WHEELOCK SDL FINANCE LTD AND OTHERS v. I-AUTOMATION LTD FORMERLY KNOWN AS INDUSTRIAL AUTOMATION LTD AND OTHERS

LDCS 10000/2022

[2024] HKLdT 54

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 10000 OF 2022

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BETWEEN

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J U D G M E N T

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BACKGROUND

1.  The applicants commenced the present application on 25 May 2022 for an order for sale (“the Application”) under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”). The subject lot is Aberdeen Inland Lot No 297 (“the Lot”) which has a total of 1000 equal and undivided shares and a building erected thereon known as Ha Lung Industrial Building, No 52 Wong Chuk Hang Road, Hong Kong (“the Building”).

2.  The Building is a 13-storey industrial building facing Wong Chuk Hang Road, with 7 car parking spaces on the Ground Floor, served by 2 lifts and 2 common staircases, and governed by the Deed of Mutual Covenant dated 1 February 1972 (“the DMC”). The Building was over 50 years old at the time when the proceedings herein commenced.

3.  Occupation Permit No H/60/71 (“the OP”) was issued for the Building on 30 March 1971 granting permission to occupy the Building for the following purposes:-

Ground Floor:	1 godown, 1 transformer room and 7 parking spaces for cars for non-domestic use
1st to 11th Floor (inclusive):	1 workshop per floor for non-domestic use
12th Floor:	1 workshop and 1 office for non-domestic use

4.  According to the approved building plans in 1969 (“the Approved Building Plans”) and the alterations and additions plans in 2012 (“the Approved A&A Plans”), there are 7 car parking spaces and one godown unit on the Ground Floor, and one workshop unit on each of the upper floors.

5.  There are existing unauthorised building works (“UBW”) in the Building. The major UBW on the Ground Floor are: (1) metal roller shutters enclosing portions of the common area adjoining Car Parking Spaces Nos 4 and 5 to 7; and (2) a cockloft constructed in metal frames within the godown unit. There are 3 existing internal staircases interconnecting several upper floors. The first internal staircase is connecting the 5^th to 7^th Floors and the second internal staircase is connecting the 7^th to 8^th Floors. No record is available showing that the Building Authority has approved the erection of the first and second internal staircases. Hence, these 2 staircases are considered to be UBW. The third internal staircase is connecting the 9^th to 12^th Floors and was erected according to the Approved A&A Plans.

6.  From the Land Registry’s records, the undivided shares of the Lot are allotted as follows:-

Car Parking Spaces No 1 to 7 (each)	4/1000
Ground Floor Unit	65/1000
1st Floor	99/1000
2nd Floor	96/1000
3rd Floor (including the Flat Roof)	81/1000
4th to 11th Floors (each)	69/1000
12th Floor (including the Roof)	79/1000

7.  There are 5 applicants in the Application who own the following units (together with their respective undivided shares):-

Applicants		Units (& Shares)
1st applicant	(“A1”)	1st Floor (99/1000)
2nd applicant	(“A2”)	2nd Floor (96/1000) and 3rd Floor including the Flat Roof (81/1000)
3rd applicant	(“A3”)	5th to 8th Floor (69/1000 each), 10th Floor (69/1000), 11th Floor (69/1000), and Car Parking Spaces Nos 2 and 3 (4/1000 each)
4th applicant	(“A4”)	9th Floor (69/1000)
5th applicant	(“A5”)	12th Floor including the Roof (79/1000), Car Parking Space No 1 (4/1000)

8.  Thus, the 5 applicants together own a total of 850/1000 undivided shares of the Lot.

9.  On the other hand, the 3 respondents in these proceedings own the following units (together with their respective undivided shares):-

Respondents		Units (& Shares)
1st respondent	(“R1”)	Car Parking Space No 4 (4/1000)
2nd respondent	(“R2”)	Ground Floor (65/1000) and Car Parking Spaces Nos 5 to 7 (4/1000 each)
3rd respondent	(“R3”)	4th Floor (69/1000)

10.  Thus, the 3 respondents together own a total of 150/1000 undivided shares of the Lot.

11.  R1 is a minority owner taking no part in these proceedings. R2 is represented by Mr Adrian But while R3 is represented by Ms Astina Au. R2 and R3 (“R2/3”) instructed Mr Patrick Lai (“Mr Lai”) of A A Property Services Limited as their valuation expert. In addition, Mr John Lau (“Mr Lau”), a building surveyor of Trusty Chartered Surveyors Limited, has prepared a Cost Estimation Report dated 15 January 2023 (which is enclosed in Mr Lai’s Valuation Report dated 13 February 2023). It relates to reinstatement works in assessing the market value of the properties on the Lot. R2/3 dispute mainly on the valuations of the market value of each property and the redevelopment value (“the RDV”) of the Lot.

12.  The applicants are represented by Mr Mok Yeuk Chi. They have appointed a building surveyor Mr Benson Wong Sai Ning (“Mr Benson Wong”) as their building condition expert and a structural engineer Mr Wong Chi Ming (“Mr C M Wong”) as their structural assessment expert, as well as Mr Charles Chan (“Mr Chan”) of Savills Valuation and Professional Services Limited (“Savills”) as their valuation expert. In addition, Mr Benson Wong has also prepared a Breakdown of Reinstatement Cost dated 5 January 2022 (which is enclosed in Mr Chan’s Valuation Report dated 22 March 2022).

13.  The applicants’ evidence is based on the following:-

(1) Mr Benson Wong’s Condition Survey Report dated 24 October 2022;

(2) Mr C M Wong’s Structural Assessment Report dated 24 October 2022;

(3) Mr Chan’s Valuation Report dated 22 March 2022;

(4) Mr Chan’s Supplemental Valuation Report dated 24 October 2022;

(5) Mr Chan’s Rebuttal Report dated 2 March 2023;

(6) Mr Chan’s Updated Valuation Report on RDV dated 15 September 2023;

(7) Witness Statement of Mr Yu Cheung Kong (“Mr Yu”) dated 24 October 2022; and

(8) Mr Yu’s Supplemental Witness Statement dated 29 September 2023.

14.  R2/3 did not produce any expert evidence on building condition and structural assessment relating to whether the redevelopment of the Lot is justified, as they only dispute on valuation. Their evidence is based on:-

(1) Mr Lai’s Valuation Report dated 13 February 2023;

(2) Mr Lai’s Updated Valuation Report on RDV dated 14 September 2023;

(3) Witness Statement of Ms Kong Julie Wai Ming dated 19 February 2023; and

(4) Witness Statement of Mr Lam Tun Ching Vincent dated 15 February 2023.

15.  Mr Chan and Mr Lai have prepared their Joint Statements on Issues in Agreement and Not in Agreement dated 30 August 2023 and 29 September 2023 regarding market value and updated RDV respectively, as well as an updated Consolidated Summary marked as Exhibit “AR2”.

16.  The parties have also produced various documents marked as Exhibits “A1” to “A8” and “R1” to “R6”. In particular, Exhibit “R5” is Mr Lau’s response to Mr Benson Wong’s opinion on reinstatement cost.

17.  At the trial, the applicants called Mr C M Wong, Mr Benson Wong, Mr Yu and Mr Chan as their witnesses, whereas R2/3 only called Mr Lai as their witness.

18.  R2 made complaint of not being able to conduct internal inspection and to take photographs of the 5^th to 12^th Floors during the time scheduled for site inspection in the afternoon on the first day of the trial. However, R2 did not seek for any adjournment to have such site inspection again nor pursue with this matter any further. Thus, we can only decide the Application based on the available evidence before us.

