EVERSOUND INVESTMENTS LTD v. WONG HIU MAN AND OTHERS

LDCS 10000 / 2012

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 10000 OF 2012

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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 in Sub-section 5 of Section D of Kowloon Marine Lot No. 52 (“the Lot”), known as Nos. 15 & 17 Wan Shun Street and Nos. 16 & 18 Wan Fuk 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.  Altogether there are 46 units (not including the Roof) in the Building.  The Building is part of Block D, Nos. 15, 17, 19, 21, 23, 25 & 27 Wan Shun Street and Nos. 16, 18, 20, 22, 24 & 26 Wan Fuk Street (“Block D”).  The interest in the Building is divided into 66 undivided shares which are held by the owners of the units as tabulated in Appendix A of this judgment.

3.  The Applicant commenced the present proceedings on 19 January 2012.  At that time, it owned 39 of the 46 units in the Building and 54 equal undivided 66th parts or shares in the Lot representing 81.818%.  The remaining units were held by the Respondents respectively.  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, the 5th Respondents and the 7th Respondent and has discontinued the application against them.  As at the commencement of the trial, only the 6th Respondent and the 8th Respondents remained, the 6th Respondent being the registered owner of 1 share in the Lot and Flat A on 3^rd Floor of House No. 3, Block D, No.17 Wan Shun Street, Kowloon and the 8th Respondents being the registered owners of 2 shares in the Lot and the whole roof, Nos. 15 & 17 Wan Shun Street, Nos. 16 & 18 Wan Fuk Street, Kowloon..

5.  We were informed by Mr C.Y. Li, SC (counsel for the Applicant) that the 6^th Respondent has entered into agreement to sell her interest afore-mentioned to the Applicant, with the completion to take place on 31 July 2013.  Madam KO Chok Hing (the authorised representative of the 6^th Respondent who attended the first day of the trial) agreed and indicated that the 6^th Respondent would not oppose the application.  By consent, we granted leave to the Applicant to discontinue the application against the 6th Respondent  with no order as to costs subject to completion.[1] Thus, upon the acquisition of the 6^th Respondent’s interest, the percentage of the undivided shares owned by the Applicant in the Lot is 96.97%.

6.  The solicitors for the Applicant have duly served all the papers on the 8th Respondents.  The 8th Respondents did not file any Notice of Opposition; they were absent at the trial and did not file any evidence. 

7.  In view of the absence of the 8th Respondents, Mr Li SC, 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

8.  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. 

9.  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.

10.  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)”.  The occupation permit of the Building was issued on 25 April 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%.

11.  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

12.  Pursuant to section 3 of the Ordinance, the Application was accompanied by a valuation report (“Application Report”) 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 26 October 2011.

13.   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.”

14.   In the Application Report of 18 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.

15.   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. 15 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 7 comparable transactions in 5 different buildings nearby.  After making what he regarded as the necessary adjustments (for time, location/accessibility, age, lift service, 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.

16.   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.

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

18.   Mr. A. Chan updated the Application Report by a supplemental report dated 4 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 each unit as at 26 October 2011.

19.   At the trial, the Applicant was required to confirm which of the two scenarios should be adopted for determining the apportionment ratio.  In other words, whether EUVs should be assessed based on the legally permitted use or the actual or existing use of the Ground Floor units in the Building.

20.   Mr. A. Chan, when giving evidence, recommended scenario 1 because it might otherwise convey the wrong message that those facing acquisition under the Ordinance could take conversion actions on the premises without obtaining approval from the relevant authorities for the purpose of getting enhanced compensation.

21.   In his closing submission, Mr. Li, SC observes that the term EUV is coined by practitioners and 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.

22.   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, at Bundle F/1325.  Mr. Li submits that 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]. He says that 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.

23.   We accept Mr Li, SC’s submission and the EUV valuation of Mr. A. Chan based on scenario 1. We determine that for the purpose of this Application, the EUV of all units in the Building, including the 8^th Respondents’ unit, as at the relevant date of valuation of 26 October 2011 are as shown in the Supplement Report of Mr. A. Chan: see the table at Bundle F/ 1272 which is reproduced as Appendix B of this judgment.

24.   We are satisfied, insofar as it is necessary, that the value of the 8^th 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 8^th Respondents’ unit - assessed at $543,500 (representing 1.2285% of the total EUV of all units); and

 (b) the total EUV of all units - assessed at $44,239,908.

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

25.   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.

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

27.   Firstly, for the requirement under (a) above, we have considered the expert opinion of Mr. Raymond Chan, the building surveyor and Dr. Sammy Chan, the structural engineer.  Both have filed their expert reports and were called to give evidence.

28.   Mr. Raymond Chan in his report dated 11 March 2013 examined various components of the Building and identified the defects therein. There were also unauthorized building works (“UBWs”). He further set out the features of obsolescence of the Building which did not comply with the current standards and statutory requirements which gave rise to safety concerns.

29.   Mr. Raymond Chan concluded that the Building was generally in a dilapidated and potentially dangerous condition. Some of the building components and finishes were at the end of their effective life span.  The structural stability of the Building is affected by the defects and UBWs.  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.  The cost of the proposed non-structural repair works is estimated to be around HK$8 million.  Given 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.

30.   Dr. Sammy Chan conducted a structural assessment of the Building and prepared a report dated 12 March 2013.  He carried out inspection of the Building and identified a total of 109 structural defects.  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) covered meter test, (g) open up survey, and (h) infra-red thermography survey.  The tests show that the protective concrete cover has lost its function to protect the embedded steel reinforcement, which is evidenced by substantial corrosion of the structural elements.  The extensive poor condition of the reinforcement can cause local structural failure of the building members and adversely affect the overall stability of the Building.

31.   Dr. Sammy Chan opined that the Building has undergone severe degradation and estimated that the structural repair costs would be in excess of $12.5 million.  He however expressed that due to the extent of repair in terms of area and degree of defects, normal concrete repair works might not be a costs effective solution and would not be worthwhile.

32.   The Applicant submits that given the total EUVs based on scenario 1 of HK$44,239,908, the estimated repair costs of over $20.5 million is unjustified.

33.   There is no contrary expert evidence and we accept the expert evidence of Dr. Sammy Chan and Mr. Raymond Chan.  We are 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 now 53 years old;

(b) the Building is in very poor physical conditions and disproportionate costs 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

34.   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 8th Respondent have accepted the Applicant’s offers to acquire their interest is telltale of the reasonableness of the steps taken. 

35.   For the 8^th 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.

36.   The Applicant made 5 offers to the 8th Respondents as follows.  The offers were based on valuation done by Mr A. Chan of Knight Frank and were generally higher than the valuations.

Date of offer	Knight Frank’s valuation	Offer amount
3 October 2011	$869,623	$920,000
4 November 2011	$876,130	$1,060,000
29 November 2011	–	$1,060,000
13 December 2011	$874,290 (based on scenario 1); $811,336 (based on scenario 2)	$1,070,000
22 June 2013	–	$1,070,000

37.   On the unchallenged evidence of Mr. A. Chan and Mr. Alex Au-Yeung, we agree with the Applicant that the offers made to the 8^th 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 8th Respondents did not participate in any mediation proposed by the Applicant and has never formally responded to the offers.  We understand that at one stage the 8th Respondents had appointed solicitors to negotiate with the Applicant but nothing fruitful resulted from the discussion.  In the premises, we are satisfied that reasonable steps have been taken by the Applicants to acquire the interest of the 8^th 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, we conclude that the Applicant has taken reasonable steps to acquire all the undivided shares in the Lot.

Reserved Price for the Auction

38.   The Applicant submits that the reserve price for the auction of the Lot should be fixed at $83,500,000, 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 28 June 2013.

39.   We have considered Mr. A. Chan’s valuation.    We 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.

40.   Mr. A. Chan opined that the optimum development on the Lot comprised a block of 21-storey composite development with shops on the G/F, further shops, lift lobby and machine room on the 1/F, and domestic units on the 2/F to 20/F with 2 flats per floor. The details of the hypothetical development and residual valuation were set out in Appendix 9 of his RDV valuation report (Bundle H/2067). The details of the comparables with adjustments were set out in Appendix 7 (for shop comparable at Bundle H/2039) and Appendix 8 (for residential comparable at Bundle H/2064).  We have gone through his valuation in details.  We are satisfied with his valuation, including the valuation assumptions he has adopted, the values and the costs parameters that he has used in his valuation. 

41.   Based on Mr. A. Chan’s valuation, we decide that the reserve price for the auction of the Lot should be HK$83.50 million.

Trustees

42.   We 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

43.   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

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

Conclusion

45.   For the above reasons, we are 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.  We therefore make an order that all the undivided shares in the Lot, the subject of this application, be sold for the purposes of development.  We 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. We 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

 

 

 

Appendix B