Mingo Properties Ltd v. The Director of Lands
Read the full judgment text of LDLR 6/2005 on BabelCite. This Lands Tribunal judgment was delivered on 26 February 2007.
1. This is an application by the Applicant for compensation in respect of the property known as Portions D and E on Ground Floor, Nos. 329 & 331 Shau Kei Wan Road and Nos. 1 & 3 Nam On Lane, Shau Kei Wan, Hong Kong (“the Property”) which was reverted to the Government on 25 May 2005 under the Lands Resumption Ordinance (“the Ordinance”), Cap. 124, for implementation of Development Proposal H21 by the Urban Renewal Authority in association with the Hong Kong Housing Society pursuant to a gazetted
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LDLR 6 OF 2005 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION Lands Resumption Application No. 6 of 2005 _______________ BETWEEN
_______________ Coram: Mr. W. K. LO, Member of the Lands Tribunal Dates of Hearing: 15, 16, 17, and 18 January 2007 Date of Judgment: 26 February 2007 ________________ J U D G M E N T ________________ Background 1.This is an application by the Applicant for compensation in respect of the property known as Portions D and E on Ground Floor, Nos. 329 & 331 Shau Kei Wan Road and Nos. 1 & 3 Nam On Lane, Shau Kei Wan, Hong Kong (“the Property”) which was reverted to the Government on 25 May 2005 under the Lands Resumption Ordinance (“the Ordinance”), Cap. 124, for implementation of Development Proposal H21 by the Urban Renewal Authority in association with the Hong Kong Housing Society pursuant to a gazetted and published Government Notice No. 851 dated 16 February 2005. 2.The Applicant received from the Government the offer of $13,770,000, which includes the value of the Property at $12,954,000. The Applicant did not accept the offer and elected to submit on 28 November 2005 to the Lands Tribunal (“the Tribunal”) a formal claim for compensation in the sum of $20,700,000, plus interest and expenses, costs or remuneration referred to in Section 10(2)(e) of the Ordinance, and costs of the application. The Respondent in the Notice of Opposition rejected the claims on the grounds that firstly, it was denied that the Applicant had any right to claim compensation; and secondly, it was denied that the claimed amount was properly assessed and the said claim was considered to be excessive. 3.After a call-over hearing in early 2006, the parties exchanged valuation reports prepared by their experts, Mr. Wayne W. K. Lee (“AW”) and Mr. Lai Wah Chi (“RW”). These reports, now included in the agreed bundle, Exhibit AR-1, are as follows:
4.Both experts were called to give evidence in the hearing. They elaborated their valuations, produced several Exhibits and were cross-examined. Both parties accepted AW and RW as expert witnesses. In his supplementary report, AW opined that the open market value (“the OMV”) of the Property was, at the relevant date, in the sum of $20,930,830. Even after taking into account RW’s comparable RC-1, AW opined that the OMV of the Property would only be marginally lower, $20,477,501. On the other hand, RW was of the opinion that the OMV of the Property was, at the relevant date, only in the sum of $11,542,000. Therefore, a difference of some 77% exists between the valuations of AW and RW. This is really a very large difference for valuation of this nature, especially when both experts were using the same method of valuation, and had between them all except one comparables in common. However, as the hearing came to an end, the Applicant conceded to agree with the Respondent on virtually all the physical measurements of the Property and the comparables, and the Applicant also agreed to discard several comparables, the differences between the parties have narrowed down. The Issue 5.At the commencement of the hearing, the parties confirmed that the only outstanding issue was the valuation issue of the amount of compensation payable under the Ordinance. The Law 6.There is no fundamental dispute of law in the present application. As summarised by the Respondent, the following statutory provisions are applicable: -
7.To sum up, the Tribunal shall determine, in the absence of agreements between the parties, the amount of compensation for the resumed Property on the basis of the value of the land resumed and any buildings erected thereon, i.e., the OMV of the Property on the date of reversion, 25 May 2005. Particulars of the Property 8.The Property comprises Portion D and Portion E together with the yard and a W.C. on the ground floor of the building known as Nos. 329 and 331 Shau Kei Wan Road and Nos. 1 and 3 Nam On Lane in the Shau Kei Wan district of Hong Kong Island, Hong Kong. The said building consisting of 11 storeys was completed in 1957 and has frontages onto both Shau Kei Wan Road and Nam On Lane but the Property only fronts onto Nam On Lane. 9.It