KEEP POINT DEVELOPMENT LTD v. CHAN CHI YIM AND OTHERS

HCMP6550/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS

ACTION NO. 6550 OF 1998

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R U L I N G

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1.  This is yet one more chapter in a long saga which began in 1994.  Then it was that 59 of the listed 63 Defendants, owners and, in most cases, occupiers of units in aging, neighbouring tenement buildings in Wong Tai Sin sold their units to a developer called Full Country Development Limited whose stated intention was to demolish the buildings and build on the site a high-rise, multi-unit edifice.

2.  Full Country succeeded in purchasing all of the units; in all, eight shops, with cocklofts, and 85 flats.  Some of the owners accepted cash for their properties, fixed at well over the open market value.  The 59 I have referred to accepted an alternative proposition which was to be 10 per cent of an agreed price; the balance, however, to be represented by their being promised title to an equivalent unit in the building to be built, or in a neighbouring project.

3.  There were other incentives.  That which is pertinent was that Full Country would fund their re-housing costs during the period between vacating their old units and moving into the new.

4.  The 59 found the proposition too good to refuse and signed up.  Four of them were shop owners and the rest owned residential units.  They were encouraged to use the services of a firm of solicitors called Yuen Sung & Co., and the principal of that firm called Winston Yuen undertook the conveyancing for them.

5.  A particular feature of the contracts between Full Country and each of the 59 was that they were not permitted to register their interests against title because Full Country wanted to use an unencumbered title to fund the cost of the redevelopment.  So, their contractual rights were entirely dependent on the success of the venture.  But it was not a success.

6.  During the course of the development, after demolition but before reconstruction, Full Country ran out of money.  In breach of its contracts with the 59, it sold the site, lock, stock and barrel, to the Plaintiff, Keep Point Development Limited.  Keep Point registered its interest.

7.  The Defendants came to learn of the sale and, on advice, registered their interests as well.  There were, by now, 63 of them because four had been assigned the rights of one of the former owners.  Keep Point sued to have these registrations voided and won.  Under the strict rules going to priority, the Defendants were too late.  They joined Full Country in third party proceedings and sued it for indemnity and damages for breach of the contracts, and won by default.  But Full Country was broke and has been wound up and they will recover nothing from this source.

8.  They also joined Yuen Sung, suing the firm, in contract and tort, for breach of its duty to protect its clients’ interests.  Deputy Judge Woolley, following a contested hearing, found that the principal, Yuen, had failed in his duty to warn his clients of the risks associated with committing to a transaction in which their rights were unsecured during the course of the development.  This trial concerns the amount of compensation Yuen Sung must pay the Defendants.

9.  Following his finding of liability, the judge laid down heads of damages, giving the parties the opportunity to agree upon the figures based on his findings, or return to have them argued and determined.  In fact, the judge’s methods of assessment were tested, first in the Court of Appeal and then in the Court of Final Appeal.  The upshot is that the CFA has replaced the orders below with its own and returned the claim to this court for assessment of the damages each claimant is entitled to.

10.  Of the 63 Defendants, seven have settled their claims and have dropped out.  One is bankrupt.  The Official Receiver is taking no steps.  Presumably, he will accept whatever the estate is awarded.  Three more have taken their files to the Director of Legal Aid.  I was told at the beginning of this trial that they would not be participating either, I assume content to abide by the court’s findings as well.

11.  Of the various heads of damages the CFA has laid down, that which is central to the Defendants’ entitlement is that those of them who actually owned units, and assigned them to the developer, must be compensated for the capital worth of their units as at the date of assignment, that being, in fact, either May or November 1994.

12.  During the course of earlier proceedings, the parties agreed on that worth, and the CFA has ruled they are bound by that agreement.  But the CFA also ruled that they are entitled to be compensated for any enhanced value should the market have moved upwards as at the date the former owners should, at law, have mitigated their loss by purchasing a unit similar to the one they had given up.  The CFA has specifically stated that this must be by a reasonable time after they knew, or ought to have known, that Full Country had sold the project and effectively scuppered their rights to completing the purchases they had committed to.  That date will stand, however, only if the former owner was then financially able to afford to buy.  If not, the date must be extended to such time when, by virtue of having received a partial or final payment, or because of some other change of circumstance, that former owner came to be in a position to fund or raise the purchase price.

13.  Apart from those who have settled, the parties have not been able to agree when that date was or is to be, the date upon which each of the former owners could, and should, have mitigated by buying another unit.  It is likely, of course, given the numbers of claimants, that at the end of the day there will be several significant dates.  Nor have they been able to agree on what the worth of the units was, or might be, on such dates, or the formula to adopt in establishing that.

14.  Under a related head, the CFA has directed that those former owners are also entitled to be compensated for the loss of use of the unit disposed of from the date they moved out to the date upon which, under the duty to mitigate, they could, and should, have purchased an alternative.

15.  With this date, in fact, these dates not established, the parties sought assistance from surveyors each side appointed for the purpose, ...(indistinct) 2.45.43 Mr William Wong of FPD Savill for the owners and Mr Alnwick Chan of Chesterton Petty for Yuen Sung.

16.  The parties having already agreed the capital worth of the units in May and October 1994, their brief was to state their value as at the earliest date by which conceivably the owners, or any of them, may have been required to mitigate, being February 1997, and then monthly thereafter to July 2004.  That latter date was fixed because it was anticipated that that would be the date of this trial on damages.  Of course, that prospect has been overtaken by events and it is likely that the brief will have to be extended to sometime this year.

17.  The second task put upon the surveyors was to work out the rental value of each unit, month by month, from May or October 1994 to July 2004.  So it was the surveyors set about their work.  At the end of the day, Messrs Wong and Chan were able to agree some matters, but not others.

18.  As a preliminary point, I have been invited to make findings on the worth of the units on specific dates selected by counsel as being potentially useful, depending on the outcome of this trial, with rent assessed up to those dates.  To this end, I have therefore read the surveyors’ reports and listened to their evidence and am ready to make those preliminary determinations.

19.  First, some detail about the units and the district.  Wong Tai Sin is a long-established residential neighbourhood, mostly occupied by those in the lower to middle income groups.  Typically, the buildings are multi-unit tenement buildings.  Commercial enterprises occupy the ground floor with the remainder comprising small, domestic premises.  These are reached by a single staircase.  There are no lifts, no communal facilities and no professional management.  Sometimes those on the 1st floor enjoy the use of a flat roof adjoining their unit above the commercial premises.  Similarly, those on the 5th or top floors may have exclusive access to the rooftop above them.

20.  The buildings which housed the subject units fell into just this category.  They, in fact, were built on three separate adjoining titles, having a combined site of about 10,000 square feet.  One was at and known as 84 Sheung Fung Street, on the corner of Sheung Fung and Wan Fung Streets.  The remaining comprised Blocks A, B, C and D, Sheung Fung Building, which were all sited along Wan Fung Street.  The units varied in size, but all were less than 40 square metres.  Some of them had flat-roof access and others rooftop access.  The shops varied in size between 50 and 200 square metres.  All of them had cocklofts or mezzanine floors which had independent as well as external access.  One of the mezzanine floors was, in fact, independently let and used as a kindergarten.  Two of the shops had yards.

21.  There is an agreed assumption that all the flat roofs and rooftops were fully enclosed and decorated to the standard of the unit of which they were a part, effectively increasing the available living space of the unit.  It is likely that those with flat roofs would have had direct access to the added extension alongside, whilst those with rooftop access would have had to climb the stairs to get to it.  One of the rooftops was, in fact, enclosed only as to 80 per cent of its total area with a balance left as an open space.

22.  The plans of the buildings and units reveal no specifications for the erection of these improvements, and there is thus the further assumption to be drawn that they would have been unauthorised and illegal.  This is hardly an uncommon phenomenon in Hong Kong.  But the owners and/or occupiers of the affected units would have been at risk of being targeted by the Buildings Department, part of whose function is to order the removal of illegal structures with emphasis on those which are, or might pose, a hazard to safety.  As evidence in the case, I was shown a press release which issued in early 2000 stating that the Director of Buildings was planning a more aggressive policy in clearing off illegal rooftop structures on buildings serviced by a single staircase.

23.  Messrs Wong and Chan agreed on the size of the units, including rooftops, flat roofs, cocklofts and yards.  They were also able to agree on the market rentals of the domestic units for the period in question, save that they could not settle the rental value of the rooftops and flat roofs where applicable, nor could they agree the capital value of the domestic units at any of the given designated dates, or the conversion rates for the flat roofs and rooftops.  As for the four shops, the only matter that they could agree, apart from size, was the conversion rate for the yards, being one-sixth.  What remains to be resolved are the rental values, the capital values and the conversion rates for the cocklofts for capital as well as rental value purposes.

24.  There is one further matter the surveyors could not agree on.  In its judgment, the CFA stated that in assessing the notional worth of the units at the appropriate dates, incorporated into their worth must be an enhanced value reflecting the potential for redevelopment.  It was put this way at paragraph 35: 

“Clearly enough, in 1994, each of the old units did have a potential for redevelopment, and that potential should be reflected in a true valuation of the units at the time.”

The matter was further addressed at paragraph 38:

“The development potential component of the value is the additional sum which a willing and reasonable developer would pay to a willing and reasonable seller for a unit in a block ripe for redevelopment.”

25.  I come now to the reports of the surveyors and their evidence.  Of course, what they were being asked to value had long since ceased to exist.  Keep Point completed the development without untoward incident, and a high-rise tower called The Vista now graces the site.

26.  So, in assessing the worth of the individual units, first as at February 1997, they adopted what has been referred to as the direct comparison approach.  This entailed each of them identifying and inspecting domestic units having the same or similar features to a selected sample unit that was sold at or about the designated date.  They then adjusted the sale prices up and down to allow for differences, either favourable or unfavourable, as to location, size, outlook, timing and so on, in order to arrive at the appropriate worth of the sample unit.  Having done that, the exercise involved further fine-tuning, having regard to the differences, albeit minor ones, between the sample and the remaining subject units.  The same or similar exercise was undertaken for the commercial units.

27.  This was a painstaking exercise involving a massive number of calculations and, per force, arbitrary adjustments depending upon each surveyor’s personal view on the extent to which a particular feature might have advanced or detracted from the value of a particular unit.

28.  It is, I suppose, hardly surprising that the results were different and not able to be compromised.  It seems the most significant differences arose because they had a different selection of comparables and a different view on the extent to which the differences warranted adjustment.

29.  Both, in evidence, gently criticised the other’s approach.  For instance, that the comparable selected units were too dissimilar to warrant inclusion, even as adjusted, and they chose different methods in determining the worth of the domestic units thereafter.

30.  Mr Wong achieved his result by adopting an index of the Rating and Valuation Department called the Private Domestic Class A Price Index, and by this means projected his 1997 findings forward to 2004.  Class A represents a cross-section of all sales, territory-wide, of units that have a saleable area of less than 40 square metres.

31.  Mr Chan, on the other hand, where possible, and it was not, he said, because of a paucity of neighbourhood sales always possible, recalculated his values based on fresh benchmark comparables yearly, adjusting for timing and cross-checking against what he regarded as the appropriate government price index.  But there was a significant difference.  The index he used combined classes A, B and C.  This meant that all sales of units territory-wide, being up to 100 square metres in size, were included.  In fact, the subject units vary in size between 25 and 36 square metres.

32.  Mr Chan had no particular quarrel with Mr Wong’s reliance on the index to project his values forward but opined that the comparable method was likely to provide a more accurate result.  However, he did grumble at the few examples on offer.  As he said, the more comparables in the basket, the better.

33.  Both surveyors adopted similar strategies in valuing the capital worth of the commercial units and their rental values.  Mr Wong did not select a sample from the subject units.  There were, after all, only four.  Mr Chan attempted yearly comparisons thereafter, and again hampered by the lack of material.

34.  A feature of Mr Chan’s calculations was that, having gathered his basket of comparables and calculated and adjusted their relative worth, he considered, and then rejected, all those that he found were out of kilter with the main body because they were not typical and liable to distort the results.  Asked how he came to decide on whether to reject or not, he said it was a matter of perception; he made surveyor’s judgment call.  He said that this was the method he favoured, but conceded that there are many alternative approaches.  Mr Wong, as before, projected forward, this time using the Private Retail Price Index and Private Retail Rental Index.

35.  When it came to assessing the potential redevelopment factor, Mr Wong chose to reassess by an adjustment upwards of 20 per cent, which he said reflected what a developer would be prepared to add on as an incentive for a resident vendor.  He acknowledged that there was no hard or fast rule, no recognised percentage but that, in his view, this was a conservative minimum.  Mr Chan, on the other hand, declined to make any adjustment at all.  It was his considered view that any redevelopment potential was embedded already in each unit’s worth.

36.  Mr Wong drew a distinction between the domestic and commercial units, declining to enhance the latter.  His reason was that the owner of a commercial unit would be less likely to have an emotional connection with his property as distinct from the owner/occupier who might have to be persuaded to give up his home.  As it happens, the surveyors’ resultant scales of values, both as to capital and, in the case of the commercial units, rental values, are a material distance apart.  I shall return to this crucial issue.

37.  The remaining matters not agreed, being the determination of the conversion factors of the flat roofs, rooftops and cocklofts, depend upon each surveyor’s perception of the extent to which these enhance the worth of the properties because of the benefits afforded the occupiers.

38.  As far as the roof spaces are concerned, both agree that the rental value should be higher because the impact of a Notice to Demolish would be significantly less given the relatively brief duration of the average tenancy.  Both also agreed that a flat roof, because of its convenient location, was to be preferred over a rooftop.  Mr Chan drew a distinction between the periods pre and post mid-2000, a time when the press release of the Director of Buildings that came out earlier that year would have become widespread, general knowledge.  In fact, post that time, he reduced the capital worth of the spaces to that which is the recognised conversion rate for open flat roofs and rooftops, thus putting no value at all on the structures and decoration.  Mr Wong made no such distinction.

39.  Relative to the unit worth of the units, Mr Wong valued the rental worth of the flat roofs at 80 per cent and the rooftops at 75 per cent.  For capital values, he reduced these to 50 per cent and 40 per cent, respectively.  Mr Chan’s selections were lower.  For the rental worth of the flat roofs, he chose 50 per cent and for the rooftops, 33-1/3 per cent.  For capital values, these became 33-1/3 per cent and 25 per cent, respectively, and from post mid-2000, he halved these to 16-2/3 per cent and 12½ per cent.  The final calculations thus of 1/6th and 1/8th, in fact, equate with the standard worth of open flat roofs and rooftops.  In respect of the cocklofts, Mr Wong’s conversion rate was 33-1/3 per cent; Mr Chan’s was 25 per cent.

40.  Before ruling on these various matters I am required to determine, I think it appropriate to remark on the quality of the evidence before me.  The comprehensive reports defining the methodology used by both surveyors, coupled with their performances in the witness-box, reveals them to be dedicated professionals at the height of their game.  That their methods and results are different and irreconcilable goes to show that valuing is not scientific or mathematical, but an art form for which feel plays as much a part as does hard data.  That said, it is now my difficult task to select a methodology and calculations which I hope will do justice to all who are affected.

41.  On the all important topic of valuing the capital worth of the units, it is obvious in the absence of the units that the adaption of comparables is the only feasible starting point.  In undertaking that exercise, my view is that the more comparables in the basket, the more reliable the end result data would be.  Of course, no unit is identical, but those variations are dealt with by adjustment.  The important feature is to match the environment, the style of unit, the size and the timing.

42.  What concerns me about Mr Chan’s approach is that to expel from his basket those comparables that did not to him feel right might well end up distorting the figures rather than preventing a distortion.  When it came to projecting the figures forward year by year, I accept Mr Chan’s logic that actual sales achieved in those years provided a reliable guide as to what the market was doing.  However, I see that more as a check on the more comprehensive data achieved by following the territory-wide price index adopted by Mr Wong rather than as a primary means of establishing values and, as Mr Chan was quick to accept, a spot check on government statistics indicated that Mr Wong’s adopting the R and V index produced figures that were within an acceptable range.

43.  On this point, I particularly favour the use by Mr Wong of the Class A scale as against Mr Chan’s composite A, B and C scale.  Units were all smaller; some much smaller than the maximum of 40 square metres.  To compare them with units sold all over Hong Kong up to four times that size was, in effect, to compare chalk with cheese.  The adoption of the appropriate index has the added advantage that it will be much more convenient and cost effective to project forward to a date to coincide with the delivery of this judgment if ,as seems likely, that proves necessary.

44.  Counsel, in their closing addresses, have been studious to point out differences in the methods used by the surveyors as to the selection of comparables and method of adjustment and, of course, there are differences.  Inevitably, they have produced different results, but neither surveyor could be accused of going down the wrong path.

45.  However, aside from my concerns as to various aspects of Mr Chan’s strategy, it seems to me, and I find, that Mr Wong’s methodology in assessing the values, adjusted as I shall come to, fits the bill as to accuracy and, by use of the indices, reliability, and I propose to adopt his format accordingly.

46.  I come next to the issue of the potential redevelopment factor.  I have to say I prefer Mr Wong’s assessment that there should be an enhancement rather than Mr Chan’s that it is already embedded in the market worth of the units.  The CFA judgment anticipated an add-on, I think for good reason.  As both surveyors applying their expertise stated, the scope for redevelopment was predetermined by such physical attributes as specific location, size, prospects of amalgamation and such like.  A small site will seriously inhibit commercial viability, given the percentage space needed for lifts and lift lobbies.

47.  Some of the comparables chosen were obviously not attractive prospects.  As it happens, in the intervening time, none are in buildings that have been demolished for redevelopment.  Conversely, the buildings comprising these units were ripe for development.  The amalgamated site was more than 10,000 square feet.  This has allowed The Vista to be built, having many times the plot ratio of the original buildings.  Undoubtedly, this would have been a major incentive for redevelopment.  Mr Wong said 20 per cent was a conservative minimum.  I can find no good reason to discredit that notion or otherwise vary it.

48.  I have been asked in closing submissions by counsel for the Defendants to consider an enhancement to the commercial units as well, perhaps by a smaller percentage.  Mr Wong has considered and rejected that course, and there is no evidence to suggest he was wrong to do so.  The enhancement of 20 per cent shall be to the capital worth of the domestic units only.

49.  I come now to deal with the issue of flat roofs and rooftops.  First, I pay heed that the value is of an unauthorised structure that would have been liable to be subjected to a demolition order at any time.  I make no distinction, as does Mr Chan, between the periods pre and post the summer of 2000.  Nothing changed as to the status or liability for enforcement.  But I also pay heed to the value to the occupiers of these structures.  The flats were, on any account, very small.  The use of the rooftops and flat roofs would have virtually doubled the size, giving the owners a singular advantage.  It seems to me, and I so find, that overall figures somewhere between those propounded by Messrs Chan and Wong are a reasonable solution.  In respect of that unit whose rooftop was not enclosed as to 20 per cent, that 20 per cent will be assessed as an open rooftop.

50.  For enclosed flat roofs, the conversion factor shall be 40 per cent and for enclosed rooftops, it shall be 33-1/3 per cent.  The rental value conversions shall be, respectively, 60 per cent and 40 per cent.  For the open space, that shall be 12½ per cent in respect of both capital and rental values.

51.  Finally, the cocklofts.  This expression is something of a misnomer.  They were clearly not crawl spaces suitable only for storage, but were more like mezzanine floors that could be independently utilised; one was.  I am satisfied that this practical feature would have impacted on their value to the extent not less than that unit rate percentage proposed by Mr Wong, being 33-1/3 per cent.  That is the conversion rate I adopt.

52.  That concludes my findings on the preliminary point.  I leave it to the parties’ legal teams by utilising Mr Wong’s charts, with appropriate adjusting, to come up with the appropriate figures which reflect my determinations.  If there is some difficulty, I invite them back.  I suggest the order for sealing should incorporate a schedule for ease of reference, checked, I trust, for accuracy by both sides.

53.  I anticipate that the costs order should be in the cause but, if need be, I can hear from counsel in a moment.  The parties will need a bit of time to digest these rulings, and I now invite counsel to anticipate how much time they might need for this purpose.