Wisdom Gaining Ltd v. Wisdom Light Industrial Limited and Others

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 23000 OF 2012

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J U D G M E N T

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Background

1.This is an application under the Land (Compulsory Sale for Redevelopment) Ordinance (“the Ordinance”) for the compulsory sale of two lots of land in Tsim Sha Tsui known as No 58 Shanghai Street (“No 58”) and No 60 of Shanghai Street (“No 60”) (collectively called “the Lot”).

2.At the time of the application, the applicant owned 5 out of the 8 equal undivided shares in No 58 and all the 8 undivided shares in No 60,[1] representing 81.25% of the undivided shares in the Lot.  The remaining undivided shares belonged to the respondents as follows:

Respondent	Unit	Undivided shares
1st respondent (“R1”)	G/F shop unit in No 58	1 equal undivided 8th share in No 58
2nd respondent (“R2”)	3/F domestic unit in No 58	1 equal undivided 8th share in No 58
3rd respondent (“R3”)	5/F domestic unit in No 58	1 equal undivided 8th share in No 58

3.The applicant has since acquired the interest of R2 and discontinued the proceedings against R2.  By the time of trial therefore, the applicant owns 87.5% of the undivided shares in the Lot.

4.R1 and R3 continue to oppose the application.

The Lot

5.The Lot is located on the eastern side of Shanghai Street between the junction with Jordan Road to the north and the junction with Bowring Street to the south.

6.On 8 March 1960, permission was granted for the occupation of a series of connected 8-storey composite buildings located at Nos 58-64 Shanghai Street (including the Lot) with retail shops on the ground floor and domestic units on the upper floors.[2]

7.The building at No 58 and the building at No 60 (collectively called “the Building”) are connected by two staircases intended for common use by the occupiers.

8.The applicant began acquiring units in the Lot in 2010 through agents or associated companies.  As noted above, it is now the owner of all the units in the Lot except those owned by R1 and R3.  All the units owned by the applicant are vacant. 

9.R1 purchased the G/F shop at No 58 in September 2011 for investment purposes at a consideration of $20,400,000.  The current occupancy of R1’s unit is unknown.

10.One Madam Tam acquired R3’s unit in 1961 for rental purposes.  When Madam Tam emigrated to Australia in 1997, she made a will leaving all her properties to R3 which is an Australian company set up to hold her investments for her family.  Madam Tam later passed away and the flat was formally vested in R3 in 2006.  The flat, which was last renovated in 2003, has been rented out to tenants most of the time over the years.

The application

11.Section 3(1) of the Ordinance generally requires an applicant to have not less than 90% of the undivided shares in a lot before he can make an application in respect of that lot. However, section 3(5) provides that the Chief Executive in Council may, by notice in the Gazette, specify a percentage lower than the percentage mentioned in section 3(1) in respect of a lot belonging to a class of lots specified in the notice. 

12.The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice (“the Notice”) [3] lowers the threshold for compulsory sale to 80% in respect of the classes of lots specified therein.  One of the classes specified is “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 defined as the date of the application].”

13.As the occupation permit of the Building was issued on 8 March 1960, which is more than 50 years before the date of the application, the application is covered by the Notice and the threshold percentage should be 80%.

14.There is no dispute that the applicant is entitled to apply for compulsory sale under the Ordinance.

The issues

15.Under section 4 of the Ordinance, the tribunal shall determine an application by, inter alia, hearing and determining any dispute the minority owners may have on the value of any property in the lot the subject of the application as assessed in the application.  The tribunal is directed not to order compulsory sale unless, after hearing the objection of the minority owners, it is satisfied that the redevelopment of the lot is justified due to the age or state of repair of the existing development there and that the majority owner has taken reasonable steps to acquire all the undivided shares in the lot.

16.According to the Notice of Opposition filed by R1, it opposes the application on the grounds that: (1) the applicant has failed to assess the true and accurate existing use value (ie EUV) of R1’s unit; (2) the applicant has failed to take fair and reasonable steps to acquire R1’s unit; and (3) the applicant is required to justify the redevelopment of the Lot.

17.R3 opposed the application on similar grounds according to its Notice of Opposition which was not professionally drafted.

18.In terms of evidence, the respondents initially disputed many aspects of the applicant’s case. For example, they challenged the justifications for redevelopment arguing that the Building had not reached the end of its economic life span, put forward several valuations of the EUV of the properties in the Lot and the reserve price of the Lot (ie RDV) based on different valuation dates and valuation basis (such as redeveloping the Lot together with adjacent land), disputed the reasonableness of the steps taken by the applicant in acquiring their units, and advocated stipulation of special conditions in the sale of the Lot if compulsory sale was ordered.  This has led to the filing of much conflicting factual and expert evidence. 

19.Mr Li, SC (the applicant’s counsel) warned in his written opening that many of the issues raised by the respondents in evidence have not been pleaded. 

20.In response, Ms Siu (R1’s counsel) confirmed in her opening that R1 would:

(a) leave it to the applicant to satisfy the tribunal that redevelopment of the Lot is justified;

(b) accept the applicant’s RDV valuation as at 27 September 2013 of $118,400,000; and

(c) agree to the particulars and conditions of sale proposed by the applicant.

21.On the part of R3, its counsel Mr Cheung also indicated in his opening that R3 would no longer take issue with the justifications for redevelopment, and not argue for a merge-site scenario.

22.The parties have invited the tribunal to receive all the evidence filed but to ignore those parts that relate to matters that are no longer in issue (instead of wasting time on a redaction exercise).

23.At the trial, R1 and R3 did not cross-examine the applicant’s experts at all on the justifications for redevelopment but maintained a fierce attack on the reasonableness of the steps taken by the applicant in acquiring their properties.  They also disputed the applicant’s EUV and RDV valuations.

24.In addition, Ms Siu took the point in her closing submission that the Ordinance is not consistent with Articles 6 and 105 of the Basic Law.

25.The main issues for determination are therefore:

(1) Whether the Ordinance is Basic Law compliant?

(2) What is the EUV of the properties in the Lot?

(3) Whether the redevelopment of the Lot is justified due to the age or state of repair of the existing development?

(4) Whether the applicant (as the majority owner) has taken reasonable steps to acquire all the undivided shares in the Lot?

(5) What is the RDV of the Lot?

The evidence

26.The following witnesses testified at the trial:

(a) For the applicant: (i) its manager Choi Yan Fai (“Mr Choi”); (ii) So Kin Shing of KS So & Associates Limited (“Mr So”), a structural engineer; (iii) Benson Wong Sai Ning of Benson Wong & Associates Limited (“Mr Benson Wong”), a building surveyor; and (iv) Charles CK Chan (“Mr Chan”) of Savills Valuation and Professional Services Limited (“Savills”), a valuation surveyor.

(b) For R1: (i) its director Tam Wai Man (“Ms Tam”); and (ii) Sat Wei Ling of Memfus Wong Surveyors (“Ms Sat”), a valuation surveyor.

(c) For R3: (i) its director Wong Chun Gian (“Mr Wong”) who is the son of Madam Tam mentioned in paragraph 10 above; and (ii) valuation surveyor Emus Lam of Argus Property Consultants Limited (“Mr Lam”).

27.Their evidence is set out in their respective witness statements and expert reports.  There is no dispute on the expertise of the experts.  In our view, the determination of this case does not turn on the credibility of the witnesses.  Subject to what we stated above, we generally accept their evidence.  In order not to overload this judgment, we shall only outline and discuss below their evidence insofar as they are relevant to any issue at trial.

28.In addition, we (together with the parties and their legal team) conducted a site-visit generally on the comparables used by the experts in their EUV and RDV valuations.

(1) Whether the Ordinance is Basic Law compliant?

29.Ms Siu submitted for the first time in her closing submission that “the Ordinance may be inconsistent with Articles 6 and 105 of the Basic Law” without argument. 

30.It is a serious matter to challenge the constitutionality of an ordinance.  It behoves the challenger to raise the issue specifically and well in advance (so that the issue may receive proper attention of the parties and the court) and to explain clearly the basis of the challenge.

