Penny’s Bay Investment Co Ltd v. Director of Lands
Read the full judgment text of LDMR 23/1999 on BabelCite. This LDMR judgment was delivered on 15 October 2014.
1. On 2 November 1999, the applicant applied to the Lands Tribunal pursuant to section 13(3) of the Foreshore and Seabed (Reclamations) Ordinance (“the FSRO”) to determine its claim for compensation arising from extinguishment of its marine rights caused by the authorization published in Gazette Notice No. GN 1574 dated 5 May 1995 (LDMR 23/1999 refers).
Cites 3 cases
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LDMR 23/1999 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION MISCELLANEOUS REFERENCE APPLICATION NO. 23 OF 1999 _________________
_________________ LDMR 1/2005 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION MISCELLANEOUS REFERENCE APPLICATION NO. 1 OF 2005 _________________
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_________________ J U D G M E N T _________________ Index D. THE VALUATION BY EXPERTS. 14 E. FACTORS AFFECTING THE BEFORE VALUE.. 14
G. FACTORS AFFECTING THE AFTER VALUE.. 129
1.On 2 November 1999, the applicant applied to the Lands Tribunal pursuant to section 13(3) of the Foreshore and Seabed (Reclamations) Ordinance (“the FSRO”) to determine its claim for compensation arising from extinguishment of its marine rights caused by the authorization published in Gazette Notice No. GN 1574 dated 5 May 1995 (LDMR 23/1999 refers). 2.On 14 September 2005, the applicant submitted a further claim for compensation under the Ordinance (LDMR 1/2005 refers) caused by the publication of the Gazette Notice No. GN 2231 dated 14 April 2000, as an alternative to LDMR 23/1999. 3.The background of this case has been succinctly set out by Lam J (as he then was) in his judgment dated 25 May 2007 which involved a trial of the preliminary issues in this case. We shall gratefully adopt the same as follows :
(The abbreviations quoted above are being adopted in this judgment.) 4.The determination on the preliminary issues by Lam J found its way to the Court of Appeal (“CA”) and then to the Court of Final Appeal (“CFA”). On 26 March 2010, Lord Hoffmann NPJ, in the judgment of CFA (“CFA Judgment”), found that :
5.This is the trial on the assessment of compensation payable to the applicant under FSRO by applying the declarations laid down by Lord Hoffmann. 6.The following findings of the CFA are relevant in the consideration of the compensation payable in this case :
7.The applicant had called the following witnesses to testify in this case :
8.It is the contention of the applicant that there was a delay in the sale of Container Terminal 9 (“CT9”) in early 1995 which resulted in the general view that further sale of container terminals will only take place after the change of sovereignty in 1997. It is also the industry’s view back in 1995 that CT10 and CT11 would not go ahead since the demand or the “trigger-point mechanism” (according to the policy of the Government) had not been met to justify the construction of a further container terminal. The Government would not have started work on either the reclamation or the road scheme associated with the Container Terminal Scheme (“Associated Road Scheme”) until it was known that the sales of both CT9 and CT10 would go ahead. Furthermore, as at 5 May 1995, the Associated Road Scheme under the OZP had not been authorized. Based on these factors, the applicant contends that the Container Terminal Scheme is not expected to go ahead. 9.With the Container Terminal Scheme and its Associated Road Scheme not expected to go ahead, AW is of the opinion that there would be no road access to Lot 22, whether in the Before or After Situation. Without new container terminals, private mid-stream operators would have an increase in business, picking up the slack that might otherwise have been accommodated by CT10 or CT11. 10.So the optimal use of Lot 22 with marine access in the Before Situation should be shipyard in the shipbuilding area and godown for mid-stream operation in the Industrial/Godown area. For the After Situation, with the marine rights being extinguished and the Container Terminal Scheme not going ahead, there would be no marine access and also no road access. The whole of Lot 22 would have been landlocked and sterilized and it would have no commercial value or little remaining value. This is named as Scenario 1A by AW. 11.Even if the Container Terminal Scheme and the Associated Road Scheme were expected to go ahead, the chances were very slim and delay would have been expected. There were significant uncertainties as to whether the Container Terminal Scheme and any road access to Lot 22 might or might not materialize at all so there could hardly be any lively expectations or enhancement warranting consideration in the valuations. This is named as Scenario 3 by AW. 12.In either case, the Before Value is in excess when compared to the After Value, so the applicant is entitled to compensation under the Ordinance. 13.AW had also considered other scenarios in his analysis and come to the conclusion that Scenario 1A is the most reliable basis for assessing the compensation payable for the extinguishment of marine access rights at Lot 22 which is in the sum of $1,411 million. 14.However, in light of a report prepared by Mr Eric Yeung (the valuation expert of the respondent back in 2005) which also confirmed the viability of using Lot 22 for open storage of containers and its strong demand, AW had also assessed the compensation on the basis of an open storage of containers use in Scenario 1A. The compensation should be in the sum of $1,599 million. 15.The respondent had called the following witnesses to testify in this case :
16.The respondent’s case is that in the Before Situation, given the shipyard use was the only use which had ever been carried out at Lot 22 over the years with marine access, the hypothetical purchaser is well aware that the marine rights appurtenant to Lot 22 would continue to be in existence and exercisable until 2047 unless he agreed to surrender them. He would have known that a container based use was contrary to the Special Condition 3(a) of the Grant and would be unlawful, and impossible under planning restrictions unless the OZP was radically changed. As a prudent person, he would not be willing to pay anything for a container based use on the land when the only possible use is its existing use. Value of Lot 22 for shipbuilding purpose and open storage ancillary to shipbuilding is the 1st Before Value named by Mok. 17.However, with the publication of the OZP in March 1995 and the proposal of the Associated Road Scheme in April 1995, the purchaser of Lot 22 would have expected to reach an agreement with the Government to give up his marine rights voluntarily in order to secure a reclamation and a new road which would permit industrial development of the greater part of the land. With the prospect of a new use of the land for an industrial purpose, this is the Alternative 2nd Before Value found by Mok. 18.As for the After Situation, since the reclamation had already taken place and completed, the hypothetical willing purchaser could confidently expect to be able to carry out an industrial development over the greater part of the land since the Associated Road Scheme either had been completed or was about to be constructed to provide a link leading to North Lantau. The value of the land would include the industrial value as well as compensation for resumption of the road land within Lot 22. This is what Mok called the Alternative After Value. 19.Since the Alternative After Value is in excess when compared to the two Before Value, no compensation should be payable to the applicant. 20.The assessment of valuation by the experts of the parties are summarised below :
21.In assessing the value of Lot 22, it is not in dispute that the valuation date falls on 5 May 1995 and Lot 22 involved areas for the following use :
E. FACTORS AFFECTING THE BEFORE VALUE E.(1) Voluntary Surrender of Marine Right 22.There is no dispute that in the Before Situation, the existing marine rights of Lot 22 continued to subsist and were not extinguished on 5 May 1995 and the landowner would be perfectly entitled to continue to exercise such a right until 2047. And with the marine rights of Lot 22 remained, it would be impossible to carry out the reclamation and for the Associated Road Scheme to be built. 23.So it is the respondent’s contention that the potential purchaser would anticipate and believe that he would be able to enter into an agreement with the Government to give up the marine rights voluntarily in order to enable the reclamation and the road works to be carried out so as to facilitate the development of Lot 22 for industrial purposes. There is nothing in law or in principle which prevents such to be taken into consideration by the potential purchaser since the CFA Judgment had specifically required “the prospect of new uses for the land” to be considered “both with and without access to the sea” (at §45). 24.The applicant submitted in reply that the owner of Lot 22 does not have the free will choice as to whether he would give up the marine rights and it is also not in line with the legal assumption about marine rights found by the CFA in the Before Situation. According to the CFA Judgment, it must be assumed that the marine rights would remain exercisable for the full term of the lease. The Tribunal is not allowed to give a Before Value to Lot 22 on any other basis, in particular on the basis that the marine rights would be surrendered whether voluntarily or otherwise. Discussion 25.We agree with the submission of the applicant. Lord Hoffmann had, in the CFA Judgment, conducted a thorough analysis of section 12 of the FSRO and come to the conclusion that compensation under it should be :
The spirit of such a calculation of compensation is to reflect the effect of the extinguishment of marine rights. So the Before Value of the land must be one with marine rights in existence and in actual enjoyment whilst the After Value is one with such rights being extinguished factually and legally. To allow a consideration of giving up the marine access voluntarily in the Before Situation is not in line with the assumption that marine rights continued to be exercisable throughout the rest of the term. 26.The “prospect of new use” contemplated by the CFA must be a new use “with access to the sea” in the Before Situation and “without access to the sea” in the After Situation. To adopt the respondent’s contention that the landowner lost its marine rights by way of voluntary surrender in assessing the Before Value is inconsistent with the CFA findings which required the new use of Lot 22 with the marine access and not without it. Any new use without marine access falls within the After Situation instead as found in the CFA Judgment. 27.We also accept the applicant’s submission that it is not for the landowner to dictate, by giving up its marine rights, as to the materialization of the reclamation and for the Associated Road Scheme to be built. Section 10(1)(b) of the FSRO provided that:
The anticipation by the purchaser to reach an agreement with the Government in order to enable the reclamation and the Associated Road Scheme to be carried out is unrealistic. It is solely for the Government to decide as to whether to proceed with the reclamation and for the Associated Road Scheme to be built and no one can stop the Government from pursuing with it, not even the exercise of the marine rights at Lot 22. This is the rationale of the Government having the power to issue the 1995 Authorization. What’s more, there is no guarantee that, even if the purchaser is prepared to give up his marine rights, the Container Terminal Scheme and the Associated Road Scheme would, as a matter of course, be built. 28.The respondent’s contention is also based on the artificial assumption that the purchaser can reach an agreement with the Government for a voluntary surrender of its marine rights in return for the Container Terminal Scheme and the Associated Road Scheme to materialize. Such artificial assumption is specifically disallowed in the CFA Judgment which stated that:
29.We found the respondent’s assertion that the purchaser may consider giving up the marine rights is inconsistent with the CFA Judgment and cannot stand. With marine rights remained exercisable, the Shipbuilding Area of Lot 22 can remain to be used for shipbuilding and repairing purposes and the valuation of the Shipbuilding Area should reflect this fact. E.(2) Godown for Mid-stream Operation 30.There is a dispute as to whether the Industrial/Godown Area on Lot 22 can be used as godown for mid-stream operation or open storage of containers as suggested by the applicant. 31.The applicant contended that Lot 22 could be used for godown/warehouse purposes for container back-up, storage and transhipment. This means storage, in a covered-structure or in the open, of containerized goods and empty containers, transported to and from the Lot by barges in connection with mid-stream operation. 32.The respondent, on the other hand, contended that the Industrial/Godown Area could only be used for open storage purpose ancillary to shipbuilding use. Any container-based use is not a feasible option for the purchaser due to the following reasons :
Special Condition 3(a) 33.The Special Condition 3(a) for Lot 22 stipulated that Lot 22 “shall be used for general industrial and/or godown purposes” with “not less than 285,000 sq ft of the lot shall be used for shipbuilding purposes only”. The argument turns on whether the mid-stream operation can be considered a “godown purpose”. 34.As a start, both parties referred to the dictionary definition. According to the Shorter Oxford English Dictionary,the word “godown” is defined as “a warehouse or store for goods” and the word “warehouse” is “a building or part of a building used for the storage of retail goods, furniture, etc”. The Applicant’s Contention 35.Mr Chang for the applicant had cited the following judgments in his submission.
36.Relying on the authorities cited above, Mr Chang submitted that “godown purposes” under the Special Condition 3(a) plainly covers a godown for mid-stream operation or open storage involving the storage of goods in bulk or in large quantities, whether in the open or in a building, for the purposes of distribution and/or onward delivery of the same to someone including consignees and/or their carriers, without any distinction between empty or filled containers. So the mid-stream operation use suggested by the applicant is not contrary to Special Condition 3(a). The Respondent’s Contention 37.According to the Oxford Dictionary, there are 2 essential elements in the concept of a godown, ie there must be a warehouse or some storage building and the use of the building must be for storage and not other purposes. The Black’s Law Dictionary (9th ed) also defined a store as “a place where goods or supplies are stored for future use, a warehouse”. The concept of storage is critical. So a godown must involve a building which is a warehouse where commodities and articles which are not for the time being needed elsewhere are stored as opposed to being placed or kept there temporarily for some other purpose. 38.The mid-stream operation or open storage suggested by the applicant did not comprise any building. On this factor alone, the use cannot be a warehouse or godown use. The operation involved bringing in of containers, be it filled or empty ones, to Lot 22 by barge from a point of origin, placing the containers in stacks on Lot 22 for a period and then taking them away again by barges to a further or ultimate destination. Such a use cannot be for a godown purpose since the containers are just placed there for a short time during the course of the journey because of lack of immediately available facilities elsewhere. It is not the case that the containers are not needed for use but because they are in use, ie in the journey of transporting from one location to another without any element of storage involved. During the course of their journey from origin to destination, sea borne containers are for parts of their journey in container ships, on barges, on mid-stream operation sites, or on lorries. During this process, they are not in a warehouse or a godown. 39.The respondent also relied on the following authorities to support its contention.
