CENTURY TREASURE LTD AND ANOTHER v. OR PUI KWAN AND OTHERS

LDCS 4000/2021

[2023] HKLdT 55

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 4000 OF 2021

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BETWEEN

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JUDGMENT

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BACKGROUND

1.  This is the applicants’ 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 Inland Lot No 4513, Inland Lot No 4514 and Inland Lot No 4515 (“the Lots”) together with a building erected thereon known as Sei Li Building, Nos 3 & 5 Lai On Lane and Nos 21, 22, 23 & 24 Chiu Kwong Street, Hong Kong (“the Building”).

2.  The Building is a 7-storey tenement block served by 2 common staircases. According to the approved building plans, there are 2 shop units planned on lower ground floor abutting onto Lai On Lane, 4 shop units planned on ground floor abutting onto Chiu Kwong Street, 3 office units planned on 1^st floor and 4 residential units planned on each of 2^nd floor to 5^th floor.

3.  Occupation permit No H34/71 was issued for the Building on 24 February 1971, granting permission to occupy its lower ground floor as 2 shops for non-domestic use, ground floor as 4 shops for non-domestic use, 1^st floor as 3 offices for non-domestic use, and 2^nd floor to 5^th floor as 4 tenements per floor for domestic use.

4.  According to the records of the Land Registry, the Lots together with the Building standing thereon is divided into 35 equal and undivided 1/35^th parts or shares in the Lots (each 1/35^th parts or shares called “1 undivided share” for easy reference herein). Each of the 2 units on lower ground floor is given 3 undivided shares, each of the 4 units on ground floor is given 2 undivided shares, each of Unit A and Unit C on 1^st Floor is given 2 undivided shares, Unit B on 1^st Floor and each of the 16 units from 2^nd floor to 5^th floor (including flat roof attached to each of the units on 2^nd floor and roof attached to each of the units on 5^th floor) is given 1 undivided share, making up a total 35 undivided shares.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

5.  At the time of filing of the Notice of Application (“NOA”) on 31 March 2021, there were 7 respondents and the applicants owned 80% (i.e. 28 out of the total 35) of the undivided shares in the Lots, the minimum threshold 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%.

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 on 24 February 1971, i.e. more than 50 years before the date of application (i.e. 31 March 2021; the relevant date under the Notice), the applicable percentage is therefore 80%.

10.  We are satisfied that as at the date of application, the applicants owned not less than 80% of the undivided shares in the Lots. We are therefore satisfied the applicants are entitled to make the present application under section 3 of the Ordinance.

THE REMAINING RESPONDENTS

11.  The applicants have subsequently amended the NOA on 14 October 2022 pursuant to the Order of the tribunal. At the time of trial, the applicants still owned 80% (i.e. 28 out of the total 35) of the undivided shares in the Lots.

12.  The following 7 respondents (except otherwise stated, the reference to “the respondents” in the discussion below refers to these remaining respondents) remain in the present action: -

Respondent		Premises
1st Respondent	(“R1”)	Flat A on 2nd Floor including Flat Roof; Flat B on 2nd Floor including Flat Roof; Flat C on 2nd Floor including Flat Roof; and Flat C on 4th Floor
2nd Respondent	(“R2”)	Flat A on 4th Floor
3rd Respondent	(“R3”)	Flat B on 3rd Floor
4th Respondent	(“R4”)	Flat D on 2nd Floor including Flat Roof
5th Respondent	(“R5”)	Any interest, if at all, in R4’s premises
6th Respondent	(“R6”)	Any interest, if at all, in R4’s premises
7th Respondent	(“R7”)	Any interest, if at all, in R4’s premises

13.  R2, R5 and R6 are unrepresented and did not appear at trial.

14.  R1 is represented by Mr Benjamin Chain (“Mr Chain). R4 and R7 are represented by Mr Matthew Choi (“Mr Choi”). R3 was also represented by Mr Choi at the commencement of trial, but later R3 came into an agreement on sale and purchase of R3’s premises, and it was ordered by consent on 3 November 2022, the 4^th day of the trial, that R3 do have leave to withdraw his Notice of Opposition and evidence filed on his behalf. Completion of the sale of R3’s undivided share in the Lots to the 1^st applicant took place on 1 December 2022, and the applicants filed an application on 18 April 2023 to discontinue the proceedings against R3, which was approved by the tribunal on 20 April 2023. At the time of judgment, the applicants own 82.857% (i.e. 29 out of the total 35) of the undivided shares in the Lots.

15.  R4, R5, R6 and R7 are siblings. R7 is and was mentally incapacitated at all material times. R4 has been appointed the Committee of R7 under the Mental Health Ordinance and by a Consent Order dated 11 October 2022, the tribunal appointed R4 in her capacity as the Committee of the Estate of R7 to represent R7 in these proceedings.

16.  Flat D on 2^nd floor was originally owned by the mother of R4, R5, R6 and R7, who had passed away in 2005. Their father as the administrator of the estate of the mother assigned Flat D on 2^nd Floor to R4 at nil consideration by an Assignment dated 29 January 2010. R5, R6 and R7 as siblings of R4 and beneficiaries to the estate of their mother may be entitled to apply for the avoidance of the assignment of R4’s premises and hence they are joined as party. Further, by a Deed of Family Arrangement dated 25 February 2019, R4, R5 and R6 agreed inter alia that R4 shall take care of R7 for life, failing which part of the proceeds of sale of Flat D on the 2^nd Floor may be applied for the maintenance of R7 as directed by the Court; and R5 & R6 declared that they did not own any interest in Flat D on the 2^nd Floor and shall unconditionally sign any consent or document to facilitate the sale of Flat D on the 2^nd Floor by R4.

17.  Nonetheless, the applicants joined R5, R6 and R7 to cover any argument that they are the minority owners.

18.  R1, R4 and R7 dispute the valuation of the Lots in the application. However, only R1 and R3 have jointly appointed Mr CW Wong of Grandmax Surveyors Limited as their valuation surveyor. R1 and R3 have also jointly appointed Mr So Chi Wang Paul (“Mr So”) of Great Mega Architects & Consultants Limited as their building expert on site classification upon development. Nevertheless, as discussed in §14 above, R3 had already withdrawn his evidence on 3 November 2022.

19.  R1 has also disputed in law on (i) whether in setting the reserve price, the tribunal may take into account the redevelopment potential of the Lots on the basis that the Lots can, or in this case will be redeveloped together with the adjoining lots (“Lee On Lots”) (i.e. Inland Lot No 4509, Inland Lot No 4510, Inland Lot No 4511 and Inland Lot No 4512), which are wholly owned by the applicants. In the event the answer is in the affirmative, R1 argues about (ii) how the tribunal will then “value” such “potential”; and arising therefrom is the question (iii) how the tribunal should approach the term “redevelopment potential”.

