Main Light Ltd v. Chow Chiao Shing Tseng and Others

Read the full judgment text of LDCS 40000/2012 on BabelCite. This LDCS judgment was delivered on 30 June 2014.

1. This is an application made under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) concerning a composite building of 10 inter-connected blocks known as Golden Horse Mansion (“The Building”).

Cited by 3 cases · Cites 2 cases

Case No.LDCS 40000/2012
Court
LDCS
Date30 Jun 2014
Judge
Case Document
100%Judiciary

LDCS 40000/2012

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION

NO. 40000 OF 2012

_________________

BETWEEN
MAIN LIGHT LIMITED
(仲光有限公司)
Applicant
and
EVERLASTING METROPOLITAN COMPANY LIMITED 1st Respondent (Discontinued)
LEE WAI LING MAY (李惠玲) 2nd Respondent (Discontinued)
KBK MOTORS LIMITED
(佳捷車行有限公司)
3rd Respondent (Discontinued)
LAM SING (林盛) and LAM CHAN NUNG (林振濃) 4th Respondent (Discontinued)
LEUNG LIN HO 5th Respondent (Discontinued)
KWAN SUI LIN 6th Respondent (Discontinued)
NORMAN NIM-CHI FUNG (馮念慈), the Executor of the Will of FUNG WING KIN (馮永堅), alias LANNY WING KIN FUNG, the late executor of the Will of Tang Siu Kwai, deceased 7th Respondent (Discontinued)
CHOW CHIAO SHING TSENG 8th Respondent
LIT LEUNG YAN and CHAN CHUEN TAI 9th Respondent (Discontinued)
SO MAN KWONG 10th Respondent (Discontinued)
JONG NOEI GING, the Executrix of the Will of PANG GIM GET (馮任日), alias IMAWAN PUTRO otherwise known as PUTRO IMAWAN, deceased 11th Respondent (Discontinued)
KONG MEI YING, JOLENE, appointed by Order of the Lands Tribunal representing the estate of SIU CHI WAI PETER, deceased 12th Respondent
NEWBO INVESTMENT LIMITED
(良寶投資有限公司)
13th Respondent (Discontinued)
HUI SHUI FONG, appointed by Order of the Lands Tribunal representing the Estate of GEORGE HOUEY LOON alias HOUEY LOON, deceased 14th Respondent

_________________

Before: Deputy Judge KOT, Presiding Officer, Lands Tribunal and Mr. Alex NG, Member of the Lands Tribunal

Dates of Hearing: 20 & 21 May 2014

Date of Judgment: 30 June 2014

_________________

J U D G M E N T

_________________

Background

1.This is an application made under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) concerning a composite building of 10 inter-connected blocks known as Golden Horse Mansion (“The Building”). 

2.The Building sits on 10 sections of Quarry Bay Inland Lot No. 4 (collectively known as “the Lots”) as follows :

Block Street No. Lot No.
A-D Nos. 21-23 & 37-39
Mansion Street
(i) Section A of Sub-section 2 of Section C of Quarry Bay Inland Lot No. 4
E No. 35 Mansion Street (ii) Section B of Sub-section 2 of Section C of Quarry Bay Inland Lot No. 4
(iii) Section B of Sub-section 1 of Section D of Quarry Bay Inland Lot No. 4
(iv) Section A of Sub-section 2 of Section D of Quarry Bay Inland Lot No. 4
F No. 25 Mansion Street (v) The Remaining Portion of Sub-section 2 of Section C of Quarry Bay Inland Lot No. 4
(vi) The Remaining Portion of Sub-section 1 of Section D of Quarry Bay Inland Lot No. 4
(vii) The Remaining Portion of Sub-section 2 of Section D of Quarry Bay Inland Lot No. 4
G No. 33 Mansion Street (viii) Section C of Sub-section 1 of Section D of Quarry Bay Inland Lot No. 4
H No. 27 Mansion Street (ix) Section D of Sub-section 1 of Section D of Quarry Bay Inland Lot No. 4
I & J Nos. 29 & 31 Mansion Street (x) Section A of Sub-section 1 of Section D of Quarry Bay Inland Lot No. 4

3.The applicant applies for an order for sale of all the undivided shares in the Lots pursuant to Section 3(1) and Section 3(2)(b) of the Ordinance.

4.The Building is a 9-storey commercial/residential composite building with two shops for non-domestic use and eight flats for domestic use on Ground Floor and ten flats for domestic use on each upper floor from 1st Floor to 8th Floor.  With reference to respective assignment plans, flat roof and top roof are attached to some units on 8th Floor of the Building. 

5.The Building, served by 3 lifts and 2 common staircases,was completed in 1960 with the Occupation Permit No. H128 issued on 21 July 1960[1].  Each of the shops and flats in Blocks A, B, C and D is given 1 undivided share making a total of 36 undivided shares in their lot.  Each of the flats in Blocks E, F, G and H is given 1 undivided share making a total of 9 undivided shares in each Block.  Each of the flats in Blocks I and J is given 1 undivided share making a total of 18 undivided shares in their lot.

