WELLAND RESOURCES LTD AND ANOTHER v. MEGA JOYFUL LTD

LDCS 6000/2022

[2023] HKLdT 56

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 6000 OF 2022

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BETWEEN

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J U D G M E N T

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1.  This is an application for a compulsory sale order (hereinafter referred to as “the Application”) to sell all the undivided shares of the Remaining Portion of Inland Lot No 199 (hereinafter collectively referred to as “the Lot”) under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”). Erected on Lot is a 6-storey tenement buildings being served by a common staircase (“the Building”) at No 18 Sau Wa Fong, Wan Chai, Hong Kong which discharges onto a side lane (“the Side Lane”) by the side of the building.

2.  The occupation permit for the Building (“OP”), H69/63 was issued pursuant to the then Buildings Ordinance, 1955 on 3 May 1963 whereby each of the 6 floors was permitted for one tenement for domestic use.

3.  According to the Land Registry, there is a Deed of Mutual Covenant dated 17 October 1964 by which one equal and undivided share was allotted to each floor.

4.  Mr Simon K C Lam (“Mr Simon Lam”), counsel for the applicants, summarized in his opening submission that at the time of the Application dated 6 May 2022, the applicants altogether owned 83.33% of the undivided shares of the Lot save for the share allotted to the ground floor of the Building which is owned by sole respondent.

5.  This sole respondent is represented by Mr Adrian But (“Mr But”), instructed by Messrs Mayer Brown.

Whether the Applicants are entitled to make the Application

6.  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.

7.  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 a lot belonging to a class of lots specified in the notice.

8.  The Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice was gazette 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) a lot with each of the units on the lot representing more than 10% of all the undivided shares in the lot; and

(b) a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (ie the date of the application under the Ordinance)”.

9.  As each unit of the Lot constitutes more than 10% of all the undivided shares in the Lot and the OP for the Building was issued on 3 May 1963 (namely, not less than 50 years before the date of the Application), the Notice is applicable and the threshold percentage should be 80%.

10.  At the time of the filing of the Application dated 6 May 2022, the applicants owned altogether 83.33% of the undivided shares of the Lot. I agree therefore that the applicants are entitled to make the Application under section 3(1) of the Ordinance.

The Issues in the Application

11.  As confirmed by Mr But on the 1^st day of trial, the main dispute is on valuation. By reference to the agreed list of issues by the applicants and the respondent[1], the Tribunal has to determine:

(1) What is the “market value” of each property (which is usually coined by the valuation profession as the “Existing Use Value” or simply “EUV”) on the Lot, ie the Building as determined by the Tribunal pursuant to section 4(1)(a)(i) of the Ordinance and what should be the “apportionment ratio” of the expenses and proceeds under section 10 of the Ordinance between the applicants and the respondent;

(2) In the event that the Tribunal makes an Order that all the undivided shares in the Lot be sold for the purposes of redevelopment of the Lot under section 4(1)(b)(i) of the Ordinance, so that the Lot would be sold by public auction pursuant to section 5(1)(a) of the Ordinance, what should be the reserve price of the public auction pursuant to paragraph 2 of Schedule 2 to the Ordinance; and

(3) Without prejudice to the generality of paragraph (2) above, whether an area of 23.2 sq m of the Lot, being portion of a right of way to which the Lot is subject to, ought to be taken into account in the calculation of the site area in the assessment of the redevelopment potential of the Lot.

The Evidence

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

(a) the witness statement and supplemental statement dated 22 September 2022 and 5 January 2023 respectively from Mr Fan Wing Hung Danny (“Mr Fan”), representative of the applicants;

(b) a Building Condition Survey Report by Mr Wong San, Samson (“Mr Wong”) dated 16 September 2022;

(c) a Structural Assessment Report by Dr Chan Yin Nin Sammy (“Dr Chan”) dated 17 August 2022;[2]

(d) the following reports by Mr Chan Cheung Kit (“Mr Chan”) of Lanbase Surveyors Limited (“LSL”);

(i) the Application Report dated 20 April 2022 pursuant to Part 1 of Schedule 1 to the Ordinance;

(ii) a report dated 21 April 2022 assessing the redevelopment value (“RDV”) of the Lot;

(iii) a supplemental report dated 16 September 2022 on the revised market value (“EUV”) of the Building as at 11 February 2022;

(iv) a supplemental report dated 16 September 2022 on the RDV of the Lot;

(v) a rebuttal report dated 4 January 2023 on the EUV and RDV report dated 25 November 2022 on behalf of the respondent prepared by Ms Sat Wei Ling (“Ms Sat”) of Memfus Wong Surveyors Limited;

(vi) an updated RDV report dated 26 April 2023.

(e) for the purpose of determining whether the 23.2 sq m of the Lot subject to a right of way ought to be taken into account in the calculation of the site area in the assessment of the redevelopment potential, reports from Mr Mak Chi Cheung Peter (“Mr Mak”), Authorized Person dated 29 December 2022 and 22 May 2023 respectively.

13.  The respondent relies on the following reports:

(a) the following reports by Ms Sat:

(i) as said, the EUV and RDV report dated 25 November 2022;

(ii) a rebuttal report of even date on the EUV and RDV as assessed by Mr Chan;

(iii) an updated RDV report dated 26 April 2023.

(b) for the purpose of determining whether the 23.2 sq m of the Lot subject to a right of way ought to be taken into account in the calculation of the site area in the assessment of the redevelopment potential, reports from Mr Lam Siu-tong (“Mr S T Lam”), Authorized Person, dated 20 November 2022 and 25 April 2023 respectively.

14.  Indeed, Mr Chan and Ms Sat prepared two joint statements, one dated 13 February 2023 setting out their agreements and disagreements on the EUV & RDV, followed by a second one dated 23 May 2023 on RDV. The latter joint statements had incorporated the report of Mr Mak dated 22 May 2023.

15.  During the Pre-Trial Review on 29 May 2023, the Tribunal granted leave for the respondent to file and serve, on or before 9 June 2023, a further statement from Mr S T Lam in response to the report of Mr Mak dated 22 May 2023. Corresponding leave was granted to the applicants to file and serve a statement from Mr Mak in reply thereto on or before 16 June 2023 which he did.

16.  But on the first day of trial, leave was further granted for both Mr S T Lam and Mr Mak to file further statements in response. Mr S T Lam filed his statement on 23 June 2023[3] which was followed by Mr Mak’s dated 27 June 2023[4].

17.  As such, Mr Mak and Mr S T Lam had filed the following statements in chronological order:

Mr Mak	Mr S T Lam
	20 November 2022
29 December 2022
	25 April 2023
22 May 2023
	9 June 2023
16 June 2023
	23 June 2023
27 June 2023

EUV as at 11 February 2022

Assessment of G/F units

18.  Notwithstanding the ground floor (“G/F”) of the Building was upon the issue of the OP dated 3 May 1963 permitted for domestic use, it is currently occupied for non-domestic use.

19.  Under section 2 of the then Buildings Ordinance, 1950 Edition, “domestic building” meant “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 BO defines ‘domestic building’ to mean “a building constructed or intended to be used for habitation and the expression domestic purposes shall be construed accordingly”.

20.  In Tsuen Wan Trade Association Education Foundation Ltd. v. Chui Kam Ying [2012] 2 HKLRD 1163, Jeremy Poon J (as he then was), deciding on a similar provision under the old Buildings Ordinance No 18 of 1935, ruled that “even if two domestic permits had in fact been issued, it does not necessarily follow that the Property can be used for residential purpose only. ….. This inferentially but strongly shows that the Property can in fact be used for non-residential purposes legally.” (underline added)

21.  In any event, in Wing Hong Investment Company Limited v Fung Sok Han & Others, [2016] 1 HKLRD 1, Chan J (as he then was) found at §235 of the judgment that there is no provision in the Buildings Ordinance to suggest that it is an offence to adopt a user of premises which is materially different from that stated in the occupation permit although the Building Authority may serve an order on the owner under section 25(2) to prohibit the intended user or require the changed user to be discontinued if it is found that the changed or intended new user is not acceptable.

22.  In my view, it is entirely correct for Mr Chan and Ms Sat agreeing to assess the EUV of the G/F on the basis of non-domestic use. They have agreed the saleable area of the subject property on G/F at 49.29 sq m but to its rear, there is a yard of about 26.5 sq m which is covered and enclosed as part of the unit. By our inspection dated 27 June 2023, it appears that the occupier of the yard, ie the respondent’s tenant, has been using it as an integral and undistinguishable part of the rest of the office/studio/shop on G/F. Aesthetically, the yard also has a “see-through” design alongside with other parts of the unit.

23.  And with respect to Mr Simon Lam, neither the yard nor its conversion as it exists hampers the escape route of the upper floor which relies solely on the single common staircase which opens to the side lane.

24.  Nevertheless, this yard is subject to a Notice No WNZ/U08-10/0001/09 issued by the Building Authority dated 3 January 2011 of reference EB/2248/62/N05W (BUC 09) requiring the demolition of the structure (“the Building Notice”). There is also an area under the staircase of some 2.58 sq m.

25.  While both parties agreed that this rear yard should belong to the common parts of the Building, Mr Chan placed no value on it and even at one stage suggested there should be allowance for its demolition cost. Ms Sat, on the other hand, assumed its unit value should be 1/8 of the subject G/F unit.

26.  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)

27.  In the present case, the Building Notice requiring demolition as afore-said mentioned was issued on 3 January 2011 but nothing following up happened in the past 12 years. On the other hand, the applicants referred to the sale and purchase of the G/F by the respondent in June 2011 when the then solicitors acting on the latter’s behalf requested a deduction of $40,000 from the purchase price agreed at $7,380,000 (ie a deduction of 0.5%) upon finding out the Building Notice which was just issued in January 2011.[5] In my opinion, this requested reduction in purchase price was nominal and appeared to be a negotiation tactic rather than a genuine concern about the enforcement of the Building Notice.

28.  In 803 Funds Limited v Director of Buildings, HCAL 2215/2020 which has been reported as [2021] 2 HKLRD 1274, the following are noted:

“16. Under s 2(1), the expression “building works” is widely defined to include “any kind of building construction, site formation works, ground investigation in the scheduled areas, foundation works, repairs, demolition, alteration, addition and every kind of building operation, and includes drainage works”.

17. Generally speaking, BA would regard building works as UBWs in cases where:

(1) the works are carried out without the prior approval and consent of BA under s 14(1) and do not fall within the exemptions under s 41; or

(2) small-scale building works that are designated as minor works under the Building (Minor Works) Regulation, Cap 123N, are carried out without complying with the simplified requirements of the Minor Works Control System.

18. Under s 24(1), where any building works have been or are being carried out in contravention of any of the provisions of the Ordinance, BA may by order in writing require the demolition of the relevant building or building works, or alteration of the relevant building or building works as may be necessary to cause the same to comply with the provisions of the Ordinance, within a specified time (“Section 24 Order”).

19. As earlier mentioned, BA has issued, and revised from time to time, enforcement policies for tackling UBWs. One such policy was issued in 2001. In March 2011, upon a review of BD’s 10-year programme of removal of UBWs, it was estimated that some 400,000 UBWs which constituted a higher risk to public safety or an obvious or imminent danger to life or property (such as metal cages and flower racks on external walls and illegal rooftop structures on single-staircase buildings) had been removed. BA then issued a revised enforcement policy (“the 2011 UBWs Policy”), which came into effect on 1 April 2011 and which is currently still in force.

20. Under the 2011 UBWs Policy, BA would issue Section 24 Orders to the owners concerned requiring removal of the following actionable items and register the orders against the relevant property titles:

(1) items constituting obvious hazards or imminent danger to life or property;

(2) new items (excluding statutorily exempted building works under the Ordinance) irrespective of the date of completion of the building where such items have been carried out;

(3) items on the exterior of buildings, including those on rooftops and podium, in yards and lanes and projecting from external walls (excluding projecting structures covered by the Household Minor Works Validation Scheme and the proposed Signboard Control System and other minor amenity features);

(4) items in the interior of buildings, constituting obvious hazards or imminent danger to life or property (eg building works associated with subdivided units with obstruction to means of escape, serious water seepage causing deterioration of structural members or overloading problem);

(5) items in or on buildings, constituting a serious health or environmental nuisance (eg misconnection of drainage systems);

(6) major standalone items;

(7) a specific type of UBWs, or items identified in buildings or groups of buildings, targeted for large-scale operations; and

(8) unauthorized alterations to or works in green and amenity features of a building (eg balconies, sky gardens and podium gardens) for which exemption from calculation of gross floor area has been granted by BA (collectively referred to as “Actionable Items”).

21. For UBWs which do not fall within the list of Actionable Items, BA may, instead of issuing Section 24 Orders, issue to the owners concerned statutory notices under s 24C or advisory letters requesting them to remove the UBWs voluntarily. In general, advisory letters would be issued save and except the following, for which warning notices may be issued:

(1) existing unauthorized cocklofts on ground floor not constituting obvious hazard or imminent danger to life or property; and

(2) unauthorized internal staircases constructed prior to 2011 and not constituting obvious hazard or imminent danger to life or property.” (underline added)

29.  Whereas Building Notice instead of Building Order was issued in respect of the unauthorized structure in respect of the yard, it appears therefore the unauthorized structure does not fall within one of the list of Actionable Items.

30.  In fact, in Resources Leader Limited v Ho Ngo Ying, HCA 2667/2018 (unreported, 4 August 2023), Hon Ng J of the Court of First Instance, at §§72-73, drawing a distinction between the time when the relevant unauthorized building works were complained of and the time when a sale and purchase agreement was signed, came to the conclusion that the perceived risk of enforcement action by the Building Authority was not real:

“72. … there was a time gap of almost 11 years between the 2007 Letter of Withdrawal and the Preliminary Agreement and there is no suggestion that in the meantime the BA has changed its mind and taken or threatened to take further enforcement action in relation to the 2 UBWs named in the 2006 Building Order. On the other hand, in Heung Sui Kei, the s 24 Order was served in October 1995, the so-called Letter of Compliance was said to be dated 17 April 1997 and the sale and purchase agreement between the purchaser and the vendor was entered into in June 1997, albeit completion was postponed to June 1997. With such a short time gap in between, and the threat contained in the so-called Letter of Compliance, it was not unreasonable for the purchaser to be concerned about the risk of enforcement action by the BA.

73. Heeding the advice of Liu JA (in Jumbo Gold Investment Ltd v Yuen Cheong Leung and Another [1993] 3 HKLRD 825), this court does not consider it should be troubled by the absence of an absolute risk-free assurance, nor unduly hampered by strict legal proof in the matters requisitioned. In these circumstances, guided by reasonably robust common sense in light of the commercial or in this case administrative reality, this court is of the view that any perceived risk of enforcement action by the BA in relation to the 2006 Building Order would not be a real risk.” (underline added)

31.  Similarly, in Joint Hope Limited v Vecent Hong Kong Trading Limited & Others, LDCS 21000/2019 (unreported, dated 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 unauthorised building works that included 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.

32.  Surely, when the Building Authority issued the order of 11 May 2018, it should have known about the unauthorised 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. Neither 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 unauthorised building works.

33.  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 unauthorised building works that included 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.

34.  And in Sound Advice Property Limited & Others v Mok Wai Ching & Mok Yui Cheung Anthony, LDCS 18000/2020 (unreported, dated 21 December 2021), the Tribunal found that although Building Orders against an unauthorised building structure 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.

35.  Perhaps even more pertaining to the present case is Cheer Capital Limited v Unibase Investment Limited & Another, LDCS 5000 & 6000/2013 (unreported, dated 12 June 2015) where the Tribunal found a yard on lower ground floor, also a common area of the building thereto, had been enclosed to become an extension of a restaurant for a long time. Mr Chan, who happened to be one of the valuation experts in that case, attributed to the enclosed yard a value equivalent to 1/6^th of the assessed EUV per unit saleable area of the lower ground floor premises.

36.  In comparison, the yard as enclosed and covered had been in existence for a long time (at least prior to 3 January 2011 before the Building Notice No WNZ/U08-10/0001/09 was issued by the Building Authority). Although the conversion has been open and conspicuous, there appears to have no enforcement action or complaint by the Incorporated Owners of the Building so that the defence of acquiescence may be available.

37.  In The Incorporated Owners of Freder Centre v Gringo Ltd [2016] 2 HKLRD 190, the Court of Appeal found that the lying by on the part of the applicant in that case who was an incorporated owners in respect of breaches committed for some 14 years by one of the respondents and by other owners could reasonably be taken as representation that similar breaches would be tolerated. Chu JA summarized the defence of acquiescence at §26:-

“… to succeed in a defence of acquiescence, it must be shown firstly, there was on the part of the plaintiff, an assent or lying by in relation to the acts of another person; and secondly, in view of the assent or lying by and consequent acts it is unjust in all the circumstances to grant the relief in question: see Spry, Equitable Remedies, (9th ed.), p.56.”

38.  In Yick Fung Holdings Ltd v Sandwood Ltd [2009] 4 HKC 43, Le Pichon JA dealt with the issue of knowledge for the purpose of establishing acquiescence and held that:-

“(1) It is sufficient that at the relevant time the party concerned knew of the facts or matters that gave rise to his right to equitable relief, even although he may not have fully understood, as a question of law, the rights that he possessed. The paramount question relates to the justice or injustice of granting the particular relief that is sought and the degree of knowledge required in any situation must depend on all other circumstances. See Spry on Equitable Remedies, 6th ed, pp 440-442.

(2) It is thus sufficient that the party knew the facts ‘constituting the title to relief’. See Spry, p 431; Lindsay Petroleum Co v Hurd (1874) LR 5 PC 221 at 241.

(3) It is ordinarily sufficient that the plaintiff has been put on suspicion, that is, that he is aware of sufficient matters to raise in his mind a doubt whether an infringement of his rights has taken place. See Spry, p 431; Marquis of Clanricarde v Henning (1861) 30 Beav. 175, 54 ER 855.”

39.  Regarding the issue of knowledge, as the yard so converted is constructed in such a patent and obvious manner in the Building. I consider that every other owner of the Building must have been fully aware of the breach of the Deed of Mutual Covenant (or at the very least the facts and circumstances in relation to the breach) in respect of the yard.

40.  Indeed, the ruling of the Tribunal in Hong Kong Telephone Company Limited v The Hong Kong Land Company Limited, LDLA 5/1982 (unreported, dated 5 November 1982) is highly relevant. In that case, “(b)ecause of the steep slope down from the road level the foundations of the building continue for a considerable further distance below the lower level floor opening onto a paved open garden area. The area of these foundations below the lower level floor has been closed to provide a playroom”. Therefore, the conversion created a 4^th storey although the Government Lease limited the building to only 3 stories. The Tribunal held that while the enclosed foundation area used as a playroom did not form part of the legal gross floor area, it was part of the suit premises and must for valuation purposes be taken into account as ancillary to the residential area, in the same way as the garden and car park areas were likewise ancillary. The Tribunal was satisfied that its existence could reasonably be expected to attract a slightly higher rent than if it did not exist, in the same way as other ancillary features add value to premises. The possibility that the landlord may at sometime have to remove the glass doors enclosing the area could not be discounted, nor could the probability that it is allowed for the time being.

41.  This view is supported by Transport for London (London Underground Limited) v Spirerose Limited [2009] 1 WLR 1797, [2009] UKHL 44, where Lord Neuberger pointed out at paragraph 50:

“First, if a statute directs that property is to be valued on an open market basis as at a certain date, one would not expect any counter-factual assumptions to be made other than those which are inherent in the valuation exercise (such as the assumption that the property has been on the market and is the subject of a sale agreement on the valuation date) or those which are directed by the statute.”

42.  More recently, in Newbigin (VO) v SJ & J Monk (A Firm) [2015] 1 WLR 4817, Lewison LJ discussed “the reality principle” in these terms:

“It is a well-known principle of valuation, not confined to rating, that in principle you must value the property as it stands on the valuation date. This is the principle of reality; or as classicists prefer to call it, the principle that property must be valued rebus sic stantibus. This principle can be displaced by contrary instructions in the statute or contract under which the valuation takes place[6].”

43.  In the present case, I, like the Tribunal in Hong Kong Telephone Company Limited above, the yard as enclosed could reasonably be expected to attract a slightly higher rent than the G/F unit without such an area. The Building Notice was issued for more than 12 years, granted alongside with other orders made against the Building, before and afterwards. It can safely be inferred that the Buildings Department was aware of the status and conditions of incidents of non-compliances within the Building but no follow-up enforcement action was initiated. As well, throughout the history of the Building, there is no evidence to suggest that the Incorporated Owners ever intends to take any objection or enforcement action to recover possession of the yard.

44.  Indeed, Mr Chan, in the Application Report dated 20 April 2022, awarded “5% additional value” to the yard under a factor known as “accessibility to common yard”[7]. It seems that he did appreciate that the yard as enclosed was a value-adding feature. Incidentally, the 1/8 value proposed by Ms Sat is equivalent to some additional value of .

45.  In view of the above therefore, I agree with Ms Sat that the enclosed yard in the present case should be attributed 1/8 of the unit value of the G/F.

46.  Pausing here, I note Mr Simon Lam had suggested against assigning value to the enclosed yard or the respondent would be unjustly enriched at the applicants’ expense etc. Mr Simon Lam even submitted that to ascribe value to the enclosed yard would be tantamount to awarding the respondent for its illegal activities.

47.  In considering an allegation of unjust enrichment, four questions have to be asked: (1) is the respondent enriched; (2) is the enrichment at the applicants’ expense; (3) is the enrichment unjust; and (4) are there any applicable defences: Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79, at §67.

48.  While assigning value to the enclosed yard would certainly increase the EUV of the respondent’s interest, and its pro rata share of the proceeds of sale of the Lot, such “enrichment” is not unjust because such value for “unauthorized use”, which is not illegal[8], is generally recognized in the market as demonstrated by the authorities stated above.

49.  Notwithstanding the above, Mr Chan and Ms Sat agreed to assess the EUV of this ground floor unit on the basis of direct sales comparison by referring to three common shop comparable transactions:

Comp	Address	Date of Sale	Consideration	Age of Building	Saleable Area (m2)	Effective Area (m2)	Frontage (m)	Depth (m)	Headroom (m)	Unit Rate (/m2)
Subject	G/F, 18 Sau Wa Fong			1963	49.29 + Yard: 26.5	53.89	7.21
A1	Shop 4, G/F, Chi Lok Terrace, 3 Kennedy Street	27 Jan 22	$5,500,000	1981	14.34	14.34	3.43	4.18	4.23	$383,543
A2	Shop 4, G/F, Kin On Building, 16-20 Kennedy Street	18 Jun 21	$3,000,000	1980	10.26 + Yard: 2.46	10.67	2.2	4.67	4.33	$281,162
A3	G/F, 29 Sau Wa Fong	16 May 14	$11,780,000	1969	31.46	31.46	7.39	4.26	3.66	$374,444

50.  Mr Chan and Ms Sat have also agreed on the following adjustments applicable to the three transactions:

Adjustment Factor	Mr Chan	Ms Sat
Time	Private Retail Price Index published by Rating and Valuation Department (”RVD”)
Frontage	1.25% for every 1m difference
Headroom	2.0% for every 1m difference
Depth	1.5% for every 1m difference
Size	3.0% for every 10 sq m difference (threshold basis)	2.0% for every 10 sq m difference (linear basis)
Age	0.1% for every 1 year difference
Vehicular Access	-5% to comparables having vehicular access
Adjusting Total	Multiplication
Unit Value of Yard	1/6 of G/F
Unit Value of Area under Staircase	½ of G/F Proper

51.  As regards location, the Building is situated within a quaint and tranquil residential precinct of Sau Wa Fong which lies just off the periphery of the “Starstreet Precinct” to the west which, according to the Hong Kong Tourist Board, has evolved over the years into an eclectic hangout hotspot filled with cosy cafes, restaurants, bars, boutique shops with the coolest fashion and galleries. For instance, many of the ground floor premises in Sau Wa Fong have been converted into cosy cafes, restaurants or bars.

52.  In contrast, comparables A1 and A2 are situated in an area of completely different characters, with ground floor premises mainly occupied as garages, car repair workshops, metalware shops and other engineering-related business. In Wisdom Gaining Ltd v Wisdom Light Industrial Ltd, LDCS 23000/2012 (unreported, dated 3 June 2014) the following passages in Land Compensation & Valuation Law in Hong Kong was quoted:

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

“However, a careful analysis can only provide useful evidence or enable realistic adjustments to be made where the comparables are sufficiently similar to the property being valued. If the comparables are not reasonably similar, then no matter how detailed the subsequent analysis, the result may well be spurious. The point was emphasized in Lait Kit Lau Mutual Aid Committee v Commissioner of Rating and Valuation [1984] HKDCLR 31…”[9] (underline added)

53.  At trial, both Mr Chan and Ms Sat conceded that comparables A1 and A2 are not good comparables in terms of location. I would not make any allowance for location and would not even make any adjustment for the so-called vehicular access which should not have been one of the considerations of opening a café or restaurant in Sau Wa Fong which is indeed vehicular accessible via St Francis Street, the street that separates Sau Wa Fong from the “Starstreet Precinct”.

54.  On the other hand, in spite of its dated sale, comparable A3 appears to be the one and only best comparable because it requires no subject adjustment for location or even for the vehicular access. I do not agree with Mr Chan that there is any difference in location so long as this comparable is also situated at Sau Wa Fong. I further cannot agree with Mr Chan that people entering Sau Wa Fong from St Francis Street tend to walk past comparable A3 which lies at a dead end.

55.  Indeed, Mr Chan admitted at trial that once a person gets into Sau Wa Fong, the subject G/F premises of the Building becomes more visible and accessible. As well, the property has the additional advantage of being the preferred barrier-free pedestrian connectivity linking with Schooner Street/ Ship Street.

56.  As regards the size adjustment, in view of the vast size differences between the subject and the comparables, I prefer a more sensitive adjustment of 3.0% for every 10 sq m difference as proposed by Mr Chan though I would adopt the linear approach as in this bracket of small sizes any minor difference would result in a change in value.

57.  By reason of the above, my assessment of the EUV for the ground floor premises is as follows:

Comp	Unit Price (/m2)	Adjustments								Adj Unit Price (/m2)
		Time	Location	Frontage	Headroom	Depth	Size*	Age	Total
A1	$383,543	-2.3%	0.0%	4.7%	-2.1%	-5.7%	-10.5%	-1.8%	-17.0%	$318,341
A2	$281,162	-0.1%	0.0%	6.3%	-2.3%	-5.0%	-11.7%	-1.7%	-14.4%	$240,675
A3	$374,444	5.6%	0.0%	-0.2%	-0.9%	-5.6%	-5.3%	-0.6%	-7.2%	$347,484

* Adjustment on the basis of the saleable area only

58.  As said, I would place more weight on the analysed result of comparable A3 which, to a certain extent, is supported by the analysed result of comparable A1.

59.  At trial, when Ms Sat was put to the above revised results, she agreed that at least comparable A2 had to be discarded.

60.  As a result, the EUV of the G/F should be assessed as follows:

49.29 sq m x $347,000 per sq m	=	$17,104,000
26.5 sq m x $43,375 per sq m	=	$1,149,000
2.58 sq m x $173,500 per sq m	=	$448,000
		$18,701,000

61.  In respect of the EUV for the upper floors, Mr Chan and Ms Sat agreed to take 3/F of the Building as the reference unit and rely on the following transactions as comparables:

Comp	Address	Date of Sale	Consideration	Age of Building	Saleable Area (m2)	Effective Area (m2)	Unit Rate (/m2)	View
B1	2/F, 4 Sau Wa Fong	16 Apr 22	$6,300,000	1962	38.70	38.70	$162,791	Building View
B2	4/F, 4 Sau Wa Fong	7 Mar 21	$7,000,000	1962	38.70	38.70	$180,879	Building View
B3	2/F, 33 Ship Street	30 May 20	$4,170,000	1969	26.00	26.00	$160,385	Construction Site
B4	5/F & Roof, 35 Ship Street	12 Jul 19	$4,650,000	1969	26.00 + Roof: 15.00	27.88	$166,786	Construction Site

62.  As well, Mr Chan and Ms Sat had the following agreements disagreements on the adjustment factors:

Adjustment Factor	Mr Chan	Ms Sat
Time	Private Domestic Price Index (Class A) published by RVD
Location	Nil
Age	0.375% for every 1 year difference
Floor	2.0% for every floor difference
Top Floor	+/-3% % for unit on top floor
View	Building View: 0% View facing Construction Site: +5%	Building View: 0% View facing Construction Site: +2%
Size	1.0% for every 10 m2 difference (threshold basis)	2.0% for every 10 m2 difference (linear basis)
Internal Condition	+/-2% for each internal condition grade: Unacceptable/Very Poor/ Poor/ Fair/ Good)	+/-3% for each internal condition grade: Unacceptable/Very Poor/ Poor/ Fair/ Good)
Vehicular Access	-5% to comparables having vehicular access
Adjusting Total	Multiplication
Unit Value of Roof	1/8 of Top Floor

63.  Having conducted the joint site inspection on 23 June 2023, I agree with Mr Chan that for the two comparable units that face the construction site to its opposite, there should be an adjustment of +5%.

64.  As regards the adjustment for size, bearing in mind the relatively small size of the subject units and the comparables, I prefer Ms Sat’s more sensitive adjustment of 2.0% for every 10 m².

65.  In respect of the adjustment for internal condition, it should reflect the relative extent of renovation costs to reasonably be expected to be incurred by a prospective purchaser of a flat to improve its interior and install fittings etc upon purchase on the basis of vacant possession. The Building is situated at a distance of the vehicular access at St Francis Street. The units upstairs are not served by lifts but can only be accessed via a narrow doorway and common staircase. Contractors would have difficulty in transporting materials and larger fittings to the units. These shortcomings would in fact increase the costs of renovation when compared with units in Ship Street.

66.  Thus, having conducted the joint site inspection, I prefer Ms Sat’s adjustment for internal condition.

67.  Thus, my analysis of the comparables is shown below:

Comp	Unit Price (/m2)	Adjustments									Adj Unit Price (/m2)
		Time	Age	Floor	Top Floor	View	Size	Internal Condition	Vehicular Access	Total
B1	$162,791	-0.6%	0.4%	-2.0%	0.0%	0.0%	-1.8%	3.0%	0.0%	-1.1%	$161,000
B2	$180,879	-2.7%	0.4%	2.0%	0.0%	0.0%	-1.8%	3.0%	0.0%	0.8%	$182,326
B3	$160,385	-1.4%	-2.3%	0.0%	0.0%	5.0%	-4.3%	3.0%	-5.0%	-5.3%	$151,885
B4	$166,786	-2.8%	-2.3%	6.0%	3.0%	5.0%	-4.0%	3.0%	-5.0%	2.3%	$170,622
									Average:		$166,458
									Say		$166,500

68.  Thus, on the basis of the adjustments agreed by the two experts, my assessment of the total EUV of the Building as at 11 February 2022 is calculated as follows:

Floor	Saleable Area (m2)	Effective Area (m2)	Adjustment			Unit Rate (/m2)	Total
			Floor	Internal Condition	Total
G/F	49.29 + Yard: 26.5 + Area under Staircase: 2.58	53.89				$347,000	$18,701,000
1/F	47.7	47.7	4%	-3%	0.9%	$167,999	$8,014,000
2/F	47.7	47.7	2%	0%	2.0%	$169,830	$8,101,000
3/F	47.7	47.7	0%	0%	0.0%	$166,500	$7,942,000
4/F	47.7	47.7	-2%	-6%	-7.9%	$153,347	$7,315,000
5/F	47.7 + Roof: 42.5	53.01	-7%	-6%	-12.6%	$145,521	$7,714,000
						Total:	$57,787,000

Conclusion on EUV

69.  To conclude, the total EUV of the Buildings is $57,787,000 and the pro rata shares of the respondent’s unit is 32.3619%.

Whether Redevelopment of the Lot is Justified

70.  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 undivided shares of the Lot. The respondent puts the applicants to strict proof as to whether redevelopment is justified.

71.  In his opening submission, Mr Simon Lam referred to the principles enunciated in Charmlink Limited v Lee Tong Hing & Others, LDCS 16000/2010 (unreported, dated 29 November 2011:

“29. The Applicant submits that with the two experts’ evidence, the Tribunal would require no persuasion to be satisfied that redevelopment of the Lot is justified due to the age and/or state of repair of the Building. We agree with this submission, but we need to look at the requirements for “the age” and “state of repair” separately. As held in Good Trader Ltd v. Hinking Investments Ltd [2007] 3 HKC 219, each of these two requirements can constitute a separate ground to justify redevelopment.

30. In Intelligent House Ltd v. Chan Tung Shing & Ors [2008] 4 HKC 421, the Tribunal formulated the tests for “the age” and “state of repair”. ... We do not find it necessary to formulate any general test in the present case. As held in a recent case of the Tribunal, Top Sail International Limited v. Cheng Kai Ming, executor of the estate of Chan Hue also known as Chan Sum Hiu, deceased, LDCS 18000/2010 (judgment delivered on 15 November 2011), 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. Likewise, we do not find it necessary to formulate a general test on “state of repair”. 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.”

72.  Parties have no dispute on the applicability of the above legal principles. In any event, during the Pre-Trial Review on 29 May 2023, the Tribunal, on the basis of the agreement between the parties, directed that the Structural Assessment Report dated 17 August 2022 prepared by Dr Chan and the Building Condition Survey Report dated 16 September 2022 prepared by Mr Wong be admitted as evidence without calling Dr Chan or Mr Wong.

73.  By the Structural Assessment Report dated 17 August 2022 and the Amendment Report dated 23 June 2023 (which was prepared at the invitation of the Tribunal on 21 June 2023), Dr Chan found the following:

(a) The Building was constructed more than 50 years according to the requirements of the LCC By-laws which however were lower than those stated in the Code of Practice for Structural Use of Concrete 2004 and the Code of Practice for the Structural Use of Concrete 2013 in 7 aspects which could adversely affect the structural performance of the structural frames of the Building. They may include insufficient concrete cover to protect the reinforcement bars against corrosion and fire, inadequacy of the structural frames and foundation to withstand the effects of wind and inadequate robustness against “disproportionate collapse” in the event of an accident. The latter lack of consideration for robustness is of utmost concern. The tragic incidence that occurred in January 2010 when a building on Ma Tau Wai Road collapsed owing to an accidental damage provided the most recent example.

(b) Even upon visual inspection, a total of 16 defects such as cracks and spalling of concrete could be observed on the structural elements of all accessible units and common areas of the Building. Some of the defective areas are extensive, and also serious, with exposure of corroded steel reinforcement. The severe degradation of the some of the structural members could likely cause partial failure of the structural members which, if unabated, could potentially lead to progressive failure of the Building.

(c) The Building was built in a sub-standard manner. From the results of compressive strengthen test submitted by “MTC” (an approved laboratory accredited by the HOKLAS), the mean in-situ cube strength retrieved from the beams is lower than the design strength of 20.6 MPa. These reinforced concrete beams with low concrete strength are inadequate to resist the design loading imposed on them.

(d) The results of carbonation test indicate all 9 tested locations are carbonated. 7 out of these 9 tested locations are considerably carbonated with carbonation occurred deeper than the depth of embedded steel bars. Excessive carbonation of concrete indicates the concrete cover has lost its function to protect the embedded reinforcement of the reinforced concrete members from corrosion. The structural members are already suffering from various degrees of pitting concrete. Progressive cracking and spalling concrete of the structural frame of the Building will continue.

(e) 4 out of 9 tested locations revealed chloride content exceeding the maximum permitted limit of 0.35%. One location even had a chloride content of 1.33%. Coupled with the occurrence of pitting concrete, it is suspected that sufficient amount of concrete had already reached the steel reinforcement. The resistivity of concrete would have been reduced, resulting in accelerating the corrosion rate of the steel bars.

(f) The results of cement content test indicate that 1 out of 3 samples taken from slabs (ie 7.19%), 2 out of 3 samples taken from beams (ie 11.42% and 6.8%) and 2 out of 3 samples taken from columns (ie 13.03% and 8.93%) are lower than the estimated 14.3% of the design mix. Low cement content would weaken the capability of the structural members and would not provide a durable protective environment for the reinforcement bars, permitting rapid carbonation and subsequent loss of the protective alkaline environment for the embedded reinforcement bars. Structural integrity of the building would be adversely affected even by a small number of structural members with low cement content.

(g) The results of cover meter tests for column are 33mm, 35mm and 46mm, which show that 2 out of the 3 test results are slightly lower than the design concrete cover of 38.1mm as required in the Approved Plan. Durability of the structural elements is adversely affected.

(h) Open-up survey carried out on 9 structural elements indicate that 28 out of 36 reinforcements thus exposed suffered from Grade 3 corrosion, meaning that these exposed reinforcements have, i) bars corroding along its length, ii) general rusting / local pitting and iii) minimal loss of section (less than 10%). It is worth noting that the locations of open-up survey were randomly chosen from structural elements that did not exhibit any structural defects. The test results show that corrosion of structural members is not a localized problem, but a general and extensive phenomenon of the reinforcement bars of the structural elements of the Building.

74.  Dr Chan concluded that the structural frames of the Building have deteriorated to the final stage of their design working life and the deterioration will continue due to extensive carbonation of the concrete. Even if remedial works were to be carried out, it is inevitable that new defects will occur and the previous defects though repaired will recur readily, requiring substantial repairs or even partial demolition and re-construction of some defective structural members in the future. Hence, it is recommended that future regular inspection and repair of the structural frames should be carried out.

75.  Mr Wong, in his Building Condition Survey Report dated 16 September 2022, highlighted the following:[10]

(a) There is no proper emergency vehicular access to the Building. The nearest means of access for fire vehicles is situated on St Francis Street, at a location of about 60m away.

(b) The Building has only one staircase, which serves both as the means of access for firefighting as well as means of escape in case of fire. There is no fireman’s lift. This situation is usually considered by the Fire Services Department as unfavourable.

(c) There are defects and major fire safety deficiencies, including:

- Absence of smoke lobby;

- No fireproof enclosures for electricity meters and electrical wirings;

- No emergency lighting in the staircase;

- No equipotential bonding system for metal fixtures;

- Lack of fire hydrant or hose reel system; and

- Lack of sprinkler installation (which would be expensive and technically difficult to provide) to the ground floor non-domestic unit.

(d) The Building is within the target building list under the Fire Safety (Building) Ordinance, Cap 572. It is believed that fire safety improvement directions will be issued shortly.

(e) It is believed that water seepage has occurred from the roof and damage the ceiling soffit of the 5^th floor premises. Continuous cracks were also observed at the parapet wall of the roof.

(f) The external pipework the Building is unhygienic and unacceptable in many aspects.

(g) The existing metal railing of the staircase is only 900 mm high which is lower than the minimum requirement of 1100 mm. This would pose potential danger to users.

76.  Mr Wong concluded that the Building has obviously come near to the end stage of its working life. Although its life can be extended by repairing and reconstructing the defective parts repeatedly, due to more rapid deterioration in the final part of its design working life, repairs will be escalated in the near future to the level making the continued occupation of the Building unjustifiable.

77.  Mr Wong estimated the costs of essential works amount to $7,900,000. Whereas the total floor area is around 360m² and the unit cost of the repair works is around HK$22,000/sq m, the unit cost of essential repair works is about 104% of the unit cost of HK$21,100/sq m (HK$21,100/sq m is according to the RLB’s “Hong Kong Report Quarterly Construction Cost Update, June 2022”. The construction cost for high rise, better quality is $19,500 to $22,700/sq m) for constructing a new building. In short, the essential works costs are disproportionately high as compared with the cost of constructing a new building.

78.  Therefore, from the structural and building condition evidence available, it is obvious that, firstly, the Building is obsolete in many important respect due to its age. Its substandard construction (as revealed by its below-design concrete strength and cement content) also exacerbated age-related deteriorations. Further, the Building is already in a poor state of repair. Although its “working life” may be prolonged by suitable repair and refurbishment works, substantial and ever-increasing costs would have to be repeatedly incurred within short cycles of time.

79.  Mr But had confirmed that the respondent would not take issue on the age and state of repair of the Building.

80.  Having considered the evidence before the Tribunal, I am satisfied that redevelopment of the Building is justified due to the age and state of repair.

Section 4(2)(b) – Whether Applicants have taken reasonable steps

81.  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.

82.  There is no dispute that the applicants, through their solicitors, made an offer dated 31 March 2022 in the amount of $18,652,000 to the respondent to acquire the unit or interest it owns.

83.  Having commissioned the Application report and the RDV report prepared by Mr Chan dated 20 April 2022 and 21 April 2022 respectively, the applicants, through their solicitors, made another offer dated 21 April 2022 repeating the same offer above but enclosing the afore-mentioned reports to the respondent.

84.  More recently, the applicants made an offer dated 6 February 2023 in the sum of $21,000,000 to the respondent to acquire the unit or interest it owns. This offer was rejected by the respondent on 7 February 2023.

85.  And after the Pre-Trial Review on 29 May 2023, the applicants made a further offer dated 16 May 2023 in the sum of $23,000,000 to the respondent to acquire the unit or interest it owns. Again, this offer was rejected by the respondent on 19 May 2023.

86.  I note that the offers were all higher than the EUV of the respondent’s unit as at 11 February 2022.

87.  In Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363, the Court of Final Appeal has emphasized at §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.”[11]

88.  The respondent actually does not oppose the order for sale on the ground of the applicants not having taken reasonable steps to acquire all the undivided shares in the Lot on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance.

89.  Bearing in mind the above legal principles and on the evidence available, I am satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot including negotiating for the purchase of those shares as are owned by the respondent on terms that are fair and reasonable.

Disputes on the estimation of the RDV of the Lot

Optimum Hypothetical Development Model

90.  Both Mr Chan for the applicants and Ms Sat for the respondent agreed to resort to the residual valuation method in determining the RDV. This can be done by deducting development cost (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value (“GDV”) of the completed optimum development.

91.  By their Joint Statement dated 13 February 2023, Mr Chan and Ms Sat agreed that the optimum hypothetical form of development on the Lot should comprise a 12-storey (including the ground floor) residential building served by 1 lift and 2 staircases. As the Lot falls within an area partly zoned Residential (Group C) (“R(C)”) on the Approved Wan Chai Outline Zoning Plan No S/H5/29, the total domestic plot ratio is agreed to be 5.0.

92.  However, Mr Chan and Ms Sat could not agree on the site area of the Lot because there was dispute on whether a 23.2 sq m subject to a right- of-way ought to be taken into account on otherwise: Mr Chan assumed not and took the site area at 179.27 sq m and Ms Sat said it should be 202.47 sq m. And because of this difference, on the basis of a plot ratio of 5, Mr Chan’s proposed gross floor area was 896.4 sq m whereas that by Ms Sat was 1,012.35 sq m. That is a difference of 115.95 sq m or about 12%.

93.  By reference to an Assignment Plan vide memorial no UB187791, the Lot comprises approximately 311.92 sq m but is subject to rights-of-way (“Rights of Way”) at its peripheries on three sides, ie Sau Wa Fong, the Side Lane against which the retaining wall abuts and the rear lane. The Rights of Way were granted when Inland Lot 199 which comprises largely the Sau Wa Fong precinct. It lies on a sloped terrace which takes the form of the Chinese character “回”. It has been subdivided into various sections, as a result of which people can now walk around Sau Wa Fong and for instance go behind the Building, reaching Schooner Street at its rear which may lead down to Queen’s Road East, a major distributor in Wan Chai, via a long flight of steps, ie Sik On Street. When the areas subject to the Rights of Way and the retaining wall[12] are excluded, the site area is only 179.27 sq m.

94.  The term “site” has not been defined in the Buildings Ordinance or the Building (Planning) Regulations (“the Regulations”) but Lord Fraser of the Privy Council in Attorney General v Cheng Yick Chi & Others (1983) 1 HKC 14, at 19 & 20 gave his opinion that:

“… the land which forms a “site” for the purpose of the Regulations must be ascertained as a question of fact in the case of each development. It means, in addition to the land on which it is proposed to erect buildings, any land which the developer bona fide proposes to include in the development. It can only include land which he owns or which he has a realistic prospect of controlling. The additional land must be at least sufficient to enable the proposed building to comply with the Regulations and it must, of course, not have been taken into account and, so to speak, used up in enabling some other existing building to comply with the Regulations.” (underline added)

95.  Exactly, pursuant to regulation 23(2)(a) of the Regulations (“Reg 23(2)(a)”), in determining the site area for the calculations of plot ratio and site coverage, no account shall be taken of any part of any street or service lane. Ms Sat however relied on the advice provided by Mr S T Lam, a Registered Professional Surveyor (Building Surveying) as well as an Authorized Person[13], who explained in his Report dated 20 November 2022 that the Side Lane can be included in the site area for plot ratio calculation according to paragraph 6 of the Practice Note for Authorized Persons, Registered Structural Engineers and Registered Geotechnical Engineers (“PNAP”) No APP-73. APP-73 is headed “Service Lanes” and its paragraph 6 states as follows:

“Where an abutting private lane is in the ownership of the developer but is not specifically required for any purpose under the Buildings Ordinance for the proposed scheme, the Building Authority will give favourable consideration to including the relevant area of such lane in site coverage and plot ratio calculations. Where the legal status of a lane has been clearly established by the existence of rights-of way, it would be necessary to apply formally for a modification of BPR23(2)(a).” (underline added)

96.  In such regard, Mr S T Lam stated that the portion of Sau Wa Fong within the Lot and the rear lane would be required to support the redevelopment scheme on site classification and as such cannot be taken as GFA accountable area for plot ratio calculation.

97.  According to Mr S T Lam, he worked for the Buildings Department (formerly the Buildings Ordinance Office) at various posts for 37 years, rising to the position of Deputy Director between October 2008 and September 2011. Mr S T Lam asserted there has been a change of policy of the Buildings Department after a review of its position in Reg 23(2)(a) in 1995 leading to the issue of APP-73 for the purpose of unifying the practice in dealing with service lanes and promulgating a policy to generally relax the exclusionary effect of Reg 23(2)(a) by way of granting modification in favor of landowners.

98.  In particular, Mr S T Lam stated in the said review in which he participated, the Buildings Department recognized, from the Privy Council decision in Hinge Well Co Ltd v Attorney General [1988] 1 HKLR 32 the following:

(1) While a piece of land is subject to a private easement, it is a very different thing from saying that the owner has no realistic prospect of controlling the land over which the easement is exercisable. (See p 39H-I)

(2) The essence of a service lane is that it is an area dedicated to serving the domestic building erected on the land, not to serving any other building erected on other parcel of land. Thus any character of “service” which may have been possessed by the scavenging lane evaporated with the demolition of the building to be served. (See p 42E)

(3) However, when a service lane is subject to a right of way, it continues to be taken as a street under Reg 23(2) and will not be available to be built up and included in site area unless a modification is granted under section 42 of the Buildings Ordinance. (See p 43I-44A)

99.  Mr S T Lam further explained in his report dated 9 June 2023 as follows:[14]

“2.4.1 …, the overarching policy under APP-73 is that the BD would give ‘favourable consideration’ unless the site are is ‘required’ for the purpose under the BO.

2.4.2 Based on my practical experience working in the BD and as an AP, I understand that the BD tends to view that the expression ‘specifically required for any purpose under the BO for the proposed scheme’ under APP-73 refers to major requirements which mandates the portion of privately owned land to be ‘used’ for a particular purpose. Such requirement usually involves land being specifically ‘required’ to be provided (or constructed0 for a positive purpose to ‘serve’ the proposed building (cf negative restrictions).

2.4.3 As examples, the said ‘major considerations’ of the BD would usually refer to important requirements such as ‘means of access’ to ‘street’ (Reg 5), ‘specified streets’ being used for site classification purposes (Reg 18A) and/or ‘service lanes’ as required to be constructed (Reg 28) to ‘serve’ a positive purpose for the intended development project.

2.4.4 In contrast, there are many other compliance requirements under the BO or its subsidiary legislations which may ‘affect’ the private lane (eg erection of pavements, drainage, manholes, kerbstones or utilities supply requirements etc). These ‘compliance’ requirements under the BO are relatively minor and technical in nature. While the BD may take into consideration of these matters, these ‘BO requirements’ are highly unlikely to constitute weighty factors that leads to the rejection of a modification application under APP-73. Otherwise, no APP-73 application could have been possibly granted.

2.4.5 According to my experience, Reg47 under the B(P)R belongs one of the relatively ‘less important’ considerations that may be taken into account by the BD, but would not constitute a determination factor to decline the modification sought under APP-73.

2.4.6 Particularly, in the present case, the BD would take a pragmatic view over the matter and consider that the retaining wall’ adjacent to the Side Lane Portion has been recently stabilized with a ‘Grade 30D/20 concrete skin wall’ (with weepholes for water drainage and other reinforcement works). The previous BD order was satisfactorily and fully complied with.

2.4.7 When such ‘retaining wall’ is contrasted with other ‘slopes’ which might be relatively dangerous that is more susceptible to landslides or slips) or being less satisfactorily maintained for years, the said retaining wall causes little threat to the safety hazard to the proposed building and/or the user of the Side Lane Portion. As a result, while the Side Lane Portion may not be built upon due to the restriction under reg 47, the BD would likely take the view it may be regarded a merely ‘minor’ and ‘technical’ requirement.

2.4.8 …

2.4.9 Taking the above into consideration, the presence of the ‘retaining wall’ next to the Side Lane Portion is highly unlikely to constitute a deterrent factor to the grant of modification under APP-73.”

100.  On the other hand, Mr Mak, an architect by profession and Authorized Person, in his report dated 29 December 2022 at §3.3, referred to regulation 47(2) of the Regulation whereby “a space not less than 1.5m in width shall be left between any domestic building and the bottom of any retaining wall exceeding 4.5m in height.”[15]

101.  Mr Mak referred further to item 5 of “Summary of Items Discussed in 4/2020 APSEC Discussion Forum on 26 November 2020” where the Buildings Department advised that “if the pedestrian walkway/footpath required under the lease was specified as a “right-of-way” to the public or adjoining lot owners, it should be excluded from site area under Reg 23(2)(a)”.[16]

102.  Mr Mak, in his further response dated 16 June 2023, questioned the interpretation or policy as elucidated by Mr S T Lam above as such are not mentioned in the Regulations nor in the PNAP.

103.  As regards the provision “not specifically required for any purpose under the Buildings Ordinance for the proposed scheme” in para 6 of APP-73, Mr Mak referred to the following regulations:[17]

(1) Under Reg 25(1) of the Regulations,

“(a) Every domestic building on a class A or B site or on a class C site shall have within the site an open space at the rear, or partly at the rear and partly at the side, at a level of not less than 150 mm below the floor of the lowermost storey in accordance with the Second Schedule:

(b) The open space provided pursuant to subparagraph (a) shall be such that no part of the building which bounds on such open space at any level shall be within 1.5 m, measured horizontally, of a line drawn vertically from a point in the boundary of the open space immediately opposite thereto.”

104.  Mr Mak then referred to the Second Schedule to the Regulations which requires provision of open space of not less than one-half of the roofed-over area of the building for a Class A site like the subject. Mr Mak calculated the roofed-over area of the hypothetical development proposed by Mr S T Lam at 86.15 sq m. That means open space of 43.08 sq m has to be provided. However, the area of the rear lane is calculated to be only 38.3 sq m. Mr Mak opined that if part of the rear right-of-way is required to be designated as service lane under Reg 28, such area might further be excluded from the open space requirement under Reg 28(1) under para 9 of APP-73. As a result, Mr Mak considered that part of the side right-of-way is inevitably required for the purpose of fulfilling the open space requirement.

105.  For the purpose of the hypothetical development, Mr S T Lam had proposed a balcony and utility platform, being green and innovative features under Joint Practice Note (“JPN”) Nos 1 and 2 on each typical floor. Mr Mak remarked however, in para 1(a)(vi) of Appendix A of JPN1 and para 1(b)(vii) of Appendix A of JPN2, not less than 40% of the perimeter of the balcony or utility platform has to face into the open air. Under Reg 2, “open air” means a space which—

(a) is vertically uncovered and unobstructed;

(b) is not less, in any horizontal dimension, than 1.5 m.

Therefore, part of the side right-of-way is required for the purpose of fulfilling the conditions.[18]

106.  Besides, Mr Mak remarked that some of the other major considerations of the Buildings Department may include prescribed window for lighting and ventilation, means of escape and access for firefighting and rescue purpose etc. Referring to para 6 of APP-73, Mr Mak doubted whether the Buildings Department would allow the side right-of-way to be exempted for plot ratio calculations.

107.  Notwithstanding the above, I am impressed by Mr S T Lam having worked with the Buildings Department for over 37 years from 1974 to 2011 and particularly his confirmation that he participated in the review that led to the issue of APP-73 in 1995, the latter of which is not challenged by the applicant. I note that APP-73 has never been subject to major revision since then save for minor revision in 2011 of paragraphs 12 and 13 thereof which are not relevant in the present case.

108.  As regards Mr Mak’s comment on the requirement under Reg 47 (that a space not less than 1.5 m in width shall be left between any domestic building and the bottom of any retaining wall exceeding 4.5 m in height), I agree with Mr S T Lam that the Side Lane would continue not to be built upon and will be available for pass and repass by the adjoining owners. As such, I also agree with Mr S T Lam that Reg 47 belongs to one of the relatively ‘less important’ considerations that may be taken into account by the Buildings Department. It would not constitute a determination factor to decline the modification sought under APP-73.

109.  And as I had intimated on 28 June 2023 at trial, the rights-of-way around the Building were not required under the lease for Inland Lot 199 and therefore item 5 of “Summary of Items Discussed in 4/2020 APSEC Discussion Forum on 26 November 2020” appears not to be applicable to the present case.

110.  In relation to the open space requirement under Reg 25, Mr S T Lam, in his reply dated 23 June 2023, referred to his assessments dated 23 April 2023[19] on the permitted GFA after including the Side Lane in the site area and the feasibility of utilizing the additional GFA.  He stated that while minor changes to the layout of the proposed building may be required, there should be no problem in complying with the open space requirements:

Area of Site:	88.300 sq m
Site Coverage:	84.375 sq m
Remaining Area within Site for Open Space:	3.925 sq m
Area of Rear Lane:	38.300 sq m
Total Area available for Open Space:	42.225 sq m
Open Space required:	84.375 sq m ÷ 2 = 42.1875 sq m
	< 42.225 sq m

111.  Although Mr Mak remarked that Mr S T Lam’s open space calculation could only marginally satisfy the requirement, I accept that with the prevailing advanced technology in land surveying, this should not pose any problem on site.

112.  At trial, both Mr S T Lam and Mr Mak had taken note of the recent modification under APP-73 of a proposed development along Pan Hoi Street around its corner of King’s Road in Quarry Bay granted on 21 March 2022 where the existing rear service lane and right of way in the front of the site was approved for inclusion in the site area calculation.[20] I consider this modification approved consistent with that discussed in Building Authority v Appeal Tribunal (Buildings) [2013] 4 HKLRD 52 (sometimes known as the Dobrowen Appeal) where the area in front of Nos 7-9 Ying Wa Terrace, over which the owners of units in Nos 10-12 Ying Wa Terrace had a right of way, was included as part of the site area of Nos 7-9 Ying Wa Terrace with consequences for calculating permitted site coverage and plot ratio. Neither do I see any difference between the circumstances for the modification approved for Nos 7-9 Ying Wa Terrace and the prospective modification in the present case.

113.  In view of the above, I agree with Mr S T Lam that the prospective modification of the Side Lane under APP-73 is relatively straight forward and modification under APP-73 will be readily be granted.

114.  However, this is not the end of the matter. Mr Simon Lam had taken issue on the wordings of APP-73 which, for instance, is headed as “Service Lanes”, which are “formally known as scavenging lanes”, “are commonly incorporated into building designs to provide sources of lighting and ventilation and routes for access and escape.” Mr Simon Lam submitted therefore APP-73 which is applicable to “Service Lanes” does not apply to the Side Lane which has now become a street accessible by the public or acquired all the physical characteristics of a street.

115.  With respect, I consider Mr Simon Lam having gone too far in making such an assertion. In Hinge Well, supra, the Privy Council confirmed at p 37F that there is no definition of the expression “service lane” in the Building (Planning) Regulations although a “service lane” is a compulsory adjunct to a domestic building under Reg 28. In fact the same happened when the service lane in Hinge Well had “taken on a public character”. Then at p 39F as partially cited by Mr S T Lam, the Privy Council remarked that:

“It is not suggested … that the site of the previous scavenging lane was anything other than private land utilized by the landowner for the private purpose of serving the houses previously erected on the land and for the exercise by adjoining occupiers of their private easements of passage. There is no question of any dedication to the public.”

