EVERSOUND INVESTMENTS LTD v. TSANG CHUNG WAI NORMAN AND OTHERS

LDCS 39000/2012

THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 39000 OF 2012

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JUDGMENT

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1.   This is an application under the Land (Compulsory Sale for Redevelopment) Ordinance (“the Ordinance”) for an order to sell all the undivided shares of the lot known as the Remaining Portion of Section D of Kowloon Marine Lot No 52 situate as Nos 23, 25 and 27 Wan Shun Street, Nos 24 and 26 Wan Fuk Street, Kowloon, Hong Kong for the purposes of redevelopment.

Background

2.   There is erected on the lot an 8-storey tenement building (including the G/F but excluding the roof) with 5 units on each floor connected by three common staircases.  The building forms part of a larger development called Block D, Nos 15, 17, 19, 21, 23, 25 and 27 Wan Shun Street and Nos 16, 18, 20, 22, 24 and 26 Wan Fuk Street (“Block D”).  Each unit in the building was allotted 2 of the 82 equal undivided shares in the lot and the remaining 2 shares were allotted to the roof.  Some of the units are sub-divided into flats A and B, and each flat was allocated 1 equal undivided 82^nd share.  A table showing how the undivided shares in the lot are distributed is appended hereto as Appendix A.

3.   When the applicant commenced these proceedings on 27 April 2012, it owned 69 equal undivided 82^nd shares representing approximately 84.1463% of the undivided shares in the lot and there were 11 respondents.  Other than the 11^th respondent (“R11”), all the other respondents were owners of some undivided shares in the lot.  There was an ongoing probate dispute (namely, High Court Probate Action No 4 of 2012) between R11 and the 5^th respondent (“R5”) and the 6^th respondent (“R6”) and R11 was therefore included. 

4.   Thereafter, Madam Chan Lai-King filed a claim in the High Court (namely, High Court Action No 18 of 2013) against the 3^rd respondent herein (“R3”) claiming adverse possession of R3’s unit at Unit 1A, No 24 Wan Fuk Street.  Madam Chan was joined into these proceedings by an order dated 11 January 2013 as the 12^th respondent (“R12”).

5.   Since then, the applicant has acquired some of the remaining units and discontinued the proceedings against the relevant owners.  For the purpose of this trial, the respondents that remain are:

Respondent	Unit	Undivided share
R3 or R12	Unit 1A, No 24 Wan Fuk Street	1
R5 or R11	Unit 4B, No 24 Wan Fuk Street	1
R6 or R11	Unit 4A, No 24 Wan Fuk Street	1
R10s	Roof	2

6.   Other than R12 who is represented by Mr Tsui Wai-Hay solicitor, these respondents are absent at the trial.

7.   By a facsimile transmission sent to the Tribunal on 16 August 2013, R6 (who has been appointed by an order dated 11 January 2013 to represent the estate of R5 as well) tendered her apologies for absence and expressed that she would prefer to have the properties sold by public auction given the ongoing probate dispute.

8.   The applicant was unable to serve the application on R3.  There is a record of the death of R3 at the Births and Deaths Registry but no one has applied for the grant of probate or letters of administration in respect of the estate as confirmed by probate search. On 16 October 2012, the applicant obtained an order under section 3(4) of the Ordinance to dispense with service of the application on R3 and for publication of notices to call upon anyone who claims to be minority owners of the lot to establish their claims.  So far, no one has responded to the advertisements and all persons claiming to be minority owners shall, in accordance to section 3(4) of the Ordinance, be bound by the proceedings herein as it they had been served.

9.   The 10^th respondents (“R10s”) were apparently the developer of Block D.  There is no record of their death or any grant of probate or letters of administration relating to them.  The applicant has established contact with them through the personal assistant of the 1^st named R10s and, at one stage, R10s had instructed a solicitor to negotiate with the applicant.  We are satisfied that R10s have been duly served and have elected not to participate in these proceedings.

