Stadium Holdings Ltd v. New Era Group Ltd
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HCA 1160/2009 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 1160 OF 2009
BETWEEN
Coram : Before Master R. Lai in Court Date of Hearing : 26 January 2011 Dates of Written Submission : 2 and 11 February 2011 Date of Handing Down Decision : 17 May 2011 ___________________________ ASSESSMENT OF DAMAGES ___________________________ CASE SUMMARY 1.This is an assessment of damages payable by the Defendant (as seller) to the Plaintiff (as purchaser) for breach of a provisional agreement for sale and purchase dated 22 January 2009 (the “Agreement”) for a property situates at Workshops C1 and D1, Ground Floor, Hang Fung Industrial Building, Phase I, No. 2G Hok Yuen Street, Hung Hom, Kowloon (the “Property”). The Defendant failed to complete the sale of the Property to the Plaintiff pursuant to the Agreement. 2.The Plaintiff issued the writ herein on 8 May 2009 and obtained summary judgment under Order 86 of the Rules of the High Court on 27 October 2009. The Court ordered, inter alia, the Defendant to pay the Plaintiff damages for breach of the Agreement to be assessed. 3.The contract price for the Property under the Agreement was $45,000,000. The date of completion for the sale and purchase under the Agreement was 30 April 2009. It is common ground that the Agreement was terminated in early May 2009. 4.On 12 July 2010, the Court granted leave for the parties to adduce expert evidence on the market value of the Property free from encumbrances with tenancies at 30 April 2009 and 6 May 2009. 5.The Plaintiff adduced an expert report dated 22 May 2009 (“P’s Report”) issued by Centaline Surveyors Limited stating that the market value of the Property was the same as at 30 April 2009, 6 May 2009 and 22 May 2009. The Plaintiff’s expert valued the Property as at the aforesaid dates with vacant possession, free from all encumbrances and in a reasonable internal condition at $59,000,000. The Plaintiff’s expert valued the Property as at the same dates subject to existing tenancies except shops CD5(a), CD5(b), CD5(c) and CD7(c) which were sold with vacant possession, free from all encumbrances and in a reasonable internal condition at $59,200,000. 6.The Defendant adduced two expert reports dated 17 July 2009 and 10 August 2010 issued by CB Richard Ellis. In the first report (“D’s First Report”), the Defendant’s expert valued the Property subject to existing tenancies and free from all encumbrances as at 30 April 2009 and 8 May 2009 at $43,000,000 and as at 17 July 2009 at $45,000,000. In the second report (“D’s Second Report”), the Defendant’s expert confirmed the valuations reached in D’s First Report. D’s Second Report further stated that the valuations of the Property as at 30 April 2009, 6 May 2009, 8 May 2009 and 20 May 2009 were all the same, i.e. $43,000,000. 7.It is common ground of the parties that the proper measure for damages in this case is the difference between the contract price of $45,000,000 and the market price of the Property in early May 2009, i.e. in about 6 to 8 May 2009. 8.The normal measure of damages for breach by seller for sale of land is the difference between the market value of the property at the contractual time for completion and the contract price. (McGregor on Damages (18th ed.) paragraph 22-005) 9.The contractual time for completion in this case was 30 April 2009. However, the parties agreed that the relevant date for this assessment should be early May 2009 as the Agreement was not terminated until early May 2009. 10.In Suleman v Shahsavari [1988] 1 WLR 1181 the English High Court after acknowledging the usual measure of damages at common law as aforesaid pointed out that there were occasions when it might be more just to assess damages at a date different from the contractual completion date. The learned Judge cited an example at page 1183 that “where the innocent party reasonably continues to try to have the contract completed: in such a case it is logical and just to assess damages as at the date when (otherwise than by his default) the contract is lost.” 11.In this case, it makes no different to assess the damages by reference to the contractual date for completion (i.e. 30 April 2009) or the date when the contract was lost in early May 2009 as experts of both parties agreed that there was no change in value of the Property between 30 April 2009 and early May 2009. 12.Mr. Hung representing the Defendant suggested in his written submission that I might consider having a site visit to have a feel on the spot. Mr. Dawes representing the Plaintiff submitted in his written submission that it was probably too late to have a site visit at about two years after the material date for the assessment and the value of such exercise was questionable. I agree with Mr. Dawes that it is of little assistance to this assessment for me to attend the site in more than 20 months after the relevant date when the surrounding environment will have already been changed significantly. I do not propose a site visit. 13.It is common ground of the parties’ experts that the value of the Property remained unchanged for the period from 30 April 2009 to 22 May 2009. As it is agreed that the value of the Property remained unchanged in early May 2009, it is not necessary for me to determine a specific date in May 2009 as the relevant date for this assessment. THE PROPERTY 14.The Property is two workshops (i.e. C1 and D1) on the ground floor of Hang Fung Industrial Building Phase I (the “Building”). 15.The Building is situated on an island site in Hung Hom district bounded by Man Lok Street on the east, Hok Yuen Street on the south, and Sung Chi Street on the west. Other buildings in the immediate locality are industrial, commercial and residential buildings of various ages and heights. Thus this district is a mixed industrial, commercial and residential used district. 