Kannix Ltd and Another v. Coreluxe Developments Ltd and Others
Read the full judgment text of LDCS 8000/2018 on BabelCite. This LDCS judgment was delivered on 25 March 2020.
1. This is the applicants’ 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 Inland Lot No 5286 (“1 st Lot”) and Inland Lot No 5287 (“2 nd Lot”) (1 st Lot and 2 nd Lot are collectively referred to as “the Lots”), together with a building erected thereon known as On Hing Building, Nos 326, 328, 330 and 332 Des Voeux Road West and Nos 11A, 11B, 11C and 1
Cited by 7 cases · Cites 2 cases
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LDCS 8000/2018 [2020] HKLdT 9 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LAND COMPULSORY SALE MAIN APPLICATION NO 8000 OF 2018 __________________________ BETWEEN
________________________ Before: Mr Alex Ng, Member of the Lands Tribunal Dates of Trial: 11- 15 & 18 November and 24 & 31 December 2019 Date of Judgment: 25 March 2020 __________________ JUDGMENT __________________ BACKGROUND 1.This is the applicants’ 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 Inland Lot No 5286 (“1st Lot”) and Inland Lot No 5287 (“2nd Lot”) (1st Lot and 2nd Lot are collectively referred to as “the Lots”), together with a building erected thereon known as On Hing Building, Nos 326, 328, 330 and 332 Des Voeux Road West and Nos 11A, 11B, 11C and 11D Sai On Lane, Hong Kong (“the Building”). 2.The Building is a 9-storey commercial / residential composite building served by 2 common staircases. An occupation permit No H280 was issued for the Building on 23 December 1959, granting permission to occupy its ground floor (“G/F”) as shops for non‑domestic purpose, and 1st floor (“1/F”) to 8th floor (“8/F”) as Chinese type apartments for domestic purpose. According to the approved building plans of the Building, there are 8 shops planned on G/F, and 7 flats planned on each of 1/F to 8/F. 3.The Lots together with the Building standing thereon were allocated 64 undivided shares. Each of the 8 shops on G/F and 56 flats on upper floors was given 1 undivided share, making up a total of 64 undivided shares. SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS 4.At the time of filing of the Notice of Application (“NOA”) on 22 February 2018, there were 7 respondents and the applicants owned 89.84% undivided shares in the Lots (i.e. 57 and ½ undivided shares), more than the threshold of 80% required for building aged 50 years or above. 5.After the filing of the NOA, the applicants amended the NOA on 18 October 2019 pursuant to the Order of the tribunal. The applicants acquired undivided shares of the 3rd respondent, and subsequently discontinued the proceedings against it. 6.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%. 7.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. 8.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:
9.Since the occupation permit of the Building was issued in 1959, i.e. more than 50 years before the date of application (i.e. 22 February 2018; the relevant date under the Notice), the applicable percentage is therefore 80%. 10.I am satisfied that as at the date of application, the applicants owned more than 80% of the undivided shares in the Lots. I am therefore satisfied the applicants are entitled to make the present application under section 3 of the Ordinance. THE REMAINING RESPONDENTS 11.At trial, the applicants own 91.41% undivided shares in the Lots. The following 6 respondents (collectively referred to as “the Remaining Respondents”) remain in the present action: -
12.Although R1 had once appointed a solicitor firm, it was not legally represented at trial. Representative of R1, Mr Denys Kwan, submits that R1 is dissatisfied with the applicants’ offers, but does not object redevelopment of the Lots. Although R1 has not adduced any valuation evidence, R1 prefers the opinion and valuations of Mr Wayne Lee of Wayne Lee & Associates limited appointed by the other respondents. 13.R2 is represented by Mr Desmond Cheung, who submits the main dispute is on the valuation issues. R2 makes no submission on the other issues and put the applicants to prove whether redevelopment is justified. 14.R4 and R5 are represented by Mr Howard Wong. Although they have not adduced any expert evidence, Mr Howard Wong submits that they in general rely on Mr Wayne Lee’s opinion, except the area measurement of their units which should include the enclosed corridor and lobby immediately in front of their units. Mr Howard Wong also submits the general condition of the Building is tenantable and therefore redevelopment is not justified. Further, given that the applicants’ offers have not taken into account the stamp duties for purchasing replacement properties and the costs for removal and decoration of replacement properties, the applicants have not taken reasonable steps to acquire their units. 15.R6 and R7 are represented by Mr Ross Yuen. Similar to R2, R6 and R7 primarily dispute the valuations only and put the applicants to strict proof in respect of the other statutory requirements under the Ordinance. ISSUES FOR DETERMINATION BY THE TRIBUNAL 16.The remaining issues to be decided in this case are as follows:
DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING 17.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: -
18.There are disputes between the applicants and the Remaining Respondents on both the EUV and RDV valuations. The applicants rely on the reports and valuations of Mr Charles Chan of Savills Valuation and Professional Services Limited. Whilst, only R2, R6 and R7 have retained Mr Wayne Lee. 19.After a without prejudice meeting, the two valuation experts prepared their 1st Joint Statement dated 17 July 2019. They agree on most of the facts of the units in the Building and the comparables and adoption of the same reference units, but they disagree on selection of some comparables, some conversion factors and some adjustment rates. They also disagree on how to value unauthorized structures and/or enclosures (“UBW”). Each of the Remaining Respondents has his individual position and submissions on each of the UBW too. UBW 20.There are 4 types of UBW in the present proceedings, namely (1) cocklofts including the self-constructed cocklofts and the areas above the ceiling slab of kitchen and toilet on G/F; (2) covered yard of Shop H on G/F; (3) flat roof of Units F and G on 1/F including the open flat roof, the flat roof with concrete structure and the flat roof with corrugated metal roofing; and (4) enclosed corridors on upper floors. 21.Mr Charles Chan has prepared 2 scenarios of valuation. In Scenario 1 and Scenario 2, he assigns value to the UBW under the market reality approach and nil value respectively, whereas nil value is adopted by Mr Wayne Lee in his valuation. Nevertheless, although the areas above the ceiling slab of kitchen and toilet on G/F are regarded by both valuation experts as authorized cocklofts, they have not been approved to be used as cockloft. I accept the opinion of the applicants’ building expert, Mr Benson Wong Sai Ning (“Mr Benson Wong), a building surveyor, of Benson Wong & Associates Limited that the areas above the ceiling slab of kitchen and toilet on G/F are not cocklofts. I agree with him, with reference to the approved building plans, there is no means of access to these areas and therefore they could not be counted for gross floor area. 22.In assessing the value of UBW, the parties have no objection to adopt the market reality approach. Whether the structures and/or enclosures are authorized or not, value should be assigned to them if reasonable buyer would pay for them in the market. Under the definition of market value, I consider this is the estimated amount for which the UBW should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. 23.Importantly, there is a willing buyer in the market and the willing buyer would act knowledgeably, prudently and without compulsion. That means the willing buyer is reasonably informed about the nature and characteristics of the UBW and have the knowledge to assess their advantages and disadvantages. Since both the advantages and the disadvantages should be taken into consideration, there is possibility that UBW may have negative value. 24.I consider the advantages of UBW would be benefits of occupation, and the disadvantages would be mainly costs of reinstatement, safety hazard, risk of litigation, pressure for reinstatement, possibility of defective title and difficult mortgage, adverse impacts caused by their existence like lower ceiling height, and etc. Some of the advantages and disadvantages may be user specific, but market value requires the disregard of such element of value to a particular willing buyer. 25.Nature and characteristics of UBW, like mode of construction and enclosure, materials, location, and etc., and their history would have bearing on the risk of enforcement for their demolition and removal as well as the assessment of their advantages and disadvantages. If a structure should be demolished and removed soon, its demolition and removal costs may be greater than its short term benefits. The UBW with higher risk of safety and greater exposure would generally have higher risk of enforcement. 26.With a view to assess the enforcement risk, a willing buyer would review the possibility of rectification and/or legalization, prevailing government policy, response of the neighbourhood on enforcement of deed of mutual covenants and etc. Unauthorized use may be able to be legalized, but unauthorized building works cannot be approved retrospectively under the prevailing government policy. In the past, building plans for increase of floor area of a particular unit in a building might be approved by Building Authority, but Building Authority now requires consent of all owners in the building for such application. Some UBW may be tolerated by government at the moment like those in village house, but such government policy is subject to specific conditions and was changing over time. UBW - Unauthorized Cocklofts 27.The self-constructed cocklofts irrespective of their methods of construction and materials are unauthorized building works which cannot be approved retrospectively. Although the government might not take any enforcement action against them for a long period, no one can affirm as at the valuation date whether the government will take enforcement action in future and if yes when will the enforcement action be taken. While the self-constructed cocklofts are always subject to the risk of enforcement action, their existence is also at the expense of high ceiling height and spacious ground floor. I agree with Mr Wayne Lee that some occupiers in the locality particularly those modern shop operations such as café and boutique would prefer vertical spaciousness and openness without cocklofts to additional storage space created by cocklofts. 28.On the other hand, if cockloft is really valuable and enforcement action is really expected not to be taken for a period, owners and occupiers of the shops without cockloft may also build one for themselves, but shops without self-constructed cockloft are common in the subject locality. In such hypothetical circumstances, I consider the main advantage of self-constructed cockloft may merely be the savings in cost for its construction only, as this can be passed to a new owner upon sale of the shop, instead of the benefits derived from its occupation. Having considered all the advantages and disadvantages, I am of the view the self-constructed cocklofts in the Building cannot bring any additional value under the market reality approach. 29.Nevertheless, I consider the areas above the ceiling slab of kitchen and toilet on G/F can bring some additional value to the respective shops because they are not created by unauthorized building works, but their use if any is in fact unauthorized and there are also questions of their accessibility and enclosure if any. I am of the view their use if any is difficult to be authorized because it would increase the total gross floor area of the Building, but the creation and / or rectification of their access and enclosure if any would be easier. Under the market reality approach and having considered their location at the back of the shops, I consider they can be converted at say 1/8 of the G/F value. UBW – Covered Common Yard 30.It is not in dispute that the yard next to Shop H on G/F is common area. Hence, the unauthorized cover at this common yard is subject to the risks of enforcement action by both the government and the other owners in the Building under the Deed of Mutual Covenants (“DMC”). 