116.  Then the Privy Council continued to explain at p 42D-G:

“Here there is not and never has been any question of any part of the appellant’s land having been dedicated as a public way, so that in the context of the application of regulation 23(2)(a), the only question is whether the area of the former scavenging lane constitutes a “service lane” and not whether it is a street. Assuming for the sake of argument, …, that prior to demolition the lane might have been properly described as a service lane, it ceased to be such when the houses on the site was demolished, for the essence of a “service” lane is that it is an area dedicated to serving the domestic building erected on the land, not to serving other buildings erected on other parcels of land. Thus any character of “service” which may have been possessed by the area of the scavenging lane evaporated with the demolition of the building to be served. Accordingly, since at the material time there was neither a public street on the land nor a service lane there was nothing upon which regulation 23(2)(a) could operate. Equally, if regulation 23(2)(a) has a prospective as well as a present significance, there is no service lane being provided under the appellant’s plans and none is required nor are the pavements … “streets” in the sense in which that word is used in regulation 23(2)(a) of public streets and if they were they would, in any event, fall under regulation 23(2)(b).” (underline added)

117.  In the above regard, I consider nothing inappropriate to have the heading of APP-73 as “Service Lanes” to describe the application of Reg 23(2)(a) to a “former” service lane like the Side Lane (which is the route for access and escape) in the present case.

118.  Paragraph 6 of APP-73 begins with the sentence:

“Where an abutting private lane is in the ownership of the developer but is not specifically required for any purpose under the Buildings Ordinance for the proposed scheme, the Building Authority will give favourable consideration to including the relevant area of such lane in site coverage and plot ratio calculations.” (underline added)

119.  Mr Simon Lam further asserted that paragraph 6 of APP-73 is not applicable to the Side Lane which is no longer required under, for instance, Reg 28. It now become a street accessible by the public or acquired all the physical characteristics of a street.

120.  Again, with respect, the Side Lane is still a private lane which has never been dedicated as a public way. At p 43E-F of Hinge Well, the Privy Council continued:

“It does not, however, follow from the “On Hing Terrace case”[21] or from the framework of the regulation that the differentiation in regulation 23(2)(a) of a street from a service lane necessarily involves reading “street” solely in the sense of “street dedicated to the public”. In their Lordships’ view an area of land (not being a service lane) over which there are private rights of passage in an adjoining occupier may nevertheless remain a street within regulation 23(2)(a).”

121.  As submitted by Mr But, the decision of Building Authority v Appeal Tribunal (Buildings) & Estoree Limited, HCAL 147/2002 (unreported, dated 25 July 2003) which followed the above passage shed more light on this. In that case, the site area, for the purposes of Reg 23(2)(a), was held to include correctly a narrow strip of paved area on the western boundary of the site 'overlapping' a private street. The developer was still in “control” of the narrow strip because there are no third party rights of way over it. It did not constitute any part of a “street” though it had the physical appearance of a “street”.

122.  By analogy, as noted at p 43A of Hinge Well, the geography of the site in that case was such that no service lane was required under that regulation. By applying the same test, the Side Lane would fall within the statutory definition of “street” but not a “service lane” as required under Reg 28 because:

(a) the Side Lane is subject to a “private right of way” only in favour of other owners in Sau Wa Fong;

(b) the Side Lane, is however not required for the provision of “service lane” under Reg 28 when, according to Mr S T Lam, the site abuts Schooner Street or a “public lane” wider than 3 metres.[22]

123.  Mr Simon Lam, in his closing submission, tried to challenge that the Lot does not abut Schooner Street because the latter does not connect to the rear lane behind the Building but to the rear lane which is subject to the same Rights of Way behind the adjoining 12-storey residential building, Greenland House at No 22 Sau Wa Lane.[23] With respect, there have been numerous authorities stating that actual contiguity between a site and the paving of an adjacent street is not necessary for abuttal. They include Attorney General of Hong Kong v Mightystream Ltd [1983] 1 WLR 980 (PC), Multi-Strategic Investments Ltd v Attorney General [1984] HKC 178, Building Authority v Appeal Tribunal (Buildings) & Estoree Ltd, supra, etc.

124.  In Attorney General of Hong Kong v Mightystream Ltd [1983] 1 WLR 980, one side of the site was bounded by a “nullah” over which a bridge leading from Borrett Road crossed on its way to the site. The trial judge found there was a very substantial natural feature in the form of “nullah” which lay between Borrett Road and the site throughout its length; the “nullah” was far from something in the nature of a mere gulley which could be disregarded, if precise contiguity was not required. The trial judge held that by that observation, the site did not abut a street which was in fact a “nullah”. This finding was approved by the Court of Appeal and undisturbed by the Privy Council. On the other hand, the Lordships in the Privy Council, agreeing with the Court of Appeal, held that the bridge connecting the site with Borrett Road was a “road-bridge” that the site abutted on it for the purpose of classification as a Class A site. By the same analogy in the present case, the Lot is connected via the Rights of Way at the rear to Schooner Street.

125.  This present abutting situation is supported by Multi-Strategic Investments Ltd v Attorney General [1984] HKC 178 when the road in question was bounded by embankment cut out of the hill which transferred to the site. Mantell J said he was bounded by the construction of the words “abut on” by the Privy Council in Aik San Realty Ltd v Attorney General (PCA 48/81, unreported) which distinguished between “abuts” and “front” in this way:

“It may ‘abut’ the street ie be contiguous with the boundary of the street at street level; it may ‘front’ the street ie be set back from the street without being contiguous with its boundary.”

126.  Thus, it follows that by the second sentence of paragraph 6 of APP-73, where the Side Lane is in the ownership of the developer but subject to a private right-of-way, it would be necessary to apply formally for a modification of Reg 23(2)(a) to have its area included in the site coverage and plot ratio calculations.

127.  Mr Mak did try to provide a contrasting example of the development of a site at No 46 Caine Road (a 37-storey residential tower now known as Scenic Rise)[24] where both the rear lane and a lane cutting through the middle of the site, known as Leung Fai Terrace, were excluded from site area calculation.[25] I agree however with Mr S T Lam’s response dated 9 June 2023 that, at first blush, both the rear lane as well as Leung Fai Terrace were not under the exclusive control of the developer of the site.[26] Mr Mak did not provide any evidence or land search to prove otherwise. In the least, by reference to the location plan itself, the rear lane and Leung Fai Terrace are there to serve the residents or occupiers of the neighbouring developments, ie Sun Fat Building at No 4 Leung Fai Terrace and Tak Mansion at No 5 Leung Fai Terrace which were both built in the 70s. There is no information available as to whether the developer of Scenic Rise did apply for modification under APP-73.

128.  In addition, Mr S T Lam explained there are many topographical features which limits the design and configuration of the intended development of Scenic Rise, rendering the applicability of APP-73 highly doubtful:[27]

“4.7.1 The site configuration of Scenic Rise is quite irregular (T-shaped)[28]. It is not a corner site (ie a Class A site) which required the provision of service lane at the rear end.

4.7.2 Being just a ‘class A site’, the site coverage is just 33% and the plot ratio is 8. The building height restriction is 170m above PD.

4.7.3 Due to the inverted ‘T-shaped’ configuration and the presence of Leung Fai Terrace (suspected to be subject to a ‘right of way’) which runs in between the lots, the ‘developable’ site area is actually very small. It can be seen that the development potential of all 4 lots (in particular, the unbuilt land of IL 150 sA ss2 RP abutting No 46 Caine Road) has been ‘squeezed’ and concentrated into the ‘southern part’ of the three lots in IL 150 SA (ie next to Leung Fai Terrace).

4.7.4 Given such a small-sized and tightly configured ‘developable’ podium area, any increase in the site coverage of residential tower would mean reduction of the size of the swimming pool[29]. It is also found that there are two smaller buildings were built onto the podium level on the opposite site (presumably one of them being a transformer sub-station) that further reduces available ‘developable areas’ within such lots.

4.7.5 The available ‘building area’ in Scenic Rise is closely surrounded by other buildings nearby (and slope behind). Such feature poses serious challenges owing to ‘lighting and ventilation’, ‘setback’ or ‘building separation’ requirements under the BO. These requirements severely limits design options and ‘maneuvering space’ of the developer when designing the residential tower erected on the ‘developable area’ above the podium level. Even if extra site coverage/plot ratio could be gained by way of modification, there might not be much physical room to make use of it.

4.7.6 By reason of the small size of area available for development, the single residential tower of Scenic Rise is already 37 stories high consisting of 143 units. The density of the development is quite high for a Class A site and the building height restriction might have been maximized already. This may be a relevant factor against the grant of modification under APP-73.

4.7.7 Due to the aforesaid site constraints, the development potential of the site was likely to have been already exhausted under the existing development. There is decent chance that any extra site coverage and/or plot ratio to be gained under APP-73 might turn out not to be too useful.

4.7.8 It is further noted that the developer of Scenic Rise has already included part of No 46 Caine Road for road widening purposes which presumably extra plot ratio and site coverage was already granted.

4.7.9 The site is erected on a sloped terrain alongside the gradient of Shelley Street. It is not certain as to whether Leung Fai Terrace is mandated to be used as a fire escape route and/or Eva. Moreover, Leung Fai Terrace seems to be the only means of access towards the adjacent buildings located in the ‘inner part’ of the street[30]. This might be a possible factor that might influence whether the BA would grant modification.”

129.  Having regard to the above, I agree with Mr S T Lam that the development of Scenic Rise is not a good example to rebut the application of APP-73 in the present case.

130.  A fortiori, I am persuaded by Mr S T Lam having worked with the Buildings Department for 37 years and retired from a senior position where he should know how APP-73 works. Indeed, Mr S T Lam has outlined the most important consideration here which are in favour of granting the modification under APP-73:[31]

(a) Owing to the development constraints under the Outline Zoning Plan and the small size of the Side Lane, the grant of modification would only cause a slight increase of site coverage and plot ratio, resulting in a slightly larger flat on each floor by about 10 sq m.

(b) The building height and total number of flats/households will remain the same. It would not result in any “denser” development.

(c) The “GFA concession” (ie non-accountable GFA) under the proposed development scheme is just 2.147% of the total GFA which falls far short of the permissible “10%” exempted GFA under various PNAPs.

(d) The grant of modification will enhance the efficiency, habitability and quality of the proposed development scheme by having more design options and may not be limited to just a studio flat.

131.  Lastly, in his final attempt to argue otherwise, Mr Simon Lam referred to Transport for London v Spirerose Limited [2009] 1 WLR 1797 where the House of Lords ruled a premium to certainty or, conversely, a discount to reflect a lack of certainty would be required when a planning permission might or might not be granted for the benefit of a prospective development. In that case, the discount was from £608,000 on a certainty basis to £400,000 on a hope basis, ie as much as 35%.[32] Mr Simon Lam submitted that a discount is nevertheless required when there has yet been no “actual grant” and there is a possibility that the application may fail in the end.

132.  In fact, such a discount only as nominal as 5% was applied by the Tribunal in Deluxe Ascent Limited v Director of Lands, LDLR 9/2018 (unreported, 28 February 2022). However, in a more recent case, Peace Ever Limited & Others v Chan Sui Ching & Others, LDCS 28000/2018 (unreported, 1 August 2018) where modification under APP-73 of a proposed development along Pan Hoi Street as discussed at §112 was in question, the Tribunal found such modification more forthcoming and compelling. Should the modification under APP-73 be successful, the increase in plot ratio would be about 173.163 sq m x say 10.5 = 1,818.22 sq m or an approximate increase in total gross floor area of 4% from 40,941.118 sq m[33]. In assessing the residual land value, the valuation expert on behalf of the applicants in that case did not apply a discount on the residual value of the development. Rather he chose to increase the developer’s profit in the residual valuation by 2%. The Tribunal disagreed to this approach at §441 because “it is theoretically wrong for Mr Charles Chan to increase his allowance for risk by say 2% to the whole hypothetical development when as a matter of fact, there is only a minor increase in plot ratio that has a risk that might not be achieve; if Mr Charles Chan had to reflect that risk, he should only account for the marginal increase in plot ratio.”

