High-rise ruling swells costs
A landmark judgment by the top court means developers must pay land premiums when demolishing houses for tower projects
Developers wishing to replace houses with high-rises will in many cases have to pay a land premium after a game-changing ruling from the city's top court.
The ruling could result in billions of dollars being added to the government's coffers.
In the landmark judgment yesterday, the Court of Final Appeal unanimously ruled that a high-rise building is not a house.
Many sites in Hong Kong are subject to government leases with restrictive covenants, such as those allowing "not more than one house" to be built on them.
In the past, the Lands Department would permit construction of residential towers on such sites without charging the developers a land premium.
The case that changed the law arose when developer Fully Profit (Asia) proposed in 2006 to tear down five houses and build a 26-storey block of flats on a site on Nam Kok Road in Kowloon City. The developer was appointed by the land owner, who was not identified.
But the director of the Lands Department insisted that, under the government lease dating from 1952, Fully Profit could build only houses on the subdivided site.
If the developer wanted to build upwards, the structure would no longer be considered a house and it would have to pay a premium, the government said.
"It is clear that the meaning of the word 'house' under the government leases must have reference to those characteristics of the houses which were actually standing at the time the government leases were entered into," the top court said yesterday.
That was also the approach the Court of First Instance took when Fully Profit applied to it in 2011 for a declaration that its plan to build the tower did not breach the lease. The court dismissed the application, ruling that a 26-storey block was not a house.
In January last year, the Court of Appeal ruled in favour of the developer. The Court of Final Appeal allowed the Lands Department's appeal.
Charles Chan Chiu-kwok, managing director at Savills Valuation and Professional Services, said many sites in Kowloon and residential districts in Hong Kong Island such as on Tai Hang Road would be affected.
"It is still a question of how much the developers have to pay," Chan said.
"We still have to wait for the Lands Department to define the meaning of 'house' [which would affect the evaluation of land premium]."
He said it would probably be at least HK$5,000 per square foot.
Chan expects developers to put redevelopments of old buildings on hold and suspend acquisitions of these buildings if the sites are subject to such leases.
A property consultant said: "There are a number of redevelopment projects in Kowloon City that have been put on hold as the Lands Department warned the development might breach the lease." He said sites owned by Henderson Land Development, Richfield Realty and local investor Lo Wah in Kowloon City would be affected by the judgment.
The consultant, who asked not to be named, said developers would reduce the amounts they offered to acquire old buildings for redevelopment, as they would now have to pay a land premium.
Chief Justice Geoffrey Ma Tao-li wrote in his 17-page judgment yesterday: "It is significant that the word 'house' should be used, rather than the word 'building' … Construed in this way, it is clear that the building that is proposed to be built on the five lots cannot be regarded as a house for the purposes of the restrictive covenants."