Oriental Generation Ltd and Others v. Luk Yung and Others
Read the full judgment text of LDCS 4000/2013 on BabelCite. This Lands Tribunal judgment was delivered on 29 February 2016 before His Honour Judge KW Wong, Presiding Officer and Mr Lawrence PANG, Member.
Land law – compulsory sale – Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 – Order for sale – Building Management Ordinance – common parts – valuation evidence – direct comparison method versus investment method – 'hope value' – expert evidence – disciplinary proceedings against expert. KTM is a 7-storey commercial/residential estate at 53, 53A, 55 and 55A Kwun Tong Road with occupation permit issued on 27 April 1962, comprising 16 shops, 288 residential units and 100 car parking spaces. The applicants owning more than 80% of the undivided shares in each of the four lots made application for compulsory sale under section 3(2) of the Ordinance read with the Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, which lowered the threshold to 80% for lots with buildings over 50 years old. The Tribunal held that the applicants satisfied the 80% threshold as at the date of the application. On EUV of the residential and shop units, the Tribunal accepted the methodology of Mr Charles Chan of Savills over Mr Keith Siu (R22, R33 and R34) and Ms Sat Wai Ling (R40/R44), adopting direct comparison using market comparables with appropriate adjustments. The Tribunal refused to add R13's adjoining toilet area to the saleable area of his shop because the 1963 Assignment granted only a non-exclusive 'right' to use the toilet, not an exclusive right to possession, occupation or enjoyment, applying the Court of Appeal decisions in The Incorporated Owners of Goa Building v Wui Tat Company Limited and The Incorporated Owners of Shatin New Town v Yeung Kui, and the BMO. As regards the 100 CPS, the Tribunal found that most of the covered CPS had been converted into 'Garage CPS' by R22 in breach of the user clause in the Government Leases, attracting warning letters from the Lands Department dated 26 January 2010 and 23 July 2010, and a forbearance fee of approximately $1,000,000. The Tribunal rejected Mr Siu's investment method of valuation, which capitalised pre-enforcement (2009/2010) rentals using a retail yield plus a notional 1-2% risk premium, as inherently unreliable and as producing irrational and anomalous results, preferring the direct comparison method of Mr Chan. The Tribunal further rejected Ms Sat's proposed 'hope value' reflecting prospects in Town Planning Board interpretation proceedings, applying Spirerose Ltd v Inland Revenue Commissioners, on the basis that no evidence of realistic prospect of success had been adduced. The Tribunal's assessment adopted Mr Chan's RDV of $2,293,000,000 (agreed with Ms Sat), with developer's profit at 15%, marketing cost at 3% of GDV, and rejected the 2% hope value uplift suggested by Mr Mak. The Tribunal also rejected the argument that Mr Chan's expert evidence should be rejected or given reduced weight because of disciplinary action against him by the Disciplinary Board of the HKIS, holding that the disclosure duty in HKSAR v Lee Ming Tee applies primarily to criminal cases, and that under section 58(1) of the Evidence Ordinance and section 10(6) of the Lands Tribunal Ordinance, the Tribunal had discretion to admit and attach weight as it considered appropriate. Application granted with order for sale and auction reserve price to be determined in accordance with the Tribunal's assessment.
Legal issues: Sufficiency of ownership threshold for compulsory sale · Methodology for valuing covered car parking spaces (CPS) · Treatment of the toilet area in R13's shop · Inclusion of 'hope value' in redevelopment value · Admissibility and weight of Mr Chan's expert evidence given his disciplinary history
Outcome: Application for compulsory sale granted; order for sale made in respect of all undivided shares in the Lots, with auction reserve price to be determined on the basis of the EUVs and RDV assessed by the Tribunal.
Cites 24 cases
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LDCS 4000/2013 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LAND COMPULSORY SALE APPLICATION NO. 4000 OF 2013 ___________________
___________________ Before:His Honour Judge KW WONG, Presiding Officer and Mr Lawrence PANG, Member, of the Lands Tribunal Date of Hearing: 2-6 March,9-13 March 2015, 27-30 April 2015, 12 & 13 May 2015 Date of Submission on Admissibility of Expert Evidence: 28 December 2015, 5 January 2016 Date of Judgment: 29 February 2016 ___________________ J U D G M E N T 1.This is an application for compulsory sale of all the undivided shares in:
which are hereinafter collectively referred to as “the Lots” and individually a “Lot”, for the purpose of redevelopment pursuant to Section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”). The application was made on 21 February 2013. 2.Currently erected on the Lots are 4 rectangular blocks of 7-storey commercial/residential buildings standing parallel to each other and perpendicular to Kwun Tong Road. The 4 blocks, are respectively known as 53, 53A, 55 and 55A of Kwun Tong Road:
3.Served by six common staircases, each block has 4 shops fronting Kwun Tong Road, 16 covered car parking spaces (“covered CPS” and generally “CPS”) on the ground floor plus 12 residential units on each of the 6 upper floors. The 4 blocks together with 36 uncovered CPS spread along the boundaries of the site (except the shop front) form an estate development known collectively as the Kai Tak Mansion (“KTM”). Thus, KTM comprises altogether 16 retail shops, 288 residential units and 100 CPS of which 64 are covered and 36 uncovered. The occupation permit of KTM was issued on 27 April 1962, thus it is over 50 years old. 4.KTM is situated in the Kwun Tong/Ngau Tau Kok region abutting Kwun Tong Road, a busy 12-lane highway along which some 40 bus routes running. It is sandwiched between an 8-storey primary school and a children playground on its 2 sides. At its back there is 10-m wide slope beyond which stands the former Royal Air Force (“RAF”) Headquarters Building and Officers’ Compound (now occupied by the Hong Kong Baptist University Academy of Visual Arts) which are both 2-storey high and Grade 1 listed buildings. Along Kwun Tong Road and to the further northwest of KTM, there is a single storey Grade 3 listed building – the Sam Shan Kwok Wong Temple. Further away from the temple is a public housing estate – Ping Shek Estate which is with limited retail activities. At the other end of KTM next to the aforementioned primary school, there is a footbridge. This is the only road crossing facility from the KTM to the other side of this part of the Kwun Tong Road which is 12-lane. Across the road, there is a public housing estate known as Kai Yip Estate. It is also with very limited retail activities. Active Respondents 5.Each Lot is governed by one Deed of Mutual Covenant according to which each lot is allotted 82 undivided shares so that:
6.The first 3 applicants (hereinafter referred to A1, A2 or A3 where necessary), being the majority owners of the Lots took out the present applicationon 21 February 2013 (“the Application”). At that time, there were 38 respondents (hereinafter referred to R1, R2, R3 etc as the case may be) as follows:
7.Apart from interest in CPS, A1, A2 and A3 altogether owned at the commencement of the Application:
8.A1 further owned 16 CPS (Nos. 1 to 14, 18 & 25), being allotted in total 16/100 undivided parts of:
9.Accordingly, ignoring the complication of calculating the exact undivided share percentage in each Lot attributable to the 16 CPS owned by A1, at the time of filing of the Application, the A1, A2 and A3 as a whole owned more than 80% of the undivided shares in each of the Lots. 10.Since the Application, there were the following developments resulting in some new respondents being joined and proceedings against some other respondents being discontinued:
11.In addition to the CPS-related respondents, the other outstanding respondents consist of the following:
12.Among the outstanding respondents:
13.In furtherance of the issues in dispute, out of the 7 represented respondents (including R13):
14.The applicants have filed the following documents in support of the Application:
15.Having set out above the background, in short, the proceedings are now being fought between the following 4 main groups, namely,
16.Attendance of R35, R36, R37, R38 and R45 has been excused by order of Tribunal dated 27 February 2015. R27 filed no objection and his attendance was also dispensed of. Section 3 of the Ordinance – Ownership of the Applicants 17.Section 3(1) of the Ordinance requires the applicants to have not less than 90% of the undivided shares in a lot before it can make an application. 18.Section 3(2) of the Ordinance also states that an application under subsection (1) may cover 2 or more lots where the majority owner owns not less than the percentage of the undivided shares in each lot specified in subsection (1). 19.Section 3(5) of the Ordinance states that the Chief Executive in Council may, by notice in the Gazette, specify a percentage lower than the percentage mentioned in subsection (1) in respect of a lot belonging to a class of lots specified in the notice. 20.The Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice made under section 3(5) of the Ordinance (“the Notice”) was gazetted on 22 January 2010 and tabled at the Legislative Council meeting on 27 January 2010. It came into operation on 1 April 2010. Section 3 of the Notice lowered the threshold for compulsory sale, insofar as it is applicable, from 90% to 80%. Section 4(1)(b) of the Notice specified one of the classes for the purposes of Section 3 as “a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (which is the date of the Application)”. Since the occupation permit in respect of KTM was issued[5] more than 50 years as at the date of Application, KTM is covered by the Notice and the applicable percentage is 80%. 21.When the Application was commenced by A1, A2 and A3 on 21 February 2013, they altogether owned on average of more than 80.0% of the undivided shares in each of the Lots. The applicants were therefore entitled to make the Application under section 3(2) of the Ordinance. EUV as at 1 December 2012 22.Under section 3(1)(a) of the Ordinance, the applicants have to produce a valuation report pursuant to Part 1 of Schedule 1 to the Ordinance, prepared not earlier than 3 months before the date of the Application, setting out the assessed market value of each property on the Lots:
23.The Application was accompanied by an valuation report dated 18 January 2013 containing assessments of the values of all units (which are conveniently termed as the existing use values, the “EUV” of all units) in KTM on the Lots as at 1 December 2012 (“Application Report”). 24.The Application Report was prepared not earlier than 3 months before the date of the Application, i.e. 21 February 2013 and is therefore, in our view, in compliance with section 3 of the Ordinance. 25.However, under Section 4(1)(a) of the Ordinance,
26.In the Application Report of 18 January 2013, Mr Chan explained the method of valuation and the process of his assessment to arrive at the EUV of each unit of the Buildings. 27.In his EUV valuation of the domestic units of the Buildings, Mr Chan adopted the following methodology :
28.Similar method was used by Mr Chan in assessing the EUV of the ground floor shops:
29.Similarly, Mr Chan adopted the same method as above in coming up with the CPS’s EUV:
30.Mr Chan updated the EUV of all KTM’s units by his Supplemental Report of 7 August 2014 when more units in KTM were available for inspection and by reference to the updated property index prepared by the Rating and Valuation Department (“RVD”). In this supplemental report, Mr Chan basically repeated the same exercise which he did in the Application Report. R2: Apartment 8, 3/F, Block 1 (No. 53 Kwun Tong Road) 31.Mr Chan assessed the EUV of R2’s unit at Apartment 8, 3/F, Block 1 in the sum of $3,200,000 as at 1 December 2012 excluding redevelopment potential. 32.Madam Ip Wai Har (“Madam Ip”), one of the registered owners of this unit, appeared on behalf of R2. She raised her concern that according to the Private Domestic Price Index published by the RVD, the prices of domestic units had increased from about 90 in early 2006 to some 283 in 2015[6] (i.e. 3.14 times) but Mr Chan’s assessment had not reflected the change. Nevertheless, Madam Ip appears to have failed to appreciate that valuation of properties should best be determined by reference to comparables instead of to a particular index which is at best an average which may not be applicable to every property particularly when there has been a substantial lapse in time: see also §60 below. 33.Madam Ip also referred the Tribunal to an unsuccessful attempt of a joint sale for redevelopment of KTM in 2007 when she was advised by Centaline Surveyors Limited, a subsidiary of the Centaline Group that her unit could fetch about $4,800,000 or more. We consider she is totally misconceived because the said advice has taken into account the prospect of redevelopment which is not in compliance with the statutory requirement under Part 1, Schedule 1 of the Ordinance[7]. In addition, as correctly pointed out by Mr Chan in response, the reference date of the EUV should be 1 December 2012 instead a date in 2015. 34.Madam Ip tried also to refer to certain sales in Sheung Shui in the New Territories and suggested that the transaction prices were higher than Mr Chan’s assessment of her unit. Notwithstanding Sheung Shui being a wholly different locality from the Ngau Tau Kok or Kowloon Bay where KTM is situated, Madam Ip, however, could not offer any specific sales information which might be comparable to her unit. As correctly pointed out by Mr Chan, the price range in Sheung Shui could vary considerably depending on the age, facilities and quality of the premises. Without further information and/or reasoned analysis we are afraid the mere assertion that one’s own unit is more valuable than others is of little help to one’s case. 35.In our view, Madam Ip could not provide any useful comparable transaction that can upset Mr Chan’s assessment. R8: Apartment 8, 2/F, Block 3 (No.55 Kwun Tong Road) 36.R8, being the registered owner of Apartment 8, 2/F, Block 3, appeared in person. His submission, in a nutshell, is that he considers his unit assessed at $3,260,000 undervalued. However, it appears to the Tribunal that he fails to understand the difference between EUV and RDV. Most of his comments or challenges focused on the redevelopment value of KTM instead of the EUV i.e. a valuation without taking into consideration of redevelopment potential. The current value of KTM for redevelopment which he concerns most is normally termed the redevelopment value (“RDV”). It will be dealt with in the later part of this judgment when we proceed to determine the auction reserve price of the Lots pursuant to Schedule 2 to the Ordinance after satisfying that an order for sale should be granted under section 4(2) of the Ordinance. R9: Apartment 8, 4/F, Block 3 (No. 55 Kwun Tong Road) 37.R9 is the registered owner of Apartment 8, 4/F, Block 3. Mr Chan attributed an EUV of $3,130,000 to his unit. He remarked that Mr Chan had not made sufficient adjustment to his unit respecting location by reference to the San Po Kong comparables. It is R9’s case that KTM is located in an easily accessible location of Kowloon abutting the 12-lane Kwun Tong Road with some 40 bus routes running. Mr Chan agreed that transport might be convenient when the traffic is southeast bound but would be otherwise if someone was travelling in the opposite direction. The aforementioned footbridge over the 12-lane highway is the only road crossing facility of the region. 38.Mr Chan explained that he had already made an upward adjustment of +5% for location having regard to, for instance, the price level of domestic units in Tak Po Garden along Kwun Tong Road, though the latter was further southeast and was more into the centre of Ngau Tau Kok, and is considered at a more convenient location than KTM. We accept Mr Chan’s explanation. 39.R9 queried why Mr Chan did not refer to comparable transactions in other part of Ngau Tau Kok, say along Ting Fu Street. Once again, like the case of R2, R9 could not produce at all any comparable transaction that may cast doubts on Mr Chan’s assessment. 40.R9 also queried Mr Chan’s adjustment for noise impact. It is noted that there are 12 units per floor for each of the 4 rectangular blocks of KTM. One of the short ends of each rectangular block is abutting Kwun Tong Road. The 12 units in each block are arranged in 6 rows, each with 2 units with apartment nos 1 and 2 nearest to Kwun Tong Road and nos 11 and 12 the furthest. The Reference Domestic Unit is situated at the third row from Kwun Tong Road. Mr Chan adopted an adjustment factor of -10% for noise effect for the first row and -5% for the second row. However, Mr Chan adopted a nil adjustment for the fourth row where R9’s unit is situated, and only a blanket rate of +3% for units on the fifth and sixth rows. R9 suggested a linear adjustment be adopted instead of the non-linear progressive adjustment now adopted by Mr Chan. Accordingly, said R9, his unit should receive at least some upward adjustment as it was further away from Kwun Tong Road which is the main source of noise than the Reference Domestic Unit. We are of the opinion that the drop in noise intensity is not proportional to distance in a linear relationship, but rather, to the square of the distance. Accordingly, the closer to the noise source the more severe that one may be affected. On the other hand the difference will become less significant if one is moving further away from the source. We accept Mr Chan proposed manner of adjustment for noise. 41.R9 also suggested that according to the information from RVD[8], the saleable area of his unit should be 52.2 m2 instead of 50.2 m2 as now adopted by Mr Chan. Mr Chan explained that his adopted saleable area was derived from measurement of the approved building plans for the subject premises. He said he was in no position to comment on how RVD came up with their set of measurements. Mr Chan, however, confirmed that upon receipt of R9’s suggestion in December 2013, he had reviewed his set of measurements and found his were correct. Indeed, Mr Siu, the expert appointed by R22, R33 & R34, adopted the same 50.2 m2 as the saleable area for R9’s unit and similar type of units in his valuation. 42.Mr Chan explained that his measurement of saleable area is in accordance with the code of measurement practice promulgated by the Hong Kong Institute of Surveyors (“HKIS”) which is accepted by the Government. He also explained that in the old days when RVD conducted their measurement for rating purposes, they had adopted a different standard. According to him, although RVD is now reviewing and updating their measurements with a view to bringing them in line with the definition of saleable area, RVD’s exercise had not yet been completed. 43.R9 also referred to information from the internet provided by Centadata.com that units similar to his in KTM were all described as having a saleable area of 52.2 m2 instead of 50.2 m2. However, there is simply no evidence from R9 as to how Centadata.com or Centaline Property Agency Limited came up with the information available in their website. We believe that it is entirely possible that Centaline, being an estate agent, may simply be adopting the information from RVD. 44.In further support that 52.2 m2 should be used, R9 said that the same has been adopted in the joint sale for development in 2007 initiated by Centaline Surveyors Limited. Alternatively, R9 suggested that Mr Chan should have conducted on-site measurements in order to determine the saleable areas of all the premises. 45.Mr Chan explained that on-site measurements would not usually be conducted because of the difficulty in ascertaining the thickness of external walls which, by definition of saleable area, should be included. In this connection, the Tribunal would like to refer to the Court of First Instance (“CFI”) decision in Leung Man Cheung and Others v. Secretary for Planning and Lands and Another[9]. It is considered that measurement based on the latest approved building plans should be accepted in preference to on-site measurements. 46.Having heard Mr Chan’s evidence, we accept the saleable area of R9’s unit having a measurement of 50.2 m2. 47.Mr Chan conceded, however, that when he prepared his Supplemental Report of 7 August 2014, he had not inspected R9’s unit. Having inspected R9’s unit during our joint inspection on 4 March 2015, Mr Chan agreed that an upward adjustment of +5% should be added to reflect the better internal condition of R9’s unit. We consider Mr Chan’s proposed upward adjustment reasonable and fair. R13: Shop No 3, G/F, Block 4 (55A Kwun Tong Road) 48.R13 is the registered owner of Shop No 3, G/F, 55A Kwun Tong Road, the only shop unit not owned by the applicants. R13 is a bone setter, operating his own clinic at the shop. Mr Chan assessed that the EUV of his unit was $4,750,000. 49.Both Mr Chan and Mr Siu found the saleable area of his shop being 22.5 m2. R13, however, disagreed and queried why the toilet (about 3 m2) attached to his unit was not counted towards the saleable area of his shop. When we conducted our site inspection on 4 March 2015, we did find out that the toilet was structurally partitioned for the exclusive use and enjoyment of the owners/occupiers of R13’s unit. However, by the Assignment vide memorial no 418285 dated 30 October 1963 executed by the developer of KTM in favour of R13’s predecessor in title, it is provided that:
50.R13 explained that prior to his becoming the owner of the shop on 1 December 1986 (i.e. more than 28 years ago), both Shop 3 and Shop 4 were under the same ownership. When he purchased Shop 3, he made arrangement with the Shop 4 owner to convert the toilet for his sole use and occupation. On a balance of probability, we accept R13’s evidence in this respect. However, it is noted that the right conferred upon owners of Shops 3 and 4 is described as a right but not an exclusive right. In The Incorporated Owners of Goa Building v Wui Tat Company Limited[10], the Court of Appeal (“CA”) considered that even a developer was given the exclusive right to erect signs, etc on the external walls, section 34H[11] of BMO does not engage and the external walls are still considered common part of the building. Similar conclusion was reached in The Incorporated Owners of Shatin New Town v Yeung Kui[12]. In that case, although the relevant deed of mutual covenant gave the developer the exclusive right to erect pipes on the external wall, it was only for a limited purpose and did not gave exclusive possession of the exterior wall. Both cases have recently been applied in the CFI decision in 聯基新樓業主立案法團 v Yan Yan Motors Limited[13]. In the present case, the right is not even described as an exclusive right, not to mention that the usual magic phrase of “the exclusive right to the use, occupation or enjoyment of …” has not been used. Under section 2 and Schedule 1 of the Building Management Ordinance (“BMO”), toilets, water closets not designated for the exclusive use, occupation or enjoyment of an owner by any instrument are in fact common parts of a building. 51.In light of the above, we conclude that the area of the toilet cannot be included as saleable area of R13’s unit. It is an area to which R13 has no exclusive right to enjoy and is a common part. 52.R13 then suggested that his shop premises being situated off Kwun Tong Road are superior in location than all the comparables relied on by Mr Chan. He commented that the placard for his business can be readily visible by all passers-by, no matter by vehicles or otherwise. He further maintained that his clients came from all over Hong Kong and found his shop convenient. 53.Indeed, the three shop comparables adopted by Mr Chan are as follows:
54.Mr Siu on behalf of R22, R33 and R34 did not agree on the use of any of the aforesaid comparables in terms of location, He introduced three other comparables[14], all in the San Po Kong district, as follows:
* Value of open yard, etc is assumed to be worth 1/6th of that of the ground floor shop. 55.All these comparables were inspected by the Tribunal together with representatives of the parties on 4 March 2015.
