PROMISE FINE INVESTMENTS LTD AND OTHERS v. POON CHUAN AND OTHERS

LDCS 32000/2018

[2020] HKLdT 49

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 32000 OF 2018

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BETWEEN

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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 in Sham Shui Po, Kowloon, Hong Kong (hereinafter collectively referred to as “the Lots”):

Lot	Address
The Remaining Portion of New Kowloon Inland Lot 981	244 Hai Tan Street
Section B of New Kowloon Inland Lot 976	246 Hai Tan Street
The Remaining Portion of Section C of New Kowloon Inland Lot 976	248 Hai Tan Street
The Remaining Portion of Section F of New Kowloon Inland Lot 976	250 Hai Tan Street
The Remaining Portion of Section D of New Kowloon Inland Lot 976	252 Hai Tan Street
The Remaining Portion of Section E of New Kowloon Inland Lot 976	254 Hai Tan Street
The Remaining Portion of New Kowloon Inland Lot 976	256 Hai Tan Street

2.  Standing at 244 Hai Tan Street is a 6-storey building with an occupation permit dated 5 January 1957 granting permission for domestic use. According to a set of drainage plans approved on 11 August 1956[1], a shop was planned on G/F and a domestic unit on each of 1/F to 5/F. By a Deed Poll dated 19 March 1984, 2/F was subdivided into 4 units each registered in the Land Registry.

3.  246-256 Hai Tan Street comprise 3 pairs of 6-storey buildings, each being connected by 2 staircases intended for common use of the occupants thereof. By 2 occupation permits both dated 23 December 1955, permission was granted for domestic use on upper floors and non-domestic use on G/F. According to a set of building plans approved on 27 October 1955 and alterations and additions work plans approved on 10 April 1956 and 13 October 1956 (hereinafter collectively referred to as “Approved Building Plans”), 6 shops were planned on G/F and 6 domestic units on each of 1/F to 5/F. Further, by a Sub-Deed of Mutual Covenant with plans dated 27 September 1988, 5/F of 250 Hai Tan Street was sub-divided into 3 units each registered in the Land Registry.

4.  Thus, whereas each building standing at 244-256 Hai Tan Street is governed by a separate Deed of Mutual Covenant, the units are allocated undivided shares as follows:

Hai Tan Street		244	246	248	250	252	254	256
G/F		1 With cockloft	1	1	1	1	1	1
1/F		1	1	1	1	1	1	1
2/F	A	¼ of 1	1	1	1	1	1	1
	B	¼ of 1
	C	¼ of 1
	D	¼ of 1
3/F		1	1	1	1	1	1	1
4/F		1	1	1	1	1	1	1
5/F	A	1	1	1	1/3 of 1	1	1	1
	B				1/3 of 1
	C				1/3 of 1
Total:		6	6	6	6	6	6	6

The buildings standing thereon at 244-256 Hai Tan Street are collectively referred to as “the Buildings”.

5.  According to the records of the Land Registry, the 3^rd applicant began to acquire 5/F of 254 & 256 Hai Tan Street in December 2017. Then provisional agreements for sale and purchase of units in the Buildings began to be signed on 7 May 2018 with most assignments taking place on 3 August 2018. At the time of filing the Application on 12 December 2018, the 1^st applicant, 2^nd applicant and 3^rd applicant (collectively referred to as “the applicants”) together owned the following undivided shares in the Lots:

Hai Tan Street	244	246	248	250	252	254	256
Ownership	95.8333%	91.6667%		83.3333%		83.3333%

6.  After the Application was filed, the applicants acquired further interests from the following respondents (as denoted by the prefix “R”) and the proceedings against them have been discontinued:

(a) R3 and R4 as joint tenants of 3/F of 250 Hai Tan Street;

(b) R5 as owner of 2/F of 252 Hai Tan Street; and

(c) R7 as owner of 3/F of 256 Hai Tan Street.

