LDCS 9000/2014
IN THE LANDS TRIBUNAL OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
LAND COMPULSORY SALE MAIN APPLICATION
NO 9000 OF 2014
_________________
BETWEEN
CHARMWIDE INVESTMENT LIMITED (昌偉投資有限公司)
Applicant
and
LEE PING KEE (李炳祺)
1st Respondent
WONG HING CHUEN (黃興全)
2nd Respondent
KONG BING QUEN (江炳權) and
3rd Respondents
CHAN KIT CHING BETTY
4th Respondent
LAI SHING WOON
5th Respondent
LAI SUK HAN (黎淑嫻)
6th Respondent
LAM SIU HUNG (林紹雄)
7th Respondent
LAM FUNG YI (林鳳宜) and CHAN CHIU LIN (陳肖蓮)
8th Respondents
LAU WAI SUM (劉偉森)
9th Respondent
CHUNG LILY WAI YI (鍾慧儀), CHUNG JOHNNY NGAI MING (鍾毅明) and CHUNG NGAI PUN DAVID
10th Respondents
TSANG KAM LAN
11th Respondent
PAU CHI KONG, the Person Appointed to represent the estate of PAU BEAU otherwise known as PAU BIU, deceased (by Carry On Order dated 4th August 2015) 鮑志江 (根據2015年8月4日的命令被委任為死者
12th Respondent
LAM KAU MUI (林九妹)
13th Respondent
LEUNG CHU SUM (梁柱深) and IP FUNG PING (葉鳳屏)
14th Respondents
_________________
Before : Mr Alex Ng, Member of the Lands Tribunal
Date of Hearing: 10 May 2016
Date of Judgment: 19 May 2016
_________________
J U D G M E N T
_________________
BACKGROUND
1. This is an application for compulsory sale of all the undivided shares of and in Sub-section 1 of Section A of New Kowloon Inland Lot No 317 and the Extension thereto (“the Lot”), with a building erected thereon known as Nos 464, 464A and 466 Sai Yeung Choi Street North and Nos 50, 52, 54, 54A, 56 and 56A Wong Chuk Street, Kowloon (“the Building”), for the purposes of redevelopment pursuant to section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”).
2. The application is uncontested but there is one missing owner in the Lot. There is also an intended sale and purchase of another unit pending for completion. In any event, the tribunal has to determine whether the application has satisfied the requirements of the Ordinance.
3. The Building comprises 2 blocks (i.e. Blocks A, B, C & D and Blocks E, F, G, H & I) of 8-storey tenement buildings with four and five domestic units planned on each floor from Ground Floor to 7th Floor of the respective blocks. Each of the units on Ground Floor is attached with a yard, whilst Block E (No 52 Wong Chuk Street ) on 3rd Floor (the “Sub-divided Unit”) is subdivided into four rooms.
4. The Building was completed in 1958 with Occupation Permit No K62/58 issued on 24 February 1958 and each block is served by two common staircases. Each of the units in the Building is given 1 undivided share, making up a total of 72 undivided shares for the Lot, and each of the four rooms of the Sub-divided Unit is given ¼ of 1/72 undivided share.
5. The applicant filed the Notice of Application (“the NOA”) on 13 August 2014, which was subsequently amended on 11 August 2015 pursuant to the Order made by H.H. Judge KW Wong dated 4 August 2015.
6. At the time of filing of the NOA, the applicant owned 58 and ¾ out of 72 undivided shares in the Lot, i.e. 81.6% except for 13 units and 1 room of the Sub-divided Unit.
7. The applicant had subsequently acquired the undivided shares owned by 12 respective respondents, including 5th Respondent that an Assignment was executed on 6 April 2016 and is now pending for registration, resulting in an ownership of 70 out of 72 undivided shares in the Lot (i.e. 97.2% of the undivided shares in the Lot) at the hearing. Proceedings against 1st , 2nd , 4th , 5th , 6th , 7th , 8th , 9th , 10th , 11th , 13th and 14th Respondents had been discontinued.
8. 3rd Respondents (“R3”) and 12th Respondent (“R12”) are the remaining life respondents on record.
