Fortress Jet Ltd and Others v. Tang Hoi Yip and Cheung Sau Chan Property Ltd and Others

LDCS 3000/2015

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO. 3000 OF 2015

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J U D G M E N T

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1.This is an application for compulsory sale of all the undivided shares of and in the following lots for the purposes of redevelopment pursuant to section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”):

Lot No	Address
Kowloon Inland Lot 9580	No 21 Ashley Road
Kowloon Inland Lot 9251	No 21A Ashley Road

These lots are hereinafter referred to as “KIL 9580”, “KIL 9251” or collectively as “the Lots” as the case may be and the building standing thereon as “21 Ashley Road”, “21A Ashley Road” or collectively as “the Buildings” as the case may be.

2.According to a set of building plans of reference no 2/4410/56 approved by the Building Authority on 23 October 1956, the Buildings comprise a pair of 6-storey tenement buildings served by a common staircase with 2 units at each level (i.e. a total of 12 units).  The Occupation Permit No K1/58 was issued on 2 January 1958 and gave permission to occupy “Shops on front portion of ground floor for non-domestic purposes, and Rear portion of ground floors, five (5) upper floors for domestic purposes”.  By virtue of 3 sets of Alteration and Additional Works Plans approved by the Building Authority on 7 November 1961, 23 July 1971 and 29 November 1971 respectively, the whole of the G/F has been converted to shop uses.

3.According to the Land Registry records, each of the Buildings is subject to one Deed of Mutual Covenant and each of the 6 units housed in each of the Buildings is given 1/6 undivided shares of its respective lot.

The Application

4.The 1^st, 2^nd and 3^rd applicants (collectively as “the applicants”) are associated companies who own majority number of the undivided shares of and in the Lots.  When they commenced the present proceedings on 27 April 2015 (“the Application”), they had owned all units and the allotted undivided shares of the Lots save and except:

(1)	the 1/6 undivided share of the 1st respondent (“R1”) allotted to the G/F (shop) of 21A Ashley Road (“R1’s Shop”), and
(2)	the 1/6 undivided share of the 2nd respondent (“R2”) allotted to the 1/F of 21A Ashley Road.  Around 20 May 2015, R2 assigned the 1/6 undivided share and the 1/F unit to the 3rd respondent (“R3”) and the unit will be referred to as R3’s Unit.

5.Thus, on average, the applicants own 83.3333% of all undivided shares of the Lots.

Live Respondents Remaining

6.The outstanding respondents are R1 and R3 (or collectively referred to as “Rs”):

(1)	R1, through its previous solicitors, filed the Notice of Opposition disputing (1) justification of redevelopment, (2) reasonable steps, and (3) the Existing Use Value (“EUV”) of R1’s Shop; and
(2)	R3 filed a home-made Notice of Opposition on similar grounds.

The Applicants’ entitlement to make the Application

7.Section 3(1) of the Ordinance requires an applicant to have not less than 90% of the undivided shares in a lot before he can make an application.

8.Section 3(2)(b) further provides that an application under subsection (1) may cover 2 or more lots: -

(i)	on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings; and
(ii)	where the average of-
	(A)	the percentage of the undivided shares owned by the majority owner in the lot or lots on which one of the buildings stands; and
	(B)	the percentage of the undivided shares owned by the majority owner in the lot or lots on which the other of the buildings stands, is not less than the percentage specified in subsection (1).

9.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.

10.The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice was gazetted on 22 January 2010 and came into operation on 1 April 2010 (“the Notice”).  Section 3 of the Notice lowered the threshold for compulsory sale in respect of the classes of lots specified in the Notice from 90% to 80%.  Those classes of lots include “a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (i.e. the date of the application under the Ordinance)”.

11.The occupation permit for the Buildings was issued on 2 January 1958 (i.e. more than 57 years before the date of the Application).  The Notice is applicable and the threshold percentage should be 80%.

12.Whereas the applicants together owned 83.3333% of the undivided shares in the Lots, i.e. they owned on average more than 80% of the undivided shares in the Lots when they commenced the present proceedings on 27 April 2015, we agree therefore that the applicants were entitled to make the Application under section 3(2)(b) of the Ordinance.

Section 4(2)(a) - Whether redevelopment of the Lots is justified due to the “age” and/or “state or repair” of the Buildings

13.Under section 4(1)(b) of the Ordinance, the Tribunal is to be satisfied that an order of sale should be made pursuant to the Application.  Section 4(2) of the Ordinance provides that there are basically 2 considerations, namely:

(i)	whether the redevelopment is justified due to age or state of repair of the existing development on the Lots, i.e. the Buildings in this case; and
(ii)	whether the applicants have taken reasonable steps to acquire all the undivided shares in the Lots where owners’ whereabouts are known.

14.The applicants have to satisfy this Tribunal that the above statutory requirements are met; otherwise, an order for compulsory sale will not be granted.

15.In our view, the issues in dispute include:

(1)	Whether the current state and condition of the Buildings is brought about as result of the neglect or deliberate act of the applicants;
(2)	Whether it is appropriate to compare the existing Buildings with a new building;
(3)	What is the proper inspection and repair standard;
(4)	Whether the repair cost of the Buildings should cover those cost for the individual units;
(5)	Whether weight should be given to the hearsay evidence of the specialists contained in the applicants’ expert reports; and
(6)	The repair items and cost

Issue no 1   Whether the current state and condition of the Buildings is brought about as result of the neglect or deliberate act of the applicants

16.The Rs submitted that there was evidence that the applicants had either through neglect and /or deliberate act significantly contributed to the current state and condition of the Buildings, that included:

a.	Mr Kan Sze Man (“Mr Kan”), the factual witness of the applicants, confirmed that there had been no general repair done after the applicants had become the owners and the applicants had deliberately or otherwise, left their units and the common areas of the Buildings in a rundown condition.
b.	Extensive rubbish had been dumped at the roof and some of the units owned by the applicants.
c.	The applicants failed to comply with the Notice issued on 22 November 2013 (“2013 Notice”) under the Mandatory Building Inspection Scheme and the Mandatory Window Inspection Scheme.  No explanation had been given by the applicants.  Mr Kan claimed that he was not aware of the 2013 Notice.  Had the 2013 notice been complied with, some of the cost suggested by Mr Benson Wong (“Mr B Wong”), the applicants’ building condition expert, would have been taken care of.

17.Mr Mok, counsel for the applicants, replied to the above submission as follows:

“(1)	These submissions are putting forward a positive case and such a positive case should not be permitted without any pleading.  There is no pleading of such a positive case in the Form 33 of R3.  Not only is there no such pleading in the Form 33 of R1, such a positive case would have been inconsistent with what is pleaded in §1(a)(iii) & (iv), which averred to the effect that the building has been reasonably well maintained and is in good repair and condition.
(2)	Further, there is no hint of such a positive case in any reports filed on behalf of R1 & R3 and R1 & R3 filed no witness statement.  The so called “evidence” put forward in the Closing §9.19(b) is no more than alleging the “extensive rubbish” dumped at the roof and some of the units owned by the Applicants during joint inspection, which were obvious leftovers by tenants or occupants which had not yet been removed.
(3)	……
(4)	In Rs’ Closing §9.20 in support of its assertion that “occupied units are in fair to good condition whereas vacant units are not”, it referred to the reply of Mr. B Wong, the applicants' building condition expert, in cross-examination acknowledging that “the condition of the flats commensurate with the length of time it had been vacant and the condition was generally poor due to lack of maintenance”.  Counsel for the Rs appears to suggest that the applicant has failed her duties of repair and maintenance to ensure all their units are “100% fully-tenanted” and should not leave their units vacant at any time. Quite on the contrary, the fact is, the applicants have continued to put out its units for lease/license even after filing its Form 32 as reflected in the amendments to the "list of tenants/licensees" contained in the Amended Form 32.  At all material times from its application to before the trial, no less than 50% of its units were under a lease/license.  As the witness for the applicants (Kan) said during cross-examined, it is not the applicants’ intention to left the premises vacant pending redevelopment, as to why they were left vacant for certain period of time, it would depend on the market and many factors as to when they could procure an appropriate tenant/licensee.  This probably may also be a reflection of the lack of attractiveness to lease/license an old building with staircase access only unless the rent is well below market, which is also a point in support of applicants’ application that the building is justified for redevelop due to its age and state of repair.”

