Nice Able Holdings Ltd and Another v. Chi Ah Chiang and Another

LDCS 22000/2020

[2021] HKLdT 6

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION

NO. 22000 OF 2020

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Before: Mr. Lawrence PANG, Member of the Lands Tribunal

Dates of Hearing: 12 January 2021

Date of Judgment:  26 January 2021

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J U D G M E N T

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Background

1.This is an application made under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) for an order of compulsory sale of all the undivided shares in the Remaining Portion of Section A of Marine Lot No 245 and Sub-section 7 of Section A of Marine Lot No 245 (which is collectively referred to as “the Lot”) with a pair of 6-storey tenement buildings erected thereon known as No 93-95 Catchick Street (which is collectively referred to as “the Building”). 

2.An Occupation Permit dated 29 August 1962 was issued for Block A (which includes the Building) granting permission to occupy their G/F as shops for non-domestic use and 1/F to 5/F as 4 tenements per floor for domestic use. The Building is thus more than 58 years old and is served by one common staircase.

3.According to the building plans approved on 29 May 1961, the Building comprises 2 shops on G/F and 2 domestic units on each of 1/F to 5/F. 

4.Whereas a Deed of Mutual Covenant dated 27 September 1962 is registered against 93 Catchick Street, 1 equal and divided shares is allotted to each floor from G/F to 5/F (including the Roof). Similarly, a Deed of Mutual Covenant dated 29 September 1976 is registered against 95 Catchick Street with 1 equal and divided shares being allotted to each floor from G/F to 5/F (including the Roof).

5.The applicants filed the Notice of Application (“the NOA”) in this case on 18 August 2020.  At the time of filing of the NOA, the applicants owned an average of 91.6667% of the undivided shares in the Lot.

6.The only respondents are the 1^st respondent (“R1”) and the 2^nd respondent (“R2”) who are surviving joint tenants, having become the registered owners of 2/F, 95 Catchick Street by operation of law as other joint tenants passed away in 1990 and 1997 respectively. By a Notice of Severance dated 2 September 2020 and section 8 of the Conveyancing and Property Ordinance, Cap 219, R2 gave notice to R1 that the surviving joint tenancy be severed with effect from the date of the Notice of Severance and held by R1 and R2 as tenants in common in equal shares. Then the 1^st applicant successfully acquired R2’s interest on 31 December 2020 resulting in an ownership of 11.5 of the 12 undivided shares in the Lot, representing an average of 95.8333% of all the undivided shares of the Lot. 

7.Up to the date of trial, R1 made no response whatsoever and was absent at the sole call-over hearing on 14 October 2020 despite the Notice of Trial dated 15 October 2020 and the applicants’ following efforts:

(a)  Due service of the Application;

(b)  Affixture of a notice of the Application at the Building; and

(c)  Publication of a notice of the Application in newspapers.

8.Thus R1 had filed no Notice of Opposition and no evidence in this case.  Nor had R1 taken part in these proceedings.

Section 3 of the Ordinance – Ownership of the applicants

9.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.

10.The applicants, owning an average of 91.6667% of the undivided shares of the Lot, was entitled to file the Application under section 3(2)(b) of the Ordinance which may cover two or more lots—

(i)  on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings; and

(ii)  where the average of—

(a)  the percentage of the undivided shares owned by the majority owner in the lot or lots on which one of the buildings stands; and

(b)the percentage of the undivided shares owned by the majority owner in the lot or lots on which the other of the buildings stands,

is not less than the percentage specified in subsection (1).

Determination of the existing use values (“EUV”) of all units in the Building

11.Pursuant to section 3 of the Ordinance, the NOA was accompanied by a valuation report dated 17 August 2020 (“Application Report”) prepared by Mr Charles C K Chan of Savills Valuation and Professional Services Limited (“Mr Chan”), the applicants’ valuation expert, containing the assessments of the values of all units (which are conveniently termed as the existing use values, the “EUV” of all units) in the Building on the Lot as at 15 July 2020. The report was prepared not earlier than 3 months before the filing of the NOA in accordance with section 3 of the Ordinance.