133.  Having reviewed the above, I accept that the area of Side Lane of 23.2 sq m should be included in the site coverage and plot ratio calculations. I agree with Mr S T Lam that there is a strong chance that the Buildings Department would allow the modification under APP-73 in favour of the redevelopment scheme to include the area of the Side Lane into the site coverage and plot ratio calculations.[34] Whereas the benefit following the modification would be just a marginal increase in gross floor area of 115.95 sq m or about 12%, following Peace Ever Limited, supra, I prefer not to award any specific discount save to take account of it in the developer’s profit of the residual valuation.

134.  In any event, in Capital Well, supra, at §33, the Court of Final Appeal stated that when the Tribunal granted the order for sale under the Ordinance, the value and level of compensation would be determined by the public auction. “The auction results may prove that the minority’s assessment was commercially wise. Or they may show that the majority’s offer exceeded what was realised at the auction.”

Gross Development Value of Hypothetical Development Model

135.  In assessing the gross development value of the 12-storey residential building to be built on the lot, Mr Chan selected a total of 15 domestic comparables from 4 developments: 4 comparables from One Star Street, 6 comparables from Phase 2, The Avenue, 4 comparables from Eight Star Street and 1 comparable from York Place.

136.  Applying various adjustments which include +22% for age and +3% for exclusiveness in layout[35] to the 4 comparables from One Star Street, Mr Chan arrived at an average unit rate of $228,869 per sq m for the unit on 7/F of the hypothetical development.

137.  Applying various adjustments which include -5% for location and +3% for exclusiveness in layout to the 6 comparables from Phase 2, The Avenue, Mr Chan arrived at an average unit rate of $228,696 per sq m.

138.  Similarly, applying various adjustments which include -5% for location and +3% for exclusiveness in layout to the sole comparable from York Place, Mr Chan arrived at a unit rate of $237,447 per sq m.

139.  On the other hand, applying various adjustments which include -10% for location and +3% for exclusiveness in layout to the 4 comparables from Eight Star Street, Mr Chan arrived at a much higher average unit rate of $337,546 per sq m.

140.  Thus, from the above, Mr Chan suggested the average unit rate for the hypothetical development on the Lot would be $258,000 per sq m.

141.  However, in view of the disparity of results above, I do not consider taking an average would be appropriate; either the result derived from the comparables from Eight Star Street should be disregarded because the result appears to be an outliner or the results derived from the other comparables from One Star Street, Phase 2 of The Avenue and York Place should be ignored because they are not good comparables.

142.  I agree with Mr But’s submission that one fundamental fallacy often committed by valuers was the adoption of “more comparables” just for the sake (or under the disguise of) of so-called “diversity” and “sampling” without paying regard to the appropriateness and similarity of its nature of such comparables with the subject. Such flawed exercise would contribute to more errors and unreliability in valuation exercise.

143.  The Tribunal would have been better assisted by the use of a smaller number of relevant comparables.

144.  Here, I find Ms Sat’s comment at §4.2 of her Rebuttal Report dated 25 November 2022 appropriate:[36]

“Mr Chan adopted two comparable developments – One Star Street and The Avenue Phase 2.[37] These two developments are not comparable to the subject development in terms of building age (One Star Street completed in 2001) or location and development scale (The Avenue Phase 2 is away from the subject locality and has three blocks).

There is a new residential development – Eight Star Street at No 8 Star Street which is situated in the same locality as the subject development and is completed in May 2022. I doubt if any reasonable valuer would totally ignore such comparable development in the course of assessing the redevelopment value of a site in the same locality. Indeed, Eight Star Street should be the best comparable development to be adopted.”

145.  As regards transactions in One Star Street, they are in respect of units within a much older development built some 22 years ago. I agree with Ms Sat that prospective buyers of units in the hypothetical development would not make reference to sales of units of some 22 years ago even if the latter appears selling at a much lower value.

146.  In this regard, Mr Simon Lam referred to Sarford Development Limited & Others v Super Star Properties Limited, LDCS 14000/2018 (unreported, dated 27 March 2020), another compulsory sale application where in the assessing the GDV of the hypothetical development at Nos 3 & 5 St Francis Street, the Tribunal adopted comparables in No 1 Star Street and York Place as proposed by the applicants’ valuation expert in that case. Alas, in that case, firstly the hypothetical development was situated at the lower end of St Francis Street close to its junction with Queen’s Road East where the character of the surroundings was more likened to the bustling Wan Chai district at which York Place is situated. Secondly, the Tribunal was constrained by the evidence presented by the valuation experts. Indeed, one of the two valuation experts did challenge the comparables proffered by the other being at locations of completely different character and enjoying facilities (the units in The Avenue specifically referred to) which are lacking in the hypothetical development or No 1 Star Street. In any event, when the trial of that case proceeded, sales of units in Eight Star Street had not taken place yet and the Tribunal could only rely on the evidence before it.

147.  On the other hand, the sales of unis in Eight Star Street were “first hand sales” whereby there will be developer’s guarantee/ warranty period for any defects and appliances that may occur in the near future. More importantly, it is the usual practice that all “estate agency commission” would be borne by the developers whereas market prices obtained in the secondary market are exclusive of such “estate agency commission”. To the extent that “marketing costs” have already been deducted in the residual valuation from the GDV, the GDV derived from the second-hand sales net of “estate agency commission” would likely risk “double counting” of marketing costs if no proper adjustment is allowed.

148.  Thus, Ms Sat’s reliance on only transactions in Eight Star Street in assessing the GDV of the hypothetical development is preferred:

* The effective area is being calculated on the basis of Mr Chan’s proposal of assuming value of flat roof at ½ of that of the floor proper.

149.  Notwithstanding the above, Mr Chan and Ms Sat had the following agreements/ disagreements on the adjustment factors applicable:

150.  Ms Sat’s proposed adjustments are shown in the table below (while those of Mr Chan, if they are different, are shown in parenthesis):

* Mr Chan did not adopt these comparables as they were pre-sale transactions by way of stage payments.

151.  As stated in the remark of the table above, Mr Chan did not adopt comparables MWC4 to MWC9 as they were pre-sale transactions by way of stage payments. Indeed, in Million Add Development Ltd v Secretary for Transport, LDMR 3/1994 (unreported, dated 4 February 1997), the Tribunal rejected the use of the pre-sale comparables, notwithstanding having acknowledged that they were actual market transactions, because:

“proper analysis would have to take into account a variety of factors, several of which would not easily be quantified. Allowance would have to be made for loss of interest on pre-payments; uncertainties over quality and completion dates; and varying market conditions over the relevant period... We consider it extremely difficult to make reliable adjustments for the presale factors....”

152.  The in Good Faith Properties Limited and Others v Cibean Development Company Limited, LDCS 42000/2011 (unreported, dated 31 May 2013) (“Good Faith”), the Tribunal remarked that:

“185. .... It may sound peculiar to someone who is not familiar with the basic assumption of residual valuation that if pre-sales (even if they are close to the relevant valuation date) are used, difficult adjustments would have to be made because in the market, pre-sale transactions are usually completed with stage payment, i.e. without the need for the purchasers to pay up the full amount of purchase price (hence the gearing ratio of the investment is different from the purchase of a completed development). It is this factor that Mr. Chan sought to argue that presale prices could most likely be inflated by the vendor/developer as the purchaser does not need to pay the full price today.”

153.  While the above remarks by the Tribunal were noted, in Gainfield Investment Limited & Other v Legend Time Limited & Others, LDCS 16000/2014 (unreported, 17 October 2016) and some compulsory application cases that followed, pre-sale comparables were adopted by the Tribunal in the determining the GDV of the respectively hypothetical developments because they on the one hand are the most appropriate comparables and on the other hand were sales with imminent completion by cash or immediate mortgage payment, ie in terms very similar to the normal secondary market transactions. For instance, in Gainfield Investment the other sales that required stage payment up to 120 days or 180 days were disregarded.

154.  In the present case, comparables MWC4 to MWC9 all had the provisional sale and purchase agreements signed much beyond 180 days prior to the issue of occupation permit. I agree with Mr Chan that they should be disregarded. But as said, Mr Chan was at pain to dismiss the more recent transactions in Eight Star Street as comparables.

155.  As regards comparables MWC1 which comprises a flat roof, Mr Chan opined that its exceptionally high sale price had to be analysed by reference to other sales of Eight Star Street to find out the value of the flat roof as follows:[38]

* Unit with Flat Roof

156.  On the basis of the above analysis, Mr Chan assumed the unit value of the flat roof be approximately ½ of that of the floor proper and arrived at a unit rate of $394,757 per sq m as opposed to Ms Sat’s $413,997 per sq m x (1 - 5%) = $393,297 per sq m for Flat B on 2/F and $393,070 per sq m as opposed to Ms Sat’s $460,919 per sq m x (1 - 15%) = $391,781 per sq m for Flat C on 2/F. Notwithstanding the difference in assumption or analysis, the two figures for each unit are less than 1% apart, Ms Sat’s approach is arbitrary and cannot be supported.

157.  Then there was a difference in opinion on the location adjustment: Mr Chan adopted -10% while Ms Sat adopted just -5%.

158.  Eight Star Street is situated within the popular “Starstreet Precinct” and in particular close to the entrance to Three Pacific Place, which is directly connected to the Admiralty MTR Station and the Pacific Place mall by an air-conditioned walkway. Although the Building is situated not far away, also in a comparatively secluded and tranquil neighbourhood, I agree there is a difference in location. As stated in §75(a) above, the nearest means of vehicular access is situated on St Francis Street, at a location of about 60m away. Having said that however, I do not agree with Mr Simon Lam’s suggestion that the location of the subject is prohibitively inconvenient to prospective buyers or occupiers of units in Sau Wa Fong. Those prospective buyers or occupiers would definitely trade the balance between living in a quiet residential neighbourhood within the heart of the city at Admiralty and relatively inconvenience of a short walk (also of about 60m) up or down the slope along St Francis Street.

159.  On the other hand, I am also aware of the presence of a refuse collection point situated behind Eight Star Street. In such regard, I agree with Ms Sat’s -5% for location.

160.  As regards the adjustment for time, I agree with Mr Chan to adopt the usual practice of applying the Private Domestic Price Index (Class B) published by the RVD (“the Index”). At trial, however, Ms Sat had alluded to the Index not so applicable to the sales of Eight Star Street. Because of this, I had requested the respondent to provide the Register of Transactions for Eight Star Street and the corresponding Price Lists for the purpose of analysis of the comparable transactions. Whereas the respondent provided the information as requested on 7 July 2023, I saw no harm for Mr Chan carrying out such analysis though as an expert tribunal, the Tribunal would apply its own expertise to bear on the facts and form a view of its own[39]. In such regard, as illustrated by Mr Chan in Table 2 which is attached to Mr Simon Lam’s closing submission, Ms Sat’s argument that the transaction price of the development having no obvious downward trend when compared with the RVD index was subject to query. For instance, by 16 Aug 22 when MWC3 took place, only 8 out of the 35 typical units remained unsold. The developer would have lesser incentive to reduce the asking price to cope with the market. Notwithstanding this, I consider there being adequate number of recent transactions in Eight Star Street to support the market value of premises in the vicinity. Of course, by reference to the Table 2 afore-mentioned, more units including MWC1a, MWC1, MWC2 and MWC3 have been sold since then.[40]

161.  In respect of the adjustment for size, the two experts were not far apart. For the sake of simplicity, I follow Ms Sat’s adjustments.

