SMART HOST LTD v. ACEWELL INVESTMENTS LTD

LDCS 29000/2020

[2022] HKLdT 27

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 29000 OF 2020

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J U D G M E N T

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1.  This is an application for a compulsory sale order under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”) (hereinafter referred to as “the Application”) to sell all the undivided shares of the following lots (“the Lots”):

Lot No	Address	Site Area (m2)
Tai Hang Lot No 29 (“Lot 1”)	23 Sun Chun Street	39.39
Tai Hang Lot No 170 (“Lot 2”)	24 Sun Chun Street	39.11
	Total:	78.50

2.  The Lots, like many other lots in the vicinity, are held on lease from Government for a term of 999 years from 1 January1894. In Lee Bing Cheung v Secretary for Justice, HCA 1092/2010 (unreported, 21 February 2013), Deputy High Court Judge Marlene Ng (as she then was) held at §164 as follows:

“… under Hong Kong municipal law, the transition of land tenure being part of Hong Kong’s transition from a British Colony to a Special Administrative Region of the PRC under the principle of “one country, two systems” upon the resumption of sovereignty by the Chinese State on 1 July 1997 is achieved by the enactment of the (Basic Law) and the Hong Kong Reunification Ordinance … The system of land tenure has not changed after 1 July 1997 save that all land in Hong Kong has become State property and is managed, used, developed and leased by the SARG (see articles 120‑123 in Section 2 of Chapter V of the (Basic Law)). This means that all rights of “ownership” held by the British Crown and/or the (British Hong Kong Government) in right of the British Crown in respect of land in Hong Kong prior to 1 July 1997 are the same rights held by the Chinese State and/or the (HKSAR Government) in right of the Chinese State on or after 1 July 1997.”

3.  Standing on the Lots is a pair of 6-storey tenement buildings (“the Buildings”) the occupation permit of which[1] was issued on 22 November 1965 permitting 2 shops for non-domestic use on ground floor (“G/F”) and 2 tenements for domestic use on each of 1/F to 4/F; only 1 tenement for domestic use was planned on 5/F. The buildings are served by one common staircase.

4.  On 17 May 2022, the parties informed the Tribunal by their joint letter of their common ground that, inter alia, if an order for sale of the Lots shall be made, the parties invite the Tribunal to make a direction to sell the Lots together with the following adjoining lots as a merged site (“the Merged Site”) in one public auction:

(a)  Tai Hang Lots Nos 35, 36 and 37 (with address at Nos 17 and 17A Sun Chun Street);

(b)  Section A, Section B and the Remaining Portion of Tai Hang Lot No 31 (with address at Nos 18 and 19 Sun Chun Street);

(c)  Tai Hang Lot No 30, Section A and the Remaining Portion of Tai Hang Lot No 171 and Tai Hang Lot No 172 (with address at Nos 21-22 Sun Chun Street); and

(d)  Tai Hang Lot No 28 (with address at No 25 Sun Chun Street)

which are hereinafter collectively referred to as the “Adjoining Lots”.

5.  In view of the above, the parties intend to have the auction of the whole parade of tenement buildings standing west of the junction of Sun Chun Street and Ormsby Street towards the southwest to its end. This section of Sun Chun Street is a cul-de-sac.

6.  Each of Lot 1 and Lot 2 is governed by its own Deed of Mutual Covenant (“DMC”) with each unit on each floor having been allotted 1/6 of the undivided share of their respective lot.

7.  As at the date of the Application on 28 September 2020, the applicant already owned 100% of Lot 1 and 5/6 of the undivided shares of Lot 2; the respondent owned only the G/F of the Buildings at No 24 Sun Chun Street, ie the remaining 1/6 (ie 16.67%) of the undivided shares of the Lot 2.

8.  Ms Nancy Ngai (“Ms Ngai”) acts on behalf of the applicant and Ms Astina Au acts on behalf of the respondent.

The Issues in the Application

9.  Ms Ngai identified the following issues to be determined by the Tribunal, namely: -

(1)  The respondent has confirmed that it does not take issue on whether redevelopment of the Lots is justified due to the “age” or “state of repair” of the Buildings but will leave it to the applicant to satisfy the Tribunal that all the statutory requirements are satisfied;

(2)  The respondent will primarily take issue with the existing use value (“EUV”) as at 21 July 2020 and the redevelopment value (“RDV”) of the Lots (as part of the Merged Site) as at the notional date of 6 May 2022.

The Evidence

10.  The applicants filed, inter alia, the following documents in support of the application:

(a)  a witness statement and supplemental witness statement of Ms Lui Wing Yan (“Ms Lui”), representative of the applicant, dated 29 March 2021 and 20 May 2022 respectively;

(b)  a Building Condition Survey Report by Mr Wong Wing Cheung Dennis (“Mr Dennis Wong”), a Registered Building Surveyor and Authorized Person, dated 30 March 2021;

(c)  a Structural Survey Report by Mr Wong Chi Ming (“Mr CM Wong”) dated 24 March 2021;

(d)  the following reports by Ms Dorothy Chow (“Ms Chow”) who is now working with Colliers International (Hong Kong) Limited (“Colliers”):

(i)  an Application Report pursuant to Part 1 of Schedule 1 to the Ordinance dated 25 September 2020;

(ii)  a Supplemental EUV Report dated 30 March 2021;

(iii)  a Rebuttal Report dated 25 June 2021 on EUV and RDV report both dated 1 April 2021 prepared by Dr Tsz-Choi Wong (“Dr Wong”), Consultant of CBRE Limited;

(iv)  Updated RDV Valuation Report dated 5 May 2022.

11.  The respondent filed, inter alia, the following:

(a)  a witness statement of Mr Chow Ka Yin Edward (“Mr Chow”), a Director of the respondent, dated 1 April 2021;

(b)  the following reports by Dr Wong:

(i)  a Valuation & Advisory Report dated 1 April 2021 on the EUV as at 21 July 2020 and another of even date on RDV;

(ii)  Rebuttal Report dated 23 July 2021 on the EUV as at 21 July 2020 and another of even date on RDV;

(iii)  Supplemental Report on RDV dated 6 May 2022.

12.  Ms Chow and Dr Wong have also prepared a joint statement one dated 12 August 2021 setting out their agreements and disagreements mainly on EUV, followed by another one dated 20 May 2022 on RDV (“2^nd Valuation Joint Statement”).

13.  In effect, Ms Chow and Dr Wong have reached agreement on the EUV of all the domestic units in the Buildings. They have also revised their respective assessment of EUV of the two shops on G/F of the Buildings and RDV of the Merged Site.  In respect of the latter, the only remaining matter in dispute is the gross development value (“GDV”) of the retail portion of the hypothetical development.

Whether the Applicant is entitled to make the Application

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

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

16.  The Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice was gazetted on 22 January 2010 and came into operation on 1 April 2010 (“the Notice”). Section 3 of the Notice lowered the threshold for compulsory sale in respect of the classes of lots specified in the Notice from 90% to 80%. Those classes of lots include:

(a)  a lot with each of the units on the lot representing more than 10% of all the undivided shares in the lot; and

(b)  a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (ie the date of the application under the Ordinance).

17.  Either Lot 1 or Lot 2 is one with each of the units thereon representing 16.667% of the total undivided shares (ie more than 10% of all the undivided shares in the Lot 1 or Lot 2 respectively), and since the occupation permit for the Buildings was issued on 22 November 1965 (ie not less than 50 years before the date of the Application), the Notice is applicable and the threshold percentage should be 80%.

18.  The applicant, owning an average of 91.66% of the undivided shares of Lot 1 and Lot 2 at the commencement of the Application, was entitled to file the Application under section 3(2)(b) of the Ordinance which may cover two or more lots—

(i) on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings; and

(ii) where the average of—

(a) the percentage of the undivided shares owned by the majority owner in the lot or lots on which one of the buildings stands; and

(b) the percentage of the undivided shares owned by the majority owner in the lot or lots on which the other of the buildings stands,

is not less than the percentage specified in subsection (1).

EUV as at 21 July 2020

Assessment of EUV of G/F Units

19.  In compliance with Part 1 of Schedule 1 to the Ordinance, the applicants filed a valuation report dated 25 September 2020 (ie the Application Report) prepared by Ms Chow to set out the assessed market value of each property on the Lots—

(a)on a vacant possession basis;

(b)assessed as if the Lots could not be made the subject of an application for an order for sale; and

(c)not taking into account the redevelopment potential of the property or the Lots.

