CITY FAIR DEVELOPMENT LIMITED (昌輝發展有限公司) 1st Applicant RISE CHEER INVESTMENT LIMITED (展騰投資有限公司) 2nd Applicant DYNAMIC HERO LIMITED (恒雄有限公司) 3rd Applicant GENTWAY LIMITED (雋偉有限公司) 4th Applicant EVER PLANET LIMITED (偉宙有限公司) 5th Applicant SUPREME HERO LIMITED (崇英有限公司) 6th Applicant GLORY STAR DEVELOPMENT LIMITED (佳星發展有限公司) 7th Applicant TRIPLE GLORY LIMITED (三耀有限公司) 8th Applicant GROUP LEADER LIMITED (合英有限公司), CITY FAIR DEVELOPMENT LIMITED (昌輝發展有限公司), RISE CHEER INVESTMENT LIMITED (展騰投資有限公司), DYNAMIC HERO LIMITED (恒雄有限公司), GENTWAY LIMITED (雋偉有限公司), EVER PLANET LIMITED (偉宙有限公司), SUPREME HERO LIMITED (崇英有限公司), GLORY STAR DEVELOPMENT LIMITED (佳星發展有限公司), TRIPLE GLORY LIMITED (三耀有限公司), GROUP LEADER LIMITED (合英有限公司)
HO NGAI SAU (何藝修) and HO NGAI HIM (何毅謙) 1st Respondents (Discontinued) HO SHIU HA (何少霞), HO SHIU HA (何少霞), YEUNG CHU (楊珠), WONG CHIK NGA IVY (黃直雅), TSU HA SIN (朱夏仙), ADMINISTRATRIX OF THE ESTATE OF LIU SO KUEN (廖素娟), DECEASED, WONG WAH YEUNG (王華陽), LAU WAI FAN (劉偉芬), HUANG XIAOCAI (黃孝財), THE PERSON APPOINTED BY ORDER DATED 28 JULY 2020 TO REPRESENT THE ESTATE OF WONG YUEN LAN (黃月蘭), DECEASED, SO TSANG FAI (蘇增輝), WU KUK WA (胡菊華), LAU KIN SAU (劉建壽), LO CHI HANG LONNIE (盧志恒), SOLE EXECUTOR OF THE ESTATE OF LOW CHEUNG LOI (盧昌來), DECEASED, U HA MIN ALIAS TAM MAN (譚民)
agrees that the applicants were entitled to make the application for an order for sale of the Lots and takes issue on valuations as assessed in the application only, but R4 has not appointed any valuation expert in these proceedings. Mr Cheung also agrees with Ms Nancy Ngai (“Ms Ngai”), counsel; Ms Nancy Ngai, instructed by Lo & Lo
CITY FAIR DEVELOPMENT LTD AND OTHERS v. HERN MIU FONG AND OTHERS
________________________
| Before: | Mr Alex Ng, Member of the Lands Tribunal |
| Dates of Trial: | 23, 24 & 27 – 30 June and 4 & 7 July 2022 |
| Date of Judgment: | 5 August 2022 |
________________________
J U D G M E N T
________________________
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 section D of Kowloon Inland Lot No 4148 and the Remaining Portion of Kowloon Inland Lot No 4148 (“the Lots”) together with the building erected thereon known as Nos 68A, 68B, 68C, 70, 70A, 70B and 70C To Kwa Wan Road, Kowloon (“the Building”). As per the assignments vide Memorial Nos UB346918 and UB382011, the Lots are subject to a right of way for the owner(s) of the adjacent lot, section C of Kowloon Inland Lot No 4148.
2. The Building is a 9-storey commercial / residential composite building and is served by 8 common staircases. Occupation permit No K220/60 was issued for the Building on 20 October 1960, granting permission to occupy its ground floor as 7 shops for non-domestic use and 7 tenements for domestic use, and its 1st floor to 8th floor as 14 tenements per floor for domestic use. According to the approved building plans of the Building, there are 7 shop units (i.e. Front Portions facing To Kwa Wan Road) and 7 domestic units (i.e. Rear Portions facing a common playground) planned on ground floor, and 14 domestic units planned on each upper floor from 1st floor to 8th floor. According to the records of the Land Registry and the respective assignment plans, Front Portion on 3rd Floor of No 68B To Kwa Wan Road is subdivided into 2 smaller units (i.e. Flat1 and Flat 2), and Front Portion on 8th Floor of No 70 To Kwa Wan Road is subdivided into 3 smaller units (i.e. Flat A, Flat B and Flat C).
3. According to the Deed of Mutual Covenant and Grant, there is reference to the exclusive use of each of the roofs in the Building for the benefit of the corresponding 8th Floor owners with exception of Front Portion on 8th Floor of No 68A To Kwa Wan Road, which has no such right and the roof above it is for the exclusive use of the owner of Rear Portion on 6th Floor of No 68A To Kwa Wan Road. There is also reference to the exclusive use of portion of a playground for the benefit of the owner of Rear Portion on Ground Floor of No 70C To Kwa Wan Road. Further, the 2 valuation experts appointed in these proceedings agree that all Front Portions on 1st Floor are attached with flat roof.
4. The Lots together with the Building standing thereon is allocated 126 undivided shares. Each of the shop units and domestic units is given 1 undivided share, making up a total of 126 undivided shares. Each of the sub-divided units of Front Portion on 3rd Floor of No 68B To Kwa Wan Road is given 1/2 of 1 undivided share, and each of the subdivided units of Front Portion on 8th Floor of No 70 To Kwa Wan Road is given 1/3 of 1 undivided share.
SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS
5. At the time of filing of the Notice of Application (“NOA”) on 22 March 2018, there were 19 respondents. Pursuant to the Order of the tribunal dated 28 July 2020, the 20th respondent (“R20”) was added to these proceedings. Excluding the undivided shares held by R20, the applicants then owned, 86.243% (i.e. 108 and 2/3 out of the total 126) undivided shares in the Lots, more than the threshold of 80% required for building aged 50 years or above.
6. After the filing of the NOA, the applicants acquired units from 12 respondents, and subsequently discontinued the proceedings against them.
7. 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%.
8. Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a lower percentage in respect of a lot belonging to a class of lots specified in that notice.
9. The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, made under section 3(5) of the Ordinance (“the Notice”), was gazetted on 22 January 2010 and came into operation on 1 April 2010. Section 3 of the Notice lowered the threshold for compulsory sale of specified classes of lots from 90% to 80%. Those classes of lots include:
“a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the relevant date”
10. Since the occupation permit of the Building was issued in 1960, i.e. more than 50 years before the date of application (i.e. 22 March 2018; the relevant date under the Notice), the applicable percentage is therefore 80%.
11. I am satisfied that as at the date of application, the applicants owned more than 80% of the undivided shares in the Lots. I am therefore satisfied the applicants are entitled to make the present application under section 3 of the Ordinance.
THE REMAINING RESPONDENTS
12. At trial, the applicants owned 94.709% (i.e. 119 and 1/3 out of the total 126) undivided shares in the Lots. The following 8 respondents (“the respondents”) remain in the present action: -
Respondent Premises 4th Respondents (“R4”) Front Portion, 8th Floor, No 68B To Kwa Wan Road (“R4’s Property”) 5th Respondents (“R5”) 1/2 share of Rear Portion, 4th Floor, No 68B To Kwa Wan Road (“R5’s Property”) 10th Respondent (“R10”) Front Portion, 4th Floor, No 70 To Kwa Wan Road (“R10’s Property”) 11th Respondent (“R11”) Front Portion, 5th Floor, No 70 To Kwa Wan Road (“R11’s Property”) 14th Respondent (“R14”) 1/2 share of Flat C of Front Portion, 8th Floor, No 70 To Kwa Wan Road (“R14’s Property”) 16th Respondent (“R16”) Rear Portion, 5th Floor, No 70A To Kwa Wan Road (“R16’s Property”) 18th Respondents (“R18”) Front Portion, 5th Floor, No 70B To Kwa Wan Road (“R18’s Property”) 20th Respondent (“R20”) Rear Portion, 4th Floor, No 68A To Kwa Wan Road (“R20’s Property”)
13. There are 3 named R4, and they are tenants in common in equal shares of R4’s Property. The 1st named R4 is a mentally incapacitated person. Pursuant to the Order of the tribunal on 23 June 2022, the 2nd named R4 was appointed the guardian ad litem of the 1st named R4 for the purpose of these proceedings. Since this appointment at commencement of the trial, all 3 named R4 have then been represented by Mr Earnest Cheung (“Mr Cheung”).
14. R4 agrees that the applicants were entitled to make the application for an order for sale of the Lots and takes issue on valuations as assessed in the application only, but R4 has not appointed any valuation expert in these proceedings. Mr Cheung also agrees with Ms Nancy Ngai (“Ms Ngai”), counsel for the applicants, that in case if the Lots are successfully sold, the net proceeds of sale attributable to the undivided share owned by the 1st named R4 be paid to and retained by the trustees to be appointed by the tribunal pending the appointment of the committee of the 1st named R4 pursuant to the Mental Health Ordinance, Cap 136.
15. R5 has entered into 2 provisional agreements for sale and purchase with the 1st applicant on 13 October 2016 and 10 July 2014, but they have not been able to complete the transaction because R5 have not yet obtained the grant of probate in respect of the estate of Mak Guen, deceased. Nonetheless, R5’s solicitors on behalf of R5 have confirmed that they do not oppose the application.
16. R10, R11 and R16 are represented by Mr Simon Lam (“Mr Lam”). They do not dispute that the applicants were entitled to take out this application, and put the applicants to strict proof in respect of the “age or state of repair” of the Building and the “reasonable steps” to acquire all the undivided shares in the Lots. Nevertheless, they take issue on valuations as assessed in the application.
17. R14, represented by Mr Huang Youzeng, has not engaged any legal services. In the Notice of Opposition dated 28 August 2020, R14 does not oppose the application, but R14 has concern over how much can be obtained upon sale of the Lots.
18. The 1st named and 2nd named R18 cannot be found. Substituted service of the application on them was effected on 24 December 2018 pursuant to the Order of the tribunal dated 7 December 2018. They have not shown up after the expiration of the 1-month period as specified respectively in the notices.
19. The 3rd named R18 has appointed a valuation expert together with the other respondents, and appeared at trial in person. In the Notice of Opposition dated 10 April 2018, the 3rd named R18 disputes over the valuations as assessed in the application. He submits that the acquisition price is far below the market value.
20. R20 is the paper title owner of R20’s Property. One Tam Wing Chung acquired possessory title to R20’s Property and obtained a declaration of his possessory title on 12 April 2017 in HCA 1598 of 2014, and then he assigned his possessory title to the 1st applicant on 15 August 2017.
21. R20 cannot be found. Substituted service of the application on R20 was effected on 25 August 2020 pursuant to the Order of the tribunal dated 11 August 2020. No one has shown up after the expiration of the 14-day period as specified respectively in the notices.
22. At trial, only R4, R10, R11 and R16 are legally represented, and only R10, R11, R16 and the 3rd named R18 have appointed Mr Paul Varty (“Mr Varty”) as their valuation expert in these proceedings.
ISSUES FOR DETERMINATION BY THE TRIBUNAL
23. The remaining issues to be decided in this case are as follows:
1) What was the respective existing use value (“EUV”) of all units in the Building as at 5 January 2018, the valuation date adopted in the application valuation report dated 15 March 2018, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?
