PRO SHINE INTERNATIONAL INC LTD AND ANOTHER v. KWOK HON PON AND OTHERS

LDCS 26000/2020

[2022] HKLdT 29

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 26000 OF 2020

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J U D G M E N T

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1.  This is an application for a compulsory sale order under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”) (hereinafter referred to as “the Application”) to sell all the undivided shares of the Remaining Portion of Inland Lot No 767 (“the Lot”) located at Nos 124 & 126 High Street, Sai Ying Pun, Hong Kong, formerly known as No 10 Sui Wah Terrace.

2.  Standing thereon is an 8-storey commercial/residential building (“the Building”) served by two common staircases exiting onto High Street and to the rear lane. According to the records at the Land Registry and actual usage, the G/F flat is divided into a front shop unit “Flat A” and a rear domestic unit “Flat B”, and two domestic units Flats A & B on each of the 1^st to 7^th floors. That means there are 1 G/F shop unit and 15 domestic units. The owner of Flat 7A has the exclusive right to the Roof.

3.  The occupation permit of the Building was issued on 14 April 1966, more than 54 years before the date of the Application on 23 September 2020.

4.  The Building is governed by a Deed of Mutual Covenant dated 3 June 1966 and under the First Schedule of it, each of the units in the Building is allocated 1/16 undivided shares.

5.  The 1^st respondent (“R1”) and the 2^nd respondent (“R2”) are the registered owners of Flat 5A of the Building (“Flat A”). They filed a Form 33 (Notice of Opposition) asserting that redevelopment was not justified, and the offers and valuation were too low. They had been represented by Messrs Li, Kwok & Law, Solicitors & Notaries.

6.  By consent, order was granted by the Tribunal on 7 June 2022 that:

(1)  Leave be granted to R1 & R2 to withdraw (a) their Notice of Opposition filed herein on 13 November 2020; and (b) all evidence filed in opposition, including witness statements and expert evidence;

(2)  The attendance of R1 & R2 at the trial of these proceedings be excused.

7.  The 3^rd respondent (“R3”), 4^th respondent (“R4”), 5^th respondent (“R5”) and 6^th respondent (“R6”) are estranged family members of R1 and were joined as respondents for doubts on title defects that may cause a possibility that they enjoy some residual beneficial interest in Flat A. They have remained inactive in these proceedings.

8.  In the applicants’ last offer to R1 & R2 dated 26 May 2022 for the purchase of their interest in Flat 5A, the applicants imposed the usual condition that R1 & R2 have to give good title of Flat A, in particular, it is a condition that R3-6 shall countersign the agreement for sale and purchase to assign all their beneficial and potential interest in Flat 5A to the applicants. However, R1 & R2 are unable to procure R3-6 to do so. Hence, the sale and purchase of Flat 5A cannot proceed and parties entered into an alternative form of settlement of these proceedings as set out below:

(a)  If an Order for Sale is granted by the Tribunal, and if the net proceeds of sale to be attributed to Flat 5A does not reach the settlement figure, then the applicants shall pay the difference between R1 & R2’s share of the sale proceeds received from the appointed Trustees on the one hand, and the settlement sum on the other hand.

(b)  In other words, R1 & R2 are guaranteed to still receive the settlement sum in full.

(c)  On this basis, R1 & R2 agree not to contest an Order for Sale to be made and to withdraw their opposition and evidence in the proceedings.

9.  This settlement agreement was in respect of the total money to be received by R1 & R2 upon eventuality of a successful auction sale under an Order for Sale. R1 & R2 remain as the registered owners of Flat 5A.

10.  The 7^th respondent and 8^th respondent were sued as the Personal Representative of Suchin Surawatanabutr, deceased and the Personal Representative of Aow Ng Si, deceased respectively. The 7^th, 8^th and 9^th respondents are at all material times the registered and beneficial owners, as tenants-in-common, of All That 1 equal and undivided 16^th part or share of an in the Lot and the Building together with the sole and exclusive right and privilege to hold, use, occupy and enjoy Flat B on 1/F of the Building (“Flat 1B”).

11.  On 15 January 2021, Ms Patchara Angsuratkomel, daughter of the late Suchin Surawatananbutr and the late Aow Ng Si, was granted letters of Administration by the High Court over their respective Estates, Messrs Peter W K Lo & Co, Solicitors, have confirmed that they have instructions to act for Ms Patchara Angsuratkomel in her capacities as the sole administratrix for the above-mentioned Estates.

12.  The 10^th respondent and 11^th respondent are alleged to be the occupiers of Flat 1B and allegedly asserted an adverse possessory title over Flat 1B. According to Messrs K W Wong & Co, who represented the 10^th respondent and 11^th respondent in correspondence with Messrs Mayer Brown, solicitors for the applicants, the 10^th respondent and 11^th respondent are family relatives of Suchin Surawatananbutr and/or Aow Ng Si, both of whom had passed away in the early 2000’s.

13.  Upon the joint application of the solicitors for the applicants and the solicitors for the 7^th, 8^th and 9^th respondents by way of consent summons filed on 26 July 2021, the Application against the 7^th, 8^th and 9^th respondents were wholly discontinued.

14.  The applicants also discontinued the Application against the 10^th respondent and 11^th respondent on the even date.

15.  At trial, Mr Mok Yeuk Chi and Ms Julia Au acted on behalf of the applicants while the outstanding respondents were all absent.

The Evidence

16.  The applicants have filed the following documents in support of the Application:

(a)  a witness statement and supplemental witness statement of Mr Li Ki Cheung, representative of the applicants, dated 12 August 2021;

(b)  a Building Condition Survey Report by Mr Benson Wong (“Mr Benson Wong”) dated 12 August 2021;

(c)  a Structural Survey Report by Mr Wong Chi Ming (“Mr C M Wong”) dated 3 August 2021;

(d)  the following reports by Mr Charles Chan (“Mr Chan”) of Savills Valuation and Professional Services Ltd (“Savills”);

(i)  an Application Report pursuant to Part 1 of Schedule 1 to the Ordinance dated 21 September 2020;

(ii)  a Supplemental Report dated 11 August 2021;

(iii)  a Rebuttal Report dated 12 November 2021 against the valuation report prepared by the valuation expert on behalf of R1 & R2;

(iv)  an Updated Report on the redevelopment value (“RDV”) of the Lot on 3 May 2022.

Whether the Applicant is entitled to make the Application

17.  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.

18.  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.

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

20.  Insofar as the occupation permit for the Building was issued on 14 April 1966, ie not less than 54 years before the date of the Application, the Notice is applicable and the threshold percentage should be 80%.

21.  The applicants, owning all the undivided shares of the Lot save those 2/16 allotted to Flat 1B and Flat 5A respectively, obviously more than 80% of the Lot at the commencement of the Application, were entitled to file the Application under section 3(1) of the Ordinance.

EUV as at 10 July 2020

Assessment of EUV of G/F Units

22.  Pursuant to Part 1 of Schedule 1 to the Ordinance, a valuation report, prepared not earlier than 3 months before the date on which the application under section 3(1) of the Ordinance is made, is required in setting out the assessed market value of each property on the lot—

(a)  on a vacant possession basis;

(b)  assessed as if the lot could not be made the subject of an application for an order for sale; and

(c)  not taking into account the redevelopment potential of the property or the lot.

This was what had been done by Mr Chan in his Application Report dated 21 September 2020.

23.  Mr Chan, in the Application Report, adopted eight transactions of shops in the vicinity as comparables in the assessment of the market value (usually termed by the profession as “EUV”) of the only shop in the Building as at 10 July 2020. Subsequently, on 18 January 2022, he and the valuation expert on behalf of R1 & R2 agreed the EUV of the shop in the Building at $18,247,000[1]. They also agreed the EUV for the only domestic unit on G/F of the Building, ie Flat B at $7,858,500[2].

24.  The EUVs of the domestic units were assessed by Mr Chan as follows:

	Flat A	Flat B
1/F	$9,100,000	$7,850,000
2/F	$8,080,000	$6,590,000
3/F	$7,680,000	$7,030,000
4/F	$7,770,000	$6,890,000
5/F	$7,840,000	$6,560,000
6/F	$7,680,000	$6,570,000
7/F	$8,020,000	$6,430,000

Conclusion on EUV

25.  I am satisfied that the value of the minority owners’ properties 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.

26.  The total EUV of the Building is therefore in the sum of $130,195,500.

Whether Redevelopment of the Lot is Justified on “Age” or “State of Repair”

27.  Section 4(2)(a) of the Ordinance stipulates that the Tribunal shall not make an order for sale unless it is satisfied that redevelopment of the Lot due to the “age or state of repair” of the Building is justified.

Experts’ Evidence

28.  On this issue, the applicants adduced the Condition Survey Report dated 12 August 2021 by Mr Benson Wong, the Building Surveyor and the Structural Assessment Report dated 3 August 2021 by Mr C M Wong, the Structural Engineer.

29.  In the Structural Survey Report, Mr C M Wong concluded as follows:[3]

(1)  Cracks and spalling are found at 23 locations of the Building.

