Fineway Properties Ltd v. Sin Ho Yuen Victor, The Administrator of the Estate of Sin Yat
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LDCS 5000 OF 2007 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LANDS COMPULSORY SALE APPLICATION NO. 5000 OF 2007 ---------------------- BETWEEN
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-------------------------- J U D G M E N T ------------------------ The Application 1.This is an application made under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) for an order of compulsory sale of all the undivided shares of and in Sub-Sections 3 & 4 of Section E of Inland Lot No.2147 (“the Lot”). The Applicant is the owner of 93.75% of the undivided shares of the Lot. The Respondent having the rest of the undivided shares is the owner of Ground Floor, 44 Haven Street, Hong Kong. 2.The Respondent mainly challenges the valuations of the existing use value (“EUV”) and the redevelopment value (“RDV”) of the Lot. Apart from that, the Respondent also opposes the application on the grounds that the redevelopment is not justified and the Applicant has not taken reasonable steps to acquire all the undivided shares in the Lot. 3.On the Lot, there is a Building situated at Nos.44-46 Haven Street, a cul-de-sac branching off the eastern side of Leighton Road in Causeway Bay. It is a residential block consisting of 8 storeys with 2 flats at each floor and 2 shops at Ground Floor totalling 16 units. The Building was completed in 1958 with the occupation permit issued on 16th May 1958 and was 49 years of age by 2007 when the present application was made. Valuation issues to be decided by the Tribunal 4.We first have to determine the valuation issues that could not be resolved by the parties, namely,
Summary of the experts’ valuation of the EUV of the units 5.The Applicant’s expert, Mr. Charles Chan (“Mr. Chan”) has produced a valuation report dated 27 July 2007, which set out the EUV of all the units in the Building as at 27 July 2007. In Mr. Chan’s Supplemental Report dated 7 December 2007, he revised the EUV of the units he additionally inspected and set out his opinion of the EUV of all the units (see TRB(I)/81 and TRB(I)/89). Similarly, the Respondent’s expert, Mr. Wong Chi Wai (“Mr. Wong”) set out the EUV of all the units in his report of 28 November 2007. He subsequently made adjustments reflecting the state and estimated costs of repairs, providing his valuations of the EUV of all units as at 30 July 2007 in his report of 14 May 2008 (see TRB(IV)/1306). 6.We set out in the attached Appendix I the EUV of all units in the Building as estimated by Mr. Chan and Mr. Wong. In summary, the total estimated EUV of the domestic and the shop units of the Building are as follows:
7.The Applicant in the written Closing Submission submitted that there were two special features in the EUV assessments in this case:
Determination of the EUV of all units in the Building 8.Under section 10 of the Ordinance, the apportionment between the majority owner and the minority owners of the Lot shall be on the basis as specified in Part 3 of Schedule 1 of the Ordinance. Under the Schedule, the proceeds are to be apportioned on the basis of the EUV as stated in the Applicant’s Notice of Application. Therefore, if there is a dispute between the parties on the EUV of the units in the Building on the Lot, the Tribunal has to determine the values. 9.As pointed out by the Applicant in the written Closing Submission, despite of the differences in the EUV assessments of the domestic units in the Building, the Tribunal’s site inspection was only confined to the shops units of the Building and the shop comparables. Also, in view of the parties’ positions of not opposing the domestic EUV as assessed by the experts employed by the other sides, there was no cross-examination on the adjustments of the comparables and the assessments of the domestic EUV made by Mr. Chan and Mr. Wong. 10.Therefore, the Applicant submitted that, because both parties chose not to contest the EUV assessments of the domestic units of the other side and “the main function of the EUV assessments was to ensure that a fair and reasonable proportion among all the units is maintained for the distribution of expenses and proceeds among the units”, the Tribunal should “evaluate the general reliability of the experts and their assessments to decide to prefer and adopt in total the assessments (shop & domestic) of one expert and reject those of the other” 11.On the other hand, the Applicant submitted, if the Tribunal should conduct its own assessment on the shop EUV, the Tribunal would have no reliable way of assessing:
12.We do not agree the reasoning of the Applicant’s submission as summarized above. The Tribunal, in assessing the EUV of the units in the Building when there is a dispute between the parties, is discharging the judicial function as laid down in the Ordinance. And, needless to say, all the experts giving evidence in the Tribunal, including Mr. Chan and Mr. Wong, were experts of the Court. We therefore do not think that the obvious stand taken by either party, i.e., the preference to adopt the domestic EUV valuation of the other side’s expert will have any effect on our decision. 13.Firstly, we find that both parties and their experts hotly contested the EUV of the shops in the Building as assessed by the experts employed by the other side. However, there was adequate information for the Tribunal to determine the disputes between the two experts. As such, there was no reason that the Tribunal should not handle this valuation matter in the usual manner, i.e. to assess the EUV of the shops instead of accepting the valuation of either expert en-bloc. Next, after assessing the EUV of the shops ourselves, we will then be in a better position to decide whether Mr. Chan or Mr. Wong was a more reliable expert in so far as the assessment of the EUV of the domestic units in the Building is concerned. We will then also have to decide whether we will adopt the EUV of the domestic units of the Building as assessed by one expert, or we will assess the EUV ourselves. 14.For the above reason, we shall first consider the EUV of the shop units in the following section. Determination of the EUV of the shop units in the Building 15.Both experts valued the EUV of the shops on direct comparison approach. However, despite of the very large number of shop comparables both experts had between them considered, they had only 1 common comparable, namely Comparable A1/C4 (i.e. G/F of 9 Haven Street). 16.Mr. Chan considered that a total of 12 shop transactions were suitable comparables, referenced Comparables A1 to A12. These include 5 comparables in Haven Street, 6 in Tai Hang area and 1 in the Causeway Bay area nearby. He set out his analysis and adjustments of comparables at page TRB(I)/31. On the other hand, Mr. Wong listed out in Appendix V of his report at TRB(IV)/1325 (as amended and shown as Table R5B attached to the Respondent’s written Closing Submission) a total of 13 comparables of which 6 were located in Haven Street and the nearby Leighton Road or Caroline Hill Road, 6 in Tai Hang area and 1 in Causeway Bay area nearby. 17.Mr. Chan at the end estimated that the appropriate unit rate for the estimation of the EUV of the shops of the Building was $52,000 per sq. m. (see TRB(I)/31) whereas Mr. Wong’s respective estimated unit rate was $142,000 per sq. m. (see Table R5B of the Respondent). 18.Mr. Chan elaborated at considerable length in his various supplemental reports that apart from the common comparable, all the other comparables of Mr. Wong should not be considered as suitable comparables mainly for the reasons:
19.Mr. Wong gave evidence that he had actually considered a far greater number of shop transactions (referenced Comparables R1 to R22, see TRB (IV)/1320-1323) but he decided at the end that only the comparables he quoted in TRB(IV)/1325 were the suitable comparables. During the trial, he produced Exhibit R2(1), R2(2) and R2(3) in which,
20.Some of the salient details of all the shop comparables respectively identified by Mr. Chan and Mr. Wong as suitable comparables were set out in Appendix II attached at the end of this Judgment. For ease of reference, they were shown as comparables A1 to A12 (of Mr. Chan) and comparables C1 to C10 (of Mr. Wong) using the same references of the 2 experts. 21.After careful consideration, we have decided to adopt 4 of Mr. Chan’s 12 shop comparables as the most suitable comparables in the direct comparison approach for the purpose of estimating the EUV of the shops in the Building as at the relevant date of 27 July 2007. This is now shown in Appendix III attached at the end of this Judgment. All the comparables were located in Haven Street, but excluding those located near or at the other end of Haven Street. This is because essentially we consider that Haven Street, being a cul-de-sac has the characteristics quite typical of other cul-de-sacs. The ground floor units in the Building are very much inferior, in so far as the pedestrian flow and the trading potential are concerned, when compared with shop units at the other end of the street, near or at its junction with Leighton Road. As we have visited the subject shops and the comparables during our site inspection, what we have observed on site reinforces our opinion and led to our above decision. 22.We shall next set out below our grounds for rejecting some of Mr. Chan’s shop comparables on the ground that they are not as suitable as the comparables we have agreed to adopt. Similarly, we shall set out below our grounds for rejecting all except one of Mr. Wong’s shop comparables. Choice of suitable shop comparables 23.All the comparables considered by the 2 experts as suitable comparables could be grouped under the following categories:
Shop comparables at Haven Street that are close to the Lot 24.After careful consideration of the evidence adduced by both experts, we conclude that the best comparables are those located at Haven Street, close to the Building. In fact, both experts agreed in principle that those were the best comparables too but Mr. Wong opined that some of those (i.e. his Comparable R7 and R8 as shown in TRB(IV)/1321, respectively marked and known as Comparable A6 and A5 by Mr. Chan, as shown in Appendix III) had to be rejected because they were purchased by the Applicant for site assembly purpose. As a result, Mr. Wong agreed that the common Comparable A1/C4 was the only suitable comparable at Haven Street. 25.For ease of comparison, the sale prices and the unadjusted unit rates of the above said 3 comparables and Mr Wong’s Comparable C4b, as well as the valuation of Mr. Wong for the 2 shops in the Building are summarized in the table below.
26.Mr. Wong could not explain why the Tribunal should exclude Comparables A6/R7 and A5/R8 along Haven Street that are close to the Building as relevant comparables. Even though the Applicant had purchased these 2 Comparable properties as part of their land assembly exercise, there was no evidence or no suggestion that these 2 transactions included the redevelopment potential of the buildings of which they form parts. 27.There is no provision in the Ordinance that any purchase by a majority owner or by a minority owner has to be excluded for consideration as market evidence. The Ordinance only stipulates that in estimating the EUV of the properties in the building in the lot which is the subject matter of an application under the Ordinance, the market value of each property should be assessed on the basis of,
28.Moreover, having compared the actual transacted prices of these 2 comparables and the final estimated values of the shops in the Building in the Lot as assessed by Mr. Wong, it is abundantly clear that their transacted prices could not have included any redevelopment potential. This is because firstly, according to Mr. Wong, his EUV valuation of the 2 shops in the Building could not have included any redevelopment potential of the Lot in order to comply with the provisions of the Ordinance as set out in Schedule 1, Part 1; and secondly, since Mr. Wong’s EUV valuation of the 2 shops in the Building exceed the actual transacted prices of these 2 comparables by such a large extent, these 2 comparables could not have included any redevelopment potential as well. Therefore, even though these 2 comparables were part of the land assembly exercise of the Applicant, their transacted prices could not have been higher due to the land assembly. 29.Of the other comparables at Haven Street close to the Lot of Nos. 44 and 46 Haven Street, Mr. Wong only included Comparable C4 (G/F., 9 Haven Street) and Comparable C4b (G/F., 11 Haven Street) as the suitable comparables (see Appendix III). As we have said before, Comparable C4 is the same as Mr. Chan’s Comparable A1, the only common comparable. Other than that, Mr. Chan disagreed to adopt Comparable C4b on the ground that it was transacted after the intention to acquire all the units in various buildings in Haven Street was made known, in March 2007, to the public by the Applicant. We will deal with this issue later. 30.Other than Comparables C4 and C4b, Mr. Wong opined that all the other comparables at Haven Street close to the Lot should all be rejected because either they were purchased by the Applicant for site assembly purposes (i.e. Comparables R9, R10, R11, R12 and R13), or they did not comply with the “like with like principle” as they were located at various parts of a shopping arcade with no direct street frontage (i.e. Comparables A4/R5, R4 and R6), or it was sold at an unreasonably low price (i.e. Comparable A3/R3). They were the following transactions:
31.Mr. Chan agreed with Mr. Wong to reject all the above comparables, except two (Comparable A3/R3 and A4/R5), although for different reasons. For Comparable A4/R5, Mr. Chan opined that it could be adopted as a comparable with suitable adjustments made to reflect the disadvantage that it had no street frontage. We disagree with Mr. Chan in this respect. We agree with Mr. Wong that the location inside an arcade is very different from street frontage shop such as the 2 shops in the Building so that all the arcade shop comparables should be discarded. Therefore, we abandon both Comparable A4/R5 as well as 2 other shops with no street frontage, Comparable R4 and R6. 32.However, for Comparable A3/R3, we agree with Mr. Chan that this should not be discarded on the ground as put up by Mr. Wong. In addition, we agree with Mr. Chan that its unit rate, whether before or after adjustments is not unreasonably low when compared with the other suitable comparables finally adopted by the Tribunal (see the analysis at Appendix III). 33.Regarding the timing of the site assembly by the Applicant, we accept the factual evidence of Mr. Kwan Chi Ming, the Applicant’s representative regarding the site assembly efforts of the Applicant in the Haven Street locality (that is, in respect of properties including Nos. 32-50 Haven Street, Lei Wen Court, Lei Kwa Court, Lei Ha Court, Caroline Hill Court and Haven Court). Mr. Kwan stated that during January and February 2007, the Applicant made known to the unit owners of the above said properties the Applicant’s intention of site assembly by general offers made to the unit owners. His evidence was not challenged at all in cross-examination. 34.We further agree that Mr. Kwan’s evidence, as submitted by the Applicant, fully supported Mr. Chan’s analysis (as set out in his 2nd Supplemental Report at TRB(I)/161-164 and 167) that there were “2 diverse price ranges for transactions of shops in the locality of Haven Street before and after March 2007 and Mr. Chan’s conclusion that “(a) the post-March 2007 transactions were embedded with hope value for redevelopment and should not be used to assess the EUV of the suit shops and (b) the pre-March 2007 transactions should be used.” To illustrate his conclusion, Mr. Chan actually produced a table (see TRB(I)/184) listing out in chronological order the dates of transactions, the sale prices and the unadjusted unit rates, etc. of all the shop sales at Haven Street, Caroline Hill Road and Leighton Road (from 20 April 2006 for Comparable R1 to 6 November 2007 for Comparable C4b). 35.Alternatively, put simply in terms of lump sum figures, the transaction prices of the 5 “post-March transactions”, i.e., Comparables R9 to R13, range from $6,999,800 to $8,000,000. These should be contrasted with the lump sum transaction prices of the 2 “pre-March transactions”, i.e., Comparables A5/R8 and A6/R7 (dated 18/9/2006 and 10/8/2006 respectively) that are located very close to these 5 transactions, in the range of $4,780,000 and $3,600,000 (see Appendix III). Also, the general price level of these 2 “pre-March comparables” are very close to the other 2 “pre-March transactions” in Haven Street, i.e., Comparables A1/C4 and A3/R3 (see Appendix III). 36.Therefore, we agree with Mr. Chan that the hope values for redevelopment are definitely embedded in the price level of Comparables R9 to R13 as they were all transacted after March 2007 (with the first transaction at 10 April 2007 for Comparable R9, and the last transaction at 24 August 2007 for Comparable R11). As such, we agree with Mr. Chan to exclude Comparables R9 to R13, as well as Comparable C4b (see Appendix II) as suitable comparables on the ground that they were embedded with redevelopment value, but not to exclude, as suggested by Mr. Wong, Comparables A6/R7 and A5/R8, as suitable comparables on the simple ground that the Applicant acquired these 2 comparables. Comparables located at Haven Street further away from the Lot or located at Leighton Road or Caroline Hill Road 37.Mr. Wong identified a few other comparables at Haven Street at or near to its junction with Leighton Road, at Leighton Road or the nearby Caroline Hill Road. They were known as Comparables C1, C2, C3, C4a, R1 and R2. They are summarized below:
38.Mr. Wong considered the above comparables, with the exception of Comparables R1 and R2 as suitable comparables. However, Mr. Chan rejected Comparables C1, C2, C3 and C4a on the ground that they were located at superior location than the Lot, as witnessed by their adjusted units rates (see Appendix III), all of which were a few times higher than those identified to be suitable comparables at Haven Street (see Appendix II). We accept Mr. Chan’s analysis and finding. We agree that it is sheer common sense that a comparable fronting at Leighton Road or close to Leighton Road or at Caroline Hill Road should be discarded as they are so much different from the Lot, which is located near the far dead-end of Haven Street. Similarly, any comparable which adjusted unit rate is close to the above said comparables should be discarded as it is obviously out of line. We will not comment further on Comparables R1 and R2 as both experts agreed that both were not relevant comparables. Comparables located at Tai Hang area 39.Mr. Chan identified 6 comparables of ground floor shops at Tai Hang area to be suitable comparables for the valuation of the EUV of the shops in the Building. They were known as Comparables A2, A8, A9, A10, A11 and A12 (see our summary at Appendix III). Similarly, Mr. Wong identified 6 comparables of other ground floor shops at Tai Hang to be suitable comparables. They were known as Comparables C5, C6, C7, C8, C9 and C9a (see Appendix III). Of these 6 comparables used by Mr. Wong, 3 were located at King Street (i.e. C5, C6 and C9a) whilst the other 3 (i.e., C7, C8 and C9) were located at Wun Sha Street. 40.Mr. Chan rejected all the comparables at Wun Sha Street as identified by Mr. Wong on the ground that as the street was superior to Haven Street in terms of pedestrian flow and trading potential, the shops there including the comparables commanded a much higher level of rental than shops in the Building, hence requiring substantial downward adjustments if the comparables were adopted. We agree with Mr. Chan on this observation of the differences between Wun Sha Street and the Lot, as well the area of Haven Street close to the Lot where the comparables adopted by the Tribunal (see Appendix III) are located. 41.Also, in respect of Mr. Wong’s other comparables at Tai Hang area, Mr. Chan opined in his Rebuttal Report at TRB(I)/110 that Comparables C5 and C6 were obviously out of line with those comparables at Haven Street that did not include elements of redevelopment value. Mr. Chan concluded that Comparables C5 and C6 were embedded with hope value for redevelopment. As for Comparable C9a, Mr. Chan similarly opined that its sale price was obviously out of line with those suitable comparables at Haven Street (see Appendix III). We also agree with Mr. Chan’s above observation and analysis. 