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LDGA 224 / 2004
& LDRA 358 / 2004
(Consolidated)
IN THE LANDS TRIBUNAL OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
GOVERNMENT RENT APPEAL NO. 224 OF 2004
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BETWEEN
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THE HONG KONG ELECTRIC CO. LTD. |
Appellant |
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and |
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COMMISSIONER OF RATING AND VALUATION |
Respondent |
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IN THE LANDS TRIBUNAL OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
RATING APPEAL NO. 358 OF 2004
_______________
BETWEEN
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THE HONG KONG ELECTRIC CO. LTD |
Appellant |
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and |
|
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COMMISSIONER OF RATING AND VALUATION |
Respondent |
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Before: His Honour Judge Thomas Au, Presiding Officer, Lands Tribunal, and Mr. W.K. Lo, Member, Lands Tribunal, in Court
Dates of Hearing: 5-9, 12-16, 19-23, 27, October & 12-14 November 2009
Date of Judgment: 30 November 2009
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C O R R I G E N D U M
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Paragraph 1 of the Judgment should read as follows:
“1. This is the hearing of the appeals lodged by the Hong Kong Electric Company Ltd (“HEC”) against the rateable value ascribed to its tenement for the rate year of 2004/2005…”
Paragraph 3 of the Judgment should read as follows:
“3. At the material times, the business of HEC has been governed by a Scheme of Control Agreement2 (“SOC”) made between it and its holding company, Hongkong Electric Holdings Ltd (“HEHEH”) on the one hand, and the Hong Kong Government on the other hand. The SOC is intended and stated to govern the financial affairs of the electricity-related activities of HEC.”
Paragraph 5 of the Judgment should read as follows:
“5. For 2004/2005, the Commissioner of Rating and Valuation (“CRV”) assessed the rateable value of the Tenement (a) for rate-paying purposes to be HK$6,294 million, and (b) for Government Rent purposes to be HK$2,6052 2,605.2 million.”
Paragraph 6(1) of the Judgment should read as follows:
“6. …
(1) The “rateable value” of a tenement as defined under s. 7(2) of the RO is the amount equal to the “rent” at which the tenement might reasonably be expected to let on a yearly tenancy, … The amount of rates payable under the tenant is taken to be a percentage on this rateable value.
…”
Paragraph 12(2) and (3) of the Judgment should read as follows:
“12. …
(2) In particular, the CRV was wrong in ascertaining the tenant’s share under the DB by applying the Weight Weighted Average of Cost of Capital (“WACC”) onto the net book value (“NBV”) of the tenant’s assets to assess what is a reasonable return for the tenant.
(3) If the SOC had been properly taken into account in the valuation method, the tenant’s shares share should be determined by (a) first assigning 25% of the DB to the tenant to reward its enterprise and risk , and (b) apportioning a sum to the tenant representing the permitted return of revenue under the SOC on the proportion of the tenant’s assets value as determined under the SOC, and (b) by further assigning 25% of the DB to the tenant to reward its enterprise and risk.
…”
Paragraph 13(2) of the Judgment should read as follows:
“13. …
(2) If so, whether the tenant’s reasonable return in investing in the business undertaking and in taking up the tenancy is to be assessed and measured by (a) the permitted return under the SOC on the tenant’s average proportion of net fixed assets value, together with (b) a (b) subject to a prior adjustment in the amount of 25% of the value of the DB.
…”
Paragraph 14(2) of the Judgment should read as follows:
“14. …
(2) Notwithstanding that the R&E Method is the primary method that should be adopted to assess the rateable value of the Tenement, whether the Tribunal should still have regard to the CB Method in determining the rateable value of the Tenement.
…”
Paragraph 23 of the Judgment should read as follows:
“23. However, in order to enable the rating valuation exercise to be legitimately and possible to be carried under the various requirements and preconditions created by statute, judicial authorities over the years have established what is known as the hypothetical rating world, with various legal hypothesis hypotheses…”
Paragraph 27 of the Judgment should read as follows:
“27. Arising out of this principle is also the assumption that any incoming new HT would have no difficulty in acquiring the assets (at market value) and management staff of the sitting HT at the instance commencement of the tenancy.”
