ABLE WIDE CORPORATION LTD AND OTHERS v. THE INCORPORATED OWNERS OF GOOD YEAR INDUSTRIAL BUILDING AND ANOTHER

LDCS 1000/2020

[2022] HKLdT 69

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 1000 OF 2020

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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 Section A and Remaining Portion of Kun Tong Inland Lot No 1 (“the Lot”) on which stands an industrial building known as Good Year Industrial Building at Nos 119 – 121 How Ming Street, Kwun Tong, Kowloon (“the Building”).

2.  The Building comprises a 15-storey industrial building and is served by 2 cargo lifts and 3 common staircases. Occupation Permit No NK 87/78 was issued by the Building Authority for the Building on 11 August 1978, granting permission to occupy its ground floor as workshop, garage, switch room, transformer room and 2 pump rooms for non-domestic use, and its 1^st to 14^th floors as workshops for non-domestic use. According to the approved building plans for the Building (“Approved Building Plans”), there are 2 industrial units, 5 private car parking spaces and 6 lorry parking spaces planned on ground floor, 1 industrial unit planned on 1^st floor, 3 industrial units planned on each of 2^nd to 4^th floors, and 4 industrial units planned on each of 5^th to 14^th floors.

3.  According to the records of the Lands Registry, each of the 4 industrial units on 5^th floor is attached with a flat roof, each of the 4 industrial units on 14^th floor is attached with roof.

4.  The Lot together with the Building standing thereon is allocated with 1,000 undivided shares with 3/1000 allotted to each of the 11 car parking spaces and the rest in the following distribution:

	Undivided Shares
	Factory A	Factory B	Factory C	Factory D
G/F	22/1000	46/1000	NA
1/F	NA	45/1000
2/F	22/1000	25/1000	45/1000	NA
3/F	22/1000	25/1000	45/1000
4/F	22/1000	25/1000	45/1000
5/F (each unit including its respective flat roof)	14/1000	20/1000	20/1000	14/1000
6/F	11/1000	17/1000	17/1000	11/1000
7/F	11/1000	17/1000	17/1000	11/1000
8/F	11/1000	17/1000	17/1000	11/1000
9/F	11/1000	17/1000	17/1000	11/1000
10/F	11/1000	17/1000	17/1000	11/1000
11/F	11/1000	17/1000	17/1000	11/1000
12/F	11/1000	17/1000	17/1000	11/1000
13/F	11/1000	17/1000	17/1000	11/1000
14/F (each unit including its respective roof)	12/1000	19/1000	19/1000	12/1000

The Remaining Respondents

5.  Since the commencement of the proceedings, the applicants had purchased the undivided shares of the 1^st respondent and the 3^rd respondent and discontinued the proceedings against them.

6.  At trial, only the 2^nd respondent (“R2”) and the 4^th respondent (“R4”) remained in the present application, which are the registered owners of Car Parking Space No 3 (i.e. 3/1,000 undivided shares) and Factory D on 5^th Floor (i.e. 14/1,000 undivided shares) of the Building.

7.  R2 had not filed any Notice of Opposition nor taken any step in the proceedings.

8.  R4 filed a Notice of Opposition dated 15 May 2020 raising the following issues:

(a) The said value is too low, under estimated and not reasonable; and

(b) The age and/or building condition of the existing development on the Lot does not justify the making of an order for sale.

9.  At trial, R4 was represented by Mr Desmond Leung (“Mr Leung”) leading Michelle Chan (“Ms Chan”) whereas the applicants were represented by Mr Edward K S Chan SC (“Mr Chan”) and Mr Mok Yeuk Chi (“Mr Mok”).

Issues for Determination by the Tribunal

10.  By reference to the opening submission of Mr Leung and Ms Chan for R4, the issues to be decided in this case are: -

(1)	Whether the applicants have fulfilled the prerequisites on ownership for making the present application in accordance with section 3 of the Ordinance? (“Issue 1”)
(2)	Whether the redevelopment of the Lot is justified due to age and/or state of repair of the Building in accordance with section 4(2)(a) of the Ordinance? (“Issue 2”) (a) In considering whether redevelopment of the Lot is justified, should the Tribunal consider the alternative of revitalizing the Building (“Revitalization Scheme”)? (“Sub-Issue 2(a)”) (b) If the answer to Sub-Issue 2(a) is yes, whether it is economically worthy to carry out the Revitalization Scheme? (“Sub-Issue 2(b)”) (c) If the answer to Sub-Issue 2(b) is yes, and considering all other factors pertaining to the issue of age and state of repair, whether redevelopment of the Lot is justified? (“Sub-Issue 2(c)”)
(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)	What was the respective EUV of all units in the Building as assessed in accordance with Part I of Schedule 1 to the Ordinance? (“Issue 4”)
(5)	If an order for sale should be granted, what should be the reserve price (i.e. RDV of the Lot) for the purpose of auction sale? (“Issue 5”)

11.  Notwithstanding the above, Mr Leung and Ms Chan confirmed that, subject to the applicants proving to the satisfaction of the Tribunal, R4 would not take issue with the applicants on Issues 1 and 3. Moreover, the valuation experts on both side have agreed on the EUV of the units of the Building (i.e. Issue 4). Accordingly, Issues 2 and 5 remain the only live issues at trial.

Section 3 of the Ordinance – Ownership of the applicants

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

13.  At the time of filing of the Notice of Application on 17 March 2020, there were 4 respondents and the applicants together owned 97.7% of the undivided shares in the Lot. We agree therefore that the applicants were entitled to make the Application under section 3(1) of the Ordinance.

The Evidence

14.  For the purpose of the present proceedings, the applicants and the R4 have produced the following expert reports:

Structural Assessment

(1) Mr Wong Chi Ming (“Mr CM Wong”), a Registered Structural Engineer, on behalf of the applicants, filed the following reports:

(a) Structural Assessment Report dated 30 March 2021;

(b) Rebuttal Report dated 30 April 2021.

(2) Dr Chan Yin Nin (“Dr Sammy Chan”), also a Registered Structural Engineer, on behalf of R4, filed the following reports:

(a) Structural Assessment Report dated 29 March 2021;

(b) Rebuttal Report dated 10 June 2021.

(3) Mr CM Wong and Dr Sammy Chan’s joint statement dated 15 July 2021.

Condition Survey

(1) Mr Wong Sai Ning (“Mr Benson Wong”), a Chartered Building Surveyor, on behalf of the applicants, filed the following reports:

(a) Condition Survey Report dated 31 March 2021;

(b) Rebuttal Report dated 14 June 2021.

(2) Mr Chan Yuk Ming (“Mr Raymond Chan”), also a Chartered Building Surveyor, on behalf of R4, filed the following reports:

(a) Condition Survey Report dated 30 March 2021;

(b) Rebuttal Report dated 10 June 2021.

(3) Mr Benson Wong and Mr Raymond Chan’s joint statement dated 14 July 2021.

Valuation

(1) Mr Chan Chiu Kwok (“Mr Charles Chan”), a Chartered Valuation Surveyor, on behalf of the applicants, filed the following reports:

(a) Valuation Report dated 16 March 2020 attached to the Application, containing the assessments of the market values of all units (which are usually coined as the existing use values, the “EUV” of all units by the valuation profession) in the Building on the Lot as at 31 December 2019;

(b) Supplemental Report dated 30 March 2021 on the EUV of the Building as at 31 December 2019;

(c) Rebuttal Report dated 11 June 2021;

(d) Second Supplemental Report dated 10 June 2022 on the RDV of the Lot.

(2) Mr Cheung Chor Yin (“Mr Kenneth Cheung”), also a Chartered Valuation Surveyor, on behalf of R4, filed the following reports:

(a) Valuation Report dated 31 March 2021, containing the assessments of the EUV of all units in the Building on the Lot as at 31 December 2019;

(b) Valuation Report dated 31 March 2021, containing the assessments of the RDV and Wholesale Conversion Value of the Building;

(c) Rebuttal Report dated 10 June 2021;

(d) Supplemental Report dated 13 June 2022 on the RDV and Wholesale Conversion Value of the Building.

(3) Mr Charles Chan and Mr Kenneth Cheung’s 1^st joint statement dated 14 July 2021.

(4) Mr Charles Chan and Mr Kenneth Cheung’s 2^nd joint statement dated 22 June 2022.

Existing use values (“EUV”) of all units as at 31 December 2019

15.  By virtue of Mr Charles Chan and Mr Kenneth Cheung’s 1^st joint statement dated 14 July 2021, the following EUV have been agreed:

Unit	EUV[1]	Pro Rata Share
Car Parking Space No 3 of R2	$2,705,000	0.41%
Factory D on 5th Floor of R4	$8,745,000	1.33%
Whole of Building	$657,272,900	100%

16.  The Tribunal is prepared to adopt the experts’ agreement above.

RDV of the Lot as at June 2022

17.  By virtue of Mr Charles Chan and Mr Kenneth Cheung’s 1^st joint statement dated 14 July 2021, they agreed the parameters of the residual model for the development of a non-polluting industrial development, on the basis that the town planning application No A/K14/794 for relaxing the plot ratio by 20% had been approved as at the date of valuation of 31 March 2021[2]. They agreed the RDV at $1,004,000,000 (i.e. an accommodation value of $71,310 per sq m).

18.  Mr Charles Chan and Mr Kenneth Cheung followed the same residual model and the 20% bonus plot ratio in their latest valuation reports; Mr Charles Chan arrived at a RDV of $1,008,000,000 as at 8 June 2022 while Mr Kenneth Cheung arrived at a RDV of $1,333,620,000 as at 13 June 2022. At trial, they had revised the RDV to $990,000,000[3] and $1,535,490,000[4] respectively.

19.  In their 2^nd joint statement dated 22 June 2022, they agreed on the residual model and the valuation date of 13 June 2022. As well, they had the following agreements/ disagreement on the parameters to be adopted in the residual valuation:[5]

	Mr Charles Chan	Mr Kenneth Cheung
Marketing Cost	3.0%
Interest Rate	4.5%
Professional Fees	6.0%
Demolition Cost	$22,401,661	$24,552,000
Construction Cost	$468,687,778	$421,476,000
Demolition Period	0.75 year	0.5 year
Construction Period	2.25 years
Legal Cost	0.2%	NA
Stamp Duty	4.25%	NA
Developer’s Profit on cost and land	25% (exclusive of Legal Cost & Stamp Duty)	15% (inclusive of Legal Cost & Stamp Duty)
Premium to permit general industrial use	10% of Market Value of the Lot

20.  In spite of the above, it has always been the position of R4 that the Tribunal should consider the alternative of revitalizing the Building when considering if an order for sale is justified (Issue 2). In such regard, Mr Kenneth Cheung arrived at a market value of the Building on the basis of Mr Raymond Chan’s revitalization scheme at $1,281,500,000[6] (or $1,238,472,710)[7] either of which, however, is lower than the RDV of $1,333,620,000 or $1,535,490,000 arrived by himself.

21.  Thus, even assuming Mr Kenneth Cheung’s valuation exercise is 100% correct (to which we disagree), revitalization by a wholesale conversion does not represent the highest and best use of the Lot and should be disregarded for the purpose of valuation.

22.  Notwithstanding the above, on 2 July 2022, just some one week before the trial, however, Mr Kenneth Cheung provided a Supplemental Information, stating that:

“In modification cases which do not involve any realignment of the boundaries of the lot(s) covered by the lease concerned and are conducted by a modification letter … It is also the government policy, to modify old lease conditions, in order to allow redevelopment complying with the applicable town planning requirements.”

23.  That is, Mr Kenneth Cheung explained, by reference to a modification letter dated 24 June 2015 in respect of Kwun Tong Inland Lot No 680, which is known as 93 Wai Yip Street, Kowloon, the Lands Department, would impose a clause as follows:

“no building or buildings may be erected on the lot or any part thereof or upon any area or areas outside the lot specified in these Conditions, nor may any development or use of the lot or any part thereof, or of any area or areas outside the lot specified in these Conditions take place, which does not in all respects comply with the requirements of the Town Planning Ordinance, any regulations made thereunder and any amending legislation.”

24.  More particularly, according to Mr Kenneth Cheung, there would be a 2^nd payment of premium in addition to the 10% already agreed with Mr Charles Chan, and proposed that the RDV of the Lot will have to be adjusted as follow:

RDV with the bonus plot ratio:		$1,535,490,000
	$1,535,490,000
RDV prior to the grant of bonus plot ratio:	$1,188,630,000
2nd premium payable:		$346,860,000
		$1,188,630,000

25.  At this juncture, we consider pertaining to explain the reason why the 20% plot ratio comes about.

26.  Owing to the restructuring of the Hong Kong’s economy, over the years, suitable industrial land has been identified and rezoned into other uses more compatible with the prevailing socioeconomic needs, such as commercial and residential uses. To facilitate the transformation of industrial buildings on such rezoned land to realise the latest planning intention, the Government implemented a revitalisation scheme for industrial buildings from 2010 to 2016 (hereafter the “2010 Revitalisation Scheme”) to incentivise redevelopment or wholesale conversion of these industrial buildings.

27.  To further optimise the use of industrial buildings, The Chief Executive announced in her 2018 Policy Address another round of Industrial Buildings Revitalisation Scheme (hereafter the “2018 Revitalisation Scheme”)[8]. In particular, this round of measures gives a stronger push to encourage the redevelopment of pre-1987 industrial buildings, which were constructed under a set of lower fire service installation requirements before the relevant code of practice on minimum fire service installations and equipment was revised by the Fire Services Department in 1987 (for example, many do not have automatic sprinkler systems) and thus of higher risk.

28.  The key incentive for the 2018 Revitalisation Scheme was a planning measure (hereafter the “2018 planning measure”) to allow relaxation of the maximum permissible non-domestic plot ratio by up to 20%, on a case-by-case basis upon application to the Town Planning Board, for a three-year period from October 2018. The approved cases are required to have their lease modification (if any) executed within three years from the date of Town Planning Board’s approval of the planning application.[9] Whereas land premium would be assessed based on the optimal use and proposed development density under the 2010 Revitalisation Scheme, there is no land premium related measure under the package announced for the 2018 Revitalisation Scheme[10]. Pursuant to the latter, the Lands Department has issued a Practice Note No 2/2019 dated 18 February 2019 providing for application for a lease modification or an in-situ land exchange for the redevelopment of an industrial lot at a non-domestic plot ratio not exceeding 20% more than the maximum development intensity permitted under the relevant statutory town plans.

29.  Thus, on 1 September 2020, the applicants submitted an application to the Town Planning Board, i.e. No A/K14/794, for relaxation of the maximum plot ratio for redevelopment by 20%. This application was approved by the Town Planning Board on 30 April 2021.

30.  However, the user restriction of the Lot under the Government Lease dated 15 May 1966 is not general industrial and/ or godown uses: it is restricted to a factory for the manufacture of wearing apparel hats and gloves embroidery and ancillary offices and quarters for persons essential to the safety and security of the building. It is the understanding of Mr Charles Chan that the premium payable to Government for relaxing this restriction to permit general industrial use is calculated at 10% of the full market value of the Lot reflecting general industrial use under the prevailing government policy. Mr Kenneth Cheung is agreeable to that but on 2 July 2022, just some one week before the trial, he suggested a 2^nd premium would be payable, lowering the resultant RDV of the Lot to $1,188,630,000.

31.  When compared with $1,281,500,000 as assessed by Mr Kenneth Cheung himself for the revitalization of the Building by wholesale conversion[11], $1,188,630,000 is just about 7% lower and is within the normal margin of error of 10%[12]. Thus, even if Mr Kenneth Cheung was correct in all circumstances, revitalization by a wholesale conversion does not necessarily represent the highest and best use of the Lot.

32.  With respect, Mr Kenneth Cheung’s valuation exercise was indeed faulted for at least two reasons.

33.  During cross-examination, Mr Kenneth Cheung admitted that he had no experience in making such application for revitalization of industrial buildings. As the planning approval with 20% bonus plot ratio is in place, we questioned common sense of his 2-stage approach in making an application for modification of the user restriction and then another application for modification for complying with the town planning requirements. Why the applicants could not make an application for modification of the user restriction in just one go when the Lands Department can incorporate the conditions complying with the town planning approval? We opine Mr Kenneth Cheung’s 2-stage approach is also defying the Government’s policy for encouraging the redevelopment of pre-1987 industrial buildings.

34.  As well, Mr Kenneth Cheung’s reference to the lease modification for Kwun Tong Inland Lot No 680 cannot assist him as that modification occurred prior to Government’s announcement of the 2018 Revitalisation Scheme.

35.  In the end of the cross-examination, Mr Kenneth Cheung conceded that his 2-stage approach is wrong.

36.  Another fault by Mr Kenneth Cheung is that his valuation for the revitalization of the Building by wholesale conversion was on the basis of fait accompli. However, according to the Practice Note No 6/2019 issued by the Lands Department on 2 April 2019, an application for special waiver for conversion of entire existing industrial building must be “submitted by the owner of the lot on which the existing industrial building is erected or, if the existing industrial building is in multiple ownership, jointly submitted by all existing owners of the lot, together with the consent from all mortgagees, chargees and purchasers ….”[13] (underline added)

37.  Obviously, the applicants and R4 are at loggerheads at least at this moment on the issue on “the alternative” or otherwise of revitalizing the Building:

where p denotes the probability of the option for choosing redevelopment.

38.  Certainly, if the option for redevelopment would realize the highest and best use of the Lot, p would be 100%. But in the case of uncertainty on which option to be adopted, assuming p = 50%, the present value would be $1,535,490,000 (or whatever according to Mr Kenneth Cheung) x 50% + $1,281,500,000 x 50% = $1,362,060,000. What Mr Kenneth Cheung failed to take into account is the uncertainty for the applicants and R4 to come into consensus and that it also takes time to negotiate. In this regard, Mr Raymond Chan had provided a good example which he acknowledged during cross-examination had been the only “successful” application for wholesale conversion of an entire existing industrial building in multiple ownership. On behalf of the multiple owners of Precious Industrial Centre at 18 Cheung Yue Street, Mr Raymond Chan applied for the special waiver on 21 March 2016 (under the 2010 Revitalisation Scheme). Eventually, he got the offer of the special waiver from the Lands Department on 11 March 2021[14] (i.e. some 5 years after his application) but for whatever reasons Mr Raymond Chan tried to explain, the owners had been hesitant to accept the offer which had already lapsed on 7 April 2021.

39.  Indeed, Mr Kenneth Cheung confirmed during cross-examination that:

(a) It would be unrealistic to expect the applicants and R4 to agree on every possible issue of the wholesale conversion scheme before the application for lease modification; and

(b) It is impossible to know whether the co-owners can agree on all details concerning the wholesale conversion scheme and all technical issues arising during the process of application which includes lease modification, premium payable, special waiver and alterations & additions plans etc.

40.  In Transport for London v Spirerose Limited [2009] 4 All ER 810, [2009] UKHL 44, [2009] RVR 225, [2009] WLR 1797, the House of Lords of the United Kingdom remarked at §7 of its judgment that “(t)he open market can be expected to attribute a premium to certainty or, conversely, to apply a discount to reflect a lack of certainty”. In §33, Lord Nicholls made reference to Camrose v Basingstoke Corporation [1966] 1 WLR 1100 to explain further:

“If (to take an extreme and indeed absurd example) planning permission for residential development were assumed for 1,000 acres of high-altitude moorland in Cumbria[15], the open-market value of the land could be expected to reflect the market’s scepticism as to whether the development would ever be carried out and prove profitable. That is the point, in much less extreme circumstances, of the Camrose case. Disregarding (under section 6 and the First Schedule, case 4) what Lord Denning MR called the “artificial inflation” of Basingstoke under the Town Development Act 1952, and the extra infrastructure needed for that expansion, the 233 outlying acres (part of the total 550 acres acquired from the Berry family trustees) were unlikely to be developed for many years. Therefore, although there was an assumed planning permission, it was in the circumstances discounted to no more than “hope value”—hope not of planning permission (which was assumed), but of the permission being acted on (see [1966] 1 WLR 1100, 1106).”

41.  Lord Collins also added at §99, in the light of the finding of fact in that case, that:

“it seems to me to be plain on the basis of the statutory provisions and of authority going back more than 100 years, which is entirely in accordance with commercial common sense, that (a) the value of the land is the open market value; (b) any depression in the price which the land might be expected to fetch which is caused by the scheme is to be disregarded; (c) the valuation must take into account the potential of the land, including its potential for development; and (d) the development potential must be valued in the normal way, by discounting for future uncertainties…” (underline added)

42.  In this English case, the discount was from £608,000 to £400,000, i.e. some 34%. And reverting to the present case, we consider the discount should be even higher. In considering the argument of revitilisaton, the RDV for the revitalisation model has to be considered within a range to reflect the uncertainty element in the proposed scheme.

43.  Thus, from the viewpoint of the highest and best use and the consequential valuation, this revitalization of the Building is not an option at all.[16]

44.  While we have so analysed the revitalization as set out in Sub-issue 2(b) under valuation as aforesaid, we are not suggesting that we agree that revitalization is a factor to be considered in an application for determining if an order for sale should be granted. We shall come back to the legal argument later.

Gross Development Value (GDV)

45.  Notwithstanding the difference in RDV for redevelopment arrived by Mr Charles Chan and Mr Kenneth Cheung, they both resorted to the residual valuation method in determining the RDV of the Lot which comprises a site area of 929.02 sq. m. A residual valuation is done by deducting development costs (including construction cost, professional fees, finance costs etc) and developer’s profit from the estimated gross development value (“GDV”) of the completed optimum development.

46.  By reference to the planning application A/K14/794 which has been approved by the Town Planning Board on 30 April 2021, there would be a 38-storey (plus a 2-level carpark basement) industrial building with podium garden on 1/F and sky garden on 20/F. On the ground floor, there will be 4 loading bays for heavy goods vehicles, a light goods vehicles car lift as well as a pair of escalators leading to 1/F which comprises a workshop and lift lobbies to the upper floors. The car lift will give vehicular access to the car parking spaces in the lower two basements.

47.  There will be no workshop on G/F and therefore, in assessing the GDV of the proposed redevelopment, both Mr Charles Chan and Mr Kenneth Cheung referred to sales of workshop units in Core 45 at 45 Tsun Yip Street and the building at 46 Tsun Yip Street for the purpose of direct comparison. Then they have the following agreements and disagreements on the adjustments to be adopted:[17]

Adjustment Factors	Mr Charles Chan	Mr Kenneth Cheung
Time	Private Flatted Factory Price Index published by the Rating and Valuation Department
Location	5%	10%
Floor Level	0.5% per floor
Age	0.5% per year
Size/ Quantum	1% per 10 sq m
View	Close Building View: -3% Building View: 0% Seaview: 15%	N/A
Headroom	N/A
Building Facilities	46 Tsun Yip Street: 4% Core 45: 3%
Form of Development	N/A	5%
Synergy Effect	N/A	10%
Adjustment Calculation	By multiplication
Adjusted Reference Unit Rate (/m2)	$226,000	$271,785

48.  To address the demand for safe, lawful and affordable space of the relevant sectors with policy support, Government now permits, under a pilot arrangement during a period of five years from 1 February 2019 to 31 January 2024, the following non-industrial users to operate at individual units of existing industrial buildings without requiring relevant owners to apply for a waiver to depart from the relevant land lease and pay a waiver fee -[18]

(i) Art Studio;

(ii) Office (Audio-visual Recording Studio);

(iii) Office (Design and Media Production);

(iv) Office (used by “specified creative industries” only); and

(v) Research, Design and Development Centre.

49.  This relaxation measure effectively means that while the above permitted uses are not in line with the user restrictions for “industrial and/or godown purposes” under lease, LandsD will not take any enforcement action against the breach of user restrictions concerned so long as the prescribed pre-requisites are met. This measure enables industrial units to be used for industrial and some non-industrial uses.

50.  By reference to the history of Government’s policy on revitalizing industrial buildings since 2010, we opine that it is more likely than not that such relaxation measure would continue and the proposed industrial development, as particularized in the planning application A/K14/794, will be office-like as Core 45, one of the two comparable developments. In this regard, we agree with Mr Kenneth Cheung that the Lot is conveniently accessible by reason of its proximity to the Kwun Tong MTR Station from which pedestrians can gain access to the Lot via APM, the regional shopping centre next to the MTR station and through Entrepot Centre which is situated next to it. We agree such locational advantage would be +10% as proposed by Mr Kenneth Cheung.

51.  Again, as the proposed development will be office-like, view will be a relevant factor in consideration and therefore we agree with Mr Charles Chan’s proposed adjustments on view.

52.  Also, we agree with Mr Charles Chan that the proposed development and the comparable developments are very similar in development form and hence no adjustment for such is required.

53.  As regards the synergy effect alleged by Mr Kenneth Cheung, he was in effect referring to the vacant site (which was the subject of LDCS 7000/2014) pending redevelopment at the back of the Building. This vacant site is abutting Hoi Yuen Road, not on How Ming Street. We are totally at a loss as to how such synergy effect comes about. More particularly, by reference to para 2 in Schedule 2 to the Ordinance, if the Lot be ordered for sale, it will be subject to a reserve price which takes into account the redevelopment potential of the lot on its own. The +10% adjustment proposed by Mr Kenneth Cheung is not justified.

54.  In view of our comments above, our analysis is shown as follows:

Comparables		Unit Rate[19] (/m2)	Adjustments							Adjusted Unit Rate (/m2)
			Time[20]	Location	Floor[21]	Age	Size[22]	Building Facilities	Total
A3	46 Tsun Yip Street	$210,901	1.8%	10%	5.0%	1%	-0.9%	4%	22.4%	$258,143
A4		$190,133	1.8%	10%	6.0%	1%	-0.7%	4%	23.8%	$235,385
A5		$224,055	1.8%	10%	5.0%	1%	-0.7%	4%	22.6%	$274,691
A6		$210,170	1.8%	10%	5.0%	1%	-0.7%	4%	22.6%	$257,668
A7		$207,919	1.8%	10%	5.0%	1%	-1.0%	4%	22.3%	$254,285
A8		$201,304	1.8%	10%	6.0%	1%	-1.0%	4%	23.4%	$248,409
A9		$187,772	1.8%	10%	9.0%	1%	-0.6%	4%	27.4%	$239,222
A10		$186,512	5.6%	10%	6.5%	1%	-0.7%	4%	29.0%	$240,600
A11		$176,454	5.6%	10%	8.0%	1%	-0.6%	4%	31.0%	$231,155
A12		$195,060	5.6%	10%	9.0%	1%	-0.7%	4%	32.1%	$257,674
A13	Core 45	$187,998	-2.5%	10%	6.0%	2%	0.1%	3%	19.6%	$224,846
A14		$188,044	-2.5%	10%	6.5%	2%	0.1%	3%	20.1%	$225,841
A15		$205,800	-2.5%	10%	6%	2%	0.1%	3%	19.6%	$246,137
A16		$177,233	-2.5%	10%	6.5%	2%	0.1%	3%	20.1%	$212,857
A17		$187,467	-2.5%	10%	6.5%	2%	0.4%	3%	20.5%	$225,898
A18		$180,864	-2.5%	10%	6.0%	2%	0.1%	3%	19.6%	$216,313
A19		$189,731	-2.5%	10%	6.5%	2%	-0.1%	3%	19.9%	$227,487
A20		$181,361	-2.5%	10%	6.5%	2%	-1.0%	3%	18.8%	$215,457
A21		$189,282	-2.5%	10%	6.0%	2%	0.4%	3%	19.9%	$226,949
A22		$183,178	-2.5%	10%	6.0%	2%	-1.0%	3%	18.2%	$216,516
A23		$191,541	-2.5%	10%	6.0%	2%	-0.1%	3%	19.3%	$228,508
A24		$179,011	-2.5%	10%	6.5%	2%	0.1%	3%	20.1%	$214,992
									Average:	$235,411

55.  Thus, we are prepared to adopt $235,411 per sq m as the unit rate for the reference unit. As regards further adjustments to be taken into consideration, we note that Mr Charles Chan and Mr Kenneth Cheung have agreed all the factors save that on aspect. We cannot agree that for non-domestic premises, aspect (instead of view) could become an adjustment factor as proposed by Mr Kenneth Cheung. We therefore follow Mr Charles Chan’s various adjustments[23] on floor level, size, view (that had been agreed by Mr Kenneth Cheung) and arrive at an average rate of $245,000 per sq m for the hypothetical development.

56.  Mr Charles Chan and Mr Kenneth Cheung have also agreed the unit rate for car parking spaces to be provided by the hypothetical development as follows:[24]

Type of Parking Space:	Unit Value:
Private Car Park	$2,160,000
Private Car Park (Double Deck)	$1,510,000
Light Goods Vehicles	$3,260,000
Heavy Goods Vehicles	$4,100,000
Motorcycle	$140,000

Demolition Cost

57.  Mr Charles Chan derived his estimate of demolition cost (at $22,401,661) by reference to the Building Cost Data published by Rider Levett Bucknall (“RLB”), a reputable property construction consultant which has been established in Hong Kong since 1960s. On the other hand, Mr Kenneth Cheung saw fit to seek the cost estimate (at $24,552,000) from Mr Cheung Tat Tong, a qualified quantity surveyor since 1968.

58.  Notwithstanding the above, the difference is less than 10%. Certainly, the Building Cost Data provided by RLB tend to be an average figure and an ad-hoc estimation tends to be more accurate. In such regard, we are content to adopt $2,450,000 as the demolition cost.

Construction Cost

59.  The same happened in the difference in construction cost adopted by Mr Charles Chan and Mr Kenneth Cheung: $468,687,778 versus $421,476,000. Mr Kenneth Cheung conceded during cross-examination that he agreed to adopt $468,687,778.

Demolition & Construction Period

60.  Mr Charles Chan and Mr Kenneth Cheung agreed that the construction period would take 2.25 years but failed to agree on the demolition period: Mr Charles Chan suggested 0.75 years whereas Mr Kenneth Cheung suggested 0.5 years.

61.  Bearing in mind the size of the Building at about 10,183 sq m and similar arguments in previous compulsory sale applications, e.g. Wealth Plan Development Limited v Xiu Chuan Limited & Others, LDCS 21000/2018 (unreported, dated 27 December 2019) where an industrial building up to 4,345 sq m was required to be demolished, and Daily Leader Limited & Another v Top Lead Investment Limited & Others, LDCS 29000/2019 (unreported, dated 29 April 2021) where an industrial building up to 5,300 sq m was required to be demolished etc, we consider 0.75 years more appropriate.

Developer’s Profit

62.  As usual, the determination of developer’s profit to be adopted in a residual valuation is subject to dispute or disagreement by experts.

63.  Developer’s profit is normally included as a percentage of the costs involved, or sometimes as a percentage of the GDV. The level of profit should represent the return that a hypothetical developer will require for undertaking the project and should be commensurate with the risk involved. By para 3.6.4 of the HKIS Guidance Notes on Valuation of Development Land published in 2016, the related risks include marketing risks for sales and lettings, risks of construction difficulties and cost overruns, and delays in obtaining relevant development approvals.

64.  In a residual valuation, developer’s profit is included in a broad brush nature in the absence of a fully researched risk analysis. Thus, the level of return is only meaningful as a comparative figure but must be related to the risky nature of the hypothetical development and to the length of the project.

65.  Mr Kenneth Cheung, in his initial residual valuation prepared on 31 March 2021, adopted a developer’s profit at 15% on cost[25]. This is in contrast to 25% proposed by Mr Charles Chan[26]. They continued to adopt the same in their updated valuations in June 2022[27] where the economic environment had changed a lot especially after the 5^th wave of pandemic in early 2022. Notwithstanding the above, the Private Flatted Factories Price Index published by RVD had dropped from 869.2 to 857.7*[28].

66.  More importantly, in adopting his developer’s profit at 15%, Mr Kenneth Cheung had not included any stamp duty and legal costs while Mr Charles Chan’s 25% was subject to further allowance for stamp duty and legal costs. During cross-examination, Mr Kenneth Cheung explained that for valuation purposes, taxes and legal costs would not be deducted. In addition, as the applicants, being the majority owners, would not be required to pay to the trustees under the order the full purchase price in case they become the purchaser[29], and the consequential ad valorem stamp duty etc thereof, it would be unfair to deduct from the residual land price the full stamp duty and legal costs.

67.  With respect, Mr Kenneth Cheung’s concept on the residual valuation is wrong. If a valuation is determined by reference to market transactions by the direct comparison method, the values of the comparables as reported would be exclusive of taxes and legal costs and therefore no additional allowance for such should be made when it is comparing like-with-like.

68.  On the other hand, the residual method of valuation works on the premise that the price a buyer can pay for a parcel of land or property ripe for, say redevelopment is the surplus after deducting the costs of construction, the costs of buying and selling, the cost of finance and the amount of profit required to carry out the project, from the estimated sale price or market value of the finished development, i.e.

Proceeds of sale less costs of development and profits = surplus for land in its existing state.

69.  Therefore, expenses to be necessarily incurred by the prospective developer, including the costs of purchase, e.g. stamp duty and legal costs, should be deducted from the estimated sale price of the finished development before the surplus for land can be arrived. Indeed, the same has been explained at para 3.9.1 and 3.9.2 in HKIS Guidance Notes on Valuation of Development Land.

70.  Also, it is inappropriate to assume that the applicants or the majority owners are necessarily the successful purchaser in case of an auction being held. Firstly, in preparing a valuation of market value, it is always assumed that both the seller and purchaser are hypothetical ones. Secondly, an application for compulsory sale pursuant to the Ordinance can be made by one or various parties who have no intention to purchase the property for their own development. This happened in Wah Ha Property Development Limited & Others v Rosehawk Group Limited & Others, LDCS 25000/2018 (unreported, 30 April 2021) though that application was refused by the Tribunal. There were other two cases, i.e. Pacific Base Holdings Limited & Others v Lee Hop Biu & Others, LDCS 14000/2017 (unreported, dated 4 June 2020) and Perfect Horizon Limited v Co Sam & Others, LDCS 23000/2018 (unreported, 11 September 2020) where the auctions did not attract any bid by the applicants in these cases.

71.  Setting a market value of a lot or reserve price for auction unnecessarily too high would defeat the purpose of the Ordinance.

72.  In any event, having been referred to the HKIS Guidance Notes on Valuation of Development Land, Mr Kenneth Cheung conceded that stamp duty and legal costs should be deducted.

73.  We are prepared to determine the developer’s profit at 20%.

74.  We determine the market value of the Lot at $1,128,000,000 (i.e. an accommodation value of $80,120 per sq m) as shown in the Appendix of this judgment.

SECTION 4(2) OF THE ORDINANCE – JUSTIFICATION AND REASONABLE STEPS

Age and State of Repair

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

“(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) 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).”

Whether development of the Lot is justified due to age and/or state of repair of the Building

76.  In Top Sail International Limited v Cheng Kai Ming, LDCS 18000/2010 (unreported, dated 15 November 2011), the Tribunal held that age and state of repair were two separate grounds and even though there may be considerations common to both, the Tribunal should still consider them separately. However, even though the section speaks of “age” or ‘state of repair” in disjunctive and it had been held in Intelligent House Limited v Chan Tung Shing & Others [2008] 4 HKC 421 at §165(3) that they should be separately considered:

“On the grounds of both the “age” and “state of repair” of the old building, the Tribunal is entitled to look at all of the above factors or tests collectively to see if that justifies redevelopment, even though when each of them is considered alone, it is insufficient to do so.”

Age

77.  The Building was completed in 1978, i.e. some 44 years ago. While its absolute physical age does not necessarily mean that it should be developed, the applicants submitted that there are many features of obsolescence and because of its age, its design, its workmanship and also its state of repair, redevelopment of the Building is justified.

78.  Firstly, there is no dispute that the structural design of the Building was based on, for instance, on the Building (Construction) Regulations 1975 (“B(C)R 1975”) which had been amended in 1990 and then repealed and replaced by a new version in 2020. In spite of this, according to the B(C)R 1975, the thickness of concrete cover had to satisfy the durability and fire resistance requirements:[30]

Structural Element	Durability Requirement	Fire Resistance Requirement	Minimum Required Concrete Cover	Concrete Cover Specified on Approved Building Plans
Slab	0.5 in	0.5 in	0.5 in	0.5 in
Beam	2 in	2 in	2 in	2 in
Column (above G/F)	1.5 in	2 in	2 in	1.5 in
Column (below G/F)	2 in	N/A	2 in	2 in

79.  As noted, the minimum cover for column (above ground) satisfied only the durability requirement but not the fire resistance requirement even at the time of design.

80.  Notwithstanding the above, 36% of slabs, 65% of beams and 18% of columns were found by the two structural experts having actual cover less than the design cover:[31]

		Mr C M Wong	Dr Sammy Chan	Combined
Slab	Spot Tested	70	11	81
	Spots where Actual Cover is Smaller than Design Cover	22	7	29
	Percentage of Cover Smaller than Design Cover	31%	64%	36%
Beam	Spot Tested	41	10	51
	Spots where Actual Cover is Smaller than Design Cover	28	5	33
	Percentage of Cover Smaller than Design Cover	68%	50%	65%
Column	Spot Tested	59	17	76
	Spots where Actual0% Cover is Smaller than Design Cover	14	0	14
	Percentage of Cover Smaller than Design Cover	24%	0%	18%

81.  Dr Sammy Chan, on behalf of R4, also identified 193 defects on the structural elements listed below:[32]

		No of Defects	Area of Defect (m2)
Slab	Workshop floor	51	15.96
	Inside lavatory	21	13.45
	Within 5m of lavatory	40	22.25
Beam	Workshop floor	40	8.28
	Inside lavatory	26	4.33
	Within 5m of lavatory	11	2.73
Column	Workshop floor	2	0.02
	Inside lavatory	2	0.19
	Within 5m of lavatory	0	0
	Total:	193	67.21

82.  The total defective area (67.21 m²) is about 0.3% of the total surface area of the Building (20,400 m²). Dr Sammy Chan summarized therefore a relatively large proportion of the defects were located inside and within 5m of lavatory areas.

83.  Further, the combined results of depth of carbonation test are as follows:[33]

		Mr C M Wong	Dr Sammy Chan	Combined
Slab	No of test samples	10	4	14
	No of samples with carbonation depth exceeding average actual cover in outermost reinforcement	9	4	13
	%	90%	100%	93%
Beam	No of test samples	10	4	14
	No of samples with carbonation depth exceeding average actual cover in outermost reinforcement	8	1	9
	%	80%	25%	64%
Column	No of test samples	10	4	14
	No of samples with carbonation depth exceeding average actual cover in outermost reinforcement	2	0	2
	%	20%	0%	14%

84.  From the above analysis, carbonation depth has exceeded 93% of slabs, 64% of beams and 14% of columns.

85.  While carbonation depth reaching rebars does not mean automatic onset of corrosion, carbonation destroys the protective alkalinity layer around the rebars. After the loss of the protective layer around the rebars, oxygen and water vapour from the atmosphere could then react with the rebars to start the corrosion process. We trust, to anybody’s surprise however, according to Dr Sammy Chan, no corrosion was recorded for all the 93 exposed rebars. In contrast, for the 276 rebars exposed by Mr C M Wong’s laboratory, all show a certain degree of corrosion – 41% partly corroded and 59% mildly corroded. Certainly, given the Building is over 40 years’ old in Hong Kong at the highly polluted industrial area Kwun Tong as it previously was and the results of the above tables, Mr C M Wong’s finding is more reliable.

86.  Again, the Building was designed as workshop with an imposed load of 150 pounds per sq ft (i.e. 7.2kPa) in accordance with B(C)R 1975. But since 1990, the B(C)R 1975 had been amended so that all industrial workshops, on top of its designed imposed load, are required to withstand dynamic loads. With respect, Dr Sammy Chan could only say that no retrospective requirement is required in the latest code.

87.  There is also disagreement between Mr C M Wong and Dr Sammy Chan on the concept of the design working life of the Building. The design working life a building is the period of use intended by the designer or the client at the time of designing the building. It is a nominal value, not a scientific determination, which represents an estimated target period of time, as opposed to an actual period. If the design working life of a building is set at 50 years at the design stage, this building is expected not to require major repairs within 50 years, assuming it has undergone normal maintenance.

88.  In Hong Kong, the first code that mentioned the requirement for the design life is Code of Practice for Structural Use of Concrete 2004 (“2004 Code”). In 2013, this code was updated (“2013 Code”) but Clause 2.1.5 remains unchanged as follows:

“The design working life should be clearly identified. This Code of Practice assumes a design working life of 50 years, which is deemed appropriate for general buildings and other common structures. Where, the design working life differs from this value, the recommendations should be modified as appropriate.”

89.  In §80 above, 36% of slabs, 65% of beams and 18% of columns were found by the two structural experts having actual cover less than the design cover. But when it is compared with the 2013 Code, the picture is more alarming:[34]

	Horizontal Structural Elements	Slab*	Beam*
	Minimum Required Cover in 2013 Code (mm)	25	25
Mr C M Wong	Spots Checked	131	152
	Spots where Actual Cover is Smaller than 2013 Code	79	47
Dr Sammy Chan	Spots Checked	78	98
	Spots where Actual Cover is Smaller than 2013 Code	49	22
Overall	Spots Checked	209	250
	Spots where Actual Cover is Smaller than 2013 Code	128	69
	Percentage of Spots with Cover Smaller than 2013 Code	61%	28%

* Area outside Lavatory

90.  According to Mr C M Wong, since the concrete cover for slab, which is one of the main factors that affects ductility, was found in 61.0% of the test samples of the Building to be less than the required under the 2013 Code, the design working life of the Building was inferred to be shorter than 50 years. Mr C M Wong however agreed that the Building would not suddenly exhibit structural problems or become unsafe after the expiry of its design working life because the deterioration of structures is a continuous process.[35]

91.  Dr Sammy Chan did not agree that the Building had a design working life of less than 50 years because the design of buildings prior to the 2004 Code does not necessarily mean the structure was designed with a shorter design working life. Even if we accept Dr Sammy Chan’s choice of words as “does not necessarily mean the structure was designed with a shorter design working life”, we agree with Mr C M Wong that given the findings of the performance of the Building, it is more likely than not that the design working life of the Building is over or at least towards its end. We also agree that the structure of the Building had entered into the propagation phrase, i.e. when its protective barrier from deterioration is lost and the building structure would require increasingly frequent major repair.[36]

92.  Dr Sammy Chan considered that based on his visual inspection in early 2021, the defective areas accounted for only 0.3% of the total building area. The defective areas (67.21 m²) are mainly local in nature, with a large portion occurring in toilets and adjacent areas which are humid and were badly neglected when being left vacant.

93.  Despite the above, Mr C M Wong and Dr Sammy Chan did not have much difference on the cost of necessary repair. The average amount is approximately $818,000.[37] However, this amount was determined on the basis of repairing those defective elements which could be visually seen up to March 2021 or found by hammer tapping of those parts immediately next to the visually seen defective parts. There is no practical way of locating all elements which would in due course become defective or to identify spots which would in due course spall out or crack.

State of Repair

94.  Again, in Intelligent House Limited, supra, at §146, the Tribunal agreed with the following submissions by the applicants at §145(2), (3) & (4) in that case:

“(2) While looking at these factors or matters to decide whether redevelopment is justified, the Tribunal is also entitled to look at any comparison made between the old/existing building and a new building or any proposed redevelopment.

(3) It is open to the Tribunal to consider and look at the obsolescence of an existing building in terms of its functional items or facilities, since this is something related (directly or indirectly) to the “age” of the building. The older a building is, the more obsolete and outdated its facilities are.

(4) Further, the Tribunal is entitled to compare these facilities of the old building with what a modern day building could correspondingly offer whether as required by the present day regulations or law, or because of the advance of technology, or because of the rising expectations of the public for proper, safe and hygienic habitation and residence.”

95.  Mr Benson Wong stated obsolescence is a concept of comparison. He considered therefore current legislative requirement such as the Code of Practice for Fire Safety in Buildings 2011 (“Fire Safety Code 2011”), prevailing market and construction standards should be adopted for comparison, otherwise no building constructed years ago will be considered obsolete or aged. Following from this, Mr Benson Wong suggested there existed the following 18 obsolescence aspects for the Building:[38]

(a) The use of the Building as an industrial building is outdated and incompatible to the recent surrounding environment and the newly permitted uses under the prevailing Kwun Tong Outline Zoning Plan No S/K14S/24 dated 25 March 2022.[39] Because of the zoning, many industrial buildings there in the old days have been redeveloped.

(b) The design and construction of the structural frames are obsolete as these were based on the B(C)R 1975 without considering ductility and dynamic effects.

(c) The fire services installation is incomplete and sub-standard suffering from the following deficiencies according to the Codes of Practice for Minimum Fire Service Installations and Equipment 2012 (“FSI Code 2012”) which are enforceable on the Building under the Fire Safety (Industrial Buildings) Ordinance, Cap 636:

(i) Incomplete manual fire alarm system with no alarm units and alarm bells installed in the lift lobbies, and outdated push-button type alarm units;

(ii) There is no fire detection system provided in the lift machine room and other service rooms;

(iii) The existing sprinkler system has no sprinklers installed inside the lavatories; the key components are not installed inside the sprinkler pump room and is operated by one duty pump without a stand-by;

(iv) The existing fire hydrant/hose reel system has no hose reels installed in the lift lobbies; its upfeed and upfeed system operated by duty pump with no stand-by and a small pump chamber;

(v) There is no emergency lighting provided to the workshops, required staircases lift lobbies and car park; and

(vi) There is no emergency generator provided in the Building to provide emergency electricity supplies for the essential fire service systems.

(d) The fire escape arrangements are unsatisfactory as compared with the requirements of Part B of the Fire Safety Code 2011 enforceable on the Building under the Fire Safety (Industrial Buildings) Ordinance, Cap 636:

(i) There is no emergency lighting provided to the workshops, required staircases, lift lobbies and car park;

(ii) Of the three required staircases in the Building, Staircase No 3 is not interconnected with another required staircase; and

(iii) There is no protected lobby provided to the entrance of Staircases No 1 and No 2 from the lift lobby on each floor.

(e) The railings around the outer edge of stairs inside all the three required staircases are found having gaps over 160mmm between adjoining uprights exceeding the mas permitted gap width of 100mmm for protective barriers.

(f) The fire resisting construction of the fire escape route is outdated as compared with the requirement of Part C of the Fire Safety Code 2011 enforceable on the Building under the Fire Safety (Industrial Buildings) Ordinance, Cap 636:

(i) The concrete cover of the floor slabs is only 12.7mm which is only a half of the current cover thickness;

(ii) The existing staircase, protected lobby doors and workshop entrance doors opening to the fire escape routes are not fire rated doors as currently required;

(iii) The meter cabinet doors opening to lift lobby are also not fired rated doors as currently required; and

(iv) The existing electrical installations and wirings installed in the lift lobbies and required staircases are exposed and not enclosed with fire barrier enclosures.

(g) The means of fire service access have a few deficiencies against the requirements of Part D of the Fire Safety Code 2011 enforceable on the Building under the Fire Safety (Industrial Buildings) Ordinance, Cap 636:

(i) There is no protected fireman’s passage over the car park area connecting the fire service access point off How Ming Street and the fireman’s lift in the main lift lobby;

(ii) Although a fireman’s lift is provided, there is no fireman’s protected lobby provided at the discharge point on each upper floor; and

(iii) There is no fire-fighting and rescue stairway provided in the Building.

(h) The existing lorry and car parking provisions provided are substantially inadequate and sub-standard as compared with the current standards of the Hong Kong Planning Standards and Guidelines.

(i) The barrier free access facilities provided in the Building are sub-standard and not conforming to the requirements of the Design Manual: Barrier Free Access 2008 as follows:

(i) No accessible lift is provided; and

(ii) No accessible ramp nor lifting platform is provided as barrier free access facilities for persons with a disability to supplement the stairs connecting the floors of the lift lobbies and the workshops on 12/F, 13/F and 14/F.

(j) The internal floor layout designs were to maximize internal usable area at the expense of common circulation area:

(i) There is no designated passage to separate pedestrians including persons with a disability from vehicular and goods flows on G/F;

(ii) The passage of pedestrians and goods between the ground and upper floors are mingled in one comparatively small lift lobby on each floor; and

(iii) The passage of pedestrians and goods are bottle-necked through 2 lifts serving all floors.

(k) There is no proper refuse disposal, storage and material recovery facilities provided in the Building thereby creating convenience, hygienic and fire safety problems.

(l) There is no condensate drainage provided for most of the A/C units installed externally resulting in condensates dripping down to the flat roof, street or lane areas thereby causing nuisances to other people and committing summary offences under the Public Health and Municipal Services Ordinance, Cap 132.

(m) The underground drainage design with drains running underneath the private areas of Workshops A and B on G/F is outdated and causing maintenance access problems and not complying with the current requirements of the Buildings Ordinance and Regulations.

(n) Equipotential bonding connections are provided only for some exposed metal fixtures only, but not others such as metal railings, water pipes, doors, gates and exposed metal fixtures inside the workshops thereby endangering the safety of occupants and breaching the Electrical Code.

(o) There is no lightning protection system installed on the roof of the Building to protect occupants and building parts from lightning strikes.

(p) There are no building management systems which are commonly provided nowadays, but are not provided in the Building:

(i) CCTV surveillance system;

(ii) Instant fault signal and control system;

(iii) Timer or sensor control of artificial lighting; and

(iv) Energy efficiency monitoring and control system etc.

(q) There are no management and access facilities provided though some of these may be granted with gross floor area exemptions:

(i) An IO meeting room;

(ii) A management office;

(iii) A Telecommunications and Broadcasting Equipment room;

(iv) A mail room; and

(v) Letter boxes meeting the sizes of mails nowadays.

(r) Externally, there are no green features such as sun-shading features and proper overhangs at roof and floor levels for weather protection.

96.  While Mr Benson Wong admitted that some of these aspects of functional obsolescence can be rectified relatively easily with reasonable cost, most of them cannot unless the Building is demolished and redeveloped. In this regard, Mr Raymond Chan responded that it is feasible to provide them in a wholesale conversion/ revitalization and related alterations and additions works.

97.  In addition, Mr Benson Wong found the main roof of the Building covered with concrete tiles generally stained and pitted. Part of the main roof areas are finished in cement screeding, and the surfaces have generally worn and cracked. Mr Benson Wong recommended the whole roof areas to be completely recovered. Mr Raymond Chan did not object to re-roofing save for the upper roof area of lift machine room, fire services pump room and water tanks.

98.  As regards the elevations of the Building, even Mr Raymond Chan agreed to complete replacement of the external rendering though he argued that the external walls were in fair conditions.

99.  In short, Mr Benson Wong, with the help of a quantity surveyor, estimated a total cost of repair works in the sum of $51,969,138 while Mr Raymond Chan, also with the help of a quantity surveyor, estimated a total cost of repair works in the sum of $24,317,000.

100.  At this juncture, it is of interest to note that throughout the trial, Mr Raymond Chan appeared to recommending, if not advocating for revitalizing the Building at a cost of $143,220,000[40]. In our opinion, Mr Raymond Chan’s recommendation totally defeated R4’s argument that the Building is not justified for redevelopment due to its age or state of repair. It is also difficult to compromise the so-called total cost of repair works in the sum of $24,317,000 with the cost of wholesale conversion up to $143,220,000. If owners of the Building could spend just $24,317,000 to keep the Building in a tenantable condition, why should they opt for an expenditure of $143,220,000?

101.  Further to our comments at paragraph 43 above, there are attached difficulty for carrying out revitalisation, as compared to the process of redevelopment.

102.  Mr Raymond Chan’s cited example of prospective wholesale conversion of Precious Industrial Centre at 18 Cheung Yue Street[41] demonstrates the difficulty in obtaining the consensus among owners on revitalization when a building is multi-owned. In the present case, the applicants are obviously pursuing redevelopment of the Building which, as manifested in the analysis in §§31-43 above, appears to be the highest and best use of the Building. Why should the applicants be enjoined to opt for revitalization which is not the highest and best use of the Building? Even as suggested by Mr. Leung, if we are to look at the issue from the prospect of a reasonable majority owner, there should be sufficient reason for a reasonable majority owner to choose revitalisation instead of redevelopment.

103.  More particularly, as stated in the letter of the applicants’ solicitors dated 29 April 2022[42], R4 has made no approach to invite the applicants to consider revitalization. Neither R4 had provided any evidence that she was interested in participating in revitalizing the Building and paying the modification premium which appears to be more than $100 million. This is a key factor to suggest revitalisation as a matter to be considered. If R4 did not prove her interest in revitalisation, and ability to fund the revitalisation, she could not begin to argue that this Tribunal should consider the option of revitalisation.

104.  To the extent that if R4 tries to rationalize her argument by emphasizing that she is not asking the Tribunal to order revitalization in place of redevelopment but only asks the tribunal not to make an order for sale so as to allow the parties to undertake the revitalization exercise, our short answer is that there is actually no difference between directly ordering the applicants to go for revitalization and indirectly coercing the applicants into doing so by declining an order for sale for redevelopment such that the applicants will be left with no choice but to revitalize. Bearing in mind that revitalization is not mandatory but voluntary in nature, the majority owners are under no legal obligation to pursue the same if they do not wish to. We see no reason why an otherwise successful application should be refused simply because the applicants have decided against revitalization which is a decision they are fully entitled to make.

