ABLE LUCK DEVELOPMENT LTD AND OTHERS v. BOLY METAL MANUFACTORY LTD AND OTHERS

LDCS 11000/2018

[2022] HKLdT 17

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 11000 OF 2018

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J U D G M E N T

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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 Kun Tong Inland Lot No 15 (“the Lot”), together with a building erected thereon known as Yip Fat Factory Building, No 77 Hoi Yuen Road, Kowloon (“the Building”).

2.  The Building comprises a 15-storey industrial building and is served by 3 cargo lifts and 5 common staircases. Permit No NK 11/78 was issued for the Building on 2 February 1978, granting permission to occupy its ground floor as car park, 1 workshop, 1 transformer room and 1 switch room for non-domestic use, its 1^st floor as 2 workshops for non-domestic use, and its 2^nd to 14^th floors as 4 workshops and 1 store per floor for non-domestic use.  According to the approved building plans, there are 1 industrial unit, 13 private car parking spaces and 9 lorry parking spaces planned on ground floor, 2 industrial units planned on 1^st floor, and 4 industrial units and a store planned on each of 2^nd to 14^th floors.

3.  According to the records of the Lands Registry, each of the 2 industrial units on 1^st floor is attached with a flat roof, each of the 4 industrial units on 5^th floor is attached with a flat roof, each of Units A, B and C on 14^th floor is attached with roof, and there is also a Roof D.

4.  The Lot together with the Building standing thereon is allocated with 1,000 undivided shares. Each of the 13 private car parking spaces and 9 lorry parking spaces is given 1 undivided share; the industrial unit (i.e. Unit A) on ground floor is given 100 undivided shares; each of the 2 industrial units together with flat roof on 1^st floor is given 30 undivided shares; each of Units A and B on 2^nd to 4^th floors is given 24 undivided shares, each of Units C and D on 2^nd to 4^th floors is given 17 undivided shares; each of Units A and B together with flat roof on 5^th floor and each of Units A, B and C together with roof on 14^th floor is given 16 undivided shares; each of Units C and D together with flat roof on 5^th floor, each of the 4 industrial units on 6^th to 13^th floors and Unit D on 14^th floor is given 14 undivided shares; and Roof D is given 2 undivided shares, making up a total of 1,000 undivided shares.

THE REMAINING RESPONDENT

5.  Since the commencement of the proceedings, the applicants had purchased the undivided shares of the 1^st respondent, the 2^nd respondent, the 3^rd respondent, the 5^th respondent, the 6^th respondent, the 7^th respondent and the 8^th respondent and discontinued the proceedings against them.

6.  At trial, only the 4^th respondent (“R4”) remained in the present application, which is the registered owner of Unit C on 8^th Floor (i.e. 14/1,000 undivided shares) and Unit D on 8^th Floor (i.e. 14/1,000 undivided shares) of the Building.

7.  R4, represented by Mr C Y Li SC (“Mr Li”), Mr Jeremy Kwong and Mr Li Pak Hei, takes issues on all fronts including the prerequisites on ownership for making an application, age and state of repair of the Building, whether the alternative option such as revitalization shall be considered, whether reasonable steps have been taken by the applicants and the assessments of both existing use value (“EUV’) and redevelopment value (“RDV”).  R4 also disputes whether the RDV is less than or close to the EUV, and whether there can be a feasible alternative of revitalizing the Building.

8.  R4 relies on the reports and expert opinion of the valuation surveyor Mr Patrick Lai of AA Property Services Limited, the building surveyor Ms Joy Leung of Arly Building Consultancy Limited and the structural engineer Mr K K Lo.

9.  The applicants are represented by Mr Edward Chan SC (“Mr Chan’) and Mr Y C Mok.  They have appointed Mr Charles Chan of Savills Valuation and Professional Services Limited as their valuation surveyor, Mr Benson Wong of Benson Wong & Associates Limited as their building surveyor and Mr C M Wong of C M Wong & Associates as their structural engineer.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

10.  The issues to be decided in this case are: -

(a)	Whether the applicants have fulfilled the prerequisites on ownership for making the present application in accordance with section 3 of the Ordinance and sections 3 and 4 of the Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, Cap 545A (“Cap 545A”)?
(b)	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?
(c)	Whether an alternative of revitalizing the Building should be considered in the application?
(d)	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?
(e)	What was the respective EUV of all units in the Building as at 29 March 2018, the valuation date adopted in the application valuation report dated 20 April 2018, as assessed in accordance with Part I of Schedule 1 of the Ordinance?
(f)	If an order for sale should be granted, what should be the reserve price (i.e. RDV of the Lot) for the purpose of auction sale?

OWNERSHIP OF THE APPLICANTS

11.  At the time of filing of the Notice of Application (“NOA”) on 23 April 2018, there were 8 respondents and the applicants owned 84% (i.e. 840 out of the total 1,000) undivided shares in the Lot.  At trial, the applicants owned 97.2% (i.e. 972 out of the total 1,000) undivided shares in the Lot.

12.  Section 3(1) of the Ordinance provides that: -

“Subject to subsection (5), the person or persons who owns or own, otherwise than as a mortgagee, not less than 90% of the undivided shares in a lot may make an application—
(a)	accompanied by a valuation report as specified in Part 1 of Schedule 1; and
(b)	to the Tribunal for an order to sell all the undivided shares in the lot for the purposes of the redevelopment of the lot.”

13.  Sections 3 and 4(1)(c) of Cap 545A provide that: -

“Section 3 Specification of percentage 80% is specified as the percentage required for the purposes of section 3(1) of the Ordinance in respect of a lot that belongs to any class of lot specified in section 4.
Section 4 Specification of classes of lot
(1)	The following classes of lot are specified for the purposes of section 3—
	(a)	a lot with each of the units on the lot representing more than 10% of all the undivided shares in the lot;
	(b)	a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the relevant date;
	(c)	a lot that is not located within an industrial zone and each of the buildings erected on the lot—
		(i)	is an industrial building; and
		(ii)	was issued with an occupation permit at least 30 years before the relevant date.

14.  There is no dispute that the Building is an industrial building.

15.  The applicants’ position is that they are entitled to make the application under section 3(5) of the Ordinance and sections 3 and 4(1)(c) of Cap 545A because: -

(a)	The occupation permit (“OP”) of the Building was issued in 1978, more than 30 years before the date of the application;
(b)	Under the Outline Zoning Plan (“OZP”), the Lot is zoned for “Other Specified Uses (Business)” (“OU(B)”) and is not located in an area of industrial zone;
(c)	80% is the percentage specified by the Chief Executive in Council by notice in the Gazette (L.N.6 of 2010) on 12 January 2010 (“L.N.6 of 2010”); and
(d)	The applicants already owned 84% of the undivided shares in the Lot when they made the application.

16.  R4 disagrees and says that the applicants cannot claim the benefit of the lower percentage of 80% under section 4(1)(c) of Cap 545A because the Lot is located within an industrial zone.  The threshold requirement under section 3(1) of the Ordinance is 90% of the undivided shares in the Lot but the applicants had merely held 84% of the undivided shares in the Lot as at the date of application.  R4’s broad reasons are as follows: -

(a)	According to the OZP, in term of town planning, the uses always permitted of the Lot include information technology and telecommunication industries and non-polluting industrial[1] and the uses that may be permitted with or without conditions on application to the Town Planning Board include non-polluting industrial use (not elsewhere specified) and warehouse[2].
(b)	The Schedule of Uses in the OZP does not have “industrial use” as such.  On a proper understanding of the OZP, the Lot is located within an industrial zone because industrial uses are either always permitted or may be permitted for the Lot.
(c)	The Building as built and existing has been used for industrial purpose and is situated in a locality which mainly comprises of industrial buildings and godown.
(d)	According to the Conditions of Sale, no building shall be erected on the Lot except an industrial building.
(e)	The fact that the applicants may have acquired 90% or more of the undivided shares of the Lot after commencement of the application does not render the application to have been properly constituted if the applicants did not have the requisite number of undivided shares to entitle them to launch the proceedings in the beginning.

17.  Mr Li submits that the “OU(B)” zone, being a zone which is set apart for uses one of which is industrial, is in law and in fact an “industrial zone” as mentioned in Cap 545A.  He makes reference to a number of legal principles on statutory interpretations such as: -

(a)	a court cannot attribute a statutory provision a meaning which the language, understood in the light of its context and statutory purpose, is incapable of bearing[3];
(b)	the plain meaning of the language used in section 4(2) of Cap 545A shall be applied[4];
(c)	a statute must be considered as a whole, any statutory provision must be understood in its context taken in its widest sense[5]; and
(d)	in case of ambiguity, a statutory provision should be construed in favour of the party whose private property is being dispropriated[6]. The Ordinance is an expropriatory legislation and must be strictly construed.

18.  Mr Li submits that the term “industrial zone” as defined in section 2 of Cap 545A actually refers to any zone that is set apart for industrial use in a draft plan prepared by the Town Planning Board or approved by the Chief Executive in Council under the Town Planning Ordinance.  It is not restricted only to a zone designated as “Industrial” on such draft plan or restricted to a zone that is set apart “only for industrial use”.  The plain meaning of “industrial zone” should include a zone which is set apart for industrial and other uses, such as “OU(B)” zone because:-  (1) the word “only” does not appear in section 4(1)(c) of Cap 545A;  (2) the insertion of the word “only” would be unwarrantedly and unjustifiably remove the protection conferred by the 90% threshold on the property rights of minority owners, the case Hysan Development Co Ltd and Others v Town Planning Board[7] is cited; and  (3) Cap 545A is not drafted to refer to the specific zoning designation “Industrial” or “Industrial (Group D)”.

19.  For reason (3), it is further submitted that even if Cap 545A does intend that “industrial zone” means a zone designated as “Industrial”, “OU(B)” should be viewed as an “industrial zone” because “OU(B)” is perceived as a combination of the “Commercial” and “Industrial” zones and taking into account the pace required for transformation of the area from industrial uses to non-polluting industrial and business sectors. Section 2 of Cap 545A is directed at substance (i.e. industrial use) and not form (i.e. “Industrial” designation), and undoubtedly an “industrial zone” still exists in substance in the “OU(B)” zone in which the Lot is located.

20.  Mr Chan submits that Mr Li’s arguments are wrong both as a matter of construction of the plain words in Cap 545A and as a matter of giving effect to the legislative intent of the notice.

21.  As a matter of construction of the plain words in Cap 545A, “industrial zone” is defined to mean “a zone that is set apart for industrial use in a draft plan prepared by the Town Planning Board or approved by the Chief Executive in Council under the Town Planning Ordinance, Cap 131 (“TPO”)”. The words used in the definition of “industrial zone” are “zone that is set apart for industrial use”, and not “zone with industrial use” nor “zone set apart for industrial and other use”.

22.  Under the TPO, “industrial use” zoning, “commercial use” zoning and “other specified use” zoning are separate and distinct zoning.  This is clear from section 4(1)(b) which stipulates that: -

“4.	Contents of lay-out plans and powers of the Board
	(1)	The Board’s draft plans prepared under section 3(1)(a) for the lay-out of any such area may show or make provision for –
		…
		(b)	zones or districts set apart for use for residential,     commercial, industrial or other specified uses;
		…”

23.  Mr Chan submits that “a zone set apart for industrial use in a draft plan…” in the context of section 2 of Cap 545A must refer to the whole zone set apart for industrial use as defined and set out in the relevant OZP and not a zone where industrial and other use may be permitted. 

24.  If one goes to the schedule of the permitted use under each of the zones set out under the OZP, one can certainly find many overlapping.  For example, “Government Use” is always permitted under “Industrial” zone[8]. Plainly when the legislation speaks of a “zone set apart for industrial use” in Cap 545A, it could not be referring to any zoning under which one of the possible permitted uses could be said to be an industrial purpose.  It should be properly understood to be referring to the category of the zoning in the relevant OZP.

