FULLY HK INVESTMENTS LTD AND OTHERS v. POON VAI CHING, THE EXECUTRIX OF THE WILL OF POON KAM CHUEN (DECEASED) AND OTHERS

HCMP 591/2007

in the high court of the

hong kong special administrative region

court of appeal

MISCELLANEOUS PROCEEDINGS no. 591 of 2007

(on INTENDED APPEAL from LAND COMPULSORY SALE

APPLICATION NO. LDCS 3000 of 2005)

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REASONS FOR JUDGMENT

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1.  These were applications by the second respondent for leave to appeal out of time from the order for sale by public auction dated 26 February 2007 made by HH Judge Wong, Presiding Officer of the Lands Tribunal and Mr WK Lo sitting at the Lands Tribunal (“the Tribunal”) and for a stay pending appeal under Order 59 rule 13.  On Friday 30 March 2007, the Presiding Officer of the Tribunal dismissed the second respondent’s application for a stay.  The applications were therefore heard on an urgent basis, the public auction having been scheduled for 4 April 2007.  At the conclusion of the hearing, the applications were refused.  My reasons appear below.

Background

2.  The applicants who own 11 out of 12 flats and 10 out of 11 car parking spaces in a building known as Villa Splendor, 9-12 Chun Fai Terrace, Hong Kong (“the building”) applied for an order of compulsory sale under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”).  The second respondent owns the remaining unit and car parking space (collectively “the remaining unit”).  At the hearing before the Tribunal, the substantive ground of opposition advanced by the second respondent which proved unsuccessful before the Tribunal was that the applicants had failed to make a fair and reasonable offer for the remaining unit.  The Tribunal made an order for sale by public auction with a reserve price of $508.89 million.

3.  The applicants’ application for the compulsory sale order was made as long ago as November 2005.  After three days of hearing in July 2006, it had to be adjourned part-heard and only concluded in late January 2007 after another four days of hearing.  The judgment was handed down on 26 February 2007.

Delay

4.  Time for appealing the order of the Tribunal expired on 19 March 2007.  The summons seeking leave to appeal out of time was not filed until 27 March 2007, a delay of eight days.  The handling solicitor for the second respondent Mr Kwong Chiu Yin filed an affirmation explaining that when judgment was handed down, he looked at the wrong rule prescribing the period of appeal and thought (wrongly) that the applicable period was 28 days.  He came to realise his error only on 23 March when he tried to file the Notice of Appeal.

5.  In considering whether the delay was excusable, it is relevant to have regard to the events between the delivery of the judgment and the filing of the summons for leave to appeal.  On 12 March 2007 the applicants’ solicitors informed the second respondent’s solicitors that the public auction had been scheduled for 4 April 2007 and the first advertisement was to be published on 14 March 2007.  This invited a response the following day to the effect that the second respondent would be appealing.  Later that same day (13 March 2007) the applicants’ solicitors informed the second respondent’s solicitors of the dates of the advertisements, re-iterating the date of the public auction and the fact that the trustees intended to proceed with the auction unless and until there was an order to stay execution.

6.  Having heard nothing, on 15 March the applicants’ solicitors enquired whether an application would be made for a stay and received an affirmative reply.  Notwithstanding this, as noted above, the leave summons was not filed for another 12 days, returnable before me on 4 April 2007 which was the date scheduled for the public auction.  It should be mentioned that even at that stage, no attempt had been made to file any application for a stay.  That only happened two days later on 29 March when a summons was taken out for a stay of execution before HH Judge Wong.

7.  In these circumstances, even if Mr Kwong’s explanation of his original error were accepted, I find it surprising (to say the least) that, upon learning of the date of the public auction and the intention to proceed with it in the absence of any stay of execution, he was not goaded into immediate action.  I pause here to observe that without a stay of execution, any leave to appeal even if it were as of right would be of no avail to the second respondent.  Whilst there is no prescribed period for applying for a stay, it goes without saying that such applications should be made with expedition.  On the facts of the present case, one would have expected the two applications to have been made in tandem immediately.  The events mentioned would have prompted any prudent solicitor to proceed with maximum dispatch and to double check any time constraints for the making of the relevant applications.  The fact that this did not happen I do find inexplicable.

8.  It would appear from enquiries made by this court of the listing officer that when the summons for leave to appeal was filed, although a request was made for an early date, there was no indication of any urgency. As noted above, the original hearing date obtained was 4 April, the date of the auction itself.  Yet no attempt was made by the second respondent’s solicitors to seek an earlier date.  It fell to the solicitors for the applicants who, upon receipt of the summons, invited attention to the urgency of the matter and requested and obtained an expedited hearing date.  The conduct of the second respondent’s solicitors in this regard is symptomatic of its lackadaisical approach.

9.  Having regard to all the circumstances, I consider the delay of the second respondent in seeking leave to appeal to be inexcusable.

Merits

10.  Where the delay is inexcusable, for leave to appeal out of time to be granted, the second respondent must demonstrate a real prospect of success on the merits.  I therefore turn to consider the merits of the proposed appeal.

11.  It is common ground that under the current OZP dated 30 September 2005 which applies to the lot on which the building stands, any redevelopment can only be on the basis of plot ratio 5.  There is, however, a set of approved plans for the lot in existence allowing it to be redeveloped on the basis of plot ratio 9.  It would appear that some time prior to commencement of the current OZP, a company by the name of Luck Dragon submitted and obtained approval of a set of plans for the lot on the basis of plot ratio 9.  It is accepted by the applicants that Luck Dragon is a related entity, the applicants and Luck Dragon having a common parent holding company.  It is unclear whether its rights under the approved plans with plot ratio 9 are assignable.  In any event, Luck Dragon itself is in a position to utilize those rights should it be the developer.

12.  According to the second respondent’s expert, Mr Faulkner, on the basis of plot ratio 5, the market value of the lot is $508.89 million and on the basis of plot ratio 9, its value is $917.7 million.  The second respondent’s share, depending on the applicable plot ratio, would be approximately $43.15 million or $77.78 million, as the case may be.  Before the Tribunal, the main dispute was whether the lot should be valued on the basis of plot ratio 5 or plot ratio 9.

13.  The Tribunal concluded that the offer made by the applicants of $42.5 million was a fair and reasonable one thus satisfying section 4(2)(b) of the Ordinance which is one of the preconditions for the making of a compulsory sale order.  It is the second respondent’s case that the Tribunal erred in so concluding in that the value of the lot was based exclusively on plot ratio 5 and the existence of a ‘special interest’ purchaser (viz. the owner of the approved plans based on plot ratio 9) to whom the lot would be worth considerably more was totally disregarded.  It was said that a value should have been attributed to that factor in assessing the value of the lot since that exercise had to be undertaken before a view could be formed as to the fairness and reasonableness of the offer.

14.  In reaching its conclusion, the Tribunal adopted the approach laid down by the Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd [2004] 4 HKLRD 363.  The second respondent’s contention, as refined in the course of the hearing, was that Capital Well is distinguishable and/or that there was scope for the application of what was described as the Raja line of cases.

15.  A convenient starting point is the decision in Capital Well.  In that case, the respondent had acquired five contiguous tenement buildings occupying six lots in a particular street.  These were demolished with a view to the redevelopment of the entire site.  Subsequently, the respondent’s acquisition of a half-share interest in the tenement in the middle of that row was set aside as an unconscionable bargain.  The appellant purchased that half share for $2.4 million.  The appellant’s interest was calculated to be 2.16% of the whole, applying the methodology set out in section 3(1) of the Ordinance.  It rejected the respondent’s offer of $2.5 million and counter offered $15 million.  The appellant contended that to attribute the appellant’s interest at 2.16% was wrong in that it ignored “the strategic position” of the tenement in question and hence the appellant’s ability to prevent the respondent’s realisation of the “marriage value” of redeveloping the entire lot.  Before the Tribunal, the appellant’s contention was that its value should be assessed at $3,377,500, reflecting an interest of the order of some 3% rather than 2.16%.

16.  The proper approach and the nature of the section 4(2)(b) exercise appear from the following passage in the judgment of Ribeiro PJ:

“	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.  If duly satisfied that the rejected offer was fair and reasonable, the Tribunal may make the order, leaving the value and level of compensation to be determined by the public auction….
	34.	… Mr Chain sought to argue that the Tribunal had erred in failing to recognise that a valuation of the minority owner’s interest was obliged to take into account the Lot’s “strategic position” and “marriage value”.  He submitted that any valuation which failed to attribute significant value to those features of the Lot over and above its proportionate value was wrong in principle and could not serve as a basis for judging whether the $2.5 million offer was fair and reasonable.  As the Tribunal had relied precisely on such deficient valuation evidence, it was wrong as a matter of law.  Mr Chain was therefore approaching the s.4(2)(b) exercise as if it required the Tribunal to decide first what the correct valuation was, and only then to assess the fairness and reasonableness of the majority owner’s offer against the valuation carried out on correct principles.
	35.	We do not consider that the Tribunal is required to perform any such task.  At most contested hearings, one may expect conflicting evidence as to value to be filed.  The present case is a good illustration.  The evidence as to how “marriage value” is to be assessed and how much of it should be attributed to the minority owner’s interest was hotly disputed before the Tribunal…. The Tribunal does not need to resolve conflicts of this nature since it does not have to decide on the value of the interest for itself.”

17.  Mr Smith SC who appeared for the second respondent relied on Inland Revenue Commissioners v Clay [1914] 3 KB 466, a case concerning the assessment of the gross value of land for the purposes of the Finance Act 1910.  In that case the house if used as a private residence was what not worth more than £750 but it adjoined a nurses’ home the trustees of which were desirous of extending the home.  The trustees were willing to pay £1000 for the house which was actually purchased by them for that amount.  On the question of the factors to be taken into account in assessing the open market value of the house for the purposes of the Finance Act 1910, Swinfen Eady LJ said (at page 475):

“It scarcely needed evidence to inform us – it is common knowledge – that when the fact becomes known that one probable buyer desires to obtain any property, that raises the general price or value of the thing in the market.  Nor only is the probable buyer a competitor in the market, but other person, such as property brokers, compete in the market for what they know another person wants, with a view to a resale to him at an enhanced price, so as to realize a profit.  A vendor desiring to realize any land would ordinarily give full publicity to all facts within his knowledge likely to enhance the price.”

Mr Smith SC submitted that this principle (which I will refer to as “the Clay factor”) was applicable in the present case because Luck Dragon was likely to offer more than the property would be worth to anybody else because of its ability to utilise the approved plans based on plot ratio 9.  He submitted that the Tribunal erred in disregarding that fact.  Reference was also made to the decision of the Privy Council in Raja Vyricherla Narayana Gajapatiraju v The Revenue Divisional Officer, Vizagapatam [1939] AC 302 at 312 where Lord Romer said:

“… the value of the land is not to be estimated at its value to the purchaser.  But this does not mean that the fact that some particular purchaser might desire the land more than others is to be disregarded.  The wish of a particular purchaser, though not his compulsion, may always be taken into consideration for what it is worth.”

18.  I do not consider those authorities to be of assistance to the second respondent.  As Mr Mok who appeared for the applicants rightly submitted, the Raja line of cases establishes assumptions for assessments and valuation purposes that apply in a context where there is absolutely no possibility of an actual auction.  Where, as here, there is to be a public auction, the factors mentioned in the judgment of Swinfen Eady LJ quoted above would be matters that would be taken care of by the actual process of the public auction.  To say that the Tribunal should seek to attribute a value to those factors so as to establish a valuation by reference to which the fairness and reasonableness of the offer is to be determined is little short of inviting the Tribunal, as it were, to second guess the outcome of the public auction.  That is at odds with the principles set out in Capital Well.

19.  It is clear from that decision that in assessing whether reasonable steps had been taken by the majority owners under section 4(2)(b) of the Ordinance, the role of the Tribunal is not to conduct a valuation exercise. Mr Smith SC sought to distinguish Capital Well on the basis that the Tribunal’s finding in that case was made on the basis of both sides’ valuation evidence on the open market value of all six lots, taking account of the composite sites redevelopment potential.  He submitted that this was not the present case since what is in the issue is the Tribunal’s assessment of the lot’s redevelopment potential.  But if Capital Well is properly understood, it is not distinguishable.  What according to Mr Smith SC the Tribunal ought to have done is precisely what the Court of Final Appeal held a Tribunal should not do – to engage in a valuation exercise that decides what valuation principles ought or ought not be adopted such as ‘marriage value’ ‘strategic position’ ‘special interest’ and the like and how they are to be assessed.

20.  The value of the lot on the basis of plot ratio 5 is not in dispute.  As to the question how the court is to “decide what figure to put on top” of the plot ratio 5 to reflect the Clay factor, the second respondent’s stance below was that that was a question of quantum.  Yet, it is clear from the transcript of the evidence of the second respondent’s expert that he could not tell what the quantum was except that it should be somewhere between the levels of plot ratio 5 and plot ratio 9.  As I have said, that is a matter that is to be resolved as part of the actual auction process.

21.  In my view, I have no hesitation in concluding that the second respondent failed to demonstrate a real prospect of success on the merits.  Even if (contrary to my view) the delay where held to be excusable, the second respondent has failed to show an arguable appeal.