Way Creation Ltd and Others v. Lai Hing Enterprises Ltd and Others
Read the full judgment text of LDCS 17000/2014 on BabelCite. This LDCS judgment was delivered on 14 October 2016.
1. This is an application for compulsory sale of all the undivided shares of and in Section A, Section B, Section C and the Remaining Portion of New Kowloon Inland Lot No 1556 (“the Lots”), with a building erected thereon known as Nos 51 - 53 (Section A), 55 - 57 (Section B), 59 (Section C) and 61 (Remaining Portion) Tai Po Road, Kowloon (“the Building”) for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”).
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LDCS 17000/2014 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LAND COMPULSORY SALE MAIN APPLICATION NO 17000 OF 2014 __________________________
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________________ J U D G M E N T ________________ BACKGROUND 1.This is an application for compulsory sale of all the undivided shares of and in Section A, Section B, Section C and the Remaining Portion of New Kowloon Inland Lot No 1556 (“the Lots”), with a building erected thereon known as Nos 51 - 53 (Section A), 55 - 57 (Section B), 59 (Section C) and 61 (Remaining Portion) Tai Po Road, Kowloon (“the Building”) for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”). 2.The Building comprises 2 adjoining blocks of 7-storey composite buildings. Each block (ie Nos 51 - 57 and 59 - 61) is served by 1 lift, 1 staircase fronting onto Tai Po Road and 2 staircases at the back and 1 of which is shared by the 2 blocks. It is common ground that the 2 lifts have not been functioning. 3.Two occupation permits were issued for the Building on 30 March 1957, one for non-domestic covering the ground floor and another for domestic covering the upper floors. There are 6 shop units on ground floor of the Building and 2 domestic units on each of the upper floors (1st floor to 6th floor) in each block. It is also common ground that 4th Floor of Nos 55 - 57 has been subdivided into 6 sub-units. Each of the 6 ground floor shop is attached with a yard and each of the 4 domestic units on the 6th floor is attached with roof. 4.Each of the units of Nos 51 - 53 and Nos 55 - 57 (ie 2 ground floor shops and 6 upper floor domestic units in each section) is given 1 undivided share of and in Section A and Section B respectively (including the 6 sub-units of 4th Floor of Nos 55 - 57 that each is given 1/6 undivided share of a unit), making a total of 8 undivided shares for each section. Each of the units of Nos 57 and 59 (ie 1 ground floor shop and 6 upper floor domestic units in each section) is given 1 undivided share of and in Section C and the Remaining Portion respectively, making a total of 7 undivided shares for each section. 5.The applicants filed a Notice of Application (“the NOA”) on 16 October 2014, which was subsequently amended on 24 March 2015 pursuant to the order made by H.H. Judge KW Wong on 17 March 2015. At the time of filing of the NOA, the applicants owned not less than 80% of the undivided shares in each section of the Lots, except for 1/8 undivided share in Section A (1st respondent), 1/8 and 2/6 of 1/8 undivided shares in Section B (2nd, 3rd and 4th respondents), 1/7 undivided share in Section C (5th respondent) and 1/7 undivided share in the Remaining Portion (6th respondent). Live Respondents Remaining 6.The applicants have discontinued the proceedings against the 3rd, 4th and 6th respondents following the acquisition of their respective units in the Building. 7.The following respondents are the 3 live respondents remaining on record:-
Issues for Determination by the Tribunal 8.Issue not in dispute but subject to proof by the applicants is “whether the applicants are entitled to make the application”. 9.R1 opposes to the application on the ground that redevelopment is not justified due to “age” and/or “state of repair” of the Building, whilst R2 & R5 put the applicants to proof that the application has satisfied the requirement under section 4(2)(a) of the Ordinance. 10.There are other issues in dispute between the parties as follows:-
SECTION 3 - WHETHER THE APPLICANTS ARE ENTITLED TO MAKE THE APPLICATION IN TERMS OF OWNERSHIP 11.Section 3(1) of the Ordinance requires an applicant to have not less than 90% of the undivided shares in a lot before it can make an application. Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a percentage lower than the percentage mentioned in section 3(1) in respect of a lot belonging to a class of lots specified in the notice. 12.Pursuant to section 3(5) of the Ordinance, a Notice was gazetted on 22 January 2010 and tabled at the Legislative Council meeting on 27 January 2010, which 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)”. 13.The occupation permits for the Building were issued on 30 March 1957 (ie 57 years before the date of the application). The Notice is applicable and the threshold percentage should be 80%. 14.We are satisfied that as at the date of application, the applicants had already owned on average more than 80.0% of the undivided shares in the Lots (ie 87.5% in Section A, 83.3% in Section B, 85.71% in Section C and 85.71% in the Remaining Portion). We therefore agree that the applicants were entitled to make the application under the Ordinance. SECTION 4(2)(a) – WHETHER REDEVELOPMENT OF THE LOTS IS JUSTIFIED DUE TO “AGE” AND/OR “STATE OF REPAIR” OF THE BUILDING 15.In determining the application, section 4(2) of the Ordinance empowers the tribunal to make an order for sale if it is satisfied that:-
16.For the age and state of repair requirements, the applicants adduced expert evidence of Mr Benson Wong Sai Ning (“Mr Benson Wong”), an Authorized Person and a building surveyor and Mr So Kin Sing (“Mr So”), a structural engineer. None of the respondents had adduced any expert evidence in this connection. 17.Mr So conducted a structural assessment and prepared one report dated 10 April 2015. He had identified the following defects in the Building:-
18.Mr So concluded that according to the then condition of the structural frames of the Building deterioration would 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. Further, although repairs are possible, repair work will need to be carried out regularly in the future and that such repairs will be more and more expensive as the structural frames become older. 19.Mr Benson Wong also prepared one condition survey report dated 10 April 2015. In coming to his conclusion after investigation, he stated that:-
