ALLIED ASSET LTD. v. KENLEY INVESTMENT LTD.

HCA4614/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATION REGION

COURT OF FIRST INSTANCE

ACTION NO. 4614 OF 1998

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JUDGMENT

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1. This assessment arises from interlocutory judgment for damages to the plaintiff following the defendant's default as vendor under a sale and purchase agreement for the property, Flat I, 1st Floor, Splendour Villa, South Bay Road plus two car parking spaces. In the course of the judgment on liability, the defendant was found to have breached the agreement on 9 March 1998, the date set for the signing of the Formal Agreement.

2. Argument was heard on the preliminary issue of the relevant date for this assessment. The plaintiff contended for the date of breach, 9 March 1998, whereas the defendant urged the date of completion, 24 April 1998. Although the time factor was short, the volatile market had apparently caused a significant drop in the value of the property during the intervening six weeks. The court ruled that the assessment would be effective at the date of breach, 9 March 1998, as the plaintiff's acceptance of the repudiation rendered the completion date academic in the absence of a continuing contract.

3. The plaintiff's claim is for damages for loss of bargain based on the difference between its contract figure of $13.8 million and the court's valuation, now established to be at 9 March 1998. It is common ground that the defendant has already paid to the plaintiff $1,379,000, representing reimbursement of stamp duty in the sum of $379,500 plus $1,000,000 paid in an ineffective attempt to buy out the contract by way of "double deposit" payment. Of this sum $500,000 for the original deposit was refundable anyway, with the result that the plaintiff has already in effect received $879,500 as compensation. If therefore the court's finding on the value of the subject premises fails to exceed $14,679,500 ($13,800,000 + $879,500) the plaintiff will not be entitled to further damages.

4. As against the parties' contract price of $13.8 million, the resale price obtained by the defendant under a provisional agreement of 6 March 1998 was $15.2 million. Mr. Yeung for the defendant argued that the resale figure is irrelevant and does not reflect the market price. It should therefore be disregarded in favour of Mr. Wong's evidence. Mr. Lee for the plaintiff however contended that the resale figure does at least show a willing purchaser at that price on 6 March, which undermines Mr. Wong's valuation of $14.2 million as at 9 March.

5. The plaintiff's expert witness was Ms. Lisa Fisher-Jones of Vigers, and the defendant chose Mr. William W.L. Wong of FPD Savills. The valuation reports of the respective witnesses produced figures of $16.5 million from Ms. Fisher-Jones, and $14.2 million from Mr. Wong. In her evidence, the plaintiff's witness discussed the comparables used in her valuation, which appear at page 11 of the bundle of witness statements.

6. There are two comparables in the same development as the subject premises and both have been considered by the two experts. Comparable 1 in both lists (Flat F on the second floor) is apparently very similar to the subject premises and attracted a price of $17.75 million on 5 March 1998. It is one floor higher, only 5.5% larger, and the transaction was only four days prior to the valuation date. Ms. Fisher-Jones in her valuation report at page 90 of the documents bundle therefore gives it more weight than other comparables because of the minimal adjustment required. She considered it to represent a good indication of the open market value of the subject premises.

7. Ms. Fisher-Jones disagreed with the defence suggestion that this comparable was out of tone with the market trend and should not therefore be accorded much weight. The expert witnesses each applied similar adjustment factors to this comparable, and Mr. Wong's overall downward adjustment of -3% was in fact slightly more generous to the plaintiff than Ms. Fisher-Jones's -3.5%. There is no evidence that the transaction was not an open market sale, and comparable 1 is therefore ostensibly persuasive.

8. Mr. Wong however, in his evidence for the defendant, said that he placed little weight on comparable 1. He conceded that it was at first glance a good comparable, but he found by reference to his other comparables that it achieved a much higher unit value. He concluded therefore that it was out of tone with the market, and relied on what he described as the common practice of surveyors to discount comparables showing unit values unusually higher or lower than others.

9. Mr. Wong said that he relied for his valuation of the subject premises on his comparables 3 and 6. He did not rely on his comparable 2 which he said was in Deepwater Bay, quite far from the subject premises, nor on his comparables 4 and 5. His comparable 6 was also distant from the subject premises, being in Shouson Hill, but he said he chose it because it offered a similar environment, it had a similar sea view, was the same age, and fetched a similar price. It therefore required little adjustment, save as to date of transaction which was over three months later and for which Mr. Wong applied an upward adjustment of 6%. Ms. Fisher-Jones agreed that it would be a useful comparable if the two sales in the same block as the subject premises had not been available.

10. It is apparent from Mr. Wong's preference for a distant comparable that he found insufficient in the area of the subject premises as a realistic basis for his valuation. He has declined to rely on three of his six comparables, and has also discounted as out of tone with the market the one comparable which in all respects is similar to the subject premises and requires minimum adjustment. To discount the persuasive similarity of comparable 1 there should be an obvious and compelling market trend emerging from the other comparables which in the context clearly shows the "freak" nature of the discounted transaction. Mr. Wong however relies on only two other transactions to discount the third. One of those he relies on, comparable 6, is both geographically distant from the subject premises and three months later in transaction date in a volatile market. These disadvantages must to some extent counterbalance the similarities of environment, age, sea view, and price mentioned by Mr. Wong. Although comparable 6 should be given due weight, I find this considerably less than comparable 1, with little indication that it contributes to a market trend strong enough to justify discounting the apparently superior comparable 1 as out of tone. Mr. Wong has however relied on comparables 3 and 6 together in reaching this conclusion and consequently in giving little weight to comparable 1.

11. Mr. Wong's comparable 3, like comparable 1, is situated in the same development as the subject premises and is also in the lists of both expert witnesses. It is Flat B on the first floor of Splendour Villa and appears as comparable 2 in Ms. Fisher-Jones's list. In other respects this comparable is very different from the subject premises. It is less than half the size and is situated at the side of the development with, as Mr. Wong agreed, only a distant and narrow angle sea view as opposed to the panoramic view from the front enjoyed by the subject premises. The sale price was $6.28 million, and the transaction date was 17 April 1998.

12. The physical situations of the subject premises and of the two comparables in the same development are illustrated by the composite photograph appearing at page 12 of the bundle of witness statements. Mr. Wong however pointed out that the feature appearing in the left foreground of the photograph was a jetty rather than a continuous piece of land, and the premises did in fact have an angled view of Repulse Bay beyond the jetty.

13. The divergence of expert opinion on this comparable rested solely on the respective adjustments made by the two witnesses for the view factor. All other aspects were awarded identical treatment in achieving the adjusted unit rate. To reflect the superior view from the subject premises, Mr. Wong allowed an upward adjustment of 5%, whereas Ms. Fisher-Jones's corresponding adjustment was considerably greater at 25%. Defending her adjustment, Ms. Fisher-Jones agreed that it was substantial but said that it represented the difference between a sea view and a view comprising trees and the roof of a building. In Hong Kong, she said, people would pay for view and she thought that Mr. Wong's adjustment of +5% inadequately reflected this factor. She illustrated her point with photographs she had apparently taken from the public area one floor directly below the comparable - exhibit P1.

14. In cross-examination Ms. Fisher-Jones was directed to the location plan at page 68 of the documents bundle, which is also exhibit D4 as marked by Mr. Wong, and agreed that the roof she had mentioned was that of the Hong Kong Life Guard Club marked on the plan. The comparable was apparently in the second angle of the development's annexe and facing northwest, which from the plan is not in the direction of the sea.

15. Mr. Wong disagreed with the conclusion that the comparable did not have a sea view. He criticised the photographs at exhibit P1 as showing the view from a lower level than the comparable itself (a point acknowledged by Ms. Fisher-Jones), and produced his own photographs as exhibit D3. From these Mr. Wong pointed out that the view from the comparable was unimpeded by the rooftop of the Life Guard building and extended to take in an aspect of Repulse Bay over the trees. He did however agree that it was a relatively distant, narrow and angled sea view, unlike the direct and panoramic view from the subject premises. He also agreed that the unsightly material on top of the Life Guard building would be visible from the comparable, but maintained that the sea view itself was the important factor.

16. I accept Mr. Wong's evidence that the direct line of view from the comparable was at a higher level than the rooftop of the Life Guard building and extended to give a distant and angled sea view of Repulse Bay. It is however a view which, on Mr. Wong's own photographs at exhibit D3, clearly comprehends the inelegant Life Guard building and the ugly impedimenta on its rooftop. Repulse Bay is an area in which the view must be an important consideration for the potential purchaser of luxury accommodation. In this context I find inadequate Mr. Wong's upward adjustment of only 5% to reflect the considerable disparity between the quality of the view from this comparable and that from the subject premises.

17. However Ms. Fisher-Jones's own upward adjustment of 25% for this comparable seems excessive. This would imply an absurd reduction in the value of the subject premises by over $4 million if they were miraculously transposed to the location of the comparable. It is difficult to reconcile such widely diverging expert opinions of the adjustment for the view factor, and in the circumstances I find it correct to apply a mean adjustment of +15%. When applied to the square footage of the subject premises this will produce a notional sale price of $14.72 million.

18. Although this conclusion appears to favour the defendant, it represents a mere compromise between two artificial adjustments to a transaction which I find to contain little relevant to this assessment. Even the factor that the comparable is in the same development is diminished by its very different location and size. Lest this appear critical of the experts, I appreciate that in times of slump in property values there is a scarcity of transactions and a corresponding dearth of useful comparables. This inevitably increases the difficulty of the valuer in assessing the positive and negative factors of a comparable which in reality may have only a tenuous relation to the subject premises.

19. I therefore give little weight to this comparable, even though it is in the same development. I am moreover unable to accept Mr. Wong's evidence that his conclusions on his comparables 3 and 6 together justify disregarding comparable 1 as out of tone with the market. Mr. Wong's comparables 3 and 6 have failed to establish a market trend, and as he does not rely on his other comparables 2, 4 and 5, the persuasiveness of comparable 1 is undiminished.

20. Ms. Fisher-Jones admitted that she did not find her comparables 3 - 8 particularly helpful. She said in cross-examination that she had ignored her comparables 3, 4, 5 and 6 because they were high-rise blocks, and Mr. Wong in his evidence discounted them for the same reason. Apparently different considerations apply in valuing premises in high-rise buildings.

21. Mr. Wong criticised Ms. Fisher-Jones's calculations on her comparable 8, as she had not included the usual additional allowance of 10% of the floor space to reflect the roof-top area. He also disagreed with the adjustment for view as it is situated on a sloping road and has an unobstructed but distant sea view. In her earlier cross-examination Ms. Fisher-Jones agreed that from 6% to 10% should be added for the roof-top factor and accepted that she had not made a downward adjustment to reflect this, which would have resulted in a drop in the unit rate. She also acknowledged an error in her figure for the saleable area. The usefulness of comparable 8 to the plaintiff is therefore considerably diminished, although Ms. Fisher-Jones has anyway placed little reliance on it.

22. Discussing her comparable 7 in cross-examination, Ms. Fisher-Jones maintained her adjustments against those suggested by defence counsel, although she conceded a small error in the saleable area. This property is apparently some distance from the sea front and has an inferior sea view as there are lower properties in front. Both comparables 7 and 8 are four blocks back from the sea front off South Bay Road, and for this reason Ms. Fisher-Jones did not find them as relevant as comparable 1. I note that Mr. Wong did not comment on comparable 7.

23. Both expert witnesses discussed the overall market trend, which had been down since the last quarter of 1997. Ms. Fisher-Jones however spoke of an upward rebound about the time with which are concerned. Mr. Wong disagreed, save for isolated cases, and said that the market continued falling. Government land auctions had, according to Ms. Fisher-Jones, produced higher than expected prices which had been instrumental in pushing up the prices of private sales at the relevant period. Mr. Wong discounted this factor as he said it indicated only that major developers were trying to rescue the declining market by increasing their land banks, which would not affect the secondhand market.

24. Whatever the correct interpretation of these events, I note that the resale price of the subject premises had itself, only shortly before the relevant date for this assessment, shown a substantial increase over the contract price between the parties. Although both experts, in accordance I understand with valuation principles, properly ignored this transaction in reaching their respective conclusions, it cannot be regarded as totally irrelevant for our present purposes. At the least it is consistent with an upward move in the private sales market at the material time.

25. The remaining area of difference between the experts concerned the value of the two carparks belonging to the subject premises as affecting the valuation of the premises as a whole. Mr. Wong reached a valuation of $150,000 each, which he conceded was an estimate without comparables based on car park ratios. As each unit had at least one carpark he added $150,000 to reflect the value of the additional one to the subject premises. Ms. Fisher-Jones valued the extra carpark at $400,000 by comparison with comparable 1 which had only one space. She demonstrated this conclusion by her comparables at page 14 of the witness statements. I find that the evidence indicates the probability that the value of the extra carpark is in the region of $400,000 rather than the lower figure offered by Mr. Wong.

26. The evidence before me demonstrates the fallibility of expert valuations in a slumping property market with few transactions and even fewer desirable comparables. The experts, through no fault of their own, are driven to comparables ever more distant in location, time, size, age and amenities from the subject premises. The adjustments are necessarily greater and are on occasions seemingly reached by difficult feats of mental gymnastics. Greater room is inevitably allowed for the variable of subjective interpretation. In short the valuation itself becomes less reliable, a conclusion which is amply demonstrated by the considerable divergence in the respective valuations of the present expert witnesses.

27. I have found that Mr. Wong's preferred comparables 3 and 6 fail to establish even a market trend, let alone a sufficient trend to displace as out of tone the otherwise persuasive evidence of comparable 1. Each expert has declined to rely on a substantial proportion of their respective comparables and there is moreover no evidence that the comparable 1 transaction was other than an open market sale. In these circumstances I inevitably regard comparable 1 as having considerable weight, although I note the dangers of relying on too narrow a base of evidence.

28. I therefore take comparable 1 as an obvious starting point, given the degree of similarity to the subject transaction in every respect. I accept that Mr. Wong's comparable 6 is useful, although I do not give it the weight of comparable 1. I give relatively little weight to the other comparable in the same block, given the distorting effect of its very different view and position in the development, as well as its size. Neither of the expert witnesses seeks to place much weight on their other comparables and I am not inclined to disagree.

29. On the basis of this evidence I find that the market value of the premises as at 9 March 1998 is unlikely to have been less than $15.5 million and I assess their value in that amount. Applying this figure to the contract price between the parties of $13.8 million gives a figure of $1,700,000, which is the amount of damages to which the plaintiff is entitled. Credit will be given for the amount of $879,500 already paid by the defendant to the plaintiff, and the balance of $820,500 is duly awarded to the plaintiff. Interest will run on this amount at the judgment rate from writ to payment and the plaintiff is awarded costs with a certificate for counsel.