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

CAMP 330 /2023, [2023] HKCA 1286

On appeal from [2023] HKLdT 55

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 330 OF 2023

(ON AN INTENDED APPEAL FROM LDCS NO 4000 OF 2021)

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REASONS FOR JUDGMENT

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

1.  On 25 October 2023, the 1^st respondent Or Pui Kwan issued a summons in the Court of Appeal for leave to appeal against the judgment (“Judgment”) of Deputy District Judge Roy Yu, presiding officer of the Lands Tribunal and Mr Alex Ng, member of the Lands Tribunal, given on 7 September 2023 in the Lands Tribunal (“Tribunal”) in an application for compulsory sale for redevelopment, pursuant to the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“Ordinance”). By the Judgment, the Tribunal made an order for sale of all the undivided shares in Inland Lot Nos 4513, 4514 and 4515 (“the Lots”) by public auction and set the reserve price of the auction at $254 million. The 1^st respondent contended that the reserve price is neither fair nor reasonable. Leave to appeal was refused by the Tribunal on 24 October 2023 with oral reasons^[1].

2.  The 1^st respondent also sought a stay of execution of the Judgment pending determination of his intended appeal, and, if necessary, an interim-interim stay of execution of the Judgment pending determination of the leave to appeal application.

3.  As the public auction was to be held on 26 October 2023 at 11 am, an urgent hearing was convened by this court at 4 pm on 25 October to deal with the summons.  The trustees appointed by the Tribunal to discharge the duties under the Ordinance in relation to the sale of the Lots informed the court by letter dated 25 October they would adopt a neutral stance.

4.  After hearing from Mr Jin Pao, SC^[2] for the 1^st respondent and Mr Y C Mok^[3] for the 1^st and 2^nd applicants, we refused to grant leave to appeal against the Judgment.  As a result, no stay of execution was granted by the court.  These are the reasons for our judgment.

The grounds of appeal

5.  Three grounds were advanced in the intended appeal.

6.  The first two grounds are concerned with the proper interpretation of Schedule 2 §2(a) of the Ordinance, which provides as follows:

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

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

(b) approved by the Tribunal.”

7.  At the time of the Judgment, the applicants owned 82.857% (29 out of the total 35) of the undivided shares in the Lots and wholly owned the adjoining lots (“Lee On Lots”).  It is not in dispute that the applicants intend to develop the Lots together with the Lee On Lots.  What is in dispute is that in setting the reserve price, when the Tribunal is required to take into account “the redevelopment potential of the lot on its own”, whether the Tribunal may take into account the redevelopment potential of the Lots on the basis that the Lots can and will be redeveloped with the Lee On Lots (“the merged site factor”).  The Tribunal held in favour of the applicants that on a proper construction of Schedule 2 §2(a), the reserve price shall only take into account the redevelopment potential of the Lots on their own.  The 1^st respondent argued that the Tribunal’s interpretation is wrong in law.

8.  The third ground is concerned with an alternative argument of the applicants, in the event that the Tribunal should rule against it on the construction point above.  The Tribunal held that if it is required to take into account the merged site factor in setting the reserve price, the 1^st respondent would have to establish by evidence that it is probable and the additional value.  The Tribunal found there was no evidence, other than the assertion of the 1^st respondent’s valuation surveyor, that there would be hypothetical buyer(s) other than the applicants to purchase the Lots at a price reflecting the merged site development and accordingly held that the market value of the Lots would just be the redevelopment value (“RDV”) of the Lots on their own, without any hope value or marriage value for joint development with the Lee On Lots.  The Tribunal did not find any exceptional circumstances in this stance which can reflect hope value and took the view that the marriage value (an overall increase of about 25% as assessed by the two valuation experts) is not so substantial as to attract risk-taking speculators willing to offer a higher price than the market value of the Lots in order to take speculation for sharing part of the marriage value, particularly when the RDV of the Lots on their own is a substantial lump sum.  It was held that from a valuation viewpoint, the marriage value of the Lots and the Lee On Lots should not be taken into account in the assessment^[4].

9.  The 1^st respondent argued it is not necessary to demonstrate the likely existence of speculators willing to bid and even though this might be of relevance to the analysis of hope value, it would provide no support that the marriage value of the Lots and the Lee On Lots should not be taken into account.

The proper construction of Schedule 2 §2(a)

10.  The original draft of Schedule 2 §2(a) in the bill for the Ordinance did not contain the phrase “on its own”.  The apparent reason for the addition of this phrase may be found in the minutes of the meeting of the Bills Committee under the House Committee of the Provisional Legislative Council on 28 February 1998 (BC127-08/97-98), the relevant part of which being §13 read as follows:

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

11.  On 27 March 1998, a House Committee meeting was held and a paper entitled “Report of the Bills Committee on Land (Compulsory Sale For Redevelopment) Bill” was prepared and annexed to the meeting minutes.  A list of Committee Stage Amendment (“CSA”) was annexed to the report as appendix. In the CSA, the words “on its own (or, where 2 or more lots are the subject of the auction, on their own)” were proposed to be added, and such formula subsequently became the current version of Schedule 2 §2(a).  In the concluding paragraphs of the report, it was stated that subject to the CSA to be moved by the government as per the appendix, the Bills Committee supported the Bill.