9. R3 is missing. Pursuant to the Order made by H.H. Judge KW Wong dated 4 August 2015, substituted service of the application on R3 was effected on 19 August 2015. R3 had not shown up after expiration of the 1-month period specified in the notices. By the same Order dated 4 August 2015, H.H. Judge KW Wong also dispensed with service on R3 of all documents in respect of these proceedings subsequent to this Order.
10. On 4 April 2016, the applicant and R12 entered into a settlement agreement in respect of these proceedings, but they have not been able to complete their intended sale and purchase before commencement of the trial. Nevertheless, upon the joint application of the applicant and R12 by way of Consent Summons lodged with the tribunal before Deputy Judge Kot on 6 April 2016, leave be granted to R12 to withdraw his opposition to these proceedings and all documents previously filed by R12 in support of such opposition.
11. At the hearing, since there was no expert evidence filed by the respondents in these proceedings, Ms Ngai for the applicant simply called the witnesses to prove the applicant’s case. The applicant contended that all the requirements of the Ordinance had been satisfied and asked for an order for sale of the Lot.
SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS
12. Section 3(1) of the Ordinance requires the applicant to have not less than 90% of the undivided shares in a lot before it can make an application. Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a percentage lower than the percentage mentioned in subsection (1) in respect of a lot belonging to a class of lots specified in the notice.
13. Pursuant to section 3(5) of the Ordinance, a Notice was gazetted on 22 January 2010 and tabled at the Legislative Council meeting on 27 January 2010, which came into operation on 1 April 2010. Section 3 of the Notice lowered the threshold for compulsory sale, insofar as it is applicable, from 90% to 80%. Section 4(1)(b) of the Notice specified one of the classes for the purposes of section 3 as “a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (which is the date of the application)”.
14. As at the date of the application, the applicant owned 81.6% of the undivided shares in the Lot and the occupation permit of the Building was issued for more than 50 years. I am satisfied that the applicant is entitled to make the application.
DETERMINATION OF THE EXISTING USE VALUES (“EUV”) OF ALL UNITS IN THE BUILDING
15. Pursuant to section 3 of the Ordinance, the NOA was accompanied by a valuation report dated 27 June 2014 (“Application Report”) prepared by Mr Wong Chi Wai (“Mr CW Wong”), the applicant’s valuation expert, containing assessments of values of all units (which are conveniently termed as the existing use values, the “EUV” of all units) of the Building as at 6 June 2014. The report was prepared not earlier than 3 months before the filing of the NOA in accordance with section 3 of the Ordinance.
16. 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 Lot, the tribunal has to determine the values. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the Lot who cannot be found, the majority owner of the Lot 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.”
17. R3 is a missing owner. The tribunal, before making an order for sale if any, should satisfy that the value of the unit owned by R3, Block B (No 56 Wong Chuk Street) on 4th Floor (“R3’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 majority owner’s property as assessed in the application.
18. In the Application Report, Mr CW Wong explained his valuation method and the assessment process to arrive at the EUV of each unit in the Building. In undertaking the assessment, Mr CW Wong adopted the Direct Comparison Method. He had firstly identified reference units for both shop and domestic portions of the Building and compared them with the actual transactions in the market. The remaining shop and domestic units in the Building were then compared with the respective reference units.
19. In the valuation of all ground floor units, Mr CW Wong assumed that they can be used for non-domestic use, although in the Occupation Permit No K62/58 permission was granted to occupy and use of the Building for domestic purposes only.
20. Mr CW Wong updated his EUV assessments by a supplemental report dated 30 December 2015 (“Supplemental Report”). He added one new shop comparable and three new domestic comparables; changed the measurements of frontage to full width including column instead of clear width; rectified the adjustments for frontage, building quality and layout to ground floor shops, changed the assessments of Block A (No 56A Wong Chuk Street) on Ground Floor, Block C (No 54A Wong Chuk Street) on Ground Floor and Block I (No 464A Sai Yeung Choi Street North) on Ground Floor as domestic units instead of shop units. Mr CW Wong finally revised the unit price of the reference domestic unit to $56,000/sq m and the unit price of the reference shop unit to $169,000/sq m, and then updated the EUV of each unit in the Building.