56.This comparable is the best in terms of time. Similar to R13’s shop, it is used as a doctor’s clinic[15]. We have reviewed the adjustments made by Mr Chan and consider perhaps the most controversial adjustment in R13’s opinion may be the downward adjustment of 10% for location and visibility, i.e. Mr Chan considered this comparable superior than the Reference Shop Unit and R13’s shop. 57.Despite R13’s able argument, we are totally not persuaded either the Reference Shop Unit or his shop enjoy a good pedestrian flow. We take the view that KTM is situated at an isolated location with limited passers-by. R13’s suggestion that his client would come from all over the Hong Kong only suggests the trade or business he is now doing is neither dependent on location nor pedestrian flow which are important elements in determining landed properties value. We consider R13’s goodwill more important than location for the survival of his trade or business. 58.In our view, the location of comparable C1 is superior than R13’s shop because it serves a larger hinterland or neighbourhood including for instance the residents of Jade Field Garden, Tak Po Garden to the northwest, Lee Kee Building and even Amoy Gardens to the further southeast on the same side of Ngau Tau Kok Road. Nevertheless, we consider a -10% adjustment for location excessive especially in light of Mr Chan himself seeing fit to adopt 0% and +5% for comparables C2 and C3 respectively. We are prepared to adopt -5% instead. 59.Save for the above, we are prepared to adopt all other adjustments by Mr Chan.
60.The transactions of these two comparables took place more than one year from the relevant date. Following the Private Retail Price Index published by RVD, Mr Chan made adjustment for time by as much as +48% and +55% respectively to C2 and C3. This is undesirable because the preparation of an index is more or less an averaging exercise and there is no guarantee that the price trend for the subject location or property necessarily follows the index. This is particularly the case for shop premises where a slight variation in location would lead to significant difference in value. Therefore, the larger the adjustment figure is, the more likely that an error will ensue. We would only adopt these two comparables as a check on the valuation rather than comparables by themselves. Meantime, we would adopt all the adjustments proposed by Mr Chan on a provisional basis for the purpose of doing the preliminary analysis to be set out in §65 below.
61.Each of these two comparables on its own has a saleable area (excluding yard) of 74 m2 as adopted by Mr Siu[16]. Its size is more than 3 times of that of the Reference Shop Unit or R13’s shop unit. The fact that these two adjoining units were all transacted on the same date suggests that it was very likely they were part of a larger transaction. By this reason alone they are not good comparables at all, although Mr Chan, in his Rebuttal Report of 13 October 2014 only commented on the 5.6% adjustment suggested by Mr Siu insufficient[17]. 62.Since Mr Chan had not proposed any proper adjustment for size, again for checking purpose, we are going to adopt -20%. Meanwhile, apart from this, all the other adjustments proposed by Mr Siu are adopted on a provisional basis for the purpose of doing the preliminary analysis to be set out in §65 below.
63.The transaction of this comparable took place close to the relevant date of valuation. 64.Although Mr Chan did not comment on this comparable, we are going to adopt a larger adjustment of 4% for its larger size than the Reference Shop Unit or R13’s shop. In the meantime, all other adjustments proposed by Mr Siu are adopted on a provisional basisfor the purpose of doing the preliminary analysis to be set out in §65 below. 65.The comparables with their adjustments are accordingly shown in the table below:
66.As we have commented above that C2, C3, S1 and S2 are not desirable comparables, we are not going to take the average of the adjusted result to determine the EUV of the Reference Shop Unit. However, they serve to show that S3 is obviously out of the tone[19]. In this regard, we are going to adopt $232,000/m2 for the assessment of the EUV of the Reference Shop Unit. 67.R13 has suggested that some 25 years ago when he purchased his shop, its value was double that of a domestic unit in KTM. We consider there is simply no logical basis to use the ratio of value of a shop to that of a domestic unit in KTM some 25 years ago as a yardstick of their respective values today because the market as well as the local conditions might have undergone substantial changes. 68.Accordingly, the EUV of all shop premises in KTM are assessed in the table as shown at Appendix A hereof. Mr Siu, in his valuation report of 18 September 2014, had suggested adjustments for layout (6.4%), corner frontage (5%) as well as size (0.46%) between the Reference Shop Unit and the two shops at the end of each block. However, in view of the marginal difference in depth (about 1 m) between shops which have similar frontage, we consider the adjustments for size and depth proposed by him inappropriate. R17: Apartment 1, 3/F, Block 4 (No. 55A Kwun Tong Road) 69.Mr Leung Ting Kuen (“Mr Leung”) appeared on behalf of R17 who is the registered owner of Apartment 1, 3/F, Block 4. It is a unit at the front of the building facing directly Kwun Tong Road. His unit was assessed an EUV of $3,810,000. Mr Leung complained that Mr Chan had made too much downward adjustment (-10%) to his unit in respect of noise. We have expressed our view on noise adjustment in the early part of this judgment and consider Mr Chan’s adjustment reasonable[20]. Mr Siu does not appear to differ either. 70.R17 seemed to suggest in his witness statement filed in August 2014 that the relative values of units in KTM fixed by the developer when it was first sold in the early 1960s[21] was one of the considerations in the valuation. Mr Chan responded in his report that the fixing of prices of various units in a real estate development only reflected the pricing strategy of the developer when the properties were launched for sale, and was not necessarily the same as the difference in the then market values of large and small units. We agree to Mr Chan’s observation in this respect. 71.R17, whose unit is Apartment 1[22], said in her witness statement that her apartment belongs to the category of large unit in KTM. According to her, large units were more expensive than small ones[23]. The listed price difference between these units when KTM was put up for sale by the developer was then about 35%. According to her, this price difference is more or less maintained at the same level after 10 to 20 years. It appears R17 is suggesting that large units should remain more valuable than smaller ones by at least 35% now. Mr Chan has conducted a “paired comparison” by pairing up transactions of large and small units of KTM in different years in his rebuttal report dated 16 September 2014 to refute R17’s proposition[24]. In his analysis, 3 pairs of large and small units transacted at different time were chosen. Though minor adjustments may still be made to reflect the difference in time and floor level in appropriate circumstances, each pair is very similar in most respects save for size. Mr Chan takes a view, and we consider correctly and fairly, that it will be more appropriate and meaningful to compare their respective unit prices of the paired units instead of their gross transaction price with a view to testing R17’s proposition. His analysis is set out in Bundle B2/414. He compared 3 pairs and assessed their respective values as at November 2002, July 1996 and July 2001. Contrary to what R17 has asserted, the result of his analysis is that the unit price of large apartments is less than smaller apartments. After reviewing his report, we accept Mr Chan’s analysis. 72.R17 acting through Mr Leung, like many other lay respondents, does not appear to understand the statutory scheme of compulsory sale prescribed under the Ordinance. Mr Leung spent quite a lot of time recapping what had happened during and since the collective sale of KTM initiated by Centaline Surveyors Limited in 2007 and since then. In our judgment, this history is only relevant as to background but is of little use, if any, to our determination of the Application under the Ordinance. According to the 3rd witness statement of A4[25] which we accept, A1 only started negotiation with the previous “Harmonizing Committee for the Joint Property Sale of Kai Tak Mansion Blocks One to Four”[26] on or about 29 March 2010. The applicants began to acquire the units in KTM in July 2010, but not through the Centaline Group. Apparently, the applicants have not participated in the joint sale of units in KTM[27]. 73.Neither is Mr Leung’s reference to the movement of price index published by RVD of any assistance on valuation. We have explained in §33 above that the price fixed for the collective sale had taken into consideration the prospect of redevelopment of KTM. The prices fixed for the purpose do not meet the statutory requirement under Part 1 of Schedule1 to the Ordinance. Difference between Mr Chan and Mr Siu in the assessment of the EUV of domestic units 74.Mr Siu had adopted 5 comparables in common with Mr Chan and later introduced 4 more which were all transacted in December 2012. By reference to the Statement of Agreements and Disagreements dated 26 February 2015, they agreed to adopt these 5 comparables in common. They also agreed the saleable area in respect of 4 of them. Surprisingly, they saw fit to disagree on the remaining one, which is 32.5 m2 according to Mr Chan and 32.52 m2 according to Mr Siu, i.e. a mere difference of only 0.02 m2 , or about 0.08% of the total area no matter by reference to which figure! It is most undesirable and we really cannot see any rational ground for both experts insisting on their own figures, given the small difference. In view of the negligible difference, we adopt 32.5 m2. 75.In respect of these 5 comparables, they could agree on the adjustments for time, the top floor effect, quantum and building age but not for the adjustments in respect of floor level difference and location. The table of adjustments contained in the Statement of Agreements and Disagreements aforementioned[28] is reproduced as follows. The adjustment factors therein proposed are to be applied to a comparable with a view to finding out the value of the Reference Domestic Unit[29]. From what has been proposed, both experts appeared to agree that, since KTM comprises 4 blocks all without service of lifts, the lower a unit is situated, the more expensive it will be:
76.Having reviewed the above and particularly the comments by Mr Chan in his Rebuttal Report of 13 October 2014[30], we prefer the adjustments proposed by Mr Chan. We accept that KTM is closer to Choi Hung Mass Transit Railway station compared with other comparables and therefore justifies a higher adjustment of +5%[31]. We also consider Mr Chan’s proposed adjustments for level difference reflect the actual market condition which, we believe, is not a mechanical application of +/-2% per level difference as proposed by Mr Siu. 77.The adjustments made to the 5 common comparables using the factors accepted by the Tribunal are as follows. The unit rate of the Reference Domestic Unit is therefore $64,900.
