EVERSOUND INVESTMENTS LTD v. AU-YEUNG NGAN SIU AND OTHERS

LDCS 34000 / 2012

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 34000 OF 2012

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JUDGMENT

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The Application

1.  This is an application (“the Application”) made under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) for an order of compulsory sale of all the undivided shares of the Remaining Portion of Kowloon Marine Lot No. 52 (referred to as “the Lot”).

2.  The existing building (“the Building”) on the Lot is a block of 8-storey residential building.  There are altogether 24 units (i.e. 8 storeys x 3 units per floor). They have the street address description of No.23 Wan King Street, No. 24 Wan Shun Street and No. 26 Wan Shun Street. The occupation permit was issued on 25 April 1960.  The Building is therefore more than 50 years old when the Applicant made the application on 18 April 2012.  The ground floor units are according to the occupation permit certified for domestic purpose but they had in the past been used for business purposes. The upper floor units are all certified for domestic purpose.

3.  Each of the 24 units was allotted 2/50 equal undivided shares in the Lot.  The remaining 2 equal undivided shares were allotted to the roof.  All the upper floor units of No.24 Wan Shun Street were further subdivided into Flats A and B, and each of these subdivided units has its separate assignment for 1/50 equal undivided shares.

4.  At the time of the Application, the Applicant owned 40/50 of the equal undivided shares and therefore 80% of the equal undivided shares in the Lot.  Since then, the Applicant has further acquired the properties of the 1^st Respondent, the 4^th Respondent and the 5^th Respondent, which took its interests to 45/ 50 (i.e. 90%) of the equal undivided shares in the Lot.  The remaining Respondents are R2, R3 and R6.

5.  The 2^nd Respondent is the registered owner of “Flat A on 5^th Floor, House No. 10, Block C, No. 24 Wan Shun Street, Kowloon, Hong Kong” while the 6^th Respondent is the registered owner of “Roof of House Nos. 9, 10 & 12, Block C, No. 23 Wan King Street, Nos. 24 & 25 Wan Shun Street, Kowloon, Hong Kong”.  Both the 2^nd Respondent and the 6^th Respondent took no part in these proceedings.  By Order of the Tribunal dated 3 October 2012, the services on the 2^nd and 6^th Respondents were dispensed with.  The 3^rd Respondent is the registered owner of “6^th Floor, House No.12, Block C, No.26 Wan Shun Street, Kowloon, Hong Kong.” The 3^rd Respondent was represented by his sister Madam Lam Wong at the hearing.  She gave evidence herself but otherwise called no other witness.  According to the Applicant, Madam Lam has now entered into an agreement to sell the 3^rd Respondent’s property to the Applicant, with the completion to take place on 13 May 2013. 

6.  Section 3(1) of the Ordinance requires the majority owner making the application to own not less than 90% of the undivided shares in the lot in question, but it is subject to subsection (5).  Subsection (5), which is in turn subject to subsection (6), stipulates 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.  Subsection (6) stipulates that no percentage may be specified in a notice under subsection (5) which is less than 80%.  By virtue of section 3 of the Land (Compulsory Sale for Redevelopment)(Specification of Lower Percentage) Notice, Cap. 545 (“the Notice”), the percentage in section 3(1) of the Ordinance is lowered to 80% in respect of a lot that belongs to any class of lot specified in section 4 of the Notice.  One of the classes of lot specified in section 4 of the Notice is a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the relevant date.  The relevant date is defined in section 2 of the Notice to mean the date of the application.

7.  In other words, for a building with the occupation permit issued more than 50 years before the date of the application for compulsory sale, the majority owner is only required to own not less than 80% of the undivided shares of the lot.  As the occupation permit of the Building was issued more than 50 years before the Application and the Applicant did have not less than 80% of the undivided shares of the Lots at the date of the Application, the Applicant was clearly entitled to make the Application for the compulsory sale of the Lot.

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

8. Under section 3 of the Ordinance, the Applicant has made the Application accompanied by a valuation report (“Application Report”) as specified in Part 1 of Schedule 1, prepared not earlier than 3 months before the date of the Application, 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 Building on the Lot.  This requirement has been met since the date of the Application is 18 April 2012 and the date of the Application Report prepared by Mr. Alnwick Chan of Knight Frank Petty Ltd. (“Mr. Chan”), the Applicant’s valuation expert witness, is of the same date while the relevant date of valuation of the EUV of all units is 21 February 2012.

9. Under section 4(1)(a)(i), if there is a dispute between the parties on the EUV of the units in the Building on the Lot, the Tribunal has to determine the values. 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.”

10. In the Application Report of 18 April 2012, Mr. Chan explained the method of valuation and the process of his assessment to arrive at the EUV of each unit of the Building as at 21 February 2012.

11. Mr. Chan updated the Application Report by a supplemental report dated 14 December 2012 (“Supplemental Report”) in which he has reviewed the EUV of all the units in the Building after taking into account the updated property index prepared by the Rating and Valuation Department and the fact that he was able to gain access to more units. In the Supplemental Report, Mr. 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 21 February 2012:

(1) the 2^nd Respondent’s unit - assessed at $550,168 (representing 1.5887% of the total EUV of all units);

(2) the 3^rd Respondent’s unit – assessed at $1,300,295 (representing 3.7548% of the total EUV of all units)

(3) the 6^th Respondent’s unit - assessed at $491,281 (representing 1.4186% of the total EUV of all units); and

(4) the total EUV of all units - assessed at $34,630,257.

