Far Union Investment Ltd and Others v. Ever Legend (H.K.) Ltd and Others
Read the full judgment text of LDCS 21000/2020 on BabelCite. This LDCS judgment was delivered on 17 November 2023.
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 and in the Remaining Portion of Section B of Kowloon Inland Lot No 6022 (“the Lot”) together with the building erected thereon known as Champagne Court, No 16 Kimberley Road, Kowloon (“the Building”).
Cited by 2 cases · Cites 6 cases
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LDCS 21000/2020 [2023] HKLdT 66 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LAND COMPULSORY SALE MAIN APPLICATION NO 21000 OF 2020 __________________________ BETWEEN
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__________________ JUDGMENT __________________ 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 and in the Remaining Portion of Section B of Kowloon Inland Lot No 6022 (“the Lot”) together with the building erected thereon known as Champagne Court, No 16 Kimberley Road, Kowloon (“the Building”). 2.To be accurate, Champagne Court is a development consisting of more than one building. The Building together with its adjoining building(s) (i.e. Nos 18 - 20 Kimberley Road, and Nos 40 – 46 Carnarvon Road) are one single development, collectively known as Champagne Court, sharing common structural elements, drainage system and transformer room. According to the submissions of the applicants, for easy identification in these proceedings, Nos 18 – 20 Kimberley Road at the junction between Kimberley Road and Carnarvon Road is named as Block A, the Building is named as Block B, and Nos 40 – 46 Carnarvon Road is named as Block C of Champagne Court. (And in some building plan, Block A and Block C are collectively called Block A. For our judgment, Block A only refers to Nos 18 - 20 Kimberley Road.) 3.We also attach herewith as Appendix I being Annex 1 of the applicants’ opening submission which is a plan showing the layout and location of Blocks A, B and C, with Block A coloured in green, Block B in red, and Block C in yellow. There is no dispute to the plan. 4.The Building is a 10-storey (i.e. lower ground floor, ground floor, and 1st to 8th floors, but excluding roof) commercial/residential composite building. There are 2 passenger lifts serving the Building from the ground floor to the 8th floor, and 3 common staircases from the lower ground floor to the roof. In addition, there are 1 common staircase serving the lower ground floor to the 1st floor, and another common staircase serving the lower ground floor and ground floor only. 5.Three occupation permits Nos 8K, 5K and 7K were issued for the Building on 11 January 1957, granting permission to occupy its lower ground floor, ground floor, 1st floor and transformer house (which is the transformer room referred to hereinafter) for non-domestic purposes and its 2nd floor to 8th floor for domestic purposes. There is also one occupation permit No K8 dated 21 February 1957, granting permission to occupy its lower ground floor and ground floor for non-domestic purposes and its upper floors for domestic purposes, and another occupation permit No K3/58 dated 2 January 1958, granting permission to occupy its additional storey for domestic purposes. 6.According to the approved building plans of the Building, there are arcade shops and parking spaces planned on the lower ground floor, street shops and arcade shops planned on the ground floor, a restaurant planned on the 1st floor, 8 domestic units planned on each of the upper typical floors. According to the approved building plan for proposed alterations on roof, 2 domestic units are planned on the roof. 7.According to the Deed of Mutual Covenants (“DMC”) dated 1 July 1957 and the records of the Land Registry, the Lot together with the Building standing thereon is divided into 64 equal and undivided 1/80 parts or shares in the Lot (i.e. units on 1st floor and 2nd to 8th floors) plus 68 equal and undivided 1/340 parts or shares in the Lot (i.e. units on lower ground floor, ground floor and roof). 8.The 1st Floor is given 8/80 undivided shares in the Lot, and each of the 56 domestic units on the 2nd to 8th Floors is given 1/80 undivided share, making up a total of 64 1/80 undivided shares in the Lot. Units A, B, C, D and E on Ground Floor (which collectively is Shop No 1 under the DMC with 3/340 undivided parts or shares in the Lot and which has been sub-divided into these 5 units under a sub-deed of mutual covenant vide memorial number 7135573 (“the sub-DMC”)) are given 18,838/58,776 of 3/340, 18,838/58,776 of 3/340, 1,575/58,776 of 3/340, 3,150/58,776 of 3/340 and 16,375/58,776 of 3/340 undivided shares respectively. Each of the other units on the Ground Floor and the units on the Lower Ground Floor and Roof is given 1 to 4 undivided share(s) (i.e. including the Transformer Room on Lower Ground Floor of 1/340 undivided share and Units 20A & 20B on Ground Floor (hereinafter called “Shop 20AB”) of 1/340 undivided share), making up a total of 68 1/340 undivided shares in the Lot. THE REMAINING RESPONDENTS 9.At the time of filing of the Notice of Application (“NOA”) on 5 August 2020, there were 16 respondents. Subject to the argument whether the beneficiary of the transformer room should also be joined, all the minority owners have been joined and served with the NOA. 10.After the filing of the NOA, the applicants acquired Unit G on 4th Floor owned by the 1st respondent, Unit G on 5th Floor owned by the 3rd respondent, Units C, D and E on Ground Floor owned by the 13th respondent, and Parking Lot Nos 1, 5 and 6 on Lower Ground Floor owned by the 14th respondent, and have discontinued the proceedings against them. The applicants have also amended the NOA on 29 October 2020 pursuant to the Rule 12(1) of the Lands Tribunal Rules. 11.At trial, the following 12 respondents (except otherwise stated, the reference to “the respondents” in the discussion below refers to these remaining respondents) remain in the present action: -
12.The 1st named R9 cannot be found. By the Order of the tribunal dated 26 May 2021, substituted service on the 1st named R9 be effected by way of notices, which was effected on 1 June 2021 by publication in newspapers and by ordinary post to R9’s Property on 15 June 2021. Up to the date of trial, the 1st named R9 remained unfound and did not appear in any proceedings. 13.R5 and R16 act in person and did not appear at trial. 14.R15 is legally represented but did not appear at trial. We are informed that they have entered into a sale and purchase agreement with the applicants and for some difficulty on the probate matter, the assignment has not been signed. And technically, R15 is still the paper owner of the Transformer Room at the date of trial. 15.R2, R4, R6, R7, R8, the 2nd named R9, R10, R11 and R12 are all legally represented and have appointed counsel to appear at trial. ISSUES FOR DETERMINATION BY THE TRIBUNAL 16.The parties, except for the 1st named R9, R12 and R16, have made and filed an Agreed List of Issues for Trial on 30 September 2022 stating 5 agreed issues in dispute. Taking into account the closing submission of parties, the 5 agreed issues in our view can be rephrased and renumbered as follows: -
17.We have put the Prerequisite Requirement Issues as the 3rd issue as our consideration of this issue has cross reference to Issues (1) and (2). In addition, some of the respondents have raised some further points for determination in their submission. 18.R2, represented by Mr Dennis Chang, SC (“Mr Chang”) and Mr Ross Yuen (“Mr Yuen”), opposes the grant of a compulsory sale order, particularly in the issues related to the shared structural and other elements, the age and state of repair of the Building, and whether these proceedings are validly constituted with all necessary parties joined and given an opportunity to be heard. Nonetheless, R2 does not take any position on whether the applicants are majority owners at the time of application pursuant to section 3(1) of the Ordinance and how the undivided shares ought to be calculated for the purpose of determining majority ownership. 19.R2 has taken 2 other issues set out in Part 2 of the Agreed List of Issues, which are irrelevant in the view of the applicants, as follows: -
20.It is noted that the developer of the Building did not build the transformer room according to the original building plan. For some reason, a unit at the Lower Ground Floor has been assigned to 4 persons as joint tenants, where the transformer equipment is housed. Since all has passed away, the property vest in the estate of the last survivor, R15. And to make thing difficult, there is no trust deed produced. According to the terms of the assignment as recorded in the memorandum registered in Land Office by memorial number 260352, some of the respondents argue that the said 4 persons are holding the transformer room in trust for all the owners of Blocks A, B and C. 21.We shall discuss about the issue of trust (if any) of the transformer room and its impact(s) on the application later. 22.R4, represented by Mr Nyon Tsang (“Mr Tsang”) and Mr Victor Lau, takes issue primarily on valuations in the application, but does not dispute whether a compulsory sale order should be granted. 23.R6, represented by Mr Benjamin Chain (“Mr Chain”) and Mr Adrian But (“Mr But”), opposes to the grant of a compulsory sale order on all grounds. In addition to the disputes on valuations in the application, R6’s main contention is that: -
24.R7, R8, R10 and R11, represented by Mr CY Li, SC (“Mr Li”) and Mr Chester Kwan, take issue with Issues (1), (2), (3) and (5) only. In particular, Mr Li contends that: -
25.The 2nd named R9, represented by Mr Daneel Heung (Mr Heung”), takes issue primarily on valuations in the application only. 26.R12 is represented by Mr Ambrose Ho, SC (“Mr Ho”) and Mr Jonathan Lee. In addition to the dispute on valuations in the application, Mr Ho primarily contends that: -
THE EVIDENCE AND EXPERTS 27.The applicants and the respondents represented by Mr Chain, Mr Li and Mr Ho have filed witness statements of their respective factual witnesses. 28.R2, R4, R6, R7, R8, the 2nd named R9, R10, R11 and R12 have jointly appointed Mr Patrick W C Lai (“Mr Patrick Lai”) of AA Property Services Limited as their valuation expert. Only R2, R6 and R12 have appointed Mr Raymond Lo Man Chiu (“Mr Raymond Lo”) of Leadtops Raymond Limited as their structural engineering expert and Mr Remus Wong Wai Kong (“Mr Remus Wong) of Amazing Group Limited as their building surveying expert. 29.The applicants are represented by Ms Nancy Ngai (“Ms Ngai”) and Ms Catherine Hau. They have appointed Mr Alnwick Chan Chi Hing (“Mr Alnwick Chan”) of Knight Frank Petty Limited (“Knight Frank”) as their valuation expert, Mr Wong Chi Ming (“Mr CM Wong”) of C M Wong Associates Limited as their structural engineering expert and Mr Benson Wong Sai Ning (“Mr Benson Wong”) of Benson Wong & Associates Limited as their building surveying expert. 30.The experts have prepared their respective expert reports, and have also jointly prepared the joint expert statements on valuation, structural assessment and building condition respectively. ISSUE (1) – MARKET VAULE OF EACH PROPERTY 31.According to section 3(1)(a) of the Ordinance, the application to tribunal for compulsory sale of lot should be accompanied by a valuation report as specified in Part 1 of Schedule 1 of the Ordinance. Part 1 of Schedule 1 specifies the valuation report to be: -
32.Pursuant to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the assessment under section 3(1), the tribunal shall determine the proper value. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the lot who cannot be found, the majority owner of the lot is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is: -
33.There is a missing owner, the 1st named R9, in these proceedings, and all the respondents represented by counsel at trial dispute the valuations as assessed in the application. Before we could assess the market value of each property, we have to deal with a preliminary issue raised by the parties, namely, what is the meaning of “each property in the lot”. Meaning of “Each Property in the Lot” 34.Mr Li challenged the reports of Mr Alnwick Chan that they are not prepared in accordance with the Ordinance, and the report is not in compliance of the requirement of the Ordinance. He raised one issue on what is the meaning of each property in a Lot. We consider the argument also relevant to our consideration of the EUV and hence we first deal with his argument herein. 35.Mr Li gives a detailed analysis of the distinction between 2 terms used in the Ordinance, “property” and “undivided share” in his closing submission which we do not repeat. He submits that the 2 terms used in the Ordinance carry different meaning and purpose. “Property” is the basis for determining the apportionment of sale expenses and proceeds of sale. “Undivided shares” are the basis for deciding whether one can apply for an order for sale and for defining majority owners and minority owners. 36.Mr Li also refers to the Minutes of the Provisional Legislative Council Meeting on 10 February 1998 to support his argument that “property” and “undivided shares” have different purpose in the Ordinance. Hence he submits that each property, and not each undivided shares in the Building should be valued. And if not every property has been valued, the report served with the NOA is defective and does not serve the purpose of the Ordinance. 37.Mr Li submits that there are only a limited number of assignment plans. He also refers to the DMC, which has no plan attached. Both valuers from the applicants and the respondents have tried to meet the task of assessing the market value of the property on the Lot by coming up with their versions on the size and location of the property. Mr Alnwick Chan’s approach is to do valuation on the basis that what he saw at site are taken to be the properties on the Lot which he tries to correlate to the properties as listed in the DMC schedule. And Mr Patrick Lai has also adopted such an approach. 38.Mr Li say this approach is problematic as there could be changes over the years, and neither of them has tried to find out the changes to the layout and position of the properties over the years. 39.Mr Li submits that the fallacy of the valuers’ approach is clearly manifested by the fact that they could not locate Shop 20AB and give no value to Shop 20AB. Shop 20AB are listed as a property in the DMC Schedule for which 1/340 part or share was allotted. There is no reason to suggest that Shop 20AB did not physically exist when the Building was built and the DMC made. There is no reason to suggest that they are common parts. The report has not valued each property of the Lot. 40.Mr Li also refer to the evidence of Madam Lui, witness for the applicants, that they have paid over $8M for Shop 20AB for the acquisition of the 1/340 undivided share as allotted to Shop 20AB. And Madam Lui said the physical area of Shop 20AB did not exist. 41.Mr Li submits that the bare assertion that Shop 20AB did not exist anymore should be rejected. And Mr Alnwick Chan should prepare his valuation report by valuing Shop 20AB by giving them a value, with reference to the price paid by the 1st applicant (“A1”). Currently, both valuers assess the market value of Shop 20AB at nil. Mr Alnwick Chan gives nil value of the shops, as their location could not be found, and the owner has no enjoyment of the Shop 20AB. 42.It is submitted by Mr Li that the valuation report by Mr Alnwick Chan is defective in that it did not value Shop 20AB. The applicants fail to adduce a proper valuation report in support of the application herein and the application is not properly constituted. 43.Mr Li also refers to a number of shops on ground floor and lower ground floor which location is challenged. It is his submission that not each property has been properly identified and hence the report has not valued “each property” of the Lot. 44.Ms Ngai submits that the property in respect of which the EUV to be assessed pursuant to Part 1 of Schedule 1 of the Ordinance is an estate or interest in land, or an estate or interest in the whole or part of an undivided share of and in land. She refers to the judgment of the Court of Final Appeal given in Kung Ming Tak Tong Co Ltd v Park Solid Enterprises Ltd (2008) 11 HKCFAR 403. She refers in particular to paragraphs 35 and 36 of the judgment and submits that in any assignment of land, the undivided shares in the property are the subject-matter of the assignment. Their assignment immediately results in the assignor and the assignee becoming co-owners of the property with unity of possession, subject to and with the benefit of the deed of mutual covenant. And the grant of exclusive possession is generally read as reference to the product – purely as a matter of contract – of the mutual covenants simultaneously entered into, rather than of any proprietary grant under the deed of assignment. 45.Further, Ms Ngai submits that in the context of land resumption under the Land Resumption Ordinance, the compensation payable to a claimant is also the market value of “an estate or interest in land” being resumed by the Government. She submits that the authorities and legal principles in the Land Resumption Ordinance are applicable to the Ordinance. We presume she wishes to make reference to the Land Resumption Ordinance to assist in the interpretation of words and phrases in the Ordinance. 46.Ms Ngai submits that under section 11 of the Lands Resumption Ordinance, “when any property is resumed”, the Land Tribunal is to assess the compensation under the guidelines of section 11. She submits that “property” is not defined by the Land Resumption Ordinance. And with reference to the definition of “property” in Cap 1, the land or property resumed by the Government must refer to the estate or interest in land being resumed. Equally, she argues that the “each property” refers to in the Ordinance is referring to the estate or interest in the land. 47.One must bear in mind that the scheme of resumption of land under the Land Resumption Ordinance is different from the scheme under the Ordinance. When a property or land is resumed by the Government, the tribunal is to determine the compensation. As for an application under the Ordinance, there is no resumption and the tribunal is to determine if an order for sale should be granted. If an order is granted, this is not a resumption but an order that the lot shall be put up for sale in the market by public auction. The applicants may not be the successful bidders. And the tribunal shall set the reserve price, with the final sale price to be determined by the market. We consider the submission of Ms Ngai with caution when she refers to a different scheme of resumption. Yet, there is force in the argument that “property” refers to the property forming the subject lot of the application. Anyway, it would also be helpful to refer to conveyancing practice and legal principle to understand the term “each property in a lot”. 48.Let us consider the meaning of “property” and “undivided shares” being used in the Ordinance. And if we read section 3(1) of the Ordinance, the applicant has to have 90% (in this case 80%) of the undivided shares in a lot. So an “undivided share” should be read with the interest in the lot, meaning “an undivided share in a lot”. The term “undivided share” by itself is just a quantity unit of the interest in a lot, which is a land and an immovable property. 49.Looking this way, when one talks about an undivided share in the lot, or a unit in the building in the lot as described in the DMC, or a property referred to in the Ordinance, they are all referring to an estate or interest in the land, or part thereof. 50.We accept that by counting the undivided shares in the land, we assess the total ownership of the applicants in the Lot, in particular to assess if they hold 80%. And we are talking about interest in immovable property. Mr Li submits that the valuation report is to value each property, referring to the undivided shares in the DMC, the area with exclusive possession and use reflected in any plan, and any later changes in order to properly define each property. And he submits that the valuers have not done so. And in particular, they could not find the area for exclusive use of Shop 20AB and give no analysis why they are missing. He submits that both valuers jump to conclude that there is no market value for Shop 20AB which is wrong. 51.Given our analysis, each property is a share or interest in the Building and the Lot defined by the assignment and the DMC, or part thereof, together with the exclusive right to use and possession of a designated area. If we take Units A and B on Ground Floor as an example, they are part of Shop No 1 which has been subdivided into 5 units by the sub-DMC. There are plans and the location is clear. And for market value, the location and the usage of the unit is material to the assessment by the valuers. 52.The location of each property would be a matter of finding of fact. When the experts are making their assessment of the value of a property, they must have regards to the conveyancing document assigning the undivided shares to that property, and the location which would affect the valuation and the DMC. Their site visit and observation would be evidence for the tribunal to rule on the location of each property, if there is a dispute, particularly when there is no assignment plan or DMC plan on location of each unit or property. 53.But like any experts, the valuation experts are only given an expert evidence. They are not to determine finally the location of a property, if there is such a dispute, and the value. The valuers have done their site visit and do valuation on the basis that what they saw at site are taken to be the properties on the Lot, including the number of properties and the area and location of each property in their expertise. The report is not to conclude on any matter that could be in dispute, but to set out their findings and their opinion for consideration of the tribunal. 54.There would be an owner of each unit or part of the property, referring to the Lot. He may be the majority owner or the minority owner and they could raise any objection as to the location of their property, and the size. Technically, we have no objection raised in the Application or Notices of Opposition on the location and area of Shop 20AB in the Lot. 55.If there is challenge to the location, this must be a matter raised by the parties at the trial supported by evidence, and for the tribunal to rule as a matter of finding of fact. The Ordinance requires the application be served on all minority owners, and all the owners (including the majority owners) could give their objection/view as to the location of their property. And given we do not have all the assignment plans, the tribunal have to rule on the best evidence available to determine each property and to assess the value of each property. The evidence of the experts is also relevant and admissible and what remains must be an assessment by the tribunal on the reliability of the assessment and investigation carried out by each valuer, having heard all the evidence, and receiving all the plans and document on location. 56.We do not agree with Mr Li that technically, the experts have to give analysis as to what happen to the location of, or disappearing of Shop 20AB before they could assess the value of each property. It would help if they are available. They are not forensic experts. But if not, we have to rule on the evidence before the tribunal, and we are to do that later in this part of our judgment. 57.We have all the owners in the application, and we shall proceed to consider the correctness of the assessment of the valuers that no area could be allocated to Shop 20AB and whether they are justified in given nil value to it in the section “Locations and Effective Areas of the Units on Ground Floor and Lower Ground Floor” of the judgment. The important part of the report is all units or parts of the Lot has been account for and opinion given. Given the valuers have set out their findings for adjudication, we fail to see any ground to suggest that the report is not a report of “each property” in compliance of the Ordinance. Valuation Methodology 58.Despite the facts that (i) Units A and B on Ground Floor (i.e. owned by R12) and Units C, D and E on Ground Floor (i.e. previously owned by R13 and now owned by A1; (ii) Unit 13 on Ground Floor (i.e. owned by R8) and Unit 14 on Ground Floor (owned by the A1); and (iii) Unit 15 on Ground Floor (i.e. owned by A1) and Unit 16 on Ground Floor (owned by the 1st named R9 and the 2nd named R9), are owned by different owners, Mr Alnwick Chan has valued each group of them together as 1 single unit and then apportioned the value on a pro rate basis according to the respective effective areas of each unit. Whilst, Mr Patrick Lai has valued Unit 15 on Ground Floor and Unit 16 on Ground Floor together as 1 single unit only, and the units in the other 2 groups of units are valued separately in accordance with their respective ownership. 59.Ms Ngai submits that the “highest and best use” valuation principle adopted by Mr Alnwick Chan in the EUV assessment has long been accepted by the tribunal. Ms Ngai further submits that the valuation of Unit 13 on Ground Floor and Unit 14 on Ground Floor together or separately should have no difference; Mr Patrick Lai has also valued Unit 15 on Ground Floor and Unit 16 on Ground Floor as a combined unit because these 2 units had the same occupier at the valuation date; and it makes no commercial sense to suggest that the 2 owners of Units A and B on Ground Floor and Units C, D and E on Ground Floor would not cooperate with each other and sell their properties in one go to a purchaser in order to receive the highest possible consideration to the best interest of both. Given that the value of a combined unit comprising Units A, B, C, D and E is higher than the aggregate values of the 2 groups of units, there are willing purchasers or speculators willing to purchase the 2 respective groups of units and sub-sell them as one whole unit to another purchaser at the higher price on the same day, even on the assumption that they would refuse to do so. 60.From valuation perspective, we agree to adopt the “highest and best use” principle in the EUV assessment, but we do not accept to value units with different ownership together as 1 unit unless there is sufficient evidence that these units would really be sold together, or have reasonable prospect of joint sale. Depending on individual circumstances, a joint sale agreement on or before the valuation date may be the sufficient proof. We are of the view that (i) whether or not there is difference in value if these units are valued together or separately; (ii) whether or not these units are occupied together or separately; and (iii) whether or not there is noticeable increase in value if these units are valued together, as advocated by the applicants, should not be the prior and main considerations in choosing the valuation method. 61.Even if there is no difference in value between the results of the 2 valuation methods, it cannot make an inappropriate method to be acceptable. Even if the units have the same occupier (but different owners) as at the valuation date and/or the value of a combined unit is much higher than the aggregate values of the units, these are not sufficient evidence that the units would be sold together. In reality, different owners may have different opinion on the current market and the future market and their respective contribution in a combined sale if any, and hence they are very often arguing with each other over apportionment of value. 62.Therefore, a combined sale should not be lightly inferred unless there is sufficient proof, and there is no sufficient proof in the respective combined sale of the said 3 groups of units in these proceedings. In any event, the evidence in this case reveals that R8 refused to sell Unit 13 on Ground Floor and objects to the grant of a sale order. R12 also refused to sell Units A and B on Ground Floor and objects to the grant of a sale order. The 1st named R9 is a missing owner who could not agree to a combined sale and apportionment at all. 63.Based on the determinations that, from valuation perspective, units owned by different owners in this instance should be valued separately unless there is clear evidence to support the claim that they would be sold together, we do not agree with the methodology of Mr Alnwick Chan in assessing the said 3 groups of units together. 64.And as we rule against the methodology used by Mr Alnwick Chan in assessing the market value of some units as aforesaid, and the same methodology has been used in all valuation reports prepared by him including the initial report attached to the application, we shall further discuss whether the applicants have fulfilled the prerequisite requirements of serving a valuation of each property with the application in Issue (3) and whether the applicants have taken reasonable steps to acquire all the undivided shares in the Lot in Issue (5). 65.On the other hand, Mr Alnwick Chan has valued Unit 17 on Ground Floor (i.e. 17A and 17B), Unit 18 on Ground Floor (i.e. 18A and 18B) and Parking Lot 4 on Lower Ground Floor (i.e. 4A and 4B) as 2 units respectively, and has also valued Parking Lot 5 on Lower Ground Floor and Parking Lot 6 on Lower Ground Floor as one combined unit, but there is no complication of the above said ownership issue in these assessments. In this instance, we agree with the applicants that there is no noticeable difference in value no matter these units are valued as 1 or 2 units respectively, but we would prefer to value them as 1 or 2 units in accordance with the records of the Lands Registry, the same as that adopted by Mr Patrick Lai. Agreements and Disagreements of the Valuation Experts 66.The 2 valuation experts agree to assess the EUV on 5 June 2020 primarily by direct comparison method. Except for the identification of “each property” for a few units on the Lower Ground Floor and Ground Floor which has been partly discussed in the paragraphs above, the effective areas of a few units on the Lower Ground Floor and Ground Floor, the views of a few domestic units on the upper floors, they agree on the attributes and parameters of all the other units in the Building. 67.In the assessment of the street shops facing Kimberley Road, they agree on the same street shop reference unit (i.e. Unit 3 on Ground Floor), but they argue on the choice of some comparables and the adjustments for mainly location, frontage, size and layout. They also argue extensively whether Units C, D and E on Ground Floor should be valued as a street shop or an arcade shop. 68.In the assessment of the arcade shop on the Ground Floor, they agree on the unit rate of the arcade shop reference unit (i.e. Unit 9 on Ground Floor) at $405,000 per square meter and the adjustment for frontage at 2% for every 1-meter difference but they disagree on the adjustments for mainly return frontage, layout, proximity to entrance and size. 69.In the assessment of the units on the Lower Ground Floor, they agree that the unit rate of Unit 25 on Lower Ground Floor should be $196,250 per square meter, but they argue whether the same unit rate should be applied to all the other units on the Lower Ground Floor as proposed by Mr Alnwick Chan or there should have further adjustments for frontage, location and size as suggested by Mr Patrick Lai. 70.In the assessment of the 1st Floor, they argue whether direct comparison with a comparable should be adopted or a fraction of the overall ground floor unit rate should be applied. 71.In the assessment of the domestic units on upper floors, they agree on the same domestic reference unit (i.e. Unit A on 3rd Floor) and its unit rate at $118,000 per square meter, the adjustments for headroom and floor and the adjustment rates for view, but they disagree on the adjustment rates for internal condition and the adjustments for mainly size, noise, view, facing aspect and top floor. Locations and Effective Areas of the Units on Ground Floor and Lower Ground Floor 72.The parties including their respective experts could not identify the location of Shop 20AB, though these 2 units are allocated with 1/340 undivided share in the Lot and were sold to A1 on 18 January 2018 at a consideration of $8,243,846. Both Mr Alnwick Chan and Mr Patrick Lai have assigned nil value to these 2 units. 73.On the evidence available to the tribunal, we consider that the consideration for sale and purchase of these 2 units might reflect the redevelopment value only because they are allocated with undivided share, for which the applicants under the Ordinance should take reasonable steps for acquisition. We accept that their locations cannot be identified for valuation and there is no vacant space that may be allocated for their effective use on ground floor, which are agreed by the 2 valuation experts. In the circumstances, we accept the assignment of nil value to them, which is agreed by the 2 valuation experts. We are also of the view that the assignment of nil value to them, which are all owned by the applicants, should not be less than fair and reasonable. 74.Nonetheless, the 2 valuation experts argue extensively over the respective locations of Units 29, 30, 31, 34, 35 and Parking Lots 1, 2, 3 on Lower Ground Floor. Given that only the parking lots have an assignment plan for identification, which tallies with the descriptions of Mr Alnwick Chan, and there is no other conclusive evidence in this regard, we on balance of probabilities agree to adopt the locations of these units and parking lots as proposed by Mr Alnwick Chan. In any event, all these units and parking lots are owned by the applicants, and the 2 valuation experts have also agreed on the respective occupied areas and usages. Hence, no matter what they are named and numbered, the respective interests of and the apportionment among the applicants and the respondents would not be affected. 75.Regarding the calculation of effective area, the 2 valuation experts have basically agreed on the occupied area of each unit. Except for the conversion of cocklofts, men’s lavatory and extension of men’s lavatory (i.e. Units 29, 30, 31 and 34 on Lower Ground Floor), parking lots, and an extension of Units 4 and 5 on Ground Floor, they agree to accept all other extensions as the effective areas. 76.With reference to the consolidated tables prepared by the 2 valuation experts and the measurement worksheets in Appendix V of the application valuation report, we basically agree to the measurements of the parties, but we are of the view that the areas of some extensions onto the arcade should be separated from the saleable areas for easy identification. 77.However, we disagree to assign value to the self-erected cocklofts, which are converted by Mr Alnwick Chan at 1/8 and Mr Patrick Lai at 1/4 (i.e. except for the cockloft of Unit 17 on Ground Floor). We are of the view that Mr Patrick Lai is right to opine that the cockloft of Unit 17 on Ground Floor should not be taken into account in the valuation analyses due to the absence of evidence that this cockloft would be authorized by the Building Authority. We consider that the same principle should also be applied to the other self-erected cocklofts, which are of similar nature and backgrounds. Further, although the self-erected cocklofts can increase storage space, they would reduce the headroom of the respective shops. We consider that prospective purchasers in the market would not pay a price for such self-erected cocklofts because their construction cost would not be substantial and their depreciation over time should also be taken into consideration. 78.On the other hand, although we agree to convert the extensions onto the arcade and/or within the building envelope at full value (i.e. except for 2 extensions of Units 4 and 5 on Ground Floor and some of the extensions of Units 29 – 31 and 34 on Lower Ground Floor, which will be discussed in the latter part of this section of the judgment) as agreed by the 2 valuation experts, we disagree to assign any value to the extensions onto Government land and the extensions subject to building orders. 79.Given that the extensions onto the arcade and/or within the building envelope have a long history without enforcement even if there are encroachments onto common areas, there is no DMC plan and limited numbers of assignment plans to delineate clearly the boundaries of each unit and the building plan is not the conclusive evidence on layout of each unit, we agree with the 2 valuation experts that prospective purchasers in this instance would pay full price for these extensions. 80.However, we are of the view that the encroachment of Government land (i.e. extensions of the shops onto Kimberley Road beyond the boundary line of the Lot) by Units A and B on Ground Floor, which are subject to the risk of enforcement by Government, and the encroachment outside the building envelope by Parking Lots 2, 3 and 4, which are subject to building orders, should not be assigned with any value. We consider that prospective purchasers in the market would not pay a price for them because of their respective risks of enforcement and temporary enjoyment only. 81.Three factual witnesses gave evidence on the extension of Units 4 and 5, namely, Mr Kwan Feng (“Mr Kwan”), a witness adduced by R7, R8, R10 and R11, R11 (“Mr Ting”) and R6 (“Ms Su”) the owner of Units 4 and 5. 82.Mr Kwan is a caretaker of the Building. He said he has been the caretaker since 1 January 1999. One of his duties is to collect the monthly management fees and subsidy fees (補助費) from some shop owners who has occupied common areas of the Building. A table has been produced in his witness statement dated 14 October 2022. He recorded that R6 paid subsidy fees of $2,200 per month for using the space between Units 4/5 and Units 3 to place display box. 83.When being cross examined, Mr Kwan agree that the subsidy fees is fixed by the incorporated owners of the Building and he was not involved. He is only responsible for collecting the fees and pay into the account of the incorporated owners. 84.Mr Ting gives evidence and suggests R6 has not received any complaints for using the 2 areas of extensions outside Units 4 and 5 because she has been paying licence fees in the form of monthly subsidies. He believes that the incorporated owners of the Building is not obliged to allow R6 to use the extension indefinitely. 85.Ms Su gave evidence and she admits that she has been paying monthly subsidy. She denies that this represent licence fees and explains that the fees have been paid to subsidy the management expenses of the Building. She states in her first and supplemental witness statements that the show cabinets were building by her ex-husband 32 years ago, in around 1990. She obtained the ownership of Units 4 and 5 after their divorce. Following the practice of her husband, she paid the monthly subsidiary. 86.It is her understanding that the incorporated owners do not have sufficient funds as some owners fail to pay the monthly management fees. She said the subsidy is to subsidise payment of wages of employees and maintenance expenses. This help to maintain the shopping arcade in a reasonable condition to attract visitors. 87.Ms Su also mentioned that Mr Kwan has been very helpful and sometime he would look after the shop for her if she has to go out for a short moment. Mr Kwan has been helpful in cleaning the arcade. But his wages were delayed on some occasions by the management company and she paid the subsidy to ensure that Mr Kwan could have payment. 88.It is the submission of Mr Li that the evidence of Mr Kwan is credible. And since licence fees have been paid by R6 for her use of the extension, R6 should not be entitled to include those area as part of Unit 4 and 5 in the valuation. 89.Mr Chain submits that Mr Kwan is not credible, he has signed his witness statement which is pre-written and signed during a meal (which is agreed by Mr Kwan on cross-examination). There is no prior interview. And Mr Ting is relying on the evidence of Mr Kwan. 90.Having assessed the evidence, we have to say that the evidence of Mr Kwan is not reliable, particularly on his evidence on the purpose of the monthly subsidy. To begin with, he cannot speak for the incorporated owners and he cannot tell how the fees are fixed, and for what purpose, or for which area. 91.The document produced by Mr Kwan could not speak on the purpose of the subsidy. And the name of the fees is for subsidy. If this is a form of licence fees, there is no reason why the term “licence fees” are not used, or for layman they could call these rent. Hence we have to assess the document with caution. 92.We accept that it is the unchallenged evidence of Ms Su that she had not paid for the fees for sometime and there is no follow up action against her. We do accept evidence of Ms Su that the payments were voluntary and had nothing to do with all the extensions. And further, some other units with extensions have not been required to pay licence fees or subsidy. On the balance, we do not accept the submission that there is evidence of licence fees and reject the submission of Mr Li. 93.Yet we have to assess if the extension claimed by R6 should be included as Units 4 and 5 for valuation and we assess the matter from valuation prospective. 94.From valuation perspective, we disagree to assign any value to the movable wooden cupboard and its adjacent display cabinet of Units 4 and 5 on Ground Floor, which are separated from and opposite to the main shop area and are located next to Shop 3 on Ground Floor. It is not likely that any buyer is prepared to give additional value to them. But for the extensions in front of the main shop area and the passenger lifts, we accept the evidence of Ms Su that Units 4 and 5 have been using these areas for many years. It is credible in terms of valuation that a potential buyer would pay additional price for these areas. This part of the extension shall be taken into account for valuation. 95.Regarding the extensions of Units 29 – 31 and 34 on Lower Ground Floor, we consider that the areas of about 6.4 square meters immediately next to the Men’s Lavatory as described in the building plan, which is subject to a building order, should not be counted for effective area. Further, since there is no evidence that conversion of the Men’s Lavatory into shop area has been approved by the Building Authority and the extension over part of the parking lot adjacent to the units appears to be irregular, we consider that prospective purchasers in the market would pay a price with discount only for these extensions. We are of the view these extensions can be converted at say 80%, instead of 100% proposed by Mr Alnwick Chan and 50% suggested by Mr Patrick Lai. 96.Nonetheless, we prefer the assignment of full value to the units with planned use as car parking space as proposed by Mr Alnwick Chan to the adjustment at 50% as suggested by Mr Patrick Lai. Although they are named as parking lots / spaces, we consider that such description would not materially affect their usage as shop or store and prospective purchasers in the market would pay a full price for them. 97.The saleable area, extension area (if any) and effective area of each unit or each group of units are listed in Appendixes III and VI of the judgment. EUV of Ground Floor Street Shops 98.In the valuation of the street shop reference unit, Mr Alnwick Chan and Mr Patrick Lai propose 7 and 5 comparables respectively, and 3 of them (i.e. Comparables ES1, ES2 and ES3) are common. Since there are not many relevant comparables, we agree to analyse Comparables ES4 and ES7 proposed by Mr Alnwick Chan and Comparables ES8 and ES9 suggested by Mr Patrick Lai, though the analysed results of Comparables ES8 and ES9 should be further reviewed because they have frontages on both Carnarvon Road and Humphreys Road. We disagree with Mr Alnwick Chan to analyse Comparables ES5 (i.e. Ground Floor, Nos 10A Humphrey’s Avenue) and ES6 (i.e. Ground Floor, Nos 20-20A Ashley Road) because they are much larger in size and were transacted in 2018, more than 2 years before the valuation date. 99.The 2 valuation experts agree on the adjustment for time with reference to Private Retail Price Indices, the adjustment for age at 1% for every 10-year difference and the adjustment for headroom at 2% per 1-meter difference. 100.Regarding the location, we agree with Mr Alnwick Chan that Comparables ES1, ES2 and ES3 should be adjusted at 10%, 10% and 20% respectively instead of 15%, 15% and 25% suggested by Mr Patrick Lai. We also agree with Mr Alnwick Chan that Comparable ES4 should be adjusted at 15%, but we consider that Comparable ES7 facing Carnarvon Road is similar to the reference unit and therefore should have nil adjustment instead of 5% proposed by Mr Alnwick Chan. Whilst, Comparables ES8 and ES9 with frontage facing Carnarvon Road should have nil adjustment too instead of -5% suggested by Mr Patrick Lai. 101.Regarding the frontage, we agree with Mr Alnwick Chan to adopt a less sensitive rate at 3% for every 1-meter difference instead of 4% suggested by Mr Patrick Lai. For the 2nd frontage of Comparables ES8 and ES9 facing Humphrey’s Avenue, we agree with Mr Patrick Lai to adopt the adjustment rate at 4% for every 1-meter difference instead of -10% only as proposed by Mr Alnwick Chan. The existence of the 2nd frontage facing Humphrey’s Avenue would allow subdivision and are beneficial. 102.Regarding the adjustment for size, there is no great difference between the 2 valuation experts. Nevertheless, we prefer the adjustment rate at 1% for every 3-square meter difference and the linear approach suggested by Mr Patrick Lai to the adjustment rate at 3% for every 10-square meter difference and the threshold approach with cap proposed by Mr Alnwick Chan. 103.The 2 valuation experts agree not to adjust for layout to Comparables ES1 and ES3. We consider that Comparable ES2, which is similar to Comparable ES1, should not be adjusted for layout too. With reference to the depth of the comparables, we agree with Mr Alnwick Chan not to adjust for layout to Comparable ES4 and that Comparable ES7 should be adjusted at 5%. Nevertheless, we agree with Mr Patrick Lai to adjust for layout to Comparables ES8 and ES9, which are sub-divisible, at -20%. 104.The valuation of the ground floor street shop reference unit is listed in Appendix II of the judgment. The average unit rate of the 7 comparables is about $1,586,805, and the average excluding Comparables ES8 and ES9, which appear out of line, is about $1,453,387. We consider that the adopted unit rate for the reference unit should be $1,500,000 per square meter. 105.The valuation of the street shops on ground floor is listed in Appendix III of the judgment. In the valuation of Units C, D and E on Ground Floor, we disagree with Mr Patrick Lai to adopt the arcade shop reference unit rate. Units C, D and E on Ground Floor, which has frontage onto arcade only, is located at the main entrance of the Building and can easily be seen along Kimberley Road. We are of the view that it is more like a combined street shop instead of a combined arcade shop. 106.The same adjustment rates and principles as agreed by the valuation experts or as determined by the tribunal above are applied to the valuation of the street shops in the Building. The 2 valuation experts have also agreed to adjust for the return frontage of Unit 2 on Ground Floor onto arcade at 10%. Nevertheless, we consider that Units C, D and E on Ground Floor should be adjusted for exposure at -40% and layout at -15%, and should not be adjusted for frontage in this instance. The frontage onto arcade is much more inferior than the frontage onto street, and there is also a newspaper stall immediately in front of Units C, D and E on Ground Floor, which would block some of the pedestrian flow. The irregular L-shape of Units C, D and E on Ground Floor with shallow depth along Units C and D is also atypical. 107.Although the street shop reference unit rate is adopted for the valuation of Units C, D and E on Ground Floor, its adjusted value at $780,000 per square meter is much below the value of a street shop with street frontage. If Units C, D and E is valued together with Units A and B as 1 shop, we envisage that the total value would be higher than the aggregate value of 2 independent shops because 1 shop only would be in a better layout with reasonable size and Units C, D and E would also be benefited from the street frontage onto Kimberley Road. However, as discussed in §§58-63 above, they should be valued separately because of different ownership. EUV of Ground Floor Arcade Shops 108.Regarding the return frontage, we consider that Unit 15 on Ground Floor at a prominent location in the arcade should be adjusted at 10% suggested by Mr Patrick Lai (i.e. for both Units 15 and 16) instead of 5% only proposed by Mr Alnwick Chan. The extended frontage of Units 4 and 5 on Ground Floor in front of the passenger lifts and at a prominent location in the arcade should also be adjusted at 10%. 109.Regarding the layout, the 2 valuation experts agree that Units 12 and 19 on Ground Floor should be adjusted at -3% and -5% respectively. On the conditions that Units 13 and 14 on Ground Floor and Units 15 and 16 on Ground Floor should be valued separately and Unit 18 on Ground Floor should be valued as 1 shop, we consider that nil adjustment should be made for their respective layout. In addition, we consider that Unit 20 on Ground Floor of L-shape should be adjusted at -5% instead of -3% proposed by Mr Alnwick Chan and -10% suggested by Mr Patrick Lai. 110.Regarding the adjustment for size, there is no great difference between the 2 valuation experts. Nevertheless, we prefer the adjustment rate at 1% for every 5-square meter difference and the linear approach suggested by Mr Patrick Lai to the adjustment rate at 2% for every 10-square meter difference and the threshold approach with cap proposed by Mr Alnwick Chan. 111.Regarding the proximity to entrance, we consider that Units 4 and 5 on Ground Floor with the extended frontage should be adjusted at 20% instead of 0% proposed by Mr Alnwick Chan and 10% suggested by Mr Patrick Lai. We agree with Mr Patrick Lai that Units 6 and 20 on Ground Floor closer to the main entrance off Kimberley Road should be adjusted at 5% instead of 0% proposed by Mr Alnwick Chan. Units 13 and 14 on Ground Floor should be adjusted at -5% and Unit 17 on Ground Floor should be adjusted at -10%. 112.The valuation of the arcade shops on ground floor is listed in Appendix III of the judgment. EUV of Units on Lower Ground Floor 113.We agree with Mr Patrick Lai that the same unit rate cannot be applied to all units on lower ground floor as proposed by Mr Alnwick Chan because of their different sizes and characters. Since the environment of lower ground floor is relatively inferior and the units thereon are mainly used for storage and secondary trade purposes, we are of the view that the adjustment for frontage as suggested by Mr Patrick Lai is not necessary, but there should have adjustment for size at 1% for every 10-square meter difference. Instead of the adjustment for location, we consider that Units 21, 21A, 21B and 21C, which are next to the front staircase, the main passage to the lower ground floor, should be adjusted at 10% for exposure. 114.The valuation of the units on lower ground floor is listed in Appendix IV of the judgment. EUV of 1st Floor 115.The comparable (i.e. Shop 8 on Ground Floor and Shop on 1st Floor, Luna Court, No 55 Kimberley Road) adopted by Mr Patrick Lai was transacted at $180,000,000 on 4 October 2021. After the conversion of its ground floor saleable area (i.e. 66.37 square meters) at the factor of 3, Mr Patrick Lai derives an effective 1st floor area at 1,045.63 square meters and an effective unit rate at $172,145 per square meter. He makes adjustments for time at -6.7%, location at 25%, exposure at -15%, accessibility at -15%, age at -3.1%, headroom at -2.5%, layout at -5% and size at 2.8% (i.e. total -22.3%) and then derives the adjusted unit rate at $133,757 (i.e. say, $134,000) per square meters. Whilst, Mr Alnwick Chan simply applies a conversion factor of 1/3 to his overall ground floor unit rate to derive the 1st floor unit rate at $205,000 per square meter. 116.While we agree with the 2 valuation experts that the 1st floor unit rate should have a relationship with the ground floor unit rate as they both have adopted a conversion factor of 1/3 in their respective assessments, we consider that this comparable is hardly to be compared with the subject 1st floor because they have quite different characters and/or various significant adjustments should be made in the valuation similar to those as adopted by Mr Patrick Lai, which appears not to be so reliable. Given that there is no other comparable suggested by the 2 valuation experts, we prefer to adopt a conversion factor only in the valuation as proposed by Mr Alnwick Chan. However, we consider that the conversion factor in this instance should be 25% only of the overall ground floor unit rate instead of 1/3 (i.e. 33.33%) proposed by Mr Alnwick Chan. The subject 1st floor of 769.44 square meters is large in size; the overall ground floor unit rate in this instance has not included the areas of common corridor and facilities; and the existing accessibility to the 1st floor, which relies on mainly a staircase in the arcade, is relatively inferior. We also note that the adjusted 1st floor unit rate adopted by Mr Patrick Lai at $134,000 is about 21% of his overall ground floor unit rate. 117.On the condition that the overall ground floor unit rate is assessed at $609,826 per square meter (i.e. $348,900,000 / 572.13 square meters), we value the 1st floor at $609,826 x 25% x 769.44 square meters = $117,306,129, say $117,310,000. The 1st floor unit rate at about $152,457 per square meter is lower than the overall lower ground floor unit rate (i.e. excluding the transformer room) of about $187,448 per square meter, which comprises various small to medium-sized units and has not included the areas of common corridor and facilities too. EUV of Upper Floor Flats 118.The 2 valuation experts agree on the adjustment for headroom at 2% for every 1-meter difference and the adjustment for floor at 0.5% for every 1-level difference, and that the units on roof floor without direct lift service should be adjusted at -5%. They also agree on the adjustment rate for congested view at -5%. 119.With the benefits of site inspection together with the parties, we agree with Mr Alnwick Chan that Units G and H facing mainly the adjacent development, The One, should have congested view instead of building view suggested by Mr Patrick Lai. Nevertheless, we consider that the view of Units G and H at the respective corners of the Building should be better than the other units with congested view, and therefore would justify an adjustment rate at -3% only. 120.Regarding the adjustment for size, we prefer the adjustment rate at 1% for every 5-square meters and on linear approach suggested by Mr Patrick Lai to the adjustment rate at 2% for every 10-square meters and on threshold approach proposed by Mr Alnwick Chan. we are of the view that, with the aid of computer, the adjustment on linear approach can fully reflect the effect of size on value. 121.We also agree with Mr Patrick Lai to make adjustment for top floor but the adjustment rate should be -3% only instead of -5%. We are of the view that the top floor units in such aged building would be more susceptible to the adverse effects of solar heat and the risks of water seepage / leakage. There should have adjustment for noise from nearby A/C system too suggested by Mr Patrick Lai, but we disagree to make adjustment for traffic noise and facing aspect. We are of the view that traffic noise would have minimal impacts on value in the busy commercial and tourist district where has traffic noise in all places, but the nearby A/C system do have direct impacts of noise on Units B, C and E up to the 4th Floor. We agree with Mr Patrick Lai that Units C and E should be adjusted at -3%, but Unit B at the corner should be adjusted at -1% only in this instance. Further, we are of the view that the south facing aspect of Units G and H, which are surrounded and blocked by the adjacent buildings, would have minimal benefits. 122.Regarding the adjustment rates for internal condition, we agree with Mr Alnwick Chan that poor internal condition should be adjusted at -2% and very poor internal condition should be adjusted at -4% only instead of -3% and -6% suggested by Mr Patrick Lai. Based on a unit of say $8,500,000 and 75 square meters, we consider that the costs of about $170,000 (i.e. 2% for poor internal condition) and $340,000 (i.e. 4% for very poor condition) would be able to reinstate it to a fair internal condition. 123.The valuation of each domestic unit in the Building is listed in Appendix V of the judgment. EUV of All Units in the Building 124.The EUV of all units in the Building as at the date of valuation, i.e. 5 June 2020, and adopted by this tribunal are appended below: -
