Best Origin Ltd v. Commissioner of Rating and Valuation
Read the full judgment text of CACV 67/2008 on BabelCite. This Court of Appeal judgment was delivered on 19 November 2010.
1. Rating law has a long history. Its foundation is the Poor Relief Act of 1601 which imposed a liability on, amongst others, occupiers of a parish to contribute a sum, assessed annually, for the relief of the poor. In 1836, the Parochial Assessment Act of 1836 was passed, as its preamble stated, because, “it is desirable to establish one uniform mode of rating … and to lessen the costs of appeal against an unfair rate”. The uniform mode adopted was the hypothesis of an annual tenancy. Lord
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CACV 67/2008 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 67 OF 2008 (ON APPEAL FROM LDGA NO. 14 OF 1998) ____________ BETWEEN
____________ Before: Hon Tang Ag CJHC, Kwan JA and A Cheung J in Court Dates of Hearing: 4 - 8 October 2010 Date of Judgment: 19 November 2010 _______________ JUDGMENT _______________ Hon Tang Ag CJHC: Introduction 1.Rating law has a long history. Its foundation is the Poor Relief Act of 1601 which imposed a liability on, amongst others, occupiers of a parish to contribute a sum, assessed annually, for the relief of the poor. In 1836, the Parochial Assessment Act of 1836 was passed, as its preamble stated, because, “it is desirable to establish one uniform mode of rating … and to lessen the costs of appeal against an unfair rate”. The uniform mode adopted was the hypothesis of an annual tenancy. Lord Parmoor said in Poplar Assessment Committee v Roberts [1922] 2 AC 93 at 120:
2.In Railway Assessment Authority v Southern Railway [1936] AC 266 at 273 Viscount Hailsham LC explained:
3.We are concerned with some of the difficulties in adapting the relevant statutory provisions to the facts of this case. The difficulties are less daunting when one recalls Lord Pearce’s observation in Dawkins (Valuation Officer) v Ash Brothers and Heaton Ltd [1969] 2 AC 366, 381H:
The lease 4.The lease in respect of Inland Lot No.8874, Electric Road, Hong Kong (“the Site”) was purchased by the appellant, Best Origin Limited (“Best Origin”), at an auction. 5.The conditions of lease required Best Origin to demolish the existing building on the Site within 9 months of the Conditions of Sale, and to erect on the Site a building(s) on or before 31 December 2000 with a minimum gross floor area of 11,000 square metres. Since 6 December 2000, a 35-storey building known as 148 Electric Road has been erected on the Site. 6.The lease is an applicable lease under the Government Rent (Assessment and Collection) Ordinance, Cap. 515 (“GRACO”), and as such, Best Origin:
7.Sections 7(2) and 7A(2) of the Rating Ordinance, Cap. 116, are important. 8.Section 7(2) requires rates to be assessed on the basis of a hypothetical yearly tenancy and provides:
9.Section 7A(2) of the Rating Ordinance embodies the rebus sic stantibus principle (“the rebus principle”), another rating principle of long standing,
10.Section 7A(2) provides:
Agrila 11.In earlier proceedings, reported as Commissioner of Rating & Valuation v Agrila Ltd & Others (2001) 4 HKCFAR 83, Best Origin, together with owners of other sites, had challenged the Director of Lands’ assessment of rent based on a substantial rateable value. In those proceedings it was common ground that a site would not be rateable under the Rating Ordinance while under construction because it would not be regarded for rating purposes to be in rateable occupation. These owners contended that rent was not payable while their sites did not attract a liability for rates. That was the first of the preliminary points for the decision of the Court of Final Appeal. 12.That argument was rejected by the Court of Final Appeal because Regulation 2 of the Government Rent (Assessment and Collection) Regulation, Cap. 515 (“Rent Regulation”) provides:
13.The answer to this point (Point 1) given in Sir Anthony Mason NPJ’s judgment (with the concurrence of the other members) was:
14.Another preliminary point decided in Agrila, which is important to this appeal, is Point 4:
15.Answer (a) refers to the statutory hypothesis of a tenancy from year to year, which, as Lord Pearce has explained, has to be assumed:
16.Lord Herschell LC, said, with the concurrence of the other members of the House of Lords in London County Council v Erith Parish [1893] AC 562 at 595, that the hypothesis of an annual tenancy in section 1 of the Act of 1836:
17.And, “the hypothesis of the imaginary tenant is intended to assist and not hinder that process”: Townley Mill Company (1919) Ltd v Oldham Assessment Committee [1936] 1 KB 585, per Scott LJ at 643. 18.Answers (b) and (c) concern the rebus principle. As Sir Anthony Mason explained:
19.The Court of Appeal in Agrila had concluded that the intended development could not be taken into account. They were of the view that the rebus principle precluded it. The Court of Final Appeal, however, was of a different view. Sir Anthony Mason pointed out at page 107E that Dawkins “is an answer to the main thrust of the [owners’] case”, namely, that section 7A(2)(a) and the rebus principle require that the valuation must be based on an actual tenement in its existing state as a site undergoing development, because the valuer must consider:
20.Sir Anthony Mason went on to say that:
Also,
Lands Tribunal 21.Following the decision in Agrila, the Lands Tribunal (Lam J and Mr W K Lo, Member) assessed the rateable value of the Site for 1997/98 in the Government Rent Roll at HK$26,880,000 pursuant to section 27(1)(c) of the GRACO. In doing so, the Tribunal adopted as the correct approach the Contractor’s basis (“CB”) valuation, which was the Commissioner’s primary case. Paras. 306 and 316. Before the Lands Tribunal, it was common ground and so stated in a statement of agreed facts that:
22.Best Origin’s primary case before the Lands Tribunal was that the only possible hypothetical tenant of the tenement was a building contractor who would not pay anything to occupy the tenement, thus Best Origin contended for a nil or nominal valuation. As the learned president has pointed out, Best Origin’s valuers:
Best Origin’s alternative case was that on the basis of the Site being used for “open storage and work sites” it had a value of $764,000 per annum. It was in such context that the Tribunal said at para. 18 the first issue to be resolved is the implication of the agreed fact that the mode and character of occupation was that of a development site. 23.The Tribunal assessed the rateable value on the basis that at the relevant date the Site was being occupied as a development site. But for the agreement the Tribunal would have first to consider the likelihood of the development being carried out and decide whether “at the relevant date … the site was being occupied as a development site”. See answers (b) and (c) to Point 4 in Agrila. As the learned president pointed out, in answer 4(b), Sir Anthony Mason had in mind a developer as occupier and not a contractor because
The Appeal 24.This is Best Origin’s appeal. 25.Mr Howell QC for Best Origin submitted that the Tribunal had failed to ask the relevant question, namely, for what rent, if any, would the leased land, which was capable of being developed, have been let on a tenancy from year to year on the terms set out in section 7(2) of the Rating Ordinance, given that the hypothetical landlord under that hypothetical tenancy had the right to bring that tenancy to an end by serving a notice expiring at the end of a year. Mr Howell submitted that the question is not whether there can be a hypothetical tenancy from year to year under which any activity may be carried on which was being, or might have been, carried on at the time the relevant list comes into force. He accepted that the rating hypothesis does not exclude such a tenancy. The legal issue is what rent would be paid as a matter of fact when that activity can only be carried on under a tenancy from year to year which may be brought to an end by a notice expiring at the end of a year. He submitted that amount is nil or nominal. (I note in passing that much of the Tribunal decision has to be read in the context of Best Origin’s primary case before the Tribunal that “the building contractor should be regarded as the hypothetical tenant.”) 26.The second main point relied on by Mr Howell is the rebus principle, in particular the state of the premises, and the mode and character of its occupation on the date the list came into force. He submitted that the function of the rebus principle is to limit the assumptions that may be made for the purpose of assessing the rent payable under the hypothetical yearly tenancy about the state of the premises to be valued, and the uses to which they may be capable of being put, by reference to things as they are at a particular date. Mr Howell reminded us that Pearce LJ (as he then was) had said in Tomlinson (VO) v Plymouth Argyle Football Co Ltd (1960) 53 R & IT 297 at 299:
27.Essentially, Mr Howell’s arguments revolve around the statutory hypothesis of a tenancy from year to year and the rebus principle. Some of the arguments overlap, but they are variations on these two themes. Hypothetical yearly tenancy 28.Mr Howell placed considerable reliance on para. 29 of the decision where the Tribunal said:
29.The reliance is misplaced. Mr Howell is familiar with Humber Ltd v Jones (Valuation Officer) (1960) 6 RRC 161 (CA) where Willmer LJ said at page 171:
30.Here, the Tribunal had adopted the correct approach and looked at the actual user, namely, the Site being occupied as a development site by a developer. The fact that in the real world, nobody would do it on the basis of a year to year tenancy is beside the point. It is for the Tribunal, guided by the expert evidence of valuers and such skilled persons, to “do the best it can to arrive at a rateable value”, per Sir Anthony Mason at 106F. 31.Indeed, that is what the courts have always done as Scott LJ in Robinson Brothers (Brewers) Ltd v. Houghton and Chester-le-Street Assessment Committee [1937] 2 KB 445 explained:
32.Lord Coleridge CJ was to similar effect in Smith v. Birmingham (Churchwardens) (1889) 22 QBD 703 at 705-706:
33.Further, as Sir Anthony Mason has noted in Agrila, a valuation based on an assumed duration of a yearly tenancy for 50 years was upheld by the English Court of Appeal in Humber. So, for rating purposes, a yearly tenancy may be of indefinite duration, and it is a question of fact in each case: how long the yearly tenancy is likely to be. 34.Humber was concerned with a car assembly works of 1,000,000 square feet, the cost of tooling up was ₤1,500,000 and it took 5 years to achieve full production in order to recruit the requisite labour force. Hodson LJ (as he then was) said at page 166:
35.Willmer LJ added:
36.Here, the learned president, in a passage with which I am in complete and respectful agreement said:
37.Mr Howell also submitted that although Agrila at page 108E/F said:
that does not entail assuming that development will take place. He submitted:
38.But Mr Howell has overlooked the fact that the Site was being occupied as a development site, and was to be rated as such. Whether a site was being so occupied is a question of fact to be determined by the Lands Tribunal. In the case of a site which is capable of being developed, the likelihood of development taking place is an important consideration. Even where development had already begun one may have to consider the likelihood of the development proceeding to completion. Of course, sometimes, that is so obvious that it can be taken for granted. That is again a question of fact. Here, I do not think it has ever been suggested that development on the Site would not begin, or once begun, would not proceed to completion. As noted above, Best Origin’s primary case was that the only hypothetical tenant was a building contractor. 39.Mr Howell made the point that the Tribunal had wrongly assumed that the development would be profitable for the hypothetical tenant. I think the Tribunal was entitled to proceed on the basis that, ordinarily, no commercial development would take place except in the expectation of profit. As an exception, Mr Howell gave the example of a benevolent millionaire who was prepared to build a concert hall, and then let the hypothetical landlord take over the concert hall without payment at the end of it. Whether a hypothetical tenant can ever find a hypothetical landlord who would be willing to allow a valuable site to be used for that purpose is another question. If the Site was indeed occupied by a benevolent millionaire building a concert hall, it may be one has to presume a hypothetical yearly tenant doing the same. No doubt, the court will deal with such a situation when it arises. In the present case, the Site was occupied for a commercial development. And in the context of a commercial development, the Tribunal was entitled to proceed on the basis that it was motivated by an expectation of profit. I do not believe that there was evidence before the Tribunal that the development might be unprofitable. If there had been, no doubt it would have been taken into consideration. 40.Mr Howell also queried whether the hypothetical tenant would be able to realize the full value of the development. That is a question of valuation for the Tribunal. 41.Mr Howell also criticized the following passage from the decision:
42.Those remarks were preceded by the acceptance of the submissions of Mr Holgate QC (who appeared for the Commissioner before the Tribunal as well as on appeal) that:
43.With respect, earlier, in paras. 44 and 45, the learned president had cited passages from the judgments of Willmer LJ in Humber at 246 and Lord Denning MR in R v Paddington Valuation Officer [1966] 1 QB 380 at p. 412E to F that the hypothetical tenant and the hypothetical landlord would behave as reasonable people in the circumstances which have to be postulated. Thus, a hypothetical landlord who lets his land for a commercial development to a hypothetical tenant who takes it for the same purpose, could be expected not to do anything which would frustrate the development. 44.Mr Howell submitted that the Tribunal erred in law in stating at paras. 