12.  When the second reading debate of the Bill was resumed on 7 April 1998, the CSA was put to the legislators almost clause by clause and were all accepted.  The Council then resumed on the same day, the Bill was read for the third time and was passed.

13.  As observed by the Tribunal (Judge K W Wong, presiding officer and Mr Lawrence Pang, member) in Day Bright Development Ltd & Ors v Choi Pak Ling & Ors [2014] 4 HKC 364 at §54, the main concern in the debates of the legislature was to prevent an unscrupulous developer to bundle unnecessary adjacent lots which it owned with lots it did not own, leading to oppressive compulsory acquisition.  When the Bill was at its early stage, a consensus was reached between the legislators and the administration to exclude from setting the reserve price the redevelopment potential arising from the majority owner’s ownership of adjacent lots.  There was no controversy that the minority owner was to share only up to the full redevelopment potential of the subject lot and not the entire site of the redevelopment.  The “on its/their own” formula was agreed as early as 28 February 1998.

14.  The Tribunal found the meaning of the legislative provision clear, it is to take into account the redevelopment potential of the subject lot on its own. Even without looking at the minutes of the Bills Committee, it is in conflict with the clear wording of the Ordinance to take into account a merged site redevelopment potential^[5].

15.  Mr Pao contended that the wording of Schedule 2 §2(a) does not, expressly or by implication, prevent the Tribunal from having regard to the merged site factor.  He criticised the Tribunal’s interpretation as too literal.  The phrase “on its own” does no more than require that the Lots be valued on the basis as if they were sold by themselves and not part of some larger composite sale.  It does not mean that the potential enhancement to value which the Lots obtain from being combined in a development with adjoining property should be excluded from consideration in fixing the reserve price.  He prayed in aid principles in land resumption cases – the  presumption of reality (which requires the consideration of all facts and circumstances as they are at the time of valuation)^[6]; and the principle of equivalence (a claimant is to be compensated fairly and fully for the loss attributable to the taking of his land)^[7], and articles 6^[8] and 105^[9] of the Basic Law.  And one should not readily ascribe an intention to the legislature of making unwarranted inroads against the principle of equivalence^[10].  The Tribunal’s construction is incompatible with the above principles and the relevant provisions of the Basic Law.  It disregards the prospect of a bid from a ‘special purchaser’, namely, the owner of the Lee On Lots (ie the applicants) who would have incentive to offer a higher bid in order to redevelop the Lee On Lots with the Lots.

16.  Special reliance was placed on Good Faith Properties Ltd v Cibean Development Ltd [2014] 5 HKLRD 534, in which the Court of Appeal held that the compensation approach on costs in compulsory acquisition cases should also apply to costs for cases decided under the Ordinance.  Despite differences in the inherent nature and special features of proceedings under the Ordinance and resumption proceedings, given that the deprivation of private ownership without fair and reasonable compensation was an infringement of the minority owner’s constitutional right, it was held that the principle of equivalence was engaged in both instances, notwithstanding the absence of specific provisions in the Ordinance that the applicant should bear the minority owner’s reasonable costs.

17.  Mr Pao submitted further it is not an answer to say that the reserve price is only a minimum price and the actual price is to be determined by the market^[11], as an auction under the Ordinance is not a true open market sale, the majority owner tends to be the sole bidder and the sole bid normally does not exceed the reserve price^[12].

18.  We do not consider the arguments advanced on behalf of the 1^st respondent would have reasonable prospect of success for leave to appeal to be granted.

19.  The language of Schedule 2 §2(a) is clear.  If there should be any doubt or ambiguity arising from the wording (and we do not think there is), this would be dispelled by the minutes of the Bills Committee, which made clear the purpose of the CSA.  The “on its/their own” formula was specifically designed to address the problem that “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”.  The Tribunal rightly observed at §55 of the Judgment that “the Legislature must be correct in making provision in the Ordinance against the situation, that if whatever factors affecting the redevelopment may be taken into account in setting the reserve price, the tribunal would be burdened with an impossible task”.  And it was fairly accepted by the 1^st respondent before the Tribunal that the quantification of hope value is “always difficult”^[13].  The contention that the language of Schedule 2 §2(a) does not preclude the Tribunal from taking into account the merged site factor in setting the reserve price is just not a viable proposition.  We agree with Mr Mok that the text, context and purpose of the legislative provision all point the same way.

20.  The scheme under the Ordinance is for the Lands Tribunal to decide, upon the application of the majority owner, whether a compulsory sale order should be made, and, if so, appoint trustees to conduct the sale.  Unless the parties agree to some other method of sale approved by the Tribunal, the lot must be sold by public auction, subject to a reserve price approved by the Tribunal pursuant to Schedule 2 §2.  The lot is to be sold to the highest bidder with any owner allowed to purchase.  The proceeds of sale and associated expenses are then apportioned between the majority and minority owners on a pro rata basis pursuant to the Ordinance^[14].

21.  The purpose of the reserve price is to fix the minimum, it is not meant to be the final sale price.  The role of the Lands Tribunal is to fix the reserve price according to Schedule 2 §2 and leave it to the public auction to reflect any possible hope value arising from the majority owner’s adjacent lot (which does not form the subject of the sale order in this instance)^[15].  As rightly submitted by Mr Mok, there is no conflict between the statutory regime and the valuation principles relied on by Mr Pao.  Nor do we think there is any unconstitutional deprivation of the minority owners of a portion of the true value of their units.

22.  What Mr Pao sought to do is to bring in principles in land resumption cases and urge the court to adopt a construction that gives effect to those principles, notwithstanding that this would be a departure from the clear wording of the legislative provision.  This is not permissible.  To borrow the words of French NPJ in Secretary for Justice v Cheng Ka Yee (2019) 22 HKCFAR 97 at §47: “The Court seeks to ascertain the purpose of the statute to inform its construction.  It does not identify a purpose which it thinks would be beneficial and then construe the statute to fit it.”

23.  What was said about the applicability of the principle of equivalence to cases decided under the Ordinance in Good Faith Properties Ltd v Cibean Development Ltd must be understood in the context of the issue decided in that case.  We do not think the passages relied on by Mr Pao^[16] are of direct relevance to the proper construction of Schedule 2 §2(a).

24.  For the above reasons, the first two grounds of appeal are not sustainable.  The 1^st respondent’s leave application would be refused on this basis alone for failing to meet the threshold requirement.  There is also no other reason in the interest of justice for leave to be granted.

The need to demonstrate by evidence the probability of speculators willing to bid

25.  That being the case, the remaining ground of the intended appeal does not arise and it is not strictly necessary to deal with it.  We will just deal with this briefly.

26.  Mr Pao submitted that the Tribunal was wrong in not taking into account the marriage value of the Lots and the Lee On Lots – an overall increase of 25% and which it accepted as attractive – in setting the reserve price.  That hope value should not be taken into account in fixing the reserve price does not mean marriage value should also be excluded, as the two concepts are distinct and separate.

27.  There is no substance in this contention.  Under the scheme, the Tribunal is to fix the reserve price and let the market decide the value.  Assuming that the proper construction of Schedule 2 §2 requires the Tribunal to take into account the merged site factor, if there is evidence of the probability of hope value (or Full Land Value) such that it may be reflected in the final sale price, then hope value should be taken into account in setting the reserve price.  There is no such evidence in this instance.  Marriage value should not be taken into account where there is little or no chance of any risk-taking speculator bidding for the lot at a price higher than the RDV in the hope of sharing the marriage value.

28.  For all the above reasons, we dismissed the 1^st respondent’s application with costs to the applicants, with a certificate for two counsel.

[1]  This court was not provided with a transcript of the oral reasons.  A summary of the reasons was given in the 1^st affirmation of Leung Man Man filed on behalf of the 1^st respondent on 25 October 2023 at §22.

[2]  With Mr Adrian Kwan

[3]  With Ms Julia Au

[4]  Judgment, §§65, 71 to 74

[5]  Judgment, §53

[6]  Penny’s Bay Investment Co Ltd v Director of Lands (No 2) (2017) 20 HKCFAR 465 at §§81 to 83, 86

[7]  Director of Lands v Yin Shuen Enterprises Ltd & Anr (2003) 6 HKCFAR 1 at §12

[8]  Article 6 provides: “The Hong Kong Special Administrative Region shall protect the right of private ownership of property in accordance with law.”

[9]  Article 105 provides: “The Hong Kong Special Administrative Region shall, in accordance with law, protect the right 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.  Such compensation shall correspond to the real value of the property concerned at the time and shall be freely convertible and paid without undue delay. …”

[10]  Cheermark Investment Ltd v Director of Lands [2018] 1 HKLRD 79 at §§106 to 107.  The case concerned the construction of section 12(b) of the Lands Resumption Ordinance, Cap 124.

[11]  Judgment, §55

[12]  Land Compensation & Valuation Law in Hong Kong (4^th ed) by Gordon N Cruden and Liza Jane Cruden, §§7.51 and 7.56.  The authors advocated an “improved alternative” by replacing the public auction with the Lands Tribunal making a full valuation assessment of the open market value.

[13]  Judgment, §69

[14]  Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, §§10 to 21

[15]  Judgment, §§61 and 63

[16]  §§11, 16, 19, 21 to 24, 33 to 37