20.  In the Valuation Joint Statement dated 12 August 2021, Ms Chow and Dr Wong agreed the particulars of the G/F units of the Buildings as follows[2]:

G/F	Saleable Area (m2)	Yard (m2)	Effective Floor Area (m2)	Frontage (m)	Depth (m)	Headroom (m)
23 Sun Chun Street	23.80	11.05	26.01*	4.32	6.60	2.90
24 Sun Chun Street	21.69	11.52	23.99*	4.29	5.26	2.90

21.  As regards the conversion to the effective floor area* above, Ms Chow and Dr Wong could not agree on the conversion factor for the rear yard which opens (if it is indeed opened) to a rear lane which Dr Wong called the 2^nd section of Sun Chun Street (because there are altogether four street/lane running in parallel to each other but all named Sun Chun Street). Dr Wong considered there should be much value as the rear lane (ie the 2^nd section of Sun Chun Street) is wide and many premises in the vicinity which are occupied by cafés, bars or small restaurants do make use of the similar rear lanes for sitting area. Ms Chow considered otherwise and adopted 1/6 as the conversion factor as opposed to Dr Wong’s 1/2. Just at the beginning of the trial, Ms Chow revised her conversion factor to 1/5.

22.  Indeed, Tai Hang, in which the Lots are located, used to be a residential enclave to the southeast of Tung Lo Wan Road. In recent years, many cafés, bars or small restaurants cropped up at the ground floor of the old residential blocks which have been occupied and dominated by car-repairing workshops. The four sections of Sun Chun Street which run somewhat in parallel to Tung Lo Wan Road are situated towards the end of the enclave abutting a retaining wall of a residential development, Illumination Terrace, up on the hill. The four sections of Sun Chun Street are however farthest away from Tung Lo Wan Road and are traversed by Ormsby Street which runs next to Wun Sha Street, the widest local artery in the enclave leading from Tung Lo Wan Road up to the hillside at the end of which a school and the entrance to Illumination Terrace are located. Patrons of the eateries may park their cars along Wun Sha Street and walk towards the west into the inner streets.

23.  As said, the four sections of Sun Chun Street are farthest away from Tung Lo Wan Road and the cafés, bars or small restaurants are mainly along the streets closer to Tung Lo Wan Road, namely School Street, King Street, Shepherd Street (hereinafter collectively referred to as “the Streets”), then the 1^st section Sun Chun Street and the 3^rd section etc or at the corner of the street junctions. The 2^nd section of Sun Chun Street or the 4^th section of Sun Chun Street, like intervening lanes between the Streets, are relatively narrow. The 2^nd section of Sun Chun Street which the Lots abut at the back have no shop fronts anyway. I do not agree with Dr Wong that this 2^nd section of Sun Chun Street behind the Buildings may be used as outdoor waiting and seating area[3]. In the latter regard, I share Ms Chow’s initial view that the so-called second frontage to the rear lane does not add value to the retail units. Therefore, I do not agree with Ms Chow’s concession on the conversion factor of the rear yard at 1/5 and would continue to adopt the conversion factor at 1/6 for the purpose of direct comparison analysis. Nevertheless, I am prepared to adopt Ms Chow’s concession to assess the EUV of the respective units.

24.  G/F of No 23 Sun Chun Street is adopted by the valuation experts as the Reference Shop Unit. Ms Chow assessed the EUV of the Reference Shop Unit as at 21 July 2020 at $353,500 per sq m while Dr Wong assessed at $568,400 per sq m.

25.  The two valuation experts have adopted the following comparables for valuation on direct sales comparison basis:[4]

Comp Ref:	Address	Age	Date of PASP or ASP*	Consideration	Saleable Floor Area (m2)	Frontage (m)	Headroom (m)	Depth (m)	Effective Area (m2)	Effective Unit Price (/m2)
Ref Unit	G/F, 23 Sun Chun Street	1965	21 Jul 20		23.8	4.32	2.9	6.6	26.01*
ES1	G/F & C/L, 42 & 43 Sun Chun Street	1975	14 Nov 13	$30,800,000	61.43 + Yard: 3.92 + C/L: 35.54	8.36 + Return Frontage: 6.97	5.03	8.33	70.97	$433,986
ES2	Shop B, G/F including Storage B on C/L above,  6 & 7 Shepherd Street	1988	18 Jul 13	$24,200,000	39.51 + + C/L: 25.39	3.06	5.29	9.55	45.86	$527,693
ES3	Shop A, G/F including Open Yard, Sze Hai Building, 12 & 13 Shepherd Street	1964	26 Apr 13	$42,000,000	97.60 + Yard: 3.79	9.17 + Return Frontage: 11.42 + 9.77 onto Third Lane	3.71	11.42	98.23	$427,568
ES4	G/F,  19 Ormsby Street	1974	14 Mar 17	$18,800,000	31.06	4.62 + Return Frontage: 6.55	3.66	7.15	31.06	$605,280
ES5	G/F (including Open Yard) , 3 King Street	1966	12 Aug 14	$26,200,000	31.14 + Yard: 4.27	4.47	2.90	7.34	31.99**	$819,006
ES6	G/F, 12 King Street	1959	10 Feb 13	$27,680,000	36.48 + Yard: 4.30	6.02 + Return Frontage: 4.70	3.35	4.70	37.34**	$741,296

* PASP stands for provisional agreement for sale and purchase while ASP stands for Agreement for Sale and Purchase.

26.  Again, Ms Chow and Dr Wong could not agree on the conversion factor for the rear yards which open (if they are indeed opened) to a rear lane of the last two comparables on King Street**. Neither was I aware of any shop front along this rear lane which is named Second Lane and for similar reason above, I adopt Ms Chow’s conversion factor of the rear yard at 1/5.

27.  Notwithstanding the above, Ms Chow and Dr Wong had the following agreements or disagreements on the adjustments[5]:

		Mr Chan	Mr Lee
Time		On the basis of the Private Retail Price Index of the Rating and Valuation Department (“RVD”)
Location:	Comparable ES1: Comparable ES2: Comparable ES3: Comparable ES4: Comparable ES5: Comparable ES6:	-2.0%		0.0%
		-20.0%		-10.0%
		-15.0%		-5% if this comparable is adopted
		NA		0.0%
		-60% if this comparable is adopted		-20.0%
		-60% if this comparable is adopted			-15.0%
Age		1% for 5 years’ difference		0.1% per year’s difference
Quantum/ Size		1% for 5 m2		0.5% for 1 m2 (ie 1% for 2 m2)
Frontage		1% for every 0.5 m difference
Layout		NA		+3% for comparable ES2 & ES6
Depth		NA		1% for 1 m
Headroom		1% for every 0.5 m difference		3% for every 1 m difference on the basis of weighted headroom
Total Adjustment		By Multiplication

28.  Thus the various adjustments proposed by Ms Chow are shown in the following table (while those by Dr Wong, if different from Ms Chow, are shown in the parenthesis):[6]

Comp Ref:	Effective Unit Price (/m2)	Adjustments										Adjusted Effective Unit Price (/m2)
		Time	Location	Frontage	Return/ Second Frontage	Quantum/ Size	Headroom	Layout	Age/ Building Condition	Depth	Total
ES1	$433,986	4.2%	-2.0% (0.0%)	-8.1%	-10.0% (-3.0%)	9.1% (20.8%)	0.3% (-1.0%)	0.0%	-2.0% (-1.0%)	(1.7%)	-9.4% (11.8%)	$393,191 ($485,370)
ES2	$527,693	2.3%	-20.0% (-10.0%)	2.5%	0.0% (2.0%)	4.0% (8.3%)	0.0% (-0.8%)	0.0% (3.0%)	-4.6% (-2.3%)	(3.0%)	-16.8% (7.2%)	$439,041 ($565,634)
ES3	$427,568	3.9%	-15.0% (-5.0%)	-9.7%	-15.0% (-5.0%)	14.5%	-1.6%	0.0%	0.2%	0.0%	-23.5%	$327,090
ES4	$605,280	(-4.0%)	(0.0%)	(-0.6%)	(-3.0%)	(0.9%)	(-2.3%)	(0.0%)	(-0.9%)	(0.6%)	(-9.0%)	($550,623)
ES5	$819,006	0.1%	-60.0% (-20.0%)	-0.3%	0.0%	1.2% (2.0%)	0.0%	0.0%	-0.2% (-0.1%)	(0.7%)	-59.7% (-18.1%)	$331,510 ($644,923)
ES6	$741,296	4.4%	-60.0% (-15.0%)	-3.4%	-10.0% (-8.0%)	2.3% (4.7%)	-0.9% (-1.0%)	0.0% (3.0%)	1.2% (0.6%)	(-1.9%)	-62.8% (-16.9%)	$276,800 ($595,375)

Adjustment for Location

29.  From the above, the greatest differences in opinion between Ms Chow and Dr Wong lie on the location adjustments.

30.  Although all the comparables proposed by the valuation experts are located in the same Tai Hang enclave, it is quite obvious that the farthest away from Tung Lo Wan Road, or more particularly from Wun Sha Street, the lowest are the values of the shops. For instance, all these comparables are being occupied by cafés, bars or small restaurants but the shops in the Buildings are still occupied as car-repairing workshops.

31.  Perhaps owing to historical reasons, most of the cafés, bars or small restaurants are found on streets closest to the junction of Tung Lo Wan Road and Wun Sha Street or at the various junctions of the Streets with streets that lead from Tung Lo Wan Road, particularly Ormsby Street. In such regard, I agree with Ms Chow that the last two comparables proposed by Dr Wong at King Street are not good comparables and if they are to be adopted, significant adjustments as much as -60% could be appropriate. I am of the view that nobody preparing to open a café, bar or small restaurant, not to mention a high-end one as suggested by Dr Wong, would consider either of the shops in the Building. With respect, I consider Ms Au’s criticism of Ms Chow’s belated concession on Day 2 of the trial in adopting comparables ES5 and ES6 misplaced.

32.  I have similar observation in regard of the comparables at Shepherd Street, ie comparables ES2 & ES3; but in respect of comparables ES3, on the one hand, it is situated at the advantageous position being at junction of Shepherd Street and Brown Street. On the other hand, a refuse collection point and a public toilet are situated immediately across the street junction. While Dr Wong acknowledged that the latter constitutes a nuisance and is very undesirable for the high-end food and beverage business, I consider Ms Chow not a heavy handed shaver in applying location adjustments of -20% and -15% respectively; I would apply a higher adjustment of about -40% for both, a progressive reduction further away from Tung Lo Wan Road.

33.  In terms of proximity, comparable ES1 is closest to the shops in the Buildings, being lying on the same street. However, this comparable occupies a corner position which is visible when people walk along Ormsby Street towards its end. In addition, this comparable is a distance away from the car-parking workshops for instance occupying the shops in the Buildings. I consider Ms Chow’s location adjustment of -2% not adequate; I would be prepared to allow a higher adjustment of -20%.

34.  What is left is comparable ES4 which is situated on Ormsby Street not very far away from comparable ES1. However, it is quite a distance from Tung Lo Wan Road as admitted by Dr Wong in his Rebuttal Report dated 23 July 2021 at  para 4.2.17, “this section of Ormsby Street is a cul-de-sac with very low pedestrian flow”[7] . I am prepared to apply -30% for location.

35.  At this juncture, it is noted that Ms Chow considered this comparable not suitable because, according to her, there is likely to be “a hope value for redevelopment” resulting from “site assembly activities” in 2010 to 2011 in the building. Ms Chow has provided a table of ownership in support of her opinion:[8]

Floor	19 Ormsby Street (also known as Block A, 29 Sun Sun Street)	21 Ormsby Street (also known as Block B, 29 Sun Sun Street)	29 Sun Sun Street (also known as Block C, 29 Sun Sun Street)
G/F	Wiser Ever Limited (via Assignment dated 31 July 2017)	Fairview Corporation Limited (via Assignment dated 31 July 2014)	Chan Tak Ho (via Assent dated 21 May 2003)
1/F	Smart Host Limited* (via Assignment dated 20 June 2011)	Chow Shui Chiu (via Assignment dated 20 June 1986)	Ngan King Ming & Ng Oi Kam (via Assignment dated 20 October 1982)
2/F	Smart Host Limited* (via Assignment dated 20 September 2011)	Smart Host Limited* (via Assignment dated 20 July 2010)	Lau Mee Lin (via Assignment dated 29 August 1978)
3/F	Smart Host Limited* (via Assignment dated 20 September 2011)	Chan Kai Tong & Chan Siu Ngan (via Assignment dated 18 September 1986)	Lau Yun Kwai & So Kwai Ching (via Deed of Gift dated 3 December 1977)
4/F	Smart Host Limited* (via Assignment dated 20 September 2011)	Yuen Pui Hei (via Assignment dated 28 December 2018)	Fung Mui Fun (via Assignment dated 25 May 1974)
5/F	Smart Host Limited* (via Assignment dated 10 October 2011)	Chan Shui Chim (via Assignment dated 20 August 1986)	Fung Mui Fun (via Assignment dated 25 May 1974)

* Smart Host Limited is the applicant in the present application.

36.  Although it appears that Ms Chow was correct in that the applicant was interested in acquiring the majority interest of this building at 19 & 21 Ormsby Street, for reasons unknown, the acquisition process was stopped after 2011. Then in July 2014, Fairview Corporation Limited, which turns out to be associated with the respondent in the present case, acquired G/F, 21 Ormsby Street. Further, in July 2017, comparable ES4 was acquired by Wiser Ever Limited which appears to be an unrelated third party. I agree with Ms Au that this comparable ES4 is not subject to any sufficiently significant hope value for redevelopment.

37.  On the face of the above evidence, I am content to include ES4 as a comparable because it is situated relatively close to the shops in the Building and is particularly the only comparable which was transacted closest to the valuation date of 21 July 2020 (though it is of itself dated).

Adjustment for Age

38.  As can be seen from the comparables above, they are located in buildings of having a wide range of ages, from 1959 for comparable ES6 to 1988 for comparable ES2, all being occupied by eateries. In such regard, I tend to agree with Dr Wong that a less sensitive adjustment of 0.1% per year’s difference is reasonable.

Adjustment for Quantum/ Size

39.  In view of the relative small size of the shops in the Building, their values would be sensitive to changes in sizes. This would especially be the case when the comparables are occupied as café, bar or small restaurant.  In such regard, comparable ES3 is too large as a comparable when it has a saleable area of about 98 sq m which is about 3 times larger than the shops in the Building. The same comment is also applicable to comparable ES1 which is about 3 times as large. I prefer therefore Dr Wong’s adjustment of 1% for 2 m².

Adjustment for Layout

40.  Dr Wong for instance applied a -3% adjustment for layout to comparable ES2 for what he described as awkward shape of the cockloft of this comparable. I do not consider it justified as the inverted L-shape or dumbbell shape is not so adverse as it is in relation to the cockloft which is less valuable than the ground floor; the narrowest portion, according to the floor plan, still consists of some 2 metres.

41.  Similarly, I consider Dr Wong’s adjustment of -3% for comparable ES6 not justified when the so-called recessed portion comprises only the washrooms at the back.

Adjustment for Depth

42.  In the valuation of a shop, the front portion is usually considered most valuable as it provides the most prominent selling space. For restaurant premises, it is not uncommon to find that the majority of the front or the seats by the frontage or the glass are the most popular. In this regard, I prefer to adopt the adjustments for depth as proposed by Dr Wong. I am not persuaded that as suggested by Ms Chow, such allowance has been factored in in her layout adjustment on which she did not apply anything.

Adjustment for Headroom

43.  As explained by Dr Wong in his Rebuttal Report dated 23 July 2021, the cocklofts being provided at the comparable premises have resulted in a lower headroom for the ground floor in the rear portion. Thus, so long as value has been assigned to the cocklofts at ¼ of that of the ground floor, Ms Chow’s adjustment approach based on full headroom may have allowed double benefits for those units having a cockloft constructed.

44.  Ms Chow said in the witness box that for those shops with a cockloft, she found the void areas were installed with air-conditioning outlets and lightings. Ms Chow opined that it would be appropriate to take the headroom underneath cockloft as the headroom of the G/F part. With respect, I consider the higher headroom say in the front portion of a shop would give an impression of grandness and a less oppressive environment for the patrons.

45.  I prefer Dr Wong’s approach on the basis of weighted headroom and adopt his adjustment at 3% per m difference. In any event, the percentage adjustments proposed by the two valuation experts are not significantly different.

Adjustment for Return Frontage

46.  Having carried the joint inspection, I consider a uniform adjustment of -10% appropriate for shops having the return frontages. For instance, comparable ES4 is particularly small in size, the presence of a return frontage improves accessibility and attraction.

47.  On the other hand, I would not allow any additional adjustment for the so-called rear frontage onto the rear lane by Dr Wong.

48.  Thus, on the basis of the above discussion, the adjustments for the comparables would have been as follows:

Comp Ref:	Effective Unit Price (/m2)	Adjustments										Adjusted Effective Unit Price (/m2)
		Time	Location	Frontage	Return/ Second Frontage	Quantum/ Size	Headroom	Age/ Building Condition	Depth	Total*	Absolute Total
ES1	$433,986	4.2%	-20.0%	-8.1%	-10.0%	22.6%	-1.0%	-1.0%	1.7%	-15.7%	68.6%	$365,656
ES2	$527,693	2.3%	-40.0%	2.5%	0.0%	10.1%	-0.8%	-2.3%	3.0%	-30.9%	61.0%	$364,891
ES3	$427,568	3.9%	-40.0%	-9.7%	-10.0%	36.3%	-2.4%	0.1%	4.8%	-29.3%	107.2%	$302,304
ES4	$605,280	-4.0%	-30.0%	-0.6%	0.0%	2.7%	-2.3%	-0.9%	0.6%	-33.2%	41.1%	$404,435
ES5	$819,006	0.1%	-60.0%	-0.3%	0.0%	3.1%	0.0%	-0.1%	0.7%	-58.6%	64.3%	$339,102
ES6	$741,296	4.4%	-60.0%	-3.4%	-10.0%	5.8%	-1.0%	0.6%	-1.9%	-62.5%	87.1%	$278,202
									Average:			$342,432
									Average, if ES3, ES5 and ES6 are excluded:			$378,327
									Average, if ES1, ES3, ES5 and ES6 are excluded:			$384,663

* By multiplication

49.  Notwithstanding the above adjustments, the transaction of G/F, 19 Ormsby Street appears to be the best comparable in terms of timing and location, the two very important factors of adjustments. Simply averaging the results of the adjustment process to develop an averaged value fails to recognize the relative comparability of the individual transactions as indicated by the size of the total adjustments and the reliability of the adjustments. The sale that requires the least significant or lowest total adjustment (in absolute terms regardless of sign) is often the best comparable. Generally, more weight should be given to this best comparable in reconciling the value indications from the direct comparison approach.

