BOND STAR DEVELOPMENT LTD v. CAPITAL WELL LTD

CACV 458/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 458 OF 2002

(ON APPEAL FROM LDCS NO. 2000 OF 2001)

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal from a decision of the Lands Tribunal given on 5 December 2002. The application before the Lands Tribunal was an application pursuant to section 3(1)(b) of the Land (Compulsory Sale for Redevelopment) Ordinance ("the Ordinance"). The application was made in respect of a number of lots which were different subdivisions in Inland Lot Number 897 namely: section A of Sub-section 1 of section B of Inland Lot No. 897 and section A of Sub-section 5 of section B of Inland Lot No. 897, the Remaining Portion of Sub-section 5 of section B of Inland Lot No. 897, the Remaining Portion of Sub-section 8 of section B of Inland Lot No. 897, section A of Sub-section 8 of section B of Inland Lot No. 897, and Sub-section 9 of section B of Inland Lot No. 897. These were known as Nos. 24, 26, 28, 30 and 32 Ming Yuen Western Street, Hong Kong. No. 28 shared a common staircase with No. 30, but was not connected to Nos. 24, 26 and 32. The buildings which had been at those addresses had been described as tenements and at the time the application was made they had been demolished. There does not seem to be any real dispute that before they were demolished they had been in what may be termed a run-down condition, furthermore, not only were they old, they had no facilities and they had no lifts. Hence, it can be taken that these buildings had been ripe for demolition so that more modern buildings could be put in their place.

2. Originally, the applicant had acquired title to all properties. However, the applicant's acquisition of flat A, 3rd floor of 28 Ming Yuen Western Street ("the property") was set aside as being an unconscionable bargain. The respondent then acquired title to that flat by paying the previous owners $2.4 million for their interest in the property. Albeit, evidence has been filed that the respondent is in fact beneficially owned by the previous owners. In the intervening time, however, after the commencement but before the conclusion of the action setting aside the applicant's purchase as an unconscionable bargain, the applicant demolished all the buildings on the lots in anticipation of developing the site.

3. In June and July 2001 the applicant made 4 offers to the respondent to purchase the respondent's interest in the property. The first offer was $1.969 million and the final offer was $2.5 million. The respondent counter offered to sell its interest at $15 million. The parties were, thus, so far apart that unless there were to have been a drastic change there was no realistic possibility that any agreement on price could be reached. In those circumstances, the applicant made the application to the Lands Tribunal. After a number of days of hearing, which had been interspersed over more than 8 months, the Lands Tribunal made the following order on 5 December 2002:-

"(1) The values of all the premises of the Lots in the properties Nos. 24 to 32, including the value of the Premises of which the Respondent had a half-share interest, be as set out in Ms. Koo's 2nd report accompanying the Application.

(2) An order that all the undivided shares of the Lots be sold by way of public auction for the purposes of redevelopment of the Lots is hereby granted.

(3) The matters of reserve price, conditions of sale, appointment of trustees, costs and any other ancillary and consequential matters be adjourned to a date to be fixed by the Assistant Registrar, after consultation with counsel's diaries."

4. On this appeal Mr Chain, on behalf of the respondent, took 4 main points.

1. Whether the Ordinance applies to land in respect of which the applicant is already the full owner? If so, how should the Tribunal approach an application in which the applicant asks for an order for sale to include land which the applicant already owns?

2. Whether the Ordinance as it stands applies to vacant land?

3. Whether the effect of the Ordinance is such that it interferes with the market forces and relieves a majority owner from offering the minority owner the "last unit" premium which under normal market forces it would inevitably attract?

4. On the facts of this case, did the Tribunal err in accepting the evidence of the applicant that in calculating the site area a private street should be excluded? In this respect it was said that a minority owner who opposes an order for sale bears no evidential burden when disputing the value of the properties.

The Land (Compulsory Sale for Redevelopment) Ordinance

5. Before turning to the specific questions which arise on this appeal it would be convenient to consider the background to the Ordinance generally. It is clear that the framework of the Ordinance is designed to assist in urban renewal. The long title of the Ordinance reads:-

"An Ordinance to enable persons who own a specified majority of the undivided shares in a lot to make an application to the Tribunal for an order for the sale of all the undivided shares in the lot for the purposes of the redevelopment of the lot; to enable the Tribunal to make such an order if specified criteria are met; and for matters incidental thereto or connected therewith."