31.Similar to the self-constructed cocklofts, I am of the view the unauthorized cover at the common yard cannot bring any additional value under the market reality approach. In any event, I consider the benefits if any derived from its occupation is minimal only because of its dilapidated conditions at the back of the shop. Further, since all the G/F owners have not claimed for value of open yard, the value of the open area at the common yard if any is not studied and assessed in the judgment. UBW – Unauthorized Structures / Extensions on Common Flat Roof 32.It is also not in dispute that the flat roof next to Units F and G on 1/F is common area. On the conditions that the unauthorized structures and extensions on this common flat roof are subject to the risks of enforcement action by both the government and the other owners in the Building under the DMC, I consider they cannot bring any additional value under the market reality approach irrespective of their method of construction and materials. Even if the government had just ordered the removal of their adjacent unauthorized structures and had not issued any building order against them in the past, there is no acceptable evidence that they will be tolerated by the government. 33.Further, although the applicants, which own all Units E, F and G on 1/F that appear to have access to the common flat roof, have claimed for value of open flat roof next to Unit G on 1/F, these 3 flats are valued separately and the other 2 flats, Units E and F on 1/F, have no such claim in the application. In the circumstances and in view of consistency, I decide not to value the open area on the common flat roof in the judgment. From another perspective, if Units E, F and G on 1/F are valued together in order to enjoy all the accesses to the common flat roof, there will have at least a downward adjustment for size. UBW – Unauthorized Enclosures of Common Corridor 34.All the unauthorized enclosures are located at the common corridor, which are subject to the risks of enforcement action by both the government and the other owners in the Building under the DMC. I consider such enclosures at common area, which would have fire safety concerns and are always subject to enforcement risks, cannot bring any additional value under the market reality approach. 35.Nonetheless, though no enclosure is allowed, I am of the view the common areas immediately in front of Units A, D, E and G can bring some additional value to the respective units. Assuming everything is equal between 2 flats except the said common areas, the flat with the said common areas immediately in front of it would be preferred by a willing buyer and have a higher value. I consider the said common areas can make the entrance of the flat next to it more spacious and are sometimes usable temporarily even if no enclosure is allowed. In the circumstances, I agree to convert these common areas at say 1/6 of the flat value, and say 2 square meters are counted for each of all Units A, D and E and 0.5 square meter is counted for each of all Units G. 36.Mr Howard Wong has further argued that R4 and R5 can enjoy larger common areas because their units are occupied together. On the conditions that the R4 and R5’s units are valued separately, I consider only the R4’s unit, Unit A on 2/F, would have the benefits of the common areas. The common areas immediately in front of Unit B is the passageway to Unit A. Nevertheless, if the R4 and R5’s units are valued together, there will have at least a downward adjustment for size. Selection of G/F Shop Comparables 37.Both valuation experts agree to value the G/F shops facing Des Voeux Road West and Sai On Lane separately, and therefore adopt 2 different sets of comparables. In the valuation of shops facing Des Voeux Road West, there are 3 common comparables (i.e. Comparables A1, A3 and A4). Mr Charles Chan further adopts Comparable A2, and Mr Wayne Lee further adopts Comparables A5, A7, A8 and A9. 38.Although Comparable A2 is larger in size, I agree with Mr Charles Chan to analyse it, but its selection should be further reviewed after adjustments. I also agree with Mr Wayne Lee to analyse Comparable A5, which is located in a better location. Nonetheless, I consider Comparable A7, which is situated in a different locality along Pok Fu Lam Road, should not be adopted, and Comparables A8 and A9, which were acquired by the Urban Renewal Authority (“URA”), should not be adopted too when there are better comparables. I agree with Mr Charles Chan that the transaction prices of Comparables A8 and A9 might be affected by the ex-gratia payments offered by the URA. 39.In the valuation of shops facing Sai On Lane, the valuation experts adopt the same 4 common comparables (i.e. Comparables A1 (SOL), A2 (SOL), A3 (SOL) and A4 (SOL)). Adjustments to Shop Comparables 40.In the valuation of shops facing Des Voeux Road West, the valuation experts agree on the adjustments for shape (i.e. the common comparables only), depth (i.e. 2% per 1-meter difference), size (i.e. 1% per 5-square meter difference), frontage (i.e. 4% per 1-meter difference), time (i.e. with reference to price indices) and age (i.e. 1% per 5-year difference). They disagree on the adjustments for location and headroom of all comparables and return frontage of Comparable A1. 