FIRST MATE DEVELOPMENT LTD v. GEE WING CHUNG, THE ADMINISTRATOR OF THE ESTATE OF LIU WAI YAN ALSO KNOWN AS BO FONG LIU GEE, DECEASED AND OTHERS

LDCS 8000/2016

[2018] HKLdT 16

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 8000 OF 2016

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D E C I S I O N
(Leave to Appeal on Interlocutory Application)

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1.  On 19 January 2018, this Tribunal handed down its reasons for decision made on 5 January 2018 (“the Decision”), inter alia, dismissing an application by the 2^nd respondent (“R2”) for leave to file and exchange supplemental valuation report on marriage value.

2.  It is trite that under Section 11AA (6) of the Lands Tribunal Ordinance (“LTO”): -

“Leave to appeal shall not be granted unless the Tribunal, the Court of Appeal or the registrar hearing the application for leave is satisfied that –

(a) the appeal has a reasonable prospect of success; or

(b) there is some other reason in the interests of justice why the appeal should be heard.”

3.  On 23 February 2018, R2 filed a Notice to Appeal on the following grounds:

(1)   The Tribunal has erred in law in holding that, upon proper construction of Paragraph 2 of Schedule 2 of the Land (Compulsory Sale for Redevelopment) Ordinance (“the Ordinance”), in assessing the reserve price of the subject lot, the Tribunal can only consider the redevelopment potential of the subject lot on its own;

(2)   The Tribunal has erred in law in holding that Paragraph 2 of Schedule 2 of the Ordinance has operated to qualify or exclude the basis of market value in that any enhanced bid a willing buyer may offer or any potentialities that may have existed by reason of a possible agglomeration of sites shall be excluded;

(3)   The correct interpretation of Paragraph 2 is that there has to be assumed a hypothetical sale of a lot with that lot sold by itself and not as part of some larger entity of land and with the sale price of that larger entity then apportioned in some arbitrary fashion in order to find the value of the lot;

(4)   It is not in practice possible to value a piece of land without taking into account the potential for development of other land adjoining it or in its vicinity since the prospect of such other development is an integral component of the value of the piece of land in question;

(5)   If an attempt were made to value a piece of land ignoring its potential for development as a part of a larger development the result would be an artificially reduced value of the piece of land in question. The legislation here being applied is in effect a power of compulsory purchase in private hands and to allow a person’s land to be taken from him by compulsion for the benefit of others at a price less than it could command in the open market would be a patent injustice;

(6)   The decision of the Tribunal flouts the principle of equivalence, namely that the compensation for the acquisition of an interest in land, should not be less than its true value and not less than the actual loss to the landowner, and is for that reason unjust; and

(7)   The following question of law is of great and general public importance and also in the interest of justice the appeal should be decided by the Court of Appeal: -

Upon proper construction of Paragraph 2 of Schedule 2 of the Ordinance, whether any potentialities that may have existed or attached to the subject lot by reason of a possible agglomeration of sites shall be excluded in the determination of its reserved price.

Further Submission by R2

4.  Notwithstanding the above, R2 filed further submission for arguments on 2 March 2018, proposing “to clarify the scope/nature of the application first”.

5.  R2 submits that there are at least 3 possible meanings for the term “marriage value”, ie: -

(1)   the merger of different interests as in the case of Mountview Estates Ltd v London Borough of Enfield (1969) 20 P & CR 729[1] which has nothing to do in the present application;

(2)   the 2^nd one involving a factual assumption that there is a joint development by combining 2 sites, ie an extrinsic fact other than the Subject Lot which R2 concedes, for the purpose of this application, what the words “on its own” in Paragraph 2 of Schedule 2 of the Ordinance tend to exclude from the Tribunal’s consideration for the reserve price; and

(3)   a “Clay Factor”, a nomenclature following from IRC v Clay [1914] 3 KB 466[2], which, as argued by R2, is not excluded by the words “on its own” in Paragraph 2 of Schedule 2 of the Ordinance.

6.  R2 submits that in valuing the Clay Factor, a valuer does not take into account any extrinsic fact, but only whatever objective facts which are in the public domain relevant to the Subject Lot itself.

7.  The usual difficulty of a valuer in assessing the Clay Factor is how to assess its value, ie whether the Subject Lot is of (special) interest to owners of one (or more) adjoining site which is entirely a question of evidence.

8.  At the hearing on 6 March 2018, Mr Benjamin Chain (“Mr Chain”), counsel for R2, emphasized the question should be a matter of evidence and the Tribunal should not pre-judge on its admissibility. R2’s present application is limited to the Clay Factor as its valuer at the time of her original report was not aware of the status of the 2 adjoining sites. Had it been otherwise, she would have taken that into account in arriving at her original valuation and no question of leave would have arisen. At trial, she would be cross-examined on that and her evidence may, or may not be accepted.

9.  In aid of his argument, Mr Chain referred to Trocette Property Co Ltd v Greater London Council (1974) 28 P & CR 408[3] at 422 per Lawton LJ as follows:

“In my judgment, this passage (of the English Lands Tribunal given by John Watson, Esq, FRICS) is too broadly stated and is not apt to cover the unusual facts of the present case. In most cases it may well be that the personal characteristics of the parties are irrelevant, but if the evidence in a particular case establishes that buyers would be likely to be put off bidding

beyond a certain figure because of the existence of an unusual factor such as the likely refusal to cooperate of a freeholder whose cooperation is essential if the full potential of the premises or site is to be released then the existence of that factor should be taken into consideration in assessing compensation, and this would be so whatever the reason for the existence of that factor might be. The assessment of compensation under rule (2) of section 5 of the Act of 1961 is not concerned with the search for an economic abstraction - a valuer’s Holy Grail – but with “… the amount which the land if sold in the open market by a willing seller might be expected to realise: …” Who are likely to be buyers in such a market will depend on the facts of each case, and what they would be likely to bid, and their reasons for doing so, will also depend on the facts.” (emphasis added)

10.  In the present application, Mr Chain, submits, the “unusual factor” that the adjoining owners are indeed interested is not even disputed.

11.  In gist, Mr Chain contends that the proposed appeal satisfies both limbs of s.11AA (6) in that there is at least an arguable case and also “in the interests of justice” that deserves a ruling by the Court of Appeal.

Applicant’s Opposition

12.  Ms Nancy Ngai (“Ms Ngai”), counsel for the applicant, submits that leave to appeal should not be granted to R2.

13.  Ms Ngai puts forth R2’s argument as follows:

(1)   The applicant, being the sole owner of the 1^st Adjoining Lots and the majority owner of the 2^nd Adjoining Lots, applying the same nomenclature as adopted in the Decision, is a “special purchaser” having a “special interest” who would likely pay more than the Subject Lot would be worth to anybody else because the Subject lot is located next to the 1^st Adjoining Lots and the 2^nd Adjoining Lots and because the applicant has an intention to redevelop the 3 groups of lots together as a whole;

(2)   Apart from the applicant, there may be other persons, such as property brokers, competing in the market for what they know the applicant wants, with the view to a resale to it at an enhanced price so as to realise a profit as per Swinfen Eady LJ in IRC v Clay, supra;

(3)   Therefore, the open market value of the Subject Lot on redevelopment basis should be the RDV of the Subject Lot on its own plus an enhanced value, which is referred to by R2 as “marriage value”, reflecting the potentiality of joint redevelopment of the Subject Lots together with the 1^st Adjoining Lots and the 2^nd Adjoining Lots as an enlarged merged site; and

(4)   Hence, the reserve price to be set under Paragraph 2 of Schedule 2 of the Ordinance for the sale of the Subject Lot in auction should be the RDV of the Subject Lot on its own plus such “marriage value”.

14.  Ms Ngai submits that R2’s intended appeal does not have any reasonable prospect of success. She makes reference to the Hong Kong Civil Procedure 2018 which at §59/2A/4 (p 1142) states:

“In Wynn Resorts (Macau) SA v Mong Henry (unrep, [2009] HKEC 1293, Chu J (as she then was) observed that:-

“The adoption of the “reasonable prospect of success” test, as opposed to the “real prospect of success” test, in our legislation is not accidental. In the Interim Report of the Chief Justice’s Working Party on Civil Justice Reform (2001), the proposal was to adopt the “real prospect of success” test as the threshold for granting leave to appeal: Proposal 44 and paras 535-539. In the Final Report (2004), however, the Working Party decided to adopt as the test for granting leave a requirement that the appeal has reasonable prospects of success, as conveying the notion that the prospects of succeeding in the appeal must be “reasonable” and therefore more than “not fanciful”, without having to be “probable”: Recommendation 115 and para 656.

