HIGH DYNAMIC HOLDINGS LTD v. TSE SIU BONG

LDCS 25000/2014

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION

NO 25000 OF 2014

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J U D G M E N T

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BACKGROUND

1.  This is an application for compulsory sale of all the undivided shares of and in Kowloon Inland Lot No 3276 (“the Lot”), with a building erected thereon known as Nos 168, 168A, 168B and 168C Boundary Street, Kowloon (“the Building”), for the purposes of redevelopment pursuant to Section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”).

2.  The Building, served by one common staircase, is a 4-storey block with four units planned on each floor from Ground Floor to 3^rd Floor.  It was completed in 1956 with Occupation Permit No 184 issued on 4 May 1956.  Each of the units in the Building is given 1 undivided share, making up a total of 16 undivided shares for the Lot. 

3.  The applicant filed the Notice of Application (“the NOA”) on 30 December 2014, which was subsequently amended on 1 March 2016 pursuant to my order at the hearing.  Given the questionable capacity of the respondent, Deputy Judge Tracy Chan made an order on 8 May 2015 that service of the NOA and all subsequent documents in respect of these proceedings on the respondent be dispensed with; and the respondent be bound by these proceedings as if he had been duly served in accordance with section 3(3) of the Ordinance. 

4.  The application is uncontested. Nonetheless, the tribunal has to determine whether the application has satisfied the requirements of the Ordinance.

5.  At the time of filing of the NOA, the applicant owned 15 out of 16 undivided shares in the Lot, i.e. 93.75% except for the following units which are owned by the respondent: -

(1) ½ share of Second Floor in Block A (No 168A) of the Building (“Property 1”); and

(2) ½ share of Second Floor in Block B (No 168C) of the Building (“Property 2”).

6.  Before the filing of the NOA, the applicant had already acquired the other ½ share of both Property 1 and Property 2 from the daughter of the respondent, who owned Property 1 and Property 2 together with the respondent as tenants in common. 

7.  At the hearing, since there was no expert evidence filed by the respondent, Mr Man for the applicant simply called the witnesses to prove the applicant’s case.  The applicant contended that all the requirements of the Ordinance had been satisfied and asked for an order for sale of the Lot.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANT

8.  Section 3(1) of the Ordinance requires the applicant to have not less than 90% of the undivided shares in a lot before it can make an application. 

9.  As at the date of application, the applicant owned 93.75% of the undivided shares in the Lot. I am satisfied that the applicant is entitled to make the application.

DETERMINATION OF THE EXISTING USE VALUES (“EUV”) OF ALL UNITS IN THE BUILDING

10.  Pursuant to section 3(1) of the Ordinance, the NOA was accompanied by a valuation report dated 29 December 2014 (“Application Report”) prepared by Mr Chan Chi Hing Alnwick of Knight Frank Petty Limited (“Mr A Chan”), the applicant’s valuation expert, containing assessments of values of all units (which are conveniently termed as the existing use values, the “EUV” of all units) of the Building as at 5 November 2014. The report was prepared not earlier than 3 months before the filing of the NOA as specified in Part 1 of Schedule 1 of the Ordinance.

11.  Under section 4(1)(a)(i), if there is a dispute between the parties on the EUV of the units in the Building on the Lot, the tribunal has to determine the values. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the Lot who cannot be found, the majority owner of the Lot is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is :

“(A) not less than fair and reasonable; and

(B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

12.  The present case falls within neither.  The respondent is not a missing owner, but he had not contested the application due to his questionable capacity.  In any event, the tribunal, before making an order for sale if any, should satisfy that each of the value of ½ share of Property 1 and Property 2 as assessed in the application is not less than fair and reasonable and not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.

13.  In the Application Report, Mr A Chan explained his valuation method and the assessment process to arrive at the EUV of each unit in the Building as at 5 November 2014.  In undertaking the assessment, Mr A Chan adopted the Direct Comparison Method.  A “reference unit” was selected, and its value was assessed by reference to market comparables.  Then comparison was made between the reference unit and the other units.

14.  Mr A Chan updated his EUV assessments by a supplemental report dated 14 October 2015 (“Supplemental Report”).  He updated the property indices for the valuation; amended the transaction date and transaction instrument nature of some comparables; and added two comparables for analysis.  Mr A Chan finally revised the unit price of the reference unit to $100,000/m², and then updated the EUV of each unit in the Building.

15.  Although the two ground floor units facing Boundary Street,  i.e. Ground Floor of No 168A Boundary Street (Block A) and Ground Floor of No 168C Boundary Street (Block B), were occupied for non-domestic use, they and the other units in the Building were assessed by Mr A Chan for domestic use in accordance with the approved building plans and occupation permit.

