EARNING YIELD LTD AND ANOTHER v. WONG SIN YEE DORIS

LDCS 14000/2015

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION

NO 14000 OF 2015

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J U D G M E N T

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BACKGROUND

1.  This is an application for compulsory sale of all the undivided shares of and in the Remaining Portion of Kowloon Inland Lot No 3903 and the extensions thereto (“the Lot”), with a building erected thereon known as Iau Moon Mansion at Nos 15-25 Yau Moon Street, Kowloon (“the Building”), for the purposes of redevelopment pursuant to the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”). 

2.  The Building, which is a 7-storey tenement block and is served by 2 common staircases, was completed in 1973 with Occupation Permit No K49/73 issued on 11 May 1973. According to the Occupation Permit and the approved building plans of the Building, there are 1 shop for non-domestic use planned on ground floor, 4 flats for domestic use planned on upper ground floor and 8 flats per floor for domestic use planned on 1^st to 5^th floor. 

3.  The Lot is allocated with 76 undivided shares. The ground floor shop is subdivided into 5 shop units and each is given 4 undivided shares, making a sub-total 20 undivided shares, whilst 1 of the 5 shop units (ie Shop D) is further subdivided into 2 sub-units and each has 2 undivided shares.  Each of the domestic units on upper ground floor is given 4 undivided shares and each of the domestic units on 1^st to 5^th floors is given 1 undivided share, making a sub-total of 56 undivided shares. 

4.  The applicants filed a Notice of Application (“the NOA”) on 16 November 2015, which was subsequently amended on 15 December 2015 pursuant to the Order made by HH Judge KW Wong dated 11 December 2015. 

5.  At the time of filing of the NOA, the applicants owned 75 out of 76 (ie 98.68%) undivided shares of and in the Lot.  There is only 1 live respondent remaining on record, who owns Flat D on 5^th Floor and Roof D of the Building. While the respondent has not appeared at all the hearings including the trial hearing, she had informed the tribunal in writing that she would not submit any evidence (including expert evidence and witness statement), she was not opposing the application, she would not attend the trial hearing and she was willing to abide by any decisions made by the tribunal.

6.  At trial, there was no expert evidence filed by the respondent in these proceedings. Mr Howard Wong for the applicants simply called the witnesses to prove the applicants’ case.  The applicants contended that all the requirements of the Ordinance had been satisfied and asked for an order for sale of the Lot.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

7.  Section 3(1) of the Ordinance requires applicant to have not less than 90% of the undivided shares in a lot before it can make an application. 

8.  As at the date of the NOA, the applicants of these proceedings owned 98.68% of the undivided shares of and in the Lot. I am satisfied that the applicants are entitled to make the application.

DETERMINATION OF THE EXISTING USE VALUES (“EUV”) OF ALL UNITS IN THE BUILDING

9.  Pursuant to section 3 of the Ordinance, the NOA was accompanied by a valuation report dated 28 October 2015 (“Application Report”) prepared by Mr Wong Chi Wai (“Mr CW Wong”) of Lawson David & Sung Surveyors Limited (“Lawson”), containing assessments of values of all units (which are conveniently termed as the existing use values, the “EUV” of all units) of the Building as at 30 September 2015. The report was prepared not earlier than 3 months before the filing of the NOA in accordance with section 3 of the Ordinance.

10.  Under section 4(1)(a)(i), if there is a dispute between the parties on the EUV of the units in the Building on the Lot, the tribunal has to determine the values. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the Lot who cannot be found, the majority owner of the Lot is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is: -

“(A)  not less than fair and reasonable; and

(B)  not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

11.  In these proceedings, the respondent is not a missing owner, is not legally represented and has not disputed the value of any property as assessed in the application.  In the circumstances, Mr Howard Wong submitted that depending on whether or not the tribunal is satisfied with the valuation as submitted by the applicants and whether or not interest of the minority owner is protected, the tribunal can accept such evidence in total or reject the application.  Nevertheless, if the tribunal is not fully satisfied with the valuation as submitted by the applicants and considers that some minor amendments thereto is necessary to give more protection to the minority owner, the tribunal ought to have a discretion of substituting its own valuation or part of its own valuation, provided that the tribunal in so doing the tribunal ought to balance the interest of the majority and minority owners in order to achieve a result that both of them shall receive fair and reasonable compensation after public auction.

