SOUTH CROWN DEVELOPMENT LTD v. CHUNG KI TO (AS ADMINISTRATOR OF THE ESTATE OF CHUNG KOON KOW, DECEASED) AND OTHERS

CAMP 288/2019

[2020] HKCA 188

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 288 OF 2019

(ON AN INTENDED APPEAL FROM LDCS NO 2000 OF 2016)

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BETWEEN

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

1.  This is an application of the 5^th respondent, Harper Property Limited (“R5”), for leave to appeal to the Court of Appeal against the order for sale made by the Lands Tribunal (Deputy District Judge W Y Ho, Presiding Officer of the Lands Tribunal and Mr Alex Ng, Member of the Lands Tribunal) in a judgment handed down on 1 August 2019 (“the Judgment”) in respect of five lots of land in Hung Hom Marine Lot No 1 (“the Lots”) and the five buildings erected thereon (“the Buildings”), under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”).

2.  Leave to appeal was refused by the Lands Tribunal in a decision handed down on 31 October 2019 (“the Decision”).  R5 renewed its application to the Court of Appeal for leave to appeal by a summons filed on 12 November 2019.

3.  R5 lodged a statement in support of its application of 12 pages^[1], with leave granted by the Registrar of Civil Appeals, who also gave leave to the applicant, South Crown Development Limited, to lodge a statement in opposition not exceeding the same length.  R5 also sought leave to lodge a statement in reply to answer new factual matters and new points of law in the statement of opposition.  Leave was given by the Court of Appeal to R5 to lodge a statement of reply only in respect of the new factual matters.

4.  R5’s counsel, Mr Benjamin Chain, sought an oral hearing of its summons for leave to appeal.  Having considered the comprehensive submissions lodged on both sides, we have decided to exercise the power under Order 59 rule 2A(5)(a) of the Rules of the High Court to determine this summons without an oral hearing on the basis of the written submissions before us.

5.  The principles for granting leave to appeal are set out in sections 11AA and 11 of the Lands Tribunal Ordinance, Cap 17.  It is stipulated under section 11AA(1) that subject to subsection (2), no appeal may be made under section 11(2) unless leave to appeal has been granted by the Tribunal or the Court of Appeal. Under section 11AA(6), leave to appeal shall not be granted unless the court is satisfied that (a) the appeal has a reasonable prospect of success; or (b) there is some other reason in the interests of justice why the appeal should be heard.  A reasonable prospect of success means an appeal with prospects that are more than ‘fanciful’ but which do not need to be shown to be ‘probable’ (KNM v HTF, HCMP 288/2011, 7 September 2011, §9).

6.  Section 11(2) provides that subject to section 11AA and the provisions of any Ordinance relating to appeals from the Tribunal, any party to proceedings before the Tribunal may appeal to the Court of Appeal against a judgment, order or decision of the Tribunal on the ground that such judgment, order or decision is erroneous in point of law.

Background

7.  The background to the application in the Lands Tribunal is set out primarily in the Judgment at §§1 to 25.  For present purpose, the following matters may be noted.

8.  On 31 March 2016, the applicant filed a notice of application to the Lands Tribunal for an order for sale of all the undivided shares of and in the Lots with the Buildings thereon.  At that time, the applicant owned more than the threshold of 80% of the undivided shares in the Lots required for buildings aged 50 years or more^[2], and was entitled to make the application under the Ordinance.

9.  Under section 4(2)(b) of the Ordinance, the majority owner is required to establish to the satisfaction of the Tribunal it 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)”.

10.  The applicant had made four offers to all respondents to acquire their respective units^[3] – on 11 March 2016, 21 March 2018, 21 August 2018 and 18 April 2019.  The trial commenced in the Tribunal on 6 May 2019.

