KWOK KA v. MAK SHIU HIN AND OTHERS

HCA 3262/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3262 OF 1997

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JUDGMENT

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1. This is an assessment of the damages sustained by the plaintiff as intending purchaser under a sale and purchase contract between himself and the first defendant, after the sellers' failure to complete according to the contract. Interlocutory judgment was given against the first defendant only, and the damages were stipulated to be assessed on a valuation of the property as at 12 May 1997, which was the contractual date for completion.

2. The purchase price under the contract was $8.38 million, and the plaintiff's claim arose from the collapse of a sub-sale agreement in the sum of $12.5 million as a result of the defendant's failure to complete. It should however be noted that it is the valuation of the property which is to establish the damages for loss of bargain, and not the contract price of the aborted sub-sale. The plaintiff also claims legal costs and disbursements as described in its statement of damages at page 82 of the bundle. The claim for stamp duty was abandoned at the hearing.

3. According to the plaintiff's evidence, once he had concluded the provisional agreement with the defendant he requested an estate agent friend, one Fong Wah, to contact Mr. Lee Shiu Kee of Henderson Land Development Co Ltd in regard to an intended sub-sale of the property. Mr. Fong knew Mr. Lee, and a few days later he told the plaintiff that Henderson Land would offer $12.5 million for the sub-sale. The plaintiff's solicitors then received a letter dated 19 November 1996 from solicitors representing "the intending purchaser" confirming the sub-sale at $12.5 million and enclosing their cheque for $1 million as earnest money (page 272 of the bundle). Henderson Land is not mentioned as the intending purchaser, but the plaintiff said he understood from Mr. Fong that this was the case. However there is no direct evidence of Henderson Land's involvement.

For the valuation in support of his damages claim the plaintiff chose Mr. Patrick Lai of AA Property Services Ltd, and the defendants chose Mr. Esmond Yu of Messrs Jones Lang Wootton. Both these gentlemen are experienced surveyors and valuers and both gave oral evidence in addition to their reports in the bundle of documents.

4. On the basis of existing use and subject to existing tenancies, the two valuations of the subject premises, 21 Temple Street Kowloon, produced figures of $9 million from Mr. Lai, and $8.9 million from Mr. Yu. I accept that this discrepancy of about 1% is not a significant factor in the context of an exercise which cannot aspire to precision, and Mr. Lai observed that there was no substantial difference between his report and that of Mr. Yu.

5. Mr. Yu also valued the premises from the standpoint of its redevelopment potential on its own and concluded that this value would be similar to its existing use value. Mr. Lai considered that the smallness of the premises and its common staircase with the adjoining property made it uneconomic to develop on its own, and concluded that its optimum use as a single entity lay in its existing use. Essentially therefore both experts agree that there is no economic benefit in developing the premises on its own.

6. Although the experts are in substantial agreement in considering the premises as a single unit, they differ in considering its redevelopment potential in conjunction with one or more of the adjoining properties. Mr. Lai describe this potential as the "marriage value" to the premises of being joined for redevelopment either with 23 alone, or with 23, 25 and 27 Temple Street. Mr. Yu described it more sceptically as the "hope value".

7. With the reservation that the exercise was unrealistic, Mr. Yu said in cross-examination that he had "no objection" to Mr. Lai's valuation of the premises at $12 million, including the redevelopment potential with the adjoining properties. This comment was however based only on the assumption, put to Mr. Yu by plaintiff's counsel, that Mr. Lai's $12 million redevelopment valuation was indeed based on realistic and ascertainable factors. This however is an assumption that Mr. Yu has consistently declined to accept.

8. He drew the court's attention to his report at page 262 of the bundle where he had considered the potential marriage value to the subject premises, if it did exist, of redevelopment with the adjoining three premises. He found that a valuation so based would be speculative and lacking in certainty and hence declined to make a decision on that basis. Mr. Lai conceded the element of uncertainty, but nonetheless maintained that a valuation could be achieved using a mathematical approach in discounting the uncertainty as a reduction in the ultimate valuation. On this basis he produced his valuation of the property for purposes of redevelopment with all three adjoining properties as at 12 May 1997 of $12 million.

9. In his first report of 27 November 1997, Mr. Lai reached valuations of the premises on three different assumptions. The first of these was the open market value of the premises in its existing condition, which produced his valuation of $9 million. His second assumption was the redevelopment of the premises with the adjoining building at 23 Temple Street, and his third assumption was that the premises would be redeveloped jointly with numbers 23, 25 and 27 Temple Street.

10. The latter two assumptions produced valuations of the premises as at 12 May 1997 of $13.6 million and $16.5million respectively. This "marriage value" increase over the $9 million for the existing use valuation is explained by Mr. Lai as - " latent value which is released----by the merger of the individual sites which are not usually capable of beneficial use or development, but when merged become a viable proposition---".

11. An enhanced value to reflect the joint redevelopment of the premises with numbers 23, 25 and 27 would be beyond dispute if all four properties were in the same ownership and with vacant possession. The combining of the title and redevelopment as one entity would not then be speculative. This is not however the case, as there are a number of existing tenants in the subject premises, and number 23 is in different ownership from 25 and 27. On Mr. Lai's evidence, numbers 25 and 27 are owned by a corporate vehicle of Henderson Land, but number 23 has been owned by the administrators of a deceased estate for about 40 years.

12. In his second report (page 153), Mr. Lai offers four reasons for considering the likelihood of joint redevelopment of the four properties to be high, and concludes that the joint development potential must be considered in reaching a valuation. Discussing the uncertainties of existing tenants and different ownership (page 157), Mr. Lai reduces these factors to mathematical terms in discounting his valuation from $16.37 million to $12 million.