20.  The applicants are represented by Mr Mok Yeuk Chi (“Mr Mok”) and Ms Julia Au. They have appointed Mr Charles Chan of Savills Valuation and Professional Services Limited (“Savills”) as their valuation surveyor, Mr CM Wong of CM Wong Associates Limited as their structural engineer, Mr Benson Wong of Benson Wong & Associates Limited as their building surveyor, and Mr Ng Chi Ho (“Mr Ng”) of Handi Architects Limited as their building expert on site classification.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

21.  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 Building as at 25 January 2021, the valuation date adopted in the application valuation report dated 31 March 2021, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?

(2) Whether the redevelopment of the Lots is justified due to age and/or state of repair of the Building 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 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 for the purpose of auction sale?

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING

22.  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.”

23.  On the 4^th day of trial, the parties have agreed on the EUV of all units in the Building. Having reviewed the reports of Mr Charles Chan and Mr CW Wong and their joint agreements, we accept the EUV as agreed by them. We consider that in the latest agreement on the EUV the value of the minority owner’s property is not less than fair and reasonable, and not less than fair and reasonable when compared with the value of the majority owner’s property.

EUV of All Units in the Building

24.  The EUV of all units in the Building as at the relevant date of valuation, i.e. 25 January 2021, and adopted by this tribunal are appended below: -

Floor	Unit	EUV	Ratio
LG/F	Flat A	$15,475,000	7.925%
LG/F	Flat B	$16,700,000	8.552%
G/F	Flat A	$12,180,000	6.238%
G/F	Shop B	$15,300,000	7.835%
G/F	Flat C	$15,730,000	8.056%
G/F	Shop D	$14,745,000	7.551%
1/F	Flats A, B & C	$25,398,500	13.007%
2/F	Flat A and Flat Roofs	$5,667,000	2.902%
2/F	Flat B and Flat Roof	$5,065,000	2.594%
2/F	Flat C and Flat Roof	$5,316,500	2.723%
2/F	Flat D amd Flat Roof	$5,598,500	2.867%
3/F	Flat A	$5,141,000	2.633%
3/F	Flat B	$4,772,000	2.444%
3/F	Flat C	$4,390,000	2.248%
3/F	Flat D	$5,105,000	2.614%
4/F	Flat A	$4,952,000	2.536%
4/F	Flat B	$4,678,500	2.396%
4/F	Flat C	$4,486,500	2.298%
4/F	Flat D	$5,091,000	2.607%
5/F	Flat A and Roof A	$5,026,000	2.574%
5/F	Flat B and Roof B	$4,488,000	2.298%
5/F	Flat C and Roof C	$4,881,000	2.500%
5/F	Flat D and Roof D	$5,080,000	2.602%
	Total:	$195,266,500	100%

25.  We accept that the total EUV of the Building is $195,266,500.

SECTION 4(1) & 4(2) OF THE ORDINANCE - JUSTIFICATION AND REASONABLE STEPS

26.  Section 4(1) set out the provisions for determination of an application under the Ordinance. Section 4(1) provides as follows: -

“(1) Subject to subsection (2), the Tribunal shall determine an application under section 3(1) by—

(a) first—

(i) if any minority owner of the lot the subject of the application disputes the value of any property as assessed in the application, hearing and determining the dispute;

(ii) in the case of any minority owner of the lot who cannot be found, requiring the majority owner of the lot 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;

(b) second—

(i) making an order that all the undivided shares in the lot the subject of the application be sold for the purposes of the redevelopment of the lot; or

(ii) refusing to make such an order; and

(c) …”

27.  The jurisdiction of this tribunal to order all the undivided shares in the Lots be sold derives from section 4(1)(b)(i). Section 4(1) does not set out how to exercise this jurisdiction to grant an order for sale. But it is clear that this jurisdiction is subject to provision in subsection (2). 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).”

28.  It is trite that, reading these 2 provisions together, the applicants must satisfy this tribunal the above statutory requirements are met, in particular that the development of the Lots is justified due to age and/or state of repair of the Building, and the majority owner has taken reasonable steps to acquire all the undivided shares in the Lots; otherwise, an order for compulsory sale would not be granted.

Whether development of the Lot is justified due to the age and/or state of repair of the Building

29.  None of the respondents adduced expert evidence to rebut the reports complied by Mr CM Wong and Mr Benson Wong.

30.  Having considered the reports of Mr CM Wong and Mr Benson Wong, we accept their expert opinion. The Building, being erected more than 52 years ago, is in poor condition and has come to the end of its design working life. The design of the Building has become obsolete over time in many aspects, both physically and functionally, and fails to conform to modern safety standards and statutory requirements.

31.  We are also of the view that the Building is in poor state of repair and the costs of repair to bring the Building to tenantable condition is disproportionate to the costs for constructing a new similar superstructure. Even if repair works are carried out, such works will bring about a modest improvement only to the existing condition of the Building and the Building will continue remain a sub-standard one.

32.  By reasons of the matters set out above, we are satisfied the redevelopment of the Building is justified.

Whether the applicants have taken reasonable steps

33.  The applicants have made the following offers to the respondents respectively: -

Respondent	1st Offer on 1 Mar 21	2nd Offer on 21 Oct 22
R1	$29,088,000	$31,281,000
R2	$7,196,000	$7,912,000
R4, R5, R6 and R7	$7,747,000	$8,499,000

34.  In assessing the reasonableness of the offers, we have considered the case of Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. In particular, we have considered paragraphs 33 and 36 of the judgment in which Ribeiro PJ stated: -

“33. In making that assessment the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It 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. It is obviously necessary to recognise that there will often be differences of opinion on that matter……” [our emphasis]

“36. ...... We are of course not suggesting that it is necessary for the offer to “beat” the valuation as if it were a payment into court. What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site……”

35.  The 1^st offers, made before the application, were accompanied with the assessment of Savills and had reflected the pro-rata share of the Redevelopment Value (“RDV”) of the Lots as at 25 January 2021. The 2^nd offers, made after the application, were based on the RDV of the Lots as at 19 September 2022 assessed by Savills. Mr Mok submits that the applicants have taken reasonable steps in acquiring all the undivided shares in the Lots. We agree.

36.  We do not have to adjudicate upon the dispute about the correct valuation test following Capital Well. On the evidence available, we accept that the offered prices have reflected the respective proportionate share of the RDV of the Lots and do fall within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. We are satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots.

RDV ASSESSMENT AND MERGED SITE FACTOR

37.  By reason of being satisfied that redevelopment of the Lots is justified and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots, an order for sale should be granted in favour of the applicants. Before we move on to grant the order, it is necessary to consider the argument of R1 that in setting the reserve price of the Lots, the merged site factor may be taken into account. The merged site factor would affect the RDV valuation, and would affect our ruling on the reserve price. (R4 and R7 make no submission on this issue.)

