ASIA HERO (H.K.) LTD AND OTHERS v. PRIME WAY INVESTMENT CO LTD AND OTHERS

LDCS 4000/2016

[2018] HKLdT 21

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO. 4000 OF 2016

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J U D G M E N T

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1.  This is an application for a compulsory sale order under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”) (hereinafter referred to as “the Application”) to sell all the undivided shares of the Remaining Portion of Section A of Kowloon Inland Lot No 1693, the Remaining Portion of Section B of Kowloon Inland Lot No 1693, Sub-section 1 of Section B of Kowloon Inland Lot No 1693 and the Remaining Portion of Kowloon Inland Lot No 1693 (hereinafter collectively referred to as “the Lot”). Erected thereon are 2 pairs of 5-storey tenement buildings each sharing 2 common staircases (“the Buildings”) with the postal address of Nos 61, 63, 65 & 67 Soy Street respectively.

2.  The occupation permit for the Buildings (“OP”) was issued pursuant to the Building Ordinance (Chapter 123 of the Revised Edition, 1950) on 13 September 1955 whereby permission was granted to occupy and use the Buildings for domestic purposes.

3.  Section 2 of such earlier Building Ordinance defines ‘domestic building’ to mean “any building constructed, used or adapted to be used, wholly or partly, for human habitation, but does not include any building where caretakers only, not exceeding two in number, pass the night” (underline added).

4.  It is not disputed that the total gross floor area of the Buildings is about 1,503.17 sq m but the Government lease governing the use and development of the Lot is relatively unrestricted whereby it can be developed to a plot ratio up to 9, ie based on its site area about 328.40 sq m, a commercial/residential composite building about 2,955.60 sq m (ie nearly doubling the gross floor area) pursuant to the prevailing Draft Mong Kok Outline Zoning Plan No S/K3/30 dated 31 May 2013.

5.  According to the Land Registry, there are 3 Deeds of Mutual Covenant and Grant: 1 for No 63 Soy Street dated 28 November 1955 and 2 for No 65 Soy Street dated 18 October 1955 and 31 January 1956. That is, there is no Deed of Mutual Covenant for either No 61 Soy Street or No 67 Soy Street which has been 100% owned by the applicants.

6.  Mr C Y Li, SC (“Mr Li”), counsel for the applicants, summarized in his opening submission that at the time of the Application dated 17 August 2016, the applicants altogether owned an average of 90% of the undivided shares of the Lots subject to the remaining shares as follows:

(a)   The 1/5 undivided share held by the 1^st respondent (“R1”) allotted to G/F, 65 Soy Street;

(b)   The 1/5 undivided share held by the 2^nd respondent (“R2”) allotted to G/F, 63 Soy Street;

(c)   The 1/5 undivided share held by the 3^rd respondent (“R3”) allotted to 1/F, 63 Soy Street.

7.  The interest of R3 was subsequently acquired by the applicants and the action against him was discontinued on 28 April 2017.

8.  Thus, the remaining live respondents are R1 and R2 who are represented respectively by Mr Jonathan Lee (“Mr Lee”), instructed by Messrs. Anthony Chiang & Partners and by Ms Athena Wong (“Ms Wong”), instructed by Messrs. C K Mok & Co.

Whether the Applicants are entitled to make the Application

9.  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.

10.  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.

11.  The Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice was gazette 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 with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (ie the date of the application under the Ordinance)”. 

12.  As mentioned, the OP for the Building was issued on 13 September 1955 (namely, not less than 50 years before the date of the Application).  The Notice is applicable and the threshold percentage should be 80%.

13.  At the time of the filing of the Application, the applicants owned an average of 90% of the undivided shares of the Lots. We agree therefore that the applicants are entitled to make the Application under section 3(2)(b) of the Ordinance which may cover 2 or more lots—

(i)   on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings; and

(ii)   where the average of—

(a)   the percentage of the undivided shares owned by the majority owner in the lot or lots on which one of the buildings stands; and

(b)   the percentage of the undivided shares owned by the majority owner in the lot or lots on which the other of the buildings stands, is not less than the percentage specified in subsection (1).

The Issues in the Application

14.  Mr Li summarized the following issues as shall be determined by the Tribunal according to section 4 of the Ordinance:

(a)   Issue not disputed by the respondents but subject to proof by the applicants, namely: -

(i)   whether the redevelopment of the Lot is justified due to the age or state of repair of the existing development, ie the Buildings according to section 4(2)(a) of the Ordinance.

(b)   Issue not disputed by R2 but subject to proof by the applicants, namely: -

(i)   whether the applicants have taken reasonable steps to acquire all the undivided shares in the Lot including those owned by R2 on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance.

(c)   Issue in dispute between the applicants and R1: -

(i)   whether Apps have taken reasonable steps to acquire all the undivided shares of the Subject Lots including those owned by R1 on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance.

(d)   Issues in dispute between the applicants and the respondents: -

(i)    what is the market value (which is usually termed by the valuation profession as the Existing Use Value or just “EUV”) of each of the units in the Buildings as at 1 June 2016 as assessed in accordance with Part 1 of Schedule 1 to the Ordinance.

(ii)    if an order for sale of the Lots be granted, what the redevelopment value (“RDV”) of the Lot should be for the purpose of setting the reserve price of the public auction according to clause 2 of Schedule 2 to the Ordinance.

15.  Notwithstanding the above, both Mr Lee and Ms Wong confirmed at the beginning of the hearing of closing submissions that they are not opposing the order for sale on the ground of the applicants not having taken reasonable steps to acquire all the undivided shares in the Lot on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance. The issue is just one of valuation.

The Evidence

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

(a)   the witness statement dated 4 May 2017 from Mr Wong Cheuk Fai (“Mr Wong”), representative of the applicants;

(b)   a Condition Survey Report by Mr Richard Cheung dated 26 April 2017;

(c)   a Structural Assessment Report by Mr Thomson Chan dated 2 May 2017;

(d)   the following reports by Mr Alnwick Chan (“Mr A Chan”) of Knight Frank Petty Limited (“KFP”);

(i)   the Application Report dated 15 August 2016 pursuant to Part 1 of Schedule 1 to the Ordinance;

(ii)   RDV report dated 2 May 2017;

(iii)   a Supplemental EUV Report dated 2 May 2017 on the revised EUV as at 1 June 2016;

(iv)   a Rebuttal Report dated 2 June 2017 on Mr Steven C W Lam’s EUV report on behalf of R1 and R2;

(v)   a Rebuttal Report dated 2 June 2017 on Steven C W Lam’s RDV report on behalf of R1 and R2;

(vi)   a letter of report dated 13 September 2017 for further revising the EUV as at 1 June 2016 pursuant to agreement of the valuers made in Joint Statement; and

(vii)   an updated RDV report dated 1 November 2017 on RDV as at 18 October 2017.

