EVERSOUND INVESTMENTS LTD v. WU LAI HO FATIMA AND OTHERS

LDCS 36000/2012

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 36000 OF 2012

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J U D G M E N T

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Background

1.  This is an application for compulsory sale of all the undivided shares in Subsection 2 of Section D of Kowloon Marine Lot No. 52 (“the Lot”), known as Nos. 3 & 5 Wan Shun Street and Nos. 4 & 6 Wan Fuk Street, (formerly known as Nos. 5, 6, 7 and 8, Block B), Kowloon, Hong Kong (“the Building”), for the purposes of the redevelopment of the Lot pursuant to Section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”).

2.  There is erected on the Lot an 8 storey composite building served by 2 common staircases.  Altogether there are 33 units in the Building and each unit is allotted one share with a total of 33 undivided shares for the Building and the Lot.  The Building is part of Block B of Nos. 22 & 24 Wan On Street, Nos. 1, 3, 5, 7, 9, 11 & 13 Wan Shun Street and Nos. 2, 4, 6, 8, 10, 12 & 14 Wan Fuk Street, Kowloon, Hong Kong (“Block B”).

3.  The Applicant commenced the present proceedings on 25 April 2012.  At that time, the 1st Respondent is the registered owner of First Floor of House No. 5, Block B, No. 3 Wan Shun Street, Kowloon; the 2nd Respondent, 1st Floor of House No. 8, Block B, No. 6 Wan Fuk Street, Kowloon,; the 3rd Respondent, 2nd Floor of House No. 7, Block B, No. 5 Wan Shun Street, Kowloon,; the 4th Respondents, 3rd Floor of House No. 5, Block B, No. 3 Wan Shun Street, Kowloon,; the 5th Respondent, 7th Floor of House No. 8, Block B, No. 6 Wan Fuk Street, Kowloon; and the 6th Respondents, the Whole of the Roofs, Nos. 3 & 5 Wan Shun Street, Nos. 4 & 6 Wan Fuk Street, Kowloon.  The Applicant owns the remaining units in the Building and 27 equal undivided 33rd parts or shares in the Lot representing 81.82%. The Applicant contends that it is entitled to make the present application by virtue of Section 3(2) of the Ordinance.

4.  Since then, the Applicant has acquired the interests of the 1st Respondent, the 2nd Respondent, the 3rd Respondent, the 4th Respondents and the 5th Respondent and has discontinued the application against them by orders of the Tribunal.

5.  As at the date of hearing, the 6th Respondents own 1 share in the Roof of the Building ("the 6th Respondents’ premises").  All the remaining shares and units in the Building and the Lot are owned by the Applicant.  Thus, the percentage of the undivided shares owned by the Applicant in the Lot is 96.97%.

6.  The 6th Respondents did not file any Notice of Opposition.

7.  Before the hearing, the solicitors for the Applicant have duly served all the papers of the Application to the address of the 6th Respondents made known to the solicitors.  The 6th Respondents were absent at the hearing and did not file any response or expert report. 

8.  In view of the absence of the 6th Respondents, Mr C.Y. Li SC, Counsel for the Applicant, simply called the Applicant’s witnesses to confirm their evidence.  The Applicant contends that all the requirements of the Ordinance have been satisfied and asks for an order for sale in terms of the draft order submitted.  The Applicant also asks there be no order as to costs.

Section 3 of the Ordinance – Ownership of the Applicant

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

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

11.  Pursuant to Section 3(5) of the Ordinance, the notice was gazetted on 22 January 2010 and tabled at the Legislative Council meeting on 27 January 2010.  It came into operation on 1 April 2010.  Section 3 of the notice lowered the threshold for compulsory sale from 90% to 80%.  Section 4(1)(b) of the notice specified one of the classes for the purposes of Section 3, as “a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (which is the date of the application)”.  The occupation permit of the Building was issued on 4 February 1960, which is more than 52 years before the date of application.  The Building therefore is covered by the notice and the applicable percentage is 80%.

12.  As at the date of application, the Applicant owns 81.82% of the shares in the Lot.  The Applicant is clearly entitled to make the application. 

Section 4(2) of the Ordinance - Justification and Reasonable Steps

13.  In determining the Applicant’s application, Section 4(2) of the Ordinance requires me not to make an order for sale unless, after hearing the objections, if any, of the 6th Respondents, I am satisfied that:

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

(b)   the Applicant has taken reasonable steps to acquire all the undivided shares in the Lot (including negotiating for the purchase of the undivided share owned by the 6th Respondents on terms that are fair and reasonable).

14.  Mr Li submits that the relevant tests on age and state of repair were set out in Top Sail International Ltd v. Cheng Kai Ming, executor of the estate of Chan Hue also known as Chan Sum Hiu, deceased (LDCS 18000/2010, 15 November 2011, unreported).  Mr. Li further submits that the tests were also applied recently in the decisions of this Tribunal in Champion Success Limited & Another v. Leung Lai Lai the administratrix of the estate of Lai Yin King Deceased & Others (LDCS 41000/2011, 16 January 2013, unreported) and Eversound Investments Limited v. Tung Chun Hung & Others (LDCS 5000/2012, 23 January 2013, unreported).  I am of the view that “the age” and “state of repair” are two separate grounds and even though there may be considerations common to both, I should still consider them separately.  Since Mr Li relies primarily on “state of repair”, I shall deal with this ground first.

State of Repair of the Building

15.  The Applicant’s expert, Mr Raymond Chan of Raymond Chan Surveyors Limited (“Mr R Chan”), in his Condition Survey Report, gives his opinion, inter alia, that:

(a) Unauthorized covered structures are erected on part of the main roof.

(b) Shrinkage cracks are commonly found on the finishes of the external walls of staircase hoods.

(c) Based on his visual inspection to the external walls with the aid of binoculars, the following defects are observed:

(i) The condition of render and paint of the external walls is fair.