25.  It is submitted that as a matter of giving effect to the legislative intent of Cap 545A, clearly the legislative intent of the notice is to lower the required percentage of undivided shares ownership so as to free up more land for compulsory sale applications under the Ordinance in order to facilitate redevelopment by private enterprises.  In the Legislative Council Brief for the enactment of Cap 545A, the government explained in clear terms the purpose and policy behind that piece of legislation.  At paragraph 6 of the Brief[9] as part of the background of the policy to encourage urban redevelopment, the Brief referred to the changing economic needs of Hong Kong, the surplus industrial premises in Hong Kong, and that the government had a large scale re-zoning of industrial land for non-industrial use including to “OU(B)”.

26.  At paragraphs 7 and 10 of the Brief, the government said: -

“7.	To put the existing industrial buildings situated in non-industrial zone to their best economic use, the Chief Executive announced in his 2009-10 Policy Address a package of measures to facilitate releasing the potential of these over 1,000 industrial buildings.  The lowering of the compulsory sale application threshold for the redevelopment of industrial buildings for 30 years of age or above is one of the three measures mentioned …
	…
10.	We propose to specify a lower threshold of 80% for the following three classes of land lot -
	(c)	a lot with all industrial buildings aged 30 years or above not located within an industrial zone.
	…
16.	To address the changing economic needs of Hong Kong, we propose to specify lots on which all the industrial buildings stand are aged 30 years or above, and that are not located within an industrial zone to be subject to the lower application threshold. This will facilitate the redevelopment of under-utilised or disused industrial buildings standing on land which, over the years, has been rezoned from industrial to non-industrial …”.

27.  Mr Chan highlights that the LegCo Brief is consistent with the following zoning history and documents issued by the government by this line of analyses: -

(a)	The Lot was originally within an area in the Kwun Tong (South) OZP No S/K14S/8 zoned as “Industrial”[10];
(b)	The Government Press Release of 19 January 2001 announcing the Guideline for “OU(B)” zone[11]:-
	(i)	Paragraph 3 reads: “The new zoning will allow maximum flexibility”; and
	(ii)	Paragraph 8 reads: “In tandem with the promulgation of the guidelines, a number of industrial sites in Kowloon Bay and Tsing Yi are rezoned from “Industrial” to “OU(B)” today…”[12];
(c)	By the next version of the same OZP No S/K14S/9, which was announced in the Government Gazette Notice G.N.6394 dated 19 October 2001[13], the area including the Lot was converted from an “industrial zone” to a zone of “Other Specified Uses” annotated “Business”[14].  It described the amendments as:-
	“Item A – Rezoning all the industrial sites in Kwun Tong Industrial Area from “Industrial” (“I”) to “Other Specified Uses” annotated “Business” (“OU” annotated “Business”, which clearly recognized that “I” zone and “OU(B)” one are different zones[15];
(d)	The Lot is now still within the area zoned as “OU(B)” in the current OZP No S/K14S/22[16].

28.  The applicants submit that the Lot here falls squarely within what the Brief said in paragraph 16, i.e. “land which, over the years, has been rezoned from industrial to non-industrial…”.  Such interpretation of the relevant provisions of Cap 545A fits in seamlessly with the provisions of section 4(1) of the TPO which provides that “The Board’s draft plans prepared under section 3(1)(a) for the lay-out of any such area may show or make provision for – (b) zones or districts set apart for use for residential, commercial, industrial or other specified uses”.  Very clearly, under section 4(1) of the TPO, an “industrial zone” is not an “otherwise specified uses zone” or vice versa.  This is also consistent with section 4(1)(b) of the TPO as well as the different versions of the OZP which have always drawn a distinction between an “industrial” zone and a zone for “special uses” annotated for “business”.  The fact that the permitted uses of an “otherwise specified uses (business)” zone include some industrial use does not detract from the fact that a zone designated as “industrial” is different from a zone designated as “other specified uses (business)”.  This is reinforced by the fact that the Lot was once within an area designated an “industrial zone” by a previous version of the OZP for the same district but now no more.

29.  We agree with Mr Chan’s analyses.

30.  In fact, the fundamental fallacy of Mr Li’s argument is revealed upon closer study of the purpose of introducing the “OU(B)” zone and the issuance of the L.N.6 of 2010 reducing the prerequisite percentage for filing a compulsory sale application to 80% undivided shares of the subject Lot.  In the brief to the Legislative Council dated 15 October 2009 entitled “Optimising the use of Industrial Buildings to Meet Hong Kong’s Changing Economic and Social Needs” (“the 2009 LegCo Brief”) prepared by the Development Bureau, it is stated at the outset that the policy proposals are to be implemented to: -

“facilitate redevelopment of industrial buildings situated in non-industrial zones through … (i) allowing the majority owners of industrial buildings aged 30 years or above situated in non-industrial zones to apply under the Land (Compulsory Sale for Redevelopment) Ordinance (LCSRO) for a compulsory order to sell the whole lot for redevelopment, if the majority owners own not less than 80% of the undivided shares of the lot; …”

31.  The 2009 LegCo Brief goes on to state the followings in the ensuing paragraphs: -

“Vacancy and under-utilisation of industrial buildings
3.	As a result of Hong Kong’s economic restructuring and relocation of traditional manufacturing activities to the Mainland, many private flatted industrial buildings are now vacant or under-utilised.  This is a serious waste of our precious land resources.  The TPB, with assistance from the Planning Department (PlanD), has adopted a two-pronged approach to promote optimum use of our land resources: broadening the permissible uses in industrial buildings and rezoning surplus and suitable industrial land for non-industrial uses.  In 2001, TPB introduced a new OU(B) zone, which allows a mix of office, commercial and non-polluting industrial uses.  During the past two decades, about 500 hectares of industrial land have been rezoned for non-industrial uses, including about 200 hectares to OU(B) uses …
	…
5.	Due to continual rezoning of industrial land for other uses (including OU(B), commercial and residential uses) there were 1026 private industrial buildings situated in various types of non-industrial zones in the metro and new town areas in early 2009, and about 80% (818 buildings) of them are situated in OU(B) zones.
6.	The above demonstrates that despite the large scale rezoning and relaxation of uses by the TPB over the years, not that many owners of industrial buildings have responded by developing or converting their industrial buildings for higher value-added uses …
	…
10.	The bulk of OU(B) zone is found in former industrial areas such as Kwun Tong, Kwai Chung, Kowloon Bay, Cheung Sha Wan, San Po Kong and Aberdeen in the Metro Area …
	…
20.	Redevelopment of existing industrial buildings in non-industrial zones will help materialize certain planning gains and upgrade these former industrial areas.  For example, PlanD has introduced setback requirements in the OZPs for some OU(B) zones, e.g. Kwun Tong, Cheung Sha Wan, Kowloon Bay.  These planning gains can be materialized only upon redevelopment of the existing industrial buildings there.  Redevelopment of industrial buildings may also encourage early removal of sources of environmental concerns, e.g. disused chimneys of old industrial buildings, which often inhibit revitalization of the surrounding areas”
	(emphasis added)

32.  The LegCo Brief on “Land (Compulsory Sale for Redevelopment) Specification of Lower Percentage) Notice)” dated January 2010 (“the 2010 LegCo Brief”) prepared by the Development Bureau is also directly to the point: -

“Changing Economic Needs of Hong Kong
6.	Having regard to the fact that the bulk of Hong Kong’s manufacturing activities have been relocated to the Mainland and that Hong Kong still has a total stock of 17 million square metres floor space in private flatted factory buildings built mostly in the 1970’s to 1980’s, we have also considered further how we may facilitate the redevelopment of old industrial buildings to release the potential of the precious land resources to meet the economic needs of Hong Kong.  To tackle the problem of surplus industrial premises, the Planning Department has, since 1991, rezoned about 500 hectares of industrial land for non-industrial use, including “Other Specified Use (Business)”, “Residential (Group E)” and “Comprehensive Development Area”. There are over 1450 private industrial buildings in Hong Kong’s metro and new town areas now, and the majority (about 70%) of them is located in non-industrial zones.  Despite the large-scale rezoning, the hurdle of unifying multiple ownership of flatted factory buildings has hindered large scale redevelopment of the older industrial buildings in non-industrial zones.
7.	To put the existing industrial buildings situated in non-industrial zones to their best economic use, the Chief Executive announced in his 2009-10 Policy Address a package of measures to facilitate releasing the potential of these over 1000 industrial buildings.  The lowering of the compulsory sale application threshold for the redevelopment of industrial buildings of 30 years of age or above is one of the three measures mentioned (the other two are: the payment of premium based on a “pay for what you build” principle and payment of premium by instalments for lease modification or land exchange required in redevelopment of industrial buildings in non-industrial zones; and, subject to certain criteria being met and if the application is approved, exemption of waiver fee for change of use of the entire existing old industrial building). …
	…
16.	To address the changing economic needs of Hong Kong, we propose to specify lots on which all the industrial buildings stand are aged 30 years or above, and that are not located within an industrial zone to be subject to the lower application threshold.  This will facilitate the redevelopment of under-utilised or disused industrial buildings standing on land which, over the years, has been rezoned from industrial to non-industrial.  As of today, we estimate that there are around 580 industrial buildings of age 30 years or above located within non-industrial zones.  According to available statistics, amongst those over 1000 private industrial buildings on non-industrial zones, only about 5% are 50 years of age or more, 18% are between 40 and 49 years of age; and 34% are between 30 and 39 years of age, with some 44% being under 30 years of age.”
	(emphasis added)

33.  The relevant LegCo Briefs clearly recount the history that with a view to releasing the potential of the precious land resources to meet the economic needs of Hong Kong and to avoid serious waster of such resources due to the existence of many vacant or under-utilized private flatted industrial buildings, the government has adopted a two-pronged approach to promote optimum use of our land resources: broadening the permissible uses in industrial buildings and rezoning surplus and suitable industrial land for non-industrial uses.  In 2001, a new “OU(B)” zone, which allows a mix of office, commercial and non-polluting industrial uses was introduced.

34.  But despite the large scale rezoning exercise and relaxation of uses of industrial buildings over the years, it was noted that not many owners of industrial buildings have responded by developing or converting their industrial buildings for higher value-added uses.  It is specifically mentioned that Kwun Tong is one of such former industrial areas among the bulk of “OU(B)” zone introduced in the rezoning exercise.

35.  The government considered that these planning gains can be materialized only upon redevelopment of the existing industrial buildings in those non-industrial zones. By the term “non-industrial zones”, the government obviously referred to or intended to cover those zones which became non-industrial after the rezoning exercise and the introduction of “OU(B)”.

36.  The government also observed that the hurdle of unifying multiple ownership of flatted factory buildings had hindered large scale redevelopment of the older industrial buildings in non-industrial zones.  To tackle this problem, a package of measures was announced in the Chief Executive’s 2009-10 Policy Address, one of which was to lower the compulsory sale application threshold for the redevelopment of industrial buildings of 30 years of age or above, i.e. the introduction of Cap 545A reducing the application threshold from 90% to 80% undivided shares.

37.  R4’s contention that because the Lot is “OU(B)” under which one of the permissible use is industrial, it should still be considered as set apart for “industrial zone” and cannot benefit from the reduced threshold of 80% is, in our view, an indulgence to sophistry and an oblivion of the historical background and purpose of the rezoning exercise and the introduction of Cap 545A to reduce the ownership threshold.  Such argument if accepted will undesirably counteract the tremendous efforts made over the years to utilize the valuable land resources to meet the needs of the society.