38.  It is the main argument of Mr Chain that the tribunal may take into account the merged site value of the Lots in fixing the reserve price for sale. He submits that the reserve price is not meant to be the sale price, but the minimum sale price.

39.  Mr Chain submits, properly understood, the Ordinance does not provide for compensation to the minority owners, as this is a compulsory sale, and not compulsory purchase. The Lots would be sold in the market, and the majority owners and the minority owners share in the sale price or sale proceeds.

40.  Mr Chain also submits that there is no express provision in the Ordinance for valuation of the Lots for the purpose of setting the reserve price, or assessing the RDV. He accepts that for fixing the reserve price, the tribunal may, not must, carry out some valuation. He ventures to submit that, in the past the tribunal has almost invariably carried out a detailed and meticulous valuation exercise to “assess” the RDV (a term which does not appear in the Ordinance) may be due to a subconscious recognition that the reserve price is likely to become the sale price. With no disrespect to Mr Chain, we do not agree with his own speculation on the reason for receiving expert evidence on RDV by other panels of judicial officers of the tribunal.

41.  While there is no provision that the reserve price has to be set with reference to valuation report, it has to be based on some evidence on redevelopment value. The production of valuation report on a proposed redevelopment scheme is a mean by applicants, and respondents to address the tribunal to set the appropriate reserve price. As Mr Chain rightly accepts, some valuation evidence for the purpose for setting the reserve price may be admissible. It is part of the evidence that the tribunal could rely on in setting the reserve price. His argument, which we shall come to later is that while this tribunal shall consider evidence on the redevelopment potential of the Lots on their own, we may also consider the redevelopment potential of the Lots with adjacent lots, the merged site factor.

42.  Mr Chain submits that the Ordinance does not contain any provision which deprives the minority owners of any portion of the value of their properties. The Ordinance contemplates a sale of the Lots on the market, and the scheme under the Ordinance is to “let the market decides” the sale price. What Mr Chain submits is, under the Ordinance, in setting the reserve price, the “on its own formula” as suggested by the applicants does not have the effect of precluding the tribunal from taking merged site factor into account when setting the reserve price. We have to take into account the redevelopment value of the Lots on their own, but it would not preclude the tribunal from considering other factors, which must include merged site factor.

The “On Its Own Formula”

43.  Schedule 2 Paragraph 2 of the Ordinance provides as follows: -

“2. The lot the subject of the auction shall be sold subject to a reserve price—

(a) which takes into account the redevelopment potential of the lot on its own (or, where 2 or more lots are the subject of the auction, on their own); and

(b)   approved by the Tribunal.”

44.  It is the argument of the applicants that on a proper interpretation of Schedule 2 Paragraph 2 of the Ordinance, the value of potentiality stemming from the fact that the Lee On Lots are wholly owned by the applicants should be excluded in setting the reserve price. We follow the list of legal issues as set by Mr Mok in his skeleton submission on this matter, with some modification on the wordings: –

(a) whether in setting the reserve price, Schedule 2 Paragraph 2 require this tribunal to exclude the merged site factor;

(b) if the answer to (a) is positive, is the exclusion constitutional;

(c) if the answer to (a) is negative, whether such value is properly established by any valuation evidence to enable the tribunal to assess the reserve price. And if so, this tribunal is required to consider the following 2 additional issues on valuation evidence (“the setback argument of the applicants”), namely: -

(i) whether R1 has to establish by expert evidence that on the balance of probability that the Building Authority would exercising its discretion to grant an upgrade of the site classification on a voluntary setback of the subject Lots (on their own or as a merged site) and the upgraded classification is at least or greater than 50% in order to include the hope value of such permission at all; and

(ii) whether there is valuation evidence to establish the assessment method and the quantum of the hope value of the upgraded classification.

45.  Mr Mok submits that the proper starting point for interpreting a piece of legislation is to look at the relevant words or provisions having regards to their context and purpose, and to ascertain the legislative intent. We do not think this is or can be disputed by the respondents.

46.  To understand Schedule 2 Paragraph 2, Mr Mok further refers to the records of the Provisional Legislative Council and the minutes of the Bills Committee which has been referred to in the judgment of the tribunal given by a different panel in Day Bright Development Ltd v Choi Pak Ling [2014] 4 HKC 364 at paragraph 53 (which is set out in Appendix V).

47.  It is not disputed that the original draft of the Bill for the Ordinance does not include the phase ‘on its own’. Mr Mok refers to the following passage in the minutes of the Bills Committee meeting of 28 February 1998: -

“Referring to the [Law Society’s] suggestion that the reserve price should take into account the redevelopment potential of the lot ‘on its own’, members consider this suggestion fair as it would be difficult to assess the reserve price if other factors such as the potential of adjacent sites acquired by the majority owners were taken into account. Moreover, even if the majority owners owned a number of adjacent lots, they might not be the successful purchaser of the lot at the auction. The Administration agreed to introduce CSAs [Committee Stage Amendment] to schedule 2 to specify that the reserve price should take into account the redevelopment potential of the lot ‘on its own’ (or where two or more lots were the subject of the auction, on their own.”

48.  Mr Mok submits that the Committee was fully aware of different level of redevelopment potential that could be taken into account and there was the clear agreement to exclude the potential that could flow from the ownership of the minority owners in adjacent lot(s). This interpretation would direct the tribunal not to take into account the merged site approach in fixing the reserve price as opined by Mr CW Wong. (As to the credibility of the evidence of Mr CW Wong, it would be a finding of facts that we would come to later, as Mr Mok consider that Mr CW Wong’s evidence is not reliable in any event.)

49.  Mr Mok refers to a number of decisions of the tribunal when the “on its own” formula is followed. And Mr Mok also refers to the judgment of Le Pichon JA (as she then was) given in Fully H.K. Investments Limited & Others v Poon Vai Ching & Others, HCMP 591/2007. We refer in particular to the following paragraphs: –

“18. I do not consider those authorities to be of assistance to the second respondent. As Mr Mok who appeared for the applicants rightly submitted, the Raja line of cases establishes assumptions for assessments and valuation purposes that apply in a context where there is absolutely no possibility of an actual auction. Where, as here, there is to be a public auction, the factors mentioned in the judgment of Swinfen Eady LJ quoted above would be matters that would be taken care of by the actual process of the public auction. To say that the Tribunal should seek to attribute a value to those factors so as to establish a valuation by reference to which the fairness and reasonableness of the offer is to be determined is little short of inviting the Tribunal, as it were, to second guess the outcome of the public auction. That is at odds with the principles set out in Capital Well.