Paragraph 28 of the Judgment should read as follows:
“28. Thus, in Railway Assessment Committee v Southern Railway [1936] AC 266, an example is given of an enterprise of a nature which requires the HT to make a large investment in plant and equipment it . It has to be assumed that the incoming HT can acquire … ”
Paragraph 32 of the Judgment should read as follows:
“32. Where there is only one or more … Pearce LJ said at 178-179:
‘Therefore, it was important for the Tribunal to try to decide what in the ‘higgling of the market’ would be the resulting rent of this special hereditament as a result of the probably probable negotiations between the lessors and the ratepayer tenants. Each had powerful bargaining arguments….’”
Paragraph 38 of the Judgment should read as follows:
“38. The ‘rent’ is intended to represent the value of occupation of the premises: Poplar Assessment Committee v Roberts [1922] AC 93, per Lord Buckmaster at 103… ”
Paragraph 39 of the Judgment should read as follows:
“39. It is an open market rent that which HT would pay in a competitive market, taking into account of … Warren Chow v Commissioner of Rating and Valuation[1977] HKLTLR 277, approved in Commissioner of Rating and Valuation v Agrila and Others[ (2001)] 4 HKCFAR 83 at 107G.”
Paragraph 41 of the Judgment should read as follows:
“41. In Robinson Bros, supra, Scott LJ said at 4709:
‘…’
He also said at 469 that,
“…it is the duty of the valuer to take into consideration every intrinsic quality and every intrinsic circumstance which tends to push the rental value either up or down, just because it is relevant to the valuation and ought therefore to be cast into the scales of the balance before he looks to se see the resultant figure on the dial at which the pointer finally rests.”
…”
Paragraph 48 of the Judgment should read as follows:
“48. Moreover, all the legal hypotheses… If they hinder, it is said that they must be ‘pro tanot tanto be treated as inapplicable’. See …”
Paragraph 53 of the Judgment should read as follows:
“53. Therefore, a “plant” within the meaning of section 8A of the RO is included as part of a tenement…”
Paragraph 55 of the Judgment should read as follows:
“55. As we mentioned above, in these appeals, the Tenement includes part of HEC’s entire generation, transmission and distribution of electricity to Hong Kong Island, Lamma Island and Ape Ap Lei Chau. Hence the Tenement in the present case covers more than land and buildings. For examples, it also covers certain plants plant and machinery, the cables for the transmission and distribution of electricity in addition to the land they occupy.”
Paragraph 72 of the Judgment should read as follows:
“72. In 1993, … The Government started negotiations with HEC and HEH (as well as China Light and Power Hong Kong Ltd (“CLP”)) on the form of regulations that she it would introduce to monitor and control these electricity companies’ business and tariffs.”
Paragraph 77(2) and (3)(a) of the Judgment should read as follows:
“77. …
(2) The PR for a particular year is the aggregate product of 13.5% of “Average Net Fixed Assets” (“ANFA”) plus 1.5% of shareholders investments made after 31 December 1978 for financing…
(3) At the same time, HEC is required to maintain:
(a) A Development Fund which is intended to assist in financing the acquisition of fixed assets… In other words, if the Development Fund maintains a surplus, then in…
…”
Paragraphs 81(4)(c), and 81(7) of the Judgment should read as follows:
“81.
(4) ….
(c) The DB is the difference between the anticipated gross income and the general expenditures and cost for the year of the tenancy.
…
(7) The duration of the hypothetical yearly tenancy is assumed likely to be much more than 4 years.”
Paragraph 83 of the Judgment should read as follows:
“83. HEC’s case is that the tenant’s share should be determined by starting with the PR under the SOC to be earned on the proportion of assets hypothetically assumed to be owned by the HT, and then making a further prior adjustment to allow the HT to earn an appropriate amount for management and risk. In effect:
(1) From the DB, subject to (2) below, it should first be apportioned to the HT its share by reference to the return on assets permitted under the SOC…
(2) Then, the The HT should also be rewarded for the risk and enterprise in running the business by having a 25% share of the DB.”
Paragraph 86(2) of the Judgment should read as follows:
“86. …
(2) The SOC governs and regulates the financial affairs of the entire business, and provides for the mechanism as to how and how much the business is entitled to earn form from its operation.
