Gilmerton Ltd and Others v. Polywin Holdings Ltd and Others
Read the full judgment text of LDCS 2000/2004 on BabelCite. This LDCS judgment was delivered on 17 January 2005.
1. This is an application made under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) for an order of compulsory sale of all the undivided shares in 4 lots which are known as Nos. 4, 4A, 6 and 6A of Castle Steps, Hong Kong. The particulars of these 4 lots as respectively registered in the Land Registry and the number of undivided parts or shares therein are as follows: -
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LDCS 2000 OF 2004 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LAND COMPULSORY SALE MAIN Application No. ldcs 2000 of 2004 _______________ Between
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_______________ J U D G M E N T _______________ The Application 1.This is an application made under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) for an order of compulsory sale of all the undivided shares in 4 lots which are known as Nos. 4, 4A, 6 and 6A of Castle Steps, Hong Kong. The particulars of these 4 lots as respectively registered in the Land Registry and the number of undivided parts or shares therein are as follows: -
The Background 2.The 1st Respondent is the registered owner of 1 equal undivided 5th part or share of and in the 3rd Lot together with the exclusive right to occupy the 2nd floor of the building thereon. It opposes this application. 3.The 12th Applicant and the 2nd and 3rd Respondents together own 1 equal undivided 6th part or share of and in the 1st Lot and the exclusive right to occupy the Basement of the building thereon. Of this 1 equal undivided 6th part or share, the 12th Applicant owns 55/100 parts or shares of and in it, the 2nd Respondent owns 25/100 parts or shares of and in it and the 3rd Respondent owns the remaining 20/100 parts or shares of and in it. 4.Save as referred to in the last two paragraphs, the rest of the undivided shares in the 4 Lots are owned by the Applicants. Regarding the 3rd Lot, the remaining 4 equal undivided shares or 80% of the undivided shares are owned by the 2nd, 5th, 7th and 9th Applicants. Regarding the 1st Lot, the 2nd and 3rd Respondents together own 7.5% of the undivided shares and the 1st, 2nd, 3rd, 4th and 12th Applicants own the remaining 92.5% undivided shares. 5.The 1st Respondent had filed a Notice of Opposition to oppose the application on various grounds which are referred to below. The 2nd and 3rd Respondents cannot be found. The Issues
6.Section 3(1) of the Ordinance provides that the person or persons who own, otherwise than as a mortgagee, not less than 90% of the undivided shares in a lot may apply to the Tribunal for an order to sell all the undivided shares in the lot for the purposes of the redevelopment of the lot. Section 3(2) further provides that an application may cover two or more lots where (a) the majority owner owns not less than 90% of the undivided shares in each lot; or (b) on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings and the average of: (i) the percentage of the undivided shares owned by the majority owner in the lot or lots on which one of the buildings stands and (ii) the percentage of the undivided shares owned by the majority owner in the lot or lots on which the other of the buildings stands, is not less than 90%. 7.The 1st Respondent took issue on the eligibility of the Applicants to make this application. It said in the Notice of Opposition: -
8.Section 4(2)(a) provides that the Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot, the Tribunal is satisfied that the redevelopment of the lot is justified due to the age or state of repair of the existing development on the lot. 9.The 1st Respondent also opposed the application on this point. Its Notice of Opposition said: -
10.Section 4(2)(b) provides that the Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot, the Tribunal is satisfied that the majority owner has taken reasonable steps to require all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable). 11.The 1st Respondent also took this point. Its Notice of Opposition said: -
12.Section 3(1) of the Ordinance requires the application to be accompanied by a valuation report. Part 1 of Schedule 1 of the Ordinance provides that the valuation report should be prepared not earlier than three months before the date on which the application is made and it should set out the assessed market value of each property on the lot: -
13.Section 10(3) and Part 3 of Schedule 1 provide that the net proceeds of sale of the lot, after payment of all costs and expenses as provided in the Ordinance, shall be distributed to the owners on a pro rata basis in accordance with the values of the respective properties of the owners as assessed in the application. 14.Section 4(1)(a) the Ordinance provides that if any minority owner of the lot should dispute the value of any property as assessed in the application, the Tribunal should hear and determine such dispute. The section further provides that in the case of any minority owner who cannot be found, the Tribunal shall require the majority owner of the lot to satisfy the Tribunal that the value of the minority owner’s property as assessed in the application is (a) not less than fair and reasonable; and (b) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application. If the assessed value of any property should be varied by the Tribunal under section 4, the basis of distribution of the net proceeds of sale will be varied accordingly. 15.The 1st Respondent also attacked the assessed value of the properties in the 4 Lots. Its Notice of Opposition said: -
