that percentage wens applied, the result would be a rental of $56.25 per square metre.

37. The Appellant also pointed out that Mr. Noffke had indicated that the Main Block, situated in an industrial complex, would be less attractive to a prospective tenant looking for office space alone. He had also found the Main Block "slightly inferior" physically to the Air Cargo Terminal Office Building, but he considered that on a physical basis the Main Block was worth in the order of $65,00, though his adjusted figure for the Air Cargo Terminal Offices had been $64,00.

38. No adjustment had apparently been made for the fact that the Main Block, built in 1961, was fifteen years older than the Air Cargo Terminal Office Building.

39. No adjustment had been made by the Respondent to reflect the fact that the rentals in I₁ and I₂ were based on net usable floor area whereas the Main Block contained long corridors.

40. Mr. Noffke conceded in evidence that the tenants such as freight forwarders in 12 would not be likely to bid for offices in the Main Block, which would not be found convenient by such tenants.

41. Comparable I₃ was situated at 31-35 Sa Po Road, 9/F., Unit C. It consisted of plain modern accommodation, with no false coiling or central air-conditioning, but with lift access. It let in April 1983 for $70.1 per square metre.

42. Comparable I₄ was situated at 452 Prince Edward Road, 3/F. Mr. Noffke described it as plain accommodation in a poorly managed building, with lift access. It had false ceiling and floor coverings fitted by tenant and no central air-conditioning.

43. It let for $43.3 per square metre from March 1983.

44. Comparable I₅, situated at 454 Prince Edward Road, 2/F., described by Mr. Noffke as very inferior space in a poorly managed older building, with no lift or central air-conditioning, let from July 1983 at $39.4 per square metre.

45. Mr. Kwok's comment on I₃, I₄ and I₅ was that although they were in Kowloon City near the airport, the area in which they were situated could not be described as an industrial area and the were therefore unreliable as comparables.

46. Mr. Noffke appeared to arrive at his figure of the order of $65.00 Per square metre after mentioning suspended ceilings, flush lighting and floor coverings. It was suggested for the Appellant, however, that it could not be assumed that such facilities would be available to a hypothetical tenant who in accordance with Hong Kong practice, would be expected to do the fitting out himself.

47. Mr. Noffke's reduction from $65.00 to his final $50.00 is arbitrary. The factors he mentions in that connexion are the fact that the offices adjoin an industrial complex and are thus less attractive to a potential tenant and that offices would be "not of such value to an industrial occupier". He regarded the Main Block to be physically better than I₃, I₄ and I₅.

48. Mr. Kwok's three comparables are described in detail at pages 160 - 162 inclusive of his Rule 18 Statement (A1). They show unit rates of about $50.00 per square metre and he took $50.00 as his starting point. He then made a 20% deduction to take into account the age and obsolescence of the Main Block and thus arrived at his figure of $40.00. We note that at this stage of his evidence Mr. Kwok demonstrated his analysis which placed reliance on averages. The use of averages was criticised by the High Court of Australia in The Commonwealth v Milledge (1953) 90 CLR 157. All three comparables are in 16 storey factory buildings built in 1983. Mr. Noffke conceded that their facilities and recent construction would make them more attractive than the Main Block but pointed out that the Main Block had been maintained since it was built and that it was fitted out to a good standard. There was nothing that an incoming tenant would not like except perhaps the layout of the partitioning. He took the view that the Chung Nam Center, in which D1, D2 and D3 are located is net a comparable, because account would have to be taken of a requirement for substantial fitting out costs.

49. We have had the advantage of inspecting the suit premises and the comparable, and have noted that the Chung Nam Center was used for both industrial and office/showroom use, whereas the Main Block was used for offices (which are, of course associated with the industrial complex). The rents in Chung Nam Center would reflect the value of loading and unloading areas in the building.

50. It was accepted on both sides that there are no direct comparable. We think that there is considerable force in the criticisms made in relation to Mr. Noffke's I₁ and I₂ even after eliminating the lettings which took place prior to June 1983. Mr. Noffke did not rely on his remaining comparable, I₃, I₄ and I₅, which Mr. Kwok considered unreliable. He deseribed them in a written submission as the absolute lowest level of quasi-office values. He said that $50.00 is the midpoint between I₁, I₂ and I₃ on the one hand, and I₄ and I₅ on the other, and reflects the location, use and quality of the main block.

