TOTAL SELECT LTD v. WONG WAI MAU ENTERPRISE LTD AND OTHERS

LDCS 13000/2017

[2019] HKLdT 7

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO. 13000 OF 2017

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J U D G M E N T

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Background

1.  This is the applicant’s application, filed on 11 December 2017, for an order for sale of all the undivided shares in New Kowloon Inland Lot No 1744 (“the Lot”) for the purpose of redevelopment pursuant to Section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”) (“the Application”).

2.  The applicant is represented by Mr Y C Mok (“Mr Mok”), instructed by Messrs Mayer Brown JSM in the present proceedings whereas the respondents are represented by Mr C Y Li SC (“Mr Li”) and Mr Jeremy Kwong instructed by Messrs So, Lung & Associates, Solicitors.

3.  Currently erected on the Lot is an 8-storey industrial building which is known as Amoycan Industrial Centre Block 1 (“the Building”) with the address of 7 Ngau Tau Kok Road, Kowloon. Ngau Tau Kok Road is a local distributor diverting from Kwun Tong Road running into the Ngau Tau Kok district. This section of Kwun Tong Road is a major district distributor which divides a comprehensive residential estate development, Telford Gardens, and a new business area to the west from the predominantly residential area to the east. The Building is  located amongst a cluster of residential cum commercial developments.

4.  The occupation permit of the Building, Permit No K210/61 (“OP”), was issued on 26 October 1961, i.e. more than 50 years before the Application. According to the approved building plans (of reference 2/4846/69) approved by the Building Authority on 21 October 1961, there was 1 factory unit planned on the ground floor and each of the upper floors from 1/F to 7/F.

5.  Notwithstanding the above, the Government Lease of the Lot, which was dated 24 June 1937, contains no user restriction except the usual non-offensive trade clause.

6.  According to the records of the Buildings Department, there are 3 sets of Alteration and Addition Works Plans (“A&A Plans”) as follows:

(1)   1962/63:

a.   a machine room was constructed at the loading space on G/F near the driveway exit to Ngau Tau Kok Road;

b.   the 1/F factory unit was repartitioned to accommodate a food manufacturing factory with cold storages and ancillary office;

c.   a neon signboard, various water storage tanks and cooling towers were constructed on the roof.

(2)   2003: the workshop unit on G/F was converted into shop uses, i.e. Shop A and Shop B.

(3)   2016: reinstatement works of an unauthorized staircase constructed between 1/F and 2/F at the southern part of the Building.

7.  According to the plans of the Deed of Mutual Covenant dated 30 December 1961 (“the DMC”), each of 2/F to 5/F is divided into 4 workshops (A, B, C and D) with a common corridor in a reversed “T” shape linking up the lift lobby at the rear of the building with the two staircases located near the two corners of the Building fronting what the plans identified as Kwun Tong Road and what is in fact Ngau Tau Kok Road. Each of 6/F and 7/F is divided into 2 workshops (A and B) sharing a common lift lobby.

8.  According to the records of the Land Registry, the 33/33 undivided shares of the Lot are allotted as follows:

(1)   G/F and Lavatories, Store Rooms and Other Rooms on the Eastern Boundary: 4/33 undivided shares

(2)   1/F Workshop: 4/33 undivided shares

(3)   2/F Workshop: 4/33 undivided shares

(4)   3/F Workshop: 4/33 undivided shares

(5)   1/33 undivided share is allotted to each of Workshop A, Workshop B, Workshop C and Workshop D on 4/F

(6)   1/33 undivided share is allotted to each of Workshop A, Workshop B, Workshop C and Workshop D on 5/F

(7)   2/33 undivided share is allotted to each of Workshop A, and Workshop B on 6/F

(8)   7/F Workshop: 4/33 undivided shares

(9)   Roof and Exterior Walls (except the Front Exterior of G/F): 1/33 undivided share.

9.  Having acquired various units in the Building from Monafat Ltd (“Monafat”), Food Labs Ltd (“Folabs”) and Goldenlamp Investments Ltd (“Goldenlamp”) on 21 November 2017, all being subsidiaries of the same group to which the applicant belongs, the applicant now owns all the undivided shares and units other than those owned by all the respondents, R1-R8, as set out below:

(1)   Workshop A (1/33 undivided share) and Workshop C (1/33 undivided share) on 4/F (respectively “Workshop 4A” and “Workshop 4C”) owned by R1, R2 and R3 as tenants in common;

(2)   Workshop 4D (1/33 undivided share) on 4/F owned by R4;

(3)   Workshop 5C (1/33 undivided share) on 5/F owned by R5;

(4)   Workshop 5D (1/33 undivided share) on 5/F owned by R6, R7 and R8 as tenants in common.

Thus, at the time of the Application, the applicant owned  28/33 equal and undivided shares,  which is equivalent  to 84.85% of the Lot.

10.  On 21 June 2016, a major fire broke out in the Building (“the 2016 fire”), causing damage to the units in the Building and to the Building as a whole. The fire took a few days to extinguish and tragically claimed the lives of 2 firemen. Since the 2016 fire, all units in the Building have been vacant, and entry into the Building has been strictly controlled requiring prior appointment before entry. Furthermore,  the following safety measures have been introduced by the building management company, the applicant and/or its predecessors in title:

(1)   Construction of scaffoldings and covered walkways on the pavement;

(2)   Installation of steel props as temporary supports to the beams and slabs at the 2/F, 3F and 4/F;

(3)   Partial demolition and reconstruction of some external walls and patch repairs of the external rendering;

(4)   Replacements of protected lobby, staircase, first aid room and toilet doors;

(5)   Repair / replacement of windows in the applicant’s units; and

(6)   Removal of the unauthorized building works in the applicant’s units;

(7)   Overhaul of Lift No 2 and its resumption for service; and

(8)   Repair / reinstatement of fire services installation in common areas.

Issues in dispute

11.  The issues to be decided in this case are as follows:

(1)   Whether the “market value”, as per Part I of Schedule 1 of the Ordinance (hereinafter referred to as “EUV”), of each unit of the Building should be assessed on a reinstatement basis;

(2)   What is the proper valuation of the EUV of the Building and the individual units therein;

(3)   Whether the Tribunal is satisfied that redevelopment of the Lot is justified due to the age and/or state of repair of the Building; and

(4)   Whether the Tribunal is satisfied that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot;

(5)   Whether the Tribunal should grant an order for sale and make the necessary orders pursuant to section 4(1)(c) of the Ordinance. 

Section 3 of the Ordinance – Ownership of the applicants

12.  Whereas section 3(1) of the Ordinance requires the applicants to have not less than 90% of the undivided shares in a lot before they can make 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 section 3(1) in respect of a lot belonging to a class of lots specified in the notice.

13.  The Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice was gazetted on 22 January 2010 and came into operation on 1 April 2010 (“the Notice”). Section 3 of the Notice lowered the threshold for compulsory sale in respect of the classes of lots specified in the Notice from 90% to 80%. Those classes of lots include:

“a lot that is not located within an industrial zone and each of the buildings erected on the lot—

(i) is an industrial building; and

(ii) was issued with an occupation permit at least 30 years before the relevant date (i.e. the date of the application under the Ordinance)”.

14.  As mentioned, the OP for the Building was issued on 26 October 1961 (i.e. not less than 30 years before the date of the Application) and the Lot is not located within an industrial zone[1]. The Notice is applicable and the threshold percentage should be 80%.

15.  At the time of the filing of the Application, the applicant owned 84.85% of the undivided shares of the Lot. We are satisfied the applicant is entitled to make the Application under section 3 of the Ordinance.

The Evidence

16.  For the purpose of the present proceedings, the applicant and the respondents have produced the following expert reports:

(1)   Structural Assessment Report: Expert report dated 8 June 2018[2] by Mr K S So (“Mr So”) for the applicant;

(2)    Condition Survey Report: Expert report dated 8 June 2018[3] by Mr Benson Wong Sai-ning (“Mr Wong”) for the applicant;

(3)    Valuation Report: The applicant relies on the valuation reports prepared by Mr Charles Chan (“Mr Chan”) for the assessment of the EUV as well as the redevelopment value (“RDV”) of the Lot whereas the respondents rely on the valuation reports prepared by Mr C K Lau (“Mr Lau”) for the same. There is no dispute that the relevant date of valuation is 15 September 2017.

EUV

17.  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.  Thus, the first task before us is to determine the dispute on EUV as at 15 September 2017 in case an order for sale be granted.

Whether the market value of the Building and the units therein should be assessed on a reinstatement basis?

18.  In assessing the EUV of the units, Mr Chan based his assessment on  the actual physical condition of the Building and  the units as at the date of valuation.  Mr Lau disagrees to this approach and has conducted his valuation based, inter alia, on the following assumptions[4]:

(1)   The 17 out of 41 investigation orders, repair orders, removal orders and building orders (collectively “the Building Orders”) issued by the Buildings Department since the 2016 fire that remain outstanding have been complied with, not taking into account the possible reinstatement costs needed to comply with the said orders; and

(2)   The internal conditions are tenantable.

(3)   The building has been put back to a structurally safe condition and the relevant units would be of a reasonable condition commensurate with the age of the Building.

19.  In “Mr Lau’s Table of Responses for EUV Valuation with Mr Chan’s Responses”, Mr Lau explained the reasons for his valuation assumptions as follows:  

“Given the virtually unrestricted nature of its government lease and the large disparity between existing use value and the redevelopment value, the market value of the subject lot would reflect the redevelopment potential. Owners of units of the building would seek to explore a redevelopment of the subject lot … In light of the dangerous building order and the redevelopment potential, owner of such units would give second thoughts to spending costs to make the units to become habitable again. I have reviewed the repair costs of HK$50M or so, as estimated by the applicants’ building surveyors for the subject building (including the internal conditions of units) which when divided by the total GFA of the existing building would be some 5,029/m² which I consider hypothetical owners would be able to afford such costs in light of the EUV assessment … I opine that it is not unreasonable for owners not to pursue the repair works as a priority but to seek redevelopment as long as the Building Authority can tolerate the non-compliance of the building orders. Thus, I have considered owners may not like to spend such repair costs which would be wasted in the event of a redevelopment. And I have made the assumption accordingly that the building orders have been complied with and the units have got tenantable condition.”[5] (own emphasis added)

20.  We disagree with Mr Lau’s valuation assumptions as set out hereinabove for the reasons set out below.

21.  Firstly, we are of the view Mr Lau’s assumption that the HK$50M should be divided by the total gross floor area (“GFA”) of the existing building to arrive at 5,029/m² is wrong[6]. Save for 2 orders pertaining to the G/F which was recently acquired by the applicant after the 2016 fire, 14 out of the 17 outstanding Building Orders are either applicable only to the respondents’ units or in respect of the common parts of the Building where the respondents are reluctant to contribute to the sinking funds set up for the Building to repair the fire damages: see the Appendix and paragraphs 44 and 46 to 52[7] of the witness statement of Leung Woon Tim, Moses (“Mr Moses Leung”), dated 8^th June 2018[8]. It is therefore apparent Mr Lau has underestimated the repair costs likely to be borne by  the respondents by dividing the whole of the repair costs by the GFA of the whole Building instead of apportioning the repair costs amongst the respondents, the applicant and the owners of the whole building in accordance with their respective liability.

22.  Secondly, we do not accept Mr Li’s submission that, but for the prospect of an order for sale, the respondents would have complied with the various outstanding Building Orders against them. Consequently, we do not accept Mr Lau’s assumption that the Building Orders would have been complied with has any factual basis.

23.  Mr Wong Kwong Hung Henry (“Mr Henry Wong”), a shareholder and director of 2^nd and 4^th Respondent, claimed that the respondents would have carried out repairs but for the prospect that an order for sale may be made. He further explained in his evidence in court that the respondents have not paid the sinking fund and the management fees because the respondents considered themselves the victims of the 2016 fire. Despite there being no determination on the cause of the 2016 fire, the respondents believe the tenant and/or owner of 3/F, and the Manager of the Building are responsible for the cause of the 2016 fire and that any damage suffered to the respondents’ respective units, including the loss of use of the units as a result of the 2016 fire, should be compensated by the owner and/or tenant of the 3/F.

24.  We note the actions of the respondents are inconsistent with Mr Henry Wong’s claim that the respondents would have carried out the necessary repairs but for the prospect that an order for sale may be made. The Notice of Application was filed with this Tribunal on 11^th December 2017 (more than 1 year after the resolutions for contribution to the sinking fund were passed). There has not been any evidence to show the respondents took any steps prior to the Application to carry out repair works to their respective units; nor have they made any contributions to the sinking fund as required.  The respondents’ reluctance to carry out any repair works is further supported by Mr Lau where he speculated in “Mr Lau’s Table of Responses for EUV Valuation with Mr Chan’s Responses”: the “owner of such units would give second thoughts to spending costs to make the units to become habitable again.”

25.  Furthermore, we do not accept the respondents’ explanation for failing to contribute to the sinking fund and management fees as being the true reason for their failure to contribute to the respective fees.  Resolutions were passed at the Owners’ Meetings held on 28^th July 2016, 13^th September 2016 and 24^th October 2016 relating to the contributions to the sinking fund and the repair works. It is not disputed that all the respondents attended the said meetings and clearly knew of their obligations to make contributions. However, as at the date of trial (being more than 2 years after the 2016 fire and the passing of the resolutions), the respondents have not commenced any action against the Manager of the Building, or the tenant and/or owner of 3/F for damages suffered as a result of the 2016 fire. Moreover, the respondents have not challenged the said resolutions by means of any legal action. They have simply ignored the resolutions and refused to contribute in the sums as resolved at the various Owners’ Meetings.

26.  We therefore do not accept the respondents would have complied with the Building Orders made against their respective units and reject Mr Li’s submissions on the same. Hence, we find Mr Lau’s valuation assumption that the Building Orders would have been complied with to be without factual basis and reject the same.

27.  Thirdly, we find Mr Lau’s valuation assumption on a reinstatement basis to be contrary to the express wording of Part 1 of  Schedule 1 of the Ordinance.  

28.  Part 1 of Schedule 1 of the Ordinance states:

“A valuation report, prepared not earlier than 3 months before the date on which the application under section 3(1) of the Ordinance is made, setting 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.”

29.  The express wording of Part 1 of Schedule 1 of the Ordinance requires the assessment of the market value be done without regard to any underlying presumptions about any possible order for sale or redevelopment potential. In other words, the property should be assessed on an “as is” basis as at the date of the valuation.

30.  The market reality approach has been incessantly applied by this Tribunal in, for instance, Cheer Capital Limited v Unibase investment Limited & Others, LDCS 5000 and 6000/2013 (unreported, dated 12 June 2015), Able Luck Development Limited & Others v Public Global Investments Limited & Others, LDCS 7000/2014 (unreported, dated 6 October 2017), and in Oriental Generation Ltd & Others v Luk Yung & Others, LDCS 4000/2013 (unreported, 29 February 2016), when one of the respondents maintained that his unit was kept in a better internal condition, its market value should deserve to be adjusted upwards to reflect fairness[9].

31.  We find support of our view in the case of Transport for London (London Underground Limited) v Spirerose Limited  [2009] 1 WLR 1797, [2009] UKHL 44, where Lord Neuberger pointed out at paragraph 50:

“First, if a statute directs that property is to be valued on an open market basis as at a certain date, one would not expect any counter-factual assumptions to be made other than those which are inherent in the valuation exercise (such as the assumption that the property has been on the market and is the subject of a sale agreement on the valuation date) or those which are directed by the statute.”

32.  Mr Li submitted the majority decision of the English Court of Appeal in the case of Trocette Property Co Ltd v Greater London Council (1974) 28 P&CR 408 laid down the principle that in assessing the market value of a unit (which was the marriage value there in issue), the market information known to the buyer (and ipso facto the vendor) and the intention of the parties concerned would be taken into account. It must be assumed that the vendor would be willing to sell at the best price he could reasonably get in the market. Applying the same principle, Mr Li argued one has to take into account the intention of the respondents to repair their units in order to sell them at the best price in the market. He submitted such a view also accords with the definition of “market value” promulgated by the Hong Kong Institute of Surveyors:

“The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”

33.  With respect, we do not agree with Mr Li’s application of Trocette Property Co Ltd and we do not accept his submissions regarding the need to take into account the respondents’ purported intention of repairing their respective units.

34.  Megaw LJ in Trocette Property Co Ltd at page 416 of the judgment stated:

“In valuing the leasehold interest one has to assume that there is a willing seller of the leasehold interest, offering the interest in the open market, with buyers prepared to pay a fair commercial price for it. No buyer in the open market is going to offer to pay a price which takes into account the leaseholder’s share of the potential “marriage value” if that buyer knows that in fact the freehold owner is either unable or unwilling to do that which it is necessary for him to do in order to create the “marriage value.” I see nothing in the legislation, apart from the provisions of section 9 which have to be considered under question (2), which compels or permits one to ignore, in assessing compensation for the leasehold interest, evidence of a fact which would be known to the buyers in the market and which would eliminate any question of “marriage value.” The fact that his freehold owner, the G.L.C., is no longer prepared to do that which is necessary to create the “marriage value” may be described as a peculiar characteristic of this particular landlord, but I see nothing in the rules which enable it to be ignored on that account. It is a fact which would indeed have affected the value of the leasehold interest if it had been offered on the open market by the claims on the relevant date. “The amount which the land” (the leasehold interest) “might be expected to realise” in a sale by a willing seller in the open market would have been an amount which included no element in respect of “marriage value.”

If the assessment of the value for the purpose of compensation is to be on the basis of ignoring a proven or admitted fact which would have affected the purchase price of an actual sale on the open market, the use of such basis must, I think, be justified by reference to some specific provision in the legislation.” (own emphasis added)

35.   Lawton LJ reiterated the same and said at the end of page 420:

“It is important that this statutory world of make-believe should be kept as near as possible to reality. No assumption of any kind should be made unless provided for by statute or decided cases.”

36.  Whilst we are prepared to accept that should there exist a “fact” that affects the value of the property it should be considered in assessing the value of the property, we are of the view such “fact” can only be considered where it is consistent with the express wording of the Ordinance.

37.  As set out hereinabove, we do not accept the respondents have any real intention of repairing their respective units and in complying with the outstanding Building Orders. We therefore do not accept the respondents’ purported intention of repairing their units to be a “fact” which would be known to the buyer and therefore should be considered.

38.  Furthermore, any consideration of the respondents’ purported intention of repairing the units is not consistent with the express wording of Part 1 of Schedule 1 of the Ordinance.  For reasons stated hereinabove, we are of the view Part 1 of Schedule 1 requires the assessment of market value to be done on an “as is” basis on the date of valuation. The state of the property and the true reality is that no such repairs were carried out by the respondents and the outstanding Building Orders against the respondents’ units have not been complied with.  

39.  As a matter of common sense, we do not accept a hypothetical and reasonable buyer would offer to purchase the respondents’ units in its current state at the same price one would offer if the unit was tenantable and without encumbrances.

40.  In Saunders v Maltby (Valuation Officer) (1976) RA 109, [1976] 2 EGLR 84, a case concerning the determination of Rateable Value, the English Court of Appeal remitted the case back to the English Lands Tribunal “to consider what extent of liability to repair it would be economically reasonable to attribute to the hypothetical landlord in the particular circumstances, having regard to the extent and nature of the disrepair and the likelihood of demolition.”  The English Court of Appeal stated:

“If the expenditure was such that it would be out of all sense to do the repairs, then a hypothetical landlord would let the house at the low rent. That fits in exactly with the statute, which says it has got to be in such a state of repair as to command that rent.”

41.  To put it simply, the respondents cannot “have their cake and eat it too.” The respondents cannot, on one hand, avoid spending money on repair works to their units to comply with the outstanding Building Orders and, on the other hand, benefit from a higher purchase price of their unit on the assumption they had spent the money on such repair works.

42.  For reasons set out above, we consider Mr Lau’s valuation assumption “that the building orders have been complied with” to be without factual basis, erroneous, and not in accordance with the spirit of Part 1 of Schedule 1 of the Ordinance. Therefore, we reject Mr Lau’s valuation on a reinstatement basis. We prefer and agree with the valuation approach of Mr Chan in assessing the EUV of the Building and the units therein.

What is the proper valuation of the EUV of the Building and the individual units therein?

G/F

43.  The physical attributes of the G/F shop(s) are set out in the EUV Joint Statement at Table A1 and Table A2 (“EUVJS/TA1 & 2”)[10]. The valuation opinion of the shop units, including the adjustment and discount factors, are set out in the EUV Joint Statement at Table A3 (“EUVJS/TA3”)[11] whereby we note Mr Chan agreed with Mr Lau to use Shop A as the reference unit. However, there is disagreement between Mr Chan and Mr Lau on the unit rate of Shop A; Mr Chan suggests the unit rate of $232,000/sq. m while Mr Lau suggests a unit rate of $202,000/sq. m.

44.  In respect of the return frontages, Mr Lau disagrees with Mr Chan that both Shop A and Shop B have return frontages (for which Mr Chan gave an upward adjustment of 5%). According to the A&A Plan in 2003, both the sides and the rear of the G/F have secondary frontages of about 75.9 metres in total[12]. Although the secondary frontages are abutting or facing the internal access roads only, Mr Chan considers there having better exposure as a result. However, upon our inspection on 13 November 2018, we found the openings at the sides of both Shop A and Shop B are at far distance away from Ngau Tau Kok Road and separated from the main street frontage by loading spaces and staircases in the Building extending to more than 10 metres. We consider these openings were created mainly to facilitate loading and unloading. We agree with Mr Lau that pedestrians are unlikely to be attracted by theses openings; there should not be any adjustment on “the return /secondary frontages”.

45.  As for the value to be given to the sprinkler room of about 66.4 sq. m inside the G/F shop, Mr Lau gave no value to the sprinkler room as the room is so specified according to the A&A Plan. On the other hand, Mr Chan included it as part of the saleable area of Shop B because it was part of the saleable area in the DMC G/F plan[13] and the assignment plan.

46.  We note the sprinkler room is built into the plan to satisfy the fire safety measures required by the Fire Safety (Commercial Premises) Ordinance, Cap 502. Therefore, we are of the view the sprinkler room should be excluded from the saleable area calculation.

47.  Lastly, the two experts disagree on how to deal with the parade of accommodation at the rear of the shops and separated by the internal road. According to the A&A plan aforementioned, they were designated for male and female toilets, a first aid room, and a store. Upon our inspection, these rooms have all been converted into storerooms. Owing to these characteristic differences, we agree with Mr Lau that these rear portions should be valued separately by deducting say 50% (but nothing more on size and frontage as the 50% itself is a spot figure likened to the halving back in the zoning principle) from the unit value for Shop A.