This was in effect not actually an opposition as it did not say that because of the incorrect valuation, the application should not be allowed. It merely wanted the valuation of some or all of the properties in the 4 Lots to be revised. However, the 1st Respondent did not adduce any surveyor's report or provide any particulars of the unit(s) that have allegedly not been properly assessed in the application. Withdrawal of the 1st Respondent 16.Immediately before the commencement of the trial, the 1st Respondent entered into a sale and purchase agreement with the 11th Applicant agreeing to sell its interest in the 3rd Lot to the 11th Applicant. The 1st Respondent also withdrew its Notice of Opposition and consented to an order for sale to be made for the 4 Lots. However, the whereabouts of the 2nd and 3rd Respondents are still unknown. It is thus still necessary for us to scrutinize the merits of the application and see if an order for sale is justified. The evidence
17.The buildings standing on the 4 Lots together form one concrete superstructure. The Applicants say that it is about 50 years old. The certified true copy of the occupation permit produced was issued on 16th August 1955. However, it refers to 2 European houses at Castle Steps on I. L. 577 R. P. The Applicants say that this is the occupation permit for the buildings on the 4 Lots. 18.The general building plans for this development, which were approved by the Building Authority on 21st October 1954, described the 4 Lots simply as I. L. 577 R. P. They do not show any partition separating No. 4 from No. 4A or No. 6 from No. 6A. They only show 2 rectangular flats on each floor lying side by side. The description and the number of buildings shown in these plans thus tally with that in the occupation permit. It is apparent that when the development was completed, there were 4 flats on each storey instead of 2 as shown in the approved plans. This was achieved by building a partition wall in the middle of the 2 rectangular flats on each floor. The locations of the staircases remain unchanged. The partition wall shown in the plans for separating the landings of the 2 staircases positioned in the middle of the superstructure was however not built. Without the partition, access was made possible from the flats on either side to both staircases. We thus accept that the copy occupation permit as produced is a copy of the occupation permit for the 4 buildings on the 4 Lots with particulars of the lot and building thereon the same as those in the general building plans.
19.The 1st Lot and the building erected on it sit adjacent to the 2nd Lot and opposite to the 3rd Lot. The 2nd Lot and the building thereon faces the 4th Lot. The 3rd and 4th Lots and the buildings thereon sit next to each other. The 4 Lots and the buildings thereon thus form a rectangle. The percentages of undivided shares in the 4 Lots as owned by the Applicants are 92.5%, 100%, 80% and 100% respectively. 20.The Court of Appeal has in Bond Star Development Ltd. v. Capital Well Ltd. [2004] 2 HKLRD 855, paragraphs 12 to 210, decided that applicants for orders for sale under this Ordinance should not include in the application any lot which is 100% owned by the applicants unless such lot is one of the two or more lots on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings (see section 3(2)(b) of the Ordinance). For these lots, it is suffice if the average of percentage of undivided shares in the lots owned by the Applicants is not less than 90%. 21.Despite the agreement of the 1st Respondent to sell its interest in the 3rd Lot to the 11th Applicant, completion has not taken place and the Applicants currently only own 80% of the 3rd Lot. The 1st Respondent will only cease to have an interest in the 3rd Lot after completion of the sale and purchase. In any case, we must at least For for the sake of the 2nd and 3rd Respondents, we make sure that only those lots that are covered by section 3(2)(b) are included in the order for sale, otherwise, the scale of the auction will be enlarged unnecessarily by the inclusion of lots that are not eligible to be included. That will make it difficult for the minority owners to bid at the auction. Thus, we still have tomust consider whether the 3rd Lot is connected to the other Lot(s) by a staircase(s) intended for common use by the occupiers of these buildings and thus making section 3(2)(b) applicable. If not, we canwill not order the sale of interest in the 3rd Lot together with the other Lots. If the 3rd Lot is excluded and an order for sale is still to be made, the order may or may not link up the 1st Lot with the 2nd and/or 4th Lot. It all depends on whether the building on the 1st Lot is or is not connected to the other building(s) on the other Lot(s) by a staircase(s) intended for common use by the occupiers of these buildings. 22.There are 3 staircases inside the superstructure standing on the 4 Lots. All of them go from the ground floor of the buildings to their roofs. There is no partition for the roofs of the 4 buildings. They are on the same level and are amalgamated into one big roof. Thus, anyone can go from any of the 3 staircases up to the big roof and come down from either one of the other two staircases. 