LAI SHUN HANG v. THE DIRECTOR OF LANDS

LDLR 3 OF 2010

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Lands Resumption Application No. 3 of 2010

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BETWEEN

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J U D G M E N T

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The Application

1.  The Applicant was the registered owner of the property known as All That Ground Floor including Open Yard at Rear Cockloft including the Flat Roof appertaining thereto of No. 63 Kweilin Street, Kowloon, Hong Kong (“the Property”) immediately prior to 23 February, 2008.  The Property was reverted to the Government at the midnight of 23 February, 2008 for the implementation of Development Scheme SSP/1/001 & 002 by the Urban Renewal Authority, in association with the Hong Kong Housing Society, at Lai Chi  Kok Road / Kweilin Street and Yee Kuk Street, Shum Shui Po, Kowloon, pursuant to a gazetted Government Notice ( G.N. No. 7553 of 2007) dated 14 November, 2007 under the Lands Resumption Ordinance (Cap. 124).

2.  On 13 September, 2010, the Applicant filed a Notice of Application, to the Lands Tribunal for the determination of the amount of compensation payable in respect of the resumption of the Property.  The Respondent filed on 4 October 2010 a Notice of Opposition opposing the claim. 

Occupancy Status of The Property

3.  The Property comprises a ground floor shop and a cockloft.  At the date of reversion, the ground floor of the Property was leased to a tenant operating a hair salon under a monthly tenancy at a rent of $18,500 per month, inclusive of rates whilst the cockloft of the Property was in vacant possession.

The Issues

4.  At the beginning of the hearing, the parties confirmed that they only disputed on the valuation of the Property as at the relevant valuation date.  Two expert witnesses were called by the parties, i.e. Ms. Sat Wei Ling (“AW”) for the Applicant and Mr. Lai Wah Chi (“RW”) for the Respondent.  In their expert reports, AW contended that the value of the Property should be $11,500,000 whilst RW contended that it should be $8,023,000.  In assessing the compensation for the Property, both experts have agreed that the compensation shall be assessed on the basis of its open market value (“OMV”), the definition of which was set out in the Valuation Standard on Properties (First Edition, 2005) issued by the Hong Kong Institute of Surveyors.  They have adopted the direct comparison method in their valuation of the Property. 

5.  More specifically, they managed to agree on (1) the saleable area of the ground floor shop, being 55.09 sq. m. as well as all the ancillary accommodation including the yard of 18.06 sq. m., the cockloft area of 31.31 sq. m., and the space below the common staircase with an area of 1.90 sq. m.; (2) the ratio of the values of each ancillary accommodation area to the value of the saleable area of the shop proper, for valuation purpose and (3) the clear frontage of the Property at 3.23 m. and the overall frontage (including columns and structural wall) at 3.55 m.  AW in her report said that the fact that the ground floor shop of the Property was subject to a monthly tenancy had only a negligible effect on the value of the Property so that she actually valued both the ground floor shop and the cockloft on vacant possession basis.  This remains a live issue and the Applicant in the Final Written Submission still asked for determination by this Tribunal (i.e., that AW’s approach instead of RW’s should be adopted).

6.  However, to assist the Tribunal, AW provided her valuation based on the summation of (a) “the term and reversion” basis for the shop, and (b) vacant possession basis for the cockloft, i.e. the same methodology as that adopted by RW.  On this basis, AW revised her valuation to $12,150,000 (adduced as page 184 of the Trial Bundle) whilst RW also revised his to $8,362,000 (adduced as page 188 of the Trial Bundle). 

7.  The parties have the following valuation issues that would have to be determined by this Tribunal:

(a) Whether AC4/RC2 should be adopted as an appropriate comparable;

(b) Whether the weighting approach advocated by AW should be adopted;

(c) Whether visibility, depth and structural wall columns ought to be taken into account as adjustment factors and if appropriate, the proper adjustments; and

(d) The appropriate location adjustments for the comparables

The choice of the comparables by the experts

8.  The parties summed up in a table at page 183 of the Trial Bundle the comparables adopted by AW, the unadjusted unit rates, the individual adjustment for each factor including the basis of adjustment for the factors of time, location, clear frontage and corner, depth, structural wall/columns, headroom, visibility, quantum/size/layout, the total adjustments to the comparables and the resulting adjusted unit rates of the comparables.  The table also contained the various adjustments opined by RW and his resulting adjusted rates for the comparables.  However, although RW at the time of experts’ meeting agreed with AW that all 6 comparables were appropriate comparables, AW gave evidence in the hearing that after re-consideration, he opined that AC4/RC2 should not be accepted by the Tribunal as an appropriate comparable because it had been physically sub-divided, prior to the transaction, into several smaller shops.  I reproduce below a summary of the table.

Table 1 – Comparables for the Property

Comp. No	Address	Sale Price / Date of Sale, based on PASP	Effective Floor Area (sq. m.)	Unit Rate (per sq. m. of Effective Floor Area
AC1/RC6	G/F, 260 Ki Lung Street	$10,000,000 6/8/2007	73.05	$136,893
AC2/RC4	G/F, 268 Ki Lung Street	$9,800,000 26/10/2007	73.05	$$134,155
AC3/RC3	G/F, 369 Ki Lung Street	$11,000,000 18/1/2008	60.35	$182,270
AC4/RC2	G/F, 362 Lai Chi Kok Road	$17,000,000 28/1/2008	61.88	$274,725
AC5/RC1	Unit B, G/F, 254-256 Yu Chau Street	$11,300,000 17/3/2008	41.24	$274,006
AC6/RC5	Shop A3, G/F, 314 Lai Chi Kok Road	$6,200,000 14/9/2007	48.12	$128,845

Whether AC4/RC2 should be adopted as an appropriate comparable

9.  It is common ground that all the six comparables are suitable comparables, with the exception of AC4/RC2.  Indeed, it has all along been RW’s position that AC4/RC2 is also a suitable comparable.  It was adopted as  one of the comparables in his Rule 20 document and remained to be one of the 6 common comparables when the experts helpfully compiled a consolidated table of analysis setting out their agreed adjustments and their differences.  However, at the commencement of the trial, Counsel for the Respondent indicated to the Tribunal that RW opined to retract from adopting AC4/RC2 as a suitable comparable for the present valuation exercise, for the following reasons  (which were summed up in the Respondent’s Final Written Submission):

(1) unlike the Property, AC4/RC2 was a corner shop enjoying a significant return frontage on Kweilin Street and Lai Chi Kok Road (4.54 m and 6.57 m, respectively, on a clear frontage basis), thus warranting a very substantial adjustment to be made on account of this factor alone (i.e. 24% using the experts’ otherwise agreed linear method for the comparables in this case); this factor together with the adjustment for location factor would seriously affect the reliability of this comparable;

(2) “AC4/RC2 was at the date of the relevant sale transaction, and still is, physically sub-divided into 3 smaller shops, which translates into a real risk that its transaction price was in fact materially affected by this factor, this also affects the reliability of this comparable”; and

(3) even excluding AC4/RC2 as a comparable, the Tribunal would still have more than a sufficiently number of common comparables for the valuation.

10.  In particular, the Respondent cited the decision of Deputy Judge Lui in Data Key Limited v. Director of Lands (unreported, LDLR 6/2009, para. 8-13) in support of the submission that “the value of a shop premises which can be or is sub-divided is positively affected by the fact that it can be used for the purposes of smaller shops instead of a single large shop.”

11.  The Applicant disagreed with the opinion of RW and the submission of the Respondent that AC4/RC2 should be discarded as a comparable.  The Applicant said that if AC$/RC2 should not be excluded, the fact that there remained a sufficient number of common comparables could not be accepted as a good reason for excluding the comparable in the first place.  As to the fact that it should be excluded because it was the only corner shop whereas the other comparables and the Property were not located at the corner of 2 streets, the Applicant submitted that it could not be right in principle as the frontage or return frontages were after all a factor to be reckoned with and suitably adjusted in the analysis of the comparables.  I agree with the Applicant on these 2 points.

12.  Lastly, I agree with the Applicant that Data Key is not an authority on RW’s proposition that a comparable with a corner and physical sub-division is not an appropriate comparable for a subject premises such as the Property not having such feature.  In Data Key, Deputy Judge Lui only determined that the value of the property resumed in that particular case should be valued as the summation of the values of the 3 smaller shops which were sub-divided for many years and were legally sold individually.  In reaching that decision, the learned Judge accepted the applicant’s arguments, amongst others, on the following grounds:-

(1) Section 11 of the Ordinance expressly permits the Tribunal to take into account the physical condition of the subject property as at the date of reversion (i.e., the fact that it was sub-divided) and

(2) The subject property shall be valued on its highest and best use.

13.  In addition, I agree with the Applicant that there is no evidence that the sub-division of AC4/RC2 is legally permissible and that the comparable is indeed closest to the Property, in geographical terms.  I also find the value of any shop premises always includes the hope value of its being sub-divided into smaller units or merged into a bigger size shop, depending on the location, physical characteristics of the shop, lease conditions, Statutory constraints and market conditions.  This applies to any comparable including AC4/RC2.  To summarize, I decide for reasons set out above that the comparables for the present valuation exercise should not exclude AC4/RC2. 

Whether the weighting approach advocated by AW should be adopted

14.  AW opined that two of the comparables, namely AC3/RC3 and AC5/RC1 were two best comparables as their attributes were most similar to the Property.  As such, AW applied a full weighting to these two comparables but only a half weighting to the remaining four comparables.  The Applicant submitted that AW’s approach should be preferred as this would be able to account for the differences in nature and characteristics of the comparables.

15.  RW disagreed the adoption of this weighting approach as he opined that after applying appropriate adjustments to the comparables, the adjusted unit rates would have already provided a good indication of the market value of the Property.  The Respondent submitted that there was no objective or legitimate basis for AW to have chosen a factor of 1 and 0.5 for the weighting, and there was either no objective basis for differentiating different comparables into 2 groups, or simply “cherry picking” a particular factor (which had already been adjusted) and to emphasize that as being representing a critical difference between a particular comparable and the Property.  The Respondent submitted that RW’s approach, being the conventional approach of equal weighting given to suitable comparables, should be preferred.

16.  Having considered the opinion of both AW and RW, I prefer the approach of RW.  Since valuation at the end is a subjective exercise and the parties and their experts have already taken pains to consider various factors affecting the Property and the comparables, I do not find it helpful to introduce additional factors of (1) whether a comparable is closest to or less closest to the Property in all respect and (2) whether the weighting ratio of 0.5 to 1.0 or other ratio should be used.

Time

17.  The experts agreed to adopt the Rating & Valuation Department’s rental index as the basis for the adjustment of time factor, and they finally also agreed to use the Provisional Sale & Purchase Agreements’ dates as the dates of transactions.  Therefore, they have calculated and agreed on all the time adjustments, with the exception that for AC6/RC5, there was a difference of 0.5% due to rounding off difference.  In view of the minute difference between the two figures, I decide to use AW’s figure as it will be to the advantage of the Applicant.  As for the other adjustments, I decide to use the commonly agreed adjustments.

Location

18.  This remained the most hotly contested factor of adjustment between the parties.  The Tribunal had the benefit of a joint site inspection with the parties on the first date of hearing, and was assisted by (1) the evidence from both AW and RW both being well experienced valuation experts and (2) the submissions by Counsel for the parties.

19.  It was common ground that the Property was inferior to all the comparables, but by varying extents.  The experts, at the suggestion of the Tribunal during the hearing, produced sketch plans showing their opinion of the extents of the “wet market” that affect the comparables. In summary, AW opined that downward adjustments to the comparable of between 5 and 10% were appropriate whereas RW suggested similar but more substantial downward adjustments of between 20 and 35% were needed to reflect the location characteristics of the Property and the comparables.

20.  I decide that adjustments of -15% to -20% are warranted.  The details of the adjustments for this factor are shown in Table 2 below.

Clear Frontage & Corner

21.  After discussion, AW and RW managed to agree on the quantum on this factor of adjustment, sometimes a live issue in other cases.  I agree to adopt the experts’ adjustments in the analysis at Table 2 below.

Depth

22.  AW opined that adjustments had to be made to the depth factor in order to account for the differences in depth between the comparables and the Property.  At the end, AW suggested an adjustment of 1% for every 4m difference in depth.  The Applicant clarified in the closing that that was not an attempt by AW to introduce indirectly the reduced zoning method (“RZA”) in the valuation of the Property.  The Applicant submitted that unlike the other cases in which the Tribunal had considered but decided not to employ the RZA in the valuation, there was no arbitrariness in AW’s methodology in this case as she simply based on the actual depth of the Property in making the adjustments.

23.  RW considered that this adjustment was not applicable.  The Respondent in the Closing submitted that although the adjustments given by AW were favourable to the Respondent, these were still objected in terms of methodology.

24.  Having considered AW’s rationale and RW’s opinion, I decide that the depth adjustments to the comparables were inappropriate and unnecessary.

Structural Wall/Column

25.  AW made adjustments ranging from 1% to 5% whilst RW gave no adjustment on this factor.  RW gave evidence during the hearing that according to a floor plan he had obtained for the Property, there were also columns in the middle of the ground floor shop of the Property.  The Respondent submitted that the comparables were similar in nature and that “none of the comparables suffered from any material adverse effect from the structural walls or columns which would render any adjustment to be made”.  I decide to agree with the opinion of RW.

Quantum/Size/Layout

26.  AW gave an adjustment on the basis of 1% for every difference of 6.8 sq. m. (i.e. about 10% of the Effective Floor Area of the Property) whereas RW gave adjustments on the basis of 1% for every difference of 5 sq. m., based on the previous decisions of the Tribunal.  However, RW did not have any strong objection to the approach of AW.  Under this circumstance, I decide to adopt AW’s adjustments to the comparables, the details of which are shown in Table 2 below.

Headroom

27.  Again, the experts managed to agree the adjustments for all the comparables in respect of this factor.  I decide to adopt the agreed adjustments, the details of which are shown in Table 2 below.

Visibility

28.  AW opined that this was an independent factor, particularly for AC1/RC6 and AC2/RC4, located at Ki Lung Street but completely blocked by permanent fixed market stalls.  As such, adjustments were necessary to reflect such disadvantages.

29.  RW however opined that such adjustments were not as the shop owners did not rely on the visibility of their shops for the retail potential.  Counsel for the Respondent even submitted in Closing that the existence of these on-street fixed market stalls might enhance the pedestrian flow to the comparables located behind these stalls.  However, Counsel for the Applicant disagree with this submission and pointed out that (1) some photos of the comparables already demonstrated that the shop owners had made effort to display their trade name on “canvas eaves” with the purpose of showing their presence to passer-bys and (2) the pedestrians flows along the front facades of the fixed stalls could not have benefited the shops as these adversely affected shops were completely blocked by the back side, but not the front side of the stalls. 

30.  I agree that, other things being equal, any reasonable purchaser would obviously prefer a shop without having its front view completely blocked by the fixed stalls.  Therefore, I decide that an adjustment on visibility should be allowed, and the extent required for such adjustment should be the same as that suggested by AW.  I also agree with AW to give very minor adjustments to the other comparables.  The details are shown in Table 2 below.

Adjustments of the comparables by the Tribunal

31.  I have summarized in Table 2 below the adjustments I consider to be appropriate for the 6 adopted comparables: -

Table 2 – Adjustments of comparables by the Tribunal

Comparable Reference	AC1/RC5	AC2/RC4	AC3/RC3	AC4/RC2	AC5/RC1	AC6/RC5
Unadjusted Unit Rate (per sq. m.)	$136,893	$134,155	$182,270	$274,725	$274,006	$128,845
Time	12.0%	8.0%	2.0%	2.0%	-2.0%	10.5%
Location	-15.0%	-15.0%	-20.0%	-20.0%	-20.0%	-15.0%
Clear Frontage & Corner	0%	0%	2.0%	-24.0%	-4.0%	-1.0%
Depth	0%	0%	0%	0%	0%	0%
Structural Wall/Column	0%	0%	0%	0%	0%	0%
Quantum /Size/Layout	0.7%	0.7%	-1.1%	-0.9%	-4.0%	-2.9%
Headroom	-1.0%	-1.0%	-1.0%	4.0%	-1.0%	-1.0%
Visibility	10.0%	10.0%	-1.5%	-1.5%	-1.5%	-1.5%
Overall	6.7%	2.7%	-19.6%	-40.4%	-32.5%	-10.9%
Adjusted Unit Rate (per sq. m.)	$146,065	$137,777	$146,545	$163,736	$184,954	$114,801
Average Adjusted Unit Rate (per sq. m.)  Rounded to (per sq. m.)						$148,980 $149,000

Valuation of the OMV of the Ground Floor of the Property on vacant possession basis

32.  Applying the average of the adjusted unit rates of the adopted 6 comparables, in the amount of $149,000 per sq. m. to the agreed areas of the ground floor shop and the appropriate unit rates to the ancillary accommodation on the ground floor of the Property, the OMV of the ground floor of the Property is assessed as follows:

Ground floor shop 55.99 sq. m. x $149,000 / sq. m. = $8,342,510

Yard 18.06 sq. m. x $149,000 / sq. m. x 1/6 = $448,490

Space below staircase 1.90 sq. m. x $149,000 / sq. m. x 1/2 = $141,550

Total = $8,932,550

The OMV of the ground floor of the Property upon reversion (i.e. on vacant possession basis) is $8,932,550.

Valuation of the OMV of the Property subject to tenancy

33.  However, it is not disputed that the ground floor of the Property was subject to an existing monthly tenancy at the date of valuation.  Although AW opined that since it had been accepted by both parties that it took a month’s notice to terminate the monthly tenancy and it would therefore be technically correct to adopt the valuation methodology of RW in using the term and reversion for the ground floor and vacant possession basis for the cockloft, she opined that the difference was negligible if both the ground floor shop and the cockloft were valued on vacant possession basis. However, the fact that the difference is negligible cannot be accepted as the reason for not adopting the generally accepted methodology.  I therefore concur with RW and decide that his methodology should be adopted.  Hence, I use RW’s format (as well as his adopted yield and the period for valuing the term and reversionary interest for the ground floor) at page 188 of the Trial Bundle and assess the OMV of the Property as follows:

(a) OMV of the ground floor shop subject to existing monthly tenancy:

Term Value-

Monthly rent	$18,500
Less monthly rates $495	$495
Less monthly rates $495	$495
Net monthly rent	$18,005
	x 12
Yearly rent	$216,060
YP for 0.0795 year at 5.0% p.a.	0.0774
Value of Term		$16,723

Add- Reversion Value:
Reversion to OMV on vacant possession	$8,932,550
PV for 0.0795 year @ 5.5% p.a.	0.9958	$8,895,033
	Total =	$8,911,756

(b)OMV of the cockloft on vacant possession basis:

Orders

34.  Accordingly, I order that the Respondent do pay the Applicant compensation for the Property in the sum of $10,268,500.  Cost order nisi that the Respondent do pay to the Applicant the costs of this Application, to be taxed on High Court Scale if not agreed, with Certificate for Counsel.  Cost order nisi shall become absolute if there is no application made by either party to vary the order within 14 days. The matters of professional fees and interest shall be reserved, with liberty to apply by either party.