21. Although all nine ground floor units were permitted for domestic purposes only in the Occupation Permit of the Building, Mr CW Wong considered that the optimum use of six of them (i.e. Block B (No 56 Wong Chuk Street), Block D (No 54 Wong Chuk Street), Block E (No 52 Wong Chuk Street), Block F (No 50 Wong Chuk Street), Block G (No 466 Sai Yeung Choi Street North) and Block H (No 464 Sai Yeung Choi Street North) on Ground Floor) is non-domestic and therefore he assessed them as shop units but there was no adjustment for conversion of use in his valuation. Ms Ngai submitted that Mr CW Wong’s approach with no adjustment for conversion of use is in line with the approach set out in Pacific China Development and Another v The PR of Chu Tak Hing, deceased, Administratix of the estate of Yu Kei Ming, deceased and Another , LDCS 10000 of 2014 dated 5 February 2016 (unreported) and New Eagle Development Ltd v Chu Biu Cheung as trusted for and on behalf of Cepriano Lee alias Chu Biu Chung and Others , LDCS 28000 of 2012 dated 18 June 2014 (unreported).
22. Mr CW Wong was also the valuation expert in Fully International Ltd and Another v Chan Man Kong alias Chan Sang, by the Official Solicitor, his guardian ad litem and Others, LDCS 18000 of 2011 dated 18 December 2014 (unreported), an application for compulsory sale of another lot near the Lot, and he had made -10% adjustment in this case to reflect the time and costs for the conversion of domestic unit to shop unit. At the hearing, when Mr CW Wong was enquired why he made no adjustment in the present case and what are the differences between these two cases, he replied that in the present case he has just followed the recent judgments of the tribunal that no adjustment was made for conversion of use. He further explained that, however, there should have -10% adjustments for conversion of use from valuation perspective in the present case, and he has then updated his assessments accordingly.
23. I consider that the adjustment if any for conversion of use is a matter of expert opinion depending on facts and evidence of each case, and there is no universal rule in this regard. In the present case, on the conditions that Mr CS Wong’s expert opinion is unchallenged and the latest changes made by him at the trial with negative adjustment for conversion of use are in fact more favourable to the minority owners in the apportionment of sale price on EUV ratios, I agree to make -10% adjustments for conversion of domestic unit to shop unit.
24. Subsequent to Mr CW Wong’s replies to the enquiries, I accept the EUV assessed by Mr CW Wong. The EUV of all units in the Building as at the relevant date of valuation, i.e. 6 June 2014, are reproduced below: -
Floor
Wong Chuk Street
No 56A
No 56
No 54A
G/F
$4,280,000
$8,143,907 *
$3,350,000
1/F
$3,910,000
$3,730,000
$2,970,000
2/F
$3,840,000
$3,660,000
$2,920,000
3/F
$3,950,000
$3,590,000
$2,860,000
4/F
$3,680,000
$3,520,000
$2,810,000
5/F
$3,610,000
$3,450,000
$2,750,000
6/F
$3,530,000
$3,320,000
$2,690,000
7/F
$3,460,000
$3,040,000
$2,640,000
Floor
Wong Chuk Street
No 54
No 52
No 50
G/F
$7,866,359 *
$8,313,786 *
$10,680,073 *
1/F
$3,680,000
$3,810,000
$4,280,000
2/F
$3,610,000
$3,740,000
$4,200,000
3/F
$3,540,000
(1) $1,120,000
$4,120,000
(2) $830,000
(3) $660,000
(4) $1,260,000
4/F
$3,650,000
$3,590,000
$4,040,000
5/F
$3,400,000
$3,520,000
$3,960,000
6/F
$3,270,000
$3,360,000
$3,600,000
7/F
$2,960,000
$2,970,000
$3,290,000
Floor
Sai Yeung Choi Street North
No 466
No 464
No 464A
G/F
$7,741,248 *
$6,065,275 *
$3,090,000
1/F
$3,370,000
$3,220,000
$2,790,000
2/F
$3,470,000
$3,160,000
$2,740,000
3/F
$3,240,000
$3,100,000
$2,690,000
4/F
$3,180,000
$3,040,000
$2,640,000
5/F
$3,110,000
$2,980,000
$2,590,000
6/F
$2,990,000
$2,850,000
$2,530,000
7/F
$2,690,000
$2,510,000
$2,480,000
Total
$267,290,648
Note:- * - units that were assessed as shop units
SECTION 4(2) OF THE ORDINANCE – JUSTIFICATION AND REASONABLE STEPS
25. In determining the application, section 4(2) of the Ordinance empowers the tribunal to make an order for sale if it is satisfied that :
(1) the redevelopment is justified due to age or state of repair of the Building; and
(2) the applicants have taken reasonable steps to acquire all the undivided shares in the Lot (including negotiating for the purchase of the undivided shares owned by the respondents on terms that are fair and reasonable).
