For discussion
FCR(98-99)8
on 3 April 1998

ITEM FOR FINANCE COMMITTEE

CAPITAL WORKS RESERVE FUND
HEAD 701 - LAND ACQUISITION
New Subhead "Special Compensation Payments for Former Residents
of the Tiu Keng Leng Cottage Area"

Members are invited to approve the creation of a new subhead under Head 701 Land Acquisition, with a commitment of $574.08 million, for special compensation payments to certain former residents of the Tiu Keng Leng Cottage Area.

PROBLEM

In accordance with the High Court judgment on the Judicial Review (JR) proceedings relating to Tiu Keng Leng Cottage Area (TKLCA) delivered on 19 March 1998, we need to compensate certain former residents of TKLCA for damages in lieu of their loss of opportunity to reside indefinitely in the area and to continue to enjoy the low rentals associated with such residence.

PROPOSAL

2. We propose to offer compensation to eligible former residents of TKLCA in accordance with the High Court judgment delivered on 19 March 1998.

JUSTIFICATION

Judicial Review

3.In March and June 1996, 82 TKLCA residents applied to the High Court for a JR of the Housing Authority's issue of notices to quit the area and sought remedies and damages. The JR was heard by the Hon. Mr. Justice Sears on 25 and 26 June 1996. On 27 June 1996, Judge Sears ruled that -

  1. residents who lived in TKLCA prior to 5 June 1961 were entitled to damages. This was based on a promise in a written letter made by the then Commissioner for Resettlement that the residents could reside in the TKLCA indefinitely;

  2. eligible residents should be compensated for damages on their loss of opportunity to reside in TKLCA at low rentals; and

  3. the Government should discuss compensation arrangements with residents, failing which both parties could revert to the court for determination.

4. In accordance with the judgment, the Government offered a compensation package, on a without prejudice basis, to the JR Applicants in January 1997. Eligible households were offered a standard amount of compensation of about $190,300. The amount was derived by capitalising the monthly rental value of a typical TKLCA cottage at a yield of 8% for a period of 23 years which was the average life expectancy of TKLCA residents at the time. The proposal was rejected by the JR Applicants. The Government made an improved offer in June 1997 by re-assessing the monthly rental value and replacing the factor in the formula relating to "average" life expectancy of TKLCA residents to the life expectancy of the youngest eligible household member. Under the improved offer, eligible households would have received compensation ranging from $234,500 to $329,900, an increase of 23% to 73% as compared with the original proposal. Again, agreement could not be reached with the JR Applicants, and both parties agreed to refer the case to the court for determination.

The Judgment

5. The JR proceedings on eligibility and quantum of compensation before Judge Sears lasted from 9 March to 16 March 1998. The judgment was delivered orally on 19 March 1998. We anticipate that the written judgment will be available in mid to late April.

6. Judge Sears expressed the view that residents in TKLCA are not land owners and are only licensees with a licence to occupy the land under the terms of an occupation permit. On the matter of eligibility for compensation, the Judge essentially upheld the Government's argument that in order to be eligible, residents -

  1. must have been living in TKLCA on or before 5 June 1961; and

  2. must have been continuously living in TKLCA from 5 June 1961 until 4 April 1995, the date on which the clearance was announced.

7. As regards the quantum of damages for the loss of opportunity to reside in TKLCA indefinitely, Judge Sears essentially agreed with the Government's proposed formula for calculating damages, i.e. the capitalisation of the monthly rental value of each cottage at a given yield, as applied to the longest life expectancy among eligible household members. The Judge, however, adjusted slightly the level of the monthly rental value and the yield. He also determined that the actual size of a cottage (including ancillary areas) should be used as the basis for calculating compensation rather than the area stipulated on the occupation permit. The compensation formula then became the "actual size of cottage multiplied by the notional monthly rental multiplied by the capitalisation factor". The Judge also awarded redecoration expenses to each eligible household for the costs of redecoration works of their new homes and required that interests should be paid on the damages awarded. Specifically, the amount of compensation is based on -

  1. the size of the cottage which includes the actual covered area of each cottage and any ancillary area such as enclosed paved open spaces and porches;

  2. a notional monthly rental at a rate of $61 per square metre (sq.m.) (as opposed to $55 per sq.m. proposed by Government) for covered areas and $6.1 per sq.m. for ancillary areas;

  3. a capitalisation factor which is a combination of the estimated market rental yield of similar cottages in the area and the longest life expectancy among eligible members in a household. The Judge ruled that a rate of 7.5% (rather than the 8% proposed by Government) would be appropriate in calculating market rental yield;

  4. an award of redecoration expenses totalling $65,000 to be paid to each eligible household for the costs of basic redecoration works for their new homes; and

  5. a requirement to pay interest on the damages awarded at a rate of 10% per annum, assessed from the day of the residents' departure from TKLCA until the delivery of the judgment.

