In the Chief Executive’s January 2014 Policy Address, Mr. Leung Chun-ying outlined the Hong Kong Government’s plan to streamline procedures for resolving land premium disputes in order to improve land supply for housing and other uses in the short to medium term. This involves the Government introducing a “Pilot Scheme for Arbitration on Land Premium” to facilitate swifter agreement with property developers on the issue of premiums payable for lease modification and land exchange. The Pilot Scheme was put forward for consideration by Hong Kong’s Legislative Council (LegCo) in July 2014 and has since been launched by the government in late October 2014.

Premiums in dispute

In Hong Kong, land premiums are payable when a property developer wishes to seek lease modifications/ land exchanges from the Government. Disputes over such land premiums tend to be quite prevalent since the sums demanded by the Government are generally not commercially acceptable to developers. While setting high premiums allow the Government to pre-empt any potential accusations of collusion with the private sector when the valuation assessment comes under scrutiny by LegCo, it also creates a strong disincentive for developers to pursue their development projects as it would mean their profits are eroded. As such, extensive negotiations and repeated appeals ensue. The failure of the parties to reach common ground often leads to stalled development projects and lands remaining idle for years until some commercial imperative provides impetus for the parties to agree. The introduction of an arbitration mechanism is therefore seen as a means to expedite the dispute resolution process and break the deadlock more readily.

The Government’s Pilot Scheme at a glance

The Government’s Pilot Scheme was officially launched on 27 October 2014 and will run for an initial period of two years. The arbitration mechanism will be subject to review over time and its application will be fine-tuned and broadened after the Government acquires the relevant experience. The general features of the Pilot Scheme include:

Trigger mechanism

Both the Government and the developer is entitled to refer a land premium dispute to arbitration after a substantial exchange of views (i.e. after at least two appeals by the developer) and no agreement could be reached. This allows for the issues in dispute to be crystallised following a substantive exchange of information.

Case priority

Should the land premium arbitration case load exceed the capacity of the Lands Department, the Department of Justice and the available arbitrator candidates, cases will be prioritised in accordance to higher yields (i.e. gains in flat numbers or non-residential gross floor area); wider premium gaps and lesser complexity of issues in dispute.

Scope of arbitration

The matters to be arbitrated will be confined to the amount of premium and any disagreement on fundamental issues such as lease interpretation (e.g. interpretation of “industrial” use) and government policies must be resolved by way of civil proceedings in court.

Tribunal composition and appointment

Land premium arbitrations will be decided by an Arbitral Tribunal of three arbitrators to be led by a nominated President to be agreed by the parties. Other members of the Tribunal are to be nominated by each of the parties respectively to be agreed by the other party. The President of the Tribunal must be a legal professional with at least 10 years post-qualification experience, while the other members should comprise of valuation professionals with at least 10 years of experience in land matters and professional valuation. The appointed arbitrators need not, however, hold any arbitration qualifications. The Hong Kong International Arbitration Centre (HKIAC) will be the Appointing Authority in the event of any disagreement.

Safeguards

Arbitrators will be required to make a written declaration as to their independence and impartiality, as well as being subject to an ongoing duty of disclosure for any conflicts of interest that may be relevant. Such declarations may be disclosed by the Government as its discretion. Anti-collusion provisions will also be included in the Arbitration Agreement to prohibit unauthorised discussions outside of the arbitral proceedings, and arbitrators will be deemed ‘agents’ in the context of Section 9 of the Prevention of Bribery Ordinance and will be liable for offences under the legislation in the event of misconduct.

Walk away provisions

To deter developers from walking away during the arbitration proceedings or after receiving an arbitral award, they will be required to execute a Deed of Undertaking which stipulates their agreement to restrictions on alienation of the subject lot and on transfer of shareholding (if the lot is held by a company) until the execution of the relevant lease modification/land exchange. The developers must also pay the Government 15% of the premium last assessed by the Government in the event the developer purports to discontinue the arbitral proceedings or fails to execute the lease modification/land exchange at the premium under the arbitral award.

Date of valuation and timeframe

The valuation date will be the date when the Arbitral Tribunal is first constituted. However, to prevent the assessed land premium to be too out of date, the parties will agree on a suitable timeframe for an award to be handed down on a case-by-case basis (i.e. generally expected to be around 10 weeks after constitution for ‘documents only’ proceedings but longer if hearings are required). Extensions of time may be allowed by agreement of the parties, and the valuation date may be adjusted accordingly to reflect an unforeseen extension.

Arbitral award

The Tribunal is able to decide on a suitable land premium amount by consensus or majority vote and is not confined to any pre-determined upper or lower limits. The details of the arbitration will be kept confidential in view of the commercially sensitive nature of the information involved, although the Government reserves the right to disclose information to the public about concluded cases.

Costs

Each party will be required to bear their own legal and other costs while the costs of the arbitral proceedings (i.e. the fees and expenses of the Tribunal) shall be borne by the parties in equal shares unless the Tribunal within its discretion deems a different allocation is appropriate.

Appeal

An arbitral award in a land premium dispute will be subject to the same court appeal mechanism as defined in the Arbitration Ordinance (Cap 609).

Comment

The Pilot Scheme will undoubtedly face a number of hurdles in the process of implementation. For example, there is the question of whether the Government will succeed in obtaining developer buy-in that arbitration represents a commercially viable solution to premium disputes. Also, the issue of enforcement and appeals to the arbitral award will certainly be matters of contention. While the performance of the Pilot Scheme is unknown at this stage, the first test case will be closely scrutinised by the industry and will shed more light on the actual effectiveness of the arbitration mechanism in practice. If the aforementioned complications could be overcome, it is anticipated that the mechanism could serve to expedite the resolution of less complex land premium disputes. For more complex cases, particularly those involving disputes over fundamental issues such as lease interpretation and government policies, the parties will nevertheless need to resolve the matters via court proceedings.

While the Domestic Arbitration Rules of the HKIAC are said to apply to arbitrations under the Pilot Scheme, the proforma Arbitration Agreement provided by the Government includes extensive modifications to these Rules. As a result, there may be some uncertainty as to precisely which of the other procedural rules will, by implication, be adopted.

Furthermore, since a List of Disputes is intended to be annexed to the Arbitration Agreement, parties should take care when setting out and agreeing the issues as this will determine the scope of the Tribunal’s jurisdiction and it may be difficult to subsequently amend this list. Developers are advised to seek independent legal advice to better protect their interests.