DOUBLE TOP DEVELOPMENT LTD AND OTHERS v. KENTONE LTD AND OTHERS

LDCS 16000/2019

[2023] HKLdT 28

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 16000 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 the Remaining Portion of section R of Marine Lot No 414 (“the Lot”) together with a building erected thereon known as Lee Wang Building, Nos 133 – 134 Connaught Road West, Hong Kong (“the Building”).

2.  The Building is an 8-storey tenement block served by 2 common staircases. According to the approved building plans, there are 2 ground floor shops plus cockloft fronting onto Connaught Road West and 4 residential flats per floor from 1^st floor to 7^th floor.

3.  Occupation permit No H48/69 was issued for the Building on 13 March 1969, granting permission to occupy its ground floor as 2 shops with 2 stores on cockloft for non-domestic use and its 1^st floor to 7^th floor as 4 tenements per floor for domestic use.

4.  According to the records of the Land Registry, the Lot together with the Building standing thereon is allocated 35 undivided shares. Each of the 2 shop units on ground floor is given 2 undivided shares, each of the 2 cocklofts is given 1 undivided share, each of the 28 residential flats is given 1 undivided share and portion of main roof is given 1 undivided share, making up a total 35 undivided shares.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

5.  At the time of filing of the Notice of Application (“NOA”) on 23 May 2019, there were 3 respondents and the applicants owned 85.71% (i.e. 30 out of the total 35) undivided shares in the Lot, more than the threshold of 80% required for building aged 50 years or above.

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%.

7.  Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a lower percentage in respect of a lot belonging to a class of lots specified in that notice.

8.  The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, made under section 3(5) of the Ordinance (“the Notice”), was gazetted on 22 January 2010 and came into operation on 1 April 2010. Section 3 of the Notice lowered the threshold for compulsory sale of specified classes of lots from 90% to 80%. Those classes of lots include:

“a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the relevant date”

9.  Since the occupation permit of the Building was issued on 13 March 1969, i.e. more than 50 years before the date of application (i.e. 23 May 2019; the relevant date under the Notice), the applicable percentage is therefore 80%.

10.  I am satisfied that as at the date of application, the applicants owned more than 80% of the undivided shares in the Lot. I am therefore satisfied the applicants are entitled to make the present application under section 3 of the Ordinance.

THE REMAINING RESPONDENTS

11.  The applicants have subsequently amended the NOA on 4 December 2019 pursuant to the Order of the tribunal. At the time of trial, the applicants still owned 85.71% (i.e. 30 out of the total 35) undivided shares in the Lot.

12.  The following 3 respondents (except otherwise stated, the reference to “the respondents” in the discussion below refers to these remaining respondents) remain in the present action: -

Respondent		Premises
1st Respondent	(“R1”)	Flat D on 4th Floor, Flat C on 5th Floor and Flat C on 6th Floor
2nd Respondent	(“R2”)	Flat B on 1st Floor and Flat Roof
3rd Respondent	(“R3”)	Flat B on 4th Floor

13.  R1 and R2 are represented by Mr Kenny Lin (“Mr Lin) and Mr Kin Lau, and R3 is represented by Mr Jeremy Kwong (“Mr Kwong”). Before the trial, the respondents have come into agreement with the applicants on the existing use value (“EUV”) of all units in the Building, but they disagree on the redevelopment value (“RDV”) of the Lot in the application. The respondents have jointly appointed Mr CW Wong of Grandmax Surveyors Limited as their valuation expert.

14.  Subject to the applicants being able to prove the requisite statutory requirements under the Ordinance, R3 does not oppose an order for sale of the Lot, and only disputes about the RDV assessment. Whilst, R1 and R2 object to the grant of an order for sale. They dispute about the “reasonable steps” taken by the applicant and the “age” and “state of repair” of the Building, though they have not filed any building expert evidence.

15.  In addition, Mr Lin submits that, in setting the reserve price in accordance with Part 2 of Schedule 2 of the Ordinance, it is a requirement that the tribunal shall take into account the redevelopment potential, but it does not mandate the tribunal to equate the reserve price with the RDV as assessed by the valuation experts or the tribunal. The redevelopment potential is only a factor that has to be taken into account but it cannot be the only consideration. Mr Lin further submits that on the principle of equivalence an upward adjustment should be added to the RDV as assessed in these proceedings to reflect the existence of the special interest purchaser. Since the applicants have also owned or are able to control an adjoining lot, the applicants have the special interest in this instance and hence should be prepared to give a higher value to the Lot than any other market players.

