CHEUNG LIN v. DIRECTOR OF LANDS

LDLR 1/2015

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LANDS RESUMPTION APPLICATION NO 1 OF 2015

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J U D G M E N T

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Background

1.  This is an application by the applicant for determination of compensation pursuant to section 10(2)(a) of the Lands Resumption Ordinance, Cap. 124 (“the Ordinance”).  The applicant is the former registered owner of a property known as Shop A on Ground Floor (including the Mezzanine Floor), San Loong House, Nos 27-37 Tung Yan Street and Nos 55-57 Hip Wo Street, Kowloon, Hong Kong (“the Property”) being 1/108^th equal and undivided shares of and in Kwun Tong Inland Lot No 336 (“the Lot”) registered in the Land Registry.

2.  By a notice of resumption dated 13 February 2012 and published in GN 1296, the Government informed the applicant that the Property would be resumed for implementation of the First Phase of the Kwun Tong Town Centre – Main Site Development Scheme by the Urban Renewal Authority after the expiration of 3 months from the date of the affixing of the notice.  The notice of resumption was affixed to the Property on 2 March 2012 and therefore the Property reverted to the Government at midnight on 2 June 2012.

Particulars of the Property

3.  Completed in 1964, San Loong House, hereinafter referred to as “the Building”, comprised a Ground Floor which, according to the approved building plan dated 26 September 1963 (“the Approved Plan”) had 5 shops all fronting onto Tung Yan Street. It also used to have one storage unit on the Lower Ground Floor, as well as one shop and one storage unit on the Mezzanine Floor. The 1^st to 10^th Floors of the Building consisted of domestic flats.

4.  A comparison of the assignment plan of the Property (“Assignment Plan”) with the Approved Plan reveals that the Property was the product of subdividing one of the 5 shops on the Ground Floor, as well as subdividing the shop on the Mezzanine Floor (“M/F Shop”) of the Building.  The shop on the Ground Floor from which the Property was subdivided (“G/F Shop”) was originally the largest shop amongst the 5 with 3 toilet cubicles within its shop area, with 2 cubicles marked for “Gent” and 1 cubicle marked for “Ladies” on the Approved Plan (“collectively referred to as the “3 Cubicles”).  The G/F Shop was subdivided into Shops A to D with the 3 Cubicles located within the area of Shop D whilst the M/F Shop was also subdivided into Cocklofts A to D.

5.  According to the First Assignment of the Property dated 14 January 1965 (“1^st Assignment”), the Property comprised of “ALL THAT SHOP A on the GROUND FLOOR (including the Mezzanine floor) of the said building which said portion is shown and coloured Pink and marked ‘A’ on the said plan”.  On the Assignment Plan, both Shop A and Cockloft A are coloured Pink and marked “A”. There was in addition a small toilet area constituting 1 cubicle of the “Gent” toilet of the G/F Shop which was also coloured Pink but not marked “A” (“Toilet Cubicle”).  The Toilet Cubicle, situated at the rear of Shop D, was detached from and not in any way connected with Shop A in terms of location. The Property was subsequently sold and assigned to the applicant by an assignment dated 5 June 1970 with no plan attached or appended to the assignment.

6.  It is not in dispute that all 3 Cubicles were combined and rented to a Mr Chow to run a grocery store by 1993 latest with access to it by cutting open the external wall of the Building behind the 3 Cubicles to create a shop front for the grocery store.

7.  While the Building has long been demolished and the surrounding areas cleared for the resumption, we are supplied with photographs showing the Property and its surroundings taken on various dates in 2008 and 2009 well before the resumption. We are also provided with video recordings taken in December 2009 and March 2012. There is no dispute that retail was the best use of the Property and shops in the vicinity were all of relatively small sizes.

8.  Situated at a corner location, the Property was directly facing the Yue Man Square bus terminal, and was located right at the exit driveway from the bus terminal abutting Tung Yan Street. Yue Man Square has long been regarded as the Kwun Tong Town Centre and the business hub of the region where a variety of trades and restaurants were concentrated.

9.  Opposite the Property across Tung Yan Street were the former Kwun Tong District Government Offices and Jockey Club Kwun Tong Health Centre. To the further south is the Kwun Tong MTR station which was within 5 minutes walking distance from the Property. On the other hand, Hip Wo Street to which the other side of the Building abutted is a main distributor leading from Yue Man Square to the upper residential district of Kwun Tong and Sau Mau Ping. 

10.  In Eltron Development Limited v Director of Lands, LDLR 4/2013 (unreported, 21 August 2015) (“Eltron Development”) which concerned the determination of compensation for the resumption of a property interest on Mut Wah Street falling under the same scheme, the Tribunal had the following finding at §13:

“Hip Wo Street is a main distributor leading from Kwun Tong Town Centre (which was better known as Yue Man Square) to the upper residential district of Kwun Tong and Sau Mau Ping. There were few shops on the western side of Hip Wo Street and no shops on the eastern side. The experts agree that pedestrians walking from Yue Man Square to the residential district to the north would also take Fu Yan Street and then turn right or left onto Mut Wah Street which is a local distributor with shops on both sides serving as the main shopping area second only to Kwun Tong Town Centre. By reference to the exhibits of photographs submitted as well as the joint site inspection, Mut Wah Street appears to be a busy shopping street served by a wide variety of public transport including numerous bus routes. This street is favoured by banks, jewellery shops as well as a wide variety of local trades and restaurants etc. Pedestrians walking from Yue Man Square to the north might alternatively take Hong Ning Road which has however a relatively steep gradient; pedestrian flow between Yue Man Square and Mut Wah Street on the eastern side of this section of Hong Ning Road was perhaps interrupted because of the presence of a children playground though at its junction with Mut Wah Street, a McDonald's Restaurant was present.”

