NEXT APEX LTD v. The Personal Representatives of the estate of WONG HING, deceased AND OTHERS

LDCS 53000/2012

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 53000 OF 2012

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BETWEEN

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JUDGMENT

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The Application

1.  This is an application for compulsory sale of a building at Nos. 18, 18A and 20 of Ko Shan Road, Kowloon (“the Building”). The Building stands on Subsection 1 of Section L of Kowloon Inland Lot No. 4307 (“the Lot”), which is divided into 17 equal undivided shares.  The Building is a 6-storey commercial/residential building with the occupation permit issued on 21 August 1958 (“the OP”). The permitted use for G/F is shops for non-domestic use and the permitted use for the 1/F to 5/F is 3 tenements on each floor for domestic use.

2.  On 26 October 2012, the Applicant as the majority owner commenced the present proceedings under the Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545)(‘the Ordinance”) against the 3 Respondents (“the Rs”) as the minority owners.

3.  At the material time, the Applicant owned 97.794% of the undivided shares of the Building, except the remaining undivided shares owned by the Rs.

4.  The 1^st Respondent, the 2^nd Respondent and the 3^rd Respondent are 3 of the 8 tenants-in-common of the unit at Flat B2 on 2^nd Floor of the Building (“the Unit”). The Unit has 1/17 undivided shares of the Lot. Therefore, each of the Rs has 1/8 of the 1/17 undivided shares of the Lot.

5.  The Rs have neither filed any Notice of Opposition nor taken part in the proceedings. As recounted in the Affirmation of Mr. Louie Wai Kuen filed on 10 January 2013, there is evidence that the Rs have all passed away and hence the proceedings are against the personal representatives of the estates of the Rs. However, there is no one representing the estates of the Rs. Hence, the Applicant has asked for an order to dispense with services of the proceedings on the Rs in accordance with section 3(4) of the Ordinance. The Tribunal has granted the dispensation of service order on 15 January 2013 and the Applicant has duly complied with the requirement on the publication of notices as required under the dispensation of service order.

Whether the Applicant owns sufficient undivided shares

6.  As the OP was dated 21 August 1958, the Building was built with more than 50 years old. As the Applicant owns 97.794% of the Building on the Lot, the application is covered by section 3(1) of the Ordinance and section 4(1)(b) of the Land (Compulsory Sale for Redevelopment)(Specification of Lower Percentage) Notice Cap. 545A.

The formality requirement

7.  On the formality requirement, the Applicant relies on the 1^st Affirmation of Mr. Shack Kam Man filed on 1 November 2012 on the service of the Notice of Application on the Rs, the registration of the Notice of Application at the Lands Registry and the publication of the Notice of Application in the newspapers.

8.   On the further services of order and notice in compliance with the dispensation of service order, the Applicant relies on the 2^nd Affirmation of Mr. Shack Kam man filed on 30 April 2013.

The existing use value (“EUV”) of all the units in the Building

9.   The Applicant relies on the expert evidence of Mr. Charles Chan (“Mr. Chan”), Chartered Surveyor of Savills Valuation and Professional Services Limited in the assessment of the EUV of all the units in the Building. His EUV report (“Application Report”) dated 24 October 2012 was attached to the Application. The Application Report is used for deciding the apportionment ratio under section 10(3) and Part 3 of Schedule 1 of the Ordinance (Gilmerton Limited and Others v Polywin Holdings Limited and Others, LDCS 2000 of 2004, unreported, at paras. 12, 13, 14 and 15).The Application Report was done in pursuance of section 3(1)(a) and Part 1 of Schedule 1 of the Ordinance. The valuation date of 30 July 2012 is within 3 months of the Application of 26 October 2012.

10.   According to the Application Report, the market values of all the units in the Building as at the date of valuation of 30 July 2012 are as follows :-

	MARKET VALUE
Retail Portion	Flat A2	Flat A3
G/F	$12,940,000	$12,620,000
Retail Portion Sub-Total: $25,560,000

 

	MARKET VALUE
Domestic Portion	Flat B2	Flat B3	Flat C1
1/F	$2,630,000	$2,870,000	$2,140,000
2/F	$2,580,000	$2,680,000	$2,300,000
3/F	$2,760,000	$2,760,000	$2,250,000
4/F	$2,820,000	$2,760,000	$2,100,000
5/F	$2,620,000	$2,570,000	$2,050,000
Domestic Portion Sub-Total: $37,890,000 Grand Total (Retail and Domestic): $63,450,000

11.   I am satisfied that the above market values for all the units in the Building, on the basis of EUV, are fair and reasonable values.

12.    According to the Application Report, the EUV of the Unit is $2,580,000 and the total EUV of all the units in the Building is $63,450,000. On the basis that each of the Rs has 1/8 share of the value of the Unit, the EUV of the interest of each of the Rs is $322,500. Hence, the apportionment ratio for each of the Rs is 0.508%.

Taking reasonable steps to acquire the undivided shares

13.   On the criterion laid down in section 4(2)(b) of the Ordinance, the Applicant has acquired all the units except the Rs’ interest in the Unit. The Applicant submits that the Applicant has taken reasonable steps to acquire the Rs’ interest in the Unit. A summary of the position is set out in the statement of Mr. Louie Wai Kuen Statement. The Applicant also relies on the various offer letters dated 30 August 2012, 12 September 2012 and 27 September 2012 made by Messrs. So, Lung & Associates on behalf of the Applicant to the Rs with the offer prices based on the valuation estimated by Mr. Chan.

14.   On the question of offers made by the Applicant, insofar as may be necessary, the Applicant relies on the CFA’s decision in Capital Well Ltd. v Bond Star Development Ltd (2005) 8 HKCFAR 578 at paras. 33, 34, 35 and 36 on the proposition that the Tribunal is not required to conduct a valuation exercise in deciding whether the offer price was fair and reasonable compensation.

15.   I am satisfied that the Applicant has taken reasonable steps to acquire the remaining undivided shares in the Building on the Lot owned by the Rs.

Justification for redevelopment

16.   On the criterion laid down section 4(2)(a)(i) of the Ordinance, the matter has been discussed in various authorities. In this respect, the Applicant refers the Tribunal to the following judgments of the Lands Tribunal and submits that they are relevant in the present Application:

(1) Top Sail International Limited v Cheng Kai Ming, executor of the estate of Chan Hue also known as Chan Sum Hiu, deceased,LDCS 18000 of 2010 (unreported) at paras. 9, 10, 16, 23, 24 and 25.

(2) Champion Success Ltd., All Bright Hong Kong Investment Ltd. V Leung Lai Lai and others,LDCS 41000 of 2011 (unreported) at paras. 17, 18, 19 and 20.

(3) Pacific Crown Enterprises Limited v Man Yu On,LDCS 32000 of 2011 (unreported) at para. 22.

(4) Eversound Investments Ltd v Tse Yuen Chi & Ors., LDCS 11000 of 2012 (unreported) at para. 14.

17.   The Applicant submits that the tests of “age” and “state of repair” are separate tests both of which are satisfied in this Application.

18.   The Applicant relies on the expert evidence of Mr. Benson Wong (“Mr. Wong”), Registered Building Surveyor of Benson Wong & Associates Limited who has prepared and filed to the Tribunal a Building Condition Survey report. The report gives a comprehensive survey of the condition of the Building in term of the age of the Building and the state of repair of the Building. Mr. Wong also gives an estimate of the total cost of “immediate” repair works (at $6,216,900) and opines that such an estimated sum of the costs of immediate repairs is about 64% of the total costs for constructing a new building similar to the Building.

19.   The conclusion of Mr. Wong is at pages 539 - 548 of the Bundle 2. His opinion is that the Building has become obsolete over time and is in a poor state of repair.  Therefore, the Building should be redeveloped rather than being repaired.

20.   The Applicant also relies on the expert evidence of Mr. So Kin Shing (“Mr. So”), Registered Structural Engineer, of K.S. So & Associates Ltd. Mr. So has prepared and filed a Structural Assessment report. He has conducted desk study and visual inspection, carried out a number of standard tests on the concrete, and identified various structural defects in the Building. He has given a detailed discussion on the obsolete design of the Building. His conclusions and recommendations are at pages 1325 – 1329 of Bundle 2. In summary, Mr. So opines that based on his investigation findings, the structural frames of the Building are in need of repair as the Building, constructed with reinforced concrete, has reached the end of its design working life given that the Building was designed for a design working life of 50 years. In addition, although repairs are possible, repair work will need to be carried out regularly in the future and that such repairs will be more and more extensive as the structural frames become older. 

21.   As explained by Ribeiro PJ in Capital Well Ltd v Bond Star Development Limited (2005) 8 HKCFAR 578§21:

“The objectives of the Ordinance underlying this four-stage process are clear. On the one hand, the Ordinance aims to facilitate urban renewal in respect of old and dilapidated buildings by assisting private developers to complete their acquisition where they already own at least 90% of the lot in question and by preventing the indefinite obstruction of a redevelopment by any minority owners who may seek to extract a wholly unreasonable price or ‘ransom’ for permitting the redevelopment to proceed. On the other hand, it aims to ensure that the minority owner receives fair and reasonable compensation for its interest in the lot. Such compensation may be that which the minority owner agrees to accept or that which represents his share of the market value of the lot (reflecting its redevelopment value) as determined at a public auction, subject to a reserve price approved by the Tribunal.”

22.   In Fairtex v Tso Pee Hong [2012] 6 HKC 167, the Lands Tribunal (Deputy Judge Yu and Mr. Kwok), having considered a number of authorities in this area (in particular Intelligent House Ltd v Chan Tung Shing & Ors [2008] 4 HKC 421 (LT) and Fineway properties Ltd v Sin Ho Yuen Victor [2010] 4 HKLRD 1 (CA)), explained the proper approach in the following terms:

“We agree that ‘age’ and ‘state of repair’ are two separate grounds and even though there may be considerations common to both, we should still consider them separately. We agree that we do not have to formulate any general test for age and state of repair, and would consider if the expert evidence is sufficient to show that the age and state of repair is such state that redevelopment of the relevant lot is justified.”

23.   As for the requirement of “the age” of the Building, this Tribunal agree 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, 15 November 2011 (unreported) 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.

The physical age of a building is clearly one of the considerations, but it would not be the only consideration. The physical conditions of a building and the amount that would be required to maintain the building are other factors that the Tribunal should consider, as they would affect the decision on whether the life of the building should be ended or prolonged. The obsolete design of a building should also be considered as it has an important impact on whether it is too old to serve a modern society”. (at paragraph 23-24)

24.   I agree that the tests of ‘age’ and ‘state of repair’ are two separate tests. I am satisfied with the evidence of Mr. Wong and Mr. So that in the present case, both the tests of ‘age’ and ‘state of repair’ are satisfied and that the Building should be redeveloped.

Redevelopment Value (“RDV”) of the Lot

25.   Mr. Chan has produced a RDV report dated 13 May 2013 with valuation date also of the same date. The RDV of the Lot was estimated to be $68,700,000.

26.   In Mr. Chan’s RDV report, Mr. Chan states that he has carried out valuation of the RDV of the Lot on both the basis of direct comparison and residual valuation. In the valuation on direct comparison basis, he compares the Lot with a recent land sale in the vicinity known as Nos. 11 & 13 Wan King Street and Nos. 12 & 14 Wan Shun Street. He considers the land sale as a relevant comparable as it is not only located in the same district as the Lot but is also similar to the Lot in terms of town planning zoning and scale of development. After making what he considers to be appropriate adjustments, Mr. Chan opines that as at the date of his valuation (1 May 2013), the market value of the Lot is in the sum of $68,500.000.

27.   I have gone through Mr. Chan’s valuation, on the basis of direct comparison, as set out in the RDV report. I accept his valuation.

28. Mr. Chan has also carried out another valuation of the RDV of the Lot using the residual valuation method, which is an assessment of the land value by deducting the development costs from the gross development value (“GDV”) of the proposed development on the Lot. Put simply, the GDV in the residual valuation is an estimate of the gross sales revenue or the gross sale price of the proposed development to be built on the Lot. Mr. Chan states in his RDV report that after testing with different scenarios, he opines that the optimum hypothetical development to be built on the Lot will be “a 24-storey composite building with shop at G/F and domestic units on upper floor”.

29. Mr. Chan sets out the details of the hypothetical development and the residual valuation at Appendix IV of his RDV report (Bundle 1, pages 450 – 451). In particular, in estimating the GDV of the proposed development, he adopts an average unit rate of $264,000 per sq. m. (on saleable area basis) for the G/F accommodation of 110.70 sq. m. (saleable area) and an average unit rate of $161,000 per sq. m. (on saleable area basis) for the residential accommodation of 716.99 sq. m. (saleable area). He also adopts an average unit rate of $54,000 per sq. m. (on saleable area basis) for the “residential (lift lobby of single unit floors)” of 80 sq. m. (saleable area). He also states that he has adopted these average unit rates after analysing the relevant shop and residential comparables, including the process of making appropriate adjustments, with the details of his working set out in the various appendices of his RDV report. As to the construction cost, Mr. Chan based on the estimate prepared by WT Partnership, with adjustment based on the tender price index prepared by Langdon & Seah Hong Kong Ltd.

30. In the final analysis, Mr. Chan estimates the market value of the Lot (i.e. the RDV of the Lot), using the residual valuation method, at $68,700,000. Since this is higher than the RDV on the direct comparison basis, Mr. Chan opines that the RDV of the Lot should be $68,700,000. The Applicant relies on Mr. Chan’s estimation of value in the RDV report for determination of the RDV of the Lot and for setting the reserve price.

31. In arriving at the average unit rate for the residential accommodation in the estimation of the GDV in his residual valuation, he has based on the relevant transactions in the following 3 comparable developments: (1) Star Ruby, 1 San Wai Street (16 transactions with estimated completion date of year 2014), (2) Chatham Gate, 388 Chatham Road North (2 transactions with completion date of year 2012) and (3) Wuhu Residences, 105-113 Wuhu Street (17 transactions with completion date of year 2011). He confirms that the sales transactions of individual residential unit in all three developments (including the pre-sales in the development of “Star Ruby, 1 San Wai Street) are relevant and are of equal weight in his estimate of the average unit for the residential accommodation in his residual valuation. He in fact takes an average of the averages of sales transactions of units in these 3 comparable developments (at $166,692 per sq. m., $153,895 per sq. m. and $143,978 per sq. m.) respectively for the developments (1), (2) and (3)). He arrives at $154,854 per sq. m. which he rounds off to $154,900 per sq. m. In addition, based on his initial estimate of $154,900 per sq. m., he further adjusts this average rate of $154,900 per sq. m. to reflect the additional values due to the top floor special unit and the units with different views, etc. and arrived at an adjusted rate of $161,090 per sq. m. He rounds off this to $161,000 and adopts the latter figure in the estimation of the GDV of the proposed development for the Lot in his residual valuation.

32. During the hearing, in answering to my query, Mr. Chan confirms his approach to be correct. He also said that the comparables in development (1), being a development under construction are also relevant for determining the appropriate GDV for the residential accommodation in the proposed development.

33. I have gone through Mr. Chan’s residual valuation in details. I accept his valuation with the exception of the following 2 points: (1) that he should assign values for the “Residential (lift lobby of single unit floors)” of 88 sq. m. and (2) that he should adopt the 3 comparable developments and prefer to take an average of the averages from the sales of these 3 residential developments. Firstly, I think that since Mr. Chan estimates the GDV on saleable area bases, he should not assign values for the lift lobby as the latter should be excluded in the saleable area calculations. Secondly, I think it is more appropriate to adopt the average of transactions in development (1) alone because (i) the estimated completion date of the comparable development (1) is closer to the relevant date of valuation of Mr. Chan than that of development (2), which was completed in 2011 and (ii) the number of transactions in development (1) is more numerous than those in development (2), making it more reliable. Given that the average of the transactions of units in development (1) is $166,692 per sq. m. I substitute this to Mr. Chan’s adopted average unit rate of $154,900 per sq. m. and apply this to Mr. Chan’s adjustments for the top floor special units etc., I arrive at the figure of $173,256 per sq. m. (i.e. $166,692 x $161,000 / $ 154,900). Therefore, I round off this to $173,300 per sq. m. as to be the appropriate average unit rate for the estimation of the residential GDV in the residual valuation. This is to replace Mr. Chan’s estimated figure of $161,000 per sq. m.

34. Therefore, after making the above amendments, I have revised Mr. Chan’s residual valuation and set out the details in the appendix to this Judgment. I arrive at a value of $71,841,076 which is rounded off to $71,850,000. Since this is higher than Mr. Chan’s estimate of the RDV on direct comparison method ($68,500,000), I adopt this as the GDV for the Lot. Likewise, I agree with the Applicant and adopt this as the reserve price for the Lot.

Other Matters

35.   Finally, the Applicant states that there is no application by any tenant, if any, of the units in the Building. As a result, no order needed to be made with respect to any tenancy of the units at the Building.

36.   On the choice of trustees, the Applicant proposes to appoint Mr. Ho Chi Kit and Mr. Cheung Chi Yu of Katherine Y.W. Or & Co.

37.   The Applicant has adduced the draft Particulars and Conditions of Sale for the auction sale of the Lot.

38.   The Applicant agrees that there shall be no order as to costs in this application.                  

Conclusion

39.   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 Applicant should be granted with the reserve price fixed to reflect the redevelopment potential of the Lot on its own.

40.   This Tribunal made the following orders :

(a) This Tribunal is satisfied that the value of the interest of the three Respondents in the Unit partially owned by the three Respondents as assessed in this Application is fair and reasonable and is fair and reasonable when compared with the value of the Applicant’s units;

(b) This Tribunal is satisfied that the redevelopment of the Lot is justified due to the age or state of repair of the Building, and that the Applicant has taken reasonable steps to acquire all the undivided shares in the Lot including that of the three Respondents;

(c) 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;

(d) Mr. Ho Chi Kit and Mr. Cheung Chi Yu of Messrs. Katherine Y.W. Or & Co., nominated by the Applicant be appointed trustees (“the Trustees”) to discharge the duties imposed on trustee under the Ordinance in relation to the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter at pages 398-400 of Bundle 1;

(e) 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 substantially the same as those in the draft Particulars and Conditions of Sale (as set out in pages 401-423 of Bundle 1) to be initialled and approved by the Tribunal;

(ii) The reserve price be set out at $71,850,000;

(iii) Subject to further extensions that the Tribunal may subsequently allow upon the application of the purchase 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 Subject Lot becomes the owner of the Subject Lot;

(f) No order as to costs; and

(g) Liberty to the Applicant, the Respondents and the Trustees to apply to the Tribunal for further directions.