6.The applicant filed the Notice of Application (“the NOA”) in this case on 8 May 2012.  At the time of filing of the NOA, the applicant owned on average 82.87% of the undivided shares in the Lots.  Since the commencement of application, the applicant has successfully acquired additional shares from R1 to R7, R9 to R11 and R13 and the proceedings against them have been discontinued.

7.As at the date of this hearing, the applicant owned on average 93.515% of the undivided shares in the Lots, except for the followings :

(a) the 2/36 undivided shares in 5/F and 6/F of Block D owned by the 8th respondent (“R8’s Unit”);

(b) the 1/9 undivided shares in 1/F of Block H owned by 12th respondent (“R12’s Unit”); and

(c) the 2/9 undivided shares in G/F and 1/F of Block E owned by 14th respondent (“R14’s Unit”).

8.The 8th respondent (“R8”) is a missing owner.  Substituted service of the Application was effected on 3 September 2013 pursuant to the Order of HH Judge Ko dated 27 August 2013[2] under section 3(4) of the Ordinance.

9.Pursuant to the Order of HH Judge Ko dated 5 March 2013[3], Madam Kong Mei Ying, Jolene (“Mdm. Kong”) was appointed by the Tribunal to represent the estate of the 12th respondent (“R12”) for the purposes of these proceedings.  The applicant and Mdm. Kong have entered into a settlement agreement, and Mdm. Kong has withdrawn the Notice of Opposition and all the expert evidence filed pursuant to the Order of Deputy Judge Kot dated 4 October 2013[4].

10.Pursuant to the Order of HH Judge Ko dated 22 July 2013[5], Mr. Hui Shui Fong (“Mr. Hui”) was appointed by the Tribunal to represent the estate of 14th respondent (“R14”) for the purposes of these proceedings.  The applicant and Mr. Hui have entered into a Provisional Agreement for Sale and Purchase dated 29 April 2011[6] pending completion upon the grant of Letters of Administration of the deceased’s estate.

11.At the hearing, since there was no expert evidence filed by the respondents in these proceedings, Mr. Fung for the applicant simply called the witnesses to prove the applicant’s case.  The applicant contends that all the requirements of the Ordinance have been satisfied and asks for an order for sale in terms of the draft order submitted.

Section 3 of the Ordinance – Ownership of the Applicant

12.Section 3(1) of the Ordinance requires the applicant to have not less than 90% of the undivided shares in a lot before it can make an application.  Section 3(5) of the Ordinance provides 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.

13.Pursuant to section 3(5) of the Ordinance, a Notice was gazetted on 22 January 2010 and tabled at the Legislative Council meeting on 27 January 2010, which 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)”. 

14.As at the date of application, the applicant owned on average 82.87% of the undivided shares in the Lots and the occupation permit of the Building was issued for more than 50 years.  We are satisfied that the applicant is entitled to make the application.

Determination of the existing use values (“EUV”) of all units in the Building

15.Pursuant to section 3 of the Ordinance, the NOA was accompanied by a valuation report (“Application Report”)[7] prepared by Mr. Brian Kam Pui Law of Prudential Surveyors International Limited (“Mr. Law”), the applicant’s valuation expert, containing 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 Lots as at 15 March 2012. The report was prepared not earlier than 3 months before the filing of the NOA in accordance with section 3 of the Ordinance.

16.Under section 4(1)(a)(i), if there is a dispute between the parties on the EUV of the units in the Building on the Lots, the Tribunal has to determine the values. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the Lots who cannot be found, the majority owner of the Lots is required to satisfy the Tribunal that the value of the minority owner’s property as assessed in the application 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.”

17.As at the date of hearing, the remaining respondents had either filed no notice of opposition to dispute the EUV of the units in the Application Report or had withdrawn their respective oppositions before the hearing.  Nevertheless, R8 is a missing owner.  The Tribunal, before making an order for sale if any, should satisfy that the value of R8’s Unit as assessed in the application is not less than fair and reasonable and not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.

18.In the Application Report, Mr. Law explained the method of his valuation and the process of his assessment to arrive at the EUV of each unit in the Building as at 15 March 2012.

19.In his valuation of the EUV of the domestic units in the Building, Mr. Law adopted the following methodology :

(a) He selected 2nd Floor of Block D (“Reference Domestic Unit”), which is a unit of reasonable internal condition, as the reference unit for the purpose of valuing its unit price; 

(b) Unit price of the Reference Domestic Unit was first assessed by making reference to market comparables.  He took into account 12 comparable transactions in buildings of similar age nearby.  After making what he regarded as the necessary adjustments (for time, location and environment, age, quantum, floor, view, etc.) for all these comparable transactions, he adopted the unit price of the Reference Domestic Unit at $71,900/sq m that is close to the average of the adjusted unit rates of the comparables excluding the lowest (i.e. Comparable 6 in the List of Aged Domestic Comparables & Adjustment)[8];

(c) He further considered the differences in floor, size, view 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[9].

