GAINFIELD INVESTMENT LTD AND OTHERS v. LEGEND TIME LTD AND OTHERS

LDCS 16000/2014

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION

NO. LDCS 16000 OF 2014

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JUDGMENT

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1.  This is an application for compulsory sale of all the undivided shares of and in the following lots for the purposes of redevelopment pursuant to section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”): 

Lot No	Address
Kowloon Inland Lot 11015	No 2A Tak Shing Street
Kowloon Inland Lot 11016	No 2B Tak Shing Street
Kowloon Inland Lot 11017	No 2C Tak Shing Street
Kowloon Inland Lot 11018	No 2D Tak Shing Street
Kowloon Inland Lot 11019	No 2E Tak Shing Street
Kowloon Inland Lot 11020	No 2F Tak Shing Street

These lots are hereinafter referred to as “KIL 11015”, “KIL 11016”, “KIL 11017”, “KIL 11018”, “KIL 11019”, “KIL 11020” or collectively as “the Lots” as the case may be. 

2.  The Lots were previously known as Sections A, B, C, D, E and F of Kowloon Inland Lot 2303 (“KIL2303”) the Government Lease of which however expired on 24 June 1990. By 6 new leases all dated 28 January 1994, the Lots were re-granted to the Financial Secretary Incorporated and then to the respective owners until 30 June 2047.

3.  Pursuant to the new Government Leases, salient points concerning the use and development of the Lots are extracted as follows:

“... will not during the continuance of this demise use exercise or follow in or upon the demised premises or any part thereof the trade or business of a Brazier Slaughterman Soap-maker Sugar-baker Fellmonger Melter of tallow Oilman Butcher Distiller Victualler or Tavern-keeper Blacksmith Nightman Scavenger or any other noisy noisome or offensive trade or business whatever without the previous licence of the Government ...” (Clause 4(12) of the Government Leases of KIL 11015 and KIL 11016 and Clause 4(11) of the Government Leases of KIL 11017, KIL 11018, KIL 11019 and KIL 11020)

“The Lessee will not use or permit or suffer the said piece or parcel of ground or any part thereof or any building or buildings erected or to be erected thereon or any part or parts of such building or buildings to be used for any purpose other than non-industrial (excluding godown) purposes.” (Clause 4(14) of the Government Leases of KIL 11015 and KIL 11016 and Clause 4(13) of the Government Leases of KIL 11017, KIL 11018, KIL 11019 and KIL 11020)

4.  Pak Cheung House, a 9-storey residential building with garages, has been erected on the Lots since 1957. It is served by two lifts and two common staircases for all units above garage level. There is also one additional common staircase serving exclusively units at No 2A Tak Shing Street and No 2B Tak Shing Street on all floors.

5.  According to the set of building plans of reference no 2/4432/56 approved by the Building Authority on 2 August 1956 and 3 December 1956 (to be collectively referred to as “the Approved Building Plans”), there are 6 residential units on each floor from Ground Floor to 7^th Floor and 2 garages on Basement (which is however in effect abutting Tak Shing Street at street level). Occupation permit of Pak Cheung House (Permit No K150/57) was issued on 29 November 1957 which permitted the use for “garages on ground floor for non-domestic purposes and eight upper floors for domestic purposes”.

6.  Each residential unit is allocated 1 equal and undivided share of and in their corresponding lots whereas each garage at No 2A Tak Shing Street and No 2B Tak Shing Street respectively is also assigned 1 equal and undivided share of and in their corresponding lots.

7.  By reference to the record at Land Registry, however, the 2 units being No 2B Tak Shing Street and No 2D Tak Shing Street on 7^th  Floor have been subdivided into 2 further units (or half share of the corresponding lots) respectively.

TheApplication

8.  The 1^st, 2^nd and 3^rd applicants are associated companies who own majority number of the undivided shares of and in the Lots. When they commenced the present proceedings on 14 October 2014 (“the Application”), the ownership of the undivided shares in the Lots was as follows:

Floor	KIL 11015 (No 2A)	KIL 11016 (No 2B)	KIL 11017 (No 2C)	KIL 11018 (No 2D)	KIL 11019 (No 2E)	KIL 11020 (No 2F)
Garage on Basement	2nd applicant	2nd applicant	-	-	-	-
Ground	2nd applicant	2nd applicant	2nd applicant	2ndrespondent	4th respondent	2nd applicant
First	2nd applicant	2nd applicant	2nd applicant	2nd applicant	2nd applicant	2nd applicant
Second	2nd applicant	2nd applicant	2nd applicant	2nd applicant	5th respondent	2nd applicant
Third	2nd applicant	2nd applicant	2nd applicant	2nd applicant	2nd applicant	2nd applicant
Fourth	2nd applicant	1stand 2ndapplicants (each half share thereof)	2nd applicant	3rd respondent	2nd applicant	2nd applicant
Fifth	2nd applicant	2nd applicant	1st respondent	3rdapplicant	2nd applicant	2nd applicant
Sixth	2nd applicant	2nd applicant	2nd applicant	2nd applicant	2nd applicant	2nd applicant
Seventh*	2nd applicant	2nd applicant	2nd applicant	2nd applicant	2nd applicant	2nd applicant
Percentage of undivided shares owned by the applicants	100.0%	100.0%	87.5%	75.0%	75.0%	100.0%
Average percentage of undivided shares owned by the applicants	89.583%

* Each of the Seventh Floor of 2A and 2B Tak Shing Street includes their corresponding portion of Roof on top thereof.

Live Respondents Remaining

9.  More recently, the applicants have successfully acquired the units owned by the 4^th and 5^th respondents and have since discontinued the proceedings against them. The applicants now own 94% of all undivided shares of the Lots.

10.  The following respondents are the 4 live respondents remaining on record:

Respondent		Respondent’s present solicitors
R1	Registered owner of 5/F, No 2C Tak Shing Street	Messrs Y C Lee, Pang, Kwok & Ip
R2	Registered owner of G/F, No 2D Tak Shing Street	Messrs Hon & Co
R3	Registered owner of 4/F, No 2D Tak Shing Street	In person
1st named R6	Occupiers of 4/F, No 2B Tak Shing Street claiming, inter alia, adverse possession in their Defence and Counter-claim to A1 and A2’s claim for possession in HCA 2418/2013 (subsequently transferred to District Court under DCCJ 3736/2014)	Messrs Paul Kwong & Co
2nd and 3rd named R6		Messrs Au-Yeung, Cheng, Ho & Tin

* The prefix “A” and “R” denote the corresponding applicants and respondents respectively.

11.  All the respondents have filed Notice of Opposition except R3. Pursuant to the Order of HHJ KW Wong dated 29 May 2015, Mr Wong Hiu Ngon Howard, a partner of Messrs Zhong Lun Law Firm, Solicitors for the applicants, made his 3^rd Affirmation dated 1 June 2015 which set out what had happened on 11 May 2015 and 27 May 2015 during his visit to R3 at her residential address at Pak Cheung House, ie 4/F, No 2D Tak Shing Street. Basically it related R3’s saying that she would take a neutral stance in these proceedings and would not attend any court hearing.

12.  In the present hearing, the applicants are represented by Mr Patrick Fung, Senior Counsel (“Mr Fung”) and Ms Nancy Ngai whereas R1 is represented by Mr Denis Chang, Senior Counsel (“Mr Chang”) and Mr Ross M Y Yuen. R2 is represented by Mr B K Ho (“Mr Ho”) and Mr Gavin Wan while the 1^st named R6 is represented by Mr Paul Kwong and the 2^nd & 3^rd named R6 is represented by Mr K M Lam.

Agreed List of Issues for Trial

13.  It is submitted that the main issues for determination by the Tribunal in the present case are as follows:

(1)  Whether the applicants are entitled to apply for an order for sale of all the undivided shares in the Lots under the Ordinance?

(2)  Whether redevelopment of the Lots is justified due to the “age” or “state of repair” of Pak Cheung House?

(3)  What are the Existing Use Values (“EUV”) of the units in Pak Cheung House as at 25 August 2014?

(4)  Whether the applicants have taken reasonable steps to acquire all the undivided shares in the Lots?

(5)  Whether an Order for sale of the Lots should be made?

(6)  What should be the reserve price in the public auction for sale of the Lots?

14.  R1 and R6 do not take issue on Issues (1) and (2) mentioned above; they simply put the applicants to strict proof of the same.

15.  R2 has expressly confirmed in the Witness Statement of Yeung Yeuk Chuen dated 21 August 2015 that he does “not intend to take any issue that due to the (i) design, (ii) age and (iii) structure of the building, redevelopment may be justified so as to save the time of this Tribunal.”[1]

16.  R2 has also expressly confirmed in the 2^nd Witness Statement of Yeung Yeuk Chuen dated 18 November 2015 that he opposes the Application “on the sole ground that no reasonable offer has yet been made by the applicants to purchase the Property (ie G/F, No 2D Tak Shing Street).”[2]

17.  However, as arguments developed, R2 further submits that there are sub-issues arising from the Agreed List of Issues for Trial. They include, for instance, under agreed Issue (1) above, if issues of illegality are involved in relation to the Approved Addition and Alteration Plan of the basement of Pak Cheung House or the excavation therein, whether the Tribunal would consider dismissing the Application.

18.  The other sub-issue raised by R2 also concerns his entitlement to (i) the yard to the west of his unit (“the West Yard”), (ii) the passageway and the yard to the east (collectively referred to as “the East Yard”) (which are coloured Indigo and Green respectively in the Deed of Mutual Covenant of Pak Cheung House) and the value thereto.

19.  R2 also queried the Redevelopment Value (“RDV”) of the Lots and suggested that by virtue of the prevailing use of his unit as a specialist clinic, whether a reasonable period of time for removal should be allowed. R2 further suggested that time for relocation of a large tree up to 5-storey high new situated at the East Yard should be allowed. All these factors would affect the RDV at the end.

20.  Having reviewed those sub-issues as postulated by R2, we are of the opinion that they are consequential issues that would necessarily ensue the Agreed List of Issues for Trial. We are content that these consequential issues cannot be disregarded when we deal with the Agreed List of Issues for Trial. Therefore, we shall also deal with these sub-issues herein below where the topic arises.

Whether the Applicants are entitled to make the Application

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

22.  Section 3(2)(b) further provides that an application under subsection (1) may cover 2 or more lots-

(i)   on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings; and

(ii)  where the average of-

(A)  the percentage of the undivided shares owned by the majority owner in the lot or lots on which one of the buildings stands; and

(B)  the percentage of the undivided shares owned by the majority owner in the lot or lots on which the other of the buildings stands,
is not less than the percentage specified in subsection (1).

23.  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.

24.  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 includes: “a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (ie the date of the application under the Ordinance)”. 

25.  The occupation permit for Pak Cheung House was issued on 29 November 1957 (ie nearly 57 years before the date of the Application).  The Notice is applicable and the threshold percentage should be 80%.

26.  When the applicants commenced the present proceedings on 14 October 2014, they together owned 89.583% of the undivided shares in the Lots, ie they owned on average more than 80.0% of the undivided shares in the Lots.  We agree therefore that the applicants were entitled to make the Application under section 3(2)(b) of the Ordinance.

Section 4(2)(a) - Whether redevelopment of the Lots is justified due to the “age” and/or “state or repair” of Pak Cheung House

27.  Under section 4(1)(b) of the Ordinance, the Tribunal is to be satisfied that an order of sale should be made pursuant to the Application.  Section 4(2) of the Ordinance provides that there are basically 2 considerations, namely :

(i)   whether the redevelopment is justified due to age or state of repair of the existing development on the Lots, ie Pak Cheung House in this case; and

(ii)  whether the applicant has taken reasonable steps to acquire all the undivided shares in the Lots where owners’ whereabouts are known.

28.  The applicants have to satisfy this Tribunal that the above statutory requirements were met; otherwise, an order for compulsory sale would not be granted.

29.  For the age and state of repair requirements, the applicants adduced the expert evidence of Mr Wong Chi Ming (“Mr C M Wong”), a Registered Structural Engineer and Authorised Person, and Mr Dennis W C Wong (“Mr Dennis Wong”), a Registered Building Surveyor and Authorised Person. Their expertise is not disputed.

30.  Mr C M Wong conducted a structural assessment report dated 20 August 2015 in respect of Pak Cheung House.  He identified the following defects:

(1)  cracks, spalling and severe water stains at 303 locations (excluding the 27 found at the unauthorized excavated basement attached to Garage 2A, hereinafter referred to as “the Basement Extension” which we shall revert to later)were observed during visual inspection of 39 out of the 50 units and common area;

(2)  67% of the steel reinforcement bars were suffering from mild to severe corrosion;

(3)  carbonation had reached the concrete surrounding the steel reinforcement bars in 64% of the test samples;

(4)  50% of the core samples had chloride content exceeding 0.40%;

(5)  36% of the samples were found to pose a “high” risk of corrosion of the steel reinforcement bars, whilst 43% of the bars were at “moderate” risk;

(6)  51% of the structural members were found to have concrete cover less than the design cover under the current design standard;

(7)  the average cement content was about 259kg/m³, which is lower than the current standard of 290kg/m³.

31.  Based on his findings, Mr C M Wong concluded that the structural elements of Pak Cheung House were in a poor condition.  He opined that the structural elements had passed their design working life of 50 years and were inferior to the current standard.  The corrosion of the reinforcement bars had entered the propagation phase and extensive maintenance and repair works would be required in the near future.  He said that the design and construction of the structural frames had become obsolete over time and the structure failed to meet the current safety standard.  He recommended that hammer tapping works be carried out to all the structural members and he also recommended that all revealed cracks and spalling should be patch repaired.

32.  Mr Dennis Wong also prepared a condition survey report dated 20 August 2015 in respect of Pak Cheung House.  He stated that Pak Cheung House was in a state of disrepair and was well below a tenantable standard so that comprehensive repair works would be required to upgrade and maintain it.

33.  Mr Dennis Wong estimated that the total costs of immediate repair works to restore Pak Cheung House to tenantable standard would come to $31,475,360 which is about 29% of the cost of constructing a new building similar to Pak Cheung House.  He concluded that Pak Cheung House had deteriorated to a state which is beyond reasonable economic repair.  Also the carrying out of the essential repairs would cause considerable disturbance and would require a very long implementation period.  It is inevitable that the occupation and enjoyment of the flats would be affected intermittently during the course of the repair. For flats with substantial unauthorized building works, the occupants would have to be evacuated during the carrying out of work for safety reasons.

34.  Mr Dennis Wong also pointed out that even after essential repair works have been implemented, Pak Cheung House will remain an old residential cum commercial building with out-dated design and construction which not only fall below market expectations but also constitute a continuing repair liability to the owners. At trial, he confirmed his recommendation that Pak Cheung House should be redeveloped rather than keeping it under constant repair given that it holds no historical value or architectural merit.

35.  While no one seeks to challenge these expert evidences,  Mr Ho for R2 tries to take issue on the alleged illegality of the Basement Extension where the back of the garages was excavated up to 488 sq m “extending to almost the whole footing of the building”[3].

36.  We could not see how R2’s argument on illegality of the Basement Extension would prevent redevelopment of the Lots if it is justified “due to the age or state of repair of the existing development on the (Lots)” under Section 4(2)(a) of the Ordinance.  If the situation comes to the extent that the excavation or the Basement Extension itself has rendered Pak Cheung House becoming structurally dangerous as alleged by R2[4], it would only have added ground for justification of demolition of Pak Cheung House rather than retaining it. In spite of the above, there was no evidence before us to support this allegation.

37.  Having considered the evidence before the Tribunal we are satisfied that redevelopment of Pak Cheung House is justified due to the age and state of repair of the existing development on the Lots.

EUV as at 25 August 2014

The Valuation Evidence

38.  The Application was supported by a valuation report dated 29 August 2014 (“Application Report”) prepared by Mr Charles C K Chan (“Mr Charles Chan”) of Savills Valuation and Professional Services Limited, containing assessments of the EUV of all units in Pak Cheung House on the Lots as at 25 August 2014. The Application Report was prepared not earlier than 3 months before the date of the Application, i.e. 14 October 2014 and is therefore, in our view, in compliance with section 3(1) of the Ordinance, setting out the assessed EUV of each unit on the Lots.

39.  Under section 4(1)(a) of the Ordinance,

“the Tribunal shall determine an application under section 3(1) by......,if any minority owner of the lot the subject of the application disputes the value of any property as assessed in the application, hearing and determining the dispute”

40.  In the present case, there is dispute among the parties about the assessed EUV of Pak Cheung House; R1 and R2 have jointly appointed a single valuation expert, Mr Chan Cheung Kit (“Mr C K Chan”) of Lanbase Surveyors Limited. Thus, for the purpose of the present proceedings, the applicants, R1 and R2 have adduced the following expert reports as evidence:

For the applicants by Mr Charles Chan:

(1)  The Application Report dated 29 August 2014[5];

(2)  Supplemental Report dated 20August 2015[6];

(3)  Rebuttal Report dated 25 November 2015[7] commenting on the valuation report dated 11 November 2015 by Mr C K Chan;

(4)  Rebuttal Report dated 23 February 2016[8] commenting on the Supplemental Report dated 20 January 2016 by Mr C K Chan;

(5)  Updating Report dated 3 June 2016[9];

(6)  Amendments made in consequence of the Supplemental Joint Expert Statement referred to in the following paragraph[10].

