Ipsofactoj.com: International Cases [2003] Part 4 Case 11 [CFA]


COURT OF FINAL APPEAL, HKSAR

Coram

Director of Lands

- vs -

Yin Shuen Enterprises Ltd

MR JUSTICE BOKHARY PJ

MR JUSTICE CHAN PJ

MR JUSTICE SILKE NPJ

MR JUSTICE NAZARETH NPJ

LORD MILLETT NPJ

17 JANUARY 2003


Judgment

Justice Bokhary PJ

  1. Any person whose property is compulsorily acquired has a constitutional right to compensation according to the property's "real value". Article 105 of the Basic Law so provides, thus entrenching a promise made in Section VI of Annex I of the Joint Declaration. In such circumstances, the role which the Joint Declaration and the Basic Law play in preserving Hong Kong's pre-handover system drew Mr. Robert Tang SC for the Director of Lands into submitting at one stage that no pre-handover law was open to constitutional review under art. 105. This underestimates the Basic Law's reach, which extends beyond preserving old rights and includes conferring new ones. For example, we held in Gurung Kesh Bahadur v Director of Immigration [2002] 2 HKLRD 775 that art. 31 of the Basic Law confers rights additional to those conferred by the Bill of Rights enacted before the handover. Section 12(c) of the Lands Resumption Ordinance, Cap. 124, excludes compensation "in respect of any expectancy or probability of the grant or renewal or continuance, by the Government or by any person, of any licence, permission, lease or permit whatsoever". Wisely Mr. Tang did not press his submission that s.12(c) is immune from constitutional review under art. 105. He concentrated instead on his able argument that s.12(c) merely excludes a speculative element which sometimes inflates land prices and that such exclusion is consistent with compensation according to the real value of the property resumed. I accept this argument for the reasons given by Lord Millett NPJ with whose judgment I agree.

    Justice Chan PJ

  2. I agree with the judgment of Lord Millett NPJ.

    Justice Silke NPJ

  3. I agree with the judgment of Lord Millett NPJ.

    Justice Nazareth NPJ

  4. I agree with the judgment of Lord Millett NPJ.

    Lord Millett NPJ

  5. These two appeals raise an important issue of principle in regard to the assessment of compensation payable on the resumption of land under the Lands Resumption Ordinance, Cap. 124 ("the Ordinance"). Both appeals raise the same issue and have been heard together. They concern land which possesses significant development potential but is held under a Government lease on terms which do not permit building. The question is whether the compensation payable on resumption should reflect a price in excess of the value of the land subject to the restrictions if the evidence shows that purchasers are willing to pay such a price in the hope or expectation of obtaining a modification of the terms of the lease. The question turns on the meaning and effect of s.12(c) of the Ordinance.

    THE ORDINANCE

  6. The general rule for the assessment of compensation for the resumption of land is contained in s.10 of the Ordinance. So far as material this provides:

    10.

    Determination by Tribunal of compensation payable by Government

    (1)

    The Tribunal shall determine the amount of compensation (if any) payable in respect of a claim submitted to it under section 6(3) or 8(2) on the basis of the loss or damage suffered by the claimant due to the resumption of the land specified in the claim.

    (2)

    The Tribunal shall determine the compensation (if any) payable under subsection (1) on the basis of -

    (a)

    the value of the land resumed and any buildings erected thereon at the date of resumption ....

  7. Section 10 is supplemented by s.12, which is in the following terms:

    12.

    Additional rules for determining compensation

    In the determination of the compensation to be paid under this Ordinance-

    (a)

    no allowance shall be made on account of the resumption being compulsory;

    (aa)

    no account shall be taken of the fact that the land lies within or is affected by any area, zone or district reserved or set apart for the purposes specified in section 4(1)(a), (c), (d), (e), (f), (g), (h) or (i) of the Town Planning Ordinance (Cap. 131);

    (b)

    no compensation shall be given in respect of any use of the land which is not in accordance with the terms of the Government lease under which the land is held;

    (c)

    no compensation shall be given in respect of any expectancy or probability of the grant or renewal or continuance, by the Government or by any person, of any licence, permission, lease or permit whatsoever:

    Provided that this paragraph shall not apply to any case in which the grant or renewal or continuance of any licence, permission, lease or permit could have been enforced as of right if the land in question had not been resumed; and

    (d)

    subject to the provisions of section 11 and to the provisions of paragraphs (aa), (b) and (c) of this section, the value of the land resumed shall be taken to be the amount which the land if sold by a willing seller in the open market might be expected to realize.

    THE FACTS

  8. The detailed facts can be found in the judgments of the Tribunal and the Court of Appeal, and there is no need to set them out again in full. In each case the land, which was resumed in 1999 for public housing, was unimproved agricultural land in the New Territories and was currently either vacant or used for open storage. It was zoned for residential use, close to an urban area with road frontage and suitable for residential development. In each case the land was held under a Crown (now a Government) lease, was demised as agricultural or garden land and was subject to restrictive covenants. These consisted of

    1. a user covenant which prohibited the use of the land for building purposes other than for its occupation as agricultural or garden ground; and

    2. a building covenant which prohibited the erection of any building on the land without the approval of the Crown's (now the Government's) surveyor.