19.  In any event, we note that in the experts’ Joint Statement dated 30 August 2023, as well as during the trial, there is no dispute between the two valuation experts regarding the internal conditions of all the upper floor units which are considered to be “Fair” by both sides. We do not think that further internal inspection is necessary if the intention is just to ascertain the internal conditions. If, on the other hand, further internal inspection is a critical issue, the parties should have dealt with this matter at the time when the expert reports were prepared. It is simply too late to raise it at the trial.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

20.  The issues to be decided in this case are agreed by the parties as follows:-

(1) Whether the applicants have fulfilled the prerequisites as set out in section 3(1) of the Ordinance and are entitled to make the Application? (“Issue 1”)

(2) What was the respective market value of each property (including the car parking spaces) on the Lot as at 22 March 2022 as assessed in accordance with sections 3(1)(a), section 4(1)(a)(i) and Part 1 of Schedule 1 of the Ordinance? (“Issue 2”)

(3) Whether the redevelopment of the Lot is justified due to the age or state of repair of the Building in accordance with section 4(2)(a)(i) of the Ordinance? (“Issue 3”)

(4) Whether the applicants have 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? (“Issue 4”)

(5) If an order for sale is granted, what should be the reserve price for the purpose of public auction? (“Issue 5”)

21.  The 5^th to 8^th Floors have been converted to form a single property interconnected by the first and second internal staircases as mentioned above. Likewise, the 9^th to 12^th Floors have been converted to form a single property interconnected by the third internal staircase as mentioned above. Thus, in respect of Issue 2, the parties raise legal arguments on how these two sets of units should be valued.

22.  The applicants argue in law that the Ordinance does not preclude the 5^th to 8^th Floors and the 9^th to 12^th Floors to be valued as separate units of one unit per floor, but subject to the cost of reinstatement works. The applicants’ approach on valuation of each unit is on reinstatement basis (“the Reinstatement Approach”).

23.  On the other hand, R2/3 argue in law that the 5^th to 8^th Floors should be valued as a single property, and likewise regarding the 9^th to 12^th Floors. They contend that each property (even though it comprises several units) should be valued in its existing state (“the As-is Approach”).

24.  Thus, the parties raise this legal issue of whether the Reinstatement Approach or the As-is Approach should be adopted to value the 5^th to 12^th Floors.

ISSUE 1 – PREREQUISITES FOR AN APPLICATION

Ownership of the applicants

25.  At the time of the filing of the Notice of Application on 25 May 2022, the applicants owned 85% (ie 850/1000) of the undivided shares in the Lot and the 3 respondents owned the remaining 15% (ie 150/1000) of the undivided shares.

26.  Section 3(1) of the Ordinance stipulates that the minimum percentage of undivided shares that an applicant or applicants should possess before making an application under the Ordinance is 90%.

27.  However, 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.

28.  The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice (“the Notice”), which was issued pursuant to section 3(5) of the Ordinance and was gazetted on 22 January 2010, 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” and “a lot that is not located within an industrial zone and each of the buildings erected on the lot—

(ii) is an industrial building; and

(ii) was issued with an occupation permit at least 30 years before the relevant date”.

29.  Since the OP was issued on 30 March 1971, which is more than 50 years before the date of the Application on 25 May 2022 (ie the relevant date) and the Building is an industrial building not located within an industrial zone, the applicable percentage is therefore 80%. As the applicants owned 85% of the undivided shares in the Lot at the time of making the Application, they have satisfied the requirement.

Valuation Report

30.  Section 3(1)(a) and Part 1 of Schedule 1 of the Ordinance stipulates that an application should be accompanied by a valuation report, prepared not earlier than 3 months before the date on which the application is made. In these proceedings, the accompanying valuation report was dated 22 March 2022, which is not earlier than 3 months before the Application. Thus, the applicants have complied with the requirement in respect of an accompanying valuation report.

Entitlement

31.  Since the applicants have fulfilled the prerequisites as mentioned above, we are satisfied that the applicants are entitled to make the Application under section 3(1) of the Ordinance.

ISSUE 2 – DETERMINATION OF THE MARKET VALUE OF EACH PROPERTY

32.  According to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the value of any property as assessed in the application, the Tribunal shall determine the dispute.

33.  Section 4(1)(a)(ii) of the Ordinance further provides that:-

“in the case of any minority owner of the lot who cannot be found, requiring the majority owner of the lot 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.”

34.  There are disputes between both sides’ valuation experts on the valuation of the market value of the properties and the RDV of the Lot. Thus, we need to make determination of the same.

Market Value of the Ground Floor Unit

35.  There is a dispute on the valuation conversion factor of the unauthorised cockloft. Mr Chan considers that the conversion factor of an unauthorised cockloft in an industrial unit should be less than that of an unauthorised cockloft in a shop unit, and the usual factor for an unauthorised cockloft in a shop unit accepted by the Tribunal in previous cases was 1/4 of the ground floor unit. In addition, unauthorised cocklofts are always subject to the risk of enforcement action under the Buildings Ordinance. Mr Chan adopts a conversion factor of 1/8 of the Ground Floor Unit following the Tribunal decision in LDCS 7000/2018 (the unit concerned comprises a ground floor industrial unit plus an unauthorised cockloft with a saleable area of about 616 sq m and 390 sq m respectively).

36.  Mr Lai, however, considers that the cockloft has been in existence for a long time and there is no sign of any risk that the cockloft would be subject to enforcement action by the Building Authority. Besides, the cockloft with a size of 7.9 sq m can serve the purpose of storage well. Thus, Mr Lai suggests a conversion factor of 1/3.

37.  We agree with Mr Chan on his approach. However, having considered the size of the subject cockloft, which is 2.7% of the Ground Floor Unit, we accept a higher conversion factor of 1/6. The converted area becomes 293.9 sq m (292.6 sq m + 7.9 sq m x 1/6). Apart from the above, both parties have no dispute on the property’s particulars including (1) Effective Existing Frontage at 19.9 m; (2) Depth at 14.2 m; and (3) Headroom at 4.4 m. They have also agreed that the Reference Unit Value is $200,000 / sq m.

38.  Thus, the market value of the Ground Floor Unit is equal to $58,780,000 (293.9 sq m x $200,000 / sq m).

Value Adjustment for Upper Floor Units

39.  In respect of the Value Adjustment of different upper floor units, those items agreed by both sides include (1) Floor/Floor Level at 0.5% per floor difference; (2) Headroom at 2.5% per 1 m difference; (3) Top Floor at -2% for top floor; and (4) Composite Value Adjustment be derived by multiplication of various Value Adjustment items.

40.  The valuation experts have disputes on two Value Adjustment items. The first Value Adjustment item is regarding the “Size Adjustment”. Mr Chan opines that in general the size adjustment of industrial property is relatively less sensitive to the size difference of other types of properties. He refers to LDCS 21000/2018, in which the Tribunal adopted the rate of 1% per 40 sq m for the size adjustment for upper floor industrial comparables. Having considered that the size of the Reference Unit of the Application is larger than that of LDCS 21000/2018, he adopts the “1% per 50 sq m difference” in his progressive adjustment approach.

41.  On the other hand, Mr Lai argues that a straight-line adjustment approach with “1% per 20 sq m difference” is more appropriate.

42.  We are of the view that the existing occupation situation of the Building with one tenant occupying more than one floor has demonstrated that the market value of industrial property in the vicinity should not be very sensitive to size difference. With the same reason, we prefer the progressive adjustment approach and Mr Chan’s view of “1% per 50 sq m difference”.

43.  The second Value Adjustment item is regarding “Lighting & Ventilation Adjustment”. Mr Chan considers that an adjustment is required to reflect the difference in value for the enjoyment of better sunlight and air ventilation of upper floor units. He adopts -3% for the 1^st and 2^nd Floor Units.

