SUN FAI INVESTMENT DEVELOPMENT LTD v. CHAN BIN AND OTHERS

LDCS 32000/2020

[2021] HKLdT 74

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 32000 OF 2020

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BETWEEN

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JUDGMENT

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BACKGROUND

1.  This is the applicant’s 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 the Remaining Portion of New Kowloon Inland Lot No 537 (“the 1^st Lot”), section A of New Kowloon Inland Lot No 537 (“the 2^nd Lot”), the Remaining Portion of New Kowloon Inland Lot No 339 (“the 3^rd Lot”), and section A of New Kowloon Inland Lot No 339 and section B of New Kowloon Inland Lot No 299 (“the 4^th Lot”) (the 1^st Lot, the 2^nd Lot, the 3^rd Lot and the 4^th Lot are collectively referred to as “the Lots”), together with 2 buildings erected thereon known as Nos 134 and 136 Yee Kuk Street, Kowloon (“the 1^st Building”), and Nos 138 and 140 Yee Kuk Street, Kowloon (“the 2^nd Building”) (the 1^st Building and the 2^nd Building are collectively referred to as “the Buildings”).

2.  Each of the 1^st Building and the 2^nd Building is a 6-storey (i.e. excluding cockloft attached to ground floor) tenement block served by 2 common staircases. A domestic permit No 231 was issued for the 1^st Building on 30 May 1956 and another domestic permit No 8 was issued for the 2^nd Building on 14 June 1956, granting permission to occupy and use the Buildings for domestic purposes. According to the approved building plans, there are 2 units planned on ground floor (“G/F”) as shops and each of them is attached with a cockloft for non-domestic purpose, and 2 domestic units on each upper floor from 1^st floor (“1/F”) to 5^th floor (“5/F”) in each of the Buildings. Though the 2 buildings are adjoining, they are not interconnected.

3.  The 1^st Lot together with part of the 1^st Building (i.e. No 134 Yee Kuk Street) standing thereon is allocated 6 undivided shares; each floor is given 1 undivided share, making up a total of 6 undivided shares. The 2^nd Lot together with part of the 1^st Building (i.e. No 136 Yee Kuk Street) standing thereon, the 3^rd Lot together with part of the 2^nd Building (i.e. No 138 Yee Kuk Street) standing thereon and the 4^th Lot together with part of the 2^nd Building (i.e. No 140 Yee Kuk Street) standing thereon have the same allocation of undivided shares as that of the 1^st Lot together with part of the 1^st Building (i.e. No 134 Yee Kuk Street) standing thereon.

4.  According to the records of the Land Registry, 1/F of No 134 Yee Kuk Street in the 1^st Building has been sub-divided into 3 subdivided units [i.e. Flat A (1/3 of 1/6), Flat B (1/3 of 1/6) and Flat C (1/3 of 1/6)]; and 1/F of No 136 Yee Kuk Street in the 1^st Building has been sub-divided into 4 subdivided units [i.e. Portion A (1/4 of 1/6), Portion B (1/4 of 1/6), Portion C (1/4 of 1/6) and Portion D (1/4 of 1/6)].

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

5.  The applicant filed a Notice of Application (“NOA’) on 20 October 2020. At the time of filing of the NOA, there were 11 respondents and the applicants owned 5 over 6 (i.e. 83.33%) undivided shares in the 1^st Lot, 5 and 3/4 over 6 (i.e. 95.83%) undivided shares in the 2^nd Lot (i.e. on average 89.58% in the 1^st Building), all undivided shares in the 3^rd Lot, and 5 over 6 (i.e. 83.33%) undivided shares in the 4^th Lot (i.e. on average 91.67% in the 2^nd Building), meeting 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%. Section 3(2) of the Ordinance prescribes that an application under subsection (1) may cover (a) 2 or more lots where the majority owner owns not less than the percentage specified in subsection (1) of the undivided shares in each lot; or (b) 2 or more lots (i) on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings; and (ii) where the average of (A) the percentage of the undivided shares owned by the majority owner in the lot or lots on which one of the buildings stands; and (B) the percentage of the undivided shares owned by the majority owner in the lot or lots on which the other of the buildings stands, is not less than the percentage specified in subsection (1).

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 lot issued with an occupation permit at least 50 years before the relevant date”

9.  Since the occupation permit of the Building was issued in 1956, i.e. more than 50 years before the date of application (i.e. 20 October 2020; the relevant date under the Notice), the applicable percentage is therefore 80%.

10.  I am satisfied that as at the date of application, the applicant owned on average more than 80% of the undivided shares in the 1^st Lot and 2^nd Lot (i.e. the 1^st Building), the 3^rd Lot and 4^th Lot (i.e. the 2^nd Building), and the Lots (i.e. the Buildings). I am therefore satisfied the applicants are entitled to make the present application under section 3 of the Ordinance.

THE REMAINING RESPONDENTS

11.  At trial, the applicant owned all undivided shares in the 1^st Lot, the 2^nd Lot and the 3^rd Lot, and 89.58% (i.e. 5 and 3/8 over 6) undivided shares in the 4^th Lot (i.e. on average 94.79% in the 2^nd Building). The applicant has acquired undivided shares from the 1^st, 2^nd, 3^rd, 4^th, 5^th and 11^th respondents and discontinued the proceedings against them.

12.  The 6^th respondent (“R6”), 7^th respondent (“R7”), 8^th respondent (“R8”), 9^th respondent (“R9”) and 10^th respondent (“R10”) (collectively referred to as “the Remaining Respondents”) remain in the present action, and each of them owns 1/8 of a flat, 5/F of No 140 Yee Kuk Street, in the 2^nd Building.

13.  The Remaining Respondents are not represented and did not appear at trial. The applicant submits that the Remaining Respondents are missing owners.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

14.  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 Buildings, or in the respective buildings, as at 11 September 2020, the valuation date adopted in the application valuation report dated 16 October 2020, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?

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

3) Whether the applicant has taken reasonable steps to acquire all the undivided shares in the Lots, or the respective 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, or the respective lots) for the purpose of auction sale?

15.  Since the application comprises 2 buildings and the applicant asks for orders of a combined sale of the Lots in one auction, the reserved price to be set at the RDV of the Lots as a merged site, and the respective EUV of all units in the Buildings to be adopted for apportionment of the proceeds of sale of the Lots, the tribunal is also required to determine whether the applicant’s suggestions are acceptable.

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING

16.  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.”

17.  The applicant relies on the reports and valuations of Mr Leo Cheung Sing Din (“Mr Cheung”) and Mr Ng Sai Hee (“Mr Ng”) both of Prudential Surveyors (Hong Kong) Limited. Mr Cheung prepared the application report dated 16 October 2020, which assessed the EUV of all units in the Buildings as at 11 September 2020. Mr Ng prepared a supplemental report dated 4 August 2021, which reviewed the EUV as initially assessed by Mr Cheung and assessed the RDV of the Lot as at 1 August 2021. Mr Ng has further prepared an updated report dated 20 September 2021, which assessed the RDV of the Lot as at 20 September 2021, and has also attended the trial as a professional witness.

18.  In the application valuation report, Mr Cheung explained the direct comparison method he adopted and the process of his assessment to arrive at the EUV of each unit in the Buildings. In the supplemental report, Mr Ng confirmed his in principle agreement to Mr Cheung’s views and conclusion as stated in the application report. Nonetheless, Mr Ng has revised the particulars of a shop comparable, revised the typos in an adjustment table and subsequently reviewed the EUV assessment with reference to the latest time index and his internal inspection to some units in the Buildings.

19.  Mr Ng assesses the reference shop unit (i.e. G/F of No 134 Yee Kuk Street) at $171,808 per square meter saleable and the reference domestic unit (i.e. 3^rd Floor of No 134 Yee Kuk Street) at $79,546 per square meter saleable.