8. If an eligible household has more than one cottage, the Judge ruled that compensation should be paid for one cottage only, and if there are more than one eligible resident in a household, the compensation amount should be shared equally among them. Judge Sears also ruled that the legal costs of the eligible JR Applicants should be paid by the Housing Authority.1

9. Under the Judge's ruling, the amount of compensation for each eligible household will vary, depending on the size of the cottage and the life expectancy of the youngest eligible member in the household. To take an actual example quoted in the judgment, in the case of a household with its youngest eligible member, who is a female aged 38, occupying a cottage with a covered area of 50.2 sq.m. and ancillary areas of 123.31 sq.m., the estimated compensation would be -

$

(a)

Covered area



50.2 sq.m. x $61 x 155.4327152

475,966



(b)

Ancillary area



123.31 sq.m. x $6.1 x 155.432715

116,915



(c)

Redecoration expenses

65,000




Sub-total

657,881



(d)

Interest at 10% per annum for 24 months

131,576




Total

789,457

Government's Response

10. The Government appreciates the expedient determination on eligibility and quantum, which essentially upheld the spirit of the Government's proposed compensation proposals, albeit with some adjustments. We have consulted our legal advisors on the outcome of the judicial review and they have advised that the prospect of a successful appeal against the judgment is minimal. We, therefore, accept that the judgment on eligibility and quantum for compensation is not unreasonable given the unique circumstances that prevailed in the TKLCA. We now wish to move forward quickly in terms of an early settlement as this would be in the interest of both parties.Further Summonses11. During the trial on the JR proceedings, some 490 other former TKLCA residents submitted summonses to the court for compensation. The Housing Authority have assessed that some 115 are likely to be eligible for compensation. Judge Sears directed on 18 March 1998 that the Housing Authority should inform these residents by 22 May 1998 whether they are eligible for compensation. Unresolved cases will be heard and determined separately by the court on 15 September 1998.12. In order to ensure equity in treatment and to minimise further litigation against the Government on similar grounds (which will be costly and time-consuming) it is the Government's view that any compensation determined by the Court should be extended to other eligible residents, irrespective of whether they are parties to the JR proceedings. However, payment for compensation will be made to eligible residents in accordance with the following guidelines in order to protect the interests of the Government -

  1. eligible JR Applicants will be required to provide a discharge to the Housing Authority and the Government upon receipt of payment to the effect that the payment is in full and final settlement of their entitlement in terms of the judgment;

  2. eligible non-JR residents who are not among those cases to be heard in September 1998, will be required to provide a discharge of the Housing Authority's and the Government's liability for breaching the undertaking made in 1961 upon their receipt of payment; and

  3. eligible residents who may return to court in September 1998 will be required to sign a discharge of their claims against the Housing Authority and the Government upon their receipt of payment. If they do not accept the payment, we will arrange payment into court3 so as to minimise the risk of costs against the Government in future proceedings.

FINANCIAL IMPLICATIONS

13. Based on the judgment delivered on 19 March 1998, we estimate that about 730 households (including 58 JR Applicants) are eligible for compensation. The estimated cost of the compensation package is $574.08 million, made up as follows -



$million

(a)

Compensation for rental loss

387.46

(b)

Redecoration expenses of $65,000 for each household

47.45

(c)

Interest at 10% per annum for 24 months

86.98

(d)

10% contingency4

52.19




Total

574.08



BACKGROUND INFORMATION

14. The TKLCA forms part of the Tseung Kwan O Phase III New Town development. Its clearance will make available land for the construction of some 12 000 public housing and Home Ownership Scheme (HOS) flats as well as other infrastructural projects. The clearance of TKLCA was formally announced on 4 April 1995 and most residents moved out of TKLCA between April and July 1996.

15. About 6 500 TKLCA residents were rehoused either to public rental flats, interim housing flats or were offered priority to purchase HOS flats. In addition, taking into account TKLCA's unique background, cottage owners were given a special ex-gratia allowance of $7,000 per sq.m. for loss of their structures and of $59.63 per sq.m. for ancillary areas such as enclosed paved open space and porches. Domestic clearees were given an additional enhanced domestic removal allowance (ranging between $900 to $1,950) owing to TKLCA's poor accessibility. Business operators were offered business ex-gratia allowances and restricted tender for Housing Authority's estate shops or $73,000 in lieu. In March 1995, Finance Committee approved the payment of special ex-gratia allowances for the clearance of TKLCA amounting to $972 million.

16. We briefed the Provisional Legislative Council Panel on Housing on the matter on 30 March 1998. Members noted the judgment and expressed no objection to the proposed compensation.


Housing Bureau
March 1998


1. These costs (which are as yet unknown) will be provided under separate funding arrangements and will not be charged to Head 701 Land Acquisition.

2.Capitalisation factor of 7.5% yield and life expectancy of 45 years.

3.The payment procedure is designed to encourage a settlement by placing the risk as to legal costs on the residents who unreasonably reject Government's offer. If any resident fails to recover more than the amount paid into court by the Government in respect of his or her claim, he or she will be liable to pay Government's legal cost.

4.A provision for contingency is required as the estimated cost of the compensation package is based on an average life expectancy of 33 rather than the actual life expectancy for individuals which is unknown at this stage. Additional funds are also required for interest payable to eligible JR Applicants at the judgment rate (12.06% per annum) with effect from the delivery of the judgment.