Siu Sau Kuen v. The Director of Lands

Read the full judgment text of LDLR 1/2010 on BabelCite. This Lands Tribunal judgment was delivered on 9 March 2012.

1. This is an application made by the applicant on 23 March 2010 for determination of the amount of compensation to be paid in respect of the resumption of “1/6th equal and undivided parts and shares of and in the Remaining Portion of New Kowloon Inland Lot No. 1497 and of and in the appurtenant thereto together with the right to the exclusive use occupation and enjoyment of messuage, erections and buildings known as No. 426A Un Chau Street, Cheung Sha Wan, Kowloon together with the sole and exc

Cited by 10 cases · Cites 5 cases

Please refer to CACV180/2012 for the relevant appeal(s) to the Court of Appeal.
Case No.LDLR 1/2010[2012] 2 HKC 75[2012] 2 HKC 76
Court
Lands Tribunal
Date09 Mar 2012
Judge
Case Document
100%Judiciary

LDLR 1/2010

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Lands Resumption Application No. 1 of 2010

________________

BETWEEN

  SIU SAU KUEN Applicant
  and  
  THE DIRECTOR OF LANDS Respondent

________________

Before: HH Judge M Wong, Presiding Officer of the Lands Tribunal and Mr Kenneth Kwok, Temporary Member of the Lands Tribunal
Dates of Hearing:
16-20 May 2011, 8, 9, 12, 14, 16, 19 & 20 September 2011, 4 & 31 October 2011 and 10 November 2011
Date of Judgment: 9 March 2012

_______________

JUDGMENT

_______________

BACKGROUND

1.This is an application made by the applicant on 23 March 2010 for determination of the amount of compensation to be paid in respect of the resumption of “1/6th equal and undivided parts and shares of and in the Remaining Portion of New Kowloon Inland Lot No. 1497 and of and in the appurtenant thereto together with the right to the exclusive use occupation and enjoyment of messuage, erections and buildings known as No. 426A Un Chau Street, Cheung Sha Wan, Kowloon together with the sole and exclusive right and privilege to hold use occupy and enjoy the Ground Floor of the said messuages erections and buildings” (“the Property”) pursuant to section 6(3) of the Lands Resumption Ordinance, Cap 124 (“the Ordinance”).

2.The applicant was the registered owner of the Property and used it as a shop for processing and selling glass.  By notice of resumption dated 7 July 2005 and published in Gazette Notice No. 3331, the government resumed the Property for the implementation of the development proposal “K21” by the Urban Renewal Authority in association with the Hong Kong Housing Society.  The applicant and the respondent could not agree on the amount of compensation payable to the applicant and hence the applicant makes the present application.

3.There is no dispute that the Property comprised a shop on the Ground Floor together with a cockloft at No. 426A Un Chau Street in Cheung Sha Wan, Kowloon.  The Property formed part of a building which was a 6-storey tenement building completed in 1956.  The site area of the land upon which the building was erected is 100.34 m² including scavenging lane.  According to the approved building plans, the Property was designed for shop uses.  The government lease under which the Property was held was unrestricted in general, except for offensive trades.

4.Under the Cheung Sha Wan Outline Zoning Plan No. S/K5/28 dated 12 August 2005, the Property was zoned for "Residential (Group A)" uses as at the date of resumption. The Property was resumed for implementation of the development proposal K21 at Castle Peak Road/Hing Wah Street/Un Chau Street.  Together with development proposals K20, K22 and K23, the four development proposals form part and parcel of a large resumption scheme.

5.In the Notice of Application, the applicant claimed for a sum of $7,727,610.00 as the market value of the Property.  The applicant also claimed for a disturbance payment of $19,396,301.10 or $49,224,160.00.  Nevertheless, at the trial, the applicant amended the claim for the market value of the Property to a sum of $56,951,770.00 and confirmed that there is no longer any claim for disturbance payment.

6.In support of the application, the applicant’s valuation expert, Mr Wong Yung-shing (“Mr Wong”) of Dynasty Premium Asset Valuation & Real Estate Consultancy Limited, gave a valuation report dated 3 December 2009, in which Mr Wong opined that:-

(1) “according to the scientific method of assessment, the reasonable total amount of statutory land valuation to the claimant as at 15th October, 2005 in its existing use and state, with the benefit of immediate vacant possession, and without the problem of 3rd parties’ interests in the affected property, is HK$56,951,770.00 …  This value is the maximum amount of acquisition price that might be expected to realize by the affected owner out of her own willingness according to the Section 12(d) of the relevant Ordinance under the ‘as-of-right’ conditions of the Government Lease, the current town planning controls and the building regulations at the date of valuation.”

(2)  “However, according to the performance in the general market, … the affected owner should be paid not less than HK$27,123,911.10 by way of bare negotiation and mutual agreement with the acquisition institutions under the circumstances of private acquisition for redevelopment to a larger density and upon the compliance with the 'as-of-right' conditions of the Government Lease, the current town planning controls and the building regulations at the date of valuation.”

(3)  “According to the direct comparison method for assessment of the market value on the basis of “existing use and state”, the market value of the affected property is HK$7,727,610.00.”

7.In his Supplementary Statement dated 15 November 2010, Mr Wong added that since the market value of the Property means the "full market value of the land taken", the reasonable amount of resumption compensation can be equivalent to either one of the following 10 scenarios:-

“(a) under Section 10(2)(a) of Cap. 124 and principle of common law basis (Horn v Sunderland Corp (1941)) with reference to the definition of "value to the owner" embedded in Section 12(d) of Cap. 124

in line with the Judge Cruden's advice for the case of solitary purchaser. The form of resumption compensation may be divided into two heads – ‘present’ market value of property plus development land value:

(i) Section 10(2)(a) - HK$8,126,081.00 for the part of 'present market value in existing (lawful) use and state; plus Horn v Sunderland Corp (1941) - HK$20,396,463.31, for the part of development land value which is the loss to the affected owner; or

(ii) Section 10(2)(a) - HK$8,126,081.00 for the part of 'present' market value in existing (lawful) use and state; plus Horn v Sunderland Corp (1941) - HK$48,825,689.00, for the part of development land value which is the loss to the affected owner; or

(iii) Section 10(2)(a) - HK$8,126,081.00 for the part of 'present' market value in existing (lawful) use and state; plus Horn v Sunderland Corp (1941) - a value between HK$20,396,463.31 and HK$48,825,689.00 for the part of development land value which is the loss to the affected owner; OR

(b) wholly under Section 10(2)(a) of Cap. 124

(i) either HK$28,522,544.31

(ii) or HK$56,951,770.00

as the whole full market value of the affected property; OR

(c) under Section 10(2)(a) & 10(2)(b) of Cap. 124

(i) Section 10(2)(a) - HK$8,126,081.00 for the part of 'present' market value in existing (lawful) use and state plus Section 10(2)(b) - HK$20,396,463.31 for the value of the right in the land resumed, owned, held, or enjoyed by a claimant at the date of resumption. The right is the proprietary right or the legal entitlement of assigning the property to a third party purchaser in the competitive market at a higher value shown in Appendix VI(c) of my First Valuation Statement; or

(ii) Section 10(2)(a) - HK$8,126,081.00 for the part of 'present' market value in existing (lawful) use and state plus Section 10(2)(b) - HK$48,825,689.00 for the value of the right in the land resumed, owned, held, or enjoyed by a claimant at the date of resumption. The right is the proprietary right or the legal entitlement of assigning the property to a third party purchaser in the competitive market at a higher value shown in Appendix VI(d) of my First Valuation Statement; or

(iii) Section 10(2)(a) - HK$8,126,081.00 for the part of 'present' market value in existing (lawful) use and state plus Section 10(2)(b) - a value between HK$20,396,463.31 and HK$48,825,689.00 for the value of the right in the land resumed, owned, held, or enjoyed by a claimant at the date of resumption. The right is the proprietary right or the legal entitlement of assigning the property to a third party purchaser in the competitive market at a higher value shown in Appendix VI(c) of my First Valuation Statement; OR

(d) wholly under Section 10(2)(b) of Cap. 124

a higher compensation value not less than the average premium ratio of 3.51 (= ranging from 3.42 to 3.65) times to the present market value in existing lawful use and state on the date of valuation (= Multiplier 3.51 x Existing Use Value HK$8,126,081.00 = HK$28,522,544.31), when the claimant can freely and is entitled to exercise her exclusive (proprietary) right of selling her affected property to an acquiring entity in the open competitive market as if the instant resumption scheme does not occur.

(e) wholly under Section 10(2)(a) of Cap. 124 on the basis of existing (lawful) use and existing state with reference to the best evidence

Since EUV-3 is most proximity to the affected property accurately reflecting the parameters of the affected property for its market value, it is likely the best comparable. Adopting my adjustment to the different parameters of the Comparable EUV-3 in the Appendix VI(b) of my First Valuation Statement, the reviewed most reasonable amount of the market value of the affected property will be :

Adjusted Unit rate of EUV-3 x Effective total saleable area of the affected property

= HK$9,776,09 sq.ft.’S x 851.56 sq.ft.’S

= HK$8,324, 927.20

(f) wholly under Section 10(2)(a) of Cap. 124 on the basis of existing (lawful) use and existing state with reference to the average adjusted unit rate of 4 comparables

The market value of the affected property is accordingly HK$8,126,081.00.”

8.The respondent contends that the applicant’s claimed amount is not properly assessed under the Ordinance and the claim is considered to be excessive.  The respondent’s valuation expert, Mr Lai Wah Chi (“Mr Lai”) of AA Property Services Limited, gave a report dated 2 September 2010 and opined that the amount of compensation payable to the applicant for the resumption of the Property under the Ordinance should be $4,569,000.00.  Mr Lai is of the views that the statutory principle of “value to the owner” as submitted by Mr Wong should be rejected and that compensation for the resumption of the Property should be assessed on the basis of “market value” as defined by the Hong Kong Institute of Surveyors in paragraph VS3.1 of its Valuation Standard on Properties (first Edition 2005), namely:-

“Market Value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”

9.Thus, although Mr Wong and Mr Lai both agree that the compensation should be based on the market value of the Property, they seem to have different interpretations on the basis of assessment for the compensation payable to the applicant.

RELEVANT STATUTORY PROVISIONS

10.Section 10 of the Ordinance provides that:-

“(1) The Tribunal shall determine the amount of compensation (if any) payable in respect of a claim submitted to it under section 6(3) … on the basis of the loss or damage suffered by the claimant due to the resumption of the land specified in the claim.

(2) The Tribunal shall determine the compensation (if any) payable under subsection (1) on the basis of-

(a) the value of the land resumed and any buildings erected thereon at the date of resumption;”

11.Section 11 of the Ordinance provides that:-

“(1) When any property is resumed, the Lands Tribunal in determining the compensation to be paid and in estimating the value of the land resumed and of any buildings thereon, may-

(a) take into consideration the nature and existing condition of the property, and the probable duration of the buildings in their existing state, and the state of repair thereof; and

(b) decline to make any compensation for any addition to or improvement of the property made after the date of the publication in the Gazette of the notice of intended resumption (unless such addition or improvement was necessary for the maintenance of the property in a proper state of repair):

Provided that, in the case of any interest acquired after the date of such publication, no separate estimate of the value thereof shall be made so as to increase the amount of compensation.

(2) The Lands Tribunal may also receive evidence to prove-

(a) that the rental of the buildings or premises was enhanced by reason of the same being used as a brothel, or as a gaming house, or for any illegal purpose; or

(b) that the buildings or premises are in such a condition as to be a nuisance within the meaning of any Ordinance relating to buildings or to public health, or are not in reasonably good repair; or

(c) that the buildings or premises are unfit and not reasonably capable of being made fit, for human habitation.

(3) If the Lands Tribunal is satisfied by such evidence, then the compensation-

(a) shall, in the first case, so far as it is based on rental, be based on the rental which would have been obtainable if the building or premises had not been occupied as a brothel, or as a gaming house, or for an illegal purpose; and

(b) shall, in the second case, be the amount estimated as the value of the building or premises if the nuisance had been abated or if they had been put into reasonably good repair, after deducting the estimated expense of abating the nuisance or putting them into such repair, as the case may be; and

(c) shall, in the third case, be the value of the land and of the materials of the buildings thereon.”

12.Section 12 of the Ordinance provides that:-

“In the determination of the compensation to be paid under this Ordinance-

(a) no allowance shall be made on account of the resumption being compulsory;

(aa) no account shall be taken of the fact that the land lies within or is affected by any area, zone or district reserved or set apart for the purposes specified in section 4(1)(a), (c), (d), (e), (f), (g), (h) or (i) of the Town Planning Ordinance (Cap. 131);

(b) no compensation shall be given in respect of any use of the land which is not in accordance with the terms of the Government lease under which the land is held;

(c) no compensation shall be given in respect of any expectancy or probability of the grant or renewal or continuance, by the Government or by any person, of any licence, permission, lease or permit whatsoever:

Provided that this paragraph shall not apply to any case in which the grant or renewal or continuance of any licence, permission, lease or permit could have been enforced as of right if the land in question had not been resumed; and

(d) subject to the provisions of section 11 and to the provisions of paragraphs (aa), (b) and (c) of this section, the value of the land resumed shall be taken to be the amount which the land if sold by a willing seller in the open market might be expected to realize.”

BASIS OF ASSESSMENT

13.From the above statutory provisions, it is clear to us that the applicant should be compensated on the basis of “the value of the land resumed and any buildings erected thereon at the date of resumption” (section 10(2)(a) of the Ordinance), and that the value of the land resumed, subject to the provisions of sections 11, 12(aa), 12(b) and 12(c) of the Ordinance, shall be taken to be “the amount which the land if sold by a willing seller in the open market might be expected to realize” (section 12(d) of the Ordinance).

14.In other words, the compensation payable to the applicant should be assessed on the basis of the open market value of the Property.  The wording in section 12(d) of the Ordinance is not quite the same as the definition used by the Hong Kong Institute of Surveyors mentioned above, but the concept is more or less the same.  It still denotes an objective assessment based on the open market value.

15.We agree with Mr Lai that it is wrong for Mr Wong to rely on the principle of “value to the owner” or to say that this principle is embedded in section 12(d) of the Ordinance.  The concept of “value to the owner” denotes a subjective assessment and has ceased to apply in Hong Kong since 1921 when section 12(d) was first enacted under the Crown Lands Resumption (Amendment) Ordinance 1921.  In his book Land Compensation & Valuation Law in Hong Kong (3rd ed), p 102-103, Judge Cruden gave a succinct account of the no longer applicable concept of “value to the owner” as follows:-

“Special value is a historical land compensation principle which no longer applies in Hong Kong. In other common law jurisdictions, the term was and in some is still concerned with an element of the higher value a property might have to the owner compared to the lower value of the same land to a resuming authority. The value to the owner was generally higher than open market value. At times, it also came to be used either to include or separately describe disturbance compensation. The concepts of ‘value to the owner’ and ‘special value’ ceased to apply in Hong Kong when in 1921 statutory changes replaced compensation for land resumed from the subjective basis of value to the owner to the objective assessment of the open market value of land.

Despite these important statutory changes, the term ‘value to the owner’ and to a lesser extent ‘special value’ has lingered on at the highest judicial level.  This, if fortunately declining practice, is not only wrong but can be misleading.  Although it did not on the facts affect the outcome, the Privy Council in recent years in applying Hong Kong resumption law, while at times correctly referring to open market value, has also used the terms ‘value to the owner’ and ‘special value’: Shun Fung Ironworks Ltd v Director of Buildings and Lands [1995] 2 AC 111 at 125.  More recently, Lord Millett in Director of Lands v Yin Shuen Enterprises (2003) 6 HKCFAR 1 when observing that English and Hong Kong land compensation law were generally the same, also listed the first relevant English compensation assessment principle as the value of the land to the claimant.  That was only an accurate statement of English law until 1919 and of Hong Kong law until 1921.  The no longer applicable concept of ‘value to the owner’ was replaced in both jurisdictions in 1919 and 1921 respectively by similar statutory amendments.  Hence Lord Millett’s statement in 2003 is no longer good law.  These recent judgments emphasise the importance of using correct current statutory and common law compensation terminology.  Otherwise errors of this magnitude can result in valuations being carried out on a fundamentally wrong basis.  Although special value is no longer part of Hong Kong compensation law, an awareness of its history is useful, when considering the extent to which judgments referring to special value are otherwise relevant to Hong Kong.”

16.We agree with Judge Cruden’s views as aforesaid.  We do not find it correct for Mr Wong to use the concept of “value to the owner” or to suggest that such a concept is embedded in section 12(d) of the Ordinance.  In determining the compensation payable to the applicant, the basis of assessment should just be the open market value as stipulated in section 12(d) of the Ordinance, ie “the amount which the land if sold by a willing seller in the open market might be expected to realize”.

RELEVANT DATE

17.According to section 10(2)(a) of the Ordinance, the relevant date for determining compensation is “the date of resumption”.  In his valuation report, Mr Wong submits that the Notice of Land Resumption for the Property was published in Gazette Notice No. 3331 dated 7 July 2005 and the date of resumption is 7 October 2005.  Mr Wong further submits that the date of reversion and the date of valuation are both 15 October 2005.  In Mr Wong’s evidence, the date of resumption is different from the date of reversion.

18.Mr Lai, on the other hand, submits that the date of resumption and the date of reversion are the same.  As the notice of resumption dated 7 July 2005 and published in G.N. 3331 stated that the Property would be resumed after the expiration of 3 months from the date of the affixing of the notice, and the notice of resumption was affixed to the Property on 15 July 2005, reversion took place on 15 October 2005 upon expiration of the 3-month notice period.  Thus, the date of valuation should be 15 October 2005.

19.In our view, although Mr Wong agrees that 15 October 2005 is the valuation date, his opinion that the date of reversion and the date of resumption are different is clearly flawed.  It is clearly stated in the notice of resumption G.N. 3331 that the Property “shall be resumed and revert to the Government … on the expiration of THREE months from the date of the affixing of this notice to the said land.”  Thus, both the date of reversion and the date of resumption should be 15 October 2005, being the expiration of 3 months from the date of affixing of the notice of resumption to the Property on 15 July 2005.  The date of valuation should therefore be 15 October 2005.

PLEADING POINT

20.The respondent objects to the applicant asking us to determine the “development land value” of the Property as it is not a claim included in the Notice of Application.  We do not agree with the respondent in this aspect.  There is only one claim made by the applicant and that is “the value of the land resumed and any buildings erected thereon” pursuant to section 10(2)(a) of the Ordinance.  The applicant is not making a separate claim for “development land value”, but merely alleges that the value of the land includes “development land value”.  The respondent is well aware of this issue as it was mentioned in the applicant’s expert reports.  We see no prejudice to the respondent by making determination of this issue.  The Notice of Application in the Lands Tribunal is strictly speaking not a pleading.  As long as the issues are clearly identified and the parties are not prejudiced in any way, we are entitled to proceed with the determination of the issues, including this issue on the “development land value” of the Property.    

THE ISSUES

21.Mr Mak, counsel for the applicant, identifies the following main issues in this case:-

“(a) The existence of Development Value.

(b) Residual Value Method.

(c) The "Premium Ratio" point.

(d) Existing Use Value point.

(e)   "Without Prejudice Offers" point.”

22.Mr Mak summarizes the applicant’s case as follows:-

(1) The compensation of the interest resumed is entitled to include development value.

(2) If there is little or even total lack of evidence of likelihood of development, the Court will do its best, by making a discount, perhaps a substantial discount, to measure that value (see Transport for London(formerly London Underground Ltd) v Spirerose Ltd (in administration)[2009] I WLR 1797).

(3) The extent of that development value is normally measured by reference to the residual value method, discounted by the likelihood of development.  The figure advised by the applicant’s expert is $56,951,770.

(4) Another bench mark is the compulsory sale of unwilling owner holding minority undivided share.  In the speech of the Secretary for Development, a ratio or multiplier of 2.66 may be expected and in the event of the auction under an order of the Tribunal, the owner will get his percentage share of the profit in the land by way of development potential.

(5) Adopting the premium ratio approach, in the present case, comparables were adopted and a ratio or multiplier of 3.51 was arrived at.  The figure advised by the applicant’s expert is $27,123,911.10.  Alternatively, if the premium ratio is 3.44, this will give $26,582,978.40 (3.44 x $7,727,610).  The applicant does not apply mechanically the ratio of 2.66.

(6) Under the existing use valuation, this is arrived at by a direct comparison method.  The figure as advised by the expert is $7,727,610.

(7) Theobjectionto without prejudice correspondence is totally misplaced.  The respondent has withdrawn its objection of the first offer and had failed to object to the content of the applicant’s expert report with references to the offers.  The respondent has waived its rights to object.

