FULLY INTERNATIONAL LTD AND ANOTHER v. CHAN MAN KONG ALIAS CHAN SANG, by the Official Solicitor, his guardian ad litem AND OTHERS

LDCS 18000/2011

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION

NO. 18000 OF 2011

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J U D G M E N T

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BACKGROUND

1.  This is an application for compulsory sale of all the undivided shares of and in the Remaining Portion of Section A of New Kowloon Inland Lot No 317 and the Extension thereto (“the Lot”), with a building erected thereon known as Nos 456 – 456A and 458 – 458A Sai Yeung Choi Street North, Kowloon (“the Building”), for the purposes of redevelopment pursuant to Section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”). 

2.  The application is uncontested but there are two missing owners in the Lot.   Nonetheless, the tribunal has to determine whether the application has satisfied the requirements of the Ordinance.

3.  The Building is an 8-storey tenement building with four domestic units planned on each floor from Ground Floor to 7^th Floor.   Each of the units on Ground Floor is attached with yard.

4.  The Building, served by two common staircases, was completed in 1958 with Occupation Permit No K245/58 issued on 19 September 1958[1].  Each of the units in the Building is given 1 undivided share, making up a total of 32 undivided shares for the Lot. 

5.  The applicants filed the Notice of Application (“the NOA”) on 11 May 2011[2], which was subsequently amended on 3 April 2012 pursuant to the Order made by H.H. Judge M Wong dated 28 March 2012 and re-amended on 5 September 2013 pursuant to the Order made by H.H. Judge Ko dated 4 September 2013[3]. 

6.  At the commencement of the proceedings, the applicants applied for an order for sale of the Lot together with the adjoining lot known as Sub-section 2 of Section A of New Kowloon Inland Lot No 317 and the Extension thereto (i.e. Nos 460 – 460A and 462 – 462A Sai Yeung Choi Street North, Kowloon) (“the Adjoining Lot”).

7.  After the commencement of the proceedings, the applicants acquired 100% of the undivided shares in the Adjoining Lot and, hence, the subject matter of the application at the hearing consists of the Lot only.  Proceedings against the 7^th respondent, the 8^th respondent, the 9^th respondent and the 10^th respondent, which were the owners in the Adjoining Lot, had been discontinued.

8.  At the time of filing of the NOA, the applicants owned 27.25 out of 32 undivided shares in the Lot, i.e. 85.16% except for the following units: -

(1) Ground Floor and Portion of Back Yard, 456 Sai Yeung Choi Street North owned by the 1^st respondent (“R1”);

(2) 7^th Floor, 456 Sai Yeung Choi Street North owned by the 2^nd respondent (“R2”);

(3) 1/5 share of Ground Floor and Portion of Back Yard, 456A Sai Yeung Choi Street North owned by the 3^rd respondent (“R3”);

(4) 3^rd Floor, 456A Sai Yeung Choi Street North owned by the 4^th respondent (“R4”);

(5) 1/2 share of 4^th Floor, 456A Sai Yeung Choi Street North (“R5’s Unit”) owned by the 5^th respondent (“R5”); and

(6) 6^th Floor, 456A Sai Yeung Choi Street North (“R6’s Unit”) owned by the 6^th respondent (“R6”).

9.  The applicants had subsequently acquired the undivided shares owned by R1, R2, R3 and R4 resulting in an ownership of 30.5 out of 32 undivided shares in the Lot (i.e. 95.31% of the undivided shares in the Lot) at the hearing. Proceedings against R1, R2, R3 and R4 had been discontinued.

10.  R5 and R6 are the remaining life respondents on record but they are missing.  Pursuant to the Order made by H.H. Judge Ko dated 4 September 2013, substituted service of the application on R5 and R6 was effected on 23 September 2013.  R5 and R6 had not shown up after the expiration of the 1-month period specified in the notices[4].  Pursuant to the Order made by H.H. Judge Ko dated 6 November 2013[5], service on R5 and R6 of all documents in respect of these proceedings subsequent to this Order be dispensed with.

11.  At the hearing, since there was no expert evidence filed by the respondents in these proceedings, Ms Ngai for the applicants simply called the witnesses to prove the applicants’ case.  The applicants contended that all the requirements of the Ordinance had been satisfied and asked for an order for sale of the Lot.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

12.  Section 3(1) of the Ordinance requires the applicant to have not less than 90% of the undivided shares in a lot before it can make an application.  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 subsection (1) in respect of a lot belonging to a class of lots specified in the notice.

13.  Pursuant to section 3(5) of the Ordinance, a Notice was gazetted on 22 January 2010 and tabled at the Legislative Council meeting on 27 January 2010, which came into operation on 1 April 2010.  Section 3 of the Notice lowered the threshold for compulsory sale, insofar as it is applicable, from 90% to 80%.  Section 4(1)(b) of the Notice specified one of the classes for the purposes of Section 3 as “a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (which is the date of the application)”. 

14.  As at the date of application, the applicants owned 85.16% of the undivided shares in the Lot and the occupation permit of the Building was issued for more than 50 years. I am satisfied that the applicants are entitled to make the application.

DETERMINATION OF THE EXISTING USE VALUES (“EUV”) OF ALL UNITS IN THE BUILDING

15.  Pursuant to section 3 of the Ordinance, the NOA was accompanied by a valuation report dated 6 May 2011 (“Application Report”)[6] prepared by Mr Wong Chi Wai of Lawson David and Sung Surveyors Limited (“Mr CW Wong”), the applicants’ valuation expert, containing assessments of values of all units (which are conveniently termed as the existing use values, the “EUV” of all units) of the Building as at 28 February 2011. The report was prepared not earlier than 3 months before the filing of the NOA in accordance with section 3 of the Ordinance.

16.  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.”

17.  R5 and R6 are the missing owners.  The tribunal, before making an order for sale if any, should satisfy that the value of R5’s Unit and the value of R6’s Unit as assessed in the application are not less than fair and reasonable and not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.

18.  In the Application Report, Mr CW Wong explained his valuation method and the assessment process to arrive at the EUV of each unit in the Building as at 28 February 2011.  In undertaking the assessment, Mr CW Wong adopted the Direct Comparison Method.  He had firstly identified reference units for both retail and domestic portions of the Building and compared them with the actual transactions in the market.  The remaining retail and domestic units in theBuilding were then compared with the respective reference units.

19.  Mr CW Wong updated his EUV assessments by a supplemental report dated 29 September 2014 (“Supplemental Report”)[7]. He inspected more units in the Building internally; updated the property indices for the valuation; add one new retail comparable; rectified the information of the comparables; rectified the yard area of Ground Floor, No 456A Sai Yeung Choi Street North; add information on depth and headroom of the retail units in the Building; made adjustment for headroom to retail comparables; changed the assessments of Ground Floors, Nos 456A and 458A Sai Yeung Choi Street North as retail units to domestic units; and allowed discount for change of usage of Ground Floors, Nos 456 and 458 Sai Yeung Choi Street North from domestic units to retail units. Mr CW Wong finally revised the unit price of the reference domestic unit to $36,000/sq m and the unit price of the reference retail unit to $87,000/sq m, and then updated the EUV of each unit in the Building[8].

20.  Although Ground Floors, Nos 456 and 458 Sai Yeung Choi Street North were described as domestic units in the occupation permit, Mr CW Wong considered their optimum use is non-domestic.  Mr CW Wong had therefore assumed their change of usage from domestic units to retail units in his valuation and applied -10% adjustment to reflect the time and costs for the conversion.  The possibility for the proposed change of usage was confirmed by Mr Benson Wong Sai Ning of Benson Wong & Associates Limited (“Mr Benson Wong”), a qualified building surveyor, at the hearing.  Ms Ngai also submitted that Mr CW Wong’s approach is in line with the approach set out in Many Gain Investment Limited v Chan Fai Ho and the Others, LDCS 28000 of 2012 dated 18 June 2014 (unreported).

21.  At the hearing, when Mr CW Wong was enquired why his reports did not have the explanations of the adjustment rates in his valuation, he admitted that he had forgotten to include such information in his reports, but he subsequently submitted the information to the tribunal.

22.  When Mr CW Wong was enquired whether he had considered depth in the valuation of retail units, he replied that depth of retail units should have been considered and included in his adjustment for layout.  However, he admitted that he had failed to consider the depth of the retail comparables 2, 3 and 4 in the Supplemental Report.  He then submitted that there should be an additional adjustment at 5% made to these three comparables.  Nevertheless, since the adjusted unit rates of the retail comparables 3 and 4 were the highest and the lowest among the ten retail comparables and therefore were disregarded, Mr CW Wong confirmed that the unit price of the reference retail unit should be maintained at $87,000/sq m.

23.  Subsequent to Mr CW Wong’s replies to the enquiries, I accept the EUV assessed by Mr CW Wong. The EUV of all units in the Building as at the relevant date of valuation, i.e. 28 February 2011, are reproduced below: -

SECTION 4(2) OF THE ORDINANCE – JUSTIFICATION AND REASONABLE STEPS

24.  In determining the application, section 4(2) of the Ordinance empowers the tribunal to make an order for sale if it is satisfied that :

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

(2)     the applicants have taken reasonable steps to acquire all the undivided shares in the Lot (including negotiating for the purchase of the undivided shares owned by the respondents on terms that are fair and reasonable).

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

25.  This tribunal has taken into consideration the expert evidence of Mr Wong Chi Ming (“Mr CM Wong”), a qualified structural engineer and Mr Benson Wong adduced by the applicant. 

26.  Mr CM Wong had conducted a structural assessment of the Building and prepared a Structural Assessment Report dated 29 September 2014[9].  Mr Benson Wong had conducted a condition survey of the Building and prepared a Condition Survey Report dated 29 August 2014[10].

27.  I accept the unchallenged evidence of the applicants in these respects.  I am satisfied that, based on the evidence of Mr CM Wong and Mr Benson Wong, redevelopment of the Lot is justified due to the poor state of repair of the Building and disproportionate costs to repair and maintain.  I am also satisfied that redevelopment of the Lot is justified due to the age of the Building.  This 56-year old Building is in a poor condition and in fact has come to the end of its life. Its design has become obsolete over time in many aspects both physically and functionally and failed to conform to modern standards and requirements in many material respects.

Section 4(2)(B) – Reasonable steps taken

28.  The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of all the undivided shares of the Lot under Section 4(2)(b) of the Ordinance.

29.  Before the commencement of the present proceedings, the applicants made the following offers to R5 and R6 on 25 March 2011: -

(1) R5: $3,079,000

(2) R6: $5,894,000

30.  After the commencement of proceedings, the applicants made the following offers to R5 and R6 on 18 May 2012: -

(1) R5: $3,660,000

(2) R6: $7,006,000

31.  The applicants submitted that the respective offer prices were higher than the EUV as at 28 February 2011 as assessed by Mr CW Wong at about the time of the offer, and were also higher than the value reflecting their respective shares in the potential of the Lot for joint redevelopment with the Adjoining Lot at about the time of the offer (i.e. R5: $2,931,778 for the offer on 25 March 2011 and $3,485,099 for the offer on 18 May 2012; R6: $5,612,708 for the offer on 25 March 2011 and $6,672,008 for the offer on 18 May 2012).

32.  The applicants contended that the offers made to the respondents were fair and reasonable and the applicants were reasonable in not making any further attempt to offer to purchase the respective shares of R5 and R6 after 22 October 2013, the expiration of the 1-month period specified in the notices dated 23 September 2013, because any attempt to do so would not be fruitful in the light of the fact that R5 and R6 are missing.

33.  In assessing the reasonableness of the offers, Ribeiro PJ stated in Capital Well Limited v Bond Star Development Limited[11] that :

“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.”[12]

34.  There is no evidence before this tribunal that Mr CW Wong’s assessments are faulted.  In the circumstances, I am satisfied that the offers made by the applicants fall within the range of what may broadly be regarded as fair and reasonable and the applicants have taken reasonable steps to acquire all the undivided shares of the Lot including the respondents’ shares in their respective units. 

ORDER FOR SALE

35.  I am satisfied that redevelopment of the Lot is justified in terms of both age and state of repair of the Building and the applicants had taken reasonable steps to acquire all the undivided shares of the Lot and had negotiated for the purchase of the respondents’ shares in their respective units on terms that are fair and reasonable.  In the circumstances, I agree that an order for sale should be granted in favour of the applicants.

RESERVE PRICE FOR THE AUCTION

36.  The applicants submitted that the reserve price for the auction of the Lot should be fixed at $240,000,000, which is based on Mr CW Wong’s assessment of the redevelopment value (“RDV”) of the Lot as at 14 November 2014 in his Valuation Report dated 18 November 2014[13] (“RDV Report”).

37.  Mr CW Wong had adopted the Residual Method to assess the RDV of the Lot.  Residual Method is the assessment of land value by deducting the development costs (including construction costs, professional fees, financial costs and profit, etc.) from the estimated gross development value (“GDV”) of the proposed development, as if completed, as at the date of valuation.

38.  Mr CW Wong opined that the optimum redevelopment on the Lot comprised a 30-storey commercial/residential composite building with retail shops on ground floor, 1^st floor and 2^nd floor, recreational facilities on 3^rd floor, and domestic units on the remaining upper floor.  Details of the hypothetical development with the proposed total gross floor area of 5,643.41 sq m and plot ratio of 8.4375, the GDV assessed (i.e. $201,000 - $211,000/sq m saleable area for shops on ground floor, $67,000/sq m saleable area for shop on 1^st floor, $53,600/sq m saleable area for shop on 2^nd floor and $147,000 - $176,000/sq m saleable area for domestic units on upper floors), the development costs adopted (i.e. $40,576 - $43,504/sq m gross floor area) and the residual valuation were set out in the appendixes of the RDV Report[14]. The residual land value was assessed at $240,000,000, which is equivalent to an accommodation value of about $42,527/sq m gross floor area.

39.  Mr CW Wong had also attempted to apply the Direct Comparison Method to assess the RDV of the Lot, but no suitable comparable was identified.

40.  Having gone through Mr CW Wong’s valuation in the RDV Report, I accept that the market value of the Lot reflecting its redevelopment potential on its own, i.e. the RDV of the Lot, as at 14 November 2014 was $240,000,000, which should be the reserve price for the auction of the Lot.

ORDER

41.  This tribunal make the following determinations :

(1) This tribunal is satisfied that redevelopment of the Lot is justified due to the age and state of repair of the Building, and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot including those of the respondents;

(2) 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;

(3) Mr Ma Ho Fai and Ms Tsang May Ping, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees by the Ordinance in relation to the sale of the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Woo Kwan Lee & Lo dated 5 September 2014;

(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 substantially the same as those in the draft Particulars and Conditions of Sale to be approved and initialed by the tribunal;

(b) The reserve price be set at $240,000,000;

(c) 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 becomes the owner of the Lot; and

(d) Liberty to the applicants, the 5^th respondent, the 6^th respondent and the Trustees to apply to the tribunal for further directions.

COSTS

42.  The applicants did not ask for costs.  I make a costs order nisi that there be no order as to costs and such order be made absolute after 14 days if no application is made to vary the said costs order.