CHENG KWOK KUEN in his capacity as the Administrator of the estate of CHENG LAM YING LAN, deceased v. DIRECTOR OF LANDS

LDLR 6/2015

[2018] HKLdT 41

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LANDS RESUMPTION APPLICATION NO 6 OF 2015

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J U D G M E N T

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BACKGROUND

1.  This is an application by the applicant for determination ofcompensation pursuant to section 10(2)(a) of the Lands Resumption Ordinance, Cap 124 (“the Ordinance”).

2.  The applicant is the Administrator of the estate of the former registered owner of the land known as No 14 Yu Lok Lane (“the Property”), and registered in the Land Registry as Inland Lot No 4056 (“the Lot”).  It is common ground that the building standing on the Lot was a 2-storey unauthorized building without records of approved building plans and occupation permit.

3.  By a notice of resumption dated 23 December 2008 and published in G.N. 204, the Government informed the applicant that the Lot would be resumed and reverted to the Government for implementation of Development Scheme SYP/1/001 by the Urban Renewal Authority at Yu Lok Lane / Centre Street, Sai Ying Pun, Hong Kong on the expiration of 3 months from the date of affixing of the notice.  The notice of resumption was affixed to the Lot on 9 January 2009.  Thus, upon expiration of the 3‑month notice period, reversion took place at midnight on 9 April 2009.

4.  At the hearing, the applicant and the respondent had no dispute that, under section 10(2)(a) of the Ordinance, the basis of compensation in the present proceedings should be the market value of the Lot as at the date of resumption, i.e. 9 April 2009, and the Lot should be assessed on redevelopment basis.  Since no relevant site comparable could be identified for direct comparison, they also agreed to adopt residual valuation method in the assessment.

5.  Although the parties agreed that the valuation should be undertaken on redevelopment basis, they had different views of the development potential.  The major disputes involve the determination of the classification of the Lot, and then, the optimum development potential.

6.  The applicant argued that: -

(i)   the Lot was a Class A site under regulation 18A of the Building (Planning) Regulations, Cap 123F (“BPR”) and had a maximum plot ratio and site coverage as set out in First Schedule of BPR;

(ii)   alternatively, the Lot was an unclassified site and the site coverage and plot ratio permitted will be determined by the Building Authority under regulation 19(3) of BPR; and

(iii)   and if the Lot was an unclassified site, the development potential, which would be determined by the Building Authority, was a 3-storey non-domestic building including the ground floor, the cockloft, the first and second floors and the roof.

7.  The respondent, on the other hand, suggested that the Lot was an unclassified site pursuant to the relevant provisions of BPR and the development potential permitted by the Building Authority was a 2‑storey domestic building.

8.  The issues remain to be determined by the tribunal are summarized as follows: -

(1)   Was the Lot a Class A site?

(2)   Which hypothetical development should be adopted in the valuation?

(i)   Number of storeys

(ii)   Domestic or non-domestic use

(3)   What are the suitable comparables for assessment of Gross Development Value (“GDV”)?

(4)   What adjustments have to be made to the selected comparables?

(5)   What are the parametres of residual valuation?

9.  The applicant submitted that the compensation should be $6,440,000.  Whilst, the respondent submitted that the compensation was assessed at $1,575,000 only.

THE EVIDENCE

10.  The parties had produced the following building expert reports and documents on building intensity of the hypothetical development: -

    Mr Lam Siu Tong (“Mr ST Lam”), appointed by the applicant

(1)   building Expert Report dated 28 October 2016; and

(2)   building Expert Rebuttal Report dated 3 January 2017.

    Ms Cheung Yuk Ching (“Ms Cheung”), appointed by the respondent

(1)   expert Report dated 28 October 2016; and

(2)   rebuttal Report in Reply dated 3 January 2017.

11.  The building experts had prepared a Building Expert Joint Statement dated 15 February 2017 setting out the areas of agreement and disagreement of their professional opinions.   

12.  In respect of valuation, the parties had produced the following valuation expert reports and documents: -

    Mr Wayne W K Lee (“Mr Lee”), appointed by the applicant

(1)   valuation Report dated 9 October 2015; and

(2)   supplementary Report dated 12 January 2016.

    Mr Lai Wah Chi (“Mr Lai”), appointed by the respondent

(1)   valuation Report dated 8 October 2015; and

(2)   supplementary Report dated 11 January 2016.

13.  The valuation experts had prepared Joint Statement on Matters Agreed and Joint Statement on Matters Disagreed both dated 10 March 2016.  The parties together with their experts and we have also inspected the Lot and the comparables externally on 25 July 2017.

CLASS OF SITE

14.  There is no dispute that the relevant regulations of the BPR are: -

(i)   Regulation 18A(1): -

“’Class A site’ means a site … that abuts on one specified street not less than 4.5m wide or on more than one such street”

(ii)   “Street” is defined under regulation 2: -

“streetincludes any footpath and private and public street.”