6. The scheme of the Ordinance clearly envisages that a person who is preparing to develop a lot that requires development should be able to do so without having to pay an excessive amount for an interest in a lot that it has not been possible to acquire by other means. The corollary of this is that a part owner of only a small proportion of a lot intended to be redeveloped cannot hold the development up by demanding payment of an amount which is unreasonable. The way the Ordinance accomplishes this, as will be seen, is by enabling the Tribunal to make an order for sale of the lot. Thus any order which is made would amount to compulsory acquisition or, at the very least, compulsory deprivation of the land. However, under the Ordinance the minority owner is protected against applications in respect of premises where redevelopment is not required to the extent that before an order can be made it must be established that redevelopment of the lot is justified due to the age or state of repair of the existing development on the lot. If an order for sale is made, the mechanism under the Ordinance is such that the minority owner will receive an amount that includes the redevelopment potential of the lot: see Schedule 2 clause 2(a).

7. The way the Ordinance is structured is as follows. Section 3(1) provides:-

" (1) 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." (emphasis added)

8. A person who makes application under section 3(1) is defined under the Ordinance as being the "majority owner". In section 2 "lot" is defined as follows:-

"(a) means-

(i) any piece or parcel of ground the subject of a Government lease;

(ii) a section which by virtue of section 8(3) or 27(2) of the Government Rent and Premium (Apportionment) Ordinance (Cap. 125) is deemed to be a lot for the purposes of that Ordinance;

(b) includes a section and subsection of a lot;"

It can thus be noted that the word "lot" is defined specifically and, as will be noted below, it is not used in the Ordinance to connote a broad area earmarked by a developer for redevelopment.

9. The valuation report which is required under section 3(1) must set out the assessed market value of each property on the lot without taking into account the redevelopment potential of the property or the lot. See Schedule 1 Part 1.

10. It would appear that there are 2 purposes for the valuation report. The first is so that the Tribunal can assess whether the applicant has taken reasonable steps to try to acquire all the undivided shares in the lot. The applicant is required to show that he has negotiated the purchase of the shares that are owned by a minority owner on terms that are fair and reasonable: see section 4(2)(b). The other purpose for which the valuation report would be used would be if the Tribunal were to make an order for sale. In those circumstances it would be necessary for the Tribunal to assess the apportionment between the majority owner and the minority owner of the lot, the subject of the order for sale, on the basis specified in Schedule 1 Part 3, namely on a pro rata basis in accordance with the values of the respective properties of each majority owner and each minority owner of the lot. Part 3 goes on to require that if is there is a dispute as to the values of the respective properties then the proportions will be on the basis of the values found by the Tribunal.

11. To safeguard the owners from being put under financial pressure by having to pay the full cost of the whole area of the land of which they already own a percentage, there is a provision that the owners may bid at the auction and if one of them bids successfully that owner is not required to pay for the interest that it already owns. The safeguard against abuse by an applicant is that a reserve price based on the redevelopment value must be fixed before any auction is held. In those circumstances, even if the majority owner were to be the only bidder at the auction, it would still have to bid a price that reflected the redevelopment potential of the lot taken on its own: see Schedule 2 clause 2(a). Although the minority owner, who would by this means be effectively bought out, might not be in a position to bid for the whole lot, it would thus benefit from the redevelopment potential of the lot in which it held an undivided share.

Whether the Ordinance applies to land of which the applicant is already 100 percent owner?

12. In my view the first question, whether the Ordinance applies to land that the applicant already owns, is answered by reference to the Ordinance itself. Starting first with section 3(2), it will be noted that this was a provision that was not contained in the Bill as originally published. That subsection reads as follows:-

" (2) Without prejudice to the operation of subsection (5), an application under subsection (1) may cover-

(a) 2 or more lots where the majority owner owns not less than the percentage specified in subsection (1) of the undivided shares in each lot; or

(b) 2 or more lots-

(i) on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings; and

(ii) where the average of-

(A) the percentage of the undivided shares owned by the majority owner in the lot or lots on which one of the buildings stands; and

(B) the percentage of the undivided shares owned by the majority owner in the lot or lots on which the other of the buildings stands,

is not less than the percentage specified in subsection (1)."

13. It seems to me that the purpose of section 3(2) is to provide for 2 situations. The first is where there are 2 lots in respect of which the applicant does not own all the undivided shares. The other is where there is one building connected to another by a common staircase and the 2 buildings straddle two lots. There is the safeguard that the overall average percentage of undivided shares which the applicant owns must still satisfy the 90% rule.

14. As was pointed out in the course of argument by Mr Tong SC, who appeared for the applicant, there is no specific wording in section 3(2)(a) that precludes an application being made by an applicant who owns the entirety of a lot that is the subject of an application. Nevertheless, there would be no purpose in permitting an applicant to join, in an application in respect of one lot, a number of other lots where no order for sale is needed. It is clear from section 4(2) that the legislature envisaged there would be minority owners "of the lot the subject of the application." If one were to apply a purposive construction to the Ordinance it would be clear that such a course would not lead to a construction which would enable an applicant to so apply. The only effect of such an application would be that, if it were granted, all the lots would be sold as the subject of one auction and that a minority owner would be faced with a reserve price reflecting the (larger) size of the subject of the auction. As Mr Chain put it, the effect would be to swamp the minority owner and prevent it from bidding at the auction.

15. Moreover, applying a purposive construction to the Ordinance, it seems to me that the intent behind the Ordinance is that a developer can obtain the last portion of a lot which he does not already own. There is thus no purpose in an owner of a lot asking for an order to put up the lot for auction if he already owns all the shares in that lot. He could do so without an order. Furthermore, as already noted, the Ordinance specifically defines the word "lot". The word "lot" is used throughout the Ordinance, but there is no place in the Ordinance where, as far as I can determine, that word has been used in a loose sense. Whereas, normally the use of a singular noun would include the plural, the drafting of section 3 makes it quite clear that applications in respect of 2 or more lots can only be made in accordance with subsection 3(2).

16. It would put a considerable strain on the construction of the Ordinance if section 3(2) were to be construed in such a way as to permit an application to be made in respect of a number of lots where the applicant already was the full owner of one or more of those lots. As was pointed out in the course of argument, "minority owner" is defined in section 2 as follows "in relation to a lot which is the subject of an application under section 3(1) means the person or persons who owns or own undivided shares in the lot...". If section 3(2) were to be construed as permitting a single application which comprised a lot in respect of which the applicant was not the full owner together with one or more other lots in respect of which the applicant was the full owner, the definition of minority owner would have to be construed as if the words "or one of the lots" were inserted after the word "lot" in both places where the word appeared. This difficulty of construction would exist despite the fact that section 3(2) does not contain reference to the minority owner.

17. No doubt there are practical difficulties which may face a developer, for example, in a situation where the applicant has put together a number of lots and wishes to redevelop them together. If such an applicant owns a number of adjacent lots that are intended to be developed together but is forced to make an application in respect of one lot alone, it may well arise that if that single lot were put up for auction an unrealistic price might be bid for that lot. The person bidding could in effect force the applicant to pay a premium because, unless the applicant were prepared to pay an unrealistic price for the particular lot, he might be deprived of that lot by reason of being out bid at the auction and thus would not be able to pursue his original development. Whilst that is true, it is also relevant to take into account the fact that the majority owner might in such circumstances be forced to bid up to the full redevelopment value, thus benefiting the minority owner.

18. In my view the construction of the Ordinance is clear. In those circumstances, there is no basis to go to the legislative history of the Ordinance, since there is no ambiguity to clarify. Nevertheless, I take some comfort from the fact that at the second reading of the Bill on 7 April 1998 it appears to have been recognised that the legislation would apply to single lots only. Mr Edward Ho is reported to have said:

"The key lies in the Bill being applicable to single lots only. It is therefore not applicable to consolidated redevelopment plans for buildings straddling several lots. As a result, development of pencil buildings will result. From the angle of town planning and of increasing space and basic community facilities for an area, 'pencil buildings' are far from being satisfactory. Hence I hope the Government can look into other ways, which better conform to town planning principles, to help the private sector to conduct redevelopments."

19. Reference was also made it to the "pencil" effect by Mr Ronald Arculli. Mr Ngan Kam-chuen also referred to the "pencil" developments which he referred to as not being conducive to comprehensive urban redevelopment. The Secretary for Planning, Environment and Lands did not say anything to disagree with what had been said in this respect by the members of the Legislative Council.

20. As already noted, the Ordinance provides that the minority owner should obtain a proportion of the redevelopment potential of the lot. Of course, this is dependent upon a successful auction. But, again, the legislation is clearly predicated on the assumption that the applicant will pursue his development. If the applicant does not pursue his redevelopment and no other person seeks to do so, the minority owner is left undisturbed.

Whether the Ordinance as it stands applies to vacant land?

21. Mr Chain relied heavily on the wording of section 4(2) which reads:-

" (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 ..."

22. As he pointed out, there have been no regulations made under subsection (ii). It is said that the ordinary meaning unaffected by other provisions in the Ordinance should be given to subsection 4(2)(a)(i). It was argued that since there were no buildings on the lot, because they had been demolished, the Tribunal was unable to take into account the state of repair of the existing development because there was no existing development.

23. In my view, it is still possible to give effect to this provision in the circumstances of this case. First of all, the state of repair of the existing development was such that all the buildings had ceased to exist. Importantly, the buildings had ceased to exist because they had been demolished for redevelopment. There was no dispute that the pre-existing buildings needed to be redeveloped. In construing section 4(2)(a)(i) I consider that it is justifiable to take into account the state of repair of the buildings on the lot at the time when they were demolished for redevelopment.

