ASIA BRIGHT ENTERPRISES LTD AND OTHERS v. LIU CHEUK MAN AND OTHERS

LDCS 35000/2019

[2023] HKLdT 30

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 35000 OF 2019

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BETWEEN

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JUDGMENT

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BACKGROUND

1.  This is the applicants’ application for an order for sale, for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”), of all the undivided shares of and in section B of Kowloon Inland Lot No 4148 (“the Lot”) together with the building erected thereon known as Nos 72 – 76 Lok Shan Road and Nos 72 – 76B To Kwa Wan Road, Kowloon (“the Building”).

2.  The Building is an 8-storey commercial/residential composite building and is served by 4 common staircases. Occupation permit No K335/58 (“Occupation Permit”) was issued for the Building on 3 December 1958, granting permission to occupy its ground floor as 10 shops for non-domestic use and 3 tenements for domestic use, and its 1^st floor to 7^th floor as 13 tenements per floor for domestic use. According to the approved building plans, there are 7 shop units (ie units facing Lok Shan Road and To Kwa Wan Road) and 3 domestic units (ie units facing a yard) planned on ground floor, and 13 domestic units planned on each upper floor from 1^st floor to 7^th floor. Upon inspection, the 3 domestic units on the Ground floor of Nos 72A, 72B and 72C To Kwa Wan Road were occupied together with a shop unit on the Ground floor of No 74A To Kwa Wan Road as one single shop.

3.  The Lot together with the Building standing thereon is allocated 104 undivided shares. Each of the shop units and domestic units is given 1 undivided share, making up a total of 104 undivided shares.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

4.  At the time of filing of the Notice of Application (“the NOA”) on 13 November 2019, there were 10 respondents. The applicants then owned 90.385% (ie 94 out of the total 104) undivided shares in the Lot.

5.  After filing of the NOA, the applicants acquired further units from 4 respondents (ie the 3^rd, 5^th, 6^th and 10^th respondents), and subsequently discontinued the proceedings against them.

6.  Section 3(1) of the Ordinance prescribes that the minimum percentage of undivided shares that an applicant or applicants should possess before making an application under the Ordinance is 90% (which has been lowered to 80% by the Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, Cap 545A).

7.  We are satisfied that as at the date of application, the applicants owned more than 90% of the undivided shares in the Lot. We are therefore satisfied the applicants are entitled to make the present application under section 3 of the Ordinance.

THE REMAINING RESPONDENTS

8.  At the time of the trial, the applicants owned 94.231% (ie 98 out of the total 104) undivided shares in the Lot. The following 6 respondents (“the respondents”) remain in the present proceedings: -

Respondent		Premises
1st Respondents	(“R1”)	Ground Floor of No 72 Lok Shan Road (“R1’s Property”)
2nd Respondent	(“R2”)	Ground Floor of No 74 Lok Shan Road (“R2’s Property”)
4th Respondent	(“R4”)	6th Floor of No 76 Lok Shan Road (“R4’s Property”)
7th Respondent	(“R7”)	1st Floor of No 76A To Kwa Wan Road (“R7’s Property”)
8th Respondent	(“R8”)	2nd Floor of No 76A To Kwa Wan Road (“R8’s Property”)
9th Respondent	(“R9”)	1st Floor of No 76B To Kwa Wan Road (“R9’s Property”)

9.  There is no missing minority owner in these proceedings. At the trial, R1 is represented by Mr Ernest Koo and Mr Stony Chan. R2 is represented by Mr Benjamin Chain and Mr Adrian But. R4, R7, R8 and R9 are represented by Mr Matthew Choi. The respondents dispute on the valuations, including the assessed market value of each property on the Lot and the redevelopment value (“RDV”) of the Lot, and whether the applicants have taken reasonable steps to acquire all the undivided shares in the Lot. They rely on the reports and valuations of Mr Kenneth Cheung Chor Yin (“Mr Cheung”) of Citiland Surveyors Limited.

10.  R2 further argues in law that “the redevelopment potential of the Lot on its own” under the Ordinance, being the reserve price for public auction if a compulsory sale order is granted, should be assessed with reference to the RDV of a merged site (“Merged Site”), including the Lot and its 3 adjacent sites (ie Site A, Site B and Site C), which should then be apportioned with reference to the respective RDV of each site. In this connection, R2 has solely instructed Mr Cheung to prepare a supplemental report on the RDV of the Merged Site and each individual site.

11.  R2 also argues in law whether the Ground Floors of Nos 72A, 72B and 72C To Kwa Wan Road should be valued as 3 domestic units only and they should not be valued together with the Ground Floor of No 74A To Kwan Wan Road as a merged shop under the Ordinance.

