Sarford Development Ltd and Others v. Super Star Properties Ltd and Another
Read the full judgment text of LDCS 14000/2018 on BabelCite. This LDCS judgment was delivered on 27 March 2020.
1. This is an application for a compulsory sale order under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”) (hereinafter referred to as “the Application”) to sell all the undivided shares of the Remaining Portion of Inland Lot No 350 and Section E of Inland Lot No 350 (hereinafter collectively referred to as “the Lots”). Erected thereon are two 5-storey tenement buildings with a common staircase (“the Buildings”) with the street address of Nos 3 & 5 St Francis S
Cited by 7 cases · Cites 11 cases
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LDCS 14000/2018 [2020] HKLdT 8 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LAND COMPULSORY SALE MAIN APPLICATION NO 14000 OF 2018 __________________________
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_________________ J U D G M E N T _________________ 1.This is an application for a compulsory sale order under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”) (hereinafter referred to as “the Application”) to sell all the undivided shares of the Remaining Portion of Inland Lot No 350 and Section E of Inland Lot No 350 (hereinafter collectively referred to as “the Lots”). Erected thereon are two 5-storey tenement buildings with a common staircase (“the Buildings”) with the street address of Nos 3 & 5 St Francis Street respectively. 2.The occupation permit for the Buildings (“OP”) was issued pursuant to the then Buildings Ordinance, 1955 on 13 October 1962 whereby permission was granted to occupy the Buildings for the following purposes:
3.According to the Land Registry, there is a Deed of Mutual Covenant for No 3 St Francis Street dated 21 December 1963 by which five undivided shares were allotted with one share for each floor. But there is no Deed of Mutual Covenant for No 5 St Francis Street which has been 100% owned by the applicants. 4.There is however a Deed of Mutual Grant of Right of Way dated 11 December 1962 granting the owners of Nos 3 & 5 St Francis Street mutual rights of way over along and upon the common staircase. 5.Mr CY Li, SC (“Mr Li”), counsel for the applicants, summarized in his opening submission that at the time of the Application dated 17 July 2018, the applicants altogether owned an average of 90% of the undivided shares of the Lots subject to the remaining shares as follows:
6.The interest of R2 was subsequently acquired by the applicants and the action against it was discontinued on 30 September 2019. 7.The only remaining live respondent is R1 who is represented by Mr Bosco Cheng (“Mr Cheng”), instructed by Messrs Katherine Y W Or & Co. Whether the Applicants are entitled to make the Application 8.Section 3(1) of the Ordinance requires an applicant to have not less than 90% of the undivided shares in a lot before he can make an application. 9.Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a percentage lower than the percentage mentioned in section 3(1) in respect of a lot belonging to a class of lots specified in the notice. 10.The Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice was gazette on 22 January 2010 and came into operation on 1 April 2010 (“the Notice”). Section 3 of the Notice lowered the threshold for compulsory sale in respect of the classes of lots specified in the Notice from 90% to 80%. Those classes of lots include: “a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (ie the date of the application under the Ordinance)”. 11.As the OP for the Buildings was issued on 13 October 1962 (namely, not less than 50 years before the date of the Application), the Notice is applicable and the threshold percentage should be 80%. 12.At the time of the filing of the Application, the applicants owned an average of 90% of the undivided shares of the Lots. We agree therefore that the applicants are entitled to make the Application under section 3(2)(b) of the Ordinance which may cover two or more lots—
The Issues in the Application 13.Mr Li summarized the following issues as shall be determined by the Tribunal according to section 4 of the Ordinance:
The Evidence 14.The applicants have filed the following documents in support of the Application:
15.R1 relies on the following reports of Mr T Wong:
16.Mr A Chan and Mr T Wong prepared two joint statements, one dated 29 March 2019 setting out their agreements and disagreements on EUV, followed by another dated 16 October 2019 on RDV. 17.R1 elected not to adduce any expert evidence on the age and state of repair of the Buildings and Mr Cheng confirmed that R1 would not take issue thereon. 18.At trial, both Mr A Chan and Mr T Wong submitted revised documents to be included in the trial bundles as Exhibits A3 & A11 and Exhibits R3 & R7 respectively. EUV as at 7 May 2018 Assessment of G/F units 19.On the assessment of the EUV of the ground floor units of the Buildings, the most substantial difference between the two experts lies on the choice of shop comparables:
20.As shown in the table above, the two experts have only one common comparable, ie KF1 and CB1. 21.Their agreements and disagreements on adjustments[1] are set out below:
22.Based on the above, the two experts arrived at the following values respectively:
23.According to the websites of the Hong Kong Tourism Board and the Pacific Place which is a regional shopping centre to the west of the vicinity, the Buildings are situated at the peripheral region of a stylish dining neighbourhood, called “Starstreet Precinct”, with design-driven lifestyle stores of special characters. Mr T Wong explained that it was for this reason he adopted comparables all within this dining neighbourhood or in proximity thereto despite their transactions were dated much earlier than the valuation date of 7 May 2018. On the other hand, Mr A Chan adopted comparables which were much farther away within the Wan Chai district. 24.We prefer Mr T Wong’s approach because, to a certain extent, those aged comparables can be remedied by applying the index of the Rating and Valuation Department. By contrast, when the character and clientele of the comparables are completely different, any adjustment on location tends to be only subjective. We observe, for instance, that both the No3 Ground Floor and No 3 Basement are operated as a small boutique but we find no similar trades in the proximity to KF2, KF3 or KF4. Also, location is the single factor with the highest adjustment rates by Mr A Chan. Assuming all other adjustments by Mr A Chan are acceptable, the sample standard deviation is as much as $121,691[6] with the closest common comparable, ie KF1 at Queen’s Road East which is about 20 metres to the northeast of the Buildings, about 20% higher than the next one ie KF2. 25.In Wisdom Gaining Ltd v Wisdom Light Industrial Ltd, LDCS 23000/2012 (unreported, dated 3 June 2014) the following passages in Land Compensation & Valuation Law in Hong Kongwas quoted:
26.By reason of the above, we prefer Mr T Wong’s comparable but would accept Mr A Chan’s location adjustment of -20% for the common comparable, ie KF1/CB/. 27.The other differences between the two experts are minor as Mr T Wong at trial abandoned his original formulae for the adjustments for size and frontage. Subject to such minor difference, we agree with Mr A Chan’s adjustment for the benefit of the side windows that No 3 Ground Floor enjoys over a side lane because the side windows with decoration or placement of advertisement thereat may provide attraction to the prospective customers[8]. Thus, if we add 3% (ie by multiplication) to Mr T Wong’s calculation, the average of the four adjusted comparables would give $826,427/sq m approximately:
28.As a result, our assessment of the EUV on the basis of direct comparison method for No 3 Ground Floor (ie R2’s unit) would be: 34.65 sq m x $826,400/sq m = $28,634,760
29.As regards the EUV for the ground floor of No 5 St Francis Street (“No 5 Ground Floor”) which does not have any side window, our assessment on the basis of direct comparison method would be: 32.77 sq m x $802,400/sq m = $26,294,648 Say $26,295,000 30.In the above analysis, the sale that requires the least significant or lower total adjustments (ie the absolute adjustment based on the sum of the adjustments regardless of sign) is often the best comparable. We find the total absolute adjustments for the following comparables significant:
31.We note that No 3 Ground Floor, ie R2’s unit, was then subject to a tenancy agreement dated 13 June 2017 for a term of one year from 8 August 2017 to 7 August 2018 at $30,000 per month exclusive of rates, government rent and management charges. This tenancy was extended by an agreement dated 22 June 2018 from 8 August 2018 to 31 December 2018 on the same terms and condition. 32.We also note that when CB3 was sold on 16 May 14 for $86,000,000, it was then subject to two tenancy agreements: Shop A for a term commencing from 1 September 2011 to 31 August 2014 at $80,000 per month exclusive of rates and management charges and Shop B for a term from 16 June 2013 to 15 June 2015 at $60,000 per month exclusive of rates and management charges, that is at a yield around 1.95%. 33.Similarly, when CB4 was sold on 21 Aug 13 for $47,000,000, it was subject to a tenancy for a fixed term from 1 May 2013 to 12 August 2015 at $73,800 exclusive of rates and management charges, representing a yield of around 1.88%. During these periods, the retail yields as published by the Rating and Valuation Department were relatively constant:
34.Investment approach is no doubt an alternative means of ascertaining the market value of a property by capitalizing the rental income at an appropriate discount rate (or yield). However, in Fan Chun Keung v The Secretary for the Environment, Transport and Works, LDMR 5/2014 (unreported, 15 July 2005), it was observed that if there were suitable sale comparables, the investment approach would not be adopted because, for instance, a minor change in the capitalization rate for the rental income would greatly affect the capital value of the property. Nevertheless, in the review decision of this case dated 2 November 2005, it was agreed by the experts thatthis alternative investment method would at least serve as a check to the valuation conducted by the more direct sales comparison method. If we are to adopt the investment approach of valuation as a check here in the present case, we will get $18,000,000 which is some 37% lower than$28,635,000 arrived at by the direct comparison method:
35.We appreciate that there are no true comparables in the present case. Even the common comparable, ie KF1/CB1 is situated on a local distributor outside the Starstreet Precinct. The best comparables in terms of location are CB3 & CB4 which are however dated and have to be adjusted by applying the Retail Price Index of the Rating and Valuation Department. In our opinion, the preparation of an index is more or less an averaging exercise and there is no guarantee that the price trend for the subject location or property necessarily follows the index which is territory wide. This is particularly the case for shop premises where a slight variation in location would lead to significant difference in value. We have also received evidence from Mr A Chan that the so-called Starstreet Precinct is losing its popularity nowadays. 36.Whilst the direct comparison method is the primary method of valuation under usual circumstances, more than one valuation approach or method may be used to arrive at an indication of value, particularly when there are insufficient factual or observable inputs for a single method to produce a reliable conclusion. We find it appropriate to adopt the average result of the direct comparison method and the investment method as the EUV for No 3 Ground Floor, ie
37.The corresponding EUV for No 5 Ground Floorwould become $21,410,000 which is equivalent to $653,343/sq m. Assessment of Basement Units 38.Notwithstanding the “Office for non-domestic purposes” as specified in the OP, the parties are in agreement that the basement units in the Buildings should be valued as shops which we consider appropriate. 39.In Wing Hong Investment Company Limited v Fung Sok Han & Others, [2016] 1 HKLRD 1, Chan J found at §235 of the judgment that there is no provision in the Buildings Ordinance to suggest that it is an offence to adopt a user of premises which is materially different from that stated in the occupation permit although the Building Authority may serve an order on the owner under section 25(2) to prohibit the intended user or require the changed user to be discontinued if it is found that the changed or intended new user is not acceptable[10]. 40.In Join Union Investment Limited v China Tree Investment Limited, [2016] 2 HKLRD 901 (“Join Union”), there was also a subdivision of the ground floor premises into four shops. The structural engineering expert in the case could not cite any example or authority where, in similar circumstances, the Government or the Building Authority took enforcement action requiring demolition of the partitioning and reinstatement of the property to its original state. Chow J was of the view that there was no real risk of enforcement by the Government or Building Authority in respect of the alleged unauthorised partitions. See §§97-103 of the judgment. 41.At §107 of the judgment, the learned judge observed that:
42.The differences in opinion between the two experts in relation to the basement units are as follows[11]:
43.Evidence shows that the basement of No 5 St Francis Street (“No 5 Basement”) is interconnected to No 5 Ground Floor by an internal staircase. However, such similar staircase which used to connect No 3 Basement and No 3 Ground Floor had been demolished. 44.Whilst the two experts are ready to assess the EUV of the No 5 Basement and No 5 Ground Floor together, we would not adopt any size adjustment for the reason that the basement and the ground floor units can be separately occupied.We agree with Mr T Wong that the independent toilet should be valued separately by deducting say 50% from the unit value of No 5 Basement. The toilet is situated in the covered yard and we do not consider it forming an integral part of the basement. In any event, it is small, having an area about 2.35 sq m only. Based on the ground floor unit rate of $802,400/ sq m, we arrive at the following:
45.We assess the value of No 5 Basement and No 5 Ground Floor together as at 7 May 2018 at: $26,295,000 + $8,778,000 =$35,073,000 on the basis of direct comparison method. 46.Again, we note that No 5 Basement and No 5 Ground Floor as a whole was then subject to a tenancy agreement for a term of 2 years from 15 December 2017 to 14 December 2019 at $42,000 per month exclusive of rates, government rent and management charges. 47.If we adopt the investment approach of valuation as a check, we will arrive at $25,200,000 which is some 28% lower than $35,073,000 calculated by the direct comparison method:
48.Alternatively, if we adopt $21,410,000 as EUV for the No 5 Ground Floor, ie$653,343/sq m as calculated in paragraph 37 above instead, we will arrive at the following for No 5 Basement:
49.The total value of No 5 Basement and No 5 Ground Floor would be $28,558,000[12] which is less than 6% lower than the average of $25,200,000 and$35,073,000 (ie $30,136,500). This confirms that a unit rate of $653,343/sq m for No 5 Ground Floor is more appropriate. 50.In relation to No 3 Basement, evidence shows that its rear yard has been covered by open-ended metal frames. As can be seen from the table in paragraph 42 above, there are disagreements between Mr A Chan and Mr T Wong on the “Value of the Basement to Ground Floor” as well as the “Value of the Covered Yard to Basement” which is unauthorized. 51.There is no dispute that this covered yard constitutes unauthorized structure under the Buildings Ordinance. Mr Benson Wong during his oral testimony confirmed that the Building Authority would accord low priority to this type of unauthorized structure in taking possible enforcement action. We observe as a matter of fact that the two Superseding Notices No UMB/5OD101/1501-705/0001 issued by the Building Authority both dated 30 October 2017 did not concern or require removal of any unauthorized structure at No 3 Basement. These notices required a prescribed inspection and, if necessary, prescribed repair of the common parts of No 3 St Francis Street only. In any event, it appears that the unauthorized structure has been present for a long time. 52.Mr Li for the applicants also drew our attention to the Deed of Mutual Covenant for No 3 St Francis Street, clause 8 of which is as follows:
53.We opine that the possibility of enforcement action being taken by other owners of the building against the structural conversion of the covered yard is low given that the covered yard has been in existence for quite a number of years and that there have been five owners only for No 3 St Francis Street. It is more likely that a prospective purchaser would not totally ignore the value of the covered yard. We consider that there should be additional value attached to this unauthorized appurtenance by reason of the market reality approach as explained in Join Union, supra, Cheer Capital Limited v Unibase Investment Limited & Others, LDCS 5000 & 6000/2013 (unreported, 12 June 2015) at §§57-66, and more particularly in Gainfield Investment Limited & Others v Legend Time Limited & Others, LDCS 16000/2014 (unreported, 17 October 2016) at §§56-61. We accept the factor of 1/3rd of the value to the basement proposed by Mr T Wong instead of the norm of 1/6th for the open yard. In any event, as we shall see at paragraph 55 below, the difference in value is about $470,316 or a contribution of less than 5%. 54.As regards the value of No 3 Basement when compared with the ground floor, we note that Mr A Chan applied an usual conversion factor of 1/4th. We consider that this No 3 Basement is at street level though abutting the side lane because this portion of St Francis Street is sloping uphill. Valuers sometimes adopt a factor of 1/3rd for the commercial accommodation on the first floor (if any) but we consider that No 3 Basement deserves a higher value because of its retail potential[13] despite fronting to a side lane. We also agree with Mr T Wong that the value of No 3 Basement to the ground floor should be higher than that of No 5 Basement as it has a separate entrance at the side lane. Having said that, we share Mr A Chan’s observation that No 3 Basement was flooded on several occasions as evident by some water stains seen on the walls during site inspection. Weighing everything in the round, we are going to adopt a conversion factor of 1/3rd instead of Mr T Wong’s suggested factor of 2/5th. 55.Similarly, we would adopt $23,317,500 or $672,944/sq m[14] for the EUV of No 3 Ground Floor. The assessment of the EUV for No 3 Basement is as follows:
56.As the EUV for the upper floor units have been agreed by the two experts, the total EUV of the Buildings as at 7 May 2018 is calculated as follows:
Conclusion on EUV 57.To conclude, the total EUV of the Buildings is $95,947,732 and the pro rata shares of R1’s unit is 10.7663%. Whether Redevelopment of the Lots is Justified 58.Section 4(2) of the Ordinance provides that the Tribunal shall not make an order for sale unless it is satisfied that the "age or state of repair" of the Buildings is justified and that the applicants have taken "reasonable steps" to acquire all undivided shares of the Lots.R1 puts the applicants to strict proof as to whether redevelopment is justified. 59.In his opening submission, Mr Li referred to the guidelines laid down in Top Sail International Limited v Cheng Kai Ming, LDCS 18000/2010 (unreported, dated 15 November 2011 (“Top Sail”) and Charmlink Limited v Lee Tong Hing & Others, LDCS 16000/2010 (unreported, dated 29 November 2011) (“Charmlink”) on the factors that the Tribunal should consider whether redevelopment is justified due to age and state of repair. 60.In Top Sail, the Tribunal said:
61.Such an approach of exercising discretion by the Tribunal was followed in Charmlink:
62.Parties have no dispute on the applicability of the above legal principles. In any event, during the pre-trial review on 3 October 2019, Mr Cheng on behalf of R1 confirmed that R1 would not take issue about the age and state of repair of the Buildings. 63.The applicants adduced the expert evidence of two experts namely, Mr Benson Wong who is an authorised person and a building surveyor, and Mr So who is a civil and structural engineer. Their expertise is not disputed. 64.Mr Benson Wong, in his Building Condition Survey Report dated 1 February 2019, pointed out that the Buildings were 57 years old while the design life of a concrete building structure would be shorter than 50 years by reference to the “Code of Practice for Structural Use of Concrete 2013”. Mr Benson Wong observed that the Buildings appeared to be one of the oldest buildings in the area. 65.On physical obsolescence, Mr Benson Wong considered the appearance of the Buildings outdated as revealed by five signs of physical obsolescence as compared with other modern buildings:
66.According to Mr Benson Wong, the Buildings were suffering from ten aspects of functional obsolescence which had safety and hygiene implications as compared with modern standards:
67.In particular, Mr Benson Wong was of the view that three of the ten aspects of functional obsolescence including (a) obsolete design and construction of the structural frames, (e) lack of barrier free access facilities, and (f) lack of proper refuse disposal system could not be rectified unless the Buildings were demolished and redeveloped. Before then, the occupiers would have to remain in occupation of the Buildings which were sub-standard or even unsafe by current standards. Also, though reparable, the rendering on the external wall surfaces and the waterproofing to roof areas had already passed their respective effective lives. 68.Mr Benson Wong concluded that the Buildings were aged as many features and facilities which would nowadays be expected to be standard provisions in a residential/commercial composite building were missing or though provided had not been improved to meet the upgraded construction standards and statutory requirements. 69.Turning to the state of repair, Mr Benson Wong noted that there were many defects in different parts of the Buildings:
70.Mr Benson Wong opined that the Buildings were in a poor state of repair and substantial repairs were required to restore the Buildings to the tenantable standards. He estimated that the total repair costs would be $4,446,526 which represented about 56% of the cost of building the superstructure of a new similar building and that it would take about thirteen months for the repair works to complete. His conclusion was that the redevelopment of the Buildings was justified due to the state of repair and age of the Buildings. 71.According to Mr So in his Structural Assessment Report dated 1 February 2019, at paragraph7.7, the Buildings were designed on the basis of the LCC By-Laws which were less stringent than the current standards. More particularly, the lack of consideration for robustness was the one with utmost importance because the Buildings may not possess adequate robustness against disproportionate collapse in the event of accident. 72.Mr So identified cracks and spalling on the beams, columns and slabs both inside the inspected units and in the common areas of the Buildings. In addition to visual inspection, cover-meter survey, carbonation tests, compression tests on concrete cores, testing on the cement content and chloride test were conducted. Among other things, Mr So found that there had been carbonation of concrete and corrosion in steel reinforcement bars of the Buildings. The durability of the concrete of the columns, beams and slabs of the Buildings had been impaired. Mr So estimated that the structural repair costs would be $37,800 which did not cover the footing foundations. Although the present cost of repair might be relatively modest, such cost would escalate in the future as the extent and seriousness of the deterioration of the structural elements would increase with age. 73.Based on his findings, Mr So concluded that the structural frames of the Buildings were in need of repair. He recommended hammer tapping works on all structural elements together with carrying out of repair works to rectify the defects. In view of the age of the Buildings, Mr So also recommended that the next cycle of such repair works should be carried out in five years’ intervals after the current repair exercise. 74.As submitted by the applicants, no one seeks to challenge these expert evidences. R1 has not adduced any evidence, factual or expert, in relation to the “age” and “state of repair” of the Buildings. Throughout the trial, R1 has not suggested that the Buildings should be retained. Having considered the evidence before the Tribunal, we are satisfied that redevelopment of the Buildings is justified due to the age and state of repair. Section 4(2)(b) – Whether Applicants have taken reasonable steps 75.The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interest of the respondents under Section 4(2)(b) of the Ordinance. 76.The applicants have made three offers to the R1 through their solicitors to acquire the unit or interest it owns: -
77.We note that the offers were all higher than the EUV of R1’s unit as at 7 May 2018 and the latest offer on 25 September 2019 was some 69% higher than the EUV of R1’s unit at $7,693,000. 78.In Intelligent House Ltd v Chan Tung Shing & Others [2008] 4 HKC 421 where the majority owner relied on its valuation expert to formulate some of the offers, the Tribunal ruled at §334(3) that:
79.There is no reason for us not to believe that Knight Frank Petty Limited is a reputable firm of valuers. The applicants have successfully made offers to and acquired the interest of R2 after commencement of the Application. 80.More importantly, the Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363 (“Capital Well”) has emphasized at §33 that:
81.As mentioned in paragraph13 above, R1 actually does not oppose the order for sale on the ground of the applicants not having taken reasonable steps to acquire all the undivided shares in the Lots on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance. 82.Bearing in mind the above legal principles and on the evidence available, we are satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots including negotiating for the purchase of such of those shares as are owned by R1 on terms that are fair and reasonable. Disputes on the estimation of the RDV of the Lots Optimum Hypothetical Development Model 83.At the trial, no suitable redevelopment site comparables was adduced as evidence for our consideration. Both Mr A Chan for the applicants and Mr T Wong for R1 agreed to resort to the residual valuation method in determining the RDV. This can be done by deducting development cost (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value (“GDV”) of the completed optimum development. 84.By their Joint Statement dated 16 October 2019, Mr T Wong agreed with Mr A Chan that the optimum hypothetical form of development on the Lots should comprise a 22-storey commercial and residential composite building over one level of electrical/mechanical basement with retail shops and plant room on G/F[16], recreational facilities on 1/F, open and covered landscaped area on 2/F and residential units on upper floors (each having 1 unit per floor). They also agreed a site area of 135.54 sq m. However, Mr T Wong held different opinion on the following matters:[17]