51. Mr. Kwok's comparables are much never than the main block. On the other hand, the main block appears well maintained. It would be proper to make a reduction in the unit rate to take account of differences in the ages of the buildings. On the other hand, the use with which we are concerned is a use as part of an industrial operation. It seems to us that the convenience of having offices integral to the industrial complex, inside the secure area of the airport, must also be taken into account. Bearing in mind all we have seen and heard, we feel that a basic rate of $50.00 per square metro is about right.

52. To the agreed figure of $2,950,000.00 must be added the assessment of the Main Block, Floors 1 - 4 inclusive, an area of 6,954.8 square metres, which at $50.00 per square metre, works out at $347,740.00. We must also add the value of the land let on the apron under tenancy agreement KX813. The Respondent's valuer put a value of $20.00 per square metre on the apron when he gave evidence. His valuation was not challenged. We will adopt it. 2000 x $20 = $40,000 per month.

53. The basic working figure for assessment on the basis of comparable rentals is $3,337,740.00, the sum of the above three figures.

54. We would note that there was some disagreement between the export witnesses over two matters. One of these was the question whether any account should be taken of a substantial difference between the actual rent of a comparable and its rateable value. Mr. Kwok tools the view that in a case where there was such a disparity, either the rental should be ignored as being too unreliable for use as a comparable or suitable adjustments should be made in other to arrive at a fair and correct valuation. In this regard he prayed in aid the dictum of Lord Templeman in K. Shoe Shops Ltd. and others v. Hardy (Valuation Officer) and others (1984) (unreported) which reads as follows: -

"It is always open to a ratepayer to urge that his rateable value should be decreased because other comparable properties have been assessed at lower figures. Disputed questions of fact and fairness lie within the province of the local valuation court and the lands Tribunal."

55. Mr. Noffke's view was that while there may sometimes be a disparity between rental and rateable value in a comparable it is not relevant to the fixing of a correct rateable value for the subject promises. He reminded us of the decision in Ladies Hosiery and Underwear Ltd. v. West Middlesex Assessment Committee (1932) 2 KB 679, which, he said, established the principle that the correctness of the assessment is paramount. He referred us to the words of Scrutton L.J. reported at p. 688 as follows :-

"The assessing authority should not sacrifice correctness to ensure uniformity but, if possible, obtain uniformity by correcting inaccuracies rather than by making an inaccurate assessment in order to secure uniform error."

56. It seems to us to be common sense that if there is a marked discrepancy between the actual rent on the basis of a letting on or about the relevant date on the one hand and the rateable value en the other, then the Commissioner of Rating and Valuation has seen fit to regard the rent as being out of line in relation to the market. It is only natural that in such a case one would be doubtful of using that actual rental as a comparable unless the reason for the discrepancy were known. The Respondent, having carried out the valuation, would be in a position to explain the reason for the discrepancy and this might be of considerable assistance. It is not necessary for us to grapple with specific adjustments in this case, however, the relevant basic rates in question having been agreed.

57. There was at one stage discussion as to how open storage spaces, toilet blocks and the like should be treated in a tenement such as this where the facilities are not shared in common by several tenants but are an integral part of a single tenement notionally occupied by one tenant. In this case however values have been agreed (see e.g. items 3, 20, 21, 22, 23, 29, 30, 32, 34, 35, 43 and 46).

58. Other items, such as an Electricity Distribution Centre and a Switch Room and Transformer Enclosure were deemed by agreement to be included in the general valuation figure.

59. There was some dispute auto how to value the welfare building's upper floors (see item 38). Those floors are now included in the weed figure and no issue falls to be decided by us in that regard.

2. The Apron

60. We must bear in mind the fact that our duty is to assess the market rental on a hypothetical letting of the whole tenement occupied by the Appellant as at the relevant date on the basis of the current use. We cannot assume the continuance of the complicated and piecemeal nature of the present arrangements which now exist between the Appellant and its landlord. We must assume that the landlord will let the whole of NKIL 5058 and extension, NKIL 5241 and NKIL 5784, and the land let on the apron on the basis that the existing limited use of the whole apron will continue and be provided for in the lease. The value of that use must be reflected in the rent of the tenement. We feel that this approach is consistent with the decision in Shell Mex & BP Co., Ltd. and Another v. Longley (Valuation Officer) (1962) 9 RRC 249 which was cited to us.