(iii)   Under regulation 18A(3): -

“A street is to be regarded as a specified street-

(a) if there exists, with respect to the street, any of the following circumstances-

(i) the street is vested in the Government and is maintained by the Highways Department;

(ii) the street is a private street on land held under the same Government lease as the site and under the terms of the lease the lessee has to surrender (when required to do so) the land on which the street is situated to the Government;

(iii) the street is a street required to be constructed on unleased Government land by the lessee of the Government lease under which the site is held pursuant to the terms of that lease;

(iv) the street is on land over which the owner of the site is expressly granted, by or by virtue of an instrument, a right of way exercisable at all times;

(v) the street is on land held under a Government lease by the owner of the site; or

(b) if-

(i) one or more of the circumstances mentioned in subparagraph (a)(i), (ii), (iii), (iv) and (v) exist with respect to different parts of the street; and

(ii) those parts together constitute the street.”; and

(iv) Regulation 19 makes provisions for the maximum site coverage and plot ratio for different classes of sites under the First Schedule, by reference to regulations 20 and 21 and in particular regulation 19(3) which provides that: -

“   The height of a building or buildings on a site that is not a class A site, class B site or class C site, and the maximum site coverage and maximum plot ratio permitted in respect of such a building or buildings, shall be determined by the Building Authority.”

15.  There is also no dispute that if the Lot was a Class A site, the development potential of a 3-storey (plus cockloft) non-domestic building suggested by Mr Lee was permissible under BPR.  If, however, the Lot was not a Class A site for the present case, the parties agreed that it would then be an unclassified site and this tribunal would have to determine what would be the maximum development potential, in terms of site coverage and plot ratio, permitted by the Building Authority under regulation 19(3) of BPR.  And the building experts, Mr ST Lam and Ms Cheung, would provide assistance to this tribunal in making the determination.

16.  We are therefore asked to determine whether the Lot was a Class A site first. The applicant’s counsel, Mr Ross Yuen, invited this tribunal to look at the question from 2 alternative ways: -

(1)   The Lot was abutting on a portion of Yu Lok Lane which was directly in front of the Lot and was a specified street of not less than 4.5 metres wide; or

(2)   The portion of 12 to 14 Yu Lok Lane was only a slight intervention between the Lot (which was situated at 14 Yu Lok Lane) and 9 to 11 Yu Lok Lane such that the Lot was still abutting on 9 to 11 Yu Lok Lane which was a specified street of not less than 4.5 metres wide.

17.  In support of his primary contention, he relied on the Lands Tribunal authority of Mayloy Development Ltd v The Director of Lands, LDLR 4 of 1998 (unreported, 29 February 2000) which was held that only that portion of a street directly in front of the subject site should be taken into consideration.

18.  We find the argument of the applicant not very attractive. In our judgment, the learned judge never intended to make it a general principle and the decision was made on its own facts.  Although we agree with Mr Ross Yuen that every case is unique and is always fact-sensitive, this authority does not give us too much assistance.  If these were the legislative intents of BPR, we agree with Mr Simon Lam, counsel for the respondent, that they would have wholly defeated the purposes of the regulations 18A & 19 of BPR.

19.  We accept the submissions of Mr Simon Lam that, in classification of site under BPR, overall width of the entire street where the site is abutting must be taken into consideration. He helpfully invited us to make reference to the decision of the Buildings Appeal Tribunal in Case No 9 of 1987 (unreported, 21 March 1988): -

“ … [T]he object of regulation 19 is to empower the Building Authority to restrict developments where access to and from a site, i.e., a street, is less than 4.5m and that this object would be defeated if in determining the width of a street, one only looks at the point where a site abuts the street and ignores the width of the other parts of the street. For the sake of argument, let us suppose for one moment that the overall width of Knutsford Terrace was only 2m except the point where the subject site abuts the street which was more than 4.5m wide. Would the subject site qualify as a class A site? With respect, we would think not. Whether a lengthy street would so qualify if parts of it were over 4.5m wide while others less than 4.5m depends, in our view, upon the particular circumstances of each case. In any event, it is neither necessary nor desirable for us to speculate on an answer to a hypothetical question. …

We are fortified in our view by both the definition of ‘class A site’ and the wording of regulation 19. The expression ‘abuts on a street (not) less than 4.5m wide’ means, in our view, ‘abuts on a street whose overall width is (not) less than 4.5m.’’’

20.  He also suggested that the same view was expressed by the Buildings Appeal Tribunal in Case No 75 of 1990 (unreported, 6 February 1991).

21.  Mr Simon Lam even invited us to make reference to the applicant’s building expert’s view because his view also supported the respondent’s submissions, namely: -

“ In assessing the width of a narrow street to determine whether it is not less than 4.5m wide which enable a site abutting the street to be qualified as a Class A site, it is the practice of the Buildings Department to take into account the overall condition of the street. However, in assessing the width of this type of streets, the concern is whether the streets might provide the required accessibility and servicing level to the proposed building on the site. The Buildings Department would normally take into account those parts of the streets used by the owners/occupants for access to the proposed building and would ignore those parts which are not used by the owners/occupants for access. …”

“ In other words, only Nos. 1 to 17 Yu Lok Lane are those parts of the street used by the owners/occupants for access to the proposed building at the Property. In the circumstances, we may therefore concentrate in this case on the parts of Yu Lok Lane from Nos. 1 to 17.”

22.  Alternatively, Mr Ross Yuen relied on the Court of Appeal authority Mightystream Ltd v Attorney General [1982] HKLR 56 in making his other proposition that the Lot was only a few shops away from the portion between 9 and 11 Yu Lok Lane (which he suggested that it was a specified street of not less than 4.5 metres wide) and such short intervention should not prevent the Lot from abutting the latter.

23.  In our judgment, 9 to 11 Yu Lok Lane was not a specified street and we will give the reasons later in this judgment and this alone is more than sufficient to dispose of this point.  Furthermore, although there is no argument on the legal principle as decided in Mightystream, the authority in fact suggested a more general approach to the question that first, “it must be a question of fact”, secondly “the court must approach the problem in a practical and common sense way” and thirdly, “[i]t will be a question of degree”.  After considering the evidence in light of the above principles, we are of the view that it is against common sense to suggest that the Lot was abutting on the portion between 9 and 11 Yu Lok Lane.  And a few shops away was definitely not a slight obstruction or intervention.  The Lot was abutting on the portion of Yu Lok Lane right in front of it and not anywhere else.

24.  All in all, we accept the respondent’s argument that for determination whether a street is a “specified street” of a width of more than 4.5 metres, overall condition must be taken into account and not just the portion in front of the site or just any particular one section of the street alone.

25.  For the purpose of clarification of the Lot, there is no dispute that if the Lot was abutting a “specified street” of more than 4.5 metres wide, the Lot was a Class A site.  There is no issue that the Lot was abutting Yu Lok Lane and the only remaining issue for classification is whether it was a “specified street” under BPR of more than 4.5 metres wide.  To come to a determination of the overall condition of Yu Lok Lane, in our view, we must examine different portions of the street one by one.

26.  We therefore start with 1 to 8 Yu Lok Lane.  It is not disputed that this portion had a width of over 4.5 metres but this portion of Yu Lok Lane was privately owned and mutual rights of way were only granted between the owners of 1 to 8 Yu Lok Lane and owners of 56-70A Third Street. In other words, no similar right of way was granted to the other owners of Yu Lok Lane, particularly the owner of the Lot.  For this reason, the respondent submitted that this portion of Yu Lok Lane was not a “specified street” under regulation 18A(3)(a)(iv) of BPR, as the relevant regulations require that the Lot “is expressly granted, by or by virtue of an instrument, a right of way exercisable at all times”.  In short, even though this portion of Yu Lok Lane had a width over 4.5 metres, this portion was not a “specified street”.

27.  We agree with the respondent’s submissions that the portion between 1 and 8 Yu Lok Lane did not satisfy the requirements for a “specified street” of a width of more than 4.5 metres.

28.  Now we turn to the next portion, namely 9 to 11 Yu Lok Lane. For this portion, the major issue seems to be about the area which was occupied by a temporary structure marked on the resumption plan as “TS”.  The applicant proposed that it should be taken into account for measurement of the width of Yu Lok Lane but the respondent disagreed.  We do not think the actual measurements did matter very much (as the building experts had slightly different measurements of the area) and the parties agreed that if the area occupied by the temporary structure was taken into account for measurement of the width of this portion of Yu Lok Lane, this portion of Yu Lok Lok Lane satisfied the requirement under BPR to be a “specified street” of a width of more than 4.5 metres.  However, if the temporary structure is excluded from the measurement, both building experts agreed that this portion of Yu Lok Lane was not a “specified street” of a width of more than 4.5 metres.

29.  After considering the evidence, we agree with the respondent that this portion of the Yu Lok Lane did not satisfy the requirements under BPR. Although we agree with the applicant that this portion was vested in the Government and the presence of the unauthorized building works should not prevent the same to be taken into account for measuring the width of the street, no evidence was shown that it was maintained by the Highways Department and hence regulation 18A(3)(a)(i) of BPR was not satisfied.

30.  After coming to the view that the portions between 1 and 11 Yu Lok Lane did not satisfy the requirement for a “specified street” of a width of more than 4.5 metres, it would be hard for the applicant to argue that the overall condition of Yu Lok Lane would satisfy the requirement, even assuming the remaining portions of the Yu Lok Lane, namely 12 to 17 Yu Lok Lane and the staircase leading to Thrid Street could do so.  It is therefore unnecessary for us to determine the width of the remaining portions of Yu Lok Lane.

31.  By reason of the above, we are of the view that Yu Lok Lane, where the Lot was abutting, was not a “specified street” of a width of more than 4.5 metres.  And therefore, the Lot was not a Class A site under BPR. The site was an unclassified site and therefore its permissible site coverage and plot ratio would be determined by the Building Authority under regulation 19(3) of BPR.

HYPOTHETICAL DEVELOPMENT

Number of Storeys

32.  For determination of development potential of the Lot under regulation 19(3) of BPR, Mr Ross Yuen submitted that a 3-storey (plus cockloft) non‑domestic building, suggested by Mr Lee, would be permitted by the Building Authority.  He relied on the expert opinion of Mr ST Lam, the applicant’s building expert.

33.  Mr Simon Lam disagreed with Mr Ross Yuen and suggested that this tribunal should adopt the development potential previously existed at the Lot before the resumption, namely a 2-storey domestic building as suggested by Mr Lai.

34.  This tribunal was therefore invited to look at the expert opinions of the 2 building experts.

35.  The building experts had no dispute that we may take into consideration of development potential previously existed at the Lot before the resumption, although the parties agreed that no approved building plans or occupation permit of it could be found from the records of the Building Authority.

36.  Mr ST Lam is an Authorized Person and had been working for the Building Authority for 37 years before retirement from the public service.  In his opinion, the development potential of a 3-storey (plus cockloft) non-domestic building suggested by the applicant would be permitted by the Building Authority.  He came to this view after considering the relevant factors including safety, traffic, servicing access and drainage capacity.  He said in his report that: -

“ In general, since the determination is relating to a site abutting a narrow street, the approach adopted by BA is not to allow developments of a high intensity. Therefore, the BA may make a comparison between the proposed building and the existing building to ensure that generally the proposed building is not of a higher intensity than before. Higher intensity does not simply mean higher development parameter such as higher plot ratio. BA would look at the population that the new development would have to accommodate. It is because after all the main concern of BA in the entire exercise is to ensure the proposed building is supported by sufficient services in terms of safety, accessibility, drainage, etc.” (at paragraph 24)

37.  Mr ST Lam after undertaking the relevant analysis, came to the view that the proposed development of a 3-storey (plus cockloft) non-domestic building would be acceptable to the Building Authority.  He gave his reasons in his report that: -

“ Although the height and plot ratio of the proposed building seem higher than the existing building on the Property, the comparison above has indicated that the proposed building is of a lower intensity in terms of population that can be accommodated. This means that its impact on safety, traffic, service requirements and drainage capacity will be even lower than that of the existing building. Having considered all the above, I am of the opinion that the Valuer’s proposed development, with such key development parametres as site coverage, plot ratio, buildable floor area and saleable area as stated in para. 21 above and delineated conceptually on the drawings attached to Appendix 10 to his Valuation Report dated 9 October 2015, is highly likely be accepted by the BA under BPR 19(3).” (at paragraph 26)

38.  Ms Cheung, the respondent’s building expert, is also an Authorized Person.  She is a Chief Building Surveyor working for the Building Authority.  When she was asked to give her view of the Building Authority’s determination under regulation 19(3) of BPR for the Lot, she said in her report dated 28 October 2016 that: -

“ … I am not in a position to speculate in this Report the likely maximum site coverage and maximum plot ratio of the Subject Property which would be adopted by the BA.” (at paragraph 22)

“ Comments from relevant government departments on such issues are essential for a full consideration of the case. Without the required information, such as detailed building design drawings and calculations demonstrating the compliance with the BO, and impact assessments addressing concerns of relevant government departments, it is unlikely for the BA to make a determination of the building height, the maximum site coverage and” (at paragraph 29)

39.  Ms Cheung, then in her report dated 3 January 2017, when asked to answer the same question, she, in disagreeing with Mr ST Lam, maintained her view that: -

“ In essence, comments from Planning Department, Lands Department, Fire Services Department, Transport Department, Highways Department, Drainage Services Department, Food and Environmental Hygiene Department, etc on the aspect of safety, access, health, traffic, drainage discharge capacity, development intensity in the vicinity are essential for the BA to have a comprehensive consideration of the case. Without the comments from the relevant departments, the BA would not consider the acceptance of the development potential under the B(P)R19(3), in particular that the building bulk resulting from the proposed development parameters are much larger than the bulk of Subject Property, not even to mention that this is merely a hypothetical case.” (at paragraph 33)

“ On the contrary, I find the proposed domestic development put forward by the Respondent’s Valuation Expert Mr Lai Wah Chi more akin to the Subject Property in terms of height and building bulk. As the use of the proposed development is the same as the Subject Property, the impact on safety, traffic, service requirements, drainage capacity and the estimation on the occupant density will be similar to the existing.” (at paragraph 34)

“ Noting that the Subject Property had already been demolished and amalgamated into the URA development, I am in the opinion that the BA would not make any determinations on the maximum site coverage and maximum plot ratio of the Subject Property based on the proposed development put forward by the valuation expert Mr Wayne W. K. Lee which is merely a hypothetical case.” (at paragraph 36)

40.  In our judgment, on balance of probabilities, the view of Mr ST Lam should be preferred. We have the following reasons.

41.  First and foremost, Ms Cheung refused to give any meaningful conclusion of her expert opinion in both reports.  In fact, in both of her reports, she evaded the question in issue completely by just giving this tribunal an overview of how the Building Authority may determine development potential of unclassified sites generally under regulation 19(3) of BPR.  This was not the question she was asked to answer.  She was supposed to give her professional opinion on which proposed development schemes were more likely permitted by the Building Authority under regulation 19(3) of BPR. She did not answer the question at all in the report dated 28 October 2016 and only later indicated very briefly in the rebuttal report dated 3 January 2017 of her view on the 2 schemes proposed by the parties.

42.  Secondly, when she purported to answer the question in the rebuttal report dated 3 January 2017 and gave her view that a 2-storey domestic building would be more likely to be permitted by the Building Authority, she failed to give a detailed analysis. She purported to justify her view by saying that the development proposal of a 2-storey domestic building was “more akin” to the building previously existed at the Lot before the resumption and that seems to be the only reason. In comparison, Mr ST Lam gave a more detailed and elaborated analysis.

43.  Thirdly, the concluding remarks in the rebuttal report of her dated 3 January 2017 were confusing.  After giving her view that the development proposal of a 2-storey domestic building should be preferred, she then went on to say in her report as conclusion that, “I am in (sic) the opinion that the BA would not make any determinations of the maximum site coverage and maximum plot ratio of the Subject Property based on the proposed development put forward by the valuation expert Mr Wayne W K Lee which is merely a hypothetical case.” (emphasis added) In our view, these remarks completely contradicted and defeated her analysis because the development schemes proposed by Mr Lee and Mr Lai respectively were both “hypothetical”.

44.  In other words, she was of the view that there would be no determination by the Building Authority for the Lot.  This tribunal takes no issue of this statement per se.  There was no dispute that as both development schemes were “hypothetical”, certainly the Building Authority would not make any determination.  But Ms Cheung seemed to have forgotten that this was however the very reason why building experts were appointed by the parties to advise this tribunal as to what would be the realistic determination by the Building Authority.  In our view, Ms Cheung completely failed to answer this question.  She seemed to have misunderstood her role as an expert witness in this hearing and gave this tribunal a very strong impression that she was giving evidence as a government official from the Building Authority (which we are sure that she was a fine one) instead of giving an impartial view from an independent professional expert assisting this tribunal to resolve the disputes between the parties.

45.  Ms Cheung seemed to have suggested, in both of her reports, that insufficient information was provided for her to come to a meaningful view of the matter.  If that was the case, she was entitled to clarify the matter with the respondent so that the respondent may take appropriate action, for instance, requesting for further and better particulars or for disclosure of further information and documents from the applicant or any third parties.  Unfortunately, there was no such clarification by her at all. All in all, her evidence was simply not helpful.

46.  Fourthly, we share the observations made by Mr Ross Yuen that Ms Cheung’s view was not reliable.

47.  Ms Cheung was unable in her cross-examination, even given time to consider, to point out any reasons why the development potential of a 3-storey (plus cockloft) non-domestic building could not be accepted by the Building Authority.  It was only in her re-examination, she said for the very first time that it could not be permitted because the fire exit leading to the rear lane was blocked off by illegal structures; and the disabled lift was not accessible in the common area.  We notice that these views have never appeared in her 2 reports and the joint expert statement.  However, upon clarification by this tribunal in her re-examination, she agreed that the fire exit issue would be resolved if the layout was to be changed slightly to direct the fire exit to Yu Lok Lane instead of the rear lane.  And, the disabled lift was in fact a non-issue because there is no requirement to have it accessible in the common area when the applicant’s proposed development was intended to be occupied by a single user.

48.  Regarding the occupancy capacity, both building experts agreed that the Building Authority would compare the occupancy capacity of the development potential previously existed at the Lot before the resumption and the proposed development to ensure that generally the proposed development was not of a higher intensity.  Ms Cheung originally used the actual occupancy of the building previously existed at Lot before the resumption (3 persons) as the basis of analysis for comparison in her report but she later also agreed in her cross-examination that the Building Authority would look into the designed occupancy rather than the actual occupancy.  In doing so, Ms Cheung agreed that the Building Authority would refer to the Fire Safety Code of Practice.

49.  Mr ST Lam and Ms Cheung had a slight disagreement in using the Fire Safety Code of Practice.  She suggested that the building previously existed at the Lot before the resumption was a single family house (with a lower occupancy capacity) whereas Mr ST Lam was of the view that it was a tenement house (with a higher occupancy capacity).  However, under cross-examination, when she was asked to look at the sketch floor plan of the building previously existed at the Lot before the resumption, she agreed that it could well be a tenement house. Mr ST Lam, on the other hand, was of the view that it was more likely to be a tenement house as ascertained from its layout. We prefer Mr ST Lam’s view.

50.  According to the Fire Safety Code of Practice, the population accommodated in the building previously existed at the Lot before the resumption was 18 persons which was more than the proposed development by the applicant of 12 (based on the assumption that 1/F and 2/F were offices) or the same as the proposed development of 18 (based on the assumption that 1/F and 2/F were shops).  We therefore accept Mr ST Lam’s view that the development potential proposed by the applicant’s valuation expert, Mr Lee, did not have a building intensity more than before and if this were submitted for the Building Authority for determination under regulation 19(3) of BPR, it would be accepted.

51.  For determination of the optimum development potential for the Lot, we were also advised that the Building Authority would also look into the building intensity of the buildings in the vicinity.  We accept the applicant’s submissions that there were no short of 3 or even more storeys buildings on the same street of the Lot, namely Yu Lok Lane.  According to the measurement plan, namely Exhibit “R1”, for instance, 21-22 Yu Lok Lane was a 5-storey building and 17 Yu Lok Lane was a 3-storey building.

52.  Mr Simon Lam further argued that the determination under regulation 19(3) of BPR by the Building Authority for the applicant’s proposed development of a 3-storey non-domestic building involved speculative element which was not compensatable by reason of section 12(c) of the Ordinance. He relies on the cases of Director of Lands v Yin Shuen Enterprises Ltd & Another [2003] 6 HKCFAR 1 and Dragon House Investment Ltd & Another v Secretary for Transport & Another [2005] 8 HKCFAR 668.

53.  Mr Ross Yuen agreed that the case Yin Shuen is relevant but drew our special attention to paragraph 46 of Lord Millett NPJ’s judgment. He submitted that the determination of plot ratio by the Building Authority of unclassified sites under BPR did not include the speculative element which section 12(c) of the Ordinance is designed to eliminate. This is the relevant paragraph of the judgment: -

“ Plot ratio directly affects the potential of land for development and hence its value. It is governed by the Building (Planning) Regulations (Cap.123, Sub.Leg.). Generally the plot ratio for any given site is as fixed by those Regulations according to the physical attributes of the site and the type of building to be erected thereon. In the exceptional case where the site abuts on a street less than 4.5 m wide or does not abut on a street, its plot ratio is determined by the Building Authority. So what falls to be valued is the land with the appropriate plot ratio. Such value does not include the speculative element which s.12(c) is designed to eliminate, and s.12(c) is not engaged.” (emphasis added)

54.  If Mr Simon Lam’s proposed construction of section 12(c) of the Ordinance were right, it means no compensation would be payable to all unclassified sites because they always involve Building Authority’s determination under regulation 19(3) of BPR and this seems to contradict the legislative intention of the Ordinance.  Mr Simon Lam, in reply, explained that this would not happen as rebuilding the “existing building” is enforceable “as of right” and therefore is an exception under section 12(c) of the Ordinance.  In our judgment, by plain reading of regulation 19(3) of BPR, we fail to see why rebuilding the “existing building” is enforceable “as of right”. Mr Ross Yuen therefore must be right and we accept his submissions on this point.

Domestic or Non-Domestic Use

55.  This tribunal is also asked to determine whether the proposed development should be a domestic or non-domestic building.  There is no dispute that both domestic and non-domestic (or a mixture of 2) were permitted on the Lot under BPR.  Mr Lee suggested that it should be a commercial development, namely non-domestic use but Mr Lai said that it should be a domestic building.  The test is an economical one, namely what was the best use of the Lot having the highest value?

56.  First, we accept that a number of buildings on Yu Lok Lane had been put to commercial use.  There was no dispute that 5 occupants of different buildings at the time of resumption on Yu Lok Lane were non-domestic including 3 occupants at 1-2 Yu Lok Lane, 1 occupant at 12 Yu Lok Lane and 1 occupant at 17 Yu Lok Lane.  Furthermore, the applicant pointed out that there was a printing house and trading company at 7 and 8 Yu Lok Lane respectively.

57.  The respondent, however, submitted that the above observations are not very useful and drew our attention to the fact that all these premises were permitted for domestic purposes only under the respective occupation permits.  We take a different view.  The fact that occupants used their properties for non-domestic purpose despite what the occupation permits disallowed them to do so strongly suggests that there was a demand for non-domestic use of premises on Yu Lok Lane at that time. It, in fact, supports the view of Mr Lee.

58.  Secondly, on the evidence before us, we also accept Mr Lee’s suggestion that the 3-storey (plus cockloft) building could be used as “eatery, tea room, private club, gallery, exhibition hall or office”.

59.  Mr Lai disagreed with Mr Lee’s suggestion and he said that the Lot was located on a narrow lane in a rather secluded area and pedestrian flow in front of the Lot was mainly residents living along Yu Lok Lane.  According to Mr Lai, shopping potential of the Lot would be very low.  In short, Mr Lai thought that the Lot was quiet and therefore not suitable for retail purposes.  With respect, we disagree.  There are many different types of retail activities.  Some may require high pedestrian flow to survive but some, on the other hand, could succeed in quiet places and the uses what Mr Lee had suggested are obviously the latter.  Another example would be coffee shop or cafes.  They could be very successful even located at the deep end of a cul-de-sac with very low pedestrian flow.

60.  Thirdly, taking into account the neighbourhood characteristics of the area around the Lot, we are unable to follow the logic of Mr Lai why the proposed building on Lot should be “designed wholly for domestic use”.  We agree that the neighbourhood is primarily residential but we also notice that there were a reasonable amount of commercial activities in the area on the date of resumption, particularly in the buildings along Centre Street and Third Street.  We therefore also disagree with Mr Lai’s view on this.

61.  By reasons of the above, we prefer the view of Mr Lee that, on balance of probabilities, the Lot could be developed for non‑domestic purposes.

62.  In conclusion, we find that the Lot was an unclassified site.  We also accept the professional views of Mr Lee and Mr ST Lam that a 3-storey (plus cockloft) commercial (non-domestic) development was permissible by the Building Authority under regulation 19(3) of BPR.  Although Ms Cheung had raised some concern over the design of a 3-storey (plus cockloft) non-domestic building and Mr Lai disagreed with Mr Lee on his calculation of saleable areas, no other evidence was adduced to challenge the applicant’s development parametres of the proposed hypothetical development, including, net site area of 31.15 square metres, site coverage of 100% and total non-domestic accountable gross floor area (and the area of each floor) of 124.58 square metres, as set out in the residual valuation in Mr Lee’s report (Appendix 9) dated 9 October 2015.  We therefore accept them in full for valuation purposes. 

63.  In addition, since the accountable gross floor area of a 3-storey (plus cockloft) non-domestic building (i.e. 124.58 square metres) proposed by Mr Lee is much more than the accountable gross floor area of a 2-storey domestic building (i.e. 53.58 square metres) proposed by Mr Lai and we are of the view that the unit value of non-domestic premises had no great difference from the unit value of domestic premises in this instance, we also accept that Mr Lee’s development model was the optimum development potential of the Lot and would have the highest value.  We shall further determine the GDV of a 3-storey (plus cockloft) non-domestic building in the assessments below.

SELECTION OF COMPARABLES

64.  In the valuation of the G/F GDV, Mr Lee had analyzed 6 shop comparables, but 4 of them (i.e. Comparables 1, 2, 4 and 6) are located in Shun Tai Building on First Street and 1 of them (i.e. Comparable 3) is located in General Building on the section of Centre Street close to the waterfront, where are relatively far from the Lot and have different nature of trades in their respective vicinities.  Only Comparable 5 in Fook Moon Building abutting on Third Street is close to the Lot, but the commercial environment along Third Street is in fact different from the commercial environment along Yu Lok Lane.  Mr Lai disagreed to value the hypothetical development for non-domestic use and had not proposed any shop comparables for analyses.

65.  In view of the special characteristics of Yu Lok Lane, an elevated pedestrian lane off vehicular access, we are not surprise that no relevant comparable could be identified for valuation.  Nevertheless, in the absence of the best or the most relevant comparable and other evidence for the tribunal’s consideration, we are of the view that 5 out of the 6 shop comparables (except Comparable 6 that has return frontage) suggested by Mr Lee, particularly Comparable 5, can still be analyzed for reference purpose in the valuation.

66.  In the valuation of the upper floor GDV, Mr Lee had made reference to a pair of comparables (i.e. Comparable 3 and another transaction Shop D on 3/F of the same building) to derive the relationship in value between G/F shop and upper floor shop.  Whilst, Mr Lai had not proposed any comparables and valuation method in this regard.  He also said that Mr Lee’s approach was not acceptable because the said pair of comparables was different from the hypothetical non‑domestic development in characters and the number of samples was not adequate too.

67.  We agree with Mr Lai that the analyses of the said pair of comparables could not be applied in the valuation of the Lot because the price relationship of G/F shop and upper floor shop in a standard commercial/residential composite building could be quite different from that in the subject hypothetical non-domestic development, where is unique without vehicular access and having limited pedestrian flow.  However, we consider that in the assessment of the upper floor GDV we can make reference to the unit price of the 3/F shop comparable.  Further, whilst we are of the view that the unit value of non-domestic premises had no great difference from the unit value of domestic premises in the subject location, we can also make reference to the GDV domestic comparables proposed by Mr Lai and his analyses.

ADJUSTMENTS TO THE COMPARABLES

68.  Although Mr Lai disagreed to value the hypothetical development for non-domestic use, he had made comments on the G/F GDV assessments.  Both Mr Lai and Mr Lee had made the same adjustments for size (i.e. 0.5% per 1 square meter difference) and time (i.e. with reference to Private Retail Price Index published by Rating and Valuation Department), but they had different opinions on the adjustments for location, age, frontage and headroom.  The main difference between the two experts was the adjustment for location.

Adjustment for Location

69.  Mr Lee made an adjustment for location at -5% to Comparables 1, 2, 3 and 4 and -10% to Comparable 5, whilst Mr Lai proposed -70% to Comparables 3 and 5, -60% to Comparable 1, and -50% to Comparables 2 and 4. 

70.  With the benefit of joint site inspection, we agree with Mr Lee that Comparable 5, which is close to the Lot and a wet market, is relatively better in location among the comparables, and therefore should have greater downward adjustment in this regard, but the adjustment rate should be -50%.  On the other hand, we consider that the respective locations of Comparables 1, 2, 3 and 4 are similar, and they should be adjusted at -40%.

Adjustment for Building Age

71.  Mr Lee made an adjustment for age at 0.5% per year to reflect the new hypothetical development on the Lot, which we agree.  We are not persuaded by Mr Lai that adjustment for age is not required in this instance because of its minimal effect on shop prices.  We consider that a newly completed shop should certainly be better than a shop completed years ago.

Adjustments for Frontage and Headroom

72.  The valuation experts had proposed different adjustment rates for frontage and headroom. We consider that these two adjustments could be skipped in the initial assessment, but they will be reviewed before conclusion of the valuation.

73.  Since the Lot is located in a relatively quiet pedestrian walkway, we have reservation to make adjustment for frontage. We consider that it is not a material factor.  We may not make any adjustment for frontage unless the frontage in consideration is clearly superior or inferior to the norm that the benefits or limitations which the frontage produces are clearly evident.

74.  About the headroom, Mr Lee had not disclosed in his reports the headroom of the hypothetical G/F and cockloft.  He had proposed some positive adjustments for headroom but he had not provided any explanation.  Whilst, Mr Lai said that the headroom of the hypothetical G/F including cockloft was about 6 metres.  He had adopted an adjustment rate at 2% for every 1-meter difference and an additional -2% to reflect the proposed cockloft, which would reduce the headroom of portion of the hypothetical G/F underneath.  However, he had not provided information about the headroom of the respective portions.  We consider that the information disclosed by the parties could not justify a meaningful and reasoned adjustment for headroom. In any event, we also consider that the adjustment for headroom in this instance is of minimal significance only.

Valuation of Upper Floors as Shop Premises

75.  In the valuation of the 1/F and 2/F GDV, although we disagree with Mr Lee to make reference to a pair of comparables in General Building, we agree to his proposed conversion factors at 1/2 and 2/5 of the G/F unit rate respectively.  We agree to his proposed conversion factor for the roof at 1/10 of the 1/F unit rate too.  Mr Lai had not provided analyses of upper floor shop premises.   

76.  On the other hand, we accept the conversion factor for the cockloft at 1/4 of the G/F unit rate, which were adopted by the two valuation experts.

77.  The assessments of the GDV unit rates are listed in Appendix I of the judgment.  Although the initial assessment of the G/F unit rate has not covered the adjustments for frontage and headroom and the adjustment for size has counted the size of the G/F only, they are not the determining adjustments in the valuation. The determining adjustment is the adjustment for location, but it is rather subjective and has a greater extent of adjustment too.

78.  Whatever, since Comparable 5 is near the Lot, is larger in size and was transacted close to the valuation date, and therefore is relatively the most relevant comparable among all the identified comparables, we consider that it should have a greater weight, whilst the adjusted unit rate of Comparable 4 appears to be out of line and could be disregarded in the assessment.  Above all, after taking into consideration of the adverse effects of the overall size of the hypothetical development which could be used by a single occupier and the G/F layout with lift and staircase to the upper floors, we are of the view that the G/F GDV could be assessed at $80,000 per square metres. 

79.  With reference to the unit price of the 3/F shop comparable in General Building at $40,629 per square metres and Mr Lai’s adopted unit rate for 1/F domestic flat at $68,441 per square metres, we consider that the 1/F and 2/F unit rates at $40,000 and $32,000 per square metres, which are assessed at 1/2 and 2/5 of the G/F unit rate, are reasonable.

PARAMETRES OF RESIDUAL VALUATION

80.  The valuation experts agreed on professional fees at 6% of costs only, but disagreed on measurement of saleable area, demolition cost, construction costs, development period, finance cost and development profit.  Mr Lai valued the Lot subject to tenancy and had allowed an additional 1 month for obtaining vacant possession, which was disagreed by Mr Lee.

Measurement of Saleable Area

81.  Measurement of saleable area is a major disagreement between the two valuation experts. Mr Lee said that the hypothetical development was intended to be used by a single occupier and therefore he had taken all floor areas within the external walls (i.e. 31.15 square metres on each floor) as saleable area, except the cockloft which in his opinion was 20.95 square metres.  On the contrary, Mr Lai said that in measuring the saleable area of the G/F shop it was not appropriate to include the staircase that did not form part of it, and this principle should also be applied in measuring the saleable area of upper floors.

82.  On balance, we accept the saleable areas proposed by Mr Lee, which includes the areas of lift and staircase.  We consider that the areas of lift and staircase would have value to the single occupier of the hypothetical development, and there should not be zero value as suggested by Mr Lai. In any event, the layout with lift and staircase on each floor have already been taken into account for the GDV unit rates as assessed.

Demolition Cost and Construction Costs

83.  Both valuation experts agreed that the basic costs for demolition and construction were $1,500 and $11,000 per square metres respectively, but Mr Lai had made further positive adjustments for small-scale development and restricted access.  In view of the small-scale of the hypothetical development and its restricted access via staircase, we agree to the demolition cost and construction costs at $1,725 and $12,650 per square metres proposed by Mr Lai respectively.

Development Period and Finance Cost

84.  Mr Lee said that the development period was 1.125 years including 0.125 year for demolition and 1 year for construction. Whilst, after considering the accessibility of the Lot, Mr Lai was of the view that the development period should be 1.5 years including 0.25 year for demolition and 1.25 years for construction.  We agree that the accessibility of the Lot would adversely affect the development period and prefer the development period proposed by Mr Lai.

85.  In the adoption of finance cost, Mr Lee proposed 4% per annum and Mr Lai proposed 5% per annum.  In view of the then prevailing best lending rate at 5% per annum and the then market condition, we consider that the finance cost at 5% per annum proposed by Mr Lai is reasonable.

Development Profit

86.  Mr Lee adopted development profit at 15% on costs, but Mr Lai said that the rate should be 20% to reflect the relatively high risk in undertaking the subject hypothetical development in a secluded area. We agree that from developers’ viewpoint there was high risk in undertaking such a small-scale development in a secluded area, but there was also demand from owner-occupiers which would accept lower profit margin.  We agree with Mr Lee that development profit at 15% on costs is reasonable.

Subject to Tenancy

87.  Since the Lot was subject to tenancy, Mr Lai suggested to defer the land value for 1 month, which in his opinion was required to obtain vacant possession for development.  We disagree to make such deferment because the actions for obtaining vacant possession and planning for demolition and construction could be implemented simultaneously.

VALUATION

88.  In accordance with the above discussions, the residual valuation is listed in Appendix II of the judgment.  The overall GDV with total gross floor areas of 124.6 square metres is assessed at about $5,278,400, equivalent to about $42,363 per square meter, which appears to be reasonable for such a small-scale and unique commercial development in a secluded area in the then market condition.

89.  The then market value of the Lot on redevelopment basis is assessed at $2,530,000, equivalent to an accommodation value of about $20,305 per square meter.

CONCLUSION

90.  We determine the value of the Lot should be, for the purpose of section 10(2)(a) of the Ordinance, in the sum of $2,530,000.  

ORDERS

91.  Accordingly, we order that the respondent do pay the applicant compensation for the Lot in the sum of $2,530,000.  The matters of professional fees, interest and costs shall be adjourned to a date to be fixed, with liberty to apply for any other ancillary and consequential matters.