Getting a third opinion

Getting a third opinion

Pilot scheme for arbitration on premium to speed up development

Developers and surveying experts have cautiously welcomed the government’s latest proposal to speed up the often tiresome process of land administration for private development projects which it hopes will get more flats on the market sooner.

In his second policy address last Wednesday, Chief Executive Leung Chun-ying said the government would implement a pilot scheme for arbitration on land premium.

Answering questions in the Legislative Council later on Friday, Leung said this was a new initiative on the part of the government although it occupied only one sentence in the address.

He pointed out the ball still stay lay at the developer’s feet with regard to initiating the process of lease modification.

“The government cannot initiate the process for the developers,” Leung said.

Lands Department generally demands payment of a premium for modification of a government lease to allow development, say on agricultural land.

Other examples of lease modification include increasing the building height, change of use and increase in gross floor area.

A land exchange would also require payment of a premium.

Usually, premiums are calculated on the value of the land using residual valuation on a before-and-after basis.

As can be expected when a developer deals with the government, the process of agreeing a premium can take months, if not years, to complete.

“If the two sides cannot [see] eye to eye on the question of the level of premium payment, then we use arbitration to determine that figure,” Leung, a registered general practice surveyor, said.

The government however has yet to announce the fine detail such as whether the scheme would it be voluntary or mandatory, the threshold of premium at which a dispute goes to arbitration, the choice of arbitrator and any appeal mechanisms.

According to Lands Department records, in 2013 for those lease modifications that required payment of premium, the total premium agreed during the year was HK$3.12 billion.

They ranged from as high as HK$1.33 billion for a commercial building at Kowloon Bay down to a mere HK$1,000 for residential development at Shau Kei Wan.

The Hong Kong Institute of Surveyors welcomed the new initiative saying it was worth careful consideration.

“Concerning this proposal and its details, the government should consult the [surveying] community as soon as possible,” the institute said in a press release last Wednesday.

Swire Pacific initially was unsuccessful in arbitration over a dispute on land premium with the government for the office portion of its Citiplaza project in Taikoo Shing  (Danny Chung)

Swire Pacific initially was unsuccessful in arbitration over a dispute on land premium with the government for the office portion of its Citiplaza project in Taikoo Shing (Danny Chung)

Asked for his views by a local television news channel, chairman of the executive council of The Real Estate Developers Association of Hong Kong Stewart Leung Chi-kin proceeded to suggest a convoluted way of doing the arbitration.

Leung said the developer and Lands Department should each appoint their preferred arbitrator to assess the premium and then compare notes with third arbitrator jointly appointed by both parties.

For one veteran former government surveyor, the latest proposal was nothing but “an old chestnut”.

“Whilst the government has generally been sympathetic to the use of arbitration, remember though that they won handsomely when it was used in Swire’s dispute a few years back,” said Roger Nissim adjunct professor at the Department of Real Estate and Construction at the University of Hong Kong.

In January 2000, Swire Pacific announced it had received a demand from Lands Department for premium of HK$4.5 billion for the office towers at Citiplaza in Taikoo Shing.

It subsequently had to include a sum of HK$4.25 billion for premium payment in its year 2000 annual results after losing an arbitration case in January 2001.

“It is the developers who balk at its use because once they enter into the process they are bound to accept the outcome, win or lose,” Nissim said.

Despite failing to convince the Court of Final Appeal to grant leave to appeal on a point of law, the dispute ended happily for Swire when it announced in August 2005 that it had finally agreed a lower premium of HK$2.9 billion with the government although the company had to pay interest of HK$658 million on the sum.

It is not clear whether the pilot scheme would apply to cases where the developer has already completed the development but the premium has not been agreed beforehand such as in the Swire case.

Usually, developers must agree and pay the premium to complete the lease modification prior to development.

“With private negotiation, they can always withdraw and come back again when the market conditions favour them,” Nissim said.

Danny Chung



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