61. Mr. Noffke considered two approaches. One was to take 25% of the full value of the apron area covered by the expired lease of NKIL 5058 as its value to the Appellant. This approach was adopted and agreed by both parties to the negotiations for renewal of the lease of NKIL 5058. According to Mr. Noffke, the resulting figure is $115,680.00 per month.

62. He also considered the use of the apron as a 5% enhancement of the value of all buildings except Hangar 4, since the apron next to that is the subject of a separate licence. There would be no enhancement to the B747 simulator which is not used for the business of repair and maintenance. His resulting figure was 5% x $2,168,168.00 = $108,408.00. On balance, he preferred the former figure of $115,680.00.

63. Mr. Noffke's 5% enhancement figure was purely arbitrary and he did not defend it. It was argued by the Appellant that the apron area hardly enhances the rent of a toilet or pantry any more than the simulator.

64. We take the view that the best course is to try to assess what the hypothetical tenant would be prepared to pay for the limited use of the apron new enjoyed as at 1st July 1983. The only apron is adjacent to the only aircraft maintenance and repair establishment. The tenant of the tenement would, in our view, require the lease to include a licence over the apron (though the licence would not be exclusive). We have evidence of what the Appellant was prepared to pay for the use of two parts of the apron with effect from 1st April 1982 and, as to one part, with effect from 1st April 1984.

65. In a valuation report dated 25th March 1983, prepared by Mr. Noffke in connexion with the negotiations for the renewal of the lease of NKIL 5058 and extension, the apron area of 26,136 square metres was valued at $30.00 per square metre and discounted by 75% to reflect non exclusive use, giving a not figure of $196,020.00 per month, i.e. $7.50 x 26,136. As we understand it, that valuation was not seriously disputed by the Appellant, but hard bargaining took place, as a result of which an overall reduction of about 25% was made in the rent. We are satisfied that the reduction was net based on general principles of valuation. It resulted from the special position and bargaining power of the Appellant. Ignoring for the moment that special position, we can take $7.50 per square metre as some indication of the value of the use of the apron to a hypothetical tenant of NKIL 5058, with effect from 1st April 1982. After the 25% reduction, the actual rate is about $5.60 per square metre.

66. In his Schedule of Buildings and Rateable Values at Appendix D to his Rule 18 statement (Exhibit R1) Mr. Noffke has valued the same area at $20.00 per square metre, discounted by 75% as before, i.e. at $5,00 per square metre, thus arriving at a figure of $115,680.00. After an overall quantity allowance of 20% had been made, the effective rate was $4.00 per square metre. So Mr. Noffke's valuation for rating purposes is about $1.60 per square metre less than the sum the Appellant was actually paying with effect from 1st April 1982, even after a special 25% reduction.

67. Mr Noffko in calculating his figure of $115,680 used as area of 23,136 square metres. The plan on page 84 of Mr. Kwok's Rule 18 documents, shows the apron area as 26,136 square metres, the same as that adopted originally by Mr. Noffke in his earlier exercise. The plan appears to be that accompanying the draft lease for NKIL 5058 and the latest assessment of the apron area is assumed to be that shown on this plan. We have therefore assumed 23,136 square metres is an error and adopted 26,136 square metres as the correct area.

68. We also know that the Appellant agreed to pay, with effect from 31st March 1982, an annual licence fee of $1,090,297.63, payable in advance, in respect of the apron area of 11,680 square metres used in association with NKIL 5241 (see Exhibit A12). Mr. Kwok told us, however, that when the proposed new lease over NKIL 5058 was being negotiated in 1982, the terms of this licence were also reviewed. The result was that, after an appeal to the Director of Lands, the fee was reduced with effect from 1st April 1984 from $1,090,297.63 to $788,400.00, i.e. from about $7.78 to about $5.63 per square metre per month.

69. In all the circumstances, we think that Mr. Noffke's $5.00 per square metre (before quantity allowance), being less than that which is already being paid for either part of the apron, may well be regarded as overgenerous. Since it is the Respondent's figure, however, we shall adopt it.