7.  Also, at the time of the Application on 12 December 2018, the Land Registry records showed R2 as the then registered owner of 4/F of 246 Hai Tan Street. However, as it turned out, R9 acquired that unit from R2 by an assignment dated 3 August 2018, Therefore, the applicants discontinued proceedings against R2 and joined R9.

8.  More recently, by an order dated 17 August 2020, the Notices of Opposition and evidence of R6 and R9 were withdrawn but they remain as respondents as their units are not yet assigned to the applicants.

9.  Thus, the remaining respondents are as follows:

(a) R1 who is the registered owner of Flat C on 2/F at 244 Hai Tan Street (“R1’s Unit”);

(b) R6 who represents the estate of the deceased owner of 2/F, 254 Hai Tan Street (“R6’s Unit”);

(c) R9 who happened to acquire 4/F of 246 Hai Tan Street (“R9’s Unit”) on 4 June 2018 by an agreement for sale and purchase and has become the owner on 3 August 2018 contemporarily with the acquisition by the applicants of other units; and

(d) R8 who was joined as person who may have a potential claim in relation to 3/F of 244 Hai Tan Street despite her title to which was extinguished in an action pursuant to Sections 7 and 17 of the Limitation Ordinance, Cap 347.

10.  R1 is however a missing owner who made no response to various methods of notification of the Application whatsoever and was absent at all call-over hearings.

11.  Mak Yau who is the registered owner of R6’s Unit. He accepted the applicants’ offer of $12,403,481 for R6’s Unit on 26 November 2018 but passed away on 16 September 2019. By an order dated 6 December 2019, R6 was then appointed to represent the estate of Mak Yau. By an agreement dated 14 August 2020, the 2nd applicant agreed to purchase and R6 agreed to sell R6’s Unit at $13,800,000 subject to R6’s obtaining the grant of probate of the estate of Mak Yau. By an order dated 17 August 2020, R6’s Notice of Opposition dated 23 December 2019 and evidence were withdrawn. R6 is excused from attending trial.

12.  R9, through its solicitors, Messrs Yung Yu Yuen’s letter dated 8 October 2019, indicated that it does not intend to oppose the Application. It is excused from attending trial.

13.  R8 was joined as person who may have a potential claim in relation to 3/F of 244 Hai Tan Street ownership of which is registered in the name of the 2^nd applicant. Indeed, by an order dated 2 March 2015 in HCA 1652/2013 (“2015 Order”), the Court of First Instance granted the following orders in favour of “Yee Shiu Har (余笑霞)” (as plaintiff) against “the Estate of Jung Lees (李錦蘭alia, 張李錦蘭), Deceased” (as defendant, “Estate”):

(a) A declaration that the Estate’s title of and in 3/F, 244 Hai Tan Street (“the Property”) has been “extinguished pursuant to Sections 7 and 17 of the Limitation Ordinance, Cap 347”;

(b) A declaration that Yee Shiu Har has been in adverse possession of the Property for a period exceeding 20 years prior to the commencement of this action and has thereby acquired an indefeasible possessory right, title and interests of and in the Property;

(c) An order that Yee Shiu Har be registered as owner of the Property in the Land Registry.

14.  Then Yee Shiu Har was so registered as owner of 3/F, 244 Hai Tan Street and by an assignment dated 3 August 2018, she assigned all her interests in the Property to the 2^nd applicant.

15.  Mr Jonathan Lee (“Mr Lee”), counsel for the applicants, submitted that there may be an argument that R8 may have potential interests against the Property as follows but, for reasons below, the applicants contended that R8 ceased to have any interest in the Property:

(a) O15r6A(2) may have required the defendant in HCA 1652/2013 to be named as “The Personal Representatives of the Estate of Jung Lees, Deceased” (rather than simply “Estate of Jung Lees, Deceased” as stated in the 2015 Order). However, the applicants submit the following:

(i) Hong Kong Civil Procedure 2020 at §15/6A/3 states that “the defendant may be described in any other way so long as it is made clear that the action is brought against the estate of the deceased”.

(ii) Up to the date of these submissions, the applicants still have no information as to the whereabouts of the personal representatives (if any) of the Estate of Jung Lees.

(iii) In the assignment of the Property to Jung Lees in 1957, she was described as “Jung Lees (張李氏)” and in the 2015 Order, she was described as “the Estate of JUNG LEES　(李錦蘭alia, 張李錦蘭), Deceased”.

(iv) Therefore and against the above background, R8 was joined in these proceedings and described as “The Personal Representatives of the Estate of JUNG LEES　(李錦蘭alia, 張李錦蘭), Deceased also known as Jung Lees (張李氏)”.

(b) R8 may be regarded as the paper owner. However, the applicants submitted the following:

(i) The possessory owner (ie the 2^nd applicant) has acquired an “absolute title” and the paper owner’s “right is forever extinguished” by reference to §5 of Cheung Yat Fuk v Tang Tak Hong & Others (2004) 7 HKCFAR 70 citing the Privy Council’s advice in Perry v Clissold [1907] AC 73 at p79.

(ii) In any event, the possessory title owner is “deemed … to be the owner of the undivided share in the Lot” in the context of the Ordinance, citing Chung Chiu Hing v The Personal Representatives of Law Sam, Deceased, HCMP 2384/2011 (unreported, dated 9 June 2017) at §134.

(iii) In the 2015 Order, the Court of First Instance specifically ordered, inter alia, that the said Yee Shiu Har (1) had acquired an “indefeasible” possessory right, title and interests of and in the Property and (2) be “registered as owner” of the Property in the Land Registry.

(iv) By an assignment dated 3 August 2018, Yee Shiu Har assigned all her interests in the Property to the 2^nd applicant.

Therefore, the purpose of joining R8 was to cover the above argument so that if the Estate wished to raise such argument or any concern, then opportunity should be given to have such argument/ concern to be heard by the Tribunal.

16.  According to the 2^nd Affirmation of Mr Cheng Kin Ho (“Mr Cheng”), the Director of the applicants, dated 20 August 2019, the applicants attempted but failed to locate the personal representatives of the Estate. By an order of the Tribunal dated 26 August 2019 and pursuant to section 3(4) of the Ordinance:

(a) service of all documents on R8 be dispensed with;

(b) notice be published in newspaper to call upon R8 and any person claiming to be interested in the Estate to establish his/her claim before the Tribunal within 21 days;

(c) upon such expiration, R8 “shall be bound by these proceedings as if the personal representative(s) of the estate of the Deceased had been duly served” in accordance with section 3(3)(a) of the Ordinance; and

(d) pursuant to O15r15, “these proceedings may proceed in the absence of a person representing the estate of the Deceased and any judgment or order … shall bind the estate of the Deceased”.

17.  According to Mr Lee, R8 made no response whatsoever and was absent at all stages of these proceedings, and is thus bound by these proceedings.

Whether the Applicant is entitled to make the Application

18.  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.

19.  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.

20.  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 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)”. 

21.  As the occupation permits for the Buildings was issued in 1955 and 1957, not less than 50 years before the date of the Application, the Notice is applicable and the threshold percentage should be 80%.

22.  By reference to the table in §5 above, the applicants, owning not less than 80% or an average of not less than 80% of the undivided shares of the Lots, were entitled to file the Application under section 3(2)(a) and (b) of the Ordinance which may cover—

(a) 2 or more lots where the majority owner owns not less than the percentage specified in subsection (1) of the undivided shares in each lot; or

(b) 2 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).

The Issues in the Application

23.  Mr Lee summarized the following issues as shall be determined by the Tribunal according to section 4 of the Ordinance:

(a) First, the Tribunal shall determine the market value (commonly termed the Existing Use Value (“EUV”) of “each property on the lot” according to Part 1 of Schedule 1 to the Ordinance;

(b) Secondly, the Tribunal shall decide whether to make the compulsory sale order which depends on whether: -

(i) the redevelopment of the Lots is justified due to the age or state of repair of the existing development, ie the Buildings according to section 4(2)(a) of the Ordinance; and

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

(c) Third, if the Tribunal makes a sale order, the Tribunal shall

(i) determine the redevelopment value (“RDV”) of the Lots for the purpose of setting the reserve price of the public auction according to clause 2 of Schedule 2 to the Ordinance;

(ii) appoint trustees and authorize their remuneration; and

(iii) give appropriate orders relating to particulars and conditions of the auction.

The Evidence

24.  The applicants have filed the following documents in support of the Application:

(a) a witness statement dated 28 April 2020 by Mr Cheng;

(b) a Building Condition Survey Report by Mr Benson Wong Sai Ning (“Mr B Wong”) dated 28 April 2020 of Benson Wong & Associates Limited;

(c) a Structural Assessment Report by Dr Sammy Chan (“Dr S Chan”) dated 29 April 2020 of Wong & Cheng Consulting Engineers Ltd;

(d) the following reports by Mr Charles CK Chan (“Mr C Chan”) of Savills Valuation and Professional Services Limited (“Savills”);

(i) an Application Report dated 10 December 2018 pursuant to Part 1 of Schedule 1 to the Ordinance;

(ii) a Supplemental Report dated 27 April 2020 on, inter alia, the revised EUV as at 13 September 2018;

(iii) an updated report on EUV and RDV dated 25 September 2020;

(iv) a Rebuttal Report dated 28 May 2020 and Joint Statement dated 29 June 2020 which are however no longer relied on as R6’s valuation evidence, the only opposing evidence, was withdrawn.

EUV as at 13 September 2018

25.  The Application was accompanied by a valuation report dated 10 December 2018 (“Application Report”) prepared by Mr Chan of Savills containing assessments of the EUV of all units in the Buildings on the Lots as at 13 September 2018. The Application Report was prepared not earlier than 3 months before the date of the Application, i.e. 12 December 2018 and is therefore, in my view, in compliance with section 3 of the Ordinance.

26.  Under section 4(1)(a)(i), if there is a dispute between the parties on the EUV of the units in the Buildings on the Lots, the Tribunal has to determine the values.

27.  Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the Lots who cannot be found, the majority owner of the Lots is required to satisfy the Tribunal that the value of the minority owner’s property as assessed in the application is “(A) not less than fair and reasonable; and (B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”  

28.  In the Application Report of 10 December 2018, Mr C Chan explained the method of valuation and the process of his assessment to arrive at the EUV of each unit of the Buildings.

Assessment of EUV of Ground Floor Non-Domestic Units

29.  In assessing the EUV of the ground floor units, Mr C Chan just followed the designated shop use in accordance with the drainage plans and the Approved Building Plans for 244 Hai Tan Street and 246-256 Hai Tan Street respectively.

30.  Notwithstanding the “domestic purposes” as specified in the occupation permit for the building at 244 Hai Tan Street, the latter’s G/F was planned as a shop as per the drainage plans. Indeed, this occupation permit was issued pursuant to the Building Ordinance (Chapter 123 of the Revised Edition, 1950). Section 2 of such earlier Buildings Ordinance defines ‘domestic building’ to mean “any building constructed, used or adapted to be used, wholly or partly, for human habitation, but does not include any building where caretakers only, not exceeding two in number, pass the night” (underline added).

31.  Further, in Tsuen Wan Trade Association Education Foundation Ltd. v. Chui Kam Ying [2012] 2 HKLRD 1163, Jeremy Poon J (as he then was), when considering a similar provision under the old Buildings Ordinance No 18 of 1935, ruled at §22 of the judgment that:

“… even if two domestic permits had in fact been issued, it does not necessarily follow that the Property can be used for residential purpose only. ….. This inferentially but strongly shows that the Property can in fact be used for non-residential purposes legally.” (underline added).

32.  I accept therefore the definition of “domestic building” of the then Buildings Ordinance allowed for wholly or partly human habitation and included non-domestic purposes such as shop.

33.  Mr C Chan adopted the following methodology in his assessments:

(i) He selected G/F, 250 Hai Tan Street as the Reference Shop Unit.  He then took into account 10 comparable shop transactions in the vicinity. After making what he regarded as the necessary adjustments (for time, location, size, age, layout, frontage, return frontage, headroom etc) for all these comparable transactions, he took off the highest and the lowest comparables and adopted the average of the adjusted unit rates of the other comparables to come to the unit price of the Reference Shop Unit.

(ii) He further considered the size and frontage/layout, the Reference Shop Unit and the other shop units at G/F of the Buildings and made adjustments to arrive at the EUV for the latter.

Assessment of EUV of Upper Floor Domestic Units

34.  In his valuation of the EUV of the domestic units on the upper floors of the Buildings, Mr C Chan adopted a similar methodology:

(i) He selected 3/F, 252 Hai Tan Street as the reference unit (“the Reference Domestic Unit”) for the purpose of valuing its unit price.

(ii) The unit price of the Reference Domestic Unit was first assessed by making reference to market comparables.  He took into account 11 comparable transactions in 10 different buildings in the vicinity.  After making what he regarded as the necessary adjustments (for time, location & environment, floor level, age, size, view, noise, lighting & ventilation, physical condition & building management etc) for all these comparable transactions, he again took off the highest and the lowest comparables and adopted the average of the adjusted unit rates of the other comparables.

(iii) He further considered the floor level, top floor effect, size, view, lighting & ventilation, and internal conditions of the Reference Domestic Unit and the remaining domestic units within the Buildings and made adjustments to arrive at the EUV of all the domestic units on the upper floors of the Buildings.

Total EUV

35.  Mr C Chan updated the Application Report by a Supplemental Report dated 27 April 2020 in which he revised the EUV of all the units in the Buildings after taking into account the inspection of more units in the Buildings and the updated property index prepared by the Rating and Valuation Department.  In this report, Mr C Chan basically repeated the exercise he did in the Application Report but with more comparables around the date of valuation.

36.  Furthermore, Mr C Chan had reviewed his EUV assessments in his updated valuation report dated 25 September 2020.

37.  The total EUV of the Buildings is $279,540,000 as shown at Appendix V of Mr C Chan’s updated Valuation Report[2] which is now reproduced at Appendix 1 of this judgment. The pro rata shares of R1’s, R6’s and R9’s interests are 0.3184%, 2.0641% and 1.7278% respectively.

38.  In the absence of any evidence to the contrary, I am satisfied that the values of the minority owners’ properties as assessed in the Application are “(A) not less than fair and reasonable; and (B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”  

Whether Redevelopment of the Lot is Justified

39.  Section 4(2) of the Ordinance provides that the Tribunal shall not make an order for sale unless it is satisfied that the "age or state of repair" of the Buildings is justified and that the applicants have taken "reasonable steps" to acquire all undivided shares of the Lots.

40.  In his opening submission, Mr Lee referred to the guidelines laid down in, for instance, Alliance Fame Ltd v Mak Kam To, LDCS 9000/2015 (unreported, dated 4 August 2017) which referred to Top Sail International Limited v Cheng Kai Ming, LDCS 18000/2010 (unreported, dated 15 November 2011 and Charmlink Limited v Lee Tong Hing & Others, LDCS 16000/2010 (unreported, dated 29 November 2011) on the factors that the Tribunal should consider in deciding whether redevelopment is justified due to age and state of repair.

41.  Mr Lee summarised the relevant factors which includes:

(a) “Physical age … and physical conditions of a building and the amount that would be required to maintain the building”;

(b) “The obsolete design of a building … whether it is too old to serve a modern society”;

(c) Whether the Buildings are “over 50 years old” and “obsolescent in design and not economical to maintain”; and

(d) Whether the building is in a “poor state of repair and in fact untenantable without substantial repair”.

42.  The applicants adduced the expert evidence of two experts namely, Mr B Wong who is an Authorised Person and a building surveyor, and Dr S Chan who is a structural engineer. Their expertise was not disputed.

43.  In his Condition Survey Report dated 28 April 2020, Mr B Wong identified defects in the following components of the Buildings:

(a) Main roof:

(b) Staircases;

(c) Flats and shops internally;

(d) Aboveground plumbing;

(e) Aboveground and underground drainage;

(f) Electrical installations; and

(g) Fire services installation.

44.  Mr B Wong’s key findings are as follows:

(a) The Buildings are 64-65 years old well exceeding the design life of 50 years;

(b) The Buildings suffer from 14 aspects of functional obsolescence with safety/ hygiene implications as compared with modern standards and 7 of them “cannot be rectified unless the Buildings are demolished and redeveloped”;

(c) The Buildings’ “defects and deficiencies … cannot be easily rectified by simple and piecemeal repairs”. Substantial repairs of $54,928,863 “are required to be carried out in order to restore the Buildings to a fair state of repair”;

(d) This repair cost is around 99% of the costs of constructing a new similar superstructure. Such cost is “disproportionately high” indicating the deterioration of the Buildings’ superstructure is “very serious” and reached a state “beyond reasonable economic repair”; and

(e) The future mandatory and voluntary repairs will make continued occupation “uneconomical and even unsafe”. Even if the Buildings are repaired, the quality of accommodation is still “below market expectation”.

45.  Mr B Wong drew the following conclusions:

(a) “the age and the state of repair, each on its own, is a justification for redevelopment of the Buildings for these have become obsolete over time and are in a poor state of repair”;

(b) “Based on my experience as a building surveyor practicing in the field of building maintenance, renovation and redevelopment for 39 years, I recommend the owners to redevelop rather than repair the Buildings, particularly bearing in mind the Buildings do not possess any historical value or architectural merit, and are merely two buildings of the past that can be replaced”.

46.  In respect of the Structural Assessment Report dated 29 April 2020, Dr S Chan performed a structural assessment of the Buildings and assessed the results from the following tests/surveys: visual inspection, physical tests/surveys, cover meter surveys, carbonation depth tests, compression tests, chloride content tests, sulphate content tests, cement content tests and reinforcement corrosion surveys.

47.  Dr S Chan had the following key findings:

(a) The embedded steel reinforcements are “extensively corroded”;

(b) The structural elements are in a degraded condition caused by corrosion of reinforcement due to carbonation resulting in reduced structural capacity. Carbonation of concrete is an “irreversible deterioration” which will “inevitably lead to corrosion of structural members”;

(c) The Buildings do not meet the current safety standards and current structural engineering requirements;

(d) The design and construction of the structural frames are obsolete as they were constructed and designed according to the old LCC By-Laws which are of a lower standard than the current structural design standards: the Buildings may not be able to avoid disproportionate collapse;

(e) The “structural frames of these buildings have deteriorated to the final stage of their design working life and the deterioration will continue steadily due to extensive carbonation of the concrete”; and

(f) It is inevitable that new defects will occur and previous defects though repaired will recur readily, requiring substantial repair or even partial demolition and reconstruction of defective structural members.

48.  There is no other evidence, factual or opinion, in relation to the “age” and “state of repair” of the Buildings. Having considered the evidence before the Tribunal, 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

49.  The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interests of the respondents under Section 4(2)(b) of the Ordinance.

50.  In relation to R1, according to Mr Cheng’s witness statement dated 28 April 2020, the applicants took the following steps but received no response at all:

(a) In Messrs Mayer Brown’s letter dated 26 November 2018, the applicants made an offer of $1,980,955 to which Mr C Chan’s advice letter explaining the valuation basis of the offer was attached.

(b) By a Mediation Notice dated 12 December 2018, the applicants invited R1 to attempt mediation to resolve the disputes.

(c) In Messrs Mayer Brown’s letter dated 11 June 2019, the applicants again invited R1 for mediation.

(d) In Messrs Mayer Brown’s letter dated 17 October 2019, the applicants re-opened the said offer of $1,980,955 to which Mr C Chan’s advice letter explaining the valuation basis of the offer was attached.

51.  As stated in §11 above, the 2^nd applicant agreed to purchase and R6 agreed to sell R6’s Unit at $13,800,000 subject to R6’s obtaining the grant of probate of the estate of the deceased registered owner. By an order of the Tribunal dated 17 August 2020, R6’s Notice of Opposition was withdrawn.

52.  In relation to R9, according to Mr Cheng’s witness statement dated 28 April 2020, the applicants had took the following steps:

(a) In Messrs Mayer Brown’s letter dated 28 December 2018, the applicants made an offer of $10,670,145 to which Mr C Chan’s advice letter explaining the valuation basis of the offer was attached.

(b) In a letter dated 17 January 2019 from R9’s solicitors, Messrs Yung Yu Yuen & Co, the said offer was rejected.

(c) On 19 August 2019, mediation was conducted.

(d) In a letter dated 8 October 2019, Messrs Yung Yu Yuen & Co indicated that R9 did not intend to oppose the Application.

(e) By an order of the Tribunal dated 17 August 2020, R9’s Notice of Opposition was withdrawn.

53.  Mr Lee submitted, and I agree, that it is unnecessary for the applicants to negotiate with R8 to purchase anything. In any event, service of all documents on R8 is dispensed with.

54.  The Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363 (“Capital Well”) has 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.”[3]

55.  On the evidence available, I am satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots including negotiating for the purchase of such of those shares as are owned by R1, R6 and R9 on terms that are fair and reasonable.

RDV of the Lots

Optimum Hypothetical Development Model

56.  Mr C Chan adopted the residual valuation method in determining the RDV.  This can be done by deducting 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.

57.  In his updated Valuation Report dated 25 September 2020, Mr C Chan has prepared an assessment of the RDV of the Lots at $566,000,000 (ie an accommodation value of $97,314 / sq m) as at 14 September 2020. The net developable site area of the Lots as determined by Mr C Chan is 689. 33 sq m.

58.  The applicants submit that the reserve price for the auction of the Lots should be fixed at $566,000,000 accordingly.

59.  I have scrutinized Mr C Chan’s valuation of the RDV of the Lots. For instance, Mr C Chan opined that the optimal development on the Lots would be a 25-storey commercial/residential composite building with shop units on ground floor (plus cocklofts), club house & plant room on 1/F and residential units on the upper floors. Details of the hypothetical development and residual valuation were set out in Appendix VIII[4].  

60.  In respect of the shop units, Mr C Chan relied on 5 transactions of comparables four of which are situated on Hai Tan Street with one opposite the Buildings across the street. The remaining one is situated further away on G/F of Park One, 1 Nam Cheong Street which lies towards the southeastern end of Hai Tan Street.

61.  During the joint inspection on 12 October 2020, it is noted that all the Hai Tan Street comparables are scattering around a big redevelopment scheme named as Seaside Sonata, Tower 1, 2 & 3 the occupation permits of which, according to Mr C Chan, was issued in September 2020. More particularly, the buildings across the street opposite the Building, ie 223-225A Hai Tan Street are under demolition for redevelopment. Indeed, the buildings further to the northwest of the Buildings up to the end of Hoi Tan Street are pending redevelopment. All these point that the environment of the neighbourhood where the ground floor units are predominated by a range of grocery stores, hardware shops and car repairing workshops would undergo substantial improvement.

62.  When I put the above to Mr C Chan during trial, Mr C Chan explained that the comparables he chosen, particularly the one at 229 Hai Tan Street opposite the Buildings which was sold in August 2020 should, to a certain extent, have reflected the prospective change. However, I am not persuaded as the ground floor units in the immediate vicinity are still predominated by a range of grocery stores, hardware shops and car repairing workshops. More importantly, the time adjustments applied by him, based on the Private Retail Price Index prepared by the Rating and Valuation Department which is basically an average of the movements in prices of retail unit across the whole territory cannot cater for the change in the particular area.

63.  In Alliance Fame, supra, the Tribunal accepted an increase of 10% for the enhancement of the trading environment upon redevelopment[5]. More recently, the same was allowed by the Tribunal in Top Harmony Limited v Cheung Yuet Sheung & Others, LDCS 39000/2018 (unreported, dated 15 October 2020)[6]. I therefore increase the unit price of the hypothetical retail unit by 10%.

64.  As regards the residential units, Mr C Chan has considered the sales of units in 4 new developments nearby: they are Park One at 1 Nam Cheong Street, Harbour Park at 208 Tung Chau Street, West Park at 256 Tung Chau Street and Campton at 201 Fuk Wing Street (which is in fact farthest away from the Buildings). Mr C Chan determined an average unit price of $217,000 per sq m which appears to be reasonable.

65.  Mr C Chan also adopted the Development Cost Pro-forma promulgated by the Hong Kong Institute of Surveyors to facilitate consideration of construction costs in land value assessments[7]. The construction cost is estimated at $221,589,591.

Finding on RDV and the Reserve Price

66.  Subject to what I have stated above, I shall follow Mr C Chan’s residual valuation model which is reproduced at Appendix 2 to this judgment. I determine the land value of the Lot at $576,253,106, say $576,253,000.

67.  I shall adopt the estimated RDV of $576,253,000 (ie accommodation value of $99,077/m²) as the Reserve Price for the auction of the Lots.

Other Incidental Matters

68.  The applicants proposed to appoint Mr Ma Ho Fai and Ms Hung Suet Shan Catherine, being partners of Messrs Woo Kwan Lee & Lo, Solicitors, Notaries, Agents for Trademarks & Patents, as the sale trustees.  Based on the information on their background and experience as set out in their letter dated 30 September 2020[8], I am satisfied that they are proper persons to be appointed as trustees to discharge the duties imposed on trustees under the Ordinance.  The remuneration package proposed in the said letter appears reasonable.

69.  The applicants have prepared a set of draft Particulars and Conditions of Sale of the Lots[9].  Subject to any amendment that may become necessary as a result of our ruling on the arrangement of auction above, the particulars and conditions of sale of the Lots by public auction submitted by the applicants are also reasonable.

Order

70.  This Tribunal make the following orders:

(1) This Tribunal is satisfied that the redevelopment of the Lots is justified due to the “age” and “state of repair” of the Buildings and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots including those of the 1^st, 6^th, 8^th and 9^th respondents;

(2) All the undivided shares in the Lots, the subject of the Application herein, be sold by way of a public auction 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 Ma Ho Fai and Ms Hung Suet Shan Catherine of Messrs Woo Kwan Lee & Lo, Solicitors, Notaries, Agents for Trademarks & Patents, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to sale of the Lots and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Woo Kwan Lee & Lo, Notaries, Agents for Trademarks & Patents, dated 30 September 2020.

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

(i) The sale of the Lot 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 $576,253,000.

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

(iv) Liberty to the applicants, the respondents and the Trustees to apply to the Tribunal for further direction(s) under the Ordinance.

Costs

71.  In accordance with the order of the Tribunal dated 17 August 2020 aforementioned, there be no order as to costs between the applicants and R6 and the applicants and R9 in this Application.

Appendix 1

Appendix 2