38.  Another argument of R4 is that the Lot cannot benefit from the reduced threshold of 80% because the subject building is an industrial building and there are many industrial buildings in the vicinity such that the Lot shall be treated as having been set apart for industrial use.  Again, we do not see any merit in such a contention.  It should come with no surprise to find industrial buildings in the locality of Kwun Tong.  From the wording of the relevant provisions in Cap 545A, it is also plain that the existence of industrial buildings on the target lots is well within expectation. The suggestion that the mere existence of some industrial buildings in a lot shall render the reduction of ownership threshold to 80% inapplicable does not make any sense.  

39.  R4’s further submits that the plain meaning of “industrial zone” includes a zone which is set apart for industrial and other uses (such as the “OU(B)” zone) because the phrase “a zone that is set apart for industrial use in a draft plan…” in section 2 of Cap 545A does not contain the word “only”, and the insertion of the word “only” is contrary to the Hysan Development case where the Court of Final Appeal held that it was unwarranted to insert the word “only” before the phrase “in accordance with law” in that case.

40.  With respect, we do not think Hysan Development is relevant here. That case concerns whether certain planning restrictions of the Town Planning Board were constitutional.  The CFA held that the central feature of arts 6 and 105 of the Basic Law (“BL”) was that they imposed an obligation on the HKSAR to protect private property rights.  The phrase “in accordance with law” shall not be construed in a way to diminish the protection of the constitutional rights by qualifying that the protection must be by way of legal restriction. Such an interpretation of the articles in effect involves the unwarranted insertion of the word “only” before the phrase “in accordance with law”.  The CFA found that the phrase “in accordance with law” actually introduced another aspect of protection in that property rights were to be guaranteed by clear and accessible laws rather than being left to uncharted administrative discretion.

41.  To begin with, Hysan Development concerns public law matters involving constitutionality challenges to certain decisions of the public authority.  The present case is litigation between private parties not involving any public authority.  As confirmed by Mr Li, R4 does not seek to raise any systemic challenge to the constitutionality of the Ordinance or Cap 545A for infringement of private property rights.  Such being the case, R4’s attempt to apply the legal principles laid down in Hysan Development to the present case may not be very helpful.

42.  Even if Hysan Development is applicable to the present context, to follow the line of reasoning in that case, one shall first identify the objective of Cap 545A to see what interpretation would produce the effect of diminishing its objective or achieving its objective.  The term under concern here is “industrial zone” and this is defined by section 2 of Cap 545A to be “a zone that is set apart for industrial use in a draft plan ...”. As opposed to BL6 and BL105 which are obviously for protection of private property rights, Cap 545A was introduced to lower the threshold for making an application for compulsory sale.  The interpretation advocated by R4 patently has the effect of counteracting rather than furthering the objective which Cap 545A seeks to achieve.  As we see it, in submitting that the CFA refused to read into BL6 and BL105 the word “only” hence likewise the applicants in the present case should not either, R4 is citing authority out of context without due appreciation of the rationale behind Hysan Development.

43.  Even if we leave aside the rationale in Hysan Development for the time being and confine our mind to the superficial meaning of words for the sake of argument, our interpretation of section 2 of Cap 545A actually does not depend on inserting the word “only” to the subject phrase as suggested by R4.  It is actually not necessary to insert the word “only” in order to arrive at the interpretation we adopt.  The subject phrase is “a zone that is set apart for industrial use in a draft plan prepared by the Town Planning Board or approved by the Chief Executive in Council under the Town Planning Ordinance (Cap 131)” and the Chinese version of which is “在根據《城市規劃條例》(第131章)由城市規劃委員會擬備的草圖或經行政長官會同行政會議核准的草圖中劃出作工業用途的地帶”. The words “set apart” (「劃出」) means the carving out of a zone for certain use which term intrinsically bears the element of exclusiveness.  One may also refer to Oxford Dictionaries which explain the phrasal verb “set apart” as “to keep something for a special use or purpose”.  Considering that the “subject” being “set apart” is a “zone”, it does not make sense to say that the “OU(B)” zone which undisputedly allow a mix of office, commercial, and non-polluting industrial uses could be regarded as a zone “set apart” for industrial use.  The contention that the permission of some industrial uses in an “OU(B)” zone would have the drastic effect of turning the “OU(B)” zone into an industrial one, in our view, defies logic.

44.  R4 argues that the Lot shall be considered as within an industrial zone because the Conditions of Sale provides that no building shall be erected on the Lot except an industrial building.  This argument is unpersuasive as it seeks to incorporate certain hand-picked contents of the Conditions of Sale into the definition of “industrial zone” in section 2 of Cap 545A which is entirely without basis.

45.  By reasons of the above analyses, we rule that an “OU(B)” zone shall not be considered or treated as an “industrial zone” for the purpose of sections 2, 3 and 4(1)(c) of Cap 545A.  We are satisfied that the applicants met the ownership threshold for filing an application for a compulsory sale order which is 80% undivided shares in the Lot.

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

Age and State of Repair

46.  Section 4(2) of the Ordinance provides that: -

“(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).”

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

47.  In short, the applicants’ case is that although the two factors of “age” and “state of repair” are put in the alternatives in section s4(2)(a) of the Ordinance, they are related as they both relate to the physical state of the existing building.

48.  The applicants submit that in considering the “age” of the building, the tribunal is to take into account all features of obsolescence, and in considering the “state of repair and the cost of repair”, the test to apply is the “tenantable repair” standard[17] (meaning as follows) with reference to the reasonable requirement and expectation of comfort and hygiene standard of the present day occupiers:-

“[the Building] should be safe and hygienic for occupiers and visitors; and provides a standard of comfort and convenience, which is reasonable in the present day circumstances for the type of buildings in question.”

49.  For both issues the tribunal may also consider the economic aspect but there is no rule to say that if it is economically not viable, such as in cases where the EUV is higher than the RDV, the tribunal may not make the order if it is satisfied that due to the age or state of repairs of the existing building redevelopment is justified.

50.  On the other hand, R4 contends that the tribunal does not have to formulate any general test for “age” and “state of repair” and should focus on analysing the evidence to determine whether redevelopment of the relevant lot is justified.  

51.  Mr Li submits[18] that the approach in Intelligent House Ltd v Chan Tung Shing and Others[19] based on economic lifespan and economic test was expressly doubted by the Court of Appeal in Fineway Properties Ltd v Sin Ho Yuen Victor[20].  Their building condition expert, Ms Joy Leung, disagrees with the “tenantable condition” test as laid down in Intelligent House in the assessment of the state of repair and advocates the standard of “habitable condition”[21] in substitute, which means:-

“If a building is defined as habitable, it means that the condition of the structural frame, the building components, the finishes and the building services installations are in reasonable condition which is fit for use.”

52.  R4 justifies the “habitable condition” standard by reference[22] to The “Guide to Prepare An Expert Report for Application under Land (Compulsory Sale for Redevelopment) Ordinance Chapter 545” published by The Hong Kong Institute of Surveyors (“HKIS”) (Building Surveying Division) (“the HKIS Guide”) which as described by R4, made no mention of the “tenantable condition” but expressly referred to the “habitable condition”.  It is submitted that the age and state of repair of the Building do not warrant redevelopment under the Ordinance.

53.  The applicants fundamentally disagree with the “habitable condition” standard advocated by R4’s condition expert and maintain that the relevant standard should be that of the repair which would put the building into “tenantable conditions” as defined in the previous decisions of the tribunal.  The applicants submit that this is supported by the tribunal’s decision in Intelligent House, and in fact in all reported decisions of the tribunal, whenever this issue of the test to be applied arose.  

54.  We shall start our analyses with Intelligent House[23].  The tribunal in Intelligent House decided that when considering whether redevelopment is justified due to the age and state of repair, the tribunal was entitled to look at: -

(1)	On the ground of age:-
	(a)	Whether the old building had reached the end of its physical life.
	(b)	Whether the old building had reached the end of its economic lifespan. The economic lifespan came to an end when the cleared site value of the lot significantly exceeded the existing use value of the building, provided that it could be demonstrated that the building had so come to the end of the economic lifespan because of its age as reflected by features of obsolescence.
(2)	On the ground of state of repair:-
	(a)	The state of repair of the old building is such that it has rendered the building a danger to the residents or the public at large.
	(b)	The state of repair of the old building is such that it has rendered the building coming to the end of its economic lifespan, in that it has become economically unworthy to repair.  This includes the situation where (i) the costs of repair exceed the existing use value of the building, or (ii) the cost of repairs significantly exceeds the enhancement value arising from or attributable to the repairs.
	(c)	For the purpose of determining whether it is economically worthy to do so, the tribunal is entitled to look at repairs which would render the building to a tenantable condition fit for the enjoyment of tenants and visitors, which is reasonable in the present day circumstances for the type of building in question.
(3)	For both grounds of both age and state of repair, the tribunal is entitled to look at all of the above factors collectively to see if that justifies redevelopment, even though when each of them when considered alone is insufficient to do so.

55.  It should be noted that whilst the economic tests formulated in Intelligent House was subject to some reservations in the Court of Appeal decision of Fineway Properties, the point did not actually come up for decision by the Court of Appeal which expressed no concluded view on whether the tests so formulated was correct or not.  The Court of Appeal’s concern was that the concept of “economic lifespan” did not feature in the Ordinance itself and that in relation to the consideration of the “age” factor, the Court of Appeal had doubt on the meaning and scope of the proviso, i.e. on the words “provided that it could be demonstrated that the building had so come to the end of the economic lifespan because of its age as reflected by features obsolescence”.

56.  Mind that even in Intelligent House, the economic test is not the only and exhaustive test for the tribunal to consider.  It was held that on top of the economic test, the tribunal was entitled to consider: -

(1)	any factor or matters that are directly or indirectly related to the elements of “age” or “state of repair”[24].
(2)	comparison between the existing building and a new building or any proposed redevelopment[25].
(3)	obsolescence of the existing building in terms of its functional items or facilities[26].
(4)	comparison of the existing facilities between the existing building with what a modern day building could offer as required by present day law or rising expectations of the public for proper, safe and hygienic habitation and occupation[27].
(5)	repair works which are necessary to render the building a tenantable condition, which is reasonably fit for use in the sense that it should be safe and hygienic for occupiers and visitors, and provide a standard of comfort and convenience which is reasonable in the present day circumstances for the type of building in question[28].

57.  We shall now turn to the “habitable standard” advocated by R4. According to their building condition expert, this standard means “if a building is defined as habitable, it means that the condition of the structural frame, the building components, the finishes and the building services installations are in reasonable condition which is fit for use”.  So under this standard, except for things which because of the change in the law making it mandatory to change, the standard required for all components and services installations may stay at the same level and requirements as to the time when the building was completed in 1978.  The only authority Ms Joy Leung could refer to was the “HKIS Guide” published by the Hong Kong Institute of Surveyors in August 2011.  

58.  We agree with the applicants that the HKIS Guide is doubtful for a number of reasons.  The qualification and experience of those named as the working group preparing the HKIS Guide is not known.  There was no discussion, explanation or justification given for their views and why “habitable condition” should be adopted.  The guide was full of caveat and disclaimer reminding members to exercise their own judgment, and reminding that the guide is not meant to be authority or comprehensive etc. 

59.  In fact, in a recent case Century Supreme International Limited v Kam Chi Kit Charles and Hui Pui Kuen & Others[29], the respondents there also engaged Ms Joy Leung as their building condition expert and the applicants there also engaged Mr Benson Wong.  The arguments run by R4 in the present case relating to the criterion of “age” and “state of repair” as well as the applicable test are highly similar to the arguments of the respondents in that case.  We append below certain paragraphs in the judgment of Century Supreme where the tribunal of the same composition as the present case discussed the topics.  We would adopt those paragraphs (except the parts which are obviously specific to that case of course) in our rejecting R4’s arguments: -

“51. As for whether a general test is needed, in our opinion, the respondent’s proposition that it was not necessary to formulate a general test for state of repair would not further the respondents’ case because such proposition does not entail the conclusion that the assessment could be done in a vacuum. Whilst each case must depend on its own facts, there is a set of factors which are always relevant to the tribunal’s exercise of its discretion in this regard. In Top Sail International Limited v Cheng Kai Ming, Executor of the Estate of Chan Hue also known as Chan Sum Hiu, Deceased [30], the tribunal acknowledged that factors such as physical age, physical conditions and the obsolete design of a building are all pertinent to the issue of whether redevelopment is justified on the ground of the age of the building. The following paragraphs in the judgment are particularly relevant: -

“23. … we are of the view that the absence of a specific physical age in the Ordinance indicates that the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question.

  24.  The physical age of a building is clearly one of the considerations but it would not be the only consideration.  The physical conditions of a building and the amount that would be required to maintain the building are other factors that the Tribunal would consider, as they would affect the decision on whether the life of a building should be ended or prolonged.  The obsolete design of a building should also be considered as it has an important impact on whether it is too old to serve a modern society.  We do not intend to list all the factors here.  Each case must depend on its own facts …”

  52. The same set of criteria was adopted by the tribunal in Charmlink Limited v Lee Tong Hing and Others [31] which aptly demonstrate that obsolescence and maintenance costs are relevant consideration:-

“… The relevant factors in the present case are that the Building is over 50 years old and it has passed its designed life. It is also obsolescent in design and not economical to maintain. All these factors point to the fact that the Building has come to an end of its physical as well as economic life. Thus, we find that redevelopment is justified on the ground of the age of the Building.

… With the clear evidence from the two experts that the Building is in a poor state of repair and in fact untenantable without substantial repair works to be carried out over a long period of time, we have no hesitation in finding that redevelopment is justified by the state of repair of the Building.”

  …

  62. As rightly observed by the tribunal in Pacific Base Holdings Limited and Others v Lee Hop Biu and Others [32], the Court of Appeal in Fineway actually did not make any adverse comment on the standard of “tenantable condition” or other related considerations as discussed above.  Putting aside the different labels of “habitable standard” and “tenantable standard”, the tribunal in previous cases has approached the matter consistently and has essentially considered the same or similar set of factors when the age and state of repair of a building came to be assessed. 

  63. In our view, Fineway as properly construed and comprehended, does not assist the respondents in attacking the consideration of obsolescence and the adoption of the tenantable standard in assessing whether the statutory criterion of “age or state of repair” is satisfied.

  64. Premised on the above discussions, we now specifically answer Mr Ho’s[33] challenge to the tenantable condition standard as summarised in paragraph 46 above.  Mr Ho considers that standard deficient because it requires comparison of a building subject to a compulsory sale application (constructed some 50 years ago) with what are reasonably expected of in modern-day standard.  In his view, such comparison is wrong because:- (1) old building must fall short of a building built in modern-day standard and will not be able to satisfy the tenantable condition standard any way; and (2) on the natural and ordinary meaning of the phrase “state of development of the existing development on the lot” in section 4(2)(a) of the Ordinance, since it makes no mention of any other building, the tribunal should focus on the state of repair of the subject building rather than making comparison with other developments.

 65. With respect, we cannot agree to this view.  In relation to point (1), whilst it may bear some truth to say that generally old buildings would fall short of buildings constructed in modern-day standard, it is a misconception to think that whenever the subject building is found to be inferior than modern buildings, then the tribunal must reach the conclusion that redevelopment is justified.  To what extent the existing building falls short of modern-day standard certainly is one of the considerations to be taken into account.  To suggest that in the evaluation exercise under section 4(2)(a), the tribunal must strictly confine its scope of vision to the subject building and must ignore the current living standard as demonstrated by more up-to-date buildings is just like sticking to the beaten track and resting complacently on one's laurels.  In relation to point number (2) (i.e. natural and ordinary meaning of the phrase in section 4(2)(a)), whilst it is true that the phrase does not mention any building other than the subject building, it is clear that the words “redevelopment” and “justified” in section 4(2)(a) provide the context against which the grounds of “age” and “state of repair” could be assessed. Therefore, in considering whether it is “justified” to demolish and replace the existing building with a new development, the court certainly could compare the state of the existing building with what a new building could provide.  To suggest otherwise is to limit our own progress in achieving betterment.

 …

 77. It is noted that Ms Leung actually relied on the same CityU Research Paper in Pacific Base where she asserted that “the repair costs will not increase when age of building increase provided there is regular maintenance”.  She makes a similar statement in the present case^[34].

78.  The tribunal in Pacific Base rejected Ms Leung’s assertion for a number of reasons and made reference to the following provisions contained in the CityU Research Paper^[35] which were found at paragraph 127 of the judgment to be “quite conclusive against any reliance on the finding of the research paper”: -

“It is interesting to note that the study finds no relationship between building age/MR [i.e. Management Remuneration] and the maintenance and management fee. Perhaps some major renovations are not being included in the daily expenses and fees. Further study is recommended to investigate major renovations being done in aging estates/buildings and how the MR and the administration fee are decided in an estate/building in Hong Kong.”

  79.  When Ms Leung was challenged in this regard during cross-examination, she took a rather ambivalent stance and was unable to provide a forthcoming answer despite rounds of questions from the bench and the applicant.  At the end, Ms Leung confirmed that she would not rely on the CityU Research Paper.

 …

 90. To conclude, we find Ms Leung’s distinction between essential repairs and improvement works artificial by nature and is in lack of consistency in application.  Whilst the respondents challenge the application of the “tenantable standard” in the consideration of the state of repair and the cost of repair, they apparently are unable to suggest any better alternative.  In our view, the “habitable standard” advocated by her is basically the bare minimum requirements with limited referential value for the assessment.  Such a standard is a disincentive to improvement in living/occupation condition and is unattractive to us.  As a matter of principle and policy, the Ordinance was passed for the purpose of assisting assembly of land for redevelopment which is plainly for improvement of the environment.  It makes more sense to say that in considering the age and state of repairs, one should put emphasis on or at least be receptive to the up-dating of the environment rather than being gratified by a mere satisfaction of the minimum safety requirement for the public and the occupiers.  Having considered all the evidence available with or without the application of any particular test, we are satisfied that redevelopment is justified by reason of the age or state of repair of the Building.”

60.  For the reasons explained above including the analyses in Century Supreme which we adopt, we find that the Court of Appeal’s observations in Fineway as properly construed and comprehended does not take R4’s case any higher.  We are not persuaded by the rival “habitable condition” standard as contended by Ms Joy Leung.

61.  We now turn to the evidence about the condition of the Building.  The evidence on this aspect largely consist of the expert evidence called by the parties and also the reports filed by the parties on the building conditions and also on the structural aspects of the Building.

62.  The applicants’ expert witnesses are Mr Benson Wong and Mr C M Wong.  Mr Benson Wong’s evidence covers the features of obsolescence, the general conditions of the Building, the state of repairs and the estimated cost for the repair.  He also comments on the viability of revitalisation in particular the revitalisation scheme proposed by R4 and the cost for such revitalization on the assumed basis that R4’s proposed scheme were to be carried out.  His main evidence in chief was contained in (a) the Condition Survey Report[36]; (b) Rebuttal Report (in answer to the Condition Survey Report of Ms Joy Leung[37]) with appendices[38]; and 2^nd Rebuttal Report[39] with appendices[40].

63.  Mr C M Wong’s evidence concentrated on the structure of the Building:- (a) Structural Assessment Report of the Building with appendices[41]; and (b) Rebuttal Report in answer to the report of R4’s expert, Mr K K Lo[42].

64.  R4’s building condition expert, Ms Joy Leung, has made the following reports:- (a) Condition Survey Report[43] with appendices[44]; and (b) Rebuttal Report[45] together with supplement[46].

65.  R4’s structural expert is Mr K K Lo.  He has made:- (a) Structural Assessment Report of the Building[47] with appendices[48]; and (b) Rebuttal Report[49] with appendices[50].

66.  The building condition experts filed their Joint Statement[51] setting out the extent of their agreement and disagreement with brief reasons.  The structural experts also filed their Joint Statement[52].

67.  On the question of age of the Building, Mr Benson Wong opines that the Building suffers from physical obsolescence.  The external appearance is not attractive and is in lack of architectural features as compared with more modern buildings.  He observes that the finishes of the external wall with cement rendering and paintwork is obsolete, new type of the finishes are more durable and will be less costly to maintain.  Likewise, the obsolete windows are inferior to the modern type with colour tinted glass and film coated for light and heat reflectance giving better thermal comfort and energy saving.

68.  On physical obsolescence, Mr Benson Wong says that the Building was completed in 1978 and is now more than 40 years old, it is to be expected that many of the building facilities including in particular the fire safety facilities are missing, although they met the legal requirements at that time, the fire safety facilities would not able to meet the present day requirements.  Likewise, even for the building structures since the date of the completion of the Building, there are changes in the legal requirement on the structural designs which are meant to ensure the better safety of the building, and again these new design requirements are not met. Some of the deficiencies particularly relating to the construction of the Building could not be updated or rectified practically without redevelopment of the Building.

69.  On the obsolescence of the fire services provisions, Mr Benson Wong highlights the following deficiencies as compared with the requirement of the current Code of Practice for Minimum Fire Service Installations and Equipment 2012 (FSI Code 2012)[53]:-

(a)	No automatic fire detection system which is valuable for fire safety even though it was not compulsory when the Building was designed and constructed;
(b)	Incomplete manual fire alarm system in that break-glass fire alarm was not found in lift lobbies.  Even for those installed at the workshops, they are not connected to fire control panel at the management office to enable the management office to inform all occupants and take immediate fire-fighting action in case of the fire alarm;
(c)	The hose reels are not found at common area, and those installed at the workshops are operated by only one water-pump installed on the roof and thus there is no stand-by provision to cater for the break-down of the pump.  The existing pump chamber had been relocated from 1st floor to the roof and the chamber is substandard in size and headroom clearance making it impossible for installation of any further pump to meet the current requirement;
(d)	No automatic sprinkler system at the staircases and protected lobbies;
(e)	No emergency generator to provide back up for essential services e.g. fire pumps, sprinkler pumps and fireman’s lift; and
(f)	No fire service direct link system connecting directly with the Fire Services Department.

70.  Mr Benson Wong also observes that the means of access for fire rescue or escape is deficient when compared with the requirement of the current Code of Practice for Fire Safety in Building 2011 (Fire Safety Code 2011) in many respects[54]:

(a)	No proper fire-fighting and rescue stairway provided;
(b)	Horizontal distance from fire service access point at the front perimeter of the Building to the door of the fireman’s lift exceeds the current maximum allowed distance;
(c)	No protected passage connecting the fire service access point and fireman’s lift;
(d)	The staircases are not interconnected at each level by fire-protected corridor; and
(e)	Handrail along the main staircase found on one side only.

71.  About the fire-resisting construction of the fire escape routes in the Building, Mr Benson Wong comments that it is also sub-standard and could not meet the current requirement for fire protection[55]:

(a)	The fire resistance of the structural frames of the Building, the existing concrete cover thickness of the existing floor slabs are too thin to meet the current safety requirement;
(b)	The doors of the workshops, the meter room and lift machine room, are not qualified as fire resisting doors.   Hence, the fire resistance of the fire escape routes within the Building is compromised; and
(c)	The electrical cables and installations installed inside the main staircase and lift lobbies are not enclosed with fire resisting enclosures.

72.  He comments that the barrier free access facilities are substandard to cater for the need of disabled persons and to meet the requirement of the Design Manual: Barrier Free Access 2008.  This is particularly so for the 13^th floor and 14^th floor where there was a marked difference in level between the lift lobby and the floor level of the workshops[56].  The car parks at the Building are inadequate in number and also in size to meet the current requirement[57].  There is no condensate drainage pipework provided to drain away the condensates from air conditioners affixed on the metal frames mounted outside the workshops.  Apart from the nuisance from dripping water and the breach of s12(1)(g) of the Public Health and Municipal Services Ordinance, the air conditioners and the individually connected drain pipe (if any) would affect the external outlook of the Building[58]. There is no lightning protecting system[59].

73.  On the structural aspect, the applicants’ evidence is that the Building was designed with reference to and in compliance with the Hong Kong (Construction) Regulation 1975.  At the time the relevant safety requirement was less stringent when compared with the requirement today.  In particular, the modern design code HK2013 not only requires the minimum percentages of reinforcement, but also the proper detailing of the anchorages between beams and columns to improve the ductility of the building.  Besides, the modern code also requires that “a structure should be designed and constructed so that it is inherently robust and not unreasonably susceptible to the effects of accidents or misuse, and disproportionate collapse”.  These modern requirements were absent in the code applicable in 1978 when the Building was built[60]. Although it does not mean that the Building erected in 1978 was unsafe, this is an aspect of the obsolescence of the Building due to its age.

74.  It is common ground that the designed working life of concrete structure refers to the “period of time during a structure that has undergone normal maintenance is unlikely to require major repairs”[61]. It is also common ground that a building would not automatically become unsafe after its design working life[62]. Where a building has undergone normal maintenance, it is unlikely that it would require major repair during its design working life but after the design working life, major repair is to be expected.  The applicants submit that in deciding whether redevelopment is justified, one does not have to wait for the time when the design working life is over.  If the tribunal should come to the view that it could reasonably be anticipated that major repair to the Building is expected in a few years’ time, taking into account other factors, the tribunal would be well justified to come to the view that redevelopment is justified.

75.  Mr C M Wong and his team, on behalf of the applicants, had conducted an inspection of the Building and photographs of the various parts of the Buildings were taken.  Apart from the visual inspection, samples from the slabs, beams and columns were taken for the purpose of conducting: - (a) test for the actual concrete cover thickness; (b) the core compression test for testing the concrete strength; (c) depth of carbonations; and (d) chloride test. The results and observation were set out in his Structural Assessment Report dated 30 January 2019[63].

76.  In terms of the design life of the structural frames, Mr Benson Wong refers to Mr C M Wong’s Structural Assessment Report[64]. It is stated that the design life of a building structure should be shorter than 50 years.  Given the physical age of the building (43 year-old), the structural frame of the Building is approaching the end of its design life.

77.  Mr K K Lo for R4 had similarly carried out an inspection of the Building and also taken samples from the slabs, beams and columns for the same test and his finding were recorded in his report[65].

78.  Ms Joy Leung opines that although the design working life of an ordinary building in Hong Kong is 50 years, proper building maintenance can extend the service life of building structures[66]. Referring to Mr K K Lo’s Structural Assessment Report, she opines that the Building is in good maintenance and structural conditions compared to many other buildings of similar age, and does not exhibit any sign of deterioration that requires major repairs at the moment[67].

79.  From the site inspection, it is noted that the external beams of the Building were in very poor conditions with serious spalling[68]. In the Joint Statement of the structural experts, Mr C M Wong remarked that “Of the 52 external beams inspected, 31 of them exhibited severe defects including sever corrosion of reinforcement[69]”, and this observation has not been denied or commented on by Mr K K Lo.

80.  In fact, in the Joint Statement the experts agreed that[70] -

“4.4 Defects in Building

More than half of the external beams at the open area outside the toilets exhibits severe defects and require immediate repair.  Part of the ceilings above ground floor carpark also showed serious spalling.  Other than these 2 locations, the other defects were mainly found at the roof and toilet areas. Compared to external beams, roof, toilet areas and ceilings above ground floor carpark, the number and scale of defects in other areas that were inspected were much less.”

81.  Because of the findings in the carbonation test, the experts agreed that “most of the slabs and a significant number of the beams have entered the propagation phase[71]”. The significance of the propagation phase is that once the structure is at that phase, the protective barrier “is completely lost” and “this induces the development of deterioration (e.g. active corrosion of reinforcement steel bars) and causes a loss of function”and the “deterioration will accelerate and additional defects may appear in more locations” and “frequent maintenance and repair works may be required in the future in order to keep the building in a safe and functional state”.

82.  Apart from the expert evidence on the structural elements, the tribunal have also heard evidence that there were occasions that large pieces of concrete cover or rendering had suddenly fallen out from the ceiling of the toilet.  The tribunal observed during the site visit that many parts of the external wall and ceiling of the carpark area had exposed reinforcement which means the concrete cover had fallen off.  Even though it may be said that the fallen concrete cover by itself does not seriously affect the structure of the Building and could be repaired, one must bear in mind that normally to many of the ordinary land user, there is no imminent sign or warning that the concrete cover would be falling, and when it happens, it would certainly be a danger to the public and the users and occupants of the Building.

83.  Having regard to fact that in all probabilities, the design life of the Building would run out shortly, most of the slabs and a significant number of the beams have entered the propagation phase, and the very poor condition of the external beams, even though currently the Building is not structurally dangerous, objective evidence suggest that the Building would likely require major repair work in the near future.

84.  Both parties have adduced voluminous expert evidence about the age and the state of repair of the Building and have made extensive submissions in relation to each and every item/aspect of the Building which they consider relevant to the statutory criteria.  We have no intention to set out herein parties’ respective arguments on all individual items to avoid undesirably lengthening the judgment and overloading it with unnecessary details.  Suffice it to say that on the evidence available, we prefer the observations and conclusions of the applicants’ team to R4’s team.  We agree with Mr Benson Wong that apart from the structural elements, there are many other parts of the Building and its associated features and facilities which are in poor condition because of their age and the poor state of repair.  No doubt, this tribunal also made our own observation on these aspects during the site visit of the Building on day 2 of the trial.  We find without hesitation that redevelopment is justified by reason of the age and the state of repair of the Building. 

85.  Lastly, on the reliability of the expert witnesses, the applicants ask this tribunal to be cautious in accepting Ms Joy Leung’s evidence because she failed her duty as an expert by repeatedly advocating for the “habitable condition” standard both in the present case and in other cases where she was involved as the respondents’ expert.  The aggravating factor is that Ms Joy Leung was adamant about her contention with full awareness that this low standard had been rejected by the tribunal with reasoning in earlier decisions and yet did not explain why she considers the tribunal wrong in rejecting her advocated standard in earlier decisions. 

86.  The applicants also point out that about the question of the escalating cost of repair as the building ages which is relevant to the question of whether redevelopment is justified by reason of its age, Ms Joy Leung put forward the “Research Paper of the City University of Hong Kong on the benchmarking of management and maintenance fees for residential properties (public and private) in Hong Kong in 2007 – 2008” to justify her view that so long as the building is regularly maintained, the building repair cost will be insignificant and has no significant relationship with the building age.  Once again, Ms Joy Leung failed her duty by maintaining a view that was considered but rejected by the tribunal with reasons given in Pacific Base at paragraphs 126 to 128 of the judgment without explaining in substance how the tribunal was wrong in rejecting her. 

87.  The applicants urge the tribunal to take a dim view on the reliability of her evidence.

88.  Having ruled in paragraph 84 that we prefer the observations and conclusions of the applicants’ experts to R4’s experts, it does not appear necessary for us to comment on the way in which Ms Joy Leung discharged or failed to discharge her duty as an expert witness for the disposal of this case. It is sufficient for us to say by way of remark that when certain notion advocated by an expert in earlier cases has been clearly rejected by the court with reasons, it is undesirable for an expert to turn a deaf ear to the court’s decision by repeatedly postulating the same notions in subsequent cases without properly dealing with the reasons of rejection.

Revitalization

89.  R4 submits that redevelopment is not justified as there can be the feasible alternative of revitalizing the Building under the Revitalization Scheme for Industrial Building re-introduced by the government in 2019 (“the Revitalization Scheme”).  In summary, R4’s arguments are that instead of redeveloping the Lot, it is to the advantage of the applicants and R4 to have the Building revitalized.  It is a red herring for the applicants to submit that the tribunal should not consider revitalization for the reason that there was no revitalization at the time of enactment of the Ordinance.  The Ordinance is in its nature a policy legislation whereby the tribunal is seized with the task of taking into account all relevant matters in deciding whether an existing building should be redeveloped by making an order for sale. Such consideration must include whether instead of redeveloping the building the same should be revitalized.  If it is, then the correct decision of the tribunal is not to make an order for sale so as to allow the parties to undertake the revitalization exercise.  It is beside the point for the applicants to argue that revitalization is not redevelopment as it is not R4’s case that the tribunal can order revitalization in place of redevelopment. R4 accepts that the tribunal cannot order the applicants to co-operate with R4 to do revitalization but R4 only asks the tribunal not to grant an order for sale.

90.  Incidentally, R4 also argues that the entrenched position taken by the applicants in refusing revitalization is relevant in deciding the question of whether the applicants have made reasonable offers to acquire R4’s undivided shares.  This point will be discussed in paragraphs 107 to 118 below.

91.  R4 has caused the preparation of valuation evidence on the assessment of the updated RDV, EUV and the value of the Revitalization Scheme of R4 on the same valuation date for comparison of the three values.

92.  On the other hand, the applicants submit that revitalization is irrelevant under the Ordinance. Section 4(2)(a)(i) of the Ordinance directs the tribunal to concentrate on two factual issues when examining the question of whether redevelopment of the Lot is justified, namely “due to the age or state of repair of the existing development”.  The bracketed words even exclude the tribunal from examining “whether or not the majority owner proposes to or is capable of undertaking the redevelopment”.  If the tribunal is excluded from examining whether the applicants propose to or are capable of redeveloping the Building and the Lot, section 4(2) cannot possibly require the tribunal to examine whether the applicants are proposing or are capable of revitalizing the Building. There are no words in section 4(2) where such a requirement can be parked.

93.  It is therefore submitted that once the tribunal is satisfied that redevelopment is justified owing to the age or state of repair of the Building, the tribunal should conclude that redevelopment of the Lot is justified.  The applicants cite Able Luck[72] where the tribunal accepted that revitalization was not feasible because of the requirement of all owners’ consent.  The tribunal further ruled that once it is satisfied that redevelopment is justified, the tribunal shall have no residual discretion to refuse making the compulsory sale order[73] and there is nothing in the Ordinance that enable the tribunal to direct the owners to adopt any particular conduct and stance on how to deal with his own property.  In light of the tribunal’s observations[74] in Able Luck, it is submitted that R4’s contention is misconceived.

94.  We shall approach the issue this way.  As regards R4’s submission that the Ordinance is “in its nature a policy legislation whereby the Tribunal is seized with the task of taking into consideration all relevant matters in deciding whether an existing building should be redeveloped and such consideration must include whether the building should be revitalized instead of redeveloped”, to begin with we find it difficult to comprehend what the term “policy legislation” actually means as legislations ordinarily stem from some underlying policy.  Even assuming that the Ordinance is a piece of “policy legislation” as described by R4 for whatever it means, we have serious reservation to the idea that the tribunal should compare the relative feasibility of the various options of dealing with the Lot, including the relative feasibility between redevelopment and revitalization, in the process of exercising its function under the Ordinance.    