10.   In the premises, we are satisfied that the application should proceed.

The issues

11.   Section 3(1) of the Ordinance generally requires an applicant to have not less than 90% of the undivided shares in a lot before it can make an application.  Section 3(5) then provides that the Chief Executive in Council may, by notice in the Gazette, specify a percentage lower than 90% in respect of a lot belonging to a class of lots specified in the notice.

12.   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”).  The Notice lowered the threshold for compulsory sale from 90% to 80% and one of the classes of lot specified therein is “a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date [that is, the date of the application]”. 

13.   The occupation permit of Block D was issued on 25 April 1960, which was more than 50 years as at the date of the application.  The lot therefore is covered by the Notice and the applicant, who then owned about 84% of the undivided shares in the lot, was clearly entitled to make the application.

14.   R5, R6, R11 and R12 have filed their respective Notice of Opposition.  The applicant’s counsel Mr Benjamin Chain has observed, correctly in our view, that these respondents only expressed dissatisfaction at the applicant’s valuation without raising any specific issue.  None of the respondents has put in any evidence and the applicant, according to Mr Chain, has been put to strict proof.  Mr Tsui does not submit otherwise. 

15.   According to section 4 of the Ordinance, the issues that require adjudication are as follows:

(1)   What is the market value of the units comprising the lot without taking into account their redevelopment potential?  The profession has called this the existing use value or “EUV”.

(2)   Whether the value of R3’s unit (the minority owner who cannot be found) as assessed by the applicant is not less than fair and reasonable and not less than fair and reasonable when compared with the value of the applicant’s units?

(3)   Whether the redevelopment of the lot is justified due to the age or state of repair of the existing development there?

(4)   Whether the applicant 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 these shares as are owned by that minority owner on terms that are fair and reasonable)?

(5)   What is the reserve price for the lot taking into account the redevelopment potential of the lot on its own?  The profession has called this the redevelopment value or “RDV”.

(6)   Matters incidental to an order for sale, such as the appointment and remuneration of the sale trustees and the conditions of sale.

16.   Given the stance of the remaining respondents, the focus of the trial will be on the determination of EUV and RDV.

Issue (1): Determination of EUV

17.   The applicant instructed Mr Alnwick Chan of Knight Frank to advise them on valuation matters.  Mr Chan is a Fellow Member of the Royal Institute of Chartered Surveyors in the General Practice Division as well as Hong Kong Institute of Surveyors.  We are satisfied with his academic and professional qualifications.

18.   Mr Chan compiled a valuation report on the EUV as at 21 February 2012 of all the units comprising the lot.  The report (dated 26 April 2012) was prepared not earlier than 3 months before the date of the application and accompanied the copies of application served on the respondents.  The statutory requirements concerning the report under section 3(1) of the Ordinance are satisfied.

19.   Mr Chan later updated his assessment after he inspected more units and on account of the latest property indices published by Rating and Valuation Department.  His latest assessment is contained in a report dated 21 May 2013.

20.   In his assessment, Mr Chan adopted the assumptions specified in Part 1 of Schedule 1 to the Ordinance and took into account the condition of the units as revealed from inspections.  He employed the comparative method of valuation with reference to recent transactions in the vicinity of the lot.  He selected 4/F of No 25 Wan Shun Street as the reference unit, which is situated on the middle floor of the building.  He worked out the unit price of the reference unit with reference to 13 comparables from 10 different buildings nearby.  He made adjustments to reflect the differences in characteristics between the reference unit and the comparables (such as time, location, building age, floor level, size, condition, and view).  Based on such unit price, he worked out the EUV of all the units in the building by making adjustments to reflect the actual internal condition, floor difference, view and size between the reference unit and the other units.  He converted the saleable area of the roof as domestic by using a conversion factor of 1:8.  He took into account the property indices published by Rating and Valuation Department.

21.   In the course of the assessment, Mr Chan noted that the existing use of the G/F units (ie shop) is at variance with the use permitted by the occupation permit (ie domestic). He carried out his valuation based on two different scenarios:

(a)   scenario 1, adopting the use as permitted by the occupation permit; and

(b)   scenario 2, reflecting the existing use of the G/F units.

22.   Mr Chain recommended scenario 1 in his closing submission.  He said that if we were to adopt scenario 2, we might be sending the wrong message to those facing acquisition for compulsory sale that they could take conversion actions on their premises without obtaining the necessary approval so as to get an enhanced compensation.  He submitted that no informed and prudent purchaser in the open market would be willing to pay extra for a property on the basis of an illegal use and risked enforcement actions by the relevant authorities. 

23.   Mr Chain also said that the applicant, having acquired all the G/F units, was agreeable to adopt scenario 1 in assessing the EUV of their G/F units which would be more favourable to all other minority owners. 

24.   Having considered everything, we are satisfied that we should adopt scenario 1 and accept Mr Chan’s assessment of the EUV of all the units in the lot as set out on page I/2264 of the trial bundle, which is annexed hereto as Appendix B for easy reference. 

Issue 2: Whether the value of R3’s unit is fair and reasonable?

25.   We have recounted the process of Mr Alnwick Chan’s assessment above.  He adopted the same assumptions, methodology and raw data in assessing all the units comprising the lot.  We are satisfied that his assessment of the value of R3’s unit (the only minority owner who cannot be found) is not less than fair and reasonable and not less than fair and reasonable when compared with the value of the applicant’s units.

Issue 3: Whether redevelopment is justified?

26.   Since there is really no dispute on this, we shall be brief in recounting the substantial evidence adduced by the applicant.  Suffice for us to say that we have considered all the evidence carefully.

27.   To start with, we note from the occupation permit that the existing building is about 53 years old.

28.   The applicant commissioned Dr Sammy Chan to provide a structural assessment report dated 27 May 2013 for the building.  Dr Chan is a Registered Structural Engineer and a Registered Inspector (List of Engineers) under the Buildings Department Ordinance and we are satisfied with his academic and professional qualifications.

29.   Dr Chan (together with his team of engineers) carried out visual inspection on the structural elements of the existing building and discovered a total of 101 defects (including concrete spalling, spalling with exposure of corroded reinforcing bar and water seepage) and unauthorized building works (including unauthorized extension of the retail shops on the G/F, unauthorized mezzanine floor above the retail shops on the G/F, unauthorized metal structures on the roof and unauthorized subdivision of some of the units).  In-situ and laboratory tests revealed that the protective concrete cover had carbonated and the embedded steel reinforcements were extensively blistered, corroded and pitted.

30.   Dr Chan opined that the degradation of the structural members had adversely affected the overall stability of the building and could cause local structural failure of the members.  Given the considerable extent in terms of area and degree of defects, he said that normal concrete repair works might not be a cost-effective solution to restore the overall integrity of the building. Furthermore, he considered that the building structures had been overloaded and overstressed for many years due to the presence of unauthorized building works and their structural integrity might have been damaged already.

31.   In conclusion, Dr Chan opined that the existing building had already undergone severe degradation rendering it not worthwhile to be rectified by convention repair and maintenance measures.  He expressed doubts about the overall structural integrity of the building and considered that conventional repair and maintenance works might not be a long-term measure to relieve the prevailing degradation.  For the purpose of his assessment, he adopted the cost estimate of a qualified quantity surveyor of about HK$14.5 million for the structural repair works. 

32.   The applicant also commissioned Mr Raymond Chan to survey the existing condition of the building.  Mr Chan is a Building Surveyor and an Authorised Person.  We are satisfied with his academic and professional qualifications.

33.   Mr Raymond Chan led a team of surveyors to inspect the external facades, the roof, the internal communal area (including the staircases) and those units of the building which were accessible to them and compiled a condition survey report dated 27 May 2013.

34.   Based on their findings, Mr Chan opined that the building was generally in a dilapidated and potentially dangerous condition and the structural stability of the building had been compromised by the unauthorized building works therein.  He said that extensive repair works would have to be carried out to extend the life span of the building, but the continuous maintenance costs would be increasing high given the age of the building.  He further opined that the design of the building was obsolete and substantial upgrading works would have to be carried out to bring it in line with current legislative requirements and the upgrading costs would be enormous.

35.   In conclusion, Mr Chan said that the building was in a state of disrepair with its structural frames in a dilapidated condition.  Some of the building components and finishes were at the end of their effective life span and substantial repairs would have to be carried out to bring it up to tenantable standard.  Adopting the cost estimate of a qualified quantity surveyor, he estimated that the non-structural repair costs would be around $10.5 million.  He expressed reservations that, aside from the astronomical costs involved, it might not be feasible or practical to undertake such repair as it would entail closure of the building for a substantial period of time.

36.   There is nothing to contradict the expert evidence of Dr Sammy Chan and Mr Raymond Chan and we accept their findings and opinions.  The total estimated costs of repair comes to about HK$25 million, which is over 40% of the total EUV of all the units of the existing building (HK$61,984,646). 

37.   Having regard to all these evidence and considerations, we are satisfied that the redevelopment of the lot is justified due to the age or state of repair of the existing building thereon.

Issue 4: Reasonable steps taken to acquire the undivided shares in the lot?

38.   The applicant is under an obligation to take reasonable steps on terms that are fair and reasonable to acquire the interest of the minority owners.  The fact that all the minority owners except the remaining respondents have accepted the applicant’s offer is telltale of the reasonableness of the steps taken respecting them.

39.   The applicant called Mr Alex Au-Yeung to testify on the the steps taken against the remaining respondents.  The applicant was guided by the expert opinion of Mr Alnwick Chan in making offers.  Mr Chan (as we have noted) is a professional valuation surveyor from a reputable firm of surveyors in Hong Kong.  There is nothing to suggest that his valuation is other than proper and professional, and we have accepted his assessment of EUV above.

40.   The offers made by the applicant to the remaining respondents may be summarised in the following table:

Respondent	Date	Knight Frank’s valuation	Offer amount
R3	8 November 2011	HK$1,082,066	HK$1,140,000
	29 November 2011	–	HK$1,140,000
	15 December 2011	HK$1,064,703 (based on scenario 1); HK$973,163 (based on scenario 2);	HK$1,300,000
	30 March 2012	HK$1,033,621 (based on scenario 1); HK$926,369 (based on scenario 2);	HK$1,300,000
R5	8 November 2011	HK$1,210,892	HK$1,280,000
	29 November 2011	–	HK$1,280,000
	15 December 2011	HK$1,191,462 (based on scenario 1); HK$1,089,024 (based on scenario 2)	HK$1,460,000
	30 March 2012	HK$1,030,009 (based on scenario 1); HK$923,132 (based on scenario 2)	HK$1,460,000
R6	8 November 2011	HK$1,015,133	HK$1,070,000
	29 November 2011	–	HK$1,070,000
	15 December 2011	HK$998,844 (based on scenario 1); HK$912,966 (based on scenario 2)	HK$1,220,000
	30 March 2012	HK$863,493 (based on scenario 1); HK$773,894 (based on scenario 2)	HK$1,220,000
R10s	8 November 2011	HK$1,397,325	HK$1,470,000
	29 November 2011	–	HK$1,470,000
	15 December 2011	HK$1,375,136 (based on scenario 1); HK$1,256,906 (based on scenario 2)	HK$1,680,000
	30 March 2012	HK$1,188,794 (based on scenario 1); HK$1,065,441 (based on scenario 2)	HK$1,680,000
R11	31 July 2013	–	HK$1,460,000 for Unit 4B, No 24 Wan Fuk Street
	31 July 2013	–	HK$1,220,000 for Unit 4A, No 24 Wan Fuk Street
R12	31 July 2013	–	HK$1,300,000

41.   Mr Au-Yeung testified that the applicant generally offered a price higher than the valuation of Knight Frank.  The offer letters enclosed Knight Frank’s valuation so that the respondents could better appreciate the offer.  The applicant had been willing to mediate and did suggest mediations to the remaining respondents but they never responded.  The offers to R11 and R12 matched the offers made to other respondents concerning the same unit.

42.   Despite the Notices of Opposition, no one has really challenged the reasonableness of the offers. 

43.   We are satisfied that the offers generally fall “within the range of what may broadly be regarded as fair and reasonable” (per Mr. Justice Ribeiro PJ in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578 at para. 33).  The latest offers also fare well against our determination:

Respondent	Last offer	Respondent’s share of RDV
R3/R12	HK$1,300,000	HK$107.1 m x (HK$716,927/HK$61,984,646) = HK$1,238,740
R5/R11	HK$1,460,000	HK$107.1 m x (HK$714,423/HK$61,984,646) = HK$1,234,414
R6/R11	HK$1,220,000	HK$107.1 m x (HK$598,926/HK$61,984,646) = HK$1,034,853
R10s	HK$1,680,000	HK$107.1 m x (HK$824,462/HK$61,984,646) = HK$1,424,544

44.   Based on the unchallenged evidence of Mr Au-Yeung and the above considerations, we are satisfied that the applicant has taken reasonable steps in acquiring all the undivided shares in the lot and that it has negotiated with R3 (as well as R10s insofar as it is necessary) on terms that are fair and reasonable.

Issue 5: Determination of RDV

45.   According to the report of Mr Alnwick Chan dated 6 August 2013, the RDV of the lot as at 18 July 2013 is $107,100,000. 

46.   Mr Chan adopted the residual method of valuation in assessing the RDV of the lot.  That was done by deducting development costs (including construction costs, professional fees and finance costs) and developer’s profit from the estimated gross development value of the completed development.  He opined that a composite building with retail shops on the G/F with cockloft, lift lobby and machinery on the 1/F and residential units on 2/F to 23/F should be the optimum development on the lot upon redevelopment.  The details of his hypothetical development and residual valuation are set out in Appendix 9 of his report. 

47.   In addition to his report, Mr Chan also produced a plan showing the location of some nearby lots which had been sold by auction in 2013 (Exhibit A1).  He pointed out that the accommodation value of those auctions ranged from HK$37,122 to HK$49,102 per square metre and his assessment of HK$107.1 million for the lot represented an accommodation value of HK$50,299 per square metre compared favourably with recent auctions in the vicinity.

48.   We have gone through the valuation in detail.  We appreciate that Mr Chan’s assessment is based on recent retail and residential sale comparables in the vicinity and we agree with his assumptions and the values and costs parameters he used. 

49.   We accept Mr Chan’s valuation and decide that the reserve price for the auction should be HK$107.1 million.

Issue 6: Matters incidental to the order for sale

50.   The applicant proposes to appoint Mr Ho Chi-Kit and Mr Cheung Chi-Yu, both solicitors of Katherine YW Or & Co, as the sale trustees.  Based on the information on their background and experience as set out in their letter dated 31 July 2013, we are satisfied that they are proper persons to be appointed.  We also approve the remuneration package proposed in the said letter.

51.   Mr Chain has also provided a set of draft particulars and conditions of sale by public auction [F/1558-1580 of the trial bundle] for our consideration.  We understand these are the usual terms used for compulsory sale and we approve them.

Conclusion

52.   For the above reasons, we are satisfied that the redevelopment of the lot is justified due to the age and state of repair of the existing building thereon and that the applicant (as the majority owner) has taken reasonable steps to acquire all the undivided shares in the lot.  We therefore make an order that all the undivided shares in the lot, the subject of this application, be sold by public auction for the purposes of development. 

53.   We appoint Mr Ho Chi-Kit and Mr Cheung Chi-Yu as the sale trustees to discharge the duties imposed on them under the Ordinance in relation to the lot and authorise their remuneration for their service as trustees as provided in the letter dated 31 July 2013.  We approve the particulars and conditions of sale of the lots placed before us and grant liberty to the parties and the trustees to apply for further directions if necessary.

or the 12^th Respondent

                                                                                      Appendix A

Note:

WFS = Wan Fuk Street; WSS = Wan Shun Street

                                                                                      Appendix B