12.  The applicants are represented by Ms Nancy Ngai. They have appointed Mr Benson Wong Sai Ning of Benson Wong & Associates Limited and Mr C M Wong of C M Wong & Associates Limited as their building experts, and Mr Alnwick Chan Chi Hing (“Mr Chan”) of Knight Frank Petty Limited as their valuation expert. At the trial, Ms Ngai informed the tribunal that the applicants agree to adopt the market value of each property on the Lot as assessed by Mr Cheung, save and except for the market value in respect of the Ground Floors of Nos 72A, 72B, 72C and 74A To Kwan Wan Road.

13.  As directed by the tribunal at the hearing on 14 June 2022, the evidential part of the trial was heard before the Member only, and the matters pertaining to legal arguments and the closing submissions were heard before both the Member and the Presiding Officer.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

14.  The remaining issues to be decided in this case are as follows:

1) What was the respective market value of each property on the Lot as at 9 September 2019, the valuation date adopted in the application valuation report dated 7 November 2019, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?

2) Whether the redevelopment of the Lot is justified due to age and/or state of repair of the Building in accordance with section 4(2)(a) of the Ordinance?

3) Whether the applicants have taken reasonable steps to acquire all the undivided shares in the Lot on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance?

4) If an order for sale should be granted, what should be the reserve price for the purpose of auction sale?

DETERMINATION OF THE MAREKT VALUE OF EACH PROPERTY

15.  Pursuant to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the value of any property as assessed in the application, the tribunal shall determine the proper value. 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.”

16.  After the agreement of the applicants at the trial to adopt Mr Cheung’s market value assessments except for the market value of some ground floor units, the tribunal is required to determine the market value in respect of the Ground Floors of Nos 72A, 72B, 72C and 74A To Kwan Wan Road only.

Market Value of the Ground Floors of Nos 72A, 72B, 72C and 74A To Kwan Wan Road

17.  In this regard, we accept the applicants’ submission that Part 1 and Part 3 of Schedule 1 of the Ordinance do not preclude the applicants from treating the Ground Floors of Nos 72A, 72B, 72C and 74A To Kwan Wan Road together as one property in the assessment of their market value.

18.  There is no dispute that the Ground Floors of Nos 72A, 72B, 72C and 74A To Kwan Wan Road have been used together as one single shop for some years, and hence they have been regarded as one property at the material times. The expression “each property” in Part 1 of Schedule 1 of the Ordinance is not defined, and Part 1 of Schedule 1 merely requires “A valuation report … setting out the assessed market value of each property on the lot”. It does not say that the market value of each “unit as specified in the building plan” has to be assessed.

19.  The purpose of assessing the market value of “each property” is to give the basis of apportionment of the proceeds of sale when the Lot is sold so that the majority owner and each minority owner of the Lot can share the proceeds on a pro rata basis in respect of their “properties” (see Part 3 of Schedule 1 of the Ordinance). It is clear that the Ordinance intends each owner to get a fair share of the proceeds of sale in respect of his property.

20.  When the property comprises more than one unit, and if we have to covert it back to individual units for the purpose of assessing their individual values, this will distort the true Existing Use Value (“EUV”) of the property as a whole. In other words, the owner will not get a fair share of the proceeds of sale for his property. Thus, we do not think that assessing each “unit” of a single “property” separately is the legislative intent of the Ordinance.

21.  If it is the legislative intent that each “unit” has to be assessed “on its own”, then the Ordinance could have stated that clearly by defining “each property” as “each unit on its own”, just like what is stipulated for “the lot” in paragraph 2(a) of Schedule 2 of the Ordinance in which the words “the lot on its own” is used.

22.  R2 submits that from the expressions “each property” in Part 1 of Schedule 1 and “respective properties of each majority owner and each minority owner” in Part 3 of Schedule 1 of the Ordinance, the legislature intended to have the market value of all “properties” in the existing development to be assessed individually as if each unit as subdivided under the deed of mutual covenants (“the DMC”) and registered in the Lands Registry to be separately sold in the open market, and it would be contrary to the statutory meaning of “each property” and impermissible for market values of “each property” to be assessed on the basis of a “joint sale” of multiple units.

23.  We disagree with these submissions. As aforesaid, if the Ordinance intended to have “each unit on its own” to be assessed, these words should have been used instead of “each property”.

24.  Moreover, the market value that is required to be assessed under Part 1 of Schedule 1 of the Ordinance is the EUV. When the 4 units in question are being used as a single shop, it is just not realistic to separate them and assess the EUV of each unit, as the “existing” use is just one single shop. It certainly does not represent the true “existing” value of the property owned by the owner and would not achieve the purpose of sharing the proceeds of sale fairly on a pro rata basis among the owners as intended by the Ordinance.

25.  R2 submits that the statutory requirement for assessment of market value for “each property” meaning “individual unit” as subdivided per the DMC and registered in the Lands Registry (ie no “merger “allowed) was supported by the Tribunal’s ruling in Harvest Treasure Limited and Ors v Cheung Fat Enterprises Limited and Ors, LDCS 8000/2014. However, the case of Harvest Treasure does not give such a supporting view as suggested by R2. What that case has decided (adopting Eltron Development Limited v Director of Lands, LDLR 4 of 2013) is that unless the market evidence shows otherwise, when the summation of the values of the two portions would give rise to a higher value, the 2-shop basis should be preferred to the value of the two portions as a single unit in determining the market value of the two portions; this accords with the principle of determining the “highest and best use” of properties.

26.  Although the assessment of EUV for Shop A and Shop B as two individual units was adopted in Harvest Treasure, this ruling was made by the Tribunal immediately after it had referred to the aforesaid principle of determining the “highest and best use of properties”. Thus, it is clear that the Tribunal in Harvest Treasure did not give a definite ruling that “each property” under the Ordinance must mean “individual unit” as suggested by R2.

27.  In the present case, the EUV of the single shop on the Ground Floors of Nos 72A, 72B, 72C and 74A To Kwan Wan Road is higher than the summation of the EUV of each individual unit. Thus, applying the aforesaid principle of determining the “highest and best use” of properties, we would adopt the EUV of the single shop instead of treating it as 4 individual units.

28.  R2 further relies on the minutes of the Bills Committee of the Provisional Legislative Council of the draft bill of Cap 545 on 26 February 1998 to submit that the expression of “existing use basis” was removed from the bill and replaced with “assessed market value” for the purpose of disregarding any additional value that may be attributed from existing users who did not comply with the designated user under the DMC or original approved building plans (eg UBWs or illegal users), and hence the applicants’ valuation based on the conversion of the Ground Floor units from “domestic” to “shop” use must be disallowed.

29.  We do not accept R2’s submissions in this regard. Even though the expression “assessed market value” is used in the Ordinance instead of “existing use basis”, it cannot be disputed that the “market value” must be assessed on an “existing use basis” as redevelopment potential cannot be taken into account (see paragraph (c) of Part 1 of Schedule 1 of the Ordinance). Thus, the use of the phrase “assessed market value” does not give rise to any different interpretation. The issue is still on how the phrase “each property” should be interpreted.

30.  If the intention of the legislature was to prevent existing users from gaining benefits because of their illegal use of the premises as suggested by R2, then the mere fact that the domestic units were converted into shop units is not illegal, but just a breach of the Occupation Permit. In Wing Hong Investment Company Limited v Fung Sok Han & Others, [2016] 1 HKLRD 1, the defendants there also claimed that the plaintiff in that case had converted the ground floor carport into shops in contravention of the Building Ordinance. However, His Honourable Judge L Chan of the High Court found that there is no provision in the Building Ordinance to suggest that it is an offence to adopt a user of premises which is materially different from that stated in the occupation permit. Thus, the non-conformity of the property with the Occupation Permit is a non-issue.

31.  The fact that the partition walls of the Ground Floor Units were demolished to convert them into a shop is also not illegal (See Mingo Properties Limited v the Director of Lands, LDLR 6 of 2005 (unreported, 26 February 2007) and Snowland Limited v Director of Lands, LDLR 2/2014 (unreported, dated 11 November 2016)).

32.  Although there were some UBWs, both sides’ experts had already disregarded those UBWs in their respective assessments. Apart from that, there is no evidence of any other breach of the DMC. Thus, it would be unrealistic and unfair to treat the single shop as 4 individual units. We are of the view that the market value of the Ground Floors of Nos 72A, 72B, 72C and 74A To Kwan Wan Road should be assessed as a single shop.

33.  From valuation perspective, we also agree with Mr Chan to value the Ground Floors of Nos 72A, 72B, 72C and 74A To Kwa Wan Road together as a large shop as this conforms with the market reality approach. These units have been occupied together as a large shop for a period, which reflects the market demand for such conversion. In addition, we consider that the change of use from domestic units to shop units in this instance would be practical and feasible.

34.  Nevertheless, we disagree to value them with adjustments for size at -15% (ie 1% per 10-square meter difference on threshold approach) and layout at -15% as proposed by Mr Chan. We are of the view these 2 adjustments, each at -15%, cannot fully reflect the inferiority of the Ground Floors of Nos 72A, 72B and 72C To Kwa Wan Road at the back, which are ancillary shop areas and/ or storage areas of the Ground Floor of No 74A To Kwa Wan Road only.

35.  In the absence of other objective data, we consider that the Ground Floors of Nos 72A, 72B and 72C To Kwa Wan Road can be assessed at say 1/3 of the reference shop (ie the Ground Floor of No 74B To Kwa Wan Road) unit rate (ie $527,374 / 3 = $175,791 per square meter) to reflect their inferiority as ancillary areas at back end, their substantial size and irregular layout, and the costs and risks for their regularization (if any and where necessary), which is about 83% above the agreed unit rate of the reference domestic unit on the 4^th Floor of the Building (ie $96,012 per square meter). The market value of the Ground Floors of Nos 72A, 72B and 72C To Kwa Wan Road would then be assessed at say $27,970,000 (ie $175,791 x 159.11 square meter) and the market value of the Ground Floors of Nos 72A, 72B, 72C and 74A To Kwa Wan Road as a large shop would be $53,770,000 (ie $27,970,000 + $25,800,000)

Market Value of Each Property on the Lot

36.  The market value of each property on the Lot as at the date of valuation, ie 9 September 2019, and adopted by this Tribunal are appended below: -

Address	Floor	EUV
No 72 Lok Shan Rd	G	$20,380,000
No 74 Lok Shan Rd	G	$24,060,000
No 76 Lok Shan Rd	G	$23,760,000
No 72 To Kwa Wan Rd	G	$15,180,000
No 74 To Kwa Wan Rd	G	$25,960,000
Nos 72A, 72B, 72C and 74A To Kwa Wan Rd	G	$53,770,000
No 74B To Kwa Wan Rd	G	$26,040,000
No 76 To Kwa Wan Rd	G	$26,090,000
No 76A To Kwa Wan Rd	G	$25,870,000
No 76B To Kwa Wan Rd	G	$29,460,000
	Sub-total:	$270,570,000

Street	Street No	Floor	EUV		Street	Street No	Floor	EUV
LSR	72	1	$5,020,000		TKWR	74	4	$5,420,000
LSR	74	1	$5,190,000		TKWR	74A	4	$5,320,000
LSR	76	1	$5,180,000		TKWR	74B	4	$5,320,000
TKWR	72	1	$5,640,000		TKWR	76	4	$5,420,000
TKWR	72A	1	$5,530,000		TKWR	76A	4	$5,330,000
TKWR	72B	1	$5,190,000		TKWR	76B	4	$7,540,000
TKWR	72C	1	$4,910,000		LSR	72	5	$4,640,000
TKWR	74	1	$5,750,000		LSR	74	5	$4,800,000
TKWR	74A	1	$5,640,000		LSR	76	5	$4,890,000
TKWR	74B	1	$5,640,000		TKWR	72	5	$5,210,000
TKWR	76	1	$5,640,000		TKWR	72A	5	$5,110,000
TKWR	76A	1	$5,540,000		TKWR	72B	5	$4,800,000
TKWR	76B	1	$7,990,000		TKWR	72C	5	$4,540,000
LSR	72	2	$4,920,000		TKWR	74	5	$5,210,000
LSR	74	2	$5,090,000		TKWR	74A	5	$5,210,000
LSR	76	2	$5,080,000		TKWR	74B	5	$5,210,000
TKWR	72	2	$5,530,000		TKWR	76	5	$5,210,000
TKWR	72A	2	$5,420,000		TKWR	76A	5	$5,120,000
TKWR	72B	2	$5,090,000		TKWR	76B	5	$7,380,000
TKWR	72C	2	$4,820,000		LSR	72	6	$4,540,000
TKWR	74	2	$5,530,000		LSR	74	6	$4,790,000
TKWR	74A	2	$5,530,000		LSR	76	6	$4,690,000
TKWR	74B	2	$5,530,000		TKWR	72	6	$5,210,000
TKWR	76	2	$5,530,000		TKWR	72A	6	$5,010,000
TKWR	76A	2	$5,430,000		TKWR	72B	6	$4,700,000
TKWR	76B	2	$7,840,000		TKWR	72C	6	$4,450,000
LSR	72	3	$4,830,000		TKWR	74	6	$5,100,000
LSR	74	3	$4,990,000		TKWR	74A	6	$5,210,000
LSR	76	3	$4,980,000		TKWR	74B	6	$5,100,000
TKWR	72	3	$5,530,000		TKWR	76	6	$5,210,000
TKWR	72A	3	$5,320,000		TKWR	76A	6	$5,020,000
TKWR	72B	3	$5,000,000		TKWR	76B	6	$7,230,000
TKWR	72C	3	$4,730,000		LSR	72	7	$4,450,000
TKWR	74	3	$5,420,000		LSR	74	7	$4,600,000
TKWR	74A	3	$5,420,000		LSR	76	7	$4,590,000
TKWR	74B	3	$5,420,000		TKWR	72	7	$5,000,000
TKWR	76	3	$5,420,000		TKWR	72A	7	$4,900,000
TKWR	76A	3	$5,440,000		TKWR	72B	7	$4,600,000
TKWR	76B	3	$7,690,000		TKWR	72C	7	$4,360,000
LSR	72	4	$4,730,000		TKWR	74	7	$5,000,000
LSR	74	4	$4,890,000		TKWR	74A	7	$5,000,000
LSR	76	4	$4,890,000		TKWR	74B	7	$5,000,000
TKWR	72	4	$5,320,000		TKWR	76	7	$5,000,000
TKWR	72A	4	$5,210,000		TKWR	76A	7	$4,910,000
TKWR	72B	4	$4,900,000		TKWR	76B	7	$7,080,000
TKWR	72C	4	$4,640,000			Sub-total:		$481,400,000
Keys:	LSR = Lok Shan Road
	TKWR = To Kwa Wan Road

37.  We therefore accept that the total market value of all the properties on the Lot is $751,970,000 (ie $270,570,000 + $481,400,000).

