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The Principles and Practice of Rating

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RV 35.4 66.5. 40. Case Study No.3 (cont.) Matters to consider : No rental evidence ... Court of Appeal (CA) confirmed LT decision of RV $2,000M ... – PowerPoint PPT presentation

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Title: The Principles and Practice of Rating


1
  • The Principles and Practice of Rating
  • in Hong Kong
  • by R. M. Aldridge
  • Senior Valuation Surveyor
  • Rating and Valuation Department

2
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

2
3
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.

3
4
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

4
5
  • 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

5
6
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.

6
7
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.

7
8
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.

8
9
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.

9
10
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.

10
11
  • July 1983 first designated date received from the
    Governor at a special ceremony

11
12
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.

12
13
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

13
14
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.

14
15
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.

15
16
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.

16
17
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.

17
18
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.

18
19
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.

19
20
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.

20
21
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.

21
22
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)

22
23
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.

23
24
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.

24
25
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

25
26
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.

26
27
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

27
28
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.

28
29
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.

29
30
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.

30
31
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.

31
32
Rating Valuation Practice Case Study No.1
  • Rating valuation of an upper floor flat in
    Hunghom

32
33
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

33
34
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?

34
35
Rating Valuation Practice - Case Study No.2
  • Rating valuation of a commercial unit in
    Wanchai

35
36
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

36
37
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?

37
38

Rating Valuation Practice - Case Study No.3
  • Cross Harbour Tunnel

38
39
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

39
40
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

40
41
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

41
42
Rating Valuation Practice - Case Study No.4
  • China Light and Power Cumulo Assessment

42
43
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

43
44
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

44
45
Rating Valuation Practice - Case Study No.5
  • Royal Hong Kong Yacht Club

45
46
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.

46
47
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 ?

47
48
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

48
49
Assessment of types of tenement
  • Domestic
  • Retail
  • Office
  • Industrial

49
50
Assessment of types of tenement
  • Hotels
  • Cinemas
  • Clubs
  • Utilities

50
51
Critical Analysis of the System
  • Advantages and current impact
  • Annual Revaluations
  • Restrictions on proposals
  • Appeals procedure
  • Plant and Machinery

51
52
Conclusion
  • Is it really cloud cuckoo land and not the real
    world ?
  • Thank you

52
53
Q A
53
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