20.In assessing the EUV of the two Ground Floor shop units, Mr. Law adopted the following methodology:

(a) He selected Ground Floor of Block A (“Reference Shop Unit”) as the reference unit for the purpose of valuing its unit price.  He then took into account 7 comparable transactions in 5 different buildings in the same district, Quarry Bay, or the adjacent district, North Point. After making what he regarded as the necessary adjustments (for time, age, location, quantum, headroom, frontage / return frontage, etc., and conversion for yard, flat roof and cockloft) for all these comparable transactions, he adopted the unit price of the Reference Shop Unit at $158,800/sq m that is close to the average of the adjusted unit rates of the comparables[10];

(b) He further considered the unit price of the Reference Shop Unit and the adjustment for quantum to arrive at the EUV of the two Ground Floor shop units[11].

21.Mr. Law updated his EUV assessments by a supplemental report dated 3 May 2013 (“Supplemental Report”)[12].  He inspected more units internally in the Building, revised the saleable area and / or ancillary area of some units and comparables, rectified the age of some domestic comparable transactions, took into account more domestic and shop comparable transactions and made reference to the updated property index prepared by the Rating and Valuation Department in the valuation.  In the valuation of the Reference Shop Unit, Mr. Law renamed the adjustment for “Frontage / Return Frontage” to “Layout” and added an adjustment for “Return Frontage” too.  Mr. Law finally revised the unit price of the Reference Domestic Unit to $74,200/sq m[13] and the unit price of the Reference Shop Unit to $169,900/sq m[14], and then updated the EUV of each unit in the Building[15].

22.At the hearing, Mr. Law was asked as to why there was no adjustment for view to Comparable 2 (i.e. Unit C on 10th Floor of Mansion Building) for the assessment of the EUV of domestic units in the Supplemental Report[16], whilst he made +2.5% adjustment for view to the domestic units in Blocks A & B of the Building[17] when both the said Comparable 2 and the domestic units in Blocks A & B have an aspect towards Mansion Street as compared to the close building view of the Reference Domestic Unit. 

23.Mr. Law admitted that there should actually be -2.5% adjustment for view to Comparable 3 (i.e. Unit A on 6th Floor of Mansion Building) in the same table, instead of Comparable 2.  He then submitted revised Appendices 10 (i.e. List of Aged Domestic Comparables & Adjustments) and 14 (i.e. Details of Adjustments for Subject Domestic Units) of the Supplemental Report to the Tribunal (marked as Exhibit 10 and 11 respectively). 

24.Mr. Law told the Tribunal that any adjustment for view should only be based on the aspect of the living / dining room.  Since the living / dining room of the said Comparable 2 has an aspect towards nearby buildings, same as that of the Reference Domestic Unit, therefore no adjustment for view is required in the valuation.  He also said that he has not considered the view of the bedroom relevant in the adjustment for view even though bedrooms of the said Comparable 2 has an aspect facing Mansion Street and bedrooms of the Reference Domestic Unit has close building view only.   Moreover, he considered that -2.5% adjustment for view should be made to the said Comparable 3 in Exhibit 10 since its living / dining room has an aspect facing King’s Road that is better than that of the Reference Domestic Unit.

25.With respect, we disagree with the opinion of Mr. Law in this regard.  We consider that adjustment for view should always take into consideration the aspects of both living / dining room and bedrooms, though depending on the circumstances in each case, aspect of the living / dining room is sometimes more important than that of the bedrooms.  Since both Comparables 2 and 3 have aspect towards Mansion Street from their bedrooms, we found an adjustment of -1.5% for view should be adopted.

26.As for the view towards King’s Road, other than the revised adjustment to the said Comparable 3, Mr. Law has made no adjustment for view in Comparables 1, 5, 6, 8 & 9 in the same table, which have respective aspects facing King’s Road as well.  If Mr. Law really considered that adjustment for view towards King’s Road (i.e. his proposed -2.5% adjustment for view to the said Comparable 3) is necessary, he should apply the same or similar adjustment to all these comparables, but he did not do so.  There is nothing to explain the inconsistency in this regard.

27.In fact, we share the view of Mr. Law that no adjustment for view towards King’s Road is necessary to the said Comparables 1, 5, 6, 8 & 9 as well as for Comparable 3.  Hence, we found the -2.5% adjustment to Comparable 3 suggested by Mr. Law is not justified. 

28.Even though we have reservations on Mr. Law’s adjustment for view, we accept the other adjustments in Exhibit 10 are reasonable.  We note that even if we apply the -1.5% adjustment for view to Comparables 2 and 3 that have aspect towards Mansion Street from their bedrooms, these adjustments would have minimal impact on the assessments with round up of figures and do not affect the final result of $74,100/sq m found by Mr. Law in Exhibit 10. 

