GENTWAY LTD v. LI KING FONG AND OTHERS

LDCS 1000/2010

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LANDS COMPULSORY SALE APPLICATION NO. 1000 OF 2010

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REASONS FOR JUDGMENT

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Written Reasons

1.  After hearing and reading submissions and evidence before me, I have granted judgment in favour of the Applicant on 15 December 2010 and made an order for sale under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) with reasons reserved. I now give my written reasons for the judgment.

The Application

2.  This was an Application made under the Ordinance for an order of compulsory sale of all the undivided shares of and in Subsections 1, 2, 3, 4, 5 and the Remaining Portion of Section A of New Kowloon Inland Lot No. 1694 (Nos. 186, 186A, 186B, 186C, 186D and 188, Tai Po Road, Kowloon) (“the Lots”)

3.  There was a 5-storey commercial / residential building (“the Building”) erected on the Lots with 4 commercial units on the ground floor of Nos 186 and 188 of Tai Po Road, 4 domestic units on the ground floor of 186A, 186B, 186C and 186D of Tai Po Road, 6 domestic units on 1^st floor of Nos. 186, 186A, 186B, 186C, 186D and 188 of Tai Po Road, 10 domestic units on 2^nd floor of Nos. 186, 186A, 186B, 186C, 186D and 188 of Tai Po Road, 6 domestic units on 3^rd floor of Nos. 186, 186A, 186B, 186C, 186D and 188 of Tai Po Road and 6 domestic units on 4^th floor of Nos. 186, 186A, 186B, 186C, 186D and 188 of Tai Po Road making a total of 5 undivided shares on each subsection (Total: 30 undivided shares). The building was completed in 1955 and was served by 3 staircases.

4.  The Applicant was the registered owner of all the undivided shares of the Lots with exclusive right to use all the units of the Building (“the Applicant’s Units”), except:-

(1)  3/4 of 1 undivided share of Subsection 3 of Section A of New Kowloon Inland Lot No. 1694 held by the 1^st Respondent and 1/4 of 1 undivided share of Subsection 3 of Section A of New Kowloon Inland Lot No. 1694 held by the 2^nd Respondent, both with exclusive right to use the domestic unit at 2^nd Floor, No. 186B Tai Po Road, Kowloon (the 1^st and 2^nd Respondents’ Unit);

(2)  1 undivided share of Subsection 2 of Section A of New Kowloon Inland Lot No. 1694 held by the 3^rd Respondent with exclusive right to use the domestic unit at 3^rd Floor, No. 186A Tai Po Road, Kowloon (the 3^rd Respondent’s Unit); and

(3)  1/5 of 1 undivided share of Subsection 5 of Section A of New Kowloon Inland Lot No. 1694 held by the 4^th Respondent with exclusive right to use the domestic unit at Portion D 2^nd Floor, No. 188 Tai Po Road, Kowloon (the 3^rd Respondent’s Unit);

5.  The average of Applicant’s undivided shares of the Lots was 92.66%. I was satisfied that the Applicant was entitled to make this Application pursuant to section 3(1) of the Ordinance.

6.  The Respondents did not appear in the hearing. I was satisfied that the notices published in the Chinese and English newspapers pursuant to the Directions of this Tribunal dated 4June 2010 of HH Judge M Wong were sufficient to bring the Respondents to the attention of this Application.

7.  Since the Respondents did not appear in the hearing, I therefore requested the Applicant to prove its case to justify its application for making the order according to the Ordinance. In my judgment, even if it was uncontested, because of the absence of the Respondents, unless the Applicant could satisfy this Tribunal with sufficient credible evidence that all the requirements and conditions as laid down in the Ordinance were duly met, the order of compulsory sale should not be granted. Since the Applicant’s evidence was not challenged, I therefore directed that all the witness statements, expert reports and documents filed by the Applicant in support of this Application be admitted as evidence in the hearing without calling the makers.

Valuation of the Existing Use Values (“EUV”) as per Part 1 of the Schedule 1 of the Ordinance

8.  Under section 4(1)(a) of the Ordinance, the first determination by the Tribunal would have been the determination of dispute, if any, on the EUV valuations undertaken in the application valuation report filed pursuant to section 3(1)(a) of the Ordinance. However, since the Respondents did not appear in the present hearing, pursuant to section 4(1)(a)(ii) of the Ordinance, the Applicant had a duty to satisfy this Tribunal that the value of the Respondents’ units as assessed in this Application was not less than fair and reasonable, and in particular, when compared with the value of the Applicant’s Units.