was agreed that before the resumption of the subject building by the Government, a tenant occupied the Property as a mah-jong games hall. According to the Occupation Permit of the said building issued by the Building Authority on 12 July 1957, it was certified by the Authorized Architect to comply in all respects with the Buildings Ordinance, with “the ground floor for Post Office”; and permission was granted to occupy and use the said building for “non-domestic purposes.” Furthermore, according to record of the general building plans approved by the Building Authority, the whole of the ground floor of the said building, including the Property, was designed for Post Office use. Also, according to the Sub-Deed of Mutual Covenant dated 6 March 1989 registered in the Land Registry, the ground floor of the said building was sub-divided into 9 portions, known respectively as Portions A, B, C, D, E, F, G, H and I. Based on the copies of the assignment plans registered in the Land Registry, the Property comprised Portions D and E. 10.For the purpose of the present proceedings, the parties agreed the following basic measurements of the Property: -
Common grounds between the parties 11.During the final submission, the parties confirmed that they had reached the following common grounds: -
12.However, before going to the perennial questions of the choice of the suitable comparables and their adjustments, it is apt to deal at this stage with the remaining disputes that will not only have much effect on the outcome of the valuation but will also affect the methodology of the valuation in the present application. These include the following: -
When using the direct comparison approach, whether the Zonal Method should be used in addition to the traditional overall unit rate method 13.AW did not suggest the use of Zonal Method in his first valuation report. However, in his supplementary report (para. 19), he raised the issue that somehow, “as far as shop premises are concerned, frontage, size and layout are inter-related factors in the sense that the effect of one on the value of a property may be modified by the others. That said, unless the other factors are about equal for all the properties under comparison, adjusting for one of the factors by reference to the relative magnitudes of that factor only distrusts the true picture of its effect.” As an example, he illustrated that “pairs of adjacent, usually equally elongated-shaped shops may not be considered elongated at all when they are combined to form one large shop”. For this reason, he concluded that, “there is no reason why he (the owner) cannot value the Property for compensation purpose in the same way as the market does, as two shops”. AW further suggested that in order to avoid the too mechanistic methods of adjustments for the above said factors of frontage, size and layout, he adopted a “collective” approach, which was commonly employed by many valuers and known as the “zonal method” (para. 20). He confirmed at the end of that paragraph that he had used a two-zones, “halving-back” approach (with the rental value of the second zone equals to half of the first zone) and a zonal distance of 4m for Zone A, the first zone. He did not explain for his choice of the zonal distance and the halving back approach, instead of adopting, for example, a two-zones and a remainder approach. 14.AW then carried out valuations in his supplementary report using two methods: (i) the traditional overall unit rate method but valuing the Property as 2 shops, i.e. Portion D and Portion E separately and (ii) the 2-zones zonal rate method (i.e. a 4-m zone A and remainder, and “halving back” approach) by valuing the Property as a whole, i.e. as 1 shop or Portions D & E together. However, notwithstanding the use of two different methods, AW arrived at almost identical figures of OMV for the Property. 15.The Applicant submitted that the zonal method has always been an acceptable method for valuation of retail purposes. It could be used when the subject property was of a depth and layout different from the comparables (Rand Company Limited v. The Director of Lands - LDLR 7 of 2001, unreported, date of Judgment: 7 March 2002). In the final submission, the Applicant accepted that if the Tribunal would not agree with the AW on the preferred choice of the zonal method, the Applicant would accept the valuation of the Property on direct comparison method on vacant possession basis. 16.On the other hand, RW opined that in the present case, there was no great discrepancy in the shape of the shops that justified the adoption of the zonal method to be useful or necessary. Also, whilst there was a commonly adopted zone A distance in UK, there used to be no generally accepted distance for zone A in Hong Kong. Therefore, the uncertainties in the choice of zone depth and the number of zones would lead to highly subjective and arbitrary results. Based on the opinion of RW, the Respondent submitted that there was no evidentiary basis for the Tribunal to adopt the use of zonal method for this case at all. 17.During the hearing, at the request of the Tribunal, AW drew up the layouts of the Property and those of the comparables, using roughly the same scale, on a large sheet of paper, which was produced as Exhibit A5. Based on this sketch and the copies of floor plans of the comparables shown in the bundle, I share the view of RW that in the present case, there is no need to adopt the use of zonal method as there are no large variations in layout and size that exist between the 2 portions of the Property and the adopted comparables. The adoption of an overall unit rate method on the basis of effective saleable area of the Property and the comparables is preferred. Whether the valuation of the Property should be the sum of the term interest and the reversionary interest 18.Both experts agreed that for a tenanted shop, it is generally possible to adopt the term and reversion approach in valuing the property. AW adopted the approach of firstly, valuing the term by multiplying the said passing rent of $106,000 with the years purchase factor of 2.4677 (i.e. the years purchase at say 6% for 2.75 years, the duration of the remaining tenancy assuming no resumption) and secondly, valuing the reversionary interest of the Property by multiplying the estimated market value of the Property as at the relevant date on vacant possession basis, or $20,350,000 with the present value factor of 0.8747 (i.e. the present value of $1 for 2.75 years at discounting rate of 5%). In the first valuation report, AW valued the OMV of the Property as to be the sum of (i) the term interest at $3,138,878 and (ii) the reversionary interest at $17,800,000, or $20,938,878. It therefore transpires that the OMV of the Property subject to the existing tenancy as at the relevant date was estimated to be slightly higher than the OMV of the Property on vacant possession basis, by a small margin of some $590,000 (i.e. $20,938,878 less $20,350,000 which equals to $588,878, rounded to $590,000). In his supplementary report, AW used a similar approach of the summation of the term interest and the reversionary interest. 19.On the other hand, RW considered that the valuation adopted by AW using the summation of the term interest (which was based on the rent reserved under the said tenancy) and the reversionary interest should be discarded. In the written final submission, the Respondent submitted that on the facts of the present case, the circumstances surrounding the agreed rent of $106,000 for a 3-year term commencing from 1 March 2005 was “highly suspect” which “renders the valuation of the term value suspect, unreliable and arbitrary”. 20.Firstly, the Applicant submitted that since Clause 18 of the supplementary tenancy agreement dated 10 March 2005 show that the parties knew of the impending resumption (for which the date of affixing of the resumption notice was 25 February 2005, about 2 weeks earlier) before the date of said agreement, there was no reason that any reasonable landlord or tenant would agree to an extended term of 3 years. Secondly, there were abnormal features in the supplementary agreement that suggest that it was probably not “an arms length commercial agreement”. Thirdly, the Applicant submitted that there was no evidence that the renewal was the result of the exercise of an option as of right. Although the Applicant first instructed AW in early 2004, AW admitted his lack of personal knowledge in this regard. Fourthly, the Applicant chose not to call any factual witness to explain the above said unusual circumstances even though AW himself confirmed that such a witness would be a person that the Respondent should ask in relation to these matters. Finally, whilst AW might opined that the said passing rent of $106,000 was “at market rate” or “on the high side” (the latter given during cross-examination), he confirmed that he had not carried out any rental analysis to determine the open market rental value of the Property as at the relevant date. On the other hand, RW had carried out a full rental analysis based on actual comparable transactions, albeit during the hearing dates, that formed the basis of his opinion that the open market rental value of the Property was, at the relevant date, “between $345 (conservative) and $400 (less conservative)”. These figures were much lower than the overall unit rate of $696 fetched by the said passing rent of $106,000 per month. 21.Therefore, to sum up, in view of (i) the unusual features surrounding this supplementary tenancy agreement, (ii) the fact that the passing rent under that tenancy was so much higher than the estimated open market rental value of the Property which, according to AW, warranted an adjustment to the agreed yield of 5.5%, to reflect the insecurity of this tenancy, and (iii) in the absence of any evidence from AW as to the type and level of adjustment that should be made even though it was he who put forward this term and reversion approach in the first place, I decide that the valuation should be done on the basis of vacant possession. Whether the Investment Method should be used a “check valuation” 22.AW used the Investment Method as a ‘rough check’ under the heading ‘counterchecking of valuation’ in paragraph 9 of his report dated 23 May 2006. On the outset, I do not understand how this sort of ‘ball park’ valuation figure could assist in this case, which both experts have already agreed, should be done on the basis of simple direct sale comparison. In fact, according to AW, his ‘rule-of-thumb’ valuation involves the capitalizing of the prevailing market rent of the subject property by the appropriate market yield. But AW gave evidence that he had not even done any solid market analysis as to find out whether the quoted “passing rent” of $106,000 per month was above, at or below market level. Therefore, AW could not have reached a fair opinion of the value of the prevailing market rent of the Property so that he could form his judgment as to the difference between the actual rent passing and the open market rental value of the Property before deciding on the level of adjustment for the yield. 23.To sum up, I find that AW’s “check valuation” cannot stand because firstly, the direct comparison method is always the best method for valuing a shop; secondly, there was no basis for adopting $100,000 as the prevailing market rent and finally, there is nothing to be gained by trying to work out a “check valuation” in which one of the two inputs has no solid basis. Whether the Property should be valued as 2 shops or 1 shop 24.AW opined that the Property could be valued as 2 shops or 1 shop, the difference being in the quantum of adjustments for size, frontage and shape/layout in either case. In his supplementary report, AW in fact attempted valuations on both bases, i.e. zonal valuations for the Property as 1 shop using different sets of comparables, supported by counter-check valuations for the Property as 2 shops on overall area basis (pages 136 to 138 of Exhibit AR-1 refer). On the other hand, although RW agreed that the valuation of the Property as 2 shops or 1 shop would have impacts on the adjustments made for size, frontage and shape/layout, he opined that the Property should be valued as 1 shop. However, what was agreed between the 2 experts was that the value of the Property would be higher if they were assessed separately (mainly because the quantum allowance would be lower in the 2 shops scenario). 25.The following facts were not disputed:
26.The Applicant submitted, “AW gave evidence that “the re-erecting of the partitioning wall (between Portion D and Portion E) is a simple and straightforward work which only costs less than $10,000 and should be finished within days. No evidence was given to suggest that it required any complicated procedure.” The Applicant added that there was no reliable evidence from the Applicant that “any specific procedure or work is required to re-erecting the partition wall,” and what RW suggested in the witness box was without proper foundation as he was only a valuation surveyor and did not possess expertise or comprehensive knowledge in the matters concerning the application of the Buildings Ordinance. On the contrary, the Applicant pointed out that AW had relied on the Authorized Person’s letter dated 1 February 1989 stating that erecting (including re-erecting) the partition wall within the Property are not structural work and required no approval from the Building Authority. 27.Moreover, the Applicant suggested that RW did not carry out valuation of the Property as 2 shops was because it would produce a higher value and RW did not like the outcome of this alternative valuation. Therefore, even though RW was aware of AW’s alternative valuations in the latter’s supplementary report, RW chose not to give any opinion of whether and how the valuation would change on this alternative basis. Finally, the Applicant submitted that since “it was held in Maori Trustee v. Ministry of Works [1959] AC 1 (PC) that compensation should be awarded on the basis of 2 properties when they are as a matter of fact capable to be divided and are in fact divided” (Land Compensation and Valuation Law in Hong Kong by Cruden, pp. 95 – 96), it would be reasonable to treat the Property as 2 separated units for valuation purpose. 28.The Respondent submitted that the Tribunal should adopt a “realistic” approach, by which the Respondent referred to the fact that the actual ownership and occupation of the Property for the last 15 years was for the use as one shop. Hence, the Respondent said that the best use of the Property was for the use as one shop. Since the determination of the OMV of the Property was to find the highest and best use value of the Property, it is submitted that Property should be valued as one shop. 29.Moreover, contrary to the common law definition of open market value, such as that referred to in IRC v Clay [1914] 3 KB 466, the Applicant submitted that the valuation of the Property has to be subject to the provision of section 11(1) of the Ordinance. In particular, under section 11(1)(a), the Tribunal may have regard to the “existing condition” of the Property in determining compensation. The Respondent pointed out that this “existing condition” must reflect the fact that at the relevant date, there was actually no partition wall between Portions D & E. Also, under section 11(1)(b) of the Ordinance, the Tribunal may decline to make compensation for any addition or improvement to the Property after the notice of intended resumption is gazetted. Therefore, even assuming that the Applicant were able to erect the partition wall between Portions D & E after the gazette date of 16 February 2005, the Tribunal should decline to award compensation to the Applicant as the partition wall would then constitute “an addition or improvement” of the Property. 30.As summed up in paragraph 5 above, under the Ordinance, the amount of compensation shall be taken to be the amount that the Property “if sold by a willing seller in the open market might be expected to realise”. Therefore, the Tribunal should consider the issue of the open market value of the Property at the relevant date from the perspectives of the potential purchasers as well as the owner (as the willing seller). 31.Firstly, it was the consensus of both experts giving evidence that using their own sets of comparables and adopting their own adjustments, the summation of values of the two portions of the Property (i.e. Portions D and E) exceeded the value of the Property as a whole. This was due to the higher overall adjustments for size, frontage and shape/layout in the former scenario. Therefore, I do not agree with the Respondent’s submission that the best use of the Property was its use as one shop because the concept of “the best use” of any property should be that of “the highest and best use” of the said property, within the permitted legal and planning constraints. Also, it is logical to infer that the owner of the Property as the willing seller, if properly advised by experienced professional valuation surveyor such as either one of the two experts, would be aware of this consensus opinion that 2 separate portions would combine to give a higher value. It would be absurd to assume that the owner of the Property would not sell for the higher value only because it had been occupied for over 15 years as one shop unit before the relevant date. I do not see why the owner of the Property as a reasonable and willing seller should necessarily adhere to the historical state of ownership or occupation in trying to determine the best mode of selling the Property, but should not strive to obtain the highest and best value, which, I hasten to emphasise, is the common basis of the definition of the open market value of a property. Even if in a hypothetical situation that the actual owner of a property (as the seller) or his expert were not aware of the higher value of the property if properly partitioned physically, the Tribunal which is empowered by the Ordinance to determine the compensation must take into regard the market realities of this higher value scenario if the evidence, as in the present case, clearly suggested so. Similarly, in a reverse situation, if an owner owns more than one shop unit contagious to each other and if there is clear evidence from the market (including, for example, advice from the experienced valuation surveyors practising in the market) that the value of a larger sized shop, which can be made possible by the merging of 2 or more shops will be higher, there is no reason that the market value of these shops units should not be the value of the units as a whole but the lower sum of the values of individual shops as separate units. 32.There were indeed numerous examples of how the seller and the market decided from time to time to carve out a larger ground floor retail shop unit into a number of shops, or to convert a whole upper floor retail/commercial space (such as a restaurant) into a shopping arcade consisting of numerous small retail units. I fail to understand how in those circumstances the sum of the sale prices of such carved out units did not represent open market values of the hitherto un-partitioned property. 