FINEWAY PROPERTIES LTD v. AU YEUNG CHOW AND ANOTHER

LDCS 6000/ 2007

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 6000 OF 2007

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J U D G M E N T

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The Application

1.  This is an application made under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) for an order of compulsory sale of all the undivided shares of and in Sub-Section 5  of Section E of Inland Lot No.2147 and the Remaining Portion of Section E of Inland Lot No. 2147 (“the Lot”). The Applicant is the owner of 93.75% of the undivided shares of the Lot.  The Respondent having the rest of the undivided shares is the owner of Ground Floor, No. 50 Haven Street, Hong Kong.

2.  The Respondent mainly challenges the valuations of the existing use value (“EUV”) and the redevelopment value (“RDV”) of the Lot. Apart from that, the Respondent also opposes the application on the grounds that the redevelopment is not justified and the Applicant has not taken reasonable steps to acquire all the undivided shares in the Lot. 

Background

3.  On the Lot, there is a Building situated at Nos.48-50 Haven Street, a cul-de-sac branching off the eastern side of Leighton Road in Causeway Bay.  It is a residential block consisting of 8 storeys with 2 flats at each floor and 2 shops at Ground Floor totalling 16 units. The Building was completed in 1958 with the occupation permit issued on 16^th May 1958 and was 49 years of age by 2007 when the present application was made.    

4.  At trial, Mr Liu of the Respondent no longer challenges the evidence of the Applicant in relation to the age and state of repair of the Building.  The remaining issues only confine to the assessment of the EUV and the RDV, and whether reasonable offer had been made by the Applicant.   

Valuation issues to be decided by the Tribunal

5.  At the beginning of the trial on 22 September 2008, Mr. Liu confirmed that there were only 2 valuation issues in dispute that have to be determined by the Tribunal:

(1)  the assessment of the EUV of the shops, including that of the Respondent’s unit (i.e., G/F of 50 Haven Street) after the parties managed to agree on the EUV of domestic units of the Building on the Lot, by splitting the difference in the assessments of the 2 experts called by the parties;

(2)  the fixing of the reserve price, which was agreed to be the RDV of the Lot over which the Building stands.

Summary of the experts’ valuation of the EUV of the units in the Building

6.  The Applicant’s expert, Mr. Charles Chan (“Mr. Chan”) valued the total EUV of all domestic units in the Building at $31,590,000 whilst the Respondent’s expert, Ms. Ellen Lo (“Ms. Lo”) valued the same at $30,590,000.  The total difference in the EUV of all domestic units between the 2 experts was only $1,000,000.

7.  For the shop units, the parties had much larger differences in their opinion of the EUV.  Mr. Chan valued the EUV of shop No. 50 at $3,780,000 and that of shop No. 48 at $3,660,000.

8.  On the other hand, Ms. Lo filed 2 valuation reports in December 2007 and July 2008 respectively.  In her first report of December 2007, she valued only one unit on the ground floor, i.e. shop No. 50 as at 19 December 2007 at $6,800,000 whilst in the second report of 29 July 2008 she valued the 2 shops in the Building as at 27 July 2007, at $8,860,000 for shop No. 50, and $8,540,000 for shop No. 48.  The Respondent submitted that the Tribunal should adopt the values of Ms. Lo as given in her second report.

9.  In summary, the total estimated EUV of the domestic and the shop units of the Building as initially assessed by the 2 experts are as follows:

	Mr. Chan	Ms. Lo
Total EUV of the domestic units	$31,590,000	$30,590,000
Total EUV of the shop units	$7,440,000	$17,400,000
Total EUV of the Building	$39,030,000	$47,990,000

10.  The parties have during the hearing agreed on the EUV of the domestic units of the Building on the Lot, by splitting the difference in the assessments of the 2 experts.  Adopting the agreed EUV of each of the domestic units of the Building, we set out below the parties’ revised assessments of the EUV of the Building:

	Applicant	Respondent
Agreed EUV of the domestic units	$31,090,000	$31,090,000
Total EUV of the shop units	$7,440,000	$17,400,000
Total EUV of the Building	$38,530,000	$48,490,000

11.  Under section 10 of the Ordinance, the apportionment between the majority owner and the minority owner of the Lot shall be on the basis as specified in Part 3 of Schedule 1 of the Ordinance.  Under the Schedule, the proceeds are to be apportioned on the basis of the EUV as stated in the Applicant’s Notice of Application.  However, if there is a dispute between the parties as to the EUV of the units in the Building on the Lot, the Tribunal has to determine the values.

Determination of the EUV of the shop units in the Building

12.  The main submission of the Applicant was that,

(1)  Ms. Lo’s evidence was shown to be totally unreliable and her shop EUV assessments should be rejected, and

(2)  Mr. Chan’s evidence should be accepted.

The Respondent strenuously rejected this submission and instead submitted that the Tribunal should accept Ms. Lo’s evidence, but not those of Mr. Chan.

13.  We will first summarize below the 2 experts’ valuation of the EUV of the shop units in the Building, noting in particular their reasons for the choice of suitable comparables or exclusion of unsuitable comparables, the analysis and adjustments of chosen comparables, reconciliation and their final conclusion of values.

Valuation of the EUV of the shops in the Building by Mr. Chan

14.  In Mr. Chan’s 2^nd Supplemental Report dated 11 September 2008, he set out the revised EUV of all the units in the Building as at 27 July 2007.  In Appendix A3 of the said Report (see TRB(I)/147), he set out his list of shop comparables and adjustments, including the adjustment for time which was based on the confirmed retail property price index published by the Rating & Valuation Dept. (RDV).  He arrived at the appropriate adjusted unit rate of $53,000 per sq. m. for the valuation of the shops in the Building.

