CHINA ORCHID INTERNATIONAL LTD AND OTHERS v. FUJITEC (HK) CO LTD AND OTHERS

LDCS 7000/2018

[2023] HKLdT 38

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO. 7000 OF 2018

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J U D G M E N T

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THE APPLICATION

1.  This is an application for a compulsory sale order (“the Application”) under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”) to sell all the undivided shares of Sub-Section 6 of Section E of Quarry Bay Marine Lot No 2 and the Extension Thereto (collectively “the Lot”) on which a building known as Wah Ha Factory Building (“the Building”) stands and its postal address is No 8 Shipyard Lane, Quarry Bay, Hong Kong.

2.  The Building is a 20-storey industrial building accessible from King’s Road and Shipyard Lane. According to a set of building plans of reference no 2/3205/69 approved by the Building Authority on 25 February 1970, 8 July 1970 and 13 March 1972 (collectively referred to as “the Approved Building Plans”), the Ground Floor to the 19^th Floor (“G/F” to “19/F”) were mainly planned for workshops.

3.  The occupation permit of the Building (permit No H51/72), which was issued on 13 March 1972, permitted the following uses:

Floor	Permitted Use
G/F	2 workshops, loading & unloading area, transformer room, switch room, telephone room, pump houses & watchman’s room for non-domestic use
1/F to 19/F	4 workshops & 2 meter rooms on each floor for non-domestic use

4.  By reference to an alteration and addition plan approved by the Building Authority on 26 February 1974, new water tanks were added on 2/F. Watchman room and lavatory on G/F were also converted into transformer room and main switch room by reference to another alteration and addition plan approved by the Building Authority on 2 July 1980.

5.  By a deed of mutual covenant vide memorial no UB880753 dated 4 April 1972 as registered in the Land Registry, equal and undivided shares of the Lot have been allotted to the following units:

Floor	Undivided Shares
G/F	Flat A1*		Flat A2*		Flat B
	90/1800		68/1800		52/1800
	Flat A	Flat B		Flat C		Flat D
1/F	36/1800	25/1800		28/1800		27/1800
2/F	36/1800	25/1800		28/1800		27/1800
3/F	36/1800	25/1800		28/1800		27/1800
4/F & Flat Roof	31/1800	21/1800		23/1800		23/1800
5/F	21/1800	18/1800		19/1800		18/1800
6/F	21/1800	18/1800		19/1800		18/1800
7/F	21/1800	18/1800		19/1800		18/1800
8/F	21/1800	18/1800		19/1800		18/1800
9/F	21/1800	18/1800		19/1800		18/1800
10/F	21/1800	18/1800		19/1800		18/1800
11/F	21/1800	18/1800		19/1800		18/1800
12/F	21/1800	18/1800		19/1800		18/1800
13/F	21/1800	18/1800		19/1800		18/1800
14/F	21/1800	18/1800		19/1800		18/1800
15/F	21/1800	18/1800		19/1800		18/1800
16/F	21/1800	18/1800		19/1800		18/1800
17/F	21/1800	18/1800		19/1800		18/1800
18/F	21/1800	18/1800		19/1800		18/1800
19/F	21/1800	18/1800		19/1800		18/1800
Roof	1/1800	1/1800		1/1800		1/1800

* Factory Unit A was originally owned by Ming Pao Daily News Limited but was subsequently subdivided to Factory Unit A1 and Factory Unit A2, the latter of which was assigned to Fujitec Engineering Company (Hong Kong) Limited in 1974.

6.  Mr Mok Yeuk Chi (“Mr Mok”), leading Mr Jonathan Lee, counsel for the applicants, summarised in his opening submission that at the time of the Application, ie on 2 February 2018, the applicants altogether owned 81.603% undivided shares of the Lot and the remaining shares were held as follows:

(a)  The 104/1800 undivided share held by the 1^st respondent (“R1”) allotted to Factory Flat A2 on G/F and Factory Flat A on 1/F;

(b)  The 90/1800 undivided share held by the 2^nd respondent (“R2”) allotted to Factory Flat A1 on G/F;

(c)  The 36/1800 undivided share held by the 3^rd respondent (“R3”) allotted to Factory Flat A on 2/F;

(d)  The 21/1800 undivided share held by the 4^th respondent (“R4”) allotted to Factory Flat A on 11/F;

(e)  The 18/1800 undivided share held by the 5^th respondent (“R5”) allotted to Factory Flat B on 11/F;

(f)  The 19/1800 undivided share held by the 6^th respondent (“R6”) allotted to Factory Flat C on 13/F;

(g)  The 18/1800 undivided share held by the 7^th respondent (“R7”) allotted to Factory Flat D on 15/F;

(h)  The 21/1800 undivided share held by the 8^th respondent and 9^th respondent (“R8 & R9”) as joint tenants allotted to Factory Flat A on 7/F;

(i)  The 23% of the 18/1800 undivided share held by the 10^th respondent (“R10”) allotted to Factory Flat B on 12/F[1];

7.  Save for R10 who acts in person, the following respondents were all legally represented:

Respondent	Instructing Solicitors	Counsel/Solicitor
R1	Messrs P C Woo & Co	Ms Margaret K M Chan (“Ms Chan”)
R2, R6, R8 & R9	Messrs Lo & Lo	Mr Ross M Y Yuen (“Mr Yuen”), leading Ms Emily Ting
R3	Messrs Raymond Chan, Kenneth Yuen & Co	Mr K C Li
R4, R5 & R7	Messrs Lo, Wong & Tsui	Mr Edward Chan, SC (“Mr Chan, SC”), leading Mr Kenny Lin, Ms Anna Chow and Mr Lau Kin

8.  By consent applications with the applicants, R2 and R6 withdrew their respective Notice of Opposition on 2 August 2022 and they filed their respective Notice to Act in Person on 11 August 2022. They then did not appear on the last day of trial on 31 August 2022 for closing submissions. However, the applicants did not file any Notice of Discontinuance against them.

9.  Likewise, R8 and R9 withdrew their Notice of Opposition on 17 August 2022 and they did not appear on the last day of trial. However, the applicants filed a Notice of Discontinuance against them on 21 September 2022.

ISSUES IN THE APPLICATION

10.  Mr Mok identified the following issues to be determined by the Tribunal, namely:

(a)  First, the Tribunal shall determine the market value (which is usually termed by the valuation profession as the Existing Use Value or just “EUV”) of each property on the Lot as at 22 December 2017 and as assessed in accordance with Part 1 of Schedule 1 to the Ordinance;

(b)  Second, the Tribunal shall decide whether to make an order for sale (section 4(1)(b)) which depends on whether the Tribunal is satisfied that:

(i)  the redevelopment of the Lot is justified due to the age or state of repair of the existing development, ie the Building (section 4(2)(a)); and

(ii)  the applicants have taken reasonable steps to acquire all the undivided shares in the Lot (section 4(2)(b)).

(a)  Third, if the Tribunal makes an order for sale, the Tribunal shall:

(i)  determine the reserve price at the auction on the basis of the redevelopment value (“RDV”) of the Lot (section 5(1)(a) & paragraph 2 of Schedule 2);

(ii)  appoint trustees and authorise their remuneration (section 4(1)(c)); and

(iii)  give appropriate orders relating to particulars and conditions of the auction (section 4(6)(a)(i)).

THE EVIDENCE

11.  The applicants have filed the following documents in support of the Application:

(a)  the witness statement dated 17 January 2021 from Ms Tse Ka Ki, representative of the applicants;

(b)  the following reports by Mr Benson Wong Sai Ning (“Mr Benson Wong”) of Benson Wong & Associates Limited:

(i)  a Condition Survey Report dated 17 January 2020;

(ii)  a Rebuttal Report dated 30 July 2020;

(c)  the following reports by Mr C M Wong (“Mr C M Wong”) of C M Wong & Associates Limited:

(i)  a Structural Assessment Report dated 16 January 2020;

(ii)  a Rebuttal Report dated 21 July 2020;

(d)  the following reports by Mr Charles CC Chan (“Mr Charles Chan”) of Savills Valuation and Professional Services Limited (“Savills”):

(i)  the Application Report of 1 February 2018 pursuant to Part 1 of Schedule 1 to the Ordinance;

(ii)  the Supplemental Report of 17 January 2020 on both the EUV and RDV;

(iii)  the Rebuttal Report dated 14 August 2020 on Mr W K Wayne Lee (“Mr Lee”) of Wayne Lee & Associates Limited’s EUV and RDV report dated 16 June 2020; and

(iv)  Updated RDV Report dated 30 September 2021;

(v)  Further updated RDV Report dated 22 April 2022.

12.  R2, R6, R8 & R9 relied on Mr Lee’s aforesaid valuation reports. Mr Lee subsequently prepared two updated RDV reports dated 5 October 2021 and 22 April 2022 respectively.

13.  Both Mr Charles Chan and Mr Lee filed a Joint Statement dated 27 July 2020 agreeing to assess RDV on a single-site basis. Further, Mr Charles Chan and Mr Lee filed the following Joint Statements:

(a)  Joint Statement dated 29 September 2020 on EUV;

(b)  Joint Statement dated 30 October 2021 on updated RDV; and

(c)  Further Joint Statement dated 13 May 2022 on updated RDV.

14.  The reason for the two valuation experts, Mr Charles Chan and Mr Lee, having been required to file two updated RDV reports was that, originally by the order of the Tribunal dated 19 November 2018, the Application was to be heard together with another similar application (LDCS 6000/2018) in respect of an adjoining lot on which another industrial building (Zung Fu Industrial Building) stands. However, on the 4^th day of the trial, ie 18 November 2021, it turned out that the Application could only be part-heard because, as explained in the paragraghs below, a new expert witness on building conditions of the Building had to be appointed in due course[2].

15.  R4, R5 and R7 had filed valuation evidence with RDV assessments on single-site and merged-site bases by their expert, Ms Serena Lau, but they chose not to rely on her evidence.

16.  On the other hand, Mr Lo Kwok Kay (“Mr Lo”), a structural engineer, and Ms Leung Chi Hang Joy (“Ms Joy Leung”), a building surveyor, were engaged by R4, R5 & R7 to carry out structural survey/assessment and building condition survey/assessment of the Building dated 29 April 2020 and 8 May 2020 respectively. They also prepared their corresponding Rebuttal Report against the findings of Mr C M Wong and Mr Benson Wong respectively. A Joint Statement dated 18 November 2020 was prepared by Mr C M Wong and Mr Lo; another Joint Statement dated 3 December 2020 was prepared by Mr Benson Wong and Ms Joy Leung.

17.  However, when the trial commenced, Ms Joy Leung was unable to attend the Tribunal to give evidence. Subsequently Mr Kung Sui Lun Andrew (“Mr Kung”), Director of Bright Solution Consulting Limited, was appointed by Messrs Lo, Wong & Tsui, Solicitors and Notaries, for R4, R5 & R7, to replace Ms Joy Leung on building conditions. Mr Kung prepared a Supplemental Building Assessment Report dated 7 March 2022. He then worked out a Supplemental Joint Statement dated 19 April 2022 together with Mr Benson Wong.

WHETHER THE APPLICANTS ARE ENTITLED TO MAKE THE APPLICATION

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

19.  Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a percentage lower than the percentage mentioned in section 3(1) in respect of a lot belonging to a class of lots specified in the notice.

20.  The Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice was gazetted on 22 January 2010 and came into operation on 1 April 2010 (“the Notice”). Section 3 of the Notice lowered the threshold for compulsory sale in respect of the classes of lots specified in the Notice from 90% to 80%. Those classes of lots include: “a lot that is not located within an industrial zone and each of the buildings erected on the lot—

(i)  is an industrial building; and

(ii)  was issued with an occupation permit at least 30 years before the relevant date (ie the date of the application under the Ordinance)”.

21.  Under section 2 of the Notice, “industrial building” means:

“a building the whole or any part of which is approved by the Building Authority for any of the following uses under a plan approved under the Buildings Ordinance (Cap. 123)—

(a) godown;

(b) any industry in which articles are manufactured, altered, cleaned, repaired, ornamented, finished, adapted for sale, broken up or demolished, or in which materials are transformed.”

22.  As mentioned, the occupation permit for the Building was issued on 13 March 1972 (namely, not less than 30 years before the date of the Application) permitting workshops within the Building. For the purposes of regulations 29 and 33 of the Building (Administration) Regulations, where plans for building works have to be submitted for approval by the Building Authority, industrial building includes a workshop. Pursuant to section 21(6)(a) of the Buildings Ordinance, such an occupation permit would not have been issued if “any part of the building works” contravenes the Buildings Ordinance.

23.  The Lot also falls within an area zone “Commercial” under the approved Quarry Bay Outline Zoning Plan No S/H21/26 dated 6 July 2010, ie not within an industrial zone. The Notice is therefore applicable and the threshold percentage should be 80%.

24.  At the time of the filing of the Application, the applicants altogether owned 81.603% of the undivided shares of the Lot. We therefore agree that the applicants are entitled to make the Application under section 3(1) of the Ordinance.

EUV AS AT 22 DECEMBER 2017

25.  By their Joint Statement dated 17 November 2020, Mr Charles Chan and Mr Lee agreed on the parameters of the various factory units in the Building. These include the following:[3]

Floor	Flat Unit	Saleable Area (m2)	Unauthorised Cockloft on G/F or appurtenant Flat Roof on 4/F or encroached protected lobby on upper floors (m2)	Street Frontage (m)	Full Headroom (m)
G/F	A1	616.2	390.9	14.3	5.0 (3.3 under C/L)
	A2	477.2	88.0 + 19.2 (with restricted accessibility)	Nil	5.0 (4.5 under C/L)
	B	354.9	264.9 + 16.0 (encroachment at stairwell)	11.2	5.0 (3.3 under C/L)
1/F	A	643.7
	B	427.4
	C	465.5	23.4 (on Flat Roof) + 2.8 (encroached protected lobby)
	D	460.2
2/F-3/F (each)	A	643.7	3.4	NA	3.4
	B	427.4	2.8		3.4
	C	465.5	2.8		3.4
	D	460.2	3.4		3.4
4/F	A	333.3	313.9		3.4
	B	320.0	114.8		3.4
	C	333.3	137.2		3.4
	D	320.0	157.9		3.4
5/F-9/F (each)	A	333.3	3.4		3.4
	B	320.0	2.8		3.4
	C	333.3	2.8		3.4
	D	320.0	3.4		3.4
10/F-19/F (each)	A	333.3	NA		3.2
	B	320.0			3.2
	C	333.3			3.2
	D	320.0			3.2
Roof	A	324.0			NA
	B	322.8
	C	324.0
	D	322.8

26.  On the other hand, the two experts could not agree on the value of the unauthorised cockloft (if any) on G/F.

Definition of Market Value

27.  According to the Approved Building Plans, there did not exist any cockloft on G/F. However, as at the relevant date, Mr Benson Wong observed the following unauthorised cockloft being erected at units on G/F:

Flat Unit	Saleable Area (m2)	Observation	Building Order
A1	390.9	Office for the seafood wholesale shop	C/TB/000022/15/HK dated 9 June 2015[4]
A2	88.0 + 19.2 (with restricted accessibility)	Office and Storage for workshop
B	264.9 + 16.0 (encroachment at stairwell)	Furniture Display	C/TB/002173/15/HK dated 6 October 2015[5]

28.  Ms Ng Merlinda Man Ling (“Ms Ng), the Company Secretary of R2, explained in her witness statement dated 17 June 2020 as follows:[6]

“3. My family has been running business in seafood trading since 1973, through and under the name of a company called Worldwide Seafood Limited (“Worldwide Seafood”). … We engage in both whole-sale and retail trades, and our broad client base includes renowned 5-star hotels, restaurants, air catering, cruises and casinos (in Macau)[7] …

 

4. In 1995, as part of a business development, we acquired the G/F Unit through Well Full as a shop/factory and have continued trading at the premises ever since… Later in 2007, as the business continued to thrive and expand, we through Best Wheel acquired the 13/F Unit which serves mainly as an expanded factory for seafood processing ...

 

5. In order for our business to be carried out in the Units, both of the Units have a Food Factory Licence and the G/F Unit also has a Fresh Provision Shop Licence issued by the Food and Environmental Hygiene Department of Hong Kong (the “FEHD Licences”). We have also obtained the certificate of ISO 22000 for our food safety management system which has incorporated the elements of HACCP (Hazard Analysis and Critical Control Points) for our food safety standard (the “International Certification”) …

 

6. Our business, in its nature, is inseparable from the Units as the physical shop/factory because the business heavily relies on the installations and facilities in the Units (the “Installations and Facilities”) to process and store the seafood. For example, the G/F Unit is equipped with over 4,000 square feet of cold storage on elevated platform necessary for drainage and with industrial cooling system including chiller pipes and ventilation system and is laid with thermal insulating flooring for the purpose of maintaining a low room temperature. There are in the G/F Unit water holding tanks of over 8 tonnes in volume for keeping our stock of seafood fresh and alive.

 

…

Concerns about relocation

…

10. Secondly, if our operation is relocated, Worldwide Seafood’s qualification for the FEHD Licences and the International Certification has to be re-assessed all over again. Not only does it take money, it also takes time for the set-up and re-assessment which, in my experience and to my knowledge, will take over a year in practice:

10.1 It takes around 6 months for fitting out, renovation and installation of facilities and equipment: including 2 months for the measurement and production of the tailor-made refrigeration facilities; 1.5 months for installation, laying of pipes, etc; and at least 1 month test running of the system to ensure the proper functioning of the machinery. I would emphasise that the 1 month test running is the minimum testing time in the trade because the slightest failure in one single part of the system of the refrigeration and fish tanks would spoil all seafood and fish kept there.

10.2 After full fitting out, it takes 4 months for application and assessment for FEHD Licences. Note that no business can be carried out during this stage before the FEHD Licences have been granted.

10.3 After getting the FEHD Licences and that business could commence, it takes 3 further months for the application and assessment for the International Certification which can only be applied for after the business at the new location has been operating for at least 3 months. Take note the application for the International Certification cannot be done concurrently with the application for FEHD Licences. The prerequisite of applying for the International Certification is commencement of business with the FEHD Licences for at least 3 months.

…

 

Cockloft at the G/F Unit

18. I was personally involved in the acquisition of the G/F Unit back in 1995. At that time, there was already constructed a cockloft (the “Cockloft”) in the G/F Unit. The Cockloft was one of the main reasons why we purchased the G/F Unit for the extra space available …

 

19. Over the years, we have been using the Cockloft as an office and the Cockloft has been maintained in the same state without any addition or alteration.

 

Building Orders

20. I am aware that there are two outstanding encumbrances against the G/F Unit, which are two building orders issued by the Building Authority:-

20.1. Order No UBCS/05-40/0002/10 by the Building Authority under Section 24(1) of the Buildings Ordinance dated 5 January 2012 (Memorial No 12100501190425) (the “2012 Order”); and

20.2. Order No C/TB/000022/15/HK by the Building Authority under Section 24(1) of the Buildings Ordinance dated 9 June 2015 (Memorial No 15070201620047) (the “2015 Order”)

 

21. The 2012 Order concerns “a projecting structure attached to the external wall (facing rear lane) on G/F” and “replacement of an approved door at the entrance of Factory Flat A1 on G/F with a door inadequate fire rating”. We have already made rectification work in or around June 2015 but I believe that the 2012 Order is still in existence because no report has been made to the Buildings Department after the rectification.

 

22. The 2015 Order concerns the Cockloft. In around 2015, 2 officers of the Buildings Department … visited the G/F Unit and asked to inspect the premises … I remember that I was informed by … that they initiated the inspection upon receiving repeated complaints from some co-owners of Wah Ha and he said that there was found no imminent danger concerning the Cockloft but he was bound to issue a building order.

 

23. Subsequent to the said inspection, we received the 2015 Order dated 9 June 2015 from the Buildings Department. Since then, there has never been any other inspection requested and/or performed by the Buildings Department and I have never heard from the Buildings Department again in relation to the Cockloft. Over the years, I have continued to use the Cockloft as an office.

…”

29.  When Ms Ng gave her evidence in the afternoon of 19 November 2021, she confirmed the above once again and confirmed her reply to the query from the bench that when R2 purchased the Unit A1 in 1995, she was aware that the cockloft was unauthorised.[8] Also, when Ms Ng was informed by the officers of the Buildings Department that the latter received complaints against the cockloft almost daily, she referred the officers to Unit B on G/F where a cockloft was erected as well. Then the Building Authority issued C/TC/002173/15/K dated 6 October 2015 against Unit B.

30.  Ms Ng alleged that the officers from the Buildings Department told her that the enforcement against her cockloft would not be immediate or prioritised[9]. Ms Ng never received any warning or notice in respect of the cockloft from the Building Authority afterwards.

31.  When cross-examined by Mr Chan, SC, Ms Ng replied that she suspected the complaint to the Buildings Department arose because of the ongoing acquisition of units in the Building by the applicants[10].

32.  There is however no building order issued on the unauthorised cockloft in Factory Unit A2 on G/F.

33.  By Part 1 of Schedule 1 to the Ordinance, the market value of each property on the Lot has to be assessed:

(a)  on a vacant possession basis;

(b)  assessed as if the lot could not be made the subject of an application for an order for sale; and

(c)  not taking into account the redevelopment potential of the property or the lot.

34.  The word “property” is defined under section 2 of the Ordinance to mean immovable property. Thus, by this definition, it does not matter whether a property is authorised or unauthorised, ie an unauthorised property is not necessarily excluded from being assessed if it had a value.

35.  We note that there has been continuous doubt on whether an unauthorised property can attract market value, for instance, in determining the EUV under the Ordinance. At this juncture, we would like to emphasise once again that EUV or Existing Use Value is only a term coined by the valuation profession in similar compulsory sale application cases; indeed, when the Ordinance was originally drafted as a Bill, the provision contained the words “and existing use” between “vacant possession” and “basis”. But in the Provisional Legislative Council Meeting on the Bill on 26 February 1998, “existing use basis” was deliberately deleted as members in the meeting expressed concern that an existing use might be unauthorised and should not be encouraged.

36.  In spite of the above, the term “market value” on a vacant possession basis was not further elaborated.

37.  In Join Union Investment Limited v China Tree Investment Limited, [2016] 2 HKLRD 901, there was a subdivision of the ground floor premises into four shops. The structural engineering expert in the case could not cite any example or authority where, in similar circumstances, the Government or the Building Authority took enforcement action requiring demolition of the partitioning and reinstatement of the property to its original state. Chow J (as he then was) was of the view that there was no real risk of enforcement by the Government or Building Authority in respect of the alleged unauthorised partitions(see §§97-103 of the judgment).

38.  At §107 of the judgment, the learned judge observed that:

“... it is apparent, from the evidence of Mr Lai, Madam Chan and Madam Shiu, that none of them considered the 2010 Building Order, or indeed any unauthorised building works in the Property, to be of any great moment. Prior to the respective purchases of the Property by the defendant (through Madam Chan) and the plaintiff (through Madam Shiu), none of them took the trouble to go inside the Property to inspect its physical conditions, or ascertain whether there might be any unauthorised building works in the Property. Even after her attention had been drawn to the 2010 Building Order, Madam Shiu did not carry out any further investigation prior to entering into a binding contract to purchase the Property, and was prepared to accept a modest sum of HK$20,000 from the defendant as sufficient compensation for the costs of complying with the 2010 Building Order. The existence of unauthorised building works in retail premises, especially in the older districts in Hong Kong, is common place and does not appear to have any significant impact on their market or capital values. These properties change hands frequently like ordinary commercial commodities, as demonstrated in the present case by the fact that the defendant (through Madam Chan) purchased the Property in September 2010 and sold it to the plaintiff (through Madam Shiu) in March 2011 for a handsome profit. It is contrary to market reality to treat the existence of an unauthorised cockloft, even of a substantial size like the present one, as constituting a title defect going to the root of title....” (emphasis added)

39.  Thus, when we take judicial notice that when shops consisting of unauthorised structures are sold, they are usually sold on an “as is” basis. This does not contravene the vacant possession basis (which is in contrast to “subject to an occupier or tenancy”).