16.  Although the recent judgment of the Lands Tribunal on Cheer Capital Limited v Unibase Investment Limited and Others, LDCS 5000 of 2013 and Cheer Capital Limited v Better Ray Company Limited and Others, LDCS 6000 of 2013, both dated 12 June 2015, accepted the market reality approach and allowed non-domestic existing use value as the basis of valuation despite these ground floor premises were all designated for domestic use under their occupation permit, Mr A Chan elected to adopt domestic use in his valuation because (1) the Lot is zoned “Residential (Group B)” under Outline Zoning Plan (“OZP”) and no ground floor shops are permitted under the relevant OZP; and (2) the land lease governing the Lot stated that it “…… shall not nor will erect any building or buildings …… other than detached or semi-detached houses of a European type ……”.  Mr A Chan said pursuant to Lands Department Practice Note No 3/2000 only one main entrance and one secondary entrance together with such means of escape are permitted in “one house”.  Hence, the ground floor units abutting on Boundary Street each with a shop entrance of the Building, one block (i.e. house) only, would constitute a breach of lease condition and could lead to lease enforcement.

17.  Nevertheless, except for the allegation of Mr A Chan, there is no evidence before this tribunal that no ground floor shops are permitted under the OZP.  In fact, the OZP has just stated that “Residential (Group B)” is intended primarily for medium-density residential developments where commercial uses serving the residential neighbourhood may be permitted on application to the Town Planning Board, and “Shop and Services” are actually uses in “Column 2” that may be permitted with or without conditions.  Further, the current Town Planning Ordinance may not confer enforcement authority in urban areas that could stop existing use.

18.  On the other hand, even if existing use as shop with independent shop entrance may breach the lease condition from Government’s viewpoint and may not be permitted under the OZP, there is no evidence before this tribunal that market value of the ground floor units abutting on Boundary Street would not have reflected their existing commercial uses.

19.  The valuation of the ground floor units abutting on Boundary Street as domestic units may be arguable.  However, I agree that these units that are owned by the majority owner could be assessed for domestic use in these proceedings because (1) if they were assessed as shops but without independent shop entrance abutting on street, they might have value lower than the value for domestic use and in such circumstances the latter would be the market value; and (2) having considered the then much higher license fee (i.e. $55,000 per month) of Ground Floor of No 168A Boundary Street that might have reflected value for commercial use, in comparison with the then licence fees (i.e. $10,000 - $10,800 per month) of domestic units on upper floors, their valuation for domestic use might have lower value, which in fact is more favourable to the minority owner in apportionment of sale price on EUV ratios.

20.  I accept the EUV assessed by Mr A Chan. The EUV of all units in the Building as at the relevant date of valuation, i.e. 5 November 2014, are reproduced below: -

SECTION 4(2) OF THE ORDINANCE – JUSTIFICATION AND REASONABLE STEPS

21.  In determining the application, section 4(2) of the Ordinance empowers the tribunal to make an order for sale if it is satisfied that :

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

(2) the applicant has taken reasonable steps to acquire all the undivided shares in the Lot (including negotiating for the purchase of the undivided shares owned by the respondent on terms that are fair and reasonable).

Section 4(2)(A) - Age and State of Repair

22.  This tribunal has taken into consideration the expert evidence of Mr Chan Hie Leung Thomson (“Mr T Chan”), a qualified civil and structural engineer and Mr Cheung Kwok Ho Richard (“Mr Cheung”), a qualified building surveyor adduced by the applicant. 

23.  Mr T Chan had conducted a structural assessment of the Building and prepared a Structural Assessment Report dated 2 September 2015.  Mr Cheung had conducted a condition survey of the Building and prepared a Condition Survey Report dated 2 September 2015.

24.  I accept the unchallenged evidence of the applicant in these respects.  I am satisfied that, based on the evidence of Mr T Chan and Mr Cheung, redevelopment of the Lot is justified due to the bad state of repair of the Building and disproportionate costs to repair and maintain.  I am also satisfied that redevelopment of the Lot is justified due to the age of the Building.  This 59-year old Building is in a poor condition.  It has reached the end of its design life and has also failed to conform to modern standards and requirements in many material respects including the safety standards.

Section 4(2)(B) – Reasonable steps taken

25.  The applicant is under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of all the undivided shares of the Lot under Section 4(2)(b) of the Ordinance.

26.  Before the commencement of the present proceedings, the applicant made the following offers to the respondent on  25 November 2014: -

(1) ½ share of Property 1 – $6,900,000

(2) ½ share of Property 2 - $6,900,000

27.  The applicant submitted that the respective offer prices were higher than the EUV as at 5 November 2014 for the whole Property 1 and Property 2 respectively as assessed by Mr A Chan, and were also higher than the redevelopment value apportioned on EUV ratios to the ½ share of the respective units.

28.  The applicant further submitted that there were legitimate questions as to whether the respondent was fit to effect a sale, which led to the order of Deputy Judge Tracy Chan dated 8 May 2015.  Nonetheless, offers had been made to the respondent and they were fair and reasonable. 

29.  In assessing the reasonableness of the offers, Ribeiro PJ stated in Capital Well Limited v Bond Star Development Limited[1] that :

“the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It does not itself arrive at any conclusion as to what figure represents the correct valuation. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question.”[2]

30.  There is no evidence before this tribunal that Mr A Chan’s assessments are faulted.  In the circumstances, I am satisfied that the offers made by the applicant fall within the range of what may broadly be regarded as fair and reasonable and the applicant has taken reasonable steps to acquire all the undivided shares of the Lot including the respondent’s shares in his respective units. 

ORDER FOR SALE

31.  I am satisfied that redevelopment of the Lot is justified in terms of both age and state of repair of the Building, and the applicant has taken reasonable steps to acquire all the undivided shares of the Lot and the applicant’s offers were on terms that are fair and reasonable.  In the circumstances, I agree that an order for sale should be granted in favour of the applicant.

RESERVE PRICE FOR THE AUCTION

32.  The applicant submitted that the reserve price for the auction of the Lot should be fixed at $128,103,000, which is based on Mr A Chan’s assessment of the redevelopment value (“RDV”) of the Lot as at 5 February 2016 in his supplemental valuation report dated 11 February 2016 (“2^nd RDV Report”).  Details of his RDV valuation were also listed in his prior valuation report dated 14 October 2015 (“1^st RDV Report)

33.  Mr A Chan adopted the Residual Method to assess the RDV of the Lot and has assumed lease modification would be applied subject to payment of land premiums.  Residual Method is the assessment of land value by deducting the development costs (including construction costs, professional fees, financial costs, etc.) and developer’s profit from the estimated gross development value (“GDV”) of the proposed development, as if completed, as at the date of valuation.

34.  Mr A Chan opined that, subject to payment of land premiums to maximize the redevelopment potential, the optimum redevelopment on the Lot under the OZP comprised a 13-storey domestic building with carparking spaces at basement and club house on 1^st floor.  Land lease of the Lot is subject to a building height restriction of not exceeding 45 feet (about 13.71 meters).  Mr A Chan adopted the Residual Method to assess the land value “After” and “Before” lease modification of height restriction (i.e. increase of plot ratio from about 2.6044 to 5) and then estimated the land premium at $140,514,000.  He also estimated the land premium for building green balcony and utility platform as per Lands Department Practice Note No 2/2015 at $2,341,040.

35.  Details of the hypothetical development with the proposed accountable gross floor area of 2,097.25 sq m and plot ratio of 5, the GDV assessed (i.e. $279,000/sq m saleable area, etc.), the development costs adopted (i.e. $44,270/sq m gross floor area including the non-accountable gross floor area for balcony and utility platform), the assessments of land premiums and the residual valuation were set out in the appendixes of the 2^nd RDV Report. The residual land value with deduction of land premiums was assessed at $128,103,000, which is equivalent to an accommodation value of about $117,266/sq m gross floor area (based on a plot ratio of 2.6044) or about $61,081/sq m gross floor area (based on a plot ratio of 5).

36.  Although Mr A Chan said in the 1^st RDV Report that he had adopted both the Residual Method and the Direct Comparison Method to assess the RDV of the Lot, no further information of the Direct Comparison Method was contained in both 1^st RDV Report and 2^nd RDV Report.  When Mr A Chan was enquired why there was such omission, he replied and confirmed at the hearing that there was no suitable site comparable for the RDV valuation.

37.  Having gone through Mr A Chan’s valuation in the 2^nd RDV Report and his oral evidence at the hearing, I accept that the market value of the Lot reflecting its redevelopment potential, i.e. the RDV of the Lot, as at 5 February 2016 was $128,103,000, which should be the reserve price for the auction of the Lot.

ORDER

38.  This tribunal make the following determinations :

(1) This tribunal is satisfied that redevelopment of the Lot is justified due to the age and state of repair of the Building, and that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot including those of the respondent;

(2) All the undivided shares in the Lot, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lot;

(3) Mr Ma Ho Fai and Ms Tsang May Ping, nominated by the applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees by the Ordinance in relation to the sale of the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Woo Kwan Lee & Lo dated 19 February 2016;

(4) For the purpose of the sale of the Lot by public auction:-

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

(b) The reserve price be set at $128,103,000;

(5) Subject to further extensions that the tribunal may subsequently allow upon the application of the purchaser of the Lot or its successor in title, the redevelopment of the Lot and the Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot; and

(6) Liberty to the applicant, the respondent and the Trustees to apply to the tribunal for further directions.

COSTS

39.  The applicant did not ask for costs.  I make a costs order nisi that there be no order as to costs and such order be made absolute after 14 days if no application is made to vary the said costs order.