41.With the benefit of site inspection together with the parties, I agree with Mr Charles Chan to adjust Comparable A3 at 30% and Comparable A4 at -30%, and agree with Mr Wayne Lee to adjust Comparable A1 at 5%. Nevertheless, the adjustment rate for Comparable A2 should be 0%, a midway between -5% proposed by Mr Charles Chan and 5% proposed by Mr Wayne Lee. Further, I consider Comparable A5 should be adjusted at -25% instead of -15% only proposed by Mr Wayne Lee. 42.Regarding the adjustment for headroom, I agree with Mr Charles Chan to adopt an adjustment rate at 2% per 0.5-meter difference instead of 3% per 0.5-meter difference proposed by Mr Wayne Lee, but I consider this adjustment is mainly attributable to the overall space within main shop area instead of the height of shop front as suggested by Mr Charles Chan. I also disagree with Mr Charles Chan that this adjustment rate could be applied whether or not there is an authorized cockloft within the main shop area. 43.Regarding the adjustment for return frontage of Comparable A1, I agree with Mr Charles Chan to adopt an adjustment rate at -15% instead of -10% only proposed by Mr Wayne Lee. Further, since I note the agreed area and depth of Comparable A5 in the 1st Joint Statement is different from those in the 2nd Joint Statement for the RDV valuation (i.e. Comparable B4), I decide to adopt the figures in the latter which were agreed at a latter date and make adjustments accordingly, but the adjustment for shape should be 3% only instead of 10% proposed by Mr Wayne Lee. 44.In the valuation of shops facing Sai On Lane, the valuation experts agree on the adjustments for location, shape, level of shop front, time and age, but disagree on the adjustments for depth, size, frontage and headroom. While Mr Charles Chan maintains his adjustment rate at 2% per 0.5-meter difference for headroom, he adopts less sensitive adjustment rates for size at 1% per 10-square meter difference, frontage at 2% per 1-meter difference and depth at 1% per 1-meter difference because Sai On Lane commands lower pedestrian flow. I agree. 45.The valuation of the shop reference units facing Des Voeux Road West (i.e. Unit B on G/F) and Sai On Lane (i.e. Unit F on G/F) are listed in Appendix I and Appendix II of the judgment respectively. The average unit rate of the 5 selected comparables facing Des Voeux Road West is about $495,728, whilst the average excluding the highest and the lowest comparables (i.e. Comparables A4 and A2) is about $508,993. I consider the shop reference unit facing Des Voeux Road West should be assessed at $500,000 per square meter. Whilst, the average unit rate of the 4 selected comparables facing Sai On Lane is about $172,857, and I consider it should be assessed at $173,000. EUVs of Shop Units on G/F 46.By applying the same principles above, the valuation of all the ground floor shops is listed in Appendix III of the judgment, and the sub-total EUV is determined at $192,130,000. EUVs of Domestic Units on Upper Floor 47.The valuation experts agree on 1 common comparable (i.e. Comparable C2) only. Each of them proposes 8 other comparables (i.e. Mr Charles Chan: Comparables C1, and C3 to C9; Mr Wayne Lee: Comparables C11 to C17) respectively. Since there are sufficient number of comparable, I prefer not to analyse the comparables transacted more than a year from the valuation date (i.e. Comparables C7, C8 and C9). In addition, I consider the analyses can exclude the comparables less than 30 square meters (i.e. Comparables C12, C13, C14 and C16). 48.The valuation experts agree on the adjustments for floor (i.e. 6% for 1/F, 4% for 2/F, 2% for 3/F, -2% for 5/F, -5% for 6/F, -9% for 7/F and -14% for 8/F), size (i.e. 1% per 5-square meter difference), time (i.e. with reference to price indices), age (i.e. 0.5% per 1-year difference), lighting and ventilation (i.e. including -5% to Comparable C11) and view (i.e. 0% to all selected comparables). They disagree on the adjustments for headroom, noise and location. Regarding the adjustment for headroom, I prefer the less sensitive adjustment rate at 2% per 0.5-meter difference proposed by Mr Charles Chan. Regarding the adjustment for noise, I consider nil adjustment should be made because all the selected comparables and the flat reference unit face the main roads in the district. 49.They have differences in opinion over mainly the adjustments for location and environment as named by Mr Charles Chan and accessibility and environment as named by Mr Wayne Lee. While Mr Charles Chan adopts 1 adjustment rate for both location and environment, Mr Wayne Lee separates accessibility and environment into 2 individual adjustments. I consider location, accessibility and environment are similar factors and could be grouped into 1 adjustment in order to simplify the valuation. I also consider there are not much differences in environment between the flat reference unit (i.e. Unit B on 4/F) and the comparables. However, since Comparables C1, C2, C3, C4, C6, C11 and C15 are closer to entrances of MTR station, I prefer to make adjustment to them at -3%, and adjustment to Comparables C5 and C17 at 0%. 50.On the other hand, although Mr Howard Wong submits that the internal condition of the R4 and R5’s units should be classified as good, I agree with the valuation experts, who had inspected many units in the Building for comparison, that they are fair only. 51.The valuation of the flat reference unit is listed in Appendix IV of the judgment. The average adjusted unit rate is about $120,254, and the average excluding Comparables C11, C15 and C17, which are proposed by Mr Wayne Lee and appear out of line, is about $103,575. I agree to adopt the unit rate of $106,200 proposed by Mr Charles Chan. 52.In the comparison between the flat reference unit and the other units in the Building, the valuation experts agree on all the adjustments. By applying the agreed adjustment rates, the valuation of all the upper floor domestic units is listed in Appendix V of the judgment, and the sub-total EUV is determined at $310,060,000. EUVs of All Units in the Building 53.The EUVs of all units in the Building as at the relevant date of valuation, i.e. 4 December 2017, and adopted by this tribunal are appended below: -
54.I therefore accept the total EUV of the Building is $502,190,000. SECTION 4(2) OF THE ORDINANCE - JUSTIFICATION AND REASONABLE STEPS 55.Section 4(2) of the Ordinance provides as follows: -