Section 4(2)(A) - Age and State of Repair
26. This tribunal has taken into consideration the expert evidence of Mr Wong Chi Ming (“Mr CM Wong”), a qualified structural engineer and Mr Benson Wong adduced by the applicant.
27. Mr CM Wong had conducted a structural assessment of the Building and prepared a Structural Assessment Report that was filed on 29 January 2016. Mr Benson Wong had conducted a condition survey of the Building and prepared a Condition Survey Report that was also filed on 29 January 2016.
28. I accept the unchallenged evidence of the applicant in these respects. I am satisfied that, based on the evidence of Mr CM Wong and Mr Benson Wong, redevelopment of the Lot is justified due to the poor state of repair of the Building and disproportionate costs to repair and maintain. I am also satisfied that redevelopment of the Lot is justified due to the age of the Building. This 58-year old Building is in a poor condition and in fact has come to the end of its life. Its design has become obsolete over time in many aspects both physically and functionally and failed to conform to modern standards and requirements in many material respects.
Section 4(2)(B) – Reasonable steps taken
29. The applicant is under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of all the undivided shares of the Lot under section 4(2)(b) of the Ordinance.
30. I accept the submission of Ms Ngai that the fact that the applicant has successfully entered into a settlement agreement with R12 before the trial is a solid proof of the reasonable steps taken by the applicant to acquire the unit owned by R12.
31. Before the Order for substituted service, the applicant had made the following offers to R3: -
(1) $5,412,000 on 17 June 2014
(2) $5,439,000 on 30 July 2014
32. The applicant submitted that the respective offer prices were higher than the EUV (i.e. $3,520,000) as at 6 June 2014 as assessed by Mr CW Wong, and were also higher than the value reflecting its share in the potential of the Lot for joint redevelopment with the adjoining lots at about the time of the offer.
33. The applicant contended that the offers made to R3 were fair and reasonable and the applicant was reasonable in not making any further attempt to offer to purchase the share of R3 because any attempt to do so would not be fruitful in the light of the fact that R3 is missing. The applicant also submitted that the amount of offer price is less important, if not entirely irrelevant, because (1) no offer could have reached R3; and (2) no matter how much the applicant had offered, the applicant could never be successful in acquiring R3’s Unit by negotiation.
34. In assessing the reasonableness of the offers, Ribeiro PJ stated in Capital Well Limited v Bond Star Development Limited[1] that :
“the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It does not itself arrive at any conclusion as to what figure represents the correct valuation. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question.”[2]
35. From the issuance of the Application Report to the date of trial, Mr CW Wong has been changing the basis of valuation for assessment of ground floor units and also the assessments of all EUV, and hence the EUV ratios for apportionment of sale price. In the period, he has also updated the redevelopment value (“RDV”) of the Lot as at different valuation dates. Based on the figures provided by Mr CW Wong, I agree that the offer prices in June / July 2014 were higher than the EUV of R3’s Unit as at 6 June 2014 and the value reflecting its share in the potential of the Lot for redevelopment on its own at about the time of the offer. However, when the latest EUV ratios as derived from Mr CW Wong’s revised assessments at the trial are taken into consideration, the offer prices were in fact lower than the value reflecting the share of R3’s Unit in the potential of the Lot for joint redevelopment with the adjoining lots at about the time of the offer.
36. In assessing the reasonableness of the offers, I have query on whether the offer prices should be higher than the proportioned redevelopment value reflecting joint redevelopment with the adjoining lots. Anyhow, except for the latest changes to the EUV of six ground floor units at the trial, there is no evidence before this tribunal that Mr CW Wong’s assessments were faulted. In the circumstances, I am satisfied that the offers made by the applicant to R3 fall within the range of what may broadly be regarded as fair and reasonable and the applicant has taken reasonable steps to acquire all the undivided shares of the Lot including those owned by R3 and R12.
