FAIRBO INVESTMENT LTD v. ALLAN GAN-HONG LEW, the Executor of the Estate of YUET KING LEW, Deceased AND OTHERS

LDCS 19000/2019

[2021] HKLdT 39

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION

NO. 19000 OF 2019

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J U D G M E N T

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Background

1.  This is an application (“the Application”) made under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) for an order of compulsory sale of all the undivided shares in the following lots:

Lot No		Buildings
1st Pair of Lots	New Kowloon Inland Lot 3586 Section DD (“Lot 1”)	1st Pair of Buildings	No 9 Yiu Tung Street, Kowloon (“Building 1”)
	New Kowloon Inland Lot 3586 Section CC (“Lot 2”)		No 10 Yiu Tung Street, Kowloon (“Building 2”)
2nd Pair of Lots	New Kowloon Inland Lot 3586 Section BB (“Lot 3”)	2nd Pair of Buildings	No 11 Yiu Tung Street, Kowloon (“Building 3”)
	New Kowloon Inland Lot 3586 Section AA (“Lot 4”)		No 12 Yiu Tung Street, Kowloon (“Building 4”)
3rd Pair of Lots	New Kowloon Inland Lot 3586 Section Z (“Lot 5”)	3rd Pair of Buildings	No 13 Yiu Tung Street, Kowloon (“Building 5”)
	New Kowloon Inland Lot 3586 Section Y (“Lot 6”)		No 14 Yiu Tung Street, Kowloon (“Building 6”)

2.  Two Domestic Permits for the Buildings Nos 68 and 428 were issued on 28 February 1952 and 3 December 1952. The 1^st Pair of Buildings each comprising 4 storeys are served by one common staircase and the same is true for the 2^nd Pair of Buildings and the 3^rd Pair of Buildings. The domestic permits referred to stated that the architect had certified that the new building complied in all respects with the provisions of the Buildings Ordinance (Chapter 123 of the Revised Edition, 1950), section 2 of which 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)

3.  In Tsuen Wan Trade Association Education Foundation Ltd. v. Chui Kam Ying [2012] 2 HKLRD 1163, Jeremy Poon J (as he then was), deciding on a similar provision under the old Buildings Ordinance No 18 of 1935, ruled 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).

4.  According to the set of building plans of reference no 2/4275/52 approved by the Building Authority on 21 June 1952 in respect of Nos 1-10 Yiu Tung Street, two domestic units were planned on each floor from Ground Floor (“G/F”) to Third Floor (“3/F”) of Nos 9-10 Yiu Tung Street.

5.  According to the set of building plans of reference no 2/4426/51 approved by the Building Authority on 11 August 1951 in respect of Nos 11-14 Yiu Tung Street, two domestic units were planned on each floor from G/F to 3/F of Nos 11-14 Yiu Tung Street.

6.  According to the set of Addition and Alteration (“A&A”) plans of reference no 4163/68 approved by the Building Authority on 6 January 1969, the domestic unit on G/F of No 12 Yiu Tung Street was converted to work shop and cockloft for storage.

7.  According to the set of A&A plans of reference no 4175/68 approved by the Building Authority on 25 February 1969, the domestic units on G/F of Nos 13 and 14 Yiu Tung Street were converted to shops and cocklofts for storage.

8.  Notwithstanding the designated domestic us of the G/F units, it is noted during inspection that they are occupied as shops.

9.  There is no Deed of Mutual Covenant registered for units of No 10 Yiu Tung Street. The units of Nos 9, 11, 12, 13, 14 and sub-units of 1/F of No 11 and 3/F of No 14 Yiu Tung Street are subject to Deed of Mutual Covenant/ Deed of Covenant/ Deed of Mutual Grant/ Sub-Deed of Mutual Covenant and Grant as tabulated below:

Units	Memorial No	Instrument Date
All units of No 9 Yiu Tung Street	UB290480	26 January 1959
All units of No 11 Yiu Tung Street	UB271526	14 January 1958
All units of No 12 Yiu Tung Street	UB292605	3 March 1959
All units of No 13 Yiu Tung Street	UB368671	14 May 1962
All units of No 14 Yiu Tung Street	UB1236586	20 January 1976
Sub-units of 1/F, No 11 Yiu Tung Street	UB2465187	20 July 1983
Sub-units of 3/F, No 14 Yiu Tung Street	UB2198358	10 October 1981

10.  At the commencement of the Application on 10 June 2019, the applicant owned the following undivided shares of and in the Lots:

Lot		Applicant’s undivided shares	Average % of undivided shares
1st Pair of Lots	Lot 1	3/4th (75%)	87.5%
	Lot 2	4/4th 100%
2nd Pair of Lots	Lot 3	4/4th (100%)	87.5%
	Lot 4	3/4th (75%)
3rd Pair of Lots	Lot 5	3/4th (75%)	87.5%
	Lot 6	4/4th (100%)

11.  More particularly, there were then 3 respondents but after the commencement of the Application, the applicant successfully acquired the undivided share in Lot 4 previously owned by the 2^nd respondent (“R2”). The applicant’s proceedings against R2 has been withdrawn.

12.  The applicant has also acquired the possessory title to 2/F, No 9 Yiu Tung Street (“R1’s Unit”) from one Wu Sai Yeung. R1, ie the 1^st respondent, who is supposed to be residing in Canada, is merely the owner of the paper title to R1’s Unit. The amended Notice of Application was served to R1 in Canada on 8 July 2020 pursuant to the Order made by HH Judge M Wong dated 19 March 2020.

13.  The 3^rd respondents (“R3”) are the registered owners of 1/F, No 13 Yiu Tung Street (“R3’s Unit”) but they are missing. Substituted service of the application on R3 was effected on 14 August 2019 pursuant to the Order made by HH Judge M Wong dated 6 August 2019. R3 did not show up after the expiration of the 21-day period as specified in the notices.

Section 3 of the Ordinance – Ownership of the applicants

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 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.  As the occupation permits for the Buildings were issued in 1952, 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 87.5% of the undivided shares of the Lotsat 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).

Determination of the existing use values (“EUV”) of all units in the Building

19.  Pursuant to section 3 of the Ordinance, the Notice of Application was accompanied by a valuation report dated 31 May 2019 (“Application Report”) prepared by Mr Charles C K Chan of Savills Valuation and Professional Services Limited (“Mr C Chan”), the applicants’ valuation expert, containing the assessments of the values of all units (which are conveniently termed as the existing use values, the “EUV” of all units) in the Buildings on the Lots as at 20 March 2019. The report was prepared not earlier than 3 months before the filing of the Application in accordance with section 3 of the Ordinance.

20.  Under section 4(1)(a)(i), if there is a dispute between the parties on the EUV of the units in the Building on the Lot, the Tribunal has to determine the values. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the Lot who cannot be found, the majority owner of the Lot is required to satisfy the Tribunal that the value of the minority owner’s property as assessed in the application is:

“(a) not less than fair and reasonable; and

  (b) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

21.  In the Application Report, 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.

22.  In his valuation of the EUV of the G/F units of the Building, Mr C Chan adopted the following methodology:

(a)  He selected G/F, No 11 Yiu Tung Street as the Reference Shop Unit.  He then took into account 6 comparable transactions in 6 different buildings nearby. After making what he regarded as the necessary adjustments (for time, location, size, building age, frontage and/or return frontage, layout and headroom) for all these comparable transactions, he arrived at a unit price of the Reference Shop Unit at $150,000/sq m;

(b)  He then used the unit rate of the Reference Shop Unit to assess the other ground floor units on G/F of the Buildings.

23.  In assessing the EUV of all the domestic units, Mr C Chan adopted the following methodology:

(a)  He selected 1F, No 9 Yiu Tung Street (“the Reference Domestic Unit”) as the reference unit for the purpose of valuing its unit price; 

(b)  The unit price of the Reference Domestic Unit was first assessed by making reference to market comparables.  He took into account 10 comparable transactions all in different buildings nearby.  After making what he regarded as the necessary adjustments (for time, location & environment, size, building age, floor level, top floor effect, view, lighting and ventilation, noise etc) for all these comparable transactions, he took the average of the adjusted unit rate of the comparables to arrive at the unit price of the Reference Domestic Unit at $72,000/sq m;

(c)  He further considered the floor difference, size, view, lighting and ventilation, noise 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;

(d)  He converted the saleable area of the open flat roofs on the 1/F or the top Roofs of the Building by using a conversion factor of 1:6 and 1:8 respectively.

24.  Mr C Chan updated the Application Report by a supplemental report dated 16 December 2020 (“Supplemental Report”) in which he revised the EUV of all the units in the Buildings after taking into account the inspection of 1 additional residential unit in the Buildings and the updated property index prepared by the Rating and Valuation Department. He also took into account 6 more recent retail comparables and 6 more recent domestic comparable which were not available at the time of his preparation of the Application. Then Mr C Chan repeated the exercise he did in the Application Report with the new information and set out his revised assessments of the EUV of each unit as at 20 March 2019.  

25.  The EUV of all units in the Buildings as at 20 March 2019 are reproduced at Appendix 1 of this judgment[1].

26.  I am satisfied that the value of the R1’s Unit, ie 2/F, No 9 Yiu Tung Street and that of R3’s Unit[2], ie 1/F, No 13 Yiu Tung Street as assessed above are (A) not less than fair and reasonable; and (B) not less than fair and reasonable when compared with the value of the applicant’s property as assessed in the Application.

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

27.  In determining the application, Section 4(2) of the Ordinance empowered the Tribunal to make an order for sale unless, after hearing the objections of the respondent, it is satisfied that:

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

(b)  the applicant has taken reasonable steps to acquire all the undivided shares in the Lot (including negotiating for the purchase of the undivided shares owned by the respondent on terms that are fair and reasonable).

Section 4(2)(a) - Age and State of Repair

28.  This Tribunal has taken into consideration the expert evidence of Mr Dennis Wong, the Chartered Building Surveyor and Mr Wong Chi Ming, the Structural Engineer adduced by the applicant. 

29.  There is no evidence to the contrary and I accept the applicant’s evidence in whole. I am satisfied that based on the evidence above, redevelopment of the Lots is justified due to the state of repair of the Buildings which are in a very poor state of repair.

30.  I am satisfied that redevelopment of the Lots is also justified due to age in view of the following factors:

(a)  The Buildings are more than 58 years old and in a very poor condition.

(b)  Their design has become obsolete over time in many aspects both physically and functionally and failed to conform to modern construction and statutory standards and requirements.

(c)  The Buildings are in serious disrepair and are not tenantable and disproportionate cost is required to repair and maintain the Buildings.

Section 4(2)(b) - Reasonable Steps Taken

31.  The applicant is 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.

32.  Ms Nancy Ngai, counsel for the applicant, submitted that although the applicant had commenced the Application under the Ordinance, the applicant continued to negotiate with the available respondents and successfully acquired the undivided share formerly owned by R2. The applicant had also acquired the possessory title to R1’s Unit and made offer to R1 in Canada with the view to also acquiring his paper title. R1 did not respond at all. The applicant has not been able to acquire the R3’s Unit because they cannot be found at all.

33.  At the pre-trial review (“PTR”) hearing on 9 April 2021, one Mr Chan Chi Wai (“CW Chan”) informed the applicant’s solicitors, Messrs Lo & Lo, that he had commenced an action in DCCJ 5478 of 2020 claiming a possessory title to R3’s Unit. Mr CW Chan did not formally attend the PTR. He merely sat in the hearing at the public gallery. Up to the date hereof, Mr CW Chan has not provided the applicant or its solicitors any documents in relation to the proceedings in DCCJ 5478 of 2020. Hence, the applicant has not been able to ascertain whether Mr CW Chan is really claiming adverse possession of the R3’s Unit against R3 and the exact relief sought by him in the said proceedings etc.

34.  In view of the above, I am satisfied that the applicant has taken reasonable steps to acquire all the undivided shares of the Lots including R1’s and R3’s interest.

 Order for Sale

35.  I am satisfied that redevelopment of the Lots is justified both in terms of age and state of repair of the Buildings and the applicant had taken reasonable steps to acquire all the undivided shares of the Lots.  Under such circumstances, I find an order for sale should be granted in favour of the applicant.

Reserved Price for the Auction

36.  The applicant submit that the reserve price for the auction of the Lots should be fixed at $524,000,000, based on the assessment by Mr C Chan of the RDV of the Lots in his Valuation Report dated 1 April 2021.

37.  I have carefully considered Mr C Chan’s valuation of the RDV of the Lots.  I note Mr C Chan reported that there is no relevant land sale transaction in the vicinity for direct comparison and I therefore agree with Mr C Chan that as a last resort, the residual method has to be employed as the method of assessment of the RDV of the Lots. This is done by deducting development costs (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value of the completed development.

38.  Mr C Chan opined that the optimum development on the Lot comprised a block of 25-storey commercial/residential composite building with retail units on ground floor plus cockloft, club house on first floor and residential units on the upper floors.  Details of the hypothetical development and residual valuation are set out in Appendix 2[3], and details of the comparables with adjustments in Appendix 4[4] (for shops) and Appendix 6[5] (for new residential units).  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 in Appendix 3[6]. 

39.  Having gone through his valuation in details, I accept Mr C Chan’s valuation, including the valuation assumptions he has adopted, the values and the costs parameters that he has used in his valuation.  I accept that the open market value of the Lots reflecting its redevelopment potential, i.e. the RDV of the Lots, as at 1 April 2021 is $524,000,000 (ie an accommodation value of $90,877 per sq m), which should be the reserve price for the auction of the Lots.

Order

40.  This Tribunal make the following determinations:

(1)  This Tribunal is satisfied that the value of the 1^st respondent’s Unit and the 3^rd respondent’s Unit as assessed in this Application are fair and reasonable and are fair and reasonable when compared with the value of the applicants’ unit;

(2)  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 1^st respondent and 3^rd respondent;

(3)  All the undivided shares in the Lots, the subject of the Application, be sold by way of public auction for the purposes of redevelopment of the Lots;

(4)  Mr Chow Wing Kin Anthony and Ms Chow Suk Han Anna of Messrs Guantao & Chow, nominated by the applicant, 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 from Messrs Guantao & Chow, Solicitors & Notaries, dated 10 March 2021;

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

(a)  The sale of the Lots be on the particulars and conditions of sale substantially the same as those in the draft Particulars and Conditions of Sale (as set out in page 575-606 of Bundle B2) initialed and approved by the Tribunal;

(b)  The reserve price be set at $524,000,000;

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

(6)  The Applicant do publish notices once in a Chinese language newspaper (and in the Chinese language) and once in an English newspaper (and in the English language) circulating generally in Hong Kong within 7 days from the date of the sealed judgment to be made herein by the Tribunal informing R3 and all persons claiming to the owners of the Lots:-

(a)  That the Tribunal has made Orders for sale of the Lots;

(b)  That the Lots be sold by one public auction; and

(c)  Where and the times during which a copy of the Orders for sale to be made herein be obtained.

(7)  Liberty to the applicant, the 1^st respondent, the 3^rd respondent and the Trustees to apply to the Tribunal for further directions.

Costs

41.  Costs order nisi that there be no order as to costs. Unless any of the parties apply by summons to vary it, the costs order nisi shall be made absolute upon expiry of 14 days.

[1] See Bundle E/1821.

[2] A joint inspection was scheduled to inspect this unit on 30 April 2021 but nobody answered the door.

[3] Bundle E/1867.

[4] Bundle E/1871.

[5] Bundle E/1875.

[6] Bundle E/1869.

Appendix 1