SUCCESS ACTIVE LTD v. HARBOURVIEW INTERNATIONAL HOLDINGS LTD AND OTHERS

LDCS 31000/2018

[2021] HKLdT 24

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 31000 OF 2018

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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 following lots in Hung Hom, Kowloon, Hong Kong (hereinafter collectively referred to as “the Lots”):

Pair	Lot	Address
1st Pair	The Remaining Portion of Section A of Kowloon Inland Lot 1526 (“Lot 1”)	472 Chatham Road North
	Subsection 3 of Section A of Kowloon Inland Lot 1526 (“Lot 2”)	474 Chatham Road North
2nd Pair	The Remaining Portion of Subsection 1 of Section A of Kowloon Inland Lot 1526 (“Lot 3”)	476 Chatham Road North
	Subsection 2 of Section A of Kowloon Inland Lot 1526 (“Lot 4”)	478 Chatham Road North

2.  Erected thereon Nos 472 & 474 Chatham Road North is a pair of 6-storey tenement buildings (ie the 1^st pair of Buildings”) sharing 2 common staircases with 2 shops on ground floor (with cockloft) fronting onto Chatham Road and 5 storeys of domestic units from 1/F to 5/F.

3.  Erected thereon Nos 476 & 478 Chatham Road North is a pair of 7-storey tenement buildings (ie the 2^nd pair of Buildings”) sharing 3 common staircases with 2 shops on ground floor fronting onto Chatham Road and Shek Tong Street respectively.  Each of the residential floor from 1/F to 6/F of the building at 478 Chatham Road North is divided into the front portion and the rear portion, each rear portion is accessible by 1 staircase only. The two pairs of buildings are collectively referred to as “the Buildings”.

4.  The 2 occupation permits for the 1^st pair of Buildings (collectively referred to as “OP1”) were issued pursuant to the Building Ordinance (Chapter 123 of the Revised Edition, 1950) on 28 November 1956 whereby permission was granted to occupy and use the ground floor (“G/F”) and mezzanine floor (“M/F”) of the two buildings for non-domestic use and the upper floors for domestic use.

5.  By a building plan approved on 14 August 1956, one domestic unit was permitted on 5/F of the first pair of Buildings. Also by an alterations and additions works plan approved 15 September 1962, the 2 flats on 1/F of the 1^st pair of Buildings had been converted into classroom and office uses although they are at present occupied for domestic purposes.

6.  The occupation permit for the 2^nd pair of Buildings (“OP2”) was issued on 4 April 1957 whereby permission was granted to occupy and use the two buildings at Nos 476 & 478 Chatham Road North with ground floors for non-domestic purposes and with upper floors for domestic purposes.

7.  Each of the Lots is governed by its own Deed of Mutual Covenant. According to the records from the Land Registry, the undivided shares of the Lots are allotted as follows:

Undivided Share of the Lots
Floor	Chatham Road North
	472	474	476	478
G/F	1/6	1/6	1/7	2/14
				Front Portion	Rear Portion
1/F	1/6	A: ¼ of 1/16	1/7	1/14	1/14
		B: ¼ of 1/6
		C: ¼ of 1/6
		D: ¼ of 1/6
2/F	1/6	1/6	1/7	A: ¼ of 1/14	1/14
				B: ¼ of 1/14
				C: ¼ of 1/14
				D: ¼ of 1/14
3/F	1/6	1/6	1/7	1/14	1/14
4/F	1/6	1/6	1/7	1/14	1/14
5/F	1/6	1/6	1/7	1/14	1/14
6/F	-	-	1/7	1/14	1/14
Shares owned by applicant upon Application	100%	83.33%	85.71%	82.14%
Average	91.67%		83.92%

8.  Mr Benjamin Chain, SC (“Mr Chain”), counsel for the applicant, contended that at the time of the Application dated 29 November 2018, the applicant owned all units of the Buildings which represents an average of more than 80% of the undivided shares of each pair of the lots subject to the remaining shares as follows:

(a)  1/6 undivided shares of Lot 2 owned by the 1^st respondent (“R1”) together with the sole and exclusive right and privilege to hold, use, occupy and enjoy 2/F of 474 Chatham Road North;

(b)  1/7 undivided shares of Lot 3 owned by the 2^nd respondent (“R2”) together with the sole and exclusive right and privilege to hold, use, occupy and enjoy 1/F of 476 Chatham Road North;

(c)  2/4 of 1/14 of the Lot 4 owned by the 3^rd respondent (“R3”) together with the sole and exclusive right and privilege to hold, use, occupy and enjoy Flat C and Flat D of Front Portion on 2/F, 478 Chatham Road North;

(d)  1/14 of the Lot 4 owned by the 4^th respondent (“R4”) together with the sole and exclusive right and privilege to hold, use, occupy and enjoy Front Portion on 3/F, 478 Chatham Road North; and

(e)  1/14 of the Lot 4 owned by the 5^th respondent (“R5”) together with the sole and exclusive right and privilege to hold, use, occupy and enjoy Front Portion on 6/F, 478 Chatham Road North.

9.  Each of R1 and R5 filed a Notice of Opposition dated 11 February 2019 which was amended on 29 September 2020 to include an argument that the redevelopment of the Lots is not justified due to the age or state of repair of the Buildings under section 4(2)(a) (i) of the Ordinance.

10.  R4 filed her Notice of Opposition dated 2^nd July 2019 on the grounds that first, the valuation of her unit by the applicant was too low and secondly, the applicant had failed to take reasonable steps to acquire all the undivided shares in the Lots under section 4(2)(b) of the Ordinance. The second argument has subsequently been withdrawn.

11.  R2 and R3 did not file any Notice of Opposition. In respect of R2 in particular, by an order dated 6 October 2020 directing substituted service of the Notice of Application, it was ordered that all persons claiming to be the minority owners of the Lots shall be bound by the proceedings as if they have been served with the Application in accordance with section 3(3)(a) of the Ordinance. Upon the applicant’s acquiring the interest of R3, the proceedings against him has been discontinued.

12.  R1 and R5 are represented by Mr Ross MY Yuen (“Mr Yuen”), instructed by Messrs Foo & Li, Solicitors & Notaries, while R4 is represented by Mr Simon KC Lam, instructed by Messrs Anthony Chiang & Partners. The remaining live respondent, ie R2 is not represented and was absent in the trial.

Whether the Applicant is entitled to make the Application

13.  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.

14.  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.

15.  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)”. 

16.  As the OP1 and OP2 for the Buildings were issued on 28 November 1956 and 4 April 1957 respectively, not less than 50 years before the date of the Application, the Notice is applicable and the threshold percentage should be 80%.

17.  The applicant, owning an average of 80% of the undivided shares of the Lot, was entitled to file the Application under section 3(2)(b) of the Ordinance which may cover two or more lots—

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

(ii)  where the average of—

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

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

The Issues in the Application

18.  Mr Yuen, on behalf of R1 and R5, summarized the following issues as shall be determined by the Tribunal, namely: -

(1)  Whether the redevelopment of the Lot is justified due to the age or state of repair of the existing development as required in section 4(2)(a) of the Ordinance;

(2)  What is the market value (which is usually termed by the valuation profession as the Existing Use Value or just “EUV”) of each of the units in the Buildings as at 1 November 2018 as assessed in accordance with Part 1 of Schedule 1 to the Ordinance;

(3)  if an order for sale of the Lot be granted, what the redevelopment value (“RDV”) of the Lots should be for the purpose of setting the reserve price of the public auction according to clause 2 of Schedule 2 to the Ordinance.

19.  Mr Lam, on behalf of R4, confirmed that he was only concerned with issues (2) and (3) above.

The Evidence

20.  The applicant has filed the following documents in support of the Application:

(a)   a witness statement of Mr Kam Ming Chun Bridge, representative of the applicant dated 8 October 2019;

(b)  the following reports by Mr Dennis Wong (“Mr Wong”) of Prudential Surveyors International Ltd:

(i)  a Building Condition Survey Report and a Structural Survey Report both dated 10 October 2019;

(ii)  Rebuttal Report on R1 and R5’s Condition Survey Report and a Structural Assessment Report dated 28 February 2020;

(c)   the following reports by Mr Charles CK Chan (“Mr Chan”) of Savills Valuation and Professional Services Limited (“Savills”);

(i)  an Application Report pursuant to Part 1 of Schedule 1 to the Ordinance dated 20 November 2018;

(ii)  a Supplemental EUV Report on the revised EUV as at 1 November 2018 and RDV dated 19 December 2019;

(iii)  a Rebuttal Report on Mr Patrick Lai of AA Property Services Ltd (“Mr Lai”)’s EUV and RDV report dated 28 February 2020.

21.  R1 and R5 relied on the following reports:

(a)   a witness statement Mr Lai Kwok Chun, the Director of R1 dated 13 January 2020;

(b)   a witness statement Mr Ip Chi Fai Eric, the Business Development Manager of R5 dated 13 January 2020;

(c)   the following reports by Mr Fung Kai Yan Stephen (“Mr Fung”):

(i)    a Building Condition Survey Report dated 3 January 2020 together with Expert Report on Estimated Repair Cost and Construction Cost for Redevelopment prepared by Mr Ho Yiu Yu;

(iii)  a Rebuttal Report dated 20 March 2020 on Mr Wong’s Rebuttal Report;

(d)  the following reports by Dr Lo Man Chiu Raymond (“Dr Lo”):

(i)   a Structural Survey Report 3 January 2020;

(ii)  a Rebuttal Report dated 20 March 2020 on Mr Wong’s Rebuttal Report;

(e)   the following reports by Mr Lai:

(i)   a Valuation Report on the EUV as at 1 November 2018 and RDV dated 10 January 2020;

(ii)  a Rebuttal Report dated 18 March 2020 on Mr Chan’s Rebuttal Report.

22.  Mr Wong and Mr Fung prepared a joint expert statement on Condition Survey dated 16 October 2020 (“Joint Statement on Condition Survey”) which was followed by another joint expert statement prepared by Mr Wong and Mr Lo on Structural Assessment dated 22 October 2020 (“Joint Statement on Structural Assessment”).

23.  Mr Chan and Mr Lai have also prepared two joint statements, one dated 12 October 2020 setting out their agreements and disagreements on EUV and RDV (“1^st Valuation Joint Statement”), followed by another one dated 17 November 2020 on RDV (“2^nd Valuation Joint Statement”).

24.  At trial, Mr Chan and Mr Lai revised their assessments of EUV and RDV on the basis of their Valuation Joint Statements. At the request of the Tribunal, the two valuation experts had on 11 December 2020 prepared the 3^rd Joint Statement on the Assessment of the Accommodation Value (“AV”) of the Lots by Comparison Method.

25.  Lastly, leave was granted for Mr Fung and Dr Lo to prepare an expert report regarding the fire safety of the Buildings.

26.  R2 has not filed any witness statement. R4 relied on Mr Lai’s reports adduced by R1 and R5.

EUV as at 1 November 2018

Assessment of EUV of G/F Units

27.  By reference to the 1^st Valuation Joint Statement, the 2 experts agreed the particulars of the G/F units of the Buildings as follows[1]:

G/F:	Saleable Area (m2)	Cockloft Area (m2)	Yard (m2)	WC at Yard (m2)	Frontage (m)	Return Frontage (m)	Full Headroom (m)
472 Chatham Street North	57.0	28.3	16.2		4.8		5.1 (2.7 under M/F)
474 Chatham Street North	53.1	23.6	20.1	-	3.7		5.2 (2.8 under M/F)
476 Chatham Street North	59.8	-	8.4	-	4.6		3.9
478 Chatham Street North	61.6	-	7.2	5.0	4.1	12.0	4.0 (Front Portion)	4.5 m (Rear Portion)

28.  The shop on G/F, 474 Chatham Road North is chosen by the valuation experts as the Reference Shop Unit. The table below shows the comparables to be adopted for valuation on direct sales comparison basis (with prefix “A” standing for comparables adopted by Mr Chan while prefix “S” stands for those by Mr Lai):[2]

Comp Ref:	Address	Age	Date of PASP*	Consideration	Saleable Floor Area (m2)	Frontage (m)	Headroom (m)	Depth (m)	Effective Area (m2)	Effective Unit Price (/m2)
Ref Unit	G/F, 474 Chatham Road North	1956	1 Nov 18		53.1 + C/L: 23.6 + Yard: 20.1	3.7	2.80		62.4
A1	G/F, 13 To Kwa Wan Road	1957	18 Mar 19	$33,300,000	71.8 + Yard: 15.2	4.2	3.5	17.4	74.3	$448,183
A3/S4	Shop C, G/F, Ming Wah Court, 20-30 Sung Chi Street	1973	28 Jul 18	$9,000,000	41.1	3.9	3.2	10.8	41.1	$218,978
A4/S3	G/F, 3 Sze Chuen Street	1960	31 Jul 18	$11,800,000	51.0	5.9 + Return Frontage: 8.8	5.2	8.8	51.0	$231,373
A5	Shop 4, G/F & C/L, Loyal Mansion, 264 Ma Tau Wai Road	1967	25 Apr 18	$29,000,000	57.5 + C/L: 39.0	4.5	5.5 (2.8 under C/L)	12.8	67.3	$430,906
A6	G/F, 27 To Kwa Wan Road	1957	5 Mar 18	$27,500,000	74.1 + Toilet in Yard:1.2 + Yard:13.7	4.1	3.5	17.4	76.6	$359,008
A7	Shop D, E & portion of F, G/F, Chung Shun Building, 56A, 56B & 56C Kowloon City Road and 3 Lok Shan Road	1964	17 Apr 17	$59,200,000	133.7	9.8 + Return Frontage: 6.2	3.8	18.3	133.7	$442,782
A8	G/F “B”, 1R Lok Shan Road	1960	20 Jan 17	$31,500,000	54.3	4.5	4.7	13.0	54.3	$580,110
S1	Shop 1, G/F, Wing Fai Mansion, 52 Wing Kwong Street	1994	23 Jan 18	$6,500,000	23.9	3.0 + Return Frontage: 6.8	4.6	6.6	23.9	$271,967
S2	G/F, Walker Mansion, 4A Cooke Street	1981	1 Jun 18	$7,500,000	29.9	2.4	5.3	12.4	29.9	$250,836
S5	Shop 3, G/F and Lavatory, Loong Wah Mansion, 34-42B Baker Street & 6 Lo Lung Hang Street	1979	27 Jan 19	$6,280,000	23.9	4.4	4.3	5.6	23.9	$262,762

* PASP stands for provisional agreement for sale and purchase. Mr Lai relied on the dates of the PASPs although, according to Mr C Chan the PASPs were not registered in Land Registry. Unless, for instance, there were differences in the prices paid between the PASPs and the corresponding assignments, we agree with Mr Lai that the dates of the PASPs should be adopted since they were the first dates on which the price paid for the comparables were agreed reflecting the then market conditions. Mr Chan made such concession on the 3^rd day of the trial on 3 December 2020.

29.  To arrive at the effective unit price above, the appropriate conversion factor for the ancillary areas of the premises has to be determined. Mr Chan and Mr Lai have agreed, for instance, that the value of the yard as well as the water closet in the yard at 1/6 of the value of the G/F proper of the units. However, they were unable to agree on the value of the cockloft by reference to the value of the G/F proper (Mr Chan suggested 1/8 whilst Mr Lai suggested ¼).

30.  The question as to which conversion factor is appropriate then arises. For a cockloft or M/F inside a shop, it is of course an ancillary area to the shop and its value derives from that of the shop. In Bright Dragon Properties Limited v Director of Lands, LDLR 3/2007 (unreported, 8 August 2014) at §§34-36, the Tribunal agreed that “a relatively higher price will be demanded by the owner if the ground floor shop can form an entrance providing an upper floor shop premises with a direct access from the street and hence increase the value of the upper floor shop premises.”

31.  If Mr Chan’s 1/8 is adopted, the effective area for Comparable A5 would be 62.4 sq m and the unit price would become $464,744 per sq m (the unit price for the cockloft would be $58,093 per sq m). On the other hand, if Mr Lai’s ¼ is adopted, the effective area for Comparable A5 would be 67.3 sq m and the unit price would become $430,906 per sq m (the unit price for the cockloft would be $107,727 per sq m). We prefer Mr Lai’s assessment which is more realistic.

