STARWICK INVESTMENT LTD AND ANOTHER v. YIP KA YIN AND OTHERS

LDCS 9000/2021

[2023] HKLdT 64

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 9000 OF 2021

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BETWEEN

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J U D G M E N T

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BACKGROUND

1.  This is the applicants’ application for an order for sale, for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”), of all the undivided shares of and in Kowloon Inland Lot No 1331 (“the Lot”), together with a building erected thereon known as No 4 Liberty Avenue, Kowloon (“the Building”).

2.  The Building is a 10-storey composite building, and is served by one lift and two common staircases. Occupation Permit No K120/58 was issued for the Building on 3 May 1958 granting permission to occupy its basement as garages and its mezzanine floor as children playroom for non-domestic purposes, and its ground floor and 7 upper floors for domestic purposes. The Building was 63 years old at the time when the proceedings herein were commenced.

3.  According to the approved building plans, there are 2 garages on basement off Liberty Avenue, 2 children playrooms on mezzanine floor, and 4 flats per floor from ground floor to 7^th floor.

4.  According to the records of the Land Registry, a total of 36 undivided shares are allotted to the Lot together with the Building. Each of the 2 garages, 2 children playrooms and 32 flats is given 1 undivided share, making up a total of 36 undivided shares.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

5.  At the time of filing of the Notice of Application (“the NOA”) on 25 August 2021, there were 2 respondents. The applicants then owned 94.44% (i.e. 34 out of the total 36) undivided shares in the Lot.

6.  Section 3(1) of the Ordinance prescribes that the minimum percentage of undivided shares that an applicant or applicants should possess before making an application under the Ordinance is 90%.

7.  We are satisfied that as at the date of application, the applicants owned more than 90% of the undivided shares in the Lot. We are therefore satisfied the applicants are entitled to make the present application under the Ordinance.

THE REMAINING RESPONDENTS

8.  At the time of the trial, the applicants still owned 94.44% undivided shares in the Lot. The following 2 respondents (“the respondents”) remain in the present proceedings, and they own the following properties in the Building: -

Respondent		Properties
1st respondents	(“R1”)	Flat B on Basement (“R1’s Property”)
2nd respondent	(“R2”)	Flat B on 2nd Floor (“R2’s Property”)

9.  R1 is represented by Mr Simon Lam (“Mr Lam”). In addition to the disputes on valuations, Mr Lam submits that the age and state of repair of the Building do not justify the redevelopment of the Lot. Further, Mr Lam submits that, other than the 2 criteria under section 4(2) of the Ordinance (i.e. “age and state of repair” and “reasonable steps”), there is a residual discretion on the part of the tribunal under the Ordinance not to make an order for sale. In these proceedings, since the redevelopment value (“RDV”) of the Lot is too close to its existing use value (“EUV”), and therefore (Mr Lam submits) redevelopment of the Lot would not be beneficial, or sufficiently beneficial, to the minority owners of the Lot, the tribunal should exercise its discretion against granting an order for sale of the Lot even if section 4(2) of the Ordinance is satisfied.

10.  R1 has appointed Mr Liu Yuk Shing (“Mr YK Liu”), a structural engineer, of Civic Consultancy Limited and Mr Lau Pak Wo (“Mr PW Lau”), a building surveyor, of Trusty Surveyors as their building experts. R1 together with R2 have also jointly appointed Mr Patrick Lai (“Mr Lai”), a valuation surveyor, of AA Property Services Limited as their valuation expert.

11.  R2, represented by Mr Desmond Leung (“Mr Leung”) and Ms Christine Leung, primarily disputes the valuations in the application, and does not take issues on “age and state of repair” and “reasonable steps” undertaken by the applicants. R2 also takes a neutral stance on the issue of residual discretion of the tribunal advanced by R1 in these proceedings.

12.  The applicants are represented by Ms Nancy Ngai (“Ms Ngai”). The applicants have appointed Mr CM Wong, a structural engineer, of CM Wong & Associates Limited and Mr Benson Wong, a building surveyor, of Benson Wong & Associates Limited as their building experts, and Mr Wong Chi Wai (“Mr Wong”), a valuation surveyor, of Grandmax Surveyors Limited as their valuation expert.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

13.  The parties have filed an Agreed List of Issues for Trial on 30 January 2023 identifying 6 issues in dispute, in which Issues 5 and 6 are raised by R1 only. The 6 issues can be rephrased as follows: -

(1)	What was the respective EUV of all the units in the Building for the purposes of and in accordance with Part I of Schedule 1 of the Ordinance? (“Issue 1”)
(2)	Whether the redevelopment of the Lot is justified due to the “age” and/or “state of repair” of the Building in accordance with section 4(2)(a)(i) of the Ordinance? (“Issue 2”)
(3)	Whether the applicants have 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? (“Issue 3”)
(4)	If an order for sale is granted, what should be the reserve price for the sale of the Lot by public auction in accordance with Paragraph 2 of Schedule 2 of the Ordinance? (“Issue 4”)
(5)	In the event that the tribunal is satisfied with the matters set out in section 4(2) of the Ordinance, whether the tribunal has a residual discretion not to make an order for sale of the Lot? (“Issue 5”)
(6)	In the event that Issue 5 is determined in the affirmative, whether, in the circumstances in the present case, the tribunal’s discretion ought to be exercised against granting an order for sale of the Lot, despite being satisfied with the matters set out in section 4(2) of the Ordinance, on the ground, inter alia, that the RDV of the Lot is too close to the EUV of the Building, and that therefore redevelopment of the Lot would not be beneficial, or sufficiently beneficial, to the minority owner of the Lot? (“Issue 6”)

ISSUE 1 - THE EUV OF ALL UNITS IN THE BUILDING

14.  Pursuant to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the EUV of the units as assessed in the application, the tribunal shall determine the proper value.

15.  Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the lot who cannot be found, the majority owner of the lot is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is: -

“(A) not less than fair and reasonable; and

(B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

16.  There is no missing owner in the present case, but the applicants and the respondents dispute on both the EUV and RDV valuations.

17.  Mr Wong and Mr Lai, appointed by the applicants and the respondents respectively, agree on the assessments by direct comparison method, the valuation date of 27 July 2021, the EUV of each unit on mezzanine floor at $3,258,000 and the unit rate of the domestic reference unit at $143,700 per square meter. They also agree to value the garages on basement as shop units but they disagree on the selection of some shop comparables and the adjustments for location, layout, size and frontage. In the comparison between the domestic reference unit and the other domestic units in the Building, they disagree on the view of Units C and D on 1^st to 4^th Floors.

EUV of Shops on Basement

18.  In addition to the 5 common comparables (i.e. Comparables ES1, ES2, ES3, ES4 and ES5), Mr Wong has proposed 3 other shop comparables. We agree to adopt Comparables ES6 and ES7 along Soares Avenue, which are in fact not far from the Building, but we decide to exclude Comparable ES8 (i.e. Unit A, G/F, La Belle Mansion, Nos 118 – 120B Argyle Street and Nos 5 – 7A Julia Avenue) along Argyle Street, which has characters quite different from the shop reference unit (i.e. Unit B on Basement of the Building).

19.  The 2 valuation experts agree on the adjustment for time with reference to retail price indices, adjustment for headroom at 4% per 1-meter difference, and adjustment for age at 0.2% per 1-year difference

20.  Regarding the adjustment for location, the 2 valuation experts agree to apply an adjustment rate of -10% to Comparables ES3 and ES5. We agree with Mr Wong to adjust for location to Comparable ES2, which is not far from Comparable ES5, at -10%, instead of -15% suggested by Mr Lai. We consider that Comparable ES6, which is not far from Comparable ES3, should also be adjusted at -10%, instead of -5% only suggested by Mr Wong. We also take the view that Comparable ES1, which is close to the junction with Waterloo Road with heavier pedestrian flow, should be adjusted at -30%, instead of -40% proposed by Mr Wong and -20% suggested by Mr Lai. Comparable ES4 should be adjusted at -15% suggested by Mr Lai, instead of -20% proposed by Mr Wong. Comparable ES7 should be adjusted at -5%, instead of nil adjustment proposed by Mr Wong. We consider that Comparable ES7 along Soares Avenue and opposite to Comparable ES6 has lesser pedestrian flow and is inferior to Comparable ES6.