19. It is clear from that decision that in assessing whether reasonable steps had been taken by the majority owners under section 4(2)(b) of the Ordinance, the role of the Tribunal is not to conduct a valuation exercise. Mr Smith SC sought to distinguish Capital Well on the basis that the Tribunal’s finding in that case was made on the basis of both sides’ valuation evidence on the open market value of all six lots, taking account of the composite sites redevelopment potential. He submitted that this was not the present case since what is in the issue is the Tribunal’s assessment of the lot’s redevelopment potential. But if Capital Well is properly understood, it is not distinguishable. What according to Mr Smith SC the Tribunal ought to have done is precisely what the Court of Final Appeal held a Tribunal should not do – to engage in a valuation exercise that decides what valuation principles ought or ought not be adopted such as ‘marriage value’ ‘strategic position’ ‘special interest’ and the like and how they are to be assessed.

20. The value of the lot on the basis of plot ratio 5 is not in dispute. As to the question how the court is to “decide what figure to put on top” of the plot ratio 5 to reflect the Clay factor, the second respondent’s stance below was that that was a question of quantum. Yet, it is clear from the transcript of the evidence of the second respondent’s expert that he could not tell what the quantum was except that it should be somewhere between the levels of plot ratio 5 and plot ratio 9. As I have said, that is a matter that is to be resolved as part of the actual auction process. “

50.  Mr Mok submits that we are bound by the decision of Fully’s case, and correctly understood, we should have no difficulty to rule that merged site or special interest factors are excluded by Schedule 2 Paragraph 2. And there is no unfairness to the minority owners as the issues of any enhanced value would be taken care of by the process of auction.

51.  Mr Chain submits that the formula does not have that effect. The formula is to provide a guaranteed minimal, i.e. the reserve price, and leaves the rest to the market. The formula only requires the tribunal when setting a reserve price to “take into account (in Chinese 顧及) the redevelopment potential of the lot but on its own”. That is inclusionary, i.e. the tribunal must have regard to the redevelopment potential of the lot on its own. It does not follow that the tribunal may not have regards to other factors. He submits that under the scheme of the Ordinance, the minority owners are supposed to receive the full value of their properties. It is strange that somehow the formula mandates the tribunal when setting the reserve price must set what he calls a “maximum minimum”.

52.  Mr Chain submits that if the reserve price does not take into account other factors, that would deprive the minority of a portion of the true value of their units. That would be unconstitutional (which we would consider separately later).

53.  We must say that the meaning of Schedule 2 Paragraph 2 is clear. We have to take into account the redevelopment potential of the subject lot on its own. Taking into account a merged site redevelopment potential is in conflict with the clear wording of the Ordinance, even without looking at the minutes of the Bills Committee.

54.  Further, Mr Mok and Mr Chain have argued this issue before Deputy Judge Roy Yu in another case, being Luck Most Limited and Others v Good Movement Limited LDCS11000/2020 when a similar submission has been raised by Mr Chain. In the decision handed down on 24 February 2023, Deputy Judge Roy Yu has ruled against the submission of Mr Chain and we would quote: –

“33. And as Mr. Chain submits, the reserve price is the minimum and is not meant to be the final sale price. I thought it must follow that the ultimate sale price, as determined by the market, is the fair compensation for the minority owners, and would reflect when appropriate, other factors that the lot or lots would enjoy including merged site or special interest factors.

34. And as Mr. Mok submitted, the enhanced price by merged site factor, or indeed any reason why someone in the market is prepared to put up a higher price would be reflected in the auction proceedings. And that is also the ruling of Court of Appeal in Fully’s case. By employing the auction proceedings, it would reflect the market price, which must include all realizable value of the lot(s), including any merged site or special interest factors. I would refer to a passage in the judgment given by the Court of Appeal in Good Faith Properties Limited & Others v Cibean Development Company Limited, CACV 35/2014 (dated 22 September 2014): -

“32. We appreciate there are differences in the inherent nature and special features of the proceedings when one compares [Cap. 545] proceedings with resumption cases:

(a) The Tribunal has to decide whether an order for sale should be made in [Cap. 545] proceedings whereas in resumption cases it only has to decide the quantum of compensation;

(b) When the Tribunal ordered a sale under [Cap. 545], it would be conducted by a trustee in an auction with a reserve price and the purchaser may not be the majority owner;

(c) Unlike ss 6(2A),8(4) and 10(2)(e)(ii) of the Lands Resumption Ordinance Cap 124, there is no statutory provision in [Cap. 545] prescribing that reasonable costs of the proceedings of the minority owner shall be borne by the applicant; and

(d) As explained above, the minority owner may obtain the benefit of the hope value if this is reflected in the sale price achieved in an auction ordered under the [Cap. 545].”

[my emphasis]

35. The above judgment is on whether the respondents in a Cap. 545 application should be entitled to costs on compensation approach. But the above passages shed light on the way how Cap. 545 should be interpreted.”

55.  As Mr Chain submits, the reserve price is the minimum. It is not meant to be the final sale price. And one of the purpose of the reserve price is to fix the minimum. It has to be noted that the reserve price is not set according to the existing market value of the lots in issue. The Ordinance provides for fixing the reserve price with reference to the redevelopment potential, a sum presumable higher than the EUV of the Lots, with a minimum higher than the EUV. And the Legislature must be correct in making provision in the Ordinance against the situation, that if whatever factors affecting the redevelopment may be taken into account in setting the reserve price, the tribunal would be burdened with an impossible task. And reading with the minutes of the meeting, it is clear that the Legislature decided the reserve price shall be fixed with reference to the redevelopment potential of the lot or lots alone. But the reserve price is not meant to be the final sale price. The sale price is to be determined by the market.

56.  Member Ng agrees with the view of Deputy Judge Roy Yu and we therefore find that, the reserve price to be fixed under the Ordinance shall only take into account the redevelopment potential of the Lots on their own (subject to our discussion of constitutionality hereinafter.)

Constitutionality

57.  Mr Chain submits that if the merged site factor is not taken into account in assessing the reserve price, the formula does on occasions deprive the minority owners of a portion of the true value of their units. That would be unconstitutional.

58.  Mr Mok refers to the judgment of the Court of Final Appeal given in Hysan Development Co. Ltd. & Others v Town Planning Board (2016) 19 HKCFAR 372 and submits that the proportionality test contains the following four steps-

(1) The aim should be legitimate;

(2) Rational connection;

(3) Proportionate restriction; and

(4) Whether a reasonable balance has been struck.

59.  Mr Mok commented that Mr Chain has failed to provide any argument or clear prayer for striking down, remedial interpretation or whatever the remedy. Mr Mok also relies on Intelligent House and Pacific Base to submit that the Ordinance is constitutional. We do not repeat his submission in paragraphs 52 to 62 of his written submission dated 15 December 2022.

