WEALTH MASTER INTERNATIONAL LTD AND OTHERS v. WONG WENG WA VINCENT

LDCS18000/2014

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL

ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO.

18000 OF 2014

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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 an application for compulsory sale of all the undivided shares in the Remaining Portion of Marine Lot No 479 (“Lot 1”) and the Remaining Portion of Marine Lot No 484 (“Lot 2”) which are hereinafter collectively referred to as “the Lots” where necessary, for the purposes of redevelopment pursuant to section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”). There had a building erected thereon known as Man Fung Building, Nos 101-102 Connaught Road West, Hong Kong (“the Building”).

2. The Building, which was demolished in 2013, consists of a block of 13-storey commercial/residential building served by one lift and two common staircases. According to an occupation permit issued on 9 March 1967, the Building had 2 retail shops on Ground Floor, 3 office units on the First Floor, 4 office units on the Second Floor and 3 domestic units on each of the Third to Twelfth Floors. Each of the units was allotted either some of the 43 undivided shares of Lot 1 or some of the 43 undivided shares of Lot 2 by a Deed of Covenant dated 31 August 1967.

THE APPLICATION

3. When the 1^st applicant, the 2^nd applicant and the 3^rd applicant (hereinafter collectively referred to as “the applicants”) commenced the present proceedings on 28 October 2014 (“the Application”), the ownership of the undivided shares in the Lot was:

	Lot 1			Lot 2
	Remaining Portion of Marine Lot No 479			Remaining Portion of Marine Lot No 484
G/F	Shop A			Shop B
	(6/43)			(6/43)
	1st applicant			2nd applicant
1/F	Portion A-1		Portion BC		Portion A-2
	(2/43)		(1/43)	(1/43)	(2/43)
	1st applicant		3rd applicant		1st applicant
2/F
	Portion A-1	Portion B		Portion A-2		Portion C
	(2/43)	(2/43)		(2/43)		(2/43)
	2nd applicant	3rd applicant		2nd applicant		3rd applicant
	Flat B		Flat A		Flat C
	(2/43)		(1/43)	(1/43)	(2/43)
3/F	2nd applicant		2nd applicant		2nd applicant
4/F	2nd applicant		2nd applicant		2nd applicant
5/F	3rd applicant		2nd applicant		2nd applicant
6/F	2nd applicant		2nd applicant		2nd applicant
7/F	3rd applicant		2nd applicant		2nd applicant
8/F	2nd applicant		2nd applicant		2nd applicant
9/F	2nd applicant		2nd applicant		2nd applicant
10/F	respondent		2nd applicant		2nd applicant
11/F	2nd applicant		2nd applicant		2nd applicant
12/F & Roof	2nd applicant		2nd applicant		3rd applicant

4. As manifested from the above table, the applicants are the persons who owned the average of 97.6744% of the undivided shares of the Lots. The only remaining interest was held by the sole respondent, estate of Wong Shing Kwong, deceased (“the Deceased Owner”) who owns the 2 undivided shares allotted to Flat B, 10/F of the Building (“the Unit”).

5. According to the Witness Statement dated 24 February 2015 of Pan Wai Hung Christopher, the Director of the Property Department of Tai Hung Fai Enterprise Company Limited, the holding company of the applicants, the Deceased Owner made his will naming Pun Man Yung (“Madam Pun”) as the sole executrix and beneficiary before he passed away on 18 November 1984. Madam Pun also made her will, naming Wong Weng Wa Vincent (“Vincent Wong”) and Wong Wing Yee as executors of her estate before she passed away on 15 December 1985 without having proved the will of the Deceased Owner.

6. On 15 October 1997, Letters of Administration with the will annexed of the estate of the Deceased Owner was granted to Vincent Wong who has become the respondent in the Application.

7. However, the Unit is said to be held in trust by the Deceased Owner for certain beneficiaries and the Unit was omitted from the Schedule of Property annexed to the Letters of Administration.

8. By a Provisional Agreement of 21 September 2011, Vincent Wong, as the personal representative of the estate of the Deceased Owner, agreed to sell the Unitto the 3^rd applicant. Paragraph 2 of the Schedule to the Provisional Agreement provided that the respondent was making an application to amend the Schedule of the Trust Property[1].

9. The amendment has never been approved and the parties entered into a Supplemental Agreement of 26 September 2014 providing for an alternative way of performing the spirit of the Provisional Agreement. Clause 2 contained the respondent’s acknowledgement that the Building had been demolished after the signing of the Provisional Agreement and provided that if the revised Letters of Administration be issued, the parties would proceed to complete but it would not be necessary for the respondent to deliver possession of the Unit. Clause 4 provided, inter alia, that if the Order for Sale being sought in the Application is obtained before the completion of the sale and purchase and the Lots be sold in auction, the respondent shall be deemed to have assigned the interest in the estate of the Deceased Owner in respect of the portion of net sale proceeds to be apportioned to the Unit to the 3^rd applicant and the Provisional Agreement (and any formal agreement) shall be treated as terminated.

10. Mr Mok Yeuk Chi (“Mr Mok”), counsel for the applicants, submits that under O 15  r.14 (1):

“Any proceedings … may be brought by or against trustees, executors or administrators in their capacity as such without joining any of the persons having a beneficial interest in the trust or estate, as the case may be; and any judgment or order given or made in those proceedings shall be binding on those persons unless the Court in the same or other proceedings otherwise orders on the ground that the trustees, executors or administrators, as the case may be, could not or did not in fact represent the interests of those persons in the first-mentioned proceedings.”(underline added)

11. Mr Mok further refers to paragraph 15/14/2 of the Hong Kong Civil Procedure 2015 which provides that :

“Where an action is brought by a stranger in respect of property vested in trustees, the trustees sufficiently represent all persons interested, and the beneficiaries should not be joined; but may be allowed to come in to protect their interests and to make a defence separately from the trustees …” (underline added)

12. In any event, there has been no application by any beneficiaries in the Application to be joined.

13. The applicants contend that all the requirements of the Ordinance have been satisfied and ask for an order for sale in terms of the draft order submitted.  The respondent is absent throughout the trial.

Section 3 of the Ordinance – Ownership of the ApplicantS

14. 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 the Application.

15. Section 3(2) of the Ordinance also states that an application under subsection (1) may cover-

(a)  2 or more lots where the majority owner owns not less than the percentage specified in subsection (1) of the undivided shares in each lot; or

(b)  2 or more lots-

(i)  on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings; and

(ii)  where the average of-

(A)  the percentage of the undivided shares owned by the majority owner in the lot or lots on which one of the buildings stands; and

(B)  the percentage of the undivided shares owned by the majority owner in the lot or lots on which the other of the buildings stands, is not less than the percentage specified in subsection (1).

16. When the applicants commenced the present proceedings on 28 October 2014, it owned on average 97.6744% of the undivided shares in the Lots which share two common staircases.  The applicants were therefore entitled to make the Application under section 3(2)(a) of the Ordinance.

Section 4(2)(a) of the Ordinance – WHETHER REDEVELOPMENT WAS JUSTIFIED

17. Under section 4(2)(a) of the Ordinance, 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 redevelopment of the Lots is justified. As stated in §2 above, however, the Building has been demolished.

18. According to the Witness Statement of Pan Wai Hung Christopher afore-mentioned, the applicants commenced the acquisition of units in the Building since March 2009. Since early 2010, however, the applicants kept receiving a number of building orders from the Buildings Department relating to various repair works of the Building under section 26 of the Buildings Ordinance, for instance. While the applicants then considered that it was more economical to demolish the Building for redevelopment, the applicants were advised by the agent responsible for acquiring the units that it would only take a few more months to acquire the Unit which is the only unit outstanding to complete 100% ownership of the Building. On the other hand, the redevelopment proposal and demolition plan were approved by the Buildings Authority in November 2010 and by the Provisional Agreement of 21 September 2011, the respondent, as the personal representative of the estate of the Deceased Owner, agreed to sell the Unitto the 3^rd applicant. Believing that the respondent would act in good faith and eventually amend the Letters of Administration as stated in §8 above, the Construction Department of Tai Hung Fai Enterprise Company Limited proceeded with the demolition in respect of the Building in the end of October 2012. Demolition works were completed in May 2013.

19. Mr Mok refers to Bond Star Development Limited v Capital Well Limited, LDCS 2000 of 2001 (unreported, dated 5 December 2002) (“the Bond Star Development case”) where the buildings on the lots the subject of an application under the Ordinance were similarly demolished.

20. Then the Tribunal, after considering the parties’ submissions on the construction of section 4(2)(a)(i), agreed that the scope of the Ordinance should cover the situation where the building was no longer standing on the lots. Later, when the Bond Star Development case proceeded to the Court of Appeal[2], Hon Rogers VP affirmed at §24 of the judgment that “the Ordinance envisages that redevelopment includes building on land where there has formerly been buildings.”  The same is also affirmed by the Court of Final Appeal. See §§25-27 of the judgment: (2005) 8 HKCFAR 578 at p 587.

21. Nevertheless, Mr Mok does not proceed the Application on the basis that the Tribunal does not have to satisfy itself that redevelopment of the Lots is justified as per the judgment of the Bond Star Development case. Indeed, as remarked by Hon Rogers VP at §23 of the Court of Appeal judgment, “it is still possible to give effect to [section 4(2)(a)(i)]  in the circumstances of this case… it is justifiable to take into account the state of repair of the buildings on the lot at the time when they were demolished for redevelopment.” Mr Mok called the evidence of Mr Benson Wong (“Mr B Wong”), an Authorised Person and a qualified building surveyor, to prove that redevelopment of the Lots is justified regarding the age or state of repair of the Building.

22. Mr B Wong, in his Condition Survey Report dated 9 February 2015 stated that he understood from the outset of his appointment that the Building had already been demolished. His views on the age and the state of repair of the Building prior to its demolition were based on, inter alia, the following documents:

(i) Certified copies of approved plans and amendment plans for the Building from Buildings Department;

(ii) Occupation Permit of the Building No H67/67, dated 9 March 1967;

(iii) Building orders under section 26 of the Buildings Ordinance issued by the Buildings Department;

(iv) Building orders under section 24 of the Buildings Ordinance issued by the Buildings Department;

(v) Demolition Plan Submission dated 15 September 2010 for the demolition of the buildings at Nos 99-103A Connaught Road West, which included the Building and two adjoining buildings on its sides;

(vi) Valuation report dated 14 January 2011 prepared by Savills Valuation and Professional Services Limited;

(vii) Valuation report dated 29 April 2011 prepared by Savills Valuation and Professional Services Limited;

(viii) Photo records of the exteriors and interiors of the Building taken by the Valuation Team of Savills Valuation and Professional Services Limited in 2010 before the commencement of demolition of the Building in 2012; and

(ix)Photo records taken by the demolition work contractor showing various stages of demolition of the buildings at Nos 99-103A Connaught Road West, during the period from 31 August 2012 to 13 May 2013.

23. Mr B Wong examined two section 26 and twenty eight section 24 building orders which remained in force prior to the demolition of the Building. Most of the section 24 building orders were first issued in 2005 and nearly all had been superseded one or twice by new building orders owing to changes of ownership and/or some unauthorised building works being removed to partly comply with some prior building orders.

24. As manifested from the occupation permit, the Building would have been aged over 47 years had it not been demolished. Mr B Wong stated that in structural engineering terms the building structure has only a design working life about 50 years. Also, in specifying the various recommendations, the Code of Practice for Structural Use of Concrete 2013 assumes a design working life of 50 years for reinforced concrete structure. Thus the Building was approaching the end of its design working life.

25. From his review of the record photographs of the building elevations, the internal common parts, the interiors of the flats as well as the building service installations of the Building, Mr B Wong was of the view that the Building had not changed with time and had become functionally obsolete in many aspects before its demolition.

26. On the issue of state of repair, Mr B Wong specifically referred to two building orders both dated 29 December 2005 issued by the Buildings Department under section 26 of the Buildings Ordinance which required removal of loose cracked and defective concrete from the reinforced concrete structure and adding steel bars as necessary.

27. On the same day, the Buildings Department also served two section 24 building orders to the Incorporated Owners of the Building requiring removal of unauthorised building works.

28. These orders were ignored and eventually the required works were taken over by the Buildings Department in 2010. Judging on the neglects of the building orders, Mr B Wong said the Incorporated Owners did not have the minimum awareness, inclination or ability to handle the repairs.

29. By reference to the two section 26 building orders, Mr B Wong suspected there should be corrosion of the steel reinforcement bars and spallings and cracks of the concrete of the reinforced concrete structure of the Building in parts other than the common areas.

30. Mr B Wong formed his views that

(i)  the Building was in a poor state of repair well below tenantable standard and

(ii)  the repairs required to restore the Building back to the tenantable standard would likely have been as extensive as those required of other old buildings lacking proper maintenance of similar age.

31. Thus Mr B Wong formed his view that the Building was aged and in a poor state of repair at the time when the Building was demolished in 2012.  He also commented that the Building did not possess any historical value or architectural merit.

32. The applicants also rely upon “the age test” conducted bythe applicants’ valuation expert witness Mr Charles C K Chan of Savills Valuation and Professional Services Limited (“Mr C Chan”). In his Supplemental Report prepared on 17 February 2015 (which was prepared subsequent to his initial Valuation Report prepared on 25 August 2014 pursuant to section 3(1)(a) of the Ordinance).

33. Mr C Chan conducted the age test by comparing the aggregate market value of the existing units of the Building prior to its demolition and the redevelopment value (“RDV”) of the Lots and formed his opinion that redevelopment is economically justified.

34. There is no contrary evidence and I accept the applicants’ evidence in whole.  In particular, I am satisfied that based on the evidence of Mr B Wong, redevelopment of the Lots is justified due to the age and the state of repair of the Building :

(i)  The Building was constructed in 1967, with obsolete designs;

(ii)  The unit owners had totally neglected the maintenance of the Building as amply demonstrated by the ignorance of the building orders for about 5 years leading eventually to the Buildings Department carrying out the required works to remove imminent danger;

(iii) Corrosion of the steel reinforcements of the reinforced concrete structure must have commenced before its demolition;

(iv)The Building had become obsolete in many respects both physical and functionally, and some of the items of obsolescence carried obvious safety and hygiene implications;

(v)  The Building would likely involve a very substantial and disproportionate amount of repair costs and disturbance to restore the Building to a tenantable condition;

(vi)The respondent had entered into the Provisional Agreement to sell to the 3^rd applicant its interest and the sale would have been completed if not for the title problem of the Schedule of the Letters of Administration not having included the Unit. All other unit owners had sold their units to the applicants rather than complying with the building orders.

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

35. The Application was accompanied by the Valuation Report dated 25 August 2014 (“The Application Report”) prepared by Mr C Chan, containing 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 Lots as at that date. The Application Report was prepared not earlier than 3 months before the date of the Application, i.e. 28 October 2014 and is therefore, in my view, in compliance with section 3 of the Ordinance.

36. 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 Lots, the Tribunal has to determine the values.

37. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the Lots who cannot be found, the majority owner of the Lots is required to satisfy the Tribunal that the value of the minority owner’s property as assessed in the application is “(A) not less than fair and reasonable; and (B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”  

38. In the Application Report of 25 August 2014, Mr C Chan explained the method of valuation and the process of his assessment to arrive at the EUV of each unit of the Building.

39. In his valuation of the EUV of the domestic units on the upper floors of the Building, Mr C Chan adopted the following methodology :

(i) He selected Flat C on 7/F as the reference unit (“the Reference Domestic Unit”) for the purpose of valuing its unit price.

(ii) The unit price of the Reference Domestic Unit was first assessed by making reference to market comparables.  He took into account 5 comparable transactions in 3 different buildings in the vicinity.  After making what he regarded as the necessary adjustments (for time, location & environment, floor level, age, size, lighting & ventilation, view and noise) for all these comparable transactions, he took the average of the adjusted unit rates of the comparables to arrive at the unit price of the Reference Domestic Unit.

(iii) He further considered the floor level, top floor effect, size, lighting & ventilation, view and noise of the Reference Domestic Unit and the remaining domestic units within the Building and made adjustments to arrive at the EUV of all the domestic units on the upper floors of the Building.

40. In assessing the EUV of the office units on 1/F and 2/F, Mr C Chan selected Portion B on 2/F as the reference office unit (“the Reference Office Unit”). Here he made reference to 5 comparable transactions in 5 different office buildings in the vicinity.  After making what he regarded as the necessary adjustments (for time, location, floor level, age, size & view) for all these comparable transactions, he took the average of the adjusted unit rates of the comparables to arrive at the unit price of the Reference Office Unit. He then proceeded to determine the EUV of the other office units, making similar adjustments.

41. In assessing the EUV of the ground floor units, Mr C Chan selected Shop A on Ground Floor as the Reference Retail Unit.  He then took into account 4 comparable shop transactions nearby.  After making what he regarded as the necessary adjustments (for time, location, size, age, frontage, layout and headroom) for all these comparable transactions, he took the average of the adjusted unit rates of the comparables to come to the unit price of the Reference Retail Unit. He then compared the Reference Retail Unit with the other retail unit on Ground Floor and made adjustments to arrive at the EUV for the latter.

42. Mr C Chan updated the Application Report by the Supplemental Report dated 17 February 2015 afore-mentioned (“Supplemental Report”) in which he revised the EUV of all the units in the Building after taking into account the updated property index prepared by the Rating and Valuation Department.  In this report, Mr C Chan repeated basically the exercise he did in the Application Report.

43. The EUV of all units in the Building assessed by Mr C Chan as at 25 August 2014, are reproduced at the Appendix hereto.

44. I am satisfied that the values of the respondent’s unit as assessed by Mr C Chan is not less than fair and reasonable; and not less than fair and reasonable when compared with the value of the applicants’ properties:

(i) Flat B, 10/F - assessed at $6,770,000 (representing 2.57% of the total EUV of all units);  and

(ii) the total EUV of all units - assessed at $263,420,000.

Section 4(2)(b) of the Ordinance - Reasonable Steps

45. Under section 4(2)(b) of the Ordinance the second consideration in making an order for sale should be whether the applicants have taken reasonable steps to acquire all the undivided shares in the Lots where the owners’ whereabouts are known.

46. As stated in §§8-9 above, the Provisional Agreement for the sale of sole remaining unit was not completed only because of the title problem of the Unit not having been included in the Letters of Administration. Mr Mok also submits that the Supplemental Agreement in 2014 demonstrates the parties agreed inter alia to the alternative way of performing the spirit of the Provisional Agreement in the event the compulsory sale order being applied for is granted and the Lots are auctioned. All other units have been acquired by the applicants.

47. In the circumstances of this particular case, I am satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots. 

Reserve Price for the Auction

48. In the Supplemental Report, Mr C Chan has prepared an assessment of the RDV of the Lots at $309,000,000 (ie an accommodation value of $81,623/ sq m) as at 17 February 2015. The total site area of the Lots as determined by Mr C Chan is 252. 38 sq m.

49. The applicants submit that the reserve price for the auction of the Lots should be fixed at $309,000,000 accordingly.

50. I have considered Mr C Chan’s valuation of the RDV of the Lots which was on the basis of a residual valuation. This is done by deducting development costs (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value of the completed optimum development.

