Allied Future Limited v. Lee Yuk Sim and Others
Read the full judgment text of LDCS 23000/2020 on BabelCite. This LDCS judgment was delivered on 8 May 2023.
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 in Sham Shui Po, Kowloon, Hong Kong (hereinafter collectively referred to as “the Lots”):
Cited by 3 cases · Cites 28 cases
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LDCS 23000/2020 [2023] HKLdT 40 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LAND COMPULSORY SALE MAIN APPLICATION NO 23000 OF 2020 __________________________ BETWEEN
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_________________ 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 in Sham Shui Po, Kowloon, Hong Kong (hereinafter collectively referred to as “the Lots”):
2.Standing on the Lots are two pairs of 5-storey tenement buildings (collectively referred to as “the Buildings”) each having shops on ground floor (“G/F”) and domestic units on upper floors which are served by two common staircases, one in the front abutting Tung Chau Street and the other in the rear abutting a scavenging lane. The occupation permit of the Buildings was issued on 28 May 1955. 3.There are two Deeds of Mutual Covenant for the buildings at Nos 306 and 308 Tung Chau Street respectively both dated 4 August 1955 but there is no Deed of Mutual Covenant for the buildings at Nos 310 and 312 Tung Chau Street. According to the record in the Land Registry however, each of the Buildings at Nos 306, 308, 310 and 312 Tung Chau Street was allocated 5 equal undivided shares with each unit holding 1 share. 4.According to a set of building plans approved by the Building Authority dated 24 November 1954, there is one unit on each floor in each of the Buildings 5.At the time of the Application, ie 4 September 2020, the applicant was the majority owner owning 80% (ie 4 out of 5) undivided shares of each of the Lots whereas the respondents were minority owners owning the following units of the Buildings:
6.At trial, the applicant was represented by Mr C Y Li, SC leading Mr Matthew Choi and Ms Jennifer A Tse (collectively referred to as “Messrs Li & Others”), as instructed by Messrs Iu, Lai & Li, Solicitors & Notaries. R1 and R2 were represented by Ms Evelyn L C Cheng, R3 was represented by Mr Adrian But, whereas R4 was represented by Ms Karen Chan. Whether the Applicant is entitled to make the Application 7.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. 8.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. 9.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)”. 10.As the occupation permits for the Buildings was issued in 1955, not less than 50 years before the date of the Application, the Notice is applicable and the threshold percentage should be 80%. 11.Thus, the applicant, owning not less than 80% or an average of not less than 80% of the undivided shares of the Lots, was entitled to file the Application under section 3(2)(a) and (b) of the Ordinance which may cover—
The Issues in the Application 12.Mr Li & Others summarized the following issues as shall be determined by the Tribunal according to section 4 of the Ordinance:
The Evidence 13.The applicant has filed the following documents in support of the Application:
14.As stated above, Mr Lai prepared a Valuation Report on EUV and RDV dated 18 October 2021. He also prepared an Updated Supplemental Report on RDV dated 2 December 2022. 15.Then Mr Chan and Mr Lai had prepared 2 joint statements, one dated 17 February 2022 and the another dated 21 December 2022. EUV as at 22 June 2020 16.The Application was accompanied by a valuation report dated 30 June 2020 (“Application Report”) prepared by Mr Chan of Savills containing assessments of the EUV of all units in the Buildings on the Lots as at 22 June 2020. The Application Report was prepared not earlier than 3 months before the date of the Application, i.e. 4 September 2020 and is therefore, in my view, in compliance with section 3 of the Ordinance. 17.Under section 4(1)(a)(i), if there is a dispute between the parties on the EUV of the units in the Buildings on the Lots, the Tribunal has to determine the values. 18.In the Application Report of 30 June 2020, Mr Chan explained the method of valuation and the process of his assessment to arrive at the EUV of each unit of the Buildings. Assessment of EUV of Ground Floor Non-Domestic Units 19.In assessing the EUV of the ground floor units, Mr Chan and Mr Lai had agreed a unit rate of $166,500 per sq m which is applicable to G/F, No 308 Tung Chau Street assuming the presence of the unauthorized works, if any, in the corresponding unit did enjoy their respective market value, ie Mr Chan’s Scenario 1. 20.In the alternative, Mr Charles Chan had provided Scenario 2, where all existing unauthorized building works found upon inspection of the Buildings were disregarded and the respective market values of the Buildings were assessed in accordance with the respective Approved Building Plans and the Addition & Alteration Plans, if any. 21.With respect, Part 1 of Schedule 1 to the Ordinance provides that market value of each property is to be assessed without any qualification save for the following:
22.EUV or Existing Use Value is only a term coined by the valuation profession in similar compulsory application cases; when the Ordinance was originally drafted as a Bill, the provision contained the words “and existing use” between “vacant possession” and “basis”. But in the Provisional Legislative Council Meeting on the Bill on 26 February 1998, “existing use basis” was deliberately deleted as members in the meeting expressed concern that an existing use might be unauthorized and should not be encouraged. In spite of this, the term “market value” on a vacant possession basis was not further elaborated. 23.I consider Scenario 1 the only scenario to be adopted. 24.Firstly, it must be a market reality that the owner of each property would not let his premises without charging a rent for the full area of the enclosed premises. Needless to say, if the unauthorized structure has no additional value, it would not have been there in the first place. 25.In Ni Tiee Bor Robert & Another v Golden Crane Industries Limited, HCMP4407/1998 (unreported, 21 March 2000), the property sold was full of unauthorised structures and alterations. 26.In Join Union Investment Limited v China Tree Investment Limited, [2016] 2 HKLRD 901, there was a subdivision of the ground floor premises into four shops. The structural engineering expert in the case could not cite any example or authority where, in similar circumstances, the Government or the Building Authority took enforcement action requiring demolition of the partitioning and reinstatement of the property to its original state. Chow J (as he then was) was of the view that there was no real risk of enforcement by the Government or Building Authority in respect of the alleged unauthorized partitions. See §§97-103 of the judgment. 27.At §107 of the judgment, the learned judge observed that:
28.Indeed, shops consisting of unauthorized structures are sold on “as is” basis without prejudice to the vacant possession basis. For instance, the unauthorized cockloft, if any, is usually referred to as “自由閣” which in English means “a cockloft that is self-erected” because 自己建、自己拆、很「自由」. Such term indeed appears in many marketing pamphlets of the owners or real estate agents. In fact, as demonstrated by the fact and discussions in Li Yan Ping v Multi Elite Limited & Another, HCA 1486/2014 (unreported, 22 October 2020), many purchasers of shop premises were either having full knowledge of or indifferent to the presence of “unauthorized or illegal structures”. They were prepared to take the commercial risk of the “unauthorized or illegal structures” because the presence of unauthorized or illegal structures would not affect their prospective use save for where, for instance, a restaurant license is required. 29.In Circle Angle Limited v Orchard Enterprise (Hong Kong) Limited, DCCJ 1252/2011 (unreported, dated 6 February 2012), the purchaser was aware that the property which it intended to purchase was subject to a notice issued under section 24C(1) of the Buildings Ordinance. In spite of this, it signed a Provisional Agreement which contained a clause that read:
30.Something similar took place in Gold Glory International (HK) Limited v K W Wong Investment Company Limited, HCMP 1618/2012 (unreported, dated 17 December 2013) where the parties agreed that:
31.The recognition that unauthorized structure attracts market value is not new. In Hong Kong Telephone Company Limited v The Hong Kong Land Company Limited, LDLA 5/1982 (unreported, 5 November 1982), the Tribunal considered market rent appropriate for the premises although there was an illegal addition in the form of an enclosed void at ground level having been converted into a playroom. 32.In that case, “(b)ecause of the steep slope down from the road level the foundations of the building continue for a considerable further distance below the lower level floor opening onto a paved open garden area. The area of these foundations below the lower level floor has been closed to provide a playroom”. Therefore, the conversion created in effect a 4th storey but the Government Lease limited the building to only 3 stories. The Tribunal held that while the enclosed foundation area used as a playroom did not form part of the legal gross floor area, it was part of the suit premises and must for valuation purposes be taken into account as ancillary to the residential area, in the same way as the garden and car park areas were likewise ancillary. The Tribunal was satisfied that its existence could reasonably be expected to attract a slightly higher rent than if it did not exist, in the same way as other ancillary features add value to premises. The possibility that the landlord may at some time have to remove the glass doors enclosing the area could not be discounted, nor could the probability that it is allowed for the time being. 33.This view is supported by Transport for London (London Underground Limited) v Spirerose Limited [2009] 1 WLR 1797, [2009] UKHL 44, where Lord Neuberger pointed out at paragraph 50:
34.More recently, in Newbigin (VO) v SJ & J Monk (A Firm) [2015] 1 WLR 4817, Lewison LJ discussed “the reality principle” in these terms:
35.Referring back to Transport for London, supra, I do not consider any particular evidence is needed to prove the existence of market value of an unauthorised structure, save for quantum, when this is recognized as a market reality. In Almond v Ash Brothers & Heaton Ltd [1969] 2AC 366, Lord Pearce stated, at p 382 that “one only excludes the human realities to a limited and necessary extent, since it is only the human realities that give any value at all to hereditaments.” And in the same case, Lord Wilberforce described the reality principle at pp 385—386 as “mainly devised to meet, and it does deal with, an obvious type of case where the character or condition of the property either has undergone a change or is about to do so.” 36.Cheung Kwong Yuen v Sun Hui Fang, CACV 112/2015 which has been reported as [2016] 1 HKLRD 464 concerned an appeal from an application for recovery of vacant possession of unauthorized roof top structure of a building at 107 Tai Nan Street, Kowloon. During the trial before the Tribunal, being LDPD 1740/2014, it was found that Suen Chor Ming (alias Suen Ming Fai), the brother of the respondent, Madam Sun, had paid money in 1992 for acquiring the occupation of the corrugated steel sheet structure existing on the roof of the building. Obviously no legal title was passed and the Tribunal considered adverse possession by Madam Sun was not proven. Madam Sun’s subsequent appeal was allowed by the Court of Appeal on 30 January 2015 and the case was remitted to the District Court for retrial, which became DCCJ 743/2016. The District Court found adverse possession in favour of Madam Sun on 6 September 2017 and appeal by Mr Cheung, the unfortunate landlord who failed to verify the status of Madam Sun when he made the purchase on 31 October 2013, was refused by the Court of Appeal on 26 February 2019 in CAMP 64/2017. 37.From this case, it is manifest that the unauthorized roof top structure commanded market value in 1992. It also continued to attract significant market value at least until early 2019 despite a lapse of some 27 years. Otherwise, Madam Sun would not have taken the time and trouble in advancing her adverse possession claim. Without the shelter provided by the unauthorized roof top structure, it is absurd to think that Madam Sun would reside on an open roof. 38.The Tribunal has witnessed similar landlord and tenant disputes on the letting of unauthorized structures. LDPD 1802/2021 was another case where the landlord sought vacant possession of an unauthorized roof-top structure which had been let since 1980. Obviously, the unauthorized roof top structure commanded significant market value from 1980 till at least the commencement of 2022 when the case was heard. 39.In Joint Hope Limited v Vecent Hong Kong Trading Limited & Others, LDCS 21000/2019 (unreported, dated 9 July 2021), the Building Authority issued to the owner of G/F, including the space underneath the staircase, 38 Ming Fung Street, Kowloon, a building order dated 11 May 2018 under section 24(1) which required the owner to demolish the unauthorized building works that included the structure erected on and over the yard but not the cockloft at high level of the G/F Shop. Then on 31 May 2019, the Building Authority issued a letter to the owner stating that: “As the building works have been modified, I am prepared to withhold further enforcement action for the time being, and withdraw my Order.” As at the date of the land search on 5 February 2021, no order was issued against the cockloft. 40.Surely, when the Building Authority issued the order of 11 May 2018, it should have known about the unauthorized cockloft (against which notice was issued in 2016). Yet the Building Authority did not enforce against such cockloft in the order of 11 May 2018. Neither did the withdrawal letter of 31 May 2019 mention anything about the cockloft save to state that the premises were not free of any other unauthorized building works. 41.Similarly, in the same case, on 11 May 2018, the Building Authority issued to the owner of G/F, including the space underneath the staircase, 44 Ming Fung Street, a building order under section 24(1) which required the owner to demolish the unauthorized building works that included the structure erected on and over the yard but not the cockloft at high level of the G/F Shop. Then on 17 August 2018, the Building Authority issued a letter of compliance of the order. 42.In Sound Advice Property Limited & Others v Mok Wai Ching & Mok Yui Cheung Anthony, LDCS 18000/2020 (unreported, dated 21 December 2021), the Tribunal found that although Building Orders against an unauthorized building structure had been issued in March 2007, the Building Authority had not taken any further action for at least 14½ years until the date of the trial. 43.In Link Harvest Ltd v Wayhang Development [2001] 2 HKC 652, Recorder Edward Chan SC said:
44.It is incorrect for the applicant to suggest that the Tribunal, for instance, in Kannix Limited & Another v Coreluxe Developments Limited & Others, LDCS 8000/2018 (unreported, dated 25 March 2020) declined to ascribe value to the unauthorized building works. To the contrary, the Tribunal remarked at §26 that the value attributable to such unauthorized structures would be a matter of assessment of the enforcement risk. 45.In the present case, the cocklofts existing at the premises (extending over the rear portion of the shop below) are however all authorized and approved by the Building Authority but the applicant referred to, for instance, a building order dated 10 December 2015 issued by the Building Authority against G/F, No 310 Tung Chau Street (“the Building Order”) by which, according to the applicant, the unauthorized metal staircase which provided access to the approved cockloft, cockloft extension from the approved cockloft to the front, 2-storey structure at the yard, and structures erected on and over the flat roof at the approved cockloft level have to be demolished and reinstated.[2] 46.Upon our joint site inspection conducted on 10 January 2023, as confirmed by Mr Ko Man Wai, the 1st named R3 (“Mr Ko”), “the flat roof” above the approved cockloft level has been cleared and removed of all such “structures” as referred to in the Building Order. 47.Notwithstanding the above, I note there is indeed similar unauthorized works present at G/F, Nos 306, 308 & 312 Tung Chau Street. More particularly, a portion of the shop front of each unit has been formed as the entrance to the cockloft directly from the street. “There are three individual exclusive staircases constructed for direct access from Tung Chau Street to the cockloft of Nos 306, 308 and 312 Tung Chau Street respectively.”[3] In comparison with the unauthorized conversions at G/F, No 310 Tung Chau Street, those unauthorized works present at G/F, Nos 306, 308 & 312 Tung Chau Street are more obvious and noticeable but yet no building order has been issued ever since. A photo of the unauthorized stairway inside G/F, No 306 Tung Chau Street leading to the cockloft is attached at Appendix 1 herein.[4] 48.I agree with Mr Lai that these unauthorized works, both at G/F, Nos 306, 308 & 312 Tung Chau Street and G/F, No 310 Tung Chau Street had been “in existence for a long period of time”[5]. They appear to be constructed of sturdy materials and show no signs of imminent danger. I am surprised that the building order dated 10 December 2015 was only issued against G/F, No 310 Tung Chau Street but not against G/F, Nos 306, 308 & 312 Tung Chau Street. 49.More recently, in 803 Funds Limied v Director of Buildings [2021] 2 HKLRD 1274, it confirmed once again there exists a “risk-based approach in determining the priority of enforcement action under the Buildings Ordinance against building safety issues. Building Authority may consider the following unauthorized building works not falling within the list of Actionable Items:[6]