Discussion 40.It is not in dispute that godown for mid-stream operation involved the bringing in of containers (filled or empty) onto Lot 22 by barges and when they are needed, to be taken away by barges to its destination or onto going vessels. Containers coming in from international waters, predominantly being empty ones, could be barged to Lot 22, stored there until needed and then barged up the Pearl River Delta to Mainland PRC factories where they would then be filled. Containers, after being filled in Mainland, could be sorted and consolidated at Lot 22, and then be barged at the convenient and appropriate schedule to the large ocean going vessels destined for international waters. 41.The argument is on:
42.There is no dispute as to the dictionary definition of the word “godown” which is, in a gist “a warehouse or store for goods”. Since the dictionary definition of “warehouse” required “a building or part of a building used for the storage of merchandise …”, the respondent relied heavily on this definition and contended that a godown use must involve a structure or a building which is missing from the suggested use by AW. 43.We found the dictionary definition may be of assistance as a start to understand the words concerned, but we do not think that we can simply take the dictionary definition as the ordinary meaning of the word and apply it to the interpretation of the Grant. Rather, as can be seen from all the cases relied upon by both parties in this case, the crucial determination of whether a warehouse was made out is the nature or purpose of the use instead of confining to whether a building was involved. 44.In Green, the argument turns on whether a railway arch which was used for stacking cases and crates of glass and was called the plate arch was a warehouse. The respondent in Green was carrying on a business which consisted of 2 shops and the plate arch. It is found by the appeal court that :
45.O’Connors MR in Calcaria, after considering the dictionary definition, found that:
So, the function of the building is relevant. 46.In the case of Fisher, Stevenson J. held that the word “warehouse” was wide enough to include a transit shed. A specified space in a transit shed at a dock was used for the storage of cargo unloaded from their ships, with the cargo remained there until transferred to the consignees or their carriers. It is the ruling of the court that :
A shed is not a building. The deciding criterion is the function of the use of the shed. 47.Given the function of the godown or warehouse is the storage of goods, we found this should be the determining factor in deciding whether the godown for mid-stream operation can be considered a “godown purpose” under Special Condition 3(a). 48.In British Oxygen, cylinders containing hydrogen gas were being put on a trailer pulled by a tractor for the purpose of delivery to the premises of the purchaser. One of the issues before the court is whether the function of the hydrogen trailers and the cylinders were essentially that of storage or distribution. It is found by Lord Reid that :
49.Relying on the case of British Oxygen, Mr Barnes for the respondent contended that if any article or commodity is kept at a certain place because it is not currently needed then it can be said to be stored at that place. If however, it is in a certain place for the primary purpose, or as a part of a primary purpose, of transporting it from location A to location B, then it is not being stored at that place. It is merely kept there for the time being as part of the total transportation purpose. So keeping of the containers at Lot 22 is only part of the transportation process and should not be considered as storage. 50.We found the case of British Oxygen is not directly on the point since it concerned with the equipment used in the course of transportation and the argument turns on whether the equipment can be considered as for storage purpose or transportation purpose. The keeping of the containers on Lot 22 is not in the course of its transportation nor can Lot 22 be said to be an equipment used in the course of transportation. They are stored at Lot 22 since they are not needed at that time and when the need arises, the containers will be dispatched out of Lot 22, like the situation in Fisher mentioned above. 51.In Jefferson, terms of the contract allowed storage of petrol only in the shed provided. One of the issues is whether emptying a drum of petrol in the garage was a breach of the contract. The facts of the case is that a drum of petrol was brought from the shed into the garage in order to empty it into tins in the garage. It was held that :
52.It is argued by Mr Barnes that the petrol was not stored there because for the time being, it was not needed elsewhere but simply because it had to be there as a part of its transfer from the drum in the store to the tins in the garage. In a gist, it was there for the purpose of transportation. 53.We found Jefferson can be distinguished from our present case. The drum of petrol brought into the garage is clearly not intended to be stored there but to be transferred to tins. It is found by the court that at the material time, the petrol was in the garage not for the purpose of storage but for the purpose of transferring it from the drum to tins. The petrol is in fact needed to be used in the garage there and then and not kept there when they are not needed. We cannot see how, with such a use, there can be any intention to store the petrol in the garage. But containers kept at Lot 22 were not kept there for use at the Lot. Rather they were being kept there until they are needed, ie when needed to be barged to the Mainland factories or when needed to be loaded onto ocean liners. We failed to see how can one argue that the containers, whilst at Lot 22, has other purpose other than to be stored there. 54.In Plews, terms of the insurance contract provided that there should be no liability for damage to articles “which were not stored at least 12 inches above floor level”. Video tapes were taken from the shelves and placed on the floor during some decoration work and were accidentally damaged. The argument was that the video tapes were stored on the floor, hence no liability arisen. Lord Kingarth found that :
55.It is the submission for and on behalf of the respondent that the keeping of containers temporarily on Lot 22 is only a part of their transit from an origin to a destination and not on Lot 22 with any degree of permanence. This is analogous to their being stored on the ship or the barge which is carrying them during the remaining part of their transit from one place to another. 56.Again, we do not find the case of Plews to be of any assistance to the respondent’s argument. The facts of Plews are distinct since the video tapes were all along on the shelves and were just placed on the floor and will be returned to the shelves the following morning after the painting work. This involved a temporary placing of the video tapes on the floor, a place where the tapes were not supposed to be. The word “temporarily” should be understood in this context. The containers kept at Lot 22 may remain there for a short period of time, but could not be seen as “temporarily” on Lot 22 in the sense as the video tapes in Plews. 57.In the case of Thompson, a small quantity of gasoline in a stove which was being used temporarily for cooking purpose was brought into the building, causing a fire and the building was burnt down. The issue is whether liability can be avoided under the relevant statutory condition while gasoline is “stored or kept in the building insured”. It was held that the gasoline was not stored because “stored or kept”:
58.It is the respondent’s argument that the case of Thompson supports the concept of articles being kept at a particular place because they are not needed elsewhere for the time being. The containers on Lot 22 are not to be deposited for safe custody or kept in stock for trading purposes. We beg to differ. There is no dispute that the use of godown for mid-stream operation at Lot 22 involved large quantities of containers being kept. The containers kept there must be for safe custody purpose whilst waiting for their need to arise. 59.In Rensaw, another insurance claim turning on whether the storage of gasoline in a retail grocery store would render the insurance policy void. It is found that “there is an intended distinction between storing an article and keeping it for sale” and “store” means “to deposit in a storehouse or other building for preservation”, so the keeping of gasoline for sale in the store is not something prohibited by the policy. 60.It is the respondent’s submission that the key word “preservation” connotes articles stored at a particular location for the purpose of preserving them whilst they are not needed to be used elsewhere. This is missing for containers kept on Lot 22. 61.We found the word “preservation” as used in the case of Rensaw must be understood in the context of distinguishing it from the concept of “keeping for sale”. “Keeping for sale” involves a parting of the goods kept on sale without any intention of preserving it at the store. Storage involves preservation of the goods since the intention is for the goods to remain in storage till needed. The containers at Lot 22 are being kept and preserved there till they are needed to be distributed elsewhere. 62.The applicant relied on the case of Cavendish which involved a finding on the word “godown” or “godown purposes”. The plaintiff in Cavendish, being the owner of the Cavendish Centre, is seeking for a declaration that the use by its tenant of the leased premises as a data processing centre for banking is not in contravention of the permitted use with reference to the Special Condition of the Grant. The relevant Special Condition stipulated that the premises are not to be used for a purpose “other than for industrial or godown purposes or both”. The respondent also accepted in its final submission that the restriction in the case of Cavendish closely mirrored Special Condition 3(a) in the present case. 63.Liu J in Cavendish, having considered the dictionary definition of “godown” and a number of authorities, had made the following findings :
64.We found the case of Cavendish is directly on the point and the consideration adopted in it should also be applicable and be a criterion to decide whether the mid-stream operation use suggested by the applicant falls within a “godown purpose” under Special Condition 3(a). 65.The containers, once barged onto Lot 22, will only be there for a short period of time till they are needed to be filled or ready for their shipment to its destination. The containers are being kept at Lot 22 and they are not just stored there without more. Movement of these stored containers is apparently expected involving transient deposit and storage for delivery purpose. The three characteristics of a godown found by Liu J are all satisfied. 66.It is also an admitted fact that on 12 January 1989, the applicant, through its solicitors, approached the District Lands Office seeking for approval to sub-let to China Merchants Godown, Wharf and Transport Company Limited (“China Merchants”) 200,000 sq ft of the undeveloped portion of Lot 22 for open storage of freight containers and large machinery and large accessories and repair and maintenance of the same. On 15 February 1989, the District Lands Office replied stating that the proposed use of the lot for open storage of containers does not comply with Special Condition 3. 67.There is no evidence to show the reason behind the decision made by the District Lands Office that the proposed use by the applicant back in 1989 was not in line with the Special Condition 3(a). In any event, such a decision is not binding on us. The applicant had eventually not proceeded with such proposal and we are not here to speculate the reason behind. In any event, the decision of the District Lands Office has no bearing on our finding on whether the proposed use by the applicant as a godown for mid-stream operation is in compliance with the Special Condition 3(a). 68.We found a godown does not necessarily involve a building. The keeping or storage of containers on Lot 22 in covered structure or in the open as a godown for mid-stream operation use or for open storage of containers amounts to godown purpose under the Special Condition 3(a). The OZP 69.On this issue, we think the respondent had accurately stated the questions required to be considered in the written final submission. They are :
The Respondent’s Contention 70.The respondent submitted that, with the OZP published on 24 March 1995, it had the effect of a planning restriction upon publication, albeit a draft. A hypothetical willing purchaser would have to pay close regard to the zonings in the OZP. The Industrial zoning of the OZP consists of 2 columns of categories of use. The mid-stream operation use suggested by AW does not fall within any of the categories of use described in the OZP since it is neither industrial use nor a warehouse (adopting the same argument under Special Condition 3(a) above). The mid-stream operation use does not fall within any of the categories of use under Column 1, which use is permitted as of right; nor does it fall within Column 2, which use is subject to permission from the Town Planning Board. 71.Even if the mid-stream operation use can arguably be said to be within Column 2 where permission could be sought from the Town Planning Board, it is most unlikely that such permission would be granted given the OZP was carefully drafted with precise areas specifically zoned as “container back-up use”. The explanatory statement (page 2216 Bundle F) published with the OZP provided that “this back-up area provides space for empty container storage; container repair and refurbishment; lorry, tractor and trailer parking; and possibly container freight station development”. The mid-stream operation use proposed by AW is by no means satisfied such a use stipulated under the OZP. The Applicant’s Contention 72.The applicant submitted that the OZP has zoned the majority of Lot 22 for ‘Industrial’ use, with the remainder for ‘Government/Institution/Community’ use, ‘Green Belt’ and ‘Other Specified Uses’. The mid-stream operation use falls under Column 1 as uses always permitted and not Column 2 of the categories of use. 73.The Notes to the OZP stipulated that for areas zoned ‘Industrial’, “warehouse (other than dangerous goods godown)” and “industrial use (other than those listed in Column 2)” were listed under Column 1. According to the definition of “warehouse/godown” and “industrial use” in the Definitions of Terms used in Statutory Plans (“Definition of Terms”) published which is used by the Town Planning Board, the mid-stream operation use proposed by the applicant is a use met with such definition. 74.If use as a godown for mid-stream operation did not qualify as a “warehouse” or “industrial use” under Column 1 for the purpose of the OZP, ‘Industrial’ zoning do include “port related industries and quasi-industrial activities directly related to the operation of the port”. The mid-stream operation use is consistent with “port-related” land use in close vicinity to the proposed container terminal facilities which would be “directly related to the operation of the port”. 75.And even if approval is required under Column 2, the Town Planning Board would be more than prepared to grant the same given the acute shortage of back-up spaces for container storage and the undesirability of short-term tenancy arrangements for such back-up land, in particular when CT 10 and CT 11 were not expected to go ahead. Discussion 76.The Index to the OZP had provided for the permitted use under “Industrial” zone. Column 1 comprises “Uses always permitted” whilst Column 2 are for “Use that may be permitted with or without conditions on application to Town Planning Board” (page 2205 Bundle F). It is not in dispute that “Industrial use” and “Warehouse” under Column 1 are relevant in this case, ie if the godown for mid-stream operation falls within either of them, such use is permitted as of right. 77.Both parties relied upon the Definition of Terms for the definition of the different use in the Index. And there is also no dispute that the Town Planning Board is also using the same document in interpreting the various planning terms used in statutory plans. 78.“Industrial Use” is defined in the Definition of Terms as “the use of premises, structure, building or part of a building or place for the manufacture, alteration, cleansing, repairing, ornamenting, finishing, adaptation for sale, breaking up, or demolishing or transformation of goods and materials; for the storage, loading, unloading or handling of goods and cargoes; or for the training, research, design and development, quality control and packaging in relation to the above processes” (page 2287-2288 Bundle F). 79.We found the godown for mid-stream use proposed by the applicant do fall within “Industrial Use” since the use falls within the definition of “storage, loading, unloading or handling of goods and cargos”. As far as storage is concerned, we referred to our ruling in §48-61 above. Storage of containers at Lot 22 clearly involved the loading, unloading or handling of goods and cargos. 80.“Warehouse/Godown” is defined as “any place, building or part of a building for the storage of raw materials and goods including the carrying out of bulk breaking and packaging, but excluding the storage of any dangerous goods to which Section 3 of the Dangerous Goods Ordinance (Cap. 295) applies” (page 2303 Bundle F) in the Definition of Terms. 81.It is our ruling above that the term “warehouse” does not necessarily require a building structure. In any event, the definition of “warehouse” in the Definition of Terms does not require a building or a structure but rather “any place” can be a warehouse. The respondent’s contention that a warehouse required a building structure cannot stand in this regard. 82.We found the godown for mid-stream operation use falls within the “Warehouse/Godown use” under Column 1 of the Index to the OZP and is permitted as of right. 83.Even if we are wrong in the ruling above, we also found that the godown for mid-stream operation use is a use which is likely to have the permission of the Town Planning Board in view of the contention by the applicant stated below and accepted by us that :
Economically viable? The Applicant’s Contention 84.The applicant contends that it is not in dispute that waterfront container handling sites are extremely scarce in 1995 and there is no suitable site available near the container terminal. Kong found Lot 22 satisfied the requirement of such a site in particular with its long quay length and back up land area. 85.So Lot 22 could have offered an alternative to using barges as “floating container yards” which was expensive. Incoming containers can be offloaded from barges at Lot 22 whilst waiting for berthing congestions to clear up. When berths became free, cargo could then be taken from Lot 22 by barge and unloaded onto land for transport to their destinations. Lot 22 would have acted as mid-stream storage to free up barges quickly and efficiently. Whilst at Lot 22, the containers could have been inspected for damage, cleaned and repaired onsite. 86.With barges as mode of transporting containers, it is a far cheaper and more efficient mode when compared to trucking by lorries for containers with consolidated cargo since containers are moving in bulk numbers in barges between Hong Kong and China whilst cross-border trucking made no sense economically. So river trade cargo from China can be discharged at Lot 22 and consolidated into containers inside a warehouse. These containers could then transferred by barges to container terminals. 87.Kong also opined that Lot 22 could be used for open storage of containers in particular as a holding area for transiting containers. Given container traffic congestion was very apparent throughout the port of Hong Kong in 1995, Lot 22 is ideal for such purpose since the site was easily accessible by barge and not too remote from Kwai Chung container port. In reality, space for storage and handling of empty and full containers was in extreme short supply at the time. 88.Kong also found the use of Lot 22 and its related operating costs is lower than the current operating costs of storing and using barges as storage. Given the rental rates at Kwai Chung in mid-1995 were about $14 per square foot, Kong expected a rent reduction of 40% to 50% and estimated the rental of Lot 22 would be at $8 per square foot, with a long term lease of more than 3 years which is not available in Kwai Chung or near the container terminal. With the operator’s costs at $36 per container per day (for open storage) to $41 per container per day (for warehouse storage), Lot 22 offers a more attractive alternative to storage of containers at Kwai Chung which costs $300 to $350 if left longer than the free period. Whilst storage on barges costs $60 per day, storage on Lot 22 at $36 to $41 per day means a more lucrative profits in return. 89.It is Kong’s opinion that the use of Lot 22 as godown for mid-stream operation or open storage of containers would have been economically and commercially viable. The Respondent’s Contention 90.Wort, on the other hand, opined that such a use was not viable. Apart from the fact that such a use was against the restrictions under the Lease and the OZP, he found barge movement more expensive than vehicle transport and Lot 22 was remote in the sense that it was not on the trade route and this added to handling and transit time costs. Whilst Lot 22 can arguably be used for long time storage space, it is unquestionably not fit for container operations, ie stuffing or devanning. Using barges as temporary storage was the most economic solution at the time and demand for container storage or repair facilities in Hong Kong would decline within 5 years with the competition from Shenzhen ports. 91.In terms of money, Mok opined that 80% discount should be more appropriate as far as the rental is concerned due to the remoteness of Lot 22. And adjustment should be made for the total area for open storage and the handling capacity since Kong and AW are adopting different figures in these 2 items. 