    THE DECISIONS BELOW

  9. The claimants' comparables were challenged by the Government's valuer on the ground (inter alia) that the prices paid contained a large element of what he described as "hope value", that is to say the amount which a purchaser is prepared to pay in excess of the market price of the land for the use permitted under the lease in the hope or expectation of obtaining a modification of the terms of the lease to permit development. He contended that the comparables in question should be disregarded because s.12(c) of the Ordinance excludes this element of the value of the land from compensation.

  10. In each case the Tribunal rejected this contention and based its assessment on the claimant's comparables, which it found to be perfectly acceptable. It made no finding whether the prices included an element of "hope value" and made no adjustment to reflect it, taking the view that the claimant was entitled to compensation which fully reflected the development potential of the land even if it could not be realised without first obtaining a modification of the terms of the lease to which the claimant had no legal right.

  11. The Court of Appeal (Rogers VP, Le Pichon JA and Chung J) dismissed both appeals. It laid repeated emphasis on the fact that the claimants were entitled to compensation for the intrinsic value of their land with all its natural attributes which made it suitable for development. It held that s.12(c) did not affect this principle because it merely excluded compensation in respect of any expected or probable interest in the land which the claimant did not own at the date of resumption but might have expected to obtain in future if the land had not been resumed. The section did not depart from the principles which governed the assessment of compensation in England or other common law jurisdictions. This did not mean that no regard should be paid to the terms of the lease. But the claimants' comparables were held under similar leases and were subject to similar restrictions. They were, therefore, directly comparable, and the prices paid must have taken full account of the prospect of obtaining a modification of the restrictions and of being required to pay a premium for their modification.

    "FAIR COMPENSATION": THE PRINCIPLE OF EQUIVALENCE

  12. The basic principles which govern the assessment of compensation for the compulsory taking or resumption of land were described by the Lord Nicholls of Birkenhead in Director of Buildings & Lands v Shun Fung Ironworks Ltd [1995] 2 AC 111 at pp.124-5. "In general", he observed,

    the value of the land resumed is taken to be the amount which the land if sold by a willing seller in the open market might be expected to realise: section 12(d).

    Later he said:

    The purpose of these provisions, in Hong Kong and England, is to provide fair compensation for a claimant whose land has been compulsorily taken from him. This is sometimes described as the principle of equivalence. No allowance is to be made because the resumption or acquisition was compulsory; and land is to be valued at the price it might be expected to realise if sold by a willing seller, not an unwilling seller. But subject to these qualifications, a claimant is entitled to be compensated fairly and fully for his loss. Conversely, and built into the concept of fair compensation, is the corollary that a claimant is not entitled to receive more than fair compensation: a person is entitled to compensation for losses fairly attributable to the taking of his land, but not to any greater amount. It is ultimately by this touchstone, with its two facets, that all claims for compensation succeed or fail.

  13. But, as Lord Nicholls recognised, while the open market value of land is "in general" the measure of fair compensation; it is not universally so. Sometimes a departure from the open market value may be justified. Section 12(d) is subject to exceptions, in particular to ss 12(b) and 12(c). They describe particular circumstances in which the legislature considered that the resuming authority ought not to be required to pay the open market value of the subject land.

  14. Purchasers are often willing to pay more for land than its intrinsic value would justify. Thus the land may be used for an illegal or non-conforming purpose. In a free market purchasers may be willing to buy such land in the hope or expectation that the current use will continue to be tolerated. Such purchasers may be prepared to pay a higher price than would otherwise be justified. On resuming the land, however, the Government obviously ought not to be required to pay compensation on this basis. Sections 11(3)(a) and 12(b) accordingly preclude the assessment of compensation on the basis of the current use where it is illegal or not in conformity with the terms of the lease under which it is held. This means that the claimant may well receive less by way of compensation than he could receive on the open market; but this is not unfair.

  15. Again, a purchaser of a short lease from a sitting tenant may be prepared to pay more than the value of the current lease in the expectation that he will in due course obtain a renewal of the lease. If the land is compulsorily acquired or resumed, however, compensation must be assessed without regard to this possibility, even though this means that the claimant may well receive less by way of compensation for his interest than he could have obtained by a sale on the open market: see Lynch v The Corporation of the City of Glasgow (1904) 5F 1174 (Court of Session). This, too, is not unfair. Section 12(c) gives statutory effect to this principle. The question for decision in these appeals is whether it goes further.

  16. Another situation where purchasers on the open market may be prepared to pay more than the intrinsic value of the land was described by H H Judge Cruden, sitting in the Lands Tribunal, in Suen Sun-yau v Director of Buildings & Lands [1991] HKDCLR 33 at p.41. After acknowledging that an owner of land held under a Crown lease with restricted use had no legal right to a change of use, he added:

    The market reality is that purchasers are prepared to buy agricultural land with non-agricultural potential and accept the risk of obtaining the necessary change of user. Mr. MacNaughton agreed that this commonly, occurred in the market. It was for this very reason that he rejected Mr. Chan's six comparables of agricultural land, because they included an element over and above their value for agricultural use, because of the purchaser's hope that he could obtain a change of user. On the evidence I am satisfied that Lot 22, because of its size and location, was suitable for residential use. I appreciate any purchaser would require to obtain Crown approval for any change of use; probably have to pay a premium; and comply with other conditions. However, I am equally satisfied that a purchaser, fully aware of those risks, would be willing to pay above bare agricultural land market value for the land, with that potentiality. Where land is compulsorily resumed, the owner is entitled to the present value of the land, including the advantage of those potentialities.