16.The Building is a multi-storeyed industrial building completed in 1979. Occupation permit for the Building was issued on 10 January 1979 with permitted usage for ground floor as workshops and transformer room for non-domestic use. 17.The Property is located at the southwest corner of the Building with Hok Yuen Street at its south and Sung Chi Street at its west. The Property was sub-divided into various units. P’s Report said that it was sub-divided into 13 units. D’s First Report stated that it was sub-divided into 12 units. 18.P’s Report stated that according to findings at inspection, the Property was divided into 13 units, namely shops CD1, CD2, CD3, CD4, CD5(a), CD5(b), CD5(c), CD6(a), area being 12 feet in front of rear entry of CD6(a), CD7(a), CD7(b), CD7(c) and CD7(d). The Defendant’s expert had also conducted inspection to the Property. In the D’s First Report, it referred to a lease plan provided by the Defendant which did not show “area being 12 feet in front of rear entry of CD6(a)” as a separate unit. However, the tenancy schedule annexed to the Agreement listed out 13 units. In respect of the number of units sub-divided from the Property, I prefer the evidence contained in P’s Report. THE AGREEMENT 19.The Agreement which was dated 22 January 2009 was a provisional agreement for sale and purchase. The Agreement provided for a formal agreement for sale and purchase to be signed on or before 12 February 2009. The parties engaged in disputes before signing of the formal agreement and no such formal agreement was signed. 20.The Agreement provided that the sale and purchase was subject to existing tenancies. As stated above, there was a tenancy schedule annexed to the Agreement which listed out 13 units. Twelve units [i.e. except shop CD5(b)] were occupied by tenants at the date of the Agreement. However, the contractual term of four of the leases [i.e. leases for shops CD5(a), CD5(c), CD7(b) and CD7(c)] would expire on or before 30 April 2009, the contractual completion date. 21.In the premises, this assessment would be on the basis that shop CD5(b) was vacant, leases for shops CD5(a), CD5(c), CD7(b) and CD7(c) had expired and other shops were with sitting tenants. EXPERT REPORTS AND EXPERTS 22.As stated above, the Plaintiff had submitted one expert report. P’s Report was prepared by Miss Pamela W.I. Lam (“Miss Lam”), Senior Manager of the Valuation Department of Centaline Surveyors Limited. Miss Lam stated in P’s Report that a site inspection was made on 20 May 2009 before the report was issued on 22 May 2009. Miss Lam attended the assessment hearing to give evidence for the Plaintiff. 23.Miss Lam is member of surveyors associations in Hong Kong and United Kingdom. She had previously given evidence as expert in hearings at the Lands Tribunal and the High Court. 24.I accept Miss Lam as expert and I accept P’s Report as expert report. 25.In P’s Report, Miss Lam adopted the methodology of direct comparison. She used the following properties as comparables:
26.The agreement for sale and purchase of Comparable 1 was dated 7 May 2009. The provisional agreement for sale and purchase of Comparable 2 was dated 2 March 2009. 27.Miss Lam made adjustments to the comparables and arrived at her valuation as set out in paragraph 5 above. 28.The Defendant had submitted two expert reports. D’s First Report dated 17 July 2009 was jointly signed by Mr. Thomas Tang and Ms. Carmen Wong. They were Senior Director and Assistant Manager respectively of CB Richard Ellis. 29.The methodology adopted in D’s First Report was also direct comparison. Comparable 1 and Comparable 2 were included as comparables in D’s First Report. 30.D’s First Report further included the following comparables:
31.For the following reasons, D’s First Report was of limited assistance to this Court in this assessment:
32.D’s Second Report was signed by Mr. Tsz-choi Wong (“Mr. Wong”), Associate Director of CB Richard Ellis. D’s Second Report was entitled “A Rebuttal on The Report of Centaline Surveyors”. However, it also contained a corrigendum to D’s First Report and supplementary information on two of the comparables referred to in D’s First Report. In fact, D’s Second Report was also a report supplementary to D’s First Report. Mr. Wong attended the assessment hearing to give evidence for the Defendant. He adopted D’s First Report as part of his evidence. 33.Mr. Wong is also member of the same professional associations of Miss Lam. Although Mr. Wong confirmed that this was his first appearance in Court as expert, I do not see that as a ground for rejecting Mr. Wong as an expert. All experts have their first time in Court. I accept Mr. Wong as expert and accept his report as expert report. 34.As D’s Second Report is supplementary to D’s First Report, it goes without saying that the methodology adopted by Mr. Wong was also direct comparison. 35.In D’s Second Report, Mr. Wong agreed that Comparable 1 and Comparable 2 were the most relevant to this valuation exercise. Mr. Wong adopted Comparable 1 and Comparable 2 as the comparables for his valuation. He made various adjustments to the comparable transactions and reached his conclusion on the value of the Property as at early May 2009. It is interesting to note that Mr. Wong reached the same value for the Property as stated in D’s First Report although Mr. Wong had excluded D’s Comparable A, D’s Comparable B and D’s Comparable C from his valuation. 36.Mr. Wong explained at the hearing that only Comparable 1 and Comparable 2 had been taken into account in reaching the conclusion in D’s First Report. He said that D’s First Report only stated that they were aware of the five comparable transactions but not that all five comparable transactions had been included in their calculations. 