Good Faith Properties Ltd and Others v. Cibean Development Company Ltd
Read the full judgment text of LDCS 18000/2010 on BabelCite. This LDCS judgment was delivered on 31 May 2013.
1. This is an application made under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) for an order of compulsory sale of all the undivided shares in the remaining Portion of Inland Lot No. 1486 (“the Lot”). A composite building is erected on the Lot known as No. 20 Caine Road Hong Kong (“The Building”). The respondent is the owner of the only commercial unit of the Building (“the Shop”).
Cited by 45 cases · Cites 14 cases
|
LDCS 42000 of 2011 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LAND COMPULSORY SALE MAIN APPLICATION NO. 42000 OF 2011 _________________
_________________
_________________ J U D G M E N T _________________ Background 1.This is an application made under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) for an order of compulsory sale of all the undivided shares in the remaining Portion of Inland Lot No. 1486 (“the Lot”). A composite building is erected on the Lot known as No. 20 Caine Road Hong Kong (“The Building”). The respondent is the owner of the only commercial unit of the Building (“the Shop”). 2.The Building is a 10-storey composite building served by 3 common staircases and 2 lifts, with the Shop on the basement floor fronting Caine Road and 74 upper floor domestic units on Ground Floor to Eighth Floor. One undivided share is allotted to each of the units from basement to the 8th Floor and to the roof, making a total of 76 undivided shares. The Occupation Permit of the Building was issued on 18 January 1960. 3.The applicants, jointly own all the undivided shares in the Lot save and except the one share of the Shop, which is owned by the respondent. Thus, the applicants own 75 equal undivided 76th parts or shares in the Lot representing 98.6842% of all the undivided shares of the Lot. The applicants contend that they are entitled to make the present application by virtue of s. 3(2) of the Ordinance. 4.In the Notice of Opposition filed by the respondent on 1 December 2011[1], the respondent opposed the application on the ground that :
5.Nevertheless, it is the respondent’s stance at trial that whether redevelopment is justified due to age and state of repair is no longer a live issue between the parties. Section 3 of the Ordinance – Ownership of the applicants 6.Section 3(1) of the Ordinance requires the applicants to have not less than 90% of the undivided shares in a lot before it can make an application. As at the date of application, the applicants own 98.6842% of the shares in the Lot. We are satisfied that the applicants are entitled to make the application. Section 4(2) of the Ordinance – Justification and Reasonable Steps 7.In determining the application, Section 4(2) of the Ordinance empowered the Tribunal to make an order for sale unless, after hearing the objections of the respondent, it is satisfied that :
Section 4(2)(a) - State of Repair of the Building 8.This Tribunal has taken into consideration the expert evidence of Mr. Benson Wong (“Mr. Wong”) the Chartered Building Surveyor and Mr. So Kin Shing (“Mr. So”) the Structural Engineer adduced by the applicants. 9.Mr. So had conducted a structural assessment of the Building and prepared a report dated 20 July 2012[2]. He found the following defects in the Building:
10.Based on the above findings, Mr. So concluded that the design and construction of the structural frames of the Building have become obsolete over time and are in need of repair as the Building, constructed with reinforced concrete, has passed its design working life of 50 years. The structural frames have deteriorated to the final stage of their design working life and the deterioration will continue steadily due to extensive carbonation of the concrete. It is inevitable that new defects will occur and previous defects though repaired will recur readily, requiring substantial repairs or even partial demolition and re-construction of some defective structural members in the future. Repair work will need to be carried out regularly in the future and such repairs will be more and more extensive. Although the cost of repair may be relatively modest, such costs will escalate in the future as the extent and seriousness of the deterioration of the structural members increases with age. He recommended that hammer tapping works be carried out to all structural members and any defects as a matter of urgency. 11.Mr. Wong, in his Condition Survey Report dated 23 July 2012[3] stated that :
12.He assessed the total cost of immediate repair works at $21,945,962 which is about 43% of the cost of constructing a new building similar to the Building. He came to the conclusion that the Building has deteriorated to a state which is beyond reasonable economic repair as signified by the high repair cost. As more rapid deterioration will occur in the future, the necessary maintenance and repairs will inevitably be more frequent and extensive, making the continued occupation of the Building not economical and even unsafe, to both occupants and third party. He recommended the owners to redevelop rather than repair given the Building does not possess any historical value or architectural merit. 13.As the respondent did not challenge any of the evidence adduced by the applicants, we accept the applicants’ evidence in whole. In particular, we are satisfied that based on the evidence of Mr. So and Mr. Wong, redevelopment of the Lot is justified due to the state of repair of the Building which is in a very poor state of repair and indeed in dangerous condition. Section 4(2)(a) - Age of the Building 14.The applicants had adduced a report prepared by Dr. Li Ling Hin (“Dr. Li”)[4] as a land economist and land policy specialist to examine whether it is justified to redevelop the Building from the perspective of the age of the building. Dr. Li opined that :
15.The applicants also relied upon two economic tests, i.e. the age test and the repair test, conducted by Mr. Alnwich Chan (“Mr. Chan”) the Surveyor to demonstrate the theory laid down by Dr. Li. 16.For the age test, Mr. Chan assessed the total existing use value (“EUV”) as at 20 July 2012 at $401,125,747 whilst the redevelopment value (“RDV”) is at $561,400,000 as at 20 July 2012. Given the RDV is much higher than the EUV, Mr. Chan opined that the redevelopment of the Lot is warranted[5]. 17.For the repair test, adopting the findings by Mr. Wong that the total estimated cost to restore the Building to tenantable standard is at $21,945,962, Mr. Chan deducted the cost for the removal of unauthorised building works from it and found the net repair costs to be $20,408,712. When comparing the net repair cost to the assessed EUV, Mr. Chan found that the repair cost is approximately 5.4% of the EUV. Whilst the expected enhancement in EUV after the repair is not more than 5% (i.e. less than $18,929,779), it would be insufficient to cover the estimated net repair cost. On top of this, Mr. Chan also found that since the total cost of immediate repair works is about 43% of the construction cost of a new building similar to the Building, it is not worthwhile to spend repair cost in a sum over 40% of total construction cost for a new similar building to merely restore it to tenantable standard[6]. 18.As for the requirement of “the age” of the Building, this Tribunal agree with the observation by Judge Wong in the case of Top Sail International Limited V Cheng Kai Ming, executor of the estate of Chan Hue also know as Chan Sum Hiu, deceased[7] that,
19.Having considered the evidence, we are satisfied that redevelopment of the Lot is also justified due to age due to the following factors:
Section 4(2)(b) - Reasonable Steps Taken 20.The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the Shop under Section 4(2)(b) of the Ordinance. 21.It is not in dispute that prior to the filing of the Notice of Application (“the Application”) by the applicants on 11 November 2011, the applicants had made an offer to the respondent in the following terms :
22.And after the Application had been filed, further offers were made as follows:
23.The respondent contended that :
Only Pre-Application Offers were to be considered? The Respondent’s Case 24.The respondent accepted that on the face of it, Section 4(2)(b) does not limit the scope of reasonable steps to those taken before the filing of the Application, nor gives any hint as to whether post-application offers will suffice. But it is contended that to adopt the reasoning in Fully H. K. Investments Limited & Others v Poon Vai Ching & Others[13]based on the present perfect tense of the word “taken” in the section may lead to different construction in different context, as reflected in a number of authorities. And the present perfect tense can signify a past and complete event, be it a pre-application offer or a post-application. The use of the word ‘taken’ in the present perfect tense renders the legislature’s intent equivocal. To say that both pre- and post-application offers fall within the ambit of section 4(2)(b) will lead to absurdity. 25.Instead, the wordings of Section 4(2)(c) should be construed according to the ordinary meaning of the words as applied to the subject matter in regard to which they are used. 26.The wordings of Section 4(2)(b) of the Ordinance closely modelled on Section 15(4)(c) of the Land Development Corporation Ordinance Cap. 15 with much of the wordings in the 2 sections being identical, both required the acquiring party to have taken reasonable steps to acquire the property in question. In cases on Section 15(4)(c) like Wong Tak Woon v Secretary for Planning, Environment and Lands[14] and Li Po Chun Estate Limited v Director of Lands[15], the court ruled that the Land Development Corporation (“the Corporation”) must have taken all reasonable steps to acquire the subject property before resorting to the exceptional course of resumption. Section 4(2)(b) should also be construed in a like manner. 27.In compulsory sale context, Ribeiro P.J. in Capital Well Limited v Bond Star Development Limited[16]had expressed a similar view that:
28.What’s more, according to the Official Record of Proceedings of the Provisional Legislative Council of Hong Kong dated 7 April 1998, the Secretary for Planning, Environment and Lands (“SPEL”) had made the following statement :
