FINEWAY PROPERTIES LTD v. SIN HO YUEN VICTOR, THE ADMINISTRATOR OF THE ESTATE OF SIN YAT

CACV 95/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 95 OF 2009

(ON APPEAL FROM LDCS NO. 5000 OF 2007)

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BETWEEN

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J U D G M E N T

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Hon Le Pichon JA:

1.  This was an appeal by Sin Ho Yuen Victor, the administrator of the estate of Sin Tat (“the respondent”) from an order dated 20 March 2009 of the Lands Tribunal for the compulsory sale of all the undivided shares of and in a lot situated at 44-46 Haven Street in Causeway Bay under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545. At the conclusion of the hearing judgment was reserved which we now give.

Background

2.  The matter before the tribunal was an application by Fineway Properties Ltd (“the applicant”) for an order of compulsory sale of the lot on which a residential building consistingof 8 floors with two units on each floor had been erected. The two ground floor units have been converted into shops. The respondent owned one undivided share of and in the lot, representing 6.25% of the lot with exclusive possession of the ground floor shop at 44 Haven Street. The applicant owned the balance of the undivided shares.

3.  The application for an order for compulsory sale was made on 30 July 2007 and amended on 15 January 2008. Under section 10 of, and Part 3 of Schedule 1 to, the Ordinance, the apportionment of the proceeds of sale between the majority and minority owners is on a pro rata basis of the existing use value (“ the EUV”) of the respective properties of each of them and where there is disagreement between the parties, the tribunal has to determine the EUV.

4.  The parties’ valuations of the EUV were significantly different. As recorded in § 6 of the judgment, they were as follows:

	Applicant	Respondent
Total EUV of the domestic units	$28,890,000	$35,581,265.80
Total EUV of the shop units	$7,180,000	$20,463,856.84
Total EUV of the Building	$36,070,000	$56,040,122.64

5.  In determining the EUV of the shop units, the tribunal considered that only four comparables were relevant and on that basis determined the average unit rate at 66,441 resulting in a valuation for each shop unit at $4,580,000. In reaching that determination, it had rejected a comparable (referred to as “C4b”) advocated by the respondent’s expert. The tribunal’s determination resulted in the respondent being entitled to 12.0368% of the proceeds. Had C4b been included as a comparable, the respondent’s entitlement would have increased to 13.8423%. The tribunal’s exclusion of C4b as a comparable is one of the matters (albeit a subsidiary one) raised in this appeal.

6.  The trial commenced in June 2008. Shortly after it began, the parties agreed the reserve price at $122 million. The reserve price or the redevelopment value (“RDV”) of the lot is another critical factor in compulsory purchase applications by reason of § 2 of the Second Schedule to the Ordinance.

7.  The June trial dates of 7 days had been fixed in January 2008. However, shortly before trial, it emerged that quite apart from differences on the valuations, there were serious disputes on many other matters particularly on age and/or state of repair of the property that required each party to call upon at least 3 to 4 experts and another 16 days of trial. The original trial dates were spent on valuation disputes concerning the EUV. The matter was then adjourned part-heard.

8.  The trial resumed for another 7 days commencing 8 December2008. When the outstanding evidence concluded some time on 11 December, the applicant made his application (notice of which had been given to the respondent prior to the resumption of the trial in December) to re-open the fixing of the reserve price on two grounds: first, that the agreement had been made on a false premise and second, that during the interval of six months, there had been an “unimaginable drastic market drop” caused by the financial tsunami. On 16 December, the tribunal rejected the first ground but accepted the second and allowed the re-opening of the RDV. The reserve price was ultimately set at $70.5 million.

9.  At the originally agreed reserve price of $122 million, at the percentage of the lot attributable to his share as determined by the tribunal (i.e. 12.0368%) the respondent’s entitlement would have been $14.68 million. On the RDV of $70.5 million, the respondent’s share fell to $8.48 million, a drastic reduction of approximately $6.2 million or over 40%. The main focus of this appeal was whether the re-opening of the RDV should have been allowed.

10.  To complete the chronology, it should be mentioned that the trial did not conclude in December. It had to be adjourned part-heard and a further 4 hearing days were required in February to complete the trial. Also, it should be noted that the trial would have taken much longer had the respondent not acceded to the tribunal’s ‘encouragement’ not to rely upon the expert technical evidence filed by him relating to the condition and structural investigations of the building to counter the applicant’s evidence.