17.  As stated in the paragraph above, R1 and R2 rely on the following joint reports of Mr Steven C W Lam (“Mr Lam”):

(i)   an EDV report dated 28 April 2017;

(ii)   a RDV report dated 28 April 2017;

(iii)   a Rebuttal Report dated 31 May 2017 on EUV and RDV;

(iv)   an updated EUV report dated 18 October 2017 on EUV as at 1 June 2016; and

(v)   an updated RDV report dated 31 October 2017 on RDV as at 18 October 2017.

18.  Mr A Chan and Mr Lam have prepared 2 Joint Statements, one dated 29 June 2017 setting out their agreements and disagreements, followed by another dated 15 November 2017.

19.  At the hearing, both Mr A Chan and Mr Lam produced their revisions as Exhibit A1 and Exhibit R1 respectively.

20.  On the other hand, both R1 and R2 have not adduced any expert evidence on the age and state of repair of the Buildings.

EUV as at 1 June 2016

Assessment of G/F Units

21.  Notwithstanding the “domestic purposes” as specified in the OP, it appears that the parties are not in dispute that the ground floor units in the Buildings would be valued as shops.

22.  We consider such an agreement by the parties appropriate having regard to the definition of ‘domestic building’ of the then Buildings Ordinance which allowed for wholly or partly human habitation.

23.  In Tsuen Wan Trade Association Education Foundation Ltd. v. Chui Kam Ying [2012] 2 HKLRD 1163, Jeremy Poon J (as he then was), deciding on a similar provision under the old Buildings Ordinance No 18 of 1935, ruled at §22 of the judgment that:

“… even if two domestic permits had in fact been issued, it does not necessarily follow that the Property can be used for residential purpose only. ….. This inferentially but strongly shows that the Property can in fact be used for non-residential purposes legally.” (underline added).

24.  A fortiori, in Wing Hong Investment Company Limited v Fung Sok Han & Others, [2016] 1 HKLRD 1, Chan J found at §235 of the judgment that there is no provision in the Buildings Ordinance to suggest that it is an offence to adopt a user of premises which is materially different from that stated in the occupation permit although the Building Authority may serve an order on the owner under section 25(2) to prohibit the intended user or require the changed user to be discontinued if it is found that the changed or intended new user is not acceptable.

25.  Then in Join Union Investment Limited v China Tree Investment Limited, [2016] 2 HKLRD 901 (“Join Union”), there was also a subdivision of the ground floor premises into 4 shops. The expert in the case, a registered structural engineer, could not cite any example or authorities where, in similar circumstances, the Government or the Building Authority took enforcement action to require the demolition of the partitioning and reinstatement of the property to its original state. Chow J 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.

26.  Further, at §107 of the judgment, the learned judge observed that:

“... it is apparent, form 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)

27.  We are given to understand however that the greatest dispute between the parties lies on the choice of shop comparables.

28.  Pursuant to the Joint Statement dated 29 June 2017, the two experts agree the following comparables to be adopted for valuation on direct sales comparison basis:

Comp Ref:	Address	Age	Transaction Date	Consideration	Saleable Floor Area (m2)	Frontage (m)		Headroom (m)	Depth (m)	Effective Unit Price* (/m2)
						Clear	Physical
Ref Unit	G/F, 63 Soy Street	1955	1 Jun 16		58.39 + C/L: 26.76 + Yard: 16.98 + Flat Roof: 4.85	3.2	3.83	2.74	17.37
KF1/CS2	Unit 7, G/F, Block 2, Tsui Yuen Mansion, 83-87 Dundas Street/ 2-20 Kwong Wa Street	1964	16 Mar 16	$33,468,000	50.50 + Yard: 14.94	3.92	4.22	3.77	12.66	$631,591
KF2	G/F & C/L, Chung Kay Building, 515 Shanghai Street	1974	3 Mar 16	$22,800,000	55.43 + C/L: 37.91	2.70	4.54	2.87	13.56	$351,256
KF3	Unit B, G/F & C/L, Master Building, 297-299 Reclamation Street	1976	8 Jan 16	$33,000,000	69.80 + C/L: 53.2 + Yard: 3.33	3.80	4.57	2.84	16.02	$394,454
KF4	Unit 12, G/F & M/F, Ngai Hing Mansion, 2-24 Pak Po Street	1964	14 Dec 15	$29,000,000	51.65 + C/L: 46.40	5.12	5.40	3.53	9.65	$458,498

Comp Ref:	Address	Age	Transaction Date	Consideration	Saleable Floor Area (m2)	Frontage (m)		Headroom (m)	Depth (m)	Effective Unit Price* (/m2)
						Clear	Physical
KF5	Unit A, G/F & C/L, Master Building, 297-299 Reclamation Street	1976	20 Oct 15	$32,600,000	72.34 + C/L: 53.74 + Yard: 3.40	3.04	4.07	2.84	16.02	$377,577
KF6	G/F & C/L, David Commercial House, 139 Portland Street	1976	20 Aug 15	$35,000,000	61.67 + C/L: 40.65 + Yard: 23.98	2.20	2.93	2.87	13.72	$461,559
KF7	G/F, Joye Fook Mansion, 468 Shanghai Street	1966	6 Jul 15	$25,000,000	55.54 + Yard: 12.37	3.85	4.59	5.33	13.44	$434,028
CS1	G/F, 62 Fa Yuen Street	1961	5 Aug 16	$131,100,000	60.69	3.92	4.27	4.27	13.41	$2,160,158
CS3	Unit 4, G/F, 25-31 Soy Street	1959	3 Aug 15	$63,000,000	16.03 + Yard: 15.17	2.90	2.90	4.98	7.06	$2,236,422
CS4	Unit 5, G/F, Concord Building, 60-104B Soy Street	1984	19 Jul 12	$39,000,000	48.71	4.13	4.43	4.40	11.17	$800,657

* on the basis of the following conversion factors:

Yard: 1/6 of G/F Covered Yard: 0.8 of G/F for CS3 only Flat Roof: 1/6 of G/F C/L (ie cockloft): ¼ of G/F

29.  Further, the two valuation experts have agreed the following adjustment factors for the assessment of the non-domestic premises in the Buildings[1]:

	Mr A Chan	Mr Lam
Time	Private Retail Price Indices as published by the Rating and Valuation Department (“RVD Index”)
Age	1% for every 10 years difference	NA
Frontage	2% for every 1m difference
Headroom	2% for every 1m difference
Size	2% for every 10m2 difference Difference Adjustment 0 m2 – 9.99 m2: 0% 10 m2 – 19.99 m2: 2% 20 m2 – 29.99 m2: 4% …..	3% for every 10m2 difference Difference Adjustment 0 m2 – 9.99 m2: 0% 10 m2 – 19.99 m2: 3% 20 m2 – 29.99 m2: 6% …..
Return Frontage for Shop at 67 Soy Street	+15%	Adding up the length of the 2 frontages

30.  Thus, the adjustments proposed by Mr A Chan for assessing the EUV for the Shop at G/F, 63 Soy Street are shown as follows (while those proposed by Mr Lam are in parenthesis):

