Silver Wisdom Investments Ltd and Another v. Yeung Hin Kan and Tam Sau Wah and Another
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LDCS 7000/2013 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LAND COMPULSORY SALE MAIN APPLICATION NO. 7000 OF 2013 _________________
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_________________ 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 Sub-section 1 of Section A of Sub-section 2 of Section A of Marine Lot No. 243 and the Remaining Portion of Section A of Sub-section 2 of Section A of Marine Lot No. 243 (collectively “the Lot”). A composite building is erected on the Lot known as No. 41 - 45 Catchick Street (“The Building”). 2.The Building is a block of 8-storey commercial/residential building with retail shops on Ground Floor. The Building, served by 2 common staircases,was completed in 1966 with the Occupation Permit issued on 15 January 1966. There are 3 shops on Ground Floor for non-domestic-use each with a cockloft for storage, 4 residential units at each level on 1st to 7th Floors with 2 units (a front unit and a rear unit) at No. 41 and 1 unit each at No. 43 and 45 and a roof. Each of the 3 shops, the 28 residential units and the roof is given 1 undivided share making a total of 32 undivided shares. 3.The applicants filed the Notice of Application (“the NOA”) in this case on 21 March 2013. At the time of filing of the NOA, the applicants owned all the undivided shares except the 1 share of the shop on Ground Floor at No. 41 Catchick Street which is owned by the 1st respondent (“R1’s Unit”) and the 1 share of the residential unit on 5/F No. 43 Catchick Street owned by the 2nd respondent. In other words, the applicants had 30 of the 32 undivided shares or 93.75% of the undivided shares of the Lot. 4.The applicants had subsequently acquired the undivided shares owned by the 2nd respondent resulting in an ownership of 31 of the 32 undivided shares in the Lot, representing 96.875% of all the undivided shares of the Lot. 5.The 1st respondent has filed no Notice of Opposition and no evidence in this case. Nor had the 1st respondent taken part in these proceedings. 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 owned 93.75% of the shares in the Lot. We are satisfied that the applicants are entitled to make the application. Determination of the existing use values (“EUV”) of all units in the Building 7.Pursuant to section 3 of the Ordinance, the NOA was accompanied by a valuation report (“Application Report”) prepared by Mr. Charles C. K. Chan of Savills Valuation and Professional Services Limited (“Mr. Chan”), the applicants’ valuation expert, containing the assessments of the values of all units (which are conveniently termed as the existing use values, the “EUV” of all units) in the Building on the Lot as at 20 March 2013[1]. The report was prepared not earlier than 3 months before the filing of the NOA in accordance with section 3 of the Ordinance. 8.Under section 4(1)(a)(i), 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. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the Lot who cannot be found, the majority owner of the Lot is required to satisfy the Tribunal that the value of the minority owner’s property as assessed in the application is :
9.Mr. Mok on behalf of the applicants submits that this Tribunal is not called upon to determine the EUV assessment of the units and the roof since the 1st respondent had filed no notice of opposition to put in dispute the EUV of the units and the roof as assessed in the Application Report; nor is the 1st respondent an owner who cannot be found because the 1st respondent, through letters of their solicitors to the applicants’ solicitors, issued 4 counter-offers before and after the application was commenced on 21 March 2013. 10.We agree. However, we would like to make one observation in respect of the assessment of EUV by Mr. Chan. 11.In the Application Report, Mr. Chan explained the method of valuation and the process of his assessment to arrive at the EUV of each unit of the Building. 12.In his valuation of the EUV of the domestic units of the Building, Mr. Chan adopted the following methodology :
13.In assessing the EUV of all the 3 Ground Floor units, Mr. Chan adopted the following methodology:
14.Mr. Chan updated the Application Report by a supplemental report dated 23 October 2013[3] (“Supplemental Report”) in which he revised the EUV of all the units in the Building after taking into account the inspection of 4 more residential units in the Building and the updated property index prepared by the Rating and Valuation Department. In the Supplemental Report, Mr. Chan repeated the exercise he did in the Application Report with the new information and set out his revised assessments of the EUV of each unit as at 20 March 2013. For instance, Mr. Chan revised the unit price of the Reference Domestic Unit to $88,100/sq m. Mr. Chan however included an extra shop transaction at No. 70 Catchick Street which occurred in October 2012 and revised the unit price of the Reference Shop Unit to $504,000/sq m. 15.As regards the assessment in the Supplemental Report, we do not agree with the approach by Mr. Chan in making no adjustment for location for the 2 comparables at Hau Wo Street when compared with the Reference Shop Unit. Hau Wo Street is a narrow street running in parallel to Catchick Street where the tram passes. During our inspection on 19 November 2013, although we noted that Catchick Street was not particularly busy, there are banks on the street with one of which directly opposite the Reference Shop Unit. On the other hand, Hau Wo Street was more quiet and there were a lot of vacant shops along the street (including Mr. Chan’s comparable no. 2). We are not persuaded by Mr. Chan’s explanation that Hau Wo Street is transforming into a street popular in eateries and consider an adjustment for location of at least 10% is justified. 16.Nevertheless, such adjustment, if needed, only affects two of the 8 comparables adopted by Mr. Chan and the result is only marginally higher (about 2.5%) at $517,000/sq m. We agree that property valuation is not an exact science; mathematical precision is neither a feature of valuation for retail properties for the imperfection in the market where even between skilled valuers the margin of opinion may be surprisingly wide. We also note that nobody filed any notice of opposition to dispute the EUV of the units as assessed by Mr. Chan and we accept therefore the assessments for the shops as contained in the Supplemental Report should be adopted for the purpose of determining the EUV in this Application. 17.The EUV of all units in the Building as at the relevant date of valuation, i.e. 20 March 2013 are reproduced below[4]:
Section 4(2) of the Ordinance – Justification and Reasonable Steps 18.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) - Age and State of Repair 19.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. 20.Mr. So had conducted a structural assessment of the Building and prepared a report dated 4 October 2013[5]. He found the following defects in the Building:
21.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 and are approaching 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 works will need to be carried out regularly in the future and such repairs will be more and more extensive as the structural frames becomes older. He estimated the cost of repairing defective structural members of the Building amounts to $80,000. Although the present cost of repair may be relatively modest, such costs will escalate in future as the extent and seriousness of the deterioration of the structural members increases with age. He also recommended that hammer tapping works be carried out to all structural members and any defects as a matter of urgency. 22.Mr. Wong, in his Condition Survey Report dated 23 October 2013[6] stated that :
23.He assessed the total cost of immediate repair works at $9,105,489 which is about 39% 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. Most of the defects present in the Building are not superficial in nature which can be repaired effectively and economically. 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. 24.The applicants also relied upon two economic tests, i.e. the age test and the repair test, conducted by Mr. Chan to demonstrate that redevelopment is justified. 25.For the age test, Mr. Chan assessed the total existing use value (“EUV”) at $191,120,000 whilst the redevelopment value (“RDV”) is at $207,300,000 as at 23 October 2013. Given the RDV exceeds the EUV, Mr. Chan opined that redevelopment of the Lot is warranted[7]. 26.For the repair test, adopting the findings by Mr. Wong that the total estimated cost to restore the Building to tenantable standard is at $9,105,489, Mr. Chan deducted the cost for the removal of the unauthorised building works ($794,049) from it and found the net repair costs to be $8,311,440. Based on the repair works recommended by Mr. Wong and research on the price movement of residential developments which have undergone major renovation works in recent years, Mr. Chan opined that there would be about 3% enhancement to the domestic portion of the Building and only nominal enhancement to the value of retail portion. Whilst the expected enhancement in EUV after the repair is about $2,529,300, it would be insufficient to cover the estimated net repair cost, therefore the carrying out of repair works is not economically justified.[8]. 27.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. 28.As for the requirement of “the age” of the Building, this Tribunal agrees 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[9] that,
29.Having considered the evidence, we are satisfied that redevelopment of the Lot is also justified due to age in view of the following factors:
Section 4(2)(b) - Reasonable Steps Taken 30.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. 31.A total of 7 offers had been made by the applicants in respect of R1’s unit and the 1st respondent had made 4 counter-offers. None of the offers and counter-offers was accepted.
32.Except for the first 2 offers, the applicants’ offers were based on the assessment by Savills Valuation and Professional Services Limited which were in excess of the 1st respondent’s share of the redevelopment value of the Lot. There was no indication in the counter-offer as to how the suggested figure was being formulated. 33.In assessing the reasonableness of the offers, Ribeiro PJ had found in Capital Well Limited v Bond Star Development Limited[10] that :
34.This Tribunal will bear this in mind in assessing the reasonableness of each offer made by the applicants in this case. 35.There is no evidence before this Tribunal to demonstrate that the assessment by Saville can in any way be faulted. In Intelligent House Limited v Chan Tung Shing & Ors[12], the Tribunal, in its ruling on the reasonableness of the terms offered, had said the following :
36.We totally agree with such observation. Even though there are counter-offers from the 1st respondent, there is no indication as to how the counter-offers are being formulated or anything to challenge the assessment by Savills. There is nothing to suggest that the applicants should not rely upon the advice of Savills. Since all the offers made, except the first 2, are in a sum more than the valuation of R1’s unit as assessed by Mr. Chan of Savills, we are satisfied that these offers made by the applicants fall within the range of what may broadly be regarded as fair and reasonable. 37.As for the first 2 offers, it may well be that they are made without any professional advice, there is nothing to suggest that they are not fair and reasonable. In any event, since there are another 5 subsequent offers made before the filing of the NOA which we found to be fair and reasonable, even if the first 2 offers are not reasonable, this will not be sufficient to support the contention that the applicants had not taken reasonable steps to acquire the undivided shares of R1’s unit and/or the Lot. 38.Under such circumstances, we are satisfied that the offers made by the applicants fall within the range of what may broadly be regarded as fair and reasonable and the applicants have taken reasonable steps to acquire all the undivided shares of the Lot including R1’s unit. Order for Sale 39.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 R1’s unit on terms that are fair and reasonable. Under such circumstances, we found an order for sale should be granted in favour of the applicants. Reserved Price for the Auction 40.The applicants submit that the reserve price for the auction of the Lot should be fixed at $207,300,000, based on the assessment by Mr. Chan of the RDV of the Lot in Supplemental Report. 41.We have carefully considered Mr. Chan’s valuation of the RDV of the Lot. We note Mr. Chan reported that there is no relevant land sale transaction in the vicinity for direct comparison in the past year and we therefore agree with Mr. Chan that as a last resort, the residual method has to be employed as the method of assessment of the RDV of the Lot. This is done by deducting development costs (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value of the completed development. 42.Mr. Chan opined that the optimum development on the Lot comprised a block of 23-storey commercial/residential composite building with retail/commercial units on ground floor and first floor and residential units on the upper floors. Details of the hypothetical development and residual valuation are set out in Appendix 3.2[14], and details of the comparables with adjustments in Appendix 3.3[15] (for shops) and Appendix 3.4[16] (for new residential units). Mr. Chan also adopted the Development Cost Pro-forma recently promulgated by the Hong Kong Institute of Surveyors to facilitate consideration of construction costs in land value assessments in Appendix 3.2[17]. 43.Having gone through his valuation in details, we accept his valuation, including the valuation assumptions he has adopted, the values and the costs parameters that he has used in his valuation. We accept that the open market value of the Lot reflecting its redevelopment potential, i.e. the RDV of the Lot, as at 23 October 2013 is $207,300,000, which should be the reserve price for the auction of the Lot. Order 44.This Tribunal make the following determinations :
Costs 45.Costs order nisi that there be no order as to costs. 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 Mayer Brown JSM, for the applicants The 1st respondent was not represented and did not appear [1] Bundle A3/0475-0517 [2] Bundle A3/516-517 [3] Bundle B1 [4] Bundle B1/5-6 para. B3.5 [5] Bundle D1 & D2 [6] Bundle C1 to C4 [7] Bundle B1/18-25 [8] Bundle B1/1-18 [9](unreported) LDCS 18000/2010 [10] (2005) 8 HKCFAR 578 [11] Supra, at paragraph 33 [12][2008] 4 HKC 421 [13] Supra, at page 471 [14] Bundle B1/56-58 [15] Bundle B1/65 [16] Bundle B1/67-68 [17] Bundle B1/59-63 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment