CHU CHOR YIU v. DIRECTOR OF LANDS

LDLR 7/2015

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LANDS RESUMPTION APPLICATION NO 7 OF 2015

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J U D G M E N T

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BACKGROUND

1.  This is an application by the applicant for determination ofcompensation pursuant to section 10(2)(a) of the Lands Resumption Ordinance, Cap 124 (“the Ordinance”). 

2.  The applicant is the former registered owner of the property known as 3^rd Floor, No 608 Shanghai Street, Kowloon (“the Property), which was given 1/7^th equal and undivided share of and in section G of Kowloon Inland Lot No 1684 (“the Lot”).  It is common ground that the building standing on the Lot was a 6-storey tenement block, which shared a common staircase with the adjoining block, No 610 Shanghai Street, and was built in 1963 (“the Building”).  The Property was one of the residential flats on upper floor of the Building and has an effective saleable area of 47.93 m² including a balcony.

3.  By a notice of resumption dated 25 July 2012 and published in G.N. 5234, the Government informed the applicant that the Lot would be resumed and reverted to the Government for implementation of Development Scheme MK/01 by the Urban Renewal Authority at Shanghai Street / Argyle Street, Mong Kok, Kowloon on the expiration of 3 months from the date of affixing of the notice.  The notice of resumption was affixed to the Lot on 3 August 2012.  Thus, upon expiration of the 3-month notice period, reversion took place at midnight on 3 November 2012.

4.  At the hearing, the applicant and the respondent had no dispute that, under section 10(2)(a) of the Ordinance, the basis of compensation in the present proceedings should be the market value of the Property as at the date of resumption, i.e. 3 November 2012, domestic use was then the best use of the Property and the Property should be assessed by direct comparison method and on the basis of vacant possession.

5.  The issue remains to be determined by the tribunal is the compensation for the Property.  The applicant submitted that, after consideration of two respondent’s comparables, the compensation should be $5,033,000, but the respondent submitted that the compensation was assessed at $2,814,000 only.

THE EVIDENCE

6.  The parties had produced the following expert reports and documents on valuation:

Mr Wayne W K Lee (“Mr Lee”) of Wayne Lee & Associates Limited, on behalf of the applicant

(1)   Valuation report dated 26 October 2015;

(2)   Supplementary valuation report dated 28 January 2016;

(3)   Inspection bundle including a route map for property inspection; and

(4)   Transaction records in Fa Yuen Street.

Mr Lai Wah Chi (“Mr Lai”) of AA Property Services Limited, on behalf of the respondent

(1)   Valuation report dated 23 October 2015; and

(2)   Supplementary valuation report dated 26 January 2016.

7.  In addition, the experts had prepared a joint statement of experts on 25 April 2016 (“the Joint Statement”) setting out the areas of agreement and disagreement on the particulars of the Property and the comparables.  The parties together with their experts and I have also inspected the Property and the comparables externally on 20 February 2017.  

AGREEMENTS BETWEEN THE PARTIES

8.  Other than the particulars of the Property, the valuation date, the valuation method and the basis of valuation, the parties agree on the particulars of the comparables, the exclusion of one comparable (i.e. A5[1]) proposed by Mr Lee and the adoption of two comparables (i.e. R3[2] and R5[3]) proposed by Mr Lai.

9.  Pursuant to the Joint Statement, the following two adjustment factors are also agreed, inter alia, between the parties:

a.	Age	:	At the rate of 0.5% per year difference
b.	Time	:	Based on the Private Domestic Price Indices (Classes A, B & C) published by Rating and Valuation Department

DISAGREEMENTS BETWEEN THE PARTIES

10.  Mr Lee proposed 5 comparables (referred to as “A1” to “A5”) and he agreed with Mr Lai to discard A5, whilst Mr Lai proposed 8 comparables (referred to as “R1” to “R8”) including R3 and R5 that were also agreed to be adopted by Mr Lee.   

11.  Other than the selection of comparables, Mr Lee and Mr Lai had disagreements on the adjustments for location (or environment / accessibility), floor, size, and orientation / view (or light and ventilation). The disagreements between the parties are discussed in the paragraphs below.

Selection of Comparables

12.  Mr Lai opposed the use of all comparables proposed by Mr Lee.  The reasons of his opposition are as follows: -

A1[4] & A2[5]	They were sold at the same time to the same purchaser and therefore they should be regarded as one transaction of two adjacent premises.  In addition, since both are situated on 1st floor, their price would usually include value reflecting potential for commercial uses.  They also contain large flat roof at the rear which is of higher value than the factor of 1/6 adopted by Mr Lee.
A3[6]	Similar to A1 & A2, it is situated on 1st floor and its price might include value reflecting potential for commercial uses.
A4[7]	The purchaser who owned other unit in the same building had a special interest in the premises, which could be reflected in the application for sale under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545.  The price should have included the value reflecting the redevelopment potential.