20.Mr Benson Wong concluded that the age and the state of repair of the Building, each on its own, is justification for redevelopment of the Building. 21.The two experts called on this topic were not cross-examined by Mr Chain who acted for R2 and R5. Mr Hung for R1 had put questions to Mr So to the effect that his report was not independent. In reply Mr So explained that he passed his report in draft form to Mr Benson Wong for the latter to compile his own report. Mr So added that Mr Benson Wong would pass his own draft for him to see as well, he would then check whether Mr Benson Wong had correctly understood his report. He said he would not be influenced by Mr Benson Wong, and his report formed only one part of Mr Benson Wong’s report. 22.During cross examination, Mr Hung suggested that the report of Mr Benson Wong was not reliable and its purpose was only to justify redevelopment. It was suggested to Mr Benson Wong that his remarks about repair works taking 21 months to complete would cause grave disturbance to the existing tenants represented no truth in the present case because there were basically only two units being occupied in the Building at that time. In reply, Mr Benson Wong said that disturbance caused to the existing tenants is an objective assessment disregard of number of occupants or number of units being occupied. The number of occupants could change from time to time. We agree. Further there is also no evidence before us to say that if the Building was not to be redeveloped, the units inside the Building would remain to be vacant or otherwise. 23.Mr Hung criticized Mr Benson Wong for his having made a recommendation to the tribunal when he was not instructed so to do. Mr Benson Wong maintained that as he knew that the purpose of his report was to assist the tribunal, he therefore put in his recommendation. 24.Having considered the evidence before this tribunal, we are of the view this tribunal could rely on the reports of Mr So and Mr Benson Wong. Neither of the experts had been shaken under cross-examination. We are satisfied that redevelopment of the Building is justified due to the poor state of repair of the Building and the disproportionate cost to repair and maintain the same. We are also satisfied that redevelopment of the Building is justified due to the age of the Building. This 59-year old building is in a poor condition and has in fact come to the end of its designed working life. Its design has become obsolete over time in many aspects both physically and functionally and has failed to conform to modern standards and requirements in many material respects. 25.Nonetheless, Mr Hung has taken the point that the revised RDV of the Lots at $234,000,000 assessed by Mr Alnwick Chi Hing Chan (“Mr Chan”), the applicants’ valuation expert, as at 1 March 2016 in the valuation report dated 23 March 2016 is only $25,817,852 more than the revised EUV of the Building of $208,182,148 as at 14 August 2014 in the rebuttal report dated 3 August 2015. In fact, if one should compare the EUV and RDV on the same basis (ie the same valuation date), Mr Chan has also valued the RDV of the Lots at $257,000,000 as at 14 August 2014 in the valuation report dated 20 January 2015, and the difference in EUV and RDV in this instance is $48,817,852. 26.Mr Hung also said that the proposed redevelopment which would require 2.75 years and a huge sum of $123,507,374 in cost to complete would produce a meager return of $28,500,806 only, while the cost of repairing the Building is only $23,256,049. On the whole, Mr Hung appeared to submit that redevelopment of the Lots is not justified as one had to invest time and money to redevelop the Lots but to earn so little in return, as compared with the relative small amount of repair cost and the small difference in EUV and RDV. 27.In reply, Mr Li for the applicants submitted that the use of economic test for considering the justification of redevelopment has at least been doubted if not rejected, per Le Pichon JA in Fineway Properties Ltd v Sin Ho Yuen Victor [2010] 4 HKLRD 1, §§33-36:-
28.Following Fineway Properties, a number of decisions of the tribunal also expressed reservation on the use of economic test albeit one also sees some cases making reference to the economic test. However, the position remains that there is no endorsement of the economic test by higher court and as rightly said by Le Pichon JA, as she then was, prima facie, economic consideration is not included in the statutory test for justification for redevelopment under section 4(2)(a)(i) of the Ordinance. 29.We agree with Mr Li’s contention that even if the economic test is open to R1 to take and is a valid consideration, R1 has not adduced proper expert evidence to advance a case on economic lifespan. R1’s case as raised is just by crude comparisons between EUV and RDV, and the repair cost and the estimated gain in a hypothetical RDV valuation, which are indeed not the correct or complete approach to economic test. In any event, the RDV as assessed still exceeds the EUV and it is not a case that RDV is less than or equal to the EUV. 30.The submissions of Mr Hung in this regard have not changed our findings that redevelopment of the Lots is justified in terms of both age and state of repair of the Building. DETERMINATION OF THE EXISTING USE VALUES (“EUV”) OF ALL UNITS IN THE BUILDING 31.Pursuant to section 3 of the Ordinance, the NOA was accompanied by a valuation report dated 29 September 2014 (“Application Report”) prepared by Mr Chan containing assessments of EUV of all units of the Building as at 14 August 2014. The report was prepared no earlier than 3 months before the filing of the NOA in accordance with section 3 of the Ordinance. 32.Under section 4(1)(a)(i), if there is a dispute between the parties on the EUV of the units in the Building on the Lots, the tribunal has to determine the values. 33.EUV is in dispute. For the purpose of the present proceedings, the parties have adduced the following expert reports as evidence.