For R1 and/or R2 by Mr C K Chan:

(1)  Valuation Report dated 11 November 2015[11];

(2)  Rebuttal Report dated 25 November 2015[12];

(3)  Supplementary Report dated 20January 2016[13];

(4)  Supplementary Report for Updated EUV Valuation dated 3 June 2016[14];

(5)  Supplementary Report for Updated RDV Valuation dated 3 June 2016[15];

(6)  Amendments made in consequence of the Supplemental Joint Expert Statement referred to in the following paragraph[16];

41.  Mr Charles Chan and Mr C K Chan have also made the following 2 Joint Expert Statement of Experts:

(1)  Joint Statement dated 15 December 2015[17]; and

(2)  Supplemental Joint Statement dated 8 June 2016[18].

Illegality of the Basement Extension

42.  According to the Approved Building Plans, behind the walls of the 2 garages on Basement was an unspecified portion beneath units 2C, 2D, 2E and 2F on Ground Floor – the Basement Extension. There is no dispute that the 2 garages in the front had been converted into shops before their respective acquisition by the applicants.  There was no evidence before us to say how and when the Basement Extension came into being except that it is not disputed for the purpose of these proceedings that it was created without the approval of the Building Authority and was converted into an extension to Garage 2A, a part of which abutting Tak Shing Street has also been partitioned and dedicated to provide an access to the Basement Extension[19]. We noticed during our joint inspection an internal memo displayed on the wall therein, the Basement Extension had most probably been occupied as an office ancillary to the shop at Garage 2A in the front as early as in 1998 by Yue Hwa Chinese Products Emporium Limited which has been running department stores in Hong Kong[20].

43.  As stated at §6.1.2 of the Structural Assessment Report by Mr C M Wong:

“-    The unauthorised excavation works have removed the backfilling and reduced the factor of safety for stability of the building under lateral loads.

-    Additional slabs and beams were also observed in the unauthorised basement. These additional elements are supported by the existing approved RC Structure and thus have increased the loading of the element.”

44.  In respect of the “increased loading”, however, during cross-examination by Mr Chang appearing for R1, Mr C M Wong conceded that with the backfilling removed, the loading on the foundation would also be reduced.[21]

45.  Mr Charles Chan said that he had no knowledge about the conversion or the presence of the Basement Extension when he prepared the Application Report dated 29 August 2014. According to his evidence at trial, he was given the opportunity to inspect 2 further residential units and the 2 garages in June 2015 when he found out the conversion and the Basement Extension.

46.  In his Supplemental Report dated 20 August 2015, Mr Charles Chan stated at §B3.1.1[22] that he considered appropriate to include the value of the Basement Extension in his valuation of Garage 2A in light of the Tribunal decision in Cheer Capital Limited v Unibase Investment Limited & Others, LDCS 5000 & 6000/2013 (unreported, dated 12 June 2015) (which is hereinafter referred to as “Cheer Capital”).

47.  In Cheer Capital, notwithstanding an occupation permit issued in 1955 allowing the premises in question to be occupied and used for domestic purposes, units in the premises were occupied for retail purposes for a long time. The Tribunal (which had the same constitution as the present case) observed that while plans for alterations and additions of building works (commonly known as the A&A plans in the profession) had been approved by the Building Authority for conversion of some of those units to retail use in the 50s or in 1965, owners or occupiers of other units on the same floor did not care to submit similar A&A plans before conversion of their units to retail use. Despite the absence of A&A submissions, although the Building Authority had issued Building Orders requiring the owners of the various premises to carry out extensive repair works, no complaint whatsoever had been received regarding the manifest change of use. The Tribunal accepted therefore the evidence of Mr C K Chan (who happened also to be a valuation expert in that case) that approval for alterations and additions of building works was irrelevant on the basis of non-domestic use if structural alteration to the premises was not required. “Market realities should dictate”: see §51 of the judgment.

48.  We agree with Mr Chang for R1 that the situation of the Basement Extension is not however comparable to Cheer Capital. Obviously the conversion of the Basement Extension involves structural alteration and is unauthorised. Although Mr Dennis Wong did submit such an A&A plan to the Building Authority for approval of the change of use of Garage 2A in April 2015, he conceded at trial that he would not have made the A&A submission which identified the area behind the two garages as “unexcavated” if he knew the Basement Extension was indeed created without authorisation.

49.  In spite of the above, this is not the first time the Tribunal comes across such unauthorised excavation or conversion. In Hong Kong Telephone Company Limited v The Hong Kong Land Company Limited, LDLA 5/1982 (unreported, 5 November 1982) (which is hereinafter referred to as Hong Kong Telephone), the Tribunal considered market rent appropriate for the premises although there was an illegal addition in the form of an enclosed void at ground level having been converted into a playroom.

50.  In that case, “(b)ecause of the steep slope down from the road level the foundations of the building continue for a considerable further distance below the lower level floor opening onto a paved open garden area. The area of these foundations below the lower level floor has been closed to provide a playroom”, a situation in topography which is comparable to the Basement Extension in the present case. In that case, therefore, the conversion created a 4^th storey but the Government Lease limited the building to only 3 stories. The Tribunal held that while the enclosed foundation area used as a playroom did not form part of the legal gross floor area, it was part of the suit premises and must for valuation purposes be taken into account as ancillary to the residential area, in the same way as the garden and car park areas were likewise ancillary. The Tribunal was satisfied that its existence could reasonably be expected to attract a slightly higher rent than if it did not exist, in the same way as other ancillary features add value to premises. The possibility that the landlord may at sometime have to remove the glass doors enclosing the area could not be discounted, nor could the probability that it is allowed for the time being.

51.  In respect of the probability of enforcement action by the Building Authority, Mr Ho also produced at trial a letter from the Building Authority dated 7 April 2016 after R2 reported the illegal conversion on 11 March 2016, ie some one and half year after the relevant date for assessing the EUV as at 25 August 2014. The penultimate paragraph of the letter reads as follows:

“Regarding the suspected unauthorised building works below the ground floor level, you are advised that site inspection was carried out by staff of the Buildings Department and no obvious structural danger was noted during the inspection. Nevertheless, the department will follow-up with enforcement actions against the unauthorised building works in the subject premises in accordance with the prevailing enforcement policy. As this building has been selected as one of the target building for large scale operation, this department will serve a removal order against the pertaining unauthorised building works.” (underline added)

52.  While we appreciate that the Building Authority could have the unauthorised building works removed, we also take judicial notice that in the past, due to policy, the Building Authority usually takes action in the order of priorities[23]. The fact that Pak Cheung House was identified “as one of the target building for large scale operation” is neither here or there as such operations have been in place for a period of time[24]. Despite Mr Chang’s insistence and Mr Dennis Wong’s admission that the enforcement policy of the Building Authority has been changing from time to time, in the present proceedings, we are not supplied with evidence on how soon the Building Authority had commenced or would commence the large scale operation stated in the letter above. Both Mr C M Wong and Mr Dennis Wong, being Authorised Persons, when asked by this Tribunal, conceded that they have no such idea.

53.  What we can say is, up to the date of closing submission, we are not informed of any removal order being issued against the Basement Extension.

54.  More importantly, as at 25 August 2014 (ie more than 2 years ago) which is the agreed date for preparing the EUV, the parties to the hypothetical sale would have taken cognisance of the fact that no enforcement action had been taken by the Building Authority although  the Basement Extension had been in use as early as in 1998 at the latest[25]. Prior to the Application, none of the other owners of Pak Cheung House including R2 took the trouble to investigate or go inside the Basement Extension to inspect its physical conditions, or ascertain whether there might be any unauthorised building works there. Indeed, a door to a lift pit inside the Basement Extension was observed to be there during our joint inspection. More probably than not, it would have aroused attention of somebody when the lift serving the upper floors was being maintained or repaired. Despite that, a number of Building Orders were issued against the various units or the common areas of Pak Cheung House but none of them is related to the Basement Extension[26].

55.  We accept, as what the Tribunal did in Hong Kong Telephone, that there should be value attached to this appurtenance. We shall deal with the same at the later part of this judgment. We accept further the submission of the applicants that the authorities like Active Keen Industries Limited v Fok Chi-keong [1994] 1 HKLR 396 and Giant River Limited v Asie Marketing Limited [1990] 1 HKLR 297 which involved blot on title due to presence of unauthorised structures are irrelevant when we agree that there should be value attached to the Basement Extension.

User of the Garages

56.  In the Application Report dated 29 August 2014, Mr Charles Chan observed that despite the designated use of “garages” on Basement, the two garages are occupied as shops. He further stated that with the advice of an Authorised Person (which turns out to be Mr Dennis Wong at trial), the changing of the garages to shops would likely be approved by the Building Authority upon submission of plans for A&A works[27]. Therefore, Mr Charles Chan proceeded to value the garages as shops for the purpose of determining the EUV.

57.  We have stated at §48 above that Mr Dennis Wong conceded at trial that he would not have made the A&A submission if he knew the Basement Extension was indeed created by unauthorised excavation. We consider this irrelevant and our view in Cheer Capital still prevails particularly in light of the following two judgments subsequent to Cheer Capital.

58.  Firstly, in Wing Hong Investment Company Limited v Fung Sok Han & Others, HCA 2075/2009 dated 25 September 2015 which is reported as [2016] 1 HKLRD 1 (“Wing Hong”), the defendants there also claimed that the plaintiff in that case had converted the ground floor carport into shops. The Buildings Department initially replied that the alleged unauthorised building works did not belong to those that needed priority of enforcement. Then later the said department made another reply saying that the partition walls as added were exempt building works; the change of user did not pose structural danger and did not affect the structure of the building or obstruct the fire escape, it therefore would not take any further action. See §§194-207 of the judgment.

59.  More particularly at §235 of the judgment, Chan J found there is no provision in the Buildings Ordinance to suggest that it is an offence to adopt a user of premises which is materially different from that stated in the occupation permit although the Building Authority may serve an order on the owner under section 25(2) to prohibit the intended user or require the changed user to be discontinued if it is found that the changed or intended new user is not acceptable.

60.  Then in Join Union Investment Limited v China Tree Investment Limited, HCA 1126/2013 dated 5 April 2016 which is reported as [2016] 2 HKLRD 901 (“Join Union”), there was also a subdivision of the ground floor premises into 4 shops. The expert in the case, a registered structural engineer, could not cite any example or authorities where, in similar circumstances, the Government or the Building Authority took enforcement action to require the demolition of the partitioning and reinstatement of the property to its original state. Chow J was of the view that there was no real risk of enforcement by the Government or Building Authority in respect of the alleged unauthorised partitions. See §§97-103 of the judgment.

61.  Further, at §107 of the judgment, the learned judge observed that:

“... it is apparent, form the evidence of Mr Lai, Madam Chan and Madam Shiu, that none of them considered the 2010 Building Order, or indeed any unauthorised building works in the Property, to be of any great moment. Prior to the respective purchases of the Property by the defendant (through Madam Chan) and the plaintiff (through Madam Shiu), none of them took the trouble to go inside the Property to inspect its physical conditions, or ascertain whether there might be any unauthorised building works in the Property. Even after her attention had been drawn to the 2010 Building Order, Madam Shiu did not carry out any further investigation prior to entering into a binding contract to purchase the Property, and was prepared to accept a modest sum of HK$20,000 from the defendant as sufficient compensation for the costs of complying with the 2010 Building Order. The existence of unauthorised building works in retail premises, especially in the older districts in Hong Kong, is common place and does not appear to have any significant impact on their market or capital values. These properties change hands frequently like ordinary commercial commodities, as demonstrated in the present case by the fact that the defendant (through Madam Chan) purchased the Property in September 2010 and sold it to the plaintiff (through Madam Shiu) in March 2011 for a handsome profit. It is contrary to market reality to treat the existence of an unauthorised cockloft, even of a substantial size like the present one, as constituting a title defect going to the root of title....” (emphasis added)

62.  Incidentally, Basement and Shops B & C on Ground Floor, Gay Mansion of 66 Waterloo Road was sold for $30,000,000 in November 2015. It was widely reported in the media that the sale premises originally comprised a garage which accommodated 10 carparking spaces but the vendor had converted it into a shop space which is now being used as a pet hotel. Our joint site inspection on 21 June 2016 confirmed this is the case.

63.  Mr Ho for R2, in his opening and reply closing submission, also referred to the Outline Zoning Plan to which the Lots are subject prohibiting car parks to be used as shops. We are afraid this argument is misconceived. With respect, Mr Ho has not put sufficient weight to the fact that the Outline Zoning Plan(s), though being statutory, merely reflects planning intention. The plans, other than those transformed from the Development Permission Areas (DPA) Plans in the New Territories, provide no enforcement powers save through section 16(1)(d) of the Buildings Ordinance[28]. As stated in section 13 of the Town Planning Ordinance, the Outline Zoning Plan(s) only serve to provide guidance to all public officers and bodies in the exercise of any powers already vested in them. There is no “prohibition” under the Outline Zoning Plan as suggested by Mr Ho; in contrast, non-conforming uses are allowed throughout the life of existing buildings unless the change of use requires building works not exempted from the Buildings Ordinance.

64.  In other words, when the change of use does not require any submission of building plans for approval under section 14 of the Buildings Ordinance, the Outline Zoning Plans have no application.

65.  In the above regard, we agree that the 2 garages, ie Garage 2A and Garage 2B on Basement should be appropriately valued as shops or retail use.

Extent of R2’s Interest

66.  Owing to the topography of the Lots, the Basement level of Pak Cheung House is not below ground as usual but at the street level of Tak Shing Street. The Ground Floor which is above the Basement level is naturally one-storey higher than the street level.  Unit 2A and Unit 2B Ground Floor fronting onto Tak Shing Street are served by a separate common staircase situated in between the 2 garages. In addition, there exists an open flight of steps to the right hand side of the two garages which is guarded by a security gate. This open flight of steps leads up to a raised level of an open yard comprising mainly part of KIL 11017, part of KIL 11018 (ie the East Yard) and part of KIL 11019. The open yard provides access to all Ground Floor units as well as the common lift lobby situated at the rear of Unit 2A and Unit 2B Ground Floor serving the upper floors.

67.  As stated in §2 above, the Lots were previously known as Sections A, B, C, D, E and F of KIL 2303 the Government Lease of which however expired on 24 June 1990. By reference to the first assignments in respect of all units on Ground Floor to 7/F of Section D of KIL 2303, for instance, the owners of each floor were assigned:

“All That one equal undivided eighth part or share of and in All That the said piece or parcel of ground which said piece or parcel of ground with its abuttals and dimensions is more particularly delineated and described on the plan hereto annexed and thereon coloured Pink, Blue and Green and is registered in the Land Office as Section D of Kowloon Inland Lot No 2303 and of and in the messuage erections and buildings thereon known at the date hereof as No 2D Tak Shing Street Together with the exclusive right and privilege to hold use occupy and enjoy the [respective floor] of the said messuage or building And Together with the rights of way as are more particularly described and set out in the First Schedule hereto and all other rights of way (if any) and other rights privileges easements and appurtenances thereto belonging or ascertaining or therewith at any time used held occupied or enjoyed ...... And Subject to the rights of way as are more particularly described and set out in the Second Schedule hereto...”

68.  The First Schedule referred to a full free and uninterrupted right of way for the Purchasers and other owners and occupiers of the Pak Cheung House to go pass and repass over and along, inter alia, the yard which is shown and coloured yellow on the plan attached.

69.  The Second Schedule referred to, inter alia, a full free and uninterrupted right of way for the owners and occupiers of the other portions of the KIL 2303 (in common with others having the like right thereto) to go pass and repass over and along, inter alia, the yard which is shown and coloured green on the plan attached.

70.  By 6 new leases all dated 28 January 1994, the Lots were re-granted to the Financial Secretary Incorporated and then to the respective owners until 30 June 2047. According to R2, the re-grant assignment by Government in 1997 (“the 1997 Assignment”) provides him with the whole of the interest on Ground Floor of KIL 11018 including the West Yard and East Yard. Further, it is R2’s position that he is entitled to the exclusive use of an area of 184 sq m which is equivalent to the whole registered site area of KIL 11018.

71.  The 1997 Assignment states:

“... the Assignor HEREBY ASSIGNS to the Assignee the property described in the Schedule hereto (“R2’s Interest) ...”

72.  The Schedule in the 1997 Assignment described R2’s Interest as follows:

“ALL THAT one equal undivided eighth part or share of an in ALL THAT piece or parcel of ground registered in the Land Registry as KOWLOON INLAND LOT NO 11018 And of and in the messuage erections and buildings thereon known at the date hereof as NO 2D TAK SHING STREET (“the Building”) TOGETHER with the sole and exclusive right and privilege to hold use occupy and enjoy ALL THAT the GROUND FLOOR of the Building”

73.  Further, the 1997 Assignment is subject to a Deed of Mutual Covenant registered in the Land Registry vide memorial UB6843856 dated 5 December 1996 (“the DMC”) which reads as follows:

“Any undivided 8^th part or share in the Lot and the Building and the full and exclusive right and privilege to hold use occupy and enjoy any floor of the Building shall be held by the owner thereof subject to and with the benefit of the easements rights privileges and obligations set out in the Third Schedule hereto.”

74.  Paragraph 1 of the Third Schedule in the DMC deals with right of way for owners and the affected area are marked with different colour, pink and yellow:

“(a)  A full free and uninterrupted right of way for the owners and occupiers ... to go pass and repass over ... (b) the passage erected upon portions of the premises registered respectively in the Land Registry as KOWLOON INLAND LOT NOS 11015, 11016, 11017 AND 11019 ... coloured Pink on the plan attached hereto (“the said Plan”) (underline added)

(b)  A like right of way over and along the yard over portions of the premises registered respectively in the Land Registry as KOWLOON INLAND LOT NOS 11015, 11016, 11017, 11019 AND 11020 which is shown and coloured Yellow on the said Plan.” (underline added)

Reading from paragraph 1 of the Third Schedule, KIL 11018 (eg R2’s premises at Unit 2D, Ground Floor) has not been included in the area described to be “right of way” for owners.

75.  By reference to “the said Plan”, however, the West Yard was coloured Yellow. As a result the description clause (b) of the Third Schedule is inconsistent with the coloured part of “the said Plan”. In this connection, R2 commenced actions in the Court of First Instance (HCA 680/2015 and HCMP 823/2016) and argued that this was a wrong colouring. According to R2 his case in HCMP 823/2016 is that the applicants had conceded that the West Yard should have been coloured Green and subject to the same right of way as the passageway and the garden on the Ground Floor of KIL 11018.

76.  By reference to the original assignment to R2’s predecessor in title dated 17 March 1958 vide memorial 274690 in the Land Registry[29], we agree this concession would have been correctly made as the West Yard was coloured Green.

77.  Notwithstanding the above, we agree with the applicants and R1 that whether the West Yard was coloured Green or Yellow does not matter because it is still common parts of Pak Cheung House.

78.  Paragraph 2 of the Third Schedule in the DMC sets out the easements rights and privileges subject to which any undivided shares or and in the Lot and the Building and the exclusive right to hold use occupy and enjoy each floor is held:[30]

“(a) .......

(b)  A full free and uninterrupted right of way for the owners and occupiers of KOWLOON INLAND LOT NOS 11015, 11016, 11017, 11019 and 11020 and their respective tenants servants visitors workmen and other persons by them authorised (in common with others having the like right thereto) from time to time and at all times hereinafter to go pass and repass over through upon and along the staircase and landings and the passage erected upon far right portion of each floor of the Building which passage is shown and coloured Indigo on the said Plan.

(c)  A like right of way over and along the yard (lying to the east of the building) which is shown and coloured Green on the said Plan.” (underline added)

79.  Mr Ho argues that there are no commons parts as so specified in the DMC. We do not agree. We look at the substance instead of the form[31]; the areas, either coloured Green or Yellow, are not exclusively used or occupied by owners or occupiers of Unit 2D,  Ground Floor. They are used “in common with others ...”.

80.  Moreover, Mr Fung and Ms Ngai for the applicants, in their closing submissions, drew our attention to the fact that the subject matters of re-grant assignments from Ground to 7/F of 2D are identical (save and except for the number of undivided shares and the floor numbers). We agree with the applicants that it is impossible for the Financial Secretary Incorporated to have assigned the “exclusive” right to use, enjoy and occupy the corridors/passages, the staircases and the landings on the 1/F to the 7/F of the same building, the East Yard and the West Yard on G/F to different persons. For this reason, the “FLOOR” as contained in the 1997 Assignment should just be “portion of floor of the Building... intended for the separate use and occupation” as defined in the DMC” instead of the whole floor.

81.  Further, we also agree with the applicants that both the West Yard or the East Yard is common parts under section 2 of the Building Management Ordinance, Cap 344 (“BMO”) as they are not specified or designated in an instrument registered in the Land Registry as a portion of land for the exclusive use, occupation or enjoyment of an owner of Unit 2D, Ground Floor.

82.  Here, Mr Ho for R2 argues that BMO is only enacted for the purpose of building management but not describing ownership of land. Even if we agree with Mr Ho, section 34C of BMO could not be ignored. Section 34C(1) of Part VIA provides that “except where otherwise expressly provided, applies only to a building in respect of which a deed of mutual covenant is in force whether that deed came into force before or after the material date.” It provides further that “(i)n the event of any inconsistency between this Part and the terms of a deed of mutual covenant or any other agreement, this Part shall prevail.”

83.  This being the case, under section 34I of the same part of BMO:

“(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)  ...

(2)  Any person who contravenes subsection (1) shall be deemed to be in breach of an obligation imposed on him by the deed of mutual covenant in respect of the building.”

84.  In spite of the above, by virtue of our joint site inspection, there is no direct access to the West Yard save from Unit 2D, Ground Floor; the West Yard, which is located at a dead end, was probably only connected to a similar yard in Unit 2F, Ground Floor within KIL 11020. This connection had however been blocked by an old boundary wall which does not appear to affect any owners other than those of the 2 units. On a balance of probability, we are satisfied that owners or occupiers of Unit 2D, Ground Floor have de facto exclusive use and enjoyment of the West Yard for a long time which has in effect become their appurtenance. We are satisfied therefore that the West Yard should be valued as such[32] and the same for the yards adjacent to Units 2A, 2C, 2E and 2F, Ground Floor.

85.  As regards a storeroom underneath the common staircase outside Unit 2D, Ground Floor but has been enclosed for the exclusive use by R2, we agree similar principle should apply so that its value should be reflected.

86.  We do not however agree with the submissions made by Mr Ho that the East Yard should be similarly treated.

87.  As mentioned earlier, at the raised level of Ground Floor (which is identified as an open yard to which the open flight of staircase leads) there is a passageway alongside Units 2A, 2C and 2D, Ground Floor. Strictly speaking there are more than 1 open yard because there are 3 ground floor units ie 3 lots. Whilst on one side of the yard situate the 3 units, on the other side of the yard, there is the boundary wall. R2 argues that the area at the open yard between the boundary wall and Unit 2D, Ground Floor within Lot KIL 11018 had been exclusively used by them and a garden had been created. It is said that gardening works had been done by R2 throughout the several decades in the past. Because of such nice gardening works which include a line of flower beds dividing the passageway and the garden with concrete benches being put there upon, few people would go pass through the garden[33]. The garden, ie the East Yard, has become for their exclusive use. They even started to grow valuable mushroom on a tree there. We do not find this argument helpful. Even if that is the case, the East Yard is still subject to right of way of others and open at all times for use by the other owners. The concrete benches sited inside would probably attract other owners to sit-out in the East Yard and this would further defeat the argument of R2. R2’s suggestion that those benches were made by order of his father for use by his patients is immaterial.

88.  Thus, for the reasons above, we agree that no value should be attached to the East Yard.

89.  Mr Ho also submits that it has been the evidence of R2 that his parents purchased Unit 2D, Ground Floor because it consists of a garden and a yard, which are important and instrumental to the practice of the specialist clinic to be conducted thereat. That is, the garden and the yard are of special value to the practice.

90.  It seems by putting up the above argument Mr Ho was trying to say that value should be attached to the existing use of Unit 2D, Ground Floor. Unfortunately, it is unlikely that he could succeed. The term “existing use value” or “EUV” is not found in the Ordinance. Rather it is a term coined by the valuation profession for the purpose of assessing the market value of each existing unit subject to an application pursuant to Part 1 of Schedule 1 to the Ordinance; the adjective “existing use” is adopted to distinguish from the market value derivable from taking into account the redevelopment potential of the property or the lots in question.

91.  Also, under the same part, market value should be assessed on a vacant possession basis and therefore any value referable to the existing practice or operation inside a unit should be disregarded if it cannot be founded from the market value on a vacant possession basis.

92.  For these reasons we say we are not able to attach any value added to Unit 2D, Ground Floor by the use of it as a clinic with the presence of the East Yard and a tree.

Illegal Structure on the West Yard

93.  There exists at the West Yard adjoining and attaching to the Unit 2D, Ground Floor an “L-shaped” structure which has been erected and enclosed as an extended kitchen, with an area up to 200 sq ft.

94.  While R2 conceded that the Building Authority had on 2 March 2007 issued a Superseding Notice No WNZ/U28-31/0002/05 notifying R2 of his contravention of the Buildings Ordinance. This notice was followed up by issuance of an order (WNZ/U28-31/0002/05) in about 2009 (“the Order”) requesting demolition of the same. We were informed that R2 took out an appeal and parties had since reached an agreement that in exchange for his withdrawal of the appeal, the Building Authority will not enforce the Order, but the Building Authority is at liberty to register the Order at the Land Registry[34].

95.  This agreement was recorded by a solicitor, Mr Ng Hoi Sang of Messrs S H Chan and Company, in a statutory declaration dated 16 December 2014 which, in gist, contained the following:

“In exchange of Mr Yeung withdrawing the said two appeals, the Building Authority undertook not to require Mr Yeung to remove the “L” shape illegal structure at Ground Floor No 2D Tak Shing Street, Kowloon (ie the subject matter of the two Building Orders aforesaid), but was at liberty to register the same two Building Orders at the Land Registry.”[35]

96.  On the basis of the principle as stated in §55 above, we are content that there should be value attached to this illegal “L-shaped” structure, though not necessarily at the same rate as Unit 2D, Ground Floor proper or that for the unauthorised Basement Extension. We shall revert to this later in this judgment when we consider the evidence of the 2 valuation experts.

EUV of the Two Garages

97.  In the Application Report dated 29 August 2014 and the Supplemental Report dated 20 August 2015, Mr Charles Chan had valued the front portion ie the two garages as shops at about $440,000/sq m as at 25 August 2014 by making reference to transactions of 6 comparables in the vicinity[36]. As a result of the Joint Statement dated 15 December 2015 both experts agree that only the sale of Shop 5, G/F, Block A, Fortune Terrace in June 2013 is relevant.

98.  In his Report on Updating dated 3 June 2016, Mr Charles Chan applied the detailed adjustments as shown in the table below whereas those by Mr C K Chan are shown in the parenthesis:

Shop 5, G/F, Block A, Fortune Terrace					Adjustments						Adjusted Unit Price /m2
Unit Price/m2	Saleable Area	Head-room	Front-age	Depth	Time	Age	Front-age	Layout	Head-room	Total
$412,844	65.4 m2	5.2 m	5.3 m	15.0 m	3.0%	-4%	5.0%	10.0%	-9.0%	3.9%	$428,945
					(2.5%)	(0%)	(5.0%)	(3%)	(-5.0%)	(5.3%)*	($434,725)*

* Originally, Mr CK Chan also adopted a further conversion adjustment of -5% to allow for time and cost for converting the garages to shop use.

99.  In the table above, we note that the difference in time adjustment is a matter of rounding.  As we understand, both experts apply the Private Retail Price Index of Rating and Valuation Department (“RVD”) for the purpose of this time adjustment. We have explained at §112 of Cheer Capital that the preparation of an index is more or less an averaging exercise and there is no guarantee that the price trend for the subject location or property necessarily follows the index. In this regard, the adjustment is only an approximate and therefore we prefer the rounded figure of 3.0%.

100.  As regards age, we appreciate that this would have a less significant impact on retail premises as compared to its effect on domestic units. However to the extent that this comparable was built in 1978 vis-à-vis Pak Cheung House was built in 1957, ie a difference of 21 years, we are content to adopt a minor adjustment. We therefore prefer Mr Charles Chan’s application of -4%.

101.  Turning to layout, both Garage 2A or Garage 2B are nearly square in shape (7.7 m x 8.9 m) but this comparable is in an “L” shape with a long and narrow depth upto 15.0 m; we consider a layout adjustment of 10% proposed by Mr Charles Chan appropriate. We consider concession of 3% made by Mr C K Chan too small.

102.  Originally, Mr C K Chan also adopted a further conversion adjustment of -5% to allow for time and cost for converting the garages to shop use. At trial, Mr C K Chan confirmed that he would withdraw this adjustment application to Garage 2B; he does not withdraw this conversion adjustment for Garage 2A because, as he explained, Mr Dennis Wong had conceded that he would not have made the A&A submission which identified the area behind the 2 garages as “unexcavated” if he knew the Basement Extension was indeed created by excavation. See §48 above.

103.  We find the latter assertion above contrary to Mr C K Chan’s own opinion in Cheer Capital and as we said in §57 above, we consider whether A&A plan has been submitted or would be submitted in due course irrelevant; our view in Cheer Capital still prevails particularly in light of Wing Hong and Join Union.

104.  Mr C K Chan also revised his opinion that in light of the evidence of Mr C M Wong and Mr Dennis Wong that reinstatement of the Basement Extension would involve large scale work to be carried out for as long as 1 year, adjustment should be made to reflect the time and cost. This is set out at Appendix B-1 of the closing submission of Mr Chang as follows:

Market Value of Garage 2A with no unauthorised extension		$434,700	/m2
PV in 12 months at 5% per annum		0.9524
		__________
		$414,008	/m2
Saleable area of Garage 2A		68.7	m2
		__________
		$28,442,350
	say	$28,442, 000
Less reinstatement cost for the unauthorised portion of Garage 2A		$1,500,000
		__________
Market Value of Garage 2A with the unauthorised extension		$26,942,000

105.  However, as we have stated our opinion at §55 above, reinstatement, as at 25 August 2014 particularly, was not imminent. We find there should be no distinction in the valuation of Garage 2A and Garage 2B and the conversion adjustment should therefore not be applied.

106.  We confirm that the EUV of both Garages 2A and 2B should be determined at $428,945/sq m which is rounded to $429,000/sq m. On the basis that the saleable area of each garage is 68.7 sq m, the EUV for each should be $29,470,000 as proposed by Mr Charles Chan[37].

EUV of the Basement Extension

107.  We have at §55 above ruled that there should be value attached to the Basement Extension though it was illegally constructed. It is obvious from the definition of market value, for instance by the HKIS Valuation Standards (2012 edition) published by the Hong Kong Institute of Surveyors (“HKIS”) that even a liability can be sold or exchanged at a value:

“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.”

108.  In his Updating Report of 3 June 2016, Mr Charles Chan decided to deal with it by the usual halving-back zoning method. Whereas he had already determined the unit rate for the Garages at $429,000/sq m by the conventional direct comparison approach, he tried to convert Garage 2A into Zone A and Zone B, for instance, with a zonal depth about 7 m so that Zone A had an area of about 57.3 sq m and Zone B had an area of about 11.3 sq m (ie 68.7 sq m – 57.3 sq m). Thus, the Zone A value of Garage 2A, say “A” could be determined as follows:

68.70 sq m x $429,000/sq m = A x 57.3 sq m + A/2 x 11.3 sq m

and “A” was found at about $468,000/sq m.

109.  Likewise, Mr Charles Chan divided the Basement Extension behind Garage 2A into further zones with the following unit rates subject to a discount of 25% to allow for its lacking legal title:[38]

	Authorised Portion		Unauthorised Portion
	Zone A	Zone B	Zone B	Zone C	Zone D	Zone E	Zone F
Zonal Area (sq m)	57.3	11.3	69.6	78.4	86.6	88.6	119.0
Zone A Unit Rate  (/sq m)	$468,000	$468,000	$468,000	$468,000	$468,000	$468,000	$468,000
Factor	1	1/2	1/2	1/4	1/8	1/16	1/32
Halving Back Unit Rate  (/sq m)	$468,000	$234,000	$234,000	$117,000	$72,000*	$72,000*	$72,000*
Discount for Lacking of Legal Title @25%			$175,500	$87,750	$54,000	$54,000	$54,000

* Mr Charles Chan found however those rates for Zone D, Zone E and Zone F after halving back were even lower than the adjusted unit rate of storage comparables at $72,000/sq m and therefore, for these zones, $72,000/sq m was adopted as the minimum[39].

110.  Then, Mr Charles Chan added up the value of Zone B, Zone C, Zone D, Zone E and Zone F for the Basement Extension at $34,981,200 and applied a bulk discount of 20% to arrive at $27,984,960 for the EUV of the Basement Extension. In other words, Mr Charles Chan has allowed up to 40%[40] discount to the value of the Basement Extension.

