Whilst this article refers primarily to the English principles of compensation for compulsory purchase, the vast majority of them are applicable in Hong Kong for land resumption with appropriate modifications and I have been unable to find any Hong Kong case law which conflicts with these principles. I have also deliberately omitted reference to the huge amount of English statutory provisions, which are irrelevant in Hong Kong. In England it is called ‘compulsory purchase’ because the acquiring authority acquires the freehold and/or other interests from the owner. However, in Hong Kong and in most of the other English colonies, most notably Australia, the Crown remained the owner of all the land and granted leases of it. Therefore, in these colonies the Crown merely ‘resumes’ the land. Since the Handover in Hong Kong, the government is in the same position, but the leases are extended to the year 2047. However, the principles of compensation are the same for both compulsory purchase and resumption.

The English law of compulsory purchase was first consolidated in the Lands Clauses Consolidation Act 1845. It was a very long Act and only a few of the sections related to compensation. I am not dealing in this article with the powers of compulsory purchase, which are quite different in England and Hong Kong. The main power in Hong Kong is the Lands Resumption Ordinance (Cap 124) (originally 1889); but the Mass Transit Railway (Land Resumption etc) Ordinance (Cap 276), the Roads (Works, Use and Compensation) Ordinance (Cap 370) and the Foreshore and Sea-bed (Reclamations) Ordinance (Cap 127) are also relevant in connection with the power to resume land. So far as compensation is concerned, the Lands Resumption Ordinance is based on the English 1845 Act, the many cases decided by the courts in England during the 19th century and by amendments made after 1889, the important rules introduced in England by s 2 of the Acquisition of Land (Assessment of Compensation) Act 1919. There are also many cases decided by the English courts during the 20th century which are of direct relevance in Hong Kong.

The basic rule is:

‘… the principle of equivalence, which is at the root of statutory compensation, that the owner shall be paid neither less nor more than his loss …’ (per Scott LJ in Horn v Sunderland Corporation [1941] 2 KB 26, 49).

There are five important rules in s 10(2) of the Lands Resumption Ordinance. You should note in particular that the date for the purpose of the valuation is the date of the resumption. There are some additional rules in s 12. Rules (a) and (d) were introduced by amendment in 1924 and are based on the English 1919 Rules (1) and (2), namely that:

‘… no allowance shall be made on account of the resumption being compulsory.’

and that:

‘… 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 realise.’

The purpose of these Rules, particularly the former, was that during the 19th century the judges came to construe the 1845 Act as if an addition of 10% should be made for the owner being forced to sell. By 1919 this was thought to be wrong, though interestingly there is some re-thinking taking place in England at the moment about this point.

Considering the principles of assessment of compensation in s 11 of the Lands Resumption Ordinance, subsection (1)(b):

‘… decline to make any compensation for any addition to or improvement of the property made after the date of the publication in the Gazette of the notice of intended resumption …’

The same rule has applied in England for many years save that it finishes with the words, ‘if the Lands Tribunal is satisfied the work was not reasonably necessary and was undertaken with a view to obtaining compensation or increased compensation.’ The result is that, as far as I am aware, there never has been a case where the rule has been applied. Sections 11(2)(a) and (b) and 11(3)(a) and (b) deal with the cases where the uses of the land are for an illegal purpose or cause a nuisance to public health. The land is to be valued on the basis of what it would have been if it were not used for an illegal purpose or if the nuisance were abated. This is the same as the English 1919 Rule 4. Section 11(2)(c) and (3)(c) deal with the case of buildings which are unfit for human habitation. The value shall be restricted to the value of the land and the materials of the buildings. There were many such cases decided in England after the Second World War, but the provision has now been repealed. Finally, you should note s 12(c) to the effect no compensation shall be given for any expectancy or probability of the grant or renewal of a lease.

