EXCEL CASTLE INTERNATIONAL (HK) LTD AND OTHERS v. MO WAI YI AND OTHERS

LDCS 2000/2019

[2020] HKLdT 10

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 2000 OF 2019

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JUDGMENT

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BACKGROUND

1.  This is the applicants’ 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 Kowloon Inland Lot No 7410 (“1^st Lot”) and Kowloon Inland Lot No 6435 (“2^nd Lot”) (1^st Lot and 2^nd Lot are collectively referred to as “the Lots”), together with a building erected thereon known as Nos 49, 49A and 51 Kimberley Road, Kowloon (“the Building”).

2.  The Building is a 9-storey commercial/residential composite building served by 2 lifts and 2 common staircases. An occupation permit No K228/64 dated 19 May 1964 was issued for the Building granting permission to occupy its ground floor (“G/F”) as 1 shop for non‑domestic use and 1 flat for domestic use, and 1^st floor (“1/F”) to 8^th floor (“8/F”) inclusive as 5 flats per floor for domestic use.

3.  According to the records of the Land Registry, the G/F is subdivided into 4 units (i.e. Shop A, Shop B, Flat C and Flat D), and there is also a store room on G/F together with external walls. With reference to the assignment plan and the on-site condition as submitted by the applicants, Flat C and Flat D on G/F are occupied as a single unit.  Further, according to the records of the Land Registry and the respective assignment plans of the units on upper floors, there are 6 flats on 1/F and 5 of them are attached with flat roof, 8 flats on each floor from 2^nd Floor (“2/F”) to 8^th Floor (“8/F”) (except the 4^th Floor (“4/F”)) and 6 of the 8 flats on 8/F are attached with roof, and 10 flats on 4/F.

4.  The Lots together with the Building standing thereon were allocated 127 undivided shares. Each of the 2 shops on G/F was given 8 undivided shares, each of the 2 flats on G/F was given 4 undivided shares and the store room on G/F together with external walls was given 1 undivided share, making up a sub-total of 25 undivided shares on the G/F.  Each of the flats from 1/F to 7/F was given 1 or 2 undivided shares, making up a sub-total of 12 undivided shares on each floor thereof.  Each of the 6 flats on 8/F together with roof was given 2 or 3 undivided shares, and each of the 2 flats on 8/F without attachment of roof was given 1 undivided share, making up a sub-total of 18 undivided shares on the 8/F.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

5.  The applicants filed a Notice of Application (“NOA”) on 31 January 2019, which was subsequently amended on 10 April 2019 and re-amended on 14 October 2019. At the time of filing of the NOA, there were 10 respondents and the applicants owned 110/127^th (i.e. 86.61%) undivided shares in the Lots, more than the threshold of 80% required for building aged 50 years or above.

6.  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%. 

7.  Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a lower percentage in respect of a lot belonging to a class of lots specified in that notice. 

8.  The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, made under section 3(5) of the Ordinance (“the Notice”), was gazetted on 22 January 2010 and came into operation on 1 April 2010.  Section 3 of the Notice lowered the threshold for compulsory sale of specified classes of lots from 90% to 80%.  Those classes of lots include:

“a lot with each of the buildings erected on the Lots issued with an occupation permit at least 50 years before the relevant date”

9.  Since the occupation permit of the Building was issued in 1964, i.e. more than 50 years before the date of application (i.e. 31 January 2019; the relevant date under the Notice), the applicable percentage is therefore 80%.

10.  I am satisfied that as at the date of application, the applicants owned more than 80% of the undivided shares in the Lots.  I am therefore satisfied the applicants are entitled to make the present application under section 3 of the Ordinance.

THE REMAINING RESPONDENT

11.  After the commencement of the application, the applicants acquired further undivided shares from 9 respondents, and subsequently discontinued the proceedings against them. At trial, the applicants owned 126/127^th (i.e. 99.21%) undivided shares in the Lots, and the 5^th respondent (“R5”), who owns Flat G on 4/F, is the only live respondent on record.

12.  R5 is a missing owner. Substituted service of the application on R5 have been effected both in Hong Kong and Toronto on 21 August 2019 pursuant to the Order of the tribunal dated 13 August 2019.  R5 did not show up after the expiration of the 21-day period (i.e. 11 September 2019) as specified in the notices of substituted service.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

13.  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 21 December 2018, the valuation date adopted in the application valuation report dated 30 January 2019, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?

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

3) Whether the applicants have taken reasonable steps to acquire all the undivided shares in the Lots 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 Lots) for the purpose of auction sale?