29.We also note that the interest of R8, the missing owner, would not be adversely affected by the adoption of the revised figures in Exhibit 10 and 11 submitted by Mr. Law at the hearing.  In these circumstances, we accept the EUV of the domestic units as listed in Exhibit 11.

30.When Mr. Law was asked to explain his adjustment for layout to retail comparables in Appendix 7 of the Supplemental Report[18], he replied that he had made reference to the depth to frontage ratios of the Reference Shop Unit and the shop comparables.  He took Comparable 1 in Appendix 7 of the Supplemental Report as an example and explained how he applied the mechanical adjustment for layout.  He firstly divided the depth by the frontage to derive the depth to frontage ratio.  He subtracted the ratio of the Reference Shop Unit from the ratio of Comparable 1 and then divided the result of the subtraction by the ratio of the Reference Shop Unit. The result of the division would then be rounded up to the next integer and +5% adjustment for layout was made for each positive integer of 1.

31.The adjustments for layout have recently been commented by a differently constituted panel of the Tribunal in Supergoal Investment Limited v Five F Ming House Limited and Ors [2014] 1 HKLRD 286 as follows: -

“93. Valuation usually proceeds by way of comparison where the valuer looks for a market transaction that is as close as possible to that which he has to value. He then works on the premise that if the subject matter of his valuation were to be the subject of a similar transaction, it would command the same value as the comparable. Since the comparable will never be identical to the subject matter of the valuation, the valuer will have to make adjustments to the value revealed by the comparable in order to reflect the differences between the comparable and the subject matter of his own valuation.

94. In the case of valuation of a shop, it is well understood that a shop with a wider street frontage (and hence, a bigger shop window) is more valuable than a shop of the same area but with a narrower shop front and a greater depth. This explains why, sometimes, an adjustment for the depth to frontage ratio is required.However, this does not mean that the combination of, say, two standard sized shops of equal frontage and depth (thus yielding 1/2nd the depth to frontage ratio) would justify a higher unit price. Mechanical application of depth to frontage adjustments clearly defies common sense and market expectation that retail shops with long shop fronts can be subdivided and let/sold more profitably (in terms of unit rate) in parts.

95. Using the Reference Shop Unit and Comparable A3 on Waterloo Road as an example:

Shop Unit Clear Frontage (m) Depth (m) Depth to Frontage Ratio
Ref Shop Unit 4.1 14.1 3.44 : 1
Comparable A3 9.6 17.1 1.78 : 1

Mr CW Wong applied an adjustment of -25% to account for its apparent low depth to frontage ratio. However, he might have been clouded by the illusion that the low depth to frontage ratio of Comparable A3 was really caused by the combination of two standard sized shops into one. If he is correct, then the value of Comparable A3 will drop by 25% if the owner subdivides it into two shops each having half of the frontage. The adjustment is clearly inappropriate.

96. While it is not suggested that the "zoning" method should be adopted here, we can use the principle that the immediate area behind the frontage of a shop should fetch a higher value "in terms of zone A" to confirm the correctness of the above analysis. Everything being equal, the immediate area behind the frontage should fetch a similar zone A value whether the frontage is 9.6 metres or 4.8 metres.There is no room for making an adjustment of -25% for the difference in layout. Indeed, Comparable A3 is deeper than the Reference Shop Unit and may fetch a lower unit value (instead of a higher one).

97. Although Mr CW Wong did try to compensate the size of the large shop by making an adjustment for size (ie quantum) by 20%. The two adjustments adding together end up with some -5%, ie the unit price of this comparable is more valuable in terms of layout and size than the Reference Shop Unit which, according to our view, may not be the case. Conceptually, the shop depth and size should be independent factors and the adjustment for one should not compensate the other. This was indeed the case for Comparables A6 and A7. In any event, the application of two or more adjustments which are subjective in nature but intending to compensate each other would only tend to present a picture of false accuracy and mask the error, if any…...”

32.Mr. Law was alerted of the judgment quoted above and invited to comment on the above paragraphs and their application in the subject valuation.  Mr. Law replied that he did not agree with the approach of the Tribunal in Supergoal and also pointed out that the Tribunal in the judgement had in any event adopted -5% adjustment for layout, instead of a positive adjustment to the said Comparable A3 to reflect its favourable depth to frontage ratio.

33.We agree with the comments of the learned Tribunal in Supergoal quoted above and with respect disagree with Mr. Law for adopting a mechanical adjustment for layout in the subject valuation. We note that the final -5% adjustment for layout to the said Comparable A3 adopted by the Tribunal in Supergoal had actually considered a marginal allowance for the more prominent frontage[19] and was not an acceptance of the mechanical adjustment for layout.

34.We have concern over Mr. Law’s mechanical adjustment for layout because, according to his formula in the mechanical adjustment, he had put equal weight to both frontage and depth in the assessment.  In addition, he had ignored the need to consider the irregularities in layout, if any, of a shop (e.g. irregular shape, presence of staircase, pillar and split level, etc.).