51. For instance, Mr C Chan opined that the optimal development on the Lots would be a 25-storey commercial building with shop units on ground floor and commercial/office units on upper floors.  Details of the hypothetical development and residual valuation were set out in Appendix 3.3 of the Supplemental Report (Bundle B1/64).  Details of retail and commercial/office comparables with adjustments were set out in Appendix 3.4 (Bundle B1/67) and Appendix 3.5 (Bundle B1/69-70) respectively.  Mr C Chan also adopted the Development Cost Pro-forma promulgated by the Hong Kong Institute of Surveyors to facilitate consideration of construction costs in land value assessments (Bundle B1/65). The valuation arrived at by Mr C Chan was $309,000,000, representing an overall accommodation value of $81,623/sq m.

52. Mr C Chan has not conducted a valuation on basis of direct comparison because he said there was no relevant land sale transaction.

53. I have gone through Mr C Chan’s valuation.  In the absence of evidence to the contrary, I am satisfied with his valuation, including the valuation assumptions he has adopted, the values and the costs parameters he has used in his valuation.

54. Based on Mr C Chan’s valuation, I decide that the reserve price for the auction of the Lots should be HK$309,000,000.

TRUSTEES

55. The applicants propose to appoint Mr Ma Ho Fai (馬豪輝) and Ms Tsang May Ping (曾美萍) who are respectively senior partner and partner of Messrs Woo Kwan Lee & Lo as the sale trustees.  Based on the information on their letter dated 30 March 2015, the proposed trustees also intend to appoint Messrs Michael Cheuk, Wong & Kee to act as the solicitors of the trustees/vendors in the sale of the Lots for handling the sale and discharging the duties imposed on the trustees under the Ordinance. I am satisfied that Mr Ma Ho Fai (馬豪輝) and Ms Tsang May Ping (曾美萍) are proper persons to be appointed.  Their proposed remuneration at the rate of $5,500 per hour (exclusive of disbursements and fees payable to consultants) as mentioned in the letter dated 30 March 2015 is also reasonable and hereby allowed.

PARTICULARS AND CONDITIONS OF SALE OF THE LOTS

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

Conclusion AND ORDERS

57. By reasons of the aforesaid, I am satisfied that the redevelopment of the Lots is justified due to the age and state of repair of the Building; and the applicants have taken reasonable steps to acquire the undivided shares of the Lots. This Tribunal is also satisfied that the value of the single minority owner’s unit as assessed in the Application is not less than fair and reasonable, and not less than fair and reasonable when compared with the value of the applicants’ properties as assessed in the Application.  This Tribunal now makes the following orders:

(i) All the undivided shares in the Lots, the subject of the Application, be sold by way of public auction for the purposes of redevelopment of the Lots under the Ordinance;

(ii) Mr Ma Ho Fai (馬豪輝) and Ms Tsang May Ping (曾美萍) nominated by the Applicants be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to the Lots; and the Trustees be authorized to charge such remuneration for their service in accordance with the terms set out in the letter from Messrs Woo Kwan Lee & Lo dated 30 March 2015;

(iii) For the purposes of the sale of the Lots by public auction,

(a) The sale of the Lots be on particulars and conditions of sale the same or substantially the same as the set of draft particulars and conditions of sale submitted to the tribunal (Appendix 2 of  the Applicants’ opening submission) initialled and approved by me;

(b) The reserve price of the Lots be set at HK$309,000,000;

(c) Subject to further extension that the Tribunal may subsequently allow upon the application of the purchaser of the Lots or its successor in title, the redevelopment of the Lots be completed and made fit for occupation within a period of six (6) years after the date on which the purchaser of the Lots becomes the owner of the Lots;

(iv) There be liberty to the applicants, the respondent and the Trustees to apply for further directions.

Costs

58. The applicants do not ask for costs. I make a costs order nisi that there be no order as to costs between the parties, such order be made absolute after 14 days if no application is made to vary the said costs order.

Appendix