Able Wide Corporation Ltd and Others v. The Incorporated Owners of Good Year Industrial Building and Another
Read the full judgment text of LDCS 1000/2020 on BabelCite. This LDCS judgment was delivered on 23 December 2022.
1. This is the applicants’ application for an order for sale, for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”), of all the undivided shares of Section A and Remaining Portion of Kun Tong Inland Lot No 1 (“the Lot”) on which stands an industrial building known as Good Year Industrial Building at Nos 119 – 121 How Ming Street, Kwun Tong, Kowloon (“the Building”).
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LDCS 1000/2020 [2022] HKLdT 69 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LAND COMPULSORY SALE MAIN APPLICATION NO 1000 OF 2020 _________________ BETWEEN
_________________ Before: Deputy District Judge Roy Yu, Presiding Officer of the Lands Tribunal and Mr Lawrence Pang, Member of the Lands Tribunal Dates of Trial: 11 – 15 July 2022 and 18 –19 July 2022 Date of Joint Inspection: 12 July 2022 Date of Closing Submission: 15 September 2022 Date of Judgment: 23 December 2022 _________________ J U D G M E N T __________________ Background 1.This is the applicants’ application for an order for sale, for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”), of all the undivided shares of Section A and Remaining Portion of Kun Tong Inland Lot No 1 (“the Lot”) on which stands an industrial building known as Good Year Industrial Building at Nos 119 – 121 How Ming Street, Kwun Tong, Kowloon (“the Building”). 2.The Building comprises a 15-storey industrial building and is served by 2 cargo lifts and 3 common staircases. Occupation Permit No NK 87/78 was issued by the Building Authority for the Building on 11 August 1978, granting permission to occupy its ground floor as workshop, garage, switch room, transformer room and 2 pump rooms for non-domestic use, and its 1st to 14th floors as workshops for non-domestic use. According to the approved building plans for the Building (“Approved Building Plans”), there are 2 industrial units, 5 private car parking spaces and 6 lorry parking spaces planned on ground floor, 1 industrial unit planned on 1st floor, 3 industrial units planned on each of 2nd to 4th floors, and 4 industrial units planned on each of 5th to 14th floors. 3.According to the records of the Lands Registry, each of the 4 industrial units on 5th floor is attached with a flat roof, each of the 4 industrial units on 14th floor is attached with roof. 4.The Lot together with the Building standing thereon is allocated with 1,000 undivided shares with 3/1000 allotted to each of the 11 car parking spaces and the rest in the following distribution:
The Remaining Respondents 5.Since the commencement of the proceedings, the applicants had purchased the undivided shares of the 1st respondent and the 3rd respondent and discontinued the proceedings against them. 6.At trial, only the 2nd respondent (“R2”) and the 4th respondent (“R4”) remained in the present application, which are the registered owners of Car Parking Space No 3 (i.e. 3/1,000 undivided shares) and Factory D on 5th Floor (i.e. 14/1,000 undivided shares) of the Building. 7.R2 had not filed any Notice of Opposition nor taken any step in the proceedings. 8.R4 filed a Notice of Opposition dated 15 May 2020 raising the following issues:
9.At trial, R4 was represented by Mr Desmond Leung (“Mr Leung”) leading Michelle Chan (“Ms Chan”) whereas the applicants were represented by Mr Edward K S Chan SC (“Mr Chan”) and Mr Mok Yeuk Chi (“Mr Mok”). Issues for Determination by the Tribunal 10.By reference to the opening submission of Mr Leung and Ms Chan for R4, the issues to be decided in this case are: -
11.Notwithstanding the above, Mr Leung and Ms Chan confirmed that, subject to the applicants proving to the satisfaction of the Tribunal, R4 would not take issue with the applicants on Issues 1 and 3. Moreover, the valuation experts on both side have agreed on the EUV of the units of the Building (i.e. Issue 4). Accordingly, Issues 2 and 5 remain the only live issues at trial. Section 3 of the Ordinance – Ownership of the applicants 12.Section 3(1) of the Ordinance requires the applicants to have not less than 90% of the undivided shares in a lot before they can make an application. 13.At the time of filing of the Notice of Application on 17 March 2020, there were 4 respondents and the applicants together owned 97.7% of the undivided shares in the Lot. We agree therefore that the applicants were entitled to make the Application under section 3(1) of the Ordinance. The Evidence 14.For the purpose of the present proceedings, the applicants and the R4 have produced the following expert reports: Structural Assessment
Condition Survey
Valuation
Existing use values (“EUV”) of all units as at 31 December 2019 15.By virtue of Mr Charles Chan and Mr Kenneth Cheung’s 1st joint statement dated 14 July 2021, the following EUV have been agreed:
16.The Tribunal is prepared to adopt the experts’ agreement above. RDV of the Lot as at June 2022 17.By virtue of Mr Charles Chan and Mr Kenneth Cheung’s 1st joint statement dated 14 July 2021, they agreed the parameters of the residual model for the development of a non-polluting industrial development, on the basis that the town planning application No A/K14/794 for relaxing the plot ratio by 20% had been approved as at the date of valuation of 31 March 2021[2]. They agreed the RDV at $1,004,000,000 (i.e. an accommodation value of $71,310 per sq m). 18.Mr Charles Chan and Mr Kenneth Cheung followed the same residual model and the 20% bonus plot ratio in their latest valuation reports; Mr Charles Chan arrived at a RDV of $1,008,000,000 as at 8 June 2022 while Mr Kenneth Cheung arrived at a RDV of $1,333,620,000 as at 13 June 2022. At trial, they had revised the RDV to $990,000,000[3] and $1,535,490,000[4] respectively. 19.In their 2nd joint statement dated 22 June 2022, they agreed on the residual model and the valuation date of 13 June 2022. As well, they had the following agreements/ disagreement on the parameters to be adopted in the residual valuation:[5]