    [emphasis added]

    The question in the present case is whether H H Judge Cruden was correct in saying that in these circumstances the claimant is entitled to have compensation assessed on the basis of the open market value, or whether s.12(c) has the effect of excluding the speculative element in that value from the computation.

    THE LEGAL CONTEXT IN WHICH SECTION 12(C) WAS ENACTED

  17. Section 12(c) must be understood in its legal and factual context. It has no counterpart in the English legislation. It was introduced by amendment in 1922, when in other respects the law of Hong Kong in relation to compensation for compulsory acquisition was generally the same as the law of England and, for that matter, elsewhere in the Commonwealth. The relevant principles of English law can be summarised as follows:

    1. The value of the land is the value to the claimant, not its value to the acquiring authority: see Re Lucas & Chesterfield Gas & Water Board [1909] 1 KB 16 at p.29 per Fletcher Moulton LJ; Re South Eastern Railway Co. & London County Council's Contract [1915] 2 Ch 252 at p.258-9 per Eve J.

    2. Although it is common practice to speak of the value of the land, the property taken, and therefore the subject of compensation, is not the physical land itself but the claimant's estate and interest in the land. That is why the sitting tenant is entitled to compensation for his lease, but not to the chance of obtaining its renewal: this is the true ratio of Lynch v The Corporation of the City of Glasgow.

    3. The subject land must be valued not only by reference to its present use but also by reference to any potential use to which it may lawfully be put: see Horn v Sunderland Corporation [1941] 2 KB 26, where agricultural land suitable for development was valued as building land; Raja Vyricherla Narayana Gajapatiraju v Revenue Divisional Officer, Vizagapatam [1939] AC 302; and Maori Trustee v Ministry of Works [1959] AC 1, where undivided land suitable for subdivision was to be valued for what it was at the date of taking, that is to say as undivided land, but taking into account its suitability for subdivision.

    4. Where land is subject to restrictions which affect its value, the claimant is not entitled to be paid the unrestricted value of the land. While, however, the existence of the restrictions must be taken into account, so too must the possibility of obtaining a discharge or modification of the restrictions: see Corrie v MacDermott [1914] AC 1056. In such a case the costs as well as the risks and delays involved in obtaining any necessary consents must also be taken into account: see Maori Trustee v Ministry of Works.

  18. In the absence of s.12(c), therefore, compensation for the subject lands would be based in the first instance on their value subject to the restrictions in the relevant lease. But regard would also have to be paid not only to the likelihood or otherwise of the Government granting a modification of the terms of the lease, without which the development potential of the lands could not be realised, but also to the costs of obtaining such modification, including the payment of any premium which the Government might demand as the price of modification.

  19. Two further considerations are relevant at this point.

    • First, the user covenants in the Crown leases are absolute. They are not qualified by any requirement that the Crown's consent is not to be unreasonably withheld; and the statute law of Hong Kong does not subject user covenants in leases to any such requirement.

    • Secondly, in deciding whether to grant or withhold its consent to a modification of the terms of a lease, the Government does not exercise a public law function but acts in its private capacity as landlord: see Hang Wah Chong Investment Co. Ltd v Attorney-General [1981] HKLR 336 (PC). It thus has an absolute right if it chooses to demand a premium, however large, for granting a modification of the terms of the lease, or to withhold its consent altogether, however unreasonably: see Viscount Tredegar v Harwood [1929] AC 72.

    THE FACTUAL CONTEXT IN WHICH SECTION 12(C) WAS ENACTED

  20. The Court of Appeal observed that in 1922 the New Territories were intensely rural. Most of the land was devoted to agriculture and occupied by smallholders. In fact, however, the legislation in question was prompted, not by conditions in the New Territories, but by the explosive growth of Kowloon, which was experiencing a speculative boom in land prices. At that time the sale and disposal of land in Hong Kong was ordered by the Governor under the authority of Letters Patent from the Crown, and the conditions which might be imposed on the grant of land or of a change of use were not limited in any way by statute. There was no town planning legislation before 1939. The Government of Hong Kong exercised control over land development through its rights as ground landlord of almost all land in what was then a Crown Colony. Land was almost universally demised either as agricultural land or building land, and different rents were charged accordingly. It was not the normal practice of the Government to charge a premium for the modification of the terms of a lease, but it had the legal right to do so. It is not clear whether it was accustomed to charge an increased rent, but this would have been an appropriate course for it to take.