125.We therefore accept that the total EUV of the Building is $1,066,624,000 (i.e. $348,900,000 + $103,850,000 + $117,310,000 + $496,564,000). ISSUE (2) - RESERVE PRICE 126.Before we move on to the assessment of reserve price, it is necessary to consider a core issue in dispute. 127.As we mentioned above, the transformer room houses the electricity equipment for supply of electricity to Blocks A, B and C. According to the evidence of the experts, before Block B is to be demolished, the supply of electricity has to be decommissioned before consent may be obtained from the Building Authority to demolish Block B. And there are 2 other issues. We borrow the closing submission of Mr Chang to set out the issues-
128.The existence of the issues raised by Mr Chang is not in real dispute. There are then 3 issues –
129.It is submitted that these 3 issues affect our determination in 2 ways. First, the 2 valuation experts have not taken into consideration the problems related to the transformer room and the shared facilities on their effects to the costs and time for redevelopment. Is it necessary for the tribunal to take these into account when fixing the reserve price? Ms Ngai submits that we do not have to and we shall come to the argument shortly. 130.And secondly, it is the time to consider if these issues shall be taken into account as a consideration whether the order for sale should be granted. Ms Ngai relies heavily on the judgment from Court of Appeal given in Pacific Base. 131.Pacific Base is a case concerning 2 buildings joined by a common staircase. The 2 buildings rest on 2 different lots. Application has been made to the tribunal under the Ordinance to redevelop one of the buildings on one lot and one of the issue is the feasibility of demolishing one of the joint buildings for redevelopment. In board terms, the Court of Appeal rule that the tribunal does not have to be concerned with feasibility on ruling of the application. This is a matter to be left to the market. 132.Ms Ngai also submits that by section 8(1)(a) of the Ordinance, the beneficiaries’ rights in or over the transformer room shall cease and the future purchaser of the Lot (if any order for sale is granted) will not be required to obtain consent from the owners of Blocks A and C for decommissioning the transformer inside the transformer room. 133.Mr Chang agrees that the tribunal is bound by the ruling in Pacific Base. He submits that the case is distinguishable. First, he submits that the owners in the adjacent lot (in Pacific Base) does not have any share in the subject lot. But in the present case, the owners of Blocks A and C are beneficiaries to the undivided shares of the transformer room in Block B. Secondly, he submits that Pacific Base turns on technical feasibility and our case also concern legal feasibility, which has not been determined by the Court of Appeal. The owners of Blocks A and C, besides the issue of not been served with the application, has not given their consent to the demolition of any structure or re-routing of any facility before demolition of the Building. He refers to part of paragraph 19 of Pacific Base and we set out the whole paragraph for easy reference and further consideration: –
134.Mr Chang relies on the part of this paragraph saying that the owners of the adjacent lot do not own any undivided shares in the subject lot. We do not agree that by this single fact Pacific Base could be distinguished. His argument is similar to the issue as to whether the owners of Blocks A and C shall be served with the application. If they have been served (which is not our case), would they be entitled to argue the issue of structural feasibility (and we are coming to later at Issue (3))? 135.Mr Ho also support the submission of Mr Chang and submits that Pacific Base only rule on technical feasibility. He further added that the Ordinance envisages that a sale order is made with the aim that there would be demolition of the old building and construction of a new building in its place. So an order of sale should not be granted unless we are satisfied that there would be redevelopment. 136.The answer would start in the reasoning of the Court of Appeal. If we read paragraph 19 again, there is no distinction between legal feasibility and structural feasibility. The 3 issues raised by Mr Chang are by nature structural and relate to electric equipment and construction issues. The Court of Appeal confirm that under common law, provided that the owner could put in place sufficient measure to safeguard the easements enjoyed by the owners of the adjoining lot, they need not secure the consent of the owners of the adjacent lot for the redevelopment of the subject. And no doubt, the Building Authority would ensure structural safety of demolition and rebuilding, and the tribunal shall not usurp the role of Building Authority (see paragraph 46 of Pacific Base.) 137.There is no evidence on any covenant between the owners of Blocks A, B or C that Champagne Court has to be redeveloped together. And if we use the 3 issues raised by Mr Chang, the structural safety is clearly a matter on re-development and for the successful bidder to consider before he bid, and to be supervised by the Building Authority. And following Pacific Base, the tribunal is not concerned with the structural feasibility. 138.The same argument could apply to the drainage system and should not concern our determination. The more difficult issue would be the transformer room. It could be argued that without the consent of the owners of Blocks A and C, the transformers cannot be decommissioned, or even if the supply to Blocks A and C is to be terminated for a short moment to facilitate an alternate supply of electricity, it could be argued that the owners of Block B is not legally entitled without the consent of owners from Blocks A and C. 139.Leaving aside any question of easement which we shall come to later, we agree with Ms Ngai that by section 8(1) of the Ordinance, all rights of the owners shall cease upon the purchaser becoming the owner of the Lot. Their right if any to transformer room would cease. 140.Further, this is a matter to be monitored by the CLP Power Hong Kong Limited, the electricity supplier to the buildings. If this is not feasible without the consent of Blocks A and C, parties interested to bid in the auction, including the applicants would bear that in mind before they put in a bid. And if it is not feasible, the auction would fail and the order for sale would be discharged if there is no successful auction within 3 months or such further period of 3 months as the tribunal may specify in directions. 141.We refer to paragraph 49 of Pacific Base: -
142.We believe the Ordinance set out a scheme of allowing the majority owners on satisfying the statutory requirement, may force the minority owners to join sell the whole lot. We found that the legislature leaves it to the market to decide if redevelopment is feasible instead of requiring the tribunal to reach a conclusion on this matter, and also the sale price. And we repeat paragraph 41 of Pacific Base: -
143.And equally, there is no reason to suggest that the tribunal has to be satisfied that the redevelopment work proposed is feasible before we shall grant the order for sale. The order for sale is granted under section 4(1) of the Ordinance, taking into account the factor set out in section 4(2). And section 4(2) provides that “the Tribunal shall not make an order for sale unless …... the Tribunal is satisfied that (a) the redevelopment of the lot is justified …... (i) due to the age or state of repair of the existing development on the lot….” Pacific Base has given a very detailed analysis of section 4(2) and we repeat paragraphs 27-29.
144.It is clear that we are to consider if the lot is ripe for redevelopment. The question of whether the proposed development scheme could work out is a matter for the parties who are to bid at the auction to consider. 145.Since feasibility is not a factor that this tribunal has to be concerned with, one may argue that there is no reason to take this factor into account in assessing the RDV for the purpose of fixing the reserve price. The reserve price is not the sale price. And by fixing the reserve price, the tribunal is setting one of the conditions of the auction and to allow the auction to go ahead. And if all the issues in relation to the feasibility are to be taken into account, the reserve price may drop. And in such event, the tribunal is indirectly ruling on the feasibility which the tribunal is not supposed to deal with. 146.To be on the safe side, we would consider this issue from valuation perspective. It could be argued that consideration of feasibility in a valuation is very often unavoidable so long if the considerations are reasonable, logical and supported by evidence if any. The determinations on the optimum hypothetical development scheme, development costs, development period and etc are all related to feasibility, which would affect the RDV to be assessed. In some cases, the parties would argue about the optimum hypothetical scheme due to the site constraints, say, whether a high-rise or a low-rise building should be built, and this is one of the many feasibilities that may be encountered in a valuation. 147.In Pacific Base, the parties have argued whether or not demolition of the building which shares a common staircase with an adjoining block is technically feasible, but the valuation experts in this case have agreed on the demolition cost as well as the redevelopment period in the residual valuation. In fact, redevelopment of an aged tenement block, which shares a common staircase with its adjoining tenement block, is not uncommon in the market. Hence, one may argue that Pacific Base has mainly discussed whether or not demolition in the case is feasible only, and it is arguable that the Court of Appeal decided that the tribunal is not required to reach a conclusion on this matter when determining if an order for sale should be granted. Without consideration of this matter, the tribunal in Pacific Base could still determine the RDV by residual valuation, in which the demolition cost and redevelopment period were agreed by the parties. 148.In these proceedings, the redevelopment cost and redevelopment period are agreed by the 2 valuation experts, and they have expressed that their respective valuations have not taken the said 3 technical issues into account and therefore have assumed that demolition of the Building for redevelopment is feasible. 149.If the tribunal is just required to determine “yes” or “no” on feasibility of demolition in these proceedings, we should follow Pacific Base that the tribunal is not required to reach a conclusion and such should then be decided by the market in public auction. After consideration of the evidence before the tribunal, in which the 2 valuation experts have agreed on redevelopment cost and redevelopment period, the tribunal should then decide the other disputes if any and finally the RDV. 150.Nevertheless, Mr Chain and Mr Li have also argued that, in view of the said 3 technical issues, the applicants failed to properly assess the RDV. Mr Chain further argued that in the circumstances the RDV of the Lot may even be lower than the EUV of the Building and therefore grant of a compulsory sale order is not justified. However, except for the legal submission, the respondents have not put forward any valuation evidence other than that of Mr Patrick Lai for tribunal’s consideration. In fact, Mr Patrick Lai is jointly appointed by the respondents represented by Mr Chain and Mr Li, and none of the respondents have asked for permission to file additional valuation evidence. 151.We appreciate the argument that the said 3 technical issues, even if they can finally be resolved, they may affect redevelopment cost and redevelopment period, but no concrete evidence in this regard has been submitted by the respondents. The said 3 technical issues may and may not have adverse effects on value, and even if there are adverse effects, the extent of effects may be substantial or minimal. Legal submission is not evidence. The valuation evidence before the tribunal is the evidence of Mr Alnwick Chan and Mr Patrick Lai only, and we can rely on their opinion in assessing the reserve price. Other than the valuation evidence, there is only piecemeal technical evidence from the building experts. 152.Since the valuation methodology adopted by Mr Patrick Lai in the RDV assessment is similar to that of Mr Alnwick Chan, we cannot find any justified ground for Mr Chain and Mr Li to argue that the experts failed to consider the said 3 technical issues and properly assess the RDV and/or the RDV should be assessed in another way. The respondents may drop some of their expert’s evidence, but there is no other valuation evidence in this instance. 153.On the other hand, in case if a compulsory sale order is granted, we are of the view that a RDV / reserve price without consideration of the adverse effects if any caused by the said 3 technical issues would not create any real prejudice to the respondents, or at least to most of the respondents in this instance. Other than the arguments of Mr Chain and Mr Li above, the respondents represented by counsel and their valuation expert Mr Patrick Lai have been arguing for a higher RDV in the proceedings. 154.Having considered the above matter, we shall determine the RDV without the consideration of the said issues for assessing the reserve price. Agreements and Disagreements of the Valuation Experts 155.In the assessment of the RDV, the 2 valuation experts agree to adopt the residual method, but they argue whether or not reference should also be made to a site transaction in the district (i.e. No 3 Granville Circuit). We consider that the character of this site transaction, which is smaller in size and in an inferior location, is much different from the Lot and has little reference value. 156.The 2 valuation experts agree on the valuation date of 6 October 2022 and the hypothetical development scheme, being a 23-storey commercial building with management office and plant room on lower ground floor, shops from ground floor to 2nd floor, podium garden on 3rd floor, office from 4th floor to 20th floor and restaurant on 21st floor. They also agree on the site area of 1,141.11 square meters, the net site area of 1,072.63 square meters, the plot ratio (i.e. including the bonus plot ratio of 0.137) at 12.1369 and the total gross floor area of 13,849.34 square meters. 157.In the residual valuation, they agree on the demolition cost at $16,390,504 (i.e. $2,220 per square meter), demolition period of 1 year, construction cost at $645,773,000 (i.e. $46,628 per square meter), construction period of 3.25 years, professional fees at 6% and developer’s profit at 17.5%, but they disagree on the gross development value (“GDV”) of the hypothetical development, marketing and agency cost, interest rate and whether or not stamp duty and legal cost on residual land value should be allowed. 158.In the assessment of the GDV, they agree on the saleable areas of all units in the hypothetical development, but they argue whether or not the areas covered by the escalators, which serve the ground floor to the 2nd floor, should be assigned with value. 159.In the valuation of the ground floor street shop reference unit, except for 1 comparable suggested by Mr Patrick Lai, they agree on the selection of 7 common comparables. They agree on the adjustment for time with reference to Private Retail Price Indices, but disagree on the adjustments for mainly location, age, frontage, headroom, size and layout. They also disagree on the adjustment for layout to a hypothetical ground floor street shop. 160.In the valuation of the ground floor arcade shop reference unit, they agree on the selection of all the comparables and the adjustment for time with reference to Private Retail Price Indices, adjustment for proximity to arcade entrance at -5% to 10%, adjustment for frontage at 2% for every 1-meter, adjustment for return frontage at -5%. However, they disagree on the adjustments for mainly location (prominent arcade entrance), age, headroom, size and layout. Nevertheless, they agree to apply the unit rate of the ground floor arcade shop reference unit to all the arcade shops on the ground floor, 1/2 of the overall ground floor unit rate as the 1st floor unit rate, and 3/4 of the 1st floor unit rate as the 2nd floor unit rate. 161.In the valuation of the upper floors, they argue extensively over the valuation method. While Mr Alnwick Chan adopts direct comparison method, Mr Patrick Lai applies investment method. In the valuation of each hypothetical units, they agree on the adjustments for floor, view and speciality, but disagree on the adjustments for size and headroom. GDV – Ground Floor, 1st Floor and 2nd Floor 162.In the valuation of the ground floor street shop reference unit, we agree with Mr Patrick Lai to select and analyse Comparable RS5, though it is a bit far from the Lot and the analysed result of this comparable should be further reviewed. 