Teryhill Ltd and Others v. Ng Lok Kaan and Another

LDCS 10000/2020

[2021] HKLdT 15

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO 10000 OF 2020

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Before: Mr Lawrence PANG, Member of the Lands Tribunal

Date of Hearing : 17 February 2021

Date of Judgment : 10 March 2021

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J U D G M E N T

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BACKGROUND

1.This is an application for compulsory sale of all the undivided shares in Section C of Inland Lot No 734 (“the Lot”), on which stands a 6-storey commercial/residential building (“the Building”) known as No 5 Sharp Street East, Causeway Bay, Hong Kong, for the purposes of redevelopment pursuant to Section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”).

2.According to the approved building plans, the Building comprises 1 shop on G/F with a store on cockloft (“C/L”) and 4 domestic units on each of the 1/F to 5/F being served by 2 common staircases (one serving the front block consisting of Flat A & Flat B and the other serving the rear block consisting of Flat C & Flat D and with a corridor linking the two staircases on 1/F). The occupation permit of the Building was issued on 17 April 1971.

3.The Building and the Lot are governed by a Deed of Mutual Covenant dated 12 May 1971 under the 1^st Schedule of which the shop is allotted 10/30 equal and undivided shares and each of the 20 domestic units above is allotted 1/30 equal and undivided share.

4.The applicants filed the Notice of Application on 29 May 2020 (“Form 32”) when they together owned 90% of the undivided shares of the Lot. Then the 10^th applicant (“A10”) purchased from the 3^rd and 4^th respondents (“R3 & R4”) the 1/30 undivided share allotted to Flat D on 4/F owned by them as tenants in common and from the 5^th respondent (“R5”) the 1/30 undivided share allotted to Flat D on 5/F owned by R5. The actions against R3, R4 and R5 were discontinued.

5.The 1^st respondent (“R1”) and the 2^nd respondent (“R2”) are the only remaining respondents, who as tenants in common are the registered owners of Flat B on 3/F. They are indeed missing owners in respect of which the Tribunal has granted the Order dated 28 July 2020 dispensing with service of the Form 32 and directing the publication of notices in the newspapers under section 3(4)(b) of the Ordinance. The required notices were published in the newspapers and neither R1 nor R2 has established his or her respective claim before the Tribunal.

6.It is submitted by Mr YC Mok, counsel for the applicants, that all requirements of the Ordinance have been satisfied.  Mr Mok asked on behalf of the applicants for an order for sale in terms of the draft order submitted. 

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

7.Section 3(1) of the Ordinance requires the applicants to have not less than 90% of the undivided shares in a lot before it can make an application. When the applicants commenced the present proceedings on 29 May 2020 (“the Application”), they altogether owned not less than 90% of the undivided shares of the Lot. They are therefore entitled to make the Application.

DETERMINATION OF THE EXISTING USE VALUES (“EUV”) OF ALL UNITS IN THE BUILDING

8.The Application was accompanied by a valuation report (“Application Report”) prepared by Mr Charles Chan of Savills Valuation and Professional Services Limited (“Mr C Chan”), the applicants’ valuation expert witness, 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 31 March 2020. The Application Report was prepared not earlier than 3 months before the date of the Application, i.e. 29 May 2020 and is therefore, in my view, in compliance with section 3 of the Ordinance.

9.Section 4(1)(a)(ii) of the Ordinance provides that, in the case of any minority owner of the Lot who cannot be found, for instance, R1 and R2, the majority owner of the Lot is required to satisfy the Tribunal that the value of the minority owner’s property, i.e. the R1 & R2’s Unit 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.”

10.In the Application Report of 26 May 2020, Mr C Chan explained the method of valuation and the process of his assessment to arrive at the EUV of each unit of the Building.

11.In his valuation of the EUV of the domestic units of the Building, Mr C Chan adopted the following methodology:

(i)  He selected Flat A on 3/F as the Reference Domestic Unit, which was situated on the middle floor of the domestic portion.

(ii)  The unit price of the Reference Domestic Unit was first assessed by making reference to market comparables.  He took into account 7 comparable transactions all in 6 different buildings scattering in the Causeway Bay vicinity.  After making what he regarded as the necessary adjustments (for transaction time, location and environment, size, building age, floor level, view, lighting and ventilation, noise and physical condition and building management) 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.

(iii)  He further considered the location and environment, floor difference, size, view, lighting & ventilation, noise 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.

12.Having said that, Mr C Chan observed that upper floor commercial uses such as beauty parlour, hair salon, spa shop and toy shop are commonly found on 1^st and 2^nd floors of aged tenement buildings in the vicinity especially those units with exposure to the street. He considered there were commercial potential for the subject units on 1/F and 2/F with an exposure to the street, ie Flats A on 1/F and 2/F.

13.Mr C Chan therefore selected Flat A on 1/F of the Building as the reference unit for assessing the market value of the upper floor commercial units. Comparison was then made between this reference commercial unit and 5 comparable transactions scattering in the Causeway Bay vicinity. In the process, Mr C Chan considered the different attributes in terms of transaction time, location and environment, floor and visibility, size, age, layout and physical condition and building management, and have made adjustments accordingly.

14.In assessing the EUV of the ground floor retail unit, Mr C Chan took into account 4 comparable transactions in different buildings nearby. After making what he regarded as the necessary adjustments (for transaction time, location and environment, size, building age, frontage, layout and headroom) for all these comparable transactions, he took the average of the adjusted unit rate of the comparables to come to the unit price of the Reference Shop Unit.

15.Mr C Chan updated the Application Report by a supplemental report dated 28 December 2020 (“Supplemental Report”). He revised therein the EUV of all units in the Building after inspection of units which were unavailable when he did the first report. He also took into account the updated property index prepared by the Rating and Valuation Department. In the Supplemental Report, Mr C 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 31 March 2020.

16.The EUV of all units in the Building, including the R1 & R2’s Unit are as shown in paragraph 3.4.7 of the Supplemental Report[1] which is reproduced as Appendix 1 of this judgment.

17.In the absence of valuation evidence to the contrary, I am satisfied, insofar as it is necessary, that the value of the R1and R2’s Unit as assessed by Mr C Chan is not less than fair and reasonable; and not less than fair and reasonable when compared with the value of the applicants’ properties:

(i)  R1 and R2’s Unit: assessed at $5,130,000 (representing 1.4939% of the total EUV of all units); and

(ii)  the total EUV of all units: assessed at $343,400,000.

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

18.Under Section 4(1)(b) of the Ordinance the second determination is whether an order of sale should be made. Section 4(2) of the Ordinance provides that there are basically 2 considerations, namely :-

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

(ii)  whether the applicants have taken reasonable steps to acquire all the undivided shares in the Lot where owners’ whereabouts are known.

19.The applicants have to satisfy this tribunal that the above statutory requirements were met, otherwise, an order for compulsory sale would not be granted.

20.For the age and state of repair requirements, we have taken into consideration the expert evidence of Mr Wong Chi Ming (“Mr CM Wong”), the structural engineer and Mr Benson Wong (“Mr B Wong”), the building surveyor adduced by the applicants. 

21.Mr CM Wong had conducted a structural assessment of the Building and prepared a report dated 23 December 2020. He found the following defects in the Building[2]:

(i)  Out of the 18 spots of Open-Up Inspection, 8 were found to have problems in rebars fixing. Such deficiency in rebars, apart from an indication of poor workmanship, should cause the lowering of the structural capacity than the originally designed value.

(ii)  Out of 18 locations tested for concrete strength, 5 locations gave results which may be lower than the specified strength. This indicates poor workmanship.

(iii)  Cracks, spalling and recently repaired defects at 63 locations were observed during the visual inspection of the Building. The number of observed defects may be lower than the actual number of defects present in the Building as some of the units had been re-plastered or had false ceilings installed which may have concealed other defects.

(iv)  Based on the test samples, carbonation has reached the steel reinforcement bars in 25% and 100% of the test samples of respectively the vertical and horizontal structural elements. Such carbonation will make the steel reinforcement bars susceptible to corrosion as it has destroyed the passive alkaline layer of protection provided by the concrete cover.

(v)  Based on the test results, all rebars are found to be corroded, with about 85% classified as “mild corrosion” or “moderate corrosion”.

22.Based on the above findings, Mr CM Wong concluded that the deterioration of the structural elements has entered the propagation phase. Once propagation phase is reached, the deterioration will accelerate and additional defects may appear in more locations. Frequent maintenance and repair works may be required in the near future in order to keep the Building in a safe and functional state.

