SURPLUS COME LTD AND OTHERS v. KAN KWONG HUNG PAUL

LDCS 19000/2011

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 19000 OF 2011

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REASONS FOR JUDGMENT

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1.  This is an application made under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) for an order of compulsory sale of all the undivided shares in 2 lots of land, namely:

(i) Section A of Sub-section 1 of Section C of Inland Lot No. 1300 and Subsection 2 of Section C of Inland Lot No. 1300 (“the 1^st Lot”) and

(ii) the Remaining Portion of Section C of Inland Lot No. 1300 and the Remaining Portion of Subsection 1 of Section C of Inland Lot No. 1300 (“the 2^nd Lot”).

2.  After hearing evidence and submissions before us, judgment was granted in favour of the Applicants on 13 December 2011 with an order for sale made under the Ordinance accordingly.  This is the written reasons for the judgment. 

The Application

3.  The 1^st Lot carries the postal address of No. 1 South Lane, Hong Kong whilst the 2^nd Lot carries the postal address of No. 34 Hill Road, Hong Kong.  The 2 lots are collectively called the Lots in this judgment (“the Lots”). 

4.  The existing building (“the Building”) on the Lots, consisting of 2 blocks sharing 2 staircases (front and rear) for common use, is a 7 storey residential/commercial building.  The Ground Floor of each of the 2 blocks is for non-domestic use with the Ground Floor of the 1^st Lot being divided into 2 units. The First to Fifth Floor of each block has 2 domestic units, the front and the rear unit.  The Sixth Floor of each block has 1 domestic unit.  The Occupation Permit of the Building was issued on 21 November 1957.

5.  The 1st Lot has 13 equal undivided shares with each unit being allotted 1 share.  The 2nd Lot has always been owned by one owner.  The Applicants were the registered owners of all units in the 1st Lot except Unit A of 3/F which was owned by the Respondent (“the Respondent’s Unit”).  The Applicants owned 92.3077% of all the undivided shares of the 1st Lot and owned the whole of the undivided shares in the 2nd Lot.  The Tribunal is satisfied that the Applicants are entitled to make this Application pursuant to Section 3(1) of the Ordinance. 

6.  The Applicants had been able to get into contact with the Respondent in November 2010 and upon negotiation, a verbal agreement had been reached for the sale and purchase of the Respondent’s Unit.  However the Respondent reneged on the agreement.  Since the Applicants had not been able to secure the correspondence address of the Respondent from the Respondent himself or the solicitor acting for the Respondent then, the Applicants applied for directions concerning service of the Notice of Application.

7.  By an order dated 28 June 2011, it is ordered that service of the Notice of Application and subsequent documents on the Respondent be dispensed with and the relevant notice be published once in a Chinese newspaper circulating in Hong Kong within 14 days and upon expiry of 21 days after the notice being published, the Respondent shall be bound by the proceedings as if he had been duly served in accordance with S. 3(3)(a) of the Ordinance.  A notice was published on 6 July 2011 in Sing Tao Daily.  No claim or notice of opposition has been filed by the Respondent who is also absent at this hearing.

Determination of the application

8. According to section 4(1)(a)(ii) of the Ordinance, when the minority owner cannot be found, the Tribunal shall first determine whether it is satisfied that the value of the minority owner’s property 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 majority owner’s property as assessed in the application. The Tribunal shall then decide whether to make the compulsory sale order (section 4(1)(b) of the Ordinance) which in turn depends on whether the Tribunal is satisfied that the redevelopment of the lot is justified due to the age or state of repair of the existing development on the lot (section 4(2)(a)(i) of the Ordinance); and whether the Applicants have taken reasonable steps to acquire all the undivided shares in the lot (section 4(2)(b) of the Ordinance).

9. Where a compulsory sale order is made, the Tribunal shall then appoint trustees to discharge the duties imposed on trustees under the Ordinance and authorize their remuneration (section 4(1)(c) of the Ordinance). The Tribunal may also give such directions relating to the sale and purchase of the lot including settling the particulars and conditions of sale (section 4(6)(a)(i) of the Ordinance), and order the sale by auction to be subject to a reserve price which takes into account the redevelopment potential of the lot on its own (section 5(1)(a) and paragraph 2 of Schedule 2 of the Ordinance).

