PINE HARVEST LTD AND ANOTHER v. HUI CHE SHING AND ANOTHER

LDCS 48000 / 2012

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 48000 OF 2012

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J U D G M E N T

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Background

1.  This is an application for compulsory sale of all the undivided shares in Section A of Inland Lot No. 2155 (“the 1^st Lot”), with a building erected thereon known as No. 307 Des Voeux Road West, Hong Kong, Section E of Inland Lot No. 2155 (“the 2^nd Lot”), with a building erected thereon known as No. 309 Des Voeux Road West, Hong Kong and Section B of Inland Lot No. 2155 (“the 3^rd Lot”), with a building erected thereon known as No. 311 Des Voeux Road West, Hong Kong, for the purposes of the redevelopment pursuant to Section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”). The 1^st Lot, the 2^nd Lot and the 3^rd Lot are hereinafter collectively referred to as “the Lots”

2.  There is erected on each of the Lots a 6-storey composite building with a ground floor shop, a mezzanine floor (or cockloft) and upper floor domestic units. These buildings, hereinafter collectively referred to as “the Buildings”, are connected to each other by staircases intended for common use by occupiers of the Buildings.

3.  The undivided interests of the respective units of the Buildings sharing each of the Lots as well as their corresponding ownerships when the Applicants commenced the present proceedings on 30 August 2012 are shown in the table below:

Floor	No. 307 Des Voeux Road West (Ownership)	No. 309 Des Voeux Road West (Ownership)	No. 311 Des Voeux Road West (Ownership)
Ground Floor	3[1] (1st Applicant)	2 (1st Applicant)	2 (1st Applicant)
Mezzanine Floor		1 (2nd Applicant)	1 (2nd Applicant)
1st Floor	2 (1st Respondent)	2 (1st Applicant)	2 (1st Applicant)
2nd Floor	2 (1st Applicant)	2 (1st Applicant)	2 (1st Applicant)
3rd Floor	2 (1st Applicant)	2 (2nd Applicant)	2 (1st Applicant)
4th Floor	2 (2nd  Respondent)	2 (1st Applicant)	2 (1st Applicant)
Penthouse & Roof	1 (1st Applicant)	1 (1st Applicant)	1 (1st Applicant)
Total	12	12	12

4.  Thus as at the date of the captioned application, the 1^st Applicant and the 2^nd Applicant (hereinafter collectively referred to as “the Applicants”) together owned 66.67% equal undivided  parts or shares in the 1^st Lot,  100% equal undivided parts or shares in the 2^nd Lot and 100% equal undivided parts or shares in the 3^rd Lot.  The average of the percentage of the undivided shares owned was 88.89% pursuant to Section 3(2) of the Ordinance. They then owned not less than 80% of the undivided shares in the Lots and were entitled to make the present application by virtue of the Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice under Section 3(5) of the Ordinance (“the Notice”).

5.  On 5 August 2013, the 1^st Applicant also acquired the interest of the 1st Respondent. The Applicants have re-amended the Notice of Application and have discontinued the application against the 1st Respondent.[2]  As at the commencement of the trial, only the 2^nd Respondent remained, that being the registered owner of 2 shares in the 1^st Lot and 4^th Floor of No. 307 Des Voeux Road West, Hong Kong. The average of the percentage of the undivided shares owned by the Applicants is 94.44%.

6.  In respect of the 2^nd Respondent, Mr MOK Yeuk Chi (“Mr. Mok”), Counsel for the Applicants, submits that the 2^nd Respondent has deceased. Although the solicitors for the Applicants have received a letter from Messrs. Peter Mo & Co., Solicitors & Notaries, dated 7 August 2013 that an application by the intended administratrix to the estate of the 2^nd Respondent for Letters of Administration had been lodged with the Probate Registry of the High Court on 6 August 2013, no Probate or Letters of Administration has been granted. Mr. Mok also submits that the Applicants have duly served all the papers on the 2^nd Respondent, including but not limited to entering into a Provisional Agreement for Sale and Purchase with the former intended administrator to the estate of the 2^nd Respondent dated 28 May 2010, Agreement and a Supplemental Agreement dated 19 August 2010 for the purchase of the 2^nd Respondent’s interest which was nevertheless cancelled on 16 March 2012 for want of representation.  In any event, no Notice of Opposition or any other evidence on behalf of the 2^nd Respondent has been filed; the 2^nd Respondent was unrepresented at the trial. 

7.  In view of the above, Mr Mok simply called the witnesses to prove the Applicants’ case.  The Applicants contend that all the requirements of the Ordinance have been satisfied and ask for an order for sale in terms of the draft order submitted. 

Section 3 of the Ordinance – Ownership of the Applicants

8.  Section 3(1) of the Ordinance requires the Applicants to have not less than 90% of the undivided shares in a lot before it can make an application. 

9.  Section 3(5) of the Ordinance also states that the Chief Executive in Council may, by notice in the Gazette, specify a percentage lower than the percentage mentioned in subsection (1) in respect of a lot belonging to a class of lots specified in the notice.

10.  Pursuant to Section 3(5) of the Ordinance, the Notice was gazetted on 22 January 2010 and tabled at the Legislative Council meeting on 27 January 2010.  It came into operation on 1 April 2010.  Section 3 of the Notice lowered the threshold for compulsory sale, insofar as it is applicable, from 90% to 80%.  Section 4(1)(b) of the Notice specified one of the classes for the purposes of Section 3 as “a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (which is the date of the application)”.  The occupation permit of the Buildings was issued on 19 July 1955, which is more than 50 years as at the date of application.  The Buildings are therefore covered by the Notice and the applicable percentage is 80%.

Determination of the existing use values (“EUV”) of all units in theBuildings

11.  Pursuant to section 3 of the Ordinance, the Application was accompanied by a valuation report (“Application Report”) prepared by Mr. Alnwick Chan of Knight Frank Petty Ltd. (“Mr. A. Chan”), the Applicants’ valuation expert witness, containing the assessments of the values of all units (which are conveniently termed as the existing use values, the “EUV” of all units) in the Buildings on the Lots as at 1 June 2012.

12.  Under section 4(1)(a)(i), if there is a dispute between the parties on the EUV of the units in the Buildings on the Lots, the Tribunal has to determine the values. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the Lots who cannot be found, for instance, the 2^nd Respondent as submitted by the Mr. Mok, the majority owner of the Lots 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.”

13.  In the Application Report of 29 August 2012, Mr. A. Chan explained the method of valuation and the process of his assessment to arrive at the EUV of each unit of the Buildings.

14.  In his valuation of the EUV of the domestic units of the Buildings, Mr A. Chan adopted the following methodology :

(a) He selected 3^rd Floor, No. 307 Des Voeux Road West (“the Reference Domestic Unit”), which was situated on the middle floor of the domestic portion as the reference unit for the purpose of valuing its unit price. 

(b) The unit price of the Reference Domestic Unit was first assessed by making reference to market comparables.  He took into account 4 comparable transactions all in different buildings nearby.  After making what he regarded as the necessary adjustments (for time, location/accessibility, age, lift service, floor, size, building condition, internal condition and view) for all these comparable transactions, he took the average of the adjusted unit rate of the comparables to come to the unit price of the Reference Domestic Unit.

(c) He further considered the floor difference, view, size and internal conditions of the Reference Domestic Unit and the remaining domestic units within the Buildings and made adjustments to arrive at the EUV of all the domestic units.

15.  For the Penthouses & Roofs of the Buildings, Mr A. Chan converted their saleable areas of the Roofs as domestic by using a conversion factor of 1:8 and valued the Penthouses as domestic.

16.  In assessing the EUV of all Ground Floor units, Mr A. Chan noted the Ground Floor and Mezzanine Floor of No. 307 Des Voeux Road West are registered as a single property in the Land Registry. Whilst Ground Floor and Mezzanine Floor of either No. 309 or 311 Des Voeux Road West are registered separately, according to the approved building plans, units on those respective Mezzanine Floors are provided with separate access independent of the units on Ground Floor. He adopted the following methodology:-

(a) Zoning Method was adopted, due to the elongated layout of the ground floor units.

(b) Mr A. Chan adopted Ground Floor, No. 307 Des Voeux Road West, No. 309 Des Voeux Road West and No. 311 Des Voeux Road West respectively as the reference unit (“the Reference Shop Unit”).  He then took into account 4 comparable transactions in 3 different buildings nearby. After making what he regarded as the necessary adjustments (for time, location, building age, internal condition, frontage, return frontage, headroom, quantum) for all these comparable transactions, he took the average of the adjusted unit rate of the comparables to come to the unit price of the Reference Shop Unit.

(c) To facilitate the assessment of whole ground floor unit, including shop portion and ancillary portion (i.e. yard and mezzanine floor, if appropriate), such unit rates in terms of Zone A (“ITZA”) were then converted into unit rate on saleable area.

17.  The Applicants have noted from the occupation permit issued on 19 July 1955 that the Buildings and other adjacent buildings not being the subject of the Application (i.e. Nos. 307-317 Des Voeux Road West altogether) were for “domestic purposes” whereas the approved building plans dated 30 November 1954 and 17 March 1955 provided for the ground floor shop accommodation.  Mr. Mok submits that the domestic permit referred to stating that the architect had certified that the new building complied in all respects with the provisions of the Buildings Ordinance (Chapter 123 of the Revised Edition, 1950) could only mean that the new building was constructed in accordance with the approved building plans with ground floor shops, cocklofts and upper floor domestic units. Under the then Buildings Ordinance, 1950 Edition, there were the following significant differences to the current issue of the Buildings Ordinance (“BO”):

(a) Section 2 defines ‘domestic building’ to mean “any building constructed, used or adapted to be used, wholly or partly, for human habitation, but does not include any building where caretakers only, not exceeding two in number, pass the night” (underline added) whereas the current version of the BO defines ‘domestic building’ to mean “a building constructed or intended to be used for habitation and the expression domestic purposes shall be construed accordingly”  In other words, submits Mr. Mok, unlike under the 1950 BO, a domestic building under the current BO has to be wholly for human habitation and cannot be partly for non-domestic use.

(b) There is no provision prohibiting material change of use as found in section 25 of the current BO.

(c) Whereas section 137(1) provided for the need of a written permit from the Building Authority to occupy a new building, the first sentence of section 137(2) provided: “In issuing permits the Building Authority shall have regard to the nature of the building and its fitness for occupation or use as a domestic or as a non-domestic building and shall accordingly issue permits appropriate to such occupation or use”. Mr. Mok submits, a domestic permit issued to a new building could be partly (such as Ground Floors and cocklofts) for non-domestic use and were not inconsistent with the approved building plans providing for Ground Floor shops and cocklofts.

(d) The second sentence of section 137(2) provided: “And no person shall wilfully use or knowingly permit to be used any building with respect to which a non-domestic permit has been issued as a domestic building”. Mr. Mok submits that unlike the current BO, the prohibition went only one way to prohibit non-domestic buildings to be used as domestic buildings but not the other way round.

18.  Accordingly, submits Mr. Mok, under the 1950 BO, the domestic permit issued to cover the Buildings was consistent with what was expressly provided in the approved building plans for the non-domestic use of the ground floor and cockloft units and such non-domestic use was/is the permitted use.

19.  Indeed, recently in Tsuen Wan Trade Association Education Foundation Ltd. v. Chui Kam Ying [2012] 2 HKLRD 1163, Jeremy Poon J., deciding on a similar provision under the old Buildings Ordinance No 18 of 1935, ruled that “even if two domestic permits had in fact been issued, it does not necessarily follow that the Property can be used for residential purpose only.  …..  This inferentially but strongly shows that the Property can in fact be used for non-residential purposes legally.” (underline added). I therefore accept Mr. Mok’s submission as regards the ground floor shop and cockloft usage.

20.  Mr. A. Chan updated the Application Report by a supplemental report dated 28 May 2013 (“Supplemental Report”) in which he revised the EUV of all the units in the Buildings after taking into account the inspection of more units in the Buildings and the updated property index prepared by the Rating and Valuation Department. In the Supplemental Report, Mr. A. Chan repeated the exercise he did in the Application Report with the new information and set out his revised assessments of the EUV of each unit as at 1 June 2012. In this exercise, however, Mr. A. Chan carried out his valuation based on two different scenarios. In scenario 1, as in the Application Report, the EUV of the 3 Penthouse & Roof Units were assessed as Penthouses and Roof as stated in the Deed of Mutual Covenants and the First Assignments of these units whereby higher valuers were obtained. For scenario 2, the EUV of the 3 Penthouse & Roof Units were however assessed as Drying Shelter as provided in the approved building plans. As in the Application Report, Mr A. Chan converted their saleable areas of the Roofs as domestic by using a conversion factor of 1:8 but assigned 1.5 times the value of the open roof for the Penthouses to arrive at lower values.

21.  Mr. Mok submits that there may be a legitimate argument that the 3 Penthouse & Roof Units are entitled to be valued at the higher EUV as Penthouses and Roofs because of the following:

(a) The 1950 BO did not contain any provision against the material change of user, in this case from Drying Shelters to Penthouses and Roofs.

(b) The First Assignments of the 3 Penthouse & Roof Units and the 3 Deed of Mutual Covenants of 1956 and 1957 all identified the 3 Penthouse & Roof Units as Penthouses and Roofs.

(c) The 3 Penthouse & Roof Units have been sold and used as Penthouses and Roofs right from the beginning since 1956 and 1957 for about 57 years and it might be fair and reasonable that their EUV should be assessed on this basis.

22.  Mr. Mok submits however that to avoid impression that the Applicants may be taking advantage of the missing and deceased 2^nd Respondent without any grant of administration[3], the Applicants agree that the Tribunal shall assess the EUV of the 3 Penthouse & Roof Units as Drying Shelters, i.e. scenario 2 in accordance with the approved building plans. In this regard, I accept Mr Mok’s submission and hold that the EUV of the 3 Penthouse & Roof Units should be determined on the assumption that all the units are for Drying Shelters only.

23.  Notwithstanding my agreement in paragraph 19 above with Mr. Mok’s submission as regards the ground floor shop and cockloft usage, I note in the meantime, there was a dispute between the 2 valuation experts[4] on whether the Zoning Method was applicable in the EUV assessment for shops in Good Faith Properties Limited and Others v. Cibean Development Company Limited, LDCS 42000 of 2011, dated 31 May 2013 (“the Good Faith Properties case”). When I drew this to the Applicants’ attention, Mr. A. Chan conceded that the direct comparison method (instead of the zoning method) should be adopted for the Application and revised his assessments for the shops accordingly. For the sake of comparison, the relevant portion of Mr. A. Chan’s assessment for the shop, for instance, on Ground Floor, No. 307 Des Voeux Road West in the Supplemental Report and his revised assessment are reproduced below:

Assessment in the Supplemental Report based on Zoning Method

Comparable No.	Effective Area (m2)	Effective Area (ITZA) for shop portion (m2)	Effective Unit  Rate (ITZA) for shop portion (/m2)	Adjustments		Total Adjustment	Adjusted Unit  Rate (ITZA) for shop portion (/m2)
				Quantum	Others
Reference Unit	61.19	36.67
1	44.85	29.36	$190,722	-2.0%	39.0%	37.0%	$261,289
2	57.25	36.25	$276,260	0.0%	8.1%	8.1%	$298,637
3	26.31	25.91	$203,782	-3.0%	49.5%	46.5%	$298,541
4	37.66	23.83	$272,765	-2.0%	34.8%	32.8%	$362,232
						Average	$305,175
			Adopted Unit  Rate on saleable area				$210,707

Assessment after Revision based on Direct Comparison Method

Comparable No.	Effective Area (m2)	Effective Unit  Rate (/m2)	Adjustments		Total Adjustment	Adjusted Unit  Rate for shop portion (/m2)
			Quantum	Others
Reference Unit	61.19
1	44.85	$125,975	-2.0%	39.0%	37.0%	$172,586
2	57.25	$196,786	0.0%	8.1%	8.1%	$212,726
3	26.31	$200,684	-3.0%	49.5%	46.5%	$294,002
4	37.66	$172,597	-2.0%	34.8%	32.8%	$229,209
					Average	$227,131

24.  I note from the above that after revision based on the direct comparison method, Mr. A. Chan has arrived at his assessment about 8% upwards without changing any of his adjustments. Mr. Mok for the Applicants submits that as the original assessments for the shops in the Supplemental Report appear to yield lower values which are more favourable to the missing and deceased 2^nd Respondent, the Applicants are happy to adopt the original assessments for the shops.

25.  Nevertheless, although the Zoning Method, by its application, takes account of mainly changes in value due to depth, it does incorporate some allowance for size. For instance, applying the Zoning Method, the size difference between the Reference Unit being Ground Floor, No. 307 Des Voeux Road West and Comparable No. 1 is about 20% when Mr. A. Chan made an allowance of 2%. When adopting the direct comparison method, however, the size difference is about 27%. Thus, for the size factor alone, it appears a higher adjustment should be adopted.

26.  Indeed, in the Good Faith Properties Limited case, it was agreed between the parties that the adjustment for size should be 1% for every difference in Effective Floor Area of 5 sq. m. If such “rule of thumb” adjustment is adopted, the assessment for the shop on Ground Floor, No. 307 Des Voeux Road West should be as follows:

Comparable No.	Effective Area (m2)	Effective Unit  Rate (/m2)	Adjustments		Total Adjustment	Adjusted Unit  Rate for shop portion (/m2)
			Quantum	Others
Reference Unit	61.19
1	44.85	$125,975	-3.0%	39.0%	36.0%	$171,326
2	57.25	$196,786	-1.0%	8.1%	7.1%	$210,758
3	26.31	$200,684	-7.0%	49.5%	42.5%	$285,975
4	37.66	$172,597	-5.0%	34.8%	29.8%	$224,031
					Average	$223,023

That is, the increase should be about 6% instead of 8%.

27.  Also, in the Good Faith Properties Limited case, Mr. A Chan took the liberty to adjust for the layout and depth to frontage ratio when the Zoning Method was not applied[5] but here, in answer to my query, he replied such adjustment(s) was not necessary.

28.  Whilst property valuation is not an exact science, mathematical precision is neither a feature of valuation for retail properties for the imperfection in the market where even between skill valuers the margin of opinion may be surprisingly wide. In Tsang Ling Chu trading as Wrench Engineering Co. v. Director of Lands, LDLR No. 23 of 1994, dated 20 May 1996, the Lands Tribunal was even hesitant to make an adjustment that is within the discrepancy range of 10%. I accept therefore Mr Mok’s submission that the original assessments for the shops as contained in the Supplemental Report be adopted for the purpose of determining the EUV in this Application.

29.  The EUV of all units in the Buildings, including the 2^nd Respondent’s unit, as at the relevant date of valuation of 1 June 2012 are as shown under scenario 2 in the Supplemental Report of Mr. A. Chan: see the table at Bundle C(4)/ 1268 which is reproduced below:

Floor	No. 307 Des Voeux Road West	No. 309 Des Voeux Road West	No. 311 Des Voeux Road West
Ground Floor	$12,911,090	$10,568,680	$10,568,680
Mezzanine Floor		$1,013,733	$1,013,733
1st Floor	$3,748,214	$3,704,518	$3,704,518
2nd Floor	$3,748,214	$3,631,880	$3,631,880
3rd Floor	$3,674,720	$3,559,242	$3,559,242
4th Floor	$3,527,731	$3,486,605	$3,486,605
Penthouse & Roof	$448,310	$447,821	$441,456
Total	$80,876,872

30.  I am satisfied, insofar as it is necessary, that the value of the 2^nd  Respondent’s unit as assessed by Mr. A. Chan is not less than fair and reasonable and not less than fair and reasonable when compared with the value of the Applicant’s properties:

(a) the 2^nd Respondent’s unit - assessed at $3,527,731 (representing 4.3619% of the total EUV of all units); and

(b) the total EUV of all units - assessed at $80,876,872.

Section 4(2) of the Ordinance - Justification and Reasonable Steps

31.  The second determination under Section 4(1)(b) of the Ordinance is whether an order of sale should be made.  According to Section 4(2) of the Ordinance, this would involve 2 considerations, namely :-

(a) is the redevelopment justified due to age or state of repair of the Buildings; and

(b) has the Applicant taken reasonable steps to acquire all the undivided shares in the Lot.

32.  The Applicants have to satisfy this Tribunal that the above statutory requirements were met, otherwise, an order of compulsory sale ought not be granted. 

33.  Firstly, for the requirement under (a) above, I have taken into consideration the expert evidence of Mr. Benson Wong (“Mr. Wong”), the building surveyor and Mr. So Kin Shing (“Mr. So”), the structural engineer adduced by the applicants. 

34.  Mr. So had conducted a structural assessment of the Buildings and prepared a report dated 27 May 2013. He found the following defects in the Buildings:

(a) visual inspections showed many defects in the form of spallings and cracks in the structural members of the Buildings;

(b) covermeter survey revealed that the concrete covers of the concerned columns are not sufficient to (1) protect the embedded steel reinforcement bars against corrosion, (2) protect the bars against fire, and (3) provide sufficient depth of concrete for the safe transmission of bond forces;

(c) carbonation depth test results revealed that carbonation has penetrated pass the concrete cover of beam samples and slab samples; this means the alkaline environment in many of the concrete covers which gives protection to the reinforcement bars in the structural members against corrosion has been destroyed and steel bars in these structural members must have caused to corrode;

(d) chloride content tests showed an increased risk of corrosion of the embedded steel reinforcement bars in the reinforced concrete structural members;

(e) corrosion (open up) surveys revealed columns, beams and slabs exhibit rust of various magnitudes and suffered from reduction in their cross-sectional areas due to corrosion;

(f) the structural frames of the Buildings are deteriorating and they need to be repaired, the deterioration will continue steadily due to extensive carbonation of the reinforced concrete structural members;

(g) the design and construction of the structural frames were based on an obsolete design, there are at least 10structural design and construction aspects where the Buildings cannot meet the current structural engineering design requirements and the Buildings may not process adequate robustness to prevent it from damages arising from accidents or misuse.

(h) The design and use of timber pile foundation for the
Buildings is obsolete.

35.  Based on the above findings, Mr. So concluded that the structural frames of the Buildings are in need of repair and the Buildings, completed 57 years ago, have exhibited signs that the structural frames have deteriorated to the final stages of its design working life. The deterioration will continue steadily due to extensive carbonation of the concrete.  It is inevitable that new defects will occur and previous defects though repaired will recur readily, requiring substantial repairs or even partial demolition and re-construction of some defective structural members in the future.  Repair works will need to be carried out regularly in the future and such repairs will be more and more extensive.  Although the cost of repair may be relatively modest, such costs will escalate in the future as the extent and seriousness of the deterioration of the structural members increases with age.  He recommended that hammer tapping works be carried out to all structural members and any defects as a matter of urgency.

36.  Mr. Wong, in his Condition Survey Report dated 28 May 2013 stated that :

(a) the Buildingsare in a poor state of repair due to general wear and tear;

(b) infrared thermographic survey carried out on the external rendering has revealed hollow spots scattered throughout the external walls on all elevations and are potentially dangerous;

(c) the building envelope is not external seepage resistant as evidenced by damp penetrations through the external walls and the main roof coverings;

(d) the staircases are unsatisfactory means of fire escape for the upper floors because no improvement was made to the fire resisting construction and fire service installation in the Buildings;

(e) unauthorized building works of enclosed balcony structures and internal flat sub-divisions adversely affected the structural safety and fire safety standards of the Buildings;

(f) the conditions of the internal doors, finishes, bathrooms and kitchens fitments are poor, the most common defects in the flats are missing or defective bedroom, bathroom and kitchen doors, dampness and spalling to the internal floors, walls and ceilings;

(g) sanitary fitments in the bathrooms and cooking facilities in the kitchens generally are broken or otherwise defective requiring replacement;

(h) original mild steel windows have generally corroded and should be replaced with new aluminum units;

(i) internal electrical installations inside 9 flats have been haphazardly altered and are in poor condition;

(j) internal inspection of flats found equipotential bonding connections are not provided for exposed and extraneous conductive parts;

(k) flushing water supply system  for the Buildings have been put out of use with the flushing water tanks demolished;

(l) condensate drainage system with drain inlets provided for all AC units needs to be installed in order to avoid creating water dripping nuisance;

(m) closed circuit television survey carried out to the underground drainage has revealed defective drainpipes and manholes requiring replacements;

(n) defects in electrical installation that require repair and maintenance;

(o) fire service systems required to be added in compliance with the requirements of the Fire Safety (Buildings) Ordinance.

37.  Mr. Wong assessed the total cost of repair works at $7,929,249 which amounts to 53% of the construction cost of a new similar superstructure.  He came to the conclusion that the Buildings have deteriorated to a state which is beyond reasonable economic repair as signified by the high repair cost.  As more rapid deterioration will occur in the future, the necessary maintenance and repairs will inevitably be more frequent and extensive, making the continued occupation of the Buildings not economical and even unsafe, to both occupants and third party.  He recommended the owners to redevelop rather than repair given the Buildings do not possess any historical value or architectural merit. 

38.  The Applicants also rely upon two economic tests, i.e. the age test and the repair test, conducted by Mr. A. Chan in his Supplemental Report.

39.  For the repair test, Mr. A. Chan adopted the findings by Mr. Wong that the total estimated cost to restore the Buildings to tenantable standard is $7,929,249.  The enhancement by the repairs (the difference between the After EUV and the Before EUV) under scenario 1 is $3,169,839 and under scenario 2 is $3,000,741; it is not economically justified to carry out the proposed repair works.  Another important consideration is the expected time required and the complication involved with unit owners suffering disturbance and loss of rental during the repair period. On top of this, Mr. Chan found that since the total cost of immediate repair works is about 53% of the construction cost of a new building similar to the Buildings, it is not worthwhile to spend repair cost in a sum over 50% of total construction cost for a new similar building to merely restore it to tenantable standard.

40.  For the age test, Mr. A. Chan assessed the total existing use value (“EUV”) as at 2 April 2013 at $101,941,904 whilst the redevelopment value (“RDV”) is $165,460,000 as at 2 April 2013.  Given the RDV is much higher than the EUV, Mr. A. Chan opined that the redevelopment of the Lots is warranted.

41.  There is no contrary expert evidence andI accept the applicants’ evidence in whole.  In particular, I am satisfied that based on the evidence of Mr. So and Mr. Wong, redevelopment of the Lots is justified due to the age and the state of repair of the Buildings which are in a very poor state of repair and indeed in dangerous condition.

Reasonable Steps to Acquire All the Undivided Shares in the Lots

42.  The Applicantsare under an obligation to negotiate on terms that are fair and reasonable in a situation when the whereabouts of a minority owner are known. The fact that all the Respondents except the 2^nd Respondent have accepted the Applicants’ offers to acquire their interest is telltale of the reasonableness of the steps taken. 

43.  Where the 2^ndRespondent is deceased without any grant of letter of administration, the Applicants submit that there is no obligation to negotiate as imposed by section 4(2)(b) of the Ordinance for the purchase of her interest. Further. It is legally impossible for the Applicants to acquire the 2^ndRespondent’s interest until there is either probate or letters of administration granted in respect of her estate.

44.  In spite of the above, the Applicants did manage to enter into a Provisional Sale and Purchase Agreement and other agreements in 2010 with a Chui Mee Yun (“Miss Chui”) who claimed to be the daughter and intended administrator of the 2^nd Respondent as stated in paragraph 6 above.

45.  The Applicants submit that reasonable efforts have been made to ascertain and contact all interested parties that the Applicants can find and to bring to their notice the Application and the Applicants’ interest to purchase the 2^ndRespondent’s interest, including an offer made via Messrs. Woo, Kwan, Lee & Lo dated 1 August 2012 at $6,870,000 based on the advice on EUV and redevelopment value (“RDV”)given by Mr. A. Chan. The offer was sent to (i) the named executrix of the Will of the 2^ndRespondent, (ii) Miss Chui and (iii) the Tung Wah Group of hospital, the named beneficiary under the Will though conditional upon the grant of probate or letters of administration.

46.  The Applicants also refer to the recent acquisition of the 1^st Respondent’s interest on 5 August 2013 in support.

47.  In those circumstances, I am satisfied that the Applicants have taken reasonable steps to acquire all the undivided shares in the Lots including the 2^ndRespondent’s interest.

Reserved Price for the Auction

48.  The Applicants submit that the reserve price for the auction of the Lots should be fixed at $163,970,000, based on the assessment by Mr. A. Chan of the RDV of the Lots as at 2 July 2013 in his valuation report of 26 July 2013.

49.  I have considered Mr. A. Chan’s valuation.    I agree with him that the residual method has to be employed as the method of assessment of the RDV of the Lots. This is done by deducting development costs (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value of the completed development.

50.  Mr. A. Chan opined that the optimum development on the Lots comprised a block of 28-storey composite development with shops, entrance lobby and transformer room on the G/F, pump room and machine room on the 1/F, recreation facilities on the 2/F, podium garden on the 3/F and domestic units on the 4/F to 27/F with 2 flats per floor. The details of the hypothetical development and residual valuation were set out in Appendix 4 of his RDV valuation report (Bundle C(4)/1410). The details of the comparables with adjustments were set out in Appendix 1 (for shop comparable at Bundle C(4)/1391) and Appendix 2 (for residential comparable at Bundle C(4)/1400).  I have gone through his valuation in details.  I am satisfied with his valuation, including the valuation assumptions he has adopted, the values and the costs parameters that he has used in his valuation. 

51.  Based on Mr. A. Chan’s valuation, I decide that the reserve price for the auction of the Lots should be HK$163,970,000.

Trustees

52.  The Applicants proposed to appoint Mr. Ho Hing Choi Peter and Ms. Hong Tin Yee Yeda who are both senior lawyers of Messrs. Mayer Brown JSM, Solicitors, as the sale trustees.  Based on the information on their background and experience as set out in the letter dated 22 July 2013 from their firm, I am satisfied that they are proper persons to be appointed.  I also approve the remuneration package proposed in the said letter.

Particulars and conditions of sale of the Lots

53.  Mr Mok has submitted a set of draft particulars and conditions of sale by public auction for my consideration.  I understand these are the usual terms used for compulsory sale and I approve them.

Costs

54.  There be no order as to costs as no one has asked for costs.

Conclusion

55.  For the above reasons, I am satisfied that the redevelopment of the Lots is justified due to the age and the state of repair of the existing buildings on the Lots and that the Applicants (as the majority owner) have taken reasonable steps to acquire all the undivided shares in the Lots.  I therefore make an order that all the undivided shares in the Lots, the subject of this application, be sold by the way of public auction for the purposes of redevelopment. I appoint Mr. Ho Hing Choi Peter and Ms. Hong Tin Yee Yeda as the sale trustees to discharge the duties imposed on them under the Ordinance in relation to the Lots and authorized their remuneration for their service as trustees as provided in their letter dated 22 July 2013. I approve the particulars and conditions of sale of the Lots placed before me and grant liberty to the parties and to the trustees to apply for further directions if necessary.