SMART BASE HOLDINGS LTD AND ANOTHER v. WONG TAK SHING, the Administrator of the Estate of WONG PING, deceased AND ANOTHER

LDCS 16000/2021

[2024] HKLdT 59

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 16000 OF 2021

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JUDGMENT

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Background

1.  This is an application for a compulsory sale order (“the Application”) under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”) to sell all the undivided shares of Section G (“SG Lot”) and Remaining Portion (“RP Lot”) of New Kowloon Inland Lot No 2813 (collectively, “the Lots”) on which a pair of 5-storey tenement buildings (“the Buildings”) are erected, having addresses respectively as 291 and 293 Castle Peak Road, Cheung Sha Wan, Kowloon (respectively, “291 Building” and “293 Building”).

2.  By reference to a Permit No 87 issued by the Building Authority on 22 February 1955 in pursuant to the Building Ordinance (Chapter 123 of the Revised Edition, 1950) (“Occupation Permit”),  permission was granted to occupy and use the Buildings for domestic purposes. More particularly, Section 2 of the then Buildings Ordinance, 1950 Edition, “domestic building” was defined to mean “any building constructed, used or adapted to be used, wholly or partly, for human habitation, but does not include any building where caretakers only, not exceeding two in number, pass the night” (underline added) whereas the current version of the Buildings Ordinance defines ‘domestic building’ to mean “a building constructed or intended to be used for habitation and the expression domestic purposes shall be construed accordingly”.

3.  By virtue of the building plans of the Buildings approved by the Building Authority on 24 November 1954, the ground floor accommodation of each was designed for shop purposes with an internal cockloft above. The upper floors were designed with a residential unit on each floor which is served by 2 staircases intended for the common use by the occupiers of the Buildings, one fronting onto the Castle Peak Road while the other abuts a scavenging lane at the rear.

4.  According to the record of the Land Registry, the 293 Building is subject to a Deed of Mutual Covenant and Grant dated 23 April 1955[1], and, the Ground Floor and Fourth Floor of the 293 Building are also subject of a Deed of Mutual Covenant and Grant dated 15 August 1955[2]. Each floor of the 293 Building was allotted one equal and undivided share of and in the RP Lot.

5.  While there is no similar Deed of Mutual Covenant in respect of the 291 Building, SG Lot is subject to no sub-division and the 1^st applicant is the sole owner. As at the date of the Application, 20 December 2021 (“Application Date”), the 1^st Applicant also owned 3 equal undivided share 5^th parts or shares of and in the RP Lot with the right to exclusive use and occupation of First Floor, Third Floor and Fourth Floor of the 293 Building.

6.  As at the Application Date, the 2^nd applicant owned all that 1 equal undivided 5^th part or share of and in the RP Lot with the right to exclusive use and occupation of the Ground Floor of the 293 Building, amounting to 64% equal and divided shares of the RP Lot.

7.  That is, the applicants altogether owned an average of 82% of the undivided shares of the Lots. The remaining shares were then owned by the 1^st and 2^nd respondents (“R1” and “R2” respectively) as follows:

Respondent	Equal Undivided Share of the RP Lot	Corresponding Unit of the 293 Building
R1	4/5 of 1	Ground Floor (“R1’s Unit”)
R2	1	Second Floor

8.  R1 (Wong Ping) passed away on 5 June 2016. Following an order of K Yeung J made in action HCMP 1494/2022 on 3 February 2023, Mr Wong Tak Shing was appointed by the Tribunal to represent the estate of Wong Ping as R1.

9.  Subsequently, the 1^st Applicant acquired the shares and interest of R2 on 13 September 2023. The Application against R2 was discontinued on 19 September 2023. As a result, the applicants now own an average of 92% of the undivided shares of the Lots.

Legal Representation

10.  The applicants are represented by Mr C Y Li SC (“Mr Li”), leading Ms Ann Lee and Mr Felix H Y Tang, instructed by Messrs Iu, Lai & Li whereas R1 is represented by Mr Howard Wong of Messrs Zhong Lun Law Firm LLP.

The Issue at Trial

11.  As indicated by R1 to the Tribunal at the Pre-trial Review held on 19 March 2024, R1 does not oppose an order for sale. In short, subject to satisfactory proof of the statutory requirements for granting an order for sale by the applicants, the dispute in the trial as between the applicants and R1 is on valuation.

The Evidence

12.  The applicants have filed the following documents in support of the Application:

(a)  A witness statement dated 15 September 2022 by Mr Wai Chun Sing Terence, representative of the applicants;

(b)  A Condition Survey Report by Mr Benson Wong Sai Ning (“Mr Benson Wong”) of Benson Wong & Associates Limited dated 15 September 2022;

(c)  A Structural Assessment Report by Mr So Kin Shing (“Mr So”) of K S So & Associates Limited dated 15 September 2022;

(d)  The following reports by Mr Charles C K Chan (“Mr Charles Chan”) of Savills Valuation and Professional Services Limited (“Savills”):

(i)  the Application Report of 6 October 2021 pursuant to Part 1 of Schedule 1 to the Ordinance;

(ii)  Supplemental Valuation Report of 14 September 2022 on both the existing use value (“EUV”) and redevelopment value (“RDV”) of the Lots as a composite site;

(iii)  Supplemental Valuation Report on updated RDV dated 21 March 2024.

13.  Mr Wong Tak Shing filed his witness statement dated 16 May 2023. Later, he appointed Mr Patrick Lai (“Mr Lai”) of AA Property Services Ltd as his valuation expert. Mr Lai used to be the valuation expert appointed by R2 but following the discontinuation of the proceedings against R2, all Mr Lai’s reports prepared for R2 were withdrawn. With the new appointment by R1, Mr Lai filed the Report on updated RDV dated 20 March 2024.

14.  Mr Chan and Mr Lai compiled the following joint statements:-

(1)  the Joint Expert Statement dated 4 May 2023 on the EUV of the Buildings (with Mr Lai’s statements, which were given on R2’s instructions, redacted); and

(2)  the Joint Expert Statement dated 16 April 2024 on RDV.

Whether the Applicants are Entitled to Make the Application

15.  A prerequisite for an application for compulsory sale order is to meet the statutory ownership threshold of undivided shares in the lot(s) concerned as stipulated in section 3 of the Ordinance as follows:-

3. Application to Tribunal for compulsory sale of lot

(1) Subject to subsection (5), the person or persons who owns or own, otherwise than as a mortgagee, not less than 90% of the undivided shares in a lot may make an application—

(a) accompanied by a valuation report as specified in Part 1 of Schedule 1; and

(b) to the Tribunal for an order to sell all the undivided shares in the lot for the purposes of the redevelopment of the lot.

(2) Without prejudice to the operation of subsection (5), an application under subsection (1) may cover—

(a) 2 or more lots where the majority owner owns not less than the percentage specified in subsection (1) of the undivided shares in each lot; or

(b) 2 or more lots—

(i) on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings; and

(ii) where the average of—

(A) the percentage of the undivided shares owned by the majority owner in the lot or lots on which one of the buildings stands; and

(B) the percentage of the undivided shares owned by the majority owner in the lot or lots on which the other of the buildings stands,

is not less than the percentage specified in subsection (1).

16.  Section 3(1) of the Ordinance requires an applicant to have not less than 90% of the undivided shares in a lot before he can make an application for an order to sell all the undivided shares in the lot for the purposes of the redevelopment of the lot.

17.  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 section 3(1) in respect of lots specified in the notice.

18.  The Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice was gazetted on 22 January 2010 and came into operation on 1 April 2010 (“the Notice”). Section 3 of the Notice lowered the threshold for compulsory sale in respect of the classes of lots specified in the Notice from 90% to 80%. Those classes of lots include: “a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the relevant date”.

19.  Given the Buildings are more than 50 years old prior to filing of the Application. The Notice is therefore applicable and the threshold percentage should be 80%.

20.  In the present case, the Buildings are connected to each other by a staircase intended for common use by the occupiers of the Buildings. As at the Application Date, the applicants owned 100% of the SG Lot and 64% equal and undivided shares of the RP Lot. On average, they owned 82% of the Lots. The parties have no disagreement that the applicants are entitled to seek a sale order under section 3(2)(b) of the Ordinance notwithstanding that the applicants own 100% of the SG Lot.  

21.  Recently, however, in Max Win Development (HK) Limited v Gain Excel Limited & Another, LDCS 37000/2019 (unreported, 30 September 2022) (“Max Win”), the Tribunal[3] casted doubt on the issue of whether an applicant owning 100% of a lot, on which one building is connected to another building on an adjoining lot by a staircase intended for common use by the occupiers of the buildings (collectively, “Common Staircase Buildings”), could make an application under section 3(2)(b) despite the average of the percentage of the adjoining lots is not less than the percentage specified in section 3(1) as shown in the following table:-

	Building over 4 lots at (Common Staircase Buildings)		Building over 2 lots at
	No 300 Castle Peak Road	No 302 Castle Peak Road	No 304 Castle Peak Road	No 306 Castle Peak Road
Applicant’s ownership at commencement of application	100.0%	66.67%	100.0%	80.0%
	Average: 83.33%		Average: 90.0%
Applicant’s ownership after application	100.0%	66.67%	100.0%	100.0%
	Average: 83.33%		Average: 100.0%

22.  The Tribunal held that whilst an application under the Ordinance may include multiple or contiguous lots, such multiple-lots application is permissible if, and only if, the conditions in section 3(2)(a) or 3(2)(b) are satisfied. With reference to the Court of Appeal judgment in Bond Star Development Ltd v Capital Well Ltd [2004] 2 HKLRD 855 (“Bond Star”), the Tribunal considered that Bond Star “make it clear that the Ordinance’s focus or object is to resolve disputes between majority and minority owners. Specifically, the Ordinance is not intended to permit an application where there is no minority owner when the applicant already owns 100% of the lot.” and such rationale applies to section 3(2)(b).

23.  The applicant was accordingly found not entitled to seek assistance from section 3(2)(b) and could not rely on the average ownership percentage of the lots on which the Common Staircase Buildings stood where one of such lots was 100% owned. As a result, the Tribunal ruled that:-

(1)  as the portion of the building at No 300 Castle Peak Road ever since the commencement of the application was 100% owned, the said lot was not within the scope of the Ordinance.

(2)  the portion of the building at No 302 Castle Peak Road was also  out of the scope on its own because the 66.67% ownership fell short of the minimum percentage requirement as stipulated in section 3(2)(a).

(3)  Similarly, as the portion of the building at No 304 Castle Peak Road was 100% owned, the said lot was out of scope of the Ordinance.

(4)  the lot on which the building at No 306 Castle Peak Road stood, which had become 100% owned by the applicants, could no longer formed the proper subject matter of the application.

24.  Max Win was not followed in Apex Intelligence Limited v Chan Hoi Kuen & Others, LDCS 5000/2019 (unreported, 19 October 2022) (“Apex Intelligence”). In determining an application under section 3(2)(b), the Tribunal[4] in Apex Intelligence took into account the average of the ownership percentage of the two lots on which the Common Staircase Buildings stood. The application was allowed notwithstanding that the majority owner had already owned 100% of one of the two lots concerned (§8, 9, 26 to 46 of the judgment).

25.  Shortly after Apex Intelligence, the same issue arose again and was posed as a preliminary issue in Winmark Properties Limited & Another v Prime Way Investment Co Ltd, LDCS 4000/2020 (unreported, 21 November 2022) (“Winmark”). In that case, the undivided shares in the lots on which the Common Staircase Buildings at Nos 11 & 13 Lyndhurst Terrace straddled can be summarized as follows:

	Common Staircase  Buildings standing at		Building standing at the 2 lots at 15 & 17 Lyndhurst Terrace
	Lot at 11 Lyndhurst Terrace	Lot at 13 Lyndhurst Terrace
Applicant’s ownership at commencement of application	62.5%	100.0%	92.86%
	Average: 81.25%
Applicant’s ownership after application	75.0%	100.0%	100.0%
	Average: 87.5%

26.  Deputy District Judge Roy Yu gave a detailed analysis of Bond Star and concluded that the Court of Appeal, in Bond Star, determined the interpretation of section 3(2)(a) only but left open the scenario of section 3(2)(b). Specifically, Bond Star was argued, and decided, only on section 3(2)(a) at Lands Tribunal and so was its appeal to Court of Appeal. The Court of Appeal had actually directed that the question as to whether the applicant was entitled to make an application under section 3(2)(b) on the basis that the Common Staircase Buildings straddled the wholly-owned lot and the partially-owned lot “has not been argued as such” and remitted the said question to the Lands Tribunal for further consideration.  

27.  On a purposive interpretation, the learned deputy judge regarded the 2 sub-sections of section 3(2) cover 2 different exceptions to the restriction of multiple-lots application. Section 3(2)(b) specifically provides an exception for the lots over which the Common Staircase Buildings straddled. There should be no reason to exclude an owner who owns 100% of a lot but not 100% of the other lot, on which the Common Staircase Buildings straddle, from making an application under section 3(2)(b), taking into account that “technically it must be easier to develop the lots together”. His shareholdings in the two lots should therefore be taken as the average of the two lots.

28.  As such, the learned deputy judge ruled that when the application was made, the buildings on Lot 11 and Lot 13 were Common Staircase  Buildings and by section 3(2)(b), the applicants owned 81.25% and thus, satisfied the statutory requirement. The post-application change in ownership from 81.25% to 87.5% did not take the two lots out of the scope of section 3(2)(b). On the other hand, Lot 15 and Lot 17, which did not involve Common Staircase Buildings, were not covered by section 3(2)(b), and, when the applicant acquired 100% ownership subsequently, section 3(2)(a) did not apply as “there is no purpose in granting an order for sale according to the ruling of Bond Star.”

29.  Subsequently, the Tribunal in Peace Ever Limited & Others v Chan Sui Ching & Others, LDCS 28000/2018 (unreported, dated 1 August 2023) and Ever Great Development Limited v Chan Woon Cham & Another, LDCS 6000/2020 (unreported, dated 31 July 2023)[5] came across the same issue again.

30.  Having reviewed the preceding judgments on the issue, the Tribunal agreed with the view of the learned Deputy Judge Roy Yu that the rationale given by the Court of Appeal in deciding Bond Star, and the ratio of the appeal judgment, was confined to section 3(2)(a) only. The ratio of Bond Star is not binding on the Lands Tribunal in determining applications made under section 3(2)(b).

Legislative History of the Ordinance

31.  Indeed, the Tribunal in Max Win had reviewed the legislative history of the Ordinance in details, which we thankfully adopt and summarize for the present purpose as follows.

32.  The bill at first only contained section 3(1), which dealt solely with “single-lot” application. On 21 January 1998, the Land (Compulsory Sale for Redevelopment) Bill (“the Bill”) was proposed and laid before the Provisional Legislative Council for its first reading. The preamble of the Bill and the original section 3 provided for "the person or persons who owns or own ... ... not less than 90% of the undivided shares in a lot may make an application to the Tribunal for an order to sell all the undivided shares in the lot for the purposes of the redevelopment of the lot". (emphasis added)

33.  The debate of the Bill was then adjourned to the Bills Committee for further discussion between 10 February and 24 March 1998, during which a common question as to whether multiple or contiguous lots would be covered was raised. In particular : -

(1)  the representatives of the Real Estate Developers Association opined that redevelopment should be considered on a project basis rather than on a “lot” basis and suggested that the Bill should allow majority owners holding an average of 90% aggregate undivided shares in contiguous lots to apply for an order for sale;

(2)  the representatives of the Hong Kong Institute of Surveyors proposed to widen the scope of the Bill to cover schemes comprising several contiguous lots as it was more cost-effective and economical to redevelop a larger site than a single lot.

34.  In view of the concerns raised, the Members of the Bills Committee agreed to discuss the issue as to whether the Bill should apply to a single lot or contiguous lots. In particular, the Minutes for the Bills Committee on 12 March 1998 recorded that it was necessary to have clearer provisions to specify how the minimum threshold would apply in cases where buildings were connected by a common staircase.

35.  The Administration agreed to introduce Committee Stage Amendments to the effect that “the minimum acquisition level of buildings connected by a common staircase should be an average of 90% of the undivided shares in the lots on which these buildings respectively stood”. Section 3(2) was introduced by way of amendments to the Bill to deal with the concerns of some members of the Provisional Legislative Council when the bill passed through committee stage.

36.  The Paper for the House Committee meeting on 27 March 1998, Report of the Bills Committee on Land (Compulsory Sale for Redevelopment) Bill, summarized the concerns of some members and deputations that thriving "pencil" developments would result if the 90% threshold were to be applied to a single lot:-

“Whilst supporting the concept of comprehensive redevelopment, the majority members of the Bills Committee are concerned that should such approach be adopted, there may be situations in which the applicants have not acquired any undivided shares in one of the lots notwithstanding the holding of 90% of the aggregate undivided shares. In these circumstances, they consider it not justifiable on the sole ground of comprehensive redevelopment to compel all the owners of that lot to dispose of their properties against their will. As the Bill does not prohibit the majority owners holding 90% of the undivided shares in each of the lots to make one application for a sale order in order to redevelop the lots together, the Bills Committee accepts that the minimum acquisition percentage should apply to a lot per se. However, to address the technical problems in respect of buildings connected to one another by a staircase which is intended for common use by their occupiers, the Administration takes on board members' suggestion to provide in the Bill that the minimum acquisition level should be an average of 90% of the undivided shares in the lots on which these buildings respectively stand (clause 3).” (emphasis added)

37.  The corresponding proposed amendments were set out in Appendix III of that Paper and it was this Clause 3 amendment that introduced the current version of section 3(2) of the Ordinance.

38.  On 7 April 1998, the Provisional Legislative Council resumed Second Reading debate of the Bill. On the scope of the Bill, the Chairman of the Bills Committee, Mr. Ronald Arculli said that: -

“Another focal point of discussion in the Bills Committee was whether owners holding an average of 90% of aggregate undivided shares in contiguous lots should be allowed to make an application to redevelop the lots as a package. Whilst we fully support the concept of comprehensive redevelopment, our concern was that should such approach be adopted, there may be situations where an applicant did not own any undivided shares in one of the lots whilst holding 90% of the aggregate undivided shares. The Bills Committee considered that it could not be justified on the sole ground of comprehensive redevelopment to compel all the owners of such a lot to sell their properties against their will. We, therefore, agreed that the ownership percentage should apply to each lot except where two buildings served by a common staircase in which case it would be the average of the undivided shares of the lots on which the buildings stand.” (emphasis added)

39.  In respect of the proposed amendments to clause 3 of the Bill (ie current version of section 3(2)(a) and (b) of the Ordinance), SPEL said that: -

“Subclause (1A) [i.e. current section 3(2)(a) and (b)] specifies that if the majority owner makes an application covering two or more lots, he must own not less than 90% of the undivided shares in each lot. It also provides for the average to be taken for the purpose of calculating the percentage of the undivided shares of two or more lots on which there are two buildings joined by a common staircase.”

40.  On the same day, the Committee passed the Bill with the amendments as proposed. The Bill was read a third time and passed by the Provisional Legislative Council.

Construction of the Ordinance

41.  By a review of the legislative history of the legislation, it is clear to us that the legislative scheme of compulsory sale focuses on "lot-based" as opposed to “building-based” or “redevelopment area/site-based”. In particular, right at its inception, it concentrated on “single-lot” application and the Bill was drafted to apply only to “single lot”. That said, we see the relaxation of the strict rule of single-lot application by the addition of section 3(2), after much consideration and deliberation. Section 3(2) in effect expand the scope of the Bill to allow multiple-lots applications in the confined scenarios as provided in its two sub-sections.

42.  Section 3(2) is the only section in the Ordinance which provides for exceptions to the restriction of the single-lot based application under section 3(1). It allows applications involving 2 or more lots in two peculiar scenarios, which are dealt with respectively by section 3(2)(a) and section 3(2)(b) as follows:-

(1)  Section 3(2)(a) allows application by an applicant who owns not less than 90% of the undivided shares in “each lot”.

(2)  Section 3(2)(b) allows application by an applicant who owns the average of the undivided shares of the 2 or more lots over which the Common Staircase Buildings straddle is not less than 90% .

43.  As observed by the Court of Appeal in Pacific Base Holdings Limited & Ors v Lee Hop Biu & Ors (CACV426/2020, unreported, 31 May 2021) (“Pacific Base”), section 3(2) is “a permissible variant of an application under section 3(1)” which provides for multiple-lots applications. “section 3(2)(a) is the provision which applies generally to all such cases other than the situation provided for under section 3(2)(b). The general requirement is that 90% ownership has to be satisfied in respect of each lot individually.” Section 3(2)(b) provides for application in respect of the lots on which the Common Staircase Building stands. “In that particular type of situation, the 90% minimum can be satisfied by way of averaging between the ownership in the lot(s) on which one of the buildings stand and the ownership in the lot(s) on which the other building(s) stand.” (emphasis added)

44.  While the exception as provided in section 3(2)(a), in substance, maintains the single-lot-based approach in the sense that the minimum ownership percentage threshold is required to apply to each of the lot(s), the Ordinance finds it necessary to add an independent and separate exception under section 3(2)(b). Section 3(2)(b) is strictly confined to the lots on which the Common Staircase Buildings straddle and a completely different mechanism in determining the minimum ownership percentage threshold is introduced therein. It is the only exception in the Ordinance that enables the ownership percentage threshold to be applied by taking the average of the ownership percentages of the multiple lots, which form the subject of the application (“Common Staircase Exception”).

45.  In our view, the legislative intent is well-reflected in the structure of the Ordinance. While the Ordinance focuses on single-lot based approach, it permits an application for sale of multiple or contiguous lots so long as the conditions in section 3(2)(a) or section 3(2)(b) are satisfied. The two sub-sections cater for two different scenarios. We regard section 3(2)(a) as just a flexible approach in applying single-lot based application as “each lot” is clearly referred to each of the lots, all of which the applicant owns not less than 90% of the undivided shares in each of them separately and individually. While it allows application for sale of multiple lots, it indeed retains the legislative intent of keeping the ownership percentage threshold for each of such lots. We respectfully agree with the view of Bond Star in the construction of section 3(2)(a).

46.  Notwithstanding that, the Ordinance still finds it necessary to include section 3(2)(b) as a separate exception. The addition of section 3(2)(b) understandably caters for a peculiar scenario which does not cover by section 3(2)(a), necessitating a special way to determine the ownership percentage threshold. It is the only exception which provides for the ownership percentage minimum to be satisfied by way of averaging between the ownership in the lot(s) on which the Common Staircase Building straddle. Such exception is narrowly confined to Common Staircase Buildings scenario only.

47.  Apparently, the Ordinance recognizes the Common Staircase Buildings as a “particular type” of situation which warrants an addition of the “common-staircase exception” [6] to serve as “a special route”[7]exception not only to the restriction of single-lot based applications under section 3(1), but also to the general exception under section 3(2)(a).

48.  In our view, section 3(2)(b) is apparently devised to address the implication, possible consequences and potential problems which might arise from the peculiar physical feature of the two buildings being connected by a staircase intended for common use by their occupiers throughout the process of application, sale, demolishment and redevelopment.

49.  Viewed in this light, with respects, the rationale given in Bond Star to exclude 100%-owned lots in multiple “single-lot” applications under section 3(2)(a) of the Ordinance (i.e. there is no purpose for an owner of a lot asking for an order to put up the lot for auction if he already owns all the shares, for he could do so without an order) does not, we think, apply to “multiple-lot” applications made under the “common-staircase exception”, or “the special route”, of section 3(2)(b).

50.  Adopting a purposive construction of the Ordinance, we share the view with the learned Deputy Judge Roy Yu at Winmark that it serves good and legitimate purpose to include (and retain) in section 3(2)(b) applications 100%-owned lots already owned by applicant(s) so as to allow its specially-designed “less stringent” “averaging” ownership percentage requirement to operate to its fullest when otherwise the same may not be met for one reason or another.

51.  Given that the buildings in applications made under section 3(2)(b) “is connected by a common staircase”, there exists, we believe, good reason to join and retain the 100%-owned lot(s) so as to ensure that all the lots over which the connected buildings are built could be sold to the same purchaser, demolished together and redeveloped together as a composite site. Technical or feasibility problems caused by their staircase connection[8] may accordingly be avoided and the connected buildings can be redeveloped at the same time as a result.

52.  If the 100%-owned lots (on which part of the the Common Staircase Building is built) cannot form the subject matter of section 3(2)(b) application together with the other partially-owned lots, and, unless their owners manage to out-bid others at auction to purchase the partially-owned lots, it is possible that the said Common Staircase Buildings may only be demolished “partly”, giving rise to technical or feasibility problems, ending up with those lots being possibly re-developed in a “haphazard” , if not a “dangerous”, manner. We are slow to consider that would be the legislative intent.

53.  As illustrated by the Tribunal[9] in §47 of the judgment of Supergoal Investment Ltd v Five F Ming House Ltd [2014] 1 HKLRD 286 (“Supergoal”), the exclusion of 100%-owned lots from section 3(2)(a) applications as in Bond Star, if applied to section 3(2)(b) applications, would undermine the policy objectives of the Ordinance as elaborated by Riberiro PJ when Bond Star reached the Court of Final Appeal which became known as Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578 (“Capital Well”) as follows:-

“21.  The objectives of the Ordinance … are clear. On the one hand, the Ordinance aims to facilitate urban renewal in respect of old and dilapidated buildings by assisting private developers to complete their acquisition where they already own at least 90% of the lot in question and by preventing the indefinite obstruction of a redevelopment by any minority owners who may seek to extract a wholly unreasonable price or “ransom” for permitting the redevelopment to proceed. On the other hand, it aims to ensure that the minority owner receives fair and reasonable compensation for his interest in the lot. Such compensation may be that which the minority owner agrees to accept or that which represents his share of the market value of the lot (reflecting its redevelopment value) as determined at a public auction, subject to a reserve price approved by the Tribunal.”

54.  We also share the same concerns that the exclusion of 100% -owned lots from section 3(2)(b) might end up with undesirable results, which do not sit well with the objective of the Ordinance, in particular:-

(1)  a developer applicant might  be subject to the “ransom power” of minority owners or third parties if it could only apply for compulsory sale of a lot (over which a portion of the Common Staircase Buildings stands) that it does not fully own. This would not facilitate comprehensive urban redevelopment in respect of old and dilapidated buildings.

(2)  faced with such a possibility, an applicant may elect not to acquire all the undivided shares in those lots on which the Common Staircase Buildings straddle after he has achieved the threshold percentage so that the application may cover all those lots. This runs counter to section 4(2)(b) of the Ordinance, which imposes the duty on the majority owner to take reasonable steps to acquire all the undivided shares in the lot. In particular, such duty extends until the trial of the application [10].

(3)   Given a developer applicant intends for a composite site redevelopment, there is no reason why the minority owners of the lots over which the Common Staircase Buildings straddle should not be entitled to a share of the whole redevelopment value on that basis. Instead, the reserve price of auction will be set by taking into account of the redevelopment potential of the lot where only a portion of the Common Staircase Buildings stands.

55.  Thus analyzed, on a purposive approach, we believe that section 3(2)(b) permits both the lot which is fully owned by an applicant together with the lot which he partially owns to form the subject matter of an application so long as Common Staircase Buildings straddle those lots. Indeed, we found no conceivable reason of policy to exclude the wholly owned lots on which a portion of the Common Staircase Buildings stands from section 3(2)(b) for the reasons set out above. Instead, we found such construction could further advance the underlying objective of the Ordinance as elaborated at §21 of Capital Well.

56.  We also take the view that such construction is in line with the legislative history of the Ordinance as set out above as well as the structure of the Ordinance. There is no specific wording in section 3(2)(b) that prohibits the inclusion of a lot (on which a portion of a Common Staircase Building stands) that is fully owned by an applicant. We would further agree with §§43 and 44 of the judgment of Winmark where the definition of the “majority owner” in section 2 of the Ordinance should be read into section 3(1) and section 3(2)(b). The combined effect is that an applicant taking out an application under section 3(1) relying on section 3(2)(b), is regarded as a majority owner under section 3(2)(b).

57.  By a proper reading of the three sections together, we notice and agree, by reference to the status of the applicant(s) taking out application under section 3(2)(b), the ownership threshold requirement is separately provided for in section 3(1), where the words used are “not less than 90%” but not “less than 100%”. Obviously, that is to  prescribe minimum percentage to be achieved rather than maximum percentage to be avoided.

58.  In “multiple-lots” application made under section 3(2)(b), as was explained at §45 of Apex Intelligence, “majority owner” “in the lot or lots” in section 3(2)(b)(ii) must, we think, mean the majority owner of the 2 or more lots on which the Common Staircase Building straddle.

59.  Thus considered, while we share the observation as expressed at §34 and 35 of the judgment of Max Win that the recurrent and consistent theme throughout the Ordinance is a contest between majority owner(s) and minority owner(s), we, however, have to part company with our learned brothers in Max Win to take the view that the inclusion of the lot owned fully by an applicant together with his partially owed lot on which a Common Staircase Building straddle under section 3(2)(b) will not frustrate the underlying theme of the Ordinance.

The Applicants’ Entitlement to Make the Present Application

60.  This Application itself is, we think, a good example of such an effective contest. The applicants wholly own SG Lot whereas the minority owners own part of the equal undivided shares of the RP Lot when the two buildings erected thereon are connected by two common staircases.

61.  For as long as there remains in the Application under section 3(2)(b) one single lot which is not wholly owned by the applicants, the contest between majority owners and minority owners as envisaged by the Ordinance could, we think, still exist. As explained above, section 3(2)(b)(ii) does not set maximum percentage of share ownership of each of the subject lots individually. The use of the term “Majority Owner” in that subsection does not bring in such effect.

62.  In the context of this Application, it therefore does not matter to us that SG Lot came to be wholly owned by the applicants by the time of this trial. It is undisputed that as at the Application Date, the applicants owned on average 82% of the undivided shares of the Lots. For the above reasons, we would therefore hold that the applicant(s), despite owning 100% of the shares of SG Lot, they can rely on, section 3(2)(b) to make, and continue, the Application for an order of sale of all undivided shares of the Lots for the purpose of redevelopment.

EUV AS AT 21 SEPTEMBER 2021

63.  According to section 4(1)(a)(i) of the Ordinance, there is a need to determine the value of the property as assessed in the Application Report by which Mr Chan stated the valuation date was as at 21 September 2021.

64.  As mentioned above, on the Application Date, there were two respondents but only R2 took the trouble of appointing Mr Lai to prepare the corresponding valuation reports. However, when the proceedings against R2 was discontinued, Mr Lai’s valuation reports had been withdrawn save that the Joint Expert Statement dated 4 May 2023 issued by Mr Chan and Mr Lai on the EUV of the Buildings remains; but Mr Lai’s opinion therein had been redacted.

65.  In effect, we have only before us Mr Chan’s assessment of the EUV as stated in Table A3 in the Joint Expert Statement dated 4 May 2023:[11]

Unit	Scenario 1	Scenario 2
G/F, 291 Castle Peak Road	$34,600,000	$36,950,000
1/F, 291 Castle Peak Road	$7,760,000	$7,760,000
2/F, 291 Castle Peak Road	$7,600,000	$7,600,000
3/F, 291 Castle Peak Road	$7,160,000	$7,160,000
4/F, 291 Castle Peak Road	$6,630,000	$6,630,000
G/F, 293 Castle Peak Road	$35,010,000	$38,920,000
1/F, 293 Castle Peak Road	$8,000,000	$8,270,000
2/F, 293 Castle Peak Road	$8,090,000	$8,090,000
3/F, 293 Castle Peak Road	$7,160,000	$7,160,000
4/F, 293 Castle Peak Road	$6,630,000	$6,630,000
Total:	$128,640,000	$135,170,000

66.  For scenario 1, Mr Chan disregarded the value of unauthorised building works (“UBW”) found in the corresponding units and assessed the EUV of the units in accordance with the approved building plans and the alterations and additions plans (if any). And for scenario 2, Mr Chan took into account the additional value of the aforesaid UBW which are found in G/F, 291 Building, G/F, 293 Building and 1/F, 293 Building:

(1)  G/F, 291 Building: There exists an unauthorised covered yard (16.2 sq m) and extended cockloft (46.9 sq m);

(2)  G/F, 293 Building: There exists an unauthorised covered yard (23.4 sq m) and extended cockloft (85.6 sq m);

(3)  1/F, 293 Building: There exists an unauthorised covered flat roof (14.3 sq m).

67.  It is common to have these kinds of UBW in aged buildings.

68.  The Tribunal in Kannix Limited & Another v Coreluxe Developments Limited & Others, LDCS 8000/2018 (unreported, 25 March 2020) gave a detailed observation on whether it is appropriate to take into account of the UBW in assessing the EUV:

“22. In assessing the value of UBW, the parties have no objection to adopt the market reality approach. Whether the structures and/or enclosures are authorized or not, value should be assigned to them if reasonable buyer would pay for them in the market. Under the definition of market value, I consider this is the estimated amount for which the UBW should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

23. Importantly, there is a willing buyer in the market and the willing buyer would act knowledgeably, prudently and without compulsion. That means the willing buyer is reasonably informed about the nature and characteristics of the UBW and have the knowledge to assess their advantages and disadvantages. Since both the advantages and the disadvantages should be taken into consideration, there is possibility that UBW may have negative value.

24. I consider the advantages of UBW would be benefits of occupation, and the disadvantages would be mainly costs of reinstatement, safety hazard, risk of litigation, pressure for reinstatement, possibility of defective title and difficult mortgage, adverse impacts caused by their existence like lower ceiling height, and etc. Some of the advantages and disadvantages may be user specific, but market value requires the disregard of such element of value to a particular willing buyer.

25. Nature and characteristics of UBW, like mode of construction and enclosure, materials, location, and etc., and their history would have bearing on the risk of enforcement for their demolition and removal as well as the assessment of their advantages and disadvantages. If a structure should be demolished and removed soon, its demolition and removal costs may be greater than its short term benefits. The UBW with higher risk of safety and greater exposure would generally have higher risk of enforcement.

26. With a view to assess the enforcement risk, a willing buyer would review the possibility of rectification and/or legalization, prevailing government policy, response of the neighbourhood on enforcement of deed of mutual covenants and etc. Unauthorized use may be able to be legalized, but unauthorized building works cannot be approved retrospectively under the prevailing government policy. In the past, building plans for increase of floor area of a particular unit in a building might be approved by Building Authority, but Building Authority now requires consent of all owners in the building for such application. Some UBW may be tolerated by government at the moment like those in village house, but such government policy is subject to specific conditions and was changing over time.”

69.  Notwithstanding the clear goal of the Government to remove the UBW and to take enforcement actions persistently, there have been some cases, in the past, that the enforcements actions against UBW were not forthcoming.

70.  In Ni Tiee Bor Robert & Another v Golden Crane Industries Limited, HCMP4407/1998 (unreported, 21 March 2000), the property sold was full of unauthorized structures and alterations. In Link Harvest Ltd v Wayhang Development [2001] 2 HKC 652, Recorder Edward Chan SC said:

“Even though s24 gives the Building Authority a discretion on whether to exercise its power against a particular contravention and what order it would make if it has decided to exercise its power, in my judgment, prima facie, one would normally expect that the Building Authority would take enforcement action against the unauthorised building or structures. Thus, unless there is a good reason for believing that the Building Authority would not take any action, where a building or structure was erected in contravention of the Buildings Ordinance, there is the risk of an enforcement action by the Building Authority so as to render the title of that building or that structure to be defective. It is difficult to state exhaustively what would be the good reasons. The typical one would be where the breach is very trivial, or where because of the nature and the age of the structure, the enforcement priority within the Building Authority was so low that it could be expected that the time for enforcement would not come even by the end of the practical life of the building or structure in question.” (underline added)

71.  In Join Union Investment Limited v China Tree Investment Limited, [2016] 2 HKLRD 901, there was a subdivision of the ground floor premises into four shops. The structural engineering expert in that case could not cite any example or authority where, in similar circumstances, the Government or the Building Authority took enforcement action requiring demolition of the partitioning and reinstatement of the property to its original state. Chow J (as he then was) was of the view that there was no real risk of enforcement by the Government or Building Authority in respect of the alleged unauthorized partitions. See §§97-103 of the judgment.

72.  At §107 of the judgment, the learned judge observed that:

“... it is apparent, form the evidence of Mr Lai, Madam Chan and Madam Shiu, that none of them considered the 2010 Building Order, or indeed any unauthorised building works in the Property, to be of any great moment. Prior to the respective purchases of the Property by the defendant (through Madam Chan) and the plaintiff (through Madam Shiu), none of them took the trouble to go inside the Property to inspect its physical conditions, or ascertain whether there might be any unauthorised building works in the Property. Even after her attention had been drawn to the 2010 Building Order, Madam Shiu did not carry out any further investigation prior to entering into a binding contract to purchase the Property, and was prepared to accept a modest sum of HK$20,000 from the defendant as sufficient compensation for the costs of complying with the 2010 Building Order. The existence of unauthorised building works in retail premises, especially in the older districts in Hong Kong, is common place and does not appear to have any significant impact on their market or capital values. These properties change hands frequently like ordinary commercial commodities, as demonstrated in the present case by the fact that the defendant (through Madam Chan) purchased the Property in September 2010 and sold it to the plaintiff (through Madam Shiu) in March 2011 for a handsome profit. It is contrary to market reality to treat the existence of an unauthorised cockloft, even of a substantial size like the present one, as constituting a title defect going to the root of title....” (emphasis added)

73.  Indeed, shops consisting of unauthorized structures are sold usually on “as is” basis.

74.  In Circle Angle Limited v Orchard Enterprise (Hong Kong) Limited, DCCJ 1252/2011 (unreported, 6 February 2012), the purchaser was aware that the property which it intended to purchase was subject to a notice issued under section 24C(1) of the Buildings Ordinance. In spite of this, it signed a Provisional Agreement which contained a clause that read:

“買方日後不能藉此拒絕交易”.

75.  Something similar took place in Gold Glory International (HK) Limited v K W Wong Investment Company Limited, HCMP 1618/2012 (unreported, 17 December 2013) where the parties agreed that:

“The purchaser and vendor declare that they are both aware of the (two notices by the Building Authority under section 24C(1) of the Buildings Ordinance) where the property is situated. Both parties hereby agree to complete the transaction notwithstanding the (two Notices) ...”

76.  Cheung Kwong Yuen v Sun Hui Fang [2016] 1 HKLRD 464 concerned an appeal from an application for recovery of vacant possession of unauthorised roof top structure of a building at 107 Tai Nan Street, Kowloon. During the trial before the Tribunal, being LDPD 1740/2014, it was found that Suen Chor Ming (alias Suen Ming Fai), the brother of the respondent, Madam Sun, had paid money in 1992 for acquiring the occupation of the corrugated steel sheet structure existing on the roof of the building. Obviously, no legal title was passed and the Tribunal considered adverse possession by Madam Sun was not proven. Madam Sun’s subsequent appeal was allowed by the Court of Appeal on 30 January 2015 and the case was remitted to the District Court for retrial, which became DCCJ 743/2016. The District Court found adverse possession in favour of Madam Sun on 6 September 2017 and appeal by Mr Cheung, the unfortunate landlord who failed to verify the status of Madam Sun when he made the purchase on 31 October 2013, was refused by the Court of Appeal on 26 February 2019 in CAMP 64/2017.

77.  From this case, it is manifested that the unauthorised roof top structure commanded market value in 1992. It also continued to attract significant market value at least until early 2019 despite a lapse of some 27 years. Otherwise, Madam Sun would not have taken the time and trouble in advancing her adverse possession claim.

78.  The Tribunal has witnessed similar landlord and tenant disputes on the letting of unauthorised structures. LDPD 1802/2021 was another case where the landlord sought vacant possession of an unauthorised roof-top structure, which had been let since 1980. Obviously, the unauthorised roof-top structure commanded significant market value from 1980 until at least the commencement of 2022 when the case was heard.

79.  In Joint Hope Limited v Vecent Hong Kong Trading Limited & Others, LDCS 21000/2019 (unreported, 9 July 2021), the Building Authority issued to the owner of G/F, including the space underneath the staircase, 38 Ming Fung Street, Kowloon, a building order dated 11 May 2018 under section 24(1) which required the owner to demolish the UBW that include the structure erected on and over the yard but not the cockloft at high level of the G/F Shop. Then on 31 May 2019, the Building Authority issued a letter to the owner stating that: “As the building works have been modified, I am prepared to withhold further enforcement action for the time being, and withdraw my Order.” As at the land search of 5 February 2021, no order was issued against the cockloft.

80.  Surely, when the Building Authority issued the order of 11 May 2018, it should have known about the unauthorized cockloft (against which notice was issued in 2016). Yet the Building Authority did not enforce against such cockloft in the order of 11 May 2018. Nor did the withdrawal letter of 31 May 2019 mention anything about the cockloft save to state that the premises were not free of any other UBW.

81.  Similarly, in the same case, on 11 May 2018, the Building Authority issued to the owner of G/F, including the space underneath the staircase, 44 Ming Fung Street, a building order under section 24(1) which required the owner to demolish the UBW that include the structure erected on and over the yard but not the cockloft at high level of the G/F Shop. Then on 17 August 2018, the Building Authority issued a letter of compliance of the order.

82.  In Sound Advice Property Limited & Others v Mok Wai Ching & Mok Yui Cheung Anthony, LDCS 18000/2020 (unreported, 21 December 2021), the Tribunal found that although Building Orders against an UBW had been issued in March 2007, the Building Authority had not taken any further action for at least 14½ years until the date of the trial.

83.  More recently, in Wellland Resources Limited & Another v Mega Joyful Limited, LDCS 6000/2022 (unreported, 12 September 2023), an unauthorized covered yard was subject to a Building Notice issued by the Authority dated 3 January 2011 requiring the demolition of the structure. By the time of trial in June 2023, however, the unauthorized covered yard still existed and appeared as an integral and undistinguishable part of the rest of the office/studio/shop on G/F.

84.  Viewed in this light, we are of the opinion that vigilance market dealers in the sales and purchase of properties that comprise UBW would take into account “the possibility of rectification and/or legalization, prevailing government policy, response of the neighbourhood on enforcement of deed of mutual covenants and etc” and place a value on the UBW as the case may be.

85.  In the present case, we are aware that Building Orders dated 6 December 2019 were issued against the UBW in G/F, 291 Building[12] and 3/F, 293 Building[13]. But no such order had been issued against the UBW in G/F, 293 Building. However, upon our inspection on 3 May 2024, ie more than 4 years have lapsed, such UBW still exist and the Building Orders remain unenforced. The situation may be different after the tragic fire incident took place in New Henry House in Jordan on 10 April 2024 after which, the Government promised to enhance enforcement action and amend the law to increase the penalty for those who fail to comply with fire safety rules.

86.  However, the relevant date for assessing the EUV in this case is 21 September 2021, not some time in the present or in the future. Thus, scenario 2 put forward by Mr Chan is preferred and indeed has been agreed by the parties[14]. That is R1, with his 4/5 interest in G/F, 293 Building, is entitled to the following apportionment of the sale proceeds of the Lots upon sale:

Whether Redevelopment of the Lot is Justified

87.  Section 4(2) of the Ordinance provides that the Tribunal shall not make an order for sale unless it is satisfied that the "age or state of repair" of the Buildings is justified and that the applicants have taken "reasonable steps" to acquire all the undivided shares of the Lots.

88.  R1 had not produced any expert report or evidence in relation to the question as to whether redevelopment of the Lots is justified due to the "age” or “state of repair" of the Buildings.

89.  Top Sail International Limited v Cheng Kai Ming, LDCS 18000/2010 (unreported, 15 November 2011) and Charmlink Limited v Lee Tong Hing & Others, LDCS 16000/2010 (unreported, 29 November 2011) laid down the factors that the Tribunal should consider in determining whether redevelopment is justified due to age and state of repair.

90.  In Top Sail, the Tribunal stated that:

“23. ……, we are of the view that when the requirement of “the age” of the Buildings is considered, we should not restrict our consideration to just the physical age of the Buildings.…… we are of the view that the absence of a specific physical age in the Ordinance indicates that the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question.

24. The physical age of a building is clearly one of the considerations…... The physical conditions of a building and the amount that would be required to maintain the building are other factors that the Tribunal should consider, as they would affect the decision on whether the life of a building should be ended or prolonged. The obsolete design of a building should also be considered as it has an important impact on whether it is too old to serve a modern society.”

91.  Such approach was followed in Charmlink:

“30. We are of the view that the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question. The relevant factors in the present case are that the Building is over 50 years old and it has passed its designed life. It is also obsolescent in design and not economical to maintain. All these factors point to the fact that the Building has come to an end of its physical as well as economical life. Thus, we find that redevelopment is justified on the ground of the age of the Building.

31.  …… It is also within the Tribunal’s discretion to determine in what conditions a building should be redeveloped after considering all the relevant factors concerning the state of repair of the building in question. With the clear evidence from the two experts that the Building is in a poor state of repair and in fact untenantable without substantial repair works to be carried out over a long period of time, we have no hesitation in finding that redevelopment is justified by the state of repair of the Building.”

92.  There is no disagreement on the principles set out in Top Sail and Charmlink in determining whether redevelopment is justified due to age and state of repair. The Tribunal is entitled to take into account the modern construction requirements. See §134 of Harvest Treasure Limited & Others v Cheung Fat Enterprises Limited & Others, LDCS 8000/2014 (unreported, 31 December 2015).

93.  For the age and state of repair requirements, the applicants adduced the expert evidence of two experts: Mr Benson Wong who is an authorised person and a building surveyor, and Mr So who is an authorised person and a structural engineer. Their expertise was not disputed and the legal representative of R1 confirmed at the Pre-Trial Review hearing that there is no need for the applicants to call Mr Benson Wong and Mr So for R1’s cross-examination.

Structural Assessment

94.  Firstly, in his Structural Assessment Report dated 15 September 2022, Mr So commented that the Buildings were designed and constructed more than 67 years ago when the applicable standards were the LCC By-laws. The structural and construction aspects then required were less stringent than the prevailing standards for the design of reinforced concrete buildings as those stipulated in the Code of Practice for the Structural Use of Concrete 2013. Mr So identified 7 structural design and construction aspects where the Buildings do not meet the current design requirements, especially the one on robustness to avoid disproportionate collapse due to accidents. Also, the thickness of concrete covers for the beams and slabs and the width of some beams do not comply with the Code of Practice for Fire Safety in Buildings 2011.

95.  Mr So conducted a structural assessment of the Buildings on the basis of the following tests/surveys:

a.  visual inspection,

b.  cover-meter survey,

c.  carbonation depth test,

d.  coring and compression test,

e.  cement content test

f.  chloride content test, and

g.  reinforcement corrosion surveys (open-up inspections).

96.  Save for the visual inspection, Mr So had carried out 9 sets of tests for each of the test/survey. His methodology was that, to conduct a representative assessment, 3 samples would be taken for each of the 3 different types of structural members (viz column, beam and slab).

97.  Mr So found the following defects in the Buildings:

(a)  Cracks and spalling at 107 locations were observed during the visual inspection of the Buildings. Whereas only 9 out of 12 units of the Buildings were inspected, it is considered reasonable to assume that the 3 remaining units also contain defects in their structural elements in the same proportion as in the inspected ones.

(b)  The cover-meter surveys revealed that 1 out of 3 (33.3%) of the tested samples of beam does not comply with the required concrete cover. In other words, the concrete covers in the beams of the Buildings are insufficient to provide protection to the embedded steel reinforcement bars against corrosion or against fire. There is also insufficient concrete cover for the safe transmission of bond forces.

(c)  The carbonation depth tests revealed that carbonation has penetrated the concrete covers of all tested samples of columns, beams and slabs. In other words, the alkaline environment in much of the concrete covers in the columns, beams and slabs of the Buildings which the steel reinforcement bars rely on for corrosion protection has been extensively destroyed and as a result, reinforcement bars near the surface of these structural elements are vulnerable to be attacked by corrosion.

(d)  The compression tests revealed that the concrete strength of all 3 tested samples (100%) of beams and 2 out of the 3 (66.6%) tested samples of slabs failed to comply with the requirement. That is, the structural capability of the beams and slabs of the Buildings may be impaired.

(e)  The cement content tests revealed that 1 out of the 3 (33.3%) tested samples of beams does not fulfill the requirement. The durability of the concrete of beams of the Buildings may be impaired.

(f)  The chloride content tests revealed that 2 out of the 3 (66.6%) tested samples of columns, 2 out of the 3 (66.6%) tested samples of beams and 1 out of the 3 (33.3%) tested samples of slabs had chloride content exceeded the 0.35% limit. There is, therefore, increased risk of corrosion of the embedded steel reinforcement bars in the columns, beams and slabs of the Buildings.

(g)  The reinforcement corrosion surveys revealed that all 22 exposed bars from columns, all 14 exposed bars from beams and all 14 exposed bars from slabs exhibited rust of various magnitudes and suffered from reduction in their cross-sectioned areas due to corrosion. The test results of the open-up inspections confirmed that the inspected bars are suffering from corrosion extensively.

98.  As a result, Mr So considered that the structural frames of the Buildings are deteriorating and needing to be repaired. More particularly, the deficiency in concrete covers in the structural elements, deficiency in concrete strength, deficiency in cement content in the concrete and excessive chloride content etc cannot be rectified. The latter is also a structural defect whereby the performance of the structural frames of the Buildings may be adversely affected.

99.  Furthermore, the deterioration will continue steadily due to extensive carbonation and excessive chloride content of the reinforced concrete structural elements. It is inevitable that new defects will occur and previous defects though repaired will relapse readily, requiring substantial repairs or even partial demolition and re-construction of some defective structural elements in the future.

100.  Mr So was of the opinion that while the cost of repair in the present may be relatively modest, amounting to $424,800, such cost will escalate in future as the extent and seriousness of the deterioration of the structural elements increase with age.

Building Condition Survey

101.  Mr Benson Wong, in his Condition Survey Report dated 15 September 2022, remarked that the Buildings were aged over 67. He identified defects and deficiencies in, inter alia, the following aspects of the Buildings:

(a)  The fire services installation is obsolete while the fire escape arrangements are unsatisfactory;

(b)  No equipotential bonding systems are provided in the Buildings thereby causing dangerous threats of electrical accident to people and a breach of the Code of Practice for Electricity (Wiring) Regulations;

(c)  No lightning protection system is installed on the roof to protect its occupants and building parts from lightning strikes.

102.  In addition, on the basis of the standard commonly accepted by the building maintenance industry and inferred from the Mandatory Building Inspection Scheme imposed by the Building Authority under section 30B(5) of the Buildings Ordinance, Mr Benson Wong considered that the following building components should have passed their respective useful life span:

(a)  The original rendering and mosaic tiling on external wall surfaces;

(b)  The original waterproof membrane on various roof areas;

(c)  The original underground cast iron drain pipes.

103.  In respect of the state of repair of the Buildings, Mr Benson Wong, while adopting the standard of ‘tenantable condition’, considered that the components, finishes and service installations of the Buildings have been suffering from various deteriorations resulted from the UBW constructed within the Buildings, substandard workmanship and/ or materials used in the original construction, lack of repair and continuous natural weathering over the years.

104.  He considered the defects and deficiencies found in the Buildings being of the nature and magnitude that cannot be easily rectified by simple and piecemeal repairs. Substantial repairs at the total estimated costs of $11,237,897 are required to be carried out in order to restore the Buildings to a fair state of repair. This amounts to over 53% of the construction costs for new similar superstructures. Thus, the repair cost, which is disproportionately high, demonstrated that the deterioration of the Buildings’ superstructure has been very serious and had reached a state which is beyond reasonable economic repair.

105.  Mr Benson Wong also opined that the implementation of the repair works and discharge of other repair obligations would be disturbing and onerous to the existing occupiers and building owners. The future mandatory and voluntary repairs concerning safety and hygiene improvements introduced after the Buildings were constructed will make the continued occupation of the Buildings uneconomical to both occupants and building owners. He recommended the owners to redevelop rather than repair the Buildings, particularly bearing in mind the Buildings do not possess any historical value or architectural merit.

106.  R1 does not take issue that redevelopment of the Lots is justified due to the age and existing state of repair of the Buildings.

107.  In any event, having carried out the joint inspection on 3 May 2024 and having considered the evidence before the Tribunal, we are satisfied that redevelopment of the Buildings is justified due to the age and state of repair of the Buildings.

Whether the Applicants have Taken Reasonable Steps to Acquire

108.  The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interest of the respondents under Section 4(2)(b) of the Ordinance.

109.  It is not disputed that the applicants, on the basis of Mr Chan’s valuations, have made the following offers to R1 through their solicitors to acquire his 4/5 interest in G/F, 293 Building:

Round of Offer	Date of Offer	Offer Price
1st Offer	10 November 2021	$43,870,000
2nd Offer	25 November 2021	$44,308,700
3rd Offer	12 December 2023	$35,000,000
4th Offer	10 April 2024	$28,500,000
5th Offer	25 April 2024	$30,000,000
6th Offer	30 April 2024	$31,000,000

110.  In Intelligent House Ltd v Chan Tung Shing & Others [2008] 4 HKC 421 where the majority owner relied on its valuation expert to formulate some of the offers, the Tribunal ruled at paragraph 334(3) that:

“… it is not disputed that Savills is a reputable firm of valuers. In our view, it is also reasonable for Intelligent House to rely on Savills’ expert opinion to formulate the purchase prices offered to the minority owners. There is also no reason for us to believe, nor is there such evidence to suggest, that the advices from Savills were not properly made based on professional valuation of the EUV and RDV of the minority owners’ units.”

111.  Thus, the applicants are entitled to rely on their valuation expert, which is a reputable valuation firm.

112.  More particularly, we note the first two offers were substantially higher than the EUV in respect of R1’s interest in the sum of

.

113.  While the first two offers were addressed initially to the solicitors acting for the two former executors of the estate of Wong Ping, copies of the same were sent to Mr Wong Tak Shing with a cover letter dated 30 November 2021. In the said cover letter, the applicants asked Mr Wong Tak Shing to confirm whether he accept the 2^nd Offer by 16 December 2021.

114.  R1 did not accept any of the aforesaid offers made by the applicants.

115.  In the 1^st and 2^nd Offers, which predated the Application, the then valuation of Mr Chan was attached to the 1^st Offer. According to the then assessment of Mr Chan as at 21 September 2021:

(a)  The EUV of all units in the Buildings was $139,440,000 and that of R1’s Unit was $39,820,000. Hence the apportionment ratio of R1’s Unit which R1 was entitled to (given his 4/5 interest) was 22.84566838% which was just marginally below 23.03% currently assessed on the basis of the EUVs agreed by the parties.

(b)  The RDV was $192,000,000, which was higher than any updated RDV as assessed by both experts as at 18 March 2024.

(c)  Hence, the apportioned RDV, which R1 was entitled to, was, $192,000,000 x 22.84566838% = $43,863,683.

116.  Thus, both the offer prices in the 1^st and 2^nd Offer were higher than the then assessed apportioned RDV which R1 was entitled to and even higher than the assessed apportioned RDV, which R1 could have been entitled to, based on Mr Lai’s latest assessed RDV of $165,500,000 x 23.03% = 38,114,650.

117.  Of course, in light of the changes in market conditions, we agree that the applicants were entitled to revise their offers in the 3^rd Offers onwards. Such are commercial decisions that are not precluded by the Ordinance. See also Starex Development Limited v Yau So Ching & Others, DCCJ 2372 & 2374/2021 (unreported, 13 February 2023) at §31.

118.  As for the 1^st post-application offer, namely the 3^rd Offer, as explained therein, the offer price was based on the 1^st Joint Expert Statement dated 4 May 2023, which provided an assessment of the revised RDV as at 9 September 2022 and the declining property market since September 2021. The latter was evidenced by the fact that Mr Chan’s revised RDV of $174,000,000 as at 9 September 2022[15] was even higher than Mr Lai’s latest assessed RDV as at 18 March 2024. It appeared that it was reasonable and justifiable for the applicants to make downward adjustment from the apportioned revised RDV as at 21 September 2021, i.e. $174,000,000 x 27.29%[16] x 4/5 = $37,987,680.

119.  The 4^th Offer was made by reference to Mr Chan’s Updated RDV Report, in which Mr Chan assessed the RDV to be $122,000,000 as at 18 March 2024 and the apportionment ratio then agreed by the parties was 28.79%. The offer price of $28,500,000 was indeed higher than the apportioned revised RDV of

$122,000,000 x 28.79% x 4/5 = $28,099,040.

120.  The 5^th Offer and the 6^th Offer were made upon receiving the counteroffers of R1 dated 23 April 2024 in the sum of $36,460,000 and 29 April 2024 in the sum of $33,000,000 respectively. It is worth noting that:

(a)  The 6^th Offer and the last counteroffer only had a difference of $2 million; and

(b)  The offer prices of the 5^th and 6^th Offers were still significantly higher than the apportioned revised RDV based on the latest RDV assessed by Mr Chan, namely $114,000,000 x 23.03% = $26,254,200.

121.  Insofar as R1 complained about the 4^th Offer being unreasonable, such complaint is unjustified in light of the Tribunal’s ruling in Good Faith Properties Limited & Others v Cibean Development Company Limited, LDCS 42000/2011 (unreported, 31 May 2013) at §61. All the steps taken by the applicants both before and after the commencement of the Application even up to shortly before the trial should be taken into account when determining whether the applicants have taken reasonable steps to acquire all the undivided shares.

122.  More importantly, the Court of Final Appeal in Capital Well, supra, has emphasized at paragraph 33 that:

“In making that assessment (whether an offer is reasonable) 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.”

123.  The Court of Final Appeal stated further at paragraph 36 of the judgment that:

“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.”

124.  We also appreciate that the applicants have successfully acquired additional undivided shares in the Lots from R2 who in fact had appointed Mr Lai to prepare the corresponding valuations on his behalf.

125.  Thus viewed, we are satisfied that on the evidence available and in the circumstances of the Application, the applicants have taken reasonable steps to acquire all the undivided shares in the Lots including negotiating for the purchase of such of those shares as are owned by R1 on terms that are fair and reasonable.

The Estimation of the RDV of the Lots

126.  The Lots altogether comprises a rectangular site that has a frontage of some 12.19 m abutting Castle Peak Road and has a depth of some 21.95 m in the Cheung Sha Wan district of Kowloon, Hong Kong. By their Joint Statement dated 16 April 2024, Mr Chan and Mr Lai agreed that the joint site has an area of 267.56 sq m but only 260.42 sq m after deducting part of the rear portion of the site to comply with the Building (Planning) Regulations.

127.  Whilst the Government lease governing use and development of the Lots is virtually unrestricted save for the usual offensive trade clause, the Lots falls within an area zoned “Residential (Group A) 8” on the Approved Cheung Sha Wan Outline Zoning Plan No S/K5/39 (“the Outline Zoning Plan”) exhibited on 17 February 2023. According to the explanatory notes annexed to the Outline Zoning Plan, the “Residential (Group A) 8” zoning “is intended primarily for high-density residential development. Commercial uses are always permitted on the lower three floors of a building or in the purpose-designed non-residential portion of an existing building.”

128.  It is further provided in the Remarks section of the said explanatory notes that:

a.  “On land designated “Residential (Group A) ” (“R(A)”), (“R(A)1”) to (“R(A)8”), …, no new development, or addition, alteration and/or modification to or redevelopment of an existing building shall result in the plot ratio for the building upon development, and/or redevelopment in excess of 7.5 for a domestic building or 9.0 for a building that is partly domestic and partly non-domestic, or the plot ratio of the existing building, whichever is the greater. Except where the plot ratio is permitted to be exceeded under paragraphs (19) and/or (20) hereof, under no circumstances shall the plot ratio for the domestic part of any building, to which this paragraph applies, exceed 7.5”.

b.  “For a non-domestic building to be erected on land designated (“R(A)”), (“R(A)1”) to (“R(A)8”), …, the maximum plot ratio shall not exceed 9.0 except where the plot ratio is permitted to be exceeded under paragraphs (19) and/or (20) hereof.”;

c.  “For the purposes of paragraph (1) above, on land designated (“R(A)”), (“R(A)1”) to (“R(A)8”), …, no new addition, alteration and/or modification to or redevelopment of an existing building shall result in a total development and/or redevelopment in excess of the relevant maximum domestic and/or non-domestic plot ratio(s), or the domestic and/or non-domestic plot ratio(s) of the existing building, whichever is the greater, subject to, as applicable –

(i)  the plot ratio(s) of the existing building shall apply only if any addition, alteration and/or modification to or redevelopment of an existing building is for the same type of building as the existing building, ie domestic, non-domestic, or partly domestic and partly non-domestic building; or

(ii)  the maximum domestic and/or non-domestic plot ratio(s) stated in paragraph (1) above shall apply if any addition, alteration and/or modification to or redevelopment of an existing building is not for the same type of building as the existing building, ie domestic, non-domestic, or partly domestic and partly non-domestic building.”; and

d.  “On land designated (“R(A)”), (“R(A)1”) to (“R(A)8”), a maximum building height restriction of 120PD would be permitted for sites with an area of 400m² or more.”

129.  Given the Lots comprise a site area that is smaller than 400m², section d above does not apply. In accordance with the Outline Zoning Plan, the maximum building height applicable to the Lots upon redevelopment is 100 above the Hong Kong Principal Datum.

130.  The main dispute in these proceedings is on the estimation of the RDV of the Lots on their own, which shall be taken into account in fixing the reserve price for the public auction when the order for sale is granted.

131.  Mr Chan, particularly, relied on the direct comparison method of valuation by reference to a recent sale of a site on 9 June 2023 at Nos 102 & 104 Nam Cheong Street on which a 6-storey commercial building is erected. The site, having a net area of 165.58 sq m, is zoned “Residential (Group A) 6” on the Outline Zoning Plan, ie the maximum building height applicable the Lots upon redevelopment is 80 above the Hong Kong Principal Datum.

132.  Mr Chan made the following adjustments to this transaction for the purpose of deriving the accommodation value (“AV”) for the Lots:[17]

Sale Price	$70,000,000	Remark
Plot Ratio	Non-domestic: 155.2313 sq m (PR 0.9375) Domestic: 1,241.85 sq m (PR 7.5) Total: 1,397.08 sq m (PR 8.4375[18])
AV	$50,105 per sq m
Adjusted for Time	-25% (which has taken into account the multiplier effect embedded in a residual land value)[19]	By reference to the Private Retail Price Index (-9.8%) and Private Domestic Price Index (Class A, B & C) (-13.0%) published by the Rating and Valuation Department (“RVD”)
Adjusted for Location	+15%	This comparable is situated within 5 minutes’ walking distance from the nearest exit of the Sham Shui Po MTR station on Ap Liu Street, which is renowned for its flea market and electronic shopping galore.
Scale	+20%	Because of the small site size, a hypothetical development on this comparable site can only accommodate 1 unit per floor by reference to a new development, Zebrano at Nos 50 to 52, Lion Rock Road.
Total Adjustments	+3.5%	By Multiplication
Adjusted AV	$51,859 per sq m

133.  Assuming a plot ratio of 8.4375 on the basis of a net site area of 260.42 sq m of the Lots, therefore, Mr Chan arrived at a value of $113,948,225, say $114,000,000 for the Lots.

134.  Firstly, Mr Lai did not consider this a comparable at all because in his opinion, the transaction was in respect of the existing use value of the building standing thereon rather than for redevelopment. He noted that the premises are on lease. He had even taken the trouble to carry out a residual valuation to demonstrate that the redevelopment value, if any, would be substantially lower than the consideration of $70,000,000.[20] It is noted that Mr Lai assumed a plot ratio of 8.4376, ie the same as that assumed by Mr Chan.

135.  Returning to the basics, however, market value is the higher of the existing use value of a property and its value for development, if any.[21] If the sale of Nos 102 & 104 Nam Cheong Street, for instance, did not incorporate any value for development, the consideration paid at $70,000,000 would simply reflect the existing use value of the premises which was higher than that for development value. This would still be the case even though the improvements thereon may contribute little to the value of $70,000,000.[22] Moreover, if Mr Chan was mistaken on that but had applied this higher $70,000,000 as the development value of the site for direct comparison purposes, his analyzed AV$51,859 per sq m must have overstated the RDV of the Lots.

136.  Surprisingly, Mr Lai disagreed with the above principle when, as we shall see later, Mr Chan’s assessment by means of the residual valuation at $118,000,000 happened to be marginally higher. With respect, this by itself does not suggest either approach of valuation is faulty when valuation is not an exact science. Certainly, value changes over time and an acquisition for the sake of redevelopment in June 2023 may in 2024 turn out to be riskier or no longer viable in May 2024. In Capital Lake Property Limited & Others v Yau Luen Stevedoring Transportation Packers Company Limited, LDCS 15000/2022 (unreported, 17 May 2024), for instance, it was suggested at §264 that redevelopment of a comparable was no longer pursued because of changes in market conditions.

137.  Regarding the analysis itself conducted by Mr Chan, Mr Lai considered the movement in prices as reflected by the price indices not applicable to reflect the movement in land price as the latter should also be affected by a great number of other factors including movement in building costs, changes in market sentiment in terms of developer’s profit, change in finance cost, etc. In this regard, we note that Mr Chan had adopted -25% which is about -12% higher than the Private Domestic Price Index of -13.0% or -15% higher than the Private Retail Price Index of -9.8%.

138.  As the Tribunal illustrated in Able Luck Development Limited & Others v Public Global Investments Limited & Others, LDCS 7000/2014 (unreported, 6 October 2017) at §§104-105, any adjustments that might be applicable to the GDV would be amplified in the resultant land value because the latter is simply derived from its development potential to produce revenues (or the GDV) in excess of the required payments to all other factors of production, for example, the construction cost (“C”), ie for simplicity:

Land Value = GDV – C

where C is usually territory-wide and subject to less variation within a short period of time, C is relatively constant.

139.  However, the same comment is also applicable to the adjustment for location. As remarked by Mr Lai, this comparable site is situated in a very inferior location by reference to the retailing potential, availability of basic necessities such as market places and accessibility in terms of distance from MTR station. In contrast, the Lots are situated at about 10 meters southeast of the junction between Castle Peak Road and Fat Tseung Street; the latter leads all its way from Un Chau Street, another distributor running in parallel to Castle Peak Road with traffic running in opposite direction, to Shun Ning Road where the Po On Road Municipal Services Building is situated. The Po On Road Municipal Services Building houses a regional wet market and next to it is a public library and a sports centre. This is a focal point in the district and as found by our site visit on 3 May 2024, there are two jewelry shops located on the opposite side of Castle Peak Road. This appears to be the busiest spot in the district.

140.  Mr Chan did not state that he had already applied the multiplier effect to the location adjustment in the Joint Statement dated 16 April 2024.[23] During cross-examination, however, he replied to the bench that he had also taken similar multiplier effect into account.

141.  In any event, Mr Chan arrived at a net adjustment of +3.5%. However, this net adjustment is misleading because we cannot assume that any inaccuracies in the positive and negative adjustments will cancel each other out. For example, if a comparable property is 25% superior to the subject in some characteristics and 20% inferior in others (ie the small size of the site in the present comparable), the net adjustment in multiplication is zero but the gross adjustment in simple addition is 45%.

142.  Particularly in the present case, the resultant total absolute adjustment would be as much as

25% + 15% + 20% = 60%

which is a little high. [24]

143.  While it is generally not a good approach to carry out valuation by direct comparison method using a single comparable, the remarks by the Tribunal in Hofei Estates Limited v Secretary for City and New Territories Administration, LDLR 1/1982, 30 November 1982 (which has been reported at [1980-82] CPR 486 ) at §§14-15 are relevant:

“14. Unfortunately, the comparables were not only in different localities, but were also very much smaller than the subject property, have varying development costs and contained other differences. Theses major differences obliged both valuers to make substantial adjustments to the comparables to relate them, for valuation purposes, to the subject property. The adjustments actually made were mostly subjective and unsupported by any detailed analysis.

15.   In these circumstances a better approach would have been to have used the residual method. The adoption of the residual method would have enabled the valuers to have tested the value of the subject property in terms of optimum development in relation to cost and reasonable profit margins.”

144.  Then the Tribunal in Hofei Estates continued to say at §§16-17 that when evidence was available from the comparables and elsewhere to enable reasonably accurate assessments to have been made by the residual method, the residual method would have allowed for a better comparison between the subject property and the comparables.

Residual Valuation

145.  Thus, both Mr Chan and Mr Lai relied on the residual valuation method to determine the RDV of the Lots for checking purpose or otherwise. The residual valuation can be done by deducting development cost (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated GDV of the completed optimum development.

146.  While Mr Chan and Mr Lai further agreed that there shall be a 24-storey hypothetical development comprising retail shops on G/F, retail shops and clubhouse on 1/F and 2 domestic units per each floor above, they could not agree on the particulars of the hypothetical development where Mr Chan, in particular, commented that Mr Lai did not choose to maximise the domestic plot ratio in his development scheme which only consisted of a plot ratio of 7.3599 instead of 7.5[25]:

	Mr Chan	Mr Lai
Hypothetical Development	G/F: Shops, common area (including entrance lobby), plant room 1/F: Shops, common area, clubhouse, plant room 2/F: 2 residential flats, with flat roof, balcony and utility platform 3/F-22/F: 2 residential flats per floor, with balcony and utility platform 23/F: 2 residential flats with balcony, utility platform and roof	G/F: Shops, common area (including entrance lobby), plant room 1/F: Shops, common area, clubhouse, plant room 2/F: 2 residential flats, with flat roof, balcony and utility platform 3/F-22/F: 2 residential flats per floor, with balcony and utility platform 23/F: 1 simplex domestic unit with balcony, utility platform and roof
Saleable Area for G/F (Retail)	192.92 sq m
Saleable Area for 1/F (Retail)	21.71 sq m	90.08 sq m
Saleable Area for Upper Floors (Residential)	1,330.14 sq m	1,295.38 sq m

147.  In any event, Mr Chan and Mr Lai arrived at the following RDV:

Method of Valuation	Mr Chan	Mr Lai
Direct Comparison	$114,000,000	-
Residual Valuation	$118,000,000	$165,100,000

GDV for G/F

148.  In assessing the value of the GDV for G/F, Mr Chan and Mr Lai agreed a hypothetical shop with a saleable area of 96.46 sq m, having a frontage of 4.6 metres, a headroom of 5.0 metres and a depth of 21.0 metres. They then referred respectively to the following transactions as comparables:

Comp	Address	Age of Building	Date of Sale	Consideration	Saleable Area (m2)	Effective Area* (m2)	Frontage (m)	Depth (m)	Head room (m)	Unit Price (m2)
C2	G/F, 273 Castle Peak Road	1961	10 May 2023	$22,000,000	78.5 + Yard: 9.5 + WC at Yard: 3.5 + C/L: 51.3	93.49	3.6	21.3	2.74	$235,319
C3	Shop C, G/F and lavatory, Fulham Court, 142 Castle Peak Road	1998	22 Sep 2022	$11,500,000	18.6 + WC: 4.62	19.18	3.2	5.5	4.75	$599,583
C4	Shop 3, G/F & Cockloft, Ever Wealth Building, 9-11 Fat Tseung Street	1994	9 Jun 2022	$13,000,000	17.28 + C/L: 12.87	20.50	2.4	7.15	3.2	$634,146
C5	Shop E, G/F, On Fat Building, 28 Cheung Fat Street	1992	4 Jun 2022	$12,800,000	21.81	21.81	3.88	5.75	5.45	$586,887
C6	G/F, 277 Castle Peak Road	1958	1 Apr 2022	$31,000,000	103.6 + Yard: 14.8 + Staircase Shop: 4.1	108.12	4.7	21.3	5.3	$286,718
C7	Shop 2, G/F, Po Wah Court, 450-454 Un Chau Street	1985	21 Oct 2021	$20,000,000	58.5	58.50	3.9	19.0	4.2	$341,880
C8	G/F, 381 Castle Peak Road	1958	29 Sep 2021	$24,750,000	76.1 + Yard: 6.9 + WC at Yard: 1.6	77.52	4.0	16.1	5.5	$319,272

* The conversion factors of the ancillary areas were agreed by Mr Chan and Mr Lai as follows:

(a) Rear Yard at 1/6 of the rate of the floor proper;

(b) Authorised Cockloft at ¼ of the rate of the floor proper;

(c) W C at Yard at 1/6 of the rate of the floor proper;

(d) W C separated from the floor proper at 1/8 of the rate of the floor proper;

(e) Staircase Shop at ½ of the rate of the floor proper.

149.  Save for the adjustments for location and layout differences between the shops considered and the hypothetical shop, the two valuation experts then had the following agreements or disagreements on the other various adjustment factors:

Adjustment Factors	Mr Chan	Mr Lai
Time	By reference to the Private Retail Price Index published by RVD
Size	1% per 10 sq m difference
Age	1% per 5 years difference
Frontage	2% per 1 m difference	4% per 1 m difference
Headroom	4% per 1 m difference

150.  Relying on Comparables C2, C6, C7 and C8, Mr Chan arrived at a unit rate for the hypothetical shop at $306,000 per sq m while Mr Lai, relying on Comparables C3, C4, C5 and C6, arrived at a unit rate of $527,000 per sq m[26].

Choice of Comparables and Location Adjustments

151.  Comparable C2 was adopted by Mr Chan only. It is situated just 50 metres away to the southeast of the hypothetical development and situated in between is a branch of Chong Hing Bank at 285-287 Castle Peak Road. It should be regarded as the best comparable in terms of location as well as timing though the latter was still one year earlier from today.

152.  On the other hand, we do not agree with Mr Chan that there should be no locational difference between this comparable and the hypothetical shops. This comparable is little far away from the street junction between Castle Peak Road and Fat Tseung Street which provides a direct access from Un Chau Street to the Po On Road Municipal Services Building. We agree with Mr Lai’s fallback adjustment of +10% for location.

153.  Indeed, Mr Lai had hesitation to adopt this transaction as a comparable because he considered the unit price achieved was too low when compared with the others. With respect, as we shall see, we consider his view was misled by his chosen comparables having sizes too small when compared with the hypothetical shops.

154.  As stated in the paragraph above, Comparable C3 which was adopted by Mr Lai only is too small for comparison purpose as it has only a saleable area of some 1/5 of the hypothetical shop. As such, the two shops of significant differences in size tend to serve different markets. The adjustment for size/quantum should not be a uniform formula nor a constant. On most occasions, the adjustment would depend on the location, the kind of trades, the size of the subject shop with respect to the comparables etc. For instance, in Eltron Development Limited v Director of Lands, LDLR 4/2013 (unreported, 21 August 2015) at §34, the Tribunal adopted two formulae for the size adjustments, one at 1% per 2 sq m difference for assessing a shop having 27.8 sq m and another at 1% per 1 sq m difference when the shop area to be assessed was very small at 13.9 sq m.

155.  Thus, the 1% per 10 sq m difference agreed by the two experts may be applicable if the shop size is larger ie around 96.46 sq m in the present case. Surely, the same adjustment should not be applied when the shop size is much less. When this was pointed out to Mr Lai at trial, he came up with a revised formula of doubling the sensitivities at 1% per 5 sq m. However, this revised formula may not resolve the problem when the difference in sizes between the comparable and the subject is too significant. Instead, if the transaction of such a small shop has to be taken as comparable at all, we prefer to treat the saleable area of this comparable like a zone A that is usually adopted in a zoning analysis, ie on the principle that the immediate area behind the frontage of a shop should fetch a higher value “in terms of zone A”.[27] The adjustment, as an approximation, will be as much as -50%.

156.  The same comments above similarly apply to Comparable C4 and C5, which were also adopted by Mr Lai only.

157.  Then we come to the only common comparable adopted by the two valuation experts, Comparable C6, which comprises a furniture store as well as a small space under the staircase occupied by a small estate agent. This comparable is situated even closer to the subject than Comparable C2 but still in the middle of the street. For such reason, we prefer a location adjustment of +5% in preference to Mr Chan’s nil adjustment or Mr Lai’s +10%.

158.  Mr Lai’s only reservation to take this as a comparable was on the ground that the premises were too old; he suggested a further addition of 10% for age as adjustment. But as pointed out by Mr Chan, this further addition of 10%, if applicable, should be similarly applied to Comparable C2, which is just a few year newer than Comparable C6. In any event, we have reservation on whether this additional allowance of 10% is fully justified but for the sake of carrying out better analysis, we adopt it de bene esse.

159.  Unlike Comparables C2 and C6, Comparable C7 is situated towards the end of Un Chau Street which is relatively quiet. Pedestrian flow is particularly broken by the car park entrance of Heya Crystal, which provides no shop accommodation on the ground floor that abuts Un Chau Street. This comparable is occupied by a shop selling electric accessories; a very small local estate agency is situated further northwest towards the street junction between Un Chau Street and Cheung Wah Street. Another bigger local estate agency occupies the corner of Un Chau Street and Cheung Wah Street. But across the street opposite this comparable, is a religious institution, 香港道教學院, another proof that the retail potential on ground floor is weak.

160.  Mr Lai refused to adopt this as a comparable because it was dated more than 2½ years from now and therefore, the RVD index which to a large extent an average may not truly reflect the time difference in the captioned locality when the time lapse is substantial.

161.  In spite of this, Mr Lai, during the site inspection on 3 May 2024, provided a fallback opinion up to +40% for location adjustment against Mr Chan’s +5%. Having regard to the trading environment, we prefer to adopt +15% for the time being. This is also not a good comparable as the shop has a size as small as some 60% of the hypothetical shop; the size adjustment can only be applicable when the comparable and the subject have sizes within similar range.

162.  We also agree with Mr Lai that the layout of this shop is inferior because of its depth and configuration. We therefore cannot agree with Mr Chan’s zero adjustment for layout.

163.  Comparable C8 is also situated on Castle Peak Road but unlike Comparables C2 and C6, lies to the northeast of the subject instead. It is currently occupied by a popular estate agency with a mahjong parlour by the side. However, situated in between this comparable and the subject are a branch of Bank of East Asia at 305 Castle Peak Road, One Madison, a branch of Hang Seng Bank at 339 Castle Peak Road and a branch of Bank of China (Hong Kong) at 365-371 Castle Peak Road which indeed lie within the same block of the street. For the time being, we are prepared to adopt a location adjustment of +5% as suggested by Mr Chan. Again, Mr Lai refused to adopt this as a comparable because it was dated more than 2½ years from now.

Frontage Adjustment

164.  In Tai Ping Restaurant Limited v Director of Lands, LDLR 1/2013 (unreported, 8 December 2014), the Tribunal remarked at §48 that there should not be any adjustment for frontage 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. In that case, the Tribunal adopted an adjustment rate of 2% per 1 metre difference in full frontage.

165.  In the present case, as we commented at §139 above, the hypothetical shops are situated among the busiest location in the area. We consider a more sensitive adjustment of 4% per 1 metre difference as suggested by Mr Lai more relevant. This is especially the case when many of the comparables have frontages much smaller than 4 metres whereas the hypothetical shops have a frontage of 4.6 metres. As explained by Mr Lai at trial, this more sensitive adjustment of 4% per 1 metre difference can effectively reflect the differences.

Headroom Adjustment

166.  While we note that both Mr Chan and Mr Lai had agreed to adjust the headroom difference the hypothetical shop and the comparable at 4% per 1 metre, we find, for instance, they adopt the full headroom of the latter instead of the actual headroom under cockloft. For instance, the Tribunal in Peace Ever, supra, had pointed out at §175 that when the experts had allowed a separate value for the cockloft in analysing the unit sale price, they would have reduced the unit sale price upon the unit rate analysis. Then when they had adopted the full headroom for adjustment, ie in ignorance of the presence of the cockloft, they would have underestimated the adjusted unit value.

167.  For the purpose of illustration, imagine two shops, Shop A and Shop B, each having a saleable area of 100 sq m, with the same frontage and depth, lying side by side. The only exception is that Shop A has an authorised cockloft of 68 sq m so that the headroom under the cockloft becomes 2.7 metres (as in the case of Comparable C2) whereas Shop B, without the cockloft, has a full headroom of 5.2 metres (also as in the case of Comparable C2). If Shop A is sold for $22,000,000, and on the basis that the unit value of cockloft is worth ¼ of that of the G/F (ie same as the assumption by the valuation experts in the present case), the unit value of Shop A is

.

168.  If this reduced unit value of Shop A because of the presence of the cockloft (which has become a comparable for Shop B) is applied to value Shop B, assuming the same full headroom of 5.2 metres for Shop A in ignorance of the reduced headroom of 2.7 metres so that no adjustment will be made for the headroom difference (as what the valuation experts had done here), Shop B, thus having a higher headroom of 5.2 metres because of no cockloft there, will be valued just at $18,803,400, ie the value of ground floor portion of Shop A with in fact a lower headroom of 2.7 metres. This cannot be correct.

169.  Indeed, the Tribunal had on many occasions explained that this headroom under cockloft approach is to be preferred, following Chan Kai Yuen & Another v Director of Lands, LDLR 8/1999 (unreported, 1 September 2000) in which the Tribunal decided to adopt an enhancement of 5% to the adjusted unit rate in assessing the G/F area with an extra 2.1m of headroom. See for example Success Active Limited v Harbourview International Holdings Limited & Others, LDCS 31000/2018 (unreported, 19 April 2021) at §§67-68.

Layout Adjustment

170.  Both Mr Chan and Mr Lai agreed that there should be an adjustment for layout at +5% for Comparable C2.

171.  In respect of Comparables C3, C4 and C5, Mr Lai tried to compensate for the significant size differences between the reference shop unit and comparables by adopting a layout adjustment of -15% with the caveat that the high efficiency arising from the small sizes has also been taken into account. But as pointed out by Mr Chan, Mr Lai’s approach to deal with size in layout adjustment is unorthodox. Fortunately, when the zoning approach is adopted for the analysis, this allowance for small shops falls away so long as all the area concerned lies within the same zone unless within the zone itself, there exists an area of irregular shape, masked portion, obstruction or split levels.

172.  As regards Comparable C6 and C8, Mr Lai agreed with Mr Chan in their Joint Expert Statement dated 16 April 2024 that a layout adjustment of +5% would be appropriate. However, in Exhibit 3 which was produced at the last day of trial, Mr Lai changed the layout adjustment for Comparable C6 to -5% without any explanation. Having reviewed the floor plan for this comparable, however, we prefer to maintain the +5% adjustment when we note this comparable comprises 2 portions, a furniture shop and a small space under the staircase.

173.  In §162 above, we state that we agree with Mr Lai that the layout of this shop is inferior because of its depth and configuration. We therefore cannot agree with Mr Chan’s zero adjustment for layout. We are content to apply a similar adjustment for layout at +5%.