40.  In Circle Angle Limited v Orchard Enterprise (Hong Kong) Limited, DCCJ 1252/2011 (unreported, dated 6 February 2012), the purchaser was aware that the property which it intended to purchase was subject to a notice issued under section 24C(1) of the Buildings Ordinance. In spite of this, it signed a Provisional Agreement which contained a clause that read:

“買方日后不能藉此拒絕交易”.

41.  Something similar took place in Gold Glory International (HK) Limited v K W Wong Investment Company Limited, HCMP 1618/2012 (unreported, dated 17 December 2013) where the parties agreed that:

“The purchaser and vendor declare that they are both aware of the (two notices by the Building Authority under section 24C(1) of the Buildings Ordinance) where the property is situated. Both parties hereby agree to complete the transaction notwithstanding the (two Notices) ...”

42.  And more recently in LDCS 5000/2019 (unreported, dated 19 October 2022), in respect of an Agreement for Sale and Purchase dated 21 December 2021 of a comparable at G/F, 80 Nam Cheong Street, it was subject to a tenancy agreement specifically referring to the premises which included an unauthorised cockloft.

43.  The recognition that unauthorised structure attracts market value is not new. In Hong Kong Telephone Company Limited v The Hong Kong Land Company Limited, LDLA 5/1982 (unreported, 5 November 1982), the Tribunal considered market rent appropriate for the premises although there was an illegal addition in the form of an enclosed void at ground level having been converted into a playroom.

44.  In the above case, because of the steep slope down from the road level, the foundations of the building continue for a considerable further distance below the lower level floor opening onto a paved open garden area. The area of these foundations below the lower level floor has been closed to provide a playroom. Thus, the conversion created a 4^th storey but the Government Lease limited the building to only 3 storeys. The Tribunal held that while the enclosed foundation area used as a playroom did not form part of the legal gross floor area, it was part of the suit premises and must for valuation purposes be taken into account as ancillary to the residential area, in the same way as the garden and car park areas were likewise ancillary. The Tribunal was satisfied that its existence could reasonably be expected to attract a slightly higher rent than if it did not exist, in the same way as other ancillary features add value to premises. The possibility that the landlord may at sometime have to remove the glass doors enclosing the area could not be discounted, nor could the probability that it is allowed for the time being.

45.  This view is supported by Transport for London (London Underground Limited) v Spirerose Limited [2009] 1 WLR 1797, [2009] UKHL 44, where Lord Neuberger pointed out at paragraph 50:

“First, if a statute directs that property is to be valued on an open market basis as at a certain date, one would not expect any counter-factual assumptions to be made other than those which are inherent in the valuation exercise (such as the assumption that the property has been on the market and is the subject of a sale agreement on the valuation date) or those which are directed by the statute.”

46.  When a property comprises an unauthorised structure, we consider it counter-factual if the presence of such unauthorised structure is assumed not to have existed.

47.  More recently, in Newbigin (VO) v SJ & J Monk (A Firm) [2015] 1 WLR 4817, Lewison LJ discussed “the reality principle” in these terms:

“It is a well-known principle of valuation, not confined to rating, that in principle you must value the property as it stands on the valuation date. This is the principle of reality; or as classicists prefer to call it, the principle that property must be valued rebus sic stantibus. This principle can be displaced by contrary instructions in the statute or contract under which the valuation takes place.”[11]

48.  Then in Hong Kong, in Lai Kit Lau Mutual Aid Committee v Commissioner of Rating and Valuation [1986] HKLR 93 in respect of rating illegal structures which were to be assessed on the assumption that they were vacant and available to be let[12], Kempster, JA of the Court of Appeal quoted the speech of Lord Buckmaster in Port of London Authority v. Assessment Committee of Orsett Union and Others [1920] A.C. 273 at p 305:

“The actual hereditament of which the hypothetical tenant is to be determined must be the particular hereditament as it stands with all its privileges, opportunities and disabilities created or imposed either by its nature position or by the artificial conditions of an Act of Parliament.”

49.  Kempster, JA even remarked at the same paragraph of the judgment, ie §7 that:

“In carrying out this exercise statutory restrictions which affect the occupation of the premises must be taken into account as must possibilities of waiver by the Crown or of the willingness of potential occupiers to incur the risk of breaking the law.”

50.  In effect, what the Tribunal stated in Kannix Limited & Another v Coreluxe Developments Limited & Others, LDCS 8000/2018 (unreported, dated 25 March 2020) echoed the above:

“Nature and characteristics of UBW, like mode of construction and enclosure, materials, location, and etc., and their history would have bearing on the risk of enforcement for their demolition and removal as well as the assessment of their advantages and disadvantages. If a structure should be demolished and removed soon, its demolition and removal costs may be greater than its short term benefits. The UBW with higher risk of safety and greater exposure would generally have higher risk of enforcement” (where UBW stands for unauthorised building works).

51.  Referring back to Transport for London, supra, we do not consider any particular evidence is needed to prove the existence of market value of an unauthorised structure, save for quantum, when this is recognised as a market reality. In this connection, we are content to cite Swinfen Eady LJ’s explanation of a sale in the open market in IRC v Clay & Buchanan [1914] 3 KB 466 at 475:

“… means such amount as the land might be expected to realise if offered under conditions enabling every person desirous of purchasing to come in and make an offer, and if proper steps were taken to advertise the property and let all likely purchasers know that the land is in the market for sale. It scarcely needed evidence to inform us – it is common knowledge – that when the fact becomes known that one probable buyer desires to obtain any property, that raises the general price or value of the thing in the market. Not only is the probable buyer a competitor in the market, but other persons such as property brokers compete in the market for what they know another person wants, with a view to resale to him at an enhanced price, so as to realise a profit. A vendor desiring to realise any land would ordinarily give full publicity to all facts within his knowledge likely to enhance the price. The local conditions and requirements, the advantages and situation of the property for any particular purpose, and the names of the persons who are probable buyers would ordinarily be matters of local knowledge to the property brokers, agents and speculators. In order to arrive at the amount which the land might be ‘expected to realise’ all these matters ought to be taken into consideration.” (underline added)

52.  Cheung Kwong Yuen v Sun Hui Fang, CACV 112/2015 which has been reported as [2016] 1 HKLRD 464 concerned an appeal from an application for recovery of vacant possession of unauthorised roof top structure of a building at 107 Tai Nan Street, Kowloon. During the trial before the Tribunal, being LDPD 1740/2014, it was found that Suen Chor Ming (alias Suen Ming Fai), the brother of the respondent, Madam Sun, had paid money in 1992 for acquiring the occupation of the corrugated steel sheet structure existing on the roof of the building. Obviously no legal title was passed and the Tribunal considered adverse possession by Madam Sun was not proven. Madam Sun’s subsequent appeal was allowed by the Court of Appeal on 30 January 2015 and the case was remitted to the District Court for retrial, which became DCCJ 743/2016. The District Court found adverse possession in favour of Madam Sun on 6 September 2017 and appeal by Mr Cheung, the unfortunate landlord who failed to verify the status of Madam Sun when he made the purchase on 31 October 2013, was refused by the Court of Appeal on 26 February 2019 in CAMP 64/2017.

53.  From this case, it is manifested that the unauthorised roof top structure commanded market value in 1992. It also continued to attract significant market value at least until early 2019 despite a lapse of some 27 years. Otherwise, Madam Sun would not have taken the time and trouble in advancing her adverse possession claim. Without the shelter provided by the unauthorised roof top structure, it is absurd to think that Madam Sun would reside on an open roof.

54.  The Tribunal has witnessed similar landlord and tenant disputes on the letting of unauthorised structures. LDPD 1802/2021 was another case where the landlord sought vacant possession of an unauthorised roof top structure which had been let since 1980. Obviously, the unauthorised roof top structure commanded significant market value from 1980 till at least the commencement of 2022 when the case was heard.

55.  In Joint Hope Limited v Vecent Hong Kong Trading Limited & Others, LDCS 21000/2019 (unreported, dated 9 July 2021), the Building Authority issued to the owner of G/F, including the space underneath the staircase, 38 Ming Fung Street, Kowloon, a building order dated 11 May 2018 under section 24(1) which required the owner to demolish the unauthorised building works that included the structure erected on and over the yard but not the cockloft at high level of the G/F Shop. Then on 31 May 2019, the Building Authority issued a letter to the owner stating that: “As the building works have been modified, I am prepared to withhold further enforcement action for the time being, and withdraw my Order.” As at the land search of 5 February 2021, no order was issued against the cockloft.

56.  Surely, when the Building Authority issued the order of 11 May 2018, it should have known about the unauthorised cockloft (against which notice was issued in 2016). Yet the Building Authority did not enforce against such cockloft in the order of 11 May 2018. Neither did the withdrawal letter of 31 May 2019 mention anything about the cockloft save to state that the premises were not free of any other unauthorised building works.

57.  Similarly, in the same case, on 11 May 2018, the Building Authority issued to the owner of G/F, including the space underneath the staircase, 44 Ming Fung Street, a building order under section 24(1) which required the owner to demolish the unauthorised building works that included the structure erected on and over the yard but not the cockloft at high level of the G/F Shop. Then on 17 August 2018, the Building Authority issued a letter of compliance of the order.

58.  In Sound Advice Property Limited & Others v Mok Wai Ching & Mok Yui Cheung Anthony, LDCS 18000/2020 (unreported, dated 21 December 2021), the Tribunal found that although Building Orders against an unauthorised building structure had been issued in March 2007, the Building Authority had not taken any further action for at least 14½ years until the date of the trial.

59.  In Link Harvest Ltd v Wayhang Development [2001] 2 HKC 652, Recorder Edward Chan SC said:

“Even though s24 gives the Building Authority a discretion on whether to exercise its power against a particular contravention and what order it would make if it has decided to exercise its power, in my judgment, prima facie, one would normally expect that the Building Authority would take enforcement action against the unauthorised building or structures. Thus, unless there is a good reason for believing that the Building Authority would not take any action, where a building or structure was erected in contravention of the Buildings Ordinance, there is the risk of an enforcement action by the Building Authority so as to render the title of that building or that structure to be defective. It is difficult to state exhaustively what would be the good reasons. The typical one would be where the breach is very trivial, or where because of the nature and the age of the structure, the enforcement priority within the Building Authority was so low that it could be expected that the time for enforcement would not come even by the end of the practical life of the building or structure in question.” (underline added)

60.  More recently, in 803 Funds Limited v Director of Buildings [2021] 2 HKLRD 1274, it was confirmed once again that there is a “risk-based” approach in determining the priority of enforcement action under the Buildings Ordinance against building safety issues. The Building Authority may consider the following unauthorised building works not fall within the list of Actionable Items:[13]

(1)  Existing unauthorised cocklofts on ground floor not constituting obvious hazard or imminent danger to life or property, and

(2)  Unauthorised internal staircases constructed prior to 2011 and not constituting obvious hazard or imminent danger to life or property.

61.  In this 803 Funds case, it was confirmed that such a “risk-based” approach is applicable to any unauthorised change in use. More particularly, under the enforcement guidelines, “(c)ontraventions on other planning matters such as lighting and ventilation, plot ratio, site coverage and height should not warrant immediate action.”[14]

62.  Notwithstanding the above, in the present case, we note that Factory Units A1 and B were served with the Building Orders anyway but Ms Ng had explained clearly the “(n)ature and characteristics of UBW… location, and etc., and their history.” We have taken judicial notice what happened in Joint Hope Limited and Sound Advice Property Limited, supra and with the benefits of hindsight, we do not observe any enforcement actions by the Building Authority. We agree the cockloft in both Factory Units A1 and B should attract market value.

63.  And in respect of the cockloft inside Factory Unit A2, indeed no building order has ever been served despite the officers of the Buildings Department had visited the adjoining units and served the building orders as stated. We are content to assign a market value to the cocklofts in Factory Unit A2.

64.  On the other hand, Mr Lin referred to the Deed of Mutual Covenant dated 4 April 1972 for the Building where the following provisions are found in the Second Schedule:

“5. Not to make any structural alteration to any factory unit of which he is the owner nor cut maim, injure, damage, alter or interfere with any part or parts of the said premises or building in common use ….

6. Not to use or permit or suffer any factory unit of which he is the owner to be used for any purpose whatsoever other than industrial.”

65.  Mr Lin submitted that nobody, including the Incorporated Owners of the Building (“the IO”), has the power to give permission or acquiescence for the structural alteration or change of use, if any.

66.  In that regard, we would like to refer to the witness statement dated 17 June 2020 prepared by Mr Cheung Kar Wai Lawrence (“Mr Cheung”) who is the managing director of R4, R5 and R7, as well as the Chairman of the Management Committee (“the Management Committee”) of the IO since 15 April 2011.

67.  During the cross-examination by Ms Chan on 22 November 2021, for instance, Mr Cheung conceded that even the existing management office on G/F is not something approved by the Approved Building Plans. Mr Cheung also conceded that even prior to his becoming the Chairman of the IO, the management of the Building did tolerate structural alteration works inside individual units. As pointed out by Ms Chan, in a minute of the Management Committee’s meeting dated 14 August 2015, the structural alteration on the external walls outside Factory Flat D on 19/F was acquiesced to the extent that the owner was required to sign a guarantee and pay a deposit[15].

68.  Mr Cheung was further cross-examined by Mr Yuen who acted on behalf of R2, R6, R8 and R9 and replied that he or the Management Committee had been aware of the unauthorised doorway formed in the compartment wall between the Factory Flat A1 on G/F and the loading/unloading area for a long period of time but did not take any enforcement action.[16]

69.  There used to be a canteen which occupied the common area on G/F of the Building, the Management Committee was content to turn a blind eye to its unauthorised operation until its food licensed was terminated by the relevant authority.[17]

70.  Mr Cheung also confirmed that the Management Committee remained silent when Factory C on 13/F decided to construct a raised floor to sustain heavy water tanks[18].

71.  According to Mr Cheung, the Building has been occupied by many mini-stores[19], he used to let his units to ping pong ball classes, yoga classes etc[20] which in our view are not industrial by reference to the Court of Final Appeal decision in Raider Limited v the Secretary for Justice [2003] 3 HKLRD 300, (2000) 3 HKCFAR 309.

72.  Thus, despite Mr Cheung’s claim that he or the Management Committee had provided quality building-related services, many non-industrial uses have been permitted or otherwise acquiesced for a long period of time. Mr Benson Wong also found most of the units had been used as offices which were installed with false ceilings[21]. In The Incorporated Owners of Freder Centre v Gringo Limited & Another [2016] 2 HKLRD 190, the Court of Appeal found that “nearly all the other owners or occupiers of … units have for many years committed similar breaches, and the applicant has never taken any enforcement action or proceedings against them suggests that the breaches are prevalent and have over the years been tolerated by the applicant.” Citing Cheung Yuet & Anor v. The Incorporated Owners of Oriental Gardens [1979] HKLR 536 where many other owners in the building had committed similar breaches, the Court of Appeal ruled that it would be inequitable to grant the injunctive relief against the breaches of the deed of mutual covenant.

73.  Thus, even taking into account any possible enforcement action by the IO or co-owners, value should be attributed to the “unauthorised” uses which appear to have been acquiesced for a long period of time. Such conduct by the IO can in effect be regarded as an implied waiver of the covenant in the DMC[22]. Mr Lin argued that if that was the case, there should be no reason why the Tribunal should not have assessed the upper floor units on the basis of non-industrial use. To reply, it is no secret that many industrial units so-called nowadays had attracted non-industrial users. To cite the principle as elucidated by IRC v Clay & Bunchanan, supra, so long as the valuers made reference to transactions of those industrial units, the open market value of the upper floor units capable of non-industrial uses, which is a market reality, has been properly reflected. This is not a counter-factual assumption as submitted by Mr Lin.

74.  Therefore, with respect to Mr Lin, we are content to assign values to the unauthorised cockloft existing at Factory Flat A1 and Factory Flat B on G/F. It is unfair that a landowner should receive less than the market value for its interest when there is no express qualification or restriction by the Ordinance.

EUV for G/F Premises

75.  Although the occupation permit of the Building described the workshop spaces on G/F as such and by the Deed of Mutual Covenant, the “factory units” were restricted to industrial use, the Government lease for Lot imposes no such restriction.

76.  In the leading decision of the Privy Council in Vyricheria v Revenue Divisional Officer [1939] AC 302 (“the Indian Case”), Lord Romer stated at 314 as follows:

“… it has been established by numerous authorities that the land is not to be valued merely by reference to the use to which it is being put at the time at which its value has to be determined … but also by reference to the uses to which it is reasonably capable of being put in the future.”

77.  In addition to the discussion on the enforcement policy of the Building Authority and the continuous use of the G/F premises in non-industrial use, Ms Chan referred also to Alliance Fame Limited & Others v Mak Kam To & Others, LDCS 9000/2015 (unreported, 4 August 2017) where the basement units, despite being permitted for storage purpose only, can be compared and valued as if they were retail spaces insofar as such were the highest and best use in the market.

78.  Mr Charles Chan and Mr Lee had agreed to adopt Factory Unit A1 on G/F as the reference unit and indeed made reference to the following shop transactions as comparables:[23]

Comp Ref	Address	Age of Building	Date of Sale	Consideration	Saleable Area (m2)	Frontage (m)	Return Frontage	Full Headroom (m)	Unit Price* (/m2)
	Factory Unit A1	1972	22 Dec 17		616.2 + C/L 390.9	14.3		5.0 (3.3 under C/L)
A1	Shop G1, G/F & Car Parking Space No 25, Tai On Building, 57-87 Shau Kei Wan Road	1968	9 Feb 18	$59,200,000	57.7	11.5	4.7	3.5	$1,025,997
A2	Shops B & C, G/F, Fortwest, 1 Westlands Road	1982	31 Jan 18	$83,000,000	175.2	16.6		4.2	$473,744
A3	Unit 3, G/F, Shing On Building, 38-46 Shing On Street	1965	11 Aug 17	$23,000,000	51.5 + yard: 9.4	4.9		4.4	$433,145
A4	Unit D, G/F, North Point Mansion, 692-702 King’s Road	1959	8 Aug 17	$17,028,000	48.5	4.9		3.0	$351,093
A5	Unit A, LG/F, Splendid Place, 39 Taikoo Shing Road	200.4	25 Jul 17	$55,000,000	84.5	6.1		3.8	$650,888
A6	G/F & Cockloft, 949 King’s Road	1955	14 Jul 17	$37,680,000	76.7 + C/L: 15.1 + yard: 29.0	5.4		5.2	$451,799
A7	Shop G22, G/F & Car Parking Space No 5, Tai On Building, 57-87 Shau Kei Wan Road	1968	5 Jul 17	$29,200,000	72.0	5.9		3.8	$405,556
A8	G/F, 5 Shing On Street	1958	12 Jun 17	$30,500,000	51.5 + Yard:10.6	4.6	5.4	3.0	$572,233
A9	Shop 1, G/F, Parker 33, 33 Shing On Street	2017	30 Mar 17	$57,000,000	75.7	9.0	8.3	5.0	$752,972
A10	Shop G23, G/F, Tai On Building, 57-87 Shau Kei Wan Road	1968	21 Mar 17	$28,500,000	72.0	5.9		3.8	$395,833
A11	Unit A, G/F, Lai Wan Building, 33-55 Shau Kei Wan Street	1965	3 Mar 17	$22,800,000	50.4 + Yard: 8.5	4.5		4.2	$440,154
A12	Shop 3, G/F, Parker 33, 33 Shing On Street	2017	27 Feb 17	$25,900,000	51.6 + Yard: 2.9	3.9		5.0	$497,121

* Value of Cockloft (authorised) assumed at 1/8 of value proper on G/F

Value of Yard assumed at 1/6 of value proper on G/F

79.  In addition, Mr Charles Chan and Mr Lee had the following agreements/disagreements on the adjustments to the comparables:[24]

	Mr Charles Chan	Mr Lee
Time	Private Retail Price Index published by the Rating and Valuation Department (“RVD”)
Size/ Quantum	1% per 30 m2 difference for the first 300 m2 difference, lower unit rate for larger size	1% per 50 m2*
Building Age	1% per 5 years difference
Frontage	2% per 1 m difference
Headroom	4% per 1 m
Total Adjustment	By Multiplication

* Eventually Mr Lee adopted the same adjustment rate for size/quantum as that by Mr Charles Chan as he found the resulting adjustments were pretty much the same.

80.  Mr Charles Chan arrived at a unit rate of $326,000 per sq m[25] while Mr Lee arrived at a unit rate of $391,000 per sq m[26].

Adjustment for Location

81.  Whereas Zung Fu Industrial Building, the subject of LDCS 6000/2018, was situated around the corner of King’s Road and Shipyard Lane, the Building is situated behind Zung Fu Industrial Building with the entrance, particularly the vehicular entrance, from Shipyard Lane. Factory Unit A1 and Factory Unit B have however frontages onto King’s Road on the other side of the Building. Apart from those, this section of King’s Road has virtually no shopfront until the entrance to Cityplaza in Taikoo Shing. Residents of Taikoo Shing, a comprehensive residential estate nearby, are unlikely to walk pass the Building as a wide range of shopping facilities are provided in Cityplaza. They enjoy also their closer proximity to the MTR entrances in Taikoo Shing itself instead of the one opposite Zung Fu Industrial Building.

82.  There is a pedestrian crossing in front of Zung Fu Industrial Building on King’s Road opposite Kornhill Plaza (a commercial complex) with an exit of Taikoo MTR Station nearby. Residents of Taikoo Shing are unlikely to use this exit as they enjoy their closer MTR entrances. Passengers coming from this exit using the crossing would mostly turn left onto the much busier section of King’s Road.

83.  Factory Flat B is situated closer to this pedestrian crossing but pedestrian flow was broken by the petrol filling station that used to be located on the ground floor of Zung Fu Industrial Building. According to Mr Cheung, there used to be an emergency exit of the Building next to the petrol filling station so that people tended to make use of it as a short cut either for gaining access to the Building or the buildings further down Shipyard Lane. However, this emergency exit had been closed in early 2019 for security reason. As a result, people crossing the pedestrian crossing would not be attracted towards Factory Flat B or Factory Flat A1 unless they are their destinations. Residents living on the other side of the Building along King’s Road, for instance, in Taikoo Shing which is a large scale and comprehensive residential estate comprising some 61 residential blocks and a regional shopping centre, would likewise not be attracted to pass along this section of King’s Road because they have the benefits of the regional shopping centre and their MTR exits.

84.  According to Mr Lee however, there used to be a mini-bus stop close to the frontage of Factory Flat B as at the relevant date and this may be confirmed by reference to the photos taken by Mr Benson Wong during his survey period between April 2017 to December 2019[27]. Notwithstanding the latter, we are not persuaded that pedestrian flow in front of either Factory Unit B or Factory Flat A1 was heavy as at the relevant date.

