Total Select Ltd v. Wong Wai Mau Enterprise Ltd and Others
Read the full judgment text of LDCS 13000/2017 on BabelCite. This LDCS judgment was delivered on 30 January 2019.
1. This is the applicant’s application, filed on 11 December 2017, for an order for sale of all the undivided shares in New Kowloon Inland Lot No 1744 (“the Lot”) for the purpose of redevelopment pursuant to Section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”) (“the Application”).
Cited by 4 cases · Cites 10 cases
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LDCS 13000/2017 [2019] HKLdT 7 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LAND COMPULSORY SALE MAIN APPLICATION NO. 13000 OF 2017 _________________
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_________________ J U D G M E N T _________________ Background 1.This is the applicant’s application, filed on 11 December 2017, for an order for sale of all the undivided shares in New Kowloon Inland Lot No 1744 (“the Lot”) for the purpose of redevelopment pursuant to Section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”) (“the Application”). 2.The applicant is represented by Mr Y C Mok (“Mr Mok”), instructed by Messrs Mayer Brown JSM in the present proceedings whereas the respondents are represented by Mr C Y Li SC (“Mr Li”) and Mr Jeremy Kwong instructed by Messrs So, Lung & Associates, Solicitors. 3.Currently erected on the Lot is an 8-storey industrial building which is known as Amoycan Industrial Centre Block 1 (“the Building”) with the address of 7 Ngau Tau Kok Road, Kowloon. Ngau Tau Kok Road is a local distributor diverting from Kwun Tong Road running into the Ngau Tau Kok district. This section of Kwun Tong Road is a major district distributor which divides a comprehensive residential estate development, Telford Gardens, and a new business area to the west from the predominantly residential area to the east. The Building is located amongst a cluster of residential cum commercial developments. 4.The occupation permit of the Building, Permit No K210/61 (“OP”), was issued on 26 October 1961, i.e. more than 50 years before the Application. According to the approved building plans (of reference 2/4846/69) approved by the Building Authority on 21 October 1961, there was 1 factory unit planned on the ground floor and each of the upper floors from 1/F to 7/F. 5.Notwithstanding the above, the Government Lease of the Lot, which was dated 24 June 1937, contains no user restriction except the usual non-offensive trade clause. 6.According to the records of the Buildings Department, there are 3 sets of Alteration and Addition Works Plans (“A&A Plans”) as follows:
7.According to the plans of the Deed of Mutual Covenant dated 30 December 1961 (“the DMC”), each of 2/F to 5/F is divided into 4 workshops (A, B, C and D) with a common corridor in a reversed “T” shape linking up the lift lobby at the rear of the building with the two staircases located near the two corners of the Building fronting what the plans identified as Kwun Tong Road and what is in fact Ngau Tau Kok Road. Each of 6/F and 7/F is divided into 2 workshops (A and B) sharing a common lift lobby. 8.According to the records of the Land Registry, the 33/33 undivided shares of the Lot are allotted as follows:
9.Having acquired various units in the Building from Monafat Ltd (“Monafat”), Food Labs Ltd (“Folabs”) and Goldenlamp Investments Ltd (“Goldenlamp”) on 21 November 2017, all being subsidiaries of the same group to which the applicant belongs, the applicant now owns all the undivided shares and units other than those owned by all the respondents, R1-R8, as set out below:
Thus, at the time of the Application, the applicant owned 28/33 equal and undivided shares, which is equivalent to 84.85% of the Lot. 10.On 21 June 2016, a major fire broke out in the Building (“the 2016 fire”), causing damage to the units in the Building and to the Building as a whole. The fire took a few days to extinguish and tragically claimed the lives of 2 firemen. Since the 2016 fire, all units in the Building have been vacant, and entry into the Building has been strictly controlled requiring prior appointment before entry. Furthermore, the following safety measures have been introduced by the building management company, the applicant and/or its predecessors in title:
Issues in dispute 11.The issues to be decided in this case are as follows:
Section 3 of the Ordinance – Ownership of the applicants 12.Whereas section 3(1) of the Ordinance requires the applicants to have not less than 90% of the undivided shares in a lot before they 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. 13.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:
14.As mentioned, the OP for the Building was issued on 26 October 1961 (i.e. not less than 30 years before the date of the Application) and the Lot is not located within an industrial zone[1]. The Notice is applicable and the threshold percentage should be 80%. 15.At the time of the filing of the Application, the applicant owned 84.85% of the undivided shares of the Lot. We are satisfied the applicant is entitled to make the Application under section 3 of the Ordinance. The Evidence 16.For the purpose of the present proceedings, the applicant and the respondents have produced the following expert reports:
EUV 17.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 Lot, the Tribunal has to determine the values. Thus, the first task before us is to determine the dispute on EUV as at 15 September 2017 in case an order for sale be granted. Whether the market value of the Building and the units therein should be assessed on a reinstatement basis? 18.In assessing the EUV of the units, Mr Chan based his assessment on the actual physical condition of the Building and the units as at the date of valuation. Mr Lau disagrees to this approach and has conducted his valuation based, inter alia, on the following assumptions[4]:
19.In “Mr Lau’s Table of Responses for EUV Valuation with Mr Chan’s Responses”, Mr Lau explained the reasons for his valuation assumptions as follows:
20.We disagree with Mr Lau’s valuation assumptions as set out hereinabove for the reasons set out below. 21.Firstly, we are of the view Mr Lau’s assumption that the HK$50M should be divided by the total gross floor area (“GFA”) of the existing building to arrive at 5,029/m2 is wrong[6]. Save for 2 orders pertaining to the G/F which was recently acquired by the applicant after the 2016 fire, 14 out of the 17 outstanding Building Orders are either applicable only to the respondents’ units or in respect of the common parts of the Building where the respondents are reluctant to contribute to the sinking funds set up for the Building to repair the fire damages: see the Appendix and paragraphs 44 and 46 to 52[7] of the witness statement of Leung Woon Tim, Moses (“Mr Moses Leung”), dated 8th June 2018[8]. It is therefore apparent Mr Lau has underestimated the repair costs likely to be borne by the respondents by dividing the whole of the repair costs by the GFA of the whole Building instead of apportioning the repair costs amongst the respondents, the applicant and the owners of the whole building in accordance with their respective liability. 22.Secondly, we do not accept Mr Li’s submission that, but for the prospect of an order for sale, the respondents would have complied with the various outstanding Building Orders against them. Consequently, we do not accept Mr Lau’s assumption that the Building Orders would have been complied with has any factual basis. 23.Mr Wong Kwong Hung Henry (“Mr Henry Wong”), a shareholder and director of 2nd and 4th Respondent, claimed that the respondents would have carried out repairs but for the prospect that an order for sale may be made. He further explained in his evidence in court that the respondents have not paid the sinking fund and the management fees because the respondents considered themselves the victims of the 2016 fire. Despite there being no determination on the cause of the 2016 fire, the respondents believe the tenant and/or owner of 3/F, and the Manager of the Building are responsible for the cause of the 2016 fire and that any damage suffered to the respondents’ respective units, including the loss of use of the units as a result of the 2016 fire, should be compensated by the owner and/or tenant of the 3/F. 24.We note the actions of the respondents are inconsistent with Mr Henry Wong’s claim that the respondents would have carried out the necessary repairs but for the prospect that an order for sale may be made. The Notice of Application was filed with this Tribunal on 11th December 2017 (more than 1 year after the resolutions for contribution to the sinking fund were passed). There has not been any evidence to show the respondents took any steps prior to the Application to carry out repair works to their respective units; nor have they made any contributions to the sinking fund as required. The respondents’ reluctance to carry out any repair works is further supported by Mr Lau where he speculated in “Mr Lau’s Table of Responses for EUV Valuation with Mr Chan’s Responses”: the “owner of such units would give second thoughts to spending costs to make the units to become habitable again.” 25.Furthermore, we do not accept the respondents’ explanation for failing to contribute to the sinking fund and management fees as being the true reason for their failure to contribute to the respective fees. Resolutions were passed at the Owners’ Meetings held on 28th July 2016, 13th September 2016 and 24th October 2016 relating to the contributions to the sinking fund and the repair works. It is not disputed that all the respondents attended the said meetings and clearly knew of their obligations to make contributions. However, as at the date of trial (being more than 2 years after the 2016 fire and the passing of the resolutions), the respondents have not commenced any action against the Manager of the Building, or the tenant and/or owner of 3/F for damages suffered as a result of the 2016 fire. Moreover, the respondents have not challenged the said resolutions by means of any legal action. They have simply ignored the resolutions and refused to contribute in the sums as resolved at the various Owners’ Meetings. 26.We therefore do not accept the respondents would have complied with the Building Orders made against their respective units and reject Mr Li’s submissions on the same. Hence, we find Mr Lau’s valuation assumption that the Building Orders would have been complied with to be without factual basis and reject the same. 27.Thirdly, we find Mr Lau’s valuation assumption on a reinstatement basis to be contrary to the express wording of Part 1 of Schedule 1 of the Ordinance. 28.Part 1 of Schedule 1 of the Ordinance states:
29.The express wording of Part 1 of Schedule 1 of the Ordinance requires the assessment of the market value be done without regard to any underlying presumptions about any possible order for sale or redevelopment potential. In other words, the property should be assessed on an “as is” basis as at the date of the valuation. 30.The market reality approach has been incessantly applied by this Tribunal in, for instance, Cheer Capital Limited v Unibase investment Limited & Others, LDCS 5000 and 6000/2013 (unreported, dated 12 June 2015), Able Luck Development Limited & Others v Public Global Investments Limited & Others, LDCS 7000/2014 (unreported, dated 6 October 2017), and in Oriental Generation Ltd & Others v Luk Yung & Others, LDCS 4000/2013 (unreported, 29 February 2016), when one of the respondents maintained that his unit was kept in a better internal condition, its market value should deserve to be adjusted upwards to reflect fairness[9]. 31.We find support of our view in the case of Transport for London (London Underground Limited) v Spirerose Limited [2009] 1 WLR 1797, [2009] UKHL 44, where Lord Neuberger pointed out at paragraph 50:
32.Mr Li submitted the majority decision of the English Court of Appeal in the case of Trocette Property Co Ltd v Greater London Council (1974) 28 P&CR 408 laid down the principle that in assessing the market value of a unit (which was the marriage value there in issue), the market information known to the buyer (and ipso facto the vendor) and the intention of the parties concerned would be taken into account. It must be assumed that the vendor would be willing to sell at the best price he could reasonably get in the market. Applying the same principle, Mr Li argued one has to take into account the intention of the respondents to repair their units in order to sell them at the best price in the market. He submitted such a view also accords with the definition of “market value” promulgated by the Hong Kong Institute of Surveyors:
33.With respect, we do not agree with Mr Li’s application of Trocette Property Co Ltd and we do not accept his submissions regarding the need to take into account the respondents’ purported intention of repairing their respective units. 34.Megaw LJ in Trocette Property Co Ltd at page 416 of the judgment stated:
35.Lawton LJ reiterated the same and said at the end of page 420:
36.Whilst we are prepared to accept that should there exist a “fact” that affects the value of the property it should be considered in assessing the value of the property, we are of the view such “fact” can only be considered where it is consistent with the express wording of the Ordinance. 37.As set out hereinabove, we do not accept the respondents have any real intention of repairing their respective units and in complying with the outstanding Building Orders. We therefore do not accept the respondents’ purported intention of repairing their units to be a “fact” which would be known to the buyer and therefore should be considered. 38.Furthermore, any consideration of the respondents’ purported intention of repairing the units is not consistent with the express wording of Part 1 of Schedule 1 of the Ordinance. For reasons stated hereinabove, we are of the view Part 1 of Schedule 1 requires the assessment of market value to be done on an “as is” basis on the date of valuation. The state of the property and the true reality is that no such repairs were carried out by the respondents and the outstanding Building Orders against the respondents’ units have not been complied with. 39.As a matter of common sense, we do not accept a hypothetical and reasonable buyer would offer to purchase the respondents’ units in its current state at the same price one would offer if the unit was tenantable and without encumbrances. 40.In Saunders v Maltby (Valuation Officer) (1976) RA 109, [1976] 2 EGLR 84, a case concerning the determination of Rateable Value, the English Court of Appeal remitted the case back to the English Lands Tribunal “to consider what extent of liability to repair it would be economically reasonable to attribute to the hypothetical landlord in the particular circumstances, having regard to the extent and nature of the disrepair and the likelihood of demolition.” The English Court of Appeal stated:
41.To put it simply, the respondents cannot “have their cake and eat it too.” The respondents cannot, on one hand, avoid spending money on repair works to their units to comply with the outstanding Building Orders and, on the other hand, benefit from a higher purchase price of their unit on the assumption they had spent the money on such repair works. 42.For reasons set out above, we consider Mr Lau’s valuation assumption “that the building orders have been complied with” to be without factual basis, erroneous, and not in accordance with the spirit of Part 1 of Schedule 1 of the Ordinance. Therefore, we reject Mr Lau’s valuation on a reinstatement basis. We prefer and agree with the valuation approach of Mr Chan in assessing the EUV of the Building and the units therein. What is the proper valuation of the EUV of the Building and the individual units therein? G/F 43.The physical attributes of the G/F shop(s) are set out in the EUV Joint Statement at Table A1 and Table A2 (“EUVJS/TA1 & 2”)[10]. The valuation opinion of the shop units, including the adjustment and discount factors, are set out in the EUV Joint Statement at Table A3 (“EUVJS/TA3”)[11] whereby we note Mr Chan agreed with Mr Lau to use Shop A as the reference unit. However, there is disagreement between Mr Chan and Mr Lau on the unit rate of Shop A; Mr Chan suggests the unit rate of $232,000/sq. m while Mr Lau suggests a unit rate of $202,000/sq. m. 44.In respect of the return frontages, Mr Lau disagrees with Mr Chan that both Shop A and Shop B have return frontages (for which Mr Chan gave an upward adjustment of 5%). According to the A&A Plan in 2003, both the sides and the rear of the G/F have secondary frontages of about 75.9 metres in total[12]. Although the secondary frontages are abutting or facing the internal access roads only, Mr Chan considers there having better exposure as a result. However, upon our inspection on 13 November 2018, we found the openings at the sides of both Shop A and Shop B are at far distance away from Ngau Tau Kok Road and separated from the main street frontage by loading spaces and staircases in the Building extending to more than 10 metres. We consider these openings were created mainly to facilitate loading and unloading. We agree with Mr Lau that pedestrians are unlikely to be attracted by theses openings; there should not be any adjustment on “the return /secondary frontages”. 45.As for the value to be given to the sprinkler room of about 66.4 sq. m inside the G/F shop, Mr Lau gave no value to the sprinkler room as the room is so specified according to the A&A Plan. On the other hand, Mr Chan included it as part of the saleable area of Shop B because it was part of the saleable area in the DMC G/F plan[13] and the assignment plan. 46.We note the sprinkler room is built into the plan to satisfy the fire safety measures required by the Fire Safety (Commercial Premises) Ordinance, Cap 502. Therefore, we are of the view the sprinkler room should be excluded from the saleable area calculation. 47.Lastly, the two experts disagree on how to deal with the parade of accommodation at the rear of the shops and separated by the internal road. According to the A&A plan aforementioned, they were designated for male and female toilets, a first aid room, and a store. Upon our inspection, these rooms have all been converted into storerooms. Owing to these characteristic differences, we agree with Mr Lau that these rear portions should be valued separately by deducting say 50% (but nothing more on size and frontage as the 50% itself is a spot figure likened to the halving back in the zoning principle) from the unit value for Shop A. 48.The various saleable areas for the G/F are therefore as follows:
49.The two experts also disagree on the choice of retail comparables and adjustments:[14]
50.Basically the respondent disagrees to adopt Comparable B1 as a comparable because it took place on 31 October 2015, which is about 1.5 months after the agreed date of valuation as at 15 September 2017[15]. We cannot agree with the rationale of Mr Lau because comparables occurring both before and after the date of valuation are usually relevant unless some event took place after the valuation date so that comparables after this event do not reflect the market conditions as at the valuation date[16]. In this regard, we would also comment that Mr Lau had initially identified another transaction being Shop 14 also of Tak Bo Garden which took place on 22 September 2018, i.e. about 1 week after the valuation date. We agree however this comparable should not be included not because of its transaction date but for the reason that this is in respect of an arcade shop where the character is entirely different from that of the subject. 51.Further, the two experts have the following agreements/disagreements on the adjustment factors applicable:[17]
52.The various adjustments (save that for return frontages which is now out of question) applied by Mr Chan are shown in the following table (while those by Mr Lau are shown in parenthesis)[18]:
53.From the above, it is manifest that many of the adjustments have been agreed except those for location, size and layout. 54.In respect of location, we have inspected all the above comparables on 13 November 2018 and found that none of the comparables have frontage onto Ngau Tau Kwok Road. All of them are much inferior in location and we prefer to adopt the higher of any 2 adjustments suggested by the two experts, save for comparable B1 for which we shall split the difference (i.e. 25%, 35%, 30%, 30% and 35% respectively). 55.Also, when compared with the reference shop unit of 459.8 sq. m, all the comparables are very small. While the differences in adjustment for size between the two experts are very small (i.e. less than 1%), we adopt Mr Chan’s figures. 56.As for the layout, we are doubtful if a further adjustment for layout is necessary after having adjusted for frontage and depth. Also, as pointed out by Mr Chan, both Shop A and Shop B have a side opening for loading and unloading, etc. We prefer not to apply any further adjustment for layout. 57.The Tribunal has previously explained in paragraphs 89 - 94 of Cheer Capital Limited v Unibase investment Limited & Others, supra, adjustments by multiplication should be more correct mathematically than the summation process. The accuracy of the multiplication process can be illustrated by using, as an example, adjustment factors of time and location. Applying the time adjustment, say, for comparable B1 at -0.3% will make $256,776/sq. m become $256,006/sq. m so that it can be compared with the reference shop unit at the same time frame. Only then are we in the position to adjust for the difference for location at 25%, i.e. $256,006/sq. m x (1+25%) = $320,008/sq. m. This is obviously a series of multiplication. On the other hand, if the summation approach is adopted, the result would be $256,776/sq. m x (1+24.7%) = $320,200/sq. m. 58.Therefore, we emphasize that if we are facing a choice between the two different approaches, we would prefer the multiplication approach. 59.Thus our assessment of the EUV for Shop A is shown as follows:
60.Thus, the EUV for Shop A is 459.8 sq. m x $222,840/sq. m
61.Adopting the adjustments for Shop B by Mr Chan, its EUV = 516.2 sq. m x $222,840 x (-3.7% for size) x (-1.4% for frontage)[19]
62.Applying 50% to the unit value for Shop A, the EUV for the Rear Portion of G/F = 53.4 sq. m x $111,420/sq. m = $5,949,828
63.Therefore, the total EUV for G/F is $217,630,000. We find there being no justification for any bulk discount as suggested by Mr Lau. Upper Floor Workshops 64.Again, EUVJS/TC1[20] includes the agreements and disagreements concerning the physical attributes of the Upper Floor Workshops. 65.While EUVJS/TC4[21] sets out the areas of different parts of the common area exclusively used by the respective owners, EUVJS/TC6[22] sets out the disagreements on the value given to such different parts of the common areas. For instance, there is no existing subdivision of the 2/F and 3/F into Shops A-D as shown in the DMC and the records of the Land Registry show that the 2/F and 3/F were sold as a whole without any sub-division. Mr Chan considers these common areas should be treated as part of the saleable area. Mr Lau has revised his position on “the common corridors” of 2/F and 3/F and agrees to assign a value to such areas to the extent that the common areas on 2/F and 3/F have been occupied for years as a whole (i.e. a 30% discount). 66.Section 34I of BMO provides that:
67.Thus, the conversion of “the common area” into private use can be a type of breach within the power of the Incorporated Owners to acquiesce as held in Hollywood Shopping Centre Owners Committee Limited v The Incorporated Owners of Wing Wah Building Mongkok Kowloon, [2011] 4 HKLRD 623, at paragraphparagraph68-69; and The Incorporated Owners of Freder Centre v Gringo Ltd [2016] 2 HKLRD 190, at paragraph24. 68.In the case of Cheung Yuet & Another v The Incorporated Owners of Oriental Gardens [1977-1979] HKC 168 (Huggins VP, Leonard and Cons JJ), the Court of Appeal opined the inaction of the Incorporated Owners’ predecessor, namely the management committee in that case, was a material and weighty factor to be taken into account in considering an equitable defence of acquiescence: paragraph 15, per Leonard J and at paragraph 20, per Cons J (pp 172F-173G). See also paragraphs 26 and 29 per Chu JA in Freder Centre. 69.We note it is not disputed that there has never been any objection raised by any owner on the occupation of the common corridors and no enforcement action has ever been taken on the same. We consider any chance of enforcement remote and following the principle of reality as previously discussed, we agree with Mr Chan that no discount should be allowed on the former common corridors of 2/F and 3/F but having been converted into part of the accommodation at least since 2004. This is evidenced by the tenancy agreements produced by the applicant. 70.Based on the same principle, we would allow no discount to the common toilets and first aid rooms exclusively used by their respective adjoining owners from 1/F to 7/F for a long period of time without being challenged. In any event, we have found some of these “common toilets” have been converted into storerooms. 71.The two experts agree to use Workshop D on 4/F as the reference unit. However, Mr Chan’s unit rate is $49,900/sq. m whereas that by Mr Lau is $63,720/sq. m. Their choices of comparables are in the following[23]:
72.We note that only comparables C8 and C9 are common comparables adopted by both experts. For instance, comparable C10 comprises a basket of industrial units scattering on different floors. Mr Lau considers “(g)iven the bulk transaction nature of these units, these should not be treated as comparable for this exercise.” As regards comparables C1 to C6, Mr Lau considers they have very small sizes for the purpose of comparison. On the other hand, Mr Chan does not adopt comparable C7 because he questions the genuineness or reliability of this comparable as he finds there was another transaction of the 10/F of the same building having a much lower price. 73.We agree with Mr Lau that comparable C10 can be excluded because it comprises of various units up to a total of 3,188.2 sq. m whereas the reference workshop unit has an agreed saleable area of 344.5 sq. m and the whole of 1/F comes up to 1,477.3 sq. m only. There are also many variables as the transaction involves 8 purchases of units on various floors (including the basement) and Mr Chan just grouped the total of 8 transactions together. We include only all the others which give a total of 9 comparables; as we shall see later, the adjusted unit value of comparable C7 is within a reasonable range of the others and should be reliable and included in the analysis. 74.Nonetheless, the two experts have the following agreements/disagreements on the adjustment factors applicable:[24]
75.In respect of the above differences, we agree with Mr Lau on the adjustments for location[25], accessibility[26] and user restriction. Regarding the latter, we appreciate Mr Chan’s concern that unauthorized non-industrial uses of workshops are common but we consider that a minor adjustment of 3% as suggested by Mr Lau is reasonable. This is because, according to the Practice Note issued by the Lands Department on 27 March 2014, the standard rates of lump sum waiver payable for the lifetime of the concerned premises are $4,790/sq. m or $5,910/sq. m depending on what type of user change is required. The amount of waiver fees, if payable, is about 8% to 10% of the unit value of the premises. 76.In respect of the remaining adjustments, we agree with Mr Chan. For instance, the adjustments proposed by Mr Lau for headroom is very minor because the headrooms of these comparables are within the same threshold as the reference unit. The difference is negligible. 77.Thus, we have the following analysis for the reference workshop unit:
78.Then, we follow Mr Chan’s approach in assessing the EUV of individual floor/unit of the Building as follows:[27]
79.In the above assessments, we have disregarded the so-called “premium on large size (whole floor)” applied by Mr Chan. Indeed, Mr Chan has carried out analysis of 3 pairs of comparison in respect of industrial properties in Tsuen Wan and Tsing Yi for the purpose of supporting his assertion[28]. While the demand and supply condition in Tsuen Wan or Tsing Yi may be different because of their proximity to the Container Terminal, if his assertion is correct, investors would not have sub-dividing the premises for selling or leasing and making profits. Mr Lau criticizes that Mr Chan “had selectively excluded certain relevant comparables and had not taken into account such material considerations like physical constraints for sub-division of whole floor/large space and commanding views.”[29] Although Mr Chan has put forward evidence to challenge Mr Lau on the issue[30], we consider Mr Chan has failed to realize that by sub-dividing a large whole floor unit, one has to sacrifice common corridors, toilets, circulation spaces, etc. His analysis of about 10% premium is therefore an illusion when he has not taken into account the spaces that have to be sacrificed. 80.On the other hand, based on the principle of reality in valuation, we follow the adjustments proposed by Mr Chan on internal conditions and the presence of dry sprinkler system. 81.Hence, the total EUV of the Building is $719,240,000 and the respective shares of the respondents’ units are as follows:
Section 4(2) of the Ordinance - Justification and Reasonable Steps 82.Section 4(2) of the Ordinance provides as follows:
83.The applicant must satisfy this Tribunal the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted. Whether the Tribunal is satisfied that redevelopment of the Lot is justified due to the age and/or state of repair of the Building 84.We note at the outset the respondents do not take issue on the age and state of repair of the Building. We further note the respondents have not filed any rebuttal report to rebut the applicant’s Condition Survey Report compiled by Mr Wong or the Structural Assessment Report compiled by Mr So, both reports being dated 8th June 2018. 85.In the Structural Assessment Report, Mr So identified the following defects in the Buildings:
86.Based on the above findings, Mr So concluded that the structural frames of the Building are in need of repair. He opined the Building, designed and constructed more than 56 years ago, exhibited signs that its structural frames have deteriorated to the final stages of its designed working life. The deterioration will continue steadily due to extensive carbonation of the concrete. It is inevitable that new defects will occur and previous defects, though repaired, will recur readily, requiring substantial repairs or even partial demolition and re-construction of some defective structural members in the future. Repair works need be carried out regularly in future and such repairs will be more and more extensive as the Building becomes older. It is his view that although the costs of repair may be relatively modest, such costs will escalate in future as the extent and seriousness of the deterioration of the structural members increases with age. In view of the age of the Building, Mr So further recommended that the next cycle of such repair works should be carried out in 5 years’ intervals after the current repair exercise. 87.Mr Wong, in his Condition Survey Report, found the following:
88.Having considered reports of Mr So and Mr Wong, we are satisfied the age and the state of repair of the Building and the units therein justify redevelopment of the Lot. Whether the Tribunal is satisfied that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot 89.The respondents submitted the sums offered by the applicant for the purchasing of their respective units are unreasonable for the following reasons:
90.In respect of R1, R2 and R3’s unit, the applicant made the following offers:
91.In respect of R4’s unit, the applicant made the following offers:
92.In respect of R5’s unit, the applicant made the following offers:
93.In respect of R6, R7 and R8’s unit, the applicants made the following offers:
94.We have, in the above paragraphs, scrutinized Mr Chan’s EUV assessments. Despite having made some adjustments to his findings, we find his assessment reasonable or within a reasonable range. Having regard to the offers made in comparison to our assessment of the EUV of the respective units, we accept the applicant did take reasonable steps to acquire all the undivided shares in the Lot. 95.In respect of the respondents’ submissions on the unreasonableness of the applicant’s offer, we have considered Mr Mok’s rebuttal submissions which we do not intend to repeat. 96.We are of the view that the complaints raised by the respondents in respect of the reasonableness of the offer are misconceived and irrelevant in the context of section 4(2) of the Ordinance. 97.In the case of Capital Well Limited v Bond Star Development Limited (2005) 8 HKCFAR 578, Ribeiro P J stated at paragraphs 32 and 33 to 36 of the judgment:
98.The fact that there will often be differences of opinion in the value of the minority owner’s interest is recognized. However, the mere fact the applicant has failed to agree to the respondents’ asking prices or the respondents’ use of another unit’s purchase price as a reference point in itself will not render the applicant’s offer unreasonable in the context of the Ordinance. 99.What the Tribunal must consider is whether the offers made by the applicant fall “within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site.” It is not the task of the Tribunal to scrutinize the reasons behind each and every transaction made before the offers made to the respondents, in particular the transaction price paid to the G/F owner. Furthermore, as set out in paragraph 33 of Capital Well Limited, the Tribunal is not required to adjudicate on the correct valuation principles behind the applicant’s offers or that the sums offered to the respondents represent the correct valuation of the respective units. 100.In Good Faith Properties Limited & Other v Cibean Development Company Limited, LDCS 42000 of 2011, (unrep), 31 May 2013 (“Good Faith Properties Limited”) at paragraph 40, the Tribunal ruled:
This ruling was not criticized nor challenged when this case was referred to the Court of Appeal (CACV 35/2014)[31]. 101.Having considered the case of Capital Well Limited and the applicant’s offers, we are satisfied that on the evidence available and in the circumstances of this Application, the applicant did take reasonable steps to acquire all the undivided shares in the Lot including negotiating for the purchase of the respective shares owned by the 1st to 3rd, 4th, 5th, and 6th to 8th respondents on terms that are fair and reasonable. 102.We are therefore satisfied that in all the circumstances, an order for sale should be granted.
103.The Lot has a site area of 1,923.077 sq. m. It falls within an area zoned “Residential (Group A)” on the Ngau Tau Kok Outline Zoning Plan No S/K13/29 dated 13 April 2017 subject to a development height restriction of 120 metres. The total developable GFA is about 16,500 sq. m. 104.In the latest RDV reports, there is a huge difference in the assessment of the RDV between the two valuation experts. Resorting to the residual valuation approach, Mr Chan arrives at $1,727 million (formerly $1,894 million before trial) whereas Mr Lau takes the average of his site comparable analysis and the residual valuation, arriving at $2,568.3 million (formerly $2,664 million before trial). 105.We appreciate the direct sales comparison method is usually regarded as the best method of valuation. It simply involves comparing the property to be valued with sale transactions of similar properties. Whereas Mr Chan has not adopted this approach, Mr Lau has relied on the following Government tender sales as comparables:
106.These comparables are situated at different districts and at considerable distances from the Lot. Unlike the Lot, which is situated at an established residential area with a wide range of commercial facilities serving the residents mostly at ground level, the sites in Kai Tak or at Anderson Road above are new residential areas with comprehensive development planning. More particularly, the Kai Tak district is planned to be the “Heritage, Green, Sports and Tourism in Hong Kong”[32]. All the private residential developments in the locality there are of modern design with high specifications planned for middle to high income class. NKIL 6568, in particular, is capable of providing a regional shopping centre next to a new railway station. In terms of character and development scale, these new sites are completely different from the Lot and any comparison between the Lot and these site tends to be subjective or arbitrary[33]. 107.The site at Ko Chiu Road, Yau Tong is smaller but is still nearly twice as much of the Lot in terms of development scale. Comparison is further complicated by the requirement to cut and retain a slope at this Yau Tong site. The two experts have vastly different opinions on the formation cost and the costs of retaining the slope. In the absence of information regarding the design details, there is huge uncertainty on what adjustments are required to be made to obtain a proper analysis. Also, this site is situated at an area which is significantly different from that of the Lot. 108.In Hofei Estates Limited v Secretary for City and New Territories Administration, LDLR 1/1982 dated 30 November 1982, the Tribunal had similar comment on the comparables:
109.The Tribunal went on to remark that:
110.We share the opinion of the Tribunal in Hofei Estates and consider it more appropriate to value the RDV of the Lot by the residual valuation. Optimum hypothetical development model 111.The two valuation experts disagree on the hypothetical development model as shown in RDVJS/TA:[34]
112.At this juncture, it is noted that Mr Lau did not have any schematic drawings to support his hypothetical development until the very late. Based on the 3rd draft of schematic drawings dated 13 November 2018, he revised some of the parameters as follows:
113.In spite of the minor adjustments, we find that the differences between the two experts to be marginal. In comparison, we prefer Mr Chan’s model based on the following reasons:
114.Indeed, in answer to the various questions/comments made by Mr Chan, Mr Li has slipped in a revised schematic design at Schedule 11 of his closing submission. On the one hand, we agree with Mr Mok that this new evidence came a little too late and without providing a chance for Mr Chan to comment. On the other hand, save for adopting 100% site coverage for the basement, the new schematic drawing does not address the concerns mentioned in the above paragraph. 115.We further agree with Mr Mok at paragraph 117 of his closing submission that there are still problems with the new schematic design that may call for cross-examination. For instance: -
Gross Development Value (“GDV”) of Car Parks as at 17 September 2018 116.While Mr Chan’s car parking spaces are assessed at $3,000,000 each and motor cycle spaces at $310,000 each, those of Mr Lau’s assessments are $3,100,00 and $310,000 respectively. Their differences are nominal, if any. We adopt therefore car parking spaces at $3,100,000 each and motor cycle spaces at $310,000 each. The total value of the car parking becomes $101,060,000. GDV of G/F Retail Provision as at 17 September 2018 117.Again, Mr Chan and Mr Lau agree on the same set of comparables except that Mr Lau adopts an additional one, being Shop 14 of Tak Bo Garden. For the same reason as explained in paragraph 50 above, we disregard this “comparable”. Thus, the comparables relied on are in the following:
118.Further, the two experts have the following agreements/disagreements on the adjustment factors applicable:[37]
119.As can be seen from the above, one major difference between the 2 experts lies on the adjustment for the return or secondary frontage. According to the schematic design relied on by Mr Chan, a means of escape to the public road is provided, blocking the return frontage of a shop. This would be evitable if the entrance to the residential tower(s) is placed at the side, similar to the adjoining residential buildings. On the other hand, Mr Lau allows a set-back area of 4.5m in width in order to create two corner shops but at the expense of ground floor saleable area. As stated in hereinabove, Mr Chan’s scheme is preferred, save that we would allow for the relocation of the entrance of the residential tower to the side and then have a secondary frontage for the shop. 120.We also agree to the 10% allowed on all comparables without return/secondary frontage as the service road around the Lot cannot be compared with a busy street which may deserve otherwise a 25%. 121.In view of the above, we are prepared to adopt the hypothetical development model proposed by Mr Chan for the purpose of determining the RDV of the Lot (save for the relocation of the residential entrance). 122.As regards the +10% adjustment provided by Mr Lau in the name of better facilities, it appears that Mr Lau is relying on paragraph116 of Alliance Fame Limited & Others v Mak Kam To & Others, LDCS 9000/2015 (unreported, dated 4 August 2017) where the Tribunal allowed the 10% for “enhancement of the trading environment”. However, the Lot here is situated in an established residential area and near the far end of Ngau Tau Kok Road. We consider a new development there would not enhance the trading environment. To the extent that Mr Lau changes his stance and suggests that the factor of better facilities is to reflect the better electricity facilities and air-conditioning system in the new development[38], we agree with Mr Chan that the age adjustment would have already taken this into account. Thus, we do not agree to the adjustment proposed by Mr Lau. 123.The various adjustments (save that for layout and better facilities which are now out of question) applied by Mr Chan are shown in the following table (while those by Mr Lau are shown in parenthesis)[39]:
124.We understand that Mr Chan is relying on a hypothetical shop A (with the exception of the return frontage we now assume) in the new development with the following particulars[40]:
125.Although the two experts agree the valuation date should be 17 September 2018 and the RVD Retail Price Index is applicable, we are surprised that they come up with different time adjustments for the comparables. In any event, we have reviewed the RVD Retail Price Index and considered Mr Chan’s figures more appropriate. Having said that, we note Mr Chan has slightly amended his time adjustments in his submission dated 16 November 2018. While the differences are very minor, we are not prepared to adopt the revised figures as the valuation date was agreed at 17 September 2018. 126.As regards the adjustments for location, size, frontage and depth, we adopt Mr Chan’s figures (save for NR4 where we adopt 25% as stated at paragraph 54 above). 127.Our assessment of the hypothetical shop proposed by Mr Chan is shown as follows:
128.Thus, following Mr Chan’s calculation as shown at Exhibit Bundle/95, we arrive at the following assessments:
* By Multiplication.
129.Mr Chan adopted 50% of the non-corner G/F unit rate as that for 1/F. In our assessment, it is $312,160/ m2 x 50% = $156,080. On the other hand, Mr Lau allows 65%. In our case, it is equivalent to $312,160/ m2 x 65% = $202,904 which appears more reasonable and should be preferred.
130.In Million Add Development Ltd v Secretary for Transport, LDMR 3/1994 (unreported, dated 4 February 1997), the Tribunal rejected the use of the pre-sale comparables, notwithstanding having acknowledged that they were actual market transactions, because:
131.More recently in Good Faith Properties Limited, the Tribunal remarked that:
132.Nevertheless,both experts rely on pre-sale comparables from projects in Kai Tak and To Kwa Wan (save for City Hub which is newly completed upon sale). 133.For the same reason that we do not adopt the tender sales in the Kai Tak area for direct site sales comparison, we do not agree that sales of the more prosperous developments in Kai Tak should be adopted as comparables. 134.On the other hand, the To Kwa Wan district is an established residential area with a wide range of commercial facilities serving the residents mostly at ground level, somewhat resembling the Ngau Tau Kok district where the Lot is located. 135.Mr Chan adopts 3 sales of 93 Pau Chung Street in To Kwa Wan as comparables but as pointed out by Mr Lau, the average unit rate of $218,896/m2 is far below the adjusted average unit rate of the City Hub and 80 Maidstone Road in the same vicinity. The sales of 93 Pau Chung Street first commenced in September 2016 with 9 units on each typical floor. Perhaps owing to that these 3 sales were the last batch of sales that took place in January 2018, they are obviously out of line[41]. 136.Then, as both experts agree to adopt sales of units in the City Hub and 80 Maidstone Road, we shall proceed with the analysis below. 137.The two experts have the following agreements/disagreements on the adjustment factors applicable:[42]
138.We note Mr Chan has made no time adjustment for his pre-sale comparable transactions, Mr Chan explained during cross-examination that the sale prices as set by the developers usually depend on the marketing strategies and may be revised up or down within a very short time frame; some will however prevail for a period of time without adjustment. Either of these strategies would not be caught by the RVD index[43]. We accept Mr Chan’s explanation and make no time adjustment for the sales of units in City Hub from July 2018 to October 2018[44]. However, we would make allowance of +10% for sales of units in 80 Maidstone Road which all took place in January 2018. 139.Having inspected these comparable developments, we agree with Mr Lau that there should be adjustments for location but it should be +5% for City Hub because of its location close to a flyover and +3% for 80 Maidstone Road. 140.We also share Mr Chan’s view that only comparables with saleable area below 40 sq. m are relevant and disregard those having ancillary features like flat roof which may distort the average adjusted rates[45]. 141.As regards view, it is noted that Mr Lau takes into consideration the general views of the whole site. We consider this inappropriate and prefer Mr Chan’s approach by comparing between the reference unit and the comparable units. 142.Turning to the holding costs, in response to Mr Chan’s rebuttal comments, Mr Lau considers a +0.5% for all pre-sale units “to reflect the payment terms like equitable mortgage”. During cross-examination, however, we regret to find that Mr Lau has not distinguished the payment terms of each transaction; i.e. he has mixed up transactions which require immediate full payments or full payments within a close period with those of stage payment upon completion. This is completely undesirable and defeats the whole purpose of making allowance for holding costs; for those transactions with stage payments, in particular, this indiscriminate application of +0.5% has to a certain extent double counted the holding costs. 143.While the difference between the 2 experts on adjustment for headroom is minor, we prefer Mr Chan’s +/-1% per 0.25 m for the sole reason that we or more properly the experts have already agreed a similar adjustment for shops. We do not consider such an adjustment should be more sensitive for residential premises. 144.Mr Chan has analysed altogether 15 transactions from City Hub since July 2018 to early October 2018 and arrived at an average of $242,712/m2. Similarly, he has analysed 19 transactions from 80 Maidstone Road all in January 2018 and arrived at an average of $241,994/m2.[46] Then we are going to make further adjustments as stated above and arrive at the following:
145.Thus, we are prepared to adopt $264,500/m2 as the unit price applicable to the 4/F to 33/F in the hypothetical development. 146.Mr Chan has carried out further assessment of the 3/F units as well as the uppermost units on 34/F[47]. When we conduct the same exercise, our assessments are as follows:
147.Having established the development potential or the GDV, a residual valuation can be expressed as a simple equation:
148.By the Joint Expert Statement dated 19 October 2018, Mr Chan and Mr Lau also agree the following:
149.As can be seen from the table above, the difference in unit construction cost is about 10%. Both Mr Chan and Mr Lau are referring to the Building Cost Data published by Rider Levett Bucknall Limited (“RLB”); Mr Chan refers to data belonging to High to Very High Quality standard whereas Mr Lau just adopt data belonging to High Quality. Whereas we have stated at paragraph 113 above that we prefer Mr Chan’s model, we are also of the opinion that the comparables we adopted, i.e. City Hub or 80 Maidstone Road should belong to High to Very High Quality instead of High Quality standard as explained by Mr Chan at Table ER1 at D7/1476. Therefore we prefer to adopt the revised unit rate of $678,251,453 proposed by Mr Chan[49]. Developer’s Profit 150.Another major disagreement between Mr Chan and Mr Lau is the developer’s profit to be allowed in the residual valuation: Mr Chan proposes 15% (which is later revised to 20%) and Mr Lau proposes 10%. 151.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 a capital 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.”[50] 152.When the market was vigorous, we believe it is correct to adopt 10% for commercial/residential development. However, by 17 September 2018, there are signs that the property market was either stagnant or weakening. We consider therefore it is more reasonable to revert to 15%. The 20% later adjusted by Mr Chan appears to be excessive. Stamp Duty and Legal Cost 153.Further, Mr Lau proposes deduction of stamp duty and legal cost at the end of the valuation. He refers to the HKIS Guidance Notes on Valuation of Development Land at paragraph3.9.3 which states as follows:
154.Stamp duty and legal cost that would be incurred for acquiring land are certainly not the developer’s general overheads and tax but would be direct cost related to a particular acquisition. We agree with Mr Lau in this case that the stamp duty and legal cost should be deducted. 155.Based on the analysis above, our residual valuation is shown at Appendix A. We determine the land value of the Lot at $2,075,600,000 (i.e. accommodation value of $125,390/m2). 156.We shall adopt the estimated RDV of $2,075,600,000 as the Reserve Price for the auction of the Lot. Other Incidental Matters 157.The applicant proposes to appoint Mr Ma Ho Fai and Ms Tsang May Ping, being partners of Messrs Woo Kwan Lee & Lo, as the sale trustees. Based on the information on their background and experience as set out in their letter dated 23 August 2018, 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. 158.The applicant has prepared a set of draft Particulars and Conditions of Sale of the Lot[51]. 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 Lot by public auction submitted by the applicant are also reasonable. Order 159.This Tribunal make the following orders:
Costs 160.We make a costs order nisi that the respondents be awarded costs of the proceedings, to be taxed if not agreed on party and party basis on the High Court scale, with certificate for one counsel. Unless any of the parties applies to vary the costs order within 14 days hereof, the costs order shall be become an order absolute. 161.It remains for us to thank counsel for their invaluable assistance.
Mr Y C Mok, instructed by Mayer Brown, for the applicant Mr C Y Li SC and Mr Jeremy Kwong, instructed by So, Lung & Associates, for the respondents
[1] More particularly, the Lot is within an area zoned “Residential (Group A)” on the Ngau Tau Kok & Kowloon Bay Outline Zoning Plan No S/K13/29. [2] F1/1-F5/1371 [3] E1/1-E10/2198 [4] See D1/80 and D6/1338 [5] See D6/1338. [6] At D6/1356, that Mr Lau had divided the cost for the workshop portions by means of saleable area, despite its consistency with what he stated at D6/1338, is similarly wrong in principle. [7] See B1/11-14. [8] See B1/17-20. [9] See §47 of the judgment. [10] D6/1133. [11] D6/1134. [12] D6/1157. [13] See A1/62. [14] See D6/1136. [15] See D4/448. [16] See also Gordon N Cruden & Another, Land Compensation & Valuation Law in Hong Kong, 4th Ed, 2017, para 23.39-23.43. [17] See D6/1137. [18] See D6/1138. [19] See D6/1177. [20] See D6/1139. [21] See D6/1140. [22] See D6/1141. [23] See D6/1144. [24] See D6/1145. [25] Save for the adjustment on location for comparable C2 where we adopt Mr Chan’s adjustment instead. [26] See D6/1344. [27] See D6/1178. [28] See D6/1167. [29] See D6/1346-1352. [30] See D6/1423-1425. [31] Reported as [2014] 5 HKLRD 534. [32] See Kai Tak Outline Zoning Plan No S/K22/6 dated 25 May 2018. [33] Mr Chan adopts an adjustment for location as much as -20% to -25% for the Kai Tak sites while Mr Lau allows a nominal -1%. See Exhibit Bundle/24. [34] D7/1428-1429. [35] See Exhibit Bundle/37. [36] This 11,975 sq. m is only marginally higher than Mr Chan’s 11,667 sq. m (by less than 3%). [37] See D7/1435. [38] See D7/1473. [39] See D7/1436. [40] See Exhibit Bundle/95. [41] See D7/1437. [42] See D7/1435. [43] See also §§2.5.6.1-2.5.6.2 at D5/795-796. [44] These sales in October 2018 are adopted because they pertain to the price list that prevailed in September 2018. [45] See paragraph 2.5.2.9 at D5/793. [46] See Exhibit Bundle/97 and 158. [47] See Exhibit Bundle/98 and 159. [48] We adopt an adjustment of 10% instead of Mr Chan’s 7% because in his analysis at D7/1552, Mr Chan did not make any allowance on quantum. [49] See Exhibit Bundle/160. [50] Eric Shapiro, David Mackmin and Gary Sams, Modern Methods of Valuation, 11th Edition, 2013, p150. [51] See C4/94/767-792. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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