LDCS 8000/2019
[2020] HKLdT 17
IN THE LANDS TRIBUNAL OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
LAND COMPULSORY SALE MAIN APPLICATION NO 8000 OF 2019
__________________________
BETWEEN
FAVOUR DAY LIMITED
Applicant
and
NG CHIU (吳潮)
1st Respondent
KWONG KWONG MAN (鄺廣民)
2nd Respondent
MAK SHUI KING (麥瑞琼)
3rd Respondent
FUNG KWOK FIN ALEX (馮國健)
4th Respondent
CHOY PING KONG (蔡炳光)
5th Respondent
CHAN SZE (陳詩)
6th Respondent
WONG WAI MUN CHRISTINA
7th Respondent
ROBERTA M. LAI also known as ROBERTA MANALO
8th Respondent
JAMES K. LAI
9th Respondent
FORTUNE RAINBOW INVESTMENTS LIMITED
10th Respondent
__________________________
Before: Mr Alex Ng, Member of the Lands Tribunal
Dates of Trial: 12 - 14 May 2020
Date of Judgment: 28 May 2020
__________________
JUDGMENT
__________________
BACKGROUND
1. This is the applicant’s application for an order for sale, for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”), of all the undivided shares of and in the Remaining Portion of Inland Lot No 188 (“1st Lot”), and section A of Inland Lot No 188 and section B of Inland Lot No 188 (“2nd Lot”) (1st Lot and 2nd Lot are collectively referred to as “the Lots”), together with a building erected thereon known as Nos 16 (i.e. 1st Lot) and 18 (i.e. 2nd Lot) Gage Street, Hong Kong (“the Building”).
2. The Building is a 6-storey (excluding a cockloft floor) commercial / residential composite building served by 1 common staircase. An occupation permit No H47/69 was issued for the Building on 12 March 1969, granting permission to occupy its ground floor (“G/F”) as 2 shops with 2 stores on cockloft for non‑domestic use, and 1st floor (“1/F”) to 5th floor (“5/F”) as 4 tenements per floor for domestic use. According to the approved building plans of the Building, there are 2 shops planned on the G/F, 2 stores planned on the cockloft floor and 4 flats planned on each of 1/F to 5/F. According to the records of the Land Registry, G/F of No 16 Gage Street has been sub-divided into 2 units (i.e. Shop A and Shops B & C), and Cockloft of No 16 Gage Street has been sub-divided into 3 units (i.e. Portion A, Portion B and Portion C).
3. 1st Lot together with part of the Building (i.e. No 16 Gage Street) was allocated 18 undivided shares. Shop A on G/F was given 2 undivided shares, Shops B & C on G/F was given 3 undivided shares, each of the 3 portions on cockloft floor was given 1 undivided share, and each of the 10 flats on upper floors was given 1 undivided share, making up a total of 18 undivided shares.
4. 2nd Lot together with part of the Building (i.e. No 18 Gage Street) was allocated 16 undivided shares. G/F was given 4 undivided shares, cockloft was given 2 undivided shares, and each of the 10 flats on upper floors was given 1 undivided share, making up a total of 16 undivided shares.
SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS
5. At the time of filing of the Notice of Application (“NOA”) on 22 March 2019, there were 10 respondents and the applicant owned on average 82.29% undivided shares in the Lots (i.e. 15 out of the total 18 undivided shares in 1st Lot and 13 out of the total 16 undivided shares in 2nd Lot), more than the threshold of 80% required for building aged 50 years or above.
6. After the filing of the NOA, the applicant amended the NOA on 11 June 2019 pursuant to an Order of the tribunal. The applicant acquired undivided shares of the 2nd , 7th , 8th and 9th respondents, and subsequently discontinued the proceedings against them.
7. Section 3(1) of the Ordinance prescribes that the minimum percentage of undivided shares that an applicant or applicants should possess before making an application under the Ordinance is 90%. In addition, section 3(2)(b) of the Ordinance prescribes that, without prejudice to the operation of section 3(5), an application may cover 2 or more lots on which 1 building is connected to another building by a staircase intended for common use by the occupiers of the buildings, and where the average of (A) the percentage of the undivided shares owned by the majority owner in the lot or lots on which 1 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 section 3(1).
8. Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a lower percentage in respect of a lot belonging to a class of lots specified in that notice.