85.  As we stated at §64 in LDCS 6000/2018, “comparables” located near the market place in another completely different district in Sai Wan Ho should be disregarded. The same also applies to Comparable A1 (also a corner shop opposite a pedestrian crossing), Comparable A3, Comparable A7 (which is occupied by Pizza Hut), Comparables A8-A12 etc.

86.  Comparable A2 is also not a good comparable as it is situated close to the junction of King’s Road and Westlands Road which is a local distributor leading all the way to Taikoo Place, a newly developed commercial/office hub. It is occupied by a food chain restaurant. Although both Mr Charles Chan and Mr Lee agreed to a -10% location adjustment, with respect, we are not persuaded. It is hard to believe that the food chain restaurant would be willing to relocate to the position of Factory Flat A1 with a saving of 10%. We are going to apply -20% as a minimum.

87.  Comparable A4 is occupied by a local restaurant as well. Likewise, we prefer a location adjustment of -20% to the -10% agreed by the two valuation experts.

88.  Although termed as a unit on lower ground floor, Comparable A5 is indeed on road level and is occupied as a clinic, but next to a Vietnamese restaurant. It is situated also opposite a pedestrian crossing that leads to On Shing Terrace of Taikoo Shing and One Island East, a relatively new Class A office building. We prefer Mr Charles Chan’s adjustment of -35% to Mr Lee’s -5%.

89.  Comparable A6 is occupied by a local restaurant as well along King’s Road which is a main distributor in the district where heavy traffic passes along. Again, we prefer Mr Charles Chan’s adjustment of -35% to Mr Lee’s -5%.

Adjustment for Layout

90.  Both Mr Charles Chan and Mr Lee had the same pattern of layout adjustment but Mr Lee’s adjustment quantums were all 5% less than those by Mr Charles Chan. Considering the layout of the comparables, we agree with Mr Charles Chan.

Conclusion on EUV

91.  While Mr Charles Chan and Mr Lee agreed on other factors for adjustments, our assessment of the EUV for the reference unit is as follows:

Comp Ref	Unit Price (/m2)	Adjustments								Adjusted Unit Price (/m2)
		Time	Location	Size	Age	Headroom*	Layout	Frontage	Total
A2	$473,744	-0.8%	-20%	-10.7%	-2.0%	3.2%	-15.0%	-4.6%	-41.9%	$275,245
A4	$351,093	2.7%	-20%	-11.3%	2.6%	7.6%	-20.0%	18.8%	-23.5%	$268,586
A5	$650,888	3.5%	-35%	-11.2%	-6.4%	4.8%	-15.0%	16.4%	-42.0%	$377,515
A6	$451,799	3.5%	-35%	-11.2%	3.4%	-0.8%	-15.0%	17.8%	-38.6%	$277,405
								Average (excluding A5)		$273,745

* The area of the unauthorised cockloft at Factory Unit A1 occupies mainly its rear portion and therefore, we accept the headroom adjustments agreed by the experts.

92.  The adjusted results of 3 of the comparables come very close around $274,000 per sq m whereas that for Comparable A5 jumps out of the tone. We agree that this phenomenon arises because we have increased the location adjustments for Comparable A2 and A4 by an additional -10%. But even if we have not done so, the adjusted unit rate for Comparable A5 would similarly jump out of the tone; the average of the adjusted unit rate for the remaining 3 comparables would be higher at about $296,391 per sq m which is only about 8% higher than $274,000 per sq m.

93.  In respect of Mr Lee’s assessment, we regret that on the one hand, he stated that those comparables in Sai Wan Ho are situated in a different neighbourhood with different character and catchment area from the subject. On the other hand, he applied minimum location adjustments, eg 0% to Comparables A7 & A10 or -10% to Comparables A3 & A12, which is contradictory to his own opinion.

94.  Having reviewed the above, we are content to adopt $274,000 per sq m as the unit rate of Factory Unit A1 for the ground floor proper.

95.  In addition, we are prepared to add the value of the unauthorised cockloft which, according to the agreement between Mr Charles Chan and Mr Lee, would be about 1/8 of that for the ground floor proper:

EUV of Factory Flat A1
G/F	616.2 m2	x	$274,000 per m2	=	$168,838,800
Cockloft	390.9 m2	x	$34,250 per m2	=	$13,388,325*
				Total:	$182,227,125
				Say	$182,200,000

* The value of this unauthorised cockloft adds less than 10% to the market value of the premises.

96.  Then, we assess the EUV of Factory Flat B (which we agree with Mr Charles Chan that its location is better) as follows:[28]

Unit B	Area (m2)	Adjustments					Adjusted Unit Rate (/m2)	EUV
		Location	Size	Layout	Frontage	Total
G/F	354.9	5.0%	8.2%	5.0%	-6.2%	11.9%	$306,606	$108,814,469
Cockloft	264.9						$38,326	$10,152,491
							Total:	$118,966,961
							Say	$119,000,000

97.  But in respect of Factory Flat A2, it has no frontage onto King’s Road. For that, Mr Charles Chan proposed an adjustment of -30% whereas Mr Lee proposed -70%.

98.  During cross-examination, Mr Charles Chan explained that his -30% was arrived at by reference to the frontage adjustment of 2% for 1 metre and the lack of frontage of Factory Flat A2 when compared with Factory Flat A1 which has a 14.2m frontage. He further stated that this figure had already taken into account the foot traffic brought by the closed emergency exit.

99.  On the one hand, we do not consider the closure of the emergency exit or otherwise would have affected much the value of Factory Flat A2 which in any way does not have direct access from King’s Road. On the other hand, we consider Mr Charles Chan not having placed enough weight on that Factory Unit A2 can be vehicularly accessible via the “unauthorised” door opening near the loading and unloading area of the Building. We consider Mr Charles Chan’s adjustment of -30% more appropriate than again the arbitrary -70% proposed by Mr Lee.

100.  Indeed, Mr Lee had prepared an alternative valuation by reference to transactions of industrial premises on upper floors[29]. To adjust for the floor level difference from his reference unit on 10/F, Mr Lee simply marked it up by 15%. With respect, this percentage appears to be too arbitrary and in any event does not reflect the value of the premises on G/F with vehicular access.

101.  We further agree with Mr Charles Chan that this unit has a more regular shape and therefore agree to the +10% suggested by him.

102.  As regards the portion of the unauthorised cockloft which has restricted access with an area of only 19.2 sq m, we are content to disregard this small area in our assessment:[30]

Unit A2	Area (m2)	Adjustments				Adjusted Unit Rate (/m2)	EUV
		Size	Layout	Street Frontage	Total
G/F	477.2	4.2%	10.0%	-30.0%	-65.6%	$219,748	$104,863,746
Cockloft	88.0					$27,469	$2,417,228
						Total:	$107,280,974
						Say	$107,300,000

EUV for Upper Floors

103.  In respect of the upper floors, Mr Charles Chan and Mr Lee had agreed to adopt Factory Flat A on 10/F as the reference unit and made reference to the following workshop transactions as comparables:[31]

Comp Ref	Address	Year of Building	Date of Sale	Consideration	Saleable Area (m2)	Loading Capacity (lbs/sq ft)	Full Headroom (m)	Unit Price* (/m2)
	Factory Unit A, 10/F	1972	22 Dec 17		333.3	150	3.2
D1	Unit 2, 3/F, Westlands Centre, 20 Westlands Road	1989	3 Jan 18	$24,800,000	160.6 + F/R: 107.0	300	3.2	$139,013
D2	Unit 5, 3/F, Westlands Centre, 20 Westlands Road	1989	3 Nov 17	$21,700,000	154.7 + F/R: 72.3	300	3.2	$126,401
D3	Unit 5, 8/F, Eastern Centre, 1065 King’s Road	1985	15 Jun 17	$20,429,000	187.7	150	3.3	$108,839
D4	Unit 7, 22/F, Westlands Centre, 20 Westlands Road	1989	20 Nov 17	$20,300,000	160.6	200	3.2	$126,401
D5	Unit 6, 9/F, Westlands Centre, 20 Westlands Road	1989	20 Nov 17	$20,300,000	160.6	300	3.2	$126,401
D7	Unit 6, 14/F, Westlands Centre, 20 Westlands Road	1989	27 Apr 17	$20,270,000	160.6	200	3.2	$126,214
D8	Unit 7, 14/F, Westlands Centre, 20 Westlands Road	1989	27 Apr 17	$20,271,000	160.6	200	3.2	$126,220
D9	Unit 4, 6/F, Westlands Centre, 20 Westlands Road	1989	10 Feb 17	$17,778,000	143.7	300	3.2	$123,716
D10	Units 7 & 8, 17/F, Westlands Centre, 20 Westlands Road	1989	17 Jan 17	$33,000,000	302.1	200	3.2	$109,235
D11	Unit 1, 15/F, Westlands Centre, 20 Westlands Road	1989	30 Dec 16	$18,958,000	154.7	300	3.2	$122,547

* Value of Flat Roof is assumed at 1/6 of that of floor proper.[32]

104.  In addition, Mr Charles Chan and Mr Lee had the following agreements/disagreements on the adjustments to the comparables:[33]

	Mr Charles Chan	Mr Lee
Time	Flatted Factory Price Index published by RVD
Size/ Quantum	1% per 50 m2 difference for the first 300 m2 difference, 1% per 250 m2 difference for remaining difference	1% per 150 m2
Building Age	0.25% per 1 year difference
Floor	0.5% per 1 floor difference
Headroom	2% per 1 m	4% per 1 m
Building Management	-5% for Westlands Centre -2% for Eastern Centre
Total Adjustment	By Multiplication

Adjustment for Location

105.  Again, Mr Charles Chan and Mr Lee could not agree on the adjustment for location. For instance, Mr Charles Chan considered the environment and location of Westlands Centre more pleasant than that of the Building. He proposed an adjustment of -5%. On the other hand, Mr Lee considered visitors and users of the industrial buildings including the employees there more concerned about the ease of access to public transportation and amenities. He proposed an adjustment of 5%, that is in opposite direction to that of Mr Charles Chan.

106.  With respect, we agree with Mr Charles Chan. Both the Building and Westlands Centre are situated at the same locality but the latter is in closer proximity to the commercial hub of Taikoo Place. The choice of which premises to buy or rent will be made by the prospective business operators; the ease of access to public transportation and amenities, though a relevant factor, may not be the most important factor for consideration. Indeed, while the emergency exit could no longer be used as a main entrance to the Building, the degree of convenience or proximity to the Taikoo MTR station is diminished.

107.  Having said that, we are content to adopt zero adjustment for location in respect of the transaction at Eastern Centre.

Adjustment for Headroom

108.  In the past, high headroom was an important factor for industrial premises for the installation of heavy or bulky plant or machinery; for instance, according to Mr Cheung, the Building was occupied dominantly by printing press or related industries. However, most of the industrial premises in the subject location are occupied by light industrial or even non-industrial uses. In this regard, we agree with Mr Charles Chan’s lessor adjustment for headroom.

Adjustment for Floor Loading Capacity

109.  Notwithstanding the above comment, we consider higher floor loading capacity being still favoured for the installation of high technology equipment. In this regard, we prefer Mr Charles Chan’s adjustment.

Adjustment for Facilities

110.  By agreement of the valuation experts, Westlands Centre enjoys the benefits of 21 lorry carparking spaces, 23 private carparking spaces, 8 cargo lifts etc which are superior to the Building. Similarly, Eastern Centre enjoys the benefits of 28 lorry carparking spaces, 30 private carparking spaces, 8 cargo lifts and 3 passenger lifts etc.[34]

111.  Also, both Westlands Centre and Eastern Centre are fitted with automatic sprinkler system which is lacking in the Building.

112.  In this regard, Mr Charles Chan proposed an adjustment of -10% while Mr Lee proposed -5%. In respect of the difference, Mr Lee explained that facilities available to a building should be commensurate with the scale of the building. He considered the facilities available to the Building which comprises no carparking spaces and 4 cargo lifts still acceptable.[35]

113.  Having viewed the Building, we agree with Mr Charles Chan: prospective purchasers or tenants should give value for these better facilities.

114.  In view of the above, our assessment of the EUV for the reference unit is as follows:

Comp Ref	Unit Price (/m2)	Adjustments										Adjusted Unit Price (/m2)
		Time	Location	Size	Age	Floor	Headroom	Floor Loading	Building Management	Facilities	Total
D1	$139,013	-1.5%	-5.0%	-9.8%	-4.3%	-3.5%	0.0%	-5.0%	-5.0%	-10.0%	-36.7%	$87,995
D2	$126,401	0.1%	-5.0%	-9.8%	-4.3%	-3.5%	0.0%	-5.0%	-5.0%	-10.0%	-35.7%	$81,276
D3	$108,839	4.8%	0.0%	-9.8%	-3.3%	-1.0%	0.0%	0.0%	-2.0%	-10.0%	-20.2%	$86,854
D4	$126,401	0.1%	-5.0%	-9.9%	-4.3%	6.0%	0.0%	-3.0%	-5.0%	-10.0%	-27.9%	$91,135
D5	$126,401	0.1%	-5.0%	-9.9%	-4.3%	-0.5%	0.0%	-5.0%	-5.0%	-10.0%	-33.7%	$83,804
D7	$126,214	8.8%	-5.0%	-9.9%	-4.3%	2.0%	0.0%	-3.0%	-5.0%	-10.0%	-24.6%	$95,165
D8	$126,220	8.8%	-5.0%	-9.9%	-4.3%	2.0%	0.0%	-3.0%	-5.0%	-10.0%	-24.6%	$95,170
D9	$123,716	12.6%	-5.0%	-9.9%	-4.3%	-2.0%	0.0%	-5.0%	-5.0%	-10.0%	-26.6%	$90,808
D10	$109,235	12.7%	-5.0%	-9.3%	-4.3%	3.5%	0.0%	-3.0%	-5.0%	-10.0%	-20.2%	$87,170
D11	$122,547	13.1%	-5.0%	-9.9%	-4.3%	2.5%	0.0%	-5.0%	-5.0%	-10.0%	-22.9%	$94,484
										Average:		$89,386
										Say:		$90,000

115.  Thus, we shall adopt $90,000 per sq m as the EUV of Factory Flat A, 10/F of the Building as at 22 December 2017. There are however similar agreements/disagreement between Mr Charles Chan and Mr Lee on the adjustments among the various units in the Building that we have dealt with above:[36]

	Mr Charles Chan	Mr Lee
Floor	0.5% per 1 floor difference
Top Floor	-3%
Size/ Quantum	1% per 50 m2 difference for the first 300 m2 difference, 1% per 250 m2 difference for remaining difference	1% per 150 m2
Headroom	2% per 1 m	4% per 1 m
Total Adjustment	By Multiplication

116.  There was a dispute between the valuation experts on whether area of certain encroachment onto the protected lobby has to be taken into account. While Mr Charles Chan assumed it had to be included as part of the saleable floor area, Mr Lee considered its value would be some 1/10[37]. Whereas we have observed that such encroachment has been common in the Building with no enforcement action whatsoever, applying the same principle as that has been ruled by the Court of Appeal in The Incorporated Owners of Freder Centre, supra, we would have agreed with Mr Charles Chan. However, the area under dispute is 2.8 sq m or 3.4 sq m for a particular unit which concerns just about 1% of the saleable area. Any difference as a result thereof is negligible[38].

117.  We therefore just adopt the saleable areas of the various units agreed by the parties.[39]

118.  There were further minor disagreements between Mr Charles Chan and Mr Lee on the internal condition of the various units. Having conducted the joint site inspection on 17 November 2021, we agree with Mr Charles Chan.

119.  Both Mr Charles Chan and Mr Lee applied adjustments to reflect the difference in view and level of openness to light and air but their opinions varied. Having conducted the joint site inspection on 17 November 2021, however, we agree with Mr Lee from 1/F to 14/F but with Mr Charles Chan from 15/F to 19/F.

120.  Our assessment of the EUV of the other upper floor units is shown as follows:[40]

Floor	Unit	Saleable Area (m2)	Adjustments							Adjusted Unit Price (/m2)	EUV
			Floor	Top Floor	Size	Internal Condition	Headroom	View & Lighting	Total
1/F	A	643.7	4.5%	0.0%	-6.2%	-3.0%	0.4%	0.0%	-4.5%	$85,950	$55,300,000
	B	427.4	4.5%	0.0%	-1.9%	0.0%	0.4%	-5.0%	-2.2%	$88,020	$37,600,000
	C	465.5	4.5%	0.0%	-2.8%	0.0%	0.4%	-5.0%	-3.1%	$87,210	$40,600,000
	D	460.2	4.5%	0.0%	-2.5%	-3.0%	0.4%	-5.0%	-5.7%	$84,870	$39,100,000
2/F	A	643.7	4.0%	0.0%	-6.2%	0.0%	0.4%	0.0%	-2.1%	$88,110	$56,700,000
	B	427.4	4.0%	0.0%	-1.9%	0.0%	0.4%	-5.0%	-2.7%	$87,570	$37,400,000
	C	465.5	4.0%	0.0%	-2.8%	0.0%	0.4%	-5.0%	-3.6%	$86,760	$40,400,000
	D	460.2	4.0%	0.0%	-2.5%	0.0%	0.4%	-5.0%	-3.3%	$87,030	$40,100,000
3/F	A	643.7	3.5%	0.0%	-6.2%	0.0%	0.4%	0.0%	-2.5%	$87,750	$56,500,000
	B	427.4	3.5%	0.0%	-1.9%	0.0%	0.4%	-5.0%	-3.2%	$87,120	$37,200,000
	C	465.5	3.5%	0.0%	-2.8%	-3.0%	0.4%	-5.0%	-6.9%	$83,790	$39,000,000
	D	460.2	3.5%	0.0%	-2.5%	-3.0%	0.4%	-5.0%	-6.6%	$84,060	$38,700,000
4/F	A	333.3 + F/R: 313.9	3.0%	0.0%	-1.0%	0.0%	0.4%	0.0%	2.4%	$92,160	$35,500,000
	B	320.0 + F/R: 114.8	3.0%	0.0%	-0.1%	0.0%	0.4%	0.0%	3.3%	$92,970	$31,500,000
	C	333.3 + F/R: 137.2	3.0%	0.0%	-0.5%	0.0%	0.4%	-5.0%	-2.2%	$88,020	$31,300,000
	D	320.0 + F/R: 157.9	3.0%	0.0%	-0.3%	0.0%	0.4%	-5.0%	-2.1%	$88,110	$30,500,000
5/F	A	333.3	2.5%	0.0%	0.0%	0.0%	0.4%	0.0%	2.9%	$92,610	$30,900,000
	B	320.0	2.5%	0.0%	0.3%	0.0%	0.4%	0.0%	3.2%	$92,880	$29,700,000
	C	333.3	2.5%	0.0%	0.0%	0.0%	0.4%	-5.0%	-2.2%	$88,020	$29,300,000
	D	320.0	2.5%	0.0%	0.3%	0.0%	0.4%	-5.0%	-1.9%	$88,290	$28,300,000
6/F	A	333.3	2.0%	0.0%	0.0%	0.0%	0.4%	0.0%	2.4%	$92,160	$30,700,000
	B	320.0	2.0%	0.0%	0.3%	0.0%	0.4%	0.0%	2.7%	$92,430	$29,600,000
	C	333.3	2.0%	0.0%	0.0%	0.0%	0.4%	-5.0%	-2.7%	$87,570	$29,200,000
	D	320.0	2.0%	0.0%	0.3%	0.0%	0.4%	-5.0%	-2.4%	$87,840	$28,100,000
7/F	A	333.3	1.5%	0.0%	0.0%	0.0%	0.4%	0.0%	1.9%	$91,710	$30,600,000
	B	320.0	1.5%	0.0%	0.3%	-3.0%	0.4%	0.0%	-0.9%	$89,190	$28,500,000
	C	333.3	1.5%	0.0%	0.0%	0.0%	0.4%	-5.0%	-3.2%	$87,120	$29,000,000
	D	320.0	1.5%	0.0%	0.3%	0.0%	0.4%	-5.0%	-2.9%	$87,390	$28,000,000
8/F	A	333.3	1.0%	0.0%	0.0%	0.0%	0.4%	0.0%	1.4%	$91,260	$30,400,000
	B	320.0	1.0%	0.0%	0.3%	0.0%	0.4%	0.0%	1.7%	$91,530	$29,300,000
	C	333.3	1.0%	0.0%	0.0%	0.0%	0.4%	-5.0%	-3.7%	$86,670	$28,900,000
	D	320.0	1.0%	0.0%	0.3%	0.0%	0.4%	-5.0%	-3.4%	$86,940	$27,800,000
9/F	A	333.3	0.5%	0.0%	0.0%	0.0%	0.4%	0.0%	0.9%	$90,810	$30,300,000
	B	320.0	0.5%	0.0%	0.3%	0.0%	0.4%	0.0%	1.2%	$91,080	$29,100,000
	C	333.3	0.5%	0.0%	0.0%	0.0%	0.4%	-5.0%	-4.1%	$86,310	$28,800,000
	D	320.0	0.5%	0.0%	0.3%	0.0%	0.4%	-5.0%	-3.9%	$86,490	$27,700,000
10/F	A	333.3	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	$90,000	$30,000,000
	B	320.0	0.0%	0.0%	0.3%	3.0%	0.0%	0.0%	3.3%	$92,970	$29,800,000
	C	333.3	0.0%	0.0%	0.0%	0.0%	0.0%	-5.0%	-5.0%	$85,500	$28,500,000
	D	320.0	0.0%	0.0%	0.3%	0.0%	0.0%	-5.0%	-4.7%	$85,770	$27,400,000
11/F	A	333.3	-0.5%	0.0%	0.0%	0.0%	0.0%	0.0%	-0.5%	$89,550	$29,800,000
	B	320.0	-0.5%	0.0%	0.3%	0.0%	0.0%	0.0%	-0.2%	$89,820	$28,700,000
	C	333.3	-0.5%	0.0%	0.0%	0.0%	0.0%	-5.0%	-5.5%	$85,050	$28,300,000
	D	320.0	-0.5%	0.0%	0.3%	0.0%	0.0%	-5.0%	-5.2%	$85,320	$27,300,000
12/F	A	333.3	-1.0%	0.0%	0.0%	-3.0%	0.0%	0.0%	-4.0%	$86,400	$28,800,000
	B	320.0	-1.0%	0.0%	0.3%	0.0%	0.0%	0.0%	-0.7%	$89,370	$28,600,000
	C	333.3	-1.0%	0.0%	0.0%	0.0%	0.0%	-5.0%	-5.9%	$84,690	$28,200,000
	D	320.0	-1.0%	0.0%	0.3%	0.0%	0.0%	-5.0%	-5.7%	$84,870	$27,200,000
13/F	A	333.3	-1.5%	0.0%	0.0%	0.0%	0.0%	0.0%	-1.5%	$88,650	$29,500,000
	B	320.0	-1.5%	0.0%	0.3%	-3.0%	0.0%	0.0%	-4.2%	$86,220	$27,600,000
	C	333.3	-1.5%	0.0%	0.0%	0.0%	0.0%	-5.0%	-6.4%	$84,240	$28,100,000
	D	320.0	-1.5%	0.0%	0.3%	0.0%	0.0%	-5.0%	-6.1%	$84,510	$27,000,000
14/F	A	333.3	-2.0%	0.0%	0.0%	-3.0%	0.0%	0.0%	-4.9%	$85,590	$28,500,000
	B	320.0	-2.0%	0.0%	0.3%	0.0%	0.0%	0.0%	-1.7%	$88,470	$28,300,000
	C	333.3	-2.0%	0.0%	0.0%	-3.0%	0.0%	-5.0%	-9.7%	$81,270	$27,100,000
	D	320.0	-2.0%	0.0%	0.3%	0.0%	0.0%	-5.0%	-6.6%	$84,060	$26,900,000
15/F	A	333.3	-2.5%	0.0%	0.0%	0.0%	0.0%	0.0%	-2.5%	$87,750	$29,200,000
	B	320.0	-2.5%	0.0%	0.3%	0.0%	0.0%	-5.0%	-7.1%	$83,610	$26,800,000
	C	333.3	-2.5%	0.0%	0.0%	0.0%	0.0%	0.0%	-2.5%	$87,750	$29,200,000
	D	320.0	-2.5%	0.0%	0.3%	0.0%	0.0%	-5.0%	-7.1%	$83,610	$26,800,000
16/F	A	333.3	-3.0%	0.0%	0.0%	0.0%	0.0%	0.0%	-3.0%	$87,300	$29,100,000
	B	320.0	-3.0%	0.0%	0.3%	-3.0%	0.0%	-5.0%	-10.3%	$80,730	$25,800,000
	C	333.3	-3.0%	0.0%	0.0%	-3.0%	0.0%	0.0%	-5.9%	$84,690	$28,200,000
	D	320.0	-3.0%	0.0%	0.3%	0.0%	0.0%	-5.0%	-7.6%	$83,160	$26,600,000
17/F	A	333.3	-3.5%	0.0%	0.0%	-3.0%	0.0%	0.0%	-6.4%	$84,240	$28,100,000
	B	320.0	-3.5%	0.0%	0.3%	0.0%	0.0%	-5.0%	-8.0%	$82,800	$26,500,000
	C	333.3	-3.5%	0.0%	0.0%	0.0%	0.0%	0.0%	-3.5%	$86,850	$28,900,000
	D	320.0	-3.5%	0.0%	0.3%	-3.0%	0.0%	-5.0%	-10.8%	$80,280	$25,700,000
18/F	A	333.3	-4.0%	0.0%	0.0%	0.0%	0.0%	0.0%	-4.0%	$86,400	$28,800,000
	B	320.0	-4.0%	0.0%	0.3%	0.0%	0.0%	-5.0%	-8.5%	$82,350	$26,400,000
	C	333.3	-4.0%	0.0%	0.0%	0.0%	0.0%	0.0%	-4.0%	$86,400	$28,800,000
	D	320.0	-4.0%	0.0%	0.3%	0.0%	0.0%	-5.0%	-8.5%	$82,350	$26,400,000
19/F	A	333.3	-4.5%	-3.0%	0.0%	0.0%	0.0%	0.0%	-7.4%	$83,340	$27,800,000
	B	320.0	-4.5%	-3.0%	0.3%	0.0%	0.0%	-5.0%	-11.7%	$79,470	$25,400,000
	C	333.3	-4.5%	-3.0%	0.0%	-3.0%	0.0%	0.0%	-10.1%	$80,910	$27,000,000
	D	320.0	-4.5%	-3.0%	0.3%	0.0%	0.0%	-5.0%	-11.7%	$79,470	$25,400,000
Roof	A	324.0								$10,100	$3,300,000
	B	322.8								$10,100	$3,300,000
	C	324.0								$10,100	$3,300,000
	D	322.8								$10,100	$3,300,000
										Total:	$2,357,300,000

* Value of Flat Roof is assumed at 1/6 of that of unit adjoining while value of Roof is assumed at 1/8 of the average unit rate of the floor immediately below.

121.  Thus, the total EUV of the Building is $182,200,000 (for Factory Unit A1) + $107,300,000 (for Factory Unit A2) + $119,000,000 (for Factory Unit A2) + $2,357,300,000 = $2,765,800,000.

122.  The corresponding pro rata share of the various respondents’ unit is therefore:

Respondent	Flat Unit	EUV	Pro Rata Share of Total EUV
R1	Factory Flat A2 on G/F	$107,300,000	3.8795%
	Factory Flat A on 1/F	$55,300,000	1.9994%
R2	Factory Flat A1 on G/F	$182,200,000	6.5876%
R3	Factory Flat A on 2/F	$56,700,000	2.0500%
R4	Factory Flat A on 11/F	$29,800,000	1.0774%
R5	Factory Flat B on 11/F	$28,700,000	1.0377%
R6	Factory Flat C on 13/F	$28,100,000	1.0160%
R7	Factory Flat D on 15/F	$25,700,000	0.9690%
R8 & R9	Factory Flat A on 7/F	$30,600,000	1.1064%
R10	Factory Flat B on 12/F	$28,600,000	1.0341%

WHETHER REDEVELOPMENT OF THE LOT IS JUSTIFIED

123.  Section 4(2) of the Ordinance provides that the Tribunal shall not make an order for sale unless it is satisfied that the "age or state of repair" of the Building is justified and that the applicants have taken "reasonable steps" to acquire all the undivided shares of the Lot. While R1 did not take issue on these matters, R2 put the applicants to strict proof.

124.  Mr Mok in his opening submission referred to the guidelines laid down in Top Sail International Limited v Cheng Kai Ming, LDCS 18000/2010, unreported, dated 15 November 2011 (“Top Sail”) and Charmlink Limited v Lee Tong Hing & Others, LDCS 16000/2010, unreported, dated 29 November 2011 (“Charmlink”) on the factors that the Tribunal should consider in determining whether redevelopment is justified due to age and state of repair.

125.  In Top Sail, the Tribunal stated that:

“23. ……, we are of the view that when the requirement of “the age” of the Buildings is considered, we should not restrict our consideration to just the physical age of the Buildings.…… we are of the view that the absence of a specific physical age in the Ordinance indicates that the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question.

24. The physical age of a building is clearly one of the considerations…... The physical conditions of a building and the amount that would be required to maintain the building are other factors that the Tribunal should consider, as they would affect the decision on whether the life of a building should be ended or prolonged. The obsolete design of a building should also be considered as it has an important impact on whether it is too old to serve a modern society.”

126.  Such a discretion by the Tribunal was followed in Charmlink:

“30. We are of the view that the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question. The relevant factors in the present case are that the Building is over 50 years old and it has passed its designed life. It is also obsolescent in design and not economical to maintain. All these factors point to the fact that the Building has come to an end of its physical as well as economical life. Thus, we find that redevelopment is justified on the ground of the age of the Building.

31. …… It is also within the Tribunal’s discretion to determine in what conditions a building should be redeveloped after considering all the relevant factors concerning the state of repair of the building in question. With the clear evidence from the two experts that the Building is in a poor state of repair and in fact untenantable without substantial repair works to be carried out over a long period of time, we have no hesitation in finding that redevelopment is justified by the state of repair of the Building.”

Structural Conditions of the Building

127.  By the Joint Statement dated 18 November 2020 prepared by Mr C M Wong and Mr Lo on the structural assessment for the Building, the structural conditions of the Building were rated as mediocre/ moderate. There were no signs to indicate that the structure of the Building had fallen into such disrepair that the structural safety of the Building was threatened.[41]

128.  On the other hand, all industrial buildings developed after 1983 should be designed for an addition of dynamic loads of 2.5 kPa on the slabs and beams. If this new requirement is not followed, the addition of dynamic loads of 2.5 kPa would render all slabs overstressed.[42]

129.  Apart from the above, one of the disagreements between Mr C M Wong and Mr Lo was on the concept of the design working life of the Building. The design working life of a building is the period of use intended by the designer or the client at the time of designing the building. It is a nominal value, not a scientific determination, which represents an estimated target period of time, as opposed to an actual period. If the design working life of a building is set at 50 years at the design stage, this building is expected not to require major repairs within 50 years, assuming it has undergone normal maintenance.

130.  In Hong Kong, the first code that mentioned the requirement for the design life is Code of Practice for Structural Use of Concrete 2004 (“2004 Code”). In 2013, this code was updated (“2013 Code”) but Clause 2.1.5 remains unchanged as follows:

“The design working life should be clearly identified. This Code of Practice assumes a design working life of 50 years, which is deemed appropriate for general buildings and other common structures. Wherethe design working life differs from this value, the recommendations should be modified as appropriate.”

131.  According to Mr C M Wong, since the concrete cover, which is one of the main factors that affects ductility, was found in 48.5% of the test samples of the Building to be less than the required under the 2013 Code, the design working life of the Building was inferred to be shorter than 50 years. Mr C M Wong however agreed that the Building would not suddenly exhibit structural problems or become unsafe after the expiry of its design working life because the deterioration of structures is a continuous process.[43]

132.  Mr Lo did not agree that the Building had a design working life of less than 50 years because the design of buildings prior to the 2004 Code does not necessarily mean the structure was designed with a shorter design working life. Mr Lo cited the following paragraph from Concrete Code Handbook – An Explanatory Handbook to the Code of Practice for Structural Use of Concrete 2004 published by the Hong Kong Institute of Engineers:[44]

“2.1.2 … In actual practice, the environmental and usage conditions of the buildings could vary from one extreme to another and similar buildings designed to the same durability standard might end up with very different degrees of deterioration after 30 or 40 years. Hence, the specified design life or design working life should be treated only as a nominal value.”

133.  Mr Lo considered that based on the visual inspection covered by Mr C M Wong, a very small extent of defects, ie with cracks and spalling, was found on the structural members. The corrosion of the reinforcement bar was mild and the chloride content was low if not negligible. Mr Lo reiterated that it is difficult to quantify the deterioration rate and extent of defect in the future. The rate of deterioration is subject to a lot of factors such as maintenances and usage of the Building.[45] With respect to Mr Lo, while the degree of deterioration is difficult to quantify, it is reasonable for Mr C M Wong to adopt the concept of design working life, which, we consider, is the reason for having such a benchmark in the first place. This concept of design working life was indeed adopted by the Government in procuring the lowering of the application threshold for certain classes of lots with respect to applications for compulsory order for sale under the Ordinance. See the Development Bureau’s “Proposals to Facilitate Redevelopment by the Private Sector: Applications Threshold under the Land (Compulsory Sale for Redevelopment) Ordinance” in June 2009[46] and the Legislative Council Brief on Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice in January 2010[47].

134.  Mr C M Wong and Mr Lo also differed on the structural design and compliance with the structural safety standards.

135.  According to Mr C M Wong, there were three aspects that the design of the superstructure of the Building is not up to the latest safety standards, these being:

(a)  Ductility and Robustness in accordance with the 2013 Code;

(b)  Allowance for dynamic effects for industrial building in accordance with the Building (Construction) Regulations enacted in 1983;

(c)  Resistence to wind loads.

136.  Aspects (a) and (b) arise from the evolution of codes or regulations, which have been enacted after more knowledge and experience is gained in the respective areas. Aspect (c) is not due to the issue of any new codes but relates to the actual behaviors of the structure of the Building.

137.  Mr C M Wong agreed with Mr Lo that there is currently “no statutory requirement (save as expressly specified in a newer version of codes and/or regulations”. However, Mr C M Wong explained that when a proposed building is designed, a factor of safety is always required under the prevailing building code.[48] But when the more stringent requirements in the codes or regulations are issued after the completion of the Building, the margin of safety of the Building would likely fall below the latest standards. Although the introduction of new design code or requirement would not make the old building unsafe, it would render the structure of the Building to fall short of the current safety standards, thus demonstrating that the Building has become obsolete in design and construction.[49]

138.  As regards the remark of Mr C M Wong above, Mr Lo repeated that whether the original safety margin would actually be compromised is dependant on the actual usage of the building. Unfortunately, as explained by Mr C M Wong, when the core wall system was first introduced to Hong Kong during that time, many structural designers assumed that the core wall would take up all the wind forces. However, it was later revealed that when wind forces act on a building, not only do the core walls/ shear walls sway, the building also sways as a whole and such sway induces additional stresses in all the core walls/ shear walls and frames. Therefore, the beam-column frames inevitably need to take up some wind loads. That the Building Authority in the past generally accepted the assumption of all wind forces being taken up by the core wall was because under the old code, the permissible tensile stresses in rebars could be increased if the induced additional stresses were due to wind only.[50] As Mr Lo accepted, as computing technology advances, this oversimplified approach is no longer accepted.

139.  Mr Lo could not dispute that some of the beams in the Building were found to be overstressed based on ETABS modelling. His only reply was that when the Building was built, there was no computer software or ETABS model to facilitate the analysis of the structure.[51]

140.  To the extent of Mr Lo’s latter concession alone, we cannot but agree with Mr C M Wong that the Building has become obsolete in design and construction. We agree with Mr C M Wong that the Building exhibits no sign of distress only because it has not been subject to the designed wind load and wind speed. If there be a typhoon with wind force reaching the designed wind load of the Building, it would be overstressed as shown in the figures of the ETABS analysis[52].

141.  Then Mr C M Wong differed with Mr Lo on the cost of patch repair. It was undisputed that the percentages of slabs, beams, columns and structural walls with cracks and spalling were found to be 0.49%, 0.21%, 0.01% and 0.01% respectively.[53] However, in order to account for further defects which may be revealed by hammer tapping, Mr C M Wong suggested an assumed factor of 1.5 be applied to the defective areas of the structural elements, ie 0.735% for slabs, 0.315% for beams, 0.015% for columns and 0.015% for walls:

Structural Elements	Total Area (m2)	Defective %	Assumed Defective Area (m2)
Slabs	28,000	0.735%	205
Beams	28,000	0.315%	88
Columns	5,100	0.015%	1
Walls	6,300	0.015%	1
Total:	67,400	Total:	295

142.  Mr C M Wong would adopt the following procedures for repairing the cracks and spalling:

(1)  Hammer tapping on all exposed structural elements to find out all spalled areas;

(2)  Removing the concrete cover to a depth of at least 20mm beyond the reinforcement;

(3)  Brush-cleaning the existing steel reinforcement;

(4)  Adding new reinforcement if the remaining area of the reinforcement is less than 80% of its original sectional area;

(5)  Applying ant-corrosion paint onto the steel reinforcement;

(6)  Applying cementitious repair mortar to reinstate the hacked-off area.

143.  Based on the standard rates that were applied to building surveying consultancy services for Urban Renewal Authority (“URA”) for Rehabilitation Project under “Operation Building Bright” in 2012 and taking into account the inflation of labour cost since then, Mr C M Wong calculated a unit rate of $15 per sq m for hammer tapping and $1,300 per sq m for patch repair works. Applying a discount factor of 20% to take into account the economy of scale due to the relatively large surface area of the Building, Mr C M Wong proposed the unit cost for patch repair of the Building as follows:[54]

	Total Area (m2)	Unit Rates (/m2)	Discounted Rates (/m2)	Costs
Hammer Tapping	67,400	$15	$12	$808,000
Patch Repair	295	$1,300	$1,040	$306,000
			Sub-Total:	$1,114,000
			Professional Fee: 10%	$111,000
			Total:	$1,225,000

144.  On the other hand, Mr Lo suggested that by reference to the actual cost from Stanger Asia Limited for carrying out hammer tapping, the estimated cost would just be $100,000.[55] No other information on his estimate can be found in Mr Lo’s Rebuttal Report dated 29 April 2020. With respect, on the basis of the Tribunal’s experience in dealing with similar compulsory sale applications, this $100,000 appears to be very unreasonable.

145.  Notwithstanding the above, the patch repair cost only dealt with the cracks and spalling. They will not cover the extensive carbonation of the slabs and beams agreed by Mr Lo. Nor would they deal with the corrosion of the rebars at the locations where the carbonation of the slabs and beams had reached the rebars. The carbonation of concrete, which is irreversible, at the slabs and beams and the corrosion at those locations which have reached the propagation phrase and will deteriorate. Certainly, the patch repair cost does not remove the inherent risk posed by the non-compliance of the wind load requirements and lowering of the margin of safety of the Building according to the new safety standard.

Building Conditions of the Building

146.  Since the completion of the Building, more updated versions of the Buildings Ordinance and related legislations have been enacted from time to time with the objectives to improve the safety and/or hygiene of buildings in Hong Kong. Though not all such new regulations have retrospective application on the Building, they show that many features and facilities of the Building have become obsolete, substandard or even unsafe over time by current standards, and some are liable for mandatory improvements. According to Mr Benson Wong, the Building has carried out minor repair and maintenance from time to time but no improvement to the current standards of newly enacted Buildings Ordinance and related legislations.

147.  With respect to Mr Kung or his predecessor, Ms Joy Leung and those others who were appointed by the respondents in similar compulsory sale applications, their confirmation that the Building was safely built according to the legislation at that time is neither here nor there as what the Tribunal has to pay regard to is “age or state of repair” of the Building nowadays or by the time of the trial.

148.  The emphasis of the Ordinance is neither on whether the Building is safe or otherwise. Of course, if the Building is unsafe, the Building Authority may issue the necessary order under section 26 of the Buildings Ordinance but this is never the role of the Tribunal under the Ordinance.

149.  For instance, the “Proposals to Facilitate Redevelopment by the Private Sector: Applications Threshold under the Land (Compulsory Sale for Redevelopment) Ordinance” issued by the Development Bureau in June 2009 to the Legislative Council Panel on Development stated as follows:[56]

“Urban decay and urban redevelopment in Hong Kong

2. The design working life for normal buildings in Hong Kong is assumed to be 50 years. There are now about 3 300 buildings aged 50 years or above; it is estimated that every year about 500 buildings will reach the end of their design life in the next ten years.

3. With support from the Government, the Urban Renewal Authority (URA) is implementing an urban renewal programme. Since its establishment in 2001, the URA has commenced projects to redevelop 550 dilapidated buildings (these redevelopment projects will take up to 2021 to be completed) and rehabilitate another 500 buildings. It is clear that it is impossible to rely on the public sector alone to tackle the problem of urban decay. Indeed, the private sector has all along been an important player in urban redevelopment. The urban regeneration experience in other Asian cities also indicates that successful urban regeneration models usually involve a mix of public and private sector participation.

4. The Government issued a policy statement Urban Renewal in Hong Kong in 1996, setting out a comprehensive package of proposals to deal with the problems of urban renewal in the short and long run. One of the proposals was to introduce legislation to enable owners holding a clear majority of the shares in a lot which merits priority redevelopment to sell the whole lot, even though the owners have not acquired the legal interests of the minority owners. This has resulted in the LCSRO[57] enacted in 1998 and came into operation in 1999.

5. The object of the LCSRO is to facilitate private sector participation in urban renewal. Private sector involvement is recognised as necessary in order to speed up urban renewal. In view of the difficulties in acquiring interests in properties due to problems such as defective titles, missing or intestacy of owners, and unreasonable high prices demanded by owners, some legislative provisions are justified.”

150.  Thus, from the above, it is crystal clear that the affirmation that the Building is safe or otherwise is off the focus. The Tribunal is never intended to assume the role of the Building Authority. That Mr C M Wong’s concession that if he were the Building Authority, from the statutory point of view, there was no statutory requirement to upgrade the Building is neither here nor there. Similarly, the arguments raised by Mr Kung under sections 30B(3) or 30C(3) of the Buildings Ordinance on prescribed inspection are totally irrelevant under the Ordinance.

151.  According to Mr Benson Wong, the Building has not undertaken any major repairs in the last 10 years apart from partial replacement of the staircase and workshop doors according to the abatement notices from the Fire Services Department (“FSD”). However, the FSD is not the authority on fire resisting construction, therefore, the purpose of the FSD’s abatement notice was for removal of fire risks and not for improvement of the existing staircase and workshop doors to the current fire resisting construction standard.[58]

152.  Mr Benson Wong then proceeded to list out the various fire safety provisions and fire service installation of the Code of practice for Fire Safety in Buildings 2011 that are obsolete or missing in the Building as follows:

(i)  No Automatic Fire Detection System for plant and service rooms;

(ii)  Incomplete Manual Fire Alarm System;

(iii)  The Fire Hydrant/Hose Reel System though installed, is outdated due to various deficiencies;

(iv)  No Automatic Sprinkler System provided in the Building except some piecemeal installations of individual dry sprinkler systems to a few workshops;

(v)  No emergency generator to provide alternative emergency power supply; and

(vi)  No Fire Services Direct Link System.

153.   Again with respect, Mr Kung’s response that the fire service installation provided at the time the Building was built is adequate is neither here nor there. Similarly, whether the enforcement authority under the Fire Safety (Industrial Buildings) Ordinance, Cap 636 would issue and serve on the owners of the Building a fire safety direction to direct the owners to comply with a fire safety requirement is irrelevant because Mr Kung acknowledged that when actual circumstances would make it difficult for pre-1987 industrial buildings to add firefighting and rescue stairways etc as in the case of the Building, such requirements would not be imposed.[59]

154.  At least, in response to Mr Benson Wong’s comment that there is no emergency lighting to the workshops, lift lobbies etc, Mr Kung agreed that such emergency lighting system can be extended to cover all floor landings of the four required staircases.[60]

155.  But regarding the existing concrete cover thickness for floor slab at only 12.7 mm which is only half of the current requirement of 25 mm, Mr Kung’s answer was deploring. He, citing the opinion of Ms Joy Leung, concurred that the additional cover can be compensated by the reduction of live load from industrial use to other uses. As pointed out by the bench, how can such reduction of live load be enforced in reality when the Building, which is an industrial building in itself, is currently multi-owned?

156.  The same deploring answer was given by Mr Kung, citing the opinion of Ms Joy Leung:

“Although the expenditure on ‘Repair & Maintenance’ and ‘Lift Maintenance’ (of the Building) generally showed an upward trend from 2010 to 2017, this was due to inflation of labour and material costs, particularly in lift maintenance.”

It is hard to believe that there will be no increase in labour and material costs in future. As calculated by Mr Benson Wong, the increase over this 7 years’ period were 183% and 43% respectively.

157.  Mr Benson Wong, on the basis of the IO’s minutes of meetings, was of the opinion that those works done were of maintenance nature and on piecemeal basis. Of the total 56 work items done during the period from 2011 to 2017, only 13 were for routine maintenance, the other 43 work items were for 30 day-to-day and 13 emergency repairs, but none for preventive repairs or improvement to upgrade the features or facilities of obsolescence in the Building to current requirement or standard.[61]

158.  Having reviewed the above and by the joint site inspection carried out on 17 November 2021, we share the view of Mr Benson Wong that the deterioration of the structural frames, lifts, fire services installation, plumbing and drainage may have been increasing at a much faster rate requiring more repairs. We also agree with his conclusion that the Building has become obsolete over time and is in a poor state of repair.

159.  As regards age, it is undeniable that the Building is now 50 years old which corresponds with the design working life of the 2013 Code. Mr Kung tried to come into rescue by citing the example of Wing Hong Factory Building which was partly owned by the URA. Mr Kung cited that Wing Hong Factory Building is 59 years old but URA still adopted a Partial Conversion method and invested money in its revitalization. Mr Kung referred, for instance, to the blog of the Managing Director of URA dated 9 January 2022 from URA which stated, inter alia, the following:[62]

“市區重建局在2013年， 回應政府提出加快舊工業大廈的更新工作， 啟動長沙灣汝州西街工業樓宇重建項目先導計劃， 雖然項目在2018年因收購率低而中止重建的計劃， 但我們改用樓宇復修及改造重設這重建以外的市區更新策略， 為這幢老化的工廈提升樓宇安全和設施水平， 延長樓宇的壽命， …….”

160.  From the above passage, however, it is obvious that revitalization was not URA’s original intention; its original intention was to redevelop the industrial building but was frustrated by unco-operation or objection by other individual owners of this industrial building. This was indeed manifested in the press release by URA on August 2013 as follows:

“The Secretary for Development has authorised the Urban Renewal Authority (URA) to proceed with its industrial building redevelopment pilot scheme project at Nos. 777 - 783 Yu Chau West Street, Cheung Sha Wan, Kowloon.

The authorisation for the project is given under Section 24(4)(a) of the Urban Renewal Authority Ordinance (URAO) and is published in the Gazette today (Friday).

 

The project was implemented by way of a development project in accordance with Section 26 of the URAO. The implementation notice of the Yu Chau West Street industrial building redevelopment project was published in the Gazette on 18 January 2013 under Section 23 of the URAO. It was followed by a two-month publication period, during which three objections were received.

 

In accordance with Section 24(3) of the URAO, the URA submitted the Yu Chau West Street industrial building redevelopment project to the Secretary for Development for consideration on 5 June 2013.

 

The project area occupies a site abutting King Lam Street to the north, Yu Chau West Street to the east and Wing Hong Street to the south. Built in 1962, the 10-storey industrial building occupied a site area of about 1,393 square metres.

The site, which has been zoned for "Other Specified Uses" ("OU") annotated "Business" in the relevant statutory plan, is intended primarily for general business/office use. The URA's initial proposal is to redevelop the site to provide about 16,700 square meters of office and retail floor space. It is tentatively scheduled for completion by 2019/2020.”

161.  Then on 31 December 2018, Sing Tao Daily reported as follows:[63]

“市建局參與工廈重建再次碰壁，本報獲悉，位於長沙灣的永康工廠大廈被該局納入重建先導計畫後，五年以來，仍有逾三成業權不願接受收購，令局方決定「變陣」放棄收購，改以「改造重設」模式推展項目，早前已率先獲城規會批准，將地面鋪位改作地區資源中心「自用」，下一步會考慮將部分已收購的樓上單位改裝成藝廊或共享空間，供非牟利團體或年輕藝術家租用。據知，涉及的改裝費用超過一億五千萬元。 為協助推動工廈重建，市建局近年推出工廈重建先導計畫，但所選定的兩個項目均遭於挫折，除了計畫重建西環士美菲路祥興工業大廈為住宅時，遭全體業主反對而被逼擱置，二○一三年推展長沙灣汝洲西街的永康工廠大廈項目時，同樣面對業主強烈反抗，一直陷入膠着狀態。據悉，市建局五年來僅成功收購約六成八業權，一直未達收購門檻，難以動用《土地收回條例》收回餘下業權，故早於今年初已部署「變陣」，打算放棄重建，改用「改造重設」概念推展項目。 所謂「改造重設」，是為舊樓增置符合現代樓宇標準的設施，該概念原本只是應用於德輔道西、豉油街、荔枝角道和必發道的安置大廈，但市建局今年六月提交予立法會發展事務委員會的文件，已初次提到會將位於長沙灣汝洲西街的工業樓宇重建項目，納入有關工作範疇。市建局近月率先向城規會申請，將面積逾二千平方呎的一個已收購地鋪，改作地區資源中心，提供重建及復修的支援，並於早前順利獲批。 消息指，除了改裝地鋪，市建局亦打算收回工廈的多個樓上單位「自用」，用作處理「樓宇更新大行動2.0」的員工辦公室，以節省在同區租用其他物業的開支；至於餘下的三成已收購樓上單位，該局初步考慮改裝為藝廊或共享空間，供非牟利團體或年輕藝術家租用，以配合當局近年的活化工廈政策。據了解，永康工業大廈經過「改裝重設」後，由於涉及改變地契用途，或需要繳交大筆「豁免費用」（waiver fee），但市建局打算申請豁免。 此外，為配合當局準備提升舊式工廈的消防裝置至現代水平，市建局在替永康工廠大廈「改造重設」時，計畫於其他已收購單位內加裝自動灑水系統和泵房，配合整幢大廈的未來需要，並希望可以產生示範作用；局方亦計畫在有關單位引入一些環保和智能裝置，以減少大廈日後的能源消耗。據知，「改造重設」的開支超過一億五千萬元，由於局方可因而節省在同區租用辦公室的租金支出，估計長遠能夠「回本」，亦較完全丟空已收購業權理想。 消息人士指，不願接受收購的工廈業主，近年曾經翻新工廈，作為業主之一的市建局當時也需要「夾錢」，「既然餘下業主也不願意，（市建局）也不想再花錢進行收購，故改以另一模式推展項目。」” (underline added)

162.  From the above, it is also manifested that revitalisation was only a compromise because “市建局五年來僅成功收購約六成八業權，一直未達收購門檻，難以動用《土地收回條例》收回餘下業權” and “既然餘下業主也不願意，（市建局）也不想再花錢進行收購，故改以另一模式推展項目。” It does not mean that Wing Hong Factory Building was not old, obsolete and ripe for redevelopment. On the other hand, the objective of enacting the Ordinance itself is to facilitate private sector participation in urban renewal. Under the Ordinance, revitalisation is not one of the considerations. “Redevelopment” is defined under section 2 of the Ordinance to mean “the replacement of a building on (or formerly) on” the subject lot, not revitalisation. In fact, in Able Luck Development Limited v Boly Metal Manufactory Limited, LDCS 11000/2018 (unreported, dated 22 April 2022), the Tribunal (though differently constituted) held that there is no need to weigh other alternatives such as revitalisation or the URA’s renewal.[64] Recently, this decision of the Tribunal was affirmed by the Court of Appeal in CAMP 435/2022 dated 17 February 2023.

163.  Nevertheless, both Mr Benson Wong and Mr Kung identified defects in the Building and formulated the following repair costs:[65]

	Mr Benson Wong	Mr Kung
Works	$85,028,350	$36,591,874
Preliminaries	$8,882,800 (10.83%)	$3,659,187 (10.0%)
Sub-Total:	$93,911,150	$40,251,061
Contingency	$9,391,115 (10.0%)	$4,025,106 (10.0%)
Sub-Total:	$103,302,265	$44,276,167
Professional/Supervision Fees	$8,380,000 (8.1%)	$4,427,617 (10.0%)
Total:	$111,682,265	$48,703,784

164.  Notwithstanding the difference in repair cost above, Mr Kung concurred with Ms Joy Leung that:

(a)  The “standard adopted would affect the repair costs”[66]; and

(b)  The major difference is “mainly due to the extent of repair and improvement works to be carried out” while the “unit rates adopted by both experts are quite similar”[67].

165.  In respect of (a), the Lands Tribunal has been consistently applying the “tenantable standard” ever since Intelligent House Limited v Chan Tung Shing [2008] 4 HKC 421. In §145(6) of the judgment, the Tribunal stated:

“… in considering the cost of the “state of repair”, the Tribunal is similarly entitled to look at repair works which are necessary to render the building a tenantable condition, which is reasonably fit for use in the sense that it should be safe and hygienic for occupiers and visitors, and provide a standard of comfort and convenience which is reasonable in the present day circumstances for the type of building in question.”

166.  Most recently, in Able Luck Development Limited, supra, the Tribunal again approved the “tenantable standard” and rejected the “habitable standard” applied by Ms Joy Leung in that case[68]. In gist, the “habitable standard” focused on the structural safety and building services installations which, as explained above, was “basically the bare minimum requirements with limited referential value for the assessment. Such a standard is a disincentive to improvement in living/occupation condition and is unattractive to us. As a matter of principle and policy, the Ordinance was passed for the purpose of assisting assembly of land for redevelopment which is plainly for improvement of the environment. It makes more sense to say that in considering the age and state of repairs, one should put emphasis on or at least be receptive to the up-dating of the environment rather than being gratified by a mere satisfaction of the minimum safety requirement for the public and the occupiers.”[69]

167.  With regret, when Mr Kung took up the instruction to be an expert in this case, he may have failed to read previous Lands Tribunal’s judgments on similar compulsory sale applications. We appreciate that, as a qualified building surveyor, Mr Kung, like Ms Joy Leung, may have been very experienced in the term “habitable” where for instance, Ms Joy Leung stated in her Rebuttal Report dated 8 May 2020 at §2.2 & §3.37 as follows:

“2.2 …According to my experience in surveying buildings for Urban Renewal Authority, Hong Kong Housing Society and Buildings Department, more concentration is on structural defects such as spalled concrete, severe cracks, dampness etc. In fact, a standard similar to “Habitable/Occupiable Condition” is adopted by Queensland Government of Australia for the building condition assessment on Queensland buildings.”

“3.37 … if a building is considered as “habitable/ occupiable”, it would mean that the condition of the structural frame, the building components, the finishes and the building services installations are in reasonable condition which are, as a whole, fit for use/occupation and suitable for occupants to carry out activities in it which is a standard that BD will issue OP to certify it is suitable for occupation.”

168.  It may have become too late when Mr Kung had already taken up the instructions when he found out the difference. He then tried to explain away on the excuse that there may not be a single definition for “tenantable condition” which can fit all types of buildings. Therefore, while Mr Kung tried to rename his basis of assessment to “tenantable condition”, he maintained that “the focus would be more on whether the current condition of the structural frame, building components, building services are in reasonable conditions to meet the needs of the current users or potential uses of an industrial building.”[70] With respect, Mr Kung, for instance, failed to note the background of the Ordinance and particularly the reason behind when the Government procured to lower the application threshold of 80% for three classes of land lot which include “a lot with all industrial buildings aged 30 years or above not located within an industrial zone.”

169.  Again, in the Legislative Council Brief issued by the Development Bureau in January 2010 on the Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, it was stated as follows:[71]

“16. To address the changing economic needs of Hong Kong, we propose to specify lots on which all the industrial buildings stand are aged 30 years or above, and that are not located within an industrial zone to be subject to the lower application threshold. This will facilitate the redevelopment of under-utilised or disused industrial buildings standing on land which, over the years, has been rezoned from industrial to non-industrial.”

As a matter of fact, as found by the Tribunal as stated at §71 above, many units of the Building had been converted into non-industrial uses. The Lot also falls within an area zone “Commercial” under the approved Quarry Bay Outline Zoning Plan No S/H21/26 dated 6 July 2010. The Building is relatively old and its current uses are not in line with the current planning intention. The objective of the Ordinance is completely different from that of the Buildings Ordinance which is concerned more with hygiene and safety of buildings.[72]

170.  Bearing the above in mind, it is no surprise that Mr Benson Wong remarked that Mr Kung “merely combined the essential repairs and improvement works previously formulated by JL based on habitable condition”[73]. Mr Kung raised no objection except clarifying that he merely “added new waterproofing system on the main roof and enhancement works to all five lifts with one BFA lift”[74]. During cross-examination, Mr Kung further clarified that he also proposed a complete replacement of external rendering for light well and re-entrant. Apart from these few items, Mr Kung just adopted Ms Joy Leung’s essential repairs and improvement works on the basis of “habitable/occupiable condition”.

171.  In any event, the difference in repair cost between Mr Benson Wong and Mr Kung is significant.

172.  As regards Mr Kung’s proposal of complete replacement of just the external rendering for light well and re-entrant instead of a complete replacement of external wall rendering[75], we share the view of Mr Benson Wong that Mr Kung’s proposal is dubious given the following undisputed matters:

(a)  The patch repair area is primarily formulated on the extent of delamination of rendering from wall surface revealed by infrared survey which did not cover 31% of the external wall area owing to site and technical constraints.[76]

(b)  The extent of cracks and external water seepages, which cannot be detected by infrared survey and visual inspection from the exterior of the Building, had been substantially underestimated.

(c)  Mr Kung himself detected 181 numbers of possible causes of water seepage, of which 81 are likely caused by seepage through the external walls (ie 37 from light well and re-entrant and 44 from external facades).[77]

(d)  The external rendering on the main façade is subject to more severe weathering than those on the light well and re-entrant where some 37 numbers of water seepage spots were detected by Mr Kung.

(e)  No infrared survey was conducted by any expert on the light well and re-entrant.

(f)  Even Ms Joy Leung’s infrared specialist identified 247 hollow spots (of which 69 were minor and 178 were serious debonding). In fact, Ms Joy Leung’s infrared specialist detected 28 hollow spots more than those by Mr Benson Wong’s.

173.  Similarly, there is a difference in repair cost on the replacement of roof covering. The Building has a large roof area which is covered with concrete roof tiles with mortar joints on four sides of the tile and the joint sealants have generally cracked. While Mr Benson Wong proposed complete replacement of roof covering, Mr Kung proposed the application of a waterproof coating on the surface of roof. We share the view of Mr Benson Wong that the coating could just be a short term remedy when it is applied without surface protection but exposed to direct weathering and physical damage. That said, the coating appears to be susceptible to the following deficiency in the present case:

(a)  According to its catalogue, the coating is designed to be applied on “concrete substrate”, ie concrete slab surface instead of concrete tiles which because of disrepair or weathering provide an uneven or undulating surface. The manufacturer of the coating only suggested it could be “as water barrier under plasters, screeds or tiles”[78].

(b)  Mr Kung accepted that since there are water tanks and meter rooms on the roof which requires maintenance, heavy equipment may need to be brought onto the roof surface. At trial, Mr Kung proposed to add steel grit (“鋼砂”) to the coating before it dries; however, the product catalogue does not mention such technique and only mentions “screeding” as an example of “protection” to be applied on top of the coating layer.

(c)  There are many existing cracks appearing on the parapet walls of the roof. The surface-applied coating may not be suitable as water may penetrate through/ under the coating via the inner/ outer faces of the parapet wall. From the joint site inspection on 17 November 2021, vegetation growth could be seen on the Building’s top-floor façade next to the parapet walls. Mr Benson Wong gave evidence that this showed severe water seepage/ accumulation on the parapet walls and roof slabs.

174.  There was also a minor difference in the repair cost for the lifts. By reference to Hitachi’s letter dated 30 November 2021, a replacement of lifts was suggested as the existing lifts have aged and major parts are unavailable. An excerpt of the letter is as follows:[79]

“感謝 貴法團多年來選用日立電梯， 並委托敝司為上述升降機進行原廠保養維修工作。

……

然而， 貴大廈之升降機已運行超過四十年， 機械部件始呈現老化跡象。隨著技術不斷進步， 貴大廈之升降機型號及有關主要部件將於數年內停產， …… 敝司預計數年內升降機將面對的老化問題包括：故障次數增加、停機時間加長、停產後之保養及維修費用將會上漲， 故敝司特意來函通知 貴大廈。

 

日立為解決上述升降機老化及部件停產問題， 特意為 貴大廈度身設計升降機更新方案， 為 貴大廈現有舊型號之升降機升級至最新式電腦化型號[80]， 以配合 貴大廈日常運作需要及符合現行法例要求， ……”

175.  Mr Benson Wong proposed, on the basis of his appointed consultant, Mr Hugo C F Hung (“Mr Hung”), a Registered Lift Engineer, replacement of the 5 outmoded lifts (which were installed when the Building was completed in 1972) in the sum of$11,351,000 as follows:

Item	Sub-element	Proposed Works	Quantity	Unit	Unit Rate	Amount
1．	Lift system	Demolition work for existing lifts system for L1, L2, L3, L4 & L5	5	system	$150,000	$750,000
2．	Lift system	Supply labor and material to install computerized control panel, VVVF traction machine and necessary components, new rope system for L1, L2, L3, L4 & L5 including double brake, ACOP and UCMP device	5	system	$750,000	$3,750,000
3．	Lift car	Supply labor and material to replace lift cars for L1, L2, L3, L4 & L5	5	lift	$250,000	$1,250,000
4．	Lift car	Supply labor and material to install the new car door and powered car door operator for L1, L2, L3, L4 & L5	5	lift	$60,000	$300,000
5．	Landing floor	Supply labor and material to install new landing door, sill, supporting channel and apron for L1, L2, L3, L4 & L5	62	landing	$45,000	$2,790,000
6．	Landing floor	Supply labor and material to install new landing call feature, indicator and fireman switch for L1, L2, L3, L4 & L5	5	lift	$45,000	$225,000
7．	Lift system	Supply labor and material to install new rails and bracket, counterweight, Governor and buffer for L1, L2, L3, L4 & L5	5	lift	$90,000	$450,000
8．	Lift bottom	Supply and installation of compensation chain for L1, L2, L3, L4 & L5	5	lift	$20,000	$100,000
9．	Lift shaft	Supply and installation of lifts shaft lighting for L1, L2, L3, L4 & L5	5	lift shaft	$18,000	$90,000
10．	Lift shaft	Supply and installation of compensation chain for L1, L2, L3, L4 & L5	5	lift shaft	$20,000	$100,000
11．	Lift car	Supply and installation of car door lock for L1, L2, L3, L4 & L5	5	lift	$26,000	$130,000
12．	Lift shaft	Internal renovation of the wall finishes with scaffolding for existing lift shaft for L1, L2, L3 & L4	4	sum	$150,000	$600,000
13．	Lift shaft	Supply and installation of fire resistance material with scaffolding for existing lift shaft for L1, L2 & L3	3	sum	$150,000	$450,000
14．	Lift shaft	Supply and installation of water proof material for existing lift shaft for L3	1	sum	$150,000	$150,000
15．	Lift machine room	Internal renovation of the ceiling finishes for existing lift machine room for L1, L2, L3, L4 & L5	1	sum	$80,000	$80,000
16.	Lift machine room	Re-condition work for weatherproof louvre for L1, L2, L3, L4 & L5	2	sum	$8,000	$16,000
17.	Lift machine room	Re-condition work for hoisting hook for L1, L2, L3, L4 & L5	5	sum	$8,000	$40,000
18.	Lift machine room	Supply and installation of the new E&M services for lift machine room and lift system for L1, L2, L3, L4 & L5	1	sum	$80,000	$80,000
					Total:	$11,351,000

176.  On the other hand, Mr Kung only proposed “upgrading” ($8,250,000) and “builder’s work” ($438,000), ie a total of $8,688,000 on the basis of Hitachi’s quote as stated in its letter of 29 December 2021 [81]， which was subject to the following caveat:

“1. ……

2. 我司正常的工作天施工時間為周一至週六， 早上 9:00 至下午5:30； 星期日及公眾假期除外 …… 如因業主要求或在緊急情況下， 須在正常施工時間以外工作， 我司將收取額外費用。

3． ……

4． ……

5． 電梯井道以外的閉路電視， 對講機及監控屏等系統所需用的一切電線、線槽及喉管供、須由其他承辦商提供及安裝。

6． 本報價不包括聘任註冊結構工程師 （RSE）作工地考察及提交報告， 以確認現有的建築結構能承受電梯更新工程中所更換的有關部件， 如需聘任， 其一切費用由僱主承擔。

7． 如因以下原因引致工程被延遲：

i. 不可抗力事件或我司無法控制之原因； 或

ii. 業主或其代理之延遲 、過失或原因 （包括延遲/拒絕提供指示、批准圖則、交出工地等）； 我司則有權 ……收取因此引起之額外費用。

8． 其他條款， 請參閱附件“符合現行法例之土建及電氣項目 – 須由客戶或其他承辦商負責”。”

177.  Accordingly, based on the evidence of Mr Benson Wong, Mr Hung commented that Hitachi’s quotation did not include the costs of:[82]

(a)  Associated building works included but not limited to:

(i)  E & M works

(ii)  Builder’s Works

(iii)  Lift equipment logistics

(iv)  Temporary lift service

(v)  Waste disposal

(vi)  Extra protection

(vii)  Environmental, Health and Safety management

(b)  Repairs of defects inside the lift shafts and the lift machine room.

(c)  Structural alteration to the lift machine room:

(i)  Slab for the rope holes; and

(ii)  Supporting beam

(d)  Structural alteration to the lift shafts:

(i)  New landing door openings; and

(ii)  Holes and/or recesses for landing buttons and indicators.

178.  In response, Mr Kung suggested otherwise, stating that he had talked to the author of the quotation[83] and prepared an estimate on the necessary builder’s works (土建項目) as follows:[84]

業主負責之土建項目

		Cost Estimate	Remarks
1．	通往保養或檢查之通道須提供足夠空間， 如有需要， 機房入口處部份設備需要移離或臨時拆除， 以供新舊電梯設備進入及搬離電梯機房。	$0	Access is wide enough
2．	提供及更換機房門鎖及加裝自閉裝置。 （建議項目， 更換現有電梯機房門， 門不可向內開啟）	$20,000
3．	提供及加裝每台升降機之三相電源開關上鎖裝置。	$50,000
4．	提供及加裝多個附有過電流保養之獨立單相電源開關以供電給機房， 各機箱及各井道的照明及電源插座電路， 每個電路須附有保護裝置。	$100,000
5．	提供及加裝機房緊急照明。	$10,000
6．	電梯機房天花及牆身修補及防水工程。	$0	Already included in repair works
7．	提供及加裝井道七米燈連雙向開關及13A防水電源插座。	$100,000
8．	提供及加裝井道透氣窗鐵網。	$5,000
9．	提供及更換井底爬梯， 踏腳位要用角鐵， 其扶手要伸展至高於地台。	$10,000
10．	井道及井底牆孔須填塞，井底須完全密封防水及垃圾須清理。（如有需要）	$15,000
11．	井坑須完全密封防水及垃圾須清理。（如有需要）	$15,000
12．	更換外扲手面板及外顯示器等設備之外牆及地台修補。（如有需要， 日立只負責更換後之一般泥水修補， 其他如瓦仔、紙皮石或地磚等須由客方負責修補）	$0	Not necessary
13．	各外樓層門口建築項目， 如縮減門口闊度（由手動拉閘轉自動門）。	$108,000	0.75m2 per lift x 4 lifts x 20 storeys = 60m2 x $1,800/m2 = $108,000
14．	提供及安裝井道外至管理處舖設喉管或線槽供對講機系統及監控之用。	$5,000
15．	工程期間，客方需提供臨時暫存位置， 以存放新及舊電梯設備等裝置	$0	No cost involved
	Total:	$438,000

179.  In respect of the above, Mr Kung confirmed that he had not consulted a quantity surveyor or a lift engineer. Neither Mr Hung or Ms Joy Leung’s quantity surveyor was called to give evidence. As far as we can discern, Hitachi’s quotation should have covered items 1-11 and possibly item 18 of those proposed by Mr Hung for an amount of approximately $10 million, leaving some $1,470,000 uncovered for items 12-17. With respect, however, the Hitachi’s quotation is subject to a lot of caveats or exclusions. For instance, if the Building still exists and the users inside continue to operate, it is unreasonable to expect that the replacement of lifts could be carried out within normal business hours as suggested under caveat 2; of course, maybe the replacement of lifts could be carried out one by one so as to mitigate disturbance, this would certainly prolong the replacement period which is subject to Hitachi’s claim for reimbursement under caveat 7(ii).

180.  Mr Kung’s builder’s works did not cover works under caveats 5 & 6. Indeed, caveat 6 left a lot of uncertainty to be decided upon because it depends on the assessment of a Registered Structural Engineer to ascertain that the structures of the Building (which is 50 years’ old) could accommodate the new lifts proposed. Also, there were other costs, such as items b & c commented by Mr Hung which had not been allowed for in Mr Kung’s builder’s works (土建項目).

181.  Also, Mr Kung concurred with Ms Joy Leung’s opinion that the “state of repair” assessment under the Ordinance should only refer to “its structural frames, its components, its finishes and its service installations in the common area. It is not appropriate to assess the condition of the non-structural elements inside the individual units, particularly the fitting out and decorative works”. If this is the case, for instance, the cost of reinstating the toilets inside the units, replacement of missing or defective water closets and fittings etc ie item in the sum of $4,339,000 be excluded[85], the estimated cost of works would amount to something like $80,000,000.

182.  Apart from the cost of works involved, there was substantial difference between Mr Benson Wong and Mr Kung on the assessment of the preliminaries. Mr Kung conceded that the preliminaries should be built up from various items, such as site management, insurance etc instead of a mere percentage of 10%. However, Mr Kung explained, there existed uncertainty and difference in opinions in the components such as project duration and scope of works which are major contributor to the percentage of preliminaries[86].

183.  In view of the above analysis, it appears that Mr Benson Wong’s assessment is more reliable as Mr Kung, like Ms Joy Leung, misapplied the standard of repair required right from the start. According to Mr Benson Wong, it came up to some 29.34% of the cost of constructing a similar superstructure whereas Mr Kung’s figure was about 13% or 10.21% (inclusive of demolition/ foundation costs). There is no reason to include demolition/foundation cost as the exercise is not for rebuilding the superstructure but to indicate the degree of deterioration and hence, the state or repair of the superstructure by comparing the cost of repair with the cost of construction of the existing structure above ground.

184.  In Ms Chan’s closing submission for R1, she proposed a “common sense” approach in comparing the cost of repair and EUV in arriving at a view that redevelopment is not justified. For instance, based on our assessment of the total EUV of $2,765,800,000, Mr Benson Wong’s cost of repair is about 3.07% (or 2.77% if the internal items were excluded) of the total EUV.

185.  We agree that such percentage can be one of the many factors which the Tribunal may take into account to determine whether redevelopment is justified. However, in Nice Beauty Limited v Yan Yan Motors Limited & Others, LDCS 14000/2019 (unreported, dated 6 December 2021, the Tribunal commented at §55 that:

“the percentage of about 3.4% is not very high, but it is not a low figure that most owners in the Building are willing to make the contribution.”

186.  Indeed, earlier in Harvest Treasure Limited & Others v Cheung Fat Enterprises Limited & Others, LDCS 8000/2014 (unreported, dated 31 December 2015), the Tribunal stressed that it did not lay down the minimum ratio required before the Tribunal would be in the position to order the sale pursuant to the Ordinance. Each case has to be decided on its own merits.[87]

187.  We have earlier mentioned that there is no Automatic Sprinkler System provided in the Building except some piecemeal installations of individual dry sprinkler systems to a few workshops. Mr Benson Wong recommended an automatic sprinkler system of $8,659,000 while Mr Kung recommended $4,000,000. The dispute is only academic and indeed serves little or no purpose when the Building is retained and the users are still in operation. It is unreasonable to expect that the owners of a multi-owned building would agree to spend such a vast sum as Mr Kung or Ms Joy Leung always reminded us that the fire service installation provided at the time the Building was built was adequate and met the requirement of fire service installation. Up to the present, there is no such Fire Abatement Notice (Fire Improvement Direction) ever been served under the Fire Safety (Industrial Buildings) Ordinance as certain modern or up-to-date requirements are not retrospective. The Building is habitable in the eyes of Mr Kung or Ms Joy Leung but could not meet the present day’s requirement.

188.  We have reviewed “age” and “state of repair” separately and are satisfied that redevelopment of the Building is justified due to the age and state of repair of the Building. While it is true that the structural safety of the Building is not a cause of concern at the moment, it is manifested that the Building suffers from obsolete design/ construction and inherent deficiencies which are not and cannot be remedied by the proposed repair items of the experts. We also share the view of the Tribunal in Intelligent House Limited v Chan Tung Shing [2008] 4 HKC 421 at §165(3) below and come to the same answer:

“On the grounds of both the “age” and “state of repair” of the old building, the Tribunal is entitled to look at all of the above factors or tests collectively to see if that justifies redevelopment, even though when each of them is considered alone, it is insufficient to do so.”

189.  Indeed, we note the ruling of the Court of Appeal in Pacific Base Holdings Limited & Others v Lee Hop Biu & Others, CACV 426/2020 (unreported, dated 31 May 2021) at §27 as follows:

“Whilst the Tribunal is directed by Section 4(2)(a) of LCSRO to consider if the redevelopment is justified due to the age or state of repair of the existing development on the lot, there is no requirement that the Tribunal has to be satisfied that the building works issues can be resolved before it makes an order for compulsory sale.”

190.  Thus, we find that the building should be redeveloped.

WHETHER THE APPLICANTS HAVE TAKEN REASONABLE STEPS

191.  The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interest of the respondents under Section 4(2)(b) of the Ordinance.

192.  It is not disputed that the applicants have made the following offers to the respondents through their solicitors to acquire the units or interests they own:-

Respondent	Factory Flat Unit(s)	Dates of offers
		5 Jan 2018*	11 Feb 2020	20 Oct 2021	11 May 2022
R1	A2, G/F	$154,790,000	$191,500,000	$300,000,000	$293,800,000
	A, 1/F	$81,170,000	$96,770,000
R2	A1, G/F	$261,280,000	$339,460,000	$456,900,000	$440,000,000
R6	C, 13/F	$41,990,000	$53,760,000
R3	A, 2/F	$80,840,000	$96,770,000	$104,000,000	$106,700,000
R4	A, 11/F	$42,420,000	$54,020,000	$165,300,000	$157,800,000
R5	B, 11/F	$38,680,000	$52,480,000
R7	D, 15/F	$37,900,000	$51,900,000
R8 & R9	A, 7/F	$43,440,000	$54,020,000	$57,600,000	$57,500,000
R10	B, 12/F (23%)	$8,850,000	$12,070,000	$12,100,000	$11,700,000

(* These offers included the advice letter of Savills setting out the relevant valuation assessments and calculations of the share of the respondents’.)

193.  By a joint-letter dated 2 August 2022, the applicants and R2 & R6 informed the Tribunal that:

(1)  R2 & R6’s shares were purchased by the 1^st applicant; and

(2)  R2 & R6 no longer contested this action and support the Application.

194.  By a Consent Summons dated 17 August 2022, the applicants and R8 & R9 agreed that leave be granted to R8 & R9 to withdraw their Notice of Opposition dated 12 March 2018.

195.  In Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363 (“Capital Well”), the Court of Final Appeal emphasised at §33 that:

“In making that assessment (whether an offer is reasonable) 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.”

196.  The Court of Final Appeal stated further at §36 of the judgment that: “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.”

197.  Ms Chan on behalf of R1 complained that the 4^th offer by the applicants had dropped by 2%. However, it does not mean that the 4^th offer was not within the broad reasonable range. More importantly, we agree with Mr Mok that there is no legal requirement that the premium of an offer must be kept at a certain level at all times.

198.  This complaint by R1 was indeed a mirror image of the same argument introduced by R4, R5 & R7 in their Amended Notices of Opposition that notwithstanding the age or state of repair of the Building, the Tribunal should not make a sale order in light of the economic downturn. R4, R5 & R7 alleged “equal bargaining power”, unfairness to force a sale and loss of “steady source of income” in such circumstances. Mr Chan, SC, in his closing submission, relied on this argument, suggesting that the Tribunal should consider a minority owner’s undue hardship by conducting a proportionality test before making a sale order. This argument by R4, R5 & R7 is without merit and unsupported by any provision in the Ordinance or any authorities. Whereas art. 105 of the Basic Law provides protection of the rights of individuals and legal persons to the acquisition, use, disposal and inheritance of property and their right to compensation for lawful deprivation of their property, the Court of Final Appeal in Director of Lands v Yin Shuen Enterprises Ltd & Another (2003) 6 HKCFAR 1 held at §56 that in general the “open market value” of a property is the “real value” of the property that would be payable to those affected by compulsory acquisition. Such proportionality test has been rejected by the Tribunal in Wellcity Development Limited & Others v Ho Yung Man & Others, LDCS 22000/2014 (unreported, dated 28 April 2017). See §§22-39 of the judgment.

199.  With respect, there is no crystal ball to predict market fluctuation. How could one determine which is the right moment to make a compulsory sale application or which is the appropriate time for the Tribunal to grant a sale order. Everybody has to take the market condition as it is to make the decision. This is manifested by reference to Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 where the Privy Council remarked that:

“… The mortgagee and the company seeking to uphold the transaction must show that the sale was in good faith and that the mortgagee took reasonable precautions to obtain the best price reasonably obtainable at the time. The mortgagee is not bound to postpone the sale in the hope of obtaining a better price ...”

200.  Indeed, in Able Luck Development, supra, at §123, the Tribunal ruled as follows:

“… the purpose of the Ordinance is to free up land under multi-ownership for redevelopment where the co-owners could not agree amongst themselves to do so, this is itself a kind of public social and economic benefit. As the tribunal would not make an order for sale unless it is satisfied that redevelopment is justified having regard to the age or state of repair of the building and since the Ordinance allows dissenting minority owners to have full participation by making oppositions in the statutory process and further provides for compensation in the form of distribution of a proportionate share of the net proceeds of sale, there should be no additional constitutional objection to the making of a sale order if the tribunal considers it an appropriate order to make.”

201.  R4, R5 & R7 had full participation in the present proceedings when they had all along engaged a 4-counsel team (and later 3-counsel team) led by senior counsel even for attending call-over hearings. It is difficult to imagine that they were in a disadvantageous position.

202.  A minority owner’s “equal bargaining power” as alleged by R4, R5 & R7 is simply irrelevant in the context of the Ordinance. In Pacific Base Holdings, supra, the Court of Appeal stated at §40 as follows:

“… it is a matter for the legislature to strike the balance between different interests amongst the majority owners, the minority owners and the public interest in urban renewal. In essence, it is a policy judgment.”

203.  Hence, it is not a matter for the Tribunal to balance different interests or to decide whether a sale order would satisfy any proportionality test. The balancing act has already been made by the legislature as reflected in the Ordinance as remarked by the Court of Appeal in Good Faith Properties Ltd v Cibean Development Co Ltd [2014] 5 HKLRD 534 at §42 as follows:

“… the whole statutory scheme in the context of a proportionate balance of competing interest and a justified interference with a constitutionally entreached right of private ownership of property.”

204.  In reply to a question raised by the Hon Ronny Tong Ka-wah in a Legislative Council on 5 January 2011, the then Secretary for Development, Mrs Carrie Lam stated as follows:[88]

“If the Tribunal decides to grant a compulsory sale order after hearing the case, it will approve a reserve price which has "taken into account the redevelopment potential of the lot", and appoint a trustee to sell the lot by public auction (unless all owners of the lot have agreed to seek the Tribunal's approval under the Ordinance for selling the lot by other means). A reserve price which has "taken into account the redevelopment potential of the lot" will be higher than the total existing use values of all properties on the lot as the former reflects the value derived from, among others, a better utilisation of the plot ratio of the lot.”

205.  As well, in Fuller Holdings Limited & Another v Hsu Ling Ling & Another, LDCS 13000/2019 (unreported, dated 27 August 2020), the Tribunal stated at §§26-27 as follows:

“26. In this regard, Mr Mok submits there are clear limits on how far legislative materials can be used in the interpretation of a statute, and there is now no ambiguity in the language of s.4(2) to create any difficulty in its interpretation, and its natural interpretation does not lead to absurdity that there is a residual discretion under s.4(2) grounded on undue hardship. Even if there is such a residual discretion, which is denied by the applicants, the content of the residual discretion and how it should be exercised must be formulated in a principled way and should be of general application to all minority owners. However, such a residual discretion if any cannot be properly formulated just to cater for the situation of the early discharge of the Legal Charge for a minority owner under the Scheme. In addition, the vague concept of “fairness” cannot exist without taking into consideration of the offers made to the respondents. If it is unreasonable for the respondents to refuse the offers, the respondents contribute to their current situation and it is unfair and wrong in principle to refuse the sale order because of an unfair situation created by their own choosing.

27. I agree with Mr Mok s.4(2) of the Ordinance is clear on what should be considered by the tribunal and there is no residual discretion grounded on undue hardship. In fact, the Secretary for Development may make regulations under s.12(1) of the Ordinance to cover very extensive grounds, including matters to be taken into account for the purposes of s.4(2)(b) - whether the applicant has taken reasonable steps, but so far no regulation has been made to provide any special consideration to the minority owners under the Scheme or to any perceived hardship which may be faced by the minority owners as a result of early triggering of the discharge of the Legal Charge.”

206.  Further, in Able Luck Development Limited & Others v Public Global Investments Limited & Others, LDCS 7000/2014 (unreported, 6 October 2017)[89], the Tribunal held at §§167-170, citing Good Faith Properties, supra, that there is no residual discretion to consider matters other than the 2 statutory criteria under section 4(2) of the Ordinance. The Tribunal rejected the argument that the negative phrase ‘not make an order for sale unless” in the section implies such discretion. We agree with the reasoning in that case and also rule here that there is no residual discretion in the statutory regime. Even though “discretion” or “hardship” may have been raised during the discussion of the bill for the Ordinance, the fact is that no such “discretion’ or “hardship” was incorporated into the Ordinance in the end, which in fact shows that there should not be such residual discretion as contended.

207.  However, Mr Chan, SC, in his closing submission, also alleged that the applicants discriminated against the respondents in that the terms of the offers were different because the applicants had, for instance, allowed R2 & R6 up to 11 months after completion of sale before the latter would be required to deliver vacant possession of their premises.

208.  Firstly, in Fancy Million Limited & Another v Yearly Glory Limited & Others, LDCS 15000/2018 (unreported, dated 23 November 2021), the Tribunal agreed with Mr Mok (who happened to be the counsel for the applicants in that case) and held at §127 that:

“there is no requirement under the Ordinance that the offers to the minority owners after the commencement of the Application has to be commensurate with each one and another. Particularly, the insistence of the respondents on receiving the similar premium would have the effect of deterring majority owners to be more generous in making early offers. That would run against the legislative intent of the Ordinance to encourage negotiation and settlement among the majority owner and the minority owners.”

209.  Secondly, as stated in §28 above, one of the main concerns by R2 & R6 was the time taken for relocation. Perhaps owing to the adjournment of the trial for more than 8 months, the applicants and R2 & R6 could have compromised their respective requirements. It serves the legislative intent of the Ordinance to encourage negotiation and settlement among the majority owner and the minority owners.

210.  Bearing in mind the above, we are satisfied that on the evidence available and in the circumstances of the Application, the applicants have taken reasonable steps to acquire all the undivided shares in the Lot including negotiating for the purchase of such of those shares as are owned by the respondents on terms that are fair and reasonable.

ORDER FOR SALE

211.  Thus, we find that the applicants have satisfied us on both section 4(2)(a) and (b) of the Ordinance. There is no residual discretion not to order sale of the Lot. We will grant the order for sale accordingly.

DISPUTES ON THE ESTIMATION OF THE RDV OF THE LOTS

Optimum Hypothetical Development Model

212.  Both Mr Charles Chan for the applicants and Mr Lee for the respondents agreed to resort to the residual valuation method in determining the RDV. This can be done by deducting development cost (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value (“GDV”) of the completed optimum development.

213.  By their Joint Statement dated 13 May 2022, the two valuation experts agreed that the retail/office model is the optimum hypothetical form of development on the Lot. All along they proceeded with their valuations on the assumption that the hypothetical development would be a Grade A office building. They both agreed that the hypothetical development will comprise basement floors for carparks with 28 storeys above. However, there are differences in their hypothetical models as follows:[90]

		Mr Charles Chan	Mr Lee
Site Area		2,516.72 sq m
Proposed Gross Floor Area (“GFA”)		37,750.03 sq m
Form of Optimal Development	Basement Car Park:	Levels 1 to 3	Levels 1 to 2
	G/F Retail & Loading Unloading	Office Lift Lobby on 1/F	Lift Lobby on G/F
	1/F Retail
	Office (2 units per floor)	2/F-27/F	2/F-27/F
Saleable Area	G/F Retail	79.164 sq m	40.53 sq m
	1/F Retail	1,095.838 sq m	1,597.47 sq m
	Office	30,068.950 sq m	31,222.59 sq m
Common Area	G/F	287.572 sq m	307.00 sq m
	1/F	717.576 sq m	200.75 sq m
	2/F-14/F	220.068 sq m	198.574 sq m
	16/F-27/F	189.401 sq m per floor	172.895 sq m per floor

214.  In LDCS 6000/2018, Mr Charles Chan’s hypothetical development model was formulated in reliance on Authorised Persons Mr Chan Chung Yee Albert (“Mr Albert Chan”)’s advice. Mr Lee’s development model was formulated in reliance on that of Mr Tsui Tack Kong (“Mr Tsui”). The Tribunal, then after reviewing various parameters of the corresponding development models, preferred that of Mr Charles Chan[91].

215.  In the present case, Mr Charles Chan again relied on Mr Albert Chan who produced schematic drawings of the proposed development:[92] On the other hand, Mr Lee had not produced any revised schematic drawings of the proposed development.

216.  We have noted that both Mr Charles Chan and Mr Lee had proceeded with their valuations on the assumption that the hypothetical development would be a Grade A office building. We are not persuaded that this Grade A Office assumption has to be changed notwithstanding that Ms Chan for R1 suggested otherwise.

217.  While we consider the comments made by the Tribunal in LDCS 6000/2018 still applicable, we are prepared to adopt Mr Charles Chan’s hypothetical development model, which according to him, has already incorporated Mr Tsui’s advice.

Assessment of the Value for G/F

218.  Regarding the assessment of the value for G/F, Mr Charles Chan and Mr Lee tended to adopt the following as the reference ground floor unit (“the Reference Shop Unit”):[93]

	Mr Charles Chan	Mr Lee
Size (sq m)	42.8	40.53
Frontage onto King’s Road (m)	5.0	7.8
Headroom (m)	5.5	5.95
Depth (m)	10.5	5.75

219.  As can be seen from the above, there are no significant differences between Mr Charles Chan and Mr Lee on their designs of the Reference Shop Unit save on the frontage onto King’s Road. We prefer Mr Charles Chan’s layout design for the G/F, and we adopt his proposed Reference Shop Unit.

220.  Mr Charles Chan and Mr Lee referred to the following comparables and arrived at a unit rate of $459,000 per sq m and $811,000 per sq m respectively:[94]

Comp Ref	Address	Age of Building	Date of Sale	Consideration	Saleable Area (m2)	Frontage (m)	Depth (m)	Headroom (m)	Unit Price* (/m2)
	Reference Shop Unit	New			42.8	5.0	10.5	5.5
J1	Shop D, G/F, Tak Fat Building, 15 Finnie Street	1985	2 Dec 21	$17,900,000	43.4	3.8	11.0	3.3	$741,506
J2	Shops G and H, G/F, Oceanic Building, 22-46 Finnie Street	1989	13 Nov 21	$26,800,000	54.4	7.1 + Return Frontage: 10.4	10.4	3.9	$359,640
J3	Shop 2, G/F, Tai Kut House, 7 Greig Road	1966	5 Jul 21	$36,000,000	100.1	7.1	14.1	3.6	$359,486
J4	Unit C, G/F, Eastern Centre, 1065 King’s Road	1985	29 Jun 21	$100,800,000	280.4	9.0	25.2	5.0	$501,222
J6	Shop 8, G/F, Ka Wing Building, 4-6 Hoi Bun Street	1982	20 Jan 21	$17,080,000	27.5	2.9	9.6	4.3	$922,190
J7	Shop 9, G/F, Tak Lee Building, 993 King’s Road	1967	24 Jul 20	$32,000,000	34.7	4.8	7.9	3.9	$400,000
J8	Shop 8, G/F, Ka Wing Building, 4-6 Hoi Wan Street	1971	26 Dec 20	$27,000,000	40.7 + C/L: 33.9	4.4	9.8	2.9	$621,091

* Assuming value of cockloft is equal to ¼ of that of G/F

Choice of Comparables and Adjustment for Location

221.  Unlike Zung Fu Industrial Building, the subject of LDCS 6000/2018, the Lot is recessed from the corner junction of King’s Road and Shipyard Lane and further away from the pedestrian crossing across King’s Road to the commercial complex of Kornhill Plaza.

222.  Mr Charles Chan only adopted J1 to J4 as comparables but Mr Lee considered otherwise for the reason of locational difference and for J4, of size difference. Mr Lee, however, was prepared to propose certain location adjustments as fall-back.

223.  Comparable J1 is situated far away from the Lot and close to the end of a cul-de-sac. Its location is relatively quiet despite there exists a Quarry Bay MTR exit outside the cul-de-sac. While Mr Charles Chan applied a location adjustment of +5%, Mr Lee proposed 25% which we preferred.

224.  Comparable J2 however is a corner unit situated at the entrance of the cul-de-sac mentioned above. It is just opposite the Quarry Bay MTR exit. This time Mr Charles Chan applied nil location adjustment while Mr Lee maintained a high adjustment of +20%. With shop premises, location is of prime importance; large variation in value can be found within a comparatively short distance. We consider Mr Charles Chan’s nil adjustment more appropriate.

225.  Comparable J3 is in fact Comparable E2 in LDCS 6000/2018. Its location is inferior when compared with the subject, being situated at a recessed area on Greig Street which section is a cul-de-sac leading to The Orchards. Mr Charles Chan applied a location adjustment of -10% while Mr Lee maintained a high adjustment of +20%. We prefer a mid-way between the two, ie +5%.

226.  Comparable J4 is in fact Comparable E3 in LDCS 6000/2018. It is currently occupied by a bank and is situated relatively closer to the subject along King’s Road. Mr Lee proposed a location adjustment of -5% but we agree with Mr Charles Chan’s proposed -20% this time as this comparable is situated at a busier and bustling location.

227.  Comparable J6 is in fact Comparable E8 in LDCS 6000/2018. It is currently occupied by a fast food shop within Taikoo Place. Mr Charles Chan considered this transaction dated more than two years’ ago from the valuation date but in view of the dearth of good comparables, we are content to adopt it as a comparable for the time being. We agree with Mr Lee on his -5% adjustment for location.

228.  Similarly, Comparable J7 is Comparable E6 in LDCS 6000/2018 and was dated. It is located near a wet market in front of Tak Lee Building and Wai Lee Building and also next to the footbridge landing connecting to the Quarry Bay Municipal Services Building. We agree with Mr Lee on his -30% adjustment for location.

229.  As well, Comparable J8 is Comparable E9 in LDCS 6000/2018 and was dated. It is situated close to Comparable J7 but is within the pedestrian precinct of the wet market between Tak Lee Building and Wai Lee Building. While we agree with Mr Lee that the adjustment for location should be negative, we consider -15% more appropriate than his proposed -5%.

230.  In respect of other adjustment factors, Mr Charles Chan and Mr Lee had the following agreements/ disagreements:[95]

	Mr Charles Chan	Mr Lee
Time	Private Retail Price Index published by RVD
Size/ Quantum	1% per 5 m2 difference for the first 100 m2 difference, 1% per 10 m2 difference for remaining difference	1% per 5 m2
Building Age	1% per 5 years’ difference
Layout	J1: 3% J2: -3% J3: 0% J4: 3%	J1: 15% J2: 10% J3: 0% J4: 10% J6: 5% J7: 0% J8: 0%
Frontage	2% per 1 m difference
Headroom	6% per 1 m
Total Adjustment	By Multiplication

Adjustment for Size

231.  According to Mr Lee, no agreement for size adjustment could be reached with Mr Charles Chan only because the latter had chosen Comparable J3 and J4 which had significant sizes as a comparable. On the other hand, Mr Lee’s comparables are all of a much smaller size than the Reference Shop Unit. In this regard, we will adopt Mr Charles Chan’s dual-rate adjustment approach: 1% per 5 sq m difference for size under 100 sq m and 1% per 10 sq m difference for size over 100 sq m.

Adjustment for Frontage

232.  Mr Charles Chan and Mr Lee agreed that the frontage of the comparables would be adjusted at 2% per 1 metre difference and the return frontage for Comparable J2 at -5%.

Adjustment for Headroom

233.  Mr Charles Chan and Mr Lee agreed that the headroom would be adjusted at 6% per 1 metre difference.

Adjustment for Layout

234.  Both Mr Charles Chan and Mr Lee agreed that there should be adjustments for layout but their opinion differed as to magnitude.

235.  Having reviewed the floor plan for the comparables, we agree with Mr Charles Chan.

236.  The following table shows our adjustments:

Comp Ref	Unit Price (/m2)	Adjustment										Adjusted Unit Price (/m2)
		Time	Location	Size	Age	Layout	Frontage	Return Frontage	Headroom	Total	Absolute Total
J1	$412,442	-4.0%	25.0%	0.1%	7.4%	3.0%	2.4%	0.0%	13.2%	54.0%	55.1%	$635,161
J2	$492,647	-2.8%	0.0%	2.3%	6.6%	-3.0%	-4.2%	-5.0%	9.6%	2.6%	33.5%	$505,456
J3	$359,640	-5.0%	5.0%	11.5%	11.2%	0.0%	-4.2%	0.0%	11.4%	32.0%	48.3%	$474,725
J4	$359,486	-1.8%	-20.0%	29.5%	7.4%	3.0%	-8.0%	0.0%	3.0%	6.6%	72.7%	$383,212
J6	$621,091	3.3%	-5.0%	-2.6%	8.0%	0.0%	4.2%	0.0%	7.2%	15.3%	30.3%	$716,118
J7	$922,190	2.3%	-30.0%	-1.2%	11.0%	0.0%	0.4%	0.0%	9.6%	-13.6%	54.5%	$796,772
J8	$548,781	1.5%	-15.0%	1.7%	10.2%	0.0%	1.2%	0.0%	15.6%	13.1%	45.2%	$620,671
Average:												$590,302
Average , if J1 is disregarded:												$582,826

237.  With regret, the outcome of the adjusted unit rates comprises a wide range from $383,648 per sq m to $796,118 per sq m, with a sample standard deviation of as much as $114,244. This is undesirable as it is trite that as a matter of valuation practice, comparables needing large adjustments should be avoided. The better practice is in fact to avoid comparables requiring many adjustments especially when some of the factors are based essentially on intuition or impression which are not always susceptible to verification for accuracy. In this regard, Comparable J1 should be disregarded because of its significant adjustment magnitude. Save for Comparables J2 & J6, the other comparables are not better as their absolute adjustments required are also significant.

238.  Comparable J2 appears to be the best comparable in terms of location and time. If we allow a 10% margin increase, its adjusted unit rate becomes $556,002/sq m. We are prepared to round it up to $560,000/sq m as the unit rate for the Reference Shop Unit.

239.  Then we follow the adjustments proposed by Mr Charles Chan in the assessment of the GDV of the another shop units as follows:[96]

Unit	Saleable Area (m2)	Frontage onto King’s Road (m)	Depth (m)	Adjustment					Adjusted Unit Rate (/m2)	GDV for G/F Shops
				Location	Size	Frontage	Layout	Total
1	42.780	5.0	10.5	0.0%	0.0%	0.0%	0.0%	0.0%	$560,000	$23,956,800
2	36.384	8.5	3.6	0.0%	1.3%	7.0%	6.0%	14.9%	$643,440	$23,410,921
	79.164								Total:	$47,367,721
							Average Unit Rate:			$598,349
							Say:			$600,000

Assessment of the Value for 1/F (Retail)

240.  In respect of the value of the 1/F retail unit, Mr Lee agreed with Mr Charles Chan that it would be 55% of that of the average ground floor[97]. As a result, its unit rate is $330,000 per sq m.

241.  Both valuation experts agreed that the value of the flat roof attached thereto is 1/6 of its unit rate, ie $55,000 per sq m.

Assessment of the Value for the Upper Floors (Offices)

242.  By their Joint Statement dated 13 May 2022, Mr Charles Chan and Mr Lee agreed to adopt sales in 2 developments as comparables for the purpose of assessing the value of the office premises for their hypothetical developments. They are Island Place Tower, Island Place at 510 King’s Road in North Point and K Wah Centre at 191 Java Road also in North Point which lies closer to the Lot.

243.  Island Place Tower is in fact a single office tower completed in 1997 as part of the Island Place development complex comprising, in addition to the office tower, three residential towers next to it surmounting a commercial plaza. Island Place Tower has 29 storeys with a typical floor space of approximately 2,000 sq m, under-floor trunk, extra high ceiling height, and grand entrance/ lift lobby area. The building has a total gross floor area of about 50,000 sq m which is served by 12 passenger lifts and two service lifts.

244.  K Wah Centre comprises a 29-storey office tower completed even earlier in 1991 at relatively isolated location off the waterfront[98]. It consists of a total gross floor area of about 36,000 sq m (which is similar to the total GFA of the hypothetical development of 34,625.10 sq m) with a typical floor space of approximately 1,250 sq m (as compared with 1,356 sq m of the hypothetical development) which is served by 6 passenger lifts and one service lift. This building is however situated at a relatively isolated location and the management runs a shuttle bus service to and from a ferries pier nearby.

245.  We regret that the two buildings are more than 20 years old and located at a relatively faraway location. However, given that they are the only comparables provided by the experts, we cannot but adopt them for consideration and analysis:[99]

Island Place Tower

Comp Ref	Address	Consideration	Date of Sale	Saleable Area (m2)	Headroom (m)	View	Unit Price (/m2)
K2	Unit 3, 9/F	$16,665,600	24 Mar 17	83.1	3.5	Building	$200,602
K3	Unit 2, 9/F	$25,612,800	24 Mar 17	127.8	3.5	Building	$200,391

K Wah Centre

Comp Ref	Address	Consideration	Date of Sale	Saleable Area (m2)	Headroom (m)	View	Unit Price (/m2)
K1	Offices 3 & 4, 9/F	$28,280,000	5 May 17	128.9	3.3	Seaview	$219,395
K4	Office 2, 8/F	$22,000,000	17 Feb 17	118.6	3.3	Seaview	$185,497

246.  Mr Charles Chan and Mr Lee further had the following agreements on the various adjustment factors:[100]

Adjustment Factors	Mr Charles Chan	Mr Lee
Time	Private Office Price Index published by RVD (All Classes)[101]
Size/Quantum	1% per 75 sq m difference
Building Age	0.5% per 1 year difference
Floor Level	0.5% per 1 floor difference
Headroom	4% per 1 m difference

247.  However, Mr Charles Chan and Mr Lee failed to agree on adjustment factors like location, views & aspect etc.

248.  The following table shows the adjustments applied by Mr Charles Chan (and those by Mr Lee, if any, are in parentheses):[102]

Comp Ref	Unit Price (/m2)	Adjustments
		Time	Location	Size	View	Building Age	Scale & Facilities	Floor	Quality	Aspect	Headroom
K1	$219,395	4.6%	10.0% (15.0%)	-6.3% (-6.6%)	-20.0% (-15.0%)	15.5%	5.0%	2.5%	10.0% (8.0%)	5.0% (10.0%)	1.2% (0.8%)
K2	$200,549	7.2%	5.0%	-6.9% (-7.2%)	0.0% (10.0%)	12.5%	3.0%	3.0%	10.0% (8.0%)	5.0% (10.0%)	0.4% (0.0%)
K3	$200,413	7.2%	5.0%	-6.3% (-6.6%)	0.0% (10.0%)	12.5%	3.0%	3.0%	10.0% (8.0%)	5.0% (10.0%)	0.4% (0.0%)
K4	$185,497	7.8%	10.0% (15.0%)	-6.4% (-6.7%)	-20.0% (-10.0%)	15.5%	5.0%	3.0%	10.0% (8.0%)	5.0% (10.0%)	1.2% (0.8%)

Adjustment for Location

249.  The area under consideration is undergoing a transformation from an industrial hub into a high class office/commercial area with many newly developed Grade A office towers. In this regard, we agree with the location adjustments proposed by Mr Lee.

Adjustment for Size

250.  Although Mr Charles Chan and Mr Lee agreed on the formula for the adjustment for size, they have different assumptions on the reference office unit (“Reference Office Unit”):[103]

	Mr Charles Chan	Mr Lee
Size (sq m)	601.4	624.45
Headroom (m)	3.6	3.5
Aspect	2 sides	3 sides

251.  Whereas we have adopted Mr Charles Chan’s hypothetical development model, we are also prepared to adopt his proposed reference office unit. In any event, the difference in size is insignificant.

Adjustment for View

252.  As the hypothetical development will be abutting King’s Road and far away from the seafront, we agree with Mr Charles Chan that the view enjoyed by the new development will mostly be building view. Thus, we agree with Mr Charles Chan on his proposed adjustments for view.

Adjustment for Aspects

253.  Both valuation experts had allowed positive adjustments for the Reference Office Unit probably having windows on two sides (by Mr Charles Chan) or on three sides (by Mr Lee).

254.  Mr Charles Chan commented that since Mr Lee assumed there being only two units on a typical floor, one side of the floor plate would be blocked by the service core and therefore, the Reference Office Unit could not have windows on three aspects. Having reviewed the typical floor plan proposed by Mr Lee[104], we find that the so-called third side of window is minimal and we therefore agree with Mr Charles Chan.

Adjustment for Headroom

255.  Although Mr Charles Chan and Mr Lee agreed on the formula for the adjustment for headroom, they had different assumptions on the Reference Office Unit.

256.  Again, as we are prepared to adopt Mr Charles Chan’s proposed reference office unit, we shall follow his adjustments. In any event, the difference in headroom is insignificant.

257.  Thus our assessment of the adjusted unit price for the hypothetical Reference Office Unit is as follows:

Comp Ref	Unit Price (/m2)	Adjustments											Adjusted Unit Price (/m2)
		Time	Location	Size	View	Building Age	Scale & Facilities	Floor	Quality	Aspect	Head- room	Total
K1	$219,395	4.6%	15.0%	-6.3%	-20.0%	15.5%	5.0%	2.5%	10.0%	5.0%	1.2%	31.0%	$287,407
K2	$200,549	7.2%	5.0%	-6.9%	0.0%	12.5%	3.0%	3.0%	10.0%	5.0%	0.4%	45.0%	$290,796
K3	$200,413	7.2%	5.0%	-6.3%	0.0%	12.5%	3.0%	3.0%	10.0%	5.0%	0.4%	46.0%	$292,603
K4	$185,497	7.8%	15.0%	-6.4%	-20.0%	15.5%	5.0%	3.0%	10.0%	5.0%	1.2%	35.5%	$251,348
										Average:			$280,539
									Average (if K4 is excluded):				$290,269

Conclusion on Office Value

258.  From the above, it is obvious that the adjusted unit rate for Comparable K4 falls outside the tone. We are minded therefore to adopt $290,000 per sq m as the unit rate for the Reference Office Unit.

259.  Then we proceed to determine the total GDV for the office portion, following Mr Charles Chan’s template below:[105]

Zone	Floor	Unit	View	Saleable Area of Each Office Unit (m2)	Adjustments			Adjusted Unit Price (/m2)	GDV
					Floor	View	Total
Low	2/F	A	Building	601.4	-6.0%	0.0%	-6.0%	$272,600
Low	2/F	B	Building	601.4	-6.0%	0.0%	-6.0%	$272,600
		Flat Roof						$45,000
Low	2/F-14/F	A	Building	601.4	-3.0%	0.0%	-3.0%	$281,300	$2,199,259,660
Low	2/F-14/F	B	Building	601.4	-3.0%	0.0%	-3.0%	$281,300	$2,199,259,660
High	16/F-20/F	A	Building	601.4	2.0%	0.0%	2.0%	$295,800	$889,470,600
High	16/F-20/F	B	Building	601.4	2.0%	0.0%	2.0%	$295,800	$889,470,600
High	21/F-23/F	A	Partial Seaview	601.4	4.0%	10.0%	14.4%	$331,760	$598,561,392
High	21/F-23/F	B	Partial Seaview	601.4	4.0%	10.0%	14.4%	$331,760	$598,561,392
High	24/F-26/F	A	Seaview	601.4	5.5%	20.0%	26.6%	$367,140	$662,393,988
High	24/F-26/F	B	Seaview	601.4	5.5%	20.0%	26.6%	$367,140	$662,393,988
High	27/F	A	Seaview	601.4	6.5%	20.0%	27.8%	$370,620	$222,890,868
High	27/F	B	Seaview	601.4	6.5%	20.0%	27.8%	$370,620	$222,890,868
								Total:	$9,145,153,016
								Average:	$304,139

Assessment of the Value for Private Car Parking Spaces

260.  As regards the assessment of the GDV for the private car parking spaces, Mr Lee was content to adopt the determination of the market value of private car parking spaces in LDCS 6000/2018 at $2,800,000 each on Basement Level 2.

261.  On the other hand, Mr Charles Chan referred to all the following two comparables and the adjustments thereto, assessing the value of a private car parking spaces at $2,600,000 each on Basement Level 2:[106]

Comp Ref	Carparking Address	Consideration	Date of Sale	Building Age	Adjustments				Adjusted Value
					Time	Age	Floor	Total
L1	P222, 2/F, Eastern Harbour Centre	$2,350,000	25 Jul 21	1992	3.1%	3.0%	0.0%	6.2%	$2,495,700
L2	P19, 1/F, Westlands Centre	$2,300,000	7 Jul 20	1989	17.5%	3.0%	0.0%	21.0%	$2,783,000

(* Eastern Centre is situated at 1065 King’s Road whereas Westlands Centre is situated at 20 Westlands Road, both being industrial buildings per se.)

262.  Mr Lee commented that L1 was not a suitable comparable as unlike the subject car parks, it is an above-ground car park and located on a higher floor level. As a result, the price of L1 tended to be low owing to its older and outmoded design[107].

263.  We consider Mr Lee’s comment valid and are prepared to determine again the value of the Reference Private Car Parking Space on Basement Level 2 at $2,800,000.

Assessment of the Value for Lorry Car Parking Spaces & Motorcycle Spaces

264.  Indeed, the two valuation experts agreed to follow the Tribunal’s assessment of a lorry parking space and a motorcycle space in LDCS 6000/2018 at $3,400,000 each and $200,000 each respectively.[108]

Other Parameters

265.  By their Joint Statement dated 12 April 2022, Mr Charles Chan and Mr Lee had the following agreements/disagreements on other parameters of the residual valuation:[109]

	Mr Charles Chan	Mr Lee
Marketing Cost	2.5%
Interest Rate	4.0%	3.5%
Professional Fee	6.0%
Demolition Cost	$33,209 sq m x $2,200 per sq m = $73,059,800
Demolition Period	9 months
Construction Cost	$1,652,179,473[110] on the basis of $35,650 per m2	$1,484,199,106
Construction Period	48 months (ie 4 year)	36 month (ie 3 years)
Developer’s Profit	25%	17.5%
Legal Cost	0.1%
Stamp Duty	4.25%

Construction Cost

266.  As a matter of practice, Mr Charles Chan made reference to the building cost data published by Rider Levett Bucknall Ltd (“RLB”) – office buildings with high to very high quality finishes and derived his construction cost based on the Development Cost Pro-forma promulgated by the Hong Kong Institute of Surveyors.

267.  While Mr Lee did something similar in his earlier report in October 2021, he had not prepared an updated estimate but by just increasing his previous assessment by 3% on the RLB tender price index in the last 6 months from 2^nd Quarter of 2021 to 3^rd Quarter of 2021.

268.  Upon cross-examination, Mr Lee accepted that the RLB tender price includes data for both office and residential buildings.

269.  On the other hand, Mr Charles Chan made reference to the following and commented that the unit construction cost of offices had increased by more than 3% during the relevant period:[111]

	2nd Quarter of 2021	2nd Quarter of 2021	Change
High Quality	$30,200 per sq m	$31,900 per sq m	+5.6%
Very High Quality	$37,700 per sq m	$39,400 per sq m	+4.5%
Average	$33,950 per sq m	$35,650 per sq m	+5.0%

270.  We appreciate that construction costs have been increasing during the past year. We agree therefore that Mr Lee had underestimated the construction cost. Mr Charles Chan’s assessment is therefore adopted in the absence of further updating.

Construction Period

271.  In LDCS 6000/2018, on the basis of evidence provided by Mr Charles Chan, we adopted a construction period of 48 months as suggested by him.

272.  We now make a comparison between the present case and LDCS 6000/2018 and agree again with Mr Charles Chan that the proper construction period should be 48 months instead of Mr Lee’s proposal which has no evidence in support:

Office Development	Site Area (m2)	Total GFA (m2)	Number of Basement Floor
LDCS 6000/2018	2,308.34	34,625.10	3
Present Case	2,516.72	37,750.03	3

Development Profit

273.  As commented by Mr Charles Chan, when Mr Lee argued for a lower developer’s profit in the residual valuation, he suggested a usual development period of 4 to 5 years in contrast to his 36 months in the present case.

274.  Again while we appreciate that Mr Lee did not have a crystal ball in predicting the future, when giving evidence as an expert, he should have been ready to provide valid and reliable opinion based on contemporary materials or financial data which he provided none. It is of little assistance to note his bare assertion (if not speculation) below:[112]

“It is true that the current inflation hike was attributable to the sudden global supply chain failure and oil price increase which were in turn caused by the Covid pandemic and the Russia-Ukraine war. However, unless those random or geo-political events will escalate to an irreversible state that no one can predict, economic cycle theory had it that the market will adjust itself. It means that while global demand is still there, inflation will ebb once the bottleneck problems on the supply side are sorted out and interest rate hike aimed at clamping down on it be tamed and rising labour demand and cost got under control in the mid-term.”

The passage itself contains a lot of uncertainties or caveats like “unless”, “inflation will ebb once the bottleneck problems on the supply side are sorted out …”

275.  In Shapiro, Mackmin and Sams, Modern Methods of Valuation, 12^th edition, p 222, the development profit is explained as follows:

“As for any risky enterprise a profit is required to compensate for risk. Target levels of profit will depend on the nature of the development and allied risks, the competition for development schemes in the market, the period of the development and the general optimism in relation to that form of development …”

276.  Like other investments, property development involves some uncertainties about future development period before revenue or profit returns. It is trite that in times of economic downturn, or when the market is in the doldrums, people are more risk averse. There must be a positive risk premium to induce or attract such risk-averse investors or developers to take up the project for development. As manifested from Mr Lee’s statement above, it contains a lot of uncertainties. It is a pity that Mr Lee provided no contemporary financial data to support his bare assertion.

277.  Just by comparing the period before the judgment for LDCS 6000/2018 was handed down in early February 2022, the 5^th wave of Covid-19 pandemic had become more widespread and the infection rates kept on rising. Then came the Russia-Ukraine war and the world-wide inflation.

278.  In this regard, Mr Charles Chan cited the Financial Secretary’s blog of 15 May 2022[113] which, according to Mr Charles Chan, appeared to paint a gloomy overview of the Hong Kong economy. However, as cited by Mr Charles Chan, it was the Financial Secretary’s last comment that “Hong Kong’s economy will continue to move forward stably even amid a complex and volatile environment.”

279.  We are of the view that the outlook was not as bleak as described by Mr Charles Chan. That there was no new or up-to-date Grade A office transaction in the vicinity is neither here or there as most of the Grade A offices there were not for sale. The same is true when Mr Charles Chan quoted there having been 3 failed tender sale of commercial sites in Kowloon East in the past 3 years. Did he forget the Caroline Hill Road tender, ie the sale of Inland Lot 8945 as discussed in §§149-152 in LDCS 6000/2018 where Hysan Development Company Limited (“Hysan”) together with the Chinachem Group were the successful tenderers?

280.  When the trial recommenced on 23 May 2022, a report on the performance of Hong Kong Property Market was published by JLL Hong Kong reported that “The leasing (office) market picked up some momentum in April due to the relaxed social distancing measures … The overall vacancy rate stood at 9.4% as of end-April due to completion of new supply.”[114] We note the Grade A Office Vacancy in Hong Kong East, ie where the Lot is located was 8.2% though that in Central was 7.4%.

281.  We are aware of Mr Charles Chan’s comment that such kind of market reports might be biased in order to promote their agency business. However, the figures or passages we just quote from JLL Hong Kong were supposed to be supported by hard data instead of mere speculation or outlook assertion.

282.  Also we are aware of Mr Charles Chan’s comment that a commercial site in Tung Chung was sold by Government tender in March 2022 at a price much lower than market expectation. Yet, as informed by Mr Charles Chan, the winning bid was 54% higher than the second bid. This demonstrates that certain developers are still willing to take risk than the others.

283.  On the other hand, the price index published by RVD does show that in the least Grade A office market has shown signs of improvement as suggested by Mr Lee. The picture would become clearer, as submitted by Mr Yuen before, when the moving averages of 3 months or 6 months are taken into consideration. The office market has stabilised despite the various uncertainties prevailing in the market:

Year	Month	Index	3-month average	6-month average
2022	1	477.8	461.1	461.6
	2	507.7	482.0	470.4
	3	*
	4	478.2	487.9	472.4
	5	467.8	484.6	472.8
	6	467.5	471.2	476.6
	7	469.2	468.2	478.0

* Insufficient data for analysis

284.  Thus following LDCS 6000/2018, we prefer to maintain a profit allowance of 17.5%.

Interest Rate

285.  Again, in LDCS 6000/2018, we have adopted an interest rate of 3.5% in the residual valuation.

286.  But since 3 January 2022, the Hong Kong Interbank Offered Rate (“HKBOR”) for one month has been rising from 0.15% to 0.20% on 6 May 2022[115]. Lately the HIBOR for one month has risen further to 2.6%.

287.  Mr Charles Chan also produced a chart showing the three months’ interbank rates rising from January 2022 at about 0.2% to about 0.9% in May 2022.[116] Similar rising yield trend was shown by the Hong Kong Dollars Swap Curve downloaded by Mr Charles Chan from Bloomberg.[117] The 4-year Hong Kong Dollars interest swap as at 30 September 2021 was 0.889% but as at 30 April 2022, the rate had become 2.92%. Mr Mok submitted that the development period should be around 4 years and Swire Properties Limited (“Swire”), the mother company of the applicants in the present proceedings, did use interest rate swaps for most of its borrowing.[118]

288.  In Shapiro, Mackmin and Sams, Modern Methods of Valuation, 12^th edition, pp 220-221, the interest cost is explained as follows:

“Considerable sums of capital are needed for property development. Normally, this money is raised from banks or other lending institutions …

In some instances the developer might have raised money on a long-term basis at a favourable rate of interest which may be low compared with prevailing rates, or money might be provided from the developer’s own resources. In these cases the prevailing borrowing rate must be adopted in the valuation as this is the opportunity cost of the capital and it reflects the market for the site. The rate of interest chosen will vary according to the type of scheme and the size of the likely developer. A small scheme … will attract small development companies who have, in general, a higher cost of interest than would be the case for a major developer with access to institutional funding.”

289.  In view of the above, we are prepared to accept Mr Charles Chan’s proposal of 4% in the captioned residual exercise.

290.  Before we leave this topic, we would like to point out that Mr Charles Chan used the term “Capitalisation Rate” instead of interest rate in his Updated RDV Report dated 22 April 2022[119].

291.  While the Tribunal in Gain Union Limited v Leung Chi Man, LDCS 5000/2021 (unreported, dated 6 September 2022) has criticized this misnomer, for the avoidance of further confusion, we have to repeat our observation.