12.Under section 4(1)(a)(i), if there is a dispute between the parties on the EUV of the units in the Building on the Lot, the Tribunal has to determine the values. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the Lot who cannot be found, the majority owner of the Lot is required to satisfy the Tribunal that the value of the minority owner’s property as assessed in the application is:

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

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

13.In the Application Report, Mr Chan explained the method of valuation and the process of his assessment to arrive at the EUV of each unit of the Building.

14.In his valuation of the EUV of the 2 retail units of the Building, Mr Chan adopted the following methodology:

(a)  He selected G/F, No 95 Catchick Street as the Reference Shop Unit.  He then took into account 6 comparable transactions in 6 different buildings nearby, 2 on Hau Wo Street, 3 on Belcher’s Street but 1 on Catchick Street. After making what he regarded as the necessary adjustments (for time, location, size, building age, frontage and/or return frontage, layout and headroom) for all these comparable transactions, he arrived at a unit price of the Reference Shop Unit at $524,000/sq m;

(b)  He then used the unit rate of the Reference Shop Unit to assess the other ground floor unit at G/F, No 93 Catchick Street.

15.In assessing the EUV of all the domestic units, Mr Chan adopted the following methodology:

(a)  He selected 3F, No 95 Catchick Street (“the Reference Domestic Unit”), which was situated on the middle floor of the domestic portion as the reference unit for the purpose of valuing its unit price; 

(b)  The unit price of the Reference Domestic Unit was first assessed by making reference to market comparables.  He took into account 6 comparable transactions all in different buildings nearby.  After making what he regarded as the necessary adjustments (for time, location, size, building age, floor level, top floor effect, view, lighting and ventilation, etc) for all these comparable transactions, he took the average of the adjusted unit rate of the comparables to arrive at the unit price of the Reference Domestic Unit at $120,400/sq m;

(c)  He further considered the floor difference, size, view, lighting and ventilation, and internal conditions of the Reference Domestic Unit and the remaining domestic units within the Building and made adjustments to arrive at the EUV of all the domestic units;

(d)  He converted the saleable area of the open flat roofs on the 1/F or the top Roofs of the Building by using a conversion factor of 1:6 and 1:8 respectively.

16.Mr Chan updated the Application Report by a supplemental report dated 27 November 2020 (“Supplemental Report”) in which he revised the EUV of all the units in the Building after taking into account the inspection of 4 more residential units in the Building and the updated property index prepared by the Rating and Valuation Department. He also took into account 2 more retail comparables and 1 additional domestic comparable which were not available at the time of his preparation of the Application. Then Mr Chan repeated the exercise he did in the Application Report with the new information and set out his revised assessments of the EUV of each unit as at 15 July 2020.  

17.At trial, Mr Chan further updated his valuation. For instance, Mr. Chan revised the unit price of the Reference Retail Unit and Reference Domestic Unit to $499,000/sq m and $119,000/sq m respectively.

18.In the assessment of 1/F, 95 Catchick Street, Mr Chan had noted that its adjoining open flat roof had been covered and enclosed as part of the premises. He resorted to the market reality approach as approved by the Tribunal in Cheer Capital Limited v Unibase Investment Limited & others, LDCS 5000 & 6000/2013 (unreported, dated 12 June 2015) for instance and assigned a higher value to it as an alternative scenario 1. However, by reference to the photograph no 5.4-22[1] as attach to the Condition Survey Report dated 30 November 2020 prepared by Mr Benson Wong Sai Ning (“Mr Wong”), a Chartered Building Surveyor and Authorised Person under the Buildings Ordinance, this unauthorized conversion is quite visible and appears protrusive from the outside. According to Mr Wong, such unauthorised conversion is one of those prioritized for enforcement action for reason of structural safety and environmental nuisances. In such regard, I agree not to take into consideration any additional value that may occur to this unauthorised conversion but assume reinstatement costs may be required for removing the unauthorised structure – Mr Chan’s scenario 2.