78.In determining the EUV of other units by applying adjustment to the aforesaid unit rate of the Reference Domestic Unit, Mr Chan and Mr Siu appear to have more disagreements as follows:
79.We understand from evidence that Mr Chan had the opportunity to inspect the internal condition of most of the units whereas Mr Siu had not been able to do so prior to our joint inspection on 4 March 2015. However, we are surprised to note that no requests or attempts have ever been made by Mr Siu to inspect these units, or at least some of them, prior to expressing his opinions in his report for the purpose of assisting the Tribunal. One wonders how a person attending the Tribunal as an expert expressing an opinion on the value of a subject matter can discharge his duty to the Tribunal without even doing an inspection of that subject matter. Further, in Mr Chan’s Rebuttal Report of 13 October 2014, he clarified his opinion on adjustments on view, lighting and ventilation as against those by Mr Siu[33]. We agree with Mr Chan that adjustments made in respect of view only are an over-simplified approach. The view only adjustment could not sufficiently deal with the unique situation of KTM where the quality of its units differs substantially depending on its surrounding neighborhood, level and directions. Additional adjustments need be made for light and ventilation which vary with flats having different views and orientation. We find the additional adjustments proposed by Mr Chan reasonable, more realistic and being able to cater for the unique situation of KTM units. We have no hesitation to reject Mr Siu’s assessment in this respect. We therefore adopt Mr Chan’s adjustments which are reproduced below:
80.Bearing in mind the +5% adjustment for internal condition for R9’s unit as agreed by Mr Chan[34], and also the revised EUV for the Reference Domestic Unit at $64,900/m2 [35] instead of Mr Chan’s $62,400/m2, we have set out our assessment of the EUV for all the domestic units in KTM at Appendix B hereof. EUV for the CPS 81.Perhaps the hottest dispute for EUV is that for the CPS most of which are owned by R22. As said above, of the 100 CPS in KTM, 36 are uncovered and 64 are covered. There are 16 covered CPS on the ground floor of each of the 4 blocks. In each block, the covered CPS are arranged in an array of 8 rows x 2 CPS counting from Kwun Tong Road towards the slope at the back. The 8 rows x 2 CPS are divided into 2 groups separated by a staircase in the middle. The boundary of each CPS is marked on the floor. However, these covered CPS are separated by very ample common areas between them and the on-site condition is that one or more of them have been partitioned into enclosed “garage” or even workshops. Almost all of them are enclosed from the outside with, for instance, roller shutters. 82.Between each block and on the boundaries of the KTM (except the part fronting Kwun Tong Road) there are driveways. On the building plan, apparently each covered CPS is freely accessible via the driveway to which it opens. It is also the only freely accessible point of each covered CPS, and accordingly, a vehicle can be parked at the said space by either backing or driving in from the driveway. However, the landscape of KTM is such that each driveway goes up a ramp before connecting to the driveway at the back immediately below a steep slope. The up ramps are so steep that the 2 covered CPS at the last row nearest to such ramp are in fact blocked by the said ramp. The last row CPS and the ramp are at totally different levels. On site, the 8 CPS, namely, CPS 1[36], CPS 8, CPS 15, CPS 22, CPS 29, CPS 36, CPS 43 and CPS 50, are observed not open to any driveway. They can only be accessible via the covered CPS next to it (the said 8 covered CPS are referred to as “ramped covered CPS”). From our site inspection, the ramp rises up to as high as 3 feet above ground level above the ramped covered CPS. Accordingly there are 3 types of CPS in KTM: uncovered CPS, covered CPS and ramped covered CPS. The 2 experts do not differ much on the valuation of uncovered CPS. However, they have adopted totally different approaches in doing valuations for the 2 different types of covered CPS and come to substantially different valuations. 83.By using direct comparison method, Mr Chan determines the EUV of these 3 types of CPS by reference to sales of car parking spaces in four comparable buildings. He comes up with the EUV of these 3 types as follows:
84.Mr Siu basically relies on the investment method of valuation and comes up with an EUV value for an uncovered CPS at $420,000, which can be regarded as basically the same as that assessed by Mr Chan at $410,000. However, using his methodology, Mr Siu arrives at $889,000 to $2,213,000[37] for a covered CPS which is substantially different from that arrived at by Mr Chan. He made no distinction between a normal covered CPS and a ramped covered CPS. 85.As stated above, during our joint inspection on 4 March 2015, we noted most of the covered CPS have been partitioned into individual garages and even workshops by temporary material such as wooden or sheet metal. Many of them have their own roller shutter gates. It is Mr Siu’s case that because in reality these covered CPS have been put to retail/non-carparking use, he has adopted a totally different approach from that of Mr Chan who only valued these covered CPS based on mere car parking use. 86.According to Law Siu Lung (“Madam Law”), a director of R22, since R22 acquired the 84 CPSs on 19 November 1998, R22 had operated a business under the name of 啟德停車場 (i.e. “Kai Tak Car Park”) leasing out the CPS on a monthly basis. No written tenancy agreement had ever been signed with individual tenants. It ceased its operation in or about October 2010, except for the period between December 1997 and December 1999. During this period R22 let the CPS to Imperial Parking (Hong Kong) Limited at a monthly rental of $164,000.[38] It is Madam Law’s evidence that R22 was indifferent as to whether the CPS was used for car-repairing workshop or other retail trades[39]. 87.During cross-examination, Madam explained that R22 ceased to carry on its business of “Kai Tak Car Park” in or about October 2010 in order to get ready to deliver up vacant possession of the CPS to the applicants in the event of a successful sale to them. 88.Mr Siu stated in his Rebuttal Report dated 17 October 2014 at §2.4 as follows:
89.It is Mr Siu’s view that there are no appropriate comparable transactions for garage. He therefore adopts the investment method of valuation by capitalization of the net rental incomes derived from the “Garage CPS”. In his actual calculation, Mr Siu capitalized the rentals for individual CPS based on rentals in respect of year 2009 or 2010. He then applied a retail properties yield published by RVD, and added on a further + 2% “to reflect the retail potential of the property as for then existing uses”. At trial, when this capitalization based on retail use of the “Garage CPS” was challenged, Mr Siu then revised his view to “reflect a risk premium (i) given the retail potential of the property as for then existing uses and (ii) the un-utilized occupancy”. 90.Initially, Mr Siu adopted the retail property yield indexes for 2009/2010[40] to capitalize the rentals received by R22 during that period of time to arrive at an EUV as at 2009/2010. He then adjusted this capitalized value to 1 December 2012, i.e. the valuation date of the Application Report using the Price Retail – Price Index from RVD. 91.For those untenanted Garage CPSs, Mr Siu adopted the average capitalized value of those tenanted Garage CPS derived above as their EUV value. 92.There is no dispute that in respect of the breach of user of the CPS, the Lands Department had initiated enforcement action against R22. At trial, it was confirmed that when Mr Siu prepared his valuation, he was not aware or given a copy of a letter from District Lands Office, Kowloon East, Lands Department dated 26 January 2010 (“the warning letter”) which reads as follows:
93.It is not in dispute that a subsequent letter from District Lands Office, Kowloon East, Lands Department dated 23 July 2010 was issued to R22. There is attached to that letter an annexure setting out details of breaches and irregularities identified in respect of the CPS owned by R22, ranging from using them for storage purposes or for parking of truck and van. Such letter was registered in the Land Registry against each of R22’s CPS vide memorial 10081200460014. 94.R22 appeared to have rectified the situation after the aforesaid warning letter and subsequent letter. It was not in dispute that a further letter from the Lands Department dated 18 May 2011 was issued to R22 confirming all breaches had been purged. R22 was reminded in this letter that “(s)hould the breach of lease conditions occur again, Government will proceed with the vesting/re-entry of the premises without further notification”. 95.We consider that Mr Siu should have been told of the aforesaid by those appointing him as court’s expert when he was instructed to prepare his report. In any event, being a court’s expert who owes a duty to the Tribunal, one would expect that he should have conducted his own land searches of the subject matters to find out what encumbrances, if any, the land is subject to before writing his report. Had he conducted the searches, the Lands Department’s letter should have been discovered. In our view, information revealed in the land search would have been sufficient to trigger off a series of enquiries by any prudent expert, leading to discovery of the threatened action by the Government. Mr Siu agreed during cross-examination that the rents he used for his valuation exercise were those achievable prior to the said enforcement action. 96.Madam Law admitted at trial that R22 had paid to the Government some $1,000,000 in total as forbearance fee as a result of the Government’s enforcement action. After hearing all her evidence, it is the Tribunal’s judgment that, on a balance, the fear for further payment and enforcement action by the Government was its genuine reason for ceasing its business of Kai Tak Car Park in or about October 2010, instead of Madam Law’s earlier explanation that R22 was prepared to hand over vacant possession of the CPS to the applicants. 97.Mr Mak for R22, R33 & R34 submits that even if the direct comparison method were a better way to assess the EUV of the covered CPS, the investment method can be and should be used at least as a check especially when, in the present case, the divergence of the experts’ assessment is significant. Mr Mak draws our attention to Fan Chun Keung v The Secretary for the Environment, Transport and Works[41] (at §§25-54). This was indeed a decision of review of the Tribunal’s earlier judgment dated 15 July 2005 in which the Tribunal found that “the investment approach is not as reliable or accurate as the direct comparison approach” 98.At §22 of Fan Chun Keung, the Tribunal had the following observation concerning valuation by investment method:
99.We agree with Mr Mak’s submission that the rental previously payable in respect of the “Garage CPS” would have included a speculative value over and above that for a normal car parking use, especially most of the tenancies for the CPS in question were on monthly basis or short-term determinable with short notice. However, after the Lands Department had issued the warning letters, the speculative value should have totally gone and the former rentals achieved would no longer be achievable[42]. It would be imprudent for Mr Siu to capitalize the historical rents in perpetuity without any regards to the Government’s enforcement action and threatened re-entry which have, in our view, basically removed any speculative value it may attract. The basis for Mr Siu continuing adopting the pre-enforcement rentals has gone. 100.Mr Siu expressed a view during cross-examination that those historical rentals (i.e. the pre-enforcement rentals) should have already taken into the account the probability of Government taking enforcement actions. We are unable to accept his view. As stated by Madam Law in her 1st Witness Statement dated 26 September 2014[43], no such enforcement action had occurred or re-entry threatened has taken place since R22 acquired the CPSs in 1988 until the 1st applicant entered into the picture. The perceived risk, if any, during those old days had become real risk no matter what was the reason behind. 101.Next comes the question of whether the yield percentage adopted by Mr Siu is appropriate. Although at trial, faced with queries, Mr Siu has revised his calculation based on 2% on top of the yield rate of retail properties to reflect (i) the risk that the said covered CPS are then put to existing retail uses and (ii) the un-utilized occupancy, an item added by Mr Siu to reflect the costs for managing these 80 plus CPS. In our judgment, this new meaning given to the +2% is artificial. It is an afterthought and a salvage operation to resuscitate his investment method assessment, and is wholly unconvincing. The 1% which Mr Siu later suggested[44] suffers from the same drawback and is also unconvincing and unsafe. In view of the fact that the Lands Department has already issued a clear and an unequivocal warning threatening re-entry without notice in the event of a repeated breach, this Tribunal has serious doubt whether a simple +1% or +2% on the top of the RVD’s retail properties index to reflect Mr Siu’s suggested risk is sufficient. The fact that R22 saw fit to cease totally Kai Tak Car Park’s business in or about October 2010 shows that the risk is rather real, at least as perceived by R22. 102.Neither had Mr Siu taken on board the forbearance fee paid by R22 to the Government in his valuation. It is at least a cost on the part of R22 when it put the CPS to use other than for parking of vehicles with a view to earning a higher income. 103.Mr Siu tried to defend his position by bragging that if R22 approached him earlier he would be able to negotiate with the Lands Department to resolve the matter at nil premium. Mr Siu even referred the Tribunal to a case he previously dealt with at the junction of Prince Edward Road West and Sai Yee Street which he said was successful. He conceded, however, in that case all the car parking spaces concerned are situated on a single piece of land under same ownership with no common areas, whereas in the present case, the CPS have different ownership and are separated by common areas. It is not in dispute that all covered CPS together with the adjacent common areas are now being encroached by their owners/occupiers with partitions. In the circumstances, the Tribunal do not believe, irrespective of whether premium is payable, the Lands Department would consider allowing a lease modification (for which we are provided with no evidence that this would be likely) for the simple reason that KTM’s common parts, the use and ownership of which are subject to DMC and the BMO, would be involved. We consider this Prince Edward Road West case referred to by Mr Siu totally irrelevant 104.In connection with the aforesaid Prince Edward Road example cited by Mr Siu, this Tribunal cannot help forming an impression that Mr Siu may have confused his role as an independent court expert and a party’s professional adviser/advocate. Times and again we have to remind him that he is acting as the Tribunal’s expert and is under a duty to provide his expert opinion to assist the Tribunal rather than acting as a party’s adviser or advocate. 105.In addition, we find Mr Siu’s justification for his investment approach not convincing and is with inherent difficulty. While we agree that those “Garage CPS” might have provided a higher level of privacy and security through erection of partitions on KTM’s common parts, each of these so-called “Garage CPS” should not have differed much in value. However, Mr Siu’s assessment of the EUV for the covered CPS ranges from $394,000 to $1,967,000 based on retail yield (as revised on 6 March 2015) or $352,000 to $1,821,000 based on the CPS yield relying on rental information given to him. There is something apparently irrational and unless one is satisfied there exist exceptional circumstances, we do not believe any professional valuer will be content with the results with such unusually wide range. Mr Chan has indeed pointed out such problems in his comments on Mr Siu’s revision on 6 March 2015by comparing Mr Siu’s valuation of CPS 45 and CPS 46, which are situated next to each other and are at the 6th and 5th row counting from Kwun Tong Road, as follows:
106.Furthermore, Mr Siu never begins to query himself as to why CPS 15 (which is one of the ramped covered CPS on the 8th row) is valued at $1,515,000, while CPS 16 (which is next to CPS 15 on the 7th row but NOT a ramped covered CPS) attracts a lower valuation of $1,053,000 and CPS 14 (on the 1st row and not a ramped covered CPS) attracts an even lower valuation of $1,010,000. He attempts to deal with the overall result by adopting an averaging exercise to arrive at $1,010,000 for each “Garage CPS”, no matter ramped or not. Given the irrational and anomalous results arrived at by him concerning individual covered CPS, we are of the view that the averaging of unreliable valuations cannot produce a reliable result. The basis of his assessment is questionable. 107.The valuation evidence, i.e. the raw data, which Mr Siu has adopted in his valuation, has been totally and utterly discredited and unreliable. In addition, the way he handled such evidence and justified his methodologies simply falling short of what may be legitimately expected of a valuation expert. Further, Mr Siu’s investment method of assessment of the EUV of the covered CPS (or “Garage CPS” as he put it) is shown to be completely unjustified. We have no hesitation to reject Mr Siu’s valuation approach using the investment method. 108.The fact that there are 8 ramped covered CPS are not in dispute and are easily discoverable if one conducted a site inspection of the CPS in question. We are surprised that Mr Siu still insisted that there should not be any discount on such disability (save for two, namely CPS 1 & CPS 8 at a discount of 15% which we disagree on ground that the rate being too low[45]). He maintained his position initially that a ramped covered CPSs might be used not as a car parking space at all or it can be used in conjunction with other CPS, even when the warning letters of the Lands Department were shown to him during cross-examination. He only conceded later that an across-the-board downward adjustment of 15% be applicable to all ramped covered CPS. 109.We are also not persuaded that Mr Siu is right to adjust the capital value arrived at using the historical rentals by the Private Retail – Price Index to 1 December 2012. Mr Mak concedes in his closing submission that it might be more appropriate to adjust first the rentals in 2009 or 2010 to 2012 using the Private Retail – Rental Index before capitalization. Even if we were to accept the CPS bears resemblance as garages, this Tribunal considers that they are far from being a retail shop in any respect. As discussed in §93 above, the letter from District Lands Office, Kowloon East, Lands Department dated 23 July 2010 identifying various unauthorized uses such as for storage purposes or parking of truck or van; none were comparable to a retail use. More importantly, time adjustments by as much as 74.1% to 114.8% applied by Mr Siu will certainly magnify any error as remarked by us in §98 above. For the same reason, the Tribunal in Good Faith Properties Limited and Others v Cibean Development Company Limited[46] has already commented at §177 of its judgment against using index for time adjustment for comparables occurring more than 2 years from the valuation date. 110.Thus every element in the investment approach adopted by Mr Siu is so unreliable that we are not persuaded that his approach can be used as a check on any valuation arrived at, for instance, by the direct comparison method, not to mention that it is used in substitution of the direct comparison method. The valuation arrived at by Mr Siu is wholly unreliable and we have no hesitation to reject it totally. 111.This Tribunal has on many occasions acknowledged that the direct comparison method would be the best and preferred method of valuation where suitable comparables are available. At one stage, it was suggested that the sale of CPS 28 to R33 and CPS 35 to R34 by R22 not too long before the Application may provide market evidence for the assessment. According to the land search record, the provisional agreement for sale and purchase regarding CPS 28 was dated 30 May 2012 and the assignment regarding CPS 35 took place on 6 September 2012 (without any prior agreement for sale and purchase). As a matter of fact the said transactions took place some two years after the applicants had started negotiation for the purchase of all units in KTM. 112.In R33’s affirmation dated 23 February 2015[47], she indeed acknowledged that the purchase price for CPS 28 was acceptable in view of, inter alia, the CPS’s redevelopment value. Similarly, in R34’s affirmation of the same date[48], he acknowledged that the basis for agreeing the purchase price for CPS 35 included the prospect of it being acquired by developer. These purchase prices, therefore, even if they were derived from genuine market sales, cannot be used for the purpose of assessing EUV for the simple reason that they fail to meet the requirements of Part 1 of Schedule 1 to the Ordinance. EUV should be determined by not taking into account the redevelopment potential of the property or the lot. 113.As regards the following sale of CPS by R22, they all took place well after the applicants took out the Application on 21 February 2013 which has been registered in the Land Registry against each of the units in KTM. The prospect of redevelopment must already have been reflected in the purchase price :
114.We do not accept that the purchase prices of these 8 CPS set out in the preceding paragraph are relevant to the assessment of the CPS’s EUV and must revert back to Mr Chan’s CPS sales comparables. 115.Mr Mak submits that the covered CPS was described in the Occupation Permit as “Covered Garage”. He refers to Barnett and Block v National Parcels Insurance Company Limited [1942] 1 All ER 221 where a garage was defined as a place where one can get reasonable protection and shelter. We consider, however, this definition does not give us more information than what we have got on-site. As said in the preceding paragraphs, all covered CPS are on the ground level of each block and no doubt are protected and sheltered in the sense they are covered. They appear to be nothing more than normal covered car parking spaces but obviously are more spacious as each one is surrounded by ample common parts. They also enjoy better privacy because they (together with the surrounding common parts of the building) are enclosed by temporary materials. We see no reason why they cannot be compared with other car parking spaces found elsewhere provided appropriate adjustments are made. 116.Mr Mak draws our attention to Secretary for Transport v Wong Bun[49], where the Tribunal observed at §20(2) of the judgment that a car parking space comparable which was entirely enclosed “should be rejected because of the uncertainty involved in the actual and potential use of the car parking space”. In our view Wong Bun is distinguishable because the car parking space comparable therein referred to might be endowed with the prospect of alternative use, legal or illegal. Since no further particulars of that car parking space comparable can be discerned from Wong Bun or the submission of Mr Mak, we are unable to comment on the said judgment further. However in the present case, we have already been alerted to the enforcement action taken by Government, and its unequivocal threat to re-enter in the event of any use not in compliance of the Government Leases. In our judgment, the demand and subsequent payment of some $1 million forbearance fee demonstrated the determination on the part of the Government to enforce the terms of the Lease. Despite Mr Mak’s able submission, we are still of the view that the subject CPS are no different from normal car parking spaces, except that they enjoy better privacy for which we shall take into account in analyzing the comparables provided by Mr Chan. 117.In any event, after rejecting Mr Siu’s investment method of valuation, we are only left with the comparables provided by Mr Chan for the purpose of assessing the EUV of the CPS. CPS comparables relied on by Mr Chan
118.Mr Chan relied on a total of 40 CPS sales in Rhythm Garden of which 39[50] were by the developer in November 2012 applying a +5% adjustment for location and +2% adjustment for each floor difference downward. These are all carparks within a multi-storey building. However, out of these 40 sales, 3 were on 2/F and 2 were on 3/F. The rest (35 of them, or 87.5% of the total Rhythm Garden samples) were all on 4/F. Common sense tells that a simple average of the adjusted price of all these 40 comparables will result in an average mainly dominated by the numerous transactions on 4/F. Further if one looks at those transactions more closely, the average sale of a car parking on each floor is as follows before any adjustments:
119.The above demonstrates that Mr Chan’s proposed adjustment of +2% for each floor difference downward did not tally with the reality situation for Rhythm Garden: the difference between the 2/F and 3/F is about 15%[51] and that between the 3/F and 4/F is about 8%[52]. In our judgment, the difference in level adjustment may reflect the pricing policy or other special considerations of the developer on top of market conditions which, presumably, every developer will take into account. Further, as all except one were developer’s sales, the level of price may be overwhelmed by the developer’s consideration which may or may not fully reflect the actual market considerations. In the circumstances, in order to minimize such impact, we prefer to adopt the sales for the 2/F only and make the following adjustments:
* According to Mr Mak, only this transaction was a secondary market sale and therefore should only be used. However, we are hesitant to adopt just one comparable. On a balance, we have included 2 developer’s sales in our assessment, though developer’s pricing consideration may have been included on one hand, the possibility of a seriously biased sale can be minimized on the other.
