Hero Progress Ltd v. Ting Ping Kwan Billy and Others
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LDCS 13000 / 2010 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LAND COMPULSORY SALE APPLICATION NO. 13000 OF 2010 __________________ BETWEEN
___________________ Coram : Deputy Judge KOT, Presiding Officer and Mr. W.K. LO, Member of the Lands Tribunal Date of Hearing : 18 July 2011 Date of Judgment : 18 July 2011 Date of Reasons for Judgment : 25 July 2011 _________________ REASONS FOR JUDGMENT _________________ 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 Sub-section 3 of Section B of Inland Lot No. 675 (No. 4A South Lane, Hong Kong ) and Sub-Section 4 of Section B of Inland Lot No. 675 (No. 6 South Lane, Hong Kong) (collectively referred to as “the Lots”). 2.After hearing evidence and submissions before us, judgment was granted in favour of the Applicant on 18 July 2011 with an order for sale made under the Ordinance accordingly. This is the written reasons for the judgment. The Application 3.The existing building (“the Building”) on the Lots is a commercial/residential building consisting of 7 levels (excluding the roof), namely, the basement floor, the ground floor and the 1st to 5th floors. There are 2 units at each level, one unit at No. 4A and the other at No. 6. There is a common staircase serving the Building, with the entrance at the ground floor connecting up to the main roof. According to the Occupation Permit, the Building was completed on 31 May 1961. 4.The Applicant was the registered owner of 6 out of 7 units of No. 4A and the entire lot at No. 6. Each unit being given one undivided share, the Applicant owned the average of 92.857% of all the undivided shares of the Lots. The Tribunal is satisfied that the Applicant is entitled to make this Application pursuant to Section 3(1) of the Ordinance. 5.The outstanding unit, namely 2nd Floor of No. 4A (“the R1’s Unit”), was registered in the sole name of Mr. Ting Chi Tung (“the Late Mr. Ting”) who passed away on 29 March 2009. There was no grant of probate or letters of administration being granted in respect of the late Mr. Ting’s estate. By an order dated 4 January 2011, the 1st Respondent was appointed by the Tribunal to represent the estate for the purpose of these proceedings and it is ordered that these proceedings be carried on against the 1st Respondent. The 1st Respondent’s stance in this trial is that he agrees to the order sought by the Applicant. 6.The R1’s Unit was mortgaged to the 5th Respondent and the 5th Respondent in turn sub-mortgaged it to the 6th Respondent. By a letter dated 1 November 2010, the 5th Respondent also confirmed it had no objection to the order sought subject to and without any prejudice to its legal right and interest in respect of the premises against the mortgagor in connection with this Application. The 5th and 6th Respondents also gave notice that the sub-charge between them was discharged by a partial Release dated 20 May 2011. Determination of the existing use values (“EUV”) of all units in theBuilding 7.Under section 3 of the Ordinance, the Applicant may make an application accompanied by a valuation report as specified in Part 1 of Schedule 1, prepared not earlier than 3 months before the date of the Application, containing the assessments of the EUV of all units in the Building on the Lots. 8.Under section 4(1)(a), if there is a dispute between the parties on the EUV of the units in the Building on the Lots, the Tribunal has to determine the values. 9.Section 4(1)(a) further provides that, “(ii), in the case of any minority owner of the lot who cannot be found, requiring the majority owner of the lot to satisfy the Tribunal that the value of the minority owner’s property as assessed in the application is- (A) not less than fair and reasonable; and (B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.” 10.The present Application made on 25 October 2010 was accompanied by a valuation report dated 15 October 2010 prepared by Mr. Kam-Hung Yu of CBRE (“Mr. Yu”). In the valuation report, the date of valuation was stated to be 20 August 2010. Mr. Yu estimated the EUV of the R1’s Unit at $2,357,000 and the total EUV of all units in the Building on the Lots at $36,775,000. Therefore, the ratio of the EUV of R1’s Unit and the total EUV of all units is $2,357,000 / $36,775,000, or 6.4092%. 11.The Applicant decided to engage the service of another valuation consultant / expert, Mr. Charles Chan of Savills (“Mr. Chan”), who also was called as an expert witness. Before the hearing, Mr. Chan has filed a supplemental valuation report dated 11 May 2011 and further, close to the hearing date, a valuation report dated 7 July 2011. The first report covered the assessments of the EUV of the units in the Building whilst the latter report dealt with the RDV and the Reserve Price for the proposed auction, which we shall refer to later in this Judgment. 