FULLER HOLDINGS LTD AND ANOTHER v. HSU LING LING AND OTHERS

LDCS 13000/2019

[2020] HKLdT 34

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 13000 OF 2019

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BETWEEN

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JUDGMENT

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BACKGROUND

1.  This is the applicants’ application for an order for sale, for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”), of all the undivided shares of and in Inland Lot No 7756 and the Extension thereto (“the Lot”) together with a building erected thereon known as Nos 2, 4, 6 and 8 Mount Parker Road, Hong Kong (“the Building”).

2.  The Building comprises two 6-storey residential blocks, which are connected by an external common staircase, and each block is also served by an internal common staircase. An occupation permit No H9/73 dated 29 May 1973 was issued for the Building granting permission to occupy its ground floor (“G/F”) as car parking area for non-domestic use and 1^st floor (“1/F”) to 5^th floor (“5/F”) inclusive as 4 European type flats per floor for domestic use.  According to the approved building plans of the Building, there are 17 covered car parking spaces and 2 open car parking spaces on G/F, and 2 flats on each upper floor of each block from 1/F to 5/F.

3.  The Lot together with the Building standing thereon was allocated 26,360 undivided shares. Each of the 10 flats of Nos 2 and 4 Mount Parker Road was given 1,528 undivided shares, and each of the 10 flats of Nos 6 and 8 Mount Parker Road was given 1,108 undivided share, making up a total of 26,360 undivided shares.

4.  The car parking spaces are not separately owned and do not hold any undivided share in the Lot.  The applicants submit that the owners’ corporation of the Building has been granting car parking licenses to owners of the Building by means of drawing lots on an annual basis, and if there is no request for re-drawing the allocation, there would be no change on the then car park arrangement.

5.  The Building was developed under the Civil Servants’ Co-operative Building Society Scheme (“the Scheme”), which allowed land to be granted at a concessionary premium.  Pursuant to the Conditions of Grant dated 23 August 1961, the Conditions of Extension No 8556 dated 27 November 1963 and the Modification Letter dated 11 August 1998 of the Lot (together referred as “the Land Grant”), there is an alienation restriction clause. Any owner of a relevant interest in the Lot shall not assign, underlet or part with the possession of or otherwise dispose of the Lot or any part thereof or any interest therein or any building or part of any building thereon or enter into any agreement so to do, unless and until the relevant owner shall have first paid to the Government either (a) an amount equal to two-thirds of the existing use land value of the relevant interest in the Lot; or (b) if the Lot is economically suitable for redevelopment at the relevant date, an amount equal to two-thirds of such sum as the Director of Lands shall on a fair and impartial valuation certify the same to be the full market value of such relevant interest at the said date (in either case, referred as the “Premium”).

6.  The Lot was originally granted to The Mount Parker Road Co-operative Building Society Limited, which subsequently assigned unto its former members, including the 1^st respondent (“R1”) and the 2^nd respondent (“R2”), undivided shares in the Lot subject to and together with the benefit of a deed of mutual covenant and on the condition that each of its former members on taking such assignment shall execute a First Legal Charge in favour of the Financial Secretary Incorporated (“Legal Charge”) for securing the payment to the Government of the Premium. R1 and R2 were assigned with undivided shares in the Lot and they executed the Legal Charge on 21 November 1998 and 10 October 1998 respectively.

7.  Except for 1/F of No 2 Mount Parker Road (‘R1 Flat”) owned by R1 and 2^nd Floor (“2/F”) of No 8 Mount Parker Road (“R2 Flat’) owned by R2, all the other flats of the Building, which are now owned by the applicants, have been released from alienation restriction and their Premiums have been paid to the Government.

8.  Further, the Land Grant also restricts that the total gross floor area of any building or buildings erected or to be erected on the Lot shall not exceed 2,703.72 square meters.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

9.  The applicants filed a Notice of Application (“NOA”) on 18 April 2019, which was subsequently amended on 10 July 2020 pursuant to the Orders of the tribunal made on 8^th and 10^th July 2020. At the time of filing of the NOA, there were 4 respondents and the applicants collectively owned 23,724 out of the total 26,360 (i.e. 90%) undivided shares in the Lot. 

10.  R1 and R2 hold 1,528 and 1,108 undivided shares respectively in the Lot.  The 3^rd respondent (“R3) and the 4^th respondent (“R4”) do not own any undivided shares in the Lot, but they have interest in R1 Flat and R2 Flat because of the alienation restriction and the Legal Charge.

11.  Section 3(1) of the Ordinance prescribes that the minimum percentage of undivided shares that an applicant or applicants should possess before making an application under the Ordinance is 90%. 

12.  I am satisfied that as at the date of application, the applicants owned not less than 90% of the undivided shares in the Lot.  I am therefore satisfied the applicants are entitled to make the present application under section 3 of the Ordinance.

THE REMAINING RESPONDENTS

13.  At trial, R1 has executed a sale and purchase agreement with the 2^nd applicant on 20 March 2020, is not contesting the application and has also withdrawn her Notice of Opposition.  R1 has applied to the Director of Lands for assessment of the Premium, and completion of the sale and purchase of R1 Flat is subject to completion of assessment of the Premium by the Director of Lands and payment of the Premium.

14.  R2 is the only active respondent in these proceedings.

15.  Although R3 and R4 do not own any undivided shares in the Lot and are not the minority owners under the Ordinance, the applicants involved them in the application. Mr Mok, counsel for the applicants, submits that one of the main reasons for joining R3 and R4 as parties were to allow R3 to be heard on the assessment of the Premium under the alienation restriction clause and the proper co-ordination of the assessment and payment of the Premium and discharge of the Legal Charge executed by R1 and R2 in favour of R4 in the event a sale order is to be granted.  In any event, the applicants subsequently discontinued the proceedings against R3 and R4 at the hearing on 6 August 2019.

16.  R2 is not legally represented.  He filed his Notice of Opposition on 2 May 2019 contending that the applicants’ offer prices to acquire R2 Flat were very low and the applicants had not offered him any compensation scheme too.  He said that the applicants had not well considered his interest in the Lot and had not fulfilled the minimum requirements of the Ordinance.  He further asked for costs and objected to the arrangement that the trustees would act for him to collect compensation and sale payment in the process.

17.  In the documents filed by R2, his letters to the applicants and his submissions at trial, he also argues he can hold his interest in the Lot forever. He has a right to refuse the applicants’ offers and the application under the Ordinance.  In any event, in case if his interest is sold for redevelopment, he should be entitled to at least a cash compensation of $80,000,000 together with units of about 5,346.6 square feet in the new development upon its completion, which are derived in accordance with the ratio of his undivided shares in the Lot (i.e. 1,108 / 26,360 = about 4.2%). On the other hand, he considers that the Building is in good condition without safety issue and therefore does not justify redevelopment.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

18.  The remaining issues to be decided in this case are as follows: -

1) Whether the Ordinance is applicable to compulsory sale of properties and interests in the Building which was developed under the Scheme?

2) What was the respective market value of each property in the Lot (a) on a vacant possession basis; (b) assessed as if the Lot could not be made the subject of an application for an order of sale; and (c) not taking into account the redevelopment potential of the property or the Lot (i.e. the existing use value (“EUV”) of each unit in the Building) as at 1 February 2019, the valuation date adopted in the Application Valuation Report dated 17 April 2019, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?

3) Whether the redevelopment of the Lot is justified due to age and / or state of repair of the Building in accordance with section 4(2)(a) of the Ordinance?

4) Whether the applicants have taken reasonable steps to acquire all the undivided shares in the Lot on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance?

5) If an order for sale is granted, what should be the reserve price (i.e. redevelopment value (“RDV”) of the Lot) for the purpose of auction sale?

6) If an order for sale is granted, whether trustees should be appointed to handle the sale and what will be the particulars and conditions of sale?

APPLICABILITY OF THE ORDINANCE

19.  Given that the Building was developed under the Scheme, R1 Flat and R2 Flat are currently subject to an alienation restriction clause in the Land Grant and the Premiums as secured by the Legal Charges are yet to be paid for these two units owned by the respondents, there is a question of applicability of the Ordinance.  R2 also said that the Ordinance is not applicable to sell his unit compulsorily, but he has not submitted the details.

20.  In the discussion of applicability of the Ordinance at trial, the applicants were asked to assist the tribunal and search whether there were any discussions in the papers of Legislative Council on applicability of the Ordinance to the Scheme at the time when the Ordinance was enacted. After the searches, Mr Mok submits the applicants are unable to identify any document which discussed or confirmed that the Ordinance should not apply to, or should be excluded from the redevelopment of buildings under the Scheme.  However, there is a relevant document prepared by Government[1] expressing its views on the applicability of the Ordinance.  I consider that the Government’s position if any is not the law, and this finding cannot assist the tribunal in the determination of applicability.

21.  On the other hand, the applicants were asked to comment whether the Legal Charge is different from normal charges or mortgages. In response to the question, Mr Mok submits the alienation restriction secured by the Legal Charge is no different in nature from the kind of encumbrances envisaged by the Ordinance and is also no different in nature of any ordinary legal charge entered into by a purchaser / owner over his property to charge the land he purchased / owned as security in favour of the vendor for a portion of the unpaid purchase price.

22.  I agree the Ordinance does not differentiate the type of encumbrances, but I consider the subject Legal Charge should have some differences from the ordinary legal charge. An ordinary legal charge would normally comprise a demand clause that a chargor would reserve a right to call the loan as appropriate, but the Government including the Financial Secretary Incorporated does not have such right under the Land Grant and the Legal Charge. The leasee under the Land Grant, and the chargee under the Legal Charge, has a right not to pay back the Premium, and the loan, until there is an alienation that triggers the mechanism of redemption. 

23.  Since the respondents should have the freedom not to release the alienation restriction when they have no intention at all to sell their properties, the compulsory sale of their properties (if applicable) could cause perceived hardship to them.  The value to the respondents in such circumstances could be higher than the compensations payable to them in compulsory sale (if applicable and if any) because of the substantial discount (i.e. 2/3 of the land value) and the Premium. The value to the respondents for using their premises continuously appear to be higher than their proportional shares of the redevelopment value less the Premium. Further, the assessment of Premium in case of compulsory sale will base on the redevelopment value instead of the possibility of existing use land value, which may further reduce the net compensations.

24.  Even if there is perceived hardship caused to an owner because of the removal of alienation restriction in compulsory sale, Mr Mok submits that the only legal requirement for a majority owner to make an application under the Ordinance is for him to reach the required undivided share percentage as provided in s.3(1) and / or (2) of the Ordinance, and the applicants have met this requirement.  Further, what a tribunal has to satisfy before granting a sale order is s.4(2) of the Ordinance irrespective of whether the building in the application was developed under the Scheme and whether there is possible perceived hardship caused to an owner. The early repayment of a loan as a result of a compulsory sale order should not be a relevant factor which should be considered under s.4(2) of the Ordinance, otherwise the Ordinance cannot facilitate urban renewal by removing ransom situations and ensure minority owners receiving fair and reasonable compensation.  If possible perceived hardship to be caused by early repayment of mortgages may form a consideration under s.4(2) to refuse a sale order, it can provide minority owners with a device to create a hardship situation with the aim of holding out for ransom compensation. There is a possibility for an owner to create a legal charge and a hardship situation that the chargor in this legal charge does not have a right to call the loan, similar to the Legal Charge.

25.  Nonetheless, although the minutes of the Bills Committee of the then Legislative Council did not contain any consideration of the buildings under the Scheme, there were in fact some discussions that the criteria specified in the bill were not meant to be exhaustive and factors including undue hardship of minority owners may be considered by the tribunal[2].

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

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

28.  No doubt, compulsory sale of a private interest may create hardship to some owners, no matter whether or not their developments were developed under the Scheme. If Government has intention to protect the civil servants or former civil servants under the Scheme particularly, the Secretary for Development could make such regulations under s.12(1) of the Ordinance. Making regulation in this connection may be able to deal with the particular hardship of the owners under the Scheme in a principled way, but there is no such regulation now.

29.  On the other hand, even if the tribunal has the residual discretion under s.4(2) to consider undue hardship if any caused to a respondent, I agree with Mr Mok that this should be considered together with the offers made to that respondent. In such circumstances, I am of the view that value to the owner cannot be taken as the benchmark to assess the reasonableness of an offer because different owners may have different value to them and this could not be assessed objectively too. Alternatively, the value on the assumption that the flat can be sold to the other civil servants free from payment of the Premium but subject to the great discount because of the concessionary premium at land grant may be assessable for comparison with the offer.

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING

30.  Pursuant to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the EUV of the units as assessed in the application, the tribunal shall determine the proper value. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the lot who cannot be found, the majority owner of the lot is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is: -

“(A) not less than fair and reasonable; and

(B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

31.  The applicants appoint Mr Alnwick C H Chan (“Mr Chan”) of Knight Frank Petty Limited to give his opinion on valuation.  In the Application Valuation Report dated 17 April 2019, Mr Chan explained the direct comparison method he adopted and the process of his assessment to arrive at the EUV of each unit of the Building as at 1 February 2019. Since he then considered it was practically impossible from valuation perspective to assess the impact of the alienation restriction clause in the Land Grant that might have on the EUV of R1 Flat and R2 Flat, he had assumed in his valuation that the Premium for R1 Flat and R2 Flat had been paid to the Government and all units in the Building were freely transferrable in the open market.

32.  In valuing the car parking spaces, Mr Chan assumed that the car parking spaces are licensed to the owners of the Building by means of drawing lots on an annual basis; and subject to payment of monthly fee to the owners’ corporation, each unit of the Building was entitled to a right for 1 car parking license. He collected and analyzed rentals of public car parking spaces in the vicinity.  After deducting the monthly fee payable to the owners’ corporation, he capitalized the net monthly rental to arrive at the market value of a car parking license.

33.  Mr Chan updated his EUV assessments in the Supplemental Report dated 2 December 2019.  He made reference to the latest property indices published by Rating and Valuation Department and then assessed the unit rate of the reference domestic unit (i.e. 3^rd floor of No 4 Mount Parker Road) at $129,000 per square meter and the unit value of each car parking license at $1,200,000. He compared the reference domestic unit with the other units in the Building, added the value of a car parking license to the value of each unit, and then assessed the EUV of all units in the Building at $338,175,310.

34.  If R1 Flat and R2 Flat can be sold to the other civil servants free from payment of the Premium, I disagree it is practically impossible from valuation perspective to assess the market value subject to the impact of the alienation restriction clause in the Land Grant as opined by Mr Chan.  There should have evidence that a valuer can make reference to in the valuation, such as transaction of similar interest under the Scheme and transaction of unit subject to similar alienation restriction.  Some Government subsidized housing flats, which are subject to alienation restriction, can be sold to eligible persons in a secondary market.  In such secondary market, the transaction price may not be equal to the market value free from alienation restriction less the premium for release of alienation restriction.

35.  Nevertheless, since R1 and R2 took up their undivided shares of the Lot and executed the Legal Charge in favour of The Financial Secretary Incorporated respectively, both R1 Flat and R2 Flat have not been allowed to be sold to the other civil servants free from payment of the Premium (i.e. no secondary market among civil servants). In the circumstances, I agree the market value under Part 1 of Schedule 1 of the Ordinance should be basically the same as the market value free from alienation restriction, though there are considerations of other minor factors such as cost, time and risk for assessment of the Premium. There is “a willing seller” in the definition of market value, and “a willing seller” in a transaction should have known that the Premium should have been paid to the Government for release of alienation restriction before completion of the transaction.

36.  I accept the EUV assessed by Mr Chan in the Supplemental Report and am satisfied that the value of the units owned by the respondents are not less than fair and reasonable and not less than fair and reasonable when compared with the value of the applicants’ units. The EUV of all units in the Building as at the relevant date of valuation, i.e. 1 February 2019, are appended below: -

Floor	No 2		Floor	No 4
1/F	$19,676,753		1/F	$20,057,530
2/F	$19,332,240		2/F	$19,694,885
3/F	$18,969,595		3/F	$19,332,240
4/F	$18,606,950		4/F	$18,969,595
5/F	$18,425,628		5/F	$18,425,628
Floor	No 6		Floor	No 8
1/F	$15,353,171		1/F	$15,070,107
2/F	$15,083,586		2/F	$14,800,523
3/F	$14,800,523		3/F	$14,530,939
4/F	$14,530,939		4/F	$14,261,354
5/F	$14,126,562		5/F	$14,126,562

37.  I accept the EUV of all units in the Building as listed above and the total EUV of $338,175,310.  The apportionment of R2 Flat would then be about 4.3766% (i.e. $14,800,523 / $338,175,310 = about 4.3766%)

38.  Although R2 had once proposed an approximate apportionment ratio of 5% and later an apportionment ratio of 4.2% in accordance with the ratio of undivided shares, the apportionment of proceeds of sale of the Lot is specified in Part 3 of Schedule 1 of the Ordinance, on a pro rata basis in accordance with the values of the respective properties of each majority owner and each minority owner of the Lot as assessed in the application and subject to the satisfaction of the tribunal.

SECTION 4(2) OF THE ORDINANCE - JUSTIFICATION AND REASONABLE STEPS

39.  Section 4(2) of the Ordinance provides as follows: -

“2. The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that—

(a) the redevelopment of the lot is justified (and whether or not the majority owner proposes to or is capable of undertaking the redevelopment)—

(i) due to the age or state of repair of the existing development on the lot; or

(ii) on 1 or more grounds, if any, specified in regulations made under section 12; and

(b) the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”

40.  The applicants must satisfy this tribunal the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted.

Whether development of the Lots is justified due to the age and / or state of repair of the Building

41.  The applicants adduce expert evidence of Mr Dennis W C Wong (“Mr Wong”), both a structural engineer and a building surveyor, of Prudential Surveyors International Limited. Mr Wong conducted a structural survey of the Building and prepared a Structural Survey Report in December 2019.  He also conducted a condition survey of the Building and prepared a Condition Survey Report in December 2019.

42.  None of the respondents adduced expert evidence to rebut the reports compiled by Mr Wong. Although R2 submits that the Building is in good condition without safety issue and therefore does not justify redevelopment, his submissions are not supported by expert evidence.  Further, even if there is no immediate danger for demolition of the Building, it does not mean the Building is not poor in condition in terms of age and / or in poor state of repair.

43.  Having considered the reports of Mr Wong, I accept his expert opinion. The Building, being erected about 47 years ago, is in poor condition and has come to the end of its design life.  The design of the Building has become obsolete over time in many aspects, both physically and functionally, and fails to conform to modern construction standards and statutory requirements.

44.  I am also of the view the Building is in poor state of repair and the costs of repair to bring the Building to tenantable condition is disproportionate to the costs of redevelopment.  Although regular repair can extend the life of the Building, repair costs will increase with time. Even if repair works are carried out, such works will bring about a modest improvement only to the existing condition of the Building, and the Building will continue remain a sub-standard one.

45.  By reason of the matters set out above, I am satisfied the redevelopment of the Building is justified.

Whether the applicants have taken reasonable steps

46.  In assessing the reasonableness of the offers, I have considered the case Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. In particular, I have considered paragraphs 33 and 36 of the judgment in which   Ribeiro PJ stated: -

“33. In making that assessment the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It does not itself arrive at any conclusion as to what figure represents the correct valuation. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. It is obviously necessary to recognise that there will often be differences of opinion on that matter……”

“36.  ...... We are of course not suggesting that it is necessary for the offer to “beat” the valuation as if it were a payment into court. What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site……”

47.  Before the trial, the applicants and R1 has entered into an agreement for sale and purchase of R1 Flat.

48.  The applicants had made 3 offers to R2 and all these offers were rejected by R2.  The 1^st offer on 20 February 2019 at the price of $16,081,205 (inclusive of the Premium at about $13,496,764 assessed by Mr Chan; equivalent to a net amount of about $2,584,441 payable to R2 after the Premium is deducted from the offer) was based on the valuation of Mr Chan, had reflected the then RDV attributable to the units owned by R2, and had also included a premium over the valuation. The 2^nd offer on 8 March 2019, about half month after the 1^st offer, at the price of $5,986,000 (exclusive of the Premium to be paid by the applicants for R2) was more than 2 times of the 1^st offer price.  The 3^rd offer on 30 June 2020 at the price of $26,018,427 (exclusive of the Premium to be paid by the applicants for R2) was about 10 times of the 1^st offer price. The 2^nd offer and the 3^rd offer had not specified the basis of assessments. When the factual witness of the applicants, Mr Tiu, was asked at trial why there were such great increases in the offer prices, he replied that these were their commercial decisions in view of the whole project.  The applicants then decided to increase the attractiveness of the 2^nd offer price, and the 3^rd offer price had made reference to the acquisition price of R1 Flat.

49.  Mr Mok submits that the applicants have already taken reasonable steps to acquire all the undivided shares in the Lot. I agree.

50.  Although the 1^st and 2^nd offer prices might not be greater than the value to the owner R2, which may not have any limit, and the value of R2 Flat on the assumption that it can be sold to the other civil servants free from payment of the Premium, they appear to be greater than the then value of R2’s interest reflecting a proportionate share of the redevelopment value of the Lot as assessed by Mr Chan.  Since the Legal Charge is an encumbrance registered against R2 Flat, the net value of R2’s interest upon redevelopment should exclude the Premium payable to the Government. 

51.  Nonetheless, based on the EUV and RDV (i.e. as at 1 June 2020) assessments in this judgment, the 3^rd offer price on 30 June 2020, which was exclusive of the Premium to be paid by the applicants for R2, should be greater than the value of R2’s interest reflecting a proportionate share of the redevelopment value of the Lot.  Even if we assume R2 Flat can be sold to the other civil servants free from payment of the Premium, the 3^rd offer price should not be less than the value attributable to R2 Flat under such assumption, because the 3^rd offer price should be greater than the proportional share of the redevelopment value of the Lots, the proportional share of the redevelopment value of the Lots appears to be greater than the EUV free from payment of the Premium, and the EUV free from payment of the Premium should be greater than the market value under such assumption.

RESERVE PRICE FOR THE AUCTION

52.  By reason of being satisfied that redevelopment of the Lot is justified and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot, I am satisfied an order for sale should be granted in favour of the applicants.

53.  Mr Chan firstly assessed the RDV of the Lot as at 25 October 2019 is his RDV Valuation Report dated 2 December 2019, and subsequently updated his valuation as at 1 June 2020 in his Supplemental RDV Report dated 1 June 2010.  While he adopted residual approach to arrive at the market value of the Lot as a development site, he considered the optimum development of the Lot would be a 25-storey residential block over a 1-level basement carpark (i.e. including 21 car parking spaces and 1 motorcycle parking space) and a 2-level podium on G/F and 1/F (i.e. including an entrance lobby, a clubhouse, a plant room and a visitor carpark).  The residential block would comprise 138 typical domestic units (i.e. 6 domestic units on each typical floor) from 2/F to 24^th floor and 6 duplex units on 25^th floor and 26^th floor. 

54.  Mr Chan’s residual valuations were based on the registered site area of 1,182.65 square meters, the maximum plot ratio of 10 for a Class C site and the maximum gross floor area of 11,826.5 square meters (i.e. excluding the exempted floor area of 294 square meters for balconies and utility platforms as green features).

55.  Since the Lot is restricted to a maximum gross floor area of 2,703.72 square meters only and 1 car parking space per flat in the Land Grant, Mr Chan assumed there would be a modification of the Land Grant subject to payment of modification premium.  He assessed the modification premium by before and after valuation and then deducted it as part of the costs in the residual valuation of the Lot.  In the assessment, he had also deducted the premium for building the exempted floor area (i.e. balconies and utility platforms as green features) in accordance with the practice notes of Lands Department.

56.  In the Supplemental RDV Valuation Report dated 1 June 2020, Mr Chan assessed the gross development value of the proposed development at $3,3348,876,180 (i.e. typical domestic unit at an average unit rate of $299,000 per square meter saleable; duplex domestic unit at an average unit rate of $432,000 per square meter saleable; motorcycle parking space at $260,000; and private car parking space at an average price of $2,100,000), the modification premium for release of gross floor area and car parking restrictions under the Land Grant at $1,611,000,000 (i.e. after valuation at $1,977,000,000 less the before valuation at $366,000,000), the premium for green features exemption at $13,580,400, the demolition cost of the Building at $5,755,735, and the construction cost of the proposed development at $382,141,204 (i.e. equivalent to an unit rate of about $32,312 per square meter gross).  He also assumed a development period of 4.3 years (i.e. including lease modification period of 1.5 years, demolition period of 0.5 year and construction period of 2.5 years, in which demolition period of 0.25 year would be overlapping with construction period), marketing cost at 3% on gross development value, professional fee at 6% on demolition cost and construction cost, interest at 4% per annum, and profit at 18% (i.e. without further allowance of stamp duty and legal cost on residual land value) on all costs including the modification premium.

57.  After reviewing the residual valuations prepared by Mr Chan, I asked Mr Chan at trial whether the lease modification period could overlap the demolition period so as to shorten the overall development period. Mr Chan replied positively and has then further revised on 10 July 2020 his RDV assessment from $432,800,000 to $452,000,000.  He changed the development period from 4.3 years to 4 years only, and assumed that half of the demolition period would be overlapping with the lease modification period and the construction period respectively.

RDV of the Lot as at 1 June 2020

58.  I accept the residual valuation of the Lot submitted by the applicants on 10 July 2020.  The RDV of the Lot as at 1 June 2020 is assessed at $452,000,000 and should be the reserve price for public auction.

59.  If it is assumed that the Lot is free from the restrictions on maximum gross floor area and car parking space per flat under the Land Grant, and hence the modification premium is taken out and the development period is shorten to say 2.75 years in the residual valuation, but the premium for green features exemption and other parameters of the residual valuation are maintained therein, the RDV of the Lot would then be assessed at about $2,071,000,000 equivalent to an accommodation value of about $175,115 per square meter (i.e. about $16,269 per square foot).

PARTICULARS AND CONDITIONS OF SALE

60.  Although R2 objected to the arrangement that the trustees would act for him to collect compensation and sale payment in the process, he has not proposed any alternative arrangement that could handle the sale of the Lot by public auction. 

61.  Pursuant to s.4(1)(c) of the Ordinance, where an order for sale of the Lot for redevelopment is granted by the tribunal, the tribunal shall appoint in the order for sale trustees satisfactory to the tribunal nominated by the majority owner to discharge the duties imposed on trustees under the Ordinance. Having reviewed the experience and background of Mr Ma Ho Fai and Ms Hung Suet Shan Catherine nominated by the applicants, I am satisfied that they be appointed trustees and be authorized to charge remuneration for their services in accordance with their proposal.

62.  Before the trial, the applicants have submitted for consideration by the tribunal a draft Particular and Conditions for Sale, which specifies that the trustees will handle the sale of the Lot by public auction including the application to the Civil Service Bureau for temporary waiver of the alienation restriction imposed by the Land Grant and the application to the Director of Lands for assessment of the Premium for the removal of the alienation restriction as secured by the Legal Charge. In the Premium application, the trustees will also be authorized to use and apply the auction deposit to pay and settle the Premium as assessed by the Director of Lands, which shall eventually be borne by the respondents as minority owners and shall also be deducted from the proceeds of the sales to be applied by the trustees to the relevant minority owner.

63.  While R2 has not made any comment on the draft Particulars and Conditions of Sale, the tribunal asked the applicants on the 1^st day of trial in such circumstances how can the draft safeguard the interest of all parties including the respondents and the purchaser in case if the Premium cannot be agreed and/or cannot be settled on time for completion of sale.  The Government offer of the Premium for R2 flat was unknown at trial, whilst Mr Chan has commented that the Premiums of the other units in the Building as assessed by the Director of Lands in the past were excessive and higher than his estimations. From a practical point of view, there will have a dilemma if the Government offer is higher than Mr Chan’s Premium assessment, which can be revealed in his before valuation as at 1 June 2010.  In the circumstances, it may be unreasonable and imprudent for the trustees to accept the Government offer.  However, if the trustees then decide to appeal against the Government offer, there will likely be a long delay in completion of sale.

64.  In response to the queries, the applicants lodged on the last day of trial a revised Particulars and Conditions of Sale that the applicants as the majority owners undertake to bear all the costs and expenses including the Premium as may be assessed by the Director of Lands and shall also deposit with the trustees a lump sum for the purposes of settling the costs and expenses.  The applicants further undertake not to dispute, complain, challenge or otherwise raise any objection to the amount of the Premium as may be assessed by the Director of Lands and that no part of the costs and expenses including the Premium shall be deducted from the purchase price or the relevant proceeds of sales to be applied by the trustees in payment to the minority owners.

65.  Since the revised Particulars and Conditions of Sale answers the queries satisfactorily and appears not to prejudice the interest of the respondents, I accept it as the draft to be further approved by the tribunal.

ORDERS

66.  For reasons given in this judgment, I have set out reasons why I am satisfied an order for sale should be granted and I therefore make the following orders: -

1) All the undivided shares in the Lot, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lot;

2) Mr Ma Ho Fai and Ms Hung Suet Shan Catherine, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lot;

3) The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Woo Kwan Lee & Lo dated 24 June 2020;

4) For the purposes of the sale of the Lot by public auction: -

a) the sale of the Lot be on the particulars and conditions of sale the same or substantially the same as those set out in the draft Particulars and Conditions of Sale to be approved and initialed by the tribunal; and

b) the reserve price be set at $452,000,000;

5) Subject to further extensions that the tribunal may subsequently allow upon the application of the purchaser of the Lot or its successor in title, the redevelopment of the Lot and the Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot shall become the owner of the Lot; and

6) Liberty to the applicants, the 1^st respondent, the 2^nd respondent and the Trustees to apply to the tribunal for further directions.

COSTS

67.  Following Good Faith[3], I make a costs order nisi that the applicants do pay costs of these proceedings to the respondents on High Court scale, with certificate for counsel and including any reserved costs, to be taxed if not agreed.  Unless any parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from the date of this judgment.

68.  Last but not least, I thank Mr Mok for his assistance.