2) Whether the redevelopment of the Lots is justified due to age and/or state of repair of the Building in accordance with section 4(2)(a) of the Ordinance?
3) Whether the applicants have taken reasonable steps to acquire all the undivided shares in the Lots on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance?
4) If an order for sale should be granted, what should be the reserve price (i.e. redevelopment value (“RDV”) of the Lots) for the purpose of auction sale?
DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING
24. 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.”
25. All active respondents at trial dispute on the valuations as assessed in the application, but only R10, R11, R16 and the 3rd named R18 have engaged the valuation services of Mr Varty. Whilst, the applicants appoint Mr Alnwick Chan (“Mr Chan”) of Knight Frank Petty Limited as their valuation expert.
26. In the EUV assessment by direct comparison method, the 2 valuation experts agree on the valuation date of 5 January 2018, the adoption of the same reference shop unit (i.e. Front Portion on Ground Floor of No 68C To Kwa Wan Road) and reference domestic unit (i.e. Front Portion on 4th Floor of No 68B To Kwa Wan Road), and the particulars and attributes of all units in the Building and the comparables except for the conversion of the fenced playground of Rear Portion on Ground Floor of No 70B To Kwa Wan Road and the top roofs.
27. They disagree on the selection of some comparables. In the direct comparison, they disagree on mainly the adjustments for location and layout for the shop comparables, and the adjustments for location, view and additional window or lighting / ventilation for the domestic comparables. They also argue whether an adjustment for top floor at 5% should be applied to Comparable ED14 and whether different weightings should be applied to the shop comparables to derive the adopted unit rate of the shop reference unit.
28. In the comparison with the reference units, they agree on the adjustment rates for the shop units in the Building, but fail to reach agreement on the adjustments for view, additional window or lighting / ventilation, internal condition, lowest floor and noise for some of the domestic units.
EUV of Shops
29. Mr Chan and Mr Varty propose 4 shop comparables and 6 shop comparables respectively, and 4 of them are common (i.e. Comparables ES1, ES2, ES3 and ES4). I agree to analyse Comparables ES5 and ES6 proposed by Mr Varty. I consider that Comparables ES5 and ES6 are not that far from the Building. They are located along To Kwa Wan Road and have character similar to that of the shop reference unit.
30. The valuation experts agree on the adjustment for time with reference to retail price indices, adjustment for age at 1% for every 10-year difference, adjustment for frontage at 2% for every 1-meter difference, adjustment for headroom at 2% for every 1-meter difference, adjustment for size at 1% for every 10-square meter difference and adjustment for return frontage to Comparable ES4 at -3%.
31. Regarding the adjustment for location, I agree with Mr Chan Comparable ES1 is similar to the reference shop unit and nil adjustment should be made, instead of -3% as suggested by Mr Varty. I also agree with Mr Chan nil adjustment should also be made to Comparable ES3, which was then close to a planned MTR entrance and opposite to a market building, instead of 10% as suggested by Mr Varty.
32. Nonetheless, I am of the view Comparable ES2, closer to the junction between To Kwa Wan and Lok Shan Road, is better than Comparable ES1 and the shop reference unit and should justify -5% adjustment as suggested by Mr Varty instead of 0% as adopted by Mr Chan. I am also of the view Comparable ES4, which abuts on Kowloon City Road with a vehicular flyover and is in mid of a wet market, is inferior than the reference shop unit along To Kwa Wan Road, a main road in the district, and its adjustment rate should be 5% instead of 10% as adopted by Mr Chan and 0% as suggested by Mr Varty. Further, I consider that Comparables ES5 and ES6 are inferior than the reference shop unit and their adjustment rate should be 9% instead of 8% only as suggested by Mr Varty. The 2 valuation experts agree on the adjustment rate for the RDV Comparable RS3 at 9%, and the respective locations of Comparables ES5 and ES6 are similar to it. I disagree with Mr Chan that substantial adjustment should be made to these 2 comparables just because they are further away from the junction between Lok Shan Road and To Kwa Wan Road, there is a garden on the opposite side of the road and there is no pedestrian crossing nearby.
33. Regarding the adjustment for layout, the 2 valuation experts agree not to make any adjustment to Comparables ES2 and ES3, which have respective depths (i.e. 12.5 meters and 13.03 meters) slightly longer than that of the reference shop unit (i.e. 8.95 meters). Accordingly, I consider that 5% should be made to Comparables ES1, ES4, ES5 and ES6, which have respective depths of 17.03 meters to 18.9 meters, instead of 0% or 2% as suggested by Mr Varty. I consider that there are not much differences between the respective shapes of the reference shop unit and the comparables, except for Comparable ES4. The shape of Comparable ES4 is a bit odd, but its L-shape appear not to affect its usage materially.
34. The valuation of the shop reference unit is listed in Appendix I of the judgment. The average unit rate of the 6 comparables is about $553,499, and the average excluding the highest and the lowest, Comparables ES3 and ES6, is about $566,920. Anyhow, I am of the view the character of Comparables ES3 and ES4 is different from that of the reference shop unit and the adjusted unit rate of Comparable ES6 is out of line. I consider that the adopted unit rate for the reference shop unit should be $585,000 per square meter, close to the adjusted unit rates of Comparables ES1, ES2 and ES5 (i.e. on average $588,272), all along To Kwa Wan Road.
35. The valuation of each shop unit on ground floor is listed in Appendix II of the judgment. The same adjustment rates and principles as agreed by the valuation experts or as determined by the tribunal above are applied to the valuation of all shop units in the Building.