21.  Regarding the adjustment for frontage, we agree with Mr Wong to adopt a less sensitive adjustment rate at 1% per 1-meter difference instead of 2% per 1-meter difference suggested by Mr Lai, but we agree with Mr Lai that the long frontage of the shop reference unit together with its shape as a square would allow its subdivision. We are of the view that such benefit of long frontage should be reflected in the adjustment for layout.

22.  Regarding the adjustment for size, Mr Wong and Mr Lai agree to adopt an adjustment rate of 1% per 3-square meter difference to the comparables less than 25 square meters. For the comparables more than 25 square meters, Mr Lai applies the same adjustment rate of 1% per 3-square meter, but Mr Wong adopts a much less sensitive adjustment rate of 1% per 10-square meter. We are not persuaded by Mr Wong to adopt 2 sets of adjustment rates in this instance. If Mr Wong’s proposal is accepted, it is odd to note that all comparables larger than the shop reference units (i.e. Comparables ES3, ES5, ES6 and ES7) would be subject to substantially less positive adjustment. We agree with Mr Lai that smaller shop units are in demand in the area and therefore smaller shop units would have higher unit rate, which would justify the adjustment rate of 1% per 3-square meter in the assessment.

23.  Regarding the adjustment for layout, we consider that both the shape and depth of the comparables should be taken into consideration. With reference to the approved building plan, the shop reference unit has a better shape (in square and a long frontage for easy subdivision), and also has a short depth, which allow all its trading area to be close to the shop front.

24.  In the comparsion of layout, the 2 valuation experts agree on the adjustment rates for Comparables ES3, ES4 and ES5 at 10%, 0% and 10% respectively. We agree to the adjustment rate for Comparable ES3 at 10%. However, Comparable ES4 with shorter depth but without the benefit of further sub-division should be adjusted at 2.5%, and Comparable ES5 with a much longer depth should be adjusted at 12%. We agree with Mr Lai to adjust for layout to Comparables ES1 and ES2 with longer depth and without the benefit of further sub-division at 5%, instead of nil adjustment proposed by Mr Wong. We are also of the view that Comparables ES6 and ES7 with much longer depth should be adjusted at 10% and 12% respectively.

25.  The valuation of the shop reference unit is listed in Appendix I of the judgment. The average unit rate of the 7 selected comparables is $487,269, the average excluding the highest (i.e. Comparable ES2) and the lowest (i.e. Comparable ES7) is $492,537, and the average excluding the 2 highest (i.e. Comparables ES1 and ES2) and the 2 lowest (i.e. Comparables ES6 and ES7) is $508,430. We consider that the adopted unit rate of the shop reference unit should be $490,000 per square meter.

26.  Accordingly, Unit A and Unit B on Basement should be assessed, after rounding to the nearest thousand, at $16,910,000 (i.e. 34.51 x $490,000) and $16,832,000 (i.e. 34.35 x $490,000).

EUV of Flats on Upper Floors

27.  In the comparison between the domestic reference unit (i.e. Unit B on 4^th Floor) and the other units in the Building, the 2 valuation experts agree on the adjustment for floor at 0.5% per 1-level, adjustment for top floor at -4%, adjustment for size at 0.2% per 1-square meter, and all the adjustments for internal condition and lighting / ventilation. Although they agree on the adjustment rate for each type of view, they disagree on the actual view of Units C and D on 1^st to 4^th Floors.

28.  With the benefit of site inspection together with the parties, we agree with Mr Wong that the view of Units C and D on 1^st to 4^th Floors should be “Building” instead of “Close Building” suggested by Mr Lai and nil adjustment should be made to Units C and D on 2^nd, 3^rd and 4^th Floors. However, we consider that the building view of Units C and D on 1^st Floor is relatively inferior and they should be adjusted at -1.5%, instead of 0% proposed by Mr Wong and -5% suggested by Mr Lai.

29.  The valuation of each domestic unit is listed in Appendix II of the judgment.

EUVs of All Units in the Building

30.  The EUVs of all units in the Building as at the relevant date of valuation, i.e. 27 July 2021, and adopted by this tribunal are appended below: -

Floor	Unit	EUV		Floor	Unit	EUV
Basement	A	$16,910,000		Basement	B	$16,832,000
M/F	A	$3,258,000		M/F	B	$3,258,000
					Sub-total:	$40,258,000

Floor	Unit	EUV		Floor	Unit	EUV
G/F	A	$9,236,000		4/F	A	$10,528,000
G/F	B	$8,854,000		4/F	B	$9,573,000
G/F	C	$7,392,000		4/F	C	$7,036,000
G/F	D	$7,022,000		4/F	D	$7,409,000
1/F	A	$9,871,000		5/F	A	$10,073,000
1/F	B	$9,430,000		5/F	B	$9,143,000
1/F	C	$6,828,000		5/F	C	$7,445,000
1/F	D	$6,491,000		5/F	D	$7,445,000
2/F	A	$9,922,000		6/F	A	$10,124,000
2/F	B	$9,956,000		6/F	B	$9,181,000
2/F	C	$7,337,000		6/F	C	$7,108,000
2/F	D	$6,971,000		6/F	D	$7,853,000
3/F	A	$9,972,000		7/F	A	$9,771,000
3/F	B	$9,047,000		7/F	B	$9,324,000
3/F	C	$7,373,000		7/F	C	$5,776,000
3/F	D	$7,373,000		7/F	D	$5,894,000
					Sub-total:	$266,758,000

31.  We therefore assess the total EUV of the Building at $307,016,000 ($40,258,000 + $266,758,000).

ISSUE 2 – AGE AND STATE OF REPAIR

32.  Section 4(2) of the Ordinance provides that: -

“The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that —
(a)	the redevelopment of the lot is justified (and whether or not the majority owner proposes to or is capable of undertaking the redevelopment) —
	(i)	due to the age or state of repair of the existing development on the lot; or
	(ii)	on 1 or more grounds, if any, specified in regulations made under section 12; and
(b)	the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”

33.  Thus, the applicants have to satisfy the tribunal that the redevelopment of the Lot is justified due to the age or state of repair of the Building (section 4(2)(a)); and that the applicants have taken reasonable steps to acquire the respondents’ undivided shares in the Lot (section 4(2)(b)). If not, the tribunal shall not make an order for sale.

The Proper Approach

34.  Before we address the specifics of the expert evidence, we should first deal with Mr Lam’s submissions on what he considered to be the proper approach. As stated at Greatmax International Limited & Ors v Lo Sha Kam Ha Teresa & Ors [2023] HKLdT 47 §26, the Ordinance does not define “age” or “state of repair” and the tribunal therefore has to decide what factors are relevant for our consideration. To that extent, it is a question of mixed law and fact.

35.  The arguments advanced by Mr Lam may be summarized as follows.

(1) His starting proposition is that recent decisions of the tribunal have refrained from any general tests on “age” and “state of repair”. In particular, he criticized Mr Benson Wong as being misconceived in his “unwavering allegiance” to the test set out in Intelligent House Ltd v Chan Tung Shing & Ors [2008] 4 HKC 421 (i.e. the tenantable standard), as the Court of Appeal in Fineway Properties Ltd v Sin Ho Yuen Victor [2010] 4 HKLRD 1 had expressed reservations on Intelligent House.

(2) From his first proposition, he then submitted that the tribunal in recent decisions have preferred to exercise its discretion to determine at what stage a building should be developed after considering all the relevant factors of a case, citing Charmlink v Lee Tong Hing & Ors LDCS 16000/2010 (29 November 2011).

(3) He next advanced the following propositions which are in our view largely not supported by authorities.

(4) As regards “state of repair”, Mr Lam submitted, in summary, that:

a) repair must be distinguished from improvement, reinstatement or rectification;

b) the tribunal should only take into account the present “state of repair” and not the future “state of repair”;

c) the costs of renovation of individual units are irrelevant, unless their state of disrepair is caused by defects in common structures or facilities, citing Bright Full Ltd & Ors v Hing May Properties Ltd [2023] HKLdT 1 §154;

d) from the above parameters, the tribunal should first ascertain what aspects of the Building have fallen into disrepair;

e) the tribunal should then determine whether the items of disrepair of the Building materially affect the use and enjoyment of the Building;

f) finally, the tribunal should ask whether the items of disrepair can be put back to a reasonable state of repair by incurring reasonable repair costs.