9. The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, made under section 3(5) of the Ordinance (“the Notice”), was gazetted on 22 January 2010 and came into operation on 1 April 2010. Section 3 of the Notice lowered the threshold for compulsory sale of specified classes of lots from 90% to 80%. Those classes of lots include:
“a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the relevant date”
10. Since the occupation permit of the Building was issued on 12 March 1969, i.e. more than 50 years before the date of application (i.e. 22 March 2019; the relevant date under the Notice), the applicable percentage is therefore 80%.
11. I am satisfied that as at the date of application, the applicant owned on average more than 80% of the undivided shares in the Lots. I am therefore satisfied the applicant is entitled to make the present application under section 3 of the Ordinance.
THE REMAINING RESPONDENTS
12. At trial, the applicant owns on average 88.19% undivided shares in the Lots (i.e. 16 out of the total 18 undivided shares in 1st Lot and 14 out of the total 16 undivided shares in 2nd Lot). The following 6 respondents (collectively referred to as “the Remaining Respondents”) remain in the present action: -
Respondent Premises
st Respondent
rd Respondentth Floor (“4/F”), No 16 Gage Street (i.e. as joint tenants together with R4)
th Respondentth Floor (“4/F”), No 16 Gage Street (i.e. as joint tenants together with R3)
th Respondentth Floor (“4/F”), No 18 Gage Street (i.e. as joint tenants together with R6)
13. At the 1st day of trial on 12 May 2020, both the applicant and R1 submitted that R1 had accepted a recent offer of the applicant and they would enter into an agreement for sale and purchase of R1’s premises on 13 May 2020. Therefore, R1 asked to be excused to attend the subsequent trial hearing, for which leave was granted by the tribunal.
14. R3, R4, R5 and R6 were legally represented in the application and had jointly filed a Notice of Opposition on 29 August 2019. Nonetheless, they have acted in person since 13 January 2020, and at the call-over hearing on 14 January 2020, leave was granted to R4, R5 and R6 to withdraw their Notice of Opposition. This order does not cover R3, who did not appear at the said call-over hearing. At trial, R3 did not appear again and R5 was also absent. Whilst, R4 and R6 said that they do not oppose the application, but they would have concerns over the acquisition prices offered by the applicant and their respective entitlements if an order for sale of the Lots is granted by the tribunal.
15. Before the trial, the applicant and R10 had come into an agreement on 5 May 2020. They agreed that (1) R10 shall have no objection to the proceedings for compulsory sale; (2) service of further pleadings and documents on R10 be dispensed with; (3) attendance of R10 at the trial be excused; and (4) there shall be no order as to costs between the applicant and R10 in the proceedings. The agreement was noted by the tribunal, and an order was subsequently made on 19 May 2020 in terms of the consent summons dated 18 May 2020.
ISSUES FOR DETERMINATION BY THE TRIBUNAL
16. The remaining issues to be decided in this case are as follows:
1) What was the respective existing use value (“EUV”) of all units in the Building as at 14 February 2019, the valuation date adopted in the application valuation report dated 20 March 2019, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?
2) Whether the redevelopment of the Lots is justified due to age and/or state of repair of the Building in accordance with section 4(2)(a) of the Ordinance?
3) Whether the applicant has taken reasonable steps to acquire all the undivided shares in the Lots on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance?
4) If an order for sale should be granted, what should be the reserve price (i.e. redevelopment value (“RDV”) of the Lots) for the purpose of auction sale?
DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING
17. Pursuant to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the EUV of the units as assessed in the application, the tribunal shall determine the proper value. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the lot who cannot be found, the majority owner of the lot is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is: -
“(A) not less than fair and reasonable; and
(B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”
18. Although R3 has not withdrawn her opposition and R4 and R6 have concerns over the valuation and how much they will be able to obtain in the redevelopment of the Lots, they have not filed any evidence in these proceedings.
19. The applicant appoints Mr Charles Chan (“Mr Chan”) of Savills Valuation and Professional Services Limited to give his opinion on valuation. In the application report, Mr Chan explained the direct comparison method he adopted and the process of his assessment to arrive at the EUV of each unit of the Building as at 14 February 2019. He assessed the market value of all ground floor units and Portion C on Cockloft of No 16 Gage Street, which has direct access off Graham Street, with reference to the ground floor shop transactions in the locality. In assessing the market value of the remaining cockloft units, he made reference to the transactions of cockloft and 1st floor units. The upper floor domestic units were assessed with reference to the transactions of aged domestic units without lift service.
20. In his valuation, in addition to assessing the market value of the structures and areas as shown on the approved building plans and/or assignment plans, Mr Chan had assigned positive value to 6 unauthorized structures, including an extended cockloft that is attached to Cockloft of No 18 Gage Street, 2 enclosed flat roofs within the open flat roof of Unit A and Unit B on 1/F of No 16 Gage Street respectively, and 3 enclosed lobbies in front of the entrances of Unit A on 1/F, Unit A on 2nd floor (“2/F”) and Unit A on 3rd Floor (“3/F”) of No 18 Gage Street respectively. All these units in connection with the unauthorized structures identified by Mr Chan are owned by the applicant.
21. Mr Chan subsequently prepared a supplemental report on 14 November 2019, in which he reviewed the EUV of all the units in the Building. He had inspected 4 additional domestic units internally, had made reference to the updated property indices, had reviewed the saleable area of a ground floor shop comparable and had also taken into consideration of an additional ground floor shop comparable.
22. At trial, Mr Chan further updated his EUV assessments (“Scenario 1). He revised the depth of a ground floor shop comparable and the saleable area of the reference domestic unit (i.e. Flat A on 3/F of No 18 Gage Street), for which he included the area of its enclosed lobby. He had also prepared another scenario of valuation (“Scenario 2”) in which he excluded the value of the extended cockloft, assessed the 2 enclosed flat roofs as open flat roofs only, and converted the 3 enclosed lobbies at the rate of 1/6 instead of 1 in Scenario 1.
23. When Mr Chan was asked why he prepared another scenario of valuation, he replied Scenario 2 was prepared in accordance with the recent judgment, Kannix Ltd and Another v Coreluxe Developments Ltd and Others LDCS 8000/2018, 25.3.2020, in which the respective values of unauthorized structures if any were discussed and determined by the tribunal. He further testified at trial that he then had no preference on the adoption of which valuation scenario because Scenario 1 is also supported by another case Sarford Development Ltd and Others v Super Star Properties Ltd and Another LDCS 14000/2018, 27.3.2020, in which additional values are given to the unauthorized structures which existed for a long time and that there is no evidence they are subject to enforcement action.
24. I consider the valuation principles as discussed in both Kannix and Sarford are correct and are not contradictory, but different valuer would have different opinion on their application in a particular case and each case would have its own particular circumstances. Nevertheless, in a compulsory sale application, an applicant should bear the burden to prove his case especially in the controversial issues subject to satisfaction of the tribunal. A respondent should also prove his case if he put forward a controversial issue for determination.
25. From valuation perspective, I consider the valuation of unauthorized structure is a controversial issue. In order to prove a case in a controversial issue, simply a valuation opinion without the support of any objective evidence is generally not persuasive unless the valuation opinion in question has already been widely accepted in the then market. In these proceedings, Mr Chan has not filed any objective evidence to support the case in Scenario 1 that the unauthorized structures would have positive value. He also said at trial that the 2 valuation scenarios are arguable and he then had no preference.
26. In the circumstances, I am of the view the applicant fails to prove the EUV assessments in Scenario 1 satisfactorily. Nonetheless, I am also of the view the extended cockloft and the enclosed flat roof, which were created by unauthorized building woks and are always subject to risks of enforcement actions by government and/or other owners in the Building, should not have any positive value with reasons same as those in Kannix .
27. Having gone through Mr Chan’s valuation reports and his assessments in Scenario 2, except the valuation of the enclosed lobbies which will be discussed in the paragraphs below, I accept his direct comparison method of valuation. I also accept the adjusted unit rates of the ground floor reference unit (i.e. G/F of No 18 Gage Street), the cockloft reference unit (i.e. Cockloft of No 18 Gage Street) and the domestic reference unit (i.e. Flat A on 3/F of No 18 Gage Street) at $638,000, $167,000 and 193,000 per square meter saleable respectively, and their application to the valuation of the units in the Building.
28. In Scenario 2, Mr Chan has converted the 3 enclosed lobbies at the rate of 1/6, same as the conversion rate determined in Kannix . However, upon enquiry of the tribunal, he agreed at trial the subject case could be differentiated from Kannix . The respective Unit A on upper floors of No 18 Gage Street could not be extended into the lobby if the entrances of their adjacent units (i.e. Unit B) had not been relocated to another location, and there is no evidence that the said relocations found on site had been approved or authorized by government. In the circumstances, I consider the enclosed lobbies, or the common areas, immediately in front of Unit A on upper floors of No 18 Gage Street cannot attract any positive value because there could not be any enclosed lobbies or open area if there is no relocation of Unit B’s entrances, and unauthorized relocation created by unauthorized building works is always subject to risks of enforcement actions.