…”
Paragraph 87 of the Judgment should read as follows:
“87. HEC therefore submits that, subject to various minor adjustments, the tenant’s share should be the summation of (a) PR x HT’s ANFA, and (b) 25% of the DB value , and (b) a share of the remainder of the DB in proportion to HL’s and HT’s NFA in the tunes of PR x HT’s ANFA value.”
Paragraph 98(2) of the Judgment should read as follows:
“98. …
(2) The freedom and … As the CRV consistently argues, this is a ‘bad’ thing for the business operator, as it puts a cap on its earning capacity while at the same time provides no guarantee to such an earning .
…”
Paragraph 105 of the Judgment should read as follows:
“105. The CRV however contends that the operator under the SOC is not guaranteed with the PR as the revenue...”
Paragraph 106(1) and (4) of the Judgment should read as follows:
“106. We do not think this is correct:
(1) The situations where the PR would not be achieved is are where (a) the operator decides not to achieve it in a particular year for a particular reason, and or (b) ...
…
(4) We also accepts accept HEC’s submissions that even when at times there is insufficient balance in the Development Fund which results in a shortfall between the actual return and the PR, …
…”
Paragraph 109 of the Judgment should read as follows:
“109. The CRV further contends that … This is so because the SOC does not determine the permitted return of the HT but only the integrated business (which is PR x HEC’s ANFA ). As such, …”
Paragraph 111 of the Judgment should read as follows:
“111. Mr Yu, Leading Counsel for CRV, further argues that HEC’s approach in first dividing the DB with a proportion of the HT and HL’s assets (even if in accordance with the SOC) is inconsistent with the economics economic theory of rent, which underpins the R&E Method…”
Paragraph 113 of the Judgment should read as follows:
“113. The CRV relies on various dicta of the following authorities to support the submissions that the economic theory of rent is central to the R&E Method…”
Paragraph 114(4) of the Judgment should read as follows:
“114. …
(4) The residue portion, when so determined is only presumably the rent. This we see it as allowing flexibility for the valuers to cater for and to deal with different circumstances…”
Paragraph 115(2) of the Judgment should read as follows:
“115. …
(2) Further, even if the exercise in determining the rent involves the assessment of the position of the HT, it could still be regarded as appropriate under the R&E Method also to consider the position of the HL:
…”
Footnote 35 of the Paragraph 112 of the Judgment should read as follows:
“35. Transcript fof the decision, 29 November 2007, Owen (Chairman), McEnvoy & Wheldon.”
Paragraph 126(5) of the Judgment should read as follows:
“126. …
(5) To use CAMP CAPM39 to calculate CLP’s WACC including the applicable formula …”
Paragraph 128 of the Judgment should read as follows:
“128. Despite this agreement, when the decision was reviewed by the Tribunal, it expressly observed that44: ‘he the tribunal did not accept the weighted average cost of capital [i.e., WACC] as …’.”
Paragraph 130(1) and (3) of the Judgment should read as follows:
“130. …
(1) The Tribunal erred in law in valuating valuing the tenement on a definite tenancy of four years, instead of on the basis of a hypothetical tenancy from year to year. The Court of Appeal held that the Tribunal committed no error of law in making an assumption as to the duration of what a reasonable period time for the tenant to continue to be a tenant …
…
(3) The Tribunal had misapprehended … In dismissing this ground, Godfrey JA said47 as follows:
‘It does appeal 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 it matters….’
…”
Paragraph 131 of the Judgment should read as follows:
“131. Reading the Land Tribunal’s decisions and the Court of Appeal judgment as summarized above, and noting the agreements on various issues made between the parties, we do not think the Court of Appeal is laying down any rule of law or general legal principle that, in applying the R&E method for valuating valuing the tenement, … ”
Paragraph 136 of the Judgment should read as follows:
“136. It is also CRV’s contention … In the premises, any HT asking for more (such as the way contested by the HEC), would be out-bid by such an interested HT for the tenancy…”
Paragraph 140 of the Judgment should read as follows:
“140. This puts a question mark as to … As such, we have doubts as to whether these parts of Mr Jones’ evidence could be treated as clear and sufficient evidence to deal with the issue on whether, if it is only the HT’s business that is on sale, there would be an interested potential HT who would be prepared to purchase it with a return expected at WACC level. ...”