GDV Analysis

174.  Bearing in mind the above, our analysis for the GDV of the hypothetical shop is as follows:

Comp Ref	Unit Rate (/m2)	Adjustments									Adjusted Unit Rate (/m2)
		Time	Location	Age	Size	Frontage	Layout	Headroom	Total	Absolute Total
C2	$235,319	-9.5%	10.0%	22.6%	-0.3%	4.0%	5.0%	9.0%	44.8%	60.4%	$340,742
C3	$599,583	-12.1%	25.0%*	5.2%	-50.0%**			1.0%	-41.6%	93.3%	$350,156
C4	$634,146	-15.2%	10.0%*	6.0%	-50.0%**			7.2%	-47.0%	88.4%	$336,097
C5	$586,887	-15.2%	40.0%*	6.4%	-50.0%**			-1.8%	-38.0%	113.4%	$363,870
C6	$286,718	-12.8%	5.0%	23.2%	1.2%	-0.4%	5.0%	-1.2%	18.0%	48.8%	$338,327
C7	$341,880	-15.6%	15.0%	7.8%	-3.8%	2.8%	5.0%	3.2%	12.1%	53.2%	$383,247
C8	$319,272	-18.6%	5.0%	23.2%	-1.9%	2.4%	5.0%	-2.0%	8.8%	58.1%	$347,363
										Average:	$351,401
								Average of C2 & C6 only:			$339,535

* For the time being, these adjustments as proposed by Mr Lai are adopted.

** The application of the zoning analysis would have already dealt with minor layout differences like depths or even awkward shape when customers would be attracted into the same zone.[28]

175.  Obviously, from the above analysis, the comparables that have lowest absolute adjustments are C2, C6, C7 and C8[29]. We however share Mr Lai’s observation that Comparables C7 and C8 were dated. In normal circumstances, with the vagaries of the property market in Hong Kong, valuers should try to find comparable(s) occurring only within 1 year of the valuation date. Thus, only Comparables C2 and C6 remain and they have an adjusted average of $339,535 per sq m.

176.  Whereas we have reservation that if the additional 10% for age applied by Mr Lai is fully justified[30], we determine the GDV for the ground floor of the new hypothetical at $320,000 per sq m[31].

GDV for 1/F

177.  In the present case, Mr Chan proposed a hypothetical development that would comprise 21.72 sq m on the basis of a plot ratio of 8.4375 which allows the maximum domestic plot ratio of 7.5 to be achieved under the Outline Zoning Plan. On the other hand, Mr Lai proposed 90.08 sq m, intending to maximise the plot ratio permitted to 8.5599, the difference being resulted from allocating higher non-domestic plot ratio on 1/F, thereby sacrificing the domestic plot ratio on the higher floors because of the requirement under Schedule 1 of the Building (Planning) Regulations.

178.  Both Mr Chan and Mr Lai could not find any comparable for the 1/F premises. In such circumstances, they both consider the unit value of the 1/F as a proportion of the unit value of the ground floor. However, they could not agree the conversion factor: Mr Chan adopted 1/3 while Mr Lai adopted 1/2.

179.  We prefer the conversion factor of 1/3 and the unit rate for the 1/F is determined at say $107,000 per sq m. Indeed, the conversion factor of 1/2 or the like is seldom chosen or applicable in the valuation of commercial premises on 1/F save for those in respect of large commercial spaces or shopping centre as envisaged in Peace Ever, supra, at §415. Mr Chan had remarked that unit rate for retail space on 1/F in the vicinity would be lower than the unit rate of residential units on the low floors. He found trades of the majority of the 1^st floor shops within the new developments in the vicinity would only cater for food and beverage and even gymnasium that could not normally afford high rental on ground floor. Mr Chan cited, for instance, The Astro, a residential cum commercial development built in 2019, which lies at 310 Un Chau Street in the vicinity, has likewise fully utilized the maximum permitted domestic plot ratio of 7.5.

180.  Mr Lai disagreed. He considered the Lots being situated in an area of very high retail potential, referring particularly to One Madison, which lies on the opposite side of Fat Tseung Street and provides more commercial spaces on 1/F. With respect, however, One Madison comprises a development of larger scale at the corner site which has an area more than 3 times as that of the Lots. In comparison, the Lots are much smaller and not situated at the corner position.

181.  And if the conversion factor of 1/3 is adopted, ie a unit rate of $107,000 per sq m, the increase in value of the 1/F by (90.08 sq m - 21.72 sq m) x $107,000 sq per m = $7,314,520 as proposed by Mr Lai would risk the chance of forsaking domestic value of (1,330.14 sq m - 1,295.38 sq m) x say $220,000 per sq m[32] = $7,647,200. It is only when Mr Lai is able to prove that the value of the 1/F of the hypothetical development can fetch as much as $160,000 per sq m or something higher than $107,000 per sq m, it is then justifiable to have larger commercial space for the hypothetical development on 1/F. Regrettably, we do not have such information and neither did Mr Lai draw our attention to such retail shops on 1/F during the joint site inspection.

182.  Having reviewed the above, we agree with Mr Chan that a prudent developer should try to maximize the potential of the development by fully utilizing the domestic plot ratio of 7.5 instead of, as proposed by Mr Lai, having a larger commercial space on 1/F but risking the loss of more valuable domestic areas.

183.  Thus, we are prepared to adopt the hypothetical development having a gross floor area of 1,397.08 sq m (PR 8.4375) as proposed by Mr Chan, ie the same plot ratio approved by the Tribunal in Gain Union Limited v Leung Chi Man, LDCS 5000/2021 (unreported, 17 January 2023).

GDV for the Upper Floors

184.  As stated above, Mr Chan and Mr Lai were able to reach an agreement on the unit rate for a domestic unit on level 14 of the hypothetical development at $199,000 per sq m on the basis of a unit size of about 30 sq m.[33]

Other Parameters of Residual Valuation

185.  In respect of other parameters of the residual valuation, Mr Chan and Mr Lai also had the following agreements or disagreements:

Other Parameters of Residual Valuation	Mr Chan	Mr Lai
Marketing Cost	3% of GDV
Professional Fees	6% of costs
Demolition Cost	$2,068,000 (ie 940 m2 x $2,200/m2)
Construction Cost	$112,211,000
Construction Period	24 months	18 months
Interest Rate	5.5%	4.75%
Developer’s Profit	18% on costs
Stamp Duty	4.25%
Legal Cost	0.1%

Construction Period

186.  As regards the construction period, Mr Chan referred to the construction of two recently built composite commercial/residential developments in the vicinity, Giovane at 201 Castle Peak Road and Astro at 310 Un Chau Street. According to the research conducted by Mr Chan, Giovane, which has a gross floor area of 3,793.7 sq m, took 2.6 years to be built; Astro, which has a gross floor area of 3,255.9 sq m, took 2.3 years to complete.[34] With respect, this information was dated and the developments concerned were much larger; they do not provide any assistance in assessing the construction period of the hypothetical development here which shall have a gross floor area of 2,200 sq m or thereabouts.[35]

187.  On the other hand, Mr Lai referred to two previous compulsory sale applications, New Dorset Investments Limited v Leung Wing Hing Joss Sticks Factory (Hong Kong) Limited & Others, LDCS 30000/2018 (unreported, 9 June 2020) and Crown Centre Development Limited & Another v Wong Wai Ping & Others, LDCS 12000/2021 (unreported, 8 December 2023) where the hypothetical developments were pure commercial in nature and had a gross floor area of 2,930 sq m and 2,675.55 sq m respectively. In both cases, the Tribunal accepted a construction period of 2 years.

188.  Although in the present case, the hypothetical development envisaged by the experts had a smaller gross floor area of 2,200 sq m or thereabouts, it comprises a composite commercial/residential development where the domestic portion would require more internal finishes and fittings.

189.  Indeed, in New Merit Limited v Lau So & Another, LDCS 3000/2022 (unreported, 19 September 2023) where the hypothetical development had a gross floor area of 1,581.16 sq m (ie much smaller than the captioned hypothetical development), the valuation experts in that case then agreed a construction period of 1.75 years. And in Welland Resources Limited & Another v Mega Joyful Limited, LDCS 6000/2022 (unreported, 11 August 2023), the hypothetical development was even smaller at about 1,000 sq m, the two valuation experts (where Mr Chan happened to be one of them) agreed the construction period was also two years.

190.  Mr Lai suggested that owing to the downturn of the economy and slowdown of the construction industry, labours and machineries supply shall be less stringent and construction of this relatively small site can be more efficient. The developer would also speed up the construction process in the prevailing high interest rate environment. However, Mr Lai’s proposition is contradicted by his own residual valuation of the site comparable at Nos 102 & 104 Nam Cheong Street adopted by Mr Chan when he adopted a demolition period of 0.5 year and a construction period of 2 years for this even smaller site.[36]

191.  We are however not persuaded that the construction period can be reduced to as short as 18 months.

Interest Rate

192.  At trial, Mr Lai produced Exhibit R2 which showed the latest HIBOR being charged by HSBC at 4.25%. In such event, it would be unreasonable to expect the developer’s cost for finance would be mere 0.5% above HIBOR. While it is undisputed that HSBC’s best lending rate prevails at 5.875%, we agree with Mr Chan that the interest rate in the residual valuation which should reflect the cost of finance by a hypothetical developer should be 5.5%.

Stamp Duty and Legal Costs

193.  The two experts have different approaches in their calculation under the Residual Valuation Method, but the derived figures have no significant difference. We prefer Mr Lai's approach as it is conceptually more correct.

Finding on RDV and the Reserve Price

194.  Thus, on the basis of what we have stated above, we determine the land value of the Lots at $120,000,000 (ie accommodation value of $54,613/m²) as shown in the Appendix herein.

195.  We adopt the estimated RDV of $120,000,000 as the Reserve Price for the auction of the Lots as a whole.

Two Incidental Matters

196.  The applicants propose to appoint Mr Lam San Keung and Ms Ma Lap Yan, being senior partner and partner respectively of Messrs Grandall Zimmern Law Firm, as the sale trustees. Based on the information on their background and experience as set out in their letters dated 20 February 2024[37], we are satisfied that they are proper persons to be appointed as trustees to discharge the duties imposed on trustees under the Ordinance. The remuneration package proposed in the said letter appears to be reasonable.

197.  The applicants have prepared a set of draft Particulars and Conditions of Sale of the Lots[38]. Subject to any amendment that may become necessary as a result of our agreement, the said particulars and conditions of sale of the Lots by public auction submitted by the applicants are also reasonable.

Order

198.  Thus analyzed, we make the following orders:

(1)  This Tribunal is satisfied that the redevelopment of the Lots is justified due to the “age” and “state of repair” of the Buildings and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots including those of the respondents;

(2)  All the undivided shares in the Lots be sold by way of a public auction for the purposes of the redevelopment of the Lots under s.4(1)(b) of the Land (Compulsory Sale for Redevelopment) Ordinance (“the Ordinance”);

(3)  Mr Lam San Keung and Ms Ma Lap Yan of Messrs Grandall Zimmern Law Firm nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to the sale of the Lots and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letters of Grandall Zimmern Law Firm dated 20 February 2024.

(4)  For the purpose of the sale of the Lots by public auction under section 5(1)(a) of the Ordinance:

(i)  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 (including any amendments thereof proposed by the Trustees) to be initialed and approved by the Tribunal.

(ii)  The reserve price of the Lots be set at $120,000,000.

(iii)  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 Buildings shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser shall become the owner of Lots.

(iv)  Liberty to the applicants, the 1^st respondent and the Trustees to apply to the Tribunal for further direction(s) under the Ordinance.

Costs

199.  In accordance with the compensation approach as determined by the Court of Appeal in Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 534, the  respondent is entitled to costs notwithstanding the outcome of the Application.

200.  Accordingly, we order that the applicants do pay the 1^st respondent’s costs in these proceedings on High Court scale, including any costs reserved, to be taxed if not agreed.

201.  Last but not least, the Tribunal thanks the Counsel and Mr Wong for their assistance.