10. We shall deal with all these matters below.

Valuation of the Respondent’s Unit

11. Part 1 of Schedule 1 of the Ordinance stipulates that the valuation report has to set out the assessed market value of each property on the lot (a) on a vacant possession basis; (b) assessed as if the lot could not be made the subject of an application for an order for sale; and (c) not taking into account the redevelopment potential of the property or the lot. It also stipulates that the valuation report has to be prepared not earlier than 3 months before the date of making the application. Although the Ordinance does not expressly use the term “existing use value” (“EUV”), from the requirements laid down in Part 1 of Schedule 1 of the Ordinance for what should be set out in the valuation report accompanying the application, it is clear that the Tribunal is to look at the EUVs of the properties in question.

12. In order to determine whether the value of the Respondent’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, we have to look at the EUV of the Respondent’s Unit and the EUV of the Applicants’ properties as assessed by the Applicants’ expert.

13. The present application was accompanied by a valuation report dated 1 March 2011 (“the Application Report”) prepared by Mr. Gilbert KM Yuen (“Mr. Yuen”) of Vigers Appraisal & Consulting Limited, the Applicants’ valuation expert. In the Application Report, Mr. Yuen explained the method of valuation and the process of assessment in arriving at the EUV of each unit of the Building, which was set out in the table at paragraph 10 on page 234 of Exhibit “A3”. In particular, he set out the following matters in the Application Report:-

(1) the floor area of each unit (paragraph 6);

(2) the valuation assumptions, in line with what is stipulated in Part 1 of Schedule 1 of the Ordinance (paragraph 10);

(3) the reasons to value the G/F of each block as one unit, one of the reasons being that he was unable to identify the demarcation between the front and rear units in each block (paragraph 10.6 ii);

(4) the residential comparables including the adjustments to arrive at the adopted unit rate of $6,155 per sq. ft. for the reference residential unit (Appendix IV); and

(5) the shop comparables including the adjustments to arrive at the adopted unit rate of $9,022.60 per sq. ft. with another 10% downward discount for the shop being located on the platform (Appendix V).

14. Before the hearing, Mr. Yuen filed a second valuation report dated 28 November 2011 (“the Supplementary Valuation Report”) which covered (1) the assessment of the Redevelopment Value (“RDV”) of the Lot at $216,500,000 for the purpose of setting the reserve price for the proposed auction of the Lots (which will be discussed below) and (2) the review and re-assessment of the EUV of all the units in the Building, at the same valuation date of 1 March 2011 as adopted in the Application Report. Mr. Yuen explained that the review of the EUV was prompted by (1) the availability of the Rating and Valuation Department’s confirmed indices for time adjustment, thus replacing the provisional indices previously used in the Application Report, resulting in consequential changes in the time adjustments for the comparables.

15. The following table shows the EUV of all the units in the Building based on the information shown in the Supplementary Valuation Report:-

	Unit A	Unit B
G/F, No. 1 South Lane	$9,810,000
1/F, No. 1 South Lane	$3,640,000	$3,200,000
2/F, No. 1 South Lane	$3,570,000	$3,130,000
3/F, No.1 South Lane	$3,500,000	$3,070,000
4/F, No. 1 South Lane	$3,430,000	$3,010,000
5/F, No. 1 South Lane	$3,360,000	$2,940,000
6/F, No. 1 South Lane	$4,240,000	--
G/F, No. 34 Hill Road	$9,810,000
1/F, No. 34 Hill Road	$3,640,000	$3,200,000
2/F, No. 34 Hill Road	$3,570,000	$3,130,000
3/F, No. 34 Hill Road	$3,500,000	$3,070,000
4/F, No. 34 Hill Road	$3,430,000	$3,010,000
5/F, No. 34 Hill Road	$3,360,000	$2,940,000
6/F, No. 34 Hill Road	$4,240,000	--
Total	$93,800,000

16. We are satisfied that the value of the Respondent’s Unit as shown in Mr. Yuen’s Supplementary Valuation Report 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 above.

Justification for Redevelopment

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

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

(b) had the Applicants taken reasonable steps to acquire all the undivided shares in the Lots.

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

19. As for the requirement under (a) above, the Tribunal has taken into consideration the expert opinion of Mr. Benson Wong (“Mr. Wong”), the building surveyor, Mr. So Kin Shing (“Mr. So”), the structural engineer and Mr. Yuen, the valuation surveyor.

20. Mr. So had conducted a structural assessment of the Building and prepared a report dated 21 November 2011. He found the following defects in the Building:

(a) cracks and spalling are found in the slabs, beams and columns of 20 units;

(b) carbonation depth test results have revealed that the alkaline environment in many of the concrete covers which gives protection to the reinforcement bars in the structural members against corrosion has been very extensively destroyed which is an indication that reinforcement bars near the surface of structural members are vulnerable to attack by corrosion;

(c) there is increased risk of corrosion in the embedded steel reinforcement bars in the columns and beams;

(d) all the steel reinforcement bars exposed from corrosion survey locations exhibit rust of various magnitudes;

(e) there are at least 7 aspects where the Building cannot meet the current structural engineering design requirements and the structural performance of the structural frames of the Building may have been adversely affected.

21. Based on the above findings, Mr. So concluded that the structural frames of the Building are in need of repair as the Building, constructed with reinforced concrete, has passed its design working life of 50 years. The structural frames have deteriorated to the final stages of their design working life and the deterioration will continue steadily due to extensive carbonation of the concrete. It is inevitable that new defects will occur and previous defects though repaired will recur readily, requiring substantial repairs or even partial demolition and re-construction of some defective structural members in the future. Repair work will need to be carried out regularly in the future and such repairs will be more and more extensive. Although the cost of repair may be relatively modest, such costs will escalate in the future as the extent and seriousness of the deterioration of the structural members increases with age.

22. Mr. So recommended hammer tapping works to all structural members of the Building and repair work to rectify defects such as spalling and cracks already identified should be carried out as a matter of urgency and to be carried out periodically in the future.

23. Mr. Wong in his Condition Survey Report dated 30 November 2011 stated that the Building is in a poor state of repair. Features and facilities which would nowadays be expected to be standard provisions in a residential/commercial building are missing. The obsolescence of the Building gives rise to real safety concerns. There are defects found in the structural frames, components, finishes and service installations which are of the nature and magnitude that cannot be easily made good by simple and piecemeal repairs. Substantial repairs are required to be carried out in order to restore the Building to the tenantable standard.

24. He assessed the total cost of immediate repair works at $8,683,771 which is about 41% of the cost of constructing a new building. He opined that such repair cost is very substantial and even after the repairs, the Building would remain as an old commercial/residential building with its design, components, finishes and services outdated and below market expectations. The Building has deteriorated to a state which is beyond reasonable economic repair as signified by the high repair cost. As more rapid deterioration will occur in the future, the necessary maintenance and repairs will inevitably be more frequent and extensive, making the continued occupation of the Building not practical and economical. The repairs will affect the use, occupation and enjoyment of the Building and tremendous interruption to the usual activities in the Building will last for at least 18 months. He recommended the owner to redevelop rather than repair given the Building does not possess any historical value or architectural merit.

25. In the Supplementary Valuation Report, Mr. Yuen examined the age consideration of the Building from the economic perspective. He found that the difference between the EUV as at 31 October 2011 (i.e. $95,980,000) and the RDV at $216,500,000 is substantial and the RDV well exceeds the EUV. He concluded that the Building is therefore considered well justified for redevelopment by its age.

26. In considering the state of repair from the economic perspective, Mr. Yuen opined that if the cost of repairs is no less than the enhancement value to the Building after the repair works, it can be said that the repair works are not worthwhile or justified in economic terms. Upon research, he concluded that it is obvious that the repair works on the Building are not economically viable as the estimated repair cost exceeds the estimated enhancement value.