(5) In relation to “age”, Mr Lam submitted that the relevant considerations are (a) what is the physical age of the Building; (b) in what respect is the Building obsolete, in the sense that such obsolescence materially affects the use and enjoyment of the Building; (c) can the obsolescence be removed or improved at reasonable costs; and (d) if an obsolescence cannot be removed or further improved, to what extent would the reasonable use and enjoyment of the Building be materially affected.

36.  For the reasons set out below, we do not generally agree with Mr Lam.

37.  As noted above, Mr Lam contended that, for “state of repair” and “age”, the relevant test is whether an item of disrepair or an obsolescence would “materially affect the use and enjoyment” of the Building. Although Mr Lam did not give further elaborations on what his proposed test entailed, we understand that it is in fact a standard lower than the “tenantable standard” set out in Intelligent House and more akin to the “habitable standard” advocated by Mr PW Lau.

38.  In this regard, previous cases have already dealt with the issue of whether Fineway did in fact have the effect of casting doubt on the “tenantable standard” set out in Intelligent House. For example, at Century Supreme International Limited v Kam Chi Kit Charles and Hui Pui Kuen & Ors [2022] HKLdT 6 §§57 to 63, the tribunal (constituted by DDJ Michelle Soong and Member Alex Ng) was of the view that Fineway, properly construed and comprehended, did not have such effect and the tribunal should adopt the tenantable standard in assessing whether the statutory criteria of “age” and/or “state of repair” are satisfied. We agree with and adopt the analysis set out in Century Supreme. See also China Orchid International Ltd & Ors v Fujitec (HK) Company Limited & Ors [2023] HKLdT 38 at §§165 to 166 where the tribunal (constituted by HHJ M Wong and Member Lawrence Pang) noted that the “tenantable standard” has been consistently applied by the tribunal and the “habitable standard” is inappropriate as it is a disincentive to improvement in living or occupation condition.

39.  As submitted by Ms Ngai, the “tenantable standard” is set out in Intelligent House at, inter alia, §§145 to 146 and 199. The tribunal is entitled to look at any factors or matters that are directly or indirectly related to the elements of “age” or “state of repair” of the existing building and can include: -

(1) a comparison made between the old building and a new building or any proposed redevelopment;

(2) the obsolescence of an existing building in terms of its functional items or facilities and a comparison of these facilities of the old building with what a modern day building could correspondingly offer;

(3) in considering the costs of the “state of repair”, repair works which are necessary to render the building fit for use in the sense that it should be safe and hygienic for occupiers and visitors and provide a standard of comfort and convenience which is reasonable in the present day circumstances for the type of building in question, and with its structural frames, components, finishes and service installations in either fair or good conditions requiring no repair in the near future.

40.  Once it is accepted (as we do) that the “tenantable standard” is the preferred standard, it is evident that the parameters proposed by Mr Lam are unduly restrictive. We do not accept that improvement, reinstatement and rectification can never be relevant considerations when one considers “state of repair” or that we should not look at repairs which may become necessary in the future. As the cases have emphasized, this is a fact-sensitive issue. For example, it may that repairs which are only identified as being necessary in a very distant future should not feature or feature prominently. However, we do not see how the tribunal should be oblivious to repairs or maintenance which have been identified as necessary in the near future.

41.  We also do not accept Mr Lam’s submissions that the costs of renovation (i.e. the costs of internal work on individual units) are irrelevant. The Bright Full case cited by Mr Lam was the tribunal’s judgment dismissing the applicant’s application for an order for sale under the Ordinance. The tribunal thereafter heard the application for leave to appeal ([2023] HKLdT 45). As is made clear in the tribunal’s decision on the leave to appeal application, it did not lay down any general proposition that the costs of renovation of individual units are irrelevant. In fact, the tribunal acknowledged the propositions set out in Fortress Jet Limited & Ors v Tang Hoi Yip and Cheung Sau Chan Property Limited, LDCS 3000/22015, 11 August 2017 that, as a matter of principle and construction of the Ordinance, it is relevant to look at the state of repairs concerning every part of a building, common parts and parts privately owned included: Leave Decision §§50 to 52.

42.  In passing, we also deal with Mr Lam’s submission that Mr Benson Wong’s attempt to compare repair costs with construction costs (but excluding demolition and foundation costs) is fundamentally flawed. Again, arguments of similar nature have been dealt with in previous cases and rejected by the tribunal. See Greatmax §76.

43.  For the above reasons, we generally disagree with the approach advocated by Mr Lam. We do agree, however, with the one aspect of Mr Lam’s submissions, namely that the demarcation between “age” and “state of repair” may sometimes be obscure. For example, we tend to agree with Mr Lam that Mr Benson Wong’s suggestion that the lift of the Building should be replaced may not neatly fall within the rubric of “state of repair” and may be more appropriately be dealt with under “age”. However, we regard that such criticisms are only ones on presentation as opposed to ones of substance. As submitted by Ms Ngai, Century Supreme §50 is an authority for the proposition that the two factors, despite being put in the alternatives in section 4(2)(a) of the Ordinance, are related as they both relate to the physical state of the building in question. This is particularly so if the “tenantable standard” is adopted for the costs of the “state of repair” because it entails an assessment of a standard of comfort and convenience which is reasonable in the present day circumstances. Whilst it may be more “direct” to discuss the old lift in terms of obsolescence, we do not regard it as entirely inappropriate to discuss its replacement as an item of the costs of the “state of repair”.

44.  Having dealt with the submissions made by Mr Lam on the approach to be adopted, we now turn to the specifics of the expert evidence.

The Evidence on the Age and/or State of Repair of the Building

45.  The applicants rely on the expert evidence of Mr CM Wong and Mr Benson Wong. Only R1 has adduced the expert evidence of Mr YK Liu and Mr PW Lau to rebut the applicants’ evidence. R2 merely puts the applicants to strict proof as to the issues of “age” and “state of repair” of the Building.

Structural Assessment

46.  Mr CM Wong and Mr YK Liu agree on the structural test results as follows: -

(1) Visual Inspection Survey: Although a total of 25 defects were identified at structural elements (i.e. 1.8% on slab, 1.3% on beam and 0.5% on column) and the estimated defective areas are about 2.7% on slab, 1.95% on beam and 0.75% on column, they agree that the Building structure was constructed in a satisfactory manner at the time of construction. The extent of defects of the Building as found are generally similar to the buildings built in the same period. No sign of movement, settlement or tilting of the Building can be observed and no excessive deflection or structural distress can be found on the structural elements.

(2) Open Up Inspection: 100% of the steel reinforcement are suffering from corrosion; most of the reinforcement bars sampled have Corrosion Grade 3 (Mild Corrosion: general rusting and loss of section less than 10%) and the remaining bars have Partly Corrosion Grade 2 (loss of section less than 10%). However, under the HK MBIS Code (2018 Amendment), only the seriously corroded reinforcement (i.e. with loss of sectional area greater than 15%) shall be replaced by new reinforcement.

(3) Concrete Cover: The measured concrete cover to reinforcement bars, by and large, comply with the design requirements. 7 out of the 9 reinforcement bars for slabs that have less cover than the designed are from only 1 (out of 10) test location. All the 11 sampled locations for beams do not have reinforcement bar smaller than the designed. 11 out of the 12 sampled locations for columns do not have reinforcement bar smaller than the designed.

(4) Strength of Concrete: The strength of concrete, except for 2 out of 33 samples, satisfy the design strength requirement.

(5) Depth of Carbonation: The carbonation has reached the reinforcement bars in most of the structural elements (i.e. 90% of the slab samples, 91% of the beam samples and 83% of the column samples). Those re-bars in the circumstances have lost the protection against corrosion as the alkaline medium has been destroyed by carbonation. However, carbonation creates an unprotected environment for corrosion only, and is not a cause of steel corrosion. It is well established that steel corrodes only under the co-existence of oxygen and adequate moisture in the concrete matrix around the steel reinforcement bar to create the electro-chemical reaction of corrosion.

(6) Chloride Content: 73% of the test spots (i.e. 50% of the slab samples, 73% of the beam samples and 92% of the column samples) have chloride contents exceeding the threshold of 0.35% specified in the HK Concrete Code 2013, but such has not been specified in the LCC 1938, which was applicable when the Building was built in 1958.

47.  They also agree on the estimated cost of repair for defects in structural elements in the sum of $195,000, but they disagree on the interpretation of some structural test results, the remedial measure, the comparison with the HK Concrete Code 2013 and the applicability of the concept “Design Working Life”.

48.  Although Mr YK Liu opines that there is minor reinforcement corrosion in the Building, that is not uncommon in aged building. We agree with Mr CM Wong that the loss in sectional area in this instance infers less reinforcement area to perform its structural functions, and this reduction of reinforcement has reduced the ultimate structural capacity of the Building and lowered the originally intended margin of structural safety.

49.  In terms of concrete cover, Mr CM Wong has also compared the test results with the new requirements in the Code of Practice for Fire Safety in Buildings 2011 and finds that 69% of slabs and 32% of beams fail to comply with the required Fire Resistance Rating. Mr YK Liu considers that such comparison is not relevant and appropriate as the Building was built in 1958.

50.  As discussed in the section “The Proper Approach” above, we accept the “tenantable standard” as adopted by the applicants, and therefore we also accept the comparison with the new Codes. Further, as compared with the HK Concrete Codes 2004 and 2013 (an exercise done by Mr CM Wong), we accept that the Building does not satisfy the ductility requirements, has not been designed for wind forces and ductility, and its Design Working Life is shorter than 50 years.

51.  In terms of depth of carbonation, although Mr YK Liu suggests an application of a layer of waterproofing cementitious coating and external painting / tiling on the repaired concrete surfaces to stop water or water moisture penetrating into the inner parts of the concrete, we accept Ms Ngai’s submissions that, putting aside the water-proofing quality of the cementitious coating, the effectiveness of the application of such cementitious coating to only limited surface areas is in doubt.

52.  Above all, we accept Mr CM Wong’s conclusion that the Building is currently in a mediocre condition in that the structural elements are subjected to moderate to high risk of chloride-induced corrosion of the reinforcement, the passive alkaline protection to reinforcement has been lost in most structural elements and the reinforcement are all susceptible to corrosion. By comparing with the building condition of the other buildings with similar age, even if the Building can be considered to be in a good condition, which is opined by Mr YK Liu (but it is an overstatement in our opinion), the Building in any event is more than 65-year old and many buildings with similar age have already been redeveloped or are ripe for redevelopment.

Building Condition Survey

53.  We do not repeat here our comments and determinations on the standard to be adopted, the costs of renovation, the comparison with construction costs and Mr Benson Wong’s presentation on repair costs in the section “The Proper Approach” above.

54.  Regarding the other major disagreements between Mr Benson Wong and Mr PW Lau, we have the following findings: -

(1) Building Facades: Since we accept the adoption of “tenantable standard” in the assessment, we prefer complete replacement of external rendering as proposed by Mr Benson Wong to patch repair of 4.1% only of the overall building facades as suggested by Mr PW Lau. We agree with Mr Benson Wong that localised patch repair would not bring the external facades of the Building to the requisite “tenantable standard”. With the benefit of site inspection together with the parties, we also agree with Mr Benson Wong that the condition of the external rendering is poor due to peeling of paintwork, cracking of rendering and vegetation growth. We accept that complete replacement of external rendering would provide a completely watertight envelope to prevent water seepage; it is a good practice to add movement joints to minimize spalling and cracking of rendering in the future; and it is also an acceptable safety measure to erect metal covered walkways during the renovation / repair period.

(2) Fire Services Installation: Although there was an absence of Fire Safety Improvement Directions as at the date of trial, we agree with Mr Benson Wong that, in view of the current conditions of the Building, there should be upgrades of fire services installations including provision of a manual fire system and a fire hydrant and hose reel system.

(3) Unit Rate of Costs of Repair: In the estimation of repair costs, Mr Benson Wong relies on the unit rates suggested by a quantity surveyor, Mr KC Tang, in his Repair Works Cost Assessment Report, and Mr PW Lau adopts the reference unit rates under Building Rehabilitation Platform as released by the Urban Renewal Authority. Regarding the expert evidence of Mr KC Tang, we agree with Mr Lam that it is odd for Mr KC Tang to make comparison with the repair and renovation costs of 3 other high-end multi-storey residential developments, which are different from the Building in character. However, we accept Mr KC Tang’s expert evidence in this instance. Although Mr KC Tang’s finding in his report is limited to his own experience, his calculation and conclusions therein are logical and reasonable. Whilst, the reference unit rates under Building Rehabilitation Platform comprise a wide range they are for general reference only. Anyhow, the main differences between the cost estimations of Mr Benson Wong and Mr PW Lau are the items to be included and their extent rather than the unit rates to be adopted.

55.  Above all, we prefer the evidence and expert opinions of Mr Benson Wong, which have incorporated the evidence and expert opinion of Mr CM Wong, to those of Mr PW Lau. We agree with Mr Benson Wong that the age and state of repair, each on its own, is a justification for redevelopment of the Building.

56.  We accept that the Building, having been erected more than 65 years ago, is in poor condition and has come to the end of its design working life. The design of the Building has become obsolete over time in many aspects both physically and functionally, and fails to conform to modern safety standards and statutory requirements.

57.  We also accept that the Building in in poor state of repair and the costs of repair to bring the Building to tenantable condition is disproportionate to the costs for constructing a new similar superstructure. Even if repair works are carried out, such works will bring about a modest improvement only and the Building will remain a sub-standard one.

ISSUE 3 – REASONABLE STEPS

58.  The applicants have made 3 rounds of offers to R1 and R2 respectively as follows: -

	30-Jul-21	3-Aug-22	13-Feb-23
R1	$19,280,000	$19,970,000	$19,970,000
R2	$12,070,000	$13,040,000	$13,040,000

59.  Ms Ngai submits that the applicants’ offers have made reference to the then independent valuations prepared by Mr Wong and have reflected the RDV attributable to the respective units owned by the respondents.

60.  In assessing the reasonableness of the offers, we have considered the Court of Final Appeal’s judgment in Capital Well Ltd v Bond Star Development Ltd FACV 4/2005, (2005) 8 HKCFAR 578 particularly paragraphs 33 and 36 thereof where Ribeiro PJ has this to say: -

“33. In making that assessment 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. It is obviously necessary to recognise that there will often be differences of opinion on that matter …

…

36. ... We are of course not suggesting that it is necessary for the offer to ‘beat’ the valuation as if it were a payment into court. What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site …”

61.  We accept that the applicants’ respective offer prices fall within the range of what may broadly be regarded as fair and reasonable compensation for the interests in question. In these proceedings, there is no evidence that Mr Wong’s valuations were unreliable, and in fact the determinations by the tribunal in the judgment are not far from the assessments by Mr Wong. Although we may not agree with Mr Wong on each and every item in his assessments, it is a matter of differences in opinion and his valuations before the tribunal have no serious fault.

62.  Thus, we are satisfied that the applicants have taken reasonable steps to acquire the respondents’ properties in accordance with section 4(2)(b) of the Ordinance.

ISSUE 4 - RESERVE PRICE FOR THE PUBLIC AUCTION

63.  Subject to the determinations on Issues 5 and 6 in the later parts of the judgment, we are satisfied that the redevelopment of the Lot is justified and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot. Such being the case, we are satisfied that an order for sale should be granted in favour of the applicants.

64.  For the redevelopment of the Lot, Mr Wong and Mr Lai agree that the Lot, after deduction of 11.13 square meters as service lane, has a net site area of 442.42 square meters. They also agree to develop the Lot into a 26-storey composite building with total gross floor area of about 3,732.92 square meters (i.e. plot ratio of about 8.4376). There would be 3 shops on ground floor, 1 shop on 1^st floor with exclusive access from ground floor, a clubhouse on 2^nd floor, 4 flats per floor from 3^rd to 24^th floors, and 2 flats on 25^th floor.

65.  The 2 valuation experts agree on the adoption of residual method, the valuation date of 6 February 2023 and the saleable areas of the shops on ground and 1^st floors, but they disagree on the common areas on 2^nd floor and the upper residential floors, and therefore they disagree on the saleable areas of the flats in the hypothetical development. They also disagree on the gross development value (“GDV”) of both shops and flats, and the interest rates and construction costs in the residual valuation.

Hypothetical Development

66.  The main disputes are the sizes of the common areas on 2^nd floor and the upper residential floors.

67.  In respect of the 2^nd floor, since we agree with Mr Lai the lift lobby area of the clubhouse can be taken as part of the clubhouse, we agree with Mr Lai that the subject lobby area can be exempted from the gross floor area calculation, but such design would at the same time reduce the other exempted areas in the hypothetical development. Anyhow, the difference is 5 square meters only between the 2 estimations and is therefore not substantial.