163.In terms of location, the 2 valuation experts agree that Comparables RS2 and RS6 should be adjusted at 5%. We agree with Mr Patrick Lai that Comparables RS1, RS4 and RS7 with frontages onto Ichang Street are much inferior than the ground shop reference unit and should be adjusted at 30% instead of 15% only proposed by Mr Alnwick Chan. We also agree with Mr Patrick Lai to covert the 1st floor of Comparable RS3, which was separated from the ground floor physically upon site inspection, at 1/5 instead of 1/2 proposed by Mr Alnwick Chan. Nonetheless, we agree with Mr Alnwick Chan that Comparable RS3 with frontage onto Nathan Road should be adjusted at -15% instead of -10% only suggested by Mr Patrick Lai. Comparable RS8 with frontage onto Hankow Road should be adjusted at 10% instead of 5% only proposed by Mr Alnwick Chan and 20% suggested by Mr Patrick Lai. We are also of the view that Comparable RS5 with frontage onto Middle Road should be adjusted at 10% only instead of 20% suggested by Mr Patrick Lai. 164.In terms of age, we consider that the adjustment rate in this instance should be 1% per 5-year to reflect the differences between the comparable shops in aged buildings and the reference shop in a brand new commercial building instead of 1% per 10-year proposed by Mr Alnwick Chan and 1% per 3-year suggested by Mr Patrick Lai. 165.In terms of frontage, we prefer the less sensitive adjustment rate at 3% per 1-meter proposed by Mr Alnwick Chan to the adjustment rate at 4% per 1-meter suggested by Mr Patrick Lai. 166.In terms of headroom, we consider that higher headroom for street shop in new building is valuable and the adjustment rate in this instance should be 4% per 1-meter instead of 2% per 1-meter proposed by Mr Alnwick Chan and 6% per 1-meter suggested by Mr Patrick Lai. 167.Regarding the adjustment for size, we accept the linear approach at 1% per 3-square meters suggested by Mr Patrick Lai instead of the threshold approach at 3% per 10-square meters proposed by Mr Alnwick Chan. 168.In terms of layout, the 2 valuation experts agree that nil adjustment should be made to Comparable RS8, which has a relatively inferior shape and a slightly longer depth when it is compared with the reference unit. Applying the same principles and with reference to the depth of each comparable, which is shorter than the reference unit and the relatively inferior shape of Comparables RS1, RS2 and RS4, we consider that Comparables RS1, RS2, RS3, RS4, RS5, RS6 and RS7 should be adjusted at 0%, -5%, -2.5%, -2.5%, -2.5%, -2.5% and -5% respectively. 169.The valuation of the ground floor street shop reference unit is listed in Appendix VI. The average unit rate of the 8 shop comparables is about $1,434,973. The average excluding the 2 highest (i.e. Comparables RS5 and RS8) and the 2 lowest (i.e. Comparables RS1 and RS4) adjusted unit rates is $1,456,586, and the average excluding the comparables with frontages onto Ichang Street, Middle Road and Hankow Road (i.e Comparables RS1, RS4, RS5, RS7 and RS8) is $1,447,641. We are of the view that the ground floor street shop reference unit should be assessed at $1,450,000 per square meter. 170.In the valuation of the ground floor arcade shop reference unit, we disagree with Mr Patrick Lai to make an additional adjustment for prominent arcade entrance and exposure, which should better be considered in the adjustment for location. Having considered the better arcade entrance and exposure in the hypothetical development, we are of the view that Comparable RA1 in Hankow Centre should be adjusted for location at 15% and Comparables RA2 – 7 in Mirador Mansion and Wing Lee Building should be adjusted at 10%. 171.In terms of age, we consider that the adjustment rate in this instance should be 1% per 5-year to reflect the differences between the comparable arcade shops in aged buildings and the reference arcade shop in a brand new commercial building instead of 1% per 10-year proposed by Mr Alnwick Chan and 1% per 3-year suggested by Mr Patrick Lai. 172.In terms of headroom, we consider that the adjustment rate in this instance should be 3% per 1-meter instead of 2% per 1-meter proposed by Mr Alnwick Chan and 4% per 1-meter suggested by Mr Patrick Lai. 173.Regarding the adjustment for size, we accept the linear approach at 1% per 5-square meters suggested by Mr Patrick Lai instead of the threshold approach at 3% per 10-square meters proposed by Mr Alnwick Chan. 174.With reference to the depth of each comparable, we consider that Comparables RA1 – RA7 should be adjusted for layout at 2.5%, -3%, -3.5%, -3.5%, -3%, -3% and -3% respectively. 175.The valuation of the ground floor arcade shop reference unit is listed in Appendix VII. The average unit rate of the 7 arcade shop comparables is about $457,556. We are of the view that the ground floor arcade shop reference unit should be assessed at $450,000 per square meter. 176.The valuation of all the shops on ground floor, 1st floor and 2nd floor is listed in Appendix VIII. We consider that it is not necessary to make an adjustment for layout to Street Shop 2, which is similar to the reference unit (i.e. Street Shop 1), as suggested by Mr Patrick Lai. Further, since we are of the view that the agreed conversion rates for 1st floor (i.e. 1/2 of the overall ground floor unit rate) and 2nd floor (i.e. 3/4 of the 1st floor unit rate) should have reflected the better accessibility to be provided by the escalators, we agree with Mr Alnwick Chan to exclude the areas covered by the escalators in the valuation. GDV – Upper Floor Office and Restaurant 177.We consider that the comments of Member Ng in the case Asia Rich Incorporation Limited and Others v Li Kam Wah and Others [2023] HKLdT9 on direct comparison method and income capitalization (investment) method at §94 are also applicable to the subject case.
178.In fact, Mr Alnwick Chan and Mr Patrick Lai were also the valuation experts for the applicants and respondents respectively in Asia Rich and they had similar arguments on the valuation method. 179.In these proceedings, similar to Asia Rich, we agree with Mr Patrick Lai that the sales comparables identified Mr Alnwick Chan, which were built in 1982 – 1994, about 30 – 40 years ago, are not so relevant in the subject valuation. Nevertheless, we agree with Mr Alnwick Chan that the adoption of investment method in this instance would have many shortcomings. Hence, we consider that there 2 valuation methods should also be adopted, and the results should then be overall reviewed. 180.In the adoption of direct comparison method, the 2 valuation experts agree on the adjustment for time with reference to the Private Office Price Indices (Grade A), the adjustment for floor at 1% per 1-level and the adjustment rates for view. Although they agree to adopt Comparable OS5 (i.e. 6th floor of No 8 Hau Fook House), we consider that it should be excluded in the assessment because it has characters far different from the hypothetical office unit in a modern commercial building. Nevertheless, we agree with Mr Alnwick Chan to analyse Comparables OS2, OS3, OS4, OS6 and OS9 along Chatham Road South as there are limited number of comparables. 181.In terms of location, we consider that Comparables OS1, OS7 and OS8 in Silvercord, in the business hub along Canton Road, is better than the Lot in the fringe of Tsimshatsui and they should be adjusted at -5% instead of -10% proposed by Mr Alnwick Chan and 10% suggested by Mr Patrick Lai, and Comparables OS2, OS3, OS4, OS6 and OS9 along Chatham Road South should be adjusted at 5% instead of 10% proposed by Mr Alnwick Chan. 182.In terms of age, we agree with Mr Patrick Lai to make adjustment at 1% per 3-year instead of 1% per 2-year proposed by Mr Alnwick Chan, but at the same time there should have adjustments for quality and standard of finishes to Comparables OS1, OS7 and OS8 in Silvercord at 10%, Comparables OS2 and OS6 in Chevalier House at 20%, and Comparables OS3, OS4 and OS9 in No 39 Chatham Road South and Eu Yan Sang Tower at 15%. The quality and standard of finishes of all these comparable buildings are much inferior than the hypothetical development as a new commercial building. Further, Comparables OS1, OS3, OS7, OS8 and OS9, which have provision of car parking spaces in the building, should be adjusted at -3% for scale and facilities. 183.The 2 valuation experts agree on the adjustment for size at 1% per 50-square meters, but we prefer the linear approach suggested by Mr Patrick Lai to the threshold approach proposed by Mr Alnwick Chan. We also agree with Mr Patrick Lai to make a more sensitive adjustment rate for headroom at 4% per 1-meter instead of 2% per 1-meter proposed by Mr Alnwick Chan and not to make an additional adjustment for exclusive floor. We are of the view that higher headroom is valuable in a modern office, and an exclusive floor with larger size do not have material impact on value. 184.The valuation of the office reference unit by direct comparison method is listed in Appendix IX of the judgment. The average unit rate of the 8 comparables is about $268,733 and the average of the 3 comparables in Silvercord is about $272,932. We consider that the office reference unit in this instance should be assessed at $270,000 per square meter. 185.In the adoption of investment method, the 2 valuation experts agree on the adjustment for time with reference to the Private Office Rental Indices, the adjustment for floor at 1% per 1-level and the adjustment rates for view. With reference to the location plan and floor plan provided by the parties, we agree with Mr Alnwick Chan that Comparable OR10 in Mira Place should have open view instead of building view suggested by Mr Patrick Lai. 186.In terms of location, the 2 valuation experts agree that nil adjustment should be made for the comparables in Mira Place immediately opposite to the Lot. We agree with Mr Alnwick Chan that HK Pacific Centre along Hankow Road in the centre of Tsimshatsui is similar to the hypothetical development and nil adjustment should be made instead of 5% suggested by Mr Patrick Lai, and that One Peking in the business hub along Canton Road is better than the hypothetical development, but the adjustment rate should be -5% instead of -10% proposed by Mr Alnwick Chan. 187.In terms of age, similar to the valuation by direct comparison method, we consider that the adjustment rate should be 1% per 3-year suggested by Mr Patrick Lai. At the same time, there should have adjustment for scale and facilities at -5% to the comparables in Mira Place and One Peking which have car parking facilities. There should also have adjustment for quality and standard of finishes to the comparables in Mira Place at 4% and the comparables in HK Pacific Centre at 2%. 188.Similar to the valuation by direct comparison method, we also prefer the adjustment for size at 1% per 50-square meter on linear approach, the adjustment for headroom at 4% per 1-meter and nil adjustment for exclusive floor suggested by Mr Patrick Lai. 189.The rental valuation of the office reference unit by investment method is listed in Appendix X of the judgment. The average unit rate of the 6 comparables is about $907 per square meter, which should be the adjusted unit rate of the office reference unit. 190.The 2 valuation experts have argued extensively over capitalization rate. Mr Patrick Lai adopts the capitalization rate of 2.6% per annum. He makes reference to the market yield of Grade A office premises published by the Rating and Valuation Department at 2.4% per annum, and has also analysed a transaction as at 23 July 2021 in Mandarin Plaza, which is a Grade B office premises, and the yield is 2.82% per annum. He adds 0.1% to the market yield to reflect the uncertainty in the general market condition, the impact of Covid-19, high inflation rate and increasing borrowing costs, and another 0.1% to reflect the facts that the rental comparables were agreed some time ago, and therefore he derives the capitalization rate at 2.6% per annum. 191.Whilst, Mr Alnwick Chan in his fallback valuation suggests that Comparables OR10, OR11 and OR12, which were used as medical centres, a semi-retail use, should be capitalized at 4.5%, and Comparables OR13 and OR14 in One Peking, which were leased to office tenants, should be capitalized at 4%. He considers that the published market yield cannot be directly adopted in this instance. To identify the appropriate market yield, he has analysed 3 transactions in Eu Yan Sang Tower, Silvercord and No 8 Hau Fook Street (i.e use as a restaurant) and derives the yields as at the respective transaction dates at 2.9%, 2.8% and 3.3% respectively, which represent yield of about 3% for office use and yield of about 3.5% for restaurant use. Having further considered the high vacancy rate in Tsimshatsui, massive Grade A office supply in the coming 2 years, fierce competition from nearby commercial buildings and the adverse market sentiment under the high interest rate environment, he adds 1% to the yields as analysed and then derives the capitalization rates at 4% and 4.5%. 192.We are of the view that the published market yield as adopted by Mr Patrick Lai, which is general statistics for all Grade A offices in Hong Kong, cannot be applied directly in the subject valuation. In addition, since the properties included in the rental analysis of the statistics may be different from those in the price analysis, the publisher Rating and Valuation Department has already reminded the readers of the statistics that the figures should therefore be regarded as providing a broad indication of market yield and trends only. Further, the published market yield, and the market yield as derived from analysis of transactions, would not take into consideration of the additional risks for buying a vacant unit / floor of strata-title ownership in new commercial building for investment purpose. 193.With reference to the market yield analysis prepared by the 2 valuation experts, which are based on limited number of transactions and these transactions are not located in modern commercial building and the tenancies are not in the trade of medical and/or beauty centre similar to some rental comparables, we tend to accept that the office market yield in Tsimshatsui, where has relatively high office vacancy rate and would have substantive office supply, is roughly 3% per annum as at the valuation date. If 0.75% is added to reflect the abovementioned additional risks for investment in new commercial building, we tend to accept the capitalization rate in this instance at 3.75%. We disagree to adopt different capitalization rates for different tenants in this instance because the use of the hypothetical office units in the hypothetical development would be rather flexible, the selected rental comparables have already comprised a mix of different uses and there is not much market data for detailed analyses. 194.If a capitalization rate of 3.75% is applied, the office reference unit is assessed at $290,240. If 3.50% or 4.00% is applied, the result will be changed to $310,971 or $272,100. Having considered the analyses by both the direct comparison method and the investment method, which have their respective shortcomings, we are of the view that it is fair and reasonable to adopt the unit rate at $280,000 per square meter in this instance. 195.The valuation of all upper floor offices and restaurant is listed in Appendix XI of the judgment. The 2 valuation experts agree on the adjustment for floor at 1% per 1-level, the adjustment for speciality for the top floor at 15% and the adjustment rates for view. We agree with Mr Patrick Lai to adjust for size at 1% per 50-square meters and on linear approach and adjust for headroom at 4% per 1-meter. Residual Valuation 196.In view of the relatively poor market sentiment as at the valuation date, we envisage that there would have additional marketing and agency costs. We are of the view that the marketing and agency costs in this instance should be fixed at 3.5% in the residual valuation instead of 4% proposed by Mr Alnwick Chan and 3% suggested by Mr Patrick Lai. In view of the relatively poor market sentiment as at the valuation date, we also consider that stamp duty at 4.25% and legal cost at 0.1% of the residual land value should be allowed in the assessment as proposed by Mr Alnwick Chan to cover the risks and uncertainties in the then market. 197.We accept the interest rate at 4.25% per annum in the residual valuation proposed by Mr Alnwick Chan too instead of 4% only suggested by Mr Patrick Lai. Interest rate has been increasing as at the valuation date. In fact, the central banks of many developed countries have been increasing their interest rates, HIBOR has been increasing and banks in Hong Kong have also increased their best lending rates on 23 September 2022. 198.Based on the agreements of the 2 valuation experts and the above determinations, the residual valuation of the Lot is listed in Appendix XII of the judgment. 199.Taking all into account, the RDV of the Lot as at 6 October 2022 is assessed at $1,728,000,000, equivalent to an accommodation value of about $124,771 per square meter (i.e. about $11,592 per square foot), which should be the reserve price for public auction. ISSUE (3) – PREREQUISITE REQUIREMENTS OF THE APPLICATION 200.At the time of the application on 5 August 2020, there were 16 respondents and the applicants owned, in accordance with the records of the Land Registry, (i) 52 equal and undivided 1/80 parts or shares in the Lot; and (ii) 51 equal and undivided 1/340 parts or shares in the Lot. 201.Section 3(1) of the Ordinance prescribes that the minimum percentage of undivided shares that an applicant or applicants should possess before making an application under the Ordinance is 90%. 202.Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a lower percentage in respect of a lot belonging to a class of lots specified in that notice. 203.The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, made under section 3(5) of the Ordinance (“the Notice”), was gazetted on 22 January 2010 and came into operation on 1 April 2010. Section 3 of the Notice lowered the threshold for compulsory sale from 90% to 80% for some classes of lots, include:
204.Since the occupation permits of the Building were issued in 1957 and 1958, i.e. more than 50 years before the date of application (i.e. 5 August 2020; the relevant date under the Notice), the applicable percentage is therefore 80%. This is not disputed. Calculation of “Undivided Shares” 205.There are a number of sub-issues raised in this issue. And we have to start with the meaning of undivided shares. The applicants own a number of units in the Building as aforesaid, which is not disputed. Ms Ngai submits that by summing up all the undivided shares of the units owned by the applicants, they have 80% of the undivided shares of the Lot. This is disputed by some respondents. 206.It is the submission of Mr Chain that “the way the undivided shares in the lot was allotted by the DMC, it is a 2-tier (or strata) scheme.” In his closing submission, Mr Chain argues as follow –
207.It is not disputed that according to the DMC, some units in the Building has each been allotted with 1/80 part or share in the Lot and they are the 56 residential units from the 2nd to 8th floors, and the 1st floor has 8/80 parts or shares (i.e. a sub-total of 64 1/80 parts or shares). And for the non-domestic units on lower ground floor and ground floor, they were each assigned 1/340 to 4/340 part(s) or share(s), and the residential units on the roof were each assigned with 2/340 parts or shares (i.e. a sub-total of 68 1/340 parts or shares). Mr Chain then submits that these 2 tier or strata of shares are given different rights by the DMC and hence, there is a total of 132(68 + 64) shares within the Lot. The applicant does not have 80% of the total number of undivided shares, but have less than 105.6 or say 106 of the shares. 208.In addition, Mr Chain argues that in the DMC, the drafter has chosen to use the term “undivided shares or interest” instead of the more common “undivided shares”. He submits that the word “share” in the DMC of the Building is given a special meaning in clause 11(d) of the DMC which governs the co-owners’ votes in owners’ meeting. 209.Mr Ho also supports the argument of Mr Chain. He states in his closing submission that –
210.Let consider their approach in greater details and we would start with the argument of Mr Chain. There is no definition of “undivided shares” in the Ordinance. Understandably, this is a term in conveyancing law with well-established legal principle, and we need no further definition. As Mr Chain rightly pointed out, in Hong Kong, for multi-storey buildings, the owner of a unit is not allotted the interest in that unit. We do not have the strata system as in other jurisdiction. Hence, a first buyer is allotted undivided share in the land, say 1/80th. The developer may retain 79/80th. The first owner and the developer owns 100 percent of the land. 211.So conceptually, the first owner does not own “one” share in the land. He owns 1/80 undivided part or share in the land. And if parties care to read the assignment, the operative words are clear that what has been assigned is “one equal undivided 1/80 part or share of and in [the Lot]”. This is the assignment on the interest in the land. 212.Mr Chain seeks to argue that like companies, there could be different classes of shares. He is referring to the terms of the DMC. But a developer may assign the interest in the land before a deed of mutual covenant is signed and established. And if we look at the assignment of Unit F on 5th Floor of the Building, this was executed on 28 February 1957, before the DMC has been executed. Surely, there is also provision in the assignment for exclusive possession to Unit F on 5th Floor which is marked for identification on a plan attached to the assignment. (See B2/1276.152-153) 213.By the assignment, there is no differentiation between different rights to different owners. We consider that undivided share is just undivided share on the ownership of the Lot. 214.As pointed out by Mr Chain, under common law, all co-owners have rights over the whole lot, irrespective of their percentage of share in the lot. Hence for a multi-storey building, the first owner who may have 1/80 share in the land is entitled to use all the units in the building. But the developer/owner is also entitled to use his unit. This would create difficulty or unfairness to the owners. 215.The concept of exclusive right and privilege to use a special unit is important to specify the rights of the respective co-owners to exclusive of individual units or area. The co-owners would also execute a deed of mutual covenant to regulate their rights to use the Building or the Lot. But the deed of mutual covenant only regulates the respective right to use the land and the building, and set out their joint liability to maintain the land and the building. There would be provision that owner of an area to his exclusive use and privilege, other owner shall not enter save as provided in the deed of mutual covenant (usually for emergency or maintenance). There would be provision for use, in common with other co-owners, the common parts. There would be provisions of contribution to management fees and repair costs. But the right to the legal ownership of the land is not transferred by the deed of mutual covenant. It is transferred and covered by the assignment. 216.In modern deed of mutual covenant, there could be allotment of undivided share to individual units. And yet the share is never one, but a fraction of one. And the deed of mutual covenant only record who is the owners of the undivided shares when signed and very often, the deed of mutual covenant is signed between the developer and the 1st buyer. And in subsequent assignment by the developer of units to new buyers, the assignment would qualify that the new buyer is subject to and with the benefit of the deed of mutual covenant. 217.Mr Chain seeks to argue that the words “shares and interest” is being used in the DMC and that does not necessary means the shares (referring to 1/80 vs 1/340) enjoy the same right. And there are 2 strata of undivided shares as allotted. We are not convinced. The owners may have different rights to the use and management of the Building under the DMC. Yet the share in the undivided shares of the Lot would be assigned to individual owners by the assignment. And the assignment is the only instrument that grant the undivided shares and ownership to each subsequent buyer. 218.Mr Chain and Mr But seeks to argue that, like shareholding in limited company, there could be different classes of shares with different right. But the undivided share concept in conveyancing is completely different from shares in company law. We reject their argument. The Ordinance is concerned with ownership in the land, and not the respective rights to use and manage the land between co-owners. 219.Ms Ngai has referred to the judgment in Kung Ming Tak Tong earlier, and I refer to the following judgment of Li CJ on nature and effect of a deed of mutual covenant: -
220.It is clear that the submission of Mr Chain is not supported by authority. The document to effect the assignment of right in the land is the assignment and the DMC is just a contract between the co-owners to regulate their rights to use the Building. We reject the two tier share argument. 221.Mr Ho argues against the way how Ms Ngai calculates the percentage. He said the undivided shares can only validly be altered with the consensus of all the owners. But we do not agree that the applicants are trying to vary the undivided shares. They have to do a calculation to see if they have 80% of the total undivided shares. 222.For illustration, we start with a piece of land with no building. The developer assigned 1/3 undivided share to the first owner. Of the remaining 2/3, he later decided to give to 4 of his children. So he divided the remaining 2/3 share in the land into 4 1/6 undivided shares and give 1/6 of the land to each of his children. A developer has later acquired, the interest of the first owner, and the interest of 3 of the children. He could not acquire the share of the last child. He wishes to engage the Ordinance to acquire the interest of the remaining child in the land. It would be a mathematical calculation to see if he hit the 80% threshold
223.The undivided share has not been varied and by the above formula, it shows that the applicants has over 80% of all the undivided shares in the example. In the present case, the fact that the applicants acquired some 1/80 shares and some 1/340 shares would not make the calculation impossible. What the applicant has to do is to add the undivided shares hold by each applicant in the Lot. And we adopt the calculation of Ms Ngai, subject to other issue hereinafter to be determined, we found that the applicants have 80% of the undivided shares in the Lot. The Missing Shop 20AB 224.Another issue that affect the 80% shareholding in the Lot by the applicants is the missing Shop 20AB. It is not disputed that the 1/340 part or share allotted to Shop 20AB has been assigned to A1 by an assignment dated 18 January 2018. And discussed above, it is not disputed that according to the experts who have given evidence for this application, they could not locate the position of Shop 20AB. We borrow the closing submission of Mr Ho to set out the issue in dispute –
225.Mr Chain added that according to the assignment in favor of A1, it is provided that no vacant or physical possession of Shop 20AB will be delivered by the vendor to the purchaser upon completion. And according to all the experts, all the physical space within Block B have been accounted for and Shop 20AB in fact do not exist. 226.And while the assignment in favour of A1 covers other properties, the reference to Shop 20AB is separate from the remaining properties. 227.If one of the shops owned by the applicants should not be counted for the 80% ownership in the Lot, the applicants do not have 80% of the undivided shares when they start the application. 228.Ms Ngai does not dispute that the exclusive possession of Shop 20AB has not been delivered to A1. She seeks to argue that by the assignment, A1 has acquired 14/340 parts or shares in the Lot. And for the 1/340 part or share of Shop 20AB, she seeks to argue that the owner, now A1, is entitled to enjoy and use the common areas of the Building. In addition, A1 via Shop 20AB has a beneficial interest in the transformer room. 229.In any event, she argues that the fact that the owner of the 1/340 undivided share has the right in common with all the other co-owners to use and enjoy the common parts of the Lot and the Building does not mean that the said 1/340 undivided share has been allocated to the common parts. 230.To approach the issue, we start with section 3(7)(a) of the Ordinance, which reads: -
231.The submission of Mr Ho and Mr Chain turns on the meaning of “undivided shares in respect solely of any common parts of the lot”. 232.There is no decided case referred to us to interpret the phase. The explanation appears again on the drafting of the DMC. Reading the DMC of the Lot, we do not find any undivided shares being allotted to common parts of the Building. And in many deeds of mutual covenant, particularly newly draft ones, certain percentage of shares would be allotted to the common parts. And often they are held initially by the developer and later transferred to the incorporated owners. We have come across such deeds in Lands Tribunal, and we are sure those instructing solicitors for the respondents, or their conveyancing partners would have come across such drafting. 233.And if we read the section again, one has to ask the question, is the 1/340 undivided share in respect solely of any common parts of the Lot? According to the DMC, it is in respect of Shop 20AB. There is no evidence where Shop 20AB exists at any stage. Yet the undivided share is clearly for Shop 20AB and not common parts. All the common parts in the Building does not have any undivided shares. 234.The argument of Mr Chain is that, the owner of this 1/340 undivided share is only entitled to enjoy the common parts of the Building as no area on the ground floor has been identified and handed over to A1 for his exclusive enjoyment. We have no quarrel with that and we do not think Ms Ngai could object. But it is conceptually wrong to then say this undivided share is in respect of common parts. That the owner of this undivided share may have limited use and access in the Building would not convert the share to become share in respect of the common parts. 235.The Chinese version of the phase may be clearer-
236.Following the above analysis, we found that the undivided share for Shop 20AB is not share in respect of common parts. The owner enjoys the right to apply for an order under the Ordinance and in this aspect, we agree with the submission of Mr Li. That the owner of this 1/340 part or share in the Lot is also entitled to beneficial right in the transformer room is another right for the owner, and which shows that the share is not for common parts. There is no undivided share set by the DMC for common parts. Hence we reject this argument and find that the share of Shop 20AB may be taken into account by the applicants in calculating the 80% of the undivided shares of the Lot. According to the calculation of Ms Ngai which we accept, the applicants have 80% of the undivided shares of the Lot when taking out the application. 237.That takes us to the next 2 issues, first, whether the applicants have served the application on all minority owners, and whether the application has been served with a valuation report as required by the Ordinance. We shall start with the first matter and in particular the able submission of Mr Chang. Service on all Minority Owners 238.There are two aspects to this issue. Firstly, whether the transformer room has been held by R15 in trust for all the owners of Blocks A, B and C. Secondly, what does minority owners in the Ordinance includes? 239.We take the trust issue first. According to the Amended Notice of Application, the applicants said
240.It appears that the applicants accept that R15 is holding the transformer room in trust for the owners of Blocks A, B and C. Yet at their Notice of Reply to R2’s Amended Notice of Opposition, the applicants plead that the share of the transformer room was assigned to the 4 joint owners as joint tenants absolutely. They further plead that “Full right and privilege to hold, use, occupy and enjoy the Transformer Room were granted to [the 4 joint owners] to the exclusion of the other co-owners of the Lot to the intent that they should have in all respects the rights of an absolute owner of the Transformer Room.” (See paragraph 5 of the Reply.) 241.We are aware that paragraph 5 is in reply to the averment of R2 at paragraph 1(a)(i) and (ii) of its Amended Notice of Opposition where R2 avers that the problem caused by the structural interlinkage, drainage system and transformer room “shared” between [Blocks A, B and C] shall be taken into account in determining whether an order for sale should be granted under the Ordinance. Yet, the applicants’ averment in the Reply is inconsistent with the Amended Notice of Application. 242.Indeed, before the trial commence, Ms Ngai has applied to re-amend the Notice of Application to amend the plead on trust, which application has been refused. There is no appeal against our decision and at the closing, Ms Ngai accepts that the tribunal should proceed as if R15 is the trustee for the purpose of this application. 243.It is not an appropriate situation to rule on the trust issue. Not even the assignment of the transformer room has been produced. We have in the trial bundle a copy of the Memorandum for Registration of the assignment with the Land Office. It is in the old style when the copy assignment has not been attached, and there is detail recital setting out the terms of the assignment. For the present proceedings, we have to assume that the owner, R15, is holding the transformer room in trust for all the owners of Blocks A, B and C. 244.Mr Chang submits that the applicants have not joined all the necessary parties including all “minority owners” and served them with a copy of the Notice of Application. He refers to section 3(3)(a) of the Ordinance which provides that the applicants “shall” serve a copy of the Notice of Applicant on “each minority owner of the lot”. 245.Section 2 of the Ordinance defines minority owner as follow-
246.Mr Chang submits that there is no distinction between beneficial owners and paper owners. There appears to be no direct authority on this point. Mr Chang refers us to a number of judgments. He refers to Many Gain Investment Ltd v Chan Fai Ho LDCS28000/2012, 29 November 2013, a judgment given by HH Judge Ko. The argument before HH Judge Ko is for costs and some background fact of the case would assist the tribunal to understand the judgment correctly. R1 in Many Gain (“R1-MG”) has signed a provisional sale and purchase agreement selling his property to the applicant in Many Gain (“A-MG”). Later, R1-MG claimed that the agreement had been rescinded and re-sold the property to a new purchaser. A-MG brought the application in Lands Tribunal under the Ordinance against, inter alia, R1-MG for an order of sale. At the same time, A-MG started another action in the High Court for a declaration that the provisional agreement is valid. 247.R1-MG argued in his Notices of Opposition that he has sold his property to another purchaser, and he is a trustee of the property for the purchaser. 248.On the date of trial before the tribunal, parties informed the tribunal that the High Court has granted judgment in favour of A-MG on the provisional agreement. R1-MG sought for costs, and argued that he is a paper owner. A-MG should join the new purchaser, or should wait for completion of the High Court Action. 249.Mr Chang refers us to paragraph 18 of the judgment, in particular the first sentence saying “There is nothing in the language which indicate that a distinction between beneficial owners and paper owners is intended.” We do not agree that a sentence should be interpreted in isolation. With the background we set out, it is clear that HH Judge Ko is ruling only that R1 is correctly joined. And if we move on, HH Judge Ko also said “a paper owner nonetheless owns the undivided shares in the property” in the same paragraph. What the tribunal has not ruled upon is whether both the beneficial owner and the paper owner, if they are not the same person, has to be joined. The judgment is not assisting R2. 250.Mr Chang also refers to Pacific Crown Enterprises Ltd v Man Yu On [2013] 1 HKLRD 833 when the tribunal rejected the application by a tenant to be joined as party. And in Group Leader Ltd v Hui Sun Fat [2016] 2 HKLRD 625, the tribunal rejected the application by the Director of Lands to be joined on the ground that he has no locus. These cases give no assistance to the definition of “minority owners”. 251.Mr. Chang refers to a number of judgments, mostly from the tribunal when the beneficiary has been joined. We do not preclude the need in appropriate case for additional parties, including beneficiary to trust property be joined. And the tribunal do have jurisdiction to join additional parties. But the question we have to determine now is whether the applicants have complied with the Ordinance to serve the proceedings on all the minority owners when only the trustee is served. Unfortunately, the judgments refer to by Mr Chang give no assistance to the issue. 252.In answer to the argument of Mr Chang, Ms Ngai first relies on Order 15 Rule 14(1) of the Rules of High Court (which is applicable in the Lands Tribunal). The Rule read-