33.Secondly, I am in agreement with the Respondent that the Applicant failed to prove that the Respondent as the owner of the Property could not dispose of the two different portions of the Property to the same or different purchasers by way of separate assignments. There is no factual evidence adduced by the Applicant. On the contrary, the Land Registry record clearly stated that the entire ground floor of the subject building had been partitioned into various portions, including the subject Portions D and E a long time ago. The parties had different views as to the cost and time of carrying out any actual partition work separating the two Portions on the ground. However, I do not think that it is even necessary to estimate the cost of building up such a physical partition wall. More realistically, after purchasing the Property as 2 separate portions, the purchasers would have in mind their usages and modes of occupation. It would be normal for them to carry out alteration or decoration works during which time the partition wall could be erected either by consensus of the 2 different purchasers or by any of them. 34.It is true that for convenience of identification by intending purchasers, for example, many sellers would consider erecting a physical partition wall between the two different portions that were to be demised separately. Even under that circumstance, I agree with the Respondent that this could be done with minimal cost and there was not sufficient evidence from the Applicant that such work, being the erection of a non-structural party wall would actually require the approval of the Building Authority. Moreover, there is no law requirinig that 2 different landed interests have to be separated by a physical wall. There are from time to time many retail shops or commercial units being sold to different owners but are occupied by a single tenant. Why is it necessary to consider how the whole unit be divided physically before the value of each portion can be assessed? My short answer is a simple no. In the present case, there was a proper division plan of the whole ground floor, which was properly drawn up by an authorized architect and registered in the Land Registry. I do not see any difficulty other than referring to that same plan when preparing the assignment document for the different portions, Portions D and E. 35.To summarise, I agree with the Applicant that since the summation of the values of the 2 different portions would give rise to a higher value, this should be adopted in preference to the value of the 2 portions as one shop unit as this complies with the provisions of the Ordinance, in particular the definition of the open market value of the landed interest. There was no evidence adduced by the Respondent that the Applicant could not dispose of the Property as 2 different portions without seeking approval from the Building Authority. Therefore, the Property should be valued on the basis of 2 shops, i.e. Portions D and E but not as 1 shop. Whether the Property should be valued on the basis of its use for retail/commercial purposes at the relevant date 36.AW valued the Property on the basis of its being capable of use for retail/commercial purposes at the relevant date. On the other hand, RW opined that it would be necessary for the Respondent to spend time, expense and efforts to seek the necessary approvals from the Building Authority. The Respondent submitted that in the event that the Tribunal “accepts that the Occupation Permit restricts the use of the property as a post office, a direct reduction and deferment in time arising from the necessary applications to the Building Authority should be made.” 37.The Applicant has made lengthy submission that approval by the Building Authority was not required for continuing use of the Property for retail/commercial purposes. I do not intend to cover these arguments in details, suffice to say that I agree entirely with the Applicant the following two main points:
38.Therefore, I do not see the rationale of adopting AW’s suggested adjustments for expenses and time deferment. 39.After determining the disputes between the experts in the appropriateness of the use of the zoning valuation method and the investment method, the valuation of the Property as one shop or 2 shops, as well as their differences in the interpretation of the permitted uses of the Property as permitted by the Occupation Permit and under the Buildings Ordinance, I can now consider the main dispute between the parties, i.e. the choice of comparables. Choice of comparables 40.For this application, AW has collected 10 comparables (i.e. AC-1 to AC-10) in support of his valuation. On the other hand, RW has collected 6 comparables (i.e. RC-1 to RC-6). Among these, RC-6 and AC-1 are transactions at different dates of the same property whilst RC-1 was only used by RW. Apart from RC-1 and RC-6, the other RW’s comparables were the same as those used by AW. Since the 2 experts have numbered their comparables, with the exception of AC-2/RC-2, differently, both their references will be quoted in this Judgment. 