Intelligent House Ltd v. Chan Tung Shing and Others
Read the full judgment text of LDCS 11000/2006 on BabelCite. This LDCS judgment was delivered on 23 June 2008 before H.H. Judge Thomas Au, Mr. W.K. Lo.
Lands Tribunal – Land (Compulsory Sale for Redevelopment) Ordinance (Cap 545) – compulsory sale of lot for redevelopment – majority owner with 92.87% undivided shares – two 46-year-old buildings (Kam Kwok Building and National Building) on the Lots situated at the Remaining Portion of Section A of Marine Lot No. 436 and Section F of Marine Lot No. 435 – Applicant purchased majority shares in 2006 public tender for $825 million – Whether Ordinance infringes Basic Law Articles 29 (inviolability of homes) and 105 (protection of private property and compensation for deprivation) – Whether applicant meets 90% undivided shares threshold under s. 3(1) – Whether EUVs of individual residential and commercial/retail units are appropriate – Whether redevelopment justified on grounds of age or state of repair – Whether applicant took reasonable steps to acquire minority shares – Whether RDV too low – Constitutional challenge rejected; Articles 29 and 105 do not apply to private-to-private transfers under the Ordinance, following Harvest Good Development Ltd v Secretary for Justice – 90% threshold satisfied based on undivided shares of the entire Lots (not each building) – date of EUV valuation is the date of the valuation report attached to the application (29 September 2006), not the date of trial – tribunal adopts mixed approach to EUV valuation: Mr Chan's basic unit rates for residential units with Mr Lynch's RZA method for commercial/retail units – meaning of "age" and "state of repair" under s. 4(2)(a)(i) interpreted broadly: land economic test (cleared site value exceeds EUV) applicable to age; repair cost vs. enhancement value test applicable to state of repair – redevelopment justified on ground of age: cleared site value of approximately $1.2 billion substantially exceeds EUV of approximately $579 million – redevelopment justified on ground of state of repair: total repair cost of $91,239,654.50 exceeds enhancement value of $70,770,954 by $20,468,700.50 – reasonable steps requirement under s. 4(2)(b) satisfied: four written offers and meetings; offer prices based on auctioned sale price and Savills valuation fall within range of fair and reasonable compensation – reserve price fixed at $1,421,124,000 reflecting 8.4% increase (1.4% per month over 6 months) over January 2008 RDV – order for sale granted – costs nisi against 13th Respondent (China Superior) only, on High Court Scale with certificate for 2 counsel
Legal issues: Constitutionality of the Ordinance under Basic Law Articles 29 and 105 · Whether the 90% undivided shares threshold is met · Correct date of EUV valuation · Appropriateness of RZA method for commercial/retail unit valuation · Proper interpretation of "age" and "state of repair" under s. 4(2)(a)(i) · Whether redevelopment is justified on the ground of "age" · Whether redevelopment is justified on the ground of "state of repair" · Whether Intelligent House took reasonable steps to acquire minority shares
Outcome: Order for sale of all undivided shares of the Lots granted in favour of the Applicant Intelligent House Limited; redevelopment held to be justified on grounds of age, state of repair, and collectively on both grounds.
Cited by 1 case · Cites 3 cases
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LDCS 11000 / 2006 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LAND COMPULSORY SALE APPLICATION NO. 11000 OF 2006 ----------------------
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---------------------- JUDGMENT ---------------------- I. Introduction 1.The Applicant, Intelligent House Ltd (“Intelligent House”), is the owner of a majority number of the undivided shares of Kam Kwok Building and National Building situated on the lots (“the Lots”) known as the Remaining Portion of Section A of Marine Lot No. 436 and Section F of Marine Lot No. 435. It now applies for an order to sell all the undivided shares of the lots under the Land (Compulsory Sale for Redevelopment) Ordinance (“the Ordinance”) (Cap 545). 2.There are initially 25 named Respondents to this application, but some of them no longer feature in the trial[1]. Amongst them, the 13th Respondent is legally represented by counsel at trial, while the rest appear in person[2]. 3.In summary, under the Ordinance, the Tribunal would only grant an order for sale as sought if the following are satisfied:
4.Further, the Ordinance provides that:
5.In light of the grounds of opposition raised by the Respondents altogether[10], the following are the principal issues that need to be determined at trial:
6.Unless otherwise stated, the following background facts are not in dispute. 7.The Lots have a total area of about 15,955 square feet, with Jaffe Road running through lot ML436 sA PR dissecting it into 2 portions. 8.Both Kam Kwok Building and National Building on the Lots were built in 1961, and are now some 46 years old. Kam Kwok Building is erected on the northern portion of lot ML436 sA RP and lot ML 435 sF, while National Building is on the southern portion of lot ML436 sA RP. 9.The northern part of Kam Kwok Building abuts Gloucester Road and faces the harbour. The western side of it abuts Marsh Road, and the southern part Jaffe Road. It has 22 non-domestic units at the Ground and 1st Floors, and 219 domestic units on 2nd to 17th Floors, inclusive of 2 penthouse units at the roof. 10.The northern part of National Building abuts Jaffe Road and faces Kam Kwok Building. The western side of it abuts Marsh Road, and the southern party Lockhart Road. It has 9 non-domestic units at the Ground and 1st Floors, 59 domestic units on 2nd to 18th floors and the roof. 11.The Lots (and the 2 buildings) are governed by one Deed of Mutual Covenant dated 12 March 1963, as varied by a Supplemental Deed dated 26 September 1966. The Lots (and thus the 2 buildings) have and share one set of 360 undivided shares, with a designated number of them allotted to each individual unit of the 2 buildings. 12.In 2003, the 2 buildings underwent certain renovation works for its common area. 13.In September 2006, Intelligent House in a public tender purchased 92.31% of the undivided shares of the Lots from their owners. The sale was subject to tenancy and the purchase price was $825,000,000.00. 14.On 15 October 2007, Intelligent House further purchased from the 25th Respondent[11] her unit at Shop No. 2B, Ground Floor, National Building. As a result of this purchase, Intelligent House’s ownership in the undivided shares of the Lots is increased from 92.31% to 92.87%. Out of this ownership, Intelligent House has in fact acquired and become the owner of all the undivided shares of National Building. 15.For convenience, a table showing the allocation of undivided shares of the buildings and their respective ownership by Intelligent House is attached to this decision as Appendix I. 16.After various attempts to purchase the units from the respective minority owners of Kam Kwok Building had failed, on 29 November 2006, Intelligent House took out the present application seeking an order for sale. 17.After the issue of the present application, China Superior Ltd (“China Superior”) purchased Flat No 7, 5th Floor of Kam Kwok Building from its original owner. The Application is then amended to join China Superior as the 13th Respondent instead of the predecessor owner of the unit. 18.Quite a substantial number of the residential units at Kam Kwok Building and National Building are internally partitioned and subdivided, and have been leased out as small-room lodges. Many of the ground floor commercial/retail units of the buildings have been used for car related business, such as selling tyres and car spare parts. The first floor of Kam Kwok Building has been leased to a sauna house. 19.Since the purchase of the majority undivided shares of the buildings by Intelligent House, most of the leases (residential and commercial) have been terminated. 20.The 8th, 22nd and 23rd respondents contend that the Ordinance is in contravention of Articles 29 and 105 of the Basic Law. 21.Article 29 of the Basic Law provides as follows:
22.Article 105 of the Basic Law provides as follows:
23.Insofar as Article 29 is concerned, we cannot see how it applies to the Ordinance. On a proper reading, in our view Article 29 concerns only with the situations of physical intrusion and searches of private individual’s homes. It provides that such intrusion and searches must be made in accordance with the law and cannot be made on any arbitrary grounds. 24.However, the Ordinance is not concerned with physical intrusion or searches of the respondents’ units or homes. It is concerned with the making of an order requiring the private individuals to sell the respective properties at a public tender with a reserved price. Article 29 therefore has no application. 25.In any event, even if it is contended that a compulsory sale order is tantamount to an “intrusion” into one’s home, the Ordinance provides for a detail statutory requirements of, and procedure on, when and how the order can be made. As such, the “intrusion” cannot be said to be unlawful and arbitrary. Thus, in our judgment, the Ordinance still does not contravene Article 29. 26.Insofar as the contentions made under Article 105 are concerned, only the 8th Respondent has provided a written submission in support of the same. His submissions can be summarized as follows:
27.Properly understood, the 8th Respondent’s submission is that, since Article 105 only provides for deprivation of private property by the Government or State (in accordance with the law and with compensation), the Ordinance thus contravenes that Article as the Ordinance provides “deprivation” of property by a private individual but not the Government or State. 28.In our view, this construction is wrong. On a proper reading, what Article 105 provides for is that, in the situation where the Government or State is to take away private property from an individual, it must and can only do so in accordance with the law, and with compensation measurable to the real value of the property at the time. The Article however does not exclude a law permitting and requiring a private individual to sell his property to another private individual in accordance with the law, and with appropriate compensation. 29.In relation to this question, Hartmann J’s decision In Harvest Good Development Ltd v Secretary for Justice [2007] 4 HKC 442 is of relevance. 30.In Harvest Good, Hartmann J considered (in paragraphs 129-153) the question of the inter-relationship between sections 7(2) and 17 of the Limitation Ordinance (which provides the legal recognition and basis for adverse possession), and whether these provisions contravene, inter alia, Article 105 of the Basic Law. His Lordship concluded at paragraph 152 of his judgment that Article 105 only guaranteed the right to compensation where the deprivation constituted expropriation by the State or a State agency, and that a loss of possessory title to land in consequence of the operation of the Limitation Ordinance did not constitute an expropriation. As such, Article 105 is not relevant to, and has no bearing on, the relevant provisions under the Limitation Ordinance. He therefore held that these provisions were not in contravention of the Basic Law. 31.Although there are differences in terms of the statutory frameworks between the Ordinance and the Limitation Ordinance, both involve the transfer of property from one private individual to another. We do not see any obvious basis to distinguish this part of Hartmann J’s decision from the present consideration. 32.For the above reasons, we hold that Article 105 of the Basic Law is not relevant, and does not apply to the Ordinance. There is thus no question of any contravention. 33.However, if we were wrong above, and Article 105 did apply to the Ordinance, we are further of the view that the Ordinance satisfies the requirements under Article 105, and therefore is not in breach of it:
34.In the premises, we are of the view that the oppositions raised by those respondents on the grounds of Articles 29 and 105 of the Basic Law are invalid and without merits. B. Whether Intelligent House has more than 90% of the buildings 35.This ground of opposition is raised by the 8th, 22nd and 23rd Respondents. 36.The 8th Respondent has not pursued this point in his closing submissions. However, given that this ground is still contained in the Grounds of Opposition filed by the 22nd and 23rd Respondents, although they did not formally make any submissions at trial, we believe for the sake of completeness and fairness, we should deal with this issue as well. 37.The relevant statutory provision is section 3(1) of the Ordinance, which provides as follows:
38.Section 3(5) is irrelevant for the present consideration. “Lot” is defined under section 2 of the Ordinance as for all practical purposes any piece or parcel of ground the subject of a Government lease, and includes a section and subsection of it. 39.The objective evidence, which includes the land search records and the assignment for the purchase of the undivided shares of the 2 buildings by Intelligent House, shows clearly that before taking out the present application, it had acquired altogether 92.31% of all the undivided shares of the Lots, which is more than the statutory requirement of 90% to ground the application[12]. 40.This is particularly so in the present case, since as mentioned above, there is only one single DMC which governs both buildings on the Lots. This supports that the undivided shares respectively of the 2 buildings should be treated together to calculate a particular owner’s share ratio of the undivided shares of the Lots. 41.As such, for the purpose of Section 3(1) of Ordinance, we conclude that it is 90% of the total undivided shares of the entire Lots, but not each of the Kam Kwok Building or the National Building, that Intelligent House needs to have acquired before it could make an application under the Ordinance. 42.We find this ground of opposition also invalid. C. Whether the EUVs of the individual units or shops (and thus also the total EUV of the 2 buildings) as assessed by Intelligent House are appropriate, and if not, what are the proper EUVs. C1. The respective parties’ valuation in summary 43.Intelligent House relies on the expert reports and evidence of Mr Charles Chan of Savills on the valuation of the EUV of the 2 buildings (as a whole) and of the individual domestic and commercial units therein. The valuation dates adopted by Mr Chan in these reports are 29 September 2006 (which is the valuation provided in the report attached to the Application as required by the Ordinance), and 29 June 2007. 44.The EUV[13] of the 2 buildings together as assessed by Mr Chan as at 29 September 2006 is HK$605,660,000.00. As at 29 June 2007, the EUV is HK$745,370,000.00. 45.& The EUV as assessed by Mr Chan for Intelligent House is challenged by the respondents as being too low. 46.China Superior relies on the expert reports and evidence of Mr Simon Lynch of Cushman & Wakefield. Mr Lynch values the EUV of the 2 buildings as a whole and of the individual units as at 23 July 2007. The revised[14] total valuation of the 2 buildings by Mr Lynch is HK$870,843,000.00. 47.The 8th, 9th, 11th, 17th and 22nd Respondents have filed and sought to rely on the expert reports provided by Mr James Cheung of Centaline. The valuation of EUV provided by Mr Cheung is HK$1,063,988,067 as at 25 October 2007 and HK$1,176,060,576.00 as at 29 December 2007. Mr Cheung is not called to give evidence at trial, and is therefore not available for cross examination. C2. Exclusion of the Centaline’s reports 48.Intelligent House disputes the valuations provided in the Centaline reports. Mr Roots QC, leading Mr Y C Mok, counsel for Intelligent House points out that there are various areas in these reports, as identified by Mr Chan of Savills, which should be subjected to challenge. These include whether the various comparables adopted in the reports were appropriately chosen, and whether it is appropriate for the reports not to take into account of transactions within Kam Kwok Building itself. 49.However, given that Mr Cheung of Centaline is not called to give evidence at trial, Intelligent House has not been provided with an opportunity to cross examine him on his reports. 50.& Mr Manzoni, appearing together with Mr Adrian Lai, counsel for China Superior also submits that as Mr Cheung has not been subjected to cross examination, the evidence contained in the Centaline reports should not add or detract in any substantive and effective way to the weight to be given to the expert evidence of Mr Chan or Mr Lynch. Mr Manzoni thus decides not to deal with the evidence of the Centaline reports in his closing submissions. 51.Given that Mr Cheung is not called to be cross examined by the other parties (in particular by Intelligent House) at trial, and given that there are what we believe prima facie justified queries raised in Centaline’s reports as identified by Intelligent House, we are of the view that it is only fair and appropriate that we would not consider or give any weight to the Centaline reports in determining the EUV (or the RDV as discussed below) of the 2 buildings. In this decision, we therefore would not take into account of the Centaline reports in determining what should be the appropriate EUV (or the RDV) of the 2 buildings. C3. The contentions between the valuations provided by Mr Chan and Mr Lynch 52.Given our exclusion of the Centaline’s reports for the present purpose, that leaves only the conflict of the valuations of the EUV between Mr Chan of Savills and Mr Lynch of Cushman & Wakefield. There is no dispute as to their expertise in this area. 53.Both experts in their reports have separately valued the domestic (or residential) units and commercial/retail units of each of the 2 buildings. Further, in attempting to arrive at the valuations of each of these units, both experts have also adopted a similar methodology (which will be explained in greater detail below) as follows:
54.The parties submit that the other side’s expert valuation is unreliable, and should not be accepted. Given their submissions, as far as we can see, the real contentions between the parties on these valuations lie in the following principal areas:
55.We will deal with these principal contentions below, having also taken into account those raised by the other respondents. C3.1. Correct date of valuation 56.Sections 3, 4(1)(a)(i) and Schedule 1 Part 1 of the Ordinance provide as follows:
57.Intelligent House submits:
58.On the other hand, China Superior submits that the proper and relevant date of valuation should be as at the date of trial, and the burden is on Intelligent House as the applicant to show and prove the valuation as at the date of trial. This is so because, as submitted by Mr Manzoni, it must be the EUV as at the date of trial, so that the Tribunal could decide whether the buildings are at an end of their economic lifespan. This is underlined by the real possibility that any change of the market value of the EUV of the buildings at say an earlier date and that of the date of trial, would make a significant difference (and thus resulting in a significantly different conclusion) as to whether the enhanced value of the buildings (which is expressed by way of % increase on the EUV after repair) significantly exceeds the EUV and thus they should be redeveloped. 59.We reject Mr Manzoni’s submissions and accept Intelligent House’s above submissions on what is the relevant date of the valuation of the EUV as required under the Ordinance. Our reasons are as follows:
60.For the above reasons:
C3.2 Validity of Mr Chan’s valuation accompanying the application 61.Although not further elaborated in the closing submissions, Mr Manzoni in his opening contends that Intelligent House’s EUV valuation accompanying the application is invalid because it does not comply with the Ordinance. The complaints are:
62.We accept Mr Roots’ submissions that these contentions are not justified for the following reasons:
63.We therefore reject China Superior’s submissions that the valuation report attached to the application is invalid for non-compliance with the Ordinance. C4. Valuations of the EUV of the residential units C4.1 The methods adopted by the experts 64.In coming to his valuation of the EUV of the residential units of Kam Kwok Building, Mr Chan has adopted the following methodology[16]:
65.Mr Lynch adopts similar procedures as above in arriving at his valuations of the various residential units of Kam Kwok and National Buildings. Insofar as his valuations are concerned:
C4.2 Whether it is appropriate to include certain Kam Kwok Building transactions or not 66.Mr Manzoni for China Superior submits that it is incorrect and inappropriate for Mr Chan to include the two Kam Kwok Building transactions in the comparables. As the evidence evolves at trial, Mr Manzoni’s contentions can be, we believe, summarized as follows:
67.Mr Roots submits that, in light of Mr Chan’s evidence, his inclusion in his valuations of only two out of the nine Kam Kwok Building transactions identified now by Mr Lynch is justified on a professional basis. 68.After assessing the evidence given by Mr Chan and Mr Lynch on this issue, we accept that it is appropriate in the present case for Mr Chan to include only the selected Kam Kwok Building transactions identified in his report as comparables. Our reasons are as follows:
69.In the premises, we accept that it is appropriate for Mr Chan to include only two out of the nine Kam Kwok Building transactions as comparables in his valuation exercise. For the same reasons, we find it inappropriate and thus unreliable for Mr Lynch to exclude all the Kam Kwok Building transactions as comparables to enable him to arrive at his valuation. 70.For the above reasons, we accept that Mr Chan’s valuations for the basic unit rates respectively of his reference units in Kam Kwok Building and National Building are more reliable. As such, in working out the EUV of the respective residential units within the 2 buildings below, we find it appropriate and decide to adopt as a starting point $2,100 psf[23] as the basic unit rate in Kam Kwok Building. We similarly adopt as a starting point $2,300 psf as the basic unit rate in National Building[24]. C4.3 Appropriateness of the adjustments made by the experts 71.The task of applying the reference unit rates throughout the other units of the buildings involves allowing for various adjustment factors, which account for value differences between all the units. Mr. Chan allowed adjustments made for five factors: floor level, view, size, noise and internal condition. 72.Both experts agree that what percentage adjustment should be made for each of the factors is not a form of exact science but more a matter of professional adjustment, which involves certain degree of subjectiveness. There are also no hard and fast rules in the exercise. 73.The principal differences between Mr. Chan and Mr. Lynch with regard to relativities between residential units fall under the following subheadings. 74.Floor levels: Mr. Chan allows 4% per floor between the 2nd and 4th floor; 2% per floor between 4th floor and 6th floor; and then 1% per floor as from 6th floor onwards. He takes the view that this reflected market perception because the lower floors suffer poor ventilation and sunlight. In contrast Mr. Lynch applies a uniform 1% per floor. 75.Noise: Mr. Chan allows a deduction ranging from –2.5% to 10% on lower floors to take account of noise from the street, especially the floors facing the flyover. In contrast Mr. Lynch makes no allowance at all for this factor. 76.View: Mr. Chan explains that the units in Kam Kwok Building facing Gloucester Road, face a nice open view across the harbour (illustrated by photographs produced by the respondents) which justifies an addition ranging between +10% for the 2nd floor with a restricted view to +20% above the 2nd Floor. Mr. Lynch’s corresponding adjustments ranges from +5% to +20% on a gradual scale. For units facing Marsh Road, Mr. Chan allows between +7.5% and +10%, whereas Mr. Lynch allows only +5% (Mr Chan however explains in his evidence in chief that the difference may to some extent be accounted for by their different reference units). There is a difference between the valuers in relation to National Building too, although this to some extent can also be accounted for by the choice of the different reference unit. 77.We accept China Superior’s submissions that Mr Chan’s approach and treatment of the floor and noise adjustments cannot be justified in the circumstances. Our reasons are as follows. 78.In relation to non-uniform approach in making the floor adjustments, under cross examination by Mr Manzoni for China Superior, Mr Chan provides his justification for the different percentage adjustment for different floor levels as follows:
79.For the above reasons, we accept Mr Manzoni’s submissions and are of the view that the approach adopted by Mr Chan for the above floor adjustments is inconsistent and not justified. There is at least some form of double accounting to include noise as a justification for allowing greater adjustments for lower floors, and then making a further separate adjustment for noise alone. As such, we prefer the uniform approach adopted by Mr Lynch for making floor adjustments. 80.Next is the noise adjustment itself. When establishing his unit rate for the reference unit, Mr Chan did not make any adjustment for noise, other than within the floor adjustment. As pointed out by Mr Manzoni, Mr Chan has not made any separate noise adjustment in any place in his report other than negatively on floors below the reference unit within the subject buildings, despite having to adjust for floor on several occasions. We agree with Mr Manzoni’s submission that if noise was genuinely a separate factor that requires adjustment, a separate adjustment would and should have to be made in all cases. This would give an increase on floors above the reference unit. 81.Although Mr Chan accepts under cross examination that noise adjustment could be done separately or could be combined with the floor factor, by making a larger floor adjustment, he has only made a separate adjustment for noise in the one case where his floor adjustment is largest. This therefore does not provide justification for the way he has approached in making adjustments for noise separately in addition to floor adjustments (which he says he has taken into account of the noise factor). 82.In the premises, we are also of the view that Mr Chan has failed to show justification for making adjustment separate for noise in the way as he did. We accept that Mr Lynch’s approach in not making any separate adjustment for the noise is the correct one in the present circumstances. 83.Insofar as view adjustment is concerned, there also appears to be certain inconsistency in Mr Chan’s approach. He makes a -10% reduction for view when arriving at a reference rate from a particular flat in Kam Kwok, and yet when valuing the same flat at a different floor as an individual unit, he only adds back 5%. This appears to us as inconsistent and not justified, because the same flat on a different floor bears essentially the same view. 84.However, insofar as the adjustments for view made respectively by Mr Chan and Mr Lynch are concerned, the real difference is not significant for the present purpose. Mr Chan criticises Mr Lynch for not making an adjustment between Flats 6, 7 and 8. Mr Chan’s own adjustment for Flat 7 (i.e. the same as Mr Lynch’s reference unit) was -5%, whereas his view adjustment for Flat 6 was -3% and for Flat 8 was -8%. Thus, his criticism of Mr Lynch amounts to a criticism for failing to make a +2% adjustment for Flat 6 and a -3% adjustment for Flat 8. We accept Mr Manzoni’s submissions that this degree of difference between the two surveyors on a matter, which is a question of professional judgment, is insignificant. We therefore have come to the view that both experts’ approach to the view adjustments is justified. However, for the present purpose, we would prefer to accept Mr Chan’s view adjustments to those made by Mr Lynch. C4.4 Conclusion on the EUV for the residential units 85.For the above reasons, we have come to the view that we would not accept wholly the valuations on EUV for the residential units made either by Mr. Chan or Mr. Lynch. We believe that Mr. Lynch’s valuation of the basic unit rates would tend to be on the high side since he has failed to take into account of the relevant Kam Kwok Building transactions as comparables. However, as for the some of the adjustments to be applied to each residential unit in Kam Kwok and National Building, for the reasons set out in the above section, we are also of the view that Mr. Chan’s valuation is not wholly reliable. 86.In the circumstances, and doing the best as we could, we have estimated and set out in the attached Appendix II and Appendix III our valuation of the EUV of all the residential units in Kam Kwok and National Buildings respectively based on (i) Mr. Chan’s basic unit rates for his reference units and (ii) our adopted adjustments for floor level, noise and view as summarized in paragraphs 79 to 84 above[25]. 87.As summarized in Appendices II and III, the proper total EUV of the residential units of two buildings as at 29 September 2006 should be as follows:
C5. Valuations of EUV of the commercial units of the buildings C5.1 The methodology adopted 88.The commercial/retail units[26] of the two buildings include the shops located at the ground, 1st and 2nd floors, facing Gloucester Road and the harbour. 89.Mr Chan and Mr Lynch have adopted a similar methodology of valuations for commercial/retail units of the two buildings as for the residential/domestic units explained above. In other words, they both selected a reference unit in the subject building, and tried to work out the valuation of the unit price of the reference unit by using comparable transactions in nearby buildings, with what they believed to be the necessary adjustments made. 90.Other than the differences in the choice of comparables and the adjustments made for different units, the major difference between the two experts in their approach of valuation is that Mr Lynch has adopted a what is known as Reduced Zone Area (RZA) method to the ground floor shops, while Mr Chan adopted the average area method (that is valuing the entire area on an equal basis, just like the one adopted for the residential units). C5.2 Whether the RZA method is more appropriate 91.It is common ground that the rationale behind RZA valuation is that, where the shop’s business is likely to be significantly influenced by the size of its frontage, its value should be assessed in the way to reflect this particular feature. In other words, the valuation should reflect the feature that the quantity of business attracted to the shop is directly related to the size of its frontage to a street or mall from which passing trade can be attracted. 92.It is also common ground between the experts that RZA is an appropriate valuation for shops located at primary retail area. 93.The dividing line between the two experts’ evidence as to the applicability of RZA for the present case is as follows:
94.In light of the rationale behind the RZA method of valuation, and the above summary of the evidence given by the two experts as to the applicability of the RZA method to the ground floor shops, we believe the real issue that needs to be determined for the present case, is whether the nature of the business carried on at the ground floor shops of the two buildings and the comparable buildings are of a nature that is more likely to be affected by the size of the frontages. 95.After paying a site visit to the areas and the two buildings:
96.Under cross examination, Mr Lynch explains why he is of the view that for small restaurants and bars, small grocery shops, and shops selling car products such as tires, wheels or aluminium enhanced features, they are sensitive to the size of the frontages as follows[27]:
97.On the other hand, when Mr Chan is cross examined as to why the business carried on at these shops are not sensitive to the size of the frontages:
98.In the premises, and for the above reasons, we accept Mr Lynch’s evidence on why RZA valuation is appropriate for these shops. We therefore also hold that for the valuation of the commercial units of the Kam Kwok and National Buildings, the RZA valuation adopted by Mr Lynch is justified and more appropriate than the average method adopted by Mr Chan. C5.3 Choice and adjustments of commercial/retail comparables 99.In his valuation, Mr Lynch has only selected eight comparable transactions all on Jaffe Road. He then derives his reference unit rate from only four of them, being what he describes as the “best average”. 100.Mr Chan on the other hand has chosen five comparables, two in Jaffe Road, one in Lockhart Road and two in Lockhart/Marsh Road. 101.Mr Chan criticizes Mr Lynch’s selection of the comparables on the following principal grounds:
102.We find Mr Chan’s above criticisms not justified:
103.We therefore do not accept that Mr Lynch’s valuation on the commercial/retail units of the buildings is unreliable because of the way in which he has made the necessary adjustments. C5.4. Valuation of the advertising sign 104.Mr Chan gives a valuation of the advertising sign of $20,000,000 as at both 29 September 2006 and 29 June 2007. Mr Chan explains that he arrived at this figure by looking at comparables and the rental income as well as the market yield. Mr Chan however has not provided the comparables in his reports. 105.Mr Lynch gives a valuation of $16,320,000 as at 23 July 2007. He arrived at this figure by capitalising the 2007/08 rateable value by 10%. 106.Given these explanations, we prefer the valuation made by Mr Chan since his method of adopting the use of comparables and market yield is in our view likely to be more accurate than simply capitalizing on the rateable value in arriving at the market value of the advertising sign. 107.However, in the scale of the matters in the present case, we do not think this conclusion on the valuation of the advertising sign would in any material way affect our view that Mr Lynch’s valuations of the EUV of the commercial/retail units are more reliable and accurate. In particular, it should be noted that Mr Lynch in his report has included the valuation of the advertising sign in the section concerning the residential/domestic unit, and thus this valuation of the sign has no impact on his EUV valuation of the commercial/retail units. C5.5 Conclusion on the EUV for the commercial/retail units of the two buildings 108.For the above reasons, for the purpose of section 4(1)(a) of the Ordinance, we would accept Mr Lynch valuations of EUV of the commercial/retail units of the two buildings. 109.However, given that Mr Lynch’s valuation is as at 23 July 2007, while the application valuation report date is 29 September 2006 (which is the correct date for consideration as we have decided above), doing the best that we could in light of the evidence adduced, we would give an across the board 7.30% (i.e., 1 – 100/107.88) reduction of Mr Lynch’s said valuations. This is so because:
110.However, we are of the view that the EUV of the advertising sign should more appropriately be included as part of the EUV valuation of the commercial/retail units of the buildings. Given that Mr Lynch has not included that in this part of his valuation, we propose to add to his valuation of the EUV of the commercial/retail units of the buildings the EUV also of the advertising sign of $20,000,000 as assessed by Mr Chan as at 29 September 2006. 111.In the premises, we conclude and find that the proper total EUV for the commercial/retail units of the 2 buildings are as follows:
112.To avoid any doubt, insofar as the EUV valuation of each of the commercial/retail units of the 2 buildings as at 29 September 2006, it should be the one of Mr Lynch’s valuation as set out in his revised schedule (after taking into account of the agreed floor areas), with a discount of 7.3%. For convenience, the EUV valuations for each of the commercial/retail units of the 2 buildings as found by the Tribunal are respectively shown in the attached Appendix IV and Appendix V. C6. The proper total EUVs for the entire 2 buildings 113.Adding the proper EUVs for the entire domestic units and commercial/retail units of the 2 buildings as found respectively at paragraphs 87 and 111 above, the grand total of the proper EUV for the entire 2 buildings as at 29 September 2006 as found by the Tribunal is thus: $453,850,816 + $184,049,336 = $637,900,152. D. Whether the RDV of the Lots as assessed by Intelligent House is too low, and if so, what is the proper RDV 114.Given we are dealing with the valuations of the 2 buildings, we think it is also convenient for us to deal with this issue first at this stage. 115.Mr Chan for Intelligent House has provided a valuation of the RDV of the 2 buildings as at 29 June 2007 of $1,210,000,000. He then provided an updated valuation as at 11 January 2008 of $1,311,000,000, representing an increase of about 8.4% over a period of about 6 months. 116.Mr Lynch’s RDV valuation as at 23 July 2007 is $1,212,940,000, which is very close to Mr Chan’s valuation as at June 2007. Mr Lynch has not provided any updated RDV valuation, as he has not been asked to do so. 117.Both experts have adopted a similar valuation method which can be summarized as follows:
118.Albeit both experts have chosen different but what they believed to be the optimum development models on the sites, and that they have selected different reference comparables, they have arrived at very close valuations of the RDV as mentioned above. 119.In fact, Mr Lynch under cross examination accepts that, had he been asked to update his RDV valuations to as at January 2008, it is likely that he would have also come up with a figure close to Mr Chan’s updated valuation. 120.In light of the above observations, we would accept that for the present purpose, the RDV valuation as at 11 January 2008 made by Mr Chan is reliable and justified. 121.However, Mr Manzoni points out that it is common ground that the property market is on the rise, and that if any auction is to be made under an order for sale (if granted by the Tribunal), it is only likely to be held some time in September 2008 or even later. As such, Mr Manzoni further submits that we should either make a direction in the order for sale to require the appointed Trustees to demand for a further but more updated RDV valuation of the entire buildings to fix the reserve price for the sale, or to at least make further upward adjustment based on the January 2008’s RDV to reflect the likely increase in valuation with the passage of time until the anticipated auction. 122.There is some force in Mr Manzoni’s submissions, in particular given that the legislative objective of the RDV is to enable the Tribunal to fix a reserve price for the sale of the subject buildings in an auction so as to protect the interest of the minority owners. 123.However, if we decide to make an order for sale, and if it is possible and practicable without causing any injustice to any parties, we think it is neither desirable nor satisfactory to delay the matter any more by either directing a further hearing on the updated RDV valuations or to require the Trustees to carry out (through an appointed valuer)[29] a further RDV valuation. 124.It must be noted that under Schedule 2 of the Ordinance, the lots shall be sold in an auction subject to a reserve price, which takes into account of the redevelopment potential of the lot and “approved by the Tribunal”. 125.As mentioned in paragraph 115 above, there is now evidence before us to show that there is an increase of 8.4% of the valuations of the RDV over a period of 6 months between June 2007 and January 2008. It is equivalent to an average monthly increase of 1.4% in the RDV. There is on the other hand nothing in the evidence to suggest that the market trend is likely to behave significantly differently in the 6 months or so[30] after January 2008. 126.In these circumstances, taking the date of this decision as the reference time, we believe it would not be unjust or unfair to any party, for the Tribunal to fix the reserve price for the sale of the subject 2 buildings in an auction, by adding a further 8.4% (1.4% x 6) to the January RDV value. In other words, the reserve price that is approved by this Tribunal is: $1,311,000,000 x 1.084 = $1,421,124,000. E. Whether redevelopment is justified on the grounds of age or state of repair of the buildings E1. What are the proper meaning and interpretation of the terms “age” and “state of repair” 127.The relevant section under the Ordinance that needs to be considered is s. 4(2)(a), which provides as follows:
128.No further grounds have been specified by way of section 12 regulations. Thus, under this section, the Tribunal shall only make an order for sale under the Ordinance if it is “satisfied” that “redevelopment” is “justified” due to the “age” or “state of repair” of the “existing development”. 129.What these terms mean is a matter for the proper construction of the provisions and the Ordinance. E1.1 The proper construction of s. 4(2)(a)(i) 130.Relying on the decision of this Tribunal in Good Trader Ltd v Hinking Investments Ltd [2007] 3 HKC 219 and the CFA’s decision in Capital Well, supra, Mr Manzoni for China Superior contends that, on a proper construction, the Tribunal is entitled to consider and look at only the following criteria, factors and matters in relation to “age” or “state of repair” of the existing development:
131.In relation to the economic test set out in paragraph 130(3)(b) above, Mr Manzoni does submit that, although this appears to be an alternative and appropriate test that can be applied by the Tribunal under the provision[31], the decisions respectively in Gilmerton Ltd v Polywin Holdings (unrep., LDCS 2000/2004, HH Judge L Chan, Mr W K Lo, 17 January 2005) at para 41, and Good Trader, supra, at para 44 appear to have excluded it. 132.In Gilmerton, the Tribunal decided at paragraph 33 that redevelopment was justified on the ground of state of repair since the subject building was of a serious state of disrepair. The Tribunal then, for completeness sake, went on to discuss the valuation expert’s evidence on the enhancement value of the building arising from the recommended repairs. The Tribunal based on the evidence of that case rejected the valuation assessment. But at paragraph 41 of the decision, the Tribunal made it clear that, since it had already decided in favour of redevelopment given the state of disrepair of the building, it did not wish to go further in the discussion concerning the enhancement value:
133.In our view, on a proper reading of the decision in Gilmerton, it does not in any way intend to exclude the applicability of the above economic test from the consideration under the ground of “state of repair”. Quite to contrary, in discussing the reliability of the valuation at some length, the Tribunal in that case at least impliedly considered that the enhancement value did constitute a relevant consideration under the ground of “state of repair”. 134.Paragraph 44 of the decision in Good Trader says as follows:
135.Again, on a proper and careful reading of that part of the decision, what the Tribunal was saying is that under the ground of “state of repair”, it should not consider repairs which were recommended “to increase the value of the land” or “to improve the environment of the vicinity”. What it says is that, under the ground of “state of repair”, the Tribunal should not look at those repairs which are recommended for the purpose of improving the value of the building or the surrounding environment. This is very different from saying that it does not regard it relevant the issue of enhancement in the value of the subject building due to repairs, which are already accepted to be properly recommended for under the ground of state of repair. We therefore also do not read this decision as excluding the applicability of the said economic test under the ground of “state of repair”. 136.In any event, the above decisions are not binding on this Tribunal and are decided on the grounds of the submissions and evidence made before them. 137.The parties in the present case accept that the economic lifespan test propounded in Good Trader is an applicable test permissible under s. 4(2)(a)(i) of the Ordinance. 138.In the context of economic lifespan of a building, and on the question of what would be considered as economically worthwhile in relation to repairs that should be carried out to a building, Professor Baum, a land economics expert for Intelligent House (whose evidence we accept and admit as relevant), gives the view that the test would be whether the expenditure on the building led to an equal or greater increase in value of that building. 139.We accept this evidence. This evidence is in fact quoted by Mr Manzoni in his closing submissions[32] without any challenge. 140.In the circumstance, and for the reasons stated above, we conclude that as a matter of principle, when considering whether the ground of “state of repair” under s. 4(2)(a)(i) is satisfied, it is open to the Tribunal to apply the economic lifespan test as to whether the building has reached the end of that lifespan, in that the cost of repairs recommended outweighs the increase in its value because of the repairs. 141.Further, Mr Manzoni submits that in considering the above factors or criteria set out in paragraph 130, on a proper construction of s. 4(2)(a)(i) of the Ordinance, the Tribunal cannot look at anything outside the existing building. In other words, the Tribunal, in considering the question of whether the grounds of “age” and “state of repair” are established or satisfied, it is not entitled to look at any comparison made between those factors of the existing building with what a proposed redevelopment or new building would be able to provide or offer. He says this is so because:
142.Because of this construction, Mr Manzoni further submits that the Tribunal in considering whether the requirements under s. 4(2)(a)(i) are satisfied, it is not entitled to look at matters or factors such as:
143.For Intelligent House, Mr Roots accepts that the tests formulated by Mr Manzoni and set out at paragraph 130 above, are matters which the Tribunal is entitled to look at to decide whether the requirements under s. 4(2)(a)(i) are satisfied. 144.However, Mr Roots contends that these cannot be the only tests that the Tribunal is entitled to look at. He also disagrees with Mr Manzoni’s above construction of s 4(2)(a)(i) of the Ordinance. 145.Instead, Mr Roots submits that, on a proper construction of the Ordinance and the relevant provision, with reference to the intention and objective of the Ordinance to facilitate and assist urban renewal, in determining whether the requirements under s. 4(2)(a)(i) are satisfied:
146.We accept Mr Roots’ above submissions for the following reasons. 147.“Redevelopment” is defined under section 2 of the Ordinance to mean “the replacement of a building on (or formerly) on” the subject lot. 148.The terms of “satisfied”, “justified”, “age”, “state of repair” and “existing development” are not defined under the Ordinance. 149.In our view, “existing development” clearly refers to the building already existed or formerly existed on the subject lot. As observed by Rogers VP in Bond Star Development Ltd v Capital Well Ltd [2004] 2 HKLRD855 (CA) at 864 B-E:
24. In this respect, sight should not be lost of the fact that s. 2 defines ‘redevelopment’ as ‘in relation to any lot, means the replacement of the building on (or formerly on) the lot’. Thus, the Ordinance envisages that redevelopment includes building on land where there has been formerly been buildings. Moreover, s 3(3)(c)(i)(B) provides for affixing a notice in a case ‘where there is no building on the lot’.” 150.Further, in not defining or prescribing any criteria for the terms “justified” and “satisfied” under s. 4(2)(a)(i), we are of the view that the legislature intended to give the Tribunal a wide discretion to look at all the circumstances and factors relating to the grounds of “age” and “state of repair” of the existing building, to decide whether it is “satisfied” that redevelopment (meaning replacing the old building with a new one) is “justified”. This is particularly so as:
151.As such, on a proper construction of s. 4(2)(a)(i) and in light of the intention of the Ordinance, the section entitles the Tribunal to look at and take into account anything directly or indirectly related to the “age” and “state of repair” of the existing or old building on the subject lot, to see whether it is convinced that replacing the old one with a new building (thus redevelopment) is shown to be warranted or supported. When deciding whether redevelopment is so warranted or supported, the Tribunal is entitled to and should have in its mind the objective that the making of an order for sale is to facilitate and assist urban renewal. E1.2 Is the Tribunal entitled to look at features of obsolescence under the ground of “age” of the existing development 152.Further, we find it in principle incorrect of China Superior’s submissions that the Tribunal is entitled to look at matters concerning the “age” or “state of repair” of only the existing building internally, but is not entitled to compare these with the proposed redevelopment or new building. This is so because:
153.For the above reasons, we conclude that on a proper construction of s. 4(2)(a)(i), if there is such evidence, the Tribunal is entitled to compare any factors or matters relating to the “age” or “state of repair” of the old building with a new building or a proposed redevelopment, to see whether redevelopment is justified on those grounds. 154.Mr Manzoni further contends that in Good Trader, supra, the Tribunal expressly said at paragraph 14 (pp. 223I – 224C) that the ordinary meaning of “age” did not include facilities. Therefore, applying Good Trader, features of obsolescence, which includes mostly references to facilities of a building, should be excluded when the Tribunal considers matters concerning the age of the building. 155.We reject Mr Manzoni’s submissions. First, as accepted by Mr Manzoni, Good Trader is not binding on us, and thus this Tribunal is not bound to follow or apply it. Secondly, for the reasons stated above, we are satisfied with the submissions made before us that the proper construction of s. 4(2)(a)(i) as a whole allows the Tribunal to consider anything directly or indirectly relating to the age of the building, which includes features of obsolescence. It must be noted that in Good Trader, with the arguments then advanced before it, the Tribunal was focusing on whether the meaning of the word “age” alone included facilities. Read as such, we do not in any event regard Good Trader as laying down any general proposition as to the construction of s. 4(2)(a)(i) as whole, or making any exhaustive statement as to what the Tribunal is entitled to look at under the ground of “age”. 156.In the premises, given the above reasons and that features of obsolescence of the old building are related to its age, we are also of the view that, in considering whether it is satisfied that redevelopment is justified under the ground of “age”, the Tribunal is entitled under s. 4(2)(a)(i) of the Ordinance to have regard to features of obsolescence of the old building if there is such evidence. E1.3 Is it open to the Tribunal to adopt and use the land economic theory to determine whether the ground “age” is satisfied to justify redevelopment 157.It is not disputed[36] that features of obsolescence (which is related indirectly to the age of the building) can be reflected in the economics of the building, being the more serious (in terms of both extent and numbers) the features of the obsolescence it carries, the lower the value of the building. It is also accepted by the parties[37] that when considering the concept of “age” and “state of repair” under s. 4(2)(a)(i), the Tribunal is entitled to look at it at the perspective of economic lifespan of the building. 158.In the circumstances, we accept, as submitted by Mr Roots, that as a matter of principle, the Tribunal can look at the land economic test under the ground of “age” to determine whether redevelopment is justified, provided it can be shown that the test is satisfied by reasons attributed solely to matters of obsolescence. E.1.4 Is the Tribunal entitled to compare what can be offered by a new building by modern standards when considering matters under the ground of “state of repair” 159.We also not do accept Mr Manzoni’s submissions that Ribeiro PJ’s remarks made in Capital Well, supra, at para 27 supports the proposition that redevelopment is justified on the ground of “state of repair” only if it is in a serious disrepair and require demolition on the ground of public safety. Ribeiro PJ said as follows:
160.On a proper reading of the decision in Capital Well, it is clear that Ribeiro PJ’s above remarks were made to address one of the questions on appeal as to whether the Ordinance applied to a vacant piece of land. The learned Permanent Judge of the CFA was only making the point that the Ordinance must also apply to circumstances where the building was in such a poor state that it had to be pulled down before the application for an order for sale had been made or heard. 161.Mr Manzoni then submits that, in considering the ground of “state of repair” under s. 4(2)(a)(i) of the Ordinance, the Tribunal should not consider any proposed repairing works which have their reference made to any modern building or bring the state of the old building in line with or to modern day standards expected of a building, unless such is strictly required by any current relevant regulations for safety or hygienic purposes expressly made applicable to even buildings built previously. In support, he relies on (a) the ordinary meaning of the word “repair”, which denotes only work needed to be done to bring the matter back to its original state, and (b) three cases decided in England. They are: Lister v Lane and Nesham [1893] 2 QB 212, Murray v Birmingham City Council [1987] EGLR 53 and Quick v Taff Ely Borough Council [1986] 1 QB 809. 162.With respect, we do not agree with Mr Manzoni:
163.Further, in our view, the standard against which the Tribunal is entitled to look at on what extent and nature of repairs are necessary under the ground of “state of repair” is to render the old building to a tenantable condition, with reference to what are reasonably expected of in modern day standards. This is so, because under this provision, the context from which the consideration is to be is against whether redevelopment is justified. 164.However, this is not necessarily to be equated with everything that a proposed redevelopment building could offer or provide. A proposed redevelopment may well offer facilities and functional components well above or much better than what would have been expected of for providing a reasonable standard of tenantable condition in present day. Whether certain proposed repairs fall within this standard is to be decided on a case-by-case basis, dependent upon the evidence and what is the use of the existing building. E 1.5 Summary of the scope and ambit of s. 4(2)(a)(i) 165.For the reasons set out above, in summary, on a proper construction of s. 4(2)(a)(i) of the Ordinance, we conclude that in deciding whether redevelopment is justified:
166.Further, given the wide terms in which the provision is drafted, we must emphasize that the above propositions are not intended to be an exhaustive list of what the Tribunal is entitled to look at under s. 4(2)(a)(i) to decide whether redevelopment is justified on the ground of “age” or “state or repair”. E.2 Is redevelopment justified in the present case E2.1 On the ground of “age” 167.It is not contended by Intelligent House that the 2 buildings have reached the end of their physical life. Thus, the Tribunal needs not consider this. 168.Intelligent House however submits that redevelopment is justified under the ground of “age” in the present case, because the 2 buildings have come to the end of their economic life as the cleared site value of the Lots substantially exceeds the existing use value of the land with the existing building. 169.Under this test, the Tribunal has to be satisfied with two elements:
170.Intelligent House submits that according to Mr Chan’s expert evidence, the RDV (which is equivalent to the cleared site value[38]) as at 29 June 2007 is $1,210,000,000, while the EUV as at 29 June 2007 is $745,370,000. As such, the cleared site value of the Lots clearly exceeds its EUV as at 29 June 2007 by $464,630,000. It therefore submits that this limb of the test is satisfied. It further submits that even if the Tribunal is to wholly adopt Mr Lynch’s assessment (i.e, RDV of $1,212,940,000 and EUV of $870,843,000 as at 23 July 2007, giving a difference of $342,097,000), this limb of the test is also clearly satisfied. 171.In our view, given the evidence before us, we should take the valuations of the EUV as at 23 July 2007, being the date closest to the trial, to determine whether the above test is satisfied. Although these are valuations as at July 2007, any market movement during the period between July 2007 and April 2008 (when the trial was completed) should have been applied equally to the RDV and EUV figures, unless it is shown otherwise (there is no such evidence in the present case). As such, we believe adopting the values as at July 2007 for the present purpose is appropriate. 172.We concluded at paragraph 87 above that the EUV of the residential units of the 2 buildings as at 29 September 2006 is $453,850,816. At the same time, according to Mr Chan’s respective revised valuation of the EUV of the residential units of the 2 buildings as at 29 September 2006[39] and 29 June 2007[40], there is an increase of 27.74% in the value over this period of time. Adopting this same percentage as the change in the market value for the period between 29 September 2006 and 23 July 2007, the proper EUV of the residential units of the 2 buildings as at 23 July 2007 should thus be $453,850,816 x 1.2774 = $579,749,032. 173.In the premises, the total EUV of the 2 buildings as at 23 July 2007 should thus be: $579,749,032 + $196,968,000[41] = $776,717,032. 174.Thus as at 23 July 2007, the RDV (i.e., the cleared site value) of the Lots exceeds its existing use value by: ($1,210,000,000[42] x 1.014[43]) - $776,717,032 = $1,226,940,000 - $776,717.032 = $450,222,968. 175.In the circumstances, we are satisfied that this first limb of the test as set out in paragraph 169 above is satisfied. 176.Intelligent House then relies on the following evidence to show that the second limb of the test as set out in paragraph 169 above is satisfied by reasons attributed to obsolescence (and thus age) of the 2 buildings:
177.It has been contended by China Superior that, given the interpretation of the Ordinance advanced by it, it is not open to the Tribunal to look at the said evidence under the grounds of “age” or “state of repair”, since the Tribunal is not entitled to compare matters of the 2 buildings with a redevelopment under these grounds. 178.Since we have in the above rejected China Superior’s interpretation of the Ordinance, this submission should also be rejected. 179.On the other hand, as to the reliability and correctness of the above evidence on the features and grounds of obsolescence of these buildings, this is not in any material way challenged by China Superior or the other respondents at trial. There is also nothing before us to cast any doubt on this part of the evidence. We therefore accept the same. 180.At the same time, in his closing submissions, given the above evidence, Mr Roots fairly accepts that the difference between the RDV and the EUV of the Lots takes into account of matters attributable both to “age” and “state of repair”. He however submits that this does not render the second limb of the test not met. He explains as follows:
181.We reject the first reason given by Mr Roots. As he submits, and as we have concluded above, this land economic test is to be applied under the ground of “age”. It is not his submissions, nor have we so found, that the test is also applicable under “state of repair” or jointly with the ground of “state of repair”. We therefore do not think it is right to include any matters under “state of repair” to decide whether this particular test is satisfied. 182.However, we do accept his second and third explanations:
183.For the above reasons, we accept that it has been proved on the balance of probabilities that the substantial difference between the cleared site value of the Lots and its existing use value is attributable to factors of obsolescence of the 2 buildings, and thus to their age. We are therefore satisfied that the second limb of the land economic test as set out in paragraph 169 above is also met. 184.We therefore conclude that Intelligent House has proved to our satisfaction under s. 4(2)(a)(i) of the Ordinance that redevelopment of the Lots is justified on the ground of age. E2.2 Whether redevelopment is justified on the ground of “state of repair” 185.As rightly submitted by Mr Manzoni, there is no suggestion in the present case that redevelopment is justified because (a) the state of repair of the 2 buildings is such that it cannot be repaired, or (b) the disrepairs are to such an extent that the 2 buildings pose danger to their residents or the public at large. 186.As such, we are only concerned as to whether the economic question under this ground is satisfied. 187.At the same time, even under this question, it is also not suggested by Intelligent House that the cost of repair (even taking its case to the highest, which is $92 million odd as at 29 June 2007) exceeds the existing use value of the buildings (which is in the region of $800 million). 188.In the circumstances, the only live issue before us is whether the cost of the necessary repairs significantly outweighs the enhancement value in the buildings created by the repairs. 189.Under this issue, we have to determine the following material sub-issues:
E2.2.1 Determination of the necessary repairs and their costs 190.Only Intelligent House and China Superior have adduced evidence in this respect. 191.Intelligent House relies on the expert evidence of Mr Benson Wong (a building surveyor) as to the estimated cost of the necessary repairs. Mr Benson Wong relies on his own views, as well as the various expert reports of Mr C M Wong (a structural engineer) and Mr Matthew Chan of Building Diagnostic Consultant Ltd (who had carried out infra-red thermo survey to evaluate the conditions of the external façade of the buildings), to determine what are the necessary repairs that need to be carried out in these buildings. As will be explained in greater detail below, Mr C M Wong, in compiling his reports, has also engaged other specialist consultants to carry out what he regarded as necessary tests to enable him to form a view on the conditions of the structural elements and the concrete of the buildings. Intelligent House also relies on the expert report of Prof Albert Kwan (a chartered engineer and Professor of Civil Engineering at the University of Hong Kong), which provides his comments on the various expert reports relied on by China Superior on the physical and structural conditions of the 2 buildings. 192.China Superior relies on the expert of evidence of Mr James Law (a building surveyor) as to what are the costs estimates to carry out what he regarded as the necessary repairs of the buildings. It also relies on the expert evidence of Dr Eddie Lam (a structural engineer, and an Associate Professor in the Department of Civil and Structural Engineering, the Hong Kong Polytechnic), Mr Paul Kong (a structural engineer), Professor Leung (Chair Professor in Building and Construction at City University of Hong Kong), and Professor Poon (Professor at the Department of Civil and Structural Engineer of Hong Kong Polytechnic University) to show the conditions of the structural elements and concrete of the 2 buildings. Both Professor Leung and Professor Poon did not on their own commission or carry out any independent tests or surveys of the 2 buildings, but only premised their opinions on the reports of Mr James Law, Mr Paul Kong and Dr Eddie Lam. 193.Neither party takes issue on the expertise of these experts. 194.Both Mr Benson Wong and Mr James Law say that they adopt the standard of tenantable conditions to determine what are the necessary repairs that need to be carried out at the 2 buildings. They have however arrived at significantly different and diverging views as to (a) what are these necessary repairs, (b) the methods of carrying such repairs, and (c) the estimated cost of the suggested repairs. 195.Before examining the reasons of their differences, it is perhaps convenient to first set out their respective costs estimates:
196.In relation to these estimates, Mr Manzoni has very helpfully provided to the Tribunal various tables summarizing the repair cost positions between Mr Benson Wong and Mr James Law, with corresponding break downs, categorized according to the different sections or parts of the buildings, as adopted by Mr Benson Wong in his report. These sections or parts are: (1) preliminaries, (2) structural works, (3) building facades, (4) roofs and roof structures, (5) staircases & typical floor lobbies, (6) flats & shops, (7) arcade at ground floor, (8) above ground plumbing installation, (9) ground & underground drainage system, (10) electricity supply installation, and (11) fire services installation. 197.For convenience and for the present purpose, we produce one of these tables summarizing the broad cost estimates respectively of Mr Wong and Mr Law as Appendix VI attached to this decision. 198.Before we proceed to discuss and determine the proper repair cost under these subsections, there are three matters that we need to deal with first. 199.First, we accept that under the ground of “state of repair”, it is the standard of tenantable conditions that dictate what would be the necessary repairs that need to be carried out at the subject buildings. For what constitute tenantable conditions, we adopt our conclusion made at paragraph 165(2)(c) above and Mr Benson Wong’s view[45] that, they should be those which would render the building fit for the enjoyment of its tenants and visitors, which are reasonable in the present day circumstances for the type of building in question, and with its structural frames, components, finishes and service installations in either fair or good conditions, requiring no repair in the near future. 200.Secondly, Mr Manzoni submits that since when Intelligent House purchased the majority share in the buildings, most if not all of their units had been occupied, these 2 buildings are by definition of tenantable conditions. We have difficulties to accept this submissions:
201.Thirdly, where there are areas of conflict between the parties in relation to the structural conditions of the 2 buildings (which include the state and conditions of the concrete, and the steel reinforcement), we generally prefer the views of Mr C M Wong to that of the evidence of China Superior’s experts. We have come to this view because of the following reasons. 202.Mr C M Wong’s evidence and conclusions are more reliable and accurate:
203.Further, Mr C M Wong’s findings on the conditions of the reinforcement bars of the 2 buildings are also to be preferred by us to that of Mr Paul Kong. It is because we find that Mr Kong’s reports are likely to be less reliable and accurate than that of Mr Wong for the following reasons:
204.We also accept Intelligent House’s submissions that Dr Eddie Lam’s conclusion set out in his report on the probability of corrosion of the reinforcement bars of 2 buildings is not as reliable. Our reasons are as follows:
205.Given that we have found the expert reports respectively of Mr Paul Kong and Dr Eddie Lam are relatively less reliable and accurate than that of Mr C M Wong’s report, both Professor Poon’s and Professor Leung’s reports do not therefore take China Superior’s evidence on the condition of the concrete and reinforcement of the 2 buildings any further. This is so because, as we have explained above, they have compiled their reports basing on the tests and conclusions set out in the reports of Mr Kong and Dr Lam. As accepted by them under cross examination, the accuracy and reliability of their own reports are therefore dependent significantly upon the accuracy and reliability of Mr Paul Kong’s and Dr Eddie Lam’s reports. 206.For these reasons, insofar as the structural conditions of the 2 buildings are concerned, we accept Mr C M Wong’s findings stated in his report and his evidence, which have led him to conclude as follows:
207.Insofar as necessary, for the same reasons advanced above, we also accept Professor Kwan’s evidence insofar as his evidence is in support of Mr C M Wong’s views. 208.Having dealt with the above matters, we could now proceed to look more closely at the evidence on the repair cost under each of the broad categorization set out in paragraph 196 above. 209.Mr Benson Wong makes an estimate of $7,770,500, while China Superior submits that it should be either $130,000 (its best case) or $1,560,930. 210.Mr Benson Wong has included a long list of what he regards as administrative, management and preliminary work items, which are generally and usually related to and necessary for carrying out substantive building repair works. For example, these include office administration and overheads, project management staff, premiums for various forms of public liability and contract insurance, statutory levies, testing of materials, and final cleaning upon completion of works. 211.On the other hand, Mr Law has not provided such a detailed list of preliminaries in his report. He however accepts in evidence that it is usual to provide about 10% of the entire contract sum as cost for preliminaries, inclusive of scaffolding. Mr Benson Wong holds the contrary view that scaffolding should be excluded from the items of preliminaries and should be separately provided for. 212.After hearing the evidence, we prefer the views of Mr Benson Wong under this section. We also accept that his cost estimates are reasonable and fairly arrived at. We come to this view since we accept that Mr Benson Wong’s evidence is more reliable and credible for the following reasons:
213.We therefore accept Mr Benson Wong’s estimate that the cost required for preliminaries should be $7,770,500. It is noted that this is less than 10% of the total estimated contract sum of $92m. As mentioned above, 10% of the contract sum is in Mr Law’s own view a reasonable estimate for cost to be incurred for preliminaries. 214.These include proposed repair works to be carried out to remedy defects or deteriorations of the concrete and steel reinforcement identified in the 2 buildings. 215.The cost of repair under this item as estimated by Mr Benson Wong is $9,184,700. China Superior’s best case estimate is $1,044,225, and its alternative case is $5,712,041. 216.Mr Benson Wong’s suggested repairs are based on the conclusions on defects and conditions of the structural elements of the 2 building identified by Mr C M Wong. Mr Law however identifies much less structural defects in the buildings that in his view require repair. 217.As explained above, we accept Mr C M Wong’s conclusion in his report on the structural conditions of the buildings. In the premises, we also accept Mr Benson Wong’s report on the repairs that need to be carried out to remedy or rectify these defects. We also accept his cost estimate of $9,184,700 to carry out these repairs as reasonable in the circumstances of the present case. 218.Mr Benson Wong estimated a cost of $22,953,050 for repair works under this item. China Superior says that the cost should be $2,108,000 (its best case scenario), or alternatively $2,761,730. 219.The significant difference between their estimates lies predominantly in their different views on the extent of certain repair works, and whether some of the repair works should be included at all. 220.nbsp; Mr Wong recommends that repairs works should be carried out to hack off the finishes and to apply new waterproof renderings to the entire external walls of the buildings. He says that the deterioration and lamination of the renderings is extensive and is getting worse. Mr Law however says that the lamination is only limited and only parts of the external walls need repair. Mr Benson Wong also recommends demolishing various unauthorized structures and balconies, and reinstating original external enclosures to them. He also suggests the removal of corrugated canopies as they contain asbestos. Mr James Law is of the opinion that they should not be included in the repair costs of the buildings, as they belong to works that need to be carried out by individual owners. 221.Mr Benson relies on the following to support his recommendation for the complete re-rendering of the external walls: (a) the infra-red thermographic survey conducted by Mr Matthew Chan, which detected 170 spots of delamination in Kam Kwok Building and 73 in National Building, all scattered on the external walls to all four elevations, (b) the buildings are 46 years old and the external wall renderings have come to the end of their effective life, (c) there are many seepage defects found internally indicating that the external wall renderings of the buildings are generally unsound and not watertight, and (d) the added layers of tile filler and paint finish to the external renderings, made under the repairs of the external walls in 2003, might have aggravated the problem of debonding. 222.On the other hand, Mr James Law gives the opinion that the conditions of external walls are much better than what Mr Wong has suggested. He says that his view is based on his visual inspection of the external walls of the buildings, which according to his practical experience, is even more reliable than the test results of infra-red survey. In any event, China Superior also submits that the infra-red survey results carried out by Dr Eddie Lam reveals much less extensive lamination than what Mr Matthew Chan has suggested. 223.After hearing the evidence, we come to the view that Mr Benson Wong’s view on the condition of the external walls is to be preferred to that of Mr James Law. Our reasons are as follows:
224.Although accepting that the works for the removal of the unauthorized structures ought to be carried out, Mr Manzoni for China Superior contends that its cost should not be included for the present purpose. This is so, as Mr Manzoni submits, because the benefits of these works belong to the individual owners of the units where the structures are located, and there is no reason why this would be a relevant consideration when addressing whether redevelopment is justified. 225.Mr Manzoni further submits that this view is supported by the way the EUV of the buildings is valued by Mr Charles Chan of Savills. He says in the valuation, it is stated expressly that it assumes that the layout of the flats is as per the approved plans and that there are no illegal uses or structures, and no reinstatement costs are allowed. It is therefore submitted that if one includes the cost of reinstatement into the cost of the necessary works, one also has to deduct it from the original EUV, on the basis that that valuation assumes that those works had already been done. The enhancement would thus be increased by a further amount at least exactly equal to the cost of the reinstatement. To avoid the alleged double accounting, Mr Manzoni submits that the cost of the reinstatement should be excluded. 226.We reject Mr Manzoni’s submissions:
227.Mr Manzoni further contends that Mr Benson Wong’s unit cost estimates for the scaffolding required to be erected to carry out the recommended repairs at the buildings ($200 psm for Kam Kwok, and $230 psm for National Building) are demonstrably too high. Mr Law gives evidence that the unit cost for double scaffolding required for this type of work should be $70 psm. Mr Manzoni also says that in relation to the external wall repair works carried out at the buildings in 2003, the contractor quoted a unit cost of only $58 psm for erecting the scaffolding. This shows that the price quoted by Mr James Law is reasonable, after taking into account an increase in material cost between 2003 and now. 228.In relation to this, Mr Benson Wong’s evidence is that his estimate of the unit cost of $200 psm is based on (a) the figure quoted in the Building Maintenance Guidebook published by the Buildings Department in 2001, and (b) his own extensive experience in dealing with cost estimates for similar renovation works. 229.In light of the materials presented before us, we accept that, on balance, Mr Benson Wong’s evidence on this is to be preferred for the following reasons:
230.For the above reasons, we accept Mr Benson Wong’s evidence and cost estimate for the scaffolding work. 231.Finally, we also accept that the work of removing the corrugated canopies should be included for the present consideration. It has been revealed by the tests commissioned that these canopies contain asbestos. This is not challenged. It is common ground that asbestos is harmful to human being. We do not see any reason in principle why they should not be removed to render the buildings of tenantable conditions. 232.In the premises and for the above reasons, we also accept the repair cost estimate provided by Mr Benson Wong under this item, which is $22,953,050. 233.Mr Benson Wong suggests a cost of $1,664,280. China Superior says these should cost only $724,650 or alternatively $880,488. 234.The principal difference under this item relates to three matters:
235.Although Mr Law has not included the cost of repair of the roof advertising sign in his recommendations, Mr Manzoni for China Superior in his closing submission accepts that this should be included as it accepts that the sign requires repair to maintain it in a tenantable condition. He however submits that the cost of repair suggested by Mr Wong (which is $663,000) may be too expensive if the Tribunal is of the view that (as submitted by Mr Manzoni, which will be examined in greater detail below) Mr Wong’s costs are generally on the high side. 236.For reasons to be explained later below, we do not accept that there is evidence to show that Mr Benson Wong’s costs estimates are generally on the high side. We therefore prefer to deal with each of the cost estimates individually to see if there is justification to say that any of it is too high. 237.The repairs suggested for the advertising sign are to de-rust, prepare and apply new protective paintwork onto, and replace seriously rusted members of, the sign. The cost also includes providing special scaffolding to it to carry out the repairs. China Superior has not provided any evidence to suggest why the quoted price is too high. We are not satisfied that it is shown that this cost estimate is too high. We therefore accept this as reasonable and appropriate. 238.Mr Wong suggests to repair the railings on the parapet wall as a result of the grilles installed over the piping on the roof. They have the effect of reducing the effective height of the parapet wall to less than the 3 foot 6 inches, which was originally designed, and required under the 1956 Building Regulations. Mr Wong recommends installing and repairing the railings to the height of 1.1m as required by the 1990 Building Regulations. 239.It is not suggested that the 1990 Building Regulations now apply to these 2 buildings built in 1961. It is thus submitted by Mr Manzoni that the suggested “repair” should not be considered for the present purpose under the Ordinance. 240.We accept Mr Manzoni’s submissions. There is nothing to suggest that the existing height of the parapet wall, if not increased to 1.1m (albeit not compulsorily required by the Regulations) would have rendered any obvious safety hazards to the residents of the 2 buildings. In the premises, even gauged against the standard of tenantable conditions as explained above, we do not think that the works recommended by Mr Benson Wong falls properly within the ground of “state of repair” under the Ordinance. 241.We therefore find that this item of work should be excluded from the calculation in deciding what is the proper cost of repair to be considered under “state of repair”. The amount of cost that should thus be excluded from the calculation should be $229,000 (for Kam Kwok Building), plus $112,500 (for National Building), which is equal to $341,500. 242.Mr Manzoni also submits that China Superior does not accept that it is necessary to spend $60,000 (as recommended by Mr Benson Wong) on repair to crazing on the inside of the parapet wall. The recommendation comes from Mr Wong’s view that the parapet walls are “generally finished with cement and paint finish, which have been weathered with cracking and crazing”. 243.However, given our view on the relevant test of tenantable condition, we believe this recommendation falls within the proper consideration under “state of repair”, and should be included. 244.For the above reasons, the cost of repair under this item of “Roof and roof structures” as accepted by the Tribunal is: $1,664,280 - $341,500 = $1,322,780. Staircases and typical floor lobbies 245.Mr Benson Wong estimates the cost of repair under this item to be $4,050,070. China Superior suggests $660,000 or alternatively $894,000. 246.There are three significant differences between the two surveyors in relation to the staircases and lobbies:
247.It is contended by Mr Manzoni that it is not a necessary element of condition of the buildings, having regard to their location, their character their age and use, that the staircases need to have over $1.6m spent on redecoration. He submits that, as suggested by Mr James Law, only certain small-scale patch works painting needs to be carried out for the purpose of repair. He however accepts that the Tribunal, having been to the buildings, is well positioned to form a view as to whether total redecoration is required as repairs. 248.With reference to the standard of tenantable condition set out above, we are of the view that total redecoration in the form as recommended by Mr Benson Wong can be properly regarded as repairs for the purpose of considering whether redevelopment should be justified under the ground of state of repair. 249.As such, we also accept the types of repairs as recommended by Mr Wong under this sub-item. 250.Mr Manzoni further argues that the unit cost of painting of $100 psm as suggested by Mr Wong is simply too high. Mr Manzoni submits that the cost of painting quoted by the contractor for the 2003 repair work is only $63 psm. Given that price indexes published by the Consensus and Statistics Department show that the relevant cost of labour for painting work has decreased by 13% between April 2003 and June 2007, while the cost of material has increased by 8%, taking the evidence to the highest, Mr Manzoni submits that the unit cost of painting in July 2007 (when Mr Benson Wong’s report was completed) should have been more or less the same as $63 psm. 251.Despite Mr Manzoni’s submissions, in our judgment, Mr Benson Wong’s unit cost estimate on painting work is reasonable for the following reasons:
252.For the above reasons, we accept Mr Wong’s cost estimates for the suggested painting works to be carried out under this item. 253.Under this item, in relation to what has been described by Mr Manzoni in his closing submissions as fire safety requirements, Mr Wong has provided cost estimates on works that need to be carried out to meet these requirements. These estimates are (a) $434,500 for Kam Kwok Building, and (b) some $459,500 for National Building. 254.Mr James Law’s estimates are (a) $395,000 for Kam Kwok Building, and (b) $265,000 for National Building. 255.The thrust of Mr Manzoni (and Mr James Law)’s case on excluding some of the recommended items of repair is on the basis that, the relevant existing statutory regulations or practices of the Fire Services Department and the Buildings Department (which enforces requirements relating to fire safety construction) do not apply to old buildings such as the present ones. 256.Mr Manzoni’s submission is correct as to the applicability of these regulations and practices. However, by reference to the meaning of tenantable condition set out in paragraph 199 above, we are of the view that these recommended items of repair should also be included in the calculation of total repair costs, to consider whether redevelopment is justified under the ground of “state of repair”. This is so, as we accept that these items would render the 2 buildings of reasonable safety in modern day standards. 257.We therefore would also accept the entire cost estimates provided by Mr Wong for this sub-item. 258.Other than the above contentions (which we have rejected), there is no evidence before us to show that the other costs quoted by Mr Wong under this item are unreasonable. We therefore accept as reasonable all of Mr Wong’s estimates of the repair costs under this item. 259.As a result, the reasonable repair cost under this item is $4,050,070. Flats and shops internal work 260.Mr Wong’s total estimate of repair costs under this item is $14,291,030. China Superior’s estimate is $1,556,324. It does not have an alternative estimate under this item. 261.The majority of the repair works recommended under this item is in relation to the removal of unauthorized building works and the subsequent reinstatement of the buildings to the approved plans. Mr Manzoni submits that all these works should be excluded. In support of his submissions, he advances the same reasons as above in relation to the removal of unauthorized structures of the balconies. He says as a matter of principle, they should be excluded in the present cost calculation to determine whether redevelopment is justified under “state of repair”. 262.For the same reasons we have set out above in relation to the balconies, we similarly reject Mr Manzoni’s present submissions. We do not see how it can be seriously suggested that, in restoring the buildings to a tenantable condition, it is unreasonable to demolish unauthorized structures (which by definition are not permitted under the law) and to reinstate them in accordance with the approved plans. As such, as a matter of principle, for the purpose of assessing the costs to be involved in restoring the buildings to a tenantable condition, such costs should also be included. We therefore agree that Mr Benson Wong is entitled to include the repair cost of this work in his estimates for the present purpose. 