South Crown Development Ltd v. Harper Property Ltd and Others

LDCS 2000/2016

[2019] HKLdT 40

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 2000 OF 2016

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BETWEEN

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Before: Deputy District Judge W Y Ho, Presiding Officer of the Lands Tribunal and Mr Alex Ng, Member of the Lands Tribunal

Dates of Trial: 6^th, 7^th, 8^th, 9^th and 23^rd May 2019

Date of Judgment: 1^st August 2019

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JUDGMENT

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BACKGROUND

1.This is the applicant’s application for an order for sale, for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”), of all the undivided shares of and in 5 lots of land together with 5 buildings erected thereon.

2.The 5 lots of land (collectively referred to as “the Lots”) which are the subject of the present application are:

1)  Subsection 10 of section A of Hung Hom Marine Lot No 1 (“Lot 1”);

2)  Section A of subsection 12 of section A of Hung Hom Marine Lot No 1 (“Lot 2”);

3)  Section B of subsection 12 of section A of Hung Hom Marine Lot No 1 (“Lot 3”);

4)  The Remaining Portion of subsection 12 of section A of Hung Hom Marine Lot No 1 (“Lot 4”); and

5)  Subsection 14 of section A of Hung Hom Marine Lot No 1 (“Lot 5”).  

3.The 5 buildings erected on the Lots (collectively referred to as “the Buildings”) are:

1)  Nos 1, 1A, 3 and 5 Whampoa Street (“Building 1”);

2)  Nos 7, 7A, 9 and 9A Whampoa Street (“Building 2”);

3)  Nos 11, 11A, 11B and 11C Whampoa Street (“Building 3);

4)  Nos 15, 15A, 17 and 17A Whampoa Street (“Building 4”); and

5)  Nos 19, 21, 21A, 21B and 21C Whampoa Street and Nos 80, 82, 84 and 86 Baker Street (“Building 5”).

4.Though the Buildings are adjoining, they are not interconnected. A brief description of each Building is set out below.

5.Building 1 is served by 2 common staircases and is a 7-storey Chinese tenement block. Occupation permits Nos 11K and 15K issued for Building 1, both dated 25 January 1957, granted permission to occupy portion of the ground floor (“G/F”) as shops for non-domestic purposes, and portion of the G/F and upper floors for domestic purposes.  According to the building plans of Building 1 filed by the applicant, there were 3 non-domestic units and 1 domestic unit planned on G/F and 4 domestic units planned on each of 1^st Floor (“1/F”) to 6^th Floor (“6/F”).

6.Lot 1 together with Building 1 standing thereon has 28 undivided shares. Each of the 4 non-domestic / domestic units on G/F and the 24 domestic units on upper floors of Building 1 are allotted 1 undivided share respectively, making up a total of 28 undivided shares.

7.Building 1 has been further subdivided as follows:

1)  The 3^rd Floor (“3/F”) of No 1 Whampoa Street was sub-divided into 3 sub-divided units (i.e. Unit A, Unit B and Unit C);

2)  The 3/F of No 1A Whampoa Street was sub-divided into 3 sub-divided units (i.e. Unit 1, Unit 2 and Unit 3);

3)  The 4^th Floor (“4/F”) of No 1A Whampoa Street was sub-divided into 3 sub-divided units (i.e. Unit A, Unit B and Unit C);

4)  The G/F of No 3 Whampoa Street was sub-divided into 2 sub-divided units (i.e. Unit A and Unit B); and

5)  The 4/F of No 3 Whampoa Street was sub-divided into 3 sub-divided units (i.e. Unit A, Unit B and Unit C).

8.Buildings 2, 3 and 4 are each served by 2 common staircases and are each an 8-storey Chinese tenement block. An occupation permit No K4, dated 28 December 1956, was issued for these 3 buildings, granting permission to occupy the G/F for non-domestic purpose and upper floors for domestic purpose.  According to the building plans of Buildings 2, 3 and 4 filed by the applicant, there were 4 non-domestic units planned on G/F and 4 domestic units planned on each of 1/F to 7^th Floor (“7/F”) of each building. 

9.Lot 2 together with Building 2 standing thereon was allocated 32 undivided shares. Each of the 4 non-domestic units on G/F and the 28 domestic units on upper floors of Building 2 are allotted 1 undivided share respectively, making up a total of 32 undivided shares.  The units in Lot 3 together with Building 3 standing thereon and the units in Lot 4 together with Building 4 standing thereon have the same allocation of undivided shares as that of Lot 2.

10.Buildings 2, 3, and 4 have been sub-divided as follows:

1)  In respect of Building 2:

a)  The 6/F of No 7A Whampoa Street was sub-divided into 2 sub-divided units (i.e. Unit 1 and Unit 2).

2)  In respect of Building 3:

a)  The 2^nd Floor (“2/F”) of No 11B Whampoa Street was sub-divided into 3 sub-divided units (i.e. Unit A, Unit B and Unit C).

3)  In respect of Building 4:

a)  The 7/F of No 15A Whampoa Street was sub-divided into 3 sub-divided units (i.e. Unit 1, Unit 2 and Unit 3); and

b)  The G/F of No 17 Whampoa Street was sub-divided into 2 sub-divided units (i.e. Unit 1 and Unit 2).

11.Building 5 is served by 2 common staircases and is an 8-storey Chinese tenement block. An occupation permit No K4, dated 11 January 1957, was issued for Building 5 granting permission to occupy the G/F for non-domestic purpose and upper floors for domestic purpose. According to the building plans of Building 5 filed by the applicant, there were 5 non-domestic units planned on G/F and 5 domestic units planned on each of 1/F to 7/F.

12.Lot 5 together with Building 5 standing thereon was allocated 40 undivided shares. Each of the 5 non-domestic units on G/F and the 35 domestic units on upper floors in Building 5 are allotted 1 undivided share respectively, making up a total of 40 undivided shares. 

13.Building 5 has been subdivided as follows:

1)  The G/F of No 82 Baker Street was sub-divided into 2 sub-divided units (i.e. Unit A and Unit B);

2)  The 3/F of No 21 Whampoa Street was sub-divided into 2 sub-divided units (i.e. Unit 1 and Unit 2); and

3)  The 4/F of No 21B Whampoa Street was sub-divided into 4 sub-divided units (i.e. Unit 1, Unit 2, Unit 3 and Unit 4).

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

14.At the time of filing of the Notice of Application (“NOA”) on 31^st March 2016,  the applicant owned more than the threshold of 80% undivided shares in the Lots required for building aged 50 years or above. The applicant’s ownership in the respective Lots is set out as follows:

1)  80.36% (i.e. 22.5 out of the total 28 undivided shares) in Lot 1;

2)  84.38% (i.e. 27 out of the total 32 undivided shares) in Lot 2;

3)  81.25% (i.e. 26 out of the total 32 undivided shares) in Lot 3;

4)  87.50% (i.e. 28 out of the total 32 undivided shares) in Lot 4; and

5)  85.00% (i.e. 34 out of the total 40 undivided shares) in Lot 5.  

15.Since the filing of the NOA, the applicant acquired further undivided shares from 18 respondents, and subsequently discontinued the proceedings against them.

16.As at the date of the first day of trial, the applicant’s ownership in the Lots increased to:

1)  91.07% in Lot 1;

2)  90.63% in Lot 2;

3)  96.88% in Lot 3;

4)  96.88% in Lot 4; and

5)  97.50% in Lot 5. 

17.Section 3(1) of the Ordinance prescribes that the minimum percentage of undivided shares that an applicant or applicants should possess before making an application under the Ordinance is 90%. 

18.Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a lower percentage in respect of a lot belonging to a class of lots specified in that notice. 

19.The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, made under section 3(5) of the Ordinance (“the Notice”), was gazetted on 22 January 2010 and came into operation on 1 April 2010.  Section 3 of the Notice lowered the threshold for compulsory sale of specified classes of lots from 90% to 80%.  Those classes of lots include:

“a lot that is not located within an industrial zone and each of the buildings erected on the lot—

(i) is an industrial building; and

(ii) was issued with an occupation permit at least 30 years before the relevant date (i.e. the date of the application under the Ordinance)”.

20.Since the occupation permits of the Buildings were issued in 1956 or 1957, i.e. more than 50 years before the date of application (i.e. 31 March 2016), the applicable percentage is therefore 80%.

21.We are satisfied that as at the date of application, the applicant owned, on average, more than 80% of the undivided shares in the Lots.  We are therefore satisfied the applicant is entitled to make the present application under section 3 of the Ordinance.

THE REMAINING RESPONDENTS

22.As at the last day of the trial hearing, the following 7 respondents remain in the present action (collectively referred to as “the Remaining Respondents”) : -

Respondent	Premises
5th Respondent (“R5”)	1/F, No 3 Whampoa Street
6th Respondent (“R6”)	1/F, No 5 Whampoa Street
7th Respondent (“R7”)	1/2 share of 4/F, No 5 Whampoa Street
10th Respondent (“R10”)	2/F, No 7 Whampoa Street
11th Respondents (“R11”)	3/F, No 9A Whampoa Street
12th Respondent (“R12”)	6/F, No 9 Whampoa Street
26th Respondents (“R26”)	2/F, No 21C Whampoa Street

23.R10 is a missing owner and was absent throughout the proceedings.

24.R12 is a litigant-in-person and has not filed any Notice of Opposition.

25.R5, R6, R7, R11 and R26 (“the Five Respondents”) were all along unrepresented and it was not until the first day of trial were they represented by Mr Benjamin Chain (“Mr Chain”). Though R7 and R11 have not filed any Notice of Opposition, the Five Respondents rely on the same grounds of opposition as submitted by Mr Chain. Furthermore, the Five Respondents all rely on the findings of Mr Chan Yat Hei of Landscope Surveyors Limited (“Mr Chan”) in the present proceedings, despite the fact Mr Chan was only instructed by R6, R11, and R26.   

ISSUES FOR DETERMINATION BY THE TRIBUNAL

26.The issues to be decided in this case are as follows:

1)  Whether the redevelopment of the Lots or the respective lots is justified due to age and/or state of repair of the Buildings in accordance with section 4(2)(a) of the Ordinance?

2)  As at 25 January 2016, what was the respective existing use value (“EUV”), as assessed in accordance with Part 1 of Schedule 1 of the Ordinance, of all units in the Buildings as a whole, or of the respective buildings?

3)  Whether the applicant has taken reasonable steps to acquire all the undivided shares in the Lots or the respective lots on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance?

4)  If an order for sale should be granted, what should be the reserve price (i.e. redevelopment value (“RDV”) of the Lots or the respective lots for the purpose of auction sale)?

5)  What is the proper approach to be taken when assessing the “redevelopment potential” in setting the reserve price?

27.In so far as R12’s case is concerned, she has repeatedly confirmed with the tribunal her primary concern is about the sale price only. R12 explains she is dissatisfied with the previous offers made by the applicant and believes that her property should command a price higher than the offers made by the applicant.  However, we note she has not instructed any valuation expert and has not filed any evidence to rebut the applicant’s evidence. Hence, other than the issues set out hereinabove, R12 does not raise any additional issue to be decided in this case.

28.As for the position of the Five Respondents, Mr Chain has made it clear the Five Respondents do not dispute the EUV of all the units in the Buildings should be adopted for the apportionment of the proceeds of sale of the Lots. Mr Chain does not seek to make any argument about the propriety of the present application, being an amalgamation of the Lots and the Buildings in one order for sale.   

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDINGS

29.Pursuant to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the EUV of the units as assessed in the application, the tribunal shall determine the proper value. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the lot who cannot be found, the majority owner of the lot is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is: -

“(A) not less than fair and reasonable; and

(B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

30.Mr Chan and the applicant’s valuation expert, Mr Wong Chi Wai (“Mr CW Wong”) of Grandmax Surveyors Limited, agreed on the EUV of all units in the Buildings, as set out in their 1^st Joint Statement dated 20 June 2018. The two valuation experts have adopted the direct comparison method in assessing the EUV of each unit of the Buildings.  Though we note Mr Chan is not instructed by R5, R10 and R12, having examined the valuation reports of Mr Chan and Mr CW Wong, and their 1^st Joint Statement, we accept the EUV as agreed by the two valuation experts are proper.

31.The EUV of all units in each of the buildings and the Buildings as at the relevant date of valuation, i.e. 25 January 2016, are appended below: -

Building 1

Address	Floor	Unit	EUV
1 Whampoa Street	G	-	$15,508,000
1A Whampoa Street	G	-	$18,818,000
3 Whampoa Street	G	3A	$7,815,000
3 Whampoa Street	G	3B	$8,839,000
5 Whampoa Street	G	-	$22,273,000
1 Whampoa Street	1	-	$3,751,000
1A Whampoa Street	1	-	$3,402,000
3 Whampoa Street	1	-	$4,424,000
5 Whampoa Street	1	-	$3,787,000
1 Whampoa Street	2	-	$3,697,000
1A Whampoa Street	2	-	$3,538,000
3 Whampoa Street	2	-	$4,363,000
5 Whampoa Street	2	-	$3,730,000
1 Whampoa Street	3	A	$1,432,000
1 Whampoa Street	3	B	$1,243,000
1 Whampoa Street	3	C	$1,108,000
1A Whampoa Street	3	A1	$1,375,000
1A Whampoa Street	3	A2	$1,062,000
1A Whampoa Street	3	A3	$1,124,000
3 Whampoa Street	3	-	$4,077,000
5 Whampoa Street	3	-	$3,674,000
1 Whampoa Street	4	-	$3,536,000
1A Whampoa Street	4	A	$1,085,000
1A Whampoa Street	4	B	$1,154,000
1A Whampoa Street	4	C	$1,471,000
3 Whampoa Street	4	A	$1,336,000
3 Whampoa Street	4	B	$1,573,000
3 Whampoa Street	4	C	$1,518,000
5 Whampoa Street	4	-	$3,618,000
1 Whampoa Street	5	-	$3,399,000
1A Whampoa Street	5	-	$3,702,000
3 Whampoa Street	5	-	$3,840,000
5 Whampoa Street	5	-	$3,346,000
1 Whampoa Street	6	-	$2,978,000
1A Whampoa Street	6	-	$3,463,000
3 Whampoa Street	6	-	$3,055,000
5 Whampoa Street	6	-	$2,875,000
TOTAL			$160,989,000

Building 2

Address	Floor	Unit	EUV
7 Whampoa Street	G	-	$20,873,000
7A Whampoa Street	G	-	$5,440,000
9 Whampoa Street	G	-	$20,192,000
9A Whampoa Street	G	-	$5,440,000
7 Whampoa Street	1	-	$4,403,000
7A Whampoa Street	1	-	$3,236,000
9 Whampoa Street	1	-	$4,403,000
9A Whampoa Street	1	-	$3,416,000
7 Whampoa Street	2	-	$4,821,000
7A Whampoa Street	2	-	$3,544,000
9 Whampoa Street	2	-	$4,337,000
9A Whampoa Street	2	-	$3,367,000
7 Whampoa Street	3	-	$4,750,000
7A Whampoa Street	3	-	$3,491,000
9 Whampoa Street	3	-	$4,275,000
9A Whampoa Street	3	-	$3,491,000
7 Whampoa Street	4	-	$4,208,000
7A Whampoa Street	4	-	$3,094,000
9 Whampoa Street	4	-	$4,679,000
9A Whampoa Street	4	-	$3,094,000
7 Whampoa Street	5	-	$4,147,000
7A Whampoa Street	5	-	$3,218,000
9 Whampoa Street	5	-	$4,147,000
9A Whampoa Street	5	-	$3,384,000
7 Whampoa Street	6	-	$4,414,000
7A Whampoa Street	6	1	$1,704,000
7A Whampoa Street	6	2	$1,581,000
9 Whampoa Street	6	-	$4,414,000
9A Whampoa Street	6	-	$3,335,000
7 Whampoa Street	7	-	$3,821,000
7A Whampoa Street	7	-	$3,115,000
9 Whampoa Street	7	-	$3,617,000
9A Whampoa Street	7	-	$3,115,000
TOTAL			$158,566,000

Building 3

Address	Floor	Unit	EUV
11 Whampoa Street	G	-	$20,192,000
11A Whampoa Street	G	-	$5,440,000
11B Whampoa Street	G	-	$20,192,000
11C Whampoa Street	G	-	$5,440,000
11 Whampoa Street	1	-	$4,892,000
11A Whampoa Street	1	-	$3,593,000
11B Whampoa Street	1	-	$4,892,000
11C Whampoa Street	1	-	$3,593,000
11 Whampoa Street	2	-	$4,821,000
11A Whampoa Street	2	-	$3,544,000
11B Whampoa Street	2	A	$1,276,000
11B Whampoa Street	2	B	$2,089,000
11B Whampoa Street	2	C	$1,606,000
11C Whampoa Street	2	-	$3,367,000
11 Whampoa Street	3	-	$4,750,000
11A Whampoa Street	3	-	$3,317,000
11B Whampoa Street	3	-	$4,750,000
11C Whampoa Street	3	-	$3,140,000
11 Whampoa Street	4	-	$4,208,000
11A Whampoa Street	4	-	$3,437,000
11B Whampoa Street	4	-	$4,446,000
11C Whampoa Street	4	-	$3,437,000
11 Whampoa Street	5	-	$4,840,000
11A Whampoa Street	5	-	$3,384,000
11B Whampoa Street	5	-	$4,607,000
11C Whampoa Street	5	-	$3,048,000
11 Whampoa Street	6	-	$4,414,000
11A Whampoa Street	6	-	$3,165,000
11B Whampoa Street	6	-	$4,414,000
11C Whampoa Street	6	-	$3,335,000
11 Whampoa Street	7	-	$4,019,000
11A Whampoa Street	7	-	$3,115,000
11B Whampoa Street	7	-	$4,019,000
11C Whampoa Street	7	-	$3,444,000
TOTAL			$162,226,000

Building 4

Address	Floor	Unit	EUV
15 Whampoa Street	G	-	$20,192,000
15A Whampoa Street	G	-	$5,440,000
17 Whampoa Street	G	1	$12,420,000
17 Whampoa Street	G	2	$8,361,000
17A Whampoa Street	G	-	$5,440,000
15 Whampoa Street	1	-	$4,892,000
15A Whampoa Street	1	-	$3,416,000
17 Whampoa Street	1	-	$4,892,000
17A Whampoa Street	1	-	$3,593,000
15 Whampoa Street	2	-	$4,337,000
15A Whampoa Street	2	-	$3,190,000
17 Whampoa Street	2	-	$4,821,000
17A Whampoa Street	2	-	$3,190,000
15 Whampoa Street	3	-	$4,275,000
15A Whampoa Street	3	-	$3,317,000
17 Whampoa Street	3	-	$4,512,000
17A Whampoa Street	3	-	$3,491,000
15 Whampoa Street	4	-	$4,679,000
15A Whampoa Street	4	-	$3,094,000
17 Whampoa Street	4	-	$4,679,000
17A Whampoa Street	4	-	$3,094,000
15 Whampoa Street	5	-	$4,607,000
15A Whampoa Street	5	-	$3,384,000
17 Whampoa Street	5	-	$4,375,000
17A Whampoa Street	5	-	$3,218,000
15 Whampoa Street	6	-	$4,414,000
15A Whampoa Street	6	-	$2,998,000
17 Whampoa Street	6	-	$4,192,000
17A Whampoa Street	6	-	$3,165,000
15 Whampoa Street	7	-	$3,821,000
15A Whampoa Street	7	1	$1,360,000
15A Whampoa Street	7	2	$1,093,000
15A Whampoa Street	7	3	$860,000
17 Whampoa Street	7	-	$4,019,000
17A Whampoa Street	7	-	$2,952,000
TOTAL			$159,783,000

Building 5

Address	Floor	Unit	EUV
19 Whampoa Street	G	-	$16,337,000
80 Baker Street	G	-	$21,949,000
82 Baker Street	G	A	$11,928,000
82 Baker Street	G	B	$9,832,000
84 Baker Street	G	-	$24,403,000
86 Baker Street	G	-	$23,332,000
19 Whampoa Street	1	-	$4,238,000
21 Whampoa Street	1	-	$5,408,000
21A Whampoa Street	1	-	$4,199,000
21B Whampoa Street	1	-	$4,513,000
21C Whampoa Street	1	-	$3,249,000
19 Whampoa Street	2	-	$4,179,000
21 Whampoa Street	2	-	$5,063,000
21A Whampoa Street	2	-	$4,600,000
21B Whampoa Street	2	-	$4,147,000
21C Whampoa Street	2	-	$3,267,000
19 Whampoa Street	3	-	$4,114,000
21 Whampoa Street	3	1	$2,199,000
21 Whampoa Street	3	2	$3,046,000
21A Whampoa Street	3	-	$4,531,000
21B Whampoa Street	3	-	$4,300,000
21C Whampoa Street	3	-	$3,218,000
19 Whampoa Street	4	-	$4,054,000
21 Whampoa Street	4	-	$5,170,000
21A Whampoa Street	4	-	$4,462,000
21B Whampoa Street	4	1	$910,000
21B Whampoa Street	4	2	$1,150,000
21B Whampoa Street	4	3	$1,268,000
21B Whampoa Street	4	4	$1,061,000
21C Whampoa Street	4	-	$3,169,000
19 Whampoa Street	5	-	$4,204,000
21 Whampoa Street	5	-	$5,094,000
21A Whampoa Street	5	-	$4,393,000
21B Whampoa Street	5	-	$3,960,000
21C Whampoa Street	5	-	$3,121,000
19 Whampoa Street	6	-	$4,030,000
21 Whampoa Street	6	-	$4,827,000
21A Whampoa Street	6	-	$4,235,000
21B Whampoa Street	6	-	$4,008,000
21C Whampoa Street	6	-	$2,920,000
19 Whampoa Street	7	-	$3,596,000
21 Whampoa Street	7	-	$3,710,000
21A Whampoa Street	7	-	$3,450,000
21B Whampoa Street	7	-	$3,592,000
21C Whampoa Street	7	-	$3,024,000
TOTAL			$251,460,000

32.We therefore accept the total EUV of the Buildings is $893,024,000. 

SECTION 4(2) OF THE ORDINANCE - JUSTIFICATION AND REASONABLE STEPS

33.Section 4(2) of the Ordinance provides as follows:

“2.  The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that—

(a)  the redevelopment of the lot is justified (and whether or not the majority owner proposes to or is capable of undertaking the redevelopment)—

(i)  due to the age or state of repair of the existing development on the lot; or

(ii)  on 1 or more grounds, if any, specified in regulations made under section 12; and

(b)  the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”

34.The applicant must satisfy this tribunal the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted.

Whether development of the Lots is justified due to the age and/or state of repair of the Buildings

35.Mr Wong Chi Ming (“Mr CM Wong”) of CM Wong & Associates Limited for the applicant, both a structural engineer and a geotechnical engineer, conducted a structural survey of the Buildings and prepared a Structural Assessment Report dated 9 March 2018.  Mr Wong Wing Cheung Dennis (“Mr Dennis Wong”) of Prudential Surveyors International Limited for the applicant, both a building surveyor and a structural engineer, conducted a condition survey and prepared a Condition Survey Report dated 12 March 2018. 

36.Mr Dennis Wong concluded, at paragraph 7.2.1 of his report, the state of the Buildings is poor and the structural frames of the Buildings have deteriorated to the final stages of its working life. He also found the spalling of the reinforcement steel bars to be serious (See paragraph 5.4.2 of Mr Dennis Wong’s report).

37.Furthermore, he opined the Buildings do not meet many current safety requirements, such as the following examples:

1)  There are no fire prevention installations in the Buildings. The lack of such installations does not comply with the current fire safety codes. (See paragraph 4.5.1.2 of Mr Dennis Wong’s report)

2)  The current corridors and stairways of the Buildings do not comply with the current fire safety regulations.  (See paragraph 4.5.1.3 of Mr Dennis Wong’s report)

38.Mr Dennis Wong estimated the costs of repairs to the Buildings would amount to 46.62% of the rebuilding costs (see paragraph 6.3.2 of Mr Dennis Wong’s report), and the repairs would take at least 20 months to complete (see paragraph 6.4.3 of Mr Dennis Wong’s report). He opined that by reason of the complexity of the repair works, the extensive length of time required to complete such works, and the substantial costs of such repairs, such repairs would not be economically viable (see paragraph 7.2.1 of Mr Dennis Wong’s report). He further concluded that even if the repair works were carried out, the Buildings would still be outdated in design (see paragraph 7.2.5 of Mr Dennis Wong’s report)

39.Mr CM Wong opines the rusting of the reinforcement steel bars is serious and that the structural frames of the Buildings are in need of repair (see paragraphs 11.3 and 11.4 of Mr CM Wong’s report).  He also is of the view that the repair costs are substantial and further opines that constant repair works will be needed (see paragraph 11.7 of Mr CM Wong’s report).

40.None of the respondents adduced expert evidence to rebut the reports complied by Mr CM Wong and Mr Dennis Wong.   

41.Having considered the reports of Mr CM Wong and Mr Dennis Wong, we accept their opinion and are satisfied that redevelopment of the Buildings is justified.  The Buildings, being erected more than 61 years ago, are in poor condition and have come to the end of their design life.  The design of the Buildings has become obsolete over time in many aspects, both physically and functionally, and fails to conform to modern safety standards and statutory requirements.

42.We are also of the view the cost of repair works to bring the Buildings to tenable condition is disproportionate to the costs of redevelopment.   We accept the experts’ opinion that even if repair works were carried out, such works would only bring about a modest improvement to the existing condition of the Buildings and the Buildings would continue remain outdated in design.

43.By reason of the matters set out above, we are satisfied the  redevelopment of the Buildings is justified.   

Whether the applicant has taken reasonable steps

44.In summary, Mr Chain makes the following submissions on whether the applicant has taken reasonable steps in acquiring the shares of the minority owners:

1)  Only one offer has been made to R10. Though he does not represent R10, Mr Chain submits the applicant cannot be said to have taken reasonable steps in this regard.

2)  Mr Chain in his closing submissions conceded that whilst the terms of offer made to the Remaining Respondents may be reasonable, having regard to the purchase price of the units owned by R16, R17, and R19, the offers made to the Remaining Respondents (in particular the Five Respondents) cannot be said to be fair.

45.In respect of the argument relating to R10, we have doubts as to whether it is appropriate for Mr Chain to be making submissions on behalf of a respondent he does not represent. Nevertheless, we have considered the arguments raised and we do not accept Mr Chain’s submissions.

46.Pursuant to an order of the tribunal made on 18 July 2017, substituted service of the NOA on R10 was effected by publication of the requisite notices by way of newspaper advertisement. By the same court order, service of the subsequent documents in these proceedings on R10 was dispensed with. Despite the requisite notices having been published in the newspapers on 16 August 2017, R10 remained absent throughout the proceedings.

47.By reason of the impossibility to locate R10 and/or his representative, we fail to see how the applicant could realistically make any further offers to R10. We therefore do not accept Mr Chain’s submission on the applicant’s failure to take reasonable steps in so far as R10 is concerned. 

48.In respect of Mr Chain’s argument that the purchase price of the units belonging to R16, R17, and R19 reflect the offers made to the Remaining Respondents are unfair, we have considered the same.

49.On the third day of trial, Mr Chain submitted a table of figures (see Exhibit R1) which are purportedly calculated by dividing the purchase price of the units held by R16, R17 and R19 by the EUV percentage of the respective units, and then multiplying the figure by the EUV percentage of the Five Respondents’ respective units to arrive at an ultimate figure.

50.The Five Respondents made an offer to the applicant based on the sums calculated in Exhibit R1. However, the applicant rejected the Five Respondents’ offer on the same day. Mr Chain argues the Ordinance requires the offer made by the applicant be “fair” and “reasonable.” He argues both words entail different criteria and therefore the tribunal is required to assess whether the offers made to the Remaining Respondents are both “fair” and “reasonable.” Mr Chain submits that the applicant, by failing to make an offer to the Remaining Respondents in the sums set out in Exhibit R1, has not treated the Five Respondents in the same manner as it has treated R16, R17, and R19.  Hence Mr Chain submits the applicant has acted unfairly towards the Five Respondents.

51.Whilst we are prepared to accept both the words “fair” and “reasonable” are not synonymous, and accept the word “fair” requires the terms of the offer to be just, impartial and unbiased, we do not agree the purchase price of the units owned by R16, R17 and R19 are indicative of whether the offers made to the Remaining Respondents were fair.

52.Whether the terms of an offer are fair in the context of compulsory sale cases can be judged on two levels: one is procedural and one is in the quantum of the offer. We understand Mr Chain’s main complaint in his argument on “fairness” to be on a quantum level.

53.Firstly, we are not persuaded the purchase price of the units belonging to R16, R17, and R19 are a true reflection of the market value of their respective units. The sale and purchase agreements between the applicant and R16, R17, and R19 were made before the commencement of the trial hearing as a settlement between the parties. The applicant’s witness, Ms Lui Wing Yan, confirmed that the purchase price of the respective units reflect a variety of factors considered by the parties and cannot be a true reflection on the value of the property itself.