16.  Nonetheless, if an order for sale should be granted, the respondents have no particular view and comments on the applicants’ proposed appointment of trustees and draft particulars and conditions of sale.

17.  The applicants are represented by Ms Verna Lui (“Ms Lui”). The applicants appoint Mr Charles Chan of Savills Valuation and Professional Limited (“Savills”) as their valuation expert and Mr Dennis Wong of Prudential Surveyors International Limited as their building expert.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

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

(1) What was the respective EUV of all units in the Building as at 12 April 2019, the valuation date adopted in the application valuation report dated 17 May 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 applicant has 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 EUV OF ALL UNITS IN THE BUILDING

19.  Pursuant to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the EUV of the units 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.”

20.  There is no missing owner in the application. Before the trial, the parties have agreed on the EUV of all units in the Building, which are also accepted by the tribunal.

EUV of All Units in the Building

21.  The EUV of all units in the Building as at the relevant date of valuation, i.e. 12 April 2019, and adopted by this tribunal are appended below: -

Floor	Unit	EUV ($)		Floor	Unit	EUV ($)
G/F & Cockloft	A	$33,805,000		G/F & Cockloft	B	$43,186,500
1	A	$5,938,300		4	C	$5,483,300
1	B	$8,321,500		4	D	$5,474,000
1	C	$6,038,800		5	A	$5,383,800
1	D	$7,393,800		5	B	$7,511,800
2	A	$5,642,800		5	C	$5,567,500
2	B	$7,870,800		5	D	$5,168,300
2	C	$5,716,300		6	A	$5,318,800
2	D	$5,503,300		6	B	$7,421,800
3	A	$5,530,300		6	C	$5,452,500
3	B	$7,710,800		6	D	$5,184,300
3	C	$5,598,300		7	A	$5,093,300
3	D	$5,388,800		7	B	$7,105,300
4	A	$5,496,300		7	C	$4,974,800
4	B	$7,631,000		7	D	$4,910,800
				Roof	-	$2,136,000
					Total:	$248,958,900

22.  I accept that the total EUV of the Building is $248,958,900.

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

23.  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).”

24.  The applicant must satisfy this tribunal 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

25.  Mr Dennis Wong conducted a structural survey of the Building and prepared a Structural Assessment Report, and a condition survey of the Building and prepared a Condition Survey Report, both dated 29 May 2020. None of the respondents adduced expert evidence to rebut the reports complied by Mr Dennis Wong.

26.  Nevertheless, R1 and R2 dispute, inter alia, (1) the validity and reliability of certain conclusions drawn by Mr Dennis Wong in his reports due to relatively small sampling size, and (2) the extent or necessity of certain repair items suggested by Mr Dennis Wong, such as the application of anti-carbonation coating system to all surfaces of structural frames, a complete rendering of the external walls, a complete re-roofing of the main roof, inclusion of the repair costs for the sub-divided flats which are owned by the applicants, inclusion of the repair costs for those unauthorized building works with low risk of enforcement, inclusion of the repair costs for the asbestos-corrugated sheets which are low risk in nature. Mr Lin further submits that it is pointless to consider the nominal 50-year design working life, some of Mr Dennis Wong’s test results are in fact better than the original design requirements and some average figures of the test results are higher than modern standard. Mr Lin also contends that the tribunal should adopt a “common sense” approach by comparing the repair costs with the EUV instead of comparing with the hypothetical costs for constructing a similar building.

27.  In absence of contrary evidence, I accept that Mr Dennis Wong has already taken reasonable steps to take samples for testing. Although I have doubt on the application of anti-carbonation coating system to all surfaces of structural frames, this proposition was withdrawn by Mr Dennis Wong at trial. I accept the repair costs proposed by Mr Dennis Wong.

28.  Having reviewed the findings and recommendations in Mr Dennis Wong’s reports, I accept that a complete rendering of the external walls and a complete re-roofing of the main roof are reasonable and justified. The Rapid Infrared Thermographic Survey, which has scanned approximately 50% of the external walls, has detected a total of 42 spots of delamination. There are also a number of unauthorized building works and asbestos-corrugated sheets attached to the external walls. The roof finishes were in poor condition, with evidence of water seepage to the units below.