Comp Ref:	Effective Unit Price* (/m2)	Adjustments								Adjusted Unit Price (/m2)
		Time	Location	Age	Frontage	Headroom	Size	Layout/ Shape	Total
KF1/ CS2	$631,591	-2.4% (-2.4%)	0.0% (15.0%)	-1.0%	－1.0% (-1.4%)	-2.0% (-2.1%)	-2.0% (-3.0%)	0.0% (-8.0%)	-8.4% (-1.9%)	$578,537 ($619,591)
KF2	$351,256	-2.4%	0.0%	-2.0%	-1.0%	0.0%	0.0%	0.0%	-5.40%	$332,288
KF3	$394,454	-2.9%	5.0%	-2.0%	-1.0%	0.0%	2.0%	0.0%	1.10%	$398,793
KF4	$458,498	-3.9%	5.0%	-1.0%	-3.0%	-2.0%	0.0%	0.0%	-7.90%	$422,277
KF5	$377,577	-8.3%	5.0%	-2.0%	-1.0%	0.0%	2.0%	0.0%	-4.30%	$361,341
KF6	$461,559	-9.1%	0.0%	-2.0%	2.0%	0.0%	0.0%	0.0%	-9.10%	$419,557
KF7	$434,028	-8.8%	0.0%	-1.0%	-2.0%	-5.0%	-2.0%	0.0%	-18.80%	$352,431
CS1	$2,160,158	(1.6%)	(-35.0%)		(-1.4%)	(-3.1%)	(0.0%)	(-8.0%)	(-45.90%)	($1,168,645)
CS3	$2,236,422	(-9.1%)	(-25.0%)		(0.6%)	(-4.5%)	(-12.0%)	(-8.0%)	(-58.00%)	($939,297)
CS4	$800,657	(20.2%)	(-5.0%)		(-1.9%)	(-3.3%)	(-6.0%)	(-8.0%)	(5.0%)	($840,690)

31.  As can be seen from the above, there is only one common comparable adopted by both valuation experts. This comparable, being situated at Kwong Wa Street, is comparatively inferior in location when compared with the subject reference unit which is directly opposite the Acesite Hotel, a 3-star boutique hotel and obliquely opposite the Stanford Hotel across Soy Street which leads from the busiest part of Mong Kok district at Nathan Road, the famous shopping and tourist spot in Hong Kong.

32.  Although this section of Soy Street is quieter with the presence of a few educational institutions towards its end at Yim Po Fong Street, a local traffic distributor running in parallel to a railway embankment, we do not agree that there should be no locational adjustment as proposed by Mr A Chan; we agree with the locational adjustment proposed by Mr Lam at +15%.

33.  As regards age, while we agree with Mr Lam that it is not a major factor for consideration for shops, we agree with Mr A Chan that for premises that are aged, there would be additional cost for repair and maintenance though the amount would not be significant when compared with the values for retail purposes. For this reason, we prefer the adjustment for age at 1% for every 10 years’ difference as proposed by Mr A Chan to nil adjustment proposed by Mr Lam.

34.  The other difference in opinion between the two valuation experts is that Mr A Chan adopts 2% adjustment for every 1m difference in frontage while Mr Lam considers such an adjustment should be applicable to the clear frontage instead of the full frontage.

35.  Such a difference was considered by the Tribunal on various occasions. For instance, in Tai Ping Restaurant Limited v Director of Lands, LDLR 1/2013 (unreported, dated 8 December 2014), the Tribunal preferred the adjustment for full frontage to the adjustment for clear frontage because the former would not miss the effects of columns on the frontage if any in the frontage adjustment. As explained at §38 thereof:

“38. I consider columns on the frontage of a shop are valuable, but the weight of such columns in an assessment is generally less than that of clear frontage. Subject to the availability of information, different weights should be attached to columns on the frontage and clear frontage respectively in an assessment. Nevertheless, in the absence of detailed assessment, there is no material difference between these two approaches if each could be applied consistently in the valuation.”

36.  Earlier in Good Faith Properties Limited and Others v Cibean Development Company Limited, LDCS 42000/2011 (unreported, dated 31 May 2013) (“Good Faith Properties Limited”), a differently constituted Tribunal also gave its view on the dispute on such frontage issue and agreed with the expert in that case that the columns in shops do have potential to attract customers.

37.  Mr Lam, during cross-examination, initially explained that he could not find any display or advertisement at the subject shops of the Buildings but it was immediately pointed out by Mr Li that he was wrong by reference to the photographs taken at the Buildings[2]. We agree that decorations put on the columns and walls would attract customers in the comparables and following Good Faith Properties Limited, we consider the adjustment at 2% adjustment for every 1m difference agreed by the experts should be applied to the full frontage.

38.  Turning to the adjustments for headroom and size, we note the absolute differences between the two experts are minimal and we just adopt those proposed by Mr A Chan for difference within 10 sq m and those proposed by Mr Lam when the difference is larger.

39.  In relation to the adjustment for layout/shape, we appreciate that Mr Lam is in fact referring to the “L” shape (excluding the yard) and depth of the reference shop unit which is as much as 17.37m whereas this comparable has a more regular rectangular shape. We agree therefore to his proposed -8%.

40.  Regarding the other comparables proposed by Mr A Chan, we note that save for KF4, they are all situated on the other side of Nathan Road, the busy thoroughfare running from north to south that has divided Mong Kok to a certain extent into two districts of different characters. For instance, shops in the vicinity of the reference shop unit are predominated by eateries of all types (despite the presence of some educational institutes) whereas shops to the west of Nathan Road where these other comparables are situated comprise a variety of trades which include those selling building or decoration materials, hardware, engineering companies and even mahjong parlours, karaoke and nightclubs etc. Also, they are as much as 10 to 15 minutes’ walk from the Buildings.

41.  Despite Mr A Chan’s insistence that the latter comparables he chose are close to Langham Place, a regional shopping cum office complex in the area, we agree with the respondents that the characters to the west of Nathan Road are drastically different from those to the east where in particular the reference shop unit is located. Although Mr A Chan agreed to drop his two comparables at Reclamation Street ie KF3 and KF5 at trial, we consider the other comparables, ie KF2, KF6 and KF7 should be discarded as well. We must point out once again that apart from pedestrian flow, the location value of a shop would also depend on “the character of the pedestrians (who they are, what they are there for, etc)”[3].

42.  As regards KF4 which is occupied by a restaurant, as we observed during the joint inspection that it was very quiet during daytime and the restaurant in question would only open at night. Following from the joint inspection on 1 December 2017, we are prepared to adopt +20% locational adjustment for KF4.

43.  Bearing in mind our comments above, we consider the only relevant comparables proposed by Mr A Chan are KF1 and KF4. We are surprised that Mr A Chan has eventually discarded KF1 on the ground that it was out of line with the others.