11.  Since the filing of the notice of application, the applicant acquired further undivided shares from 18 respondents and discontinued the proceedings against them.  Among them were R16, R17 and R19. Shortly before the commencement of the trial, the applicant settled all its disputes with these three respondents and entered into a sale and purchase agreement with each of them, by which R16, R17 and R19 sold their respective units to the applicant at certain prices (“the Settlement Prices”). In respect of the units owned by R16 and R19, there were two actions in the High Court in which the applicant claimed against each of them for specific performance under previous sale and purchase agreements.  Those actions in the High Court were resolved by consent^[4].

12.  As at the last day of the trial in the Tribunal in May 2019, seven respondents remained in the proceedings.  Of the seven, five were represented by Mr Chain and R5 was among them.  These five respondents all relied on the findings of a valuation expert instructed by three of them, Mr Chan Yat Hei.

13.  The applicant adduced evidence from a building surveyor and a structural engineer who opined that redevelopment of the Buildings is justified and that repairs would not be economically viable.  The remaining respondents did not adduce expert evidence to rebut the applicant’s experts.  The Tribunal accepted that the redevelopment of the Lots is justified due to age and/or state of repair of the Buildings in accordance with section 4(2)(a) of the Ordinance.

14.  As for the existing use value (“EUV”) of all the units in the Buildings assessed in accordance with Part 1 of Schedule 1 of the Ordinance, there was agreement between Mr Chan Yat Hei and the applicant’s valuation expert.  The agreed EUVs were accepted by the Tribunal as proper^[5].  Hence, there was no dispute over the parties’ respective shares in the proceeds of sale of the Lots, in the event of a sale by public auction pursuant to an order for sale of the Lots^[6].

15.  There were three issues in contention before the Tribunal:

(1) Whether the applicant had 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?

(2) 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 the auction sale?

(3) What is the proper approach to be taken when assessing the “redevelopment potential” referred to in §2(a) of Schedule 2 of the Ordinance in setting the reserve price?

16.  On the third day of the trial^[7], the five respondents represented by Mr Chain made an offer to the applicant to settle the proceedings.  The offer for the applicant to purchase these respondents’ units was based on the Settlement Prices.  The offer amounts were calculated by dividing the purchase price of the units held by R16, R17 and R19 by the EUV percentage of the respective units, and then multiplying the figure by the EUV percentage of the respective units of the five respondents to arrive at an ultimate figure. This offer was rejected by the applicant on the same day^[8].

17.  Mr Chain argued that section 4(2)(b) requires the offer made by the applicant to be “fair” and “reasonable” and by failing to make an offer to the five respondents based on the Settlement Prices in the manner as calculated above, the applicant had not treated these respondents in the same manner as it had treated R16, R17 and R19 and had acted unfairly towards the five respondents.  He contended that the Settlement Prices were a true reflection of the market value of the respective units of R16, R17 and R19 and should be used as a comparison figure in determining whether the offers made to the five respondents were fair.

18.  The Tribunal was not persuaded that the Settlement Prices were a true reflection of the market values of the respective units of R16, R17 and R20, given the circumstances under which the sale and purchase agreements were signed^[9]. It did not accept the applicant’s failure to accept the offer of the five respondents to be unfair, in light of the fact that the offer was made more than half way into the trial and substantial legal costs had already been incurred by then^[10]. Having reviewed the steps taken by the applicant to acquire the units of the remaining respondents, the Tribunal accepted that the four offers made to the seven remaining respondents including R5 were fair both in terms of quantum and procedure^[11]. The Tribunal found that the applicant’s offers fell within a range of what may broadly be regarded as fair and reasonable, citing Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578 at §§33 and 36^[12], and was satisfied that the applicant took reasonable steps to acquire all the undivided shares of the Lots^[13].

19.  Mr Chan Yat Hei and the applicant’s valuation expert agreed to value the Lots as a composite site instead of five independent sites and both adopted the residual method to assess the RDV^[14]. After considering the two experts’ assessments, the Tribunal assessed the RDV of the Lots at $2,137,000,000, ie about $12,038 per sq ft, and decided that this should be the reserve price for the auction of the Lots^[15].

20.  Mr Chain submitted that the approach adopted in the majority of compulsory sale cases of assessing the RDV and setting the reserve price on the assumption that the full redevelopment potential will be realized by way of public auction is not correct and should be overhauled.  He contended that the full redevelopment value of the site cannot be realized at the public auction because the auction price is manipulated by the majority owner, and minority owners or outsiders have little bargaining power to influence the ultimate transaction price.  He asked the Tribunal to take a “broad brush approach” and to consider whether the assessment of the reserve price would be different if the Tribunal were free to order the site to be sold by way of tender^[16].

21.  The Tribunal declined to depart from the traditional approach, in the absence of any workable theory provided by Mr Chain or the respondents’ expert^[17].  It rejected the suggestion of considering the reserve price on the assumption that the sale of the Lots could be conducted by way of tender, as it is inappropriate to speculate on a valuation based on a method not consistent with that which is mandated in section 5(1)(a) of the Ordinance, which dictates that the Lots should be sold by public auction where there is a missing owner^[18].

22.  The Tribunal made the order on 1 August 2019 for sale by public auction. Pursuant thereto, the Lots were sold by public auction on 17 September 2019 at the hammer price of $2,137,000,000, which was the reserve price set by the Tribunal, with the applicant as the successful bidder (apparently the sole bidder).  The sale was completed on 18 October 2019^[19].  R5 did not apply for a stay of execution of the order for sale, having reached an agreement with the applicant on their rights and liabilities in the event that leave to appeal is granted to R5 and its appeal succeeds^[20].

23.  The Tribunal handed down the Decision on 31 October 2019 refusing leave to appeal. R5 renewed its leave application to the Court of Appeal on 12 November 2019.  The grounds of appeal annexed to R5’s statement in support are the same as those considered in the Decision.

The grounds of appeal in the intended appeal

24.  There are five grounds of appeal. They may be divided into two groups. The first group (grounds 1 and 2) raises the contentions that the Tribunal erred in failing to hold that the Settlement Prices were a true reflection of the market values of the respective units of R16, R17 and R19^[21] and in failing to hold that the applicant had treated R5 unfairly and had failed to negotiate for the purchase of its property on terms that were fair and reasonable.

25.  The second group (grounds 3 to 5) deals with the contentions that the Tribunal erred in refusing to adopt a more broad-brush approach in assessing the redevelopment potential of the properties, in particular by considering the reality that in almost all cases of compulsory sale, it is not a true sale by public action but a compulsory purchase by the applicant developer at the reserve price fixed by the Tribunal; that there was no or no sufficient statutory basis for the Tribunal to assess the redevelopment potential “by attempting to value the future would-be redevelopment as if it were in existence at the date of trial, by direct comparables and making every minute adjustment down to almost each and every unit”; and that the Tribunal erred in holding it is not in any position to address any grievance about the public auction system mandated in the Ordinance.

26.  Central to the contentions in all the above grounds of appeal is the proposition that the Settlement Prices should be used as a comparison figure or an indication of the market value, in determining whether the offers made by the applicant to R5 were “reasonable and fair” (section 4(2)(b)) and in setting a reserve price in making an order for sale by public auction (section 5(1)(a))^[22].

27.  Mr Chain raised an additional contention in R5’s supporting statement^[23] that the Tribunal had failed to have regard to merged sites/marriage value in assessing the RDV and this should be considered by the Court of Appeal.  He submitted that those decisions of the Tribunal^[24] which held that it is not permissible to consider merged sites/marriage value by virtue of §2(a) of Schedule 2 of the Ordinance are against all principles of valuation law and that leave to appeal had been granted on this point in another case but the appeal was not proceeded with^[25].  This contention did not feature in R5’s draft grounds of appeal.