95.  We shall draw reference from the Court of Appeal in Pacific Base Holdings Limited v Lee Hop Biu and Others[75] where the respondent in that case sought to argue among other things that an order for sale shall not be granted because the redevelopment plan was not technically feasible.  The Court of Appeal held that: -

(1)	The tribunal is directed by section 4(2)(a) of Cap 545 to consider if the redevelopment is justified due to the age or state of repair of the existing development on the lot, and there is no requirement that the tribunal has to be satisfied that the building works issues can be resolved before an order for sale under the ordinance could be made (see paragraphs 27 and 39 of the judgment);
(2)	Even though an order for sale under Cap 545 would interfere with the private ownership of the minority owners, the order would not have the effect of disposing the interest of any owners if there is no successful bid at the public auction within 3 months of the order (see paragraphs 34 and 35 of the judgment);
(3)	It is thus for the market to decide on the feasibility of the redevelopment and the marketability of the Lot at the reserve price (see paragraph 36); and
(4)	Whether the scheme under the Ordinance is constitutional is essentially a matter of policy judgment and as to that the legislature should have a great margin of discretion in devising the scheme. Even though the Court may entertain a judicial review based on constitutional grounds in respect of a balance embodied in a statute, the standard of the review should be that of “manifestly without reasonable foundation” (see paragraph 40).”

96.  The following paragraphs in the Court of Appeal’s judgment are particularly relevant: -

“42. Further, as Mr Mok submitted, it is difficult to define the scope of the inquiry into feasibility in the proceedings before the Tribunal. There is no reason in principle to confine the concept of feasibility to structural engineering feasibility. On the other hand, section 4(2)(a) makes it clear that financial ability of the majority owners to undertake the redevelopment is not relevant.

43. From a practical point of view, since there is no requirement on the majority owners to submit a detailed redevelopment plan at this stage, the proposed redevelopment could only be presented to the Tribunal on a conceptual level with a high degree of generality. In such context, it would not be profitable to engage in a debate on engineering feasibility at this stage.

…

45. If one were to examine the question of feasibility on a theoretical level without regard to practicalities, it is quite possible for someone to devise a bizarre solution such as that put by the member of the Tribunal to the Applicant’s expert at p.51D to G of the transcript. Little purpose would be served by any debate on feasibility on such abstract and theoretical level.

46. On the other hand, if one were to examine feasibility on a practical and realistic level, the economics of redevelopment and financial viability would inevitably come into the equation. The whole exercise would be blown out of proportion and an unduly onerous burden would be placed on the majority owner applicant. There is also a risk of usurpation of the role of the Building Authority by the Tribunal without the requisite expertise. We can find nothing to suggest that this was the legislative intent.

47. Viewed thus, we can see the wisdom of leaving the question of feasibility to be determined by the market.

…

49. We therefore conclude that in an application for compulsory sale order in the Tribunal under the LCSRO, the Tribunal should not be concerned with the question of feasibility of the redevelopment.  Section 4(2) does not impose a duty on the part of an applicant to show that redevelopment is feasible and it is not the function of the Tribunal to examine such issue in the context of the application.”

 (emphasis added)

97.  What could be gained from the above paragraphs in Pacific Base is that, if in handling a compulsory sale application the tribunal is not expected to be concerned with the feasibility of the redevelopment, we do not see the reason why the tribunal shall be concerned with the relative feasibility of redevelopment as compared with other options.

98.  One must be aware that in the treatments of old buildings, apart from redevelopment, in truth there are many other alternatives thereto such as revitalization, conservation, urban renewal project to be undertaken by the Urban Renewal Authority (“URA”), rehabilitation either from private funds or through obtaining rehabilitation fund administered by the URA, improvement of building conditions by the incorporated owners’ exercising their substantial power under the Building Management Ordinance or otherwise over maintenance and improvements to common parts of a building etc.  If R4’s contention is right, by analogy and by extension, the same argument could be run to the effect that the tribunal should take into considerations all options other than redevelopment as long as they are raised by the minority owners, weigh and compare each and every one of them against redevelopment and grant an order for sale only when redevelopment is found to be the best course to take among all the options.

99.  As said in paragraph 97 above, in light of the Court of Appeal’s observations and ruling in Pacific Base Holding, we see no merits in the contention that the tribunal must weigh the relative feasibility or benefits of redevelopment vis-à-vis revitalization or other options when considering whether an order for sale shall be made. Such a contention would place an impossible task on the tribunal to explore and go into those other topics which the Ordinance does not even mention by name, let alone prescribing what are to be considered under those topics.  To embark on such an exercise would risk usurping the functions of other bodies such as the URA which are tasked to oversee the specific area.

100.  In our view, R4’s contention if accepted would also subject the majority owners to the substantial risk of their compulsory sale application being refused not due to their failing to meet the statutory criteria stipulated in the Ordinance but due to the surface, at any stage, of some alternative options to deal with the building(s) on the lot in circumstances that are outside the majority owners’ control. 

101.  In conclusion, we cannot agree more with the Court of Appeal’s observation that once we go into the rabbit hole and expand the statutory equation to include topics such as revitalization, rehabilitation, urban renewal etc, the whole exercise would be blown out of proportion and no one can tell when the expansion of considerations under the Ordinance would come to an end.  We do not find this to be the legislative intent of the Ordinance.  

102.  R4 tries to rationalize their argument by emphasizing that they are not asking the tribunal to order revitalization in place of redevelopment (which R4 concedes that the tribunal has no such power) but only asks the tribunal not to make an order for sale so as to allow the parties to undertake the revitalization exercise.  Our short answer to this is that there is actually no difference between directly ordering the applicants to go for revitalization and indirectly coercing the applicants into doing so by declining an order for sale for redevelopment such that the applicants will be left with no choice but to revitalize. Bearing in mind that revitalization is not mandatory but voluntary in nature, the majority owners are under no legal obligation to pursue the same if they do not wish to.  We see no reason why an otherwise successful application should be refused simply because the applicants have decided against revitalization which is a decision they are fully entitled to make.

103.  We therefore conclude and rule that in an application for compulsory sale order under the Ordinance, the tribunal should focus on whether redevelopment is justified by reason of the age or state of repair of the building concerned.  In the exercise, the tribunal is not required to engage itself in weighing redevelopment against all other potential alternatives (such as conservation, revitalization, rehabilitation, urban renewal etc) nor is it obliged to satisfy itself that redevelopment is the best option among all possibilities before it could make an order for compulsory sale.

104.  In any event, we share the same observation as the tribunal in Able Luck that revitalization is not feasible because it requires the consent of all owners. The hard fact of the present case is that the applicants do not agree to revitalizing the Building. 

105.  For completeness, we will briefly comment on the revitalization value of the Building as well. On the assumption that revitalization is relevant at all, our assessment is that the revitalization value of the Building will not be more than the RDV of the Lot. As to be explained in paragraph 170 of this judgment below, we accept the RDV of $2,349,000,000 as in March 2021 as assessed by Mr Charles Chan, which is higher than the revitalization value of $2,045,000,000 as in March as assessed by Mr Patrick Lai which figure is on the high side in our view. We generally prefer the comparables adopted by Mr Charles Chan in the assessment of the revitalization value. In the main, Mr Patrick Lai has either over-estimated the value after conversion or under-estimated the conversion costs.  Mr Patrick Lai has not made adjustment for building services and facilities and has applied an adjustment rate at 1% per year for age and a discount of 5% only in the comparison between the revitalized units and the office comparables with normal standard of finishing, but at the same time he has adopted the conversion costs of about $8,872 per square meter gross only.  In light of the existing condition of the Building, we take the view that the spending of about $8,872 per square meter gross only cannot revitalize the Building up to a normal standard as that of the comparables.

106.  Further, although the revitalization value may be higher than the EUV, we are of the view that with reference to the industrial price indices and our determinations of the EUV as at 29 March 2018 and the RDV as at 12 March 2021 in this judgment, the RDV of the Lot should be higher than the EUV of the Building.

Whether the applicants have taken Reasonable Steps

107.  To obtain an order for sale, the applicants have to satisfy section 4(2)(b) of the Ordinance by taking reasonable steps to acquire the undivided shares of the Lot.

108.  The applicants have made the following offers to purchase R4’s units: -

	Date	Amount Offered
1.	6 April 2018	$55,794,200
2.	18 December 2019	$75,200,000
3.	15 April 2021	$82,500,000

109.  R4 submits that the applicants have not acted reasonably and have failed to take reasonable steps by taking the entrenched position not to accept R4’s offer on revitalization.

110.  Further or alternatively, in term of offer price, the applicants have failed to make an offer based on the market value of R4’s units as can be fetched on a revitalized basis.

111.  In opposition to the above, the applicants raise that R4 failed to plead the above defence in their amended Notice of Opposition and these arguments are now raised by way of surprise attack.  The defence pleaded on revitalization is related exclusively to the issue of whether redevelopment is justified[76]. The defence on reasonable step is raised in paragraph 1(c)(ii)[77] which placed no reliance on revitalization.

112.  It is submitted that in any event, the two offers made by the applicants were way above the benefit that R4 would have derived from a joint venture of revitalization as assessed by Mr Patrick Lai, even if one were to ignore his inflating his revitalization value assessment.  R4 has not given any reason why they saw fit to reject the offers which would have given it benefits far greater than the joint venture to revitalize.  The only inference that can be drawn is that R4’s counteroffer of a joint venture is purely a forensic move made solely with the aim of creating unnecessary complications for the compulsory sale application.

113.  Relying on Capital Well Ltd v Bond Star Development[78], Mr Chan submits that the tribunal is not conducting a valuation exercise and the tribunal needs not come to a view on what is the correct valuation of the minority’s shares.  What the tribunal must do is to consider whether in the circumstances of the case the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority interest reflecting a proportionate share of the redevelopment of the whole site.  It is submitted that since the applicants’ offers exceed both sides’ assessment of the value of the minority’s proportionate share of the development site taking its development value into account, the tribunal is fully entitled to find that the applicants’ offer falls within the range of what is fair and reasonable and that reasonable steps have been taken to acquire the minority owners’ shares on fair and reasonable terms. 

114.  About revitalization, in the applicants’ opinion, it was only upon seeing that their own valuation could not justify any claim that the offer price of 15 April 2021 was too low then R4 sought to bring in the revitalization value.  The applicants submit that revitalization is irrelevant and that revitalization value is not a realistic assessment for a number of reasons.  Most importantly, the revitalization value is a value that R4 has no hope to get because the applicants’ opposition to such idea.

115.  In our view, R4’s contention that the applicants have failed to take reasonable steps by not accepting R4’s offer on revitalization and have also failed to make an offer based on the market value of R4’s units on a revitalized basis demonstrate a misconception on their part over the reasonable steps requirement in the Ordinance.

116.  Section 4(2) of the Ordinance requires the majority owners to take reasonable steps to acquire all the undivided shares in the Lot.  What actually happened here is that R4 did not counter proposed terms for the sale of their undivided shares to the applicants. Instead, R4 asked the applicants to enter into joint venture with them for revitalization of the building which was something completely different.  The Ordinance does not empower the minority owners to request alternative ways to deal with the building (such as revitalization) in lieu of redevelopment as a kind of statutory protection of their property rights such that if the applicants unreasonably decline their alternative proposals, the application for compulsory sale shall be refused. R4’s accusing the applicants of failing to meet the statutory requirements by declining their joint venture for revitalization is without basis.  This point alone is sufficient to disposal of R4’s opposition relating to reasonable steps. 

117.  Concerning R4’s second argument that the applicants have failed to make an offer based on the market value of R4’s units as can be fetched on a revitalized basis, this argument is unsustainable and could be dismissed right away because the valuation on revitalized basis actually depends on something which R4 have no hope to get given the applicants’ opposition to the idea of revitalization.   

118.  On the evidence available, we accept that the applicants’ offer prices, which have reflected the respective proportionate share of the RDV of the Lot, do fall within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question.  We are satisfied that the applicants have taken reasonable steps.