68.  Nonetheless, we agree with Mr Wong that the size of the common area on each upper residential floor should be 40 square meters instead of 35 square meters suggested by Mr Lai. By reference to the common area (i.e. about 44.59 square meters inclusive of the concession for larger lift shaft of about 4.59 square meters) of Madera Garden (i.e. a nearby new development that is similar to the scale and form of the hypothetical development), we agree with Mr Wong that 40 square meters is justified in this instance. Since there are 23 residential floors in the hypothetical development, the difference of 115 square meters (i.e. 5 square meters x 23) in this instance is substantial and relatively significant.

69.  In view of the above discussions and determinations, we prefer Mr Wong’s hypothetical development scheme to that of Mr Lai. Accordingly, we accept all the saleable areas proposed by Mr Wong.

GDV – Shops on Ground Floor and 1st Floor

70.  In the valuation of the shop reference unit, in addition to the 3 common comparables (i.e. Comparables RS1, RS2 and RS3), Mr Wong has proposed 3 other shop comparables. Similar to the EUV assessment, we accept Comparables RS4, RS5 and RS6 (i.e. they are named as Comparables ES6, ES2 and ES3 in the EUV assessment) proposed by Mr Wong, which are not far from the Lot.

71.  In the conversion of the raised yard of Comparable RS2, we agree with Mr Lai to adopt the rate of 1/8 instead of 1/6 proposed by Mr Wong. Accordingly, we accept that Comparable RS2 has an effective area of 59.92 square meters suggested by Mr Lai.

72.  The 2 valuation experts agree on the adjustment for headroom at 4% per 1-meter and adjustment for age at 0.2% per 1-year only.

73.  Regarding the adjustment for time, although the 2 valuation experts agree to make reference to the private retail price indices, Mr Lai suggests to add 2% to each of the adjustments to reflect the improvement in market sentiment envisaged at the valuation date. We disagree to make the additional adjustments proposed by Mr Lai, which is not supported by concrete evidence. With the benefit of hindsight, the retail property price was in fact decreasing instead of increasing in 2022 up to the valuation date in February 2023.

74.  Regarding the adjustment for location, similar to the EUV assessment, we consider that Comparables RS3, RS4, RS5 and RS6 should be adjusted at -30%, -10%, -10% and -10% respectively. The adjustment for location to Comparable RS2 at 30% is agreed by the 2 valuation experts, and we consider that Comparable RS1 should be adjusted at -10% instead of -15% proposed by Mr Wong and nil adjustment suggested by Mr Lai. Although Comparable RS1 is closer to the junction with Waterloo Road, this section of Victory Avenue is similar to that of Comparable RS5. Anyhow, we disagree with Mr Lai that there will be enhancement in trading potential after completion of the hypothetical development. Although there are a few redevelopment projects in the vicinity, we are of the view that such new developments including the subject redevelopment would not bring material change to the characters of Liberty Avenue as a secondary shopping area in midst of Mong Kok and Ho Man Tin.

75.  Regarding the adjustment for frontage, similar to the EUV assessment, we accept the adjustment rate at 1% per 1-meter difference proposed by Mr Wong. Nevertheless, in terms of size, we prefer the adjustment rate at 1% per 5-square meters instead of 1% per 3-square meters adopted in the EUV assessment. Unlike the shop reference unit in the EUV assessment, which is relatively small and is easy for further sub-division, the shop reference unit in the RDV assessment is a much larger unit, which is relatively less sensitive to size.

76.  Regarding the adjustment for layout, applying the same principles in the EUV assessment, we agree with Mr Wong to adjust for layout to Comparables RS3, RS4, RS5 and RS6 at -10%, -5%, -10% and -5% respectively. Unlike the shop reference unit in the EUV assessment, the shop reference unit in the RDV assessment has a much longer depth and do not have the benefit of further sub-division. Nevertheless, we are of the view that Comparables RS1 and RS2, which have relatively short depth, should be adjusted at -12.5% and -10% respectively instead of -10% and -5% only proposed by Mr Wong.

77.  The valuation of the shop reference unit is listed in Appendix III of the judgment. The average unit rate of the 6 comparables is $403,468 and the average excluding the highest and the lowest (i.e. Comparables RS4 and RS5) is $398,308. We consider that the adopted unit rate of the shop reference unit should be $403,000 per square meter.

78.  The valuations of all ground floor units and the 1^st floor unit are listed in Appendix IV. While the same principles adopted in the valuation of the shop reference unit are applied in this assessment, we prefer the 1^st floor conversion rate of 1/3 proposed by Mr Wong to 1/2 suggested by Mr Lai. We are of the view that the 1^st floor shop in the area would have relatively poor marketability.

GDV – Flats on Upper Floors

79.  The 2 valuation experts agree on the unit rate of the domestic reference unit at $257,000 per square meter, the adjustment for floor at 0.5% per 1-level and the adjustment for specialty at 15% to the units on 3^rd and 25^th floors.

80.  We agree with Mr Lai that the building height of the units on 25^th floor would be above the top level of the adjacent buildings and therefore would enjoy better open building view. Nonetheless, we consider that they should be adjusted at 4% instead of 5% suggested by Mr Lai and 2% only proposed by Mr Wong.

81.  The valuation of all the flats in the hypothetical development is listed in Appendix V. The GDV of all the flats is assessed at $638,910,780 at the average unit rate of $259,335 per square meter.

Residual Method – Interest Rates and Construction Costs

82.  The 2 valuation experts agree on the marketing and agency fees at 3% of the GDV, demolition costs at $2,200 per square meter, demolition period of 0.7 year, professional fees at 6%, construction period of 2 years, developer’s profits at 15%, and stamp duty and legal costs at 4.25% and 0.1% on residual land value.

83.  Having considered the historical data of US Federal Funds Rate, the Base Rate set by the Hong Kong Monetary Authority and the HSBC’s best lending rate provided by Mr Wong, we agree with Mr Wong to adopt an interest rate of 4.5% per annum in the assessment instead of 4% only suggested by Mr Lai. All these 3 rates were increasing in 2022 and reached the levels of 4.5% to 4.75%, 5% and 5.625% respectively as at the valuation date. We are also of the view that the interest rates would continue to increase in medium term, which would lift up the costs of project finance. On the other hand, we disagree with Mr Lai to make reference primarily to the effective interest rates of some property developers. We consider that such effective interest rates announced by the property developers cannot reflect the project finance costs in the market because the former would also comprise the finance costs of investment properties and would be also affected by the overall gearing of a particular developer.

84.  Regarding the construction costs, we agree with Mr Wong to adopt the base rate of $36,450 per square meter for high to very high quality building instead of $32,100 only for high quality building suggested by Mr Lai. Therefore, the adopted construction costs including additional costs and adjustments should be $188,473,978 (i.e. $50,490 per square meter gross). We accept that, in order to achieve the unit rate of $257,000 for the domestic reference unit as agreed by the 2 valuation experts, a high to very quality building similar to Madera Garden (i.e. one of the comparable developments adopted by the 2 valuation experts) should be built.

85.  The applicants submit that the unit rate of $50,490 is reasonable because it is much lower than the estimated construction costs (i.e. including professional fees) of Madera Garden at the rate of $65,050 disclosed in the Authorized Person’s certificate dated 10 June 2021. We have no objection to make some reference to such comparison as suggested by Mr Wong, but it would be a rough check only because the 2 cost estimates have different compositions and may also be based on different principles.

RDV of the Lots as at 6 February 2023

86.  The residual valuation of the Lot is listed in Appendix VI of the judgment. Based on the agreements between the two valuation experts and the above determinations by the tribunal, we assess the RDV of the Lot at $355,000,000, equivalent to an accommodation value of about $95,100 per square meter (i.e. about $8,835 per square foot), which should be the reserve price for public auction.

ISSUE 5 – WHETHER THE TRIBUNAL HAS A RESIDUAL DISCRETION NOT TO MAKE AN ORDER FOR SALE

87.  As stated above, Issue 5 (and Issue 6) are raised by R1 only. Although Issue 5 is formulated in general terms, Mr Lam in closing confirmed that his case is advanced on the premise that the tribunal should, in addition to the statutory criteria set out at sections 4(2)(a) and (b) of the Ordinance, also take into account undue hardship on the part of the minority owners as part of the discretionary mix in deciding whether or not to make an order for sale.