13. The existing tenants are discounted by Mr. Lai at $1.6 million, reflecting $400,000 per floor for the 1st - 3rd floor monthly tenants, $200,000 for the ground floor monthly tenant, and $200,000 for the roof occupant. In his evidence Mr. Lai said that these figures would be based on likely statutory compensation plus 10% as an inducement. In cross-examination he testified that a tenant had never in his experience failed to vacate if offered good compensation.

14. The greater uncertainty however lies in the different ownership of the various properties. This is discussed by Mr. Lai in terms of a time allowance to reflect the time likely to be required to achieve unification of ownership. Bearing in mind the status of the ownership of the various properties (the four points at page 153), Mr. Lai assessed the time allowance at 18 months and calculated a deduction from his valuation in terms of the cost of money over that period at 10.75% pa. This produced a reduction from his original valuation of $16.37 million to roughly $14.05 million, from which he also deducted the assumed $1.6 million of tenants' compensation to give a valuation rounded down to $12 million.

15. There are imponderables in this conclusion, as Mr. Lai well recognised. Some of the tenants may be intractable and require court proceedings to obtain vacant possession. On Mr. Lai's evidence this would require over a year, which would extend the time factor for unification and hence the intervening cost of money. Other uncertainties could be the complete refusal of an owner to sell to achieve unification, or more likely, that Mr. Lai's 18 months allowance for unification could be a serious underestimate. The former would make reunification impossible, whilst the latter would again increase the intervening cost of money and retrospectively make Mr. Lai's $12 million valuation incorrect.

16. In his evidence Mr. Lai argued that his $12 million valuation is realistic and is reached in accommodating the uncertainties of the situation by giving them a financial value as a discount from his full redevelopment valuation. Mr. Yu however said that without compulsory purchase powers the assumption of merging the properties was remote and was not therefore a factor in valuation. He pointed out that property 23 held the key to unlocking development potential, and that if the owners of 23 would not sell, then 21 could only be redeveloped on its own.

17. Mr. Yu drew the court's attention to his comparable 3, which he had used in reaching his valuation of $8.9 million, and pointed out the similarity of its situation to the subject premises. Like the subject premises, two adjoining properties were in single ownership, whilst another on the opposite side was in different ownership. He said that the "hope" factor of such a situation, if it existed, would already be in the purchase price and was difficult to isolate as a consideration in reaching a valuation.

18. The decision before the court is not therefore the typical issue as to the merits of competing expert valuations. Essentially the issue is whether or not Mr. Lai's approach to his redevelopment valuation is acceptable, in that it quantifies present uncertainties in money terms to reach a discount from the valuation made at100% certainty of joint redevelopment. Put more simply, does this approach prove as a probability that his valuation at $12 million is correct.

19. The valuation of property as a basis for assessing damages for loss of bargain is an exercise fraught with uncertainty. There is a subjective element in choosing and construing comparables which unsurprisingly leads to each party's valuer reaching a valuation favourable to the client. The issue here is different in detail but not in substance. One valuer has used mathematical calculations to discount future imponderables in reaching what he regards as a valid estimate of today's joint redevelopment value. The other valuer regards this approach as speculative and unrealistic and contends that any possibility of releasing latent value through redevelopment will already be in the market price. Both experts are professionals of repute and neither view can lightly be dismissed.

20. The burden is however on the plaintiff to prove the likely accuracy of Mr. Lai's valuation at $12 million to reflect the joint redevelopment potential. It would also be implicit in a finding to that effect that the court accepted Mr. Lai's methods of mathematical discount of uncertainty as valid in establishing the probability of his conclusion.

21. With reservations I am willing to accept Mr. Lai's evidence of the likely compensation to sitting tenants, and the time factor for obtaining vacant possession leading to his discount for the intervening cost of money. Even here however there are uncertainties of time which could carry over into the intervening cost of money and hence reduce the ultimate value below the valuation if the time estimates proved optimistic.

22. What I cannot accept as a valid tool in a valuation exercise is the quantification of the volition of the owners of property 23 - the crucial property in this presently notional redevelopment exercise - in deciding whether or not to sell their property. To assess it as a discount of 18 months cost of money is simply not a realistic proposition in achieving a valuation for assessing these damages. In the eventuality it could be wildly wrong, with injustice inflicted on the defendant as a result.

23. I accept Mr. Lam's submission for the plaintiff that redevelopment potential is to be considered in reaching a valuation. As Mr. Lam pointed out by reference to IRC v Clay [1914] 3KB 466, an open market sale supposes knowledge of the property's situation and all advantageous circumstances. This would however necessarily mean that the extra value from adjoining property or whatever is already in the price, as Mr. Yu suggested when saying that his extra "hope" value could not be isolated. It is anyway a long way from accepting that such an imponderable as the will of intervening owners can be quantified in reduction of a higher valuation calculated on the assumption that the intervening ownership is not a problem. This approach would be to add an impossible weight of additional uncertainty to an an already imprecise exercise. As a method of valuation I agree with Mr. Yu that it is speculative and unrealistic.

24. I am not therefore satisfied that Mr. Lai's approach has produced a valuation at $12 million which I can accept as a probability. Any attempt by the court to reach a lower redevelopment valuation would involve speculation in the precise area in which I have faulted Mr. Lai's valuation, namely the imponderable decision of the owners of property 23. I accept that the property had a value for our present purposes of $9 million, in line more or less with both valuations on the basis of existing use, and the damages will be calculated accordingly.

25. The damages for loss of bargain are therefore $(9m-8.38m) = $620,000. To this will be added $50,000 for return of the deposit and $26,535 for expenditure on legal costs. The total award is therefore $696,535 which will attract interest at the judgment rate from writ to payment. Costs are to the plaintiff with a certificate for counsel.