11.  We agree with the observation quoted above and find that the Property was situated at a good location with busy pedestrian access comparable with the subject property in Eltron Development at Mut Wah Street for the reason that commuters are going to and from the bus terminal and the MTR station along the pavement outside the Property.  And we also find that pedestrians coming to and from the residential district of Kwun Tong and Sau Mau Ping would likely go along Hip Wo Street and turn onto Tung Yan Street for going either to the bus terminal or to the MTR station because it appears to be the shortest route instead of taking Mut Wah Street, another major distributor in the area and then through Fu Yan Street.

Issues in Dispute

12.  The applicant and the respondent have no dispute that under 10(2)(a) of the Ordinance, the basis of compensation should be the market value of the Property as at the date of resumption, ie 2 June 2012. They further agreed that the compensation should be determined on the basis of vacant possession despite the cockloft of the Property was subject to a verbal tenancy, which are agreed by both parties to be disregarded for the purpose of determining the compensation.

13.  Save from the above, the saleable area of the three portions of the Property are also agreed by the parties as follows:

the Property	Saleable Area (sq m)	Frontage (m)	Depth (m)	Headroom (m)
Shop A on Ground Floor	27.12	4.84	5.6	3.25
Shop A on Mezzanine Floor	27.12
Toilet Cubicle	3.1

* The effective area of the Property is agreed at 33.9 sq m on the basis that the value of the cockloft is ¼ of that of the ground floor.

14.  The major issues in dispute are :

a.  Whether the applicant was conferred the exclusive possession of the Toilet Cubicle and such should be counted towards the effective area of the Property?

b.  If answer to (a) above is yes, should the Toilet Cubicle be given any value, and if yes, how much?

c.  Should the “return frontage” be compensated for? and

d.  What are the suitable comparables for valuation and how should the location of the comparables be adjusted when compared with that of the Property?

Toilet Cubicle

15.  Mr Ross M Y Yuen (“Mr Yuen”), counsel for the applicant, submitted that the applicant’s right to exclusive possession of the Toilet Cubicle is supported by :

a.  the Approved Plan;

b.  the 1^st Assignment and Assignment Plan; and

c.  the Deed of Mutual Covenant dated 28 December 1964 (“DMC”).

Approved Plan

16.  Mr Yuen contended that there were in total 5 shops on the Ground Floor and each of the shops had toilet cubicle within its boundary and there is no evidence to show any toilet facility available in the Building for common use.  This shows the intention of the developer that each shop should have its own toilet as a matter of necessity and convenience.

1^st Assignment and Assignment Plan

17.  It is not in dispute that Shop A and Cockloft A are coloured pink and marked “A” on the Assignment Plan in line with the description in the 1^st Assignment but the Toilet Cubicle is coloured pink but not marked “A”.  It is the submission of Mr Yuen that such discrepancy between the 1^st Assignment and the Assignment Plan must have been a deliberate colouring of the Toilet Cubicle in pink but not an inadvertent mistake since the Toilet Cubicle was completely detached from the shop proper or the cockloft.  Applying Yam Yun-fai v Yip Siu Hung [1992] 1 HKLR 346 (“Yam Yun-fai”), the description by way of the Assignment Plan should be taken as the operative description prevailing over the verbal description.

18.  It is also the submission of Mr Yuen that the exclusive possession of another toilet cubicle (more particularly the ladies’ toilet) further away from the Toilet Cubicle together with other areas were similarly conferred on 14 November 1970 on the owner of Shop D under one assignment with plan. That is, only one toilet cubicle instead of all the 3 Cubicles at the rear of Shop D was assigned to the owner of Shop D.  Even though all 3 Cubicles are located within the boundary of Shop D but only 1 cubicle was being assigned to Shop D, the only explanation is that the exclusive possession of the Toilet Cubicle was already conferred on the owner of Shop A.

19.  Mr Yuen also pointed out the fact that in the likewise assignment plans for Shop B and C, only the shop proper of the shops are coloured pink while the middle toilet cubicle within the boundary of Shop D was coloured green instead but it was silent in both assignments as to the definition of the green area.  Mr Yuen suggested that the middle toilet cubicle was meant to be commonly used by the owners of Shop B and C but such information just missed out from the assignments.

20.  Mr Yuen also submitted that possession is the best evidence of title.  The renting of the 3 Cubicles to Mr Chow tends to show that probably right after the completion of the Building, the Toilet Cubicle was physically partitioned from Shop D and access made possible by making a doorway through the external wall.  If only owner of Shop D had the sole access to the 3 Cubicles, it was highly unlikely that the owner of Shop D would have agreed to share the rental proceeds of the 3 Cubicles with other owners.

21.  In opposition, Mr Simon Lam (“Mr Lam”), counsel for the respondent, refers to the Agreement for Sale and Purchase dated 17 March 1964 (“Agreement”) preceding the 1^st Assignment and submits that by reference to the plans appended to the Agreement, all 3 Cubicles on the Ground Floor Shop formed part of Shop D and were not part and parcel of the Property.

22.  And by reference to the assignments of Shop B and Shop C in September 1969 and July 1969 respectively, the remaining toilet cubicle in the gentlemen’s toilet was coloured green and not granted together with a particular shop.  Mr Lam submits that the developer did not intend to give exclusive possession of any part of the gentlemen’s toilet to any of the three owners for Shop A, Shop B and Shop C respectively and in later assignments for Shops B and C, not only that the toilet areas were not marked “A”, “B” or “C” in the assignment plans, it even used a different colour to avoid confusion. And any sub-division of the Gent’s Cubicle is meaningless since there was no right of way for the owners of Shops A, B and C to access the toilet area.  The design exhibited no more than a ‘gentlemen’s agreement’ that the owner of Shop D might permit the owners of Shops A, B and C to jointly make use of what was originally the Gent’s toilet of the ground floor shop.

DMC

23.  In the DMC, the Building is described as “a block of building consisting of two units on the lower ground floor, eight shops on the ground floor, five units on the mezzanine floor and ten self contained units on each floor from the first floor to the tenth floor” making a total of 108 equal undivided shares.

24.  Mr Yuen submitted that with the word “self-contained” used to describe the domestic units, this tends to suggest that as opposed to the domestic units, there are shops on the ground floor which are not “self-contained”. The exclusive possession of the Toilet Cubicle by the Shop A owner is an example in that Shop A with the Toilet Cubicle detached from the shop proper must be a non-self-contained unit.  Furthermore, according to the definition of common parts provided in Clause 2 of DMC, the 3 cubicles located on the ground floor are not said to be common parts of the Building in the DMC.

Discussion

25.  We find the argument that it was the intention of the developer that each shop should have a toilet cubicle of its own can no longer stand when the developer decided to sub-divide the G/F Shop into Shops A to D since there were only 3 toilet cubicles within the G/F Shop area.  Whatever intention the developer may have as revealed from the Approved Plan must have been given up otherwise the G/F Shop would not have been sub-divided into 4 shops instead of 3.  The fact that Shop B and Shop C were required to share one toilet cubicle also supports the conclusion that the intention of each shop having its own toilet cubicle can no longer stand.

26.  In any event, we cannot see how the applicant can rely on the Approved Plan to prove that exclusive possession of the Toilet Cubicle had been conferred on her.

27.  We find the word “self-contained” in the DMC was only added to show that all the domestic units were self-contained with its own toilet and/or kitchen facilities whilst the units or shops on the Ground Floor or Mezzanine floor may not be so.  This is consistent with the fact that not all shops or cocklofts were having its own toilet or kitchen facilities.  For Shop A to Shop D, apparently they had to share 3 toilets on the Ground Floor.  We fail to see how such a distinction can prove that the applicant was conferred the exclusive possession of the Toilet Cubicle.  On the contrary, we find nothing in the DMC that can be taken to have conferred the exclusive right of possession to the Toilet Cubicle on the owner of Shop A or Cockloft A.

28.  The absence of the 3 Cubicles being mentioned in the definition of common area in the DMC is neither here nor there.  It is never the case that the 3 Cubicles were common parts of the Building in the sense that all owners could have a right to use it.  From the design on the Approved Plan and the Assignment Plan, the 3 Cubicles were intended to be used by the owner or occupier of the G/F Shop.  The fact that the 3 Cubicles were not common parts of the Building under the DMC is beyond argument but this does not mean that not being a common part of the Building must mean that some owner was having the exclusive possession of that part of the Building on the sub-division of the G/F Shop.

29.  As for the discrepancy between the description on the 1^st Assignment and the Assignment Plan, we find the case of Yam Yun-fai is directly on the point.  In Yam Yun-fai, there was an inconsistency between the assignment and the assignment plan in that the verbal description of the property concerned was “All that the Ground Floor ... and thereon coloured Pink” but only 4 designated carports were coloured pink on the assignment plan.  Bokhary J laid down the principle on resolving such an inconsistency :

“Where different portions of the description of the property in question are inconsistent, then the first step is to see if any portion clearly and definitely defines the property. If such clear and definite portion is found, then it is to be taken as the operative description prevailing over the remainder inconsistent with it. But if no such clear and definite portion is found, then it will be necessary to look at other parts of the deed or contract in order to see if they contain a clear expression of the intention of the parties as to what property is to be conveyed or otherwise dealt with thereby. And if such clear expression is found, then it will provide the operative description. But if no such clear expression is found, then extrinsic evidence should – subject to general principles governing the use thereof – be resorted to in the search for an operative description.” (at page 349)

30.  Adopting the principle quoted above, we find the verbal description on the 1^st Assignment defines the Property clearly and definitely to the exclusion of the Assignment Plan which is inconsistent with it.  Unlike the case in Yam Yun-fai, the 1^st Assignment in this case specified the portion assigned being “said portion is shown and coloured Pink and marked ‘A’ on the said plan” and not just those portions coloured pink.  The Property assigned was Shop A and Cockloft A which were coloured Pink and marked “A” on the Assignment Plan.  The Toilet Cubicle though coloured Pink, did not tally with the verbal description in that no “A” was being marked on the Toilet Cubicle.  This must mean that it is not in line with the verbal description and did not form part of the property assigned.

31.  Furthermore, we note that the words “(including the Mezzanine floor)” in the 1^st Assignment as referred to in §5 above was specifically added as an addendum. If the Toilet Cubicle was supposed to be included, the addendum would have provided a second chance to do so but the Toilet Cubicle was not added anyway.

32.  Even if we are wrong in the findings above, we also find that there is extrinsic evidence to show what property the description applies. It is not in dispute that on the Agreement for the Property, the Property assigned is “ALL THAT portion of the GROUND FLOOR including the Cockloft thereof of the said buildings which said portion is shown coloured Pink and marked ‘A’ on the plan hereto annexed”.  On the ground floor plan annexed to the Agreement, only Shop A is coloured Pink and not for the Toilet Cubicle.  We find the plan annexed to the Agreement showed the clear intention of both parties that the Property assigned only involved Shop A & Cockloft A and never the Toilet Cubicle.

33.  As for the contention that the applicant had been using Shop A all these years and had been able to share the rental of the 3 Cubicles, we find this is also consistent with the fact that the applicant had given up her entitlement to use the Toilet Cubicle and cannot be evidence to support the conclusion that she had exclusive possession of the same being assigned to her.

34.  Having considered the above, we find the applicant had never been assigned the right to the exclusive use, occupation or enjoyment of the Toilet Cubicle and no compensation is payable for it.

Value for the Toilet Cubicle

35.  And in case we are wrong in our ruling above, we shall proceed to deal with this issue.

36.  It is the contention by Mr Yuen that the Toilet Cubicle should be given full value subject to appropriate discount if any, to reflect the market reality by virtue of long exclusive use of the Toilet Cubicle by the applicant (Cheer Capital Limited v Unibase Investment Limited & Other, LDCS 5000 & 6000/2013 (unreported, dated 12 June 2015) (“Cheer Capital”).  And there must be implied in the DMC by necessary implication in favour of the Shop A owner a right of way over the Toilet Cubicle through the external wall by way of a doorway (Chiu Shu-choi v Merrilong Dyeing Works Ltd [1990] 1 HKLR 385) (“Chiu Shu-choi”). Since the applicant had been accessing the Toilet Cubicle through the grocery store’s shop front for almost 20 years, the incorporated owners or other co-owners had effectively waived or acquiesced the breach of DMC for taking down the external wall of the Building (Wing Ming Garment Factory Ltd v The Incorporated Owners of Wing Ming Industrial Centre [2014] 4 HKLRD 52).

37.  Mr Lam submitted that no value should be given to the Toilet Cubicle due to the title problem associated with the Toilet Cubicle and the area where the Toilet Cubicle located was land-locked.  Furthermore, the removal of part of the external wall did not have the approval of the Building Authority in accordance to section 14(1) of the Buildings Ordinance, Cap. 123 (“BO”) and by section 12(c) of the Ordinance, no compensation should therefore be granted on the expectancy or probability that the Building Authority might grant approval for the removal of the external wall of the Building to create an access to the Toilet Cubicle. The removal of the external wall was also in breach of Clause 8 of the DMC and section 34I(1)(a) of the Building Management Ordinance Cap. 344 (“BMO”).  In any event, the DMC predated the creation of the Toilet Cubicle in the 1^st Assignment and could not conclude that there was an implied right of passage to the Toilet Cubicle under the DMC.

Discussion

38.  Under section 10(2)(a) of the Ordinance, the Tribunal shall determine the compensation on the basis of the value of the land resumed and any buildings erected thereon at the date of resumption (ie as at 2 June 2012).

39.  Section 12(d) of the Ordinance further provides that, “subject to the provisions of section 11 and to the provisions of paragraphs (aa), (b) and (c) of this section, the value of the land resumed shall be taken to be the amount which the land if sold by a willing seller in the open market might be expected to realize.”

40.  Furthermore, under section 12(b) of the Ordinance, “no compensation shall be given in respect of any use of the land which is not in accordance with the terms of the Government lease under which the land is held.”

41.  Section 12(c) provides that:

“(c) no compensation shall be given in respect of any expectancy or probability of the grant or renewal or continuance, by the Government or by any person, of any licence, permission, lease or permit whatsoever:

Provided that this paragraph shall not apply to any case in which the grant or renewal or continuance of any licence, permission, lease or permit could have been enforced as of right if the land in question had not been resumed;”

42.  Although the Court of Final Appeal in Dragon House Investment Limited & Another v Secretary for Transport and Housing (2005) 8 HKCFAR 668 (“Dragon House”) at §24 was dealing with section 12(c) instead of section 12(b)of the Ordinance, we trust the same principle applies, that is:

“... in determining the amount of compensation payable on resumption the value of the land must be taken to be its value subject to the restrictions in the lease.”

43.  In other words, Cheer Capital should be distinguished as the open market value under section 12(d) of the Ordinance is qualified for instance by section 12(b) and 12(c).

44.  There is no evidence of approval under section 14(1) of the BO by the Building Authority on the cutting or knocking down of the external walls.  Under section 41(3) of the BO, only building works (other than drainage works, ground investigation in the scheduled areas, site formation works or minor works) in any building can be exempted from seeking approval if the works do not involve the structure of the building. In the absence of evidence to the contrary, we are of the opinion that the external walls which enclose the Building clearly form the structure of the Building and cutting open or knocking down the external walls above must involve the structure of the Building, hence approval is required.  Given the absence of any approval for the knocking down of the external wall to create access to the Toilet Cubicle, this must be illegal under the BO[1].

45.  As pointed out by Hon Cheung J (as he then was) in Leung Man Cheungand Others v. Secretary for Planning and Lands and Another, HCAL 274, 375-382, 390-394, 396, 900-904, 906, 907, and 909-915 of 2000 (unreported, dated 18 July 2002) at §67, “It has been established by a series of land resumption cases that unauthorized structures do not attract compensation ...”.  Here, the value that may have been derived from the letting to Mr Chow or otherwise must be excluded when it must involve the demolition of the external wall which is illegal under the BO.

46.  And applying section 12(c) of the Ordinance, no compensation should be granted on the expectancy or probability of the approval to be granted by the Building Authority for the removal of the external wall. This approval is neither "administrative" nor incapable of affecting the value of the Toilet Cubicle as elucidated by Lord Millett NPJ in Director of Lands v Yin Shuen Enterprises Limited & Another [2003] 2 HKLRD 399; (2003) 6 HKCFAR 1 at §45, so s.12(c) of the Ordinance is applicable.

47.  Also, by clause 8 of the DMC, the owners of the Building “shall not make any structural alteration to the said building ...”.  It is found in Incorporated Owners of Elite Garden v Profit More Co Ltd [2002] 2 HKLRD 518 that “alteration” is “something which altered the form or structure of a building” and the “form” of a building “concerned its appearance or visual aspect. ... the addition of the word ‘structural’ did not fundamentally change this meaning ... nor its context, required some special technical meaning to be ascribed to the word ‘structural’, which should be given its natural and ordinary meaning” (at page 518-519).  The knocking down of the external wall of the Building to create access to the Toilet Cubicle must be a structural alteration to the Building in breach of Clause 8 of the DMC and such illegal use must not attract any compensation. 