29. Further, it is important to note in Kannix that value is given to the common areas which can make the entrance of the flat next to it more spacious and are sometimes usable temporarily only instead of their enclosure, and if such value can be established, value should also be given to those similar units without enclosure of lobby.
30. By excluding the enclosed lobbies and then adjusting the converted saleable areas of Unit A on 1/F, Unit A on 2/F and Unit A on 3/F of No 18 Gage Street to 34.2 square meters, 31.6 square meters and 31.6 square meters respectively, their market values would be revised to $7,050,000, 6,410,000 and $6,280,000 respectively. The market values of the other units as assessed by Mr Chan in Scenario 2 are accepted by this tribunal.
EUVs of All Units in the Building
31. The EUVs of all units in the Building as at the relevant date of valuation, i.e. 14 February 2019, and adopted by this tribunal are appended below: -
Floor
Street No
Unit
EUV
G
16
A
$26,740,000
G
16
B & C
$28,260,000
G
18
-
$63,800,000
Cockloft
16
Portion C
$8,930,000
Cockloft
16
Portion A
$8,283,000
Cockloft
16
Portion B
$5,104,000
Cockloft
18
-
$13,898,000
1
16
A
$6,530,000
1
16
B
$6,510,000
2
16
A
$6,220,000
2
16
B
$5,970,000
3
16
A
$6,100,000
3
16
B
$5,680,000
4
16
A
$5,800,000
4
16
B
$5,400,000
5
16
A & Roof
$6,240,000
5
16
B & Roof
$5,970,000
1
18
A
$7,050,000
1
18
B
$5,730,000
2
18
A
$6,410,000
2
18
B
$5,450,000
3
18
A
$6,280,000
3
18
B
$5,340,000
4
18
A
$5,980,000
4
18
B
$5,080,000
5
18
A & Roof
$6,250,000
5
18
B & Roof
$5,350,000
32. I therefore accept the total EUV of the Building is $274,355,000.
SECTION 4(2) OF THE ORDINANCE - JUSTIFICATION AND REASONABLE STEPS
33. Section 4(2) of the Ordinance provides as follows: -
“2. The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that—
(a) the redevelopment of the lot is justified (and whether or not the majority owner proposes to or is capable of undertaking the redevelopment)—
(i) due to the age or state of repair of the existing development on the lot; or
(ii) on 1 or more grounds, if any, specified in regulations made under section 12; and
(b) the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”
34. The applicant must satisfy this tribunal the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted.
Whether development of the Lots is justified due to the age and/or state of repair of the Building
35. The applicant adduces expert evidence of Mr So Kin Shing (“Mr So”), a structural engineer, of K S So & Associates Limited and Mr Benson Wong Sai Ning (“Mr Wong”), a building surveyor, of Benson Wong & Associates Limited. Mr So conducted a structural survey of the Building and prepared a Structural Assessment Report dated 14 November 2019. Mr Wong conducted a condition survey of the Building and prepared a Condition Survey Report dated 14 November 2019.
36. None of the respondents adduced expert evidence to rebut the reports complied by Mr So and Mr Wong.
37. Having considered the reports of Mr So and Mr Wong, I accept their expert opinion. The Building, being erected more than 51 years ago, is in poor condition and has come to the end of its design life. The design of the Building has become obsolete over time in many aspects, both physically and functionally, and fails to conform to modern safety standards and statutory requirements.
38. I am also of the view the Building is in poor state of repair and the costs of repair to bring the Building to tenantable condition is disproportionate to the costs of redevelopment. Even if repair works are carried out, such works will bring about a modest improvement only to the existing condition of the Building and the Building will continue remain a sub-standard one. Further, although regular repair can extend the life of the Building, repair costs will increase with time, and the inherent defects caused by defective workmanship, defective materials or defective supervision in the construction of the structural elements of the structural frames of the Building cannot be repaired.