60.  We understand Mr Chain is arguing that, in the past the tribunal has invariably carried out a detailed and meticulous valuation exercise to assess the “RDV” of the Lots. He claims that this may be due to a subconscious recognition that the reserve price is likely to become the sale price. And in not taking into account the merged site factor, or any hope value, the minority owners would be deprived of a portion of the true value of their property, and this would be unconstitutional.

61.  The reserve price as submitted by Mr Chain is to set the minimum selling price and offer some form of fixing a minimum sale price. But this is not the final sale price. To be fair, setting the reserve price or setting the minimum selling price is a step to allow the auction to go ahead. As analysed by Court of Appeal in Luck Most, any hope value including merged site value may be reflected in the sale price. We should be looking at the whole scheme of sale as provided by the Ordinance to consider if the minority owners would be deprived of any value of their land, and not by looking solely at how the reserve price is fixed. We do not agree the minority owners may suffer any loss from the scheme.

62.  Mr Chain argues that if the Legislature is to deprive the owners of anything, the Ordinance can simply direct the tribunal to set the sale price. He accepts that it is common for statutes dealing with compensation to lay down rules to limit the amount of compensation, and he refers to sections 11 and 12 of the Lands Resumption Ordinance. He commented that in those cases, the rules will be set out clearly. But again, we are not dealing with the sale price, or the compensation. This tribunal is only to fix the reserve price.

63.  It is possible that no one (including both the majority owner or a third party developer) is interested in giving a higher price for the hope value. In which event, it is the market that determine against the minority owners’ claim on the value of the Lots. Or put in another way, such hope value is proved not realisable if no one put up the bid in the auction. Hence we are not persuaded that the scheme of sale under the Ordinance, including the fixing of the reserve price would deprive the minority owners of some value of their property in any way, and it is not unconstitutional. Further, we agree with the analysis of Mr Mok in his submission that the Ordinance is constitutional, and adopt his analysis with regards to the above 4 tests constitutionality.

64.  Mr Chain also argues that whether a factor should be taken into account is a matter of fact, and not a matter of law. There should be no hard and fast rule against considering merged site factor. We believe the Ordinance is clear on this point. For the above reason, we do not agree this is an issue that we have to consider for setting the reserve price, because it is in clear conflict with the wordings of Schedule 2 Paragraph 2.

The Setback Argument of the Applicants

65.  For completeness, we consider issues (c) and the setback argument raised by Mr Mok. We do accept that if merged site factor has to be taken into account in setting the reserve price, the respondent has to establish by evidence that it is probable, and the additional value. And we consider the probability of merged site development in the Lots, and the probability of the upgrade of the site, with the available evidence before us.

Probability of Merged Site Development

66.  It is the argument of Mr Mok that in any event, if merged site factor has to be taken into account for fixing of the reserve price, the respondent has to show by evidence the following 3 elements –

(1) The probability (more than 50%) of Full Land Value or hope value;

(2) The method of assessing the Full Land Value or hope value that is claimed;

(3) And the quantum of the Full Land Value or hope value that is claimed.

67.  Mr Mok also submits that there is no hope value may come into play unless the Lee On Owner (i.e. the applicants) would refrain from bidding in the auction and there would be ‘speculators’ willing to bid in the auction on the hope that sometime in the near future the Lee On Owner will agree to a merged site development. He submits that this is highly unlikely and unreal scenario.

68.  Mr Mok also submits that R1 has to establish by evidence on the balance of probability that the Building Authority would exercising its discretion to grant an upgrade of the site classification on a voluntary setback of the Lots with the Lee On Lots.

69.  Mr Chain submits that ‘hope value’ is a well known concept in valuation, and in appropriate case will be part of the intrinsic value of a piece of land on its own. He accepts that quantification of hope value is always difficult. But that does not absolve the tribunal as the fact finding body to assess it on the evidence before it.

70.  We accept the submission of Mr Mok that there has to be evidence in support of hope value, even if it is a matter that has to be taken into account. And we would consider, as a drawback position, whether there is an evidence to support the possibility of merged site development when coming to evidence of the experts.

Assessment of Valuation Evidence on Merged Site Development

71.  Except for the assertion of Mr CW Wong that there would have hypothetical buyer(s) other than the applicants to purchase the Lots at a price reflecting the merged site development, there is no other evidence giving proof. From valuation perspective, we disagree with Mr CW Wong and are of the view that the market value of the Lots would just be the RDV of the Lots on their own only without any hope value or marriage value for joint development together with the Lee On Lots.

72.  Similar issue has been argued before His Honour Judge M Wong and Member Ng in another compulsory sale case, being Asia Bright Enterprises Ltd and Others v Liu Cheuk Man and Chan Lai Mui and Others LDCS35000/2019. In the decision handed down on 21 April 2023, the tribunal has ruled against the inclusion of hope value for merged site development, and we would quote: -

“57. From valuation perspective and in accordance with HKIS Valuation Standards 2020, hope value can be included in the market value, which should reflect the highest and best use of an asset that maximises its potential and that is possible, legally permissible and financially feasible, but the amount of hope value must be limited to the extent that it would be reflected in offers made by prospective purchasers in a general market under a rational environment which means with market-evidence.

58. We agree that if the Lot is redeveloped together with its adjacent 3 sites, there will have a marriage value released from the site merger. Both Mr Chan and Mr Cheung opine that the market value of the merged site is greater than the aggregate of the individual market value of the 4 sites, though they have different opinion on the amplitude of the difference. However, we are not persuaded by Mr Cheung that the market value of the Lot would include the proportional marriage value or part of the proportional marriage value. On the conditions that size of the Lot is about 1,000 square meters, large enough for an efficient development, and the market value of the Lot is a large lump sum over $1,000 million, we are of the view that except for the applicants and/or related parties of the applicants, which are the special purchaser(s), there would not have any rational purchaser which would pay a price for the Lot higher than the RDV of the Lot in the hope of sharing the marriage value with the applicants.

59. Hope value may sometimes be reflected in the market value but usually in exceptional cases only, such as the cases that (i) there would have competition from at least 2 purchasers (ie in the scenario that the relevant lot can be merged with the other lots on the right or the lots on the left and the lots on the right and left are owned by different parties); and (ii) the marriage value is substantial when it is compared with value of the relevant asset, so that a rational purchaser would take the risk to put in a higher bid in the circumstances.

60. For example, in the scenario that a small lot of say 50 square meters is located in the centre of the other lots with unified ownership of say 5,000 square meters, there may be some willing speculators and/or investors who are willing to offer a price higher than the market value of the small lot in order to take speculation for sharing part of the substantial marriage value; and if there is a chance of say not less than 50% that earning of an investment can be achieved at say about double, there may well be such risk-taking speculators in the market, particularly when the market value of the small lot is relatively small in lump sum. However, the Lot does not fall within these criteria.

61. In the circumstances, we are of the view that the marriage value and/or “Clay Factor” of Site A, Site B, Site C and the Lot should not be taken into account.”