27. This Tribunal accepts the evidence of the experts which are sound and supported by facts. Having considered the opinion of the experts above, this Tribunal accepts that the condition of the Building is not up to tenantable standard and is substantially below the usual standard for human habitation. Without extensive repair at unreasonable high costs, the Building is unfit for habitation. This Tribunal is satisfied that the redevelopment of the Lots is justified due to the state of repair of the Building.

28. As for the requirement of “the age” of the Building, this Tribunal agrees with the observation by Judge Wong in the case of Top Sail International Limited V Cheng Kai Ming, executor of the estate of Chan Hue also know as Chan Sum Hiu, deceased (LDCS 18000/2010) that “we should not restrict our consideration to just the physical age of the Buildings… we are of the view that the absence of a specific physical age in the Ordinance indicates that the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question” (at paragraph 23).

29. Given the fact that the Building is 53 years old with obsolete design and in a very poor not-tenantable condition (as particularised in paragraph 20-23 above), coupled with the fact that very substantial cost is required to repair and maintain the Building, this Tribunal is satisfied that an order for sale is justified on the ground of age as well.

Reserve price

30. In the Supplementary Valuation Report, Mr. Yuen valued the RDV of the Lots as at the date of valuation on 31 October 2011 at $216,500,000. He first valued the Lots, by the direct comparison method, at $216,500,000. He then cross-checked his valuation by the residual valuation and arrived at a value of $216,000,000.

31. When attempting to assess the RDV by the direct comparison method, Mr. Yuen admitted that it relied on the availability of appropriate transaction comparables. He was able to identify the following land sales which were all “whole block/lots” transactions in the Western District, having the similar zoning and classification of site as the subject Lots:

		Date of sale	Sale Price	Site Area (sq. ft.)
1.	46 Belcher’s Street	12/3/2010	$588,000,000	11,125
2.	1 & 2 Kwan Yick Street	3/12/2010	$68,100,000	2,338
3.	4A & 6 South Lane	18/7/2011	$70,000,000	1,461.66
4	604 Queen’s Road West	9/11/2010	$30,300,000	598.5
5.	16-18 Catchick Street	2/9/2010	$66,690,000	1,246
6.	105 Belcher’s Street	8/6/2010	$32,870,000	782.35

32. Mr. Yuen discarded Comparables 4, 5 and 6 as inappropriate comparables as they were too small when compared with the Lots and would not achieve the highest permissible plot ratio under the Building (Planning) Regulations on their own. Given that the registered site area of the Lots is about 398.79 sq. m. (4,292.5 sq. ft.), we agree with Mr. Yuen’s opinion.

33. All of the remaining comparables are sales of lots by auctions under the Ordinance. And they were all transacted at the reserve prices previously determined by the Lands Tribunal. In particular, Mr. Yuen found that although Comparable 3 was relatively small in size when compared with the Lots, it had the benefits of (1) being the most recent transaction and (2) being directly opposite the building, just on the opposite side of South Lane. Besides, Mr. Yuen has carried out an analysis and opined that in arriving at the reserve price of the lot of Comparable 3, the Tribunal (relying on the expert’s valuation) could have valued the lot on the basis of a plot ratio of 8 being achieved. In the circumstances, Mr. Yuen opined that Comparable 3 could be retained as a suitable comparable for direct comparison purpose. We agree with his opinion in this respect.

34. Mr. Yuen further made adjustments to the Comparables 1, 2 and 3 on the factors of location, size and time (Appendix XI of Supplementary Valuation Report at page 49 of Exhibit A4). Based on the adjusted unit rates, he arrived at an average Accommodation Value (“AV”) of $5,646.98 per sq. ft. for the Lots. He then arrived at the market value of the RDV at $216,455,795 for which he rounded to $216,500,000. We have gone through his valuation by direct comparison method in details and are of the view that the whole valuation is fair and reasonable.

