Savings Opportunities & Refurbishments

Savings Opportunities & Refurbishments 1400 788 Dwyer Lynch & Co
This note outlines potential opportunities to achieve significant savings in rates and government rent for any property undergoing refurbishment works.

Liability for rates are calculated as a percentage of rateable value, which is, in turn, based upon the rent that would be payable for the subject property in an imagined letting. Within this hypothetical leasing transaction are certain assumptions directed by law and valuation principles, including those concerned with the assumed physical state of the property.

This note concerns the assumptions that may or may not be made with reference to the subject property for rating purposes and its implications on the rateable value. This area of valuation is subject to constant change and the decision of Newbigin v Monk is just the latest update to this. However, this case does carry some important implications to ratepayers in Hong Kong.

Relevant Principles

Rating valuation in Hong Kong is largely undertaken by reference to the Rating Ordinance. The directions contained in statute are supplemented and interpreted through case law, either decided in the courts of Hong Kong or in other common law jurisdictions, such as Newbigin v Monk.

The rateable value of a tenement is the rent that may reasonably be obtained for a property, assuming that the landlord paid the cost of repairs sufficient to maintain that property.[1] Therefore, the hypothetical landlord is deemed to have undertaken all repairs necessary to maintain, say, an office unit, in a state conducive to use as an office unit.

In addition to the physical state of the property, the rateable value must also reflect any relevant factors affecting the mode or character of occupation as of the relevant date,[2] being the date that the new list comes into force (i.e. 1 April of each assessment year).

Therefore – taking again the example of an office – the rateable value must be the rental value of the property, assuming that any repair or maintenance works required to place or keep the premises in a physical state conducive to office use had already been done at the landlord’s expense. This is, of course, predicated on the assumption that the property was in the mode and character of occupation of an office as of 1 April of each assessment year.

Newbigin v Monk

This case was ultimately a question of whether an office undergoing refurbishment was to be valued as an office or as a construction site for rating purposes. It was held that this presumption of reality is to be given priority over the statutory direction to assume that the property is ‘in repair’. The main rationale for this decision was based on the distinction between the physical state of the property and the mode and character of occupation of the property: “the repair assumption…applies to matters affecting the physical state of the hereditament…but not to the mode or category of occupation of the hereditament”.[3]

The court decided that the correct approach was to:

  • Determine whether the property is capable of rateable occupation;
  • If so, determine its mode and character of occupation;
  • Then consider whether the property is in a state of reasonable repair for use consistent with that mode or category.[4]

In Newbigin v Monk the building under question was an office building undergoing renovation and improvement works incorporating a reconfiguration of the space.[5] The works undertaken included the removal of all internal elements, stripping out of the cooling system, internal and external plant, lighting and power installations, fire alarm system, suspended ceiling, sanitary fittings, masonry walls and partitions, among others.[6] On this basis, the mode and character of occupation of those premises were altered from “office and premises” to “building undergoing reconstruction” and duly given a nominal ($1) rateable value to reflect this.

Therefore, the court held that these works were sufficiently extensive so as to overcome the repair assumption. But more importantly, the nature and scope of these works had the effect of altering the mode and character of the occupation of these premises. Thus, what were once office premises were converted into something more akin to a construction site, or a “building undergoing reconstruction”.

Applicability to Hong Kong

There already exists authority in Hong Kong to substantiate the decision in Newbigin v Monk. The importance of the mode and character of occupation in rating valuation was stated clearly in the Lands Tribunal: “the tenement…is valued on the basis of its actual mode or character of occupation. The Commissioner must therefore assess the rateable valuation [sic] on the basis of a hypothetical tenancy but in relation to the actual physical tenement…the tenement to be valued must physically be of the same mode or character as the actual tenement.[7] The limits of the repair assumption to a reasonable or economical extent have also been clarified, as per Warren Chow.[8]

Thus, there exists clear theoretical groundwork, both in the UK and in Hong Kong, to support the main rationale of the decision in Newbigin v Monk. We observe four potential scenarios in which these principles may be applied to mitigate rates and government liabilities in Hong Kong. These are addressed in turn below.

Reconstruction & Revitalisation

The first type of works to be considered are those undertaken for a total rebuild or reconstruction of an entire building. For example, an industrial building being converted into office and retail use or an old factory being converted into a modern data centre. The common theme in these scenarios is the complete and comprehensive removal of existing provisions and physical features, save for the structure and envelope of a building. Thus, in the first example, every component of the building may be removed and replaced, save for the superstructure and the façade.

It is established law in Hong Kong that sites under construction have no value.[9] Thus, these such cases often follow a relatively easy and established set of valuation principles, insofar as the works undertaken render the premises in a state more akin to a construction site. The RVD’s usual approach to such cases involves a simple deletion of the relevant rates assessments from the date at which Buildings Department approved ‘structural’ works are first undertaken.


The second type of works that may potentially be impacted by this decision are less intensive renovation works. The general tests to be applied in determining whether physical works are beyond the scope of the repair assumption are based on the proportion of the total building that is affected by those works and whether the completed works would produce a property very different from that which existed prior.[10] Thus, the applicability of the Newbigin v Monk decision on renovation cases will likely be dependent upon the extent of the works being undertaken in relation to the building or property as a whole.

This second category of renovation cases most closely fits the facts considered in Newbigin v Monk by the UK Supreme Court. While it involved only the first floor of a three-floor building, the works on that first floor were deemed sufficient for the purposes of rendering the mode and character of its occupation to that of a building under reconstruction. Therefore, as applied to Hong Kong, it may be that portions of retail malls or office towers that are undergoing major renovation works with the view of improving or renewing the property may potentially be assessed at a nominal rateable value.