I shall now deal with some basic matters. The land must be valued for its existing use as it is at the date of resumption or for its development value, that is, if such development would be permitted. The basic principle is contained in the ‘Indian Case’, ie Raja Vyricherla Narayana Gajapatiraju v The Revenue Divisional Officer, Vizagapatam [1939] AC 302, which, as set out in the headnote is as follows:

‘Land compulsory acquired must be valued not merely by reference to the use to which it is being put at the time at which its value has to be determined, but also by reference to the uses to which it is reasonably capable of being put in the future.

Where the land has unusual features or potentialities, the Valuing Officer must ascertain as best he can from the materials before him the price a willing purchaser would pay for the land with those features or potentialities. The owner is entitled to, and the Valuing Officer must, ascertain the value of the potentialities, even when the only possible purchaser of the potentialities is the authority purchasing under powers enabling compulsory acquisition.’

You should note the last sentence. Neither India nor Hong Kong have the English 1919 Rule 3, which provides that where the only market for a special purpose is afforded by the acquiring authority, one does not get the value for this purpose. However, the Rule seldom applies in practice. The special purpose in the ‘Indian Case’ was this: a harbour was being constructed and the appellant’s nearby land contained springs yielding a constant and abundant supply of good drinking water. The land was acquired for anti-malarial works. So the appellant obtained valuable compensation to reflect this potentiality.

One also obtains valuable compensation in England if there is development value, but not in the rare cases when the Rule 3 ‘special suitability’ rule applies. However, one may have to defer the value if the development would not have been carried out for some years. The valuer calculates by reference to published tables what the value is in terms of current HK$ of development which would not be carried out for, say, 5 or 10 years.

‘Hope Value’ is where there is a prospect of development but the carrying out of it is remote. Lord Denning MR said in Camrose v Basingstoke Corporation [1966] 1 WLR 1100, 1106:

‘Even though the 233 acres are assumed to have planning permission, it does not follow that there will be a demand for it. It is not planning permission by itself which increases value. It is planning permission coupled with demand. The Tribunal thought that the demand for these 233 acres was so far distant as to warrant only a "hope" of development, and valued them accordingly. I see nothing wrong with this method of calculation.’

However, according to the fundamental principle called the rule in Pointe Gourde v Sub-Intendent of Crown Lands [1947] AC 565 compensation cannot include an increase in value which is entirely due to the scheme underlying the acquisition. This is merely a repetition of the principle which goes back to 1833 when the Queen’s Bench Division decided Re Countess Ossalinsky v Manchester Corporation (unreported). The principle applies also to decreases in value. That was established in a case in which I took part, Jelson v Blaby District Council [1977] 1 WLR 1020. A road had been proposed around Leicester. Housing estates were built by Jelson on both sides of the proposed road. The road was then abandoned. Planning permission could not be assumed to be granted for homes on this long strip because it was too narrow. But the scheme underlying the acquisition was the road proposal and the value of the land had been decreased due to it. That decrease had to be ignored. The value was to be the value it would have had for housing as if there had not been a proposed road scheme. This principle was also established in the Privy Council in an Australian case, Melwood v Main Roads Commissioner [1979] AC 426. You should note that what is the scheme underlying the acquisition is a question of fact, not law, per Widgery LJ in Wilson v Liverpool Corporation [1971] 1 WLR 302, 310.

I suggest that you think long and hard in Hong Kong about Stokes v Cambridge Corporation (1961) 13 P&CR 77. The principle is that the owner of the front-land who has ready means of access to the highway will deny his or her neighbour on the back-land behind access for his or her valuable development unless he or she is allowed to share in the overall profit of the development. However, matters have been further advanced. Developers, when they construct an estate, will leave a ‘ransom strip’, usually very narrow, against their neighbour’s boundary so that if the neighbour wishes to develop his or her land and cannot find another means of access, he or she will have to buy the ransom strip. The usual rule is that the ransom land is valued at one-third of the development value of the back-land. The principle is that the back-land cannot be developed without access, and that therefore the owner of the front-land should share in the profit. Sometimes, depending on the facts, it is put at 25% rather than one-third.