15.  In the Report, Mr. Chan adopted a total of 12 comparables as suitable comparables.  They include 5 comparables in Haven Street, 1 in Shelter Street at the Causeway Bay area nearby and 6 in Tai Hang area.  A summary of these 12 comparables is shown in the following table (with references Comparables A1 to A12, corresponding to Mr. Chan’s original references 1 to 12):

Comp. Ref.	Address	Date of sale	Sale price
A1	G/F., 9 Haven Street	09/03/2007	$4,800,000
A2	Unit B, G/F., 5-7A Warren Street	16/03/2007	$2,550,000
A3	G/F., 13 Haven Street	25/01/2007	$2,100,000
A4	G/F., 15A Haven Street	24/11/2006	$1,700,000
A5	G/F., 36 Haven Street	18/09/2006	$4,780,000
A6	G/F., 38 Haven Street	10/08/2006	$3,600,000
A7	Units 1-3, G/F., Parkview Commercial Building, 9-11 Shelter Street	02/02/2006	$4,338,000
A8	G/F., 18C King Street	16/11/2006	$1,290,000
A9	Unit 2, G/F., 2 Second Lane / 28 Shepherd Street	17/10/2006	$2,198,000
A10	G/F., 12 Sun Chun Street	09/06/2006	$1,600,000
A11	G/F., 39 Sun Chun Street	17/10/2006	$1,915,000
A12	Shop B on G/F & Cockloft, Sun Chun Building, 5 Sun Chun Street / 15 – 17 Ormsby Street	29/04/2006	$2,820,000

Valuation of the EUV of the shops of the Building by Ms. Lo

16.  In her first report dated 19 December 2007, Ms. Lo identified 5 shop comparables of which 3 were located in Tai Hang area and 2 in Haven Street (see TRB(III)/1419).  She carried out an analysis for each comparable by dividing the sale price with the saleable area arriving at an unadjusted unit rate.  The unit rates of her 5 comparables per sq. m. were $15,455, $18,096, $12,432, $8,738 and $9,756.  During the hearing in September 2008, Ms. Lo provided further details of her analysis (see TRB(III)/1419(a)) arriving at adjusted unit rates per sq. m. of $12,174, $12,750, $9,114, $7,867 and $8,939.  She explained that based on her experience, she first selected the 2 comparables with the lowest adjusted unit rates and based on these figures, she then adopted a unit rate of $8,640 per sq. m. for the Respondent’s unit (i.e., G/F of 50 Haven Street).

17.  In her second report dated 29 July 2008, Ms. Lo used a method different from what she used in her first report.  She identified and compiled a larger list of 11 shop comparables all of which were located in Haven Street, including some at or near its junction with Leighton Road. The salient details of these comparables are summarized below:-

Comp. Ref.	Address	Date of sale	Sale price	Unadjusted unit rate (per sq. m.)	Adjusted unit rate (per sq. m.)
C1	G/F., 32 Haven St.	26/4/07	$7,990,000	$114,155	$123,316
C2	G/F., 46 Haven St.	26/4/2007	$7,990,000	$114,155	$122,316
C3	G/F., 40 Haven St.	10/4/2007	$7,990,000	$114,155	$123,316
C4	G/F., 9 Haven St.	9/3/2007	$4,800,000	$111,208	$114,966
C5	Shops 1 & 2, G/F., Haven Court, 128-138 Leighton Road and 2-30 Haven St.	25/1/2007	$11,280,000	$204,167	$191,258
C6	G/F., 13 Haven St.	10/1/2007	$2,100,000	$50,637	$52,194
C7	G/F., 15A Haven St.	24/11/2006	$1,700,000	$39,875	$42,537
C8	G/F., 36 Haven St.	18/9/2006	$4,780,000	$68,293	$76,993
C9	G/F., 38 Haven St.	10/8/2006	$3,600,000	$51,434	$59,307
C10	Shop 17, G/F., Lei Shun Court, 106-126 Leighton Road and 1-5 Haven St.	13/3/2006	$3,000,000	$186,336	$199,778
C11	Shop 4 & Shop 15, G/F., Lei Shun Court, 106-126 Leighton Road and 1-5 Haven St.	23/3/2006	$6,880,000	$232,662	$258,559
Average					$123,867

18.  This time, Ms. Lo did not see fit to do any selection but simply averaged all the adjusted unit rates in arriving at the figure of $123,867 per sq. m. and opined that this was the appropriate unit rate for the shops in the Building, including the Respondent’s unit.  She multiplied this average adjusted unit rate with the saleable area of the shops in the Building, arriving at the estimated EUV of $8,543,539 (rounded to $8,540,000) for G/F of 48 Haven Street and $8,862,825 (rounded to $8,860,000) for G/F of 50 Haven Street. 

19.  Ms. Lo’s different approaches in her 2 valuation reports were severely criticized by counsel for the Applicant, who set out in details his criticisms in the written Closing Submission.

