EASE KIND DEVELOPMENT LTD v. HSBC PRIVATE TRUSTEE AND OTHERS

LDCS 7000/2009

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LANDS COMPULSORY SALE APPLICATION NO. 7000 of 2009

_______________

________________________________

REASONS FOR JUDGMENT

________________________________

Written Reasons

1.  After hearing and reading submissions and evidence from the Applicant, I have granted judgment in favour of it on 25 August 2010 and made an order for sale under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) with reasons reserved. I now give my written reasons for the judgment.

The Application

2.  This is an Application made under the Ordinance for an order of compulsory sale of all the undivided shares of and in : -

(1)     Section B of Inland Lot No. 2670 (No. 3 Kwai Fong Street) (“the 1^st Lot”);

(2)     The Remaining Portion of Inland Lot No. 2671 (No. 4 Kwai Fong Street) (“the 2^nd Lot”);

(3)     The Remaining Portion of Inland Lot No. 2672 (No. 5 Kwai Fong Street) (“the 3^rd Lot”) respectively; and

(4)     The Remaining Portion of Inland Lot No. 2673 (No. 6 Kwai Fong Street) (“the 4^th Lot”).

3.  There were 4 buildings erected on the 4 lots respectively with the building at No. 3 Kwai Fong Street sharing a common staircase with the building at No. 4 Kwai Fong Street and the building at No. 5 Kwai Fong Street sharing a common staircase with the building at No. 6 Kwai Fong Street. There is 1 residential unit on each of the Ground Floor to 5^th Floor with a roof in each of the buildings, making a total of 24 residential units (each given undivided shares), with the roof of No. 4 Kwai Fong Street building (but not the other roofs) also given 1 undivided share. All the buildings were about 52 years old.

4.  At the time when this Application was taken out on 24 August 2009, the Applicant was the registered owner of all the undivided shares of the 1^st, 2^nd, 3^rd and 4^th Lots with exclusive right to use all the units of the Buildings, except 3 undivided shares (out of 21) of the 2^nd Lot with exclusive right to use the domestic unit at 2^nd Floor of No. 4 Kwai Fong Street (“2/F of 4 Kwai Fong Street”) and 1 undivided share (out of 6) of the 3^rd Lot with exclusive right to use the domestic unit at 2^nd Floor of No. 5 Kwai Fong Street (“2/F of 5 Kwai Fong Street”).

5.  The 1^st Respondent was the registered owner of 2/F of 4 Kwai Fong Street and the 3^rd Respondent was an occupier of it.The 2^nd Respondents were the registered owners of 2/F of 5 Kwai Fong Street.

6.  It was not in dispute that the average of Applicant’s undivided shares of the 1^st and 2^nd Lots and the average of the Applicant’s undivided shares of 1^st and 2^nd Lots were 92.85714% and 91.66666% respectively. I was satisfied that the Applicant was entitled to make this Application pursuant to section 3(1) of the Ordinance.

7.  Subsequently, just days before the hearing of this Application was about to begin on 23 August 2010, a Consent Application was jointly filed by the Applicant, the 1^st and the 3^rd Respondents for leave to withdraw the 1^st and 3^rd Respondents’ opposition to this Application and all the supporting evidence thereof. Leave was then duly granted and the 1^st and 3^rd Respondents’ attendance of the hearing was therefore excused.

8.  The background of such application would be dealt with later in my reasons for judgment. In short, I have been given the explanation that a settlement was reached between the parties but due to the fact that the 1^st Respondent, who was a trustee, lacked the power to enter into a sale and purchase agreement with the Applicant to sell the 2/F of 4 Kwai Fong Street, they therefore agreed for the Applicant to proceed with the Application but raised no objection against the Tribunal to make the order for sale of the 1^st and 2^nd Lots.

9.  Furthermore, when Mr. Mok, Counsel for the Applicant filed his Opening Submissions for the hearing on 18 August 2010, I was informed that there was also a settlement between the Applicant and the 2^nd Respondents who decided to sell the 2/F of 5 Kwai Fong Street to the Applicant. The completion of such transaction took place on 20 August 2010, namely 3 days before the hearing.

10.  On the first day of hearing, due to the successful acquisition of all the undivided shares of the 3^rd and 4^th Lots, the Applicant made an Interlocutory Application to amend the Notice of Application (Form 32) to exclude the 2 lots from the Application.

11.  Consequently, I was therefore only requested to deal with an uncontested application for an order for sale of the 1^st and 2^nd Lots and since the Applicant amended the Application, there were no longer any 2^nd Respondents. However, an order for sale shall not be granted, even if it was uncontested, unless, the Applicant has satisfied this Tribunal with sufficient credible evidence that all the requirements and conditions as laid down in the Ordinance were duly met. I would therefore deal with them one by one below.

12.  Since the evidence of the Applicant was not challenged by any of the Respondents, I therefore directed that all the witness statements, expert reports and documents filed by the Applicant in support of the Application be admitted as evidence in the hearing without calling the makers, save and except for Mr. Charles Chan, FRICS FHKIS, a Chartered Valuation Surveyor, to give his up-to-date opinion on the auction reserved price for the sale of the 1^st and 2^nd Lots.

Valuation of the Existing Use Values (“EUV”) as per Part 1 of the Schedule 1 of the Ordinance

13.  Under section 4(1)(a) of the Ordinance, the first determination by the Tribunal would have been the determination of dispute, if any, on the EUV valuations undertaken in the application valuation report filed pursuant to section 3(1)(a) of the Ordinance. However, since the 1^st and 3^rd Respondents have withdrawn their oppositions and evidence, there is no dispute by any minority owner of any EUV as assessed in the application valuation report. I therefore accept Mr. Mok’s submissions that the EUVs as set out in paragraph 9 in the application valuation report dated 4 August 2009 and updated in paragraph B1.5 in the supplemental report dated 31 March 2010 of Mr. Chan be adopted without any determination as follows:-

Floor	Existing Use Values as at 15 July 2009
	No. 3 Kwai Fong Street (1st Lot)	No. 4 Kwai Fong Street (2nd Lot)
G/F	$1,935,000	$ 1,899,000
1/F	$ 1,893,000	$ 1,911,000
2/F	$ 2,094,000	$ 2,227,000
3/F	$ 2,052,000	$ 2,074,000
4/F	$ 2,082,000	$ 2,139,000
5/F	$ 1,810,000	$ 1,731,000
R/F		$ 196,000

Justification for Redevelopment and Reasonable Steps Taken

14.  The second determination under section 4(1)(b) of the Ordinance is whether the compulsory order for sale shall be made. According to section 4(2) of the Ordinance, this would involve 2 issues:

(1) Was the redevelopment of the 1^st and 2^nd Lots justified due to age or state of repair of the existing buildings; and

(2) Has the Applicant taken reasonable steps to acquire all the undivided shares in 1^st and 2^nd Lots.

15.  If the Applicant failed to satisfy this Tribunal that the above 2 issues were answered in the affirmative, be it an uncontested application, an order for sale ought not be granted.

16.  For Issue (1) above, I have taken into consideration of the professional opinion of :- (a) Mr. Benson Wong, MRICS FHKIS, a Chartered Building Surveyor and an Authorized Person as stated in his report dated 29 March 2010; and (b) of Mr. K. S. So, a Chartered Structural Engineer as stated in his report dated 24 March 2010, and in particular for the fact that:-

(1)     Both the existing buildings at No. 3 and 4 Kwai Fong Street respectively were the among the oldest buildings in the neighbourhood. Mr. Wong and Mr. So both were of the view that the buildings were “entering into the propagation phase, suffering from continuous and growing deterioration.”;

(2)     The existing buildings were not designed to have external architectural fins and overhangs for weather protection of the external wall finishes purposes;

(3)     The external walls of the existing buildings were finished with poor materials of cement/sand rendering and paintwork;

(4)     No entrance lobby was provided at the ground floor entrance. The access to the upper floors of both No. 3 and 4 Kwai Fong Street was through a narrow common entrance and staircase;

(5)     The common staircase shared by No. 3 and 4 Kwai Fong Street was narrow and no emergency lighting was installed to the meet the statutory requirement for means of escape;

(6)     The wirings, including:- electricity, telephone , internet and television cables, in the existing buildings were “haphazardly installed with exposed wirings running in the staircases and inside the flats.”;

(7)     Due to the buildings’ old age, no lift was installed and they were inaccessible to persons with physical disability or chronic illness;

(8)     There was no refuse disposal installation;

(9)     No building automation system, for example:- security installation or residents entry and remote door control system, was installed;

(10)   No equipotential bonding system was provided for the earth bonding of metal components such as windows, doors, railings and other metal fixtures. This omission was a fundamental breach of the Code of Practice for Electricity (Wiring) regulations endangering the safety of the occupants;

(11)   Defects identified in the existing buildings included:- cracks and spalling of concrete in floor slabs and beams, plaster cracks and blistering / flaking of paintwork;

(12)   Mr. So was of the view that the structural frames of the existing buildings were poor. He said that they had practically reached the end of their design working life of 50 years;

(13)   The alkaline environment in concrete covers which gave protection to the steel reinforcement bars in the structural frames against corrosion had been extensively destroyed. Chloride content in 2 floor slab samples was in excess of the permitted limit. The exposed steel reinforcement bars were having rust of various magnitudes. In Mr. So’s view, all of the above meant that the reinforcement bars would be vulnerable to attack by corrosion;

(14)   A number of unauthorised building works were identified in the existing buildings;

(15)   Hollow spots were identified on the external wall rendering. Mr. Wong of the view that since the existing buildings were over 50 years old, the external wall rendering should have passed their effective life;

(16)   Seepages of water were identified on the internal faces of the external walls in the flats and other common areas of the existing buildings;

(17)   Asbestos containing materials were found in many areas of the existing buildings;

(18)   Both Mr. Wong and Mr. So were of the view that the repair costs for restoring the existing buildings to a reasonable standard would be high; and

(19)   The existing buildings did not possess any historical or architectural values.

17.  Apart from the professional opinions of the experts, I also looked at the primary evidence supporting the opinions including:- the photographs, the survey records and the various tests results (including:- carbonation depth tests, compression tests and chloride content tests) in coming my decision. I accepted that their professional opinions were sound and supported by the facts.

18.  Further, in consideration of the evidence above, I was entitled to look at all of the above collectively to see if redevelopment was justified, even though when each of them, if considered alone, was insufficient to do so. I was satisfied that the evidence showed that the existing buildings on the 2 lots had reached beyond the design working life of 50 years and the state of repair was poor. Unreasonable high costs may have to be incurred to restore them into an acceptable standard but no evidence seemed to suggest that any reasonable owners would do so. I was therefore satisfied that the redevelopment of the 1^st and 2^nd Lots was justified due to age and state of repair of the existing buildings.

19.  In Intelligent House Ltd v Chan Tung Shing & Others [2008] 4 HKC 421, this Tribunal formulated certain tests, which included some economic perspective, for deciding whether or not a redevelopment is justified due to age or state of repair. However, the correctness of these tests were subsequently questioned by the Court of Appeal “without the benefit of hearing full argument” in Fineway Property Ltd v Sin Ho Yuen VictorCACV 95 of 2009 (Unreported). I do not intend to deal with the correctness of the relevant tests formulated in Intelligent House  on “age” and “state of repair” in this Application for 2 reasons:-

(1)     First, for the facts of this Application, it was not necessary for me to apply the relevant tests as I was satisfied on the facts and professional opinions adduced before me that the redevelopment was justified due to age and state of repair of the existing buildings; and

(2)     Second, this Application was not an appropriate occasion to go into the questions of correctness of the relevant tests formulated in Intelligent House because there was no opposition to the Application and the Tribunal was not properly assisted by opposing submissions.

20.  For Issue (2) above, I have taken into consideration of the evidence of Mr. So Wai Wing who was a manager of the Applicant. He explained in his witness statement that how negotiation with the 1^st and 3^rd Respondents had taken place and how different offers were made to them at different times. I do not intend to repeat the evidence in detail here.

21.  In the hearing, I was further informed that since preparation of the witness statements, the Applicant made further attempts to acquire, the remaining unit, namely 2/F of 4 Kwai Fong Street from the 1^st Respondent. The correspondence between the Applicant and 1^st Respondent showed that there was an agreement in principle reached between the parties on 14 May 2010 for the Applicant to acquire this remaining unit at a price of $10 million (the apportioned Redevelopment Value for this unit was about $6.7 million as at 8 March 2010) on terms to be worked out between the parties. The main problem, however, was that the 1^st Respondent was the trustee of the estate of the original registered owner and did not have any power of sale during the life of the 3^rd Respondent. The 1^st Respondent will need an order from the High Court to authorize such sale. I was told that the parties then worked on the question of how a sale reached in principle could be achieved in an alternative way if the High Court order is not available in time. Eventually, an agreement was signed by the parties a few days before this hearing and by reasons of this, the 1^st and 3^rd Respondents withdrew their oppositions against this Application.

22.  As the 1^st and 3^rd Respondents had not yet obtained the High Court order authorizing the sale of the 2/F of 4 Kwai Fong Street, the parties agreed to proceed with the Application but the 1^st and 3^rd Respondents would make no opposition. It was the intention of parties that if the order for sale were to be granted, the auction sale would take place before the granting of the High Court Order authorizing the sale, the Applicant would then proceed to acquire the 1^st Respondent’s share of sale proceeds at the price of $10 million less the expenses for removal of the encumbrances that would have been necessary to give good title of property.

23.  Having considered the above, I accepted that the various offers made by the Applicant were fair and reasonable because:-

(1)     they had taken into account the redevelopment potential of the 2 lots and the distribution of that redevelopment potential to the 2/F of 4 Kwai Fong Street;

(2)     they were issued according to the advice of valuation expert and the statutory formula; and

(3)     the 1^st and 3^rd Respondents, in fact, accepted this latest offer of $10 million and were willing to withdraw the objection to this Application.

In my judgment, applying the test formulated in Capital Well Ltd v Bond Star Development Ltd [2005] 4 HKLRD 363, I was satisfied that the Applicant has taken reasonable steps to acquire all the undivided shares in the 1^st and 2^nd Lots including this remaining unit, namely 2/F of 4 Kwai Fong Street.

Auction Reserved Price for the Auction

24.  On 16 August 2010, the Applicant has filed another valuation report of Mr. Chan for the purpose of determination of the auction reserve price in accordance with the requirement as set out in paragraph 2 of Schedule 2 of the Ordinance. Mr. Chan gave his view that the redevelopment value, as at 2^nd August 2010, of the 1^st, 2^nd, 3^rd and 4^th Lots was $151,000,000. However, after the successful acquisition of the 2^nd Respondents’ undivided share in the 3^rd Lot by the Applicant, the 3^rd and 4^th Lots were no longer the subject of this Application. Mr. Chan was therefore requested to give his further opinion orally in the Tribunal for the redevelopment value of the 1^st and 2^nd Lots only. He used his original valuation of $151,000,000 for the 4 lots as a “based figure” and applied a pra-rata basis of the site areas of the 4 lots to give his view on the redevelopment value of the 1^st and 2^nd Lots. According to his analysis, he said that the redevelopment value would not be more than $74,800,000. I accepted Mr. Chan’s opinion being reasonable and therefore approved that the reserved price for the auction shall be $74,800,000.

The Order for Sale

25.  By reasons of the above, I was satisfied that the requirements and conditions as laid down in the Ordinance have been met and an order for compulsory sale was made in the following terms:-

(1)     Having considered the evidence adduced in Court, the Tribunal is satisfied that the redevelopment of the 1^st and 2^nd Lots is justified due to the age and state of repair of the existing development on the lots, and that the Applicant has taken reasonable steps to acquire all the undivided shares in the lots including that of the Respondents;

(2)     All the undivided shares of the 1^st and 2^nd Lots, the subject of the Application, be sold by way of a public auction for the purposes of the redevelopment of the lots under section 4(1)(b) of the Ordinance;

(3)     Ms. Chow Pui Wa Carol and Ms. Fung Wan Yiu Agnes, nominated by the Applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to the 1^st and 2^nd Lots and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs. Vincent T.K. Cheung, Yap & Co dated 11August 2010;

(4)     For the purposes of discharging the duties of the Trustees under section 10 and Part 3 of the Schedule 1 of the Ordinance, the Trustee be directed to take note that (a) there is no dispute on the value of any of the units as assessed and set out in paragraph 9 of the application valuation report herein and (b) the existing use values of each of the units of Nos. 3 and 4 Kwai Fong Street as set out herein are appropriate to be relied on by the Trustees;

(5)    Service of a copy of the order for sale on the Respondents be dispensed with. Further, the Applicant is to publish notices in substantially the same form as the draft as submitted to the Tribunal within 21 days from the date hereof in a Chinese newspaper and an English newspaper circulating in Hong Kong on the same day;

(6)     For the purpose of a sale of the 1^st and 2^nd Lots by public auction under section 5(1)(a) of the Ordinance:

(a)     The sale of the lots be on the particulars and conditionssubstantially the same as those in the draft Particulars and Conditions of Sale initialed and approved by the Tribunal;

(b)     The reserve price be set at $74,800,000;

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

(7)     Liberty to the Applicant, the 1^st Respondent, the 3^rd Respondent and the Trustees to apply to the Tribunal for further directions;

(8)     No order as to costs for this hearing and the entire application.