12. In the Supplemental Report, in assessing the EUV of all Ground Floor units. Mr. Chan has carried out his valuation based on two different scenarios, ie. scenario 1, assuming permitted domestic uses as shown in the occupation permit for the Building and scenario 2, assuming the existing non-domestic uses. The EUV assessed under scenario 2 were higher than that assessed under scenario 1. However, the Applicant submits that as the Applicant owns all the Ground Floor units, the Applicant adopts Mr. Chan’s valuation under scenario 1 as this is to the advantage of all outstanding minority owners’ interests.

13. None of the remaining Respondents filed any expert evidence.  Madam Lam Wong for the 3^rd Respondent gave evidence at the trial and she referred to various property value figures she had obtained from estate agents near the date of the trial.  In response to this, Mr. Chan was recalled by the Applicant.  Mr. Chan explained to the Tribunal that the figures produced by Madam Lam Wong were all either inappropriate or unreliable.  In any event, given the sale by the 3^rd Respondent to the Applicant, this is now irrelevant.

14. I accept the EUV valuation of Mr. Chan. I determine that for the purpose of this Application, the EUV of all units in the Building, including the 2^nd Respondent’s unit , the 3^rd Respondent’s unit and the 6^th Respondent’s unit as at the relevant date of valuation of 21 February 2012 are as shown in the Supplement Report of Mr. Chan as stated above.

15. Also, as I accept the expert valuation evidence of Mr. Chan as set out above, I am satisfied that the value of the 2^nd Respondent’s unit, the 3^rd Respondent’s unit and the 6^th Respondent’s unit as assessed in Mr. Chan’s Supplemental Report is not less than fair and reasonable and not less than fair and reasonable when compared with the value of the Applicant’s properties as assessed in the same report.

Justification for Redevelopment

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

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

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

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

18. Firstly, for the requirement under (a) above, I have considered the expert opinion of Mr. Raymond Chan, the building surveyor and Dr. Sammy Chan, the structural engineer.  Both have filed their expert reports and were called to give evidence in the hearing.

19. Mr. Raymond Chan in his report dated 5^th December 2012 examined the various components of the Building and identified the defects in the state of repair thereof. There were also unauthorized building works (“UBWs”). He further set out the features of obsolescence of the Building which did not comply with the current standards and statutory requirements which gave rise to safety concerns.

20. Mr. Raymond Chan concluded that “the Building was generally in a dilapidated and potentially dangerous condition. The structural stability is affected by the defects and UBWs, and that given the Building is more than 50 years old, although extensive repair works may extend the Building’s life span, the continuous maintenance costs are expected to be increasingly high.” He further opined that as the Building was in obsolete design, the upgrading costs would invariably been enormous and therefore would be unjustifiable in comparison with complete redevelopment.

21. Dr. Sammy Chan conducted a structural assessment of the Building and prepared a report dated 17 December 2012.  He carried out inspection of the Building and identified a total of 130 structural defects. He further carried out the following tests on the existing structural conditions of the Building:- (a) compressive strength test, (b) carbonation test, (c) chloride content test, (d) cement content test, (e) sulphur content test, (f) covered meter test, (g) open up survey, and (h) infra-red thermography survey.  He concluded that the overall stability of the Building might be adversely reduced and that Building was in a poor state of repair.

22. Dr. Sammy Chan estimated that the repair costs would be in excess of $11 million, and that due to the extent of repair in terms of area and degree of defects, normal concrete repair works might not be a costs effective solution and would not be worthwhile.

23. The Applicant submits that given the total estimated repair costs of over $18 million, on either the age or the state of repair tests, or both, redevelopment of the Building is justified.

24. There is no contrary expert evidence.  I accept the expert evidence of Dr. Sammy Chan and Mr. Raymond Chan.  I am satisfied that redevelopment of the Building and the Lot is justified due to age and/or state of repair of the Building, particularly bearing in mind the unreported judgment of the Tribunal in Charmlink Ltd v Lee Tong Hing & others (LDCS 16000/2010, unreported) handed down on 29 November 2011:

(1)  “….the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question. The relevant factors in the present case are that the Building is over 50 years old and it has passed its designed life. It is also absolescent in designed and not economical to maintain. All these factors point to the fact that the Building has come to an end of its physical as well as economical life. Thus, we find that redevelopment Is justified on the ground of the age of the Building” (paragraph 30; and see the similarity of the expert evidence summarized in paragraphs 23-28) .

(2) “It is also within the Tribunal’s discretion to determine in what conditions a building should be redeveloped after considering all the relevant factors concerning the sate of repair of the building in question. With the clear evidence from the two experts that the Building is in a poor state of repair and in fact untenantable without substantial repair works to be carried out over a long period of time, we have no hesitation in finding that redevelopment is justified by the state of repair o the Building” (paragraph 31).