44.  Indeed, we note that Mr A Chan has proposed 4 other shop comparables for the assessing of the gross development value (“GDV”) in determining the RDV as at 18 October 2017, they being:

Comp Ref:*	Address	Age	Transaction Date	Consideration	Saleable Floor Area (m2)	Frontage (m)	Headroom (m)	Depth (m)	Effective Unit Price* (/m2)
						Physical
KF8	Unit 11, G/F & M/F, Ngai Hing Mansion, 2-24 Pak Po Street	1964	16 Mar 17	$28,280,000	37.81 + C/L: 43.07	4.14	3.53	9.65	$582,133
KF9	G/F, 511 Shanghai Street	1964	3 Mar 16	$29,000,000	65.51 + C/L: 34.29	4.94	3.15	13.87	$388,740
KF10	Unit 4, G/F, On Hong Building, 15-23 Yin Chong Street	1984	31 Aug 16	$18,500,000	45.43	4.14	3.50	11.84	$407,220
KF11	Unit D, G/F, Lisa House, 12-14A Yim Po Fong Street	1973	26 Aug 16	$33,840,000	65.36	7.25	4.03	9.15	$517,748

*   These comparable numbers have been renamed by us so as not to confuse with those for assessing the EUV.

45.  We find no reason why these comparables (save for KF9 which lies to the west of Nathan Road as explained in §40 above) were not included for the assessment of the EUV where the transaction dates are generally much closer to the relevant date as at 1 June 2016.

46.  Apart from the closer dates of transaction, KF8 and KF11 are more relevant in terms of location. KF8 is situated just next to KF4 and therefore a similar adjustment of 20% is applicable; KF11 is also occupied by an eatery at Yim Po Fong Street which is also relative by quiet in daytime. We therefore consider a locational adjustment of +20% is also appropriate. As we shall see, if these 2 comparables are included, KF1 is no longer out of kilter. Rather it appears that KF4 is out of line with the others[4].

47.  On the other hand, although KF10 is situated close-by, it is located within a wet market area the character of which is very different from that of the area surrounding the Buildings. In any event, the visibility of this latter comparable is blocked by the hawkers’ stall along Yin Chong Street and Mr A Chan considers its location inferior to the subject. We accept Mr Lam’s evidence that the hawkers’ stall would be closed during night time, rendering the area becoming very quiet especially when compared with the subject.

48.  Notwithstanding the above, the comparables proposed by Mr Lam do not fare better.

49.  CS1 is situated within the hub of “the Sneakers Street” which enjoys a conglomeration of trades famous for selling sportswear, sports shoes etc. As referred to in Snowland Limited v Director of Lands, LDLR 2/2014 (unreported, dated 11 November 2016) at §52, according to the homepage of the Hong Kong Tourism Board, “Fa Yuen Street is where Hong Kong’s image-conscious youth have come to get their statement-making footwear since the 1980s. They come for the latest designs and limited-edition releases from all over the world...”   

50.  In comparison, the Buildings are situated in a section farthest away from the busiest part of Mong Kok where as stated at §32 above, a few educational institutes are located where the shopping route from west to east is interrupted. Pedestrian flow would not continue towards the subject section of Soy Street as suggested by Mr Lam as it is truncated by the Sai Yee Street Garden and Playground lying in between. That the Buildings are situated within 5 minutes’ walking distance from Fa Yuen Street is neither here nor there as shops’ value may change only at short distance. We consider the adjustment of -35% proposed by Mr Lam grossly inadequate. CS1 and the reference shop unit are not comparable to each other and should be discarded outright as comparable.

51.  CS3 is neither a comparable at all when it is situated at the busiest hub of Mong Kok. In addition, it has a significantly small size even when the area of the covered yard is included. The proposed adjustment for size by Mr Lam is manifestly not adequate nor appropriate as it caters for a different market. Indeed, despite its small size, this “comparable” is further subdivided into three shops – a herbal tea house, a money changer and a juicy food outlet (facing the scavenging lane thereof), the latter two being standing on the covered yard. The layout/shape adjustment that might be appropriate to reflect all these differences would be as much as -50% or higher.

52.  In terms of location per se, CS4 appears to be a better comparable as it lies just opposite the reference shop unit across Soy Street. It is currently occupied as a branch of HSBC. Unfortunately, the transaction took place some 4 years before the relevant date. Although both experts agree that RVD index is appropriate to be taken into account, the preparation of an index is more or less an averaging exercise and there is no guarantee that the price trend for the subject location or property necessarily follows the index. The reliability of the transaction evidence decreases the further the date of the transaction is away from the valuation date.  Nevertheless, when there is dearth of good comparables and the location for a shop is the most important factor for consideration, we consider to adopt this comparable in such an exceptional circumstance where the time adjustment is perhaps the only objective adjustment factor.

53.  In addition, we have scrutinized the provisional agreement for sale and purchase in respect of CS4[5] and find nothing suspicious or untoward regarding this transaction. We have further noted from the provisional agreement for sale and purchase that the premises were formerly occupied by “Kwong Hing Metal Wares Ltd” which has now given way to the branch of HSBC; this suggests an improvement in the subject area. We decide to place weight on this comparable.

54.  Having said that, we agree with Mr Li that this side of pavement at Soy Street enjoys better pedestrian flow perhaps owing to the greater retail activities; this comparable is being occupied as a bank while, for instance, G/F, 63 Soy Street is occupied by a laundry shop and a tailor shop. Therefore, we are prepared to adopt a locational adjustment of -15%.

55.  In view of the above, we determine the EUV of the reference shop unit as follows:

Comp Ref:	Effective Unit Price* (/m2)	Adjustments								Adjusted Unit Price (/m2)
		Time	Location	Age	Frontage	Headroom	Size	Layout/ Shape	Total
KF1/ CS2	$631,591	-2.4%	15.0%	-1.0%	-1.0%	-2.0%	-3.0%	-8.0%	-2.4%	$616,433
KF4	$458,498	-3.9%	20.0%	-1.0%	-3.0%	-2.0%	0.0%	-8.0%	2.1%	$468,126
KF8	$582,133	-5.2%	20.0%	-1.0%	-1.0%	-2.0%	-6.0%	-8.0%	-3.2%	$563,505
KF11	$517,748	1.6%	20.0%	-2.0%	-7.0%	0.0%	0.0%	-8.0%	4.6%	$541,564
CS4	$800,657	20.2%	-15.0%	-3.0%	-1.0%	-3.3%	-6.0%	-8.0%	-16.10%	$671,751
								Average:		$572,276
								Average (if KF4 is excluded):		$598,313
								Average (if KF4 and CS4 are excluded):		$573,834

56.  As opposed to Mr A Chan who opines that KF8 was “inflated”, we consider KF4 being on the low side[6] and we decide to adopt $600,000 per sq m, arriving at the following:

Subject Shop Premises	Effective Floor Area (m2)	EUV
G/F, 61 Soy Street	70.72	$42,432,000
G/F, 63 Soy Street	68.72	$41,232,000
G/F, 65 Soy Street	68.41	$41,046,000
G/F, 67 Soy Street	69.48	$47,941,200
	Total:	$172,651,200

57.  In respect of G/F, 67 Soy Street which is a corner shop with return frontage to Hak Po Street, Mr A Chan proposed an adjustment of 15% but Mr Lam proposes to add up the length of the two frontages as a result of which a similar adjustment about 13% is applicable[7].