46 and 47 that one must assume that the hypothetical landlord would not exercise his right under the hypothetical tenancy to terminate it even if it would enable him to derive a greater return than he would obtain by way of the continued payment of the yearly rent under it. But once it is accepted, as I do, that the hypothetical landlord would not be entitled to the completed development at the end of a hypothetical tenancy, I do not believe this can arise. Nor was there evidence to show there could be some other more profitable use of the Site other than use as a commercial development site. In Humber, it was accepted by the tribunal that the hypothetical landlord would be unlikely to serve a notice to quit terminating the hypothetical tenant’s occupation because in a case of property such as a car factory, it would appreciate that he would be unlikely to find another tenant. In the present case, the Commissioner’s valuer Mr T K Tang gave evidence to like effect. This is a question of fact. 45.Nor can I agree with Mr Howell’s criticism of the fact that the learned president said:
46.With respect, the learned president has correctly explained in the same paragraph:
47.Mr Howell also submitted that the fact that there was an actual occupier does not mean that there would necessarily be a hypothetical tenant. He relied on Black v Oliver [1978] 1 QB 870. 48.Mr Howell’s reliance on Black v Oliver is misplaced. The facts in Black v Oliver are far removed from this case, and provide no support for what effectively is a variation of his submission that although the Site was being occupied by the owner as a development site, no tenant from year to year would be prepared to pay any substantial rent to occupy the Site. 49.In Black v Oliver the rate payer was in occupation of a 1/F flat which was in an extreme state of dilapidation with no electricity and was unfit and dangerous for occupation. The rate payer also had to share a bathroom and access to the bathroom and to the back garden was through the G/F flat which was occupied by two families with a total of 13 people. The rate payer, however, wished to continue the occupation in order to retain the advantage of protection under the Rent Acts and her qualification for re-housing if the local authority should issue a closing order. The rate payer proposed that the hereditament should be reassessed as uninhabitable and contended for a nil value. The local valuation court reduced the gross value to a hundred pounds and the rateable value to ₤60, which was further reduced by the lands tribunal on appeal by the rate payer to ₤70 and ₤39 respectively. The lands tribunal refused to take into account harassment by the two families downstairs and held that as there was beneficial occupation by the rate payer, there could not be a nil assessment since the hypothetical tenant postulated would include the occupation of the current occupier. The appeal was allowed and Browne LJ said at 880G:
50.Mr Howell also complained that the Tribunal had made an unwarranted assumption that the hypothetical tenant would enjoy any rights in respect of the property after the hypothetical tenancy of the tenement has ended. This is another way of making the same argument, namely that since the Site could yield no profit during development, it would be wrong to take into consideration any earnings which might accrue after the completion of the development since such earnings could not accrue to the hypothetical tenant for the period under consideration. But such submission should be rejected. I have already cited what Sir Anthony Mason has said at page 108B (see para. 20 above). Sir Anthony Mason went on to refer to Consett Iron Co Ltd v Assessment Committee for No.5 Area Durham [1931] AC 396, which concerned a loss-making mine, and where it was held that it was permissible to have regard to a future change in market conditions which would make the mine profitable. The prospect of continuation of the tenancy for a number of years enabled the Tribunal to have regard to the prospect of profits in later years and set them off against losses in earlier years. 51.Mr Holgate submitted that the Tribunal’s valuation judgment as to the rental value of the development site was further supported by the common ground between the parties that upon the determination of the tenancy, the hypothetical tenant would be entitled to receive the market value of his assets, the building, as at the date of termination. 52.The Tribunal had proceeded on the basis that this was common ground. Para. 79. Mr Howell submitted that the Tribunal had misunderstood Best Origin’s submission. Mr Howell submitted that the concession was made on the basis of the Commissioner’s case only. 53.I do not doubt that. The concession was irrelevant to Best Origin’s primary case. A building contractor occupier would not be entitled to the building. 54.In any event, with respect, Mr Holgate’s submission is plainly right. 55.In Railway Assessment Authority v Southern Railway, where the leading judgment was given by Viscount Hailsham LC, at 286 he said:
56.In Humber,Hodson LJ dealt with:
57.When queried, Mr Howell seemed to have accepted that on the Commissioner’s case in any event, at the end of the hypothetical tenancy, the landlord would not be entitled to the building. This bears on the likelihood of the hypothetical landlord terminating a hypothetical development tenancy. Ex hypothesi, the hypothetical landlord entered into the hypothetical tenancy so as to enjoy the rent which would be paid, but the continuation of payment would depend on the tenant being able to enjoy the fruit of the development. It does not matter what value might be put on the building, what is important for the present purpose is that the landlord would not be able to have the building as a windfall. On this hypothesis, a hypothetical landlord who gives notice would frustrate the purpose of such a lease in the first place. 58.I should add that there was a hint in Mr Howell’s submission that as the building is not a chattel, the hypothetical tenant might not be able to remove it. Mr Howell also tentatively suggested that the value of the building at the end of the hypothetical tenancy might be nil because the building could not survive without the land on which it was erected. This is, in effect, analogous to the argument that a tenant’s machinery might be damaged or not reusable after removal. In a case such as Humber, I would not be surprised if some of the plants and machinery would have been expensive to remove or be destroyed on removal. I believe that has to be disregarded. Rebus 59.Mr Howell submitted that the function of the rebus principle is to limit the assumptions which may be made for the purpose of assessing the rent payable under the hypothetical yearly tenancy about the state of the premises to be valued, and its uses to which they may be capable of being put, by reference to things as they are at a particular date. Thus the first limb of the principle, section 7A(2)(a) deals with the state of tenement as it was on the material date, subject to immaterial alterations. In relation to the second limb, section 7A(2)(b), the mode or character of occupation. It is to be assumed that during the hypothetical tenancy, the tenancy may be put to the use or uses to which it was (or could reasonably have been) put on the material date in its then condition. Mr Howell submitted that these assumptions do not mean that the changes which are likely to occur affecting the premises or its use subsequently, given the circumstances which existed when the list came into effect are to be ignored: they may affect the enjoyment of the tenancy on these assumptions under the hypothetical tenancy. But the tenement may not be valued on the basis that the hypothetical tenant will be able to enjoy it at some future time under the hypothetical tenancy in a materially different state, or in a way in which it could not realistically be used in that state at a date the list came into force. 60.However, the answer to this submission lies in the fact so far as the two limbs are concerned, especially the second one, the mode and character of occupation of the Site is that of a development site. It has to be assessed for rates on such basis. In other words, if no account is taken of the present prospect of continued occupation after the completion of the building, the valuer would not be assessing the rent for a tenement with development as its character or mode of occupation. 61.Mr Howell submitted that since the Tribunal proceeded correctly on the basis that when the development was completed, its rateable value would fall to be re-assessed based on another hypothetical tenancy, the completed development is irrelevant to assessing its rateable value whilst under development. But we are not concerned with the re-assessment of the rateable value on completion of the development. What the Tribunal was concerned with was the rateable value of the Site as a development site. 62.Mr Howell also relied on what Lord Wilberforce said in Dawkins at 385G:
63.Lord Wilberforce’s statement that “a house in course of construction cannot be rated” has no relevance to an assessment of Government rent under GRACO, because of Rent Regulation 2. The statement that a building cannot be rated by reference to changes which might be made in it either as to its structure or its use is also irrelevant. We are not concerned with the rating of a completed development. We are concerned with the rating of a site being occupied as a development site. With respect, the decision in Agrila is too plain for misunderstanding. In such circumstances, the Tribunal must:
64.Indeed, that is what the courts have done since 1601, overcoming the greater difficulties of rating railways, gas works etc. 65.Mr Howell criticised the following passage.
