Smart Host Ltd v. Acewell Investments Ltd
Read the full judgment text of LDCS 29000/2020 on BabelCite. This LDCS judgment was delivered on 11 July 2022.
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 following lots (“the Lots”):
Cited by 2 cases · Cites 5 cases
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LDCS 29000/2020 [2022] HKLdT 27 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LAND COMPULSORY SALE MAIN APPLICATION NO 29000 OF 2020 __________________________
__________________________ Before: Mr Lawrence Pang, Member of the Lands Tribunal Dates of Hearing: : 6 - 8 June 2022 Date of Inspection: 6 June 2022 Date of Closing Submissions: 10 June 2022 Date of Judgment: 11 July 2022 _________________ 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 following lots (“the Lots”):
2.The Lots, like many other lots in the vicinity, are held on lease from Government for a term of 999 years from 1 January1894. In Lee Bing Cheung v Secretary for Justice, HCA 1092/2010 (unreported, 21 February 2013), Deputy High Court Judge Marlene Ng (as she then was) held at §164 as follows:
3.Standing on the Lots is a pair of 6-storey tenement buildings (“the Buildings”) the occupation permit of which[1] was issued on 22 November 1965 permitting 2 shops for non-domestic use on ground floor (“G/F”) and 2 tenements for domestic use on each of 1/F to 4/F; only 1 tenement for domestic use was planned on 5/F. The buildings are served by one common staircase. 4.On 17 May 2022, the parties informed the Tribunal by their joint letter of their common ground that, inter alia, if an order for sale of the Lots shall be made, the parties invite the Tribunal to make a direction to sell the Lots together with the following adjoining lots as a merged site (“the Merged Site”) in one public auction:
which are hereinafter collectively referred to as the “Adjoining Lots”. 5.In view of the above, the parties intend to have the auction of the whole parade of tenement buildings standing west of the junction of Sun Chun Street and Ormsby Street towards the southwest to its end. This section of Sun Chun Street is a cul-de-sac. 6.Each of Lot 1 and Lot 2 is governed by its own Deed of Mutual Covenant (“DMC”) with each unit on each floor having been allotted 1/6 of the undivided share of their respective lot. 7.As at the date of the Application on 28 September 2020, the applicant already owned 100% of Lot 1 and 5/6 of the undivided shares of Lot 2; the respondent owned only the G/F of the Buildings at No 24 Sun Chun Street, ie the remaining 1/6 (ie 16.67%) of the undivided shares of the Lot 2. 8.Ms Nancy Ngai (“Ms Ngai”) acts on behalf of the applicant and Ms Astina Au acts on behalf of the respondent. The Issues in the Application 9.Ms Ngai identified the following issues to be determined by the Tribunal, namely: -
The Evidence 10.The applicants filed, inter alia, the following documents in support of the application:
11.The respondent filed, inter alia, the following:
12.Ms Chow and Dr Wong have also prepared a joint statement one dated 12 August 2021 setting out their agreements and disagreements mainly on EUV, followed by another one dated 20 May 2022 on RDV (“2nd Valuation Joint Statement”). 13.In effect, Ms Chow and Dr Wong have reached agreement on the EUV of all the domestic units in the Buildings. They have also revised their respective assessment of EUV of the two shops on G/F of the Buildings and RDV of the Merged Site. In respect of the latter, the only remaining matter in dispute is the gross development value (“GDV”) of the retail portion of the hypothetical development. Whether the Applicant is entitled to make the Application 14.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. 15.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. 16.The Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice was gazetted 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:
17.Either Lot 1 or Lot 2 is one with each of the units thereon representing 16.667% of the total undivided shares (ie more than 10% of all the undivided shares in the Lot 1 or Lot 2 respectively), and since the occupation permit for the Buildings was issued on 22 November 1965 (ie not less than 50 years before the date of the Application), the Notice is applicable and the threshold percentage should be 80%. 18.The applicant, owning an average of 91.66% of the undivided shares of Lot 1 and Lot 2 at the commencement of the Application, was entitled to file the Application under section 3(2)(b) of the Ordinance which may cover two or more lots—
EUV as at 21 July 2020 Assessment of EUV of G/F Units 19.In compliance with Part 1 of Schedule 1 to the Ordinance, the applicants filed a valuation report dated 25 September 2020 (ie the Application Report) prepared by Ms Chow to set out the assessed market value of each property on the Lots—
20.In the Valuation Joint Statement dated 12 August 2021, Ms Chow and Dr Wong agreed the particulars of the G/F units of the Buildings as follows[2]:
21.As regards the conversion to the effective floor area* above, Ms Chow and Dr Wong could not agree on the conversion factor for the rear yard which opens (if it is indeed opened) to a rear lane which Dr Wong called the 2nd section of Sun Chun Street (because there are altogether four street/lane running in parallel to each other but all named Sun Chun Street). Dr Wong considered there should be much value as the rear lane (ie the 2nd section of Sun Chun Street) is wide and many premises in the vicinity which are occupied by cafés, bars or small restaurants do make use of the similar rear lanes for sitting area. Ms Chow considered otherwise and adopted 1/6 as the conversion factor as opposed to Dr Wong’s 1/2. Just at the beginning of the trial, Ms Chow revised her conversion factor to 1/5. 22.Indeed, Tai Hang, in which the Lots are located, used to be a residential enclave to the southeast of Tung Lo Wan Road. In recent years, many cafés, bars or small restaurants cropped up at the ground floor of the old residential blocks which have been occupied and dominated by car-repairing workshops. The four sections of Sun Chun Street which run somewhat in parallel to Tung Lo Wan Road are situated towards the end of the enclave abutting a retaining wall of a residential development, Illumination Terrace, up on the hill. The four sections of Sun Chun Street are however farthest away from Tung Lo Wan Road and are traversed by Ormsby Street which runs next to Wun Sha Street, the widest local artery in the enclave leading from Tung Lo Wan Road up to the hillside at the end of which a school and the entrance to Illumination Terrace are located. Patrons of the eateries may park their cars along Wun Sha Street and walk towards the west into the inner streets. 23.As said, the four sections of Sun Chun Street are farthest away from Tung Lo Wan Road and the cafés, bars or small restaurants are mainly along the streets closer to Tung Lo Wan Road, namely School Street, King Street, Shepherd Street (hereinafter collectively referred to as “the Streets”), then the 1st section Sun Chun Street and the 3rd section etc or at the corner of the street junctions. The 2nd section of Sun Chun Street or the 4th section of Sun Chun Street, like intervening lanes between the Streets, are relatively narrow. The 2nd section of Sun Chun Street which the Lots abut at the back have no shop fronts anyway. I do not agree with Dr Wong that this 2nd section of Sun Chun Street behind the Buildings may be used as outdoor waiting and seating area[3]. In the latter regard, I share Ms Chow’s initial view that the so-called second frontage to the rear lane does not add value to the retail units. Therefore, I do not agree with Ms Chow’s concession on the conversion factor of the rear yard at 1/5 and would continue to adopt the conversion factor at 1/6 for the purpose of direct comparison analysis. Nevertheless, I am prepared to adopt Ms Chow’s concession to assess the EUV of the respective units. 24.G/F of No 23 Sun Chun Street is adopted by the valuation experts as the Reference Shop Unit. Ms Chow assessed the EUV of the Reference Shop Unit as at 21 July 2020 at $353,500 per sq m while Dr Wong assessed at $568,400 per sq m. 25.The two valuation experts have adopted the following comparables for valuation on direct sales comparison basis:[4]
26.Again, Ms Chow and Dr Wong could not agree on the conversion factor for the rear yards which open (if they are indeed opened) to a rear lane of the last two comparables on King Street**. Neither was I aware of any shop front along this rear lane which is named Second Lane and for similar reason above, I adopt Ms Chow’s conversion factor of the rear yard at 1/5. 27.Notwithstanding the above, Ms Chow and Dr Wong had the following agreements or disagreements on the adjustments[5]:
28.Thus the various adjustments proposed by Ms Chow are shown in the following table (while those by Dr Wong, if different from Ms Chow, are shown in the parenthesis):[6]
Adjustment for Location 29.From the above, the greatest differences in opinion between Ms Chow and Dr Wong lie on the location adjustments. 30.Although all the comparables proposed by the valuation experts are located in the same Tai Hang enclave, it is quite obvious that the farthest away from Tung Lo Wan Road, or more particularly from Wun Sha Street, the lowest are the values of the shops. For instance, all these comparables are being occupied by cafés, bars or small restaurants but the shops in the Buildings are still occupied as car-repairing workshops. 31.Perhaps owing to historical reasons, most of the cafés, bars or small restaurants are found on streets closest to the junction of Tung Lo Wan Road and Wun Sha Street or at the various junctions of the Streets with streets that lead from Tung Lo Wan Road, particularly Ormsby Street. In such regard, I agree with Ms Chow that the last two comparables proposed by Dr Wong at King Street are not good comparables and if they are to be adopted, significant adjustments as much as -60% could be appropriate. I am of the view that nobody preparing to open a café, bar or small restaurant, not to mention a high-end one as suggested by Dr Wong, would consider either of the shops in the Building. With respect, I consider Ms Au’s criticism of Ms Chow’s belated concession on Day 2 of the trial in adopting comparables ES5 and ES6 misplaced. 