48.  The various saleable areas for the G/F are therefore as follows:

	Shop A*	Shop B (excluding sprinkler room)	Rear Portion of Shop A & B
Saleable Area (m2)	459.8	516.2	53.4

* Shop A is agreed as the reference shop unit.

49.  The two experts also disagree on the choice of retail comparables and adjustments:[14]

Comp No	Address	Year Built	Transaction Date	Sale Price	Saleable Area (sq. m)	Frontage (m)	Headroom (m)	Depth (m)	Unit Price (/sq. m)
B1	Shop F, G/F Tak Bo Garden, 3 Ngau Tau Kok Road	1984	31 Oct 17	$18,000,000	70.1	3.5	4.0	17.5	$256,776
B2	Shop U, G/F, Lee King Building, 50 Ngau Tau Kok Road	1978	17 Jun 17	$4,550,000	15.5	3.2	5.6	4.08	$293,548
B3	Unit 24, G/F, Wang Kwong Building, 33 Ngau Tau Kok Road	1977	20 Sep 16	$13,200,000	56.4	4.1	5.6	14.0	$234,043
B4	Unit 37, G/F Tak Bo Garden, 3 Ngau Tau Kok Road	1984	23 Oct 15	$9,900,000	41.4	5.1	4.0	8.2	$239,130
B5	Shop D, G/F Tak Cheong House, 174-176 Ngau Tau Kok Road	1974	28 Mar 17	$8,000,000	37.7	4.4	5.2	8.4	$212,202

50.  Basically the respondent disagrees to adopt Comparable B1 as a comparable because it took place on 31 October 2015, which is about 1.5 months after the agreed date of valuation as at 15 September 2017[15]. We cannot agree with the rationale of Mr Lau because comparables occurring both before and after the date of valuation are usually relevant unless some event took place after the valuation date so that comparables after this event do not reflect the market conditions as at the valuation date[16]. In this regard, we would also comment that Mr Lau had initially identified another transaction being Shop 14 also of Tak Bo Garden which took place on 22 September 2018, i.e. about 1 week after the valuation date. We agree however this comparable should not be included not because of its transaction date but for the reason that this is in respect of an arcade shop where the character is entirely different from that of the subject.

51.  Further, the two experts have the following agreements/disagreements on the adjustment factors applicable:[17]

Adjustment factors	Agreements/disagreements
	Mr Chan	Mr Lau
Time	RVD Retail Price Index (rounded to 1 decimal place)
Location	No agreement on retail potential, pedestrian flow, accessibility, visibility and the like
Size/Quantum	1% per 30 sq. m difference, lower unit rate for larger size
Age	0.2% per 1 year difference (rounded to 1 decimal place)
Frontage	1% per 1 m difference (rounded to 1 decimal place)
Return / Secondary Frontage	5% allowed on all comparables without return/secondary frontage	No return / secondary frontage
Layout	Consideration on overall shape, location of entrance, level of difference and the like	10% downward adjustment for all comparables of rectangular shape
Depth	0.75% per 1 m difference (rounded to 1 decimal place)
Headroom	1% per 0.25 m difference (rounded to 1 decimal place)
Total Adjustment	By Multiplication	By Summation

52.  The various adjustments (save that for return frontages which is now out of question) applied by Mr Chan are shown in the following table (while those by Mr Lau are shown in parenthesis)[18]:

Comp No	Unit Price (/sq. m)	Adjustments
		Time	Location	Size	Age	Frontage	Depth	Layout	Headroom
B1	$256,776	-0.3% (-0.3%)	20.0% (30.0%)	-13.7% (-13.0%)	-4.6% (-4.6%)	5.3% (5.3%)	-13.2% (-13.2%)	0.0% (-10.0%)	-1.2% (-1.2%)
B2	$293,548	2.6% (2.6)	35.0% (25.0%)	-15.5% (-14.8%)	-3.4% (-3.4%)	5.6% (5.6%)	-22.7% (-22.7%)	0.0% (-10.0%)	-7.6% (-7.6%)
B3	$234,043	9.0% (9.0%)	30.0% (25.0%)	-14.1% (-13.4%)	-3.2% (-3.2%)	4.7% (4.7%)	-15.8% (-15.8%)	0.0% (-10.0%)	-7.6% (-7.6%)
B4	$239,130	0.2% (0.2%)	30.0% (25.0%)	-14.6% (-13.9%)	-4.6% (-4.6%)	3.7% (3.7%)	-20.2% (-20.2%)	0.0% (-10.0%)	-1.2% (-1.2%)
B5	$212,202	3.6% (3.6%)	35.0% (35.0)	-14.7% (-14.1%)	-2.6% (-2.6%)	4.4% (4.4%)	-20.0% (-20.0%)	0.0% (-10.0%)	-6.0% (-6.0%)

53.  From the above, it is manifest that many of the adjustments have been agreed except those for location, size and layout.

54.  In respect of location, we have inspected all the above comparables on 13 November 2018 and found that none of the comparables have frontage onto Ngau Tau Kwok Road. All of them are much inferior in location and we prefer to adopt the higher of any 2 adjustments suggested by the two experts, save for comparable B1 for which we shall split the difference (i.e. 25%, 35%, 30%, 30% and 35% respectively).

55.  Also, when compared with the reference shop unit of 459.8 sq. m, all the comparables are very small. While the differences in adjustment for size between the two experts are very small (i.e. less than 1%), we adopt Mr Chan’s figures.

56.  As for the layout, we are doubtful if a further adjustment for layout is necessary after having adjusted for frontage and depth. Also, as pointed out by Mr Chan, both Shop A and Shop B have a side opening for loading and unloading, etc. We prefer not to apply any further adjustment for layout.

57.  The Tribunal has previously explained in paragraphs 89 - 94 of Cheer Capital Limited v Unibase investment Limited & Others, supra,  adjustments by multiplication should be more correct mathematically than the summation process. The accuracy of the multiplication process can be illustrated by using, as an example, adjustment factors of time and location. Applying the time adjustment, say, for comparable B1 at -0.3% will make $256,776/sq. m become $256,006/sq. m so that it can be compared with the reference shop unit at the same time frame. Only then are we in the position to adjust for the difference for location at 25%, i.e. $256,006/sq. m x (1+25%) = $320,008/sq. m. This is obviously a series of multiplication. On the other hand, if the summation approach is adopted, the result would be $256,776/sq. m x (1+24.7%) = $320,200/sq. m.

58.  Therefore, we emphasize that if we are facing a choice between the two different approaches, we would prefer the multiplication approach.

59.  Thus our assessment of the EUV for Shop A is shown as follows:

Comp No	Unit Price (/sq. m)	Adjustments								Adj Unit Price (/sq. m)
		Time	Location	Size	Age	Frontage	Depth	Headroom	Total*
B1	$256,776	-0.3%	25%	-13.7%	-4.6%	5.3%	-13.2%	-1.2%	-7.3%	$238,031
B2	$293,548	2.6%	35%	-15.5%	-3.4%	5.6%	-22.7%	-7.6%	-14.7%	$250,396
B3	$234,043	9.0%	30%	-14.1%	-3.2%	4.7%	-15.8%	-7.6%	-4.0%	$224,681
B4	$239,130	0.2%	30%	-14.6%	-4.6%	3.7%	-20.2%	-1.2%	-13.2%	$207,565
B5	$212,202	3.6%	35%	-14.7%	-2.6%	4.4%	-20.0%	-6.0%	-8.8%	$193,528
								Average:		$222,840

* by multiplication

60.  Thus, the EUV for Shop A is 459.8 sq. m x $222,840/sq. m

   =   $102,461,924

   Say $102,460,000.

61.  Adopting the adjustments for Shop B by Mr Chan, its EUV = 516.2 sq. m x $222,840 x (-3.7% for size) x (-1.4% for frontage)[19]

   = $109,223,063

   Say $109,220,000.

62.  Applying 50% to the unit value for Shop A, the EUV for the Rear Portion of G/F = 53.4 sq. m x $111,420/sq. m = $5,949,828

   Say $5,950,000.

63.  Therefore, the total EUV for G/F is $217,630,000. We find there being no justification for any bulk discount as suggested by Mr Lau.

Upper Floor Workshops

64.  Again, EUVJS/TC1[20] includes the agreements and disagreements concerning the physical attributes of the Upper Floor Workshops.

65.  While EUVJS/TC4[21] sets out the areas of different parts of the common area exclusively used by the respective owners, EUVJS/TC6[22] sets out the disagreements on the value given to such different parts of the common areas. For instance, there is no existing subdivision of the 2/F and 3/F into Shops A-D as shown in the DMC and the records of the Land Registry show that the 2/F and 3/F were sold as a whole without any sub-division. Mr Chan considers these common areas should be treated as part of the saleable area. Mr Lau has revised his position on “the common corridors” of 2/F and 3/F and agrees to assign a value to such areas to the extent that the common areas on 2/F and 3/F have been occupied for years as a whole (i.e. a 30% discount).

66.  Section 34I of BMO provides that:

“(1) No person may-

(a) convert any part of the common parts of a building to his own use unless such conversion is approved by a resolution of the owners’ committee (if any);

(b) use or permit to be used the common parts of a building in such a manner as-

(i) unreasonably to interfere with the use and enjoyment of those parts by any owner or occupier of the building; or

(ii) to cause a nuisance or hazard to any person lawfully in the building.”

67.  Thus, the conversion of “the common area” into private use can be a type of breach within the power of the Incorporated Owners to acquiesce as held in Hollywood Shopping Centre Owners Committee Limited v The Incorporated Owners of Wing Wah Building Mongkok Kowloon, [2011] 4 HKLRD 623, at paragraphparagraph68-69; and The Incorporated Owners of Freder Centre v Gringo Ltd [2016] 2 HKLRD 190, at paragraph24.

68.  In the case of Cheung Yuet & Another v The Incorporated Owners of Oriental Gardens [1977-1979] HKC 168 (Huggins VP, Leonard and Cons JJ), the Court of Appeal opined the inaction of the Incorporated Owners’ predecessor, namely the management committee in that case,  was a material and weighty factor to be taken into account in considering an equitable defence of acquiescence: paragraph 15, per Leonard J and at paragraph 20, per Cons J (pp 172F-173G). See also paragraphs 26 and 29 per Chu JA in Freder Centre.

69.  We note it is not disputed that there has never been any objection raised by any owner on the occupation of the common corridors and no enforcement action has ever been taken on the same. We consider any chance of enforcement remote and following the principle of reality as previously discussed, we agree with Mr Chan that no discount should be allowed on the former common corridors of 2/F and 3/F but having been converted into part of the accommodation at least since 2004. This is evidenced by the tenancy agreements produced by the applicant.

70.  Based on the same principle, we would allow no discount to the common toilets and first aid rooms exclusively used by their respective adjoining owners from 1/F to 7/F for a long period of time without being challenged. In any event, we have found some of these “common toilets” have been converted into storerooms.

71.  The two experts agree to use Workshop D on 4/F as the reference unit. However, Mr Chan’s unit rate is $49,900/sq. m whereas that by Mr Lau is $63,720/sq. m. Their choices of comparables are in the following[23]:

Comp No	Address	OP Date	Transaction Date	Sale Price	Saleable Area (sq. m)	Floor loading (lb/sq. ft)	Headroom (m)	Unit Price (/sq. m)
C1	2/F, 324 Kwun Tong Road	1978	16 Sep 17	$10,000,000	206.9	150	3.4	$48,333
C2	Workshop A, 4/F and portion of Flat Roof, Manning Industrial Building, 116-118 How Ming Street	1978	12 Sep 17	$20,625,000	293.8 + F/R: 154.2	150	3.0	$64,554*
C3	8/F, Lanton industrial Building, 99 Wai Yip Street	1978	4 Aug 17	$18,000,000	344.5	150	3.4	$52,250
C4	Flat C, 7/F, Chen Yip Industrial Building, 5 Lai Yip Street	1980	26 Jul 17	$16,500,000	298.6	150	3.5	$55,258
C5	2/F, On Cheong Factory Building, 19 Tai Yip Street	1986	8 Jun 17	$13,380,000	332.7	150	3.2	$40,216
C6	Unit A, 3/F and  Car Parking Spaces 7 and 8 on G/F, King Win Factory Building, 65-67 King Yip Street	1986	23 May 17	$26,500,000	465.3	154	3.1	$50,935 **
C7	7/F, Rainbow Industrial Building, 149 Wai Yip Street	1977	10 May 17	$23,080,000	430.5	150	3.2	$53,612
C8	7/F, Ko Leung Industrial Building, 25 Tai Yip Street	1977	21 Apr 17	$15,780,000	288.6	150	3.2	$54,678
C9	3/F, Lanton Industrial Building, 99 Wai Yip Street	1977	28 Feb 17	$17,800,000	344.5 + F/R: 55.3	150	3.35	$50,325*
C10	Basement, Units A, B and D on 1/F with Flat Roof thereof, Unit C on 1/F, Unit D on 2/F, Units A and B on 4/F and Units A-C on 5/F, Unify Commercial – Industrial Building, 31 Tai Yip Street	1977	29 Jun 17	$155,350,000	3,188.2 + F/R: 111.5	157	3.00	$49,686*

* The unit value of Flat Roof and Roof is assumed at 1/6 and 1/7 respectively of the saleable floor proper.

** Value of Car Parking Space is assumed at $2,800,000.

72.  We note that only comparables C8 and C9 are common comparables adopted by both experts. For instance, comparable C10 comprises a basket of industrial units scattering on different floors. Mr Lau considers “(g)iven the bulk transaction nature of these units, these should not be treated as comparable for this exercise.” As regards comparables C1 to C6, Mr Lau considers they have very small sizes for the purpose of comparison. On the other hand, Mr Chan does not adopt comparable C7 because he questions the genuineness or reliability of this comparable as he finds there was another transaction of the 10/F of the same building having a much lower price.

73.  We agree with Mr Lau that comparable C10 can be excluded because it comprises of various units up to a total of 3,188.2 sq. m whereas the reference workshop unit has an agreed saleable area of 344.5 sq. m and the whole of 1/F comes up to 1,477.3 sq. m only. There are also many variables as the transaction involves 8 purchases of units on various floors (including the basement) and Mr Chan just grouped the total of 8 transactions together. We include only all the others which give a total of 9 comparables; as we shall see later, the adjusted unit value of comparable C7 is within a reasonable range of the others and should be reliable and included in the analysis.

74.  Nonetheless, the two experts have the following agreements/disagreements on the adjustment factors applicable:[24]

Adjustment factors	Agreements/disagreements
	Mr Chan	Mr Lau
Time	RVD Private Flatted Factory Price Index (rounded to 1 decimal place)
Location	No agreement on retail potential, pedestrian flow, accessibility, visibility and the like
Size/Quantum	1% per 100 sq. m difference, lower unit rate for larger size
Age	0.35% per 1 year difference (rounded to 1 decimal place)
Floor	0.5% per 1 floor difference lower unit rate for higher floor level
Headroom	4% per 1 m difference but no agreement on threshold basis or otherwise (rounded to 1 decimal place)
Loading Capacity	No agreement on how to reflect the difference in floor loading capacity between the subject and comparables. Units with higher floor lading capacity command a higher unit rate
Main Entrance Accessibility	No agreement on the accessibility and the location of the main entrance
Accessibility	No adjustment	Upward adjustment for inferior provision of only 1 lift in the respective comparable buildings
Physical Condition and Building Management	Consideration on the provision of various facilities in the building such as sprinkler system, loading/unloading platforms and lifts	No adjustment
Loading / Unloading Provision	No separate adjustment	Separate adjustment for the loading/unloading provision
Provision of Carpark	Industrial Building with car parking facilities will benefit with more efficiency in good transportation	No separate adjustment
User Restriction	No separate adjustment	The unrestricted lease status of the government lease gives flexibility to the usage of the workshops
Total Adjustment	By Multiplication	By Summation

75.  In respect of the above differences, we agree with Mr Lau on the adjustments for location[25], accessibility[26] and user restriction. Regarding the latter, we appreciate Mr Chan’s concern that unauthorized non-industrial uses of workshops are common but we consider that a minor adjustment of 3% as suggested by Mr Lau is reasonable. This is because, according to the Practice Note issued by the Lands Department on 27 March 2014, the standard rates of lump sum waiver payable for the lifetime of the concerned premises are $4,790/sq. m or $5,910/sq. m depending on what type of user change is required. The amount of waiver fees, if payable, is about 8% to 10% of the unit value of the premises.

76.  In respect of the remaining adjustments, we agree with Mr Chan. For instance, the adjustments proposed by Mr Lau for headroom is very minor because the headrooms of these comparables are within the same threshold as the reference unit. The difference is negligible.

77.  Thus, we have the following analysis for the reference workshop unit:

Comp No	Unit Price (/sq. m)	Adjustments												Adj Unit Price (/sq. m)
		Time	Locat-ion	Size	Age	Floor	Head-room	Access	Physical Condition	User	Provision of Car Park	Internal Condition	Total*
C1	$48,333	0.0%	5.0%	-1.4%	-1.8%	-1.0%	0.0%	7.0%	3.0%	3.0%	0.0%	-6.0%	7.4%	$51,910
C2	$64,554	0.0%	-5.0%	-0.3%	-5.6%	0.0%	0.0%	0.0%	-5.0%	3.0%	-5.0%	-6.0%	-21.9%	$50,417
C3	$52,250	2.4%	5.0%	0.0%	-2.1%	2.0%	0.0%	7.0%	5.0%	3.0%	0.0%	-6.0%	16.8%	$61,028
C4	$55,258	3.0%	5.0%	-0.5%	-3.5%	1.5%	0.0%	0.0%	0.0%	3.0%	0.0%	-6.0%	2.0%	$56,363
C5	$40,216	2.0%	5.0%	-0.1%	-3.2%	-1.0%	0.0%	7.0%	0.0%	3.0%	0.0%	-6.0%	6.2%	$42,709
C6	$50,935	5.1%	5.0%	1.2%	-6.7%	-0.5%	0.0%	0.0%	0.0%	3.0%	-5.0%	-6.0%	-4.6%	$48,592
C7	$53,612	5.1%	5.0%	0.9%	-3.2%	1.5%	0.0%	0.0%	0.0%	3.0%	0.0%	-6.0%	5.9%	$56,775
C8	$54,678	6.0%	5.0%	-0.6%	-3.2%	1.5%	0.0%	7.0%	3.0%	3.0%	0.0%	-6.0%	16.0%	$63,426
C9	$50,325	9.6%	5.0%	0.1%	-2.1%	-0.5%	0.0%	7.0%	5.0%	3.0%	0.0%	-6.0%	22.1%	$61,447
										Average:				$54,741

* By Multiplication.

78.  Then, we follow Mr Chan’s approach in assessing the EUV of individual floor/unit of the Building as follows:[27]

Unit	Saleable Area (sq. m)	Adjustments						Adj Unit Price	EUV
		Floor	Size	Top Floor	Internal Condition	Sprinkler System	Total*
1/F	1,472.8	1.5%	-11.3%	0.0%	6.0%	-2.0%	-6.50%	$51,183	$75,380,000
2/F	1,477.3	1.0%	-11.3%	0.0%	3.0%	-2.0%	-9.60%	$49,486	$73,110,000
3/F	1,477.3	0.5%	-11.3%	0.0%	0.0%	-2.0%	-12.60%	$47,844	$70,680,000
Workshop A, 4/F	313.5	0.0%	0.3%	0.0%	0.0%	0.0%	0.30%	$54,905	$17,210,000
Workshop B, 4/F	441.8	0.0%	-1.0%	0.0%	0.0%	-2.0%	-3.00%	$53,099	$23,460,000
Workshop C, 4/F	274.2	0.0%	0.7%	0.0%	0.0%	0.0%	0.70%	$55,124	$15,120,000
Workshop D, 4/F	344.5	0.0%	0.0%	0.0%	0.0%	0.0%	0.00%	$54,741	$18,860,000
Workshop A, 5/F	313.5	-0.5%	0.3%	0.0%	3.0%	-2.0%	0.70%	$55,124	$17,280,000
Workshop B, 5/F	441.8	-0.5%	-1.0%	0.0%	3.0%	-2.0%	-0.60%	$54,413	$24,040,000
Workshop C, 5/F	274.2	-0.5%	0.7%	0.0%	6.0%	-2.0%	4.10%	$56,985	$15,630,000
Workshop D, 5/F	344.5	-0.5%	0.0%	0.0%	6.0%	-2.0%	3.40%	$56,602	$19,500,000
Workshop A, 6/F	622.2	-1.0%	-2.8%	0.0%	6.0%	-2.0%	0.00%	$54,741	$34,060,000
Workshop B, 6/F	621.8	-1.0%	-2.8%	0.0%	6.0%	-2.0%	0.00%	$54,741	$34,040,000
7/F	1,121.4	-1.5%	-7.8%	-5.0%	6.0%	-2.0%	-10.40%	$49,048	$55,000,000
Roof and External Wall	1,054.1							$7,820	$8,240,000
								Total:	$501,610,000

* By Multiplication.

79.  In the above assessments, we have disregarded the so-called “premium on large size (whole floor)” applied by Mr Chan. Indeed, Mr Chan has carried out analysis of 3 pairs of comparison in respect of industrial properties in Tsuen Wan and Tsing Yi for the purpose of supporting his assertion[28].  While the demand and supply condition in Tsuen Wan or Tsing Yi may be different because of their proximity to the Container Terminal, if his assertion is correct, investors would not have sub-dividing the premises for selling or leasing and making profits. Mr Lau criticizes that Mr Chan “had selectively excluded certain relevant comparables and had not taken into account such material considerations like physical constraints for sub-division of whole floor/large space and commanding views.”[29] Although Mr Chan has put forward evidence to challenge Mr Lau on the issue[30], we consider Mr Chan has failed to realize that by sub-dividing a large whole floor unit, one has to sacrifice common corridors, toilets, circulation spaces, etc. His analysis of about 10% premium is therefore an illusion when he has not taken into account the spaces that have to be sacrificed.

80.  On the other hand, based on the principle of reality in valuation, we follow the adjustments proposed by Mr Chan on internal conditions and the presence of dry sprinkler system.

81.  Hence, the total EUV of the Building is $719,240,000 and the respective shares of the respondents’ units are as follows:

Respondent(s)	Unit(s)	EUV	Pro Rata Share
R1, R2 and R3	Workshops 4A and 4C	$32,330,000	4.4950%
R4	Workshops 4D	$18,860,000	2.6222%
R5	Workshop 5C	$15,630,000	2.1731%
R6, R7 and R8	Workshop 5D	$19,500,000	2.7112%

Section 4(2) of the Ordinance - Justification and Reasonable Steps

82.  Section 4(2) of the Ordinance provides as follows:

“2. The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that—

(a) the redevelopment of the lot is justified (and whether or not the majority owner proposes to or is capable of undertaking the redevelopment)—

(i) due to the age or state of repair of the existing development on the lot; or

(ii) on 1 or more grounds, if any, specified in regulations made under section 12; and

(b)   the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”

83.  The applicant must satisfy this Tribunal the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted.

Whether the Tribunal is satisfied that redevelopment of the Lot is justified due to the age and/or state of repair of the Building

84.  We note at the outset the respondents do not take issue on the age and state of repair of the Building. We further note the respondents have not filed any rebuttal report to rebut the applicant’s Condition Survey Report compiled by Mr Wong or the Structural Assessment Report compiled by Mr So, both reports being dated 8^th June 2018.

85.  In the Structural Assessment Report, Mr So identified the following defects in the Buildings:

(1)   The design and construction of the structural frames of the Building were based on an obsolete design with less stringent requirements as compared against the current standard. There are at least 4 structural design and construction aspects where the Building falls short of present structural engineering design requirements, particularly on robustness. Therefore, the Building might not possess adequate robustness to avoid disproportionate collapse due to accidents;

(2)   Visual inspections showed as many as 202 defects in the form of spalling and cracks in the columns, beams and slabs both inside the factories/units and in the common area of the Building;

(3)   Cover-meter survey revealed that 4 beam samples and 3 slab samples do not have sufficient concrete cover to:

i)   protect the embedded steel reinforcement bars against corrosion; and

ii)   provide sufficient depth of concrete for the safe transmission of bond forces.

(4)   Carbonation depth test results revealed that carbonation had penetrated through the concrete cover of 1 out of 14 tested beam samples and 9 out of 14 tested slab samples. This means the alkaline environment in many of the concrete covers, at least in all the beams and slabs sampled, which give protection to the reinforcement steel bars in the structural members against corrosion, have been very extensively destroyed. Accordingly, some steel bars near the surface of these structural members may likely be corroded.

(5)   Cement content tests revealed deficiencies in cement content in 10 out of 14 sets of tested column samples, 10 out of 14 sets of tested beam samples and 12 out of 14 sets of tested slab samples which means that the durability of the concrete might have been impaired;

(6)   Chloride content tests showed an increase risk of corrosion in the embedded steel reinforcement bars;

(7)   Corrosion survey by opening up of the concrete cover to examine the reinforcement steel bars embedded was carried out. The survey revealed columns, beams and slabs are suffering from various degree of rusting.

86.  Based on the above findings, Mr So concluded that the structural frames of the Building are in need of repair. He opined the Building, designed and constructed more than 56 years ago, exhibited  signs that its structural frames have deteriorated to the final stages of its designed working life. 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 works need be carried out regularly in future and such repairs will be more and more extensive as the Building becomes older.  It is his view that although the costs of repair may be relatively modest, such costs will escalate in future as the extent and seriousness of the deterioration of the structural members increases with age.  In view of the age of the Building, Mr So further recommended that the next cycle of such repair works should be carried out in 5 years’ intervals after the current repair exercise.

87.  Mr Wong, in his Condition Survey Report, found the following:

(1)   The Building is aged as many features and facilities, which would nowadays be expected to be standard provisions in an industrial building, are missing or, if provided, have not been improved to meet the upgraded construction standards and statutory requirements;

(2)   The Building is in a poor state of repair due to general wear and tear;

(3)   The fire accident in June 2016 has caused substantial damage to the structural frames, building components, finishes and service installations in particular to the floors immediately above and below the 3/F where the 2016 fire broke out;

(4)   As a result of its preliminary investigation, the Buildings Department issued a total of 41 building orders ordering the owners to employ an Authorised Person and a Registered Structural Engineer to carry out protective works, emergency repairs, rectification of unauthorized building works and more detailed investigations. Seventeen out of the forty one Building Orders continue to remain outstanding more than 2 years after the outbreak of the 2016 fire;

(5)   The defects and deficiencies found in the Building are of the nature and magnitude that cannot be easily rectified by simple and piecemeal repairs. Substantial repairs at the cost of $50,332,300 are required to be carried out in order to restore the Building to tenantable condition.

(6)   The estimated repair costs amount to 38% of the estimated costs of re-constructing a similar building (estimated at $131,863,000). The substantial repair costs reflects the serious deterioration of the superstructure of the Building and that the Building has reached a state which is beyond reasonable economic repair.

88.  Having considered reports of Mr So and Mr Wong, we are satisfied the age and the state of repair of the Building and the units therein justify redevelopment of the Lot.

Whether the Tribunal is satisfied that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot

89.  The respondents submitted the sums offered by the applicant for the purchasing of their respective units are unreasonable for the following reasons:

(1)   The applicant offered almost double the assessed EUV unit rate, as at 17 September 2017, to the owner of the G/F.  However, the applicants only offered 34% above the assessed EUV unit rate, as at 17 September 2017, to the respondents.

(2)   The applicant initially assessed the EUV unit rate on a reinstatement basis. Since such an approach is now abandoned by the applicants, their initial EUV unit rate valuation is incorrect. Consequently, the first and second offers were made based on an incorrect valuation.

(3)   Since the applicant’s latest offers were substantially more than the sums offered in the first and second offer, this signifies the previous offers “were not sound”.

90.  In respect of R1, R2 and R3’s unit, the applicant made the following offers:

Date of Offer	Offer Amount	EUV (as assessed by the Tribunal)	% above EUV	Remarks
20 Sept 2017	4A: $31,200,000 4C: $26,200,000	4A: $17,210,000 4C: $15,120,000	81.30% 73.28%	Counter offer: 4A: $97,900,000 4C: $78,925,000
7 Nov 2017	4A: $32,760,000 4C: $27,510,000			Offer accompanied by Savills’ letter setting out the two units’ share of the RDV	24 Oct 2018
4A: $43,801,000 4C: $38,470,000			This offer contained a premium of more than 11% above Savills’ assessment of the share of the RDV
1 Nov 2018	4A: $45,870,000 4C: $40,280,000			This offer contained a premium of more than 16% above Savills’ assessment of the share of the RDV

91.  In respect of R4’s unit, the applicant made the following offers:

Date of Offer	Offer Amount	EUV (as assessed by the Tribunal)	% above EUV	Remarks
20 Sept 2017	4D: $37,200,000	4D: $18,860,000	97.24%	Counter offer: $118,050,000
7 Nov 2017	4D: $39,060,000			Offer accompanied by Savills’ letter setting out the unit’s share of the RDV
24 Oct 2018	4D: $47,990,000			This offer contained a premium of more than 11% above Savills’ assessment of the share of the RDV
1 Nov 2018	4D: $50,250,000			This offer contained a premium of more than 16% above Savills’ assessment of the share of the RDV

92.  In respect of R5’s unit, the applicant made the following offers:

Date of Offer	Offer Amount	EUV (as assessed by the Tribunal)	% above EUV	Remarks
20 Sept 2017	5C: $26,200,000	5C: $15,630,000	67.63%	Counter offer: $78,925,000
7 Nov 2017	5C: $27,510,000			Offer accompanied by Savills’ letter setting out the unit’s share of the RDV
24 Oct 2018	5C: $39,754,000			This offer contained a premium of more than 11% above Savills’ assessment of the share of the RDV
1 Nov 2018	5C: $41,630,000
This offer contained a premium of more than 16% above Savills’ assessment of the share of the RDV

93.  In respect of R6, R7 and R8’s unit, the applicants made the following offers:

Date of Offer	Offer Amount	EUV (as assessed by the Tribunal)	% above EUV	Remarks
20 Sept 2017	5D: $37,100,000	5D: $19,500,000	90.26%	Counter offer: $118,050,000
7 Nov 2017	5D: $38,955,000			Offer accompanied by Savills’ letter setting out the unit’s share of the RDV
24 Oct 2018	5D: $49,636,000			This offer contained a premium of more than 11% above Savills’ assessment of the share of the RDV
1 Nov 2018	5D: $51,970,000			This offer contained a premium of more than 16% above Savills’ assessment of the share of the RDV

94.  We have, in the above paragraphs, scrutinized Mr Chan’s EUV assessments. Despite having made some adjustments to his findings, we find his assessment reasonable or within a reasonable range. Having regard to the offers made in comparison to our assessment of the EUV of the respective units, we accept the applicant did take reasonable steps to acquire all the undivided shares in the Lot.

95.  In respect of the respondents’ submissions on the unreasonableness of the applicant’s offer, we have considered Mr Mok’s rebuttal submissions which we do not intend to repeat.

96.  We are of the view that the complaints raised by the respondents in respect of the reasonableness of the offer are misconceived and irrelevant in the context of section 4(2) of the Ordinance.

97.  In the case of Capital Well Limited v Bond Star Development Limited (2005) 8 HKCFAR 578, Ribeiro P J stated at paragraphs 32 and 33 to 36 of the judgment:

“32.  In our view, that argument rests on a misconception as to the nature of the s 4(2)(b) requirement and must be rejected.  As noted above, the Ordinance stipulates that before the Tribunal can make a compulsory order, the majority owner should try to reach agreement with the minority to purchase the latter’s interest on fair and reasonable terms.  It is only after such an offer is made – and rejected by the minority – that the Tribunal may proceed to order a sale by public auction.  The Ordinance therefore recognizes that the minority is perfectly entitled to take its own view and to refuse to sell at the price offered even though the Tribunal may regard that price as fair and reasonable. 

33.  In making that assessment 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.  It is obviously necessary to recognize that there will often be differences of opinion on that matter.  If duly satisfied that the rejected offer was fair and reasonable, the Tribunal may make the order, leaving the value and level of compensation to be determined by the public auction.  The auction results may prove that the minority’s assessment was commercially wise.  Or they may show that the majority’s offer exceeded what was realised at the auction. 

…

35.  We do not consider that the Tribunal is required to perform any such task.  At most contested hearings, one may expect conflicting evidence as to value to be filed.  The present case is a good illustration.  The evidence as to how “marriage value” is to be assessed and how much of it should be attributed to the minority owner’s interest was hotly disputed before the Tribunal.  And while Mr Chain repeatedly asserted before the Court that the Lot’s situation in the middle of the other lots acquired by the respondent gave it a particular strategic value, Mr Edward Chan SC, leading for the respondent, argued that the location of the Lot permitted viable redevelopment of the lots on either side, so that the “ransom power” attaching to the Lot was much less significant than it might otherwise have been.  The Tribunal does not need to resolve conflicts of this nature since it does not have to decide on the value of the interest for itself. 

36.  The Tribunal was fully entitled to find that the majority owner’s offer which exceeded both sides’ assessment of the value of the appellant’s proportionate share of the developable site, taking its redevelopment value into account, fell within the range of what was fair and reasonable.  We are of course not suggesting that it is necessary for the offer to “beat” the valuation as if it were a payment into court.  What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site.  The Tribunal in the present case was entitled to find that the hurdle of s 4(2)(b) had been crossed and entitled to make the order for sale.”

98.  The fact that there will often be differences of opinion in the value of the minority owner’s interest is recognized. However, the mere fact the applicant has failed to agree to the respondents’ asking prices or the respondents’ use of another unit’s purchase price as a reference point in itself will not render the applicant’s offer unreasonable in the context of the Ordinance.

99.  What the Tribunal must consider is whether the offers made by the applicant fall “within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site.”  It is not the task of the Tribunal to scrutinize the reasons behind each and every transaction made before the offers made to the respondents, in particular the transaction price paid to the G/F owner. Furthermore, as set out in paragraph 33 of Capital Well Limited, the Tribunal is not required to adjudicate on the correct valuation principles behind the applicant’s offers or that the sums offered to the respondents represent the correct valuation of the respective units.

100.  In Good Faith Properties Limited & Other v Cibean Development Company Limited, LDCS 42000 of 2011, (unrep), 31 May 2013 (“Good Faith Properties Limited”) at paragraph 40, the Tribunal ruled:

“… The time for the Tribunal to be satisfied is at trial and not before. This plainly envisages that there can be offers made to acquire the minority interest even after the filing of the Application and all the steps taken up to the point an order for sale was to be made should be considered by the Tribunal. This is a safeguard rendered to the minorities to ensure that the compensation offered by the majority owner must be fair and reasonable before the majority owner is able to convince the Tribunal that an order for sale should be granted.”

This ruling was not criticized nor challenged when this case was referred to the Court of Appeal (CACV 35/2014)[31].

101.  Having considered the case of Capital Well Limited and the applicant’s offers, we are satisfied that on the evidence available and in the circumstances of this Application, the applicant did take reasonable steps to acquire all the undivided shares in the Lot including negotiating for the purchase of the respective shares owned by the 1^st to 3^rd, 4^th, 5^th, and 6^th to 8^th respondents on terms that are fair and reasonable.

102.  We are therefore satisfied that in all the circumstances, an order for sale should be granted.

Reserve Price for the Auction

103.  The Lot has a site area of 1,923.077 sq. m. It falls within an area zoned “Residential (Group A)” on the Ngau Tau Kok Outline Zoning Plan No S/K13/29 dated 13 April 2017 subject to a development height restriction of 120 metres. The total developable GFA is about 16,500 sq. m.

104.  In the latest RDV reports, there is a huge difference in the assessment of the RDV between the two valuation experts. Resorting to the residual valuation approach, Mr Chan arrives at $1,727 million (formerly $1,894 million before trial) whereas Mr Lau takes the average of his site comparable analysis and the residual valuation, arriving at $2,568.3 million (formerly $2,664 million before trial).

105.  We appreciate the direct sales comparison method is usually regarded as the best method of valuation. It simply involves comparing the property to be valued with sale transactions of similar properties. Whereas Mr Chan has not adopted this approach, Mr Lau has relied on the following Government tender sales as comparables:

Date	Property	Site Area (m2)	Max GFA (m2)	Consideration (million)	AV (/m2)
14 Nov 18	NKIL 6591, Kai Tak Runway	9,708	53,394	$8,906.76	$166,812
7 Nov 18	NKIL 6574, Kai Tak Runway	9,706	53,383	$8,333.00	$156,098
15 May 18	NKIL 6568, Kai Tak	16,556	131,495	$25,161.00	$191,346
12/13 Feb 18	NKIL 6565 and NKIL 6562, Kai Tak	20,065	97,786	$15,959.41	$163,208
8 Mar 18	NKIL 6564, Kai Tak	7,318	39,517	$6,359.20	$160,923
24 Jan 18	Lot 1068 in SD 3, Anderson Road, Kwun Tong	5,354	24,093	$3,122.80	$129,614
15 Aug 18	NKIL 6593, Ko Chiu Road, Yau Tong	3,680	33,120	$3,300.00	$99,638
16 May 17	NKIL 6567, Kai Tak	9,721	$53,465	$7,230,00	$135,229
15 Mar 17	NKIL 6563, Kai Tak	9,482	51,202	$7,440.50	$145,317
25 Jan 17	NKIL 6564, Kai Tak	7,318	39,517	$5,529.70	$139,932

* Whereas “GFA” stands for gross floor area, “AV” stands for accommodation value.

106.  These comparables are situated at different districts and at considerable distances from the Lot. Unlike the Lot, which is situated at an established residential area with a wide range of commercial facilities serving the residents mostly at ground level, the sites in Kai Tak or at Anderson Road above are new residential areas with comprehensive development planning. More particularly, the Kai Tak district is planned to be the “Heritage, Green, Sports and Tourism in Hong Kong”[32]. All the private residential developments in the locality there are of modern design with high specifications planned for middle to high income class. NKIL 6568, in particular, is capable of providing a regional shopping centre next to a new railway station.  In terms of character and development scale, these new sites are completely different from the Lot and any comparison between the Lot and these site tends to be subjective or arbitrary[33].

107.  The site at Ko Chiu Road, Yau Tong is smaller but is still nearly twice as much of the Lot in terms of development scale. Comparison is further complicated by the requirement to cut and retain a slope at this Yau Tong site. The two experts have vastly different opinions on the formation cost and the costs of retaining the slope. In the absence of information regarding the design details, there is huge uncertainty on what adjustments are required to be made to obtain a proper analysis. Also, this site is situated at an area which is significantly different from that of the Lot.

108.  In Hofei Estates Limited v Secretary for City and New Territories Administration, LDLR 1/1982 dated 30 November 1982, the Tribunal had similar comment on the comparables:

“14. Unfortunately, the comparables were not only in different localities, but were also very much smaller than the subject property, have varying development costs and contained other differences. Theses major differences obliged both valuers to make substantial adjustments to the comparables to relate them, for valuation purposes, to the subject property. The adjustments actually made were mostly subjective and unsupported by any detailed analysis.”

109.  The Tribunal went on to remark that:

“15. In these circumstances a better approach would have been to have used the residual method. The adoption of the residual method would have enabled the valuers to have tested the value of the subject property in terms of optimum development in relation to cost and reasonable profit margins.

16. We are satisfied that evidence was available from the comparables and elsewhere; for reasonably accurate assessments to have been made by the residual method. Furthermore this is the method more likely to be adopted by a reasonable prospective purchaser of this type of property.

17. We appreciate that caution must be exercised before adopting the residual method. However, provided the variables used are supported by evidence in the market, it has many advantages. Certainly on the facts of this particular application, the residual method would have allowed for a better comparison between the subject property and the comparables. For each could have been compared in relation to its optimum development. In the absence of evidence adduced before us enabling the residual method to be applied, we are obliged to arrive at a valuation based largely on unsupported percentage adjustments to comparables which, quite apart from other differences, are too dissimilar in size and development potential, for direct comparison.”

110.  We share the opinion of the Tribunal in Hofei Estates and consider it more appropriate to value the RDV of the Lot by the residual valuation.

Optimum hypothetical development model

111.  The two valuation experts disagree on the hypothetical development model as shown in RDVJS/TA:[34]

		Mr Chan	Mr Lau
Form of Optimum Development		A 32-storey residential tower on top of  basement car park, 2 levels of retail and a level of club house.	A 29-storey residential tower on top of  basement car park, 2 levels of retail and a level of club house.
Proposed Non-domestic GFA (sq. m)		2,504 (Plot Ratio: 1.30)	2,404 (Plot Ratio: 1.25)
Proposed domestic GFA (sq. m)		14,049 (Plot Ratio 7.31)	14,102 (Plot Ratio 7.333)
Proposed Total GFA (sq. m)		16,553 (Plot Ratio: 8.61)	16,506 (Plot Ratio: 8.583)
Floor Plate of Typical Residential Units (sq. m including non-accountable GFA)		452.3 (Site coverage: 23.5%)	505.6 (Site coverage: 26.3%)
Proposed No of G/F Shops		3	4
Saleable Area	G/F Retail	1,215 sq. m	1,108 sq. m
	1/F Retail	1,239 sq. m	779 sq. m
	Residential Portion (including Exempted Balconies)	11,667 sq. m	12,141 sq. m
Proposed No of Private Carparks		32	40
Proposed No of Private Visitor Carparks		5
Proposed No of Motor Cycle Carparks		6
Proposed No of Loading/Unloading Spaces		4	2
Size of Basement Floor		1,923.077 sq. m (100% site coverage)	1,600 sq. m (83.2% site coverage)
Size of G/F Reference Retail Unit		347.6 sq. m	302.25 sq. m
Frontage and Depth of G/F Reference Retail Unit		Frontage: 7.1 m Depth: 39.8 m	Frontage: 8.35 m Depth: 35.0 m
Average Size per Residential Unit		33.1 sq. m	28.6 sq. m
No of Flats per Floor		11	15
Common Area on G/F		100 sq. m	120 sq. m
Common Area on Upper Typical Floor		88 sq. m	86.9 sq. m

112.  At this juncture, it is noted that Mr Lau did not have any schematic drawings to support his hypothetical development until the very late. Based on the 3^rd draft of schematic drawings dated 13 November 2018, he revised some of the parameters as follows:

“a. 7 motorcycle spaces would be added on basement carpark;

b. The size of reference unit of ground floor shop would be slightly adjusted from 302.25 m² to 300 m² in saleable area and the depth would also be adjusted from 35m to 36 m;

c. The common area of typical residential floors would be increased from around 86.9 m² to around 89.0 m²;

d. The exempted GFA for green features would be decreased from 742 m² to 553 m² due to the decrease in the number of utility platforms;

e. The headroom of residential floors would be decreased from 3.5m to 3.4 m for a transfer plate of 2.6m thick.

As the common area and saleable area are adjusted, the average unit size of residential units would be decreased from 28.6 m2 to 28.1 m² in saleable area …” [35]

113.  In spite of the minor adjustments, we find that the differences between the two experts to be marginal. In comparison, we prefer Mr Chan’s model based on the following reasons:

(1)   Higher RDV would be achieved by the maximum plot ratio achieved;

(2)   Even for the same plot ratio, a higher (narrower) building would enable the top floors units to have better view and hence selling prices;

(3)   Too many units on a typical floor would result in a feel of ‘public housing’ which may impose adverse effect on selling prices;

(4)   We agree with Mr Chan that full site coverage for the basement is required to accommodate the number of car parking spaces and loading/unloading spaces, etc.;

(5)   Despite Mr Lau’s criticism of Mr Chan’s placing a commercial entrance at the corner of G/F, we opine that Mr Lau’s designating the commercial entrance next to the entrance to the residential tower less desirable. We also agree with Mr Chan that Mr Lau’s scheme may affect the layout of the basement carpark;

(6)   We agree with Mr Chan that the transformer room cannot be located on 1/F because of the provisions of CLP Code for Distribution Substation; and

(7)   Mr Chan’s provision of car parking spaces which complies the requirement of the Hong Kong Planning Standards and Guidelines (“HKPSG”). While it appears that Mr Lau tries to explain the non-compliance by referring to the proximity to the Kowloon Bay MTR station of the Lot so that lesser car parking is needed or encouraged, the number of car parking spaces provided by him is higher instead of lower.

114.  Indeed, in answer to the various questions/comments made by Mr Chan, Mr Li has slipped in a revised schematic design at Schedule 11 of his closing submission. On the one hand, we agree with Mr Mok that this new evidence came a little too late and without providing a chance for Mr Chan to comment. On the other hand, save for adopting 100% site coverage for the basement, the new schematic drawing does not address the concerns mentioned in the above paragraph.  