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING

14.  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.”

15.  The applicants appoint Mr Alnwick Chan (“Mr Chan”) of Knight Frank Petty Limited to give his opinion on valuation.  In the application report dated 30 January 2019 prepared by Mr Chan, he explained the direct comparison method he adopted and the process of his assessment to arrive at the EUV of each unit of the Building.  He valued Flats C and D on G/F as a single unit for both domestic use and shop use.  He prepared 2 scenarios of valuation because Flats C and D on G/F had been used as a shop and there are also building plans approved on 28 October 1966 showing their change of use to “Shop (Non-domestic)”, whereas they fall within the site area of the 2^nd Lot which is restricted for residential purpose only in the land grant. 

16.  Further, Mr Chan valued Unit A on 1/F for commercial use to reflect its existing use and commercial potential.  Shop B on G/F and Flat A on 1/F are connected by an internal staircase and were operating as a hair salon, and according to the Minor Works Records of the Buildings Department, minor works for the addition of an internal staircase was completed on 10 May 2017.  Regarding the store room on G/F together with external walls, he assigned value to the store room only because in his opinion any value associated with the advertising right of the external walls has been extinguished pursuant to the Deed of Mutual Covenant (“DMC”) of the Building.

17.  Mr Chan had subsequently prepared a supplemental report on 6 November 2019 to update his EUV assessment. He made reference to the latest property price indices published by the Rating and Valuation Department, adopted multiplication method instead of summation method in calculating the total adjustment, and reviewed the selection and area measurement of the residential comparables.  In the supplemental report, he valued Flats C and D on G/F for domestic use only because he then weighted the associated uncertainty in the risk of enforcement of their non-conforming use by the Lands Department.

18.  Although the application is uncontested, I have made various queries on valuation in the pre-trial review on 29 November 2019 which was attended by the solicitor of the applicants only.  In response to my queries, Mr Chan revisited his EUV assessment, and the applicants also submitted coloured site plans, approved building plans, coloured assignment plans and building cost data to the tribunal.  At trial, Mr Chan revised his valuation of the store room on G/F together with external walls and assigned nil value to it because after his review of the DMC he considers the store room is also a common area of the Building.

19.  In the valuation schedule submitted at trial, Mr Chan valued the reference shop unit (i.e. Shop B on G/F) at $966,000 per square meter and the reference domestic unit (i.e. Flat A1 on 4/F) at $115,000 per square meter.  He then compared the reference units with the other units in the Building and assessed the EUV of all units in the Building at $476,336,391.

20.  When I was writing the judgment, I subsequently found the valuation schedule submitted at trial might have mathematical error and therefore made a requisition to the applicants. The applicants then made written submissions on 8 January 2020 to update the valuation schedule again and revise the EUV of all units in the Building to $476,336,392.

21.  I accept the EUVs assessed by Mr Chan and submitted on 8 January 2020, and am satisfied that the value of the unit owned by R5 is not less than fair and reasonable when compared with the value of the applicants’ properties. The EUVs of all units in the Building as at the relevant date of valuation, i.e. 21 December 2018, and adopted by this tribunal are appended below: -

Floor	Unit	EUV		Floor	Unit	EUV
G	Shop A	$69,626,189		5	A	$8,749,946
G	Shop B	$78,613,080		5	B	$8,620,663
G	Flats C & D	$6,734,793		5	C	$3,122,337
G	External Walls &  Store Room	$0		5	D	$2,943,150
				5	E	$3,292,565
1	A	$25,980,055		5	F	$2,688,928
1	B	$8,449,109		5	G	$4,451,949
1	C	$3,403,736		5	H	$4,401,096
1	D	$3,020,678		6	A	$8,569,617
1	E	$7,742,404		6	B	$8,488,823
1	F	$7,347,194		6	C	$3,137,866
2	A	$8,619,310		6	D	$2,957,788
2	B	$8,661,767		6	E	$3,308,941
2	C	$3,075,749		6	F	$2,702,301
2	D	$2,899,236		6	G	$4,474,098
2	E	$3,243,437		6	H	$4,422,992
2	F	$2,648,807		7	A	$7,946,067
2	G	$4,166,246		7	B	$7,853,901
2	H	$4,118,657		7	C	$3,153,423
3	A	$8,662,882		7	D	$2,972,452
3	B	$8,364,125		7	E	$3,325,346
3	C	$3,029,441		7	F	$2,715,699
3	D	$2,913,874		7	G	$4,406,341
3	E	$3,259,813		7	H	$4,533,805
3	F	$2,662,181		8	A and Roof A	$8,209,006
3	G	$4,407,651		8	B and Roof B	$7,801,715
3	H	$4,357,304		8	C and Roof C	$3,382,641
4	A1	$4,739,150		8	D and Roof D	$3,200,778
4	A2	$3,917,452		8	E	$3,274,866
4	B1	$3,997,400		8	F	$2,729,073
4	B2	$4,739,150		8	G and Roof G	$5,176,449
4	C	$3,106,808		8	H and Roof H	$5,124,837
4	D	$2,928,512
4	E	$3,276,189
4	F	$2,675,554
4	G	$4,429,800
4	H	$4,379,200

22.  I therefore accept the total EUV of the Building is $476,336,392.

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

23.  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).”

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

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

25.  The applicants adduce 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 8 November 2019.  Mr Wong conducted a condition survey of the Building and prepared a Condition Survey Report dated 8 November 2019.

26.  Having considered the reports of Mr So and Mr Wong, I accept their expert opinion. The Building, being erected 55 years ago, is in poor condition and has come to the end of its design life.  The design of the Building has become obsolete over time in many aspects, both physically and functionally, and fails to conform to modern construction standards and statutory requirements.

27.  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 of redevelopment.  Although regular repair can extend the life of the Building, repair costs will increase with time. 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.

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

Whether the applicants have taken reasonable steps

29.  In assessing the reasonableness of the offers, I have considered the case of Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. In particular, I have considered paragraphs 33 and 36 of the judgment in which   Ribeiro PJ stated: -

“33. In making that assessment the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It does not itself arrive at any conclusion as to what figure represents the correct valuation. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. It is obviously necessary to recognise that there will often be differences of opinion on that matter……”

“36. ...... We are of course not suggesting that it is necessary for the offer to “beat” the valuation as if it were a payment into court. 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……”

30.  Prior to the issue of the NOA on 28 January 2019, The applicants made an offer to R5 on 8 January 2019, and after the issue of the NOA, the applicants made 2 other offers on 15 April 2019 and 21 November 2019.  The respective offer prices were based on independent valuation, had reflected the then RDV attributable to the R5’s unit, and had also included a premium over the valuation. 

31.  Ms Ngai, counsel for the applicants, submits that the applicants have not been able to acquire the remaining 1 undivided share solely because R5 cannot be found at all.  In the circumstances. the applicants have already taken reasonable steps to acquire all the undivided shares in the Lots.

32.  Having considered that the applicants have made offers to R5, which were based on independent valuation, and it could never be successful in acquiring R5’s unit because R5 is missing, I am satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots.

RESERVE PRICE FOR THE AUCTION

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

34.  Mr Chan firstly assessed the RDV of the Lots as at 4 November 2019, and subsequently reviewed his assessment as at 25 November 2019 with reference to the latest property price indices.  While he adopts residual approach to arrive at the market value of the Lots as a development site, he considers the optimum development of the Lots would be a commercial development of 20-storey over 2-level of basement carpark. Given that the 2^nd Lot is restricted for residential use only under its land grant, he assumes in his valuation there will be a modification of this land grant subject to payment of modification premium.  He assesses the modification premium by before and after valuation, and then deduct it as part of the costs in the residual valuation of the Lots.

35.  Similar to the EUV assessment, Mr Chan has further updated his RDV assessment at trial in response to my queries in the pre-trial review. In his valuation submitted at trial, he revised in the premium assessment some of the development parameters including the interest rate from 5.125% to 5%, the demolition period from 0.5 year to 1 year, and the location adjustments to some of the G/F comparables.  He also revised in the RDV assessment the interest rate from 5.125% to 4%. Finally, he assessed the modification premium at $110,100,000 and the RDV of the Lots (after deduction of the modification premium) at $569,100,000. In his residual valuation, he adopted a maximum plot ratio of 12 and a net site area of 624.3 square meters (i.e. registered site area of 668.9 square meters less the right-of-way (“ROW”) of 44.6 square meters) to derive a total gross floor area of 7,491.56 square meters.

36.  I have doubt whether the ROW should be excluded in the calculation of plot ratio and site coverage as suggested by Mr Chan and therefore made requisitions to the applicants on 6 January 2020.  The applicants replied on 14 January 2020 and Mr Chan confirms the ROW falls within the boundary of the Lots and there are no records that the ROW has been surrendered to the government.  Mr Chan also confirms there are no records that the ROW is subject to any easement, mutual right of way or the likes.  In the circumstances, he considers a service lane is not required to be provided at the rear or side of the hypothetical development under Building (Planning) Regulation 28(1), and the Building Authority would give favourable consideration to include the ROW in the calculation of plot ratio and site coverage, but a formal application for modification of Building (Planning) Regulation 23(2)(a) would be required because the ROW has been an established right-of-way. 

37.  In response to my requisitions, Mr Chan has also checked and confirmed similar rights-of-way in the nearby commercial developments, namely No 25 Kimberley Road and No 35 Kimberley Road, have been included in the calculation of plot ratio and site coverage. Accordingly, he revised in his residual valuation the net site area of the Lots to 668.9 square meters including the ROW.  In the after value assessment of the modification premium which proposes to build a commercial building too, he revised the net site area of the 2^nd Lot to 334.45 square meters. He revised his assessment of the modification premium to $149,100,000 and the RDV of the Lots (after deduction of the modification premium) to $594,100,000. 

38.  Unfortunately, after reviewing the revised valuation submitted on 14 January 2019, I found the commercial podiums in the hypothetical developments in both the after value assessment and the RDV assessment have been built over the ROW which is an established right-of-way, and therefore made further requisitions to the applicants on the same date.  On 16 January 2020, the applicants replied and Mr Chan confirms the commercial podium in the hypothetical commercial developments cannot be built over the ROW, and hence further revised his assessment of the modification premium to $145,700,000 and the RDV of the Lots (after deduction of the modification premium) to $591,200,000.

39.  In the latest assessment of the gross development value (“GDV”) submitted on 16 January 2020, Mr Chan values the G/F retail portion at $906,000 per square meter, the 1/F retail portion at $317,000 per square meter, the office portion on upper floors at $219,000 per square meter and each of the car parking spaces at $2,500,000.  However, in the after value assessment of the modification premium, he adopts a higher unit rate at $248,000 per square meters for the office portion on upper floors.

40.  I consider Mr Chan’s valuation submitted on 16 January 2020 should be further adjusted. I am of the view the GDV of the office portion in the RDV assessment should not be less than $248,000 per square meter, which is the figure adopted by Mr Chan in the after value assessment, though the common part on the upper floor lobby in such scenario should then be enlarged by say 20 square meters to accommodate the sub-division if any.  I consider the office on upper floors can be sub-divided, Mr Chan’s adjustment for size at 1% per 10-square meter difference and adjustment for whole floor premium at 10% are excessive, and office in a larger commercial building (i.e. the hypothetical development in the RDV assessment) should have value generally higher than office in a smaller commercial building (i.e. the hypothetical development in the after value assessment).  Further, the total development period can be shortened to 3.5 years if there will be demolition (i.e. 0.75 year) within the lease modification period (i.e. 1.5 years) and the construction period for 2 years will commence immediately after the lease modification.

RDV of the Lots as at 25 November 2019

41.  Based on the RDV assessment prepared by Mr Chan and submitted on 16 January 2020 and the above determinations, the residual valuation of the Lots as at 25 November 2019 is listed in Appendix of the judgment.  The Lots are assessed at $652,500,000.

ORDERS

42.  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 Lots, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lots;

2) Mr Yam Kam Kwong Allen and Mr Wong Hiu Ngon Howard, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lots;

3) The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Zhong Lun Law Firm dated 11 December 2019;

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

a) the sale of the Lots 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 $652,500,000;

5) The applicants do publish notices once in a Chinese newspaper (and in the Chinese language) and once in an English newspaper (and in the English language) circulating generally in Hong Kong and once in an English newspaper (and in the English language) circulating generally in Toronto of Canada within 21 days from the date of the judgment to be made herein by the tribunal informing the 5^th respondent and all persons claiming to be the owners of the Lots: -

(a) that the tribunal has made an Order for sale of the Lots;

(b) that the Lots be sold by public auction; and

(c) where and the times during which a copy of the Order for sale to be made herein be obtained;

6) 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 becomes the owner of the Lots; and

7) Liberty to the applicants, the 5^th respondent, and the Trustees to apply to the tribunal for further directions.

COSTS

43.  Although the application is uncontested, I am of the view the applicants have not well prepared for it. The applicants were late in appointing counsel to review the readiness for trial. Many mistakes, such as filing of wrong documents, summation of figures incorrectly and adoption of unfeasible and/or suboptimal valuation model, were found by the tribunal, which are unsatisfactory and would result in a waste of court resources.

44.  Nevertheless, given that the live respondent is missing, 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.