Proportionality Argument

119.  Relying on the CFA judgment in Hysan Development, R4 raises basic law issues and makes proportionality argument along the following line.  It is submitted that first, the CFA held in that case that BL6 and BL105 were engaged and that the proportionality test shall be applied to determine the encroachment of property rights under BL6 and BL105.  Secondly, the CFA held that while a three-step analysis to the proportionality test had previously been applied in Hong Kong, a fourth step was to be added and hence a four-step analysis shall be adopted. Thirdly, in the circumstances of the present case (the circumstances include the alleged low redevelopment potential, and the alleged small increase in GFA and the feasible alternative of revitalization of the Building into a commercial building which does not override R4’s rights of private ownership), making of an order for sale against R4 cannot pass the third and fourth steps in Hysan Development because it is not “no more than necessary” but is “manifestly without reasonable foundation”. The societal benefits are disproportionate to the infringement of R4’s property rights and results in an unacceptably harsh burden on R4.

120.  To tackle R4’s proportionality argument, the applicants submitted that the tribunal held in Intelligent House that the Ordinance does not offend BL29 and BL105.  In particular, BL105 does not exclude a law permitting and requiring a private individual to sell his property to another private individual in accordance with the law and with appropriate compensation.

121.  In Good Faith Properties Ltd and Others v Cibean Development Co Ltd[79], the Court of Appeal examined the scheme of protection of minority’s property right provided in the Ordinance.  The first-tier of safeguard provided thereunder is “to ensure that the minority’s property is not taken from him without the Tribunal being satisfied in the statutory process that there are sufficient justifications for the same in terms of the statutory criteria” and “the proceedings in the Lands Tribunal” should be regarded as a statutory means to justify this exceptional interference with the right of private ownership of property[80]. The second-tier safeguard is the fair and reasonable compensation to the minority owners if an order for sale is to be made[81].

122.  The Court of Appeal in Good Faith observed that if the costs involved in the application for the compulsory sale order were to be paid by the unsuccessful minority, the compensation received by the minority for the compulsory disposal of his property would be reduced and the minority would not have got the full amount of the fair and reasonable compensation.  Therefore, the Court of Appeal considered that the cost should be normally paid by the applicants as in the case of compulsory land resumption[82]. The applicants submit that the decision of the Court of Appeal in Good Faith so understood shall mean that so long as the scheme provided in the Ordinance is followed and the minority’s share is not to be unreasonably reduced by cost, the minority would be properly protected and there should be no infringement of BL6 and BL105.

123.  As regards Hysan Development heavily relied on by R4, as the applicants see it, R4 actually is contending that where a decision would involve the infringement of private ownership rights, it shall comply with the proportionality requirement and the “decision” shall cover a compulsory sale order made by the tribunal.  Whilst the applicants accept that a compulsory sale order is an interference or even deprivation of the property right of the minority, but since the purpose of the Ordinance is to free up land under multi-ownership for redevelopment where the co-owners could not agree amongst themselves to do so, this is itself a kind of public social and economic benefit.  As the tribunal would not make an order for sale unless it is satisfied that redevelopment is justified having regard to the age or state of repair of the building and since the Ordinance allows dissenting minority owners to have full participation by making oppositions in the statutory process and further provides for compensation in the form of distribution of a proportionate share of the net proceeds of sale, there should be no additional constitutional objection to the making of a sale order if the tribunal considers it an appropriate order to make.

124.  The applicants submit that the scheme in the Ordinance could pass and has passed the proportionality test.  The scheme in the Ordinance actually does not cater for the proportionality assessment by the tribunal because the tribunal can either make or refuse to make an order for sale.  There is no discretion left to the tribunal to consider whether the order for sale is no more than necessary to achieve the legitimate aim of modernizing the environment. Even assuming that the tribunal would have to be satisfied with the proportionality criteria spoken of in Hysan Development, it is submitted that all the criteria are met and satisfied.

125.  The applicants highlight that the social benefit of the individual redevelopment project does not enter into the equation, but assuming that it does enter into the equation, there is a lot of social benefit from road widening and benefit in modernizing the surrounding vicinity.  An order for sale does not restrict the purchaser from using the lot for any purposes.  The model drawn up by the applicants for the purpose of the RDV is really to try to reach a highest realistic amount to reflect also the development value of the land for the purpose of payment of compensation to the owners for selling their undivided shares.

126.  Having summed up the respective arguments of the parties relating to BL6 and BL105, we shall set out our analyses and shall begin with Hysan Development which is a case heavily relied on by R4. 

127.  In Hysan Development, Hysan owns extensive properties in Hong Kong.  The Town Planning Board issued a series of planning restrictions such as building height restrictions and non-building areas to serve public purpose such as facilitating air ventilation and pedestrian traffic flow.  Hysan challenged these restrictions but the challenges were rejected by the Board.  Hysan then brought judicial review proceedings to challenge the Board’s decisions in rejecting its representations.  The Court of First Instance dismissed the majority of Hysan’s grounds.  The Court of Appeal allowed Hysan’s appeal, quashed the Board’s decision on traditional judicial review grounds but ruled that BL6[83] and BL105[84] were not engaged.  The CFA ruled to the contrary and remitted the case back to the Board for reconsideration with the Basic Law articles and an additional four-step to the proportionality test to be taken into account.

128.  It was held that BL6 and BL105 were engaged where landowners complained about planning restrictions imposed by the Town Planning Board.  The central feature of BL6 and BL105 was that they imposed an obligation on the HKSAR to protect private property rights.  The phrase “in accordance with law” introduced another aspect of protection in that property rights were to be guaranteed by clear and accessible laws.  There was no basis for reading that phrase as qualifying the protection by making it subject to legal restrictions.

129.  Whilst BL6 and BL105 made no express provision regarding permissible restrictions, a proportionality analysis of the planning restriction was clearly required.  The CFA held that, while a three-step analysis to the proportionality test had previously been applied in Hong Kong, a fourth step was to be added as follows: -

(1)	The restriction or limitation must pursue a legitimate aim;
(2)	The restriction or limitation must also be rationally connected to that legitimate aim;
(3)	The restriction or limitation must also be no more than what was necessary to accomplish that legitimate aim; and
(4)	Where an encroaching measure had passed the three-step test, the analysis should incorporate a fourth step, asking whether a reasonable balance had been struck between the societal benefits of the encroachment and the inroads made into the constitutionally protected rights of the individual, asking in particular whether pursuit of the societal interest resulted in an unacceptably harsh burden on the individual.

130.  On that note, we shall now turn to R4’s arguments.

131.  Mr Li submits that the making of an order for sale against R4 cannot pass the third and fourth steps of the proportionality test in Hysan Development because it is not “no more than necessary” but is “manifestly without reasonable foundation” (i.e. third step).  The societal benefits are disproportionate to the infringement of R4’s property rights and results in an unacceptably harsh burden on R4 (i.e. fourth step).  As we perceive it R4 by so contending essentially is suggesting that the making of a compulsory sale order by the Tribunal is the subject “decision” or the subject “matter” to be scrutinized by the proportionality test.  If that is what R4 means, it would appear that this argument is formulated out of a misapprehension of the real meaning of Hysan Development.

132.  Hysan Development started in the Court of First Instance as a judicial review matter before it was finally appealed to the CFA.  Judicial review proceedings by nature are the process under which executive, legislative and administrative actions are subject to review by the judiciary. The traditional three-step proportionality test was subsequently refined to a four-step test in Hysan Development.  From the clear wording, the proportionality test in substance was designed is to check and scrutinize firstly, governmental decisions (in Hysan Development, the Town Planning Board’s decision to impose restrictions) and secondly, laws so as to ensure that they do not inappropriately violate constitutionally protected rights of the individuals. As the proportionality test is not designed to examine a ruling of the court, in our view it is without rhyme for R4 to say that a compulsory sale order, if made by this tribunal in this case, cannot satisfy the third and fourth steps of the proportionality test.

133.  Alternatively, if R4 is contending that whenever the making of an order by the court in any proceedings shall impact upon the private property right of citizens, the court would have to apply the proportionality test to scrutinize whatever application that is placed before it even though the proceedings actually do not involve the government/public authority but only concern private parties, we would say that this bold assertion is in dire need of authority because clearly, nothing in the Ordinance requires or mandates the tribunal to apply the four-step proportionality test in adjudicating compulsory sale applications. 

134.  We can imagine one way for R4 to circumvent this predicament is to argue that the Ordinance, by not embodying in it the proportionality test in the tribunal’s consideration of whether an order for sale shall be granted, is itself unconstitutional.  To put it in another way, in our opinion the constitutional point or the proportionality arguments now taken by R4 would have currency if and only if it is sought to challenge the constitutionality of the scheme under Ordinance as a whole.  But R4’s counsel already made it clear in his opening submissions that R4 had no intention to and would not challenge the constitutionality of the scheme under the Ordinance. In any event, even if such challenge is raised by R4, we would have serious reservation whether it would be appropriate at all for R4 to do so amidst the present compulsory sale proceedings where the government is not involved to defend the constitutionality of the piece of legislation under concern.

135.  Lastly, R4 also tries to justify their attempt to invoke the proportionality test by saying that the test is relevant to the “construction” of the relevant provisions of the Ordinance without explaining with any degree of clarity where the relevance lies.  We are not persuaded by this at all. When one comes to see the substance or the wording used in the four-step proportionality test, it is self-explanatory that the steps concern whether certain restrictions to rights (usually imposed by the government/public bodies through administrative decisions or legislation) pursue a legitimate aim; whether the restrictions are rationally connected to that aim; whether the restrictions are no more than was necessary to accomplish that aim; and whether an encroaching measure has struck a reasonable balance between the societal benefits of the encroachment and the inroads made into constitutionally protected rights.

136.  Whereas in compulsory sale applications, the proceedings are between majority owners and minority owners.  It is inconceivable how the concepts underneath the various components in the proportionality test (such as “legitimate aim” “no more necessary to accomplish that legitimate aim”, “encroaching measures struck reasonable balance” etc) can be fit into the context of individual compulsory sale application by the majority owners who are merely private parties having made no administrative decisions or law to encroach upon the protected rights of others but only file applications pursuant to the Ordinance for the court’s determination.  

137.  For the reasons explained above, we rule that the Ordinance does not require the tribunal to apply the proportionality test in the consideration of whether an order for sale shall be granted in individual applications for compulsory sale order.

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING

138.  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.”

139.  There are disputes between the applicants and R4 on both the EUV and RDV valuations.  Although Mr Charles Chan and Mr Patrick Lai agree on adoption of direct comparison method, the EUV valuation date of 28 March 2019, the value of the reference private car parking space (i.e. Car Parking Space No 1 on Ground Floor) at $2,150,000 and the value of the reference lorry parking space (i.e. Car Parking Space No 15 on Ground Floor) at $2,950,000, they argue over the discount rate for those lorry parking space with lower headroom (i.e. Lorry Parking Space Nos 6, 7, 8 and 9).

140.  In the valuation of the ground floor unit, the 2 valuation experts agree on the particulars of it (except for its internal condition) and the comparables, but they disagree on selection of comparables and a few adjustments. In the valuation of upper floor units, there are similar agreements and disagreements.

EUV of Parking Spaces

141.  With the benefit of site inspection together with the parties, we consider that the lower headroom in part of Lorry Parking Space Nos 6, 7, 8 and 9 would affect their usage, and each of them should be assessed at $2,550,000 (i.e. discount of about 13.6%), the average value of a private car parking space and a standard lorry parking space (i.e. ($2,150,000 + $2,950,000) / 2 = $2,550,000), instead of $2,861,500 as suggested by Mr Charles Chan and $2,150,000 as suggested by Mr Patrick Lai.

142.  Accordingly, the sub-total value of all the car parking spaces is assessed at $52,900,000 (i.e. each of Car Parking Space Nos 1 – 5, 10 – 14 and 20 -22 at $2,150,000; each of Car Parking Space Nos 6 – 9 at $2,550,000; and each of Car Parking Space Nos 15 – 19 at $2,950,000).

