The Principles and Practice of Rating

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• The Principles and Practice of Rating
• in Hong Kong
• by R. M. Aldridge
• Senior Valuation Surveyor
• Rating and Valuation Department

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Contents

• History of Rates
• Rating Ordinance and Rating Case Law
• Revaluations and Valuation List
• Rating Principles
• Definition of Tenement
• Hypothetical Tenancy
• Tone of the List
• Rebus sic stantibus
• Rating Valuation Practice - Cases Study

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Preamble to the Talk

• For this talk reference is made to 3 acknowledged
  sources
• Land Compensation and Valuation Law in Hong Kong
  -
• (second edition 1999) by Gordon N Cruden
• Property Rates in Hong Kong and History of Rates
  in Hong Kong - both by Rating and Valuation
  Department (RVD)
• Disclaimer
• The views expressed in this talk are my own and
  not necessarily the views of the RVD.
• If there are any errors or omissions in this talk
  please accept my apology and I shall correct as
  appropriate during my talk.

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History of Rates

• Rates are a form of tax levied on
• the occupation of real property
• They are struck annually as a percentage of
  rateable value
• Thus the purpose of a rating valuation is to
  arrive at a figure termed rateable value on which
  rates are levied at so much in the dollar

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• History of Rates (cont.)
• Hong Kong rating law is similar to English rating
  law
• Hong Kong rating principles can therefore be
  traced back to the Poor Law Relief Act 1601 in
  England
• This provided for the levying of taxation on
  every occupier of land, houses.towards the
  relief of the poor

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Introduction to Rating in HK

• Rating has a long history in HK
• Ordinance No. 2 1845 enacted and related to the
  Police Rate which was collected to pay the annual
  expenses of the police force
• Even today Chinese for rates is Chai Heung
  means police pay
• Authorised the appointment of two or more
  persons for the purpose of estimating the
  annual value of the lands, houses, and premises,
  within the Island or within any particular
  district thereof.

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Introduction to Rating in HK

• The Said Governor and Council may cause a new
  list to be made annually.
• Through the years as HK developed areas assessed
  to rates expanded and since 1988 the whole
  territory of Hong Kong has been liable to
  assessment.
• Todays General Rates contribute to the
  Governments revenue account.

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The Rating Ordinance

• The primary source of rating legislation is now
  the Rating Ordinance (the Ordinance).
  Subsidiary legislation is limited. The Rating
  (Miscellaneous Exemptions) Order specifies
  certain premises that are exempt from payment of
  rates.
• Legal notices in the Government Gazette give
  details of rates percentages charges, relevant
  dates etc.

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The Rating Ordinance

• The 1973 Rating Ordinance came into effect in
  April 1973 and is the backbone for the current
  rating legislation.
• Major changes in the modern period 1973 - 2008
  
• Rating extended to all areas of the NT.
• The Lands Tribunal was set up in 1974 to hear,
  inter alia, rating appeals.

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The Rating Ordinance

• The concept of designating a valuation reference
  date for revaluations was introduced and first
  became effective for the 1984/85 revaluation.
• Rateable values used for non-rating purposes -
  assessment of crown / government rent, landlord
  and tenant matters.
• Two Municipal Councils were dissolved from 1st
  January 2000.
• Series of rebates and concession schemes launched
  in 1998 -2008 to address economic downturn and
  other hardship encountered by ratepayers.

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• July 1983 first designated date received from the
  Governor at a special ceremony

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Rating Case Law

• In Hong Kong the prime source of rating valuation
  is statutory.
• From 1977 to 1984 the Lands Tribunal was busy
  applying the statutory basis of rating to many
  different types of property in rating appeal
  cases.
• As stated earlier Hong Kong rating law is similar
  to English rating law.
• English rating cases are often cited during Hong
  Kong rating appeals.
• In these HK rating appeals, the basis of current
  rating valuation practice in HK was laid down
  for the future.

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Revaluations

• Revaluations are currently on an annual cycle
• The latest revaluation took effect from 1 April
  2008
• Analysis of the lists are shown in the next two
  slides

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Analysis of the Valuation List as at 1.4.2007
by Assessments

• Notes- 1) Commercial premises are those
  designed and adapted for commercial use, other
  than shops or offices
• e.g restaurants, department
  stores.
• 2) Storage premises include cold stores.
• 3) Miscellaneous properties include major
  special properties e.g. public utilities, hotels
  and cinemas.