31.Regrettably, the issue was not pleaded in R1’s Notice of Opposition (which was professionally drafted) and not stated in the List of Agreed Issues (which was agreed by the parties) and in R1’s own List of Non-Agreed Issues.  It was also not raised in Ms Siu’s written opening.  And all there is is a reference to the short discussion at the Provisional Legislative Council and the following submission towards the end of her closing submissions: [4]

“85. Further, notwithstanding it is submitted that the Ordinance may be inconsistent with Articles 6 and 105 of the Basic Law or the measures incorporated in the Ordinance may not be sufficient for the said Articles, R1 respectfully submits all the above.”

32.If Ms Siu is serious, she should have raised the issue much earlier and supported it by proper argument. In the end, the issue was hardly argued and Mr Li SC only responded briefly in his closing submission that: “It is simply no [sic] right to suggest that there can be an [sic] contravention of Articles 6 and 105 of the Basic Law by Cap 545.  The private ownership of land is properly protected by Cap 545 (under Article 6) which also ensures fair compensation for the lawful deprivation of one’s property (under Article 105).”  No authority was cited by either party.

33.Given the argument taken before us and the fact that we do not know the precise basis of the challenge, we can only discuss the issue generally.

34.Article 18 of the Basic Law provides that the laws in force in the HKSAR shall be “this Law, the law previously in force in Hong Kong as provided for in Article 8 of this Law, and the laws enacted by the legislature of the Region”.  The Ordinance was enacted by the legislature in 1999 after the HKSAR came into being. 

35.Article 160 then provides that: “… If any laws are later discovered to be in contravention of this Law, they shall be amended or cease to have force in accordance with the procedure as prescribed by the Law.”   

36.Insofar as they are relevant for present purposes, articles 105 and 6 provide that:

“Article 105

The Hong Kong Special Administrative Region shall, in accordance with law, protect the right of individuals and legal persons to the acquisition, use, disposal and inheritance of property and their right to compensation for lawful deprivation of their property.

Such compensation shall correspond to the real value of the property concerned at the time and shall be freely convertible and paid without undue delay…”

“Article 6

The Hong Kong Special Administrative Region shall protect the right of private ownership of property in accordance with law.”

37.It has been observed by the Court of Appeal that Article 6 adds nothing to the protection under Article 105.[5]  The Court of Final Appeal also said that: “Whether there has been a deprivation of property within the meaning of Article 105 of the Basic Law is a question of fact and degree to be answered by looking at the reality rather than to the form.”[6]  It is therefore important that R1 should have articulated its challenge.

38.This is not the first time the constitutionality of the Ordinance is discussed by the courts.  The Court of Final Appeal briefly touched upon the issue in Sin Ho Yuen v Fineway Properties Ltd[7] in which Litton NPJ said (at §25):

“As the title of the Ordinance states, it provides mechanism for the compulsory sale of land for redevelopment, by giving to the tribunal the power to order the sale of a property in multiple ownership, over the objections of a minority owner. In order that the entrenched right of private ownership of property in Articles 6 and 105 of the Basic Law be not infringed, the protection of minority interest under the Ordinance becomes therefore a key factor. In turn, it behoves the tribunal, in carrying out the scheme of the Ordinance, to ensure that such protection be not diminished, or be whittled down through inefficiency and delay.”

39.The issue was more particularly discussed in Intelligent House Limited v Chan Tung Shing and Tong Foon Ling[8] where the Lands Tribunal said:

“30. In [Harvest Good Development Ltd v Secretary for Justice [2007] 4 HKC 442], Hartmann J considered (in paragraphs 129-153) the question of the inter-relationship between sections 7(2) and 17 of the Limitation Ordinance (which provides the legal recognition and basis for adverse possession), and whether these provisions contravene, inter alia, Article 105 of the Basic Law. His Lordship concluded at paragraph 152 of his judgment that Article 105 only guaranteed the right to compensation where the deprivation constituted expropriation by the State or a State agency, and that a loss of possessory title to land in consequence of the operation of the Limitation Ordinance did not constitute an expropriation. As such, Article 105 is not relevant to, and has no bearing on, the relevant provisions under the Limitation Ordinance. He therefore held that these provisions were not in contravention of the Basic Law.

31. Although there are differences in terms of the statutory frameworks between the Ordinance and the Limitation Ordinance, both involve the transfer of property from one private individual to another. We do not see any obvious basis to distinguish this part of Hartmann J’s decision from the present consideration.

32. For the above reasons, we hold that Article 105 of the Basic Law is not relevant, and does not apply to the Ordinance. There is thus no question of any contravention.

33. However, if we were wrong above, and Article 105 did apply to the Ordinance, we are further of the view that the Ordinance satisfies the requirements under Article 105, and therefore is not in breach of it:

(1) Article 105 does not make the deprivation of property unlawful provided that two conditions are met: (a) it must be done in accordance with law, and (b) there must be a right to compensation which reflects the real value of the property taken.

(2) With regard to (a), so long as the Tribunal is satisfied that the various requirements and conditions laid down in the Ordinance have been complied with, a compulsory sale is made “in accordance with law” and therefore not in conflict with Article 105.

(3) With regard to (b), under the Ordinance, if an order for sale is made, the compensation will amount to each owner’s share of the open market value of the whole lot, taking into account of its redevelopment value. That in our view should represent the ‘real value’ of the property of each owner.

34. In the premises, we are of the view that the oppositions raised by those respondents on the grounds of Articles 29 and 105 of the Basic Law are invalid and without merits.”

40.We respectively agree with the above and likewise consider R1’s challenge invalid and wholly without merits.

(2) What is the EUV of the properties in the Lot?

41.One of the conditions for making an application under the Ordinance is that the application must be accompanied by a valuation report as specified in Part 1 of Schedule 1 of the Ordinance (“section 3(1) report”).  The section 3(1) report should generally contain a valuation of the market value of each unit in the original development but ignoring the possibility of a compulsory order and the redevelopment potential of the lot, which is commonly called the existing use value or EUV.

42.After the making of a compulsory order and consequent upon sale, the sale proceeds and the associated expenses are apportioned between the majority and minority owners on a pro rata basis in accordance with the EUV of their respective property as assessed in the section 3(1) report subject to any adjustments that may have been made by the tribunal in pursuance of Part 3 of Schedule 1 of the Ordinance.  The section 3(1) report is therefore important as it sets out the basis for determining the percentage shares of each majority and minority owner in the net proceeds.

43.In the present case, the application was accompanied by the section 3(1) report of Mr Chan dated 16 January 2012 (“the Application Report”) setting out the following EUV valuation of the properties on the Lot as at 16 January 2012:[9]

Floor	No 58	No 60
7/F / 7/F & Roof	$1,900,000	$1,760,000
6/F	$2,000,000	$1,780,000
5/F	$2,180,000 (R3’s unit)	$1,840,000
4/F	$2,330,000	$1,880,000
3/F	$2,260,000	$2,020,000
2/F	$2,310,000	$1,950,000
1/F	$2,550,000	$2,160,000
G/F	$21,190,000 (R1’s unit)	$20,130,000
	Grand Total:	$70,240,000

44.In other words, according to the Application Report, R1 and R3 are respectively entitled to 30.168% and 3.104% of the sale proceeds minus the associated expenses.

45.If any minority owner of the lot the subject of an application under the Ordinance disputes the value of any property in the section 3(1) report, the tribunal is tasked with hearing and determining the dispute which may result in a variation of the assessment in the report.[10]

46.In the course of these proceedings, the experts engaged by the parties prepared a number of reports detailing their valuation, commenting on the valuation of the other experts and updating or revising their own valuation.  This has resulted in a number of valuations based on very different basis.

47.Notwithstanding their initial differences, the experts have agreed to adopt (i) the date of valuation of the Application Report (ie 16 January 2012), and (ii) the basis of valuation used by Mr Chan in his Application Report, which is consistent with Part 1 of Schedule 1 of the Ordinance.  We shall only recount below the relevant valuations.

48.Mr Chan updated his EUV valuation by his rebuttal report dated 10 May 2013 after considering the opinion of Ms Sat and Mr Lam.  The apportionment ratio for R1 and R3 became 31.343% and 2.924% respectively.[11]

49.Mr Chan further revised his EUV valuation at the trial on account of some further agreement reached between the experts over measurements and updated time adjustments.  As shown in Exhibit A8, the revised total EUV of all the units in the Lot is $73,650,000 and the EUV of R1’s unit and R3’s unit is $23,110,000 and $2,150,000 respectively.  The apportionment ratio for R1’s unit is therefore 31.378% and that of R3’s unit is 2.919%.