34.In addition, the 3 valuation experts have met and came up with a Joint Expert Statement of Agreement/Disagreement dated 16 July 2015 (“1st Joint Expert Statement) and another Joint Expert Statement of Agreement/Disagreement dated 1 April 2016 (“2nd Joint Expert Statement”). EUV of Domestic Portion 35.Since Mr CW Wong has not done any EUV assessment of the domestic portion, the dispute on EUV valuation of domestic portion would be as between Mr Chan and Mr Cheung only. 36.Mr Chan has selected 12 comparables, only 6 of which are equipped with lift facilities and 3 of which were also selected by Mr Cheung as comparables. They agreed that the repair cost for the lifts be set at $2,000,000. They also agreed on the adjustments for time, age, internal condition and view, but disagreed on the adjustments for location, floor, size, headroom and security. They have also selected different residential reference unit for comparison. 37.Since the Building originally has lift facilities and repair cost for the lifts have been agreed by the valuation experts, we consider it appropriate to adopt the 6 comparables with lift facilities in the valuation and hence the residential reference unit proposed by Mr Chan (ie 3rd Floor of Nos 51 - 53). We agree to the adjustments for headroom, security, floor and size proposed by Mr Chan too. 38.The residential reference unit has higher headroom. The negative adjustment for security (ie -1%) is reasonable. Taking into consideration of the lift facilities and the relative large size of the residential reference unit, the adjustments for floor (ie 0.5% per floor) and size (ie 2% for interval of every 10 sq m) are also reasonable. In fact, as compared with the adjustments for security (ie 0%), floor (ie 0.25% per floor) and size (ie 1% per 10% difference in size) proposed by Mr Cheung, Mr Chan’s proposed adjustments would increase the overall negative adjustments to the domestic portion and are in favor of the respondents who own non-domestic units only. 39.Mr Chan and Mr Cheung have proposed different location adjustment rates to 2 of the 3 common comparables as follows:-
40.We have on 7 April 2016 inspected the Building and the comparables together with parties and their valuation experts. We consider that, in the subject locality, there is not much difference in living environment and the location adjustment is much more affected by accessibility. Comparable 24 which is close to entrances of MTR station and Comparable 8 which is relatively far from MTR station should have adjustments for location at -8% and +2% respectively. Applying the same rationale to the other residential comparables, Comparables 4, 13, 19 and 10 would command location adjustment rates at 0%, -8%, 0% and 0% respectively. The valuation of the residential reference unit is listed in Appendix I of this judgment. 41.The average of the adjusted unit rates of the 6 comparables is $53,026 / sq m and the average without the highest and lowest adjusted unit rates is $53,157 / sq m. Accordingly, we agree to the unit rate of $53,000 / sq m for the residential reference unit proposed by Mr Chan and his assessments of the other residential units with adjustments for internal condition, size, floor and lift repair costs. EUV of Non-Domestic Portion 42.The parties have the following disputes at the hearing:-
Effective Saleable Area of R1’s Unit 43.The 3 valuation experts had in the 1st Joint Expert Statement reached agreement on the measurement of the R1’s Unit to be 55 sq m saleable area with 4.07 sq m open yard that is counted 1/6 of the covered area (ie total effective saleable area to be 55.68 sq m). Mr CW Wong however changed his measurement of the effective saleable area to 59.07 sq m at the hearing. Mr CW Wong said that in light of the correspondence between the Buildings Department (“BD”) and R1 (ie the Building Order dated 9 February 1998 and the BD’s letter dated 3 July 2001) in that “no enforcement action would be carried out by BD regarding the enclosed open yard”, he took the position that the open yard area should be assessed as covered yard area. Mr CW Wong also said that he was only made aware of the said letter when it was close to the hearing. 44.We agree with Mr Li that the reason for the last minute change is unacceptable because the said documents between BD and R1 could be obtained from land search at one’s will and a valuation expert is obliged to do land search and study all encumbrances affecting the property. Further, Mr CW Wong’s allegation is not supported by evidence and this has not been put to any of the applicants’ witnesses especially Mr Benson Wong, the building expert, nor the factual witness of R1 for their comments. 45.Although the BD’s letter dated 3 July 2001 in Chinese stated that if there was no change in situation BD would not take further enforcement action against some concrete blocks at the open yard though they are unauthorized, there is no identification of the said concrete blocks, whether they stand vertically or are lied horizontally over the whole open yard. On balance, we are of the view that Mr CW Wong’s allegation is speculative. Selection of Reference Unit and Shop Comparables 46.On the condition that 2 of the 3 valuation experts, Mr Chan and Mr CW Wong, have selected G/F of No 57 as the shop reference unit, we agree to adopt this unit in the subject assessment. 47.Mr Chan, Mr CW Wong and Mr Cheung have selected 8, 7 and 5 shop comparables respectively. Some of them are in common to 2 only or 3 valuation experts. There is a debate between Mr Chan on one part and Mr CW Wong and Mr Cheung on the other part as to the criterion on selection of shop comparables. Mr Chan said selection of comparables should be made on basis of proximity and not on nature of trade or business whereas the other two said that the type of trade or business of comparables is the selection criterion. They also argued whether Comparable 16 which has an unauthorized cockloft should be selected for comparison. 