9.  After reading and reviewing the valuation report dated 27 January 2010 (which was the application valuation report filed pursuant to section 3(1)(a) of the Ordinance) and the valuation report dated 29 September 2010  (which was a supplemental valuation report for adjusting his original opinion expressed in the application valuation report dated 27 January 2010) of Mr. Charles Chan, FRICS, FHKIS, Chartered Valuation Surveyor, I was satisfied that the EUV satisfied the above test that it was not less than fair and reasonable, and in particular, when compared with the EUV of the Applicant’s Units. I accepted the opinion of Mr. Chan that direct comparison method was an appropriate valuation method for these properties. And I also accepted that the valuation was based on good market comparable transactions with suitable adjustments. Accordingly, the EUV of all the units of the Building accepted by this Tribunal were:-

Street Nos. of Tai Po Road	Existing Use Values as at 19 January 2010 ($)
	G/F	1/F	2/F	3/F	4/F
186		2,850,000	2,890,000	2,730,000	2,130,000
(South Portion)	9,130,000
(North Portion)	7,440,000
186A	1,610,000	1,620,000	1,730,000	1,780,000	1,580,000
186B	1,710,000	1,720,000	1,830,000	1,620,000	1,510,000
186C	1,940,000	1,900,000	2,030,000	1,890,000	1,760,000
186D	1,810,000	1,880,000	2,000,000	1,870,000	1,640,000
188		2,780,000		2,650,000	2,050,000
(Portion A)			740,000
(Portion B)			500,000
(Portion C)			620,000
(Portion D)			310,000
(Portion E)			350,000
(South Portion)	8,100,000
(North Portion)	7,460,000
Total					88,160,000

10.  According to the above, the total EUV was $88,160,000 and the EUV of the Respondents’ units respectively were:-

(1)  The 1^st and 2^nd Respondents’ Unit was $1,830,000 and hence, it represented 2.0758 % of the total EUV of the Lots;

(2)  The 3^rd Respondent’s Unit was $1,780,000 and hence, it represented 2.0191 % of the total EUV of the Lots; and

(3)  The 4^th Respondent’s Unit was $310,000 and hence, it represented 0.3516 % of the total EUV of the Lots;

Justification for Redevelopment and Reasonable Steps Taken

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

(1) Was the redevelopment of the Lots justified due to age or state of repair of the Building; and

(2) Had the Applicant taken reasonable steps to acquire all the undivided shares in the Lots.

12.  If the Applicant failed to satisfy this Tribunal that the above statutory requirements were met, be it an uncontested application, an order of compulsory sale ought not be granted.

13.  For requirement (1) above, I had taken into consideration of the experts opinion of Mr. Dennis W C Wong, MRICS, MHKIS, Building Surveyor and Authorized Person as stated in his report dated 4 October 2010 and Mr. C M Wong, FHKIE, CEng, FICE, a Registered Structural Engineer and Authorized Person as stated in his report dated 5 October 2010. The experts were of the view that that the existing buildings were in poor and dilapidated condition, namely :-

(1)  A number of cracks and spalling were found in the structural elements of the Building;

(2)  Some of the steel reinforcement in the Building was badly corroded;

(3)  Considerable voids were found in the structural elements of the Building;

(4)  29% of the structural elements of the Building were found to have concrete over less than the design cover and the design concrete cover were below the current design standard;

(5)  19% of the structural elements of the Building had doubtful adequacy of concrete strength;

(6)  Carbonation had reached the concrete surrounding steel reinforcement in 89% of the tested samples which meant that the steel reinforcement susceptible to corrosion;

(7)  The chloride content in the concrete for 50% of the tested samples exceeded the acceptable limit of 0.4%;

(8)  The structural and concrete elements did not provide for sufficient durability and fire resistance in meeting the current requirements as stated in the relevant ordinances;

(9)  The condition of the facade of the Building was poor. The rendered and painted surface was stained and deteriorated due to weathering and lack of proper maintenance. Serious deterioration was observed at the side and rear elevations of the Building;

(10)  Delamination was observed on the external walls of the Building and such delamination would deteriorate rapidly due to ingress of rainwater to the voids behind the rendering. The external wall rendering had come to the end of its effective life;

(11)  Many unauthorized building structures were erected in the yard of ground floor, the main roof on external wall without proper maintenance;

(12)  Asbestos contained materials were found in some corrugated sheets at many locations of the Building and therefore were dangerous and hazardous to the occupants and the general public;

(13)  The waterproof membrane on the roof was defective and not performing its intended function of keeping rainwater from the entering the Building;

(14)  None of the electricity meters and electrical wirings were protected with fireproof enclosures and therefore were potential fire hazards;

(15)  No emergency lighting was provided to the staircases and corridors;

(16)  No fire hydrants or hose reels system was provided in the Building;

(17)  No equipotential bonding for metal windows for preventing electrical shocks was installed;

(18)  25% of the domestic units had been illegally and substantially altered creating structural, fire safety and hygiene problems;

(19)  Voids under the ground floor slab of the Building were detected by using Ground Penetrating Radar Survey. These voids would cause ground subsidence endangering the safety of the residents and damages to the underground utilities.

(20)  Many illegal drainage installations and connections had been made to the toilets and kitchens in the illegally altered domestic units;

14.  Mr. Patrick Fung, S.C. leading Miss Nancy Ngai Counsel for the Applicant, submitted that although extensive repair works could extend the Building’s life span, as explained in the experts’ reports, the continuous maintenance costs would be high.  Most of the building components and finishes were at the end of their effective life span and without substantial repairs, the Building was not up to tenantable standard. I accepted that the condition of the Building was substantially below the usual standard for human habitation and the expected 50-year design life of it had been reached.  Without extensive repair, the Building was unfit for habitation.

15.  Apart from the professional opinions of the experts, I also looked at the primary evidence supporting the opinions including:- the photographs, the survey records and the various tests results (including:- Covermeter Survey, Core Compression Test, Depth of Carbonation (Pheolphthalein Test) Test and Chloride Content Test) in coming my decision. I accepted the Applicant’s submissions that the expert opinions were sound and supported by the facts.

16.  Further, in consideration of the evidence above, I was entitled to look at all of the above collectively to see if redevelopment was justified, even though when each of them, if considered alone, was insufficient to do so. I was satisfied that the evidence showed that the existing building on the Lots had reached beyond the design working life of 50 years and the state of repair was very poor. The Building was unfit for habitation and unreasonable high costs may have to be incurred to restore them into an acceptable standard but no evidence seemed to suggest that any reasonable owners would do so. I was therefore satisfied that the redevelopment of the Lots was justified due to age and state of repair of the existing building.

17.  In Intelligent House Ltd v Chan Tung Shing & Others [2008] 4 HKC 421, this Tribunal formulated certain tests, which included some economic perspective, for deciding whether or not a redevelopment was justified due to age or state of repair. The Applicant’s Counsel submitted that, even without any opposing submissions, it was still appropriate in this Application for this Tribunal to apply these tests. I disagreed. Since the correctness of these tests were subsequently questioned by the Court of Appeal “without the benefit of hearing full argument” in Fineway Property Ltd v Sin Ho Yuen VictorCACV 95 of 2009 (Unreported), in my judgment, it was not appropriate to deal with the correctness of the relevant tests formulated in Intelligent House  on “age” and “state of repair” without the assistance of opposing legal submissions.  Further, since I was satisfied with the facts and expert opinions adduced before me that the redevelopment was justified due to age and state of repair of the existing building, it was no longer necessary for me to apply these tests for disposal of this Application.

18.  For requirement (2) above, I had taken into consideration of the evidence of Miss Lui Wing Yan. She was a manager of the Applicant and had knowledge about the intended acquisition of the Respondents’ units. She said that, on 30 December 2009, the Applicant offered the 1^st and 2^nd Respondents to purchase their unit for $3,714,750 and $1,238,250 respectively. Since the Applicant had no knowledge of the whereabouts of 1^st and 2^nd Respondents, it therefore sent the offer by:- (a)   leaving the offer letters at the 1^st and 2^nd Respondents’ Unit; (b) inserting the offer into the mailbox; and (c) sending the offer by registered mail. According to the witness, the Applicant did not receive any reply from them and the offers sent by mail were returned.