54.We therefore accept given the circumstances under which these sale and purchase agreements were signed, the purchase price of the units belonging to R16, R17, and R19, are not a true reflection of the value of the respective units and cannot be used as a comparison figure in determining whether the offers made to the Five Respondents were fair.

55.Secondly, we do not accept the applicant’s failure to accept the Five Respondents’ offer set out in Exhibit R1 to be “unfair.” As stated above, the offer made by the Five Respondents was made on the third day of trial, after site inspection had been completed. The case was heard for a total of 5 days (including 1 day for site inspection). In other words, the offer made by the Five Respondents was made more than half way into the trial. Substantial legal costs had already been incurred by the time the offer was made and, as a matter of common sense, such costs considerations must be factored in when considering whether the offer made by the Five Respondents should be accepted. In such circumstances, we do not see how the applicant can be criticized for not accepting an offer made so late in the day.

56.By reason of the matters set out above, we do not accept Mr Chain’s submission the applicant has treated the Five Respondents unfairly in so far as the offer price is concerned.

57.We have reviewed the steps taken by the applicant to acquire the Remaining Respondents’ respective units. Except for R10 whom has only received one offer, we note the applicant made 4 offers to all respondents on 11 March 2016, 21 March 2018, 21 August 2018 and 18 April 2019 respectively. We have not seen any evidence to indicate the said offers made by the applicant were procedurally unjust, biased or partial in any way.

58.Having considered the evidence, we therefore accept the 4 offers made to the Remaining Respondents were fair both in terms of quantum and in terms of procedure. We do not find any unfairness in the applicant’s rejection of the Five Respondents’ open offer made on the third day of trial.

59.Though Mr Chain does not take issue with the reasonableness of the applicant’s offers, for sake of completeness, we shall address the same below.

60.In assessing the reasonableness of the offers, we have considered the case of Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. In particular we considered paragraphs 33 and 36 of the judgment in which   Ribeiro PJ stated:-

“33.  In making that assessment 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. It is obviously necessary to recognise that there will often be differences of opinion on that matter……”

“36. ...... We are of course not suggesting that it is necessary for the offer to “beat” the valuation as if it were a payment into court. What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site……”

61.The applicant’s offers, having considered the marriage value of site assembly and being based on professional valuation, reflect the then RDV attributable to the respondents’ respective units. We are of the view the applicant’s offers  do fall within a range of what may broadly be regarded as fair and reasonable.

62.Although the two valuation experts are in dispute over the RDV valuations and have  different opinions on some valuation issues, it is a matter of professional judgment only. There is no evidence before this tribunal that Mr CW Wong’s assessments are to be faulted. 

63.By reason of the matters set out above, we are satisfied that the applicant took reasonable steps to acquire all the undivided shares of the Lots.

RESERVE PRICE FOR THE AUCTION

64.By reason of being satisfied that redevelopment of the Lots is justified and that the applicant has taken reasonable steps to acquire all the undivided shares of the Lots, we are satisfied an order for sale should be granted in favour of the applicant.

65.After a without prejudice meeting, the two valuation experts updated their respective RDV assessments as at 24 April 2019 and prepared a Supplemental Joint Statement dated 26 April 2019.  They agree to value the Lots as a composite site instead of 5 independent sites. They adopt the residual method to assess the RDV of the Lots and opine that the optimum redevelopment on the Lots comprises a 29-storey commercial/residential composite development.  They agree the total gross floor area at 16,492.58 square meters, the saleable area of each floor, and some development parameters (e.g. demolition costs, marketing and agency fees at 3%, professional fees at 6%, total development period of 3.5 years, interest at 4% and developer’s profit at 15%) of the hypothetical development, but they have different opinions on gross development value (“GDV”) and construction costs.  In the valuation by direct comparison, Mr Chan disagrees with Mr CW Wong to analyse a site comparable subject to compulsory sale order.

GDV – Shops on G/F and 1/F

66.The two valuation experts agree selection of 6 comparables (i.e. Comparables S1, S2, S3, S4, S5 and S6) to assess the unit rate of the reference shop unit (i.e. Shop F on G/F).  However, Mr CW Wong disregards Comparable S4 after the analyses, which is disagreed by Mr Chan.  They agree on the adjustments for size (i.e. 0.2% per square meter), frontage (i.e. 1% per meter), headroom (i.e. 2.5% per meter), time (i.e. with reference to index) and age (i.e. 0.15% per year) and the conversion factors for 1/F and the ancillary areas, but disagree on some of the adjustments for location, layout / shape, return frontage and maintenance condition.

67.In the adjustment for location, they agree to make adjustments to Comparable S2 at -20% and Comparable S5 at -25%.  Mr CW Wong submits that Comparables S1, S3, S4 and S5 should be adjusted at -20%, -20% -40% and -15% respectively, but Mr Chan proposes lesser adjustments at -5%, -5%, -30% and -5% only.  With the benefit of site inspection together with the parties and the valuation experts, we agree to the adjustment rates proposed by Mr CW Wong.  We consider that the location of Comparables S1 and S3 is similar to that of Comparable S2. The location of Comparable S4 is much better than that of the reference shop unit, and the location of Comparable S6 along a main street in the district would justify an adjustment rate at -15% instead of -5% only.

68.In the adjustment for layout / shape, Mr CW Wong proposes downward adjustment to Comparables S1, S2, S3 and S5 at -5%, and greater downward adjustment at -10% to Comparables S4 and S6.  Whilst, Mr Chan proposes nil or lesser downward adjustment to each of the comparables. In the subject assessment, although we agree with Mr CW Wong to make adjustment with reference to mainly depth of the respective comparables and the adjustment rate to Comparable S4 at -10%, we consider that lesser downward adjustment should be made to Comparables S1, S2, S3, S5 and S6 at -2.5%, -2.5%, -2.5%, -2.5% and -5% only.