292.  The term “capitalisation rate” has a concept which is completely different from a discount rate and more particularly never used in any authority or text in a residual valuation exercise. Even in the authority to which Mr Charles Chan referred, Property Valuation: The Five Methods, by Douglas Scarrett and Sylvia Osborn, 3^rd Edn, 2014, Routledge, only the term “Short-term finance” was used.

293.  Under this heading, the book stated as follows at pp 119-121:[120]

“Short-term finance is required to provide working capital to acquire the site, pay for professional services and meet interim and final certificates issued by the architect. The money is borrowed and interest paid for the period of the loan …

Where short-term finance is required it is usually arranged through a bank or similar lender to meet the developer’s need to borrow funds. The perception of property development is that of a higher-risk activity. However, the interest rate negotiated may also reflect the size of the loan, the property it bears to the total development cost, the existence of a pre-letting or forward sale, and indeed the track record and financial reliability of the developer concerned. In assessing a developer’s best bid for the land, finance costs should be included in the residual valuation even if a developer is acquiring the land and financing construction out of its own funds. This ensures that the opportunity cost of that money is reflected in the valuation and avoids the calculation of a bid price where the developer is effectively paying twice for the land and thus bidding away potential profit…” (underline added)

294.  Perhaps the phrase “the opportunity cost of that money” has led Mr Charles Chan to go astray particularly when he appreciated that a developer can only borrow up to 40% of land value and 80% of building costs for project finance under the restrictions imposed by the Hong Kong Monetary Authority.

295.  For instance, para 3.7 under the heading of “Finance Charges” in the HKIS Guidance Notes on Valuation of Development Land published in 2016 provides as follows:

“Bank Financing

3.7.1 Historically, financing charges were assumed a wholly local and straightforward issue, linked to Hong Kong Prime Rate ('HKPR'). With the greater internationalization and competitiveness of Hong Kong's banking sector in recent years, a reduction of assumed finance charges down to or below HKPR has evolved.

3.7.2 Given the wide diversity of developers, their histories, track records and net asset values, financial institutions are increasingly offering different finance charge rates to different parties, reflecting risk and business relationships. Small scale developments which are likely to be undertaken by smaller, and less well capitalised developers, will attract finance charges higher than major developers with successful track records for similar project completions.

3.7.3 Such financing may now be charged with reference to

• the Prime Rates for relevant banks;

• the Hong Kong Interbank Offered Rate ('HIBOR');

• London Interbank Offered Rate ('LIBOR').

Other Funding

3.7.4 Other forms of funding besides bank mortgages are becoming increasingly common:

• Syndicated loans of varying types have been adopted by major developers; some at fixed and others at floating rates. Small and medium developers may find this type of finance not suitable and sometimes have difficulty to secure syndicated loans.

• Bonds issued by large developers or corporations allow for potentially more flexible, longer financing than banks historically provide.

Cost Variables

3.7.5 The length and complexity of a development project will also impact on finance charges, since longer projects, particularly requiring multiple government approval processes, may significantly lengthen the development period and its risk. As a greater risk-return rate may be required, this would increase cost of funds.

3.7.6 Overall, finance charges should be carefully assessed having regard to:

• The scale of the development, and hence scale of developers likely and able to undertake it;

• The extent and certainty of works timeframe;

• The risk and market environment at the time financing is arranged; and

• Loan to value ratio, with lower rates for lower ratios.

3.7.7 Rates in the market vary substantially at any given valuation date, and adoption of market oriented achievable finance rates based at or below HKPR, or for major projects HIBOR or LIBOR oriented funding, will ensure notably more precision in the resultant residual valuation. In the residual valuation examples at Appendix 3, a rate of 4% has been used, being below prevailing HKPR.”

296.  With respect, “the opportunity cost of that money” does not refer to the developer’s cost of equity but to “other forms of funding besides bank mortgages”. This accords with the description in Modern Methods of Valuation, 12^th Ed, 2019, by Eric Shapiro, David Mackmin and Gary Sams, at p221:

“In some instances the developer might have raised money on a long-term basis at a favourable rate of interest which may be low compared with prevailing rates, or money might be provided from the developer’s own resources. In these cases the prevailing borrowing rate must be adopted in the valuation as this is the opportunity cost of the capital and it reflects the market for the site …” (underline added)

297.  Otherwise, if the cost of equity is included, the level of leverage has to be estimated and the discount rate would become the Weighted Average Cost of Capital (“WACC”) in a discount cash flow (“DCF”) exercise which is an alternative to residual valuation where the parameters in the valuation are more specific or certain.

298.  Unlike a residual valuation, when the DCF methods are employed, “the income stream is projected with explicit assumptions about rental growth and is then discounted back to a net present value (NPV) using an appropriate discount rate; the scheme is deemed viable if the NPV exceeds the total development costs. The discount rate includes an allowance (profit margin) for the management’s requirements and risk of investing in a development project rather than an existing fully let property. This approach is particularly appropriate for large, phased schemes”.[121] In such regard, if the cost of equity is included in the discount rate and the developer’s profit is also accounted for in a residual valuation, the risk element would have been double counted. See Appendix 4 of HKIS Guidance Notes on Valuation of Development Land.

299.  Thus, as stated in Valuation of Development Land, 1^st edition, 2014, published by the Royal Institution of Chartered Surveyors in section B2.2.2, “(i)n a basic residual valuation, finance is assumed at 100 per cent of both land and building costs” for the sake of simplicity though in reality this is never the case. The purpose of adopting the residual valuation is because it is prepared before the site is acquired when the estimates of cost, selling price and the program, although based on the best information available, are likely to be very broad brush.

300.  In Valuation: Principles into Practice, 6^th Ed, 2009, Estates Gazette, Nigel Dubben on the chapter of “Development Properties” suggested at p366 as follows:

“The developer is assumed to be 100% debt financed but in reality this is never the case as no business that is funded in such a way can hope to survive. Although the developer is going to be partly financed by equity in terms of the valuation, it is appropriate to include finance in this way as the opportunity cost of using equity will approximate to the short term rate of interest.”

301.  With respect, this proposition is not necessarily unsustainable. By the 1^st proposition of the Modigliani-Miller Theorem, which is one of the most important theorems in corporate finance, the capital structure of a company does not affect its overall value under the assumption of perfectly efficient markets, in which the companies do not pay taxes, while there are no bankruptcy costs or asymmetric information. Under its 2^nd proposition, the weighted average cost of capital is a function of the company’s business risk and will remain constant regardless of the capital structure. It implies that component cost of capital (i.e. cost of debt and cost of equity) will adjust with any change in debt to equity ratio resulting in a constant weighted-average cost of capital. Even when the limitations of the perfectly efficient markets are relaxed, while the additional debt still increases the chance of a company’s default, investors are less prone to negatively reacting to the company taking additional leverage, as it creates the tax shields that boost its value.

FINDING ON RDV AND THE RESERVE PRICE

302.  Thus, subject to what we have stated above, we shall follow Mr Charles Chan’s updated residual valuation model dated 22 April 2022[122] on the determination of the RDV which is reproduced at Appendix 1 to this judgment. We determine the land value of the Lot at $5,125,000,000 (ie accommodation value of $135,759/m²).

303.  Whereas pursuant to Schedule 2 to the Ordinance, the Lot which is the subject of an auction shall be sold subject to a reserve price which takes into account the redevelopment potential of the Lot on its own, it is thus the upmost duty of the Tribunal to determine a fair and reasonable reserve price reflecting the redevelopment potential on its own.

304.  At trial, Mr Chan, SC, however tried to lead Mr Charles Chan to the concept of “special purchaser” by reference to the Caroline Hill Road tender, ie the sale of Inland Lot 8945. Mr Charles Chan opined that this tender sale was not market value and should not be adopted as a comparable transaction.

305.  Mr Charles Chan admitted that Swire was also behind the compulsory sale application of LDCS 6000/2018 and eventually acquired all the interest in that case without an auction being held. Mr Charles Chan further admitted that Swire might be in a similar position for the Lot as Hysan in that tender.

306.  However, in a residual valuation exercise, the market value so found is determined on the basis of a hypothetical purchaser, not a particular purchaser. The Ordinance does not require the Tribunal to take into account any special interest of any prospective purchaser or any special purchaser who has its private agenda which can be speculative and unsupported by any valuation evidence. Indeed, when the Ordinance was still discussed in the Bill Committee of the Provisional Legislative Council on 28 February 1998, it was the Law Society of Hong Kong who suggested that the reserve price should take into account the redevelopment potential of the lot “on its own”. “(M)embers 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.”[123]

307.  Indeed, such distinction in compulsory sale was elucidated by Gordon N Cruden, the past president of the Tribunal, in the 2^nd edition of Land Compensation and Valuation Law in Hong Kong at pages 89 to 93 as follows:

“After the widespread adoption of open market value, the Privy Council in Raja Vyricherla Narayana Gajapatiraju v The Revenue Divisional Officer, Vizagapatam [1939] AC 302 considered that the earlier statement of Fletcger Moulton LJ in relation to the single purchaser was, in any event, too widely stated. The Privy Council made a distinction between the single purchaser and the compulsory purchase. The existence of the former was allowed to be taken into account as a market factor; any enhancement in value due to the latter was not to be taken into account.

 

The use of special value, either in relation to other purchasers .. is not only inappropriate but misleading. When used in relation to a wider, if limited group of purchasers it still refers to a real, if not universal, market factor.

…

Where, in accordance with the distinction made in Raja’s Case, there is only one purchaser in the market, the particular value to that solitary purchaser merely assists in ascertaining the appropriate market value. In exceptional circumstances, the price a solitary purchaser is willing to pay may represent the actual open market value. However, once that market value has been determined, even if affected by the special position of the solitary purchaser, compensation is based strictly on the market value and not any special value. In the other circumstances posed in Raja’s Case, any enhancement in value arising from the compulsory reasumption itself, is clearly excluded from consideration in accordance with the Pointe Gourde principle.”[124]

 

308.  Similarly, similar argument by Mr Chan, SC was raised in Fully H K Investments Limited & Others v Poon Vai Ching & Others, HCMP 591/2007 (unreported, dated 4 April 2007) but dismissed by Hon Le Pichon JA (as she then was) at §18 of the judgment:

“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.”

309.  The above rationale was applied by the Tribunal in First Kind Limited & Another v Liu Keng Chor & Another [2016] 3 HKLRD 39 at §59. Further, the Tribunal went on to state at §78 as follows:

“To the extent as discussed above, the LSCRO is clear. This Tribunal accepts no Hansard is necessary to construe Schedule 2. However, in case Hansard is required to aid in the construction it helps arrive at the same conclusion as the legislative intent appears to set the redevelopment potential to which a minority owner is entitled to that of the lot on its own, or if more lots are put together in an application, on their own.”

310.  Mr Chan, SC suggested in his closing submission also cited IRC v Clay & Buchanan, supra. Again, similar argument was raised in First Mate Development Limited v Gee Wing Chung & Others [2018] 1 HKLRD 668. The tribunal remarked as follows:

“25.  We consider in the present case, the reserve price to be determined is likewise qualified, not of course by the Lands Resumption Ordinance, but by Schedule 2 Paragraph 2 of the Ordinance when it states the lot the subject of the auction shall be sold taking into account the redevelopment potential of the lot on its own. The phrase “the lot on its own” must be given its purposive meaning.

26.  This is best illustrated by, for instance, Trocette Property (supra), which is also cited by Mr Cheng. In this case, the claimants for compensation sought the marriage value of the two interests in the land: the claimants’ leasehold interest with 11½ years to run and the freehold interest of the landlord, ie the Greater London Council. “The ‘marriage value’ arises because in the normal way it would sensibly be anticipated that the value of the two interests, merged, would be substantially greater than the sum of the values of the two if each had to be treated as continuing to be separate” (at 414). Whereas the value of the claimants’ leasehold interest was £2,000, the claimants contended that planning permission would have been obtained for the demolition of the existing building and for profitable redevelopment for shops with warehousing facilities above. Even then, the freehold owner (or any purchaser from him) could not begin the conversion of the property to the latter profitable use for 11½ years unless he were to obtain the consent of the lessee; and the lessee, or anyone to whom he might sell his leasehold interest, would not undertake such a development so long as his right of occupation of the land was limited to 11½ years. Therefore, the owners of the two interests, the freeholder and leaseholder, or persons having purchased their respective interests, have a common interest to make arrangements with one another to enable the combined interests, with the resultant marriage value, with each of the two taking his appropriate share of the resulting added value. “Either the landlord or the lessee might sell his interest in the open market where potential purchasers could be expected to offer a price for the respective interests which would reflect the value of the opportunity of achieving a ‘marriage’ of the two interests in the land” (at 415). In this regard, the total of the values of a lease and the freehold reversion on that lease would not necessarily be the same as the value which the freehold would have if there were no lease. The English Tribunal determined the “value of cleared site in possession” or “the freehold value of the site in possession in its existing state” at £80,160 of which £41,126 was ascribed to the landlord and £39,034 to the tenant (at 419).

27.  However, Megaw LJ stated the caveat at 416 that:

“If the assessment of the value for the purpose of compensation is to be on the basis of ignoring a proven or admitted fact which would have affected the price of an actual sale on the open market, the use of such basis must, I think, be justified by reference to some specific provision of the legislation.”

28.  In the present case, the Ordinance is the specific provision of legislation which required the Tribunal not to take into consideration any marriage value with the adjoining lots but only assessed the open market value of the Subject Lot “on its own”. That means, as in the present case, if the claimants’ interest in Trocette Property is restricted by statute or otherwise to “on its own”, its value for use for a limited period of 11½ years would be no more than £2,000; anything higher than this would prevent or eliminate the marriage value which is to be found by deducting from the value of the combined interest the respective values of the two interests on each own (Modern Methods of Valuation by Eric Shapiro, David Mackmin and Gary Sams, Estate Gazette, 11^th Edition, 2013, at 121-122).

29.  Similarly, in Mountview Estates (supra), an earlier English Lands Tribunal case also cited by Mr Cheng, the leaseholder holding the leasehold interest for an unexpired term of 22 years at a ground rent was in possession of a cleared site available for development. It was agreed that no one would have been interested in developing the leasehold site when the unexpired term of the lease was so short. Neither could the freeholder develop the land to his financial advantage before the 22 years elapsed. But by marrying their interests, the freeholder would be able to develop the land at once and accounting for the profit on the venture, including expenses in merger, it was determined there was a special value of leasehold interest to freeholder in the sum of £100 (at 731-732).

30.  Once again, if the claimants’ leasehold interest in Mountview Estates was restricted to taking into account redevelopment potential of the lot “on its own”, the value would be nominal instead of £100.

31.  In Trocette Property (supra), Lawton LJ also referred to a situation when realities in the open market can be disregarded, ie when any increase in value which is entirely due to the scheme underlying the acquisition – the Pointe Gourde principle which obtains its modern nomenclature from the Privy Council decision in Pointe Gourde Quarrying and Transport Co Ltd v Sub-Intendent of Crown Lands [1947] AC 565. In this regard, Ms Ngai refers to Good Faith Properties Ltd v Cibean Development Co Ltd [2014] 5 HKLRD 534 where the Court of Appeal drew analogy of the exercise of a statutory right of the majority owners under the Ordinance which entails a potential exercise of statutory power on the part of the Tribunal to compel a sale with the compulsory acquisition by the government or other public authorities. While in the latter situation, the Pointe Gourde principle applies, we see the logic or rationale of inserting the phrase “on its own” in Schedule 2 Paragraph 2 of the Ordinance. As stated by Rogers VP (as he then was) in Bond Star (supra), the purpose of the Ordinance is to take away the power of the owner of the “last unit” to demand a premium that would stultify a development (at §27). In such event, the marriage value, if any, that may arise is also derived from the possible development facilitated by the majority owner making the application pursuant to the Ordinance. Therefore, any increase in value which is entirely due to the scheme to be made possible by the Ordinance, save from the proviso in Schedule 2 Paragraph 2, should be excluded. Otherwise, “an unrealistic price for the particular lot” as termed by the Court of Appeal would result in an auction, the majority owner might still be forced to bid up to the full redevelopment value.

32.  In any event, the issue of “marriage value” was also touched upon by the Court of Final Appeal in Capital Well Limited v Bond Star Development Limited [2005] 4 HKLRD 363, (2005) 8 HKCFAR 578:

“34. Once the purpose of s 4(2)(b) is understood, the error in the appellant’s approach becomes apparent. Mr Chain sought to argue that the Tribunal had erred in failing to recognise that a valuation of the minority owner’s interest was obliged to take into account the Lot’s “strategic position” and “marriage value”. He submitted that any valuation which failed to attribute significant value to those features of the Lot over and above its proportionate value was wrong in principle and could not serve as a basis for judging whether the $2.5 million offer was fair and reasonable. As the Tribunal had relied precisely on such deficient valuation evidence, it was wrong as a matter of law. Mr Chain was therefore approaching the s 4(2)(b) exercise as if it required the Tribunal to decide first what the correct valuation was, and only then to assess the fairness and reasonableness of the majority owner’s offer against the valuation carried out on correct principles.”

33.  Nevertheless, Mr Justice Ribeiro PJ responded by giving a short shrift at §35 as follows:

“35. We do not consider that the Tribunal is required to perform any such task. …... The Tribunal does not need to resolve conflicts of this nature since it does not have to decide on the value of the interest for itself.”

34.  Thus, to the extent that the reserve price pursuant to Schedule 2 Paragraph 2 of the Ordinance is so qualified to the redevelopment potential of the lot “on its own”, the other authorities referred to by Mr Cheng on the ambit of open market value are irrelevant.”

311.  Whereas the above decision was made on 5 January 2018, leave to appeal was further refused by the Tribunal on 15 March 2018 on the basis of the following grounds as elucidated at §§28-29:

“28.  When the marriage value or the Clay Factor whatever it is termed is the result of an ex post facto awakening to the scheme underlying the Ordinance as explained at §31 of the Decision, the Pointe Gourde principle should apply to exclude or disregard the same.

29.  On the second limb of s.11AA (6) of the LTO, given the same issue had already been considered in the Fully H K Investments case, this Tribunal does not agree that leave to appeal should be granted in the interests of justice as contended by R2.”

312.  Lastly, in Capital Well, supra, the Court of Final Appeal emphasised at §21 that the compensation to a minority owner under the regime of the Ordinance “represents his share of the market value of the lot (reflecting its redevelopment value) …”. There is simply no room for Mr Chan SC to argue that “redevelopment potential cannot be the only factor … in setting a reserve price.”

313.  Indeed, in view of the vast sum of amount to be paid upon commitment at the proposed auction or otherwise in the present case, it is hard to believe there could be “property brokers, agents and speculators” as envisaged by IRC v Clay & Buchanan, supra, willing to take the risk to bid up the price over and above what a hypothetical developer is going to pay. We do not regard the Lot being situated at a particular strategic location that would render it to become a “ransom site”[125] that Swire could not afford not to own. The presence of the new 22-storey commercial/office tower at 1001 King’s Road not being owned by Swire is a good example.

314.  Mr Chan, SC, contends that the Tribunal in approving the reserve price ought to take into account other factors, and not just “the redevelopment potential of the lot on its own”, and hence Swire’s “special interest” should be considered.

315.  We accept that the words “takes into account” and “approved by the Tribunal” in paragraph 2 of Schedule 2 of the Ordinance show that the Tribunal in fixing the reserve price has discretion to consider other matters on top of “the redevelopment potential of the lot on its own”. In other words, the reserve price may not be just equivalent to the RDV of the lot, but can be fixed at a figure that includes other considerations on top of the RDV of the lot.

316.  However, including Swire’s “special interest” as part of the considerations for establishing “the redevelopment potential of the lot on its own” is a completely different matter. This is trying to include potential that is not due to the lot on its own. In our view, what the Ordinance stipulates is clear – it is the redevelopment potential of “the lot on its own”. Hence, this alleged “special interest” cannot be taken into account in establishing the RDV of the subject lot.

317.  This “special interest” cannot be regarded as a separate factor that should be considered by the Tribunal in fixing the reserve price either. As explained above, the Lot cannot be regarded as a “ransom site”[126] that Swire could not afford not to own. A hypothetical developer is also not going to pay a price that is higher than the redevelopment potential of the lot “on its own”. Thus, we do not agree that Swire’s “special interest” should be included in our consideration for fixing the reserve price.

318.  We therefore adopt the estimated RDV of $5,125,000,000 as the Reserve Price for the auction of the Lot.

OTHER INCIDENTAL MATTERS

319.  The applicants propose to appoint Mr Anthony Chow and Ms Anna Chow, being consultants of Messrs Guantao & Chow, Solicitors & Notaries, as the sale trustees. Based on the information on their background and experience as set out in their letter dated 27 September 2021[127], we are satisfied that they are proper persons to be appointed as trustees to discharge the duties imposed on trustees under the Ordinance. The remuneration package proposed in the said letter appears to be reasonable.

320.  The applicants have prepared a set of draft Particulars and Conditions of Sale of the Lot[128]. Subject to any amendment that may become necessary as a result of our ruling on the arrangement of auction above, the particulars and conditions of sale of the Lot by public auction submitted by the applicants are also reasonable.

ORDER

321.  Thus, we make the following orders:

(1)  This Tribunal is satisfied that the 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 1^st & 2^nd respondents;

(2)  All the undivided shares in the Lot, the subject of the Application herein, be sold by way of a public auction for the purposes of the redevelopment of the Lot under s.4(1)(b) of the Land (Compulsory Sale for Redevelopment) Ordinance (“the Ordinance”);

(3)  Mr Anthony Chow and Ms Anna Chow of Messrs Guantao & Chow, Solicitors & Notaries, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to the sale of the Lot and the Trustees be authorised to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Guantao & Chow, Solicitors & Notaries dated 27 September 2021.

(4)   For the purpose of the sale of the Lot by public auction under section 5(1)(a) of the Ordinance:

(i)  The sale of the Lot be on the particulars and conditions of sale substantially the same as those set out in the draft Particulars and Conditions of Sale to be initialed and approved by the Tribunal.

(ii)  The reserve price be set at $5,125,000,000.

(iii)  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 shall become the owner of the Lot.

(iv)  Liberty to the applicants, the 1^st to 7^th and the 10^th respondents and the Trustees to apply to the Tribunal for further direction(s) under the Ordinance.

COSTS

322.  By the consent orders dated 3 August 2022, there be no order as to costs between the applicants and R2 & R6. The applicants have also discontinued the proceedings against R8 and R9.

323.  In relation to the respondents other than R2, R6, R8 and R9, the Tribunal agree with Mr Mok’s submission to make a costs order nisi as there may be complication on at least the following matters:

(a)  R4, R5 & R7 only decided not to call another valuation expert to give evidence after the completion of the oral evidence by Mr Charles Chan and Mr Lee and this led to the Tribunal’s order to remove her written evidence. Up until that point, the applicants’ legal and expert teams had to deal with that valuation expert’s evidence.

(b)  Indeed, because of that valuation expert’s evidence, the Tribunal and all parties had to inspect her comparable as far as in another far away locality in A Kung Ngam which lies further east of Shau Kei Wan.

(c)  R4, R5 & R7 engaged 3 counsel at trial (and 4 counsel at call-over hearings including senior counsel).

324.  The applicants are directed to make submission on costs within 14 days from the date of this judgment, failing which the applicants do pay the respondents, save and except R2, R6, R8 and R9, the costs of the Application, to be taxed on the High Court scale if not agreed, with certificate for one counsel, if any, for each respondent.