120.Likewise, Mr Chan relied on a total of 12 CPS sales in the Commercial and Garage Block of Richland Gardens with 7 of them on 4/F, 2 on 5/F, 2 on 6/F and 1 on 7/F. These are all covered car parking spaces in a multi-storey building. The average sale of a car parking space on each floor is as follows before Mr Chan’s adjustments:
121.In the case of Richland Gardens, it is not in dispute that the sales were not from the developer. From the comparable data set out in the preceding paragraph, the changes in values between floors[53] are: +0.7 % (4F/5F); -10.1% (5F/6F); -3.1% (6F/7F). The usual trend of the higher the carport level the lower the price can more or less be shown, except that the average price for the car parks on the 5/F can be regarded a bit out of tone. However, it exists in reality which is very often not a perfect market. From the evidence available, we are more prepared to adopt the +2% adjustment for each floor difference downward as suggested by Mr Chan. In order to minimize error that may be caused by the floor level adjustments, only the sales on 4/F will be adopted, and they are analyzed as follows:
122.At trial, Mr Chan was cross-examined by Mr Mak that he should have taken into consideration transactions of other covered car parking spaces on ground level. However, no evidence whatsoever about ground floor covered CPS was offered by Mr Siu who only suggested that from his observation and analysis, the difference in market value of covered and uncovered CPS of Richland was about 21%.
123.Mr Chan has analyzed a total of 4 covered CPS sales in Wang Kwong Building as follows:
*Partially enclosed type car parking space 124.Although we consider the 10% adjustment for the partially covered car parking space a bit arbitrary, we are prepared to adopt the average as suggested by Mr Chan. It is because if the sales of the 2 partially enclosed type carports[54] are excluded, the average of the remaining two comparables gives $477,170 which is within the acceptable 2% range of $484,763.
125.Applying similar adjustments, Mr Chan analyzed a total of 3 covered CPS sales in Tak Bo Gardens all on the same level and arrived at an average of $671,185 for value of a car parking space.
126.As we have commented at the start of the trial, the two experts have not addressed the Tribunal on the impact of CPS to flat ratio on the property prices between KTM and the development estates where sales comparables are drawn. We consider this is an important element of adjustment as the Tribunal has found in Wong Bun: see §22 of that judgment. 127.Mr Siu, in his Rebuttal Report dated 17 October 2014, has provided the car parking space to flat ratios for KTM as well as the estates of the comparables as follows:
128.Mr Siu explained in §2.3 of his Rebuttal Report a CPS to flat ratio of 1:5 had a meaning that a CPS had to be competed with by 5 households of that development. A “higher figure”, he said, would mean “… the existence of a shortage in CPS supply in a relative sense that competition for a CPS would be more fiercely”. He noted, however the CPS: flat ratio for KTM is the lowest when compared with all the comparable estates. Mr Siu went on to say “… (w)ith relatively sufficient supply and relatively low demand for CPS in the Property [i.e. KTM] respectively, it was then therefore commercial values arisen for being used as a shop”. Although the aforesaid statement could have been better written in terms of English, in the Tribunal’s view it’s meaning is rather clear: since the demand is low and the CPS are relative abundant in KTM, these CPS could be turned for shop use and therefore they attract commercial value. By his said comments, it appears to the Tribunal that Mr Siu has completely disregarded the provision of the Government Leases which restricted the car parking spaces for “the parking of private cars of the residents of the said building”, or he is ignorant of the same. Implied in his opinion he considers the owner is free to use the CPS in whatever manner he prefers. 129.It has been well established since Hang Wah Chong Investment Company Limited v Attorney General[55] that the Government is entitled to demand premium as a condition of granting a modification of the terms of the lease. Such practice is further acknowledged by the Court of Final Appeal in Director of Lands v Yin Shuen Enterprises Limited & Another[56] where Lord Millett NPJ in giving the judgment remarked at §11 and §18 as follows:
130.Shop use is obviously different from car parking use, not to mention renting of the said CPS to a tenant other than resident of KTM is restricted by the Lease condition. We are surprised that Mr Siu, who holds himself out as land professional[57], and at the same time as an expert to assist the Tribunal, would have made his statement repeated in the latter part of §128 above without any qualification at all. These qualifications, we consider, should include for instance, the probability of Government taking enforcement actions, prospect of modification of the Government Leases and at the very least the payment of a handsome premium even if such modification is allowed, not to mention that such statement was made in total ignorance of the fact that the Lands Department has already taken enforcement action once and has threatened to re-enter if subsequent breaches occur again. 131.Although after site inspection we agree with Mr Siu that KTM’s “Garage CPSs” enjoy better privacy and more space when compared with the “open” situation of the comparables, he had not provided his opinion on adjustment in these respects save to argue that the said comparables are not comparables at all which we do not agree[58]. 132.In addition, we are of the view that no matter how spacious these “Garage CPSs” are and how much extra security that they can provide, if the Government Lease restricts these CPS for use of only KTM residents, we do not believe KTM residents would be willing to offer a high premium for the said added advantages. In addition, we consider the CPS and driveways are in a state of poor repair. The surface of the concrete-paved driveways are worn out and seriously cracked. Some parts are even broken. Taking into account of the condition of repair, we consider an adjustment of +10% appropriate to reflect the spacious and better privacy enjoyed by these “Garage CPSs”. 133.We then make further allowance for CPS : unit ratio between KTM and the comparables[59] and the factor of privacy as alluded by Mr Siu to our finding and analysis of the car parking comparables in §§118-125 above as follows:
134.From the above, the average of the adjusted values for all the comparables is about $535,000. However, the adjusted value derived from the Tak Po Gardens appears to be out of the tone with the others. It may have been inflated by the fact that the car parking spaces there are also available to other non-residents. In our opinion, the Tak Po Gardens comparable should be discarded[62]. Excluding the Tak Po Gardens comparables, the average of the remaining three comes to $492,000, which, in our view, is closed to the assessment of $510,000 by Mr Chan and accepted by the applicants, though the latter figure is arrived at by Chan using slightly different adjustments. In this connection, we are prepared to accept Mr Chan’s valuation of a covered CPS at $510,000. We believe the ramped covered CPS which access is handicapped has a very low marketability except when sold in pair with the adjacent one. We consider an assessment of $260,000 each for the ramped covered CPS reasonable in the circumstances. As said above, there is basically no dispute on the EUV of an uncovered CPS and we accept its EUV at $410,000 each. 135.Mr Mak persists in his closing submission that the investment method should be adopted as a check to the valuation result. As we have stated above, there is simply no suitable rentals in compliance with the Government Lease for the “Garage CPS” to be used for the investment method. The only other rental evidence comes from the applicants who appear to have let out their own CPS for use other than in accordance with the Government Lease. These are all post-enforcement rentals. The level of rent was much lower and was at about $1,500 per month each for covered CPS[63] by the end of 2014. For ramped covered CPS[64], the monthly rent is as low as $1,000. Take the yield rate of 5.9% (i.e. CPS yield + 2%)[65] revised by Mr Siu and adopted by Mr Mak in his closing submission[66], the capitalized value of a covered CPS arrived at is only $305,085[67], which is much lower than $510,000 arrived at by the direct comparison method. For a ramped covered CPS, it is only $203,390[68] and is also lower than $260,000. Alternatively, if we adopt the yield rate of 5.4%, i.e. the retail yield plus 2%, as revised by Mr Siu[69], using the same calculation method the capitalized values for a covered CPS and a ramped covered CPS are respectively $333,333[70] and $222,222[71] which are also lower than the values arrived at by the direct comparison method. Accordingly, adopting whatever yield rates suggested by Mr Mak, if there is no reliable or appropriate rentals that can be applied to the formula, the assessment so generated cannot provide a useful check on the assessment method we have accepted. 136.By reason of the above, we accept Mr Chan’s assessment of the EUV of all the CPS, no matter covered or uncovered, ramped or otherwise. The list of CPSs and their respective EUV shown at Appendix 1.5 of Mr Chan’s Supplemental Report[72] is therefore reproduced hereof at Appendix C. The EUV for all the CPS in KTM is in the sum of $45,400,000. 137.Thus, the grand total EUV of all units in KTM is $1,119,141,000, being the aggregate of $78,571,000 for the retail portion,$995,170,000 for the domestic portion and $45,400,000 for the car park portion. 138.The corresponding pro-rata shares for the outstanding respondents owning undivided shares are enlisted at Appendix D. Section 4(2) of the Ordinance - Justification and Reasonable Steps 139.Under Section 4(1)(b) of the Ordinance the second determination is whether an order for sale should be made. Section 4(2) of the Ordinance provides that there are basically 2 considerations, namely :-
140.The applicants have to satisfy this Tribunal that the above statutory requirements were met; otherwise, an order for compulsory sale would not be granted. 141.For the age and state of repair requirements, the applicants have adduced 3 expert reports, namely, the condition survey report by Mr Wong dated 11 August 2014, the structural assessment report by Mr So dated 16 June 2012 and the supplemental report of 7 August 2013 prepared by Mr Chan. 142.In the Structural Assessment Report by Mr So dated 16 June 2014, he identified the following defects in the Buildings:
143.Based on the above findings, Mr So concluded that the structural frames of the KTM were in need of repair. While KTM was designed and constructed more than 52 years ago, it exhibits signs that its structural frames have deteriorated to the final stages of its designed working life. The deterioration will continue steadily due to extensive carbonation of the concrete. It is inevitable that new defects will occur and previous defects, though repaired, will recur readily, requiring substantial repairs or even partial demolition and re-construction of some defective structural members in the future. Repair works need be carried out regularly in future and such repairs will be more and more extensive. It is his view that although the costs of repair may be relatively modest, such costs will escalate in future as the extent and seriousness of the deterioration of the structural members increases with age. He recommended that hammer tapping works be carried out to all structural members with a view to finding out the full extent of defects to be repaired as a matter of urgency. 144.Mr Wong, in his Condition Survey Report dated 11 August 2014, stated that :
145.Mr Wong estimated that the total costs of immediate repair works to restore KTM to tenantable standard came to $107,388,005 which was about 35.8% of the cost of constructing new similar buildings. He concluded that KTM has deteriorated to a state which is beyond reasonable economic repair. As more rapid deterioration would occur in the future, the necessary maintenance and repairs would inevitably be more frequent and extensive making the continued occupation of KTM uneconomical and even unsafe, to both occupants and third parties. He recommended the owners to redevelop rather than repair given that KTM does not possess any historical value or architectural merit. 146.The applicants also rely upon two economic tests, i.e. the age test and the repair test, conducted by Mr Chan in his Supplemental Report prepared on 7 August 2014. 147.For the repair test, Mr Chan adopted the findings by Mr Wong that the total estimated cost to restore KTM to tenantable standard is $107,388,005. If the unauthorized building works related items are excluded, the net repair cost for the remedial works is about $93,510,680. His assessment of the EUV of the domestic units as at date of report was $1,030,310,000[73]. He took the view that even if the repairs proposed by Mr Wong were carried out, they were remedial in nature and would not, in his view, enhance the value of the unit substantially. He considered such work would only bring about 3% enhancement to the domestic portion. Only nominal enhancement will be made to the ground floor as retail shops are less sensitive to building conditions as compared to residential flats. The enhancement by the repairs (the difference between the post- and pre-repair EUV) is $30,909,300. He considered obviously, putting good money of $93,510,680 to bring about an increase in value of only $30,909,300 would not make any economical sense at all. 148.For the age test, Mr Chan assessed the total EUV of $1,164,840,000 as at 7 August 2014 could be enhanced to $1,195,749,300 if a net repair cost of $93,510,680 were spent. He further assessed the RDV of the Lot on its own at $1,910,000,000 as at the same valuation date. Given the RDV was much higher than the enhanced EUV, Mr Chan was of the view that repair is not economically viable and the redevelopment of the Lot is justified. 149.There is no contrary evidence suggesting that redevelopment of KTM is not justified due to age or the poor state of repair. We accept the applicants’ evidence in whole. In particular, we are satisfied that based on the evidence of Mr So and Mr Wong, redevelopment of the Lot is justified due to the age and the state of repair of the Buildings :
Reasonable Steps to Acquire All the Undivided Shares in the Lots 150.Under section 4(2)(b) of the Ordinance, the second consideration in making an order for sale should be whether the applicants have taken reasonable steps to acquire all the undivided shares in the Lots where the owners’ whereabouts are known. 151.In respect of R2’s unit, the applicants made the following offers:
152.In respect of R8’s unit, the applicants made the following offers:
153.In respect of R9’s unit, the applicants made the following offers:
154.In respect of R13’s unit, the applicants made the following offers:
155.In respect of R17’s unit, the applicants made the following offers:
156.In respect of Apartment 7, 4/F, No 55 Kwun Tong Road the ownership of which was restored to R24 as stated in §10(3)(a). Its sale by R24 to R30 was set aside. By two orders in HCA 1554/2012, R24 is prohibited from, inter alia, disposing of or dealing with any of its assets including the unit. In any event, the applicants made four offers, one on 15 February 2014, another on 12 June 2014, the third on 18 February 2015 and the last on 23 April 2015 at $5,849,096, $5,763,796, $6,470,312 and $6,685,938 respectively. The last two offers were attached with Savills’ advice letter assessing R24’s share at $5,991,030 and $6,685,938 respectively. 157.And as stated in §10(3)(b) above, R26 purchased Apartment 10, 4/F, No 55 Kwun Tong Road from the provisional liquidator of the Incorporated Owners though such purchase was challenged by R28, the wife of the previous owner, R27. The applicants made an offer to R26 on 3 November 2012 at the sum of $4,863,175. R26 and A4 then entered into a Provisional Agreement for Sale and Purchase of the unit conditional upon R26 obtaining a court declaration that the sale by the provisional liquidators of the Incorporated Owners to R26 was lawful or R26 and R28 reaching a settlement agreement in respect of R28’s claim in HCA 255/2011. R28 and A4 also entered into a Provisional Agreement for Sale and Purchase of the unit conditional upon R28 obtaining a rescission of the sale of the unit by the provisional liquidators to R26 or R28 becoming the registered owner of the unit. 158.R35 purchased Apartment 3, 5/F, No 55A Kwun Tong Road on 9 July 2013 only after the Application. The applicants made the following offer to him:
159.Similarly, R36 acquired Apartment 1, 2/F, No 55A Kwun Tong Road and Apartment 8, 6/F, No 55A Kwun Tong Road on 9 July 2013 only after the Application. The applicants made the following two offers to her:
160.R37 purchased Apartment 3, 2/F, No 55A Kwun Tong Road on 12 July 2013 only after the Application. The applicants made the following offer to him:
161.R38 purchased Apartment 1, 4/F, No 55A Kwun Tong Road on 17 July 2013 only after the Application. The applicants made the following offer to him:
162.R45 acquired the ownership of Apartment 9, 6/F, No 55 Kwun Tong Road on 30 September 2013 only after the Application. The applicants made the following offer to her:
163.As regards R22 ownership of 84 CPS, it sold 2 to R33 & R34 before the Application. Then after the Application, it sold another 7 CPS to R39, R40, R42, R43, R44 & R46 as a result of which R22 retains the ownership of 75 CPS and mortgaged CPS 71, 72, 75, 83-90 & 93-99 to R41. The applicants made the following offers to R22 from time to time:
164.Then the applicants made the following offers to each of R33 & R34:
165.The applicants made the following offers to R39:
166.The applicants made the following offers to R40 & R43:
167.The applicants made the following offers to R42:
168.The applicants made the following offers to R44:
169.The applicants made the following two offers to R46:
170.During trial, on 9 March 2015, there was also a joint offer from R22, R33, R34, R40 and R44 to the applicants which was nevertheless declined by the applicants on 25 March 2015, suggesting that the latest offers on 18 February 2015 had exceeded Mr Chan’s assessment by 8%. 171.On the face of the above, the applicants did appear to have taken reasonable steps to acquire all the undivided shares in the Lots. More particularly those steps taken by the applicants were steered by the professional valuation opinion of Savills, which is a large and reputable surveyors company specializing in property valuation in Hong Kong. We have in the above paragraphs scrutinized Mr Chan’s EUV assessments. Despite having made some adjustments to his findings, we find his assessments reasonable or within a reasonable range. 172.In Capital Well Limited v Bond Star Development Limited (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363 (“Capital Well”) Ribeiro P J expressed his view at §2:
173.The Ordinance provides a statutory mechanism whereby a majority owner can only invoke after having taken reasonable steps to acquire the undivided share of a minority owner. Here, we also bear in mind the following guidance from Capital Well at §33:
174.We are here therefore concerned with whether on the evidence available, the offers made by the Applicant fell “within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question.” (underline added) 175.Although Ribeiro PJ stated further at §36 of the Capital Well that: “What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site”, he confirmed in §35 that the Tribunal is not required to decide first what the correct valuation was and then to assess the fairness and reasonableness of the majority owner’s offer against the valuation carried out on correct principles. The fact that there will often be differences of opinion has already been recognized. The respondents’, particularly those lay respondents’ complaint that the applicant failed to agree to their asking prices will not render the applicants’ offer unreasonable in the context of the Ordinance. 176.Bearing in mind such guidance from the Court of Final Appeal (“CFA”), we are satisfied that on the evidence available and in the circumstances of this Application, the applicants have taken reasonable steps to acquire all the undivided shares in the Lots including negotiating for the purchase of the shares owned by R22, R33, R34, R40 & R44 and the other outstanding unrepresented owners on terms that are fair and reasonable. Reserve Price for the Auction
177.In Hong Kong, the use and development of nearly all land is governed by leases granted by the Government. The KTM Lots are no exception. They are held under several Government leases each has a common term expiring 1997, and has further been extended until 30 June 2047, subject to payment of an annual Government rent at 3% of the ratable value of the premises erected thereon. Pursuant to the Government Leases dated 16 March 1921 as varied and modified by a Deed of Variation dated 26 February 1963:
This is hereinafter referred to as “building height restriction under the Government Leases” (“GL-BHR”). 178.By reference to the prevailing Draft Ngau Tau Kok and Kowloon Bay Outline Zoning Plan (‘OZP”) No S/K13/28 gazetted on 11 April 2014, the Lots fall within an area zoned “Residential (Group A)”. It means that no new development, or addition, alteration and/or redevelopment of an existing building shall result in the plot ratio of the resulting building in excess of 7.5 for a domestic building, or 9.0 for a building that is partly domestic and partly non-domestic. Under no circumstances the plot ratio for the domestic part of any resulting building shall exceed 7.5. In addition, the Lots are subject to three restrictions on development or redevelopment under the OZP:
(“collectively referred to as “the 3 OZP restrictions”). 179.The 3 restrictions were indeed introduced in draft OZP No S/K13/26 (“OZP 26”), the predecessor of the prevailing one, gazetted on 19 November 2010. Being dissatisfied with the restrictions, A1 herein had since 2011 initiated a number of judicial reviews (“JRs”) against, inter alia, the Town Planning Board (“TPB”) concerning the Lots’ re-development. As described by Reyes J in the judicial reviews (“JRs”) in Oriental Generation Limited v Town Planning Board[2012] 3 HKC 369, the re-development project of KTM is not an easy one[74] due to its special location in the region. 180.On 11 May 2012, Reyes J handed down his judgment quashing the 3 restrictions imposed by the TPB in OZP 26 and 27 as well as TPB’s refusal to consider their relaxation. The CFI considered the 3 restrictions arbitrary. It referred the question of whether, and if so what, restrictions should be imposed to the TPB for re-consideration in accordance with the judgment. 181.Both TPB and A1 lodged their respective appeals to the Court of Appeal (“CA”) under CACV 127/2012 and CACV 129/2012. Execution of the judgment of Reyes J was stayed pending the appeals or further order. On 13 November 2014, the CA handed down its decision dismissing the TPB’s appeal and upholding the decision of Reyes J. 182.The TPB filed a Notice of Motion for leave to appeal to the CFA on 16 December 2014. A1 and the TPB agreed to further extend the stay of the Reyes J’s decision, the 4th JR as regards the gazetting of the prevailing OZP, and submission of OZP 26 to the Chief Executive in Council until determination of the leave to appeal application. On 18 November 2015, the CFA refused TPB’s application for leave to appeal. 183.There are also the following parallel application/proceedings in the meantime:
184.Against the aforesaid impending litigations and constraints Mr Chan on behalf of the applicants proceeded to assess the RDV of the Lots adopting the following assumptions:
185.On 20 January 2015, R40 applied for leave to file and serve additional expert evidence on:
186.Although the Tribunal, on 3 February 2015, granted leave for the parties to put in further expert evidence sought by R40, it turns out that at trial, R40 no longer wishes to challenge Mr Chan’s assumptions. 187.In the meantime, Ms Sat, the expert for R40, agrees with Mr Chan on the plot ratio achievable for the development of the Lots, i.e. the entire domestic plot ratio of 7.5 allowable under the Building (Planning) Regulations, resulting in 0.9375 left for the non-domestic plot ratio. In their joint statement agreed on 16 April 2015, they also agreed that:
188.By reference to the valuation reports of the two experts both dated 9 April 2015 on RDV, the two experts resort to the residual valuation method in determining the RDV. This is done by deducting development costs (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross redevelopment value of the completed optimum development. Despite the many variables involved, before the two experts came to agreement on the residual land value of $2,293,000,000, their difference was only about 9% apart.[75] 189.The residual method of valuation is founded on the basis of a classic economic theory which suggests that the value of land as a factor of production depends on the ability of the land to produce revenues in excess of the required payments to all other factors of production. Payments to land are viewed as the residual productivity remaining after all other mobile factors of production have been compensated at their fair market values. It is reasonably expected that developers often use the land residual theory to determine the maximum potential value of a site after subtracting all other non-land costs from the total projected property value. A residual valuation, having established the development potential, can be expressed as a simple equation[76]:
190.Without a reasonable profit to be factored in, it would mean that the developer would be purchasing a piece of land for redevelopment expecting no return. We do not believe such will occur in reality. It is because there are always investments available in the market with fixed or guaranteed return over a period of time, e.g. Government or corporate bonds. Perhaps without appreciating this concept, those acting in persons, e.g. R8, R9, etc heavily criticized the inclusion of the developer’s profit in the residual valuation arrived at by the two experts. There are always risks associated with any investment particularly when the capital to be incurred is rather substantial, e.g. a real estate development. A developer undertaking such development will seek to make a reasonable profit out of his investment. The targeted level of profit depends on the nature of investment undertaken and the associated risk, such as market competition, market uncertainties and contingencies that may pop up before completion, and the general optimism in relation to venture undertaken[77]. The profit is the gross profit to the developer before meeting the developer’s general overheads and tax. While this profit is sometimes related to the value of the project, it is more appropriate to relate the same to the costs to be injected in the project and is equivalent to profit margin. In the present case, it is common ground of both Mr Chan and Ms Sat that a profit of 15% on the development cost over a development period of 3.75 years (i.e. about 4% per year) is appropriate. We find their assessed profit margin reasonable in the circumstances[78], and the criticism by R8, R9 etc not justified. 191.Certainly the residual method of valuation is not without its shortcomings. It is sensitive to changes in inputs: sometimes a minor variation in any of the factors involved may be compounded when they are carried forward throughout the lifespan of the project, thus producing a major effect on the final value of the scheme. In many instances, the most sensitive inputs come from the gross development value estimated. More often than not, a fractional increase in the gross development value would lead to a high percentage increase in the resulting land value even though the other factors remain unchanged. 192.The Lands Tribunal has on many occasions preferred the use of direct comparison method to the residual valuation method, if there is a choice. However, peculiar to the development conditions in Hong Kong, especially owing to the individuality of the development restrictions as specified in the Government lease pertaining to each lot, the residual method of valuation is very often adopted by the valuation profession and accepted by the Tribunal for the purpose of ascertaining land values. For instance, the Lands Tribunal in Hofei Estates Limited v Secretary for City and New Territories Administration [1980-82] CPR 486 remarked as follows:
193.In the witness statement of R17 filed on August 2014, she set out a proposed redevelopment scheme comprising a hotel and a verbal estimation of the scheme from an anonymous surveyor. Mr Chan responded in his Rebuttal Report of 16 September 2014 that such a scheme is ignorant of the prevailing OZP. This Tribunal shares his views. No particulars of construction costs, marketing costs, demolition costs, professional fees, interest cost as well as allowance for profits on the costs expended, which are usually the factors that have to be deducted from the gross development value, have been provided. Although a so-called premium was allowed in the verbal estimation, it was derived from the EUV specified in the Application Report. We agree with Mr Chan’s comment that such premium estimate was ignorant of the prevailing Government policy on land premium assessment for lease modification which is based on the enhancement of land value after the lease modification. Such anonymous surveyor, if really exists, should have attended the trial to elaborate his estimation and be cross-examined so that his theory can be tested. 194.At trial, R2, R8 & R9 appeared to be selective and only pick from the two reports those figures that are most advantageous to them. As explained by Ms Sat during cross-examination, the change of one item may lead to corresponding changes in other items. For instance, the average unit price for her model were higher than Mr Chan’s because her model comprises more small domestic units which would call for less marketing cost. However, smaller units would mean there will be a corresponding lower demand for car parking spaces, thus reducing the latter’s unit price. The combined effect is that the estimated gross development value arrived at by her was $6,458,581,019, which is even lower than that of Mr Chan at $6,505,298,530 whose proposed redevelopment scheme starts off with a lower average unit price for domestic units. The above demonstrates no one can choose whatever figures they wish from the reports in isolation because they are inter-related and are always with qualifications. 195.As regards the gross value of a hypothetical development, R8 insists on adopting the asking price for sales of new developments in completely different districts which are totally not comparable at all to the Lots in terms of neighbourhood and location. 196.In addition, for new developments, developers very often adopt different marketing strategies that suit their needs most. Various incentives to prospective purchasers, such as tax rebate, short-term financing with favourable rates, nil commission (in contrast to the lucrative commissions offered to estate agents in secondary market sales), etc will be offered in order to buoy up the asking prices that may not be achievable in the secondary market. 197.We therefore do not find R8’s “sales evidence” relating to sales in new developments elsewhere of any value to our present valuation exercise. 198.R8 together with R2 & R9 also refer the Tribunal to other land sales in recent years suggesting the valuation assessed by Mr Chan and Ms Sat too low. More particularly, R8 is referring to 3 land sales - one in Ko Shan Road sold in April 2011[79]; another at the junction of Fat Kwong Street and Sheung Foo Street sold in June 2013; and the last at Victory Avenue. The Victory Avenue sale was pursuant to the order of Lands Tribunal granted in Supergoal Investment Limited v Five F Ming House Limited & Others[80]. 199.These sites are all located in Ho Man Tin which is traditionally regarded as a popular if not prestigious residential area. The Victory Avenue lot can also be developed into a composite development with valuable retail shops on ground level which is not enjoyed by the Lots. In the Tribunal’s view, the Lots are situated at a relatively isolated location and cannot be compared to Victory Avenue which is closed to Mongkok, the traditional shopping centre of the Kowloon peninsula. R9 tries to argue that the location of the Lots is comparable to Ho Man Tin because according to media, he said, the Government is intending to develop East Kowloon to become the next central business district in Hong Kong. We share Mr Chan’s view during his cross-examination by R9 that the so-called Kowloon East is confined mainly to Kowloon Bay and Kwun Tong along the waterfront area according to announced plans. Even if R9’s prediction were to come true, it would take years to materialize. The high land value that might eventually achieve, if achievable, has to be substantially discounted for a present value. We are not persuaded that the Ho Man Tin sales are in any respects relevant comparables. 200.Further, by referring to the aforesaid transactions, as correctly pointed out by Mr Chan in his Supplemental Report of 7 August 2014, R8 had not taken into account the premium that would be payable to the Government for the removal of the GL-BHR. R9, on the other hand, suggests the premium agreed by the two valuation experts too high. We are of the view that such criticism is unfair and not based on any professional justification or experience which the 2 experts can offer. His objection is not accepted. 201.In his closing submission, R8 attempted to conduct his own residual valuation by using some of the figures adopted by Mr Chan in his Supplemental Report of 7 August 2014. Unfortunately, he failed to take into account of the developer’s profit, interest and costs afore-mentioned. R9 argued that the levels for these items allowed by the two valuation experts too high to be acceptable. Regrettably R9’s argument and submission are, with due respect, without professional basis and arbitrary[81]. We find R8’s and R9’s submission in these respect unacceptable. 202.R9 has also referred to sales of land in the Kai Tak Development Area as listed in Appendix II of Mr Chan’s Supplemental Report of 7 August 2014[82]. In that report Mr Chan commented that “these transactions are not suitable for direct comparison since there are substantial disparity in development potential due to attributes on location, development scale and development restrictions.” It is noted that all the lots referred to are zoned Residential (Group B) with a maximum plot ratio of 5 to 5.5 on the OZP as opposed to Residential (Group A) with a maximum plot ratio of 9 for the Lots. We agree with Mr Chan that for this reason alone, the sales in the Kai Tak Development Area are not good comparables because of the difference in the density of development. 203.In purported approach of the valuation in a professional way, R9 adopts the latest sale in May 2014 at $65,676/m2, and suggests, by reference to domestic price index published by RVD, an increase of 14% per annum for 2 years, i.e. $65,676/m2 x 1.14 x 1.14, thus arriving at an assessed unit rate of $85,353/m2. Applying this rate to the Lots, the value arrived at by him is, after allowing for the premium of $1,697,000,000, $3,650,349,906[83]. 204.We take the view the increase of 14% per annum has been double-counted. This sale took place in 2014 and the trial took place in 2015. Even by considering the 3 sales in Ho Man Tin referred to earlier by the Rs and the land sales in the Kai Tak Development Area, there is no evidence to support an annual increase in land value in tandem with the domestic price index alluded to by R9. The sale value of the hypothetical development is only one of the many essential elements in a residual valuation. Construction cost has to be deducted from the sale value before the residual land value can be derived. R9 in this regard had not taken into account the upward movement of construction cost recently which may set off part of the sale price in the residual valuation. 205.Having reviewed the submissions by lay respondents aforesaid and gone through both Mr Chan’s and Ms Sat’s residual valuations[84], we are of the opinion the land value, i.e. the RDV of $2,293,000,000 for the Lots agreed by the two valuation experts reasonable:
Hope Value 206.In her Valuation Report dated 9 April 2015, Ms Sat proposed there should be a hope value in addition to the land value which has been agreed with Mr Chan. The basis, according to her reports, seems to derive from her views that there must stand “some likelihood” or “some prospects of success” that land premium need not be paid at the end of the day otherwise A1, being properly advised, would not have taken the trouble of pursuing the interpretation proceedings to remove the GL-BHR[85]. 207.The way that Ms Sat came to the hope value is this. She first of all makes an assumption that the legal action may reach the CA and it will take about 21 months for the legal proceedings to finish its course. This period of 21 months, according to her, is what she has been advised, presumably by Messrs Lui & Law who have appointed her. She suggested in her Supplemental Report dated 23 April 2015 that the land value would have become $3,653,000,000[86] instead of the agreed value of $2,293,000,000 if A1 is successful in the interpretation proceedings for the obvious reason that land premium can be saved, though litigation costs and additional interests on funding may be required. The corresponding developer’s profit in the two different scenarios would be $2,300,000,000 (when A1 is successful in the interpretation proceedings) and $836,000,000 (when the interpretation proceedings are not pursued) respectively[87]. Should the legal action be unsuccessful and premium has to be paid, Ms Sat works out that the developer’s profit would be reduced from $836,000,000 to $712,000,000[88]. 208.Ms Sat takes the view that given the enormous gain ($2,300 million versus $712 million: see the preceding paragraph) if the legal action is successful, a buyer will be willing to pay a premium on top of the site value assessed in the usual manner. 209.Ms Sat then proceeded to conduct what she calls a sensitivity analysis. Her theory is this. Since it is expected that legal proceedings will take 21 months to conclude in the CA, the developer will be taking additional risk for his huge investment. Accordingly, a higher interest rate of 4.25% and a further 0.5% on top of the usual developer’s profit of 15% should be added to reflect the risk assumed during the long investment duration [89].What Ms. Sat did next is to compute a table of different land values applying various lower profit margins which a developer may be willing to accept for his investment with a view to gaining the additional benefit in case the litigation is disposed of in his favour. She comes up with a table which is reproduced below[90]:
Notes: (1) 15% : developer’s profit at ordinary level (2) PV@ 4% for normal development period (3) PV@ 4.25% taking into account 21 months legal proceedings period (4) Normal profit under normal development period is $836 million (5) Add 0.5% profit to account for longer development period if legal proceedings be involved. (6) Developer’s profit @ 15.5% will be increased to $2,300 million if successful 210.Ms Sat, however, did not recommend to adopt any of the figures in the table above. With a view to assessing what price an investor is willing to pay in order to gain the windfall brought about by the litigation, Ms Sat adopted the tool of internal rates of return (“IRR”) [91]. It can be understood that IRR is a way of measuring the profitability of a potential investment and is normally used to assess the desirability of an investment. Generally speaking, the higher the IRR the more desirable it is to undertake the investment. Ms Sat set out different IRR of the development project based on various scenarios below. She then comes to the view that “it would be unlikely that a willing purchaser would purchase the subject site at any value higher than $2,527,000,000, i.e. with an IRR below 7.1%”[92]:
211.More particularly, in her conclusion, Ms Sat said: “In the event that hope value is to be included into the Market Value, my opinion of the Market Value shall be within the range as set out … above, i.e. not more than HK$2,557,000,000[93],[revised to $2,527,000,000.00[94] and subsequently to $2,805,000,000[95] at trial] ”. In short, the “hope value” is HK$264,000,000[96], revised to HK234,000,000[97] at trial, over and above the land value agreed between the 2 experts. 212.In the closing submission of Mr Hui of counsel for R40 and R44, it is submitted for R40 and R44 that the RDV should, instead of the agreed value[98], be at $2,527,000,000. Mr Bernard Mak, submitted on behalf of R22, R33 and R34 submitted that Ms Sat was too conservative and proposed a sum of $2,800,000,000 to reflect the hope value. Alternatively, Mr Mak proposes that the reserve price should be no less than $2,527,000,000. 213.Mr Chan raised query in his Supplemental Report of 20 April 2015 that the adoption of an IRR of 7.1% by Ms. Sat is without reasonable basis[99]. Ms Sat acknowledged in her Supplemental Report dated 23 April 2015 that there are no recognized research data on the IRR of a development project. She however, makes reference to the following and is of the view that IRR of 7% is reasonable for a private developer to expect for development of this kind:
214.In using the suggested discounted cash flow approach, the IRR or the proper discount rate must reflect appropriate discount rate to incorporate both the time value of money and the venture risk.In Shun Fung Ironworks Limited v Director of Buildings and Lands[100] , the Tribunal had unequivocally stated the difficulty in determining it; at §411 of the said decision, it remarked that:
215.In the present case, neither Mr Chan nor Ms Sat has gone through the meticulous processes as in The Hong Kong Electric Co Ltd v Commissioner of Rating and Valuation, LDGA 224/2004 & LDRA 358/2004 (unreported, dated 30 November 2009) or CLP Power Hong Kong Limited v Commissioner of Rating and Valuation, LDGA 241/2004& LDRA 365-369/2004 (unreported, dated 24 April 2013) to determine this proper discount rate which is also usually referred to as the weighted average cost of capital in the discount cash flow exercise. Put simply, there is no evidence in the present case suggesting what usual IRR (or its range) that a real estate developer in Hong Kong is willing to take, and accordingly why 7.1% return is one’s best assessment that a potential purchaser may be willing to accept in the circumstances. 216.Mr Chan commented that the reference to Urban Renewal Authority’s IRR is not appropriate as it is not a commercial enterprise. Neither is the reference to the Mandatory Provident Fund system appropriate as the purpose of setting up such fund is not to take commercial risk. We share Mr Chan’s said views. Further, we agree with Mr Chan’s comment that if the two valuation experts could agree on a RDV of $2,293,000,000, this figure should have already reflected the agreement of the parties on the proper return that a hypothetical developer in the market is willing to purchase the land taken into account all risks and fortune that may come together. According to Mr Chan, based on the agreed RDV of $2,293,000,000, the IRR he worked out was around 10%, and this was not challenged. 217.If this is the agreed valuation that a hypothetical purchaser is willing to pay, we are doubtful why this hypothetical developer would suddenly change his mind and wish to adopt a lower IRR instead. We are not talking about a particular developer but a hypothetical developer in the market. If hypothetical developers could accept an IRR of 7.10% in the first place, they would certainly have competed with each other. The market would then be bid up in excess of $2,293,000,000 (with IRR at about 10%). This agreed valuation should never have been $2,293,000,000 in the first place. 218.We consider the sensitivity analysis should have already been carried out by a hypothetical developer before making up his mind on the price he should bid. If 10% is considered the optimal IRR for a hypothetical developer, there is no basis to say now there is another group of hypothetical developers who are willing to adopt a lower IRR. We understand what Ms Sat wants to say is that the IRR of 7.1% involves a speculative element. Certain risk-taking purchasers are willing to accept a lower return (i.e. 7.1%) with a view to gaining a higher return (i.e.17.16%) just in case the GL-BHR is removed without payment of premium. 219.No doubt Ms Sat was heavily cross-examined by Mr Mok at trial. She conceded during cross-examination that she was not providing a valuation as such but was only providing different scenarios for some willing speculative purchasers to form their own business decision. She also has not been advised whatsoever on the prospect of success of the interpretation proceedings. The percentage of success, in her view, might range from anything between 1% to 99%. We are of the view her said concession has destroyed totally her opinion that the land value is to be enhanced by the hope value to $2,527,000,000 or $2,805,000,000, or otherwise. If she has never been advised or has no knowledge whatsoever of the prospect of success of the interpretation proceedings, we are of the view that the idea of hope value cannot even start to engage. The fact that the applicants have initiated the said interpretation proceedings is neither here nor there on the chance of success. They may have a good chance. However, they may have got bad advice, or the proceedings are only a tactical move. Whatever may be the reason, apparently she has done nothing to assess the prospect of success of the interpretation proceedings. 220.The following remarks by Hon Lam J (as the learned V-P then was) in Chinachem Charitable Foundation v Chan Chun Chuen HCAP 8 of 2007 (unreported, dated 2 February 2010), are always good reminders of the role of an expert:
Meaning of Likelihood 221.As said above, during cross-examination, Ms Sat conceded that when she carried out the sensitivity or the IRR analysis, she paid no regard to the probability of success in removing the GL-BHR at nil premium; she had neither consulted any legal expert nor been particularly advised on this issue. In the Tribunal’s view, what she has done is contrary to commentary (7) & commentary (8) of paragraph 2.1 of Valuation Standard 3 of the Hong Kong Standards 2012 Edition which are reproduced as follows:
222.According to the Hong Kong professional valuation standards, hope value can only be included as part of the market value only when there is a reasonable prospect as reflected by at least 50% chance of success that the land can be put to use. A mere chance apparently is not accepted by the professional body unless the probability threshold can be met. The reference to “at least 50% chance” was also adopted in various jurisdictions such as in Canada. In Farlinger Developments Limited v East Your (Borough) (1975) 9 OR (2d) 553, 61 DLR (3d) 193, 8 LCR 112, the issue was whether the appellant could reasonably expect a change in zoning permitting development as desired as the basis of determining compensation for the market value of its land which had been expropriated. Howland JA of the Court of Appeal of the Ontario Supreme Court of Canada held at §38 of the judgment that:
The Canadian Court of Appeal found that there was no evidence upon which the Land Compensation Board could properly find that there existed a probability of favourable zoning instead of a mere possibility. 223.Ms Sat took the view that so long as there existed the interpretation proceedings (despite it had been discontinued by the applicants), a willing purchaser will be willing to offer a higher price to purchase the Lots. That assertion, in our view, is without any support, professionally, legally, and statistically from a survey of recent court cases. 224.This Tribunal considers that for the present purpose, a broad brush approach is to be adopted to assess the prospect of success of the interpretation proceedings. On the construction of Government lease, it has been a settled principle of construction applicable to Government grants that, contrary to the ordinary rule applicable to grants by a subject, grants by the Government usually fall to be construed in the manner most favourable to the grantor. The following passage from Slade J in Earl of Lonsdale v Attorney General[101] has been cited with approval by Lam V-P in New Mercury Holding Corporation v The Secretary For Justice[102] :
225.It was also established by the decision of the Privy Council on appeal from Hong Kong in Hang Wah Chong Investment Co. Ltd v. Attorney General, supra at §129 above[103] that the Government as lessor of Government land is just as entitled as a private landlord to name its price for any modification of the conditions on which land is held from it. 226.It was repeated in Director of Lands v Yin Shuen Enterprises Ltd, supra also at §129 above[104], Lord Millett NPJ has this to say at §27:
227.The provision of the Government Lease which forms the subject matter of the interpretation proceedings is contained in the Deed of Variation dated 26 February 1963[105], and is this:
228.It is also noted that the aforesaid was granted in consideration of, inter alia, payment of certain premium[107]. The level of the lawn was objectively ascertainable at the time of the grant. We disagree with the submission of Mr Hui for R40 and R44 that since there is no longer a RAF quarters, the height restriction has become obsolete. It is because the said height restriction is measured by reference to the lawn on which the quarters stand, and not linked to the existence or otherwise of the RAF or its quarters. Although the RAF or its quarters might have gone the lawn is still there. The term is couched in clear and unequivocal terms. It is an ascertainable height which the Government then had allowed KTM to be built upon the Lots on payment of a specified premium. It is generally the case that the higher premium chargeable for a lot the higher a building can be built upon a lot. From the legal principles briefly stated above, we cannot see how the height restriction clause can easily be rendered invalid or void simply because the RAF quarters no longer exist. 229.Furthermore, according to the recital, the parties to the Deed of Variation appeared to have gone through the process of negotiation on the terms, including the surrender of certain parts of lands and payment of premium in exchange for the variation of height to the present restriction and the provisions of car parking spaces for particular purposes. The said “height restriction” was apparently a relaxation rather than restriction at that time because it was the then lessee who requested the Government to modify a former terms which imposed rather stringent conditions by requiring the building to be built to be of the same rate, form, elevation, character and description and should front and range in a uniform manner with the buildings immediately adjoining in the same street. It was the lessee who wanted permission for a more intensive development[108]. The height restriction was part of a package deal to suit the development need of the lessee. It was relaxed to that extent on, inter alia, payment of premium. Apparently, it was a commercial deal, and the Government was then only willing to allow the building to be built to a particular height and no more on payment of a limited premium. There is no evidence suggesting that the said height restriction provision in question was related to any third party or policy which has become obsolete. It would appear that any applicant seeking to challenge the said Government Lease provision will be facing an uphill battle as a matter of law. Any prospective purchaser wishing to gain benefit from the said challenge has to make a serious and realistic assessment of its chance from a legal point of view. Ms Sat does not appear to have any clue of such chance from any legal advice. Neither has she written to the Director of Lands to enquire whether the GL-BHR has been abrogated because of the removal of the airport. 230.Furthermore, from a brief review of some 9 post-1997 cases[109] challenging whether certain terms of the Government leases having been abrogated, principles to the same effect as aforesaid together with earlier principles enunciated by Hoffmann NPJ (Lord Hoffmann) in Investors Compensation Scheme Ltd And West Bromwich Building Society[110] have been repeatedly referred to, approved or applied. All except New Mercury, which was on a different point, were unsuccessful. 231.We also do not notice that, since the removal of the airport from Kai Tak to the Lantau, there is any court decision concerning the relaxation of height restriction in the surrounding areas without payment of premium. Neither the Rs nor any of them nor Ms Sat have put in evidence suggesting that this is the Government stance. 232.Mr Mak relies on the same argument as Ms Sat to support the existence of a hope value in addition to the agreed RDV. However, the fact that the applicants had filed affidavit to support the interpretation proceedings and the Secretary of Justice did not seek to strike out the proceedings does not form the basis for adding a hope value to the already agreed valuation of the land. In the absence of other evidence concerning the chance of success of the interpretation proceedings, we are not persuaded that a hypothetical purchaser in the market is likely to pay more simply because somebody has expressed enthusiasm and have instigated legal proceedings to challenge the GL-BHR. 233.Mr Mak suggested to Ms Sat that the legal proceedings may not necessarily defer the development period because the two could have been carried out in parallel at the same time. Mr Mak invited Ms Sat to re-work her sensitivity analysis or IRR analysis and Ms Sat came up with the revised tables[111] below in contrast to those in §§209-210 above:
* This is the additional scenario added to reflect the IRR of 7.11%. 234.By reverting to the normal development period, Mr Mak submits that the borrowing rate can be reduced from 4.25% to 4.00% and the developer’s profit can be maintained at 15% instead of 15.5%. However, one of the faults of Mr Mak’s proposed approach in such scenario is that the developer must have withheld payment of premium, pending the resolution of the interpretation proceedings. In the circumstances, when premium, which is a variable that changes with market conditions, is eventually payable, due to long lapse of time beyond the agreed date of valuation of the premium, the agreed premium of $1,697,000,000 is no longer applicable. This will certainly increase the risk that a developer has to face. How can the site value be still assessed at the developer’s profit of 15% with an assessed land value remaining at $2,293,000,000 despite all the extra efforts and legal costs wasted[112] but with greater uncertainty looming? 235.Ms Sat conceded that she has little experience in lease modification applications. It is to be noted that when Government Leases are to be modified, the Government can make use of the opportunity to insert other development conditions to reflect the prevailing land policy instead of merely deleting the said restrictions. Ms Sat further accepts that it would be imprudent for a hypothetical developer to proceed with the development to build beyond the GL-BHR pending the outcome of the legal proceedings for the obvious reason that the resulting development may subsequently be found in breach of the Government Leases should the court rule against him. Accordingly, without any certainty in the outcome of the litigation, what a prudent developer will normally do is to finish the substructure/the foundation and construct no more. 236.Ms Sat said she had paid no regard to the probability of success in the GL-BHR legal proceedings. It is noted that the decision to purchase or otherwise is a business decision with binary outcomes – either successful or unsuccessful. It was pointed out to her that when she arrived at an expected site value with binary outcomes, a rough formula can be used to find out mathematically the probability implied for an outcome, i.e.
237.Ms Sat worked out the probability implied from her recommended value of $2,805,000,000 (with hope value suggested by her) at IRR 7.11% being about 32%[113]. When she answered Mr Mok during cross-examination, she conceded that if a probability is low, it would be imprudent for a developer to increase its bid. If the calculation is not based on the suggestion of Mr Mak but on the lengthened development period because of the legal proceeding as originally advanced by Ms Sat, according to Mr Hui’s closing submission, the required probability of success to support a land price of $2,527,000,000 (i.e. with hope value of $234,000,000 on top of the agreed RDV of $2,293,000,000) for the Lots is 17.21%[114]. 238.Mr Mak refers to Kwok Lee Sau Sang v Director of Lands & Survey[115] where the claimant sought to establish a redevelopment potential of amalgamated site development. At p111-112 of the judgment, the Lands Tribunal commented as follows:
239.Both Mr Mak and Mr Hui submit that Ms Sat’s view was comparable to the situation as recommended by the Lands Tribunal in Kwok Lee Sau Sang, namely, to determine how much a hypothetical developer would be prepared to risk his profit from the redevelopment of KTM. However, as highlighted in the relevant paragraphs of Kwok Lee Sau Sang, the Tribunal must first be satisfied if such potential exists. As explained by us in this judgment, we are not satisfied. Even Ms Sat also accepted that for a probability of as low as about 30%, it would be imprudent for any developer to increase his investment to take the chance. 240.It is to be stressed that the enhanced land price with hope value as proposed by Ms Sat requires mathematically a probability of about 30%. However, as the Tribunal has pointed out above, there is simply no evidence in the present case suggesting any or any reasonable prospect of success. She has never been advised legally. Neither had the respondents sought legal advice on its prospect. On the contrary, as analyzed above, the prospect is rather slim. Like Kwok Lee Sau Sang, we cannot give any weight to the possibility that a speculator, who may wish to take on board certain gambling element, might be prepared to pay a higher price or risk to the extent of his profit. It is not the purpose of the present valuation exercise. 241.Mr Mak and Mr Hui also in their closing submissions refer to an article called “Bargaining Margin: How much can a developer yield in negotiations?” [116] which has never been put in evidence for the applicants’ and their experts for comment. Mr Mok objects to its admission. In any event we consider this article fails to convince the Tribunal. It has been suggested in the said Article “bargaining margin” refers to “the incremental “up front” cash that a developer can afford to add to a project and still achieve his required rate of return”. We have explained in §217 above that a hypothetical developer in the market should have already made use of his required rate of return to bid up the price to achieve the highest value of the land, i.e. the agreed land value of $2,293,000,000, having taken reasonably and knowledgeably regard of all potentialities; he should not have any leeway to save up a few percentage as in the example given in the article. As said near the end of the article, the hypothetical developer should preserve his required IRR instead of going down further as suggested by Ms Sat. 242.We consider that to a certain extent, this “bargaining margin” also resembles the concept of “no loss basis” in Kwok Lee Sau Sang but as said, we are not satisfied that the removal of the GL-BHR at nil premium a probability. By the Hong Kong Standards 2012 Edition by which, we trust, both the valuation experts agree to abide, Market Value is defined by the IVS and followed by the said Hong Kong Standards as “the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion”. As said in §239 above, even Ms Sat conceded that the probability of 32% too low for a prudent developer to increase its bid, not to mention that 32% probability is without basis. 243.We consider her said concession fair. The probability theory is a mathematical tool to assist investors making decision. In our judgment, ordinary investor would prefer certainty over chance especially when additional capital outlay is required for the interpretation proceedings with a slim chance of success. Runnymede Development Corporation Limited v City of Oshawa (1982) 36 OR (2d) 582, 135 DLR (3d) 647, 25 LCR 105 concerns an appeal by the municipality from a decision of the Ontario Land Compensation Board which, basing on the evidence of an expert who assigned a 20% risk factor on the prospect of a development, decided that “a willing buyer would still have deducted 50 per cent for the attendant risk”. The Divisional Court of Ontario considered the Land Compensation Board’s reference of the development having “a distinct possibility” could not be elevated to “probability” as in the case of Farlinger Developments (supra). 244.Mr Hui submits that the market value of the Lots should include an element of “hope value” to reflect the prospect of success in the interpretation proceedings. In his closing submission, Mr Hui suggested that the prospect of the interpretation proceedings was comparable to an incubator venture like the early stage of Facebook which, despite its uncertainty in making profit, might attract tremendous value. We pointed out at trial that this analogy is not appropriate. It is because an incubator venture very often has multifarious outcomes where success may not be limited to a particular outcome whereas the interpretation proceedings have only binary outcomes - either successful or unsuccessful. Balance of Probabilities or Quantification of a Lost Chance 245.It is Mr Hui’s submission that at common law, a plaintiff is generally awarded hope value in respect of a lost chance to obtain a benefit, even if the chance of obtaining such benefit is less than 50%. He referred the Tribunal to a number of authorities, e.g. Chaplin v Hicks[117], Kitchen v Royal Air Force Association[118], Corfield v DS Boscher & Co[119], Allied Maples Group Ltd v Simmons & Simmons[120], etc which are mostly in the area of tort. It is Mr Hui’s proposition that the “loss of chance” jurisprudence at common law has a place in compensation cases. The balance of probability is applicable to do a deterministic assessment such as whether or not a historical event had occurred. However, for future uncertain events as opposed historical facts, a probabilistic assessment is to be adopted. From the cases he relied on, he submitted that the court should be ready to compensate a party even when the loss of chance is less than 50%. 246.Mr Hui also relies on a number of English authorities such as London Borough of Enfield v Lavender Garden Properties Ltd[121], Porter v Secretary of State for Transport[122], Transport for London v Spirerose Ltd[123] which are land compensation cases to support his proposition that the court will compensate an applicant for hope value even though the probability of the scheme in question is less than 50%. The case of Spirerose which he relies on is a House of Lords decision. 247.Mr Mok, counsel for the applicants, disagreed. It is his submission that the legal test to establish hope value as confirmed by local authorities is on the balance of probability and not on the quantification of a lost chance. It is also his submission that Mr Hui has misconceived what had been enunciated in Spirerose. Mr Mok relies on Spirerose and the Hong Kong CA decision in Siu Sau Kuen v Director of Lands[124] in support of his proposition. It is interesting to note that both parties are relying on the House of Lords’ decision in Spirerose for support. 248.In Siu Sau Kuen, the applicant’s unit was resumed by a notice of resumption issued by the Government. In determining the compensation to be paid to the applicant, issue arose as to whether there were people ready to buy up properties in the subject lot with a view to collecting a site worth redevelopment. An added value reflecting this future potentiality should be incorporated if the Lands Tribunal found in favour of the applicant. The Tribunal, however, found as a matter of fact on the available evidence against the applicant. The applicant lodged an appeal to the CA. 249.Fok JA (as the leaned PJ then was) considered that although the test which the Tribunal formulated in a particular paragraph was not entirely correct, the actual test the Tribunal was then applying as elaborated in other parts of the first instance decision was correct. Fok JA then confirmed the approach of enquiries by HH Judge Cruden sitting as a Presiding Officer of this Tribunal in Tsang Chun Ki & Anor v Director of Engineering Development[125]. Fok JA then re-state his test at §34 of Siu Sau Kuen, as follows:
250.By reason of Siu Sau Kuen, hope value, which reflects a redevelopment potentiality of a piece of land, will only be included unless and until that redevelopment potential can be established on a balance of probability. We share Mr Mok’s submission that the mere establishment of a possibility for success of the interpretation proceedings is insufficient, and evidence of any prospect of success is simply lacking. 251.In fact, Spirerose and its line of authorities[126] were discussed briefly in Siu Sau Kuen. The learned Fok JA had this to say at §35[127]:
252.We share the learned JA’s observation. In fact Spirerose concerns an appeal to the House of Lords which overturned decisions of both the English CA and Lands Tribunal. The English Tribunal found that planning permission for a valuable re-development in respect of the resumed land was likely to have been granted, though by no means certain[128]. But the English Tribunal awarded compensation on the basis of a valuation of land not on the footing that permission would probably have been granted but on the footing that it would have been granted[129]. The English Tribunal attributed a valuation of £608,000 for the latter footing but only £400,000 to the former one which reflected only a “hope value”. According to what has been recited by the House of Lords, this ‘hope value” was on the basis that “permission is not as a matter of law to be assumed and only hope value is to be taken into account.”[130] The House of Lords considered in the circumstances it would be wrong to award on the basis of 100% certainty of redevelopment[131]. A discount rate with only hope value should be awarded to reflect the chance that permission would not have been granted. 253.In Spirerose, the English Lands Tribunal found, as a matter of fact, that permission was likely, i.e. on a balance of probability or more likely than not, to be available to the applicant. The House of Lords only considered that in the circumstances, it was not right for compensation to be awarded as if such permission had been granted. Discount in the form of hope value was appropriate. Spirerose therefore does not support the proposition that a hope value should be awarded for any likelihood of redevelopment even if it is less than 50%. Before hope value was to be awarded the English Tribunal in Spirerose was satisfied on a balance that the redevelopment was likely, though not granted. The House of Lords did not upset these underlying findings. 254.The question of whether the loss of chance as commonly adopted in area of tort should be introduced in the area of land compensation asserted by Mr Hui and Mr Mak was also discussed in Spirerose. Many of the cases referred to by Mr Hui have in fact been referred to and discussed therein. With the greatest respect to Mr Hui, upon perusal of Spirerose, this Tribunal comes to a conclusion different from his. We accept Mr Mok’s submission as set out in paragraph 77 of his closing skeleton dated 8 May 2015. We consider that their Lordships’ views in Spirerose were in fact clearly against such tort rule to be introduced in the area of land compensation. Suffice to say that in §42, Lord Walker rejected this idea and had this to say:
255.Lord Walker further set out in the following paragraph certain views of Carnwath LJ expressed in Gregg v Scott which Mr Hui is also relying on, and questioned the distinction made by Carnwath LJ as arbitrary. His views are supported by all members of the House[132]. 256.The English CA in Spirerose took the view that there is no anomaly in giving a hope value even there would have been a possibility but less than a probability of a planning permission[133]. Lord Collins then went on to consider there was no basis for the CA to come to the conclusion it did. In paragraph 130 of Spirerose, Lord Collins expressed that:
257.Lord Neuberger also discussed the insufficiencies of the English Court of Appeal decision. In paragraph 61 of Spirerose, it is said by Lord Neuberger as follows:
258.In our views, Spirerose does not support the submission now contended by Mr Hui and Mr Mak. Quite the contrary, it is in line with the local authorities such as Siu Sau Kuen which requires the re-development, and in the present case, the interpretation proceedings having a prospect of success on a balance of probability before a hope value can be attached. 259.It is the Tribunal’s view that the test for the “hope value” is on a balance of probabilities, and the Rs fail to demonstrate that the threshold has been reached. As a matter of fact we find there is simply no evidence which supports any prospect of success of the interpretation proceedings. On the contrary, on a broad brush review of the said interpretation proceedings, the chance of success seems slim. 260.By reason of the above, the suggestion that a hope value to be added to the agreed land value of the Lots to reflect the possibility the GL-HRC being removed at nil premium is not substantiated. Conclusion on Reserve Price 261.Hon Ribeiro PJ at §21 in Capital Well,after examining the scheme of the Ordinance, considered that the enactment is to ensure a minority owner receive fair and reasonable compensation for his interest in the lot. Such compensation may be that which the minority owner agrees to accept or that which represents his share of the market value of the lot (reflecting its RDV) as determined at a public auction, subject to a reserve price approved by the tribunal. In this connection, the RDV assessed by the Tribunal is the “minimum” reserve price for the purpose of the auction. The market value of a minority owner’s unit will then be determined by market force through the process of auction. 262.By reason of the above, we reject the suggestion of hope value by Ms Sat, and accept the reserve price for the auction of the Lots be set at HK$2,293,000,000. Trustees 263.The applicants proposed to appoint Mr Ma Ho Fai and Ms Tsang May Ping who are respectively senior partner and partner of Messrs Woo Kwan Lee & Lo, Solicitors, Notaries, Agents for Trademarks & Patents, as the sale trustees. Based on the information on their background and experience as set out in the letter dated 24 April 2015 from their firm, we are satisfied that they are proper persons to be appointed. Their remuneration at the rate of $5,500 per hour (exclusive of disbursements) as mentioned in the letter dated 30 March 2015[134] is considered reasonable and acceptable. Particulars and conditions of sale of the Lot 264.On behalf of the applicants Mr Mok has submitted a set of draft particulars and conditions of sale[135] by public auction for our consideration. We have perused them and understand they are usual terms used for compulsory sale, and we approve the said draft accordingly. Conclusion and Orders 265.By reason of the forgoing, we are satisfied that the redevelopment of the Lots is justified due to the age and state of repair of KTM; and the applicants have taken reasonable steps to acquire the undivided shares in the Lots. This Tribunal has determined the values of the minority owners’ unit and is also satisfied that the values of the minority owners’ units as assessed in the Application are not less than fair and reasonable, and not less than fair and reasonable when compared with the value of the applicants’ property as assessed in the Application. This Tribunal now makes the following orders:
Costs 266.Following the principles laid down in Good Faith Properties Ltd v Cibean Development Co Ltd[137] we make a costs order nisi that the applicants do pay the respondents costs of the respondents, including all costs reserved, such order be made absolute after 14 days if no application is made to vary the said costs order. 267.We would like to express our gratitude to counsel for their thorough legal submissions and able assistance rendered throughout the trial. Postscript: Disciplinary Action against Mr Chan 268.Starting early September 2015, various parties had written to the Tribunal raising queries to the fitness of Mr Chan to be an expert in the present proceedings. It was because as reported in the newspaper, the Hong Kong Institute of Surveyors (“HKIS”) had instituted disciplinary action against him and found the charge substantiated. His membership was suspended as a result. 269.On 24 September 2015, the applicants’ solicitors wrote to the Tribunal attaching, inter alia, a letter of Mr Chan dated 23 September 2015 and copying the same to all other Rs. By the said letter, Mr Chan said he received on 21 August 2015 from the HKIS a decision of its Disciplinary Board (“DB”) that the charge against him for giving opinion as a professional valuer that “were not, to the best of his ability, objective, reliable and honest” is established; and that his membership was suspended for a period of 12 months from 20 August 2015. 270.As the hearings of the HKIS and its DB were conducted in strict confidence, and that Mr Chan was then contemplating lodging legal challenge to the said decision, the charge, the decision of the DB dated 25 March 2015 and the suspension letter of the HKIS dated 20 August 2015 were not enclosed with Mr Chan’s letter. However, it was stated that Mr Chan was willing to disclose these documents to any respondent who agrees to provide an undertaking to the effect that the documents would only be used for the sole and only purpose of considering the relevance of Mr Chan’s suspension to his evidence given in the present proceedings. 271.This issue has generated a series of exchange of correspondence between the applicants and various respondents and a number of letters to the Tribunal. On 16 October 2015, the Tribunal directed release of the said confidential information subject to provision of undertakings to the Tribunal, Mr Chan and the applicants along the line proposed by the Applicants. Some unrepresented parties requested re-opening of the hearing for the purpose of challenging Mr Chan’s evidence given at trial on, inter alia, grounds that he dishonestly misled the tribunal by manipulating valuation data. 272.On 11 December 2015, this Tribunal directed that:
273.In compliance with the aforesaid directions, only R22, R33 and R34 (acting through counsel Mr Bernard Mak and Mr Bosco Cheng), R9 (acting in person) and the applicants (acting through Mr Mok) put in written submission. 274.Some backgrounds leading to the disciplinary action have already been in the public domain. Taken into consideration of the confidential nature of the disciplinary proceedings and that there is an impending proceedings in the CFI, only very brief facts which are necessary for the disposal of the present issue will be set out. The validity or otherwise of the said disciplinary decision will not be discussed herein. 275.It is undisputed that in 2009 Mr Chan was engaged to prepare a valuation report relating to certain properties located in the PRC for a PRC company for the purpose of an initial public offer (“IPO”) of that company in Hong Kong. Certain properties held by the said company were subject to sales restriction. Mr Chan’s assessment was on the basis of “investment value” which, according to the report, did not represent the “market value” of the properties as defined in the HKIS Valuation Standards. An asterisk to denote this difference was placed next to the valuation with description “market value” in some but not all parts of the report annexed to the IPO document. Those parts without the asterisks include the figures being the summation totals stated under the heads of “sub-total” and “total” from figures bearing asterisks. The “investment value” attributed to 90% of the “market values” of landed properties so represented (or misrepresented). 276.It is therefore the HKIS’s case as revealed from its charge against Mr Chan that he had:
277.The formal charge against Mr Chan before the DB was issued on 14 December 2012 and amended on 9 June 2014. The DB hearing of the HKIS was held on 5 & 6 February 2015, and its decision made on 25 March 2015. According to the HKIS’s letter to Mr Chan’s lawyers notifying him of the decision of the HKIS’s General Council, it was stated therein that the meeting of the Council was held on 7 August 2015, during which resolutions to, inter alia, suspend his membership were then made. The DB’s decision dated 25 March 2015 was also enclosed to Mr Chan via his solicitors. 278.It is Mr Chan’s case that all valuation figures in the summary values of the report in question were clearly distinguishable between “investment value” and “market value” and hence the HKIS valuation standards have been complied with. It was further his case before the DB that figures under the heads of sub-totals and totals were only arithmetic summations and were not opinions. However, Mr Chan’s explanation was not accepted by the DB which considered his way of presentation misleading. The Tribunal was, however, informed at the same time that Mr Chan’s membership with the Royal Institution of Chartered Surveyors (“RICS”), another professional valuation body, remained intact. 279.Counsel Mr Mak and Mr Cheng do not, and we think fairly and reasonably, invite this Tribunal to automatically disregard totally Mr Chan’s evidence as a consequence of the suspension of membership. It is their submission that:
280.Counsel for R22, R33 and R34 refer the Tribunal to a passage in an English decision of Watkins & Davis Limited v Legal General Assurance Co Ltd[138] at 680 by Neill J in purported support of their submission:
281.R9’s submission, so far as can be discerned from his submission, can be broadly be summarized as follows:
282.Mr Mok submitted that the decision of the DB does not adversely affect the credibility, reliability and integrity of Mr Chan in general, and his credibility, reliability and integrity in his evidence given in the present proceedings which concerns particular aspects of valuation which he disagreed with Mr Siu and Ms Sat. His submission can broadly be summarized as follows:
283.After reading the decision of the DB and the written submissions of the parties, the Tribunal shares generally the views of Mr Mok. As apparent from the IPO document, Mr Chan was required to do valuation of landed properties in the PRC with sales restriction. He adopted an investment valuation approach. In the DB’s proceedings, an expert was called by the HKIS as a key witness against Mr Chan. There is no suggestion by the HKIS’s expert that the methodology, namely, the investment approach adopted by Mr Chan for the landed properties in question wrong or inappropriate in the circumstances. Neither has any opinion ever expressed that if other methodology (or more appropriate methodology) was adopted, the valuation arrived at would be substantially less. What the DB’s decision seems to suggest is, since the way of presentation was misleading, and since Mr Chan was such an experienced member, the way of presentation was considered deliberate. Mr Chan was therefore considered dishonest. From what has been stated, we share Mr Mok’s view that the suspension by the HKIS of Mr Chan’s membership not casting any doubt on his professional ability and expertise in the area of valuation where his expert opinion is required in the present case. Even counsel for R22, R33 and R34 do not seek to challenge the “expertise and qualification of CC [Mr Chan] even if he was suspended”[139]. 284.The main issue of EUV in the present case concerns whether the investment method used by Mr Siu in the valuation of CPS should be adopted in preference to the direct comparison method adopted by Mr Chan. There are also aspects such as what comparables should be adopted, the extent of adjustment that should be made to a particular factor and floor areas, etc for the shops, residential units and CPS. We reject Mr Siu’s opinion on, inter alia, grounds that he simply adopted unreliable rental income, not investigating the background thoroughly, and that his theory is unsound. After detailed analysis many of the views expressed by Mr Chan on the difference between the parties are accepted by this Tribunal. It is to be emphasized that that the panel of this Tribunal comprises a member who is a professional and experienced valuer. As such, the conclusion of the DB of the HKIS leading to the suspension of his membership does not, in our view, affect in any material way Mr Chan’s opinion given and accepted in the present proceedings on the issue of EUV. Mr Chan’s opinion was accepted on the strength of his expertise and skill and, in our view, was not materially affected in any way by his integrity or credibility. 285.It is fair to say R9 accepted the EUV arrived at by Mr Chan despite his criticism. 286.Concerning the issue of RDV, as discussed above, the difference in the valuation reached between the Mr Chan and Ms Sat is less than 10% and can be regarded as within reasonable difference between 2 competent experts[140]. The plot ratio, which has once a hotly disputed issue and the subject matter of an urgent expert directions application shortly prior to trial, arrived at eventually was almost identical[141]. Subsequently the 2 experts can even agreed on the RDV of the Lots. They disagree only on the “hope value” proposed by Ms Sat. 287.The Tribunal disagrees with Ms Sat on “hope value” on grounds, inter alia, that it fails to satisfy the legal threshold and is totally without basis because there is simply no evidence suggesting any prospect of success of the interpretation proceedings when she puts forward the “hope value” for consideration. Neither has she been advised of the same before making the proposal as an expert in her professional capacity to the Tribunal. It is further the assessment of the Tribunal on a broad brush view that the case of success is slim. The reasons for rejecting the proposed “hope value” are more particularly set out above. The rejection or otherwise of the “hope value” proposed by Ms Sat is not dependent upon the findings of the DB against Mr Chan, though the Tribunal shares many of his views. 288.In the circumstances of this case we fail to see how Watkins can assist the Rs. On the areas of the EUV and RDV which require adjudication by the Tribunal, with due respect to Mr Siu and Ms Sat, we cannot see they and Mr Chan can be regarded as experts of equal standings. 289.In the argument between the experts on professional level, there has never been any allegation that Mr Chan was dishonest, unreliable or not objective. The argument was mainly on valuation methodology, choice of comparables, adjustments, etc. Accordingly, even after taking into consideration of the DB’s findings and the HKIS’s decision to suspend his membership which they are entitled to come to as they did now, this Tribunal would not come to a different conclusion from that set out in this decision. Neither do we find Mr Chan’s opinion given in the present proceedings unsafe or unreliable. 290.There has been challenge by R9 that Mr Chan should have disclosed the disciplinary action against him by the DB of the HKIS. Similar challenge was in fact lodged in another compulsory sale’s case Harvest Treasure Limited and Ors v Cheung Fat Enterprises Limited & Ors[142] before a differently constituted panel of the tribunal in which Mr Chan had also given expert evidence. In that case, counsel for the defendants submitted that Mr Chan’s evidence should be given no weight simply because he made no disclosure of the disciplinary proceedings against him in that proceeding. Various authorities including the Court of Final Appeal decision in HKSAR v Lee Ming Tee and Securities and Futures Commission[143] was considered. The Tribunal in Harvest Treasure came to a view that the duty to disclose a witness’s disciplinary inquiry discussed in Lee Ming Tee is mainly applicable to criminal cases, not civil proceedings, and the duty is on the prosecution. 291.We understand that Harvest Treasure may be subject to appeal. Suffice to say that Section 58(1) of the Evidence Ordinance provides that:
292.Mr Chan said he only knew of the DB and the HKIS’s decision on 21 August, 2015. This fact is not challenged. So when he made his various reports and testified in court he was not aware of the DB’s decision. Apparently, Mr Chan has not breached any codes of conduct for professional expert set out in the Rules of High Courts, and his evidence will not be rendered inadmissible. 293.Further, section 10(6) of the Lands Tribunal Ordinance, Cap 17 (“LTO”) provides that:
294.Even if the Tribunal were wrong and Mr Chan has a duty to disclose his disciplinary inquiry when giving his report/evidence in the present proceedings, the above LTO provision empowers the Tribunal to admit his evidence after taking all matters into consideration and attaching such weight to it as the tribunal deems fit. As such it will be a matter of weight to be attached to his evidence rather than a matter of admissibility. By reason of nature of difference between the parties on matter requiring expert evidence as more particularly set out in the preceding paragraphs, we consider the DB’s findings and the HKIS decision, which they are entitled to come to and even if upheld in any court of laws, will not render Mr Chan’s evidence given in the present proceedings unreliable or to be rejected, thus affecting the conclusion of the tribunal in any material way.