12.In Mr. Chan’s valuation report of 11 May 2011, he estimated the EUV of all the units in the Building including that of R1 as at the date of valuation of 20 August 2010 (i.e. same as that of Mr. Yu’s valuation report accompanying the Application). He gave detailed accounts of his valuation, including analysis of comparables for different types of properties found in the Building, his reasons for the adopted adjustments and finally, his opinion of values. In particular, he summed up that, in comparing his assessed EUVs with those of Mr. Yu, “except with the basement units which fetch a difference of about 30%, other units are at a margin of difference of less than 10%.” Mr. Chan considered that “a difference of less than 10% is within a reasonable range as far as valuation is concerned.” As for the basement units, although Mr. Chan agreed that the transactions of industrial units were suitable comparables he did not quite agreed with some of the valuation adjustments of Mr. Yu. Having gone through all the reports, we accept the valuation of Mr. Chan, including the direct comparison method of valuation and the choice of market comparable transactions with suitable adjustments. 13.The following schedule shows the EUV of all units in the Building as at 20 August 2011, assessed by Mr. Chan and accepted by this Tribunal:
This shows that the EUV of the R1’s Unit and the total EUV of all units to be $2,320,000 and $35,920,000 respectively, with a ratio of about 6.4588%. This gives the R1’s Unit a higher ratio when compared with the previous assessment as shown in the Application’s valuation report. Nevertheless, the Applicant raised no objection for the Tribunal to accept the EUV assessments of Mr. Chan. 14.We note that 1st Respondent has not raised any dispute on the EUV as shown in the valuation report accompanying the Application. However, as the probate of the late Mr. Ting’s estate has not been completed, we take the view that it falls within the provision of section 4(1)(a) of the Ordinance, where if “the minority owner cannot be found” , the Tribunal could determine the EUV to ensure that the EUV of the minority owner’s unit is “not less than fair and reasonable”. Therefore, we determine that for the purpose of this Application, the EUV of all units in the Building, including the R1’s Unit are as stated in the schedule shown above. 15.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 said Schedule, the proceeds are to be apportioned on the basis of the EUV as determined by this Tribunal above, in the event that the Tribunal has varied the EUV as assessed in the Application under section 3(1) of the Ordinance. Reserved Price for the Auction 16.The Applicant submitted that the Reserve Price for the auction of the Lots should be fixed at $56,400,000, which was assessed by Mr. Chan as the redevelopment value (“RDV”) of the Lots as at 7 July 2011 in his valuation report of the same date (Exhibit A5). The 1st Respondent did not oppose this assessment. 17.We have carefully considered Mr. Chan’s valuation of the RDV of the Lots. We note and agree with him that although there were direct land sale transactions in the past 12 months, they were all not suitable for direct comparison purpose because of the substantial difference in terms of development scale and potential between the Lots and the sales comparables. We also agree with him that as a last resort, the residual method has to be employed as the method of assessment of the RDV of the Lots. 18.We have gone through his valuation in details. We agree with him in the valuation assumptions he has adopted, the values and the costs parameters that he has used in his valuation. We only take issue with him in his estimation of the unit rate for the residential component of the optimum hypothetical development to be developed on the Lots. Instead of using his estimated figure of $156,000 per sq. m, we decide to use $173,000 per sq. m. with the result that the estimated total gross development value of the development is $100,869,100. Deducting the same total cost of demolition and construction, in the sum of $20,405,262, the residual balance becomes $80,463,838. After allowing for developer’s profit of 15%, we estimate the residual land value to be $69,968,555. This we shall round off to $70,000,000. 19.Based on our finding above that the open market value of the Lots reflecting its redevelopment potential, i.e. the RDV of the Lots, as at 7 July 2011 is $70 million, we decide that this should be the reserve price for the auction of the Lots. Justification for Redevelopment 20.The second determination under Section 4(1)(b) of the Ordinance is whether the order of compulsory sale should be made. According to Section 4(2) of the Ordinance, this would involve 2 statutory requirements, namely :-