Paragraph 145 of the Judgment should read as follows:
“145. HEC accepts that there is a de facto monopoly of the whole business, which has to be carried out on the Tenement…”
Paragraph 149 of the Judgment should read as follows:
“149. In other words, if the changes required to be done for to the Tenement to enable it to be used with a new set of tenant’s assets can be considered to be major by applying the above test, this cannot be taken into account in the rating world because of the rebus sic standibus stantibus rule…”
Paragraph 152 of the Judgment should read as follows:
“152. HEC’s rating valuation expert, Mr Parsons, is of the view that, in assessing the tenant’s share, other than that there be an apportionment of value of PR x HT’s ANFA (which we have accepted above), there should be a further prior allocation of 25% of the DB value to the HT.”
Paragraph 153(2) of the Judgment should read as follows:
“153. …
(2) However, for rating purposes, if the HT (as suggested by Mr Parsons) … because (a) this sum is significantly less than HEC”’s ANFA, and (b) ...
…”
Paragraph 156 of the Judgment should read as follows:
“156. Secondly, there is also nothing to support Mr Parsons’ approach to treat the PR x HT”’s ANFA as only a reward for HT’s capital investment…”
Paragraph 157(2) of the Judgment should read as follows:
“157. …
(2) Mr Parsons seeks to rely on materials (in the form of correspondences) in relation to settlement negotiations … We do not find these materials constituting good or sufficient evaluation valuation evidence…”
Paragraph 159 of the Judgment should read as follows:
“159. We therefore conclude that the tenant’s share under the DB shall be the value of PR x HT’s ANFA, being a portion of the DB in proportion to the asset split between the HL and HT. The DB shall be adjusted by making the relevant deduction for HL’s expenses and depreciation on theHT’s and HL’s assets as suggested by Mr Parsons in his first report. These depreciation adjustments are not challenged.”
Paragraph 168 of the Judgment should read as follows:
“168. Thus, it defies common sense that if a property which is not even capable of occupation would be chargeable for rate rates for the benefit or value of occupation. Unless there is clear language in the RO, which we have not seen, to show that it is the intention of the legislature to do so, we do not think such a construction is capable of the RO.”
Paragraph 170 of the Judgment should read as follows:
“170. As to whether, notwithstanding the non-rateability of the AUCs, there should be corresponding adjustment in valuations under the R&E Method or the CB Method for the Tenement, we could would discuss it later below in Member Lo’s judgment when we deal with subsidiary issues under these methods.”
Paragraph 172 of the Judgment should read as follows:
“172. The CB Method is one of the valuation methods, which is sometimes used to evaluate the rateable value of a tenement. In essence, it is a method valuating valuing the rent of the subject tenement by reference to...”
Paragraph 187 of the Judgment should read as follows:
“187. HEC however seeks to reply rely on a rateable value calculation chart based on the R&E Method prepared by Mr Parson Parsons and exhibited as CP45 to his 2nd report to show that there is no synergy value of the Tenement.”
Paragraph 190(1) and (2) of the Judgment should read as follows:
“190. …
(1) The fundamental assumption in CP45 was that if the SOC had kept up with the economic circumstances of 2003, then the PR would be fixed at the WACC arrived at by Prof Chan…
(2) In the premises, CP45’s fundamental assumption is wrong. One therefore cannot safely rely on CP45 for this purpose. [Check font size numbering]
…”
Paragraph 194 of the Judgment should read as follows:
“194. Having reached the conclusions of the above primary issues, strictly speaking, the Tribunal needs need not consider most of the subsidiary issues, in particular those … ”
The Sub-Title in line J on page 88 of the Judgment should read as follows:
“Disputes between the parties on the assessmentsassessment of the HT’s WACC”
Paragraph 196 of the Judgment should read as follows:
“196. HEC relies on the expert evidence of Mr. Jones whilst the CRV relies on that of Professor Chan... Therefore, despite of Mr. Jones’ response and revised estimates, Mr. Jones by no means said that … ”
Paragraph 198 of the Judgment should read as follows:
“198. The conclusion and results of the experts’ evidence on WACC have been summed up by HEC in its written closing submission as follows: …”
Paragraph 213 of the Judgment should read as follows:
“213. Under the CAPM, the risk of a stock could be decomposed into two components: … The Beta measures the amount if of systematic risk of the equity relative to the market.”