Mr Y C MOK, instructed by Philip T F Wong & Co, for the 1st to 4th applicants The 3rd named 2nd respondent is not legally represented and appeared in person and also being the representative of the 1st and 2nd named 2nd respondent The 8th, 9th & 13th respondents are not legally represented and appeared in person The representative of the 17th respondent is not legally represented and appeared in person Mr Bernard MAK and Mr Bosco CHENG, instructed by Li, Wong, Lam & W I Cheung, for the 22nd, 33rd and 34th respondents The 24th, 26th, 39th, 41st, 42nd, 43rd & 46th respondents are not legally represented and did not appear Attendance of the 27th respondent, unrepresented, was excused Attendance of Bobby Tse & Co, for the 35th, 36th, 37th, 38th & 45 respondents, was excused Mr George HUI, instructed by Lui & Law, for the 40th respondent and instructed by Simon C W Yung & Co, for the 44th respondent Appendix A EUV assessments for shops at KTM
* In view of the marginal difference in depth between the shops, the adjustments for size and depth as proposed by Mr Siu have been discarded. Appendix B EUV assessments for domestic units in Block 1 (i.e. No 53 Kwun Tong Road) of KTM when compared with Reference Domestic Unit (i.e. Unit 6, 4/F, No 55 Kwun Tong Road) at $64,900/m2
* As per the adjustments submitted in the applicants’ closing submission. EUV assessments for domestic units in Block 2 (i.e. No 53A Kwun Tong Road) of KTM when compared with Reference Domestic Unit (i.e. Unit 6, 4/F, No 55 Kwun Tong Road) at $64,900/m2
* As per the adjustments submitted in the applicants’ closing submission. EUV assessments for domestic units in Block 3 (i.e. No 55 Kwun Tong Road) of KTM when compared with Reference Domestic Unit (i.e. Unit 6, 4/F, No 55 Kwun Tong Road) at $64,900/m2
* As per the adjustments submitted in the applicants’ closing submission. EUV assessments for domestic units in Block 4 (i.e. No 55A Kwun Tong Road) of KTM when compared with Reference Domestic Unit (i.e. Unit 6, 4/F, No 55 Kwun Tong Road) at $64,900/m2
* As per the adjustments submitted in the applicants’ closing submission. Appendix C - EUV assessments for all CPS in KTM Car Parking Space Nos
Appendix D
[1] At the end of the trial, the Tribunal was advised that this proposed sale was cancelled by agreement between the parties. [2] See Bundle A1/1/7-8 at §10(a). [3] See Bundle A1/1/10-11 at §12. [4] See Bundle A1/1/26 at §29(g) & (h). [5] See §3 above [6] The index for Class A domestic units as at January 2006 was 86.6 and that as at October 2014 was 289.3. However, R2’s unit, having a saleable area about 50.2 m2, should be classified as Class B by RVD. The relevant index as at those two points in time should be 91.8 and 253.1 respectively. [7] For a gist of Part 1, Schedule 1 of the Ordinance please refer to §22 above [8] See Bundle H/213. [9] HCAL 274, 375-382, 390-394, 396, 900-904, 906, 907, and 909-915 of 2000 (unreported, dated 18 July 2002) [10] (unreported), CACV349/2002, 17 July 2003 [11] S.34H of the BMO stipulates that where a person who owns any part of a building has a right to the exclusive possession, or the exclusive right to the use, occupation or enjoyment of a part of the building, he has a duty to maintain even though the deed of mutual of the building does not impose a corresponding obligation on him to maintain. [12] (unreported), CACV 45/2009, 10 December 2009 [13] (unreported), HCSA7 -13/2015, 18 September 2015, Hon. Chow J [14] Just before trial, Mr Siu dropped his two other comparables at Fei Fung Street in the Wong Tai Sin/Tsz Wan Shan district. [15] When R13 was cross-examining Mr Chan, R13 might have mistaken this comparable as C2, the comparable is at Jade field Garden but it would not affect our judgment because R13 failed to support his assertion or allegation by any objective evidence. [16] Mr C Chan suggested a smaller area of 69.9 m2 and 69.2 m2 respectively: see Bundle B1/153. [17] See Bundle B4/521. [18] Total by multiplication instead of by summation. [19] This is explicable as the property market is imperfect and we cannot expect that all transactions can be concluded at market value in view of the possibility of personal preference and the non-existence of a perfect market, which inter alias, requires a complete free circulation of market information. [20] See §40 above [21] See Bundle B2/373. [22] Having a saleable area of 61 m2 [23] Large unit has a saleable area of 61 m2 while small unit has a saleable area of 50.2 m2 [24] See Bundle B2/373-376 and 414. [25] See Bundle A10/52/3860. [26] The Committee was formed on 9 August 2007 as result of initiation by Centaline Property Agency Limited for collective sale of KTM. See Bundle E/9/79. [27] By reference to the 2nd Witness Statement of A4 of 18 September 2014, a company related to the applicants acquired from a Yeung Ah Wun all the issued shares of A2 who then owned 15 units in KTM as at 15 March 2011. According to A4, Yeung Ah Wun is not related to any one of the applicants. See Bundle A10/50/3824. [28] See Bundle I/14/193. [29] For example, if a comparable is situated on the 7th level, since the Reference Domestic Unit is situated on the 4th level, according to Mr. C Chan, a +9% adjustment be added to the comparable while Mr. Siu proposed to add only +6%. [30] See Bundle B4/520. [31] See also §38 above. [32] By multiplication instead of by summation. [33] See Bundle B4/522A & 522B. [34] See §47 above [35] See §77 above [36] This CPS in fact has a wall (perhaps built by its owner) at its front instead of a ramp. [37] At trial, Mr Siu had revised his assessment of a covered CPS from $394,000 to $1,967,127. [38] See Madam Law’s 3rd Affirmation at Bundle I/212. [39] See §10 of Madam Law’s 1st Witness Statement dated 26 September 2014 at Bundle B4/540. [40] It is because the rents were those collected by R22 during the period 2009/2010 [41] LDMR 5/2004 (unreported, dated 2 November 2005) [42] Although the applicants who own some of these “Garage CPS” see fit to let out for use in breach of the Government Lease, the evidence provided shows the rental being received is much lower at about $1,500 per month each for CPS Nos 4, 5, 9, 10, 11, 18 & 25 etc. For CPS 8 where accessibility is handicapped, the monthly rent is $1,000. [43] See Bundle B4/540, §10. [44] Madam Law in her witness statement of 26 September 2014 stated that when R22 ceased the carpark letting operation, it has to dismiss staff. [45] Mr Chan takes the view that the discount rate of 15% inadequate. [46] LDCS 42000/2011 (unreported, dated 31 May 2013) [47] See Bundle I/101. [48] See Bundle I/106. [49] LDRW 14 of 2001 (unreported, dated 3 May 2002) [50] Only CPS no.98 is a sale by an individual owner to a third party and can be regarded as a sale in the secondary market. [51] ($395,000 – $342,500) ÷ $342,500 x 100% = 15% [52] ($342,500 - $317,147) ÷ $317,147 x 100% = 8% [53] (Value of upper level – lower level) ÷ value of lower level x 100% [54] That is CPS nos. 155 and 149 on the 2nd Floor. [55] [1981] HKLR 336 (PC) [56] [2003] 2 HKLRD 399; (2003) 6 HKCFAR 1 [57] We are also informed by Mr Siu that he had worked with the Lands Department for some years. [58] In Wong Bun, the expert for the respondent suggested that the enclosed garage in that case could still be used as a comparable to the car parking space in issue subject to a discount of about 5 to 10% because of the extra security measure afforded to that garage. [59] This analysis is performed on the assumption that the carparking space ratios as provided by Mr Siu are correct. [60] Mr Siu acknowledged in his Rebuttal Report at §2.8 that the marketability of CPS restricted to residents of the same development would be lowered. [61] The total result arrived at is the result of multiplication rather than summation and so for instance, (1+10%) x (1-10%) = 0.99 with a net adjustment of -1% [62] In contrast, Mr Mak submits in his closing submission that this is the only comparable that should be used. We cannot find any support for his said argument and therefore reject his said submission.. [63] For Nos 4, 5, 9, 10, 11, 18 & 25 etc [64] For CPS 8 [65] See Bundle H/184-3 and 184-4 [66] See §45 of Mr. Mak’s closing submission [67] $1,500 x 12 months ÷5.9% = $305,085 [68] $1,000 x 12 months ÷ 5.9% = $203,390 [69] At Bundle H/184-1 and 184-2 [70] $1,500 x 12 months ÷ 5.4% = $333,333 [71] 41,000 x 12 months ÷ 5.4% = $222,222 [72] At Bundle B1/11 [73] The EUV assessed by this Tribunal is $1,119,141,000: see §137 above. [74] See §6 of Oriental Generation Limited v Town Planning Board[2012] 3 HKC 369. [75] Mr Chan’s assessment was $2,121,000,000 whereas Ms Sat’s assessment was $2,321,000,000. [76] See the Royal Institution of Chartered Surveyors, Valuation of Development Land, 1st edition, 2014, section 6. [77] See Shapiro, Mackmin and Sams, Modern Methods of Valuation, 11th edition, p 150. [78] In Good Faith Properties, (supra), the Tribunal also declined to increase the developer’s profit from 15% to 20%. [79] The new development being erected is now marketed as “何文田山畔” (Homantin Hillside). [80] [2014] 1 HKLRD 286 [81] R9 suggests the marketing costs should be 1.5% instead of 3% proposed by Mr C Chan or the 2% proposed by Ms Sat because the developers should save costs on marketing. This is, in our view, entirely arbitrary coming from someone totally without experience in real estate marketing when new developments are put up for sales. R9 even suggests that the land value should be increased to compensate the residents for money they have expended in the past for improvement, having lived in their respective premises for long years, or even for reimbursement of the rates, stamp duty, legal cost and management fees that they had incurred in the past. The latter are sunk costs that should not have entered into the calculation of the present value of future development. [82] See Bundle I(2)/364. [83] $85,353/m2 x plot ratio 8.4373 x site area of 5,713.49 m2 less $1,697,000,000 = $3,650,349,906 [84] See Bundle I(2)/400 and Bundle J/134. [85] See §7.12 of her report dated 9 April 2015 (Bundle J-92) and §2.1 of her supplemental report dated23 April 2015 (Bundle J-149) [86] See Bundle/J-153 §8.0 (2) [87] See Bundle/J-153 §8.0 (3) & (4) [88] See Bundle/J-153 §8.0 (5) [89] It has become a 4.75 years investment after adding a 21-month litigation period [90] See Bundle/J-153 under §8.0 [91] Ms Sat has defined that IRR is the discount rate at which the net present value of the capital inflow (i.e. the Gross Development Value) is equal to the net present value of the capital outflow (i.e. the land price, construction costs, land premium, professional fees, etc) : see her first report dated 9 April 2015 at Bundle J/93 §7.13 [92] See Ms Sat’s Supplemental report dated 23 April 2015 (Bundle J/154) [93] See Bundle J/93 at §9.0 [94] See her Supplemental Report at §8.0 (Bundle J/154) [95] See Bundle J/154-1 [96] $2,557,000,000 - $2,293,000,000 = $264,000,000 [97] $2,527,000,000 - $2,293,000,000 = $234,000,000 [98] The agreed valuation between Mr. Chan and Ms Sat is $2,293,000,000 [99] See §3.3.2 and §3.4.4.1 of Mr Chan’s Supplemental Report on RDV of 20 April 2015 (Bundle/I(2)/404-413 at 410 [100] [1995] 2 HKLR 311 [101] [1982] 1 WLR 887 [102] (unreported) CACV 73/2013 & CACV 74/2013, 15 April 2014 [103] [1981] HKLR 336 [104] (2003) 6 HKCFAR 1 [105] See Bundle A1/2/99-104 [106] See Bundle A1/102, and the latter part of the covenant is “…AND shall provide space for not less than one hundred cars within the boundaries of the said demised premises for the parking of private cars of the residents of the building …and shall not use or allow to be used the spaces so provided for purpose other than the parking of private cars of the residents of the said building.” [107] See the Document at Bundle A1/101, at $105,000. [108] See recital (g) of the Deed of Variation at Bundle/A1/2-101 [109] The cases gone through are (1) Raider Limited v Secretary for Justice [2000] 3 HKLRD 300; (2000) 3 HKCFAR 309; (2) Expressluck Development Limited v Secretary for Justice (unrep), HCMP1432/2005, 26/7/2007; (3) Rank Profit Industrial Limited v Director of Lands (unrep) FAMV7/2009, 25/6/2009; (4) Gold Shine Investment Limited v Secretary for Justice (unrep) HCMP1272/2008 29/12/2009; (5) Fully Profit (Asia) Limited v The Secretary for Justice (2013) 16 HKCFAR 351; (6) Favourable Issue Co. Ltd v Secretary for Justice (unrep) CACV254/2012 22/11/2013; (7) New Mercury Holding Corporation (supra); (8) Regal Shining Limited v Secretary for Justice (unrep) HCMP2781/2012 21/10/2014; (9) United Bright Limited v Secretary for Justice [2015] 2 HKLRD 633 [110] [1998] 1 WLR 896 [111] See Bundle J/154-1. [112] This increase in land value was arrived at by Ms Sat incorporating the same parameters in the original residual valuation save that the payment of the premium was deferred. [113] See her additional analysis at Bundle J/154-1 to 154-7 with summary at 154-1 [114] See §6.3 of the Closing Submission of Mr. Hui dated 8 May 2015 [115] [1977] HKLTLR 105 [116] Dale-Johnson & Rodriguez, Real Estate Review, 1984 Spring, 54-57. [117] [1911] 2 KB 786, a negligence claims against a beauty contest organizer for loss of chance to win in the contest [118] [1958] 1 WLR 563, a professional negligence claims against solicitors [119] [1992] 1 EGLR 163, a professional negligence claims against solicitors [120] [1995] 1 WLR 1602, a professional claims against solicitors [121] (1968) 19 P & CR 480 [122] [1996] 3 All ER 693 [123] [2009] 1 WLR 1797 (HL) [124] [2013] 6 HKC 557 [125] (unrep), LDMT 2/1984, 24 October 1984 at pp 6-7 [126] Such as Waters & Ors v Welsh Development Agency [2004] ULHL 19, [2004] 2 All ER 915, [2004] 1 WLR 1304 (HL); Raja Vyricheria Narayana Gajapatiraju v The Revenue Divisional Officer, Vizagapatam [1939] AC 302, [1939] 2 All ER 317 (HL); Cedars Rapids Manufacturing and Power Co v Lacoste & Ors [1914] AC 569, [1914-15] All ER Rep 571 (PC) [127] [2013] 6 HKC at 567F-G [128] See [2009] UKHL 44 per Lord Neuberger at §49 [129] See [2009] UKHL 44 §6 per Lord Scott [130] See [2009] UKHL 44 at §6 [131] According to Lord Walker, he regarded the English Lands Tribunal and Court of Appeal’s reasoning, taken to the extreme, is that if there is at the valuation date a 51% chance of planning permission being granted, that should be treated as 1 100% certainty: per §38 of Spirerose [132] Supported by Lord Scott: see §1; Lord Mance: see §46; Lord Neuberger: see §47 and Lord Collins: see §133 [133] See §103 of the House of Lords decision in Spirerose quoting certain paragraphs of Spirerose in the Court of Appeal [134] See Bundle I(2)/46/433-434. [135] See Bundle I2/48/436-469 [136] See Bundle I2/48/436-469 [137] [2014] 5 HKLRD 534 [138] [1981] 1 Lloyd’s Law Rep 674 [139] See §9 of Mr. Bernard Mak and Mr. Bosco Cheng’s submission lodged with the tribunal on 28 December 2015 [140] See §205 above [141] See in particular, §205(iii) above [142] (unreported) LDCS8000/201431 December 2015 [143] (2003) 6 HKCFAR 336 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under LDCS 4000/2013