WISE GRACE INVESTMENT LTD AND OTHERS v. KWOK WAI SIN AND OTHERS

LDCS 27000/2019

[2021] HKLdT 42

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 27000 OF 2019

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BETWEEN

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JUDGMENT

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BACKGROUND

1.  This is the applicants’ 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 the Remaining Portion of Inland Lot No 4694 (“the 1^st Lot”), the Remaining Portion of Inland Lot No 4695 (“the 2^nd Lot”), the Remaining Portion of Inland Lot No 4696 (“the 3^rd Lot”), and Inland Lot No 4697 (“the 4^th Lot”) (the 1^st Lot, the 2^nd Lot, the 3^rd Lot and the 4^th Lot are collectively referred to as “the Lots”), together with a building erected thereon known as Ko Shing Building, Nos 78 - 80 Queen’s Road West, Nos 265 – 267 Hollywood Road, Hong Kong (“the Building”).

2.  The Building is a 10-storey tenement block served by 2 common staircases. According to the record of the Rating and Valuation Department, a permit was issued for the Building on 10 March 1966, granting permission to occupy and use its ground floor as 2 shops for non-domestic use, 1^st floor as 3 shops for non-domestic use, 2^nd floor as 1 office for non-domestic use, and 3^rd floor to 9^th floor as 4 tenements on each floor for domestic use. According to the approved building plans, the ground floor is planned as 2 shops fronting onto Queen’s Road West, the 1^st floor is planned as 3 shops fronting onto Hollywood Road, the 2^nd floor is planned as an office, and the 3^rd to 9^th floors are planned as 4 tenement units on each floor.

3.  According to the records of the Land Registry, the ground floor in the approved building plans is described as the ground floor fronting onto Queen’s Road West, the 1^st floor in the approved building plans is described as the ground floor fronting onto Hollywood Road, the 2^nd floor in the approved building plans is described as the mezzanine floor and is sub-divided into 4 units, and the 3^rd to 9^th floors in the approved building plans are described as the 1^st to 7^th floors and each residential unit on the 7^th floor is attached with roof.

4.  The Lots together with the Building standing thereon is allocated 37 undivided shares. Each unit including each sub-divided unit on the mezzanine floor is given 1 undivided share, making up a total of 37 undivided shares.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

5.  The applicants filed a Notice of Application (“NOA’) on 21 August 2019, which was subsequently amended on 6 May 2021 pursuant to the Order of the tribunal dated 11 January 2021. At the time of filing of the NOA, there were 7 respondents and the applicants owned 30 over 37 (i.e. 81.08%) undivided shares in the Lots, meeting the threshold of 80% required for building aged 50 years or above.

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

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

8.  Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a lower percentage in respect of a lot belonging to a class of lots specified in that notice. 

9.  The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, made under section 3(5) of the Ordinance (“the Notice”), was gazetted on 22 January 2010 and came into operation on 1 April 2010.  Section 3 of the Notice lowered the threshold for compulsory sale of specified classes of lots from 90% to 80%.  Those classes of lots include:

“a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the relevant date”

10.  Since the occupation permit of the Building was issued in 1966, i.e. more than 50 years before the date of application (i.e. 21 August 2019; the relevant date under the Notice), the applicable percentage is therefore 80%.

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

THE REMAINING RESPONDENTS

12.  At trial, the applicants own 34 over 37 (i.e. 91.89%) undivided shares in the Lots. The following 3 respondents (collectively referred to as “the Remaining Respondents”) remain in the present action: -

Respondent		Premises
1st Respondent	(“R1”)	Flat A on 1st Floor and Flat C on 1st Floor (“R1’s Premises)
4th Respondent	(“R4”)	1/2 of Flat B on 3rd Floor
5th Respondent	(“R5”)	1/2 of Flat B on 3rd Floor

13.  The Remaining Respondents are not represented and did not appear at trial.   

1^st Respondent

14.  Mr Y C Mok, counsel for the applicants, submits that R1 is non-responsive and cannot be contacted for any dialogue. All evidence and expert reports in these proceedings were served by leaving the same at R1’s Premises and none had been returned. In addition, R1 never appeared in any of the hearings nor contacted the applicants or the applicants’ lawyers.

4^th and 5^th Respondents

15.  R4 and R5 are tenants in common of Flat B on 3^rd Floor and both are now deceased without representation.  By an Order dated 23 January 2020, service of the NOA and all subsequent documents of these proceedings on them be dispensed with and judgment in this action shall bind their estates.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

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

1) What was the respective existing use value (“EUV”) of all units in the Building, as at 24 May 2019, the valuation date adopted in the application valuation report dated 24 May 2019, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?

2) Whether the redevelopment of the Lots 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 applicants have taken reasonable steps to acquire all the undivided shares in the Lots 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 Lots) for the purpose of auction sale?

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING

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

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

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

18.  The applicants rely on the reports and valuations of Mr Charles Chan of Savills Valuation and Professional Services Limited. In the application valuation report dated 24 May 2019, Mr Charles Chan explained the direct comparison method he adopted and the process of his assessment to arrive at the EUV of each unit in the Building as at 24 May 2019.  In the valuation of Shop A and Shop B on Ground Floor fronting onto Hollywood Road, Mr Charles Chan assessed their market values on 2 scenarios.  In Scenario 1, they were valued as 2 individual shops and no value was credited to the hall immediately in front of them.  In Scenario 2, they were valued together as a single shop including the hall.

19.  Mr Charles Chan subsequently prepared a supplemental valuation report dated 17 September 2020, in which he reviewed the EUV of all units in the Building.  In the supplemental valuation report, he updated the internal condition of the units in the Building, made reference to the updated property indices, considered additional comparables, revised some measurements of the units and the comparables, and revised some of the adjustments.

20.  At trial, in response to the queries raised by the tribunal on the adjustments for floor and location / environment in the valuation of aged domestic units, Mr Charles Chan further updated his EUV assessment. He takes into consideration of the level difference from the main entrance of the Building and the cockloft (if any) of the comparables and further revises his adjustments for floor, which would increase the adjusted unit rate of the reference domestic unit from $127,000 to $129,000 per square meter, but he maintains his view that in terms of location / environment, the reference domestic unit was worse than all aged domestic comparables.

21.  Mr Charles Chan assesses the reference shop unit (i.e. Flat A on Ground Floor, No 78 Queen’s Road West) at $288,000 per square meter, the reference office unit (i.e. Flat A on Mezzanine Floor) at $138,000 per square meter and the reference domestic unit (i.e. Flat C on 4^th Floor) at $129,000 per square meter.  In Scenario 1, Shop A and Shop B on Ground Floor fronting onto Hollywood Road are assessed at $14,910,000 and $6,140,000 respectively.  In Scenario 2, the 2 shops together including the hall are assessed at a higher value at $24,990,000.

22.  Mr Y C Mok submits Scenario 2 is preferred because Shop A and Shop B on Ground Floor fronting onto Hollywood Road together with the hall immediately in front of them were assigned to the same purchaser in the Assignment dated 24 June 1966.  Although the plan attached to their Agreement for Sale and Purchase dated 11 November 1964 excludes the hall, it is clear in the Assignment that there was change of contractual intention to include the hall in the sale and it was the legal intention of the then vendor, the developer, to sell the hall together with Shop A and Shop B. Further, the Deed of Mutual Covenant dated 17 June 1966 had not specified the hall as the common area of the Building. I agree and accept Scenario 2 in the assessment.

23.  I also accept the EUV of all shops and office units in the Building as assessed by Mr Charles Chan.  However, I consider that in addition to the revisions to the adjustments for floor at trial by Mr Charles Chan, the adjustments for location / environment to the aged domestic comparables should also be revisited.  Although I agree with Mr Charles Chan that in terms of location / environment, the comparables along Hollywood Road and the comparables close to MTR entrance are better than the reference domestic unit, I consider he has made too much adjustments at -5% to -20% in his assessment. Since Comparable 15 (i.e. Unit B, 4^th Floor, Tat Hing Building, Nos 182-186 Queen’s Road West) immediately opposite to a MTR entrance is about 3 minutes’ walk only from the Lots, it is unreasonable to make an adjustment to it at -20%.  The adjustments to the comparables along Hollywood Road at -15% are also excessive.  Further, I consider the comparables along Queen’s Road Central and Comparable 12 (i.e. 5^th Floor, No 112 Queen’s Road West) that is close to the Lots are similar to the domestic reference unit.

24.  Mr Charles Chan explains that his adjustments for location / environment can be supported by his analyses of the rateable values of the comparables and the reference domestic unit, but he cannot answer satisfactory why there are many irregularities in the result of his analyses. I am of the view Mr Charles Chan’s explanation is not persuasive, and his adjusted unit rate of the domestic reference unit at $129,000 per square meter should be further adjusted at say +5% to $135,450 per square meter.  In addition, the adjustment for size to Flat D on 1^st Floor of the Building, which is attached with flat roof, should be -0.5% instead of -0.3%.

25.  Following the above determinations of the tribunal, the EUV of all units in the Building as at the relevant date of valuation, i.e. 24 May 2019, are appended below: -

Floor (Land Register)	No 78 Queen's Road West	No 80 Queen's Road West
	Flat A	Flat B
G/F	$23,790,000	$24,460,000

Floor (Land Register)	Nos 265-267 Hollywood Road
	Shop A and Shop B	Shop C
G/F	$24,990,000	$17,610,000

Floor (Land Register)	Queen’s Road West / Hollywood Road
	Flat A	Flat B	Flat C	Flat D
Mezzanine	$4,240,000	$4,690,000	$3,540,000	$6,180,000
1/F	$5,180,000	$5,440,000	$4,670,000	$5,650,000
2/F	$5,080,000	$5,340,000	$4,710,000	$5,240,000
3/F	$4,980,000	$5,240,000	$4,630,000	$5,140,000
4/F	$4,880,000	$5,290,000	$4,530,000	$4,900,000
5/F	$4,790,000	$5,030,000	$4,310,000	$4,800,000
6/F	$4,690,000	$4,930,000	$4,350,000	$4,700,000
7/F and Roof	$4,730,000	$5,140,000	$4,400,000	$4,270,000

26.  The total EUV of the Building is assessed at $246,540,000.

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

27.  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).”