73.  In the subject case, although the Lots of 276.57 square meters only are smaller in size, they can still be developed into a decent commercial / residential composite building, and their RDV on their own of over $250 million is a large lump sum. In addition, we do not envisage that there are exceptional circumstances which can reflect hope value in this instance. Other than the applicants and/or related parties of the applicants, there would not have competition from at least 2 other purchasers who would bid up the price over the RDV of the Lots on their own. The marriage value in this instance (i.e. an overall increase in value of about 25% as assessed by the 2 valuation experts respectively) is attractive, but it is not so substantial to attract risk-taking speculators and/or investors in the market, particularly when the RDV of the Lots on their own is a large lump sum.

74.  From valuation viewpoint, we consider that the marriage value of the Lots and the Lee On Lots should not be taken into account in the assessment.

Assessment of Valuation evidence on Upgrade of Site Classification

75.  In the dispute on site classification, the parties have relied on the respective expert opinion of the Authorized Persons, Mr So and Mr Ng. They agree that (1) both Chiu Kwong Street and Lai On Lane are “specified streets” under B(P)R and are wider than 4.5 meters; (2) Sai Hing Lane is a “specified street” and is less than 4.5 meters wide; (3) the Lots are currently a Class B site under Regulation 18A(1) of the B(P)R; (4) change of site classification of the Lots from a Class B site to a Class C site is subject to the discretion of the Building Authority and is determined by the Building Authority on a case-by-case basis; (5) favourable support from concerned government departments have to be obtained before the Building Authority can grant permission to the voluntary setback of Sai Hing Lane; and (6) genuine needs and benefits to the public that the voluntary setback can bring are 2 major considerations of the Building Authority, but they argue whether or not the Building Authority tends to be stringent in exercising this discretion.

76.  Based on the evidence before the tribunal and on a balance of probabilities, we are of the view that the Building Authority would not exercise the discretion to approve the change of site classification. Although Mr So has quoted a number of precedent successful cases for reference, there are improvements in air ventilation, fire safety, traffic congestion and/or pedestrian circulation in these cases after their voluntary setback which would bring benefits to the public. In the subject case, Mr So has failed to provide any evidence of support of the relevant government departments, and there is also no persuasive evidence in relation to the genuine need and public benefits for voluntary setback of Sai Hing Lane. Neither the Outline Development Plan nor the Outline Zoning Plan exhibit any intention or plan on the part of the government to widen Sai Hing Lane too.

77.  We agree with Mr Mok that the existing use of Sai Hing Lane is in the nature of a rear scavenging lane. At both ends of Sai Hing Lane are freights of steps of some height, thus preventing vehicular traffic access, including emergency vehicular access, and deterring pedestrian use. In addition, the proposed setback would involve only part of the lane with the rest of the lane remaining narrow. Therefore, there is no evidence for improvement in traffic circulation, open spaces and air ventilation. There is also no improved access to open space and public transport.

78.  On the conditions that our findings on both legal issues and valuation issues do not support the consideration of marriage value, we are of the view the reserve price for the auction if any should be the RDV of the Lots on their own only.

RESERVE PRICE FOR THE AUCTION

79.  By reason of being satisfied that redevelopment of the Lots is justified and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots, we are satisfied an order for sale should be granted in favour of the applicants. We shall now consider the reserve price.

80.  At the trial, the 2 valuation experts agree on the valuation date of 16 September 2022, the gross site area of the Lots of 276.57 square meters and the assessment by residual valuation method, but they argue on whether the Lots as a Class B site abutting on 2 specified streets (i.e. Chiu Kwong Street and Lai On Lane) under the Building (Planning) Regulations (“B(P)R”), Cap 123F, can be upgraded to a Class C site by offering a voluntary set back (i.e. about 1.1 meters wide) along the boundaries fronting Sai Hing Lane. Nevertheless, they agree on the respective hypothetical development schemes of the Lots as a Class B site and a Class C site.

81.  As a Class B site, the 2 valuation experts agree that the Lots would be developed into a 25-storey commercial / residential composite building at the plot ratio of about 8.3054 (i.e. gross floor area of about 2,297.02 square meters). There would have retail shops with sub-total saleable area of 125.08 square meters on Lower Ground Floor fronting Lai On Lane, retail shops with sub-total saleable area of 175.08 square meters on Ground Floor fronting Chiu Kwong Street, and residential flats with sub-total saleable area of 1,549.10 square meters from 3^rd floor to 23^rd floor.

82.  In the assessment of gross development value (“GDV”), they agree on the value of the shops on Lower Ground Floor at $159,950 per square meter, but no agreement can be reached on the values of the shops on Ground Floor and the flats on upper floors.

83.  In the residual valuation, they agree on the marketing cost at 3% of the GDV, demolition cost at $3,229,952, demolition period of 6 months, construction cost at 130,300,000, construction period of 2 years, professional fee at 6%, legal cost and stamp duty on the residual land value at 0.1% and 4.25%, but they disagree on the interest rate and developer’s profit.

Market Value of Shop Reference Unit (Facing Chiu Kwong Street)

84.  The 2 valuation experts agree on the size of the shop reference unit (i.e. 58.36 square meters saleable), but they disagree on its layout. Mr Charles Chan proposes a wider ground floor residential lobby entrance of 4 meters, and therefore the hypothetical shop would have frontage of 4.80 meters and depth of 12.10 meters. Whilst, Mr CW Wong suggests a narrower ground floor residential lobby entrance of 3 meters, and the frontage and depth of the hypothetical shop would be 5.17 meters and 12.71 meters respectively. Although the design with a narrower ground floor residential lobby entrance can increase the overall value of the ground floor shops, we agree with Mr Charles Chan to build a wider ground floor residential lobby entrance in this instance because such design can increase the overall value of the upper floor flats and the overall value of the upper floor flats is much higher than the overall value of the ground floor shops in the hypothetical development. As compared with the comparable residential developments, a 4-meter entrance lobby is justified.

85.  Both Mr Charles Chan and Mr CW Wong have proposed 5 comparables and 4 of them are common. We agree to analyse Comparable B3 proposed by Mr Charles Chan because it has vehicular access and its location is close to the Lots. We also agree to analyse Comparable B6 suggested by Mr CW Wong because there are not many comparables in the assessment and its transaction date is about 10 months only earlier than the valuation date.

86.  The 2 valuation experts agree on the conversion rates for open yard, flat roof and cockloft at 1/6, 1/6 and 1/4 respectively. They also agree on the adjustment for time with reference to price indices, the adjustment for size at 1% per 10-square meter difference, the adjustment for age at 1% per 5-year difference, the adjustment for frontage at 2% per 1-meter difference, and the adjustment for headroom at 2% per 1-meter difference, but they disagree on some of the adjustments for location, return frontage and layout. They also argue on the adjustments for level difference and business potential suggested by Mr CW Wong and whether in the adjustment for headroom to the comparable with cockloft full headroom or headroom under cockloft should be adopted.