Paragraph 216 of the Judgment should read as follows:
“216. Alternatively, the cost of equity can also be estimated based on the DGM approach. According to the DGM, the current stock price is equal to the sum of the discounted value of all future dividends (named as equation (3) ), as follows: …”
Paragraph 222 of the Judgment should read as follows:
“222. One of the parameters used in calculating… The only disagreement is in the source of date data that should be taken into account: Mr. Jones has used daily data over a 2 year period whilst Professor Chan has used monthly data over a 5 year period.”
Paragraph 223 of the Judgment should read as follows:
“223. HEC submits that there are two fundamental problems in the present case which underlie Mr. Jones’ concerns …”
Paragraph 237 of the Judgment should read as follows:
“237. The CRV explains that the MRP in the CAPM approach seeks to estimate … However, The the CRV reminds us that it is commonly known that the Hang Seng Index is calculated using the market capitalization weighting.”
Paragraph 238 of the Judgment should read as follows:
“238. The CRV first explains that both parties in fact agree that for an individual stock, the expected return of that stock ‘r’ can be obtained by the following formula:
r = D1/P + g
where D = Expected dividend in the first year;
P = Current stock price; and
G g = Expected growth rate of dividends.”
Paragraph 239 of the Judgment should read as follows:
“239. The CRV points out that the above formula is actually from the algebraic equation, which clearly shows that “geometric growth of dividend has already been taken into account. The equation is as follows: …”
Paragraph 243 of the Judgment should read as follows:
“243. HEC contends that (1) Professor Chan’s assessment of the MRP is subject to a very large degree of uncertainly uncertainty and potential for error, …”
Paragraph 249 of the Judgment should read as follows:
“249. HEC in its submissions reminds us that … For these reasons, the HEC submits that Mr. Jones was right to discard KC3 completely because of the very substantial unreliability of the method both generally and in the specific circumstances of this case.”
Paragraph 255 of the Judgment should read as follows:
“255. We therefore accept that in any event, finding the HEC’s WACC by a method other than the CAPM method ensures that we do not have to … ”
Paragraph 256 of the Judgment should read as follows:
“256. HEC submits that there is an insurmountable problem in CRV’s adoption of HEC’s WACC as the HT’s WACC for the purpose of the R&ME Method ...”
Paragraph 263 of the Judgment should read as follows:
“263. In our view, we find that even on the assumption that … What Professor Chan has done was an attempt to estimate the HEH ’s WACC and in turn the HEC’s WACC (assuming that the HEH’s WACC is very close to or equal to that of the HEC). As contended by the HEC, the CRV has not given any instruction instructions to Professor Chan to try to estimate the WACC of other entities…”
Paragraph 271 of the Judgment should read as follows:
“271. The CB method involves the assessment of the replacement costs of all parts of the Tenement to arrive at the effective capital value (“ECV”). Consequently, it is necessary to identify as accurate accurately as possible, all parts of the Tenement to be costed and included in the valuation.”
Paragraph 280 of the Judgment should read as follows:
“280. Mr. Parsons explained in his first report… He chose to adopt possibility (c), hence assuming that it is his fiction in the rating world that the Tenement was built instantly without for interest.”
Paragraph 283 of the Judgment should read as follows:
“283. HEC further points out that in the Mobil decision, as both parties included interest on construction … The HEC says that the Tribunal’s decision in the Mobil case gave an even less satisfactory justification for including interest on land during the construction… HEC submits that the methodology of valuation in Shun Fung, which is a land resumption case, should have no relevance to the appropriateness of including interest on land during the construction for valuation by the CB method Method, or indeed in any CB valuation of any other rating case including the present case.”