Reasonable Steps Taken

25. The Applicant is under an obligation to negotiate on terms that are fair and reasonable in a situation when the whereabouts of a minority owner are known. For the remaining minority owners, the 2^nd , the 3^rd and the 6^th Respondents, the Applicant submitted that it has complied with the statutory obligation to negotiate with them on terms that are fair and reasonable, as stated in the witness statement of Mr. Alex Au-Yeung.

26. Madam Lam Wong disputes the reasonableness of the Applicant’s offers but this has now been overtaken by the sale of the 3^rd Respondent’s property to the Applicant.

27. According to the CFA decision of Capital Well v Bond Star Development Ltd [2005] 4 HKLRD 363, the Tribunal is only required to be satisfied on the evidence available that the Applicant’s offers fall within the range of what might broadly be regarded as fair and reasonable.

28. On the unchallenged evidence of Mr. Chan and Mr. Alex Au-Yeung, I agree with the Applicant that the offers made to the 2^nd , the 3^rd and the 6^th Respondents were fair and reasonable.  And, I am satisfied that reasonable steps have been taken by the Applicants in respect of both the 2^nd , the 3^rd and the 6^th Respondents.

Reserved Price for the Auction

29. The Applicant submits that the reserve price for the auction of the Lot should be fixed at $44,800,000, based on the assessment by Mr. Chan of the redevelopment value (“RDV”) of the Lot as at 21 February 2013 in his valuation report of the same date.

30. I have considered Mr. Chan’s valuation of the RDV of the Lot.    I agree with him that the residual method has to be employed as the method of assessment of the RDV of the Lot.

31. Mr. Chan opined that the optimum development on the Lot comprised a block of 21-storey composite development with shops on G/F, lift lobby and machine room on 1/F, and domestic units on the 2/F to 20/F. The details of the hypothetical development and residual valuation were set out in Appendix 9 of his RDV valuation report (Bundle C(3)/804). The details of the comparables with adjustments were set out in Appendix 7 (for shop comparable at Bundle C(3)/789) and Appendix 8 (for residential comparable at Bundle C(3)/802). 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. 

32. Based on the open market value of the Lot reflecting its redevelopment potential, i.e. the RDV of the Lot, of $44.80 million as assessed by Mr. Chan at 21 February 2013, I decide that this should be the reserve price for the auction of the Lot.

Trustees

33. I find that Mr. Ho Chi Kit and Mr. Cheung Chi Yu, both of Messrs. Katherine YW Or and Co., solicitors, nominated by the Applicant, are suitable persons to be appointed as trustees to discharge the duties imposed on trustees under the Ordinance.  The remuneration, on a lump sum basis (subject to the maximum amount of legal fees charged, exclusive of disbursements, of not more than $60,000) is also reasonable and will be allowed accordingly.

Particulars and conditions of sale of the Lot

34. The particulars and conditions of sale of the Lot by public auction submitted by the Applicant are also reasonable and will be adopted accordingly.

Time for completion of redevelopment

35. The Applicant submits that as stipulated in Schedule 3 of the Ordinance, and subject to such further period as the Tribunal may allow, the redevelopment of the Lot shall be completed and made fit for occupation within 6 years after the date on which the purchaser of the Lot became the owner of the Lot.  I agree.

Costs

36. Since the Applicant and all the Respondents do not ask for costs, I will give a costs order that there be no order as to costs.

Conclusion

37. As aforesaid, I am satisfied that the value of the 2^nd Respondent’s property, the 3^rd Respondent’s property and the 6^th Respondent’s property as assessed at $550,168, $1,300,295 and $491,281 respectively are fair and reasonable,  and are fair and reasonable when compared with the value of the Applicant’s properties as assessed. I am also satisfied that (a) the redevelopment of the Lot is justified due to the age and state of repair of the Building and (b) the Applicant has taken reasonable steps to acquire all the remaining undivided shares in the Lot.  Having considered the above, I am therefore satisfied that the requirements and conditions as laid down in the Ordinance have been met and an order for compulsory sale sought by the Applicants ought be granted.

Orders

38. I therefore grant the following orders:-

(1) The Tribunal is satisfied that each of the values of the 2^nd Respondent’s unit, the 3^rd Respondent’s unit and the 6^th Respondent’s unit (representing 1.5887%, 3.7548% and 1.4186% respectively of the value of all units in the Building) as assessed by Mr. Chan is fair and reasonable and is fair and reasonable when compared with the Applicant’s properties in the Building.

(2) All the undivided shares in the Lot, the subject of the Application herein, be sold by public auction for the purposes of the redevelopment of the Lot.

(3) Mr. Ho Chi Kit and Mr. Cheung Chi Yu, both of Messrs. Y W Or and Co., solicitors, nominated by the Applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs. Katherine YW Or & Co. to Messes. Tony Kan & Co. dated 6 March 2013.

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

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

(b) the reserve price be set at $44,800,000; and

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

(5) Liberty to the Applicant, the 2^nd Respondent, the 3^rd Respondent, the 6^th Respondent and the Trustees to apply to the Tribunal for further directions as may be required under the Ordinance.

(6) There be no order as to costs.