MASTER HONEST INVESTMENTS LTD v. HO SUI KUEN WANLY AND ANOTHER

LDCS 24000/2020

[2021] HKLdT 71

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 24000 OF 2020

__________________________

BETWEEN

__________________________

__________________

JUDGMENT

__________________

BACKGROUND

1.  This is the applicant’s application for an order for sale, for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”), of all the undivided shares of and in sub-section 7 and sub-section 8 of section B of Inland Lot No 1216 (“the Lot”) together with a building erected thereon known as Nos 94, 94A & 98 Robinson Road, Hong Kong (“the Building”).

2.  The Building is an 8-storey residential block served by 1 lift and 2 common staircases. Occupation permit No H124/63 was issued for the Building on 27 July 1963, granting permission to occupy its basement as children’s playground for non-domestic use, and its ground to 6^th floors as 3 flats on each floor for domestic use. According to the approved building plans of the Building, there are a children’s playground planned at basement, 3 flats [i.e. Flat A (No 94A), Flat B (No 96) and Flat C (No 94)] planned on each of ground floor to 6^th floor, and a store room planned on roof.

3.  The Lot together with the Building standing thereon is allocated 23 undivided shares. Each of the 21 flats from ground to 6^th floor is given 1 undivided share, the Basements is given 4/5 of 2 undivided shares and the Store Room on Roof is given 1/5 of 2 undivided shares, making up a total of 23 undivided shares.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

4.  At the time of filing of the Notice of Application (“NOA”) on 17 September 2020, there were 2 respondents and the applicant owned 91.304% (i.e. 21 out of the total 23) undivided shares in the Lot.

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

6.  I am satisfied that as at the date of application, the applicant owned more than 90% of the undivided shares in the Lot. I am therefore satisfied the applicant is entitled to make the present application under section 3 of the Ordinance.

THE REMAINING RESPONDENTS

7.  At trial, the applicant still owned 91.304% (i.e. 21 out of the total 23) undivided shares in the Lot. The following 2 respondents remain in the present action: -

Respondent		Premises
1st Respondent	(“R1”)	Flat C on 2nd Floor (“R1’s Property”)
2nd Respondent	(“R2”)	Flat A on 2nd Floor (“R2’s Property”)

8.  R1 and R2 (“the Respondents”), represented by Mr Desmond Leung (“Mr Leung”), take issues primarily on the valuations as assessed in the application and put the applicant to strict proof in respect of the other statutory requirements under the Ordinance.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

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

1) What was the respective existing use value (“EUV”) of all units in the Building as at 14 August 2020, the valuation date adopted in the application valuation report dated 14 September 2020, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?

2) Whether the redevelopment of the Lot is justified due to age and/or state of repair of the Building in accordance with section 4(2)(a) of the Ordinance?

3) Whether the applicant has taken reasonable steps to acquire all the undivided shares in the Lot on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance?

4) If an order for sale should be granted, what should be the reserve price (i.e. redevelopment value (“RDV”) of the Lot) for the purpose of auction sale?

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING

10.  Pursuant to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the EUV of the units as assessed in the application, the tribunal shall determine the proper value. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the lot who cannot be found, the majority owner of the lot is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is: -

“(A) not less than fair and reasonable; and

(B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

11.  There are disputes between the applicant and the Respondents on both the EUV and RDV valuations. The Respondents rely on the reports and valuations prepared by Mr Wayne Lee (“Mr Lee’) of Wayne Lee & Associates Limited, whilst Mr Charles Chan (“Mr Chan’) of Savills Valuation and Professional Services Limited is appointed by the applicant.

EUV of Flats

12.  The 2 valuation experts agree on the unit rate of the reference unit (i.e. Flat C on 3^rd Floor) at $169,494 per square meter saleable. Except for the internal conditions of 4 flats, they agree on the particulars of all units in the Building. In the comparison between the reference unit and the other flats in the Building, they agree on the adjustment for floor at 0.5% per 1-level difference, the adjustment for top floor at -3%, the adjustment for size at 1% per 10-square meter difference and the adjustment rates for view and internal condition, but they argue whether or not there should have an additional adjustment for lighting and ventilation to all Flats A and an additional adjustment for floor to Flats B and C on Ground Floor.

13.  With reference to the photos in the valuation reports prepared by the valuation experts and the joint site inspection on 7 September 2021, I agree with Mr Chan the internal conditions of Flat A on 2^nd Floor, Flat A on 4^th Floor, Flat A on 5^th Floor and Flat C on 2^nd Floor as at the valuation date were poor, fair, good and fair respectively.

14.  In terms of lighting and ventilation, I agree with Mr Lee that Flat A, which has windows on 3 sides, is generally better than Flats B and C, but the adjustment rate should be 2% only instead of 3% as adopted by Mr Lee. Further, I consider that Flats A on Ground Floor and 1^st Floor on the lowest 2 floors do not have the advantage in this regard. Regarding Flats B and C on Ground Floor that can easily be seen along Robinson Road, I agree with Mr Lee that they are relatively inferior with lesser privacy. I am of the view there should have an additional and special adjustment for them at -3% in respect of their ground floor position.

EUV of Basements and Store Room on Roof

15.  The 2 valuation experts agree to convert the Basements and the Store Room on Roof with reference to the average unit rates of the ground floor flats and the top floor flats respectively, but they disagree on their respective conversion factors.

16.  Since the Store Room on Roof is a small unit and is useful for storage purpose to the occupants in the Building, I agree with Mr Chan to convert it at the factor of 1/2 instead of 1/3 as suggested by Mr Lee. However, I agree with Mr Lee to convert the Basements at the factor of 1/4 instead of 1/3 as suggested by Mr Chan. Although the Basements can be accessed via the common lift and is largely covered, it is restricted for use as a children’s playground only and is a large unit with substantial lump sum.

EUV of All Units in the Building

17.  The valuation of all units in the Building is listed in Appendix I of the judgment. The EUV of all units in the Building as at the relevant date of valuation, i.e. 14 August 2020, and adopted by this tribunal are appended below: -

Floor	Flat	EUV
G/F	A (94A) & portion of yard	$14,170,000
1/F	A (94A)	$15,000,000
2/F	A (94A)	$15,860,000
3/F	A (94A)	$16,420,000
4/F	A (94A)	$16,500,000
5/F	A (94A)	$17,060,000
6/F	A (94A) & portion of roof	$16,470,000
G/F	B (96) & portion of yard	$16,380,000
1/F	B (96)	$16,290,000
2/F	B (96)	$15,440,000
3/F	B (96)	$16,450,000
4/F	B (96)	$15,600,000
5/F	B (96)	$16,140,000
6/F	B (96) & portion of roof	$15,930,000
G/F	C (94)	$12,310,000
1/F	C (94)	$16,440,000
2/F	C (94)	$16,520,000
3/F	C (94)	$16,120,000
4/F	C (94)	$16,200,000
5/F	C (94)	$17,260,000
6/F	C (94) & roof	$16,590,000
Basements	-	$8,770,000
Roof	Store	$580,000

18.  I therefore accept the total EUV of the Building is $344,500,000.

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

19.  Section 4(2) of the Ordinance provides as follows: -

“2. The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that—

(a) the redevelopment of the lot is justified (and whether or not the majority owner proposes to or is capable of undertaking the redevelopment)—

(i) due to the age or state of repair of the existing development on the lot; or

(ii) on 1 or more grounds, if any, specified in regulations made under section 12; and

(b) the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”

20.  The applicant must satisfy this tribunal the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted.

Whether development of the Lot is justified due to the age and/or state of repair of the Building

21.  The applicant adduces expert evidence of Mr CM Wong, a structural engineer, of CM Wong & Associates Limited and Mr Benson Wong, a building surveyor, of Benson Wong & Associates Limited. Mr CM Wong conducted a structural survey of the Building and prepared a Structural Assessment Report on 4 February 2021. Mr Benson Wong conducted a condition survey of the Building and prepared a Condition Survey Report on 5 February 2021.

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

23.  Having considered the reports of Mr CM Wong and Mr Benson Wong, I accept their expert opinion. The Building, being erected more than 58 years ago, is in poor condition and has come to the end of its design life. The design of the Building has become obsolete over time in many aspects, both physically and functionally, and fails to conform to modern safety standards and statutory requirements.

24.  I am also of the view the Building is in poor state of repair and the costs of repair to bring the Building to tenantable condition is disproportionate to the costs of redevelopment. Even if repair works are carried out, such works will bring about a modest improvement only to the existing condition of the Building and the Building will continue remain a sub-standard one.

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

Whether the applicant has taken reasonable steps

26.  In assessing the reasonableness of the offers, I have considered the case of Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. In particular, I have considered paragraphs 33 and 36 of the judgment in which Ribeiro PJ stated: -

“33. In making that assessment the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It does not itself arrive at any conclusion as to what figure represents the correct valuation. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. It is obviously necessary to recognise that there will often be differences of opinion on that matter……”

“36. ...... We are of course not suggesting that it is necessary for the offer to “beat” the valuation as if it were a payment into court. What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site……”

27.  The applicant has made 3 rounds of offers to R1 and R2 on 1 September 2020, 13 May 2021 and 17 August 2021, which have made reference to the valuations of Mr Chan and reflected the then pro-rata share of the RDV. The prices offered in the 2^nd and 3^rd rounds were 5% higher than the then Mr Chan’s assessments. Ms Nancy Ngai (“Ms Ngai”), counsel for the applicant, submits that the applicant has taken reasonable steps in acquiring all the undivided shares in the Lot.

28.  On the evidence available, I accept that the applicant’s offer prices have reflected the respective proportionate share of the RDV of the Lot and do fall within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. I am satisfied the applicant has taken reasonable steps to acquire all the undivided shares in the Lot.

RESERVE PRICE FOR THE AUCTION

29.  By reason of being satisfied that redevelopment of the Lot is justified and that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot, I am satisfied an order for sale should be granted in favour of the applicant.

30.  The 2 valuation experts agree to adopt residual method and update their respective RDV assessments as in August 2021, but they cannot agree on the exact valuation date. They agree to develop the Lot on a registered site area of 591.04 square meters and to build a high-rise residential building at the domestic plot ratio of 5 (i.e. gross floor area of about 2,955.16 square meters), but they argue about the optimum hypothetical development scheme particularly the provision of car parking spaces.

31.  It is odd that the parties cannot agree on the exact valuation date. Nonetheless, I am of the view the difference of 5 days only is minimal and would not affect the final valuation result. For ease of reference in the judgment, I adopt the valuation date of 16 August 2021 in this instance.

32.  In the residual valuation, they agree on gross development value (“GDV”) of each covered car parking space (if any) at $3,800,000, marketing cost at 3%, interest rate at 4% per annum, professional fee at 6%, demolition cost at $5,306,840 (i.e. $2,200 per square meter gross), demolition period of 9 months, and stamp duty and legal cost on land value at 4.25% and 0.1%, but they have different opinion on GDV of flat, construction period, construction cost and developer’s profit.

Hypothetical Development Scheme

33.  The 2 valuation experts argue mainly whether car parking spaces should be provided in the hypothetical development. Mr Lee proposes to build 14 car parking spaces above ground level, whist Mr Chan is of the view that the optimal form of hypothetical development would be without car parking spaces (i.e. his original residual valuation, the 1^st Model). The main disputes in this regard are (1) whether car parking spaces above ground level as suggested by Mr Lee would be accountable for gross floor area calculation, which would lead to the maximum gross floor area being exceeded; (2) whether the provision of car parking spaces at 2-level basement below ground level as suggested by Mr Chan alternatively would exceed the bulk excavation limit under the geotechnical control on developments in Mid-Levels Scheduled Area; and (3) the number of car parking space (if any) that can be provided in the hypothetical development.

34.  Mr Lee relies on the Letter of Advice by Mr Lam Siu Tong (“Mr Lam”), an Authorized Person and a former Deputy Director of Buildings Department. Mr Lam considers that when considering the permitted plot ratio of a building plan submission, Buildings Department would always adopt the practice of making reference to the plot ratio specified in the First Schedule referred to in section 21 of Building (Planning) Regulations, Cap 123F. Hence, applying this principle to Mr Lee’s hypothetical development, whether one seeks the 50% gross floor area exemption or not under the practice note PNAP APP-2 issued by Buildings Department (i.e. gross floor area of underground carparks would be disregarded and 50% of the gross floor area of aboveground carparks would be disregarded), the maximum plot ratio of 8 under the Building (Planning) Regulations for the Lot as a Class A site would not be exceeded.

35.  Mr Chan holds a different view that aboveground carparks if any would be counted 50% of the gross floor area and the maximum plot ratio in this instance should be 5 only in accordance with the town planning control, and therefore it is not financially viable to build aboveground carparks at the expense of the domestic gross floor area. Although aboveground carparks may be 100% disregarded from gross floor area calculation if it is proven with sufficient evidence that it is technically infeasible to construct underground carparks due to the specific site constraints, Mr Chan considers that there is no such adverse evidence, which will be further discussed below in the judgment. He is also of the view the building of 2-level underground carparks is not financially viable because of higher construction cost and longer construction period (i.e. his 2^nd Model with 2-level car parking basement as presented at trial).

36.  On balance of probabilities, I agree with the analyses of Mr Chan that Mr Lee’s hypothetical development with 14 aboveground car parking spaces would exceed the maximum plot ratio of 5. I am of the view that when considering the permitted plot ratio of a building plan submission, the First Schedule of the Building (Planning) Regulations, the then town planning control at the maximum plot ratio of 5 and the practice note PNAP APP-2 should be taken into consideration altogether. If Planning Department holds a certain view as to whether certain floor area is accountable for gross floor area calculation, it is not ultimately up to Buildings Department only to approve or reject a building plan submission under the Centralized Processing System. Alternatively, First Schedule of the Building (Planning) Regulation should not be the only consideration of the Buildings Department.

37.  Section 16(1)(d) of the Buildings Ordinance, Cap 123, stipulates that “The Building Authority may refuse to give his approval of any plans of building works where …… the carrying out of the building works shown thereon would contravene the provisions of this Ordinance or of any other enactment, or would contravene any approved or draft plan prepared under the Town Planning Ordinance (Cap 131)”. Under the Approved Mid-Levels West Outline Zoning Plan No S/H11/15, the maximum plot ratio of the Lot is 5 and any floor space that is constructed or intended for use solely as car park may be disregarded only.

38.  Nevertheless, given that both Mr Chan and Mr Lee are of the view the covered carparks on ground floor in Mr Chan’s 3^rd Model (i.e. accommodation of the car parking spaces on ground floor and 1-level basement) may not result in environmental or visual impact, I consider on balance of probabilities and in accordance with paragraph 18 of PNAP APP-2 the covered car parking spaces on ground floor as proposed by Mr Chan in this instance can be exempted for gross floor area calculation and Mr Chan’s 3^rd Model is the optimum hypothetical development of the Lot.

39.  Regarding the building of 2-level basement for car parking purpose, I tend to agree with Mr Chan such proposal is feasible under the geotechnical control on developments in Mid-Levels Scheduled Area, but there are still some uncertainties on how to determine pre-development topography and whether extra working area is required during construction, which were raised by the parties at trial only and have not been proved by the applicant in details. Nevertheless, since I agree with Mr Chan in any event his 2^nd Model with 2-level car parking basement is not financially viable because of higher construction cost and longer construction period, I decide not to make a determination in this regard.

40.  Regarding the number of car parking space, I agree with Mr Chan reference should be made to Hong Kong Planning Standards and Guidelines and the provision of 14 car parking spaces in Mr Lee’s model is excessive, which is above the minimum number of private car parking space as allowed and therefore would in any event not be fully exempted by Building Authority in gross floor area calculation.

41.  Having reviewed the 4 hypothetical development schemes proposed by Mr Chan and Mr Lee respectively, I prefer to adopt the 3^rd Model proposed by Mr Chan and also accept his proposed layouts and flat reference unit (i.e. a flat of 42.38 square meters on 6^th floor with building view) in the assessment. Further, I agree with Mr Chan to build a residential block of 14-storey (i.e. 2^nd floor to 15^th floor) only instead of 16-storey (i.e. 3^rd floor to 18^th floor) as suggested by Mr Lee. I consider that the advantage of a lower residential block in this instance because of lesser common area and therefore higher efficiency could outweigh its disadvantage that lesser units on upper floors may enjoy open view.

GDV of Flat

42.  The 2 valuation experts agree to make direct comparison with the domestic comparables in 2 new developments, Babington Hill and The Richmond, but they disagree on some of their selection. They agree on the adjustment of time with reference to the Private Domestic Property Indices (Classes A, B & C) compiled by the Rating and Valuation Department, the adjustment for location at 0% for Babington Hill, the adjustment for size at 1% per 10-square meter difference, the adjustment for floor at 0.5% per floor level, the adjustment for facilities at -5% for Babington Hill and 0% for the Richmond, the adjustment for headroom at 1% per 0.2-meter difference and the adjustment for holding costs at 3% per annum for the period from date of full payment to the estimated date of the development. However, they disagree on the adjustment for location for the Richmond, the adjustments for view and age, the actual floor level of the comparables and whether a loading as suggested by Mr Lee should be added to the adjustment for floor.

43.  In the selection of comparables, I agree with Mr Lee to exclude the transactions in The Richmond on or before 7 May 2020 because there are a large number of relevant comparables closer to the valuation date. I also agree to exclude Flat B on 28^th Floor of The Richmond because the hypothetical development would have height below 20-storey.

44.  Regarding the adjustment for location, I agree with Mr Chan the adjustment rate for The Richmond should be 3% only instead of 5% as suggested by Mr Lee. I also agree with Mr Chan his proposed actual floor level of each comparable and that no loading is required in the floor adjustment for Babington Hill because its lower site level may affect the view adjustment only and is not a relevant consideration in the floor adjustment.

45.  With the benefit of site inspection together with the parties, I agree with the description of view of each comparable as proposed by Mr Chan and his proposed adjustment rates (i.e. 0% for building view and -5% for open view). In the adjustment for age, I consider the adjustment rate should be 1% per year in this instance, a midway figure between 0.5% per year as proposed by Mr Chan and 2% per year as proposed by Mr Lee. Nevertheless, after consideration of the scale of the hypothetical development and the comparable developments and that the hypothetical development would have car parking spaces, I am of the view there should have an adjustment for scale and facilities at -2% for Babington Hill and 2% for The Richmond irrespective of the agreement between the 2 valuation experts on facilities.

46.  The valuation of the flat reference unit is listed in Appendix II of the judgment. The average unit rate of the 11 comparables in Babington Hill is $353,608, and the average excluding Comparables NR-1 and NR-2 on 1^st floor with flat roof is $350,405. The average unit rate of the 13 comparables in the Richmond is $364,719. I consider the flat reference unit should be assessed at $357,500 per square meter saleable.

47.  After consideration of the adjustments for view, floor and special unit as suggested by Mr Chan, the average unit rate of all flats in the hypothetical development is $375,500 per square meter saleable, about 5% above the unit rate of the flat reference unit. I agree with Mr Chan that one of the 4 flats on each floor from 8^th Floor onwards of the hypothetical development can enjoy partial sea view and the additional adjustment rate for special units on 14^th and 15^th Floors should be 10% only (i.e. an overall adjustment of about 20% as compared with the flat reference unit).

Residual Valuation

48.  I agree with Mr Lee that the construction period of the hypothetical development is 2.25 years only instead of 2.5 years as suggested by Mr Chan. Accordingly, the development period including the demolition period is 3 years. I also agree with Mr Lee that the developer’s profit in this instance is 12.5% (exclusive of stamp duty and legal cost on land value) instead of 15% as suggested by Mr Chan. I am of the view as at the valuation date residential site market has improved and the hypothetical development project in the Mid-Levels district is a rather secure investment with relatively low risk, and therefore would justify a lower developer’s profit in the residual valuation.

49.  Nevertheless, I agree with Mr Chan the construction cost in this instance is $157,211,986 (i.e. $53,199 per square meter gross). As compared with Babington Hill and The Richmond, I am of the view the hypothetical development should be of very high quality and there should also be additional cost for construction of car parking spaces. Further, the parties have not argued on the value of motorcycle parking space, and I accept the unit rate of $150,000 as suggested by Mr Chan.

RDV of the Lot as at 16 August 2021

50.  Based on the agreements of the 2 valuation experts and the above determinations, the residual valuation of the Lot as at 16 August 2021 is listed in Appendix III of the judgment. The Lot is assessed at $522,100,000, equivalent to an accommodation value of about $176,674 per square meter (i.e. about $16,413 per square foot).

ORDERS

51.  For reasons given in this judgment, I have set out reasons why I am satisfied an order for sale should be granted and I therefore make the following orders: -

1) All the undivided shares in the Lot, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lot;

2) Mr Anthony W K Chow and Ms Anna S H Chow, nominated by the applicant, be appointed the trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lot;

3) The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Guantao & Chow dated 13 August 2021;

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 $522,100,000;

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

6) Liberty to the applicant, the 1^st respondent, the 2^nd respondent and the Trustees to apply to the tribunal for further directions.

COSTS

52.  Following Good Faith ^[1], I make a costs order nisi that the applicant do pay costs of these proceedings to the respondents, on High Court scale with certificate for counsel and including any reserved costs, to be taxed if not agreed. Unless any parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from the date of this judgment.