44.  Mr Lai, however, argues that it is very common for windows of upper floor industrial units being blocked in accordance with the respective usages and thus adjustment is not necessarily required. However, if the Tribunal accepts this adjustment item, Mr Lai agrees that he would have no objection to adopt the rate as suggested by Mr Chan.

45.  We are not convinced that lighting & ventilation does not affect the value of industrial units for the subject case as suggested by Mr Lai. As there is no dispute on the extent of adjustment, we accept the rate of -3% as suggested by Mr Chan.

46.  Details of the Composite Value Adjustment of Upper Floor Units are summarised in Table 2 of Appendix I attached herein.

Market Value of the 1^st to 4^th Floor Units

47.  Both sides’ valuation experts have agreed that in so far as valuation of Upper Floor Units is concerned, the Reference Unit is the 7^th Floor Unit assuming a fair internal condition and adopting a Reference Unit Value at $95,350 / sq m.

48.  There is no dispute regarding the property’s particulars including the area, internal condition and headroom of the Upper Floor Units. Details of the particulars are provided in Table 1 of Appendix I herein. The market value as assessed is tabulated below:-

Market Value of the 1^st to 4^th Floors

Unit	Converted Area (sq m) (see Table 1 of Appendix I)	Reference Unit Value ($/sq m)	Composite Value Adjustment (see Table 2 of Appendix I)	Market Value (rounded off to the nearest $10,000)
1/F	646.1	$95,350	-3.4%	$59,510,000
2/F	644.8	$95,350	-3.8%	$59,150,000
3/F	509.0	$95,350	1.7%	$49,360,000
4/F	482.4	$95,350	1.5%	$46,690,000

Market Value of the 5^th to 8^th Floors and the 9^th to 12^th Floors

49.  Orient Logistics Limited (“the Tenant”) occupies the whole of the 5^th to 12^th Floors by 3 Tenancy Agreements all dated 30 October 2021 with an extended tenancy term up to 29 November 2023 for wine storage. The first Tenancy Agreement covers the 5^th to 8^th Floors, the 10^th Floor and the 11^th Floor together with Car Parking Spaces Nos 2 and 3, which were let by A3 to the Tenant at $525,000 per month exclusive of Government rents & rates and management fee. The second Tenancy Agreement covers the 9^th Floor, which was let by A4 to the Tenant at $87,500 per month exclusive of Government rents & rates and management fee. The third Tenancy Agreement covers the 12^th Floor and Car Parking Space No 1, which were let by A5 to the Tenant at $106,200 per month exclusive of Government rents & rates and management fee. A3, A4 and A5 are related parties having the same registered office.

50.  As mentioned above, there are 3 existing internal staircases interconnecting the 5^th to 12^th Floors. The units on these floors were purposely merged and customised to provide “one-stop services” to customers, which include selling of wines, cold storage, hosting of promotional events and wine-tasting private parties.

51.  R2/3 argue in law that the 5^th to 8^th Floor and 9^th to 12^th Floor have to be valued as two merged units respectively by the As-is Approach and that valuation on the Reinstatement Approach is inappropriate. The applicants, however, submit that due to the principle of determining “the highest and best use” of properties, the Reinstatement Approach should be adopted and that valuation of each individual floor unit is appropriate.

52.  Both sides have referred us to a number of authorities to support their contentions in respect of this “legal issue”. However, as far as we can see, the only legal issue in this case is in respect of the interpretation of the words “each property” in Part 1 of Schedule 1 of the Ordinance, which reads as follows:-

“A valuation report, prepared not earlier than 3 months before the date on which the application under section 3(1) of the Ordinance is made, setting out the assessed market value of each property on the lot—

(a) on a vacant possession basis;

(b) assessed as if the lot could not be made the subject of an application for an order for sale; and

(c) not taking into account the redevelopment potential of the property or the lot.” (underline added)

53.  Section 2 of the Ordinance defines “property” to mean “immovable property”, but it does not have a definition for the expression “each property” in Part 1 of Schedule 1. With the definition in section 2, “each property” in Part 1 of Schedule 1 just means “each immovable property”, which does not add anything as the whole of the Ordinance is certainly referring to “immovable property”. Hence, it still requires judicial interpretation of this expression in Part 1 of Schedule 1.

54.  As held by the Tribunal in Asia Bright Enterprises Ltd & Others v Liu Cheuk Man & Others [2023] HKLdT 30, the purpose of assessing the market value of “each property” is to give the basis of apportionment of the proceeds of sale when the Lot is sold so that each majority owner and each minority owner of the Lot can share the proceeds on a pro rata basis in respect of their “properties” (see Part 3 of Schedule 1 of the Ordinance). It is clear that the Ordinance intends each owner to get a fair share of the proceeds of sale in respect of his “property”. If it is the legislative intent that each “unit” according to the Approved Building Plans has to be assessed “on its own”, then the Ordinance could have defined “each property” to be “each unit on its own”.

55.  Thus, without such a definition, we are of the view that the Ordinance does not impose a restriction that “each property” must refer to “each unit” according to the Approved Building Plans. If there are several “units” that have been merged to form a single “property”, then the market value of this single “property” should be assessed according to Part 1 of Schedule 1 of the Ordinance.

56.  However, with this interpretation, we are not saying that the value of a single merged property can never be assessed with the Reinstatement Approach. What we are saying is that when several “units” are merged to form a single “property” in reality, the value of this single “property” should be assessed. It is a legal issue for us to interpret what “each property” means in Part 1 of Schedule 1 of the Ordinance, and we have made this interpretation. What comes next is how the value of this single “property” should be assessed, and this is entirely a matter of valuation.

57.  The Reinstatement Approach contended by the applicants and the As-is Approach contended by R2/3 are just two different methods for the valuation of the 2 merged properties from the 5^th to 8^th Floors and from the 9^th to 12^th Floors respectively. We are of the view that this is just a matter of valuation when the Tribunal is deciding which approach is the correct approach for valuing the 2 merged properties.

58.  Of course, there are parameters set by the Ordinance in Part 1 of Schedule 1 when the market value of each property is assessed. They are: (1) the valuation date is on a date not earlier than 3 months before the date on which the Application is made; (2) on a vacant possession basis; (3) assessed as if the Lot could not be made the subject of an application for an order for sale; and (4) not taking into account the redevelopment potential of the property or the Lot.

59.  With these parameters, the market value of each property would be the same as the existing use value (“EUV”) of each property in most cases, because it has to be a value existed at the time of the Application, but not more than 3 months before the Application. No tenancy, no possibility of being a subject of an application under the Ordinance and no redevelopment potential are to be taken into account. That is why in many of the previous land compulsory sale cases under the Ordinance, the market value of each property was simply referred to as the EUV (such as Asia Bright, supra). It is in fact a term used for the sake of convenience. The underlying concept of this term should be understood within the parameters set out by Part 1 of Schedule 1 of the Ordinance.

60.  As submitted by the applicants, in Part 2 of Schedule 1 of the original Bill for the Ordinance, the valuation report was required to set out “the assessed market value of each property on the lot on a vacant possession and existing use basis”. However, the expression “existing use basis” was removed from the Bill, and Part 2 of Schedule 1 was replaced by the current Part 1 of Schedule 1.

61.  We agree that with the removal of this expression of “existing use basis”, the market value of each property is not to be tied exclusively to the existing or actual use of the property, but subject to the parameters mentioned above.

62.  Market value is a well-established concept. It refers to a value at which a willing seller is prepared to sell and a willing buyer is prepared to purchase in an arm’s-length transaction when they are acting knowledgeably, prudently and without compulsion. On top of that, there are guiding principles in valuation, such as the principle of “the highest and best use” and the principle of “reality”.

63.  Thus, what we are required to do in assessing the market value of these two merged properties is just to follow the aforesaid concept of “market value” and the guiding principles in valuation, but subject to the parameters set out in Part 1 of Schedule 1 of the Ordinance.