This rule applies even when a public authority acquires such land. I lost this point on behalf of Kent County Council in Batchelor v Kent County Council (1990) 59 P&CR 357 CA. One acre was needed for a roundabout to give access to a huge housing estate. The Council acquired this acre compulsorily, worth £10,000 as agricultural land, but because the land was the key to the development of the huge estate, the compensation was assessed at over £2m. (It was heard a second time in the Lands Tribunal). I argued that Pointe Gourde prevented this absurd result, but was held to be wrong.

By far the best method is by use of comparable transactions. Both sides try to discover the nearest comparable cases in terms of similarity of use, date of transaction, size, length of lease, nature of the surroundings, access to facilities and so on. Then one compares them, and the Lands tribunal will compare them, and make adjustments mentally and in writing in order to arrive at a value. One can also use comparable settlements, eg if other cases have been agreed between the acquiring authority and claimants, but they are not as reliable as real transactions.

If there are no comparables at all, one can as a last result use a residual valuation. Such valuations are very useful for enabling developers to work out whether they should purchase sites to carry out development. But they are very unreliable for use in assessing compensation. The English Lands Tribunal has almost killed off use of them.

I should first explain briefly how one calculates a residual valuation, though the subject is in truth extremely complicated. One begins by estimating the rents which are likely to be derived from the completed building. One makes assumptions as to how long the construction and rent-free periods will last. Then the quantity surveyor has to tell the valuer what the total cost of the building will be, including contingencies. Regard must be paid to letting and legal fees and the cost of financing the project, ie the interest to be paid throughout. Then one must allow for what is called ‘developer’s profit’, which is a way of reflecting risk. This is usually put at about 15% or rather more. One must then add in the site price. Finally, one must capitalise the rents at yields prevailing in the area at the time for such developments. One then has a total value which hopefully exceeds the costs, and that will be the residual valuation.

One only has to state the method used in the simple way I just have to see that it is full of variable assumptions. The point has never been put better than by Mr Walmsley, a distinguished valuer member of the English Lands Tribunal, in Clinker & Ash Ltd v Southern Gas Board (1967) 203 EG 735:

‘Now the Tribunal has frequently rejected such valuations as having too many uncertain elements, and has almost invariably done so when some simpler method (such as the use of comparables) is available.

…

From the viewpoint of a valuer who is retained by an intending vendor and who has therefore a responsibility to ensure that his client obtains not less than the full value of his land, there is a natural tendency to adopt somewhat full figures for the variables which together make up the completed value and/or to adopt somewhat conservative figures for the variables which together make up the development cost.

Conversely, from the viewpoint of a valuer who is retained by an intending purchaser and who has therefore a responsibility to ensure that his client does not pay more than the full value for the land, there is a natural tendency to adopt somewhat conservative figures for the variables making up the completed value and/or somewhat full figures for the variables making up the development cost. At this point of divergence, however, between the two valuers, the discipline of open-market conditions intervenes, imposing external sanctions which are highly effective. The external sanction facing the valuer for the intending vendor is that, if his choice of figures for the variables should throw up too great a difference between completed value and development cost, his client may well fail to find a purchaser at all because the calculated site value is above actual open market value.

…

When a residual valuation is prepared for arbitration purposes, however, the conditions are very different; the valuation is then a calculation made in vacuo; and although there may be a deemed open market there are no external sanctions acting as an incentive to the achievement of the delicate balance which I have described, because there is in effect a captive purchaser and a captive vendor; thus, there is no risk on the vendor’s part of losing a sale by reason of the price advised by his expert being too high, nor is there any risk on the purchaser’s part of missing a buy because the price advised by his expert is too low. Possibly as a side-effect of this absence of any external constraint, the natural tendency of the vendor’s (or claimant’s) valuer to adopt full figures when calculating developed value and conservative figures when calculating development cost almost invariably results (in the experience of the tribunal) in his putting forward an undependably high opinion of site value. Similarly the natural tendency of the purchaser’s (or authority’s) valuer to adopt conservative figures when calculating developed value and full figures when calculating development cost almost always results in his putting forward an undependably low opinion of site value, and on occasion it may even throw up a minus site value. Having observed on so many occasions the working out of these tendencies in terms of widely conflicting "valuations", the deep impression on the minds of the tribunal is that under arbitration conditions "… once valuers are let loose upon residual valuations, however honest the valuers and reasoned their arguments, they can prove almost anything" (First Garden City Ltd v The Letchworth Garden City Corporation (1966) 200 EG 123, 225, 365, 457, 507, 603, 714, 783). It is against this background and for this reason that the tribunal has reluctantly found itself compelled to reject the residual method when put forward as opinion evidence, unless there is no simpler method of valuation available.’

This criticism was adopted fully by the Singapore Appeals Board (which forms part of the High Court) in 1981 in Beauty Park v Urban Redevelopment Authority.

Before leaving valuation of the land, I should mention the special case where the acquisition or resumption is of a lease or leases where there has been sub-letting. In this case one takes the amounts of the rents and multiplies them by the years remaining of the term, making necessary adjustments for deferment. That gives the value to the claimant of the interest which he or she held.

I shall say nothing about this subject because the valuation depends entirely on the differing circumstances of each case.

Herein lies one of the few major differences between the compensation laws of England and Hong Kong. In England one can obtain compensation for injurious affection (harmful effect) even when there is no severance, eg for the noise and fumes caused by the traffic on a new road. In Hong Kong there has to be severance of the land resumed from the land retained, and the compensation will relate only to the loss due to that severance. The straightforward example is the greater difficulty which may arise from working land which in consequence of the resumption lies on the opposite side of a new road.

According to decisions in the English Lands Tribunal this loss or damage has to be measured as depreciating in value, not damages (Cooke v Secretary of State for Transport (1974) 229 EG 1117 and Cuthbert v Secretary of State for Transport (1979) 252 EG 921). I am not satisfied that this is correct in law and we need Court of Appeal authority on the point.

We call it ‘disturbance’ in England. Neither the 1845 Act nor any other Act made express provision for it. So the judges in the 19th century invented the fiction that it was part of the value to the owner of the land taken. Anyway in Hong Kong there is express provision for it. The law is exactly the same in Hong Kong and England. I shall call it ‘disturbance’ throughout, and indeed it is called ‘disturbance’ in Hong Kong.

Disturbance is very similar to damages at common law. It is often useful to look at the books on damages, eg MacGregor on Damages. Also, Lord Nicholls of Birkenhead sets out many of the general principles at the beginning of his judgment in Director of Buildings and Land v Shun Fung Ironworks [1995] 2 AC 111. For example, and obviously, the losses claimed must not be too remote in the same sense as at common law. There has to be a causal connection between the resumption and the loss in question.

To make by the way a special point which may be of limited application in Hong Kong, it has been held by the Court of Appeal in England in DHN v Tower Hamlets London Borough Council [1976] 1 WLR 852 that, where the trading company was in a position to control the subsidiary company in every respect, the Lands Tribunal could pierce the corporate veil and treat the group as a single common entity for the purpose of awarding compensation for disturbance. So the claimant is not defeated if the company conducting the business is different from the company which holds the lease of the land taken or resumed.

Throughout the claimant must behave reasonably, or as Lord Nicholls put it in Shun Fung: ‘It all depends on how a reasonable businessman using his own money would behave in the circumstances.’ The claimant has to mitigate his or her loss just as a plaintiff must do in damages. The claimant must decide whether to relocate his or her business or to accept total extinguishment of it. Provided the claimant acts reasonably in making that decision, he or she can claim compensation for relocating even though the cost is greater than it would have been for total extinguishment, or vice versa.

The claimant obtains compensation for losses incurred before as well as after the resumption. For many years the law in England was thought by the Lands Tribunal to be otherwise. However, that was put right by two Scottish decisions, the first of which was Smith v Strathclyde Regional Council (1980) 42 P&CR 397. The English Court of Appeal later followed these decisions and the law in Hong Kong is the same, as so held in Shun Fung by a majority. In other words, ‘due to’ in s 10(2)(d) has a causal, not a temporal connotation. One can incur losses due to an anticipated resumption.

In a case where the reasonable businessperson decides to relocate, recovery of all moving expenses, costs of setting up again and all incidental expenses are recoverable. But the claimant does not get compensation for betterment. If the claimant has to install a new plant and equipment at the new location, and if it was better than it was at the resumed sight, a deduction is made for betterment (Tamplins Brewery v Brighton County Borough Council (1971) 22 P&CR 746, a decision of a strong Lands Tribunal following Denning J in Harvey v Crawley Development Corporation [1957] 1 QB 485).

The claimant will also recover loss of profits for the period before the resumption, during the move and maybe after the move, provided always that he or she can prove that the losses were due to the resumption rather than some other cause. But the tax which the claimant would have paid on these profits, if he or she had earned them, is deductible (West Suffolk County Council [1957] AC 403 (HL)).

If the reasonable businessperson decides to accept total extinguishment of his or her business, they will recover loss of goodwill or loss of profits. In either case it is the quantum of loss suffered by the claimant which matters, not the market value. To assess the value of goodwill one ascertains the average annual profits, and then multiplies that by a number of years depending, first, upon what is done in the market according to the evidence. That is often around three years. However, the English Lands Tribunal has on numerous occasions adopted a ‘robust’ approach in view of the fact that it is the loss to the claimant which matters. A good example is Roy v Westminster City Council (1976) 31 P&CR 458, where a doctor actually lost no goodwill because the profession forbids the sale of a practice. However, the Lands Tribunal adopted a robust approach, did not apply any multiplier, and simply awarded him £11,000 (multiply by about 10 for inflation since then).

It may be that the annual profits would have increased after the resumption, in which case regard may be paid to such an anticipated increase. A neat case on this is Reed Employment v London Transport Executive (1978) 246 EG 233. There was a rebuilt underground station on land taken in Oxford Street, which included Reed’s employment agency. Reed had three other employment agencies in Oxford Street, and they sought to demonstrate by reference to the performance of these three during the following five years or so that there would have been increased profits at the site taken. I was in this case and we won every point of law and valuation, but the Lands Tribunal did not like the accountant’s evidence very much and so the claim was only partially successful. However, one of the important points won was that the principle in Bwlffa applies to compensation for disturbance – Bwlffa & Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426:

‘If the question goes to arbitration, the arbitrator’s duty is to determine the amount of compensation payable. In order to enable him to come to a just and true decision it is his duty, I think, to avail himself of all information at hand at the time of making his award which may be laid before him. Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark?’

So, although you must value as at the date of resumption you must pay regard, so far as disturbance is concerned, to all the evidence since.

By virtue of s 17(3) and (3A), the Lands Tribunal may award interest from the date of resumption at a rate having regard to the lowest rate payable from time to time by members of the Hong Kong Association of Banks on time deposits, which was held in Shun Fung to mean the lowest time deposit rate as so specified unless there were good reasons for fixing a different rate. It was actually fixed at the 7-day call rate plus 2%.

The Lands Tribunal has a discretion to award costs. It is wise for the party resuming to make a Calderbank offer as soon as possible after the proceedings in the Lands Tribunal are begun. It is named after the English case in which the propriety of such offers was upheld. It has now been upheld in Shun Fung also. If the sum awarded by the Lands Tribunal is less than the offer, the costs incurred by both sides up to the date of the offer are borne by the resuming party but thereafter the costs are borne by the claimant. But, if the sum awarded is more than the offer, the resuming party bears all the costs throughout.

Malcolm Spence QC