18.We agree with the submissions of Mr Mok.  In R1’s Notice of Opposition filed on 15 May 2015, it was averred in paragraph 1(a)(iii) and (iv) that “the Building has been reasonably well maintained and is in good repair and condition and is fit for habitation.  The internal condition of the units within the Building are of good tenantable standards or capable of being restored to a good tenantable standard at reasonable and affordable costs.”

19.Not only that the allegation of neglect or deliberate act of the applicants was not mentioned in the Notice of Opposition, it was also not raised in Rs’ Opening Submissions.  In the report of Mr Kenneth Chan (“Mr K Chan”), the building condition expert of the Rs, he stated that the general condition of the main roof was good, notwithstanding that in one of the photographs (C33), the view that a lot of rubbish were dumped on the roof was captured.  The general condition of the Buildings was stated as fair or good in the report.  If there was the allegation that the state of the condition was not good and it was the result of the neglect or deliberate act of the applicants, the matter should be raised earlier and the applicants should be given the chance to adduce evidence relating to the management of the Buildings.  We find that the Rs should not be allowed to raise the argument.

20.Mr Kan is not responsible for the management of the properties of the applicants.  He is not in a position to answer questions relating to the management of the Buildings.  Furthermore, the applicants intended to redevelop the Buildings.  It is understandable if the applicants’ focus is not on the repair and maintenance of the units.  Such lack of focus, in our view, is different from deliberately allowing the units to fall into disrepair.  The existence of rubbish on the roof, which is a common area, cannot be the evidence of the applicants deliberately neglect the management of the Buildings.  Such rubbish can be readily removed and there is no evidence that the structure of the Buildings was affected by the existence of rubbish.

21.Furthermore, it was Mr Kan’s evidence that the applicants intended to let out as many units as possible.  As a matter of fact, at all material times, around 50% of the units were under a lease/license.  We do not accept that the Rs had proved the allegation that the current state and condition of the Buildings was brought about as result of the neglect or deliberate act of the applicants.

Issue no 2   Whether it is appropriate to compare the existing Buildings with a new building

22.Mr Li, leading counsel for Rs, submitted it was incorrect that a building should be redeveloped simply because it was old and did not meet the up-to-date standards in terms of compliance with statute or regulations or facilities and convenience.  If not, it would mean not only all old buildings (like the Buildings which were built in 1958) should be redeveloped due to its age and/or state of repair, even more recent and relatively new buildings should have the same fate by reason of modern requirements of lift or barrier free access or firefighting facilities.

23.Mr Li further submitted that the correct definition of “tenantable standard” given in Intelligent House Ltd v Chan Tung Shing [2008] 4 HKC 421 should be similar if not the same as “tenantable repair” or “good tenantable repair”.

24.Good tenantable repair has been defined to mean such repair as having regard to the age, character and locality of the premises, would make them reasonably fit for the occupation for a reasonably minded tenant of the class who would likely to take it.

25.Mr Li argued that according to the statutory wording of section 4(2)(a)(i) of the Ordinance, the pertinent consideration was “age or state of repair of the existing development”.  There was no basis to suggest that one should compare the existing development, with a modern type of development, for if not the statutory age criterion will be satisfied in every case for an old building.

26.Mr Li stated that the Tribunal should only consider the comparisons in terms of repair requirements and modern finishes and installations as required by law and in the context of the age, character, locality and use of the Buildings.  This would render most parts of the opinion expressed by Mr B Wong about the age and state of repair of the Buildings irrelevant.

27.In reply, Mr Mok submitted that the meaning of the term “tenantable repair” was flexible and might be different in a case by case basis, in particular where the facts differed materially.

28.Mr Mok relied on §§145-146 of Intelligent House Ltd, the submissions by the applicant’s leading counsel therein and had been accepted by the Tribunal, as follows:

“On a proper construction of the Ordinance and the relevant provision, with reference to the intention and objective of the Ordinance to facilitate and assist urban renewal, in determining whether the requirements under s.4(2)(a)(i) are satisfied:
(1)	The Tribunal is entitled to look at any factors or matters that are directly or indirectly related to the elements of "age" or "state of repair" of the existing building.
(2)	While looking at these factors or matters to decide whether redevelopment is justified, the Tribunal is also entitled to look at any comparison made between the old/existing building and a new building or any proposed development.
(3)	It is open to the Tribunal to consider and look at the obsolescence of an existing building in terms of its functional items or facilities, since this is something related (directly or indirectly) to the "age" of the building.  The older a building is, the more obsolete and outdated its facilities are.
(4)	Further, the Tribunal is entitled to compare these facilities of the old building, with what a modern day building could correspondingly offer whether as required by the present day regulation or law, or because of the advance of technology, or because of the rising expectations of the public for proper, safe and hygienic habitation and residence.
(5)	Further, in considering the cost of the "state of repair", the Tribunal is similarly entitled to look at repair works which are necessary to render the building a tenantable condition which is reasonably fit for use in the sense that it should be safe and hygienic for occupiers and visitors, and provide a standard of comfort and convenience which is reasonable in the present day circumstances for the type of building in question.  Mr Roots emphasizes in his closing submissions that he is not contending that (a) the repairs that needed to be carried out is to make the old building "as new" either by today's standard or even by the standards when it was built, and (b) modern finishes and installation should replace the type originally provided except where that is required by law or good safety practice".

29.Mr Li submitted that the judgment of Intelligent House was doubted by the Court of Appeal in Fineway Properties Ltd V Sin Ho Yuen Victor [2010] 4 HKLRD.  Mr Mok disagreed and submitted that only the economic tests therein were questioned.  There was no doubt on other decisions in Intelligent House by the Court of Appeal.  We are fully aware that Intelligent House is not binding on us.  We regard the Judgment as persuasive.  However, we accept the submissions cited above.

30.We accept that tenantable repair in the Landlord and Tenant context is a flexible concept.  In the compulsory sale context, tenantable condition as defined in Intelligent House has a different meaning.

31.We agree that when deciding whether redevelopment is warranted, the Tribunal is entitled and should have in mind the objective that the making of an order for sale is to facilitate and assist urban renewal.

32.The meaning of the term “justified” is wide and general.  All the circumstances and factors relating to age and repair should be considered.  We find that it is justified to compare the old building with new building to see what facilities the new building could offer.

33.Mr Li submitted that by granting the order for sale, there was no guarantee that the site would be redeveloped to a new building offering more units.  A person might purchase the site and build one house only.

34.We do not accept such argument.  There may be a loophole in the present legislation if it happens, but such possibility does not affect the criteria for granting the order.  Pursuant to Schedule 3 of the Ordinance, there shall be a redevelopment completed and made fit for occupation within 6 years anyway.

Issue no 3   What is the proper inspection and repair standard

35.Mr Daniel Mok (“Mr D Mok”), structural expert for Rs, adopted the standards of the Mandatory Building Inspection Scheme (“MBIS”) and Mandatory Window Inspection Scheme (“MWIS”) to prepare his report.  We accept Mr Mok’s submission that such standards should be rejected for the following reasons:

a.

The Building (Inspection and Repair) Regulation promulgated to implement the Mandatory Inspection regime provides in s.5(1) that an examination or assessment of a building must be carried by reference to the standard specified in s.5(2) [namely, the approved plans, the two specified ordinances and the standard of the building design and construction, prevalent at the time of construction of the building] “to (a) ascertain whether a building is safe or liable to become dangerous, or has been rendered dangerous; (b) identify any defects or deficiency of a building; and make proposal for any prescribed repair”.

b.

The inspection and repair standard under the Mandatory Inspection regime is accordingly to ascertain whether a building is safe or liable to become dangerous or has been rendered dangerous; the repairs are to restore safety from imminent danger according to the statutory requirements prevalent at the time of the construction of the building, not merely improvement of safety according to the current statutory requirements.  It is a standard fundamentally different from the tenantable condition standard adopted by Intelligent House.