92.The respondent also submitted that there is no evidence to support the fact that to put the greater part of Lot 22 to a mid-stream operation use is economically justified. To rely on the sum to be paid for 2 year’s lease of land in the New Kowloon as the justification, as suggested by AW, is irrational and without conducting any economic appraisal or financial feasibility study. What AW should do is to estimate the present value of the mid-stream operation by way of a discounted cash flow analysis to see whether the future profits anticipated would justify paying a particular sum to acquire the land (Director of Buildings and Lands v Shun Fung Ironworks Ltd [1995] 2 AC 111). Without such an assessment, no purchaser would pay an extra $1.1 billion suggested by AW for the acquisition of Lot 22. Discussion 93.We agree with the applicant that from the evidence of Kong, one can safely conclude that the suggested use as a godown for mid-stream operation or godown for open storage of containers is commercially viable. 94.Lot 22 is a more viable option for the storage of empty containers compared to the existing practice of storage in the New Territories. In fact, Wort agreed that Lot 22 would be an alternative for storage on barges and it is more economical to store the containers, filled or empty, at somewhere and barged them by way of marine transport instead of road transport. The difference between the two modes is the different means to transport these empty containers from Hong Kong to China. It is either by way of trucking on road by lorry or barging by sea up the Pearl River Delta. Wort had no dispute about the costs suggested by Kong for the trucking of containers, full or empty, ie $600 or $900 for 20-foot container and $750 or $1,000 for 40-foot container. Whilst a single barge can move 50 containers in a go which only costs $5,000 to $6,000, the costs of barging is apparently more economical and efficient when compared to trucking. 95.As for the remoteness of Lot 22, Wort in his evidence under cross-examination agreed that the remoteness is not in terms of distance but rather it is away from the centre of activity. Yet, he also agreed that Lot 22 can be used for the storage of containers destined for the Pearl River Delta ports or to the Kwai Chung terminals and in terms of access within the sea, there is not much difference between Lot 22 and Kwai Chung. This supports Kong’s opinion that “barges plying between the container terminals in Kwai Chung and the Pearl River Delta ports could easily call there to pick up and drop off containers. There will not be much of a detour away from their normal routes.” 96.And Wort also agreed that Lot 22 can be used for open storage when there was sufficient demand in 1995 and sorting of containers can also be done on Lot 22. Given the fact that only short term tenancies were being granted at the time, a lease length of over 3 years offered by Lot 22 is an attraction to mid-stream operators. 97.As for the problem with stuffing and devanning which Wort found cannot be done at Lot 22, he confirmed under cross-examination that by this, he meant for goods which are going to hit the road since these goods are Hong Kong bound cargo, ie for use in Hong Kong. But Wort also agreed that this kind of in-bound container traffic is less than 5%. With this nominal amount, we found the viability of using Lot 22 as a mid-stream operation will not be affected. History of Use 98.The respondent commented that the applicant, who held the lease of Lot 22 since 2 January 1970, had never used the land for any other use except as a shipyard and ancillary use. Even though the applicant had in 1989, as stated above, tried to lease out part of the lot for container based use, upon refusal by the Government on the ground of unlawfulness, the applicant had never pressed on. Should the proposed godown for mid-stream operation use be a worthwhile investment, why such a use had not been implemented during the term when the applicant held the Lot? 99.The applicant submitted that as a matter of law, valuation of land should proceed upon the basis of best user rather than historical user. The fact that Lot 22 was not used for container storage does not mean that it was not suitable. 100.We agree with the applicant that the applicant may not have put Lot 22 to such use before, but in valuation, the hypothetical purchaser should be advised as to all possible use in order for the purchaser to consider how much he is prepared to pay for the acquisition itself. This is what the CFA said about prospect of new uses for the land which should be considered in the valuation process. Conclusion 101.To conclude, we found the Industrial/Godown Area of Lot 22 can be used as a godown for mid-stream operation or for open storage of containers as suggested by the applicant. E.(3) Expectation about the Future – Container Terminal Scheme and Associated Road Scheme 102.Lord Hoffmann, in the CFA Judgment, had said :
103.It is accepted by the parties that expectations about the future, if any, relating to the Container Terminal Scheme and its Associated Road Scheme have to be considered and reflected in the valuation both in the Before and After Situation. And if the Container Terminal Scheme is to be proceeded as planned, the infrastructure including the Associated Road Scheme would be proceeded simultaneously. The Applicant’s Case 104.It is the contention of the applicant that, as at the valuation date, the Container Terminal Scheme (and hence its Associated Road Scheme) was not expected to go ahead, whether in the Before or After Situation. In those circumstances, there would be no expectation of any Container Terminal Scheme and new road access to Lot 22 to be factored in for present valuation purposes. 105.The applicant’s contention is based on the following factors :
106.And even if it is considered that the Container Terminal Scheme were expected to go ahead, it is the submission of the applicant that the chance would nevertheless be very slim and delay would have been expected. There will be significant uncertainties as to whether the land use dependent on availability of road access could be achievable, whether in the Before and After Situation. AW opined that there was 80% chance that the Container Terminal Scheme would not go ahead. The Respondent’s Case 107.The respondent, on the other hand contends that with all the information published as at the valuation date, it points to the conclusion that the Container Terminal Scheme will go ahead. There may be delay for CT9, but there is never the requirement that container ports have to be built in sequence. With all the information published, this showed there was demand and pressure for the trigger-point mechanism to be activated and with sufficient demand, the Container Terminal Scheme can come forward in advance of CT9. Discussion 108.Following the line of thought of the CFA quoted at §102 above, both the landowners and the prospective purchasers would have expectations about the future plan in the locality and also the enhancement of value of the Lot due to the proposed work. 109.Lord Hoffmann said in §45 of his decision that:
110.The following information are available to the public on or before the date of valuation (ie 5 May 1995):
111.From the information above, the owner of Lot 22 and the potential purchaser should be aware of the Container Terminal Scheme and the Associated Road Scheme was being proposed. With the proposal being implemented and completed as planned, it could result in the loss of the marine access to Lot 22 and the area around would become “back-up” areas for container terminals. 112.It is common in the evidence of Kong and Wort that back in 1995, terminals in Shenzhen and elsewhere in the PRC had developed into serious competition to Hong Kong and increasing volume of trade routed through China ports instead. It is also common ground between Kong and Wort that the industry view back in 1995 was that the Container Terminal Scheme was not going to materialize. Mok also agreed during cross-examination that there were difficulties in relation to the sale of CT9 and there would be delay in the construction of CT9. 113.Be that as it may, with the information particularised at §110 above which were already known to the public in 1995, we agree with the respondent that it would be reasonable to expect that the Container Terminal Scheme would proceed as planned as of the date of valuation. The Government had taken various actions to facilitate the construction of CT 10 and 11, despite the delay in CT 9. To adopt the wordings of the respondent in its submission, “if it were otherwise, the actions of the Government in 1994 and 1995 would have been incomprehensible”. 114.All the factors relied upon by the applicant should have been considered by the Government before the proposal was first published in 1994, followed by the authorization in 1995. This explains why the delay of CT 9 was so apparent back in late 1992, yet the Container Terminal Scheme was still proposed in 1994. The Government and the Governor in Council should have already approved in principle to proceed with the Container Terminal Scheme and, therefore, the reclamation work was authorized after considering the trigger-point mechanism. As at 5 May 1995, all the available evidence tend to show that the container terminal project would be proceeded with as planned. 115.Although there was delay in the sale of CT 9 due to complicated reasons, the sequential actions of government including authorization of the reclamation, publishing the road works scheme, announcing the OZP etc, should give the land owner and the prospective purchaser the impression that the Container Terminal Scheme would be implemented. Although there was delay in the sale of CT 9, there was no hard and fast rule that the Government should put the sale of container terminals in sequential order and the Government could not put CT 10 on sale before CT 9. 116.And even though the Associated Road Scheme had only been published but not yet authorized, given the fact that the Container Terminal Scheme were to go ahead, it would definitely require the associated roadworks as part of its infrastructure to be built to enable the functioning of the container ports. With the Container Terminal Scheme expected to proceed, the Associated Road Scheme should also be expected to come into play. 117.Given that all the available evidence or information showed that the Container Terminal Scheme would be proceeded with, we found not much weight should be attached to the industry view back in 1995. The industry view may pose as an uncertain element but should not be considered conclusive in coming to the conclusion that the Container Terminal Scheme would definitely not go ahead. 118.We found that with the public information published, the land owner as well as the potential purchaser of Lot 22 should have the expectation that the Container Terminal Scheme as well as its Associated Road Scheme would proceed as planned. As for the extent as to how this expectation would affect the open market value of Lot 22, we shall deal with this below in the valuation process. 119.Mok has stated in his report that the land on which the shipyard was located was found to be severely contaminated by chemicals. It is logical to conclude that a hypothetical purchaser would take into account the effect of contamination and would deduct the cost of decontamination from the purchase price if the contamination was known to him in order to protect himself from any consequences of future enforcement action by the Government. 120.Mok also pointed out that if the cost of decontamination was to be deducted from the purchase price of Lot 22 as at the date of valuation, such deduction would apply to both the Before and After Valuation. As such, the cost of decontamination would be cancelled out. 121.AW in his reply report pointed out that the consideration of decontamination was not a matter which was generally taken into account in valuation undertaken in 1995. AW also agreed with Mok that if the costs of decontamination were to be taken into account they would be cancelled out in the Before and After Situation. 122.We consider that we have to take into account the contamination factor and the costs of decontamination in the valuation. However, we agree with both valuers that the costs of decontamination would be cancelled out so it is not necessary for us to consider the exact amount involved. F.(2) Demolition Cost and Canteen 123.Mok stated in his report that of the structures claimed by the applicant, only one canteen had been approved by the Buildings Department with an Occupation Permit issued on 4 July 1989. No compensation, except the canteen, would be payable to all structures thereon which were unlawful. It is reasonable to assume that a hypothetical purchaser of the Lot would take into account any demolition costs required for removal and clearance of these unauthorized structures. Mok has relied on the estimation by Architectural Services Department that the estimated cost of demolition (excluding the canteen) as at 2nd quarter 1995 was $8,049,200 and found the cost is about $8,491,400 for the demolition of the unauthorized structure and the canteen at Lot 22. 124.AW agreed with Mok that it is a normal practice for the purchaser to decide whether or to demolish and clear a site. If the purchaser is required to do so, he would allow that cost against the purchase price. AW said he would accept Mok’s cost for demolition of those structures erected not on the area of resumption. AW also commented that since the majority of these structures were at the north west part of the site, many of these would have been within the area resumed by the Government for the proposed port access road. AW claimed that all these structures would be demolished by the Government. 125.AW does not agree with Mok in respect of time required for the demolition of the existing structures to complete. AW further commented that while construction work commenced on the unbuilt area, demolition would take place as well at the same time so he would not accept any need to include a period for demolition in the construction period. Discussion 126.It was agreed by both parties that it is a normal practice that if a purchaser is going to demolish the existing structure and clear a site, he would allow the demolition cost against the value. 127.AW commented that majority of the structures were within the proposed port access road so no allowance for demolition cost is needed. However, AW has mentioned many times that there is a high uncertainty that the Container Terminal Scheme and its Associated Road Scheme would not go ahead. Taking into account the uncertainty factors, we believe that the prospective purchaser should allow the demolition costs for all structures including unauthorized ones and the canteen in the valuation. We accept Mok’s assessment of $8,491,400 as the demolition costs. This, together with 6% for professional fees and 30% for the developer’s profit which makes a total of $11,549,034 should be reflected in the valuation. 128.Regarding the period for demolition in the construction period, we agreed with AW that the demolition could take place whilst construction work commenced on the unbuilt areas of the Lot or when the building plans were submitted for approval. So, no allowance is required for the period of demolition. 129.As at the date of valuation, Lot 22 was let to Cheoy Lee Shipyards Limited, an associated company of the applicant, on a tenancy dated 8 December 1975, for an indefinite period commencing on 1 December 1975. The lease can be terminated by serving 3 months’ notice in writing by either party. The rental was HK$40,000 per month. 130.Mok has taken into account the lease and prepared valuation to reflect the value of the property subject to the existing tenancy. 131.AW has confirmed during cross examination that Lot 22, as at the date of valuation, was subject to a tenancy. However, he opined that since the tenancy was terminable by 3 months notice and a similar 3 months period is adopted as the usual period for completing a sale and purchase agreement, he did not consider there is any need to make any reference to the tenancy as the site would be sold with the benefit of vacant possession. 132.Since the existence of the tenancy was a fact, the prospective purchaser should take this into account notwithstanding that the effect of the income is minimal. 133.Therefore, we accept the approach of the respondent and take account of the tenancy in the assessment of the Before Value.
134.There are 285,000 sq ft on the Lot which is for shipbuilding purpose. 135.Valuers on both sides were in agreement with most of the shipyard comparables. All comparables involved a 15 years lease for shipyard for ship/boat building or ship/boat repairing purposes or both. 136.The comparables which both parties relied on are as follows (collectively called the “NKML Comparables”):
137.AW assessed the shipyard value to be at $399,000,000 whilst Mok’s assessment amounted to $42,680,924. The difference is the result of huge differences in the adjustments of different factors and the difference in the opinion on allowance to be allotted to the blue water area. (a) Blue Water Area (“BWA”) The Applicant’s Contention 138.The applicant’s valuer, AW, contended that the owner cannot do any “work” in the BWA which does not count towards calculating site coverage nor plot ratio. By contrast, Lot 22 had no such BWA though there was similar thing, ie the slipways erected on Lot 22 which were 20,000 sq ft only. AW considered that the slipways only accounted for 7% of the shipyard area (or less than 1% of the total area of 2 million sq ft) whereas the BWA in the NKML Comparables accounted for about 20% to 28% of the total leased areas of the shipyard comparables. In other words, the value of BWA should not be the same as the value of land area. Therefore, AW considered that the value of BWA should be one half of the value of the land area. After adjustment for the BWA, the unit rate of the NKML Comparables ranged between $110.68/sq ft ($1,191.3/sq m) and $115.72/sq ft ($1,245.6/sq m) and the average unit rate would be $113.06/sq ft ($1,217.0/sq m). The Respondent’s Contention 139.The respondent contended and AW confirmed during cross-examination that the owner/operator of a shipyard would take account of four essential characteristics for him to use the site for shipyard purpose. They are:
140.The respondent considered that both land and sea areas are useful for shipbuilding purpose and different unit rate is not justified, hence it is impossible to see a lower value to be attributed to the sea area than to the land area. Discussion 141.It is not in dispute that the land area and the BWA are both within the demise and are exclusively used by the owners. Whether there should be a discount on the value of the BWA depends on whether the existence of the BWA would reduce the actual usable area available to the owner or reduce the built-over area of the lot. 142.Based on the transaction price of the NKML Comparables, it is noted that the size of these ship/boat building sites (including slipways) in Yau Tong range between 39,654 sq ft (or 3,684 sq m) and 164,462 sq ft (or 15,279 sq m). The unit rate for each plot of land inclusive of both dry land and slipway area (or “blue water” claimed by AW) was the same notwithstanding the size of each plot of land was different and the size of land area and blue area of each lot are different too. In other words, when the landowners acquired the lots, they should have known the difference in size of land area and BWA. Yet, they eventually accepted the same unit rate for the total area for each individual transaction. 143.AW has argued that the unit rate of land area should be different from that of BWA. He has analysed the NKML Comparables and arrived at the unit rate between $1,191.3/sq ft ($12,823/sq m) and $1,245.6/sq ft ($13,407/sq m). However, he could not demonstrate to the Tribunal as to why there should be such a difference. The analysed result could not show to the Tribunal why a consistent unit rate has been arrived at which is the situation for all the NKML Comparables. 144.Based on the NKML Comparables, we accept the respondent’s argument that the unit rate for each plot of land (including both land and slipway areas) was very consistent irrespective of the difference in size in both land area and BWA as well as the restrictions thereon. If the sea area was in fact regarded as less valuable than the land area by those involved in the transactions, one would expect a reduction in the overall rate for those comparables with a proportionately larger sea area. Having taken into account the arguments of both parties and based on the NKML Comparables, we are not persuaded that there should be a difference in value between land area and the BWA. 145.Based on the above, we consider that the price of the NKML Comparables located at Stonecutter Island transacted in September 1993 was at $1,069.6/sq ft ($11,513/sq m) and this should be adopted as the unit rate for the assessment of the shipyard value for Lot 22. (b) Adjustments 146.The differences in adjustment factors between AW and Mok are summarized below for ease of reference:
(b)(1) Time 147.Dates of transactions of comparables were in September 1993 whereas the date of valuation is May 1995. Time adjustment is needed to reflect the difference in time between September 1993 and 5 May 1995. The Applicant’s Adjustment 148.AW has based on the data published by the Rating and Valuation Department relating to price indices of private flatted factories for the whole of Hong Kong for adjustment. 149.According to his report, he used the following data for time adjustment:
This showed a fall of 4% from the third quarter of 1993 to the second quarter of 1995 and this is the figure adopted by AW in the time adjustment. The Respondent’s Adjustment 150.Mok used the average prices of private flatted factories in the New Territories between the date of transaction of comparables and the date of valuation.
