Day Bright Development Ltd and Others v. U Ion Fai and Others

LDCS 12000 / 2012

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 12000 OF 2012

__________________

___________________

_________________

J U D G M E N T

_________________

BACKGROUND

1.This is an application for compulsory sale of all the undivided shares in Section E of Inland Lot No. 3536 with a building erected thereon known as Nos. 205 & 207 Tsat Tsz Mui Road (“No. 205” & “No. 207”) and Nos. 4 & 6 Nation Street (“No. 4” & “No. 6”), North Point, Hong Kong (“the Building”), for the purposes of redevelopment pursuant to Section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”).  

2.Originally the application filed on 1 February 2012 (“the Application”) included also the undivided shares in Remaining Portion of Inland Lot No. 3536. Subsequently the applicants purchased all the undivided shares of the Remaining Portion of Inland Lot No. 3536 and pursuant to the Tribunal’s Order of 21 January 2013, leave was granted to remove the undivided shares of the Remaining Portion of Inland Lot No. 3536 from the Application. The Application was discontinued therefore against the 1^st respondent, the 2^nd respondent and the 3^rd respondent who were the remaining unit owners of undivided shares of the Remaining Portion of Inland Lot No. 3536.

3.The Building is a block of 9-storey commercial/residential building served by 2 common staircases. The front elevation of the Building is facing King’s Road and the rear elevation is facing Nation Street, a private right of way. There are 4 units at each level comprising 4 shops on Ground Floor and altogether 32 residential units from 1/F to 8/F. Each of the shops and residential units is given 1 of 36 undivided shares of the Lot. The occupation permit (which covers the Building and other adjacent buildings, collectively known as Kut Cheong Mansion) was issued on 8 September 1960, more than 50 years before the date of the Application on 1 February 2012.

4.Kut Cheong Mansion in fact is a composite building comprising 14 tenement buildings arranged in two row of seven. This is in fact one of the many applications concerning these tenement buildings made under Ordinance. A more detailed description of the Kut Cheong Mansion can be found in the Tribunal’s recent unreported decision in LDCS13000/2012 handed down on 14 March 2014 concerning one of the tenement buildings of the same Mansion made by the same Applicants. I do not wish to repeat the same here. Suffice for the present purpose that each of the constituent tenement buildings of the Kut Cheong Mansion has its own staircases and governed by a separate DMC. The Building, likewise, has its own deed of mutual covenants. 

THE APPLICATION

5.When the 1^st applicant, the 2^nd applicant, the 3^rd applicant and the 4^th applicant (hereinafter collectively referred to as “the applicants”) commenced the present proceedings, the corresponding ownerships of the respective units of the Building are shown in the table below:

Floor	No. 205	No. 207	No. 4	No. 6
Ground Floor	7th & 8th respondents	2nd & 4th applicants	1st applicant	4th & 5th respondents
1st Floor	2nd applicant	1st applicant	2nd applicant	3rd applicant
2nd Floor	9th respondent	2nd applicant	1st applicant	4th applicant
3rd Floor	1st applicant	10th & 11th respondents	2nd applicant	4th applicant
4th Floor	2nd applicant	2nd applicant	4th applicant	4th applicant
5th Floor	2nd applicant	1st applicant	4th applicant	2nd applicant
6th Floor	2nd applicant	2nd  applicant	4th applicant	3rd applicant
7th Floor	1st applicant	2nd applicant	2nd applicant	4th applicant
8th Floor	4th applicant	4th applicant	3rd applicant	6th respondent
Total	9 shares	9 shares	9 shares	9 shares

6.Thus as at the date of the Application, the applicants together owned 86.1111% equal undivided parts or shares in the Lot.  By the time of the filing of the witness statement of Mr Hui Lok Shan (“Hui’s Statement”), the representative of the applicants, dated 3 December 2013, the applicants had further purchased the three units owned by (1) the 4^th & 5^th respondents, (2) the 7^th & 8^th respondents and (3) the 9^th respondent and the Application against them was discontinued. The applicants then owned 94.4444% of all the undivided shares of the Lot, i.e. not less than 90% of the undivided shares in the Lot.

7.Since then, the 2^nd applicant purchased the interest owned by the 6^th respondent and the Application against him was also discontinued by Consent Order dated 5 December 2013. The applicants then owned 97.2222% of all the undivided shares of the Lot. The applicants contend that they are entitled to make the Application by virtue of Section 3(2) of the Ordinance.

8.Thus at the commencement of trial, there was outstanding undivided shares in 1 unit as follows:

(1) 3/F, No. 207 (“the R10’s Unit”), which is owned by the 10^th respondent who is however a missing owner against whom the Tribunal Order of 29 January 2013 dispensed with service of the Notice of Application and ordered publication of notices in the newspapers.

(2) The 11^th respondent indeed used to be the occupier of R10’s Unit. He applied and was ordered by the Tribunal Order of 22 August 2012 to join as the 11^th respondent. On 27 February 2013, he assigned all his interest in R10’s Unit and delivered vacant possession of R10’s unit to the 2^nd applicant and the Application against him was discontinued on the following day.

9.In view of the above, Mr Y C Mok, counsel for the applicants, called the witnesses to prove the applicants’ case.  The applicants contend that all the requirements of the Ordinance have been satisfied and ask for an order for sale in terms of the draft order submitted. 

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

10.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. 

11.Section 3(5) of the Ordinance also states that the Chief Executive in Council may, by notice in the Gazette, specify a percentage lower than the percentage mentioned in subsection (1) in respect of a lot belonging to a class of lots specified in the notice.

12.Pursuant to Section 3(5) of the Ordinance, the Notice was gazetted on 22 January 2010 and tabled at the Legislative Council meeting on 27 January 2010.  It came into operation on 1 April 2010.  Section 3 of the Notice lowered the threshold for compulsory sale, insofar as it is applicable, from 90% to 80%.  Section 4(1)(b) of the Notice specified one of the classes for the purposes of Section 3 as “a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (which is the date of the application)”.  The occupation permit in respect of the Building was issued on 8 September 1960, which is more than 50 years as at the date of application.  The Building is therefore covered by the Notice and the applicable percentage is 80%.

DETERMINATION OF THE EXISTING USE VALUES (“EUV”) OF ALL UNITS IN THE BUILDING

13.Pursuant to section 3 of the Ordinance, the Application was accompanied by a valuation report (“Application Report”) prepared by Mr Charles Chan of Savills Valuation and Professional Services Limited (“Mr C Chan”), the applicants’ valuation expert witness, 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 28 November 2011.

14.Section 4(1)(a)(ii) 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 is “(A) not less than fair and reasonable; and (B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

15.In the Application Report of 28 November 2011, Mr C Chan explained the method of valuation and the process of his assessment to arrive at the EUV of each unit of the Building as well as the building stand on the Remaining Portion of Inland Lot No. 3536, ie. Nos. 201 & 203 Tsat Tsz Mui Road, No. 12 Healthy Street East and No. 2 Nation Street.

16.In his valuation of the EUV of the domestic units of the Building, Mr C Chan adopted the following methodology :

(a) He selected 4/F, No. 205 Tsat Tsz Mui Road (“the Reference Domestic Unit”), which was situated on the middle floor of the domestic portion as the reference unit for the purpose of valuing its unit price. 

(b) The unit price of the Reference Domestic Unit was first assessed by making reference to market comparables.  He took into account 7 comparable transactions in 6 different buildings nearby.  After making what he regarded as the necessary adjustments (for time, location, age, floor, quantum, aspect and noise effect) for all these comparable transactions, he took the average of the adjusted unit rate of the comparables to arrive at the unit price of the Reference Domestic Unit.

(c) He further considered the floor difference, view, quantum, aspect, lighting & ventilation and internal conditions of the Reference Domestic Unit and the remaining domestic units within the Building and made adjustments to arrive at the EUV of all the domestic units.

17.In assessing the EUV of all the Ground Floor units, Mr C Chan selected G/F, No. 203 Tsat Tsz Mui Road and G/F, 4 Nation Street respectively as the Reference Shop Units for shops facing Tsat Tsz Mui Road where pedestrian flow is moderate to high (“the 1^st Group”) and for shops facing Nation Street where pedestrian flow is only moderate (“the 2^nd Group”).  He then took into account 7 comparable transactions in 6 different buildings nearby for the 1^st Group and 5 comparable transactions in 3 different buildings nearby for the 2^nd Group. After making what he regarded as the necessary adjustments (for time, location, visibility, quantum, building age, layout, headroom plus accessibility (for the 2^nd Group only)) for all these comparable transactions, he took the average of the adjusted unit rate of the comparables to come to the unit price of the respective Ground Floor Units.

18.Mr C Chan updated the Application Report by a supplemental report dated 28 November 2013 (“Supplemental Report”) in which he revised the EUV of all the units in the Building after taking into account the inspection of more units in the Building and the updated property index prepared by the Rating and Valuation Department. By this time, the Remaining Portion of Inland Lot No. 3536 had been removed from the Application and therefore units in respect of Nos. 201 & 203 Tsat Tsz Mui Road, No. 12 Healthy Street East and No. 2 Nation Street were not dealt with.

19.In this Supplemental Report, Mr C 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 28 November 2011.

20.The EUV of all units in the Building, including the R10’s Unit, as at the relevant date of valuation of 28 November 2011, are as shown in paragraph B4.5 of the Supplemental Report: see the table at Bundle B1/ 6 which is reproduced  at Annex A of this judgment.

21.I am satisfied that the value of the R10’s Unit as assessed by Mr C Chan is not less than fair and reasonable; and not less than fair and reasonable when compared with the value of the applicants’ properties:

(a) the R10’s Unit - assessed at $2,550,000  (representing 2.331% of the total EUV of all units);

(b) the total EUV of all units - assessed at $109,390,000.

SECTION 4(2)OF THE ORDINANCE – JUSTIFICATION AND RESONABLE STEPS

22.The second determination under Section 4(1)(b) of the Ordinance is whether an order of sale should be made.  According to Section 4(2) of the Ordinance, this would involve 2 considerations, namely :-

(a) is the redevelopment justified due to age or state of repair of the Building; and

(b) has the Applicant taken reasonable steps to acquire all the undivided shares in the Lot.

23.The Applicants have to satisfy this Tribunal that the above statutory requirements were met, otherwise, an order of compulsory sale ought not be granted.

24.Firstly, for the requirement under (a) above, I have taken into consideration the expert evidence of Mr Benson Wong (“Mr Wong”), the building surveyor and Mr So Kin Shing (“Mr So”), the structural engineer adduced by the applicants. 

25.Mr So had conducted a structural assessment of the Building and prepared a report dated 27 November 2013. He found the following defects in the Building:

(a) visual inspections showed many defects in the form of cracks and spallings in the slabs and beams of 26 flats/units of the Building;

(b) covermeter survey revealed that the concrete covers of 1 beam and 2 slabs are not sufficient to (1) protect the embedded steel reinforcement bars against corrosion, (2) protect the bars against fire, and (3) provide sufficient depth of concrete for the safe transmission of bond forces;

(c) carbonation depth test results revealed that carbonation has penetrated past the concrete cover of beam samples and slab samples; this means the alkaline environment in many of the concrete covers, at least in the beams and slabs, which gives protection to the reinforcement bars in the structural members against corrosion have been destroyed and steel bars in these structural members must have been caused to corrode;

(d) chloride content tests showed an increased risk of corrosion of the embedded steel reinforcement bars, at least in the columns, beams and slabs;

(e) corrosion (open up) surveys revealed columns, beams and slabs exhibit rust of various magnitudes and suffered from reduction in their cross-sectional areas due to corrosion;

(f) the structural frames of the Building are deteriorating and they need to be repaired, the deterioration will continue steadily due to extensive carbonation of the reinforced concrete structural members;

(g) the design and construction of the structural frames were based on an obsolete design, there are at least 9structural design and construction aspects where the Building cannot meet the current structural engineering design requirements and the Building may not process adequate robustness to prevent it from damages arising from accidents or misuse.

26.Based on the above findings, Mr So concluded that the structural frames of the Building are in need of repair and the Building, completed more than 53 years ago, have exhibited signs that the structural frames have deteriorated to the final stages of its design working life. 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.  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 be repaired as a matter of urgency.

27.Mr Wong, in his Condition Survey Report dated 28 November 2013 stated that :

(a) the Building is in a poor state of repair due to general wear and tear;

(b) The external rendering on the external walls has signs of deterioration with not less than 19 hidden hollow spots and is potentially dangerous to public safety in the event that loosened rendering falling off ;

(c) the building envelope is not external seepage resistant as evidenced by damp penetrations through the external walls, the main roof coverings and the original mild steel windows;

(d) the two staircases are unsatisfactory means of fire escape for the upper floors because no improvement was made to the fire resisting construction and fire service installation in the Building;

(e) unauthorized building works of enclosed front balconies adversely affected the structural safety of the Building;

(f) the conditions of the internal doors, finishes, bathrooms and kitchens fitments are poor; the most common defects in the flats are missing or defective bedroom, bathroom and kitchen doors, cracks and spalling to the internal floors, walls and ceilings;

(g) sanitary fitments in the bathrooms and cooking facilities in the kitchens generally are broken or otherwise defective requiring replacement;

(h) the original mild steel windows have generally corroded and are not water resistant;

(i) internal electrical installations inside 26 flats have been haphazardly altered and are in poor condition;

(j) internal inspection of flats found equipotential bonding connections are not provided for exposed and extraneous conductive parts;

(k) flushing water supply system  for the Building have been abandoned from use;

(l) condensate drainage system with drain inlets provided for all AC units needs to be installed in order to avoid creating water dripping nuisance;

(m) closed circuit television survey carried out to the underground drainage has revealed defective drainpipes and 2 manholes requiring replacements and repairs;

(n) defects in electrical installation that require repair and maintenance;

(o) fire service systems required to be added in compliance with the requirements of the Fire Safety (Buildings) Ordinance.

28.Mr Wong assessed the total cost of repair works at $11,929,440 which amounts to 51% of the construction cost of a new similar superstructure.  He came to the conclusion that the Building had 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 parties.  He recommended the owners to redevelop rather than repair given the Building does not possess any historical value or architectural merit. 

29.The applicants also rely upon two economic tests, i.e. the age test and the repair test, conducted by Mr C Chan in his Supplemental Report prepared on 28November 2013.

30.For the repair test, Mr C Chan adopted the findings by Mr Wong that the total estimated cost to restore the Building to tenantable standard is $11,929,440.  If the unauthorized building works related items are excluded, the net repair cost for the remedial works is about $10,256,794. The enhancement by the repairs (the difference between the After EUV and the Before EUV) is $2,719,200; it is not economically justified to carry out the proposed repair works. 

31.For the age test, Mr. C. Chan assessed the total existing use value (“EUV”) of $149,680,000 can be enhanced to $152,399,200 if a net repair cost of $10,256,794 is spent. He assessed the redevelopment value (“RDV”) of the Lot on its own at $167,000,000.  Given the RDV is higher than the EUV, Mr C Chan opined that the redevelopment of the Lot is warranted.

32.There is no contrary expert evidence andI accept the applicants’ evidence in whole.  In particular, I am satisfied that based on the evidence of Mr. So and Mr. Wong, redevelopment of the Lot is justified due to the age and the state of repair of the Building :

(a) the Building is over 53 years old;

(b) the Building is in very poor physical conditions and disproportionate cost is required to repair and maintain the Building; and

(c) the obsolete design of the Building does not suit the present requirements of a building.

REASONABLE STEPS TO ACQUIRE ALL THE UNDIVIDED SHARES IN THE LOT

33.The Applicantsare under an obligation to negotiate on terms that are fair and reasonable in a situation when the whereabouts of a minority owner are known.  As stated above, however, the only respondent remaining, ie the 10^th respondent is a missing owner and there is no legal way of purchasing the undivided share allotted to the R10’s Unit.

34.In the circumstances, the applicants submitthat there is no legal obligation on the part of the Applicants to take steps to acquire the undivided share allotted to R10’s Unit. Further and/or alternatively, by being able (i) to purchase all undivided shares allotted to all the other units and (ii) to obtain from the 11^th respondent all his interest in and vacant possession of R10’s Unit, the applicants have taken reasonable steps to acquire all the undivided share in the Building, as required by section 4(2)(b).

35.In view of the above, I am satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot including the R10’s Unit. 

RESERVED PRICE FOR THE AUCTION

36.The applicants submit that the reserve price for the auction of the Lot should be fixed at $164,000,000, based on the assessment by Mr C Chan of the RDV of the Lot on its own as at 30 January 2014 in his valuation report of 30 January 2014.

37.I have carefully considered Mr C Chan’s valuation of the RDV of the Lot.  I note Mr C Chan had considered two land sale transactions in the past years, ie the sale of the site at North Point Estate Lane and Shu Kuk Street in North Point in March  2013 and another at 5-9 Hing Wan Street, Wan Chai in April 2012. I agree with him that they are all not suitable for direct comparison purpose because “of the substantial disparity in development potential due to different attributes on location, development scale and development restrictions” between the Lot and the land sale comparables. 

38.I also agree with Mr C 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.

39.Mr C Chan opined that the optimum development on the Lot comprised a block of 26-storey hotel with entrance lobby and retail shops on G/F, back of house on 1/F and hotel guest rooms on the upper floors with details of the hypothetical development and residual valuation set out in Appendix 1.4 (Bundle B2/48-49), and details of the comparables with adjustments in Appendix 1.6 (for shops at Bundle B2/59) and Appendix 1.7 (for hotels at Bundle B2/61).  Mr C 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 1.5 (Bundle B2/52-57). I have gone through his valuation in details.  I am satisfied with his valuation, including the valuation assumptions he has adopted, the values and the costs parameters that he has used in his valuation. 

40.Based on Mr C Chan’s valuation, I decide that the reserve price for the auction of the Lot should be HK$164,000,000.

TRUSTEES

41.The Applicants proposed to appoint Mr. Ma Ho Fai (馬豪輝) and Ms. Tsang May Ping (曾美萍) who are senior partner and partner respectively of Messrs. Woo Kwan Lee & Lo, Solicitors, Notaries, Agents for Trademarks & Patents, as the sale trustees.  Based on the information on their background and experience as set out in the letter dated 18 February 2014 from their firm, I am satisfied that they are proper persons to be appointed.  Their remuneration at the rate of $5,500 per hour (exclusive of disbursements) as mentioned in the letter dated 18 February 2014 is also reasonable and will be allowed accordingly.

PARTICULARS AND CONDITIONS OF SALE OF THE LOT

42.Mr Mok has submitted a set of draft particulars and conditions of sale by public auction for our consideration.  While I understand these are the usual terms used for compulsory sale, I approve the draft particulars and conditions of sale accordingly.

CONCLUSION

43.By reason of the aforesaid, I am satisfied that the redevelopment of the Lot is justified due to the age or state of repair of the Building, and that the applicants has taken reasonable steps to acquire all the undivided shares in the Lot. This Tribunal is also satisfied that the value of the 10^th respondent’s Unit as assessed in this Application is not less than fair and reasonable, and not less than fair and reasonable when compared with the values of the applicants’ units.

ORDER

44.This Tribunal makes the following orders:

(i) All the undivided shares in the Lot, the subject of the Application, be sold by way of public auction for the purposes of redevelopment of the Lot;

(ii) Mr. Ma Ho Fai (馬豪輝) and Ms. Tsang May Ping (曾美萍) nominated by the applicants be appointed trustees (“the Trustees”) to discharge the duties imposed on trustee under the Ordinance in relation to the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs. Woo Kwan Lee & Lo, Solicitors dated 18 February 2014;

(iii) For the purposes of the sale of the Lot by public auction :-

(a) The sale of the Lot be on the particulars and conditions of sale substantially the same as those in the draft Particulars and Conditions of Sale ( as set out in page 1196-1222 of Bundle A5) initialed and approved by the Tribunal;

(b) The reserve price be set at $164,000,000;

(c) Subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Lot or its successor in title, the redevelopment of the Lot and the Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot; and

(d) There be liberty to the applicants, the 10^th respondent and the Trustees to apply to the Tribunal for further directions.

COSTS

45.Since the applicants do not ask for costs, I make a costs order nisi that there be no order as to costs between the parties, such order be made absolute after 14 days if no application is made to vary the said costs order.

Mr Y C MOK, instructed by M/S Mayer Brown JSM, for the applicants.

The 10^th Respondent was not represented and did not appear.

Annex A