To meet the “reasonable prospects of success” test, an applicant is required to show more than just an arguable case, but an appeal that has merits and ought to be heard, although he does not have to demonstrate that the appeal will probably succeed.” (Emphasis added)

15.  Ms Ngai submits that the question as to whether the so-called “Clay Factor” should be taken into account in the determination of reserve price has already been considered by the Court of Appeal in Fully H K Investments Ltd and Others v Poon Vai Ching, the Executrix of the Will of Poon Kam Chuen (Deceased) and Others, HCMP 591/2007 (unreported, dated 4 April 2007).

16.  In this Fully H K Investments case, the minority owner respondent argued that the reserve price should include an enhanced value on the ground that the majority owner applicant or its related company called Luck Dragon might pay a price higher than what the lot would be worth to anybody else given Luck Dragon was the only one person capable of redeveloping the lot into a more valuable form of building with plot ratio 9 as opposed to plot ratio 5.

17.  The Tribunal (then differently constituted):-

(a) determined the reserve price on the basis of plot ratio 5; and

(b) held that it was fair and reasonable to make offers based on the assessment with plot ratio 5.

18.  Before the Court of Appeal,  relying on the UK authorities, namely IRC v Clay, supra and Raja v Vizagapatam [1939] AC 302[4], the minority owner respondent argued that:-

“13. …… the Tribunal erred in so concluding in that the value of the lot was based exclusively on plot ratio 5 and the existence of a ‘special interest’ purchaser (viz. the owner of the approved plans based on plot ratio 9) to whom the lot would be worth considerably more was totally disregarded. It was said that a value should have been attributed to that factor in assessing the value of the lot since that exercise had to be undertaken before a view could be formed as to the fairness and reasonableness of the offer.

……

……

17.…… this principle (which I will refer to as “the Clay factor”) was applicable in the present case because Luck Dragon was likely to offer more than the property would be worth to anybody else because of its ability to utilise the approved plans based on plot ratio 9. …… the Tribunal erred in disregarding that fact.”

19.  Hon Le Pichon JA (as she then was) held from §§18 to 21 as follows:

“18. I do not consider those authorities to be of assistance to the second respondent. As Mr Mok who appeared for the applicants rightly submitted, the Raja line of cases establishes assumptions for assessments and valuation purposes that apply in a context where there is absolutely no possibility of an actual auction. Where, as here, there is to be a public auction, the factors mentioned in the judgment of Swinfen Eady LJ quoted above would be matters that would be taken care of by the actual process of the public auction. To say that the Tribunal should seek to attribute a value to those factors so as to establish a valuation by reference to which the fairness and reasonableness of the offer is to be determined is little short of inviting the Tribunal, as it were, to second guess the outcome of the public auction. That is at odds with the principles set out in Capital Well.

19. It is clear from that decision that in assessing whether reasonable steps had been taken by the majority owners under section 4(2)(b) of the Ordinance, the role of the Tribunal is not to conduct a valuation exercise. Mr Smith SC sought to distinguish Capital Well on the basis that the Tribunal’s finding in that case was made on the basis of both sides’ valuation evidence on the open market value of all six lots, taking account of the composite sites redevelopment potential. He submitted that this was not the present case since what is in the issue is the Tribunal’s assessment of the lot’s redevelopment potential. But if Capital Well is properly understood, it is not distinguishable. What according to Mr Smith SC the Tribunal ought to have done is precisely what the Court of Final Appeal held a Tribunal should not do – to engage in a valuation exercise that decides what valuation principles ought or ought not be adopted such as ‘marriage value’ ‘strategic position’ ‘special interest’ and the like and how they are to be assessed.

20. The value of the lot on the basis of plot ratio 5 is not in dispute. As to the question how the court is to “decide what figure to put on top” of the plot ratio 5 to reflect the Clay factor, the second respondent’s stance below was that that was a question of quantum. Yet, it is clear from the transcript of the evidence of the second respondent’s expert that he could not tell what the quantum was except that it should be somewhere between the levels of plot ratio 5 and plot ratio 9. As I have said, that is a matter that is to be resolved as part of the actual auction process.

21. In my view, I have no hesitation in concluding that the second respondent failed to demonstrate a real prospect of success on the merits. Even if (contrary to my view) the delay where held to be excusable, the second respondent has failed to show an arguable appeal.” (emphasis added)

20.  Ms Ngai submits that although in the Fully H K Investments case, the applicable test applied was “real prospect of success” while in the present case, the applicable test is “reasonable prospect of success”, such difference is immaterial in dealing with R2’s present application for leave to appeal. There is no other reason in the interests of justice that R2’s intended appeal should be heard by the Court of Appeal.

Discussion

21.  Mr Chain is trying hard to distinguish Fully H K Investments from the present application firstly on the ground that it was an appeal out of time which was decided by a single Justice of Appeal instead of the full Court of Appeal. Mr Chain submits there was no direction in the judgment that the issue argued upon could not be renewed; it was only the 2^nd respondent/appellant there who decided not to take further action before the full Court of Appeal. We consider this distinction irrelevant so far as it is a judgment coming from a higher court which is binding on this Tribunal.  The findings in Fully H K Investments is exactly on the same issue before us and is binding on us.

22.  More importantly, Mr Chain emphasized this Fully H K Investments case was an appeal after a trial where the evidence has been heard. Mr Chain affirms that this is exactly his position because he is not suggesting the Tribunal should take into account the Clay Factor but that should ultimately be the decision of the Tribunal to adjudicate only after hearing evidence which may or may not be accepted, depending on how it comes about, how it is tested under cross-examination. Mr Chain submits Hon Le Pichon JA (as she then was) only came to her conclusion because “it is clear from the transcript of the evidence of the second respondent’s expert that he could not tell what the quantum was except that it should be somewhere between the levels of plot ratio 5 and plot ratio 9.” In contrast, in the present application, the Tribunal has not even heard the evidence on the relevancy of the Clay Factor.

23.  Be that as it may, however, we consider Mr Chain or R2 had confused the “Clay Factor” as a methodology of valuation which, this Tribunal admits, would rarely be expunged as inadmissible before hearing the evidence. But rather, the so-called “Clay Factor” impinges on the very basis of valuation which may be excluded at the outset[5].

24.  We do acknowledge here that we have not gone to the question of quantum on the amount of marriage value or synergistic value as the case may be yet. As we commented at §33 of the Decision, Mr Justice Ribeiro PJ had affirmed thatthe Tribunal is not required to perform any such task.

25.  In any event, at §35 of the Decision we have found the suggestion of marriage value by R2 inconsistent with the requirement under Schedule 2 Paragraph 2 of the Ordinance. To permit R2 or any minority owners to adduce expert report on the amount of marriage value which should otherwise be excluded at the outset would unnecessarily prolong the proceedings, the trial and therefore the costs and expenses deriving thereof.

26.  Here, once again, we would like to repeat our ruling at §34 of the Decision that to the extent that the reserve price pursuant to Schedule 2 Paragraph 2 of the Ordinance is so qualified to the redevelopment potential of the lot “on its own”, the other compensation principles or the principle of equivalence referred to by Mr Chain on the ambit of open market value are irrelevant.

27.  And to the extent that Mr Chain complained that a public auction as envisaged by section 5 of the Ordinance fails to resolve at a fair and reasonable market price of the Subject Lot, taking into consideration the marriage value or the Clay Factor as the case may be, we consider this being the exact purpose why the reserve price pursuant to Schedule 2 Paragraph 2 of the Ordinance is so qualified to the redevelopment potential of the lot “on its own”.

28.  When the marriage value or the Clay Factor whatever it is termed is the result of an ex post facto awakening to the scheme underlying the Ordinance as explained at §31 of the Decision, the Pointe Gourde principle should apply to exclude or disregard the same.

29.  On the second limb of s.11AA (6) of the LTO, given the same issue had already been considered in the Fully H K Investments case, this Tribunal does not agree that leave to appeal should be granted in the interests of justice as contended by R2.

Conclusion and Disposition

30.  In light of the above, we consider R2’s intended appeal has no reasonable prospect of success.

31.  Similarly, R2 fails to satisfy us that there was some other reason “in the interests of justice” why the appeal should be heard and therefore R2’s Interlocutory Application dated 19 January 2018 be dismissed. 

Costs

32.  The usual rule of costs to follow the event should apply. This Tribunal therefore orders that R2 do pay the costs of the applicant with certificate for counsel on High Court scale, to be taxed if not agreed. The costs order is in the form of order nisi. Unless any of the parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from today.

33.  It remains for us to thank counsel on both sides for their able assistance provided to the Tribunal.