  21. This was the background to the introduction of s.12(c) in 1922. In accordance with the normal practice in Hong Kong, there was attached to the Bill an Explanatory Memorandum which explained the objects and reasons for the Bill. Such a document has always been admissible, not for the purpose of construing the words of the statute, but as evidence of the mischief which it was the object of the proposed statute to remedy: see Elson-Vernon Knitters Ltd v Sino-Indo-American Spinners Ltd [1972] HKLR 468; Westminster City Council v National Asylum Support Service [2002] 4 All ER 654. As Lord Steyn explained in that case at p.657:

    .... there is no need to establish an ambiguity before taking into account the objective circumstances to which the language relates .... Insofar as the Explanatory Notes cast light on the objective setting or contextual scene of the statute, and the mischief at which it is aimed, such materials are therefore always admissible aids to construction. They may be admitted for what logical value they have .... If used for this purpose the recent reservations in dicta in the House of Lords about the use of Hansard materials in aid of construction are not engaged: see R v Secretary of State for the Environment, Transport & the Regions, ex parte Spath Holme Ltd [2001] 2 AC 349, 407; Robinson v Secretary of State for Northern Ireland [2002] UKHL 32, The Times, 26 July 2002, in particular per Lord Hoffmann, at paragraph 40. On this basis the constitutional arguments which I put forward extra-judicially are also not engaged: "Pepper v Hart: A Re-Examination" (2001) 21 Oxford Journal of Legal Studies 59.

  22. Such evidence is admissible for a limited purpose only, to enable the Court to understand the factual context in which the statute was enacted and the mischief at which it was aimed. This is not the same as treating the statements of the executive about the meaning and effect of the statutory language as reflecting the will of the legislature. Within the permissible limits, however, the admissible evidence is not confined to the Explanatory Memorandum of Objects and Reasons, but must logically extend to explanations given by Ministers when introducing the Bill.

  23. The Explanatory Memorandum attached to the Bill in 1922 read as follows:

    1.

    The object of this Ordinance is to make it clear that in resumptions under the Crown Lands Resumptions Ordinances no compensation is to be awarded in respect of mere expectancies or probabilities. For example, the owner of agricultural land held under a Crown lease which prohibits the erection of buildings except with the licence of the Crown is not to receive any compensation with respect to the possibility that such a licence might at some time have been obtained if the land had not been resumed. This principle is not new as it is in force under the Lands Clauses Consolidation Acts in England, and it seems only reasonable that the community should not have to pay for a mere possibility of this kind which the claimant could never have enforced.

    2.

    The reason for the amendment of Ordinance No. 14 of 1921 on this point is that the Ordinance laid down as a general rule that the basis of compensation should be the market value of the land, and it appears to be the case that speculators, in the case of agricultural land for instance, are often prepared to pay more than the value of the land for agricultural purposes in the hope that they may be allowed to convert it into building land. The claimants in such a case would no doubt argue that the speculator's price formed or was evidence of a market price above the real value of the land as agricultural land. This position is all the more likely to arise in a district which is about to be developed by the Government for building purposes, and if the above argument were to prevail the result would be that the community would have to pay a very much increased price for the land, although this increased price was based solely on the mere possibility of conversion which the Government have absolute discretion to refuse. The effect would be to make development more expensive and to raise the rents on the developed property, and it might even have the effect of checking development altogether in a particular district.

    3.

    The intention of this bill, therefore, is to provide that the rule of taking the market price as the basis of compensation is to be subject to the further rule that no compensation is to be given in respect of such mere probabilities.

    4.

    For convenience, the whole of section 2 of Ordinance No. 14 of 1921 is to be repealed and re-enacted but practically the only part of the substituted section which is new is paragraph (c).

  24. When introducing the Bill into the Legislative Council, the Attorney-General repeated the foregoing and added:

    What happens, very often, is that speculators in the case of agricultural land are prepared to pay a good deal more than the value of the land for agricultural purposes in the hope that they, or the purchasers from them, may be allowed to convert that land into building land. The operation of these speculators, of course, creates a fictitious market price, and when land is resumed the arbitrators are asked to give compensation on the basis of that fictitious market price. That happens particularly in the case where the Government is about to lay out and develop land for building purposes .... I only wish to add that this principle of not receiving compensation for a mere probability or expectancy is not a principle invented here but is already in force in England under the Lands Clauses Consolidation Acts.

  25. Two points about these passages should be noted. First, the Government was concerned with the fact that purchasers, not intending or being able to develop the land themselves, were willing to pay speculative prices in the expectation that the Government would resume the land and develop it as building land free from any restrictions in the lease. The remedy was to exclude the speculative element from the assessment of compensation. Secondly, contrary to what the Legislative Council was told, s.12(c) had no direct counterpart in the English statutes. It seems likely that the reference was to Lynch v The Corporation of the City of Glasgow, where the possibility of obtaining a renewal of a lease was described as a mere chance. But the principle laid down in that case was that the subject of compensation was limited to the interest taken. It did not exclude compensation for chances which affected the value of that interest. Insofar as the new s.12(c) excluded compensation for the possibility of obtaining a modification of the terms of the lease under which the subject land was held, it went further than contemporary English law. On the other hand, it was consistent with the principle that the value of the land was the value to the claimant, in whose hands its user was restricted, and not its value to the acquiring or resuming authority, in whose hands its user was unrestricted. Moreover, if the new s.12(c) was limited to enacting the principle in Lynch v The Corporation of the City of Glasgow, then it was not only unnecessary but failed to remedy the mischief at which it was aimed.

  26. The factual background is no longer the same as it was in 1922. Urban development is nowadays usually left to private developers, who seek any necessary modification of the terms of their lease, rather than undertaken by the Government after resumption. Since the 1950's the Government has charged premiums for granting modification of the terms of a Crown lease, and its policy for many years has been to charge the full value of the difference between the value of the land subject to the restricted use and the value of the land after modification. Whether it always succeeds is, of course, another matter; but the result is that purchasers no longer speculate on the likelihood that the Government will resume the land; instead they speculate on the Government charging a premium which does not fully reflect the value of the modification. In a rising market, they may take the view that the Government is likely to be behind the market, and the more buoyant the market, the greater the room for speculation.