21.The Applicant has to satisfy this Tribunal that the above statutory requirements were met, otherwise, an order of compulsory sale ought not be granted. 22.As for the requirement under (a) above, the Tribunal had taken into consideration the expert opinion of Mr. Benson Wong (“Mr. Wong”), the Building Surveyor, Mr. So Kin Shing (“Mr. So”), the structural engineer and Mr. Chan, the valuation surveyor. 23.Mr. So had conducted a structural assessment of the Building and prepared a report dated 27 April 2011. He concluded that the structural frames of the Building are in need of repair as the Building has reached the end of its design working life given that the Building was designed for a design working life of 50 Years. Cracks and spalling are found in the slabs, beams and columns. Carbonation depth test results revealed that the alkaline environment in the concrete covers which give protection to the reinforcement bars in structural members against corrosion have been very extensively destroyed. There is increased risk of corrosion in the embedded steel reinforcement bars in the structural members. All the steel reinforcement bars exposed from corrosion survey locations exhibit rust of various magnitudes. The deterioration will continue steadily due to extensive carbonation of the concrete and it is inevitable that new defects will occur and previous defect though repaired, will recur with repair work needed to be carried out regularly in future. The Building cannot meet the current structural engineering design requirements and the structural performance of the structural frames of the Building may have been adversely affected. 24.Mr. Wong in his report dated 12 May 2011 stated the state of repair of the Building and made recommendations on the costs on restoring the Building to a minimum acceptable standard especially in terms of safety and health aspects. He found that many features and facilities which would nowadays be expected to be standard provisions in a residential/commercial building are missing, e.g. no lifts provided, lack of proper refuse disposal provision, omission of a condensate drainage system for air conditioning units installed externally. The obsolescence of the Building also gives rise to real safety concerns. The Building has not been renovated to meet the upgraded construction standards and statutory requirements regarding fire alarm system, fire hydrant and hose reel system, emergency lighting system, handrails for the upper staircase and the basement staircase which are fire escape routes, fire resisting doors to the staircase, fireproof enclosures for exposed electrical meters and cables installed in fire escape route, missing of equipotential bonding connections to metal components, secondary electricity supply system and lightning protection system. He found defects around the facades including spalling and cracking of the concrete to the raised edges above windows and wall copings, mild steel windows are vulnerable for corrosion and water leakage, cracking and de-bonding of the external wall rendering with many hollow spots on it and staining and peeling of paintwork particularly on the external walls to the rear and side elevations. He concluded that defects found cannot be easily made good and substantial repairs are required to be carried out in order to restore the Building to the tenantable standard. He estimated the total cost of immediate repair works at HK$3,641,798. He also compared the repair cost with the construction cost of a new existing building estimated by the Quantity Surveyor at HK$9,159,530 and concluded that the repair cost amounting to over 39% of the unit new building cost is very substantial and this substantial repair cost indicates that the deterioration of the Building is very serious and obsolete. 25.In his Supplemental Report dated 11 May 2011, Mr. Chan conducted the “Repair Test” to ascertain the enhancement of the value of the Building that the recommended repairs would bring. He found the enhancement in value to the Building due to the repair works to be 5% for the domestic portion of the Building. Applying the enhancement percentage to the market value of the Building, he estimated the enhancement in value after completion of all remedial works recommended by Mr. Wong, to be about HK$1,306,000. Compared the repair cost estimated by Mr. Wong with the estimated enhancement in value, he is of the opinion that the repair works are not economically viable and not economically justified. 