SKY REACH ENTERPRISES LTD AND OTHERS v. THE PRESONAL REPRESENTATIVE OF THE ESTATE OF CHAN KIT HEN, DECEASED

LDCS 3000/2017

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION

NO 3000 OF 2017

_________________

________________

_______________

J U D G M E N T

_______________

Background

1.  This is an application for compulsory sale of all the undivided shares of and in Inland Lot No 5657 and the extension thereto (“the Lot”), with a building erected thereon known as No 153 Queen’s Road East, Hong Kong (“the Building”), for the purposes of redevelopment pursuant to the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”). 

2.  The 6-storey Building is served by a common staircase. An occupation permit No 2/3023/71 dated 30 August 1973 was issued for the Building, which permitted shop for non-domestic use on Ground Floor and 1 tenement per floor for domestic use from 1^st Floor to 5^th Floor.  According to the records of the Land Registry, the 1^st Floor includes a flat roof and the 5^th Floor includes a roof.

3.  The Lot and the Building was allocated with 8 undivided shares. The Ground Floor was given 3 undivided shares (i.e. 37.5%), each of the tenement on upper floors was given 1 undivided share (i.e. 12.5%), making a total of 8 undivided shares. 

4.  The applicants filed a Notice of Application (“the NOA”) on 31 March 2017.  At the time of filing of the NOA, the applicants owned 7 out of 8 (i.e. 87.5%) undivided shares of and 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%. 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. 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 tabled at the Legislative Council meeting on 27 January 2010. It came into operation on 1 April 2010.   Section 3 of the Notice lowered the threshold for compulsory sale, insofar as it is applicable, from 90% to 80%. Section 4(1)(a) of the Notice specified one of the classes for the purposes of Section 3 being “a lot with each of the units on the lot representing more than 10% of all the undivided shares in the lot”.  Since each of the units on the Lot was allocated with at least 12.5% of all the undivided shares in the Lot, i.e. more than 10% as specified in Section 4(1)(a) of the Notice, the applicable percentage in these proceedings is therefore 80%.

Respondent Remaining

6.  At the time of application and up to the time of trial, there was only 1 respondent, whose unit (i.e. the 3^rd Floor) has not yet been acquired by the applicants.   The respondent is missing.  The Tribunal has ordered that all documents subsequent to the Order dated 28 April 2017 in respect of these proceedings on the respondent be dispensed with. Substituted service of the application on the respondent was also effected on 10 May 2017, pursuant to the Order dated 28 April 2017.  The respondent had not shown up after the expiration of the 21-day period as specified in the notices.

7.  Ms Ngai, counsel for the applicants, submitted that, although the respondent is missing, a Sealed Copy of Writ of Summons in the proceedings of DCCJ 1776/2017 was taken out on 12 April 2017 by one Kan Yu Wai Yin Sylvia (“Sylvia Yu”), who was legally represented, against the respondent and was registered against the respondent’s unit on 2 May 2017.  By the said Writ of Summons, Sylvia Yu claimed that she had obtained possessory title to the respondent’s unit.  Nevertheless, Sylvia Yu is not a “minority owner” for the purposes of the Ordinance, the applicants have not joined her as a party to the present compulsory sale application. Whilst, Sylvia Yu has not applied for leave to be joined as a respondent in these proceedings too.

8.  In light of the existence of this adverse possession claim, the applicants apply for an additional order that, if an order for sale of the Lot is made, the net proceeds of sale to be apportioned to the respondent’s undivided share of the Lot be held by the trustees to be appointed pending final determination of the proceedings in DCCJ 1776/2017.  I agree.

Issues for Determination by the Tribunal

9.  At trial, there was no expert evidence filed by the respondent. Ms Ngai simply called the witnesses to prove the applicants’ case.  The applicants contended that all the requirements of the Ordinance had been satisfied and asked for an order for sale of the Lot.

10.  Above all, the Tribunal is required to determine the following issues under the Ordinance: -

(i) Whether the applicants have acquired the minimum undivided shares in the Lot which entitles them to make the application under the Ordinance?

(ii) What are the respective market values which are usually termed as the existing use values (“EUV”) of all units in the Building as at 19 January 2017 as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?

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

(iv) Whether the applicants have 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?

(v) 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)?

Whether the Conditions for Making an Application under Section 3(1) of the Ordinance are Satisfied by the Applicants

11.  Section 3(1) of the Ordinance requires an applicant to possess not less than 90% of the undivided shares in a lot before it can make an application.  In these proceedings, each of the units on the Lot was allocated with at least 12.5% of all the undivided shares in the Lot, i.e. more than 10% as specified in Section 4(1)(a) of the Notice. Hence, the applicable threshold is 80%.  I am satisfied that as at the date of application, the applicants had already owned more than 80% of the undivided shares in the Lot. 

12.  The application was also accompanied by a valuation report, prepared by Mr Charles CK Chan (“Mr Chan”) of Savills Valuation and Professional Services Limited, assessing the EUV of each and every units of the Building on vacant possession basis without taking into account of the redevelopment potential of the Lot as at 19 January 2017, which was within 3 months of the application.

13.  I agree that the applicants were entitled to make the application under section 3(1) of the Ordinance.

Determination of the EUV of all Units in the Building

14.  Under section 4(1)(a)(i), if there is a dispute between the parties on the EUV of the units in the Building on the Lot, the Tribunal has to determine the values. 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.  Since the respondent is missing, the Tribunal has to determine whether the EUV of the respondent’s unit as at 19 January 2017 assessed by Mr Chan is not less than fair and reasonable and not less than fair and reasonable when compared with the assessed EUVs of the applicants’ units.

16.  Mr Chan explained his valuation method and the assessment process to arrive at the EUV of each unit in the Building in his valuation report dated 30 March 2017.  In undertaking the assessment, Mr Chan adopted Direct Comparison Method.  The Ground Floor was valued as a shop unit, and was compared with sale transactions of shop units in the vicinity. For the domestic units on upper floors, he had firstly identified a reference unit and compared it with residential sale transactions of similar age in the vicinity.  The remaining domestic units in the Building were then compared with the reference unit.

17.  Mr Chan updated his EUV assessments in his supplemental valuation report dated 24 October 2017.  He said that he had adopted the latest property indices for time adjustment to update his valuation. 

18.  Although Mr Chan had provided in his valuation report and supplemental valuation report his adopted rates for conversion of saleable area and valuation tables to explain how he made the adjustments to the comparables and in the comparison between the domestic reference unit and the remaining domestic units in the Building, he had not stated in the reports the rationale of his adjustments and his adopted adjustment rates in the assessments.  Mr Chan provided the information after an enquiry of the Tribunal at trial only.  I consider that a proof of evidence valuation report for proceedings purpose should have disclosure of valuation details including rationale of each adjustment. Such late provision of valuation details is unsatisfactory in a compulsory sale application.

19.  Nonetheless, in the absence of evidence to the contrary, I accept the revised EUVs as assessed by Mr Chan in the supplemental valuation report, 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 to the value of the applicants’ properties. The EUVs of all units in the Building as at the relevant date of valuation, i.e. 19 January 2017, are appended below: -

Floor	EUV
Ground Floor	$42,510,000
1st Floor including the Flat Roof	$5,820,000
2nd Floor	$5,260,000
3rd Floor	$5,160,000
4th Floor	$5,060,000
5th Floor and the Roof	$5,050,000
Total:	$68,860,000

20.  The total EUV of the Building is $68,860,000.

Whether Development of the Lot is Justified Due to “Age” and/or “State of Repair of the Building

21.  In determining the application, section 4(2) of the Ordinance empowers the tribunal to make an order for sale if it is satisfied that: -

(1)   the redevelopment is justified due to age or state of repair of the Building; and

(2)   the applicants have taken reasonable steps to acquire all the undivided shares in the Lot (including negotiating for the purchase of the undivided shares owned by the respondents on terms that are fair and reasonable).

22.  For the age and state of repair requirements, this Tribunal has taken into consideration the expert evidence of Mr So Kin Shing (“Mr So”), a structural engineer by profession, of K S So & Associates Limited and Mr Benson Wong Sai Ning (“Mr Wong”), a building surveyor by profession, of Benson Wong & Associates Limited adduced by the applicants. Mr So conducted a structural assessment of the Building and prepared a Structural Assessment Report dated 7 August 2017. Mr Wong conducted a condition survey of the Building and prepared a Condition Survey Report dated 21 August 2017. The respondent had not adduced any expert evidence in this connection.  

23.  I accept the unchallenged evidence of the applicants in these respects.  I am satisfied that, based on the evidence of Mr So and Mr Wong, redevelopment of the Lot is justified due to the poor state of repair of the Building and the disproportionate cost of repair and maintenance. Although regular repair could extend the life of the Building, such repair cost will increase over time.  I agree that such maintenance can bring about modest improvement only to the existing condition, and the Building would remain a sub-standard one. I am also satisfied that redevelopment of the Lot is justified due to the age of the Building.  This 44-year old Building is in a poor condition and is approaching to the end of its design working life. Its design has become obsolete over time in many aspects both physically and functionally and failed to conform to modern standards and requirements in many material respects.

Whether the Applicants Have Taken Reasonable Steps

24.  The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of all the undivided shares in the Lot under section 4(2)(b) of the Ordinance. 

25.  The applicants had not made any offer to the respondent for purchasing the respondent’s unit. Ms Ngai submitted that the obligation under section 4(2)(b) of the Ordinance is not a mandatory requirement for the applicants in respect of missing owners[1], and there should have negotiation in the case of a minority owner whose whereabouts are known only.  Ms Ngai further submitted that, since the respondent is missing, the applicants were reasonable in not making any offer to the respondent because no offer to purchase could have reached the respondent and it could never be successful in acquiring the respondent’s unit by negotiation.  I agree.

26.  On the condition that the respondent is missing, I am satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot.

Order for Sale

27.  I am satisfied that redevelopment of the Lot is justified in terms of both age and state of repair of the Building.  I am also satisfied that the applicants had taken reasonable steps to acquire all the undivided shares in the Lot.  In the circumstances, I agree that an order for sale should be granted in favour of the applicants.

Reserve Price for the Auction

28.  In the supplemental report, Mr Chan adopted Residual Method to assess the RDV of the Lot as at 20 October 2017 at $81,200,000. Residual Method is the assessment of land value by deducting the development costs (including construction costs, professional fees, financial costs and profit, etc.) from the estimated gross development value (“GDV”) of the proposed development, as if completed, as at the date of valuation.

29.  Mr Chan opined that the optimum redevelopment on the Lot comprised a 5-storey (excluding cockloft) commercial/residential composite building, served by a common staircase, with retail / commercial unit on ground floor (and attachment of cockloft for storage) and domestic units on 1^st to 4^th floors.  Details of the hypothetical development with the proposed total gross floor area of 349.6 sq m and plot ratio of about 4.35, the GDV assessed (i.e. $905,000/sq m saleable area for shop on ground floor, $226,000/sq m saleable area for storage on cockloft, and an average $228,000/sq m saleable area for domestic units on upper floors), the development costs adopted (i.e. an average $30,309/sq m gross floor area) and the residual valuation were set out in the supplemental report. The residual land value was assessed at $81,200,000, which is equivalent to an accommodation value of about $232,265/sq m gross floor area.

30.  Mr Chan said that he had also attempted to apply Direct Comparison Method to assess the RDV of the Lot, but no relevant comparable was identified.

31.  Similar to the EUV assessments, Mr Chan had not disclosed in the GDV assessments the rational of his adjustments, and the information was subsequently provided after an enquiry of the Tribunal at trial only, which is unsatisfactory.

32.  Nonetheless, in the absence of evidence to the contrary, I accept that the market value of the Lot reflecting its redevelopment potential on its own, i.e. the RDV of the Lot, as at 20 October 2017 is $81,200,000, which should be the reserve price for the auction of the Lot.

Order

33.  By reason of the above, this Tribunal comes to the following decisions: -

(1) This Tribunal is satisfied that redevelopment of the Lot is justified due to the age and state of repair of the Building, and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot including that of the respondent;

(2) 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;

(3) Mr Chow Wing Kin Anthony and Ms Chow Suk Han Anna, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees by the Ordinance in relation to the sale of the Lot and 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 Solicitors and Notaries dated 31 August 2017;

(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 in the draft Particulars and Conditions of Sale to be approved and initialed by the Tribunal; and

(b) the reserve price be set at $81,200,000;

(5) The net proceeds of sale to be apportioned to the undivided share owned by the respondent be held by the Trustees pending final determination of the proceedings in DCCJ 1776/2017;

(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;

(7) Liberty to the applicants, the respondent and the Trustees to apply to the Tribunal for further directions; and

(8) The applicants do publish notices once in a Chinese language newspaper (and in the Chinese language) and once in an English language newspaper (and in the English language) circulating generally in Hong Kong within 21 days from the date of this 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; and

(b) where and the times during which a copy of the Order may be obtained.

Costs

34.  The applicants did not ask for costs.  I make a costs order nisi that there be no order as to costs, and such order be made absolute upon expiry of 14 days from today if no application is made to vary it.