Such statement is consistent with the legislative history and purposive interpretation of the Ordinance. Given the ambiguity and absurdity in the wordings of Section 4(2)(b), it is permissible under the principles enunciated by the House of Lords in Pepper v Hart[17] and referred to by the Court of Final Appeal in HKSAR v Cheung Kwun Yin[18] for the SPEL Statement to be considered. The Applicants’ Case 29.The applicants, in reply, submitted that the intention of the Ordinance is to encourage negotiation between the majority owner and the minority owner for the sale and purchase of the minority owner’s undivided shares. The reasonable steps taken referred to the process of communicating to the minority owner an indication of the majority owner’s willingness to purchase its share. Fully (supra) is rightly decided and consistent with the legislative intent. There is no indication in the Ordinance that the time for taking reasonable steps must be before the application. The plain wordings of Section 4(2)(b) fixes the time for the Tribunal to be satisfied at the trial, after hearing the objections and not before. There is no ambiguity, obscurity or absurdity. To accept the contention of the respondent is to re-write the section by adding words to it and amending the present perfect tense to one of past perfect tense, and this is impermissible as found in the case of China Field v Appeal Tribunal (Building)(No 2)[19]. And if the contention by the respondent is correct, the requirement of a reasonable offer before the Application should become a requirement before the majority owner may take out the Application under Section 3(1) of the Ordinance but this is apparently not the case. 30.If only reasonable steps taken before the Application are being considered, this would mean that once the requirement is fulfilled, the majority owner would have no further obligation to make further offers. This can work against the interest of a minority owner, in particular if the market should go up after the Application. The Fully approach gives the Tribunal the flexibility to evaluate what actually happened in each individual case up to the time of judgment to consider whether reasonable steps have been taken. 31.And the court in Cheung Kwun Yin (supra) had in fact kept open the question of whether and the extent that Pepper v Hart (supra) should apply in Hong Kong. In any event, the language of Section 4(2)(b) is plain and there is no ambiguity or obscurity and with no absurdity. The SPEL Statement relied upon by the respondent was far from clear which was in fact an explanation to address the committee members’ concern and for the deletion of the word “all” before “reasonable steps” only. Under such circumstance, no weight should be attached to the SPEL Statement. 32.Cap. 15 relied upon by the respondent had a different set up in that once the Corporation had submitted request to the Secretary to recommend to the Governor for a land resumption, the matter would be out of the hands of the Corporation. Under the Ordinance, negotiation for a sale without a compulsory sale order is never taken away from the parties by the filing of the Application. 33.Instead, provisions in the Landlord and Tenant (Consolidation) Ordinance Cap. 7 concerning rebuilding cases bears a close similarity to Section 4(2)(b). Section 53(2)(c) of Cap. 7 reads :
The format of the section is fixing the moment the Tribunal is to be satisfied is at trial and fixing the subject matter to be satisfied by the present tense. 34.Lastly, it is the applicants’ contention that what Ribeiro PJ said in Capital Well (supra) was on the point that the general aim of the Ordinance was to facilitate urban renewal and not on the question of reasonable steps so the term “appropriate efforts” was used instead of “reasonable step”. When the issue of reasonable step was considered, Ribeiro PJ observed that :
Discussion 35.Having considered the submissions, this Tribunal agree with the contention of the applicants. 36.The question raised is essentially one of statutory construction. As has been pointed out by the Court of Final Appeal in HKSAR v Cheung Kwun Yin (supra),
37.It is therefore necessary to look at the purpose of the Ordinance. Ribeiro PJ in the case of Capital Well (supra) had conducted a close examination of an application for compulsory sale under the Ordinance which is said to involve 4 distinct phases, namely the application, the Tribunal’s determination, the sale and the apportionment and application of the sale proceeds. It is found that :
38.From the ruling quoted above, it is apparent that as far as the minority owners are concerned, the purpose of the Ordinance is to protect their interests to ensure that they received fair and reasonable compensation in the sale of their minority interests, be it compulsory or voluntary. This is to be reflected not only in the reserve price to be determined by the Tribunal for the purpose of the public auction, but also in the compensation to be accepted by the minority owners in a sale as a result of negotiation with the majority owner. The protection for the minority owners is not confined to the compensation they got as a result of a compulsory sale, but also during the stage when the minority owner are negotiating to sell their interest to the majority owner. 39.To achieve this end, Section 4(2)(b) stipulated that the Tribunal shall not make an order for sale, unless it is satisfied, after hearing the case, that the majority owner has taken reasonable steps to acquire all the undivided shares in the lot, including negotiating for the purchase of the undivided shares of the minority owner on terms that are fair and reasonable. 40.On the face of it, Section 4(2)(b) had not specified whether pre-application and/or post-application reasonable steps should be considered but it required the Tribunal to consider, after hearing the objection from the minority owner, if the majority owner has taken reasonable steps before it can proceed to make the order for sale. The time for the Tribunal to be satisfied is at trial and not before. This plainly envisages that there can be offers made to acquire the minority interest even after the filing of the Application and all the steps taken up to the point an order for sale was to be made should be considered by the Tribunal. This is a safeguard rendered to the minorities to ensure that the compensation offered by the majority owner must be fair and reasonable before the majority owner is able to convince the Tribunal that an order for sale should be granted. 41.In the words of Judge Cruden in his book Land Compensation and Valuation Law in Hong Kong 3rd ed.,
In order to avoid the majority owner to expropriate the shares of the minority, it is imposed upon the majority owner the obligation to take all reasonable steps before an order is made by the Tribunal which is a last resort. To confine the reasonable steps to pre-application is apparently inconsistent with the intention of the legislation and deprived the minority owners the protection they are entitled under the Ordinance. 42.This is also in line with the objectives of the Ordinance, i.e. to ensure that the minority owners received compensation that is fair and reasonable during negotiations as well as at the public auction upon an order for sale. So, the requirement under Section 4(2)(b) must cover all steps taken by the majority owners both pre- and post-application. 43.This also explains the present perfect tense used in Section 4(2)(b) and we agree with the findings in Fully (supra) that :
44.We found no ambiguity or absurdity in the wordings of Section 4(2)(b) on a purposive interpretation of the Ordinance. On the contrary, if the contention of the respondent is accepted, i.e. only pre-Application offers were to be considered, this is inconsistent with the objective of the Ordinance and create absurdity in particular when the property market goes upwards after the Application. If only pre-Application steps were to be considered, the majority owner will have no obligation to negotiate with the minority owner or to offer terms that are fair and reasonable after an Application had been filed. Should the pre-Application steps be found to be fair and reasonable, the Tribunal is entitled to make an order for sale turning a blind eye to the fact that the majority owner had failed to take any reasonable steps after filing of the Application in view of the rising market trend. This is absurd and clearly not in the interests of the minority owners and defeat the intention of the Ordinance to protect the interests of the minority, up till the moment when the Tribunal makes an order for sale. 45.We do not agree that the Ordinance is in anyway modelled on Cap. 15 even though the wordings of the 2 provisions looked similar because the 2 ordinances are catered for different scenario. Section 15 of Cap. 15 empowered the Secretary for Planning, Environment and Lands (“the Secretary”) to recommend to the Chief Executive the resumption of land which the Corporation had been unable to acquire to implement a development proposal authorised under Cap. 15. The Secretary is not permitted to make the recommendation unless the three conditions set out in Section 15(4) have been satisfied including “unless he is satisfied that the Corporation has taken all reasonable steps to … acquire the land including negotiating for the purchase thereof on terms that are fair and reasonable”. The case of Wong Tak Woon relied upon by the respondent ruled that:
46.We accept that Section 15 of Cap. 15 required the Corporation to take reasonable steps before it made the request to the Secretary for the recommendation for land resumption. But the negotiation between the Corporation and the land owners should have ended and resulted in a failure before the Corporation can make the request to the Secretary. Once the Corporation had made such request, the Corporation is, technically “functus” in the sense that it can no longer engaged in any further negotiation with the land owner. There is no question of post-request offers or steps to be taken by the Corporation in a Section 15 scenario. This is totally different from any negotiation in a compulsory sale case. There is nothing to prevent a majority owner to make further offers to the minority owner even after the Application had been taken out. 47.Neither are we convinced that what Ribeiro PJ said in Capital Well Ltd (supra) about “appropriate efforts” connotes that reasonable steps should be taken by the majority owner to acquire the undivided share of a minority owner before it can invoke the provision of the Ordinance. We agree with the applicants that such an interpretation cannot sit comfortably with the provision under Section 3(1) of the Ordinance which reads:
48.Section 3(1) stipulated the requirement for the majority owner to lodge the Application and nothing touched upon the requirement for taking reasonable steps before this is to be done. If the intention of the legislation is minded to impose such a requirement before application, this should have been specifically spelled out in Section 3(1). The missing out of such a requirement must be intentional and, to echo with Section 4(2)(b), must be intended not to confine the reasonable offers to pre-Application stage. 49.We found what Ribeiro PJ said is about the fact that the majority owner should make efforts to acquire the balance of the undivided shares before any application is to be lodged with the Lands Tribunal. This is consistent with the words of Judge Cruden quoted above that compulsory sale should be a course of last resort so it would only be sensible to require the majority owner to try to acquire the undivided shares of the minority owner before an application is being taken out. 50.Applying the principles enunciated by the House of Lords in Pepper v Hart and referred to by the Court of Final Appeal in HKSAR v Cheung Kwun Yin, the SPEL Statement relied upon by the respondent may be referred to as an aid to interpretation for the purpose of ascertaining the meaning of the statutory language, when the following three conditions are met :
51.Since it is our finding in paragraph 44 above that there is no ambiguity or absurdity in ascertaining the meaning of the words used in Section 4(2)(b), we found the first condition is not met. 52.Moreover, we are not satisfied that the SPEL Statement (recited at paragraph 28 above) are clear enough to carry the interpretation relied upon by the respondent. As rightly pointed out by counsel for the applicants, the SPEL Statement is made in answer to concern by the committee over the word “all reasonable steps” instead of the timing for the reasonable steps to be taken and to be considered by the Tribunal. This Tribunal had the benefit of reading through all the minutes of meeting produced by the parties concerning the discussion of the relevant Bill and we found no discussion on the time frame for reasonable steps to be taken. 53.Mr. Chang for the respondent had pointed out 2 other meetings of the committee in which reasonable steps before application had been mentioned. That is in the meeting on 17 February 1998 and 21 January 1998.[24] 54.At the meeting on 17 February 1998, members are conducting a clause-by-clause examination of the Bill on compulsory sale. Under Clause 12 which is being discussed in conjunction with clause 4, the minutes of the meeting reads :
55.It is apparent from the minutes quoted above that the SPEL had never said in his statement that the reasonable steps had to be taken before making an application for a sale order. This was in fact raised by members only and never an issue discussed by the members or addressed by the SPEL. It is far from clear that it has been decided by the committee or stated in the statement of the SPEL that reasonable steps had to be taken before making the application or that only reasonable steps taken before Application should be considered by the Tribunal. 56.At the meeting on 21 January 1998, the SPEL made a statement for moving the Bill to be read for the Second time. The relevant minutes of the meeting shows that the SPEL had addressed the reason for taking out the Bill and had said, inter alia, the followings :
57.Again, in the statement quoted above, the SPEL had never mentioned about reasonable steps had to be taken before the application or that only reasonable steps taken before Application should be considered by the Tribunal. All the SPEL had said is that the majority owner can file an application when they cannot acquire the minority interests. Nothing touched upon the fact that the majority owner had to take all reasonable steps to acquire before taking out the application. 58.Rather, in the speech that follows, the SPEL had said that :
Again, there is nothing said by the SPEL that the reasonable steps had to be taken before the application. 59.The SPEL Statement relied upon by the respondent is the only part in the discussion by the SPEL that touched upon the timing of the reasonable offers to be made but it was in fact said to address a different issue, i.e. the requirement of all reasonable steps. The rest of the minutes showed that nothing had been discussed about the timing for the reasonable steps to be taken and to be considered. We cannot be satisfied that the SPEL Statement is clear enough to be relied upon in the interpretation of Section 4(2)(b). 60.Since there is no absurdity or ambiguity in the purposive interpretation of the Ordinance and the SPEL Statement is far from clear, we found that the Official Record should not be relied upon in the interpretation of the Ordinance. 61.To conclude, we do not agree with the respondent’s contention that only pre-Application steps should be considered by the Tribunal. With a purposive interpretation of Section 4(2)(b), all reasonable steps before the making of a sale order to acquire the minority owner’s share in the Lot should be considered, be it post- or pre-Application. Failure to communicate 62.The table below summarises the exchange of correspondence between the parties between 4 June 2010 and 16 November 2011. 63.It is the contention of the respondent that questions were raised by the respondent in its letters but remained unanswered at the date of the Application. Hence, the applicants had failed to engage in reasonable communication as was expected of a majority owner. 64.The applicants, relying on the case of Intelligent House Ltd v Chan Tung Shing & Ors[25], submitted that the first step of reasonable steps is “the process of communicating to the minority owner an indication of the majority owner’s willingness to purchase their shares” 65.The applicants had appointed agents to approach the respondent trying to acquire its share and once the respondent is aware of the majority owner’s intention to purchase its share, the first element of reasonable steps is satisfied. In any event, the queries raised by the respondent had been answered by the applicants’ solicitor. 66.We accept the submissions of the applicants and agree that the reasonable communication involved is for the majority owner to convey its intention to acquire the respondent’s property and nothing more. The Ordinance required the majority owner to take reasonable steps to acquire the minority interest on terms that are fair and reasonable. The steps to acquire must be to make offers for the minority owners to consider. And we do not agree that the majority owner had the onerous obligation to answer all queries from the minority owners and/or to satisfy them that its offers are justified and are fair and reasonable at the time when the offers are made. If the minority owners are not so sure about the offers, they are entitled to seek independent valuation advice or turned down the offers and leave it to the Tribunal to consider if they are fair and reasonable at trial. 67.But even if we are wrong on this, we are satisfied that the applicants had in fact answered all the respondent’s queries in their reply letter dated 3 November 2011 and 16 November 2011 and there is no question of the applicants being failed to engage in reasonable communication with the respondent. 4th Offer and 5th Offer – a belated one? 68.It is the contention of the respondent that the 4th and 5th offer were belated in the sense that they were made either shortly before or during trial. 69.Given the ruling by this Tribunal above that the Tribunal should consider all offers up to the time the Tribunal made an order for sale, there is no question of lateness. We do not accept the fact that the 4th and 5th Offer was only made shortly before or during trial, will render it not fall within reasonable steps as stipulated by the Ordinance. Are offers made fair and reasonable? 70.The respondent contended that none of the offers made by the applicants, be it pre- or post-application, is fair and reasonable. 71.It is not in dispute that in assessing the reasonableness of the offers, Ribeiro PJ had found in Capital Wel Ltd that :
This Tribunal will bear this in mind in assessing the reasonableness of each offer made by the applicants in this case. 1st Offer 72.As far as the 1st Offer is concerned, the respondent’s case is that the applicants failed to demonstrate that they could safely rely on the preliminary assessments, in the form of a brief statement prepared by Knight Frank in making the 1st Offer. The preliminary assessment was predicated on an inspection made by Mr. Chan 6 months ago and 38 out of a total of 74 domestic units had not been inspected. 73.The applicants contended that at the time when the 1st Offer was made, the respondent had made no counteroffer, gave no comment on the valuation prepared by Knight Frank nor had any valuation report been prepared. There was nothing to show that the expert valuation advice given by Mr. Chan is in any way not properly made, so the applicants are entitled to rely on his advice to formulate the offer. 74.We accept the contention of the applicants. 75.There is no evidence before this Tribunal to demonstrate that the preliminary assessment by Mr. Chan can in any way be faulted. In Intelligent House Limited v Chan Tung Shing & Ors., the Tribunal is asked to rule on the reasonableness of the terms offered. The Tribunal in Intelligent House had said the followings :
We totally agree with such observation which should also be applicable to Knight Frank who is the valuer involved in this case. 76.In this case, we cannot see how, by merely presenting the valuation by way of a brief statement, the format of the valuation can render the valuation not properly made. And there is nothing to show that failure to conduct a site inspection of all the units can have any bearing in Mr. Chan’s valuation at the time the 1st Offer was made. Neither is there any evidence to support the contention that the valuation conducted by Mr. Chan is in any way not based on professional valuation and should not be relied upon by the applicants. 77.The 1st Offer made is in a sum more than the valuation of the Shop as assessed by Mr. Chan. We are satisfied that the 1st Offer made by the applicants to the respondent to purchase the Shop fall within the range of what may broadly be regarded as fair and reasonable. 2nd and 3rd Offer 78.The 2nd and 3rd Offer can be considered in one go. It is not in dispute that at the time these 2 offers were made, again, the respondent had made no counteroffer, gave no comment on the valuation prepared by Knight Frank nor had any valuation report been prepared. 79.Adopting the reason stated above in regard to the 1st Offer, we are also satisfied that the 2nd and 3rd Offer are also fair and reasonable. 4th and 5th Offer 80.Again the 4th and 5th Offer can be considered together. The 4th Offer was made on 18 October 2012, about 2 weeks from the commencement of this trial whilst the 5th Offer was made on 4 February 2013, 2 weeks from the resumed part-heard hearing. At the time when these offers were made, both parties had already filed their respective valuation reports which indicated a wide difference.
81.Valuation conducted by the experts close to the time of the offer is of course relevant to the Tribunal’s assessment of the offer itself. As stated in Capital Well, this Tribunal should not adjudicate upon disputes as to the correct valuation principles to be applied to assess the offer. But the fact is, the 2 valuation reports which contained the above assessment by the respective experts had in fact been considered by this Tribunal in the assessment of the reserve price. 82.We opine that the reserve price (as found below) can be used as a yardstick to determine whether the 4th and 5th Offer are fair and reasonable. By doing so, this Tribunal is not suggesting that one should compare the offers against the findings of this Tribunal or to consider whether the offers had beat the valuation. This is specifically found in Capital Well to be not the correct approach. We adopt such an approach only on the special feature that the 4th and 5th Offer are very close to the trial where the reserve price will be determined by a finding of this Tribunal on the valuation evidence adduced by the parties. 83.As indicated from the reserve price found by this Tribunal, the assessment of RDV by Mr. Lai is far from reasonable and deviate from reality. On the other hand, we find that the assessment conducted by Mr. Chan is close to that assessed by this Tribunal. Under such circumstances, we find it reasonable for the applicants to rely upon the advice of Mr. Chan in making the 4th and 5th Offers which are fair and reasonable, given the sum offered is within the broad range between the valuation done by Mr. Chan and the RDV value found by this Tribunal. Order for Sale 84.We are satisfied that redevelopment of the Lot is justified both in terms of age and state of repair of the Building and the applicants had taken reasonable steps to acquire all the undivided shares of the Lot and had negotiated for the purchase of the Shop on terms that are fair and reasonable. Under such circumstances, we find that an order for sale should be granted in favour of the applicants. Valuation issues to be decided by the Tribunal 85.The following issues in dispute have to be determined by this Tribunal, namely,
86.The applicants’ valuation expert, Mr. Chan and the respondent’s valuation expert, Mr. Lai have filed and exchanged various valuation reports and letters. A summary of their EUV valuations for all units in the Building[28] are summarised herein.
87.Under section 10 of the Ordinance, the apportionment between the majority owner and the minority owners of the Lot shall be on the basis as specified in Part 3 of Schedule 1 of the Ordinance. Under the Schedule, the proceeds are to be apportioned on the basis of the EUV as stated in the applicants’ Notice of Application. Therefore, if there is a dispute between the parties on the EUV of the units in the Building on the Lot, the Tribunal has to determine the values. Determination of the EUV of the shop units in the Building
89.Mr. Chan estimated the EUV of the Shop at $17,516,800 [31] using Reduced Zone Method (“RZM”) whilst Mr. Lai estimated the EUV of the Shop at $47,890,000 [32] using the overall EFA method. The issues relating to the determination of the EUV of the Shop are :
90.The experts’ differences were set out in their various valuation reports, and supplemented by their evidence during the trial. Choice of suitable comparables for the valuation of the EUV of the Shop 91.The 2 valuation experts have identified between them a total number of 7 comparables for the subject Shop. However, they have only one common comparable (AS1/RS2[33]). Mr. Chan opined that his other 2 comparables, AS2 and AS3 should be adopted as suitable comparables, alongside with AS1/RS2. On the other hand, Mr. Lai had entirely different opinion suggesting that AS2 and AS3 should be discarded as they were situated in an entirely different shopping location, and therefore, apart from AS1/RS2, the Tribunal should adopt his other comparables, RS1, RS3, RS4 and RS5. Below is a summary of the details of the 2 experts’ shop comparables, as follows:-
Comparable AS2 and AS3 92.Mr. Chan opined that these two shop comparables located at Mosque Street were suitable comparables. On the other hand, Mr. Lai disagreed and opined that they should be rejected. In the EUV valuation report, Mr. Lai quoted the pedestrian survey of the traffic consultant and said that the pedestrian flows from these comparables were much lower than that of the Shop. The respondent, relying on Mr. Lai’s evidence, submits that these 2 comparables are situated in a secluded location with different characteristics. Also, the respondent says that Mosque Street is a street that is only used as an access route by local residents. More particularly, in terms of size, the saleable area of AS3 is only 23.75 sq. m. whereas that of the Shop, at 98.88 sq. m. is almost 4 times bigger. The respondent therefore submits that it is inappropriate to use such a small-size comparable. 93.We have the benefit of viewing the exterior of these comparables and the surroundings. We agree with Mr. Lai and the respondent that these 2 comparables should be rejected as suitable comparables, for the purpose of valuing the Shop by Direct Comparison Method of valuation. Comparable RS1 and RS3 94.Mr. Chan discarded Comparables RS1 and RS3 in his choice of suitable comparables because they, being located in the entertainment and bar district, have superior trading potential. Mr. Lai also considered RS1 and RS3 to be superior to the subject Shop though there is a substantial dispute on the extent of superiority. 95.Also, for RS1, Mr. Chan objected to its use as a comparable because it was transacted some 6 months after the valuation date. 96.We find that these 2 comparables are located fairly close to the Shop. We agree with the respondent that the superior trading potential of RS1 and RS3 is not per se a ground for discarding them. 97.As to the use of a comparable transacted after the valuation date, it is well established that a market transaction concluded after the valuation date does not per se bar it from being considered as a comparable[34]. 98.We therefore agree with Mr. Lai and the respondent that these 2 comparables should be adopted for the assessment of the EUV of the Shop. Comparable RS4 99.Although this shop has a Caine Road address, it actually fronts onto the upper part of Elgin Street very close to its junction with Caine Road. However, Mr. Chan opined that this comparable should be rejected. We agree with Mr. Lai and the respondent that this should be adopted as a comparable. Comparable RS5 100.This is the only comparable with a direct frontage onto Caine Road, same as the Shop in the Building. Mr. Chan objected to the use of RS5 as a comparable. He considered it unsuitable on the ground that it was transacted some 14 months before the valuation date. Mr. Lai disagreed. In light of scarcity of suitable shop comparables, we accept this comparable even though it was transacted a bit longer from the valuation date than the other comparables. Direct comparison approach of using the overall EFA method or the RZM 101.One dispute between the 2 experts on the EUV assessment of the Shop is whether to employ RZM in the present case. Mr. Chan opined that the RZM should be used, mainly because the layout and depth ratio differences between the subject shop and the comparables, particularly the common shop comparables (AS1/RS2) were such that the use of RZM would be appropriate. On the other hand, Mr. Lai cited a number of authorities on RZM and argued that the method should not be used in this case. 102.The applicants also submit[35] that there does not appear to be much dispute between the experts on the following 2 aspects:
103.We agree with the applicants that almost nobody in the valuation profession would have any quarrel with the above two aspects relating to the valuation of shop premises. The dispute on the RZM is usually on whether the method should be generally adopted or should be adopted in a particular case in the valuation of shop premises. 104.The applicants also submit[37] that the authorities do not decide that the RZM should not be used in Hong Kong; rather it is established that if there is a layout and depth ratio difference between the subject shop and the shop comparables it would be appropriate to consider using the RZM[38]. Therefore, the applicants stress that it is a question of valuation judgment whether the layout and depth ratio difference is such that the RZM should be used[39]. 105.On the other hand, the respondent in its final written submission[40] submits that the entire approach of Mr. Chan should be rejected, for the following reasons :
106.Therefore, the respondent concludes that the fact that the common comparable AS1/RS2 has a wider frontage than the Shop and other comparable would not justify the use of the RZM. It accords with common sense as said in Zhuang PP Holdings Limited[46]that :
107.After consideration of the evidence of the 2 experts and the parties’ submissions, we agree with the respondent that in the present case, the direct comparison method of using the unit rate per sq. m. of the EFA of the comparables and the subject Shop should be preferred. 108.As to the dispute between the experts that when the RZM is not used, an adjustment reflecting the low depth to frontage ratio should be made, this will be addressed in the section on the layout adjustment of the shop comparables below. Tribunal’s analysis and adjustments of the shop comparables 109.We have gone through the experts’ detailed and sometimes very tedious adjustments relating to various factors of differences between the subject Shop and the comparables adopted by the Tribunal. For ease of reference, we have reproduced below the table of analysis and adjustments of shop comparables prepared by Mr. Chang in his final written submission. In addition to the various percentages of adjustments suggested by the 2 experts, we have also given our corresponding estimated figures for each adopted comparable. Analysis and adjustments of shop comparables (AC: Alnwick Chan, PL: Patrick Lai, LT: Lands Tribunal)
Time and Size adjustments 110.The 2 experts have agreed to adopt the same adjustments for the factors of time and size. The time adjustment is based on the Private Retail Price Indices published by the Rating and Valuation Department. After Mr. Chan agreed with Mr. Lai to use the date of a provisional sale and purchase agreement of a comparable (where available), there is no longer any disagreement between the 2 experts on the factor of time difference between the date of sales of the comparables and the date of valuation of the Shop (3 October 2011). As for size adjustment, the 2 experts have agreed to use the “rule of thumb” basis of 1% for every difference in EFA of 5 sq. m., on the assumption that the larger the size of a property, the lesser is the unit sale price ($ per sq. m. of EFA). 111.We agree to adopt their figures for these 2 factors of adjustment. Age 112.Mr. Lai disagreed with Mr. Chan and opined that no adjustment should be made in respect of building age[48]. The respondent submits that although Mr. Chan agreed that building age was not a significant factor in shop valuation[49], his adjustments for this factor was actually in the range of 3.6% to 6.4%, which are not insignificant. Mr. Chan testified that occasionally building renovation would necessitate contribution from shop owners but he had no evidential basis for when and how much of that potential liability would be. Mr. Lai on the other hand commented that the proportionate cost of any such potential renovation was insignificant when compared with the high value of a ground floor shop. 113.We agree with Mr. Lai and decide that no adjustment is warranted for this factor. Visibility 114.For the common comparable (AS1/RS2), the respondent submits that an adjustment of 5% for its relatively inferior visibility should be applied, as suggested by Mr. Lai[50]. No similar adjustment for the other comparables was suggested. Mr. Chan disagreed and the applicants submit that this adjustment should not be allowed. Mr. Mok sets out in the final written submission[51] that the following points should be borne in mind:
115.We agree with the respondent and decide that an adjustment of 2% to the common comparable is warranted for this factor. Accessibility 116.For the common comparable (AS1/RS2), the 2 experts also had differences in the factors of accessibility and layout. Mr. Lai applied an additional 2% adjustment to reflect the relatively poor accessibility of the comparable which abuts onto the long staircase along Shelly Street[52]. Also, the respondent submits that the adjustment is further justified because there is the illegal structure (i.e. the steps) encroaching onto the public street outside the shop without which it will be very difficult to climb up and enter the shop. Mr. Chan rejected[53] this adjustment for the common comparable. 117.We agree with the respondent and decide that an adjustment of 2% for this factor is warranted for the common comparable. Layout 118.The primary position of Mr. Chan is that :
119.We have said earlier that we do not agree to use the RZM i.e. the unit rate per sq. m. of Zone A area in this case and instead shall use the EFA method, i.e. the conventional, overall unit rate per sq. m. of EFA method. Therefore, we agree with Mr. Chan that, in light of the layout and depth ratio differences between the Shop and the common comparable (AS1/RS2), an additional downward adjustment of -5% is warranted. This adjustment only applies to the common comparable, but not to the other comparables. Headroom 120.The 2 experts managed to agree on the physical measurements of the headroom for the Shop and the comparables. However, they did not reach agreement on the quantum of adjustment for the difference in headroom: Mr. Chan gave +3% per 1 metre difference whilst Mr. Lai gave +1.3% per 1 metre difference[57]. We decide to adopt Mr. Lai’s rate of adjustment as it appeared to us to be a more reasonable figure. Frontage 121.There were substantial differences for the comparables between the 2 experts on this factor of adjustment. It was not only that the 2 experts could not agree on the quantum of adjustment, they had differences in agreeing whether the Shop and the comparables should be measured in terms of the physical frontage or the cleared frontage. This is rather unusual in the determination of the market value of shops, previously heard and decided by the Lands Tribunal. 122.Mr. Chan computed the physical frontage of each comparable and suggested that this should be taken to be the frontage for the purpose of calculating and applying the mutually agreed quantum adjustment. On the other hand, Mr. Lai opined in the present case that the frontages of the comparables should be computed by reference to their “clear frontages” shown in the approved building plans. The differences in their estimated frontages for the comparables, extracted from the valuation schedules in their EUV valuation reports for the comparables, as well as for the subject Shop in the Building are as follows:
123.The parties have spent a lot of time in this factor of adjustment, both in the trial when the 2 experts gave evidence in chief and cross examination, and also at final submission[60]. Put simply, Mr. Chan opined that the usual physical measurements of the frontages of the Shop and the comparables should be adopted in applying the “rule of thumb” quantum of adjustment agreed between the 2 experts. In Mr. Chan’s approach, if the wall or column has commercial potential in attracting customers, the width of such wall or column should be included in the measurement of the frontage. Mr. Lai disagreed and said that his measured “clear frontages” (i.e. according to the frontages as shown in the approved plans but excluding all the walls and columns as provided by the approved plans) should instead be used. 124.The issue of frontage of a shop is usually one of the factors of adjustment in the determination of the market value of the shop in a compensation case heard and decided by the Lands Tribunal. However, as is usually the case for valuation of the market value of a resumed property, it is decided on the basis of factual evidence adduced before the Tribunal. Therefore, the rationale adopted in a particular case may not normally apply in another case that later come before the Tribunal. 125.In this respect, Mr. Lai quoted para 30 of Lee Yun v Director of Lands[61]and said that it supports his cleared frontage approach. However, the applicants submitthat that particular paragraph does not support Mr. Lai’s approach for at least the following reasons:
126.We agree with the reading of the Judgment of Lee Yun in the above submission of the applicants. 127.In addition, the applicants submit that if the column in the subject shop and the columns and walls in the comparables do have potential to attract customers, it is legitimate to count them all as part of the width of the frontage of the subject shop and the comparables. This is so notwithstanding that the approved plan provided for the existence of the walls or columns at the shop fronts of the comparables and the subject shop :
128.The applicants continue in the final written submission to demonstrate that for each of the shop comparables, Mr. Lai fails to justify that we should confine the measurement of the frontage to that as provided in the approved plan of that shop. In addition, the applicants submit that both experts did not check the Deed of Mutual Covenants (“DMC”) and did not consider the DMC provisions relevant for the purpose of measuring frontage. 129.We agree with the opinion of Mr. Chan. We believe that it is sheer common sense that the value of a particular shop due to its frontage shall not be dictated by the width of the opening shown in the approved building plan. Therefore, we accept the submission of the applicants. 130.As to the scale of adjustment for frontage, we decide to adopt the scale suggested by Mr. Lai (2% for every difference of 1 metre[64]) in preference to that suggested by Mr. Chan (a sliding scale with a cap at 5%)[65]. Location 131.As usual, this is the factor of adjustment which the experts have the greatest differences, with each holding almost views diverging from the other for most of the comparables. In this respect, we also have the benefit of inspecting the Shop, the exterior of the comparables and the general environment of the Shop and those of the comparables. 132.In the final analysis, we have adopted the following location adjustments for the shop comparables: AS1/RS2:-20%, RS1:-40%, RS3:-40%, RS4:-15% and RS5: -50%. Whether rateable value should be used as cross check 133.In Mr. Chan’s valuation report[66], he used the rateable value (“RV”) of the Shop and the comparables to cross check the adjustments made. The respondent submits that Mr. Chan’s entire approach should be rejected as it is “irrelevant and inherently unreliable.” [67] 134.Mr. Chang has summed up that there are three reasons that the Mr. Chan’s approach of using RV as cross check was wrong[68] :
135.We agree with the opinion of Mr. Lai and the respondent’s submission. We maintain the repeated view of the Lands Tribunal[70] that the rental and the capital markets, though inter-related are not moving in the same rate, or not even in the same direction during a particular period of time. Therefore, we reject the use of rental analysis alongside the direct comparison method of valuation which should be based on the analysis of sales transactions. Tribunal’s valuation of the EUV of the Shop 136.Hence, we apply the estimated total adjustments to the unit rates of each of the 5 shop comparables and arrive at the adjusted unit rate for the comparables. Taking the average of the 5 adjusted unit rates, we find that the appropriate unit rate for the valuation of the Shop (having an EFA of 98.54 sq. m.) is $356,870 per sq. m. We estimate that the EUV of the Shop as at 3 October 2011 is $35,166,009 which we round off to $35.20 Million. The computations are shown in the table below:
Determination of the EUV of the domestic units in the Building 137.The summary and break-down of the EUV valuation of the 2 valuation experts for all the 74 domestic units in the Building are shown in Mr. Chan’s Bundle B1/29 and Mr. Lai’s Bundle H1/189. The sum of the EUV of all the domestic units of the Building, estimated by Mr. Chan and Mr. Lai are $328,932,239 and $274,690,000 respectively, with Mr. Chan’s value about 19.75% higher than that of Mr. Lai. The difference is quite large for aged domestic units. This could be the reason that unlike most compulsory sale applications, the parties in the present case contested vigorously for the domestic EUV valuations, in addition to the usual disputes among the parties in non-domestic (usually retail shops) EUV and the RDV. We have set out earlier the issues between the parties on the EUV of the Shop of the Building. In this section, we shall deal with the issues between them on the EUV of the domestic units of the Building. Before that, we shall first summarize what they have in common in the valuation of the EUV of the domestic units of the Building. 138.The methodology in assessing the EUV of the domestic units in the Building is the same for both experts. The Direct Comparison Method of Valuation is employed in the valuation of the domestic units in the Building. Each of the domestic units is valued on the basis of the EFA which is the sum of the saleable area of the unit and the adjusted area of the ancillary accommodation (where appropriate) of the unit. This involves the following steps :
139.The experts have agreed on :
140.The outstanding issues relating to the EUV of the domestic units in the Building are :
141.For issue (d) above, the experts have agreed to use Mr. Lai’s basis before the hearing commenced. They are :
Choice of suitable comparables for the valuation of the EUV of the domestic units of the Building 142.The experts agreed to use Flat A 4/F of the Building as the Reference Domestic Unit. We have to decide on their dispute in the choice of suitable domestic comparables before we consider their valuation of the adjusted unit rate they applied to the Reference Domestic Unit, and then the detailed valuations of all the domestic units. 143.There are between the 2 experts a total of 8 different relevant domestic comparables, of which 3 are common. Mr. Chan’s adjusted unit rate for the Reference Domestic Unit of the Building is calculated by taking the average of the adjusted unit rates of his 5 comparables, at $106,000 per sq. m. whilst Mr. Lai’s adjusted unit rate for the Reference Domestic Unit, arrived similarly from his 6 comparables, is estimated at $92,700 per sq. m. Therefore, Mr. Chan’s estimated unit rate is about 14.35 % higher than that of Mr. Lai’s. Their 2 tables of analysis and adjustment of domestic comparables are extracted and set out below.
144.We have to consider whether :
145.Mr. Chan suggested that of the 4 comparables in Cordial Mansion, 15 Caine Road, only the lower floor unit (i.e. Mr. Lai’s Comparable D3) should be adopted as the suitable comparable for the Reference Domestic Unit, which is on the 4/F of the Building. The other 3 higher floor units (Mr. Lai’s Comparable D1, D2 and D5) should be discarded as they are on floor levels much higher than the Reference Domestic Unit, thus necessitating a large adjustment for different floor levels alone. Besides, these high floor comparables have much better view than the Reference Domestic Unit which again would warrant large upward adjustments as well. 146.On the other hand, Mr. Lai opined that all 4 comparables in Cordial Mansion are suitable comparables and should be adopted while the differences between them and the Reference Domestic Unit could be “objectively” adjusted, in a similar manner as for other comparables. Besides, the respondent submits that although the nominal floor level of the Reference Unit is 4/F, it is on the 5/F above the ground level. In terms of figures, the respondent also submits that according to the analysis of Mr. Lai, although more floor level adjustments for these higher floor comparables in Cordial Mansion are necessary (assuming an adjustment of 1% per floor, according to the 2 experts’ agreed adjustment percentage for floor level difference), their adjusted unit rates, according to Mr. Lai, are indeed within a tight range (D1:$86,080; D2:$85,606; D5:$96,619) and are close to the average adjusted unit of $92,700. 147.Apart from the comparables at Cordial Mansion, the 2 experts also have disagreement on whether the 2 comparables at Leung Fai Terrace (Mr. Chan’s Comparable D2 and D3) should be discarded. The applicants submit that these 2 comparables are suitable comparables. More particularly, there are only a limited number of relevant domestic comparables for the valuation of a total number of 74 domestic units in the Building. On the other hand, the respondent submits that these 2 comparables should be rejected because they are much quieter than those apartments facing the busy Caine Road in that they are located on a terrace behind Gramercy and are only accessible via a short lane beside the escalator system on Shelly Street.[72] The respondent also submits that although Mr. Chan has taken into account the area of the front garden and backyard of Mr. Chan’s Comparable D2, he has not made any adjustment to the comparable to reflect the characteristic difference if it could be objectively assessed at all [73]. The respondent further submits that contrary to the fact that these comparables enjoy a superior location, Mr. Chan is wrong in applying a +5% adjustment suggesting that they are inferior to the Reference Domestic Unit. 148.We have the benefit of having a joint site inspection with the parties of the exterior of the buildings where all the domestic comparables are located. Having considered the opinion of the experts and the submission of the parties, we found the 2 comparables at Leung Fai Terrace should be discarded as we agree with Mr. Lai that they enjoy quite a different location characteristic from the domestic units in the Building. As for the 3 higher floor comparables at Cordial Mansion, we decide that Mr. Lai’s Comparable D1 and D2 should be discarded whilst the mid floor unit, Mr. Lai’s Comparable D5 should be retained. Although the Reference Domestic Unit of the Building is 4/F Flat A, the Building actually consists of 9 storeys of domestic floors. In reaching our decision, we also take into account the fact that the 2 experts actually agree to adopt Flat C on 9/F of Cordial Mansion (i.e. Mr. Chan’s Comparable D1 / Mr. Lai’s Comparable D3) as one of the three common comparables. 149.Therefore, among the 8 comparables[74] identified and analyzed by the 2 experts, we decide to adopt 4 of these as suitable comparables for the valuation of the Reference Domestic Unit of the Building and hence the valuation of all the domestic units of the Building. Before we consider each of these 4 comparables further, we sum up below the 2 experts’ adjusted unit rates of these 4 comparables adopted by the Tribunal, as follows:
Determination of the unit rate for the valuation of the Reference Domestic Unit of the Building 150.From the above table, we find that the average of Mr. Chan’s adjusted unit rates for the 4 comparable adopted by the Tribunal, based on his analysis at Bundle B1/27 is about $98,007 per sq. m. which is rounded to $98,000 per sq. m. Similarly, Mr. Lai’s figure of the average of the 4 comparables is about $96,142 per sq. m. which is rounded to $96,000. 151.We find that the difference between the 2 experts is now very small, only about 2%. Bearing in mind that we are dealing with the valuation of domestic properties where the expert valuers for the parties (and similarly the Tribunal) have no other way but have to make a certain number of adjustments based on subjective opinion on various differences between the comparables and the Reference Domestic Unit of the Building, we decide that it is not worth the effort at all to consider further the individual adjustments made by the 2 experts for the comparables. We decide to split the final valuation outcome of the 2 experts and adopt a rate of $97,000 per sq. m. for the valuation of the Reference Domestic Unit of the Building. Tribunal’s valuation of the EUV of all the domestic units in the Building 152.We have set out in paragraph 138 above the summary and break-down of the EUV valuation of the 2 valuation experts for the domestic units (as shown in Mr. Chan’s Bundle B1/29 and Mr. Lai’s Bundle H1/189). As we have now determined that the unit rate for the Reference Domestic Unit is $97,000, we find that in order to understand the changes in the detailed EUV valuation of all the domestic units by the 2 experts, we have to substitute this unit rate for the unit rate previously used by Mr. Chan and Mr. Lai in their EUV valuations (i.e. $106,000 per sq. m., and $92,700 per sq. m. respectively). As a result of making these changes only but without changing any other valuation inputs of the 2 experts in their valuation we have estimated their revised total EUV valuation of all the domestic units. 153.Revised total domestic EUV based on Mr. Chan’s domestic EUV valuation at Bundle B1/29 = 154.Revised total domestic EUV based on Mr. Lai’s domestic EUV valuation at Bundle H1/189 = 155.We find that the difference in the revised total domestic EUV has become much smaller with the figure based on Mr. Chan’s domestic EUV valuation only about 4.72% higher than the corresponding figure based on Mr. Lai’s domestic EUV valuation. 156.Again, bearing in mind that we are dealing with the valuation of domestic properties where the expert valuers (and similarly the Tribunal) have to made a number of adjustments based on the subjective opinion on the differences between the Reference Domestic Unit of the Building and the rest of the 73 domestic units of the Building, we decide that it is reasonable to split the difference between the 2 valuation outcomes based on the original total domestic EUV valuation of the 2 experts. Taking the average of the 2 valuation outcomes, we arrive at a figure of $294,217,927 (i.e. {301,004,030 + $287,431,823} ÷2) as the sum of the EUV of all the domestic units (74 nos.) in the Building. This we would round to $294.20 Million. Summary of the Tribunal’s estimated EUV for all the Units in the Building 157.Summing up, in determining the disputes between the parties on the EUV of all units in the Building, we have estimated that the EUV of the Shop in the Building is $35.20 Million and the sum of the EUV of all the 74 domestic units in the Building is $294.20 Million. Therefore, the ratio of the EUV of the respondent’s unit (i.e. the Shop in the Building) to the EUV of all units in the Building (i.e. the Shop and all the 74 domestic units in the Building) equals to $35.20 Million / $35.20 Million + $294.20 Million = $35.20 Million / $329.40 Million, or about 10.6861%. Disputes in the estimation of the RDV of the Lot 158.Before the resumed hearing of the trial in February 2013, the 2 valuation experts each produced 2 new reports setting out their latest assessments of the RDV, as follows:
159.Though Mr. Chan stated in the analysis tables attached to Exhibit A10 that the date of valuation was 1 February 2013, it was explained by him in his oral evidence that the valuation was made up to the time when he signed the Report, i.e. 15 February 20013. Therefore, we could take that the experts had one thing in common: the date of valuation was the same, 15 February 2013. The principal live issues between the 2 experts on the estimate of the RDV 160.Apart from the substantial difference between the 2 experts in the final estimate of the RDV, they have major differences in the following issues, which remain the principal live issues even at the time of final submission by the counsel for the parties:
161.In terms of figures, we sum up below the main components and the respective figures estimated by the 2 experts in their residual valuations for the valuation of the market value of the Lot. They are basically adopting the same format normally used by valuation experts for submission of their residual valuation to the Lands Tribunal. Differences between the 2 experts in their residual valuation for the Lot
Different optimum hypothetical development models of the 2 experts 162.Before we consider the various numerical inputs of the 2 experts in their residual valuation, we have to consider their two different hypothetical development models and then to decide the optimal hypothetical development model for the Lot. The hypothetical developments proposed by the two experts should have much in common because this is really dictated by the location of the Lot, its size and dimension as well as the zoning. 163.However, notwithstanding that both experts suggested that the hypothetical development would be a residential tower block, they differed in several major aspects:
164.From the valuation report filed by Mr. Chan, his hypothetical development[80] consists of the following components :
165.On the other hand, Mr. Lai’s hypothetical development consists of the following components :
Tribunal’s view on the optimum development model for the Lot 166.In Mr. Chan’s valuation report of 17 October 2012, the following points on the development model were made[81] :
167.After comparing the models of the 2 experts and having heard their evidence at trial, it is our considered view that the development model advocated by Mr. Lai is not marketable, and that the model of Mr. Chan should be preferred and accepted as the model of the proposed development for the residual valuation of the Lot in this case. Mr. Mok had summed up in the applicants’ final written submission[83] the evidence of Mr. Lai on this issue as follows :
168.And Mr. Mok had made the following comments on Mr. Lai’s evidence which we totally agree :
169.In addition, we agree with the submission[84] of the applicants that Mr. Chan was right to suggest the following :
170.In conclusion, we agree with the applicants that the development model advocated by Mr. Lai is not marketable, and that the model of Mr. Chan is accepted. 171.There is another issue of whether in the proposed development there should be 2 units (as suggested by Mr. Chan) or 4 units (as suggested by Mr. Lai) on each floor. In this respect, we note that according to Mr. Lai’s own estimates of the domestic unit rate for the estimation of GDV for the proposed development of the Lot at Enclosures 13a and 13c of Exhibit R9, his estimated unit rate is $465,000 for the bigger reference unit of 25A of 77 sq. m. using Gramercy comparables whilst his estimated unit rate is $380,578, for the small reference unit of 12A of 40.5 sq. m., or a difference of about 22%. However, as submitted by the applicants, after taking into the adjustments of 13% for the “floor level difference” of the two reference units and 2% for difference in “view” of the two reference units, the unit rates for the bigger 2-unit design and the smaller 2-design design are not as high as the original estimates show. 172.In any event, we agree with the applicants the choice should be decided mainly by the question of marketability. In this respect, we have already set out above that we prefer to accept the 2-unit design in Mr. Chan’s model instead of the 4-unit design in Mr. Lai’s model. Summary of comparables for the domestic portion of the proposed development 173.There are many differences between the 2 experts in the estimation of the GDV of the proposed development. The most important component of the GDV in the residual valuation of the RDV of the Lot is the domestic portion. The experts’ approaches in the actual choice of comparables, the appropriate adjustments and the resulting unit rates for the estimation of the domestic portion of the GDV are drastically different. 174.After the adjournment, Mr. Chan no longer used the domestic comparables previously used in his RDV valuation reports. We set out in the following table the 4 new domestic comparables adopted by Mr. Chan for the valuation of the domestic portion of the GDV.
175.The respondent on the other hand submits that the 4 comparables should all be rejected. Instead, the Tribunal should accept the approach of Mr. Lai who consistently (i.e. before the adjournment and after the adjournment) adopted the pre-sale comparables of the few new developments, in particular Gramercy (38 Caine Road) in arriving at the appropriate unit rate for the estimation of the value of the domestic units and hence the GDV in the proposed development. Tribunal’s finding in the choice of domestic comparables for assessing the domestic portion of the GDV 176.We find that there are two main reasons that Mr. Lai’s 2010 pre-sale comparable should be rejected but on the contrary, Mr. Chan’s 4 new comparables post Government measures should not be rejected. 177.Firstly, we find that it is valuation ABC that any expert valuer should consider and adopt comparables that are close to the date of valuation. Putting aside whether the transactions in Gramercy are pre-sales, they were transactions dated back in 2010 while the date of valuation for the RDV of the Lot is 15 February 2013. Therefore, for this reason alone, we shall reject these Gramercy transactions of 2010 as suitable comparables because their dates of transactions are too far away from the valuation date for the RDV of the Lot when compared to the 4 new comparables of Mr. Chan. Although valuers usually agree to use the Rating and Valuation Department’s territory wide price indices to adjust for the difference in time between the date of valuation of the subject property and the dates of transactions of sales comparables, it is generally accepted by the valuation profession that the difference in time should not be too long, and certainly not more than 2 years (some would argue that it should not be more than 1 year, as Mr. Chan did when he sought to reject one of Mr. Lai’s shop comparables for the assessment of the EUV of the Shop). 178.Secondly, if a valuer opines that a comparable should be rejected because it is out of tone with either the level of value or the market sentiment prevailing at the valuation date, the evidence must be clear cut and supported by evidence of transactions as a whole. This is especially so in the present case when the market appeared to have lost momentum in the light of the introduction of the Government measures, thus reducing the volume of transactions. Therefore, we find that Mr. Lai cannot simply reject the use of the few transactions that have occurred post-October Government measures without re-examining his approach and evaluating all the transactions together. 179.In addition, since the difference between the experts is so great and they have submitted several rounds of reports on this issue, we shall consider in more detail the rationale behind each expert. 180.The applicants have set out in paragraph 81 of their final written submissions detailed summary of Mr. Chan’s latest reports (Exhibits A10 and A11) on the analysis and choice of these 4 new comparables. They are summed up below:
181.We note that Mr. Lai rejected all the post-October Government measures transactions in Gramercy, Soho 38 and Centrepoint for one reason or another. However, as submitted by the applicants, he insisted, during the cross examination, that :
182.We agree with the applicants that Mr. Lai’s evidence is most odd and unsatisfactory in the following ways :
183.In addition, we agree to exclude the newly transacted comparables at Soho 38 as the development was completed in 2008 and contains only small-sized domestic units. 184.In this respect, we would like to add that in residual valuation for the valuation of a piece of development land, it is well established that although it is assumed that the most optimal development (permitted by the lease, the planning and other statutory constraints as well the market conditions) will be carried out on the land over the future period of time, only present day value (i.e. sales proceeds of the completed development) and present day cost (i.e. cost of demolition, cost of construction, finance cost, etc.) will be used. Therefore, if we are using the sale price of a suitable comparable development which is sold on pre-sale terms (for example, with the development to be completed in a few years time and with the purchaser paying only 15% of the sale price), even if the sale takes place at or very close to the date of the valuation, adjustment ought to be made as the developer will not be able to receive the full amount of sale price today. In this respect, we agree with the opinion expressed by Mr. Chan and do not agree with Mr. Lai that the difference can be simply adjusted by a few percentage points. 185.The case advocated by Mr. Lai is different from what we describe above. We do not have the benefits of pre-sales transactions of a suitable comparable development close to the valuation date. Instead, the pre-sales transactions (i.e. Gramercy and Pierre) are very far away from the relevant valuation date of the RDV of the Lot, which the experts have agreed to be 15 February 2013. So we do not have to trouble ourselves of deciding what adjustments ought to be made between the proposed hypothetical development on the Lot and the sales evidence of un-completed comparable development (which can be, like the subject Lot, still in the very early stage of development). It may sound peculiar to someone who is not familiar with the basic assumption of residual valuation that if pre-sales (even if they are close to the relevant valuation date) are used, difficult adjustments would have to be made because in the market, pre-sale transactions are usually completed with stage payment, i.e. without the need for the purchasers to pay up the full amount of purchase price (hence the gearing ratio of the investment is different from the purchase of a completed development). It is this factor that Mr. Chan sought to argue that presale prices could most likely be inflated by the vendor/developer as the purchaser does not need to pay the full price today. 186.It was decided in Million Add Development Ltd v Secretary for Transport[88] that the Tribunal rejected the use of the presale comparables, notwithstanding having acknowledged that they were actual market transactions, because :
We find that similar problems in adjustments still exist today if we were faced with the situation that pre-sales comparables are being used for the estimation of the GDV for the hypothetical development for the Lot. However, since we have already rejected the use of Mr. Lai’s presales comparables, we do not need to consider further the adjustments that need to be applied to those comparables. 187.In the circumstances, we accept the applicants’ submission that Mr. Lai’s approach and his unit rates should be rejected and the Tribunal should accept (i) Mr. Chan’s approach and (2) his comparables. As to the unit rates in the assessment of the domestic GDV, we shall consider Mr. Chan’s adjustments in the section below. Tribunal’s analysis and adjustment of domestic comparables for the valuation of the domestic portion of the GDV 188.We have already said that we concur with Mr. Chan that we should reject Mr. Lai’s approach of using the Gramercy and Pierre presales plus the time index. Mr. Lai has presented no alternative way of how the presales can be legitimately used in the event that the Tribunal shall decide that Mr. Lai’s approach of using the presale comparables plus the time index is a wrong approach. Therefore the issue of whether presales are suitable comparables have become academic and we shall not deal with this issue any further in this Judgment. 189.Likewise, Mr. Lai has mentioned the term new-build premium in his report, and has also drawn our attention to the Lands Tribunal’s decision in Charmlink[89]in which the Tribunal’s preferred comparables at the development One Victory were presales in support of Mr. Lai’s use of pre-sales comparables in this case. However, we agree that from the reading of the judgment, the Tribunal was not even alerted to the fact that the sales in One Victory was presales, and the arguments advanced against presales with stage payments only were not advanced in Charmlink. 190.We understand that it is common ground that the comparables identified by Mr. Chan were from 2 new developments Gramercy and Centrepoint, and were sold by the developer and were unoccupied. Therefore, we find that no adjustment is required even if one were to agree that new-build premium exists for properties newly completed and un-occupied as against properties which have changed hands once or several times after completion. Therefore, we do not find it necessary to consider any further in this case the issue of whether new-build premium exists in some properties but not in others. 191.We set out below our adjustments to the domestic comparables that have been identified and adopted by Mr. Chan in his valuation report.
192.Although Mr. Lai did not analyze and adjust these comparables on the ground that they should all be discarded, we have also considered his views for comparables in Centrepoint and Gramercy, relative to the proposed development on the Lot. We in the final analysis adopt the following adjustments to the 4 comparables identified by Mr. Chan. Time 193.We agree to adjust with the “Private Domestic Prices Indices By Class (Territory Wide)” January 2013 provided by the Rating & Valuation Department. We understand that Mr. Lai relied on the “Centi-Citi Leading Index” to argue that there was a rise of the market of 2% from December 2012 to February 2013 notwithstanding the introduction of the Government measures on 26 October 2012 (Exhibit R10). 194.However we agree with the Applicants that we shall not use the Centi-Citi Leading Index on the following reasons :
Location 195.For Gramercy, Mr. Chan opined that an adjustment of -3% should be adopted whilst Mr. Lai said it enjoyed the similar location as the Lot. We agree with Mr. Chan on Gramercy’s superior location. Age 196.We agree with Mr. Chan in the adopted adjustment of -/+ 2% adjustment of every 1 year difference in building age. Facilities 197.We agree with Mr. Chan that the proposed development has the same facilities as Gramercy. For Centrepoint, we adopt a higher adjustment of 5%. Car parking provision 198.We also adopt a higher adjustment of 5% for the provision of car parking facilities in the subject development for the Lot. View 199.We adopt an adjustment of -5% for Centrepoint and 0% for Gramercy. Level 200.We adopt Mr. Chan’s adjustments for level differences. Quantum 201.We also adopt Mr. Chan’s adjustments for quantum differences. Tribunal’s valuation of the domestic portion of the GDV 202.We hence computed the adjusted unit rate of each comparable by adjusting the unit rate of the sale price of the comparable with the estimated total adjustment for each comparable, as follows:
203.Therefore, for the purpose of setting the unit rate for the typical floors of the domestic portion (other than the special unit) of the GDV of the proposed development in the residual valuation model for the RDV of the Lot, we shall adopt the average of the 4 domestic comparables analyzed and adjusted above, at $287,000 per sq. m. for the reference domestic floor. 204.For the special unit, Mr. Lai suggested that there should be two floors at the top, in the form of a duplex. However, judging from the lump sum amount of the price estimated for the special unit, we agree with Mr. Chan that it would be reasonable to assume a design of only one floor of special unit. In addition, we find that neither expert actually managed to identify any suitable sales comparable for the special unit. As we have accepted most of the assumptions and estimates of Mr. Chan in this case, we decide to adopt the ratio between the unit rates for the typical units and the special unit estimated by Mr. Chan and apply that to the unit rate for the typical unit we estimated above, at $287,000. This we find to be $372,037 which we round off to $327,000. Tribunal’s valuation of the car parking portion of the GDV 205.As we have decided to adopt Mr. Chan’s model which did not provide shops but had 2 floors of car parks, it would not be necessary for us to determine the unit rate for the shop portion. However, we have to determine the value of the car parking portion of the proposed development for the purpose of finding the total GDV in the residual model. 206.Mr. Chan provided 9 car park comparables which give an average price of $1,307,778[90]. However, only car park comparables 1 & 9 at Casa Bella are car parks served by car lifts whereas the rest of the comparables are served with ramps, which, as submitted by the applicants, should be more convenient than car lifts. The car park comparable 1 & 9 with car lifts are at lower levels of $980,000 and $1,180,000 while the car park comparables 2-3 & 7-8 range from $1.36 million to $1.9 million. 207.Mr. Chan adopted the price of $1.1 million for each car parking space in his hypothetical development. In his report at Exhibit A11, he stated that he had no objection to discard comparables 4 to 6, as a result of which the average price is raised from $1,308,778 to $1,461,667. 208.The respondent reminds us that the only domestic comparables and transactions that are relevant in this case are in the following developments in the neighbourhood of the Lot: Gramercy, Centrepoint, The Pierre and Soho 39. However, none of these developments, that have either been constructed relatively recently or are in the process of construction, have car parks. This is at odds with Mr. Chan’s assertion that constructing car lifts and a basement car park would be the optimum hypothetical development. However, we have already considered the issue of whether car parks or shops would be part of the optimum hypothetical development. We find that car parks but not shops should be provided as part of the hypothetical development. 209.We agree that car parks in the hypothetical development, accessed by car lifts should fetch a price lower than the car parks that are accessed by ramps. We take a rate of $1,400,000, about the average of the car parks comparables accessed by car lifts and car parks accessed by ramps, as the unit rate for car parks in the GDV of the hypothetical development. As there will be 30 car parks, the total car park portion of the GDV is estimated to be $42,000,000. Estimation of the cost of development 210.Mr. Lai all along considered the hypothetical development for the Lot to be similar in quality to that of Gramercy. Therefore, Mr. Chan considered that Mr. Lai’s adopted unit rate per construction floor area (“CFA”) at $20,406 per sq. m. in the latter’s residual valuation was too low to match the construction costs of Gramercy. Mr. Chan said his criticism was supported by the report from Rider Levett Bucknall Ltd. (“RLB”), who was instructed by Mr. Chan to conduct 2 construction cost assessment based on the building material, standard and finished of Gramercy on (i) Mr. Chan’s scheme and (ii) Mr. Chan’s scheme without car parks at the basements (so as to cross check with Mr. Lai’s scheme). The RLB’s report shows that the total cost of Mr. Chan’s scheme is $235,500,000 which is used by Mr. Chan in his residual valuation. Also, the RLB’s report shows that the unit rate for Mr. Chan’s scheme without basement car parks is $33,666 per sq. m. of CFA (with total cost being $249.8 million) which is much higher than Mr. Lai’s unit rate of $20,406 per sq. m. of CFA (with total cost being $167.7 million). 211.In response, Mr. Lai commissioned TLS & Associates Ltd. (“TLS”) to give a report on the estimation of construction costs based on Mr. Lai’s scheme. It reports a total construction cost of $215,800,000 or $27,983 per sq. m. of construction floor area (“CFA”) after taking into account of preliminaries and contingencies. 212.In reply, Mr. Chan commissioned RLB to comment on TLS’s report. RLB set out the items which are found in RLB’s cost estimate of Mr. Chan’s scheme without the basement car parks but which are not found in TLS’s report. The missing items add up to $4,691 per sq. m. of CFA. RLB commented that adding the sum of $4,691 per sq. m. to TLS’s estimated unit rate of $27,983 per sq. m. of CFA would result in a unit rate of $32,674 per sq. m. of CFA, closer to RLB’s estimate of $33,660 per sq. m. of CFA. 213.Mr. Chan pointed out that “Given RLB is the project QS to Gramercy and they were following the specifications at Gramercy to arrive at the cost estimate, I reckon his assessment is more objective and credible.”[91] The applicants submit that the Tribunal shall adopt Mr. Chan’s development costs in the event that the Tribunal adopts Mr. Chan’s development model. 214.Since RLB’s latter report shows that after adjusted for the missing items, TLS’s estimate becomes $32,674 per sq. m. of CFA and RLB’s original estimate for Mr. Chan’s scheme is $33,660 per sq. m. of CFA, we decide to adopt the average of these 2 figures, or $33,167 per sq. m. of CFA for the present exercise. As Mr. Chan’s total estimated cost is $235,500,000, we compute the total estimated cost as follows: {($235,500,000 / $33,660) x $33,167} - $6,500,000, or $225,509,401. We will substitute this for Mr. Chan’s estimate of $229,000,000. 215.For the demolition cost, we will adopt Mr. Chan’s estimate of $6,500,000. Estimation of the development period 216.In addition to the shortening of the development period, Mr. Lai proposed 6 months as demolition period whereas Mr. Chan proposed 9 months (0.75 year) for demolition with 3 months (0.25 year) overlapping with 2.75 years of development period. We agree with the applicants that the 4 months demolition period to be unreasonably short. 217.We accept Mr. Chan’s breakdown of the development period (construction and demolition periods to constitute the total development period) as set out at Mr. Chan’s report of 17 October 2012, and that the following periods are to be used for the discounting of various items in the residual valuation for the RDV of the Lot :
218.Demolition cost: 0.75/2 = 0.357 years (half of the demolition period). Estimation of the developer’s profit 219.Mr. Chan argued that after the Government measures introduced in October 2012, the developer’s profit in the residual valuation should be increased from 15% to 20%. In addition, the applicants submit that the February 2013 new measures themselves and the way they were introduced about 4 months after the October 2012 measures fully support the argument of increasing the developer’s profit in the residual valuation. 220.On the other hand, the respondent said that as admitted by Mr. Chan in the case of Eversound Investments Limited v Tung Chun Hung & Others[92], the impact of new Government measures could not be objectively assessed and the developer profit was maintained at the same rate of 10%. Besides, Mr. Lai said that it was wrong for Mr. Chan to distinguish Eversound from the present case by stating that the investment in that case was much smaller as the level of developer’s profit should not be determined by the size of investment. 221.We agree with Mr. Lai that there is no sound or objective basis for increasing developer’s profit from 15% to 20% in this case. 222.Lastly, we agree with the respondent that the latest Government measures in February 2013 and the earlier measures in October 2012 “are not relevant and have no impact whatsoever on the valuation exercise of these proceedings” mainly because valuation can only reflect the market conditions at the specific valuation date and it is not appropriate to anticipate possible future movements, whether upwards or downwards. Tribunal’s Finding on RDV and the Reserve Price 223.We accept Mr. Chan’s model as the optimum hypothetical development for the Lot. Since we accept Mr. Chan’s development model for the Lot, we shall use his estimated areas for the hypothetical development for the Lot, as set out in his residual valuation, in the Tribunal’s estimate of the RDV. 224.Also, unless otherwise stated, we shall use Mr. Chan’s estimates in his residual valuation because by comparison, we find Mr. Chan’s opinion to be more reliable than that held by Mr. Lai. Using Mr. Chan’s residual valuation format as set out in Exhibit A10 but with the few parameters (i.e. GDV for the domestic units and the car parks, the total construction cost and the developer’s profit) revised as stated above, we estimate the RDV (the land value) of the Lot at $732,331,597 for which we round off to $732,300,000. The valuation is attached as Appendix to this Judgment. 225.We adopt the estimated RDV of $732,300,000 as the Reserve Price for the auction of the Lot. Conclusion 226.Having considered the above, this Tribunal is satisfied that the requirements and conditions as laid down in the Ordinance have been met and an order for compulsory sale sought by the applicants should be granted. 227.This Tribunal make the following orders :
Costs 228.Costs order nisi that the respondent do pay costs of this case to the applicants with certificate for counsel, to be taxed if not agreed on party and party basis at High Court Scale. Unless any of the parties apply by summons to vary it, the costs order nisi shall be made absolute upon expiry of 14 days.
Mr Y. C. Mok, instructed by Messrs Mayer Brown JSM, for the applicants Mr Denis Chang leading Mr Ross Yuen and Mr Julian Chan, instructed by Messrs Clayton Wong & Co., for the respondent
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Other judgments that cite this case
Further hearings and rulings under LDCS 18000/2010