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Analysis of the Valuation List as at 1.4.2007
by Rateable Value

• Notes- 1) Commercial premises are those
  designed and adapted for commercial use, other
  than shops or offices
• e.g. restaurants, department
  stores.
• 2) Storage premises include cold stores.
• 3) Miscellaneous properties include major
  special properties e.g. public utilities, hotels
  and cinemas.

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Valuation definitions and their applications

• In Hong Kong the unit of assessment for rates is
  the Tenement. (see Cruden 315-317)
• Cap 116 Rating Ordinance Part I section 2
  definition means any land (including land
  covered with water) or any building, structure,
  or part thereof which is held or occupied as a
  distinct or separate tenancy or holding or under
  any licence.
• An important rating appeal case set out how the
  definition can be applied in rating valuation
  practice.

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Rating Case - Yiu Lian Machinery Repairing Works
Ltd and Ors vCommissioner of Rating and
Valuation (1982) HKDCLR 32

• The subject matter of this case - 5 floating
  docks, sea beds and premises moored off Tsingi
  Yi.
• Merchant Shipping Ordinance defines vessel -
  include floating dry dock.
• Lands Tribunal decided, and supported by the
  Court of Appeal, that the floating docks were not
  tenements and therefore not rateable but sea bed
  leases rateable (see below).
• In this decision the Lands Tribunal set out
  important guidelines for the definition of
  tenement.

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Rating Case - Yiu Lian Machinery Repairing Works
Ltd and Ors vCommissioner of Rating and
Valuation (1982) HKDCLR 32

• Two Limbs to determine the tenement
• Limb (1) the subject to be rated namely - land,
  buildings and structures.
• Land included in sea bed leases constitutes a
  tenement.
• Such leases included in the subject case and
  agreed rateable.
• Water above the seabed is not rateable. English
  rating law differs.
• S16 of GRA 1967 definition of Land.
• Structure is a fixture not a chattel.

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Yiu Lian Case (cont.)

• Limb (2)
• Before Limb (1) can constitute a tenement the
  property must be held or occupied as a distinct
  or separate holding or licence.
• Origin of this requirement under section 2 of the
  Ordinance
• What about a trespasser ?
• Major difference between HK and English rating
  law
• In England, occupation is the primary basis for
  rating liability.
• 4 English tests of rateability (LCC v Wilkins) -
  actual, exclusive, beneficial (or value) and not
  for too transient a period.

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The Hypothetical World of Rating

• Extract from the Appeal Case China Light and
  Power Co Ltd v CRV 1995 2 HKC 42 -
• The world of rating appears .to be cloud
  cuckoo land, a world of initial unreality from
  which real cuckoos are excluded
• (although it seems that permission to land
  will be granted to a cuckoo in flying in from the
  real world if it can be demonstrated that its
  presence in cloud cuckoo land is essential, not
  merely accidental ). A valuation for rating
  purposes must be based on hypothetical, not real
  facts.
• An interesting comment with some truth perhaps.

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The Hypothetical Tenancy in HK under s7(2)

• Rateable Value
• The rateable value of a tenement is ascertained
  in accordance with Part III of the Rating
  Ordinance.
• section 7(2) The rateable value of a tenement
  shall be an amount equal to the rent at which the
  tenement might reasonably be expected to let,
  from year to year, if
• a) the tenant undertook to pay all usual
  tenants rates and taxes and
• b) the landlord undertook to pay the
  Government rent, the costs of repairs and
  insurance and any other expenses necessary to
  maintain the
• tenement in a state to command the rent.

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The Hypothetical Tenancy (cont.)

• Under s7(2) the annual rental value of the
  tenement has to be ascertained.
• The first step in the procedure is to follow the
  well known dictum by Lord Denning MR in R v
  Paddington (VO) Ex parte Peachey
• The rent prescribed by the statute is a
  hypothetical rent, as hypothetical as the
  tenant. It is the rent which an imaginary
  tenant might be reasonably expected to pay .
• Other assumptions to consider - market rental
  value, duration, tenants expenses, landlords
  responsibility for repairs, nuisance, and vacant
  and to let. (see Cruden 333-345)

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The Hypothetical Tenancy (cont.)

• Additional important assumptions
• Ignore
• Restrictive covenants in tenancy agreements
• Restriction in government grants
• Important case decision Lai Kit Lau MAC v CRV
  1984
• Court of Appeal rules that under the HT any
  restrictions or conditions in the government
  grant are also to be ignored when carrying out a
  rating valuation.
• General statutory restrictions to be taken into
  account, but not statutory rent restrictions i.e.
  LT (Consolidation) Ordinance.

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Valuation Definitions and their application

• Tone of the list
• Following on from the definition of rateable
  value
• In HK since the 1984/1985 revaluation, the tone
  of the valuation list has been maintained by
  using a single antecedent valuation date, the
  relevant date between revaluations.

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Tone of the List (cont.)

• Thus, in respect of an interim valuation (i.e.
  one made between revaluations), s7A of the
  Ordinance provides that -
• (3) the rateable value of any tenement in
  respect of which a notice of interim valuation
  has been served shall be the value on the
  relevant date on the assumption that at that
  date-
• a) the tenement was in the same state at the
  time of service of the notice
• b) any relevant factors affecting the mode or
  character of occupation were those
  subsisting at the time of service of the
  notice and

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Tone of the List (cont.)

• c) the locality ..was in the same state, with
  regard to other premises situated in the
  locality, the occupation and use of those
  premises, the transport services and other
  facilities available in the locality and other
  matters affecting the amenities of the
  locality, as at the time of service of the
  notice.

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Valuation definitions and their applications

• Remember that to ascertain the RV the first step
  is provided by s7(2) for the basis of the
  hypothetical tenancy
• Now the second step to ascertain the RV is
  provided by s7(A) (2) and (3) above for the
  assumptions on the subsisting use and any
  relevant factors at the time of
• service of the notice for an interim valuation
• time the list comes into force for a general
  revaluation

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Rebus sic stantibus

• In UK the rebus sic stantibus principle evolved
  through rating case law.
• Relevant cases
• Townley Mill Co v Oldham Assessment Committee
  1937
• - Lord Maughams judgement the hypothetical
  rent which the tenant could give was estimated in
  reference to the hereditament in its actual
  physical condition (rebus sic stantibus) and a
  continuance of the existing state of things was
  prima facie to be presumed.
• Fir Mill Ltd v Royton UDC and Jones (VO) 1960
• - LT states the mode or category of occupation
  by the HT must be conceived as same mode or
  category as that of the actual occupier.

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Rebus sic stantibus (cont.)

• Other relevant cases
• Midland Bank Ltd v Lanham (VO) 1978
• - LT gave wider meaning to mode or category of
  occupation than Fir Mill Case stating
• .all alternative uses to which the
  hereditament in its existing state could be
  put in the real world .in the minds of
  competing bidders in the market .being as
  same mode or category, where such competition can
  be established by evidence.
• Ho Tang Fat v CRV RA 1978
• - LT held factory use not in the same mode or
  category of the subject tenement, which was a
  community hall.

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Rebus sic stantibus (cont.)

• Lai Kit Lau MAC v CRV 1984
• - LT held that the statutory references to
  subsisting mode or character of occupation
  (s7(A) (2) (3)b) required.
• - Valuation of the physical tenement .in
  accordance with the actual use or any other use
  in within the same mode or character.
• - Alternative uses, producing a higher rental,
  are not allowed to be taken into account if not
  within the same mode or character as the
  subsisting use.

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Rebus sic stantibus (cont.)

• Further case on this subject with narrower
  interpretation
• Williams (VO) v Scottish and Newcastle Retail Ltd
  and Another (2001) RA 41
• - Two public houses must be valued disregarding
  their potential as shops and restaurant use
  because the works necessary for those uses were
  more than minor and uses not in same mode or
  category as public house use.

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Rating Valuation Practice Case Study No.1

• Rating valuation of an upper floor flat in
  Hunghom

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Case Study No.1- Rent passing not followed for RV

• Location An upper floor flat at Gillies Avenue,
  Hunghom
• In 1977 the rateable value was fixed at 8,040
• CRV confirmed the assessment
• Appeal to the Lands Tribunal
• Rent received 5,520 (including rates)
• Rent was controlled rent under Part 2 of the
  Landlord and Tenant (Consolidation) Ordinance

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Case Study No.1(cont.)

• Relevant Rating Cases
• R v Paddington (VO) 1966 (see slide 22)
• Hypothetical tenancy
• Poplar Assessment Committee v Roberts 1922
• Rent paid is controlled by rent control
  legislation is to be ignored
• Reason for such legislation
• RVs reflect values prevailing when list declared
• Decision?
• Application of the decision
• Is it relevant today? Passing rent not always
  followed if controlled or not?

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Rating Valuation Practice - Case Study No.2

• Rating valuation of a commercial unit in
  Wanchai

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Case Study No.2 - Rent passing followed for RV

• Location - Wanchai
• Property - basement used as disco and night club
  IFA 700 m2
• Proposal on 05/06 RV
• Subject lease commenced 2002 and renewed 2005
• From 2002 base rent 235K per month or turnover
  rent on of gross receipts whichever is greater.
  From 2005 base rent 300K for 3 years on same
  terms.
• No turnover rent paid around the reference date
  1.10.04
• 05/06 RV 245,000 per month

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Case Study No.2 (cont.)