23.Mr Mak also makes it clear in his oral closing submission that he does not wish to go into the minor issues on valuation, but would leave them to the Tribunal for determination.

24.On the other hand, Mr Lam, counsel for the respondent, submits that the sole issue in the proceedings herein is the appropriate amount of compensation to be paid under section 10(2)(a) of the Ordinance, but it requires the Tribunal to determine the following matters:-

(a) What are the measurements of the Property and how should the ancillary areas (cockloft, yard etc.) be converted to arrive at the effective floor area for the purpose of valuation?

(b) What is the valuation obtained by using market comparables (called existing use value (EUV) by the applicant’s expert, but which the respondent says is already the “market value” under section 12(d) of the Ordinance)?

(c) Should a premium be added to the value at (b) above to reflect the redevelopment value of the Property and if so how much?

25.We shall deal with all these issues below.

DEVELOPMENT VALUE

26.Mr Mak submits that in determining the compensation for the resumption of the Property, the applicant is entitled to include development value, and the Property was ripe for development.

27.Mr Mak relies on Tak Shing Investment Co Ltd v Director of Lands, Crown Lands Resumption Reference No. 23 of 1995, where the Tribunal found the existence of development potential on the basis that the area was ripe for redevelopment, because of the age of the buildings and their location within the vicinity.

28.Mr Mak submits that the applicant does not need to show the existence of likelihood of development with adjoining buildings at the date of resumption.  All that the applicant needs to show is that the Property has the ability to be considered as having development potential.  Once this is accepted then it is a matter of estimating the quantum of development value.  So long as the applicant can redevelop the lot, and so long as this is not excluded by the provisions under section 12 of the Ordinance, she should be entitled to claim development value, on top of the existing use value.

29.Mr Mak further submits that there is no impediment for individual owners of units within a single building coming together and agreeing to combine their undivided shares to enable them to sell the combined interest to benefit from the development value of their combined interests.  The only difference between single ownership and multiple ownerships is in the time that it would take the multiple owners to agree to join together. 

30.Mr Mak also submits that section 12(d) of the Ordinance requires valuation on the basis of a "willing seller".  If the land owner cannot negotiate or sell at the best value he could obtain in the open market, he is not a "willing seller".  The best value in a piece of land that has no restriction of planning (ie under Residential Group A zoning), with unused plot ratio, and can redevelop without the need to apply for modification of the lease terms, must be the market value that includes development value.

31.On the other hand, Mr Lam submits that in the assessment of development value, a two-stage approach ought to be adopted:-

“(a) Stage One: Whether it is more likely than not that such redevelopment will, in a no-scheme world, take place on the date of resumption; if this question is determined against a claimant, that would be the end of the matter ; and

(b)  Stage Two: If Stage One is determined in favour of a claimant, the Court/Tribunal would then proceed to conduct a valuation of the redevelopment potential.”

32.Mr Lam submits that in Stage One, the approach in this regard was explained by President Power in Cheung Lai-wan v Director of Lands and Survey (wrongly reported as Director of Public Works), [1977] HKLTLR 14, as follows:-

"The Tribunal agrees that In re Lucas and Chesterfield Gas & Water Board is applicable in so far as it lays down, at 31, that when a value exists for possible purchasers, such as redevelopers, 'the owner is entitled to have this value taken into consideration' when compensation is being assessed. ... the Tribunal is satisfied that in broad terms the test to be applied in this regard in Hong Kong is still that laid down by Fletcher Moulton L.J. when he stated, at 30: 'The owner is to receive compensation based upon the market value of his lands as they stood before the scheme was authorized by which they are put to public purposes.  Subject to that he is entitled to be paid the full price for this lands, and any or every element of value which they possess must be taken into consideration in so far as they increase the value to him .'

Mr. Kan also referred to Harding v Cardiff Corporation.  Again the Tribunal accepts the applicability of this decision in so far as it established, at 886, that where 'there might well have been several people ready to buy up properties (in a particular area) with a view to collecting a site worth redeveloping' this factor, must, where it is established to the satisfaction of the Tribunal, be taken into consideration as a factor increasing value when compensation is being assessed.  The Tribunal further agrees that the words 'open market' are to be given the meaning attributed to them in the cases of I.R.C. v Clay and Glass v Inland Revenue ... We respectfully hold that Swinfen Eady L.J., at 475, of the former case, correctly set out the meaning of those words when he said: 'A value, ascertained by reference to the amount obtainable in an open market, shews an intention to include every possible purchaser.  The market is to be the open market, as distinguished from an offer to a limited class only, such as the members of the family. The market is not necessarily an auction sale.  The section means such amount as the land might be expected to realize if offered under conditions enabling every person desirous of purchasing to come in and make an offer, and if proper steps were taken to advertise the property and let all likely purchaser know that the land is in the market for sale.'

These authorities establish that if it is shown that a property has an added value on the open market because of the likelihood that it will be incorporated into a scheme of redevelopment then this added value must be taken into account when compensation is being assessed.  However before such a value can be attributed to the property the likelihood of redevelopment must be shown.  It must be established, as it was to the satisfaction of the Tribunal in Harding's case, that 'there might well have been several people ready to buy up properties ... with a view to collecting a site worth redevelopment.'  What the Tribunal was there saying was that they were, on the evidence before them in that claim satisfied on the balance of probabilities, of the existence of this possibility.

What the Tribunal in the present case must ask is whether or not we are so satisfied. ... Having considered the matter the Tribunal feels that the redevelopment value of the sites on the evidence as it stands is so remote that it cannot be given any real weight."

33.Mr Lam further submits that Cheung Lai-wan is in line with later cases such as Million-Add Development Ltd & Anor v Secretary for Transport [1997] CPR 316 and Joy Take Development Ltd & Others v Director of Lands [2008] 6 HKC 232, and in short, in cases where a claimant claims compensation on the basis that the piece of land in question would be jointly developed with other pieces of land, the Court/Tribunal requires to be satisfied that it is more likely than not that the joint development would, but for the compulsory acquisition, occur on the date of resumption.

34.As to Stage Two, Mr Lam submits that after being satisfied on a balance of probabilities basis that compensation ought to be paid for redevelopment potential, the Court/Tribunal would then go on to look for comparables which have the same potential as the subject property, so as to give a value to the potential.  This is the reverse of the scenario in View Point Development Ltd & Another v Secretary for Transport [2004] 2 HKC 52, where the Court had to look for comparables without redevelopment potential.  Such an approach is also in line with Maori Trustee v Ministry of Works [1959] AC 1 and Transport for London (formerly London Underground Ltd) v Spirerose Ltd (in administration), supra, where the Court reiterated that compensation ought to be paid for “unrealized possibilities”, not for “realized possibilities” (see also Judge Cruden’s book, supra, p126).

35.Mr Lam submits that, in the present case, no compensation ought to be paid for any development value because:-

(a)  But for the scheme, the chance of the Property being redeveloped together with all the other units in K21, or being acquired for the purpose of such redevelopment, at the date of resumption is remote; and

(b) The applicant has failed to prove such redevelopment value, by way of suitable comparables or other methodology, even assuming that such value in theory exists.

36.Although we agree with Mr Mak’s submission that in determining the compensation for the resumption of a property, the claimant is entitled to include development value (if so justified), we also agree with Mr Lam’s two-stage approach in assessing the compensation for development value.

37.In our view, Cheung Lai-wan sets out the test which the Tribunal should apply in the assessment of compensation payable to an owner of a property with development value.  Applying Cheung Lai-wan and considering Stage One, we have to examine if there were people ready to buy up properties in the subject lot with a view to collecting a site worth redeveloping. 

38.There is no evidence before us that the owners of the subject lot were related to each other, or offers had been made to acquire their interests, other than from the respondent or the Urban Renewal Authority in association with the Hong Kong Housing Society.  Applying the well established Pointe Gourde principle (Pointe Gourde Quarrying and Transport Co v Sub-intendent of Crown Lands [1947] AC 565), we should ignore the offers made under the K21 scheme.

39.According to Mr Wong, a developer, Yue Tai Hing or its associate companies, bought 3 properties at 422 Un Chau Street within K21 over a period of 12 years before 2005.  Other than this, there is no evidence before us that of the 350 odd owners in the whole K21 site, there was any other majority owner. In fact, according to Mr Wong’s own evidence, since 1985, in the vast area of Sham Shui Po covered by the plan at p 2235 of exhibit “A7”, there were only 45 redevelopment projects as listed in p 2237 of Exhibit “A7”.  This is in line with observations during the site visit on 18 May 2011, where only sporadic redevelopments were seen, and they were relatively new and tall buildings surrounded by a sea of old Chinese tenement buildings.

40.We agree with the respondent that it is exactly because redevelopment by private developers in the area was too slow that the Urban Renewal Authority had to step in and implement the development proposals K20, K21, K22 and K23.  It is undisputed that, within the K21 area, there were 291 domestic premises and 59 non-domestic premises, of which the Property was only one. There were about 24 to 25 Chinese tenement buildings within the Scheme area, mostly of 4 or 5-storey high.  The building in which the Property was situated was 6-storey high, with one unit on each floor.  Over the years, there had been very little acquisition activities going on in the K21 area. The information produced by the applicant shows that since the year 1983, there were only three suspected acquisition transactions within the area, and among these three transactions, two were no more than loan activities not directly related to acquisition (it was only when the borrower defaulted in payment that the lender might be able to foreclose the properties).  None of the suspected acquisition transactions occurred in the building in which the Property was situated.

41.Mr Wongagreed during cross-examination that the applicant might have to wait forabout 10 years to have the Property developed, and he contended that the applicant had the financial ability to hold on to the Property for another10 years. However, whether or not the applicant would be able to hold on to the Property for another10 years or not is totally beside the point. The relevant date is the date of resumption, ie 15 October 2005.  We have to consider the situation back in 2005.  There is no evidence or no sufficient evidence to suggest that at the date of resumption, “there might well have been several people ready to buy up properties … with a view to collecting a site worth redevelopment” (see Harding v Cardiff Corporation (1971) 219 Estates Gazette 885).

42.The case of Tak Shing Investment Co Ltd, supra, is different from the present case.  In that case, it was held that in the assessment of development value, regard should have been made to the 2 flanking adjacent sites which were owned by one single owner.  In the present case, almost all the owners in K21 were different.  No single lot was owned by one owner.  We are not satisfied that in a no-scheme world, there were several people ready to buy up properties in the subject lot with a view to collecting a site worth redeveloping on the date of resumption.  We are not satisfied on the balance of probabilities that there was existence of this possibility.  Thus, we do not find that there was any likelihood back in 2005 to have the Property redeveloped.  In the circumstances, the applicant has failed to prove that the Stage One test in Cheung Lai-wan is satisfied.

43.Furthermore, we also agree with Mr Lam that the applicant has failed to prove the existence of development value by way of suitable comparables.  In the course of Mr Wong’s examination in chief in May 2011, we invited him to provide comparables which might already reflect the development value, so that the development value, if any, could be taken into account while using the direct comparison method.  However, Mr Wong fails to produce any suitable comparables.

44.In Nam Chun Investment Co Ltd v Director of Lands, CACV335 of 2003, Hon Rogers VP said that:-

“Section 12 (d) requires the value to be taken as the amount that would be agreed between a willing buyer and willing seller. The best way of assessing compensation in accordance with these provisions is to take the amount of comparables as the starting point for the assessment. If the comparables taken are true comparables in terms of lease conditions and town planning orders, they will produce a result which reflects the value required to be taken under section 12(d).”

45.Our suggestion to Mr Wong to look for comparables which might already reflect the development value follows the observation of Hon Rogers VP. However, there was no such comparable produced by the applicant.

46.As a matter of fact, as we shall examine later, in assessing the market value of the Property, Mr Lai produces 4 comparables, RC6, RC8, RC9 and RC10, which are shops in buildings of 8-storey high and may reflect the development value, if any, of the Property.

47.We also note that if the applicant is not willing to sell unless she could obtain a price which includes development value from either a developer or an investor, then the applicant is not a willing seller in the open market.  In Director of Buildings and Lands v Shun Fung Ironworks Ltd [1995] 2 AC 111, Lord Nicholls of Birkenhead said that:-

"The purpose … is to provide fair compensation for a claimant whose land has been compulsorily taken from him.  This is sometimes described as the principle of equivalence.  No allowance is to be made because the resumption or acquisition was compulsory; and land is to be valued at the price it might be expected to realise if sold by a willing seller, not an unwilling seller.  But subject to these qualifications, a claimant is entitled to be compensated fairly and fully for his loss.  Conversely, and built into the concept of fair compensation, is the corollary that a claimant is not entitled to receive more than fair compensation: a person is entitled to compensation for losses fairly attributable to the taking of his land, but not to any greater amount.  It is ultimately by this touchstone, with its two facets, that all claims for compensation succeed or fail." 

48.We are of the view that by insisting that she would only sell to someone offering a price which included development value, the applicant would not be compensated as a willing seller and she would be compensated more than fairly as mentioned in the case of Shun Fung Ironworks Ltd, supra.  This would not satisfy the requirement in section 12(d) of the Ordinance.

49.Mr Mak, however, submits that if there is little or even total lack of evidence of likelihood of development, the Tribunal will do its best, by making a discount, perhaps a substantial discount, to measure that value.  Mr Mak relies on the case of Spirerose, supra, to suggest that the potential for development has to be valued by discounting for future uncertainties, and as said in that case:-

"the principles applicable were that the value of land the subject of compulsory acquisition was its open market value, any depression in the price that it might be expected to fetch caused by the scheme was to be disregarded, the valuation had to take into account its potential, including its potential for development, and that potential had to be valued by discounting for future uncertainties".

50.Mr Mak also relies on Potter v London Borough of Hillingdon [2010] UKUT 212 (LC). It was held by the English Lands Tribunal in that case that a prospective purchaser would have paid the full potential development value of the land resumed but that any such potential value must be discounted for delay and risk.

51.Mr Mak further relies on Tsang Chun Ki & Wong Yuet Sin v Director of Engineering Development, MTR Reference 2 of 1984, where the Tribunal held that redevelopment potential existed and the likelihood of redevelopment may also be established by different and far less positive evidence.  For example, in Director of Lands & Survey v Cheung Ping-kwan (1978) HKLTLR 101, there was evidence of redevelopment in the vicinity of the resumed property but no evidence of any redevelopment plans for the resumed property.  The Tribunal inspected the locality and from that merely visual evidence was prepared to find that a merger of the resumed property with two of its neighbours “was likely within a foreseeable time scale and that such a merger would result in a viable redevelopment scheme.”

52.We do not agree that either Spirerose or Potter is applicable, as they were concerned with valuation of the whole site in question.  Here we are dealing with only 1/6th share in the subject lot.  Not until the owners in the subject lot have joined together, there is no question of valuing development value of the subject lot.  Likewise, Cheung Ping-kwan is not applicable as it was concerned with a site and there was evidence that it could be developed with the adjourning sites.

53.Although Tsang Chun Ki was concerned with a flat, it is still different from the present case in that the assessment was based on the evidence from a comparable.  It only establishes that if redevelopment value is proved to exist, the valuation may be made by applying a discount to the value of the comparable on vacant possession basis, rather than subject to tenancy.  It does not help the applicant in the present case.

RESIDUAL VALUATION

54.We have already held that there was no evidence to reflect development value in the Property, and hence the applicant fails to satisfy us at Stage One.  Nevertheless, for the sake of completeness, we shall still deal with Stage Two below.

55.As advised by Mr Wong, the applicant claims compensation including development value of the Property by reference to residual valuation, and before any discount is given for the extent of likelihood for development by merger of site, the value is at $56,951,770.

56.In his assessment, Mr Wong first of all determines the land value of the whole site comprised in the K21 scheme by residual valuation.  He then apportions the land value to the subject lot by the proportion of the site area of the subject lot to the total site area of K21.  Mr Wong then further apportions the value so ascribed by the existing use value of the Property bears to the existing use value of all the units on the subject lot.

57.Mr Mak submits that in a compulsory sale order granted under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545, the Lands Tribunal is required to include development potential in the determination of the reserve price.  The aim is to protect minority owner.  If a minority owner is to be protected in an order for sale by the majority, it is difficult to see why the applicant, being also a minority owner, should not be protected similarly.  Otherwise there can be no sufficient balance of the right and interests of the owner and that of the public interest.

58.In our opinion, residual valuation is just one of the methods to value development value.  It is a means to an end.  However, by adopting this approach, the applicant would be compensated for value that she would not be able to establish, had there not been any resumption.  This is not in line with the principles in Maori Trustee and Spirerose, supra. It is clearly not appropriate to use the residual valuation method in the present case when there was no evidence to support any development value.

59.We also find it inappropriate to relate Cap 545 with the Ordinance.  Cap 545 concerns with the situations where there will definitely be redevelopment.  The Ordinance only concerns with the open market value of the property in question at the date of resumption, and redevelopment (apart from the one intended for the resumption which should not be taken into account) would not necessarily happen.  The two ordinances operate under completely different situations and criteria.  Under the Ordinance, compensation is to be assessed in a “no scheme world”; whereas under Cap 545, the minority owner will have a share of the prospect of redevelopment reflected in the auctioned price.  Thus, we do not see any merit in the applicant’s argument.

PREMIUM RATIO

60.As an alternative, the applicant claims compensation by reference to the premium ratio approach suggested by Mr Wong.  By multiplying a ratio or multiplier of 3.44 to the existing use value of $7,727,610, Mr Wong arrives at a sum of $26,582,978.40.

61.Mr Mak accepts that this is a novel approach.  He quotes the speech of the Secretary for Development that a ratio or multiplier of 2.66 of the existing use value of a property may be expected by the owner in the event of an auction under an order for compulsory sale of the Lands Tribunal pursuant to Cap 545.

62.According to Mr Wong, the premium ratio represents the historic difference between purchase offers resulting in development and those that do not result in development. This ratio, according to his assessment, should be 3.51.  He submits that the systematic approach to arrive at 3.51 is a reasonable approach.  The starting point is to select appropriate comparables, which consists of 45 redevelopment sites in the vicinity of the Property.  13 comparables are then selected to examine the unused plot ratio and planning use.  In his analysis, only 38 Hing Wah Street (with a multiple or Premium Ratio of 3.46) and 477-487 Shun Ning Road (with a multiple or Premium Ratio of 3.42) appear to be suitable comparables.  These two comparables are sufficiently good for comparison with the subject lot.  In particular, the 38 Hing Wah Street development includes two of the shop comparables of the respondent, which must be assumed to be good equivalents with the subject lot.  If 12-22 Davies Street is included, the average is 3.51.  If not, the average premium ratio is 3.44.  Applying 3.44, the claim is $26,582,978.40.

63.Mr Lam, on the other hand, submits that this approach ought to be rejected without further ado. According to Mr Wong himself, as stated in his report, the acquisition price that a developer is willing to pay depends on the stage of acquisition.  It is undisputed that the Hing Wah and Shun Ning acquisitions were at a very late stage (if not the last batch) of acquisition.  The price that a developer might be willing to pay for these acquisitions is totally irrelevant to what he might be willing to pay to buy the Property (assuming there was an interested developer around), which was situated in a site in respect of which there was hardly any acquisition activity at all.  The sample size is in any event too small for any generalization.

64.Mr Lam also comments on the premium ratios calculated from the Hing Wah, Shun Ning and Davies acquisitions.  For the Hing Wah acquisition, Mr Lam submits that the exercise is of no value whatsoever because of the following:-

(1) Adjustments have to be made for a host of other factors and the accuracy of such adjustments gravely affects the accuracy of the exercise.

(2) Substantial adjustments have to be made for size and time, thus making the resulting figure unreliable.

(3) In calculating the price without redevelopment value, an average is taken between two sets of figures which are substantially apart (one in the region of $12,000 and the other $8,000).  Such an averaging exercise is meaningless.

(4) The transacted sale at G/F, No. 27A Hing Wah Street is very close in age and nature to the Property, but Mr Wong claims that it has no redevelopment value.  If there is no redevelopment value in the transacted sale, why is there such value in the Property?

(5) The same “market value on basis of Existing Use Value” is used for both the 1st and 2nd acquisitions, when the difference in price index between the time of these two acquisitions differed by as much as 46.07%.

65.For the Shun Ning acquisition, Mr Lam submits that the exercise is again futile because:-

(1) The exercise combined shop and residential premises. Mr Wong admits under cross-examination that the premium which a developer is willing to pay for residential premises may be different from shop premises.

(2) The adjustments for other factors also make the exercise valueless.