37.Mr. Dawes submitted that Mr. Wong had manipulated the adjustments to the comparables in order to come to a pre-determined conclusion, i.e. the same valuation as stated in D’s First Report. Mr. Dawes submitted that Mr. Wong’s valuation was not reliable and Miss Lam’s evidence was preferred. 38.I note this salient feature of Mr. Wong’s valuation. I do not consider Mr. Wong’s above explanation satisfactory. However, it is hasty and unfair to Mr. Wong to reject outright his valuation solely on the above ground without looking into details of his adjustments. I shall treat his adjustments with caution. 39.Mr. Hung relied on the Private Flatted Factories – Rental and Price Indices (the “Indices”) published by the Rating and Valuation Department referred to in P’s Report in the cross-examination of Miss Lam to cast doubt on her valuation. Mr. Hung submitted at the hearing an up-dated version of the Indices which provides figures up to December 2009. He pointed out that according to the Indices, the property price increased by about 3.8% from January 2009 to May 2009 whereas Miss Lam’s valuation suggested that there was an increase of about 32% in the value of the Property from $45,000,000 to $59,200.000 in the same period. 40.Mr. Dawes submitted that the Indices were only supposed to represent the general trend in Hong Kong. They did not reflect the market value of properties in a particular location as the variation between different areas in Hong Kong could be significant. I agree. 41.Mr. Dawes further submitted that no assessment was carried out on the market value of the Property as at January 2009. He suggested that the contract price of the Property stated on the Agreement did not necessarily reflect its market value as many vendors were desperate to realize their properties during the financial crisis. 42.The Plaintiff adduced no evidence to show that the Agreement was not a transaction entered at arm’s length or that the Plaintiff had gotten a good bargain well below the market price. The above submission of Mr. Dawes is wholly without factual basis and I have no hesitation in rejecting the same. 43.The Indices expressly stated at the end that they were indices in respect of upper floor units only. The Indices do not apply to ground floor properties concerning us here. Ground floor units and upper floor units for non-domestic property are very different properties. They are properties of different categories. To rely on indices for upper floor properties to criticize valuation on ground floor properties cannot be justified and is unfair to Miss Lam. 44.Miss Lam admitted at the assessment hearing that she made a mistake in P’s Report in stating that the Property’s frontage onto Hok Yuen Street was 135 feet. Miss Lam corrected that such frontage should be 119 feet. Miss Lam conceded that she might have included the width of the staircases serving the upper floors of the Building in her measurement of frontage for the Property. This was pointed out by Mr. Wong in D’s Second Report. 45.Mr. Hung took issue on Miss Lam not rectifying her mistake by way of a supplemental report before the hearing. I agree with Mr. Hung that Miss Lam should have issued a supplemental report to rectify her mistake but I do not see this as a matter which will affect her capability as an expert or her overall credibility. 46.To evaluate the accuracy of a valuation, we have to go to the basics and look at the justifications for adjustments made to the comparables. 47.There is no dispute on methodology of valuation for this exercise. Both parties’ experts adopted the direct comparison approach which is usually adopted by valuers and is preferred for property valuation especially when suitable comparables are available. COMPARABLES 48.The Property and the five comparables used in the three expert reports of the parties are all premises located on the ground floor within the same locality in the district of Hung Hom. All have street frontage. 49.As stated above, transaction dates for D’s Comparable A and D’s Comparable B were back in October 2008 which were even earlier than the date of the Agreement. In this case, the issue is on change of property price between January 2009 and May 2009. Transactions before January 2009 do not assist. 50.The Property is a property with saleable area exceeding 12,200 square feet. The saleable area of Comparable 1 is about 10,000 square feet and the saleable area of Comparable 2 is over 3,300 square feet. The saleable area of the other three comparables used in D’s First Report ranged between 620 square feet and 788 square feet (i.e. less than 6.5% of the size of the Property). 51.Size of a property has impact on its value. If the difference in size between a comparable and the subject property is great, substantial adjustment has to be made to the comparable. When the adjustment is so substantial, it will render the comparison of little, if not nil, value. 52.In Zhuang PP Holdings Limited & Ors. v Lam How Mun Peter & Ors. (HCA 1589/2003, unreported, 19 August 2009) the Court was concerned with valuation of a basement with a saleable area of 11,388 square feet. Deputy Judge A. To (as he then was) said in paragraph 77:
53.Direct comparison is to compare like with like. The difference in size between the Property and the aforesaid three much smaller comparables make them properties of different categories. These three comparables cannot be considered as “likes” of the Property. It serves no meaningful purpose to compare their value with that of the Property. It is a sensible move of Mr. Wong to agree to use only Comparable 1 and Comparable 2 as comparables for this valuation. 54.It is now common ground of the parties’ experts that only Comparable 1 and Comparable 2 will be used as comparables for their valuation (together hereinafter referred to as “the Comparables”). 55.Although Miss Lam and Mr. Wong were using the same comparables, they still reached significantly different results in their valuations. 56.As explained by the learned Judge in paragraph 94 of Zhuang PP Holdings Limited & Ors. v Lam How Mun Peter & Ors.:
57.Miss Lam and Mr. Wong arrived at different valuations by using the same comparables because they made different adjustments to the Comparables. I shall discuss later in this Decision the different adjustments made by them to the Comparables. Thus the issue before me is “what are appropriate adjustments to be made to the transaction prices of the Comparables”. 58.Despite their differences, Miss Lam and Mr. Wong are in agreement on the following matters:
59.Mr. Wong had also considered “headroom” as an adjustment factor which was not covered by Miss Lam. However, Mr. Wong concluded that no adjustment to the Comparables had to be made on account of this factor. As such, it is not necessary for me to consider adjustment on account of this factor in this Decision. 60.I shall now discuss the differences in their adjustments to the Comparables. ADJUSTMENTS 61.Adjustments made to comparables have to be backed up by analysis on available materials and empirical studies, if available. However, it is inevitable that adjustments made on account of certain factors involve subjective opinion of the valuer when the experience of the valuer comes into play. (A) Time 62.The transaction dates for Comparable 1 and Comparable 2 were 7 May 2009 and 2 March 2009 respectively. The transaction date of Comparable 1 was the date of agreement for sale and purchase. The transaction date for Comparable 2 was the date of provisional agreement for sale and purchase. In Hong Kong, agreement for sale and purchase of real property is often preceded by a provisional agreement for sale and purchase and the transaction price is locked at the date of the provisional agreement. The sale and purchase between the parties herein followed this usual mode only that the formal agreement was not signed because of disputes between the parties. 63.Accordingly, the relevant transaction date of a comparable shall be the date of the provisional agreement if one has been signed. No information had been provided as to whether agreement for sale and purchase of Comparable 1 was preceded by a provisional agreement. Of course, there is no legal requirement that an agreement for sale and purchase has to be preceded by a provisional agreement. In such case, I proceed on the assumption that no provisional agreement had been signed for Comparable 1 and treat the date of the agreement for sale and purchase as the relevant date when the sale price for Comparable 1 was fixed. 64.Miss Lam made no adjustment to the Comparables in respect of the time factor. Miss Lam referred to the Indices, market sentiment and property price trend in months recent to her issuing of her report on 22 May 2009. She formed the view that market prices for properties in April and May 2009 were stable and she proposed no adjustment to the Comparables on this factor. As pointed out in paragraph 43 above, the Indices do not apply to ground floor properties. 65.Furthermore, Miss Lam’s said view does not sit comfortably with her valuation that the value of the Property had increased from $45,000,000 to $59,200,000 from 22 January 2009 to early May 2009. If the property market was stable from 2 March 2009 to May 2009, Miss Lam’s case would be that the value of the Property had increased by over 30% from 22 January 2009 to 2 March 2009. Although the property market of Hong Kong is known for its volatility, no evidence has been adduced to show such strong rebound of the property market in this particular month of February 2009 from the financial tsunami triggered off by the collapse of Lehman Brothers in late 2008. 66.Mr. Wong in D’s Second Report stated that the trough for real estate market in Hong Kong was around February and March 2009 and the property market showed some slight recovery afterward. He therefore adjusted Comparable 2 by 3% upward on the ground that it was transacted on 2 March 2009 when the property market was at the trough. He made no adjustment to Comparable 1 as it was transacted on 7 May 2009 which was the relevant time for this valuation. 67.I agree with Mr. Wong to make no adjustment to Comparable 1 but to make upward adjustment of 3 % to Comparable 2. (B) Location 68.Both Comparable 1 and Comparable 2 are located in Kaiser Estate 2nd Phase (the “Kiser Estate”) which is situated at a corner bounded by Man Lok Street to its east and Man Yue Street to its south. As pointed out above, the Building is bounded by Sung Chi Street on the west, Hok Yuen Street on the south and Man Lok Street on the east. 69.Both the Building and the Kaiser Estate have Man Lok Street at its east. They are just separated by Hok Yuen Street and Kaiser Estate Phase III. 70.Comparable 1 is fronting onto Man Lok Street whereas Comparable 2 is fronting onto Man Yue Street. The Property is at the corner of Hok Yuen Street and Sung Chi Street. 71.Miss Lam in P’s Report stated that Hok Yuen Street was one of the busiest streets of Hung Hom and that Hok Yuen Street was the main pedestrian route connecting Ma Tau Wai Road to the industrial area. There were many bus stops situated along Ma Tau Wai Road. She further stated that the pedestrian flow along this part of Hok Yuen Street was high particularly during peak hours and on-street parking/loading/unloading was allowed in front of the Property. 