115.  We further agree with Mr Mok at paragraph 117 of his closing submission that there are still problems with the new schematic design that may call for cross-examination. For instance: -

(1)   The total saleable area of the 28 typical residential floors is 499 sq. m greater than that of the old scheme (i.e. 11,975 sq. m[36] for the revised scheme less 11,476 sq. m for the old scheme). This is equivalent to an additional residential saleable area of about 17.8 sq. m per floor. Mr Li in his closing submission explained that “the area for common area on typical residential floors is lowered from 89 m² to around 78 m² per floor due to exemption of portion of lift shaft areas from GFA calculation”.  This gain of 11 sq. m per floor cannot be achieved from the alleged exemption of GFA calculation. paragraph 5 of APP-89 (which is also slipped in Mr Li’s closing submission as Schedule 12b) states that only the GFA of lifts provided over and above the average standard of those currently provided in buildings can be excluded from GFA calculation. The lift shafts on the typical residential floor of the new scheme have an area of some 14 sq. m by measurement from plan. Mr Li’s assertion therefore is that 11 sq. m (out of 14 sq. m) are exempted from GFA calculation. It would mean that the area of lift shafts for usual standard lift provision is only 3 sq. m, which appears impossible and misleading. We do not accept Mr Li’s reply that the lift shaft GFA exemption is calculated by means of the total GFA instead of the typical floor. If Mr Li’s submissions were correct, the gain of 11 sq. m per floor cannot be explained.

(2)   The bottom level of the lift pit underneath the G/F is stated in the Basement Plan of Schedule 11 to be 2.95 and the floor level of the basement is -0.05. Accordingly, the headroom under the lift pit is only 3 m but the minimum headroom required for light goods vehicles is 3.6 m. Since the carpark only provides one-way traffic, no light goods vehicles can access the loading/unloading bays.

Gross Development Value (“GDV”) of Car Parks as at 17 September 2018

116.  While Mr Chan’s car parking spaces are assessed at $3,000,000 each and motor cycle spaces at $310,000 each, those of Mr Lau’s assessments are $3,100,00 and $310,000 respectively. Their differences are nominal, if any. We adopt therefore car parking spaces at $3,100,000 each and motor cycle spaces at $310,000 each. The total value of the car parking becomes $101,060,000.

GDV of G/F Retail Provision as at 17 September 2018

117.  Again, Mr Chan and Mr Lau agree on the same set of comparables except that Mr Lau adopts an additional one, being Shop 14 of Tak Bo Garden. For the same reason as explained in paragraph 50 above, we disregard this “comparable”. Thus, the comparables relied on are in the following:

Comp No	Address	Year Built	Transaction Date	Sale Price	Saleable Area (sq. m)	Frontage (m)	Headroom (m)	Depth (m)	Unit Price (/sq. m)
NR1	Unit 30, G/F, Wang Kwong Building, 33 Ngau Tau Kok Road	1977	11 Dec 17	$22,800,000	69.6	4.3	5.6	16.2	$327,586
NR2	Shop 18, G/F, Jade Field Garden, 15-19 Ngau Tau Kok Road	1977	4 Dec 17	$8,380,000	27.2	3.2	4.2	8.9	$308,088
NR3	Unit 13, G/F, Wang Kwong Building, 33 Ngau Tau Kok Road	1977	2 Nov 17	$19,000,000	58.5	4.3	5.6	14	$324,786
NR4	Shop F, G/F Tak Bo Garden, 3 Ngau Tau Kok Road	1984	31 Oct 17	$18,000,000	70.1	3.5	4	17.5	$256,776
NR6	Shop U, G/F, Lee King Building, 50 Ngau Tau Kok Road	1978	17 Jun 17	$4,550,000	15.5	3.2	5.6	4.08	$293,548
NR7	Shop D, G/F Tak Cheong House, 174-176 Ngau Tau Kok Road	1974	28 Mar 17	$8,000,000	37.7	4.4	5.2	8.4	$212,202

118.  Further, the two experts have the following agreements/disagreements on the adjustment factors applicable:[37]

Adjustment factors	Agreements/disagreements
	Mr Chan	Mr Lau
Time	RVD Retail Price Index (rounded to 1 decimal place)
Location	No agreement on retail potential, pedestrian flow, accessibility, visibility and the like
Size/Quantum	1% per 30 sq. m difference, lower unit rate for larger size
Age	0.2% per 1 year difference (rounded to 1 decimal place)
Frontage	1% per 1 m difference (rounded to 1 decimal place)
Return / Secondary Frontage	+10% allowed on all comparables without return/secondary frontage	+25% allowed on all comparables without return/secondary frontage
Layout	Consideration on overall shape, location of entrance, level of difference and the like
Depth	0.75% per 1 m difference (rounded to 1 decimal place)
Headroom	1% per 0.25 m difference (rounded to 1 decimal place)
Better Facilities	No adjustment has been made	10% allowed on all comparables
Total Adjustment	By Multiplication	By Summation

119.  As can be seen from the above, one major difference between the 2 experts lies on the adjustment for the return or secondary frontage. According to the schematic design relied on by Mr Chan, a means of escape to the public road is provided, blocking the return frontage of a shop. This would be evitable if the entrance to the residential tower(s) is placed at the side, similar to the adjoining residential buildings. On the other hand, Mr Lau allows a set-back area of 4.5m in width in order to create two corner shops but at the expense of ground floor saleable area. As stated in hereinabove, Mr Chan’s scheme is preferred, save that we would allow for the relocation of the entrance of the residential tower to the side and then have a secondary frontage for the shop.

120.  We also agree to the 10% allowed on all comparables without return/secondary frontage as the service road around the Lot cannot be compared with a busy street which may deserve otherwise a 25%.

121.  In view of the above, we are prepared to adopt the hypothetical development model proposed by Mr Chan for the purpose of determining the RDV of the Lot (save for the relocation of the residential entrance).

122.  As regards the +10% adjustment provided by Mr Lau in the name of better facilities, it appears that Mr Lau is relying on paragraph116 of  Alliance Fame Limited & Others v Mak Kam To & Others, LDCS 9000/2015 (unreported, dated 4 August 2017) where the Tribunal allowed the 10% for “enhancement of the trading environment”. However, the Lot here is situated in an established residential area and near the far end of Ngau Tau Kok Road. We consider a new development there would not enhance the trading environment. To the extent that Mr Lau changes his stance and suggests that the factor of better facilities is to reflect the better electricity facilities and air-conditioning system in the new development[38], we agree with Mr Chan that the age adjustment would have already taken this into account. Thus, we do not agree to the adjustment proposed by Mr Lau.

123.  The various adjustments (save that for layout and better facilities which are now out of question) applied by Mr Chan are shown in the following table (while those by Mr Lau are shown in parenthesis)[39]:

Comp No	Unit Price (/sq. m)
		Time	Location	Size	Age	Frontage	Depth	Headroom	Return Frontage
NR1	$327,586	4.4% (3.5%)	30% (25%)	-9.3% (-7.8%)	8.2% (8.2%)	2.8% (4.2%)	-17.7% (-17.4%)	-2.4% (-2.4%)	10.0% (25.0%)
NR2	$308,088	4.4% (3.5%)	30% (30%)	-10.7% (-9.2%)	8.2% (8.2%)	3.9% (5.2%)	-23.1% (-19.6%)	3.2% (3.2%)	10.0% (25.0%)
NR3	$324,786	4.8% (3.9%)	30% (25%)	-9.6% (-8.1)	8.2% (8.2%)	2.8% (4.2%)	-19.3% (-16.4%)	-2.4% (-2.4%)	10.0% (25.0%)
NR4	$256,776	5.9% (4.9%)	20% (25%)	-9.3% (-7.6%)	6.8% (6.8%)	3.6% (4.9%)	-16.7% (-13.1%)	4.2% (4.2%)	10.0% (25.0%)
NR6	$293,548	9.0% (8.0%)	35% (25%)	-11.1% (-9.6%)	8.0% (8.0%)	3.9% (5.2%)	-26.2% (-22.7%)	-2.4% (-2.4%)	10.0% (25.0%)
NR7	$212,202	10.0% (9.0%)	35% (35%)	-10.3% (-8.8%)	8.8% (8.8%)	2.7% (4.1%)	-23.5% (-20.0%)	-0.8% (-0.8%)	10.0% (25.0%)

124.  We understand that Mr Chan is relying on a hypothetical shop A (with the exception of the return frontage we now assume) in the new development with the following particulars[40]:

Saleable Area	Frontage	Return Frontage	Depth
347.6 sq. m	7.1 m	15.5 m	39.8 m

125.  Although the two experts agree the valuation date should be 17 September 2018 and the RVD Retail Price Index is applicable, we are surprised that they come up with different time adjustments for the comparables. In any event, we have reviewed the RVD Retail Price Index and considered Mr Chan’s figures more appropriate. Having said that, we note Mr Chan has slightly amended his time adjustments in his submission dated 16 November 2018. While the differences are very minor, we are not prepared to adopt the revised figures as the valuation date was agreed at 17 September 2018.

126.  As regards the adjustments for location, size, frontage and depth, we adopt Mr Chan’s figures (save for NR4 where we adopt 25% as stated at paragraph 54 above).

127.  Our assessment of the hypothetical shop proposed by Mr Chan is shown as follows:

Comp No	Unit Price (/sq. m)	Adjustments
		Adj Unit Price (/sq. m)	Time	Location	Size	Age	Frontage	Depth	Headroom	Return Frontage	Total*
NR1	$327,586	4.4%	30%	-9.3%	8.2%	2.8%	-17.7%	-2.4%	10.0%	21.0%	$396,379
NR2	$308,088	4.4%	30%	-10.7%	8.2%	3.9%	-23.1%	3.2%	10.0%	18.9%	$366,317
NR3	$324,786	4.8%	30%	-9.6%	8.2%	2.8%	-19.3%	-2.4%	10.0%	18.7%	$385,521
NR4	$256,776	5.9%	25%	-9.3%	6.8%	3.6%	-16.7%	4.2%	10.0%	26.8%	$325,592
NR6	$293,548	9.0%	35%	-11.1%	8.0%	3.9%	-26.2%	-2.4%	10.0%	16.3%	$341,396
NR7	$212,202	10.0%	35%	-10.3%	8.8%	2.7%	-23.5%	-0.8%	10.0%	24.2%	$263,555
									Average:		$346,460

* By Multiplication.

128.  Thus, following Mr Chan’s calculation as shown at Exhibit Bundle/95, we arrive at the following assessments:

Shop	Saleable Area (sq. m)	Frontage (m)	Depth (m)	Return Frontage (m)	Adjustments					Adj Unit Price (/sq. m)	Adjusted Value
					Size	Frontage	Depth	Return Frontage	Total*
A	347.6	7.1	39.8	15.5	0.0%	0.0%	0.0%	0.0%	0.0%	$346,460	$120,429,000
B	345.7	7.1	39.8	0	0.1%	0.0%	0.0%	-10.0%	-9.9%	$312,160	$107,914,000
C	521.2	11.1	39.8	15.5	-5.8%	4.0%	0.0%	0.0%	-2.0%	$339,531	$176,964,000
	1,214.5									Total:	$405,307,000

* By Multiplication.

GDV of 1/F Retail Provision as at 17 September 2018

129.  Mr Chan adopted 50% of the non-corner G/F unit rate as that for 1/F. In our assessment, it is $312,160/ m² x 50% = $156,080. On the other hand, Mr Lau allows 65%. In our case, it is equivalent to $312,160/ m² x 65% = $202,904 which appears more reasonable and should be preferred.

GDV of U/F Residential Units as at 17 September 2018

130.  In Million Add Development Ltd v Secretary for Transport, LDMR 3/1994 (unreported, dated 4 February 1997), the Tribunal rejected the use of the pre-sale comparables, notwithstanding having acknowledged that they were actual market transactions, because:

“proper analysis would have to take into account a variety of factors, several of which would not easily be quantified. Allowance would have to be made for loss of interest on pre-payments; uncertainties over quality and completion dates; and varying market conditions over the relevant period... We consider it extremely difficult to make reliable adjustments for the presale factors....”

131.  More recently in Good Faith Properties Limited, the Tribunal remarked that:

“185. .... It may sound peculiar to someone who is not familiar with the basic assumption of residual valuation that if pre-sales (even if they are close to the relevant valuation date) are used, difficult adjustments would have to be made because in the market, pre-sale transactions are usually completed with stage payment, i.e. without the need for the purchasers to pay up the full amount of purchase price (hence the gearing ratio of the investment is different from the purchase of a completed development). It is this factor that Mr. Chan sought to argue that presale prices could most likely be inflated by the vendor/developer as the purchaser does not need to pay the full price today.”

132.  Nevertheless,both experts rely on pre-sale comparables from projects in Kai Tak and To Kwa Wan (save for City Hub which is newly completed upon sale).

133.  For the same reason that we do not adopt the tender sales in the Kai Tak area for direct site sales comparison, we do not agree that sales of the more prosperous developments in Kai Tak should be adopted as comparables. 

134.  On the other hand, the To Kwa Wan district is an established residential area with a wide range of commercial facilities serving the residents mostly at ground level, somewhat resembling the Ngau Tau Kok district where the Lot is located.

135.  Mr Chan adopts 3 sales of 93 Pau Chung Street in To Kwa Wan as comparables but as pointed out by Mr Lau, the average unit rate of $218,896/m² is far below the adjusted average unit rate of the City Hub and 80 Maidstone Road in the same vicinity. The sales of 93 Pau Chung Street first commenced in September 2016 with 9 units on each typical floor. Perhaps owing to that these 3 sales were the last batch of sales that took place in January 2018, they are obviously out of line[41].

136.  Then, as both experts agree to adopt sales of units in the City Hub and 80 Maidstone Road, we shall proceed with the analysis below.

137.  The two experts have the following agreements/disagreements on the adjustment factors applicable:[42]

Adjustment factors	Agreements/disagreements
	Mr Chan	Mr Lau
Time	No Time adjustment  is allowed  for pre-sale comparable transactions	RVD Private Domestic - Price Index (Class A)
Location and Environment	City Hub: 0%	City Hub: 3%
	80 Maidstone Road: 0%	80 Maidstone Road: 5%
Age	City Hub: 1%
	80 Maidstone Road: 0%
Floor	+/-0.5% per floor, lower unit rate for lower floors
Size/Quantum	+/-1% per 5 sq. m
View	City Hub: 0%	City Hub: -1%
	80 Maidstone Road: -3% to 0%	80 Maidstone Road: 0%
Scale and Facilities	0% for both City Hub and 80 Maidstone Road
Holding Costs	Allowed if applicable (2.6% per year away from the completion date of transaction to the material date)	Allowed if applicable (0.5% for all pre-sale transactions)
Headroom	+/-1% per 0.25 m	+/-1% per 0.20 m

138.  We note Mr Chan has made no time adjustment for his pre-sale comparable transactions, Mr Chan explained during cross-examination that the sale prices as set by the developers usually depend on the marketing strategies and may be revised up or down within a very short time frame; some will however prevail for a period of time without adjustment. Either of these strategies would not be caught by the RVD index[43]. We accept Mr Chan’s explanation and make no time adjustment for the sales of units in City Hub from July 2018 to October 2018[44]. However, we would make allowance of +10% for sales of units in 80 Maidstone Road which all took place in January 2018.

139.  Having inspected these comparable developments, we agree with Mr Lau that there should be adjustments for location but it should be +5% for City Hub because of its location close to a flyover and +3% for 80 Maidstone Road.

140.  We also share Mr Chan’s view that only comparables with saleable area below 40 sq. m are relevant and disregard those having ancillary features like flat roof which may distort the average adjusted rates[45].

141.  As regards view, it is noted that Mr Lau takes into consideration the general views of the whole site. We consider this inappropriate and prefer Mr Chan’s approach by comparing between the reference unit and the comparable units.

142.  Turning to the holding costs, in response to Mr Chan’s rebuttal comments, Mr Lau considers a +0.5% for all pre-sale units “to reflect the payment terms like equitable mortgage”. During cross-examination, however, we regret to find that Mr Lau has not distinguished the payment terms of each transaction; i.e. he has mixed up transactions which require immediate full payments or full payments within a close period with those of stage payment upon completion. This is completely undesirable and defeats the whole purpose of making allowance for holding costs; for those transactions with stage payments, in particular, this indiscriminate application of +0.5% has to a certain extent double counted the holding costs.

143.  While the difference between the 2 experts on adjustment for headroom is minor, we prefer Mr Chan’s +/-1% per 0.25 m for the sole reason that we or more properly the experts have already agreed a similar adjustment for shops. We do not consider such an adjustment should be more sensitive for residential premises.

144.  Mr Chan has analysed altogether 15 transactions from City Hub since July 2018 to early October 2018 and arrived at an average of $242,712/m². Similarly, he has analysed 19 transactions from 80 Maidstone Road all in January 2018 and arrived at an average of $241,994/m².[46] Then we are going to make further adjustments as stated above and arrive at the following:

Name of Development	Average Unit Rate determined by Mr Chan (/m2)	Further Adjustments			Adjusted Average (/m2)
		Time	Location	Total*
City Hub	$242,712	0%	5%	5%	$254,848
80 Maidstone Rd	$241,994	10%	3%	13.3%	$274,179
			Average:		$264,514

* By Multiplication.

145.  Thus, we are prepared to adopt $264,500/m² as the unit price applicable to the 4/F to 33/F in the hypothetical development.

146.  Mr Chan has carried out further assessment of the 3/F units as well as the uppermost units on 34/F[47]. When we conduct the same exercise, our assessments are as follows:

Floor	Reference Unit Rate (/m2)	Adjustments				Adjusted Unit Rate (/m2)	No of Units	Total Saleable Area (m2)	GDV
		Floor	Specialty[48]	Headroom	Total*
3/F		-6.5%	10.0%	0.0%	2.9%	$272,170	11	364.34	$99,162,000
4/F-33/F	$264,500	0.0%	0.0%	0.0%	0.0%	$264,500	330	10,930.31	$2,891,067,000
34/F		9.0%	10.0%	1.0%	21.1%	$320,310	3	372.34	$119,264,000
								Total:	$3,109,493,000

* By Multiplication.

147.  Having established the development potential or the GDV, a residual valuation can be expressed as a simple equation:

Residual land value (economic rent) =

   (Value of completed development) – (development costs + developer’s profit)  

Development Cost and Period

148.  By the Joint Expert Statement dated 19 October 2018, Mr Chan and Mr Lau also agree the following:

	Mr Chan	Mr Lau	Agreement/ Disagreement
Demolition Cost	$26,792,040		Agreed
Construction Cost	$666,132,015 ($40,242/m2 on GFA)	595,328,092 ($36,068/m2 on GFA)	Disagreed
Construction Period	2.75 years (33 months)		Agreed
Demolition Period	0. 75 year (i.e. 9 months)		Agreed
Deferment Rate	4.0%		Agreed
Professional Fee	6.0%		Agreed
Marketing Cost	3.0%		Agreed

149.  As can be seen from the table above, the difference in unit construction cost is about 10%. Both Mr Chan and Mr Lau are referring to the Building Cost Data published by Rider Levett Bucknall Limited (“RLB”); Mr Chan refers to data belonging to High to Very High Quality standard whereas Mr Lau just adopt data belonging to High Quality. Whereas we have stated at paragraph 113 above that we prefer Mr Chan’s model, we are also of the opinion that the comparables we adopted, i.e. City Hub or 80 Maidstone Road should belong to High to Very High Quality instead of High Quality standard as explained by Mr Chan at Table ER1 at D7/1476. Therefore we prefer to adopt the revised unit rate of $678,251,453 proposed by Mr Chan[49].

Developer’s Profit

150.  Another major disagreement between Mr Chan and Mr Lau is the developer’s profit to be allowed in the residual valuation: Mr Chan proposes 15% (which is later revised to 20%) and Mr Lau proposes 10%.

151.  As for any business undertaking, the developer who takes the trouble to assemble a piece of land for redevelopment would seek to make a profit in return. In Hong Kong it is usual to assume that the developer seeks a capital profit expressed as a percentage of the total development cost (including interest) but such a percentage can never be a constant.  “The target levels of profit will depend on the nature of development and allied risks, the competition for development schemes in the market, the period of the development and the general optimism in relation to that form of development.”[50]

152.  When the market was vigorous, we believe it is correct to adopt 10% for commercial/residential development. However, by 17 September 2018, there are signs that the property market was either stagnant or weakening. We consider therefore it is more reasonable to revert to 15%. The 20% later adjusted by Mr Chan appears to be excessive.

Stamp Duty and Legal Cost

153.  Further, Mr Lau proposes deduction of stamp duty and legal cost at the end of the valuation. He refers to the HKIS Guidance Notes on Valuation of Development Land at paragraph3.9.3 which states as follows:

“It is noted that some market practitioners do not allow stamp duty explicitly in their residual valuations. Where practitioners prefer not to allow the stamp duty explicitly, then a higher developer’s profit should be required in the residual valuation model to reflect relevant stamp duty liability.”

154.  Stamp duty and legal cost that would be incurred for acquiring land are certainly not the developer’s general overheads and tax but would be direct cost related to a particular acquisition. We agree with Mr Lau in this case that the stamp duty and legal cost should be deducted.

155.  Based on the analysis above, our residual valuation is shown at Appendix A. We determine the land value of the Lot at $2,075,600,000 (i.e. accommodation value of $125,390/m²).

156.  We shall adopt the estimated RDV of $2,075,600,000 as the Reserve Price for the auction of the Lot.

Other Incidental Matters

157.  The applicant proposes to appoint Mr Ma Ho Fai and Ms Tsang May Ping, being partners of Messrs Woo Kwan Lee & Lo, as the sale trustees.  Based on the information on their background and experience as set out in their letter dated 23 August 2018, we are satisfied that they are proper persons to be appointed as trustees to discharge the duties imposed on trustees under the Ordinance.  The remuneration package proposed in the said letter appears to be reasonable.

158.  The applicant has prepared a set of draft Particulars and Conditions of Sale of the Lot[51].  Subject to any amendment that may become necessary as a result of our ruling on the arrangement of auction above, the particulars and conditions of sale of the Lot by public auction submitted by the applicant are also reasonable.

Order

159.  This Tribunal make the following orders:

(1)   All the undivided shares in the Lot, the subject of the Application herein, be sold by way of a public auction for the purposes of the redevelopment of the Lot under s.4(1)(b) of the Land (Compulsory Sale for Redevelopment) Ordinance (“the Ordinance”);

(2)   Mr Ma Ho Fai and Ms Tsang May Ping of Messrs Woo Kwan Lee & Lo, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to 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 Woo Kwan Lee & Lo dated 23 August 2018.

(3)   For the purpose of the sale of the Lot by public auction under section 5(1)(a) of the Ordinance:

(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 to be initialled and approved by the Tribunal;

(ii)    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 Lots with the reserve price be set at $2,075,600,000;

(iii)   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; and

(iv)   Liberty to the applicant, the respondents, and the Trustees to apply to the Tribunal for further directions.

Costs

160.  We make a costs order nisi that the respondents be awarded costs of the proceedings, to be taxed if not agreed on party and party basis on the High Court scale, with certificate for one counsel. Unless any of the parties applies to vary the costs order within 14 days hereof, the costs order shall be become an order absolute.

161.  It remains for us to thank counsel for their invaluable assistance.