48.The parties have spent considerable time at the hearing to argue over selection criterion. No doubt, the comparable that is closer to the subject and thus may command lesser adjustment for location would be better. However, even if a comparable is close to the subject, it may not be a relevant comparable if its trade or business is basically different from the subject. We should of course consider both factors, which are equally important in the subject selection of shop comparables. 49.On the other hand, although comparable with unauthorized structure may not be a good comparable because its transaction price may comprise unknown consideration, it could still be selected for comparison if it is a good comparable in terms of proximity and trade. We note that the existence and impacts of unauthorized structure are much more transparent to both buyer and seller nowadays, and unknown consideration if any is generally minimized in transaction. Nonetheless, even if comparable with unauthorized structure is finally selected for comparison, its adjusted unit rate should be interpreted with care. In the subject assessment, we are of the view that we should also analyze Comparable 16 which has an unauthorized cockloft for displaying products but is in close proximity to and has trade potential similar to the shop reference unit. 50.Above all, we consider it appropriate to select Comparables 26, 27, 3, 2, 16 and 11 for comparison. We do not select Comparable 20 because it is substantially smaller in size. We do not select Comparable 30 because it is relatively far away from the Building. Comparables 35 and 14 which are close to entrances of MTR station are situated in a much busier locality, whilst Comparables 6 and 7 are situated in a relative quiet locality with different trade potential, and therefore these 4 comparables are not selected in the subject assessment. Adjustments to the Shop Comparables 51.The valuation experts agreed on the adjustments for time (ie based on Private Price Indices published by Rating and Valuation Department), frontage (ie 2% for 1 meter difference) and headroom (2% for 1 meter difference), but they disagreed on the adjustments for location, size, layout, building quality and return frontage. 52.In the adjustment for size, Mr Chan proposed an adjustment rate at 2% for interval of every 10 sq m, whilst Mr CW Wong proposed 1% per 10 sq m difference and Mr Cheung proposed 1% per 6 sq m difference. The proposed adjustment rates of Mr Chan and Mr Cheung are in fact close to each other and we prefer Mr Cheung’s in the subject assessment. 53.Mr Chan made no adjustment for layout but Mr CW Wong and Mr Cheung made this adjustment to some comparables because of their respective shape, location of column and configuration. We are of the view that it is appropriate to make adjustment for layout to Comparables 27, 2, 16 and 11 at +3% in the subject assessment because they have relative longer depth and/or higher depth to frontage ratio. 54.Mr CW Wong made adjustment for building quality at -5% to Comparable 16, which was commented by Mr Chan as a fair adjustment at the hearing. We agree. 55.Mr Chan and Mr CW Wong proposed adjustment for return frontage onto alleyway at -10%, whilst Mr Cheung has made an adjustment at -3% only. On the other hand, Mr CW Wong made an adjustment to Comparable 2 with street frontages both in the front and at the back at -5%. We agree that we should make adjustment to those comparables with return frontage. In the subject assessment, we consider it appropriate to make -10% adjustment to Comparable 2. Further, we agree with Mr Chan that the alleyway of Comparable 16 has heavy pedestrian flow and therefore an adjustment rate at -15% is justified. 56.The valuation experts have proposed different location adjustment rates as follows:-
57.We agree with Mr CW Wong and Mr Cheung that no location adjustment should be made to Comparable 16 that is close and similar to the shop reference unit. We also agree with Mr CW Wong that the location adjustment to Comparable 3 should be +10%, which is located in a quiet section of Un Chau Street. Further, we consider that the location of Comparables 26, 27, 2 and 11 are inferior to that of the shop reference unit and justify location adjustment rates at +5%, +5%, +2.5% and +2.5% respectively, though Mr Chan has made negative or nil adjustments to them. 58.The valuation of the shop reference unit is listed in Appendix II of this judgment. The average of the adjusted unit rates is $306,144 / sq m, and the average without the highest and lowest adjusted unit rates is $295,823 / sq m. If we further take out Comparable 16 which has an unauthorized cockloft, the average of the adjusted unit rates (ie Comparables 3, 2 and 11 only) would then be $288,782 / sq m. We are of the view that the unit rate of the shop reference unit should be $290,000 / sq m. 59.By applying the same adjustments for internal condition, size, frontage and return frontage, the valuation of the other shop units on ground floor of the Building is listed in Appendix III of this judgment. 60.In accordance with the above findings and discussions, the EUV as assessed are reproduced below:-
The total EUV of the Building is $206,889,903 ($102,211,025 + $104,678,878). SECTION 4(2)(b) – WHETHER THE APPLICANTS HAVE TAKEN REASONABLE STEPS 61.The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of all the undivided shares of the Lots under section 4(2)(b) of the Ordinance. 62.Before the commencement of the present proceedings, the applicants made the following offers to R1, R2 and R5 as follows:-
63.Mr Li submitted that the offers made on 22 August 2014 and 16 September 2014 were based on the then valuation done by Mr Chan and were higher than the pro-rata redevelopment value (“RDV”) as then assessed by Mr Chan (ie $257,000,000 as at 14 August 2014). Mr Li further said that only R2 has made a without prejudice counter-offer on 16 June 2014 which was rejected by the applicants. 64.After the commencement of the present proceedings, the applicants made the following offers:-