41.The parties managed to reduce some of their differences after 3 days’ of hearing. Mr. Lui submitted in the final submission that the Applicant would only rely on the following 6 comparables identified and analysed by AW: AC-2, AC-5, AC-6, AC-7, AC-8 and AC-9. He noted that with the exception of AC-9, RW did not object their uses in the valuation. As for RW’s comparable RC-1, the Applicant also did not object to its being used. Indeed, Mr. Lui show in the schedule attached to his final written submission AW’s suggested adjustments for RC-1. In response, Mr. Pao still had objection to AC-9 being used. He said that it should be discarded alongside with AC-10. Also, Mr. Pao maintained that RC-6 could still be used but had no strong objection to whether AC-4 should be included. Therefore, let’s firstly consider whether comparables RC-6, AC-3, AC-4 and AC-9 should be considered as suitable comparables in this valuation exercise. (i) Comparable RC-6 – Comparables AC-1 and RC-6 refer to the same property that was transacted at 2 different times with very different sale prices: AC-1 was sold at $10,095,000 on 16 January 2006 whilst RC-6 was the same property sold at $7,800,000 on 1 March 2005. The property increased in sale price of over 29% in 10 ½ months’ time. The Respondent submitted that RC-6 should be preferred as it was only transacted about 3 months before the relevant date of 25 May 2005. In the final submission, the Applicant conceded that AC-1 could be discarded. But the Applicant added that RC-6 should be abandoned as well because of the unusual circumstances of the charging orders registered in the Land Registry around the date of transaction and that there was a high prospect that RC-6 was sold under a forced sale situation. I agree with the Applicant in discarding both AC-1 and RC-6 in the choice and analysis of the suitable comparables below. (ii) Comparable AC-3 – The Applicant submitted to discard this comparable in the final submission on the ground that the comparable had return frontages and that the construction work existed outside the comparable around the time of transaction. Overall, I do agree to discard this comparable. (iii) Comparable AC-4 – AW opined that an upward adjustment of 8% was warranted due to the tenancy details of this comparable. However, during the hearing, AW confirmed that he had not examined the registered lease for the terms governing the renewal and that he also had not carried out any proper rental analysis of this comparable property based on market rental data of other comparable shops. Therefore, the Applicant conceded in the final submission to discard this comparable on account of the unusual tenancy history. Since there was lack of knowledge of the terms of the tenancy, in particular the possibility of renewals up to 2011, which may affect the value of this comparable property, I agree to discard it in the following analysis. (iv) Comparable AC-9 – The Respondent seriously objected the use of AC-9 because the comparable, alike AC-10 (which was conceded by the Applicant that it could be discarded as a comparable) was transacted quite a long time away from the relevant date of 25 May 2005. Although AC-9 was transacted on 30 September 2004, some 3 months nearer to the relevant date than AC-10 (which transaction date was 30 June 2004), it was still 8 months away from the relevant date. The Respondent submitted that since there were sufficient evidence without the need to resort to this comparable, which required substantial adjustment in one factor of time alone (24% by RW), this should be discarded. I agree with the Respondent and decide not to adopt this comparable in the analysis below. 42.Summing up, I have considered and agreed with the Applicant to discard the use of RC-6, AC-3 and AC-4. Also, I have agreed with the Respondent to discard the use of AC-9. Hence, the following 6 comparables are considered to be the best comparables for the purpose of this valuation: AC-2/RC-2, AC-5/RC-4, AC-6/RC-5, AC-7, AC-8 and RC-1. The details of these 6 comparables are summarised in the following table: Table 1 – Adopted comparables for Portions D and E