32.  Mr Chan and Mr Lai had the following agreements/ disagreements on adjustments[3]:

	Mr Chan	Mr Lai
Time	On the basis of the Private Retail Price Index of the Rating and Valuation Department
Location	Adjustment is allowed to reflect the difference in retail potential of the location between the Reference Retail Unit and comparable properties. Shops with better retail potential normally command higher unit rates	Adjustment is made to allow for the difference  in the levels of pedestrian flow between the Reference Shop and the shop comparables
Size	1% for every 10 sq m difference	1% for every 4 sq m difference
Age	1% for every 10 years difference[4]
Frontage	2% for every 1 m difference	4% for every 1 m difference
Return Frontage	Retail shops with return frontage enjoy better visibility and normally command higher unit price	Adjustment rate at 4% per metre
Layout	Adjustment is made by comparing the shape and configuration of the subject and the comparable transactions. Shops with better shape normally command higher unit rates	Adjustment is allowed to reflect the difference in shape between the Reference Shop and the shop comparables
Headroom	4% for every 1 m difference in full headroom	2% for every 1 m difference
Level Difference	Steps leading to a shop unit from street level reduces convenience in accessing the shop and thus reduces the value of the shop	There is a level difference between the shop and the street level at Shek Tong Street
Internal Condition	NA	The internal condition of the comparables is taken to be fair
Total Adjustment	By Multiplication

33.  The proposed adjustments by Mr Chan are shown in the table below (whereas those by Mr Lai are shown in parenthesis if they are different)[5]:

Comp Ref:	Effective Unit Price (/m2)	Adjustments										Adjusted Unit Price (/m2)
		Time	Location	Size	Age	Layout	Frontage	Return Frontage	Headroom	Absolute Total	Total*
A1	$448,183	6.4%	-25.0% (-50.0%)	1.5% (3.0%)	-0.1%	0.0%	-1.0% (-2.0%)	0.0%	6.8% (1.4%)	40.8% (62.9%)	-14.4% (-45.6%)	$383,645 (243,812)
A3/S4	$218,978	1.6%	30.0%[6] (-10.0%)	-1.8% (-5.3%)	-1.7%	-10.0%	-0.4% (-0.8%)	0.0%	8.0% (2.0%)	53.5% (31.4%)	23.4% (-22.5%)	$270,219 ($169,708)
A4/S3	$231,373	1.6%	25.0%[7] (-10.0%)	-0.8% (-2.9%)	-0.4%	-10.0% (-5.0%)	-4.4% (-8.8%)	-3.0% (-7.0%)	0.0% (-2.0%)	45.2% (37.7%)	4.7% (-30.2%)	$242,248 ($161,498)
A5	$430,906	2.3%	-25.0% (-50.0%)	0.3% (1.2%)	-1.1%	-5.0%	-1.6% (-3.2%)	0.0%	-1.2% (-0.6%)	36.5% (63.4%)	-29.7% (-53.2%)	$302,927 ($201,664)
A6	$359,008	2.4%	-20.0% (-50.0%)	1.7% (3.6%)	-0.1%	0.0%	-0.8% (-1.6%)	0.0%	6.8% (1.4%)	31.8% (59.1%)	-11.8% (-47.1%)	$316,645 ($189,915)
A7	$442,782	9.4%	-30.0% (-50.0%)	7.4% (17.8%)	-0.8%	0.0% (-10.0%)	-12.2% (-24.4%)	-3.0% (-24.8%)	5.6% (0.8%)	68.4% (138.0%)	-26.7% (-67.0%)	$324,559 ($146,118)
A8	$580,110	11.1%	-40.0% (-50.0%)	-0.5% (-2.0%)	-0.4%	-5.0%	-1.6% (-3.2%)	0.0%	2.0% (1.0%)	60.6% (72.7%)	-37.0% (-49.6%)	$365,469 ($292,375)
A9/S1	$271,967	3.3%	30.0% (10.0%)	-3.6% (-9.6%)	-3.8%	-10.0%	1.4% (2.8%)	-5.0% (-27.2%)	2.4% (-0.8%)	59.5% (67.5%)	10.6% (-34.0%)	$300,796 ($179,498)

* By multiplication.

Choice of G/F Comparables and Location Adjustments

34.  The Buildings are located in a residential area with the vicinity comprising a mix of commercial/ residential composite buildings.

35.  The Buildings are situated on the southeastern side of Chatham Road North around its corner with Shek Tong Street. This section of Chatham Road North is a main distributor running northeast – southwest from the To Kwa Wan district to Tsim Sha Tsu with the East Kowloon Corridor flyover running above in a similar direction. Despite the area is served by different public transportation, pedestrian flow is minimum or weak as pedestrian flow is dissuaded or broken when San Lau Street to the southwest is a busy local distributor. Beyond San Lau Street, the whole block of Nos 452-460 Chatham Road North and the further Chatham Gate that abuts Chatham Road North comprise no shop premises on Chatham Road North[8]. Shops along this section of Chatham Road North are either vacant or occupied mainly by furniture stores or design workshops[9]. In comparison, Shek Tong Street is even a short side-street with few pedestrian traffic, premises on the ground floor close to its junction with Chatham Road North comprise car-repairing or engineering workshops etc.

36.  Comparable A1 is situated on the southeastern side of To Kwa Wan Road close to its end with Ma Tau Wai Road at which Chatham Road North nearly meets but then diverts. Both the trading environment and pedestrian flow are much superior when compared with the subject location. This explains why Mr Chan proposed an adjustment of -25% while Mr Lai proposed -50%. This appears not to be a good comparable but for the sake of analysis, we are prepared to adopt an adjustment of -50% for locational difference.

37.  Albeit located at a side street, Comparable A3/S4 is occupied by a café which serves the residents of the locality. After the joint inspection conducted on the 2^nd day of trial, ie 2 December 2020, Mr Chan agreed to the adjustment proposed by Mr Lai at -10%. However, when Mr Chan gave evidence on 11 December 2020, he tried to revert to his original proposed adjustment of +30%, explaining that he made a mistake because he had assumed that what he saw on 2 December 2020 was the same as that at the date of valuation on 1 November 2018. In other words, Mr Chan was suggesting that the location of this comparable had improved by as much as 40% in the past two years. Mr Chan did not provided any evidence or material in support of such a significant change. On the other hand, we note that a new residential cum commercial development, The Vantage[10], next to this comparable around the corner of the street, is due to be completed soon. It was more probable than not that two years ago the site now being occupied by The Vantage was just a construction site if it was not vacant. In the absence of any evidence to the contrary, we are not persuaded that the location of this comparable is significantly different from what it used to be two years ago. We agree with Mr Lai that it enjoys a better location than the subject and accept his adjustment of -10%.

38.  Comparable A4/S3 is the only other common comparable agreed by the 2 experts. It is situated at a side street - Sze Chuen Street lying further away from the Buildings but is in proximity to the To Kwa Wan Market and Government Offices Building.  Likewise, after the joint inspection conducted on the 2^nd day of the trial, ie 2 December 2020, Mr Chan revised his location adjustment to -5%. However, when Mr Chan gave evidence on 11 December 2020, he again tried to revert to his original proposed adjustment of +25%, explaining that he made a mistake because he had assumed that what he saw on 2 December 2020 was the same as that at the date of valuation on 1 November 2018. In other words, Mr Chan was suggesting that the location of this comparable had improved by as much as 30% for the past two years. Mr Chan had not provided any evidence or material in support of such a significant change but according to the original inspection bundle, this comparable was previously occupied as a car-repairing workshop as opposed to the present sub-division into 3 units comprising an audio & video store and 2 fruit stores. That notwithstanding, we do not observe anything that might suggest such a significant improvement up to 30% during our joint inspection. The To Kwa Wan Market and Government Offices Building were at their place for more than two years. While there are other car-repairing workshops nearby, there are also other grocery stores or users related to the wet market. The purchaser in the acquisition of this comparable probably already had the intention of carrying out the present subdivision at the time of purchase. We agree with Mr Lai that this comparable enjoys a better location than the subject and accept his adjustment of -10%.

39.  Comparable A5 is situated near the section of Ma Tau Wai Road which connects the section of Chatham Road North where the Buildings are located but on the opposite side of the street. Pedestrian flow is moderate. Few steps to the north around the corner was once a branch of HSBC. This section of Ma Tau Wai Road is popular for furniture stores and interior design studios. We are prepared to adopt an adjustment of -35% for locational difference.

40.  Like Comparable A1, Comparable A6 is situated on the southeastern side of To Kwa Wan Road with superior pedestrian flow. We are prepared to adopt an adjustment of -50% for locational difference.

41.  Comparable A7 is situated at the corner of Kowloon City Road and Lok Shan Road opposite To Kwa Wan Market and Government Offices. The vicinity is predominated by trades linking to the busy wet market just like this comparable which is occupied by a butcher’s store. We agree with Mr Lai that the adjustment should be as much as -50%.

42.  Comparable A8 is situated close to Comparable A7 but is separated by Kowloon City Road. It is currently occupied by a butcher’s shop. We agree with Mr Lai that the adjustment should be as much as -50%.

43.  Comparable A9/S1 is situated at another side street – Wing Kwong Street which is quiet and lacks pedestrian flow. It was previously occupied by a religious institute but is now occupied as a medicine store. Both the religious institute and the medicine store choose to have the frontage onto the arcade as the main entrance. We agree with Mr Lai that the adjustment should be +10%.

44.  Both Comparables S2 & S3 are situated furthest away from the Buildings in the Hung Hom district. They are located in the vicinity of funeral parlours where the neighbourhood trades are generally related to coffin shops and funeral related businesses. In view of their small sizes which are about half of the Reference Shop Unit, they should not be regarded as comparable at all. Both experts agreed and no inspection of these two comparables was carried out.

Size Adjustments

45.  In respect of the adjustments for size, it is trite that shop values are more sensitive to size when compared with other types of properties but it should be noted that the subject location is only secondary. Mr Chan proposed adjustments on the basis of 1% for every 10 sq m difference whereas Mr Lai proposed 1% for every 4 sq m difference, ie a more sensitive adjustment basis.

46.  Taking Comparable A1 as an example, if Mr Chan’s 1% for every 10 sq m difference is adopted, for the difference of 74.3 m² - 62.4 m² = 11.9 m² which lies in the rear of the premises, the adjustment (when compared with the Reference Shop) would be 1.2%; but if Mr Lai’s 1% for every 4 sq m difference is adopted, the adjustment would be 3.0%, which appears to be a little excessive given that the subject location is secondary only.

47.  And taking Comparable A3/S4 as an example, if Mr Chan’s 1% for every 10 sq m difference is adopted, for the difference of 41.1 m² - 62.4 m² = -21.3 m², the adjustment (when compared with the Reference Shop) would be -2.1%; but if Mr Lai’s 1% for every 4 sq m difference is adopted, the adjustment would be -5.3%. In view of the significant size difference (ie this comparable is about 2/3rd of the size of the Reference Shop), I agree with Mr Lai’s -5.3%.

48.  Coming to Comparable A4/S3, if Mr Chan’s 1% for every 10 sq m difference is adopted, for the difference of 51.0 m² - 62.4 m² = -11.4 m², the adjustment (when compared with the Reference Shop Unit) would be -1.1%; but if Mr Lai’s 1% for every 4 sq m difference is adopted, the adjustment would be -2.9%. We prefer an adjustment of about -2.2% which is about 2% per every 10 sq m difference.

49.  Next is Comparable A5. If Mr Chan’s 1% for every 10 sq m difference is adopted, for the difference of 67.3 m² - 62.4 m² = 4.9 m², the adjustment (when compared with the Reference Shop Unit) would be 0.5%; but if Mr Lai’s 1% for every 4 sq m difference is adopted, the adjustment would be 1.3%. Based on Mr Chan’s formula, 0.5% is preferred.

50.  Comparable A6 has the similar effective size as Comparable A1 and therefore an adjustment of 1.4% is adopted.

51.  On the other hand, comparable A7 has a much larger size of 133.7 sq m. Obviously, a higher adjustment for size difference is desirable and Mr Lai’s of 17.8% should be adopted.

52.  Comparable A8 has a similar size to the Reference Shop Unit and we adopt Mr Chan’s adjustment for size of -0.5%.

53.  Comparable A9/S1 has a much smaller size of 23.9 sq m when compared with the Reference Shop Unit of 62.4 sq m. Again, a higher adjustment for size difference is desirable and Mr Lai’s -9.6% should be preferred.

Frontage Adjustments

54.  In respect of the adjustments for frontage, Mr Chan proposed adjustments on the basis of 1% for every 0.5 m difference whereas Mr Lai proposed 4% for every 1 m difference, ie a more sensitive adjustment basis.

55.  The Reference Shop Unit has an agreed frontage of 3.7m. In Tai Ping Restaurant Ltd v Director of Lands, LDLR 1/2013 (unreported, dated 8 December 2014), the Tribunal stated at §73 of the judgment that “there shall not be any adjustment for frontage unless the frontage in consideration is clearly superior or inferior to the norm that the benefits or disabilities which the frontage produces are clearly evident”. In that case, therefore, the Tribunal preferred 2% for every 1 metre difference to 4% for every 1 metre difference. We are content to adopt 1% for every 0.5 metre difference similar to Tai Ping Restaurant.

Return Frontage Adjustments

56.  For Comparable A4/S3, the so-called return frontage is in fact fronting onto a scavenging lane. We agree with Mr Chan that this return frontage is of marginal value and accept his adjustment of -3%. In contrast, Mr Lai’s adoption of just 1/5 of the “return frontage” is similarly subjective,

57.  As regards Comparable A7, it is being occupied as a butcher’s shop which takes advantage of the return frontage onto a side lane. Mr Chan, like what he proposed for Comparable A4/S3 above, adopted an adjustment of -3% but Mr Lai took into account the whole return frontage onto side lane which is 6.2 metres and then applied his frontage adjustment of 4% for every 1 m difference, yielding -26.8%. We prefer Mr Chan’s 2% for every 1 m difference on the frontage adjustments. We disagree with Mr Lai’s methodology which is premised on the assumption that the frontage on the side lane is as valuable as the main frontage. This methodology also has the effect of double counting the value of the corner between the main frontage and the side lane[11]. We agree with Mr Chan that such an application of mechanical formula failed to reflect the size and visibility of the return frontage. Taking into account the above, we are prepared to adopt an adjustment of -6%.

58.  As for Comparable A9/S1 which is situated at a quiet location, Mr Chan adopted an adjustment of -5% for the return frontage whereas Mr Lai adopted a formula of 1% per every 1 m for the whole return frontage onto the shopping arcade, arriving at -27.2%. We consider the latter excessive and are prepared to accept -10% only.

Layout

59.  Having regard to the shape of the Reference Shop Unit which has an irregular shape and long depth common for shops in buildings of that era, both experts applied negative layout adjustments for comparables of more regular shapes. However, they had minor opinion differences on the adjustments for the following comparables.

60.  For Comparable A4, Mr Chan adopted -10% whereas Mr Lai adopted -5%. We prefer Mr Chan’s -10% as this comparable is indeed capable of being subdivided into 3 smaller units.

61.  For Comparable A7, Mr Chan did not apply any layout adjustment because it has a similar depth as the Reference Shop Unit but Mr Lai thought otherwise and applied -10% apparently because this comparable has a longer frontage and therefore a better frontage to depth ratio. As we have already allowed for the frontage adjustment, making a second allowance for frontage would result in double counting. As the Tribunal illustrated in Supergoal Investment Limited v Five Ming House Limited & Others [2014] 1 HKLRD 286 at §§95-96. a longer frontage or a better frontage to depth ratio of a shop does not necessarily result in a higher value. In that case, the Tribunal commented: “There is no room for making an adjustment of –25% for the difference in layout. Indeed, Comparable A3 is deeper than the Reference Shop Unit and may fetch a lower unit value (instead of a higher one).” We consider that the same reasoning shall apply and there is no room for making an adjustment of –24.4% for the difference in layout by Mr Lai. We therefore prefer Mr Chan’s nil adjustment for layout.

Headroom

62.  As regards the adjustment for headroom, Mr Chan proposed 4% for every 1 m difference in full headroom as opposed to Mr Lai’s 2% for every 1 m difference; Mr Lai further allowed an upward adjustment of 2% to comparables without cockloft or mezzanine floor.

63.  The Tribunal had reservation on Mr Lai’s latter approach in Top Harmony Limited v Cheung Yuet Sheung [2020] HKLdT 42, LDCS 39000/2018 (unreported, dated 15 October 2020). In Chan Kai Yuen & Another v Director of Lands, LDLR 8/1999 (unreported, 1 September 2000). In that case, the Tribunal observed that the experts analysed the unit value of the ground floor based on a normal headroom of 3 metres. Then if there be a cockloft, be it authorized or unauthorized, it would provide an extra headroom. Thus, “willing buyers in the market will derive additional benefit out of the headroom space, of 2.1m in this case, and hence are prepared to offer an extra bid for the subject premises when making comparison with other properties without such benefit of the unusual headroom.”

64.  At trial, Mr Lai conceded that the Tribunal in Top Harmony Limited was correct in following Chan Kai Yuen when the cockloft of the reference shop in that case was fully covered over the ground floor shop. In the present case, the cockloft of the Reference Shop Unit just extends to some half of the saleable area of the G/F in the rear hence the Reference Shop Unit has full headroom in the front part. In his opinion, therefore, it is justifiable to allow adjustment on the basis of full headroom but when coming to the rear part, for those comparables that have no cockloft, ie higher headroom, he would apply +2% to reflect this advantage of ambience.

65.  Mr Chan commented that Mr Lai’s +2% is arbitrary. He preferred simply making allowance on the basis of full headroom but in order to avoid double counting the rear part having cockloft, he purposively adopted a lower unit rate for the cockloft at 1/8 of that of the G/F.

66.  Mr Yuen illustrated by referring to Comparable A4 which has the same full headroom of 5.2 m as the Reference Shop Unit. However, the latter has a cockloft at the rear which covers almost half of the shop but the former has no cockloft. Without applying a further adjustment like what Mr Lai did to reflect the absence of cockloft in Comparable A4, we consider that Mr Chan would end up with an absurd result that the Reference Shop Unit would be of the same value as Comparable A4.

67.  For the sake of further analysis, assuming there is a shop comparable by the side of the Reference Shop Unit with the same saleable area of 53.1 sq m but no cockloft selling at X. This comparable also has a full headroom of 5.2 m as the Reference Shop Unit. If Mr Chan’s approach is followed, the Reference Shop Unit will be valued at 53.1X + 23.6 X /8 = 56.05X. But if Mr Lai’s approach is followed, the G/F value of the Reference Shop Unit adjusted for headroom will be 52.04X[12] and that the cockloft will become 23.6/4 x 0.98X, giving a total of 57.82X. Or else, if Chan Kai Yuen is followed, assuming the headroom adjustment is 4% per 1 m difference, the G/F value of the Reference Shop Unit adjusted for headroom will be 53.1X x 0.904 = 48X and the value of the cockloft will be 12X, giving a total of 60X. Alternatively, assuming the headroom adjustment is 2% per 1 m difference, the total will become 50.55X + 12.64X = 63.19X, ie

For a G/F comparable selling at X/m2	Mr Chna’s approach	Mr Lai’s approach	Chan Kai Yuen’s approach*
			headroom adjustment: 4% per 1 m difference	headroom adjustment: 2% per 1 m difference
G/F Value	53.10X	52.04X	48.0X	50.55X
C/L Value	2.95X	5.78X	5.9X	5.90X
Total	56.05X	57.82X	53.9X	56.45X

* Assuming value of C/L is equal to ¼ of that of G/F

68.  As we have found the cockloft to be more realistically valued at 1/4 that of G/F, for premises which do not have cockloft covering the whole of G/F, it appears more reflective of the real life to follow the approach in Chan Kai Yuen subject to a different headroom adjustment of 2% per 1 m difference.

69.  To conclude, the adjustments for the comparables are as follows:

Comp Ref:	Effective Unit Price (/m2)	Adjustments										Adjusted Unit Price (/m2)
		Time	Location	Size	Age	Layout	Frontage	Return Frontage	Headroom	Absolute Total	Total*
A1	$448,183	6.4%	-50.0%	1.2%	-0.1%	0.0%	-1.0%	0.0%	-1.4%	60.1%	-47.5%	$235,296
A3/S4	$218,978	1.6%	-10.0%	-5.3%	-1.7%	-10.0%	-0.4%	0.0%	-0.8%	29.8%	-24.3%	$165,766
A4/S3	$231,373	1.6%	-10.0%	-2.2%	-0.4%	-10.0%	-4.4%	-3.0%	-4.8%	36.4%	-29.2%	$163,812
A5	$430,906	2.3%	-35.0%	0.5%	-1.1%	-5.0%	-1.6%	0.0%	0%	45.5%	-38.2%	$266,300
A6	$359,008	2.4%	-50.0%	1.4%	-0.1%	0.0%	-0.8%	0.0%	-1.4%	56.3%	-49.3%	$182,017
A7	$442,782	9.4%	-50.0%	17.8%	-0.8%	0.0%	-12.2%	-6.0%	-2.0%	98.2%	-48.3%	$228,918
A8	$580,110	11.1%	-50.0%	-0.8%	-0.4%	-5.0%	-1.6%	0.0%	-3.8%	72.4%	-50.6%	$286,574
A9/S1	$271,967	3.3%	10.0%	-9.6%	-3.8%	-10.0%	1.4%	-10.0%	-3.6%	51.7%	-21.8%	$212,678
										Average:		$217,670

* By multiplication.

70.  As 4 out of the above 8 comparables require adjustments for location as much as -50% which is relatively subjective, it is dubious whether they could be considered as comparables. If these 4 comparables are excluded, the average will be just $202,139.

71.  The sale that requires the least significant or lowest total adjustment (ie the absolute adjustment based on the sum of the adjustments regardless of sign) is often the most suitable comparables. We would exclude comparabes A7 and A8 as they were also dated and the resultant average will be $204,312.

72.  Having taken into account the above, we are of the opinion that the unit value of the Reference Shop Unit should be $204,000 per sq m as at 1 November 2018 and its cockloft should be valued at $51,000 per sq m.

Conclusion on EUV for G/F & Cockloft

73.  Our assessment of the EUV of G/F (including cockloft, if any), 472-478 Chatham Road North is as follows:

G/F, Chatham Road North	Saleable Area (m2)	Converted/ Effective Area (m2)	Adjustments							Adjusted Unit Price (/m2)	EUV
			Age	Size	Frontage	Return Frontage	Layout	Headroom	Total*
472	57.0	66.8	0.0%	-0.4%	2.2%	0.0%	0.0%	-0.2%	1.6%	$207,264	$13,845,000
474	53.1	62.4	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	$204,000	$12,730,000
476	59.8	61.2	0.1%	0.1%	1.8%	0.0%	0.0%	2.2%	4.2%	$212,568	$13,009,000
478	61.6	63.6	0.1%	-0.1%	0.8%	10.0%	-3.0%	2.9%**	10.7%	$225,828	$14,363,000
										Total:	$53,947,000

* By multiplication.

** Part of the shop at 478 Chatham Road North has a lower headroom of 4m right at the front of the shop. One has to walk down 3 steps in order to move from the front to the rear where the headroom is 4.5m. We accept that it is reasonable for Mr Lai to assume an average headroom of 4.25m in this adjustment.

74.  The adjustments above are made on the basis of what we have discussed in determining the EUV of the Reference Shop Unit, ie G/F, 474 Chatham Road North. For instance, as the size differences among the various ground floor units are minor, Mr Chan’s 1% for every 10 sq m difference is adopted. Similarly, Mr Chan’s 1% for every 0.5 metre difference in frontage is also adopted. As regards return frontage for G/F, 478 Chatham Road North, we also agree with Mr Chan that an adjustment of +10% is appropriate.

75.  On the other hand, we agree with Mr Lai that there appears to be no apparent difference in terms of layout between the ground floor shops at 474 Chatham Road North and 476 Chatham Road North. We notice that there are 3 steps down after entering G/F, 478 Chatham Road North which justifies a downward adjustment of -3% as opposed to Mr Lai’s -10%. We do not agree that there should be any further adjustment on accessibility as suggested by Mr Lai. It is actually quite inconceivable that Mr Lai would arrive at a total negative adjustment for G/F, 478 Chatham Road North which, as compared with G/F, 474 Chatham Road North, occupies a better corner location enjoying a return frontage[13]. The then occupier at G/F, 478 Chatham Road North was “Japan Shop 北海道物產貿易有限公司” which was a retail store[14].

Assessment of EUV of Upper Floor Domestic Units

76.  The two valuation experts had agreed that the unit value of the Reference Domestic Unit, being 4/F, 474 Chatham Road North, was $93,500 per sq m as at 1 November 2018. They could not however agree on the adjustments for the other units within the Buildings.

77.  As a result, they have also the following agreements/ disagreements on adjustments[15]:

	Mr Chan	Mr Lai
Size of Reference Domestic Unit	62.1 sq m	62.14 sq m
Quantum	Normal Size: 1% per 10 sq m difference Small Size: 4% per 10 sq m difference	1% per 5 sq m difference
Floor	2% per floor difference
Age	0.25% per year difference
Top Floor	-3%
Internal Condition	Good: 6% Fair: 3% Not inspected: 0% Poor: 0%	Good: 10% Fair: 5% Poor: 0% Very Poor: -5%
View	No window: -10% Close Building View: -5% Flyover View: -3% Building View: 0% Open Building View: 5%	No window: -10% Opposite Building Limited View: -10% Building under flyover View: -10% or -5% Building and flyover: -5% or 0% Building View: -5% or 0% or 5%
Adjustment Method	Multiplication

78.  The proposed adjustments by Mr Chan are shown in the table below (whereas those by Mr Lai are shown in parenthesis if they are different)[16]:

Quantum Adjustments

79.  Whereas the Reference Domestic Unit and other typical domestic units in the Building comprises 62.1 sq m or thereabouts, the subdivided units range from 9.2 sq m to 20.0 sq m which, in our opinion, cater for a completely different market. We prefer Mr Chan’s demarcation of 1% per 10 sq m difference and 4% per 10 sq m difference respectively. For the rear units of 478 Chatham Road North however have a size of about 39.9 sq m each, we are prepared to adopt Mr Lai’s 1% per 5 sq m difference.

Internal Conditions

80.  As regards the internal conditions of the premises, we appreciate that the classifications by the two experts are only relative and sometimes it is difficult to be quantified. We note that save for 2/F, 474 Chatham Road North, the two valuation experts agreed the internal conditions of all the domestic units in the Buildings. Having conducted the joint inspection on 2 December 2020, we agree with Mr Chan that the internal condition of 2/F, 474 Chatham Road North was ‘fair’. In any event, we do not agree with Mr Lai’s range of demarcation of value which appears to be excessive; we prefer Mr Chan’s 3% difference for each category.

Physical Condition/ Building Management

81.  Mr Chan made an allowance of -3% for the physical condition/ building management for the domestic units in 476 & 478 Chatham Road North “to reflect the general upkeeping and management of the building in the course of time”. In his Valuation Report of 10 January 2020, Mr Lai made no such allowance. In his Rebuttal Report of 18 March 2020, Mr Lai commented at para 5.41 that[17]:

“… in the absence of evidence proving the difference in terms of physical condition and management level among the individual units, I consider the adjustments made by Mr Chan were arbitrary and could not be justified.”

82.  After the joint inspection on 2 December 2020, Mr Lai made an allowance of -5% for the physical condition/building management for the domestic units in 476 & 478 Chatham Road North. We prefer Mr Chan’s -3%.

View, Nuisance & Noise

83.  At para 5.16 & 5.17 of Mr Lai’s Rebuttal Report dated 18 March 2020, he commented that[18]:

“5.16 The view of the domestic units on the first floor of the Existing Building was almost blocked by the flyover which was right in front of the Existing Building, I consider downward adjustments of 10% are appropriate.

5.17  The view of the domestic units on the second floor of the Exiting Building was partially blocked by the flyover. After review, I consider a downward adjustment of 5% is more appropriate.”

84.  Having conducted the joint inspection on 2 December 2020, we do not agree with Mr Lai’s observations. As shown in  photo 4 in Mr Lai’s Valuation Report dated 10 January 2020 at Enclosure 1(2)[19], the 1/F units of the Building look towards the opposite side of Chatham Road North under the Eastern Kowloon Corridor flyover. The view is not blocked by the flyover.

85.  With that being said, we would agree that the view of 2/F, 472 & 474 Chatham Road North is largely blocked by the flyover but not for 2/F, 476 & 478 Chatham Road North, owing to the sloping topography of the street/flyover. In spite of the above, we agree with Mr Chan’s proposed adjustment of -3% each for units at 2/F, 472 Chatham Road North, 2/F, 474 Chatham Road North, 2/F, 476 Chatham Road North and 2/F, 478 Chatham Road North owing to their proximity to the flyover which Mr Chan regarded as nuisance but not the other units.   We also agree with Mr Lai in respect of the adjustment of -5% for 3/F, 472, 474 & 476 Chatham Road North when these units are directly facing the flyover[20].

86.  Subject to the observations in the preceding paragraph, , we consider Mr Chan’s adjustments for view more consistent and reasonable.

87.  In addition, Mr Chan made a separate allowance for nuisance for units facing directly to the flyover. He explained in his Valuation Report dated 20 November 2018 that “(t)he internal condition/ activities can be easily seen from the outside by vehicles passing by”. But we concur with Mr Lai that such allowance is not necessary as vehicles running on the flyover are usually at high speed. In any event, viewing outside can be mitigated by curtain or blind.

88.  Mr Lai made no such allowance but proposed adjustments of -5% or -10% for noise for units at 1/F & 2/F, 472-478 Chatham Road North fronting onto the main street. On the other hand, Mr Lai proposed +5% for noise for units at 478 Chatham Road North as they also front onto Shek Tong Street, the side street. In his Rebuttal Report of 18 March 2020, Mr Lai explained at para 5.34 & 5.35 that[21]:

“5.34 The residential units on the first floor and second floor of the Existing Building would be subject to a high level of noise nuisance from both the passing traffic from the flyover in front of the Existing Building and the passing traffic on Chatham Road North.

5.35 The noise generated by the passing traffic on Chatham Road North would be trapped under the flyover in front of the Existing Building. The situation would aggravate the effect of noise nuisance to the residential units on the first floor and second floor of the Existing Building which were situated at a level below the flyover.”

89.  Having conducted the joint inspection on 2 December 2020, we accept Mr Chan’s argument that “both the reference domestic unit and the remaining domestic units are situated along the flyover with similar level of noise. Therefore, I do not agree with Mr Lai’s noise adjustment in this regard.”[22]

Lighting & Ventilation

90.  For similar reason mentioned at §84 above, we agree with Mr Chan’s adjustments for lighting & ventilation. In any event, we consider Mr Lai’s -10% for the domestic units on 1/F excessive.

Orientation

91.  Mr Lai made adjustment of +2% for orientation for Flat C & D on 1/F, 474 Chatham Road North and -10% for orientation for Flat D, 2/F, 478 Chatham Road North. We see no justification for these adjustments which have double counted the adjustments on view[23].

Staircase Condition

92.  Mr Lai also allowed an adjustment of -15% to reflect the narrow width and height of staircase risers of the staircase leading up to the Rear Portions on the upper floors of 478 Chatham Road. We consider such allowance not necessary and in anyway excessive.

Subdivision

93.  Mr Lai took into account the fact that the two residential units at 1/F, 474 Chatham Road North and at Front Portion on 2/F, 478 Chatham Road North respectively had been sub-divided into small units without the approval from the Building Authority. He considered the marketability of the sub-divided units low and made a discount of -5%. We consider such argument by Mr Lai counter-intuitive and believe that those units probably would not have been subdivided in the first place if the adverse impact Mr Lai perceived is true.

94.  In light of the above analysis, therefore, our assessments of the EUV of various domestic units of the Building is are follows:

Conclusion on EUV

95.  The total EUV of the Building is therefore

$53,947,000 + $148,903,000 = $202,850,000

and the pro rata shares of R1, R2, R4 and R5’s interests are as follows:

Respondent	Unit	EUV	Pro-rata Share
R1	2/F, 474 Chatham Road North	$6,033,000	2.9741%
R2	1/F, 476 Chatham Road North	$5,100,000	2.5142%
R4	Front Portion, 3/F, 478 Chatham Road North	$6,502,000	3.2053%
R5	Front Portion, 6/F, 478 Chatham Road North	$5,936,000	2.9263%

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

96.  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 Lots due to the “age or state of repair” of the Buildings is justified.

Experts’ Evidence

97.  On this issue, the applicant adduced a Condition Survey Report and a Structural Survey Report both dated 10 October 2019 prepared by their expert, Mr Wong.

98.  In the Condition Survey Report, Mr Wong concluded that[24]:

“7.1 The Planning, Design, Construction and Workmanship of the Buildings

7.1.1 The Buildings are over 62 years old, have many problems as a result of its age which impairs its appearance and function.

7.1.2 Due to changes in statutory requirements, advanced technology and higher expectations over the years, the Buildings have become substandard with many problems affecting the hygiene, safety, convenience and enjoyment of the Buildings.

7.1.3 The physical and functional hazards are a result of deficiencies in the planning, design and use of material, facilities and workmanship of the Buildings when it was first constructed. These are further aggravated due to unauthorized building works, lack of maintenance and the absence of proper building management. This has rendered the Buildings to be well below a habitable standard and fall short of many basic requirements expected in new buildings. While some of these shortcomings are of a hygienic or environmental nature, others are of a much more hazardous nature which may lead to disasters and tragedies eg overloading of the structure due to unauthorized sub-division of the flats and unprotected electrical installations in the fire escape staircases. … By today’s standard, these hazards are detrimental to the safety of the users of the Buildings as well as the general public. Another example of the detrimental consequences of disrepair to the old building is the collapse of a balcony at No 50 Gillies Avenue South on 21 June 2017 which of similar design and age.

7.2 The State of Repair of the Building

7.2.1 The Buildings are obviously below a tenantable standard with its structural frames in a poor condition and most of its components, finishes and services deteriorated towards the end of their effective life spans. …

7.2.2 The Buildings are currently in a state of disrepair and demolition of the Buildings will relieve the owners from heavy repair responsibilities. Apart from the heavy repair responsibilities that the Buildings owners have to shoulder, the economic benefit brought about by the repair to the existing derelict building is far less than the option of re-development. Indeed, demolition of the existing derelict building for redevelopment is not only economically more viable but will also improve the living standard of the new occupants and contribute to the renewal of the neighbourhood and enhance the overall environment.

7.2.3 The costs of essential repairs estimated at HK$19,099,127 amounts to HK$9381.43/sq m of the existing Gross Floor Area of the Buildings. This unit cost of essential repairs is about 46.97% of the unit cost of HK$19,975.06/ sq m for the construction of a new building. In short, the essential repairs costs are disproportionately high as compared with the cost of constructing a new building. The high cost of immediate repairs indicates that the Buildings are in a dilapidated condition.

7.2.4 The carrying out of the essential repairs will cause considerable disturbance and will require a very long implementation period. It is inevitable that the occupation and enjoyment of the flats will be affected intermittently during the course of the repair. In fact, for flats with substandard unauthorized building works, the occupants will have to be evacuated during the carrying out of work for safety reasons.

7.2.5 The plain fact is that even after the essential repair works have been implemented, the Buildings will remain an old residential cum commercial building with its design and construction out-dated and below market expectations and constitute a continuing repair liability to the owners.”

99.  In the Structural Survey Report, Mr Wong concluded that the structural elements of the Buildings are currently in a poor state of repair; the Buildings will likely require extensive maintenance and repair works in the coming few years if they were not redeveloped:

(1)   Cracks and spalling are found in structural elements throughout the Buildings. Most of the cracks observed were longitudinal cracks; the reason for such cracks is due to the corrosion of the reinforcement. Some of the cracks are tension cracks present at beams, which may be caused by excessive deformation of beams[25].

(2)  Since all samples have a depth of carbonation exceeding the actual concrete cover, the protection of the passive layer of concrete cover is already lost and the steel reinforcement is susceptible to corrosion[26].

(3)  The Buildings were designed in accordance with the London County Council (LCC) By-Laws 1952 and the consideration of the robustness of the Buildings were not required by codes and regulations at that time. Therefore, it generally has a lower performance of robustness in design[27].

100.  Mr Wong summarized the problems of the Buildings as follows:[28]

“

· Extensive cracks and spalling are found in structural elements throughout the Buildings.

· The concrete strength for the beams and slabs is inadequate.

· The chloride content is considered to be high. Under the Code of Practice for the Mandatory Building Inspection Scheme (2012), recasting should be adopted.

· Carbonation has reached the concrete surrounding the steel reinforcement in all the tested samples from slab, beams and columns of No 472-474 Chatham Road; and all the tested samples from slab and beams of No 476-478 Chatham Road. This makes the steel reinforcement susceptible to corrosion. To rectify the situation, replacement of all the affected concrete covers should be carried out. However, this solution becomes impractical due to the extensive disturbance that will be caused by the repair works.”

101.  According to Mr Wong, not much can be done to rectify the high chloride content and low concrete strength problem without demolishing the entire Buildings. To tackle the carbonation problem, protective coating (elastomeric cementitious coating) may be applied to concrete surface of all the structural elements to prevent the situation from getting any worse. However, this method does not completely eradiate the problem and is very costly.

102.  On the other hand, Mr Fung opines that the Buildings are not old and dilapidated under the current property management and scheduled maintenance carried out by Operation Building Bright (“OBB”)[29] and the Mandatory Building Inspection Scheme (“MBIS”)[30].

103.  From the current state of repair and building condition points of view, Mr Fung did not consider that the Buildings are suffering from physical and functional obsolescence. He pointed out for example that the building at 478 Chatham Road North had completed the OBB on 12 November 2012 upon compliance and inspection of a list of building conditions as per Building Order No D01117/K/10/TE[31], having expended $249,781.29 thereon. Mr Fung regarded the cost not substantial which indicates that the deterioration of the building condition and the superstructure of the Buildings was not very serious and that the Buildings could be sustainably maintained at reasonable economic repair.

104.  Both Mr Fung and Dr Lo added that the Buildings are not dilapidated as there is no outstanding MBIS order for both Nos 476-478 Chatham Road North although the building at 474 Chatham Road North was subject to both MBIS and Mandatory Window Inspection Scheme (“MWIS”)[32] notices issued by the Buildings Department on 18 September 2019.

105.  They observe that the Buildings are currently provided with valid fire extinguishers. With the installation of emergency lighting (to be carried out), the Buildings will not be exposed to potential fire risks. In any event, the Buildings are not the subject of any Fire Safety Improvement Direction.

106.  Mr Fung further commented that even though the proposed redevelopment of the Buildings would provide economic plot ratio gain, it cannot achieve best utilization of land after redevelopment[33].

107.  To conclude, R1 and R5’s experts (Mr Fung and Dr Lo) emphasized that the Buildings are safe, not dangerous or imminently dangerous by reference to the OBB and MBIS.

Redevelopment or Rehabilitation?

108.  Mr Fung highlighted the following 6 factors as extracted from the “Urban Renewal Strategy” undertaken by the URA published by the Development Bureau in February 2011:[34]

(a)  Whether the Buildings are old and dilapidated and require urgent redevelopment as identified by the building survey;

(b)  Whether the Buildings lack basic sanitation facilities or they are exposed to potential fire risk due to lack of proper management and maintenance;

(c)  Whether the living conditions of the residents in the Buildings are satisfactory;

(d)  Whether the proposed redevelopment of the Buildings will improve the area by replanning and restructuring;

(e)  Whether the proposed redevelopment of the Buildings will achieve a better utilization land after redevelopment; and

(f)   Whether re-habitation of the Buildings is a practical and viable option.

109.   Mr Fung considered that the 6 factors above laid down a comprehensive framework to determine if older buildings were more suitable for redevelopment than rehabilitation and could shed light on the wider ambit of urban renewal being an alternative option for older buildings in Hong Kong on the other hand. Mr Fung opined that a balance should be struck between redevelopment and rehabilitation to bear fruit of planning merits to secure stable supply of affordable housing on the one hand and new housing in the private market on the other hand.

110.  We agree with Mr Chain that this Tribunal is a court of law, not a court of social policy. The statutory criteria the Tribunal has to apply is “whether redevelopment is justified due to age and state of repair” under section 4(2)(a) but not whether the building in question is suitable for rehabilitation.

111.  At this juncture, it is worth noting that Mr Kam Ming Chun Bridge (“Mr Kam”)[35], the Investment Manager on behalf of the applicant, testified that ever since the applicant had acquired the majority interest of the Lots in May 2018, their intention had been for redevelopment in view of the Buildings’ age and state of repair (by visual observation)[36].

112.  According to Mr Kam, the applicant were only informed by the solicitors of R1 & R5 on 7 September 2020 that the Buildings Department had issued the MBIS or MWIS notices on 18 September 2019[37]. In answer to Mr Yuen’s question in cross-examination, Mr Kam said that being a responsible owner, the applicant would be prepared to carry out any necessary works to prevent any imminent risk or danger (避免即時危險) and to comply with the notices[38].

113.  Mr Yuen suggested during his closing submission that the Applicant was willing to renovate the Buildings in lieu of redevelopment by reason of the said testimony of Mr Kam. We do not consider that the above answer of Mr Kam could be fairly taken to mean as such which is essentially a fundamental concession of the Applicant’s case. Whether Mr Kam has the authority to commit the applicant to such a position is doubtful. Whether the question put by Mr Yuen during cross-examination could, on their chosen wording, bear such a meaning or impact is also doubtful. 

114.  In any event, we are not aware of any consensus having been reached between the majority owner and the minority owners to undergo a comprehensive renovation or repair of the Buildings. There is not an owners’ incorporation for the Buildings at 476 to 478 Chatham Road North. Mr Yuen’s suggestion of undertaking a comprehensive renovation of the Building for the purpose of regeneration or rehabilitation appears unrealistic if not wholly fanciful in the present circumstance. 

Basic Law Consideration

115.  Mr Yuen also contended that the statutory provision was there to safeguard the right of private ownership (as protected under Article 6 of the Basic Law) from being overridden without justification. Mr Yuen referred to Lam VP’s comments in Good Faith Properties Limited v Cibean Development Limited [2014] 5 HKLRD 534 at §18 that “the proceedings in the Lands Tribunal should be regarded as a statutory means to justify this exceptional interference with the right of private ownership of property”.

116.  We no doubt agree to the said observation in Good Faith. The various features in the Ordinance including, inter alia, the requirements of age or state of repair justification, the taking of reasonable steps to acquire the minority owners’ shares, the opportunity for the minority owners to dispute valuation etc. are exactly there to ensure the right of private ownership of property not being subject to undue interference without sufficient basis.  We no less agree with the observations of Lam J (as he then was) in Hong Kong Kam Lan Koon Ltd v Realray Investment Ltd[39] that in adjudicating cases involving competing proprietary claims, the court will unavoidably have to decide which competing claim prevails.  In consequence, the losing party’s interest in the property cannot be effectively exercised.  But that circumstance per se certainly should not be suggested as a contravention of Arts 6 or 105 (of the Basic Law) in respect of the property rights of the losing party.

117.  Mr Yuen referred to Regina (Sainsbury’s Supermarkets Ltd) v Wolverhamption City Council[40] which concerned the interpretation and application of section 226 of the Town and Country Planning Act 1990 (as amended by the Planning and Compulsory Purchase Act 2004). That section provides that:

"(1) A local authority to whom this section applies shall, on being authorised to do so by the Secretary of State, have power to acquire compulsorily any land in their area –

(a)  if the authority think that the acquisition will facilitate the carrying out of development, re-development or improvement on or in relation to the land, or

(b)  which is required for a purpose which it is necessary to achieve in the interests of the proper planning of an area in which the land is situated.

(1A) But a local authority must not exercise the power under paragraph (a) of subsection (1) unless they think that the development, re-development or improvement is likely to contribute to the achievement of any one or more of the following objects –

(a)  the promotion or improvement of the economic well-being of their area;

(b)  the promotion or improvement of the social well-being of their area;

(c)  the promotion or improvement of the environmental well-being of their area."

118.  Apparently, the Ordinance has completely different wording from the UK Act and does not require the redevelopment to achieve the objects of promoting or improving social, economic or environmental well-being.

119.  Mr Yuen also referred to the Official Record of Proceedings of the Provisional Legislative Council dated 21 January 1998 on the then Land (Compulsory Sale for Redevelopment) Bill (“the Bill”) which later became the Ordinance. The Secretary for Planning, Environment and Lands remarked at p112 that:

“In view of the deteriorating environment in the old districts and the serious threat which may be posed to public and residents’ safety by the state of disrepair of buildings in these districts, expediting urban renewal is a pressing task. While the Land Development Corporation and the Urban Renewal authority to be set up next year will have to make all-out efforts to meet the task, the active participation of the private sector and property owners is also indispensable. However, because of various problems encountered in the land assembly process, the replacement rate of existing buildings is slowing down. In view of the circumstances, it is necessary to implement as soon as possible the mechanism provided by the Bill so as to assist in resolving the issue of land assembly in redevelopment, thereby speeding up urban renewal and ensuring that private redevelopment projects can be conducted smoothly and quickly.”

120.   We opine that Mr Yuen had placed too much emphasis on the former part of the remark, without sufficient regard to the purpose or aim of the Ordinance being one “to assist in resolving the issue of land assembly in redevelopment, thereby speeding up urban renewal and ensuring that private redevelopment projects can be conducted smoothly and quickly.” In fact, at the beginning of the second reading of the Bill, the then Secretary for Planning, Environment and Lands said:

“The purpose of the Bill is to provide a solution to some problems which are often encountered in the course of land assembly for private property redevelopment; thereby quickening the pace of redevelopment and improving environment in derelict urban area…”

Dangerous

121.  Mr Yuen submitted that under section 4(2)(a)(i) and as the first step in determining whether the statutory criterion is met, for age, the Tribunal shall strictly look at the physical age of the building only and, for the state of repair, the Tribunal shall only look at factors that are directly related to the state of repair of the building. To give effect to the legislative intent of the Ordinance, the Tribunal must be satisfied that the age or state of repair renders the building a serious threat to public and residents’ safety. The Tribunal may consider the physical capability of the building to be repaired to render the building safe again.

122. We do not agree to the said interpretation of Mr Yuen. If the intent of the Ordinance is to permit redevelopment only when the age or state of repair renders the building a serious threat to public and residents’ safety, there is no reason why the particular section(s) was not worded to reflect the same. We are not persuaded by the contention that the Buildings have to become dangerous before an order for sale can be made. Such an interpretation is not warranted on the natural meaning of the words used in the provisions in question. 

123.   In Top Sail International Limited v Cheng Kai Ming, LDCS 18000/2010 (unreported, dated 15 November 2011 (“Top Sail”) and Charmlink Limited v Lee Tong Hing & Others, LDCS 16000/2010 (unreported, dated 29 November 2011) (“Charmlink”), on the factors that the Tribunal should consider in deciding whether redevelopment is justified due to age and state of repair, the Tribunal has this to say:

“23. ……, we are of the view that when the requirement of “the age” of the Buildings is considered, we should not restrict our consideration to just the physical age of the Buildings.…… we are of the view that the absence of a specific physical age in the Ordinance indicates that the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question.

24. The physical age of a building is clearly one of the considerations…... The physical conditions of a building and the amount that would be required to maintain the building are other factors that the Tribunal should consider, as they would affect the decision on whether the life of a building should be ended or prolonged. The obsolete design of a building should also be considered as it has an important impact on whether it is too old to serve a modern society.”

124.   Such an approach was followed in Charmlink:

“30. We areof the view that the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question. The relevant factors in the present case are that the Building is over 50 years old and it has passed its designed life. It is also obsolescent in design and not economical to maintain …”

125. We agree with Mr Chain that there is not much dispute on the objective facts including the various tests conducted by Mr Wong or his laboratory contractor – Aquality Testconsult Ltd. The disputes by R1 & R5 are mainly points of principle (law) and approach (opinion). R1 & R5’s experts, ie Mr Fung and Dr Lo’s main objection to redevelopment is that they considered rehabilitation both viable and appropriate having regard to the urban renewal strategy of the Urban Renewal Authority (“URA”). Such opinion is not persuasive.

126. We see no evidence that the poor conditions of the Buildings were deliberately caused by the inaction of the applicant in any substantial degree. The common parts which are not owned by the applicants are obviously seriously dilapidated.

127.  In light of the primary objective of the Ordinance being one to facilitate assembly of lands for redevelopment, we do not agree with Mr Yuen that the Tribunal should adopt an interpretation that is most favourable to the minority owners. In that regard, the case Chilton v Telford Development Corporation [1987] WLR 872 at 879 cited by Mr Yuen is not relevant nor helpful.

128.  As a matter of fact and as confirmed during the site visit, “extensive cracks and spalling are found in structural elements throughout the Buildings”. Deboned plaster/rendering, cracks, spalling of concrete, defective drainage pipes, water seepage, mold and plant growth were observed on the external elevations, in the common areas, flats/shops of the Buildings despite the fact that the building at 478 Chatham Road North had completed the OBB on 12 November 2012.

129.  Mr Fung admitted that reasonable up-to-date technology would only mitigate the spalling and related defects but not eradicate them. We consider that Mr Fung’s referral to Liu Seng Chun at 119 Lai Chi Kok Road as an example for rehabilitation is irrelevant as Liu Seng Chun has been designated a Grade I Historic Building so that conservation would be a matter of concern for that particular building but not the buildings at suit.

130.  We pause to mention that just before the trial was due to take place on 1 December 2020, a tragic fire accident broke out on 15 November 2020 at a similarly aged building at 562 Canton Road. On 17 November 2020, we directed the experts to address the fire safety construction of the Buildings in light of the Fire Safety (Buildings) Ordinance, Cap 572 (“Fire Safety Ordinance”).

131.  The Fire Safety Ordinance was enacted in 2007 requiring composite/domestic buildings constructed on or before 1 March 1987 (ie aged more than 20 years) to upgrade/improve protection from the risk of fire for occupants.

132.  Under sections 5(1) and (2) of the Fire Safety Ordinance,  an owner of a composite building, in respect of a part intended for domestic purposes, and an owner of a domestic building can be directed to comply with the following requirements:[41]

(a)  the protection of staircases with separating walls of fire resisting construction;

(b)  the improvement of exit arrangements in terms of exit from the parts used for domestic purposes to the street;

(c)  the provision of fire doors.

133.  The detailed requirements on the design, construction or installation in relation to construction requirements in paragraphs (a) to (c) are set out in the following codes of practice published by the Director of Buildings—

(i)  the Code of Practice for the Provision of Means of Escape in Case of Fire 1996 (“CoP MoE”);

(ii)  the Code of Practice for Fire Resisting Construction 1996 (“CoP FRC”); and

(iii)  the Code of Practice for Means of Access for Firefighting and Rescue 1995 (“CoP MoA”).

134.    As said, there are two separate staircases serving the Building at 472 & 474 Chatham Road North and three separate staircases serving the Building at 476 & 478 Chatham Road North. The front staircases of the Buildings discharge directly onto Chatham Road North. The rear staircases of the Buildings discharge to the rear lane leading to Shek Tong Street and San Lau Street. The third staircase of the building at 478 Chatham Road North discharges directly onto Shek Tong Street at the side. However, the upper floors from 1/F to 6/F of the building at 478 Chatham Road North have each been partitioned into a front portion and a rear portion in contravention of the approved General Building Plans so that each unit has access to one staircase only which is undesirable from fire safety perspective.

135.   Mr Fung and Dr Lo recommended that the problem could be rectified by opening an exit at the costs of the respective owners to allow direct means of escape between the front portion and the rear portion. This recommendation, in our view, is not feasible in practice as each of the front portion or rear portion has been subdivided into a self-contained unit. The owners are probably unwilling to carry out such alterations which would adversely affect the market value of their properties.