EUV of Flats
36. Mr Chan and Mr Varty propose 10 domestic comparables and 13 domestic comparables respectively, and 9 of them are common (i.e. Comparables ED1 to ED9). I agree to analyse Comparables ED10 and ED12, which were transacted after the valuation date, and Comparable ED13 proposed by Mr Varty, but disagree to adopt Comparable ED11, which faces a vehicular flyover directly. Although Comparable ED13 is a bit far from the reference domestic unit, it is the only domestic comparable along To Kwa Wan Road. Further, I agree to analyse Comparable ED14 proposed by Mr Chan, though its transaction price appears to be on the low side.
37. The 2 valuation experts agree on the adjustment for time with reference to domestic price indices, adjustment for age at 1% for every 5-year difference, adjustment for floor at 2% for every 1-level difference, adjustment for top floor at 5%, adjustment for headroom at 2% for every 1-meter difference, adjustment for size at 1% for every 5-square meter difference and adjustment for location to the common comparables, but they disagree on the adjustment rates for view and additional windows or lighting / ventilation.
38. Regarding the adjustment for building view, I prefer the lesser sensitive rate of 2% as adopted by Mr Chan to 5% as suggested by Mr Varty. Nonetheless, I agree to adopt the adjustment rates for additional window or lighting / ventilation as suggested by Mr Varty, which differentiate the comparables facing 2 streets and those facing 1 street and a lane only, and the latter should have a lesser adjustment rate of -2% instead of -3% as proposed by Mr Chan.
39. Further, I agree with Mr Varty to make nil adjustment for location to Comparable ED13, which is similar to the reference domestic unit, instead of a substantial adjustment as proposed by Mr Chan. However, I agree with Mr Chan to make top floor adjustment to Comparable ED14, which is a top floor unit with unauthorized building structures above it.
40. The valuation of the domestic reference unit is listed in Appendix III of the judgment. The average unit rate of the 13 comparables is about $88,701, and the average excluding the 2 highest and the 2 lowest, Comparables ED1, ED2, ED10 and ED14, is about $88,740. I consider that the adopted unit rate should be $88,700 per square meter in this instance.
41. The valuation of each domestic unit in the Building is listed in Appendix IV of the judgment. The 2 valuation experts agree on the adjustment for floor at 2% for every 1-level difference, adjustment for top floor at -5%, adjustment for headroom at 2% for every 1-meter difference, adjustment for size at 1% for every 5-square meter difference and adjustment for view towards light well at -10%.
42. I disagree with Mr Chan that the unauthorized enclosure of the common playground by Rear Portion on Ground Floor of No 70B To Kwa Wan Road could justify a positive value and a conversion factor of 1/8 in this instance. Mr Chan cannot explain to the tribunal satisfactorily the risks of enforcement for reinstatement by the other owners in the Building and / or the government. I consider that a willing and prudent purchaser with knowledge of the facts in this case would not pay a price for it as at the valuation date. There was no enforcement action in the past does not mean that there will not be any enforcement action in the future. In recent years, there is much less tolerance of unauthorized building works by the public and the government. If a positive value is assigned to this unauthorized enclosure owned by the applicants, the value of the respondents’ properties would be less than fair and reasonable when compared with the value of the applicants’ properties as assessed in the application.
43. Nonetheless, I agree with Mr Chan to convert all the roofs at 1/8 instead of 1/10 or 1/12 as suggested by Mr Varty. Although no undivided share is assigned to them separately and all of them except one have not been mentioned in the respective assignments of their corresponding domestic units, the right for their exclusive occupation have been stated in the Deed of Mutual Covenant and Grant. From valuation perspective, the conversion factor at 1/8 for such corresponding roof is fair and reasonable. In the past, roof in aged buildings might sometimes be sold independently, but the demand for independent roof is uncommon nowadays.
44. Regarding the adjustment for view towards playground, I prefer the lesser sensitive rate at -2% as adopted by Mr Chan to -5% as suggested by Mr Varty. I also agree with Mr Chan to adjust for worse lighting / ventilation at -3% instead of -5% as suggested by Mr Varty. Nevertheless, I agree with Mr Varty to adjust for better lighting / ventilation at 2% instead of 3% as adopted by Mr Chan.
45. Regarding the adjustment rate for internal condition, I consider that “Very Poor”, “Poor” and “Good” as compared with “Fair” in this instance should be adjusted at -5%, -2.5% and 2.5% respectively, the midway figures as proposed by the 2 valuation experts.
46. Regarding the adjustment for noise, I agree with Mr Chan to apply an adjustment rate at 1% to the domestic units at the rear, which is less affected by noise as compared with the units in the front. I am also of the view the noise in the front would affect all upper floors instead of mainly the 1st and 2nd floors only as proposed by Mr Varty. However, I agree with Mr Varty to make an adjustment for lowest floor to all ground floor domestic units at -5%. I consider that the inferiority of the ground floor domestic units in terms of security and privacy outweigh their better accessibility and convenience.