19.The EUV of all units in the Building as at the relevant date of valuation, i.e. 15 July 2020 are reproduced below[2]:

Floor	93 Catchick Street	95 Catchick Street
G/F	$30,150,000	$33,980,000
1/F	$6,780,000	$7,590,000
2/F	$6,650,000	$7,700,000
3/F	$6,520,000	$7,330,000
4/F	$6,580,000	$7,180,000
5/F & Roof	$6,430,000	$7,440,000
	Total:	$134,330,000

20.I am satisfied that the value of the R1’s property[3], ie 2/F, 95 Catchick Street as assessed above is (A) not less than fair and reasonable; and (B) not less than fair and reasonable when compared with the value of the applicants’ property as assessed in the Application.

Section 4(2) of the Ordinance – Justification and Reasonable Steps

21.In determining the application, Section 4(2) of the Ordinance empowered the Tribunal to make an order for sale unless, after hearing the objections of the respondent, it is satisfied that:

(a)  the redevelopment is justified due to age or state of repair of the Building; and

(b)  the applicant has taken reasonable steps to acquire all the undivided shares in the Lot (including negotiating for the purchase of the undivided shares owned by the respondent on terms that are fair and reasonable).

Section 4(2)(a) - Age and State of Repair

22.This Tribunal has taken into consideration the expert evidence of Mr Wong, the Chartered Building Surveyor and Mr So Kin Shing (“Mr So”), the Structural Engineer adduced by the applicants. 

23.Mr So had conducted a structural assessment of the Building and prepared a report dated 27 November 2020[4]. He found the following defects in the Building:

(a)  visual inspections showed a number of spallings and cracks on the columns, beams and slabs in the Building, inside the flats;

(b)  covermeter survey revealed the concrete cover of one slab is below the required thickness of concrete cover which is not sufficient to protect the steel reinforcement bars against corrosion and fire, and no sufficient depth of concrete for the safe transmission of bond forces;

(c)  carbonation depth test revealed that carbonation has penetrated past the concrete cover of all slab samples as well as 2 of the 3 beam samples; this means the alkaline environment in much of the concrete covers which gives protection to the reinforcement bars in the structural members against corrosion has been destroyed and steel bars in these structural members must have been caused to corrode;

(d)  compression tests showed compression strength of all samples on columns, beams and slabs do meet the required concrete strength;

(e)  chloride content tests showed an increased risk of corrosion of the embedded steel reinforcement bars, at least in the beams and slabs;

(f)  reinforcement corrosion (open up) surveys revealed columns, beams and slabs exhibit rust of various magnitudes and suffered from reduction in their cross-sectional areas due to corrosion;

(g)  the structural frames of the Building are deteriorating and they need to be repaired;

(h)  the design and construction of the structural frames have become obsolete over time, there are at least 7 aspects where the Building cannot meet the current structural engineering design requirements and the structural performance of the structural frames of the Building may have been adversely affected.

24.Based on the above findings, Mr So concluded that the design and construction of the structural frames of the Building have become obsolete over time and are in need of repair as the Building, constructed with reinforced concrete, has passed its design working life of 50 years.  The structural frames of the Building were constructed and designed according to the old LCC By-Laws, which are less stringent than the prevailing Concrete Codes; they have deteriorated and are approaching the final stage of their design working life and the deterioration will continue steadily due to extensive carbonation of the concrete.  It is inevitable that new defects will occur and previous defects though repaired will recur readily, requiring substantial repairs or even partial demolition and re-construction of some defective structural members in the future.  Repair works will need to be carried out regularly in the future and such repairs will be more and more extensive as the structural frames becomes older.  He estimated the cost of repairing defective structural members of the Building amounts to $252,000.  Although the present cost of repair may be relatively modest, such costs will escalate in future as the extent and seriousness of the deterioration of the structural members increases with age. He also recommended that hammer tapping works be carried out to all structural members and any defects as a matter of urgency. 