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

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

29.  The applicants adduce expert evidence of Mr K S So, a structural engineer, of K S So & Associates Limited and Mr Benson Wong, a building surveyor, of Benson Wong & Associates Limited.  Mr K S So conducted a structural survey of the Building and prepared a Structural Assessment Report dated 17 September 2020.  Mr Benson Wong conducted a condition survey of the Building and prepared a Condition Survey Report dated 18 September 2020. 

30.  None of the respondents adduced expert evidence to rebut the reports complied by Mr K S So and Mr Benson Wong.

31.  Having considered the reports of Mr K S So and Mr Benson Wong, I accept their expert opinion. The Building, being erected more than 55 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. 

32.  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.

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

Whether the applicants have taken reasonable steps

34.  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……”

35.  The applicants have made an offer to R1 and R4 together with R5 respectively on 5 August 2019. Given that these offers were based on the then valuation of Mr Charles Chan and have reflected the then RDV attributable to the respective units owned by the Remaining Respondents, I accept that they fall within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question.

36.  In addition, Mr Y C Mok submits that the applicants have made reasonable and sufficient efforts but have not been able to have any effective communication with R1, let alone to acquire R1’s Premises, and that R4 and R5 are missing owners. In the circumstances, the applicants have already taken reasonable steps to acquire all the undivided shares in the Lots. I agree.

37.  By reason of the matters set out above, I am satisfied the applicants have taken reasonable steps to acquire all the undivided shares in the Lots.

RESERVE PRICE FOR THE PUBLIC AUCTION

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

39.  Mr Charles Chan considers that there is no relevant land sale transaction for direct comparison, and therefore he adopts residual method only to assess the RDV of the Lots as at 15 April 2021. In the residual valuation, Mr Charles Chan opines that the optimum development on the Lots comprises a 24-storey commercial / residential composite building with retail units on ground floor, 1^st floor and 2^nd floor, domestic lobby entrance on 1^st floor off Hollywood Road, club house on 3^rd floor, and domestic units from 4^th floor to 23^rd floor. 

40.  Details of the hypothetical development with the net developable site area of 199.18 square meters, the proposed gross floor area of 2,018.89 square meters (excluding half of the areas for green features that are exempted in calculation) and plot ratio of 10.136, the gross development value assessed (i.e. on average $416,000 per square meter saleable area for retail units on ground floor off Queen’s Road West, on average $389,000 per square meter saleable area for retail units on 1^st floor off Hollywood Road, on average $291,750 per square meter saleable area for retail units on 2^nd floor, and on average $344,000 per square meter saleable area for residential units on upper floors), the construction cost adopted (i.e. on average $40,341 per square meter gross floor area) and the residual valuation (i.e. development period of 2.5 years, stamp duty on residual land value at 4.25%, profit at 15% of costs, and interest rate at 4% per annum) are set out in his valuation report dated 28 April 2021.  He assesses the RDV of the Lots at $259,000,000.

RDV of the Lots as at 15 April 2021

41.  Having gone through Mr Charles Chan’s assessment in his valuation report dated 28 April 2021, I accept his residual valuation. The Lots are assessed at $259,000,000, equivalent to an accommodation value of about $128,288 per square meter (i.e. about $11,918 per square foot), which should be the reserve price for public auction.

ORDERS

42.  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 Lots, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lots;

2) Mr Anthony W K Chow and Ms Anna S H Chow, nominated by the applicants, 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 Lots;

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 9 April 2021;

4) For the purposes of the sale of the Lots by public auction: -

a) the sale of the Lots 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 $259,000,000;

5) The applicants do publish notices once in a Chinese language newspaper (and in the Chinese language) and once in an English newspaper (and in the English language) circulating generally in Hong Kong within 7 days from the date of the sealed judgment informing the 1^st respondent, the 4^th respondent, the 5^th respondent and all persons claiming to be the owners of the Lots: -

a) that the tribunal has made an Order for sale of the Lots;

b) that the Lots be sold by public auction; and

c) where and the times during which a copy of the Order for sale can be obtained;

6) 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 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 Lots becomes the owner of the Lots; and

7) Liberty to the applicants, the 1^st respondent, the 4^th respondent, the 5^th respondent and the Trustees to apply to the tribunal for further directions.

COSTS

43.  I make a costs order nisi that there be no order as to costs.  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.