EUV of All Units in the Building
47. The EUV of all units in the Building as at the date of valuation, i.e. 5 January 2018, and adopted by this tribunal are appended below: -
Street No Unit Floor EUV Street No Unit Floor EUV No 68A Front G $28,570,000 No 70A Front G $22,040,000 No 68B Front G $21,990,000 No 70B Front G $22,040,000 No 68C Front G $22,010,000 No 70C Front G $21,930,000 No 70 Front G $22,010,000 Sub-total: $160,590,000
Street No Unit Floor EUV Street No Unit Floor EUV 68A Rear G $4,774,500 70 Front 5 $4,553,400 68A Front 1 $4,985,400 70 Rear 5 $3,517,000 68A Rear 1 $3,846,600 70 Front 6 $4,353,800 68A Front 2 $4,874,100 70 Rear 6 $3,446,000 68A Rear 2 $3,872,600 70 Front 7 $4,154,300 68A Front 3 $4,897,100 70 Rear 7 $3,375,000 68A Rear 3 $3,894,900 70 Front - A 8 $1,556,100 68A Front 4 $4,685,600 70 Front - B 8 $1,726,500 68A Rear 4 $3,820,600 70 Front - C 8 $893,400 68A Front 5 $4,593,600 70 Rear 8 $3,362,500 68A Rear 5 $3,742,700 70A Rear G $3,637,900 68A Front 6 $4,497,100 70A Front 1 $4,826,300 68A Rear 6 $4,042,500 70A Rear 1 $3,804,400 68A Front 7 $4,405,100 70A Front 2 $4,716,600 68A Rear 7 $3,590,500 70A Rear 2 $3,641,200 68A Front 8 $4,097,000 70A Front 3 $4,625,900 68A Rear 8 $3,591,400 70A Rear 3 $3,662,400 68B Rear G $3,648,100 70A Front 4 $4,535,200 68B Front 1 $4,826,300 70A Rear 4 $3,591,500 68B Rear 1 $3,804,400 70A Front 5 $4,444,500 68B Front 2 $4,716,600 70A Rear 5 $3,517,000 68B Rear 2 $3,733,400 70A Front 6 $4,353,800 68B Front - 1 3 $2,371,800 70A Rear 6 $3,446,000 68B Front -2 3 $1,930,500 70A Front 7 $4,154,300 68B Rear 3 $3,662,400 70A Rear 7 $3,375,000 68B Front 4 $4,535,200 70A Front 8 $4,065,400 68B Rear 4 $3,591,500 70A Rear 8 $3,279,800 68B Front 5 $4,444,500 70B Rear G $3,546,100 68B Rear 5 $3,517,000 70B Front 1 $4,826,300 68B Front 6 $4,245,000 70B Rear 1 $3,804,400 68B Rear 6 $3,446,000 70B Front 2 $4,834,500 68B Front 7 $4,263,100 70B Rear 2 $3,825,700 68B Rear 7 $3,289,800 70B Front 3 $4,508,000 68B Front 8 $4,277,800 70B Rear 3 $3,662,400 68B Rear 8 $3,362,500 70B Front 4 $4,535,200 68C Rear G $3,644,600 70B Rear 4 $3,591,500 68C Front 1 $4,826,300 70B Front 5 $4,553,400 68C Rear 1 $3,804,400 70B Rear 5 $3,517,000 68C Front 2 $4,716,600 70B Front 6 $4,245,000 68C Rear 2 $3,733,400 70B Rear 6 $3,446,000 68C Front 3 $4,625,900 70B Front 7 $4,154,300 68C Rear 3 $3,662,400 70B Rear 7 $3,375,000 68C Front 4 $4,648,600 70B Front 8 $4,065,400 68C Rear 4 $3,499,200 70B Rear 8 $3,279,800 68C Front 5 $4,444,500 70C Rear G $4,260,800 68C Rear 5 $3,517,000 70C Front 1 $4,776,100 68C Front 6 $4,353,800 70C Rear 1 $3,830,700 68C Rear 6 $3,446,000 70C Front 2 $4,668,600 68C Front 7 $4,263,100 70C Rear 2 $3,757,200 68C Rear 7 $3,375,000 70C Front 3 $4,578,900 68C Front 8 $4,277,800 70C Rear 3 $3,592,800 68C Rear 8 $3,449,100 70C Front 4 $4,377,000 70 Rear G $3,464,500 70C Rear 4 $3,613,800 70 Front 1 $4,826,300 70C Front 5 $4,399,500 70 Rear 1 $3,804,400 70C Rear 5 $3,540,300 70 Front 2 $4,716,600 70C Front 6 $4,309,800 70 Rear 2 $3,733,400 70C Rear 6 $3,470,300 70 Front 3 $4,625,900 70C Front 7 $4,323,200 70 Rear 3 $3,662,400 70C Rear 7 $3,312,900 70 Front 4 $4,648,600 70C Front 8 $4,222,000 70 Rear 4 $3,591,500 70C Rear 8 $3,293,400 Sub-total: $479,951,000
48. I therefore accept the total EUV of the Building is $640,541,000 (i.e. $160,590,000 +$479,951,000).
SECTION 4(2) OF THE ORDINANCE - JUSTIFICATION AND REASONABLE STEPS
49. 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).”
50. 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 Lot is justified due to the age and/or state of repair of the Building
51. The applicants adduce expert evidence of Mr Sammy Ng (“Mr Ng”), a structural engineer, of AECOM Asia Company Limited, Mr Tang Ki Cheung (“Mr Tang”), a quantity surveyor, and Mr Benson Wong (“Mr Wong”), a building surveyor, of Benson Wong & Associates Limited. Mr Ng conducted a structural survey of the Building and prepared a Structural Condition Survey Report in May 2021. Mr Tang conducted cost assessments and prepared a Repair Works Cost Assessment Report and a Construction Cost Assessment Report both dated 17 March 2021. Mr Wong conducted a condition survey of the Building and prepared a Condition Survey Report on 26 May 2021.
52. None of the respondents adduced expert evidence to rebut the reports complied by Mr Ng, Mr Tang and Mr Wong. However, they are cross-examined by Mr Lam at trial.
53. Having considered the reports of Mr Ng, Mr Tang and Mr Wong and in the absence of contrary evidence, I accept their expert opinion. The Building, being erected more than 61 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 safety standards and statutory requirements.
54. 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 for constructing a new similar superstructure. 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.