25.Mr Wong, in his Condition Survey Report dated 30 November 2020[5] stated that :

(a)  The Building is aged as many features and facilities which would nowadays be expected to be standard provisions in a residential/commercial composite building are missing or become obsolete and not improved to meet the upgraded construction standards and statutory requirements;

(b)  the Building is in a poor state of repair due to general wear and tear;

(c)  infrared thermographic survey carried out on the external rendering has revealed 29 numbers of hollow spots scattered throughout the external walls on all elevations are potentially dangerous;

(d)  the building envelope is not external seepage resistant with external water penetrations through the external walls, the main roof coverings, the original mild steel windows of the flats;

(e)  the single staircase is an unsatisfactory means of fire escape for the upper floors;

(f)  no improvement made to the fire service installation and fire resisting construction in the Building;

(g)  unauthorized building works constructed at various locations have adversely affected the structural safety and fire safety standards of the Building;

(h)  the conditions of the internal doors, finishes, bathroom and kitchen fitments in the flats are poor, the most common defects in the flats are missing or defective internal doors, dampness and spalling to the internal floors, walls and ceilings;

(i)  sanitary fitments in the bathrooms and cooking facilities in the kitchens are generally broken or defective requiring replacement;

(j)  condition of the original mild steel windows in the flats have generally corroded and not water resistant and should be replaced;

(k)  internal electrical installations inside 5 flats have been haphazardly altered and are in poor condition and need to be replaced completely for safety reason;

(l)  internal inspection of flats found equipotential bonding connections are not provided for metal fixtures in all flats;

(m)  unauthorized structure in the shop at 95 Catchick Street has structural risk and environmental hygiene hazard and is liable for enforcement action from the Buildings Department;

(n)  the Building has no lightning protection system installed on the roof to protect its occupants and building parts from lightning stikes;

(o)  a new condensate drainage system should be provided for all AC units in order to avoid creating water dripping nuisance;

(p)  closed circuit television survey conducted to the underground drainage had revealed defective drainpipes, manholes and manhole covers which need to be replaced or repaired;

(q)  fire service systems required to be added in compliance with the requirements of the Fire Safety (Buildings) Ordinance.

26.Mr Wong assessed the total cost of immediate repair works at $6,636,786 which is about 60% of the cost of constructing a new building similar to the Building.  He came to the conclusion that the Building has deteriorated to a state which is beyond reasonable economic repair as signified by the high repair cost.  Most of the defects present in the Building are not superficial in nature which can be repaired effectively and economically.  As more rapid deterioration will occur in the future, the necessary maintenance and repairs will inevitably be more frequent and extensive, making the continued occupation of the Building not economical and even unsafe, to both occupants and third party.  He recommended the owners to redevelop rather than repair given the Building does not possess any historical value or architectural merit. 

27.I accept the applicants’ evidence in whole.  In particular, I am satisfied that based on the evidence of Mr So and Mr Wong, redevelopment of the Lot is justified due to the state of repair of the Building which is in a very poor state of repair.

28.As for the requirement of “the age” of the Building, this Tribunal agrees with the observation by Judge Wong in the case of Top Sail International Limited v Cheng Kai Ming, executor of the estate of Chan Hue also know as Chan Sum Hiu, deceased[6] that,

“we should not restrict our consideration to just the physical age of the Buildings… we are of the view that the absence of a specific physical age in the Ordinance indicates that the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question.

The physical age of a building is clearly one of the considerations, but it would not be the only consideration. The physical conditions of a building and the amount that would be required to maintain the building are other factors that the Tribunal should consider, as they would affect the decision on whether the life of the building should be ended or prolonged. The obsolete design of a building should also be considered as it has an important impact on whether it is too old to serve a modern society”.

29.Having considered the evidence, I am satisfied that redevelopment of the Lot is also justified due to age in view of the following factors:

(a)  The Building is more than 58 years old and in a very poor condition.

(b)  Its design has become obsolete over time in many aspects both physically and functionally and failed to conform to modern construction and statutory standards and requirement.

(c)  The Building is in serious disrepair and is not tenantable and disproportionate cost is required to repair and maintain the Building.

Section 4(2)(b) - Reasonable Steps Taken

30.The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interests of the respondents under Section 4(2)(b) of the Ordinance.

31.In relation to the units jointly owned by R1 & R2, according to the witness statement of Mr Ng Hoi Kan, the Assistant Sales & Marketing Manager of the applicants, the latter had taken the following steps:

(a)  In Messrs Mayer Brown’s letter dated 11 August 2020, the applicants made an offer of $11,500,000 to R1 and R2 (who were then the surviving joint tenants) attaching thereto an advice letter of Mr Chan explaining the valuation basis of the offer.

(b)  By Mediation Notices dated 18 August 2020, the applicants invited R1 and R2 to attempt mediation to resolve the disputes.