105.  This is exactly a case when a minority owner is seeking to extract a good bargaining power before permitting the redevelopment to proceed. The Court of Appeal in Bond Star Development Limited v Capital Well Limited [2004] 2 HKLRD 855 remarked at §§27-28 as follows:

“27. As already indicated, it seems to me that the purpose of the Ordinance is to take away the power of the owner of the "last unit" to demand a premium that would stultify a development. What the Ordinance attempts to do is to give the owner of a "last unit" a share in the redevelopment value calculated in accordance with the value of his property. To this extent, the owner of a minority interest who holds out until redevelopment is planned and an application made to the Tribunal, is, at least on paper, in a more advantageous position than he would be if he simply sold his interest in the property as it existed before redevelopment was envisaged. The question, as framed by the respondent, ignores the fact that the Ordinance does give the minority owner of the "last unit" an advantage over "unsuspecting" owners, albeit it takes away the ransom power that the minority owner might otherwise have if he held out.

28. Had I not considered that the intent and meaning of the Ordinance was clear on its face, it would also have been pertinent to point out that the mischief sought to be alleviated by the Ordinance had been precisely the difficulty in obtaining the last unit of a lot, which a developer sought to redevelop. That meant that redevelopment by private developers had been hampered if not stultified by the owners of "last units" demanding an unrealistic premium; see generally the debate in the Legislative Council on the second reading of the Bill, 7 April 1998.”

106.  In the present case, the applicants’ position is that although the two factors of “age” and “state of repair” are put in the alternatives in section 4(2)(a) of the Ordinance, they are related as they both relate to the physical state of the existing building. Nevertheless, so long when the Tribunal is satisfied that due to the age or the state of repair, the prevailing law does not permit the Tribunal to consider something else. The applicants relied on Pacific Base Holdings Limited & Others v Lee Hop Biu & Others, CACV 426/2020 (unreported, dated 31 May 2021) where the Court of Appeal held at §§27 & 39 that:

“27. Whilst the Tribunal is directed by Section 4(2)(a) of LCSRO to consider if the redevelopment is justified due to the age or state of repair of the existing development on the lot, there is no requirement that the Tribunal has to be satisfied that the building works issues can be resolved before it makes an order for compulsory sale.”

107.  Further at §49, the Court of Appeal ruled that:

“We therefore conclude that in an application for compulsory sale order in the Tribunal under the LCSRO, the Tribunal should not be concerned with the question of feasibility of the redevelopment. Section 4(2) does not impose a duty on the part of an applicant to show that redevelopment is feasible and it is not the function of the Tribunal to examine such issue in the context of the application.”

108.  The above rulings of the Court of Appeal was relied on by the Tribunal in Able Luck Development Limited & Others v Pawling Limited, LDCS 11000/2018 (unreported, dated 22 April 2022) where, like R4 in the present case, the alternative of revitalization was raised. The Tribunal held at §97 that:

“What could be gained from the above paragraphs in Pacific Base is that, if in handling a compulsory sale application the tribunal is not expected to be concerned with the feasibility of the redevelopment, we do not see the reason why the tribunal shall be concerned with the relative feasibility of redevelopment as compared with other options.”

109.  We also agree with the judgement given by another panel of this Tribunal in Able Luck Development Limited & Others v Public Global Investments Limited & Others LDCS7000/2014 (unreported, dated 6 October 2017) that “revitalisation is not feasible for the Building which is in multiple ownership as it would be difficult to obtain consensus from all the owners.”

110.  We further agree with the above authorities as no other grounds has been specified in regulations made under section 12 of the Ordinance. “Redevelopment” is defined in the Ordinance to mean the replacement of a building on (or formerly on) the Lot.

111.  Mr. Leung argues that if revitalisation is a feasible alternative, the economic life span of the Building is not coming to its end and an order for sale should be refused. We do not agree. Firstly, economic life span is just a factor to be considered in respect of the age of the Building. From the various discussion above, we have given full consideration on the age of the Building. We agree with the view of HHJ Wong given in Good Trader Limited v Hinking Investments Limited, LDCS 1000/2006 that, “when either the life span or the economic life span comes to the end, it will be justified to redevelop the building.”

112.  The costs of revitalisation must be considered against the costs of redevelopment. And revitalisation is a form of Rolls Royce repair, as submitted by Mr. Leung. And with the amount of costs involved, if it is to represent the costs of repair, we believe a reasonable conclusion is that the building is at its end of economic life span.

113.  Both parties have adduced voluminous expert evidence about the age and the state of repair of the Building and have made extensive submissions in relation to each and every item/aspect of the Building which they consider relevant to the statutory criteria. We have no intention to set out herein parties’ respective arguments on all individual items to avoid undesirably lengthening the judgment and overloading it with unnecessary details. Suffice it to say that on the evidence available, we prefer the observations and conclusions of the applicants’ team to R4’s team. We agree with Mr Benson Wong that apart from the structural elements, there are many other parts of the Building and its associated features and facilities which are in poor condition because of their age and the poor state of repair. No doubt, this tribunal also made our own observation on these aspects during the site visit of the Building on day 2 of the trial. We find without hesitation that redevelopment is justified by reason of the age and the state of repair of the Building.

Section 4(2)(b) – Whether the Applicant has taken reasonable steps

114.  The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interest of the respondents owning minority interests in the Lot under section 4(2)(b) of the Ordinance.

115.  The applicants have made the following offers to purchase R2’s and R4’s units, each of which was accompanied by Mr Charles Chan’s assessments: -

	Date	R2	R4
1.	18 February 2019	$4,320,000	$12,543,000
2.	31 May 2019	$4,320,000	$12,543,000
3.	3 January 2020	$4,178,000	$12,434,000

116.  The applicants submitted that, around early February 2020, their representative received a phone call from R4, counteroffering $36.5 million.

117.  Subsequently, the applicants made the further offers as follows to purchase R4’s unit:

Date	R4
6 April 2020	$12,452,000
11 August 2020	$11,146,000
29 April 2022	$16,100,000

118.  While the first two offers in 2020 above were made on the basis of Mr Charles Chan’s assessments, the last one in 2022 was based on the RDV at an accommodation value of $85,838 per sq m as assessed by the Tribunal in Able Luck Development Limited & Others v Boly Metal Manufactory Limited & Others, LDCS 11000/2018 (unreported, 22 April 2022) in respect of another industrial site around the corner Hoi Yuen Road and How Ming Street. The area of that site was 1,858.05 square metres which is approximately double that of the Lot.

119.  In spite of the above, the applicants have made a further offer to R4 dated 15 June 2022 in the sum of $18 million, which is even higher than R4’s share of the RDV as assessed by her valuation expert, Mr Kenneth Cheung, according to the agreed EUV percentage.

120.  On 16 June 2022, the applicants made another offer to R2 in the sum of $5,500,000.

121.  The Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363 emphasized at §33 that:

“In making that assessment (whether an offer is reasonable) 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.”

122.  Further at §36 of the judgment, the Court of Final Appeal stated further that: “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.”

123.  In light of the above, we are satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot including negotiating for the purchase of the share owned by the respondents on terms that are fair and reasonable.

ORDERS

124.  For the reasons given in this judgment, we now make the following orders: -

(a)	All the undivided shares in the Lot, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lot;
(b)	Mr Shum Man Wai and Ms Lo Hoi Ying, 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;
(c)	The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Rowdget W Young & Co dated 10 June 2022;
(d)	For the purposes of the sale of the Lot by public auction: -
	(i)	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
	(ii)	the reserve price be set at $1,128,000,000;
(e)	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 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
(f)	Liberty to the applicants, the 2nd respondent, the 4th respondent and the Trustees to apply to the tribunal for further directions.

COSTS

125.  Following Good Faith Properties Limited & Others v Cibean Development Company Limited [2014] 5 HKLRD 534, we make a costs order nisi that the applicants do pay the costs of these proceedings (including any reserved costs) to R2 and R4 with certificate for 2 counsel to be taxed on the High Court scale if not agreed. Unless any parties apply by summons to vary, this costs order nisi shall become absolute upon expiry of 14 days from the date of this judgment.

126.  Last but not least, we thank Counsel for their able assistance.