20.In spite of the above, it has always been the position of R4 that the Tribunal should consider the alternative of revitalizing the Building when considering if an order for sale is justified (Issue 2). In such regard, Mr Kenneth Cheung arrived at a market value of the Building on the basis of Mr Raymond Chan’s revitalization scheme at $1,281,500,000[6] (or $1,238,472,710)[7] either of which, however, is lower than the RDV of $1,333,620,000 or $1,535,490,000 arrived by himself. 21.Thus, even assuming Mr Kenneth Cheung’s valuation exercise is 100% correct (to which we disagree), revitalization by a wholesale conversion does not represent the highest and best use of the Lot and should be disregarded for the purpose of valuation. 22.Notwithstanding the above, on 2 July 2022, just some one week before the trial, however, Mr Kenneth Cheung provided a Supplemental Information, stating that:
23.That is, Mr Kenneth Cheung explained, by reference to a modification letter dated 24 June 2015 in respect of Kwun Tong Inland Lot No 680, which is known as 93 Wai Yip Street, Kowloon, the Lands Department, would impose a clause as follows:
24.More particularly, according to Mr Kenneth Cheung, there would be a 2nd payment of premium in addition to the 10% already agreed with Mr Charles Chan, and proposed that the RDV of the Lot will have to be adjusted as follow:
25.At this juncture, we consider pertaining to explain the reason why the 20% plot ratio comes about. 26.Owing to the restructuring of the Hong Kong’s economy, over the years, suitable industrial land has been identified and rezoned into other uses more compatible with the prevailing socioeconomic needs, such as commercial and residential uses. To facilitate the transformation of industrial buildings on such rezoned land to realise the latest planning intention, the Government implemented a revitalisation scheme for industrial buildings from 2010 to 2016 (hereafter the “2010 Revitalisation Scheme”) to incentivise redevelopment or wholesale conversion of these industrial buildings. 27.To further optimise the use of industrial buildings, The Chief Executive announced in her 2018 Policy Address another round of Industrial Buildings Revitalisation Scheme (hereafter the “2018 Revitalisation Scheme”)[8]. In particular, this round of measures gives a stronger push to encourage the redevelopment of pre-1987 industrial buildings, which were constructed under a set of lower fire service installation requirements before the relevant code of practice on minimum fire service installations and equipment was revised by the Fire Services Department in 1987 (for example, many do not have automatic sprinkler systems) and thus of higher risk. 28.The key incentive for the 2018 Revitalisation Scheme was a planning measure (hereafter the “2018 planning measure”) to allow relaxation of the maximum permissible non-domestic plot ratio by up to 20%, on a case-by-case basis upon application to the Town Planning Board, for a three-year period from October 2018. The approved cases are required to have their lease modification (if any) executed within three years from the date of Town Planning Board’s approval of the planning application.[9] Whereas land premium would be assessed based on the optimal use and proposed development density under the 2010 Revitalisation Scheme, there is no land premium related measure under the package announced for the 2018 Revitalisation Scheme[10]. Pursuant to the latter, the Lands Department has issued a Practice Note No 2/2019 dated 18 February 2019 providing for application for a lease modification or an in-situ land exchange for the redevelopment of an industrial lot at a non-domestic plot ratio not exceeding 20% more than the maximum development intensity permitted under the relevant statutory town plans. 29.Thus, on 1 September 2020, the applicants submitted an application to the Town Planning Board, i.e. No A/K14/794, for relaxation of the maximum plot ratio for redevelopment by 20%. This application was approved by the Town Planning Board on 30 April 2021. 30.However, the user restriction of the Lot under the Government Lease dated 15 May 1966 is not general industrial and/ or godown uses: it is restricted to a factory for the manufacture of wearing apparel hats and gloves embroidery and ancillary offices and quarters for persons essential to the safety and security of the building. It is the understanding of Mr Charles Chan that the premium payable to Government for relaxing this restriction to permit general industrial use is calculated at 10% of the full market value of the Lot reflecting general industrial use under the prevailing government policy. Mr Kenneth Cheung is agreeable to that but on 2 July 2022, just some one week before the trial, he suggested a 2nd premium would be payable, lowering the resultant RDV of the Lot to $1,188,630,000. 31.When compared with $1,281,500,000 as assessed by Mr Kenneth Cheung himself for the revitalization of the Building by wholesale conversion[11], $1,188,630,000 is just about 7% lower and is within the normal margin of error of 10%[12]. Thus, even if Mr Kenneth Cheung was correct in all circumstances, revitalization by a wholesale conversion does not necessarily represent the highest and best use of the Lot. 32.With respect, Mr Kenneth Cheung’s valuation exercise was indeed faulted for at least two reasons. 33.During cross-examination, Mr Kenneth Cheung admitted that he had no experience in making such application for revitalization of industrial buildings. As the planning approval with 20% bonus plot ratio is in place, we questioned common sense of his 2-stage approach in making an application for modification of the user restriction and then another application for modification for complying with the town planning requirements. Why the applicants could not make an application for modification of the user restriction in just one go when the Lands Department can incorporate the conditions complying with the town planning approval? We opine Mr Kenneth Cheung’s 2-stage approach is also defying the Government’s policy for encouraging the redevelopment of pre-1987 industrial buildings. 34.As well, Mr Kenneth Cheung’s reference to the lease modification for Kwun Tong Inland Lot No 680 cannot assist him as that modification occurred prior to Government’s announcement of the 2018 Revitalisation Scheme. 35.In the end of the cross-examination, Mr Kenneth Cheung conceded that his 2-stage approach is wrong. 36.Another fault by Mr Kenneth Cheung is that his valuation for the revitalization of the Building by wholesale conversion was on the basis of fait accompli. However, according to the Practice Note No 6/2019 issued by the Lands Department on 2 April 2019, an application for special waiver for conversion of entire existing industrial building must be “submitted by the owner of the lot on which the existing industrial building is erected or, if the existing industrial building is in multiple ownership, jointly submitted by all existing owners of the lot, together with the consent from all mortgagees, chargees and purchasers ….”[13] (underline added) 37.Obviously, the applicants and R4 are at loggerheads at least at this moment on the issue on “the alternative” or otherwise of revitalizing the Building:
38.Certainly, if the option for redevelopment would realize the highest and best use of the Lot, p would be 100%. But in the case of uncertainty on which option to be adopted, assuming p = 50%, the present value would be $1,535,490,000 (or whatever according to Mr Kenneth Cheung) x 50% + $1,281,500,000 x 50% = $1,362,060,000. What Mr Kenneth Cheung failed to take into account is the uncertainty for the applicants and R4 to come into consensus and that it also takes time to negotiate. In this regard, Mr Raymond Chan had provided a good example which he acknowledged during cross-examination had been the only “successful” application for wholesale conversion of an entire existing industrial building in multiple ownership. On behalf of the multiple owners of Precious Industrial Centre at 18 Cheung Yue Street, Mr Raymond Chan applied for the special waiver on 21 March 2016 (under the 2010 Revitalisation Scheme). Eventually, he got the offer of the special waiver from the Lands Department on 11 March 2021[14] (i.e. some 5 years after his application) but for whatever reasons Mr Raymond Chan tried to explain, the owners had been hesitant to accept the offer which had already lapsed on 7 April 2021. 39.Indeed, Mr Kenneth Cheung confirmed during cross-examination that:
40.In Transport for London v Spirerose Limited [2009] 4 All ER 810, [2009] UKHL 44, [2009] RVR 225, [2009] WLR 1797, the House of Lords of the United Kingdom remarked at §7 of its judgment that “(t)he open market can be expected to attribute a premium to certainty or, conversely, to apply a discount to reflect a lack of certainty”. In §33, Lord Nicholls made reference to Camrose v Basingstoke Corporation [1966] 1 WLR 1100 to explain further:
41.Lord Collins also added at §99, in the light of the finding of fact in that case, that:
42.In this English case, the discount was from £608,000 to £400,000, i.e. some 34%. And reverting to the present case, we consider the discount should be even higher. In considering the argument of revitilisaton, the RDV for the revitalisation model has to be considered within a range to reflect the uncertainty element in the proposed scheme. 43.Thus, from the viewpoint of the highest and best use and the consequential valuation, this revitalization of the Building is not an option at all.[16] 44.While we have so analysed the revitalization as set out in Sub-issue 2(b) under valuation as aforesaid, we are not suggesting that we agree that revitalization is a factor to be considered in an application for determining if an order for sale should be granted. We shall come back to the legal argument later. Gross Development Value (GDV) 45.Notwithstanding the difference in RDV for redevelopment arrived by Mr Charles Chan and Mr Kenneth Cheung, they both resorted to the residual valuation method in determining the RDV of the Lot which comprises a site area of 929.02 sq. m. A residual valuation is done by deducting development costs (including construction cost, professional fees, finance costs etc) and developer’s profit from the estimated gross development value (“GDV”) of the completed optimum development. 46.By reference to the planning application A/K14/794 which has been approved by the Town Planning Board on 30 April 2021, there would be a 38-storey (plus a 2-level carpark basement) industrial building with podium garden on 1/F and sky garden on 20/F. On the ground floor, there will be 4 loading bays for heavy goods vehicles, a light goods vehicles car lift as well as a pair of escalators leading to 1/F which comprises a workshop and lift lobbies to the upper floors. The car lift will give vehicular access to the car parking spaces in the lower two basements. 47.There will be no workshop on G/F and therefore, in assessing the GDV of the proposed redevelopment, both Mr Charles Chan and Mr Kenneth Cheung referred to sales of workshop units in Core 45 at 45 Tsun Yip Street and the building at 46 Tsun Yip Street for the purpose of direct comparison. Then they have the following agreements and disagreements on the adjustments to be adopted:[17]
48.To address the demand for safe, lawful and affordable space of the relevant sectors with policy support, Government now permits, under a pilot arrangement during a period of five years from 1 February 2019 to 31 January 2024, the following non-industrial users to operate at individual units of existing industrial buildings without requiring relevant owners to apply for a waiver to depart from the relevant land lease and pay a waiver fee -[18]
49.This relaxation measure effectively means that while the above permitted uses are not in line with the user restrictions for “industrial and/or godown purposes” under lease, LandsD will not take any enforcement action against the breach of user restrictions concerned so long as the prescribed pre-requisites are met. This measure enables industrial units to be used for industrial and some non-industrial uses. 50.By reference to the history of Government’s policy on revitalizing industrial buildings since 2010, we opine that it is more likely than not that such relaxation measure would continue and the proposed industrial development, as particularized in the planning application A/K14/794, will be office-like as Core 45, one of the two comparable developments. In this regard, we agree with Mr Kenneth Cheung that the Lot is conveniently accessible by reason of its proximity to the Kwun Tong MTR Station from which pedestrians can gain access to the Lot via APM, the regional shopping centre next to the MTR station and through Entrepot Centre which is situated next to it. We agree such locational advantage would be +10% as proposed by Mr Kenneth Cheung. 51.Again, as the proposed development will be office-like, view will be a relevant factor in consideration and therefore we agree with Mr Charles Chan’s proposed adjustments on view. 52.Also, we agree with Mr Charles Chan that the proposed development and the comparable developments are very similar in development form and hence no adjustment for such is required. 53.As regards the synergy effect alleged by Mr Kenneth Cheung, he was in effect referring to the vacant site (which was the subject of LDCS 7000/2014) pending redevelopment at the back of the Building. This vacant site is abutting Hoi Yuen Road, not on How Ming Street. We are totally at a loss as to how such synergy effect comes about. More particularly, by reference to para 2 in Schedule 2 to the Ordinance, if the Lot be ordered for sale, it will be subject to a reserve price which takes into account the redevelopment potential of the lot on its own. The +10% adjustment proposed by Mr Kenneth Cheung is not justified. 54.In view of our comments above, our analysis is shown as follows:
55.Thus, we are prepared to adopt $235,411 per sq m as the unit rate for the reference unit. As regards further adjustments to be taken into consideration, we note that Mr Charles Chan and Mr Kenneth Cheung have agreed all the factors save that on aspect. We cannot agree that for non-domestic premises, aspect (instead of view) could become an adjustment factor as proposed by Mr Kenneth Cheung. We therefore follow Mr Charles Chan’s various adjustments[23] on floor level, size, view (that had been agreed by Mr Kenneth Cheung) and arrive at an average rate of $245,000 per sq m for the hypothetical development. 56.Mr Charles Chan and Mr Kenneth Cheung have also agreed the unit rate for car parking spaces to be provided by the hypothetical development as follows:[24]
Demolition Cost 57.Mr Charles Chan derived his estimate of demolition cost (at $22,401,661) by reference to the Building Cost Data published by Rider Levett Bucknall (“RLB”), a reputable property construction consultant which has been established in Hong Kong since 1960s. On the other hand, Mr Kenneth Cheung saw fit to seek the cost estimate (at $24,552,000) from Mr Cheung Tat Tong, a qualified quantity surveyor since 1968. 58.Notwithstanding the above, the difference is less than 10%. Certainly, the Building Cost Data provided by RLB tend to be an average figure and an ad-hoc estimation tends to be more accurate. In such regard, we are content to adopt $2,450,000 as the demolition cost. Construction Cost 59.The same happened in the difference in construction cost adopted by Mr Charles Chan and Mr Kenneth Cheung: $468,687,778 versus $421,476,000. Mr Kenneth Cheung conceded during cross-examination that he agreed to adopt $468,687,778. Demolition & Construction Period 60.Mr Charles Chan and Mr Kenneth Cheung agreed that the construction period would take 2.25 years but failed to agree on the demolition period: Mr Charles Chan suggested 0.75 years whereas Mr Kenneth Cheung suggested 0.5 years. 61.Bearing in mind the size of the Building at about 10,183 sq m and similar arguments in previous compulsory sale applications, e.g. Wealth Plan Development Limited v Xiu Chuan Limited & Others, LDCS 21000/2018 (unreported, dated 27 December 2019) where an industrial building up to 4,345 sq m was required to be demolished, and Daily Leader Limited & Another v Top Lead Investment Limited & Others, LDCS 29000/2019 (unreported, dated 29 April 2021) where an industrial building up to 5,300 sq m was required to be demolished etc, we consider 0.75 years more appropriate. Developer’s Profit 62.As usual, the determination of developer’s profit to be adopted in a residual valuation is subject to dispute or disagreement by experts. 63.Developer’s profit is normally included as a percentage of the costs involved, or sometimes as a percentage of the GDV. The level of profit should represent the return that a hypothetical developer will require for undertaking the project and should be commensurate with the risk involved. By para 3.6.4 of the HKIS Guidance Notes on Valuation of Development Land published in 2016, the related risks include marketing risks for sales and lettings, risks of construction difficulties and cost overruns, and delays in obtaining relevant development approvals. 64.In a residual valuation, developer’s profit is included in a broad brush nature in the absence of a fully researched risk analysis. Thus, the level of return is only meaningful as a comparative figure but must be related to the risky nature of the hypothetical development and to the length of the project. 65.Mr Kenneth Cheung, in his initial residual valuation prepared on 31 March 2021, adopted a developer’s profit at 15% on cost[25]. This is in contrast to 25% proposed by Mr Charles Chan[26]. They continued to adopt the same in their updated valuations in June 2022[27] where the economic environment had changed a lot especially after the 5th wave of pandemic in early 2022. Notwithstanding the above, the Private Flatted Factories Price Index published by RVD had dropped from 869.2 to 857.7*[28]. 66.More importantly, in adopting his developer’s profit at 15%, Mr Kenneth Cheung had not included any stamp duty and legal costs while Mr Charles Chan’s 25% was subject to further allowance for stamp duty and legal costs. During cross-examination, Mr Kenneth Cheung explained that for valuation purposes, taxes and legal costs would not be deducted. In addition, as the applicants, being the majority owners, would not be required to pay to the trustees under the order the full purchase price in case they become the purchaser[29], and the consequential ad valorem stamp duty etc thereof, it would be unfair to deduct from the residual land price the full stamp duty and legal costs. 67.With respect, Mr Kenneth Cheung’s concept on the residual valuation is wrong. If a valuation is determined by reference to market transactions by the direct comparison method, the values of the comparables as reported would be exclusive of taxes and legal costs and therefore no additional allowance for such should be made when it is comparing like-with-like. 68.On the other hand, the residual method of valuation works on the premise that the price a buyer can pay for a parcel of land or property ripe for, say redevelopment is the surplus after deducting the costs of construction, the costs of buying and selling, the cost of finance and the amount of profit required to carry out the project, from the estimated sale price or market value of the finished development, i.e.