65.Mr Li submitted that these offers were higher than the pro-rata updated redevelopment value (“RDV”) as then assessed by Mr Chan (ie $234,000,000 as at 1 March 2014). Mr Li further said that only R1 had made a counter-offer on 24 March 2016 asking for a purchase price of $26,315,000 plus renovation and removal expense of $1,200,000, which was apparently made on the basis of the valuation done by Mr CW Wong as calculated on the basis of the RDV being $289,000,000 as at 1 March 2016 and the apportionment ratio being 9.1057%. 66.Mr Li further submitted that the applicants’ offers which were based on valuation done by Mr Chan should be regarded as fair and reasonable unless the tribunal comes to a view that Mr Chan has been negligent in his valuation. Nonetheless, there is no evidence from the respondents on the RDV valuation as at 14 August 2014 or a date close to it to review the pre-application offers. He also contended that there are justifications for the applicants not to accept R2’s without prejudice counter-offer but this would not be addressed at the hearing because R2 took objection to its disclosure, and there is no legal basis to cover renovation and removal expenses as a term of offer or counter-offer for section 4(2)(b) of the Ordinance. 67.In assessing the reasonableness of the offers, there is the following guidance from Ribeiro PJ of the Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 579, at §§33 and 36:-
68.Mr Li referred this tribunal to two other compulsory sale cases, Good Faith Properties Ltd v Cibean Development Co Ltd LDCS 42000 of 2011 (31 May 2013) §§73-75 and Cheer Capital Ltd v Unibase Investment Ltd LDCS 5000 & 6000 of 2013 (12 June 2015) §§246-247, which were held following the CFA guidance. He said that the tribunal has expressed the view that an applicant is entitled to rely on the valuation done by valuer in making offers and offers made on that basis would be regarded to have satisfied the statutory criterion unless it can be demonstrated that the valuation is faulty. However, valuation will not be regarded as faulty even if it is outside the range of possible valuations if the valuer has arrived at his valuation by exercising reasonable care and skill. 69.In these proceedings, if the EUV as decided by this tribunal above is taken into consideration and the EUV ratios of the respective respondents are multiplied by the RDV as at 14 August 2014 as then assessed by Mr Chan (ie $257,000,000), the then respective pro-rata redevelopment values are higher than the pre-application offers, except for the first two offers to R2 that might not be made on basis of valuation. If the same exercise is carried out and the EUV ratios of the respective respondents are multiplied by the RDV as at 1 March 2016 as then assessed by Mr Chan (ie $234,000,000) and as decided by this tribunal hereinbelow (ie $267,000,000), the then respective pro-rata redevelopment values are also higher than the post application offers, but the pro-rata redevelopment value for R1 is lower than the R1’s counter offer. 70.Notwithstanding the above calculations and comparison, there is no evidence before this tribunal that Mr Chan’s assessments were faulted. Although there are differences in valuation of EUV and RDV by the valuation experts and we also disagree to some of Mr Chan’s assessments, we consider that the applicants’ offers, that were based on independent valuation, do fall within a range of what may broadly be regarded as fair and reasonable and the applicants have taken reasonable steps to acquire all the undivided shares of the Lots including those owned by R1, R2 and R5. Valuation is not an exact science. We consider that the differences between Mr Chan’s valuation and the determination of this tribunal in the present proceedings are not so wide that would command suspicion to disqualify Mr Chan’s assessments. ORDER FOR SALE 71.We are satisfied that redevelopment of the Lots is justified in terms of both age and state of repair of the Building and the applicants had taken reasonable steps to acquire all the undivided shares of the Lots and had negotiated for the purchase of the respondents’ shares in their respective units on terms that are fair and reasonable. In the circumstances, we agree that an order for sale should be granted in favour of the applicants. RESERVE PRICE FOR THE AUCTION 72.The applicants submitted that the reserve price for the auction of the Lots should be fixed at $229,200,000, which is based on the latest residual valuation of Mr Chan after the 2nd Joint Expert Statement, while the latest RDVs as assessed by Mr CW Wong and Mr Cheung are $289,000,000 and $326,250,000 respectively. The valuation experts agreed on the unit rate for typical residential units on upper floor at $169,000 / sq m, but have disagreements on mainly the redevelopment model including the location of the plant room, selection of and adjustments to the shop comparables and the construction cost. 73.In view of the disagreements among the valuation experts, Mr Chain for R2 and R5 submitted that the tribunal could adopt an averaging approach. In addition, in setting the reserve price, the tribunal is not required to, or need not to conduct a valuation exercise. He said that the tribunal can and should take a broad bush approach and to err on the side of optimism. He further said that the redevelopment potential is by its very nature going to include an element of speculation as to the future market, which is not really within the expertise of a valuer rather than, say, an economist or a financial analyst, or even a developer, and the developer’s view of what the property truly worth deserves much weight and is better than that of a valuer. In the present case, the applicants’ factual witness said that the applicants expect a 30% to 40% profit and the applicants are prepared to pay up to $210,000,000 to acquire 100% of the Lots, and therefore the applicants’ assessment of the true worth of the Lots would at least be close to if not more than $300,000,000. Further, if the reserve price cannot be reached, the applicants can always apply to have the reserve price reduced. 74.Mr Li replied to say that if the 3 valuation experts are wrong, the averaging of the 3 assessments does not make a right, and in any event the tribunal has to examine the valuation done by each valuation expert first before seeing whether the tribunal can only approach the question of valuation by averaging the assessments. We agree. 75.Mr Li disagreed to the proposed broad bush approach by taking into the developer’s view of what the property truly worth. He commented that this cannot be right as there cannot be any objective standard as to what a reasonable developer is willing to pay, and the more fundamental problem is that there may not be any evidence as to what the developers are willing to pay. He submitted that it is not fair to extract from the evidence of the applicants’ factual witness who is only a manager and not a professional to come to a view that the applicants are willing to pay 30% to 40% more than the assessed RDV for acquiring the Lots. We agree too. Questions on Redevelopment Model 76.The valuation experts have proposed different redevelopment models as follows:-