87.  The 2 valuation experts agree on the adjustment for location to Comparable B5 at -15%. We agree with Mr Charles Chan that Comparable B1 is better than the reference shop but the adjustment rate should be -2.5% only instead of -5% proposed by Mr Charles Chan and 0% suggested by Mr CW Wong. We also agree with Mr Charles Chan to apply the adjustment rates of -15% and -10% to Comparables B2 and B4 instead of -10% and -5% suggested by Mr CW Wong. However, we consider that the location of Comparable B3 at the end of a vehicular access is inferior than the reference shop and should be adjusted at 20% instead of 0% proposed by Mr Charles Chan. In addition, we agree with Mr CW Wong to adjust for Comparable B6 at -15%.

88.  We agree with Mr CW Wong to adjust for the return frontage of Comparable B1 onto a lane only at -2% instead of -3% proposed by Mr Charles Chan. We also agree with Mr CW Wong to make adjustments at 2% to those comparables with steps at the shop front, which would affect their accessibility and usage. However, we agree with Mr Charles Chan not to make adjustment for business potential. We are of the view that the redevelopments of the Lots and their nearby buildings could not affect much the immediate environment and could not bring in new business potential.

89.  Regarding the adjustment for layout, we consider that reference should be made to depth, which should have noticeable impact on value, and Comparables B4 and Comparable B6 are inferior in shape. Accordingly, the comparables should be adjusted at -1.5%, 4.0%, 0%, 2.0%, 0% and 1.5% respectively.

90.  We are of the view that both the full headroom (i.e. 5.7 meters) and the headroom under cockloft (i.e. 3.1 meters) of Comparable B4 should be taken into consideration. The location of its cockloft mainly at the back of the shop and that the cockloft covers most of the shop area should also be analysed. In this case, we consider that Comparable B4 can be adjusted manually at say 2% reflecting the fact that its shop front would have a high ceiling height but most of its shop area would have ceiling height less than the reference shop.

91.  The valuation of the shop reference unit is listed in Appendix I of the judgment. The average unit rate of the 6 comparables is about $282,855. We are of the view that the shop reference unit facing Chiu Kwong Street should be assessed at $283,000 per square meter.

Market Value of Domestic Reference Unit

92.  The 2 valuation experts agree to adopt 19 comparables in 3 comparable developments (i.e. One Artlane, Two Artlane and 15 Western Street). Except for the view of some units, they also agree on the particulars of the domestic reference unit and the comparables. They agree on the adjustment for time with reference to price indices, the adjustment for size at 1% per 5-square meter difference, and the adjustment for headroom at 4% per 1-meter difference, but they disagree on the adjustments for view, location, floor, age and scale / facilities.

93.  We agree with Mr Charles Chan that the domestic reference unit on 13^th Floor should have open building view only instead of open view suggested by Mr CW Wong. There are tall buildings not very far away from the Lots which would to a certain extent obstruct the view of the domestic reference unit. Further, we agree with Mr Charles Chan to describe the view of Comparables D2.2 and D2.8 in Two Artlane and all the comparables in 15 Western Street as open building because of the same reason, and that the adjustment for building view should be 5%.

94.  Regarding the adjustment for location, we consider that all the 3 comparables developments are better than the hypothetical development. The location of One Artlane and Two Artlane close to the MTR entrances and in a better redeveloped area should be adjusted at -7.5% instead of -10% proposed by Mr Charles Chan and -5% suggested by Mr CW Wong. The location of 15 Western Street on an uphill area and in a cluster of middle income group should be adjusted at -2.5% instead of -5% proposed by Mr Charles Chan and 0% suggested by Mr CW Wong.

95.  Regarding the adjustment for floor, we prefer the adjustment rate at 0.75% per level, the midway between the 1% proposed by Mr Charles Chan and the 0.5% suggested by Mr CW Wong. Having reviewed the floor adjustment analysis prepared by Mr Charles Chan, we consider that the floor differences in 15 Western Street at 1.24% appear to be out of line, whilst the results of One Artlane and Two Artlane are 0.58% and 0.82% only.

96.  Regarding the adjustment for age, we prefer the rate at 1% per year proposed by Mr Charles Chan to the more sensitive rate at 1.5% suggested by Mr CW Wong. In terms of scale / facilities, we agree with Mr Charles Chan that One Artlane and Two Artlane are better than the hypothetical development, but the adjustment rate should be -2% only instead of -3%, and the adjustment rate for 15 Western Street should be 0% instead of -2% suggested by Mr CW Wong.

97.  The valuation of the domestic reference unit is listed in Appendix II of the judgment. The average unit rate of the 3 comparable developments is about $295,374. We are of the view that the domestic reference unit should be assessed at $300,000 per square meter.

GDV of Domestic Units

98.  We consider that the units on or below 6^th Floor should have building view only and the units above should have open building view. Accordingly, the same adjustment rate in the valuation of the domestic reference unit at 5% should be applied to the units with building view. The floor adjustment at 0.75% per level should also be applied in this instance.

99.  In terms of the special unit on the top domestic floor, Mr Charles Chan adopts an adjustment rate of 15% inclusive of the value of the top roof, but Mr CW Wong converts the top roof at the conversion rate of 1/8 and adopts an adjustment rate of 12%. We agree with Mr Charles Chan to adopt an adjustment rate reflecting the value of the top roof, but the adjustment rate in this instance should be 22.5%. The 15% proposed by Mr Charles Chan cannot fully reflect both the value of the top roof and the special design of the top floor unit.

100.  The GDV of all domestic units is assessed at $465,670,240, which is listed in Appendix III of the judgment.

RDV of the Lots as at 16 September 2022

101.  We agree with the applicants that the property market as at the valuation date is relatively uncertain and interest rate is increasing. In the circumstances, the project finance cost has been increasing and property developers would generally demand a higher return to compensate the increasing risks.

102.  We agree with Mr Charles Chan to adopt the finance cost at 4.5% instead of 4% suggested by Mr CW Wong. We also agree that a higher developer’s profit should be adopted as at the valuation date, but we would prefer 17.5% instead of 18% proposed by Mr Charles Chan and 15% suggested by Mr CW Wong.

103.  Based on the agreements of the 2 valuation experts and the above determinations, the residual valuation of the Lots as at 16 September 2022 is listed in Appendix IV of the judgment. RDV of the Lots is assessed at $254,000,000, equivalent to an accommodation value of about $97,051 per square meter (i.e. about $9,016 per square foot), which should be the reserve price for the public auction.