20.  We agree with the Applicant and find that Ms. Lo’s second EUV valuation report dated 29 July 2008 should be rejected in its entirety because her valuation approach was shown to be totally unreliable, particularly for the following reasons:

(1)  We find that we cannot agree with Ms. Lo’s evidence and finding that there was no distinction between the location characteristics of the shops in the Building (which happen to be at the dead end of Haven Street, a cul-de-sac) and other Haven Street shops located much closer to Leighton Road or even fronting onto Leighton Road.  Ms. Lo held that opinion when preparing her analysis schedule for her report of 29 July 2008 (see TRB(III)/1521).  However, she was cross-examined on that but she remained adamant that she had been correct in her analysis and adjustment in the said report.  We would like to add that, before site inspection, we were already skeptical of Ms. Lo’s opinion on location adjustment, among other issues in her analysis as shown in her valuation report filed into the Tribunal.  During our site inspection, we had sighted the differences in the location characteristics of the shops, between those in the Building and the comparables used by both experts.  Therefore, we were disappointed that an experienced surveyor such as Ms. Lo could form such an opinion, and still refused to make any amendment even in light of the clear factual evidence against her opinion.

(2)  Regarding the huge differences in the adjusted unit rates of Comparables R5, R10 and R11 (Haven Court and Lei Shun Shun Court) when compared with those of Comparables R8 and R9, Ms. Lo was cross-examined.  In answering to counsel for the Applicant, Ms. Lo acknowledged the said huge differences, but she refused to accept that the huge differences could be accounted for by the differences in the retail potential and hence the differences in location between the 2 sets of comparables.  At the end, she maintained that there was no need for her to do any further investigation before confirming her previous opinion of giving nil adjustment as these was no location difference between all the Haven Street and Leighton Road comparables and the shops in the subject Building (i.e., Nos. 48 & 50 Haven Street).

(3)  We also disagree with Ms. Lo that after finding that the adjusted unit rates of her selected comparables ranged from $42,537 to $258,559 per sq. m., or a difference of over 600% between the lowest and the highest figures, she could still find it appropriate to simply averaging all the adjusted unit rates without doing any selection, and could treat all the comparables on the premises that “if a comparable exits, it must be a suitable comparable.”  The Tribunal actually questioned Ms. Lo on the very large difference between the adjusted unit rates of her comparables by reference to Comparables C7 and C11 as examples.  She was asked how she could justify using both as suitable comparables in her direct comparison approach.  In this regard, we fully agree with the following written submission by counsel for the Applicant: “Eventually she accepted it was not proper and stated that she should have eliminated both comparables.  Whether to eliminate both comparables is the proper thing to do or not, this line of questions and answers demonstrated conclusively that Ms. Lo’s approach, her choice of comparables and the mechanical averaging in her 2^nd report are fundamentally flawed rendering her shop EUV assessment exercise totally unreliable.”  We find this to be a serious mistake, one that this Tribunal could not tolerate.  We do not accept this mistake as if this is one of the normal differences in opinion between 2 otherwise experienced and qualified valuation surveyors. 

(4)  We actually find that in the present case, any surveyor who cared to pay attention to the history of the application by the Applicant should have realized that in some of the sales of the shops along Haven Street, there might be the question of embedded hope value due to redevelopment.  Yet Ms. Lo chose to ignore this reality, did not carry out any further investigation, not only at the time of preparing her report, but refused to budge even after reading the valuation reports prepared by Mr. Chan, hearing his evidence as well as the factual evidence of Mr. Kwan regarding the Applicant’s history of acquiring properties in the neighbourhood.

Tribunal’s adoption and adjustments of suitable shop comparables

21.  Of the Haven Street comparables (i.e., Comparables A1, A3, A4, A5 and A6) adopted by Mr. Chan, we do not agree that Comparable A4 is a suitable comparable as its location is inside an arcade, which is very different from street frontage shops such as the 2 shops in the Building.  We decide that it is appropriate to abandon this Haven Street comparable, instead of giving substantial subject adjustment to reflect this location disadvantage.

22.  In Tai Hang area, Mr. Chan was mindful of the much better location of Wun Sha Street and decided not to use the comparables located in this street and restricted his search for suitable comparables (i.e., Comparables A2 and A8 to A12) in the inner streets.  In addition, Mr. Chan also adopted Comparable A7, a shop in Shelter Street located at the nearby Causeway Bay area as a suitable comparable.  On the whole, we decide that when the Tribunal finds that there is a sufficient number of suitable comparables that are very close in location to the shops in the Building in this valuation exercise, it will be much better for the Tribunal to just use those comparables, rather than extending the geographical area of the comparables.

23.  Therefore, in the present case, we find that in the valuation of the EUV of the shops in the Building, it will be suffice to restrict ourselves to the 4 best suitable comparables at Haven Street (i.e. Comparables A1, A3, A5 and A6) and discard all other comparables, including those at Tai Hang area and Shelter Street.

24.  After having concluded that there are 4 most suitable comparables (as shown in Appendix III), we next consider the issues of adjustments.  As a valuation expert, Mr. Chan analyzed and adjusted his comparables at TRB(I)/147 under the factors of time, age & condition, size, location, frontage/depth and layout. 

25.  The other valuation expert Ms. Lo also adopted the above said 4 comparables in the list of suitable comparables in her Supplemental Report.  We note that apart from the factor of location for which Ms. Lo gave 0 % adjustment (and the same 0 % for all other comparables including those close to or fronting onto Leighton Road), her adjustments for other factors were not too different from those of Mr. Chan.  However, for reasons stated above, we have already decided not to take into account Ms. Lo’s opinion in the valuation exercise of the EUV of the Building.

26.  After consideration of Mr. Chan’s proposed adjustments, we decide to accept his opinion for all factors with the exception of the adjustment for location for which we decide to give lesser adjustments of –20% for Comparable A1, and –10% for each of Comparables A3, A5 and A6.

27.  We sum up all the adjustments we have adopted for the 4 most suitable shop comparables at Appendix I of this Judgment.  The adjusted unit rates for the chosen comparables are as follows:

Comparable	Adjusted Unit Rate (/sq. m.)
A1	$94,478
A3	$47,341
A5	$71,540
A6	$52,404
Average	$66,440

Estimation of the EUV of the shop units in the Building

28.  Applying the average of the adjusted unit rates of the chosen suitable comparables to the saleable area of the Respondent’s unit (i.e., G/F of 48 Haven Street) as estimated by Mr. Chan (see TRB(I)/152), we arrive at its estimated EUV as at the valuation date of 27 July 2007, as follows:

	Converted saleable area	68.97 sq. m.
X	Adopted unit rate	$66,440/ sq. m.
	Estimated EUV	$4,582,367
	Rounded to	$4,580,000

29.  Similarly, we estimate that the other shop, G/F of 50 Haven Street, with the converted saleable area as estimated by Mr. Chan, will have the following EUV as at 27 July 2007:

	Converted saleable area	71.26 sq. m.
X	Adopted unit rate	$66,440/ sq. m.
	Estimated EUV	$4,734,514
	Rounded to	$4,730,000

Tribunal’s assessment of the EUV of all the units in the Building

30.  We sum up in Appendix II the Tribunal’s estimated EUV for all the units in the Building at the Lot, comprising (i) the parties’ agreed EUV of all the domestic units in the Building and (ii) the Tribunal’s assessment of the EUV of the 2 shop units in the Building.  Since the Respondent’s unit is G/F of 50 Haven Street, the ratio of the EUV of the Respondent’s unit to the total EUV of all the units in the Building is therefore equal to $4,730,000 / $40,400,000, or about 11.7079%

Summary of the experts’ estimates of the RDV of the Lot

31.  The parties first filed and exchanged the following reports that contained the assessments of the RDV as at 27 July 2007, carried out by the experts for the parties but it was clear that they were assessed not for the purpose of setting the reserve price:

(1)  Mr. Chan’s Supplemental Report dated 15 January 2008, in the sum of $73M (see TRB(I)/47); and

(2)  Ms. Lo’s Supplemental Report dated 29 July 2008, in the sum of $96.59 M see TRB(III)/1451).

32.  Before the September 2008’s trial, the following occurred regarding the assessment of the reserve price:

(1)  Mr. Chan estimated in his report dated 1 September 2008 that the RDV was assessed at $108M on residual approach assuming a residential model (see TRB(I)/88);

(2)  The Respondent stated in the letter dated 17 September 2008 of his then lawyer, Messrs Wong Poon Chan Law & Co. that he agreed to adopt Mr. Chan’s RDV valuation of $108M for the purpose of fixing the reserve price.

33.  Just before the commencement of the trial, there had been correspondence between the parties that the Applicant’s valuation of the RDV of the Lot in the sum of $108 Million was accepted by the Respondent as the reserve price.  However, taking into account the global financial crisis in September 2008, the Applicant submitted that the proposed price could no longer be maintained and thus sought to review the figure and supplemented further valuation report to update the valuation after the serious impact of the financial crisis on the market. The undated figure of Mr. Chan as at 19/9/08 was $85 Million. 

34.  Mr Liu did oppose the above change of stance.  However, we are of the view that it remains the Tribunal’s duty to fix the reserve price after all. We also consider that the reserve price shall be fixed with the most updated information if available and it shall be fixed at the date as close to the actual date of auction to be undertaken as possible.  Given the unprecedented event of the financial tsunami and the very fluctuated market, even if the review was not sought by the Applicant, we do also see fit to review the figures so as to dispose the matter fairly.  As such, leave was also granted to the Respondent and the Applicant to file supplemental valuation report in response and they both did so.   As at 13/2/09, the updated figure by the Applicant on the RDV was $72 Million.

35.  During the adjournment, the experts prepared further supplemental reports.  Ms. Lo in her report dated 7 November 2008 argued that there was no evidence of any drop in the land value in Hong Kong since September 2008, and hence she maintained that the RDV of the Lot should be the same as what was previously estimated by Mr. Chan on 1 September 2008 (and subsequently agreed by the Respondent), at $108M on pure residential model. 

36.  Mr. Chan estimated in his Supplemental Report dated 28 November 2008 the RDV at $71M.  He adopted the same residual valuation model as before, assuming pure private residential development but with the following main changes: (i) developer’s profit of 20% in line with the revised percentage recently mutually agreed by the Lands Department and the property owners for the conclusion of assessment of premium in land exchange and modification cases and (ii) the substantial time adjustment, from September to November 2008 to reflect the market downturn following the recent global financial crisis.

37.  Mr. Chan further revised his previous RDV valuation to $72M as at 13 February 2009, just a few days before the Final Submission, using the latest February Price Index of RDV with some additional recent comparables for the GDV of the proposed development on the Lot (see TRB(IV)/1569).

38.  The Applicant submitted that although the Respondent had given to the Applicant in September 2008 a written confirmation that the latter would accept Mr. Chan’s RDV valuation of $108M, it was however clear that there was no agreement between the parties on the reserve price.  As such, it remains a live issue that the Tribunal has to determine the RDV of the Lot for the purpose of setting the reserve price.

39.  In addition, we agree that although the experts might have estimated the RDV at various times in the past, the Tribunal should determine the RDV as close to the date of hearing as possible so that the date of valuation of the RDV as the reserve price of the Lot for the compulsory sale, if approved by the Tribunal, would be as close to the auction date as possible.