50.  I am content to adopt $400,000 per sq m as the EUV for G/F, 23 Sun Chun Street and therefore the EUVs of the 2 shops in the Buildings are shown as follows:

Comp Ref:	Effective Floor Area (m2)	Adjustments			@$400,000/ m2	EUV as at 21 July 2020
		Frontage	Quantum/ Size	Total
G/F, 23 Sun Chun Street	26.01	0.0%	0.0%	0.0%	$10,404,000	$10,400,000
G/F, 24 Sun Chun Street	23.99	-0.1%	-1.0%	-1.1%	$9,490,444	$9,500,000
					Total:	$19,900,000

51.  Certainly, what percentage adjustment should be made for each of the factors is not a form of exact science but more a matter of professional adjustment, which involves certain degree of subjectiveness. There are also no hard and fast rules in the exercise.

52.  Nevertheless, as a matter of valuation practice, comparables needing large adjustment should be avoided, especially when such an adjustment is based essentially on intuition, impression or more euphemistically called professional judgment. At this juncture, I have to mention that Ms Chow has carried out certain pairing analysis in support her proposed adjustments for location by making reference to the respective tenancy agreements of the following units:[9]

	Address	Tenancy Commence-ment Date	Monthly Rent (adjusted for rent free etc)	Term	Effective Floor Area (m2)	Depth (m)	Frontage (m)	Weighted Headroom (m)	Unit Rental (/m2)
Ref Unit	G/F, 24 Sun Chun Street	1 Nov 13	$15,934 (exclusive of rates and management fee)	1 Nov 13 – 31 Oct 15	23.99*	5.26	4.29	2.90	$664
LR	Rear Portion on G/F (formerly designated as Shop B on G/F), 40 Sun Chun Street	18 Aug 14	$16,565 (exclusive of rates and management fee)	18 Aug 14 – 17 Aug 16 with option to renew for a further year at a monthly rent of $20,000	22.37	5.49	4.29	3.9	$741
L1	G/F (including Open Yard) , 3 King Street (ie ES5)	15 Feb 13	$52,000	15 Feb 13 – 14 Feb 16	31.99*	7.34	4.47	2.90	$1,626
L2	G/F, 6 Brown Street, ie at the junction with King Street	20 Jun 12	$50,812 (inclusive of rates and management fee)	20 Jun 12 – 19 Jun 15 with option to renew for 2 years at market rent of subject to a ceiling of $78,000/month	33.96*	4.65	6.05	3.51	$1,496
L3	G/F & C/L, 42 & 43 Sun Chun Street (ie ES1)	15 Aug 14	$55,713 (exclusive of rates and management fee)	15 Aug 14 – 14 Aug 17 with option to renew for 3 years at a rent to be agreed	70.97	8.33	8.36	3.22	$785
L4	G/F & C/L, 3 Shepherd Street	19 Mar 12	$34,981 (inclusive of rates and management fee)	19 Mar 12 – 18 Mar 15 with option to renew for 2 years at a monthly rent of $41,400	41.92	7.92	4.47	2.58	$834
L5	Shop A, G/F including Open Yard, Sze Hai Building, 12 & 13 Shepherd Street (ie ES3)	20 Feb 12	$73,980 (exclusive of rates and management fee)	20 Feb 12 – 19 Feb 15 with option to renew for 2 years at prevailing market rent	98.23	11.42	9.17	3.71	$753
L6	Shop B, G/F including Open Yard, Sze Hai Building, 12 & 13 Shepherd Street	27 Aug 12	$75,938 (exclusive of rates and management fee)	27 Aug 12 - 26 Aug 16	96.04	9.17	10.16	3.71	$791

53.  Without going into details of Ms Chow’s analysis, she arrived at the following:

Pairing		Adopting Dr Wong’s Adjustments	Adopting Ms Chow’s Own Adjustments	Average
Ref Unit	L1 & L2	-63%	-57%	-60%
Ref Unit	L3	-29.8%	0.7%	-14.5%
Ref Unit	L4, L5 & L6	-44%	-16%	-30%
LR	L1 & L2	-58%	-58%	-58%
LR	L3	-20.3%	-1.5%	-10.9%
LR	L4, L5 & L6	-35%	-20%	-27.5%

54.  Dr Wong did not agree to Ms Chow’s analysis above for the following reasons:[10]

(1)  The capital and rental markets can move in different directions and/or with different paces. The rental pairing analysis is of limited relevance to reflect the locational differences in capital value.

(2)  Retail rental market is generally less transparent. Retail rentals can be highly volatile depending on the supply and demand at a particular point of time, the short-term locational and physical attributes of the property and the locality, the terms and conditions of the tenancy, as well as the nature and strategy of the landlord and tenant. It would require an extensive analysis on the rental transactions and thorough understanding on the background of each tenancy, which are both lacking in Ms Chow’s analysis.

(3)  The rental of the Reference Unit (“the Reference Rent”) is arrived at by reference to one rental transaction only. The sample size is too small to provide a meaningful or reliable conclusion. There is also no evidence to tell whether the low Reference Rent is due to the inferior location (as Ms Chow suggests and believes), or any other reason leading to a possible below-market rental level.

(4)  The pairing analysis was carried out based on rentals in 2012 to 2014, ie more than 6 years before the EUV and RDV valuation dates. It cannot accurately reflect the locational differences as at the relevant valuation dates. Also, Ms Chow’s time adjustments are based on the changes of the RVD Private Retail Rental Index, a territory–wide indicator not necessarily reflective of the rental market performance of the subject Tai Hang locality, a location gradually changing into a dynamic dinning and leisure spot in the past years.

(5)  The reference property for arriving at the Reference Rent, ie Rear Portion of G/F, No 40 Sun Chun Street, is situated near the end of the cul-de-sac of Ormsby Street which is inferior to the Reference Unit in terms of location and exposure. It is inappropriate to assume they are the same in terms of “location”.

(6)  The pairing analysis based on the rental of No 24 Sun Chun Street, which involves a renewal tenancy of a long-term tenant of a property subject to potential compulsory sale for redevelopment. It was commenced in November 2019 when the rental market was affected by the social movement. It is questionable whether the rental under this tenancy was agreed at market level.

(7)  Nos 42-43 Sun Chun Street is nearer to the subject property when compared to No 40 Sun Chun Street. It is unreasonable and unnecessary to have any pairing analysis for Nos 42-43 Sun Chun Street.

(8)  Adjustments should be made for those rentals which are inclusive of rates and management fee.

55.  In the present case, a usual comparison exercise turns out to be a complicated issue. The comparison method is the simplest approach to valuation and, as its name implies, it works on the principle that the value of one property may be derived by comparing it with prices achieved from transactions of similar properties. Unfortunately, no similar properties can be found as comparables in the present case. As said, all these comparables are being occupied by cafés, bars or small restaurants but the shops in the Buildings are still occupied as car-repairing workshops. I am of the view that nobody preparing to open a café, bar or small restaurant, not to mention a high-end one as suggested by Dr Wong, would consider either of the shops in the Buildings which lie at a recessed position near the cul-de-sac of the 3^rd section of Sun Chun Street as well as Ormsby Street.

56.  What is worse is that the so-called comparables adopted by both the valuation experts are in respect of transactions few years earlier than the relevant valuation date, with most of them occurring in 2013. Many of the criticisms by Dr Wong about the application of rental index against Ms Chow’s pairing analysis are similarly applicable to the comparables he adopted as well. As a result, I agree to adopt Ms Chow’s pairing analysis as secondary or indirect support for instance of the location adjustments.

57.  In Union Carbide Asia Ltd v Hong Kong Lands Co Ltd [1982] HKDCLR 75 at §§43-44, the Tribunal remarked that:

“43. However, in the meantime we propose to allow an expert, notwithstanding the contrary English practice, to put in a list of comparables without being obliged to prove their contents as he would have to in a court. We would, of course, expect an expert valuer to take normal professional care to ensure that the comparables he uses are accurate. Notwithstanding that such comparables are admitted in evidence, it is always open to the other party to attack their accuracy.

44. Where an attack casts doubt on the accuracy of an expert's comparables that will affect the weight the Tribunal will give to them. It is always open to a party to prove that a certain list of comparables is inaccurate. The best way of doing so would be by strictly admissible evidence. Similarly, where a party's comparables are attacked it is always open to that party to defend them by adducing strictly admissible evidence as to their accuracy. We would emphasise that an attack on the other party's comparables can still be made, but such an attack will go to the issue of weight and not, as in England, to the different issue admissibility.”