56.The applicants 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 Building 57.The applicants adduce expert evidence of Mr So Kin Shing (“Mr K S So”), a structural engineer, of K S So & Associates Limited and Mr Benson Wong. Mr K S So conducted a structural survey of the Building and prepared a Structural Assessment Report dated 7 March 2019. Mr Benson Wong conducted a condition survey of the Building and prepared a Condition Survey Report dated 7 March 2019. 58.None of the respondents adduced expert evidence to rebut the reports complied by Mr K S So and Mr Benson Wong. Nevertheless, Mr Howard Wong submits that the general condition of the Building is tenantable and therefore redevelopment is not justified. He urges the tribunal to disregard the Structural Assessment Report of Mr K S So because Mr K S So had not reported the unauthorized cocklofts, had not inspected some of the units in the Building including the R4 and R5’s units, and etc. He also comments that the economic test in the Condition Survey Report, which compares the repair cost with the construction cost of a similar superstructure, is in doubt, and in any event the repair cost should not include those costs relating to privately owned premises. He further concludes that the R4 and R5’s units are structurally safe, repair and maintenance are alternative options to redevelopment, and R4 and R5 are happy and willing to share the expenses for repair and maintenance. 59.I consider Mr Howard Wong’s submissions, which base on the factual witness statement of R4 and R5 only, are not persuasive. Generally, I have no doubt to accept the opinion of building expert instead of the impression of layman. A building justifiable for redevelopment does not mean it should be structural unsafe at the moment. Condition of a particular unit and/or opinion of a particular owner could be one of the considerations, but the decision under the Ordinance should look at the age and the state of repair of a building, including the state of repair of all common areas and all units in the building. Hence, the economic test including the repair cost relating to privately owned premises could still assist the tribunal to make the decision. 60.Having considered the reports of Mr K S So and Mr Benson Wong, I accept their expert opinion. The Building, being erected more than 60 years ago, is in poor condition and has come to the end of its design life. The design of the Building has become obsolete over time in many aspects, both physically and functionally, and fails to conform to modern safety standards and statutory requirements. 61.I am also of the view the Building is in poor state of repair and the costs of repair to bring the Building to tenantable condition is disproportionate to the costs of redevelopment. The defective rendering found on the external elevations of the Building have imposed threats to public safety. Even if repair works are carried out, such works will bring about a modest improvement only to the existing condition of the Building and the Building will continue remain a sub-standard one. Although regular repair can extend the life of the Building, repair costs will increase with time. 62.By reason of the matters set out above, I am satisfied the redevelopment of the Building is justified. Whether the applicants have taken reasonable steps 63.In assessing the reasonableness of the offers, I have considered the case of Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. In particular, I have considered paragraphs 33 and 36 of the judgment in which Ribeiro PJ stated: -
64.The applicants have made 2 rounds of offers to the Remaining Respondents on 29 December 2017 and 16 October 2019, which were based on the valuation of Mr Charles Chan, have reflected the then RDV attributable to the respective units owned by the Remaining Respondents, and have also included a premium over the valuation. Mr Y C Mok, counsel for the applicants, submits the applicants have already taken reasonable steps to acquire all the undivided shares in the Lot. 65.Mr Howard Wong contends the applicants’ offers have not considered Mr Wayne Lee’s valuation and have not taken into account the hardship of R4 and R5. If they sell their units to the applicants by negotiation, they would need to pay stamp duties for purchasing replacement properties and would also incur costs for removal and decoration of replacement properties. 66.I am not persuaded by Mr Howard Wong’s submissions, and do not share the view that an applicant’s offer should have covered the hardship caused to a particular respondent if any and/or should have considered the particular circumstances of a respondent. I agree with Mr Y C Mok that the compensation approach as adopted by the Court of Appeal in Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 534 and applied to Cap 545 litigations is confined to the approach on costs of the litigation only instead of the approach in assessing reasonable steps taken by the applicant. 67.Following Capital Well, much more important are that “the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question” and “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”. In these proceedings, since the applicants’ offers were based on the assessments of valuation expert and had reflected the then RDV attributable to the respective units owned by the Remaining Respondents and there is no evidence that Mr Charles Chan’s valuations were at serious fault, I consider they meet the criteria laid down in Capital Well. 68.By reason of the matters set out above, I am satisfied the applicants have taken reasonable steps to acquire all the undivided shares in the Lots. RESERVE PRICE FOR THE PUBLIC AUCTION 69.By reason of being satisfied that redevelopment of the Lots is justified and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots, I am satisfied an order for sale should be granted in favour of the applicants. 70.The two valuation experts updated their RDV assessments as at 2 October 2019 and 14 October 2019 respectively and prepared their 2nd Joint Statement dated 28 October 2019. At trial, Mr Y C Mok submits that the applicants have no objection to adopt the RDV valuation date of 14 October 2019 as suggested by Mr Wayne Lee. In the 2nd Joint Statement, the valuation experts agree to assess the RDV of the Lots by residual method on the net site area of 573.39 square meters, but they disagree on the form of the optimum hypothetical development. In the assessment of gross development value (“GDV”), they disagree on selection of some comparables, some adjustments to the comparables, and particularly how to value shop units facing On Hing Lane and shop units on 1/F. In the residual valuation, they agree on the development parameters such as marketing fees at 3%, demolition costs at $2,200 per square meter, demolition period of 9 months and professional fees at 6%, but they disagree on interest rate, construction cost, construction period and developer’s profit (i.e. including stamp duty and legal costs). Optimum Hypothetical Development 71.Mr Charles Chan proposes to build a 32-storey commercial / residential composite building with G/F and 1/F planned as mainly retail units, 2/F as clubhouse, 3/F as transfer plate, and 4/F to 31/F as domestic flats (i.e. including 2 duplex units on 30-31/F). Whilst, Mr Wayne Lee suggests the optimum hypothetical development should be a 27-story building only. The two hypothetical developments are similar, but generally Mr Wayne Lee’s version is lower in overall building height, has more floor areas and flats on each domestic floor, and has flat roof and roof attached to the lowest and the highest domestic floors respectively, and each typical domestic unit is also smaller in size. 72.In the design of the commercial podium, Mr Wayne Lee has prepared a G/F layout plan for reference, which comprises 6 shop units including a L-shaped Shop 3 (i.e. formerly known as Shops 3 and 5) with frontage abutting onto both Des Voeux Road West and On Ning Lane and a large corner Shop 7 with frontage abutting onto both On Ning Lane and Sai On Lane. The proposed retail units on 1/F are connected with G/F by both internal staircases and private lifts. Whilst, Mr Charles Chan suggests there are 4 shops on G/F facing Des Voeux Road West and 3 shops on G/F facing On Ning Lane, and the proposed retail unit on 1/F is connected with G/F by mainly an exclusive staircase off On Ning Lane. 73.In comparing the 2 hypothetical developments, I prefer the proposal of Mr Charles Chan to that of Mr Wayne Lee. Since there is substantial supply of tiny flats in the market, it is prudent and sensible to build bigger flats. I consider it is also prudent and sensible to build a taller building. I accept Mr Charles Chan’s proposal that the higher floors from 23/F onwards would enjoy partial sea view, and in the circumstances there should have adjustment for view at 15% too. Regarding the layout of the commercial podium, I am of the view the proposal of Mr Wayne Lee with a L-shaped shop and a large corner shop on G/F looks odd. Further, I consider it is reasonable to connect the single large retail unit on 1/F with the G/F by mainly an exclusive staircase off On Ning Lane as suggested by Mr Charles Chan, which can meet the demand in this secondary location. Nevertheless, I agree with Mr Wayne Lee that the domestic common area at the transfer plate (i.e. 3/F) should not be counted as the accountable gross floor area and therefore Mr Charles Chan’s allowance of 40 square meters in this connection is unnecessary and unreasonable. Accordingly, although I agree to adopt Mr Charles Chan’s version of the hypothetical development, the said 40 square meters should be added to the saleable area of the domestic units. The size of each typical domestic unit would then be 27.25 square meters saleable. GDV of Shop Units on G/F and 1/F 74.Similar to the EUV assessment, Mr Charles Chan adopts 2 different sets of G/F comparables to value the shops facing Des Voeux Road West and On Ning Lane respectively. He also values the 1/F by comparables on 1/F in the district. Whereas, Mr Wayne Lee adopts 1 set of comparables to value the shops facing Des Voeux Road only, and then applies an adjustment rate for location at -20% to value the shops facing On Ning Lane and a conversion factor of 45% to value the shops on the 1/F. Generally, I prefer direct comparison with similar properties to subjective determination of adjustment rate and conversion factor, but the comparables should be relevant. In the subject assessment, I prefer to adopt 2 sets of G/F comparables to value the shops facing Des Voeux Road West and On Ning Lane respectively. On the other hand, since the 1/F comparables proposed by Mr Charles Chan are much smaller in size and therefore are not so relevant, the adjusted unit rate as derived from these comparables should be counter checked rigorously. 75.For the valuation of shops facing Des Voeux Road West, Mr Charles Chan proposes 8 comparables (i.e. Comparables B1 – B8) and only 2 of them (i.e. Comparables B1 and B4) are agreed by Mr Wayne Lee. Mr Wayne Lee has proposed 7 other comparables (i.e. Comparables B10 – B16). I consider Comparable B6 proposed by Mr Charles Chan and Comparables B10 – B16 proposed by Mr Wayne Lee should be excluded in the analyses. Comparable B6 comprises a substantial cockloft. Comparables B11 and B12 were acquired by the URA, which have also been excluded in the EUV assessment. Comparables B10 along Pok Fu Lam Road and Comparables B14 and B16 along Connaught Road West are situated in a different locality. Comparables B13 and B15 are far away from the Lots. 76.Similar to the EUV assessment of the shops facing Des Voeux Road West, the valuation experts agree on the adjustments for depth, size, frontage and age. I also prefer to adjust the return frontage of Comparable B8 at -15% and adopt the same adjustment rate for headroom at 2% per 0.5-meter difference, but Comparable B2 should not be adjusted for headroom because it has some floor areas with high ceiling height. Regarding the adjustment for shape, the valuation experts agree to apply 0% to Comparables C7 and C8, but no agreement can be reached for the other comparables. With reference to their respective layout as shown on the floor plans, I consider Comparables B1, B2, B3, B4 and B5 could be adjusted for shape at 5%, 5%, 2%, 3% and 0% respectively, which are generally lower than the rates suggested by Mr Wayne Lee. 77.The valuation experts disagree over mainly the adjustments for location and time. Regarding the adjustment for location, I agree with Mr Wayne Lee to adjust Comparables B3 and B8 at 15% and 5% respectively, but the adjustments for Comparables B1, B2, B4, B5 and B7 should be -25%, -15%, -25%, -15% and 10% respectively, the midway figures between the respective suggestions of the valuation experts. Regarding the adjustment for time, the valuation experts agree to make reference to price indices. At trial the applicants have further updated the price index as at the valuation date (i.e. 504.8 in October 2019) and contend that the valuation should be adjusted downward in accordance with the drop in price indices. I note the general drop in retail property price and agree to make reference to the latest price indices available to the tribunal. However, since the price indices in the latter part of 2019 are provisional figures only and the drop in value of retail property in secondary location is not that serious, I prefer to adopt a gentle figure, price index of say 515 in October 2019, in the assessment. 