13.  I, with the benefit of site visit together with the parties, agree with Mr Lai that a large number of 1^st floor domestic units in the area have been converted for commercial uses, whereas such conversion is not common for 3^rd floor domestic units.  Hence, I accept that the 1^st floor comparables that would have reflected commercial value are not the relevant comparables in the valuation of the Property being a 3^rd floor domestic unit.  I also agree with Mr Lai that comparables with attachment of proportional large flat roof, which would require an additional and substantial adjustment for ancillary area, are not the best comparables in the subject valuation.  On the condition that there are other relevant comparables, I agree not to adopt A1, A2 and A3 in the valuation.

14.  Mr Chan, counsel for the applicant, contended in the closing submissions that the respondent being the Government cannot benefit from its own neglect in law enforcement.  He said that conversion of domestic units for commercial use is illegal or unauthorized and subject to law enforcement. Under jurisprudential policies, the respondent cannot utilize such illegal or unauthorized conversion to advance its case and avoid or reduce compensation to the applicant, and therefore the tribunal should accept A1, A2 and A3 in the valuation.

15.  I consider that this argument is misconceived.  It is a matter of evidence and valuation to accept or discard a comparable.  Even if the respondent had pointed out an illegal or unauthorized act in the market and had also taken this “fact” in legal proceedings, one cannot conclude that the respondent had allowed such illegal or unauthorized act or the respondent would not take enforcement action.

16.  Both experts agree that A4 has reflected redevelopment potential.  Mr Ng, counsel for the respondent, submitted that the purchaser of A4 who was undergoing amalgamation of property interests for the purpose of redevelopment was a “special purchaser” and therefore

it should be discarded in the subject valuation.  Mr Chan submitted that this purchaser was not a “special purchaser” and its redevelopment potential is comparable to that of the Property.

17.  I disagree that the redevelopment potential of A4 as at the date of transaction is comparable to the redevelopment potential of the Property if any as at the date of valuation.  There is evidence before this tribunal that A4 was then ripe for redevelopment.  This purchaser had purchased other units in the same building around the date of transaction and had also subsequently made application to the Lands Tribunal for sale under the Land (Compulsory Sale for Redevelopment) Ordinance Cap 545[8]. Even if the age and physical states of the Property and the comparable were similar, their respective value reflecting redevelopment potential might be different.  Since there is no evidence that the Property as at the date of valuation was also ripe for redevelopment with redevelopment potential comparable to that of A4, I agree with Mr Lai to discard it in the valuation.

18.  Mr Lee opposed the use of R1, R2, R4, R6, R7 and R8 as comparables in the valuation because of the following reasons: -

R1[9]	Since it had been subdivided into several cubicles, its subdivision would affect the calculation of effective floor area for comparison, and would also pose problems in valuation adjustment for view, orientation, light and ventilation, etc.
R2[10], R4[11] & R7[12]	Being situated on the other side of Nathan Road, this area is very different from the subject area in character.  In addition, since they were embroiled in two “fires” not long ago before their transaction dates, their respective value must have been affected.
R6[13]	Being situated on the other side of Nathan Road, this area is very different from the subject area in character.
R8[14]	Its size is much larger than the size of other comparables.

19.  I disagree that the subdivision of R1 if any would affect its comparison with the Property in terms of effective floor area, view, orientation, light and ventilation.  Although there would have common area in subdivision and each sub-divided unit would have different attributes, the comparison is made with the whole R1 instead of each sub-divided unit if any within R1.  Further, from valuation perspective, subdivision of domestic flats in tenement buildings is not rare in the area, because there is such demand in the market.  I consider that the existence of partitions if any in R1 would not have material effects in the valuation of the Property

20.  Although R8 is relatively large in size, I agree with Mr Lai that it could be adopted for comparison if appropriate adjustment for size is made in the valuation.

21.  Mr Lee said that the characters of R2, R4, R6 and R7 that are located on the other side of Nathan Road are different from the characters of the Property.  In addition, R2, R4 and R7 would have been affected by the two “fires” along Fa Yuen Street too.  Whist Mr Lai said that they are similar to the Property in terms of location with similar transport and shopping facilities and there is no evidence to prove that the “fires” would have affected the transaction prices.

22.  I, with the benefit of site visit together with the parties, note that the living environment around R2, R4 and R7 where has on-street hawker stalls along Fa Yuen Street is different from that of the Property, and R6 is close to these 3 comparables.  However, there is no quantitative evidence to show the differences and whether the differences if any are positive or negative when they are compared with the Property.  Although Mr Lee relied on the said “fires” along Fa Yuen Street to discard R2, R4 and R7 and prepared 5 pairs of transactions to prove his case, his analyses are arbitrary without consideration of other factors such as floor level and size that would affect the transaction prices.

23.  Nevertheless, I also note that, except for R8, the unit rate before adjustments of R2, R4, R6 and R7 are lower than the other Mr Lai’s comparables particularly the common comparables R3 and R5, and their adjusted unit rates as derived by Mr Lai are generally on the low side too.  In the circumstances, although I agree to adopt them in the comparison with the Property, their analyses should be handled with care and different weighting could then be applied to them in the valuation.

Adjustment for Location (or Environment / Accessibility)

24.  Mr Lai proposed nil adjustment for location because the Property and the comparables are located in the same locality with similar accessibility, whilst Mr Lee said that separate adjustments for environment and accessibility should be made in terms of location.  I agree that both environment and accessibility should be considered in the adjustment for location, but there is no universal rule to have 1 combined adjustment or 2 separate adjustments in this connection.  Nevertheless, I agree with Mr Lai that the Property and the comparables have similar accessibility.  Mr Lee had made upward adjustment for accessibility to some comparables but he could not provide persuasive answers in cross-examination.  I accept Mr Ng’s submissions that Mr Lee’s adjustments for accessibility were sometimes unreasonable and contradictory.

25.  Mr Lee proposed upward adjustments for environment to R1, R3 and R8, for which I disagree.  I agree with Mr Lai that they are located in a similar location.  However, as discussed in [22 – 23] above, I consider that the analyses of R2, R4, R6 and R7 should be handled with care and different weighting could be applied to them in the valuation.  Although I accept that in the comparison nil adjustment for location is made to these 4 comparables, it is a test for evaluation only and is not the ruling of this tribunal.

Adjustment for Floor

26.  Mr Lai applied an adjustment rate of 2% per floor to reflect the difference in floor level, whilst Mr Lee adopted a lesser adjustment rate of 1% per floor.  Mr Lee said that a lesser adjustment rate could strike a balance between the unattractiveness of having access via staircase only and the attractiveness of having better privacy and tranquillity on higher floors. 

27.  This is a subjective adjustment. The parties had not provided any quantitative analyses to support their respective case.  Nevertheless, even having considered the two factors presented by Mr Lee, I would prefer the adjustment rate of 2% per floor in the subject valuation. For a tenement building in urban area, I consider that the unattractiveness of having access via staircase only outweighs the attractiveness of having better privacy and tranquillity on high floors.

Adjustment for Size

28.  The adjustment rate for size applied by Mr Lee is 1% per 4 m² and that applied by Mr Lai is 1% per 5 m².  This is also a subjective adjustment, and the effects of the difference is not significant. Having considered the nature of the Property, being a residential flat in a tenement building, I would prefer a relative lower adjustment rate of 1% per 5 m² in the subject valuation.

Adjustment for Orientation / View (or Light and Ventilation)

29.  Mr Lee said that he had taken into account orientation and view in his adjustment for light and ventilation.  He regarded view much the same as light and ventilation.  He also pointed out that the Property had two aspects, one facing Shanghai Street and another facing Hong Lok Street, and therefore adjustment for such benefit should be made accordingly.

30.  Having considered the arguments of the parties, I prefer to adopt the adjustments for orientation and view separately as proposed by Mr Lai.  In fact, they are two different adjustments, and light and ventilation could have been partially reflected in the adjustment for floor or view.  I also agree with Mr Lai that R1 has better view overlooking a garden on the opposite side of Shanghai Street and is not much affected by the Refuse Collection Point cum Public Toilets, and therefore a downward adjustment for view at 5% to R1 is justified.  Further, the view of the Property towards Hong Lok Street which is a narrow street is not much different from the view of the comparables towards service lane. 

31.  However, I do not accept a number of adjustments for orientation proposed by Mr Lai. Strictly speaking, the Property has a facing aspect towards mainly west-southwest instead southwest as described by Mr Lai, which is inferior than those facing mainly east-northeast (i.e. R2, R3, R4 and R7) but is similar to that facing mainly north-northwest (i.e. R8). Accordingly, I consider that nil adjustment for orientation should be made to R1 and R5, which have a facing aspect same as that of the Property, but -2% adjustment instead of +2% adjustment should be made to R2, R3, R4 and R7 and nil adjustment instead of +2% adjustment should be made to R8.  In terms of orientation, R6 that has a facing aspect same as that of the Property should have nil adjustment, but -2% adjustment for view should be made to it to reflect its partial double facing aspects.

VALUATION

32.  Following the agreements between the parties and the above discussions on disagreements, the comparison between the 8 comparables and the Property is listed in the Appendix of this judgment.  The average of the 8 comparables is $57,502/m²; the average of the 2 common comparables (i.e. R3 and R5), which are close to the Property, is $64,675/m²; and the average excluding the Fa Yuen Street’s comparables (i.e. R2, R4 and R7) is $60,850/m².

33.  Since the living environment along Fa Yuen Street that have on-street hawker stalls might be different from that of the Property and there are 5 other comparables, I consider that R2, R4 and R7 could be excluded in the valuation. Further, I consider that the common comparables could weigh heavier than the other comparables.  Hence, the Property could be valued at the adjusted unit rate of $62,500/m², in the midway between the average of the common comparables and the average of the 5 selected comparables.

34.  The then market value of the Property is assessed at $3,000,000 ($62,500/m² x 47.93m² = $2,995,625; say, $3,000,000).

CONCLUSION

35.  I determine the value of the Property should be, for the purpose of section 10(2)(a) of the Ordinance, in the sum of $3,000,000.  

ORDERS

36.  Accordingly, I order that the respondent do pay the applicant compensation for the Property in the sum of $3,000,000.  The matters of professional fees, interest and costs shall be adjourned to a date to be fixed, with liberty to apply for any other ancillary and consequential matters.