  27. The Government's right to charge the full value of the modification has not been and could not be challenged. Its policy is informed by the philosophy which formerly underlay the ownership of land in Hong Kong. While it remained a Crown Colony land in Hong Kong was regarded as belonging to the Crown, which parted with its ownership only for the duration of the lease and for the user specified in the lease. Subject thereto, it remained the undisposed property of the Crown. In granting a modification of the user covenants in the lease, therefore, the Crown in effect made a further disposal of the land for which it was entitled to charge full value. In the case of a Crown lease, at least, no distinction in principle was seen between a tenant's hope of obtaining a renewal of his lease and his hope of obtaining a modification of the terms of the lease. In England, by contrast, where the vast majority of leases are granted by private landlords, user covenants are generally qualified so that the landlord cannot unreasonably refuse his consent to a change of use or make it conditional on the payment of a premium. But even where the landlord can unreasonably withhold his consent, the right to make more beneficial use of the land during the currency of the term cannot be said to belong wholly to the landlord or wholly to the tenant, for the tenant cannot exercise the right without the consent of the landlord and the landlord cannot exercise it while the lease subsists.

  28. Section 12(c) has been incorporated into a large number of modern statutes, sometimes merely by reference, and sometimes by specific enactment: see for example Hong Kong Airport (Control of Obstructions) Ordinance, Cap. 301 s.23(e) (1957); Electricity Networks (Statutory Easements) Ordinance, Cap. 357 (1980). It cannot be dismissed as obsolete. The philosophy which informs the division of ownership as between the parties to a Government lease has not changed.

    THE MEANING OF THE STATUTORY TEXT

  29. In these circumstances, the statutory language must be decisive. The first thing to note about ss 12(b) and 12(c) is that they are both in derogation of s.12(d). To the extent that they apply, the open market value of the land which forms the basis of valuation under s.12(d) is excluded.

  30. Neither subsection is expressed with great felicity. Compensation is not given in respect of use whether in conformity with the terms of the lease or not; nor is it given in respect of any expectancy or probability whether of obtaining a modification of the terms of the lease or otherwise. It is given, and given only, in respect of the land taken. But in each case the sense is clear enough. In assessing the amount of compensation for the land taken, no account is to be taken of any value which the land may have by reason of its non-conforming use, or by reason of the probability or expectancy of obtaining any "licence, permission, lease, or permit whatsoever" to which the claimant is not entitled as of right.

  31. These are wide words. The word "lease", if it stood alone, would suggest that the subsection did no more than enact the principle in Lynch v The Corporation of the City of Glasgow. The addition of the word "licence" by itself would probably add little. But the words "permission" and "permit" are a different matter; and the word "whatsoever" precludes the application of the ejusdem generis rule.

  32. The second thing to note is that s.12(c), read with s.12(b), form a consistent whole. Any value which is attributable to the land by reason of its non-conforming use is to be disregarded, together with the probability or expectancy of obtaining permission to continue such use. It would be capricious to disregard the prospect of obtaining permission to continue a non-conforming use while having regard to the prospect of obtaining permission to commence one.

  33. The words "licence, permission, lease, or permit whatsoever" are not, however, altogether without limit. Where the grant or refusal of the licence or permission cannot affect the intrinsic value of the land, it is either outside the scope of the subsection or, if within it, without effect. Where the grant of the licence or permission is dependent on the personal qualifications of the particular applicant, its grant or refusal does not affect the value of the land, for a claimant who is unable to obtain it can realise the full value of the land's potential by selling it to a purchaser who can. So there must be some connection between the licence etc. in question and the claimant's interest in the land. In my opinion, the essential connection is an economic one.

  34. This is not how the subsection has been interpreted in the authorities, but it is consistent with them. In Ching Chun-Kau v Director of Lands & Survey [1978] HKLTLR 190 Power P, giving the judgment of the Lands Tribunal, said:

    It seems that section 12(c) was drafted locally to meet local conditions and it is a fair inference from a study of the judgments in Lynch v Glasgow Corporation that this case in some part provided the inspiration for the phraseology of section 12(c) ....

    Section 12(c) clearly went much further than the principle laid down in Lynch v Glasgow Corporation which dealt only with the renewal of a lease .... Section 12(c) goes much further as it deals with 'any licence, permission, lease or permit whatsoever' which may be issued 'by the Crown or by any other person'.

  35. In that case the land was the subject of a Crown lease which restricted its use to use for the purpose of a dairy farm. This required a licence issued by the Director of Agriculture and Fisheries. At the date of resumption the current dairy licence had only some six months to run before it fell for renewal. The Lands Tribunal held that, although the claimant had an unexpired term of 22 years, any part of that term which was not covered by the existing licence was valueless. The unspoken assumption was that the unexpired term had no value apart from the expectancy or probability of the grant or renewal of a dairy licence, which was excluded from compensation by s.12(c). This was because, unless the licence was renewed, the land could not be used as a dairy farm and, as the lease permitted no other use, the land would have to remain unused during the remainder of the term. Land which could not be lawfully used, the Tribunal reasoned, had no value.