88.  In particular, the undue hardship identified by Mr Lam is financial in nature. We will return to the evidential details when we deal with Issue 6 below. For present purposes, suffice it to point out that the general picture painted by Mr Lam is that first, it may be difficult for R1 to purchase a replacement property to generate the same rate of income as the existing property, and secondly, due to the recent negative sentiments, it is inherently unfair when the minority owner is compelled to sell at a “depressed market” whilst the majority owner (or the successful bidder) would be in a position to capture a market rebound.

89.  Sections 4(1) and (2) of the Ordinance provide, inter alia, as follows:

“(1) Subject to subsection (2), the Tribunal shall determine an application under section 3(1) by—

(a) first —

(i) if any minority owner of the lot the subject of the application disputes the value of any property as assessed in the application, hearing and determining the dispute;

(ii) in the case of any minority owner of the lot who cannot be found, requiring the majority owner of the lot to satisfy the Tribunal that the value of the minority owner’s property as assessed in the application is—

(A) not less than fair and reasonable; and

(B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application;

(b) second —

(i) making an order that all the undivided shares in the lot the subject of the application be sold for the purposes of the redevelopment of the lot; or

(ii) refusing to make such an order; and …

(2) The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that—

(a) the redevelopment of the lot is justified (and whether or not the majority owner proposes to or is capable of undertaking the redevelopment)—

(i) due to the age or state of repair of the existing development on the lot; or

(ii) on 1 or more grounds, if any, specified in regulations made under section 12; and

(b) the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”

90.  As section 4(2) of the Ordinance is drafted in a double-negative manner, Mr Lam reasoned that even if the statutory criteria prescribed thereunder are satisfied, there remains a residual discretion of the part of the tribunal to refuse to make an order for sale.

91.  Mr Lam’s argument finds resonance in Century Supreme International Limited v Kam Chi Kit Chares and Hui Pui Kuen & Ors [2022] HKLdT 6 where it was held at §§39-40:

“[39] This question originates from the wording of section 4 of the Ordinance which stipulates that the tribunal shall not make an order for sale unless it is satisfied that redevelopment of the lot is justified due to the age or state of repair and the majority owners have taken reasonable steps to acquire all the undivided shares in the lot. The statutory requirements are expressed by way of using two forms of grammatical negation in one phrase or sentence, i.e. double negative.

[40] In our view, such textual expression does not compel the tribunal to make an order for sale once the "age or state of repair" and "reasonable steps" are satisfied. This means the tribunal could refuse to grant an order even though the criteria are met...”

92.  Mr Lam further relied on what was said by the then Secretary for Planning, Environment and Lands on 7 April 1998 at the resumption of the debate on the Second Reading of the then Land (Compulsory Sale for Redevelopment) Bill, i.e. the predecessor to the Ordinance:

“Second, the Lands Tribunal shall not make an order for sale unless it is satisfied that certain criteria have been met, including criteria that the redevelopment of the lot is justified and that the majority owner has taken reasonable steps to acquire all the undivided shares in the lot.

The question has been raised as to whether the Lands Tribunal should take into consideration whether compulsory sale of the lot would cause undue hardship to the minority owners.

I wish to assure Members that the criteria specified in the Bill are not exhaustive and that the relevant clause has been purposely drafted to allow the Lands Tribunal to take into account other relevant factors, including that of undue hardship on the part of the minority owners. However, we have also reached consensus with the Bills Committee that the factors to be considered shall not include hardship on the part of tenants, as they are entitled to fair compensation as ordered by the Lands Tribunal.”

93.  Conversely, Ms Ngai submitted that there are a number of authorities, notably Able Luck Development Ltd & Ors v Public Global Investments Ltd & Ors, LDCS 7000 of 2014, 6 October 2017 (“Able Luck LT”) and Able Luck Development Ltd & Ors v Pawling Ltd [2023] 1 HKLRD 1448 (“Able Luck CA”), which are against Mr Lam’s propositions.

94.  At Able Luck LT §168, the tribunal (constituted by HHJ Kot and Member Lawrence Pang) rejected the argument that since section 4(2) is drafted in a negative sense, it is left with a residual discretion as to whether to make an order for sale even if it is satisfied that redevelopment is justified. In doing so, the tribunal at §169 referred to Good Faith Properties Ltd & Ors v Cibean Development Co Ltd [2014] 5 HKLRD 534 which reiterated the statutory regime of the Ordinance and the four phases of the whole process identified by Ribeiro PJ in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. The tribunal concluded at §170:

“As can be seen from the quotations cited above, whether the statutory criteria stipulated in s.4(2) have been met is the only requirement that this Tribunal needs to consider and once this Tribunal is satisfied that such statutory criteria had been met, an order for sale should be allowed, reserve price should then be set and the minority owners are obliged to sell. There is no room for other consideration on top of the statutory criteria of age or state of repair and reasonable steps taken to acquire all the shares.”

95.  Able Luck CA is not an appeal from Able Luck LT. However, in rejecting one of the grounds which arose in that appeal, the Court of Appeal at Able Luck CA §48 also referred to substantially the same passages in Good Faith as those in Able Luck LT:

“The question for consideration is whether, when determining an application for compulsory sale under the Ordinance, the Tribunal is under a duty to consider or weigh the merits or benefits of alternative options (such as conservation, revitalization, rehabilitation, urban renewal) vis-à-vis redevelopment. The answer to this question can be found in the judgment of Lam VP (as he then was) in Good Faith Properties Ltd & Ors v Cibean Development Co Ltd [2014] 5 HKLRD 534:

“[5] ... In Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, Ribeiro PJ examined the scheme of the LCSRO at paras 10 to 21 of the judgment. His Lordship identified four distinct phases for the whole process: (a) application; (b) determination by the Tribunal; (c) the sale; and (d) apportionment and application of the proceeds of sale. The first phase is the application by the majority owner(s) who own(s) not less than 90% of the undivided shares in the lot in question. There are statutory requirements as to the criteria which the applicant(s) must satisfy and the filing of valuation reports.

[6] The second phase is the determination by the Tribunal. Such determination usually falls into two parts. First, the Tribunal must determine whether the applicant has satisfied the conditions under s 4(2) of the LCSRO. Expert evidence is usually required to satisfy the first condition, viz redevelopment is justified due to the age or state of repair of the existing building. As for the second condition, whether the majority owner(s) has taken reasonable steps to acquire all the shares, including negotiating on terms that are fair and reasonable, is a matter of fact and judgment. On the question of whether the terms offered falls within a band of what represents a fair and reasonable assessment of the value of the minority interest, it may, subject to what was said by Ribeiro PJ at paras 32 to 36 of the judgment in Capital Well, supra, on the object of the exercise under this limb, depend on expert evidence on valuation.

[7] If those conditions are met, the Tribunal would have to set the reserve price and decide how the proceeds of sale are to be apportioned by reference to the valuations in the s 3(1) report. The second stage is essentially a H valuation exercise...

...

[11] We must recognise that the LCSRO is a statutory compromise balancing the competing interests of the co-owners: the majority owner’s interest in utilising his property by releasing the land for redevelopment versus the minority owner’s proprietary interest in the disposal of his own property. The right of private ownership protected under Article 6 of the Basic Law (see Litton NPJ in Sin Ho Yuen v Fineway Properties Ltd supra at para 24) should not be overridden without justification. Even if the right of private ownership of the minority owner were to be overridden when there is proper justification, there must be fair and reasonable compensation. Thus, the statutory compromise is to provide safeguards on two different levels:

(a) The majority owner(s) (who must hold at least 90% of the interest in the land) must establish his justification to the satisfaction of the Tribunal before he could override the private right of ownership of the minority owner. To do this, he must produce evidence to satisfy the statutory criteria; and

(b) If he manages to establish the grounds to the satisfaction of the court, the minority owner would have to sell his property even though he does not wish to do so. But he would get back a fair share of the sale proceeds on a pro rata apportionment determined by the Tribunal.

[12] It is necessary to analyse the first tier safeguard at greater length because the proper understanding of this safeguard is important for the purposes of this appeal. First, until the Tribunal is satisfied that the statutory criteria are met, the majority owner(s) does not have any right to compel the minority owner to sell...

[13] LCSRO gives the majority owner(s) a means to override the will of the minority owner not because the minority owner has done something wrong: there is no legal wrong committed by the minority owner against the legal interests of the majority owner(s). It merely gives the majority owner(s) an opportunity to establish the justification for doing so to the satisfaction of the Tribunal. And it is only upon the Tribunal deciding that the statutory criteria have been met that the minority owner becomes obliged to sell.””