50.In this 803 Funds case, it was further confirmed that such a “risk-based” approach is applicable to any unauthorized change in use. More particularly, under the enforcement guidelines, “(c)ontraventions on other planning matters such as lighting and ventilation, plot ratio, site coverage and height should not warrant immediate action.”[7] 51.As regards the assertion that Building Authority will follow up sooner or later when there is a building order issued, with the benefit of hindsight, the unauthorized works present at G/F, Nos 306, 308, 310 & 312 Tung Chau Street all exist long past the relevant date of 22 June 2020. It is unreasonable to disregard the benefits or value they may have accrued[8]. To borrow the famous quote in the finance world by John Maynard Keynes, the great British economist: "in the long run we are all dead". The short run is important and it would especially matter difference in value when the enforcement action is imminent or otherwise. The possibility is “that the time for enforcement would not come even by the end of the practical life of the building or structure in question.” In any event, this difference between the two scenarios is not significant. Mr Chan agreed that in Scenario 1, the unit value for G/F. 308 Tung Chau Street would be $166,000 per sq m but for Scenario 2, his assessed value still had $162,000 per sq m (ie a 2.4% difference). 52.In my opinion, I consider the present case quite similar to what happened in Joint Hope Limited and Sound Advice Property Limited, supra where the Building Authority had demonstrated priority if not dilatory effort in enforcing the unauthorized building works in question. I agree that Scenario 1 of Mr Chan should prevail. 53.Notwithstanding the above, Mr Chan and Mr Lai identified the following areas or portion of area pertaining to the respective G/F units:[9]
54.Then they have the following agreements/ disagreements between on the conversation factor that may be applicable to the unauthorized structures:
55.From the above, it is quite logical that the Tribunal or the experts giving evidence should not assign full value to an unauthorized structure that is equivalent to that of an authorized one. “The possibility that the landlord may at some time have to remove the (unauthorized works) could not be discounted, nor could the probability that it is allowed for the time being.” Therefore, the conversion factors proposed by Mr Chan are preferred save to the 1/3 adjustment for the self-contained staircase leading to the cockloft proposed by Mr Lai. 56.Mr Chan and Mr Lai had agreed the adjustments for size and frontage at 1% per 10 sq m difference and 2% per 1 m difference respectively. However, Mr Lai allowed an extra 2% on the unit rate to take into account the benefit of higher headroom for the front portion of G/F, No 310 Tung Chau Street which is without the cockloft. I consider this extra 2% excessive and if I were to adopt it, I would have ended up at the EUV of G/F No 310 Tung Chau Street not having the full cockloft extended higher than that of G/F No 312 Tung Chau Street with the full cockloft extended which also benefits from the direct staircase to the street. In any event this area of higher headroom is minor and does not contribute much to the trades of the subject. 57.I determine the EUV of the various shop units as follows:
Assessment of EUV of Upper Floor Domestic Units 58.Similarly, in assessing the EUV of the upper floor domestic units, Mr Chan and Mr Lai had agreed a unit rate of $78,200 per sq m which is applicable to 3/F, No 308 Tung Chau Street. 59.The two valuation experts have further agreement/ disagreement on the various adjustment factors as follows:
60.In respect of size, Mr Chan adopt the same adjustment rate for domestic unit as well as that for non-domestic but Mr Lai applied an even higher or more sensitive rate which, in my viw, should not be the case. 61.On the other hand, Mr Lai’s adjustments for view are preferred because the subject premises are in dilapidated conditions and the residents here would unlikely place much weight on view. 62.In addition to the adjustments for view above, Mr Chan applied an adjustment for nuisance to units on 2/F that front directly onto the flyover whereas Mr Lai applied none:
63.As said, while I have adopted a more minor adjustment for view, I agree that the adjustment for nuisance proposed by Mr Chan is appropriate. 64.Likewise, Mr Lai had proposed an additional adjustment of -2% for noise for units on 4/F on the ground that they suffer more from noise generated from the flyover. I agree as I do not find any double counting. 65.However, I do not agree with Mr Lai on his proposed additional adjustment for units that have a second door opening. I simply cannot find any rationale for making such an adjustment at all if Scenario 1 is adopted. 66.Whereas the respective internal conditions and the respective floor areas of the upper floor domestic units had been agreed by Mr Chand and Mr Lai[10], I determine their EUV as follows:
Total EUV 67.As a result of the above, I determine the total EUV of the Buildings in the sum of $71,716,000 + $90,302,000 = $162,018,000 and the corresponding shares of the respondents are as follows:
Whether Redevelopment of the Lot is Justified 68.Section 4(2) of the Ordinance provides that the Tribunal shall not make an order for sale unless it is satisfied that the "age or state of repair" of the Buildings is justified and that the applicants have taken "reasonable steps" to acquire all undivided shares of the Lots. 69.In his opening submission, Messrs Li & Others referred to the guidelines laid down in, for instance, Top Sail International Limited v Cheng Kai Ming, LDCS 18000/2010 (unreported, dated 15 November 2011 and Charmlink Limited v Lee Tong Hing & Others, LDCS 16000/2010 (unreported, dated 29 November 2011) and Charmlink Limited v Lee Tong Hing & Others, LDCS 16000/2010 (unreported, dated 29 November 2011) on the factors that the Tribunal should consider in deciding whether redevelopment is justified due to age and state of repair. 70.The applicant adduced the expert evidence of two experts namely, Mr B Wong who is an Authorised Person and a building surveyor, and Mr So who is an Authorised Person and a structural engineer. Their expertise was not disputed. 71.In his Structural Assessment Report dated 25 August 2021, Mr So performed a structural assessment of the Buildings and assessed the results from the following tests/surveys: visual inspection, cover meter surveys, carbonation depth tests, coring and compression tests, cement content tests, chloride content tests and reinforcement corrosion surveys. 72.Mr So had the following key findings:
73.Mr So concluded that the deterioration of the structural frames of the Buildings would continue steadily due to extensive carbonation of concrete. It is inevitable that new defects will occur and previous defects though repaired will recur readily. The defects are propagating. It is expected that substantial repairs or even partial demolition and re-construction of some defective structural elements are required in the future when, for example, there are unacceptably high reductions in the structural performance factors in the reinforced concrete structural elements due to substantial loss of cross-sectional areas of the embedded steel reinforcement bars and/ or severe deterioration of the concrete of the structural elements. Although repairs are possible, repair works will need to be carried out regularly in the future and that such repairs will be more and more expensive as the structural frames become older. 74.Mr So was of the view that the inadequacies as mentioned had been caused by defective workmanship, defective materials or defective supervision in the construction of the structural elements of the structural frames of the Buildings. These inadequacies are inherent defects that cannot be repaired. Even if repair works have been carried out the Buildings will still contain the various inherent structural defects. 75.In his Condition Survey Report dated 31 August 2021, Mr B Wong identified 13 areas where the Buildings fail to conform to modern standards regarding building safety, hygiene, comfort and convenience and other areas:
76.Mr B Wong opined that some of these aspect of functional obsolescence cannot be rectified unless the Buildings are demolished and redeveloped. Indeed, the Buildings are over 67 years old with no record of major repair done in the past. The original rendering on external wall surfaces, original waterproofing membrane on roof, and the original underground cast iron drainpipes must have passed their useful life span. 77.As well, Mr B Wong found that the Buildings are in a poor state of repair which justifies the Buildings to be redeveloped. Major repair works are required for the following 10 aspects of the Buildings:
78.Mr B Wong estimated the repair costs as much as $16,705,410 which is about 51% of the construction costs of a new similar superstructure and is disproportionately high. 79.There is no other evidence, factual or opinion, in relation to the “age” and “state of repair” of the Buildings. Having considered the evidence before the Tribunal, 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 80.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. 81.The Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363 (“Capital Well”) has emphasized at §33 that:
82.On the basis of valuation by Mr Chan, the applicant has made three rounds of offers to the respondents on 10 July 2020, 11 August 2020 and 30 December 2022 respectively:
83.This situation is very similar to what happened in Century Supreme International Limited v Kam Chi Kit Charles, LDCS 24000/2018 (unreported, dated 21 January 2022) where the Tribunal remarked at §§21-44 as follows:
84.Thus on the evidence available, 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 such of those shares as are owned by R1, R2, R3 and R4 on terms that are fair and reasonable. 85.Notwithstanding the above, Mr But on behalf of R3 submitted that the applicant had not made a post-application offer in time after the Application commenced on 4 September 2020. With respect, I find no such requirement as stipulated under the Ordinance. While the Tribunal in Good Faith Properties Limited & Others v Cibean Development Company Limited, LDCS 42000/2011 (unreported, dated 31 May 2013), as referred to by Mr But, had at §40 commented that “(t)he time for the Tribunal to be satisfied is at trial and not before”, this did not mean that a post-application offer had to be made. “There can be offers made to acquire the minority interest even after the filing of the Application” but it did not say post-application offers were a must. It only addressed the question of whether post-application offers could be taken into account in considering the question of reasonable steps that had been taken by the applicant to satisfy the Tribunal:
86.For instance, when a pre-application offer has been very high, with the benefit of hindsight for instance, it does not mean that a post-application has to be made; a post-application offer which is substantially lower than the pre-application offer in the amount may not serve good purposes. Recently, §31 of Starex Development Limited v Yau So Ching & Others, DCCJ 2372 & 2374/2021 (unreported, dated 13 February 2023) had affirmed that the offers in the acquisition scheme are matters of commercial decisions. I agree with the judgment in that same paragraph that “the peculiar factual matrix” had to be viewed as a whole. An offer that had given a minority a better or higher offer does not mean that the same or even a much better offer had to be followed. Of course, if a post-application offer has been made, the pre-application offer(s) may not be so relevant as stated in Top Harmony Limited v Cheung Yuet Sheung & Others, LDCS 39000/2018 (unreported, dated 15 October 2020) at §94 but the Tribunal did not lay down any proposition that a post-application offer must be made. 87.Whenever an offer is made by the applicant, whether pre- or post-application, the decision of the minority owner as an offeree is just a give and take exercise. 88.Mr But also referred to the Provisional Sale and Purchase Agreements previously signed by various owners of the Buildings (but not the applicant) procured by Joy Billion Properties Limited (“Joy Billion”), a real estate agent engaged by the applicant, with the intention of selling their interest to the applicant. With respect, this is neither here or there as there was no acceptance by the applicant in the law of contract; at most, as rightly admitted by Mr But himself in his closing submission, there might be invitations to treat as communicated by Joy Billion to the various owners which had no legally binding effect. A fortiori, I trust, by now, any doubt or uncertainty regarding similar acquisition scheme by a prospective applicant in compulsory acquisition would have been cleared by Starex Development Limited, supra. It had ruled that the express term in similar Provisional Sale and Purchase Agreements which gives the applicant the prerogative to terminate the Provisional Sale and Purchase Agreements to drop out of the agreements should be rightly observed. As rightly pointed out at §31 of the judgment:
89.And in the present case, as in other compulsory sale applications, there was a mediation process after the Application. Absent any evidence, I cannot simply presume that no offer was made during the mediation process. At least there is evidence from Mr Ko, the 1st named R3 and Mr Kwok, the Director of the applicant, that there had been negotiation by Joy Billion with the respondents on the sale and purchase of their units or interests in the Lots[12]. 90.Eventually, as explained by Mr Kwok in his witness statement dated 20 January 2022, the applicant had been in the process of evaluating the conditions and the latest development in the property market in Hong Kong before it was in the position to make further offers to the respondents.[13] RDV of the Lots Optimum Hypothetical Development Model 91.Both Mr Chan and Mr Lai 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. 92.Mr Chan and Mr Lai agreed a net site area of 443.23 sq m and the hypothetical development on the Lots will comprise non-domestic gross floor area (“GDV”) of 415.53 sq m (ie a plot ratio of 0.9375) and the domestic GFA of 3,324.23 sq m (ie a plot ratio of 7.5), making a total of 3,739.76 sq m (ie a plot ratio of 8.4375). However, they differed on the details of the hypothetical development:
GDV for Shops on G/F 93.Before I am going to decide on the choice of comparables and adjustment for location, I have to resolve the difference in opinion between the two experts on their assumption as to the reference shop. With respect, Mr Lai’s cockloft provision is in my opinion not acceptable by the Building Authority because of the likely abuse in the past and I have not found such cockloft provision for years in new developments. 94.As well, I agree with Mr Chan that there should be provision for plant room on G/F. According to §5.3 of CLP’s Code of Practice 101 for Distribution Substation Design (“CLP Code”) issued on 30 June 2020[14], there are additional accessibility and safety requirements for locating a plant room on an upper floor instead of G/F, namely:
95.Mr Lai however referred to §5.3.10 of the CLP Code which states:
96.Mr Lai was of the view therefore that provision of plant room would not be infeasible and referred to such provision in The Vim and The Concerto. 97.Alas, the CLP Code never suggests the provision of plant room on 1/F is not possible; otherwise there would not be the “Additional Requirements for Upper Floor Substation”. But obviously there are difficulties in locating a plant room on upper floor because of additional accessibility and safety requirements imposed. The Vim and The Concerto may not be good examples of such provision on 1/F because they are relatively small sites sandwiched between buildings on both sides[15]. The developers of such small sites have to locate the plant room on 1/F because of necessity beyond their choice. 98.In addition, Mr Chan had also made reference to similar new developments in the vicinity to support his provision of caretaker room, fire controls centre, fire service inlets etc in addition to the plant room provision on G/F. From the table below[16], it is obvious that the saleable area proposed by Mr Lai has been unreasonably exaggerated:
99.In the above analysis, only The Concerto provides for a transformer room and fire services sprinkler and pump room on 1/F, and other essential facilities including transformer room delivery area, control room, caretaker counter, cable duct and gas duct on G/F. Yet the ratio of non-accountable GFA is 15% which is higher than 14% in Mr Chan’s model and 2% in Mr Lai’s model. Therefore, even assuming a transformer room or plant room were to be provided on 1/F, Mr Lai’s proposed area of 10 sq m or 2% of GFA on G/F for access to 1/F plant room and ancillary area is infeasible and grossly inadequate. I find Mr Chan’s analysis persuasive and therefore his proposed saleable area of a hypothetical shop at 83.1 sq m is preferred to Mr Lai’s 95.81 sq m. 100.Mr Lai had suggested that in Kinstar Development Limited v Tse Yiu Keung & Others, LDCS 10000/2019 (unreported, dated 26 July 2021) the two valuation experts (one of which was Mr Lai) agreed that 10 sq m was adequate for the provision of access to the 1/F plant room and the necessary common facilities required on G/F. In that case, however, both the experts did not provide any schematic drawing on the hypothetical ground floor layout before the trial. When they subsequently provided the layout in trial, they obviously disagreed on the hypothetical model, including the location of the plant room. There is no basis for Mr Lai to assert that there was agreement as such. In any event, the Tribunal then did not have the opportunity to scrutinize their assumptions, if it was as Mr Lai said, that had been agreed. In addition, the site area concerned was very small with less than 300 sq m. It offers no comparison to the subject site. Notwithstanding the above, I note that Mr Lai agreed with Mr Chan that the G/F residential lobby, lifts and staircases etc will occupy 50 sq m.[19] 101.Mr But then tried to come to Mr Lai’s rescue by referring to Pacific Base Holdings Limited & Others v Lee Hop Biu & Others, CACV 426/2020 (unreported, 31 May 2021) where the Court of Appeal ruled at §34 that Section 4(2)(a) of the Ordinance does not carry any implied duty on the part of the Tribunal to consider the feasibility of redevelopment at the acquisition stage. In such regard, Mr But submitted that therefore any doubt in the infeasibility of the hypothetical models should be resolved in favour of the respondent so that the model proposed by Mr Lai should be adopted unless the applicant can prove otherwise. With respect, I cannot agree. On the one hand, the Court of Appeal in Pacific Base was only concerned with Section 4(2)(a) on whether an order for sale should be granted; it did not determine what matters that have to be taken into account for instance in the valuation aspects in determining the reserve price pursuant to Schedule 3 of the Ordinance. Otherwise, any experts can devise a castle in the air so as to support his hyperbole in value. This is again where the market reality principle applies so that “one only excludes the human realities to a limited and necessary extent”. Choice of Comparables and Adjustment for Location 102.Mr Chan and Mr Lai referred to the following transactions in the vicinity as comparables, the first 4 of which were commonly adopted by both experts whereas the last 4 were only adopted by Mr Lai:[20]
103.At this juncture, it is apposite to describe the environment in which the Lots are situated. While this section of Tung Chau Street is dominated by a range of similar low-rise tenement buildings which line only on the northeastern side, ground floor shops in the vicinity are mainly occupied by car repairing workshops, recycling shops, ironware shops and engineering service shops.[21] This section of Tung Chau Street is being overshadowed by a flyover – the elevated West Kowloon Corridor running along and over it. It just occurs that glimpses of the vicinity, more particularly G/F, Nos 276-286 Tung Chau Street (before the buildings thereon were demolished to give place to the urban renewal composite commercial/residential development called The Symphonie), appeared in the Hong Kong movie “Cold War (韓戰)” at around the 47th minute. The Symphonie will however be located on the other side of Yen Chau Street, a local distributor running northeast to southwest in perpendicular to Yee Kuk Street, Hai Tan Street or Tung Chau Street and leading all the way to Nam Cheong MTR station towards its end. Comparable C1 104.Comparable C1 is situated in a similar environment around the corner of Yee Kuk Street and Kweilin Street but with more bustling activities like restaurants. For this reason, I agree with Mr Lai that when the hypothetical development is completed, the general environment would improve and trades including restaurants like the ones situated at G/F, 288-290 Tung Chau Street and G/F, 292-294 Tung Chau Street will be more readily attracted to the new development or its vicinity. I agree with Mr Lai that no adjustment for location is applicable to this comparable. Comparable C2 105.Comparable C2 is situated even one block closer to the subject vicinity on Hai Tan Street which runs in parallel to Tung Chau Street. It is situated opposite to a large scale residential development project initiated by the Urban Renewal Authority, Seaside Sonata which comprises a total of 4 blocks, providing 876 residential units. Again I am content to adopt nil location adjustment as opposed to Mr Chan’s -10% or Mr Lai’s +5%. Comparable C3 106.Comparable C3 is situated on the same street as Comparable C1 but closer to the subject site and immediately beside a restaurant. Again I prefer nil location adjustment as opposed to -15% by Mr Chan or +5% by Mr Lai. Comparable C4 107.Comparable C4 is situated opposite Comparable C1 across the Yee Kuk Street and is indeed occupied by a restaurant. Again I prefer nil location adjustment as opposed to -15% by Mr Chan or +5% by Mr Lai. Comparable C5 108.Comparable C5 is situated on the other side of the main distributor, Lai Chi Kok Road, and is in close proximity to the Pei Ho Street Municipal Services Building. I agree with Mr Chan that it is not so good as a comparable in terms of location. As remarked by the Tribunal in Apex Intelligence Limited v Chan Hoi Kuen & Others, LDCS 5000/2019 (unreported, dated 19 October 2022) at §86: “a lot of boutique cafés, stores, leather shops, terrarium shops and even indie music, and more are relocated there offering a more elegant and clean environment.” If this transaction in Tai Nan Street has to be included as a comparable owing to its more recent transaction date, I would adopt a location adjustment of at least -10% as proposed by Mr Lai. Comparable C6 109.Comparable C6 is abutting Yen Chau Street. I agree that being a busy thoroughfare traversed by a variety of traffic, it has little pedestrian flow. I agree with Mr Lai’s proposed adjustment of -10% for location. Comparable C7 & C8 110.Comparable C7 & C8 should not be regarded at all as comparable because of its peculiar corner location but is far away from the subject vicinity on the opposite side of Lai Chi Kok Road. Comparable C9 111.Comparable C9 is situated close to Comparable C7 & C8 and therefore not a good comparable as it lies far away from the subject vicinity. 112.Mr Chan and Mr Lai could agree on most of the other adjustment factors including 1% per 10 sq m for size and 2% per 1 m for frontage but not for layout. While I note the substantial depth difference between the hypothetical shop and the comparables, I agree with Mr Lai on his adjustments for layout taking into account the low order trades being present in the vicinity. 113.I determine the unit rate of the hypothetical shop as follows:
114.Whereas the adjusted unit rate for Comparable C5 appears to be on the low side, I adopt $255,000 per sq m as the unit rate applicable to the hypothetical shop unit. GDV for Shops on 1/F 115.I accept the proposed saleable area for 1/F proposed by Mr Chan at 40 sq m and his assigned unit rate of 1/3 of the G/F. This means the unit rate is $255,000 x 1/3 = $85,0000 per sq m. GDV for Residential Units on Upper Floors 116.As stated in §92 above, Mr Chan’s model comprises 3 flats per floor on 2/F to 24/F whereas Mr Lai’s model comprises 4 flats per floor on 2/F to 22/F and 2 top floor simplex units on 23/F. The difference appears to be that Mr Lai had smaller units to be provided in the hypothetical development:
117.Notwithstanding the above, Mr Lai proposed 35 sq m for the common area on each floor in contrast to Mr Chan’s 40 sq m. 118.Mr Chan commented that Mr Lai’s provision of 35 sq m for common area per floor is insufficient and unrealistic for the provision of adequate lift services, common landing area and common staircases for the residential units. Mr Chan had made reference to the common area provided in developments in the vicinity:[22]