77.They all agreed that the hypothetical building will be served by 2 lifts and 2 staircases, the developable site area is 426.24 sq m, the maximum plot ratio of the proposed building is 9 including the maximum domestic plot ratio of 7.5 and the common area on typical floor is 40 sq m. They also agreed that the marketing cost is 1%, the total development period is 2.75 years including 0.5 year for demolition, the deferment rate is 3.5%, the professional fee is 6% and the profit on cost is 15%. 78.The main disagreements among the valuation experts are as follows:-
79.Since the subject locality is a residential area and the demand for flats are much more secure and consistent than the demand for 1st floor shop, we agree with Mr Chan and Mr CW Wong that the hypothetical building should better utilize firstly the domestic plot ratio of 7.5. 80.We consider that positive financial impacts of higher efficiency on domestic floors are greater than the relative higher value in a higher building, and we therefore agree with Mr Cheung that the hypothetical building would have 26 domestic stories only. 81.In view of the current market condition, we agree to build smaller flats, which are in demand and very often could achieve higher sale price. We accept Mr CW Wong’s proposal of 3 flats per floor, but we disagree to build special flats on the top floor. We consider that the building of special flats on top floor with roof only as proposed by Mr CW Wong would limit the overall design of piping, fire escape and accessibility for the roof and these so-called special flats together roof are indeed small without specialties and could not command much higher value. 82.About the location of plant room, Mr Chan had included in his supplemental valuation report dated 23 March 2016 a letter from Mr Mak Tsz Fei of Kwong Wah Consultants Limited dated 22 March 2016 (“Mr Mak” / “the Kwong Wah Letter”) enclosing an extract of the “Code of Practice 101 for Distribution Substation Design” issued by CLP (“CLP Code”). Both Mr Hung and Mr Chain contested the admissibility of the Kwong Wah letter as they said the respondents had been deprived of an opportunity to appoint their own expert to make a reply. They said further that leave had never been granted by the tribunal for the applicants to submit an additional expert report prepared by Mr Mak at the stage of case management. We have read the Kwong Wah Letter which in effect added nothing to the extract of the CLP Code attached to it. It had no value at all. Upon application made, we had ruled that the extract of the CLP Code admissible since it was information already considered by Mr Chan and we were of the view that he was entitled to read the extract of the CLP Code when forming his opinion. On the other hand we ruled the full version of the CLP Code which Mr Li sought to submit at the trial inadmissible. 83.From the extract of the CLP Code, it reveals the difficulties for locating a plant room on upper floor because of additional accessibility and safety requirements imposed. We cannot say that it is impossible, but it is relatively difficult. Further, since the new development, High Point, opposite to the Building has plant room on ground floor, which we had inspected together with parties and their valuation experts, we consider that on balance it is reasonable to propose and build the plant room on ground floor of the hypothetical building. 84.Mr Chan proposed to build 4 shops on ground floor and take Hypo Shop 3 with 93.84 sq m as the shop reference unit in the assessment of gross development value (“GDV”). Mr Chan has further explained his design concept that had already taken into consideration of the proposed plant room on ground floor and the location of the lift lobby. Whilst Mr CW Wong proposed 5 shops with the same frontage on ground floor but he could not explain clearly at the hearing the proposed layout of each shop, and Mr Cheung assumed the shop reference unit will have an average floor area. 85.On the conditions that we agree to the design of plant room on ground floor and Mr Chan has adopted a more sophisticated design of ground floor, we accept in the GDV assessment the proposed design and shop reference unit of Mr Chan. The proposed redevelopment model in the valuation is listed in Appendix VI of this judgment. Questions on Selection of Shop Comparables 86.Mr Chan, Mr CW Wong and Mr Cheung have selected 6 (including Comparable 17 that was subsequently accepted by Mr Chan), 10 and 5 shop comparables respectively. Similar to the EUV valuation, some of them are in common to 2 only or 3 valuation experts. 87.By applying the same principles adopted in the EUV valuation, we consider it appropriate to select Comparables 17, 16 and 27 only for comparison, though Comparable 16 has an authorized cockloft and Comparable 27 is a transaction in April 2014. We do not select Comparables 20A (Unit C), 28, 34, 12, 9, 5, 7, 20B (Unit E) and 14 because mainly they are smaller in size, and some of them have different trade potential too. We do not select Comparable 18 on the other side of Tai Po Road because it is situated in a relative quiet locality with different trade potential. We do not select Comparable 36 because it is relative far away and is situated in a much busier locality. We do not select Comparable 26 because it is relatively smaller in size and is a transaction dated back in July 2014. Questions on Adjustments to the Shop Comparables 88.The valuation experts agreed on the adjustments for time, frontage (ie 2% for 1 meter difference) and headroom (ie 2% for 1 meter difference), but they disagreed on the adjustments for location, size, layout, age or building quality and return frontage. 