64.  In Asia Bright, supra, the Tribunal assessed 4 ground floor units together as one property because the value of the single shop was higher than the summation of the value of each individual units. This is in accordance with the principle of “the highest and best use”. This approach may be regarded by R2/3 as the As-is Approach.

65.  On the other hand, the Tribunal in Harvest Treasure Limited and Ors v Cheung Fat Enterprises Limited and Ors, LDCS 8000/2014, assessed the value of a property by adding up the values of 2 portions of the property (ie 2 shops). This approach may be regarded by the applicants as the Reinstatement Approach.

66.  The Tribunal’s reasoning in Harvest Treasure, supra, was that “unless the market evidence shows otherwise, when the summation of the values of the two portions would give rise to a higher value, the 2-shop basis should be preferred to the value of the two portions as a single unit in determining the market value of the two portions”. The Tribunal made it clear that this approach accords with the principle of “the highest and best use” of properties.

67.  Thus, there is in fact no conflict between these 2 cases, as they both applied the principle of “the highest and best use”. In other words, both the As-is Approach and the Reinstatement Approach are permissible to be used to determine the value of a property, as long as it accords with the principle of “the highest and best use”.

68.  In Asia Bright, the Tribunal also defined what “each property” means in the Ordinance, whereas Harvest Treasure did not. It is clear that Harvest Treasure is decided purely from the angle of valuation. Thus, there is no conflict between these two cases regarding the interpretation of “each property” in the Ordinance.

69.  Moreover, in Harvest Treasure, the Tribunal mentioned that the 2-shop basis should be preferred “unless the market evidence shows otherwise”. This means that the 2-shop basis is not the only way to assess a property with two portions. It all depends on market evidence. The choice of which approach, therefore, depends on the evidence that supports “the highest and best use” of the property in question.

70.  In the present case, the evidence shows clearly that the 5^th to 12^th Floors can be converted back to one unit per floor as per the Approved Building Plans without any difficulties, and the summation of the values of each floor is higher than the values when they are assessed as two merged properties on their own. Thus, applying the principle of “the highest and best use”, these floors should be valued by assessing the value of each individual floor and the summation of these values (ie the 5^th to the 8^th Floors as one set and the 9^th to 12^th Floors as another) would give the market values of the two merged properties respectively.

71.  In other words, we agree that the Reinstatement Approach should be adopted. However, it does not mean that the 5^th to 12^th Floors must actually be converted back to one unit per floor first, or that the applicants have the right to choose to sell each floor on its own. The existing state of the 5^th to 12^th Floors is that they are two merged properties. Hence, they should be valued as two merged properties. There is no need to effect any actual conversion or actual sale, and the choice or right to sell individual floor is irrelevant, as it is purely a valuation exercise. Thus, the principle of rebus sic stantibus is not offended.

72.  What the Tribunal needs to do is to find out hypothetically at what price a willing seller is prepared to sell and a willing buyer is prepared to pay for these two merged properties. Thus, in deciding what needs to be converted back and the reinstatement cost, the Tribunal is not asking the applicants to proceed to reinstate the properties or to incur the reinstatement cost. It would be changing the existing state of these two merged properties if they were to be executed now. The reinstatement cost is purely to assess what a willing buyer is prepared to pay if he wants to make the best use of the two merged properties. Such reinstatement cost would certainly be in the mind of such a willing buyer when he offers a price to the willing seller.

73.  With the attributes of these two merged properties, in particular, the easiness of converting them back to the original state of one unit per floor, there would be willing purchasers in reality who are prepared to pay a price that is the summation of the value of each floor subject to the deduction of reinstatement cost and other expenses. Thus, adopting the Reinstatement Approach in the present case accords with the principle of reality.

74.  R2 cited the case of Total Select Ltd v Wong Wai Mau Enterprises Limited, LDCS 13000/2017 to support the contention that the Reinstatement Approach was rejected and all valuation must be kept as near as possible to the reality (ie actual state of the property). We do not consider that this case bears any similarity to the situation in the Application. The reinstatement work in Total Select was the repair work required after the property was damaged by fire. Such repair work, on the valuation basis, is regarded as improvement work to improve the existing condition of the property to tenantable condition. This is not the same as the reinstatement works to convert the property back to individual units. In fact, it was found by the Tribunal that the minority owners in Total Select had no intention to carry out repairs, and no hypothetical and reasonable buyer would offer to purchase their units in their current state. Thus, it is not the same reality as in the Application before us.

75.  We have to stress that whether the Reinstatement Approach is adopted or not depends on the facts and evidence in each individual case. It is just a valuation exercise, and not a law that applies across the board. Thus, it is not useful to compare such cases and try to establish a universal rule.

76.  We are also of the view that we are not taking into account the redevelopment potential of the properties when we are considering the reinstatement of the two merged properties. Reinstatement is completely different from redevelopment, as it is simply to convert the properties back to what the Approved Building Plans permit and nothing new is to be redeveloped.

77.  R2/3 cited several cases to support the As-is Approach but the facts of those cases are different from the situation in the Application. R2/3 also argue that the Ordinance does not allow the applicants to carry out reinstatement work prior to selling the Units and thus any value enhancement potential has to be foregone. We consider this argument not valid as the opportunity to carry out reinstatement work for value enhancement will also be recognised by typical market participant. If there is a valid profit margin for reinstatement, such will be fully reflected in the market value even if there is no prior reinstatement work bearing in mind that the work can be carried out by prospective purchaser afterwards. Thus, we do not find it necessary to discuss the implication of these cases in this judgment.

78.  From the valuation perspective, the principle of “the highest and best use” dictates the market value. In determining the highest and best use of a property, and when conversion work like the situation in the Application is involved, suitable assumptions and adjustments have to be considered before the market value can be derived.

79.  To conform with the market reality, the general principle in considering whether valuation on the Reinstatement Approach is applied or not can be summarised as follows:-

(1) If the conversion work is UBW and under active legal enforcement action of the Buildings Department or lease enforcement action of the Lands Department, any enhancement in value resulting from the conversion work would be disregarded and that valuation of the property on the Reinstatement Approach is applicable. (2) If the conversion work has no significant effect on the market value of the property, eg a flat with 3 bedrooms having been converted to 2 bedrooms, it is not necessary to argue the valuation approach. (3) If the conversion work has resulted in enhancement of value like the Asia Bright case where the ground floor shops have already been merged to give a higher value, such improvement will be reflected in the market value assessment. For cases consisting UBW and according to market reality, it may need to apply a discount to the enhanced value assessment in order to reflect the lack of full certainty of the continuality of the conversion work. There is no argument between both parties that the unauthorised cockloft in the Ground Floor Unit of the Building should fall within this category. (4) If the conversion work has resulted in the decrease of value like the Harvest Treasure case where the ground floor shops have already been merged giving a lower value, market participants may consider the option to carry out work to reinstate the property to its initial state as previously approved by the relevant authorities. In practice, the relevant factors that would be considered by a typical market participant may include:-
	(i)	the highest and best use after reinstatement must be clearly identified and not be substantial, arbitrary or speculative;
	(ii)	the work is permissible under the relevant legal restrictions applicable to the use of the premise and thus there is little risk or no uncertainty for a typical market participant in obtaining the necessary Government approvals to complete the works;
	(iii)	the reinstatement will not result in material change of the principal use of the premises under the “Before” and “After” situation that may adversely affect the market value of adjoining premises as a whole; and
	(iv)	the reinstatement must be financially feasible and result in the highest value.

80.  The justifications in adopting the Reinstatement Approach in the Application are set out as follows:-

(1) The initial design of the 5th to 12th Floors under the Approved Building Plans and the OP were on individual floor basis. Removal of internal staircases and reinstating the lavatories is physically possible. More importantly, the scope of work is clearly identified and will not result in any substantial change of the units in their actual physical state. (2) Reinstatement is permissible in accordance with the relevant legal restrictions applicable to the use of the units including the prevailing land use zoning under the Outline Zoning Plan, the respective lease restriction and Buildings Ordinance etc. (3) Although the 5th to 12th Floors have been modified to be used as a self-serviced private wine cellar, we consider that the existing principal use of the units is still for storage purpose having ancillary facilities. Besides, using the units for private catering parties would contravene the respective Lease Conditions as well as the user restriction under the three Tenancy Agreements as wine storage. The reinstatement will not result in material change of the principal use of the units under the “Before” and “After” situation, which can both be for storage purposes. The work will not distort the true market value of other portions of the Building or sharing ratio as a whole. (4) Under the Consolidated Summary of the Joint Expert Statement, Mr Lai has prepared an assessment of market value by two approaches. The total market value of the 5th to 12th Floors under the As-is Approach is about $293 million, whereas under the Reinstatement Approach, it is about $345 million (with a reinstatement cost of about $12.7 million). Using Mr Lai’s finding simply as illustration, it can be shown that if reinstatement is carried out, the enhancement in value is about $52 million, which is about 4 times of the reinstatement cost to be involved, and this is an obvious profitable opportunity. Compared with the market value under the As-is Approach (of about $293 million), the reinstatement cost as claimed by R2/3 (of about $12.7 million) is not substantial (less than 5%). The reinstatement is thus feasible and will result in the highest value.

81.  Thus, we will proceed to assess the market values of the 5^th to 12^th Floors by way of the Reinstatement Approach. Mr Chan’s valuation report was prepared under the Reinstatement Approach. Mr Lai’s initial valuation report was also prepared under the Reinstatement Approach, but a new assessment under the As-is Approach was introduced in the 1^st Joint Expert Statement. In adopting the As-is Approach, Mr Lai has valued the 5^th to 12^th Floors by assuming that they are to be used as two “one merged unit” and making a quantum discount of 20% of the aggregate market value of the units on individual floor basis without deducting any reinstatement cost.

82.  In giving his oral evidence, Mr Chan provided his opinion that should the As-is Approach be adopted, the quantum discount would be at 3% to 5% instead of 20% as claimed by Mr Lai. Since we have decided to adopt the Reinstatement Approach, there is no need for us to discuss the said different views of the 2 valuation experts in this regard. Under the scenario of valuation on the Reinstatement Approach, the market reality is that we may need to apply a discount for value assessment. Since the comparables obtained by the parties do not reflect the reinstatement work, a deduction of reinstatement cost and the related opportunity cost is required to ascertain the reduction in price that the hypothetical purchaser would demand if he were to purchase the units. The degree and extent of reinstatement, resulting to the appropriate discount for value assessment, is therefore the fundamental dispute between the valuation experts that requires our determination.

83.  Mr Lai’s opinion is that the reinstatement work amounts to about $12.7 million. The work includes: (1) Removal of internal staircases; (2) Reinstatement of lavatories and (3) Other work. Mr Chan, on the other hand, only takes into account the work for the removal of internal staircases and the cost is about $0.8 million. We agree with R2/3 that no hypothetical buyer would readily accept to buy a unit without lavatories. We are therefore of the view that apart from the removal of internal staircases, it is also necessary to include the work to reinstate the lavatories as such facilities are necessary for each floor unit to be occupied individually.

84.  In this regard, the applicants argue that the standard of lavatory reinstatement may not necessarily follow the Approved Building Plans, but we consider that reinstatement of the lavatories following the Approved Building Plans is reasonable and not arbitrary.

85.  As for the other work, it basically covers workshop reinstatement work and external reinstatement work of the existing cold storage and catering facilities of the wine cellar. Workshop reinstatement work includes the removal of general storage, E & M services, cold storage room and other rooms, as well as the associated reinstatement work. External reinstatement work include the removal of air duct, air conditioning unit and rack, as well as the associated reinstatement work. Since “property” is defined as “immovable property” under the Ordinance and the facilities of the wine cellar are mainly movable objects, they are not part of a property subject to the market value assessment under Schedule 1 Part 1 of the Ordinance.

86.  From the valuation perspective, the transaction value of a sale comparable should have reflected the necessary incidental cost of a property sale, like legal cost for conveyancing or removal cost of existing facilities, and they are not deductible in arriving the market value of a property by valuation on comparative method. Thus, reinstatement cost of the other work will be disregarded.

87.  We consider that the total permitted reinstatement cost to be applied for the 5^th to 12^th Floors is about of $5,920,000. Analysis of the reinstatement cost of each floor as submitted by both sides’ experts and our decision is summarised in Appendix II.

88.  Mr Lai considers that further discount is appropriate to reflect: (1) the interest of 4% per annum incurred for the reinstatement cost; and (2) that the reinstatement work would require 8 months for completion and the units cannot be used during the period. Mr Chan disagrees that interest should be allowed but with no valid justification given. In this regard, we accept the view of Mr Lai and find that it is reasonable to reflect in the valuation the interest of 4% per annum for the reinstatement cost incurred. Mr Chan further considers that the reinstatement work can be completed in 3 months, which falls within the usual marketing period of the sale of the property, and thus there is no need to allow the void period for occupation in carrying out the reinstatement work. We do not accept Mr Chan’s argument as the applicants can sell the units without the need to carry out the reinstatement work. We consider that the purchaser would take about 6 months to complete the work for the removal of the internal staircases and the reinstatement of lavatories.

89.  Since the 5^th to 8^th Floors and the 9^th to 12^th Floors were to be sold as two merged properties, argument was raised as to whether the valuation may need to reflect a bulk sale discount. We consider that this argument is irrelevant. From the valuation perspective, the choice of sale arrangement does not affect the assessment of market value. Bulk sale discount in property market is basically a marketing strategy and should not affect the market value of each individual property unit.

90.  Thus, the market value of the 5^th to 8^th Floors on the Reinstatement Approach is assessed as follows:-

Market value of the 5^th to 8^th Floors

Unit	5th Floor	6th Floor	7th Floor	8th Floor
Converted Area (sq m)	482.4	482.4	482.4	482.4
Reference Unit Value ($/sq m)	95,350	95,350	95,350	95,350
Composite Value Adjustment	1%	0.5%	0	-0.5%
Value before Reinstatement ($)	46,456,808	46,226,824	45,996,840	45,766,856
PV of 6 months @4% pa ($)	45,555,546	45,330,024	45,104,501	44,878,979
less Reinstatement Cost ($)	710,000	740,000	860,000	710,000
less Interest ($) @4% pa ($) for 6 months	14,000	15,000	17,000	14,000
Market value ($) (round off to the nearest $10,000)	44,830,000	44,580,000	44,230,000	44,150,000

91.  The market value of the 9^th to 12^th Floors on the Reinstatement Approach is assessed as follows:-

Market value of the 9^th to 12^th Floors and Roof

Unit	9th Floor	10th Floor	11th Floor	12th Floor & Roof
Converted Area (sq m)	482.4	482.4	482.4	536.3
Reference Unit Value ($/sq m)	95,350	95,350	95,350	95,350
Composite Value Adjustment	-1%	-1.5%	-2	-5.5%
Value before Reinstatement ($)	45,536,872	45,306,887	45,076,903	48,323,714
PV of 6 months @4% pa ($)	44,653,457	44.427,933	44,202,411	47,386,234
less Reinstatement Cost ($)	710,000	740,000	740,000	710,000
less Interest ($) @4% pa ($) for 6 months	14,000	15,000	15,000	14,000
Market value ($) (round off to the nearest $10,000)	43,930,000	43,670,000	43,450,000	46,660,000

(Note: The overall discount of market value for valuation of the 5^th to 12^th Floors on the Reinstatement Approach is about 3.6%.)