50.As for R1, Ms Sat’s initial EUV valuation as at 16 January 2012 for all the units in the Lot, R1’s unit and R3’s unit were $72,930,000, $23,440,000 and $2,030,000 respectively.  She later revised her valuation in her supplemental reports as well as during the course of the trial.  Her latest position is helpfully summarized in Appendix B to Ms Siu’s written closing submission.

51.R3’s EUV valuation remains as set out in Mr Lam’s report at Bundle B1/268.

52.For ease of comparison, we set out the final EUV valuation of the experts in the following table:

	Applicant’s valuation	R1’s valuation	R3’s valuation
	No 58
7/F	$1,880,000	$1,940,000	$3,042,000
6/F	$1,980,000	$1,910,000	$3,108,000
5/F (R3’s unit)	$2,150,000 (2.919%)	$2,080,000 (2.836%)	$3,174,000 (3.778%)
4/F	$2,310,000	$2,220,000	$3,241,000
3/F	$2,240,000	$2,160,000	$3,307,000
2/F	$2,280,000	$2,200,000	$3,373,000
1/F	$2,510,000	$2,410,000	$3,496,000
G/F (R1’s unit)	$23,110,000 (31.378%)	$23,360,000 (31.856%)	$19,992,000 (23.793%)
	No 60
7/F & Roof	$1,740,000	$1,740,000	$2,981,000
6/F	$1,760,000	$1,680,000	$3,046,000
5/F	$1,820,000	$1,740,000	$3,111,000
4/F	$1,860,000	$1,780,000	$3,176,000
3/F	$1,990,000	$1,930,000	$3,240,000
2/F	$1,930,000	$1,870,000	$3,305,000
1/F	$2,130,000	$2,070,000	$3,427,000
G/F	$21,960,000	$22,240,000	$19,004,000
Grand total:	$73,650,000	$73,330,000	$84,023,000

53.Through their effort, counsel have summarized the disagreement of the experts over EUV valuation under the following broad headings:[12]

(a) Area of the subject units.  There is no dispute between the applicant and R1, but R3 does not accept the applicant’s measurement of the domestic units.

(b) The conversion factor for the yard and cockloft.  The applicant and R1 agree on all conversion factors except the one for the isolated toilet at the yard, whereas R3 disputes the conversion factors for the yard and the isolated toilet therein.

(c) Choice of retail comparables.  The applicant and R1 agree to use the same 5 comparables (ie A1 to A5), but R3 disputes the suitability of Comparable A5.

(d) Area of the retail comparables.  Despite their initial differences, the parties finally come to an agreement to adopt the applicant’s measurements.

(e) Adjustment on retail comparables.  There remains a vast disagreement between the parties on the adjustments.

(f) Choice of domestic comparables.  The applicant and R1 agree to use the same 6 comparables (namely, B1 to B5 and B7).  Other than using Comparables B1, B2, B4 and B5, R3 adopts 5 other comparables (namely, B8, B9, B10, B11 and B12).

(g) Area of the domestic comparables.  Despite their initial differences, the parties have agreed to adopt the applicant’s measurement.

(h) Adjustment on domestic comparables.  The parties continue to dispute on these adjustments.

54.At first, we tried to follow the experts’ analysis and evidence with a view to determine each and every dispute including the adjustment to be made (if any) to the comparables respecting factors such as time, location, quantum, frontage, layout, headroom, visibility and age.  However, we note that some of the differences are so small that the result does not justify the tedious exercise.  Bearing in mind that valuation is not an exact science and experts may respectfully differ, we have decided to adopt a global approach.

55.In terms of EUV valuation, the difference between Mr Chan and Ms Sat is not significant.  For example, there is a mere difference of $250,000 in their final assessment of the EUV of R1’s unit which is less than 1% in terms of the apportionment ratio.  Their differences are mostly due to judgmental difference on trivial valuation matters such as the appropriate conversion factor for the toilet in the yard and the adjustment on retail comparables respecting location, frontage, layout and visibility.

56.There is, however, a huge difference between the EUV valuation of Mr Chan and Mr Lam.  Apart from judgmental differences, one main difference between the two experts is that Mr Lam rejected the use of Comparable A5 in his assessment.[13] It is noted that Ms Sat has agreed to use this comparable.  Another main difference between Mr Chan and Mr Lam is that Mr Chan made location adjustment to the retail comparables whereas Mr Lam gave no such adjustment.[14]  Mr Chan’s adjustment for Comparables A1 to A4 are shared by Ms Sat, although they differ on the extent of the adjustment for Comparable A5. 

57.In pages 58 to 68 of his closing submission, Mr Li SC took a global view of Mr Lam’s evidence.  He mounted very serious attacks on Mr Lam’s professionalism and invited us to reject his expert evidence in its entirety (ie both EUV and RDV valuations).  For example, it is said that: (i) Mr Lam has failed to articulate on important aspects of his opinion (eg his choice of comparables and the adjustments he made); (ii) there are aspects of Mr Lam’s opinion which are without basis (eg his assumption concerning the internal condition of the other units in the Lot), illogical (eg he made downward adjustment to his RDV valuation, the adjusted unit rate for his retail comparables and construction costs, against a rising market) or contradicted by evidence (eg his opinion on the internal condition of R3’s unit is inconsistent with the photographic evidence); (iii) when Mr Lam was cross-examined, he readily abandoned the opinion he expressed on paper (eg his redevelopment models); (iv) Mr Lam made serious challenge on the professionalism of Mr Chan without any (let alone any proper) basis; and (v) notwithstanding the many significant concessions he made during the trial, Mr Lam did not bother to redo his calculation. 

58.We find these criticisms justified and will bear them in mind when considering Mr Lam’s evidence.  However, in view of our statutory duty to hear and determine any dispute on EUV, we have decided to engage all the evidence (including Mr Lam’s) in our final analysis.  

59.By reason of the criticisms of Mr LI SC, we have grave doubt on the reliability of Mr Lam’s opinion.  In addition, we find the following aspects of Mr Lam’s EUV assessment unsatisfactory.  First, with the benefit of the joint site inspection, we agree with both Mr Chan and Ms Sat that Comparable A5 is a relevant comparable.  Secondly, we also agree with Mr Chan and Ms Sat that locationwise, the Building is better than Comparables A1 to A5 warranting upward adjustments.  Mr Lam has given no adjustment in this regard and we consider his approach wrong.  Thirdly, in respect of the adjustments for frontage, both Mr Chan and Ms Sat have given minute adjustments to Comparables A1 to A5 while Mr Lam has given -10% adjustment to each of Comparable A1 to A3 and -5% to Comparable A4.  In light of the small differences between the frontages of Comparables A1 to A5 and that of the subject shops in the Building, we do not agree with the adjustments opined by Mr Lam.  To complete the picture, although the 3 valuation experts have, in their valuation reports, given different adjustments to time and quantum (as shown in Bundle G/1290), we understand that R1 and R3 no longer take issue on these adjustments.  Finally, in respect of the remaining factors of adjustments (ie, in respect of layout, headroom, visibility and age), we find the differences among the experts, if any, trivial.

60.Since we disagree with Mr Lam’s rejection of Comparable A5, his failure to account for location differences of the comparables and his significant adjustments on frontage, we do not share Mr Lam’s analysis of the retail comparables and his subsequent valuation of the EUV of the shops in the Building.  We prefer the analysis and valuations of Mr Chan and Mr Sat (which are very similar with the exception of some trivial differences) than that of Mr Lam.

61.In the light of the very small differences which are mostly judgmental, we decide to adopt Ms Sat’s final estimate of the adjusted unit rate for the reference unit for the EUV of the shops in the Building, at $363,900 per sq m (which is a mere 1.083% different from the comparable figure of $360,000 per sq m adopted by Mr Chan).  Consequently, we adopt Ms Sat’s valuation of the EUV of the shops as set out in Appendix B to Ms Siu’s closing submission.  Applying the adjusted unit rate of $363,900 per sq m to the effective area of 64.2 sq m, the EUV for R1’s unit is calculated at $23,360,000.   We also adopt Ms Sat’s assessment of the EUV of the other shop at No 60 at $22,240,000.