89.In the adjustment for time, although they all adopted the Private Retail Indices published by Rating and Valuation Department, they have input different figures in their respective assessments. By checking with the evidence submitted by the parties, we find that the figures proposed by Mr CW Wong match with the latest indices available to this tribunal and therefore should be adopted in the valuation. 90.In the adjustment for size, similar to the EUV valuation, we prefer the adjustment rate of 1% per 6 sq m difference. In the adjustment for layout, similar to the EUV valuation, we are of the view that it is appropriate to make adjustments to Comparables 17, 16 and 27 at +4%, +3% and +3% respectively because they have relative longer depth and/or higher depth to frontage ratio. In the adjustment for return frontage, same as the EUV valuation, we consider that -15% adjustment to Comparable 16 is justified. 91.Mr Chan proposed adjustment for building age at 1% for every 10 years, whilst Mr CW Wong proposed adjustment for building quality at 5% to those comparables completed in 1960s and 1970s. We consider that these two adjustments can be combined into one, building quality/age, in the subject assessment at the adjustment rate of 1% for every 10 years plus +2% for brand new development. 92.The valuation experts have proposed different location adjustment rates as follows:-
93.Same as the EUV valuation, we agree with Mr CW Wong that no location adjustment should be made to Comparable 16 and the adjustment to Comparable 27 should be +5%. We also agree with Mr CW Wong and Mr Cheung that the location of Comparable 17 is inferior to that of the shop reference unit but the adjustment rate should be +2.5% instead of +5%. 94.After considering the above adjustment rates, the valuation of the shop reference unit is listed in Appendix IV of this judgment. The average adjusted unit rate is $303,451 / sq m and the average without Comparable 16 is $280,317 / sq m. We are of the view that the unit rate of the shop reference unit should be $290,000 / sq m. 95.The valuation experts have not selected any upper floor shop comparables for direct comparison. Mr Chan and Mr CW Wong proposed that the 1st floor shop unit rate is 1/3 of the ground floor shop unit rate, whilst Mr Cheung said that the ratio should be 1/2. In view of the current market condition and the characteristics of the subject locality that is residential in nature and is not a prime shopping area, we agree to adopt 1/3 only of the ground floor shop unit rate as the 1st floor shop unit rate in the assessment. 96.By applying the shop reference unit rate of $290,000 / sq m and the same adjustments for size, frontage, layout and return frontage, the valuation of the other shop units including that on 1st Floor is listed in Appendix V of this judgment. Questions on Construction Cost 97.In assessing the construction cost, the valuation experts have made reference to the cost data published by quantity surveyor. Both Mr Chan and Mr CW Wong assumed that the shop portion would have medium quality and the domestic portion would have enhanced quality, whilst Mr Cheung applied high quality finishes of residential building for the whole hypothetical building. They agreed on the residential unit rate for the hypothetical building but could not agree on its construction cost. 98.After considering the agreed residential unit rate of $169,000 / sq m, we agree to adopt the construction cost proposed by Mr Chan, which is slightly higher than that of Mr CW Wong’s. In fact, if we adopt higher construction cost as proposed by Mr Cheung, the higher construction cost would lower the residual land value in the assessment, which is not the submissions of the respondents. The RDV Valuation 99.The valuation experts have assessed the site value of the Lots by residual valuation method only and have not analyzed any site comparables because of no relevant site comparable. We agree. 100.The residual valuation in accordance with the discussions and findings above is listed in Appendix VI of this judgment. The RDV of the Lots reflecting the redevelopment potential on their own as at 1 March 2016 is assessed at $267,000,000, equivalent to an accommodation value of about $74,241 / sq m gross floor area. We decide that $267,000,000 should be the reserve price for sale of the Lots. METHOD OF SALE 101.Mr Chain suggested that instead of a sale by public auction, where the majority enjoys a huge advantage over all other potential bidders, the tribunal is empowered to order a sale by private tender. Nonetheless, Mr Chain admitted that in the absence of agreement among parties, the tribunal must order a sale by public auction in accordance with the mandatory provision in the Ordinance, though he described it as one of the worst provision in the Ordinance. He said that the intention of having a sale by public auction was good, but unfortunately the fact that the playing field not being level was overlooked. In a public auction, the majority owner knows each bid when made and can respond accordingly, on the basis that even for a 80% majority owner in each bid of say $10, he will need to pay an extra of $2 only, instead of the minority owners $8 and outsiders $10. Hence, in the previous applications for compulsory sale for redevelopment, as a matter of fact, subject to one or a few exceptional cases, the majority owner could always buy the property at the reserve price only. 102.The applicants disagreed to the suggestion of having a sale not by public auction. Mr Li said public auction would be done openly and anyone could bid. According to section 5(1) of the Ordinance, the Lots shall be sold by public auction, or unless if the whereabouts of each minority owner of the Lots is known, the Lots may be sold by any other means provided it is agreed in writing by each minority owner and majority owner of the Lots and subject to the approval of the tribunal in its absolute discretion. We agree that, in the absence of agreement among the parties, the Lots should be sold by public auction. 