Adjustment of comparables 43.Mr. Lui, counsel for the Applicant has helpfully summed up in his final written submission the experts’ different adjustments of the comparables. Both Mr. Lui and Mr. Pao, counsel for the Respondent submitted that the evidence of their expert should be preferred to the other. Otherwise, both agreed that there were not great disparities between the 2 experts on several factors of adjustments: headroom, time, frontage and shape. The major differences were in the remaining factors of adjustments for location and size. 44.I will now discuss below the various factors of adjustments and the quantum as suggested by the experts, as well as my adopted adjustments. (i) Location – Of all the factors of adjustments, this is the area where there were greatest differences in opinion between the 2 experts. Whilst the 2 experts generally agreed on the direction of adjustments, they differed in the quantum. Although at the beginning of the hearing, I was asked and agreed to carry out a site inspection with the company of the parties including their experts, there were bound to be limitations, the first being the difference between the date of inspection and the relevant date of valuation; the second being that the time of inspection did not correspond with the peak time of pedestrian flow so that it was not possible for me to observe the different versions of the more frequently used routes by pedestrians as reported by the experts. Nevertheless, what I saw during the inspection still did assist me in forming my opinion of the main differences in location between the Property and the comparables. On the whole, the quantum of my adopted adjustments for the comparables are nearer to AW’s than RW’s. (ii) Headroom – The 2 experts, AW and RW gave adjustments of –3% and –5% respectively for the comparable AC-5/RC-4. I agree a downward adjustment is warranted and adopt a mid-point figure of –4%. As the other comparables are similar to those of the Property in terms of headroom, no adjustment is needed. (iii) Time – There were no great differences between the opinions of the 2 experts. AW’s adjustments were based on the price index of retail properties published by the Rating & Valuation Department whilst RW adopted a more average approach of 5% adjustment per month of difference between the relevant date and the transaction date of the analyzed comparable. This 5% per month adjustment was in turn based on the analysis of “paired” comparables AC-1 and RC-6, which were transactions of the same shop premises at different dates. Since it was AW’s evidence that the period prior to the relevant date was one of the most volatile in recent years and that RW’s linear adjustment of 5% per month (amounting to 60% adjustment for a year) was rather substantial, I prefer to follow the trend line of price index, which is a more objective figure. Therefore, I adopt AW’s adjustment figures instead of RW’s. (iv) Size (Quantum) – The 2 experts basically agreed with the principle that there should be an upward allowance for smaller size, at about 5% per every 20 sq. m. difference. However, the adjustments made by the 2 experts were very different because AW treated the Portions E and F as 2 different shops. Since I have decided that the 2 portions should be valued separately as 2 separate, I have estimated the adopted adjustments using the expert’s agreed scale. (v) Frontage – AW was of the view that there should be an adjustment of about 2.5% for every 1 m difference whilst the corresponding adjustment figure for RW was 2%. Similar to the adjustments for size (quantum), the adjustments for frontage differences depend on whether one compares the comparables with Portions D and E separately or as a whole. As I have decided to value the 2 portions as 2 separate shops, I have made the adjustments on that basis too. (vi) Shape (Layout) – Similarly, I have estimated the adopted adjustments after taking into account the portions as 2 separate shops. (vii) Tenancy – Both AW and RW did not make any adjustment for this factor for those adopted comparables that were subject to tenancies. I follow their approach. Tribunal’s adjustments of the adopted comparables 45.Adopting the adjustments as summarized above, I have analysed the adopted comparables for Portions D and E separately, as follows: - Table 2 – Analysis of adopted comparables for Portion D
Table 3 – Analysis of adopted comparables for Portion E
Valuation of the Property on vacant possession basis 46.Applying the average adjusted unit rates for Portions D and E arrived at in the Tables 2 and 3 above to their respective effective saleable floor areas give the following results:
47.Therefore, the open market value of the Property is estimated to be the sum of the values of Portion D and Portion E, i.e. $6,001,780 plus $11,076,388, which is equal to $17,078,168 rounded to $17,080,000. Orders 48.Accordingly, I order that the Respondent do pay the Applicant compensation for the Property in the sum of $17,080,000. The matters of professional fees, interest and costs shall be adjourned to a date to be fixed by the Registrar, with liberty to apply for any other ancillary and consequential matters.
Mr. Simon K M LUI, instructed by M/S Cheung, Chan & Chung, for the Applicant. Mr. Jin PAO, instructed by the Department of Justice, for the Respondent. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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