58.  Firstly, I agree that the capital and rental markets can move in different directions and/or with different paces. Capital market or the capital value of a property can comprise a speculative element, particularly on the growth prospect. Whereas the relation of the capital value is linked to its rental value by an all-risk yield, the higher the growth prospect, the low would be the yield. Therefore, when Dr Wong referred to “the subject Tai Hang locality, a location gradually changing into a dynamic dinning and leisure spot in the past years”, the all-risk yield expected by the purchasers of the comparables in 2013 or 2014 could only be lower than that for the shops in the Buildings. Assume for instance, the market rental of 24 Sun Chun Street in 2013 was r and its all-risk yield was y, resulting in its market value as M. Ms Chow now found the rental of L1 & L2 was about R whereas r = R x (1-60%[11]) = R x 40%.

59.  Let’s say y is 10% higher than that for either L1 or L2 at z,

ie z x 1.1 = y

and therefore the market value of L1 or L2 is T = R ÷ z

60.  Then market value M = r ÷ y = 40%R/1.1z

= 0.36T or T x (1 – 64%)

That is the adjustment between T and M would be higher than the -60% found by Ms Chow.

61.  Of course, in her analysis, Ms Chow did not allow the rentals for L1 or L2 which was inclusive of rates (which has been set at 5% of the rateable value by Government) and management fee. But even with that in mind, the difference could still be around -60% as only nominal government rent would be payable for those premises in the vicinity having a lease term for the Government for 999 years from 1 January 1894.

62.  As regards Dr Wong’s comment that the rental of No 24 Sun Chun Street involved a renewal tenancy of a long-term tenant of a property subject to potential compulsory sale for redevelopment, Mr Chow on behalf of the respondent had prepared a witness statement dated 1 April 2021 which stated as follows:

“4. The Respondent acquired the Unit on 15 January 2009. At material times, the use of the Unit is for long term investment purposes …

5. The Respondent has let out the Unit by a Tenancy Agreement dated 29 October 2019. The tenant is 陳志輝經營亞坤車房. The term of tenancy is for a term of 2 years from 1 November 2019 to 31 October 2021…

6. The Applicant has acquired all of the units of the 1^st Building except the Unit in 2018 …”

63.  In the 2^nd Joint Expert Statement dated 20 May 2022, Ms Chow had referred to the monthly rent of $18,300 under tenancy agreement dated 29 October 2019 entered into between the respondent and陳志輝經營亞坤車房. Ms Chow compared the rental with that under the lease for Shop A on Ground Floor, Sunrise Court, Nos 42-44 Tung Lo Wan Road (comparable G4) as another rental pairing analysis for location adjustment and arrived at -43%[12].

64.  In response, Mr Chow prepared a Supplemental Witness Statement dated 2 June 2022 which comprised the following:

“4. I note the comments of Ms Chow were made without the knowledge of the relevant factual background in connection with the execution of the 2019 Tenancy, and in particular the Respondent’s considerations behind its agreement to execute the 2019 Tenancy. I am privy to such matters and I signed the 2019 Tenancy on behalf of the Respondent. I therefore make this Supplemental Witness Statement to give the relevant context to assist the Tribunal.

5. Based on my understanding at the time, the market rate for the monthly rental of the Unit was around HK$23,000 to HK$25,000 per month. When I signed the Lease I knew and considered that the stated monthly rental of the Unit was below market rate. Nevertheless, the Respondent agreed to do so for the following reasons:

(1) The Tenant was a good tenant who paid rent to the Respondent punctually during the previous tenancies between the parties since November 2013. Copies of the tenancy agreement between the Respondent and the Tenant prior to November 2019 are annexed hereto …

(2) In October 2019, when we were engaged in negotiations for renewal of the lease of the Unit, the Tenant had asked for a rent reduction as the social unrest in 2019 had adversely affected the Tenant’s business.

(3) Further, at that time, the news reported that Henderson Land Development Company Limited (“Henderson Land”) was acquiring properties near the Unit in Tai Hang. For example, in Henderson Land’s Annual Report 2018 (“Annual Report 2018”), which was released in April 2019, it was stated that No 17-25 Sun Chun Street, Tai Hang was one of Henderson Land’s newly-acquired urban redevelopment projects. The Respondent therefore envisaged that Henderson Land would apply for an order for compulsory sale in respect of the Unit…

(4) In the circumstances, the Respondent considered it would be more cost effective to renew the lease with the Tenant than go through the trouble of looking for a new tenant. First of all, the Unit was set up for a car repair business at the time. Unless the replacement tenant was also someone intending to run a car repair business, the Respondent would need to spend more time and cost to renovate the Unit before leasing the Unit out to another tenant. Secondly, the Respondent would need to incur agency costs to look for a new tenant. Thirdly, before a new tenant could be found, there would inevitably be a rent void period. Fourthly, the new tenant may ask for a rent free period under the new tenancy. Fifthly, the Unit may be subject to an order for compulsory sale in the near future.

(5) But on the other hand, renewing the lease with the Tenant, even at monthly rental lower than the market rate, would encourage the Tenant to carry on leasing the Unit or it would discourage the Tenant from walking away. In turn, the Respondent would get a steady stream of rental return, which would be better than leaving the Unit vacant and not having any return at all.

6. In 2021, the Respondent entered into a Tenancy Agreement dated 6 October 2021 with the Tenant by which the Respondent let out the Unit to the Tenant from 1 November 2021 to 31 October 2023 at a monthly rent of HK$21,000 (“2021 Tenancy”). By that time, I understood that the market rental in Tai Hang area had increased such that the market rate for the monthly rental of the Unit had become around HK$25,000 to HK$28,000 per month. Despite the fact that the monthly rental of HK$21,000 was below market rate, the Respondent agreed to enter into the 2021 Tenancy for the following reasons:

(1) At the time, the Applicant, by the Notice of Application dated 28 September 2020 in these proceedings, had already applied for an order to sell all the undivided shares in Tai Hang Lot No 29 and Tai Hang Lot No 170, which includes the Unit.

(2) In October 2021, when we were engaged in the negotiations for renewal of the lease of the Unit, the Tenant informed the Respondent that its business had been affected by the COVID-19 pandemic since 2020 and asked the Respondent to take that into account in its rent review. Balancing all relevant factors, ie the market condition at the time and the same factors as alluded to in paragraph 5 above, the Respondent proposed, and the Tenant accepted, that the monthly rental of the Unit for the 2021 Tenancy shall be HK$21,000 per month.”

65.  Well said. But the difficulties that may be encountered by the respondent would have been similarly experienced by other property investors over the territory. The table below shows the historical rental pursued or secured by the respondent when compared with the corresponding Private Retail Rental Index published by RVD. It demonstrates the rental increase/decrease more or less followed the territory-wide or market movements perhaps before the applicant formerly made the Application on 28 September 2020:

Date of Tenancy Agreement	Term	Monthly Rent (exclusive of rates and management fee)	Increase/ Decrease (A)	Corresponding Rental Index published by RVD[13]	Increase/ Decrease (B)	Difference = (A )-(B)
25 Oct 2013[14]	1 Nov 13 – 31 Oct 15	$16,000		167.5
25 Oct 2015[15]	1 Nov 15 – 31 Oct 17	$18,000	12.50%	182.5	8.96%	3.54%
13 Oct 2017[16]	1 Nov 17 – 31 Oct 19	$18,800	4.44%	184.4	1.04%	3.40%
29 Oct 2019	1 Nov 19 – 31 Oct 21	$18,300	-2.66%	183.1	-0.70%	-1.95%
6 Oct 2021[17]	1 Nov 21 – 31 Oct 23	$21,000	14.75%	174.3	-4.81%
21 Jul 2020				168.8	-7.81%

66.  By reference to the latest renewal of the tenancy agreement in 2021, however, it is futile for the respondent to argue that the prospect of redevelopment along this section of Sun Chun Street may have a dampening effect on the rental of G/F, 24 Sun Chun Street.

67.  Perhaps just by looking at a comparison between the letting of G/F, 24 Sun Chun Street and that of Rear Portion on G/F (formerly designated as Shop B on G/F), 40 Sun Chun Street (ie LR), which comprises a corner unit facing Ormsby Street with a return frontage (which is not even opened) onto the 4^th section of Sun Chun Street, one can determine whether the rental reserved for G/F, 24 Sun Chun Street ie the Reference Unit, in the October 2013 tenancy was reasonable or otherwise:

Address	Effective Floor Area (m2)	Monthly Rent (/m2)	Adjustments								Adjusted Monthly Rent (/m2)
			Time	Frontage	Return Frontage	Size	Headroom	Age	Depth	Total
Rear Portion on G/F, 40 Sun Chun Street	22.37	$741	-3.7%	0.0%	-3.0%	-6.2%	-3.0%	0.0%	0.2%	-12.2	$651

68.  Firstly, I cannot agree with Dr. Wong that the location of this comparable LR is inferior to G/F, 24 Sun Chun Street. In the least, it is visible along Ormsby Street whereas the Reference Unit was recessed behind the corner of the street.

69.  This resulting adjusted unit rent, in the absence of location adjustment, shows it was comparable with that of G/F, 24 Sun Chun Street at $675/ m² with just a marginal difference of 3.5%.

70.  Also as it also turned out, the respondent and its associated companies has been veteran shop investors in the market. They were/are owner of the following properties:

Name of Owner	Property	Date of Purchase
Acewell Investments Limited*	G/F, 12 Sun Chun Street (ie the 1st section of Sun Chun Street)
Acewell Investments Limited*	G/F, 47 Staunton Street	31 August 2007
Chow Shing Kee Investment Company Limited	Shop B, G/F including Open Yard, Sze Hai Building, 12 & 13 Shepherd Street (ie L6 in Ms Chow’s rental pairing analysis above)	May 2012
Chow Shing Kee Investment Company Limited	Shops D, E, F (and yard) on G/F and Flat B on M/F, Chuen Hing Building, 6 & 6A Wun Sha Street	25 August 2014
Fairview Corporation Limited	G/F, 21 Ormsby Street	31 July 2014

* It was the 1^st respondent in LDCS 28000/2020 (unreported, 4 April 2022).

71.  In light of the above, I am not convinced that the rental reserved at $16,000 per month for G/F, 24 Sun Chun Street in October 2013 deviated much (if any) from the market. I consider appropriate for Ms Chow to conduct her rental pairing analysis on the basis of it.

72.  In respect of the 2^nd pairing analysis between G/F, 24 Sun Chun Street and G/F & Cockloft, 42-43 Sun Chun Street, in light of the diverging result arrived by Ms Chow, I carry out a review and find $675, the unit rental for G/F, 24 Sun Chun Street versus $778, ie a location adjustment of about -13.0%:

Address	Effective Floor Area (m2)	Monthly Rent (/m2)	Adjustments								Adjusted Monthly Rent (/m2)
			Time	Frontage	Return Frontage	Size	Headroom	Age	Depth	Total
G/F & C/L, 42-43 Sun Chun Street (ie ES1)	70.97	$785	-4.1%	-8.1%	-10.0%	23.7%	-1.0%	-1.0%	3.1%	-0.9%	$778

73.  Similarly, I carry out a review of the 3^rd pairing analysis between G/F, 24 Sun Chun Street and L4, L5 and L6 respectively and find a location adjustment of about -33%:

Address	Effective Floor Area (m2)	Monthly Rent (/m2)	Adjustments								Adjusted Monthly Rent (/m2)
			Time	Frontage	Return Frontage	Size	Head- room	Age	Depth	Total
G/F & C/L, 3 Shepherd Street	41.92	$834	15.0%	-0.4%	0.0%	9.2%	1.0%	-1.0%	2.7%	28.4%	$1,071
Shop A, G/F including Open Yard, Sze Hai Building, 12 & 13 Shepherd Street (ie ES3)	98.23	$753	16.1%	-9.8%	-10.0%	37.31%	-2.4%	0.1%	6.2%	34.3%	$1,011
Shop B, G/F including Open Yard, Sze Hai Building, 12 & 13 Shepherd Street	96.04	$791	8.1%	-11.7%	-10.0%	36.22%	-2.4%	0.1%	3.9%	18.8%	$940

74.  The above does not deviate much from Ms Chow’s analysis.

75.  As regards Dr Wong’s concern that what happened in 2013 may not be still the case in 2020, I observe no material changes in the section along Ormsby Street; For instance, “龍鳳冰室” and “Hello Kitty Secret Garden” that used to occupy Shops D, E, F (and yard) on G/F and Flat B on M/F, Chuen Hing Building, 6 & 6A Wun Sha Street and G/F, 19 Ormsby Street (ie comparable ES4) respectively had come and gone. The findings from the rental pairing analysis are consistent with my location adjustments adopted earlier in the direct comparison analysis.

76.  I am also not persuaded that the monthly rental for G/F, 24 Sun Chun Street could be as much as $23,000 to $25,000 in October 2019. As said in §36 above, the respondent’s associated company, Fairview Corporation Limited, owned G/F, 21 Ormsby Street since 2014. By reference to a tenancy agreement dated 27 September 2018[18], Fairview Corporation Limited let again the premises for use as a restaurant for a term of 3 years from 18 September 2018 to 17 September 2021 at $26,000 per month exclusive of rates, management fees etc. G/F, 21 Ormsby Street is situated next to G/F, 19 Ormsby Street but further down the street; Unlike G/F, 19 Ormsby Street which has a return frontage attracting the oncoming pedestrians, the return frontage of G/F, 21 Ormsby Street opens to the 3^rd section of Sun Chun Street facing the end of the street. It has a saleable area of 15’0” x 21’6” (4.57m x 6.55m) = 29.96 sq m. That is, the $26,000 per month in September 2018 yielded a unit rental about $868 per sq m.

77.  As suggested by Mr Chow, “the social unrest in 2019 had adversely affected the Tenant’s business”. The corresponding rental index dropped from 188.0 in September 2018 to 183.1 in October 2019, ie -2.6%. Then there is a difference in location say -25% in location, ie mid-way between -30% for G/F, 19 Ormsby Street and -20% G/F & C/L, 42-43 Sun Chun Street (ie ES1) across the street: “large variations in value can be found within a comparatively short distance”[19]. The market rent for G/F, 24 Sun Chun Street is estimated by reference to the following adjustments:

Address	Monthly Rent (/m2)	Adjustments									Adjusted Monthly Rent (/m2)
		Location	Time	Frontage	Return Frontage	Size	Headroom	Age	Depth	Total
G/F,  21 Ormsby Street	$868	-25.0%	-2.6%	-0.5%	-5.0%	3.2%	-2.3%	-0.9%	0.6%	-30.6%	$602

78.  That is the market rent for G/F, 24 Sun Chun Street, as at October 2019, was approximately 23.61m² x $602/m² = $14,213 per month, which is even lower than $18,300 per month reserved in the tenancy agreement in October 2019. Ever if I reduce the location adjustment to -15% the adjusted monthly rent would be $683 and 23.61m² x 683/m²=$16,126.

79.  For similar reason, I am not convinced that “the monthly rental of the Unit had become around HK$25,000 to HK$28,000 per month” in October 2021 as suggested by Mr Chow. Indeed, he produced a copy of the tenancy agreement dated 11 October 2021 in respect of G/F, No 12 Sun Chun Street which is owned by the respondent[20]. By virtue of clause 2.22 of this tenancy agreement, the premises which is situated on the 1^st section of Sun Chun Street can only be used for operating the tenant’s business as a motorcycle workshop and café and the rental reserved was as follows:

Period	Monthly Rent (exclusive of rates and management fees)
From 8 Oct 2021 to 7 Apr 2022	$25,000
From 8 Apr 2022 to 7 Oct 2022	$28,000
From 8 Oct 2022 to 7 Oct 2023	$30,000
From 8 Oct 2023 to 7 Oct 2024	$31,800

80.  This 1^st section of Sun Chun Street, though a relatively quiet street, is a local access that vehicles can pass from its junction with Ormsby Street, then its junction with Brown Street all the way to its junction at Warren Street where some new residential development like Warrenwoods (2012), The Warren (2014) and Jones Hive (2016) were built. More particularly, it is not a cul-de-sac on which G/F, No 24 Sun Chun Street is situated. Two small restaurants are situated at Nos 14 and 16 Sun Chun Street respectively and there is another one across the street. It deserves an adjustment for location, like that for G/F & C/L, 42 & 43 Sun Chun Street (ie comparable ES1), at -20% in the least.

81.  Alternatively, in Mobil Oil Hong Kong Limited v Commissioner of Rating and Valuation [1993] HKDCLR 77, in the determination of the rateable value as at 1 July 1990, the Tribunal could not find any useful comparable evidence save an earlier agreement (“the BP Agreement”) in respect of 36.7% of the subject tenement some 3 years earlier. While the Tribunal recorded the danger of relying on only comparable, it held that it was desirable, at least as a check.

82.  In the present case, it is not disputed that the respondent acquired G/F, 24 Sun Chun Street in the sum of $1,680,000 pursuant to an Agreement for Sale and Purchase dated 5 December 2008. At that time, the Private Retail Price Index was 170.2 but as at 21 July 2020, it was 525.7. Thus, as a rough check by reference to the index only, the market value of G/F, 24 Sun Chun Street as at 21 July 2020 would be approximately $5,200,000 without any redevelopment potential of the Buildings or the Lots. Certainly, the RVD index is a general index which covers all the territory-wide properties in a particular class may not be strictly applicable to a particular property at a particular location. The longer the time span, the less reliable would be the index.

83.  Having reviewed the above, I am satisfied that the EUVs of G/F, 23 Sun Chun Street and G/F, 24 Sun Chun Street are $10,400,000 and $9,500,000[21] respectively without taking into account the redevelopment potential of the Buildings or the Lots.

Assessment of EUV of Upper Floor Domestic Units

84.  Notwithstanding the above, Ms Chow and Dr Wong had agreed the EUV of the all the domestic unit  above the ground floor as at 21 July 2020 as follows:[22]

Floor	23 Sun Chun Street	24 Sun Chun Street
1/F	$2,650,000	$2,610,000
2/F	$3,220,000	$2,980,000
3/F	$3,060,000	$3,010,000
4/F	$2,990,000	$2,850,000
5/F	$2,850,000	$2,640,000
Total	$28,860,000

Conclusion on EUV

85.  The total EUV of the Buildings is therefore $10,400,000 + $9,500,000 + $28,860,000 = $48,760,000

and the pro rata shares of respondents’ interest is 19.4832%.

Whether Redevelopment of the Lot is Justified on “Age” or “State of Repair”

86.  Section 4(2)(a) of the Ordinance stipulates that the Tribunal shall not make an order for sale unless it is satisfied that redevelopment of the Lot due to the “age or state of repair” of the Building is justified.

Experts’ Evidence

87.  On this issue, the applicants adduced the Condition Survey Report dated 30 March 2021 by Mr Dennis Wong, the Building Surveyor and the Structural Assessment Report dated 24 March 2021 by Mr CM Wong, the Structural Engineer.

88.  In the Structural Survey Report, Mr CM Wong concluded as follows:[23]

(1)  Cracks and spalling at 38 locations were observed during the visual inspection of the Building.

(2)  25% of the cores from beams, 67% of the cores from columns and 33% of the cores from walls fail to meet the minimum design cube strength.

(3)  55%, 100%, 47% and 88% of the steel reinforcement bars inspected at open up locations at the beams, slabs, columns and walls respectively in the Building are notably suffering from Mild Corrosion.

(4)  Based on the test samples, carbonation has reached the steel reinforcement bars in all the test samples in beams, slabs and walls and 67% of the test samples in columns.

(5)  21% of test samples of the structural elements in the Building have chloride content exceeding 0.40% which is classified as “moderate” risk of the corrosion.

(6)  If considering the combined effect of carbonation and chloride content, 93% of the samples in the Building pose a “moderate” to “high” risk of corrosion to the steel reinforcement bars.

89.  Mr CM Wong recommended that hammer tapping works be carried out to find out the extent of spalling and cracking in the structural members and any defects such as spalling and cracks discovered together with the spalling and cracks already identified to be patched repaired. 

90.  Based on the test results, Mr CM Wong concluded that the deterioration of the structural elements, especially the slabs and beams, has entered the propagation phase. Once propagation phase is reached, the deterioration will accelerate and additional defects may appear in more locations. Frequent maintenance and repair works may be required in the near future in order to keep the Building in a safe and functional state.

91.  In the Condition Survey Report, Mr Dennis Wong concluded that[24]:

“8.1     The Age of the Building

8.1.1    The Building is over 55 years old, has many problems as a result of its age which impairs its appearance and function.

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

8.1.3    The physical and functional hazards are a result of 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 building works, sub-division of flats, inadequate maintenance and the absence of proper building management. This has rendered the Building to be below a habitable standard and fall short of many basic requirements expected in new buildings. 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 eg absence of protected lobbies and unprotected electrical installations in the fire escape staircases…

8.1.4    … due to the age of the Building and its obsolete design, there are certain inherent deficiencies that simply cannot be overcome. These includes:

·Lack of barrier free access (such as ramps and lifts)

·No refuse chute/room provided

… the Building cannot comply with all latest standard of the Buildings Department, Fire Services Department as well as other government departments. Hence, in terms of safety, health and hygiene to the occupants and public, I am able to draw a conclusion that the Building is aged and obsolete.

8.2   The State of Repair of the Building

8.2.1    … the overall state of repair of the Building is, in my view, poor with many of its components, finishes and services installations showing deterioration beyond reasonable repair.

8.2.2    As the Building is currently in a state of poor repair, demolition of the Building will relieve the owners from heavy repair responsibilities. Apart from the heavy repair responsibilities that the Building owners have to shoulder, the economic benefit brought about by the repair to the existing building is far less than the option of re-development. Indeed, demolition of the Building for redevelopment is not only economically more viable but will also improve the living standard of the new occupants and contribute to the renewal of the neighbourhood and enhance the overall environment.

 8.2.3   The costs of essential repairs estimated at HK$3,075,424.00 amounts to HK$8,878.24 per sq m of the existing Gross Floor Area of the Building. This unit cost of essential repairs is about 42.21% of the unit cost of HK$21,034.23 per sq m for construction a new building. In short, the essential repair costs are disproportionately high as compared with the cost of constructing a new building. The high cost of repairs indicates that the Building is in a poor state of repair.

8.2.4    The carrying out of the essential repairs will cause considerable disturbance and will require a lengthy implementation period. It is inevitable that the occupation and enjoyment of the flats will be affected intermittently during the course of the repair.

8.2.5    The 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 out-dated/ obsolete and below market expectations and constitute a continuing repair liability to the owners”

92.  The respondent had not adduced any evidence to rebut either the Condition Survey Report dated 30 March 2021 by Mr Dennis Wong or the Structural Assessment Report dated 24 March 2021 by Mr CM Wong. Neither were they cross-examined.

93.  Having considered the evidence before the Tribunal, on the basis of a holistic approach, I am satisfied that redevelopment of the Buildings is justified due to the age and state of repair.

Section 4(2)(b) – Whether Applicant has taken reasonable steps

94.  The applicant is under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interest of the respondent under section 4(2)(b) of the Ordinance.

95.  As mentioned in the supplemental witness statement of Ms Lui dated 20 May 2022, the applicant had, based on the assessments by its valuation expert and through its solicitors Messrs So, Lung & Associates, made the following offers to acquire the respondent’s interest:

	Date of Offer	Purchase price offered
1st offer	28 August 2020	$14,390,000
2nd offer	23 August 2021	$18,090,000
3rd offer	10 May 2022	$18,090,000

96.  Obviously, these offers were higher than the EUV as determined by me at §83 above.

97.  Ms Ngai submitted that all the offer prices are more than fair and reasonable for the following reasons:

(1)  All the offer prices are determined with reference to the independent professional opinion of the applicant’s valuation expert.

(2)  All the offer prices have reflected the proportionate share of the respondent’s property in the Merged Site RDV assessed by the applicant’s valuation expert at the relevant times.

(3)  …

(4)  The applicant’s acceptance of applicant’s valuation expert’s opinion to derive the RDV of the Lots by apportioning the Merged Site RDV on a pro-rata basis based on the registered site area of the Lots and the total registered site area of the Adjoining Lots in making the offer prices is generous and favourable to the respondent in light of the fact that the bulk of the buildings currently erected on the Adjoining Lots is similar to that of the Buildings and the existing building known as No 25 Sun Chun Street is situated at a corner site with the benefit of two frontages.

98.  I agree with Ms Ngai’s submission. In respect of the latter, in particular, by including the lot on which the building at No 25 Sun Chun Street is standing, the Merged Site has changed from a Class A site to a Class B site under the Building (Planning) Regulations which would enjoy a much higher plot ratio in redevelopment. In addition, the total site area of the Lots at 78.50 sq m is too small to meet the requirements of Part V of the Building (Planning) Regulations. Dr Wong admitted, in his Rebuttal Report on RDV dated 23 July 2021 at §4.3.2, that: “Amid the minimal requirements on the lift and staircase provisions, the efficiency of a development on a site having an area of less than 100 square metres would be highly affected.”[25]

99.  On the other hand, the site at Nos 17A-23 Sun Chun Street, which comprises an area of 298.03 sq m, has been capable of redevelopment on its own with a high-rise building of plot ratio about 8.6. The offers by the applicant on the basis of the combined area of the Merged Site will turn the whole site into a Class B site having a plot ratio up to 9.5.

100.  The Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363 (“Capital Well”) emphasized at §33 that:

“In making that assessment (whether an offer is reasonable) 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.”[26]

101.  In Intelligent House Ltd Ltd v Chan Tung Shing & Others [2008] 4 HKC 421, where the majority owner relied on its valuation expert to formulate some of the offers, the Tribunal ruled at §334(3) that:

“… it is not disputed that Savills is a reputable firm of valuers. In our view, it is also reasonable for Intelligent House to rely on Savills’ expert opinion to formulate the purchase prices offered to the minority owners. There is also no reason for us to believe, nor is there such evidence to suggest, that the advices from Savills were not properly made based on professional valuation of the EUV and RDV of the minority owners’ units.”

102.  At the material time, Ms Chow was working as Senior Director of Jones Lang La Salle Limited, another reputable firm of valuers.

103.  On the evidence available, therefore, I am satisfied that the applicant has taken reasonable steps to acquire all the undivided shares in the Lots including negotiating for the purchase of the share owned by the respondent on terms that are fair and reasonable.

Disputes on the estimation of the RDV of the Lots

Hypothetical Development Model

104.  Both Ms Chow and Dr Wong agreed to resort to the residual valuation method in determining the Merged Site RDV.  This can be done by deducting the development cost (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value (“GDV”) of the completed optimum development.