ORDERS

104.  We have set out reasons why we are satisfied an order for sale should be granted and we 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 Cheung Wood Keung and Ms Mok Ka Cheuk Cecilia, 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 Lo & Lo dated 20 May 2022;

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

a) the sale of the Lots 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 $254,000,000;

(5) 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 Building 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

(6) Liberty to the applicants, the respondents, the Trustees and the purchaser of the Lot or its successor to apply to the tribunal for further directions.

COSTS

105.  Following Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 5340, we make a costs order nisi that the applicants do pay costs of these proceedings to the respondents, on High Court scale with certificate for counsel and including any reserved costs, to be taxed if not agreed. 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.

Appendix V – Paragraph 53 of Day Bright Development Ltd v Choi Pak Ling [2014] 4 HKC 364

53.  The following can be gleaned from the records of the Provisional Legislative Council placed before the Tribunal:

(i) 21 January 1998: According to the Official Record of Proceedings, the then SPEL moved the Bill to be read for the second time in the Council. The debate was adjourned and Bill referred to the House Committee. The following 2 areas of the Bill in its original drafting are worth mentioning:

(a) Section 3(1) of the Bill was drafted similar to the current section 3(1). The current section 3(2) is non-existent;

(b) Schedule 2 §2 is drafted differently, and is as follows. It is noted that the “on its own” formulation of the reserve price was not there.

“The lot the subject of the auction shall be sold subject to a reserve price –

(a) Which takes into account the redevelopment potential of the lot; and

(b) approved by the Tribunal”

(ii) 28^th February 1998: The Bills Committee under the House Committee of the Council held a meeting for examination of the Bill. From subsequent speeches/reports the said meeting was one of at least 12 meetings held by the Bills Committee. According to the meeting minutes (BC127-08/97-98), members examined the Bill clause-by-clause in accordance with a list of their concerns. It is recorded in §13 of the meeting minutes:

“Referring to the LS’s (“Law Society”) suggestion that the reserve price should take into account the redevelopment potential of the lot “on its own”, members considered this suggestion fair as it would be difficult to assess the reserve price if other factors such as the potential of adjacent sites acquired by the majority owners were taken into account. Moreover, even if the majority owners owned a number of adjacent lots, they might not be the successful purchaser of the lot at the auction. The Administration agreed to introduce CSAs [Committee Stage Amendment] to Schedule 2 to specify that the reserve price should take into account the redevelopment potential of the lot “on its own” (or, where two or more lots were the subject of the auction, on their own).”

(iii) 27 March 1998: A House Committee meeting was held and a paper entitled “Report of the Bills Committee on Land (Compulsory Sale For Redevelopment) Bill” was prepared and annexed to meeting minutes. It is noted that a list of Committee Stage Amendments (“CSA”) was annexed to the report as appendix. In the concluding paragraphs of the report, it was stated:

(a) Subject to the CSA to be moved by the government as per the appendix, the Bills Committee supported the Bill;

(b) The Bills Committee recommended the resumption of the second reading debate of the Bill on 7^th April 1998.

(iv) §9 of the said report addressed concerns of some members on the “pencil” effect of the Bill which was not ideal from redevelopment perspective. While the then Committee supported the concept of comprehensive development, from what has been recorded it appears that the majority members of the Committee were more concerned with a situation where a developer might bundle lots which it had already acquired the threshold percentage together with lot it had no undivided shares at all, thus oppressively acquiring the latter against the owners’ will. The report went on to say:

“… As the Bill does not prohibit the majority owners holding 90% of the undivided shares in each of the lots to make one application for the sale order in order to redevelop the lots together, the Bills Committee accepts that the minimum acquisition percentage should apply to a lot per se.”

(v) The committee went on to say that it would deal with the technical problem in respect of buildings connected to one and other by a common staircase. It also stated that the government had taken on board members’ suggestion that an average of 90% interest in each of the lots had to be acquired by the majority owners.

(vi) It is noted from the CSA already annexed the following:

(a) The current version of section 3(2)(a) & (b) was introduced as proposed additions (then as section 3(1A) under the CSA;

(b) The words “on its own (or, where 2 or more lots are the subject of the auction, on their own)” were proposed to be added, and such formula subsequently became the current version of Schedule 2 §2(a).

(vii) 7 April 1998: This was the date on which the Provisional Legislative Council resumed the Second Reading debate of the Bill. The Chairman of the Bills Committee, the Hon Arculli, some legislators who were also members of the Bills Committee and the SPEL made their speeches. Some of their speeches were referred to in Bond Star and Supergoal. After their speeches the Bill was read for the second time. The Council immediately went into House Committee stage. The CSA were put to legislators almost clause-by-clause and were all accepted. Council then resumed and the Bill was read for the third time and passed. From these records, the second reading, amendment of the Bill by the CSA and the third reading all took place on the same day.

(viii) According to the Record of Proceedings on 7 April 1998, Hon Arculli addressed the Council as the chairman of the Bills Committee on the report of the Committee before the second reading. Some paragraphs relevant to the present discussion are:

“Another focal point of discussion in the Bill Committee was whether owners holding an average of 90% of aggregate undivided shares in contiguous lots should be allowed to make an application to redevelop the lots as a package. Whilst we fully support the concept of comprehensive redevelopment, our concern was that should such approach be adopted, there may be situations where an applicant did not own any undivided shares in one of the lots whilst holding 90% of the aggregate undivided shares. The Bills Committee considered that it could not be justified on the sole ground of comprehensive redevelopment to compel all the owners of such a lot to sell their properties against their will. We, therefore, agreed that the ownership percentage should apply to each lot except where two buildings served by a common staircase in which case it would be the average of the undivided shares of the lots on which the buildings stand.

…

… The amendments to be moved later by the Secretary for Planning, Environment and Lands at the Committee stage are the product of concerted efforts on the part of deputations appearing before the Bills Committee, members of the Bills Committee and the Administration so as to ensure a fair and balanced new policy to expedite urban renewal in order to provide environmental improvement as well as much needed housing for the community, …” (emphasis added)

(ix) The SPEL, when addressing the Council before the second reading, had also said through clause-by-clause discussion in a spirit of co-operation, the Committee examined the Bill and that in turn greatly helped the government draw up the amendments to improve the Bill. He went on to say:

“We have reached consensus with the Committee on these amendments which I will explain further when they were introduced at the Committee stage.”

(x) When section 3(2)(a) and (b) (then as section 3(1A) and referred to as clause 3 in the minutes) was proposed to be added to section 3 of the Bill and put to the Committee for a vote, the SPEL said the following:

“Subclause (1A) [i.e. 3(2)(a) and (b)] specifies that if the majority owner makes an application covering two or more lots, he must own not less than 90% of the undivided shares in each lot. It also provides for the average to be taken for the purpose of calculating the percentage of the undivided shares of two or more lots on which there are two buildings joined by a common staircase.”