263.The rest of the work under this item includes certain redecoration of the flats and shops so as to put them into a tenantable condition. Other than the submission that Mr Benson Wong’s cost estimates are generally on the high side, Mr Manzoni has made it clear that China Superior has no “detailed criticism” on this work, which I take it that to mean that, other than the quantum of cost, they are not objecting to these repair works to be included in the estimates. 264.As will be explained later, we do not accept that there is evidence to show that Mr Benson Wong’s cost estimates are generally on the high side. As such, and given Mr Manzoni’s above submission, we also accept Mr Benson Wong’s estimate of the repair cost relating to this part of the item. 265.We therefore find that the total reasonable repair cost that should be allowed under this item is as suggested by Mr Wong, being $14,291,030. 266.Mr Benson Wong provides a total cost estimate of $1,392,400. China Superior suggests that a total cost of $74,448 should be sufficient. 267.The main difference between the parties under this item is whether, as recommended by Mr Wong, complete and extensive refurbishment should be carried out for the arcade, which includes the replacement of the entire floor of the arcade (where there are a few voids identified) and all the letterboxes thereat, as well the repainting with good plastering of the internal walls. 268.Mr Manzoni submits these are not necessary as they represent only betterments but not repairs. 269.The Tribunal has been to the buildings. The arcade condition can fairly be described as run down and in a rather dilapidated state. 270.In our view, to restore it to a tenantable condition as defined above requires the overall refurbishment of the arcade, so as to make it fit for the enjoyment of its residents and visitors, which is reasonable in the present day circumstances for the type of building in question, and that its finishes and its service installations are in either fair or good conditions requiring no repair in the near future. 271.It is not suggested, nor is there evidence before us to so suggest, that the repair works recommended by Mr Wong to refurbish the arcade are ones which would make the arcade too grand or too luxurious, and thus it would not be appropriate with regard to the type of building in question, to bring it outside the above meaning of tenantable condition. 272.In relation to the cost estimates concerning the repair works to be done to the communal toilet, China Superior does not make any objection to this repair as suggested by Mr Wong being included, but again raises the criticism (which we reject for reasons stated below) that Mr Wong’s costs estimate is generally too high, and a 45% percent reduction should apply to his estimates across the board. 273.We therefore would allow the entire costs estimate made by Mr Wong under this item, which is $1,392,400. Aboveground plumbing installation 274.Mr Wong’s cost estimate under this item is $939,000. China Superior’s estimate is either $160,000 or $516,450. 275.The difference between the two experts in relation to this item is that Mr Law considers the installation to be in good condition, and therefore does not allow for any cost other than $80,000 for the replacement of the two pump sets, whereas Mr Wong reports that fairly significant work is required. Mr Manzoni accepts that if the Tribunal is of the view that the condition is not good, it should be repaired. 276.Both experts set out briefly in their reports the results of their inspection of the subject aboveground plumbing systems of the 2 buildings. However, Mr Benson Wong’s report is supported by various photos of the conditions identified by him. The conditions of the plumbing systems as shown in these photos tally with Mr Wong’s comments expressed in his report. His observations are thus supported by objective evidence, and we find them to be more reliable. 277.We therefore accept Mr Benson Wong’s report on the condition of the aboveground plumbing installations. We also thus accept his recommendation of the related repair works. 278.We also find Mr Wong’s repair cost estimates under this item reasonable and thus acceptable, which is $939,000. Aboveground and underground drainage system 279.Mr Wong provides a repair costs estimate of $4,969,300, while China Superior suggests $130,000 or alternatively $1,727,165. 280.The major work recommended by Mr Wong is to replace the uPVC drains with cast iron, as he (basing on the CCTV survey conducted by Building Diagnostic Consultants commissioned by him) has identified various defects of the underground drainage pipes. He also recommends replacing the old cast iron fixings of the aboveground drainage installation because of their age, in order to maintain the system in working conditions for the reasonable future. 281.Mr James Law has not commissioned any CCTV survey of the underground drainage system. He has not provided any comments of this system in his report. 282.Given the above, we find Mr Benson Wong’s reports on the drainage system more reliable, and his recommendations for repairs should be adopted. 283.However, Mr Manzoni’s main criticism regarding Mr Wong’s estimates is as follows. Mr Manzoni points out that Mr Wong recommends replacing 100m of the uPVC drains with cast iron at a unit cost of $20,000 per m, but the BDC report says that only 20m need replacement. As such, Mr Wong’s cost estimate of $2,000,000 is simply wrong and should be reduced to $400,000. 284.In relation to this, the cost of $2,000,000 for replacing 20m of the underground pipes is in fact set out in BDC’s report at paragraph 4.1(v). It is obvious that Mr Benson Wong adopts this recommendation (including the cost estimate) wholesale in his report. There has been no cross examination on either Mr Matthew Chan (of BDC) or Mr Wong on the correctness or basis of this $2,000,000 cost estimate. China Superior itself has also not adduced any evidence on what should be the unit cost for this work. 285.In light of the above, we do not accept that Mr Manzoni’s above criticism is an appropriate one that can be made against the $2,000,000 cost estimate. 286.In light of the BDC’s own recommendation and cost estimate (which is not challenged), which are adopted in Mr Wong’s report, we conclude that this cost estimate is reasonable. 287.In the premises, we accept in its entirety the total cost estimate provided by Mr Benson Wong under this item, which is $$4,969,300. Electricity supply installation 288.Mr Wong’s estimate of cost is $9,202,000. China Superior’s estimate is $252,00 or alternatively $966,350. 289.Under this item, Mr Wong recommends:
290.For these repairs, there are certain of defects which are only identified by Mr Wong but not Mr Law. Insofar as these defects are concerned, we would accept Mr Wong’s report, as he has set out clearly the basis of his identification of those defects, which is not challenged under cross examination. 291.However, Mr Manzoni’s main challenge of Mr Benson Wong’s above recommendations runs as follows:
292.We do not accept Mr Manzoni’s submissions:
293.We therefore accept all of Mr Wong’s repair recommendations and the costs estimates under this item, which amount to $9,202,000. 294.Mr Benson Wong provides a total repair cost estimate of $3,264,000, to replace and install various fire services equipment and modalities in the buildings and their service lifts. China Superior suggests a cost of $515,650 or alternatively $520,300. 295.Mr Manzoni relies on the same submissions above in relation to his objection to the fire safety works recommended to be carried out at the staircases and floor lobbies. That is, these recommended items should not be included in the present exercise, as they are only required by the relevant regulations or practices, which are not applicable to old buildings. 296.For the same reasons set out at paragraph 256 above, we reject Mr Manzoni’s submissions. In our judgment, the recommended fire services installation should be included in the present exercise to bring the condition of the buildings to one which is reasonably safe to their residents and visitors, with reference to present day standard. 297.We therefore accept Mr Wong’s cost estimate of $3,264,000 under this item. Are Mr Wong’s cost estimates generally too high 298.Mr Manzoni submits that, in light of Mr Benson Wong’s over-inflation of the unit cost of repair for (a) scaffolding work for the external wall repair, (b) the painting work for the staircases and lobbies, and (c) the replacement work of the uPVC pipes, it is open to the Tribunal to draw the inference that Mr Wong’s cost estimates are generally on the high side. Mr Manzoni thus submits that the Tribunal should apply an across the board 45% reduction of all of Mr Wong’s cost estimates. 299.We do not accept Mr Manzoni’s submissions:
300.In summary, our conclusion on the costs of repair that should be considered for the purpose of s. 4(2)(a)(i) of the Ordinance are as follows:
301.In his cost estimates, Mr Wong factors in 10% of the contract sum as contract contingencies, and 5% of the sum as professional and supervision fees. China Superior does not challenge this approach. We therefore accept that such additional sums should be added to the above repair costs to arrive at the final figure. Thus, the final repair cost should be: $79,338,830 + $7,933,883 [$79,338,830 x 0.1] + $3,966,941.50 [$79,338,830 x 0.05] = $91,239,654.50. 302.For the above reasons, for the purpose of s. 4(2)(a)(i) of the Ordinance, we find that the reasonable repair cost required to render the 2 buildings to a tenantable condition is $91,239,654.50. E2.2.2 Estimation of the enhancement in the value of the 2 buildings due to the repair works 303.Only Mr Charles Chan for Intelligent House has provided a report on the enhancement (meaning increase) in the value of the 2 buildings due to the repairs works recommended by Mr Benson Wong. 304.In the report, he has stated the view that any enhancement in the value is only to be reflected in the residential units of these 2 buildings, but not in the commercial or retail units. This view is not challenged by Mr Lynch. We therefore accept it. 305.In trying to arrive at his valuation of the enhancement value of the 2 buildings, Mr Chan has identified and analyzed the comparable transactions of 4 selected buildings, which had recently undergone substantive repairs and renewal under the rehabilitation scheme organized by the Urban Renewal Authority. After making the necessary adjustments, including time adjustment, to these comparable transactions, Mr Charles Chan comes to the view that the value of the residential units of the 2 buildings would have increased within the range of 8% to 18% (depending on the original condition of each of these units, the worse it is originally, the higher the enhancement in value). He has set out the enhancement value (with the corresponding percentage increase) of each of these residential units in the appendices to his report. 306.As concluded by Mr Chan, in actual numerical term, basing on his EUV valuation as at 29 June 2007, the overall enhancement value of the 2 buildings after the repair works would have been $72,230,000 ($55,730,000 for Kam Kwok Building, and $16,500,000 for National Building). 307.Basing on the evidence given by Mr Lynch, Mr Manzoni submits that Mr Chan’s above valuation is unreliable:
308.We do not think Mr Manzoni’s submissions are correct. Our reasons are as follows. 309.Based on the newly identified comparables identified by him at trial, Mr Lynch seeks to draw the following conclusions:
310.However, Mr Lynch accepts that his brief analysis of the newly identified comparables is only a desktop exercise. We take this to mean that he has not done any research and has no information about the repair works carried out in each of these cases. This in our view renders his analysis less reliable. 311.In the circumstances, we do not think it can be established on the evidence that Mr Chan is incorrect in not including these newly identified comparables in his analysis, and thus his conclusion is unreliable as submitted. 312.Further, when asked by this Tribunal, Mr Chan explains his reasons for not using the RVD index in his analysis of the enhancement value. His evidence is as follows[46]:
313.We accept Mr Chan’s above explanation as a justifiable ground for him to not to adopt the RVD time index for the purpose of the valuation in the enhancement value. We therefore do not find his valuation unreliable because he has not used the RVD time index to make the time adjustments regarding the comparables. 314.For the above reasons, we generally accept Mr Chan’s report on the enhancement value as reliable. 315.However, Mr Chan’s conclusion on the actual enhancement value of the units of the 2 building is based on his percentage increase in the 29 June 2007 EUV of the residential units. On the other hand, we have found at paragraph 172 that the appropriate EUV of the residential units as at 29 June 2007 should be $579,749,032, which is about 0.9798 of Mr Chan’s own revised EUV valuation of $591,700,000. 316.In the circumstances, after making the similar adjustment, the proper enhancement value due to the repair works should thus be $72,230,000 x 0.9798 = $ 70,770,954. E.2.2.3 Whether redevelopment is justified on the ground of state of repair 317.Both Mr Roots and Mr Manzoni agree that, the mere fact that the repair cost exceeds the enhancement value does not necessarily mean that the economic test under the state of repair is satisfied to justify redevelopment. For example, if the excess say were only in the region of a few dollars or a few thousand dollars, it would not have justified redevelopment. 318.Both counsel also accept that whether the test is satisfied to justify redevelopment is a judgment call for the Tribunal to make. 319.Mr Roots submits that the Tribunal should pose the question as whether a reasonable person, having looked at the difference between the two figures, would find it worthwhile economically to proceed with the repair and maintenance. This is similar to the way in which Mr Manzoni puts his question to Mr Baum (Intelligent House’s expert on land economics) on state of repair. The question Mr Manzoni asks is:
320.We accept that this is the right approach to this test. 321.In the present case, the total repair cost of $$91,239,654.50 (as found above) exceeds the enhancement value of $70,770,954 (as found above) by $20,468,700.50. 322.In our view, given the substantial amount of the repair cost that needs to be invested, a reasonable person would not find it economically worthwhile to proceed with the repair and maintenance works in the present case. 323.In the premises, we find that it has been proved to our satisfaction that redevelopment is also justified for the 2 buildings on the ground of “state of repair”. F. Whether Intelligent House has taken reasonable steps to acquire the undivided shares from the minority owners 324.Intelligent House accepts that the requirement under s. 4(2)(b) of the Ordinance to take “reasonable steps” to acquire all the shares in the lot involves two elements:
325.It is contended by those respondents present at the trial (but not by China Superior) that Intelligent House has failed under this requirement. Their contentions are in gist as follows:
326.In the present case, Intelligent House has altogether made four formal written offers to the minority owners to purchase their units. There were also various meetings held with some of the minority owners with Intelligent House’s representatives. This is supported by meeting records. 327.It was asserted when questions were put to Mr. Augustine Wong under cross examinations that, in certain cases telephone calls had not been made as alleged and written replies had not been sent to counter offers. Mr. Augustine Wong explained the importance he attached to undertaking the task of maintaining contact with minority owners and that he and his staff had endeavoured to carry out their task systematically. 328.There is no reason for us not to accept Mr Augustine Wong’s evidence, and to think that generally this approach was not successfully applied in this case. This is particularly so when those making the allegations have not put in any witness statement to set out their allegations. As such, nothing can be taken against Intelligent House for adducing no other evidence but Mr Wong’s response under cross examination to deal with the allegations. 329.In any event, purely for the sake of argument, in light of the various and repeated formal written offers and meetings set out above, these allegations of occasional lack of responses in relation to one or few of the minority owners, even if they were true, could not in our view amount to Intelligent House’s failure to comply with the reasonable step requirement under s. 4(2)(b). 330.Given the evidence of Mr Augustine Wong, which we accept entirely, it is clear to us that the minority owners were fully aware of Intelligent House’s intention and willingness to purchase their shares. The reality is that anyone who wished to sell voluntarily could have done so, subject to agreement on the price. 331.We therefore find that Intelligent House has satisfied the first limb of the test. F2. Reasonableness of the terms offered 332.The only and real contention raised by the respondents under this limb is that the purchase prices offered by Intelligent House were too low and thus unreasonable. 333.As to what amounts to a reasonable offer under s. 4(2)(b), the CFA in Capital Well has said that it was not the Lands Tribunal’s role to adjudicate upon disputes as to the correct valuation principles to be applied to assess the offer. It merely needs to be satisfied that the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. 334.In our judgment, Intelligent House has also satisfied this limb of the test:
F3. Other points raise by some of the respondents 335.The following are some other grounds of opposition to the making of an order for sale by some of the respondents. 336.The 15th Respondent contends that the 14 days response time given in Intelligent House’s offer was too short and thus unreasonable. 337.We do not accept this submission. There is no suggestion that the 15th Respondent would have accepted the offer if longer time were given. There is also no evidence (the 15th Respondent has not given evidence) to show that she did not have enough time to consider the offer. 338.The 15th Respondent also contends that Intelligent House’s representative was unreasonable in allegedly insisting at a meeting on 20 July 2007 that, it would not negotiate with the other respondents on price because China Superior (the 13th Respondent) was not willing to sell. We reject this contention:
339.The 15th Respondent further argues that the offers were unreasonable because one of the terms was that the purchase should be with vacant possession to be completed within one month and that (a) this would have been impossible to achieve if the unit was subject to a tenancy, and (b) there was no offer that Intelligent House would be responsible for paying compensation to tenants. 340.We also reject his argument:
341.The 15th Respondent further says that the offers were unreasonable because they did not include options of “one for one exchange” (one new unit for one old unit) or “joint development”. We reject this argument. The only requirement under the Ordinance is to make an offer to purchase on reasonable terms. If the Tribunal accepts that the purchase prices offered by Intelligent to each of the Respondents were reasonable (as we have so accepted), the absence of other options would not have made the offer unreasonable. 342.A number of respondents have said that they are concerned that the prices that Intelligent House has offered to purchase their units will be insufficient to buy any similar property in the same vicinity. While this has not been proved by evidence, for those who occupy their flats themselves or (as the case may be) occupy their own shops themselves (as distinct from letting them out) one can understand the concern. However, if an order for sale is made:
343.In the circumstances, this cannot amount to a valid ground to oppose the present application. 344.The 11th Respondent points out that an order for sale would require him to purchase another property, which would incur expenses such as agents’ fees and stamp duty. That is true, but:
345.Again, this cannot amount to any valid objection to the present application. F4. Conclusion on whether s. 4(2)(b) is satisfied 346.For the above reasons, we are satisfied that Intelligent House has taken reasonable steps to acquire the undivided shares from the minority owners, as required under s. 4(2)(b) of the Ordinance. 347.For the reasons set out above, we are satisfied that the requirements under s. 4(1) and (2) of the Ordinance are satisfied, and redevelopment of Kam Kwok and National Buildings is justified on the ground of:
348.In the premises, an order for sale of the 2 buildings should thus be made under the Ordinance. 349.We therefore make the following orders:
350.In relation to the costs of the application, there is no reason why costs should not follow the event. However, Intelligent House has submitted that even if successful in the application, it would not seek costs against all the respondents except China Superior (who purchased the unit after the application has been made), as it accepts that the other respondents are effectively forced to be joined in these proceedings. 351.In the circumstances, we regard it as just and fair to make an order nisi that China Superior shall pay the costs of this application to Intelligent House in relation to China Superior’s case, to be taxed if not agreed in accordance with the High Court Scale, with certificate for 2 counsel. 352.We also would wish to take this opportunity to thank counsel and the legal teams for both Intelligent House and China Superior, for the very helpful assistance in this case.
Mr. Guy Roots, QC, leading Mr. MOK Yeuk Chi, instructed by Messrs Woo, Kwan, Lee & Lo, for Applicant. Mr. Charles Manzoni and Mr. Adrian Y.H. LAI, instructed by Messrs Wong Poon Chan Law & Co., for 13th Respondent. 1st Respondent, acting in person (present on 28 January; 1,19,26,27, 28 February & 25 April 2008) 2nd Respondent, acting in person (present on 25,28,29,30 & 31 January; 1,4,5,6,18,19,20,21,22,25,26,27,28 February & 25 April 2008) 3rd Respondent, acting in person (present on 31 January; 1 & 28 February 2008) 4th Respondent, acting in person (present on 31 January; 1 & 28 February 2008) 5th Respondent, acting in person, absent 6th Respondent, acting in person, absent 7th Respondent, acting in person (present on 25,28 January & 1 February 2008) 8th Respondent, acting in person (present on 25,28,29,30 & 31 January; 1,4,5,18,19,20,21,22,25,26,27,28 February & 25 April 2008) 9th Respondent, acting in person (present on 25,28,29,30 & 31 January; 4,18,19,20,21,22,25,26,27,28 February & 25 April 2008) 11th Respondent, acting in person (present on 25,28,29,30,31 January; 1,4,5,6,18,19,20,21,22,25,26,27,28 February & 25 April 2008) 12th Respondent, acting in person (present on 25,28,29,31 January; 4,5,18,19,21,22,25,26,27,28 February & 25 April 2008) 14th Respondent, acting in person, absent. 15th Respondent, acting in person (present on 25,28,29,30,31 January; 1,4,5, 6,18,19,20,21,22,25,26,27,28 February & 25 April 2008) 17th Respondent, acting in person (present on 25,28,29,30 & 31 January; 4,5, 6,18,19,20,21,22,25,26,27,28 February & 25 April 2008) 19th Respondent, acting in person (present on 25 January 2008) 20th Respondent, acting in person (present on 25 January 2008) 22nd Respondent, acting in person, absent. 23rd Respondent, acting in person (present on 25 January 2008) [1]By a consent order made on 11 January 2008, the 10th, 16th, 18th, 21st and 24th Respondents were granted leave to withdraw their opposition with no order as to costs. As explained later, Intelligent House has also discontinued these proceedings against the 25th Respondent before trial, as the 25th Respondent agreed to sell her unit to Intelligent House. [2] But only a few actually attend the trial. [3]Section 3(1) of the Ordinance. [4]Section 3(1)(a) and Part I of Schedule I of the Ordinance. [5]Section 4(2)(a) of the Ordinance. [6]Section 4(2)(b) of the Ordinance. [7]Section 4(1)(a)(i) of the Ordinance. [8]Section 5(1) of the Ordinance. [9]Section 11(2)(c) of the Ordinance. [10]Some of the grounds are raised by some Respondents, while some are raised by all. [11] Thus, Intelligent House’s present proceedings have since been discontinued against the 25th Respondent. [12]As a matter of evidence, even if one is to look at the ownership of the undivided shares of each of the 2 buildings built on the Lots, Intelligent House has obtained 91.57% of the undivided shares of Kam Kwok Building (257 1/3 undivided shares out of 281 undivided shares). [13]These values are the latest revised figure provided by Intelligent House after the trial, and after Intelligent House and China Superior’s experts have come to an agreement as to the respective floor areas of each of the units in the 2 buildings. The previous figures provided in their respective valuation reports are based on floor areas, which turn out to be not entirely correct. Nothing however turns on this for the purpose of this application. [14] See fn 13 above. [15] See also: Bond Star v Capital Well [2004] 2 HKLRD 855 (CA), 860C-E at para 10 per Rogers VP. [16] As can be discerned from the List of Aged Residential Comparables with Adjustments for the Reference Domestic Units prepared by Mr Chan and provided under Intelligent House’s solicitors’ letter dated 25 January 2008 to China Superior’s solicitors [17] These are respectively Paul Yee Mansion, Pak Ling Building, Golden Jubilee House and Lok Yau Building. [18] Mr Chan in fact looked at three Kam Kwok Building transactions when he compiled the comparables, but when he proceeded to use the comparables to arrive at the reference unit price of all the comparables, he discounted one of these Kam Kwok Building transactions. [19] Which is $1,718 psf. [20] Which is about $2,473 psf. [21] They are: Pak Ling Building, Fook Gay Building and Wai Sun Building. [22] See paragraphs 64(6) and 65(4) above. [23] As valued by Mr. Chan for his reference unit (i.e. Unit 12A on 10th Floor) in Kam Kwok Building. [24]As valued by Mr. Chan for his reference unit (i.e. Unit 1 on 10/F) in National Building. [25] To avoid any doubt, the individual EUV of all the residential units in Kam Kwok and National Buildings are set out in the right most columns of Appendix II and III respectively. [26]Mr Chan has included under the commercial/retail units of the Kam Kwok Building the large metal advertising sign erected on the roof. However, Mr Lynch has included this under his valuation of the residential unit of the 2 buildings. [27]Day7/29-31. [28] After the experts having agreed on the floor areas of different units of the 2 buildings, the revised total EUV for the commercial/retail units of the 2 buildings as at 29 September 2006 as assessed by Mr Chan is $142,450,000, while the same EUV as at 29 June 2007 as assessed by Mr Chan is $153,670,000. [29] A protocol suggested by Mr Manzoni. We doubt whether under the Ordinance the Tribunal is entitled to make such a direction. It must be noted that under para 2(b) of Schedule 2 of the Ordinance, the reserve price has to be “approved by the Tribunal”. We doubt whether the Tribunal can delegate this task to the Trustees. [30]Taking the time to approximately the time of this decision. [31] Paragraphs 56, 58-62 of his Closing Submissions. [32] At paragraph 52. [33] Site value equals to the gross development value less the cost of building and the profit. [34] Bond Star, supra, per Rogers VP at 858I at para 5. [35] Capital Well v Bond Star [2005] 4 HKLRD 363 (CFA), 369G-H at para 21 per Ribeiro PJ [36] Mr Lynch under cross examination accepts the general principle as proposed by the Intelligent House via the opinion of Prof Baum, which we accept is admissible as expert evidence as relevant to the determination of whether the land economics test is applicable under the Ordinance. [37] No parties in these proceedings ever disputed the economic lifespan test propounded in Good Trader. [38] This is not disputed by the parties. [39]Which is $463,210,000. [40]Which is $591,700,000. [41]The EUV of the commercial/retail units of the 2 buildings, being $176,968,000 as valued by Mr Lynch as at 23 July 2007, which is accepted above by the Tribunal as correct, with the addition of $20,000,000 being the EUV of the advertising sign. [42]Mr Chan’s valuation of the RDV of the 2 buildings as at 29 June 2007. [43]Representing the average 1.4% monthly increase in the RDV of the 2 buildings since 29 June 2007. See paragraph 125 above. [44] See paras 147- 267 of Mr Manzoni’s written closing submissions. [45] Mr Benson Wong’s said suggestion under his definition of tenantable condition is not challenged by any of the respondents. [46] Day 4/69:18 – 71:5. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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