23.Of the 3 staircases, the first staircase links up the 1st and 3rd Lots and the buildings thereon. It serves as the front staircase to the units in the 2 buildings which are Nos. 4 and 6, Castle Steps. The second and third staircases are in the middle of the superstructure. They are opposite to each other and are linked up on each floor by a common landing. The approved general plans show a partition in the middle of the landing, but it was not built. The landings are thus common landings for these 2 staircases. The 2 staircases are at the rear of the units in Nos. 4 and 6, Castle Steps and at the front of the units in the buildings on the 2nd and 4th Lots or Nos. 4A and 6A, Castle Steps. They thus serve as the rear staircases of Nos. 4 and 6 and the front staircases of Nos. 4A and 6A. There is no rear staircase for Nos. 4A and 6A. It is clear that the residents of all the flats in these 4 buildings including the basements at Nos. 4 and 4A can have access to these 3 staircases and can use them to reach all parts of the 4 buildings or to go outside. 24.Apart from the layout of and accessibility to these staircases from the flats in the 4 Lots, we have also been referred to various assignments. By these assignments, the undivided shares of individual lots together with the exclusive right to occupy some of the flats in the buildings thereon were sold. The vendors (who were the owners of the 4 Lots) covenanted with the purchasers in these assignments and their successors to give them rights of way over the staircases that did not situate outside the lots the subject of the transactions. The purchasers also covenanted with the vendors and their successors to give them rights of way over the staircases situated within the lots the subject of the transactions. 25.On the basis of the physical layout of the 3 staircases and the provisions in the assignments of rights of way over them, we are satisfied that the 4 buildings standing on the 4 Lots are connected to one another by these 3 staircases and they are all intended for common use by the occupiers of the 4 buildings. As a result of this finding, we also find that the Applicants together own 93.125% of all the undivided shares in the 4 Lots and are eligible to make this application to cover the 4 Lots.
26.We now come to the existing conditions of the 4 buildings. There is a retaining wall at the north east boundary of the 4 Lots. It is on the lower part of the slope on which the 4 Lots stand. The Applicants have called Mr. Albert N. L. Ho of Ove Arup & Partners, a geotechnical and civil engineer, as its expert witness on the conditions of this wall. Mr. Ho referred to a report on this wall by Babtie BMT Harris and Sutherland, Hong Kong Ltd. (“Babtie”) prepared in November 1998 on the instructions of the Government and also the recent site inspections of the wall by his staff. 27.The Babtie’s report shows that the basements at Nos. 4 and 4A and also the retaining wall cannot be found in the approved building plans. They are thus unauthorized structures. The Babtie’s report concluded that the failure of the retaining wall will affect the residential buildings of Nos. 4 to 6 Castle Steps and the stability of most of the retaining wall did not comply with the current Building Regulations and is liable to become dangerous. Mr. Ho further then referred to a Dangerous Hillside Order which was issued by the Buildings Department in June 2001 requiring investigation and probably remedial works to this wall. This order has not been complied with yet. 28.Mr. Ho further said that if the retaining wall should fail, it would have severe impact to the basement structures located on top of the wall and it would be potentially very dangerous to the occupants in the basements. Eventually such failure could result in the collapse of part of the superstructure on the 4 Lots and fatal injuries to some of the occupants and nearby pedestrians. 29.Mr. Ho suggested 3 options for upgrading the retaining wall. They are: -
30.Mr. Ho also concluded that the retaining wall is not likely to have an adequate factor of safety against overturning failure to meet the current design standards and therefore liable to become dangerous. Regarding his 3 options, since the basement structures and the existing retaining wall are unauthorized building works, Mr. Ho opined that the only viable option is the second one which would require the restoration of the situation to that as approved in the building plans. However there is the problem of obtaining vacant possession of the basement structure to allow for the execution of the restoration works. 31.The Applicants also called Mr. David Connell, a building surveyor and a director of Chesterton Petty Ltd., to give expert evidence on the existing state of repair of the superstructure. Mr. Connell has inspected the superstructure between 23rd March 2004 and 8th November 2004. He had inspected the external façade, the internal common areas, 12 of the residential units and the 2 basement units. At the hearing, he produced many photographs, tables and sketches showing the existence of a large number of cracks of different lengths and widths, patches of spalled concrete with some exposing the reinforcement underneath, areas of debonded plasters and patches of paint peeling off. These defects can be found on every storey as well as the external façade and they are scattered everywhere. Mr. Connell also said that the flooring of the common area on the ground floor was in poor condition with significant cracks on the floor surface. Such cracks have probably been caused by thermal movement because no expansion joint was found in the flooring. The cast iron pipes of the drainage system are badly corroded and water stains were noted on the joints of the pipes. The plastered pipes of the drainage system are also in fair condition. Serious water leakage was noted on the ceiling soffit, walls and staircases of the 4th floor which were apparently caused by defective roofing system. 