42.More importantly, we are of the view that since Tai Hang area as a whole is so far away from Haven Street, the shop transactions in the area do not accurately reflect the market values of the shops in Haven Street at the relevant valuation date of 27 July 2007, the date of the Applicant’s Application. So far as the market values of the shops are concerned, we do hold the view that since location is obviously of paramount importance and that adjustments for location are very subjective in nature so that if the Tribunal finds that there is a sufficient number of suitable comparables that are close in location to the shops in the Building in this valuation exercise, it will be much better for the Tribunal to just use the latter comparables, rather than extending the geographical area of the comparables. For the above reason, we find that in the valuation of the EUV of the shops in the Building, it will suffice to restrict ourselves to the best suitable comparables at Haven Street and discard all other comparables, including all those at Tai Hang area. Comparables located at the other part of Causeway Bay area nearby 43.Mr. Chan identified one comparable at Shelter Street (Comparable A7 at Appendix III) in another part of Causeway area nearby whilst Mr. Wong identified another comparable at Shelter Street (Comparable C10 at Appendix III). The former was transacted at an unadjusted unit rate of less than half of that of the latter. 44.Although Shelter Street is much closer to Haven Street than the whole of Tai Hang area, it is still quite different from Haven Street in so far as the pedestrian flows and trading potential are concerned. We also have the opportunity of viewing these streets at the time of our site inspection at the beginning of the hearing. As such, we hold the same view as set out above that we should restrict ourselves to the suitable comparables at Haven Street since the adoption of this approach will not necessitate the subjective adjustments of comparables to reflect the differences in the pedestrian flow and the trading potential between different streets. Therefore, we discard the 2 comparables at Shelter Street identified by the 2 valuation experts. Should any comparable be chosen as a suitable comparable if the date of sale was close to the relevant valuation date 45.The Respondent submitted that Mr. Chan erred in not choosing some of the comparable sales even though their transaction dates were very close to the relevant valuation date for the EUV valuation exercise. We do not agree with this submission. Although timing of sales is an important element that has to be considered by the Tribunal in the valuation exercise, we cannot agree that comparables should be chosen having regard to the proximity between the dates of sales of the comparables and the relevant valuation date. We wish to stress that in the comparison approach of valuation, among all the differences where adjustments have to be made, valuation surveyors usually could agree on the time adjustments. Even if they could not agree on the exact percentages of adjustments for time, they could in most cases agree on the direction of adjustments. Also, valuation surveyors could usually agree, among themselves, to use certain property price indices to account for the differences in the timing of sales and the date of valuation. On the other hand, for almost all other factors of adjustments, the surveyors have to rely on their subjective judgment in each and every case. Hence, we do not agree with Mr. Wong and the Respondent that some comparables should be used simply because they had dates of sales close to the relevant valuation date. This is against the commonly accepted valuation principle in the direct comparison approach. Adjustment of the suitable shop comparables chosen by the Tribunal 46.After having concluded that there are 4 most suitable comparables (as shown in Appendix III), we next consider the issues of adjustments. As a valuation expert, Mr. Chan analyzed and adjusted his comparables at TRB(I)/31 under the factors of time, age & condition, size, location, frontage/depth and layout. The other valuation expert Mr. Wong disputed Mr. Chan’s quantum of adjustments for various factors. 47.In particular, Mr. Wong gave evidence that since Mr. Chan’s adjustment for time was based on the earlier property price index dated July 2007 published by the Rating & Valuation Department (RVD), that should be replaced by the time adjustments to be based on the property price index published in April 2008 by the RVD as the latter index gave final statistical figures whereas in the earlier index, RVD only gave provisional statistical figures. On being challenged that he was wrong in using a different set of RVD indices in his earlier valuation report, Mr. Wong frankly admitted that he had committed a mistake in using that wrong set of indices. 48.We agree with Mr. Wong that the figures given by RVD in the latter index of April 2008 should be adopted in making the adjustments for time. As such, we decide to adopt Mr. Wong’s adjustment percentages for time as shown in his table at Exhibit R4(1) and R4(2). 49.Other than time adjustments, we consider that the other adjustments made by Mr. Chan to the comparables adopted by this Tribunal are fair and reasonable. As a result, we prefer adopting all his adjustments than those of Mr. Wong. We hold this opinion because we have already found that Mr. Wong’s choice of most of his comparables (especially Comparables C1, C2, C3 and C4a and C4b (see Appendix II) and the grounds for discarding Comparables A3/R3, A5/R8 and A6/R7 (see Appendix III) were so unreasonable that we have little confidence on his opinion of adjustments for factors other than time. As for time, since it was based on the RVD’s property price index (mutually agreed by both experts), we agree to use the most relevant index as recently submitted by Mr. Wong. 50.We sum up all the adjustments we have adopted for the 4 most suitable shop comparables at Appendix III of this Judgment. The adjusted unit rates for the chosen comparables are as follows:
Estimation of the EUV of the shop units in the Building 51.Applying the average of the adjusted unit rates of the chosen suitable comparables to the saleable area of the Respondent’s unit (i.e., G/F of 44 Haven Street), we arrive at the estimated EUV as at the valuation date of 27 July 2007, as follows:
52.Similarly, we estimate that the other shop, G/F of 46 Haven Street, with the same converted saleable area, will have the same EUV of $4,580,000. Determination of the EUV of the domestic units in the Building 53.After comparing our above estimated EUV of the shop units in the Building with the experts’ respective valuations of the EUV of the shop units (as shown in Appendix I of this Judgment), we find that our estimates are close to those of Mr. Chan but very far away from those of Mr. Wong. Also, we find that Mr. Chan was a more credible witness than Mr. Wong because the latter could not at several occasions justify his valuation during the cross-examination. In particular, we agree with the Applicant that Mr. Wong had made in his first valuation a mistake, which ought not to have been made by any experienced valuation expert. That is, he had used an index, which stated out at the outset that that should not be used for time adjustment purposes. 54.In light of the fact that we did not even have the opportunity of viewing the domestic comparables at the site inspection, whether internally or externally, and we do not have the clear information as to their view and aspects thus making our adjustments very difficult if not impossible, we decide to adopt the EUV of the domestic units of the Building as assessed by Mr. Chan, a more credible witness than Mr. Wong. We reproduce the results of Mr. Chan’s valuation at Appendix I. Summary of the Tribunal’s estimated EUV for all the Units 55.Summing up, we set out in Appendix IV the Tribunal’s estimated EUV for all the units in the Building at the Lot. Since the Respondent’s unit is G/F of 44 Haven Street, the ratio of the EUV of the Respondent’s unit to the total EUV of all the units in the Building is therefore equal to $4,580,000 / $38,050,000, or about 12.0368%. Summary of the experts’ estimates of the RDV of the Lot 56.Mr. Chan for the Applicant opined that there was no recent land sale transaction that could be accepted as suitable comparables. As a result, he could not carry out any valuation of the RDV of the Lot on direct comparison approach. He resorted to estimate, by the method of residual valuation, the RDV of the Lot at $70,434,276 (see TRB(VII)/2372) for which he rounded to $70 Million. On the other hand, Mr. Wong estimated the RDV of the Lot using both (i) the direct comparison approach and (ii) the residual approach. In the former approach, Mr. Wong estimated the RDV to be $128 Million whilst in the latter, he estimated the RDV to be $109 Million. Are there suitable land sale transactions for comparison 57.Mr. Chan opined that there was no suitable land transaction that could be used for comparison. He also dismissed the 2 land transactions cited by Mr. Wong as relevant market sales and opined that they could not be taken as suitable comparables. 58.Mr. Wong cited the following 2 land transactions as Site Comparables: (1) 33 Tung Lo Wan Road (where an existing building known as Nam Fung Building stood on the site) which was said to be transacted at $244 Million and (2) 19-21 Shelter Street (where another existing building known as Yuet Wah Court stood on the site), which was said to be transacted at $73.56 Million. In his Supplemental Valuation Report dated 12 January 2009 (see TRB(VIII/2395), Mr. Wong stated that by putting a weight of 10% on the site unit rate of Site Comparable (1) and 90% on the site unit rate of Site Comparable (2), he arrived as his estimation of the market value of the RDV of the Lot as at 3 December 2008, in the sum of $128 Million. However, he did not explain his rationale for using this weighting % for these 2 “direct” site comparables. More importantly, he also did not set out clearly his reasons for accepting the above said transactions as proper market transactions of land. 59.During the hearing, Mr. Wong was cross-examined at length by counsel for the Applicant and then re-examined by the Respondent’s counsel. However, having gone through all the documentary materials submitted before us, and the evidence of Mr. Wong and Mr. Chan, we agree entirely with the Applicant and came to the following findings:
60.To summarize, we agree with Mr. Chan that the 2 Site Comparables as identified by Mr. Wong were not appropriate site comparables for the purpose of assessing the RDV of the Lot by direct comparison approach. In the circumstances, we could only estimate the RDV of the Lot using the residual approach. Valuations of Mr. Chan and Mr. Wong using the residual approach 61.Mr. Chan all along valued the RDV of the Lot on the basis of its redevelopment for residential purpose. We reproduce his latest valuation as Appendix V attached at the end of this Judgment. It shows a residual land value of $70,434,276 for which he rounded to about $70 Million. Mr. Chan gave evidence that he also attempted to value the RDV of the Lot on the basis of its redevelopment for commercial purpose, with ground floor for shop use and upper floors for office use. However, he opined that the resulting land value, also arrived at by residual approach was less than that arrived at on the basis of the redevelopment of the Lot for residential purpose. It shows a residual land value of $64,518,651 for he rounded to about $65 Million. This valuation was on a similar basis as the residual valuation of Mr. Wong, which is reproduced as Appendix VI attached at the end of this Judgment. This shows a residual land value of $109,427,634.90 for which he did not round off at all. 62.Mr. Wong carried out different RDV valuations at 14 May 2008 (TRB(IV)/1382) and more recently, at 12 January 2009 (TRB(VIII)/2429). In Mr. Wong’s May 2008 report, he opined that there were 4 options for redevelopment available to the Building of the Lot under which he arrived at different values. They are as follows:
63.In the more recent valuation prepared in January 2009, Mr. Wong assumed the most optimal development to be a development with ground floor for shop use and upper floors for office use, and arrived at the RDV of $109,427,634.90 (TRB(VIII)/2429). The Tribunal’s determination of the RDV of the Lot 64.Instead of carrying out a residual valuation ourselves, we consider that it would be most appropriate at this juncture to consider the residual valuations presented by the 2 experts, in particular the few important parameters they adopted in their residual valuation. 65.We have considered the following most important parameters adopted by Mr. Wong in his latest residual valuation made in January 2009:
66.In the written Closing Submission, the Applicant summed up Mr. Chan’s evidence on the 5 shop comparables that had been adopted by Mr. Wong:
67.We find that Mr. Wong’s choice of shop comparables are unreasonable as they are all much better in location than that of the subject Building. Also, we agree with Mr. Chan that Mr. Wong’s 5 shop comparables, even if accepted, should warrant very substantial adjustments. 68.Mr. Chan also commented that when comparing the unit rates of shops and offices in the assessments of the gross development values at 21 April 2008 and 12 January 2009 (see Mr. Wong’s residual valuation for pure commercial RDV at TRB(VI)/1417 and Mr. Wong’s latest residual valuation at TRB(VIII)/2429 respectively), he noticed that there was (a) a –17.6% drop in the shop unit rate (from $180,000 to $148,400) but (b) a +6.5% rise in the office unit rate ($84,000 vs. $89,500). Mr. Chan also submitted that Mr. Wong was wrong in increasing the estimated office unit rate of the proposed commercial development for the Lot in light of the falling market. This was because according to the January version of RVD Price Index, there should already be a drop of about 9% for Grade C Office, from October to November 2008. The drop should be even slightly bigger according to the more recent February version of the said Index. 69.In addition, Mr. Chan gave evidence that Progress Commercial Building was much superior and there should be a location adjustment of -15 to -20%, instead of Wong’s –5%. 70.Mr. Chan actually carried out the residual valuation of the Lot for commercial purpose, i.e., similar to that as assumed by Mr. Wong. His valuation on this basis giving a RDV figure of about $65 Million is reproduced as Appendix VII attached at the end of this Judgment. 71.Lastly, in deciding on the adoption of the appropriate percentage return for the developer’s profit in the residual valuation of the RDV of the Lot, Mr. Chan gave evidence that he had followed the recent public announcement and changes in the developer’s profit allowed for by the Lands Department in its agreement for modification premium with various property owners. Mr. Chan submitted that in light of the increasing risk of property development in the present market after the current financial tsunami that affects the economy in the whole world including Hong Kong, it would be appropriate to allow for similar changes in the percentages of developer’s profits used in the residual valuation model. Mr. Wong disagreed to accept the proposed changes. The Respondent also submitted that whilst the Lands Department might have agreed to such changes, the modification premium computation could not be taken as market based. 72.Regarding the percentage allowed for as the developer’s profit in the residual model, we agree to accept the figures now adopted by the Lands Department and the property owners including property developers which applied for the lease modification or land exchange where premium payments are required. Firstly, the residual model commonly adopted by both Mr. Chan and Mr. Wong also followed the same format as that used and approved by the Lands Department in its modification premium computation. Secondly, we think that the parties on both sides are free to negotiate and to conclude the negotiation. As such, we consider that the results of such negotiation between the Government and the property owners could be taken as quasi-market evidence, in the absence of better evidence between property owners as vendors and purchasers in the market. Thirdly, since the Government, obviously in response to the property owners’ requests, has agreed to accept higher percentages of developer’s risk and therefore developer’s profit (which will lead to a lower land value) to cater for the current financial situation post the crisis following the collapse or virtual collapse of big institutions including Lehman Brothers, AIG and various international banks, we decide that we should accept similar new percentages in the residual valuation for the assessment of the RDV of the Lot. 73.To summarize, we find that Mr. Wong’s estimation of the office unit rate was unreasonable and we prefer to adopt Mr. Chan’s alternative estimated figure in Appendix VII. Therefore, after comparing Mr. Wong’s valuation at Appendix VI and Mr. Chan’s alternative valuation at Appendix VII, we prefer to adopt Mr. Chan’s figures in the 3 major parameters (i.e. shop unit rate, office unit rate and the developer’s profit) that we have discussed above. As we have said before, Mr. Chan’s valuation at Appendix VII gives a residual land value of about $65 Million. Conclusion of the Tribunal’s estimation of the RDV of the Lot 74.Mr. Chan’s most recent residual valuation made in February 2009 for the assessment of the RDV for residential use gave a figure of $70,434,276. This was higher than Mr Chan’s valuation for commercial use, at $65 Million. On the other hand, Mr. Wong did not set out any valuation for residential use in his latest report dated 12 January 2009. 75.We are satisfied with Mr. Chan’s residual valuation including the various parameters he adopted. Therefore, we determine the RDV of the Lot to be $70,434,276, for which we round to $70.50 Million. Whether redevelopment is justified 76.Section 4(2)(a) of the Ordinance provides that the Tribunal shall not make an order for sale unless it is satisfied that the redevelopment of the lot is justified due to the age or state of repair of the existing development on the lot, but the definition of age or state of repair has not been stated in the Ordinance. 77.In Intelligent House Ltd v Chan Tung Shing & Ors, LDCS 11000/2006, 23 June 2008, the following tests have been formulated by the Tribunal (also adopted in New Vision Development Ltd v Excellent Speed International Ltd LDCS10000/2007),
78.The Respondent accepts the above tests but submits that they have not been satisfied. Age test 79.The Applicant is not suggesting that the existing Building has reached the end of its physical life. Instead, it reaches the end of its economic lifespan as the clear site value of the Lot does significantly exceed the existing use value of the Building and also because of its age by features of obsolescence. 80.When comes to its application, Mr Liu of the Respondent, however, emphasizes that the valuation of the clear site value of the Lot shall discard the advantageous plot ratio, so as to achieve the comparison on the basis of like-with-like. Accordingly, by the Respondent’s calculation the RDV is $56.44 Million (on the basis of plot ratio of 5.44) and the EUV is $48 Million (para.57.7 of R’s closing submission). 81.We are of the view that the above proposition, i.e. “discarding advantageous plot ratio” is wrong and clearly without evidential basis. Not only was that it had never been put to the Applicant’s expert, but also it ignores the very aim of the Ordinance, which is to facilitate urban renewal in the context of private sector land redevelopment, whereupon the real market simply would not restrict or limit its redevelopment potential on actual calculation of the clear site value, which is usually done by employing residual method on the basis of the maximum permitted plot ratio. 