96.  Able Luck CA §49 then referred to the proposition set out at Able Luck LT §170, namely there is no room for other consideration on top of the statutory criteria of age or state of repair and reasonable steps taken to acquire all the shares. The Court of Appeal then said at §50:

“We agree with the Tribunal that in an application for compulsory sale under the Ordinance, there is no requirement on the part of the Tribunal to engage itself in weighing redevelopment against other potential alternatives (such as conservation, revitalization, rehabilitation, urban renewal etc), nor is it obliged to satisfy itself that redevelopment is the best option among all possibilities before it could make an order for compulsory sale.”

97.  Mr Lam submitted that the Court of Appeal in Able Luck CA was not invited to, nor did it make any determination on, whether the tribunal has residual discretion to refuse an order for sale. He further submitted that, in view of the very clear wording of the Ordinance, the tribunal ought to arrive at a view different from that set out in Able Luck LT.

98.  The arguments which were ventilated in these proceedings have been considered in a number of recent judgments, namely China Orchid International Limited & Ors v Fujitec (HK) Company Limited [2023] HKLdT 38, Greatmax International Ltd & Ors v Lo Sha Kam Ha Teresa & Ors, [2023] HKLdT 47, and Peace Ever Limited & Ors v Au Kai & Ors [2023] HKLdT 41. The weight of the authorities is clearly against the propositions advanced by Mr Lam, as in each of those judgments, the tribunal (all differently constituted) did not accept that the tribunal has a residual discretion to consider factors over and above the statutory criteria.

99.  In China Orchid, the tribunal (constituted by HHJ M Wong and Member Lawrence Pang) dealt with an argument, similar to that advanced by Mr Lam, that the tribunal should refrain from making order for sale in the light of the economic downturn: China Orchid §198.

100.  The tribunal referred to Able Luck LT §170 and said at China Orchid §206 as follows:

“Further, in Able Luck Development Limited & Others v Public Global Investments Limited & Others, LDCS 7000/2014 (unreported, 6 October 2017) , the Tribunal held at §§167-170, citing Good Faith Properties, supra, that there is no residual discretion to consider matters other than the 2 statutory criteria under section 4(2) of the Ordinance. The Tribunal rejected the argument that the negative phrase ‘not make an order for sale unless” in the section implies such discretion. We agree with the reasoning in that case and also rule here that there is no residual discretion in the statutory regime. Even though “discretion” or “hardship” may have been raised during the discussion of the bill for the Ordinance, the fact is that no such “discretion’ or “hardship” was incorporated into the Ordinance in the end, which in fact shows that there should not be such residual discretion as contended.”

101.  In Greatmax, the tribunal (constituted by HHJ M Wong and Member Alex Ng) also dealt with undue hardship and in particular the comment made by the then Secretary for Planning, Environment and Lands on 7 April 1998. The tribunal held at Greatmax §§103-107 as follows:

“[103] Mr Yuen submits that the Tribunal is entitled to take into account all the circumstances and not just “age or state of repair” in determining whether the redevelopment is justified and he relies on the case of Century Supreme, supra, where the Tribunal held that “such textual expression does not compel the tribunal to make an order for sale once the “age or state of repair” and “reasonable steps” are satisfied. This means that the tribunal could refuse to grant an order even though the criteria are met”.

[104] Mr Yuen also refers us to the Official Record of Proceedings of the Provisional Legislative Council dated 7 April 1998, where the Secretary for Planning, Environment and Lands remarked that “the criteria specified in the Bill are not exhaustive and that the relevant clause has been purposely drafted to allow the Lands Tribunal to take into account other relevant factors, including that of undue hardship on the part of the minority owners”.

[105] However, we find that Ordinance is clear on the criteria in refusing an order for sale. They are just those requirements mentioned in section 4(2), ie “the age or state of repair” and “reasonable steps to acquire”. There is nothing in the Ordinance which requires the Tribunal to consider “undue hardship” of the minority owners. When the Ordinance is clear, there is no need for us to refer to the discussions of the legislature.

[106] Even if we were to look at the discussions of the legislature, we do not find it conclusive that the Ordinance is to have the intention of including “undue hardship” as a consideration merely by reference to what the Secretary said at the time when the Bill was discussed. The Secretary did not refer to any particular provisions or words of the Bill which could infer “undue hardship” being intended. It is possible that the Secretary might have a wrong understanding of the Bill herself. Alternatively, she could have referred to the regulations to be made under section 12 of the Ordinance, but no such regulations were ever made.

[107] In the premises, we do not follow Century Supreme, supra, and we do not find it necessary to consider the alleged hardship of R2 and R3.”

102.  The arguments on undue hardship in the present case are further dealt with at Peace Ever §§344 to 356. Although the tribunal (constituted by DDJ SH Lee and Member Lawrence Pang) found the arguments to be initially attractive, it considered that indications in the Court of Appeal authorities to be to the contrary (§350). In particular, after citing Able Luck CA §50 (at §355), the tribunal said at §356 as follows:

“To the numerous considerations cited above in parenthesis, we have no doubt that the Court of Appeal would have added “undue hardship” if required.”

103.  We agree with the analyses set out in the recent judgments.

104.  It may be said that Peace Ever has stopped short of stating clearly that the Able Luck CA has laid down a general principle that the statutory criteria stipulated in section 4(2) of the Ordinance are the only requirements which the tribunal has to consider in deciding whether or not to grant an order for sale.

105.  In so far as necessary, we would go further than Peace Ever and state that Able Luck CA has done so.

106.  At Able Luck CA §50, the Court of Appel agreed with the tribunal that in an application for compulsory sale under the Ordinance, there is no requirement on the part of the tribunal to engage itself in weighing redevelopment against other potential alternatives, nor is it obliged to satisfy itself that redevelopment is the best option among all possibilities before it could make an order for compulsory sale.

107.  We note that the reasons given by the tribunal at first instance are stated at Able Luck Development Ltd & Ors v Pawling & Ors [2022] HKLdT 17 (“Pawling”) §§93 to 103.

108.  In gist, whilst the applicant at Pawling §93 referred to Able Luck LT §§168-170, the tribunal in Pawling instead drew an analogy with Pacific Base Holdings Limited v Lee Hop Biu & Ors [2021] 5 HKC 214 in which the Court of Appeal stated that in dealing with a compulsory sale application the tribunal is not expected to be concerned with the feasibility of the redevelopment. The tribunal reasoned that, if that be the case, it did not see why the tribunal should be concerned with the relative feasibility of redevelopment as compared with other options. At Pawling §99, 101 and 103, the tribunal said as follows:

“[99] As said in paragraph 97 above, in light of the Court of Appeal’s observations and ruling in Pacific Base Holding, we see no merits in the contention that the tribunal must weigh the relative feasibility or benefits of redevelopment vis-à-vis revitalization or other options when considering whether an order for sale shall be made. Such a contention would place an impossible task on the tribunal to explore and go into those other topics which the Ordinance does not even mention by name, let alone prescribing what are to be considered under those topics. To embark on such an exercise would risk usurping the functions of other bodies such as the URA which are tasked to oversee the specific area.

[101] In conclusion, we cannot agree more with the Court of Appeal’s observation that once we go into the rabbit hole and expand the statutory equation to include topics such as revitalization, rehabilitation, urban renewal etc, the whole exercise would be blown out of proportion and no one can tell when the expansion of considerations under the Ordinance would come to an end. We do not find this to be the legislative intent of the Ordinance.

[103] We therefore conclude and rule that in an application for compulsory sale order under the Ordinance, the tribunal should focus on whether redevelopment is justified by reason of the age or state of repair of the building concerned. In the exercise, the tribunal is not required to engage itself in weighing redevelopment against all other potential alternatives (such as conservation, revitalization, rehabilitation, urban renewal etc) nor is it obliged to satisfy itself that redevelopment is the best option among all possibilities before it could make an order for compulsory sale.”

109.  In Able Luck CA, the principal reason given by the Court of Appeal in agreeing with the tribunal was not the “narrower” analysis of drawing an analogy with Pacific Base Holdings, but the “wider” analysis carried out and the conclusion set out at Able Luck LT §§168-170 and advocated by the applicant at Pawling §93, namely there is no room for other consideration on top of the statutory criteria of age or state of repair and reasonable steps taken to acquire all the shares: Able Luck CA §§49 to 50.