28.  We agree with Ms Nancy Ngai for the applicant it is not open to R5 to raise this point, as this was not in issue before the Tribunal and was contrary to how the proceedings were conducted below.  The applicant had offered to purchase all the remaining respondents’ units at prices calculated on the basis that all five Lots were to be redeveloped as an amalgamated site^[26].  The applicant brought a single application seeking an order of the combined sale of all the Lots as an amalgamated site in one public auction and at a reserve price equivalent to the RDV of the amalgamated site, which would be generally higher than the aggregate of the individual site values of the Lots^[27].  None of the remaining respondents took issue on the propriety of the application for an order for sale being based on a merged site^[28].

29.  We turn to consider the two groups of draft grounds of appeal.

Grounds 1 and 2

30.  Mr Chain submitted that the Settlement Prices are on their face the market price of the properties of R16, R17 and R19, being the prices the applicant was willing to pay and must be indicative of how the applicant valued the redevelopment potential.  The applicant’s witness did not elaborate on the “variety of factors” considered by the parties in agreeing on the Settlement Prices.  The Tribunal only referred to the element of costs incurred in the proceedings in concluding that these prices did not reflect the true market value.  It did not take into account that the applicant was required to prove its case in any event and the usual costs order is that the developer would pay the costs of the minority owners irrespective of the outcome in the absence of unreasonable conduct on the part of the minority (Good Faith Properties Ltd v Cibean Development Co Ltd [2014] 5 HKLRD 534).  The applicant did not even make a counter offer that it was willing to purchase R5’s unit using the calculation based on the Settlement Prices less any additional costs incurred after the commencement of trial.

31.  Apart from complaining about the quantum of the offer which fell short of the level of the Settlement Prices, R5 contended that the applicant did not deal with it in an “even-handed” manner and there was procedural unfairness in that the applicant dealt with R5 differently from R16, R17 and R19 without any or any sufficient basis.  Irrespective of whether the Settlement Prices were a true reflection of the market value of the units of R16, R17 and R19, the applicant ought to make the same offer to R5, in fairness to R5.  Mr Chain also submitted that the Tribunal had conflated the complaint about quantum level with procedural unfairness. 

32.  The Tribunal was clearly aware that the question whether the terms of an offer in the context of section 4(2)(b) are fair can be judged on two levels, procedural fairness and the quantum of the offer, and understood Mr Chain’s main complaint to be on a quantum level^[29] (that also seems to be his position in this application).  We do not accept that the Judgment had conflated the complaint about quantum level with procedural unfairness.  The Tribunal noted that it has not seen any evidence to indicate that the four rounds of offers made to all respondents were “procedurally unjust, biased or partial in any way”^[30].

33.  It is pertinent to note that we are concerned with the requirement in section 4(2)(b), which must be satisfied before an order for sale can be made.  The position here is that the order for sale was made and the Lots had been sold by public auction pursuant to the order.  Insofar as grounds 1 and 2 seek to challenge whether the requirement in section 4(2)(b) was satisfied and whether the order for sale could have been made in this instance, the appeal in relation to this must be academic.  The court should not pronounce on abstract questions of law when there is no living issue and no dispute to be resolved (Ainsbury v Millington [1987] 1 WLR 379 at 380E to G, 381C).

34.  We have borne in mind that challenge is made to the quantum level (that the Settlement Prices were a true reflection of the market values of the respective units of R16, R17 and R19) not merely for the purpose of showing that the requirement in section 4(2)(b) was not satisfied (which is a dead issue) but also for showing that the reserve price was inappropriate. In that respect, there may still be a dispute to be resolved, as R5 is apparently dissatisfied with the amount of sale proceeds which it is entitled to receive from the public auction and has reached a settlement with the applicant on their rights and liabilities^[31] in the event its intended appeal is successful.

35.  The Tribunal was not persuaded that the Settlement Prices were a true reflection of the market price of the units of R16, R17 and R19. Two reasons were given in the Judgment.  First, the prices in the sale and purchase agreements were not the prices of ordinary transactions for sale and purchase but were reached as a settlement between the parties before the commencement of the trial hearing^[32]. The Tribunal took into account the circumstances under which these sale and purchase agreements were signed^[33]. Second, the Tribunal accepted the evidence of the applicant’s witness Ms Lui Wing Yan, who confirmed that the purchase price of the respective units reflected a variety of factors considered by the parties and cannot be a true reflection on the value of the property itself^[34].

36.  As we have mentioned earlier, there was past litigation of R16 and R19 with the applicant in the High Court, which was resolved by consent, so that would probably have formed part of the parties’ considerations in entering into the sale and purchase agreements by way of settlement.  Mr Chain made elaborate submissions on the terms of the orders in the High Court actions, pointing out that the orders did not require the applicant to re-assign the properties to R16 and R19, that different provisions were made as to costs in respect of R16 and R19, that it is not known if the Settlement Prices included the element of costs in the High Court actions.  We do not think these submissions are to the point. As Ms Lui had testified, the applicant agreed to the disposal of the High Court actions as stated in the orders and re-assigned the properties to R16 and R19 because the applicant did not want the High Court actions to cause delay to the proceedings in the Lands Tribunal^[35], the issue of costs in the High Court action vis-à-vis R16 had yet to be resolved^[36], and she was clear that as a result of the sale and purchase agreements reached before trial all the disputes with R16 and R19 were completely resolved^[37].

37.  An appeal from the Lands Tribunal must be on the ground of an error in a point of law (section 11(2) of Cap 17).  Of course if findings of fact made by the Tribunal were not supported by evidence, such findings would also be erroneous in point of law (Tam Yuk Ha v Chiu Chuk Fan [2010] 2 HKLRD 1168 §5). However in light of the matters set out in the preceding paragraph, it could not be said in the present case that the Tribunal’s finding the Settlement Prices were not a true reflection of the market price of the units of R16, R17 and R19 has no or no sufficient evidential basis.

38.  Furthermore, the notion whether the offers made to R5, which fell short of its calculation based on the Settlement Prices, were on terms that are fair and reasonable, is a matter of fact and judgment (Good Faith Properties Ltd v Cibean Development Co Ltd §6).  As stated by Ribeiro PJ in Capital Well Ltd v Bond Star Development Ltd at §33, the Tribunal does not itself arrive at any conclusion as to what figure represents the correct valuation, it merely needs to be satisfied that on the evidence available the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question, and it is obviously necessary to recognize there will often be differences of opinion on that matter.

39.  For all the above reasons, we do not think there are reasonable prospects of success for grounds 1 and 2.

Grounds 3 to 5

40.  Mr Chain pointed out that the only statutory criterion in §2(a) of Schedule 2 is “the redevelopment potential”, the assessment of which is prima facie not a valuation exercise and not an end by itself but merely a means to enable the Tribunal to set a reserve price.  He referred to Land Compensation & Valuation Law in Hong Kong (4^th ed) by Gordon N Cruden and Liza Jane Cruden at §7.51, in which the authors are critical of the present statutory auction system because of the potential unfairness to an unwilling private owner and expressed support for a review of the legislation (at footnote 81).  The relevant passage reads as follows:

“A reserve price, if properly valued provides some protection for the minority owner. An auction where more than one bidder participates is usually an accurate indicator of market value. Those auctions may achieve sales above the reserve price, which is the lowest price likely to be accepted by the vendor. An auction under the Ordinance is significantly different. The majority owner tends to be the sole bidder. Unsurprisingly the sole bid will not be higher than the reserve price. In practice, the reserve price rather than being the minimum becomes the maximum sale price. The Tribunal fixing of the reserve price is therefore particularly important. If not an accurately assessed market value it risks the sale price being less than fair and reasonable when compared to the market value assessed in the application.”