72.Miss Lam in P’s Report said that the pedestrian flows along Man Lok Street and Man Yue Street were much lower than Hok Yuen Street and Sung Chi Street. She considered that the Comparables were inferior to the Property in terms of location. She made upward adjustments of 25% and 30% to Comparable 1 and Comparable 2 respectively. 73.Mr. Wong in D’s Second Report agreed that Mau Tau Wai Road was a major road in Hung Hom and the portion of Hok Yuen Street where the Property located had benefited from its close proximity to Mau Tau Wai Road and enjoyed moderate pedestrian flow. But he commented that Hok Yuen Street was of one-lane one-way traffic and was narrower than Man Yue Street and Man Lok Street where the Comparables located. 74.Mr. Wong stated that the traffic along Hok Yuen Street was heavy during weekdays for this narrow road. The lay-by areas along the northern side of the road were usually occupied by lorries for loading and unloading. The manoeuvring of large lorries into car parks of nearby buildings caused obstruction to traffic. Mr. Wong considered the traffic condition of Hok Yuen Street as unfavourable. Mr. Wong stated that there were limited temporary parking spaces along Hok Yuen Street but he did not state how many. 75.Mr. Wong in D’s Second Report also gave a relatively detailed description on the trades operating in the vicinity of the Property and the Comparables. 76.He stated in D’s Second Report that “there are various small scale local trades including bakery, restaurants, property agency and electrical appliance retailer on the frontage of the subject property along Hok Yuen Street. Along the branching Sung Chi Street, which is not a proper driveway, the ground floors are mainly devoted for workshops or shops with inferior trades such as recycling company, garage, grocery store, construction material company and clothes mending shop. In particular, several recycling companies of waste paper and scrap metal recycling businesses are occupying the section of Sung Chi Street near its junction with Hok Yuen Street, directly opposite to the subject property. Some large metal cages are placed along the section of street where the subject property is facing. The surrounding environment is therefore considered unpleasant.” 77.Mr. Wong stated in D’s Second Report that the pedestrian flow along Man Lok Street was moderate during daytime and low at night. Mr. Wong further stated that the pedestrian flow along Man Yue Street was higher than Man Lok Street. 78.Mr. Wong stated that Man Lok Street was of two-lane traffic with loading and unloading areas on both sides of the road. Mr. Wong further stated that there were sufficient temporary waiting spaces for tourist buses but he did not state how many. In respect of Man Yue Street, Mr. Wong said that there were loading and unloading areas, most of which underneath the bridge connecting Fat Kwong Street, on the southern side along the two-lane Man Yue Street. 79.In terms of local trade, Mr. Wong stated that in the locality of Comparable 1 which was located along Man Lok Street, there were jewellery shops, outlets and souvenir shops targeting group tourist especially for the portion near its junction with Man Yue Street. On Man Yue Street where Comparable 2 located, Mr. Wong stated that there was a mix of tourist oriented shops and retailers serving local needs, including snack stalls, convenience stores, betting centre and restaurants. 80.Mr. Wong considered group tourists and those working in the nearby buildings as major patrons to the shops along Man Lok Street and Man Yue Street where the Comparables located. He further stated that the residents of Ka Wai Chuen, a public housing estate nearby, also provided certain source of customers to the shops in the vicinity of the Comparables. 81.Mr. Wong was of the opinion that the trade mix along Hok Yuen Street was generally catered for local residents nearby. These trades usually occupied much smaller floor space, comparing with the one-stop outlet stores for tourist along Man Yue Street. This view of Mr. Wong is supported by the number of units sub-divided from the Property as at the date of the Agreement. 82.Mr. Wong stated that with a size of more than 12,000 square feet, it was not easy to find a single tenant to occupy the whole of the Property. This view of Mr. Wong is again supported by the sub-division of the Property. 83.Mr. Wong further stated that it was also difficult to have all the sub-divided units occupied all the times. This view to certain extent is also supported by the fact that one of the sub-divided units of the Property was vacant at the date of the Agreement. 84.Mr. Wong was of the view that to find a single tenant for the whole property or to have all sub-divided units occupied all the times, a very favourable rent had to be offered. There may have some truth in such statement. However, this may not be “the major weakness” of the Property comparing with the Comparables as stated in D’s Second Report. 85.The tenancy schedule annexed to the Agreement showed that the Property with one unit unoccupied provided an annual yield of $3,557,660 (net of management fee, rates and government rent). To compare this yield to the contract price of $45,000,000.00, it provides a net return of about 8% per annum. If the vacant unit is also rented out, the return will be further enhanced. Such return must be considered as very attractive return on investment in the low interest environment prevailing in 2009 and even now. 86.Of course, when the Property is sub-divided into so many units, it is likely that certain units will remain vacant at certain time. This will reduce the earning ability of the Property. But the facts in this case do not suggest that the size of the Property constitutes a “major weakness” of Property. I shall discuss the factor of size later. 