32.Mr. Connell concluded that the superstructure is in a state of disrepair. If the essential repair, remedial and ratification works are carried out, they can render the superstructure to a basic wind and watertight condition. This basic condition however will only serve the minimal function of a building to let the occupants have a place of habitation and protection from whether, but will not improve the occupants' living standard. The estimated cost for such remedial works (not including renovation and modernization of the internal parts of the units and the common areas) is approximately $3.9 million and the works would take about 120 days to complete. These works can keep the superstructure in an acceptable state for 6 to 8 years. However given the age of the building, continual repair work is likely to be necessary to maintain the fabric of the building in the minimal wind and watertight condition. It is estimated that maintenance work should be carried out once every 5 years and the costs for such maintenance in the next 20 years is about $3.55 million. On top of these costs, a sum of $1 to $1.5 million is also required for upgrading the retaining wall. 33.We accept the evidence of Mr. Ho and Mr. Connell. We agree that the superstructure is in a state of disrepair and the retaining wall needs upgrading, otherwise it may become dangerous and can lead to collapse of part of the superstructure with casualties to the residents and pedestrians nearby. We are particularly concerned about the Dangerous Hillside Order which has not been attended to properly. We also agree that the only option to properly address to the problem of the slope and the retaining wall is to take away the unauthorized basement structures. In the circumstances, we are satisfied that the redevelopment of the 4 Lots and the buildings thereon is justified due to the state of repair of the existing development thereon. Valuation of minority interest or variation of assessed values 34.Since the 1st Respondent has agreed to sell its interest in the 3rd Lot to the 11th Applicant and completion will take place in the near future and there is no other Respondent contesting whether the Applicants have taken reasonable steps to acquire all the undivided shares in the lot, we do not need to deal with the third issue that was raised by the 1st Respondent. For the same reason, it is not necessary for us to consider any dispute on the value of any property as assessed in the application as there is no such dispute. However, the absence of the 2nd and 3rd Respondents necessitates the Tribunal to be satisfied that the value of the property of the minority owners as assessed is not less than fair and reasonable and also not less than fair and reasonable when compared with the value of the majority owners’ properties as assessed. 35.The expert witness on valuation for the Applicants is Mr. Charles C. K. Chan, a professional valuer and also a director of Chesterton Petty Limited. Mr. Chan has prepared 3 valuation reports for this application. The first report assessed the open market values of the individual units as at 16th March 2004. The valuation basis is in accordance with the requirements of Part 1 of Schedule 1 of the Ordinance. The total assessed value of all the units as at that date was $35.5 million. The second report assessed the open market values of these individual units as at 18th November 2004. The same basis of valuation is used. The total value of all the units as at that date was $44.14 million. 36.Mr. Chan used comparables to assess the values of the units above the basement. For the basement structures, he was not able to find any comparable. He therefore adopted the investment approach to assess their values. He capitalized the total rental income of the basement structures. He then checked the assessment against the assessed unit rate for the units above. The valuation of the basement was at about 1/5 of that of the units above and that was in line with his previous experience. 37.However, Mr. Chan’s 2 reports show an appreciation in assessed value of about 25% for the units above but with no significant appreciation for the basement units. Mr. Chan explained that the appreciation for the basement units was retarded by their poor conditions and the fact that they are unauthorized. These are the factors that have caused the basement to have much lower assessed values back in March 2004. Mr. Chan thus said that these very same factors have further prevented the basement units to have the similar appreciation that the dilapidated units above had enjoyed. We do not agree with this. We take the view that all the units in the buildings are in poor conditions and this has been well demonstrated in the evidence and reports of Mr. Connell and Mr. Ho. We think that there should be a similar appreciation of 25% in the assessed values of the basement structures. 38.However, by section 10(3) and Part 3 of Schedule 1, the apportionment of the proceeds of sale would be on a pro rata basis in accordance with the values of the respective properties as assessed in the application. Since the first valuation report of 16 March 2004 has been annexed to the application as per section 3(1) and the values of the properties in that report would form the basis of the pro rata apportionment of the proceeds of sale, the discrepancy of appreciation from March to November 2004 as shown in the second valuation report will not affect the apportionment. We therefore do not see the need to vary any of the assessed values of the properties in the first valuation report.