111.  Nevertheless, having analysed the sale of Basement and Shops B & C on Ground Floor, Gay Mansion of 66 Waterloo Road at $30,000,000 in November 2015, Mr Charles Chan revised his opinion at trial limiting the Basement Extension to 2 zones (ie Zone B and Zone C only). This is acceptable as the Basement Extension was formerly occupied as ancillary offices which should have commanded a higher rate than a storage space. This revision produces a valuation of $59,880,600.

112.  According to Mr Charles Chan, the two floors of Gay Mansion were restricted by Government Lease to carparking purposes and were so designed under the approved building plans or occupation permit[41]. He found that the premises were then sold subject a lease letting to a pet hotel at an initial yield of about 6.28% when the normal market yield was in the order of 4%. In comparison, Mr Charles Chan considers the risk of enforcement against the Basement Extension to be higher and the required yield should be 8% instead, ie a discount in the yield by 50%. He decides therefore to apply a higher discount of 50% to arrive at $29,940,300 for the EUV of the Basement Extension.[42]

113.  The Tribunal has only applied the zoning valuation approach in exceptional situation[43]. In Zhuang PP Holdings Ltd v Lam How Mun Peter and others, HCA 1589/2003, (unreported, dated 19 August 2009) (“Zhuang PP Holdings”) Deputy Judge To (as he then was) remarked at §107 that “(i)t is useful for shops of irregular shape and greater depths.”

114.  We agree that in the present case when the Basement Extension extends to some 345 metres from street frontages, it is tantamount to a shop unit with Garage 2A as shop front and we agree that, in the absence of appropriate comparable evidence for a shop of this depth, the zoning conversion is applicable. This is based on the principle that the area closest to the frontage (Zone A) is the most valuable part of a shop, as it provides the most prominent selling space, and the value per unit of area decreases as the distance from the front of the shop increases.

115.  When a value per square metre is arrived at Zone A by reference to sales or lettings of comparables, rates for the other zones in the rear will be derived formulaically and from that the value for the shop is calculated. A process, often known as ‘halving back”, which is adopted by Mr Charles Chan, is used most extensively but its application is restricted when further reduction would not be sensible.

116.  Even in the United Kingdom where the zoning approach is originated, it seldom goes beyond the 3^rd or 4^th zones otherwise the value per square meter derived therefrom for the latter zone(s) would become unrealistically low. We agree therefore the initial approach taken by Mr Charles Chan in continuing to half-back up to the “F” zone was unreasonable; his revision as presented atExhibit A1 which comprises only Zone A, Zone B, Zone C but no further zones at the beginning of the trial is preferred. Indeed, Mr C K Chan stated in his Rebuttal Report dated 25 November 2015 as follows:

“Even if the Unauthorised Portion was to be valued, only the front part of it, which was accessible from the garage, should be treated as Zone B while the exclusive passage and the entire “rear part” should be valued as one storage space without applying the reduced zoning method ...”[44]

117.  We also agree with Mr Charles Chan that the value of his revised Zone C should not be as low as a rate for storage area (which has been agreed by the two valuation experts at $72,850/sq m). On the one hand, it did not seem to be disputed that the Basement Extension was previously occupied by the advertising department of Yue Hwa Chinese Products Emporium Limited as office. This refutes Mr C K Chan’s suggestion that the Basement Extension cannot sustain any retail or commercial use because of insufficient headroom and lack of ventilation etc. On the other hand, it is the evidence of Mr C K Chan that there exists demand for space of considerable size in the vicinity which would attract large space users like baby gyms and supermarket etc. We consider that the Basement Extension would have attraction to such business also if its existence were authorized. The fact that the Basement Extension had been used and occupied by Yue Hwa Chinese Products Emporium Limited for more than 10 years cannot be disregarded.

118.  Having said that, we bear in mind there is always the possibility that the landlord might be ordered to rectify the irregularity and to carry out reinstatement. We would also take into account that market value is reflected by lump sum and not by rental income to be received over a period of time. Notwithstanding Mr Charles Chan’s analysis on the sale of Basement and Shops B & C on Ground Floor, Gay Mansion of 66 Waterloo Road, we are prepared to adopt a discount of 75% as opposed to 50% as suggested by Mr Charles Chan[45]. On the other hand, we do not agree with Mr Chang’s submitting for R1 that the risk of enforcement is of a total different nature and cannot be sufficiently dealt with by giving a discount. He said that if the change of use in Gay Mansion is enforced by the Government, the premises could be put back to its original use without many difficulties but in the case of the Basement Extension, it may have to be refilled at substantial cost. We therefore allow a substantial discount up to 75%. We consider it adequate to encompass the cost of reinstatement, if any[46].

119.  Thus our valuation of the EUV of the Basement Extension as at 25 August 2014 is:

$59,880,600 x 25% = $14,970,150 say $15,000,000

EUV for Ground Floor Units

120.  On the first day of the trial, all parties including R2 signed an agreement which concurred with the opinion of the 2 valuation experts that the EUV for the units on Ground Floor as at 25 August 2014 would have a higher value for domestic purpose than for non-domestic purpose (perhaps for it being not abutting Tak Shing Street). In this regard, we are no longer required to discuss the argument of R2 that his unit should have a higher value based on the prevailing use as a clinic. This is particularly the case when, as mentioned above, as provided in Part I of Schedule 1 to the Ordinance, the units should be assessed on a vacant possession basis.

121.  In addition to the above agreement, the 2 valuation experts agreed to adopt the following comparables for the purpose of assessing the EUV of Pak Cheung House as at 25 August 2014 on the basis of domestic use:

Comp Ref	Address	Age of Building	Date of Sale	Consideration	Saleable Area (m2)	Unit Price (/m2)
AR8	Flat B1, 13/F, Hong Yuen Court, 1-5 Tak Shing Street	1980	1 Sep 14	$7,038,000	55.50	$126,811
AR9	Flat B6, 7/F, Fortune Terrace, 4-16 Tak Shing Street	1978	14 Aug 14	$6,350,000	47.30	$134,249
AR10	Flat B1, 4/F, Fortune Terrace, 4-16 Tak Shing Street	1978	12 Aug 14	$5,470,000	42.30	$129,314
AR11	Flat B1, 12/F, Hong Yuen Court, 1-5 Tak Shing Street	1980	30 Jul 14	$6,900,000	55.50	$124,324
AR12	Flat A4, 5/F, Pak On Building, 1A Tak Shing Street / 105 Austin Road	1963	13 Jul 14	$5,850,000	63.60	$91,981
AR13	Flat B6, 3/F, Fortune Terrace, 4-16 Tak Shing Street	1978	20 Jun 14	$5,950,000	47.30	$125,793
AR14	Flat B4, 12/F, Hong Yuen Court, 1-5 Tak Shing Street	1980	30 Apr 14	$6,200,000	54.40	$113,971
AR15	Flat B2, 6/F, Hong Yuen Court, 1-5 Tak Shing Street	1980	13 Feb 14	$6,300,000	55.50	$113,514

122.  Mr Charles Chan and Mr C K Chan further set out the following adjustments, if any:

Factors of Adjustment	Mr Charles Chan	Mr C K Chan	Agreement
Floor Level	+/-1% per floor	+/-0.5% per floor	+/-1% per floor
Building Age	+/-0.25% per year	+/-0.5% per year	No Agreement
Physical Condition/ Building Management	-6% to 0%	Not allowed	No Agreement
View	-5% to 0%	-3% to 0%	No Agreement
Orientation	Not allowed	-2% for comparables facing South	No Agreement
Private Garden	Not allowed	2% for units in Hong Yuen Court & Pak On Building	No Agreement
Lighting & Ventilation	-3% to 0%	Not allowed on the ground that it has been reflected in Floor Level and Orientation adjustments	No Agreement

123.  Mr Charles Chan and Mr C K Chan could not however agree on a reference unit for the sake of comparison: Mr Charles Chan chooses 3/F, 2C Tak Shing Street while Mr C K Chan chooses 5/F, 2E Tak Shing Street, ie unit on the same floor as R1’s for the reason that it shares similar floor level and orientation and saleable area of most of the comparables. Otherwise, Mr Charles Chan’s assessment of $98,000/sq m would not be significantly different from Mr C K Chan’s $105,200/sq m.

124.  On the other hand, they are able to agree that effectively there are 7 floors of domestic unit. In such regard, we are prepared to adopt the reference unit chosen by Mr Charles Chan, ie 3/F, 2C Tak Shing Street which is located on the mid-floor of Pak Cheung House.

125.  As regards time adjustments, we note that both valuation experts make reference to the RVD Price Index for Class A, B & C (ie saleable area from less than 40 m² to 99.9 m²). Furthermore, we note that all comparables fall into Class B (with saleable area of 40 m² to 69.9 m²) whereas the reference unit (of either Mr Charles Chan or Mr C K Chan’s) belongs to Class C (with saleable area of 70 m² to 99.9 m²); each class would have its own index. As such, we consider that the time adjustments are only approximate and we are content to adopt the rounded off figure proposed by Mr Charles Chan instead of Mr C K Chan’s which goes to one decimal point.

126.  For the age adjustments, we note even the latest comparables (ie Hong Yuen Court) are aged from 1980 ie about 34 years as at 25 August 2014; the difference in opinion on the effect of age per se on value should not be significant. In that regard, we are content to split the difference between the proposal by Mr Charles Chan and Mr C K Chan. Having said that, we are not prepared to allow a further adjustment for physical condition/building management as proposed by Mr Charles Chan.

127.  For the adjustments on view, we note the difference between Mr Charles Chan and Mr C K Chan is about 2%; however, if this is considered in conjunction with Mr C K Chan’s proposed adjustment on orientation, most of the differences are gone. In any event, the difference of 2% is insignificant. We are prepared therefore to adopt Mr Charles Chan’s figures as he has been able to view all except 1 of the units in the Building and should have a more thorough understanding of the units on relevant aspects.

128.  On the other hand, having conducted a joint inspection of Pak Cheung House, we consider the adjustment proposed for the comparables in Hong Yuen Court and Pak On Building by Mr C K Chan on the “private garden” appear to be justified. Although we agree that the open yard on Ground Floor in front of Units 2C, 2D and 2E, Ground Floor are common parts, their presence does add amenity value to the units in Pak Cheung House. In contrast, we do not agree with the adjustments proposed by Mr Charles Chan on lighting and ventilation.

129.  Thus our assessment of the EUV for the reference unit, ie 3/F, 2C Tak Shing Street as at 25 August 2014 is as follows:

Comp Ref	Unit Price (/m2)	Adjustments							Adjusted Unit Price (/m2)
		Time	Private Garden	Age	Floor	Size*	View	Total
AR8	$126,811	-2%	2%	-9%	-9%	-2%	-5%	-22.9%	$97,771
AR9	$134,249	0%	0%	-8%	-3%	-3%	-5%	-17.8%	$110,353
AR10	$129,314	0%	0%	-8%	0%	-4%	0%	-11.7%	$114,184
AR11	$124,324	2%	2%	-9%	-8%	-2%	-5%	-18.9%	$100,827
AR12	$91,981	2%	2%	-2%	-1%	-1%	0%	-0.1%	$91,889
AR13	$125,793	4%	0%	-8%	1%	-3%	-5%	-10.9%	$112,082
AR14	$113,971	7%	2%	-9%	-8%	-2%	-5%	-14.9%	$96,989
AR15	$113,514	7%	2%	-9%	-2%	-2%	-2%	-6.5%	$106,136
							Average:		$103,779
							Say:		$103,800

* Both Mr Charles Chan and Mr C K Chan agree that the adjustment on size should be +/-1 per 10 sq m.

130.  Having assessed the EUV of the reference unit at $103,800/sq m, we proceed to determine the EUV of other domestic units in these proceedings which include the units on Ground Floor.

131.  As discussed above, there are ancillary areas appurtenant to the various units on Ground Floor including Unit 2D, ie R2’s unit. As a matter of common sense, these ancillary areas would not be worth the same unit price as that of the saleable area of the unit itself. By reference to the Code of Measuring Practice published by the Hong Kong Institute of Surveyors (1^st edition, March 1999), the saleable area of a unit comprises the floor area exclusively allocated to that unit including balconies and other similar features but excluding common areas such as staircases, lift shafts, lobbies and communal toilets. It shall be the area contained within the enclosing walls of the unit measured up to the exterior face of an external wall or the centre line of a separating wall between adjoining units, as the case may be. On the other hand ancillary accommodation such as cocklofts, bay windows, yards, terraces, gardens, flat roofs and the like shall be measured as attachments or additions and to be stated separately with their respective areas. Similar definition of saleable area can be found in section 8 of the Residential Properties (First-hand Sales) Ordinance, Cap 621.

132.  Thus, we list below the saleable areas of the units on Ground Floor agreed by the valuation experts. As well, their ancillary accommodation (if any) and the corresponding values in terms of main space (“ITMS”) agreed by the 2 experts at trial on 21 June 2016 are as follows:

Unit on Ground Floor		Saleable Area	Area of Ancillary Accommodation	ITMS
2A:		105.5 sq m
	Enclosed Yard:		27.8 sq m	11.25%
2B:		103.9 sq m
2C:		81.4 sq m		11.25%
	Enclosed Yard:		18.8 sq m
2D:		88.6 sq m
	Enclosed Yard:		29.8 sq m inclusive of illegal structure up to 10.7 sq m	11.25%
	Space under staircase:		3.0 sq m	41.5%
2E:		70.8 sq m
	Enclosed Yard:		53.0 sq m	11.25%
2F:		88.1 sq m
	Enclosed Yard:		47.3 sq m	11.25%

133.  Like the West Yard claimed by R2, there appears to be yards appurtenant to Unit 2A and Unit 2C on Ground Floor at the rear of Unit 2A. These yards appear to have been enclosed for a long time for the use and occupation of the owners/occupiers of the respective units. Similar yards for Unit 2E and Unit 2F on Ground Floor are also noted. We agree to adopt the ITMS stated above except for the area covered by the illegal structure at the enclosed yard for Unit 2D, Ground Floor. In respect of the latter, as discussed in §96 above, we are prepared to adopt an ITMS of 50% instead. [47]

EUV of Other Domestic Units

134.  In respect of the other adjustments to the reference units, Mr Charles Chan and Mr C K Chan come up with the following agreements or disagreements:

Factors of Adjustment	Mr Charles Chan	Mr C K Chan	Agreement
View	+2% for 2A & 2B units facing Tak Shing Street; 0% for the rest	+3% for 2A & 2B units facing Tak Shing Street	No Agreement
Orientation	Not allowed	+2% for 2A & 2B units facing south	No Agreement
Internal Condition	Unacceptable: -6% Very Poor: -3% Poor: 0%[48] Fair: +3%	Not allowed	No Agreement
Layout	Not allowed	+3% for 2A-2D units	No Agreement
Lighting & Ventilation	+3% for 2A & 2B units facing Tak Shing Street 0% for the rest	Not allowed	No Agreement
Reinstatement Cost on 2C, 5/F	Not allowed	Allowed $100,000	No reinstatement cost to be allowed
Assessment of Market Value of 7/F Units	Applied same valuation approach as for other units plus -3% top floor adjustment	An overall adjustment of -2% to the adopted 6/F unit rate of each respective unit	No Agreement despite Mr Charles Chan considers the two approaches produce the same result

135.  Considering the proposed adjustments by the 2 experts on view, orientation and lighting & ventilation in conjunction, we find that the 2 experts had produced the same total adjustments. In this regard, it does not matter whose approach is to be preferred.

136.  As regards the adjustments on internal condition, we are content to adopt those proposed by Mr Charles Chan because he has the benefit to view all except 1 of the units (Unit 2D, 4/F) and should have a more thorough understanding of the internal condition of the units. After our joint inspection on 21 June 2016, Mr Charles Chan was invited to inspect Unit 2B 4/F by the 1^st named R6. He revises his assessment of this unit from “poor’ to “fair”. We agree with such adjustment.

137.  In addition, Mr Charles Chan notes that there exists an unauthorised extension in this unit of up to 8 sq m. He is prepared to apply a conversion factor ie ITMS of 50% for this extension which is consistent with our view on assessing the EUV of the illegal structure at the enclosed yard for Unit 2D, Ground Floor. We agree.

138.  In respect of layout adjustment, however, we are not persuaded that the 2A-2D units are better by reference to their floor plans. This is particularly the case when old units are purchased, new purchasers are prepared to renovate the units including installing new partitioning. Moreover, Mr C K Chan had inspected a few domestic units only but relied only on the approved floor plans to make his assessment. The problem is the approved floor plans might not reflect the prevailing conditions of the units. For instance, R1’s unit has been subdivided into 8 units/rooms with 1 open kitchen and 1 washroom. This is not shown on the approved floor plans.

139.  As for the assessment of the units on 7/F, we agree with Mr Charles Chan that the 2 approaches would eventually come up with approximately the same results[49]. It seems that there is no dispute on the value for the appurtenant top roof for Units 2A and 2B to be valued at 1/8 of the units (ie an ITMS of 12.5%).

Conclusion on EUV

140.  By reference to the above, we have determined the EUV of the domestic units (including their appurtenance thereto) at Appendix 1 of this judgment.

141.  Thus, the total EUV of all units in Pak Cheung House is as follows:

Portion	Basis of Assessment	EUV*
Garages 2A & 2B	Non-domestic purpose	$29,470,000[50]
The Basement Extension (unauthorised)	Non-domestic purpose	$15,000,000[51]
G/F – 7/F	Domestic purposes	$458,270,000
		$502,740,000

* Assessed market value pursuant to Part 1 of Schedule 1 to the Ordinance.

142.  Thus our assessment of EUV in respect of the units of the various respondents as pro rata of the total EUV of Pak Cheung House as at 25 August 2014 is as follows:

Respondent	Interest in Unit (if any)	EUV	Pro Rata of Total EUV
R1	5/F, No 2C Tak Shing Street	$8,880,000	1.7663%
R2	G/F, No 2D Tak Shing Street	$10,200,000	2.0289%
R3	4/F, No 2D Tak Shing Street	$9,200,000	1.8300%
R6	4/F, No 2B Tak Shing Street	$12,070,000	2.4008%

Disputes on the estimation of the RDV of the Lots

Optimum hypothetical development model

143.  The two valuation experts resort to the residual valuation method in determining the redevelopment value (“RDV”) of the Lots. This is done by deducting development costs (including construction cost, professional fees, finance costs etc) and developer’s profit from the estimated gross development value of the completed optimum development.

144.  Initially there was dispute between the 2 experts on the hypothetical development model.On the 5^th day of the trial (ie 24 June 2016), however, all parties signed an agreement that “irrespective of the position in law and irrespective of any policy on the part of any government department, the applicants, R1 and R2 requested the Lands Tribunal to decide the RDV on the basis of a model for development consisting of the following agreed features:

(1)  Building height = 91.6 m PD

(2)  58 carparking spaces (not GFA countable)

(3)  230 flats, and

(4)  By application of all RDV comparables already produced by Mr Charles Chan and Mr C K Chan.”

145.  Notwithstanding the above, the valuation results of the 2 valuation experts are widely apart: Mr Charles Chan’s is $841,000,000 (ie an accommodation value of about $100,900/sq m) while that of Mr C K Chan’s is $1,620,600,000 (ie an accommodation value of about $194,830/sq m). At trial, Mr C K Chan conceded that there might be a further discount of 10% (ie a total of 20%) to his comparables for the retail premises. His revised valuation becomes $1,572,900,000 (ie an accommodation value of about $189,000/sq m).

146.  Indeed, the major shortcoming of the residual valuation method is that there are many variables or assumptions as to inputs so that a minor variation in any of the factors involved may be compounded when they are carried forward throughout the lifespan of the project, thus producing a major effect on the final value of the scheme.[52] In the professional guidance: Valuation of Development Land, Hong Kong, 1st edition published by the Royal Institution of Chartered Surveyors, which must be familiar to all surveyors, it is recommended that an attempt be made by the valuers to compare the result with such market evidence as may exist because the residual method sometimes produces theoretical results that are out of line with prices being achieved in the market.

147.  As we shall see, there are many differences in opinion between the 2 valuation experts even on the agreed hypothetical development model itself. They are as follows:

	Mr Charels Chan’s model[53]	Mr C K Chan’s model[54]
Area of Site	986.1 sq m
Hypothetical development:	Commercial/ Residential
Height Limit:	91.6 mPD
Storey Height:	G/F: 3.9 m 1/F: 3.0 m Residential Floor above: 3.1 m each
Plot Ratio (“PR”) and Gross Floor Area (“GFA”)	Domestic PR = 7.487 Non-domestic PR = 0.9619 Total PR = 8.4489 Total GFA = 8,331.4 sq m	Domestic PR = 7.5 Non-domestic PR = 0.937 Total PR = 8.437 Total GFA = 8,318 sq m
Basement:
-       Number of Car Parks	58
-       Size	3 basement floors with lowest floor taking up whole floor of the site	2.5 basement floors with lowest floor taking up half of the site
-       Plant Room / E & M Room	Plant Room of 166 sq m on basement 1	E & M room of 5 sq m on each basement floor
G/F
-       Retail (Saleable Area)	563.4 sq m	646.6 sq m
-       Residential Lobby	120 sq m	67 sq m
-       Plant Rooms / E & M room	83 sq m	Transformer Room of 16.5 sq m and E & M room of 5 sq m
1/F
-       Retail (Saleable Area)	365 sq m	207.4 sq m
-       Common Parts	39 sq m	39 sq m
-       Club House	351 sq m	354.5 sq m
-       Commercial Flat Roof	231.1 sq m	293.2 sq m
Residential Floors above
-       Flat Roof on 2/F	440.91 sq m	372.3 sq m
-       Number of Storeys	23 (2/F to 24/F)
-       Number of Units	230 (10 units on each floor)
-       Size of Residential (Saleable Area)	6,016.5 sq m	6,287 sq m
-       Common Parts	70 sq m per floor	62 sq m* per floor

* This is not exactly correct as there are also 2 sq m per floor for E & M room. The total therefore should be 64 sq m.

148.  In gist, with regard to plot ratio and the GFA, the main difference between Mr Charles Chan and Mr C K Chan is that the former tends to maximize the total permissible plot ratio whereas Mr C K Chan considers the maximum domestic plot ratio has to be safeguarded in spite of the loss of gross floor area of the non-domestic part.

149.  In support of his hypothetical development, Mr C K Chan has also attached to his Rebuttal Report dated 25 November 2015 various schematic drawings attached to the latest planning application No A/K1/252 (“the 252 Application”) in respect of the Lots by the applicants:. See D8/2475-2487. It is not disputed that this planning application has been withdrawn by the applicants. The 252 Application nevertheless supports Mr Charles Chan’s model rather than Mr C K Chan’s regarding the Basement. In the absence of further evidence to the contrary Mr Charles Chan’s model regarding the Basement is preferred.

150.  Again with the benefit of these schematic drawings, Mr C K Chan had conducted meticulous calculations of the respective floor areas for the Ground Floor and First Floor of the hypothetical development. See D8/2487-39 & D8/2487-44 to D8/2487-53.

151.  On the other hand, Mr Charles Chan had once relied on the schematic drawings in support of an earlier planning application No A/K1/246 (“the 246 Application”) which was later withdrawn. We note the main difference between the 2 applications is that in the 246 Application there were 2 podium levels whereas in the 252 Application, there were 3 podium levels so that the club house and a large plant room can be housed on 2/F ie the 3^rd podium level. Not surprisingly, as a result, the layout of the G/F and 1/F are different. We have scrutinized the drawings. We are not persuaded that there should be so many common corridors and such a large landscaped garden at the rear of G/F in the 246 Application. We prefer the saleable areas determined by Mr C K Chan for the proposed G/F and 1/F.

152.  As regards the saleable areas of the upper floors, the greatest dispute between the 2 experts lies on the area of common parts. Typical floor plans of Parkes Residence, The Paseo and AVA62 transactions of which will be adopted for the purpose of assessing the values of the proposed hypothetical development, ie the gross development value (“GDV”) are also provided for reference:

Name of Development	No of Units per Floor	No of Stairwells	No of Lifts	Area of Common Parts
Parkes Residence	6	2 (with traditional 2-flight staircases)	2	57.93 m2
The Paseo	3	1 ( with a pair of scissors staircases*)	1	43.79 m2
AVA 62	4	1 ( with a pair of scissors staircases*)	2	42.41 m2

* According to paragraph 15.4 of the Commentaries in the Code of Practice for the Provision of Means of Escape in Case of Fire 1996 published by the Buildings Department, “(a)s the number of people that can be temporarily housed in a scissors staircase is approximately 70% of that in a 2-flight staircase, a reduction factor of 0.7 is applied where the exit staircases is a scissors staircases without any intermediate landing between 2 consecutive floors.”

153.  Mr Fung, in his closing submission, however submitted that it is inappropriate to make reference to the above 3 new developments for the purposes of estimating the necessary common area on each of the domestic floor in the hypothetical development because the respective number of units on each floor of the 3 developments are much less.

154.  On the other hand, Mr Chang for R1 argues that the proposed 10 units per floor can still be accommodated with a pair of scissors staircases rather than the provision of 2 stairwells as in Parkes Residence and as such Mr C K Chan’s proposed common areas of 62 sq m per floor should be adequate.

155.  We note the typical floor plan (3/F-22/F) of the schematic drawing in support of the latest planning application No A/K1/252 show 12 units per floor but no dimension was shown.

156.  With a postulation of 10 units per floor, we have carried out a rough measurement based on the typical floor plan of AVA 62 and found 62 sq m per floor for the common parts should be technically feasible[55]. Having said that, we are of the opinion that the layout of the typical floor with 10 units per floor being served by 2 lifts (instead of 3) and a set of scissors staircases looks very unattractive; in the words of Mr Charles Chan, the class of the development may be lowered. We shall bear this in mind when we deal with the analysis of the comparables later.

157.  In other words, save for the basement floors, all dimensions or saleable areas of the hypothetical development proposed by Mr C K Chan are accepted.

Assessment of the value for G/F

158.  Next, as the 2 experts agree that each of the 58 carparking spaces can be worth $1,200,000 each, we proceed to deal with the comparables for the ground floor accommodation:

Comp Ref	Address	Age of Building	Date of Sale	Consideration	Saleable Area (m2)	Frontage (m)	Headroom (m)	Unit Price (/m2)
1.	G/F, City 18, 18 Tak Hing Street (incl Advertising Space 1 & Ext Portion 1)	2007	27 May 15	$55,000,000	140.1	6.2	5.0	$392,577
2.	Shop 5, G/F, Block A, Fortune Terrace, 4-16 Tak Shing Street	1978	21 Jun 13	$27,000,000	65.4	5.3	5.2	$412,844
3.	Shop 4, G/F, Hillwood Court, 22-28 Hillwood Road	1975	19 Mar 16	$18,000,000	18.19	3.1	3.0	$989,555
4.	Shop B, Block A, G/F, Austin Mansion, 15A Austin Avenue	1959	10 Mar 16	$17,680,000	31.52	4.0	4.0	$560,914
5.	Shop 5, G/F, AVA 62, 62 Shanghai Street	2017	27 Nov 15	$23,075,000	21.25	2.7	5.7	$1,085,882

159.  The first 2 comparables were agreed by the 2 valuation experts initially on 15 December 2015, the second one was indeed the same comparable adopted in assessing the EUV as at 25 August 2014.

160.  The last 3 comparables are introduced by Mr C K Chan on the ground that they are more recent transactions that may reflect the prevailing market value better.

161.  Mr Charles Chan comments that these later comparables are inappropriate for the following reasons[56]:

(1)  they are too small, with sizes of approximately 20 sq m to 30 sq m when compared with the much larger size of the ground floor retail space of the hypothetical development;

(2)  their depths are too shallow when compared with the long depth of the ground floor retail space of the hypothetical development;

(3)  if the large ground floor retail space of the hypothetical development is sub-divided into a number of small shops, only a small portion can have frontage onto Tak Shing Street; the remaining retail space should have frontage onto service lane or have no street frontage and the unit value of the remaining portion should be substantially lower;

(4)  the last comparable, being the shop of AVA 62 is a pre-sale transaction with a far completion date comprising a speculative elements; and

(5)  Hillwood Road is famous for restaurants and the comparable at this street should be considered superior to the subject.

162.  We consider the comments by Mr Charles Chan above validly made. A reasonable valuer would have taken another look at the comparables to see if they are sufficiently similar for them to be used in the valuation. As identified by DHCJ Cruden (as he then was) in his popular textbook, Land Compensation & Valuation Law in Hong Kong, 3^rd Edition (2009) at pp 596 and 597 on “Adjustment under the Comparative Method of Valuation”:

“Under the comparative method the valuer is required to exercise a twofold skill. First, in finding comparables sufficiently similar to the property being valued that they require minimal adjustment. Secondly, in making any necessary adjustments...” (underline added)

“However, a careful analysis can only provide useful evidence or enable realistic adjustments to be made where the comparables are sufficiently similar to the property being valued. If the comparables are not reasonably similar, then no matter how detailed the subsequent analysis, the result may well be spurious. The point was emphasized in Lait Kit Lau Mutual Aid Committee v Commissioner of Rating and Valuation [1984] HKDCLR 31...” (underline added)

163.  We agree that these comparables by Mr C K Chan are too small in size that more often they belong to a different market which may command values that cannot be readily applied to shops of larger size by just imposing a discount or otherwise. Also they are situated relatively far away from Tak Shing Street where subjective adjustments for location have to be made. The latter is particularly the case for the comparables situated at Hillwood Road or Austin Avenue which, as suggested by Mr Charles Chan, has a different character or as suggested by Mr C K Chan himself in Cheer Capital, may enjoy an “agglomeration effect”

164.  The same is also true for the comparable situated at Shanghai Street which, when compared with the Lots, is situated on the other side of Nathan Road. As remarked by the Tribunal in Urban Parking Limited v Commissioner of Rating and Valuation, LDRA 377 & 378/2002 (unreported, 10 September 2003):

“16. I find that the choice of the most relevant and suitable comparables in this appeal is a matter of fact finding only. I do not agree ... that because all Mr. Wong's comparables were located in the same Shatin district, they should be considered as suitable comparables for the tenement. Shatin district is a geographical district for census, planning, land and other civil administration purpose. It is not necessarily the case that properties located within the same Shatin district are appropriate comparables to each other. This is the same regardless of whether the properties in question are residential, commercial, industrial or special properties.

17. Therefore, I find that the general rule of valuation for properties should still apply in the present rating appeal regardless of whether the tenement, or fee-paying open car-parks are special properties or not. That is, if suitable comparables are available in locations close to the subject tenement, they are invariably preferred to the other comparables, even though the latter were also located in the same district of Shatin.” (emphasis added)

165.  Our observation above is particularly justified when Mr C K Chan, based on his 3 new comparables, arrived at a unit price of $868,400/sq m for the subject hypothetical development.[57] Although he made a further allowance of -10% “to reflect mainly the large size of shop”, the resultant figure comes up to $781,600/sq m.

166.  Mr C K Chan, during cross-examination, conceded that the discount could be -20% or more, the latter being subject to the bargaining power of the negotiating parties. Firstly, we observe that the discount of --20%, resulting in a unit price of $694,700/sq m, is still inadequate. When this is compared with his EUV assessment as at 25 August 2014 at $434,725/sq m, this suggests an increase in value of 1.6 times in a period of less than 2 years when the RVD price index has decreased from 525.2 to 524.4. We do not find any evidence which may support the price change in the subject area so vastly different from the market. The inevitable conclusion is that Mr C K Chan must be either wrong in his valuation as at 25 August 2014 or at the current date. If Mr C K Chan insists that his latter valuation is correct and not the former, he should have taken up the task of reviewing the former; otherwise, it casts grave doubt on the reliability of his valuation.

167.  We are also surprised to hear Mr C K Chan’s saying that his valuation could be “subject to the bargaining power of the negotiating parties”. We appreciate that the property market is imperfect and prices are subject to vagaries; however the role of an expert valuer is to provide his opinion on the market value as defined by law or by his profession as opposed to predicting the market price on basis of irrelevant factors. For instance, according to paragraph 2.1 of the HKIS Valuation Standards, 2012 Edition:

“Valuations to be made based on market value shall adopt the definition and conceptual framework as settled by the IVSC in the IVS.

The term, Market Value, is defined by the IVS and followed by the Standards as “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”. [58]”

168.  Further, at Commentaries that follows:

“(2) The concept of market value presumes that a price is negotiated

in an open and competitive market....”

169.  Thus, the definition of Market Value has already envisaged negotiation to have taken place but it requires an estimated amount to be made by the valuer. If Mr C K Chan really meant what he said, he was not abiding by his professional requirement to provide a Market Value; his “professional opinion”, in these circumstances, is meaningless.

170.  We appreciate that the 2 remaining comparables are dated and that the reliability of the transaction evidence decreases the further the dates of the transactions are apart from the current date. However, in the absence of substantial comparable evidence available, when “comparables are available in locations close to the subject tenement, they are invariably preferred to the other comparables”. It also happens that although the 2 comparables are dated, the RVD price index shows that the time adjustment required would be at the minimum; that is, any error resulting from the time adjustment would be minimal.

171.  Thus, we agree to the assessment by Mr Charles Chan on the premise of front portion of a hypothetical unit on ground floor of 176.9 sq m, having a frontage of 8.7 m and a depth of 21 m as follows:

When compared with a hypothetical unit		Adjustments								Adjusted Unit Price /m2
Comp Ref	Unit Price/m2	Time	Location	Size	Age	Frontage	Layout	Headroom	Total
1.	$392,577	-8.0%	10.0%	-4%	2.0%	5.0%	0.0%	-4.0%	-0.1%	$392,184
2.	$412,844	0.0%	0.0%	-11.0%	8.0%	7.0%	-5.0%	-5.0%	-7.2%	$383,119
								Average:		$387,652
								Say:		$388,000

172.  While we note likewise there is a difference in value between $429,000/sq m as at 25 August 2014 and $388,000/sq m here, such difference can be explained away because the hypothetical unit is different in size, frontage and depth when compared with either Garage 2A or 2B.