151.It showed an increase of about 1% in value between these two periods. This is the figure adopted by Mok in the time adjustment. Discussion 152.Price indexes and average prices are indicators for the price movement so the approach adopted by the valuers is acceptable. 153.A valuer, however, should understand that the overall index for the whole of Hong Kong should be different from that for a particular region or district. When we made use of the index, it is more appropriate to use the index within the same region or district so that a relatively accurate figure could be derived therefrom. 154.Having considered the above, we accept the Index adopted by Mok. Based on the average price of private flatted factories in New Kowloon between September 1993 and May 1995, the average sale price for months in 3rd Quarter 1993 was $2,072.7/sq ft ($22,310/sq m) where the average sale price in the 2nd Quarter 1995 was $2,094.3/sq ft ($22,543/sq m). This showed an upward adjustment of 1% for the price of flatted factories in New Kowloon area (Stonecutter Island) from the 3rd Quarter 1993 to 2nd Quarter 1995. We found 1% should be the adjustment adopted for the time factor. (b)(2) Lease Term 155.The NKML Comparables which were sold in September 1993 are with a 15 year lease term but Lot 22, the subject property, was a normal New Territories Government Lease which has been extended to 30 June 2047 under the New Territories Leases (Extension) Ordinance (Cap 150). The unexpired term of the Lease of Lot 22 was for a term from 5 May 1995 (ie the Valuation Date) to 30 June 2047, ie just over 52 years. Therefore, adjustment has to be made to reflect the difference in the lease term of the Lot. 156.Both valuers agreed that an upward adjustment on the comparables should be carried out to reflect a substantial longer lease term. The only difference between the valuers is the adoption of yield. AW has adopted the yield in the 3rd Quarter 1993 whereas Mok has used the yield in the 2nd Quarter of 1995. 157.The method used by AW is as follows:
158.While calculating the adjustment, AW has rounded up the unexpired lease term of 52.16 years to 53. 159.On procedure (b) above, AW has adopted the yield of 8.1% as at the 3rd Quarter of 1993 of the “Industrial Yield of New Kowloon” published by the Rating and Valuation Department. As a result, AW has made a 43% upward adjustment for the difference in lease term. 160.The respondent’s valuer, Mok, has used another approach. He adjusted the value of comparables to 1995 value first and then adjusted for the lease term based on the yield of 9.3% as at the 2nd Quarter of 1995 for flatted factories published by Rating and Valuation Department. Based on this approach, Mok adopted an upward adjustment of 34% to reflect the difference in lease term. 161.Yield is to reflect the rate of return and the risk associated with the investment as at a particular date. Adoption of market yield around the date of valuation should be able to reflect the expected rate of return and the risk from the perspective of an investor at that particular time. We do not agree with AW’s suggestion to adopt the Industrial Yield (New Kowloon) as at the 3rd Quarter of 1993 as this could not truly reflect the investment environment as at the date of valuation. We are of the opinion that adjustment of time factor of the comparable should be done first and then we could make use of the market yield as at the date of valuation, ie 9.3% to adjust for the difference in the lease term. 162.We accept the assessment method adopted by Mok and adopt a figure of 34% for the adjustment of lease term. (b)(3) User 163.Under Special Condition 3(a), at least 285,000 sq ft of Lot 22 has to be used for shipbuilding purposes only. The remaining portion of Lot 22 can be used for general industrial/godown purposes. 164.Mok has made a downward adjustment of 20% for the restriction on user as he was given to understand that Lot 22 could only be used for ship building but not for ship repairing purpose. Mok also adopted 1/12th value on the remaining site which he assumed could be used for open storage ancillary to ship building use in his 1st Before Value. 165.AW did not make any adjustment on the user restriction of Lot 22 as he considered that there is no sufficient evidence to demonstrate any difference between the value for ship building use and ship repairing use. 166.According to the evidence and agreed by both parties, we consider that shipbuilding and ship repairing purposes fall within the definition of Industrial Use. In other words, the remaining portion of Lot 22 can be used for ship repairing purpose. 167.This Tribunal believed that Mok has misinterpreted the user clause of the lease conditions of Lot 22 and assumed that ship repairing could not be used on the remaining portion of Lot 22. The adoption by Mok of a 20% discount on the shipbuilding portion and 1/12th on the ancillary uses for the remaining portion cannot be accepted as appropriate adjustment. 168.If we solely take out the shipbuilding portion of 285,000 sq ft, it is reasonable and appropriate to make a downward adjustment to reflect the restricted user clause of that portion of Lot 22. However, as the remaining portion can also be used for ship repairing purpose, the effect on the user restriction on the shipbuilding portion would be eliminated. 169.Regarding the remaining portion of Lot 22, we cannot accept Mok’s valuation that 1/12th would be applied on the ancillary use of the site. As the remaining portion of Lot 22 can be used for industrial/godown purpose, including shipbuilding and ship repairing purposes, only 1/12th of shipbuilding value cannot truly reflect the market value of the site. We are of the opinion that the 1st Before Value of Mok’s valuation should be rejected. 170.We accept the opinion of AW that no adjustment is required under this head. (b)(4) Building Height 171.Under Special Condition No 14 of the lease of Lot 22, no structure shall exceed a height of 40 ft. However, the maximum height of structures is about 98.4 ft for all the NKML Comparables. 172.Mok made a downward adjustment of 10% to reflect the difference in building height restriction between the comparables and Lot 22. However, Mok cannot demonstrate how the building height is relevant for ship building and/or ship repairing purpose. 173.AW has not made any adjustment on this factor due to the fact that 40 ft is more than sufficient for shipbuilding or ship repairing use. 174.We found this 10% adjustment an arbitrary adjustment without supporting evidence to show that a shipyard operator required a maximum height of more than 40ft. The fact that the Grant allowed a shipyard to be run with such height restriction must mean that this is the height required and feasible for the operation. The fact that the NKML Comparables got a higher height restriction is neither here nor there. Mok also admitted under cross-examination that shipbuilding and ship repairing could take place outdoors and the height restriction would not be a significant factor to consider. 175.Taking into account the above, we consider that no adjustment is required for the difference in height restriction. (b)(5) Size 176.The area of the ship building portion of Lot 22 is about 285,000 sq ft (26,477 sq m). The areas of the NKML Comparables range between 39,643.44 sq ft (3,683 sq m) and 164,364.75 sq ft (15,270 sq m). Amongst the 7 comparables, 5 of which were less than 64,583.4 sq ft (6,000 sq m) in area. 177.This raised a question as to whether a downward adjustment for size is justified. The Respondent’s Adjustment 178.The respondent drew the Tribunal’s attention to the facts stated in the “Report on the Survey of Shipyards” released by the PADS section of the Planning Department in March 1995 (“the Shipyard Survey”) that the shipbuilding area of Lot 22 was the largest among the 183 marine lots in Hong Kong used for shipyard purposes. The respective areas of the next largest shipyards were 273,317.95 sq ft (25,392 sq m) and 198,001.94 sq ft (18,395 sq m) which were located in urban areas of Kowloon. About 81% of the total marine lots were less than 32,302.46 sq ft (3,001 sq m) in area which is less than one ninth of the shipbuilding area at Lot 22. 179.Mok pointed out that there was only a slight demand for land for shipbuilding in the market and in the mid-1990s, the demand for land for shipbuilding for such a restricted purpose was much less than the demand for general shipyard purposes. Wort had also stated in his report that Lot 22 had not been used for pure shipbuilding activity up to 1995. The respondent contended that although there is no such evidence which supports the amount of reduction, the valuer can and has to make a subjective value judgment to reflect the difference in size. Mok opined that a downward adjustment of 20% is required. The Applicant’s Adjustment 180.AW did not make any adjustment for size. The applicant contended that the comparables did have anti-partitioning clauses and there was no similar clause in the lease of Lot 22 so Lot 22 can be partitioned into 2 or more parcels bringing it well within the size of the comparables. 181.The applicant also drew the Tribunal’s attention to the Shipyard Survey which stated that :
182.The applicant contended that quantum allowance should not be applied to land in the same way as buying chattels where a discount will be given for bulk purchase. Downward adjustment for size would only be given where the size of comparables was substantially smaller and there was less demand for large sized site. If there was a particular demand for larger units of land for a particular purpose, no downward adjustment for size would be justified. Discussion 183.We do not agree with the respondent’s view that there should be a quantum allowance for difference in size as the demand and supply dictates the market and reflects on the value which the prospective purchaser would be willing to pay for the property. There was no evidence in the Shipyard Survey to show that there was a decline or expected decline in future in the ship building industry. 184.We agree with the applicant’s view that no adjustment is needed for the difference in size between the comparables and Lot 22. (b)(6) Sea Frontage 185.Mok has made an upward adjustment of 10% to reflect the difference in the sea frontage between the NKML Comparables and Lot 22. 186.AW has not made any adjustment on the difference in sea frontage but the applicant does not dispute Mok’s upward adjustment. 187.As there is no dispute on this item, we adopt an upward adjustment of 10% on the difference in the length of sea frontage. (b)(7) Location and Lack of Road Access 188.The applicant and the respondent have a different view on the adjustment for location and lack of road access. AW combined these two factors as a single adjustment whilst Mok was of the opinion that these two factors should be considered separately. 189.AW has made an overall downward adjustment of 25% to reflect the poor location of Lot 22 and the absence of any road access to it in 1995 whereas Mok has made a downward adjustment of 56% for location and another 25% adjustment for lack of road access. The Applicant’s Adjustment 190.AW has not described clearly why he made one adjustment for both factors. He just made use of the average unit rate of the 7 NKML Comparables and made a 25% adjustment for the difference in location and lack of road access between Lot 22 and the NKML Comparables. However, AW has not advised the Tribunal as to how the 25% is being arrived at. 191.AW disagreed with Mok’s adjustment for location in that Mok has taken the difference between the average price for flatted factories in New Territories and New Kowloon, at -41% and then taken a further -15% to reflect the remote location on Lantau. AW considered Mok’s additional adjustment of 15% for remoteness is unnecessary. AW also considered Mok’s adjustment of -25% for lack of road access to be excessive. The Respondent’s Adjustment 192.Mok has tried to use the published data so as to find out the objective evidence to quantify the difference in location between the New Kowloon area and Lot 22. He has made use of the average price of private flatted factories at New Kowloon and the New Territories in the 2nd Quarter of 1995 published by the Rating and Valuation Department. Based on the data, the average price of private flatted factories in the 2nd Quarter of 1995 in New Kowloon was $194.57/sq ft ($2,094.3/sq m) whereas the average price of private flatted factories in New Territories was $114.99/sq ft ($1,237.7/sq m). In other words, price of private flatted factories in New Territories was about 59% of that of private flatted factories in New Kowloon. Mok found a downward adjustment of 41% should be made to reflect the difference in location. He further made an additional adjustment of 15% for location to reflect the inferior location of Lot 22 to make up a total of 56% deduction for location. 193.On top of the location factor, Mok has made a further downward adjustment of 25% for lack of road access. No direct reference has been made for this factor. Discussion 194.Whether location factor and lack of road access should be separately considered is a matter of evidence. Unless a valuer could find evidence to support a combined adjustment factor, it is hard to combine two factors together. This is because these two factors are independent and are not inter-related. We are not convinced that these two factors should be considered as a whole. 195.Penny’s Bay is clearly at a substantially more remote location than New Kowloon and both valuation experts have adopted a downward adjustment to be made to location. Lot 22 has no road access whereas all of the NKML Comparables had adequate road access. We agree with the respondent that in addition to its poor location, Lot 22 also suffered from the fact that it had no vehicular access at all. These 2 factors should be considered separately. 196.Even though it is an admitted fact that there is a difference in location between Lot 22 and the NKML Comparables, there is no specific data to show the difference in value. We incline to accept Mok’s methodology to compare the average price of private flatted factories between New Territories and New Kowloon as a reference. Based on the data published by the Rating and Valuation Department, a downward adjustment of 41% should be made. 197.In the consideration as to whether we should make further downward adjustment to reflect the poor location of Lot 22, the applicant had raised the query as to whether further adjustment is justified for ship building use. 198.Since marine access is more important for the shipbuilding or repairing yard than road access, we have to consider whether the route to Lot 22 by sea is less convenient than the NKML Comparables. We agree with the applicant that marine access is important to shipbuilding industry. Although the location of Lot 22 is relatively remote, there should not be such significant difference by way of sea transport. We consider no further adjustment is needed. 199.Mok has further made a downward adjustment of 25% for lack of road access. The respondent contended that Lot 22 suffered from a unique disadvantage compared with the other 180 or so shipyards in Hong Kong in the mid-1990s and both valuers could not point to any other shipyards in Hong Kong, apart from Lot 22, which had to operate without any access to it or from it by vehicles. 200.AW has not clearly indicated what percentage he has to make to reflect the lack of road access for shipbuilding purpose and the downward adjustment of 25% suggested by Mok has not been supported by any concrete evidence. 201.We found marine access is the main access to the shipbuilding industry but the property should be benefited by the provision of road access. We agree with Mok that adjustment is necessary. However, we consider 25% to be excessive and apply 20% to reflect the lack of road access. (b)(8) Ready for Operation 202.AW contended that Lot 22 was ready for operation whereas the NKML Comparables were sold as bare sites and the purchasers had to construct and bring their shipyards into operation within 13 months. AW claimed that the comparables did not even have slipways, hence AW has made an upward adjustment of 10% on account of this. 203.Mok disagreed and took the letting of NKML31 as an example to demonstrate his disagreement with AW. Under the particulars and conditions of grant for NKML31, it was noted that the term was 15 years commencing on a date to be specified in a letter from the Director of Lands. Another letter from the Director of Lands dated 24 September 1993 stated that the possession of the lot was deemed to have been handed over on 7 September 1992 and the rent should accrue from the date to be specified in a letter from the Director of Lands. The said letter was issued by the Director of Lands on 8 October 1993 in which it was confirmed that the term of 15 years was to commence from 7 October 1993 and rent was payable from the same date. 204.It was clear that the owner of NKML31 was in possession of the lot on 7 September 1992 which was about 13 months before the lease commencement date, ie 7 October 1993. That is to say, the owners of shipyard comparables had 13 months to prepare the shipyard and to get it ready for operation. This situation is applicable to all 7 NKML Comparables. 205.The documentary evidence tends to show that the opinion of AW is flawed. We do not agree that we should make any adjustment on the ready for operation factor taking into account that the NKML Comparables should have been ready for operation at the commencement date of the leases. (b)(9) Summation or multiplication 206.Mok has used summation process by adding up all the various adjustments in his assessment whereas AW has used multiplication process. 207.There is no fixed rule in the textbook whether summation or multiplication is right or wrong. However, the more adjustments that there are the greater may be the difference between the result of using a summation and a multiplication process. The larger the magnitude of the adjustments, the greater is the difference between the result of using a summation and a multiplication process. 208.The Tribunal considers it is more logical to use multiplication method. For an instance, there are two factors for adjustment, say, time and location. We need to adjust the time factor from the transaction date to the date of valuation. After the adjustment in time, we then make adjustment on locational difference. If the summation process is being adopted such a factor cannot be reflected in the end figure. (c) Conclusion on Adjustment 209.Having considered the above, we found the adjustment for each factor and the total adjustment to be made should be as follows :
210.Hence, the value for the Shipyard should be assessed as follows :
F.(5)Godown for Mid-stream Operation 211.As found in Section E.(2) above, we have ruled that Lot 22 could be used for godown purpose for mid-stream operation including open storage purposes. 212.As the mid-stream operators have to handle the bulk and break bulk cargoes, they need to arrange stuffing and destuffing of the cargoes and container consolidation on site. Mok stated that the operation of mid-stream sites in Hong Kong mainly involves the loading and unloading of ocean and river cargoes from barges to trucks/lorries and vice versa. This explained why the sites operated by the mid-stream operators are all accessible by roads as can be seen from the comparables adopted by the experts (listed below) which are sites occupied by the mid-stream operators either accessible by both sea and road or by road only. However, Lot 22 is a site with marine access only in the Before Situation and this is a fact which we cannot ignore. 213.As Lot 22 could be used as godown for mid-stream operation or open storage of containers, we have to identify what rental the owner is likely to accept and what price/rental the prospective purchaser/tenant would be likely to offer for the said use. 214.Both the applicant and the respondent have used the same set of comparables but expressed conflicting opinions as to their suitability. For ease of comparison and discussion, all the comparables are listed below.