(ii) Unauthorized building works, such as drying racks, antenna, air-conditioning supporting frames, corrugated canopies and shop front bulkheads in rusting and dilapidated condition are noted at the external walls.

(iii) As the Building was built in the 1950’s, Mr R Chan suspects that the unauthorized corrugated canopies commonly installed on the top of windows may contain asbestos materials which were widely used at that time for thermal insulation.

(iii)

(iv) Deteriorated shop front bulkheads on external wall for shop fronts are commonly found for the units on the Ground Floor.

(v) Unauthorized window openings on external wall between Ground and 1st Floors are found facing Wan Fuk Street and Wan Shun Street.

(d)   Based on Mr R Chan’s visual inspection with the aid of binoculars, the following defects are observed at the light wells:

(i) The condition of render and paint of the two light wells are poor.  Peeled off paint and debonded render are commonly found.

(ii) UPVC drainage pipes are mounted on the light wells and their conditions are fair. Unauthorized alteration of the drainage pipes is commonly found.  The drainage system is open system with hopper design which constitutes hygiene problem

(iii) Unauthorized building works like corrugated canopies, air conditioning supporting frames and drying racks in rusting and dilapidated condition are noted at the light well.

(iv) As the Building was built in 1950’s, Mr R Chan suspects that the corrugated canopies commonly installed on the top of windows may contain asbestos materials which were widely used at that time for thermal insulation.

(v) Unauthorized enclosure of window openings is commonly found at light wells on each floor. 

(e) The condition of the two staircases is poor. Peeling off paint and debonded plaster are noted at wall and ceiling.  Concrete spalling is commonly found near window openings, wall, beam and ceiling.

(f) Door access from some of the kitchens to common areas is blocked. The materials used for blocking might not be up to current standard.

(g) Cracks and concrete spallings are commonly found near window openings and at beams.  Damp patches are found on walls and beams,

(h) Unauthorized cocklofts are erected at the high level of all Shops. Independent entrances connecting the main staircases are provided to the unauthorized cocklofts.

16.  Based on the result of his condition survey, Mr R Chan concludes that the roof is generally in poor condition.  It is likely that unauthorized structures on the roof have damaged the waterproofing system of the main roof.  Although the external walls and the light wells are in fair condition when viewed externally, many cracks and concrete spallings are noted at the interior. Site evidence shows that the external walls and the light wells serving as an external envelope for weather protection is defective. Site evidence also shows that a lot of unauthorized drying racks, supporting racks/frames at various residential flats remain at the external walls.  Unauthorized building works (“UBWs”) are noted in the Building. They are not shown in the approved building plans and contravene the Buildings Ordinance. The corrugated canopies/sheets located at the external walls and the light wells are suspected to contain asbestos.  Defective paint and plaster finishes are commonly identified at many internal locations.  Cracks and concrete spallings are commonly found in the internal areas.  Serious cracks and concrete spallings with corroded reinforcement bars greatly exposed are observed on the structural elements, such as beams and columns. This might affect the structural stability of the Building.  Kitchen is a place with special hazard. Inadequate fire resistance rating on the walls and doors separating the kitchen with the rest of the flat will impose potential dangers to the people living inside the units in case of fire.

17.  Mr R Chan is of the opinion that the Building is generally in a dilapidated and potentially dangerous condition.  The structural stability of the Building is also affected by the defects and UBWs.  The Building was built in 1960 and is more than 50 years old. Although extensive repair works may extend the Building’s life span, the continuous maintenance costs are expected to be increasingly high. Based on the result of his condition survey, in Mr R Chan’s opinion, the Building is in a state of disrepair with its structural frames in dilapidated condition. Some of the building components and finishes are at the end of their effective life span.  Without substantial repairs, the Building is not up to tenantable standard.  Indeed, putting aside the astronomical costs need to be incurred for the repair and maintenance of the Building, Mr R Chan is also of the opinion that it is not feasible or practical to undertake such a course as it would entail a closure of the Building for a substantial period of time. The Building is indeed in potentially dangerous condition and the only sensible solution is to rebuild.

18.  The Applicant instructs another expert, Dr Sammy Chan of Wong & Cheng Consulting Engineers Limited (“Dr Chan”) to prepare Structural Assessment Report.  Dr Chan has carried out a visual inspection with a team of engineers on the structural elements of the Building for recording and identifying structural defects, so that the general condition of these elements can be evaluated. He is able to inspect all structural elements within the accessible areas of the Building including staircases, corridors and roof, over 90% (25 out of 28) of flats are accessible and are also inspected.

(a) During the inspection, structural defects such as concrete cracking/ spalling, spalling with exposure of corroded reinforcing bar and water seepage are observed in 50% of the inspected flats. Some of the defective areas are extensive. In Dr Chan’s opinion, the Building is at an advanced stage of degradation. The observed structural defects are likely caused by years of neglect and poor maintenance.

(b) Many concrete spallings are found to have extended into the inner body of the reinforced concrete columns and beams which would have reduced the strength of these structural elements. Concrete spalling with exposed and corroded reinforcing bars are observed in many locations and indicate that these areas have reached an advanced stage of corrosion. The diameters of many of these exposed reinforcements are significantly reduced due to corrosion.

(c) For the Building, the severe degradation of some of the structural members could likely cause local partial failure of the structural members, which if unabated could potentially lead to progressive failure of the Building.

(d) UBWs include unauthorized alteration for the retail shops on Ground Floor, unauthorized mezzanine floor above the retail, and unauthorized metal canopies.

19.  In order to obtain general information on the existing structural conditions of the Building, an approved laboratory Qualitech Testing & Consultancy Ltd. (Qualitech) which is accredited by the HOKLAS is instructed to carry out in-situ and laboratory tests on selected locations. 

(a) Compressive Strength Test

10 nos. of 75 mm diameter core samples have been taken and compression tests carried out in the laboratory to determine the estimated in-situ strength of concrete.

(b) Carbonation Test

The maximum and mean depths of carbonation are determined by the phenolphthalein method on 10 nos. structural elements.  The results indicate that carbonation depth has exceeded the concrete cover in all the tested structural elements.

(c) Chloride Content Test

Chloride content tests are carried out on 6 nos. of structural elements.  The results indicate that the chloride content ranges from 0.02% to 0.65% with an average of 0.4%.

(d) Cement Content Test

Cement content tests are carried out on 6 nos. of structural dements.  The results indicate that the cement content ranges from 9.2% to 12.8% with an average of 10.9%.

(e) Sulphate Content Test

Sulphate content tests are carried out on 6 nos. of structural elements.  The results indicate that the sulphate content ranges from 1.5% to 2.4% with an average of 2%.

(f) Cover Meter Test

Cover meter tests are performed on 6 nos. structural elements to determine the depth of concrete cover for each type of structural elements.

(g) Open Up Survey

10 nos. of identified areas are opened up to determine the extent of corrosion on reinforcement.  The results are:

(i) Locally - The corrosion exists in only a specific part on the surface area of the reinforcement exposed under survey.

(ii) General - The corrosion exists in all or most part on the surface area of the reinforcement exposed under survey (approx. 90% up to 100%).

(iii) Pitting - The corrosion makes pits or hollow on the surface area of the reinforcement exposed under survey.

The results indicate that all surface area of surveyed reinforcements are thoroughly weathered, thoroughly blistered, or thoroughly stained, 100% corroded and pitting.  The results also indicate that over 90% (32 nos. out of 35) surveyed reinforcements have loss of cross-sectional area (loss from 30% to 100%).

(h) Infrared Thermography Survey

Extensive suspected void areas/water seepage areas could be identified on the concrete structures of external walls by infrared thermographic survey.

20.  From the test results, in Dr Chan’s opinion:

(a) Compressive Strength Test

The average estimated in-situ cube strength obtained from the compressive strength tests are 21.75 MPa for slab, 25.25 MPa for beam and 28.3 MPa for column.  Approved plans indicate that the general concrete strength is 21 MPa. Therefore, the average estimated in-situ concrete cube strengths can be considered to be higher than the design strength of 21 MPa. 

(b) Carbonation Test

For concrete with carbonated depth exceeding the concrete cover, the passivation layer which protects the reinforcing bars from corrosion is destroyed due to the lowering of pH by the carbonated concrete and corrosion of the steel reinforcement will start with sufficient moisture and oxygen.  The test results indicate that 100% of the tested concrete elements are considerably carbonated.  Corroded steel reinforcement would result in cracking/splaying concrete.

(c) Chloride Content Test

Chloride content in concrete is an important index indicating the status of reinforced concrete structures in respect to chloride-induced corrosion.  In accordance with Building (Construction) Regulations, percentage of total chloride content of not greater than 0.35% is considered acceptable for concrete containing embedded metal and made with ordinary or rapid hardening Portland cement.  The average of chloride content on all the tested locations is 0.4% which is higher than the specified limit.

(d) Cement Content Test

The cement content of concrete is important from the aspect of durability, impermeability and strength. Too low a cement content may cause inadequate structural capability or more frequently may not provide a durable protective environment for the steel reinforcement, permitting rapid carbonation and subsequent loss of the protective alkaline environment for the steel.  The design cement sand mixing is 1:2:4 according to the approved plans which is equivalent to a cement content of approximately 14.3%. The average result of 10.9% cement content is lower than the estimated design mix.

(e) Sulphate Content Test

Exposure of concrete made with Portland cement to sulphate salts can cause damage due to an expansive reaction between the cement and the sulphate salt to form crystals of ettringite.  Given adequate space to form, the ettringite forms needle like crystals, but in confined space causes an expansive reaction.  The results indicated that the sulphate content ranges from 1.5% to 2.4% with an average of 2%.  Higher sulphate content decreases the durability of concrete by changing the chemical nature of the cement paste, and the mechanical properties of the concrete.

(f) Cover Meter Scan

Sufficient thickness of concrete cover will ensure adequate durability by providing proper protection to the steel reinforcement and also the required fire protection to the structural elements.  From the approved plans, the structure was designed to have a minimum concrete cover of 15 mm for slab, 25 mm for beam and 25 mm for column.  The test results indicated that the overall concrete cover for slab and beam is lower than the minimum design of concrete cover from the approved plans.

(g) Open Up Survey

Open up inspections confirm that the embedded steel reinforcement are extensively blistered, corroded and pitting.  Corrosion of steel reinforcing bars would cause deterioration in concrete structures due to reduction in strength as a result of reduction in cross-sectional area of the reinforcing bar, cracking and spalling of cover concrete due to the expansive forces of the corrosion products and loss of structural bond between the reinforcement and cracked concrete.

(h) Infrared Thermography Survey

Thermography testing is capable of detecting evidence of air gap or moisture due to change in thermal conductivity and/or thermal capacitance of the external wall.  Infrared thermographic survey results in the identification of extensive suspected void/water seepage areas (42 nos. with total area of 48.43 sq. m.) on the concrete structures of external wall.

21.  In conclusion, Dr Chan confirms that a total of 51 defects are observed on the structural elements of G/F, 1/F to 7/F exhibiting signs of structural defects including concrete cracking/spalling, spalling with exposure of corroded reinforcing bar and water seepage.  Over 98% (50 nos. out of 51 nos.) of observed defects are concrete cracking/ spalling. Spalling with exposure of corroded reinforcing bar, large areas (from 1 sq. m. to 0.09 sq. m.) of serious spalling with exposure of corroded reinforcing bar could be observed on the structural beams. Severe/thorough corrosion also could be observed on those exposed reinforcing bars.  The cracking/spalling, spalling with exposure of corroded reinforcing bar, are caused by concrete carbonation due to natural deterioration/degradation which reduces the alkalinity of the concrete pore solution leading to corrosion of the embedded steel reinforcing bars.  The corroded reinforcement would cause the concrete to crack/spall due to the expansive forces of the corrosion products.  Water seepages could be also observed on the slab soffit of lavatories or kitchens indicating defective waterproofing works which would allow water to penetrate into the concrete structures.  UBWs cause concerns on structural danger to the Building such as fire risks and overloading.  The results of carbonation test indicate that the passivation layer which protects the reinforcing bars from corrosion is destroyed as 100% of the tested concrete elements are considerably carbonated. The results of chloride content test indicate that the average percentage of chloride content (0.4%) of tested concrete elements is obviously higher than the specified limit (0.35%). When a sufficient amount of chlorides reaches the steel reinforcement it permeates the passivating layer and increases the risk of corrosion. The resistivity of concrete can also be reduced, affecting the corrosion rate of the steel.  The results of cement content test indicate that the average percentage of cement content (10.9%) of tested concrete elements is lower than the estimated mix (14.3%).  Too low a cement content may cause inadequate structural capability or more frequently may not provide a durable protective environment for the steel reinforcement, permitting rapid carbonation and subsequent loss of the protective alkaline environment for the steel.  The results of sulphate content test indicate that the average percentage of sulphate content (2%) of tested concrete elements. Higher sulphate content decreasing the durability of concrete by changing the chemical nature of the cement paste, and of the mechanical properties of the concrete. The result of cover meter scan indicate that the overall concrete covers for beam (16.5 mm) are lower than the estimated minimum design of concrete cover (25 mm). Insufficient thickness of concrete cover decreases the durability by providing proper protection to the steel reinforcement and also the required fire protection to the structural elements.  The results of open up survey indicate that the embedded steel reinforcements are extensively blistered, corroded and pitting. Corrosion of steel reinforcing bars would cause deterioration in concrete structures due to (i) reduction in strength as a result of reduction in cross-sectional area of the reinforcing bar, (ii) cracking and spalling of cover concrete due to the expansive forces of the corrosion products and (iii) loss of structural bond between the reinforcement and cracked concrete.  The results of infrared thermography survey identify there are extensive suspected void/water seepage areas (36 nos. with total area of 48 sq.m.) on the concrete structures of external wall. These void areas would induce deterioration in concrete structures caused by natural deterioration/degradation of the Building due to improper maintenance and ageing problem. 

22.  Based on the findings of Mr R Chan and Dr Chan, I am satisfied that redevelopment of the Building is justified on the ground of state of repair.

Age of the Building

23.  As to the age of the Building, there is no dispute that the Building is now 53 years old.  The relevant occupation permit was issued on 4 February 1960.

24.  Mr Li submits that I should not consider just the physical age of the Building, but should also consider the physical conditions of the Building.  He relies on the remarks of Mr R Chan and Dr Chan that it would cost respectively $6,430,000 and $12,384,000 to properly repair the Building, and that it is more cost effective to demolish and rebuild the Building.  I agree with Mr Li’s submission that the figure of 40.74%, being the total repair cost of $18,814,000, over the higher of the EUV of the Building, which is $46,179,837 as assessed by the Applicant’s valuer (see the discussion below), is a very substantial percentage.

25.  In Dr Chan’s opinion, according to the results of in-situ/laboratory tests, the embedded steel reinforcements of the Building are extensively blistered, corroded and pitted. Moreover, the protective concrete cover is considerably carbonated.  Excessive carbonation of concrete indicates that the concrete cover has lost its function to protect the embedded reinforcement of the reinforced concrete members. This proposition is supported by the finding of substantial corrosion of reinforcement as observed from the open-up survey of structural elements.  As a result, the overall stability of the Building may be adversely reduced for such degradation of structural members.  In respect of the chemical test result, low cement content recorded shows that the structural members could have low concrete strength and could not provide a durable protective environment for the steel reinforcement. High sulphate content also decreases the durability of concrete.  The resistivity of concrete is also low, increasing the corrosion rate of the steel bars.  As the stability of the Building is provided by frame action of the reinforced concrete frame, the extensive poor condition of the embedded steel reinforcement identified could cause local structural failure of the building members.  For the considerable extent in terms of area and degree of defects in the premises concerned, Dr Chan considers that normal concrete repair work may not be a cost-effective solution to restore the overall integrity of the Building.  Also, the overloading issue due to additional partitions in the sub-divided units and raised floor cannot be resolved or rectified simply by removing the loadings and then by patch repairing the concrete members because affected building structures may have been overstressed for many years and their structural integrity has already been damaged. 

26.  In Dr Chan’s opinion, The Building has already undergone severe degradation which renders it not worthwhile to be rectified by conventional repair and maintenance measures.  The overall structural integrity of the Building is in doubt due to the overloading in the sub-divided units (additional walls and raised floors) which renders the potential local failure of the affected building structures.  As the nature and extent of structural strengthening work to the existing building are more complicated and substantial as compared with localized repair work, Dr Chan considers the implementation of a conventional repair and maintenance work package for the Building may not relieve the prevailing degradation problem.

27.  According to Mr R Chan,

(a) The width of exit routes between the unauthorized covered structures on the roof is 900 mm approximately.  It does not comply with the current requirement of S.41(l) of the Building (Planning) Regulations (“B(P)R”) and Clause B8.1 and Table B2 of the Code of Practice for Fire Safety in Buildings 2011 published by the Building Authority in 2011 (“Fire Safety Code”). In this Code, the minimum width of staircase required is 1050 mm.

(b) The two staircases in Building which are for means of escape purposes do not comply with the current statutory requirements in the following aspects:-

(i) The wired glass in fixed metal frame has been replaced with openable wired glass. 

(ii) The width of exit routes between the unauthorized covered structures on the roof is 900 mm approximately.  The wired glass in fixed metal frame at staircases has been replaced with openable wired glass.  They do not comply with the current requirement of S.41(l) of the Building (Planning) Regulations (“B(P)R”) and Clause B8.1 and Table B2 of the Fire Safety Code. In this Code, the minimum width of staircase required is 1050 mm.

(iii) The residential units at each storey could access to the staircase directly from the entrances and the kitchens without passing through a protected lobby, which does not comply with the current requirement of S.41(l) of the B(P)R and Clause B10.4 of the Fire Safety Code. In this Code, access to the staircase at each storey should be through a protected lobby if the level of the highest floor of the building is more than 13m above ground level (According to the building plan approved by the Building Authority on 3rd March 1959 under reference number 2/4847/58, the height of the Building is around 25.65 m).

(iv) Height of balustrade along the staircase is approximately 950 mm. This does not comply with the current requirement of S.8 of the Building (Construction) Regulations (“B(C)R”). The regulation requires the protective barrier shall be constructed with minimum height of 1100 mm.

(v) No handrail is provided at isolated locations of the staircases, which does not comply with the current requirement of S.41(l) of the B(P)R and Clause B14.6 of the Fire Safety Code. In this Code, handrail on each side of the staircase is required.

(vi) Exit doors of all residential flats (including kitchen exit doors), from 1/F to 7/F directly open onto the staircase landing are of hardwood doors and metal gates.  They were built in old style and are not up to current standard. For instance, they do not have door closer and intumescent seal.  Besides, they do not comply with the current requirements of S. 90 of the B(C)R, Clause C9.3 and E5.1 of the Fire Safety Code.  In this Code, door giving access to the escape staircase requires to have minimum -/60/- Fire Resistance Rating and to be tested in accordance with BS EN 1634-1:2008, BS EN 1634-2:2008, BS EN 1634-3:2004 and BS EN 14600:2005.

(vii) The effective width of most of the sliding metal gates leading to the common staircases, which is the exit doors of the individual flats, is around 450 mm. This does not comply with the current requirement of S.41(l) of the B(P)R and Clause B7.1 of the Fire Safety Code. The Code requires that the effective width of exit door should be 750 mm.

(viii) Distance between the nearest points in the perimeter of the landings to the two required staircases connecting from roof to G/F is about 3200 mm only, which does not comply with the current requirement of S.41(l) of the B(P)R and Clause B10.2 of the Fire Safety Code.  In this clause, the minimum distance between the nearest points in the perimeter of the landings to the two required staircases should not be less than 6 m.

(ix) Width of the exit route connecting the two required staircases is 850 mm only, which does not comply with the current requirement of S.41(l) of the B(P)R and Clause B8.1 of the Fire Safety Code.  In this clause, the minimum width should be 1050 mm.

(x) The single leaf doors in the approved building plan are replaced by double leaf doors.  The width of each of the exit doors intercepting the exit route connecting the two staircases is about 450 mm, which does not comply with the current requirement of S.41(l) of the B(P)R and Clause B13.4 of the Fire Safety Code.  In this clause, exit door from a storey having an occupant capacity in excess of 3 persons should not be less than 750 mm in width and in case of double leaf doors, no leaf of such door should be less than 600 mm in width.

(xi) Some single leaf doors are relocated and opened outward swinging over the steps of staircase and obstruct the escape route.

(xii) Outward swinging metal gate swinging over the steps of staircase at some of the main entrance of the Building does not comply with the current requirement of S.41(l) of the B(P)R and Clause B5.8 of the Fire Safety Code.  The Code requires that the gate should be installed at a distance of not less than the width of the exit route (i.e. 1050 mm) away from the line of drop in level.

(xiii) Metal gates used at the final discharge point of the staircase of some parts of the Building do not comply with the current requirement of S.41(l) of B(P)R and Clause B13.1 of the Fire Safety Code.  The Code requires every door across an exit with the occupant capacity exceeding 30 should open in the direction of exit.

(xiv) All non-emergency services and utilities such as electric wires, electric meter and water supply pipes are not protected by fire rated enclosure in the required staircases. This does not comply with the current requirement of S.90 of the B(C)R and Clause C9.3(d) of the Fire Safety Code.  In this clause, any services other than emergency services should not be accommodated in a required staircase unless such services are enclosed by fire barriers having an FRR of not less than that of the walls separating the protected exit from the rest of the Building.

(xv) The means of escape from any of the flat is necessary to pass through the landing of one required staircase in order to reach another required staircase in case the first required staircase is not suitable for evacuating.  This does not comply with the current requirement of S.41(l) of B(P)R and Clause B10.3 of the Fire Safety Code.  The Code requires the means of escape from any part of a building should be so arranged that it is not necessary to pass through one required staircase enclosure or the landing of one required staircase, as the case maybe, in order to reach another required staircase.

(c) The exit doors intercepting the exit route connecting the two required staircases do not open in the direction of exit. The occupant capacity of each floor in the Building does not exceed 30, however, in case of emergency, the total occupant capacity of the Building will exceed 30. When one of the required staircases is not suitable for evacuation, it will be difficult for evacuees to reach another required staircase.

(d) The staircases which are the means of escape of the Building are in unsatisfactory condition and do not meet the current requirements under the B(P)R, B(C)R and Fire Safety Code.

(e) There is no accessible lift installed at the Building for persons with physical disability or chronic illness to access to the flats on upper floors. The upper floors are served by only one staircase. Non-provision of the accessible lift is obviously a functional obsoleteness affecting the convenience and comfort in the use of the upper floors of the Building and do not meet the current requirements of the barrier free access under the S.72(l) of the B(P)R and the Design Manual: Barrier Free Access 2008 published by the Building Authority in 2008 ( “BFA Code”).  In this Code, accessible lift shall be provided for domestic building which is more than 13 m in height above ground level and for separate occupation.

(f) The doors of the kitchens in some of the flats have been removed. This does not comply with the current requirement of S.90 of the B(C)R and Clause Cl 3.3 of the Fire Safety Code.  In this Code, the entrance of kitchen adjacent to exit door should be provided with a fire rated door having an FRR of not less than -/30/30.

(g) Some of the flats have been subdivided into small flats. No kitchen is provided within the subdivided flats. This does not comply with the current requirement of S.45 of the B(P)R.

(h) The headroom of the unauthorized cocklofts measured from the floor to the underside of any beam is about 1,700 mm, which does not comply with current requirements of S.24 of the B(P)R. In this regulation, the headroom of any room used or intended to be use for the purpose of an office or for habitation shall have a height of not less than 2.5 m from floor to ceiling and 2.3 m measured from the floor to the underside of any beam.

28.  Mr R Chan concludes that the Building is in obsolete design. The substandard in width of the escape staircase, nil provision of protected lobby to escape staircase and accessible lift for persons with disability are not up to current legislative requirements.

29.  I agree with the view of the Tribunal expressed in Top Sail (supra), that

“when the requirement of “the age” of the Building is considered, we should not restrict our consideration to just the physical age of the Building.  There are many factors related to the age of a building which should also be considered”  (para. 23);

and 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” (para. 23);

and that

“the physical age of a building is clearly one of the considerations, but it would not be the only consideration. 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.” (para .24).

30.  Having considered all the evidence as aforesaid, I am satisfied that the redevelopment of the Building is also justified on the ground of the age of the Building due to the following factors:

(a) the Building is now 53 years old;

(b) the Building is in very poor physical conditions and very substantial cost is required to repair or maintain the Building; and

(c) the obsolete design of the Building does not suit the present requirements of a building.

Reasonable Steps to Acquire All the Undivided Shares in the Lot

31.  As required by Section 4(2)(b) of the Ordinance, the Applicant is under an obligation to negotiate for the purchase of the 6th Respondents’ undivided share in the Lot on terms that are fair and reasonable. 

32.  The evidence of the Applicant’s factual witness, Mr Alex Au-Yeung, shows that:

(a) Before launching the present .proceedings and with an intention to avert the same if possible, the Applicant had made offers to the 6th Respondents based on valuation done by professional valuer. The Applicant’s associated companies Easy Favour limited, Star Keen Limited and Sky Reach Limited (“the Applicant’s associated companies”) had commissioned Knight Frank Petty Limited ("Knight Frank'') to assess the value of the units in the Building on the existing use value basis (“EUV”) and the redevelopment value (“RDV”) of the Lot.  Mr Alnwick Chan of Knight Frank (“Mr A Chan”) has prepared a letter of report dated 23 September 2011 stating the EUV of all units in the Building and the EUV of the 6th Respondents’ premises and RDV of the Lot as at 16 September 2011.  Based on Mr A Chan’s assessment, the Applicant's associated companies and the Applicant made offers to the 6th Respondents for acquiring the 6th Respondents’ premises prior to the commencement of the proceedings. According to Mr A Chan’s assessment, the EUV of all units in the Building as at 16 September 2011 was $46,534,473.  The EUV of the 6th Respondents’ premises was $483,790.  It meant in term of percentage, the share of the 6th Respondents’ premises in the Building was 1.039638%.  According to Mr A Chan’s assessment, the RDV of the Lot as at 16 September 2011 was $67,300,000.  It meant that the reasonable offer to be made to the 6th Respondents would be $699,676 (i.e. $67,300,000 x 1.039638%).

(b) The Applicant's associated companies, through their solicitors, by letter dated 23 September 2011 to the 6th Respondents offered to purchase the 6th Respondents’ premises at $735,000.  There was no reply. 

(c) Then the Applicant through its solicitors, by letter in English and Chinese dated 2 December 2011 offered to the 6th Respondents to purchase the 6th Respondents’ premises at $750,000. 

(d) The Applicant’s offer dated 2 December 2011 is based on Mr A Chan’s letter of report dated 1 December 2011 stating the EUV of all units in the Building and the EUV of the 6th Respondents’ premises and RDV of the Lot as at 21 November 2011.  According to Mr A Chan’s assessment, the EUV of all units in the Building based on uses permitted under Occupation Permit as at 21 November 2011 was $40,665,797.  The EUV of the 6th Respondents’ premises was $528,760.  It meant in term of percentage, the share of the 6th Respondents’ premises in the Building was 1.3003%.  According to Mr A Chan’s assessment, the RDV of the Lot as at 21 November 2011 was $54,900,000.  It meant that the reasonable offer to be made to the 6th Respondents would be $713,841 (i.e. $54,900,000 x 1.300257%). There was no reply to the letter of 2 December 2011. 

(e) By a letter in English and Chinese dated 30 December 2011 to the 6th Respondents, the Applicant's solicitors offered to purchase the 6th Respondents’ premises at $860,000. There was no reply to the letter of 30 December 2011. 

(f) By a letter in English and Chinese dated 30 March 2012 to the 6th Respondents, the Applicant's solicitors repeated the offer to purchase the 6th Respondents’ premises at $860,000.

(g) The Applicant’s offer dated 30 March 2012 is based on Mr A Chan’s letter of report dated 12 March 2012 stating the EUV of all units in the Building, the EUV of the 6th Respondents’ premises and RDV of the Lot as at 21 February 2012.  According to Mr A Chan’s assessment, the EUV of all units in the Building based on uses permitted under Occupation Permit as at 21 February 2012 was $40,665,797.  The EUV of the 6th Respondents’ premises was $528,760.  It meant in term of percentage, the share of the 6th Respondents’ premises in the Building was 1.300257%. According to Mr A Chan’s assessment, the RDV of the Lot as at 21 February 2012 was $50,500,000.  It meant that the reasonable offer to be made to the 6th Respondents would be $656,630 (i.e. $50,500,000 x 1.300257%). There was no reply to the letter of 30 March 2012. 

(h) As the 6th Respondents did not make any response to the offers, the Applicant commenced the present proceedings.

(i) The Applicant through its solicitors, by letter dated 1 August 2012 offered to the 6th Respondents to engage in mediation.  However, there was no response from the 6th Respondents.  No mediation took place.

33.  Although I do not have detailed evidence of Mr A Chan’s assessments when the Applicant and the Applicant’s associated companies offered to purchase the 6th Respondents’ premises, I am satisfied that, on the evidence available, the offers made by the Applicant and the Applicant’s associated companies “falls within the range of what may broadly be regarded as fair and reasonable” as said by Mr. Justice Ribeiro PJ in Capital Well Ltd v. Bond Star Development Ltd (2005) 8 HKCFAR 578 at para. 33.  Thus, I conclude that the Applicant has taken reasonable steps to acquire all the undivided shares in the Lot.

Order for Sale

34.  By reasons of the matters aforesaid, I am satisfied that an order for sale should be granted in favour of the Applicant.  The remaining question is how much I should fix for the reserve price.

Reserve Price

35.  Mr A Chan prepared a report dated 24 April 2012 valuing the EUV of all the units in the Building as at 21 February 2012 (“Knight Frank EUV Report”). The Knight Frank EUV Report is the statutory report attached to the Application. 

36.  Mr A Chan finds that according to the approved building plan and the occupation permit of the Building, all units in the Building are marked "domestic".  As such, Mr A Chan considers the permitted user of all the units is domestic.  However, during Mr A Chan’s inspection of the Building, he finds that all the units on the Ground Floor are used as non-domestic.  Mr A Chan therefore has prepared his EUV valuation based on 2 scenarios, one assuming all units are domestic; and two, assuming all the units on the Ground Floor are non-domestic.

37.  Mr A Chan also prepared a Supplemental Report dated 14 December 2012 valuing the EUV of all the units in the Building as at 21 February 2012 taking into account the further inspection of units in the Building and the available updated price index (“Knight Frank Revised EUV Report”).

38.  In his valuation of the EUV of the ground floor units of the Building as non-domestic, Mr A Chan adopted the following methodology:-

(a) He selected Ground Floor, No. 3 Wan Shun Street as the reference unit (“the Reference Shop Unit”).  He then took into account of 6 comparable transactions in 4 different buildings nearby. After making what he regarded as the necessary adjustments (for time, location, building age, internal condition, frontage, return frontage, headroom, layout and size) for all these comparable transactions, he took the average of the adjusted unit rate of the comparables to come to the unit price of the Reference Shop Unit at $67,015/m², which was rounded to $67,000/m².

(b) He then used the unit rate of the Reference Shop Unit to assess the other ground floor units.

39.  In his valuation of the EUV of the domestic units of the Building, Mr A Chan adopted the following methodology :

(a) He selected 4th Floor of No. 6 Wan Fuk Street (“the Reference Domestic Unit”), which was situated on the middle floor of the domestic portion as the reference unit for the purpose of valuing its unit price. 

(b) The unit price of the Reference Domestic Unit was first assessed by making reference to market comparables.  He took into account of 13 comparable transactions in 10 different buildings nearby.  After making what he regarded as the necessary adjustments (for time, location/accessibility, age, lift service, floor, size, building condition, internal condition and view) for all these comparable transactions, he took the average of the adjusted unit rate of the comparables to come to the unit price of the Reference Domestic Unit at $36,582/m², which was rounded to $37,000/m².

(c) He further considered the floor difference and internal conditions of the Reference Domestic Unit and the remaining domestic units within the Building to arrive at the EUV of all the domestic units.

40.  For the roof of the Building, Mr A Chan converted the saleable area of the roof as domestic by using a conversion factor of 1:8.

41.  Mr Li submits that insofar as the statutory EUV report is concerned which is used for deciding the apportionment ratio under section 10(3) and Part 3 of Schedule 1 of the Ordinance, following Gilmerton Limited and Others v. Polywin Holdings Limited and Others (LDCS 2000 of 2004, 17 January 2005, unreported) at paras. 12, 13, 14 and 15, the valuation date of Mr A Chan’s Knight Frank EUV Report is 21 February 2012, which is within 3 months of the Application.

42.  Mr Li also submits that Mr A Chan’s EUV valuation gives 2 EUV figures depending on whether the use of the ground floor of the Building is domestic or non-domestic. On the first scenario, the total EUV of all the units in the Building in the Knight Frank Revised EUV Report is $41,638,217 and the EUV of 6th Respondents’ premises is $542,989 giving rise to a ratio of 1.304%. In the second scenario, the total EUV is $46,179,837 and that 6th Respondents’ premises is still $542,989 giving rise to a ratio of 1.176%. Mr Li submits that the Applicant is happy to adopt the higher ratio which is to the benefit of the 6th Respondents.

43.  Having considered Mr A Chan’s valuation, I agree with Mr Li’s submission and hold that the EUV of the Building should be determined on the assumption that all the units are for domestic use, as shown in the Knight Frank Revised EUV Report.

44.  In Best Insight Limited (勤正有限公司) v. the Estate of Tin Hing Lin (田興蓮) (deceased) & Others (LDCS 5000/2011, 5 September 2011, unreported), when the expert for the applicant has revised his EUV valuation, the Tribunal holds that under

“section 10 of the Ordinance, the apportionment between the majority owner and the minority owners of the Lot shall be on the basis as specified in Part 3 of Schedule 1 of the Ordinance. Under the said Schedule, the proceeds are to be apportioned on the basis of the EUV as determined by this Tribunal” (para 15).

45.  The 6th Respondents have not filed any expert report.  I am satisfied that the EUV of Mr A Chan is fair and reasonable.  I hold that the proceeds are to be apportioned on the basis of the Knight Frank Revised EUV Report determined by me as follows:

Floor	3 Wan Shun Street	4 Wan Fuk Street	5 Wan Shun Street	6 Wan Fuk Street
G/F	$1,294,599	$1,399,464	$1,324,809	$1,399,464
1/F	$1,305,878	$1,392,077	$1,336,088	$1,365,811
2/F	$1,281,238	$1,365,811	$1,310,878	$1,365,811
3/F	$1,256,599	$1,339,546	$1,285,669	$1,313,280
4/F	$1,231,960	$1,287,014	$1,260,460	$1,313,280
5/F	$1,207,321	$1,260,749	$1,235,251	$1,287,014
6/F	$1,182,682	$1,260,749	$1,210,042	$1,234,483
7/F	$1,133,403	$1,234,483	$1,184,832	$1,234,483
Roof	$542,989

46.  In his valuation report dated 1 March 2013, Mr A Chan states the RDV of the Lot as at 21 February 2013 to be $59,900,000. 

47.  Mr A Chan’s valuation method can be summarized as follows:

(a) The valuation is conducted on the assumption that the existing building erected thereon is vacant and to be demolished and redeveloped into certain beneficial usages reasonably reflecting its redevelopment potential.  He takes into consideration the Government policies and measures announced on 13 October 2010 intended to reduce the gross floor area concessions which would also reduce the building bulk and the marketable gross floor area as well as the relevant Joint Practice Notes (issued by Building Department, Lands Department and Planning Department) and Practice Notes issued by Building Department or Lands Department in January to March 2011 to that effect.

(b) Mr A Chan also takes into consideration the two new measures announced by the Government on 26 October 2012 to address the overheated residential property market, the amendment to Special Stamp Duty, and the introduction of Buyer’s Stamp Duty. Mr A Chan opines that since the actual impact to the price level cannot be objectively assessed at the date of valuation, he maintains the ‘Profit on Land’ and ‘Profit on Cost’ at 10% in his residual valuation.

(c) In assessing the RDV, residual method of valuation is adopted by deducting development costs (including construction costs, professional fees, finance costs, etc.) and developer's profit from the estimated gross development value of a completed development.  Mr A Chan has carried out the valuation with reference to market comparable sale evidence assuming that vacant possession of the Lot would be readily available upon completion.  Time adjustment is applied with reference to the Private Domestic Price Indices by Class and Private Retail Price Indices prepared by Rating and Valuation Department as in February 2013.

(d) Taking into account the Building (Planning) Regulations, the restrictions of the Outline Zoning Plan affecting the Lot and the comparatively higher residential value in the vicinity and the limited retail potential on upper floors, Mr A Chan is of the opinion that a composite building with shops on ground floor with cocklofts and residential units on upper floors should be erected.

(e) He then uses the residual valuation method to assess the land value of the intended development. 

(f) Retail and domestic comparables are identified and analysed, applying relevant adjustments as appropriate.

(g) Mr A Chan uses 5 Ground Floor shop transactions in 4 buildings nearby as his Ground Floor retail comparables.  Mr Chan assumes the cockloft value to be ¼ of the Ground Floor shops. For upper floor domestic comparables, he uses a total of 38 transactions in 4 developments nearby.

(h) The following unit rates are adopted by Mr. A. Chan in assessing the gross development value:

Ground Floor Retail: $167,000/m²;

Cockloft: $41,750/m²; and

Typical Domestic Unit: $121,000/m².

(i) Mr A Chan then deducts the development costs from the gross development value.  Allowing for developer’s profit and discounting for the development period, Mr A Chan determines the land value of the Lot on redevelopment basis.

48.  Mr A. Chan confirms his RDV valuation at $59,900,000.  I am satisfied that the valuation made by Mr A Chan is fair and reasonable, reflecting the current redevelopment value of the Lot.  Thus, the reserve price of the Lot should be fixed at this value.

Conclusion

49.  In the circumstance, I make the following determination:

Upon This Tribunal being satisfied that the existing use value of the 6th Respondents’ one equal undivided 33rd part or share of and in the building known as Nos. 3 & 5 Wan Shun Street and Nos. 4 & 6 Wan Fuk Street, Kowloon, (“the Building”) erected on Subsection 2 of Section D of Kowloon Marine Lot No. 52 (“the Lot”) together with the right of possession of the Roof of the Building is $542,989 is fair and reasonable and is fair and reasonable when comparing with the existing use value of the other units, the undivided shares of which belong to the Applicant as assessed in this Application (and with the total existing use value of all the units of the Building being $41,638,217) and

Upon This Tribunal also being satisfied that the redevelopment of the Building is justified due to the age or state of repair of the Building and that the Applicant has taken reasonable steps to acquire all the undivided shares in the Lot held by the 6th Respondents

I order that

(a) That all the undivided shares in Subsection 2 of Section D of Kowloon Marine Lot No. 52 (“the Lot”), the subject of the Application, be sold by way of public auction for the purposes of redevelopment of the Lot under Section 4(1)(b) of the Land (Compulsory Sale for Redevelopment) Ordinance Cap. 545 (“the Ordinance’);

(b) That Mr Ho Chi Kit and Mr Cheung Chi Yu nominated by the Applicant be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to the Lot, and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs. Katherine Y.W. OR & Co. dated 6 March 2013;

(c) For the purposes of the sale of the Lot by public auction under Section 5(1)(a) of the Ordinance:

(i) The sale of the Lot be sold on the particulars and conditions as to be initialled and approved by the Tribunal;

(ii) The reserve price be set at $59,900,000; and

(iii) Subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Lot in the auction sale or successor in title, the redevelopment of the Lot shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot as specified by Section 9 and Schedule 3 of the Ordinance; and

(d) Liberty to the Applicant, the 6th Respondents and the Trustees to apply to the Tribunal for further directions under the Ordinance.

Costs

50.  The Applicant has indicated its position on costs. Thus, I make a costs order nisi that there be no order as to costs for the Application herein.  If the parties do not make any further application for costs within 14 days from today, the costs order nisi shall become absolute.