39.In addition to the valuation reports on existing use values of the properties, Mr. Chan has also produced a valuation report on the open market value of the 4 Lots taking into account the redevelopment potential of these Lots on their own. He took a 12 storeys residential building as the optimum development. He then applied the residual valuation on the optimum development and came to an open market value of $126 million.
40.Finally, Mr. Chan opined that if all the repair and remedial works as suggested by Mr. Ho and Mr. Connelly are to be carried out in the superstructure (without any internal refurbishment) and the retaining wall at the costs of $3.9 million and $1 to $1.5 million respectively, the existing use value of the units as a whole will only be enhanced by 5%. This would thus make it uneconomical for the works to be carried out. His reasons for the little enhancement are that the works are only remedial in nature and they would not produce substantial improvement in the condition and quality of the buildings. He added in his oral evidence that the buildings are old and there is not much room for capital appreciation even with the defects remedied. Hence, the market would only give it the 5% appreciation with all defects remedied. 41.We do not agree with this assessment. The market is varied. It consists of people of different resources, capabilities and intentions. We do not accept that a unit in the superstructure with all defects remedied will only have a 5% appreciation in open market value when compared with the same unit in the same superstructure with all defects present. Since the Tribunal, in deciding whether to make the order for sale, does not need to weight and consider the reliability and reasonableness of the valuation of enhancement of value, we do not wish to go further on this matter. Order for sale 42.For the above reasons, we are satisfied that the redevelopment of the 4 Lots and the buildings thereon is justified due to the state of repair of the existing development thereon. We therefore make an order that all the undivided shares in the 4 Lots be sold for the purposes of its redevelopment. We also appoint under section 4(1)(c)(i) Mr. Ma Ho Fai and Ms. Tsang May Ping, partners of Messrs. Woo, Kwan, Lee and Lo, to discharge the duties imposed on trustees under the Ordinance in relation to the 4 Lots. We also authorize the appointed trustees to charge remuneration for their services as trustees at the rate as specified in a letter dated 4th November 2004 from Messrs. Woo, Kwan, Lee and Lo to Messrs. Johnson Stokes & Master and marked exhibit A-12 in the trial. 43.We do not make any order on compensation to tenants under section 4(6) of the Ordinance as no tenant has filed any Form 34 in the Lands Tribunal Rules to seek determination of compensation under the Ordinance. 44.We further direct that the sale of the 4 Lots together be by auction with a reserved price set at $126 million ($126,000,000.00) and that the sale be on the particulars and conditions of sale substantially the same as those in the draft initialed and approved by the Tribunal. 45.On the period for completion of the redevelopment, we accept that a period of 51 months is reasonable for completing the development and thus specifies 51 months pursuant to paragraph 1(a) of the Third Schedule of the Ordinance. This has included a 1-year contingency period. The generosity on time is due to the fact that the 4 Lots are within an area in the Mid-Levels of Hong Kong Island where its safety is of particular concern to the Buildings Department. 46.Finally we give liberty to the trustees, the Applicants and the Respondents to apply but would not make any order of costs.
Mr. MOK Yeuk-chi, instructed by Messrs. Johnson Stokes & Master, for the Applicants The 1st Respondent represented by Messrs. Hastings & Co., absent The 2nd and 3rd Respondents, in person, absent |
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