110.  We therefore disagree with Mr Lam’s reading of Able Luck CA. Whilst the question of consideration before the Court of Appeal was whether, when determining an application for compulsory sale under the Ordinance, the tribunal is under a duty to consider or weigh the merits or benefits of alternative options vis-à-vis redevelopment, it endorsed the analysis and conclusion set out at Able Luck LT §§168-170 and made its decision on that basis.

111.  For the above reasons, we determine Issue 5 against R1.

ISSUE 6 – THE CIRCUMSTANCES IN THE PRESENT CASE

112.  In the light of our conclusion on Issue 5, Issue 6 does not arise. Were our conclusion on Issue 5 incorrect, we would have dealt with Issue 6 in the following manner.

113.  On the assumption that in the exercise of our discretion, in addition to the statutory criteria set out at section 4(2) of the Ordinance, we should also consider (alleged) financial hardship caused to R1, Mr Lam submitted as follows[1]: -

(1) The recent downturn in the property market has resulted in a substantial reduction in the RDV. It is therefore grossly unfair to the minority owners to compel them to sell in such a market situation. While the minorities would be compelled to sell in a depressed market, the purchaser would have a long period of time to await market rebound. This is not the right time to make an order for sale.

(2) This is a case in which the plot ratio has not been fully utilized at present. If the assessed RDV of the Lot is close to its EUV, this is an indication that the redevelopment potential would not be truly materialized by the proposed development at this stage in time due to the development profit being consumed by high developer’s profit (due to high risks, high interest rates, etc). This is not the right time to make an order for sale.

(3) Even if the tribunal determines that the age and state of repair of the Building justify redevelopment (which is denied), the Building is still in fairly good shape and would not pose any safety problem or hazard in the near future. The Lot can afford to wait for a better time to redevelop.

114.  Mr Lam relied on Good Faith §§11 to 13 and Sin Ho Yuen v Fineway Properties Ltd (2011) 14 HKCFAR 497 §25 for the propositions that the entrenched right of private ownership under the Basic Law should not be overridden without justification. From these premises, he developed the following propositions[2]: -

(1) The proprietary interests of R1 in the Lot and the Building are protected by the Basic Law;

(2) As a general rule, R1 have an absolute right (whether their rationale is monetary or non-monetary) to decide for themselves whether or not to dispose of their interest in their property, and if so when, how and at what price and they cannot be compelled to sell;

(3) As an exception to the general rule, a majority owner may seek an order from the tribunal pursuant to the Ordinance to compel the minority owners to sell, upon satisfying the tribunal that the making of an order for sale is justified under the Ordinance;

(4) In deciding how to exercise its discretion under the Ordinance, the tribunal must do so with an eye on the protection of the minority’s private property rights (which are entrenched under the Basic Law); and

(5) In the exercise of its discretion, the tribunal is balancing the competing interest of the majority and minority owners. In other words, the tribunal’s decision must be fair and reasonable. It must be equally beneficial to both parties, and not beneficial to one party at the expense of the other.

115.  The factual evidence relied on by Mr Lam includes the following: -

(1) Even on the applicant’s own valuation evidence, R1’s share of the proceeds is close to (but still higher than) the updated EUV of R1’s premises[3], which we do not understand is seriously disputed by Ms Ngai[4]. Together with Mr Lam’s further analysis based on rental yield, Mr Lam submitted that R1 would derive little financial benefit upon redevelopment[5].

(2) The drop in the property market is obvious from the experts’ valuations of the EUV and RDV of the Lot / Building. We do not understand this is disputed by Ms Ngai. This ties in with Mr Lam’s argument set out at §113(1) and §§114(4) and (5) above.

116.  We are prepared to accept the three propositions set out at §§114(1) to (3) above. They are amply supported by authorities and we do not understand Ms Ngai to have any quarrel over their correctness.

117.  In our view, the real dispute is on Mr Lam’s fourth and fifth propositions set out at §§114(4) and (5) above. In particular, as noted by Ms Ngai, the challenge by R1 as set out at §113 above may be reduced to one single proposition, namely this is not the right time to make an order for sale.

118.  This is not the first time such submissions (or similar submissions) have been advanced: China Orchid §198. As the tribunal noted at §199:

“With respect, there is no crystal ball to predict market fluctuation. How could one determine which is the right moment to make a compulsory sale application or which is the appropriate time for the Tribunal to grant a sale order. Everybody has to take the market condition as it is to make the decision. This is manifested by reference to Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 where the Privy Council remarked that:

“… The mortgagee and the company seeking to uphold the transaction must show that the sale was in good faith and that the mortgagee took reasonable precautions to obtain the best price reasonably obtainable at the time. The mortgagee is not bound to postpone the sale in the hope of obtaining a better price ...””

119.  We accept Ms Ngai’s submission that it could not have been the legislative intent that the granting of an order for sale can only be made in a rising property market.

120.  Whilst we do not disagree with Mr Lam’s fourth proposition set out at §114(4) above, we are of the view that the protection of the minority’s private rights (as far as the monetary aspect is concerned) is to be achieved by the tribunal by (1) determining any disputes in valuation or being satisfied that the valuation of the minority owner’s property is not less than fair and reasonable as required under section 4(1)(a) of the Ordinance; and (2) being satisfied that the majority owner has taken reasonable steps to acquire all the undivided shares in the lot, including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable as required under section 4(2)(b) of the Ordinance. In the earlier parts of this judgment, we have already determined the valuation disputes and formed the view that reasonable steps have been taken by the applicants to acquire R1’s property.

121.  As noted at China Orchid §203, the balancing act has already been made by the legislature as reflected in the Ordinance. We therefore disagree with Mr Lam’s fifth proposition set out at §114(5) above, namely that the tribunal has to additionally carry out a qualitative or quantitative analysis to ensure that the granting of an order for sale must equally be beneficial to both parties.

122.  In any event, whether R1 is financially better off in the event of an order of sale depends on a host of factors. The witness statements of the first and second-named R1 both stated that they believed that they would be unable to purchase an alternative property giving similar rental yields. As noted at Wellcity Development Limited & Ors v Mak Chun Fu & Ors, LDCS 22000 of 2014, 28 April 2017 §63, once the value of the land with the redevelopment potential realized has been converted into a sum of money represented by the sale proceeds, the compensation process is completed and it is up to the minority owner whether to purchase another premises or invest into other ventures. The rental yield enjoyed by R1 and identified by Mr Lam is presently 3.18%. In the current high interest rate environment (which itself is a cause for the fall in property prices), even if we were to carry out the additional qualitative or quantitative analysis, we are not satisfied that R1 would necessarily be worse off, as contended by Mr Lam. For example, any cursory enquiry would reveal that many banks now offer interest rates for time deposit higher than the yield currently enjoyed by R1.

123.  For the above reasons, even if we were to consider the alleged financial hardship identified by Mr Lam in the exercise of our discretion, it would not have altered our conclusion that an order for sale should be granted.

ORDERS

124.  We have set out the reasons (i) why we are satisfied an order for sale of the Lot should be granted; and (ii) why we are not persuaded by R1 not to make an order for sale of the Lot, and we therefore make the following orders: -

(1) All the undivided shares in the Lot, the subject of the application, be sold by way of public auction for the purposes of the redevelopment of the Lot;

(2) Ms Anna Chow Suk Han and Mr Anthony Chow Wing Kin, nominated by the applicants, be appointed the trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lot;

(3) The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Guantao & Chow dated 8 February 2023;

(4) For the purposes of the sale of the Lot by public auction: -

a) the sale of the Lot be on the particulars and conditions of sale the same or substantially the same as those set out in the draft Particulars and Conditions of Sale to be approved and initialed by the tribunal; and

b) the reserve price be set at $355,000,000;

(5) Subject to further extension(s) 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 Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot; and

(6) Liberty to the applicants, the respondents, the Trustees and the purchaser of the Lot or its successor in title to apply to the tribunal for further directions.

COSTS

125.  Following Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 5340, we make a costs order nisi that save for costs orders that have already been made, the applicants do pay costs of these proceedings to the respondents, including all reserved costs and the costs of this trial with certificate for one counsel for each respondent, to be taxed on High Court scale if not agreed. Unless any parties apply by summons to vary the costs order nisi, it shall be made absolute upon expiry of 14 days from the date of this judgment.