41.  Grounds 3 to 5 in the grounds of appeal made no mention of the Settlement Prices.  But it is clear from R5’s supporting statement^[38] that its contention is that as the Settlement Prices were a true reflection of the market values of the respective units of R16, R17 and R19, they should impact on the determination of the redevelopment potential for the purpose of setting the reserve price.  Mr Chain drew attention to the fact that the reserve price set by the Tribunal turned out to be much lower than the Settlement Prices and the final offer the applicant made to R5, and criticized the reserve price as divorced from reality.  He submitted that in assessing the redevelopment potential, no one knows better than the developer and its willingness to pay a certain price (the Settlement Prices in this instance) is the best indicator.  On the robust approach he advocated, there is no need to attempt to arrive at an almost precise present value of the optimal hypothetical redevelopment on the residual method and make minute adjustments on every single aspect.

42.  As for the Tribunal’s remarks that he did not put forward any alternative method of valuation that is workable or viable, and no expert evidence to support his alternative approach, Mr Chain repeated his closing submissions to the Tribunal:

“87. The Tribunal will have regard to the site (including of course its attributes, surroundings and zoning etc which should not be controversial), the identity of the applicant/developer (if known), its related activities (including its interests and activities in the neighbourhood, which is a matter for evidence), all its on site offers and purchases (which are matters of record), and expert evidence adduced by the parties on e.g. the appropriate type of redevelopment, the approximate (present) unit price of commercial/domestic unit (as the case may be). If this is the correct approach, in most cases the Tribunal should consider appointing an independent valuer to assess redevelopment potential.

88. The Tribunal may (not necessary will) even have regard to the general economic outlook, and based on its own expert knowledge, come to a broad figure, fully aware of the fact that any “valuation” of the future involves foresight/guesswork.

89. As a cross-check, the Tribunal might want to ask itself the question: “had the Tribunal’s hand not been tied, and is free to Order, say, a sale by tender, how the applicant developer is likely to behave bearing in mind its past efforts?”

90. Also armed with the knowledge of what (almost inevitably) happened at public auctions held pursuant to an order made by the Tribunal, the Respondents submit the Tribunal might in an appropriate case err on the high side.”

43.  It is important to bear in mind that behind all the criticism levied at the valuation methodology of the Tribunal is the proposition that the Settlement Prices should be used as the basis for assessing the redevelopment potential and setting the reserve price.  The Tribunal had taken the figures into account and found that they were not a true reflection of the market value of the properties of R16, R17 and R19 and could not be utilized as meaningful comparison figures^[39]. As there is no reasonable prospect of success of impugning this finding, that should be the end of the intended appeal as the court should not engage in theoretical discussion of valuation methodologies when the alternative approach or approaches as advocated would not have led to the adoption of the Settlement Prices as suitable comparison figures. 

44.  This is not a suitable case for deciding the appropriate methodology in assessing the redevelopment potential for setting a reserve price. If this point is to be pursued seriously, proper groundwork should be laid for this in the proceedings below.  R5 and the other respondents represented by Mr Chain were all along unrepresented until the first day of the trial^[40].  It would not do to raise in the final submission at the trial that the Tribunal should appoint an independent valuer to assess the redevelopment potential using the various factors as put forward by counsel.

45.  The Tribunal cannot be criticized for refusing to depart from the methodology that has long been accepted by other panels of the Tribunal and the expert witnesses that have come before it as the proper approach, in the absence of any expert evidence to demonstrate the workability and viability of the alternative approach proposed by counsel^[41].

46.  We do not think there are reasonable prospects of success for grounds 3 to 5.

Conclusion and costs

47.  We decline to give leave to appeal.

48.  As the application is wholly without merit, we further order pursuant to Order 59 rule 2A(8) that no party may under rule 2A(7) request the determination to the considered at an oral hearing inter partes.

49.  Costs of this application should follow the event.  We have considered the applicant’s statement of costs for summary assessment.  The amount claimed is $262,679,80, of which $200,000 is for counsel fee. We bear in mind that the same legal team was engaged in the leave application before the Tribunal and the grounds of appeal are the same.  The costs for preparing the statement of costs are disallowed^[42]. We reduce the amount of reasonable costs to $201,079.80.

50.  The costs order and summary assessment are in the nature of orders nisi. They will be made absolute if no application for variation is made by any party within 14 days of the handing down of this judgment.