This appeal concerns the ascertainment of the Government rent payable by Best Origin Limited (“Best Origin”) in 1997-1998 under the Government lease of Inland Lot No.8874 on Electric Road. As at the valuation date, the tenement was a development site undergoing the early phase of the development. Rents payable under Government leases of land in course of development or redevelopment are calculated by reference to its rateable value. Under the Rating Ordinance, a building site is not a rateable tenement and therefore does not attract a liability for rates. However, section 2 of the Government Rent (Assessment and Collection) Regulation changes this position by providing that when ascertaining Government rent, a building site should be treated as if it were a rateable tenement. The rules as to the ascertainment of rateable value are set out in sections 7(2) and 7A(2) of the Rating Ordinance, which together create a hypothetical test. The test requires the rateable value to be fixed based on the assumption that the tenement is subject to a yearly tenancy. It is calculated by reference to the rent of the yearly tenancy; the tenement will be assessed as it is on the valuation date, having regard to all the intrinsic quality and characteristics of the site which may affect the rental value. In 2001, Best Origin was one of the 59 developers which challenged the Director of Lands’ assessment of rent based on a substantial rateable value. They succeeded in the Court of Appeal, but the decision was reversed by the Court of Final Appeal (“CFA”) in the case reported as Commissioner of Rating and Valuation v Agrila Ltd and others (2001) HKCFAR 83. The challenge failed, and as a result of the CFA judgment, the Lands Tribunal was to assess the rateable value of the land on the basis that its mode or character of occupation on the valuation date was that of a development site. The Lands Tribunal ascertained the value by treating development potential as an intrinsic characteristic of a development site, which would generally result in a higher value as compared with a tenement lacking development potential. Best Origin appealed to the Court of Appeal and subsequently to the CFA on the basis that the Lands Tribunal made a number of errors of law in understanding and applying the principles relating to the assessment of rateable value. Both appeals were dismissed. In particular, CFA agreed with the reasoning of the Lands Tribunal except on two points, which are immaterial to the decision reached by the Lands Tribunal. Best Origin argued that the Lands Tribunal should not have taken into account development potential of the site. This error led the Lands Tribunal to assess what the premises may be capable of being developed into and then used for in the future, instead of reflecting the tenement as it is on the valuation date.It further criticized the Lands Tribunal for disregarding the fact that no developer in the real world would take up a site for development based on a yearly tenancy; it was contended that had this fact been properly considered, the resulting rateable value would have been nil or nominal. In response, the Government argued that it is in line with authorities for the valuer to take into account the prospect of the development. Further, Best Origin’s proposition that a lack of demand for a yearly tenancy in the real world would lead to a nil valuation was not supported by case law, and would enable occupiers of property for uses requiring long-term leases to escape liability for rates and Government rent. In essence, the CFA had to determine the implications of the fact that the mode and character of the occupation of the site was that of a development site. This involved an exercise in statutory construction of the relevant provisions and hypotheses. The CFA remarked that statutory hypotheses should be applied in a practical and flexible way without over elaboration beyond its statutory purpose. The CFA held that the starting point is to recognize that an active development site has an intrinsic characteristic of change towards completion of the development, where the site will grow in its physical appearance and value. Hence, the Lands Tribunal was correct to take into account the prospect of successful and profitable development, which is an intrinsic character of a development site during the course of construction. The CFA recognized that for many years courts have assessed the rateable values of tenements for public utilities such as sewage system and portion of railway lines, which no statutory undertakers would contemplate taking on a yearly tenancy. When dealing with these cases, the yearly character of the hypothetical tenancy should be interpreted as indicating an indefinite duration unless terminated by notice. Such tenements are generally valued on the contractor’s basis method of valuation by reference to an appropriate yield on their capital cost. The CFA confirmed that this approach should be extended to development sites for the purposes of assessing Government rent, taking account of the cost of the site but not the cost of the construction work. Therefore, the Lands Tribunal rightly concluded, and the Court of Appeal and the CFA have affirmed, that while a development site is not immediately productive of income or profits during the course of construction, it is nevertheless of real value to the occupier and has a significant rateable value for purposes of Government rent.