NEW MERIT LTD v. THE PERSONAL REPRESENTATIVES OF CHAN KUM KWAN, DECEASED

LDCS 1000/2022

[2022] HKLdT 66

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 1000 OF 2022

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BETWEEN

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JUDGMENT

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BACKGROUND

1.  This is the applicant’s application for an order for sale, for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”), of all the undivided shares of and in Ap Lei Chau Inland Lot No 80 (“the Lot”) together with a building erected thereon known as Nam Tak Mansion, Nos 37 and 39 San Shi Street, Hong Kong (“the Building”).

2.  The Building is a 6-storey tenement block served by a common staircase. An occupation permit No H 191/71 was issued for the Building on 12 October 1971, granting permission to occupy its ground floor as 2 shops for non-domestic use and its 1^st floor to 5^th floor as 3 European type flats per floor for domestic use. According to the approved building plans, there are 2 shops planned on the ground floor and 3 flats planned on each of the 1^st to 5^th floors. A yard is attached to Shop B on Ground Floor, a flat roof is attached to each of the flats on the 1^st floor, and a roof is attached to each of the flats on the 5^th floor.

3.  The Lot together with the Building standing thereon is allocated with 19 undivided shares. Each of the 2 shops is given 2 undivided shares and each of the 15 flats is given 1 undivided share, making up a total of 19 undivided shares.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANT

4.  The applicant filed a Notice of Application (“NOA’) on 11 February 2022, and has subsequently amended it on 7 November 2022 pursuant to the Order of the tribunal dated 24 June 2022. At the time of filing of the NOA, there was 1 respondent and the applicant owned 18 over 19 (i.e. 94.737%) undivided shares in the Lot.

5.  Section 3(1) of the Ordinance prescribes that the minimum percentage of undivided shares that an applicant or applicants should possess before making an application under the Ordinance is 90%.

6.  I am satisfied that as at the date of application, the applicant owned more than 90% of the undivided shares in the Lot. I am therefore satisfied the applicant is entitled to make the present application under section 3 of the Ordinance.

THE REMAINING RESPONDENT

7.  The respondent, who owns Flat B on 1^st Floor, is a missing owner in these proceedings. Substituted service of the application on the respondent was effected on 4 May 2022 pursuant to the Order of the tribunal dated 25 April 2022. No one has shown up after the expiration of the 21-day period as specified in the notices.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

8.  The remaining issues to be decided in this case are as follows:

1) What was the respective existing use value (“EUV”) of all units in the Building as at 31 December 2021, the valuation date adopted in the application valuation report dated 10 February 2022, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?

2) Whether the redevelopment of the Lot is justified due to age and/or state of repair of the Buildings in accordance with section 4(2)(a) of the Ordinance?

3) Whether the applicant has taken reasonable steps to acquire all the undivided shares in the Lot on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance?

4) If an order for sale should be granted, what should be the reserve price (i.e. redevelopment value (“RDV”) of the Lot) for the purpose of auction sale?

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING

9.  Pursuant to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the EUV of the units as assessed in the application, the tribunal shall determine the proper value. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the lot who cannot be found, the majority owner of the lot is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is: -

“(A) not less than fair and reasonable; and

(B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

10.  The respondent cannot be found in these proceedings.

11.  The applicant relies on the reports and valuations of Ms Dorothy Chow (“Ms Chow”) of Colliers International (Hong Kong) Limited (“Colliers”). Ms Chow prepared the application valuation report on 10 February 2022, which assessed the EUV of all units in the Building as at 31 December 2021. She subsequently prepared a supplemental report on 21 October 2022, which reviewed the EUV as initially assessed by her and assessed the RDV of the Lot as at 12 October 2022.

12.  In the application valuation report, Ms Chow adopted direct comparison method to assess the EUV of each unit in the Building. In the supplemental report dated 21 October 2022, Ms Chow assessed the reference shop unit (i.e. Shop B on Ground Floor) at $239,900 per square meter saleable and the reference domestic unit (i.e. Flat B on 3^rd Floor – on the assumption of reasonable internal conditon) at $131,800 per square meter saleable.

13.  In the absence of contrary evidence, I accept the EUV of all units in the Building as assessed by Ms Chow, and am satisfied that the value of the unit owned by the respondent is not less than fair and reasonable and not less than fair and reasonable when compared with the value of the applicant’s properties. The EUV of all units in the Building as at the relevant date of valuation, i.e. 31 December 2021, are appended below: -

Floor	Unit	EUV		Floor	Unit	EUV
Ground	Shop A	$17,570,000		Ground	Shop B	$15,940,000
					Sub-total:	$33,510,000

Floor	Unit	EUV		Floor	Unit	EUV
1st	A	$4,160,000		3rd	C	$4,670,000
1st	B	$4,230,000		4th	A	$3,540,000
1st	C	$5,170,000		4th	B	$3,880,000
2nd	A	$3,680,000		4th	C	$4,570,000
2nd	B	$4,160,000		5th	A	$3,660,000
2nd	C	$4,620,000		5th	B	$3,800,000
3rd	A	$3,720,000		5th	C	$4,490,000
3rd	B	$3,950,000			Sub-total:	$62,300,000

14.  I accept the total EUV of the Building is $95,810,000 (i.e. $33,510,000 + $62,300,000).

SECTION 4(2) OF THE ORDINANCE - JUSTIFICATION AND REASONABLE STEPS

15.  Section 4(2) of the Ordinance provides as follows: -

“2. The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that—

(a) the redevelopment of the lot is justified (and whether or not the majority owner proposes to or is capable of undertaking the redevelopment)—

(i) due to the age or state of repair of the existing development on the lot; or

(ii) on 1 or more grounds, if any, specified in regulations made under section 12; and

(b) the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”

16.  The applicant must satisfy this tribunal the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted.

Whether development of the Lot is justified due to the age and/or state of repair of the Building

17.  The applicant adduces expert evidence of Mr So Kin Shing (“Mr So”), a structural engineer, of K S So & Associates Limited and Mr Benson Wong Sai Ning (“Mr Wong”), a building surveyor, of Benson Wong & Associates Limited. Mr So conducted a structural survey of the Building and prepared a Structural Assessment Report dated 26 October 2022. Mr Wong conducted a condition survey of the Building and prepared a Condition Survey Report dated 27 October 2022.

18.  No expert evidence has been adduced to rebut the reports complied by Mr So and Mr Wong.

19.  Having considered the reports of Mr So and Mr Wong, I accept their expert opinion. The Building, being erected more than 51 years ago, is in poor condition and has come to the end of its design working life. The design of the Building has become obsolete over time in many aspects, both physically and functionally, and fails to conform to modern safety standards and statutory requirements.

20.  I am also of the view the Building is in poor state of repair and the costs of repair to bring the Building to tenantable condition is disproportionate to the costs for reconstructing a new similar superstructure. Even if repair works are carried out, such works will bring about a modest improvement only to the existing condition of the Building and the Building will continue remain a sub-standard one.

21.  By reason of the matters set out above, I am satisfied the redevelopment of the Building is justified.

Whether the applicant has taken reasonable steps

22.  Given that the respondent is dead with no one appointed to represent his estate, Mr Mok Yeuk Chi (“Mr Mok”), counsel for the applicant, submits that the applicant has no obligation under the Ordinance to negotiate with the respondent to acquire the respondent’s undivided share on terms that are fair and reasonable. Section 4(2)(b) of the Ordinance imposes the obligation to negotiate only in respect of “a minority owner whose whereabouts are known”. I agree.

23.  Nonetheless, before the applicant discovered that the respondent is a missing owner, the applicant had made a written offer to the respondent and sent it to the respondent’s property on 13 January 2022. The offer price at $5,250,000 had made reference to the valuation of Colliers and had also reflected the then pro-rata share of the RDV.

24.  On the evidence available, I accept that the offer price had reflected the proportionate share of the RDV of the Lot and do fall within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question.

25.  By reason of the matters set out above, I am satisfied the applicant has taken reasonable steps to acquire all the undivided shares in the Lot.

RESERVE PRICE FOR THE PUBLIC AUCTION

26.  By reason of being satisfied that redevelopment of the Lot is justified and that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot, I am satisfied an order for sale should be granted in favour of the applicant.

27.  In the supplemental report dated 21 October 2022, Ms Chow assessed the RDV of the Lot (i.e. a Class B site of 148.09 square meters) as at 12 October 2022 by residual method at the plot ratio of 9.273 (i.e. non-domestic plot ratio of 0.6826 and domestic plot ratio of 8.5904) and the total gross floor area of 1,373.24 square meters (i.e. excluding exempted green features). She proposed to build a 24-storey commercial/residential composite building with retail units, plant room and domestic entrance lobby on ground floor; podium garden, landscaped area and plant room on 1^st floor; and 22 residential units from 2^nd to 23^rd floors.

28.  In the residual valuation, she assessed the gross development value (“GDV”) by direct comparison at $227,934,295 (i.e. average shop unit rate at $299,337 per square meter saleable and average domestic unit rate at $274,300 per square meter saleable). She adopted demolition cost at $2,200 per square meter, construction cost at $45,202 per square meter, development period of 2.25 years (i.e. demolition period of 6 months and construction period of 1.75 years), marketing cost at 3.5% of GDV, professional fees at 6% of development costs, interest rate at 4.25% per annum and developer’s profit at 15% (i.e. with additional allowance for stamp duty at 4.25% and legal cost at 0.1% on residual land value). Finally, she assessed the RDV of the Lot at $106,000,000 (i.e. accommodation value of $77,190 per square meter / $7,171 per square foot)

RDV of the Lot as at 12 October 2022

29.  Having gone through Ms Chow’s assessments in her supplemental report, I accept her residual valuation. Although I may not agree with her each and every item in her valuation, I am of the view the overall result is fair and reasonable and reflects the market value of the Lot as at the valuation date. Since the Lot is relatively small in size, the hypothetical development on the Lot would have lower efficiency, which would adversely affect its RDV.

30.  Based on the residual valuation of Ms Chow and my above determination, the Lot as at 12 October 2022 is assessed at $106,000,000, which should be the reserve price for public auction.

ORDERS

31.  For reasons given in this judgment, I have set out reasons why I am satisfied an order for sale should be granted and I therefore make the following orders: -

1) All the undivided shares in the Lot, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lot;

2) Mr Anthony W K Chow and Ms Anna S H Chow, nominated by the applicant, be appointed the trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lot;

3) The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Guantao & Chow dated 15 November 2022;

4) For the purposes of the sale of the Lot by public auction: -

a) the sale of the Lot be on the particulars and conditions of sale the same or substantially the same as those set out in the draft Particulars and Conditions of Sale to be approved and initialed by the tribunal; and

b) the reserve price be set at $106,000,000;

5) The applicant do publish notices once in a Chinese language newspaper (and in the Chinese language) and once in an English newspaper (and in the English language) circulating generally in Hong Kong within 7 days from the date of the sealed judgment informing the respondent and all persons claiming to be the owners of the Lot: -

a) that the tribunal has made an Order for sale of the Lot

b) that the Lot be sold by public auction; and

c) where and the times during which a copy of the Order for sale can be obtained;

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

7) Liberty to the applicant, the respondent, their respective successors in title, and the Trustees to apply to the tribunal for further directions.

COSTS

32.  I make a costs order nisi that there be no order as to costs. Unless any parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from the date of this judgment.