35.Depth is usually considered in the valuation of shop in Hong Kong. The consideration of depth is actually similar to the concept of “zoning” method that the immediate area behind the frontage is considered to be more valuable than those at the back and the value along the depth is diminishing, though the rate of reduction in secondary location may be less than that in prime location. 

36.On the other hand, unless the frontage in consideration is clearly superior or inferior to the norm that the benefits or disabilities which the frontage produces are clearly evident, we may not make any adjustment for frontage. Nevertheless, it is not wrong to adopt mechanical adjustment for frontage if this could reflect impact of frontage logically. 

37.We consider that, in the subject context, the adjustment for frontage if any is minimal as the frontages in consideration are not clearly superior or inferior to the norm, whilst we should made adjustment for depth to reflect the difference in value along the depth of a shop.  Even if we apply mechanical adjustment with reference to the depth to frontage ratio, different weight should be attached to depth and frontage respectively as the impact of depth to the value of shop is greater than the impact of frontage.

38.Having said so, even if we were to apply adjustment for depth and adjustment for irregular layout (i.e. Comparable 9 that has load bearing wall in the centre of the shop and Comparable 11 that is narrower in the front portion), these adjustments would have minimal impact on the overall assessments since some of the adjustments for layout in this instance are decreased whilst the others are increased, which offset the differences.  Such an adjustment did not materially affect the final result of $169,900/sq m, particularly when Comparables 6 & 11 that are very small in size are also excluded in the calculation.

39.Although we have reservation on Mr. Law’s adjustment for layout, we accept the other adjustments for the retail comparables in the Supplemental Report are reasonable.  We accept the unit price of the Reference Shop Unit at $169,900/sq m and the EUV of the two shop units as listed in Appendix 13 of the Supplemental Report[20].

40.We are satisfied that the EUV of R8’s Unit is not less than fair and reasonable in itself and when compared with the value of the applicant’s property.

41.The EUV of all units in the Building as at the relevant date of valuation, i.e. 15 March 2012, are reproduced below: -

Shop Units

Market Value (HK$)
  Block A Block B
G/F $9,310,000 $9,310,000
Sub-total: $18,620,000

Domestic Units

Market Value (HK$)
Block A Block B Block C Block D Block E
G/F - - $4,130,000 $4,370,000 $4,400,000
1/F $6,090,000 $5,540,000 $4,650,000 $4,650,000 $4,920,000
2/F $5,870,000 $5,320,000 $4,930,000 $4,700,000 $5,210,000
3/F $6,200,000 $5,380,000 $4,980,000 $4,740,000 $5,020,000
4/F $6,260,000 $5,980,000 $5,030,000 $5,260,000 $5,060,000
5/F $5,490,000 $5,760,000 $5,070,000 $4,840,000 $5,350,000
6/F $6,090,000 $5,820,000 $5,360,000 $4,890,000 $5,400,000
7/F $5,280,000 $5,530,000 $4,930,000 $4,460,000 $5,440,000
8/F[21] $4,350,000 $4,810,000 $5,390,000 $4,980,000 $4,760,000
Block F Block G Block H Block I Block J
G/F $4,400,000 $4,150,000 $4,030,000 $3,840,000 $3,840,000
1/F $4,690,000 $4,860,000 $4,280,000 $4,750,000 $4,530,000
2/F $4,970,000 $4,910,000 $4,330,000 $4,790,000 $4,360,000
3/F $4,780,000 $4,730,000 $4,160,000 $4,620,000 $4,620,000
4/F $4,830,000 $4,770,000 $4,200,000 $4,660,000 $4,440,000
5/F $4,870,000 $4,820,000 $4,460,000 $4,920,000 $4,490,000
6/F $4,690,000 $4,860,000 $4,500,000 $5,180,000 $4,750,000
7/F $4,970,000 $4,910,000 $4,760,000 $5,220,000 $4,140,000
8/F[22] $5,020,000 $4,700,000 $4,370,000 $4,980,000 $4,620,000
Sub-total: $430,460,000
Sub-total for Shop Units: $18,620,000
Sub-total for Domestic Units: $430,460,000
Grand Total: $449,080,000

Section 4(2) of the Ordinance – Justification and Reasonable Steps

42.In determining the application, Section 4(2) of the Ordinance empowered the Tribunal to make an order for sale unless, after hearing the objections of the respondent, it is satisfied that :

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

(b) the applicant has taken reasonable steps to acquire all the undivided shares in the Lots (including negotiating for the purchase of the undivided shares owned by the respondent on terms that are fair and reasonable).

Section 4(2)(a) - Age and State of Repair

43.This Tribunal has taken into consideration the expert evidence of Mr. Wong Wing Cheung, Dennis (“Mr. D Wong”), a qualified Building Surveyor and Mr. Wong Chi Ming (“Mr. CM Wong”), a qualified Structural Engineer adduced by the applicant. 