85.The Right-of-Way areas can be explained in the deed poll plans of the Lots vide memorial numbers UB447280 and UB57972 according to which the registered site area of the Lots is 1,459 sq ft (ie approximately 135.54 sq m) and is inclusive of two Right-of-Way areas up to a total of 13.62 sq m. 86.Situated as the rear part of the Lots, the Right-of-Way areas are currently serving as a rear lane of the Buildings. Pursuant to Regulation 23(2)(a) of the Building (Planning) Regulations (“B(P)R”) under the Buildings Ordinance, in determining the site area for the calculations of plot ratio and site coverage, no account shall be taken of any part of any street or service lane. As explained by Mr A Chan in his Valuation Report on RDV of the Lots however, according to Practice Note for Authorised Persons, Registered Structural Engineers and Registered Geotechnical Engineers (“PNAP”) No APP-73, if a private lane is in the ownership of the developer and is not specifically required for any purpose under the Buildings Ordinance for the proposed scheme, the Building Authority will give favourable consideration to including the relevant area of such lane in site coverage and plot ratio calculations[18]. Where the legal status of a lane has been clearly established by the existence of rights-of way, it would be necessary to apply formally for a modification of BPR23(2)(a). 87.Mr A Chan further explained that since the Right-of-Way areas were within the boundary of the Lots and there was already a side lane at the eastern boundary of the Lots, the Right-of-Way areas were not required as a service lane or for any purpose under the Buildings Ordinance for the redevelopment of the Lots. Mr A Chan assumed that the modification of BPR23(2)(a) would be granted by the Building Authority and the Right-of-Way areas were therefore included in the site area for the calculations of plot ratio and site coverage. We agree with Mr A Chan’s analysis. 88.The first “minor” difference in Mr T Wong’s hypothetical development is that the plant room in the rear can occupy the Right-of-Way areas so that the ground floor could have more retail space. With respect, we do not consider that Mr T Wong’s proposal is supported by what Lord Oliver stated in the Privy Council case of Hinge Well Co. Ltd. v. The Attorney General of Hong Kong [1988] 1 HKLR 32 at 43:
89.As we find that no building or structure can be erected on Right-of-Way areas, this resolves the “Area differences” suggested by Mr T Wong. The only extant difference in opinion lies on whether a private top roof can be provided for sale. 90.According to Mr A Chan’s original coverage calculation, the gross floor area of each upper residential floor would be about 51.78 sq m or a coverage of 39.5% and the saleable area of each floor would be about 29.78 sq m. Taking into account the space for water tank, lift shaft etc, we agree with Mr T Wong that the area left would be about 20 sq m which we consider still acceptable. However, we agree with Mr A Chan’s fallback position that the conversion factor for this roof area should be 1/8 of the top floor. 91.On the other hand, having considered Mr A Chan’s schematic drawing for the hypothetical development, we consider that the entrance to the residential floors can be located on the side lane, like the side entrance to No 3 Basement as observed at the time of the site inspection, so that more ground floor shop space would be available. Our assessment of the RDV will therefore be based on this revised concept on the basis of which Mr A Chan has prepared a revised proposal for redevelopment[19]. 92.The table below sets out Mr A Chan’s and Mr T Wong’s agreement and disagreement on various items:
Assessment of the Value for the hypothetical shop units on the ground floor 93.Mr A Chan and Mr T Wong rely on their corresponding EUV comparables on assessment of the hypothetical shop units on the ground floor. As their comparables are different in terms of location and time, we start with the same $672,944/sq m[20] without any time adjustment[21]. 94.Because the frontage of the hypothetical shop becomes longer and enjoys a return frontage, we follow Mr A Chan’s proposal of +5%, ie $706,591/sq m plus say, 10% for the age factor and arrive at $777,250/sq m. We note that this $777,250/sq m is very close to Mr A Chan’s revised assessment of $799,000/sq m as attached to Appendix 6 of the applicants’ closing submission. We therefore adopt $799,000/sq m as the value of the hypothetical units on the ground floor. Assessment of the Value for U/F (Residential) 95.As regards the residential comparables, Mr A Chan relies on the following transactions at No 1 Star Street and York Place:
96.On the other hand, Mr T Wong relies on the following transactions:
97.As illustrated in the above, save the two comparables in No 1 Star Street, the two valuation experts again adopt different comparables. Mr A Chan challenged Mr T Wong’s comparables being at locations of completely different character and enjoying facilities (the units in The Avenue specifically referred to) which are lacking in the hypothetical development or No 1 Star Street. By contrast, Mr T Wong challenged Mr A Chan’s comparables being too large in size when compared with the units in the hypothetical development. 98.While the comments from both sides appear valid, we would prefer Mr A Chan’s comparables because in the process of valuation, location is the utmost important factor. Having said that, we prefer the -2% adjustment for the environment factor as suggested by Mr T Wong for comparables in No 1 Star Street to the -5% adjustment for location suggested by Mr A Chan. 99.Another difference in opinion between the two expert is lies on whether adjustment should be made to “exclusiveness”. Mr A Chan did not make such adjustment whereas Mr T Wong made adjustment on the basis that only one unit on each floor would provide exclusiveness. We find it reasonable to adopt 3% for such adjustment. 100.Also, we do not agree to the -5% layout adjustment suggested by Mr A Chan for the so-called inefficient use of the space beside the lift shaft and the potential difference between the actual design and the schematic design which, in our view, is obviously excessive. Taking into consideration the photos taken of the decorative design of the former occupier of No 3 Basement on the wall of the side lane[22], we do not agree with Mr A Chan that having an entrance onto the side lane would necessarily adversely affect the value of the residential units. Other than that, we accept all the adjustments proposed by Mr A Chan which are set out as follow:
101.A calculation of the gross development value of the residential portion is set out at Appendix I to this judgment. Construction Cost 102.From the table in paragraph 92 above, the difference between the two experts is only marginal. We would simply adopt $35,810/m2 under this head. Interest Rate 103.Mr A Chan suggested that because the Lots were small in size, the hypothetical development would be small in scale which might only attract small developers whose cost of money would be about the best lending rate at 5.125% per annum. But when Mr Lam Kin Chung, the authorized representative of the applicants, was cross-examined by Mr Cheng, Mr Lam could not deny that the applicants’ cost of borrowing could be at a lower rate of 4% per annum. We would therefore adopt 4% per annum as the discount rate. Finding on RDV and the Reserve Price 104.Subject to what we have stated above, we shall follow Mr A Chan’s residual valuation model as contained at page 9 of Exhibit A11 on the determination of the RDV which is reproduced at Appendix II to this judgment. We assess the land value of the Lots at $131,690,000 (ie accommodation value of $118,573/m2). 105.We shall adopt the estimated RDV of $131,690,000 as the Reserve Price for the auction of the Lots. Other Incidental Matters 106.The applicants propose to appoint Mr Andy Ngan and Ms Jonny Ma, being consultant and partner of Messrs F Zimmern & Co, Solicitors & Notaries, as the sale trustees. Having considered the information on their background and experience as set out in their letter dated 14 October 2019, we are satisfied that they are proper persons to be appointed as the trustees to discharge the duties imposed on them under the Ordinance. The remuneration package proposed in the said letter appears to be reasonable. 107.The applicants have prepared a set of draft Particulars and Conditions of Sale of the Lots[23]. Subject to any amendment that may become necessary as a result of our ruling on the arrangement of auction above, the particulars and conditions of sale of the Lots by public auction submitted by the applicants are considered reasonable. Order 108.This Tribunal make the following orders:
Costs 109.Initially, Mr Li submits that in accordance with the compensation approach as determined by the Court of Appeal in Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 534, the applicants do not object to paying the respondent’s costs in these proceedings. 110.In his closing submission, however, Mr Li complained about Mr T Wong’s adopting complicated formulae for adjusting the frontage and sizes of shop comparables. See the footnotes 2 & 3 in paragraph21 above. Mr Li pointed out that only on the 3rd day of the trial, Mr T Wong came to abandon his formulae and adopted Mr A Chan’s formulae. Mr Li opined that as a professional valuer, Mr T Wong should have considered the usual approach of the Tribunal before he consciously came to devise his own formula. He could not have come to a view only at the time of the trial that it would be better to follow Mr A Chan’s formula and then abandon his own. Mr. Li added that although Mr T Wong’s original formulae had not been explained or tested because it had been abandoned, it had been said in various cases that there could be double counting if one adjusted by frontage and then frontage to depth. Mr Li referred to Main Light Ltd v Time Richie Investment Ltd, LDCS 3000 of 2013 (unreported, dated 31 October 2014) in which the Lands Tribunal had the following comments:
111.Mr Li cited as an example the adjustment of CB3 which consisted of two shops with a saleable area of 130.30 sq m which is more than four times of the reference unit. In the original size adjustment, Mr T Wong gave a size adjustment of 8.5% only. But with the abandonment of his formula and adoption of Mr A Chan’s formula, the adjustment then became a drastic 29%. For the adjustment of CB4, Mr T Wong initially applied a frontage adjustment of 27% but with the adoption of Mr A Chan’s formula, the adjustment became -2%. 112.In short, Mr Li suggested that the change of stance of Mr T Wong came too late because the applicants or Mr A Chan already spent unnecessary costs on investigating the complicated formulae which shall not be borne by the applicants. 113.With respect to Mr Li and, having been told by Mr T Wong that he changed his stance in order to save trial time, we cannot come to any view as to whether Mr T Wong’s original formulae is necessarily wrong as he explained he found similar formula having been adopted in a certain government department. The courts or even this Tribunal have often emphasized that valuation is more an art than science. We are cautious not to jump to a conclusion that a particular formula for adjustment is correct because there may be no such universal formula in the real world when every person in the market is applying his own formula for adjustment expressly or subconsciously given that each property is unique. For instance, in the present valuation of the EUV of the ground floor of the Buildings, we found the index published by the Rating and Valuation department not applicable. Even though a formula can be true for a particular time, it may no longer be the case when market conditions change. An illustriave example is when some economists designed a formula for calculating the prices of options and by which they won the Nobel price[24], they however lost a fortune when they applied such a formula or model in practice[25]. 114.Therefore, although it appears that the Tribunal tends to follow a particular formula on adjustments, in reality the Tribunal still retains flexibility in applying different formulae based on the evidence available and the facts and circumstances of each and every case. 115.Mr Li also complained about Mr T Wong’s making no adjustment when he accepted that the internal condition of No 5 Ground Floor was good but that of No 3 Ground Floor was only fair. Mr T Wong’s explanation was that there was no need to consider internal condition of shops as prospective shop operators would do their own decoration or renovation. We agree with Mr T Wong to a certain extent following the market reality principle though we must clarify that this may not be true for domestic premises. In the present case, we allow a downward adjustment or allowance for No 3 Ground Floor only because we agree with Mr A Chan’s observation of sign of flooding or dampness which is a structural issue that may not be easily remedied. 116.In any event, we prefer Mr T Wong’s choice of shop comparables to those suggested by Mr A Chan. 117.As regards Mr Li’s further suggestion that R1 was unreasonable to ask for an exorbitant price of $28 million, we would refer to §§37-38 of Purfleet Farms Ltd v Secretary of State for Transport [2003] 1 P & CR 20 which was cited by the Court of Appeal in Good Faith, supra, as follows:
118.Having considered the above, we do not consider it justifiable to penalize R1 on cost. Accordingly, we make the usual order that the applicants do pay the respondent’s costs in these proceedings on High Court scale with certificate for counsel, including any costs reserved, to be taxed if not agreed.
Mr C Y Li SC, instructed by Messrs So, Lung and Associates, for the 1st to 3rd Applicants Mr Bosco Cheng, instructed by Messrs Katherine Y W Or & Co, for the 1st Respondent
[1] See Bundle D1/159. [2] Prior to trial, Mr T Wong’s adjustment for frontage was based on the difference in ratings as reflected by the hypothetical depths (“HD” calculated as Saleable Area of the Shop / Frontage) of the subject and sample units. The adjustment is RSU/RSA-1 where RSU and RSA representing the rating (in the nearest integer) of the subject and sample units respectively. The rating is calculated as follows: Shops with hypothetical depth ˂ 5 metres : 100 Shops with hypothetical depth ˃ 15 metres : (5 *100%+10*75% + (HD-15)*50%)/HD Shops with hypothetical depth between 5 metres and 15 metres : ((5 *100% + (HD-5)*(100%+{[10-(HD-5)]/10*50% +50%})/2)/HD [3]Prior to trial, Mr T Wong’s adjustment for size was based on a coefficient formula (Sa / Su) ^ 0.06 – 1 where Sa = Effective Area of Comparable Unit Su = Effective Area of Sample Unit [4] See Exhibit A3, page 2 [5] See Exhibit R3, page 2. [6] That is at a confidence level about 95%, the range of the adjusted values would lie between $343,757 and $830,520, ie mean +/- 2σ. [7] See §132 of the judgment. [8] See Bundle A/30. [9] This is higher than Mr A Cham’s assessment on the basis of direct comparison method at $20,339,550. [10] See also Chan Sing Hoi Enterprises Limited v Vykon Media Technology Limited, CACV 324/2007 (unreported, 4 July 2008) at §§11-12. [11] See Bundle D1/154 and 155. [12] This is higher than Mr A Chan’s assessment on the basis of direct comparison method at $24,100,038. [13] It is undisputed between the parties that No 3 Basement was occupied as a tattoo shop before it was vacated. [14] See §34 above. [15] The Court of Final Appeal stated further at §36 of the judgment that: “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.” [16] See Exhibit A4. [17] See Bundle D2/430. [18] See Bundle D1/170. [19] That is page 9 of Exhibit A11. [20] That is the unit rate found for G/F, No 3 St Francis Street as at 7 May 2018. [21] The Retail Price index as at 7 May 2018 is 588.9 and that as at today is 523.7 but we find the retail price around the Starstreet Precinct did not follow the index. [22] See Bundle A/30. [23] See Bundle C/150-175. [24] The Black-Scholes Option Pricing Model. [25]Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management, Random House Trade Paperbacks, 2001; Nicholas Dunbar, Inventing Money, Wiley, 2001. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
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