DYNAMIC HERO LTD v. LEUNG KAM SUI, APPOINTED BY THE TRIBUNAL AS REPRESENTATIVE FOR THE ESTATE OF LEUNG YIU WAH, DECEASED AND ANOTHER

LDCS17000 / 2011

 IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 17000 OF 2011

BETWEEN

_______________________

_______________________

_______________

JUDGMENT

_______________

Background

1.  This is an application for compulsory sale of all the undivided shares in ALL THOSE pieces or parcels of ground registered in the Land Registry as SECTION A OF APLICHAU MARINE LOT NO. 26 and THE REMAINING PORTION OF APLICHAU MARINE LOT NO. 26(“the Lots”), known as Nos. 70-72 Main Street, Ap Lei Chau, Hong Kong (“the Building”), for the purposes of the redevelopment of the Lots pursuant to Section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”).

2.  There is a 6-storey composite building served by one common staircaseerected on the Lots.  Originally, the Building comprises 2 Ground Floor and Cockloft units for non-domestic use, 1st to 5th Floors (inclusive) with 3 flats per floor for domestic use and one Roof unit.  Altogether there are 18 units in the Building.  The 2 Ground Floor and Cockloft units have been combined together as one unit and are allotted 4 shares, each flat on 1st to 5th Floors (inclusive) is allotted one share and the Roof one share, with a total of 20 undivided shares for the Building and the Lots. 

3.  The Applicant commences the present proceedings on 26 April 2011.  At that time, the 1st Respondent is the registered owner of Flat B on the 3rd Floor of the Building and the 2nd Respondent, Flat B on the 4th   Floor of the Building.  The Applicant owns the remaining units in the Building and 18 equal undivided 20th parts or shares in the Lots representing 90%.  The Applicant contends that it is entitled to make the present application by virtue of Section 3(2) of the Ordinance.

4.  The 1st Respondent did not file any Notice of Opposition.  At the trial, the 1st Respondent confirms that he does not oppose this application. 

5.  In the Notice of Opposition filed by the 2nd Respondent on 16 May 2011, the 2nd Respondent disputed the existing use value ("EUV") of some or all of the units in the Building assessed by the Applicant’s expert and shown in the Application Report. Nevertheless, at the trial, Mr. Jonathan Ko of Messrs. Foo & Li for the 2nd Respondent confirms that the 2nd Respondent does not oppose this application. 

6.  Thus, the 1st Respondent and the 2nd Respondent did not call any witness or produce any expert report.  The 1st Respondent and the 2nd Respondent also did not cross-examine any of the Applicant’s witnesses or make any closing submission.

7.  In view of the concession made by the 1st Respondent and the 2nd Respondent, Ms. Nancy Ngai, Counsel for the Applicant, simply called the Applicant’s witnesses to confirm their evidence.  During the trial, we raised some questions to the Applicant’s valuation expert, Mr. Charles Chan.  In response, he produced some further evidence and raised his assessment of the redevelopment value (“RDV”) of the Building from $71.4 million to $72.7 million.  The Applicant contends that all the requirements of the Ordinance have been satisfied and asks for an order for sale in terms of the draft order submitted.  The Applicant also asks there be no order as to costs.

Section 3 of the Ordinance – Ownership of the Applicant

8.  Section 3(1) of the Ordinance requires the Applicant to have not less than 90% of the undivided shares in a lot before it can make an application.  As at the date of application, the Applicant owns 90% of the shares in the Lots.  The Applicant is clearly entitled to make the application. 

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

9.  In determining the Applicant’s application, Section 4(2) of the Ordinance requires me not to make an order for sale unless, after hearing the objections, if any, of the 1st Respondent and the 2nd Respondent, I am satisfied that:

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

(b) the Applicant has taken reasonable steps to acquire all the undivided shares in the Lots (including negotiating for the purchase of the undivided shares owned by the 1st Respondent and the 2nd   Respondent on terms that are fair and reasonable).

10.  Ms. Ngai submits that “age” and “state of repair” are two separate grounds but there may be considerations common to both.  However, as the Court of Appeal in Fineway Properties Ltd v. Sin Ho Yuen Victor [2010] 4 HKLRD 1 has expressed reservations on the correctness of the tests of “age or state of repair” formulated in Intelligent House Ltd v. Chan Tung Shing & Ors [2008] 4 HKC 421, which are based on the concept of “economic lifespan”, Ms. Ngai invites me to consider Gentway Ltd v. Li King Fong & Ors (LDCS 1000/2010, 15 December 2010, unreported) at para. 17，where the Tribunal held that it was unnecessary to apply the tests formulated in Intelligent House, (supra), as it was satisfied with the facts and expert opinion that redevelopment was justified due to the age and state of repair of the existing building.  Ms. Ngai also submits that, in this application，it is appropriate to follow the approach adopted by the Tribunal in Mass Ventures International Ltd v. All Lucky Development Ltd & Ors (LDCS 20000/2010, 10 January 2012, unreported) and Top Sail International Ltd v. Cheng Kai Ming, executor of the estate of Chan Hue also known as Chan Sum Hiu, deceased (LDCS 18000/2010, 15 November 2011, unreported), and to decide whether redevelopment of the Lots is justified due to the “age” and “state of repair” of the Building by reference to the expert evidence on these two aspects. I agree that “age” and “state of repair” are two separate grounds and even though there may be considerations common to both, I should still consider them separately.  Since Ms. Ngai relies primarily on “state of repair”, I shall deal with this ground first.

State of Repair of the Building

11.  The Applicant’s expert, Mr. Dennis Wong of Prudential Surveyors International Limited, in his Condition Survey Report, gives his opinion, inter alia, that:

(a)  The Building was designed and approved under the old Buildings Ordinance and related Regulations applicable in the mid ninety-sixties.  There are no fire services installations provided in the Building.  This deviates from the current requirements under the Code of practice for Minimum Fire Service Installations and Equipment. 

(b)  There are no architectural features and proper overhangs at roof level or on the facades of the Building making the Building more prone to wear and tear and deterioration of the external wall finishes.  The external walls of the Building are finished with mosaic tile at its front elevation while its side and back elevations are finished with cement/sand rendering and paintwork. The external finishes are in poor condition which have been affected by shrinkage of render and peeled off paintwork.

(c)  Electrical cables, telephone and TV cables and devices without protection by fire resisting enclosures scatter disorderly in the staircases, corridors and roof the Building.

(d)  No protective barrier is provided at the upper roofs to prevent people from falling over and safeguard their safety.

(e)  There is no ramp provided for disabled person to gain ingress and egress between the public streets and the staircases at Ground Floor. Also, there is no disabled lift provided from Ground Floor to upper levels. No provision of such facilities is regarded as non-compliances of the current requirements for barrier free access under Regulation 72(1) of the Building (Planning) Regulations and the Design Manual for Barrier Free Access 2008.

(f)   The staircase and corridors do not meet the current requirement of the current Code of Practice for the Provision of Means of Escape in case of Fire (“MOE Code”) issued by the Buildings Department.  The staircase also does not have the necessary fire resisting construction to meet the current requirements of the Code of Practice for Fire Resisting Construction 1996 (“FRC Code”).

(g)  The fire services installations of the Building are substandard according to the requirements of the current Code of Practice for Minimum Fire Service Installations and Equipment (“F.S.I Code”).

(h)  There is no equipotential bonding system provided for metal fixtures such as windows and metal doors to prevent accidental electrical shocks to habitants as required under the Code of Practice for Electricity (Wiring) Regulations (“Electrical Code”). This is a fundamental breach of the Electrical Code rendering a real and serious threat to the safety of the occupants and all persons entering the Building.

(i)  There is no provision of access facilities for telecommunications and broadcasting (TBE) services in the Building.  These facilities are required in new buildings according to the Practice Note for Authorized Persons and Registered Structural Engineers APP-84.

12.  In Mr. Dennis Wong’s opinion, some of the defects commonly found in the Building are:

(a)  Spalling of concrete which is where patches of concrete are either about to or have broken away from the surface revealing rusted steel reinforcement bars behind. This normally occurs when water is able to penetrate the concrete surface, which in turn causes the reinforcement bars inside to rust. The rusted bars then expand and in so doing slowly push off the concrete cover. Spalling is considered serious if the steel reinforcing bars are severely corroded or it has affected large areas of the structural members such as columns, beams, and ceiling slabs, which will in turn affect the structural stability of the Building.

(b)  Plaster cracks which are surface cracks normally caused by shrinkage of the decorative materials or at the junction between two different building materials.  Such cracks often lead to debonding or bulging of plaster over a period of time.

(c)   Hair cracks or surface crazing which is generally less than one mm. and the causes are often due to natural deterioration and/or poor application of the decorative finishes. Though they are not structural, the cracks should be repaired in order to prevent further deterioration.

(d)  Blistering and flaking of paintwork which is caused by dampness in the structure or in the atmosphere which may result in paint bubbles and eventually flaking off.

13.  As part of Mr. Dennis Wong’s condition survey, Building Diagnostic Consultants Limited, a firm specializes in the field of Rapid Infrared Thermographic Survey (“RITS”) was appointed to carry out a RITS to the external walls of the Building.  The RITS detects a total of 26 spots of delamination on the external wall rendering. With time, these spots of delamination can deteriorate rapidly due to ingress of rainwater to the voids behind the rendering. Given that the delaminations are scattered throughout the external walls on the various building facades, rectification by carrying out hammer tapping work and patch repair will be both costly and time consuming and yet not very effective.

14.  In addition, a specialist asbestos consultant, Airspace Consultancy Ltd., was appointed to carry out a visual inspection to identify asbestos containing materials (ACM) in the Building. The consultant has inspected all accessible areas and found ACM in the Building.  The ACM found in the building components or parts can release asbestos fibers into the air posing serious health hazards to the occupants and need to be removed.

15.  As part of the condition survey report, Building Diagnostic Consultants Limited, (a firm with expertise in underground drain survey works) was appointed to carry out a Closed Circuit Television (CCTV) Survey of the underground drainage pipes. The CCTV Survey has revealed that the underground drainage pipe is rusted in a medium scale.

16.  Mr. Dennis Wong notes that there are some unauthorized building structures erected at the back of the Building on Ground Floor, on the flat roof on first floor and the building facades.  Upon close inspection, a number of unauthorized metal fixtures such as drying racks, window canopy, and rusty A/C frames do not appear to be structurally safe due to weathering and maintenance neglect.

17.  Mr. Dennis Wong considers the condition of roof is generally in a very poor condition.  From the water stains noted underneath the roof slabs in staircase and internal flats on the fifth floor, he concludes that the waterproof membrane at the roof slab is defective and not performing its intended function of keeping rainwater from entering into the Building.  The stair hoods and water tanks on the main roof are all finished in cement/sand rendering which show cracks and staining and appear to be in poor condition.

18.  Mr. Dennis Wong also notes that the staircase and corridors are generally in a poor state of repair as a result of water seepages, weathering and concrete spalling. Defects noted in the staircase and corridors are as follows:

(a)  Water seepages are commonly found in particular on walls and ceiling forming the building envelope.

(b)  Spalling and cracking of concrete.

(c)  Flaking and peeling off paintwork.

(d)  Blocked window on 1/F staircase.

(e)   No equipotential bonding for metal windows to prevent electrical shocks.

19.  Some of the units in the Building have been subdivided internally into smaller units.  The extent and complexity of the internal subdivision works may adversely affect the safety and maintenance of the Building.  The safety and maintenance problems arising from the subdivisions inside the flats are as follows:

(a)  Most of the subdivided units have their own toilets. To accommodate the drain pipes, many of these toilets are constructed on raised floors of 200 mm. to 300 mm. thick. The raised toilet floors pose additional load on the floor slabs and other supporting structural elements causing potential overloading situations. Moreover, water would possibly leak from the embedded drain pipes in the raised floor causing corrosion of the reinforcement bars in the concrete structure and adversely affecting the structural integrity of the Building.

(b)  The internal partitions used to subdivide the units are mostly constructed of brickwork. This also poses additional load on the floor slabs and other supporting structural elements which may further aggravate the overloading situation. Other internal partitions used to subdivide the units are mostly constructed of timber and do not have the required minimum fire resisting period of one hour as specified in the FRC Code.

(c)  The width of the internal corridors inside the subdivided units is very narrow and less than the minimum width of 1050 mm. as specified in the MOE Code.

(d)  Kitchens provided for these subdivided units are generally not enclosed with fire resisting walls and doors as required under the FRC Code.

(e) In general, there is no fire alarm system or smoke detection system provided to these subdivided units contravening the Code of Practice for Minimum Fire Service Installations and Equipment.

20.  The most common defects in the flats noted are water seepages from external walls, dampness from the floor above and cracking and spalling of concrete.  Surface crazing, blistering and peeling off of the plaster and/or paintwork in various rooms, particularly under or near windows due to water seepage or condensation staining.  The mild steel windows in some of the flats are rusted and are generally poorly maintained.

21.  The fresh water supply to the Building is via the rear lane at ground floor without any protection installed by the Water Authority.  Existing flushing water supply is extended from fresh water supply pipes directly to a flushing cistern which contravenes the water supply regulations.  The above ground drainage is in compliance with a two-stack system with separate soil and waste pipes.  Waste water branch pipes connect and discharge into vertical stacks with open hoppers which are not the current standard due to hygiene problem.  The main drainage stacks are mounted vertically on the external walls. Mr. Dennis Wong notes that the vertical main stacks turned horizontally at flat roof on 1/F are laid with insufficient fall.  Also, majority of the drain pipes at sub-divided flats are located inside the raised concrete floor.  These drainage pipes in general have insufficient falls which can easily cause blockage.  Many illegal drainage installations and connections have been made to the toilets and kitchens in the sub-divided flats. This will cause the drainage system to overload and result in a bottle-neck situation at low levels.  There is no A/C condensate drain pipes provided for A/C units installed.  Discharging water from the ventilation system which causes nuisance to the public is a summary offence under the Public Health and Municipal Services Ordinance.

22.      Mr. Dennis Wong concludes that:

(a)  The Building was completed in 1966 and is 45 years old. It has many problems as a result of its age which impair its appearance and function.

(b)  Due to changes in statutory requirements, advanced technology and higher expectations over the years, the Building has become substandard with many problems affecting the hygiene, safety, convenience and enjoyment of the Building.

(c)  The physical and functional hazards have resulted from deficiencies in the planning, design, use of material, facilities and workmanship of the Building when it was first constructed. These are further aggravated due to unauthorized buildings works, lack of maintenance, absence of proper building management. This has rendered the Building to be well below a habitable standard and fall short of many basic requirements expected in new building. While some of these shortcomings are of a hygienic or environmental nature, others are of a much more hazardous nature which may lead to disasters and tragedies e.g. overloading of the structure due to unauthorized sub-division of the flats and unprotected electrical installations in the fire escape staircases.  Two examples are the recent fire in 111 Ma Tau Wai Road, To Kwa Wan occurred in June 2011 and 188 and 198 Fa Yuen Street, Mongkok occurred on 30 November 2011 where many of the occupants died. By today’s standard, these hazards are detrimental to the safety of the users of the building as well as the general public.

(d)  The Building is below a tenantable standard with its structural frames in fair condition but most of its components, finishes and services having deteriorated towards the end of their effective life spans.  The overall state of repair of the Building is, in Mr. Dennis Wong’s view, poor with many of its components, finishes and services installations showing deterioration beyond reasonable repair.

(e)  The Building is currently in a state of disrepair and demolition of the Building will relieve the owners from heavy repair responsibilities, which evidently have been neglected for a long time. The fact that the Building has been left in a state of disrepair for so long has aggravated the problem which will now require more substantial repairs to be undertaken to reinstate the condition to a tenantable standard. Apart from the heavy repair responsibilities that the building owners have to shoulder, the economic benefit brought about by the repair to the existing derelict building is far less than the option of re-development. Indeed, demolition of the existing derelict building for redevelopment of the site is not only economically more viable but will also improve the living standard of the new occupants and contribute to the renewal of the neighborhood and enhance the overall environment.

(f)   The costs of essential repairs estimated at $6,089,925 amounts to $6,680 per sq. m. of the existing Gross Floor Area of the Building. This unit cost of essential repairs is about 32.6% of the unit cost of $20,480 per sq. m. for construction of a new building. In short, the essential repairs costs are disproportionately high as compared with the cost of constructing a new building. The high cost of immediate repairs indicates that the Building is in a dilapidated condition.

(g)  The plain fact is that even after the essential repair works have been implemented, The Building will remain an old residential cum commercial building with its design and construction outdated and below market expectations and constitute a continuing repair liability to the owners.

23.  The Applicant instructs another expert, Mr. C. M. Wong,to prepare Structural Assessment Report.  He carries out the following tests:

(a)  Visual Inspection;

(b)  Open-up Inspection;

(c)  Covermeter Survey;

(d)  Core Compression Test;

(e)  Depth of Carbonation (Phenolphthalein Test); and

(f)   Chloride Content Test.

24.  Defects that are found during the visual inspection include cracks, spalling and severe water seepage stains.  Most of the cracks observed are longitudinal cracks.  The reason for such cracks is due to the corrosion of the reinforcement. 

25.  According to the findings of the covermeter test, 18% of the checked structural elements have concrete cover less than the design cover.  For members with actual cover smaller than the design cover, the protection to the steel reinforcement bars is less than that anticipated in the original design.  Agents of corrosion, i.e. moisture and oxygen, will have more rapid access to the steel reinforcement. As such, the corrosion rate of the steel reinforcement will be higher than allowed for in the original design.

26.  60% of the samples from slabs and 83% of the samples from beams have a depth of carbonation exceeding the actual concrete cover, the protection of the passive layer of concrete cover is already lost and the steel reinforcement is susceptible to corrosion. It is inferred that the steel reinforcement is already undergoing corrosion.

27.  As the 1st Respondent and the 2nd Respondent did not challenge any of the evidence adduced by the Applicant, I accept the Applicant’s evidence in whole.  In particular, I am satisfied that based on the evidence of Mr. Dennis Wong and Mr. C. M. Wong, redevelopment of the Lots is justified due to the state of repair of the Building. It is not necessary for me to formulate a general test for state of repair as in the case of Intelligent House.  I think that with the evidence before me as aforesaid, the Building is clearly in a very poor state of repair and indeed in dangerous condition.  There is no doubt that redevelopment is justified in the present case.

Age of the Building

28.  As to the age of the Building, there is no dispute that the Building is 45 years old.  The relevant occupation permit was issued on 4 June 1966.

29. Ms. Ngai submits that in Top Sail (supra),

“23. ……when the requirement of “the age” of the Building is considered， [the Tribunal] should not restrict [its] consideration to just the physical age of the Building.  There are many factors related to the age of a building which should also be considered...... the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question.

24. The physical age of a building is clearly one of the considerations， but it would not be the only consideration. The physical conditions of a building and the amount that would be required to maintain the building are other factors that the Tribunal should consider，as they would affect the decision on whether the life of a building should be ended or prolonged. The obsolete design of a building should also be considered as it has an important impact on whether it is too old to serve a modem society."，’ [Emphasis added and parenthesis substituted]

30.  Ms. Ngai relies on the remarks of Mr. Dennis Wong and Mr. C. M. Wong that it would cost respectively $6,089,925 and $471,446 to properly repair the Building, and that it is more cost effective to demolish and rebuild the Building.  I consider that the figure of 11%, being the total repair cost of $6,561,371, over the EUV of the Building, which is $61,380,000 as assessed by the Applicant’s valuer (see the discussion below), is a considerable percentage.

31.   Ms. Ngai also submits that the design of the Building is obsolete. 

32.  According to Mr. Dennis Wong, there are many fire safety deficiencies not meeting today’s standards/requirements as follows:

(a)  The electricity meters and electrical wirings from the ground floor to the flats on upper floors are surface mounted on the walls in the staircase. Only part of the electrical installations is protected with fireproof enclosures to prevent the spread of tire and vandalism. These unprotected electrical installations in the staircase are potential fire hazards.

(b)  The existing fire doors to the staircases are generally defective and complete replacement of these fire doors is required.

(c)   The flat entrance collapsible gates are not capable of being readily open without use of keys to the flats, which contravene the MOE Code.

(d)  The placing of packed household refuses in the staircases and corridors is causing obstruction in the staircases and corridors (which serve as fire escape routes) and poses a real threat to the occupants in case of fire.

(e)   The protected lobby of the staircase for Flat C on each floor has been incorporated as part of the flat for accommodation. Therefore the staircase is not separated from the reminder of the Building which also poses a real threat to the occupants in case of fire.

(f)    The railing of the staircase which acts as a protective barrier to the staircase exceeds the maximum specified dimension of 100 mm. in their smallest dimension under Building (Construction) Regulations.

(g)  There is no fire hydrants/hose reels system provided in the Building.

(h)  Unprotected openings are formed in the staircase enclosure. The staircase is no longer imperforate and separated from the remainder of the Building.

(i)    There is no emergency lighting provided to the staircases and corridors. The lights provided are for general lighting only with no battery back-up to maintain the minimum lighting to the staircases and corridors in case of power breakdown.

(j)    All doors at the staircases are not fire rated doors and therefore are not in the compliance with current standard and code.

33.  The electrical installations are exposed in the staircase enclosure. This is one of major fire deficiencies, which is not acceptable nowadays under the current Building (Construction) Regulations.  Moreover, it is found that there is no equipotential bonding provided to earth the metal parts and fixtures inside the flat. Equipotential bonding system is an essential safety installation required under the Electrical Code to provide earth bonding to metal parts and fixtures for the prevention of electrical shocks to persons coming in touch with these parts and fixtures accidentally charged with electricity current.  In addition, the electrical cable laying in some of the flats are found concealed in wall without any mechanical protection.  These fail to comply with the Electrical Code.

34.  There is no fire services installation provided for the Building.  Though fire services installations provision might not have been required at the time when this building was first occupied, the Fire Safety (Buildings) Ordinance Cap. 572 which came into force on 1 July 2007 requires the upgrading of the basic fire services installations within a period of 6 years from 1 July 2007 to the standard as specified in the F.S.I Code.

35.  In Mr. C. M. Wong’s opinion, the structural design of the Building was prepared in 1963, based on the Building (Construction) Regulations, 1959 Edition.  The basic wind pressures adopted in the current Code of Practice on Structural Use of Concrete 2004 is about 16.8% higher than in 1959.  

36.  It is Mr. C. M. Wong’s opinion that another feature is ductility which is needed for general structural safety with respect to impact loads, cyclic loads and accidental loads. In actual fact, ductility helps to redistribute the loads from an overloaded and yielded member to the other parts of the structure so that even when a member has been overloaded, it would not collapse immediately. Ductility is therefore crucial to the safety of a structure and is at least as important as strength, according to the modern code.  In order to ensure the ductility of a structure, the modem code not only requests the minimum percentages of reinforcement, but also the proper detailing of the anchorages between beams and columns.  However, no such requirement was imposed at the time of design of the Building. The buildings designed under the old codes have generally lower performance of ductility.

37.  Mr. C. M. Wong considers that a robust building will not cause disproportionate collapse when subjected to local damage due to accidental overload or impact. The significance of a robust design is as follows:

(a)  A gas explosion occurred in one of the apartments in Ronan Point in 1968 (a UK residential building) and caused extensive damage and progressive collapse of the building. Therefore, regulatory requirements were introduced in UK to provide (in buildings above 5 storeys) structural resistance with the aim of limiting damage caused by an accident or misuse, so that it is not disproportionate to the cause.

(b)  Disproportionate collapse is now becoming the preferred term than progressive collapse because all collapses are inherently progressive. What disproportionate collapse means is that an event that should have been localized to one part of the structure instead causes most or all of the structure to collapse, out of proportion to the original damage. Disproportionate collapse implies a lack of structural redundancy.

(c)   The modem code, therefore requests that “a structure should be designed and constructed so that it is inherently robust and not unreasonably susceptible to the effects of accidents or misuse, and disproportionate collapse.” A set of design loads for robustness design should be considered and checked for the key structural elements according to the code.

(d)  However, at the time of design of the Building, the consideration of robustness of a building was not included in the design codes in Hong Kong.  The building designed under the old codes has generally lower performance of robustness.

38.  Mr. C. M. Wong also compares the requirements stipulated in the various old and new codes/regulations. He finds that the minimum grade of concrete and concrete cover has been increased. It is obvious that the durability requirement has become more stringent over time. Such changes are due to greater emphasis being placed on the durability of concrete. He opines that the concrete structures constructed in recent years are more durable than those in the earlier times.

39.  Mr. C. M. Wong also considers that the concrete grade and design concrete cover of slabs and beams of the Building are not up to the standard stipulated in the current code.  In other words, the durability provisions do not meet the requirement of the current code. Hence, the design life of the Building should be smaller than the 50 years stated in the current code. As the age of the Building is 45, his opinion is the Building is at the end of its design life.

40.  Under the current Building (Construction) Regulations, all superstructures shall be designed against the lateral wind load.  The current wind code has specified that a design wind load of return period of 50 years should be designed for.  However, the effect of lateral wind load acting on the superstructure was not considered in the design of the structural elements. Therefore, Mr. C. M. Wong considers the Building is not able to meet the current standard set out in the current Building (Construction) Regulations.

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

(a)  the Building is 45 years old;

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

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

Reasonable Steps to Acquire All the Undivided Shares in the Lots

42.  As required by Section 4(2) (b) of the Ordinance, the Applicant is under an obligation to negotiate for the purchase of the 1st Respondent and the 2nd Respondent’s undivided shares in the Lots on terms that are fair and reasonable. 

43.  The Applicant has commissioned Savills Valuation and Professional Services Limited ("Savills") to assess the value of the units in the Building on the existing use values basis ("EUV").  A valuation report for EUV was prepared by Mr. Charles Chan of Savills.  The valuation date is 28 January 2011.  

44.  The evidence of the Applicant’s factual witness, Ms. Lui Wing Yan, shows that the redevelopment value ("RDV") of the Lots as in April 2011 to be $68,200,000.  However, on the evidence, there is no detailed report on this RDV.  

45.  According to the Savills EUV report, the EUV of the Building is $56,490,000.  The EUVs of the 1st Respondent and the 2nd   Respondent's premises are respectively $1,950,000 and $1,910,000. In terms of percentage, the share of the 1st Respondent and the 2nd   Respondent's premises is respectively 3.45% and 3.38%.  Based on the RDV of $68,200,000, the reasonable offers to be made to the 1st Respondent and the 2nd Respondent would be respectively $2,352,900 and $2,305,160.

46.  Ms. Ngai submits that:

(a)  In 1967, Leung Yiu Wah, deceased, acquired the 1st Respondent’s premises (Flat 3B) and held the same as trustee upon trust for Madam Leung Tai Ho (who passed away in 1986) and Mr. Leung Kam Sui as Tenants in Common in equal shares.

(b)  Leung Yiu Wah passed away in 1988 without transferring before his death the legal title to the 1st Respondent’s premises (Flat 3B) to Mr. Leung and Madam Leung.

(c)   By the Order of H.H. Judge M. Wong dated 3 October 2011，Mr. Leung Kam Sui was appointed to represent the 1st Respondent’s estate for the purposes of these proceedings.  By its letter dated 20 September 2011，Messrs. Li, Wong，Lam & W.I. Cheung (“LWL”) advised that its clients, Madam Leung Ka Lok Coty and Mr. Yeung Fo Hi，had already applied for the grant of Letters of Administration in respect of Madam Leung’s estate and that their clients had no intention to make representation in the Applicant’s application for appointing Mr. Leung to represent the 1st Respondent’s estate for the purposes of this proceedings.

47.  The evidence of the Applicant’s factual witness, Ms. Lui Wing Yan, shows that:

(a)  On 18 April 2011 and before commencement of this Application，the Applicant wrote to the Personal Representative of the estate of Leung Yiu Wah, the Personal Representative of Madam Leung’s estate and Mr.Leung offering to purchase the 1st Respondent’s premises (Flat 3B) at $2,472,000.

(b)  Mr. Leung accepted the offer and agreed to sell his half-share in the 1st Respondent’s premises (Flat 3B) to the Applicant at the price of $1,236,000 (i.e. $2,472,000/2) free from encumbrances pending his acquisition of 50% of the legal ownership of the 1st Respondent’s premises (Flat 3B).

(c)   By its letter dated 20 September 2011, LWL advised the Applicant that their clients, Madam Leung Ka Lok Coty and Mr. Yeung Fo Hi, were willing to consider selling to the Applicant the 50% interests in the 1st Respondent’s premises (Flat 3B) subject to the grant of the Letters of Administration and terms to be agreed.

(d)  On or about 18 January 2012, the Applicant made another offer to Mr. Leung and LWL to purchase the 1st Respondent’s premises (Flat 3B) at the price of $2,717,000. Although Mr. Leung had previously agreed to sell to the Applicant his 50% interests in Flat 3B at $1,236,000, for fairness，the Applicant decided to purchase the interests of Mr. Leung and Madam Leung’s estate at the same price.

48.  The evidence of Ms. Lui also shows that:

(a)  On 11 April 2011 and before commencement of this Application，the Applicant offered to the 2nd Respondent to purchase the 2nd Respondent’s premises (Flat 4B) at the price of $2,422,000.

(b)  The offer was not accepted. The Applicant tried to reach an agreement with the 2nd Respondent by mediation on 23 June 2011 without success.

(c)  On or about 18 January 2012，the Applicant made another offer to the solicitors of the 2nd Respondent to purchase the 2nd Respondent’s premises (Flat 4B) at the increased price of $2,661,000. No agreement has been reached between the Applicant and the 2nd Respondent.

49.  Ms. Ngai submits that the Tribunal is not required to conduct a valuation exercise in assessing whether the offer made by an applicant is reasonable.  It merely has to be satisfied that “on the evidence available，the offer falls within the range of what may broadly be regarded as fair and reasonable compensationfor the interest in question”, as said by Mr. Justice Ribeiro PJ in Capital Well Limited v Bond Star Development Limited (2005) 8 HKCFAR 578 at para. 33.

50.  Although I do not have detailed evidence of the RDV of the Lots when the Applicant offers to purchase the 1st Respondent and the 2nd Respondent's premises in April 2011, I am satisfied that, on the evidence available, the offers made by the Applicant falls within the fair and reasonable range.  Thus, I conclude that the Applicant has taken reasonable steps to acquire all the undivided shares in the Lots.

Order for Sale

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

Reserve Price

52.  In his EUV report dated 20 April 2011, Mr. Charles Chan valued the EUV of the respective units of the Building as at 28 January 2011. 

53.  In his valuation of the EUV of the ground floor unit of the Building, Mr. Charles Chan adopted the following methodology:-

(a)  He converted the area of the components of the ground floor unit by using a conversion factor of 1/3 for the cockloft and 1/6 for the yard. 

(b)  He took into account of 8 comparable transactions in 7 different buildings nearby.    After making what he regarded as the necessary adjustments (for time, location, building age, quantum, and layout) for all these comparable transactions, he took the average of the adjusted unit rate of the comparables to come to the unit price at $132,091/m², which was rounded to $132,000/m².

(c)  He then used the unit rate to assess the ground floor unit.

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

(a)  He selected Flat B on 3rd Floor (“the Reference Domestic Unit”), which was situated on the middle floor of the domestic portion as the reference unit for the purpose of valuing its unit price. 

(b)  The unit price of the Reference Domestic Unit was first assessed by making reference to market comparables.  He took into account of 8 comparable transactions in different buildings nearby.  After making what he regarded as the necessary adjustments (for time, age, floor, quantum, view, and lighting and ventilation) for all these comparable transactions, he took the average of the adjusted unit rate of the comparables to come to the unit price of the Reference Domestic Unit at $52,086/m², which was rounded to $52,100/m².

(c)  He further considered the floor difference and internal conditions of the Reference Domestic Unit and the remaining domestic units within the Building to arrive at the EUV of all the domestic units and the roof, using a conversion factor of 1/8.

55.  On 18 January 2012, Mr. Charles Chan considered that during his preparation of the Valuation Report in January 2011, he had made reference to the property indices (April 2011 version) published by the Rating and Valuation Department for making time adjustment, in which the date of valuation (i.e. 28 January 2011) was covered by provisional indices.  The confirmed property indices are now available and he considers it appropriate to update his time adjustment with the confirmed price indices. As a result, Mr. Charles Chan produces a revised valuation.  His revised valuation of the EUV of all the units in the Building are:

Floor	Flat A	Flat B	Flat C
Roof		$540,000
5/F	$1,730,000	$1,730,000	$1,980,000
4/F	$2,020,000	$1,920,000	$2,020,000
3/F	$2,060,000	$1,960,000	$2,060,000
2/F	$2,100,000	$2,000,000	$2,110,000
1/F	$2,110,000	$2,080,000	$2,390,000
G/F and Cockloft		$25,860,000

56.  During the hearing, I queried Mr. Charles Chan’s use of 1/3 conversion factor for the cockloft, pointing out that in previous Lands Tribunal decisions in land resumption cases, a conversion factor of 1/4 has been used.  Mr. Charles Chan explains that in other compulsory sale cases, a conversion factor of 1/3 has been used.  Later Mr. Charles Chan also confirms that the headroom of the cockloft is 2.41 m. and the Ground Floor, 2.78 m. He considers the headroom of 2.41 m. is higher than average.  Since the 1st Respondent and the 2nd Respondent do not query the methodology adopted by Mr. Charles Chan, in the end I do not challenge Mr. Charles Chan’s conversion factor.

57.  The 1st Respondent and the 2nd Respondent take no issue on the EUV report.  I am satisfied that the revised EUV valuation of Mr. Charles Chan is fair and reasonable.  In Mass Ventures (supra), when the expert for the applicant has revised his EUV valuation, the Tribunal, applying the decision in Best Insight Limited (勤正有限公司) v. the Estate of Tin Hing Lin (田興蓮) (deceased) & Others (LDCS 5000/2011, 5 September 2011, unreported), holds that under “section 10 of the Ordinance, the apportionment between the majority owner and the minority owners of the Lots shall be on the basis as specified in Part 3 of Schedule 1 of the Ordinance.  Under the said Schedule, the proceeds are to be apportioned on the basis of the EUV as determined by this Tribunal” (para. 44).  I hold that the proceeds are to be apportioned on the basis of the EUV as set out above.

58.  Since the EUV as stated in Mr. Charles Chan’s valuation report dated 28 January 2011 has been revised, I have re-examined the offers made to the 1st Respondent and the 2nd Respondent based on the revised EUV.  After carefully considering all the evidence, I am satisfied with my earlier conclusion that the Applicant has taken reasonable steps to acquire all the undivided shares in the Lots.

59.  In his valuation report dated 3 February 2012, Mr. Charles Chan states the RDV of the Lotsas at 3 February 2012 to be $71,400,000.  At the trial, the 1st Respondent and the 2nd Respondent do not object to this valuation.

60.  Mr. Charles Chan’s valuation method can be summarized as follows:

(a)  The valuation is conducted on the assumption that the existing building erected thereon is vacant and to be demolished and redeveloped into certain beneficial usages reasonably reflecting its redevelopment potential.  

(b)  Mr. Charles Chan has assessed the RDV using the residual valuation method.  The residual method is the assessment of the land value by deducting the development costs from the potential sales revenue, i.e. the gross sale price, of the completed building.

(c)  After testing with different scenarios, Mr. Charles Chan is of the opinion that the optimum development on the Lots comprises a 24-storey commercial / residential composite building with shop units on Ground Floor and Cockloft, podium garden and plant rooms on 1/F and residential units on 2/F to 23/F.

(d)  He then identifies retail and domestic comparables, applying relevant adjustments as appropriate.

(e)  Mr. Charles Chan uses 8 Ground Floor shop transactions in 7 buildings nearby as his Ground Floor retail comparables.  For upper floor domestic comparables, he uses a total of 36 flat transactions in two developments nearby.

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

Ground Floor Retail:     $189,000/m²; and

Typical Domestic Unit: $119,700/m².

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

61.  One of the objectives of the Ordinance, as Mr. Justice Ribeiro PJ said in Capital Well Ltd v. Bond Star Development Ltd (supra) at para. 21, is “to ensure that the minority owner receives fair and reasonable compensation for his interests in the Lots”. In order to achieve this objective, I have to set a reserve price for the public auction. It is my duty to ensure that the valuation put forward by the Applicant reflects the market value of the Lots including its redevelopment value, even, as in the present case, when the 1st Respondent and the 2nd Respondent call no expert to challenge the valuation of the Applicant’s expert.

62.  When Mr. Charles Chan gives evidence at the trial, I ask him his reason in using the same identical retail comparables in his EUV and RDV valuation, despite the valuation date of the former is 28 January 2011 and the latter, 3 February 2012, a difference of one year.  Mr. Charles Chan confirms that he has carried out researches but cannot find any retail transactions in Ap Lei Chau after March 2011.  Although I am surprised that between July 2010 and March 2011, there are 8 retail transactions but between April 2011 and February 2012, there is nil, I accept Mr. Charles Chan’s evidence.

63.  I also ask Mr. Charles Chan to amplify the following factors in his RDV valuation:-

(a)  His adjustments of building age and layout for the Ground Floor shop comparables.

(b)  Whether the purchaser(s) of the comparable transactions at Nos. 14, 16 and 18 Wai Fung Street is/are related. 

(c)  His adjustments of view for the domestic comparables.

(d)  Whether there should be adjustments for his residential unit rate in his RDV valuation because one flat per floor on the upper levels is proposed in his hypothetical redevelopment of the Lots.

64.  When the hearing resumes, Mr. Charles Chan provides supporting information answering my questions: 

(a)  Mr. Charles Chan produces plans showing the layout of the Ground Floor shop comparables to support his adjustments.  After considering the plans, I agree no change should be made.

(b)  He proposes not to change his adjustments of building age because there is little difference in value between shops with age difference not more than 10 years.  I agree that for retail properties in Ap Lei Chau, there is little difference in value between shops with age difference not more than 10 years. 

(c)  Mr. Charles Chan confirms the purchasers of the transactions at Nos. 14, 16 and 18 Wai Fung Street are related.  However, the prices are within a reasonable range.  I agree Mr. Charles Chan’s adjustments are fair reflection of the situation.

(d)  He produces plans showing the layout of the residential comparables to support his view adjustments.  After comparing the views with the proposed development, I agree Mr. Charles Chan’s adjustments are justified.

65.  Mr. Charles Chan proposes to add 3% to the unit rate of the flats in the proposed development which are one flat per floor.  I agree that this is appropriate.  As a result, Mr. Charles Chan revises his RDV valuation to $72,700,000. 

66.  I am satisfied that the revised valuation made by Mr. Charles Chan is fair and reasonable, reflecting the current redevelopment value of the Lots.  Thus, the reserve price of the Lots should be fixed at this value.

Conclusion

67.  In the circumstances, I make the following determination:

(a)  This Tribunal is satisfied that the existing use value of the 1st Respondent and the 2nd Respondent’s units in the building now known as Nos. 70-72 Main Street，Ap Lei Chau, Hong Kong (hereinafter referred to as ”the Building”) erected on SECTION A OF APLICHAU MARINE LOT NO. 26 and THE REMAINING PORTION OF APLICHAU MARINE LOT NO. 26 (hereinafter collectively referred to as "the Lots") as assessed in this Application is fair and reasonable and is fair and reasonable when compared with the values of the Applicant's units;

(b)  This Tribunal is satisfied that the redevelopment of the Lots is justified due to the age or state of repair of the Building, and that the Applicant has taken reasonable steps to acquire all the undivided shares in the Lots held by the 1st Respondent and the 2nd   Respondent;

(c)  All the undivided shares in the Lots, the subject of the Application, be sold by way of public auction for the purposes of redevelopment of the Lots under the Land (Compulsory Sale for Redevelopment) Ordinance Cap. 545 (“the Ordinance”);

(d)  Mr. Ma Ho Fai (馬豪輝) and Ms. Tsang May Ping (曾美萍), nominated by the Applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to the sale of the Lots, and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs. Woo Kwan Lee & Lo dated 31 January 2012;

(e)  For the purposes of the sale of the Lots by public auction:

(i)    The sale of the Lots be on the particulars and conditions of sale substantially the same as those in the draft Particulars and Conditions of Sale to be initialed and approved by the Tribunal;

(ii)  The reserve price be set at $72,700,000; and

(iii)  Subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Lots or its successor in title, the redevelopment of the Lots 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 Lots becomes the owner of the Lots; and

(f)   Liberty to the Applicant, the 1st Respondent and the 2nd   Respondent and the Trustees to apply to the Tribunal for further directions.

Costs

68.  The parties have indicated their respective positions on costs. Thus, I make a costs order nisi that there be no order as to costs for the Application herein.  If the parties do not make any further application for costs within 14 days from today, the costs order nisi shall become absolute.