WELL WILL COPORATION LTD v. FORTUNE MAX DEVELOPMENT LTD AND OTHERS

LDCS 28000/2019

[2021] HKLdT 19

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 28000 OF 2019

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JUDGMENT

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BACKGROUND

1.  This is the applicant’s 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 Kowloon Inland Lot No 10555 (“the Lot”) together with the building erected thereon known as Lai Yuen, Nos 7 & 8 Tak Hing Street, Kowloon (“the Building”).

2.  The Building comprises 2 inter-connected residential blocks over a 1-level commercial floor. Each residential block is served by 1 lift and 2 common staircases (i.e. 1 of them is shared with another residential block). Occupation permit No K420/64 was issued for the Building on 9 September 1964, granting permission to occupy its lower ground floor as 2 shops for non‑domestic use, ground floor as 2 flats for domestic use, 1^st floor to 8^th floor as 4 flats per floor for domestic use, and roof as 2 flats for domestic use.  According to the approved building plans of the Building, there are 5 shops (i.e. Units 7A, 7B, 8A, 8B and 8C) planned on lower ground floor, 2 flats (i.e. Flats A and B) planned on ground floor, 4 flats (i.e. Flats A, B, C and D) planned on each of 1^st floor to 8^th floor, and 2 flats planned on penthouse.

3.  According to the records of the Land Registry, the lower ground floor is named as street level. Flats A and B on the ground floor are named as Flats A-1 and B-1 respectively, Flats A and B on the 1^st floor are named as Flats A-2 and B-2 respectively, and so on up to the 8^th floor as Flats A-9 and B-9 respectively. Flats C and D on the 1^st floor are named as Flats C-1 and D-1 respectively, and so on up to the 8^th floor as Flats C-8 and D-8 respectively, whilst the 2 flats on the roof or penthouse are named as Flats C-9 and D-9 respectively. With reference to the approved building plans, assignment plans and deed of mutual covenant plan, Flats A-1 and D-1 are attached with yard, Flats A-9 and B-9 are attached with roof, and Flats C-9 and D-9 are attached with flat roof.

4.  The Lot together with the Building standing thereon is allocated 76 undivided shares. Unit 7A, Unit 7B, Unit 8A and Unit 8B & 8C on street level are given 1/3 of 3/76, 2/3 of 3/76, 1/3 of 3/76 and 2/3 of 3/76 undivided shares respectively, each of the flats (i.e. except Flats C-9 and D-9) is given 2/76 undivided shares, and each of Flats C-9 and D-9 is given 1/76 undivided share, making up a total of 76 undivided shares.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

5.  At the time of filing of the Notice of Application (“NOA”) on 28 August 2019, there were 7 respondents and the applicant owned 81.58% (i.e. 62 out of the total 76) undivided shares in the Lot, more than the threshold of 80% required for building aged 50 years or above.

6.  After the filing of the NOA, the applicant acquired units from the 2^nd, 3^rd, 5^th, 6^th and 7^th respondents, and subsequently discontinued the proceedings against them.

7.  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%. 

8.  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. 

9.  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”

10.  Since the occupation permit of the Building was issued in 1964, i.e. more than 50 years before the date of application (i.e. 28 August 2019; the relevant date under the Notice), the applicable percentage is therefore 80%.

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

THE REMAINING RESPONDENTS

12.  At trial, the applicant owned 92.11% (i.e. 70 out of the total 76) undivided shares in the Lot. The following 3 respondents remained in the present action: -

Respondent		Premises
1st Respondent	(“R1”)	Flat A-3 (“R1’s Property”)
3rd Respondent 4th Respondent	(“R3”) (“R4”)	Flat B-3 (“R3’s Property”) Flat B-9 (“R4’s Property”)

13.  R1 is unrepresented, did not file Notice of Opposition, did not file any evidence and did not appear in any hearing including the trial.   

14.  The applicant and R3 have signed an agreement for sale and purchase of R3’s Property before the trial. On 1^st February 2021, leave was granted to R3 to withdraw his Notice of Opposition. After the trial, leave was granted on 4 March 2021to discontinue the proceedings against R3.

15.  R4 is represented by Mr Steven Kwan and Ms Charlotte Chan. R4 primarily disputes the valuations as assessed in the application and put the applicant to strict proof in respect of the other statutory requirements under the Ordinance.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

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

1)  What was the respective existing use value (“EUV”) of all units in the Building as at 11 June 2019, the valuation date adopted in the application valuation report dated 19 August 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 (i.e. redevelopment value (“RDV”) of the Lot) for the purpose of auction sale?

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING

17.  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.”

18.  While R1 did not appear in any hearing, there are disputes between R4 and the applicant on both the EUV and RDV valuations.  R4 relies on the reports and valuations prepared by Mr Denys Kwan of CS Surveyor Limited, whilst Mr Charles Chan of Savills Valuation and Professional Services Limited is appointed by the applicant.

EUV of Shops

19.  In the valuation of the shops on street level, the 2 valuation experts agree on the areas and attributes of the shop units in the Building and the comparables, most of the conversion rates for the ancillary areas (i.e. yard at 1/6, cockloft / mezzanine floor at ¼, and water closet at yard at 1/2), the selection of 7 common shop comparables, some of the adjustments to the shop comparables (i.e. adjustment for time with reference to time indices, adjustment for age at 1% per 5-year, adjustment for size at 1% per 10-square meters, and adjustment for headroom at 4% per 1-meter), and the adoption of the same shop reference unit (i.e. Unit 7A on Street Level).

20.  The 2 valuation experts dispute whether Comparable R8 should be selected in the analyses.  They also disagree on the conversion rates for area under staircase (i.e. with headroom under 2 meters), the adjustment for frontage, and some of the adjustments for location and layout.  Mr Denys Kwan has once adopted reduced zoning method, but during cross examination at trial he said he would not recommend the tribunal to adopt such method.

21.  I agree with Mr Charles Chan reduced zoning method should not be adopted in this instance because the differences in depth between the shop reference unit and the comparables are not great at all. I also agree with Mr Charles Chan to convert the area under staircase at 1/2 because it is less useful, but I agree with Mr Denys Kwan not to adopt Comparable R8, which was transacted in 2016, far from the valuation date, and the adjustment for frontage at 1% per 1-meter difference instead of 4% per 1-meter difference proposed by Mr Charles Chan. I consider Tak Hing Street is a quieter street, thus less sensitive to difference in frontage.

22.  Regarding the adjustment for location, the 2 valuation experts agree to apply adjustment rates at -27.5%, -35% and -10% to Comparables R2, R3 and R7 respectively, but they disagree on the adjustment rates for Comparables R1, R4 and R6 that are located along Shanghai Street and Comparable R5 that is located along Kwun Chung Street. With the benefit of site inspection together with the parties, I agree with Mr Denys Kwan that the respective locations of Comparables R1 and R6 are better than that of the shop reference unit and therefore should justify an adjustment at -5% instead of +10% proposed by Mr Charles Chan. Although this section of Shanghai Street serves mainly the lower income group in the district, it is relatively busy with heavier pedestrian flow. Accordingly, I consider nil adjustment should be made to Comparable R4 that is located in a quieter section of Shanghai Street, and +10% should be made to Comparable R5 that is located in a much quieter area with lesser pedestrian flow.

23.  In the adjustment for layout, I consider in addition to the consideration of shape, greater weighting should be given to depth because the shop front area would have a higher value.  In terms of shape, the shop reference unit is a regular unit and is slightly better than Comparables R1, R2, R3, R5, R6 and R7. After consideration of the respective depths, I consider the comparables should be adjusted in the range of -3% (i.e. Comparable R3) to 4% (i.e. Comparable R1).

24.  The valuation of the shop reference unit is listed in Appendix I of the judgment.  The average unit rate of the 7 comparables is about $383,926.  I consider the shop reference unit should be assessed at $384,000 per square meter, a midway figure between $405,000 proposed by Mr Charles Chan and $376,000 proposed by Mr Denys Kwan.

25.  By applying the same principles above, the valuation of all the ground floor shops is listed in Appendix II of the judgment, and the sub-total EUV is determined at $109,320,000. The 2 valuation experts have agreed to make adjustment for layout to Unit 7B and Unit 8B & 8C at -10% and -4% respectively. I consider the layout of Unit 8A is better than that of Unit 7B but is worse than that of Unit 8B & 8C, and therefore should be adjusted at -6%.

EUV of Flats

26.   The 2 valuation experts agree on the areas and attributes of all flats in the Building and the comparables, the conversion rates for the ancillary areas (i.e. yard at 1/6, flat roof at 1/6 and top roof at 1/8), the adoption of the same domestic reference units (i.e. Flat C-6 as large reference unit and Flat C-9 as small reference unit) and their unit rates at $117,000 and $140,000 per square meters. They also agree on the adjustments for size (i.e. 2% per 10-square meter for large units and 2% per 5-square meter for small units), lighting and ventilation (i.e. +2% to Flats A and D), floor (i.e. 0.5% per 1-storey), view (i.e. -2% to 8%), internal condition (i.e. -6% to +3%), and privacy (i.e. -3% to Flats A-1, B-1 and C-1).

27.   The 2 valuation experts disagree on the adjustment for top floor. Mr Charles Chan proposes to make an adjustment at -5% to Flats A-9, B-9, C-8 and D-8, but Mr Denys Kwan considers this adjustment is not necessary.  I agree with Mr Charles Chan the top floors in this instance are more susceptible to water seepage and the adverse effects of weather, but the adjustment rates for Flats A-9 and B-9 should be -3% only and the adjustment rates for Flats C-8 and D-8, which are partly covered by the flats above, should be -2% only.  I also agree Mr Charles Chan to deduct reinstatement costs for the outstanding building orders registered against Flats A-9 and C-9 which are owned by the applicant.

28.  The valuation of all the domestic units is listed in Appendix III of the judgment, and the sub-total EUV is determined at $432,560,000.

EUV of All Units in the Building

29.  The EUV of all units in the Building as at the relevant date of valuation, i.e. 11 June 2019, and adopted by this tribunal are appended below: -

Street Level	EUV		Street Level	EUV
7A	$21,960,000		8A	$18,850,000
7B	$33,650,000		8B & 8C	$34,860,000

Flat	EUV		Flat	EUV
A-1	$13,320,000		C-1	$10,050,000
A-2	$12,920,000		C-2	$11,680,000
A-3	$12,980,000		C-3	$11,740,000
A-4	$13,830,000		C-4	$11,460,000
A-5	$13,500,000		C-5	$11,860,000
A-6	$13,980,000		C-6	$11,570,000
A-7	$13,220,000		C-7	$11,630,000
A-8	$13,700,000		C-8	$11,460,000
A-9	$14,190,000		C-9	$5,950,000
B-1	$10,080,000		D-1	$14,470,000
B-2	$11,340,000		D-2	$12,390,000
B-3	$11,570,000		D-3	$12,340,000
B-4	$11,110,000		D-4	$12,020,000
B-5	$11,510,000		D-5	$13,050,000
B-6	$11,570,000		D-6	$13,930,000
B-7	$11,280,000		D-7	$13,590,000
B-8	$10,980,000		D-8	$13,380,000
B-9	$12,620,000		D-9	$6,290,000

30.  I therefore accept the total EUV of the Building is $541,880,000 (i.e. $109,320,000 + $432,560,000). 

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

31.  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).”

32.  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

33.  The applicant adduces expert evidence of Mr CM Wong, a structural engineer, of CM Wong & Associates Limited and Mr Benson Wong, a building surveyor, of Benson Wong & Associates Limited. Mr CM Wong conducted a structural survey of the Building and prepared a Structural Assessment Report on 24 April 2020.  Mr Benson Wong conducted a condition survey of the Building and prepared a Condition Survey Report on 27 April 2020. 

34.  None of the respondents adduced expert evidence to rebut the reports complied by Mr CM Wong and Mr Benson Wong.  

35.  Having considered the reports of Mr CM Wong and Mr Benson Wong, I accept their expert opinion. The Building, being erected more than 56 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.

36.  I am also of the view 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 of redevelopment.   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.

37.  By reason of the matters set out above, I am satisfied the redevelopment of the Building is justified.   

Whether the applicant has taken reasonable steps

38.  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……”

39.  The applicant has made 2 offers to R1 and R4 on 5 July 2019 and 5 February 2020, which were accompanied with the assessment of Mr Charles Chan and reflected the then pro-rata share of the RDV. The applicant has also relied on the RDV assessed by Mr Charles Chan in his supplemental report and made a 3^rd offer to R4 on 29 May 2020. Mr YC Mok, counsel for the applicant, submits the applicant has taken reasonable steps in acquiring all the undivided shares in the Lot.

40.  On the evidence available, I accept 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. I am satisfied the applicant has taken reasonable steps to acquire all the undivided shares in the Lot.

RESERVE PRICE FOR THE AUCTION

41.  By reason of being satisfied that redevelopment of the Lot is justified and that the applicant has 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 applicant.

42.  The 2 valuation experts agree to adopt residual method and update their respective RDV assessments as at 4 January 2021.  They agree to develop the Lot on a registered site area of 1,030.20 square meters and subject to the height restriction in the government lease to build a 17-storey commercial / residential composite building [i.e. ground floor as shops, lift lobby (i.e. 112.50 square meters) and plant room; 1^st floor as club house, plant room and podium garden; 2^nd to 16^th floors as typical domestic units (i.e. lobby of 67.50 square meters on each upper floor)], but they dispute whether the service lane of 19.80 square meters should be deducted in the calculation of gross floor area and whether more shop areas should be built in the hypothetical development.

43.  In the residual valuation, they agree on marketing cost at 3%, interest rate at 4% per annum, professional fee at 6%, demolition cost at $9,908,800, construction cost at $41,300 per square meter gross, demolition period of 9 months, construction period of 3 years, profit at 15%, and stamp duty and legal cost on land value at 4.25% and 0.1%.

44.  In the assessment of gross development value (“GDV’), they agree to make reference to the domestic comparables in the nearby development Arbour and adopt an average unit rate at $258,000 per square meter saleable for domestic units, a unit rate at $41,000 per square meter for flat roof and a unit rate at $33,000 per square meter for top roof. In the valuation of the hypothetical shops, they agree on adoption of 6 common shop comparables and some of their adjustments (i.e. location from -10% to -20%, time with reference to time indices, age at 1% per 5-year, headroom at 4% per 1-meter), but they disagree on the adjustments for size, frontage and layout.

Hypothetical Development Scheme

45.  It is not in dispute that the service lane of 19.80 square meters is included in the registered site area of the Lot and provision of service lane is required upon redevelopment in this instance.  Mr Denys Kwan considers as long as this strip of land is still privately owned, the landowner can include this area for calculation of plot ratio and coverage, whilst Mr Charles Chan considers this area should be excluded pursuant to section 23(2)(a) of the Building (Planning) Regulations, Cap 123. I agree with Mr Charles Chan, in determining the permitted plot ratio and coverage of the hypothetical development, being a commercial / residential composite building, under the Building (Planning) Regulations, no account shall be taken of any part of any street or service lane.

46.  I also agree with Mr Charles Chan to build lesser shop areas in the hypothetical development.  Since the rear retail portion if any of the shops would have much lower value in the subject location being a secondary retail area, I am of the view the optimum development would not include the rear retail portion as proposed by Mr Denys Kwan.

47.  Having reviewed the 2 hypothetical development schemes, I prefer that proposed by Mr Charles Chan and also accept his proposed layouts and shop reference unit in the assessment.

GDV – Shops on Ground Floor

48.  In the adjustment for size, I prefer the adjustment rate at 1% per 10-square meter proposed by Mr Charles Chan, which is also the agreed adjustment rate in the EUV assessment. In the adjustment for frontage, I prefer the adjustment rate at 1% per 1-meter proposed by Mr Denys Kwan, which is also the adjustment rate determined by this tribunal in the EUV assessment.

49.  In the adjustment for layout, similar to the EUV assessment, I consider in addition to the consideration of shape, greater weighting should be given to depth because the shop front area would have a higher value. In terms of shape, the shop reference unit would be better than Comparables NR1 and NR5; similar to Comparables NR2, NR3 and NR6; and worse than Comparable NR 4. In terms of depth, the comparables are all better than the shop reference unit. Accordingly, I am of the view the comparables should be adjusted in the range of -3% (i.e. Comparable NR5) to -11% (i.e. Comparables NR4 and NR6).

50.  The valuation of the shop reference unit is listed in Appendix IV of the judgment.  The average unit rate of the 6 shop comparables is about $377,593.  I consider the shop reference unit should be assessed at $378,000 per square meter, which is also the average unit rate of all the shops in the hypothetical development.

RDV of the Lot as at 4 January 2021

51.  Based on the agreements of the 2 valuation experts and the above determinations, the residual valuation of the Lot as at 4 January 2021 is listed in Appendix V of the judgment.  The Lot is assessed at $774,000,000, equivalent to an accommodation value of about $119,049 per square meter (i.e. about $11,060 per square foot).

ORDERS

52.  For reasons given in this judgment, 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 Ma Ho Fai and Ms Hung Suet Shan Catherine, nominated by the applicant, 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 Woo Kwan Lee & Lo dated 17 December 2020;

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 $774,000,000;

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 applicant, the 1^st respondent, the 4^th respondent and the Trustees to apply to the tribunal for further directions.

COSTS

53.  I agree with Mr YC Mok the adoption of reduced zoning method by Mr Denys Kwan in the EUV assessment is totally unacceptable. While the adoption of reduced zoning method in this instance is not necessary because the differences in depth between the shop reference unit and the comparables are not great at all, it is wrong in principle for Denys Kwan (i) to apply the average adjusted unit rate derived from the comparables to the front zone of the subject shops;  and (ii) to derive the depth of zone A for each of the subject shops by dividing the respective depths of each subject shop in half (i.e. such that zone A is variable).

54.  In the circumstances, and following Good Faith [1], I make a costs order nisi that the applicant do pay costs of these proceedings to the respondents, except 15% of R4’s costs on valuation fees, on High Court scale with certificate for 1 counsel to R4 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.