36.In short, the standard under the Mandatory Inspection regimes concern the safety and health of the buildings.  No consideration is given to the question of redevelopment.  It is a lower standard when compare with the tenantable condition.

37.We agree that the requirement that the Buildings have to become “dangerous” for giving the order for sale is not consistent with the wording and intention of s.4(2)(a)(i) of the Ordinance where the statutory requirement is whether “redevelopment is justified owing to age or state of repair of the existing development”.

Issue no 4   Whether the repair cost of the Buildings should cover those cost for individual units

38.Mr Li submitted that the repair cost of individual unit should not be included in the repair cost of the Buildings for the following reasons:

(a)	This Tribunal should approach the matter on the legitimate assumption that each owner should discharge his obligations of maintaining and repairing his unit.  As stated above, in this case, there are provisions in the DMCs governing such obligation.  Hence, the condition of individual unit and the necessary repair costs for it should not be taken into account as its owner should have taken care of it.
(b)	If this Tribunal does not approach in this way, one can end up in an anomalous situation in that the repair costs can be jacked up by the majority owners simply not maintaining their units.  The other co-owners of the building or the manager and the incorporated owners has no right to ask those individual owners to repair and upkeep their units so long as they do not affect others or creates any nuisance.
(c)	Moreover, the standard of repair and hence the amount of repair costs for an individual unit would depend on the choice of the owner concerned.  It is not reliable to try to extrapolate the purported rate of repair from some other projects as allegedly done by Tang.

39.We agree with Mr Mok’s submission that safety improvement recognized no boundary between common areas and private areas.  The question to be dealt with is whether redevelopment is justified due to the state of repair of the existing development on the lot, that would include the whole building.

40.Who should pay the cost of repair, in our view, is irrelevant.  The concern here is the amount for the repair.  The choice of individual owner here does not play any part as the standard was set to be tenantable condition.

41.If the majority owners try to jack up the cost by deliberately not maintaining their units, such cost, of course, may be disregarded.  But there is no such evidence in this case.

42.It is also noted that in §226 of Intelligent House, it is stated that “under s.4(2)(a)(i), the Tribunal is entitled to consider any matter relating to the state of repair of the existing development.  There is nothing to suggest that we could only look at matters concerning the state of repair of the common parts of the buildings.  As a matter of principle and construction of the provision, we are of the view that it is relevant to look at the state of repairs concerning every part of the buildings, common parts and parts privately owned included.”

Issue no 5   Whether weight should be given to the hearsay evidence of the specialists contained in the applicants’ expert reports

43.Mr Li submitted that no weight should be attached to the evidence from the other specialists because there was no reason given by the applicants as to why those specialists were not called, and there was no apparent difficulty in calling them.

44.It is noted that the reports of Rs’ experts never raise any challenge or objection to any part of the evidence contained in the specialist’s reports.

45.Further, the applicants have served hearsay notices on each of the specialist reports appended to Mr B Wong’s report, citing, inter alia, s.10 of the Lands Tribunal Ordinance and s.47A of the Evidence Ordinance.

46.S.48 of the Evidence Ordinance provides Rs with the option to call the specialists as witnesses to be cross-examined.  No such application was made.  No counter-notice was served by the Rs, and no indication was given by the Rs in any shape or form that they wanted to cross-examine the specialists.  In fact, the Rs had raised no objection in any way on the specialist reports, not until Rs’ Opening.

47.There is no evidence to show those reports are not reliable.  In the circumstances, we agree that there is no reason not to give weight to the evidence of the report of the specialists.  If the Rs wish to dispute the contents, they should have filed their reports or required the specialists to attend court for cross examination.

Issue no 6   The Repair Items and Cost

48.The applicants adduced the expert evidence of Mr So Kin Shing (“Mr KS So”), a Registered Structural Engineer and Authorized Person, and Mr B Wong, a Registered Building Surveyor and Authorized Person.

49.The Rs adduced the expert evidence of Mr D Mok, a Registered Structural Engineer and Authorized Person, and Mr K Chan, a Chartered Building Surveyor and Authorized Person.

50.On structural assessment, Mr KS So and Mr D Mok had produced the following reports and joint statement:

(a)	Mr KS So’s report dated 11 January 2016;
(b)	Mr D Mok’s report dated 23 May 2016;
(c)	Mr KS So’s rebuttal report dated 27 June 2016;
(d)	Mr D Mok’s rebuttal report dated 27 June 2016;
(e)	Joint statement of Mr KS So and Mr D Mok dated 6 September 2016.

51.On building conditions, Mr B Wong and Mr K Chan had produced the following reports and joint statement:

(a)	Report of Mr B Wong dated 22 January 2016;
(b)	Mr K Chan’s report dated 24 May 2016;
(c)	Rebuttal report of Mr B Wong dated 27 June 2016;
(d)	Rebuttal report of Mr K Chan dated 28 June 2016;
(e)	Joint statement of Mr B Wong and Mr K Chan dated 25 August 2016.

52.We consider that in assessing the items for repair and cost, it is only a hypothetical exercise in assisting the court to consider whether the Buildings should be redeveloped. The standard adopted is the tenantable condition.  Such exercise is a conceptual one.  It is different from the decision of Incorporated Owners on the question of which items should be carried out in the renovation of a building.

53.It is also noted, as stated in §145(6) of Intelligent House, it was not that “(a) the repairs that needed to be carried out is to make the old building “as new” either by today’s standard or even by the standards when it was built, and (b) modern finishes and installation should replace the type originally provided except where that is required by law or good safety practice”.

54.For the structural assessment, the major drawback of Mr D Mok’s report is that he was only instructed to conduct a structural assessment of Ground Floor and First Floor at 21A Ashley Road.  The scope is limited.  It is not in dispute those two units were owned by Rs.  They had been occupied and were maintained in a better condition.  Mr D Mok’s report does not contribute much to assess the condition of the whole Buildings, including the common areas and other units.

55.The Tribunal accepts the evidence of Mr KS So’s report in respect of the structural assessment of the common areas and other units.  In any event, it is not in dispute that carbonation of the concrete of the structural members has generally gone beyond the concrete cover and reached that steel reinforcement bars of the structural elements.  In other words, the concrete cover has lost his protection against corrosion of the steel bars.

56.We accept that corrosion of the steel bars of the Buildings was serious and repair work was needed.  Such repair would be more extensive as the structural frames become older and the cost would escalate in the future.

57.As for the building conditions, unless otherwise stated, we prefer the opinion of Mr B Wong to the opinion of Mr K Chan for the reasons hereinafter mentioned.

58.Mr K Chan’s reply in cross examination as to the use of fresh water for flushing purposes in water closet was confusing.  On one hand he said that it was beyond his knowledge that fresh water would be allowed to be used as flushing water, but on the other hand in his report he rejected Mr B Wong’s cost of repair on this item.  In his report, he said that it was not a statutory requirement for the Buildings to adopt sea water for flushing purpose.  His evidence on the issue is inconsistent.

59.The only method employed by Mr K Chan is visual inspection and tapping on those areas within his reach.  Such method is not sufficient.  There may be debonding and hollow spots on the external wall which are not visible and out of his reach.

60.In cross examination, at first, Mr K Chan said that he included item 5.1 in the joint statement, that is the sum of $16,920 for the enclosure of fire services installation, because it was important.  When challenged by Mr Mok that there was no Fire Safety Improvement Direction for this item, Mr K Chan withdrew this item.  After being commented by Mr Mok, he recanted his withdrawal and gave another reason that it was required under Mandatory Building Inspection Scheme.

61.Mr K Chan was not sure whether he allowed cost of repainting of the external wall.  Anyway, he said that he should allow the cost of repainting of those patch repair areas.  We find that is inadequate.  Some of Mr K Chan’s estimates were too low.  For example, the costs for conducting water ponding test and water seepage inspection for the main roof and upper roof is only $2,500.  We do not think the cost is sufficient to engage an expert to conduct the test.  We also regard that patch repair could not be sufficient to deal with the water leakage problem on the roof.  According to our observation, the leakage is extensive and serious.