Estimation of the RDV of the Lot by Mr. Chan

40.  Mr. Chan for the Applicant all along gave opinion that there was no land sale transaction that could be accepted as suitable comparable.  As such, he could not carry out any valuation of the RDV of the Lot on the direct comparison approach.  Mr. Chan instead resorted to estimate, by the method of residual valuation, the RDV of the Lot.  He valued the RDV of the Lot at $108M in his report dated 1 September 2008 (see TRB(I)/88).  

41.  When commenting on Ms. Lo’s Supplemental Report dated 7 November 2009, Mr. Chan dismissed Mr. Lo’s evidence that there were direct market comparables of land (i.e. after including transactions listed in Table 2 and Table 4 of Ms. Lo’s Supplemental Report dated 7 November 2009, see TRB(V)/1564 & 1568 respectively) for her to arrive at her opinion of value of the RDV of the Lot.

42.  We set out at Appendix 3 Mr. Chan’s latest valuation dated 13 February 2009.  In the valuation, Mr. Chan, based on the latest residential comparables, estimated the GDV of the units in the proposed development at $108,000 per sq. m.  He also adopted a developer’s profit of 20% in his residual valuation.

Estimation of the RDV of the Lot by Ms. Lo

43.  Ms. Lo prepared a residual valuation on 29 July 2008 (at TRB(III)/1524) arriving at a value of $96.59M as the RDV of the Lot.  In her latest expert’s report of 7 November 2008, Ms. Lo did not give any reason for not carrying out a revised residual valuation for the purpose of up-dating her previous valuation.  It appears to us that if Ms. Lo indeed submits that there is no change in value, she should at the least submit a revised residual valuation supporting her case.  Instead, she contended in the report that there was no drop in land value in Hong Kong during the 2 months from September to November 2008, despite of the financial turmoil facing Hong Kong as well as the rest of the world, as alleged by Mr. Chan.  In her own words, she said that, the previous “valuation is recent enough to be of good reference.”

44.  Ms. Lo stated in her report that “I have cross-checked the RDV of HK$108.0 million by reference to the recent sales of urban private land on Hong Kong Island.   This indicates that the Accommodation Value (AV) ranges from $3,935 to $9,343 shown in Table 2 below.  Consequently, the RDV of HK$108.0 million represents an AV of $5,373 which is within the fair market range and therefore is considered reasonable (see Appendix 4 for transaction records).”  In her Table 2, she estimated the AV of the quoted land sales by dividing the consideration with the estimated “proposed GFA” for each piece of land.  So the quoted AV was simply the “unadjusted” unit AV of the land concerned.

45.  We are completely at a loss to read the above quoted statement of Ms. Lo, who gave evidence as an expert surveyor.  First, regardless of the suitability of the land sales quoted in Table 2 as “comparables”, we could not understand why the said 4 comparables, with “unadjusted” AV of between $3,935 and $9,343, would support any valuation of land with an AV of $5,373.  The AV of $9,343 is about 2.4 times that of $3,935.  Any person who cares to compare properties including land, on the simple basis of “like with like” will be hesitated to reach such a conclusion.  Instead, the very first question one will raise is, are these 2 comparables really comparables in the sense that they are similar?  Why are they 2.4 times apart in terms of the “unadjusted” AV, the basis for comparing land values?  Ms. Lo did not seem to be concerned with these large disparities between the resulting AV of her comparables.  She did not comment on this nor report on whether she had made any investigation or had any finding.  Second, why is that a comparable with an “unadjusted” AV of $3,935 can support a valuation of $5,373 as the latter is about 136% of the former figure?  Similarly, a comparable with an “unadjusted” AV of $9,343 cannot support a valuation of $5,373 as the latter is only about 57% of the former figure.  Third, there was no adjustment not even in the crudest sense.  Fourth, if Ms. Lo said that a valuation of $5,373 fell between the range of value of $3,935 and $9,343, she was correct.  However, she could not then go on to conclude that just simply because the figure of $5,373 fell within the said range of values, the said figure would be “within the fair market range” and therefore “considered reasonable”.  This type of statement clearly defies common sense.

46.  Although Ms. Lo did not state in her report that she had identified recent land sales that could be used as comparables for the direct comparison approach, she quoted some land sales in Table 2 and Table 4.  However, Ms. Lo stated in paragraph 3. 9 of her report (see TRB(V)/1567 that she was able to infer from these 2 tables that “recent private land sales evidence indicate an increase rather than a drop in land prices (see Tables 2 & 4).”

47.  There was insufficient information or analysis to find out if Ms. Lo’s unadjusted AV of her quoted land sales in the said Table 2 and Table 4 were relevant evidence of land value.  However, even assuming that the said land sales were all reliable and relevant, the results of her analyses could not support the statement that this provided the evidence of an increase in land value over time between February 2008 and August 2008.  This is self-explanatory from the following extracts of the said Table 2:

From Ms. Lo’s Table 2

Address	ASP Date	Site Area (sq. ft.)	Proposed GFA (sq. ft.)	Consideration	AV (per sq. ft. of GFA)
94 Caine Road	28/08/2008	2,991	23,928	$138 M	$5,767
11-15A Lin Fa Kung Street	15/07/2008	1,800	21,600	$85 M	$3,935
19-21 Shelter Street	Mid 2008	3,843	30,744	$228.631 M	$7,437
118 – 122 Tung Lo Wan Road	18/02/2008	2,765	33,180	$310 M	$9,343
				Average	$6,620

48.  The reverse seems to be true, just from the resulting AV as shown above.  More importantly, we cannot understand how the sales of 4 pieces of land in 2008 the latest of which was dated 28 August 2008 could assist Ms. Lo in her investigation, analysis and conclusion of the trend of land value in Hong Kong for the period of the last quarter of 2008 and beyond.