12.  Mr Howard Wong pointed out that the Ordinance is silent on this particular point. However, given that the tribunal is empowered to determine the disputes on valuation if there are disputes, to say the otherwise that the tribunal does not have the power to adjudicate on the valuation if the minority owner is unrepresented or does not appear is not convincing.  Mr Howard Wong further concluded that if the tribunal is having the discretion as aforesaid, the exercise of the discretion should be premised on the condition that if the discretion is not exercised, protection of minority owner cannot be achieved.

13.  Although Mr Howard Wong’s written submissions used the phases “the tribunal ought to have a discretion” and “if the tribunal is having the discretion” and these were not made in a firm manner, I accept the reasoning behind his analysis and consider that where necessary and appropriate the tribunal has the discretion to substitute its own valuation assessment but the discretion should be exercised fairly and reasonably. In these proceedings, I review the valuation as submitted by the applicants accordingly.

14.  In the Application Report, Mr CW Wong explained his valuation method and the assessment process to arrive at the EUV of each unit in the Building.  In undertaking the assessment, Mr CW Wong adopted Direct Comparison Method.  He had firstly identified reference units for both non-domestic and domestic portions of the Building and compared them with the actual transactions in the market.  The remaining shop units and domestic flats in the Building were then compared with the respective reference units.  Mr CW Wong reported that each of the shop units on ground floor is attached with yard area and each of the domestic flats on 5^th floor is attached with roof area.  In the assessment of effective saleable area for comparison, the yard area was multiplied by 1/6 and the roof area was also multiplied by 1/6 for conversion, though Mr CW Wong had stated in his valuation reports that the conversion factor for top roof was 1/8 instead of 1/6.  Nevertheless, I accept the conversion factor of 1/6 for top roof in these proceedings because this would not be unfavourable to the respondent who owns a flat with top roof.

15.  Mr CW Wong updated his EUV assessments by a supplemental report dated 1 August 2016 (“Supplemental Report”).  He said that he had adopted the latest property indices for time adjustment, had included additional comparables in the valuation and had rectified some typographic and minor errors.   Mr CW Wong had also taken another domestic flat of the Building as the domestic reference unit for comparison.

16.  About 2 weeks before the trial hearing, since the applicants had just submitted an approved building plan for ground floor that shows a shop unit only without any yard area and I could not comprehend how Mr CW Wong derived the areas of the various ground floor shops, I wrote to the applicants and asked for floor plan showing the existing layout of the various ground floor shops if any.  Two days thereafter, the applicants submitted 2 assignment plans showing the layout and an extract from the Application Report showing the areas of the various ground floor shops for the tribunal’s consideration.  Regrettably, the additional information could not answer my queries on yard area and therefore I asked the applicants again to submit how Mr CW Wong derived the areas of the various ground floor shops as stated in the Application Report or the Supplemental Report and the calculation of these areas if any.

17.  The applicants then submitted on 11 November 2016, 6 days only before the trial hearing, a revised calculation of the ground floor areas and a revised EUV of the Building (“Revised Calculation”) prepared by Mr CW Wong on the same date.  Mr CW Wong said in the Revised Calculation that the yard areas as shown in the Supplemental Report should actually be referred as ownership areas, which are part of the ground floor shops, but in any event some of the areas as stated in the Supplemental Report were incorrect and should be amended.  Nevertheless, I note that the said ownership areas are clearly indicated as “unexcavated” in the approved building plan and should not be the yard areas, and there are great discrepancies between the yard areas as previously reported and the revised ownership areas as newly amended.

18.  In the Revised Calculation, Mr CW Wong further considered “extended areas” in addition to the saleable areas of the ground floor shops.  He said that he discovered the extended areas upon his inspection to 5 of the 6 shop units on 9 November 2016 after the applicants removed the wastes and obstacles therein.  Since parts of the ownership areas were converted to extended areas at the rear of all shop units, he then added these extended areas to the saleable areas for valuation and assessed their value without any conversion.  He updated the EUV of the Building accordingly.  However, after I asked questions on rationale of his assessment in this connection, he revised his assessment again at trial.  He changed his opinion and confirmed that since the extended areas appeared to be unauthorized, they should be multiplied by the factor of 1/2 for conversion in the valuation.  When queried by the tribunal at trial, Mr CW Wong also revised his adjustments for exposure in the comparison between the non-domestic reference unit and the other shop units on ground floor.  He admitted that the shops which face a scavenging lane only and could not be visible from Waterloo Road should command a greater adjustment for exposure at -10%.  These two amendments which would decrease the EUV of the ground floor shops owned by the applicants are in the respondent’s favour.

19.  In the absence of evidence to the contrary, I accept the revised EUV as assessed by Mr CW Wong at trial and am satisfied that the value of the unit owned by the respondent is not less than fair and reasonable and not less than fair and reasonable when compared to the value of the applicants’ properties. The EUV of all units as at the relevant date of valuation, ie 30 September 2015, are reproduced below: -

Non-Domestic Portion on Ground Floor

Domestic Portion on Upper Floors

20.  The total EUV of the Building is $247,872,000 ($54,072,000 + $193,800,000).

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

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

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

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

Section 4(2)(a)(i) – Age and State of Repair

22.  This tribunal has taken into consideration the expert evidence of Mr So Kin Shing (“Mr So”), a structural engineer by profession, of K S So & Associates Limited and Mr Wong Sai Ning Benson (“Mr Benson Wong”), a building surveyor by profession, of Benson Wong Associates Limited adduced by the applicants. 

23.  Mr So conducted a structural assessment, including visual inspection, cover-meter surveys, carbonation depth tests, compression tests, cement content tests, chloride content tests and reinforcement corrosion surveys, of the Building and prepared a Structural Assessment Report dated 30 July 2016.

24.  In terms of the age of the Building, Mr So held the view that the design and construction of the structural frames of the Building had compiled with less stringent requirements and there were 7 structural and construction aspects where the Building could not comply with the current structural engineering design requirements specified in the current Concrete Code, especially the requirement on robustness. Regarding the state of repair of the Building, Mr So considered that the structural frames of the Building were deteriorating and were in need of repair, and their condition would be deteriorating steadily due to extensive carbonation.

25.  Mr Benson Wong conducted a condition survey of the Building and prepared a Condition Survey Report dated August 2016. He concluded that the Building was aged as (1) many features and facilities which would nowadays be expected to be standard provisions in a residential building were missing, or though provided had not been improved to meet the upgraded construction standards and statutory requirements; (2) some features and facilities which were originally provided had become obsolete or outdated; (3) some of the key building parts, components, and finishes had already passed or were nearing the end of their useful lives; and (4) there had not been sufficient repair or renovation work over the years to maintain its structural frames, components, finishes and service installations in a tenantable condition.

26.  Mr Benson Wong also concluded that the Building had deteriorated to a state which was beyond reasonable economic repair.  He found that there were unauthorized structures and alterations, hollow spots in the external rendering, asbestos materials, defective waterproof membranes, concealed manholes, unsatisfactory means of fire escape, no equipotential bonding system, abandoned flushing water tanks, no or outdated essential fire service systems, etc in the Building.  He estimated the total costs of immediate repair works to restore the Building to a tenantable standard to be $17,551,075, including the structural repair costs of $956,200 recommended by Mr So, which was about 51% of the construction costs of a new similar building.