70. The area of the apron said to be used under licence by the Appellant is 26,136 square metres plus 11,680 square metres making a total of 37,816 square metres. At $5.00 per square metre it would be worth $189,080.00, say $190,000.00 to the hypothetical tenant. But the Appellant is occupying 2,000 square metres of this area already valued by us at $40,000, so the value of the licence must be reduced (by 2,000 x $5 = $10,000) to $180,000.

2.   (a) Statutory Security Requirements and (b) Road Repairing Obligations

71. The subject tenement lies within a Tenant Restricted Area under the Hong Kong Airport (Restricted Areas and Tenant Restricted Areas) Order which appears at Appendix B to Mr. Kwok's Rule 18 statement (Exhibit Al). Sections 18 to 24 of the Hong Kong Airport (Restricted Areas) Regulations therefore apply. They appear at Mr. Kwok's Appendix D. The regulations impose on airport tenants a duty to control access to their premises, issuing passes for that purpose,

72. It is proper to take account of the cost of this statutory burden in the valuation, Mr, Kwok quoted to us the following passage from the speech of lord Buckmaster in Port of London Authority v. Assessment Committee of Orsett Union and others (1920) A. C. 273, at p. 305 :

"The actual hereditament of which the hypothetical tenant is to be determined must be the particular hereditament as it stands, with all its privileges, opportunities and disabilities created or imposed either by its natural position or by the artificial conditions of an Act of Parliament."

73. However, it must be borne in mind that, even in the absence of a statutory requirement, the hypothetical tenant would control access to its industrial premises and almost certainly have a system of passes as a matter of common prudence. It will be necessary for us to try to arrive at a figure representing the extra cost, if any, of complying with the regulations. As Mr. Kwok put it, the question is the degree of security required.

74. Mr, Kwok gave evidence that in order to carry out its statutory duty, the Appellant employs Securair, in which the Swire Group, of which the Appellant is a subsidiary "may have a very small interest ... say 10%." In 1982 Securair's bill was $1,231,653. By October 1985 the charges were running at an annual rate of $1.49 million. It may be reasonable to assume that the annual cost in 1983 was about $1.3 million/ Mr. Kwok told us that the Appellant employs guards of its own, presently 17 in number, at an inclusive cost of $78,000 per month or $936,000 per annum. He first took a 5% allowance as representing the extra security cost as well as a provision for an obligation under the expired lease for certain road repairs outside the tenement. Later he said that he would use the 5% to cover security alone.

75. So far as road maintenance is concerned, the provisions in the lease date from a time when the reads in question, now public, were private rights of way. The Appellant has never been called on to pay for any road maintenance. We think that in the circumstances the liability to maintain may be ignored.

76. The cost of maintenance of the means of physical security, such as fences must, we think, be a matter for the landlord. The hypothetical tenant would be responsible for staff and running costs.

77. Mr. Noffke in written submissions tendered at the hearing (Exhibit R2) argued that there was no evidence that the statutory requirements produced any greater cost than the Appellant would have incurred as a matter of common prudence. We heard no evidence to suggest that the Appellant was required to employ Securair rather than do the job itself. We cannot assume that a hypothetical tenant would employ Securair. The Appellant may have reasons of its own for employing an associated company and paying fees to it.

78. In the absence of sufficient detailed evidence, doing our best in the circumstances, we would make an allowance of half the Securair bill for 1983, which we estimated at $1.3 million, i.e. $650,000 or say $55,000 per month.

End Allowance:

79. We note here that we are still engaged in the valuation exercise based on rental comparablcs. When we have dealt with that method of valuation, we shall turn to other methods. In the course of our further considerations, we shall be considering the Appellant's position on the basis that it is the only tenant in the market. For the time being, however, we shall ignore that aspect. The question of ability to pay, therefore, does not presently arise.

80. In his March 1983 valuation for the purpose of the proposed renewal of the lease on NKIL 5058, Mr. Noffke stated that he had made a 20% quantity allowance. Mr. Kwok in his valuation for the purpose of this appeal took a 20% quantity allowance also. We see no reason to disagree.