69.Therefore, expenses to be necessarily incurred by the prospective developer, including the costs of purchase, e.g. stamp duty and legal costs, should be deducted from the estimated sale price of the finished development before the surplus for land can be arrived. Indeed, the same has been explained at para 3.9.1 and 3.9.2 in HKIS Guidance Notes on Valuation of Development Land. 70.Also, it is inappropriate to assume that the applicants or the majority owners are necessarily the successful purchaser in case of an auction being held. Firstly, in preparing a valuation of market value, it is always assumed that both the seller and purchaser are hypothetical ones. Secondly, an application for compulsory sale pursuant to the Ordinance can be made by one or various parties who have no intention to purchase the property for their own development. This happened in Wah Ha Property Development Limited & Others v Rosehawk Group Limited & Others, LDCS 25000/2018 (unreported, 30 April 2021) though that application was refused by the Tribunal. There were other two cases, i.e. Pacific Base Holdings Limited & Others v Lee Hop Biu & Others, LDCS 14000/2017 (unreported, dated 4 June 2020) and Perfect Horizon Limited v Co Sam & Others, LDCS 23000/2018 (unreported, 11 September 2020) where the auctions did not attract any bid by the applicants in these cases. 71.Setting a market value of a lot or reserve price for auction unnecessarily too high would defeat the purpose of the Ordinance. 72.In any event, having been referred to the HKIS Guidance Notes on Valuation of Development Land, Mr Kenneth Cheung conceded that stamp duty and legal costs should be deducted. 73.We are prepared to determine the developer’s profit at 20%. 74.We determine the market value of the Lot at $1,128,000,000 (i.e. an accommodation value of $80,120 per sq m) as shown in the Appendix of this judgment. SECTION 4(2) OF THE ORDINANCE – JUSTIFICATION AND REASONABLE STEPS Age and State of Repair 75.Section 4(2) of the Ordinance provides that:
Whether development of the Lot is justified due to age and/or state of repair of the Building 76.In Top Sail International Limited v Cheng Kai Ming, LDCS 18000/2010 (unreported, dated 15 November 2011), the Tribunal held that age and state of repair were two separate grounds and even though there may be considerations common to both, the Tribunal should still consider them separately. However, even though the section speaks of “age” or ‘state of repair” in disjunctive and it had been held in Intelligent House Limited v Chan Tung Shing & Others [2008] 4 HKC 421 at §165(3) that they should be separately considered:
Age 77.The Building was completed in 1978, i.e. some 44 years ago. While its absolute physical age does not necessarily mean that it should be developed, the applicants submitted that there are many features of obsolescence and because of its age, its design, its workmanship and also its state of repair, redevelopment of the Building is justified. 78.Firstly, there is no dispute that the structural design of the Building was based on, for instance, on the Building (Construction) Regulations 1975 (“B(C)R 1975”) which had been amended in 1990 and then repealed and replaced by a new version in 2020. In spite of this, according to the B(C)R 1975, the thickness of concrete cover had to satisfy the durability and fire resistance requirements:[30]
79.As noted, the minimum cover for column (above ground) satisfied only the durability requirement but not the fire resistance requirement even at the time of design. 80.Notwithstanding the above, 36% of slabs, 65% of beams and 18% of columns were found by the two structural experts having actual cover less than the design cover:[31]
81.Dr Sammy Chan, on behalf of R4, also identified 193 defects on the structural elements listed below:[32]
82.The total defective area (67.21 m2) is about 0.3% of the total surface area of the Building (20,400 m2). Dr Sammy Chan summarized therefore a relatively large proportion of the defects were located inside and within 5m of lavatory areas. 83.Further, the combined results of depth of carbonation test are as follows:[33]
84.From the above analysis, carbonation depth has exceeded 93% of slabs, 64% of beams and 14% of columns. 85.While carbonation depth reaching rebars does not mean automatic onset of corrosion, carbonation destroys the protective alkalinity layer around the rebars. After the loss of the protective layer around the rebars, oxygen and water vapour from the atmosphere could then react with the rebars to start the corrosion process. We trust, to anybody’s surprise however, according to Dr Sammy Chan, no corrosion was recorded for all the 93 exposed rebars. In contrast, for the 276 rebars exposed by Mr C M Wong’s laboratory, all show a certain degree of corrosion – 41% partly corroded and 59% mildly corroded. Certainly, given the Building is over 40 years’ old in Hong Kong at the highly polluted industrial area Kwun Tong as it previously was and the results of the above tables, Mr C M Wong’s finding is more reliable. 86.Again, the Building was designed as workshop with an imposed load of 150 pounds per sq ft (i.e. 7.2kPa) in accordance with B(C)R 1975. But since 1990, the B(C)R 1975 had been amended so that all industrial workshops, on top of its designed imposed load, are required to withstand dynamic loads. With respect, Dr Sammy Chan could only say that no retrospective requirement is required in the latest code. 87.There is also disagreement between Mr C M Wong and Dr Sammy Chan on the concept of the design working life of the Building. The design working life a building is the period of use intended by the designer or the client at the time of designing the building. It is a nominal value, not a scientific determination, which represents an estimated target period of time, as opposed to an actual period. If the design working life of a building is set at 50 years at the design stage, this building is expected not to require major repairs within 50 years, assuming it has undergone normal maintenance. 88.In Hong Kong, the first code that mentioned the requirement for the design life is Code of Practice for Structural Use of Concrete 2004 (“2004 Code”). In 2013, this code was updated (“2013 Code”) but Clause 2.1.5 remains unchanged as follows:
89.In §80 above, 36% of slabs, 65% of beams and 18% of columns were found by the two structural experts having actual cover less than the design cover. But when it is compared with the 2013 Code, the picture is more alarming:[34]
90.According to Mr C M Wong, since the concrete cover for slab, which is one of the main factors that affects ductility, was found in 61.0% of the test samples of the Building to be less than the required under the 2013 Code, the design working life of the Building was inferred to be shorter than 50 years. Mr C M Wong however agreed that the Building would not suddenly exhibit structural problems or become unsafe after the expiry of its design working life because the deterioration of structures is a continuous process.[35] 91.Dr Sammy Chan did not agree that the Building had a design working life of less than 50 years because the design of buildings prior to the 2004 Code does not necessarily mean the structure was designed with a shorter design working life. Even if we accept Dr Sammy Chan’s choice of words as “does not necessarily mean the structure was designed with a shorter design working life”, we agree with Mr C M Wong that given the findings of the performance of the Building, it is more likely than not that the design working life of the Building is over or at least towards its end. We also agree that the structure of the Building had entered into the propagation phrase, i.e. when its protective barrier from deterioration is lost and the building structure would require increasingly frequent major repair.[36] 92.Dr Sammy Chan considered that based on his visual inspection in early 2021, the defective areas accounted for only 0.3% of the total building area. The defective areas (67.21 m2) are mainly local in nature, with a large portion occurring in toilets and adjacent areas which are humid and were badly neglected when being left vacant. 93.Despite the above, Mr C M Wong and Dr Sammy Chan did not have much difference on the cost of necessary repair. The average amount is approximately $818,000.[37] However, this amount was determined on the basis of repairing those defective elements which could be visually seen up to March 2021 or found by hammer tapping of those parts immediately next to the visually seen defective parts. There is no practical way of locating all elements which would in due course become defective or to identify spots which would in due course spall out or crack. State of Repair 94.Again, in Intelligent House Limited, supra, at §146, the Tribunal agreed with the following submissions by the applicants at §145(2), (3) & (4) in that case:
95.Mr Benson Wong stated obsolescence is a concept of comparison. He considered therefore current legislative requirement such as the Code of Practice for Fire Safety in Buildings 2011 (“Fire Safety Code 2011”), prevailing market and construction standards should be adopted for comparison, otherwise no building constructed years ago will be considered obsolete or aged. Following from this, Mr Benson Wong suggested there existed the following 18 obsolescence aspects for the Building:[38]
96.While Mr Benson Wong admitted that some of these aspects of functional obsolescence can be rectified relatively easily with reasonable cost, most of them cannot unless the Building is demolished and redeveloped. In this regard, Mr Raymond Chan responded that it is feasible to provide them in a wholesale conversion/ revitalization and related alterations and additions works. 97.In addition, Mr Benson Wong found the main roof of the Building covered with concrete tiles generally stained and pitted. Part of the main roof areas are finished in cement screeding, and the surfaces have generally worn and cracked. Mr Benson Wong recommended the whole roof areas to be completely recovered. Mr Raymond Chan did not object to re-roofing save for the upper roof area of lift machine room, fire services pump room and water tanks. 98.As regards the elevations of the Building, even Mr Raymond Chan agreed to complete replacement of the external rendering though he argued that the external walls were in fair conditions. 99.In short, Mr Benson Wong, with the help of a quantity surveyor, estimated a total cost of repair works in the sum of $51,969,138 while Mr Raymond Chan, also with the help of a quantity surveyor, estimated a total cost of repair works in the sum of $24,317,000. 100.At this juncture, it is of interest to note that throughout the trial, Mr Raymond Chan appeared to recommending, if not advocating for revitalizing the Building at a cost of $143,220,000[40]. In our opinion, Mr Raymond Chan’s recommendation totally defeated R4’s argument that the Building is not justified for redevelopment due to its age or state of repair. It is also difficult to compromise the so-called total cost of repair works in the sum of $24,317,000 with the cost of wholesale conversion up to $143,220,000. If owners of the Building could spend just $24,317,000 to keep the Building in a tenantable condition, why should they opt for an expenditure of $143,220,000? 101.Further to our comments at paragraph 43 above, there are attached difficulty for carrying out revitalisation, as compared to the process of redevelopment. 102.Mr Raymond Chan’s cited example of prospective wholesale conversion of Precious Industrial Centre at 18 Cheung Yue Street[41] demonstrates the difficulty in obtaining the consensus among owners on revitalization when a building is multi-owned. In the present case, the applicants are obviously pursuing redevelopment of the Building which, as manifested in the analysis in §§31-43 above, appears to be the highest and best use of the Building. Why should the applicants be enjoined to opt for revitalization which is not the highest and best use of the Building? Even as suggested by Mr. Leung, if we are to look at the issue from the prospect of a reasonable majority owner, there should be sufficient reason for a reasonable majority owner to choose revitalisation instead of redevelopment. 103.More particularly, as stated in the letter of the applicants’ solicitors dated 29 April 2022[42], R4 has made no approach to invite the applicants to consider revitalization. Neither R4 had provided any evidence that she was interested in participating in revitalizing the Building and paying the modification premium which appears to be more than $100 million. This is a key factor to suggest revitalisation as a matter to be considered. If R4 did not prove her interest in revitalisation, and ability to fund the revitalisation, she could not begin to argue that this Tribunal should consider the option of revitalisation. 104.To the extent that if R4 tries to rationalize her argument by emphasizing that she is not asking the Tribunal to order revitalization in place of redevelopment but only asks the tribunal not to make an order for sale so as to allow the parties to undertake the revitalization exercise, our short answer is that there is actually no difference between directly ordering the applicants to go for revitalization and indirectly coercing the applicants into doing so by declining an order for sale for redevelopment such that the applicants will be left with no choice but to revitalize. Bearing in mind that revitalization is not mandatory but voluntary in nature, the majority owners are under no legal obligation to pursue the same if they do not wish to. We see no reason why an otherwise successful application should be refused simply because the applicants have decided against revitalization which is a decision they are fully entitled to make. 105.This is exactly a case when a minority owner is seeking to extract a good bargaining power before permitting the redevelopment to proceed. The Court of Appeal in Bond Star Development Limited v Capital Well Limited [2004] 2 HKLRD 855 remarked at §§27-28 as follows:
106.In the present case, the applicants’ position is that although the two factors of “age” and “state of repair” are put in the alternatives in section 4(2)(a) of the Ordinance, they are related as they both relate to the physical state of the existing building. Nevertheless, so long when the Tribunal is satisfied that due to the age or the state of repair, the prevailing law does not permit the Tribunal to consider something else. The applicants relied on Pacific Base Holdings Limited & Others v Lee Hop Biu & Others, CACV 426/2020 (unreported, dated 31 May 2021) where the Court of Appeal held at §§27 & 39 that:
107.Further at §49, the Court of Appeal ruled that:
108.The above rulings of the Court of Appeal was relied on by the Tribunal in Able Luck Development Limited & Others v Pawling Limited, LDCS 11000/2018 (unreported, dated 22 April 2022) where, like R4 in the present case, the alternative of revitalization was raised. The Tribunal held at §97 that:
109.We also agree with the judgement given by another panel of this Tribunal in Able Luck Development Limited & Others v Public Global Investments Limited & Others LDCS7000/2014 (unreported, dated 6 October 2017) that “revitalisation is not feasible for the Building which is in multiple ownership as it would be difficult to obtain consensus from all the owners.” 110.We further agree with the above authorities as no other grounds has been specified in regulations made under section 12 of the Ordinance. “Redevelopment” is defined in the Ordinance to mean the replacement of a building on (or formerly on) the Lot. 111.Mr. Leung argues that if revitalisation is a feasible alternative, the economic life span of the Building is not coming to its end and an order for sale should be refused. We do not agree. Firstly, economic life span is just a factor to be considered in respect of the age of the Building. From the various discussion above, we have given full consideration on the age of the Building. We agree with the view of HHJ Wong given in Good Trader Limited v Hinking Investments Limited, LDCS 1000/2006 that, “when either the life span or the economic life span comes to the end, it will be justified to redevelop the building.” 112.The costs of revitalisation must be considered against the costs of redevelopment. And revitalisation is a form of Rolls Royce repair, as submitted by Mr. Leung. And with the amount of costs involved, if it is to represent the costs of repair, we believe a reasonable conclusion is that the building is at its end of economic life span. 113.Both parties have adduced voluminous expert evidence about the age and the state of repair of the Building and have made extensive submissions in relation to each and every item/aspect of the Building which they consider relevant to the statutory criteria. We have no intention to set out herein parties’ respective arguments on all individual items to avoid undesirably lengthening the judgment and overloading it with unnecessary details. Suffice it to say that on the evidence available, we prefer the observations and conclusions of the applicants’ team to R4’s team. We agree with Mr Benson Wong that apart from the structural elements, there are many other parts of the Building and its associated features and facilities which are in poor condition because of their age and the poor state of repair. No doubt, this tribunal also made our own observation on these aspects during the site visit of the Building on day 2 of the trial. We find without hesitation that redevelopment is justified by reason of the age and the state of repair of the Building. Section 4(2)(b) – Whether the Applicant has taken reasonable steps 114.The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interest of the respondents owning minority interests in the Lot under section 4(2)(b) of the Ordinance. 115.The applicants have made the following offers to purchase R2’s and R4’s units, each of which was accompanied by Mr Charles Chan’s assessments: -
116.The applicants submitted that, around early February 2020, their representative received a phone call from R4, counteroffering $36.5 million. 117.Subsequently, the applicants made the further offers as follows to purchase R4’s unit:
118.While the first two offers in 2020 above were made on the basis of Mr Charles Chan’s assessments, the last one in 2022 was based on the RDV at an accommodation value of $85,838 per sq m as assessed by the Tribunal in Able Luck Development Limited & Others v Boly Metal Manufactory Limited & Others, LDCS 11000/2018 (unreported, 22 April 2022) in respect of another industrial site around the corner Hoi Yuen Road and How Ming Street. The area of that site was 1,858.05 square metres which is approximately double that of the Lot. 119.In spite of the above, the applicants have made a further offer to R4 dated 15 June 2022 in the sum of $18 million, which is even higher than R4’s share of the RDV as assessed by her valuation expert, Mr Kenneth Cheung, according to the agreed EUV percentage. 120.On 16 June 2022, the applicants made another offer to R2 in the sum of $5,500,000. 121.The Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363 emphasized at §33 that:
122.Further at §36 of the judgment, the Court of Final Appeal stated further 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.” 123.In light of the above, we are satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot including negotiating for the purchase of the share owned by the respondents on terms that are fair and reasonable. ORDERS 124.For the reasons given in this judgment, we now make the following orders: -
COSTS 125.Following Good Faith Properties Limited & Others v Cibean Development Company Limited [2014] 5 HKLRD 534, we make a costs order nisi that the applicants do pay the costs of these proceedings (including any reserved costs) to R2 and R4 with certificate for 2 counsel to be taxed on the High Court scale if not agreed. Unless any parties apply by summons to vary, this costs order nisi shall become absolute upon expiry of 14 days from the date of this judgment. 126.Last but not least, we thank Counsel for their able assistance.
Mr Edward K S Chan, SC and Mr Mok Yeuk Chi instructed by Messrs Sit, Fung, Kwong & Shum, for the 1st to 10th applicants The 2nd respondent was not represented and absent in trial Mr Desmond Leung and Michelle Chan instructed by Messrs Li, Kwok & Law, for the 4th respondent
[1] See Bundle F1/33/163. [2] This application was approved by the Town Planning Board on 30 April 2021. [3] See Bundle F2/34/330. [4] See Bundle F2/34/371. [5] See Bundle F2/34/271. [6] See Bundle E3/30/543 & 576. [7] See Bundle F2/34/379 where the deduction of premium payable at 10% of the EUV instead of market value was conceptually wrong. [8] See Bundle C13/3235. [9] See the Paper from the Development Bureau to Legislative Council Panel for discussion on 19 December 2018 on Measures to Revitalise Industrial Buildings, which is attached to Exhibit A2. [10] See Annex B of the Legislative Council Brief dated 4 March 2021: https://www.devb.gov.hk/filemanager/en/Content_3/IB_Standard_Rates_LegCoBrief.pdf [11] See §20 above. [12] In Graham Miller (Hong Kong) Limited v. Heesing Company Limited, unreported, LDLA 1822 of 1988, 23 September 1988, the Lands Tribunal remarked that 10% is usually considered as a reasonable margin of error in most valuation exercises. And in Shun Fung Ironworks Limited v. Director of Buildings and Lands [1995] HKLR 311, the Lands Tribunal indicated, at § 973, that a margin of error of about 10% is an acknowledged fact in almost any valuation exercise. [13] See Bundle C8/1970, E3/476 or F2/351. [14] See Bundle C16/3922-3924. [15] In the present case, the permission becomes the agreement for revitalization by the applicants and R4 in comparison. [16] Such real options or binomial analysis is useful not only in valuing financial options etc but also as a strategic business tool in capital investment decisions. For instance, should a developer indulge its billions in either of the two alternatives? The consequences of a wrong decision can be disastrous and irreversible. See Option pricing for real estate development: Hong Kong Disneyland by Barbara Y P Leung and Eddie C.M. Hui, Journal of Property Investment & Finance, 1 December 2002 at pp473-495. Eddie C.M. Hui is the Associate Head (Partnership) and Professor of the Faculty of Construction and Environment of the Hong Kong Polytechnic University. With respect to Mr Kenneth Chueng, he confessed during cross-examination that he had not come across such analysis in his past practice. [17] See Bundle F2/34/276. [18] See “Relaxation of Waiver Application for Existing Industrial Buildings” by Development Bureau dated 1 February 2019: https://www.devb.gov.hk/filemanager/en/Content_3/Relaxation_of_the_Waiver_Application_in_Existing_IB.pdf. [19] See Bundle F2/34/324-325. [20] See Bundle F2/34/277. [21] See Bundle F2/34/279. [22] See Bundle F2/34/281. [23] See Bundle F2/34/327. [24] See Bundle F2/34/286. [25] See Bundle E3/472. [26] See Bundle E1/178. [27] See Bundle F2/300 & F2/371. [28] Provisional figure. [29] See section 6(1) of the Ordinance. [30] See Bundle F1/32/144. [31] See Bundle F1/32/147-148. [32] See Bundle F1/32/146. [33] See Bundle F1/32/149. [34] See Bundle F1/32/156. [35] See Bundle E20/5/4769. [36] See Bundle D1/19/56 at §9.3.5. [37] See Bundle F1/32/151. [38] See Bundle C1/15/18-29 and Bundle F1/31/7-18. [39] As early as in 1993, the area to the south-west of Kwun Tong Road in which the Building is located had been rezoned to meet the changing needs of the non-polluting industrial and business sectors. [40] See E3/576. [41] See §38 above. [42] See Bundle B4/12/823. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under LDCS 1000/2020