215.There are 4 sets of comparables collected by the applicant and the respondent. The issue is which comparable should be adopted. AW opined that STT 3303, 3304 and 3305 (“the 3 STT Comparables”) are suitable comparables whilst Mok opined that KCTL481 and KCTL 479 (“the KCTL Comparables”) should be the appropriate comparables. 216.Before we go into detail, we have to consider whether mid-stream or open storage is the optimum use. Optimum Development: Godown for Mid-stream Operation or Open Storage Use The Applicant’s Contention 217.AW has introduced in his first report dated 1 September 2011 that the optimum development of Lot 22 would have been continued use of the minimum area specified in the lease for shipbuilding purpose and for the remainder of the site to be developed as a godown for the storage of containerized goods from mid-stream and river-trade operations. 218.AW has also mentioned in his first report that the ideal development would have been a large steel framed and clad godown or godowns. In his calculation, he has allowed a 2-year period for the construction of the facilities. He has made adjustments on the 3 STT Comparables which are used for open storage and/or loading and unloading and storage of containers from sea or land including container consolidation (stuffing or de-stuffing). He has made adjustments on the 3 STT Comparables in terms of location and access, and time to arrive at the unit rate of $1,200/sq ft for mid-stream use. 219.In AW’s reply report, he has introduced the valuation on the basis of open storage of containers and he has adopted the unit rate of $1,000/sq ft for open storage purpose. However, AW has not disclosed what comparables he has used and what adjustment he has applied to arrive at the unit rate of $1,000/sq ft. The Respondent’s Contention 220.Mok contended that he did not agree with AW that apart from portion of Lot 22 using for ship building use, the remainder of Lot 22 could be used as godown for the storage of containerized goods from mid-stream and river trade operations. 221.Mok also contended that mid-stream is not permissible under the Conditions of Exchange and would require planning approval from the Town Planning Board. 222.Mok also commented that Lot 22 was not commercially viable for use as a container storage and consolidation. If it is viable, the owner should have used the site for such purpose for long time. 223.Details of these grounds of objection raised by the respondent as to the feasibility of the mid-stream use can be found in Section E.(2) above. 224.Mok also pointed out that AW stated in his report that the ideal development would have been a large steel framed and clad godown or godowns, of sufficient height to allow double or treble stacking of containers while waiting for delivery to ship or barge. However, AW has not deducted the construction cost of this assumed large steel framed and clad structures in his valuation. Discussion 225.AW has made adjustments on the 3 STT Comparables which are used for open storage in terms of location and access and time to arrive at the unit rate of $1,200/sq ft for mid-stream purpose. However, he has not told us how he differentiated between the open storage and the mid-stream use. We cannot find from his adjustment factors how he has adjusted from the unit rate of open storage comparables to that of mid-stream use. 226.After he has arrived at the unit rate of $1,200/sq ft, he has also not shown to us how he made adjustment to arrive at the unit rate of $1,000/sq ft for open storage use. Also, we could not find from the reports of AW as to what comparables he has used to arrive at the unit rate for open storage purpose. 227.Optimum development should be the highest and the best use of the property so there should be only one optimum use. We are confused by AW as to whether he would like to propose mid-stream or open storage of containers to be the optimum development use for Lot 22. 228.As rightly pointed out by Mok, AW has not considered in his valuation the cost of construction for the large steel framed and clad structures as proposed in his report. Apart from deferment of 2 years to reflect the construction time, he has not shown to us what kind of facilities or constructions he intended to develop. He has also not shown to us the costs of these facilities. From the calculations in his report, AW has just adjusted the unit rate of comparables in terms of location and access, and time to arrive at the unit rate for mid-stream use only. This seems to show that his “mid-stream” use is actually for open storage purpose with the facilities which the operators require 2 years time to establish only. 229.Based on the above and from the evidence he adduced before the Tribunal, AW has not reflected any superstructure to be erected on Lot 22 and he actually made use of the 3 STT Comparables, which are open storage comparables for assessment of the value of Lot 22. As we only need to choose the optimum development from AW’s proposal (and we will compare this proposed use with Mok’s proposed optimum development later), we would take the use with the highest value as the optimum development, ie $1,200/sq ft. Area of Different Uses on Lot 22 230.We note that the areas adopted by AW and Mok are not identical. However, we note from the Joint Report by the Building Surveyors prepared jointly by Lee and Howes that the land areas under the OZP are agreed (page 1777 of Bundle D). We shall adopt the same in our consideration. 231.For ease of reference, we extract the information as follows:
Internal Road Development 232.AW has made a 15% deduction for providing internal roads to serve the development on the site after discounting for the areas of shipyard, green belt, Government/Institution Community and other specified uses. He cited examples of a steel mill in Tuen Mun, an oil depot in Tsing Yi and river trade terminal in Tuen Mun where the ratio of internal roads ranges from 14.6% to 17.6%. He made a 15% reduction for internal roads to the area to be used for mid-stream godown portion of the site. 233.Mok only commented that since the River Terminal at Tuen Mun is similar to Lot 22 in terms of use, the higher percentage of 17.6% is more relevant for mid-stream operation. 234.There is no rigid rule or formula to determine the percentage for internal roads. We believe it depends on the shape and size of the site, layout of development, topography of the site etc. 235.Having taken account of the examples raised by AW, we consider that 15% reduction for internal roads is reasonable. Summary of Areas 236.Having considered the above, the area of Lot 22 can be derived as follows:
Area zoned Green Belt and GIC 237.AW has adopted 75% of the basic land value for mid-stream godown use to reflect the high possibility of rezoning the GIC area or obtaining Town Planning Board approval for change of use to warehouse/godown. 238.Mok mentioned in his supplementary report dated 25 November 2011 that he agreed with AW that objections to the two G/IC sites would be successful for the reasons stated by him and also agreed to apply a similar discount of 25% for uncertainty associated with the planning approval as AW did in his valuation. He also added that even if the Government resumes the land zoned G/IC for implementation compensation would be assessed as the market value. 239.As there is no dispute between the parties, we will adopt the same approach in our valuation. 240.For the area zoned green belt, AW has adopted a nil value to reflect that this land has no commercial value and the zoning is mostly unlikely to change. 241.Mok agreed with AW in his reply report dated 25 November 2011 that a nil value would apply as the land would have no commercial value. Mok also commented that he has reflected in his valuation the presence of Green Belt Use. 242.As such, we agree that a nil value should be given to the area zoned Green Belt. Height Restriction 243.The respondent also contended that AW has not made an adjustment for the difference in height restriction. Special Condition 16 of Lot 22 limits the height of structures on the Lot to 40 ft whereas the users of the 3 STT Comparables are allowed to stack not more than 8 layers of containers. Based on the description in §10.1.3 of AW’s report (page 413 Bundle B), he mentioned that the ideal development would have been a large steel frame and clad godown or godowns, of sufficient height to allow double or treble stacking of containers in storage. In other words, he has in mind that only 3 layers of containers would be stacked on site. However, AW has not reflected this in his calculation. According to Mok, an adjustment for capacity would be minus 62.5% because the larger the capacity the more the number of containers that can be stored/handled on site. 244.AW commented during cross-examination that 3 is an operational height for a yard that is moving in and out and not for the storage of empty containers. However, AW also admitted that 8 layers of containers are possible for storing empty containers. Discussion 245.There is no doubt that the Lot 22, due to its height restriction, could only be used for stacking 3 layers of containers. Although AW commented that 3 is an operational height for a yard, it is obvious that the operators are benefitted from the permission for the 3 STT Comparables to store up to 8 layers of containers as the operator could make use of the site for storing empty containers. Valuers should reflect this in analyzing the 3 STT Comparables. We believe that even though the operator can store up to 8 layers of containers, it should not be the case that all are full containers. We consider that the effect should not be as high as -62.5% as Mok proposed. We would use at most -35% to be reasonable adjustment. Quay Length 246.The respondent also pointed out in its closing submission that based on the opinion of Kong, the optimum ratio of quay length to back-up land area is 50 m : 5000 sq m (or 1 m per 100 sq m). As Lot 22 has a quay length of 960 m only, by comparing with the size for mid-stream purpose adopted by AW, the respondent said there is about 20% deficiency of quay length at Lot 22. 247.The respondent further elaborated that the deficiency in quay length is exacerbated by:
248.The respondent commented that the 3 STT Comparables at New Kowloon used by AW had quay length in excess of the optimum required but AW did not reflect the deficiency of quay length in his valuation. Discussion 249.We agree with the opinion of the respondent that as the sea frontage of Lot 22 should be shared between the shipyard and the mid-stream operator, the efficiency for using of the sea frontage should to a certain extent be affected. Valuers should reflect the deficiency in quay length in assessing the comparables and we found a downward adjustment of 20% is reasonable. Short Term Tenancies Comparables (“STT Comparables”) The Applicant’s Contention 250.AW, has used the following comparables, ie the 3 STT Comparables, to substantiate his valuation.
251.AW has arrived at the market price at $1,200/sq ft by taking the average rate of the 3 STT Comparables quoted above which was about $183/sq ft and then capitalized at 9.6%. 252.The adjustments made by AW is as follow:
253.AW then concluded that the capitalized value for mid-stream use of Lot 22 is about $1,200/sq ft with either marine or road access only. If Lot 22 is accessible via marine and road access, the unit rate would be around $1,600/sq ft. 254.The applicant also quoted other short term tenancies transactions as comparables which are extracted as follows but contended that they are not suitable comparables:
a) KX1565 255.The applicant contended that after adjustment of time for KX1565, the unit rate should be around HK$14/sq ft per month. By multiplying the 1995 yield of 9.3% adopted by Mok, the unit price should be around HK$1,806/sq ft which is significantly higher than the unit rate of KCTL Comparables. The applicant also drew the Tribunal’s attention to the fact that the lease of KX1565 was only for one year and renewable on a month-to-month basis thereafter so that the rental and price were therefore suppressed, as compared with Lot 22, which had none of the above mentioned problems and concerns. b) STT882 256.The applicant commented that the unit rate of STT882 was only HK$6.64/sq ft per month which was much lower than that of STT3303 although the transaction dates of these two STTs were similar. The applicant contended that the lease term of STT882 is only 9 months which was extremely short. This was one of the key reasons why the unit rate between STT882 and STT3303 has significant difference. Location was another reason because STT882 was located in Tuen Mun whereas STT3303 was located at Stonecutter Islands in Kwai Tsing district. 257.The applicant also drew the Tribunal’s attention to the situation that the STT882 had precarious marine rights which would be taken away at any time and without compensation. Therefore, the applicant contended that STT882 is not a comparable at all. c) STT3292 258.This is another short term tenancy transaction in Tsing Yi which was transacted in June 1994 for a term of 3 years and renewable on quarterly basis. The unit rate of this comparable was about HK$5.8/sq ft per month. The applicant drew the attention of the Tribunal to the point that the STT3292 has road access only and no marine access was available. 259.The lease of the STT3292 also stated that the site was for “open storage of empty containers (excluding stuffing and de-stuffing activities)”. The applicant contended that as the site was only accessible by road, so irrespective of whether the lease has stipulated the usage for empty containers, it was in reality only good for empty containers. 260.The applicant pointed out that STT3292 is located within the same district with STT3303 but the unit rates between these 2 STTs are significantly different. When the unit rate of STT3303 was $14.29/sq ft per month, the unit rate of STT3292 was only $5.8/sq ft per month. The applicant contended that this was mainly due to the availability of marine rights and due to the significant difference in unit rates, STT3292 is not a good comparable. d) STT3075 261.The applicant commented that this comparable was transacted in May 1990 immediately after the release of the PADS Report in January 1990 and the bidders would have been affected by the Report which stated that STT3075 was in the areas earmarked for redevelopment. 262.The uncertainties were also enhanced by the following terms and conditions of the Lease of STT3075:
263.The applicant contended that owing to the above special conditions, the unit rate commanded for STT3075 is significantly low so STT3075 is not useful as a comparable. The Respondent’s Contention 264.The respondent contended that the 3 STT Comparables are not relevant since they were short term tenancies granted in December 1995 with all leases, involved the same areas of 210,972 sq ft (19,600 sq m) and on two years terms whilst Lot 22 involved a lease of 52 years for an area of over 1 million sq ft. 265.The respondent contended that AW has not made any downward adjustment to reflect the difference in size between Lot 22 and the 3 STT Comparables. The respondent stated that the size of the remaining portion of Lot 22 which could be used is 1,283,504 sq ft whereas the area for each of the 3 STT Comparables is only 19,600 sq ft Mok opined a 20% downward adjustment should be made to reflect the difference in size between the 3 STT Comparables and Lot 22. 266.Mok commented that AW has made a downward adjustment of 40% for location and absence of road access for KX1565 which is grossly inadequate. Moreover, the adjustment AW made is inconsistent in its application to different comparables. 267.For the 3 STT Comparables used by AW, AW has made a downward adjustment of 40% where there is only marine or road access and of 20% where there is marine access and road access. Based on his principle, a similar downward adjustment should be made for lack of road access at Lot 22 while comparing with the other STT Comparables. 268.The respondent pointed out that AW seemed not to provide a consistent adjustment in his different scenarios. The respondent drew the attention of the Tribunal to Scenario 3 and 39 of AW’s calculation where 33% and 40% were made to reflect the difference between the property with marine access only and the property with both marine and road access. 269.The respondent contended that the 3 STT Comparables used by AW are located at Stonecutters Island which commanded a unit rate of $183/sq ft per year and was about 43% above the comparable of STT882 which was located in Tuen Mun and was leased at a rate of about $79/sq ft. The respondent claimed that these two comparables are similar in transaction date and uses where both sites enjoyed both marine and road access. The significant difference in unit rate has proved that these two transactions should not be considered good comparables to be adopted. 270.The respondent raised another comparable, STT3292, located at area 16 at Tsing Yi Island where the unit rate of which was $76/sq ft per year, ie about 42% of the rental of the 3 STT Comparables at Stonecutters Island. STT3292 only had road access. The respondent contended that based on AW’s suggestion, a reduction of 20% should be allowed in the absence of one form of access. Based on the difference in the unit rate, the resultant downward adjustment should be about 58% to reflect the poor location of Lot 22 and the absence of one of the two possible forms of access at Lot 22. 271.The respondent also contended that the applicant have tried to downplay the importance of road access for the purpose of a container based use. The respondent compared the two lettings in 1995 of STT882 at Tuen Mun and STT 3292 at Tsing Yi where the former had both marine and road access whereas the latter had road access only. However, the unit rate of Tuen Mun transaction was about 14 % higher than that for Tsing Yi. The respondent opined that this reflected the importance of road access in this industry. 272.The respondent contended that in terms of location and access, size and lease terms, the 3 STT Comparables are not good comparables. The respondent commented that if there were no comparable available, STT comparables could still be used. However, as there were other long term leases, namely KCTL479 and KCTL481 in the same district of the STT comparables, the respondent could not accept all these STT comparables as reliable comparables. He asked the Tribunal to consider the KCTL Comparables instead. Discussion Location 273.AW has made a downward adjustment of 40% for location, and absence of road access. AW has also shown to the Tribunal his opinion of adjustment on location and access if only road access is available and if both marine and road access are available (for details, see §252 above). 274.The respondent commented that AW’s adjustment is not founded on any hard evidence from comparables or from published data or statistics. 275.The respondent considered that the Tribunal should take Mok’s approach by applying the ratio between the average price for private flatted factories in New Kowloon and the New Territories (similar to the locational adjustments he made for shipyards). The respondent opined that a deduction of 41% for location to be reasonable. Mok further made a downward adjustment of 15% for the poor location of Lot 22 to reflect its remoteness. 276.In terms of location, as discussed in §196 above on the location adjustment in shipyard use, we accept Mok’s opinion to use the ratio between the average price for private flatted factories in New Kowloon and in the New Territories and applied a downward adjustment of 41%. Similarly, location factor in mid-stream operation is also important and the data compiled by the Rating and Valuation Department is a good reference as we do not have other concrete evidence to support the percentage of adjustment. Therefore, we consider that a downward adjustment of 41% is reasonable. 277.Regarding a further reduction of 15% to reflect its remoteness, although we have decided that no further adjustment on remoteness is needed for shipyard use due to the nature of shipbuilding business, we accept Mok’s opinion that the remoteness is more relevant for mid-stream use. We accept Mok’s opinion that a downward adjustment of 15% is needed to reflect its remoteness. Lack of Road Access 278.AW has combined the factor for location and lack of road access as stated in §252 above and made a downward adjustment of 40%. Based on AW’s analysis, he appeared to demonstrate to the Tribunal that a downward adjustment of 20% is made for lack of either marine or road access. 279.Mok has suggested that a downward adjustment of 25% to the 3 STT Comparables at New Kowloon for the absence of a road access at Lot 22 (same figure as Mok suggested when dealing with the shipyard comparables). 280.The respondent pointed out in his closing submission that the evidence which Mok has brought forward suggests that the road access is likely to be a more important factor. He claimed that the two lettings in 1995 of STT882 at Tuen Mun and STT3292 at Tsing Yi were different in that the Tuen Mun land had marine and road access whereas Tsing Yi land had road access only. However, the unit rent of Tuen Mun land is only 14% higher than that of Tsing Yi land. This suggests that it is the presence of road access which is important and the reduction of 20% suggested by AW could not adequately reflect the situation. The respondent requested the Tribunal to adopt Mok’s suggestion of 25% downward adjustment for the absence of a road access. 281.Similar to what we discussed in §201, we agree that as there is no road access in the Before Situation, the operator of mid-stream user should be affected. However, as the marine and road access are not exclusively inter-related for mid-stream operators, mid-stream use can be operated with either marine or road or both access, though flexibility will be affected. We consider that a downward adjustment of 20% is reasonable if the property has only either one of the access. Time 282.AW contended that as the commencement date of the 3 STT Comparables was on 1 December 1995, he has made an upward adjustment of 2% to reflect the difference in time. He has made reference to the rental index of Private Flatted factories for 2nd and 3rd Quarters 1995 compiled by the Rating and Valuation Department. Mok has no comment on this adjustment factor. We consider that the 2% adjustment to be reasonable. 283.Before we take into account the KCTL Comparables and the suitability of the STTs, based on the evidence adduced before the Tribunal and also the adjustments made by AW and Mok on the 3 STT Comparables, the percentage adjustment on different factors found by us are summarized as follows:
284.We shall keep these figures in mind when we discussed further about which should be the best comparables after stating the argument of both parties on the KCTL Comparables. KCTL Comparables The Respondent’s Contention 285.The respondent considered that the KCTL Comparables were more relevant as the areas, uses and terms of lease of these two transactions are similar to that of Lot 22 whereas the areas and terms of lease of the 3 STT Comparables are significantly different from that of Lot 22. 286.The summary of these two transactions were as follow:
287.The respondent expressed that the location of the KCTL Comparables are similar to the 3 STT Comparables quoted by AW. Apart from the date of transaction which is different from the date of valuation, the user and term of lease are similar to Lot 22. The area of KCTL Comparables is larger than that of the 3 STT Comparables and closer to the size of Lot 22. 288.The respondent commented that based on the transaction price of KCTL481, the unit rate was around $240/sq ft which was substantially lower than the unit price derived by AW from the 3 STT Comparables which is at around $1,200/sq ft. The respondent also showed to the Tribunal that the unit rate of KCTL479 was $362/sq ft which was higher than the unit rate of KCTL481 but was still substantially lower than that of the 3 STT Comparables. The respondent contended that the transactions of the KCTL Comparable should be adopted as comparables to Lot 22 but not the 3 STT Comparables quoted by AW. The Applicant’s Contention 289.AW has not used the transactions of KCTL481 and KCTL479 as comparables. Under cross-examination, AW said he could not find these comparables at the time he prepared the expert report. The applicant commented in the final submission that the unit rates of KCTL481 and KCTL479 were HK$240/sq ft and HK$362/sq ft respectively and the vast difference between these two transactions would render these comparables not good and useful. 290.The applicant took an average unit rate of the KCTL Comparables of HK$301/sq ft and indexed up between March 1998 (Index was 123) and May 1995 (Index was 173) by the Private Flatted Factories compiled by the Rating and Valuation Department to arrive at the unit rate of HK$423/sq ft in May 1995. 291.The applicant took the unit rental on Kwai Chung marine lots which was advised by AW and Kong to be around HK$14/sq ft per month to analyse the return of the KCTL Comparables. Based on the transaction price and the rental provided by AW and Kong, it was noted that the rate of return or yield was about 39.7%. The applicant contended that the return was exceptionally high because the transaction price was low due to the following reasons:
292.The applicant therefore requested the Tribunal to exclude the transactions of KCTL481 and KCTL479 as comparables. Which are the suitable comparables? Discussion 293.The comparables chosen by AW and Mok are extremely different. However, we have to point out that the lesser the factor adjustment a valuer has to make, the more reliable the comparables would be. 294.Apart from the KCTL Comparables, all other comparables are short term tenancies. Due to the limited supply of suitable sites and the close proximity to the container terminals, the location of the sites available in the market would be well sought and the bidders might pitch for a rate higher than the market parity. This might explain why the rental of those short term tenancies close to the container terminals was so high. 295.AW has made an adjustment of a combination of location difference and the lack of road access but there is no supporting evidence to show the basis of the adjustment. Mok has made use of the difference of the average price between New Kowloon and New Territories as the basis of adjustment for difference in location. However, this could not give the Tribunal a clear picture of the difference in location between the 3 STT Comparables and Lot 22. 296.Apart from the location difference, all STT Comparables have lease terms varying from 9 months to 3 years only. Even though we derived the rental after adjustment of location and difference in terms, we still need to capitalize the rental to arrive at the capital value. There seems to be a lot of variables which we need to adjust and this would inevitably affect the accuracy of our assessment. 297.Where there were sale evidence in the market, we consider the short term tenancies were not the appropriate comparables to be relied upon as the lesser the adjustment factors, the more accurate would be the result. 298.The KCTL Comparables were purposely built for mid-stream operations. The leases were granted in March 1998 for 50 years. The user clause of the leases was also similar to the proposed mid-stream operation use in Lot 22. We found the KCTL Comparables are more appropriate comparables to be adopted in this case. Adjustment Factors for the KCTL Comparables 299.The differences between the KCTL Comparables and Lot 22 would be the location, lack of road access as well as time only. 300.The size of the KCTL Comparables is about 359,417 sq ft (or 33,391 sq m) which is about one third of the size of Lot 22. We found the berth length of Lot 22 is long enough to split into 3 separate lots for leasing to 3 operators which could run together with the ship building operators. Therefore, no adjustment is needed for the larger in size. 301.Regarding the location factor, we inclined to accept the suggestion of Mok to use the average price of flatted factories between New Kowloon and New Territories as at the date of valuation. The figure compiled by the Rating and Valuation Department for the Average Price of New Territories as at 2nd Quarter of 1995 was $1,237.7 /sq ft (or $13,322/sq m) whereas the Average Price of New Kowloon as at the same period was $2,094.3/sq ft (or $22,543/sq m). The adjustment for difference in location is therefore 41%. 302.Regarding the lack of road access, AW’s analysis did suggest that 20% adjustment would be appropriate to reflect the lack of either marine or road access. As discussed in §§199-201 above, we would have no objection to adopt this 20% adjustment to reflect the lack of road access. 303.As the comparables were transacted on 13 March 1998, time adjustment is needed to reflect the difference in time between the date of transaction and the date of valuation. Both valuers have used the indexes compiled by the Rating and Valuation Department and we would use this as the basis to make the time adjustment. 304.As at the second quarter of 1995, the property index of private flatted factories was 173 and the property index of the same as at 4th quarter of 1998 was 123. Therefore, an upward adjustment of 40.65% was made to reflect the time difference. 305.Based on the above, the adjustments for the KCTL Comparables are as follow:
306.Based on the above adjustments to the average unit rate of KCTL481 and KCTL479, the unit market rate of the Industrial/Godown Area of Lot 22 for mid-stream use as at the date of valuation was about $199.5 per square foot. No Objection Clause 307.By Clause (20) [B4/89H11710-253] of the lease of the KCTL Comparables,
308.Clause 55 [B4/89I11710-284] of the STT Comparables states that:
309.The applicant contended that the sites in these comparables would be left without marine rights, and without the right to claim compensation under the FSRO whereas Lot 22 did have guaranteed marine rights and the consequential entitlement to claim compensation for breaches thereof. The applicant also opined that the precariousness of marine rights becomes much more important in a 50 year lease than a tenancy of "a few years" (as for the STT Comparables). Should the right of marine access be lost and without any compensation, the owner of the KCTL Comparables would be left with something that is akin to STT 3292, ie close to Kwai Chung and the Container Terminals, but with only road access and no marine access. This means that the KCTL Comparables would then only be good for empty containers and not full containers. 310.The respondent contends that the lease for KCTL481 was newly granted and it is hard to believe that there will be a reclamation shortly after the site is granted. The respondent contended that the presence of this Clause had no significant effect on value. 311.The respondent claimed that if this “No Objection” clause should have effect, AW, while making adjustment to arrive at the value of Lot 22 from the 3 STT Comparables, has to reflect this factor in his assessment and informed the Tribunal the quantity of adjustment. However, no evidence has been shown in his reports that he has taken this factor into account and made any adjustment thereof. Similarly, Mok has not made similar adjustments on his analysis of the KCTL Comparables. Discussion 312.The Tribunal agrees with the respondent that the lease was newly granted and it is strange to believe that persons taking a 50 year lease for container based purposes would believe that there was any realistic prospect during the term of their lease of a further reclamation being carried out at the sea immediately adjoining their lease. There is no reason to think that the presence of this clause had any significant effect on value. 313.We agree with the respondent’s contention that unlike the STT Comparables, the leases for the KCTL Comparable were granted for 50 years. According to the PADS report, these sites were allocated for long term mid-stream purposes. Although there is a resumption or “no objection” clause in the government lease, the prospective bidders would consider that the site could be used for 50 years. The government would not resume the marine access without strong social needs. Furthermore, this “resumption” clause is common for all sites with marine rights to protect the interests of government. Therefore, we do not think any adjustment is needed for this factor. 314.In addition, we also agree with the contention of the respondent that if this is a significant factor, the valuers should have taken this into account and should have reflected this in their valuations. However, AW has not included this factor when he made adjustments on the 3 STT Comparables. When Mok provided the counter evidence of the KCTL Comparables where both leases have such “no objection” clause therein, AW has not commented this factor in his reply reports. 315.In Mok’s valuation, we also do not find any adjustment he has made on this factor. We, therefore, believe that this “no objection” clause is so common and none of the valuers would consider it has any significant effect on the value of the property. China Merchant’s offer 316.In 1989, the applicant’s solicitor, Kao, Lee & Yip, approached the District Lands Officer (“DLO”) and proposed to sublet to China Merchants 200,000 sq ft of the undeveloped portion of Lot 22 for “open storage of freight containers and large machinery and large accessories and repair and maintenance of these. Possibly some packing of containers would be done on site.” 317.Based on the documents, the DLO replied that the proposed use would not be in compliance with Special Condition No 3. RE Thompson & Associates (“RE Thompson”) on behalf of the applicant to make application to the DLO also claimed that China Merchants was a special purchaser and would offer a rent higher than the market price and the wavier fee should be no more than half of the going rate excluding the special purchaser element given the industrial status of the underlying land. RE Thompson hinted in the letter to DLO that the rental around that time was about $1 per square foot and therefore the waiver fee would be around $0.50 /sq ft per month. 318.Based on the evidence adduced, China Merchants offered $1.50 for renting 200,000 sq ft in 1989. Unfortunately, the transaction eventually fell through. The Respondent’s Contention 319.The respondent contended that the offer made by China Merchants was a genuine offer and was accepted by the applicant in early 1989. Had it not been the case that the government claimed that the proposed container based use did not comply with the Special Condition 3(a) of the Lease, the agreement would have concluded. Therefore, the respondent claimed that the agreement, though not a legally binding agreement, was an agreement in principle and this offer should be regarded as a good comparable. 320.The respondent also provided the Tribunal with a Tenancy Agreement between the applicant and Kowloon Electricity Supply Company Limited (“CLP”) for a term of 2 years commencing from 1 August 1990 to 31 July 1992 for a portion of Lot 22 containing 2 hectares (215,278 sq ft) at a rent of $215,278 per calendar month (exclusive of rates). By virtue of the third schedule of the Tenancy Agreement, an area of 0.5 ha shall be used for the purpose of a works area in connection with the development of a gas turbine power station on the tenant’s neighbouring premises and the balance area of the said premises contained 1.5 ha shall be used for general industrial purposes including ancillary open storage in connection with the development of a gas turbine power station on the tenant’s neighbouring premises. 321.The respondent claimed that by using offer from China Merchants of $1.5/sq ft per month or $18/sq ft per annum, and based on the published indices for flatted factories between Jan 1989 and May 1995, the unit rent would be increased to $25/sq ft per annum. By capitalizing the annual rent at 9.3%, the capitalized unit value would be around $269/sq ft (or $2,894/sq m). 322.The respondent contended this $269/sq ft should be considered as a comparable. The Applicant’s Contention 323.The applicant referred to the letter from RE Thompson dated 9 August 1989 which stated that the lot would be used for storage of empty containers. The land consultant also mentioned that the comparables are large tracts of agricultural land commanding at around $0.8 to $1/ sq ft per month. 324.Kong commented that the rate was equivalent to the rate of agricultural land for storage around that period of time. He also commented that as he had a joint venture with China Merchants, he understood that the sole purpose for renting Lot 22 was to use that land for storage of empty containers. The restrictive usage for empty storage would pull down the revenue and eventually the rental. 325.The applicant contended that given the representations made to the Government by RE Thompson as well as the prospective tenant’s intentions at the time, the Government would restrict the lease with China Merchants to storage of empty containers only and this would inevitably pull down the rental. The applicant contended that this offer should not be considered as a comparable. Discussion 326.To be a suitable comparable, the transaction of the subject property should be the best as a comparison. However, the offer from China Merchants fell through and cannot be considered a completed transaction to become a comparable. So the offer from China Merchants could only be served as a reference. When the Tribunal assessed the value, we have to ascertain the marketability of the site which in return could affect the value of the site. We found the offer from China Merchants can be a good reference as to the marketability of Lot 22. 327.Owner of Lot 22 was approached by China Merchants in 1989 for the leasing of about 200,000 sq ft for “open storage of freight containers and large machinery and large accessories and repair and maintenance of these possibly some packing of containers would be done on site” which was clearly stated by Kao, Lee & Yip, the solicitor for the owner. 328.Kong told us that :
329.The purpose for using the portion of Lot 22 stated in the legal advice was contrary to what Kong said, ie Lot 22 would only be used by China Merchant for the storage of empty containers. As it is a written evidence from the owner or the representative of the owner, the Tribunal should consider this hard evidence to show the intention of the then prospective tenant. 330.If Lot 22, as he said, was the ideal site for mid-stream operation, one wonders why China Merchants did not persist in the leasing of the portion of Lot 22 when Kong commented that the rental of the site should be around $8/sq ft whereas the owner accepted the offer of $1.5/sq ft per month from China Merchants. The rental offered by China Merchant was less than one-fifth of the “market rental” claimed by AW and Kong. 331.Kong, who has his own mid-stream operation and being a joint-venture partner of China Merchants, must be aware of the existence of Lot 22 and the rental offered by China Merchants. Even if China Merchants did not proceed with the lease for whatever reason, one wonders why didn’t Kong discuss with the owner of Lot 22 for leasing the site for his own use. Taking into account that the owner was willing to accept a rental substantially below the rental of $8/sq ft which Kong believed to be the market rental, there should be some hidden reasons rendered the site not being attractive to the operators. These undisclosed reasons have affected the marketability and hence the rental or capital value of the site to be operated as mid-stream purpose. 332.Eventually, portion of the site was leased to CLP. The rental of CLP was only $1/ sq ft per month which was even lower than the offer from China Merchant. This reinforced what we said at the paragraph above. 333.On the other hand, even though we could assume that no mid-stream operators were aware of the existence of Lot 22, the owner appeared to be keen to lease out the property too. As a prudent owner, he should find prospective tenants in order to get the best return for the site. However, in this case, the then prospective tenant, China Merchants’ offer at $1.5/sq ft per month had fallen through due to undisclosed reason and the actual tenant, CLP signed an agreement with the owner at a rental of $1/sq ft per month only from 1 August 1990. It is difficult for the Tribunal to accept that the owner did not know the then market rent, bearing in mind that the owner had appointed his land consultant, RE Thompson, to advise him around that period of time. If the then market rent was around 6-8 times of the rental offered by the prospective tenant, it is hard to believe that a prudent landlord would accept a rental substantially below the then market rental and let portion of Lot 22 to CLP. 334.Based on the above, Kong’s contention that the market rent for Lot 22 was around $8/sq ft per month could not be accepted. It was clear that the marketability of this site for mid-stream operation was not good due to the uncertainty of user clause and other reasons then. Therefore, there was no or limited demand for this site for mid-stream operation. Even the potential tenant wanted to use the site for mid-stream operation, they were not willing to pay a rent higher than the market rate even though there was limited supply of sites suitable for mid-stream operations in the market. 335.Regarding the offer from China Merchants, the prospective tenant offered the owner of Lot 22 at $1.5 per square foot per month (or $18/sq ft per year). Based on the published indices for flatted factories between Jan 1989 and May 1995, the unit rent of $18 would be adjusted to $25 per square foot per annum. 336.As at the date of offer made by China Merchants, the landlord would expect a waiver fee to be charged for the mid-stream use. RE Thompson advised the owner that the government would charge the waiver fee of $6 per square foot per year. A prospective landlord/tenant should reflect this risk on the then market rent. 337.After reflecting the expected waiver fee to be charged by the government, the then market rent should be around $19 per square foot per annum. By capitalizing the annual rent at 9.3%, the capitalized value for remaining portion of Lot 22 would be around $204 per square foot. This is in line with the value derived from the KCTL Comparables we found to be about $199.5 per square foot at §306 above. Conclusion on Godown for Mid-stream Operation 338.Having considered the analysis of the 3 STT Comparables, China Merchant offers and the KCTL Comparables, we have the following findings:
339.Although the unit rates derived from the above are quite consistent, we consider that having taken into account the term of lease, usage of site, size etc, we should put more weight on the KCTL Comparables which is a more suitable comparable to be adopted in this case. We are of the opinion that the unit value of the remaining portion of Lot 22 for mid-stream use is about $200/sq ft. 340.Having considered the availability of the OZP and the gazette notice as at the date of valuation, although there might be possible that the Container Terminal Scheme might not be implemented, the prospective purchaser would consider the most probable option, ie the schemes would be implemented. 341.As such, with the implementation of the Container Terminal Scheme, internal road has to be provided and this has to be reflected in the valuation. Hence, the value of the remaining portion of Lot 22 for mid-stream use is:
342.And with the implementation of the Container Terminal Scheme, the area zoned for “Road” purpose on the OZP would be resumed with compensation payable to the owner. The amount of compensation for the resumption should be the market value of the “Road” plus the ex-gratia compensation. We will take the 10% rule for the land resumed. As the unit rate for mid-stream use is $200, based on the 10% rule, the market value for the portion zoned “Road” should be $20. And the prevailing ex-gratia compensation rate as at the date of valuation was $819.6/sq ft. 343.The market value of Lot 22 as at the date of valuation, for mid-stream use, assuming the Container Port Scheme goes ahead, is:
344.However, when the owner considers the best selling price, he will definitely consider different options as well. As AW said, there may be a possibility that the Container Terminal Scheme will not go ahead. If that is the case, the zoning on the OZP will not be pursued and the entire remaining portion of Lot 22 will be used for mid-stream use only. 345.The value of Lot 22 for mid-stream use, assuming the Container Port Scheme does not go ahead, as at the date of valuation, is:
346.Taking into account the above, if the land is used for mid-stream use, the best price the owner would accept as at the date of valuation should be the optimal price and should be $551.157 million. 347.In case we were wrong on our ruling on the feasibility of the voluntary surrender of marine rights proposed by the respondent, we have to consider the respondent’s proposed use of an industrial development in the Before Value situation. The Respondent’s Contention 348.With the publication of the reclamation plan, the OZP and the Outline Implementation Programme of the Port Development Strategy Second Review 1995 which are all known at the valuation date, Mok opined that the hypothetical purchaser would consider the implementation of the Container Terminal Scheme and its Associated Road Scheme would take place soon and can be seen as to be near to a certainty. 349.It is the contention of the respondent that the potential purchaser is entitled to consider using Lot 22 for an industrial development over the greater part of the lot which is consistent with the terms of the Lease and the OZP. But industrial development depended upon road access. To achieve this end, the purchaser would consider the prospect of striking a deal with the Government by giving up the marine right so as to enable the reclamation and the construction of a new link road to take place. 350.In this regard, Mok considered the marine access would continue until the construction of the CT 10 and 11 which would commence in late 1996 and mid 1997 respectively as stated in the Outline Implementation Programme of the Port Development Strategy Second Review 1995. After commencement of the construction of CT 10 in late 1996, marine access to Lot 22 would not be feasible. And in view of the site area available for industrial development is more than 10 hectares, it is considered reasonable to develop the site in phases. 351.So, Mok has assumed in his valuation that marine access would last for 1.67 years counting from 5 May 1995 and would end until the latter part of 1996. Both shipyard and the open storage use would cease for operation upon cessation of marine access so no value was assigned to the shipyard in the valuation after late 1996. 352.Mok adopted the design prepared by Lee that the industrial development comprises 12 3-storey blocks to be developed in 4 phases. Each phase will have a development period of 2 years and the commencement of each phase will be separated by 1-year interval. 353.Mok has mentioned in his Supplementary Report that he has slightly adjusted the areas of the development to reflect that portion of area zoned road would be resumed by the Government. According to the Joint Statement by Lee and Howes, the area zoned “Road” was about 145,851 sq ft (or about 13,500 sq m). 354.An area zoned Green Belt of about 53,819.5 sq ft (or 5,000 sq m) lies within Phase I of the industrial development. Adjustment was done by Mok to exclude the Green Belt portion. That area has been reflected in the supplementary valuation report prepared by Mok. 355.Portions of the Site for Phase I and III of the industrial development are zoned for GI/C purposes. The area, as advised by Mok/Lee, zoned GI/C Use is about 217,861 sq ft (20,240 sq m) for Phase I and 46,984 sq ft (4,365 sq m) for Phase III. Mok agreed with AW that a discount of 25% for uncertainty associated with the planning approval should be applied as AW did in his valuation. 356.Mok has assumed in his valuation, as advised by the Lands Department, that the estimated completion date of CT10 and its back-up area would be in mid 2001. The construction of CT10 would commence in late 1996 and the reclamation and the road link would be completed in late 1998. Mok also assumed that demolition of the unauthorized structures and the canteen building would take place in the 2nd quarter of 1999. After completion of the demolition, the Phase I development would commence in the 3rd quarter of 1999 which is about 4 years after the valuation date. 357.Mok claimed that the adjustments for the Green Belt zoning and GI/C zoning have been reflected in the calculations. 358.A summary of the development parameters of each phase is set out as follow:
359.With these information, Mok has conducted a residual valuation of each phase of the assumed industrial development on Lot 22 after completion of reclamation and road works with the costs of carrying out the development brought into the calculation.