Paragraph 285 of the Judgment should read as follows:
“285. The CRV submits that Mr. Parsons was wrong to have ignored the interests interest on construction costs … ”
Paragraph 290 of the Judgment should read as follows:
“290. As a matter of facts fact, there is no dispute between the parties that their estimation of construction costs and the land values were both made at the relevant date for the year of assessment 2042004/05 (i.e. 1 October 2003). Therefore, it is clear that ….”
Paragraph 305(1) of the Judgment should read as follows:
“305. …
(1) As a matter of law, as submitted by the CRV, in valuating valuing the rateable value of the Tenement, we should ignore any private agreements which affect the rental assessment.
…”
Paragraph 306 of the Judgment should read as follows:
“306. For the same reasons above, we reject that the facts fact that HEC needs need not pay anything for these assets constitutes the proper evidence of their rental valuation.”
Paragraph 316 of the Judgment should read as follows:
“316. On the other hand, the CRV submits that the “cost of borrowing” is, on HEC’s own case, not the full cost of financing. It is bound to underestimate the decapitalisation rate, and correspondingly, underestimating underestimate the rateable value… ”
Paragraph 319 of the Judgment should read as follows:
“319. On the other hand, whilst we have accepted in the principle to use the cost of borrowing as the basis of the decapitalisation rate in the CB valuation for the Tenement, we agree with the CRV that there is no reason why the owner occupier’s WACC (i.e. the HEC’s WACC) should not be used to assess the decapitalisation rate…”
Paragraph 332 of the Judgment should read as follows:
“332. Ms. Jim says that … Therefore, in order to implement this assumption, valuers have to adjustthe HEC’s accounts in order to identify and remove from the operating expenses any items which are taken as the cost of repairs… Ms. Jim believes therefore that the HT HL has to bear the cost of occupation or the rent for such parts of the Tenement for the purpose of effecting the repairs.”
Paragraph 338 of the Judgment should read as follows:
“338. This is so because (the CRV submits) under the R & E method, the rateable value is to be assessed by the profit that the Tenement can generate… Consequently, whether the AUC are rateable or not in law does not make any different difference in the computation of the rateable value and hence, there is no need to make any downward adjustment even if the Tribunal decides that AUCs are not rateable in law.”
Paragraph 340 of the Judgment should read as follows:
“340. Ms. Jim raises a few questions relating to … Ms. Jim disagrees with Mr. Parson Parsons’s calculations of the deduction of the DB for AUC because she does not know whether there would be any change in tariff information announced in the press release documents...”
Paragraph 357 of the Judgment should read as follows:
“357. …:
(1) Mr Yu says, in the face of … This, Mr Yu submits, is not impartial. We however agree with Mr Roots that, when Mr Parons Parsons’ evidence (including his reports) is looked at together, ...
(2) Mr Yu further submits that Mr Parsons put forward the CB Method for no other reasons reason but to produce a lower figure than the R&E Method. We do not think this is established. It must be noted that Mr Parons Parsons has made clear in his first report that, if the SOC is not to be taken into account ...
(3) Mr Parsons is also criticised for maintaining the position that he sees no synergy value or monopoly value in the Tenement… Although we have eventually rejected his explanation explanations, we do not think they are so irrational that no reasonable expert could have formed the same view.
(4) It is also said that Mr Parsons is prepared to say anything … We have heard and seen Mr Parson Parsons in giving these answers…
(5) Mr Parsons is also criticised for not setting out in his reports that the full cost of borrowing (as worked out by Mr Jones) … In the circumstances, although we agree that it would have been better if Mr Parsons has pointed out clearly in his report that Mr Jones’ evidence on the costs of borrowing is not the full costs, there is insufficient materials before us to conclude that Mr Parson Parsons has deliberately tried to conceal this …
(6) Finally, the CRV says Mr Parsons advocates … It has not been shown to us that these reasons and explanations are so utterly without basis that they could not have been advanced by any reasonable expert in the position of Mr Parson Parsons…”
Paragraph 359 of the Judgment should read as follows:
“359. For the reasons given above, we conclude that:
(1) …
(2) Subject to the depreciation adjustment … the rateable value of the Tenement under the RO for the year 2004/2005 is thus the DB – (PR x HT’s ANFA) as explained above.”
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(C. F. Tam)
Clerk to H.H. Judge Thomas Au |
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