82.Even if the Respondent’s figures are adopted, the RDV still exceeds the EUV significantly and the Building is therefore coming to its end of economic life. In our view, we assess the EUV as in July 2007 to be about 38 Million (see Appendix IV) and the RDV as in Feb 2009 to be $70.5 Million. Assuming the market movement between July 2007 and Feb 2009 applied equally to the EUV and the RDV (applying the same approach as at para.171 in Intelligent House without any evidence showing otherwise), the RDV in July 2007 shall still significantly exceed the EUV. 83.Mr Liu further argues that the above difference in value is not attributed to age but to the use of higher plot ratio. However, it must be noted from the Condition Survey Report of Mr Benson Wong of the Applicant (TRB (II)/619-), adopted by Mr Charles Chan that the Building was designed in the fifties and completed in 1958. Mr Benson Wong and Mr K.S. So have explained in their reports that (i) the Building was in urgent need of repair; (ii) the requirements of end-users have been evolving during this 49-year period; and (iii) the Building failed to fulfill current end-users requirements on various aspects including functional, environmental, legal and social. (TRB (I)/84) 84.Mr Chan then went on commenting the existing Building and comparing it to that of new developments, on choice of materials such as quality of cement rendering and paintwork on the external facades; on building services and facilities such as central towngas, refuse collection, security and recreational facilities; on building density from over 65% to redevelopment of maximum 33.33%; on environmental requirements such as balconies, utility platform, acoustic fins and sunshades. Mr Chan then concluded that due to poor physical condition and the failure to meet current end-users’ requirement, the EUV is thus substantially lower given the features of obsolescence, the need of repairs and the continuing needs. (TRB (I)/84-87) 85.We accept the above opinion and find that the clear site value of the Lot does significantly exceed the value of existing use. The difference is clearly attributable to the features of obsolescence of the existing Building and its old age. We conclude that the redevelopment of the Lot is justified on the ground of age. 86.Perhaps it is also worth mentioning that Mr Liu also submits that the acquisition costs of about $73 million, which is even higher than the proposed RDV would result in redevelopment of the Lot not being feasible in normal land economic terms. However, the acquisition costs is irrelevant to the age test, particularly considering that hope value has been embedded in the acquisition costs and is therefore not to be taken into account for the valuation of the existing use. State of repair 87.The Applicant is not submitting that the Building is posing danger to the residents or the public at large, but the Applicant relies on its team of experts including Mr Benson Wong, Mr KS So, Mr Markus Chui and Mr Matthew Chan to find and show all types of defect of the existing Building in their expert reports. The Respondent chose not to call upon their experts to counter the evidence of the Applicant’s experts. Instead, Mr Liu attacks mainly on the issues of costing of repair and the statistical analysis. 88.According to Mr Benson Wong, the costs of repair is about $6.3 Million (TRB (II)/674) and the enhancement value upon repair assessed by Mr Charles Chan is about $2.9 Million (TRB (I)/88). Thus the costs of repair exceeds significantly the enhancement value arising from the repair and therefore the test on the state of repair shall be satisfied. 89.Mr So Kin Shing, the Structural Engineer expert of the Applicant, opined in his Structural Investigation Report that the existing Building was of conventional reinforced concrete construction, and the building structure had a design working life of normally 50 years in Hong Kong. The Code of Practice for structural use of concrete also assumed the same, whereas the robustness, durability, workmanship, materials and intended maintenance would tie up with the same design working life. It was his experience that the costs of carrying out repairs to an old, dilapidated reinforced concrete building structure was usually very high because of recurrence of spalling and cracks and it might be more economical to have it pulled down and to erect a new building instead. (TRB (I)/256-264). 90.By ways of covermeter surveys, carbonation depth tests, compression tests and chloride content tests, the slabs, columns and beams were tested. Mr So concluded that the structural frames of the Building was in a poor condition of repair and in urgent need of repairs, and the Building was approaching the end of its design working life of 50 years where its structural frames had also deteriorated to the final stage of its design working life. He further stated that the deterioration would continue at faster speed than before due to extensive carbonation, new defects would occur, and previous defects though repaired would recur and requiring substantial repairs and even partial demolition and reconstruction (TRB (I)/275-277) 91.Mr Liu of the Respondent comments that Mr So is an unsatisfactory witness, the criticism mainly on insufficient samples to arrive at the conclusion. Further, it is also submitted that Mr So fails to look into the Factor of Safety and also other necessary considerations. In the absence of contrary expert evidence and the fact that these matters have not been properly put to Mr So, it is difficult to attack his expertise on this basis. We are of the view that Mr So is reliable and his opinion should be adopted. 92.On the costs of repair, Mr Liu states that Mr Benson Wong is not a member on the division of Quantity Surveying and that his estimates are inaccurate and exaggerated. However, having heard the evidence of Mr Wong and gone through his report, we find that Mr Wong has extensive experience on building repair costs, on repair packages and quotations, supervision of repair and maintenance. We do accept his view on the estimate of repair costs and the scope of repair. 93.In details, Mr Liu particularly submits that the replacement of a short section of pipe does not justify the excessive costs quoted. However, as explained, the drainage contractor would only provide the estimate of a minimum length and therefore the minimum charge. That cannot be said to be unfair nor unreasonable. In fact, no contrary evidence of costs was quoted. 94.Mr Liu also mentions that in complying with the Building Orders, essential repair works had already been undertaken in 2007, and the respective works could be seen in the Maintenance Contract (TRB (III)/ 1029-1053) and the drainage maintenance contract (TRB (III)/1054-1099) 95.To that, Mr Benson Wong had in his report dealt with it and stated that the respective costs of about $400,000 spent were mainly of decorative or superficial in nature. He commented that notwithstanding this, complete replacement of external wall rendering should be carried out as it should have already come to the end of its effective life. Also, no work has been carried out in some areas including the flats internally, scavenging lane, underground drainage, electrical, fire services and lift installations. (TRB (II)/666-674) 96.For overall analysis, even accepting that 7 domestic units had not been inspected where internal repairs may not be necessary (about $430,000 be reduced) and that the costs of structural frames be further reduced (for about $360,000) (see para.63.3 & 63.5 of the Respondent’s closing submission), the estimated repair costs shall still remain at least around $5 Million, which in our view does significantly exceed the enhancement value of $2.9 Million. For other proposed reduction, we do not find sufficient basis and evidence to alter the estimation of Mr Benson Wong. Therefore, we hold that the test on the state of repair is satisfied accordingly. 