360.However, there are still uncertainties that the Container Terminal Scheme and the Associated Road Scheme would not take place. To reflect the uncertainty, Mok has applied a 30% deduction on the industrial land value and that brings the industrial land value to $458,152,976.
361.As marine access of Lot 22 could continue from 5 May 1995 till late 1996, Mok found it reasonable to assume that the lease of Cheoy Lee at $40,000 per month would continue and will be terminated in December 1996 to make way for the reclamation and construction of the Container Terminal Scheme and its Associated Road Scheme. This sum is also included as a component of the amount the purchaser would pay for the land. 362.To enable commencement of the construction of the CT10 project, the Government would have to complete the resumption of the relevant portion of the ship building site zoned “Road” for the construction of the Associated Road Scheme from the area of the reclamation to the North Lantau Highway before late 1996. Ex-gratia compensation would also be payable for such resumption and Mok based on a rate of HK$819.6/sq ft which was the prevailing rate for building land as at the date of resumption. 363.Mok has assumed that the land would be resumed for the Associated Road Scheme a year after the valuation date and the receipt of the ex-gratia compensation has to be deferred for that 1-year period. Mok also reflected the uncertainty on the ex-gratia compensation. A 30% discount is made thereof. As such, the compensation of the road is as follow:
364.Mok found the value of an industrial development which he named as his Alternate Second Before Value as follow:
The Applicant’s Contention 365.AW did not agree with Mok’s opinion that new link road was necessary to allow reclamation works to proceed. AW said it would be feasible to carry out reclamation without road access if it was carried out by way of dredging of marine sand. Examples were quoted by AW in support. 366.AW opined that Mok’s assumed programme could not have been achieved based on the following reasons:
367.AW has stated in his Addendum report dated 17 September 2012 that he does not agree with Mok’s approach on his 30% deduction for uncertainty. AW commented that it would be a commercial decision to be made between the owner and the prospective purchasers, having taken into account all the known facts as at the date of transaction. AW also opined that it is not sufficient to justify the 30% deduction as he considered that there is 80% chance of the Container Terminal Scheme would not go ahead. Discussion 368.Mok suggested that the rental income can be receivable until late 1996 from the shipyard operator. We do not agree with Mok’s opinion. As at the date of valuation if the marine right is resumed, the shipyard operator has, legally, no right to use the marine frontage though the reclamation has not been proceeded. Similar to what we discussed at Section F.(3), the 3-month notice will be served to the tenant and the landlord will be entitled to the 3-month rental. 369.If voluntary surrender of the marine rights by the prospective purchaser is permissible, we have to consider whether Mok’s valuation is reasonable. It seems that apart from the uncertainties as to whether the Container Terminal Scheme and the Associated Road Scheme would proceed, delay in the sale of CT 9 should also be taken into account. 370.AW commented that the industrial development could be taken place on Lot 22 without road access. The Tribunal considered that this contention is too speculative. Firstly, the scale of the development is very large. Secondly, the cost of development would inevitably be increased. Whether it is justifiable to develop without road access or to wait until the road access is available, it would depend on whether the sale price of the industrial development is good enough to cover the additional cost. Taking into account the remote location of Lot 22, the Tribunal does not accept that the developer would develop the industrial development without road access. 371.AW argued that Mok has not fully reflected the delay in the granting of the lease of CT9 and the deferment of CT10 and 11. There is no concrete evidence as to what is the reasonable approach to assess the uncertainty factor. It depends on whether the prospective purchaser would believe the Container Terminal Scheme would go ahead. As at the date of valuation, there was evidence that the Government has plan for the Container Terminal Scheme with reclamation authorized, OZP published and Associated Road Scheme gazetted. Therefore, we do not accept AW’s contention that there is 80% chance of the Container Terminal Scheme not going ahead. 372.However, taking into account the delay in the sale of CT9 and the dispute between China and the Hong Kong Government, the risk was not low. We consider that the 30% deduction might not be able to reflect the risk. We believe that the prospective purchaser would try to lower the price offered to buy the site and we consider a 50% discount to be more reasonable. 373.In terms of value adopted by Mok for the assessment of industrial land value, AW has not made any particular comments on whether the value adopted by Mok is reasonable. 374.Based on the comparables adduced before the Tribunal, we found the value adopted by Mok is reasonable. With the 50% uncertainties, the Industrial Land Value would be 50% of $654,504,252, ie $327,252,126. 375.Net area available for development is 1,143,749 sq ft (§236). The unit rate for full development use is 654,504,252/1,143,749 sq ft, ie $572/sq ft. However, when the area zoned “Road” is resumed, the marine frontage should have been resumed and the land is blocked. Therefore, a 10% rule will be applied on the market value of the industrial development for assessing the compensation for resumption of road. As such, the compensation is:
376.On the assumption that voluntary surrender of the marine rights is feasible and can be materilaised, the value for the industrial use would be:
F.(7) Enhancement Value arising from the expectations as to future 377.Lord Hoffmann had said in the CFA judgment that :
378.As discussed in Section E.(3) above, we found the prospective purchaser should have expectations on the implementation of the Container Terminal Scheme. However, as at the date of valuation, in the Before Situation, the reclamation scheme has not yet been confirmed and the OZP has just been published. There was a degree of uncertainty that the Container Terminal Scheme may not be proceeded and that will affect the resumption of marine access, the Associated Road Scheme, the link road to Lot 22 as well as the back-up area. 379.In a hypothetical sale, when a prospective purchaser considers the price to be offered to the land owner, the starting point should be the base value of the land, ie the price where the scheme proposed by the Government would not be implemented. In contrast, the prospective purchaser would also consider the value of the best use of the Lot with the Container Terminal Scheme going ahead. Should such value be in excess of the base value, this is what we considered the enhancement value arising from the expectations of the future. 380.Having considered the market value of Lot 22 for mid-stream use assuming Container Terminal Scheme not going ahead, for mid-stream use assuming Container Terminal Scheme going ahead and the industrial development use, the owner will likely take the best price amongst the 3 as the bottom price for sale.
381.So, the base value the owner would consider should be $551.157 million. 382.This is the value of Lot 22 as at the date of valuation, in its existing. This figure, we believe, is the minimum amount the owner would accept or the prospective purchaser would offer if the property is put for sale. 383.Although we did not agree with the respondent’s proposal of voluntary surrender of marine right of Lot 22, it does not preclude the possibility that the prospective purchaser would consider the development of Lot 22 for industrial use in view of the availability of the public information concerning the Container Terminal Scheme, the OZP and the Associated Road Scheme. What price a prospective purchaser would offer would depend on the marketability and use of the Lot as well as the external factors, including time schedule of the proposed reclamation, road works etc. We believe that a prospective purchaser, apart from considering Lot 22 for mid-stream use, would also consider whether industrial development or other uses is feasible. He would consider all possible use and the value each use can command for consideration. 384.Regarding the methodology as to how to assess the expectation, Mok has not touched on this issue. He has however made a discount of 30% to reflect the level of uncertainty on the value of land assuming the Container Terminal Scheme is to be implemented. 385.AW has adopted a different approach and has used the following formula: ie P = [ (H – L) x R ] + L
386.We found Mok’s approach cannot truly reflect the expectation which the prospective purchaser is willing to pay for the potential highest and best use. He only made a discount on the value of industrial value assuming the Container Terminal Scheme and the Associated Road Scheme would be implemented. However, he has not taken into account that if only a discount on the full potential use is made, there might be a possibility that the discounted value would be lower than the base value which the owner is willing to accept. That cannot reflect the market practice. 387.On the other hand, we found AW’s approach is acceptable as it reflects the expectation a prospective purchaser would fetch on top of the base value or the minimum amount the owner would accept. However, his assumption in the formula may not truly reflect the market practice. 388.In the formula set out in §385 above, AW stated that L is the value of Lot 22 on the basis of the Container Terminal Scheme not going ahead whereas H is the value of Lot 22 on the basis of the Container Terminal Scheme will definitely go ahead in accordance with a programme. 389.We consider that the definition of value “L” named by AW is correct and this equates the base value we found at §381 above. However, we found the definition of “H” should be elaborated as follows:
In a gist, H is the value representing the best use of Lot 22 with the benefit of the Container Terminal Scheme being materialized. 390.The value of H consists of 2 parts, the Shipbuilding Area and the Industrial/Godown Area of Lot 22 where the expectations for future development potential would be located. 391.Regarding the shipyard value, both the land owner and the prospective purchaser understood that the marine access would be resumed soon if the Container Terminal Scheme were implemented. However, the owner is unlikely to accept a price lower than the market value of the shipyard and we believe that the prospective purchaser would still be prepared to pay $751.60/sq ft as the market value of the shipyard (the value we assessed at Section F.(4) above) since this would be compensated in any event if the marine access is lost upon reclamation. 392.Regarding the remaining portion of Lot 22, the prospective purchaser would consider that if the Container Terminal Scheme goes ahead, there would be more options in future use. They would consider the highest and the best use of the land. As proposed by the applicant and the respondent, mid-stream and industrial development would be the possible use respectively. Therefore, H would be the best price one could fetch in the market assuming the Container Terminal Scheme goes ahead and the proposed use could be developed. 393.On assessing the value for mid-stream use, AW’s adjustment on provision of road access or marine access is a bit confused. AW has shown on the table in his first report (page 411 Bundle B) which was extracted as follows:
394.As can be seen from the table above, AW opined that adjustment for a lot without marine access is equivalent to a lot without road access if the two properties are located in the same location. However, when AW adjusted in Scenario 3 of his assessment, he has adjusted the unit rate of comparable from $1,200/sq ft (with marine access only) to $1,600/sq ft (with marine and road access) and this represented a percentage adjustment of 33.3%. No further explanation as to why the adjustment on accessibility has been changed. 395.The Tribunal considers that the adjustment on accessibility on road access is similar to that of marine access. As such, the unit rate for mid-stream purpose assuming the Container Terminal Scheme goes ahead (where marine access is not available but road access is available) is the same as the value for mid-stream assuming there is no Container Terminal Scheme (where marine access is available and road access is not available), ie $200 as found at §343 and 345 above. 396.The prospective purchaser would also consider, apart from mid-stream purpose, the value for industrial development. This has in fact been dealt with at Section F.(6) above. 397.The applicant contended that there was a strong possibility that the Container Terminal Scheme and its Associated Road Scheme might not go ahead. Even if it did go ahead, significant delay was expected. In its closing submission, the applicant contended that the road access to Lot 22 would become available in 6 years’ time from the date when the go-ahead approval for the land sale for Container Terminal Scheme was given, ie about 6 years from 1997 (the time to change the sovereignty of Hong Kong from the British Government to the China Government). However AW has deferred 8 years from the date of valuation in his calculation which is a further delay of another 4 years. 398.Even if we consider that the Container Terminal Scheme will go ahead, the prospective purchaser would still consider different scenarios on the delay in time, if any. Mok has assumed in his calculation that the first phase of the development would commence in about 4 years from the date of valuation. Mok’s assessment on this can be found in his Second Supplementary Report (page 626 Bundle B) which is summarised as follows:
399.Bearing in mind the first phase of development would not commence in at least 4 years time from the date of valuation, we did a sensitivity analysis for the further delay in time:
400.As can be seen from the table above, if there is no further delay in the scheme, though it is highly unlikely, the highest value offered by the prospective purchaser on the industrial development would be $654,504,252. 401.Based on the evidence adduced before the Tribunal, it is likely that there would be a delay in the Container Terminal Scheme although there was no concrete evidence as at the date of valuation how long the delay would be. We believe that the prospective purchasers would normally take a conservative approach taking into account the known uncertainties when they made an offer to the owner. As suggested by AW, there would be a delay of, at least, 8 years from the date of valuation. The Tribunal accepted that this might be the highest price the prospective purchaser was willing to pay for as at the date of valuation in view of the extent of uncertainties. 402.After considering the uncertainty in possible delay and that road access would likely be available in 8 years from the date of valuation, the best the prospective purchaser would offer would be $431,135,728. 403.If the CT scheme goes ahead, land will be resumed for road purpose in accordance with the OZP after the marine frontage is resumed and before the Container Terminal Scheme is completed. Therefore, as discussed we will take the 10% rule on the market value of industrial land as the market value for the land resumed. With the industrial land value being $431,135,728 and the net site area for industrial development is 1,143,749 sq.ft. The unit rate per site area for industrial development is $377/sq ft. Based on the 10% rule, the market value for the portion resumed for road is $37.7/sq ft. 404.The value of Lot 22 will be :
405.Based on the formula stated in §385 above, the value for H is $841,828,021, say $841,828,000. 406.Next, we have to determine the risk factor (R) so as to assess what value the prospective purchaser is likely to offer to buy the Lot. 407.We have in fact dealt with the assessment of the risk of uncertainty at §371-372 above and we found the same analysis should be adopted in the assessment of the risk factor. We consider a discount of 50% is more reasonable to reflect the risk in the uncertainty of the Container Terminal Scheme. 408.So, applying the assessed figures to the formula :
F.(8) Conclusion 409.We found, in the Before Value, Lot 22 can be used for shipyard purpose as well as for mid-stream operation and the Before Value should be $696,492,500. G. FACTORS AFFECTING THE AFTER VALUE G.(1) Assumption about Marine Access and completion of Reclamation 410.Lord Hoffmann, in the CFA Judgment, found that the After Value should be:
411.There is no dispute that the marine rights appurtenant to Lot 22 should be assumed to have been extinguished in the After Situation and no use can be made of Lot 22 in future which depends on marine access. The argument is whether it should also be assumed that the reclamation had been completed on the valuation date. 412.The respondent contends that judging from the wordings of the declaration made by the CFA, the reclamation must be taken to have been completed on the valuation date. And the assumption must be that the reclamation was carried out over a period of 2 years or so and that period ended at the valuation date. 413.The applicant contends that the assumption laid down by the CFA is only about marine rights and not about physical completion of the reclamation. The following passage in the CFA judgment is relied upon by the applicant in support of its contention :
414.We agree with the applicant’s contention and found that the assumption by the respondent that the reclamation had also been completed as at the valuation date is misconceived. 415.By suggesting such a contention, we found the respondent had just taken the declaration (b) of Lord Hoffmann literally without regard to the reasoning behind. As rightly pointed out by the applicant, from the quotations relied upon by the applicant, the findings of the CFA (at §37-41 of the Judgment) can be summarized as follows :