Market Value of Car Parking Spaces No 1 and 2

92.  The Building comprises 7 vehicle parking spaces on the Ground Floor with direct access to Wong Chuk Hang Road. Car Parking Spaces Nos 1 and 2 can be used for parking of private car and Car Parking Spaces Nos 3 to 7 can be used for parking of lorry. Both sides’ valuation experts have agreed that the reference market value of a private car parking space and a lorry parking space of the Building are $2,360,000 and $3,020,000 respectively. For Car Parking Spaces Nos 1 and 2, both parties have agreed that the market value of each space is $2,360,000 and we accept the same.

Market Value of Car Parking Space No 3

93.  Mr Chan follows the agreed reference market value and considers that the market value of Car Parking Space No 3, which is a lorry car parking space, is $3,020,000. Mr Lai argues that in front of Car Parking Space No 3 there is a management counter, which would adversely affect the use of the parking space and considers a discount of 20% as appropriate, putting the assessed market value at $2,416,000. We accept the view of Mr Chan that the counter does not virtually obstruct the vehicular maneuvering path initially designed. There may be inconvenience during loading and unloading goods from vehicle but since the counter is not immovable, this will have little effect on the market value. We consider that a discount of 1% is appropriate for the minor inconvenience and the market value is $2,989,800 ($3,020,000 x 0.99), but we round it up to $2,990,000.

Market Value of Car Parking Space No 4

94.  Car Parking Space No 4 is owned by R1, who is a minority owner taking no part in the proceedings. This space has been enclosed by metal roller shutter and the conversion work is considered as UBW. The initial valuation submitted by Mr Chan and Mr Lai was $3,020,000 and $2,255,000 respectively. Mr Chan valued the area as a lorry parking space while Mr Lai valued the area as a storage. According to their 1^st Joint Expert Statement, the experts reached an initial agreement that the value of the area occupying Car Parking Space No 4 is $2,573,500.

95.  Mr Chan, however, has retracted from the agreement after he was reminded at the trial that the owner in question did not participate in the proceedings and was not represented by Mr Lai. The retraction on the initial agreed value has resulted in the attack of Mr Chan’s credibility as an expert by R3. However, we take the view that when the two experts are appointed to assess the market value of each property on the Lot, they are both entitled to assess the market value of each property no matter who owns that property. If their opinions differ from each other, but not in a significant way, they are entitled to agree on the figure by way of concession and irrespective of who owns the property. The reason is that their role is simply to give their expert opinions to assist the Tribunal in making determination of the market value of each property. The Tribunal is not bound to accept their agreement or disagreement and can rely on its own expertise too. Thus, their agreement on the market value is not really conclusive and does not have any binding effect on the property owner or the Tribunal.

96.  Turning to the basis of valuation, although there was conversion work to make the covered area to be used for storage purpose, we accept that the best use still lies on its original permitted use of parking goods vehicle. As the conversion work results in the decrease in value, market participants may consider reinstating the parking space back to its initial state. Valuation of Car Parking Space No 4 with the Reinstatement Approach is relatively straight forward as the cost to remove the metal roller shutters as estimated by the building expert of the applicants is just about $20,000 per space. Besides, the related opportunity cost is minimal. Having considered the overall discount of valuation with the Reinstatement Approach for the market value of the 5^th to 12^th Floors at about 3.6%, we decide to value the Car Parking Space No 4 with the Reinstatement Approach with a relatively small discount rate of 1%. Following the agreed reference market value for a lorry parking space at $3,020,000, the market value of the Car Parking Space No 4 is $2,989,800 ($3,020,000 x 0.99), and we round it up to $2,990,000.

Market Value of Car Parking Spaces Nos 5 to 7

97.  R2 is the owner of Car Parking Spaces Nos 5 to 7. These parking spaces have been enclosed by metal roller shutters and the conversion work is considered to be UBW. Their initial valuation submitted by Mr Chan and Mr Lai in aggregate was $9,060,000 and $6,535,500 respectively. According to their 1^st Joint Expert Statement, the experts reached an initial agreement that the value of the area occupying Car Parking Spaces Nos 5 to 7 is $7,612,500.

98.  In the initial valuations, Mr Chan valued the area as 3 lorry parking spaces, while Mr Lai valued the area as a merged storage unit by adopting the As-is Approach. The valuations as given by both experts have demonstrated that although there was conversion work facilitating the area to be used as a merged storage unit, the best use still lies on its original permitted use of parking of goods vehicle. During cross-examination, Mr Chan expressed that the initial agreement reached on the market value of the parking spaces was for the purpose of eliminating disputes. Both experts, during the without prejudice meeting, decided to agree on the value figures without touching on the basis of the assessment.

99.  However, R2 in his Closing Submission has urged us to adopt a consistent approach so that if valuation with the Reinstatement Approach is applied for the market value assessment of the 5^th to 12^th Floors, the assessment of Car Parking Spaces Nos 5 to 7 should follow and adopt the agreed reference market value of $3,020,000 per lorry parking space. Technically, R2 has requested to retract from the 1^st Joint Expert Statement where both experts reached an initial agreement for the parking spaces at $7,612,500. R2 should have raised this argument at an earlier stage, but we agree that the request is not unreasonable and is therefore accepted.

100.  As the conversion work results in the decrease in value, market participants may consider reinstating the property back to its initial state. Valuation of Car Parking Spaces Nos 5 to 7 under the Reinstatement Approach is not complicated as the cost to remove the metal roller shutters as estimated by the building expert of the applicants is about $60,000, and the related opportunity cost is minimal. Adopting the same approach for Car Parking Space No 4 above, we decide to value Car Parking Spaces Nos 5 to 7 with the Reinstatement Approach and adopt a discount rate of 1%. Following the agreed reference market value of a lorry parking space of $3,020,000, the market value of each parking space is $2,989,800 ($3,020,000 x 0.99), and we round it up to $2,990,000.

Market Value of all the Properties in the Building

101.  Market values of all the properties in the Building as at the relevant date of valuation (ie 22 March 2022) adopted by us are appended below:-

Units	Market Value		Units	Market Value
Ground Floor	$58,780,000		Car Parking Space No. 1	$2,360,000
1st Floor	$59,510,000		Car Parking Space No. 2	$2,360,000
2nd Floor	$59,150,000		Car Parking Space No. 3	$2,990,000
3rd Floor	$49,360,000		Car Parking Space No. 4	$2,990,000
4th Floor	$46,690,000		Car Parking Space No. 5	$2,990,000
5th Floor	$44,830,000		Car Parking Space No. 6	$2,990,000
6th Floor	$44,580,000		Car Parking Space No. 7	$2,990,000
7th Floor	$44,230,000
8th Floor	$44,150,000
9th Floor	$43,930,000
10th Floor	$43,670,000
11th Floor	$43,450,000
12th Floor & Roof	$46,660,000
Sub Total	$628,990,000		Sub Total	$19,670,000
Total	$648,660,000

ISSUE 3 – AGE AND STATE OF REPAIR

102.  Section 4(2) of the Ordinance provides 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) 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).”

103.  Thus, the applicants have to satisfy the Tribunal that the redevelopment of the Lot is justified due to the age or state of repair of the Building (section 4(2)(a)); and that the applicants have taken reasonable steps to acquire the respondents’ undivided shares in the Lot (section 4(2)(b)). If not, the Tribunal shall not make an order for sale.

104.  For the age and state of repair requirements, the applicants rely on the expert evidence of Mr Benson Wong who is an Authorised Person and a building surveyor and of Mr C M Wong who is a structural engineer. Their expertise are not in dispute.