105.  Prior to the beginning of the trial, the applicant had agreed to adopt Dr Wong’s opinion in respect of the following matters insofar as the assessment of the Merged Site RDV is concerned in order to further narrow down the issues in disputes between the parties and for the purposes of saving time and costs:

(1)  Dr Wong’s proposed form of the hypothetical development and, hence, the saleable areas of the proposed hypothetical development;

(2)  GDV of the domestic portion of the hypothetical development ($2,579.24 m² x $312,837/m² = $806,880,490);

(3)  GDV per square metre of the retail saleable area on 1/F = 1/3 of the average unit rate of the G/F retail portion;

(4)  Marketing cost: 3%

(5)  Interest rate: 4%

(6)  Professional fee: 6%;

(7)  Developer’s profit: 15%

(8)  Construction period;

(9)  Demolition period;

(10)  Construction cost;

(11)  Demolition cost;

(12)  Stamp duty: 4.25%

(13)  Legal cost: 0.10%

106.  Hence, insofar as the valuation of the Merged Site RDV is concerned, the only remaining matter in dispute is the GDV of the G/F retail portion of the hypothetical development.

107.  In view of the dearth of good comparables, both Ms Chow and Dr Wong adopted the same set of comparables as those for assessing the EUV. But in addition, one more recent transaction was suggested by Dr Wong:

Address	Transaction Date	Consideration	Age of Building	Saleable Area (m2)	Frontage to Tung Lo Wan Road (m)	Frontage to Lai Yin Street (m)	Depth (m)	Headroom (m)	Unit Price (/m2)
Shop A, G/F, Sunrise Court, 42-44 Tung Lo Wan Road	18 Aug 21	$8,480,000	1983	14.59	3.89	3.75	3.75	3.98	$581,220

108.  This new comparable is situated at the westerly fringe of the Tai Hang enclave. The only advantage of this comparable is its proximity to a bus terminal across Tung Lo Wan Road. In spite of this, pedestrian flow appears to be light or minimal unless people purposely want to enter into the Tai Hang enclave. Currently it is occupied as a frozen food store and its size, appearing to me, is too small for a café, bar or restaurant. This is particularly the case when Dr Wong proposed a hypothetical shop unit having a saleable area as much as 57.138 sq m.  I do not consider it a useful comparable particularly when a Merged Site development is assumed.

109.  On the other hand, I note that this comparable, transacted in 2021, only achieved a unit price of $581,220 per sq m despite its small size. It serves to demonstrate that, despite the lapse of so many years since, for instance, 2013, there has been no material change in retail potential in the Tai Hang enclave. Whereas for all the other comparables adopted for assessing the EUV, they are also not so useful as well because upon the redevelopment of the Merged Site, which has a total site area of 417.78 sq m[27], it will significantly enhance the environment and trading potential of the shops on G/F.

110.  Without going into the details of the two valuation experts’ analysis therefore, I prefer Dr Wong’s assessment at $636,039 per sq m to that of Ms Chow’s $423,100 per sq m. Whereas the former resembles closely the unit price of G/F, 19 Ormsby Street at $605,280 per sq m before any adjustment, the latter only represents some 5% increase from the unit rate for the EUV which, I consider, is grossly inadequate.

111.  Thus, I shall follow the assessment by Dr Wong as shown in his Consequential Amendments to the RDV Assessment of Nos 17-25 Sun Chun Street as per Second Joint Statement of Experts dated 20 May 2022. He arrived at a RDV of $588,700,000 which is equivalent to an accommodation value of $147,628 per sq m.[28]

112.  In Capital Well, supra, the Court of Final Appeal had the following observation near the end of the judgment:

“39. There is, however, a danger that if the power is so confined the policy objectives of the Ordinance may be undermined. As the Court of Appeal recognized (§17), the minority owner, if sufficiently funded, might be able to bid up the single lot to a highly inflated price thereby exercising “ransom power” through the medium of the public auction. And if the minority owner or a third party actually acquired the auctioned lot, the intended redevelopment might have to be abandoned or face lengthy delays subject to the uncertainties of negotiations with the new owner of the lot. Such consequences plainly run counter to the statutory objectives.

40. If, on the other hand, it were open to the majority owner to combine sale of the Lot with sale of the other lots already owned, the entire developable site would be put up for sale. Such an auction could be expected to attract only bids from genuine developers. There would be no room for ransom-motivated bids. An appropriate reserve price would have to be fixed to ensure that the minority owner receives a proper share of the redevelopment value of the site. But whether the successful bidder should prove to be the majority owner or someone else, a redevelopment of the entire site would be able to proceed without impediment, in line with the objectives of the Ordinance.

41. Plainly, the power coercively to order sale is confined to ordering the sale of a lot or lots in which a majority owner and a minority owner each hold a proprietary interest. However, in cases where a majority owner qualifies for the making of such a compulsory order and wishes to have that lot put up for auction together with adjacent redevelopment lots wholly owned by him, the question arises as to whether, on its true construction, the Ordinance precludes the Tribunal from making an order for sale in respect of the composite site. That matter was not in issue and was not argued before us. In the light of the policy concerns noted above, we wish expressly to leave that question open for possible future consideration.

42. Additionally, if a restrictive construction of the Ordinance is required, we wish expressly to leave it open for possible future consideration whether the Tribunal has a discretion to give suitable directions (under s 4(6)(a) of the Ordinance or otherwise) concerning conduct of the sale designed to secure that the sale of the single lot, the subject of its order, can take place together with the sale of the other redevelopment lots, similar to the directions given by the Court of Appeal in Golden Bay Investment Ltd v Chou Hung [1994] 2 HKC 197 at 200-202, or along analogous lines.” (underline added)

113.  The Application is exactly the case where the applicant qualifies for the making of such a compulsory order and wishes to have the Lots put up for auction together with the Adjoining Lots wholly owned by it. I therefore determine the reserve price of the Lots together with the Adjoining Lot as a Merged Site at $588,700,000.

Other Incidental Matters

114.  The applicant proposed to appoint Mr Anthony Chow and Ms Anna Chow, both being consultants of Messrs Guantao & Chow, Solicitors & Notaries, as the sale trustees. Based on the information on their background and experience as set out in their letter dated 17 March 2022[29], I am satisfied that they are proper persons to be appointed as trustees to discharge the duties imposed on the trustees under the Ordinance. The remuneration package proposed in the said letter appears reasonable.

115.  The applicant has prepared a set of draft Particulars and Conditions of Sale of the Merged Site. Subject to any amendment that may become necessary as a result of my ruling on the arrangement of auction above, the particulars and conditions of sale of the Merged Site by public auction submitted by the applicant are also reasonable.

Order

116.  This Tribunal make the following orders:

(1)  This Tribunal is satisfied that the redevelopment of the Lots is justified due to the “age” or “state of repair” of the Buildings and that the applicant has taken reasonable steps to acquire all the undivided shares in the Lots including that of the respondent;

(2)  All the undivided shares in the Lots, the subject of the Application herein, be sold by way of a single public auction together with the Adjoining Lots for the purposes of the redevelopment of the Lots under s.4(1)(b) of the Land (Compulsory Sale for Redevelopment) Ordinance (“the Ordinance”);

(3)  Mr Anthony Chow and Ms Anna Chow of Messrs Guantao & Chow, Solicitors & Notaries, nominated by the applicant, be appointed the trustees (“the Trustees”) to discharge the duties imposed on the trustees under the Ordinance in relation to sale of the Merged Site and 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, Solicitors & Notaries dated 17 March 2022.

(4)  For the purpose of the sale of the Merged Site by public auction under section 5(1)(a) of the Ordinance:

(i)  The sale of the Merged Site 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 $588,700,000.

(iii)  The proceeds of sale of the Merged Site should be apportioned firstly on a pro-rata basis based on the total registered site area of the Lots and the total registered site area of the Adjoining Lots to arrive at the RDV of the Lots for sharing between the applicant and the respondent.

(iv)  The respective EUVs of the domestic units in the Buildings as at 21 July 2020 agreed between the applicant and the respondent, and the EUV of G/F, No 23 Sun Chun Street and G/F, No 24 Sun Chun Street as at 21 July 2020 assessed by the Tribunal be adopted for the apportionment of that part of the proceeds of sale of the Merged Site attributable to the Lots in accordance with section 10(3) and Part 3 of Schedule 1 to the Ordinance.

(v)  Subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Merged Site or its successor in title, the redevelopment of the Lots and the Buildings shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Merged Site shall become the owner of the Merged Site.

(vi)  Liberty to the applicant, the respondent and the Trustees to apply to the Tribunal for further direction(s) under the Ordinance.

Costs

117.  In accordance with the compensation approach as determined by the Court of Appeal in Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 534, I order that the applicant do pay the respondent the costs of the Application, to be taxed on the High Court scale if not agreed.

118.  Last but not least, the Tribunal thank Counsel for their assistance.