78.The valuation of the shop reference unit (i.e. Unit 2 on G/F) is listed in Appendix VI of the judgment. The average unit rate of the 7 selected comparables is about $434,429, and the average excluding the highest and the lowest comparables (i.e. Comparables B4 and B3) is about $433,219. I consider the shop reference unit facing Des Voeux Road West should be assessed at $433,000 per square meter. Accordingly, after making adjustment for return frontage of Shop 1 at 15%, the 4 shops facing Des Voeux Road are assessed at $143,756,000, at the average unit rate of about $449,238. 79.For the valuation of shops facing On Ning Lane, Mr Charles Chan proposes 5 comparables (i.e. Comparables D1 – D5), and Mr Wayne Lee has not put forward any alternative. They agree on the adjustment for age at 1% per 5-year difference and nil adjustment for shape only. 80.Similar to the EUV assessment of the shops facing Sai On Lane, I agree to adjust for depth at 1% per 1-meter difference, frontage at 2% per 1-meter difference and headroom at 2% per 0.5-meter difference, but the adjustment rate for size should be 1% per 7.5-square meter difference. I consider value of the shops facing On Ning Lane, in a better location, are more sensitive to the adjustment for size. Regarding the adjustment for level of shop front to Comparables D1 and D5, I agree to the adjustment rate at 5% suggested by Mr Charles Chan. Regarding the adjustment for location, I consider Comparables D1, D2, D3, D4 and D5 should be adjusted at 10%, 5%, 5%, 5% and 2.5% respectively instead of -5% or 0% as proposed by Mr Charles Chan. I am of the view the location along On Ning Lane will be slightly improved upon completion of redevelopment of the Lots and in any event the location at this section of On Ning Lane is generally better than those of the comparables. 81.Regarding the adjustment for time, similar to the valuation of the shops facing Des Voeux Road West, I prefer to adopt a gentle figure, price index of say 515 in October 2019, in the assessment. 82.The valuation of the shop reference unit (i.e. Unit 6 on G/F) is listed in Appendix VII of the judgment. The average unit rate of the 5 selected comparables is about $204,549, and the average excluding Comparable D1, which appears out of line, is about $215,523. I consider the shop reference unit facing On Ning Lane should be assessed at $210,000 per square meter. Accordingly, after making adjustment for size of Shop 5 and return frontage of Shop 7 at 5%, the 3 shops facing On Ning Lane are assessed at $26,612,000, at the average unit rate of about $215,674. 83.Mr Charles Chan values the 1/F by comparison with the small units in the nearby development AVA 128, No 128 Des Voeux Road West, in which he makes substantial adjustment for size at about -40%, whilst Mr Wayne Lee adopts a conversion factor of 45% of the whole G/F unit rate. I am of the view Mr Charles Chan’s direct comparison is not so reliable and Mr Wayne Lee’s proposed conversion factor is excessive. Without any better alternative, I consider the 1/F which is connected with an exclusive staircase from G/F off On Ning Lane should be assessed at say 60% of the average unit rate of the 3 shops facing On Ning Lane (i.e. $215,674 x 60% = $129,404), a figure slightly higher than Mr Charles Chan’s proposed unit rate at $127,000 and equivalent to about 1/3 of the whole G/F unit rate as determined by the tribunal. GDV of Domestic Units on Upper Floors 84.Both valuation experts consider comparables of Novum West, 63 Pok Fu Lam Road, One Artlane and Artisan House, but there are 19 common comparables for 63 Pok Fu Lam Road and 6 common comparables for One Artlane only. 85.For Novum West, I agree to adopt Comparables NR1-1 to NR1-6 proposed by Mr Charles Chan, which have a size of 30.725 square meters similar to the reference unit on 14/F of 27.25 square meters, and Comparables NR1-7 to NR1-11 proposed by Mr Wayne Lee, which were transacted on later dates but have a smaller size of 18.452 square meters only. For 63 Pok Fu Lam Road, I agree to adopt Comparables NR2-1 to NR2-3 and NR2-5 to NR2-8 agreed by the valuation experts and Comparables NR2-20 to NR2-23 proposed by Mr Wayne Lee, which were transacted on later dates. For One Artlane, I agree to adopt Comparables NR3-1 and NR3-2 agreed by the valuation experts and Comparables NR3-11 to NR3-19 proposed by Mr Wayne lee, which were transacted on later dates. For Artisan House, I agree to adopt Comparables NR4-1 to NR4-6 proposed by Mr Wayne Lee, which were transacted on later dates after the issue of occupation permit but are located on higher floors and Comparables NR4-11 to NR4-15 proposed by Mr Charles Chan, which are located on mid floors but were transacted on earlier dates. 86.The valuation experts agree on the adjustments for floor at 0.5% per 1-level difference, size at 1% per 5-square meter difference, scale and facilities at 0% to -5%. Regarding the adjustment for location, Mr Wayne Lee separates accessibility and environment of location into 2 individual adjustments, but I prefer to adopt 1 adjustment rate only similar to the EUV assessment. I also agree with Mr Charles Chan the locations of the comparable developments are better than that of the hypothetical development and the adjustment rates at -3%, -5% and -5% for 63 Pok Fu Lam Road, One Artlane and Artisan House respectively, but the adjustment rate for Novum West should be -3% only. 87.Regarding the adjustment for age, I agree with Mr Charles Chan to adopt an adjustment rate at 1% per 1-year difference. Regarding the adjustment for headroom, I agree with Mr Wayne Lee to adopt an adjustment rate at 2.5% per 1-meter difference. Regarding the adjustment for time, similar to the GDV assessment of shops, I agree to update the adjustments with reference to the latest price indices but a gentle figure, price index of say 422 in October 2019, should be adopted in the assessment because the price indices in the latter part of 2019 are provisional figures only and there were also fluctuations in each update of the indices. 