(c)  By a Notice of Severance dated 2 September 2020, R1 and R2 became tenants in common in equal shares.

(d)  Agreement has been reached between the 1^st applicant and R2 to purchase R2 interest for $6,200,000.

32.In view of the above, I am satisfied that the applicants have taken reasonable steps to acquire all the undivided shares of the Lot including R1’s interest.

 Order for Sale

33.I am satisfied that redevelopment of the Lot is justified both in terms of age and state of repair of the Building and the applicants had taken reasonable steps to acquire all the undivided shares of the Lot.  Under such circumstances, I find an order for sale should be granted in favour of the applicants.

Reserved Price for the Auction

34.The applicants submit that the reserve price for the auction of the Lot should be fixed at $190,000,000, based on the assessment by Mr Chan of the RDV of the Lot in his Valuation Report dated 4 January 2021.

35.I have carefully considered Mr Chan’s valuation of the RDV of the Lot.  I note Mr Chan reported that there is no relevant land sale transaction in the vicinity for direct comparison in the past year and I therefore agree with Mr Chan that as a last resort, the residual method has to be employed as the method of assessment of the RDV of the Lot. This is done by deducting development costs (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value of the completed development.

36.Mr. Chan opined that the optimum development on the Lot comprised a block of 25-storey commercial/residential composite building with retail units on ground floor, club house on first floor and residential units on the upper floors.  Details of the hypothetical development and residual valuation are set out in Appendix 2[7], and details of the comparables with adjustments in Appendix 4[8] (for shops) and Appendix 6[9] (for new residential units).  Mr Chan also adopted the Development Cost Pro-forma  promulgated by the Hong Kong Institute of Surveyors to facilitate consideration of construction costs in land value assessments in Appendix 3[10]. 

37.Having gone through his valuation in details, I accept Mr Chan’s valuation, including the valuation assumptions he has adopted, the values and the costs parameters that he has used in his valuation.  I accept that the open market value of the Lot reflecting its redevelopment potential, i.e. the RDV of the Lot, as at 28 December 2020 is $190,000,000 (ie an accommodation value of $101,999 per sq m), which should be the reserve price for the auction of the Lot.

Order

38.This Tribunal make the following determinations:

(1)  This Tribunal is satisfied that the value of the 1^st respondent’s Unit as assessed in this Application is fair and reasonable and is fair and reasonable when compared with the value of the applicants’ unit;

(2)  This Tribunal is satisfied that the redevelopment of the Lot is justified due to the age or state of repair of the Building, and that the applicants has taken reasonable steps to acquire all the undivided shares in the Lot including that of the 1^st respondent;

(3)  All the undivided shares in the Lot, the subject of the Application, be sold by way of public auction for the purposes of redevelopment of the Lot;

(4)  Mr Lee Kwok Yung and Ms Leung Man Yee Cassandra, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustee under the Ordinance in relation to sale of the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs Hau, Lau, Li & Yeung, Solicitors & Notaries, dated 30 November 2020;

(5)  For the purposes of the sale of the Lot by public auction: -

(a)  The sale of the Lot be on the particulars and conditions of sale substantially the same as those in the draft Particulars and Conditions of Sale (as set out in page 224-251 of Bundle A1) initialed and approved by the Tribunal;

(b)  The reserve price be set at $190,000,000;

(c)  Subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Lot or its successor in title, the redevelopment of the Lot and the Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot; and

(6)  Liberty to the applicants, the 1^st respondent and the Trustees to apply to the Tribunal for further directions.

Costs

39.Costs order nisi that there be no order as to costs. Unless any of the parties apply by summons to vary it, the costs order nisi shall be made absolute upon expiry of 14 days.

Mr Jonathan Lee, instructed by Messrs Mayer Brown, for the 1^st & 2^nd applicants

The 1^st respondent was not represented and did not appear

[1] Bundle C1/241.

[2] Exhibit A2.

[3] R1 has only half interest.

[4] Bundle D.

[5] Bundle C1 to C2.

[6](unreported) LDCS 18000/2010

[7] Bundle B/73.

[8] Bundle B/77.

[9] Bundle B/81.

[10] Bundle B/75.