  36. The Tribunal's decision was reversed by the Court of Appeal. The object of the dairy licence was to ensure proper standards of health. If the tenant were refused a licence because he did not comply with the reasonable requirements of the Director, it did not follow that no licence would be issued to someone else who did comply with those requirements. The grant or refusal of a licence did not, therefore, affect the intrinsic value of the land. If the claimant was unable to obtain a licence himself, he could sell the land to a purchaser who could.

  37. It is sometimes said that the case decided that s.12(c) has no application to "administrative licences", whatever that may mean. I think that it decided that the subsection has no application to (or if it applies has no effect in the case of) licences the grant or refusal of which does not affect the intrinsic value of the interest taken. As Pickering J put it, the award made by the Tribunal ignored the existence of a 22-year unexpired interest in the land and was palpably inadequate.

  38. In Winfat Enterprise (HK) Co. Ltd v Attorney-General of Hong Kong [1985] AC 733 the claimant contended that, insofar as it provided for compensation which represented less than the open market value of the subject land, s.12(c) of the Ordinance was ultra vires. The claim was rejected at all levels on constitutional grounds. No argument was directed to the meaning of the section, on which the case is therefore not an authority; but it was assumed at every level from the High Court (Kempster J) to the Privy Council that the section provided for compensation which represented less than the open market value of the subject land where it was subject to a user restriction in the Crown lease. It is worthy of note that, despite the eminence of Counsel and the number and experience of the Judges who heard the case, the assumption on which it was based was never questioned. It evidently represented the Government's official view of the effect of the section, and it was one which was shared by Counsel for the claimants.

  39. In 1988 in Suen Sun-yau H H Judge Cruden evidently considered that the claimant was entitled to compensation for the open market value of agricultural land with development potential after taking account of the prospects of obtaining a modification of the terms of the Crown lease to permit such development and the costs of obtaining such modification including the payment of a premium. Any persuasive authority the case might otherwise have, however, is weakened by the fact that no argument on the effect of s.12(c) was addressed to the Tribunal, and the Judge's attention does not appear to have been directed to its existence.

  40. In Niceboard Development Ltd v China Light & Power Co. Ltd [1994] HKDCLR 69 the Lands Tribunal was concerned with s.10(5)(a) of the Electricity Networks (Statutory Easements) Ordinance, which was in substantially the same terms as s.12(c) of the Ordinance. The claimant's land was found to be building land, but it was subject to a building covenant which imposed a requirement to obtain the approval of the Crown's Surveyor for the erection of any building or structure on the land. The Tribunal held that this requirement did not reduce or affect the amount of compensation payable.

  41. In giving the judgment of the Tribunal, H H Judge Cruden said at p.77:

    .... we find that it is more probable than not, that the lawful user [of the land in question], is building land. We do not need to consider because of this finding, the otherwise very powerful submission of the respondent, that if the user was agricultural a licence for the erection of a concrete batching plant, would contractually be required. We recognise that the provisions of s.10(5) of the Ordinance would, in that event, have prevented compensation being given in respect of the expectancy or probability of the grant of such a licence.

    Section 10(5) is clearly modelled on s.12(c) of the Crown Lands Resumption Ordinance (Cap. 124). The law on s.12(c) that such expectancies or probabilities are not compensatable, is well settled.

    [emphasis added]

  42. The Tribunal held, however, that the obligation to obtain approval for a particular building was not a licence etc. within the meaning of s.12(c) and did not affect the amount of compensation payable. In this I think that the Tribunal was right. H H Judge Cruden said that the need to obtain building approval did not "lessen the right to use the land for building purposes". I would prefer to say that it did not affect the value of the land for building purposes. The need to obtain building approval is directed to the suitability of the particular building which it is proposed to erect and non-contravention of approved or draft plans prepared under the Town Planning Ordinance, Cap. 131. The case was therefore within the reasoning in Ching Chun-kau v Director of Lands and Survey.

  43. In Million-Add Development Ltd v Secretary for Transport [1997] CPR 316 the land was building land and the case was concerned with the availability of bonus plot ratio. Counsel for the claimants submitted that s.12(c) was limited to cases where the interest taken was of limited duration but the owner had a chance of renewal not enforceable as of right: in short, the kind of case covered by Lynch v The Corporation of the City of Glasgow. Counsel for the Crown submitted that the subsection was of wider application and covered the chance of obtaining bonus plot ratio which, it contended, was a matter of discretion and not of right. The Tribunal held that s.12(c) was wider than Counsel for the claimants contended, but not as wide as Counsel for the Crown asserted.

  44. Giving the judgment of the Tribunal, H H Judge Cruden remarked upon the distinction between user covenants and building covenants which, he said, had often been referred to by the Tribunal. He treated the availability of bonus plot ratio as comparable to a building covenant rather than a user covenant because, he said, s.12(c) was concerned with licences etc. which directly affected an estate or interest in the resumed land, and bonus plot ratio did not "as a matter of property law affect an estate or interest in the land or otherwise go to title."