105.  In relation to the state of repair of the structural frames of the Building, Mr C M Wong has concluded that the structural elements of the Building are currently in a poor condition. In his Structural Assessment Report dated 24 October 2022, Mr C M Wong identified the following problems of the Building:-

(1) Cracks and spalling at 159 locations were observed during the visual inspection of the Building;

(2) Based on the test samples, carbonation has reached the steel reinforcement bars in 100% of the test samples for slabs and beams, while carbonation has reached the steel reinforcement bars in 63% of the test samples for columns;

(3) Based on the test samples, all reinforcement bars are found to be corroded. Overall, 43%, 56.4% and 0.6% of the reinforcement bars are suffering from partly, mild and moderate corrosion respectively; and

(4) Based on the test result, 14% of the structural elements contain chloride content over 0.35% by mass of cement, which is the allowable limit in HK 2013 Concrete Code.

106.  Mr C M Wong concluded that the structural safety margin of the Building is a cause of concern. Based on the test conducted on concrete grade, the design life of the Building should be shorter than 50 years. In addition, the Building is considered to be not meeting the requirement of the HK Fire Code 2011 regarding the fire resistance rating. Thus, frequent maintenance and repair work of the structural frames may be required in the near future in order to keep the Building in a safe and functional state.

107.  Mr Benson Wong, in his Condition Survey Report dated 24 October 2022, has stated that the Building is one of the oldest buildings in its immediate neighbourhood. With respect to the age of the Building, 7 issues have been identified and considered, which include (1) Physical Age; (2) Design Working Life of Structural Frames; (3) Relevant Considerations; (4) Physical Obsolescence; (5) Functional Obsolescence; (6) Useful Life; and (7) Repair and Maintenance Considerations. He concluded that the Building is aged structurally, physically and functionally, and it is suffering from physical and functional obsolescence, which carry safety and hygiene implications.

108.  Mr Benson Wong also stated that the age of the Building is over 51 but there is no record available to show that major repair work has been done in the past. There were 1 Mandatory Building Inspection Scheme (“MBIS”) notice, 14 Mandatory Window Inspection Scheme (“MWIS”) notices, 23 Fire Safety Directions issued by the Buildings Department and 21 Fire Safety Directions issued by the Fire Services Department to require the concerned owners of various parts of the Building to carry out the prescribed inspection and necessary repairs. However, as at October 2022, 1 MBIS, 1 MWIS and 33 Fire Safety Directions remained outstanding. From the past repair and maintenance records, the Building is found not under proper and regular maintenance.

109.  With respect to the state of repair, Mr Benson Wong opined that the deficiencies and defects found in the structural frames, components, finishes and services installations of the Buildings are of the nature and magnitude that cannot be easily rectified by simple and piecemeal repairs. These deficiencies and defects will make the Building not tenantable without complete rectification of all of them. The cost to repair and restore the Building to a tenantable standard amount to about $32 million, which represents about 29% of the cost of constructing a new superstructure similar to the Building. Mr Benson Wong concluded that the Building has deteriorated to a state that is beyond reasonable economic repair.

110.  As submitted by the applicants, no one seeks to challenge these expert evidences and the two experts were not even cross-examined. More importantly, R2/3 have not adduced any evidence, factual or opinion, in relation to the “age” and “state of repair” of the Building. Throughout the hearing, they have not suggested that the Building should not be redeveloped. Although R2 did make the comment that the testing locations and inspections of the Building covered by the Structural Assessment Report mostly came from the lower floors and very few came from the 5^th to 12^th Floors, we have no reason to doubt the evidence and conclusion of the two experts.

111.  Having considered the expert evidence as aforesaid, we are satisfied that the redevelopment of the Building is justified due to the age and state of repair of the Building.

ISSUE 4 – REASONABLE STEPS TAKEN

112.  As aforesaid, the applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interest of the respondents under section 4(2)(b) of the Ordinance.

113.  The applicants have made the following offers to the respondents as follows:

Respondent	26 April 2022	12 October 2023
R1 (Car Parking Space No. 4)	$3,743,000	$2,773,513
R2 (Ground Floor, Car Parking Spaces No. 5 to 7)	$76,350,000	$71,487,872
R3 (4th Floor)	$58,709,000	$50,318,754

114.  The applicants’ offers have made reference to the then valuations prepared by Savills, the expert appointed by the applicants, and reflected the then RDV attributable to the respective units owned by the respondents.

115.  In assessing the reasonableness of the offers, we have considered the Court of Final Appeal’s judgment in Capital Well Ltd v Bond Star Development Ltd, FACV 4/2005, (2005) 8 HKCFAR 578, particularly in paragraphs 33 and 36 thereof Ribeiro PJ has this to say: -

“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…”

116.  We accept that the applicants’ respective offer prices fall within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. In these proceedings, there is no evidence that the valuations of Savills were basically unreliable. Although we may not agree with each and every item in Savills’ assessments, it is a matter of differences in opinion and the valuations before us have no serious fault. Our determinations are not far from the assessments of Savills.

117.  Thus, we are satisfied that the applicants have taken reasonable steps to acquire the respondents’ properties in accordance with section 4(2)(b) of the Ordinance.

ISSUE 5 – RESERVE PRICE FOR THE PUBLIC AUCTION

118.  Since we are satisfied that the 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, an order for sale should therefore be granted in favour of the applicants. What we need to do now is to fix the reserve price for the public auction.

Residual Valuation

119.  Both sides’ valuation experts have agreed to adopt residual valuation method and updated their respective RDV assessment of the Lot with 13 September 2023 as the date of valuation (“the RDV Date of Valuation”). They have agreed that the redevelopment of the Lot has a net site area of 727.42 sq m and a maximum plot ratio of 15. They have also agreed on the hypothetical development scheme of a high-rise industrial building with a total Gross Floor Area (“GFA”) of 10,911.30 sq m.

120.  Regarding the hypothetical development model, Mr Chan adopts a building with 24 storeys over 1 basement, while Mr Lai adopts a 25 storeys over 1 basement. Since the GFA of the 2 models are the same, the two experts agree that it is not a valid dispute to require a judgment from the Tribunal, and the Gross Development Value (“GDV”) should be assessed at $1,682,036,563.

121.  The RDV parameters for residual valuation as agreed by the two experts are as below:

Marketing Cost	2%
Demolition Cost	$16,720,000 (7,600 sq m x $2,200/sq m)
Demolition Period	9 months
Professional Fee	6%
Construction Cost	$359,731,770 (Estimated by the Building Cost Data published by RLB, assumed with High Quality Standard for Industrial / Office Building.)
Stamp Duty	4.25%
Legal Costs	0.10%

(Note: In respect of the Stamp Duty and Legal Costs, the two experts have different approaches in their calculation under the Residual Valuation Method, but the derived figures have no significant difference. We prefer Mr Lai's approach as it is conceptually more correct.)

Interest Rate

122.  For the residual valuation, Mr Chan adopts an interest rate of 5.5% having considered the Hong Kong Dollar Interest Settlement Rate on the RDV Date of Valuation of 1 month, 3 months and 12 months at 4.96839%, 4.98435% and 5.39601% respectively, and the Hong Kong Dollar Best Lending Rate of HSBC on 28 July 2023 at 5.875%. Mr Chan has also quoted two Lands Tribunal judgments (LDCS 28000/2018 & LDCS 16000/2019 both with date of hearing in December 2022) to show that 5.0% was adopted.

123.  Mr Lai, however, considers 5.5% being excessive and that Mr Chan has not applied a consistent approach for his first valuation report and the updated report. Mr Lai adopts an interest rate of 4.75% having considered the Interim Report 2023 from Wharf Real Estate Investment Company Limited with an effective borrowing rate of 4.7%. Three Lands Tribunal judgments have been quoted to support Mr Lai’s view including LDCS 6000/2022 (4.375%), LDCS 3000/2022 (4.75%) and LDCS 9000/2021 (4.5%).