173.  Perhaps what has disturbed Mr Chang for R1 most is the further discount of 2/3 applied by Mr Charles Chan to arrive at the unit price for the rear portion at $129,333/sq m. However, similar approach taken by Mr Charles Chan was approved by the Tribunal in Harvest Treasure Limited & Others v Cheung Fat Enterprises Limited & Others, LDCS 8000/2014 (unreported, dated 31 December 2015) which is hereinafter referred to as Harvest Treasure.

174.  In effect, as in Harvest Treasure, Mr Charles Chan divides the hypothetical shop unit into two zones, the front portion being the area from the entrance of the shop at Tak Shing Street to a depth of 21 m; and the rear portion being the area beyond. It may be less desirable that in comparison with the analyzing and valuation of the Basement Extension as at 25 August 2014, Mr Charles Chan has assumed a different zonal depth for the first zone[59]. However, zoning is not a method of valuation but a means of comparing one shop with another for analysis and valuation.

175.  In his closing submission, Mr Chang sought to rely on Ngai Kai Suen v Director of Lands [1994] HKDCLR 123 at 127 in which DHCJ Cruden (as he then was) rejected the reduced zoning method and said:

“...... Zoning does recognise the higher value of a shop frontage. However, dividing areas towards the rear into zones, in an attempt to determine their lesser value, is unnecessarily arbitrary and can often be inaccurate.

The better approach is simply to value on a unit per metre frontage basis, provided the depths of the comparables, are similar to the subject property. Any small variation in depth can be allowed for by way of a percentage or factor allowance. For example, the subject property is roughly 10 metres deep. If it is compared with shops of the same or very similar depths, the rate per metre frontage, can be compared directly rather than the rate per square metre area.

Where the depths to be compared are more varied, Dept Tables have elsewhere been devised, to allow for these larger differences. However, before being adapted to Hong Kong or other localities, they would have to be compared to the current local market, to ensure that they are appropriate for local circumstances. Where they are applicable, variations for depth are made by applying factors appropriate to the depths more or less than the standard. As depths increase, the fact that proportionate value decreases, is provided for by the application of the factor appropriate to the particular depth, until the point is reached where extra depths adds no value. Although frontage was very much in issue, neither valuer used this method, so we are unable to consider its application in the present proceedings.” (emphasis added)

176.  The citation above is however subject to a caveat that “provided the depths of the comparables are similar to the subject property.” This case was also considered in Zhuang PP Holdings but DHCJ To (as he then was) still considered the reduced zoning method acceptable.

177.  On the other hand, even in the United Kingdom where the zoning method originates, the approach to zoning using predetermined zone depths and halving back of values is not the only way of analyzing shop values.[60]

178.  Indeed, there is no hard and fast rule on the zonal depth; sometimes, natural zoning by reference to the actual configuration of the shop to be valued or the common depth of comparables are adopted. For instance, the highest value zone, Zone A, appears to be the approximate depth of the shallowest portion for the hypothetical shop unit before it expands to the whole width of the site like an inverted “L”.

179.  We note also that Mr Charles Chan has applied a discount of 2/3 or an ITMS of 1/3 instead of 1/4 which he had adopted in Harvest Treasure. In any event, the $129,333/sq m he arrives at is slightly higher than $117,000/sq m he adopts for Zone C in evaluating the Basement Extension.

180.  We are satisfied that the unit rates of $388,000/sq m and $129,333/sq m are applicable to valuing the hypothetical shop unit.

Assessment of the value for 1/F

181.  The 2 valuation experts were able to agree at the beginning of the trial, that whatever rate was determined by the Tribunal for the shop(s) on Ground Floor, they were content to adopt 1/3 of it for the 1/F. Thus, the unit rate for 1/F, being 1/3 of $388,000/sq m is again $129,333/sq m (but the total area on 1/F is significantly less).

Assessment of the value for the upper floors

182.  As mentioned earlier at §152 above, both Mr Charles Chan and Mr C K Chan refer to sales in 3 new developments, namely Parkes Residence, The Paseo and AVA 62 as comparables. Initially Mr Charles Chan adopted the following provisional agreements for sale and purchase as comparables:

Parkes Residence, completed in end of 2015
Ref:	Flat	Floor	Date of Sale Agreement	Consideration	Saleable Area (sq m)	Unit Price (/sq m)
1.	F	8	25 May 16	$5,329,000	22.813	$233,600
2.	D	7	3 May 16	$5,345,000	22.994	$232,000
3.	A	22	9 Jan 16	$6,373,000	22.813	$279,400

The Paseo, to be complete in end of 2016
Ref:	Flat	Floor	Date of Sale Agreement	Consideration	Saleable Area (sq m)	Unit Price (/sq m)
1.	B	15	16 Apr 16	$5,231,000	19.520	$268,000
2.	C	9	16 Apr 16	$5,360,000	20.625	$259,900
3.	A	18	17 Dec 15	$5,632,000	20.355	$276,700
4.	B	18	17 Dec 15	$5,357,000	19.520	$274,400
5.	B	20	1 Nov 15	$5,443,000	19.520	$278,800
6.	C	20	1 Nov 15	$5,894,000	20.625	$285,800

AVA 62, to be complete in end of 2017
Ref:	Flat	Floor	Date of Sale Agreement	Consideration	Saleable Area (sq m)	Unit Price (/sq m)
1.	A	27	25 Apr 16	$5,763,000	23.468	$245,600
2.	D	26	10 Apr 16	$5,169,000	18.622	$277,600
3.	C	20	28 Mar 16	$4,645,000	16.075	$289,000
4.	D	27	25 Mar 16	$5,205,000	18.622	$279,500
5.	D	25	1 Jan 16	$5,035,000	18.622	$270,400
6.	A	28	1 Jan 16	$6,381,000	23.468	$271,900
7.	C	22	25 Nov 15	$4,047,000	16.075	$251,800
8.	C	25	16 Nov 15	$4,087,000	16.075	$254,200
9.	B	22	15 Nov 15	$4,577,000	19.104	$239,600
10	C	12	4 Nov 15	$3,884,000	16.075	$241,600
11	A	7	3 Nov 15	$4,823,000	23.468	$205,500
12.	A	21	3 Nov 15	$5,345,000	23.468	$227,800

183.  Mr C K Chan, on the other hand, argues that only the provisional sales in 2016 should be adopted as comparables for the obvious reasons that they are more recent.

184.  On 8 June 2016, the 2 valuation experts agreed that the 2^nd comparable from Parkes Residence, Flat D on 7/F, should be disregarded as the provisional sale and purchase agreement did not proceed further.

185.  In addition, the 2 valuation experts agreed the following:

Adjustment Factor	Adjustment
Floor Level	+/-0.5% per floor
Quantum	Not Allowed
Financial Benefits	Based on the rebate given by the developer after transaction is completed
Time	RVD Private Domestic – Price Indices by Class (A)

186.  However, the 2 valuation experts hold different views on the other adjustment factors:

Adjustment Factor	Mr Charles Chan’s view	Mr C K Chan’s view
Location	Parkes Residence: +5% The Paseo: -5% AVA 62: 0%	Parkes Residence: +10% The Paseo: +10% AVA 62: +10%
Environment		Parkes Residence: +5% The Paseo: +5% AVA 62: +5%
Accessibility	Included in the location adjustment	Parkes Residence: 0% The Paseo: +3% AVA 62: +3%
Floor to Floor Height	Parkes Residence: -2% (3.15 m) The Paseo: 0% (2.8 m) AVA 62: 0% (2.8 m)	Not Allowed
Holding Cost	Upwards adjustment for time lag between delivery of possession of completed unit and full payment	Based on listed price payment terms, no holding cost needs to be allowed
Financial Benefits	Discounts
Lift Provision	Not Allowed	Parkes Residence: 0% The Paseo: +2% AVA 62: 0%

187.  It is noted that at least sales of units in The Paseo and AVA 62 are pre-sale transactions. 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....”

188.  More recently in Good Faith Properties Limited and Others v Cibean Development Company Limited, LDCS 42000/2011 (unreported, dated 31 May 2013) (“Good Faith”), 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.”

189.  In this regard, we agree with Mr Charles Chan that save for Flat A on 27/F and Flat D on 27/F in AVA 62 all the other sales that took place in 2016 should be disregarded because the purchasers did not complete the purchases by cash or immediate mortgage payment but by way of stage payment up to 120 days or 180 days.

190.  For Flat A, 28/F, for instance, the price has been increased from $6,077,000 to $6,381,000 (ie 5%) but if the purchaser can settle the transaction price in 180 days, the purchaser shall be entitled to an “early settlement benefit”. Likewise for Flat C, 20/F and Flat D, 25/F, the prices have been increased from $4,341,000 to $4,645,000 (ie 7%) and $4,795,000 to $5,035,000 (ie 5%) respectively.

191.  For Flat D, 26/F, the price has been increased from $4,827,000 to $5,068,000 then to $5,169,000 (ie a total of 7%) but if the purchaser can settle the transaction price in 120 days, the purchaser shall be entitled to an “early settlement benefit”.

192.  Similarly, for Flat D 27/F, the price has been increased from $4,860,000 to $5,103,000 then to $5,205,000 (ie a total of 7%) but land search from Land Registry shows that the purchaser took out an equitable mortgage within 90 days after the signing of the agreement for sale and purchase and would be entitled to an “early settlement benefit” of 10% of the transaction price (ie not the listed price). This early settlement benefit would have brought the price back to $4,685,000 which is even lower than the price of $4,860,000 as at 30 October 2015.

193.  These stage payments may explain why the unit prices shown appear to be rising in a period when the RVD index has suffered from a drop from 338.2 in September 2015 to about 303 in May 2016. And for this reason, we consider it appropriate and prudent to include those transactions in 2015 instead of merely those in 2016. In any event, when we speak of transactions in 2015, they are transactions in November and December 2015, ie at most 2 months before the arrival of 2016 where the dividing line between 2015 and 2016 appears arbitrary.

194.  Mr C K Chan has tried to argue that the pre-sale proceeds would be held in a trust account accumulating interest or more properly set off or reduce interest on construction cost. He adopts the listed prices of the comparables as they represent what the developer expects to get from selling the project upon completion. However, in the course of cross-examination, he conceded that the discount from the listed price included not only the interest expenses of the developer but other things which he could not identify. We are not persuaded that the listed prices or the prices based on stage payments can be relied on as proceeds receivable by a developer. We are of the view that the listed prices do not always reflect the final sales price.

195.  In comparison, we prefer Mr Charles Chan’s adjustment on Holding Cost as those purchasers on immediate payment terms cannot obtain benefits of enjoyment or occupation until the development is completed. In this regard, we consider the revision of interest cost from 4% to 2.4% fair as the latter appears to be more in line with either the prevailing equitable mortgage interest rates payable by the purchasers or the initial yield reasonably expected from investment on new residential premises. We agree with Mr Charles Chan that the initial adoption of 4%, which is agreed as the interest cost of the developer, is not appropriate to reflect what the purchasers are ready to pay in the prevailing market.

196.  As regards location, this factor is less important for domestic than for retail premises. We agree that the location of Parkes Residence is inferior to that of the Lots but this is not the case for the other 2 developments. While Mr C K Chan is of the view that the Lots are close to Cox’s Road Children Playground, some luxurious club facilities and greens, he might have overlooked that AVA 62 being situated in proximity to King George V Memorial Park, the units at flat As on the higher floors in particular would enjoy relatively better view towards the new Yau Ma Tei Typhoon Shelter and onwards. As for The Paseo in particular, the character of the environment is improving and it lies close to the pedestrian subways leading to Austin Road station and the future West Kowloon Cultural District - a large cultural quarter, blending art, education and public space.Theto-be-complete terminus of the Guangzhou-Shenzhen-Hong Kong Express Rail Link is also in its proximity. Indeed, as we shall see, where Mr C K Chan is considering the hypothetical development so much better in location etc, he somehow insists that the construction quality for the hypothetical development to be of “High Quality Finishes” standard only; that may be commensurate with these 3 developments but not a development in a superior location. His 2 arguments are out of kilter with, if not contradicting, each other. No wonder the court in Clinker and Ash Limited v Southern Gas Board (1967) 18 P & CR 372 at 378 remarked that:

“It is a striking and unusual feature of the residual valuation that the validity of a site value arrived at by this method is dependent not so much on the accurate estimation of completed value and development costs, as on the achievement of a right balancing difference between these two.”

197.  A major shortcoming of the residual valuation is that with so many variables or assumptions on the inputs, figures could be manipulated to produce a valuation which favours their clients. To arrive at a sensible result, a valuer should check if the variable inputs are consistent with one another.

198.  We therefore agree with Mr Charles Chan’s proposed adjustments for location, ie Parkes Residence: +5%, The Paseo: -5% and AVA 62: 0%. We further agree with Mr Charles Chan that Mr C K Chan’s further adjustments for environment or accessibility are reflecting similar factors and double counting. As said, The Paseo and AVA 62 as well are close to the MTR Austin Road station and the future terminus of the Guangzhou-Shenzhen-Hong Kong Express Rail Link.[61] We consider that further refinement or breaking down the location factor into sub-factors like environment or accessibility is not necessary in the present case.

199.  In addition, we agree with Mr Charles Chan’s adjustment on Floor to Floor Height as this feature is always marketed by developers as a selling point if the Floor to Floor Height is high.

200.  Turning to the adjustment for lift, we appreciate that both the Parkes Residence and AVA 62 have 2 lifts serving the upper floors whereas The Paseo has only 1. See §152 above. We have also commented in §156 above if the hypothetical development has only 2 lifts serving the upper floors each would have 10 units, that would be relatively less attractive. We agree therefore with the nil adjustment proposed by Mr Charles Chan.

201.  We note that Mr Charles Chan has applied +5% for view to Flat F on 8/F of Parkes Residence being situated opposite and close to a refuse collection point and public toilet. We consider this acceptable.

202.  In view of the above comments, we follow Mr Charles Chan’s adoption of comparables and adjustments as follows:

Parkes Residence		Adjustments									Adjusted Unit Price /m2
Comp Ref	Unit Price/m2	Time	Location & Environ-ment	Floor	View	Holding Cost	Financial Benefit	Ceiling Height	Quality	Total
1.	$233,600	0%	5%	2.5%	5%	0%	-3.0%	0%	0%	9.6%	$256,000
3.	$279,400	-3%	5%	-3.5%	0%	0%	-3.0%	0%	0%	-4.7%	$266,300
									Average:		$261,200

The Paseo		Adjustments									Adjusted Unit Price /m2
Comp Ref	Unit Price/m2	Time	Location & Environ-ment	Floor	View	Holding Cost	Financial Benefit	Ceiling Height	Quality	Total
1.	$268,000	0%	-5%	0.5%	0%	3.2%	0%	3%	0%	1.5%	$272,000
2.	$259,900	0%	-5%	2.5%	0%	3.2%	0%	3%	0%	3.5%	$269,000
3.	$276,700	-4%	-5%	-1.0%	0%	4.0%	0%	3%	0%	-3.3%	$267,600
4.	$274,400	-4%	-5%	-1.0%	0%	4.0%	0%	3%	0%	-3.3%	$265,300
5.	$278,800	-8%	-5%	-2.0%	0%	4.3%	0%	3%	0%	-8%	$256,500
6.	$285,800	-8%	-5%	-2.0%	0%	4.3%	0%	3%	0%	-8%	$262,900
									Average:		$265,600

AVA 62		Adjustments									Adjusted Unit Price /m2
Comp Ref	Unit Price/m2	Time	Location & Environ-ment	Floor	View	Holding Cost	Financial Benefit	Ceiling Height	Quality	Total
1.	$245,600	0%	0%	-5.0%	0%	3.1%	0.0%	3%	5%	5.9%	$260,100
4.	$279,500	1%	0%	-5.0%	0%	3.3%	-10%	3%	5%	-3.5%	$269,700
7.	$251,800	-8%	0%	-3.0%	0%	4.1%	0%	3%	5%	0.5%	$253,100
8.	$254,200	-8%	0%	-4.0%	0%	4.2%	0%	3%	5%	-0.5%	$252,900
9.	$239,600	-8%	0%	-3.0%	0%	4.2%	0%	3%	5%	0.6%	$241,000
10.	$241,600	-8%	0%	1.0%	0%	4.2%	0%	3%	5%	4.7%	$253,000
11.	$205,500	-8%	0%	3.5%	0%	4.3%	0%	3%	5%	7.4%	$220,700
12.	$227,800	-8%	0%	-2.5%	0%	4.3%	0%	3%	5%	1.2%	$230,500
									Average:		$247,600

203.  The average adjusted price of these 3 developments is $258,100/sq m and as most of the comparable units are on high floors, we follow Mr Charles Chan further adjustments to assess the unit price for different floors as follows:

Reference unit Price: $258,100/sq m

Floor	Mid-Level	View	Size (sq m)	Adjustments			Adjusted Unit Price (/sq m)	Proportion	Total Saleable Area (sq m)
				Floor	View	Total
2/F – 11/F (10 levels)	7	Building	27.33	-3.5%	-5%	-8.3%	$236,700	42.5%	2,733.0
12/F – 24/F (13 levels)	19	Open Building	27.33	2.5%	0%	2.5%	$264,600	56.5%	3,552.9
Weighted Average Unit Rate:							$252,463.5		6,285.9
Say							$252,500

Construction Cost

204.  The main difference in opinion between the 2 valuation experts on construction cost is that Mr Charles Chan adopts the cost pertaining to “High to Very High Quality Finishes” as published by Rider Levett Bucknall (“RLB”) whereas Mr C K Chan considers the cost applicable should be that for “High Quality Finishes”.

205.  The average adjusted price of these 3 developments is $258,100/sq m and as most of the comparable units are on high floors, we follow Mr Charles Chan further adjustments to assess the unit price for different floors as follows:

Reference unit Price: $258,100/sq m

Floor	Mid-Level	View	Size (sq m)	Adjustments			Adjusted Unit Price (/sq m)	Proportion	Total Saleable Area (sq m)
				Floor	View	Total
2/F – 11/F (10 levels)	7	Building	27.33	-3.5%	-5%	-8.3%	$236,700	42.5%	2,733.0
12/F – 24/F (13 levels)	19	Open Building	27.33	2.5%	0%	2.5%	$264,600	56.5%	3,552.9
Weighted Average Unit Rate:							$252,463.5		6,285.9
Say							$252,500

206.  In this regard, our estimate on construction cost would basically follow that of Mr C K Chan subject to the following:

(1)  While Mr C K Chan assigns a different unit cost for the commercial portion, we consider this not appropriate when the commercial portion is relatively small and the average cost of $26,700/sq m is just an average figure.;

(2)  We have commented at §149 that the carparking basements should occupy the full area of the site;

(3)  We agree with Mr Charles Chan that the unit cost for providing the appliance by Mr C K Chan is not adequate; we consider a more realistic cost should be $20,000/flat.

(4)  Taking into account site environment and the presence of a large tree on the Lots which has to be removed, we agree with Mr Charles Chan that an enhanced standard for the external works should be allowed.

Demolition and development period

207.  While Mr Charles Chan suggests a construction period of 3.5 years plus a demolition period of 0.75 year/9 months, ie a total of 4.25 years, Mr C K Chan suggests a development period of 3 years plus a demolition period of 0.75 year (ie 9 months), ie a total of 3.75 years. Taking into account the scale of the hypothetical development, we consider a total period of 4 years appropriate.

Other Construction Parameters

208.  On the other hand, the two valuation experts agree on the following:

Marketing Cost	3% of Gross Development Value (“GDV”)
Demolition Cost	$9,849,450
Demolition Period	9 months
Professional Fee	6% on cost
Developer’s interest cost	4% per annum

209.  Thus the construction cost of $379,211,650 is adopted based on our calculation as shown at Appendix 2.

Finding on RDV and the Reserve Price

210.  Thus, subject to what we have stated above, we shall follow Mr C K Chan’s residual valuation as a template in the determination of the RDV. We estimate the land value of the Lots at $944,000,000 (ie accommodation value of about $113,500/sq m) as shown at Appendix 3 to this judgment.

Section 4(2)(b) – Whether Applicant has taken reasonable steps

211.  The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interest of the respondents owning minority interests in the Lots under section 4(2)(b) of the Ordinance.

212.  Mr Justice Ribeiro P J on behalf of the Court of Final Appeal in Capital Well Limited v Bond Star Development Limited(2005) 8 HKCFAR 578 (“Capital Well”) had remarked at §2 of p582 that:

“(the Ordinance) permits a person owning at least 90% of the undivided shares in the Lot, who has failed to acquire the balance of the undivided shares despite having made appropriate efforts to do so, to apply to the Lands Tribunal for a compulsory order requiring sale of the lot for the purposes of redevelopment.”

213.  We share the view that the Ordinance provides a statutory mechanism which a majority owner may only invoke after he has taken reasonable steps to acquire the undivided share of a minority owner. Thus, to determine whether the applicants have taken reasonable steps in acquiring the units owned by R1, R2 and R3, the Tribunal has to make reference to what steps/actions the applicants have actually taken at various stages in the acquisition process.

214.  The Tribunal should also determine whether the prices offered by the applicants are fair and reasonable in light of the independent professional valuation opinion available to the applicants at the time of the offers. By reference to the witness statements of Ms Lui Wing Yan (“Ms Lui”), the Manager of the applicants, the latter determined the respective offer prices in reliance on the independent professional valuation opinion of Mr Charles Chan of Savills Valuation and Professional Services Limited. This evidence is undisputed.

215.  It is not disputed that the applicants have made the following offers to R1, R2 and R3 but none of the offers were accepted[62]:

Date	R1 5/F 2C	R2 G/F 2D	R3 4/F 2D
Revised EUV assessed by Mr Charles Chan	$8,380,000	$9,030,000	$8,680,000
EUV assessed by Mr C K Chan	$8,735,000	$8,939,000	$9,311,000
EUV determined by Tribunal	$8,880,000	$10,200,000	$9,200,000
18 June 2014	$12,821,000 Apportioned RDV ($12,209,948) + 5%	$13,615,000 Apportioned RDV ($12,965,722) + 5%	$14,179,000 Apportioned RDV ($13,503,162) + 5%
25 August 2014	$13,221,000 Apportioned RDV ($12,590,728) + 5%	$14,048,000 Apportioned RDV ($13,378,675) + 5%	$14,634,000 Apportioned RDV ($13,936,803) + 5%
13 November 2015	$15,087,000 Apportioned RDV ($14,368,228) + 5%	$16,783,000 Apportioned RDV ($15,983,048) + 5%	$16,686,000 Apportioned RDV ($15,891,297) + 5%
2 June 2016	$15,087,000 15% above the apportioned RDV ($13,139,175)	$16,783,000 23% above the apportioned RDV ($13,687,947)	$16,686,000 23% above the apportioned RDV ($13,609,551)

216.  From the table above, we note that the EUV determined by the Tribunal exceeds the EUV assessed by Mr Charles Chan by less than 6%, 13% and 6% respectively. This is acceptable because property valuation is not an exact science; the apparent “large” difference between our determination and Mr Charles Chan’s assessment for R2’s unit is mainly due to the value attributable to the illegal structure standing on the West Yard. If this value is excluded, the EUV of R2’s unit would have become $9,470,000 which is higher than Mr Charles Chan’s assessment by less than 5% only.

217.  Notwithstanding the above, based on the EUV as determined by the Tribunal at Appendix 1 hereto and the RDV as determined by the Tribunal at Appendix 3 in the sum of$944,000,000, the apportioned RDV attributable to R1, R2 and R3 respectively are higher than the offers by the applicants on 2 June 2016:

Apportioned RDV attributable to R1:

$8,880,000/$502,740,000 x $944,000,000 = $16,674,066

(which is higher than the latest offer by 10.5%)

Apportioned RDV attributable to R2:

$10,200,000/$502,740,000 x $944,000,000 = $19,152,644

(which is higher than the latest offer by 14.1%)

Apportioned RDV attributable to R3:

$9,200,000/$502,740,000 x $944,000,000 = $17,274,933

(which is higher than the latest offer by 3.5%)

218.  Pausing here, we should however bear in mind the following guidance from the Court of Final Appeal in Capital Well, at §33:

“... 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.”[63]

219.  We are here therefore concerned with whether on the evidence available, the offers made by the applicants fell “within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question.” (underline added)

220.  As we mentioned above, property valuation is not an exact science; mathematical precision is neither a feature of valuation particularly for developable land owing to the imperfection of the market where even between skilled valuers the margin of opinion may be surprisingly wide. In Singer & Friedlander Limited v John D Wood & Co (1977) 243 EG 212; (1977) 2 EGLR 84, Watkins J stated:

“The valuation of land by trained, competent and careful professional men is a task which rarely, if ever, admits of precise conclusion. Often beyond certain well-founded facts so many imponderables confront the valuer that he is obliged to proceed on the basis of assumptions. Therefore he cannot be faulted for achieving a result which does not admit of some degree of error.”

221.  Nevertheless, the learned judge went on to say that it was agreed generally in the profession that a permissible margin was 10% either side of a figure which could be said to be the right figure (assessed as if arrived at when the valuation was made and not with the benefit of hindsight). In exceptional circumstances the margin could be 15% or a little more either way. In Muldoon v Maps of Lilliput Limited (1993) 14 EG 100, Judge Zucker QC used a range of 15-20%[64]; this illustrates that the margin of error has not been not set by precedent.

222.  It is noted however that even if the valuation is outside the range, the professional may not be held to be negligent if he is found to have exercised reasonable skill and care (see Goldstein v Levy Gee [2003] EWHC 1574 (Ch), Lewison J, Dennard v PricewaterhouseCoopers LLP [2010] EWHC 812 (Ch), Vos J, and Capita Alternative Fund Services (Guernsey) Ltd v Drivers Jonas [2011] EWHC 2336 (Comm). Principles in this regard are distilled by Eder J from the authorities at §145). We reckon that the threshold for being unreasonable might be lower than that for being negligent. However, in the present case, the difference in the offer and our finding could not be used to prove that the applicants had failed to take reasonable steps.

223.  It is not disputed that the latest offers made by the applicants to R1 and R2 were well below the 20% bracket, if there is a bracket to be applied at all[65]. We consider that they were reasonable and acceptable as there have been vast differences in opinion between the parties on the value of the Basement Extension, the value of Garages 2A and 2B because of the change in use, the value of the yards adjacent to the various units on Ground Floor, all of which would not have occurred in a typical valuation exercise. Of all, the hottest debate was focused on the hypothetical development model pertaining to the Lots and parties could only come up with a consensus “irrespective of the position in law and irrespective of any policy on the part of any government department.”

224.  Mr Ho’s argument for a EUV of R2’s unit at $80 million is in our view on one hand not supported by any evidence on market price,and on the other hand using wrong comparison to offers made to other units. He compared the price offered to R2 for his unit at $16,783,000  with those for Unit 2A, 2/F at $22,705,900 (ie about $215,222/sq m) and Unit 2E, 6/F at $15,143,900 (ie about $199,773/sq m) respectively in December 2012. He then suggests R2 has been relatively ill-treated if R2 cannot receive a comparable offer as much as $23,220,000. However, with respect, we find Mr Ho has premised his propositions on a wrong assumption that R2’s unit has a saleable area as large as 107.9 sq m (1,161 sq ft) inclusive of the area of the illegal structure whereas in reality, the unit only has a saleable area about 88.6 sq m. Excluding the value of the West Yard and the illegal structure thereon for the time being, $200,000/sq m as suggested by Mr Ho times 88.6 sq m would result in $17,720,000 approximately which is higher than the latest offer to R2 at $16,783,000 by some 5.5%.

225.  Mr Ho also takes issue on the purchase prices of $18,880,000 and 11,773,000 which were accepted by R4 and R5 in end of July 2015 and in October 2015 respectively. In cross-examination, Ms Lui explained that during the interim period, domestic property prices by reference to the Centa-City Leading Index had dropped since the end of 2015 by some 12% which might lead to a drop in RDV of 20%. Also there is a difference in saleable area between R2’s unit and Unit 2A, 2/F where size adjustment has to be made. In addition, the internal condition for Unit 2E on Ground Floor (ie R4’s unit) was found to be good but when the offers to R2 were made, internal condition was not available so that its unit was assumed to be “poor” by Mr Charles Chan.

226.  But when Mr Ho pressed on, Ms Lui disclosed that there were indeed a without prejudice offer made by the applicants to R2 on 12 March 2015 which R2 did not respond. In contrast, the offer to R4 was made following mediation with R4 in January 2015 and an internal inspection of his unit which then led to R4’s acceptance of the offer.

227.  Taking the evidence in its entirety, we come to the opinion that the applicants have made reasonable effort to make offers to purchase the minority owners’ interest including those of R2’s, R4’s and R5’s.

228.  The failure of the applicants to make higher offers to R1 and R2, in our opinion, arose mainly from the disparity of views held between the parties on the proportionate share of the RDV as a result of the presence of the Basement Extension, the use of Garage 2A and Garage 2B, the value of the yards adjacent to the various units on Ground Floor as well as the future mode of development. These had been hotly debated by the applicants and R1 at trial. The hearing on the hypothetical models proposed in particular had taken up at least one day in court.

229.  We are satisfied that on the evidence available and in the circumstances of the Application, the applicants have taken reasonable steps to acquire all the undivided shares in the Lots which include negotiating for the purchase of such of those shares as are owned by R1 and R2 on terms that are fair and reasonable.

230.  As regards the request by R2 for relocation to a replacement property or a property swap, we are not persuaded that the applicants are so obliged under the Ordinance.  Consideration for relocation has not been provided in the Lands Resumption Ordinance or similar statutes either.

Conclusion

231.  Having considered the above, this Tribunal is satisfied that the requirements and conditions as laid down in the Ordinance have been met and an order for compulsory sale sought by the applicants should be granted.

Issue on Basic Law

232.  Mr Ho submitted for the first time in his closing submission that “under the current regime of Compulsory Sale it will be an infringement of the Basic Law if fair and reasonable compensation is not paid, and if other modes of compensation such as swapping, or relocating is not permissible, which is denied, under the Ordinance.”

233.  The Tribunal in Wisdom Gaining Limited v Wisdom Light Industrial Limited & Others, LDCS 23000/2012 (unreported, 3 June 2014) (“Wisdom Gaining”) has already dealt with similar argument. Regrettably, as in the case of the 1^st respondent in Wisdom Gaining, the issue was not pleaded in R2’s Notice of Opposition (which was professionally drafted) and not set out in the List of Agreed Issues; nor did it appear on R2’s own List of Issues. Neither has it been raised in Mr Ho’s written opening.

234.  Mr Ho now refers us to Articles 6 and 105 of the Basic Law which are as follows:

“Article 6

The Hong Kong Special Administrative Region shall protect the right of private ownership of property in accordance with law.”

“Article 105

The Hong Kong Special Administrative Region shall, in accordance with law, protect the right of individuals and legal persons to the acquisition, use, disposal and inheritance of property and their right to compensation for lawful deprivation of their property.

Such compensation shall correspond to the real value of the property concerned at the time and shall be freely convertible and paid without undue delay...”

235.  Then Mr Ho refers to Capital Well where Ribeiro PJ said at §21 at p586:

“The objectives of the Ordinance underlying this four-stage process are clear. On the one hand, the Ordinance aims to facilitate urban renewal in respect of old and dilapidated buildings ... On the other hand, it aims to ensure that the minority owner receives fair and reasonable compensation for his interest in the lot.”

236.  But Mr Ho has not drawn our attention to the following part of the paragraph which qualifies the above passage:

“Such compensation may be that which the minority owner agrees to accept or that which represents his share of the market value of the lot (reflecting its redevelopment value) as determined at a public auction, subject to a reserve price approved by the Tribunal.”

237.  Also, Mr Ho cited the last sentence of §32 at p588 of Capital Well which reads:

“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.”

238.  Again, Mr Ho did not refer us to the following paragraph  which reflects a more complete view of Ribeiro PJ:

“... (The Tribunal) 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.”

239.  Mr Ho’s submission in this regard again relied heavily on the prevailing use and occupation of Unit 2D, Ground Floor with its special feature: “The special configuration of the Property consisting of the Front Garden and West Yard form a composite part of the practice carried on in the clinic and are ancillary to the indoor areas.”

240.  With respect, Mr Ho has not dealt with the principle that in determining the RDV for auction, the RDV as determined envisages that redevelopment of the Lots would take place and the value of minority owners’ interest based on existing use or prevailing use would be much superseded. The English Court of Appeal in Horn v Sunderland Corporation [1941] 2 KB 26, [1941] 1 All ER 480 (CA) has long clarified that where compensation is based on the property’s value for a highest and best use, the owner is not also entitled to its “value to owner” based on its existing use. The said case involved similarly a compulsory acquisition of land. The owner of a farm being used primarily for raising pedigree horses claimed compensation for the land on the basis of its immediate suitability for use as a building subdivision for redevelopment. Additionally, he claimed also compensation for resulting disturbance damage from the existing use of the land primarily occupied for raising pedigree horses. Sir Wilfred Greene MR had this to say at p35:

“In the present case the respondent was occupying for farming purposes land which had a value far higher than that of agricultural land. In other words, he was putting the land to a use which, economically speaking, was not its best use, a thing which he was, of course, perfectly entitled to do. The result of the compulsory purchase will be to give him a sum equal to the true economic value of the land as building land, and he thus will realize from the land a sum which never could have realized on the basis of agricultural user. Now he is claiming that the land from which he is being expropriated is for the purpose of valuation to be treated as building land and for the purpose of disturbance as agricultural land, and he says that the sum properly payable to him for the loss of his land is (a) its value as building land plus (b) a sum for disturbance of his farming business. It appears to me that, subject to a qualification which I will mention later, these claims are inconsistent with one another. He can only realize the building value in the market if he is willing to abandon his farming business to obtain the higher price. If he claims compensation fro disturbance of his farming business, he is saying that he is not willing to abandon his farming business, that is, that he ought to be treated as a man who, but for the compulsory purchase, would have continued to farm the land, and, therefore, could not have realized the building value.”

241.  Scott LJ also remarked at p42 that:

“Ex hypothesi, the building value is only realizable if and when the land is offered in the market as building land, which necessarily postulates that the selling owner will have given up his farm and cleared the land of all its farm buildings, stock and implements, or at least, is ready and willing to do so at his own expense.”

242.  From the above decisions, it is apparent that Mr Ho’s argument that the Ordinance has failed to take into account the actual use of R2’s property or that significant value should be attributed to those features of R2’s property over and above what has been provided in the Ordinance is wrong in principle.

243.  According to Mr Ho the constitution issue has been briefly alluded to by the Court of Final Appeal in Sin Ho Yuen v Fineway Properties Ltd (2011) 14 HKCFAR 497 which is reported as [2011] 3 HKC 570. Litton NPJ said at §25:

“As the title of the Ordinance states, it provides mechanism for the compulsory sale of land for redevelopment, by giving to the tribunal the power to order the sale of a property in multiple ownership, over the objections of a minority owner. In order that the entrenched right of private ownership of property in Articles 6 and 105 of the Basic Law be not infringed, the protection of minority interest under the Ordinance becomes therefore a key factor. In turn, it behoves the tribunal, in carrying out the scheme of the Ordinance, to ensure that such protection be not diminished, or be whittled down through inefficiency and delay.”

244.  In fact, the issue was more particularly discussed in Intelligent House Limited v Chan Tung Shing and Tong Foon Ling, LDCS 11000/2006 (unreported, dated 23 June 2008) where the Lands Tribunal said:

“30.  In Harvest Good, Hartmann J considered (in paragraphs 129-153) the question of the inter-relationship between sections 7(2) and 17 of the Limitation Ordinance (which provides the legal recognition and basis for adverse possession), and whether these provisions contravene, inter alia, Article 105 of the Basic Law. His Lordship concluded at paragraph 152 of his judgment that Article 105 only guaranteed the right to compensation where the deprivation constituted expropriation by the State or a State agency, and that a loss of possessory title to land in consequence of the operation of the Limitation Ordinance did not constitute an expropriation. As such, Article 105 is not relevant to, and has no bearing on, the relevant provisions under the Limitation Ordinance. He therefore held that these provisions were not in contravention of the Basic Law.

31.  Although there are differences in terms of the statutory frameworks between the Ordinance and the Limitation Ordinance, both involve the transfer of property from one private individual to another. We do not see any obvious basis to distinguish this part of Hartmann J’s decision from the present consideration.

32.  For the above reasons, we hold that Article 105 of the Basic Law is not relevant, and does not apply to the Ordinance. There is thus no question of any contravention.

33.  However, if we were wrong above, and Article 105 did apply to the Ordinance, we are further of the view that the Ordinance satisfies the requirements under Article 105, and therefore is not in breach of it:

(1)  Article 105 does not make the deprivation of property unlawful provided that two conditions are met: (a) it must be done in accordance with law, and (b) there must be a right to compensation which reflects the real value of the property taken.

(2)  With regard to (a), so long as the Tribunal is satisfied that the various requirements and conditions laid down in the Ordinance have been complied with, a compulsory sale is made “in accordance with law” and therefore not in conflict with Article 105.

(3)  With regard to (b), under the Ordinance, if an order for sale is made, the compensation will amount to each owner’s share of the open market value of the whole lot, taking into account of its redevelopment value. That in our view should represent the ‘real value’ of the property of each owner.

34.  In the premises, we are of the view that the oppositions raised by those respondents on the grounds of Articles 29 and 105 of the Basic Law are invalid and without merits.”

245.  We respectfully agree with the above holdings and likewise consider the constitutional point taken by R2’s invalid and without merits. More particularly, in the Court of Final Appeal in Director of Lands v Yin Shuen Enterprises Limited and Another (2003) 6 HKCFA 1; [2003] 2 HKLRD 399, Lord Millett who delivered the principal judgment which was agreed to by the other members of the Court, considered Article 105 in more detail:

“56. .... First, art. 105 does not require compensation to be based on the open market value of the property concerned but on its "real value". In general, property is worth what it will fetch, and its open market value reflects its real value. But as the Courts of Hong Kong have repeatedly emphasised, this is not always the case. Sometimes the market is prepared to pay a speculative price which exceeds the true value of the property and reflects an element for which the resuming authority ought not to be required to pay. There is nothing in art. 105 which requires it to do so.

57. Secondly, compensation is only required to be paid for "the property concerned", that is to say for the interest acquired. In the present case, that means for the land for the duration of the Crown lease and subject to the user restrictions in the lease. ...” (emphasis added)

247.  Thus, in the absence of the Ordinance or the Application, the real value of R2’s interest is perhaps only its EUV at $10,200,000 as determined at §142 above unless it is a case where as decided by Fok JA (as the leaned PJ then was) at §34 of Siu Sau Kuen v Director of Lands [2013] 6 HKC 557, redevelopment potential can be established on a balance of probability:

“Whether, on a balance of probabilities, the evidence discloses that, as at the date of resumption, redevelopment of the property resumed was likely. Such likelihood may be demonstrated by:

(i)   Actual proposals by the applicant to redevelop the property (or unlikelihood demonstrated by the absence of such proposals) whether on its own or by merger with other properties, or

(ii)  evidence of redevelopment in the vicinity of the resumed property (whether accompanied by evidence of redevelopment plans for the resumed property or not), so long as such evidence of redevelopment in the vicinity supports a finding that redevelopment on its own or merger of the resumed property with other properties giving rise to a viable redevelopment scheme was likely within a reasonable foreseeable time scale.” (Emphasis added)

248.  In any event, when the order for sale following the Application is made, R2 will be able to receive a share of the redevelopment value higher than its real value.

Other Incidental Matters

249.  The applicants propose to appoint Anthony Chowand AnnaChow, both consultants of Messrs Guantao & Chow, as the sale trustees.  By reference to a letter dated 19 May 2016from the latter, 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.

250.  In the same letter, it is also proposed to appoint Messrs. Michael Cheuk, Wong & Kee as independent legal adviser for the Trustees (“the Trustees’ Solicitors”). The remuneration package proposed in the said letter appears to be reasonable too.

251.  The applicants have prepared a set of draft Particulars and Conditions of Sale of the Lots[66].  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 Lots by public auction submitted by the applicants are also reasonable.

Order

252.  This Tribunal make the following orders :

(1)  this Tribunal is satisfied that the redevelopment of the Lotsis justified due to the “age” and “state of repair” of Pak Cheung House and that the applicants have taken reasonable steps to acquire all the units in the Pak Cheung House including that of R1, R2 and R3;

(2)  an order for sale of all the undivided shares in the Lots should be made by auction pursuant to section 5(1)(a) of the Ordinance;

(3)  the reserve price for the sale of the Lots be set at $944,000,000;

(4)  the entire amount of the proceeds of sale of the Lots (after deduction of all legitimate expenses and payments) be apportioned among the applicants, the 1^st, 2^nd and 3^rd respondents or the 6^th respondent as the case may be by reference to the respective EUVs of their units and the total EUV of the Buildings in accordance with the statutory basis set out in section 10(3) and Part 3 of Schedule 1 to the Ordinance;

(5)  Mr Anthony Chow and Ms Anna Chow, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustee under the Ordinance in relation to the Lots and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs Guantao & Chow dated 19 May 2016;

(6)  Messrs Michael Cheuk, Wong & Kee be appointed as the solicitors for the Trustees (“the Trustees’ Solicitors”) to assist the Trustees in discharging their duties imposed by the Ordinance and the Trustees’ Solicitors be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Guantao & Chow dated 19 May 2016;

(7)  for the purposes of the sale of the Lots by public auction, the sale of the Lots be on the particulars and conditions of sale substantially the same as those in the draft Particulars and Conditions of Sale as set out in Bundle A4/1089-1114 to be initialled and approved by the Tribunal.

(8)  subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Lots or its successor in title, the redevelopment of the Lots and the development to be erected thereon shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lots becomes the owner of the Lots; and

(9)  liberty to the applicants, the respondents and the Trustees to apply to the Tribunal for further directions.

Costs

253.  We have considered the submission on costs made by the applicants against R6. The crux of the criticism is that they should not have split into 2 camps and hired two firms to represent them in these proceedings. What we say is that a person should have the freedom of choice in their own legal representative. Without prejudice to parties’ right to argue further on this point, we say that we see no fault in the arrangement. We also see that the line of opposition run by the two camps was far from being similar. Following the principles laid down in Good Faith Properties Ltd v Cibean Development Co Ltd [2014] 5 HKLRD 534 we make a costs order nisi that the applicants do pay the respondents costs of the Application, including all costs reserved to be taxed if not agreed on High Court Scale. Such order be made absolute after 14 days if no application is made to vary the said costs order.

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

[1] See A2/391.

[2] See A3/561.

[3] See Bundle A4/1025.

[4]This allegation by R2 is not supported by any warning letter, notice or order issued by the Building Authority. During the inspection, Mr Ho for R2 also pointed to various cracks underneath the cantilevered common corridors of the Building. We however agree with the evidence of Mr C M Wong that those cracks are not related to the excavation of the Basement and far from any evidence of differential settlement.

[5] See Bundle D1/1-50.

[6] See Bundle D1/51-140.

[7] See Bundle D1/141-194.

[8] See Bundle D1/195-201.

[9] See Bundle D2 - D6.

[10] See Bundle D10/2791-2800.

[11] See Bundle D7/1640 – D8/2458.

[12] See Bundle D8/2459 – D8/2487.

[13] See Bundle D9/2488 – D9/2540.

[14] See Bundle D8/2487-1 to D8/2487-33.

[15] See Bundle D8/2487-34 to D8/2487-76.

[16] See Bundle D10/2801-2809.

[17] See Bundle D1/202–215.

[18] See Bundle D10.

[19] See Bundle A1/54.

[20] According to the Land Registry record, this Garage 2A was re-granted by the Government to Yue Hwa Chinese Products Emporium Limited on 20 February 1997.

[21] At about 12:03 of the hearing on 23 June 2016.

[22] See Bundle D1/56.

[23] See Technic Investment Company Limited & Another v Appeal Tribunal (Buildings) [2012] 3 HKLRD 245 and Ronald Wilson Li Do Wai & Tang So Ha & Others v Appeal Tribunal (Buildings) [2013] 5 HKLRD 158.

[24] See for example Ko Siu Luen, Louisa & Others v Appeal Tribunal (Buildings) [2012] 1 HKLRD 149 and Ronald Wilson, Li Do Wai & Tang So Ha & Others v Appeal Tribunal (Buildings) [2013] 5 HKLRD 158.

[25] On the factual evidence of R2, the presence of the Basement Extension might be much earlier and even before R2’s parents purchased and moved to Pak Cheung House in 1971 as he could not remember any instance of any substantial removal of soil .

[26] See D1/118.

[27] See Bundle D1/9 at §3.2.

[28] Under section 16(1)(d) of the Buildings Ordinance, the Building Authority may refuse to give his approval of any plans of building works where the carrying out of the building works shown thereon would contravene the provisions of this Ordinance or of any other enactment, or would contravene any approved or draft plan prepared under the Town Planning Ordinance.

[29] See A3/741.

[30] See A3/979.

[31] In Hinge Well Company Limited v The Attorney General of Hong Kong [1988] 1 HKLR 32 at 43, Lord Oliver for the Privy Council remarked “an area of land (not being a service lane) over which there are private rights of passage in an adjoining occupier may nevertheless remain a street within regulation 23(2)(a).”

[32] Having said that, we do not share the view of Mr Ho for R2 that the West Yard should be valued similarly as Unit 2D on Ground Floor because the definition of saleable area of any premises specifically exclude open yards. See the Code of Measuring Practice published by the Hong Kong Institute of Surveyors and also section 8 of the Residential Properties (First-hand Sales) Ordinance, Cap 621.

[33] See A2/394.

[34] It appears however from the Land Registry record that the Building Authority has not registered any such order against Unit 2D, Ground Floor.

[35] See A2/411.

[36] Mr Charles Chan adopted the sales of shops at Block A, Fortune Terrace next to the Building at Tak Shing Street and others around the corner at Tak Hing Street; Mr C K Chan’s two comparables were much further away on the other side of Nathan Road.

[37] For the sake of completeness, the two experts agreed that should the two Garages be valued as garages for carparking purpose, it should be $3,300,000 each. If however the two Garages were to be valued for car repairing or car cleaning purpose, Mr Charles Chan determined each at $8,166,000 based on two comparables, one at Junction Road/Grampian Road and the other at Julia Avenue close to its junction with Emma Avenue. While Mr C K Chan considers it is not appropriate to assign a value for such purpose, we adopt $8,166,000 in case if necessary.

[38] See D2/283.

[39] On the first day of the trial however, all parties agreed with the opinion of the two valuation experts that the storage rate should be $72,850/sq m instead, which is indeed of the average of the figures proposed by Mr Charles Chan and Mr C K Chan respectively.

[40] 40% = 1- (1 - 25%) x (1 – 20%)

[41] That is, the change of use contravenes both the Government Lease as well as the Buildings Ordinance.

[42] See Exhibit A1.

[43] See Lee Yun v Director of Lands, LDLR 12 of 2006, (unreported, dated 22 December 2010) at §15.

[44] See D8/2465.

[45] Mr C K Chan in his Supplementary Report for Updated EUV Valuation dated 3 June 2016 suggested a discount of 90% though he later revised his opinion to nil value at trial.

[46] Mr Dennis Wong estimated that the material cost of just backfilling lightweight concrete would be around $900,000 exclusive of the cost of preparation work, labour and material costs for reinstating the screen wall, insurance costs etc.

[47] There exists also an illegal structure at the yard appurtenant to Unit 2E, Ground Floor subject to a Superseding Notice No WNZ/U28-32/0006/05 dated 19 March 2007. Particulars of this illegal structure are not provided and therefore its additional value, if any, is disregarded.

[48] Mr Charles Chan considers the internal condition of the reference unit is poor.

[49] Mr Charles Chan’s approach:1.04 (floor adjustment) x 0.97(top floor) = 1.0088 vis-à-vis Mr C K Chan’s approach: 1.03(for 6/F) x 0.98 (top floor) = 1.0094, the difference being 0.06%.

[50] See §106 above.

[51] See §119 above.

[52] See Clinker and Ash Ltd v Southern Gas Board (1967) 18 P & CR 372 at 377-379; Snook v Somerset County Council [2004] RVR 254 at §30.

[53] See Exhibit A3-1.

[54] See D8/2487-38 to 2487-40.

[55] There are in addition 2 sq m per floor for E & M room.

[56] See Bundle D10/2547.

[57] See D8/2487-59.

[58] Mr C K Chan had at the outset of his Valuation Report dated 11 November 2015 declared himself as a Member of the Hong Kong Institute of Surveyors (“HKIS”) and this definition of market value was stated as paragraph 10.4 of his report.

[59] If a longer depth was assumed for Zone A in analysing and valuing the Basement Extension, for instance when the whole of the authorised portion ie Garage 2A would have been Zone A, the EUV of the Basement Extension would have become marginally higher.

[60] See Patrick H Bond, Rating Valuation: Principles & Practice, 3^rd Edition (2010), Estates Gazette, pp 207-208 & 213 and Richard Hayward, Valuation: Principles into Practice, 6^th Edition 2009, Estates Gazette, pp125-126 & 343-344.

[61] With respect, Mr Ho for R2 in his reply closing submission at §11, tried on the one hand, to argue that the Lots being situated at Jordan is superior in location, failed on the other hand to discredited Mr C K Chan’s positive adjustments for The Paseo and AVA 62 which are situated in proximity to both the Jordan and Austin MTR stations.

[62] The 6^th respondent is not a minority owner as defined in the Ordinance and therefore the applicants have never made any offer to them.

[63] The Court of Final Appeal stated further at §36 of the judgment that: “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.”

[64] See also K/S Lincoln v CB Richard Ellis Hotels Ltd [2010] EWHC1156 (TCC) per Coulson J.

[65] In Good Faith Properties Limited & Others v Cibean Development Company Limited, LDCS 42000 OF 2011 (unreported, 31 May 2013), the Tribunal had at §40 of the judgment confirmed that the time for it to be satisfied with the steps taken being reasonable was at trial and not before.

[66] See Bundle A4/1089-1114.