48.  Since the DMC had specifically made provisions not allowing any knocking down of the external wall, we fail to see how there can be an implication that owner of Shop A would have a right of way through the external wall by way of a doorway.  The case of Chiu Shu-choi can be distinguished since the terms of the Deed of Mutual Covenant in that case did point to the right of the owner of the upper floor to have a right of way over the lower floor.  In the present case, it is never the case of the applicant that any terms of the DMC can be relied upon to draw such necessary implication.  And the acquiescence or waiver of the IO of the breach of the DMC may be relevant in any enforcement action by the IO but we fail to see how it can change the fact that there was a breach of the DMC.

49.  The fact that the external walls were common parts of the Building as defined by section 2 of the BMO is something which cannot be disputed. Under section 34I(1)(a) of BMO, no person may convert any part of the common parts of a building to his own use unless such conversion is approved by a resolution of the owners' committee (if any).  The knocking down of the external wall to make access to the Toilet Cubicle must be a conversion of the common parts of the Building to the applicant’s own use.  There is no evidence to show that approval from the management committee had been given.  We find the knocking down of the external wall was in breach of section 34I(1)(a) of BMO as well and such illegal use must not attract any compensation.

50.  In addition, by Special Condition (3)(c) of the Conditions of Sale No 7286 that governed the use and development of the Lot, “No shop frontage or display windows will be permitted between the points marked A & B and B & C on the plan annexed hereto.”  It is undisputed between the parties that the side wall or the wall behind the Toilet Cubicle was between “B & C on the plan annexed hereto.”  Mr Wayne W K Lee (“Mr Lee”), the valuation expert called by the applicant, has not valued the Toilet Cubicle as a shop because of Special Condition (3)(c) of the Conditions of Sale No 7286 but he had valued it just as a space. However, this would necessarily involve the demolition of the external wall as afore-mentioned which is “illegal” under the BO, the DMC and the BMO.

51.  Therefore, even if the 1^st Assignment did confer title of the Toilet Cubicle on the applicant, we are of the opinion that no value should be assigned to the Toilet Cubicle as it was inaccessible without demolition of the external wall behind it or with the permission of the owner for the time being of Shop D.  And in the absence of this illegal access, the Toilet Cubicle was landlocked. Even in the reality of the market, no purchaser would be likely to pay for this space which is inaccessible except with the permission of the owner of Shop D, ie a third party.

Valuation Evidence

52.  On behalf of the applicant, Mr Lee produced an expert report on valuation dated 30 June 2015 assessing the market value of the Property (including the Toilet Cubicle) in the total sum of $43,060,000 whereas Mr David Nicholas Faulkner (“Mr Faulkner”), on behalf of the respondent, produced an expert report on valuation also dated 30 June 2015 assessing the market value of the Property (excluding the Toilet Cubicle) in the sum of $23,665,000.

53.  On 2 November 2015 ie after the judgment of Eltron Development was handed down, Mr Lee produced a supplemental expert report revising the market value of the Property (including the Toilet Cubicle) in the sum of $44,950,000. Mr Faulkner also produced a supplementary expert report dated 30 October 2015 focusing however only on comments on Mr Lee’s valuation of 30 June 2015. Mr Faulkner amended his valuation of the Property (excluding the Toilet Cubicle) to $25,080,000 as at 2 June 2012.

54.  By a Consent Order dated 10 November 2015, the applicant was at liberty to file and serve on the respondent a 2^nd Supplemental Expert Report so as to review and reply to Mr Faulkner’s supplementary expert report which introduced new comparables in light of Eltron Development. Mr Lee did so on 30 November 2015.

55.  In addition, the two experts have prepared a joint statement dated 18 February 2016 (“the Joint Statement”) setting out the areas of agreement and disagreement basically on the particulars of the Property and the comparables to be referred to by the experts. Whereas Mr Lee has revised his valuation to $45,081,000, Mr Faulkner, in addition to revising his valuation to $27,410,000, produced an alternative valuation including the Toilet Cubicle at $27,661,000 assuming the unit rate of the Toilet Cubicle was equal to 10% of that for the main shop area.

The Comparables

56.  Pursuant to the Joint Statement, the two experts agree the following comparables to be adopted for valuation:

* The comparables with the prefix “A” are those adopted by Mr Lee whereas the comparables with the prefix “R” are those adopted by Mr Faulkner.

57.  In fact, save for R6 and R7, the above set of comparables was considered by the Tribunal in Eltron Development. Indeed, comparables R6 and R7 were previously adopted by Mr Lee in his expert report dated 30 June 2015 but were discarded in his supplemental expert report dated 2 November 2015.

58.  The two experts have also set out the adjustment factors that they agreed to be relevant for the purpose of valuation. For some non-disputed adjustment factors, they could even agree on the degree of adjustment, a practice that should be highly encouraged. A summary of their views is set out below:

Adjustment Factors	Both experts agreed to be relevant	Degree of Adjustment Agreed
Time	Yes	Private Retail Price Index of Rating and Valuation Department (“RVD”)
Location	Yes	No
Frontage	Yes	+/- 4% per 1 m difference
Return Frontage	No	Mr Lee adopts +3%
Headroom	Yes	+/- 2% per 1 m difference
Quantum	Yes	+/- 1% per 4 m difference
Depth	Yes	Professional judgment on shape
Visibility	No	Mr Faulkner adopts +10%
Accessibility (steps in front)	Yes	2%

59.  By “return frontage”, Mr Lee is referring to the side wall of the Property which had however been opened to provide additional shop front and opening. However,Mr Lee explains that he is not valuing the “return frontage” of the Property as such because of the restriction imposed by Special Condition (3)(c) of the Conditions of Sale No 7286; rather he is valuing it as an external wall with perhaps the advantage of having advertisement signs or posters attached thereto which might enhance the visibility of the Property to pedestrians. Mr Lee refers to Good Faith Properties Limited & Others v Cibean Development Company Limited, LDCS 42000 of 2011 (unreported, dated 31 May 2013) (“Good Faith”) where the Tribunal approved the expert’s argument in that case that “if the column in the subject shop and the columns and walls in the comparables do have potential to attract customers, it is legitimate to count them all as part of the width of the frontage of the subject shop and the comparables.”[2]

60.  On the one hand, this evidence of Mr Lee does not sit well with the argument by Mr Yuen that the external wall behind the Toilet Cubicle can be broken down to provide access. On the other hand, we do not consider the applicant has the right to attach advertisement signs or posters to the wall. As we have explained at §§49-50 above, the wall was a common parts of the Building and Good Faith should be distinguished because in that case “the applicants submit that both experts did not check the Deed of Mutual Covenants and did not consider the provisions in the Deed of Mutual Covenant relevant for the purpose of measuring frontage.” Therefore, we consider the Property possessed no benefit of “return frontage” as suggested by Mr Lee.

61.  Then, having the adjustment on “return frontage” discarded, we set out below the various adjustments to each comparable proposed by Mr Lee and by Mr Faulkner (in parentheses) in the Joint Statement:

* Mr Lee’s quantum adjustment includes the Toilet Cubicle for consideration.

62.  As can be seen from the above, most of the adjustment factors have been agreed by the two experts save for location which is usually an important consideration for retail premises and has a direct bearing on whether a comparable is appropriate.

63.  We appreciate that the two valuation experts have agreed that the effective area of the Property is 33.9 sq m when the cockloft is valued at ¼ of that of the ground floor. However, none of the comparables have a cockloft and the comparison based on effective area may result in a distorted view on the adjustment appropriate for quantum, depth/layout etc for the reason that the area on ground floor would be more sensitive to size and layout than the cockloft.

64.  In Eltron Development, the Tribunal has adopted the quantum adjustment on the basis of +/- 1% per 2 m difference.  Although the Tribunal is not necessarily bound by its former decisions, we are here determining compensation under the same scheme as at the same reversion date with basically the same set of comparables. We see no reason to depart especially the subject matter in Eltron Development had a comparable size with the Property. The former was of 27.8 sq m whereas in the present case, the ground floor of the Property is 27.12 sq m (ignoring the effective area of 33.9 sq m for the time being).

Analysis of Comparables

Comparable A7/R1

65.  This comparable was indeed Comparable R2 in Eltron Development. It is occupied as a restaurant at a raised platform along this section of Hip Wo Street. That is, pedestrian going along Hip Wo Street trying to reach this platform has to take a flight of steps. As stated in Eltron Development, this should justify a +5% adjustment for accessibility.  We agree therefore with the total adjustment of 15% for location as proposed by Mr Lee instead of the mere 10% by Mr Faulkner.

66.  It is interesting to note that in Eltron Development, a total adjustment of 11.5% was adopted for the difference in quantum and layout when this comparable having a size of 42.86 sq m was compared with the shop unit concerned which was about 27.8 sq m. In the present case where the ground floor of the Property is 27.12 sq m (or the effective area of 33.9 sq m when the cockloft is taken into consideration), the combined adjustment for quantum and layout is only 5.2% as agreed by the two experts.

67.  As said, we are prepared to adopt a quantum adjustment on the basis of +/- 1% per 2 m difference. This would result in the adjustment of 4.5% instead of 2.2%. This would increase the combined adjustment for quantum and layout to 7.5%.

Comparable R3 & R4

68.  These two comparables were Comparables R4and R5 in Eltron Development. They are adjoining shops opposite a Municipal Services Building where a formal wet market is situated. While they have comparable street frontage width (about 4.1 metres) like the Property (4.84 metres), their depth (13.03 metres) is more than twice of that of the Property (5.6 metres), ie a depth to frontage ratio of 3.1 when compared with that of the Property at about 1.2.

69.  We share the view of Mr Lee at §11 of his supplemental expert report dated 2 November 2015 that these two comparables “were having a host of difficulties ranging from different location character (they adjoined a wet market area), hampered shop visibility and inordinately long shop depth to out-dated transactions.”[3]

70.  In spite of the above, we note Mr Lee applied a location adjustment of mere +5% whereas Mr Faulkner applied -5%. In this regard, we agree with Mr Lam for the respondent that if the adjustment for visibility at +10% adopted by Mr Faulkner is also taken into account, the combined adjustment for location and visibility by latter would result in the same +5%.

71.  Nevertheless, we also agree with Mr Lee’s evidence that, in terms of location, we should bear in mind what prevailed just before the resumption instead of what we see nowadays. For instance, in Eltron Development, the Tribunal found the cake shop which used to be situated at Mut Wah Street was forced to vacate because of the resumption and relocated to R4.[4] Mr Lee has cited more examples at paragraph 21 of his supplemental report dated 2 November 2015.[5]

72.  Although the Tribunal is not necessarily bound by its former decisions, in view of the above analysis, we see no reason to depart from the observation of the Tribunal in Eltron Development. We are prepared to adopt a location adjustment at least of 5% plus adjustment for visibility +10% (which was additionally adopted in Eltron Development).

73.  We note also that Mr Lee has agreed with Mr Faulkner in the Joint Statement on the adjustment for layout at 4% in case R3 and R4 are adopted as comparables. We are of the view that this 4% is vastly inadequate to reflect the difference in, for instance, the depth to frontage ratio as pointed out by Mr Yuen. We regret that Mr Lee did not give much thought about it when he adopted the Joint Statement. On the other hand, as a specialist tribunal, we are not bound to accept the case of any party and may rely upon its own experience in determining the issue of dispute on valuation.[6] In Eltron Development, the Tribunal added “an extra adjustment of 10% for layout because the depth of these comparables extends to 15 metres which is some three times as much as the Property.”[7]  We tend to agree and adopt the same approach.  This being the case, together with our application of quantum adjustment on the basis of +/- 1% per 2 m difference, the total adjustments for these two comparables as shown in the table at §61 above should be much higher.

74.  Also, as stated at §58 of Eltron Development:

“As regards time adjustment, I note the transaction occurred more than half a year earlier than the relevant date. R5 in particular took place nearly as much as 1 year earlier in respect of which the adjustment as agreed by the experts comes up to 26.1% by reference to the Private Retail Price Index of RVD. Nevertheless, the preparation of an index is more or less an averaging exercise and there is no guarantee that the price trend for the subject location or property necessarily follows the index. This is particularly the case for shop premises where a slight variation in location would lead to significant difference in value. Therefore, the larger the extent of the adjustment, the higher probability of error would ensue.”

75.  R5 in Eltron Developmentis R4 in the present case.

76.  In Tin Kung Investment Limited v Secretary for Transport, LDRW 16 of 2001, (unreported, 29 June 2004) which was also cited at §50 of Eltron Development, the Lands Tribunal commented that:

‘The number of factors adopted by AW for adjustment is 11 and later reduced to 10 with some original factors taken out and substituted with others. The greatest amount of adjustment made for a single factor is 23% and the greatest in aggregate for a Comparable is 51.1%. The number of factors contained in RW's valuation reports is 9. The greatest amount of adjustment he has proposed for a single factor is 16% and the greatest amount in aggregate is 31.5%

Putting before anyone these statistics, there must be the concern whether the Comparables selected for valuation are indeed suitable for comparison. Making adjustment to compensate for the difference between two properties is not a perfect and effective valuation tool. What the experts have built in the valuation formula are largely subjective views (and such formula may be manipulated to arrive at an intended result). The subjective views tend to cause error, the risk of which goes in proportion to the quantum of adjustment made. Its application therefore is with limitation. It is suitable for use only if the two properties are in great similar but in minor place different. In the case where a large number of factors and amount of adjustment as the above are applied in the valuation, the risk of getting the valuation wrong is high. If this fundamental principle of application is not observed, the price of a commercial property in a central business area can be absurdly taken to find out the value of a piece of farmland in the green belt zone through adjustments. The great total number of factors/amount of adjustment adopted is a sheer indication of the unsuitability of a property for use for comparison to the other. In this regard, the Respondent's counsel has rightly quoted HH Judge Cruden's view in his book entitled "Land Compensation and Valuation Law in Hong Kong".’

77.  Thus, for reasons stated above, we agree that comparables R3 and R4 should be discarded when appropriate comparables are available.

Comparable A6/R5

78.  This comparable was Comparable A2.2 in Eltron Development. It appears like a quadrant with its curved portion fronting onto the prominent junction of Hong Ning Road and Ngau Tau Kok Road between Yue Man Square and Mut Wah Street.

79.  Whereas this comparable is suitable for comparing like with like with the Property in terms of its size, there is marked difference in opinion between the two experts on the adjustment for location: MrLee proposes -25% and Mr Faulkner proposes -40%. We are prepared to split the difference at -32%.

80.  Applying the same consideration at §64 above, we are going to apply a higher adjustment for quantum at 1.6%.

81.  Save from the above, the other adjustments agreed by the 2 experts are accepted and adopted by this Tribunal.

Comparable R6

82.  For reason unknown, this comparable was not brought to the attention of the Tribunal in Eltron Development.

83.  This comparable is situated at the busiest section of Hong Ning Road opposite a pedestrian crossing. Initially, it was adopted by Mr Lee in his expert report dated 30 June 2015. Mr Lee discarded this comparable when he prepared his supplemental report on the ground that it was in odd shape and it comprised a detached toilet to which the occupant has to take a tortuous route outside the premises into a scavenging lane to the south.

84.  Although we agree that it is quite inconvenient to get to the detached toilet, it is the evidence of Mr Lee that the journey would take less than 1 minute and therefore this factor is not fatal to its being adopted as comparable.

85.  Also, despite the apparent long depth of the shop (the approximate depth to frontage ratio of 3.1) or its inverted “L” shape, this comparable is of similar size to the Property; the former deficiencies would not be fatal so long as adequate adjustment to reflect the difference is applied. Although Mr Lee agrees with Mr Faulkner’s adjustment for layout at 8%, it appears vastly inadequate. We are prepared to adopt a higher adjustment at 20% if this is considered to be accepted as a comparable.

86.  Having said the above, we are prepared to adopt this as one of the comparables for consideration save that we would revise the location adjustment to -32% which is comparable with R5 and the quantum adjustment to 0.5%.

Comparable R7

87.  Again this comparable was not brought to the attention of the Tribunal in Eltron Development.

88.  This comparable is situated at 10 metres to the west of the Comparable A6/R5 on Ngau Tau Kok Road. Initially, it was adopted by Mr Lee in his expert report dated 30 June 2015. Mr Lee discarded this comparable when he prepared his supplemental report on the ground that its size of 79.61 sq m is much larger than the Property and has an extended depth as much as 16.59 metres.

89.  We note that shops in the vicinity of the Property were relatively small in size. The demand for this type of small shops may be completely different from that for shops of much larger size. We agree with Mr Lee that this comparablehas to be discarded when appropriate comparables are available.

Comparable A4

90.  This comparable was indeed Comparable A1.1 in Eltron Development. It is situated next to Comparable R6 on Hong Ning Road.

91.  Among all the comparables, it has the smallest size at 17.19 sq m which is even smaller than the ground floor shop area of the Property (27.12 sq m) by more than 35%. When it is compared with the effective area of the Property (ie 33.9 sq m), the area of this comparable is smaller by nearly as much as 50%.

92.  In Eltron Development, the Tribunal stated at §26 as follows:

“Upon our joint site inspection, I noted this comparable has been combined and occupied together with Shop 4 and Portion A of Shop 21 in the rear as a mahjong parlour.  By reference to the land search record of these shop units, the purchaser of this comparable A1.1 had been the owner of Shop 4 and Portion A of Shop 21 since June 2005, ie some 7 years before the purchase. No particulars or information regarding the acquisition process was provided. However, I note Shop 4 and Portion A of Shop 21 altogether are much larger in size than this comparable; the acquisition of the comparable is therefore extremely crucial and advantageous from a tactical perspective since it opens up Portion A of Shop 21 and nearly doubles the frontage of the entire unit. This transaction is tainted with the possibility of an additional bid from a “special purchaser” ie the owner of Shop 4 and Portion A of Shop 21 who would like to expand his shop space to accommodate a mahjong parlour.  The purchaser might be more willing to pay a premium to secure this comparable.”

93.  While we are skeptical of the reliability of this comparable because of the above, as we shall see, the total adjustment is not significantly high and the adjusted result is not out of tone.  So we accept it as a comparable and the location adjustment adopted would be the same for comparable R6.

Comparable A5

94.  This comparable was indeed Comparable A2.3 in Eltron Development. It is situated at the busiest section of Mut Wah Street where there is agglomeration of branded jewellery shops.

95.  There is however aminor difference in opinion between the two experts on the adjustment for location: MrLee proposes -25% and Mr Faulkner proposes -30%. We are prepared to adopt -25% as proposed by Mr Lee.

96.  While this comparable has a larger effective area of 59.12 sq m when compared even with the Property’s effective area of 33.9 sq m, we are prepared to adopt a quantum adjustment of +12.6%.

97.  Save from the above, the other adjustments agreed by Messrs Lee and Faulkner are adopted.

Comparable A3/R8

98.  This comparable was Comparable A2.4 in Eltron Development. This comparable, like comparable A6/R5, comprises a corner unit of quadrant shape with its curved portion fronting onto the junction of Mut Wah Street and Hong Ning Road.  Its saleable area of 33.44 sq m is very close to the effective area of the Property at 33.9 sq m. 

99.  Again, like Comparable A6/R5, there is marked difference in opinion between the two experts on the adjustment for location: MrLee proposes -25% and Mr Faulkner proposes -40%. We are prepared to split the difference at -32%.

100.  Save from the above, the other adjustments agreed by Messrs Lee and Faulkner are adopted.

The Valuation

101.  The following shows the analysed result of all the comparables:

Ref	Value/m2	Adjustments								Adj Value/m2
		Time	Location	Frontage	Head-room	Quantum	Depth/ Layout	Accessi- bility	Total
A7/R1	$979,935	-16.0%	15.0%	2.6%	-0.9%	4.5%	3.0%	0.0%	8.2%	$1,060,290
R3	$555,644									discarded
R4	$540,368									discarded
A6/R5	$1,412,809	20.8%	-32.0%	-23.0%	-0.2%	1.6%	4.0%	0.0%	-28.8%	$1,005,920
R6	$944,667	-4.2%	-32.0%	7.8%	1.2%	0.5%	20.0%	2.0%	-4.7%	$900,268
R7	$927,019									discarded
A4	$1,745,201	11.0%	-32.0%	7.6%	-4.6%	-8.4%	-3.0%	0.0%	-29.4%	$1,232,112
A5	$1,268,606	11.0%	-25.0%	3.9%	-1.9%	12.6%	4.0%	0.0%	4.6%	$1,326,962
A3/R8	$1,943,780	0%	-32.0%	-17.9%	-3.2%	-0.3%	4.0%	0.0%	-49.4%	$983,553
Average:										$1,084,851

102.  From the above table, the average analysed result is $1,084,851/sq m. Even if Comparable A4 is discarded, the average analysed result is $1,055,399/sq m which is only marginally smaller.

103.  On the other hand, the total adjustment rate for Comparable A3/R8 appears significant. If this comparable is excluded, the average adjustment is $1,105,110/sq m which is marginally higher.

104.  Therefore, we are satisfied that the market value of the Property should be determined as follows:

33.9 sq m x $1,084,851/sq m =	$36,776,449
Say	$36,780,000

Conclusion

105.  This Tribunal have determined the value of the Property, for the purpose of section 10(2)(a) of the Lands Resumption Ordinance, in the sum of $36,780,000.

106.  On the other hand, in case we are wrong that there should be a value attached to the Toilet Cubicle, we are prepared to accept Mr Faulkner’s concession that it should be worth 1/10 of the unit rate of the Property proper, that is:

3.1 sq m x $108,485/sq m =	$336,304
Say	$340,000

Orders

107.  Accordingly, we order that the respondent do pay the applicant compensation for the Property in the sum of $36,780,000. The matters of professional fees, interest and costs shall be adjourned to a date to be fixed, with liberty to apply for any other ancillary and consequential matters.

[1] Under section 40(1AA) of the Buildings Ordinance, any person who knowingly contravenes section 14(1) in respect of building works (other than minor works) or street works shall be guilty of an offence and shall be liable on conviction to fine and to imprisonment.

[2] See §§127-129 of that judgment.

[3] The same is repeated by Mr Lee at Annex 3 of the Joint Statement.

[4] See note 8 in Eltron Development.

[5] See Bundle A/107.

[6] See §188 of Cheer Capital Limited.

[7] See §60 of Eltron Development.