27.  I accept the unchallenged evidence of the applicants in these respects.  I am satisfied that, based on the evidence of Mr So and Mr Benson Wong, redevelopment of the Lot is justified due to the poor state of repair of the Building and the disproportionate costs to repair and maintain. I am also satisfied that redevelopment of the Lot is justified due to the age of the Building.  This 43-year old Building is in a poor condition. Its design has become obsolete over time in many aspects both physically and functionally and failed to conform to modern standards and requirements in many material respects.

Section 4(2)(b) – Reasonable steps taken

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

29.  Before and after the commencement of the present proceedings, the applicants had made the following 3 offers to the respondent: -

(1)  $5,490,000 on 7 October 2015;

(2)  $5,600,000 on 1 August 2016; and

(3)  $5,600,000 on 25 October 2016.

30.  In the offer letters, the solicitor for the applicants said that these offers, which were based on the then latest valuation of the Lot on existing use and redevelopment basis assessed by an independent valuer Lawson, were fair and reasonable.  Mr Howard Wong submitted that in spite of the fact that the respondent had indicated not to oppose the application in a letter dated 18 July 2016, the applicants did make a 2^nd offer and a 3^rd offer. Since the respondent had never replied to the offers, the respondent appeared to be adamant not to accept the applicants’ offer in any event.  In the circumstances, the applicants had already taken reasonable steps to acquire the respondent’s share in the Lot.

31.  Nevertheless, based on the revised EUV as assessed by Mr CW Wong at trial, the respondent’s share in the total EUV is 1.3878% (ie $3,440,000 / $247,872,000 x 100%).  When the updated redevelopment value (“RDV”) of the Lot as at 20 October 2016 as assessed by Mr CW Wong is taken into consideration, the respondent’s share in the value reflecting redevelopment of the Lot is $5,731,614 (ie $413,000,000 x 1.3878%), which is about 2.35% above the applicants’ last offer (ie $5,600,000) to the respondent.

32.  In assessing the reasonableness of the offers, there is the following guidance from Ribeiro PJ of the Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 579, at §§33 and 36: -

“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......”

“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......”

33.  Mr Howard Wong submitted that although the attributable RDV to the respondent is about 2.35% over the applicants’ last offer, the discrepancy is due to mainly the late discovery of the extended areas behind the ground floor shops.  The error was not deliberate and the discrepancy is well within the margin as previously accepted by the tribunal in Cheer Capital Ltd v Unibase Investment Ltd & Others LDCS5000 & 3000/2013 (12 June 2015), where the discrepancy was arising out of mainly the disparity of views between experts on the future mode of development, and Gainfield Investment Ltd & Others v Legend Tine Ltd & Others LDCS16000/2014 (17 June 2016), where the discrepancy was arising out of mainly the debatable value of the basement extension.

34.  Mr Howard Wong contended that in both cases the tribunal followed the CFA’s dictum in Capital Well. Property valuation is not an exact science and mathematical precision is neither a feature of valuation particularly for developable land owing to the imperfection of the market where even between skilled valuers the margin of opinion may be surprisingly wide.

35.  I consider that the alleged late discovery of the extended areas is neither here nor there to explain the existence of the discrepancy.  There is discrepancy mainly because Mr CW Wong had considered in his valuations yard areas, which are in fact non-existent.  I also consider that the present case is distinct from the said two compulsory sale cases, in which there were no findings that the valuations were faulty. In the present case, Mr CW Wong had mistakenly taken the unexcavated areas, or named as ownership areas, as yard areas for valuation.  Although he had subsequently made the corrections, his previous assessments that the offers were based on were relying on incorrect data and facts. 

36.  Nevertheless, there is no evidence before this tribunal that the above mentioned mistake was deliberate.  I agree that the mistake resulted in relative minor discrepancy only, and irrespective of the valuation processes the final figures in Mr CW Wong’s valuations appear to fall within a range of what may broadly be regarded as fair and reasonable. In addition, I agree that the respondent would be adamant not to accept the applicants’ offer in any event. Therefore, in the specific circumstances of the present case that the offers do objectively fall within a band of what may broadly be regarded as fair and reasonable and that no query has been raised by the respondent, I am satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot.