35. In addition to the primary valuation by direct comparison method, Mr. Yuen has carried out a residual valuation of the Lots as a check. The details are shown in his Supplementary Valuation Report. Simply put, the residual valuation method is the assessment of the land value by deducting the development costs from the potential sales revenue, i.e. the gross sale price, of the proposed building upon completion. Mr. Yuen opined that the optimum development on the Lots would be a block of 28-storey commercial/residential composite building with shop units on the ground floor, gymnasium room and function rooms for the residents on 1/F, and domestic units on 2/F to 27/F. He has set out in (1) Appendix XII of the report, the details of the hypothetical optimum development and the area parameters, (2) Appendix XIII and XIV, the lists of retail and new residential comparables and their respective adjustments and (3) Appendix XV, the residual valuation of the Lots. In calculating the maximum permissible plot ratio, Mr. Yuen has taken into consideration the likelihood of setting back of the Lots and the bonus plot ratio given by the Buildings Authority. In assessing the GDV of the optimum development on the Lots, Mr. Yuen adopted average unit rates of $12,000 per sq. ft. for G/F shops, and $14,000 per sq. ft. for residential units, on all saleable area basis. In summary, Mr. Yuen estimated the gross development value (“GDV”) of the optimum development for the Lots to be $382,472,000. Deducting from this the total development costs (including the demolition costs and the developer’s profits on the total costs) of $120,982,746, he arrived at a residue value of $261,489,253. After deducting the cost of finance on the land cost and the developer’s profits on the land cost, he arrived at the present value of the land cost at $215,946,200 for which he rounded to $216,000,000. Hence, Mr. Yuen opined that his residual valuation supported his primary valuation by the direct comparison method and submitted that the RDV of the Lots should be $216.50 million.

36. We have gone through Mr. Yuen’s residual valuation in details. We agree with him on the basic valuation assumptions he has adopted including the type and scale of the optimum development for the Lots, the format of valuation, the development period assumed, the appropriate period and yield for discounting, the cost parameters as well as most of the average unit values that he has used.

37. Based on our acceptance of Mr. Yuen’s valuation that the RDV of the Lots as at 9 September 2011 reflecting its redevelopment potential is $216,500,000, we decide that this should be adopted as the reserve price for the proposed auction of the Lots.

Reasonable Steps Taken

38. The Applicants are under an obligation to negotiate on terms that are fair and reasonable for the purchase of the Respondent’s Unit under Section 4(2)(b).

39. This Tribunal accepts that prior to the commencement of this proceedings, the Applicants had made the following offers to the Respondent :

(a) By letter dated 7 January 2011 by Vigers, an offer of $7,809,000;

(b) By letter dated 8 March 2011 by the Applicants’ solicitor, an offer of $7,809,000.

40. And after the Applicants had taken out this proceedings, a further offer of $9,000,000 was made to the Respondent by the letter dated 4 November 2011 from the Applicants’ solicitor. All offers are not accepted by the Respondent.

41. Adopting the test formulated in Capital Well Ltd v Bond Star Development Ltd [2005] 4 HKLRD 363, this Tribunal is not required to conduct a valuation exercise in assessing whether the offer is reasonable. This Tribunal merely needs to be satisfied that the offer falls within the range of what may broadly be regarded as fair and reasonable.

42. According to paragraph 15 above, the apportionment ratio of the Respondent’s Unit should be 3.73% ($3,500,000 / $93,800,000). We found the RDV of the Lots to be at $216,500,000. Applying the apportionment ratio, the pro-rata share of RDV of the Respondent’s Unit should be $8,075,450.

43. Even though the 2 offers made before this proceedings are lower than the sum assessed by us, we are still satisfied that the offers made by the Applicants fall within the range of what may broadly be regarded as fair and reasonable. The difference between the 2 figures is not substantial. It is not necessary for the offer to beat the valuation as if it were a payment into court. The Applicants did rely upon its expert opinion to formulate the purchase price offered and there is no contrary evidence to suggest that the expert evidence is not properly made. We find that the Applicants have taken reasonable steps to acquire all the undivided shares in the Lots.

Conclusion

44. Having considered the above, this Tribunal is satisfied that the requirements and conditions as laid down in the Ordinance have been met and an order for compulsory sale sought by the Applicants should be granted. We made the order accordingly.