87.After his analysis, Mr. Wong nevertheless agreed that the Property was better than the Comparables in terms of location. He made a moderate upward adjustment of 5% and 3% to Comparable 1 and Comparable 2 respectively. He was of the view that Comparable 2 was better located than Comparable 1. Thus less adjustment was made to Comparable 2. 88.Mr. Hung commented that Comparable 2 was sold in November 2000 at the average price of $2,353 per square feet. In contrast, the Property was also sold in November 2000 at the average price of $2,114 per square feet. He submitted that there was no evidence to show that as at 2009 the Building or the Kaiser Estate was very much different from 2000 and the substantial adjustments proposed by Miss Lam to the Comparables were patently excessive. 89.Mr. Dawes submitted that this point had not been raised previously. The experts did not have the opportunity to investigate whether the transactions referred to in 2000 were genuine transactions. He submitted that the prices quoted in the 2000 transactions might not be reliable. He further submitted that the circumstances surrounding the properties in question might be very different in 2000 when compared with 2009 and the experts had not investigated this issue. 90.It is speculative to suggest that the transactions in 2000 were not genuine. However, I agree that the transaction prices in 2000 are of little value to this assessment. Eight years is a long period of time for a dynamic city like Hong Kong and surrounding circumstances to the Property and the Comparables would have been changed significantly. 91.Miss Lam relied mainly on pedestrian flow to justify her adjustments but she provided no empirical data to substantiate her view. No pedestrian flow study or analysis was conducted. 92.In P’s Report, photographs taken on 20 May 2009 were included. They showed the street frontage of the 13 units subdivided from the Property and of the Comparables. They also showed two sections of Hok Yuen Street. 93.D’s First Report also included some photographs of the street frontage of the Property and the five comparables referred to therein as well as interior of shops CD2, CD3 and CD5(b) of the Property. However, no information as to when these photographs were taken was provided. 94.At the assessment hearing, the Defendant adduced further photographs of Hok Yuen Street, Sung Chi Street, Man Yue Street and Man Lok Street. All these photographs were taken on 13 January 2011. The Defendant also adduced photographs taken on 25 January 2011 on street frontage of the Property, the Comparables and the other three smaller comparables referred to in D’s First Report which no longer concerned us. 95.These photographs are far from a systematic empirical study and some of them were taken in 2011, i.e. about 20 months from the relevant date for assessment. They are of little assistance to the Court to form a view on the pedestrian flow at the material times. 96.Miss Lam’s proposed adjustments in 25% and 30% are also subjective. Adjustments to the extent of 25% and 30% to the Comparables are by no mean insubstantial. To justify such substantial adjustments by mere subjective view is unsatisfactory. Strong evidence, preferable empirical evidence, has to be adduced. 97.I agree with Mr. Wong that in considering the factor of location, other than pedestrian flow, trade mix and environment as well as traffic condition in the vicinity shall also be considered. 98.I accept Mr. Wong’s proposed adjustments to the Comparables on location and reject Miss Lam’s proposed adjustments. (C) Size/Quantum 99.Although expert of both parties referred to saleable area of the Property and the Comparables, they provided different figures on saleable area of the Property and the Comparables. 100.The figures of saleable area provided by the Plaintiff for the Property, Comparable 1 and Comparable 2 were 12,478 square feet, 9,943 square feet and 3,396 square feet respectively (“P’s Figures”). The corresponding figures provided by the Defendant were 12,204 square feet, 10,580 square feet and 3,570 square feet (“D’s Figures”). 101.In P’s Report, it was stated that the saleable area of the Property was reached by scaling off from the registered floor plan. The figure was “about” 12,478 square feet and it was stated in P’s Report that the said saleable area was only “approximate”. 102.In respect of the saleable areas of the Comparables, P’s Report also stated that they were scaled off from the registered floor plans. 103.Mr. Wong in D’s Second Report noted the differences between the parties on saleable area and stated that he had checked the differences by re-measuring the floor plans of the Property and the Comparables. Mr. Wong confirmed D’s Figures. 104.At the hearing, Miss Lam did not rebut D’s figures and adduced no evidence to show that P’s Figures were more accurate than D’s Figures. As Mr. Wong had checked the figure differences by re-measuring the floor plans and confirmed D’s Figures, I accept D’s Figures as the saleable areas of the Property, Comparable 1 and Comparable 2. 105.As a matter of fact, the Property is larger than Comparable 1 and much larger than Comparable 2. The parties’ experts were in agreement that the bigger the area, the lower the unit rate. 106.Miss Lam stated in P’s Report that for comparable of smaller area than the Property, downward adjustments were made. Miss Lam proposed a 0.5% adjustment was allowed for every 200 square feet (the “Size Adjustment Formula”). She proposed downward adjustment of 6.3% for Comparable 1 and 22.7% for Comparable 2. Miss Lam provided no study or authority to support the Size Adjustment Formula. 107.There is an inherent defect in the Size Adjustment Formula. According to the Size Adjustment Formula, if a property is 40,000 square feet bigger than the comparable, there will be a downward adjustment of 100% to the comparable. If the property is 80,000 square feet bigger, then the downward adjustment will be 200%. This cannot be right. 