SECTION 4(2) OF THE ORDINANCE - JUSTIFICATION AND REASONABLE STEPS

38.  Section 4(2) of the Ordinance provides as follows: -

“2. The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that—

(a) the redevelopment of the lot is justified (and whether or not the majority owner proposes to or is capable of undertaking the redevelopment)—

(i) due to the age or state of repair of the existing development on the lot; or

(ii) on 1 or more grounds, if any, specified in regulations made under section 12; and

(b) the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”

39.  The applicants must satisfy this Tribunal that the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted.

Whether development of the Lot is justified due to the age and/or state of repair of the Building

40.  The applicants adduce expert evidence of Mr C M Wong and Mr Benson Wong. Mr C M Wong conducted a structural survey of the Building and prepared a Structural Assessment Report on 31 May 2021. Mr Benson Wong conducted a condition survey of the Building and prepared a Condition Survey Report on 31 May 2021.

41.  None of the respondents adduced expert evidence to rebut the reports complied by Mr C M Wong and Mr Benson Wong.

42.  Having considered the reports of Mr C M Wong and Mr Benson Wong, we accept their expert opinion. The Building, being erected about 64 years ago, is in poor condition and has come to the end of its design life. The design of the Building has become obsolete over time in many aspects, both physically and functionally, and fails to conform with modern safety standards and statutory requirements.

43.  We are also of the view that the Building is in poor state of repair and the costs of repair to bring the Building to tenantable condition is disproportionate to the costs for constructing a new similar superstructure. Even if repair works were to be carried out, such works would bring about a modest improvement only to the existing condition of the Building and the Building will continue to remain as a sub-standard one.

44.  By reason of the matters set out above, we are satisfied that redevelopment of the Building is justified.

Whether the applicants have taken reasonable steps

45.  In assessing the reasonableness of the offers, we have considered the case of Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. In particular, we have considered paragraphs 33 and 36 of the judgment in which Ribeiro PJ stated: -

“33. In making that assessment the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It does not itself arrive at any conclusion as to what figure represents the correct valuation. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. It is obviously necessary to recognise that there will often be differences of opinion on that matter……”

“36. ...... We are of course not suggesting that it is necessary for the offer to “beat” the valuation as if it were a payment into court. What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site……”

46.  The applicants have made the following offers to the respondents respectively: -

Respondent	18-Oct-19	29-Nov-21	26-Apr-22	30-Jun-22
R1	$31,310,000	$31,310,000	$31,310,000	$31,310,000
R2	$37,150,000	$37,150,000	$37,150,000	$37,150,000
R4	$6,640,000	$7,110,000	$7,110,000	$7,110,000
R7	$7,950,000	$8,250,000	$8,250,000	$8,250,000
R8	$7,800,000	$8,090,000	$8,090,000	$8,090,000
R9	$11,400,000	$11,830,000	$11,830,000	$11,830,000

47.  Ms Ngai submits that all these offers fall within the range of fair and reasonable compensation for the respective interests owned by the respondents. The offer prices have made reference to the independent valuation of Knight Frank and have also reflected the then pro-rata share of the RDV of the Lot.

48.  On the evidence available, we accept that the offer prices have reflected the respective proportionate share of the RDV of the Lot and do fall within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. We are satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot.

MERGED SITE

49.  Paragraph 2 of Schedule 2 of the Ordinance stipulates that “The lot the subject of the auction shall be sold subject to a reserve price – (a) which takes into account the redevelopment potential of the lot on its own (or where 2 or more lots are the subject of the auction, on their own); and (b) approved by the Tribunal.”

50.  There are 3 lots (namely Site A, Site B and Site C) adjoining the Lot, which could be redeveloped together by the applicants as a merged site. However, these 3 lots are not subject to the present application, nor the intended auction.

51.  R2 contends that the Tribunal in approving the reserve price ought to take into account the adjoining lots in assessing the redevelopment potential of the Lot. In other words, R2 considers that if the 3 adjoining lots were to be redeveloped together with the Lot as a merged site, the redevelopment value of the Lot is higher.

52.  First of all, we accept R2’s submission that the words “takes into account” and “approved by the Tribunal” in paragraph 2 of Schedule 2 of the Ordinance shows that the Tribunal in fixing the reserve price has a discretion to consider other matters on top of the redevelopment potential of the Lot. In other words, the reserve price may not be just equivalent to the RDV of the Lot, but can be fixed at a figure that includes other considerations on top of the RDV of the Lot. For example, if there are other adjoining lots that would be sold together with the Lot in a single auction, the reserve price could be based on the RDV of the merged site of all the lots.

53.  However, as Site A, Site B and Site C are not the subject matters of this application and have not been included in the intended auction, we do not consider that the marriage value and/or the so called “Clay Factor” of the merged site should be included in our determination of the reserve price.

54.  R2 seeks to argue that “redevelopment potential of the lot on its own” cannot be wrongly equivocated to mean “redevelopment potential of the lot when redeveloped individually on its own”. However, in our view, what the Ordinance stipulates is clear – it is the redevelopment potential of “the Lot on its own”.

55.  If the Lot could be redeveloped together with other lots, the redevelopment potential of “the Lot on its own” would be higher. Although it is not disputed that the applicants do have the plan to redevelop Site A, Site B and Site C together with the Lot, it does not mean that the applicants will certainly be able to acquire the Lot through the auction and hence redevelop all the lots together. After all, there will be a public auction and other developers may outbid the applicants. The other developers would not be able to redevelop Site A, Site B and Site C together with the Lot, and it is unrealistic to assume that they would pay a price that reflects the marriage value of all the lots. One cannot just assume that the redevelopment potential of “the Lot on its own” must be higher because the applicants want to redevelop the Lot together with the adjoining lots, as it does not represent the market value as such. It is just a special interest to the applicants to acquire the Lot so that it could be redeveloped with the other lots.

56.  Thus, we consider that the reserve price for the auction under Schedule 2 of the Ordinance, which takes into account “the redevelopment potential of the lot on its own”, should be the RDV of the Lot only, the market value of the Lot on the basis of redevelopment of the Lot alone.

57.  From valuation perspective and in accordance with HKIS Valuation Standards 2020, hope value can be included in the market value, which should reflect the highest and best use of an asset that maximises its potential and that is possible, legally permissible and financially feasible, but the amount of hope value must be limited to the extent that it would be reflected in offers made by prospective purchasers in a general market under a rational environment which means with market-evidence.

58.  We agree that if the Lot is redeveloped together with its adjacent 3 sites, there will have a marriage value released from the site merger. Both Mr Chan and Mr Cheung opine that the market value of the merged site is greater than the aggregate of the individual market value of the 4 sites, though they have different opinion on the amplitude of the difference. However, we are not persuaded by Mr Cheung that the market value of the Lot would include the proportional marriage value or part of the proportional marriage value. On the conditions that size of the Lot is about 1,000 square meters, large enough for an efficient development, and the market value of the Lot is a large lump sum over $1,000 million, we are of the view that except for the applicants and/or related parties of the applicants, which are the special purchaser(s), there would not have any rational purchaser which would pay a price for the Lot higher than the RDV of the Lot in the hope of sharing the marriage value with the applicants.

59.  Hope value may sometimes be reflected in the market value but usually in exceptional cases only, such as the cases that (i) there would have competition from at least 2 purchasers (ie in the scenario that the relevant lot can be merged with the other lots on the right or the lots on the left and the lots on the right and left are owned by different parties); and (ii) the marriage value is substantial when it is compared with value of the relevant asset, so that a rational purchaser would take the risk to put in a higher bid in the circumstances.

60.  For example, in the scenario that a small lot of say 50 square meters is located in the centre of the other lots with unified ownership of say 5,000 square meters, there may be some willing speculators and/or investors who are willing to offer a price higher than the market value of the small lot in order to take speculation for sharing part of the substantial marriage value; and if there is a chance of say not less than 50% that earning of an investment can be achieved at say about double, there may well be such risk-taking speculators in the market, particularly when the market value of the small lot is relatively small in lump sum. However, the Lot does not fall within these criteria.

61.  In the circumstances, we are of the view that the marriage value and/or “Clay Factor” of Site A, Site B, Site C and the Lot should not be taken into account.

RESERVE PRICE FOR THE AUCTION

62.  As we are satisfied that redevelopment of the Lot is justified and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot, we find that an order for sale should be granted in favour of the applicants, and hence we need to fix the reserve price for the auction.

63.  Since we have decided as aforesaid that in accordance with the Ordinance and the facts in these proceedings, no marriage value would be reflected in the redevelopment potential of the Lot on its own, we agree with the applicants to assess the RDV of the Lot only.

64.  The 2 valuation experts agree to adopt residual valuation method and update their respective RDV assessments of the Lot as at 7 July 2022. They agree to redevelop the Lot on a registered site area of 955.68 square meters at plot ratio of 9 and maximum gross floor area of 8,601.12 square meters. They also agree on the hypothetical development scheme, a 23-storey commercial/residential composite building, and all the saleable areas.

65.  Although they agree on the adoption of the same reference shop unit (ie a shop of 102.42 square meters with frontage of 5.69 meters facing To Kwa Wan Road) and the same reference domestic unit (ie a flat of 30.81 square meters on the 10^th floor with distant building view), they disagree on the gross development value (“GDV”) of both the shop portion and the domestic portion.

66.  In the residual valuation, they agree on demolition cost at $14,771,717 (ie about $2,243 per square meter), construction cost at $362,332,448 (ie about $42,126 per square meter gross), development period of 2.75 years (ie demolition period of 0.75 year, construction period of 2.25 years and an overlapping period of 0.25 year), marketing costs on GDV at 3%, professional fees on demolition and construction costs at 6%, interest rate at 4% per annum and developer’s profit at 15%, but they argue whether the developer’s profit as agreed would be exclusive or inclusive of the stamp duty at 4.25% and legal cost at 0.1% on residual land value.

GDV – Shops on Ground Floor and 1^st Floor

67.  In addition to 7 common comparables (ie Comparables S1 – S7), Mr Cheung has proposed 3 other comparables (ie Comparables S8 – S10) in his assessment. We agree to analyse Comparables S8 – S10, which were all transacted in 2022 and are not far away from the Lot.

68.  Mr Chan and Mr Cheung agree on the adjustment for time with reference to private retail price indices only. Regarding the adjustment for age, we prefer the adjustment rate at 1% per 5-year difference, closer to the rate at 1% per 4-year difference as proposed by Mr Cheung, instead of 1% per 10-year difference as suggested by Mr Chan. We are of the view that age is more sensitive in the comparison between the reference shop in a new building and the comparable shops built more than 30 to 60 years ago. We agree with Mr Cheung that shops in building more than 30 years are more prone to recurring problems. Regarding the adjustment for frontage, we prefer a less sensitive rate at 1% per 1-meter difference, closer to the rate at 1% per 0.91-meter difference as proposed by Mr Cheung too, instead of 2% per 1-meter difference as suggested by Mr Chan. We also consider that the same adjustment rate can be applied to Comparable S2, which has a relative long frontage.

69.  Regarding the adjustment for headroom, we prefer the adjustment rate at 2% per 1-meter difference as suggested by Mr Chan instead of 1% per 0.61-meter difference as proposed by Mr Cheung, but the calculation should be rounded to the nearest 0.1%. Regarding the adjustment for size, we prefer the adjustment rate at 1% per 10-square meter difference as suggested by Mr Chan too instead of 1% per 9.29-square meter difference as suggested by Mr Cheung, but a linear approach and rounding up to the nearest 0.1% should be adopted.

70.  Regarding the adjustment for return frontage of Comparable S2, we consider that the adjustment rate should be -15%, a midway figure between -10% as suggested by Mr Chan and -20% as proposed by Mr Cheung. Accordingly, the return frontages of Comparable S8 facing a lane, and Comparable S9 facing Cheung Ning Street, should be adjusted at -2% and -15% respectively.

71.  Regarding the adjustment for layout, we consider that reference should be made to mainly depth of the shop, which can be adjusted at about 0.75% per 1-meter difference, and there is no great difference in shape. Accordingly, the respective comparables can be adjusted at the range of -9% to 3%.

72.  In terms of location, the 2 valuation experts agree on the adjustment rate of 10% for Comparables S1, S3, S4 and S7 and 15% for Comparable S5. We agree with Mr Chan to adjust for location of Comparable S2 at 5%, instead of 8% as proposed by Mr Cheung, and location of Comparable S6 at 0%, instead of 15% as proposed by Mr Cheung. We are of the view that Comparable S6 occupies a better location similar to the reference shop with heavy pedestrian flow and is better than Comparables S1, S3, S4 and S7. Further, we consider that the Comparables S8, S9 and S10 proposed by Mr Cheung should be adjusted at 25% only.

73.  We also agree with Mr Chan not to adjust for synergy effect and MTR line as proposed by Mr Cheung. We are of the view that the opening of the MTR line, which has increased the accessibility but cannot attract many shoppers from other districts, has not affected much the shop value in the district, and its opening would have already been anticipated as at the transaction dates of the comparables.

74.  Further, we agree with Mr Chan that the redevelopment of the Lot together with its adjacent sites at similar time cannot change much the character and retail potential of the immediate neighbour, which will remain a local shopping area only. In medium term, there will have more new shopping facilities at the nearby Urban Renewal Authority’s sites on the opposite side of To Kwa Wan Road, which are of larger scale and will attract the local shoppers.

75.  The valuation of the shop reference unit is listed in Appendix I of the judgment. The average unit rate of the 10 shop comparables is about $456,000. The average excluding Comparables S2, S5, S8, S9 and S10, which have frontages abutting on Lok Shan Road, Kowloon City Road, Sze Chuen Street and Sheung Heung Road instead of To Kwa Wan Road, is $451,958. We are of the view that the shop reference unit should be assessed at $455,000 per square meter.

76.  The valuation of the other hypothetical shops on ground floor is listed in Appendix II. While the 2 valuation experts agree on the adjustment for location to the 3 hypothetical shops along Lok Shan Road at -4%, we agree with Mr Chan to adjust for the return frontage of Hypo Shop D at 20%, same as that as finally agreed by them in the market value assessment, instead of 35% as proposed by Mr Cheung. The other adjustments for size, frontage and layout should follow those as determined in the comparison with shop comparables.

77.  For the conversion of the 1^st floor shops, we prefer Mr Chan’s rate at 1/3 of the ground floor unit rate (ie the corner shop - Hypothetical Shop D), which would have already reflected the better exposure of the whole 1^st floor on both To Kwa Wan Road and Lok Shan Road, to Mr Cheung’s rate at 1/2. The 2 valuation experts agree on the conversation rate for the 1^st floor flat roof at 1/6 of the ground floor unit rate.

GDV – Flats on Upper Floors

78.  The 2 valuation experts agree to adopt 44 common comparables in 6 developments (ie AXIS, Upper East, VIVA, 80 Maidstone Road, City Hub, The Vintage and Artisan Garden). They also agree on the adjustment for time with reference to private domestic price indices, adjustment for age at 1% per 1-year difference, adjustment for floor at 0.5% per 1-level difference, and all adjustments for view.

79.  Regarding the adjustment for location, they agree on the adjustment rates for City Hub and Artisan Garden at -2% and 0% respectively. We consider that the respective locations of AXIS, Upper East, VIVA and the Vintage are similar and are inferior to the Lot in terms of accessibility, and their comparables should be adjusted at 2%. 80 Maidstone Road is better in accessibility and its comparables should be adjusted at -3%.

80.  Regarding the adjustment for size, we agree with Mr Chan to adopt a more sensitive rate at 1% per 5-square meter difference instead of 1% per 9.29-square meter difference as proposed by Mr Cheung, but we prefer the linear approach and the calculations be rounded to the nearest 0.1%. Regarding the adjustment for headroom, we agree with Mr Chan too, to adopt a less sensitive rate at 2% per 1-meter difference instead of 1% per 0.305-meter difference as proposed by Mr Cheung.

81.  In terms of facilities including provision of car parking spaces, the 2 valuation experts agree on the adjustment rates for AXIS, Upper East, VIVA and City Hub at 2%, -1%, 2% and 0% respectively. We agree with Mr Chan to make adjustments for 80 Maidstone Road at 1% and Artisan Garden at -1%, but the adjustment rate for The Vantage should be -1% only instead of -3% as suggested by Mr Chan.

82.  We agree with Mr Cheung to make adjustment for aspect. We are of the view that buyers would generally prefer domestic units facing south-east to those facing north-west. We also agree with Mr Cheung to make adjustment for noise and pollution to the comparables in City Hub and Artisan Garden, but at the rate of 4% only to those facing the flyover. However, we disagree to adopt an adjustment for synergy effect as suggested by Mr Cheung. Similar to our view in the valuation of the shop portion, we agree with Mr Chan that the redevelopment of the Lot together with its adjacent sites at similar time cannot change much the character and environment of the immediate neighbour.

83.  The valuation of the domestic reference unit is listed in Appendix III of the judgment. The average unit rate of the 44 comparables is about $220,071, and the average of the 7 selected developments is about $218,964. Further, after the adjustments for floor and view as agreed by the 2 valuation experts and the adjustment for aspect as suggested by Mr Cheung, we consider that the average unit rate of the domestic portion should be assessed at say $235,000 per square meter, about 6.8% higher than the adopted unit rate of the domestic reference unit at $220,000.

RDV of the Lot as at 7 July 2022

84.  On the condition that the 2 valuation experts have agreed on the developer’s profit at 15%, we agree with Mr Chan to allow stamp duty at 4.25% and legal cost at 0.1% on residual land value in the residual valuation. We are of the view that as at the valuation date the property market is relative unstable and the market sentiment is relatively week because of the Ukrainian War, pandemic and increase of interest rate, and developers would generally demand a higher return to compensate the higher development risks.

85.  Based on the agreements of the 2 valuation experts and the above determinations, the residual valuation of the Lot as at 7 July 2022 is listed in Appendix IV of the judgment. The Lot is assessed at $1,071,000,000, equivalent to an accommodation value of about $124,518 per square meter (ie about $11,568 per square foot), which should be the reserve price for public auction.

ORDERS

86.  For reasons given in this judgment, we make the following orders: -

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

2) Mr Anthony WK Chow and Ms Anna SH Chow, nominated by the applicants, be appointed the trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lot;

3) The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Guantao & Chow dated 30 March 2022;

4) For the purposes of the sale of the Lot by public auction: -

a) the sale of the Lot be on the particulars and conditions of sale the same or substantially the same as those set out in the draft Particulars and Conditions of Sale to be approved and initialed by the tribunal; and

b) the reserve price be set at $1,071,000,000;

5) 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 and the Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot; and

6) Liberty to the applicants, the 1^st respondents, 2^nd respondent, 4^th respondent, 7^th respondent, 8^th respondent, 9^th respondent and their successors in title, and the Trustees to apply to the Tribunal for further directions.

COSTS

87.  Following Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 5340, we make a costs order nisi that the applicants do pay costs of these proceedings to the respondents, on High Court scale with certificate for one counsel and including any reserved costs, to be taxed if not agreed. Unless any parties apply by summons to vary the costs order nisi, it shall be made absolute upon expiry of 14 days from the date of this judgment.