136.   It is also noted that many doors of the domestic units do not comply with the CoP MoE and the CoP MoE.

137.   Section 1 of Schedule 2 to the Fire Safety Ordinance, laid down the following requirements in relation to the provision of fire services installations and equipment:

(a)  a requirement to provide or improve a fire hydrant and hose reel system as a source of water supply for fire fighting;

(b)  a requirement to provide or improve a manual fire alarm system to alert occupants of the building in the event of fire; and

(c)  a requirement to provide or improve emergency lighting within the common areas so as to facilitate the evacuation of occupants of the building in the event of a power failure.

138.    Mr Fung and Dr Lo agreed that, due to physical constraint of the Buildings, it is not feasible to achieve item (a) above. They however represented that the enforcement authorities would not insist full compliance of each and every requirement set out in Schedule 1 or Schedule 2 even if Fire Safety Directions are issued in respect of the Buildings.   They also emphasized that the Buildings are low-rise. Due to their proximity to the Hung Hom Fire Station at Fat Kwong Street, a fire engine can reach the Buildings within 5 minutes of reporting. Under cross-examination, Mr Wong agreed that upon arrival, the firemen can connect the fire engine to the street hydrant for water supply and the firemen can physically bring the hosereel which is connected to the fire engine to any floor of the Buildings.

139.   Despite the above comments, it is of interest to note that in assessing the EUV of the rear units at 478 Chatham Road North, Mr Lai suggested to apply -15% to reflect that the staircase being narrow and the risers being steep. We made no specific allowance in the evaluation of the EUV because during the site inspection on 2 December 2020, we observed that all the staircases leading to the premises are narrow and steep. Width of all required staircases of the Buildings are less than the minimum width of 1050mm as specified in Paragraph 11.1 of the CoP MoE[42].  The main staircase serving the building at 472-474 Chatham Road North is less than 900mm in width[43] whereas that serving the building at 476-478 Chatham Road North is less than 1000mm in width[44]. The situation was not satisfactory.

140.   The calculation by Mr Fung on the discharge value capacity of the staircases is apparently wrong in principle as he did not take into account the fact that, aside from the subdivisions (劏房) found inside the Buildings[45]，each upper floor of 478 Chatham Road North has been further partitioned and subdivided into a front and rear portion[46].

141.   As confirmed during the site inspection, we are of the view that the Buildings are suffering from physical and functional obsolescence and are in a state of substantial disrepair. Having considered the evidence before the Tribunal and on a holistic approach, we are satisfied without hesitation that redevelopment of the Buildings is justified due to the age and state of repair.

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

142.  The applicant is 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.

143.  As mentioned in the witness statement of Mr Kam[47], prior to the commencement of the Application,  the applicant had through its solicitors, Messrs Woo Kwan Lee & Lo, made an offer to each of the respondents by a letter dated 13 November 2018.

144.  Mr Kam explained that the offers were based on the pro-rata share of the respondents’ units of the redevelopment value of the Buildings/Lots which was then assessed at $300,000,000 by Mr Chan as at 7 November 2018:

Respondents	EUV	Total EUV	Pro-rata Share
R1	$5,780,000	$228,860,000	2.5256%	$7,576,684
R2	$5,500,000	$228,860,000	2.4032%	$7,209,648
R3	$1,160,000 & $1,200,000	$228,860,000	0.5069% & 0.5243%	$1,529.580 & $1,573,014
R4	$6,610,000	$228,860,000	2.8882%	$8,664,686
R5	$6,220,000	$228,860,000	2.7178%	$8,153,456

145.  As stated in §11 above, the applicant has successfully acquired the interest of R3. These offers were repeated on 23 November 2020 despite Mr Chan came up with a RDV which was much lower than $300 million.

146.  The Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363 (“Capital Well”) emphasized at §33 that:

“In making that assessment (whether an offer is reasonable) 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.”[48]

147.  On the other hand, in Intelligent House Ltd, supra,where the majority owner relied on its valuation expert to formulate some of the offers, the Tribunal ruled at §334(3) that:

“… it is not disputed that Savills is a reputable firm of valuers. In our view, it is also reasonable for Intelligent House to rely on Savills’ expert opinion to formulate the purchase prices offered to the minority owners. There is also no reason for us to believe, nor is there such evidence to suggest, that the advices from Savills were not properly made based on professional valuation of the EUV and RDV of the minority owners’ units.”

148.  On the evidence available, we are satisfied that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot including negotiating for the purchase of such of those shares as are owned by R1, R2, R4 and R5 on terms that are fair and reasonable.

Disputes on the estimation of the RDV of the Lot

Original Hypothetical Development Model

149.  Both Mr Chan and Mr Lai agreed to resort 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.

150.  Based on an agreed developable site area of the Lots at 318.00 sq m, both valuation experts had initially agreed there could be built thereon a hypothetical 23-storey residential/commercial composite development with 4 retail shops on G/F, more shops and plant room on 1/F, club house on 2/F and domestic flats on the upper floors. The non-domestic gross floor area (“GFA”) and the domestic GFA have been agreed at 526.36 sq m and 2,631.75 sq m, giving a total of 3,158.12 sq m respectively. Despite the above, the saleable areas proposed by the 2 experts are slightly different:

 

	Mr Chan		Mr Lai
G/F	236.40 sq m + C/L: 40.56 sq m	@ $236,000 @ $29,500	239.00 sq m	@ $322,870
1/F	249.40 sq m	@ $118,000	213.36 sq m	@ $205,000
3/F-22/F	1,908.01 sq m	@ $231,000	1,811.76 sq m	@ $271,840 for typical floors @ $405,900 for 2 duplex floors

GDV for Shops

151.  In determining the GDV for the G/F, the two valuation experts relied on the following comparables:

Comp Ref:	Address	Age	Date of PASP	Consideration	Saleable Floor Area (m2)	Frontage (m)	Headroom (m)	Depth (m)	Effective Area (m2)	Effective Unit Price (/m2)
Ref Unit	Shop 3 of Hypothetical Development	New	2 Nov 20		59.1 (59.75)*	4.8 (4.45)*	5.0 (5.5)*	12.4	59.1 (59.75)*
C1 & C2	Shops A & B on G/F & External Walls  & Yard adjoining such shop, Co-Tack Building, 484-492 Chatham Road North	1985	13 Jul 20	$10,280,000	69.0 + Yard: 49.1	8.6	3.1	12.8	77.2	$133,161
C3	Shop 4, G/F, Faerie Court, 72,72A, 72B, 72C, 72D, 74-88 Ko Shan Road	1979	23 Mar 20	$6,000,000	26.8	2.8	5.7	8.8	26.8	$223,881
C4	G/F, Block A, I-Feng Mansion, 26A Chi Kiang Street	1972	30 Nov 19	$8,000,000	50.6	5.2	3.6	10.5	50.6	$158,103
C5	Shop 5, Lobby level, Bailey Garden , 23 Bailey Street	1995	23 Nov 19	$11,000,000	57.6	4.1	5.1	10.0	57.6	$190,972
C6 & C7	Shop Nos 2 & 3, G/F, Faerie Court, 72,72A, 72B, 72C, 72D, 74-88 Ko Shan Road	1979	24 Oct 19	$13,900,000	49.3 + Yard: 3.0	5.3 + Return Frontage: 9.0	5.7	8.8	49.8	$279,116
C8	G/F, 123 Ma Tau Wai Road	1957	30 Oct 19	$24,680,000	72.5 + Yard: 10.5	3.8	3.5	15.7	74.3	$332,167
C9	G/F, 4 Hung Fook Street	1958	4 Oct 19	$11,500,000	43.5	6.9	3.5	7.4	43.5	$264,368
C10	Shop C, G/F, including Portion of Lavatory on M/F, Cheong Shing Court, 661-673 Gillies Avenue North/ 5-7 San Lau Street	1967	2 Oct 19	$20,800,000	74.1 + Lav: 1.8	5.6	3.7	13.4	74.3	$279,946
C11	G/F, 13 To Kwa Wan Road	1957	18 Mar 19	$33,300,000	71.8 + Yard: 15.2	4.2	3.5	17.4	74.3	$448,183

* The dimensions in parenthesis were those adopted by Mr Lai instead. As the differences (especially in saleable area) are minor, we just adopt those assumed by Mr Chan.

Choice of G/F Comparables and Location Adjustment

152.  Comparables C1 & C2 are situated close to the Buildings, only one block to the northeast. They are also close to the junction of Ma Tau Wai Road where To Kwa Wan Road and Chatham Road North nearly meet. We consider that no location adjustment is required.

153.  Mr Lai had not taken into account these comparables but, as a fallback if these comparables are to be considered, would adopt a higher location adjustment of +20% or +30%. He explained that the location character of the Buildings would change upon completion of the hypothetical development due to the completion of some other new developments in the vicinity such as City Hub, Upper East, Eresidence and The Vantage together with several redevelopment projects being undertaken by the Urban Renewal Authority at Hung Fook Street, Ngan Hon Street and Wing Kwong Street. 

154.  We do not agree. As explained in para 35-36 above, Ma Tau Wai Road or its junction with To Kwa Wan Road is much busier and enjoys high pedestrian flow. All these new development projects named by Mr Lai above are situated in the busiest hub. We do not see any reason why much pedestrian flow will be diverted to the Buildings after completion of the developments. Take Chatham Gate as an example which is relatively a much larger scale development (comprising two residential towers over a clubhouse on 2/F and a small scale shopping arcade on 1/F and G/F as well as carparking spaces on Lower Ground Floor and 2 basement levels) and was completed in late 2012, there appears to have no improvement in pedestrian flow after its completion.

155.  Mr Lai also suggested in his valuation report dated 2 November 2020 that “(t)he proposed development is situated … close to the Ho Man Tin MTR station”[49]. However, it was revealed at trial that the Ho Man Tin MTR station is at least 0.7 km up the hillside with few shop premises nearby. Then Mr Lam then shifted to emphasize that an MTR entrance of the Sha Tin Central Line would be opened soon beside City Hub which is situated at the junction of Kowloon City Road and Chi Kiang Street and that this would attract much pedestrian flow.

156.  Again, we do not see any reason why much pedestrian flow will be attracted to the Buildings or their vicinity by reason of the MTR entrances especially when people would have to walk sloping upwards along this section of Chatham Road North in order to go pass the Buildings. As we observed during the on-site inspection, people going to the Ko Shan Theatre and Ko Shan Road Park which lie on the other side of Chatham Road North would more likely cross the road at the pedestrian crossing near Kiang Hsi Street instead of passing by the frontage of the Buildings. Obviously, pedestrian flow would be broken or dissuaded.

157.  For the same reason above, we consider the location of Comparables C3, C6 and C7 are not worse than the subject despite the fact that they do not lie on a main street but lie on Ko Shan Road, opposite the entrance to Ko Shan Theatre and Ko Shan Road Park. We consider that there should be no location adjustment.

158.  As regards C6 and C7 in particular, we note that Mr Lai preferred to analyse them as two shops despite the vendor and purchaser thereof were the same parties because they were sold on different dates, i.e. 1 November 2019 and 24 October 2019 respectively.

159.  We have reservation on this approach as these sales took place so close in time that the consideration assigned for each sale may be influenced by the other or simply assigned arbitrarily. We prefer Mr Chan’s approach to analyse both sales as one transaction.

160.  Similarly, although Comparable C4 is situated on a side street, the street houses a local distributor with a mini-bus terminus. It is currently occupied by a convenience store with good pedestrian traffic. We agree with Mr Chan’s location adjustment of -5% and the same applies to Comparable C5 which is occupied by a popular real estate agency.

161.  As regards Comparable C8 which lies close to C11 (which is also Comparable A1), we consider a similar -50% location adjustment appropriate.

162.  Comparable C9 is also situated at a side street which is relatively quiet. We consider that no location adjustment is justified.

163.  Comparable C10 is abutting Gillies Avenue North opposite to the junction of Ma Tau Wai Road and Bailey Street at which there is a pedestrian crossing. This comparable is now occupied by a convenience store. We agree that a location adjustment of -10% is appropriate.

164.  We agree that upon redevelopment, the subject locality will be slightly improved. The Buildings will then be replaced by a high-rise development of more population. In this regard, we are prepared to allow for an additional of 10% for the value of the shops.

Adjustment for Age

165.  As regards age adjustment, Mr Lai assumes that the hypothetical building would be completed by 2022 and therefore postulate 2 further years in his adjustments.

166.  Mr Chan opines that Mr Lai’s approach is conceptually wrong because the residual method requires the valuer to estimate the market value on completion on the basis of values that are current on the valuation date assuming that the project has already been completed on that day[50].

167.  Take Comparables C1& C2 as examples, they having an age of 35 years as at 2020 were selling at $133,161 per sq m. Mr Lai’s approach would have assumed that these comparables selling at $133,161 per sq m were aged 37 instead which is not realistic and departs from the truth.  At the time of trial and by the time of judgment, these comparables would have aged 36. We are prepared to adopt the age of 36 for adjustment purpose.

Adjustment for Size

168.  Regarding the adjustment for size, our previous comments in the assessment of EUV are applicable. Thus basically an adjustment on the basis of 1% for every 10 sq m difference is adopted unless the size difference is significant.

Adjustment for Frontage

169.  For frontage, again, Mr Chan proposed adjustments on the basis of 1% for every 0.5 m difference whereas Mr Lai proposed 4% for every 1 m difference. At §55 above, we have indicated that we prefer to adopt 1% for every 0.5 metre difference but for Comparables C3, as its frontage is very narrow (at 2.8 metres), we are content to adopt 4% for every 1 metre difference.

Adjustment for Layout

170.  In relation to layout, Mr Chan and Mr Lai agreed the adjustments for many of the comparables but having reviewed the floor plans of those which they , we prefer the adjustments proposed by Mr Chan. For instance, Mr Chan applied no layout adjustment for Comparable C3 but Mr Lai suggested +5% based on the minor L-shape some 8m away from the shop front at the rear. We consider that such a minor L-shape design only at the rear of the premises should have nominal, if any, impact on the value.

Adjustment for Headroom

171.   In regard of the adjustment for headroom, our previous comments in the assessment of EUV are applicable. Thus an adjustment on the basis of 2% per 1 m difference as proposed by Mr Lai is adopted.

172.  Our assessment is shown as follows:

Comp Ref:	Effective Unit Price (/m2)	Adjustments										Adjusted Unit Price (/m2)
		Time	Location	Size	Age	Layout	Frontage	Return Frontage	Headroom	Absolute Total	Total*
C1 & C2	$133,161	-0.6%	10.0%	1.8%	3.6%	10.0%	-7.7%	0.0%	3.8%	37.5%	21.8%	$162,190
C3	$223,881	-1.7%	10.0%	-8.1%	4.2%	0.0%	6.8%	0.0%	-1.4%	32.2%	9.8%	$245,821
C4	$158,103	2.8%	5.0%	-0.9%	4.9%	0.0%	-0.9%	0.0%	2.8%	17.3%	14.7%	$181,344
C5	$190,972	2.8%	5.0%	-0.2%	2.6%	10.0%	1.3%	0.0%	-0.2%	22.1%	23.7%	$236,232
C6 & C7	$279,116	3.5%	10.0%	-0.9%	4.2%	0.0%	-1.1%	-10.0%	-1.4%	31.1%	2.4%	$285,815
C8	$332,167	3.5%	-40.0%	1.5%	6.4%	5.0%	1.9%	0.0%	3.0%	61.3%	-25.8%	$246,468
C9	$264,368	3.5%	10.0%	-3.1%	6.3%	-5.0%	-4.3%	0.0%	3.0%	35.2%	10.0%	$290,805
C10	$279,946	3.5%	0.0%	1.5%	5.4%	0.0%	-1.7%	0.0%	2.6%	14.7%	12.1%	$313,819
C11	$448,183	-7.5%	-40.0%	1.5%	6.4%	5.0%	1.1%	0.0%	3.0%	64.5%	-34.2%	$294,904
										Average:		$250,822
										Median:		$236,503

* By multiplication.

173.  Whilst we have arrived at an average adjusted rate of $250,822 per sq m, if Comparables C8 and C11 are excluded because of their high absolute total adjustments, it will make little difference as the resulting average is $245,147per sq m. However, if the highest and lowest adjusted unit rates are disregarded, the resulting average becomes $254,484 per sq m[51]. We find it reasonable to adopt $255,000 per sq m as the unit price for the reference shop (which is some 9.4% higher than $230,000 assessed by Mr Chan)[52].

