LDCS 5000/2018
[2020] HKLdT 11
IN THE LANDS TRIBUNAL OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
LAND COMPULSORY SALE MAIN APPLICATION NO 5000 OF 2018
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BETWEEN
CHINA VISION ENGINEERING LIMITED
1st Applicant
KAM WAH INVESTMENT COMPANY LIMITED
2nd Applicant
MI-WAVE ELECTRONIC LIMITED
3rd Applicant
PACIFIC WAY ENTERPRISES LIMITED
4th Applicant
and
BOLD TEAM INVESTMENTS LIMITED
1st Respondent
LO FUNG KUEN CATHERINE (盧鳳娟)
2nd Respondent
HUI LAM NAI (許琳娜)
3rd Respondent
SHAUKIWAN DISTRICT LIVE MARINE FISH MERCHANT ASSOCIATION COMPANY LIMITED (筲箕灣區海鮮業商會有限公司)
4th Respondent
PANG KWAI (彭貴)
5th Respondent
CHEUNG CHEE KAN (張志勤)
6th Respondent
THE PERSONAL REPRESENTATIVES OF HO KWAI YUNG (何桂容) (DECEASED)
7th Respondent
FOK HUNG (霍洪)
8th Respondent
FUNG PO CHING (馮寶貞)
9th Respondent
LAI CHI MING (黎志鳴)
10th Respondent
MOK KING PAN (莫景斌)
11th Respondent
MAIN ADVANCE LIMITED
12th Respondent
CHEUNG CHE MAN (張志民)
13th Respondent
CHEUNG KIM HAR (張劍霞)
14th Respondent
MOK WING KEUNG GARETH (莫永強)
15th Respondent
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Before: Mr Alex Ng, Member of the Lands Tribunal
Dates of Trial: 13 and 19 December 2019
Date of Judgment: 25 March 2020
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JUDGMENT
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BACKGROUND
1. This is the applicants’ application for an order for sale, for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”), of all the undivided shares of and in Shau Kei Wan Inland Lot No 735 (“the Lot”) together with a building erected thereon known as Yee Tak Building, Nos 121 - 131 Shau Kei Wan Main Street East, Hong Kong (“the Building”).
2. The Building is an 8-storey commercial/residential composite building served by 2 common staircases. An occupation permit No H2/66 dated 4 January 1966 was issued for the Building granting permission to occupy its ground floor (“G/F”) as 6 shops for non‑domestic use and 1st floor (“1/F”) to 7th floor (“7/F”) inclusive as 12 tenements per floor for domestic use.
3. The Lot together with the Building standing thereon was allocated 97 undivided shares. Each of the 6 shops on G/F was given 2 undivided shares, each of the 84 flats on upper floors was given 1 undivided share and the roof was given 1 undivided share, making up a total of 97 undivided shares.
SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS
4. The applicants filed a Notice of Application (“NOA”) on 12 January 2018, which was subsequently amended on 12 February 2018 and re-amended on 29 November 2019. At the time of filing of the NOA, there were 15 respondents and the applicants owned 81/97th (i.e. 83.51%) undivided shares in the Lot, more than the threshold of 80% required for building aged 50 years or above.
5. Section 3(1) of the Ordinance prescribes that the minimum percentage of undivided shares that an applicant or applicants should possess before making an application under the Ordinance is 90%.
6. Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a lower percentage in respect of a lot belonging to a class of lots specified in that notice.
7. The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, made under section 3(5) of the Ordinance (“the Notice”), was gazetted on 22 January 2010 and came into operation on 1 April 2010. Section 3 of the Notice lowered the threshold for compulsory sale of specified classes of lots from 90% to 80%. Those classes of lots include:
“a lot with each of the buildings erected on the Lots issued with an occupation permit at least 50 years before the relevant date”
8. Since the occupation permit of the Building was issued in 1966, i.e. more than 50 years before the date of application (i.e. 12 January 2018; the relevant date under the Notice), the applicable percentage is therefore 80%.
9. I am satisfied that as at the date of application, the applicants owned more than 80% of the undivided shares in the Lot. I am therefore satisfied the applicants are entitled to make the present application under section 3 of the Ordinance.
THE REMAINING RESPONDENT
10. After the commencement of the application, the applicants acquired further undivided shares from 13 respondents, and subsequently discontinued the proceedings against them. At trial, the applicants owned 93/97th (i.e. 95.88%) undivided shares in the Lot.
11. The 1st respondent (“R1”), which owns Flat A on 3rd Floor, Flat B on 5th Floor and Flat F on 5th Floor, and the 12th respondent (“R12”), which owns Flat K on 7/F, are the 2 live respondents on record, and they are represented by Mr Bosco Cheng (“Mr Cheng”) at trial. Mr Cheng submits that the respondents do not object to the grant of an order for sale of the Lot under the Ordinance, and do not take issue on the applicants’ entitlement in making the application, age and/or state of repair of the Building, and reasonableness of the steps taken by the applicants in acquiring all the undivided shares in the Lot.
ISSUES FOR DETERMINATION BY THE TRIBUNAL
12. The remaining issues to be decided in this case are as follows:
1) What was the respective existing use value (“EUV”) of all units in the Building as at 25 October 2017, the valuation date adopted in the application valuation report dated 12 December 2017, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?
2) Whether the redevelopment of the Lot is justified due to age and/or state of repair of the Building in accordance with section 4(2)(a) of the Ordinance?
3) Whether the applicants have taken reasonable steps to acquire all the undivided shares in the Lot on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance?
4) If an order for sale should be granted, what should be the reserve price (i.e. redevelopment value (“RDV”) of the Lot) for the purpose of auction sale?
DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING
13. Pursuant to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the EUV of the units as assessed in the application, the tribunal shall determine the proper value. 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.”
14. The applicants appoint Mr Charles C K Chan (“Mr Chan”) of Savills Valuation and Professional Services Limited to give his opinion on valuation, and Ms Sat Wai Ling (“Ms Sat”) of Memfus Wong Surveyors Limited is appointed by R1 and R12.
15. While there is no missing owner in these proceedings, Mr Chan and Ms Sat have reached agreement on the EUVs of all units in the Building as at the relevant date of valuation, i.e. 25 October 2017, which are appended below: -
16. I accept the EUVs of all units in the Building as listed above and the total EUV of $519,450,000.
SECTION 4(2) OF THE ORDINANCE - JUSTIFICATION AND REASONABLE STEPS
17. Section 4(2) of the Ordinance provides as follows: -
“2. The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that—
(a) the redevelopment of the lot is justified (and whether or not the majority owner proposes to or is capable of undertaking the redevelopment)—
(i) due to the age or state of repair of the existing development on the lot; or
(ii) on 1 or more grounds, if any, specified in regulations made under section 12; and
(b) the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”
18. The applicants must satisfy this tribunal the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted.
Whether development of the Lots is justified due to the age and/or state of repair of the Building
19. The applicants adduce expert evidence of Mr Wong Chi Ming (“Mr C M Wong”), a structural engineer, of C M Wong & Associates Limited and Mr Benson Wong Sai Ning (“Mr Benson Wong”), a building surveyor, of Benson Wong & Associates Limited. Mr C M Wong conducted a structural survey of the Building and prepared a Structural Assessment Report dated 14 January 2019. Mr Benson Wong conducted a condition survey of the Building and prepared a Condition Survey Report dated 18 January 2019.
20. None of the respondents adduced expert evidence to rebut the reports compiled by Mr C M Wong and Mr Benson Wong.
21. Having considered the reports of Mr C M Wong and Mr Benson Wong, I accept their expert opinion. The Building, being erected about 54 years ago, is in poor condition and has come to the end of its design life. The design of the Building has become obsolete over time in many aspects, both physically and functionally, and fails to conform to modern construction standards and statutory requirements.
22. I am also of the view the Building is in poor state of repair and the costs of repair to bring the Building to tenantable condition is disproportionate to the costs of redevelopment. Although regular repair can extend the life of the Building, repair costs will increase with time. Even if repair works are carried out, such works will bring about a modest improvement only to the existing condition of the Building, and the Building will continue remain a sub-standard one.
23. By reason of the matters set out above, I am satisfied the redevelopment of the Building is justified.
Whether the applicants have taken reasonable steps
24. In assessing the reasonableness of the offers, I have considered the case of Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. In particular, I have considered paragraphs 33 and 36 of the judgment in which Ribeiro PJ stated: -
“33. In making that assessment 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. It is obviously necessary to recognise that there will often be differences of opinion on that matter……”
“36. ...... We are of course not suggesting that it is necessary for the offer to “beat” the valuation as if it were a payment into court. What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site……”
25. The applicants have made 4 batches of offers to R1 and R12 on 27 November 2017, 24 July 2019, 5 December 2019 and 10 December 2019. The respective offer prices were based on independent valuation, had reflected the then RDV attributable to the units owned by R1 and R12, and had also included a premium over the valuation. The latest two offers on 5 December 2019 and 10 December 2019 also exceeded the RDV attributable to the units owned by R1 and R12 as then agreed and/or assessed by Ms Sat.
26. R1 and R12 do not take issue with reasonableness of the steps taken by the applicants in acquiring all the undivided shares in the Lot. Mr Mok, counsel for the applicants, submits that the applicants have already taken reasonable steps to acquire all the undivided shares in the Lot. I agree.
RESERVE PRICE FOR THE AUCTION
27. By reason of being satisfied that redevelopment of the Lot is justified and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot, I am satisfied an order for sale should be granted in favour of the applicants.
28. In the 2nd Joint Statement of the Valuation Experts dated 10 December 2019, Mr Chan and Ms Sat have come into agreement on all the development parameters, except the construction period and the developer’s profit together with stamp duty and legal cost (if any) in the residual valuation.
29. Mr Chan bases on Example 1 (i.e. 31 months excluding demolition period) set out in the HKIS Guidance Notes on Valuation of Development Land published in 2016 (“HKIS Guidance Notes) to come to his view that the hypothetical development, which is of a larger scale than the said example in the HKIS Guidance Notes, would require 2.75 years (i.e. 33 months; excluding the demolition period of 9 months which is agreed by the valuation experts) to construct. Whilst, Ms Sat bases on the development period of Parker 33 at No 33 Shing On Street (i.e. 31 months excluding demolition perid), a comparable development which is adopted by the valuation experts in their respective RDV assessments and is of a larger scale than the hypothetical development, to come to her view that the construction period (i.e. excluding demolition period) of the hypothetical development should be 2.25 years (i.e. 27 months) only.
30. Mr Mok submits it is wrong in principle to take the developer of Parker 33 as the sole hypothetical developer who may be more efficient than an average developer for many reasons, while Mr Cheng contends Mr Chan’s reference development is not a real but a hypothetical residential development in the HKIS Guidance Notes only.
31. I consider both the construction period of Parker 33 and the construction period as assumed in the HKIS Guidance Notes are good references. Having considered the evidence and arguments of the parties, I am of the view it is reasonable to adopt 30 months as the construction period in the subject residual valuation.
32. Regarding the developer’s profit, Mr Chan proposes 20% in addition to the allowance for stamp duty at 4.25% and legal cost at 0.1%, whilst Ms Sat suggests 17.5% only inclusive of stamp duty and legal cost. Both Mr Mok and Mr Cheng refer this tribunal to the previous judgments of the tribunal to support their respective arguments.
33. From valuation perspective, I doubt whether there is any fixed formula to assess the developer’s profit. Without analysing all the backgrounds of a case and parameters in its residual valuation, I also doubt whether one could rely on the developer’s profit as decided in a previous judgment and adopt it as a benchmark for valuation of other properties at present and in future. The property market is changing all the time and valuation is not a simple arithmetic exercise. Each valuation is unique and has to consider many factors, and each factor is inter-linked with each other. The change in one factor will have effects on the other factors. For example, it may not be unreasonable to adopt an aggressive design in a hypothetical development and/or an aggressive GDV in residual valuation, but the overall risk would be higher and would command a higher developer’s profit in such circumstances. The parameters agreed by the parties and therefore adopted by the tribunal may also affect the overall risk and hence the developer’s profit in a hypothetical development. In any event, a decision is not a comparable transaction.
34. I have no objection to allow stamp duty and legal cost in the subject residual valuation, which in fact are the actual expenses of the hypothetical buyer. Having allowed the stamp duty and legal cost and having considered all the other parameters of the residual valuation as agreed by the parties and determined by this tribunal and the market condition as at the valuation date (i.e. 15 November 2019), I am of the view the developer’s profit should be about 15%. I agree the current social movements have adversely affected property value and site value, and indeed the GDV as adopted in the residual valuation has already reflected the drop in property value. Nevertheless, the adverse effects on site value of small to medium scale commercial/residential composite development is not as great as those mega development projects.
RDV of the Lot as at 15 November 2019
35. Based on the agreement between the valuation experts and the above determinations, the residual valuation of the Lot as at 15 November 2019 is listed in Appendix of the judgment. The Lot is assessed at $804,000,000, equivalent to an accommodation value of about $127,353 per square meter (i.e. about $11,831 per square foot).
ORDERS
36. For reasons given in this judgment, I have set out reasons why I am satisfied an order for sale should be granted and I therefore make the following orders: -
1) All the undivided shares in the Lot, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lot;
2) Mr Ma Ho Fai and Ms Tsang May Ping, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lot;
3) 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 dated 9 December 2019;
4) For the purposes of the sale of the Lot by public auction: -
a) the sale of the Lot be on the particulars and conditions of sale the same or substantially the same as those set out in the draft Particulars and Conditions of Sale to be approved and initialed by the tribunal; and
b) the reserve price be set at $804,000,000;
5) 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; and
6) Liberty to the applicants, the 1st respondent, the 12th respondent and the Trustees to apply to the tribunal for further directions.
COSTS
37. Mr Mok submits R1 and R12 should pay the costs of the applicants, except the costs of the building experts on the preparation of their reports and the costs of Mr Chan on the preparation of the application report dated 12 December 2017 for the assessment of EUVs and the 2nd supplemental report dated 29 November 2019 for the assessment of the updated RDV, which are the costs that could not be avoided in the application. Whilst, Mr Cheng asks the tribunal to award R1 and R12 all of their costs of the application.
38. Both parties agree to the legal principles in Good Faith Properties Ltd v Cibean Development Co Ltd [2014] 5 HKLRD 534, which confirms the application of compensation approach on costs to Cap 545 proceedings, and that the determination of costs of the application remains the discretion of the tribunal as decided in Orientation Generation Ltd and Others v Ngo Kui Sing and Others LDCS 4000/2013 of 31 October 2016.
39. Nevertheless, Mr Mok specifies there are special reasons in the present proceedings that R1 and R12 should bear parts of the costs of the applicants because they have acted unreasonably. R1 and R12 have not accepted the applicants’ offers of 5 and 10 December 2019 which in fact matched and exceeded Ms Sat’s latest assessments. Although R1 and R12 have replied that they are a renowned real estate developer, acceptance of the applicants’ offers would deprive their right to enter into the auction to be held and they are intending to participate in the auction, Mr Mok contends that, with this background, the most reasonable and cost effective way to proceed was for R1 and R12 to inform the applicants of their position and let the applicants prove their case to obtain the sale order and then let the auction to decide everything. If matters were to proceed this way, R1 and R12 did not need to employ Ms Sat and Mr Chan and the legal team of the applicants did not need to incur time and costs to deal with Ms Sat’s evidence. However, R1 and R12 proceeded on the basis of a contested litigation and causing a lot of delay and the applicants had to incur additional time, effort and costs in the preparation of a dragged on and contested litigation leading up to a contested trial.
40. Further, R1 and R12 have been looking for unreasonable amounts at the unit rate of $18,414 in addition to the stamp duty. Mr Mok submits if R1 and R12 were to proceed to let the auction decide everything, they would not have any stamp duty concern, and if the stamp duty was the only concern, it would still not be reasonable for them to demand the applicants to pay the stamp duty. Instead, R1 and R12 should have (i) informed the applicants that they were satisfied with the applicants’ offer and (ii) provided a scheme to the applicants for their co-operation to solve the stamp duty issue.
41. Mr Cheng submits it is not a legal wrong for R1 and R12 to reject the applicants’ offer, even though such an offer may meet or exceed the entitlement of R1 and R12 to the apportioned RDV. Only in very plain cases where rejection of an offer or the pursuit of a line of opposition is obviously unreasonable, the tribunal should consider imposing costs sanction, but R1 and R12 have acted proportionate to their needs only in the present proceedings. R1 and R12 did not take any issue other than valuation at the trial and was willing to leave the differences between the experts to the tribunal. The pragmatic approach adopted by R1 and R12 resulted in the trial being able to conclude shortly.
42. I am of the view R1 and R12 have not acted unreasonably that could justify costs sanction under the compensation approach on costs. So long if R1 and R12 had intention to buy replacement properties for investment, they were not unreasonable to ask for stamp duty because they are entitled to take steps to avoid or reduce such expenditure which is unnecessary but for the application. I consider an applicant is not unreasonable not to offer stamp duty to a respondent for purchasing replacement property, but a respondent is not unreasonable to ask for it in the negotiation.
43. It is also not unreasonable for R1 and R12 to reserve their right to participate in the public auction, because they would lose such right if they come into settlement with the applicants without an order for sale of the Lot. Further, I disagree with Mr Mok that R1 and R12 were unreasonable not to inform the applicants of their position on public auction much earlier and provide a scheme to the applicants for their co-operation to solve the stamp duty issue. A respondent has no duty to advise an applicant how to tackle the issues in the proceedings and/or his financial plan which would change with time. The Ordinance has not imposed such duty on the respondent. One cannot blame a respondent not to assist an applicant as unreasonable. On the other hand, I consider Ms Sat who has settled with Mr Chan many disagreements do assist the tribunal in the application otherwise the tribunal would have one-sided valuation opinion only.
44. I therefore make a costs order nisi that the applicants do pay costs of these proceedings to the respondents on High Court scale, with certificate for counsel and including any reserved costs, to be taxed if not agreed. Unless any parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from the date of this judgment.
(Alex Ng)
Mr Mok Yeuk Chi, instructed by Messrs Mayer Brown, for the applicants
Mr Bosco Cheng, instructed by Messrs Lui & Law Solicitors, for the 1st and 12th respondents