20.  I accept the EUV of all units in the Buildings as assessed by Mr Ng, and am satisfied that the value of the unit owned by the respondents is not less than fair and reasonable and not less than fair and reasonable when compared with the value of the applicant’s properties. The EUV of all units in each of the Buildings as at the relevant date of valuation, i.e. 11 September 2020, are appended below: -

The 1^st Building

Address	Floor	Unit	EUV
No 134 Yee Kuk Street	G/F	-	$15,980,000
	1/F	A	$2,200,000
	1/F	B	$2,110,000
	1/F	C	$1,530,000
	2/F	-	$6,020,000
	3/F	-	$5,800,000
	4/F	-	$5,470,000
	5/F	-	$5,080,000
No 136 Yee Kuk Street	G/F	-	$15,750,000
	1/F	A	$1,330,000
	1/F	B	$1,680,000
	1/F	C	$1,490,000
	1/F	D	$1,700,000
	2/F	-	$6,020,000
	3/F	-	$5,740,000
	4/F	-	$5,580,000
	5/F	-	$5,530,000
		Sub-total:	$89,010,000

The 2^nd Building

Address	Floor	Unit	EUV
No 138 Yee Kuk Street	G/F	-	$14,760,000
	1/F	-	$5,850,000
	2/F	-	$5,940,000
	3/F	-	$5,710,000
	4/F	-	$5,380,000
	5/F	-	$5,030,000
No 140 Yee Kuk Street	G/F	-	$14,820,000
	1/F	-	$5,910,000
	2/F	-	$5,880,000
	3/F	-	$5,650,000
	4/F	-	$5,380,000
	5/F	-	$5,030,000
		Sub-total:	$85,340,000

21.  I accept the total EUV of the Buildings is $174,350,000 (i.e. $89,010,000 + $85,340,000).

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

22.  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).”

23.  The applicant 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 Buildings

24.  The applicant adduces expert evidence of Mr Chan Ming Lung (“Mr Chan”), a structural engineer, and Mr So Chi Wang (“Mr So”), a building surveyor of Great Mega Architects & Consultants Limited. Mr Chan conducted a structural survey of the Building and prepared a Structural Assessment Report dated 27 July 2021. Mr So conducted a condition survey of the Building and prepared a Condition Survey Report dated 31 July 2021.

25.  None of the respondents adduced expert evidence to rebut the reports complied by Mr Chan and Mr So.

26.  Having considered the reports of Mr Chan and Mr So, I accept their expert opinion. The Buildings, being erected more than 65 years ago, are in poor condition and have come to the end of their design life. The design of the Buildings has become obsolete over time in many aspects, both physically and functionally, and fails to conform to modern safety standards and statutory requirements.

27.  I am also of the view the Buildings are in poor state of repair and the costs of repair to bring the Buildings to tenantable condition is disproportionate to the costs of redevelopment. Even if repair works are carried out, such works will bring about a modest improvement only to the existing condition of the Buildings and the Buildings will continue remain a sub-standard one.

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

Whether the applicant has taken reasonable steps

29.  Before the filing of the NOA, the applicant has made an offer in writing to the Remaining Respondents and sent a letter by registered post to 5/F of No 140 Yee Kuk Street on 17 June 2020, but this offer letter was undelivered and returned to the applicant by the Hongkong Post. The applicant has also attempted to serve the NOA to the Remaining Respondents on 22 October 2020 by leaving the same at 5/F of No 140 Yee Kuk Street, but there was no response from the Remaining Respondents.

30.  On 7 December 2020, the applicant made an application to the tribunal for dispensing with the service inter alia of the Remaining Respondents. Substituted service of the application on the Remaining Respondents was effected on 18 January 2021 pursuant to the Orders of the tribunal dated 14 December 2020 and 5 January 2021. None of the Remaining Respondents has shown up after the expiration of the 21-day period as specified in the notice.

31.  Since the Remaining Respondents cannot be reached, the applicant submits the applicant has already taken reasonable steps to acquire all the undivided shares in the Lots. I agree.

32.  By reason of the matters set out above, I am satisfied the applicant has taken reasonable steps to acquire all the undivided shares in the Lots.

RESERVE PRICE FOR THE PUBLIC AUCTION

33.  By reason of being satisfied that redevelopment of the Lots is justified and that the applicant has 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 applicant.

34.  Mr Ng assesses the RDV by both direct comparison method and residual method, and he finally adopts the result derived from his residual valuation, which is higher than that derived from direct comparison. In the direct comparison, he makes reference to 6 site transactions, including 3 subject to compulsory sale order and 1 Urban Renewal Authority’s project. Whilst, No 185 Nam Cheong Street of 162.93 square meters is relatively small in size, and Nos 1 – 7 Ki Lung Street close to Nathan Road and Prince Edward Road West occupies a better location and is part of a site assembly project. I have reservation to adopt the site transactions subject to compulsory sale order and of Urban Renewal Authority’s project as comparables and agree to rely on mainly the residual valuation in this instance.

35.  In the updated report, Mr Ng assesses the RDV of the Lots as a merged site, instead of 2 independent sites, as at 20 September 2021. He opines that the optimum development on the Lots comprises a 28-storey commercial / residential composite building with retail units on G/F and 1/F, club house and plant rooms on 1/F, and domestic units from 2^nd to 27^th floor.

36.  Details of the hypothetical development with the net developable site area of 417.48 square meters (i.e. after deduction of service lane of 11.445 square meters), the proposed gross floor area of 3,523.53 square meters (excluding half of the areas for green features that are exempted in calculation) and plot ratio of about 8.44, the gross development value assessed (i.e. on average $240,393 per square meter saleable for retail units on G/F, on average $143,349 per square meter saleable for retail units on 1/F, and on average $224,826 per square meter saleable for residential units on upper floors), the construction cost adopted (i.e. on average $35,431 per square meter gross floor area) and the residual valuation (i.e. development period of 2.5 years, profit at 15% of costs, and interest rate at 4% per annum) are set out in his updated report dated 20 September 2021. Mr Ng assesses the RDV of the Lots at $327,000,000.

RDV of the Lots as at 20 September 2021

37.  Having gone through Mr Ng’s assessment in his updated report, I accept his residual valuation. Although I may not agree with him each and every item in his assessment, I am of the view the overall result is fair and reasonable and reflects the market value of the Lots as at the valuation date.

38.  Based on the valuation of Mr Ng, the Lots as a merged site are assessed at $327,000,000, equivalent to an accommodation value of about $92,805 per square meter (i.e. about $8,622 per square foot), which should be the reserve price for public auction.

SALE OF THE LOTS AS A MERGED SITE AND APPORTIONMENT

39.  From valuation perspective, the value of a merged site, which would release marriage value if any, is generally higher than the aggregate of individual site values of the lots. In addition, by looking at the achievable auction price alone, a higher reserve price would generally not prejudice the interest of minority owners. Hence, subject to a fair and equitable apportionment of the sale proceeds, I agree to assess the RDV on a merged site basis.

40.  Regarding the apportionment, I note basically the two buildings in the Lots are similar and there is no material difference in their building density. In fact, the benefits from marriage value on a merged site basis could outweigh the drawbacks in this regard, if any, on apportionment. In the circumstances, I agree to apportion the sale proceeds in accordance with the respective EUV of all units in the Buildings, which would not prejudice the interest of the Remaining Respondents.

ORDERS

41.  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 the 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 LLP dated 28 July 2021;

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

a) the sale of the Lots as a merged site 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 $327,000,000;

5) The respective EUV of all units in the Buildings as determined by the tribunal be adopted for apportionment of the proceeds of sale of the Lots;

6) The applicant do publish notices once in a Chinese language newspaper (and in the Chinese language) and once in an English newspaper (and in the English language) circulating generally in Hong within 7 days from the date of the sealed judgment informing the 6^th respondent, the 7^th respondent, the 8^th respondent, the 9^th respondent, the 10^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 together by one public auction; and

c) where and the times during which a copy of the Order for sale can be obtained;

7) 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 Buildings 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

8) Liberty to the applicant, the 6^th respondent, the 7^th respondent, the 8^th respondent, the 9^th respondent, the 10^th respondent and the Trustees to apply to the tribunal for further directions.

COSTS

42.  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.