  45. I do not doubt the correctness of the Tribunal's conclusion, but I have some difficulty with H H Judge Cruden's reasoning, which appears to rest on a distinction between "property" and "administrative" licences. In my opinion the distinction is between licences etc. which are capable of affecting the value of the interest taken and those which are not.

  46. Plot ratio directly affects the potential of land for development and hence its value. It is governed by the Building (Planning) Regulations, Cap. 123. Generally the plot ratio for any given site is as fixed by those Regulations according to the physical attributes of the site and the type of building to be erected thereon. In the exceptional case where the site abuts on a street less than 4.5 metres wide or does not abut on a street, its plot ratio is determined by the Building Authority. So what falls to be valued is the land with the appropriate plot ratio. Such value does not include the speculative element which s.12(c) is designed to eliminate, and s.12(c) is not engaged.

  47. Bonus plot ratio is available in two situations:

    1. where the Government accepts the surrender of part of the plot for an open space or other public purposes;

    2. where it accepts a surrender of part of the plot for road widening.

    In either case the owner of the plot is entitled as of right under the Building Regulations to transfer the unused plot ratio attributable to the part of the plot which is surrendered to the remainder of the plot, and this enhances the value of the whole. The Government's acceptance of the surrender of part of the plot, however, is discretionary; the owner has no legal right to compel the Government to accept it and hence no legal right to bonus plot ratio in respect of the rest of the site.

  48. At first sight, therefore, the availability of bonus plot ratio falls on the other side of the line. It directly affects the value of the land, and it is not something to which the claimant is entitled as of right. But this is a superficial analysis. It is necessary to identify the "probability or expectancy" which is involved and which s.12(c) requires to be disregarded. It is not the grant of bonus plot ratio, for the claimant has a legal right to this if the precondition is satisfied. The precondition is the Government's acceptance of the surrender of part of the plot, and this is discretionary. But the probability or expectancy of the Government accepting a surrender of part of the plot is not within the scope of s.12(c). The section is concerned with the probability or expectancy of the grant of a licence, permit or permission for the claimant to do something on the subject land, not with the probability or expectancy of the Government accepting a surrender of his interest in part of it.

  49. With the sole exception of H H Judge Cruden's observations in Suen Sun-yau v Director of Buildings & Lands, therefore, s.12(c) has been consistently understood and applied in Hong Kong to exclude from the compensation payable on resumption of land held under a Crown lease any element which would reflect the speculative element in the value of the land referable to the prospect of obtaining a modification of the user covenant in the lease. This is in accordance with the natural meaning of the section and the object which its introduction into the law of Hong Kong was intended to achieve. Despite the great experience of H H Judge Cruden in this field, I do not think that his observations, made without reference to the section and without having heard argument on the question, can stand against the terms of the section and the weight of authority to which I have referred, much of it based on his own later and more considered views.

  50. The Court of Appeal reached a different view for two reasons. In the first place, it said that the Government's argument failed to acknowledge the intrinsic value of the land "with all its potentialities"; and in the second place it failed to have regard to what it called "the realities of the commercial world" to which s.12(d) required observance. But insofar as the intrinsic value of the land includes its development potential, it cannot be realised without a modification of the terms of the lease, and the prospect of obtaining such a modification falls squarely within the words of s.12(c). And insofar as "the realities of the commercial world" include the willingness of purchasers to pay a speculative price in the hope of obtaining a modification of the terms of the lease, s.12(d) is subject to s.12(c). The Court of Appeal construed s.12(c) as limited to "licences" etc. which "related to an interest in land" and as excluding compensation for the hope of obtaining the grant of a future interest. This was the argument of Counsel for the claimants in Million-Add Development Ltd v Secretary for Transport which H H Judge Cruden, in my view rightly, rejected.

    THE USE OF COMPARABLES

  51. The claimants' strongest argument was that their comparables were concerned with private sales of land which was also held under Crown leases and subject to similar restrictions. The purchasers must have taken account of the need to obtain a modification of the terms of the relevant lease and the amount of the premium which the Government would be likely to exact. In Watford Construction Co. Ltd v Secretary for the New Territories [1978] HKLTLR 253 the land was demised as agricultural land. The Lands Tribunal held that, in order to apply s.12(c) it was not necessary to employ a two-stage approach by first ascertaining the open market value and then quantifying and deducting the expectancy or probability factor. Giving the judgment of the Tribunal, Power P said:

    This may, in certain cases, be a proper and useful approach but the Tribunal can see nothing in s.12 that would prevent it from approaching the valuation of land restricted to agricultural use by using the sales of comparable land which is similarly restricted. Indeed, in the present case, the Tribunal is satisfied not only that this is a proper and permitted approach under s.12 but also that it is the approach to the problem of valuation most likely to result in a correct valuation.

  52. The Court of Appeal relied strongly on this observation, but properly understood it does not support the Court of Appeal's approach. In the first place, it was made in answer to the contention that s.12(c) required a two-stage approach to be adopted in every case, and that unless the amount of the speculative element could be precisely quantified it could not be deducted from the open market value which the comparables established. In the second place, the Tribunal was manifestly of opinion that the speculative element was to be excluded, as otherwise the two-stage approach could never be justified.