62.The differences between Mr B Wong’s estimate and Mr K Chan’s estimate on the repair items and cost in the joint statement are as follows:

Immediate Repair Works	B Wong	Difference	K Chan
1  Preliminaries	$1,093,500	$1,021,177	$72,323
2  Structural Frames	$86,600	$13,425	$73,175
3  Building Facades	$1,529,745	$1,332,610	$197,135
4  Main Roofs and Roof Structures	$612,460	$598,460	$14,000
5  Staircases and Lobbies	$301,490	$278,420	$23,070
6  Flats Internally	$938,230	$796,760	$141,470
7  Shops Internally	$188,780	$180,480	$8,300
8  Above Ground Plumbing Installation	$142,000	$142,000	0
9  Above Ground & Underground Drainage Installation	$105,000	$81,000	$24,000
10  Electrical Installation	$220,000	$219,000	$1,000
11  Fire Services Installation	$550,200	$550,200	0
Repair Works Sub-Total:	$5,768,005
Add Contract Contingencies 10%	$576,801
Repair Works Sub-Total:	$6,344,806
Add Professional fees 7.5%	$470,000
(7.5% rounded down to nearest $10,000)
Supervision Costs	$224,000
(1 Clerk Of Works for 8 months@ $28,000/month)
	_______________
Repair Works Sub-Total:	$7,038,806	$6,484,333	$554,473

63.Mr KS So accepted there was a mistake in calculating the area for hammer tapping inspection, the area on the G/F slab was mistakenly included, the correct figure should be 1,013 sq. m instead of 1,206, the estimate should be $23,490 instead of $29,000.

64.Mr K Chan admitted that work contingencies of 10% and professional fee of 10% should be added to his estimate.

65.For item 1 - the Preliminary, the figure of $1,100,500 suggested by Mr B Wong was quite substantial.  We opine that some of the items are not necessary.  For simplicity, we adopt the figure of 15% of the project total as suggested by Mr K Chan.

66.For item 2 - the structural frames, we accept the figure of $81,090 as revised by Mr KS So.

67.For item 3 - Building Facades, we prefer Mr B Wong’s figure of $1,529,745.  For the external wall, we opine that extensive repair should be done.  That would include a complete re-rendering.  Patch repair is not sufficient.  The standard of no immediate danger is not accepted.

68.For item 4 - the Main Roof and Roof Structures, we prefer Mr B Wong’s estimate of $612,460.  A Complete renovation to the Main roof, the parapet walls, the Staircase housing and water tanks should be carried out.  It is evident that the water leakage problem on the roof was quite serious.  The condition of the roof generally was poor.  Mr K Chan’s estimate is not sufficient.

69.For item 5 - the staircase, we opine that renovation works to the staircase should be done.  However, we regard the provision of handrails should not be reasonably required under the tenantable condition.  The staircase is not wide.  The sum of $39,000 is not accepted.  The figure of $239,420 for this item is adopted.

70.For item 6 - the cost of repair for the Flats internally, we accept the views and the reasons of Mr B Wong that the metal corrugated sheet roof and a concrete floor slab with the flat roof area surrounded by metal railings of the unit 21-1/F are unauthorized building structure.  The provision of $10,000 by Mr K Chan for the reinstatement of the kitchen on 1/F is again an underestimate.  For the reason above mentioned, the cost of repair inside the flats should also be included in the hypothetical exercise.  The figure of $796,760 is accepted.

71.For item 7 - the cost of repair for the Shops internally, the cost of $188,780 is accepted.

72.For item 8 - the Above Ground Plumbing Installation, we consider that the cabinets to house the water meters and stop valves are not reasonably required under the tenantable condition, taking into account the style of the Building.  The sum of $10,000 is not accepted.  The pipes should be replaced.  The estimate of $132,000 is adopted.

73.For item 9 - the Above Ground and Underground Drainage System, the original pipes had already been replaced and were agreed to be in serviceable order.  We agree to adopt the figure of $3,000 proposed by Mr K Chan for the general inspection and maintenance.  The estimate of the cost of Condensate Pipework and Underground drainage proposed by Mr B Wong are accepted.  The cost for item 9 is $65,000.

74.For item 10 - Electrical Installation, one can see that the cables, cut–out switches and meters are haphazardly and disorderly mounted on the walls inside the staircase.  The sum of $100,000 for general inspection and maintenance is accepted.  For the Equipotential Bondings, as the new handrails is considered not necessary, the cost be reduced to $10,000.  For the Lightning Protection System, we accept the opinion of Mr K Chan that the Building was a low-rise building located at low level and surrounded by a number of high buildings.  The hazard by lightning was comparatively low.  The installation of Light Protection System is not required.  The total cost for item 10 is $110,000.

75.For item 11 - Fire Service Installation, applying the tenantable condition, we do not regard the Manual Fire Alarm system (11.1), the Fire Hydrant & Hose Reel System (11.2) and the Secondary Electricity Supply (11.4) are reasonably required.  We allow the Emergency Lighting (11.3) in the sum of $18,700.

76.For the Work Contingencies, professional Fees and Supervision Fees, we accept Mr B Wong’s estimate.  For the Supervision Fees, we consider that given the extent of the building work, a full time staff should be employed.

77.We consider that Mr K Chan’s total estimate cost of $554,473, even after adding back the Work Contingencies and Professional Fees, is grossly inadequate.

78.The accepted figures are listed as follows:

Immediate Repair Works
1   Preliminaries ($3,773,955 x 15%)	$566,093
2   Structural Frames	$81,090
3   Building Facades	$1,529,745
4   Main Roofs and Roof Structures	$612,460
5   Staircases and Lobbies	$239,420
6   Flats Internally	$796,760
7   Shops Internally	$188,780
8   Above Ground Plumbing Installation	$132,000
9   Above Ground & Underground Drainage Installation	$65,000
10   Electrical Installation	$110,000
11   Fire Services Installation	$18,700
	_______________
Repair Works Sub-Total:	$4,340,048
Add Contract Contingencies 10%	$434,005
	_______________
Repair Works Sub-Total:	$4,774,053
Add Professional fees 7.5%	$358,054
(7.5% rounded down to nearest $10,000)
	_______________
Supervision Costs	$224,000
(1 Clerk Of Works for 8 months@ $28,000/month)
	_______________
Repair Works Sub-Total:	$5,356,107

79.We are of the view that the repair cost is substantial and disproportionate to the existing value of the Buildings.  Redevelopment of the Building is justified owing to the state of repair.

The Cost of Construction of a New Similar Building

80.For completeness, in respect of the Construction Cost Assessment of a new similar building, we prefer the opinion of the applicants’ experts for the reasons stated in the report.  We accept that the total construction cost of a new low-rise residential building similar to the existing Buildings as $18,434,000.  Mr K Chan’s estimate was the building cost of a different kind of building.  It was the building cost with air conditioning, kitchen cabinets and home appliance, and not similar to the Buildings.  His estimation is rejected.

81.The percentage of the repair cost to the cost of constructing a new similar building is 29% (5,356,107 / 18,434,000).  We emphasis that the figure is hypothetical and is for reference only.

Whether redevelopment justified

82.In the circumstances, we find that the applicants have established the following:

a.	The Buildings are more than 58 years old.  They are suffering from the physical and functional obsolescence.
b.	In particular, the Buildings are obsolete in terms of fire installations and fire escape arrangement.  The refuse disposal method is outdated and unhygienic as there is no refuse provision provided in the Buildings.  Household refuse is packed in bags and placed on the staircase.  There is no drainage pipework provided for the drainage of condensates from the window type air conditioning units installed on the building facades.  The condensates from the air conditioners are allowed to drip down to areas down below causing nuisance to other occupants and passers-by.
c.	The Buildings have also passed its design working life.  We note that the concept of design working life is only one of the factors to be taken into consideration.  Maintenance plays a major part as well.  Proper and regular maintenance work could increase the life span.  But in this case, there is no evidence of regular maintenance.  The maintenance could only be said to be ordinary and piecemeal.  No substantial renovation work had been done.
d.	The external wall rendering which has been subject to weathering for over 58 years.  The condition of the surface rendering on the external walls is poor.  It can be seen that there are crackings of the external wall rendering, peeling of the paintwork, the existence of abandoned rusty metal fixtures.
e.	The original waterproofing to the roof should have passed its effective life.  There were water leakage signs on the roof and in a number of units.
f.	We accept that the repair deficiencies found in the structural frames, components, finishes and service installations are of the nature and magnitude that cannot be easily rectified by simple and piecemeal repairs.
g.	Substantial repairs in the estimated sum of about $5,356,107 are required to be carried out in order to restore the Buildings to tenantable condition. We do not accept that the Buildings can be rehabilitated at reasonable cost.
h.	The total repair cost is about 29% of the construction cost of a similar superstructure.
i.	The total repair cost are very substantial, and it indicates that the deterioration of the superstructure of Buildings is very serious and has reached a state which is beyond reasonable economic repair.
j.	We accept Mr B Wong’s view that even if the Buildings are restored to tenantable condition, it will not be able to provide the same quality of accommodations that a new building could offer.  It will also not be up to the standard of a new building because of its inherent limitations which cannot be corrected (for example, the inherent fire safety deficiencies in the staircase and the inability to rectify the staircase to provide barrier free access facilities of a lift). Further, the rental and capital values of a new building would be far greater than the aged Buildings even if they are repaired.