(2)  55% and 45% of the steel reinforcement bars at horizontal elements inspected at open up locations in the Building are notably suffering from partly corrosion and mild corrosion respectively. All of the reinforcement bars at vertical elements inspected at open up locations in the Building are notably suffering from partly corrosion.

(3)  Based on the test samples, carbonation has reached the steel reinforcement bars in 88% of the horizontal structural elements and 25% of the vertical structural elements.

(4)  75% of samples of the horizontal structural elements in the Building have chloride content exceeding 0.40% which is classified as a “moderate” risk of corrosion.

(5)  If the combined effect of carbonation and chloride content is considered, 83% of the samples in the Building pose a “moderate” risk to “high” risk of corrosion to the steel reinforcement bars.

30.  Mr C M Wong recommended that hammer tapping works be carried out to find out the extent of spalling cracking in the structural members and any such as spalling and cracks to be revealed should be patched repaired.

31.  In the Condition Survey Report, Mr Benson Wong concluded that[4]:

“6.1 The Age

6.1.1 The Building which is over 55 years old and with regard to its physical life, is amongst the oldest building in its immediate neighbourhood.

6.1.2 The Building is aged structurally as with regard to the durability provisions the Building’s structure is considered to have passed the end of its design working life.

6.1.3 The Building is aged physically as showed by 3 signs of obsolescence as compared with other modern buildings:

a. A plain looking block with monotonous elevations.

b. The external walls are simply rendered and painted. These low-cost external building finishes were only acceptable in the post war era but have been out-classed by buildings nowadays.

c. An overall untidy appearance from piecemeal replacements of the old windows with aluminum units of different types and colours.

6.1.4 The Building is also aged functionally as it has been suffering from the following aspects of functional obsolescence which have safety and hygiene implications as compared with current standards for buildings nowadays:

a. The shortfalls in fire services installation are as follows:

(i) Defective manual fire alarm system;

(ii) Outdated fire hydrant/hose reel system; and

(iii) Emergency electricity supply system.

b. The fire escape arrangement for the Building is unsatisfactory as follows:

(i) Handrail is not provided on both sides of the Buildings

(ii) Emergency lighting is not provided to the required staircases and corridors of the Building.

(ii) Reducing of effective width of the staircase landings by doors swing out from the unauthorized encroachments of flats onto the staircase landings.

c. The fire resisting construction is outdated as follows:

(i) The existing concrete cover thickness of floor slabs is 12.7mm and beams is 25.4mm which is less than the currently minimum required thickness of 20mm of floor slabs and 30mm of beams;

(ii) The existing staircase and flat entrance doors on upper floors of the Building are not fire rated doors as currently required.

(ii) The exposed electrical installations and wirings installed in the required staircases without fireproof enclosures are prohibited nowadays.

d. The Building has no barrier free access facilities as follows:

(i) An accessible lift; and

(ii) An accessible ramp.

…

g. The Building has no equipotential bonding provided for exposed metal fixtures in both common (except the staircase windows) and private areas thereby endangering the safety of occupants and breaching the Electrical Code.

h. The Building has no lightning protection system installed on the roof to protect its occupants and building parts from lightning strikes.

…

Many of these aspects of functional obsolescence … cannot be rectified unless the Building is demolished and redeveloped…

6.2 The State of Repair

6.2.1 Based on my condition survey finding and Mr C M Wong’s structural assessment results, I am of the view that the Building is in a poor state of repair.

6.2.2 According to the structural assessment of Mr C M Wong, he believes that the Building has reached the propagation phase and therefore, regular or frequent maintenance and repair works are required in the near future in order to keep the Building in safe condition.

6.2.3 Based on my condition survey findings, the components, finishes and service installations of the Building have been suffering from various deteriorations resulted from unauthorized building works constructed; substandard workmanship and/or materials used in the original construction, lack of repair and continuous natural weathering over the years.

6.2.4 The defects and deficiencies found in the Building are of the nature and magnitude that cannot be easily rectified by simple and piecemeal repairs, and the following if not repaired in time, will be liable to become dangerous and imposed threats to safety:

a. The generally defective external rendering;

b. The asbestos containing materials;

c. The defective waterproofing on various roofs;

d. The non-conforming width of fire escape route;

e. The non-conforming fire resisting staircase and flat entrance doors;

f. The exposed electrical installations and wirings;

g. The defective floor finishing and lack of stair nosing to the fire escape routes;

h. The omitted equipotential bonding for exposed metal fixtures; and

i. The omissions and shortfall in fire service installation.

j. The lack of an emergency electricity supply.