66.With respect the criticism is unfounded. The Tribunal properly pointed out that they were dealing with the hypothesis under section 7A(2) in the context of a development site; and that in the context of a development site, section 7A(2) must be construed as permitting the present prospect of the development potential being realized in the future to be taken into account. Any other conclusion would be inconsistent with Agrila and will frustrate the legislative objective as reflected in Rent Regulation 2. 67.Mr Howell further submitted that by virtue of regulation 6 of the Rent Regulation, the Tribunal was not entitled to take development value into account. The effect of regulation 6 is that when the development is completed, the entry in the Government Rent Roll pursuant to regulation 2 is deleted, a new entry is then made in the Roll relating to the land and completed building as a whole. Mr Howell submitted that this change in the entries on the Roll prevents the valuer from taking into account the prospect of realizing development value. He pointed to the first two sentences in the following passage from the Tribunal’s decision.
68.The first two sentences dealt with the situation that upon completion the tenement would be rerated as a completed development. Such rerating would be assessed on the basis of a hypothetical tenancy in relation to the completed tenement. The final sentence is unimpeachable. 69.There are at least two answers to the submission. First, it is inconsistent with the decision of the Court of Final Appeal in Agrila. See pages 108H to 109C. Secondly, when considering the rateable value of a development site in the course of development, the fact that the tenement has to be revalued at the completion of the development is as irrelevant as the fact that the Site has to be rated on a yearly basis, although the rateable value may vary from year to year according to the state of the development and on completion of the development. Provided that while the Site was under development, it must not be rated as if the development had been completed. 70.Best Origin also complained of double counting. The complaint seems to be that after the completion of the development, annual rent was payable after completion by reference to the full annual value of the premises with the building constructed (the aggregate value of those premises), but giving no credit for the fact that such rent was also payable during period of its construction, calculated by reference to the anticipated value of the building once completed. 71.Mr Holgate submitted that the Commissioner believed that this point had not been taken before the Tribunal. Whether that is so or not is unimportant. In any event, so far as the present appeal is concerned, the Tribunal has correctly and expressly directed itself in accordance with Agrila not to value the Site as if the development had been completed. See para. 41. If Best Origins is dissatisfied with the assessment of rateable value after the completion of the development, no doubt they could object and the objection would be dealt with in the usual way. The valuation 72.We are of course not concerned with the valuation as such. 73.Mr Lynch, Best Origin’s valuer accepted that, but for the legal directions given to Mr Doran and him, in Appendix 7 of their report, he would have capitalized the auction price (after making adjustment to reflect the time difference) to arrive at a rateable value for the appeal tenement. He did not carry out such a valuation because he was directed to ignore the value of any future rents or sale proceeds for the building to be completed on the Site. See para. 179. 74.There was ample discussion in the judgment on whether or not the contractors’ basis on the valuation of the Site as a development site should be adopted by the Tribunal. That was the primary valuation of the Commissioner. Another valuation put forward for consideration was the Receipt & Expenditure Method (“R & E Method”). The tribunal accepted the contractors’ basis valuation. See para. 306. The tribunal did not adopt the R & E Method. In para. 312, the Tribunal said:
75.The tribunal then went on to reject Best Origin’s primary case, and said:
76.Mr Howell referred to para. 79 of the decision where the learned president referred to submissions relating to the R & E Method and said that they “will come back to them later”. Mr Howell submitted that the Tribunal never returned to the subject. I do not agree. In para. 312, it was made abundantly clear that the Tribunal rejected the R & E method. Conclusion 77.So for the above reasons, I would dismiss the appeal and make an order nisi that the Commissioner is to have the costs of the appeal to be taxed unless agreed with a certificate for two counsel. Summons to strike out 78.In paras. 122 to 126, the learned president dealt with the summons issued by the Commissioner on 21 April 2005 to strike out certain matters relied on by Best Origin as inconsistent with the Agrila decision. That was made the subject of a respondent’s notice. Mr Holgate did not address any arguments to us on that aspect of the matter. However, he wished to keep the matter alive in the event that this goes to the Court of Final Appeal. I am content to leave it on that basis. Hon Kwan JA: 79.I agree with the judgment of Tang Ag CJHC. Hon A Cheung J: 80.I agree with the judgment of Tang Ag CJHC.
Mr John Howell, QC and Mr Nigel Kat, instructed by Messrs Woo, Kwan, Lee & Lo, for the Appellant Mr David Holgate, QC and Mr John Litton, instructed by the Department of Justice, for the Respondent Please refer to FACV21/2011 for the relevant appeal(s) to the Court of Final Appeal. | ||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under CACV 67/2008