58.  To account for the return frontage which suggests an additional value, the critical factors appear to be the size and visibility of the return frontage. While there is no apparent difference between the two experts, we consider the approach of Mr Lam wrong in principle. Firstly, the Tribunal has been hesitant to adopt a uniform frontage adjustment for every difference of 1 m as indiscriminate application of such would lead to absurd result. See §94 of Supergoal Investment Limited v Five F Ming House Limited & Others[2014] 1 HKLRD 286. Secondly, this approach of Mr Lam assumes that the frontages to both streets would have equal advantage (attraction) which is not the case as Hak Po Street is a quieter street. In addition, this approach of Mr Lam would have double counted the value of the floor space that lies at the corner; it is the higher value for the floor space that counts in the captioned analysis instead of the mere frontage. Therefore, Mr A Chan’s approach is preferred and we arrive at $47,941,200.

Assessment of 1/F Units

59.  Initially there was disagreement between the two valuation experts on whether the EUV for the 1/F units should be assessed on the basis of non-domestic use or otherwise. Mr Lam was of the opinion that “the commercial potential of the first floor units is limited”.[8] However, after the inspection of the Buildings on 1 December 2017, Mr Lam agrees to the non-domestic use basis; the assessments by Mr A Chan in his updated Supplemental EUV Report dated 13 September 2017 has been adopted[9]:

Subject Non-Domestic Premises	Effective Floor Area (m2)	EUV
1/F, 61 Soy Street	54.28	$5,642,406
1/F, 63 Soy Street	54.70	$5,415,300
1/F, 65 Soy Street	54.54	$5,399,460
1/F, 67 Soy Street	79.97	$8,154,541
	Total:	$24,611,707

Assessment of U/F Units

60.  Also, by reference to the Joint Statement dated 29 June 2017, the two experts have agreed on the EUV of the upper floors as follows[10]:

Subject Domestic Premises		EUV
61 Soy Street	2/F	$3,291,805
	3/F	$3,049,832
	4/F	$2,738,446
63 Soy Street	2/F	$3,101,100
	3/F	$2,881,561
	4/F	$2,630,849
65 Soy Street	2/F	$3,134,670
	3/F	$2,885,865
	4/F	$2,573,837
67 Soy Street	2/F	$4,497,081
	3/F	$3,899,973
	4/F	$3,239,967
	Total:	$37,924,986

Conclusion on EUV

61.  Therefore, the total EUV of the Buildings is

$172,651,200 + $24,611,707 + $37,924,986 = $235,187,893 and the pro rata shares of R1’s interest and R2’s interest are 17.4542% and 17.5315% respectively.

Whether Redevelopment of the Lot is Justified

62.  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 undivided shares of the Lot.The only challenge raised by the respondents in the present application is whether redevelopment is justified and the applicants are put to strict proof thereof.

63.  In his opening submission, Mr Li referred to Alliance Fame Limited & others v Mak Kam To & Others, LDCS 9000/2015 (unreported, dated 4 August 2017) in which the Tribunal adopted 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 whether redevelopment is justified due to age and state of repair.

64.  In Top Sail, the Tribunal stated:

“23. ……, we are of the view that when the requirement of “the age” of the Buildings is considered, we should not restricted 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.”

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

“30. We areof 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.”

66.  There is no argument on the principles set out in Top Sail and Charmlink. It is agreed that they are guidelines for the Tribunal in the exercise of its discretion.

67.  For the age and state of repair requirements, the applicants adduced the expert evidence of 2 experts: Mr Richard Cheung (“Mr Cheung”) who is an Authorised Person and a building surveyor, and Mr Thomson Chan (“Mr T Chan”) who is a civil and structural engineer. Their expertise is not disputed.

68.  According to Mr T Chan in his Structural Assessment Report dated 2 May 2017 at §§12-24, the Buildings were designed on the basis of the London Council By-law of 1938 where the design strengths were low when compared with the modern Code of Practice for Structural Use of Concrete 2013.

69.  Mr T Chan identified severe cracks and spalling on the beams, columns and slabs. The corrosion is at an advanced stage and the diameter of the reinforcement is much reduced. In addition to visual inspection, covermeter survey, compression tests on concrete cores, carbonation tests, chloride test and testing on the cement content were conducted. Inter alia, Mr T Chan found the in-situ concrete compressive strength is about 12% less the design strength, which may be due to insufficient cement used during construction. Reduced concrete strength and heavily corroded reinforcement had drastically reduced the strength of the structural members and directly affected the stability of the Buildings. As a result, Mr T Chan opined that a very comprehensive and expensive program of repair must be carried out promptly. He comes up with structural repair costs of $3,665,000 which do not cover the footing foundations.

70.  Mr T Chan comes to the conclusion that it is more costs effective to demolish and rebuild and not to repair when the Buildings have no historical, cultural or artistic value.

71.  Mr Cheung, in his Building Condition Survey Report dated 26 April 2017, stated that there is loose rendering and spalled concrete covering some 23% of external walls plus numerous cracks on the external walls and the beams underneath the balconies. Similar cracks or spalled concrete were found inside the domestic flats.

72.  As regards electrical installation, there is no valid WR2 certificate and the safety of the main power supply system is doubtful. In addition, there is exposed wiring in staircases and some Residential Current Circuit Breakers are in poor condition. Worst still, there is no fire services installations as required under the Fire Safety (Buildings) Ordinance.

73.  The Buildings have no flushing water supply; the condition of the above-ground soil and waste disposal system is poor: there is misuse of anti-siphonage pipe, abandoned waste water pipes, non-provision of rainwater pipe shoes, insufficient fall for horizontal soil pipes and lack of connection anti-siphonage pipe and lack of connection of anti-siphonage pipe to the horizontal soil water pipe. As regards underground drains, a CCTV survey has been carried out revealing 5 out of 9 underground pipe sections and 1 out of 3 manholes are defective.

74.  Turning to the age of the Buildings, Mr Cheung observed that the Buildings are over 50 years of age and passed its design life. In giving evidence-in-chief, Mr Cheung pointed out that although his report was dated 26 April 2017 which was earlier than Mr T Chan’s report of 2 May 2017, he had the opportunity of revealing the latter before it was released. Based on the latter, Mr Cheung accepted that there are problems with material strengths, design life, progressive failure, redundancies and moment joint.

75.  Mr Cheung also found the Buildings are inferior in terms of:

(a)   means of fire escape as the staircase is not provided with emergency lighting system as required under the Code of Practice for Fire Safety in Buildings 2011 (“FS code”), only a handrail on one side of the staircase and the clear of 920mm is less than 1050mm under the FS Code;

(b)   fire resisting construction of the staircase as it does not meet the Building (Construction) Regulation, Fire Safety (Buildings) Ordinance and the FS Code. Meters, trunkings and conduits of the Buildings are not enclosed by fire barriers with adequate fire ratings;

(c)  fire service installations such as fire alarm system, fire hydrant etc are totally absent;

(d)   Barrier free access which is lacking in the staircase as required by the Design Manual: Barrier Free Access 2008, FS code, Disability Discrimination Ordinance;

(e)   Energy efficiency as there is no certificate of compliance in accordance with Buildings Energy Efficiency Ordinance;

(f)   no drain pipes to collect condensation water from air-conditioners, etc.