49.  As rightly pointed out by Mr. Chan in his report dated 28 November 2008, “all the four transactions were made before the outbreak of the Lehman Brothers’ collapse, the prelude of the financial tsunami that was striking the global economies; therefore, substantial downward adjustments have to be made to account for the difference in time, particularly due to the sudden rise in risk exposed to investors after the event.”  Mr. Chan also opined that other than the said effect on time, there were several factors surrounding these 4 transactions that led him to reach the conclusion that they were not suitable comparables to the Lot in the present valuation exercise (see TRB(IV)/1530).  We agree with Mr. Chan’s findings and opinion in this regard.

50.  Ms. Lo further sought to support her opinion of the land value trend by citing a few sales in Tang Lung Street.  We reproduce the data below:

From Ms. Lo’s Table 4

Address	Site Area (sq. ft.)	Consideration	Unit value (per sq. ft. of site area)	Date of sale
14 Tang Lung Street	799	$67.8 M	$84,856	23/09/2008
8-10 Tang Lung Street	1,598	$91.5 M	$57,259	Nov. 2007
34 Tang Lung Street	727	$31.28 M	$43,026	09/10/2007

51.  However, Mr. Chan commented in his report dated 28 November 2008 that there were factors which suggested that these 3 land transactions were not relevant comparables for direct comparison approach (see TRB(IV)/1540).  We agree with his findings and opinion.

Tribunal’s determination of the RDV of the Lot

52.  We agree with Mr. Chan that there is no suitable land sale for the employment of the direct comparison approach in the valuation of the RDV of the Lot.  In addition, we also agree with Mr. Chan that of the land transactions quoted by Ms. Lo in Tables 2 and 4 of her report dated 7 November 2008,  they were all not relevant, lest suitable comparables for the Lot.  Also, these transactions do not even support the findings and conclusion of Ms. Lo that she attempted to draw in her report.

53.  We further agree to adopt Mr. Chan’s residual valuation, in particular his latest residual valuation dated 13 February 2009 for the purpose of assessing the RDV of the Lot, as at the date of this Judgment.  The methodology of that residual valuation as set out at Appendix III of this Judgment consistently follows the previous similar valuations of Mr. Chan.  It is based on a pure residential model, which, in Mr. Chan’s opinion, is the most optimal development for the Lot.  We have no reason to disagree with Mr. Chan’s finding.  It is also a valuation using the conventional format commonly adopted by valuation surveyors including those working in the Lands Department.

54.  We have stated above that in Mr. Chan’s latest valuation, he found it necessary to make certain amendments to reflect the present market situation, and to up-date the gross development value of the proposed development, based on the analysis of more recent transactions of residential units of similar developments.  We accept Mr. Chan’s evidence, analysis and his adoption of various parameters in his valuation.  Hence, we accept his final estimation of value, in the sum of $71,929,355, which is rounded to $72,000,000.

The expert evidence of Ms. Lo

55.  We have stated above our reasons for rejecting in its entirety the second EUV valuation report of Ms. Lo as well as her RDV valuation report of 7 November 2008.  We think that we should add a few remarks on the impartiality of expert witness particularly in the context of a valuation case heard before the Lands Tribunal. 

56.  In the case of Best Origin Ltd v Commissioner of Rating and Valuation [2008] RA 155-248(Lands Tribunal Judgment referenced LDGA 14 of 2008), President of the Tribunal, Lam J. had the following remarks on the issue of the impartiality of an expert witness giving evidence to the Courts, Lands Tribunal included：

‘….In Cala Homes v Alfred McAlpine Homes East [1995] FSR 818, Laddie J deprecated expert acting as a partisan hired gun, at p. 843,

“Of course the court will be aware that a party is likely to choose as its expert someone whose view is most sympathetic to its position.  Subject to that caveat, the court is likely to assume that the expert witness is more interested in being honest and right than in ensuring that one side or another wins.  An expert should not consider that it is his job to stand shoulder to shoulder through thick and thin with the side which is paying his bill.  “Pragmatic flexibility” as used by Mr Goodall is a euphemism for “misleading selectivity”.  According to this approach the flexibility will give place to something closer to the true and balanced view of the expert only when he is being cross-examined and is faced with the possibility of being “found out”.  The reality, of course, will be somewhat different.  An expert who has committed himself in writing to a report which is selectively misleading may feel obliged to stick to the views he expressed there when he is cross-examined.  Most witnesses would not be prepared to admit at the beginning of cross-examination … that he was approaching the drafting of his report as a partisan hired gun.  The result is that the expert’s report and then his oral evidence will be contaminated by this attempted sleight of mind.  This deprives the evidence of much of its value.”

Lam J. in Best Origin (supra.) also said the following:

‘98.   I have commented upon the importance of the impartiality of an expert witness in L v L HCMC 1 of 2003, 18 Nov 2003, at paras. 154 to 155, and in particular I said, 

“One important consideration the court will bear in mind in resolving the difference between the experts is the impartiality of the expert.  When it can be demonstrated that an expert had been partial to his client in giving his opinion, the court would inevitably have serious misgivings about attaching great weight to his evidence in areas that depend a lot on his judgment which is not verifiable objectively.  The court will naturally be reluctant to accept opinions from an expert who has permitted his zeal in putting forward a plausible theory that serves his client’s interest to override his duty of impartiality.”

99.    When that case reached the Court of Appeal (L v C [2007] 3 HKLRD 819), Stock JA made the following observations at paras. 110-111,

“Although there are of course many experts who come before the courts knowing full well the proper duty of an expert, the courts here, as elsewhere, are too often encumbered in the performance of their duty by experts who do not assist.  An expert stakes his reputation on the assistance he gives a court, regardless of the fact that he or she is engaged by one of the parties; and the expert who does not assist in as impartial and professional a manner as he is able does little more than waste judicial time and add to the expense of litigation. … The courts must take a firm hand.  The overriding duty of an expert is to the court: it overrides, in other words, any obligation to the person from whom he has received instructions or by whom he has been paid.  His opinion is to be ‘uninfluenced as to the form or content by the exigencies of litigation.’ Where such a breach is clearly threatened, or becomes manifest, the court may if necessary appoint, at the parties’ expense, an assessor pursuant to the provisions of section 53 of the High Court Ordinance, or disallow the relevant costs of the party that puts forward the defaulting expert.”

100. I do not wish to recite at length the criticism levelled by Mr Holgate against Professor Hughes.  Speaking for my part, I am driven to the conclusion that Professor Hughes had regrettably embarked on an exercise which is partisan and misleading.’

57.  In the present case, for reasons stated earlier in this Judgment, we regret to find that Ms. Lo did not, both when preparing her valuation reports and giving witness in the Tribunal, discharge her duty as a non-partisan expert.

Whether redevelopment is justified

58.  Section 4(2)(a) of the Ordinance provides that the Tribunal shall not make an order for sale unless it is satisfied that the redevelopment of the lot is justified due to the age or state of repair of the existing development on the lot, but the definition of age or state of repair has not been stated in the Ordinance.

59.  In Intelligent House Ltd v Chan Tung Shing & Ors, LDCS 11000/2006, 23 June 2008, the following tests have been formulated by the Tribunal (also adopted in New Vision Development Ltd v Excellent Speed  International Ltd LDCS 10000/2007),

‘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:

(c)  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.

(d)  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.

(e)  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.’

Age test

60.  The Applicant is not suggesting that the existing Building has reached the end of its physical life. Instead, it reaches the end of its economic lifespan as the clear site value of the Lot does significantly exceed the existing use value of the Building and also because of its age by features of obsolescence.

61.  When comes to its application, Mr Liu of the Respondent has at one stage in his written closing submission submitted that the Applicant has not satisfied the test of age or state of repair despite the neutral stance the Respondent has hitherto taken.  On reflection, Mr Liu eventually withdraws the submission on this part and leaving the Applicant’s evidence unopposed.

62.  In fact, having heard the evidence and read the Condition Survey Report (TRB (II)) of Mr Benson Wong of the Applicant and the Structural Investigation Report (TRB (I)/214-409) of Mr KS So, we find their evidence accurate and reliable.

63.  Mr KS So stated in his report that the design working life of reinforced concrete buildings in Hong Kong is 50 years and the present Building at the age of 49 is already approaching the end of its design working life span.  Mr Benson Wong had stated the obsolete features of the Building comprehensively and compared it with the modern building, including the appearance, floor layouts, architectural features, external wall, windows, lobbies and wiring systems and others (TRB (II)/547-553).

64.  Mr Charles Chan, the Chartered Surveyor of the Applicant, stated in his valuation report the substantial difference between the redevelopment and the existing use value of the Building is attributed to the features of obsolescence and the continuing needs of repairs.   He also listed out the differences on choice of material on external facades and walls of the common areas; on building services and facilities such as central towngas, refuse collection and security facilities; on building density from over 60% to redevelopment of 33.33%; on environment requirements such as balconies, utility platforms, acoustic fins and sunshades.  Mr Chan also stated that due to the poor physical condition and the failure to meet current end-users’ requirement, the EUV of the Building is thus substantially lower than the RDV (TRB (I)/51-56).

65.  Mr Chan compared the redevelopment value assessed at $73 Million with the existing use value at $37.7 Million as at 27/7/07.  He then concluded that the redevelopment is economically justified and the Building has come to its end of economic life.

66.  In our view, we assess the EUV as in July 2007 to be$40.40M  (see Appendix II) and the RDV as in Feb 2009 to be $72M (see Appendix III). Assuming the market movement between July 2007 and Feb 2009 applied equally to the EUV and the RDV (applying the same approach as at para.171 in Intelligent House, supra, without any evidence showing otherwise), the RDV in July 2007 shall significantly exceed the EUV.

67.  By accepting the above reports and evidence, we find that the clear site value of the Lot does significantly exceed the value of existing use.  The difference is clearly attributable to the features of obsolescence of the existing building and its old age.  We conclude that the redevelopment of the Lot is justified on the ground of age.

State of repair

68.  The Applicant is not submitting that the Building is posing danger to the residents or the public at large, but the Applicant relies on its team of experts including Mr Benson Wong, Mr KS So and others to find and show all types of defect of the existing Building in their expert reports. 

69.  According to Mr Benson Wong, the costs of repair is about $6.8 Million (TRB (II)/579) and the enhancement value upon repair as assessed by Mr Charles Chan is about 10% of the domestic EUV, i.e. about $3.1 Million (TRB (I)/50-51).  Thus the costs of repair exceeds significantly the enhancement value arising from the repair and therefore the test on the state of repair shall be satisfied.     