• RV supported by rent passing with time adjustment
  but 2 years before reference date
• Comparables in locality but require large
  adjustments
• 05/06 RV confirmed
• Relevant rating cases
• United Theatres Corp Ltd v CRV 1978
• Kader Industrial Co Ltd v CRV 1958
• The onus is on the appellant to prove the
  Commissioner is wrong
• Appeal made, then withdrawn.
• Result?

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Rating Valuation Practice - Case Study No.3

• Cross Harbour Tunnel

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Case Study No.3

• A rating assessment where there is no rent
  passing and no direct rental evidence is
  available but relevant accounts of receipts and
  expenditure
• Subject tenement - Cross Harbour Tunnel
• Interim valuation for 77/78 RV 68.4 M reduced on
  objection to 66.5M
• Appellant appeals against decision
• Profits method of valuation
• First appeal judgement on use of profits method
  for rating valuation in HK

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Case Study No.3 (cont.)

• For the subject case, table below sets out the
  two profits basis valuations of the parties
• 
  CHT CRV
• Gross receipts 98.9 (M)
  98.9 (M)
• Less working expenses 21.8
  8.7
• Divisible balance 78.1
  90.2
• Less tenants share 35.4
  11.7
• Rent and Rates (_at_18) 42.7
  78.5
• RV 35.4
  66.5

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Case Study No.3 (cont.)

• Matters to consider
• No rental evidence
• Occupier has profit motive
• Use actual accounts
• Working expenses (see case decision)
• Tenants share - CRV of GR / CHT of DB
• Supporting evidence of CHT English case
  decisions
• Decision
• Lessons learned and application
• Also see decision in the CLP case with regard to
  return on tenants assets using CAPM WACC

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Rating Valuation Practice - Case Study No.4

• China Light and Power Cumulo Assessment

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Case Study No.4

• Same criteria as case study No. 3
• Subject tenement - China Light and Power Cumulo
  Assessment
• 91/92 valuation list entry RV 3,180M
• Case to Lands Tribunal (LT)
• Court of Appeal (CA) confirmed LT decision of RV
  2,000M
• Important rating principles set out in the CA
  decision

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Case Study No.4 (cont.)

• Matters to consider and compare with case study
  No. 3 if appropriate
• Annual value
• Profits Basis
• Meaning of state re section 7(A)
• Economic growth
• Hypothetical tenancy
• Duration
• Tenants capital
• Rate of return on tenants capital

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Rating Valuation Practice - Case Study No.5

• Royal Hong Kong Yacht Club

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Case Study No.5

• A rating assessment where there is no rent
  passing, no direct rental evidence, and
  impractical to use RE method.
• Subject tenement - Royal Hong Kong Yacht Club
• 84/85 Valuation List entry RV 2.184 M
• On proposal reduced to RV 2.04M
• Appellant appeals against the decision
• Contractors method of valuation
• Following the 1984 General Revaluation with
  reference date of 1/7/83, this was the first
  rating appeal decision using the contractors
  method of valuation.

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Case Study No.5 (cont.)

• The format for the contractors basis of
  valuation set out in the decision of the LT. This
  incorporates the 5 stages set out in Ryde on
  Rating.
• Ryde stage 1 2 Value of Improvements
  (agreed) 11.08M
• Ryde stage 3 Value of Land
  7.53 M
• ECV
  18.61M
• Ryde stage 4 Decap rate 8
  RV1.49M
• Ryde stage 5 Stand back and look, would
  HT pay this rent ?

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Case Study No.5 (cont.)

• Matters to consider
• Figure arrived at beyond which a potential
  tenant, rather than rent the premises, would
  elect to construct his own premises.
• Figure produced by contractors is not HR but a
  ceiling above which the rent should not go.
• 5 stages
• Value of land rebus sic stantibus
• Decap. rate - market rate of money to borrow
• Cardiff deductions
• Also see rating case Mobil Oil HK Ltd v CRV 1991
  - stage 4 uses property market yield

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Assessment of types of tenement

• Domestic
• Retail
• Office
• Industrial

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Assessment of types of tenement

• Hotels
• Cinemas
• Clubs
• Utilities

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Critical Analysis of the System

• Advantages and current impact
• Annual Revaluations
• Restrictions on proposals
• Appeals procedure
• Plant and Machinery

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Conclusion

• Is it really cloud cuckoo land and not the real
  world ?
• Thank you

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Q A
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