124.  The applicants argue that the effective borrowing rate derived from borrowing rates of Wharf Real Estate Investment Company Limited was obtained during the previous low borrowing rate period and the recent borrowing rate must be much higher than that.

125.  We consider that each of the previous Lands Tribunal judgments as quoted from both parties has its own merit for assessment and can be used for reference only. We agree with the applicants that relying on the effective borrowing rate of a development company to derive an interest rate of the subject residual valuation is inappropriate, although we are still open for this approach if a more comprehensive research is conducted with more data resources.

126.  There is no dispute that the global economy was relatively poor and unstable as at the RDV Date of Valuation. We accept that under the prevailing overall economy environment, both the Hong Kong Dollar Interest Settlement Rate and the Hong Kong Dollar Best Lending Rate are relevant yardsticks to determine the appropriate interest rate to be applied for residual valuation of the subject small-scale property development comprising one multi-storey building.

127.  Since the interest rate had been relatively unstable prior to the RDV Date of Valuation, the Hong Kong Dollar Interest Settlement Rate of 1 month, 3 months and 12 months at the date of valuation are all relevant for consideration, but we give more weighting to the rate of 3 months. Having taken into account the interest rate movement trend prior to the RDV Date of Valuation, we decide to adopt an interest rate of 5.4% for the RDV residual valuation of the Lot.

Developer’s Profit

128.  For the residual valuation, Mr Chan adopts a Developer’s Profit of 25%. He has stressed that “In a rising market, developers require a lower profit margin…due to increase in value of the completed product and market risk in such circumstances is low….if a developer expects the selling price of his project will drop over time, he would require a higher profit margin to cover such market risk”. He also expressed that the confidence in the economy of Hong Kong is shadowed by a number of macroeconomic factors including (1) US-PRC conflict; (2) war in Ukraine results in increase in inflation rate and investment risks; (3) high inflation environment in US and many countries that prompts for interest rate increase; (4) downturn of economy in PRC; and (5) loss of labour force of Hong Kong due to emigration in recent years.

129.  A Lands Tribunal judgment (LDCS 1000/2020) with the date of hearing in July 2022 has been quoted in that a Developer’s Profit of 20% was adopted for a non-polluting industrial redevelopment and in view of the dropping market, a higher profit margin was allowed.

130.  Mr Lai, on the other hand, adopts a figure of 20%. The submitted argument is that the concept of profit is linked to the risk of the prospective developer in handling the redevelopment, and it is based on current market conditions without any projection over future events. Thus, the market should be assumed as remaining static in the residual valuation and a forecast of private flatted factories prices in the coming years should not be a considerable factor for the Developer’s Profit.

131.  The price and rental index of private flatted factories were 859.7 and 215.4 in October 2022, and 853.1 and 223.4 in July 2023 respectively. Mr Lai opined that the price level has remained almost stable during the relevant period. As regards the macroeconomic factors, Mr Lai takes a more optimistic view that the political conflicts and global high inflation environment is easing, while the economy of Hong Kong is recovering due to restoring of logistics and transportation services between Hong Kong and the PRC. The relaxation of the policy in the construction industry would ease the tension or the required labour force of Hong Kong.

132.  We are not convinced by Mr Lai’s view that in determining the Developer’s Profit any forecast should be ignored. Under the market reality, a prospective developer will make a forecast of the property market prior to making a purchase bid for the land, and the general view of the forecast will form a vital part of the prevailing market condition. However, we accept the view of Mr Lai that the private flatted factories prices had been relatively stable over the past months of the RDV Date of Valuation.

133.  Nevertheless, we agree with Mr Chan that the market shows a declining demand in the coming future. As regards the macroeconomic factors, R2 has submitted that these factors are way too far-fetched upon the actual consideration of a hypothetical purchaser undertaking the subject development in Wong Chuk Hang. We are of the view that macroeconomic factors will affect international trading and in turn will affect the demand of factory or godown properties in Hong Kong.

134.  Although there are different views between the valuation experts on the extent of impact due to the current macroeconomic factors against the private flatted factories market, they have no doubt that the risk is there. Having considered the above, we determine a Developer’s Profit of 24% be adopted for the assessment of market value of the Lot under RDV.

Construction Period

135.  The valuation experts have agreed that the demolition period is 9 months, but there is dispute on the construction period. Mr Chan proposes 33 months, referring to a development named M Place at Wong Chuk Hang Road. M Place was completed in July 2018 and, according to the records from the Buildings Department, has required 32 months to complete the superstructure. The site configuration, type of development and the total GFA of M Place are similar to the hypothetical development, with the exception that M Place has 32 storeys as compared with 24 storeys over a basement adopted in the subject valuation.

136.  Mr Lai proposes a construction period of 27 months. His major arguments include: (1) M Place has 8 storeys higher than the subject one and needs extra time for construction; and (2) M Place was built from 2015 to 2018 when the construction industry was booming competing for extra labour, and that the availability of labour and technology nowadays is much better where projects can be speeded up. He refers to a comparable project of Hundson International Center at Wong Chuk Hang Road, which contains 25 storeys over 2 levels of basement with a much higher GFA of about 15,000 sq m and was completed in October 2020. According to the records available, Hundson International Center required 26 months to complete the superstructure.

137.  We accept that both M Place and Hundson International Center are relevant comparables for consideration. The construction period of just the superstructure works of the two developments is 32 months and 26 months respectively. The subject hypothetical development of the Lot is not a complicated one and thus the advance of construction technology is irrelevant to determine the construction period. We are not convinced that the availability of labour nowadays is much better than that in mid-2010’s. We, however, are of the view that during the coming period of higher interest rate and higher investment risk, developer may face extra pressure to complete a construction project timely, while the Government has recently relaxed the importation policy for workers in the construction industry to address the issue of insufficient labours. Under this market sentiment, and given an interest rate of 5.4% and a Developer’s Profit of 24% to be adopted in the RDV residual valuation, we agree to adopt 30 months as the construction period for the hypothetical development.

RDV of the Lot

138.  Based on the above determinations, the residual valuation of the Lot is summarised in Appendix III herein. The RDV of the Lot as at 13 September 2023 is assessed at $728,000,000, equivalent to an accommodation value of about $66,720 per square metre.

ORDERS

139.  For the reasons given above, we 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 the redevelopment of the Lot;

(2) Mr Chow Wing Kin Anthony and Ms Chow Suk Han Anna, nominated by the applicants, be appointed the trustees (“the Trustees”) to discharge the duties imposed on them as trustees under the Ordinance in relation to the sale of the Lot;

(3) The Trustees be authorised to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs Guantao & Chow, Solicitors and Notaries, dated 20 July 2023;

(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 $728,000,000;

(5) Subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Lot or its successor in title, the redevelopment of the Lot and the Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot; and

(6) Liberty to the Applicants, the Respondents and the Trustees to apply to the Tribunal for further directions.

COSTS

140.  Following Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 5340, we make a costs order nisi that save for costs orders that have already been made, the applicants do pay costs of these proceedings to the R2/3, on High Court scale with certificate for one counsel and including any reserved costs, to be taxed if not agreed. Unless any parties apply by summons to vary the costs order nisi, it shall be made absolute upon expiry of 14 days from the date of this judgment.

Appendix I

Table 1 - Property Particulars

Notes

Table 2 - Upper Floor Unit - Value Adjustment

Note

* Subject to the overall discount of about 3.6% on the Reinstatement Approach as mentioned in the Note under paragraph 91 of the Judgment

Appendix II

Analysis of Reinstatement Cost

Notes

Appendix III

Valuation on Redevelopment Basis

Residual Valuation