416.From the summary above, it is crystal clear that it was never the findings by the CFA that the Tribunal has to assume that the reclamation has already completed at the date of authorization, ie the date of valuation. Rather, it is only to assume that the marine access had been extinguished in fact and in law even before the reclamation has taken place. 417.Furthermore, we agree with the applicant’s contention and found that the assumption in the After Situation that the reclamation had been completed as of the valuation date is not allowed under the CFA Judgment. The only assumption allowed in the CFA Judgment is the assumption about marine rights and the CFA had specifically mentioned that “apart from the assumptions about marine rights, not be based on any artificial assumptions” (at §46). The assumption about marine rights being extinguished is necessary in order to enable the land owner to lodge its claim on the date of authorization when the owner is still enjoying the marine access. Without such an assumption, the land owner will not have locus to claim. 418.The assumption about marine right stipulated by the CFA Judgment does not necessarily mean that it must also assume that the reclamation has been completed. The CFA’s finding is that “it must be assumed that on the date of authorisation, it was certain that the reclamation would take place” and “the reclamation is treated as having taken place”. Any assumption about the reclamation being completed is an artificial assumption which is specifically disallowed in the words of Lord Hoffmann. G.(2) Expectation as to future – Container Terminal Scheme & Associated Road Scheme The Applicant’s Contention 419.The contention of the applicant has been particularised in §104-106 above. In a gist, for the After Situation, the applicant’s stance remained that the Container Terminal Scheme and the Associated Road Scheme will not go ahead. And even if the Container Terminal Scheme as well as its Associated Road Scheme did go ahead, there would be a significant delay. 420.Since the government had only sought the approval from the China authority for the sale of CT9 about 3 weeks before the reclamation was being authorized and there was no estimated time table for the construction and selling of CT10, AW expressed doubt as to the materialisation of the Container Terminal Scheme and opined that there should be greater uncertainty in the After Situation. 421.And AW is of the opinion that a new link road is not required before reclamation can be carried out since it was the practice of the government to sell the area consisting of the seabed and required the land to be reclaimed and formed by the successful tenderer. The government will only reclaim land up to the boundaries of the new container terminals which can be performed by way of dredging marine sand, as in the construction of CT7 and CT8. 422.AW also opined that the assumption by Mok that the Associated Road Scheme is also completed is faulted since the scheme had not yet been authorized and the North Lantau highway was still under construction by 5 May 1995 and not open until 22 May 1997. And the land must be reclaimed and time allowed for it to settle and compact so it has the capacity to bear the load of whatever is to be built upon it before construction work can take place. So, reclamation would have been essential before the road can be constructed. The Respondent’s Contention 423.Mok, when assessing the After Value, has assumed that the marine rights appurtenant to Lot 22 have been extinguished under the FSRO and the area of the foreshore and seabed, subject of the 1995 Authorization, has been reclaimed and completed. 424.Mok also claimed that “the reclamation could not have been carried out and completed by 5 May 1995 unless prior to this date a new road link had been built so as to link Penny’s Bay and the area to be reclaimed to the highway network.” 425.The respondent contended that “the completion of the new road link to the North Lantau highway prior to that date is a consequence.” As the Associated Road Scheme and the reclamation are assumed to have been completed, even though the container terminal was not built, the reclaimed land, the new road and the industrial zoning would remain and the industrial development could still take place on Lot 22. Thus, there is no uncertainty for the implementation of the industrial development. Discussion 426.Given our findings in Section G.(1) above, the respondent’s contention must fail since the assumptions, that the reclamation had already completed, which formed the crux of the respondent’s case cannot sustain. 427.As for the expectations of the Container Terminal Scheme and its Associated Road Scheme in the After Situation, one must not ignore the fact that it has to be assumed that marine access had extinguished and it was certain that the reclamation would take place. All the public documents as particularized at §110 above had been published remained a fact in the After Situation. But with the marine access being extinguished and the certainty that the reclamation would take place as found by the CFA (see §414 above), the land owner as well as the potential purchaser should have greater expectation than in the Before Situation that the Container Terminal Scheme and its Associated Road Scheme was more likely to proceed as planned. 428.Having said that, we agree that there still remained a degree of uncertainty and/or delay which should be reflected in the valuation. This will be further dealt with below. G.(3) Expectation about Road Access to Lot 22 429.There is a dispute as to whether it should be assumed that the road link to Lot 22 would also have been completed on the valuation date. The Respondent’s Case 430.By the road link, the respondent is referring to the road connection between Lot 22 and the public highway system at the north of Lantau Island, namely the North Lantau expressway and has nothing to do with the Associated Road Scheme. This is based on Mok’s opinion that “the reclamation could not have been carried out and completed by 5 May 1995 unless prior to that date a new road link had been built so as to link Penny’s Bay and the areas to be reclaimed to the highway network”. It is the contention of the respondent that such a road link was shown on the OZP. 431.The respondent’s case is that the availability of the linked road to Lot 22 is not dependent on the Associated Road Scheme. Since the CFA has ordered that at the valuation date, it is to be assumed that the reclamation had been completed, the question posed at §428 above must be answered in the affirmative. 432.Citing the case of East End Dwellings Co. Ltd. v Finsbury Borough Council [1952] AC 109, where Lord Asquith had said the followings :
it is the submission of the respondent that since the reclamation of a large area at Lot 22 is taken to have been completed on 5 May 1995 for the purpose of the Container Terminal Scheme, all necessary corollaries of the imaginary state of affairs must also be assumed to exist, ie the road to link that reclaimed area to the North Lantau Highway system must also be taken to have been completed on the same date. 433.With the factual matter about reclamation being established by reason of an assumption, this Tribunal should have no difficulty in finding, on a balance of probabilities that some other consequence would follow from that. In reality, it would make no sense to say that the reclamation work can be completed before the actual road works since road is needed during the process of the reclamation for the transportation of equipment and labour force. The overwhelming likelihood is that the construction of the road link from Lot 22 to North Lantau would have proceeded at the same time as the reclamation and it makes common sense to build the road at an early stage within the reclamation works or at any rate contemporaneously with those works. The Applicant’s Case 434.The applicant, on the other hand, contends that any new road access to Lot 22 would only be provided as part of the Associated Road Scheme. The road shown on the OZP is referring to the trunk carriageway leading from the North Lantau Expressway over and through the land side of Penny’s Bay and then the reclaimed land, all the way down to the container terminals. Such a carriageway would not provide road access to Lot 22 since the trunk carriageway on the OZP was planned to be elevated above ground level. 435.It is the applicant’s submission that it would be wrong to make any other assumptions except for the one required by the CFA since it is said in the CFA Judgment that :
436.In any event, Mok also agreed that the link road was associated with the Container Terminal Scheme in the sense that any new road access to Lot 22 would only be provided as part of the Associated Road Scheme. So, the road access to Lot 22 would be wholly dependent upon the implementation of the Container Terminal Scheme. With the expert evidence that the Container Terminal Scheme is unlikely to proceed and the proposed roadworks had not been authorized with the objection period not yet expired either, the Associated Road Scheme is unlikely to be constructed, hence no road access to Lot 22. 437.The applicant considered that if the Container Terminal Scheme did go ahead, the Tribunal should consider the approach adopted by AW or Mok’s valuation in his first expert report in which both found road access to Lot 22 would become available upon completion of the entire Associated Road Scheme. And if the Container Terminal Scheme goes ahead, AW’s development programme with the road access to Lot 22 become available in 10 years time from the date when the approval for land sale for the Container Terminal Scheme was given is more realistic and reasonable for the valuation. Discussion 438.We do not accept the contention of the respondent that the road linked to Lot 22 can be taken to be independent from the Associated Road Scheme. Mok, in his evidence under cross-examination had also admitted that his conclusion on the necessity of a road link built before reclamation cannot sustain since reclamation could be carried out by dredging. 439.And Mok is also shifty in his evidence as to the so called “road link” he referred to, from the road linked to the North Lantau Highway as shown on the OZP to a slipway leading to Lot 22 according to the Gazette Notice No. GN1450. However, it is Mok’s evidence that it doesn’t show on the OZP that the carriageway will provide access to Lot 22. In fact, Mok agreed under cross-examination that the so called “road link” or “slipway” he referred to fell outside the area zoned and reserved for the major road under the OZP. 440.Given our findings at Section G.(1) above that the assumption on reclamation being completed is misconceived, the respondent’s contention about the availability of the linked road based on this assumed fact cannot stand. 441.Furthermore, we agree with the applicant’s contention and found that the assumption in the After Situation that the linked road had also been completed as of the valuation date is not allowed under the CFA Judgment. 442.It is not in dispute that the reclamation work does not include the Associated Road Scheme and the assumption about marine right stipulated by the CFA Judgment does not cover the Associated Road Scheme as well. Any assumption about the road linked to Lot 22 is an artificial assumption which is specifically disallowed in the words of Lord Hoffmann (quoted at §434 above). So even accepting the principle laid down in East End relied upon by the respondent, since this assumption is being “prohibited from doing so” by the CFA Judgment, such an assumption cannot be made. 443.Moreover, we do not agree that the assumption about the road link is corollary to the assumption about marine rights. It is not in dispute that there need not be a road link for the reclamation work to be completed. Dredging is a common method adopted in Hong Kong for reclamation work and is a method that can be adopted at Lot 22. It is not a must that for the reclamation work at Lot 22 to be completed, there must be a link road being built in the first place. 444.We found the assumption suggested by the respondent that the road link to the Lot had also been completed on the valuation date is unfounded. We found the construction of the Associated Road Scheme of the Container Terminal Scheme would bring about new road access to Lot 22 and not otherwise. H. THE AFTER VALUE 445.As at the date of valuation in the After Situation, the marine right has been resumed by the Government. The shipyard use would be stopped due to the loss of marine frontage. In other words, the owner has no right to receive any rental from the tenant/operator after the marine rights has been resumed. No rental income will be taken into account in the After Valuation. H.(2) Shipyard Value 446.Upon the extinguishment of marine rights, the respondent contended that no value will be allocated for the Shipbuilding Area since Lot 22 is landlocked. 447.However, the applicant contended that there should not be a nil value for the Shipbuilding Area though it is landlocked. The applicant commented that there is an expectation that the shipbuilding use at the site can be changed to other purposes, although full premium should be payable for the change of use. AW had adopted a 90% diminution in the value of Lot 22. 448.The Tribunal accepts the applicant’s approach and accepts that a prospective buyer is willing to pay an amount of money for the hope for change of use. In addition, the published OZP has clearly indicated that the site is zoned for industrial use. In other words, the chance for change of use from shipbuilding to industrial use is high after the marine right is extinguished. 449.As discussed in Section F.(4) above, the Before Value of the Shipbuilding Area is $214,206,000. As such, the After Value of the Shipbuilding Area would be 10% of the Before Value, ie $21,420,600. H.(3) Resumption for Road Works 450.As shown on the OZP, portion of Lot 22 has been zoned for “Road” purpose. 451.As agreed by both parties (at §236 above), the area zoned Road is 145,851 sq ft. 452.The amount of compensation for the resumption should be the market value of the area resumed plus ex-gratia compensation. 453.Under the prevailing ex-gratia compensation rate, as at the date of valuation, was $819.6 /sq ft. 454.On the market value of the area to be resumed, the parties have different opinion. AW has used $50/sq ft but he did not explain where this figure comes from. 455.The respondent contended that no market value will be compensated because:
Under both circumstances, the respondent claimed that no compensation is payable for the market value of the remaining portion of Lot 22. Discussion 456.As mentioned before, the marine right has been extinguished as at the date of valuation and the reclamation plan will be proceeded. However, there is no evidence that the road has been resumed and the assumption of the respondent that the link road is taken to have been constructed is wrong. 457.Since the road has not been built, there will be a resumption and compensation will be payable to the then owner. As at the date of valuation, the willing seller should ask for the price of that portion of land zoned “Road” as the amount of compensation offered by the Government (ie market value of the area zoned “Road” plus the ex-gratia compensation). 458.Though the applicant suggested the market value at $50/sq ft plus an ex-gratia compensation of $819.6/sq ft, and the respondent suggested none for the market value of the area zoned Road, we accept that though the land is blocked, there should be a value on it. 459.We will take the 10% rule on the market value of industrial land or mid-stream use as the market value for the land resumed (this principle is also applied in different scenarios within this judgment). 460.As per §471 below, the industrial land value was $531,193,834 in the After Situation and the net site area for industrial development being 1,143,749 sq ft, the unit rate per site area for industrial development is $464/sq ft. Based on the 10% rule, on this value the market value for the portion of remaining portion of Lot 22 zoned Road is $46.4/sq ft.
461.As for mid-stream use, based on the findings that the unit rate per site area for it is $200/sq ft, based on the 10% rule, the market value for the portion zoned Road is $20/sq ft.
462.In the After Situation, the site can still be used for mid-stream purpose though the marine access is resumed. There is no difference between the Before and After Situation except that there is no road access in the Before Situation and there is no marine access in the After Situation. 463.As discussed in Section F.(5) above, the unit value of Lot 22 for mid-stream use with the marine frontage (the Before Situation), as at the date of valuation, was around HK$200 per square foot. As at the date of valuation in the After Situation, the marine frontage has been resumed, the land would be landblocked until the road access is available. As found in Section F.(5), the quantity adjustment for reflecting the lack of marine access and that for lack of road access is the same, ie 20%. The unit rate for mid-stream use without the marine access but with the road access would be the same ie $200 per square foot. 464.With the marine access being extinguished, one would expect that the Container Terminal Scheme would proceed as planned. The only uncertainty would be the delay in the carrying out of the scheme. As discussed in Section F.(7) above about the delay of the Container Terminal Scheme and its Associated Road Scheme, we decided that a deferment of 8 years is reasonable for the Before Situation. This is what we considered to be the best scenario anticipating the Container Terminal Scheme will go ahead with 8 years delay from the date of valuation. 465.In the After Situation, it would be more certain that the Container Terminal Scheme would go ahead as the Government has resumed the marine access of Lot 22 for reclamation work. It is likely that the most optimistic scenario would be 4 years from the date of valuation (that is what Mok suggested on his assessment of industrial land value) and the worst scenario would be 8 years from the date of valuation. 466.Taking into account the uncertainty for the disposal time of CT 9 and the probable delay in the construction of the Container Terminal Scheme and its Associated Road Scheme, it is highly unlikely that the road would be available in 4 years from the date of valuation. As the Government has taken action to proceed with the reclamation, it is unlikely that the road would be delayed for 8 years from the date of valuation. 467.Taking into account the above, we consider that it would be reasonable to assume that the road access would be readily available in 6 years’ time. 468.With this in mind, the value of Lot 22 for mid-stream purpose in the After Situation, as at the date of valuation should be:
469.Apart from mid-stream operation, Lot 22 can be used for industrial use in the After Situation which complies with the zoning stipulated in the OZP. 470.Similar to the mid-stream operation discussed in Section H.(4) above, apart from the availability of marine and road access in Before and After Situation respectively, the valuation approach for industrial development in the After Situation has no difference from that in the Before Situation. The approach has been explained in Section F.(6) and we do not repeat here. 471.In Section F.(6) above, we have discussed about what value the prospective purchaser would offer if the land would be developed for industrial use assuming the Container Terminal Scheme would be proceeded either 4 years after the date of valuation (the optimistic approach ie Mok’s suggestion) or 8 years after the date of valuation (the pessimistic approach ie AW’s approach). We decided in Section F.(6) that the prospective purchaser should consider the uncertainty carefully so 8 years from the date of valuation has been adopted for the Before Situation. 472.In the After Situation, although the resumption notice has been announced and the road scheme has been stipulated in the OZP, there is still uncertainty that the entire scheme will be delayed. How long the delay would be was still an outstanding question. However, relative to the situation in the Before Value, the uncertainty should definitely be lower in view of the fact that the marine access had been extinguished. 473.The prospective purchaser would consider the possible delay in its offer to the owner. Similar to the sensitivity analysis in Section F.(7), the prospective purchaser would consider the optimistic approach and the pessimistic approach in the After Situation. 474.Taking into account the relatively low uncertainty, we consider that it would be reasonable to assume in our assessment that the delay will be around 6 years from the date of valuation. Based on the sensitivity analysis in §399, the industrial land value should be $531,193,834. 475.As such, the value of Lot 22 with industrial use, as at the date of valuation in the After Situation, should be:
476.Unlike the situation before resumption of marine access which we discussed at F.(7), the degree of uncertainty is relatively lower after the assumed resumption of marine access for implementation of the Container Terminal Scheme. In the Before Situation, the prospective purchaser who could use the site for mid-stream operation would expect the site to be used for industrial development if the Container Terminal Scheme is implemented and the Associated Road Scheme are available. Thus, when assessed the value in the Before Situation, the prospective purchaser is willing to offer a price including the hope value to be generated if the scheme is implemented. 477.However, in the After Situation, with the assumption that marine access has been extinguished, it is more certain that the Government has decided to proceed with the Container Terminal Scheme. The prospective purchaser would offer the price assuming that the site can be developed to the highest and best use, ie the highest value among different uses. In this case, it should be the highest value between the mid-stream operation and industrial development use. 478.As discussed in Section H.(4) and H.(5) above, the value of Lot 22 for mid-stream operation as at the date of valuation was $231,977,000 whereas the value of Lot 22 for industrial use would be around $685,540,000. 479.Under such circumstances, the value of Lot 22 which the prospective purchaser is willing to offer and the owner is willing to accept in the After Situation, as at the date of valuation, should be $685,540,000. 480.The amount of compensation is the amount of Before Valuation in excess of After Valuation.
Order 481.Accordingly, we order that :
Mr Denis Chang SC, Mr Johnny Ma and Mr Jeremy Chan, instructed by Wilkinson & Grist, for the applicant Mr Michael Barnes SC and Mr Valentine Yim, instructed by the Department of Justice, for the respondent | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under LDMR 23/1999