26.By way of the “Age Test”, Mr. Chan assessed the EUV of the Building and the RDV of the Lots and examined the various forms of obsolescence of the Building. He concluded that the substantial difference in the 2 valuations reflects what the market perceived to be the difference in value between the aged existing building and what new buildings can offer and redevelopment of the Lots is justified from the economic perspective. 27.This Tribunal accepted the evidence of the experts which are sound and supported by the facts. Having considered the opinion of the experts, this Tribunal accepted that the condition of the Building is not up to tenantable standard and is substantially below the usual standard for human habitation and it had already reached its expected 50 year design life. Without extensive repair at unreasonable high costs, the Building was unfit for habitation. This Tribunal is satisfied that the redevelopment of the Lots is justified due to the age and state of repair of the Building. 28.Mr. Mok for the Applicant had brought the Tribunal’s attention to the recent Court of Appeal judgment of Fineway Property Ltd v Sin Ho Yuen Victor (CACV 95 of 2009) which gave a specific warning of applying the tests formulated in the case of Intelligent House Ltd v Chan Tung Shing & others [2008] 4 HKC 421. Since this Tribunal is satisfied with the facts and expert opinions adduced before us that the redevelopment is justified due to the age and repair of the Building, it is no longer necessary for the Tribunal to apply the tests formulated in Intelligent House for disposal of this Application. Reasonable Steps Taken 29.The Applicant is under an obligation to negotiate on terms that are fair and reasonable in a situation when the whereabouts of a minority owner are known. Because of the death of the Late Mr. Ting and no grant of probate or letters of administration has been granted in respect of his estate, no offer can be accepted on behalf of the minority owner due to a lack of the required legal status. This Tribunal accepted that this is effectively the same as if the whereabouts of this minority owner are unknown and the Applicant is not duty bound to make an offer. 30.If the Tribunal’s finding as above is wrong, this Tribunal accepted the evidence of Mr. Lai Wah Kong, the Site Agent of the Applicant that an offer of $4 million had been made to the personal representative of the Unit by a letter dated 15 October 2010. The 1st Respondent had indicated his agreement to sell the R1’s Unit to the Applicant but owing to the lack of probate or letters of administration, parties cannot proceed to any binding sale and purchase. 31.Adopting the test formulated in Capital Well Ltd v Bond Star Development Ltd [2005] 4 HKLRD 363, the Tribunal is not required to conduct a valuation exercise in assessing whether the offer is reasonable. The Tribunal merely needs to be satisfied that the offer falls within the range of what may broadly be regarded as fair and reasonable. 32.The present application was filed on 25 October 2010. The offer made on 15 October 2010 is $4 million. Mr. Chan assessed the RDV of the Lots at $56,400,000. Adopting the figure of 6.4588% found in paragraph 13 above, the pro-rata share of RDV of the Unit is at about $3,642,763. This pro-rata share when compared with the offer of $4 million, the offer is clearly within the fair and reasonable range when broadly assessed. 33.Even if adopting the Tribunal’s finding of the RDV, we are also of the view that the Applicant’s offer is fair and reasonable and it does fall within the broad range of compensation of the R1’s Unit. It is not necessary for the offer to beat the valuation as if it were a payment into court. The Applicant did rely upon its expert opinion to formulate the purchase price offered and there is no contrary evidence to suggest that the expert advice is not properly made. Conclusion 34.Having considered the above, this Tribunal is satisfied that the requirements and conditions as laid down in the Ordinance have been met and an order for compulsory sale sought by the Applicant should be granted. We made the order accordingly.
Mr. Y C Mok, instructed by Messrs Gallant Y. T. Ho & Co. for the Applicant Mr. Derek T L Hu, instructed by Messrs K. B. Chau & Co for the 1st Respondent 5th Respondent absent 6th Respondent absent | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment