FULLY H.K. INVESTMENTS LTD AND OTHERS v. POON VAI CHING, THE EXECUTRIX OF THE WILL OF POON KAM CHUEN (DECEASED) AND OTHERS

LDCS 3000/2005

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Land Compulsory Sale Application No. LDCS 3000 of 2005

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JUDGMENT

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Background

1. This is an applicant made by the 1^st to 3^rd Applicants for an order of compulsory sale under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”).  The land in question is Section A of Inland Lot No. 3565 (“the Lot”) on which the building known as Villa Splendor, Nos. 9-12 Chun Fai Terrace, Hong Kong (“the Building”) is erected.  Nos. 9, 10, 11 and 12 Chun Fai Terrace are also known as Blocks 4, 3, 2 and 1 of the Building respectively.

2. The Building has 12 units (11 of which include a car parking space with the exception of the 1^st Floor of Block 2) and each unit has 1 undivided share of the Building and the Lot.  No separate undivided share is given to the car parking spaces.  The 1^st to 3^rd Applicants own 11 units and 10 car parking spaces.  The only unit that is not owned by the Applicants is the Ground Floor of Block 1 (No. 12) including Car Parking Space No. 14 (“the Remaining Unit”).

3. The late Mr. Poon Kam Chuen, who died on 13 December 1998, owned the Remaining Unit, and by his will, “No. 12 Chun Fai Terrace, Ground Floor, Hong Kong” was bequeathed to the 2^nd Respondent.  However, Car Parking Space No. 14 was not mentioned in the will.  There was a question as to whether the Car Parking Space No. 14 was also given to the 2^nd Respondent by the will or it falls into the residual estate of the will.  The 1^st Respondent is the executrix of the will and the probate was granted to her on 16 January 2002.  Under the will, the 1^st to 5^th Respondents are the beneficiaries of the residual estate. 

4. Nevertheless, during the trial the 1^st to 5^th Respondents executed an Assent dated 16 October 2006, whereby the 2^nd Respondent became the legal and beneficial owner of the whole of the Remaining Unit, including the Car Parking Space No. 14.  The 1^st Respondent also withdrew her Notice of Opposition on 24 January 2007.  The 3^rd to 5^th Respondents did not file any Notice of Opposition and were absent throughout the proceedings.  Thus, the application only involves the Applicants and the 2^nd Respondent.

5. In his Notice of Opposition, the 2^nd Respondent opposed the application on 3 grounds as follows:-

“(a)    The values of some or all units of the Building as assessed in the Application are disputed.  The Application should not be allowed because of the said incorrect valuations.

(b)      The Applicants have failed to take reasonable steps to acquire the undivided share in the Land relating to the premises from the 1^st and 2^nd Respondents.  In particular, the Applicants have failed to negotiate for the purchase of the 1^st and 2^nd Respondents’ legal and beneficial interest in such undivided share on terms that are fair and reasonable.

(c)      The redevelopment of the Land and the Building is not justified having regard to the age and existing state of repair of the Building and the provision set forth in Section 4(2)(a) of the Ordinance.”

6. However, in the closing submissions, the 2^nd Respondent no longer relies on incorrect valuations as a ground of opposition per se and only proceeds with the other 2 grounds.  Thus, the issues in this case are whether the Applicants have taken reasonable steps to acquire the Remaining Unit on terms that are fair and reasonable, and whether redevelopment of the Lot is justified.  The 2^nd Respondent further argues that these 2 issues must be determined as at the date of the application, i.e. 21 November 2005.

Fair and reasonable offer

7. The main dispute in this regard is whether the Lot should be valued on the basis of Plot Ratio 9 or Plot Ratio 5.  There is a set of approved plans for the Lot in existence allowing the Lot to be developed with Plot Ratio 9, which is almost twice the limit imposed by the current OZP dated 30 September 2005.  Thus, apart from this existing set of approved plans, no other plans with Plot Ratio 9 will be approved.  The existing approved plans belong to a company called Luck Dragon Development Limited (“Luck Dragon”).  The 2^nd Respondent alleges that Luck Dragon is a related company of the Applicants and the Applicants themselves are also related companies, and hence when the Applicants obtain an order for sale, they may be able to make use of the approved plans and develop the Lot on the basis of Plot Ratio 9.  On that basis, the 2^nd Respondent’s expert, Mr. Faulkner, values the Lot at $917.7m.  This would give the 2^nd Respondent a share of $77.78m.

8. The Applicants have made various offers ranging from $30m to $34.925m before the commencement of the present application and raising it to $42.5m thereafter on 23 June 2006.   The 2^nd Respondent alleges that it is still far below the sum of $77.78m and hence the offers made by the Applicants are unreasonable.

9. On the other hand, the Applicant’s expert, Mr. Chan, adopts the building restrictions imposed by the OZP dated 30 September 2005, i.e. a maximum plot ratio of 5 and a height of 30 storey including carports, and values the Lot at $416m.  The 2^nd Respondent’s share would then be $35,276,800.  So the Applicants contend that the offers made by them are reasonable.

10. In this regard, the 2^nd Respondent relies on a no. of authorities such as Raja Vyricherla Narayana Gajapatiraju v. The Revenue Divisional Officer Vizagapatam [1939] AC 302, Director of Lands v. Yin Shuen Enterprises [2003] 2 HKLRD 399, IRC v. Clay [1914] 3 KB 466, Million-Add Development v. Secretary for Transport [1997] CPR 316 and MajorCouncillors & Citizens of the City of Brighton v. Road Construction Authority [1986] VR 255 and argues that the offers must reflect the full redevelopment potential of the Lot on the basis of Plot Ratio 9.

11. We, however, accept the Applicants’ submission that these cases are not relevant for the purpose of determining whether the offers are reasonable or not, as these cases are all concerned with resumption of land only.  The correct approach is found in the judgment of the Court of Final Appeal in Capital Well Ltd. v. Bond Star Development Ltd. [2004] 4 HKLRD 363.  In that case, the Court of Final Appeal has made a very clear ruling that in making the assessment of whether reasonable steps have been taken by the Applicant under s. 4(2)(b) of the Ordinance, 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.  The Court of Final Appeal also makes it clear that if duly satisfied that the rejected offer was fair and reasonable, the Tribunal may make the order, leaving the value and level of compensation to be determined by the public auction. 

12. Thus, it is not necessary for us to go through a valuation exercise or to adjudicate whether the valuation principles derived from the cases cited by the 2^nd Respondent should be adopted in the valuation of the Lot.  We only need to determine whether the offers are fair and reasonable.

13. Moreover, 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 …”

(Underline added)

14. So only the redevelopment potential of the Lot on its own should be taken into account.  If the approved plans were to be considered, one is not taking into account of the potentiality of the Lot on its own.  The Plot Ratio 9 was not attributed by the Lot on its own but with the set of approved plans, which is a separate item of asset not available to everyone.  Thus, we totally reject the submission that the offers must reflect the valuation on the basis of Plot Ratio 9.  We find that it is fair and reasonable to make offers based on the assessment with Plot Ratio 5, which is the maximum limit under the current OZP.

15. As Mr. Faulkner estimated the redevelopment value of the Lot, on the basis of Plot Ratio 5, to be in the sum of $508,890,000, the 2^nd Respondent^’s pro-rata share of the redevelopment value of the Lot is $43,153,872.  Mr. Faulkner has made supplemental reports to change the figure to $44,604,800.  Since the last offer made by the Applicants before the commencement of the proceedings was $34.925m, it represents a difference of about 19% to Mr. Faulkner’s earlier figure and about 21.7% to Mr. Faulkner’s later figure.  On the other hand, if we adopt the latest offer of $42.5m made by the Applicants after the commencement of the proceedings, the difference is just about 1.5% to Mr. Faulkner’s earlier figure and about 4.7% to Mr. Faulkner’s later figure.

16. In deciding on the issue of whether the Applicants have failed to take reasonable steps to acquire the undivided shares held by the 2nd Respondent, the offers, as decided by the Court of Final Appeal, need only fall within “a range of what may broadly be regarded as fair and reasonable compensation”.  The post-application offer of $42.5m is clearly within that range.    However, the 2^nd Respondent contends that no account should be taken of any offer made by the Applicants after the filing of the present application in the Tribunal.  We disagree with this approach.

17. Section 4(2) of the Ordinance stipulates that:-

“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)    …

(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).”

(Underline added)

18. There is no indication in the Ordinance that the time for taking reasonable steps must be before the application.  On the contrary, the phrase “has taken reasonable steps” is in present perfect tense and clearly refers to the present time “after hearing the objections”, which must be after the proceedings have commenced.  So we are of the view that the offers made after the proceedings have commenced can be taken into account.

19. On the other hand, if our interpretation were wrong and the Tribunal should only take into account the highest pre-application offer, we are also of the view that the pre-application highest offer of $34.925m can be accepted as “within the range of what may broadly be regarded as fair and reasonable”.

20.  In assessing the redevelopment value of the Lot, both parties adopted the residual method of valuation, which required the estimates of many variables all of which in turn relied heavily on estimates made by them.  The basic variable inputs of the residual method include the estimate of the value of the completed hypothetical development (usually termed the “Gross Development Value” or the “GDV”), building and development costs, profits and risk of development, period of discounting the GDV and costs and the discounting rate. 

21.  The estimate of the value of the GDV is a valuation exercise of its own, using the comparative method.  In fact, both experts used different sets of apartment comparables in different comparable buildings as the basis of assessing the GDV.  Much of the time spent in the hearing was on the issue of which comparable apartment units should be preferred to the others.

22.  According to the sensitivity analysis carried out by the Applicants, if one of the various inputs of the residual valuation were to change, the resulting site values of the two experts would differ by about 15%.  It was therefore submitted that the parties’ purchase offer estimates, which were based on the two experts’ valuations, were within what may broadly be regarded as fair and reasonable.

23. The Lands Tribunal in Hong Kong has since 1980s generally accepted the residual method of valuation for the purpose of valuing site value, in the absence of suitable direct site sale comparables  (For example, Redhill Properties Ltd. v Director of Engineering Development [1984] HKDCL 1).  In this respect, the Tribunal has simply been following the accepted approach of the valuation profession in Hong Kong.  However, it remains true that because of the large number of variables used in a residual valuation, the result of valuation is dependent on the differences in opinion of the experts on these variables.  For example, as commented by H.H. Judge Cruden in page 532 to 533 of his book, Land Compensation and Valuation Law in Hong Kong, 2^nd edition, “The other elements of a residual valuation, unlike the assessment of gross receipts, rely heavily on estimates.  The hypothetical nature of the development increases the opportunity for a diversity of expert opinion to exist on the proper amounts or percentages to allow.”   

24. Valuation, as we all know, is not an exact science.  It depends heavily on the skills, experience and above all, the expert opinion of the valuer carrying out the valuations.  Even a very simple valuation of the current market value of an apartment unit in a fairly new building is of no exception.  But of course, the range of what may broadly be regarded as fair and reasonable valuation of such a property, carried out by the valuation professionals who have good knowledge of the market, should be much smaller than the valuation of redevelopment value of a development site.  Assuming a normal market condition with a fair number of transactions of suitable comparables, our view is that the broad range of value of such a property should be within a limit of 10%. 

25. However, by contrast, the broad range of value of a shop unit that could be as taken as fair and reasonable should be of a higher magnitude because firstly, there is usually a shortage of suitable comparables that require little adjustments and secondly, the differences between the subject shop and the comparables are usually more profound than the differences between an apartment unit and the comparables.

26. The broad range of limit of fair and reasonable valuations for a site should be even higher than that of a shop unit.  We have already stated above that the potential volatility of a residual valuation was due mainly to its methodology, which requires the adoption of a large number of variable inputs to be employed in the hypothetical development to be erected on the Lot.  In our opinion, in carrying out the residual valuation of the subject Lot in the present case, a difference of 19% or 21.7% can be accepted as “within the range of what may broadly be regarded as fair and reasonable.”  We form our opinion after consideration of the experts’ reports and their evidence during the hearing.  In particular, we note that after changing only one set of input in the residual valuations, the difference in the resulting site value narrows down to about 15% (per evidence of Mr. Chan given during the hearing which was not challenged by the Respondent).   

27. Thus, our conclusion is that the Applicants have made reasonable offers to the 2^nd Respondent both before and after the application has commenced.  In other words, the Applicants have taken reasonable steps to acquire all the undivided shares of the Lot including the 2^nd Respondent’s share and hence the requirement in section 4(2)(b) of the Ordinance has been satisfied.

28. We should add that during the closing submission, the 2^nd Respondent attacked the credibility of Mr. Chan on the ground that he had long term relationship with “the instructing party”, but we find that such an attack is totally unfounded.  There is nothing unusual for a professional surveyor to have been instructed by the same client on a number of occasions for different projects.  His reports and evidence are clearly given in a professional manner and we have no reason to doubt his credibility at all.

Whether redevelopment is justified

29. Section 4(2)(a)(i) of the Ordinance requires that the redevelopment of the Lot is justified due to the age or state of repair of the existing development on the Lot, otherwise the Tribunal should not make an order for sale.

30. The Applicants have adduced evidence from Mr. Benson Wong, Mr. Richard Wong and Mr. Charles Chan on the conditions of the Building.  They all concluded that the redevelopment of the Lot is justified due to the age and the state of repair of the Building.  In sum, the Building is already 40 years old.  Its building structure, components, finishes and services have deteriorated to the extent that it is considered to be unfit for habitation unless essential repairs are implemented, but the costs of the essential repairs are unjustifiably high.

31. As the 2^nd Respondent did not adduce any evidence to rebut the Applicants’ evidence, we fully accept the evidence of the Applicants’ witnesses in this regard.  We therefore find that it is justified to redevelop the Lot due to the age and state of repair of the Building.

32. We are also of the view that the time for the requirement of the redevelopment to be justified can be at the trial after hearing the objections, and not just before the application.  This, however, should have no bearing in the present application, as it is not alleged that the conditions of the Building only deteriorated after the application has commenced.

Conclusion

33. As we find that both the requirements in section 4(2) (a) and (b) are satisfied, there is no reason for us to refuse to make an order for sale.  We accordingly grant the order for sale as sought by the Applicants.

34. On the basis of Plot Ratio 5, there is no dispute that the reserve price of the Lot for the public auction can be fixed at $508.89m.  We will therefore fix the reserve price at this amount.

35. The 2^nd Respondent has not raised any objection to the appointment of the 2 trustees proposed by the Applicants, namely Mr. Ma Ho Fai and Ms. Tsang May Ping.  We will therefore appoint them as trustees for the sale.

36. Likewise, there is no dispute on the Conditions of Sale submitted by the Applicants.  We shall allow the sale to be proceeded on the same Conditions of Sale.

Orders

37. We therefore order as follows:-

(1)  All the undivided shares in the Lot the subject of the application be sold for the purposes of the redevelopment of the Lot.

(2)  Mr. Ma Ho Fai and Ms. Tsang May Ping be appointed as trustees for the sale and to discharge the duties imposed on trustees under the Ordinance, and be authorized to charge such remuneration for services as trustees in accordance with the terms set out in the letter of Messrs. Woo, Kwan, Lee and Lo dated 7 July 2006.

(3)  The Lot shall be sold by public auction in accordance with the conditions specified in Schedule 2 of the Ordinance and the Conditions of Sale submitted by the Applicants.

(4)  The reserve price for the public auction shall be fixed at the sum of $508.89 million.

(5)  Subject to any further extensions that the Tribunal may subsequently allow upon the application of the purchaser or his successor in title, the redevelopment of the Lot shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot became the owner of the Lot as specified by the Ordinance.

(6)  Both the Applicants and the 2^nd Respondent may participate in bidding at the public auction.

(7)  Liberty to the Applicants, the 2^nd Respondent and the trustees to apply to the Tribunal for further directions.

(8)  Costs Order Nisi: The 2^nd Respondent do pay the 1^st to 3^rd Applicants their costs of the application with certificate for counsel, to be taxed on High Court Scale if not agreed.  If there is no application on costs within the next 14 days, the costs order nisi shall become absolute.