PACIFIC CROWN ENTERPRISES LTD v. MAN YU ON AND OTHERS

LDCS 32000 / 2011

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 32000 OF 2011

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BETWEEN

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JUDGMENT

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Background

1.  This is an application for compulsory sale of 2 buildings at No.10 and No.12 of Kimberley Street, Kowloon (“the 1^st Building” and “the 2^nd Building” respectively).

2.  On 9 September 2011, the Applicant commenced the present proceedings under the Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545) (“the Ordinance”) against the 2 Respondents for compulsory sale of (a) Kowloon Inland Lot No. 8669 (“the 1^st Lot”) and (b) Kowloon Inland Lot No. 8753 (“the 2^nd Lot”); (collectively “the Lots”).

3.  The Lots are on the north-western side of Kimberly Street near its junction with Shun Yee Street in the Tsim Sha Tsui District of Kowloon. The building erected on the 1^st Lot is No. 10 Kimberley Street, Kowloon (“No. 10”) and is called Cheong Lok Lau and the building erected on the 2^nd Lot is No.12 Kimberley Street, Kowloon (“No. 12”). The 2 buildings (collectively “the Building”) are connected by 2 staircases intended for common use by the occupiers of the 2 buildings.

4.  The approved building plans of the Building were dated 8 January 1963 and 1 May 1963. There are separate Deeds of Covenant for No. 10 and No. 12. The occupation permit of the Building is dated 17 December 1965. The prescribed use for G/F is 2 shops, 1/F is 2 offices and 2^nd to 7^th Floors is 2 European type flats for domestic use. The shop at No. 10 had been sub-divided into Shop Nos. 1, 2 and 3 and the shop at No. 12 had been sub-divided into Shop Nos. A, B and C.

5.  A total of 10 undivided shares were allotted for No. 10. Also, a total of 10 undivided shares were allotted for No. 12.

6.  Settlement has been reached between the Applicant and the 1^st Respondent. The proceedings against the 1^st Respondent have been discontinued on 11 July 2012. The Applicant is the majority owner of the Lots and the 2^nd Respondent is the remaining minority owner of the Lots (owner of No. 12, 5^th floor).

7.  The 2^nd Respondent has on 9 November 2012 obtained leave to amend the Form 33. By the Amended Form 33 dated 12 November 2012, the 2^nd Respondent’s position has changed. The 2^nd Respondent no longer opposes an order for sale of all the undivided shares of the Lots for the purpose of redevelopment.

8.  Therefore, when the Applicant appeared before this Tribunal at the trial, the application was unopposed.

9.  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 Lots in question. When the application was made on 9 September 2011, the Applicant owned 90% of the Lots. As said, after commencement of the proceedings, the Applicant acquired the 1^st Respondent’s property. The Applicant became the owner of 95% of the undivided shares of the Lots. The Applicant was clearly entitled to make the application for the compulsory sale of the Lots.

10.  Under section 3 of the Ordinance, the Applicant has made the application accompanied by a valuation report as specified in Part 1 of Schedule 1, prepared not earlier than 3 months before the date of the application, 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 Lots.

11.  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 Lots, 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. However, in the present case, as there is no missing owner in this application, section 4(1)(a)(ii) does not apply.

12.  In the Application Report of 8 September 2011, Mr. Charles Chan (“Mr. Chan”) of Savills Valuation and Professional Services Ltd, the Applicant’s valuation expert, set out the method of valuation and the process of his assessment to arrive at the EUV of each unit of the Building as at 30 August 2011.

13.  In Mr. Chan’s second valuation report, the Supplemental Report of 27 September 2012, he (1) reviewed the EUV of the units as at 30 August 2011, which was prompted by inspection of the internal condition of more units of the Building and the availability of the confirmed property indices for time adjustment since the Application Report; and (2) provided his opinion as to whether redevelopment of the Lots is justified due to the age and/ or state of repair of the Buildings from the economic perspective. In the Supplemental Report, Mr. Chan repeated the exercise he did in the Application Report with the new information and set out the assessments of the EUV of all units, including the 2^nd Respondent’s unit:

(1)     The 2^nd Respondent’s unit (5/F of No. 12 Kimberley Street) is assessed at $5,870,000 (representing 3.6277% of the total EUV of all units); and

(2)     The total EUV of all units is assessed at $161,810,000.

14.  I accept the EUV valuation of Mr. Chan. I determine that for the purpose of this application, the EUV of all units in the Building as at 30 August 2011 (the Valuation date in the Application Report accompanying the application), including the 2^nd Respondent’s unit are as shown above.

Justification for Redevelopment

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

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

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

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

17.  The Applicant submits that with the amendment of Form 33 (Notice of Opposition) on 12 November 2012 by the 2^nd Respondent, the latter no longer takes issue as to whether the Applicant has taken reasonable steps to acquire the 2^nd Respondent’s unit.

18.  The Applicant submits that, in any event, the evidence is that the Applicant has done so. The details of the evidence were set out in the witness statement of Kwan Po Lam, Phileas, the factual witness and the representative of the Applicant. Two offers have been made by the Applicant. Firstly, before the application was made, the Applicant offered on 24 August 2011 to purchase the 2^nd Respondent’s unit at $10,000,000. As stated in the offer letter, the offer price was calculated based on the EUV valuation of Mr. Chan, with an added premium of 18.67%. Secondly, after the commencement of the proceedings, with the assistance of the expert advice from Mr. Chan (based on his estimates of EUV as at 30 August 2011 in his Supplemental Report and his updated RDV report), the Applicant has made a revised offer on 26 February 2013 to purchase the 2^nd Respondent’s unit at $10,900,000. The Applicant submits that, the revised offer of $10,900,000 is higher that the 2^nd Respondent’s share of the RDV at $10,592,884 (i.e. based on Mr. Chan’s updated RDV estimate of $292,000,000 x EUV ratio for the 2^nd Respondent’s unit at $5,870,000/$161,810,000, or 3.6277%).

19.  The Applicant refers to the CFA decision in Capital Well Ltd.V Bond Star Development Ltd (2005) 8 HKCFAR 578 at paras. 33, 34,35 and 36and submits that the Tribunal is not conducting a valuation exercise in deciding whether the offer price was fair and reasonable as the Tribunal only has to be satisfied that the offer fell within the range of what might broadly be regarded as fair and reasonable compensation.

20.  The Applicant also refers to Fully H.K. Investments Ltd and Others v Poon Vai Ching, The Executrix of the Will of Poon Kam Chuen (Deceased) LDCS 3000/2005 at paras. 17 and 18 and submits that the Tribunal can take into account the offer made by the majority owner after the application was made to decide whether section 4(2)(b) of Cap. 545 is fulfilled.

21.  Having considered the evidence aforesaid, I agree with the Applicant and determine that the Applicant has taken steps to acquire the 2^nd Respondent’s remaining unacquired undivided shares in the Lots on terms that are fair and reasonable.

22.  Next, as for the requirement under section 4(2) of the Ordinance as to whether the redevelopment is justified due to age or state of repair of the Buildings, The Applicant submits that the tests of “age” and “state of report” are separate tests and that both tests are satisfied in this application. In this regard, I have considered the expert opinion of Mr. Wong Ha, the structural engineer, Mr. Dennis Wong, the building surveyor and Mr. Chan, the valuation surveyor. Their main findings and conclusions are summarized below.

23.  Mr. Wong Ha has the following conclusions in his Structural Survey Report:

 (a) Although the structural elements are in a fair condition, test results show that if no preventive measures are carried out immediately, extensive repair and maintenance will be required in coming years.

 (b) The steel reinforcement is susceptible to corrosion.

 (c) There are cracks and spalling in some structural elements.

 (d) 33% of structural members have concrete cover less than the design cover. The design cover is less than the current design standard.   

 (e) Immediate require works are required.

 (f) The design structural safety of the Building cannot meet the current safety standard in term of wind load, ductility and robustness.

 (g) The provisions for durability and fire resistance of the Building do not meet the current requirement.

 (h) The design life of the Building is less than 50 years and the Building which is now 47 years may have its design life ended. Extensive repair will be required in coming years.

24.  Mr. Dennis Wong has the following conclusions in his Condition Survey Report for the Building:

(a) Due to changes in statutory requirements, advanced technology and higher expectations over the years, the Building has become substandard with many problems affecting the hygiene, safety, convenience and enjoyment of the Building.

(b) The physical and functional hazards have resulted from deficiencies in the planning, design, use of material, facilities and workmanship of the Building when it was first constructed. These are further aggravated due to unauthorized building works and absence of proper building management. This has rendered the Building to be below a habitable standard and fall short of many basic requirements expected in new building.

(c) The Building is obviously below a tenantable standard with its structural frames in fair condition but part of its components and services do not comply with the required standard and some of finishes having deteriorated towards the end of their effective life spans.

(d) The Building have not been maintained and managed up to the required standard with many of its components and services installations showing non-compliance with the current standard.

(e) The costs of essential works estimated at HK$9,149,587 amounts to HK$6,339.58 sq.m. of the existing Gross Floor Area of the Building. This unit cost of essential repairs is about 43.6% of the unit cost of HK$14,532.22/sq.m. for constructing a new building. In short, the essential works costs are disproportionately high as compared with the cost of constructing a new building.

(f) Even after the essential an updating works have been implemented, the Building will remain an old residential cum commercial building with its design and construction outdated and below market expectations and constitute a continuing repair liability to the owners.

25.  It is the conclusion of Mr. Dennis Wong that the redevelopment of the Lots is justified due to the age or state of repair of the Building.

26.  The Applicant submits that although the “economic test” on age or state of repair may be doubted, the test has not been overruled. Hence, the Applicant relies on the age test and state of repair test as set out by Mr. Chan in his Supplemental Report.

27.  On the age test, Mr. Chan opines that the test is whether the redevelopment value of the site less demolition costs exceeds the market value of the building as erected on it in its existing use. Having considered the various issues caused by the age of the Building and assessing the EUV and RDV, Mr. Chan’s conclusion is that the assessed RDV of $265,000,000 as at 27 September 2012 exceeds the EUV of $196,150,000 and hence redevelopment is justified. Indeed, the GDV for the hypothetical redevelopment scheme (which is a hotel with shops at G/F) is much higher than EUV after deducting the development costs and the developer’s profit.

28.  On the state of repair test, Mr. Chan opines that it is to consider the viability of repair by comparing the capital costs of repair with the additional value which the costs will create. If the costs of repair is greater than the additional value created then the repair works are not justified. After having research into the enhancement of value due to repair works in different developments, based on the repair costs estimated by Mr. Dennis Wong, Mr. Chan came to the conclusion that the market value of the office and residential portion of the Building would have an enhancement of 5% while that of the shop would only be marginally enhanced. The total enhanced value is $4,981,500 which is far less than the estimated repair costs of $8,891,329 (after taking away the costs on UBWs). Hence, redevelopment is justified on the state of repair test.

29.  I accept the above items of expert evidence of Mr. Wong Ha, Mr. Dennis Wong and Mr. Chan. I am satisfied that the redevelopment of the Building and the Lots is justified due to the age and/or state of repair of the Building. 

Reserved Price for the Auction

30.  The Applicant submits that the reserve price for the auction of the Lots should be fixed at $292,000,000 based on the assessment by Mr. Chan of the redevelopment value (“RDV”) of the Lots as at 25 February 2013 in his valuation report of the same date. The 2^nd Respondent does not oppose this assessment.

31.  I have considered Mr. Chan’s valuation of the RDV of the Lots. I note and agree with him that although there were several land sale transactions in Tsim Sha Tsui area in the past few years and a land sale transactions for hotel development in Wan Chai area, they are all not suitable for direct comparison purpose because of the differences in time and/or location between the Lots and the land sale comparables. I also agree with him that as a last resort, the residual method has to be employed as the method of assessment of the RDV of the Lots.

32.  Mr. Chan opines that the optimum development on the Lots comprised a block of 21-storey hotel with shop units on the ground floor. He estimates the RDV at $292,000,000 as at 20 February 2013. I have gone through his valuation in details. I am satisfied with his valuation, including the valuation assumptions he has adopted, the values and the costs parameters that he has used in his valuation.

33.  Based on the open market value of the Lots reflecting its redevelopment potential, i.e. the RDV of the Lots, of $292 million as at 20 February 2013 as assessed by Mr. Chan, I decide that this should be the reserve price for the auction of the Lots.

Trustees

34.  I find that Mr. Tam Tak Hing Bernard and Mr. Ching Kwok Ho Samuel of Messrs. King & Co., solicitors, nominated by the Applicant, are suitable persons to be appointed as trustees to discharge the duties imposed on trustees under the Ordinance. Their remuneration at the rate of $5000 per hour (subject to the maximum amount of legal fees charged, exclusive of disbursements, of not more than $60,000) as mentioned in the letter dated 8 February 2013 from Messrs. King & Co. to the Applicant’s solicitors is also reasonable and will be allowed accordingly.

Particulars and conditions of sale of the Lots

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

Time for completion of redevelopment

36.  The Applicant submits that as stipulated in Schedule 3 of the Ordinance, and subject to such further period as the Tribunal may allow, the redevelopment of the Lots shall be completed and made fit for occupation within 6 years after the date on which the purchaser of the Lots became the owner of the Lots. I agree.

Costs

37.  Since the 2^nd Respondent is absent, and the Applicant does not ask for costs, I will give a costs order nisi that there be no order as to costs.

Conclusion

38.  Upon consideration of all the evidence, authorities and submissions for the Applicant, I am satisfied that the redevelopment of the Lots is justified due to the age and state of repair of the Building. Even though the 2^nd Respondent no longer takes issue on this,  I am satisfied that the Applicant has taken steps to acquire the 2^nd Respondent’s property on terms that are fair and reasonable as laid down in section 4(2)(b) of the Ordinance. Therefore, I am satisfied that the requirements and conditions as laid down in the Ordinance have been met and an order for compulsory sale sought by the Applicant should be granted.

Orders

39.  I therefore grant the following orders:-

(1) The Tribunal is satisfied that the apportionment ratio in respect of the 2^nd Respondent’s property (No. 12 Kimberley Street, 5^th floor) under section 10(3) and Part 3 of Schedule 1 of the Ordinance be 3.6277%.

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

(3) Mr. Tam Tak Hing Bernard and Mr. Ching Kwok Ho Samuel of Messrs. King & Co., solicitors, nominated by the Applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the ordinance in relation to the Lots and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter dated 8 February 2013 from Messrs. King & Co. to the Applicant’s solicitors.

(4) For the purposes of a sale of the Lots by public auction under section 5(1)(a) of the Ordinance,

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

(b) the reserve price be set at $292,000,000; and

(c) subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Lots or its successor in title, the redevelopment of the Lots shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lots became the owner of the Lots.

(5) Liberty to the Applicant, the 2^nd Respondent and the Trustees to apply to the Tribunal for further directions as may be required under the Ordinance.

(6) Costs order nisi: there be no order as to costs; the costs order shall become absolute if there is no application made to vary the order within 14 days..