44.Mr. CM Wong had conducted a structural assessment of the Building and prepared a Structural Assessment Report dated 2 May 2013[23]. He found the following defects in the Building: -

(a) cracks, spalling and severe water stains at 400 locations were observed during the visual inspection of the 70 units and common area of the Building;

(b) all steel reinforcement bars were suffering from a different degree of corrosion and over 90% of the steel reinforcement bars were suffering from mild corrosion;

(c) 70% of the core samples of the structural element had either considerable or numerous voids;

(d) carbonation had reached the concrete surrounding the steel reinforcement bars in all of the test samples of slabs and beams whilst over 60% of core samples of columns were subject to this symptom;

(e) 50% of the core samples had a chloride content exceeding 0.40%;

(f) 50% of the samples were found to pose a high risk of corrosion of the steel reinforcement bars whilst 35% of the bars were at moderate risk;

(g) 14% of structural members were found to have concrete cover less than the design cover and 83% of the samples from slabs and 51% of the samples from beams were found to have concrete cover less than the minimum required cover under the current design standard; and

(h) the average cement content for the Building was calculated to be 204kg/m³, lower than the current standard of 290kg/m³ as specified in the HK2004, and therefore the design life of the Building should be shorter than 50 years as stated in the code.

45.Based on the above findings, Mr. CM Wong concluded that the structural elements of the Building were in a poor condition and irreparable problems such as high carbonation depth and high chloride content might cause the condition of the Building to further deteriorate quickly in the near future.   Mr. CM Wong believed that corrosion of the reinforcement bars had been initiated and was likely to have entered the propagation phase. Since cracks, spalling and corroded steel bars were indications that the process had already begun, he anticipated that more defects would develop in the near future.

46.Mr. CM Wong considered that the Building, which was 53 years old as at the date of his report, had passed the end of its design life. In addition, since wind load, ductility and robustness were not considered in the Building, the structure of the Building could not meet the current safety standard.

47.In view of the said problems, Mr. CM Wong recommended that hammer tapping should be carried out to find the extent of spalling and cracking in the structural members, and all revealed cracks and spalling should be patch repaired.  He further estimated the costs of repair for the Building at its current state to be $1,095,160, but this did not include the dealing of problems such as severe carbonation and high chloride content because such repair would be both technically and financially impracticable and would cause extensive disturbance during the repair works.

48.Mr. D Wong had conducted a condition survey of the Building.  In the Condition Survey Report prepared in May 2013[24], he concluded that :

(a) the Building that was 53 years old as at the date of his report had many problems as a result of its age which impaired its appearance and function;

(b) due to changes in statutory requirements, advanced technology and higher expectations over the years, the Building had become sub-standard with many problems affecting the hygiene, safety, convenience and enjoyment of the Building;

(c) the physical and functional hazards of the Building were a result of deficiencies in the planning, design, use of material, facilities and workmanship of the Building when it was first constructed;

(d) the problems were further aggravated due to unauthorized building works, lack of maintenance and the absence of proper building management, and these had rendered the Building to be well below a habitable standard and fall short of many basic requirements expected in new buildings;

(e) the Building was obviously below a tenantable standard with its structural frames in poor condition and most of its components, finishes and services deteriorated towards the end of their effective life spans;

(f) the overall state of repair of the Building was poor showing deterioration beyond reasonable repair;

(g) the Building was in a state of disrepair and demolition of the Building would relieve the owners from heavy repair responsibilities, which evidently had been neglected for a long time;

(h) economic benefits brought about by the repair to the existing derelict building is far less than the option of redevelopment;

(i) the fact that the Building had been left in a state of disrepair for so long had aggravated the problems which would require more substantial repairs to be undertaken to re-instate the condition of the Building to a tenantable standard; and

(j) the carrying out of the essential repairs would cause considerable disturbance and would require a very long implementation period, and during the course of the repair, the occupation and enjoyment of the units would be affected intermittently.

49.Mr. D Wong assessed the cost of essential repairs at $31,458,930 (i.e. about $4,965.59/sq m), which was about 31% of the unit cost for constructing a new building and was disproportionally high as compared with the costs of constructing a new building.  He came to the conclusion that the Building had deteriorated to a state which was beyond reasonable economic repair as signified by the high repair cost.  He also concluded that the overall state of repair of the Building was poor with many of its components, finishes and services installations showing deterioration beyond reasonable repair. He considered that even after the essential repair works had been implemented, the Building would remain an old building with its design and construction out-dated and below market expectations and constitute a continuing repair liability to the owners.  In these circumstances, he recommended to redevelop the Building, which would improve the living standard of the new occupants, contribute to the renewal of the neighbourhood and enhance the overall environment.