119.In 119 Limited v Yau Sau Pak & Others, LDCS 10000/2021 (unreported, dated 31March 2023), the valuation expert on behalf of the minority owners also made a similar analysis:[23]
120.Save for the latter one, the other three projects happen to be in close proximity to the Lots. It demonstrates that Mr Lai’s proposed common area of 35 sq m is unrealistically low or not pertaining to the market requirement. 121.On the other hand, Mr Lai referred to Gain Union Limited v Leung Chi Man, LDCS 5000/2021 (unreported, dated 21 July 2022) where Mr Chan then as expert adopted a residential common area of 29 sq m per floor. However, in that case, the site has an area of 215.69 sq m which could only accommodate 2 units per floor being served by 1 lift (instead of 2 lifts in the present case). Because of the above differences in the characteristics of the sites, this case does not support Mr Lai’s 35 sq m per floor, 122.Returning to the saleable area of the residential units, Mr Lai appears to have not kept abreast of the up-to-date information of the market either. At §122 of the same judgment, there was referral to an article “Trends in Residential Developments in Hong Kong – Size, Price, Standards and Cost” published by Rider Levett Bucknall (“RLB”), a construction and property consultancy of international fame on 4 April 2022 as follows:[24]
123.As a result of this article, the General Practice Division of the Hong Kong Institute of Surveyors addressed its concern to RLB on 25 July 2022 which was followed by a reply from RLB on 22 August 2022 as follows:[25]
124.Mr Lai did however make reference to the new development of The Symphonie which provides flats from 26.245 sq m to 31.406 sq m. There are other new developments which offer flat sizes of 30 sq m or below:
125.In Success Active Limited v Harbourview International Holdings Limited, LDCS 31000/2018 (unreported, dated 19 April 2021), the Tribunal accepted a typical flat size of 31.83 sq m and held at §§179-180 as follows:
126.On review, I agree that smaller units or “nano flats” are no longer as favourable as they were in the past. Although Mr Lai tried to adopt a saleable area of 29.87 sq m which is marginally higher than the 19 to 27 sq m range of “nano flats” as stated in the RLB article, “nano flats” by themselves do not have a clear definition. In the present case, as can be seen from the comparables adopted by the valuation experts below, Flat A, 5/F of Bondlane I which has a small saleable area of 21.52 sq m did not fare any better, if not worse, than the larger units. 127.Further, larger units are now relatively more affordable due to the change in mortgage policy on 22 February 2022 which allows loan to value ratio of up to 90% for properties below $10 million for first time homebuyers[26]. I agree with Mr Chan that those development projects which provide for smaller flats were only initiated years ago when the market conditions were different and smaller units were more marketable. 128.As well, I agree that Mr Chan’s model which provides for larger flats offers an additional top floor to fully utilize the residential plot ratio. This top floor would also enjoy better view, namely distant seaview and it is reasonable to maximize the height of the hypothetical development so that more units can enjoy distant seaview. 129.In contrast, Mr Lai proposed provision of top floor special units may not fare well in the subject vicinity. New residential developments like Harbour Park, Astoria Crest or The Vim do not provide such special units. As regards Astoria Crest, the only difference between the top floor units on 29/F and other units in typical floor is that Flats B, C and D on 29/F each has a portion ranging from 13.236 sq m to 16.280 sq m of top roof. In my view, they are not special simplex units justifying an uplift of 15% as envisaged by Mr Lai. On the other hand, the supposed saving in common area of the floor (ie 40 sq m) by providing special simplex units is only minimal. 130.Bondlane I may be the exception as referred to by Mr Lai. In this new development, there are 4 duplex units of Flats B, C, D and E on 27/F and 28/F with portion of the top roof, and Flats A and F on 27/F with flat roof. These top floor units are different from Mr Lai’s proposed simplexes. 131.Having reviewed the above, I cannot but come to the view that Mr Lai had only proposed a hypothetical development which tends to maximize the RDV without taking into account the reality of the market or feasibility of his proposal. It is unrealistic to provide only the bare minimum in today’s competitive market. As can be discerned from the RLB’s article, his proposal for small flat size did not take into account the possible increase in construction cost[27]. 132.In light of the above, I adopt Mr Chan’s proposed model of development and reject Mr Lai’s. 133.In any event, Mr Chan and Mr Lai adopted 5 common new residential developments as comparables:
134.Mr Chan and Mr Lai then held views that differed on the floor level adjustments: Mr Chan proposed 0.5% per floor difference while Mr Lai proposed 1.0% per floor. In normal circumstance, when the valuation experts had adopted a mid-floor unit, a hypothetical unit on 12/F in the present case, there should not be any significant deviation between the two formulae if the adjustments are applied consistently. In the present case, as there will be in general open view that can be enjoyed by the units, I prefer Mr Lai’s adjustment. 135.Mr Chan and Mr Lai also had different calibration on view adjustments:
136.Mr Chan and Mr Lai indeed assumed the reference unit has an open building view or open view respectively. The other differences are only in terms of magnitude except Mr Chan applied a -8% for view towards the flyover. Thus, in terms of magnitude, I prefer those of Mr Lai. Having said that, I note Mr But for R3 in his closing submission at §163 accepted Mr Chan’s adjustment of -8% for view towards the flyover. 137.Notwithstanding the above, however, Mr Chan and Mr Lai could not agree on the calibration of view for the following units:
138.Having toured the surroundings on the day of joint inspection, I prefer Mr Chan’s grading as such units are located on high floors or commanding relatively unobstructed view 139.In respect of noise, Mr Lai applied -3% adjustments to all hypothetical flats below 12/F. I do not agree because high floor units do not necessarily suffer less as they are receptive to noise from wider areas.[28] On the other hand, I agree with Mr Chan’s -3% adjustment on noise for units that are not facing the flyover. 140.As regards adjustment for orientation, I agree with Mr Lai on his proposed minor adjustment of +2% for those comparable units that face northeast or northwest when compared with the reference unit that faces southwest. 141.Thus, based on the same sets of comparables, I carry out the analysis as set out below:
142.From the above analysis, I find that comparables from Harbour Park, the oldest of the comparable developments, give the lowest value even after analysis and adjustments. As well, the units there are of smaller sizes as a result of which, downward size adjustments have been applied. If this not be the case, then a higher unit value would be achieved. 143.Though offering units of smaller sizes, Astoria Crest’s units achieved average unit rates slightly higher than those of Park One after size adjustments. They both point to an average rate around $205,000 per sq m. 144.The Vim provides units of very small sizes but the average unit rate achieved after adjustment was comparable to those of Park One. On the other hand, the average adjusted unit rate for Bondlane I yields the highest when there have larger units of floor area comparable to the hypothetical development. Also Bondlane I is the newest development which would have been equipped with modern facilities etc suggested by Mr Lai. 145.Having reviewed the above, I am prepared to adopt $220.000 as the unit rate for the subject hypothetical development. Then on the basis of Mr Chan’s hypothetical model, I arrive at the unit rate for the various floors as follows:
Demolition and Construction Cost 146.Whereas Mr Chan and Mr Lai had agreed the demolition cost of $4,993,300 on the basis of $2,200 per sq m , they could not agree on the construction cost of the hypothetical development though they both referred to the Building Cost Data published by RLB: Mr Chan assumed the “High to Very High Quality” standard for the hypothetical development with $51,511 per sq m while Mr Lai assumed the “High Quality” standard and took a unit rate of $42,090 per sq m. [29] 147.Mr Chan considered the unit rate adopted by Mr Lai underestimated by referring to those of the comparable developments as follows:[30]