174.  As the reference shop is assumed to be one of the 4 shops on G/F each having a similar saleable area, this 255,000 per sq m is applicable to the other 3 shops subject to a return frontage adjustment of 10% for the one at the corner of Chatham Road North and Shek Tong Street:

Hypothetical Shop No	Saleable Area (m2)	Unit Price (/m2)	Value of Shop
1	59.1	$255,000	$15,070,500
2	59.1	$255,000	$15,070,500
3	59.1	$255,000	$15,070,500
4	59.1	$280,500	$16,577,550
		Total:	$61,789,050
		Average Unit Price	$261,375/m2

175.  Mr Chan’s hypothetical development comprises cocklofts on G/F. Mr Chan suggested that the value of the cocklofts is about 1/8 of the value of the G/F. If he is correct, the unit price of the cockloft would be merely $32,672 per sq m.  Even we have determined at §31 above that the unit price of the cockloft would be about ¼ of the value of the G/F, it would just be about $65,343 per sq m.   Having regard to the relatively low unit rate, it is obvious that such provision of cockloft is not desirable. In any way, cocklofts in new buildings are uncommon nowadays.

176.  Both valuation experts proposed shops on 1/F but Mr Chan assumed the value of the 1/F shop would be 50% of that of the hypothetical G/F whereas Mr Lai adopted 65%. Again, having regard to the unit price of the hypothetical shop being assessed at 261,375 per sq m on average, it is more reasonable to adopt Mr Lai’s assessment at 65%, ie $169,894 say, $170,000 per sq m[53].

GDV for Domestic Floors

177.  In the determination of the GDV for the upper residential floors, both Mr Chan and Mr Lai referred to the sales of units in The Vantage, 63 Ma Tau Wai Road which is situated at the junction of Ma Tau Wai Road and Bailey Street[54]:

Comp Ref	Unit	Date of PASP	Consideration	Saleable Area (m2)	Unit Price (/m2)
D5	Flat A3, 29/F	29 Sep 20	$5,212,650	18.207	$286,299
D6	Flat D1, 29/F	12 Jul 20	$9,207,930	36.294	$253,704
D7	Flat D1, 30/F	11 Jul 20	$9,290,700	36.294	$255,984
D8	Flat A7, 27/F	23 May 20	$10,722,600	39.384	$272,258
D9	Flat D1, 28/F	2 May 20	$9,125,160	36.294	$251,423
D10	Flat D1, 27/F	17 Jan 20	$9,043,320	36.294	$249,168
D11	Flat A7, 25/F	20 Jun 20	$10,821,280	39.384	$274,763

178.  The two valuation experts have the following agreements or disagreements:

	Mr Chan	Mr Lai
Reference Unit	10/F
Size of Reference Unit	31.83 sq m	24.40 sq m
Headroom	3.5 m
Year of Completion	2020	2022
Time Adjustment	Latest Private Domestic Class A Price Indices published by the Rating and Valuation Department	Private Domestic Class A Price Indices available as at September 2020 plus 1.2% to reflect the increase in residential prices from September to November 2020
Quantum Adjustment	1% per 5 sq m difference
Floor Adjustment	0.5% per floor difference	1% per floor difference
Age Adjustment	1% per year difference
Headroom Adjustment	1% per 0.25m difference
View	Open View: 0% Open Building View: 5% Distant Sea View: -10%	Open View: 0% Building View: 10%
Scale & Facilities	The Vantage comprises a much larger scale development with better facilities which justifies -3% adjustment	NA
Holding Cost	2.4%
Value of Flat Roof  on 3/F	1/6 of the unit rate of the respective unit	¼ of the unit rate of the respective unit
Value of Roof	1/8 of the unit rate of the unit immediately below	NA
Adjustment Method	Multiplication

179.  Firstly, regarding the hypothetical unit size, we note that the comparables are mainly sized between 36.294 sq m and 39.384 sq m. During cross-examination, Mr Chan explained that seasoned developers nowadays like the Henderson Group which happens to be the developer of The Vantage prefer to have larger typical residential units as nano residential units are no longer marketable.

180.  Mr Yuen criticized that as a matter of fact, over 80% of the residential units in The Vantage are nano flats, with sizes ranging from 170 sq ft (15.79 qs m) to 277 sq ft (25.73 sq m). Nevertheless, the development of The Vantage was initiated more than 3 years ago when the market conditions were different and the nano units were sold in the later half of 2019. As both experts adopt comparables of The Vintage having saleable areas mainly of 36.294 sq m to 39.384 sq m, it is  appropriate to compare like with like so that Mr Chan’s 31.83 sq m is preferred for the time being[55].

181.  As for the completion date, we have commented above that Mr Lai’s assumption does not align with the valuation practice and is not realistic.

182.  Similarly, the speculation or projection of 1.2% increase in price from September to November 2020 by Mr Lai has been proved to be wrong by the time of trial by reference to the latest Private Domestic Class A Price Indices.

183.  By reference to the transaction prices of The Vantage, however, it appears that Mr Lai’s adjustment of 1% per floor difference is reasonable at least for this project. But as we shall see below, Mr Chan also relied on the sales of units in Axia at 200 Ma Tau Wai Road which is situated close to its junction with Shek Tong Street. Here, the difference in floor level is not so significant. We prefer to adopt an adjustment of 0.5% per floor.

184.  Again, having conducted the joint site inspection, we prefer to adopt the location adjustments, scale and facilities adjustments as well as the view adjustments proposed by Mr Chan. For instance, for location adjustment, Mr Lai applied +5% to all 3 developments to account for the so-called better living environment at the Lots, saying that the Lots are located far away from the busy main street of To Kwa Wan Road. We surmise Mr Lai must omitted the fact that the Lots are situated so close to the Eastern Kowloon Corridor flyover with heavy vehicular traffic.

185.  Mr Yuen tried to suggest to Mr Chan that the so-called seaview enjoyed by Comparables D8 and D11 would be over the rooftops of nearby buildings but the hypothetical development at the Lots would be at the highest point in the area, possibly enjoying open seaview over the waterfront towards the east. However, Mr Yuen had ignored the fact that the reference unit is on 10/F only.

186.  In relation to the distance from the proposed To Kwa Wan MTR station, we find that the locations of the comparables are similar and therefore no adjustment is allowed.

187.  Our assessment of the value of the reference unit on 10/F of the hypothetical development is as follows:

Comp Ref:	Unit Price (/m2)	Adjustments								Adjusted Unit Price (/m2)
		Time	Location	Level	View	Scale & Facilities	Size	Holding Cost	Total
D5	$286,299	-0.5%	0.0%	-7.5%	0.0%	-3.0%	-2.7%	1.2%	-12.1%	$251,657
D6	$253,704	-1.0%	0.0%	-7.5%	0.0%	-3.0%	0.9%	1.7%	-8.8%	$231,378
D7	$255,984	-1.0%	0.0%	-8.0%	0.0%	-3.0%	0.9%	1.7%	-9.3%	$232,177
D8	$272,258	-1.3%	0.0%	-6.5%	-10.0%	-3.0%	1.5%	2.1%	-16.5%	$227,335
D9	$251,423	-1.3%	0.0%	-7.0%	0.0%	-3.0%	0.9%	2.2%	-8.2%	$230,806
D10	$249,168	0.3%	0.0%	-6.5%	0.0%	-3.0%	0.9%	2.9%	-5.6%	$235,215
D11	$274,763	-1.4%	0.0%	-5.5%	-10.0%	-3.0%	1.5%	1.9%	-15.9%	$231,076
									Average:	$234,235

188.  We have arrived at an average of $234,235 per sq m which is marginally lower than Mr Chan’s $235,696 per sq m. If we follow Mr Lai’s level adjustment at 1% per level difference, we would have arrived at $216,789 per sq m.

189.  As said, Mr Chan also relied on the sales of units in Axia at 200 Ma Tau Wai Road as follows:

Comp Ref	Unit	Date of Agreement for Sale	Consideration	Saleable Area (m2)	Unit Price (/m2)
D12	Flat C, 6/F	16 Oct 20	$4,800,000	22.878	$209,809
D13	Flat E, 7/F	30 Sep 20	$4,900,000	26.186	$187,123
D14	Flat B, 21/F	30 Apr 20	$4,200,000	19.701	$213,187
D15	Flat B, 16/F	17 Apr 20	$4,250,000	19.701	$215,725
D16	Flat A, 23/F	6 Apr 20	$5,050,000	22.975	$219,804
D17	Flat B, 28/F	15 Apr 20	$4,350,000	19.701	$220,801
D18	Flat D, 23/F	21 Jan 20	$4,200,000	18.972	$221,379
D19	Flat B, 7/F	6 Jan 20	$4,000,000	19.701	$203,035

190.  We apply similar adjustments above as follows:

Comp Ref:	Unit Price (/m2)	Adjustments								Adjusted Unit Price (/m2)
		Time	Location	Level	View	Size	Age	Headroom	Total
D12	$209,809	-0.2%	0.0%	2.5%	10.0%	-1.8%	3.0%	1.4%	15.4%	$242,120
D13	$187,123	-0.5%	0.0%	2.0%	10.0%	-1.1%	3.0%	1.4%	15.3%	$215,753
D14	$213,187	1.4%	0.0%	-4.0%	5.0%	-2.4%	3.0%	1.4%	4.2%	$222,141
D15	$215,725	1.4%	0.0%	-1.5%	5.0%	-2.4%	3.0%	1.4%	6.9%	$230,610
D16	$219,804	1.4%	0.0%	-5.0%	5.0%	-1.8%	3.0%	1.4%	3.7%	$227,937
D17	$220,801	1.4%	0.0%	-7.0%	5.0%	-2.4%	3.0%	1.4%	0.9%	$222,788
D18	$221,379	0.3%	0.0%	-5.0%	5.0%	-2.6%	3.0%	1.4%	1.8%	$225,364
D19	$203,035	0.3%	0.0%	2.0%	10.0%	-2.4%	3.0%	1.4%	14.7%	$232,881
									Average:	$227,449

191.  We arrive at an average of $227,449 per sq m which is marginally lower than Mr Chan’s $228,665 per sq m. Alternatively, if we adopt the size of the hypothetical unit as suggested by Mr Lai, we would have arrived at $230,953 per sq m instead.

192.  Mr Chan had relied on 4 transactions of units all happening to be on 25/F of City Hub and arrived at $232,552 on average whereas Mr Lai, as a fallback, got $237,882 per sq m[56].

193.  Having regard to the above, we are prepared to adopt $235,000 per sq m as the unit value of the reference unit.

194.  We are prepared to adopt the value of the flat roof on 3/F as 1/6 of the unit rate of the respective unit which is assessed at $218,550 per sq m. As suggested by Mr Chan, this factor of 1/6 was previously accepted by the Tribunal in Perfect Horizon Limited v Co Sam & Others, LDCS 23000/2018 (unreported, dated 11 September 2020) in preference to ¼. Although Mr Lai considered a factor of ¼ not excessive, he had not provided any evidence to prove otherwise.

195.  Similarly, we adopt the value of the top roof as 1/8 of the unit rate of the unit immediately below.

196.  Mr Lai referred to Top Harmony Limited v Cheung Yuet Sheung & Others, LDCS 39000/2018 (unreported, dated 15 October 2020) where the Tribunal accepted Mr Chan’s proposal of an addition of 15% for the “special unit” on the top floor. There the Tribunal also remarked that further adjustment for the roof will result in double counting. In the present case, Mr Lai proposed a simplex unit on 21/F & 22/F, ie the top two floors. On the other hand, Mr Chan pointed out that there is no such provision in The Vantage or Axis.

197.  In City Hub, a corner unit, Flat D on 26/F, having a saleable area of 49.8 sq m, was sold in March 2018 at $14,978,000, ie $300,763 per sq m. But for the “special unit” or simplex on the 27/F, also a corner unit above, having a saleable area of 77.3 sq m, it was only sold in August 2020 for $18,553,600 or $233,085 per sq m[57]. The 2 duplex units on 28/F & 29/F each having a saleable area around 140 sq m remain unsold and are now open for public tender. These two duplex units are substantially larger than the simplex or duplex units suggested by Mr Lai.

198.  Mr Lai also referred to the two duplex units provided in Chatham Gate, each having a saleable area as much as 295.10 sq m (plus flat roof and roof) and sold in June 2019 for substantial prices of $128,000,000 and $135,000,000 respectively[58]. However, as rebutted by Mr Chan, the units are quite large when compared with the units to be provided in the hypothetical development on the Lots (which have a mere site area of 318.00 sq m) and are provided even with outdoor swimming pools or jacuzzi[59]. We note that the scale of development of Chatham Gate is quite large, comprising two residential tower over a clubhouse on 2/F providing a wide range of recreational facilities and basement carparking. In our opinion, these duplex units in Chatham Gate are of a more luxurious type and hence not comparable with the units to be provided in the hypothetical development on the Lots which caters for a completely different market.

199.  We also referred the experts to the two recent residential/commercial projects in the urban areas being marketed, Arbour at 2 Tak Shing Street and The Concerto at 203 Yee Kuk Street. It was confirmed at trial that there are no duplex units being provided in those developments.

200.  In any event, Mr Chan pointed out, which we agree, that Mr Lai’s duplexes of some 20 sq m per floor are hardly attractive to most of the purchasers. We therefore disagree with Mr Lai that a simplex or duplex unit is desirable for the subject hypothetical development on the Lots.

201.  We are surprised to note that Mr Lai, having proposed a level adjustment of 1% per floor in the analysis of the transactions of units in The Vantage for instance, suggested alternative level adjustments for the hypothetical development on the Lots as follows:

	Floor Level	Adjustment per floor
-1% per floor difference for units below 9/F:	3/F	-1%
	4/F	-1%
	5/F	-1%
	6/F	-1%
	7/F	-1%
	8/F	-1%
	9/F	-1%
	10/F (Reference Floor)	0%
+3% per floor difference for units from 11/F-18/F:	11/F	3%
	12/F	3%
	13/F	3%
	14/F	3%
	15/F	3%
	16/F	3%
	17/F	3%
	18/F	3%
+4% per floor difference for units from 19/F-22/F:	19/F	4%
	20/F	4%
	21/F	4%
	22/F	4%

202.  This approach by Mr Lai is in stark contrast with his analysis of the comparable sales. Just take comparable D5, ie Flat A3, 29/F, The Vantage as an example, even if 3% per floor is adopted as adjustment, the unit rate of the reference unit would have become $149,734 per sq m which is not realistic.

203.  More particularly, based on the unit rate of $235,000 per sq m for the reference unit on 10/F, the unit rate for 22/F would have become:

$235,000 x 1.40 = $329,000 per sq m

but we have found no similar transaction which can justify such a high unit rate in the vicinity.

204.  Mr Lai explained at §4.29 of his report dated 4 November 2020 that the high rate of adjustment for level difference between the residential units on high-floor and mid-floor units was to reflect “the benefit of enjoying relatively better distant view”[60]. Mr Lai was in effect applying both floor and view adjustments the latter appears too large and unjustified. Having said that, we are prepared to adopt a uniform level adjustment of 2% per level above 10/F.

205.  Thus, the adjustments for level become as follows:

	Floor Level	Adjustment per floor	Unit Price (/m2)
-1% per floor difference for units below 9/F:	3/F	-1%	$218,550
	4/F	-1%	$220,900
	5/F	-1%	$223,250
	6/F	-1%	$225,600
	7/F	-1%	$227,950
	8/F	-1%	$230,300
	9/F	-1%	$232,650
	10/F (Reference Floor)	0%	$235,000
+2% per floor difference for units from 11/F-22/F:	11/F	2%	$239,700
	12/F	2%	$244,400
	13/F	2%	$249,100
	14/F	2%	$253,800
	15/F	2%	$258,500
	16/F	2%	$263,200
	17/F	2%	$267,900
	18/F	2%	$272,600
	19/F	2%	$277,300
	20/F	2%	$282,000
	21/F	2%	$286,700
	22/F	2%	$291,400
		Average:	$250,040

206.  The two valuation experts have the following agreements or disagreements on other development parameters in the residual valuation:

	Mr Chan	Mr Lai
Marketing Cost	3%
Demolition Cost for the Buildings	$4,400,000
Demolition Period	0.5 year
Construction Cost	High to Very High Quality standard by reference to the Building Cost Data published by RLB[61], ie $137,160,131 (or $41,103 per sq m)	High Quality standard plus $7,365,925 for curtain walling, ie $112,242,000 (or $35,541 per sq m)
Construction Period	2 years
Professional Fee	6%	4.5%
Developer’s Profit	15%
Interest Rate	4%	3.5%
Stamp Duty	4.25%
Legal Cost	0.1%
Land Value	$254,000,000	$363,600,000
Accommodation Value	$80,428/m2	$115,132/m2

Construction Cost

207.  As regards the construction cost, Mr Lai considered the standard of High Quality finishings in line with the standard of finishings of the domestic comparables. He allowed enhanced finishes for appliances. On the other hand, Mr Chan considered some of the appliances provided in The Vantage (by reference to its sale brochure) up to the very high quality finishes. Curtain walling is also provided in the Vantage putting it within the Very High Quality category.

208.  Mr Chan also referred to the Authorised Person’s Certificate of The Vantage where the unit cost was stated as $44,399 per sq m which is much higher than the unit cost assumed by Mr Lai at $35,541 per sq m (by 25%). Mr Lai rebutted by saying that The Vantage has a huge shopping arcade served by escalators which should have significantly increased the construction cost.  He also pointed out that The Vantage is featured by a luxurious clubhouse on the highest two floors with a swimming pool.

209.  We agree with Mr Chan that whilst Mr Lai had also adopted the sale transactions of units in The Vantage as comparables, it is not reasonable or consistent for him to adopt a much lower construction cost than the actual cost for constructing The Vantage.

Professional Fees

210.   Mr Lai stated that professional fee has been charged at a lower level relative to that in the past and referred to eResidence[62] where the professional fee charged was 4.66%. However, Mr Chan referred again to the Authorised Person’s Certificate of The Vantage and found that the professional fee was 5% of the construction cost:

Development	Total GFA (m2)	Construction Cost (/m2)		Professional Fee
		Mr Chan	Mr Lai	Mr Chan	Mr Lai
Hypothetical	3,158.2	$41,103	$35,541	6%	4.5%
eResidience	24,398.33	$45,246		4.66%
The Vantage	19,254.7	$44,399		5.00%

211.    We agree with Mr Chan that these two developments are several times larger than the hypothetical development. Having considered the above, we prefer to maintain the professional fee at 6%.

Interest Rate

212.   Mr Chan and Mr Lai also differed on the interest rate applicable to discount the development value. Mr Chan adopted 4% but Mr Lai adopted 3.5% having regard to the prevailing policy of low interest rates. Mr Lai  referred to the interest rate for bank loan of investment properties of Winfair Investment Company Limited which he did the same in Top Harmony Limited, supra.

213.   Again, the interest rate adopted in a residual valuation is to reflect the cost of building mortgage which is different from mortgage for investment properties which have been completed. We agree with Mr Chan that mortgage for investment properties usually last for a longer term of up to 10 years but building mortgage is of a much shorter term. A construction site also has a higher risk than an investment property from the perspective of the lender. Hence, the interest rate for building mortgage is usually higher and we therefore adopt 4% in the present case.

Finding on RDV

214.  Subject to what we have said above, we shall follow Mr Chan’s residual valuation model as contained in his revision which is reproduced at Appendix 1 to this judgment. We arrive at a land value of the Lots at $273,133,000 (ie accommodation value of $86,486/m²).

Revised Hypothetical Development Model by Mr Lai

215.   In his updated valuation report dated 2 November 2020, Mr Lai had come up with a revised hypothetical development model:[63]

“2.6 A flyover with an average height of about 11.6 metres above ground has been running along that section of Chatham Road North in front of the Property. The passing traffic on the flyover has caused much noise nuisance to the residential units within the Existing Building.

2.7 Besides, natural lighting and ventilation of the shops and the residential units on lower floors in the Existing Building are poor because of the presence of the flyover.

2.8 In my opinion, that section of Chatham Road North in front of the Property is in need of greenery and open space should the Property be redeveloped.

2.9 With the assistance of an Authorised Person, Dr Lo Man Chiu, Raymond, additional breathing space along that section of Chatham Road North could be provided by way of adopting a special design of the proposed development upon redevelopment of the Property.

2.10 In accordance with Dr Lo, a portion of the site area fronting Chatham Road North could be dedicated forming an open ground for the enjoyment by the general public and the residents in the proposed development…

2.11 The widening of the pavement in front of the proposed development facing Chatham Road North would certainly improve the outlook of the ground floor shops in the proposed development and hence their values.

2.12 The proposed development would be erected by the side of the flyover with very high traffic flows. I consider signboards for outdoor advertisements to be erected on the external walls of the proposed development at the level of the flyover would be in great demand and therefore highly valuable.

2.13 With the assistance of Dr Lo, two signboards have been designed on the external walls at the level of flyover and another two signboards have been designed on the roof of the proposed development.

2.14 Finally, the level of the residential tower would be raised so that the residential units would not be affected by the noise nuisance from the passing traffic along the adjacent flyover.

2.15 Raising the level of the residential tower, it is possible that the residential units on high floor would have the benefit of enjoying distant open view and those on very high floors would have the benefit of enjoying distant seaview since the Property is standing at a high level in the subject neighbourhood.

2.16 Briefly, the proposed development would be a 26-storeted commercial/residential building with the following usages designed on each of the following floors:-

G/F	:	Shops, public passage and residential entrance lobby
1/F	:	Mechanical and electrical facilities
2/F	:	Shops served by independent lift leading from G/F
3/F	:	Club house
Transfer Plate
4/F – 23/F	:	Domestic units
24/F & 25/F	:	Duplex domestic units
Roof	:	2 signages for outdoor advertisements
External Wall	:	2 signage boards on 2/F - 3/F”

216.   By this means, Mr Lai intended to achieve a bonus plot ratio yielding 216.05 sq m GFA while dedicating a strip amounting to 43.21 sq m abutting the pavement of Chatham Road North for use as public passage[64], widening the pavement from 3.505 m to 5.755 m.

217.   Mr Lai relied on the Practice Note for Authorised Persons and Registered Structural Engineers App-108 which sets out the general guidelines on proposals to dedicate land or area within a building for use as public passage and the concessions which the Building Authority (BA) may grant upon acceptance of such dedication as follows:[65]

“2. The BA has the discretionary power to grant concessions in the form of exemption of certain floor areas from the gross floor area (GFA) calculations and in the form of additional plot ratio and site coverage in exchange for dedication of land or area for use as public passage…

3. …

4. B(P)R 22(2)[66] provides for additional plot ratio and site coverage in return for surrender for the purpose of street widening. Hence public passages intended for street widening shown on town plans or other street improvement plan would be considered in the context of B(P)R22(2).

5. …

6. The Building Authority may accept dedication of land or area within a building for public passage if such dedication will lead to:

(a) alleviation of congestion problems of vehicular or pedestrian traffic on public roads or walkways.

(b) …

(c) improvement of road safety or significant enhancement of public convenience; or

(d) provision of suitable greenery compatible with the use of the proposed public passageway.

7. All applications for dedication should be accompanied by suitable justification to demonstrate that there is a genuine need by the public for such dedication and the dedicated areas are reasonable in the circumstances to cater for the need. In general, upon acceptance of a proposed dedication of land or area within a building for public passage as desirable, the BA may exempt such land or area from GFA calculations. However, bonus plot ratio and site coverage for the development will only be allowed if such dedication is considered to be essential by government, taking into account alternative public passages available in the vicinity.” (underline added)

218.   In response to Mr Lai’s revised hypothetical development model, Mr Chan commented in the Joint Statement dated 17 November 2020 that:[67]

“Mr Lai and the Authorised Person appointed by the 1^st and 5^th Respondents (the “Respondents’ AP”) proposed the dedication of a strip of land for use as public passage to obtain bonus plot ratio GFA in his New Model. However, such dedication and GFA concession require approval from various government departments, such as Buildings Department (the “BD”) and the Highways Department (the “HyD”), and is only at the discretion of the departments. In the subject case, the Respondents fail to demonstrate that there is “genuine need by the public for such dedication” and such dedication fulfill the requirements as set out in PNAP APP-108…

Besides, based on my experience, I understand that BD will approve the dedication for public passage and bonus plot ratio only when HyD agrees to take up the management and maintenance responsibility of the proposed dedicated areas. I have come across a similar dedication in another case and was disapproved by BD. An extract of the letter of disapproval for reference purpose is attached …

As a matter of fact, we find there is simply no evidence which supports any prospect of success of the setback. The subject section of Chatham Road North is quiet and has low pedestrian traffic. Moreover, the Property has a frontage of about 19m onto Chatham Road North only. It is meaningless to have the pavement of such a short section widened only. The Respondents’ AP has quoted an example development in Kai Tak area with “similar dedication”. However, this is misleading because the example is irrelevant. The example development located at No 8 Muk Ning Street, namely Kai Tak One (II), has dedicated a strip of land for public passage. Despite the dedication, no bonus GFA was granted pursuant to Section 22(1) or (2) of Building (Planning) Regulations as noted from the relevant approved general building plan and the sale brochure.

Even though the proposed dedication has a high chance of being approved, it takes at least 6 to 12 months for negotiation with government departments and there are risks and uncertainties. Yet, I noticed that Mr Lai did not allow any risk factor to reflect the uncertainty. He has totally neglected the foreseeable time delay, extra costs and uncertainty in obtaining approval involved in this proposal. A rational purchaser/ investor would prefer certainty over chance, especially when extra efforts, time, professional fees and legal costs are required for the proposed dedication of land to obtain bonus plot ratio / GFA. A significant discount should be allowed in order to reflect the high level of risk and uncertainty.”

219.   Save that the responsibility for the provision, maintenance and repair of the dedicated areas rests with the building owners[68], we totally agree with Mr Chan’s statements above. As submitted by Mr Chain for the applicant, there is no evidence before the Tribunal that there is a genuine need by the public for such dedication or that such dedication is essential. Such dedication is not intended for street widening shown on town plans or other street improvement plan either. The existing pavement is already some 3.5 metres wide and we cannot see any evidence of congestion problems of pedestrian traffic.

220.   Dr Lo did cite as many as 43 examples of dedication[69] but when we tried to clarify with him, Dr Lo conceded that only one of them is in the vicinity, ie the development of Full Wing Building at 436-450 Chatham Road North. However, this example concerns the dedication of two small corner splays totaling 10 sq m (instead of a whole strip of land) abutting Chatham Road North). As stated by Mr Chan above, the hypothetical development cannot occupy the whole street block like Full Wing Building; there is also a similar 6-storey tenement building at 470 Chatham Road North together with a common staircase which used to be shared together with 468 Chatham Road North which has now been redeveloped into a low-rise residential building with shops on ground floor[70]. We also observe no such dedication when Chatham Gate was developed.

221.   There are two further examples of dedication much further away from the Lots: (1) when Get Nice Centre at Nos 270-274 Chatham Road North was developed, a corner splay of 12 sq m was dedicated to give way for the construction of a footbridge across Wuhu Street, and (2) the building at Nos 271-273 Chatham Road North was setback for the widening of Chatham Road North.

222.   We consider that the situation of these two sites and the background for dedication were completely different from the Lots. It appears that these examples, in the absence of particulars and background, are of limited value if not misleading.

223.  In Farlinger Developments Limited v East York (Borough) (1975) 9 OR (2d) 553, 61 DLR (3d) 193, 8 LCR 112, the issue in that case was whether the appellant could reasonably expect a change in zoning permitting development as desired as the basis of determining compensation for the market value of its land which had been expropriated. Howland JA of the Court of Appeal of the Ontario Supreme Court of Canada held at §38 of the judgment that:

“From these authorities it would seem to be established that the highest and best use must be based on something more than a possibility of rezoning. There must be a probability or a reasonable expectation that such zoning will take place. It is not enough that the lands have the capability of rezoning. In my opinion probability connotes something higher than a 50% possibility …..”

224.  The Canadian Court of Appeal found that there was no evidence upon which the Land Compensation Board could properly find that there existed a probability of favourable zoning instead of a mere possibility. In this case, we to the same conclusion that with the evidence currently available there exists little probability of dedication of land being approved by the Building Authority.

225.   It should also be noted that the site area of the Lots is small. The parties are on common ground that  the developable site area is 318.00 sq m. If, as proposed by Mr Lai, an area of 43.21 sq m fronting onto Chatham Road North is dedicated, it is inevitable that significant saleable area on G/F will be lost which is evidenced from Mr Lai’s own calculation:

239.00 sq m (original scheme)[71] – 192.86 sq m (revised scheme)[72] = 46.14 sq m.

The area of 216.05 sq m for the upper floor in exchange by the dedication of 43.21 sq m will be GFA which is subject to the deduction of common parts before a saleable area can be achieved.

226.  More importantly, as discussed above, the pedestrian flow along this section of Chatham Road North is weak. If the proposed G/F shops are recessed from the pavement which has a width as much as 3.5 metres, we are of the opinion that their value will be reduced as opposed to being enhanced as suggested by Mr Lai.

227.  For the same reason, the provision of shops or perhaps restaurant on 2/F which is mainly served by an independent lift will unlikely be attractive to customers at such location. Its value will be further reduced.

228.  As regards the proposed signage, 2 signboards on the external walls at the level of East Kowloon Corridor flyover and 2 others on the roof, Mr Lai referred to the provisions of signboard spaces at City Hub which is situated very close to the flyover and highly visible by the northbound traffic.

229.  Unfortunately, since City Hub’s completion in 2017, the spaces allowed for the signboards remain vacant and unoccupied. Mr Lai tried to explain that City Hub is a joint development project of URA and private developer so that the commercial portion is meant to be sold out rather than leased out. Mr Lai suggested that it would be more of a selling tactics not to sell the commercial portion (including the signboards) until the new To Kwa Wan MTR station is opened so that pedestrian flow in the area will then increase.

230.  Notwithstanding the above, there is no similar signage at Chatham Gate which was developed in 2012.

231.  During the joint inspection on 2 December 2020, Mr Lai further referred us to the signage spaces being provided at Metropolitan Rise which occupies a much larger site around the corner of Ma Tau Kok Road and Pak Tai Street, far away from the Lots[73]. We note that this location is one of the busiest areas in Ma Tau Kok but three out of six signboards there remain vacant and for those signboards that are occupied, they are for use by the existing occupiers. Despite they were sold for a total consideration of $5,000,000 in 2014, we do not consider it relevant or in any way comparable.

232.  We were also referred to the signage at Gainfull Centre which is situated at 161 Ma Tau Wai Road. It is a commercial building with G/F being occupied as a car showroom and the so-called signboards are for the promotion or advertisement of the owner/occupier[74]. Mr Lai relied on the rateable value of the signboards at $208,800 and arrived at $789.06 per sq m. He said that according to the RDV, private retail property market yield in October 2019 was 2.9% per annum. He then suggested that investment in signboard is low when compared with that in retail property and assumed a lower yield of 2% as capitalization rate. Mr Lai tried to arrive at the market value of his proposed signboards as follows:

Annual Rent		$208,800
YP in perpetuity @2%	x	50
		---------------------
		$10,400,000

233.  We agree with Mr Chan that the capitalization rate cannot be so low taking into consideration the location and surrounding circumstances. Mr Lai had not taken into account the risk of the investment.

234.  Mr Chan relied on the latest private retail property market yield in October 2020 of 2.6% and opined that signboards would require a higher yield than other types of commercial real estate. Mr Chan adopted twice of that of the retail yield, ie 5.2%:

Size of Signboard at bridge level as proposed by Mr Lai		63	m2
		$789	/m2
		------------
Annual Rent		$49,707
YP in perpetuity @5.2%	x	19.23
		------------
		$955,904

235.  In Chancemore Limited v Yee On Enterprises Limited, LDCS 17000/2015 (unreported, dated 31 July 2017) in which the applicant’s valuation expert also proposed a rooftop signage where no comparable was available, the valuation expert also relied on the capitalization of the rateable value but adopted a capitalization rate of 7%. The respondent did not challenge the calculation and the Tribunal accepted that the valuation of $5,700,000 was not significant “especially when (the valuation expert) has provisioned for a construction cost of $2,650,000”[75]. Therefore, if the capitalization rate of 7% is followed, Mr Lai’s calculation would have become:

Annual Rent		$208,800
YP in perpetuity @7%	x	14.28
		--------------
		$2,982,857

236.  We do not consider Mr Lai’s proposed provision of signboards reasonably viable as he himself suggested a construction cost of $2,021,850[76].

237.  In Transport for London v Spirerose Ltd [2009] 1 WLR 1797 (HL), the House of Lords in the United Kingdom overturned decisions of both the English Court of Appeal and the English Lands Tribunal. In short, the English Lands Tribunal found that planning permission for a valuable re-development in respect of the resumed land was likely to have been granted, though by no means certain. The English Lands Tribunal awarded compensation on the basis of a valuation of land not on the footing that permission would probably have been granted but on the footing that it would have been granted. The English Lands Tribunal attributed a valuation of £608,000 on the latter footing but only £400,000 on the former one which reflected only a “hope value”. According to what has been recited by the House of Lords, this ‘hope value” was on the basis that “permission is not as a matter of law to be assumed and only hope value is to be taken into account.” The House of Lords considered in the circumstances that it would be wrong to award on the basis of 100% certainty of redevelopment. A discount rate with only hope value should be awarded to reflect the chance that permission would not have been granted. In that case, the award was therefore £400,000 instead of £608,000, ie a discount of some 34%. Again, in the present case, we have no evidence before us that the proposed dedication by Mr Lai is likely to be approved by the Building Authority.

238.  It is of interest to note that Mr Lai arrived at a RDV of $363,600,000 based on his original development model[77] and a RDV of $406,000,000 (ie an increase of 11.66%) based on his revised development model[78] without allowing for the discount for probability. Thus, notwithstanding our adverse comments on Mr Lai’s valuations and assumptions, a similar discount of 34% would have eradicated any viability of Mr Lai’s revised development model.

239.  We must emphasis that in Spirerose, the English Lands Tribunal found, as a matter of fact, that permission was likely, i.e. on a balance of probability or more likely than not, to be available to the applicant. The House of Lords only considered that in the circumstances, it was not right for compensation to be awarded as if such permission had been granted. Discount in the form of hope value was appropriate. Spirerose therefore does not support the proposition that a hope value should be awarded for any likelihood of redevelopment even if it is less than 50%. Before hope value was to be awarded the English Lands Tribunal in Spirerose was satisfied on balance that the redevelopment was likely, though not granted. The House of Lords did not upset these underlying findings.