76.  Mr Cheung opined that substantial repairs as much as $13,696,580 are required to restore the Buildings to the tenantable standards and this amounts 34% of the costs of building a new similar building. Mr Cheung also referred to the need for future repair and maintenance especially as there is no redundancy in the building structure design. His conclusion is that the redevelopment of the Buildings is justified due to the state of repair and age of the Buildings.

77.  As submitted by the applicants, no one seeks to challenge these expert evidences and the 2 experts were not cross-examined on the issue. More importantly, the respondents have not adduced any evidence, factual or opinion, in relation to the “age” and “state of repair” of the Buildings. Throughout the trial, they have not suggested that the Building should be retained.  Having considered the evidence before the Tribunal, we are satisfied that redevelopment of the Building is justified due to the age and state of repair.

Section 4(2)(b) – Whether Applicants have taken reasonable steps

78.  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.

79.  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: -

Offer	Date of offer	R1’s Unit	R2’s Unit
1st round*	27 Jun 16	$32,900,000	$33,950,000
2nd round	19 Jul 16	$34,545,000	$35,647,500
3rd round	8 May 17	$37,000,000	$38,000,000
4th round	2 Nov 17	$45,200,000	$45,400,000

*   These offers included the advice letters of KFP setting out the relevant valuation assessments and calculations of the share of the respondents’.

80.  Despite that the 1^st round offers were supported by the advice letters of KFP, it is regretted that they were some 20% or 18% lower than the EUV as found by the Tribunal; the 2^nd round offers were not better as they were some 16% or 14% lower than the EUV. For the 3^rd offer, they were still some 10% or 8% lower than the EUV. These offers appear not to be fair and reasonable.

81.  However, in Good Faith Properties Limited & Others v Cibean Development Company Limited, LDCS 42000/2011 (unreported, dated 31 May 2013), the Tribunal ruled at §61 that not only pre-Application steps should be considered by the Tribunal, but all reasonable steps before the making of a sale order by the Tribunal to acquire the minority owner’s share in the Lots should be considered, be it post- or pre-Application. 

82.  In the present case, we note that the offers on 2 November 2017 were some 10% higher than the corresponding EUV of R1’s or R2’s unit.

83.  In Intelligent House Ltd v Chan Tung Shing & Others [2008] 4 HKC 421 where the majority owner relied on its valuation expert to formulate some of the offers, the Tribunal ruled at §334(3) that:

“… it is not disputed that Savills is a reputable firm of valuers. In our view, it is also reasonable for Intelligent House to rely on Savills’ expert opinion to formulate the purchase prices offered to the minority owners. There is also no reason for us to believe, nor is there such evidence to suggest, that the advices from Savills were not properly made based on professional valuation of the EUV and RDV of the minority owners’ units.”

84.  We are also informed that the applicants have successfully made offers and acquired the interest of R3 after commencement of the Application.

85.  More importantly, the Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363 (“Capital Well”) has emphasized 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.”[11]

86.  As said in §15 above, both Mr Lee and Ms Wong for the respondents no longer oppose the order for sale on the ground of the applicants not having taken reasonable steps to acquire all the undivided shares in the Lot on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance.

87.  Bearing in mind the above, we are satisfied that on the evidence available and in the circumstances of the present 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 R1 and R2 on terms that are fair and reasonable.

Disputes on the estimation of the RDV of the Lots

Optimum Hypothetical Development Model

88.  At the hearing, no suitable redevelopment site comparables were adduced as evidence for this Tribunal to consider. Both Mr A Chan for the applicants and Mr Lam for R1 and R2 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.

89.  Although the valuation experts had previously different opinion on the optimum hypothetical form of development on the Lots, by their Joint Statement dated 15 November 2017, Mr Lam agree with Mr A Chan that the optimum hypothetical form of development on the Lots should comprise a 22-storey composite building with retail shops and plant room on G/F& 1/F, club house on 2/F and residential units on upper floors (each having 2 units per floor). They have also agreed the other parameters including the saleable areas per floor and even the GDV for the residential portion. The table below shows their agreements:

		Mr A Chan	Mr Lam
Site Area		328.4 sq m
Form of Optimal Development		22-storey composite building with retail shops and plant room on G/F& 1/F, club house on 2/F and residential units on upper floors (each having 2 units per floor)
Area	G/F Shop	243.84 sq m (Saleable Area)
	1/F Shop	248.76 sq m (Saleable Area)
GDV	U/F Residential	$337,851,150
Marketing Cost		2%
Demolition Cost for the Buildings		$2,931,182
Construction Cost		$113,131,172 (on GFA)
Developer’s Profit		15% on Construction/Demolition cost and Professional fee
Land Value		$298,100,000	$433,046,000
Accommodation Value		$100,859/m2	$146,517/m2

90.  Thus, it is basically the value of the hypothetical shop units that the two experts cannot come into agreement, resulting in their difference in the residual land value.

Assessment of the Value for the hypothetical shop units on G/F

91.  As said in §44 above, Mr A Chan relies on 4 comparables, ie KF8, KF9, KF10 and KF11 in his assessment of the hypothetical shop units on G/F but we consider in particular they should also be relevant in assessing the GDV though KF9 and KF10 should be discarded because of their locational difference.

92.  Mr Lam, on the other hand, adopts the same 4 comparables he used for valuing the EUV. We have however, ruled that only CS2 and CS4 are relevant.

93.  Thus, in the special circumstances of the present case, we are prepared to adopt the same set of comparables for assessing both the EUV and the GDV of the hypothetical shop units.

94.  Mr A Chan has proposed a hypothetical layout of the G/F shop units[12] which is also adopted by Mr Lam. For instance, it comprises the following:

Shop No	Saleable Area (m2)	Frontage (m)		Return frontage (m)		Shape
1	67.35	5.58	abutting Soy Street	12.07	abutting scavenging lane	rectangular
2	109.62	13.32	abutting Soy Street	4.84	abutting Pak Po Street	“L”
3	66.87	10.24	abutting Pak Po Street	NA		rectangular

95.  We are prepared to apply the adjustment factors as discussed at §§31-54 above. But for the location adjustment, we note Mr A Chan agrees to give a higher average rate because of the potential shopping development at 1/F of Concord Building opposite to the Buildings. We would also envisage that with the new development at the Lot itself, the trading environment would improve. We would therefore add a further 10% for location[13]. Our valuation of Shop 1 is as follows:

Comp Ref:	Effective Unit Price (/m2)	Adjustments								Adjusted Unit Price (/m2)
		Time	Location	Age	Frontage	Headroom	Size	Return Frontage	Total
KF1/ CS2	$631,591	7.0%	25.0%	5.0%	3.0%	2.0%	-2.0%	8.0%	48.0%	$934,755
KF4	$458,498	5.3%	30.0%	5.0%	0.0%	2.0%	0.0%	8.0%	50.3%	$689,122
KF8	$582,133	3.9%	30.0%	5.0%	3.0%	2.0%	-2.0%	8.0%	49.9%	$872,617
KF11	$517,748	11.3%	30.0%	4.0%	-3.0%	1.0%	0.0%	8.0%	51.3%	$783,353
CS4	$800,657	41.6%	-5.0%	3.0%	2.0%	0.0%	-2.0%	8.0%	47.6%	$1,181,770
								Average:		$892,323
								Average (if KF4 is excluded):		$943,124

*   We adopt 8% for the return frontage for the scavenging lane instead of Mr A Chan’s 10%.