32.I have similar observation in regard of the comparables at Shepherd Street, ie comparables ES2 & ES3; but in respect of comparables ES3, on the one hand, it is situated at the advantageous position being at junction of Shepherd Street and Brown Street. On the other hand, a refuse collection point and a public toilet are situated immediately across the street junction. While Dr Wong acknowledged that the latter constitutes a nuisance and is very undesirable for the high-end food and beverage business, I consider Ms Chow not a heavy handed shaver in applying location adjustments of -20% and -15% respectively; I would apply a higher adjustment of about -40% for both, a progressive reduction further away from Tung Lo Wan Road. 33.In terms of proximity, comparable ES1 is closest to the shops in the Buildings, being lying on the same street. However, this comparable occupies a corner position which is visible when people walk along Ormsby Street towards its end. In addition, this comparable is a distance away from the car-parking workshops for instance occupying the shops in the Buildings. I consider Ms Chow’s location adjustment of -2% not adequate; I would be prepared to allow a higher adjustment of -20%. 34.What is left is comparable ES4 which is situated on Ormsby Street not very far away from comparable ES1. However, it is quite a distance from Tung Lo Wan Road as admitted by Dr Wong in his Rebuttal Report dated 23 July 2021 at para 4.2.17, “this section of Ormsby Street is a cul-de-sac with very low pedestrian flow”[7] . I am prepared to apply -30% for location. 35.At this juncture, it is noted that Ms Chow considered this comparable not suitable because, according to her, there is likely to be “a hope value for redevelopment” resulting from “site assembly activities” in 2010 to 2011 in the building. Ms Chow has provided a table of ownership in support of her opinion:[8]
36.Although it appears that Ms Chow was correct in that the applicant was interested in acquiring the majority interest of this building at 19 & 21 Ormsby Street, for reasons unknown, the acquisition process was stopped after 2011. Then in July 2014, Fairview Corporation Limited, which turns out to be associated with the respondent in the present case, acquired G/F, 21 Ormsby Street. Further, in July 2017, comparable ES4 was acquired by Wiser Ever Limited which appears to be an unrelated third party. I agree with Ms Au that this comparable ES4 is not subject to any sufficiently significant hope value for redevelopment. 37.On the face of the above evidence, I am content to include ES4 as a comparable because it is situated relatively close to the shops in the Building and is particularly the only comparable which was transacted closest to the valuation date of 21 July 2020 (though it is of itself dated). Adjustment for Age 38.As can be seen from the comparables above, they are located in buildings of having a wide range of ages, from 1959 for comparable ES6 to 1988 for comparable ES2, all being occupied by eateries. In such regard, I tend to agree with Dr Wong that a less sensitive adjustment of 0.1% per year’s difference is reasonable. Adjustment for Quantum/ Size 39.In view of the relative small size of the shops in the Building, their values would be sensitive to changes in sizes. This would especially be the case when the comparables are occupied as café, bar or small restaurant. In such regard, comparable ES3 is too large as a comparable when it has a saleable area of about 98 sq m which is about 3 times larger than the shops in the Building. The same comment is also applicable to comparable ES1 which is about 3 times as large. I prefer therefore Dr Wong’s adjustment of 1% for 2 m2. Adjustment for Layout 40.Dr Wong for instance applied a -3% adjustment for layout to comparable ES2 for what he described as awkward shape of the cockloft of this comparable. I do not consider it justified as the inverted L-shape or dumbbell shape is not so adverse as it is in relation to the cockloft which is less valuable than the ground floor; the narrowest portion, according to the floor plan, still consists of some 2 metres. 41.Similarly, I consider Dr Wong’s adjustment of -3% for comparable ES6 not justified when the so-called recessed portion comprises only the washrooms at the back. Adjustment for Depth 42.In the valuation of a shop, the front portion is usually considered most valuable as it provides the most prominent selling space. For restaurant premises, it is not uncommon to find that the majority of the front or the seats by the frontage or the glass are the most popular. In this regard, I prefer to adopt the adjustments for depth as proposed by Dr Wong. I am not persuaded that as suggested by Ms Chow, such allowance has been factored in in her layout adjustment on which she did not apply anything. Adjustment for Headroom 43.As explained by Dr Wong in his Rebuttal Report dated 23 July 2021, the cocklofts being provided at the comparable premises have resulted in a lower headroom for the ground floor in the rear portion. Thus, so long as value has been assigned to the cocklofts at ¼ of that of the ground floor, Ms Chow’s adjustment approach based on full headroom may have allowed double benefits for those units having a cockloft constructed. 44.Ms Chow said in the witness box that for those shops with a cockloft, she found the void areas were installed with air-conditioning outlets and lightings. Ms Chow opined that it would be appropriate to take the headroom underneath cockloft as the headroom of the G/F part. With respect, I consider the higher headroom say in the front portion of a shop would give an impression of grandness and a less oppressive environment for the patrons. 45.I prefer Dr Wong’s approach on the basis of weighted headroom and adopt his adjustment at 3% per m difference. In any event, the percentage adjustments proposed by the two valuation experts are not significantly different. Adjustment for Return Frontage 46.Having carried the joint inspection, I consider a uniform adjustment of -10% appropriate for shops having the return frontages. For instance, comparable ES4 is particularly small in size, the presence of a return frontage improves accessibility and attraction. 47.On the other hand, I would not allow any additional adjustment for the so-called rear frontage onto the rear lane by Dr Wong. 48.Thus, on the basis of the above discussion, the adjustments for the comparables would have been as follows:
49.Notwithstanding the above adjustments, the transaction of G/F, 19 Ormsby Street appears to be the best comparable in terms of timing and location, the two very important factors of adjustments. Simply averaging the results of the adjustment process to develop an averaged value fails to recognize the relative comparability of the individual transactions as indicated by the size of the total adjustments and the reliability of the adjustments. The sale that requires the least significant or lowest total adjustment (in absolute terms regardless of sign) is often the best comparable. Generally, more weight should be given to this best comparable in reconciling the value indications from the direct comparison approach. 50.I am content to adopt $400,000 per sq m as the EUV for G/F, 23 Sun Chun Street and therefore the EUVs of the 2 shops in the Buildings are shown as follows:
51.Certainly, what percentage adjustment should be made for each of the factors is not a form of exact science but more a matter of professional adjustment, which involves certain degree of subjectiveness. There are also no hard and fast rules in the exercise. 52.Nevertheless, as a matter of valuation practice, comparables needing large adjustment should be avoided, especially when such an adjustment is based essentially on intuition, impression or more euphemistically called professional judgment. At this juncture, I have to mention that Ms Chow has carried out certain pairing analysis in support her proposed adjustments for location by making reference to the respective tenancy agreements of the following units:[9]
53.Without going into details of Ms Chow’s analysis, she arrived at the following:
54.Dr Wong did not agree to Ms Chow’s analysis above for the following reasons:[10]
55.In the present case, a usual comparison exercise turns out to be a complicated issue. The comparison method is the simplest approach to valuation and, as its name implies, it works on the principle that the value of one property may be derived by comparing it with prices achieved from transactions of similar properties. Unfortunately, no similar properties can be found as comparables in the present case. As said, all these comparables are being occupied by cafés, bars or small restaurants but the shops in the Buildings are still occupied as car-repairing workshops. I am of the view that nobody preparing to open a café, bar or small restaurant, not to mention a high-end one as suggested by Dr Wong, would consider either of the shops in the Buildings which lie at a recessed position near the cul-de-sac of the 3rd section of Sun Chun Street as well as Ormsby Street. 56.What is worse is that the so-called comparables adopted by both the valuation experts are in respect of transactions few years earlier than the relevant valuation date, with most of them occurring in 2013. Many of the criticisms by Dr Wong about the application of rental index against Ms Chow’s pairing analysis are similarly applicable to the comparables he adopted as well. As a result, I agree to adopt Ms Chow’s pairing analysis as secondary or indirect support for instance of the location adjustments. 57.In Union Carbide Asia Ltd v Hong Kong Lands Co Ltd [1982] HKDCLR 75 at §§43-44, the Tribunal remarked that:
58.Firstly, I agree that the capital and rental markets can move in different directions and/or with different paces. Capital market or the capital value of a property can comprise a speculative element, particularly on the growth prospect. Whereas the relation of the capital value is linked to its rental value by an all-risk yield, the higher the growth prospect, the low would be the yield. Therefore, when Dr Wong referred to “the subject Tai Hang locality, a location gradually changing into a dynamic dinning and leisure spot in the past years”, the all-risk yield expected by the purchasers of the comparables in 2013 or 2014 could only be lower than that for the shops in the Buildings. Assume for instance, the market rental of 24 Sun Chun Street in 2013 was r and its all-risk yield was y, resulting in its market value as M. Ms Chow now found the rental of L1 & L2 was about R whereas r = R x (1-60%[11]) = R x 40%. 59.Let’s say y is 10% higher than that for either L1 or L2 at z,
60.Then market value M = r ÷ y = 40%R/1.1z
That is the adjustment between T and M would be higher than the -60% found by Ms Chow. 61.Of course, in her analysis, Ms Chow did not allow the rentals for L1 or L2 which was inclusive of rates (which has been set at 5% of the rateable value by Government) and management fee. But even with that in mind, the difference could still be around -60% as only nominal government rent would be payable for those premises in the vicinity having a lease term for the Government for 999 years from 1 January 1894. 62.As regards Dr Wong’s comment that the rental of No 24 Sun Chun Street involved a renewal tenancy of a long-term tenant of a property subject to potential compulsory sale for redevelopment, Mr Chow on behalf of the respondent had prepared a witness statement dated 1 April 2021 which stated as follows:
63.In the 2nd Joint Expert Statement dated 20 May 2022, Ms Chow had referred to the monthly rent of $18,300 under tenancy agreement dated 29 October 2019 entered into between the respondent and陳志輝經營亞坤車房. Ms Chow compared the rental with that under the lease for Shop A on Ground Floor, Sunrise Court, Nos 42-44 Tung Lo Wan Road (comparable G4) as another rental pairing analysis for location adjustment and arrived at -43%[12]. 64.In response, Mr Chow prepared a Supplemental Witness Statement dated 2 June 2022 which comprised the following:
65.Well said. But the difficulties that may be encountered by the respondent would have been similarly experienced by other property investors over the territory. The table below shows the historical rental pursued or secured by the respondent when compared with the corresponding Private Retail Rental Index published by RVD. It demonstrates the rental increase/decrease more or less followed the territory-wide or market movements perhaps before the applicant formerly made the Application on 28 September 2020:
66.By reference to the latest renewal of the tenancy agreement in 2021, however, it is futile for the respondent to argue that the prospect of redevelopment along this section of Sun Chun Street may have a dampening effect on the rental of G/F, 24 Sun Chun Street. 67.Perhaps just by looking at a comparison between the letting of G/F, 24 Sun Chun Street and that of Rear Portion on G/F (formerly designated as Shop B on G/F), 40 Sun Chun Street (ie LR), which comprises a corner unit facing Ormsby Street with a return frontage (which is not even opened) onto the 4th section of Sun Chun Street, one can determine whether the rental reserved for G/F, 24 Sun Chun Street ie the Reference Unit, in the October 2013 tenancy was reasonable or otherwise:
68.Firstly, I cannot agree with Dr. Wong that the location of this comparable LR is inferior to G/F, 24 Sun Chun Street. In the least, it is visible along Ormsby Street whereas the Reference Unit was recessed behind the corner of the street. 69.This resulting adjusted unit rent, in the absence of location adjustment, shows it was comparable with that of G/F, 24 Sun Chun Street at $675/ m2 with just a marginal difference of 3.5%. 70.Also as it also turned out, the respondent and its associated companies has been veteran shop investors in the market. They were/are owner of the following properties:
71.In light of the above, I am not convinced that the rental reserved at $16,000 per month for G/F, 24 Sun Chun Street in October 2013 deviated much (if any) from the market. I consider appropriate for Ms Chow to conduct her rental pairing analysis on the basis of it. 72.In respect of the 2nd pairing analysis between G/F, 24 Sun Chun Street and G/F & Cockloft, 42-43 Sun Chun Street, in light of the diverging result arrived by Ms Chow, I carry out a review and find $675, the unit rental for G/F, 24 Sun Chun Street versus $778, ie a location adjustment of about -13.0%:
73.Similarly, I carry out a review of the 3rd pairing analysis between G/F, 24 Sun Chun Street and L4, L5 and L6 respectively and find a location adjustment of about -33%:
74.The above does not deviate much from Ms Chow’s analysis. 75.As regards Dr Wong’s concern that what happened in 2013 may not be still the case in 2020, I observe no material changes in the section along Ormsby Street; For instance, “龍鳳冰室” and “Hello Kitty Secret Garden” that used to occupy Shops D, E, F (and yard) on G/F and Flat B on M/F, Chuen Hing Building, 6 & 6A Wun Sha Street and G/F, 19 Ormsby Street (ie comparable ES4) respectively had come and gone. The findings from the rental pairing analysis are consistent with my location adjustments adopted earlier in the direct comparison analysis. 76.I am also not persuaded that the monthly rental for G/F, 24 Sun Chun Street could be as much as $23,000 to $25,000 in October 2019. As said in §36 above, the respondent’s associated company, Fairview Corporation Limited, owned G/F, 21 Ormsby Street since 2014. By reference to a tenancy agreement dated 27 September 2018[18], Fairview Corporation Limited let again the premises for use as a restaurant for a term of 3 years from 18 September 2018 to 17 September 2021 at $26,000 per month exclusive of rates, management fees etc. G/F, 21 Ormsby Street is situated next to G/F, 19 Ormsby Street but further down the street; Unlike G/F, 19 Ormsby Street which has a return frontage attracting the oncoming pedestrians, the return frontage of G/F, 21 Ormsby Street opens to the 3rd section of Sun Chun Street facing the end of the street. It has a saleable area of 15’0” x 21’6” (4.57m x 6.55m) = 29.96 sq m. That is, the $26,000 per month in September 2018 yielded a unit rental about $868 per sq m. 77.As suggested by Mr Chow, “the social unrest in 2019 had adversely affected the Tenant’s business”. The corresponding rental index dropped from 188.0 in September 2018 to 183.1 in October 2019, ie -2.6%. Then there is a difference in location say -25% in location, ie mid-way between -30% for G/F, 19 Ormsby Street and -20% G/F & C/L, 42-43 Sun Chun Street (ie ES1) across the street: “large variations in value can be found within a comparatively short distance”[19]. The market rent for G/F, 24 Sun Chun Street is estimated by reference to the following adjustments:
78.That is the market rent for G/F, 24 Sun Chun Street, as at October 2019, was approximately 23.61m2 x $602/m2 = $14,213 per month, which is even lower than $18,300 per month reserved in the tenancy agreement in October 2019. Ever if I reduce the location adjustment to -15% the adjusted monthly rent would be $683 and 23.61m2 x 683/m2=$16,126. 79.For similar reason, I am not convinced that “the monthly rental of the Unit had become around HK$25,000 to HK$28,000 per month” in October 2021 as suggested by Mr Chow. Indeed, he produced a copy of the tenancy agreement dated 11 October 2021 in respect of G/F, No 12 Sun Chun Street which is owned by the respondent[20]. By virtue of clause 2.22 of this tenancy agreement, the premises which is situated on the 1st section of Sun Chun Street can only be used for operating the tenant’s business as a motorcycle workshop and café and the rental reserved was as follows:
80.This 1st section of Sun Chun Street, though a relatively quiet street, is a local access that vehicles can pass from its junction with Ormsby Street, then its junction with Brown Street all the way to its junction at Warren Street where some new residential development like Warrenwoods (2012), The Warren (2014) and Jones Hive (2016) were built. More particularly, it is not a cul-de-sac on which G/F, No 24 Sun Chun Street is situated. Two small restaurants are situated at Nos 14 and 16 Sun Chun Street respectively and there is another one across the street. It deserves an adjustment for location, like that for G/F & C/L, 42 & 43 Sun Chun Street (ie comparable ES1), at -20% in the least. 81.Alternatively, in Mobil Oil Hong Kong Limited v Commissioner of Rating and Valuation [1993] HKDCLR 77, in the determination of the rateable value as at 1 July 1990, the Tribunal could not find any useful comparable evidence save an earlier agreement (“the BP Agreement”) in respect of 36.7% of the subject tenement some 3 years earlier. While the Tribunal recorded the danger of relying on only comparable, it held that it was desirable, at least as a check. 82.In the present case, it is not disputed that the respondent acquired G/F, 24 Sun Chun Street in the sum of $1,680,000 pursuant to an Agreement for Sale and Purchase dated 5 December 2008. At that time, the Private Retail Price Index was 170.2 but as at 21 July 2020, it was 525.7. Thus, as a rough check by reference to the index only, the market value of G/F, 24 Sun Chun Street as at 21 July 2020 would be approximately $5,200,000 without any redevelopment potential of the Buildings or the Lots. Certainly, the RVD index is a general index which covers all the territory-wide properties in a particular class may not be strictly applicable to a particular property at a particular location. The longer the time span, the less reliable would be the index. 83.Having reviewed the above, I am satisfied that the EUVs of G/F, 23 Sun Chun Street and G/F, 24 Sun Chun Street are $10,400,000 and $9,500,000[21] respectively without taking into account the redevelopment potential of the Buildings or the Lots. Assessment of EUV of Upper Floor Domestic Units 84.Notwithstanding the above, Ms Chow and Dr Wong had agreed the EUV of the all the domestic unit above the ground floor as at 21 July 2020 as follows:[22]
Conclusion on EUV 85.The total EUV of the Buildings is therefore $10,400,000 + $9,500,000 + $28,860,000 = $48,760,000 and the pro rata shares of respondents’ interest is 19.4832%. Whether Redevelopment of the Lot is Justified on “Age” or “State of Repair” 86.Section 4(2)(a) of the Ordinance stipulates that the Tribunal shall not make an order for sale unless it is satisfied that redevelopment of the Lot due to the “age or state of repair” of the Building is justified. Experts’ Evidence 87.On this issue, the applicants adduced the Condition Survey Report dated 30 March 2021 by Mr Dennis Wong, the Building Surveyor and the Structural Assessment Report dated 24 March 2021 by Mr CM Wong, the Structural Engineer. 88.In the Structural Survey Report, Mr CM Wong concluded as follows:[23]
89.Mr CM Wong recommended that hammer tapping works be carried out to find out the extent of spalling and cracking in the structural members and any defects such as spalling and cracks discovered together with the spalling and cracks already identified to be patched repaired. 90.Based on the test results, Mr CM Wong concluded that the deterioration of the structural elements, especially the slabs and beams, 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. 91.In the Condition Survey Report, Mr Dennis Wong concluded that[24]:
92.The respondent had not adduced any evidence to rebut either the Condition Survey Report dated 30 March 2021 by Mr Dennis Wong or the Structural Assessment Report dated 24 March 2021 by Mr CM Wong. Neither were they cross-examined. 93.Having considered the evidence before the Tribunal, on the basis of a holistic approach, I am satisfied that redevelopment of the Buildings is justified due to the age and state of repair. Section 4(2)(b) – Whether Applicant has taken reasonable steps 94.The applicant is under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interest of the respondent under section 4(2)(b) of the Ordinance. 95.As mentioned in the supplemental witness statement of Ms Lui dated 20 May 2022, the applicant had, based on the assessments by its valuation expert and through its solicitors Messrs So, Lung & Associates, made the following offers to acquire the respondent’s interest:
96.Obviously, these offers were higher than the EUV as determined by me at §83 above. 97.Ms Ngai submitted that all the offer prices are more than fair and reasonable for the following reasons:
98.I agree with Ms Ngai’s submission. In respect of the latter, in particular, by including the lot on which the building at No 25 Sun Chun Street is standing, the Merged Site has changed from a Class A site to a Class B site under the Building (Planning) Regulations which would enjoy a much higher plot ratio in redevelopment. In addition, the total site area of the Lots at 78.50 sq m is too small to meet the requirements of Part V of the Building (Planning) Regulations. Dr Wong admitted, in his Rebuttal Report on RDV dated 23 July 2021 at §4.3.2, that: “Amid the minimal requirements on the lift and staircase provisions, the efficiency of a development on a site having an area of less than 100 square metres would be highly affected.”[25] 99.On the other hand, the site at Nos 17A-23 Sun Chun Street, which comprises an area of 298.03 sq m, has been capable of redevelopment on its own with a high-rise building of plot ratio about 8.6. The offers by the applicant on the basis of the combined area of the Merged Site will turn the whole site into a Class B site having a plot ratio up to 9.5. 100.The Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363 (“Capital Well”) emphasized at §33 that:
101.In Intelligent House Ltd 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:
102.At the material time, Ms Chow was working as Senior Director of Jones Lang La Salle Limited, another reputable firm of valuers. 103.On the evidence available, therefore, I am satisfied that the applicant has taken reasonable steps to acquire all the undivided shares in the Lots including negotiating for the purchase of the share owned by the respondent on terms that are fair and reasonable. Disputes on the estimation of the RDV of the Lots Hypothetical Development Model 104.Both Ms Chow and Dr Wong agreed to resort to the residual valuation method in determining the Merged Site RDV. This can be done by deducting the 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. 105.Prior to the beginning of the trial, the applicant had agreed to adopt Dr Wong’s opinion in respect of the following matters insofar as the assessment of the Merged Site RDV is concerned in order to further narrow down the issues in disputes between the parties and for the purposes of saving time and costs:
106.Hence, insofar as the valuation of the Merged Site RDV is concerned, the only remaining matter in dispute is the GDV of the G/F retail portion of the hypothetical development. 107.In view of the dearth of good comparables, both Ms Chow and Dr Wong adopted the same set of comparables as those for assessing the EUV. But in addition, one more recent transaction was suggested by Dr Wong:
108.This new comparable is situated at the westerly fringe of the Tai Hang enclave. The only advantage of this comparable is its proximity to a bus terminal across Tung Lo Wan Road. In spite of this, pedestrian flow appears to be light or minimal unless people purposely want to enter into the Tai Hang enclave. Currently it is occupied as a frozen food store and its size, appearing to me, is too small for a café, bar or restaurant. This is particularly the case when Dr Wong proposed a hypothetical shop unit having a saleable area as much as 57.138 sq m. I do not consider it a useful comparable particularly when a Merged Site development is assumed. 109.On the other hand, I note that this comparable, transacted in 2021, only achieved a unit price of $581,220 per sq m despite its small size. It serves to demonstrate that, despite the lapse of so many years since, for instance, 2013, there has been no material change in retail potential in the Tai Hang enclave. Whereas for all the other comparables adopted for assessing the EUV, they are also not so useful as well because upon the redevelopment of the Merged Site, which has a total site area of 417.78 sq m[27], it will significantly enhance the environment and trading potential of the shops on G/F. 110.Without going into the details of the two valuation experts’ analysis therefore, I prefer Dr Wong’s assessment at $636,039 per sq m to that of Ms Chow’s $423,100 per sq m. Whereas the former resembles closely the unit price of G/F, 19 Ormsby Street at $605,280 per sq m before any adjustment, the latter only represents some 5% increase from the unit rate for the EUV which, I consider, is grossly inadequate. 111.Thus, I shall follow the assessment by Dr Wong as shown in his Consequential Amendments to the RDV Assessment of Nos 17-25 Sun Chun Street as per Second Joint Statement of Experts dated 20 May 2022. He arrived at a RDV of $588,700,000 which is equivalent to an accommodation value of $147,628 per sq m.[28] 112.In Capital Well, supra, the Court of Final Appeal had the following observation near the end of the judgment:
113.The Application is exactly the case where the applicant qualifies for the making of such a compulsory order and wishes to have the Lots put up for auction together with the Adjoining Lots wholly owned by it. I therefore determine the reserve price of the Lots together with the Adjoining Lot as a Merged Site at $588,700,000. Other Incidental Matters 114.The applicant proposed to appoint Mr Anthony Chow and Ms Anna Chow, both being consultants of Messrs Guantao & Chow, Solicitors & Notaries, as the sale trustees. Based on the information on their background and experience as set out in their letter dated 17 March 2022[29], I am satisfied that they are proper persons to be appointed as trustees to discharge the duties imposed on the trustees under the Ordinance. The remuneration package proposed in the said letter appears reasonable. 115.The applicant has prepared a set of draft Particulars and Conditions of Sale of the Merged Site. Subject to any amendment that may become necessary as a result of my ruling on the arrangement of auction above, the particulars and conditions of sale of the Merged Site by public auction submitted by the applicant are also reasonable. Order 116.This Tribunal make the following orders:
Costs 117.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, I order that the applicant do pay the respondent the costs of the Application, to be taxed on the High Court scale if not agreed. 118.Last but not least, the Tribunal thank Counsel for their assistance.
Ms Nancy Ngai instructed by Messrs So, Lung & Associates, Solicitors, for the Applicant Ms Astina Au, instructed by Messrs Deacons, solicitors for the Respondent [1] Occupation Permit No H309/65. [2] See Bundle D3/823. [3] The reference by Dr Wong to “炳記茶檔which occupies the rear portion of No 5 Shepherd Street is perhaps the only exception as in fact, it enjoys a frontage onto Ormsby Street at its junction with Third Lane and therefore makes use of the front part of Third Lane as some sort of outdoor seating area. Its position is just like No 19 Ormsby Street which was previously occupied by “Hello Kitty Secret Garden” until early 2019 or the corner shop at Shop A, G/F including Open Yard, Sze Hai Building, 12 & 13 (ie ES3). See photo R3 on page 11 and photo R7 on page 13 of Exhibit AR1. [4] See Exhibit A7. [5] See Bundle D3/826-827. [6] See Exhibit A7. [7] See Bundle D3/727. [8] See Bundle D2/379. [9] See Exhibits A3, A4, A5 & A6. [10] See Bundle D3/999-1001. [11] The average of -63% and -57% is about -60%. [12] See Bundle D3/1067. [13] See Bundle D3/1015-1018. [14] See Bundle D3/81.8. [15] See Bundle D3/81.12. [16] See Bundle D3/81.15. [17] See Bundle D3/81.23. [18] See Exhibit R2. [19] See Eric Shapiro, David Mackmin and Gary Sams, Modern Methods of Valuation, 12th Edn, 2019, Routledge at p 327. [20] See Exhibit R3. [21] Incidentally, Ms Chow arrived at a value of $9.150,000 before she agreed to adopt the two comparables on King Street, ie ES5 and ES6: See Exhibit A1 (c). [22] See Bundle D3/828. [23] Bundle E2/344-346. [24] See Bundle E1/69-72. [25] See Bundle D3/751. [26] 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.” [27] See Bundle D1/243. [28] See Bundle D3/1073. [29] See Bundle C/269-270. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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