39. By reason of the matters set out above, I am satisfied the redevelopment of the Building is justified.
Whether the applicants have taken reasonable steps
40. In assessing the reasonableness of the offers, I have considered the case of Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. In particular, I have considered paragraphs 33 and 36 of the judgment in which Ribeiro PJ stated: -
“33. In making that assessment the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It does not itself arrive at any conclusion as to what figure represents the correct valuation. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. It is obviously necessary to recognise that there will often be differences of opinion on that matter……”
“36. ...... We are of course not suggesting that it is necessary for the offer to “beat” the valuation as if it were a payment into court. What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site……”
41. The applicants have made 2 rounds of offers to the Remaining Respondents on 22 February 2019 and 24 April 2020, which were based on the valuation of Mr Chan and had also reflected the then RDV attributable to the respective units owned by the Remaining Respondents. Mr Jonathan Lee, counsel for the applicant, submits the applicant has already taken reasonable steps to acquire all the undivided shares in the Lots.
42. In these proceedings, all the Remaining Respondents, except for R3 who has not appeared at trial, have withdrawn their opposition to the application or have come into agreement with the applicant. Anyhow, since the applicant’s offers were based on the assessments of valuation expert and had reflected the then RDV attributable to the respective units owned by the Remaining Respondents, and there is no evidence that Mr Chan’s valuations were at serious fault, I consider they meet the criteria laid down in Capital Well . I consider the applicant’s offers fall within the range of what may broadly be regarded as fair and reasonable.
43. By reason of the matters set out above, I am satisfied the applicant has taken reasonable steps to acquire all the undivided shares in the Lots.
RESERVE PRICE FOR THE PUBLIC AUCTION
44. By reason of being satisfied that redevelopment of the Lots is justified and that the applicant has taken reasonable steps to acquire all the undivided shares in the Lots, I am satisfied an order for sale should be granted in favour of the applicant.
45. Mr Chan said there was no relevant land sale transaction for direct comparison, and therefore he assessed the market value of the Lots as at 17 April 2020 on redevelopment basis by residual method of valuation. In the residual valuation, he opined that the optimum development of the Lots comprised a 26-storey commercial / residential composite building with G/F and 1/F planned as mainly retail units, 2/F as clubhouse and plant room, 3/F as podium garden, and 4/F to 25/F as domestic flats (i.e. including 3 simplex units on 23-25/F).
46. Details of the hypothetical development with the net site area of 257.53 square meters, the proposed gross floor area of 2,476.254 square meters (excluding green features to be exempted) and plot ratio of about 9.6154, the gross development value assessed (i.e. on average $762,000 per square meter saleable for retail units on G/F, on average $254,000 per square meter saleable for retail units on 1/F and on average $379,000 per square meter saleable for domestic units on upper floors), the development costs adopted (i.e. on average $55,755 per square meter gross including the adjustments for development scale and site accessibility) and the residual valuation were set out in his valuation report dated 20 April 2020. He assessed the RDV of the Lots by residual method as at 17 April 2020 in the sum of $332,000,000.
47. Having gone through Mr Chan’s assessments in his valuation report dated 20 April 2020, I accept his residual valuation of the Lots as at 17 April 2020, which assessed the RDV of the Lots at $332,000,000, equivalent to an accommodation value of about $134,073 per square meter (i.e. about $12,456 per square foot), which should be the reserve price for public auction.
ORDERS
48. For reasons given in this judgment, I have set out reasons why I am satisfied an order for sale should be granted and I therefore make the following orders: -
1) All the undivided shares in the Lots, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lots;
2) Mr Anthony W K Chow and Ms Anna S H Chow, nominated by the applicant, be appointed the trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lots;
3) The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Guantao & Chow dated 27 April 2020;
4) For the purposes of the sale of the Lots by public auction: -
a) the sale of the Lots be on the particulars and conditions of sale the same or substantially the same as those set out in the draft Particulars and Conditions of Sale to be approved and initialed by the tribunal; and
b) the reserve price be set at $332,000,000;
5) 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 Building 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
6) Liberty to the applicant, the respondents, and the Trustees to apply to the tribunal for further directions.
COSTS
49. The applicant and R10 agree there be no order as to costs between them in these proceedings, and I make a costs order accordingly.
50. Other than R10, and following Good Faith [1] nisi that the applicant do pay costs of these proceedings to the other respondents on High Court scale, with certificate for counsel, including any reserved costs, to be taxed if not agreed. Unless any parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from the date of this judgment.
(Alex Ng)
Member
Lands Tribunal
Mr Jonathan Lee, instructed by Messrs Mayer Brown, for the applicant
Ms Mak Hing Kwan of Messrs Ivan Tang & Co, for the 1st respondent
The 3rd and 5th respondents were not represented and did not appear
The 4th and 6th respondents appeared in person
Attendance of the 10th respondent, represented by Messrs Pang, Kung & Co, was excused
[1] Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 534