23.Mr CM Wong stated that according to the Code of Practice for Structural Use of Concrete 2013, the design working life of a building is assumed to be 50 years. The Building, completed in April 1971, has reached its design working life. The concrete cover for most of the horizontal structural elements are below the requirements of the Code.

24.Mr B Wong, in his Condition Survey Report dated 28 December 2020, stated that:[3]

(i)  The Building is aged physically as shown by 3 signs of obsolescence in appearance:

(a)  A plain looking block with monotonous elevations.

(b)  The external walls are simply rendered and painted. These low-cost external building finishes were only acceptable in the post-war era but have been out-classed by buildings nowadays.

(c)  An overall untidy appearance from piecemeal replacements of the old windows with aluminum units of different types and colours.

(ii)  The Building is also aged functionally as it has been suffering from 11 obsolescence aspects which have safety and hygiene implications as compared with the current standards for buildings nowadays:

(a)  The design and construction of the structural frames are obsolete as these had only complied with the less stringent structural requirements applicable more than 40 years ago thereby adversely affecting the structural performance of the Building’s structural frames.

(b)  The fire services installation is sub-standard due to the following:

i.  No automatic sprinklers system;

ii.  No manual fire alarm system; and

iii.  No fire hydrant/ hose reel system.

(c)  The fire escape arrangements are unsatisfactory with the following deficiencies:

i.  Only one required staircase is serving each block of Building.

ii.  No emergency lighting is provided to the two required staircases.

(d)  The fire resisting construction of the fire escape route is outdated:

i.  The existing flat entrance doors are not fire resisting doors as currently required.

ii.  The existing electrical installations and wirings installed in staircases are exposed and not enclosed with fire resisting enclosures.

(e)  The Building has no barrier free access facilities of an accessible lift or an accessible ramp.

(f)  The Building has no proper refuse disposal system hereby creating convenience, hygienic and fire safety problems.

(g)  The Building’s facades have no green features and proper overhangs for sun shading and weather protection purposes.

(h)  The Building has no lightning protection system to protect its occupants and building parts from lightning strikes.

(i)  The Building has maximized its internal usable areas at the expense of common circulation areas by not providing entrance and typical floor lobbies.

(j)  The Building has no building management systems which are commonly provided nowadays for convenience of the users as well as more effective use, operation and maintenance of the Building.

Mr B Wong was of the view that some of the above functional obsolescence cannot be rectified unless the Building is demolished and redeveloped. Before then, the occupiers will have to remain in occupation of a building which is sub-standard or even unsafe by current standards.

(iii)  Finally, thought repairable, the rendering on the external wall surfaces and the waterproofing to roof areas have also passed their respective effective life.

25.Mr B Wong was of the view that the Building is in a poor state of repair. He assessed the total cost of repair works at $7,739,199 which amounts to 40% of the construction cost of a new similar superstructure.  He considered the repair cost disproportionately high and the Building has reached a state which is beyond reasonable economic repair. He recommended the owners to redevelop rather than repair the Building, particularly the Building does not possess any historical value or architectural merit.

26.In view of the above and in the absence of evidence to the contrary, I accept the applicants’ evidence in whole.  In particular, I am satisfied that based on the evidence of Mr CM Wong and Mr B Wong, redevelopment of the Lot is justified due to the age and the state of repair of the Building.

REASONABLE STEPS TO ACQUIRE ALL THE UNDIVIDED SHARES IN THE LOT

27.The applicants are under an obligation to negotiate on terms that are fair and reasonable in a situation when the whereabouts of a minority owner are known.

28.This obligation is however not a mandatory requirement for the applicants vis-à-vis the missing owners.  In fact, the applicants managed to purchase from the minority owners of all the units in the Building save for one that is registered in the ownership of the missing owners. And even before realization of R1 and R2 being the missing owners, the applicants made two offers to acquire their units, one on 12 March 2020 and another on 19 May 2020, both enclosing apportionment letter of Mr C Chan setting out his assessments of values and their share of the redevelopment value (“RDV”) of the Building.

29.In view of above, I am satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot including both the R1 and R2’s Unit. 

RESERVE PRICE FOR THE AUCTION

30.Mr C Chan prepared another supplemental report dated 26 January 2021 for the purpose of assessing the RDV of the Lot as at the same date of the report and on the “on its own” basis. The applicants submit that the reserve price for the auction of the Lot should be fixed at $606,000,000 according to Mr C Chan’s said supplemental report.

31.I have considered Mr C Chan’s valuation of the RDV of the Lot.  I note Mr C Chan had come across a land sale of No 6 Sharp Street East across the street at a consideration of $280,001,400 according to the Acceptance of Offer with Conditions of Sale and Form of Tender Attached registered vide memorial 20032302030021 dated 24 February 2020. This site has a mere site area of 72.15 sq m and accommodation value analysed was $258,722 per sq m. He considered this sale a special purchase for merge site redevelopment and therefore not a suitable as a comparable.

32.I agree with Mr C Chan that as a last resort, the residual method can be employed as the method to assess the Lot’s RDV. 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.

33.Notwithstanding the Lot has a net built over area of 215.8027 sq m, it is of a longitudinal shape with a short site frontage of 6.7819m onto Sharp Street East. Mr C Chan was of the view that the optimum development on the Lot would be a 23-storey Ginza-type commercial building with entrance lobby and a retail unit on G/F, commercial units on upper floors, and major mechanical & electrical facilities on 21/F and 22/F.  Details of the hypothetical development and residual valuation set out in Appendix II (Bundle D/121). Details of the comparables with adjustments in Appendix IV (for shops at Bundle D/125-126) and Appendix VI (for commercial units on upper floors at Bundle D/129-130). Mr C 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 III (Bundle D/123).  The valuation arrived at was $606,000,000.

34.In the absence of evidence to the contrary, I am satisfied with Mr C Chan’s valuation. I also accept the valuation assumptions he has adopted as well as the values and the costs parameters he has used in his valuation. 

35.Based on Mr C Chan’s valuation, I come to the view that the reserve price for the auction of the Lot should be HK$606,000,000.

TRUSTEES

36.The applicants proposed to appoint Mr Ma Ho Fai and Ms Hung Suet Shan Catherine, both being partners of Messrs Woo Kwan Lee & Lo, Solicitors, Notaries, Agents for Trademarks & Patents, as the sale trustees.  Based on the information on their background and experience as set out in the letter dated 13 January 2021 from their firm, we are satisfied that they are proper persons to be appointed.  Their remuneration at the rate of HK$5,800 per hour (exclusive of disbursements) as mentioned in the letter is also reasonable and is hereby allowed.

PARTICULARS AND CONDITIONS OF SALE OF THE LOT

37.Mr Mok has submitted a set of draft particulars and conditions of sale by public auction for our consideration[4].  While we understand these are the usual terms used for compulsory sale, we approve the draft particulars and conditions of sale accordingly.

CONCLUSION AND ORDERS

38.By reasons of the aforesaid, I am satisfied that the redevelopment of the Lot is justified due to the age and state of repair of the Building; and the applicants have taken reasonable steps to acquire the undivided shares of the Lot. This Tribunal is also satisfied that the value of the minority owners’ unit as assessed in the Application are not less than fair and reasonable, and not less than fair and reasonable when compared with the value of the applicants’ property as assessed in the Application.  This tribunal now makes the following orders:

(i)  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;

(ii)  Mr Ma Ho Fai and Ms Hung Suet Shan Catherine nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to the Lot; and the Trustees be authorized to charge such remuneration for their service in accordance with the terms set out in the letter from Messrs Woo Kwan Lee & Lo dated 13 January 2021;

(iii)  For the purpose of the sale of the Lot by public auction,

(a)  The sale of the Lot be on particulars and conditions of sale substantially the same as the set of draft Particulars and Conditions of Sale submitted to the tribunal (Document Bundle C2/326-352) initialled and approved by me;

(b)  The reserve price of the Lot be set at HK$606,000,000;

(c)  Subject to further extension 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 be completed and made fit for occupation within a period of six (6) years after the date on which the purchaser of the Lot becomes the owner of the Lot;

(iv)  There be liberty to the applicants, the respondents and the Trustees to apply for further directions.

COSTS

39.I make a costs order nisi that there be no order as to costs between the parties, such order be made absolute after 14 days if no application is made to vary the said costs order.

Mr Y C Mok, instructed by Messrs Mayer Brown, for the applicants

The 1^st and 2^nd respondent were not represented and did not appear

Appendix 1