253.Ms Ngai submits that the application has been properly constituted by joining R15 as trustee to represent the interest of all the beneficiaries. Mr Chang reiterates that by section 3(3)(a) of the Ordinance, a copy of the application has to be served on each minority owner, and Order 15 Rule 14 could not assist the applicants. So we have to consider the meaning of minority owner in the Ordinance. 254.On the definition of minority owner, the Ordinance only provides that he is an owner of the undivided share other than a mortgagee and is not the person(s) making the application. The owner of the undivided share would be the person named on the assignment, regardless that he is holding the property for him or for some beneficiary. There is no doubt that R15 is a minority owner. 255.The settlement of a trust would often be a trust deed, a separate document. We do not know about the details of the trust of the transformer room as we only have the memorandum. But as we accept the owners of Blocks A, B and C are beneficiaries, are the beneficiaries minority owners? 256.The answer rest with what is held by the beneficiary. We have asked this question during submission. If in case a property is held by a Tso or Tong, prima facie, there would be beneficiaries. Would it be necessary to serve on all the members of the Tso or Tong? We do not have the exact answer. But if the applicants have to serve on all beneficiaries, that would incur a lot of investigation and costs of service as the members may be at different place of the world. 257.We believe it is appropriate to use a purposive approach to interpret the Ordinance. There should be special reason to use the word “own”. We believe it refers to the legal ownership. That make sense because, not only that the trustee (though R15 denies he is) has a duty to notify the beneficiary, the beneficiary must be taken to have appointed the trustee as its agent to receive notice of proceedings in respect of the trust property when the trust is settled. This tallies with the spirit of Order 15 Rule 14. And by serving on the agent of the beneficiaries, each of them has been served. 258.And the Ordinance also provides for registration of the Notice of Application with the Lands Office. That would be deemed notice to the beneficiary or any person who claims to have a right to object to the application. And if the beneficiary has any reason to apply to join as a party, he should make application to the tribunal and the tribunal may join him in appropriate cases. If indeed the Ordinance intends that all minority owners have to be joined and served, it would be creating, as in this case, tens of respondent and making the application difficult to proceed. And the argument that the beneficiary could raise in opposition to the application would usually be the same as the trustee, because the consideration of whether an order for sale should be granted is equally governed by the Ordinance. There is no purpose to join the beneficiaries. 259.It is for the beneficiary to take out an application to be joined and to show that there is a particular reason why the trustee could not represent his interest. The failure not to join the beneficiary could not make the action invalidly constituted as suggested by Mr Chang in his submission. 260.Mr Chain in his closing also submits that, if the trustee is to be one of the majority owners and applicants, he would be duty bound to secure the consent of the beneficiary or failing which he should see direction from the High Court under the Trustee Ordinance. And if the trustee is being served with an application, he ought to consult the beneficiaries and act as directed, or apply to the High Court for direction. We do not have disagreement with this averment. But R15 is not a majority owner. And R15 would have the duty to consult the beneficiaries or to apply to the High Court for direction under the Trustee Ordinance. That support our view that serving on every beneficiary would not serve any useful purpose and could not be intended by the Ordinance. 261.Mr Chain also submits that in this application, if an order for sale is granted, this would put an end to the trust. It is not correct for this tribunal to grant an order without hearing the beneficiary. 262.But our consideration of this application must only be matters to be determined under the Ordinance, particularly the matters that we have to consider before an order for sale is to be granted. Even if all the beneficiaries are joined, we are still dealing with an application to sell all the undivided shares in the Lot, of which R15 and the beneficiaries has 1/340 part or share. The beneficiary would have a share in the proceed of sale (if any) to be apportioned to the 1/340 share. They may raise the objection on age and state of repair, but we fail to see why this could not be handled by their trustee. Looking this way, it is for the beneficiary to justify the need to include each or some of them, or otherwise, R15 should have taken steps to protect their interest. And if he has not, it would be a matter between the beneficiary and R15. 263.Considering all the argument, we disagree with Mr Chain and the above analysis strengthen our finding that “minority owner” would not cover beneficiaries. 264.Taking all these into account, we rule that “minority owner” only refers to the legal owner of the undivided share, and beneficiary of the trust only own the beneficiary interest in the undivided share together with all other beneficiaries and subject to the terms of the trust. And in this case, we are determining the subject matter of the trust, i.e. the 1/340 undivided share in the Lot, and to determine if it should be sold with the Lot under the Ordinance. 265.The complication that R15 does not admit that he is the trustee is a matter of dispute between R15 and the “beneficiaries”. This would not create additional burden on the applicants. If R15 is not the trustee, surely the applicants have no obligation to serve the application on the beneficiary. If R15 is a trustee, that may be a situation that the beneficiaries may apply to be joined as a party. No owners in Blocks A or C have applied to be joined. For the minority owners of Block B, there could be no argument that they have been served. 266.There is argument that if we do give an order for sale, the trust would be ended. The beneficiaries should at least be given a chance to be heard. This is an attractive argument. But as we ruled, we are not rejecting beneficiary be joined in appropriate cases. But there is no application before us. As said, the Ordinance has been drafted with requirement of registration of the application and Order in the Lands Office to give notice to all interested parties. Their interest is sufficient protected when the applicants have complied with the registration as required by the Ordinance. 267.We have also considered submission by other counsel on the matter and in conclusion, we reject the argument that all the beneficiaries have to be joined or be served with the application. Valuation Report in the Application 268.Another objection raised on the procedure is that the valuation report served with the application is not properly prepared in accordance with the Ordinance and the service is therefore defective. The application is not properly constituted. 269.It is not disputed that, according to section 3(1) of the Ordinance, a majority owner may make an application to the Lands Tribunal for an order of sale accompanied by a valuation report as specified in Part 1 of Schedule 1, which we repeat -
270.Mr Li refers to the judgment given by the Court of Appeal in Bond Star Development Limited v Capital Well Limited, CACV48/2002 for the purpose of a valuation report for an application under the Ordinance. At paragraph 10 of the judgment: -
271.We agree with the analysis of the Court of Appeal. 272.We have analyzed the argument of Mr Li on the terms “property” and “undivided shares”. In fact, on the methodology used by Mr Alnwick Chan, we disagree with his approach to jointly assess the value for certain units together and apportion the value according to area, and we do not repeat our reasoning above. Mr Li argues that the report is wrong and there is no effective report served in compliance with the Ordinance, and the application should be dismissed. 273.We have also remarked that we do not agree with the methodology used by Mr Alnwick Chan. Yet the methodology of a joint sale is a known valuation method and, as mentioned above, should be used in some cases. Hence the disagreement on the methodology used would only go to value, and would not go as far as to say that the report is fundamentally wrong in valuation. 274.As to the contents of the valuation report, at the stage of service, the report has to comply with Schedule 1 Part 1 of the Ordinance. It is not necessary for the tribunal to be satisfied that the assessed value is correct. If it is a valuation report complying with the requirement, the applicants have discharged their duty of serving a valuation report. Understandable, the value may not be agreed by the respondents and are subject to determination of the tribunal. 275.A valuation report is given by a valuation expert, setting out the property that he has assessed, with the methodology and the raw material. We are to assess if a report is attached. It is only in very extreme case that the tribunal would rule that there is in fact no expert report produced. On the argument advanced by Mr Li, we do not agree that the report does not comply with the Ordinance. It is sufficient for us to note that the report has set out the property valued, the methodology and the raw data. This enable the minority owners to assess if the valuation is accurate and for him to consider any offer made by the applicants. (And we shall consider if the valuation is within a reasonable range at Issue (5) later). 276.In summing up, we concluded that the applicants have complied with the Ordinance in the requirement to serve a copy of the valuation report as required by the Ordinance with the application on the respondents. 277.We are satisfied that as at the date of application, the applicants owned more than 80% of the undivided shares in the Lot. The applicants have served the application on all minority owners and the application has been accompanied by a valuation report in accordance with the Ordinance. We are therefore satisfied the applicants are entitled to make the present application under section 3 of the Ordinance. ISSUE (4) – AGE AND STATE OF REPAIR 278.Section 4(2) of the Ordinance provides as follows: -
279.The applicants must satisfy this tribunal the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted. We only repeat the guideline set by the Court of Appeal in Pacific Base and we refer to paragraph 29 (set out above), that “the Chinese version requires the tribunal to consider if the lot is ripe for redevelopment by reason of the age and state of repair of the existing development on the lot.” 280.We do not repeat here our comments and determinations on the structural interlinkage, drainage system and transformer room in the Building, which have already been discussed in Issue (2) of the judgment. Mainly, following Pacific Base, we accept that the tribunal is not required to reach a conclusion on feasibility. 281.Nevertheless, before we address the specifics of the building expert evidence, we would like to firstly deal with 2 other particular issues raised by Mr Chain which he submits would affect our ruling on whether an order for sale should be granted.
Any “Right of Way” in the Arcade? 282.Mr Chain raises an argument that the owners of Block A and C have right of way to the shopping arcade at the ground floor and lower ground floor of the Building. He argues that this is an easement and it would not be extinguished by the order for sale. And hence the successful bidder could not proceed to redevelop the Building without the consent of the owners of Block A and C. 283.He submits that the owners of Blocks A and C are not likely to give consent for the demolition of the Building, when the arcade would be destroyed and the right of way would be lost. Therefore, he submits that we should not grant the order for sale and any successful bidder would not be able to redevelop the Lot, or even to present a building plan for approval by the Building Authority. 284.Before we move to consider the legal argument of Mr Chain and the reply of Ms Ngai, we have to note that there is no owner from Blocks A and C who assert the right of way before the tribunal. And from the submission, reading with the documents in the Bundle, there is no express grant of right of way. Mr Chain also relies on implied grant. And as Ms Ngai correctly analysed, the main basis of the argument is the owners of Blocks A and C have acquired the right by the doctrine of lost modern grant. But if the right of way is not claimed before this tribunal, or in any Court for such right, the highest of Mr Chain’s argument is that there is a possible claim by the owners of Blocks A and C. (He cannot represent the other co-owners of the Building, or the owners of Blocks A and C). And we take his argument as that we have to take into account the risk of an easement in the form of right of way in favour of Blocks A and C could be established when determining if an order for sale should be granted. Is this a matter that we have to take into account as provided by section 4(2) of the Ordinance? 285.We believe this is a similar argument as to structural feasibility of any redevelopment we have discussed and we just follow the ruling of Pacific Base which we have analysed above. Mr Chain may argue that this is a legal feasibility. We do not see the difference as it affects the redevelopment. It is again a matter for the market, or more accurately the potential bidder(s) to consider. We are to determine if the age or state of repair of the Building is ripe for redevelopment. Hence, on the evidence before us, we may comfortably say that this is a matter that we do not have to take into consideration in deciding if an order for sale should be granted. 286.If we have to consider this factor, we shall consider if there is reasonable ground to establish the right of way, and there is evidence that on balance of probability, it could be established. And if there is such probability, we have to consider the provision under section 4(2) in details. 287.First, on the alleged express grant, Mr Chain refer to the 1955 Re-assignments in his closing submission (and we adopt his definition of these documents and call them the “1955 assignments” hereinafter). While the term “right of way” is mentioned, there is no reference to what right that is, or who is the grantor and grantee. We do not see any basis to suggest an express grant. 288.On implied grant, Mr Chain submits that from the initial drawing, the arcade of ground floor and lower ground floor of the Building is to be a continuous and open arcade with the arcade of Building A. He submits that the intention could be inferred that a right of way is granted to Block A. 289.Unfortunately, there is no evidence from any factual witness on the intention of the then owners. It would be far-fetching to suggest that a right of way could be inferred from the drawings and document presented in these proceedings. Mr Chain refers to judgment of the tribunal when right of way is inferred from plans and drawings and we do not comment. It is a finding on facts and evidence in each case. But we are ruling on the plans and drawings in this case, and there could be many possible arrangement, and we could not infer on the balance an implied grant. Without any oral testimony or written document, we rule against the suggestion of Mr Chain of implied right of way. 290.Mr Chain also relies on the doctrine of lost modern grant. It is not disputed that in the judgment of China Field Ltd v Appeal Tribunal (Buildings) No.2 12 HKCFAR 342, the Court of Final Appeal held that an easement over land could be acquired by lost modern grant in Hong Kong. We refer to a part of his written submission: -
291.Ms Ngai refers to China Field and submits that, in the case of a claim of rights by the doctrine of lost modern grant, the claimant is required to prove that such user must be “as of right”. She also refers to the judgment of the Privy Council in Gardner v Hidgson’s Kingston Brewery Co Ltd [1903] AC 229, and submits that “a title by prescription can be established by long peaceable open enjoyment only; but in order that it may be so established the enjoyment must be inconsistent with any other reasonable inference than that it has been as of right ….” “If the enjoyment is equally consistent with two reasonable inferences, enjoyment as of right is not established….” 292.There is attraction in the legal submission of Mr Chain. The only weakness is his submission is the lack of evidence. We could not rule out any other arrangement between the owners of the Building with Blocks A and C which is not permanent in nature. We could not rule out that it could not be temporary licence. We would expect more evidence be adduced by R6 who is to run this argument. It is sufficient for us to conclude that, from the evidence before use, we could not find on the balance of probability, a right of way has been established by the doctrine of lost modern grant. 293.And as another issue, Mr Chain submits that the right of way would not be extinguished because of section 11(8) of the Ordinance, which provides that an “incumbrance” to be discharged by the trustee does not include easement. And the easement would be binding on the successful bidder. 294.We do not agree. Section 11(8) of the Ordinance, or the whole of section 11 is to cover the duty of the trustee and how the proceed of sale shall be used before distribution. And the trustee under section 11(2) shall use the proceeds of sale to redeem the incumbrance of the Lot. And section 11(8) explains “incumbrance” and express that it does not include, inter alia, easement. The section does not preserve the easement as suggested by Mr Chain. Since we have ruled as aforesaid that the right of way is not established, we do not have to go into the argument of Mr Chain. It is sufficient for us to say that the issue has to be read with section 8 of the Ordinance which is to protect the right of the successful bidder and we do not have to go into details. We believe there would be some other appropriate cases for this issue to be considered. 295.We do not agree with Mr Chain’s argument on easement. Any Intentional “Blighting” by the Applicants? 296.Mr Chain argues that there is intentional blighting by the applicants. The complaints could be divided into 2 classes of acts. 297.Firstly, R6 complains that the applicants have acquired a number of units since 2011/12. And the applicants applied to the tribunal to dissolve the management committee of the Building. By an order of the tribunal dated 29 January 2018, the management committee was dissolved, and an administrator was appointed with direction to convening the general meeting. 298.At a general meeting of the incorporated owners of the Building held on 28 March 2018, a new management committee with 11 members were elected. Mr Chain refers to some documents in the Bundle and alleges that the management committee is controlled by the applicants and has not discharged its duty to properly maintain the Building. And the applicants have not paid the management fees causing the financial difficulty of the management committee. He submits that the default in payment of management fees was a deliberate attempt to ‘starve’ and deplete the Building’s proper finance and management, which prevent the incorporated owners to carry any basic repairs and maintenance in the common areas for years which resulted in its severe dilapidation and badly run-down state. 