103.For the sake of discussion in view of criticisms brought about by Mr Chain, we say that it has come to our notice that the Government has changed the method of sale of most government sites in recent years from public auction to public tender. There must be good reasons causing the change and one of the reasons may be related to fairness in the method of sale. Before the change it was the market impression that the successful buyers in public auction were very often large developers with strong financial strength, which appeared to have controlled the property market. This line of thought is similar to the view of Mr Chain above that since the majority owner would know each bid when made in public and could respond accordingly, public auction may not be the best method of sale in the current market. Nonetheless, although we share the view of Mr Chain, there is no option opened for the tribunal to exercise discretion and order a relative better method of sale as situation so warrants. We are bound by the provisions in the Ordinance. In any event, it is not the submission of Mr Chain that if public auction is not the best method of sale the tribunal should not make an order for sale of the Lots. ORDER 104.This tribunal make the following determinations:-
COSTS 105.There are two sets of costs to be determined. One is occasioned by R2 & R5’s summons for review. The other set is of course those occasioned by these proceedings. Costs of R2 & R5’s Summons 106.Mr Chain had on 27 April 2016 in the middle of trial taken out a summons asking for review of a ruling allegedly made by us on the admissibility of the Kwong Wah Letter attaching the extract of the CLP Code into evidence. Mr Li, on behalf of the applicants opposed the application while Mr Hung, on behalf of R1, sought clarifications of the applicants’ position and/or the ruling made by the tribunal. Upon clarification Mr Chain withdrew the summons. In the circumstances, we find that R2 and R5 should bear costs of and occasioned by the summons for the applicants and R1 on the basic principle that costs should follow the event. Such costs are to be taxed if not agreed at High Court Scale. The costs order nisi shall be made absolute upon expiry of 14 days unless any of the parties apply by summons to vary the same. Costs of these Proceedings 107.The applicants ask for costs of these proceedings. Such proposition is vigorously opposed to by all respondents. All parties in fact rely on Good Faith Properties Ltd v Cibean Development Co Ltd [2014] 5 HKLRD 534 although they may focus on different passages. Mr Li refers us to the whole of the judgment and has not cited any particular passages in support. 108.On behalf of R1, Mr Hung in his final submissions in writing relies on Lam VP’s deliberations set out in paragraphs 27, 38 to 39 and 44. It is Mr Hung’s submission that compensation approach should be adopted. He has at the outset reminded this tribunal that the court in exercising its discretion on costs does not fillet the issues and to determine costs by issues. He went on to reply to the comments made by Mr Li. To summarise, Mr Hung submits that there was no exaggeration on the expert evidence; and R1 as a laymen is entitled to rely on opinion of his expert in any event. Further even if the tribunal does not find in favour of R1, R1 should only be deprived of costs when the applicants can show that “the pursuit of a line of opposition is obviously unreasonable”. It is not the case here. 109.In our judgment Mr Chan’s evidence could not be readily accepted for reasons set out in the above. We do not agree that Mr Li has a good course in saying that R1 should not be getting costs because of the opinion of its expert. Further based on our findings on the valuation and that the applicants had in fact failed to beat the tribunal’s determination on both EUV and RDV, there is no ground to say that R1 or even all of the remaining respondents had unreasonably rejected the offers of the applicants. On the same basis, we do not think why we should depart from the considerations taken by the Court of Appeal in Good Faith. 110.As to the costs argument between the applicants and R2 and R5, Mr Li criticises Mr Chain for spending time on irrelevant issues. We would say that the deliberation on a private tender by an agent in the course of acquisition was not unreasonable although at the end we put no weight to it in our assessment. It could not be said that such facts should not be brought to the attention of the tribunal at all. The cross-examination taken by Mr Chain on this topic was not unreasonably lengthy. 111.As to whether R2 and R5 are entitled to instruct 2 teams of solicitors, we say that they are well entitled to do so. The 2 respondents are separate entities holding different units in the Building and should be entitled to test their own respective case independently. The fact that they instructed the same counsel does not mean that they should have employed only one team at the outset. It also shows that when situation so allows, their joint efforts in instructing one counsel would definitely save costs for all parties. 112.Following the ruling of the Court of Appeal in Good Faith, we make a costs order nisi that the applicants do pay costs of these proceedings to the respondents with certificate for one counsel, to be taxed if not agreed at High Court Scale. Unless any of the parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days.
Mr C. Y. Li S.C., instructed by Messrs Iu, Lai & Li, for the 1st to 5th applicants Mr Andy Hung leading Mr Yuan Shan Cao, instructed by Messrs Lo & Lo, for the 1st respondent Mr Benjamin Chain, instructed by Messrs So, Lung & Associates, for the 2nd respondent, and Messrs Chan & Chan, for the 5th respondent Appendix I – EUV of residential reference unit Appendix II – EUV of shop reference unit Appendix III – EUV of all shops Appendix IV – GDV of shop reference unit Appendix V – GDV of all shops Appendix VI – Residual valuation
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Cases cited in this judgment