EUV of Ground Floor Unit

143.  Mr Charles Chan and Mr Patrick Lai have proposed 5 and 3 comparables respectively, and none of them is common. We agree to firstly analyze the 5 comparables proposed by Mr Charles Chan, though Comparable B1 is relatively larger in size, Comparable B2 is subject to a leaseback arrangement and Comparables B4 and B5 were transacted in 2016, when there are no better comparables, but their adjusted unit rate should be further reviewed before their adoption in the valuation.  We disagree to firstly analyze the 3 comparables proposed by Mr Patrick Lai because Comparables B6 and B7 are small in size with different character and Comparable B8 is suspected to be a connected transaction.

144.  Except for the minor disputes on rounding and adoption of threshold approach or linear approach, the 2 valuation experts agree on the adjustment for time with reference to industrial price indices, the adjustment for size at 1% per 40-square meter difference, the adjustment for exposure at -20% to those comparables with street frontage, and 0% adjustments for layout (except for Comparable B2). With the aid of computer, we prefer the adoption of linear approach and rounding to 1 decimal place in the assessment. With reference to the floor plans available to this tribunal, we agree with Mr Patrick Lai not to make any adjustment for layout to Comparable B2. We agree with Mr Charles Chan not to make any adjustment for internal condition.

145.  Regarding the adjustment for location, the 2 valuation experts agree on the adjustment rate at 10% for Comparable B4 only. With the benefit of site inspection together with the parties, we prefer the adjustment rates for the other comparables as suggested by Mr Charles Chan. We consider that aged ground floor industrial units in the district are less sensitive to location.

146.  Regarding the adjustment for age, we prefer the adjustment rate at 0.5% per 1-year as suggested by Mr Patrick Lai to the lesser rate at 0.25% per 1-year as suggested by Mr Charles Chan. Since the depreciation of aged industrial building is relatively fast, we agree with Mr Patrick Lai to adopt a more sensitive adjustment rate.

147.  In terms of adjustment for headroom, we agree with Mr Charles Chan to adopt a more sensitive rate at 3% per 1-meter instead of 2% per 1-meter as suggested by Mr Patrick Lai. We consider that a higher headroom is useful for ground floor industrial unit.

148.  In terms of adjustment for provision of carpark, the 2 valuation experts agree on the adjustment rates at 0% and 5% for Comarables B4 and B5 respectively.  We agree that positive adjustment should also made to Comparables B1, B2 and B3, but the adjustment rate should be 4% instead of 2% as suggested by Mr Charles Chan and 5% as suggested by Mr Patrick Lai.

149.  The valuation of the ground floor unit is listed in Appendix I of the judgment.  The average adjusted unit rate of the 5 selected comparables is $125,501, and the average excluding the highest (i.e. Comparable B2 which is subject to a leaseback arrangement) and the lowest (i.e. Comparable B4) is $125,762.  We prefer to adopt the unit rate of $126,000 per square meter and the ground floor unit is then assessed at $111,825,000.

EUV of Upper Floor Units

150.  Mr Charles Chan and Mr Patrick Lai have proposed 9 comparables and 5 comparables respectively, and 4 of them (i.e. Comparables D1, D3, D4 and D6) are common.  We agree with Mr Patrick Lai not to analyze Comparable D10 proposed by Mr Charles Chan because this transaction needs adjustment for car parking space and there are other relevant comparables.  We agree with Mr Charles Chan not to analyze Comparable D5 proposed by Mr Patrick Lai because this transaction appears to have been affected by the site agglomeration activities in the building. We agree to analyze Comparables D7, D8 and D9 in Mai Hing Industrial Building as proposed by Mr Charles Chan, though the building is vehicular accessible via a lane.

151.  The 2 valuation experts agree on the adjustment for time with reference to industrial price indices, the adjustment for floor at 0.5% per 1-level difference and the adjustment for size at 1% per 10-square meter difference.

152.  Regarding the adjustment for location and environment, they agree on the adjustment rates to all selected comparables except Comparable D6 and D8. We agree with Mr Charles Chan to make adjustment to Comparable D6 at 3% only instead of 5% as suggested by Mr Patrick Lai, whilst the adjustment rate for Comparable D8 should be 12.5%, a midway between the figures as suggested by the parties at 10% and 15%.

153.  Regarding the adjustment for age, we agree with Mr Patrick Lai to adopt a more sensitive adjustment rate at 0.5% per 1-year instead of 0.25% per 1-year as suggested by Mr Charles Chan. Nevertheless, we agree with Mr Charles Chan to make an additional adjustment for external condition to Comparable D2 at -3%, which was completed in 1986.

154.  With reference to the floor plans available to the tribunal, we agree with Mr Patrick Lai not to make any adjustment for layout.  We also take the view not to make any adjustment for building services in this instance.  In terms of toilet facilities, we agree with Mr Patrick Lai to make adjustment to Comparables D2, D3 and D4, but the adjustment rate should be 2% only instead of 5%.

155.  The valuation of the upper floor reference unit (i.e. Unit D on 7^th Floor) at $73,000 per square meter is listed in Appendix II.  The average adjusted unit rate of the 8 selected comparables is $72,702, and the average excluding the highest and the lowest is $73,161.

156.  In the comparison between the upper floor reference unit and the other upper floor units, the 2 valuation experts agree on the adjustments for floor and size.  They dispute on mainly internal condition of some units. They disagree on the adjustment for layout to the units on 14^th floor, the adjustment for exposure to Units C and D on 2^nd to 4^th Floors, and the adjustment for top floor too.

157.  With reference to the photos provided by the parties and with the benefit of site inspection together with the parties, we generally prefer the internal conditions (i.e. as at the valuation date 29 March 2018) as suggested by Mr Charles Chan to those as proposed by Mr Patrick Lai.  Nevertheless, we are of the view that the internal condition of the 2 units owned by R4 (i.e. Units C and D on 8^th Floor), which had not been inspected by Mr Charles Chan, should be fair instead of poor as assumed by Mr Charles Chan and good as described by Mr Patrick Lai.

158.  The 2 valuation experts agree on the adjustment for layout at -5% to the units on 13^th Floor, which are 3 steps above the lobby, but they cannot agree on the adjustment rate for the units on 14^th Floor, which are 5 to 6 steps above the lobby.  We consider that the units on 14^th Floor should be adjusted at -7.5% instead of -5% as suggested by Mr Charels Chan and -10% as suggested by Mr Patrick Lai.

159.  We agree with Mr Charles Chan to make adjustment for exposure to the units (i.e. Units C and D) on lower floors facing Hoi Yuen Road, but the adjustment rate for Units C and D on 2^nd Floor should be 4% only instead of 5%, the adjustment rate for Units C and D on 3^rd Floor should be 2% only instead of 4% and there should have nil adjustment to Units C and D on 4^th Floor.  We also agree with Mr Charles Chan to make adjustment for top floor at -5% to the units on 14^th Floor, which are more susceptible to the adverse effects of solar heat and water leakage. 

160.  The valuation of each upper floor units is listed in Appendix III.  The sub-total EUV of all upper floor units is $1,249,290,000. Actual or estimated reinstatement costs if any as suggested by Mr Charles Chan are deducted for compliance with the building orders.

EUV of All Units in the Building

161.  The EUV of all units in the Building as at the relevant date of valuation, i.e. 29 March 2018, and adopted by this tribunal are appended below: -

Car Parking Space

Workshop Unit

162.  We therefore assess the total EUV of the Building at $1,414,015,000 ($52,900,000 + $1,361,115,000).

RESERVE PRICE FOR THE AUCTION

163.  Since we are satisfied that redevelopment of the Lot is justified and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot, we shall grant an order for sale in favour of the applicants.

164.  The 2 valuation experts agree on the site area of 1,858.05 square meters, but they disagree on the valuation date and the optimum development scheme. In particular, they argue whether or not there should have increase of plot ratio by 20% from the plot ratio of 12 as stipulated in the OZP and bonus plot ratio for the proposed setback on ground floor. In the direct comparison, they have adopted different site comparables.  In the residual valuation, while they have adopted different hypothetical development scheme, they have also chosen different unit comparables for the assessment of gross development value (“GDV”). Except for the adjustments for time, floor and size, they adopt different adjustment rates for the other factors.

165.  It is rather unusual that the parties cannot agree on the valuation date.  The difference is 11 days only.  For ease of reference, we adopt 12 March 2021 as the valuation date in these proceedings, which should not have any material impact on the valuation in any event.

166.  In general, we prefer the residual valuation of Mr Charles Chan, who assesses the RDV of the Lot at $2,349,000,000, to that of Mr Partrick Lai, who assesses the RDV at $1,647,600,000 only or $1,015,677,000 if premium for lease modification is payable.  We are also of the view that the site comparables in Cheung Sha Wan as proposed by Mr Patrick Lai are not so relevant for comparison, and it is hardly to compare with No 82 Hung To Road, which has a different character and has height restriction in its government lease.

167.  We consider that the hypothetical development scheme proposed by Mr Charles Chan is in principle feasible, which comprises a 39-storey industrial block for non-polluting industrial uses over a 2-level basement carpark at the plot ratio of 14.728 and total gross floor area of 27,365.53 square meter, and nil premium is payable in this instance from the perspective of developer.  There are supply of similar non-polluting industrial buildings with sub-division into relatively small units for sale in the market. R4 has criticized the feasibility of such hypothetical development scheme from technical perspective, such as provision of en-suite toilets without natural lighting / ventilation, no independent staircase to basement and excessive floor height, but we agree with Mr Charles Chan that with reference to his consultation with an Authorized Person these criticisms could adequately be dealt with upon finalization of detailed design.

168.  Though it is arguable for Mr Charles Chan to include the value of loading and unloading spaces into the GDV in his valuation and that Mr Charles Chan has not allowed for the extra risks for selling so many small units for non-polluting industrial uses only in the market, we accept his assessment of the RDV of the Lot at $2,349,000,000, equivalent to an accommodation value of about $85,838 per square meter (i.e. about $7,975 per square foot).  In contrast, we consider that Mr Patrick Lai has under-estimated the RDV.  We consider that his hypothetical development scheme has not fully utilized the height limit under the OZP and the building of larger industrial units would have a lower return.  In the main, we are also of the view that in comparison with the transactions in 46 Tsun Yip Street and Core 45 as proposed by Mr Charles Chan, the upper floor industrial units should have a higher value, more than the adjusted unit rate of $170,800 per square meter only as suggested by Mr Patrick Lai.

169.  Nonetheless, Mr Li submits that R4’s position is that if an order for sale for redevelopment is granted, R4 is happy to adopt the updated RDV as assessed by Mr Charles Chan as it will maximize the compensation paid to R4.  In the circumstances, since we agree to grant an order for sale of the Lot, we accept Mr Charles Chan’s valuation at $2,349,000,000, which would not create any prejudice to R4 in any event.

RDV of the Lot as at 12 March 2021

170.  Based on the submissions of the parties and on the evidence available to this tribunal, we accept the RDV of the Lot as at 12 March 2021 to be $2,349,000,000, which should be the reserve price for public auction.

ORDERS

171.  For the reasons given in this judgment, we now make the following orders: -

(a)	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;
(b)	Mr Shum Man Wai and Ms Lo Hoi Ying, 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 Lot;
(c)	The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Rowdget W Young & Co dated 14 April 2021;
(d)	For the purposes of the sale of the Lot by public auction: -
	(i)	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
	(ii)	the reserve price be set at $2,349,000,000;
(e)	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
(f)	Liberty to the applicants, the 4th respondent and the Trustees to apply to the tribunal for further directions.

COSTS

172.  Following Good Faith, we make a costs order nisi that the applicants do pay the costs of these proceedings (including any reserved costs) to R4 with certificate for three counsel[85] to be taxed on the High Court scale if not agreed.  Unless any parties apply by summons to vary, this costs order nisi shall become absolute upon expiry of 14 days from the date of this judgment.

173.  Last but not least, we thank Counsel for their able assistance.