19.  According to the witness, on 3 February 2010, the Applicant made further effort to purchase the 1^st and 2^nd Respondents’ Unit by making offers to the 1^st and 2^nd Respondents for $4,195,800 and $1,398,600 respectively in a similar manner. Similarly, there were no reply and the offers sent by mail were returned. On 25 October 2010, the Applicant made a final attempt to purchase the 1^st and 2^nd Respondents’ Unit by making offers to the 1^st and 2^nd Respondents for $4,756,950 and $1,585,650 respectively. Again, there was no reply.

20.  Regarding the 3^rd Respondent, the witness told the Tribunal that a Richfield Realty Limited, an estate agent, said that a Mr. Yee Jay Wee claimed to be the intending administrator of Ton Sue Qune. According to Richfield Realty Limited, this Mr. Yee was living in the United States of America and did not allow Richfield Realty Limited to inform the Applicant of his address. At that time, Mr. Yee claimed that he appointed Messrs. Gallant Y.T. Ho & Co., a firm of solicitors in Hong Kong, to handle his application for administration of the estate of Ton Sue Qune. Although the capacity of Mr. Yee to represent the 3^rd Respondent was yet to be proved, Applicant still offered Mr. Yee to purchase the 3^rd Respondent’s Unit for a price of $3,000,000 to which Mr. Yee accepted. A provisional agreement for the sale and purchase was signed by the Applicant and Mr. Yee on 2 July 2009. However, up to the date of hearing, there was no proof shown to the Applicant that Mr. Yee was appointed as the administrator. Further, Mr. Yee’s solicitors, Messrs. Gallant Y.T. Ho & Co. refused to confirm their instructions to act for Mr. Yee in the sale of the 3^rd Respondent’s Unit. By reasons of the above, there was no progress of the sale of the 3^rd Respondent’s Unit and therefore it was aborted.

21.  On 26 October 2010, the Applicant made a further attempt to purchase the 3^rd Respondent’s Unit by making a revised offer for $6,169,300.  The Applicant:- (a) left the offer letters at the 3^rd Respondent’s Unit; (b) inserted the offer into the mailbox; (c) sent the offer by registered mail; and (d) requested Messrs. Gallant Y.T. Ho & Co. and Richfield Realty Limited to pass the offer to the intended administrator of Ton Sue Qun’s estate.

22.  About 3 days before the hearing, by a letter dated 5 November 2010, Messrs. Gallant Y.T. Ho & Co. confirmed their instructions to act for Mr. Yee and a Madam Woon Sen Wong who were both appointed as administrators of Ton Sue Qun’s estate. However the administrators, despite having knowledge of the present proceedings, made no attempt to participate in the same. I agreed with the Applicant’s submissions that, given factual matrix between the Applicant and Mr. Yee, I had reason to believe that the 3^rd Respondent had knowledge of this Application and did not intend to oppose it. In the same letter, Messrs. Gallant Y.T. Ho & Co. also said that the offer to purchase the 3^rd Respondent’s Unit for $6,169,300 was passed to the administrators for consideration. I was informed by the Counsel of the Applicant that, up to the date of hearing, no reply from this offer was received.

23.  Regarding the 4^th Respondent, since Mr. Yue Hing Nga was once declared as a patient under the Metal Health Ordinance, Cap. 136, his estate was managed by a committee who was then represented by the Official Solicitor. However, after Mr. Yue passed away, the committee was discharged without any court order. The Applicant had no knowledge when Mr. Yue passed away and on 17 July 2009 sent an offer to the Official Solicitor intending to purchase the 4^th Respondent’s Unit for $700,000. The Official Solicitor then informed the Applicant that they no longer represented the 4^th Respondent. As the Applicant had no knowledge who the administrator was, the Applicant made offers to the 4^th Respondents by:- (a) leaving the offer letters at the 4^th Respondent’s Unit; (b) inserting the offer into the mailbox; and (c) sending the offer by registered mail. On 30 December 2009, 3 February 2010 and 25 October 2010, the Applicant offered to purchase the 4^th Respondent’s Unit for $840,000, $948,200 and 1,074,500 respectively. However, up to the date of hearing, the Applicant received no reply from these offers.

24.  In my judgment, I accepted that the 3^rd Respondent was given sufficient time to consider the offers but failed to respond. For other Respondents who had not communicated to the Applicant, either directly or indirectly, namely the 1^st, 2^nd and 4^th Respondents, I was satisfied that the notices and advertisements published pursuant to the Directions of this Tribunal dated 4June 2010 of HH Judge M Wong were sufficient to bring these Respondents to notice of this Application and, if necessary, to respond to the offers made by the Applicant. Having considered the above, I was satisfied that the offers were duly communicated through all possible means to the Respondents.

25.  According to the Applicant’s valuation expert, Mr. Chan, the redevelopment value of the Lots, as at 21 October 2010, was $291,000,000.  In carrying out the valuation, Mr. Chan used the residual valuation method and was of the view that the optimum hypothetical development should be a composite commercial and residential building. I had carefully considered and reviewed the steps taken, assumptions made and comparables used by Mr. Chan in the valuation and accepted that they were reasonable in the circumstances.  I accepted that $291,000,000 was the open market value of the Lots reflecting their redevelopment potential, on their own.

26.  Applying the accepted redevelopment value of the Lots for $291,000,000, this would give the proportionate values of the respective Respondents units (calculated at the Respondents’ pro rata interest of the development) as follows:-

Respondents	Latest Offers in October 2010	Proportionate Values in October 2010	Pro Rata Interest
1st	$4,756,950	$4,530,434	3/4 of 2.0758 %
2nd	$1,585,650	$1,510,145	1/4 of 2.0758 %
3rd	$6,169,300	$5,875,581	2.0191 %
4th	$1,074,500	$1,023,156	0.3516 %

27.  In my judgment, the latest offers made in October 2010 clearly represented a fair and reasonable share of the redevelopment potential of the Lots. By reasons of the above, the offers made by the Applicant to the respective Respondents were fair and reasonable because they were duly communicated to the Respondents and were fair and reasonable in consideration of the statutory formula. Applying the test formulated in Capital Well Ltd v Bond Star Development Ltd [2005] 4 HKLRD 363, I was satisfied that the Applicant had taken reasonable steps to acquire all the undivided shares in the Lots including all the Respondents’ units.

28.  By reasons of the above, I was therefore satisfied that the order of compulsory sale ought to be made.

Reserved Price for the Auction

29.  Given my findings above that $291,000,000 was the open market value of the Lots reflecting their redevelopment potential, on their own, as at 21 October 2010, I therefore accepted that it should be the auction reserved price.

The Order for Sale

30.  I therefore made an order for compulsory sale in the following terms:-

(1)  All the undivided shares of and in the Lots be sold by way of a public auction for the purpose of redevelopment under Section 4(1)(b) of the Ordinance;

(2)  Mr. Ma Ho Fai and Ms. Tsang May Ping be appointed trustees (“the Trustees”) to discharge the duties imposed on the trustees to be appointed under the Ordinance in relation to the sale of the Lots and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs. Woo Kwan Lee & Lo dated 26October 2010;

(3)  For the purpose of sale of the Lots by public auction under Section 5(1)(a) of the Ordinance:-

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

(b)  The reserve price be set at $291,000,000;

(4)  Subject to further extensions which the Tribunal may subsequently allow upon the application of the purchaser of the Lots or its successor in title, the redevelopment of the Lots shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lots becomes the owner of the Lots as specified by Section 9 and Schedule 3 of the Ordinance;

(5)  Liberty to the Applicant, the Respondents and the Trustees to apply to the Tribunal for further directions under the Ordinance;

(6)  There be no order as to costs for this hearing and the entire application; and

(7)  Service of a copy of this Order on the Respondents be dispensed with subject to notices being inserted and published once within 21 days from the date hereof in Sing Dao Daily and the South China Morning Post on the same day:-

(a)  informing the owners of the Lots, including the Respondents, that an order for sale of the Lots has been made by the Tribunal; and

(b)  giving information as to the place where and times during which a copy of this Order may be obtained.