The third type of works involves a reconfiguration of a part or the whole of a property. This could involve, say, the repartitioning of a part of a retail mall, and could take the form of a lower intensity renovation scheme. The question that must be asked in such instances is whether the premises as they physical existed on 1 April would command a lower rent (and therefore a lower rateable value) by virtue of such reconfiguration works. This would turn, as with all other scenarios considered here, on whether such a state of disrepair could be ignored as per the statutory direction, or whether the reality principle would override that as to direct the valuer to consider the physical state of the premises in its actual state.

This third type of works is likely to encounter more resistance from RVD as it is unlikely such works would have the effect of altering the mode and character of occupation of the entire property. For example, where a portion of a floor of a retail podium was being reconfigured from ten shops to a single, large, shop, the mode and character of occupation would be turning from retail to retail. However, the nature of occupation would shift in between those two steps to something similar to a construction site, as partitions would be removed and other works undertaken to effect such reconfiguration efforts. The question would therefore become whether those reconfiguration works defeat the repair assumption.

Fitting Out & Reinstatement

These issues can be equally asked of the fourth type of works, simply involving fit-out or reinstatement works of individual premises. This could include a whole floor in an office tower undergoing a, say, two-month fit-out period to install necessary fixtures and fittings, as well as electrical and mechanical provisions. It could also include very large retail premises that must be fitted out and prepared for business occupation from a standard bare-shell state. In the latter example, the works required would be quite substantial but may not necessarily be to such a scope and extent as to alter the mode and character of occupation from retail use to “building undergoing reconstruction”.

The applicability of these principles on each of these four scenarios is ultimately a question of fact and degree which will need to be tested and probed in relation to RVD’s approach as time goes on. Needless to say, however, a level of success in the fourth and final type of works would mark a significant change to current rating policy, insofar as it would give rates and government rent breaks to all landlords and/or tenants who are fitting out or reinstating premises for the purpose of leasing transactions. Yet it is precisely for this reason that RVD will likely be the least willing to concede on this issue to such an extent.

Structural Alteration

As noted above, the material day that RVD must consider in assessing rateable value is 1 April of each assessment year. Therefore, the rates and government rent payable in this assessment year will reflect the subsisting physical state of the relevant property as of 1 April. However, it is often the case that certain works – whether renovation, reconfiguration or otherwise – are not undertaken so neatly as to conform to this 1 April date.

There exists a mechanism in the Rating Ordinance that states that the Commissioner may delete and, as necessary, reassess (by way of interim valuation) any tenement in which there has been any structural alteration.[11] This allows RVD to make changes to the existing list between assessment years. Therefore, if a building is, say, demolished in its entirety on 1 June, RVD will likely delete the assessment(s) for that building as it has simply ceased to exist.

However, the trigger for deletion is often not so clear-cut and the true meaning of “structural alteration” referred to in statute is vital. It was held in the Lands Tribunal that ‘”structural alteration” in section 24(a) of the Ordinance means any alteration made to the structure of the tenement so as to change its mode or character of occupation, and it does not depend on whether the stability or safety of the structure has been affected or not…I also see no reason to incorporate what is allegedly understood in the building industry in to the principles of rating valuation’.[12]

It has been RVD’s practice to, in fact, implement the opposite of this judgment and determine relevant deletion dates of tenements on building industry standards of structural works. For example, the removal of floor slabs or realignment of escalators will attract deletion while, say, a total conversion of an entire building from retail to office use (that does not require Buildings Department approval) may continue to be assessed at full market value.

Therefore, the challenge may lie in triggering this deletion and interim valuation to reduce rates and government rent liability. Current RVD practice is generally amenable to the first, and, to a lesser extent, the second type of works described above, in accepting that there has been a “structural alteration”. However, these deletions may be undertaken later than the commencement of works, if at all, and it is important that all potential avenues are explored.


There may be some opportunities to significantly reduce rates and government rent liabilities as a result of the legal and valuation principles restated in Newbigin v Monk. We believe that the potential routes to deleting and/or nominally assessing buildings or properties undergoing works merit further exploration in order to obtain clarity on the government’s position.

This note is current as of October 2018 and the legal framework and/or practice may have since changed. This note is solely for internal reference and advisory purposes only. Dwyer Lynch & Co is not qualified to provide legal advice. You should not act or omit to act by reference to or as a result of the contents herein and it is highly recommended that appropriately qualified rating surveyors and experienced solicitors be consulted before doing so.

[1] s7(2)(b), Rating Ordinance (Cap.116).

[2] s7A(2)(b), Rating Ordinance (Cap.116).

[3] Para 20, Newbigin (Valuation Officer) v S J & J Monk (a firm) [2017] UKSC 14.

[4] Para 22, ibid.

[5] Para 2, ibid.

[6] Para 3, ibid.

[7] Lai Kit Lau Mutual Aid Committee v Commissioner of Rating and Valuation [1984] HKDCLR 31.

[8] Warren Chow v Commissioner of Rating and Valuation [1977] HKLTLR 277.

[9] Commissioner of Rating and Valuation v Agrila Ltd and Others (2001) 4 HKCFAR 83.

[10] It was held in McDougall v Easington District Council (1989) 87 LGR that the extent of repair to be ignored is dependent upon whether the works go to the whole or substantially the whole of the structure or only a subsidiary part and whether the effect of the alterations were to produce a building of a wholly different character. In Lurcott v Wakeley and Wheeler [1911] 1 KB 905, it was held that repair is “restoration by renewal or replacement of subsidiary parts of a whole…renewal, as distinguished from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole subject matter under consideration.

[11] s24 and s25, Rating Ordinance (Cap.116).

[12] Kinco Investment Holding Ltd v Commissioner of Rating and Valuation [2006-07] CPR 419.

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