CHINA STEP CORPORATION LIMITED AND OTHERS v. LAM KING CHIN AND OTHERS

LDCS 4000/2018
[2019] HKLdT 30

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 4000 OF 2018

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J U D G M E N T

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Background

1.  This is an application for compulsory sale of all the undivided shares of and in Kowloon Inland Lot No 1309 (“1^st Lot”) and Kowloon Inland Lot No 1308 (“2^nd Lot”) (1^st Lot and 2^nd Lot are collectively referred to as “the Lots”), together with a building erected thereon known as Nos 9, 9A, 11 and 11A Liberty Avenue, Kowloon (“the Building”), for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”).

2.  The Building is an 8-storey tenement block, and is served by 1 common lift and 2 common staircases. An occupation permit No K128/63 dated 1 May 1963 was issued for the Building granting permission to occupy its ground floor (“G/F”) as 2 shops for non‑domestic use, 1^st floor (“1/F”) as 2 offices for non-domestic use, and 2^nd floor (“2/F”) to 7^th floor (“7/F”) inclusive as 4 flats per floor for domestic use.   

3.  1^stLot together with part of the Building (i.e. Nos 9 and 9A Liberty Avenue) standing thereon was allocated 14 undivided shares, and the shop on G/F, the office on 1/F and each of the flats on upper floors was given 1 undivided share, making up a total of 14 undivided shares.  2^nd Lot together with part of the Building (i.e. Nos 11 and 11A Liberty Avenue) standing thereon has the same allocation of undivided shares.

4.  The applicants filed a Notice of Application (“the NOA”) on 11 January 2018, which was subsequently amended on 17 April 2019 pursuant to an Order of the tribunal made on 27 March 2019 and a further Order made on 10 April 2019.  At the time of filing of the NOA, the Building was over 50 years old, and the applicants owned on average 85.714% (i.e. 13 out of the total 14 undivided shares of 1^st Lot and 11 out of the total 14 undivided shares of 2^nd Lot) of the Building. In the premises, the applicants owned more than the threshold of 80% undivided shares of the Lot required for building aged 50 years or above.

5.  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%.  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.  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 tabled at the Legislative Council meeting on 27 January 2010.  It came into operation on 1 April 2010. Section 3 of the Notice lowered the threshold for compulsory sale, insofar as it is applicable, from 90% to 80%.  Section 4(1)(b) of the Notice specified one of the classes for the purposes of Section 3 being “a lot with each of the building erected on the lot being issued with an occupation permit at least 50 years before the date of the application”.  Since the occupation permit of the Building was issued in 1963, i.e. more than 50 years before the date of application (i.e. 11 January 2018), the applicable percentage in the present proceedings is therefore 80%.

Respondents Remaining

6.  At the time of application, there were 7 respondents.  Since then, the applicants acquired further undivided shares from some of the respondents, and discontinued the proceedings against the 1^st respondent (“R1”), the 2^nd respondent (“R2’), the 3^rd respondent and the 7^th respondent.  At the time of trial, the applicants owned on average 96.429% of the Building, except for a flat that is owned by the 4^th respondent (“R4”), the 5^th respondent (“R5”) and the 6^th respondent (“R6”).

7.  R4, R5 and R6 are the registered owners of the flat, 2/F with the Yard of No 11A Liberty Avenue (“R4-7’s Property”).  R4 and R5 are joint executors of the estate of the late Tang Lin pursuant to a Grant of Probate under which they shall jointly administer one moiety or half part or share of and in 1 equal undivided 14^th part or share of and in 2^nd Lot together with exclusive right and privilege to hold, use, occupy and enjoy R4-7’s Property as tenants in common with R6.  R6 holds the remaining one moiety of half part or share thereof.

8.  R4, R5 and R6 have not filed any Notice of Opposition or evidence in the present proceedings, and have been acting in person.

Issues for Determination by the Tribunal

9.  Mr Mok, counsel for the applicants, called the witnesses to prove the applicants’ case.  The applicants contended that all the requirements of the Ordinance had been satisfied and asked for an order for sale of the Lots.

10.  Nevertheless, the tribunal is required to determine the following issues under the Ordinance: -

(i)   Whether the applicants have acquired the minimum undivided shares in the Lots which entitles them to make the application under the Ordinance?

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

(iii)   What are the respective existing use value (“EUV”) of all units in the Building as at 21 November 2017 as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?

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

(v)   If an order for sale should be granted, what should be the reserve price (i.e. redevelopment value (“RDV”) of the Lots for the purpose of auction sale)?

Whether the Conditions for Making an Application Under the Ordinance are Satisfied by the Applicants

11.  Section 3(1) of the Ordinance requires an applicant to possess not less than 90% of the undivided shares in a lot before it can make an application.  Section 3(2)(b) specifies that an application may also cover 2 or more lots, on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings, and where the average of (A) the percentage of the undivided shares owned by the majority owner in the lot or lots on which one of the buildings stands; and (B) the percentage of the undivided shares owned by the majority owner in the lot or lots on which the other of the buildings stand, is the not less than the percentage specified in section 3(1).

12.  As mentioned above, the Building was over 50 years’ old when the application was made.  The applicable threshold is 80%.  I am satisfied that as at the date of application, the applicants had already owned on average more than 80% of the undivided shares in the Lots.  The application was also accompanied by a valuation report, prepared by Mr Charles CK Chan (“Mr Chan”) of Savills Valuation and Professional Services Limited, assessing the EUV of each and every units of the Building on vacant possession basis without taking into account of the redevelopment potential of the Lots as at 21 November 2017 (“Application Report”), which was within 3 months of the application.

13.  I agree that the applicants were entitled to make the application under section 3(1) and section 3(2)(b) of the Ordinance.

Whether Development of the Lot is Justified Due to “Age” and/or “State of Repair” of the Building

14.  In determining the application, section 4(2) of the Ordinance empowers the tribunal to make an order for sale if it is satisfied that: -

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

(ii)   the applicant had taken reasonable steps to acquire all the undivided shares in the lot (including negotiating for the purchase of the undivided shares owned by the respondents on terms that are fair and reasonable).

15.  For the age and state of repair requirements, the applicants adduced expert evidence of Dr Sammy Yin Nin Chan (“Dr Chan”) of Wong & Cheng Consulting Engineers Limited, a structural engineer, and Mr Benson Wong Sai Ning (“Mr Wong”) of Benson Wong & Associates Limited, a building surveyor.  None of the respondents had adduced any expert evidence in this connection. 

16.  Dr Chan conducted a structural survey of the Building and prepared a Structural Assessment Report dated 19 July 2018.  Mr Benson Wong conducted a condition survey and prepared a Condition Survey Report dated 18 July 2018.  Having considered the evidence of Dr Chan and Mr Wong, I am satisfied that redevelopment of the Building is justified due to its poor state of repair and the disproportionate costs of repair and maintenance.  Although regular repair could extend the life of the Building, repair costs will increase with time.  Further, I opine that maintenance can bring about a modest improvement only to the existing condition, and the Building would remain a sub-standard one.  I am also satisfied that redevelopment of the Building is justified due to the age of the Building. This 55-year old Building is in a poor condition and has in fact come to the end of its design life.  Its design has become obsolete over time in many aspects both physically and functionally and has failed to conform to modern standards and requirements in many material respects.

Determination of the EUV of all Units in the Building

17.  Under 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 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.”

18.  Mr Mok submitted that the remaining live respondents, R4, R5 and R6, are not owners “who cannot be found”, and accordingly the tribunal is not required to be satisfied and to determine whether the EUVs assessed by Mr Chan are fair and reasonable as required under sections 4(1)(a)(i) & (ii) of the Ordinance. However, the tribunal may if it considers appropriate examine the assessments.  I agree.

19.  In the Application Report, Mr Chan explained the direct comparison method he adopted and the process of his assessment to arrive at the EUV of each unit of the Building.  He subsequently prepared a supplemental report on 19 July 2018 (“Supplemental Report”) in which he reviewed the EUV of all the units in the Building.  Under the instructions of the applicants, he had further prepared before the trial an up-dated EUV assessment of G/F of No 11 Liberty Avenue, the shop previously owned by R1 and R2, without taking consideration of the value of a cockloft.

20.  In the Supplemental Report, Mr Chan valued the reference shop unit (i.e. G/F of No 9 Liberty Avenue) at $459,000 per square meter, the reference office unit (i.e. 1/F of No 9 Liberty Avenue) at $72,000 per square meter and the reference domestic unit (i.e. 4/F of No 9 Liberty Avenue) at $116,000 per square meters.  He then compared the reference units with the other units in the Building and assessed the EUV of all units in the Building.  In the valuation of G/F of No 11 Liberty Avenue, he said that the assessment in the Application Report was based on the approved building plans and the assignment plan which there is no cockloft, but he subsequently noted during his inspection that there was a cockloft at the rear portion of the shop for storage purpose and therefore he then considered appropriate to take the cockloft area into consideration in assessing its market value.

21.  Mr Mok submitted that to give value to the cockloft is consistent with the “market reality approach” summarized in the recent tribunal case Top Select Ltd v Wong Wai Mau Enterprise Ltd[1], but the applicants agreed to forego the additional value of the cockloft and therefore instructed Mr Chan to exclude the value of the cockloft in the up-dated EUV assessment.  With respect, based on the facts and evidence before me that the cockloft had not been shown on both the approved building plans and the assignment plan, I disagree that the value of the cockloft, which was noted by Mr Chan during his inspection only, can be taken into consideration in the EUV assessment, and this is the reason why I had raised this concern in the pre-trial review hearing.  It is reasonably to envisage that, in case if the cockloft is unauthorized, the construction of it may breach the Buildings Ordinance and may be subject to enforcement action.

22.  Nevertheless, I accept the EUVs that were assessed by Mr Chan in the Supplemental Report and were updated in the up-dated EUV assessment, and am satisfied that the value of the unit owned by the respondents is not less than fair and reasonable and not less than fair and reasonable when compared with the value of the applicants’ properties.  The EUV of all units in the Building as at the relevant date of valuation, i.e. 21 November 2017, are appended below: -

Floor	Unit (Liberty Avenue)			Floor	Unit (Liberty Avenue)
	No 9	No 11			No 9	No 11
G/F	$31,490,000	$29,910,000		1/F	$5,560,000	$5,320,000
Floor	Unit (Liberty Avenue)			Floor	Unit (Liberty Avenue)
	No 9	No 11			No 9A	No 11A
2/F	$8,870,000	$8,810,000		2/F	$6,400,000	$7,350,000
3/F	$8,910,000	$8,580,000		3/F	$6,430,000	$6,480,000
4/F	$8,690,000	$8,890,000		4/F	$6,870,000	$6,520,000
5/F	$9,000,000	$8,940,000		5/F	$6,900,000	$6,550,000
6/F	$8,680,000	$8,890,000		6/F	$6,940,000	$6,380,000
7/F	$8,740,000	$8,660,000		7/F	$7,200,000	$6,890,000

23.  The total EUV of the Building is $258,850,000. 

WHETHER THE APPLICANTS HAVE TAKEN REASONABLE STEPS

24.  The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of all the undivided shares of the Lots under section 4(2)(b) of the Ordinance.

25.  The applicants had made 3 offers to R4 & R5 and R6 respectively on 27 December 2017, 16 August 2018 and 12 March 2019.  Mr Mok submitted that the applicants had taken reasonable steps to acquire the remaining undivided shares of the Lots.  All the prices offered by the applicants had made reference to the shares in the RDV of the Lots apportioned to the one moiety of the R4-7’s Property as then assessed by Mr Chan.

26.  In assessing the reasonableness of the offers, there is the following guidance from Ribeiro PJ of CFA in Capital Well[2]at [33] and [36]:-

“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……”

27.  I consider that the applicants’ offers to R4 & R5 and R6 respectively, which were based on professional valuation, do fall within a range of what may broadly be regarded as fair and reasonable. Except for the EUV assessment of G/F of No 11 Liberty Avenue in the Supplemental Report that is arguable, there is no evidence before this tribunal that Mr Chan’s assessments were faulted.  In any event, there is no great difference in the apportionment of the RDV even if the said cockloft had not been considered in the then EUV assessment.

28.  I am satisfied that the applicants had taken reasonable steps to acquire all the undivided shares of the Lots.

Order for Sale

29.  I am satisfied that redevelopment of the Lots is justified in terms of age and state of repair of the Building.  I am also satisfied that the applicants had taken reasonable steps to acquire all the undivided shares of the Lots and had negotiated for the purchase of the respondents’ shares in R4-7’s Property on terms that are fair and reasonable.  In the circumstances, I agree that an order for sale should be granted in favour of the applicants.

Reserve Price for the Auction

30.  Mr Chan said that there was no relevant land sale transaction for direct comparison, and hence he assessed the RDV of the Lots by residual method only.  He updated his RDV valuation as at 18 February 2019 in his report dated 19 February 2019.

31.  In the residual valuation, Mr Chan opined that the optimum development on the Lots comprised a 24-storey commercial / residential composite building with retail shops and plant room on G/F, retail shops and club house on 1/F, and domestic units from 2/F to 23/F.  Details of the hypothetical development with the proposed gross floor area of 3,685.22 square meters (excluding green features to be exempted) and plot ratio of about 8.4375, the gross development value assessed (i.e. on average $566,000 per square meter saleable area for shops on G/F, on average $142,000 per square meter saleable area for shops on 1/F and on average $267,000 per square meter saleable area for domestic units on upper floors), the development costs adopted and the residual valuation were set out in his report dated 19 February 2019.  He assessed the RDV of the Lots by residual method at $451,000,000.

32.  Having gone through Mr Chan’s assessments in his report dated 19 February 2019, I accept his residual valuation, which assessed the RDV of the Lots at $451,000,000, equivalent to an accommodation value of about $122,381 per square meter (i.e. about $11,369 per square foot).

Order

42.   By reason of the above, this tribunal comes to the following decisions: -

(i)   This tribunal is satisfied that redevelopment of the Lots is justified due to the age and state of repair of the Building, and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots including those of the respondents;

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

(iii)   Mr Ma Ho Fai and Ms Tsang May Ping, 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 Lots, and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Woo Kwan Lee & Lo dated 6 March 2019;

(iv)   For the purposes of the sale of the Lots by public auction: -

(a)   the sale of the Lots 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 $451,000,000.

(v)   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 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 Lots becomes the owner of the Lots; and

(vi)   Liberty to the applicants, the respondents and the Trustees to apply to the tribunal for further directions.

Costs

43.   I make a costs order nisi that there be no order as to costs.  Unless any parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from today.