29.  On adoption of tenantable standard in the analyses, it is reasonable for Mr Dennis Wong to include the repair costs for unauthorized building works and asbestos-corrugated sheets, no matter what are their respective risks. Unauthorized building works and asbestos would pose threats and risks to the occupants and visitors of the Building. Low risk of enforcement would not eliminate or lower the threats and risks too.

30.  Further, as repeatedly ruled by the tribunal, consideration of the nominal 50-year design working life is relevant, though it is one of the many considerations only under the Ordinance and such comparison should not be over exaggerated as all buildings over 50 years would very likely have passed their design working life. Comparison with the hypothetical costs for constructing a similar building, which to some extent can reveal the extent of repair, is also relevant. Nevertheless, even if the repair costs are compared with the EUV as suggested by Mr Lin, the ratio of 4.96% of the EUV is high, and many owners in this type of old building may not be willing to make such contribution for repair.

31.  Mr Lin’s submissions on interpretation of test results are not supported by expert evidence. The tribunal has also repeatedly ruled that the building expert should not rely on mainly the average value(s), but should also examine and review the weakest point(s) of the structural frame. In addition, even if parts of the survey results are above standards, these cannot assist to infer that the overall condition of the building should be acceptable. A few defects could lead to an unacceptable condition.

32.  In terms of the repair costs for the sub-divided flats, I accept that these should be included in the analyses and it is also not the role of the building expert to differentiate who should bear the responsibility and the costs for the internal alteration(s) in individual flat, which are complained by Mr Lin. The overall repair costs can reflect the overall condition of the Building, and this is a relevant consideration under the Ordinance. Whilst, Mr Dennis Wong has already provided a breakdown of his estimated costs, and he has never said that the minority owners have to shoulder the cost of repair necessitated in the private areas where the applicants have the exclusive duty to maintain, which is also complained by Mr Lin. It is also not the applicants’ submissions that the respondents have to bear the internal repair costs of the flats owned by the applicants.

33.  If all the repair works should really be carried out, it is expected that each individual owner will bear the internal repair costs of his own unit(s). The unfair situation that “the minority owners have to shoulder the cost of repair necessitated in the private areas where the applicants have the exclusive duty to maintain” as complained by Mr Lin in his written closing submissions should not happen at all. Other than these complaints and then the straightforward conclusion by Mr Lin that the tribunal should place little or even no weight on these internal repair items, R1 and R2 have no other persuasive submissions in this connection.

34.  Although Mr Lin has also submitted in his closing submissions that a party cannot take advantage of his own wrong, this argument is not supported by concrete evidence. This point has never been pleaded by R1 and R2, and the applicants has no chance to reply with evidence. On the evidence available to the tribunal in these proceedings, although all the subdivided flats were in fact owned by the applicants at the time of application, there is no evidence that the applicants had deliberately subdivided their flats so as to increase the estimated repair costs of the Building and then fulfil the “age” and “state of repair” requirements in the Ordinance. It is also unreasonable to assume that the applicants have acted in bad faith.

35.  Nonetheless, I note that the repair costs for the sub-divided flats amounting to $4,382,400 are substantial, about 35% of the total repair costs as estimated by Mr Dennis Wong. If all the repair costs for the sub-divided flats are taken out in the analyses, it would have impacts on the assessment of “age” and “state of repair” of the Building.

36.  Having considered the findings and expert opinion of Mr Dennis Wong and by reason of the matters set out above, I am satisfied the redevelopment of the Building is justified. The Building, being erected more than 54 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 to modern safety standards and statutory requirements. I am 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 similar building. Even if repair works are carried out, such works will bring about a modest improvement only to the existing condition of the Building and the Building will continue remain a sub-standard one.

Whether the applicants have taken reasonable steps

37.  In assessing the reasonableness of the offers, I have considered the case of Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. In particular, I 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……”

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

Unit	1st Offer 26-Apr-19	2nd Offer 22-Feb-22	3rd Offer 04-Mar-22	4th Offer 16-Nov-22
R1 - Unit D on 4/F	$8,392,000	$8,765,000	$9,807,000	$7,898,000
R1 - Unit C on 5/F	$8,526,000	$8,915,000	$9,974,000	$8,042,000
R1 - Unit C on 6/F	$8,358,000	$8,731,000	$9,768,000	$7,863,000
R2 - Unit B on 1/F	$13,292,000	$13,324,000	$14,908,000	$11,991,000
R3 - Unit B on 4/F	$12,386,000	$12,219,000	$13,671,000	$11,022,000

39.  The 1^st offers, made before the application, were accompanied with the assessment of Savills and had reflected the pro-rata share of the RDV as at 12 April 2019. The 2^nd offers, made after the application, were based on the agreed apportionment ratio and the then RDV as assessed by Savills, and there was also a 3% premium above the assessment. The 3^rd offers were made shortly after the 2^nd offers and they are higher than the 2^nd offers. The 4^th offers, made before the trial, were also based on the then RDV as assessed by Savills. Ms Lui submits that the applicants have taken reasonable steps in acquiring all the undivided shares in the Lot.

40.  On the evidence available, I 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. Although I may not agree with Mr Charles Chan each and every item in his assessments, it is a matter of differences in opinion only and his valuations before this tribunal have no serious fault. I am satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot.

41.  Mr Lin submits that the offer prices were much below the pro-rata share of the RDV as assessed by Mr CW Wong and hence they are not fair and reasonable. However, the RDV as determined in this judgment is in mid of the assessments as opined by the 2 valuation experts. In addition, there were a few only comparables for assessment of the RDV, and this is likely a reason for the variance.

42.  Mr Lin further submits that the applicants have failed to make an additional offer to the respondents after Mr Charles Chan has upward adjusted his RDV in the 3^rd joint statement dated 17 November 2022, 1 day after the 4^th offer, and the reduction in offer price from the 3^rd offer to the 4^th offer is also unjustifiable. The RDV as assessed by Mr Charles Chan has not considered the special interest of the applicants too.

43.  Mr Lin’s submissions are not supported by valuation and/or cannot be supported by the tribunal’s determination on the RDV or reserve price, which will be discussed in the later part of this judgment, and do not follow the principles as set in Capital Well. I am also of the view that it is not mandatory for the applicants to update their offers once there are changes in the applicants’ assessment. It is reasonable to say that “reasonable steps” would not cover frequent and/or automatic update of offer price because the applicants’ assessment would very often be changed due to review and/or agreement with the respondents during the application period.

RESERVE PRICE FOR THE AUCTION

44.  By reason of being 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, I am satisfied an order for sale should be granted in favour of the applicants.

45.  In the 3^rd joint statement dated 17 November 2022, the 2 valuation experts agree on the valuation date of 8 November 2022 and the adoption of residual valuation method to assess the RDV of the Lot. They also agree that the Lot has a net site area of 263.41 square meters and would be developed into a 27-storey commercial building at the plot ratio of 15 (i.e. gross floor area of 3,951.15 square meters). There would have a shop with saleable area of 158.41 square meters on ground floor and 2 office units per floor from 3^rd floor to 26^th floor with total saleable area of 2,817.74 square meters.

46.  In the assessment of gross development value (“GDV”), they agree on the value of the shop on ground floor at $255,500 per square meter, but no agreement can be reached on the value of offices on upper floors. Although they agree on the selection of 8 common comparables in Wai Wah Commercial Centre, No 6 Wilmer Street, they cannot agree on the adjustments for location and age to these comparables and the adjustment for view of 3^rd floor and 4^th floor of the hypothetical development.

47.  In the residual valuation, they agree on development cost at $3,289,400, demolition period of 6 months, construction cost at $156,226,514, construction period of 2 years, professional fee at 6%, legal cost and stamp duty on land value at 0.1% and 4.25%, but they disagree on marketing cost, interest rate and developer’s profit.

Market Value of Office Reference Unit

48.  The 2 valuation experts agree to adopt a hypothetical office unit on 15^th floor with seaview, saleable area of 58.7 square meters and headroom of 3.5 meters as the office reference unit. They also agree on the adjustment for time with reference to RVD Private Office Price Index, adjustment for headroom at 3% per 1-meter difference, adjustment for size at 1% per 10-square meter difference, adjustment for floor at 0.5% per 1-level difference, adjustment for building view and open building view at 20% and 10% respectively, adjustment for type of building at 5% and adjustment to the comparables without exclusive lavatory at 5%.

49.  Regarding the adjustment for location, I agree with Mr CW Wong that nil adjustment should be made. Although the accessibility of Wai Wah Commercial Centre, next to an entrance of MTR Sai Ying Pun Station, is better than the hypothetical development, its office environment is worse than the hypothetical development at the seafront.

50.  Regarding the adjustment for age, I agree with Mr CW Wong to adopt an adjustment rate at 1% per 1-year difference instead of 0.5% only as proposed by Mr Charles Chan. A more sensitive rate in this instance is justified to reflect the differences in quality and design between a brand new commercial building on the Lot and the comparable building completed in 1996 and renovated in 2016.

51.  The valuation of the office reference unit is listed in Appendix I of the judgment. The average unit rate of the 8 comparables is about $319,137. I am of the view that the office reference unit should be assessed at $319,000 per square meter.

Average Unit Rate of Office and Top Roof

52.  With the benefit of site inspection together with the parties and with reference to the photos as contained in the trial bundles, I agree with Mr Charles Chan that the view of 3^rd floor and 4^th floor overlooking the bridge in front of the Lot is inferior than the view of 5^th floor, but the adjustment rates for 3^rd floor and 4^th floor should be -15% and -12.5% respectively instead of -20%.

53.  The adjustment rates for floor and headroom should be the same as those in the valuation of the office reference unit. After the adjustments for view, floor and headroom, the weighted average unit rate of the office portion should be $313,790 per square meter, which is listed in Appendix I of the judgment.

54.  The 2 valuation experts agree to convert the top roof at 1/8 of the top office floor unit rate. Accordingly, the top roof should be assessed at $42,945 per square meter.

RDV of the Lot as at 8 November 2022

55.  I agree with Mr Charles Chan to adopt marketing cost at 3% of GDV, interest rate at 5% per annum and developer’s profit at 25%, instead of 2%, 4% and 17.5% suggested by Mr CW Wong. I am of the view that higher marketing cost, higher interest rate and higher developer’s profit are justified in the subject residual valuation.

56.  The hypothetical development is located in a secondary office area, where the demand for office is relatively weak. Among the 8 common comparables, there were only one transaction in 2021 and one transaction in 2019, and the other 6 comparables were transacted in 2018, about 4 years ago. In fact, there are not many office transactions in the district, and there is also no new office development for sale in recent years. Whilst, the overall property market condition is relatively poor as at the valuation date, and there will have substantial supply of offices in the coming years. In view of the Covid-19 pandemic that the office working mode has been changing, the long-term demand for office has also been weakened.

57.  In the circumstances, I consider that the development of a new commercial building on the Lot is relatively risky, which should command higher developer’s profit. At the same time, the finance cost for such higher risk development would be higher too. Higher marketing cost is also expected in a difficult market.

58.  Based on the agreements of the 2 valuation experts and the above determinations, the residual valuation of the Lot as at 8 November 2022 is listed in Appendix II of the judgment. RDV of the Lot is assessed at $465,000,000, equivalent to an accommodation value of about $117,687 per square meter (i.e. about $10,933 per square foot).

Special Interest of the Applicants

59.  Based on the findings that an adjoining lot is owned, or at least controlled by the applicants, and the opinion of Mr CW Wong that a combined site redevelopment would have a better form and in a sizeable scale for more flexible design resulting in a more attractive development, Mr Lin submits that the Lot would therefore provide an enhanced value (which would not be available to any other potential purchaser of the Lot) to the applicants if it is acquired by the applicants in this application. Mr Lin further submits that there are rooms under Part 2 of Schedule 2 of the Ordinance for the tribunal to take into account factors, for instance the existence of a developer with special and keen interest in the Lot, other than the assessed RDV when setting the reserve price.

60.  Part 2 of Schedule 2 of the Ordinance provides 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.”

61.  Mr Lin contends that, from the plain reading of Part 2 of Schedule 2 of the Ordinance, it is a requirement that the tribunal shall take into account the redevelopment potential, but it does not mandate the tribunal to equate the reserve price with the RDV as assessed by the expert or the tribunal. RDV is only one factor, but not the only factor, that the tribunal should take into account when setting the reserve price. If the reserve price may include hope value, there is no reason why the tribunal should not and cannot take into account other factors relevant to the setting of the reserve price, including the facts in the present case that the applicants have a keen and special interest in obtaining the Lot and should be prepared to give a higher value to the Lot than any other market players without special interest. Accordingly, in fixing the reserve price, an upward adjustment should be added to the RDV as assessed to reflect the existence of the special interest purchaser, and this upward adjustment is fully justified on the basis of the principle of equivalence as applicable to the Ordinance. To ignore this special interest element is to deprive the minority owner(s) of a fair and full compensation for the compulsory deprivation of their private ownership of property.

62.  In reply, Ms Lui submits that the tribunal should not entertain this new issue, which was suddenly raised by Mr Lin in extreme delay, 3 days before trial only. Given that the existence of the adjoining lot is not something new, R1 and R2 are always competently represented and the agreed list of issues settled by counsel had made no mention of this issue, there is no excuse for R1 and R2 to take out this issue lately, which would cause real prejudice to the applicants. Although the tribunal’s proceedings are comparatively informal, the proceedings are still to be conducted in an informal manner consistent with attaining justice.

63.  Ms Lui further submits that this new issue is also unarguable. If one looks at the way Part 2 of Schedule 2 is framed, it is evident that what the tribunal is meant to “take into account”, is confined to “the redevelopment potential of the lot on its own” only, and the words “on its own” also undeniably and expressly exclude the redevelopment potential of the Lot together with its adjoining lot. In addition, the argument of joint development together with the adjoining lot remains pure speculation. There is always a chance that someone other than the majority owner will successfully bid for the Lot at the auction, and the majority owner many choose to not even participate in the auction. Hence, it is still unknown whether the Lot will end up being redeveloped with the adjoining lot. In any event, all the evidence in these proceedings is silent on the “enhanced value” as alleged by R1 and R2. Mr CW Wong had just simply mentioned the existence of the adjoining lot and the alleged possibility of a combined site redevelopment, but there was no evidence on how much value ought to be added to the reserve price in order to reflect the alleged special interest.

64.  Ms Lui has also drawn the attention of the tribunal to 2 cases decided by the Court of Appeal, Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 5340 and Fully H.K. Investments Ltd and Others v Poon Vai Ching and Others, HCMP 591/2007 (unreported, 4.4.2007). In Good Faith, Lam VP (as he then was) stated at §32(d) “the minority owner may obtain the benefit of the hope value if this is reflected in the sale price achieved in an auction ordered under the LCSRO.” Ms Lui submits Good Faith therefore does not suggest that “the reserve price may include hope values”, but rather that the sale price at the auction might reflect any such hope values, if such even exist. In other words, market reality and the actual result at the auction will reveal whether any hope value and/or special interest were reflected in the final successful bid.

65.  Regarding the existence of a “special interest purchaser”, Le Pichon JA (as she then was) expressly stated in Fully H.K. at §18 and §19 that “… Where, as here, there is to be a public auction, the factors mentioned … would be matters that would be taken care of by the actual process of public auction. To say that the Tribunal should seek to attribute a value to those factors so as to establish a valuation by reference to which the fairness and reasonableness of the offer is to be determined is little short of inviting the tribunal, as it were, to second guess the outcome of the public auction. That is at odds with the principles set out in Capital Well.” and “… precisely what the Court of Final Appeal held a Tribunal should not do – to engage in a valuation exercise that decides what valuation principles ought or ought not be adopted such as ‘marriage value’ ‘strategic position’ ‘special interest’ and the like and how they are to be assessed.”

66.  With respect, I consider that these 2 cases are not directly relevant. The present case can be differentiated from Fully H.K., which is a leave to appeal case in relation to “reasonable steps”, but the present case has disputes on both “reasonable steps” and “setting of reserve price”, and we are now discussing the “setting of reserve price” only in this section of the judgment. Whilst, Good Faith has just commented that the minority owner may obtain the benefit of the hope value in an auction but there was no discussion on whether or not the setting of reserve price should include the hope value if any.

67.  I agree with Ms Lui that there is a delay in arguing this new issue that is unsatisfactory, particularly when R1 and R2 are legally represented all the time. However, I have already directed at the commencement of the trial that no new evidence could be introduced by R1 and R2 during the trial and chances would also be given to the applicants to reply. The applicants have not explained clearly what are the real prejudice if any. Even if there is prejudice to the applicants, I consider that it is mainly a matter of costs only, which will be discussed in the last section of the judgment. From case management perspective in the present case, I am of the view that it is not appropriate to preclude R1 and R2 to argue on law on the basis of the exiting and/or undisputed facts.

68.  I accept that the argument of joint development together with the adjoining lot to some extent remains speculation, but it is a matter of probability to be decided in the valuation. On a balance of probabilities, I agree with Mr Lin that the applicants would have special interest in the Lot. Where appropriate and necessary, the applicants would bid for the Lot at a higher price. In addition, from valuation perspective, “the redevelopment potential of the lot on its own” would not exclude the redevelopment potential of the Lot together with its adjoining lot because this phase has mentioned the redevelopment potential only and has not specified strictly redevelopment of the lot on its own.

69.  If a lot on its own has an intrinsic value for joint development and this can be proved on the condition that the lot is put up for sale on its own, which is commonly named as “hope value”, I consider that such “hope value” should not be excluded in the setting of reserve price, no matter whether or not this type of “hope value”, or other “hope value”, if any may also be reflected in public auction. In fact, consideration of “hope value” coincides with the definition of market value, “the estimated amount for which an asset of liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion”. However, 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.[1]

70.  Nonetheless, on the evidence available to the tribunal, I agree with Ms Lui that the subject new issue is unarguable. There is no evidence on how much is the alleged special interest. Although Lands Tribunal is a specialist tribunal, member of the tribunal is not acting as an independent valuer in the proceedings. Further, I agree with Mr Charles Chan that even if the applicants have a special interest in the Lot, they as a potential buyer of the Lot would not pay a price higher than the market value of the Lot because they should prudently envisage that such special value if any would not be available to other buyers in the market. Since other rational buyers in the subject circumstances would not bid at a price higher than the market value, the applicants as a special purchaser would not pay a higher price too.

71.  I accept that hope value can sometimes be reflected in market value. For example, when a developer owns an adjoining lot on the right and another developer owns another adjoining lot on the left, these 2 developers may bid up the price of the lot in middle when the lot in middle on its own is put up for sale in the market. When the value of a lot is relatively low and the marriage value for a joint development is substantial, there may have speculators, or they may be named as gamblers, to bid up the price. The minority owner(s) in such circumstances may also be the speculator. However, in these proceedings, there is no evidence of competitive special interest and enhanced value, and the market value of the Lot is quite substantial, which is likely unattractive to rational speculator.

72.  Part 2 of Schedule 2 of the Ordinance has already specified the consideration of “the redevelopment potential of the lot on its own” for setting the reserve price. Even if there are other factors as submitted, and/or named, by Mr Lin, the consideration should be confined to the scope under the Ordinance. As discussed above, the consideration can cover hope value, but to the extent if it can be proved with evidence and on the condition that the Lot on its own only is put up for sale in the market.

73.  Regarding the principle of equivalence, Mr Lin is not challenging the constitutionality of the Ordinance. He just submits that it is fair and reasonable to consider the special interest of the applicants and therefore the reserve price should reflect the enhanced value to the applicants. I disagree and cannot find a justified reason why the applicants should share with the respondents the enhanced value of site assembly if any when the Ordinance just specifies the consideration of “the redevelopment potential of the lot on its own” only. While the Ordinance should have struck a balance between the respective interests of the majority owner(s) and the minority owner(s), which has not been argued by R1 and R2 in the present case, the tribunal cannot rule outside the ambit of the Ordinance.

74.  The Ordinance would no doubt have some impacts on the distribution of wealth among the parties, but the arguments on the appropriateness and right extent of interference by the Ordinance should better be debated in Legislative Council instead of court room.

75.  Having considered the arguments of the parties and the above discussions, I am of the view that the RDV of the Lot as at 8 November 2022 and assessed at $465,000,000 should be the reserve price for the public auction.

ORDERS

76.  I have set out reasons why I am satisfied an order for sale should be granted and I therefore 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 Tam Tak Hing and Ms Ching Kwok Ho, 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 King & Company dated 16 February 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 $465,000,000;

(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 respondent, the 2^nd respondent, the 3^rd respondent, the Trustees and the purchaser of the Lot or its successor to apply to the tribunal for further directions.

COSTS

77.  Following Good Faith ^[2], I make a costs order nisi that the applicants do pay costs of these proceedings to the respondents, on High Court scale with certificate for counsel and including any reserved costs, to be taxed if not agreed. Unless any parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from the date of this judgment.

78.  Ms Lui submits that R1 and R2 should not be entitled to the costs in relation to the new issue, which was raised exceptionally late, some 3 days before trial only. Though I consider that in the submission of issue(s) and preparation for trial R1 and R2 including their legal team have not acted satisfactorily, there is no persuasive evidence that R1 and R2 had the bad faith to delay the case tactically. R1 and R2 had not acted unreasonably at trial too. Although there was a further round of reply submissions after the written closing submissions, the hearing of the case was shortened from 5 days as reserved to 3 days only. Hence, there is no reason why the usual compensation approach would not apply in these proceedings.