83.Having considered the evidence before the Tribunal, we are satisfied that redevelopment of the Buildings is justified due to the age and state of repair of the existing development on the Lots.

The Valuation Evidence

84.The Application was supported by a valuation report dated 27 April 2015 (“Application Report”) prepared by Mr Charles C K Chan (“Mr C Chan”) of Savills Valuation and Professional Services Limited, containing assessments of the EUV of all units in the Buildings on the Lots as at 30 March 2015.  The Application Report was prepared not earlier than 3 months before the date of the Application, or more particularly at the same day of the Application and is therefore, in our view, in compliance with section 3(1) of the Ordinance, setting out the assessed EUV of each unit on the Lots.

85.Under section 4(1)(a) of the Ordinance:

“the Tribunal shall determine an application under section 3(1) by……, if any minority owner of the lot the subject of the application disputes the value of any property as assessed in the application, hearing and determining the dispute”

86.In the present case, the Rs have adduced the valuation reports prepared by Ms Sat Wei Ling (“Ms Sat”) in rebutting the valuations of Mr C Chan. Thus, for the applicants, the following reports have been prepared by Mr C Chan:

	(1)	The Application Report dated 27 April 2015[1];
	(2)	Supplemental Report dated 12 May 2016 on both the EUV of the Buildings and the redevelopment value (“RDV”) of the Lots[2];
	(3)	Rebuttal Report dated 27 June 2016[3] commenting on the report dated 23 May 2016 by Ms Sat;
	(4)	Updated report on RDV of the Lots dated 23 February 2017[4];
whereas for Rs, the following reports have been prepared by Ms Sat:
	(1)	Valuation Report dated 23 May 2016 on both the EUV of the Buildings and the RDV of the Lots[5];
	(2)	Rebuttal Report dated 28 June 2016[6];
	(3)	Updated RDV report dated 27 February 2017[7];

87.Mr C Chan and Ms Sat have also made the following Joint Statement of Valuation Experts:

(1)	Joint Statement dated 26 August 2016 on the EUV assessments with the revised valuations of the two experts[8]; and
(2)	Supplemental Joint Statement dated 9 March 2017 on Issues in Agreement and Not in Agreement regarding the RDV[9].

EUV as at 30 March 2015

88.At trial, Mr C Chan and Ms Sat came to agreement on the EUV of all the units in the Buildings as at 30 March 2015, yielding a total of $273,550,000.[10]  For instance, the EUV of R1’s shop is $88,100,000 which represents 32.21% of the total and the EUV of R3’s Unit is $12,500,000 which represents 4.57% of the total.

Disputeson the estimation of the RDV of the Lots

Optimum hypothetical development model

89.The two valuation experts cannot however agree on the RDV of the Lots.  This is important because if an order for sale is made, the Tribunal will set the reserve price for the sale of the Lots by reference to the RDV.

90.By the Supplemental Joint Statement dated 9 March 2017, Mr C Chan and Ms Sat have the following agreements or disagreements:[11]

	Mr C Chan	Ms Sat
Date of Valuation	27 February 2017
Registered Site Area	240.80 sq. m
Net Built-over Area	224.34 sq. m (after deducting 1.5m wide non-building area from the lot boundary abutting road)
Bonus Plot Ratio	0.342
Bonus Site Coverage	1.59%
Gross Floor Area (“GFA”) of Hypothetical Commercial development:	2,971.95 sq. m
Building Height	G/F: 4.5m 1/F: 3.5m 2/F to 3/F: 3.5m 4/F to 18/F: 3.3m
Height Limit:	91.6 mPD
Storey Height:	G/F: 3.9 m 1/F: 3.0 m Residential Floor above: 3.1 m each
Common Area of G/F	Lobby: 60 sq. m Transformer Room & Plant Rooms: 50 sq. m	Lobby: 56 sq. m Transformer Room: 43 sq. m FS Control Room: under main staircase
Configuration of G/F Retail Portion	One Shop: 114.34 sq. m (Saleable)	Two Shops Large one: 107.3 sq. m (Saleable) Small one: 18.0 sq. m (Saleable) Total: 125.3 sq. m (Saleable)
Common Area on 1/F	Plant Rooms: 40 sq. m	Plant Rooms: 35 sq. m
Common Area on U/F	45 sq. m
U/F Saleable Area	1/F to 3/F: 498.02 sq. m 4/F to 18/F: 1,489.59 sq. m Total: 1,987.61 sq. m	1/F: 144.3 sq. m 2/F to 3/F: 358.6 sq. m 4/F to 18/F: 1,477.5 sq. m Total: 1,980.4 sq. m
Flat Roof on 4/F	80 sq. m (conversion rate: 1/5 of the rate of 2/F to 18/F)
Marketing Cost	2%
Interest Rate	4%
Professional Fee	6%
Demolition Cost	$800,000
Construction Cost	$104,144,000 on the basis of High Quality Office Building
Demolition Period	6 months
Construction Period	24 months
Developer’s Profit on cost and land	20%	15% in view of better market sentiment

91.In view of the above, the only major disagreements between the two valuation experts are on the area of the shop(s) on G/F and the developer’s profit.  Notwithstanding this, the valuation results of the 2 valuation experts are wide apart: Mr C Chan’s is $322,000,000 (i.e. an accommodation value of about $108,346 / sq. m) while that of Ms Sat is $404,000,000 (i.e. an accommodation value of about $135,938 / sq. m). This diverse opinion is resulted from the determination of the Gross Development Value (“GDV”) by the application of various comparables.

Assessment of G/F

92.Mr C Chan and Ms Sat agree to adopt the following comparables in assessing the GDV of the hypothetical ground floor unit(s):[12]

93.In respect of these comparables, the two valuation experts have also the following agreements and disagreements on the adjustments applicable to the comparables:[13]

Adjustment Factor	Mr C Chan’s view	Ms Sat’s view
Time	Private Retail – Price Indices (March 2017) from Rating and Valuation Department (“RVD”). Projection of +0.48% (i.e. the magnitude of the increment from Dec 2016 to Jan 2017) is made for February 2017	Private Retail – Price Indices (March 2017) from Rating and Valuation Department (“RVD”). Projection of +1% is made for February 2017
Location & Visibility	A3: +0% A6: -5% A7: +0% A8: -10%	A3: +10% A6: -2% A7: +5% A8: -5%
	A1: -10% A2: -20% A4: -5% A5: +5%	Agreed
Size/Quantum	1% per 10 sq. m difference	1% per 10 sq. m difference for A1, A3 to A6 & A8
		1.5% per 10 sq. m difference for A2 & A7
Frontage	4% per 1.0 m	Agreed
Return or Second Frontage	A1: -4% A4: -2% A6: -2%	Agreed
Depth/Layout	A1: -15% A2: -25% A3: -20% A4: -5% A5: -20% A6: -15% A7: -25% A8: -15%	Depth: 1.5% per 1.0 difference
		Layout: 5% for A1 -2% for A2 to A7 as the proposed Large Shop is not in a rectangular shape A8:+0%
Headroom	4.0% per 1.0 difference	2.0% per 1.0 difference
Steps	A1: +2.5% A3: +2%	Agreed
Age	0.2% per year difference	Agreed
Total Calculation	By Multiplication	Agreed

Adjustment for Time

94.While both valuation experts agree to adopt the RDV index for Private Retail Sector, they have disagreement on the magnitude of the projection.

95.By consent, the two experts have produced the up-to-date RVD Retail Price Index up to April 2017, by reference to which however, we find the projections by Ms Sat are not justified.

96.We would therefore just follow the time adjustments proposed by Mr C Chan.

Adjustment for Location & Visibility

97.In terms of location, we regret that only 2 of the comparables, namely A5 & A7 are situated on Ashley Road or on the west side of Nathan Road which is a major district distributor.  The other comparables are on the east side of Nathan Road where the shopping pattern or pedestrian flow may be different.

98.We appreciate however that Mr C Chan and Ms Sat have agreed on the adjustments for 4 comparables, i.e. A1, A2, A4 & A5; their disagreements on the other 3, i.e. A6, A7 & A8 are marginal only or within 5% differences.  We are prepared to split the difference for the latter between the 2 experts.

99.As for comparable A3, Mr C Chan adopts no adjustment but Ms Sat proposes +10%, i.e. this comparable is situated at a location inferior to that of the hypothetical shop. Having conducted the joint inspection, we agree that this comparable is situated on a relatively quiet street.  We also agree with Ms Sat that the continuity of shop front is broken by a rundown car park entrance just next to it.  That coaches were parked on the opposite side of the street for loading and unloading of tourists as suggested by Mr C Chan is neither here nor there.  Therefore, we accept Ms Sat’s adjustment of +10%.

Adjustment for Size & Quantum

100.The only difference in opinion between Mr C Chan and Ms Sat on adjustments for size and quantum is that for comparables A2 and A7, Ms Sat applies a higher adjustment rate of 1.5% per 10 sq. m difference in area instead of their agreed 1% per 10 sq. m difference for the other comparables. The primary basis for Ms Sat to adopt a different rate for these smaller size comparables is that the unit rate for a smaller shop is higher than that of a big shop.

101.While we agree that it is hard to draw a dividing line between a small shop and a big shop, we prefer the approach of Ms Sat.  In any event, the differences in adjustments or their effect on the average result are not significant.

Adjustment for Depth & Layout

102.On the adjustment for depth and layout, Mr C Chan applies a single adjustment for each comparable; on the other hand, Ms Sat has segregated the adjustment into 2, one for depth and one for layout.

103.While Ms Sat has not explained how she arrived at the adjustment for layout, she has adopted a formula of 1.5% per metre difference in depth whereas according to Mr C Chan, he does not have any formula.  Thus, the different adjustments between the 2 experts are shown as follows:

Comparable	Mr C Chan		Ms Sat
		Depth	Layout	Total
A1	-15%	-12%	5%	-7%
A2	-25%	-19%	-2%	-21%
A3	-20%	-15%	-2%	-17%
A4	-5%	-4%	-2%	-6%
A5	-20%	-16%	-2%	-18%
A6	-15%	-10%	-2%	-12%
A7	-25%	-18%	-2%	-20%
A8	-15%	-10%	0%	-10%

104.Again, as can be seen from the above, save for the adjustment for A1, their disagreements are marginal only or within 5% differences.  In this regard, we prefer Ms Sat’s approach because if there be needs to adjust for depth and/or shape, these adjustments should be made separately.  Similarly, therefore, we prefer the adjustment of -7% proposed by Ms Sat for A1.

Adjustment for Headroom

105.For the adjustments on headroom, Mr C Chan adopts 4% per m difference and Ms Sat adopts 2% per m difference.  Ms Sat is of the view that Mr C Chan’s 4% per meter is objectionable because he has adopted the same formula for adjustment on frontage but he agrees that frontage should be more important than headroom for G/F premises.  We agree to the approach by Ms Sat.

Conclusion on Adjustments

106.Thus, on the basis of a hypothetical shop with 114.3 sq. m having a frontage of 7m and a depth of 20.4m as suggested by Mr C Chan, the corresponding adjustments are showed in the following table:

107.Based on the above, we are prepared to adopt $1,100,000 / sq. m as the unit value for a hypothetical shop at the location of the subject.  Ms Sat has however proposed that instead of one hypothetical shop, there should be 2, one with 107.3 sq. m and the other with 18.0 sq. m.  Thus, the two valuation experts would arrive at something in the following:

Mr C Chan:	114.3 m2	x	$1,100,000/ m2	=		$125,730,000
Ms Sat	107.3 m2	x	$1,100,000/ m2	=	$118,030,000
	18.0 m2	x	$1,630,000/ m2	=	29,340,000	$147,370,000
					Difference:	$21,640,000

108.We have not been provided with any approved building plans or schematic design of the proposed hypothetical development.  In such absence, the exercise of ascertaining the gross development value is only an averaging exercise.  Having said that, we doubt if the provision of a small shop of 18.0 sq. m is a good proposition or indeed viable when we find no such small premises along Ashley Road.  For this reason, we would just adopt the 1-shop approach proposed by Mr C Chan and determine the GDV of the hypothetical shop at say $130,000,000.

Assessment of U/F

109.As can be seen from the Supplemental Joint Statement dated 9 March 2017, Mr C Chan and Ms Sat agree on the comparables to be adopted save that Mr C Chan rejects the use of 23/F and Flat Roof on 25/F of H8 at No 8 Hau Fook Street (i.e. comparable B2(2)) whereas Ms Sat adopts it as a comparable.

110.At trial, Mr C Chan gave his opinion that comparable B2(2) took place more than 3 years ago in November 2013 and hence should not be included.  The Rs’ response is that some of the comparables agreed by the experts for the ground floor shop assessment are also dated January 2013.  However, this is the difference i.e. this comparable is not agreed to be used, and as a principle of valuation, we should adopt comparable transaction at a date close to the valuation date.

111.We also agree with Mr C Chan that the RVD retail price index which is based on the prices of different types of shops is only borrowed as proxy for assessing Ginza type development.  The index may not reflect the actual price movement of Ginza type units.  The longer the time span any discrepancy between the performance of the two types of premises would become magnified.[14]

112.In any event, as Mr C Chan points out, the comparable transactions at H8 are not reliable because the unit rateable values of its units are much higher than those of Nos 17-19 Ashley Road, which comprises another Ginza type development next to the Buildings.  The percentage differences in unit rateable values between H8 and Nos 17-19 Ashley Road are 20% in the year 2016-17 and 61% in the year 2017-2018.  We consider such a difference(s) is mainly attributable to the difference in location between the two developments.

113.We agree therefore that this comparable B2(2) should be discarded and we would, as submitted by Mr Mok in closing, depart from the agreed adjustment on location by the two experts for the remaining comparable at H8.

114.Thus, the comparables agreed by both Mr C Chan and Ms Sat are as follows:

115.Again, the two valuation experts have the following agreements and disagreements on the adjustments applicable to the comparables:

Adjustment Factor	Mr C Chan’s view	Ms Sat’s view
Time	Private Retail – Price Indices (March 2017) from Rating and Valuation Department (“RVD”). Projection of +0.48% (i.e. the magnitude of the increment from Dec 2016 to Jan 2017) is made for February 2017	Private Retail – Price Indices (March 2017) from Rating and Valuation Department (“RVD”). Projection of +1% is made for February 2017
Location	B2: -10% B3: -5%	B2: -2% B3: 0%
	B1: -20% B4: -20% B5: -10%
Age	0.5% per year difference	Agreed
Floor	0.5% per year difference	0.3% per year difference
Size/Quantum	0.5% per 10 sq. m difference	Agreed
Layout	Not Allowed	Agreed
Headroom	2% per 1.0 sq. m difference	1% per 1.0 sq. m difference
Lift Services	Not Allowed	B1: +0% B2: +0% B3: +8% B4: +0% B5: +6%
Ginza design & conglomeration	Not Allowed	B1: +3% B2: +0% B3: +5% B4: +3% B5: +5%
Street Exposure/ Lowest Commercial Floor	Not Allowed	Agreed
Calculation of Adopted Unit Rate	Averaging	Double rating for H8
Total Calculation	By Multiplication	Agreed

Adjustment for Time

116.We have already ruled that the projections by Ms Sat are not justified and would therefore just follow the time adjustments proposed by Mr C Chan.

Adjustment for Location

117.Although Mr C Chan had proposed -10% adjustment for comparable B2, i.e. H8, by reference to the latest unit rateable value comparison, this is obviously inadequate.  We would rather adopt -20% which is the same as that for B1.

118.Having conducted the joint inspection, we would adopt Mr C Chan’s adjustment for B3 as well.

Adjustment for Floor

119.Mr C Chan adopts 0.5% per floor difference and Ms Sat adopts 0.3% per floor difference.  Ms Sat explains a less 0.3% adjustment per floor is owing to that the hypothetical development would be served by lifts and therefore the floor differences should not be significant.

120.We agree with Ms Sat especially when this is borne out by the sale prices of various floors in comparable B3.

Adjustment for Headroom

121.For the adjustments on headroom, Mr C Chan adopts 2% per m difference and Ms Sat adopts 1% per m difference.

122.To the extent that we have adopted 2% per m difference in headroom for G/F premises and the upper floors have also to cater for the retail operations, we agree to adopt 2% per m difference for the upper floors.

Adjustment for Lift Services

123.Mr C Chan does not give any lift service adjustments whereas Ms Sat does for some of the comparables.  As explained by Ms Sat, the lift adjustment is given on the basis of the floor area on upper floors and the number of lifts serving the building[15]:

Comparable	Saleable Area (m2) per floor	No of Lift(s)	Proposed adjustment
B1	57.6	1	0%
B2	129.2	3	0%
B3	333.3	2	8%
B4	131.7	3	0%
B5	221.0	2	6%

124.In other words, if the floor area of the comparable building is larger than the floor area of the hypothetical development (saleable area of 98.5 sq. m per floor) but there is no commensurate number of lifts serving it, then there should be upward lift adjustment for the comparables.

125.On the other hand, Mr C Chan explains that he envisages the hypothetical development and the comparable buildings have similar floor plates so that 2 lifts (as provided in the hypothetical development models of both experts) should be sufficient and the waiting time for the hypothetical model would be the same as the comparable buildings.  This is true but we find for instance from the evidence of Ms Sat that the lifts for B3 were originally designed for office uses which are being converted to other retail purposes.  We would have therefore agreed to Ms Sat’s proposed adjustments but we consider such adjustment should be better reflected in the Ginza design and conglomeration adjustments proposed by Ms Sat.

Adjustment for Ginza design and conglomeration

126.Likewise, Mr C Chan gives no adjustment but Ms Sat does for the reason that save for B2, all the comparables have not all been converted into Ginza type of use while the hypothetical development is meant to be a complete Ginza development.  Ms Sat explains that the percentage of adjustment depends on the extent of conversion.

127.Mr C Chan’s responses are as follows:

(1)	This adjustment factor is new to him and should not be given;
(2)	The scale of the hypothetical development is quite small and its Ginza design cannot be distinguished from an office design;
(3)	The cost of the hypothetical development is that of office design.  There should not be any special Ginza design;
(4)	This factor of adjustment would duplicate the location adjustment.

128.Despite Mr C Chan’s response as stated above, we find Ms Sat’s explanation persuasive.  The hypothetical development has already envisaged a Ginza design with all necessary provisions therein though we appreciate that the cost of development would not be significantly different from that of an office development.  On the other hand, some of the comparables were built originally as office and do not necessarily have similar provisions.  We consider adjustment be necessarily required or we are not comparing like with like.  However, we consider this adjustment would duplicate the lift service adjustments which are necessitated for the similar reason.  This is particularly the case when the quantum adjustments proposed by Ms Sat in respect of these two factors are within a close range of 3%.  Therefore, we would allow the adjustments proposed by Ms Sat but disregard her adjustments for the lift service provision.

Conclusion on Adjustments

129.Thus, based on the above analysis, the corresponding adjustments are showed in the following table:

* Taking 9/F of the hypothetical development for reference

130.We find from the above analysis the comparables as adjusted giving an average of $226,822 / sq. m which is somehow predominated by the 6 comparables from one single building, i.e. Kaiseng Commercial Centre.  If the average of all these adjusted transactions in Kaiseng Commercial Centre be taken as one transaction instead, the average would become $228,746 / sq. m.  We are prepared to adopt therefore $230,000 / sq. m as the unit price for the 9/F of the hypothetical development.

131.Mr C Chan and Ms Sat further agree that apart from floor adjustment, there should be a further adjustment on street exposure for 1/F at +10% and for 2/F at +5% in respect of the hypothetical development.

132.Subject to the above, Mr C Chan and Ms Sat share a very similar hypothetical development with minor differences in saleable areas.  In the absence of any approved building plans or schematic design of the proposed hypothetical development, we prefer those saleable areas as proposed by Mr C Chan.  In any event we consider the result would not be much affected as the residual valuation by itself does not tend to give an exact answer.

133.Thus, the GDV for various U/F is determined as follows:

Developer’s Profit

134.The remaining only major dispute between Mr C Chan and Ms Sat lies on the developer’s profit to be adopted in the hypothetical development: Mr C Chan proposes 20% and Ms Sat proposes 15%.

135.As for any business undertaking, the developer who takes the trouble to assemble a piece of land for redevelopment would seek to make a profit in return.  In Hong Kong it is usual to assume that the developer seeks acapital profit expressed as a percentage of the total development cost (including interest) but such a percentage can never be a constant.  “The target levels of profit will depend on the nature of development and allied risks, the competition for development schemes in the market, the period of the development and the general optimism in relation to that form of development.”[16]

136.More recently, the HKIS Guidance Notes on Valuation of Development Land contains the following provisions:

“3.6.4	Developer’s profit needs to reflect:
i.	The nature of the development and related risks. These include marketing risks for sales and lettings, risks of construction difficulties and cost overruns, and delays in obtaining relevant development approvals.
ii.	Competition and market demand for the type of development scheme, plus:
iii.	The development duration, since lengthening the development period will escalate the necessary return on outlays and capital.
3.6.5	Straightforward developments catering to strong market demand will serve to reduce risk, and thus profit rate expectation.”

137.Notwithstanding the above, it is correct that 15% is usually adopted for commercial/residential development and a higher percentage of 20% for commercial development.  In Cheer Capital Limited v Unibase Investment Limited & Others, LDCS 5000 & 6000/2013 (unreported, dated 12 June 2015) for instance, a developer’s profit of 20% was adopted for a Ginza type development in that case.  We agree however with Ms Sat that the market sentiment now is better.

138.We also agree with Ms Sat that the scale of development is smaller in the captioned case and Mr C Chan himself agrees that the agreed construction period of 24 months is short so that the developer can expect a quicker return.  It is also the defence of Mr C Chan against the adjustment for Ginza design & configuration that in light of the small scale of the hypothetical development, its Ginza design cannot be distinguished from an office design.

139.In the circumstances of this case, we are prepared to accept a developer’s profit of 15%.

Finding on RDV and the Reserve Price

140.Thus, subject to what we have stated above, we shall follow Mr C Chan’s residual valuation as a template in the determination of the RDV.  We estimate the land value of the Lots at $352,512,000 (i.e. accommodation value of about $118,613 / sq. m) as shown at Appendix 1 to this judgment.

Section 4(2)(b) – Whether Applicant has taken reasonable steps

141.The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interest of Rs owning minority interests in the Lots under section 4(2)(b) of the Ordinance.

142.In this regard, the applicants had made 5 rounds of offers to the Rs, two before the commencement of the Application and 3 after the commencement:

Date of Offers	Offer to R1	Offer to R2/R3
27 Feb 2015	$115,000,000	-
9 Apr 2015	$118,000,000	$12,000,000
11 Mar 2016	$108,000,000	$15,280,000
8 Aug 2016	$114,280,000	$18,500,000
21 Feb 2017	$124,800,000	$20,200,000

143.The offers made on 9 April 2015 and 11 March 2016 were all accompanied by Savills’ advice letters setting out the RDV shares of R1 and R2/R3 according to their EUV percentages as assessed by Savills.  Further, the offers since 8 August 2016 had taken into consideration Ms Sat’s assessment of the RDV and the share of the RDV of each of the Rs’ units according to her EUV assessments.  And as at the date of the latest offer, i.e. 21 February 2017, the applicants’ offers exceeded Ms Sat’s valuation of both R1’s shop and R3’s unit.  This evidence is undisputed.

144.While R3 accepts that the last offer by the applicants was reasonable, both R1 and R3 contend that it was only in the last offers that the applicants determined the offer prices based on valuation done by Ms Sat.  In addition, that RDV relied on by the applicants was an old figure determined by Ms Sat as at 23 May 2016; her updated RDV is $404,000,000.  Using the latest apportionment ratio agreed by Mr C Chan and Ms Sat, the offer price to R1 should be 32.21% x $404,000,000 = $130,128,400 and the offer price to R3 should be 4.57% x $404,000,000 = $18,462,800.

145.First of all, Mr C Chan and Ms Sat had come to agreement on the EUV of all the units in the Buildings as at 30 March 2015; for instance, the EUV of R1’s shop is $88,100,000 and the EUV of R3’s Unit is $12,500,000.  All the offers above exceeded these EUV by wide margins.

146.Secondly, in Intelligent House where the majority owner relied on its valuation expert to formulate some of the offers, the Tribunal ruled at §334(3) that:

“… it is not disputed that Savills is a reputable firm of valuers.  In our view, it is also reasonable for Intelligent House to rely on Savills’ expert opinion to formulate the purchase prices offered to the minority owners.  There is also no reason for us to believe, nor is there such evidence to suggest, that the advices from Savills were not properly made based on professional valuation of the EUV and RDV of the minority owners’ units.”

147.On the other hand, there can be no requirement that the offers had to be based on the minority owners’ calculation or those of their appointed experts.  Otherwise, every offer made by the majority owner would become unreasonable so long as the minority owner disagrees with it.  This is ridiculous.

148.More importantly, the Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363 (“Capital Well”) has emphasised at §33 that:

“… the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It does not itself arrive at any conclusion as to what figure represents the correct valuation. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question.”[17]

149.In our opinion, this is a reasonable caveat as can be seen in the captioned case, even Ms Sat for the respondents had kept on revising the RDV, from $380,000,000 as at 23 May 2016 to say $404,000,000 as at 27 February 2017.  Thus, the offers should be regarded as fair and reasonable if they fall within a broad range or the process would never end like a dog chasing its own tail.  In this regard, even based on Ms Sat’s valuation of $404,000,000, the apportionment attributable to R1’s share at $130,128,400 would be just 4.27% above the offer of $124,800,000 as at 21 February 2017.  This should be regarded as within a good range in property valuation which has never been an exact science.

150.And even with the benefit of hindsight, our assessment of the RDV does not come up to $380,000,000 or $404,000,000 as suggested by Ms Sat; it was only $352,512,000.  According to the latest apportionment ratio agreed by Mr C Chan and Ms Sat, R1’s share would be 32.21% x $352,512,000 = $113,544,115 and that for R3 would be about 4.57% x $352,512,000 = $16,109,798.  They are lower than the offers by the applicants both dated 8 August 2016 and 21 February 2017.

151.Therefore, we are satisfied that on the evidence available and in the circumstances of the Application, the applicants have taken reasonable steps to acquire all the undivided shares in the Lots which include negotiating for the purchase of such of those shares owned by R1 and R3 on terms that are fair and reasonable.

Conclusion

152.Having considered the above, this Tribunal is satisfied that the requirements and conditions as laid down in the Ordinance have been met and an order for compulsory sale sought by the applicants should be granted.

Other Incidental Matters

153.The applicants propose to appoint Mr Ma Ho Fai and Ms Tsang May Ping, being senior partner and partner respectively of Messrs Woo Kwan Lee & Lo, as the sale trustees.  By reference to a letter dated 17 February 2017from the latter, we are satisfied that they are proper persons to be appointed as trustees to discharge the duties imposed on trustees under the Ordinance.  The remuneration package proposed in the said letter appears to be reasonable.

154.In the same letter, it is also proposed to appoint Messrs Michael Cheuk, Wong & Kee as independent legal adviser for the Trustees (“the Trustees’ Solicitors”).  The remuneration package proposed in the said letter appears to be reasonable too.

155.The applicants have prepared a set of draft Particulars and Conditions of Sale of the Lots[18].  Subject to any amendment that may become necessary as a result of our ruling on the arrangement of auction above, the particulars and conditions of sale of the Lots by public auction submitted by the applicants are also reasonable.

Order

156.This Tribunal make the following orders:

(1)	this Tribunal is satisfied that the redevelopment of the Lots is justified due to the “age” and “state of repair” of the Buildings and that the applicants have taken reasonable steps to acquire all the units in the Buildings including that of R1 and R3;
(2)	anorder for sale of all the undivided shares in the Lots should be made by auction pursuant to section 5(1)(a) of the Ordinance;
(3)	the reserve price for the sale of the Lots be set at $352,512,000;
(4)	the entire amount of the proceeds of sale of the Lots (after deduction of all legitimate expenses and payments) be apportioned among the applicants, R1 and R3 by reference to the respective EUVs of their units and the total EUV of the Buildings in accordance with the statutory basis set out in section 10(3) and Part 3 of Schedule 1 to the Ordinance;
(5)	Mr Ma Ho Fai and Ms Tsang May Ping, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustee under the Ordinance in relation to the Lots and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs Woo Kwan Lee & Lo dated 17 February 2017;
(6)	Messrs Michael Cheuk, Wong & Kee be appointed as the Trustees’ Solicitors to assist the Trustees in discharging their duties imposed by the Ordinance and the Trustees’ Solicitors be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Woo Kwan Lee & Lo dated 17 February 2017;
(7)	for the purposes of the sale of the Lots by public auction, the sale of the Lots be on the particulars and conditions of sale substantially the same as those in the draft Particulars and Conditions of Sale as set out in Bundle A1/238-264 to be initialed and approved by the Tribunal.
(8)	subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Lots or its successor in title, the redevelopment of the Lots and the development to be erected thereon shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lots becomes the owner of the Lots; and
(9)	liberty to the applicants, Rs and the Trustees to apply to the Tribunal for further directions.

Costs

157.We opine that some of the issues taken by Rs were unreasonably argued.  The issues have been decided in previous cases and no new rationale or arguments were advanced.  We see no reason to revisit those issues.  In the circumstances, we make a costs order nisi that the Rs could only be entitled to 70% of their costs of the Application, including all costs reserved, with certificate for one counsel for Mr Li only, to be taxed if not agreed, on High Court Scale.  Such order be made absolute after 14 days if no application is made to vary the said costs order.

158.It remains for us to thank counsel for their invaluable assistance.

Mr Mok Yeuk Chi, instructed by Mayer Brown JSM, for the 1^st to 3^rd Applicants

Mr C Y Li SC and Mr Kenneth Chung, instructed by Wong Hui, & Co., for the 1^st and 3^rd Respondents

Appendix 1

Residual Valuation

	Gross Development Value
	G/F	114.34	sq m				$130,000,000
	1/F-18/F	1,987.61	sq m				$458,415,000
	Flat Roof	80	sq m @	$46,000			$3,680,000
							$592,095,000
	Marketing			@	2%	x	0.9800
	Present Value in		2.5	years @	4%	x	0.9066
								$526,057,460
Less:	Demolition Cost						$800,000
	Professional Fee @		6%				$48,000
	Developer’s Profit @		15%				$127,200
							$975,200
	Present Value in		0.25	year @	4%	x	0.9902
								$965,643
Less:	Construction Cost						$104,144,000
	Professional Fee @		6%				$6,248,640
	Developer’s Profit @		15%				$16,558,896
							$126,951,536
	Present Value in		1.5	years @	4%	x	0.9429
								$119,702,603
								$405,389,214
	Developer’s Profit @		15%				÷	1.15
								$352,512,360
							Say	$352,512,000
							AV=	$118,613	/sq m