88.Regarding the adjustment for view, I consider Comparables NR1-1 to NR1-6 should be adjusted at 0% but Comparables NR1-7 to NR1-11 that are located on higher floors should be adjusted at -1.5% to -3%, all comparables of 63 Pok Fu Lam Road should be adjusted at -3%, all comparables of One Artlane except Comparables NR3-14 and NR3-19 should be adjusted at 0% and Comparables NR3-14 and NR3-19 that could have open view should be adjusted at -3%, and Comparables NR4-11 to NR4-15 should be adjusted at 0% but Comparables NR4-1 to NR4-6 that are located on higher floors should be adjusted at -5%. 89.Although the valuation experts agree to make adjustment for holding cost of pre-sale transactions, they have not provided much information to the tribunal such as details of their payment terms, estimated handover dates upon purchase and etc. and have not explained the adjustments clearly in their reports. Having considered the limited information available to the tribunal, I consider holding cost should be adjusted at say 1% to 2% depending on the respective transaction dates. I note the ages of the 4 comparable developments and the transaction dates of their comparables fall within the same year in 2018 or 2019. 90.In addition, I agree with Mr Wayne Lee not to adjust for quality to the comparables in Artisan House, which looks similar to the other comparable developments. Although Mr Charles Chan considers Artisan House was built with high quality, which can be shown in its sales brochure, and has made an adjustment at -5%, there is no detailed comparison of construction cost. 91.The valuation of the domestic reference unit (i.e. a unit on 14/F) is listed in Appendix VIII of the judgment. The average unit rate of the 4 selected comparable developments (i.e. excluding Comparable NR4-1 which appears out of line) is about $309,367. I consider the domestic reference unit should be assessed at $310,000 per square meter. Accordingly, after making adjustment for floor, view at 15% from 23/F onwards and duplex units at 20% all proposed by Mr Charles Chan, the average unit rate of all domestic units is assessed at about $338,000. Interest Rate 92.Mr Wayne Lee adopts 3.5% as interest rate by taking into account of a mix of factors including the prime rate and also the HIBOR. He has also relied on some newspaper articles about the possible interest rate that large developers could be obtained in syndicated loans. Whilst, Mr Charles Chan applies 4% in his residual valuation that is relied on mainly the past rulings of the tribunal. I do not accept news about interest rate as evidence in these proceedings. With reference to the prevailing prime rate and HIBOR and the risk of such commercial loan as at the valuation date, I consider the adoption of interest rate at 4% is reasonable. Though there is a tendency that general interest rate may be lowered in future, the risk of such commercial loans appears to be on the increase. Construction Costs and Period 93.There are disputes of construction cost and period. The difference between the valuation experts on construction cost is minimal and I am of the view a midway figure of say $200,000,000 is reasonable. On the other hand, although Mr Charles Chan proposes to build a taller building of 32-storey, I consider the construction period of 30-month proposed by Mr Wayne Lee is reasonable with reference to the scale and form of the hypothetical development. Developer’s Profit 94.In addition to the allowance of stamp duty at 4.25% and legal cost at 0.1% for purchase of land, Mr Charles Chan proposes a developer’s profit on costs at 20%, an increase of 5% from his previous RDV assessment, whilst Mr Wayne Lee applies 15% all along inclusive of stamp duty and legal cost. The parties argue whether the social movement around the valuation date would affect the level of developer’s profit and whether the downward adjustment proposed by Mr Charles Chan is reasonable. 95.I have no objection to allow stamp duty and legal cost in the subject residual valuation, which in fact are the actual expenses of the hypothetical buyer. Having allowed the stamp duty and legal cost and having considered all the other parameters of the residual valuation as agreed by the parties and determined by this tribunal and the market condition as at the valuation date, I am of the view the developer’s profit should be about 15%. I agree the current social movements have adversely affected property value and site value, and indeed the GDV as adopted in the residual valuation has already reflected the drop in property value. Nevertheless, the adverse effects on site value of small to medium scale commercial / residential composite development is not as great as those mega development projects. RDV of the Lots as at 14 October 2019 96.Based on the agreement between the two valuation experts and the above determinations, the residual valuation of the Lots as at 14 October 2019 is listed in Appendix IX of the judgment. The Lots are assessed at $700,000,000, equivalent to an accommodation value of about $140,263 per square meter (i.e. about $13,031 per square foot), which should be the reserve price for public auction. ORDERS 97.For reasons given in this judgment, I have set out reasons why I am satisfied an order for sale should be granted and I therefore make the following orders: -
COSTS 98.Following Good Faith [1], I make a costs order nisi that the applicants 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.
Mr Mok Yeuk Chi, instructed by Messrs Mayer Brown, for the applicants The 1st respondent was represented by Ms Lam Lai Seung Phoebe and Mr Kwan Lok Ping Denys Mr Desmond Leung, instructed by Messrs Y.T. Chan & Co, for the 2nd respondent Mr Howard Wong, of Messrs Zhong Lun Law Firm, for the 4th and 5th respondents Mr Ross Yuen, instructed by Messrs Y.C. Lee, Pang & Kwok, for the 6th and 7th respondents
[1] Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 534 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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