  53. In a perfect market, of course, purchasers would pay a price which precisely reflected the prospects of obtaining a modification of the terms of the lease and the costs of obtaining it, including the payment of any premium; and the Government would charge a premium which exactly reflected the additional value which would enure to the land as a result of the modification. In such a market there would be no room for speculation. The value of the land would be the same whether one took account of the prospects and costs of obtaining a modification or disregarded them, and s.12(c) would have no effect. But the market is not perfect. Purchasers are prepared to pay prices which do not reflect the intrinsic value of the land, but contain a speculative element for which the Government ought not to be required to pay on resumption.

  54. In the present case the Government valuer asserted that the prices paid by purchasers on the claimants' comparables contained such an element and should be disregarded for this reason. His evidence has not been accepted or rejected, but rather ruled to be irrelevant. It is not irrelevant, but highly material. If correct, then the claimants' comparables cannot be taken at face value. It does not follow that they must be disregarded altogether; but they cannot stand without adjustment.

    THE BASIC LAW

  55. The claimants submitted that, if s.12(c) of the Ordinance has the effect for which the Government contended, then it is incompatible with art. 105 of the Basic Law. This provides:

    The Hong Kong Special Administrative Region shall, in accordance with law, protect the rights of individuals and legal persons to the acquisition, use, disposal and inheritance of property and their right to compensation for lawful deprivation of their property.

    Such compensation shall correspond to the real value of the property concerned at the time and shall be freely convertible and paid without undue delay.

  56. Two points call for comment.

    • First, art. 105 does not require compensation to be based on the open market value of the property concerned but on its "real value". In general, property is worth what it will fetch, and its open market value reflects its real value. But as the Courts of Hong Kong have repeatedly emphasised, this is not always the case. Sometimes the market is prepared to pay a speculative price which exceeds the true value of the property and reflects an element for which the resuming authority ought not to be required to pay. There is nothing in art. 105 which requires it to do so.

    • Secondly, compensation is only required to be paid for "the property concerned", that is to say for the interest acquired. In the present case, that means for the land for the duration of the Crown lease and subject to the user restrictions in the lease. The right to exploit the development potential of the land by using it as building land was not disposed of by the Crown and remains the property of the Government for which it ought not to be required to pay. If the claimants' argument is correct, then the Government's practice in charging a full premium on modification of the terms of a Crown lease is also open to challenge under the Basic Law; and I do not consider that that is right.

    CONCLUSION

  57. I would allow the appeal, discharge the assessments and remit both cases to the Lands Tribunal to reconsider the assessment of the compensation on a full evaluation of all the evidence and in the light of this judgment. While there can be no objection to the two cases being heard by the same panel, it would be preferable if it was differently constituted from either of the original panels. I would order that the Government should have its costs here and in the Court of Appeal but that each party should be left to bear its own costs in the Lands Tribunal.

    Justice Bokhary PJ

  58. The Court is unanimous. These appeals are allowed. The assessments are discharged and both cases are remitted to the Lands Tribunal for it to reconsider the assessment of the compensation in each case on a full evaluation of all the evidence and in the light of our judgment. There can be no objection to the two cases being heard by the same panel. But it would be preferable if it was differently constituted from either of the original panels. We award the Government its costs here and in the Court of Appeal, but leave each party to bear its own costs in the Lands Tribunal.


Cases

Gurung Kesh Bahadur v Director of Immigration [2002] 2 HKLRD 775; Director of Buildings & Lands v Shun Fung Ironworks Ltd [1995] 2 AC 111; Lynch v The Corporation of the City of Glasgow (1904) 5F 1174 (Court of Session); Suen Sun-yau v Director of Buildings and Lands [1991] HKDCLR 33; Re Lucas & Chesterfield Gas & Water Board [1909] 1 KB 16; Re South Eastern Railway Co. & London County Council's Contract [1915] 2 Ch 252; Horn v Sunderland Corporation [1941] 2 KB 26; Raja Vyricherla Narayana Gajapatiraju v Revenue Divisional Officer, Vizagapatam [1939] AC 302; Maori Trustee v Ministry of Works [1959] AC 1; Corrie v MacDermott [1914] AC 1056; Hang Wah Chong Investment Co. Ltd v Attorney-General [1981] HKLR 336 (PC); Viscount Tredegar v Harwood [1929] AC 72; Elson-Vernon Knitters Ltd v Sino-Indo-American Spinners Ltd [1972] HKLR 468; Westminster City Council v National Asylum Support Service [2002] 4 All ER 654; Ching Chun-Kau v Director of Lands and Survey [1978] HKLTLR 190; Winfat Enterprise (HK) Co. Ltd v Attorney-General of Hong Kong [1985] AC 733; Niceboard Development Ltd v China Light & Power Co. Ltd [1994] HKDCLR 69; Million-Add Development Ltd v Secretary for Transport [1997] CPR 316; Watford Construction Co. Ltd v Secretary for the New Territories [1978] HKLTLR 253

Legislations

Basic Law: Art.31

Lands Resumption Ordinance, Cap. 124: s.10, s.12

Authors and other references

Explanatory Memorandum of Objects and Reasons for Bill 1922

Representation

Mr. Robert C Tang SC and Mr. Nelson Miu (instructed by the Department of Justice) for the appellant

Mr. Benjamin Yu SC, Mr. Patrick Chong and Miss Yvonne Cheng (instructed by Messrs K C Ho & Fong) for the 1st and 2nd respondents


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