11.  On 20 March 2009 the tribunal (1) determined that the existing use value of the respondent’s one undivided share together with the right of possession of the ground floor, 44 Haven Street to be $4,580,000; (2) made an order that the lot be sold by way of public auction under section 4 (1)(b) of the Ordinance; (3) appointed trustees for that purpose; (4) made provision for the sale by public auction to the effect that (a) it be sold on the particulars and conditions approved by the tribunal; (b) the reserve price be set at $70.5 million; (c) subject to further extensions as may be allowed, the redevelopment to be completed and made fit for occupation within six years from the date the purchaser becomes the owner of the lot; (5) liberty to apply; (6) an order nisi that the respondent there 90% of the applicant’s costs be made absolute after 14 days unless either party applied to vary otherwise.

12.  The auction has taken place. There was only one bidder, namely, the applicant who acquired the lot at the reserve price of $70.5 million. The respondent accepts the reality of the auction and does not seek to set aside §§ 2, 3, 4 (a) and (c) and 5 of the order. However, he is aggrieved by the re-opening of the RDV which had the effect of drastically reducing the amount of proceeds to which he would have been entitled otherwise. The substantive relief the respondent seeks is a proper share of the previously agreed RDV.

This appeal

13.  Before proceeding to consider the issues raised, it should be mentioned that while the costs order nisi was another of the matters the respondent sought to raise in this court,as the respondent has applied to vary that order and, indeed, that application has been set down for hearing by the tribunal on 19 May 2010, it was made plain to Mr Coleman at the outset of the appeal that this court was not minded to hear any appeal on costs at this stage. As and when a final costs order has been made which is not to the respondent’s liking, it remains open to him to take such steps as may be necessary to appeal that order.

Re-opening of the RDV

14.  Mr Coleman SC who appeared for the respondent submitted that the tribunal erred in allowing the RDV to be reopened. While § 2 of the Second Schedule to the Ordinance requires that any sale ordered be subject to a reserve price which takes into account the redevelopment potential of the lot on its own and “approved by the Tribunal”, as a matter of common sense, it is virtually inconceivable that a tribunal would not approve a reserve price or RDV that has been agreed by the co-owners. There would have been no reason (much less good reason) for the tribunal not to have “approved” the price agreed by the parties. So by early June there was an agreement in place as to the RDV.

15.  When the proceedings had to be adjourned to December after the 7-day hearing in June, the tribunal was undoubtedly aware that the resumed hearing would not be taking place until six months later. The parties were never told that that interval would affect the agreed reserve price, for example, such that the parties would have to be in a position to update the reserve price by the date of the resumed hearing. There was no reason not to consider the agreed reserve price as binding and operative. Indeed, it is implicit in the tribunal’s decision to permit it to be “re-opened” that the tribunal had ‘accepted’ the agreed price as the reserve price. If, as Mr Mok who appeared for the applicant, submitted, there had been no approval as such in June 2008, no question of ‘re-opening’ the RDV would have arisen.

16.  I do not doubt that had the ‘false premise’ objection advanced by the applicant been upheld, that would have vitiated the agreement. But that did not happen. Rather, the tribunal rejected the suggestion that the agreement should be set aside because it was not a fully-informed and independent decision as far as the applicant was concerned. In those circumstances, plainly, the lapse of time was not a valid reason to allow the RDV to be re-opened since the tribunal was aware,when the June proceedings went part-heard that the six-month adjournment was not only unavoidable, the tribunal did not consider that the adjournment would have any effect on the RDV as agreed.

17.  That leaves the economic crisis that occurred in the autumn of 2008. In W v H and Z, (unreported) CACV 127 of 2008, 12 May 2009, this court rejected an attempt to reopen an order for ancillary relief on the basis that the assets retained by the husband had diminished in value in a way that had not been anticipated because of the economic turmoil of 2008 that ensued following compliance with the order. If the diminution in value of assets through the natural processes of price fluctuation, however dramatic, normally does not warrant the variation of orders made, by parity of reasoning, it can have no impact on a concluded agreement and does not constitute a valid reason for reopening it.

18.  For my part, I have no hesitation in concluding that the tribunal erred in allowing the RDV to be reopened. But what (if any) remedy is available?

19.  As earlier noted, Mr Coleman’s position is that his client seeks a proper share of the previously agreed RDV. In that connection, it is relevant to state that the respondent did not apply for a stay. Mr Coleman SC explained that in view of this court’s refusal of a stay in another case concerning an order for compulsory sale under the Ordinance, the respondent decided not to apply for a stay but to proceed with this appeal. It was suggested thathaving regard to that decision, an application for a stay was unlikely to be successful.

20.  The decision referred to was Intelligent House Ltd v China Superior Ltd [2008] 6 HKC 256, a copy of which was supplied to the court after the hearing. Having now had the benefit of reading that report, in my view,it was hardly a foregone conclusion that any a stay application made in the present case was bound to fail: the factual matrix of Intelligent House that led this court to set aside the stay in that case is certainly distinguishable. Be that as it may, the fact is that the respondent did not seek a stay of the order.

21.  Had there been a stay, the remedy now available would have been obvious. Absent a stay, as is the present case, I do not see that the position is as simple as Mr Coleman would have it - that the court must have power to correct the resulting injustice of the respondent having his ‘legitimate’ share reduced by at least $6.2 million or, put differently, that the applicant should be paying at least $6.2 million less for the property at the respondent’s expense.

22.  Mr Coleman’s approach was that this court should simply substitute $122 million as the reserve price and order that the net proceeds of sale be distributed on the basis that the property had been sold for that sum.

23.  What is a known fact is that the auction took place a year ago. Absent a stay, it is difficult to see how the clock can be turned back and the auction treated as having achieved a price of $122 million. This presents a very real difficulty in that there is nothing in the Ordinance that authorises the court to ‘deem’ the price achieved at auction to be something other than the price actually achieved. There are further difficulties. One simply cannot assume that had the reserve price been different, the auction necessarily would have been successful. Moreover, the court is totally in the dark as to what amount (if any) of the proceeds of sale remains in the hands of the trustees for sale appointed by the court.

24.  In that connection, it is relevant to note that where the successful purchaser is the majority owner of the lot, section 6(1) does not require the majority owner to pay the full purchase price to the trustees but only that proportion of that amount that the trustees consider is necessary to purchase the minority owner’s share and to enable the trustees to comply with section 11(2). Therefore, even if one were to assume in the respondent’s favour that no distribution has yet been made, it is not a case where the trustees have retained the full purchase price in their hands. Obviously, they cannot be ordered to make a distribution of funds that they do not have.

25.  The difficulties (jurisdictionalor otherwise) that arise because of the absence of a stay of execution are real. If, for any of the reasons above, the trustees cannot be ordered to distribute the proceeds on the basis that the price achieved at auction was $122 million, I do not consider that the court has any jurisdiction under the Ordinance to make an order against the applicant in favour of the respondent in respect of the ‘shortfall’.

26.  While I have considerable sympathy for the respondent and the predicament in which he finds himself, the absence of an available remedy is the inevitable consequence of not having obtained a stay.

The exclusion of comparable C4b

27.  In view of the absence of a remedy, whether or not the tribunal erred in excluding comparable C4b is academic but in deference to counsel’s submissions, I will deal with the point briefly.

28.  In March 2007, the applicant made known to the public its intention to acquire all units in various buildings in Haven Street for redevelopment purposes. Comparable C4b was a transaction that concluded in November 2007 and, hence it was a post-March 2007 transaction. The tribunal reviewed the pre-and post-March transaction values of shop comparables in Haven Street and found two distinct price ranges, with the post-March comparables falling into the higher range. The tribunal took the view that the post-March transactions including comparable C4b had ‘hope value’ embedded in them and that that accounted for the two price ranges.

29.  Mr Coleman criticised the tribunal for not being consistent in its approach in that while excluding comparable C4b (a post-March transaction) when assessing the EUV of the shop units, its assessment of the domestic EUV did include post-March transactions of domestic units.

30.  But what is to be borne in mind is the parties’ stance (made clear at the outset of the proceedings below) of not opposing the domestic EUV as assessed by the opposing expert. As a result, there was no cross-examination on the adjustments of the comparables and the assessment of the domestic EUV made by the experts. Given that backdrop, the point made by Mr Coleman loses much of its significance. In my view, it was open to the tribunal on the evidence before it to exclude comparable C4b and, accordingly, no valid ground has been shown to warrant any interference with that finding.

Section 4(2)(a) of the Ordinance

31.  This provision requires the tribunal to be satisfied that the redevelopment of the lot is justified due to “the age or state of repair” of the existing development on the lot before making an order for sale. But the Ordinance is silent as to what is meant by “age” or “state of repair”.

32.  In Intelligent House Ltd v Chan Tung Shing & Ors, LDCS 11000/2006, 23 June 2008, the tribunal formulated its own tests for that purpose:

“(1)	On the ground of age, the Tribunal is entitled to look at: (a) Whether the old building has reached the end of its physical life. (b) Whether the old building has reached the end of its economic lifespan.  The economic lifespan comes to an end when the cleared site value of the lot significantly exceeds the existing use value of the building, provided that it can be demonstrated that the building has so come to the end of the economic lifespan because of its age as reflected by features of obsolescence.
(2)	On the ground of state of repair, the Tribunal is entitled to look at: (a) The state of repair of the old building is such that it has rendered the building a danger to the residents or the public at large. (b) The state of repair of the old building is such that it has rendered the building coming to the end of its economic lifespan, in that it has become economically unworthy to repair.  This includes situation where (a) the costs of repair exceeds the existing use value of the building, or (b) the costs of repair significantly exceeds the enhancement value arising from or attributable to the repairs. (c) Moreover, for the purpose of determining whether it is economically worthy to do so, the Tribunal is entitled to look at repairs which would render the building to a tenantable condition fit for the enjoyment of its tenants and visitors, which is reasonable in the present day circumstances for the type of building in question.
(3)	On the grounds of both the “age” and “state of repair” of the old building, the Tribunal is entitled to look at all of the above factors or tests collectively to see if that justifies redevelopment, even though when each of them is considered alone, it is insufficient to do so.”

At the hearing below, the respondent did not challenge the correctness of those tests.

33.  The concept of the “economic lifespan” of a building features prominently in the Intelligent House tests but it is to be noted that its meaning depends on its precise context – age or state of repair (compare and contrast § (1)(b) with § (2)(b)). Mr Coleman’s criticisms were directed at the tribunal’s application of the tests. Mr Coleman recognised and accepted that as the respondent is not seeking to set aside the order for sale, his submissions on this issue – that the tribunal went about applying the Intelligent House tests in the wrong way – would have no impact in terms of the outcome of this appeal but he was anxious that what was perceived to be an error of law be put right.

34.  As I understand position, the tests formulated by the tribunal in Intelligent House have not yet been considered by a higher court, but they have been applied by the tribunal in other cases including the present case. Since the correctness of those tests does not arise on the present appeal, that question will have to await consideration by another court on another occasion.

35.  Nevertheless, I have some reservations as to their correctness. Admittedly, this is no more than a preliminary view without the benefit of hearing full argument on the point but it would not be inappropriate to highlight the fact that the concept of “economic lifespan” does not feature in the Ordinance. It is a concept that might have currency with economists. Be that as it may, it found favour with the tribunal in Intelligent Houseto the extent that the tribunal considered it to be one aspect of the meaning of “age”and “state of repair” for the purposes of section 4(2)(b) of the Ordinance. Whether that interpretation is sustainable in a higher court remains to be seen. As to the meaning of that concept in the context of “age” (see § (1)(b) of the citation from Intelligent House in § 32above),suffice it to say that meaning and scope of the proviso appear to be far from clear.

36.  Another matter that deserves attention is that the expert reports filed on behalf of the applicant in the present case are replete with references to the works of economic theorists/writers opining on property investment and redevelopment but from the perspective of an economist. See, for example, Baum on Property Investment Depreciation and Obsolescence (1991), Balkin & Ors on Urban Land Economics and Public Policy, 5^th edition and Grover on Land and Property Development. How these economic theories and concepts are relevant to the proper construction of the Ordinance is not readily apparent.

37.  For my part, until they have the imprimatur of a higher court, the tests formulated in Intelligent Houseshould be approached with a degree of circumspection and should not be applied as if they were part of the Ordinance itself.

Conclusion

38.  I would dismiss this appeal.   Since the respondent did succeed in showing that the tribunal erred in allowing the applicant to re-open the RDV, I would order nisi that each party should bear its/his own costs of this appeal.

Hon Cheung JA:

39.  I agree.

Hon Lam J:

40.  I respectfully agree with the judgment of Le Pichon JA on the dismissal of the appeal. As explained in Her Ladyship’s judgment, the difficulty lies in the omission of the respondent to seek a stay of execution. The outcome of this appeal highlights the impact of not getting a stay of execution pending appeal in this type of cases. Had there been an application for stay, the court may redress the imbalance by extracting an undertaking from the party opposing the stay to pay damages to the appealing party (and have it fortified if necessary) as the price for refusing a stay. Without such an undertaking, it is difficult to see how this court can have jurisdiction to grant the remedy sought by Mr Coleman.

41.  I also echo my Lady’s reservation about the tests formulated in Intelligent House.

42.  I also agree with the proposed order as to costs.

Hon Le Pichon JA:

43.  Accordingly, there will be an order in terms of § 38 above.