55. I disagree with Mr Lam that the structure of the Building is far from being in a poor condition and is not bad at all for a building of this age. Even if (i) part of the results of covermeter survey shows that some of the concrete measurements were thicker than that required in the approved building plans; (ii) carbonated concrete is one of the pre-conditons for the corrosion of rebars to happen; (iii) carbonation is reversible; (iv) only 1 sample of chloride content falls within the high risk grading; (v) the concrete strength test show that some of the results are better than that specified in the approved building plans; (vi) the results of open up reinforcement inspections considers the worst condition only of the reinforcement; (vii) end of design life does not mean the end of building life; and (viii) the structural survey did not inspect the foundation of the Building, all these cannot shake the conclusions made by Mr Ng.
56. Mr Lam has just picked up some only of Mr Ng’s answers under cross-examination in his submissions without reference to the other findings in Mr Ng’s report. In fact, there are other analyses and results reported by Mr Ng. For example, a total of 1,529 locations of structural elements containing major defects such as cracks, bulged concrete, spalling and past moisture were identified during site inspection of the Building, and concrete at 29% of the test areas was affected by chloride levels exceeding the 0.4% threshold. Even if parts of the survey results are above standard, these cannot assist the respondents to infer that the overall condition of the Building should be acceptable. Conclusion of a structural survey should not be an averaging exercise. A few major defects could lead to an unacceptable condition.
57. On the other hand, although I doubt whether or not carbonation is really reversible, I agree with Mr Ng that application of coating to the concrete surface can prevent water from penetrating into the reinforcement and hence slow down further corrosion. I also agree with him application of such coating to the whole Building should not be practical and cost effective because such works would require removal of existing finishes on the structural members.
58. Regarding the expert evidence of Mr Tang, I agree with Mr Lam that it is odd for Mr Tang to make comparison with the repair and renovation costs of 3 other high-end multi-storey residential developments, which are different from the Building in character, and not to make reference in his report to the “Reference Unit Rate under Building Rehabilitation Platform” as released or to be released by the Urban Renewal Authority. I consider that the “Reference Unit Rate under Building Rehabilitation Platform” should be relevant, even if there could be a wide range of 30% to 40% between the highest and the lowest figures. However, in the absence of contrary evidence, I accept Mr Tang expert evidence in this regard. Although his findings in his report are limited by his own experience, his calculations and conclusions therein are logical and reasonable.
59. I also accept the construction costs as estimated by Mr Tang, who adopts the rates in RLB’s “High Rise, Ordinary Quality (Residential)” category instead of Arcadis’ “Apartments, High Rise, Average Standard (Domestic)” category. I agree with his explanations that the latter should have included fit-out including air-conditioning, kitchen cabinets and home appliances but he is estimating the costs of constructing the superstructure similar to that of the Building with the provision of basic fit-out only such as toilet bowls in the bathroom and sinks in the bathroom and kitchen. In addition, the finished product should be slightly better than the public housing constructed by Housing Authority, and his adopted unit rate is higher than the Arcadis’ “Apartments, High Rise, Public Authority Standard (Domestic)”.
60. Regarding the expert evidence of Mr Wong, I agree with Mr Lam that Mr Wong appears to have exaggerated some of his findings. He commented that the existing windows of the Building were fabricated and installed by unqualified workers under no qualified supervision, but he had not conducted inspection of the windows in the Building. He commented that the Building has substandard workmanship and / or materials used in the original construction, but he took wrongly the lack of movement joints in the external rendering of the Building as an example. Nevertheless, I agree with the conclusions in his report, which are logical and reasonable.
61. I disagree with Mr Lam that an inference must be drawn to the effect that an appreciable number of units in the Building, which had been let by the applicants to NGOs, were let in a tenantable condition to under-privileged families, and that the common areas of the Building were in a safe and healthy condition in compliance with statutory requirements. There is no concrete evidence to support such inference. Even if some of the units were in tenantable condition upon lease commencement, their conditions in such aged building could have been depreciated shortly.
62. 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
63. In assessing the reasonableness of the offers, I have considered the case of 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……”
64. While R5 have not yet obtained the grant of probate in respect of the estate of Mak Guen, deceased to complete the transaction of R5’s Property between the 1st applicant and R5, the 1st named and 2nd named R18 and R20 are missing owners in these proceedings, and R20 is the paper title owner only of R20’s Property.
65. Nonetheless, the applicants have made 3 offers to R4, R10, R11, R14, R16 and R18 on 21 February 2018, 30 November 2021 and 24 May 2022 respectively. Ms Ngai submits that all these offers fall within the range of fair and reasonable compensation for the respective interests owned by R4, R10, R11, R14, R16 and R18. The offer prices have made reference to the independent valuation of Knight Frank Petty Limited and have also reflected the then pro-rata share of the RDV.
66. On the evidence available, I accept that the offer prices have reflected the respective proportionate share of the RDV of the Lots and do fall within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. In fact, Mr Chan’s assessments are generally closer than those of Mr Varty to my determinations in this judgment. I am satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots.
67. Mr Lam submits that, prior to the commencement of the application on 22 March 2018, the respondents had only received 1 offer letter dated 21 February 2015 in which there was no explanation whatsoever as to how the EUV and RDV adopted in the calculation of the offer amount were arrived at and no RDV valuation report was attached to the NOA, and therefore the respondents had no choice but to contest the proceedings. I consider that this complaint is neither here nor there because the respondents could have sought independent legal and valuation advice. The decisions of the respondents to contest the proceedings cannot infer that the applicants’ offer prices were not fair and reasonable.
RESERVE PRICE FOR THE AUCTION
68. By reason of being satisfied that redevelopment of the Lots is justified and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots, I am satisfied an order for sale should be granted in favour of the applicants.
69. The 2 valuation experts agree to adopt residual method and update their respective RDV assessments as at 16 May 2022. They agree to develop the Lots on a registered site area of 1,141.78 square meters (i.e. including a right of way of 87.45 square meters), but they disagree on the optimum plot ratio and the hypothetical development.
70. Although Mr Chan and Mr Varty agree on the adopted unit rate for the upper floor domestic units at $249,000 per square meter, they argue whether or not this adopted unit rate includes the value of top roof. They also disagree on the gross development value (“GDV”) of the ground floor shops and the conversion rate for the 1st floor shops.
71. In the residual valuation, they agree on the unit demolition cost at $2,237 per square meter (i.e. $14,871,017), unit construction cost at $42,197 per square meter, demolition period of 6 months, construction period of 30 months, marketing cost at 3% of GDV, professional fees at 6%, but they disagree on the interest (deferment) rate and developer’s profit.
Hypothetical Development Scheme
72. Although the 2 valuation experts agree to include the right of way for the calculation of plot ratio, they propose different hypothetical development schemes in their respective residual valuations. While Mr Chan proposes to firstly maximize the domestic plot ratio of 7.5 and build a 27-storey commercial / residential composite building at the total plot ratio of 8.4375 (i.e. non-domestic plot ratio of 0.9375), Mr Varty suggests to build more non-domestic floor area at the total plot ratio of 8.6999 (i.e. non-domestic plot ratio of 1.5 and domestic plot ratio of 7.1999).
73. I agree with Mr Chan that marketability of upper floor shops in the district, which mainly serve the local community, is relatively inferior, but City Hub as quoted by him as an example for illustration is irrelevant. In fact, both ground floor shops and 1st floor shops of City Hub were all vacant upon site inspection on 24 June 2022, and the reasons why they have been vacant since completion in 2017 were unknown at trial. Further, since the value of 1st floor shops is much lower than that of domestic units, which will be discussed in the later part of the judgment, I agree with Mr Chan that his hypothetical development scheme at the total plot ratio of 8.4375 could achieve the optimum RDV of the Lots.
74. I also agree with Mr Chan that there would have flat roof on 1st floor instead of 2nd floor or 3rd floor as suggested by Mr Varty. Even if it is permissible to have a transfer plate that is double the area of the gross floor area of the domestic tower above, the size of the transfer plate should be reasonable. There is no compelling reason in this instance to build an extra-large transfer plate, which would create a saleable flat roof of about 300 square meters on the lowest domestic floor as suggested by Mr Varty.
75. I accept the larger common area of 65 square meters on each upper domestic floor as proposed by Mr Chan too. In the comparison with the common areas of the other developments, I agree with Mr Chan that the calculations should take into consideration the areas of external wall and curtain wall, which have been counted in the saleable areas, otherwise the calculations could not reflect the actual size of the common areas in question. In addition, although the 2 valuation experts agree to build 2 lifts only in the hypothetical development, the design should further consider the site area, development bulk, number and size of the units on each floor and etc. Although the common areas of One Artlane and Two Artlane with 2 lifts only are close to the figure of 55 square meters as suggested by Mr Varty, these 2 developments have smaller site area and lesser development bulk.
76. Accordingly, I accept the hypothetical development scheme proposed by Mr Chan (i.e. total gross floor area of 9,633.76 square meters). I also accept his proposed layout and shop reference unit. Having considered the depth and shape of the site, it is not unreasonable for Mr Chan to propose larger shop units on ground floor.
GDV – Shops on Ground Floor and 1st Floor
77. There are 6 common comparables for valuation of the shop reference unit on ground floor. Mr Chan and Mr Varty agree on the adjustments for location, adjustment for time with reference to private retail price indices, adjustment for age at 1% for every 10-year difference, adjustment for headroom at 2% for every 1-meter difference, adjustment for size at 1% for every 10-square meter difference, and adjustment for frontage at 2% for every 1-meter difference (i.e. except for Comparable RS2, which has a relative long frontage, at 1% for every 1-meter difference).
78. Regarding the adjustment for return frontage to Comparable RS2, I prefer the greater adjustment rate at -10% as proposed by Mr Chan to -6% only as suggested by Mr Varty. Applying the same principles for layout adjustment in EUV assessment, which make reference to mainly depth of the comparables, I consider that greater adjustment at -10% should be applied to Comparables RS1 and RS2, and Comparables RS3, RS4, RS5 and RS6 should be adjusted at -2%, -2%, -6% and -4% respectively, the figures in mid of those as adopted by the 2 valuation experts.
79. I am not persuaded by Mr Varty that there should have an additional upward adjustment at 5% for blight to reflect the fact that the Lots and their nearby sites are under development or impending development. Although Comparable RS2 transacted on 25 September 2020 is close to the Lots and their nearby redevelopment projects, the other comparables are relatively far away. I consider that, as at the respective transaction dates from July 2019 to December 2021, the comparables had not been affected noticeably by the proposed redevelopment projects including the Lots, and therefore an upward adjustment for blight is not justified.
80. The valuation of the shop reference unit is listed in Appendix V of the judgment. The average unit rate of the 6 shop comparables is about $411,480. The average excluding Comparables RS2 and RS5, which have frontages abutting on Lok Shan Road and Kowloon City Road instead of To Kwa Wan Road, is $404,113. In any event, the character of Comparable RS2 that has long frontage and return frontage is different from the shop reference unit. I am of the view that the shop reference unit should be assessed at $410,000 per square meter.
81. The valuation of the other hypothetical shops on ground floor is also listed in Appendix V. In addition to the adjustments for size and frontage at the agreed adjustment rates, I consider that there should be nil adjustment for layout because they are relatively regular and have depth over 20 meters, and the return frontage of Hypothetical Shop 1 abutting on a lane only should be adjusted at 5% instead of 3% as proposed by Mr Chan (and as adopted in the EUV assessment) and 10% as suggested by Mr Varty. I consider that the condition of the subject lane, which links To Kwa Wan Road and Ha Heung Road, will improve upon redevelopment of the Building.