81. We are now in a position to bring together the figures as follows :

82. The hypothetical annual rent is therefore 12 x $2,770,000 or $33,240,000.

Existing Occupant the only Hypothetical Tenant in the Market

83. As we have said, we consider that the existing tenant must be regarded as the only tenant in the market. There is clear evidence from Mr. Noffke who was involved in the valuation exercise for the proposed renewal of the lease on NKIL 5058 and from documents produced by him, that the Appellant managed to drive down the rent to 75% of his final valuation of March 1983. Mr. Kwok said that this reduction was on the basis of ability to pay.

84. We were reminded that this Tribunal pointed out in Ho Tung Fat v. Commissioner of Rating & Valuation (1978) HKLTLR 28 that where the existing occupant would be the only hypothetical tenant in the markets his ability to pay would be taken into account in determining the market rent. This principle was recognised in the judgment of the Court of Appeal in Lai Kit Lau Mutual Aid Committee v. Commissioner of Rating & Valuation (Appeal No. 160 of 1984).

85. In the present case, however, having read correspondence and minutes relating to the rental negotiations, we agree with Mr. Noffke's view that the Appellant was indicating an unwillingness rather than inability to pay the rent indicated by Mr. Noffke's valuation of March 1983. The Appellant claimed in effect, and successfully, that it was entitled to special treatment. It is not for us to express any view as to the conduct of the negotiations. The result, however, is a material fact.

86. The Appellant was saying to the landlord that it could not pay the rent demanded and sustain its margin of profit. That is not the same as saying that it could not pay without making a loss. Moreover, Mr. Noffke cited some figures indicating that the Appellant would have been well able to pay.

87. We consider in the light of the evidence that this Appellant, the only hypothetical tenant in the market, would on past form be able to demand a discount on the market rent.

Profits Basis of Valuation

88. Mr. Noffke did not use the Profits Basis of valuation initially, but tried it at the proposal stage, using figures supplied by the Appellant. His figures appear at Appendix F of Exhibit R1. Excluding profits from overseas operations and for line/ramp maintenance he calculated a rent for 1983 of $26.604 million. Excluding overseas profits only, he arrived at a rent for 1983 of $46,813 million. Mr. Kwok using the former approach produced a figure of $19.087 million (see p.190 of Exh. A1).

89. We think it right to exclude profits from overseas operations. So far as Mr. Kwok was concerned, line ramp maintenance should be ignored, because it can be done independently of the existence of the depot. Mr. Noffke in his written submission (Exhibit R2) put forward a powerful argument for saying that the profits from line ramp maintenance, having regard to the facts of the actual conduct of the operation by the Appellant, should be included to some extent. He pointed out that the profits from line/ramp maintenance form a very significant part of the total. He felt that his valuation figure of $32.8 million was reasonably placed within the range of 26 to 46 million dollars.

90. The difference between Mr. Noffke's $26 million and Mr. Kwok's $19 million lies in their method of working out the tenant's share of divisible balance. Mr. Kwok related it to turnover, Mr. Noffke to return on capital. He satisfied us by his written arguments in Exhibit R2, especially by his comparisons with the assessments made in relation to the Hong Kong Gas Company and the Hong Kong and Yaumati Ferry Company, that his approach is more reliable than that of Mr. Kwok.

91. A consideration of the profits basis did not lead us to believe that the original method of valuation should be abandoned, but it did assist us to come to a firm conclusion that there was no question as to the Appellant's ability to pay.

Conclusion

92. If we were to ignore the unique situation of the Appellant, we would assess the market rent at $33,240,000. Having regard, however, to the fact that the Appellant would be the only hypothetical tenant in the market and has demonstrated its ability to drive down the rent we will apply a reduction. We believe, however, that the conditions which prevailed, when a 25% reduction was secured are unlikely to recur. A similar reduction in the present case would be far too high. An end allowance of 10% would, in our view be a reasonable recognition of the unique situation of this Appellant. 90% of $33,240,000 is $29,916,000. We shall round it down to $29,900,000.

93. We assess the rateable value at $29,900,000. The appeal is allowed. We direct the Collector of Rates, in terns of Section 44(1)(c), to amend the valuation list accordingly, with effect from 1st April 1984, and to pay any necessary refund of rates forthwith. There shall be liberty to the parties to apply in respect of any consequential matters.

94. Dated this 17th day of June 1986.

Representation:

Miss Maria Yuen, instructed by Johnson, Stokes & Master, for the appellant

Mr. Stephen Franklin, Senior Crown Counsel, for the respondent