(3) 3 shop comparables in Po On Road were used to calculate the existing use value.  Vast adjustments for location, size and time are required, gravely affecting the accuracy of the exercise.

(4) After adjustment, shop premises are even cheaper than residential premises.  This makes a mockery of the entire exercise.

(5) In any event, the resulting figure is only in relation to the situation in 1999, and has little relevance to the situation in 2005.

66.For the Davies Street acquisitions, Mr Lam queries that although analysis has been done for both domestic and shop premises, only premium ratio related to shop premises is used by Mr Wong, and it was a waste of time to analyse domestic premises.  He submits that the exercise is also futile because:-

(1) Davies Street is situated in Hong Kong Island.  Mr Wong admits under cross-examination that there may be a great difference between the premium that a developer is willing to pay for land in Hong Kong Island and the premium for land in Sham Shui Po.

(2) Some of the shop premises used for the calculation of existing use value were built in the 1960s.  If they had no redevelopment value, why would the Property have such value?

(3) Substantial adjustments have to be made for other factors.

67.We agree with Mr Lam’s analysis of the weakness and unreasonableness of the premium ratio approach advocated by Mr Wong.  We would add that in the samples cited to us, the premium ratio ranges between 2.66, being the average of some of the Cap 545 cases, and 3.65, for a development site in Davies Street.  Even in Mr Wong’s evidence, he only identifies 13 sites out of 45 redevelopment sites in the vicinity of the Property for examination.  Of these 13 sites, only 2 are suitable comparables according to Mr Wong.  In the end, he has to rely on a transaction in Davies Street on Hong Kong Island to support his approach.  We are very doubtful of the accuracy and reliability of Mr Wong’s novel approach.  It is extremely arbitrary.  We do not accept that the premium ratio approach is used by professional valuers in assessing the market value of properties with development potential.  In our view, there are other more conventional and well tested valuation methods which can be applied to value the compensation payable to the applicant.  We therefore do not accept Mr Wong’s proposed premium ratio approach, even if the Property had development value.

MARKET VALUE

68.We agree with the respondent that the direct comparison method is the best approach in valuing the market value of the Property.  Although Mr Wong alleges that this approach only reflects the existing use value, we do not agree with him and are of the view that this approach can assess the true market value of the Property.  If the Property had any development value, it would also be reflected in the comparables.

The Property

69.When we had site inspection in May 2011, we found that the areas covered by the development proposals K21 (which encompassed the Property) and K22 (which were on the opposite side of Un Chau Street) had become development sites.  Hence, we have to rely on the photographs produced and the evidence adduced by the parties to ascertain the situation back in 2005.  Mr Wong produced some video clips taken at the junction of Un Chau Street and Cheung Wah Street between 25 September and 31 October 2010. However, we do not find these video clips helpful, as they were not taken at the Property and they were taken only about 7 months earlier than our site visit, but still some 5 years after the valuation date.

70.Mr Wong describes the Property as located at or very near to the junction of Cheung Wah Street and Un Chau Street.  This is rather misleading and we cannot agree.  As a matter of fact, the Property was not located at the junction of Cheung Wah Street and Un Chau Street.  As can be seen on the plans shown to us at the hearing (for example, the plan at page 2235 of Exhibit “A7”), it was located almost in the middle between Cheung Wah Street and Hing Wah Street.  This is not the same as “very near” to the junction of Cheung Wah Street and Un Chau Street. 

71.Mr Wong also alleges that the Property had a strategic position, in that it was placed at the centre of a large number of residential buildings clustered with low to middle income accommodation.  On the evidence, we note that these “residential buildings” were just old tenement buildings.

72.Mr Wong places a lot of emphasis in advocating that a minibus terminus of 7 routes is located just across the street and that a large number of passengers setting down are expected.  Although we cannot step back to 2005, during our site inspection in May 2011, we were able to see the minibus terminus at Un Chau Street as it stood in 2011.  There is no evidence produced by both parties that there was any substantial difference between 2005 and 2011, in so far as the minibus terminus is concerned.

73.Before the hearing, Mr Wong and Mr Lai had different views on some of the measurements and the calculation of the effective floor area of the Property.  At the end of the hearing, the two experts were able to narrow down the differences.

74.The agreed measurements of the Property are:-

(1) Ground Floor  63.47 m²

(2) Yard    23.88 m²

(3) Headroom  2.743 m

75.The following items are not agreed:-

Item Mr Wong Mr Lai
Area Conversion Factor Area Conversion Factor
(a) Area under staircase 5.20 m² 1/2 4.04 m² 1/2
(b)  Covered yard 23.88 m² 1/4 23.88 m² 1/6
(c) Enclosed cockloft 19.91 m² 1/2.5 21.24 m² 1/4
(d) Frontage 3.362 m N/A 3.63 m N/A

Area under staircase

76.Mr Mak submits that the applicant can alter any part of her premises to provide maximum use, so long as it is not unauthorized structure.  In the present case there is never any suggestion of unauthorized works.  In Mr Mak’s submission, 5.2 m² is therefore the correct figure to be used.

77.Mr Lam submits that Mr Wong’s measurement is based, not on the approved building plan, but on a new position of an internal staircase apparently constructed without proper authorization.

78.We agree with Mr Lam that since there is no evidence that the new position of the internal staircase is authorized, we should adopt Mr Lai’s calculation rather than Mr Wong’s.  The area should be 4.04 m².

79.We also agree with the conversion factor of 1/2 used by both experts.

Covered yard

80.Mr Wong maintains that since the yard is covered, it should be valued as such.  Since there is no suggestion of any unauthorized work, the yard may be considered to be covered yard, under section 41(3) of the Buildings Ordinance, as exempted works.  He proposes a conversion factor of 1/4.  However, Mr Wong could not produce any evidence showing that the cover is authorized and just argues that the applicant has been using it for a long period of time.  When we raised the question to Mr Wong that if the structure covering the yard was not authorized, this would be unauthorized building works and how would he value unauthorized building works, Mr Wong was evasive.

81.We hold that since there is no evidence that the majority of the covering to the yard was authorized, we prefer Mr Lai’s conversion factor of 1/6.

Cockloft

82.Mr Wong’s area is 19.91 m² and Mr Lai, 21.24 m².  Both experts confirm that their figures were from measurement of plans.  However, their details of measurement or calculation were not shown to us.  Doing the best we can, we determine the area to be 20.58 m² by taking the average of the two figures.

83.Mr Wong adopts a conversion factor of 1/2.5.  To support his methodology, Mr Wong produces 3 sets of "comparables", which are sales analysis of ground floor shops and mezzanine floor commercial units.

84.Mr Lam submits that such an exercise is devoid of meaning because:-

(1)  All three sets of "comparables" are in respect of mezzanine floor premises, which are very different from cocklofts.

(2)  Substantial adjustments have to be made for the other factors (eg size).  The accuracy of such adjustments greatly affects the reliability of the figure advocated by Mr Wong.

(3)  The sample size is too small to be reliable.

(4)  The resulting figures from the exercise range from 30.225% to 31.16%. There is no satisfactory explanation as to why 1/2.5 (i.e., 40%) is adopted by Mr Wong.

85.In response to Mr Lam’s criticism, Mr Mak submits that:-

(1)  The 3 sets of “comparables” are in respect of mezzanine floor, but they are not necessary better in terms of usage, as separate access/ staircase would have to be used.

(2)  Adjustments made are said to be substantial.  However, Mr Lai makes no effort to suggest suitable comparables, and makes no suggestion what adjustments are appropriate.

(3)  Sample size of 3 is not too small.  The comparables are near the locality of the Property.

(4)  The criticism of use of 1/2.5 or 40% is that there is no satisfactory explanation why it should differ from the range of 30.225% to 31.16%.  However, if this is a sensible criticism, it amounts to a suggestion that the conversion factor of 1/3 should be used.

(5)  The rule of thumb is 1/3 which is not substantially different from 1/2.5.  The difference between 1/2.5 and 1/3 is 1/15 which is not a significant difference for the adjusted area.  The difference is actually 1/15 x 23.88 = 1.592 m.

86.On the other hand, Mr Lai adopts a conventional conversion factor of 1/4, which is used in Poon Chao Fai v Director of Lands, LDLR 6 of 1998.

87.We do not accept Mr Wong’s analysis.  A cockloft is very different to a mezzanine floor.  A cockloft is part and parcel of the ground floor, without unauthorized alteration, accessible only from within.  We agree with Mr Lam that Mr Wong’s exercise is devoid of meaning.  After considering the 2 different approaches of the experts, we prefer the methodology of Mr Lai and adopt a conversion factor of 1/4.

Frontage

88.Mr Mak submits that Mr Wong’s figure is less favourable to the applicant.  Both experts have not produced details to support their evidence.  In our view, the minor difference has no bearing on the valuation of the Property.  However, for completeness, we shall adopt 3.5 m as the frontage.

High headroom

89.In the calculation of effective floor area, Mr Wong applies an increase of 10% because the high headroom of 5.18 m of the Property commands 10% higher in value (not in area) than lower headroom of 2.74 m.  Therefore notwithstanding the adjustment is in fact made in the area, this has no difference in impact on the adjustment in value.

90.Mr Lam submits that this approach is unconventional, subjective, and without justification. 

91.In our view, if there is a difference in headroom between the Property and any of the comparables, any adjustment should be made in the analysis of the comparables. Mr Wong’s approach is amounting to double counting.  We reject his methodology.

Effective Floor Area

92.Our assessment of the effective floor area of the Property is:-

Item Area Conversion Factor Effective Floor Area
(1) Ground Floor 63.47 m² N/A 63.47 m²
(2) Area under staircase  4.04 m² 1/2 2.02 m²
(3) Covered yard 23.88 m² 1/6 3.98 m²
(4) Enclosed cockloft 20.58 m² 1/4 5.15 m²

Total
74.62 m²

Direct Comparison Method

93.Between the experts, it is common ground that the Direct Comparison Method should be used as the primary method of valuation.  Both experts analyze comparables and apply the adjusted unit rate to the effective floor area to determine the market value of the Property, although in Mr Wong’s valuation, this is his existing use value. 

94.Mr Wong’s valuation on this basis is $7,727,610 or $8,126,081, whereas Mr Lai’s revised valuation is $4,666,000.

Comparables

95.Both experts are wide apart in the choice of comparables and their appropriate adjustments.  Mr Wong does not agree to any of the 10 comparables of Mr Lai nor Mr Lai to Mr Wong’s 4 comparables.

96.The comparables are:-

Mr Wong’s comparables

Ref. Date of Transaction Location Price Area m²
EUV-1 13/10/2005 Shop 1C, LG/F, $1,570,000 11.61
Lai Bo Garden
38 Cheung Wah Street
EUV-2 5/10/2005 Shop 7A-7C $7,300,000 41.25
Federal Plaza
550-554 Fuk Wing Street
EUV-3 30/9/2005 Shop 1 $1,700,000 8.76
Campion Court
20 Cheung Wah Street
EUV-4 13/9/2005 Shop 2 $12,800,000 58.34
Peaceful Mansion
283 Shun Ning Road

Mr Lai’s comparables

Ref. Date of Transaction Location Price Area m²
RC1 3/4/2006 Shop 14 $3,480,000 48.2
Golden Jade Heights
Nos.482-492 Un Chau Street
RC2 11/11/2005 Shop 3 $2,950,000 32.6
Hing Wah Apartments
38 Hing Wah Street
RC3 11/11/2005 Shop 5 $2,450,000 28
Hing Wah Apartments
38 Hing Wah Street
RC4 14/9/2005 Shop 12 $2,980,000 46.37
Golden Jade Heights
482-492 Un Chau Street
RC5 19/4/2005 Shop A, $5,900,000 92
Lun May Building
386-390 Castle Peak Road
RC6 18/3/2005 G/F, 27B Hing Wah Street $4,000,000 57.13
RC7 21/2/2005 Shops C & D $12,080,000 158.49
Chiu Tak Mansion
373-379 Caste Peak Road
RC8 30/1/2005 G/F, 561 Fuk Wing Street $2,570,000 53.65
RC9 29/1/2005 G/F, 567 Fuk Wing Street $2,980,000 52.78
RC10 25/1/2005 G/F, 383 Castle Peak Road $5,200,000 83.27

Location

97.In Mr Wong’s opinion, one important feature of the Property is that it has a "strategic" position in the locality, which can be regarded as the centre of a hinterland according to the Central Place Theory.  The locality of the Property, particularly at the junction of Cheung Wah Street and Un Chau Street, is the hub of the bustling commercial area serving the local residents and the commercial buildings with the operation of a franchised minibus terminus nearby.  The position of the Property is within the central point of this commercial area.

98.We reject Mr Wong’s opinion outright for the simple reason that if, the position of the Property is at or near the centre of a bustling commercial area, this is not reflected by the uses of the Property and its neighbouring shops which are largely workshop type.  We find no justification in Mr Wong’s adjustments for location in the comparables.

99.In our view, in valuing the Property, it is not necessary to rely on any academic theory, such as the Central Place Theory.  Reference should be based on evidence from analyzing suitable comparables, and making suitable adjustments to relevant factors, such as pedestrian flow. 

100.We have also found earlier that the location of the Property is not at the junction of Cheung Wah Street and Un Chau Street.  There is no merit whatsoever in Mr Wong’s opinion.

Blighted Effect

101.Mr Mak submits that if Mr Lai’s comparables were to be used, any blighted effect due to the resumption should be removed. This proposition is the reverse of the Pointe Gourde principle.  In Melwood Units Pty Ltd v Commissioner of Main Roads [1979] AC 426, 37 acres of land were severed into a north and south block. The Privy Council was satisfied that but for the resumption, planning permission would have been granted for the whole 37 acres. It was held that the Pointe Gourde principle applied in reverse.  Secondly, it was also held that foreknowledge of a road having a depressive effect should be excluded.

102.Mr Mak further submits that in the present case, the blighted effect of K20, K22, K23 projects, or the foreknowledge of these projects, between commencement of negotiation (in 2004) and the resumption date (October 2005) has the impact of reducing the value of the Property.  The effect of the blight operated from the moment when the Hong Kong Housing Society commenced negotiation in July 2004, stating clearly that the Housing Society intended to redevelop comprehensively as an urban renewal project in association with the Urban Renewal Authority, and that it had the right to apply to the Secretary for Housing, Planning and Lands to recommend land resumption.  The scope of the redevelopment did not include K21 alone, but was extended to K20, K21, K22 and K23.

103.Mr Wong rejects Mr Lai’s comparables because in Mr Wong’s opinion, Mr Lai has failed to prove his comparables are suitable because of the blighted effect.  According to Mr Wong, there are two dimensions to the blighted effect.  Firstly the five URA redevelopment projects had a blighted effect on the location factor of Mr Lai’s comparables.  Pedestrian flow was also affected due to people moving out from the URA projects.  Secondly, when people moved out in a substantial form this would render Mr Lai’s comparables not suitable for use.  Mr Wong is of the view that the blighted effect of the URA projects, or the foreknowledge of these projects, had the impact of reducing the value of Mr Lai’s comparables at the valuation date.

104.To establish that Mr Lai’s comparables RC2, RC3, RC5, RC6, RC7 and RC10 are unsuitable because they were subject to blighted effect, Mr Wong makes comparison between the following transactions:-

(a)    RC1 with RC4;

(b)   RC2 and RC3 with RC6;

(c)    RC5 with RC10;

(d)   RC8 with RC9;

(e)    RC1 with RC8 and RC9; and

(f)    RC4 with RC8 and RC9.

105.Mr Lam submits that such an exercise is wholly irrational and pointless, for the following reasons:-

(a)  The combination of comparables chosen for comparison is entirely arbitrary.

(b)  All other adjustment factors are simply ignored and the price difference attributed entirely to time.

(c)   The analysis shows an increase in value with the approach of resumption and beyond.  The exercise negates blighted effect rather than proving it.

106.Mr Lam criticizes Mr Wong contradicts himself in this respect by adopting EUV-3, which Mr Wong calls "the best comparable" and "the best evidence", because EUV-3 is closer to the K21 site than any of the RCs.  If blighted effect did exist, EUV-3 should be the first to be disregarded.

107.After considering carefully Mr Wong’s exercise, we reject his proposition.  In Mr Wong’s opinion, RC2, RC3, RC5, RC6, RC7 and RC10 should not be used because they were subjected to blighted effect.  If Mr Wong wishes to prove his case, he should compare these comparables with Mr Lai’s remaining comparables, ie RC1, RC4, RC8 and RC9 to see if there is any substantial difference in the adjusted rates.  However, all the comparisons of Mr Wong are between either comparables which Mr Wong asserts were subjected to blighted effect, or not subjected to blighted effect.  There is no comparison between comparables with and without blighted effect. We find Mr Wong has failed to prove there was blighted effect in any of Mr Lai’s comparables.

Mr Wong’s Comparables

EUV-1

108.EUV-1 is a shop at Shun Ning Road, near the junction with Cheung Wah Street.  During our site inspection, we find the locality distinctly different to Un Chau Street, without the busy vehicular traffic.  The shop is very small.

109.Mr Mak submits that location should be the primary consideration in deciding whether a comparable is suitable.  Size comes with secondary importance. The logic is relatively simple, no matter how similar the size a potential comparable is, if it is situated in a different district, it would not be a suitable comparable as objectivity and arbitrariness would inevitably arise on adjustment on location and other matters.  On the other hand, difference in size can be made up by relatively simple adjustments to size and perhaps frontage. The small size of EUV-1 is well compensated because of Mr Wong’s -30% adjustment to size.  Such adjustment should not be considered to be too large.  This is because the prices of comparables RC8 and RC9 of Mr Lai have reflected the volatility of the prices, despite their very close proximity to each other. Their transaction prices differ by 17.8%, and despite the transactions differ only by one day.

110.Mr Lam submits that EUV-1 is unsuitable, and ought to be rejected because it is extremely small.  EUV-1’s size is only about 15.4% of the Property.

111.We find EUV-1 not a suitable comparable because it is too small.  We reject it for exactly the same reason as Mr Mak’s reason in not rejecting it.  A -30% adjustment in size speaks of itself.

EUV-2

112.EUV-2 is located at the junction of Castle Peak Road and Fuk Wing Street.  The shop also opens to an internal arcade of the shopping complex. 

113.Mr Lam submits that EUV-2 enjoys triple frontage and is at the busy junction of Castle Peak Road and Fuk Wing Street, close to the industrial area in Castle Peak Road.  It is of a totally different character and class from the Property.

114.Whilst we do not agree to reject EUV-2 as a suitable comparable because of location, we agree with Mr Lam that its triple frontage is of a totally different character from the Property.  We reject EUV-2.

EUV-3

115.EUV-3 is very near the Property, on the same side of Un Chau Street and close to the junction with Cheung Wah Street.  It has a return frontage to a small side lane from Un Chau Street.

116.Mr Mak submits that, similar to EUV-1, the small size of EUV-3 is well compensated because of -35% adjustment to size.  EUV-3 is in close proximity to the Property. Purchase of this property for development purpose should not be discounted. Exclusion of this property only on ground of size is inappropriate.

117.Mr Mak relies on Chung Pui Hing and Tam Wai Ling v The Director of Lands LDLR 2 of 2008, where it was held that the most important factor governing the value of a shop is location.

118.Mr Lam submits that EUV-3 is unsuitable, and ought to be rejected because it is extremely small.  EUV-3’s area is only about 11.6% of the Property.

119.We find EUV-3 not a suitable comparable.  In addition to being too small, EUV-3 has a return frontage to a side lane, making it very different in character to the Property. We also do not understand Mr Mak’s submission that the shop could be purchased for development purposes because the building is fairly new, completed in 1996.

120.Regarding Mr Mak’s reliance on Chung Pui Hing, we observe that despite the remarks of the Tribunal, in the end the comparables adopted by the Tribunal were with sizes ranging from 12.06 m² to 25.81 m², comparing to the size of the subject property in that case of 10.31 m².   

EUV-4

121.EUV-4 is located at Shun Ning Road, directly opposite a wet market.  We find the location completely different from the Property.

122.Mr Lam submits that EUV-4 is right within the market place in Shun Ning Road, and far away from the Property.  It is situated in a locality of totally different character.

123.We agree with Mr Lam that the location of EUV-4 within the market place is totally different to the Property.  We reject EUV-4.

Mr Lai’s Comparables

Measurements of the Comparables

124.All measurements of RCs are agreed between the experts. The only disagreement, which gives rise to different effective floor areas for RC6, RC8, RC9 and RC10, is whether the yard of these comparables ought to be taken into account in the calculation.

125.Mr Wong refuses to take the yards into account, on the ground that service facilities are located in these comparables.

126.Mr Mak submits that the respondent has the burden of proof that the yard in all the comparables is part of the comparable property, that the yard in question could be used for useful purpose.  He relies on Rand Company Ltd v Director of Lands LDLR 7 of 2001, where it was held that as it is not proved that the occupier has used the yard, there being no evidence that the yard forms part of the property, the yard should be excluded. 

127.Mr Lai uses a conversion factor of 1/4. 

128.In our view, there is no evidence that the yard is not part of the comparable.  Rand is not applicable.  However, the size of the yard is very small.  We hold that the appropriate conversion factor should be 1/6.

RC1and RC4

129.RC1 and RC4 are both situated at Un Chau Street, on the same side as the Property.  They are located further along Un Chau Street towards Castle Peak Road than the Property.

130.Mr Wong’s objection to RC1 and RC4 is on the basis that they are of different character from the Property in terms of locality.  They are industrial and distinctly different from the residential character of the Property.  The 2 comparables are situated in a locality comprising printing, metal-ware, car-repair, and logistic trade’s shops.

131.Mr Lam submits that it is however undisputed that the locality of the Property is similarly made up of glass shop, building material shop, metal shop, and locksmith.  The locality at which RC1 and RC4 is situated is even more superior to that of the Property.  Mr Wong’s ground of objection is wholly without merits.

132.We find RC1 and RC4 to be good comparables because they are on the same side of Un Chau Street as the Property, and in close proximity.  From what we observe from our site inspection, we are disturbed to note Mr Wong’s comment that the locality is industrial, which is by no means true.  Except for age, we find the characters of the 2 comparables and the Property are very similar.  The 2 comparables are also directly opposite a mini-bus terminus, similar to the Property as advocated by Mr Wong.

RC2 and RC3

133.RC2 and RC3 are situated at Hing Wah Street, between Castle Peak Road and Shun Ning Road.

134.In Mr Wong’s view, RC2 and RC3 should be considered as one unit.  As a matter of fact, they are used as a single unit, as a restaurant.  Before selling as RC2 and RC3 to 2 different owners, they were bought together by one owner and rented to the same tenant.  Since RC2 and RC3 are used as a single unit, there should not be any size adjustment.  This is because the combined size of the two units is 60.6 m² and the difference with the Property is only 14.14 m². Adopting Mr Lai’s approach, no adjustment on size should be made if the size difference is less than 20 m².

135.Mr Wong is also of the opinion that the 2 comparables are situated in an area which has a much wider road (Hing Wah Street) separated by long and large stretch of flower beds from the other side of the road.  They do not enjoy any advantage of mini-bus stop and has no public transport stops.  They are inferior to the Property.

136.Mr Lam agrees that RC 2 and RC3 are used as a single unit, as a restaurant.  However the two premises were sold to two different purchasers and there is no evidence to show that the two purchasers are related.

137.We find the size of RC2 is only 51.36% of the Property and RC3, 44.12%.  Since they are Mr Lai’s comparables and he adopts them as separate comparables, we conclude that we should not use them as suitable comparables in the present exercise, particularly when there are other more suitable comparables for the purpose of comparison. 

RC5

138.RC5 is situated at Castle Peak Road.  It is next to K20.

139.In Mr Wong’s opinion, the transaction date is 19 April 2005 when a large number of residents in K20 must have moved away.  The blighted effect would have set in and yet no account is taken of this fact by Mr Lai.  The photos exhibited show much less pedestrian flow and prove RC5 being inferior to the Property.  Castle Peak Road is apparently more heavily used by buses and any effect of pedestrian flow from the opposite side of the road is lessened.

140.Mr Lam submits that RC5 is situated right at the busy Castle Peak Road, a thoroughfare with heavy traffic and pedestrian flow.  There are bus stops right in front of the shop.  The locality of the shop is definitely more superior to that of the Property.

141.We have already ruled out blighted effect.  We agree Castle Peak Road is a busy street.  The bus stops in front of the shop should have added value.  We find RC5 is superior to the Property in terms of location.

RC6

142.RC6 is situated at Hing Wah Street, between Castle Peak Road and Shun Ning Road, on the opposite side as to RC2 and RC3.

143.Mr Wong opines that RC6 is separated by a long and wide stretch of flower beds from the opposite side of Hing Wah Street.  Pedestrians are not turning from Castle Peak Road into Hing Wah Street to approach RC6.  

144.Mr Lam submits that the junction of Hing Wah Street and Castle Peak Road is a busy area.  The junction brings pedestrians to RC6.  The locality is more superior to that of the Property.

145.From what we observe, we consider RC6 is similar in location to the Property.  Any advantage in the pedestrian flow from Castle Peak Road is offset by the reduction in vehicular traffic when comparing to the Property.

RC7 and RC10

146.RC7 and RC10 are at Castle Peak Road, near the junction with Hing Wah Street.

147.Mr Wong’s objection to the use of these 2 comparables is also that blighted effect would have set in at the transaction dates but no account is taken of this fact with an upward adjustment on location by Mr Lai.  In Mr Wong’s opinion, the 2 comparables are inferior to the Property.  There are no mini-bus stops on the other side of the street.  Again Castle Peak Road is apparently more heavily used by buses and any effect of pedestrian flow from the opposite side of the road is lessened.

148.Mr Lam submits that RC7 and RC10   are similar to RC5.

149.We reject Mr Wong’s opinion that the location of the 2 comparables is inferior to the Property.  From our observation during the site inspection, we find Castle Peak Road a busy shopping street, with retail shops catering for the daily requirements of the local residents.  Indeed we are very surprised that given the claim by Mr Wong of his intimate local knowledge, he would have considered the 2 comparables inferior to the Property in terms of location.  We are very doubtful of Mr Wong’s professional judgment.

RC8 and RC9

150.RC8 and RC9 are located at Fuk Wing Street, between Castle Peak Road and Cheung Wah Street.

151.In Mr Wong’s opinion, RC8 and RC9 are of different characters in terms of locality.  They do not suffer from the objection of a blighted effect. 

152.Mr Lam submits that the locality bears resemblance with that of the Property, both being occupied predominantly by retail-cum-workshop type of shops.  He admits that the locality is inferior to the Property.

153.We reject Mr Wong’s opinion that RC8 and RC9 are of different characters in terms of locality.  We find that although the location of the 2 comparables is inferior to the Property, they share the same characteristics in many aspects.  We accept RC8 and RC9 are good comparables.

154.The effective area and unit rate before adjustment of the comparables adopted by us are:-

Ref. Price
Area m²

 Cockloft Yard Area m²

Factor

Area m²

Effective Area m²

Unit Rate   /m²
RC1 $3,480,000 48.2       48.2 $72,199
     
RC4 $2,980,000 46.37       46.37 $64,266
     
RC5 $5,900,000 92       92 $64,130
     
RC6 $4,000,000 57.13       58.16 $68,776
  6.19  1/6 1.03
RC7 $12,080,000 158.49       158.49 $76,219
     
RC8 $2,570,000 53.65       54.28 $47,347
  3.80  1/6 0.63
RC9 $2,980,000 52.78       53.42 $55,784
  3.86  1/6 0.64
RC10 $5,200,000 83.27   75.90  1/4   18.98 103.66 $50,164
   8.43  1/6 1.41

Factors of Adjustment and the Appropriate Adjustment

Time

155.Both experts use the Rating & Valuation Department’s Private Retail - Price Indices (“R & V Indices”) for the whole territory of Hong Kong.

156.Although both experts agree the time adjustments for RC2 to RC10 (inclusive), for RC1, Mr Wong’s adjustment is +2% whilst Mr Lai, -2%. Both experts agree the R & V Indices for RC1 and the Property are respectively 155.8 and 153.2.  Based on a simple mathematical calculation, Mr Wong clearly has made a mistake. We accept Mr Lai’s figure and reject Mr Wong’s.

Date of Transaction of Comparables

157.Mr Mak submits that if reference is made to transactions entered by way of provisional sale and purchase agreement, this is at the most only "provisional" and cannot be market value information.  This is because firstly, the provisional agreement has a standard clause that one party can withdraw by forfeiting the deposit together with another amount of the deposit.  This is commonly known as double penalty clause.  Further, provisional agreement is not registered and hence it cannot be market information.  Formal sale and purchase agreements are registered in the Land Registry and both parties could claim for specific performance.  Therefore the date for formal sale and purchase agreement ought to be adopted.

158.Mr Lai uses the date of provisional sale and purchase agreement as the date of transaction.

159.We reject Mr Mak’s submission.  If the sale is cancelled after the signing of sale and purchase agreement (whether provisional or otherwise), this should not be relied on by the experts as market evidence.  We do not agree that an agreement must be registered at the Land Registry before experts may use it as market evidence. Tenancy agreements are often not registered and there is no reason why experts may not use them in determining market rents.

Location

160.In his adjustments for RCs , Mr Wong divides the factor for location into 5 sub factors:-

(a)    Accessibility;

(b)   Complimentarity;

(c)    Intensity of use;

(d)   Visibility; and

(e)    Distance to the centre point.

161.Mr Wong gives an adjustment figure to each of the 5 sub-factors and adds them together to arrive at total location adjustment.  He explains that the impact of the factors will affect the business customs of a given volume of pedestrian flow.  Thus it is important to distinguish between the 5 sub-factors.

162.In particular, Mr Wong considers visibility is an important sub-factor.  In his opinion, there are 2 aspects for visibility: signage and parking meters.  It cannot be disputed that the signage is there.  No suggestion is made to the legality of the signage.  Dilapidation of the signage only affects the extent of adjustment.  The lack of parking meters outside the Property also improves the visibility of the Property and commands additional value.  The circumstances in the present case requiring a sub-factor analysis is rather obvious, as adjustment for location is always a complex matter. 

163.Mr Mak submits that the analytical approach of Mr Wong is a better choice than a subjective and arbitrary assessment on pedestrian flow.

164.Mr Lam submits that it is undesirable to make separate assessments and add the figures together to arrive at total location adjustment, for the following reasons:-

(a)  The approach is unconventional.

(b)  Some of these "sub-factors" do not seem to be conceptually well defined.

(c)  There may be overlapping among the "sub-factors".

(d)  Making separate adjustment for these "sub-factors" runs a high risk of losing sight of the big picture and arriving at grossly inflated overall location adjustment totally out of touch with the reality.

(e)   At the end of the day, the location value of shop premises depends on the volume of pedestrians and the character of the pedestrians (who they are, what they are there for, etc.).  It is better for a valuer to use common sense rather than being bogged down by unrealistic technicalities.

165.We reject Mr Wong’s exercise to subdivide location into 5 sub-factors.  In our view, in considering location, an expert would take into account the 5 sub-factors as identified by Mr Wong as well as other factors coming to his mind and make a global decision.  It is not necessary to subdivide the factors.

166.We also reject Mr Wong’s claim that the projecting signage should command additional value.  On the evidence, there is no record that the signage is approved or authorized.

167.For visibility, we agree that this is a relevant consideration for shop valuation.  However, in our view, since the Property and all the comparables are mainly used as services or local day-to-day retail but not premium high street type retail shops, we agree with Mr Lam’s submissions that visibility has very little, if not nil, effect on the value of the Property and the comparables.  We accept that nil adjustment should be made.

168.Mr Lam also submits that:-

(a)  The vicinity of the Property is occupied by retail- cum-workshop type of shops selling glass, building materials, metal-ware, tyres and locks, as well as engineering shops.

(b)  On the evidence, photographs show that building materials were dumped on the pavement in the vicinity of the Property, and lorries were parked (sometimes double parking) off the pavement outside the Property, apparently loading and unloading building materials.

(c)  The Property is situated at a quieter section of Un Chau Street, and the side of the road at which the Property is situated is quieter than the opposite side of the road.

(d)  The side of the road at which the Property is situated is "cut off” from the opposite side by mini-buses parked along the pavement of the opposite side.

(e)  There are people alighting from mini-buses at the section of Un Chau Street where the Property is situated, but they mostly walk to the opposite side of the road, not to the side where the Property is situated.

(f)  The section of Un Chau Street between Castle Peak Road and Cheung Wah Street is, on the other hand, much busier; it is here (and not the section where the Property is situated) that people wait/waited to get on mini-buses.

169.Based on what we observe during the site inspection, we agree with Mr Lam’s submission and hold that the location of the Property is primarily service type uses.

Size

170.Mr Wong conducts an exercise of making comparison between 4 pairs of transactions to arrive at 1% per 1 m² in his adjustments.

171.Mr Lam submits that the exercise is meaningless and valueless, for the following reasons:-

(a) Adjustments have to be made for a host of other factors before comparison on size could be made; the accuracy of the exercise depends too much on the reliability of the other adjustments.

(b) Mr Wong adopts an adjustment rate of 7.62% per 1 m for frontage.  If this rate is rejected by the Tribunal, the accuracy of the exercise is gravely called into question.

(c) In each pair of transaction, Mr Wong compares a large shop with a small shop and not shops of similar size.

(d) For example, for S3 and S4 (in Mr Wong’s exercise), the total adjustment is as big as 96%, and the size of the two shops are 32 times different.

(e)  The sample size is in any event too small for any generalization.

172.We agree with Mr Lam’s submission that Mr Wong’s exercise is meaningless because it is subjective and very arbitrary. We reject Mr Wong’s adjustments and prefer Mr Lai’s figures.

Frontage

173.Mr Wong carries out investigation with reference to market evidence, by making comparison between 3 pairs of transactions and arrives at a rate of 7.62% per metre.

174.Mr Lam submits that Mr Wong’s unconventional approach is wholly untenable, and meaningless, for the following reasons:-

(a)  Substantial adjustments have to be made for other factors, such as time and size, making the accuracy of the exercise highly dependent upon the other adjustments.

(b)  In making size adjustment, Mr Wong does not make use of the 1% per m² rate that he advocates.

(c)  The transaction dates of some of transactions are far apart; the character of the locality may have changed with time rendering the comparison meaningless.

(d)  The selection of transactions for comparison is arbitrary and apparently to suit Mr Wong's purpose. For instance, if F2 and F4 (in Mr Wong’s exercise) are compared (the transactions being merely one month apart), it will be discovered that the shop with the larger frontage (F2) fetches a lower price; this highlights the fallacy of the entire exercise.

(e)  The exercise results in figures which range from 6.83% to 9.05%.  It is meaningless to take an average out of figures that disagree by such a large magnitude.

(f) The samples are in any event too small for any generalized conclusion to be drawn.

175.Mr Lai uses an adjustment of 2% for every 1 metre difference in frontage, in accordance with Gaininn Company Limited v The Director of Lands LDLR 5 and 10 of 2006.

176.We agree with Mr Lam that Mr Wong’s exercise is subjective and meaningless.  We reject Mr Wong’s adjustment and adopt Mr Lai’s figures.

Vacant Possession

177.All the comparables of Mr Lai except RC7 are subject to tenancies.

178.Mr Wong is of the opinion that according to the general valuation principle, in assessing the open market value of a property at a particular valuation date, one should take into account the effect of the tenancy subsisting.  Mr Wong relies on Yuen Shu Wing v Director of Lands LDLR 1 to 4 of 2004, that the market will always give allowance as to whether vacant possession can be given at a certain date of valuation.  The Court has to give regard to this fact.

179.Mr Wong adopts nil adjustment for tenancies more than one year, 5% for one year (because they are less secure) and 10% for monthly tenancy (because they are unsecure). 

180.Mr Lam submits that since none of the comparables are subject to unusual tenancies, no adjustment needs to be made for tenancies.

181.In our view, Mr Wong’s interpretation of Yuen Shu Wing is mistaken.  In Yuen Shu Wing, the Tribunal applies the term and reversion method to value the subject property which is subject to tenancy.  Applying Yuen Shu Wing, it is the unexpired term that matters, not the original length of tenancy.  For monthly tenancy, since they may be terminated at any time, there should be no adjustment.  We reject Mr Wong’s adjustments.

182.We have examined the tenancy details of the RCs.  We agree with Mr Lai that no adjustment is necessary because the tenancies are either just starting (hence the rent should be at or close to market rent) or expiring soon.

Headroom

183.In Mr Wong’s opinion, RC2 and RC3 combined together have an effective floor area of 60.6 m² but RC5 has an effective floor area of 92 m².  The volume of the headroom space is much larger in the case of RC5.  Therefore a downward adjustment of -2% and -5% for RC2 and RC3, and RC5 respectively is not incorrect, notwithstanding these RCs have the same headroom.

184.With respect, we cannot understand the rationale of Mr Wong.  If the comparables have the same headroom, any adjustment for headroom should be the same.  If Mr Wong considers volume should be a factor of adjustment, he should put forward his suggestion accordingly, but not mingle it under headroom.

185.Earlier in this judgment, we said any adjustment for headroom should be made in the analysis of the comparables.  We have compared Mr Wong and Mr Lai’s figures.  Since we are doubtful of Mr Wong, we prefer Mr Lai’s.

Adjusted Unit Rate

186.Taking into account all the factors as examined above, the adjusted unit rate to be used in the direct comparison valuation is:-

Ref.
Unit Rate   /m²
Time Location Size Frontage Headroom Total
Unit Rate   /m²
RC1 $72,199 -2% 0% -7% 0% 2% -7% $67,145
RC4 $64,266 -1% 0% -7% 3% 2% -3% $62,338
RC5 $64,130 1% -15% 0% 0% -3% -17% $53,228
RC6 $68,776 2% 0% 0% 0% 2% 4% $71,527
RC7 $76,219 11% -15% 21% -9% 2% 10% $83,841
RC8 $47,347 5% 15% -5% -3% 2% 14% $53,976
RC9 $55,784 5% 15% -5% -3% 2% 14% $63,594
RC10 $50,164 5% -15% 7% 0% 2% -1% $49,662
            Average   $63,164

187.Looking at the adjusted rates of all the comparables adopted by us, we are satisfied that they are all within a reasonable range.  We are satisfied that if there is any development value attributable to the comparables, it is reflected in the adjusted unit rates.  No further adjustment is necessary.

188.Applying the average unit rate to the effective area of the Property, the value of the Property is $4,713,298 (74.62 m² x $63,164 / m² ), which we round off to $4,710,000.

“WITHOUT PREJUDICE” OFFERS

189.On 11 May 2011, shortly before the commencement of the trial, the respondent applied by summons to strike out certain documents enclosed in Mr Wong’s reports, including Exhibit III of Mr Wong's 1st report (ie the 4 letters of offer dated 31 July 2004, 4 November 2005, 21 September 2006 and 12 October 2007) on the ground that it is "unnecessary, irrelevant, lacking in probative value and/or prejudicial and that they are unhelpful to the Court in the determination of any issue to be resolved herein".

190.During the trial, the parties at first agreed that these documents could be admitted de bene esse, subject to the determination of the Tribunal at the end of the trial.  The parties then agreed that most of these documents including the letter of offer dated 31 July 2004 could be admitted as evidence and the respondent no longer raised any objection to these documents.  The letters of offer dated 4 November 2005, 21 September 2006 and 12 October 2007 were, however, removed from the exhibits and the applicant did not attempt to put them back in evidence.  Nevertheless, Mr Mak in his closing submission made lengthy submission on these letters of offer, when they were not produced as evidence.

191.In our view, our duty is to determine the amount of compensation payable to the applicant under the Ordinance, and as aforesaid, it should be the open market value.  We are not required to arbitrate on or to have regard to the offers made by or on behalf of the respondent.  The offers, whether made known to us or not, or whether made “without prejudice” or not, will in no way affect our determination.  We fail to see why the applicant would rely on these offers at all.

192.As the parties have actually resolved what documents should be admitted or not, we do not find it necessary to make any determination concerning the summons.  Thus, no order will be made in respect of the summons.  As to the costs of the summons, subject to any further application, we will make no order as to costs, as the parties seem to have resolved the matters themselves.

ORDER

193.We therefore order that:-

(1)  In respect of the summons dated 11 May 2011, no order is made, save that there be a costs order nisi that the summons shall have no order as to costs.  If the parties do not make any application concerning the costs of the summons within the next 14 days, the costs order nisi shall become absolute.

(2)  The amount of compensation payable to the applicant is in the sum of $4,710,000.

(3)  All the consequential and ancillary matters, including professional fees, interest and costs, be adjourned to a date to be fixed by the listing officer at the request of the parties.

(Michael Wong) (Kenneth Kwok)
Presiding Officer
Lands Tribunal
Temporary Member
Lands Tribunal

Mr Andrew MAK, instructed by Messrs Yip & Partners for the applicant

Mr Simon LAM, instructed by the Department of Justice, for the respondent

Please refer to CACV180/2012 for the relevant appeal(s) to the Court of Appeal.