EVERSOUND INVESTMENTS LTD v. TONGYORKTSE AND OTHERS

LDCS 3000 / 2012

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 3000 OF 2012

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J U D G M E N T

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Background

1.  This is an application (“the Application”) for compulsory sale of all the undivided shares in Section F of Kowloon Marine Lot No. 52 (“the Lot”), known as Nos. 3 & 5 Wan King Street and Nos. 4 & 6 Wan Shun Street, Kowloon, Hong Kong (“the Building”), for the purposes of the redevelopment of the Lot pursuant to Section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”).

2.  There is erected on the Lot an 8-storey composite building served by 2 common staircases.  The Building is part of Block A, Nos. 18 & 20 Wan On Street, Nos. 1, 3, 5, 7, 9, 11 & 13 Wan King Street and Nos. 2, 4, 6, 8, 10, 12 & 14 Wan Shun Street (“Block A”).  The Building was developed together with the neighbouring properties spanning between Wan Fuk Street in the north, Wan King Street in the south and Wan On Street in the west, with Wan Shun Street in between Wan Fuk Street and Wan King Street and with Wan Lei Street in between Wan On Street and what was formerly the harbour at Tokwawan.  The authorized plans are in relation to the whole development, which was divided into 4 phases, known as Block A, Block B, Block C and Block D.  The subject matter of the present application is only limited to the Building which is part of Block A the whole of which was covered by one Occupation Permit (“OP”).  The interest in the Building is divided into 33 undivided shares.  Equal of the 32 units was allotted 1/33 equal undivided shares in the Lot. So was the Roof. 

3.  The Applicant commenced the present proceedings on 12 January 2012. At that time, it owned 27 of the 32 units in the Building and 27 equal undivided 33rd parts or shares in the Lot representing 81.818%. The remaining units were held by the six Respondents. The Applicant contends that it was entitled to make the present application by virtue of the Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice under Section 3(5) of the Ordinance (“the Notice”).

4.  Since then, the Applicant has acquired the interests of the 1st Respondent, the 2nd Respondent, the 3rd Respondents, the 4th Respondent and the 6th Respondent and has discontinued the application against them. As at the commencement of the trial, only the 5th Respondents, being the registered owners of 1 share in the Lot and the whole roof, Nos. 3 and 5 Wan King Street and Nos. 4 & 6 Wan Shun Street, Kowloon, remained. Thus, the Applicant owed all the 32 units in the Building and the percentage of the undivided shares owned by the Applicant in the Lot was 96.97%.

5.  The solicitors for the Applicant have duly served all the papers on the 5th Respondents. The 5th Respondents did not file any Notice of Opposition; they were absent at the trial and did not file any evidence. 

6.  In view of the absence of the 5th Respondents, Mr Chain simply called the witnesses to prove the Applicant’s case. The Applicant contends that all the requirements of the Ordinance have been satisfied and asks for an order for sale in terms of the draft order submitted. 

Section 3 of the Ordinance – Ownership of the Applicant

7.  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. 

8.  Section 3(5) of the Ordinance also states 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.

9.  Pursuant to Section 3(5) of the Ordinance, the Notice was gazetted on 22 January 2010 and tabled at the Legislative Council meeting on 27 January 2010. It 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)”. In the present application, the occupation permit of the Building was issued on 4 February 1960, which is more than 50 years as at the date of application. The Building therefore is covered by the Notice and the applicable percentage is 80%.

10.  As at the date of application, the Applicant owned 81.818% of the shares in the Lot. The Applicant was clearly entitled to make the application. 

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

11.  Pursuant to section 3 of the Ordinance, the Application was accompanied by a valuation report (“Application Report”) dated 10 January 2012 prepared by Mr Alnwick Chan of Knight Frank Petty Ltd. (“Mr A. Chan”), the Applicant’s valuation expert witness, containing the assessments of the values of all units (which are conveniently termed as the existing use values, the “EUV” of all units) in the Building on the Lot as at 18 October 2011. The date of valuation is within 3 months from the date of the present application. I am satisfied with Mr A. Chan’s academic and professional qualifications, and accept his expertise in giving evidence.

12.   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.”

13.   In the Application Report of 10 January 2012, Mr A. Chan explained the method of valuation and the process of his assessment to arrive at the EUV of each unit of the Building.

14.   In his valuation of the EUV of the domestic units of the Building, Mr A. Chan adopted the following methodology :

(a) He selected 4th Floor of No. 4 Wan Shun Street (“the Reference Domestic Unit”), which was situated on the middle floor of the domestic portion as the reference unit for the purpose of valuing its unit price. 

(b) The unit price of the Reference Domestic Unit was first assessed by making reference to market comparables.  He took into account of 6 comparable transactions in 5 different buildings nearby. After making what he regarded as the necessary adjustments (for time, location/accessibility, age, floor, size, building condition, internal condition and view) for all these comparable transactions, he took the average of the adjusted unit rate of the comparables to come to the unit price of the Reference Domestic Unit.

(c) He further considered the floor difference, view, size and internal conditions of the Reference Domestic Unit and the remaining domestic units within the Building and made adjustments to arrive at the EUV of all the domestic units.

15.   For the roof of the Building, Mr A. Chan converted the saleable area of the roof as domestic by using a conversion factor of 1:8.

16.   The Applicant has noted from site inspection that the existing use of all the Ground Floor units in the Building is at variance with the use permitted by the occupation permit.  In assessing the EUV of all the Ground Floor units, Mr A. Chan carried out his valuation based on two different scenarios, i.e. scenario 1, assuming the permitted domestic use as shown in the occupation permit for the Building and scenario 2, assuming the existing non-domestic use.

17.   Mr A. Chan updated the Application Report by a supplemental report dated 21 March 2013 (“Supplemental Report”) in which he revised the EUV of all the units in the Building after taking into account the inspection of more units in the Building and the updated property index prepared by the Rating and Valuation Department. In the Supplemental Report, Mr A. Chan repeated the exercise he did in the Application Report with the new information and set out his revised assessments of the EUV of all the units in the Building as at 18 October 2011.

18.   At the trial, Mr Chain confirms that the Applicant adopts Mr A. Chan’s scenario 1 valuation for all the Ground Floor units even though this will be to the benefit of the remaining Respondents, the 5th Respondents.

19.   In the Judgment of a similar case Eversound Investments Limited v. Wong Hiu Man and others, LDCS 1000/2012 (unreported) dated 15 August 2013, the Tribunal (HH Judge Ko and Member Pang) accepted the submission of Mr C.Y. Li, SC, counsel for the applicant and the EUV valuation of the expert (also the same Mr A. Chan as in the present Application) based on scenario 1. In that case, Mr Li submitted that there were two reasons that scenario 1 (domestic use) valuation for the ground floor units which were certified for domestic use under the OP should be adopted. Firstly, the term EUV normally used in the applications under the Ordinance has been coined by practitioners and was indeed never used in the Ordinance. “Instead, an applicant is required by Part 1 of Schedule 1 to the Ordinance to set out his assessment of the “market value” of each property on the lot assessed on the basis of the assumptions mentioned therein. He refers to the discussion on “market value” at pages 100-102 in Cruden, Land Compensation and Valuation Law in Hong Kong, 3rd Edition (2009) and submits that if the actual use is against the law, unless there is evidence that such contravention will not create any title problem, an informed and prudent purchaser will not be willing to pay a price on the basis of such illegal use.” Secondly, “the occupation permit issued for the Building has specified domestic use for the Ground Floor units. There is clear evidence of material change of use of these units, see the expert report of Mr. Raymond Chan, the building surveyor…In the absence of proof of due compliance with the Buildings Ordinance, such change of use would render the title of the units defective: see J. Sihombing & M. Wilkinson, Hong Kong Conveyancing Law & Practice Vol.  1 III, LexisNexis Butterworths, para. [183.1]…It is for the party who contends that any change of use is legal or proper on the basis that the risk of any enforcement action is theoretical to justify it. The Applicant has acquired all the Ground Floor units and does not seek to defend the actual use.”

20.   I agree with the above Judgment of LDCS 1000/2012 in the adoption of scenario 1 valuation for all the Ground Floor units in the Building. Hence, in the present Application, I accept Mr Chain’s submission and the EUV valuation of Mr A. Chan based on scenario 1. Therefore, I determine that for the purpose of this Application, the EUV of all units in the Building, including the 5thRespondents’ unit, as at the relevant date of valuation of 18 October 2011 are as shown in the Supplemental Report of Mr A. Chan: see the table at Bundle E/ 1058 which is reproduced as Appendix A of this judgment.

21.   I am also satisfied, insofar as it is necessary, that the value of the 5th Respondents’ unit as assessed by Mr A. Chan is not less than fair and reasonable and not less than fair and reasonable when compared with the value of the Applicant’s properties:

 (a) the 5th Respondents’ unit - assessed at $539,369 (representing 1.2285% of the total EUV of all units); and

 (b) the total EUV of all units - assessed at $41,803,198.

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

22.   The second determination under Section 4(1)(b) of the Ordinance is whether an order of sale should be made.  According to Section 4(2) of the Ordinance, this would involve 2 considerations, namely :-

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

(b) has the Applicant taken reasonable steps to acquire all the undivided shares in the Lot.

23.   The Applicant has to satisfy this Tribunal that the above statutory requirements were met, otherwise, an order of compulsory sale ought not be granted. 

24.   Firstly, for the requirement under (a) above, I have considered the expert opinion of Dr Sammy Chan, the structural engineer and Mr Raymond Chan, the building surveyor. Both have filed their expert reports and were called to give evidence. I am satisfied with their academic and professional qualifications, and accept their expertise in giving evidence.

25.   Dr Sammy Chan conducted a structural assessment of the Building and prepared a report dated 27 May 2013. He (together with the team of engineers assisting him) carried out inspection of the Building and identified a total of 56 defects which exhibited signs of structural defects including concrete spalling, spalling with exposure of corroded reinforcing bar and water seepage. He further carried out the following tests on the existing structural conditions of the Building:- (a) compressive strength test, (b) carbonation test, (c) chloride content test, (d) cement content test, (e) sulphur content test, (f) cover meter test, (g) open up survey, and (h) infra-red thermographic survey. The tests show that the concrete cover has lost its function to protect the embedded reinforcement of the reinforced concrete members. As a result, the overall stability of the Building may be adversely reduced by such degradation of structural members.

26.   Dr Sammy Chan opined that the Building has undergone severe degradation which renders it not worthwhile to be rectified by conventional repair and maintenance measures. Based on the cost estimate report prepared by the quantity surveyor Aria & Associates Ltd, Dr Sammy Chan estimated that the structural repair costs would be in excess of $10.68 million. He further expressed the view that the proposed repair works would not be a costs effective solution.

27.   The Applicant also commissioned Mr Raymond Chan (together with the team of surveyors assisting him) to survey the existing condition of the Building. Mr Raymond Chan in his report dated 27 May 2013 examined various components of the Building and identified the defects including the unauthorized building works (“UBWs”) therein. He further set out the features of obsolescence of the Building which did not comply with the current standards and statutory requirements giving rise to safety concerns.

28.   Mr Raymond Chan concluded that the Building was generally in a dilapidated and potentially dangerous condition. The structural stability of the Building is affected by the defects and the UBWs.  Some of the building components and finishes were at the end of their effective life spans. Without substantial repairs, the Building is not up to tenantable standard but it may not be feasible or practical to undertake such repair as it would entail closure of the Building for a substantial period of time. Based on the cost estimate report prepared by the independent quantity surveyor, Mr Cheung Tat Tong, the cost of the proposed non-structural repair works is estimated to be above $7.83 million. Given that the Building is more than 50 years old, the continuous maintenance costs are expected to be increasingly high. Furthermore, as the Building was in obsolete design, the upgrading costs would invariably been enormous and would be unjustifiable in comparison with complete redevelopment.

29.   The Applicant submits that given the total EUVs based on scenario 1 of $41,803,198, the estimated substantial repair costs for the structural and non-structural works of over $18 million is unjustified.

30.   There is no contrary expert evidence and I accept the expert evidence of Dr Sammy Chan and Mr Raymond Chan. I am satisfied that the redevelopment of the Lot is justified due to the age and the state of repair of the Building:

(a) the Building is over 53 years old;

(b) the Building is in very poor physical conditions and disproportionate cost is required to repair and maintain the Building; and

(c) the obsolete design of the Building does not suit the present requirements of a building.

Reasonable Steps to Acquire All the Undivided Shares in the Lot

31.   The Applicant is under an obligation to negotiate on terms that are fair and reasonable in a situation when the whereabouts of a minority owner are known. The fact that all the Respondents except the 5th Respondents have accepted the Applicant’s offers to acquire their interests is telltale of the reasonableness of the steps taken. 

32.   For the 5th Respondents, the Applicant submits, based on the testimony of Mr Alex Au-Yeung (the General Manager of the Applicant), that it has complied with the statutory obligation to negotiate with them on terms that are fair and reasonable although the parties have not reached any settlement.

33.   The Applicant made 2 offers to the 5th Respondents as follows.  The offers were based on the valuations done by Mr A. Chan of Knight Frank (i.e. EUV of the 5th  Respondents’ unit/ EUV of all units in the Building x RDV of the Lot) but were all higher than the valuations.

Date of offer	Based on Knight Frank’s valuation	Offer amount
25 November 2011	$776,758 (based on scenario  1)	$940,000
8 December 2011	$778,089 (based on scenario 1); $721,444 (based on scenario 2)	$950,000

34.   On the unchallenged evidence of Mr A. Chan and Mr Alex Au-Yeung, I agree with the Applicant that the offers made to the 5th Respondents were fair and reasonable. The Applicant was guided by expert opinion in making its offers. Mr A. Chan is a professional valuation surveyor from a reputable firm of surveyors in Hong Kong. There is nothing to suggest that his valuation is other than proper and professional. The 5th Respondents did not participate in any mediation proposed by the Applicant and has never formally responded to the offers. According to Mr Alex Au-Yeung, at one stage the 5th Respondents had appointed solicitors to negotiate with the Applicant but nothing fruitful resulted from the discussion. In the premises, I am satisfied that reasonable steps have been taken by the Applicants to acquire the interest of the 5th Respondents and the offers made by the Applicant “falls within the range of what may broadly be regarded as fair and reasonable” as said by Mr. Justice Ribeiro PJ in Capital Well Ltd v. Bond Star Development Ltd (2005) 8 HKCFAR 578 at para. 33. Thus, I conclude that the Applicant has taken reasonable steps to acquire all the undivided shares in the Lot.

Reserved Price for the Auction

35.   The Applicant submits that the reserve price for the auction of the Lot should be fixed at $63,200,000, based on the assessment by Mr A. Chan of the redevelopment value (“RDV”) of the Lot as at 5 June 2013 in his valuation report of 10 July 2013.

36.   I have considered Mr A. Chan’s valuation. I agree with him that the residual method has to be employed as the method of assessment of the RDV of the Lot. This is done by deducting development costs (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value of the completed development.

37.   Mr A. Chan opined that the optimum development on the Lot comprised a block of 24-storey composite development with shops on the G/F, lift lobby and machine room on the 1/F, and domestic units on the 2/F to 23/F with 1 flat per floor (with average saleable area of 31.57 sq. m.). The details of the hypothetical development and residual valuation were set out in Appendix 9 of his RDV valuation report (Bundle H/1739). The details of the comparables with adjustments were set out in Appendix 7 (for shop comparable at Bundle H/1720) and Appendix 8 (for residential comparable at Bundle H/1733). I have gone through his valuation in details. I am satisfied with his valuation, including the valuation assumptions that he has adopted and the values and the costs parameters that he has used in his valuation.

38.   Based on Mr A. Chan’s valuation, I decide that the reserve price for the auction of the Lot should be HK$63.20 million.

Trustees

39.   I find that Mr. Ho Chi Kit and Mr. Cheung Chi Yu, both of Messrs. Katherine YW Or and Co., solicitors, nominated by the Applicant, are suitable persons to be appointed as trustees to discharge the duties imposed on trustees under the Ordinance. The remuneration, on a lump sum basis of $60,000 (exclusive of reasonable disbursements and expenses) is also reasonable and will be allowed accordingly.

Particulars and conditions of sale of the Lot

40.   The particulars and conditions of sale of the Lot by public auction submitted by the Applicant are also reasonable and will be adopted accordingly.

Costs

41.   There be no order as to costs as no one has asked for costs.

Conclusion

42.   For the above reasons, I am satisfied that the redevelopment of the Lot is justified due to the age and the state of repair of the existing building on the Lot and that Eversound Investments Limited (as the majority owner) has taken reasonable steps to acquire all the undivided shares in the Lot. I therefore make an order that all the undivided shares in the Lot, the subject of this application, be sold by public auction for the purposes of development. The reserve price for the auction of the Lot shall be HK$63.20 million. I appoint Mr Ho Chi Kit and Mr Cheung Chi Yu as the sale trustees to discharge the duties imposed on them under the Ordinance in relation to the Lot and authorized their remuneration for their service as trustees as provided in their letter dated 19 June 2013. I approve the particulars and conditions of sale of the Lot placed before us and grant liberty to the parties and to the trustees to apply for further directions if necessary.

Appendix A