6.2.5 The Repair Cost of $10,336,017 is about 44% of the Construction Cost of $23,330,000 for constructing a new similar superstructure. The Repair Cost is disproportionately high indicating that the deterioration of the Building’s superstructure is very serious and has reached a state which is beyond reasonable economic repair.

6.2.6 In addition to the apple-to-apple comparison Repair Cost and Construction Cost, the conclusion on whether the existing state of repair of the Building is justified for redevelopment, building owners should also take into account of the following:

a. The implementation of the repair works and discharge of other repair obligations will be disturbing and onerous for the existing occupiers and building owners.

b. The future mandatory repairs concerning safety and hygiene improvements introduced after the Building was constructed will make the continued occupation of the Building uneconomical and even unsafe, to both occupants and third parties.

c. The Building will not be up to the standard of a new building due to its inherent limitations. Even if the Building is repaired, the quality of accommodation will still be below market expectation.”

32.  In the end, Mr Benson Wong recommended the owners to redevelop rather than repair the Building, particularly bearing in mind the Building does not possess any historical value or architectural merit, and is merely a building of the past that can be replaced.

33.  In the absence of evidence to the contrary, I am satisfied that redevelopment of the Building is justified due to the age and state of repair.

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

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

35.  Bearing in mind the applicants’ effort in achieving settlements with the various respondents, I am satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot including negotiating for the purchase of the share owned by the respondents on terms that are fair and reasonable.

RDV of the Lot

Hypothetical Development Model

36.  Mr Chan resorted to the residual valuation method in determining the RDV. This can be done by deducting development cost (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value (“GDV”) of the completed optimum development.

37.  Based on an agreed developable site area of the Lot at 259.05 sq m (which is relatively small), Mr Chan assumed there can be built a hypothetical 24-storey residential/commercial composite development with entrance lobby, retail shop and access to plant room on G/F, club house and plant room on 1/F, which is surmounted from 2/F to 23/F by residential flats (with 2 units per floor save for the simplex on 23/F).

38.  Because of the narrow and longitudinal shape of the Lot, Mr Chan adopted a reference new retail unit on G/F of the hypothetical development having a saleable area of 157.53 sq m with a frontage of 4.1 metres on High Street and a significant depth of some 38 metres. He agreed with the valuation expert on behalf of R1 & R2 that the unit price would be $282,600 per sq m.

39.  Mr Chan then referred to the recent transactions of One Artlane at No 8 Chung Ching Street (Date of Completion: 2019), Two Artlane at No 1 Chung Ching Street (Date of Completion: 2021) and 15 Western Street (Date of Completion: 2021). After various adjustments, Mr Chan arrived at an average unit price of about $287,000 per sq m for the domestic flats. He proceeded to the residual valuation by applying the various parameters and arrived at the RDV of $210,000,000 which is equivalent to an accommodation value of $97,862 per sq m.[5]

40.  As all evidence filed in opposition, including witness statements and expert evidence on behalf of R1 and R2 have been withdrawn, I cannot but rely on Mr Chan’s valuation.

41.  I determine the reserve price of the Lot at $210,000,000.

Other Incidental Matters

42.  The applicants proposed to appoint Mr Ma Ho Fai and Ms Kung Ying Chang, being partner and assistant solicitor respectively of Messrs Woo Kwan Lee & Lo, Solicitors, Notaries, Agents for Trademarks & Patents as the sale trustees. Based on the information on their background and experience as set out in their letter dated 21 April 2022[6], I 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 reasonable.

43.  The applicants have prepared a set of draft Particulars and Conditions of Sale of the Lot. Subject to any amendment that may become necessary as a result of my ruling on the arrangement of auction above, the particulars and conditions of sale of the Lot by public auction submitted by the applicants are also reasonable.

Order

44.  This Tribunal make the following orders:

(1)  This Tribunal is satisfied that the redevelopment of the Lot is justified due to the “age” or “state of repair” of the Building and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot including those of the respondents;

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

(3)  Mr Ma Ho Fai and Ms Kung Ying Chang of Messrs Woo Kwan Lee & Lo, Solicitors, Notaries, Agents for Trademarks & Patents, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to sale of the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Woo Kwan Lee & Lo, Solicitors, Notaries, Agents for Trademarks & Patents dated 21 April 2022.

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

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

(ii)  The reserve price be set at $210,000,000.

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

(iv)  Liberty to the applicants, the 1^st to 6^th respondents, their successors in title and/or the Trustees to apply to the Tribunal for further direction(s) under the Ordinance.

Costs

45.  There be no order as to costs