82. For the conversion of the 1st floor shops, I prefer Mr Chan’s rate at 1/3 of the ground floor unit rate (i.e. Hypothetical Shop 2) to Mr Varty’s rate at 1/2. I agree with Mr Chan that the marketability of the 1st floor shops in this instance is relatively poor. There is not much demand for upper floor shops in the district. I also accept Mr Chan’s rate at 1/6 of the ground floor unit rate to covert the 1st floor flat roof. After conversion, the lump sum value of this 1st floor flat roof appears to be substantial and on the high side, but such assessment would not create prejudice to the respondents.
RDV of the Lots as at 16 May 2022
83. Based on the agreements of the 2 valuation experts and the above determinations, the residual valuation of the Lots as at 16 May 2022 is listed in Appendix VI of the judgment.
84. The 2 valuation experts agree to adopt the average unit rate for all domestic units at $249,000 per square meters, but they argue whether or not this average unit rate would cover the value of top roof. While the 1st floor flat roof is valued separately in this instance, I prefer to value the top roof separately too, and agree with Mr Varty to convert the top roof of 238.71 square meters at the rate of 1/8 of the average unit rate.
85. Nevertheless, I disagree with Mr Varty to apply an upward adjustment at 5% for district regeneration to the residual land value. Although there are some large scale URA projects in the district, they are located a bit far from the Lots on the opposite side of To Kwa Wan Road. The redevelopments of the nearby sites are also relatively small in scale, which could not change the character of the immediate locality. In any event, even if there is enhancement in value due to district regeneration, this should better be reflected in the GDV, in the adjustments to the comparables, instead of an overall adjustment to the residual land value as suggested by Mr Varty.
86. Regarding the interest rate, I agree with Mr Chan that there is a trend of increasing finance costs, and 4% is a reasonable figure to defer the values and costs in the residual valuation. In fact, the central banks of many developed countries have been increasing their interest rates in recent months.
87. Although the 2 valuation experts have made reference to the average borrowing costs of a few developers, I consider that these average borrowing costs cannot reflect accurately the hypothetical project finance cost in the residual valuation, because average borrowing costs may also cover the finance cost of investment properties and may also be affected by the gearing ratio of a particular developer and the collateral and guarantee in each loan agreement. In any event, from valuation perspective, the applicants as a potential bidder in public auction and their backgrounds should not be the material considerations in such hypothetical valuation.
88. In assessing the developer’s profit, the 2 valuation experts agree to make allowances for stamp duty at 4.25%, legal cost at 0.1% and an extra risk at 1% on land value, but they disagree on the rate in the residual valuation. Mr Chan proposes 14.65%, but Mr Varty suggests 12% only. They also have different interpretations of the extra risk at 1% as agreed by them. While Mr Chan relates it with the general risk, Mr Varty refers to the right of way only.
89. I consider that there is no material risk in respect of the subject right of way, which is in favour of the owner(s) of the adjacent lot only and is not open to public. On the other hand, the general risk should generally be reflected in the rate of developer’s profit, and I find no acceptable reason why there should have an additional item in the assessment as proposed by Mr Chan. Nevertheless, I agree with Mr Chan that as at the valuation date the property market is relatively unstable and the market sentiment is relatively weak because of the Ukrainian War, pandemic and increase of interest rate, and developers would generally demand a higher profit to compensate the higher development risks. Although the property market had once been improving in 2021, the market condition and sentiment as at the valuation date have weakened marginally.
90. I am of the view it is fair and reasonable to adopt a rate of 15% in this instance. This rate of developer’s profit should be applied to all including demolition cost, construction cost and residual land value, and no extra risk should then be allowed.
91. The Lots as at 16 May 2022 are assessed at $1,213,400,000, equivalent to an accommodation value of about $125,953 per square meter (i.e. about $11,701 per square foot), which should be the reserve price for public auction.
ORDERS
92. 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 Lots, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lots;
2) Mr Anthony WK Chow and Ms Anna SH Chow, nominated by the applicants, be appointed the trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lots;
3) The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Guantao & Chow dated 26 May 2022;
4) For the purposes of the sale of the Lots by public auction: -
a) the sale of the Lots 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 $1,213,400,000;
5) That part of the net proceeds of sale attributable to the undivided share owned by the 1st named 4th respondents be paid to and retained by the Trustees pending the appointment of the committee of the 1st named 4th respondents pursuant to the Mental Health Ordinance, Cap 136;
6) The applicants do publish notices once in a Chinese language newspaper (and in the Chinese language) and once in an English newspaper (and in the English language) circulating generally in Hong Kong within 7 days from the date of the sealed judgment informing the 1st and 2nd named 18th respondents, the 20th respondent and all persons claiming to be the owners of the Lots: -
a) that the tribunal has made an Order for sale of the Lots;
b) that the Lots be sold by public auction; and
c) where and the times during which a copy of the Order for sale can be obtained;
7) 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
8) Liberty to the applicants, the respondents and the Trustees to apply to the tribunal for further directions.
COSTS
93. Following Good Faith [1], 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.
| (Alex Ng) | |
| Member Lands Tribunal |
Ms Nancy Ngai, instructed by Lo & Lo, for the applicants
Mr Ernest Cheung, instructed by Victor Yeung & Co, for the 4th respondents
Attendance of the 5th respondent, represented by Tang, Wong & Chow, was excused
Mr Simon Lam, instructed by Anthony Chiang & Partners, for the 10th respondent, the 11th respondent and the 16th respondent
The 14th respondent was represented by Mr Huang Youzeng
The 1st named and 2nd named 18th respondents were not represented and did not appear
The 3rd named 18th respondent appeared in person
The 20th respondent was not represented and did not appear