70.  Further, by the Structural Investigation Report of Mr So Kin Shing, the Structural Engineer expert of the Applicant, he concluded that the structural frames of the Building were in a poor condition of repair and in urgent need of repairs.  The Building was approaching the end of its design working life of 50 years and its structural frames had also deteriorated to the final stage of its design working life. He further stated that the deterioration would continue at a faster speed than before due to extensive carbonation, new defects would occur and previous defects though repaired would recur requiring substantial repairs and even partial demolition and reconstruction (TRB (I)/236-237).  

71.  Mr So also opined that the existing Building was a conventional reinforced concrete construction. The building structure had a design working life which was normally 50 years in Hong Kong.  The Code of Practice for structural use of concrete also assumed the same, whereas the robustness, durability, workmanship, materials and intended maintenance would tie up with the same design working life.  It was his experience that the costs of carrying out repairs to an old, dilapidated reinforced concrete building structure was usually very high because of recurrence of spalling and cracks and it might be more economical to have it pulled down and to erect a new building instead (TRB (I)/224).

72.  There may be one further precaution we should take when the actual inspections done by the Applicant’s experts were only 7 units out of a total of 16.  Assuming the units not inspected needed no internal repairs and that the costs of structural frames was further reduced, a broad brush reduction could be made of about $800,000 (see the breakdown on costs of repair at TRB (II)/579), the estimated repair costs shall still remain at least around 6 Million.  In our view, it does significantly exceed the enhancement value of $3.1 Million.  Therefore, we hold that the test on the state of repair shall be satisfied accordingly.

Age or State of repair collectively

73.  As stated above, the Tribunal is also entitled to look at all of the above factors or tests collectively to see if redevelopment is justified, even though when each of them, if considered alone, is insufficient to do so.

74.  We must mention, it remains the fact that the Building has been completed since 1958 and is by now more than 50 years approaching the end of its design working life. Given the legislative background for facilitating urban renewal, the present case is of our view another classical example fitting the aim of the Ordinance, in justifying redevelopment either on age or state of repair or both.  

Reasonable offer

75.  Section 4(2)(b) of the Ordinance provides that the Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot, the Tribunal is satisfied that the majority owner has taken reasonable steps to require 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).

76.  In the Court of Final Appeal case, Capital Well Ltd v Bond Star Development Ltd [2005] 4 HKLRD 363 at paragraph 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 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.  The auction results may prove that the minority’s assessment was commercially wise.  Or they may show that the majority’s offer exceeded what was realized at the auction.” 

77.  Thus when assessing whether an offer is reasonable, the Tribunal is not required to conduct a valuation exercise.  It merely needs to be satisfied that the offer falls within the range of what may broadly be regarded as fair and reasonable.

78.  In the present case, there were altogether 3 offers made by the Applicant to the Respondent, first on 11/4/2007 of $6.5 Million, then on 20/4/07 of $7 Million, and lastly on 9/5/07 offering $8 million (see letters TRA (II)/ 819-821). 

79.  The present application was filed on 30/7/2007 and the trial commenced in September, 2008.  The offer nearest to the application was $8M on 9/5/07.  As at 27/7/2007, the Applicant’s expert valued the RDV of the Lot at $73 Million and the EUV at $37.68 Million, the EUV of the Respondent at $3.49 Million and the pro-rata share of the RDV at $6.76 Million.  This pro-rata share of $6.76 Million when compared with the offer of $8 Million was clearly within the fair and reasonable range when broadly assessed. 

80.  Further, when adopting the Tribunal’s finding of the EUV and the RDV, we are also of the view that the Applicant’s offer is fair and reasonable and it does fall within the board range of compensation of the unit in question, bearing in mind that it is not necessary for the offer to “beat” the valuation as if it were a payment into court (see para.36 in Capital Well, supra).

81.  Therefore, we are satisfied that the Applicant has taken reasonable steps on terms that are fair and reasonable to acquire the undivided shares of the respondent. 

82.  In the premises, we are satisfied the requirements and conditions as laid down in the Ordinance have been met and an order for compulsory sale shall be made in the following terms,

1.  The Tribunal is satisfied that the existing use value of the Respondent’s unit, Ground Floor of No.50, Haven Street and those of the Applicant’s units as fixed and shown in Appendix II  annexed hereto are fair and reasonable.

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 sections 4(1)(b) of the Ordinance.

3.  Mr. Ma Ho Fai and Ms Tsang May Ping, nominated by the Applicant be appointed as trustees (the “Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs. Woo Kwan Lee & Lo dated 22^nd July 2008 (TRA (II)/898).

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

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

(b)  The reserve price be set at $72 Million.

(c)  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 shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot as specified by section 9 and Schedule 3 of the Ordinance.

5.  Liberty to the Applicant, the Respondent and the Trustees to apply to the Tribunal for further direction under the Ordinance.

Costs Order nisi

83.  In relation to the costs of the application, Mr Liu emphasizes that the Applicant shall bear the statutory burden to satisfy the Tribunal that the requirements laid down in the Ordinance have to be met no matter whether there comes any opposition.  The Respondent said it merely challenges the valuation in his unit and no more and therefore no order shall be made as to costs. 

84.  However, the fact is that during the course of trial, most of the time has been devoted to the dispute on valuation aspects.  On valuation, eventually this Tribunal also prefers most figures adopted by the Applicant’s expert.    .

85.  We shall therefore make a costs order nisi that the Respondent shall bear 80% of the Applicant’s costs in this application, to be taxed on High Court Scale with certificate for counsel if not agreed, to be made absolute after 14 days unless either party applies to vary otherwise.

APPENDIX  I  - III