50.We accept the applicant’s evidence in this regard, which is in fact uncontested in these proceedings.  We are satisfied that, based on the evidence of Mr. CM Wong and Mr. D Wong, redevelopment of the Lots is justified due to the state of repair of the Building, which is in a poor state of repair and disproportionate cost is required to repair and maintain the same.  We are also satisfied that redevelopment of the Lots is justified due to the age of the Building.  The Building is more than 53 years old and is in a poor condition. Its design has become obsolete over time in many aspects both physically and functionally and failed to conform to modern construction and statutory standards and requirements.

Section 4(2)(b) - Reasonable Steps Taken

51.The applicant is under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of all the undivided shares of the Lots under Section 4(2)(b) of the Ordinance.

52.At the hearing, there were only three respondents, R8, R12 and R14, remaining on record.  Whilst R12 and the applicant have entered into a settlement agreement, R14 has entered into a Provisional Agreement for Sale and Purchase dated 29 April 2011 with the applicant.  We are satisfied that the settlement agreement and the Provisional Agreement for Sale and Purchase are the indication that the applicant has taken reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the respective undivided shares of R12 and R14, although the respective purchases are yet to be completed because both Mdm. Kong and Mr. Hui have not yet obtained the grants of representation of the deceased’s estates.

53.The applicant has made the following offers to R8: -

Offer Date of offer Offer Price Market value reflecting proportionate shares in redevelopment potential of the Lots
    5/F
Block D
6/F
Block D
5/F
Block D
6/F
Block D
Before filing of Notice of Application on 8 May 2012
1st Round 2.4.2012 $8,252,000 $8,343,000 $7,858,904 $7,945,265
2nd Round 23.4.2012 $8,252,000 $8,343,000 $7,839,124 $7,905,840
After commencement of the Main Application
3rd Round 5.8.2013 $10,861,000 $10,951,000 $9,050,601 $9,125,245
4th Round 28.4.2014 $11,004,000 $11,094,000 $9,169,262 $9,244,884

54.R8 is a missing owner.  Before the commencement of the proceedings, the applicant had made 2 rounds of written offers to R8 for purchasing R8’s Unit and there was no reply. After the commencement of the proceedings, the applicant had made the 3rd round of written offers to R8 and there was also no reply.  After the applicant had obtained from the Tribunal the order of substituted service on R8 on 27 August 2013, the applicant had sent further offers to R8’s last known addresses.

55.The applicant contends that the prices offered to R8 are fair and reasonable. The applicant submitted that all the offer prices made to R8 were determined by reference to the expert opinion of Mr. Law, the applicant’s valuation expert.  The applicant further submitted that the offer prices were all higher than the then EUV and the then market value reflecting proportionate shares in the redevelopment potential of the Lots.

56.In assessing the reasonableness of the offers, Ribeiro PJ had found in Capital Well Limited v Bond Star Development Limited[25] that :

“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.”[26]

57.There is no evidence before this Tribunal that the assessments by Mr. Law are faulted.  Although we have reservations on some adjustments made by Mr. Law, we finally accept his assessments in the valuation.  In these circumstances, we are satisfied that the offers made by the applicant fall within the range of what may broadly be regarded as fair and reasonable and the applicant has taken reasonable steps to acquire all the undivided shares of the Lots including R8’s Unit. 

Order for Sale

58.We are satisfied that redevelopment of the Lots is justified in terms of both age and state of repair of the Building and the applicant had taken reasonable steps to acquire all the undivided shares of the Lots and had negotiated for the purchase of R8’s Unit, R12’s Unit and R14’s Unit on terms that are fair and reasonable.  In these circumstances, we agree that an order for sale should be granted in favour of the applicant.

Reserve Price for the Auction

59.The applicant submitted that the reserve price for the auction of the Lots should be fixed at $850,000,000, which is based on Mr. Law’s assessment of the redevelopment value (“RDV”) of the Lots as at 28 April 2014 in his Valuation Report dated 30 April 2014[27].

60.We have carefully considered Mr. Law’s valuation of the RDV of the Lots.  Mr. Law opined that due to lack of similar comparables for direct comparison, he had assessed the RDV by using the Residual Method.  Residual Method is the assessment of land value by deducting the development costs (including construction costs, professional fees, financial costs and etc.) from the estimated gross development value (“GDV”) of the proposed development, as if completed, as at the date of valuation.

61.Mr. Law also opined that the optimum development on the Lots comprised a block of 35-storey residential building with entrance lobby, plant rooms, open carparks, loading / unloading space and landscape areas on ground floor, clubhouse on 1st floor and domestic units on floors above.  Details of the hypothetical development, the GDV as assessed (i.e. $197,390/sq m saleable area for domestic units and $832,000 per each open carpark), the development costs as adopted (i.e. $36,842/sq m gross floor area) and the residual valuation are set out in the Appendices of his Valuation Report dated 30 April 2014[28].  The residual land value as assessed at $850,000,000 is equivalent to an accommodation value of about $86,054/sq m gross floor area.

62.If there are relevant comparables for direct comparison, we consider that we should always adopt the Comparative Method that is universally regarded as the best method of valuation. Nevertheless, where comparables are inadequate, we may adopt the Residual Method as the principle method of valuation or take the Residual Method as a useful check on the valuations arrived at by the Comparative Method.

63.We disagree with Mr. Law that there was no similar comparable for direct comparison.  At the hearing, Mr. Law was asked if he had considered the public tender of Shau Kei Wan Inland Lot No. 854 (“SIL 854”) by the Hong Kong Government.  Upon our enquiry, Mr. Law then submitted the information of this public tender and the valuation by the Comparative Method to the Tribunal (Exhibit 5 and 6).

64.The development of SIL 854 on a site of about 476.4 sq m is restricted to a maximum gross floor area of 4,287 sq m for private residential purposes.  The public tender result was announced on 9 April 2014, before Mr. Law’s valuation date of the RDV on 28 April 2014 and his report date of 30 April 2014, and its sale price was $433,599,000, equivalent to an accommodation value of about $101,143/sq m gross floor area.

65.In the comparison between SIL 854 and the Lots, Mr. Law made -20% adjustment for seaview, -5% adjustment for locality and +10% adjustment for scale of development, and concluded that the adjusted accommodation value of the Lots should be about $85,972/sq m gross floor area.  On the condition that there was only one comparable in the valuation by the Comparative Method and the accommodation value as derived by the Comparative Method at $85,972/ sq m was close to that as derived by the Residual Method at $86,054/ sq m, Mr. Law considered that the valuation of the RDV of the Lots should be maintained at $850,000,000.

66.Having gone through Mr. Law’s valuation including the supplementary information submitted by him at the hearing in details, we accept his valuation of the RDV.  We accept that the market value of the Lots reflecting its redevelopment potential, i.e. the RDV of the Lots, as at 28 April 2014 was $850,000,000, which should be the reserve price for the auction of the Lots.

Order

67.This Tribunal make the following determinations :

(1) this Tribunal is satisfied that the existing use value of R8’s Unit as assessed in this Application is fair and reasonable and is fair and reasonable when compared with the values of the applicant’s units;

(2) this Tribunal is satisfied that the redevelopment of the Lots is justified due to the age and state of repair of the Building, and that the applicant has taken reasonable steps to acquire all the undivided shares in the Lots including that of the 8th respondent, 12th respondent and 14th respondent;

(3) all the undivided shares in the Lots, the subject of the Application, be sold by way of public auction for the purposes of redevelopment of the Lots;

(4) Mr. Chow Wing Kin Anthony and Ms. Chow Suk Han Anna, nominated by the applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustee under the Ordinance in relation to the Lots and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs. Peter C. Wong, Chow & Chow dated 7 April 2014;

(5) for the purposes of the sale of the Lots by public auction :-

(a) the sale of the Lots 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 599-627 of Bundle B2) to be approved and initialed by the Tribunal;

(b) the reserve price be set at $850,000,000; and

(c) subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Lots or its successor in title, the redevelopment of the Lots 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 Lots becomes the owner of the Lots; and

(6) liberty to the applicant, the 8th respondent, the 12th respondent, the 14th respondent and the Trustees to apply to the Tribunal for further directions.

Costs

68.Costs order nisi that there be no order as to costs. Unless any of the parties apply by summons to vary it, the costs order nisi shall be made absolute upon expiry of 14 days.

Deputy Judge KOT Alex NG
Presiding Officer
Lands Tribunal
Member
Lands Tribunal

Mr Patrick Fung SC and Ms Nancy Ngai, instructed by Yam & Company, for the applicant

The 8th respondent was not represented and did not appear

The 12th respondent, represented by Tai, Tang & Chong, absent by notice

The 14th respondent, was not represented, absent by notice


[1] See Bundle E/28

[2] See Bundle A/95-98

[3] See Bundle A/83-85

[4] See Bundle A/99-101

[5] See Bundle A/92-94

[6] See Bundle B2/526-530

[7] See Bundle E/1-45

[8] See Bundle E/36

[9] See Bundle E/42

[10] See Bundle E/32

[11] See Bundle E/40

[12] See Bundle E/45-153

[13] See Bundle E/99

[14] See Bundle E/85

[15] See Bundle E/116 & 118

[16] See Bundle E/99

[17] See Bundle E/118

[18] See Bundle E/85

[19] See Note 23 of the case Supergoal Investment Limited

[20] See Bundle E/116

[21] Blocks A & B on 8th Floor are attached with top roof; Blocks B, C & E on 8th Floor are attached with flat roof

[22] Blocks G & I on 8th Floor are attached with flat roof

[23] See Bundles C1 & C2

[24] See Bundles D1 to D4

[25] (2005) 8 HKCFAR 578

[26] Supra, at paragraph 33

[27] See Bundle E/154-228

[28] See Bundle E/219-220