69.In the adjustment for return frontage, Mr CW Wong proposes downward adjustment to Comparables S1, S4 and S6 at -10%, -20% and -10% respectively, while Mr Chan adopts the adjustment rates at -5%, -15% and -5% only.  We consider that the return frontages of these 3 comparables can bring better benefits to them and agree to the higher adjustment rates proposed by Mr CW Wong.

70.Mr Chan proposes to make an additional adjustment at -10% for maintenance condition to Comparables S1, S2, S3, S4 and S5 that were completed in 1960s.  Mr CW Wong disagrees with Mr Chan and is of the view that the maintenance condition should have already been considered in the adjustment for age and in any event Mr Chan’s adjustments appears to be excessive with reference to their great lump sums.  We consider that the adjustment for age agreed by the two valuation experts at 0.15% per year only cannot adequately reflect the maintenance condition of the aged properties and therefore agree to the additional adjustment for maintenance condition proposed by Mr Chan, but the adjustment rate should be 5% only in the subject assessment.

71.We agree with Mr CW Wong that Comparable S4 is substantially different from the reference shop unit. No matter before or after the adjustments, the unit rate of Comparable S4 is much higher than the unit rates of the other comparables.  Since there are 5 better comparables, we agree to disregard Comparable S4 in the subject assessment. The valuation of the reference shop unit is listed in Appendix I of the judgment. 

72.Applying the same principles to the valuation of each G/F shop unit in the hypothetical development, we agree to the adjustment for return frontage proposed by Mr CW Wong, but the adjustment rates for layout / shape should generally be lower than his proposals.  The valuation of each G/F shop unit is listed in Appendix II of the judgment.

GDV – Flats on Upper Floors

73.The two valuation experts select transactions of flats in 7 nearby developments (i.e. Metro 6, Wuhu Residence, Baker Residence, La Lumiere, Star Ruby, The Met. Focus and Chatham Gate) for direct comparison with the reference residential unit.  They agree the size of the reference residential unit at 31.52 square meter and its actual level on 16/F, but they have different opinions on its view and orientation.  Mr CW Wong has not selected a particular flat on 16/F as the reference residential unit in his valuation model but he considers that the reference residential unit should generally enjoy open view only, whilst Mr Chan selects a typical southeast facing flat and considers that it should enjoy better open to sea view. 

74.They agree on the adjustments for level, time, size, age and facilities, but disagree on some adjustments for location, view and orientation.  Mr Chan also disagrees with Mr CW Wong to make an additional adjustment for accessibility to some comparable developments. Nevertheless, they agree to adopt the unit rate of the reference residential unit as the average unit rate of all flats from 4/F to 27/F.

75.With the benefit of joint site inspection, we agree to the adjustment for location at 5% proposed by Mr CW Wong to La Lumiere and that there should have no additional adjustment for accessibility.  We consider that the adjustment for location in the subject assessment should have already reflected the accessibility of the respective comparable developments.

76.Regarding the selection of reference residential unit, we prefer the valuation model proposed by Mr CW Wong to that of Mr Chan.  We agree with Ms Ngai, counsel for the applicant, that Mr Chan could not explain satisfactorily the relationship between the unit rate of his selected southeast facing flat and the average unit rate of all typical flats.  Although we agree that most of the flats on 16/F would have southeast facing aspect, we consider that the generalization of the unit rate of a particular southeast facing flat on 16/F as the average unit rate of all typical flats may have inflated the latter.

77.While we agree to the valuation model proposed by Mr CW Wong, we also accept his opinion that the reference residential unit would have open view only and his proposed adjustment for view.  Although the existing developments to the east of the Lots, which are aged buildings pending for redevelopment, do not immediately block the distant sea view of the reference residential unit, it is reasonable to envisage that as at the date of valuation such view would partially be blocked in medium term and would affect the sale price.  Further, in the circumstances that no particular unit on 16/F is selected as the reference residential unit, we agree to adjust for orientation at 2% to those comparables facing northwest only.

78.Following the agreement of the two valuation experts on some adjustments and the above determinations, we assess the unit rate of the reference residential unit at $235,000 per square meter, close to the unit rate suggested by Mr CW Wong at $233,000 per square meter. By making further adjustments for floor and view, the unit rates of flats on 3/F and 28/F are assessed at $210,000 and $259,000 per square meter respectively.

Construction Costs

79.Mr CW Wong proposes total construction costs of $596,990,224 (i.e. $36,198 per square meter gross), but Mr Chan opines that these should be $568,285,060 (i.e. $34,457 per square meter gross) only.  Although Mr Chan has listed a brief breakdown of costs in his residual valuation, he has not provided the details as those of Mr CW Wong in a Building Costs Pro-Forma.

80.Bearing in mind the quality of the hypothetical development and the GDV as determined, we agree to adopt the higher construction costs of $596,990,224 proposed by Mr CW Wong.

Direct Comparison Method

81.Mr CW Wong has adopted the direct comparison method with reference to a site transaction in the vicinity that was subject to a compulsory sale order. Though Mr CW Wong finally adopts his valuation by the residual method instead of the direct comparison method, we agree with Mr Chan that site transaction subject to compulsory sale order is not a good comparable because competition in the sale of such site in public auction would generally be constrained by the background that there was a majority owner in the application.

RDV of the Lots as at 24 April 2019

82.Based on the agreement between the two valuation experts and the above determinations, the residual valuation of the Lots as at 24 April 2019 is listed in Appendix III of the judgment.  The Lots are assessed at $2,137,000,000, equivalent to an accommodation value of about $129,573 per square meters (i.e. about $12,038 per square feet).

REDEVELOPMENT POTENTIAL

83.Mr Chain submitted, at length, the inherent problems of the public auction system in so far as compulsory sale cases are concerned. We shall not repeat his arguments in full. In summary, Mr Chain is of the view that in situations where a site, subject to a compulsory sale order, is sold by way of a public auction system, the full redevelopment value of the site cannot be realized because the auction is dominated by the majority owner. The reality of the situation is that the public auction price is manipulated by the majority owner, with minority owners or outsiders having little bargaining power to influence the ultimate transaction price. Mr Chain argues that since the RDV valuation approach is based on the assumption that the full redevelopment potential will be realized by way of a public auction and therefore the reserve prices is set with this assumption in mind. He concluded the current approach adopted in the majority, if not all, compulsory sale cases of assessing the EUV and RDV is no longer correct and that this tribunal should “think outside the box” for a better valuation solution which would more accurately reflect the redevelopment potential of any given site.

84.Mr Chain further asks this tribunal to consider whether the valuation of the reserve price would be different if the tribunal were free to order the site be sold by way of tender.

85.In so far as Mr Chain has aired his grievance about the traditional valuation methods adopted for the assessment of the EUV and RDV, Mr Chain’s suggestion of overhauling the valuation approach is innovative, to say the least. Whilst we appreciate Mr Chain’s aspiration to create a more global and encompassing valuation method, he has not suggested how one is to approach the valuation of the RDV if the “traditional” valuation approach is to be forsaken. Mr Chain asks this tribunal to take a “broad brush approach” but does not provide any insight on how the tribunal should do so, what factors one should take into account, or how one quantifies other “non-traditional” factors.

86.In absence of any workable theory being provided (either by Mr Chain or by his experts), we fail to see how this tribunal can possibly accept Mr Chain’s suggestions, creative and innovative they may be, in arriving at an RDV figure.

87.In so far as Mr Chain asks this tribunal to consider the reserve price on the assumption the sale of the Lots could be conducted by way of tender, with due respect, the question posed by Mr Chain is not a question open for the tribunal to ask itself.

88.Section 5 of the Ordinance reads as follows:

“(1)  Where an order for sale is granted and the trustees under the order have complied with section 7(1) in respect of the lot the subject of the order—

(a)  subject to paragraph (b), the lot shall be sold by public auction in accordance with the conditions specified in Schedule 2; or

(b)  if the whereabouts of each minority owner of the lot is known, the lot may be sold by any other means—

(i)  agreed in writing by each minority owner and majority owner of the lot;

(ii)  approved by the Tribunal in its absolute discretion; and

(iii)  in accordance with such conditions, if any, as the Tribunal specifies in directions.”

89.The legislation clearly dictates, in our present case where there is a missing owner, that the sale of the Lots shall be conducted by way of a public auction. It is therefore inappropriate for the tribunal to speculate any valuation based on a method sale not consistent with that which is mandated in the Ordinance.  

90.We would add that this tribunal is not in any position to address any grievance one may have about the public auction system being mandated in the Ordinance as one of the methods of sale to be adopted in specific circumstances.

91.By reason of the matters set out above, we do not accept Mr Chain’s submissions regarding the redevelopment potential.    

SALE OF THE LOTS AS A COMPOSITE SITE

92.As set out hereinabove, the Remaining Respondents do not take issue on the propriety of the applicant’s application for an order for sale being based on a merged site.

93.From valuation perspective, the value of a merged site, which would release marriage value if any, is generally higher than the aggregate of individual site values of the lots.  By looking at the achievable auction price alone, a higher reserve price would generally not prejudice interest of minority owners. Hence, subject to a fair and equitable apportionment of the sale proceeds that will be discussed in the paragraphs below, we agree the RDV as assessed at $2,137,000,000 on a merged site basis should be the reserve price for auction of the Lots.

APPORTIONMENT OF THE SALE PROCEEDS

94.We note there is no issue raised on whether the sale proceeds should be apportioned on a merged site basis. We further note the differences in building density of the respective buildings in the Lots (i.e. either 7-storey or 8-storey tenement buildings) appear to be insubstantial, and the drawbacks in this regard, if any, could outweigh the benefits from marriage value.

95.Having regard to the above, we are of the view the sale proceeds should be  apportioned in accordance with the respective EUV of all the units in the Buildings, and such apportionment would not prejudice the interests of the Remaining Respondents.

ORDERS

96.For reasons given in this judgment, we have set out reasons why we are satisfied an order for sale should be granted and we therefore make the following orders: -

1)  All the undivided shares in the Lots, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lots;

2)  Ms Anna Chow and Mr Anthony Chow, nominated by the applicant, be appointed the trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lots;

3)  The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Guantao & Chow dated 12 April 2019;

4)  For the purposes of the sale of the Lots by public auction: -

a)  the sale of the Lots as a composite site be on the particulars and conditions of sale the same or substantially the same as those set out in the draft Particulars and Conditions of Sale to be approved and initialed by the tribunal; and

b)  the reserve price be set at $2,137,000,000;

5)  The respective EUV of all the units in the Buildings as determined by the tribunal be adopted for apportionment of the proceeds of sale of the Lots;

6)  The applicant do publish notices once in a Chinese language newspaper (and in the Chinese language) and once in an English newspaper (and in the English language) circulating generally in Hong Kong within 7 days from the sealed judgment informing all persons claiming to be the owners of the Lots (including the 10^th respondent): -

a)  that the tribunal has made Orders for sale of the Lots;

b)  that the Lots be sold together by one public auction; and

c)  where and the times during which copies of the Orders for sale can be obtained;

7)  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 Buildings 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

8)  Liberty to the applicant, the Remaining Respondents, and the Trustees to apply to the tribunal for further directions.

COSTS

97.Following Good Faith [1], we make a costs order nisi that the applicant do pay costs of these proceedings to the respondents on High Court scale, with certificate for counsel, including any reserved costs, to be taxed if not agreed.  Unless any parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from the date of this judgment.

Ms Nancy Ngai, instructed by Vincent TK Cheung, Yap & Co, for the applicant

Mr Benjamin Chain, instructed by Pansy Leung, Tang & Chua Solicitors, for the 5^th, 6^th, 7^th, 11^th and 26^th respondents

The 10^th respondent was not represented and did not appear

The 12^th respondent appeared in person

Attendance of the 17^th respondent, represented by King & Co, was excused

Attendance of the 19^th respondents, represented by Johnny KK Leung & Co, was excused

Appendix I

Appendix II

Appendix III