108.Mr. Wong also pointed out the problem of the Size Adjustment Formula by his illustration in D’s Second Report. He pointed out that “following the logic of CS (Centaline Surveyors), the size difference would be in the same order of 0.5% for a pair of premises with sizes of 400 sq ft and 600 sq ft (+50% in size) and another pair of premises with sizes of 10,000 sq ft and 10,200 sq ft (+2% in size), which is obviously unjustifiable.” 109.Mr. Wong was of the view that “when comparing two property transactions of similar types but in different sizes, the quantum of difference in the unit rate can be varied for different property types, different market atmosphere and different pattern of supply and demand.” 110.Mr. Wong further stated that: “Unless a very detailed research is carried out for a particular type of property, it is difficult to determine the size difference by simply applying a universal mathematical formula.” I agree. 111.Mr. Wong suggested a downward adjustment of 10% for Comparable 2 and no adjustment for Comparable 1 after allowance on time and frontage. 112.Although both the Size Adjustment Formula and Mr. Wong’s proposed adjustment are subjective opinion not support by any empirical study, Mr. Wong’s proposed adjustment is more sensible than the Size Adjustment Formula. I prefer Mr. Wong’s proposed adjustment to the Size Adjustment Formula of Miss Lam. (D) Frontage 113.There was no dispute between the parties’ experts that frontage would enhance the value of a property. 114.Both parties’ experts agreed that the frontage of Comparable 2 was 47 feet. However, they differed in their measurements of frontage for the Property and Comparable 1. 115.After Miss Lam rectified her measurement to the frontage of the Property onto Hok Yuen Street as set out in paragraph 44 above, her figure was still four feet longer than Mr. Wong’s measurement of 115 feet. 116.The parties’ measurements on frontage of Comparable 1 were also different by one foot. Miss Lam’s measurement was 82 feet whereas Mr. Wong’s measurement was 83 feet. 117.Mr. Dawes submitted that measurement of the approved plan would fetch a result of 117 feet frontage for the Property and that if it was necessary to assess the accuracy of the different figures used, the figure of 117 feet taken from the approved plan should prevail. 118.Mr. Hung pointed out that the figure of 117 feet did not include the thickness of walls and beam. If such thickness was taken into account, the measurement of 115 feet made by Mr. Wong should be preferred. I agree and accept Mr. Wong’s measurement for the frontage of the Property. 119.In respect of the frontage of Comparable 1, as Mr. Wong had re-measured the floor plans to check the parties’ differences, I accept his measurement on the frontage of Comparable 1. 120.Miss Lam proposed that for every foot difference in frontage, 0.2% adjustment was allowed (the “Frontage Adjustment Formula”). Miss Lam provided no explanation or justification for the Frontage Adjustment Formula. She also provided no study or authority in support. 121.Mr. Wong criticized the Frontage Adjustment Formula as unreasonable. He illustrated by an example of two retail shops on the same street next to each other. The larger shop with a size of 10,000 square feet had a frontage of 100 feet and the smaller shop with a size of $1,000 square feet had a frontage of 10 feet. Applying the Frontage Adjustment Formula, the larger shop had a wider frontage of 90 feet, it should fetch a higher unit rate than the smaller shop by 18%. Mr. Wong stated that as the larger shop was actually identical to combining 10 numbers of the smaller shop, despite the size factor, the unit rates should be similar, instead of having a difference of 18%. Mr. Wong commented that adjustments according to the Frontage Adjustment Formula were totally unreasonable and illogical. 122.Mr. Wong in D’s Second Report stated that: “For frontage adjustment, instead of merely looking at the length of frontage, it would be necessary to consider the shop size at the same time. If two properties are of the same size, the one with a wider frontage should demand a higher unit rate than the other. Therefore, it would be beneficial to look at the ratio between the size and frontage of a retail premises.” 123.In adopting the above approach, Mr. Wong found that the ratios for the Property, Comparable 1 and Comparable 2 were about 1:106, 1:127 and 1:76 respectively. He concluded that Comparable 1 was worse and Comparable 2 was better comparing with the Property in terms of frontage. 124.Mr. Wong proposed an upward adjustment of 5% for Comparable 1 and a downward adjustment of 5% for Comparable 2. 125.Mr. Wong’s approach has a conceptual defect in taking into account the size of the properties concerned when considering adjustment on account of frontage. In doing so, he had double counted the effect of the size factor by considering the same matter in the adjustment on account of size and again in the adjustment on account of frontage. 126.In his analysis, Mr. Wong has also overlooked the aggregated effect of frontage. A 100 feet frontage is more valuable and useful to a retailer than ten separate 10 feet frontages. 127.In Ngai Kai-suen v Director of Lands [1994] HKDCLR 123, the Lands Tribunal stated at page 127:
128.After considered the Zoning method the Lands Tribunal concluded (also at page 127) that:
129.The frontage was in issue in this case, but neither valuer used the aforesaid method. Although floor plan of the Property was included in P’s Report and D’s First Report, no evidence had been adduced on the depth of the Property. For the Comparables, even their floor plans were not produced. In such case, I am unable to consider application of the above frontage adjustment methodology to the present proceedings. 130.I am left with the Frontage Adjustment Formula and Mr. Wong’s proposed adjustments. Both are subjective opinion not supported by empirical studies. The Frontage Adjustment Formula is more in line with the approach stated in Ngai Kai-suen v Director of Lands and is more logical than Mr. Wong’s proposed adjustments. Approach similar to that of Mr. Wong was rejected by the Lands Tribunal in the aforesaid case. I prefer the Frontage Adjustment Formula of Miss Lam to Mr. Wong’s proposed lump sum percentage adjustments. 131.I make adjustment to the Comparables in accordance with the Frontage Adjustment Formula by reference to the measurements of frontage agreed by the parties or checked by Mr. Wong, as the case may be. There will be an upward adjustment of 6.4% for Comparable 1 (i.e. 115 feet – 83 feet x 0.2% = 6.4%) and 13.6% for Comparable 2 (i.e. 115 feet – 47 feet x 0.2% = 13.6%). (E) Age 132.The Property was completed in 1979 whereas the Comparables were completed in 1978. Occupation permit for the Property was issued on 10 January 1979 and occupation permit for the Comparables was issued on 20 December 1978. In other words, the Comparables are three weeks older than the Property. Miss Lam proposed an upward adjustment of 0.5% to the Comparables to reflect the slight younger age of the Property. 133.Mr. Wong stated in D’s Second Report that the Property was completed in February 1979 whereas the Comparables were completed in December 1978. There were no significant difference in external condition between the Property and the Comparables. Hence, he made no adjustment to the Comparables for building age and building condition. 134.Age difference of a few weeks for buildings of 30 years old will not have impact on their unit price if their external conditions are of no difference although such age difference straddles two years. 135.I make no adjustment to the Comparables on account of building age. TENANCY 136.The Property was agreed to be sold to the Plaintiff subject to its then existing tenancies. Most of them were still subsisting in early May 2009. 137.P’s Report added a value of $200,000 on account of this factor which is about 0.34% of the value attributed to the Property by Miss Lam as at early May 2009. 138.Mr. Wong made adjustment to the Comparables and reached the same valuation of $43,000,000 as in D’s First Report. As pointed out in paragraph 6 above, the valuation in D’s First Report valued the Property subject to existing tenancies. No evidence had been adduced to show whether the comparable transactions were on vacant possession basis or subject to tenancies. P’s Report showed that the Comparables were vacant as at 20 May 2009. It is more likely than not that the comparable transactions were on vacant possession basis. In such case further adjustment has to be made on account of “subject to tenancy”. 139.As I have stated above, D’s First Report is of little value to this assessment. Mr. Wong had not addressed the issue of “subject to tenancy” in D’s Second Report. The only evidence available to this Court on this factor is the opinion of Miss Lam. 140.I have pointed out above that the then existing tenancies to the Property provided a very good return as an investment. Such return will certainly enhance the value of the Property. The proposal of Miss Lam to add 0.34% on account of this factor to the value of the Property on vacant possession basis is reasonable. I agree to this adjustment. SUMMARY AND CONCLUSION 141.According to my above rulings, the unit rate of the Comparables before adjustments are as follows: Comparable 1: $31,000,000÷10,580 sq. ft. = about 2,930/sq. ft. Comparable 2: $12,500,000÷3,570 sq. ft = about $3,501/sq. ft. 142.I make the following adjustments to the Comparables:
143.The parties agreed that no adjustment was required for layout/configuration. I rule that it is not necessary to make adjustment for building age. 144.After the above adjustments, the unit rates of the Comparables in saleable area are as follows: Comparable 1: $2,930/sq. ft. x 121.4% = about $3,557/sq. ft. Comparable 2: $3,501/sq. ft. x 119.6% = about $4,187/sq. ft. 145.The average adjusted unit rate of the Comparables is $3,872 per square feet of saleable area ([$3,557 + $4,187] ÷ 2 = $3,872). Adopting this rate to the Property, the market value of the Property with vacant possession as at early May 2009 was $47,253,888 (i.e. $3,872 x 12,204 sq. ft. = $47,253,888). 146.The value of the Property is enhanced by its then existing tenancies in the sum of $160,663 being $47,253,888 x 0.34%. I assess that the market value of the Property subject to existing tenancies but otherwise free from encumbrances was $47,414,551 as at early May 2009. 147.The difference between the contract price and the market price as at early May 2009 of the Property is $2,414,551. This is the damages which the Defendant shall pay to the Plaintiff for its breach of the Agreement and I so order. 148.I make an order nisi for the Defendant to pay to the Plaintiff interest on the said sum of $2,414,551 at judgment rate from date of Writ to the date of Interlocutory Judgment and thereafter also at judgment rate until payment in full. 149.I also make a costs order nisi against the Defendant in favour of the Plaintiff for the assessment of damages proceedings. 150.The above orders nisi shall become absolute after 14 days from the date hereof unless any party shall apply to vary the said orders within this 14 days period.
Mr. Victor Dawes, instructed by Messrs. Tony Kan & Co., for the Plaintiff. Mr. Andy Hung, instructed by Messrs. Fan Wong & Tso, for the Defendant. | |||||||||||||||||||||||||||||||||||||||
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