Hong Kong: Launching Arbitration For Land Premium Disputes

Last Updated: 28 November 2014
Article by Gilbert Kwok and Adrian Tang

On 24 July 2014, we issued a legal update on the Hong Kong Government's proposed two-year Pilot Scheme for arbitration on land premium (the "Pilot Scheme"). The Pilot Scheme was intended to streamline procedures for resolving land premium disputes with property developers by allowing a third party arbitral tribunal to rule on the appropriate amount of premium payable pursuant to applications for lease modification and land exchange.

The Pilot Scheme was officially launched by the Government pursuant to an Information Note dated 27 October 2014 (the "Information Note") and cases that meet the criteria for referral can now adopt the expedited procedure to help break the deadlock between the parties.

Launching the Pilot Scheme

The Pilot Scheme was originally set to launch in August 2014 following the presentation of the proposed framework to the Legislative Council ("LegCo"). However, it was met with opposition from lawmakers due to concerns over potential conflicts of interest arising on the part of third party arbitrators. As a result, the launch was delayed to facilitate additional modifications to the framework to address those concerns.

The new arbitration mechanism will serve as an alternative avenue for the Government and developers to resolve the common disputes arising from negotiations over the amount of premium to be paid, and we consider that it may go some way to addressing the underlying goal of increasing land supply for housing and other purposes in Hong Kong. However, the actual effectiveness of the Pilot Scheme can only be assessed after it has been in operation and a few arbitrations have been conducted under the procedural rules.

In this Legal Update, we will draw your attention to some key issues and provide our thoughts on a few practical matters. The main features of the Pilot Scheme are summarised in the Appendix.

Scope of arbitration The issues to be considered by the Arbitral Tribunal ("Tribunal") are confined to matters that determine the amount of land premium but questions relating to lease interpretation and/or government policy will be excluded from the scope of arbitration. The basis for this approach is that there may be sector-wide ramifications arising from a decision on such matters and an open court would be a better forum to resolve the issues. This renders the Pilot Scheme inapplicable to cases where the dispute pertains to a difference of opinion on the interpretation of a lease term and/or government policy, which nonetheless may affect the valuation of the premium. This limits the type and number of disputes that may be referred to arbitration.

We consider that, notwithstanding the Government's interest to set precedents for lease interpretation and government policy in open court, by removing the exclusion, Tribunals would be more holistically empowered to arbitrate cases relating to premium valuation and more disputes will be able to benefit from the expedited procedures under the Pilot Scheme. However, this can also mean that the arbitrators may need more time to consider the issues before making an award.

15% deposit and restrictions on alienation

The Government requires the developer to pay 15 percent of the Government's latest land premium offer as deposit, as well as to sign a Deed of Undertaking subjecting it to a restriction on alienation of the subject lot and/or on transfer of shareholding, upon agreeing to submit to arbitration under the Pilot Scheme. These "walking away provisions" are said to help bind the developer from defaulting on its agreement to arbitrate or failing to abide by the terms of the arbitral award.

There is a question of whether the deposit requirement is legally enforceable since it appears to be in the form of a penalty and not a genuine pre-estimate of the loss to the Government. This is particularly true since a majority of the sum will be paid to and held by the Government even before the determination of the actual premium. We consider that this may be an area of contention between the parties that necessitates further clarification.

Date of valuation

The valuation date for land premium under the Pilot Scheme will be the date on which the Tribunal is first constituted. Under the 'documents-only' procedure, the Tribunal is required to issue a final award within 10 weeks of the valuation date although the Tribunal may seek an extension of time of up to four weeks based on exceptional circumstances. Should further time extensions be required, the date on which each further extension is ordered will become the operative valuation date.

This is a material issue as market values tend to fluctuate over time and the longer time passes from the valuation date, the greater the risk that the assessment under the award will be superseded by events. Developers will be expected to commit to a valuation date without knowing the ultimate premium figure to be awarded by the Tribunal so there is a risk that market prices will become unfavourable between the valuation date and the date of the award. Of course, there is also potential for market prices to increase in the interim which would be advantageous to developers.

Arbitration Agreement and Procedural Rules

The Information Note included an appendix entitled "A summary on key features of an Arbitration Agreement", which constitute the terms of the pro-forma Arbitration Agreement under the Pilot Scheme. In line with usual practice, it is unlikely that the Government will agree to negotiate or amend these standard terms.

The arbitrations under the Pilot Scheme will be conducted subject to the Hong Kong Arbitration Ordinance, the IBA Guidelines on Conflicts of Interest in International Arbitration 2004 and the Domestic Arbitration Rules 2012 of the Hong Kong International Arbitration Centre ("HKIAC"). The application of the latter is subject to the modifications set out in the pro-forma Arbitration Agreement. The Government's modifications to these Rules are quite extensive and there may be some uncertainty as to precisely which of the other procedural rules will, by implication, be adopted. We would therefore recommend the parties to seek professional advice before entering into the Arbitration Agreement.

Disclosure of arbitrator's declarations

One of the notable modifications to the framework pursuant to concerns from LegCo is the ability of the Government to disclose the written declarations of the arbitrators. Disclosure was said, in the original July framework paper, to "inhibit prospective arbitrators from accepting the appointment, hence compromising the chance of the parties concerned getting the best candidates to serve as arbitrators" based on the feedback from stakeholder groups. Whether this will be the case remains to be seen, but arbitrators who accept appointments under this process will no doubt be subject to close scrutiny by LegCo and the public.

Considerations before signing the Arbitration Agreement

Prior to entering into the Arbitration Agreement with the Government, developers should carefully consider a number of issues before deciding whether arbitration under the Pilot Scheme is the best avenue for resolving the dispute at hand. Some of these include:

  • What is the scope of matters that could be included in the List of Disputes and would the Tribunal be in a position to consider these matters subject to the limitations of the Pilot Scheme?
  • Do the issues in dispute pertain to matters that can properly be resolved under a "documents-only" procedure, and do the supporting documents and records suffice to inform a suitable valuation assessment in the absence of oral hearings?
  • What is the status of the market and are there external factors that could lead to significant adverse fluctuations in market values up to the expected date of the arbitral award?
  • How will the 15% deposit and restrictions on alienation requirements affect your company's operations?
  • How will the HKIAC Domestic Arbitration Rules 2012 apply in the context of the arbitration?
  • Which suitable candidates meet the qualification requirements and could be nominated to the Tribunal?

Final thoughts

Upon reaching the trigger point of two appeals on land premium, either the Government or the developer is able to refer the dispute to arbitration. Furthermore, when the Lands Department issues its Binding Basic Terms Offer letter for the lease modification transaction, an Arbitration Agreement will also accompany the letter for the developer's consideration of the arbitration option. We recommended that developers should consult its professional advisors including legal and surveying representatives in advance of this stage to seek advice on whether pursuing arbitration under the Pilot Scheme would be in their best interests. Developers who wish to use arbitration should also begin to collect the necessary documents in anticipation of commencing the process.

Following the late October 2014 launch, we anticipate that the first few test cases to apply the arbitration mechanism under the Pilot Scheme may arise in the near future. It will certainly be interesting to see how the procedural rules are applied in practice and whether the Pilot Scheme will ultimately have the desired effect of unlocking land supply in Hong Kong

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions