HO KIN PONG AND ANOTHER v. TAM KOK HUNG AND ANOTHER

DCCJ 624/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 624 OF 2010

--------------------

BETWEEN

----------------------------

JUDGMENT

Background

1.  On 12 July 2009, the Plaintiffs entered into a preliminary sale and purchase agreement ("Preliminary Agreement") with the Defendants for the purchase of the Defendants' property at Flat C on the 21st floor of Block 1 of Metro Harbour View ("Property"), at the price of $4,580,000 ("Contract Price"). A formal sale and purchase agreement ("Agreement") was made between the parties on 24 July 2009. Completion was agreed to take place on 4 December 2009 ("Completion Date").

2.  It is not in dispute that completion did not in fact take place under the Agreement, as scheduled. The Plaintiffs claim that this was due to the Defendants' default. The Defendants returned to the Plaintiffs the deposits of $458,000 paid under the Agreement. The Plaintiffs claim that as a result of the Defendants' breach, they have sustained further loss and damage, being the difference in the market value of the Property as at the Completion Date and the Contract Price, in the sum of $330,000. The Plaintiffs also seek recovery of their wasted costs and expenses, in the total sum of $22,177.

3.  On 27 April 2010, interlocutory judgment was entered against the Defendants, for damages to be assessed. On 22 July 2010, leave was granted to the parties to adduce expert evidence on the market value of the Property on the basis of vacant possession as at the Completion Date ("Market Value").

4.  According to the valuation report of Miss Dorothy Chow ("Plaintiffs' Expert") dated 20 January 2010, the Market Value is assessed to be $4,910,000, at a unit rate of $8,150 per sq. foot and using the saleable area of the Property of 603 square feet. According to the valuation report of Mr. Kenneth Cheung dated 20 August 2010 ("Defendants' Expert"), the Market Value of the Property is assessed to be $4,370,000. The final assessment relied upon by the Defendants' Expert at trial is in fact $4,378,405, using a unit rate of $5,010 per square foot and on the basis of the gross floor area of the Property of 874 sq. feet.  If saleable area is used, the Defendants’ Expert’s figures are converted to a unit rate of $7,195, giving an assessment of $4,338,756 (according to the calculations submitted by the Defendants’ Expert at the Court’s request).

5.  Thus, on the valuation of the Plaintiffs' Expert, the Plaintiffs suffered loss of $330,000 as the difference between the Market Value and the Contract Price. However, according to the Defendants' Expert, there is a fall in the Market Value of the Property, and hence, the Plaintiffs have not sustained any damage.

6.  At issue is the Court's finding on the Market Value, and whether the Court accepts that the Plaintiffs have proved that they have sustained the loss they claim.

The valuations

7.  Both experts made use of the "direct comparison method" for their assessment of the Market Value. They compared the Property with comparable properties, and referred to completed transactions which show the price of comparable properties concluded around the Completion Date ("Comparables"). In fact, both experts used Comparables within the Metro Harbour View estate ("Development") where the Property is situated. Various adjustments were made by each expert to the price at which the Comparables were completed, to reflect the qualitative differences between the Property and the Comparables used.

8.  According to the Joint Expert Report compiled by the experts after their joint meeting ("Joint Statement"), the adjustment factors and the level of adjustments adopted by each of them were considered by the other to be "reasonable and appropriate". They did not agree on the list of Comparables appropriate for use in the assessment, nor on the level of adjustments to be made to the unit rate of the price at which the Comparables were sold. The experts considered that the difference in their valuation is due to their use of different sets of Comparables, different adjustment factors and different adjustment levels.

9.  The Plaintiffs' Expert used 6 Comparables, all within the Development. The Defendants' Expert used 13 comparables, also within the Development. The main difference is that the Plaintiffs' Expert only used Comparables of large flats within the Development, the gross floor area of which are larger than 710 sq. feet. Of the 6 Comparables used by the Plaintiffs' Expert, 3 have a gross area of 874 sq. feet, 2 have an area of 778 sq. feet and one has an area of 784 sq. feet.

10.  The Property has an area of 874 sq. feet, with 3 bedrooms.

11.  On the part of the Defendants' Expert, he used for his Comparables both the large flats as well as the small flats within the Development. The small flats within the Development have gross floor area of 499 sq. feet, 504 sq. feet, and 690 sq. feet.

12.  There is nothing wrong, in principle, in averaging comparables as a method of valuation.  However, as even the cases relied upon by Counsel for the Defendants show, it is important that appropriate  comparables are used. Otherwise, whether the property being valued are shares in a company, or real property in Hong Kong, the subject matter may be seriously over-valued, or under-valued.

The Development

13.  The Development comprises 10 high-rise residential towers, Blocks 1 to 10, over a commercial podium with a car park. Each residential block has 44 stories, with 8 units (Flats A to H) on each floor. According to the evidence, units within the Development have gross floor area which range from 477 sq. feet to 874 sq. feet. It appears from the typical floor plan that Flats C, F and G of a typical floor of each block are large units, whereas Flats A, B, D, E and H are small units. The large and small units are different in layout. The large units have 3 bedrooms, whereas the small units have only 2 bedrooms. It is not in dispute that the Property, as does the typical Flat C of blocks within the Development, has a gross floor area of 874 sq. feet and saleable area of 603 sq. feet, with 3 bedrooms. The Property is situated in Block 1 at the northwestern corner of the Development.

14.  To the west of the Development, there is a large Nam Cheong Park which spans to the north-west. To the south and the east of the Development are the older parts of the Tai Kok Tsui neighborhood. To the north is a smaller park and a larger Nam Cheong Estate. Looking at the locality in which the Development is situated, the layout design of the Development as a whole, and the location of each of the 10 blocks, I consider that any reasonable flat buyer in Hong Kong would take the view that even within the Development, flats situated in different blocks, of different total area, facing different directions and enjoying different view would be significantly different in terms of desirability and hence marketability. Adopting purely a common sense approach, I would regard the market value of different flats in different blocks within the Development to be different.

15.  In particular, it is clear that the larger units within the Development are fewer in number from the sheer design of the blocks. According to the evidence of the Plaintiffs’ Expert, the larger units in the Development are rarer on the market, and fetch a higher price per sq. foot. It would appear from the experts' reports that there were only 3 large units of 874 sq. feet in gross area which were transacted during the relevant period, and these had all been included in the Comparables used by the Plaintiffs' Expert. The price of these large units were respectively $4,899,000, $4,550,000 and $5,050,000, with unit rates of $8,124, $7,546 and $8,306 (using saleable floor areas) respectively.

16.  The large units have 3 bedrooms, whereas all the other small units have only 2 bedrooms. A property buyer who is interested in purchasing the Property, with 874 sq. feet in gross area and 3 bedrooms, would not consider a small flat with 2 bedrooms and 504 sq. feet, 574 sq. feet, or 690 sq. feet in gross area to be appropriate alternatives, or suitable comparables.  They may not even find flats of 780 sq. feet in gross area to be the best comparables.

Which valuation should be adopted?

17.  I do not consider small flats within the Development, of less than 874 sq. feet in gross area and having 2 bedrooms, to be suitable Comparables for the Property. The Defendants' Expert has included 11 such flats as Comparables in his assessment, and this has no doubt brought the valuation of the Property down. I do not consider that the adjustments made by the Defendants' Expert to be adequate, bearing in mind what I consider to be the difference in value between the large and small flats in terms of their size and layout.

18.  Counsel for the Defendants has criticized the valuation made by the Plaintiffs' Expert, for the adjustments she made for "view" and "orientation", essentially on the basis that there is overlap in these factors. I cannot agree that there is such overlap. Bearing in mind the layout of the different blocks in the Development, and the position of the different flats within each block, I consider that there is material and significant difference in the market value of the flats by virtue of the location of the blocks and the flats.

19.  The Property can be reasonably described as being situated in one of the prime spots of the entire Development. Flat C of Block 1 enjoys an unobstructed and open view, being situated at the corner of Block 1, which is itself located at the northwestern corner of the entire Development. There is no residential block immediately to the west, the south or the southeast of Block 1. So far as orientation and view are concerned, Flat C of Block 2 may be said to have more similarities to Flat C of Block 1, but Block 1 is in a better orientation than Block 2, as there is no other residential block or any other form of obstruction to the west of Block 1, whereas Block 1 stands to the west of Block 2.

20.  Blocks 5, 6 and 10 of the Development may be said to have the same advantage as Block 1 in terms of orientation, or location, being at the other 3 corners of the Development. In the terms used by the Plaintiffs' Expert, these buildings have no blockage, have better lighting and better air flow. They would have more exclusivity.

21.  I do not agree that there is necessarily overlap between adjustments made for view, and adjustments made for orientation. In terms of the layout of the residential blocks within the Development, Block 10 may be more comparable to Block 1 in terms of orientation, but Flat C within Block 10 would not be comparable to Flat C within Block 1 (i.e. the Property) in terms of view. Whereas the Property has a partial seaview (as the Defendants' Expert himself accepts) and a view of the vast Nam Cheong Park -which should attract a premium in the price, Flat C in Block 10 has a view of the old buildings of Tai Kok Tsui which would not be as attractive to many buyers. Flat C of Block 2 arguably has a similar view as the Property, but Flat C in Block 2 does not enjoy the same orientation or exclusivity as the Property in terms of Block 2 standing between Block 1 and Block 3.

22.  Bearing in mind the location of the blocks and the view enjoyed in the different units, even leaving aside the difference in the area and the layout of the flats in question, I regard many of the Comparables used by the Defendants' Expert to be totally inappropriate to be used for comparison purposes with the Property. By way of illustration, Flat D of Block 4 and all the Comparables in Blocks 9 and 10 (all included in the assessment made by the Defendants’ Expert) are unsuitable without vast adjustments.

23.  The conclusion that the valuation made by the Defendants' Expert is unreliable and unreasonably low can be supported by the fact that whereas both experts agree that the property market in Hong Kong was generally rising from July and August 2009 to December 2009, the valuation of the Defendants' Expert shows a decline instead in the value of the Property for the same period. The experts are in agreement that sales were active within the Development at the material time. The capital value of Class C properties generally increased by 8.6% during the relevant period, according to the price index and statistics of the Rating and Valuation Department ("RVD"). Counsel for the Defendants highlighted the fact that the RVD statistics only indicate the overall movement of the property market in the whole of Hong Kong generally for the relevant period. They do not differentiate between different residential markets in different parts of Hong Kong, Kowloon and the New Territories. I do not dispute this general statement, but there is no evidence produced to suggest that there were features affecting the Development which distinguished it from the general market. Whilst I would not consider the statistics to be conclusive, I can legitimately test the valuations made by the Plaintiffs' Expert and the Defendants' Expert respectively against the RVD statistics of the general market trend.

24.  Having considered all the evidence, I reject the valuation made by the Defendants' Expert, for having included inappropriate and unsuitable Comparables.

25.  As can be seen from my analysis above, I do not consider it inappropriate for the Plaintiffs' Expert to make adjustments to her Comparables in Blocks 2, 3 and 4 for the differences in orientation and view in respect of the larger units in these blocks. Both experts agree that it would not be prudent to base any valuation on only one or two transactions, and there were very few completed transactions of units of 874 sq. feet in gross area during the relevant period. The valuation made by the Plaintiffs' Expert, which has included 3 flats of either 778 sq. feet or 784 sq. feet in gross area, has produced a unit rate of $8,150, and a valuation of $4,910,000. Adopting this valuation gives a difference between the Contract Price and the Market Value of $330,000 as the Plaintiffs' loss of bargain.

26.  According to the figures produced by the Plaintiffs' Expert, if only the flats with gross floor area of 874 sq. feet are used as Comparables (i.e. Comparables 1, 2 and 6), the average unit rate is $8,265; whereas if only the flats in Block 1 are used as the most appropriate comparables (i.e. Comparables 1 and 6), the average unit rate is $8,165.50. Both these unit rates produce a difference between the Market Value and the Contract Price which exceed the amount of $330,000 pleaded in the Statement of Claim, and the Plaintiffs are content to accept the lower sum pleaded.

27.  I am satisfied that the Plaintiffs have proved, on a balance of probabilities, that they have sustained loss and damage, and I will allow the sum of $330,000 as claimed for the difference between the Market Value and the Contract Price. I also allow the wasted costs and expenses in the total sum of $22,177, as claimed, with interest.

Conclusion

28.  There will accordingly be judgment for damages in the total sum of $352,177, as claimed, with interest.

29.  I will make an order nisi that the Defendants are to pay to the Plaintiffs the costs of the main action, to be taxed if not agreed, with certificate for counsel.