The COVID-19 (“Coronavirus”, “virus”) has had a significant effect on Hong Kong with retailers, hoteliers and other tourism dependent-businesses experiencing significant declines in customers and revenue. As with SARS, we expect this to have a major impact on rental values, and in turn, rates, as demand plummets.
The Rating and Valuation Department (“RVD”) are currently preparing the new 2020/21 Valuation List, which will contain the new rateable values (“RVs”) upon which rates and (in many cases) government rent) will be charged. While RVD will likely acknowledge for the large part declines in rental values as a result of the Coronavirus, we do not anticipate that they will reduce rateable values. We believe this approach to be incorrect and, as a ratepayer, it is important to be aware of any potential remedies or means to mitigate tax exposure.
2020/21 General Revaluation
The 2020/21 rateable values will come into effect from 1 April this year. The RV is based on the annual rental value of a property, as of a specific valuation date. This valuation date is, for the purposes of the 2020/21 revaluation, 1 October 2019. RVD will therefore assess RVs with reference to rental values agreed at or around this valuation date.
The Coronavirus appeared at the end of January 2020, i.e. after the valuation date, and will therefore not have been known or anticipated at the October 2019 valuation date. As a result, RVD will typically take the position that any change in rental values subsequent to October is not relevant and therefore should not affect the 2020/21 RVs.
This was the position adopted by the department during the SARS outbreak in 2003. By the time the next revaluation had rolled around, of course, SARS had since died down and so the next year’s list also did not take into account any changes in value as a result. The very nature of viruses like SARS or the new Coronavirus means that they typically flare up in the first quarter of the year and are often gone by the arrival of warmer temperatures in spring.
Such timing therefore means that rates and government rent assessments will likely never be materially reflected within RVD’s valuations. This means that ratepayers must suffer the serious economic impact of these viruses while the government’s notional market value is never reduced to reflect this hardship.
The Coronavirus has undoubtedly caused significant business disruption in the retail and hospitality industry in Hong Kong due in large part to the substantial reduction of visitors travelling to Hong Kong. Yet the legal and valuation framework upon which rates are assessed in Hong Kong does not appear to provide any respite to this.
The Rating and Valuation Department is required by legislation (in the Rating Ordinance) to assess the rateable value by reference to the [rental] value as at the “relevant date”. There are, in fact, two relevant dates here. The first, as discussed above, is the valuation date, i.e. 1 October 2019, as relates to the present 2020/21 Valuation List. The second relevant date is 1 April 2020, which RVD must make reference to in determining the “state” of the property.
The question therefore is the proper meaning of ‘the state of the property’, as of this April date. The Rating Ordinance states that:
The rateable value of any tenement…shall be ascertained by reference to [1 October 2019] on the assumption that at that date…the tenement was in the same state as at [1 April 2020] …
It is to be further assumed that, on 1 October 2019:
…any relevant factors affecting the mode or character of occupation were those subsisting at [1 April 2020]…and the locality in which the tenement is situated was in the same state, with regard to other premises situated in the locality, the occupation and use of those premises, the transport services and other facilities available in the locality and other matters affecting the amenities of the locality, as at [1 April 2020].
We are therefore required to apply the market rent prevailing in October on the state of the property in April. Put another way, what is the value of the property, as it was on April, assuming that it was leased on October?
Interpretation & Application
The question of whether any intangible changes – such as the economic impact of the Coronavirus – between October 2019 and April 2020 may be taken into account in determining rateable value has been asked before.
The courts have held that ‘state’ is to be read broadly, and could therefore include intangible as well as physical advantages and disadvantages. Therefore, if the Coronavirus continues to have a major impact on the Hong Kong economy, and therefore rental values, into April 2020, it must be taken as a material factor affecting “the locality”, among other elements, of the tenement and consequently reflected in the rateable value.
This issue has been discussed in the Hong Kong courts. The Rating and Valuation Department has argued, successfully, that both physical and economic changes between the October date and the April date should be taken into account. Thus, the material decline in retail sales, as just one indicator, must be reflected in the rateable value.
It is therefore advisable that objections be submitted against any rateable values for premises that have been impacted by the recent viral outbreak. This could include not just obvious candidates such as hotels and serviced apartments, but also retail premises requiring subsidies from landlords or office premises unable to be used because of company policies requesting employees to stay home.
The full impact of the Coronavirus on the Hong Kong economy and, in turn, the property market, are as of yet not fully known. It is therefore important that the important prerequisite steps are taken by submitting statutory objections in April and May in order to preserve ratepayers’ interests and avoid overpayment of rates and government rent wherever possible.
This note is current as of February 2020 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/or experienced solicitors be consulted before doing so.
 Section 7A(2)(a), Rating Ordinance (Cap.116).
 Section 7A(2)(b) and (c), Rating Ordinance (Cap.116).
 Clement (Valuation Officer) v Addis Ltd  1 WLR 301.
 China Light & Power Co Ltd v Commissioner of Rating and Valuation  4 HKC 461.