148.Mr Chan then proceeded to analyzed the construction cost with reference to the subject hypothetical development:[35]
149.Mr Chan also criticized of Mr Lai’s calculation which did not include the accountable GFA of Balconies and Utility Platforms. In addition, the excluded accountable GFA of Balconies and Utility Platforms which amount to 143.5 sq m would be equivalent to about 143.5 sq m x $31,300 per sq m[36] = $4.49 million which is more than the estimated cost allowed for “Green Building Features” at $2.7 million by Mr Lai[37]. 150.As rightly pointed out by Mr Lai, the construction costs estimated might be more pertaining to those as at the commencement of the superstructure instead of the date of issue of the occupation permit. Mr Lai performed a similar analysis assuming the construction costs were estimated as at the commencement of the superstructure but had not taken into account any development scale adjustment, arriving at figures from $44,219 per sq m to $54,766 per sq m[38], the latter being the adjusted construction cost for Hyde Park, which was supposed to be a “practical but not extravagant (實而不華)” project promulgated by the Urban Renewal Authority. 151.Therefore, I carry out the same analysis with the development scale adjustment as follows:
152.I agree with Mr Chan’s comments and the end figures count. Therefore, his estimation is preferred. 153.At this juncture, it might also be useful to note that the above analysis does not include The Vim, the total cost of construction of which is not yet available before its completion. On the other hand, Mr Lai was of the view that The Vim is constructed of “High” quality instead of the “High to Very High Quality” standard as calibrated by RLB. In this regard, I note that the analyzed or adjusted unit rates for units in The Vim being sold is relatively lower. Thus even if Mr Lai’s proposition were correct, it would take a “High to Very High Quality” standard to justify the higher unit rate of $220,000. 154.RLB states further that its cost estimates for different levels of quality of finishes are based on certain assumption, including that the scale of development is between 10,000 sq m and 50,000 sq m of GFA. Therefore, when the Development Cost Pro-forma promulgated by the Hong Kong Institute of Surveyors is followed to facilitate consideration of construction costs in land value assessments, the following development scale adjustments are applicable:
155.Thus, Mr Chan applied a development scale adjustment of 25% on the basis of his GFA of 3,739.76 sq m while Mr Lai applied 20% on the basis of his GFA of 3,596.26 sq m for the reason that their proposed GFA fell far short of 5,000 sq m. However, it appears unreasonable to divided the lowest 5,000 sq m spectrum uniformly from 0 sq m to 5,000 sq m to see where the 20% or 30% fits in because it is unrealistic to expect say a new high-rise development of mere 1,000 sq m or even 1,500 sq m would be achieved as restricted under the First Schedule of the Building (Planning) Regulations. With a very small site of 215.69 sq m in Gain Union Limited v Leung Chi Man, LDCS 5000/2021 (unreported, dated 6 September 2022) having an envied plot ratio of 8.5, the total GFA would be around 1,820 sq m. Then the 30% development scale adjustment was applicable. Thus, a development lying say between 3,596.26 sq m and 3,739.76 sq m falls within the middle range of 2,000 sq m and 5,000 sq m that justifies an adjustment of 25%. I would expect that the 20% adjustment would be more pertaining to development of more than 4,000 sq m but below 5,000 sq m. 156.In respect of the difference between 3,596.26 sq m and 3,739.76 sq m, ie 143.5 sq m, Mr Lai explained that he had not taken into account the accountable GFA of balconies and utility platforms which constitute green building features under Joint Practice Notes Nos 1 and 2 on protection and improvement of the built and natural environment by Buildings Department, Lands Department and Planning Department. As Mr Lai admitted during cross-examination, this was the first time he adopted such practice of not including the accountable GFA of balconies and utility platforms in the calculation. With respect, this first trial by Mr Lai was wrong. Under the heading of green building features under Joint Practice Notes Nos 1 and 2, the RLB’s cost estimates specifically exclude green features such as balconies and utility platform which are subject to separate premium assessment.[39] There is therefore a separate 2% to 3% allowance for green building features like wider common corridors and lift lobbies with natural ventilation, non-structural prefabricated external walls of 150 mm maximum thickness, wing walls, noise barriers/ acoustic fins or similar, communal sky gardens. That is, the separate 2% allowance adopted by both Mr Chan and Mr Lai had not taken into account the accountable GFA of balconies and utility platforms. There is no double counting or whatsoever by not deducting the GFA of balconies and utility platforms from the total GFA. 157.Mr Lai was also wrong in not allowing any cost for external works. The RLB’s cost estimates specifically stated not to include the external works. The external works include “hard and soft landscaping, landscaped lighting, road works and emergency vehicular access within site, water features, minor buildings, garden furniture, irrigation etc as well as reinstatement of pavings, run-ins and connection charges; podium landscaped roof, roadworks and emergency vehicular access, external deck, ground level open area …” For instance, Ms Cheng for R1 and R2 referred particularly to the site coverage in the present case being 100% and queried if such external works had to be accounted for. With respect, if the definition of “external works” as described above is abided by, they are meant to be all inclusive and the items listed are not exhaustive. Indeed, Mr Chan had deducted the total site coverage of the residential tower(s) from the site area before he applied the agreed rates. He explained under cross-examination that costs for external works would comprise finishes and greenery work on the flat roof on 2/F. Although such flat roof on 2/F was assumed to be sold together with the corresponding 2/F units, it was common ground between him and Mr Lai that the area of the flat roof was not included in GFA or site coverage. In such regard, the applicant drew my attention to the railing or greenery on the flat roofs of Harbour Park, Park One and Astoria Crest. In the absence of further explanation from either RLB or the Institute of Hong Kong Surveyors, I do not consider nothing has to be allowed under this heading. Neither do I agree with Mr But that only “ground level open area” should be taken into account as it is only one of the examples given. There are other examples such as “reinstatement of pavings, run-ins and connection charges; podium landscaped roof.” Hence, I agree with Mr Chan’s applying $9,000/sq m to the external area of the hypothetical development, ie excluding the coverage of the residential tower. 158.Notwithstanding the above, Mr Chan and Mr Lai agreed on the demolition period and the construction period at 6 months and 24 months respectively, adding up to a total of 30 months. Developer’s Profit 159.In Shapiro, Mackmin and Sams, Modern Methods of Valuation, 12th edition, p 222, the development profit is explained as follows:
160.In the present case, Mr Chan adopted 18% and Mr Patrick Lai adopted 15% as the developer’s profit in their RDV assessments. 161.Mr Chan explained that for instance, the overall economy of Hong Kong was severely dampened by the 5th wave of the pandemic and the confidence in the economy was shadowed by a number of issues such as:
162.Some of the above factors might be true in the worst period last year when Mr Chan was preparing his RDV reports. However, ever since the Chinese government reopened its border with Hong Kong on 8 January 2023, Hong Kong’s property market regained some of its sparkle in January, with deals rising to a three-month high and this auspicious trend is continuing. In view of this, I prefer to adopt 15% as developer’s profit. Interest Rate or Finance Charges 163.Also in Modern Methods of Valuation at pp 220-221, the interest cost is explained as follows:
164.Mr Chan remarked that the low interest rate environment had ended. Since March 2022, the US Federal Reserve consecutively approved seven rounds of increase in interest rates, with a total of 4.25% as at December 2022. Although interest rates in Hong Kong might not follow the pattern of US Federal Reserved funds rates, since 17 October 1983, the Hong Kong Monetary Authority had adopted the Linked Exchange Rate System (LERS) to defend the local currency. Through such a rigorous, robust and transparent Currency Board system, the LERS ensures that the Hong Kong dollar exchange rate remains stable within a band of HK$7.75-7.85 to one US dollar. This system has been commonly referred to (or as a misnomer) as a peg against the US dollars. 165.For instance, in response to the US’s federal funds rates increase in March 2022, the Hong Kong Monetary Authority issued a press release on 17 March 2022:
166.This Base Rate has ever been set at either 50 basis points above the lower end of the prevailing target range for the US federal funds rate or the average of the five-day moving averages of the overnight and one-month Hong Kong Interbank Offered Rates (HIBORs), whichever is higher. Following the 25-basis point upward adjustment in the target range for the US federal funds rate by the US on 16 March 2022 (US time), 50 basis points above the lower end of the prevailing target range for the US federal funds rate is 0.75%, while the average of the five-day moving averages of the overnight and one-month HIBORs is 0.14%. The Base Rate was therefore set at 0.75% according to the pre-set formula. 167.Whereas the Federal Reserve raised funds rate by 0.5% in December 2022, followed by another rate increase on 2 February 2023 and several Federal Reserve officials’ warning that interest rates might need to go higher than anticipated to keep the lid on inflation in light of January's hotter-than-expected inflation data, on 15 February 2023, the one-month gap between Hong Kong and the US dollar London Interbank Offered Rate (Libor) continued to widen and hit a new height, approaching the level of 2.5%. This triggered the resurgence of capital outflows via carry trade by arbitrageurs borrowing the Hong Kong currency cheaply to buy the US dollars for higher yields. As a result, the Hong Kong dollar touched the level of the weak-side trading band against the US dollar. Therefore, the Hong Kong Monetary Authority intervened the currency market for two consecutive days, buying a total of 19 billion Hong Kong dollars. The large-scale market entry involved about 14.868 billion Hong Kong dollars as a result of which the leaving the aggregate balance – the sum of balances in clearing accounts maintained by banks with the monetary authority – measuring interbank liquidity to drop to around 77 billion Hong Kong dollars, which was the lowest level in about 3 years.[41] It presaged the banks of Hong Kong would follow the US in raising interest rates in March 2023. 168.Indeed, there has been substantial increase in the interest rates in Hong Kong in the past year:
169.Thus, I prefer to adopt a discount rate of 4.5% as opposed to Mr Chan’s 5% or Mr Lai’s 4% bearing in mind HSBC's Current Hong Kong Dollar Best Lending Rate was 5.625% prior to 4 May 2023 and the HKD Interest Settlement Rates published by The Hong Kong Association of Banks for three months is about 4.0%. 170.Meanwhile, I note that in China Orchid International Limited & Others v Fujitec (HK) Company Limited & Others, LDCS 7000/2018 the judgment of which was handed down on 5 May 2023, the interest rate adopted was 4%. However, that 4% was assessed on the basis of the evidence before HSBC started to increase the best lending rate. Then the HIBOR for one month was 2.6%.[43] Finding on RDV and the Reserve Price 171.Subject to what I have stated above, I shall follow Mr Chan’s residual valuation model which is reproduced at Appendix 2 to this judgment. I determine the land value of the Lot at $291,000,000. 172.I shall adopt the estimated RDV of $291,000,000 (ie accommodation value of $77,812/m2) as the Reserve Price for the auction of the Lots. Other Incidental Matters 173.The applicant proposed to appoint Mr Anthony Chow and Ms Anna Chow, both being consultants of Messrs Guantao & Chow, Solicitors and Notaries, as the sale trustees. Based on the information on their background and experience as set out in their letter dated 19 December 2022[44], I am 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. 174.The applicants have prepared a set of draft Particulars and Conditions of Sale of the Lots[45]. Subject to any amendment that may become necessary as a result of our ruling on the arrangement of auction above, the particulars and conditions of sale of the Lots by public auction submitted by the applicants are also reasonable. Order 175.This Tribunal make the following orders:
Costs 176.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 1st, 2nd, 3rd and 4th respondent to be taxed on the High Court scale, with certificate for counsel for each of the respondents, if not agreed.
Mr C Y Li, SC leading Mr Matthew Choi and Ms Jennifer A Tse, instructed by Messrs Iu, Lai & Li, Solicitors & Notaries, for the Applicant Ms Evelyn L C Cheng instructed by Messrs Tang & Lee, Solicitors, for the 1st Respondent, and by Messrs Humphrey & Associates, Solicitors, for the 2nd Respondent Mr Adrian But, instructed by Messrs So, Lung & Associates, Solicitors, for the 3rd Respondent Ms Karen Chan, instructed by Messrs So & Partners, Solicitors, for the 4th Respondent Appendix 1
[1] Although this judgment of the English Court of Appeal was overturned by the Supreme Court ([2017] UKSC 14) on the facts found by the English Tribunal that the premises were undergoing reconstruction at the material day, and it was therefore entitled to alter the rating list to reflect that reality, there is no real inconsistency between the two decisions in terms of principle. [2] See Bundle C9/28/1694. [3] See Bundle C1/15/69 at §3.4. [4] See Bundle C11/30/2060 & 2068. [5] See Bundle C3/20/490. [6] See §21 of the judgment. [7] See §24 of the judgment. [8] In Bright Dragon Properties Limited v Director of Lands, LDLR 3/2007 (unreported, dated 8 August 2014), the Tribunal at §34 accepted the evidence of the expert that “a relatively higher price will be demanded by the owner if the ground floor shop can form an entrance providing an upper floor shop premises with a direct access from the street and hence increase the value of the upper floor shop premises.” [9] See Exhibit A5. [10] See Exhibit A13, p2. [11] 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.” [12] See Bundle D/33/2466 at §6 & D/36/2575 at §9. [13] See Bundle D/36/2577 & 2578 at §17. [14] See Exhibit A8. [15] The same is also true in Kinstar Development Limited v Tse Yiu Keung & Others, LDCS 10000/2019 (unreported, dated 26 July 2021) where the site area was only 297.86 m2. [16] See Exhibit A17. [17] The area of the “vehicle maneuvering space/loading bay” or “turntable” was not accountable GFA. [18] Ditto. [19] See Bundle C5/24/833-2. [20] See Exhibit A5 p 4. [21] See Bundle C1/17/142 at §4.1. [22] See Exhibit A2. [23] See §104 of the judgment. [24] See also Exhibit A9. [25] Exhibit A9. [26] https://www.budget.gov.hk/2022/eng/pdf/e_budget_speech_2022-23.pdf [27] See Bundle C5/23/637. [28] “住高樓幽靜噪音少？實測結果可能跟你想的不一樣” (https://health.udn.com/health/story/10561/4205031) and “究竟住在哪幾層最安靜？See also “Traffic noise exposure of high-rise residential buildings in urban area” by Jie Wu, Chao Zou, Shaohua He, Xiaolong Sun, Xiaoxia Wang, Quansheng Yan (https://www.researchgate.net/publication/331356454_Traffic_noise_exposure_of_high-rise_residential_buildings_in_urban_area) [29] See Bundle C5/24/833-4. [30] See Exhibit A3. [31] See Bundle C3/19/481 & C5/24/833-71. [32] See Bundle C3/19/477 & C5/24/833-67. [33] See Bundle C3/19/480 & C5/24/833-70. [34] See Bundle C5/24/833-58. [35] See Exhibit A4. [36] See Bundle C5/23/637 on the unit cost for High Quality Finishes as at 2nd Quarter of 2022. [37] See Bundle C2/18/418. [38] See Exhibit R8. [39] See Bundle C5/24/833-94. [40] https://www.hkma.gov.hk/eng/news-and-media/press-releases/2022/03/20220317-4/. [41] https://www.scmp.com/business/article/3210106/hong-kong-makes-first-currency-market-intervention-2023-sells-us538-million-support-local-dollar [42] Hong Kong Interbank Offered Rate (HIBOR) as at any date means the Hong Kong Interbank Offered Rate for the interest period of 1 month for Hong Kong Dollars quoted by The Hongkong and Shanghai Banking Corporation Limited at or about 11:00 a.m. (Hong Kong time) on such date. This HIBOR quoted by The Hongkong and Shanghai Banking Corporation Limited is not necessarily the same as HKD Interest Settlement Rates published by The Hong Kong Association of Banks. [43] See §286 of the judgment. [44] See Bundle F4/110/3623-3625. [45] See Bundle F4/111/3626-3654. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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