299.We shall note this point first. We believe it is not disputed that there are outstanding management fees to be paid by the applicants. But we have no evidence as to the annual or regular maintenance that has not been carried out by the incorporated owners of the Building which worsen the condition of the common area of the Building. As management of the Building is the common interest of all owners, and if the management committee does not discharge its duty properly, any owner may bring the action under the Building Management Ordinance to discharge the management committee and to form a new management committee. And if that is necessary, the tribunal is empower under the Building Management Ordinance to appoint an administrator to replace the management committee. There is no suggestion that any of the respondents has taken the effort to protect the interest of the Building. 300.The management of the Building is the joint responsibility of all co-owners. While noting the outstanding payment of management fees, we do not accept this is an act to damage the common areas. 301.It is further complained that the applicants have not properly maintain their units. To the contrary, they have damaged their units, by removing the window and frames. Plaster to wall has been removed exposing the concrete and steel bar. And the doors are removed and replaced by steel gates. He describes the Building as a ‘war-torn’ building. 302.Mr Chain submits that this is intentional blighting act of the applicants to create a situation that the Building is ripe for redevelopment. 303.As Ms Lui said in her oral evidence, the applicants acquired their units for redevelopment. One could not expect the applicants to carry out renovation like people who acquired a flat for self-use or letting out. It is sufficient for us to note that when we are dealing with the assessment of age and state of repair, we would bear the complaint in mind. Yet at this stage, and having heard all the evidence and visited the site, we are not convinced that the applicants intentionally blight the Building. 304.While we note that the applicants acquired the units for redevelopment, the way how they handle the internal condition could well be different from an owner who acquired a property for residency or letting out. The consideration is they should not do anything to their units to affect the enjoyment of the Building by the other owners. And with our experience in the Lands Tribunal cases, we have to say that the management as complained is not satisfactory. Yet it would not amount to intentional blighting. 305.We rule against Mr Chain on the second point. But we would bear that in mind some of the complaints in assessing the age and state of repair, and when we consider if an order for sale should be granted. The Proper Approach in Assessments 306.We should first deal with the proper approach before we make the determinations on building expert evidence. In the main, the respective building experts in these proceedings have adopted different standards in their assessments, and the parties argue whether the assessment should be based on the “tenantable standard” as adopted by Mr CM Wong and Mr Benson Wong or the “habitable standard” as applied by Mr Raymond Lo and Mr Remus Wong. 307.This issue has been argued for many times in the tribunal. Mr Raymond Lo and Mr Remus Wong, acting for the respondents in other compulsory sale cases, including Supreme Host Investment Ltd & Another v The Personal Representative of the Estate of Cheng Lai Chit, Deceased [2023] HKLdT 22 and Asia Rich Incorporation Ltd & Others v Li Kam Wah, the Administrator of the Estate of Ma Kwai Fa, Deceased & Others [2023] HKLdT 9 which were heard before Member Ng, have also adopted the “habitable standard”, but such have been rejected by the tribunal repeatedly. 308.We agree to the judgments in Supreme Host and Asia Rich that “habitable standard” would to a certain extent set the minimum standards only and cannot meet the general demand nowadays. In China Orchid International Ltd & Others v Fujitec (HK) Co Ltd & Others [2023] HKLdT 38 at §§165 - 166, the tribunal (constituted by HHJ M Wong and Member Lawrence Pang) also noted that the “tenantable standard” has been consistently applied by the tribunal and the “habitable standard” is inappropriate as it is a disincentive to improvement in living or occupation condition. 309.Nonetheless, Mr Yuen further submits that (1) the “tenantable standard” put forward by Mr Benson Wong is not taken from any textbook of building surveying and may be interpreted differently by different building surveyors; (2) the Ordinance just requires the tribunal to look at the “state of repair” as the ground to justify redevelopment, and not the “scope of repair”, because “scope of repair” depends not just on the “state of repair” but also the economic decision of the owners based on choice and affordability; and (3) Mr Benson Wong’s definition of “tenantable standard” is confusing and his proposed repairs are exaggerated. 310.Mr Benson Wong’s definitions of “tenantable standard” and “condition” are as follows: -
311.We consider that the origin of the “tenantable standard” should not be an issue in these proceedings. No matter what is the origin of the definition, there may still be arguments between different parties. In any event, “tenantable standard” has long been accepted by the tribunal in compulsory sale cases. Even if there are different interpretations, the tribunal is required to make the determination. 312.We tend to agree that “state of repair” in theory is different from “scope of repair”. However, we consider that the “scope of repair” as submitted by Mr Yuen is actually more related to the consideration of “age” instead of the consideration of “state of repair” only. In fact, the demarcation of “age” and “state of repair” may sometimes be obscure, particularly in the presentation of repair costs, but Mr Benson Wong has grouped all the repair costs under the consideration of “state of repair” only. 313.There would have doubt on the presentation of all the repair costs under the consideration of “state of repair” only. For example, replacement of a passenger lift which has been regularly checked with license may mainly be a consideration of “age” instead of a consideration of “state of repair”. Nonetheless, we agree to the decision in Century Supreme International Ltd v Kam Chi Kit Charles and Hui Pui Kuen & Others [2022] HKLdT 6 §50 that these two factors, “age” and “state of repair”, despite being put in alternatives in section 4(2)(a) of the Ordinance, are related as they both relate to the physical state of the building in question, and to discuss whether they are two separate grounds does not serve useful purpose. This is particularly so if the “tenantable standard” is adopted for the costs of the “state of repair” because it entails an assessment of a standard of comfort and convenience which is reasonable in the present day circumstances. 314.Regarding the definition of “tenantable standard”, we would say that the phase “in either fair or good condition” is a bit confusing and good condition appears not to match with the “tenantable standard”. However, one cannot conclude that Mr Benson Wong’s proposed repairs are exaggerated just because of the confusing definition. We shall examine the building expert evidence including the repair costs below. Expert Evidence on Structural Assessment 315.Mr CM Wong and Mr Raymond Lo have the following agreements and disagreements on the structural test results as follows: -
316.The 2 structural engineers disagree on the extent of defects and the cost of repair. They also argue on the applicability of the comparison with the HK Concrete Code 2004 on design working life and the comparison with the HK Concrete Code 2013 on robustness and ductility, and whether or not the design working life of the Building can be extended for 10 years after compliance with the Mandatory Building Inspection Scheme (“MBIS”) and the subsequent repair. 317.Above all, having considered the test results in these proceedings and on the acceptance of “tenantable standard”, we prefer the expert evidence of Mr CM Wong to that of Mr Raymond Lo. In Asia Rich and Supreme Host, the tribunal has already decided that the comparisons with the new codes are acceptable, the reliance of MBIS is misplaced, and in addition to the reference to average value, there should have examination and review of the weakest points of the structural members. 318.Although we accept that the Building, built in 1950s, appears to had then been properly constructed and not to be worse than some existing buildings with similar age and there is no imminent danger, we agree with Mr CM Wong that the structural condition of the Building is poor and the deterioration of its structural elements has entered the propagation phase. 319.Even if the Building in terms of structural elements is not worse than some existing buildings with similar age, the Building in any event is about 65-year old and many buildings with similar age have already been redeveloped or are ripe for redevelopment partly because of poor structural condition. Expert Evidence on Building Condition 320.We do not repeat here our comments and determinations on the standard to be adopted and Mr Benson Wong’s presentation of repair costs in the section “The Proper Approach in Assessments” above. 321.With the benefit of site inspection together with the parties and on the acceptance of “tenantable standard” in the assessment, we accept Mr Benson Wong’s observation of obsolescence in the Building. It is acceptable to consider the physical age of the Building and its immediate neighbourhood. On physical obsolescence, we agree with Mr Benson Wong to look at its appearance and also agree to his conclusion that the Building is aged. On functional obsolescence, we accept the comparisons with the current standards for building nowadays. In addition to the deficiencies in respect of the fire escape arrangements, fire resisting construction, equipotential bonding, lightning protection system and building management system in the Building, we agree with him that the deficiencies in respect of the design and construction of the structural frames, barrier free access, refuse storage and material recovery facilities, weather protection features, and building management / recreational / access facilities cannot be rectified unless the Building is redeveloped. 322.Regarding the other major disagreements between Mr Benson Wong and Mr Remus Wong, we have the following finding: -
323.Above all, we prefer the evidence and expert opinion of Mr Benson Wong, which have incorporated the evidence and expert opinion of Mr CM Wong, to those of Mr Remus Wong. We agree with Mr Benson Wong that the redevelopment is justified in terms of both “age” and “state of repair” of the Building. 324.We accept that the Building, being erected about 65 years ago, is in poor condition and has come to the end of its design working life. The design of the Building has become obsolete over time in many aspects both physically and functionally, and fails to conform to modern safety standards and statutory requirements. 325.We also accept that the Building is in poor state of repair and the costs of repair to bring the Building to tenantable condition is disproportionate to the costs for constructing a new similar superstructure. Even if repair works are carried out, such works will bring about a modest improvement only and the Building will remain a sub-standard one. ISSUE (5) – REASONABLE STEPS 326.In assessing the reasonableness of the offers, we have considered the case of Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. In particular, we have considered paragraphs 33 and 36 of the judgment in which Ribeiro PJ stated: -
327.The applicants have made various offers to the respondents respectively as follows: -
328.Ms Ngai submits that all these offers fall within the range of fair and reasonable compensation for the respective interests owned by the respondents. The offer prices have made reference to the independent valuation of Knight Frank and have also reflected the pro-rata share of the RDV. 329.In addition, Ms Ngai submits that the applicants have not been able to purchase the undivided share owned by the 1st named R9 because he cannot be found. A1 and R15 have also reached an agreement for the sale and purchase of the undivided share allotted to the Transformer Room. A1 and R15 have already signed the Assignment, but the transaction was put on hold pending proof of the death of one of the purchasers (i.e. the person known as Fok Ying Tung as stated in the Assignment of the Transformer Room in 1957) and amendment and registration of the Probate of the late Madam Coo Yee San against the Transformer Room. 330.On the evidence available and with reference to our determinations on the EUV of the Building and RDV of the Lot, we accept that the offer prices have reflected the respective proportionate share of the RDV of the Lot and do fall within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. We are satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot. 331.Although we disagree with Mr Alnwick Chan’s approach to jointly assess the value for certain units together and apportion the value according to area, we accept that the disagreement on the methodology used would only go to value and would not go as far as to say that his valuation is fundamentally wrong. In any event, according to §33 of Capital Well, “the tribunal is not conducting a valuation exercise” in making the assessment of “reasonable steps”. 332.Further, even though the tribunal has made determinations on the EUV and RDV, some of the disputes between the 2 valuation experts are indeed controversial. For instance, whether Units C, D and E on Ground Floor should be compared with the street shop reference unit or the arcade shop reference unit; whether or not some of the extensions on ground floor and lower ground floor should be assigned with value and converted with discount; and whether the 1st Floor should be valued with reference to a sales transaction or be converted by a factor. All these issues would affect the apportionment among the parties, but there are no direct and universal answers. According to §36 of Capital Well, “it is obviously necessary to recognize that there will often be differences of opinion”. 333.We repeat, a valuation report is to set out the opinion of the valuer. He has to set out the methodology and the raw data. These would assist the respondent to consider, with assistance from his legal team and expert if the value is reasonable. And this tribunal is also to assess if the opinion is reasonable with reference to the methodology used and the data collected. We are satisfied that the valuation report satisfied these requirements and allow both the applicants to give a sensible offer and for the respondents to consider. Reasonable steps have been taken to acquire the undivided shares of the minority owners. CONCLUSIONS 334.For reasons given in this judgment, and having considered all the submission and evidence before us, we are satisfied an order for sale should be granted having considered the age and stage of repair of the Building. Reasonable steps have been made to acquire the property of the minority owners. 335.We are also satisfied the appointment of trustees as proposed by the applicants, for which the respondents have not made any comments. 336.Nonetheless, we disagree with the applicants to insert a condition into the draft Particulars and Conditions of Sale of the Lot that the purchaser of the Lot shall not demolish the transformer room on the Lot until an alternative arrangement in relation to the supply of electricity to Blocks A and C is available. 337.This is suggested by the applicants. There is argument by some respondents if the tribunal may impose such a condition. Before we consider our jurisdiction, we consider this is not a fair term to be included in the condition of sale. 338.Any bidder at the auction would have the relevant information. And the question of the transformer room would be apparent from our judgment. It must be part of his assessment if it is possible to resolve the transformer room issue, and other issues before he put up a bid. 339.We believe someone who finally buy the Lot have to resolve the position within the 6-year limit fixed by the Ordinance. While we are not ruling on this matter, in the event that the successful bidder has to come back to the tribunal to extend the time, and if the problem he could not resolve is the transformer room, he has to persuade the tribunal why we have to exercise our discretion, when this is an issue that must be known to any bidder. And this is how feasibility of redevelopment shall be tested by the market. Hence we would not impose the condition even if we have the jurisdiction. ORDERS 340.We therefore make the following orders: -
COSTS 341.Following Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 5340, we make a costs order nisi that the applicants do pay costs of these proceedings to the respondents, on High Court scale with certificate for counsel and including any reserved costs, to be taxed if not agreed. For the trial, we appreciate the legal issues involved and we therefore grant certificate for 2 counsel for R2, R6, R7/R8/R10/R11 and R12. Unless any parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from the date of this judgment. 342.Last and not least, we must extend our gratitude to the able assistance from all counsel.
Ms Nancy Ngai and Ms Catherine Hau, instructed by Lo & Lo, for the applicants Mr Denis Chang, SC and Mr Ross Yuen, instructed by Lo, Chan & Leung, for the 2nd respondent Mr Nyon Tsang and Mr Victor Lau, instructed by Chin & Associates, for the 4th respondent Mr Benjamin Chain and Mr Adrian But, instructed by Victor Chan & Co, for the 6th respondent Mr CY Li, SC, and Mr Chester Kwan, instructed by So, Lung & Associates, for the 7th, 8th, 10th and 11th respondents Mr Daneel Heung, instructed by Chow, Griffiths & Chan, for the 2nd named 9th respondents Mr Ambrose Ho, SC, and Mr Jonathan Lee, instructed by King & Co, for the 12th respondent The 5th respondent, the 1st named 9th respondents and the 16th respondent were not represented and did not appear The 15th respondent, represented by Kenneth Sit, Solicitors, did not appear Appendix I – Location Plan
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