162.  Thus, the only remaining difference between Mr Chan and Ms Sat is the adjustment for view in respect of comparable MWC3, ie Flat B, 15/F: Mr Chan applied -5% while Ms Sat applied -3%. While we were unable to go upstairs to inspect this comparable, by reference to the location plan, I do not find the view of this unit adversely obstructed by say Three Pacific Place as suggested by Ms Sat. Here, I follow Mr Chan’s adjustments.

163.  Thus, on the basis of the above, adopting the only MWC1a, MWC1, MWC2 and MWC3 as comparables, I arrive at an adjusted unit rate of $350,562 per sq m.

164.  Nevertheless, I note the proposed development will only be served by one lift whereas Eight Star Street, for instance, has the benefit of being served by two lifts. In Gainfield Investment, supra, Mr Chan had proposed making allowance for the comparable development for having one lift only. In Famous Concept Development Limited v Thousand Treasure Investment Limited & Others, LDCS 30000/2019 (unreported, dated 2 November 2021), the same was revisited and adjustment for lift at 2% for buildings served by 1 lift only was allowed.[41] In the present case, I am going to follow the same and apply a further -2% to the result obtained, ie $350,562 x (1 - 2%) = say $343,500 per sq m:

165.  On the basis of the hypothetical development proposed by Ms Sat which was prepared based on the advice of Mr S T Lam, a calculation of the gross development value of the residential portion is set out below:

Floor	Saleable Area (m2)	Adjustments				Adjusted Unit Rate (/m2)	GDV
		Floor	Size	View	Total
11/F	58.11	2.5%	0.0%	5.0%	7.6%	$369,606	$21,478,000
10/F	58.11	2.0%	0.0%	5.0%	7.1%	$367,889	$21,378,000
9/F	58.11	1.5%	0.0%	5.0%	6.6%	$366,171	$21,278,000
8/F	53.11	1.0%	0.0%	5.0%	6.1%	$364,454	$21,178,000
7/F	58.11	0.5%	0.0%	5.0%	5.5%	$362,393	$21,059,000
6/F	58.11	0.0%	0.0%	0.0%	0.0%	$343,500	$19,961,000
5/F	58.11	-0.5%	0.0%	0.0%	-0.5%	$341,783	$19,861,000
4/F	58.11	-1.0%	0.0%	0.0%	-1.0%	$340,065	$19,761,000
3/F	53.11	-1.5%	0.0%	0.0%	-1.5%	$338,348	$19,661,000
2/F	58.11	-2.0%	0.0%	0.0%	-2.0%	$336,630	$19,562,000
1/F	58.11	-2.5%	0.0%	0.0%	-2.5%	$334,913	$19,462,000
G/F	59.36	-3.0%	0.0%	0.0%	-3.0%	$333,195	$19,778,000
						Total:	$244,417,000

Other Parameters of the Residual Valuation

166.  The table below sets out Mr Chan’s and Ms Sat’s agreement and disagreement on the other parameters of the residual valuation:

	Mr Chan	Ms Sat
Marketing Cost	2%
Professional Fee	6%
Demolition Cost for the Building	$780,000
Construction Cost	$43,753,670 (unit cost: $48,810/m2)	$47,733,986 (unit cost: $47,152/m2)
Development Period	2.5 years (including Demolition Period: 0.5 year & Construction Period: 2 years)
Developer’s Profit on Cost/ Land	15%
Interest Rate	4.375%
Stamp Duty	4.25%
Legal Cost	0.10%
Land Value	$69,200,000	$139,000,000
Accommodation Value	$77,198/m2	$137,304/m2

Construction Cost

167.  From the table above, the only difference between the two experts was on the unit construction cost. However, as their difference was only marginal. I would simply adopt $48,000/m² under this head.

Developer’s Profit

168.  Initially, Mr Chan and Ms Sat agreed the developer’s profit at 15%. It was only on the 4^th day of trial that Mr Chan suggested to add an extra allowance for stamp duty and legal cost. Mr Chan explained that prior to that he did not give much thought about the allowance for stamp duty and legal cost.

169.  Ms Sat, during cross-examination, explained that prior to the new suggestion by Mr Chan, she had throughout assumed that the 15% agreement with Mr Chan was inclusive of stamp duty and legal cost. Ms Sat stated that if she were alerted to this additional requirement earlier, she would have allowed a smaller developer’s profit of 12% or 13% bearing in mind the small scale of the hypothetical development.

170.  I accept Ms Sat’s explanation and determine the developer’s profit at 13%, taking into account also the risk (which I consider as slim) that the area of the Side Lane that may be excluded from site coverage and plot ratio calculation.

Finding on RDV and the Reserve Price

171.  Subject to what I have stated above, I shall follow Ms Sat’s residual valuation model as contained in Exhibit AR2 on the determination of the RDV which is reproduced at Appendix to this judgment. I assess the land value of the Lot at $136,100,000 (ie accommodation value of $134,440/m²).

172.  I shall adopt the estimated RDV of $136,100,000 as the Reserve Price for the auction of the Lot.

Land Sales for Checking

173.  Although both Mr Chan and Ms Sat had agreed to resort to the residual valuation method in determining the RDV, Ms Sat referred to three land sales by Government for the purpose of checking:

Lot No	Inland Lot 9061 (IL 9061)	Inland Lot 9048 (IL 9048)	Inland Lot 9049 (IL 9049)
Address	269 Queen’s Road East	Schooner Street (behind the Lot)	9 Sik On Street
Date of Sale	21 June 2022	30 May 2014	18 September 2013
Consideration	$1,962,168,000	$233,000,000	$139,000,000
Site Area	1,226.6 sq m	270 sq m	208 sq m
Zoning	R(E)	R(C)	R(C)
User	Non-Industrial	Residential	Residential
AV	$181,782 per sq m	$172,593 per sq m	$134,519 per sq m
RVD Index – Private Domestic (Class B)*	371.1	233.8	232.6
HIBOR**	0.65%	0.2%	0.2%

* The prevailing index is about 340.

** The prevailing HIBOR is about 5%

174.  In Oriental Moon Limited v Golden Sino Link Limited & Others, LDCS 32000/2019 (unreported, dated 21 November 2022) in respect of a compulsory sale application of a site at Wood Road, Wan Chai (“the Wood Road site”), the valuation expert on behalf of the applicant, after carrying out a residual valuation, made a direct comparison by reference to the sale of IL 9061 above to test the reliability of his assessed RDV.

175.  After a meticulous analysis as shown below, the Tribunal decided at §221 that IL9061 is much superior to the Wood Road site in many aspects and it was unreasonable for the valuation expert acting for the minority owners thereof to have arrive at a valuation more than the AV at which IL9061 was sold by Government:

Adjustments
Lease Term	3.00%
Time	0.00%
Location/Environment	-5.00%
View	-5.00%
Size of Site/ Efficiency Ratio	-20.00%
Clubhouse Facilities	-3.00%
Stamp Duty	-4.25%
Total:	-32.50%
Adjusted AV (/m2)	$122,704

176.  In the present case, however, there are more variances than either the Wood Road site or IL 9061. The characteristics of the Lot which enjoys a comparatively secluded and tranquil environment are completely different from the composite mix of shops and domestic development of high-density. The Wood Road site has a proposed gross floor area of about 1,975 sq m whereas IL9061 permits a maximum development of 10,794 sq m, the latter being 10 times the GFA of 1,012.35 sq m proposed for the Lot.

177.  Also, the HIBOR as at 21 June 2022 was 0.65% when IL 9061 was sold but the HIBOR is wavering about 5%.

178.  The so many variables and vast differences make it difficult, if not impossible, to rely on the direct comparison method to arrive at a reasonable estimate.

179.  The two sales which took place some 10 years ago would also make it hard to compare with the prospective sale of the Lot. The use of indices is only acceptable when there is little evidence to go on, but their effectiveness is more diluted the longer the period over which they are used. The property market was completely different then when the HIBOR was about 0.2%. The construction costs at that time were also different. A fortiori, there is evidence that Schooner Street site forms part of the comprehensive development scheme where planning approval was recently approved. The sale in 2014 cannot be regarded as a sale on its own and the successful bid appears to come from a special purchaser.

180.  In respect of the site at Sik On Street, it is situated within stone throwing distance from Queen’s Road East, a major distributor in Wan Chai which is served by a variety of trades and public transport. Although this site lies within close proximity to the Lot, its location environment is completely different.

181.  In such regard, the remarks of the Tribunal in Hofei Estates Limited v. Secretary for City and New Territories Administration, LDLR 1/1982 [1980-1982] CPR 486 at §§14-16 are pertinent in the present case:

"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. Thses 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.

16. We are satisfied that evidence was available from the comparables and elsewhere; for reasonably accurate assessments to have been made by the residual method. Furthermore, this is the method more likely to be adopted by a reasonable prospective purchaser of this type of property."

182.  I would not place any weight on any of the three sales for the purpose of comparison by Ms Sat.

183.  In addition, Ms Sat referred to two compulsory sales ordered by the Tribunal, one being in respect of the Wood Road site and the other in respect of the site at 3-5 St Francis Street in Sarford Development Limited & Others, supra. With respect, the reserve prices fixed by the Tribunal in such compulsory sale applications were solely on the basis of the evidence of the valuation experts in question. They did not necessarily constitute the market price of the corresponding lots when they were sold to the only bidder without any competition. The Tribunal would be hesitant to adopt any of these compulsory sales as market evidence for the purpose of direct sale comparison.

184.  I maintain that the estimated RDV of $136,100,000 is the Reserve Price for the auction of the Lot.

Other Incidental Matters

185.  The applicants propose to appoint Mr Lee Kwok Yung and Ms Leung Man Yee Cassandra, being partner and senior associate of Messrs Hau, Lau Li & Yeung, Solicitors & Notaries, as the sale trustees. Having considered the information on their background and experience as set out in their letter dated 17 March 2023, I am satisfied that they are proper persons to be appointed as the trustees to discharge the duties imposed on them under the Ordinance. The remuneration package proposed in the said letter appears to be reasonable.

186.  The applicants have prepared a set of draft Particulars and Conditions of Sale of the Lot[42]. Subject to any amendment that may become necessary as a result of our ruling on the arrangement of auction above, the particulars and conditions of sale of the Lot by public auction submitted by the applicants are considered reasonable.

Order

187.  This Tribunal make the following orders:

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

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

(3) Mr Lee Kwok Yung and Ms Leung Man Yee Cassandra of Messrs Hau, Lau Li & Yeung, Solicitors & Notaries, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to sale of the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Hau, Lau Li & Yeung, Solicitors & Notaries dated 17 March 2023.

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

(i) The sale of the Lot be on the particulars and conditions of sale substantially the same as those in the draft Particulars and Conditions of Sale to be initialed and approved by the Tribunal.

(ii) The reserve price be set at $136,100,000.

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

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

Costs

188.  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, I order that the applicant do pay the respondent the costs of the Application, with certificate for counsel, to be taxed on the High Court scale if not agreed.

189.  Last but not least, the Tribunal thank Counsel for their assistance.