668a Ltd v. Yim Yiu Ying (嚴瑤英), The Administratrix of the Estate of Ho Lye Yuen (何乃源), Deceased, By Ho Yuen Lau (何遠流), The Guardian Ad Litem of Yim Yiu Ying (嚴瑤英) and Others

LDCS 5000/2022

[2022] HKLdT 57

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 5000 OF 2022

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BETWEEN

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J U D G M E N T

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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 Inland Lot No 5262 (hereinafter referred to as “the Lots) located at Nos 71-79 Ting Fu Street, Ngau Tau Kok, Kowloon.

2.Standing thereon is a 6-storey tenement building (“the Building”) which is served by a single common staircase. The occupation permit of the Buildings, Permit No NK 6/71, was issued on 15 January 1971 permitting the ground floor for 4 shops for non-domestic use and the upper 5 floors for 6 units per floor for domestic use.

3.By reference to the record of the Land Registry, each of the four shops has been allotted 2 of the 38 undivided shares of the Lot while each of the domestic units has been allotted 1 of the 38 undivided shares of the Lot.

4.At the commencement of the Application on 26 April 2022, the applicant owned all the undivided shares of the Lot save for the following:

(a) 2 shares in respect of G/F, 71 Ting Fu Street registered in the ownership of Yim Yiu Ying, the 1^st respondent (“R1”), the administratrix of the estate of Ho Lye Yuen, deceased[1];

(b) 1 share in respect of Flat E, 1/F, 75 Ting Fu Street registered in the ownership of the 2^nd respondent (“R2”);

(c) 2 shares in respect of Flat A and Flat B, 2/F, 75 Ting Fu Street registered in the ownership of the 3^rd respondents (“R3”);

(d) 1 share in respect of Flat A, 4/F, 75 Ting Fu Street registered in the ownership of the 4^th respondent (“R4”);

(e) 1 share in respect of Flat E, 5/F and its Immediate Roof, 75 Ting Fu Street registered in the ownership of the 5^th respondent (“R5”);

5.That is, the applicant was the registered owner of 31/38^th equal and undivided shares of and in the Lot which amounted to 81.58%.

6.Then after the commencement of the Application, the applicant successfully acquired the undivided shares previously owned by R2 and R3. Proceedings against them have been discontinued on 11 July 2022 and 8 July 2022 respectively. The applicant now owns 89.47% of the Lot.

7.No notice of opposition has been filed by any of the respondents. I am also advised that agreement has been reached between the applicant and all the remaining respondents to purchase their respective properties but completion has yet to take place because the named respondents have yet to obtain the necessary grants/orders. Messrs Y L Yeung & Co has been representing all the remaining respondents.

The Evidence

8.At the Pre-Trial Review on 30 September 2022, Mr Cheung Wai Man Raymond (“Mr Raymond Cheung”) of Messrs Y L Yeung & Co confirmed that none of the remaining respondents intended to adduce any evidence at trial, be it factual or expert. Notwithstanding, the following evidence has been filed by the applicant:

(a) Witness statement of Mr Li Pui Cheung Peter dated 15 August 2022;

(b) Condition Survey Report by Mr Chan Yuk Ming Raymond (“Mr Raymond Chan”), a building surveyor, dated 10 August 2022;

(c) Structural Assessment Report by Dr Chan Yin Nin Sammy (“Dr Sammy Chan”), a structural engineer, dated 10 August 2022;

(d) Valuation Reports by Dr Wong Tsz Choi (“Dr Wong”), a valuation surveyor, namely:

(i) Valuation Report dated 11 April 2022 on the market value (which is commonly coined by the profession as “Existing Use Value” or simply “EUV”) of each of the units of the Building;

(ii) Valuation Report on Redevelopment Value (“RDV”) dated 12 August 2022; and

(iii) Supplemental Valuation Report on RDV dated 9 September 2022.

9.At trial, Ms Verna Lui (“Ms Lui”) acted on behalf of the applicant while Mr Raymond Cheung acted on behalf of R1, R4 and R5.

The Issues in the Application

10.Ms Lui submitted in her opening the following issues for determination by the Tribunal at the trial:

(1) Whether redevelopment of the Lot is justified due to the age or state of repair of the Building under section 4(2)(a) of the Ordinance;

(2) Whether the applicant has taken reasonable steps to acquire all the undivided shares of the Lot on terms that were fair and reasonable under section 4(2)(b) of the Ordinance.

(3) If the Tribunal makes the sale order, whether the reserve price as assessed by Mr Wong ought to be adopted and the same should be used at the public auction of the Lot under paragraph 2 of Schedule 2 to the Ordinance.

Whether the Applicant is entitled to make the Application

11.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.

12.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.

13.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 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).

14.Insofar as the occupation permit for the Building was issued on 15 January 1971, ie not less than 50 years before the date of the Application, the Notice is applicable and the threshold percentage should be 80%.

15.In the present case, therefore, the applicant, owning then 31/38 or 81.58% of the Lot at the time of the Application on 26 April 2022, was entitled to file the Application under section 3(1) of the Ordinance.

EUV as at 8 April 2022

16.Pursuant to Part 1 of Schedule 1 to the Ordinance, a valuation report, prepared not earlier than 3 months before the date on which the application under section 3(1) of the Ordinance is made, is required in setting out the assessed market value of each property on the lot—

(a) on a vacant possession basis;

(b) assessed as if the lot could not be made the subject of an application for an order for sale; and

(c) not taking into account the redevelopment potential of the property or the lot.

This was what had been done by Dr Wong in his Application Report dated 11 April 2022.

17.In his valuation of the EUV of the domestic units of the Building, Dr Wong adopted the following methodology:

(i) He selected Flat A, 3/F of the Building (“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.

(ii) The unit price of the Reference Domestic Unit was first assessed by making reference to market comparables. He took into account 9 comparable transactions all in 7 different buildings in the vicinity of the Ngau Tau Kok locality. After making what he regarded as the necessary adjustments (for time, location, noise and environment, view, size, age and building condition, headroom, top floor, lighting and ventilation, and privacy) 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 of $102,700 per sq m.

(iii) In addition to the above adjustments, Dr Wong considered one more factor, ie 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.

18.In assessing the EUV of G/F units, Dr Wong considered 6 sale transactions of ground floor premises in the vicinity of the Ngau Tau Kok locality. After making what he regarded as the necessary adjustments (for time, location, frontage exposure, return frontage, size, building age & condition, headroom, layout etc) for all these comparable transactions, he arrived at $194,900 per sq m by giving higher weighting to the most recent transaction of Unit B, G/F, Lap Hing Building at Nos 37-43 Ting On Street.

19.In the end, Dr Wong came up with the following assessments:[2]

	71 Ting Fu Street		73 Ting Fu Street		77 Ting Fu Street		79 Ting Fu Street
G/F	$9,560,000		$11,110,000		$12,410,000		$11,050,000
	75 Ting Fu Street
	Flat A	Flat B		Flat C	Flat D	Flat E		Flat F
1/F	$2,493,000	$2,579,000		$2,412,000	$2,756,000	$2,372,000		$2,305,000
2/F	$2,261,000	$2,227,000		$2,203,000	$2,466,000	$2,088,000		$2,084,000
3/F	$2,261,000	$2,228,000		$2,204,000	$2,467,000	$2,047,000		$2,043,000
4/F	$2,216,000	$2,183,000		$2,160,000	$2,417,000	$2,006,000		$2,002,000
5/F & Roof	$2,326,000	$2,304,000		$2,279,000	$2,527,000	$2,124,000		$2,114,000
Total:	$112,284,000[3]

20.As a result, the corresponding EUV and pro rata share of the interest of the outstanding respondents are as follows:[4]

Respondents	Unit	EUV	Pro Rata Share
R1	G/F, 71 Ting Fu Street	$9,560,000	8.5141%
R4	Flat A, 4/F	$2,216,000	1.9736%
R5	Flat E, 5/F & Roof	$2,124,000	1.8916%

21.I am satisfied with Dr Wong’s assessments.

Whether Redevelopment of the Lot is Justified on “Age” or “State of Repair”

22.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 Lots due to the “age or state of repair” of the Buildings is justified.

Experts’ Evidence

23.On this issue, the applicant adduced the Condition Survey Report dated 10 August 2022 by Mr Raymond Chan, the Building Surveyor and the Structural Assessment Report dated 10 August 2022 by Dr Sammy Chan, the Structural Engineer.

24.In the Structural Survey Report, Dr Sammy Chan concluded as follows:[5]

(1) The conditions of the structural elements in the Building were degraded;

(2) A total of 20 defects including spalling of concrete and crack were observed on the structural elements of all accessible units and common area of the Building;

(3) 6 out of 12 individual estimated in-site cube strengths were below the designated concrete grade to resist the design imposed loading;

(4) 11 out of 12 tested locations were considerably carbonated with carbonation having progressed deeper than the embedded steel bars, losing its function to protect the embedded reinforcement of the reinforced concrete members from corrosion;

(5) 8 out of 12 tested locations had unacceptable chloride content, susceptible to accelerated and severe pitting corrosion;

(6) The average result[6] of the cement contents for slab (12.7%) and column (21.4%) were lower than the estimated percentage of the design mix of 14.3% for slab and 25.0% for column, resulting in inadequate structural capability and failing to provide a durable protective environment for the steel reinforcement, permitting rapid carbonation and subsequent loss of the protective alkaline environment for the steel;

(7) Results of cover meter tests indicated that the means of the depth of concrete cover for slab (18.2mm) and column (28.4mm) were lower than the design concrete cover required;

(8) The results of open-up survey to the concrete structural elements of the Building indicated that the embedded steel reinforcements were corroded and significant loss of section.

(9) In the absence of practical solution to rectify the carbonation of concrete, it is envisaged more concrete spalling defects due to corrosion of reinforcements in concrete will occur in future requiring more frequent and substantial repairs for the structural frame members.

(10) Test results showed that even preliminary preventive measures had been carried out, ie concrete patch repair works, extensive repair and maintenance will be required in the years to come. The repair and maintenance works will need to be carried out regularly in the future and that such repairs will be more and more extensive as the structural frames become older.

(11) The Building has passed the design working life of 50 years according to the Code of Practice for Structural Use of Concrete 2013.

(12) The Building was designed and constructed more than 50 years ago according to the LCC By-laws which is of lower standard than the current structural design standards, as a result of which, there are a total of 7 aspects which could adversely affect the structural performance of the structural frames of the Building:

(a) Inadequate concrete cover for reinforced concrete slab;

(b) Inadequate concrete cover for reinforced concrete beams;

(c) Absence of requirement on concrete cover for bathrooms and kitchens;

(d) Absence of requirements on limitation of alkali-aggregate reaction in concrete;

(e) Inadequate wind pressure for the design of the Building, and

(f) Absence of requirements on robustness.

25.In respect of (11) and (12) above, the original pages of Dr Sammy Chan’s report are reproduced at Appendix of this judgment.[7]

26.Dr Sammy Chan estimated that a total cost of hammer tapping works for the defective structural members at the internal areas of the Building amounted to $4,066,200.

27.In the Condition Survey Report, Mr Raymond Chan concluded that the Building was in obsolete design. The substandard in width of the escape staircase, nil provision of protected lobby to escape staircase and accessible lift for person with disability are not up to current legislative requirements and no provision of fire service installation.[8]

28.Mr Raymond Chan further stated that the Building was in a state of disrepair with its structural frames in dilapidated condition. Some of the building components and finishes were at the end of their effective lift span.

29.Mr Raymond Chan estimated the total repair cost in the sum of $19,800,000 would be required to attain a reasonable state of repair condition. Compared to the $24,000,000 construction cost for a new superstructure, Mr Raymond Chan considered that the disproportionate high repair/ construction cost of 82.5% indicated that the Building’s superstructure deterioration was very serious and had reached a state which was beyond reasonable economic repair.[9]

30.Putting aside the astronomical costs needed to be incurred for the repair and maintenance of the Building, Mr Raymond Chan was of the opinion that it is not feasible or practical to undertake such a course as it would entail a closure of the Building for a substantial period of time.

31.In the absence of evidence to the contrary, I am satisfied that redevelopment of the Building is justified due to the age and state of repair of the building.

Section 4(2)(b) – Whether Applicant has taken reasonable steps

32.The applicant is 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.

33.As stated earlier in §§6-7 above, all the respondents were satisfied with the offers made by the applicant. Formal Sale and Purchase Agreements were also entered into with R1, R4 and R5 on 11 March 2022, 28 January 2022 and 5 March 2022 respectively.

34.Ms Lui also highlighted that the agreed purchase price for each of the remaining respondents’ units proved to be over and above what Dr Wong had subsequently assessed in April 2022:

Respondent	EUV as at 8 April 2022	Pro-rata of RDV as at 8 April 2022	Agreed Purchase Price
R1	$9,560,000	$13,188,379	$17,000,000
R4	$2,216,000	$3,057,055	$3,825,000
R5	$2,124,000	$2,930,138	$3,741,000

35.Ms Lui cited Capital Well Limited v Bond Star Development Limited [2005] 4 HKLRD 363 where the Court of Final Appeal stated at §33:

“[The Tribunal] merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question.”

36.Out of completeness, Ms Lui submitted that Dr Wong’s latest RDV assessment of $141,500,000 as at 8 September 2022 is less than his previous assessment of $154,900,000 as at 8 April 2022.

37.I am satisfied that the applicant has taken reasonable steps to acquire all the undivided shares in the Lots.

RDV of the Lot

38.As stated in §8 above, Dr Wong prepared two Valuation Reports on RDV, one dated 12 August 2022 and another dated 9 September 2022. In both Valuation Reports, Dr Wong resorted 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.

39.The Lot comprises a site area of 258.92 sq m or thereabouts. Whereas it is restricted to the use for non-industrial purposes only, excluding a cinema under Conditions of Exchange No 9547, the Lot falls within as area zoned Residential (Group A) on the Approved Kwun Tong (South) Outline Zoning Plan No S/K14S/24 dated 15 March 2022 which specifies a maximum plot ratio of 7.5 for a domestic building or 9.0 for a building that is partly domestic and partly non-domestic.[10]

40.Dr Wong assumed a 25-storey development with shops on G/F, accommodating 3 shop units, the lift access to the 1/F and the entrance lobby to the upper residential floors which will have 2 units per floor. The proposed development will have a total Gross Floor Area of about 2,209.84 sq m, reflecting a total plot ratio of about 8.5348.

41.On the basis of comparables in the vicinity, Dr Wong arrived at a GDV of $319,715,929 in his latest valuation. He then assessed the RDV to be $141,500,000 (ie an accommodation value of $64,032 per sq m) after deducting the construction and demolition costs and upon applying:[11]

(a) a deferment rate of 4% per annum;

(b) a developer’s profit of 16%;

(c) stamp duty of 4.25% on land value and legal cost of 0.1% on land value;

(d) a professional fee of 6% on construction cost and demolition cost;

(e) a demolition period of 0.5 year and a construction period of 2 years; and

(f) a marketing and agency fee of 3% on GDV.

42.I have gone through Dr Wong’s valuation. In the absence of evidence to the contrary, I am satisfied with his valuation of $141,500,000.

43.I am prepared to set the reserve price for the auction of the Lot at the same $141,500,000.

Other Incidental Matters

44.The applicant proposed to appoint Mr Tam Tak Hing and Mr Ching Kwok Ho Samuel, being consultant and partner respectively of Messrs King & Company, Solicitors & Notaries, as the sale trustees. Based on the information on their background and experience as set out in their letter dated 30 August 2022[12], I are satisfied that they are proper persons to be appointed as trustees to discharge the duties imposed on trustees under the Ordinance. The remuneration package proposed in the said letter appears reasonable.

45.The applicant has prepared a set of draft Particulars and Conditions of Sale of the Lots[13]. 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 Lots by public auction submitted by the applicant are also reasonable.

Order

46.This Tribunal make the following orders:

(1) 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 applicant has taken reasonable steps to acquire all the undivided shares in the Lot;

(2) All the undivided shares in the Lot, the subject of the Application herein, be sold by way of a public auction for the purposes of the redevelopment of the Lot under s.4(1)(b) of the Land (Compulsory Sale for Redevelopment) Ordinance (“the Ordinance”);

(3) Mr Tam Tak Hing and Mr Ching Kwok Ho Samuel of Messrs King & Company, Solicitors & Notaries, nominated by the applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees 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 of Messrs King & Company, Solicitors & Notaries, dated 30 August 2022.

(4) For the purpose of the sale of the Lot by public auction under section 5(1)(a) of the Ordinance:

(i) 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 to be initialed and approved by the Tribunal.

(ii) The reserve price be set at $141,500,000.

(iii) 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 shall become the owner of the Lot.

(iv) Liberty to the applicant, the 1^st, 4^th & 5^th respondents and the Trustees to apply to the Tribunal for further direction(s) under the Ordinance.

Costs

47.The applicant agreed that following Good Faith Properties Limited & Others v Cibean Development Company Limited [2014] 5 HKLRD 534, the applicant shall be responsible for the costs of the Application. I make, therefore, a costs order that the applicant do pay the costs of these proceedings (including any reserved costs) to R1, R4 and R5 to be taxed on the High Court scale if not agreed.

Ms Verna Lui, instructed by Messrs Lo & Lo, solicitors for the Applicant

Mr Cheung Wai Man Raymond of Messrs Y L Yeung & Co on behalf of the 1^st Respondent, 4^th Respondent and 5^th Respondent