ORDER FOR SALE
37. I am satisfied that redevelopment of the Lot is justified in terms of both age and state of repair of the Building and the applicant had taken reasonable steps to acquire all the undivided shares of the Lot and had negotiated for the purchase of the respondents’ shares in their respective units on terms that are fair and reasonable. In the circumstances, I agree that an order for sale should be granted in favour of the applicant.
RESERVE PRICE FOR THE AUCTION
38. The applicant submitted that the reserve price for the auction of the Lot should be fixed at $473,000,000, which is based on Mr CW Wong’s assessment of the RDV of the Lot as at 28 April 2016 in a supplemental report dated 29 April 2016 (“RDV Report”).
39. Mr CW Wong adopted the Residual Method to assess the RDV of the Lot. Residual Method is the assessment of land value by deducting the development costs (including construction costs, professional fees, financial costs and profit, etc.) from the estimated gross development value (“GDV”) of the proposed development, as if completed, as at the date of valuation.
40. Mr CW Wong opined that the optimum redevelopment on the Lot comprised a 30-storey commercial/residential composite building with retail shops on ground floor, 1st floor and 2nd floor, recreational facilities and landscaped garden on 3rd floor, and domestic units on the remaining upper floors. Details of the hypothetical development with the proposed total gross floor area of 8,919.15 sq m (excluding 225.65 sq m green feature concessions) and plot ratio of about 9, the GDV assessed (i.e. $199,000 - $229,000/sq m saleable area for shops on ground floor, $66,333/sq m saleable area for shop on 1st floor, $53,066/sq m saleable area for shop on 2nd floor and $159,000 - $177,000/sq m saleable area for domestic units on upper floors), the development costs adopted (i.e. $40,770 - $44,639/sq m gross floor area) and the residual valuation were set out in the appendixes of the RDV Report. The residual land value was assessed at $473,000,000, which is equivalent to an accommodation value of about $53,032/sq m gross floor area.
41. Mr CW Wong had also attempted to apply the Direct Comparison Method to assess the RDV of the Lot, but no suitable comparable was identified.
42. Having gone through Mr CW Wong’s valuation in the RDV Report, I accept that the market value of the Lot reflecting its redevelopment potential on its own, i.e. the RDV of the Lot, as at 28 April 2016 was $473,000,000, which should be the reserve price for the auction of the Lot.
ORDER
43. This tribunal make the following determinations :
(1) This tribunal is satisfied that redevelopment of the Lot is justified due to the age and state of repair of the Building, and that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot including those of the respondents;
(2) 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;
(3) Mr Anthony Chow and Ms Anna Chow, nominated by the applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees by the Ordinance in relation to the sale of the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Peter C Wong, Chow & Chow dated 12 November 2015;
(4) For the purposes of the sale of the Lot by public auction :-
(a) 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 to be approved and initialed by the tribunal; and
(b) The reserve price be set at $473,000,000;
(5) Subject to further extensions that the tribunal may subsequently allow upon the application of the purchaser of the Lot or its successor in title, the redevelopment of the Lot and the Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot;
(6) Liberty to the applicant, the 3rd respondents, the 12th respondent and the Trustees to apply to the tribunal for further directions;
(7) Service of this Order on the 3rd respondents be dispensed with; and
(8) The applicant do publish notices once in a Chinese language newspaper (and in the Chinese language) and once in an English language newspaper (and in the English language) circulating generally in Hong Kong within 21 days from the date of this order informing the 3rd respondents and all persons claiming to be the owners of the Lot: -
(a) That the tribunal has made an order for sale of the Lot; and
(b) Where and the times during which a copy of the order may be obtained.
COSTS
44. The applicant did not ask for costs. I make a costs order nisi that there be no order as to costs and such order be made absolute after 14 days if no application is made to vary the said costs order.
(Alex Ng)
Member
Lands Tribunal
Ms Nancy Ngai, instructed by Vincent T.K. Cheung, Yap & Co., for the applicant
The 3rd respondents were not represented and did not appear
Attendance of Poon, Sum & Cheng, for the 12th respondent, was excused
[1] (2005) 8 HKCFAR 578
[2] Supra, at paragraph 33