ORDER FOR SALE

37.  I am satisfied that redevelopment of the Lot is justified in terms of both age and state of repair of the Building and the applicants had taken reasonable steps to acquire all the undivided shares of the Lot and had negotiated for the purchase of the respondent’s share in her unit on terms that are fair and reasonable.  In the circumstances, I agree that an order for sale should be granted in favour of the applicants.

RESERVE PRICE FOR THE AUCTION

38.  The applicants submitted that the reserve price for the auction of the Lot should be fixed at $413,000,000, which is based on Mr CW Wong’s assessment of the RDV of the Lot as at 20 October 2016 in an updated RDV report dated 26 October 2016 (“Updated RDV Report”).

39.  Mr CW Wong adopted Residual Method to assess the RDV of the Lot.  Residual Method is the assessment of land value by deducting the development costs (including construction costs, professional fees, financial costs and profit, etc.) from the estimated gross development value (“GDV”) of the proposed development, as if completed, as at the date of valuation.

40.  Mr CW Wong opined that the optimum redevelopment on the Lot comprised a 25-storey commercial/residential composite building with shops planned on ground floor, shops and a plant room planned on 1^st floor, shops and recreational facilities planned on 2^nd floor and domestic units planned on 3^rd to 24^th floors.  Details of the hypothetical development with the proposed total gross floor area of 5,148.14 sq m (excluding 115.25 sq m green feature concessions) and plot ratio of about 8.4375, the GDV assessed (ie $361,000/sq m saleable area for shops on ground floor, $90,250/sq m saleable area for shops on 1^st floor, $54,150/sq m saleable area for shops on 2^nd floor and an average $213,131/sq m saleable area for domestic units on upper floors), the development costs adopted (ie average $32,003/sq m gross floor area) and the residual valuation were set out in the Updated RDV Report. The residual land value was assessed at $413,000,000, which is equivalent to an accommodation value of about $80,223/sq m gross floor area.

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

42.  In the absence of any evidence to the contrary, I accept that the market value of the Lot reflecting its redevelopment potential on its own, ie the RDV of the Lot, as at 20 October 2016 is $413,000,000, which should be the reserve price for the auction of the Lot.

REMARKS

43.  It is disappointing to note in these proceedings that there were errors and mistakes in the trial bundle and the applicants’ valuation reports, which were discovered by the tribunal only.  Some of these errors and mistakes particularly those in relation to the floor areas of the Building which would affect the interest of the parties are certainly not acceptable.  Although it is not my findings that the applicants submitted these errors and mistakes intentionally, I consider that a prudent and serious litigation team comprising experts, legal representatives and staffs of the applicants who likely have some basic property knowledge is not difficult at all to identify them.  In fact, I found most of them in my 1^st casual reading of the documents only. 

44.  It is wrong to presume that the tribunal would relax when there is no active opposing party, and/or when the respondent is not legally represented, in compulsory sale application.

ORDER

45.  This tribunal make the following determinations: -

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

(2)  All the undivided shares in the Lot, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lot;

(3)  Ms Chow Pui Wa Carol and Ms Fung Wan Yiu Agnes, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees by the Ordinance in relation to the sale of the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letters of Messrs Vincent T K Cheung, Yap & Co dated 19 October 2016;

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

(a)  The sale of the Lot be on the particulars and conditions of sale substantially the same as those in the draft Particulars and Conditions of Sale to be approved and initialed by the tribunal; and

(b)  The reserve price be set at $413,000,000;

(5)  Subject to further extensions that the tribunal may subsequently allow upon the application of the purchaser of the Lot or its successor in title, the redevelopment of the Lot and the Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot; and

(6)  Liberty to the applicants, the respondent and the Trustees to apply to the tribunal for further directions.

COSTS

46.  The applicants did not ask for costs.  I make a costs order nisi that there be no order as to costs and such order be made absolute after 14 days if no application is made to vary the said costs order.