Cross-check by Site Transactions

240.  It is trite that in the valuation of land or other properties, where reliable comparables are available, a valuation based thereon is the best way of arriving at the correct value of the land or other properties.

241.  At trial, we were aware of two site transactions, not in the captioned vicinity but in the more prosperous districts in Mong Kok and Prince Edward, the particulars of which and the adjustments proposed by the two valuation experts are as follows:

Site Address	61-67 Soy Street[79]		1, 3, 5 & 7 Ki Lung Street[80]
Site Area	328.2 sq m		356.2 sq m
Class of Site	Class B		Class A
Total Max GFA	2,955.6 sq m		3,005.4 sq m
Transaction Price	$351,280,000		$347,500,000
AV	$118,852 per sq m		$115,625 per sq m
Transaction Date	30 November 2020[81]		27 October 2020
Adjustments	Mr Chan	Mr Lai	Mr Chan	Mr Lai
Time	0%		0%
Location	-35%	-30%	-30%	-15%
View	0%	10%	0%	10%
Stamp Duty	4.25%	NA	0%	NA
Total Adjustments	-32.2%	-23.0%	-30.0%	-6.5%
Adjusted AV	$80,582 per sq m	$91,516 per sq m	$80,938 per sq m	$108,109 per sq m

242.   Mr Lai remarked that based on the media news, the vendors of the two sites happened to belong to the same group controlled by Mr Tang Shing Bor, a sophisticated property investor, who was in financial difficulties. Therefore, Mr Lai was of the opinion that these two transactions were forced sales whereby an upward adjustment of 30% should be made.

243.   Firstly, we have doubt whether such upward adjustment as much as 30% is justified in the prevailing property market where development sites in urban areas are short in supply. More importantly, the HKIS Valuation Standards 2017 or 2020 states at para 5.15.1 that:

“The term “forced sale” is often used in circumstances where a seller is under compulsion to sell and that, as a consequence, a proper marketing period is not possible and buyers may not be able to undertake adequate due diligence. The price that could be obtained in these circumstances will depend upon the nature of the pressure on the seller and the reasons why proper marketing cannot be undertaken.”

244.   In this regard, Mr Lai had not provided any information for us to deduce that proper marketing of these two sites was not possible. On the other hand, Mr Chan had provided the marketing brochure of 1-7 Ki Lung Street prepared by Savills on behalf of the vendor. It is interesting to note that in Lam Chok Lai & Another v The Official Receiver and Trustee in Bankruptcy of Lam Chok Wai, a Bankrupt & Another, HCMP 3041/2016 & HCMP 3042/2016, dated 3 February 2021 ([2021] HKCFI 260) which concerns an application for further directions and/or to vary an order for sale made by the High Court, the plaintiffs said they had received an offer from Mr Tang Shing Bor to purchase the properties concerned at HK$280 million in late December 2020. This casts doubt on the reliability of Mr Lai’s remarks about the financial position of Mr Tang Shing Bor. 

245.   Finally, our attention was drawn to a sale of a high-rise residential commercial composite building at 2C San Lau Street on 27 December 2019 at $175,000,000. While the GFA of this building is about 1,230.054 sq m, the area of the site is 164.25 sq m and the accommodation value was analysed at as much as $126,275 per sq m based on a permitted plot ratio of 8.4375.

246.   Obviously this “comparable site” is too small on its own for redevelopment and as pointed out by Mr Chan, it was bought by Brilliant Development Holdings Limited which is the majority owner of the adjoining site at Nos 2A & 2B San Lau Street as well as 26 Ko Shan Road (ie a corner site). Brilliant Development Holdings Limited has made an application to the Tribunal for a compulsory sale order like the Application. This latest acquisition by Brilliant Development Holdings Limited at 2C San Lau Street therefore should have included a marriage value not enjoyed by the Lots on their own under paragraph 2(a) of Schedule 2 to the Ordinance.

247.   Besides, this “comparable site” is currently a Class A site under the Building (Planning) Regulations but if it is joined with the adjoining corner sites for redevelopment, it would acquire the Class B status, ie an increase in plot ratio up to 9 would be permitted. In such event, the accommodation value of the transaction would have become $118,383 per sq m.

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

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

249.   The learned judge went on to say that it was agreed generally in the profession that a permissible margin was 10% either side of a figure which could be said to be the right figure (assessed as if arrived at when the valuation was made and not with the benefit of hindsight).

250.   In light of the above, we are prepared to increase the reserve price of the Lots to $300,000,000 (which is some 9.8% higher than the value of $273,133,000 assessed by the residual valuation method).

Other Incidental Matters

251.   The applicant proposed to appoint Mr Lee Kwok Yung and Ms Lee Joanne, being respectively partner and assistant solicitors of Messrs Hau, Lau, Li & Yeung, Solicitors & Notaries, as the sale trustees.  Based on the information on their background and experience as set out in their letter dated 3 December 2020, we are satisfied that they are proper persons to be appointed as trustees to discharge the duties imposed on trustees under the Ordinance.  The remuneration package proposed in the said letter appears reasonable.

252.   The applicant has prepared a set of draft Particulars and Conditions of Sale of the Lots.  Subject to any amendment that may become necessary as a result of our ruling on the arrangement of auction above, the particulars and conditions of sale of the Lots by public auction submitted by the applicant are also reasonable.

Order

253.   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 Buildings and that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot including those of the 1^st, 2^nd, 4^th & 5^th respondents;

(2)  All the undivided shares in the Lots, 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 Lee Kwok Yung and Ms Lee Joanne of Hau, Lau, Li & Yeung, Solicitors & Notaries, nominated by the applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to sale of the Lots and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Hau, Lau, Li & Yeung, Solicitors & Notaries, dated 3 December 2020.

(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 Lots 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 $300,000,000.

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

(iv)  Liberty to the applicant, the 1^st, 2^nd, 4^th & 5^th respondents and the Trustees to apply to the Tribunal for further direction(s) under the Ordinance.

Costs

254.   In accordance with the compensation approach as determined by the Court of Appeal in Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 534, the respondents are entitled to costs notwithstanding the outcome of the Application.

255.   Accordingly, we order that the applicant do pay the respondents’ costs in these proceedings on the High Court scale with certificate for counsel, including any costs reserved, to be taxed if not agreed.

256.   Last but not least, the Tribunal thanks Counsel for their assistance.

Appendix 1

G/F	Retail		236.4	m2	x	$261,375	/m2  =	$61,789,050
1/F	Retail		249.4	m2	x	$170,000	/m2  =	$42,398,000
	Residential Flats		1,908.01	m2	x	$235,000	/m2  =	$448,382,350
3/F	Flat Roof		3.76	m2	x	$36,425	/m2  =	$136,958
	Top Roof		90.24	m2	x	$36,425	/m2  =	$3,286,992
								----------------
								$555,993,350
Marketing cost		3%					x	0.97
	Present Value for	2.5	years	@	4%		x	0.9066
								----------------
									$488,941,664
Less
	Demolition Cost		2,000.00	m2	x	$2,200	/m2  =	$4,400,000
	Professional Fee	@	6%				x	1.06
	Profit	@	15%				x	1.15
								----------------
								$5,363,600
	Present Value for	0.25	years	@	4%		x	0.99024
								----------------
									$5,311,251
	Construction Cost							$137,160,131
	Professional Fee	@	6%				x	1.06
	Profit	@	15%				x	1.15
								----------------
								$167,198,200
	Present Value for	1.5	years	@	4%		x	0.94287
								----------------
									$157,646,167
									----------------
									$325,984,246
	Stamp Duty @		4.25%
	Legal Cost @		0.10%
	Developer's Profit on Land		15%					÷	1.1935
									----------------
									$273,133,009
								Say	$273,133,000
						Accommodation Value :			$86,486/ m2

[1] See Bundle B8/2704.

[2] See Bundle B8/2710-2711.

[3] See Bundle B8/2709.

[4] Mr Lai agreed to Mr Chan’s adjustment at trial.

[5] See Bundle B10/3286.

[6] Mr Chan had revised his adjustment to -10% after the date of inspection but when he gave evidence, he tried to rely on his original adjustment of +30%.

[7] Mr Chan had revised his adjustment to -5% after the date of inspection but when he gave evidence, he tried to rely on his original adjustment of 25%.

[8] There used to be a Golden Gate Theatre around the corner on San Lau Street but its premises have been converted into a religious institute - Abundant Life Christian Church.

[9] As can be discerned from the photograph contained in Mr Chan’s Application Report dated 20 November 2018 at B7/2282, both the ground floor units of 470 (which is not part of the Buildings) & 474 Chatham Road North was vacant; G/F, 472 Chatham Road North was occupied by a grocery store (自然生活家居精品) while G/F, 476 was occupied by an engineering workshop (天馬磁磚潔具裝修工程).

[10] Sales of units in The Vantage were relied by both valuation experts for the purpose of determining the Gross Development Value of the hypothetical development on the Lots in the residual valuation in determining the redevelopment value.

[11] See also Snowland Limited v Director of Lands, LDLR 2/2014 (unreported, dated 11 November 2016) at §74.

[12] That is 53.1 x 0.98 = 52.04.

[13] See Bundle B10/3287.

[14] See photos at B7/2316, 2408 & 2409 and B8/2610.

[15] See Bundle B10/3288.

[16] See Bundle B10/3288.

[17] See Bundle B8/2686.

[18] See Bundle B8/2683.

[19] See Bundle B7/2409.

[20] Front Portion of 3/F, 478 Chatham Road North occupies a corner position with windows also overlooking Shek Tong Street and therefore we consider the effect of facing the flyover not so obtrusive. We accept Mr Lai’s nil adjustment for view.

[21] See Bundle B8/2685.

[22] See Bundle B8/2613.

[23] It was pointed out by Mr Chain that Mr Lai had valued all units on 1/F by making a total of 36% downward adjustments based on floor, view, lighting and ventilation and noise, which all related/overlapped.

[24] See Bundle B1/48-50.

[25] See Bundle B3/810.

[26] See Bundle B3/814-815.

[27] See Bundle B3/817.

[28] See Bundle B3/824.

[29] As a specific measure for “Preserving Jobs”, the Financial Secretary announced in the 2009-10 Budget that the Government, in collaboration with the Hong Kong Housing Society (HKHS) and the Urban Renewal Authority (URA), will launch a $1-billion “Operation Building Bright” (the Operation) for two years to provide subsidies and one-stop technical assistance to assist owners of about 1,000 old buildings to carry out repair works, including old buildings without owners’ corporations (OCs). The Operation aims to achieve the dual objectives of creating more job opportunities for the construction sector in the near future and improving building safety and the cityscape.

[30] Under the Mandatory Building Inspection Scheme, owners of buildings aged 30 yearsor above (except domestic buildings not exceeding 3 storeys) and served with statutory notices are required to appoint a Registered Inspector(RI) to carry out the prescribed inspection and supervise the prescribed repair works found necessary of the common parts, external walls and projections or signboards of the buildings. Where a prescribed repair is required, the owners concerned must appoint a registered contractor to carry out the prescribed repair under the supervision of an RI.

[31] See Bundle B6/2067.

[32] Under the Mandatory Window Inspection Scheme, owners of buildings aged 10 years or above (except domestic buildings not exceeding 3 storeys) and served with statutory notices are required to appoint a Qualified Person (QP) to carry out the prescribed inspection and supervise the prescribed repair works found necessary of all windows of the building. Where a prescribed repair is required, the owners concerned must appoint a registered contractor to carry out the prescribed repair under the supervision of a QP.

[33] It is not disputed that the gross floor area of the Buildings is about 2,000 sq m but the proposed gross floor area of the redevelopment will yield 3,158.12 sq m.

[34] See Bundle B6/2049-2050.

[35] See Bundle A/58-69.

[36] Mr Kam was cross-examined by Mr Yuen at 12:31 pm on 1 December 2020.

[37] Mr Yuen, during cross-examination of Mr Kam at 12:42 pm on 1 December 2020, pointed out that the applicant should have been alerted of the notices by Mr Fung’s Rebuttal Report dated 20 March 2020 at §9.6.1.5 but Mr Kam replied that he was never drawn attention to such, perhaps owing to his oversight.

[38] This statement was initiated by Mr Yuen at 12:43 & 12:44 pm and was agreed by Mr Kam.

[39] See, for instance, Hong Kong Kam Lan Kook Ltd v Realray Investment Ltd (No 5) [2007] 4 HKC 122 at §40.

[40] [2010] UKSC 20, [2011] 1 AC 437.

[41] See Section 2 of Schedule 2 to the Fire Safety Ordinance.

[42] See Bundle B1/30.

[43] See Bundle B1/296.

[44] See Bundle B1/355.

[45] See Bundle B1/32.

[46] See Bundle B9/3069-3070.

[47] See Bundle A/58-69.

[48] The Court of Final Appeal stated further at §36 of the judgment that: “What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site.”

[49] See Bundle B8/2828 at para 4.24.

[50] See para 90.8(a) of the HKIS Valuation Standards 2017 or 2020. This residual approach should be distinguished from the Income Approach which is usually referred to as the Discounted Cash Flow valuation whereby, as stated at para 90.8(b) of the HKIS Valuation Standards 2017 or 2020, the estimated value on completion is based on the special assumption that the project is completed on the anticipated date of completion. In the latter, the valuer has to estimate or in fact guess (if not speculate) what the value of the project might be on the future completion date which however has to be discounted at the cost of capital which shall include the cost of equity reflecting risk instead of merely the cost of borrowing in the residual valuation approach:

 Cost of capital = k_e[E/(D + E)] +k_d[D/(D + E)]

where k_e = cost of equity

k_d = after-tax cost of debt

E = market value of equity

D = market value of debt

[51] Alternative calculation based on Mr Lai’s dimensions of the hypothetical shop would arrive at $216,258 per sq m.

[52] In this regard, Mr Lai appears not to have taken the trouble to review his valuation which gave him a unit rate of $315,000 per sq m (which is some 85% higher than his assessment of the Reference Shop Unit on 1 November 2018 at $170,000 per sq m). It is unrealistic and there is no justification to say that shop values have increased by 85% after the social unrest in 2019 and the pandemic in 2020.

[53] In spite of the relatively low value of the 1/F shops, we agree that such shops have to be provided on the 1/F; otherwise units on the lowest residential floor would front directly onto the flyover.

[54] See B10/3295.

[55] The Henderson Group is marketing another project, Arbour at 2 Tak Shing Street where around 75% of the units have saleable areas of 31.12 sq m or above. This site was the subject of a compulsory sale application LDCS 16000/2014 (unreported, dated 17 October 2016).

[56] See B10/3294.

[57] See Exhibit A7.

[58] See Exhibit R4-2.

[59] See Exhibits A5 & A6.

[60] See Bundle B8/2829.

[61] Rider Levett Bucknall (“RLB”) is a reputable quantity surveying firm providing advisory services in cost management, quantity surveying and project management.

[62] Mr Lai did not refer to the Authorised Person’s Certificate of eResidence where the unit construction cost was some 25% higher than that adopted by him.

[63] See Bundle B8/2824-2825.

[64] See Bundle B10/3314.

[65] See Bundle B8/2852-2853.

[66] B(P)R stands for Building (Planning) Regulations.

[67] See Bundle B9/2959.

[68] See Bundle B8/2854.

[69] See Bundle B9/3048.

[70] Such a redevelopment scenario is comparable to the development proposal in Pacific Base Holdings Limited & Othera v Lee Hop Biu & Others, LDCS 14000/2017 dated 4 June 2020 ([2020] HKLdT 20) where only one side of a pair of buildings was proposed to be redeveloped but leaving the common staircase behind for the use of the remaining half.

[71] See B10/3306.

[72] See B10/3315.

[73] It is noted that one of the 43 examples of dedication cited by Dr Lo is the development of Parc 22 at 22 Sung Wong Tai Street which lies close to Metropolitan Rise at the end of Pak Tai Street. Again, the dedication was only a minor corner splay of the lot (3 sq m) instead of a whole strip.

[74] See B10/3320-3321.

[75] See §57 of the judgment.

[76] See B10/3316.

[77] See B10/3306.

[78] See B10/3315.

[79] This site was the subject of a former compulsory sale application LDCS 4000/2016 which was then sold in 2018 to the present vendor at the reserved price.

[80] According to the sale brochure prepared by Savills, this site at Ki Lung Street was offered for sale together with a 20.83% interest in the adjoining site at Nos 9-11 Ki Lung Street. As submitted by Mr Lam on behalf of R4, the combined sale might have affected the value of the transaction.

[81] This transaction was announced on 1 December 2020 by Asia Allied Infrastructure Holdings Limited (Listing Code: 00711.HK) which indirectly holds 40% interest in the purchaser, a joint venture company. The purchaser agrees that in the event of the redevelopment of the Property, if the Target Companies receive proceeds from the successful disposal of properties erected on the Property (whether by way of property disposal or shares sale) and such proceeds exceeds HK$700,000,000, then an one-off payment in the amount equal to 30% of the excessive amount shall be paid to the

Vendors on the last day of the fifth year from the date on which the occupation permit in respect of the Property after redevelopment is issued by the Building Authority.