97.There are two further points we have to answer for the sake of completeness. First, concerning the estimate of repair costs, Mr Liu said that Mr Benson Wong aimed to restore the Building above the tenantable standard. Clearly Mr Benson Wong did all along in his report only meant to bring it up to tenantable standard (TRB (II)/674). The reference of good condition simply refers to no repair in the near future (TRB (II)/640) and we do not find that it differs much from the tenantable standard, if any. In either situation, the estimated costs shall not differ significantly. The same view of Mr Benson Wong was in fact also accepted in Intelligent House, supra (para.199). 98.Second, Mr Liu also submits that some units have still been rented out or occupied by the Applicant without implementing repairs as recommended by Mr Benson Wong. However, this does not have any significant bearing for consideration as to consider whether the flats are in tenantable condition or not, as defined above. (para.200 of Intelligent House also rejected the same). Age or State of repair collectively 99.As stated above, the Tribunal is also entitled to look at all of the above factors or tests collectively to see if redevelopment is justified, even though when each of them, if considered alone, is insufficient to do so. 100.We must mention that in the course of trial, although originally there had been quite some expert reports on condition and structural investigations of the Building prepared by the Respondent countering the Applicant’s experts, it is indeed a very sensible approach adopted by the Respondent for not calling upon them, not only in saving much costs, but also after all, it remains the fact that the Building has been completed since 1958 and is by now more than 50 years of age approaching the end of its design working life. Given the legislative background for facilitating urban renewal, the present case is in our view a classical example of fitting the aim of the Ordinance, in justifying redevelopment either on age or state of repair or both. Reasonable offer 101.Section 4(2)(b) of the Ordinance provides that the Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot, the Tribunal is satisfied that the majority owner has taken reasonable steps to require all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable). In the Court of Final Appeal case, Capital Well Ltd v Bond Star Development Ltd [2005] 4 HKLRD 363 at para 33,
102.Thus when assessing whether an offer is reasonable, the Tribunal is not required to conduct a valuation exercise, it merely needs to be satisfied that the offer falls within the range of what may broadly be regarded as fair and reasonable. 103.In the present case, there were altogether 5 offers made by the Applicant to the Respondent, first on 16/4/2007 of $6 Million, then on 2/5/07 of $7M, on 11/6/07 of $8M, on 27/7/07 of $8M and lastly on 22/4/08 of $11.715M. (see letters TRA/153-154, 263-364 respectively). 104.The present application was filed on 30/7/2007 and the trial commenced in June, 2008. The offer nearest to the date of the application is $8M on 27/7/07. By then the Applicant’s expert valued the RDV of the Lot at $72M and the EUV at about $36M, the Respondent unit’s EUV at $3.59M and the pro-rata share of RDV at about $7.1M. This pro-rata share of $7.1M when compared with the offer of $8M is clearly within the fair and reasonable range when broadly assessed. 105.Further, even when adopting the Tribunal’s finding of the EUV and the RDV, we are also of the view that the Applicant’s offer is fair and reasonable and it does fall within the board range of compensation of the unit in question, bearing in mind also (i) that it is not necessary for the offer to “beat” the valuation as if it were a payment into court (see para.36 in Capital Well, supra), (ii) that the Applicant did rely on its expert opinion to formulate the purchase price offered to the minority owner and (iii) there is also no contrary evidence nor reason to suggest that the expert advice is not properly made on professional valuation of the EUV and the RDV of the Respondent’s unit. 106.Therefore, we are satisfied that the Applicant has taken reasonable steps on terms that are fair and reasonable to acquire the undivided share of the Respondent. 107.To conclude, we are satisfied that the requirements and conditions as laid down in the Ordinance have been met and an order for compulsory sale shall be made in the following terms,
Costs Order nisi 108.In relation to the costs of the application, Mr Liu emphasizes that the Applicant shall bear the statutory burden to satisfy the Tribunal that the requirements laid down in the Ordinance have to be met no matter whether there comes any opposition. He further says that the Respondent merely challenges the valuation in his unit and no more and therefore no order shall be made as to costs. 109.However, the fact is, voluminous expert reports have been filed by the Respondent and it was not until in the course of the trial that the Respondent preferred not to call their experts nor adduce their reports. It is true that some trial dates have been saved, but rebuttal reports have since been filed and the Respondent is not simply taking a neutral stance. Whether the tests of age or state of repair have been satisfied were still under protest, not to mention the disputes in various valuation aspects. On valuation, eventually this Tribunal also prefers most figures adopted by the Applicant’s expert. Thus, the extra effort and costs incurred by the Applicant to deal with all the contentions submitted by the Respondent is obvious and it is completely different from the manner of going on a simple and straight forward proof of case. 110.We shall therefore make a costs order nisi that the Respondent shall bear 90% of the Applicant’s costs in this application, to be taxed on High Court Scale with certificate for counsel if not agreed, to be made absolute after 14 days unless either party applies to vary otherwise. Appendices –
Mr. MOK Yeuk Chi instructed by M/S Lo, Wong & Tsui, for the Applicant, present. Mr. LIU C. Y. instructed by M/S Wong Poon Chan Law & Co., for the Respondent, present. Appeal by the Respondent to Court of Appeal dismissed. Please refer to CACV95/2009 dated 28 May 2010 |
Cases cited in this judgment