96.  As before, we are going to adopt a unit rate for Shop 1 at say $950,000/m² and the value of this shop unit is therefore:

67.35 m² x $950,000/m² = $63,982,500.

97.  If we carry out a similar analysis for Shop 2, the result will be as follows:

Comp Ref:	Effective Unit Price (/m2)	Adjustments								Adjusted Unit Price (/m2)
		Time	Location	Age	Frontage	Headroom	Size	Return Frontage	Total
KF1/ CS2	$631,591	7.0%	25.0%	5.0%	18.0%	2.0%	-18.0%	15.0%	54.0%	$972,650
KF4	$458,498	5.3%	30.0%	5.0%	16.0%	2.0%	-17.0%	15.0%	56.3%	$716,632
KF8	$582,133	3.9%	30.0%	5.0%	18.0%	2.0%	-22.0%	15.0%	51.9%	$884,260
KF11	$517,748	11.3%	30.0%	4.0%	12.0%	1.0%	-13.0%	15.0%	60.3%	$829,950
CS4	$800,657	41.6%	-5.0%	3.0%	18.0%	0.0%	-18.0%	15.0%	54.6%	$1,237,816
								Average:		$928,262
								Average (if KF4 is excluded):		$981,169

98.  That is, we determine the unit rate for Shop 2 at $981,000/m² and the value of this shop unit is therefore:

   109.62 m² x $981,000/m² = $107,537,220.

99.  At this juncture, we note that the adjustments for size nearly cancel out the adjustments for frontage in respect of the comparables, ie the combination of, say, two standard sized shops of equal frontage and depth (thus yielding 1/2^nd the depth to frontage ratio) would not necessarily justify a higher unit price - an observation discussed by the Tribunal at §§94-97 in Supergoal Investment Limited, supra. For this reason, we have carried out a checking valuation by subdividing this Shop 2 into a rectangular shop with a shop front of 6.79m and a depth of 11.49m and a corner shop of 6.53m x 4.84m.

100.  For the rectangular shop with a shop front of 6.79m and a depth of 11.49m, our analysis is as follows:

Comp Ref:	Effective Unit Price (/m2)	Adjustments								Adjusted Unit Price (/m2)
		Time	Location	Age	Frontage	Headroom	Size	Return Frontage	Total
KF1/ CS2	$631,591	7.0%	15.0%	5.0%	5.0%	2.0%	-6.0%	0.0%	38.0%	$871,596
KF4	$458,498	5.3%	20.0%	5.0%	3.0%	2.0%	-3.0%	0.0%	42.3%	$652,443
KF8	$582,133	3.9%	20.0%	5.0%	5.0%	2.0%	-9.0%	0.0%	36.9%	$796,940
KF11	$517,748	11.3%	20.0%	4.0%	-1.0%	1.0%	-3.0%	0.0%	42.3%	$736,755
CS4	$800,657	41.6%	-10.0%	3.0%	5.0%	0.0%	-9.0%	0.0%	35.6%	$1,085,691
								Average:		$828,685
								Average (if KF4 is excluded):		$872,746

101.  Again, if we determine the value of this rectangular shop as 78.02 m² x $875,000/m² = $68,267,500 and the value of corner shop as 31.60 m² x $875,000/m² x 1.3[14] = $35,945,000. The total is $104,212,500.

102.  We find the result is only slightly smaller than $107,537,220. We are satisfied that the value for Shop 2 at $107,537,220.

103.  For Shop 3, our analysis is as follows:

	Effective Unit Price (/m2)	Adjustments								Adjusted Unit Price (/m2)
		Time	Location	Age	Frontage	Headroom	Size	Layout/ Shape	Total
KF1/ CS2	$631,591	7.0%	10.0%	5.0%	12.0%	2.0%	-2.0%	5.0%	39.0%	$877,911
KF4	$458,498	5.3%	15.0%	5.0%	10.0%	2.0%	0.0%	5.0%	42.3%	$652,443
KF8	$582,133	3.9%	15.0%	5.0%	12.0%	2.0%	-2.0%	5.0%	40.9%	$820,225
KF11	$517,748	11.3%	15.0%	4.0%	6.0%	1.0%	0.0%	5.0%	42.3%	$736,755
CS4	$800,657	41.6%	-15.0%	3.0%	12.0%	0.0%	-2.0%	5.0%	44.6%	$1,157,750
								Average:		$849,017
								Average (if KF4 is excluded):		$898,160

104.  That is, we determine the unit rate for Shop 3 at say $900,000/m² and the value of this shop unit is therefore:

   66.87 m² x $900,000/m² = $60,183,000.

105.  As a result, the total GDV for the hypothetical shops is

   $63,982,500 + $107,537,220 + $60,183,000 = $231,702,720.

Assessment of the Value for 1/F (Retail)

106.  As regards that for 1/F which is designated for retail/commercial, Mr A Chan and Mr Lam both agree to adopt 1/3 of the unit value of the ground floor as the unit value for 1/F. However, Mr A Chan refers to Shop 3 while Mr Lam refers to Shop 1.

107.  We prefer the approach of Mr Lam and therefore determine the value for the 1/F at $320,000/m² as it faces directly opposite Concord Building on the ground floor of which CS4 is situated. The shopping floors of Concord Building were under renovation at the time of our inspection and we expect the shopping environment in the vicinity would be improved.

Assessment of the Value for U/F (Residential)

108.  The two experts have agreed the GDV for the residential portion on the upper floors at $337,851,150 which is equivalent to $206,700/m².

Development Profit

109.  As stated at §89 above, the experts have agreed the developer’s profit should be 15% on costs. But when Mr A Chan was referred to the recent Government tender land sales including the one at Cheung Sha Wan on 15 November 2017 and the others earlier in Kai Tak area during cross-examination, he conceded the developer’s profit can be lowered to 10% in view of the prevailing heated competition by developers for sites for development.

110.  We are prepared to adopt therefore 10% instead of 15% on costs as the developer’s profit.

Finding on RDV and the Reserve Price

111.  Thus, subject to what we have stated above, we shall follow Mr A Chan’s residual valuation model as contained at Appendix 1 of the Joint Statement dated 15 November 2017[15] on the determination of the RDV which is reproduced at Appendix 1 to this judgment. We determine the land value of the Lot at $386,391,000 (ie accommodation value of $130,732/m²).

112.  We shall adopt the estimated RDV of $386,391,000 as the Reserve Price for the auction of the Lot.

Other Incidental Matters

113.  The applicants propose to appoint Mr Andy Ngan and Ms Joey Hung, being partner and senior associate of Messrs F Zimmern & Co, Solicitors & Notaries, as the sale trustees.  Based on the information on their background and experience as set out in their letter dated 20 October 2017, 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.

114.  The applicants has prepared a set of draft Particulars and Conditions of Sale of the Lots[16].  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 Lots by public auction submitted by the applicants are also reasonable.

Order

115.  This Tribunal 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 and 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. Andy Ngan and Ms Joey Hung of Messrs F Zimmern & Co, Solicitors & Notaries, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to sale of the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs F Zimmern & Co, Solicitors & Notaries dated 20 October 2017.

(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 in the draft Particulars and Conditions of Sale to be initialed and approved by the Tribunal.

(ii)   The reserve price be set at $386,391,000.

(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 & 2^nd respondents and the Trustees to apply to the Tribunal for further direction(s) under the Ordinance.

Costs

116.  The law on costs is succinctly summarized at §4 of Good Faith Properties Limited and Others v Cibean Development Company Limited. LDCS 42000/2011 (unreported, dated 12 June 2015) which referred to the judgment of the Court of Appeal dated 22 September 2014 as follows:

“(a) the compensation approach on costs in resumption cases is applicable to compulsory sale proceedings (§37);

(b) the making of the application is a necessary step if the majority owner(s) wish to take advantage of Cap 545 and the costs incurred by him in making the application is the price he has to pay in order to bring him to the point where a minority owner can be compelled by an order to sell through no fault on the part of the latter (§14);

(c) costs should not be dealt with in the same manner as ordinary hostile litigation and the expenses for the determination of the proper compensation for taking the land compulsorily are regarded as part of the reasonable and necessary expenses attributable to the acquisition process as a whole. The starting point is that such costs should be paid by the acquiring authority (§27);

(d) The minority owner is quite entitled to insist on his right as private owner in rejecting any offers from the majority owner(s). It should not be regarded as a legal wrong for a minority owner to reject an offer from the majority owner even though such an offer may meet the statutory reasonable step requirement under s 4(2)(b) of Cap 545 (§12);

(e) One should not be too ready to condemn the exercise of such rights to be heard by the minority owner as unreasonable conduct in resisting an application under Cap 545 (§17);

(f) The proper approach of the Tribunal for the costs of a successful claimant (ie a claimant who is awarded more than the amount of an unconditional offer by the respondent) should be that he is entitled to his costs incurred in the proceedings in the absence of some ‘special reason’ to the contrary (§28);

…..

(h) If a minority owner raises objection and puts forward proper evidence to support his objections, he is only exercising his legitimate right to object as conferred by Cap 545. He should not be penalized even though he is doing so for a motive which the applicant may, perhaps with some justification, characterize as an attempt to extract a ransom (§44);

(i) Only in very plain cases where the rejection of an offer or the pursuit of a line of opposition is obviously unreasonable that the Tribunal should consider imposing costs sanction (§44);

(j) The real concern is about the unreasonable conduct of proceedings and the delay and prolongation of the process under Cap 545 (with the attendant increase in costs) when a minority owner takes an obviously unmeritorious point to challenge the application (§47);

……

(m) Where the minority owner achieves a valuation in excess of the applicant’s offer, it would, prima facie, have been reasonable for him to have rejected that offer (§62); and

(n) The proper approach is to examine whether the respondent acted unreasonably in relying on the evidence of its expert, Mr Lai, so as to cause the proceedings to be unnecessarily prolonged or to cause the unnecessary expenditure of additional costs (§62).”

117.  Applying the legal principles summarized above by the Court of Appeal, it would be usually the case that the applicants should pay the costs of the respondents.

118.  Referring to the same principles, however, Mr Li submits that in the present case, there should be no order as to costs because it is unreasonable for the respondents either not to respond to the applicants’ offers or purportedly rely on Mr Lam’s valuation not to accept the offers when the latter’s valuation is simply fundamentally erroneous. Further, it is wrong as a matter of law to persist to say that the 1/F units of the Buildings should be valued as domestic flat until the 3^rd day of trial. There is a plethora of authorities on the correct legal position and costs and time have been wasted on an issue which came to be abandoned by the respondents at trial.

119.  With respect, we do not agree with Mr Li that Mr Lam’s valuation is particularly erroneous. For instance, it is true that we have rejected two out of four of his comparables adopted for valuing the ground floor premises; on the other hand, we have also rejected 7 out of 11 comparables proposed by Mr A Chan. In terms of the adjustment factors, we have adopted some from each of the two experts. Perhaps the greatest criticism of Mr Lam is on his insistence on his adoption of adjustment on clear frontage instead of physical frontage. At his closing submission, Mr Li stated the following at §11.5(2):

“… Steven Lam had asserted in cross-examination that the columns on shop front of GF units had no use or not being used. On being confronted with photographs of the GF units at the Building showing the use of columns for advertisement or hanging/painting of signage, Steven Lam failed to give any explanation to reconcile his assertion for justifying use of clear frontage with the actual situation at site.”

120.  While such criticism may be valid, there has been no substantial waste of time and costs on this issue.

121.  Mr Li also takes issue on Mr Lam’s position on valuing the 1/F units of the Buildings until “a volt change of accepting Alnwick Chan’s 1F valuation as shop at trial:

“… In his examination-in-chief by R1’s counsel, (Mr Lam) gave his purported explanation of changing his position. He said that when he inspected the Building, he did not see the use of 1F as shop as he did not go inside and that 1F/63 was closed by iron gate. In short, he said the 1F units had not been used as shop and could not be used as shop. Then he said that after the inspection, he saw that there were signs indication the use of 1F as shop and he had inspected the interior of some of 1F units. He then said that after site inspection, he did his valuation of 1F as shop and found such valuation be close to Alnwick Chan.”

122.  Mr Li suggests there was no logic to say that because the 1/F units had not been used as shops at the time of (Mr Lam’s) alleged inspections prior to trial. Mr Li criticizes Mr Lam’s change of stance was inexplicable when even an external inspection of the Buildings could find various signage and advertisements showing the use of 1/F units as shops; Mr Lam simply failed to conduct a proper valuation of 1/F units.

123.  Be that as it may, Mr Lam accepted Mr A Chan’s valuation before cross-examination began and there again has been no substantial waste of time and costs on this issue.

124.  In any event, we have determined a reserve price which is substantially (about 30%) higher than that proposed by Mr A Chan and was merely 10% lower than that proposed by Mr Lam. We find no reason to depart from the compensation approach on costs as pronounced by the Court of Appeal.

125.  Thus, we make a costs order absolute that:

(i)   The 1^st & 2^ndrespondents be awarded costs of the proceedings;

(ii)    Costs awarded are to be taxed if not agreed, with certificate for counsel on party and party basis at High Court scale.