62.Mr Chan has helpfully summarized the 3 experts’ analysis of the domestic comparables at Bundle G/1291.  Their adopted adjusted unit rate for their EUV valuation of the domestic units in the Building is: Mr Chan $44,900, Ms Sat $43,100 and Mr Lam $66,400.

63.Again, the difference between Mr Chan and Ms Sat is small while the difference between Mr Chan and Mr Lam is substantial – even greater than their differences in their analysis of the retail comparables.

64.Mr Chan has commented in his rebuttal report that Mr Lam’s analysis should be rejected because he wrongly adopted Comparables B9 to B12 which are transactions from the nearby Parkes Residence.[15]  Mr Chan’s view is shared by Ms Sat.  We agree with Mr Chan that the transacted unit price of those comparables far exceed that achieved by other residential buildings of similar age in the vicinity, which is an indication that the transaction prices had taken into account the development potential of that development.  In view of the statutory requirement for EUV valuation, we shall not adopt these comparables.

65.Based on the consolidated analysis at Bundle G/1291 and Appendix B to R1’s written closing submission, if we discard Mr Lam’s Comparable B9 to B12, the average adjusted unit rate of his other comparables will become $43,239, which is somewhat between the adopted unit rate of Mr Chan (at $44,900) and Ms Sat (at $43,300).

66.Since Mr Lam has made the obvious mistake of taking into account the domestic comparables from Parkes Residence, we have decided to reject his analysis of the domestic comparables.  What remains is the evidence of Mr Chan and Ms Sat.

67.The difference between Mr Chan and Ms Sat in terms of EUV valuation of the domestic units in the Building is also small and is mostly due to judgmental differences.  One main difference dividing Mr Chan and Ms Sat is whether orientation should be a factor for adjustment.  Mr Li SC submits in his closing submission that Mr Chan’s evidence should be preferred because “orientation cannot come into play when one talks about comparables in densely populated urban areas with blocks and blocks of building hindering the flow of air and light”.  We disagree and consider that some slight adjustment as opined by Ms Sat is reasonable for the domestic comparables.  All in all, in light of the minute differences between Mr Chan and Ms Sat, we have decided to adopt Ms Sat’s figures instead of carrying out a tedious valuation on our own.  We find Ms Sat’s evidence, like that of Mr Chan, credible and that we have decided a major difference in EUV valuation in her favour.  We therefore adopt Ms Sat’s adjusted unit rate of $43,300 per sq m for the valuation of the reference domestic unit and her EUV valuations for all the domestic units, including R3’s unit, in the Building (as set out in Appendix B to Ms Siu’s closing submission).

68.The EUV of the units in the Building is therefore:

Floor	No 58	No 60
7/F / 7/F & Roof	$1,940,000	$1,740,000
6/F	$1,910,000	$1,680,000
5/F	$2,080,000 (R3’s unit)	$1,740,000
4/F	$2,220,000	$1,780,000
3/F	$2,160,000	$1,930,000
2/F	$2,200,000	$1,870,000
1/F	$2,410,000	$2,070,000
G/F	$23,360,000 (R1’s unit)	$22,240,000
	Grand Total:	$73,330,000

69.Based on our determination:

(a) The total EUV of all the units in the Building is $73,330,000.

(b) The EUV of R1’s unit is $23,360,000 (representing 31.856% of the total EUV).

(c) The EUV of R3’s unit is $2,080,000 (representing 2.836% of the total EUV).

(3) Whether the redevelopment of the Lot is justified due to the age or state of repair of the existing development there?

70.The applicant called Mr So, a structural engineer, and Mr Benson Wong, a building surveyor, to justify redeveloping the Lot.  As there is no serious dispute here, we shall be brief in recounting their evidence.

71.Mr So has been working as a professional structural engineer for more than 39 years.  His professional qualifications are recognized in Hong Kong and the United Kingdom.  He is registered as a Registered Structural Engineer and an Authorised Person under the Buildings Ordinance.  He was instructed to carry out a structural engineering investigation of the Building. 

72.Mr So and his employees inspected, took photographs and measurements of the Building, and identified the defects, cracks and spalling as well as unauthorized buildings works in the Building. He also engaged an independent laboratory to carry out physical tests and surveys.

73.He observes that the Building is of conventional reinforced concrete construction with columns, beams and slabs as structural members.  He explains that each individual structural member acts integrally with the staircase to resist the forces that the Building are designed to resist.

74.He opines that the design and construction of the structural frames of the Building was based on an obsolete design.  The structural frames were constructed more than 52 years ago and followed the requirements of London County Council By-laws which was applicable at the time.  He identifies 10 aspects of the structural design and construction of the Building that have failed to comply with the current standard stipulated in the Code of Practice for Structural Use of Concrete 2004.  He says that the Building may not possess adequate robustness to withstand damage arising from accidents or misuse, citing the recent collapse of a reinforced concrete building at Ma Tau Wai Road as an example.

75.Based on his investigation, Mr So opines that the structural frames of the Building have deteriorated to the final stage of their design working life and are in need of urgent repair.  Notwithstanding such repair, he expects the deterioration to continue steadily due to extensive carbonation of the concrete.  He says that more extensive repair will need to be carried out more regularly (as the structural frames becomes older) and the cost of repair will escalate.

76.Mr Benson Wong has been a building surveyor for over 32 years.  He holds professional qualifications in Hong Kong and the United Kingdom, and is a Registered Professional Surveyor and an Authorised Person under the Buildings Ordinance.

77.He observes that the occupation permit was issued on 8 March 1960 and the Building is now over 52 years of age.  Given the age of the buildings, he opines that:

(a) Many features and facilities (eg fire services and electrical facilities) commonly expected of modern buildings are missing or, though provided, have not been upgraded to meet the current standard or statutory requirements.

(b) Many features and facilities (eg cement rendering and painted external walls) have become obsolete or outdated.

(c) Some key building components, finishes and service installations (eg waterproofing) have already passed or are near the end of their working life.

78.He says that there has not been sufficient repair or renovation over the years and the Building is, in his opinion, in a poor state of repair due to general wear and tear.  For example:

(a) The external rendering shows signs of deterioration with 36 hidden spots detected throughout the external walls on all elevations.  This poses threats to occupiers, visitors and passer-bys.

(b) The unauthorized structure on the roof was partially demolished and is in a very dilapidated state with loosened parts liable to fall off the roof.

(c) The building envelop is not external seepage resistant, as evidenced by damp penetrations through external walls and the main roof covering.

(d) The staircase, given its obsolete design and failure to meet current standards, is an unsatisfactory means of fire escape especially for occupiers on upper floors.

(e) The general condition of the interior of the Building is poor, suffering from years of neglect.  Sanitary fitments in bathrooms and cooking facilities in kitchens are generally broken or otherwise defective requiring replacement.

(f) The old mild steel windows have generally corroded.

(g) The electrical installations inside 13 units have been haphazardly altered or are in a poor condition and need to be completely replaced for safety reason.

(h) Equipotential bonding connections should be provided to prevent electrical shock.

(i) There are unauthorized structures in the shop units on the G/F that should be demolished.

(j) The original galvanized iron fresh water pipes have generally rusted externally and should be replaced with new copper pipes to safeguard the health of occupants.

(k) The flushing water tanks have been abandoned for many years. In order to resume flushing water supply, the water tanks need to be repaired and the pipework re-provided with plastic pipes and stainless steel brackets.

(l) A new condensate drainage system should be provided to drain off condensation from air-conditioning units installed on the external wall of the Building.

(m) The overall condition of the electrical installation is poor due to neglect and lack of maintenance.

(n) The fire service installations and fire resisting construction of the Building need to be upgraded to meet current standards.

79.Mr Benson Wong estimates that the total cost of repair to bring the Building back to tenable standard would be about $7.5 million which is about 56% of the cost of constructing a new but similar building.  He remarks that the Building has deteriorated to a state which is beyond reasonable economic repair.

80.The respondents do not seek to challenge the findings and opinions of Mr So and Mr Benson Wong.  Ms Siu and Mr Cheung made it plain in their respective opening that they would leave it to the applicant to satisfy this tribunal with the justifications for redevelopment.  In the premises, we accept the evidence of Mr So and Mr Wong and find that the redevelopment of the Lot is justified having regard to the age and state of repair of the Building.

(4) Whether the applicant has taken reasonable steps to acquire all the undivided shares in the Lot?

81.The fact that the applicant has been successful in purchasing from the other minority owners in the Lot (including R2) is telltale of the reasonableness of the offers made to them.

82.We are given to understand that the applicant made the following offers to acquire the undivided shares of R1 and R3:

Date	Offer to R1	Offer to R3
20 January 2012	$22,004,404	$2,100,000
11 February 2012	$23,890,000	$2,460,000
27 February 2012	$24,600,000	$2,530,000
13 March 2012	$24,600,000	–
8 October 2013	$37,106,560	$3,457,280
18 October 2013	$38,300,000[16]	Amount not disclosed to the tribunal

83.Given the filing date of the Notice of Application of 20 March 2012, some of the offers were made before the application and some afterwards.  Besides, the parties participated in mediation in August 2012 although the effort was not fruitful.

84.According to Mr Choi, the applicant generally took guidance from Mr Chan’s valuation from time to time in making the offers. 

85.It is common ground that R1 did not respond to the offers at all. 

86.R3 responded to the 11 February 2012 and the 27 February 2012 offers by its replies dated 20 February 2012[17] and dated 6 March 2012[18] respectively.  In both replies, R3 basically rejected the offer and asked for a better offer although its reasoning is quite incomprehensible.

87.Stripped of all the rhetoric, the respondents’ objections may be summarised thus:

(a) On behalf of R1, Ms Siu argues that:

(i) Post-application offers should not be taken into account as a matter of statutory construction of section 4(2)(b) of the Ordinance.[19]

(ii) Alternative to (i), the post-application offers made in this case came too late having regard to the commencement of the trial.[20]

(iii) The pre-application offers were made in a hasty manner within a short timeframe and the applicant did not bother to take other steps to liaise with R1.[21]

(iv) The applicant did not update its offers on account of the rising market.[22]

(v) The first offers to both respondents on 20 January 2012 fell below the applicant’s estimation of the respondent’s share of the RDV of the Lot at the time.[23]

(vi) The pre-application offers made to R1 were not on terms that are fair and reasonable, having regard to the RDV valuations as at 20 February 2013.[24]

(vii) The tribunal should not consider Mr Chan’s RDV valuation as at 16 January 2012 at all.[25]

(viii) The pre-application offers were not fair and reasonable as the applicant had failed to ascertain the RDV of the Lot as at 20 March 2012 (being the date of the application) or anytime close to that date given a rising market,[26] and failed to take into account R1’s removal cost and the cost of acquiring a replacement investment.[27]

(b) Mr Cheung for R3 takes the point that:

(i) The 20 January 2012 offer made to R3 was lower than the applicant’s own EUV valuation of R3’s unit, lower than the applicant’s own assessment of R3’s share of the RDV of the Lot, and was almost 50% lower than what the applicant had paid for the acquisition of the other units in No 58. [28]

(ii) Against a rising property market, the applicant should have updated its EUV and RDV valuation as at 16 January 2012 before making the 11 and 27 February 2012 offers to R3.[29]

(iii) Mr Chan’s RDV valuation as at 16 January 2012, based on which the applicant made its 11 and 27 February 2012 offers, is an underestimation[30] because the redevelopment model,[31] the discount rate for present value[32] and the figure for construction costs[33] adopted for the calculation were all wrong.

(iv) The 11 and 27 February 2012 offers were both lower than R3’s share of the RDV of the Lot as at 16 January 2012 (as calculated by Mr Cheung).[34]

(v) Mr Chan’s EUV valuation as at 16 January 2012, based on which the applicant made its 20 January 2012 offer, was erroneous having regard to the internal condition of R3’s unit.[35]

(vi) The applicant did not revise its offer upward after the applicant filed its rebuttal report on 10 May 2013 (in which Mr Chan adjusted his RDV valuation upwards).[36]

(vii) The 8 October 2013 offer made to R3 was a little bit lower than R3’s share of the RDV of the Lot as at 27 September 2012[37] and did not take into account R3’s legal costs.[38]

(viii) Mr Chan’s RDV valuation as at 27 September 2013, based on which the applicant made its 8 October 2013 offer, is erroneous because he estimated the marketing cost, discount rate, construction costs, the cost of air-conditioning and appliances, and the unit rate for the 1/F retail unit wrongly, and his adjustments on layout of the retail comparables were also wrong.[39]

88.Ms Siu and Mr Cheung have spent considerable effort at trial and in their submissions to develop these objections, which may be crudely grouped under three headings:

(a) The tribunal should not consider any post-application offer in a section 4(2)(b) exercise.

(b) Objections relating to the manner in which the offers were made (or not made).

(c) Objections relating to the amount offered.

89.With respect, we think these objections are misconceived. 

90.Insofar as it is relevant, section 4(2)(b) of the Ordinance provides that:

“The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that … the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner shoes whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”

91.This is not the first time a minority owner in a compulsory sale application seeks to argue that the tribunal should not take into account post-application offers in a section 4(2)(b) exercise.[40]

92.In Good Faith, the tribunal recognized that the issue is one of statutory construction and that section 4(2)(b) should be looked at having regard to its context and purpose.  The tribunal decided that, first, the section draws no distinction between pre-application and post-application offers.  Rather, it requires the tribunal not to make an order for sale unless it is satisfied that the majority “has taken reasonable steps” to acquire all the undivided shares in the lot the subject of the application. The use of the present perfect tense suggests that all the steps taken up to the time when the tribunal is asked to determine the issue should be considered.  The tribunal in Good Faith thought that such interpretation is consistent with the purpose of the Ordinance to ensure that the minority owners should receive fair and reasonable compensation.  Secondly, the tribunal refused to draw an analogy with section 15(4)(c) of the Land Development Corporation Ordinance as urged upon it by the respondent in that case, ruling that the two ordinances cater for very different scenarios.[41]  The tribunal observed that section 3(1) of the Ordinance, which spells out the pre-requisites for an application under the Ordinance, is silent on any requirement that the majority owner must have taken reasonable steps before it may apply.  Thirdly, the tribunal found no ambiguity in the Ordinance warranting a reference to the legislative material as an aid to interpretation.  See §§24-61 of that judgment.

93.In the present case, Ms Siu seeks to distinguish Good Faith on the ground that not all relevant legislative materials had been drawn to the attention of the tribunal.[42] But she has failed to identify any ambiguity in the legislation which is a pre-requisite to enable us to look at the parliamentary debate.[43] 

94.In her attempt at purposive construction, Ms Siu argues that by reading section 3(1) and Part 1 of Schedule 1 of the Ordinance together it is apparent that “the intent of the Ordinance [is] that the applications should be processed by the Tribunal in a speedy manner…”.  And she submits that: “If the cut-off date is the date of the application, a speedier resolution of the disputes is made possible since there are clear reference points and valuation dates to the parties and the Tribunal to consider whether the requirements under section 3 and also section 4(2)(b) are satisfied.” 

95.We note that despite the above submission, R1 has not adduced evidence on the RDV valuation of the Lot as at 20 March 2012 (ie the date of application) for the purpose of the section 4(2)(b) exercise.  Instead, Ms Siu has invited us to measure the applicant’s offers against RDV valuations as at 20 February 2013 (which is in evidence) in her closing submission.[44]  We deplore this kind of half-baked argument.

96.In any event, we take the view that Ms Siu’s attempt to infer from the timing of the section 3(1) report that the tribunal must disregard post-application offers in a section 4(2)(b) exercise as wholly without basis.  The point of a section 3(1) report is, subject to any adjustment by the tribunal, for determining the percentage share of each majority and minority owner in the net proceeds.[45]  There is nothing to link the timing of the report to the section 4(2)(b) exercise.  We agree with the decision of Good Faith as recounted above.  In our view, neither the context nor the purpose of the Ordinance requires us to ignore offers that were made after the application.

97.The Court of Final Appeal has also given guidance in Capital Well Ltd v Bond Star Development Ltd on what a section 4(2)(b) exercise should entail:

“The reasonableness of the offer

28. Mr Chain sought to persuade the Court that the Tribunal was wrong to accept that the offer to purchase the appellant’s interest for $2.5 million constituted an offer of purchase “on terms that are fair and reasonable” for the purposes of s 4(2)(b).

29. The Tribunal had made its finding on the basis of valuation evidence filed by both sides as to the open market value of all six lots, taking account of the composite site’s redevelopment potential. The valuations put in by the respondent and appellant assessed such value at $106 million and $113.75 million respectively. The appellant’s interest was calculated to be 2.16% of the whole, applying by analogy the s 3(1) report methodology of identifying a minority owner’s percentage share in the original development.

30. On that basis, the appellant’s proportionate share of the open market value of the overall site, came to $2,289,600 (on the respondent’s evidence) and to $2,457,000 (on the appellant’s evidence). The majority owner’s offer of $2.5 million was therefore higher than each of those assessments and was accepted by the Tribunal to be fair and reasonable for the purposes of the section. This was upheld in the Court of Appeal.

31. Mr Chain argued that it was wrong simply to attribute a proportionate value, calculated at 2.16%, to the appellant’s interest because this ignored what he termed “the strategic position” of the Lot which, he contended, made it disproportionately valuable. He argued that its situation in the middle of the row of lots intended to be redeveloped meant that a refusal to sell the Lot would prevent the respondent from realising the “marriage value” of redeveloping the entire row of lots (as opposed to embarking upon two smaller redevelopments separated by an undeveloped lot). Before the Tribunal (§§60-63), it was contended that a proper reflection of such marriage value required the appellant’s interest to be assessed at $3,377,500. Accordingly, so the argument ran, the Tribunal could not properly regard the $2.5 million offer as fair and reasonable.

32. In our view, that argument rests on a misconception as to the nature of the s 4(2)(b) requirement and must be rejected. As noted above, the Ordinance stipulates that before the Tribunal can make a compulsory order, the majority owner should try to reach agreement with the minority to purchase the latter’s interest on fair and reasonable terms. It is only after such an offer is made – and rejected by the minority – that the Tribunal may proceed to order a sale by public auction. The Ordinance therefore recognizes that the minority is perfectly entitled to take its own view and to refuse to sell at the price offered even though the Tribunal may regard that price as fair and reasonable.

33. In making that assessment the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It does not itself arrive at any conclusion as to what figure represents the correct valuation. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. It is obviously necessary to recognize that there will often be differences of opinion on that matter. If duly satisfied that the rejected offer was fair and reasonable, the Tribunal may make the order, leaving the value and level of compensation to be determined by the public auction. The auction results may prove that the minority’s assessment was commercially wise. Or they may show that the majority’s offer exceeded what was realised at the auction.

34. Once the purpose of s 4(2)(b) is understood, the error in the appellant’s approach becomes apparent. Mr Chain sought to argue that the Tribunal had erred in failing to recognize that a valuation of the minority owner’s interest was obliged to take into account the Lot’s “strategic position” and “marriage value”. He submitted that any valuation which failed to attribute significant value to those features of the Lot over and above its proportionate value was wrong in principle and could not serve as a basis for judging whether the $2.5 million offer was fair and reasonable. As the Tribunal had relied precisely on such deficient valuation evidence, it was wrong as a matter of law. Mr Chain was therefore approaching the s 4(2)(b) exercise as if it required the Tribunal to decide first what the correct valuation was, and only then to assess the fairness and reasonableness of the majority owner’s offer against the valuation carried out on correct principles.

35. We do not consider that the Tribunal is required to perform any such task. At most contested hearings, one may expect conflicting evidence as to value to be filed. The present case is a good illustration. The evidence as to how “marriage value” is to be assessed and how much of it should be attributed to the minority owner’s interest was hotly disputed before the Tribunal. And while Mr Chain repeatedly asserted before the Court that the Lot’s situation in the middle of the other lots acquired by the respondent gave it a particular strategic value, Mr Edward Chan SC, leading for the respondent, argued that the location of the Lot permitted viable redevelopment of the lots on either side, so that the “ransom power” attaching to the Lot was much less significant than it might otherwise have been. The Tribunal does not need to resolve conflicts of this nature since it does not have to decide on the value of the interest for itself.

36. The Tribunal was fully entitled to find that the majority owner’s offer which exceeded both sides’ assessment of the value of the appellant’s proportionate share of the developable site, taking its redevelopment value into account, fell within the range of what was fair and reasonable. We are of course not suggesting that it is necessary for the offer to “beat” the valuation as if it were a payment into court. What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site. The Tribunal in the present case was entitled to find that the hurdle of s 4(2)(b) had been crossed and entitled to make the order for sale.”

98.The following principles may be gathered from the above:

(a) The majority owner must have taken reasonable steps to acquire the interest of the minority owners before the tribunal will consider making a compulsory sale order.  This may come in the form of an offer to purchase the minority owner’s undivided shares on terms that are fair and reasonable.

(b) The minority owner is entitled to take its own view in deciding whether to accept an offer.  The tribunal may still make a compulsory order even though the majority owner’s offer has been rejected, in which case the value of the lot the subject of the application will be determined by public auction.  The result of the auction may prove that the minority owner was wise in rejecting the offer or not.

(c) In discharging its duty under section 4(2)(b), the tribunal is not conducting a valuation exercise.  In particular, the tribunal is not required to determine the correct valuation principles to be applied or what constitutes the correct valuation for the interest in question.  So long as the tribunal finds, on the evidence, that the rejected offer falls within the range of what may broadly be regarded as fair and reasonable compensation, it is entitled to come to the view that reasonable steps had been taken by the majority owner.  The rejected offer does not even have to “beat” the valuation as if it were a payment into court. 

99.In the present case, Mr Choi testified that the applicant generally based its offers on the professional advice of Savills.  Based on Mr Chan’s EUV assessment in the Application Report dated 16 January 2012[46] and his RDV assessment in his report dated 16 January 2012 (ie $75,400,000),[47] the share of R1 and R3 of the RDV of the Lot as at 16 January 2012 were $22,746,672[48] and $2,340,416[49] respectively. 

100.The first offer made to R1 and R3 respectively on 20 January 2012 was approximately 97% and 90% of Mr Chan’s valuation.  Mr Choi explained at trial that the applicant’s board of directors had decided on the amounts making reference to their own data as well (which has not been disclosed). 

101.It is noted that the other pre-application offers are all better than Mr Chan’s then valuation. 

102.Mr Chan later updated his EUV and RDV valuations in his rebuttal report dated 10 May 2013.  The updated apportionment ratio for R1’s and R3’s units became 31.343% and 2.924% respectively[50] and the RDV of the Lot as at 20 February 2013 was assessed to be $118,400,000.[51]

103.In pursuance of the tribunal’s direction to update the RDV valuation before trial, Mr Chan prepared a further RDV report dated 27 September 2013 assessing RDV of the Lot as at the date of the report to be $118,400,000.[52] Thus according to Mr Chan’s latest assessment, R1’s and R3’s share of the RDV of the Lot as at 27 September 2013 should be $37,110,112 and $3,462,016 respectively.

104.The post-application offers of 8 October 2013 to both R1 and R3 roughly matched Mr Chan’s latest valuation.  There is no suggestion, as far as we understand, that the offers made at the beginning of the trial did not fare better than such valuation.

105.In our view, the objections under the second and third headings (regarding the mode and amount of the offers) are without merit. 

106.One can generally expect conflicting valuation evidence in a contested case due to difference in professional opinion.  The applicant has engaged Savills, a reputable firm of surveyors, to advise them on valuation.  The fact that another expert has come up with a different valuation does not mean that the applicant’s assessment is wrong. 

107.We note that the pre-application offers were generally based on Mr Chan’s valuation in the Application Report and his RDV report dated 16 January 2012.  We are not persuaded by the “rising market” argument mounted by both respondents.  This is particularly so as they have not prepared any RDV valuation as at 16 January 2012.  We are not satisfied that Mr Chan’s valuation has, by the time of these offers, become stale. 

108.The Court of Final Appeal has pointed out that so long as the offers fell within the range of what was fair and reasonable on the evidence, they may be regarded as satisfying the requirements in section 4(2)(b).  There is no requirement that the offer must “beat” any valuation as if it were a payment into court.  It does not matter that the first offers dated 20 January 2012 fell slightly below Mr Chan’s assessment at the time.  What is more important is the fact that all subsequent offers measured up to Mr Chan’s valuation.

109.Ms Siu has taken a technical objection in her bid to forbid the applicant from relying on Mr Chan’s RDV report dated 16 January 2012 (in terms of his RDV assessment as at 16 January 2012) to demonstrate the reasonableness of its pre-application offers.  It is said that the report was adduced as expert evidence without leave and that the respondents had been taken by surprise so much so that both Ms Sat and Mr Lam had not provided any RDV valuation as at 16 January 2012.  She also challenged the valuation in terms of the development model adopted for the exercise, the adjustments made to the retail and domestic comparables, etc. [53] In our view, the challenge is misconceived.

110.The applicant is not adducing Mr Chan’s RDV report dated 16 January 2012 as expert evidence but as real evidence, to confirm that it had taken the report into account in making the offers.  The applicant is not asking the court to accept the opinion stated in the report (ie RDV as at 16 January 2012 of $75,400,000) in setting the reserve price.  The existence of the report was disclosed by means of the applicant’s list of documents filed on 20 February 2013.  A copy of the report had been served on R1’s solicitors and R3’s solicitors before the trial.[54]  Mr Chan also talked about the report in his witness statement[55] and a copy of the report has been included in the trial bundle.[56] 

111.Given their knowledge of the report, it was open to the respondents to adduce expert evidence to challenge Mr Chan’s RDV valuation as at 16 January 2012 with a view to demonstrate that Savills’ opinion is anything but proper.  They have elected not to do so and it is now too late for them to complain.

112.Ms Siu also seeks to cast doubt on Mr Chan’s valuation by submitting, for example, that Mr Chan did not set out in his report the adjustments he had adopted for the retail and domestic comparables, that Mr Chan relied on a different redevelopment model in his later report, and that Mr Chan’s assessment of developer’s profit might be too high. 

113.All these comments must be viewed in the context that the respondents have not offered an alternative valuation as at 16 January 2012. We do not think these challenges are sufficient to discredit Mr Chan’s assessment. Consequently, we accept on the evidence that it was reasonable for the applicant to rely on the professional opinion of Savills to formulate its offers.

114.In our view, R1’s complaints that the offers were made hastily, within a short time, or too late and that the applicant did not contact it by other means must be viewed against the fact that it had never responded.  There is no suggestion that R1 did not receive the offer letters, did not have sufficient time to consider the offers, or that it would have accepted the offer had longer time been given. 

115.After making the pre-application offers, the applicant did not make any offer for a period of 18 months until October 2013.  In our view, it would be too onerous to generally oblige a majority owner to make an offer when there is arguably a change in the market or require it to track its offer with the market.  This is particularly so in this case when there was no response at all from R1 and the replies from R3 were indecipherable.  The respondents could have put forward their proposal clearly for the applicant’s consideration.   

116.The attempt of Mr Cheung to compare the offers made to R3 with the applicant’s successful purchase of the other units in the Lot is futile.  Mr Choi explained in his evidence that those successful purchases were based on different considerations.  They relate to properties with different characteristics and different circumstances prevailed at the time.  For example, some of the purchases were made much earlier in time when the applicant was not yet entitled to apply under the Ordinance and was therefore prepared to pay more.  There is nothing to oblige the applicant to extend the same courtesy to R3 which is discretionary in nature.

117.Both Ms Siu and Mr Cheung have spent considerable time and effort in their closing submissions to demonstrate, by means of meticulous calculations, that the applicant’s valuations were wrong and the offers (particularly, the pre-application offers) too low.  As we have said above, this is exactly what the Court of Final Appeal has warned us against doing.  We are not required to determine the correct valuation principles or come up with the correct valuation in a section 4(2)(b) exercise.  Save and except those considerations which are material to our determination of the disputes over EUV and RDV, we refuse to be drawn into such fine argument.

118.In our view, section 4(2)(b) instructs us to take all the offers into account (and not to dwell on the pre-application offers or any particular offer).  The applicant was entitled to generally rely on the professional advice of Savills in formulating its offers.  There is a general improvement in the offers and the latest offers (as far as we are aware) fall within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question based on our determination:

Respondent	Share of the RDV of the Lot according to our determination	Latest offer of the applicant
R1	$37,717,504 ($118,400,000 x 31.856%)	$38,300,000 (on 18 October 2013)
R3	$3,357,824 ($118,400,000 x 2.836%)	$3,457,280 (on 8 October 2013)

119.In the premises, we are satisfied that reasonable steps had been taken by the applicant to acquire all the undivided shares in the Lot, including negotiating for the purchase of R1’s and R3’s undivided shares on terms that are fair and reasonable.

(5) Determination of the RDV of the Lot

120.If a compulsory order is made, the Lot will generally be sold by public auction in accordance with the conditions specified in Schedule 2 of the Ordinance.[57] In pursuance of that schedule, the tribunal is to set a reserve price taking into account the redevelopment potential of the Lot, which is what the profession commonly called the redevelopment value or RDV.

121.The applicant relies on Mr Chan’s updated RDV report in which he estimated the RDV of the Lot as at 27 September 2013 to be $118,400,000.[58] R1 agrees with Mr Chan’s valuation.  Both the applicant and R1, however, take issue with Mr Lam’s estimation of $158,160,000 in his RDV report.[59] 

122.Both Mr Chan and Mr Lam have used the residual method in their assessment.  This is done by deducting the development costs (including demolition costs, construction costs, professional fees, marketing costs and finance costs) from the estimated gross development value (or GDV) of the proposed development, ie the potential sales revenue. 

123.Whilst both Mr Chan and Mr Lam have adopted the valuation date of 27 September 2013, they differ greatly on their development model for the assessment, their GDV calculation and their estimation of the development costs. 

124.In terms of the development model, Mr Chan considers that a 22-storey composite (commercial/residential) building with retail shops on the G/F, 1/F and 2/F is optimal after testing several models.  The details of his proposed development and residual valuation are set out in Appendix III of his report (at Bundle G/1188-1193).  On the other hand, Mr Lam has adopted a 22-storey composite building with retail shops on the G/F and 1/F for his valuation.  His proposed development and residual valuation are detailed in Appendix 9 of his latest RDV report (at Bundle G/1263).

125.The following table contrasts their estimation of the saleable area in their respective proposed development:

	Mr Chan’s development model	Mr Lam’s development model
No of storey	22	22
No of non-domestic (ie retail) floors	3	2
No of domestic floors	19	20
G/F retail Saleable Area	112.92 sq m	95.71 sq m
1/F retail Saleable Area	84.92 sq m	128.3 sq m
2/F retail Saleable Area	127.92 sq m	--
Total retail Saleable Area	325.76 sq m	224.01 sq m
Upper floors Saleable Area	599.68 sq m	602.6 sq m
Total Saleable Area	925.44 sq m	826.61 sq m

126.We also append below the unit rates adopted by Mr Chan and Mr Lam respectively in their GDV calculation:

Use	Mr Chan’s Unit Rate	Mr Lam’s Unit Rate
Retail Shops (G/F)	$625,000/sq m	$843,000/sq m
Retail Shops (1/F)	$156,000/sq m (being 1/4 of G/F value)	$281,000/sq m (being 1/3 of G/F value)
Retail Shops (2/F)	$125,000/sq m (being 1/5 of G/F value)	–
Domestic Flats	$178,000/sq m	$175,000/sq m

127.The experts also cannot agree on the development costs for the hypothetical development in terms of their estimation of the marketing cost, demolition cost and construction cost and the discount rate to covert these costs into present value.

128.During the course of the trial, R3 has practically abandoned Mr Lam’s development model.   In his supplemental closing submissions, Mr Cheung adopted Mr Chan’s model as well as Mr Chan’s unit rate for domestic flats but relied on Mr Lam’s opinion for the other parameters and recalculated RDV to be $146,548,397.13.[60]  Based on this latest calculation, R3 continues to dispute Mr Chan’s estimation of:  (a) the unit rate for retail shops; (b) marketing cost; (c) demolition cost;  (d) construction cost; and  (e) present value of those costs.

129.To start with, we have followed Mr Chan’s valuation closely and find his process to be up to the usual standard of valuation experts testifying before this tribunal.  Despite Mr Cheung’s cross-examination, we do not find any anomaly in Mr Chan’s assessment. 

130.The same, however, cannot be said of Mr Lam.  Although Mr Lam has basically gone through a similar process, his approach is far from conventional.  He gave a RDV valuation of $187,031,151 as at 14 February 2013[61] but a very different valuation (of $158,160,000) as at 27 September 2013.  A significant drop of the RDV of the Lot of almost $29 million within a short time span of 7 months is simply incredible.  No explanation is given.  It appears to us that Mr Lam made a mistake in over-estimating the saleable area of the domestic portion of the hypothetical development in his earlier valuation.  In his valuation as at 14 February 2013, he assumed site coverage of over 33.33% when the maximum site coverage for the domestic portion was only 33.33%.[62]  This translated into a total saleable area of the residential portion of 763 sq m.  Mr Lam must have noticed the mistake and confined the site coverage of the domestic portion to 33.33% in his later valuation, estimating the total saleable area of the residential portion to be 602.6 sq m only.  In other words, there is an over-estimation of almost 27%!  To our dismay, Mr Lam did not own up the mistake in his updated RDV report, in clear breach of §§2 and 11 of the Code of Conduct for Expert Witnesses (“the Code”).[63]

131.Of his latest RDV valuation as at 27 September 2013:

(a) Although he attested to his development model as late as in his updated RDV report dated 8 October 2013, Mr Lam has only come to the trial less than a month later to abandon his own development model.

(b) Mr Lam adopted the unit rate of $175,000 per sq m in his calculation of the domestic portion of the GDV of the hypothetical development. Although he claimed that: “To determine the value of residential flats in the proposed development, adjustments were made to the residential sales comparables to reflect the difference in time, floor level, building age, view, orientation, environment, accessibility size, recreational facilities, care parking facilities and building conditions from those of the proposed development”,[64] he only provided general information on his residential comparables (such as transaction date, price and saleable area) without any analysis.[65]  There is no inkling as to how he came up with the figure of $175,000 per sq m.  When he was cross-examined on the omission, he was unable to give any explanation.  We consider this a serious failure on the part of Mr Lam to discharge his duties as an expert witness, see §§2, 8(c), 9 and 10 of the Code.  As we have noted above, Mr Lam eventually abandoned his assessment and adopted Mr Chan’s opinion in this regard.

(c) Mr Lam worked out the unit rate for the retail units of the hypothetical development at $843,000 per sq m by reference to the following 6 comparables:[66]

Ref #	Comparable’s Address	Effective Saleable Area	Sale Price	Unit Rate (per sq m)	Total Adjustment	Adjusted Unit Rate (per sq m)
C7	Unit C, G/F, 29-35 Temple Street	52.12 sq m	$19,000,000	$364,578	1.1%	$368,406
C5	Unit D, G/F, 259A Temple Street	68.61 sq m	$44,800,000	$652,966	-2.8%	$634,422
C8	Unit 14, G/F, 8-20 Bowring Street	65.58 sq m	$70,000,000	$817,948	5.2%	$860,154
C9	Unit 4, G/F, 42-46 Shanghai Street	11.89 sq m	$15,680,000	1,318,755	-6.8%	$1,228,552
C10	Shop 1, G/F, 2-8 Parkes Street	19.42 sq m	$24,800,000	1,277,034	-1.8%	$1,253,537
C11	Unit 7, G/F, 42-46 Shanghai Street	19.60 sq m	$13,900,000	709,184	0.6%	$713,155
				Average of the Adjusted Unit Rates		$843,000

132.There is a huge discrepancy between the adjusted unit rates of the comparables.  For example, the difference between Comparable C7 (of $368,406) and Comparable C10 (of $1,253,537) is as much as 400%!  In our view, a reasonable valuer would have taken another look at the comparables to see if they are sufficiently similar for them to be used in the valuation.  This is certainly the approach advocated by Dr Cruden in his standard textbook on the subject:[67]

“Under the comparative method the valuer is required to exercise a twofold skill. First, in finding comparables sufficiently similar to the property being valued that they require minimal adjustment. Secondly, in making any necessary adjustments…” (underline added)

“However, a careful analysis can only provide useful evidence or enable realistic adjustments to be made where the comparables are sufficiently similar to the property being valued. If the comparables are not reasonably similar, then no matter how detailed the subsequent analysis, the result may well be spurious. The point was emphasized in Lait Kit Lau Mutual Aid Committee v Commissioner of Rating and Valuation [1984] HKDCLR 31…” (underline added)

133.We generally agree with Mr Chan that Comparable C7 is too far away from the Lot, Comparable C8 is close to a MTR exit and Mr Lam has given insufficient adjustment on location (a mere -5%) and Comparables C9, C10 and C11 are too small, rendering these comparables unsuitable to be taken into account.  When Mr Lam was cross-examined, he stubbornly insisted on the suitability of all his comparables and claimed that his comparables had helped him to confirm that Comparable C8 was the best comparable available.  His explanation is truly astounding and defies common sense.

134.Mr Chan has also adopted the remaining comparable (Comparable C5) in his assessment.  We prefer his adjustments,[68] which is not disputed by Ms Sat. 

135.We share Mr Li SC’s scepticism as to whether Mr Cheung may validly transplant part of Mr Lam’s opinion onto Mr Chan’s calculation.  First, it is not right for Mr Cheung as counsel to undertake the work of an expert to come up with a RDV valuation, which is not a simple arithmetical exercise.  For reasons unknown, Mr Lam did not bother to redo his calculation after making the many concessions in his evidence and so Mr Lam has not vouched for the “cut-and-paste” exercise.

136.More importantly, we prefer Mr Chan’s estimation of the marketing cost, demolition cost and construction cost of the hypothetical development and his calculation of the present value of those costs.  The details of the estimation of Mr Chan and Mr Lam are at Bundle G/1188-1189 and Bundle G/1263 respectively.  Mr Lam did not set out the reasons for his opinion in his report, in breach of his duty under §8(c) of the Code.  When he was cross-examined, he was unable to give any satisfactory explanation.

137.In the premises, we have decided to reject Mr Lam’s RDV valuation altogether and do not agree with Mr Cheung’s “cut-and-paste” approach.  As we have said in the beginning of this section, we have gone through Mr Chan’s RDV valuation at Bundle G/1288-1289 and find it to be in order.

138.To conclude, we accept the evidence of Mr Chan on RDV of the Lot which is agreed to by R1.  We adopt Mr Chan’s estimate of $118,400,000 to be the reserve price of the Lot taking into account its development potential.

Conclusion

139.By the foregoing discussion, we are satisfied that the redevelopment of the Lot is justified due to the age and the state of repair of the existing Building there and that the applicant (as the majority owner) has taken reasonable steps to acquire all the undivided shares in the Lot.  We therefore make an order that all the undivided shares in the Lot be sold by public auction for the purposes of redevelopment. 

140.The applicant proposes to appoint Tam Wai Choi and Leung Ping Chiu, both of Sit Fung Kwong & Shum, a firm of solicitors, as the sale trustees.  Based on the information on their background and experience as set out in their letter dated 23 August 2013,[69] we are satisfied that they are proper persons to be appointed as trustees to discharge the duties imposed upon them by the Ordinance.  The remuneration package proposed in the said letter appears to be reasonable too.  We therefore appoint them as the sale trustees and authorise their remuneration for their service as trustees as provided in the said letter.  We further approve the particulars and conditions of sale of the Lot placed before us[70] (which are no longer disputed) and grant liberty to the parties and to the trustees to apply for further directions if necessary.

141.At the request of the parties, we make a costs order nisi that there be no order as to the costs of the application which is the usual order.  Unless an application has been made to vary the order, the order shall become absolute 14 days after the handing down of this judgment.

Mr C Y LI, Senior Counsel instructed by Iu, Lai & Li, for the applicant

Ms Jo SIU instructed by Lui & Law, for the 1^st respondent

Mr Anthony P W CHEUNG instructed by Kong & Chang, for the 3^rd respondent