CHARMLINK LTD v. LEE TONG HING AND OTHERS

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Land Compulsory Sale Application No. 16000 of 2010

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BETWEEN

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JUDGMENT

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Background

1.  This is the Applicant’s application for a compulsory sale order under section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) to sell all the undivided shares in Kowloon Inland Lot No. 2079 (“the Lot”).  The postal address of the existing building (“the Building”) erected on the Lot is No. 116 Argyle Street.  The occupation permit of the Building was issued on 11 February 1959, more than 50 years before the application.

2.  The Building is a block of 12-storey commercial/residential building.  The front elevation of the Building is facing Argyle Street with the rear elevation facing Julia Avenue (which is at one level higher than that facing Argyle Street).  The Lower Basement level has 2 shops facing Argyle Street with the rear portion at this level consisting of unexcavated ground.  In between the 2 shops is a corridor leading to a lift lobby (2 lifts) and the staircases providing vertical access to the upper floors.  The Upper Basement level has 2 shops facing Argyle Street and 2 garages facing Julia Avenue, which at the date of the application were used also as shops.  The upper floors, namely the Ground Floor to the 9^th Floor consist of 38 residential units with 4 units at each floor from the Ground Floor to the 8^th Floor, and 2 units at the 9^th Floor.

3.  The Lot has altogether 42 undivided shares, the allotment of which to the units is as follows:-

(1)  Each shop at the Lower Basement (facing Argyle Street) is paired with the shop above it at the Upper Basement to form 1 unit, and is given 1 undivided share.  The 2 pairs of shops facing Argyle Street have a total of 2 undivided shares.

(2)  Each of the 2 garages at the Upper Basement (facing Julia Avenue) is given 1 undivided share, making a total of 2 undivided shares.

(3)  Each of the residential units is given 1 undivided share giving a total of 38 undivided shares.

4.  At the time of the filing of the application, i.e. on 2 December 2010, the Applicant owned 86.90% of the undivided shares of the Lot.  After the filing of the application, the Applicant was able to acquire the units of the 1^st, 2^nd, 4^th, 5^th and 6^th Respondents.  Now the Applicant owns all the undivided shares and units except the remaining half share of the garage of Block B (“Garage B”) belonging to the 3^rd Respondent.  The Applicant has discontinued the application against the 1^st, 2^nd, 4^th, 5^th and 6^th Respondents and the Notice of Application has been amended to reflect the acquisitions of these units.

5.  Thus, Garage B is now co-owned by the Applicant and the 3^rd Respondent as tenants in common, each holding half of the 1 undivided share allotted to Garage B, and the 3^rd Respondent is the only outstanding respondent.  As the 3^rd Respondent is a missing owner, the Tribunal has ordered on 8 June 2011 that service of the Notice of Application and subsequent documents on the 3^rd Respondent be dispensed with and notice be published in a Chinese newspaper to call upon him to establish his claim before the Tribunal.  However, the 3^rd Respondent has not responded to the proceedings at all.  The trial was therefore conducted in the absence of the 3^rd Respondent.

Ownership of the Applicant

6.  Section 3(1) of the Ordinance requires the majority owner making the application to own not less than 90% of the undivided shares in the lot in question, but it is subject to subsection (5).  Subsection (5), which is in turn subject to subsection (6), stipulates 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.  Subsection (6) stipulates that no percentage may be specified in a notice under subsection (5) which is less than 80%.  By virtue of section 3 of the Land (Compulsory Sale for Redevelopment)(Specification of Lower Percentage) Notice, Cap. 545 (“the Notice”), the percentage in section 3(1) of the Ordinance is lowered to 80% in respect of a lot that belongs to any class of lot specified in section 4 of the Notice.  One of the classes of lot specified in section 4 of the Notice is a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the relevant date.  The relevant date is defined in section 2 of the Notice to mean the date of the application.

7.  In other words, for a building with the occupation permit issued more than 50 years before the date of the application for compulsory sale, the majority owner is only required to own not less than 80% of the undivided shares of the lot.  As the occupation permit of the Building was issued more than 50 years before the present application and the Applicant did have more than 80% of the undivided shares of the Lot at the date of the present application, the Applicant is clearly entitled to make a claim for compulsory sale of the Lot.

Determination of the application

8.  According to section 4(1)(a)(ii) of the Ordinance, when the minority owner cannot be found, the Tribunal shall first determine whether it is satisfied that the value of the minority owner’s property as assessed in the application is 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.  The Tribunal shall then decide whether to make the compulsory sale order (section 4(1)(b) of the Ordinance) which in turn depends on whether the Tribunal is satisfied that the redevelopment of the Lot is justified due to the age or state of repair of the existing development on the Lot (section 4(2)(a)(i) of the Ordinance); and whether the Applicant has taken reasonable steps to acquire all the undivided shares in the Lot (section 4(2)(b) of the Ordinance).

9.  Where a compulsory sale order is made, the Tribunal shall then appoint trustees to discharge the duties imposed on trustees under the Ordinance and authorize their remuneration (section 4(1)(c) of the Ordinance).  The Tribunal may also give such directions relating to the sale and purchase of the Lot including settling the particulars and conditions of sale (section 4(6)(a)(i) of the Ordinance), and order the sale by auction to be subject to a reserve price which takes into account the redevelopment potential of the Lot on its own (section 5(1)(a) and paragraph 2 of Schedule 2 of the Ordinance).

10.  We shall deal with all these matters below.

Valuation of the 3^rd Respondent’s property

11.  In order to determine whether the value of the 3^rd Respondent’s property as assessed in the application is not less than fair and reasonable; and not less than fair and reasonable when compared with the value of the Applicant’s properties as assessed in the application, we have to look at the existing use value (“EUV”) of the 3^rd Respondent’s property and the EUV of the Applicant’s properties as assessed by the Applicant’s expert.  Although the Ordinance does not expressly use the term “EUV”, from the requirements laid down in Part 1 of Schedule 1 of the Ordinance for what should be set out in the valuation report accompanying the application, it is clear that the Tribunal is to look at the EUVs of the properties in question.  Part 1 of Schedule 1 of the Ordinance stipulates that the valuation report has to set out the assessed market value of each property on the lot (a) on a vacant possession basic; (b) assessed as if the lot could not be made the subject of an application for an order for sale; and (c) not taking into account the redevelopment potential of the property or the lot.  It also stipulates that the valuation report has to be prepared not earlier than 3 months before the date of making the application.  These requirements are clearly referring to the EUV of each of the properties in question.

12.  The present application was accompanied by a valuation report dated 17 November 2010 (“the Application Report”) prepared by Mr. Charles Chan (“Mr. Chan”) of Savills Valuation and Professional Services Ltd., the Applicant’s valuation expert.  In the Application Report, Mr. Chan explained the method of valuation and the process of his assessment in arriving at the EUV of each unit of the Building, which was set out in the table at paragraph 10 on page 26 of Exhibit “A1”.  In particular, he set out the following matters in the Application Report:-

(1)   the floor area of each unit (paragraph 4);

(2)   the valuation assumptions, in line with what is stipulated in Part 1 of Schedule 1 of the Ordinance (paragraph 7);

(3)   the assessment of the unit rates per saleable area for the reference unit of the shops and the reference unit of the residential units, and the adjustments between the chosen reference units and all the other units in arriving at the EUV of all the units in the Building as set out in paragraph 10 (paragraph 9);

(4)   the shop comparables including the adjustments to arrive at the adopted unit rate of $211,000 per sq. m. for the shops at Argyle Street and $84,000 per sq. m. for the garages (used as shops) at Julia Avenue (Appendix IV); and

(5)   the domestic comparables including the adjustments to arrive at the adopted unit rate of $62,300 per sq. m (Appendix VI).

13.  Before the hearing, Mr. Chan filed a second valuation report dated 9 September 2011 (“the Second Valuation Report”) which covered (1) the assessment of the Redevelopment Value (“RDV”) of the Lot by residual valuation at $515,000,000 for the purpose of setting the reserve price for the proposed auction of the Lot (which will be discussed below) and (2) the review and re-assessment of the EUV of all the units in the Building, at the same valuation date of 17 November 2010 as adopted in the Application Report.

14.  In the Second Valuation Report, Mr. Chan explained that the review of the EUV was prompted by (1) the availability of the Rating and Valuation Department’s confirmed indices for time adjustment, thus replacing the provisional indices previously used in the Application Report, resulting in consequential changes in the time adjustments for the comparables, and (2) Mr. Chan’s ability to inspect more of the units thereby warranting consequential changes in the adjustments of the comparables, where appropriate.

15.  The following table shows the EUV of all the units in the Building based on the information shown in the Second Valuation Report:-

Floor	Existing Use Values as at 17 November 2010
	Block A	Block B	Block C	Block D
Lower Basement	$30,110,000	-	$30,110,000	-
Upper Basement /Garage		$6,090,000* ($3,045,000+ $3,045,000)		$7,610,000
G/F	$7,660,000	$6,460,000	$7,660,000	$6,460,000
1/F	$7,750,000	$5,760,000	$7,750,000	$5,760,000
2/F	$7,830,000	$5,820,000	$7,830,000	$5,820,000
3/F	$7,990,000	$5,880,000	$7,990,000	$5,590,000
4/F	$8,150,000	$5,940,000	$8,150,000	$5,940,000
5/F	$8,320,000	$5,700,000	$8,320,000	$6,000,000
6/F	$8,400,000	$6,060,000	$8,400,000	$6,060,000
7/F	$8,490,000	$6,120,000	$8,060,000	$6,120,000
8/F	$8,570,000	$6,190,000	$8,570,000	$5,880,000
9/F	$8,220,000	-	$8,650,000	-
Sub-total of Retail Portion (i.e. Lower Basement and Upper Basement / Garage				$73,920,000
Sub-total of Domestic Portion (i.e. G/F to 9/F)				$270,320,000
Grand-total of all the units in the Building				$344,240,000

* Note- The 3^rd Respondent and the Applicant co-own Garage B as tenants in common

16.  Since the Applicant and the 3^rd Respondent jointly own Garage B as tenants in common, each holding half of the 1 undivided share allotted to Garage B, Mr. Chan in his valuation assessed the EUV of Garage B as the sum of 2 half-share interests, allowing a 20% discount.  Hence, the half-share interest of Garage B owned by the 3^rd Respondent equals to the EUV of the whole interest of Garage B (having the same value as Garage D) x 80% x 1/2 which in turn equals to $7,610,000 x 0.8 x 0.5, or $3,044,000, rounded to $3,045,000.  In addition, the EUV of the whole unit of Garage B equals to the summation of the 2 half-share interests of Garage B, or $6,090,000.

17.  At the hearing, we queried Mr. Chan over his allowance of 20% for the half-share interest of Garage B.  Mr. Chan admitted that there was no direct market evidence to suggest a definite percentage of allowance in assessing a half-share interest of a property such as Garage B.  He gave oral evidence that in assessing a half-share interest of a property for stamp duty purpose, the Rating and Valuation Department applied a discount of 15 to 20%.  He at the end decided to adopt an allowance of 20%.  Although we accept Mr. Chan’s expertise in valuation, as there is no substantial market evidence on this issue and in order to protect the 3^rd Respondent’s interest, we find that a 15% allowance should be applied in assessing the half-share interests of Garage B.

18.  Thus, adopting the EUV of the whole interest of Garage B at $7,610,000 (as assessed by Mr. Chan), we assess the half-share interest of Garage B owned by the 3^rd Respondent at $3,235,000 ($7,610,000 x 0.85 x 0.5 which is equal to $3,234,250, rounded to $3,235,000).  The EUV of the whole unit of Garage B equals to the summation of the 2 half-share interests, or $6,470,000.

19.  Apart from the EUV of the 2 half-share interests of Garage B, we are satisfied that the assessment of the EUV of all the other units in the Building by Mr. Chan in the Second Valuation Report is fair and reasonable.  Hence, we determine that for the purpose of the application, the EUV of all the units in the Building, including the 3^rd Respondent’s half-share interest in Garage B are as stated in the table of EUV shown below:-

Floor	Existing Use Values as at 17 November 2010
	Block A	Block B	Block C	Block D
Lower Basement	$30,110,000	-	$30,110,000	-
Upper Basement /Garage		$6,470,000* ($3,235,000+ $3,235,000)		$7,610,000
G/F	$7,660,000	$6,460,000	$7,660,000	$6,460,000
1/F	$7,750,000	$5,760,000	$7,750,000	$5,760,000
2/F	$7,830,000	$5,820,000	$7,830,000	$5,820,000
3/F	$7,990,000	$5,880,000	$7,990,000	$5,590,000
4/F	$8,150,000	$5,940,000	$8,150,000	$5,940,000
5/F	$8,320,000	$5,700,000	$8,320,000	$6,000,000
6/F	$8,400,000	$6,060,000	$8,400,000	$6,060,000
7/F	$8,490,000	$6,120,000	$8,060,000	$6,120,000
8/F	$8,570,000	$6,190,000	$8,570,000	$5,880,000
9/F	$8,220,000	-	$8,650,000	-
Sub-total of Retail Portion (i.e. Lower Basement and Upper Basement / Garage				$74,300,000
Sub-total of Domestic Portion (i.e. G/F to 9/F)				$270,320,000
Grand-total of all units in the existing Building				$344,620,000

* Note- The 3^rd Respondent and the Applicant co-own Garage B as tenants in common

20.  This table shows that the EUV of the 3^rd Respondent’s half-share interest in Garage B and the EUV of all the units in the Building are $3,235,000 and $344,620,000 respectively.  The percentage of the value of the 3^rd Respondent’s property in the Building is therefore 0.9387%.  On the other hand, the value of all the Applicant’s units and its percentage in the Building are $341,385,000 and 99.0613% respectively.  Based on these values and considering that the 3^rd Respondent only owns a half-share in a garage of the Building, we find that the value of the 3^rd Respondent’s property as assessed above is not less than fair and reasonable; and not less than fair and reasonable when compared with the value of the Applicant’s properties as assessed above.

Whether redevelopment justified

21.  In respect of whether redevelopment is justified, two expert reports were filed by the Applicant. The first report is the Condition Survey Report dated 7 September 2011 by Mr. Benson Wong (“Mr. B. Wong”), an expert in building surveying.  The second report is the Structural Assessment Report dated 7 September 2011 by Mr. C.M. Wong (“Mr. C.M. Wong”), a structural engineering expert.

22.  In his report, Mr. B. Wong examined the various features of the physical obsolescence of the Building, some of which have definite safety or hygiene implications.  He also examined each component of the Building, indentified the defects in the state of repair and formulated the necessary repair works.  For example, he found that repair works are necessary for the building elevations, the main roof, the entrance corridor and staircases, the flats and shops internally, the aboveground plumbing, the aboveground drainage, the underground drainage, the electrical installations, the fire services installations and the lifts.  Based on these findings, as well as the structural assessment of Mr. C.M. Wong, Mr. B. Wong concluded that the Building is in a poor state of repair, the defects found in the structural frames, components, finished and service installations are of the nature and magnitude that cannot be easily made good by simple and piecemeal repairs and substantial repairs are required to be carried out in order to restore the Building to tenantable standard.  He assessed the total cost of immediate repair works at $20,486,860, and noted that the cost of immediate repair is about 25% of the cost of constructing a new building similar to the Building.

23.  Mr. B. Wong gave the following opinion:-

(a)  The repair cost is very substantial.

(b)  This very substantial repair cost indicates that the deterioration of the Building is very serious.

(c)  Any building of this age will suffer from continued wear and tear of its structural frames, components, finished and service installations.  Though these may continue to be kept in operable condition by carrying out substantial repairs, given the age of the Building, the rate of wear and tear will increase rapidly with time requiring more frequent substantial repairs.

(d)  The carrying out of the repairs will affect the use, occupation and enjoyment of the Building requiring service disruption intermittently and tremendous interruption to the usual activities in the Building for at least 22 months.

(e)  Even after the repairs, the Building would remain as an old commercial/residential composite building with its design, components, finishes and services outdated and below market expectations with its inherent limitations which cannot be corrected and with a far less rental and capital value as compared to a new building.

(f)  The features of obsolescence of the Building will give rise to real safety concerns and show that the Building is aged, because some key building components, finishes and service installations have already passed or are nearing the end of their useful lives and there has not been sufficient repair or renovation work over the years to maintain them in tenantable condition.

24.  Mr. B. Wong concluded that:-

(a)  The Building has deteriorated to a state which is beyond reasonable economic repair as signified by the high repair cost.  As more rapid deterioration will occur in the future, the necessary maintenance and repairs will inevitably be more frequent and extensive, making the continued occupation of the Building not practical and economical.

(b)   The age and state of repair of the Building are justifications for redevelopment of the Building which has become obsolete over time and is in a poor state of repair.  Based on his experience as a building surveyor practicing in the field of building maintenance, repair and redevelopment for 31 years, he recommends the owners to redevelop rather than repair the Building, particularly bearing in mind that the Building does not possess any historical value or architectural merit, and is merely a building of the past that can be replaced.

25.  The other expert, Mr. C.M. Wong, set out in his report the structural details of the Building, the tests, the test locations, and the test results such as the results of the visual inspection, the results of the open up inspections, the results of the covermeter survey, the results of the core compression test and the extent of voids in the concrete, the result of the depth of carbonation test and the results of the chloride content test.  The test results were analyzed and the following points were noted:-

(a)  Many of the flats had been re-plastered recently and some of the flats have false ceiling which may have covered up some visible cracks on the structural elements.  The recorded 54 location of defects may be lower than what could have been the case.

(b)   Most of the cracks observed were longitudinal cracks due to the corrosion of the reinforcement.

(c)  The extent of voids contributes to a higher rate of corrosion of the steel reinforcement.

(d)   75% of the structural elements have a depth of carbonation exceeding the actual concrete cover and carbonation is an irreversible action.  It is inferred that some portion of the steel reinforcement in this building is already undergoing corrosion and more significant cracking and spalling of concrete would likely occur in coming years if no improvement works are to be carried out.

(e)  34% of the sample tested for chloride content showed high corrosion risk and the problem of high chloride content is very difficult to be completely rectified.

26.  Mr. C.M. Wong formulated the repairs and cost of repairs ($220,808) and made the point that active deterioration may have occurred in the Building and the deterioration has entered the propagation phase.  He further explained the design life of a reinforced concrete structure, set out the various durability requirements stipulated in the old and new codes/regulations, and opined that “it is obvious that the durability requirement has become more stringent over time” and “concrete structures constructed in recent years are more durable than those constructed in earlier times”.  From the Code of Practice for Structural Use of Concrete 2004 (HK2004), he quoted that “This Code of Practice assumes a design working life of 50 years, which is deemed appropriate for general buildings and other common structures”.  According to his opinion, it may be assumed that for structures with the durability provisions (concrete grade, cover, etc.) smaller than that stipulated in HK2004, the design life of the building structure may be shorter than 50 years.  He also compared the durability requirements in HK2004 and those applied to the construction of the Building and set out the inferior durability requirements applied to the construction of the Building.

27.  Mr. C.M. Wong concluded that as the Building “has passed the end of its design life, extensive maintenance and repair works would be required in the near future”.

28.  We have considered the evidence of these two experts as contained in their reports carefully.  We do not find anything wrong in their reports and hence accept their evidence in full.  We also accept their opinions that the Building has passed its designed life and it is in a poor state of repair.  It requires extensive maintenance and repair works at substantial cost to make it tenantable.  The Building is also obsolescent in design and it would not be economical to repair it.

29.  The Applicant submits that with the two experts’ evidence, the Tribunal would require no persuasion to be satisfied that redevelopment of the Lot is justified due to the age and/or state of repair of the Building.  We agree with this submission, but we need to look at the requirements for “the age” and “state of repair” separately.  As held in Good Trader Ltd v. Hinking Investments Ltd [2007] 3 HKC 219, each of these two requirements can constitute a separate ground to justify redevelopment.

30.  In Intelligent House Ltd v. Chan Tung Shing & Ors [2008] 4 HKC 421, the Tribunal formulated the tests for “the age” and “state of repair”.  However, the Court of Appeal in Fineway Properties Ltd v. Sin Ho Yuen Victor [2010] 4 HKLRD expressed reservations on the correctness of these tests.  We do not find it necessary to formulate any general test in the present case.  As held in a recent case of the Tribunal, Top Sail International Limited v. Cheng Kai Ming, executor of the estate of Chan Hue also known as Chan Sum Hiu, deceased, LDCS 18000/2010 (judgment delivered on 15 November 2011), we are of the view that the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question.  The relevant factors in the present case are that the Building is over 50 years old and it has passed its designed life.  It is also obsolescent in design and not economical to maintain.  All these factors point to the fact that the Building has come to an end of its physical as well as economical life.  Thus, we find that redevelopment is justified on the ground of the age of the Building.

31.  Likewise, we do not find it necessary to formulate a general test on “state of repair”.  It is also within the Tribunal’s discretion to determine in what conditions a building should be redeveloped after considering all the relevant factors concerning the state of repair of the building in question.  With the clear evidence from the two experts that the Building is in a poor state of repair and in fact untenantable without substantial repair works to be carried out over a long period of time, we have no hesitation in finding that redevelopment is justified by the state of repair of the Building.

32.  Thus, we are of the view that the redevelopment of the Lot is justified due to both the age and the state of repair of the Building.

Reasonable steps

33.  The Applicant, by its solicitors’ letter dated 29 November 2010, made an offer of $5.7 million to the 3^rd Respondent to purchase his half share in Garage B.  The letter was returned.  As the 3^rd Respondent is a missing owner and cannot be found, the Applicant has not been able to take any effective step to acquire the interest of the 3^rd Respondent.  However, the offer of $5.7 million is based on advice taken from professional valuation surveyor and was higher than the RDV of the 3^rd Respondent’s property then assessed by the surveyor.  The Applicant in fact managed to purchase from the 3^rd Respondent’s co-owner, namely the other tenant in common, on 30 September 2010 (about 2 months before the offer letter to the 3^rd Respondent) at the purchase price of $3,960,000, a figure much lower than the offer to the 3^rd Respondent.  The offers made to all the other owners were also successful, resulting in the Applicant being able to acquire from all the other owners of their undivided shares in the Lot.

34.  As discussed below, we find that the RDV of the Lot should be about $666 million.  The 3^rd Respondent’s share of the RDV should therefore be about $6,251,742 ($666 million x 0.9387%).  Although the Applicant’s offer of $5.7 million is lower than this sum assessed by us, we still find that the offer is a reasonable offer.  As held by the Court of Final Appeal in Capital Well Ltd v. Bond Star Development Ltd (20050 8 HKCFAR 578, as long as the offer “falls within the range of what may broadly be regarded as fair and reasonable”, the Applicant has taken reasonable steps to acquire.  Since the difference between the Applicant’s offer and our assessment is less than 10%, we are of the view that the offer falls within the range of what may broadly be regarded as fair and reasonable.  Moreover, as the 3^rd Respondent is a missing owner, it is impossible for the Applicant to get any counter-offer from the 3^rd Respondent or negotiate with him.  As a preliminary offer, we do not think that $5.7 million is unreasonable.

35.  In the circumstances, we find that the Applicant has already taken reasonable steps to acquire all the undivided shares in the Lot, including the 3^rd Respondent’s share.

Reserve price

36.  In the Second Valuation Report, Mr. Chan valued the RDV of the Lot as at the date of valuation on 9 September 2011 at $515 million.  He attempted to value the Lot by both the direct comparison method and the residual valuation method.  Although he was able to identify several land sale transactions in the Ho Man Tin district since the second half of 2010, he opined that these transactions were not suitable for direct comparison as they were superior in terms of location, and for two of the land sales, much larger in scale when compared with the Lot.  We agree with his opinion that as the last resort, the residual valuation method has to be employed for assessing the RDV of the Lot.

37.  Simply put, the residual valuation method is the assessment of the land value by deducting the development costs from the potential sales revenue, i.e. the gross sale price, of the proposed building upon completion.  Mr. Chan stated in the Second Valuation Report that “after testing with different scenarios, I am of the opinion that the optimum development on the Property comprises a block of 27-storey commercial/residential composite building with shop units/commercial space of ground floor and 1/F, recreational facilities on 2/F and residential units on 3/F to 26/F.”  Furthermore, he set out in (1) Appendix II of the report, the details of the hypothetical development and the residual valuation, (2) Appendix IV and V, the lists of retail and new residential comparables and their respective adjustment and (3) Appendix VI, the location plan of the comparables.  In assessing the GDV of the optimum development on the Lot, Mr. Chan adopted average unit rates of $265,000 per sq. m. for G/F shops, $105,000 per sq. m. for 1/F commercial space and $165,000 per sq. m. for residential units, on all saleable area basis.

38.  We have gone through Mr. Chan’s residual valuation in details.  We accept that he has carried out his valuation in a clearly understood, professional manner.  In particular, he has taken adequate steps in explaining his valuation.  Therefore, even though the 3^rd Respondent is absent and no opposition has been lodged against Mr. Chan’s assessment of the RDV of the Lot, we find that the Tribunal has been assisted by his evidence, in particular, his Second Valuation Report.  At the end, we agree with him on the basic valuation assumptions he has adopted including the type and scale of the optimum development for the Lot, the format of valuation, the development period assumed, the appropriate period and yield for discounting, the cost parameters as well as most of the average unit values that he has used.  However, we take issue with him in his estimation of the unit rate for the residential component of the optimum development to be developed on the Lot.  The reason is that we differ in opinion with him in the best comparable for the Lot.

39.  Mr. Chan set out in Appendix V of the Second Valuation Report the following list of new residential comparables for the purpose of assessing the average unit rate for the domestic units in the optimum development for the Lot, the most significant input in the residual valuation:-

Development No.	Address	Year of Completion	Average Unit Rate (per sq. m. of saleable area)
1	Sky Garden 223 Prince Edward West	2004	$156,493
2	Grand Excelsior	2002	$162,083
3	St. George Apartment 81 Waterloo Road	2001	$182,088
4	One Victory 1-2 Victory Avenue	2011 (expected)	$214,112

40.  Mr. Chan stated in Notes (3) to Appendix V of the Second Valuation Report that since the launch of the development in August 2010, there were only a total of 8 flats sold (out of a total of 63 flats), accounting for about 13% of the whole development, and in view of the weak response in the sale and the time of transactions of the comparable (already 1 year ago), he had some doubts in relying on these transactions in his valuation.  When he was questioned by the Tribunal on this point during the hearing, he basically repeated verbatim this statement without further adducing any further evidence.  Mr. Chan at the end relied on the sales of the domestic units in Development Nos. 1, 2 and 3.  He found the average of the average unit rates for the Development Nos. 1, 2 and 3 to be $167,000 per sq. m.  He adopted this as the average unit rate for the reference domestic unit in the optimum development for the Lot.  With further adjustments, he then arrived at $165,000 per sq. m. and adopted this as the average unit rate for all the domestic units in the optimum for the Lot.

41.  However, we differ in opinion with Mr. Chan.  We find that we could not eliminate this comparable (i.e. Development No. 4) on the ground that the comparable sales in the Development No. 4 were not too up-to-date and there were only a total of 8 flats sold in the whole development.  We note that all the other sales of domestic units in Development Nos. 1 to 3 are also transactions of quite a few months ago.  Mr. Chan has allowed for time adjustments using the Rating and Valuation Department’s sales indices.  We note that this has also been done in the analysis and adjustment of the sales of Development No. 4.  We find this approach to be appropriate and reasonable.  As to the argument that the sales in Development No. 4 only represent a fraction (about 13% according to Mr. Chan) of all the units in the soon-to-be-completed building, we do not agree that this justified discarding the comparable sales.  We asked during the hearing if Mr. Chan had any information on the number of actual sales vis-à-vis the total number of listings of sales in the market, Mr. Chan admitted that he did not have the information.  But he opined that the sales of domestic units in comparable developments or soon-to-be-completed development should be viewed differently from existing developments.

42.  Indeed we find that Development No. 4 is the best comparable for the purpose of finding the appropriate unit rate for the domestic units of the optimum development on the Lot.  From the location plan at Appendix VI of the Second Valuation Report, we find that Development No. 4 is similar in size to the Lot, whereas Development Nos. 1, 2 and 3 are occupying much bigger site areas.  Apart from this, it is also situated in very close vicinity of the Lot, within 5 minutes’ walking distance away, separated only by another side street, Soares Avenue.  In fact, Development No. 4 and the subject Lot definitely fall within a localized triangular shaped area founded by Argyle Street, Waterloo Road and Peace Avenue (and the parallel railway track of the KCR East Line) and of similar characteristics.  On the other hand, although all the other 3 Developments fall within this area of Kowloon, on the fringe of Kowloon Tong and Kadoorie Avenue area, they are not that similar to that of the Lot in location.  As such, it is obvious that the location of Development No. 4 has much closer resemblance to that of the Lot.  As location is commonly agreed to be one of the most significant factors affecting the value of land and the value of the unit rate of domestic units to be developed on the land, we therefore find that Development No. 4 is the best comparable development for the Lot.  In addition, Development No. 4 also has the advantage of being a soon-to-be-completed development whereas the other comparable developments were completed 7 to 10 years ago.  Given that the market places a very high premium for new developments, the phenomenon being more prevalent in the past few years, we find that even though Mr. Chan has adjusted for the differences in the “Age & Condition” of the comparables in the analysis of Development Nos. 1, 2 and 3, it is preferable to use the sales in the Development No. 4 as the evidence of unit prices for domestic units in the optimum development for the Lot.

43.  We therefore decide to adopt as a starting point Mr. Chan’s average adjusted unit rate of $215,000 per sq. m. derived from the analysis of the sales of units in Development No. 4 (see Appendix V of the Second Valuation Report) as the average unit rate for the reference domestic unit.  Based on the ratio between Mr. Chan’s average unit rate for his reference domestic unit (i.e. $167,000) and his adopted average unit rate for all the domestic units (i.e. $165,000), we derive our adopted average unit rate for all the domestic units at $215,000 x $165,000 / $167,000, or $212,425, rounded to $212,500 per sq. m.   This gives a revised total residential component of GDV of $876,160,875 (i.e. saleable area of 4,123.11 sq. m. x $212,500 per sq. m.).  We otherwise leave entirely intact the rest of Mr. Chan’s residual valuation.  The RDV valuation of the Lot is therefore revised as follows:-

GDV

Less Costs

44.  Based on our finding above that the RDV of the Lot as at 9 September 2011 reflecting its redevelopment potential is $666 million, we decide that this should be adopted as the reserve price for the proposed auction of the Lot.

Trustees

45.  We find that Mr. Ma Ho Fai and Ms. Tsang May Ping, nominated by the Applicant, are suitable persons to be appointed as trustees to discharge the duties imposed on trustees under the Ordinance, as they have been appointed as trustees in 20 similar applications and should have experience in carrying out their duties under the Ordinance.  Their remuneration at the rate of $5,500 per hour as mentioned in the letter from Messrs. Woo, Kwan, Lee & Lo to the Applicant’s solicitors dated 19 September 2011 is also reasonable and will be allowed accordingly.

Particulars and conditions of sale

46.  The particulars and conditions for sale by public auction submitted by the Applicant are also reasonable and will be adopted accordingly.

Time for completion of redevelopment

47.  As stipulated in Schedule 3 of the Ordinance, and subject to such further period the Tribunal may allow, the redevelopment of the Lot shall be completed and made fit for occupation within 6 years after the date on which the purchaser of the Lot became the owner of the Lot.

Costs

48.  Since the 3^rd Respondent is a missing owner and the Applicant does not ask for costs, we will give a costs order nisi for no order as to costs.

Conclusion

49.  As aforesaid, we are satisfied that the value of the 3^rd Respondent’s property as assessed at $3,235,000 is fair and reasonable and is fair and reasonable when compared with the value of the Applicant’s properties as assessed at $341,385,000.  We are also satisfied that the redevelopment of the Lot is justified due to the age and state of repair of the Building.

50.  We therefore grant the following orders:-

(1)  All the undivided shares in the Lot, the subject of the application herein, be sold by public auction for the purposes of the redevelopment of the Lot.

(2)  Mr. Ma Ho Fai and Ms. Tsang May Ping, nominated by the Applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs. Woo, Kwan, Lee & Lo to Messrs. Mayer Brown JSM dated 19 September 2011.

(3)  For the purposes of the sale of the Lot by public auction,

(a)  the sale of the Lot be on the particulars and conditions substantially the same as those in the draft Particulars and Conditions of Sale initialed and approved by the Tribunal;

(b)  the reserve price be set at $666,000,000; and

(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 shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot became the owner of the Lot.

(4)  Liberty to the Applicant, the 3^rd Respondent and the Trustees to apply to the Tribunal for further directions as may be required under the Ordinance.

(5)  Costs order nisi: There be no order as to costs between the Applicant and the 3^rd Respondent.  If the Applicant and the 3^rd Respondent do not make any application for costs within 14 days from the date of this order, the costs order nisi shall become absolute.