24. In this respect sight should not be lost of the fact that section 2 defines "redevelopment" as "in relation to any lot, means the replacement of the building on (or formerly on) the lot". Thus the Ordinance envisages that redevelopment includes building on land were there has formerly been buildings. Moreover, section 3(3)(c)(i)(B) provides for affixing a notice in a case "where there is no building on the lot".

25. In reaching its conclusion, the Tribunal also took into account the argument that, if the respondent's construction were right, it would mean that no one could invoke the Ordinance for the purpose of developing a lot if a dangerous building previously standing on the lot had been demolished even as a result of complying with a building order.

26. In those circumstances, it seems to me difficult to suggest that the Ordinance should be construed as excluding in all circumstances cases where there was no building on the lot.

Whether the minority owner is entitled to a "last unit" premium?

27. As already indicated, it seems to me that the purpose of the Ordinance is to take away the power of the owner of the "last unit" to demand a premium that would stultify a development. What the Ordinance attempts to do is to give the owner of a "last unit" a share in the redevelopment value calculated in accordance with the value of his property. To this extent, the owner of a minority interest who holds out until redevelopment is planned and an application made to the Tribunal, is, at least on paper, in a more advantageous position than he would be if he simply sold his interest in the property as it existed before redevelopment was envisaged. The question, as framed by the respondent, ignores the fact that the Ordinance does give the minority owner of the "last unit" an advantage over "unsuspecting" owners, albeit it takes away the ransom power that the minority owner might otherwise have if he held out.

28. Had I not considered that the intent and meaning of the Ordinance was clear on its face, it would also have been pertinent to point out that the mischief sought to be alleviated by the Ordinance had been precisely the difficulty in obtaining the last unit of a lot, which a developer sought to redevelop. That meant that redevelopment by private developers had been hampered if not stultified by the owners of "last units" demanding an unrealistic premium; see generally the debate in the Legislative Council on the second reading of the Bill, 7 April 1998.

Whether in calculating the site area a private street should be excluded?

29. At the hearing before the Tribunal, the respondent applied for and was permitted to amend Form 33 to include an allegation that the applicant's valuation wrongly calculated the area of the site by excluding a portion thereof known as "road area". However, the Tribunal recorded that it was expressly stated on behalf of the respondent that a positive case on this issue of the road was not being advanced. It was not, apparently, submitted that Ming Yuen Western Street was not a private street. Counsel for the respondent only took exception to what he submitted was a lack of evidence from the applicant as to why at least part of the 22 ft. 6 in. private street could not be built upon as part of the redevelopment of the lot.

30. The Tribunal found that the applicant's surveyor, Ms. Koo, was correct to exclude the "road area" from the site area of the lot as it was common case that the road area had been used as a private street by the owners of the lot and the adjoining owners for the purpose of passage for a long time. On the evidence, the Tribunal came to the conclusion that it had no reason to disagree with Ms. Koo that the road area should be excluded for the purpose of calculation of the site area of the lot. This was because under Regulation 23(2) of the Building Ordinance (Cap. 123):-

" In determining for the purposes of regulation 20, 21 or 22 the area of the site on which a building is erected -

(a) no account shall be taken of any part of any street or service lane; and

(b) there shall be included any area dedicated to the public for the purposes of passage."

31. This point appears to be a narrow question of whether the Tribunal should have accepted the evidence of the applicant's witnesses. Mr Chain does not dispute the fact that if the street in question was being used as a street, then the Tribunal was correct in its approach. The only question then is whether the Tribunal was correct in accepting the only evidence that was before it.

32. In reviewing the evidence that was before the Tribunal, one starting point is a consideration of the assignments relating to the various lots. The original assignment in relation to 28 Ming Yuen Western Street was expressed to be subject to a right of way for the owners and occupiers for the time being of other portions of section B of Inland Lot No. 897 and all other persons having the like right from time to time. That area was marked on the plan which was attached to the assignment. That depicts an area which is marked Ming Yuen Western Street, the section is marked as being 22 ft. 6 in. wide. Similar assignments in respect of the other lots i.e. 24, 26, 30 and 32 Ming Yuen Western Street also show similar rights of way. Interestingly however, the assignment in respect of Section B, subsection 5, 26 Ming Yuen Western Street, shows that although the right of way may have been 22 ft. 6 in., Ming Yuen Western Street extended a further 17 ft. 6 in. i.e. a total of 40 ft. In this respect it is not irrelevant to point out that the development plans, which have been approved by the Building Authority, show Ming Yuen Western Street to be 12.19 metres. This is the exact equivalent of 40 feet. There is no evidence that any right of way has been given up, lost or extinguished.

33. Furthermore, our attention was drawn to evidence given by Mr Kenneth Tang, a director of the applicant, that the road area was a private street even in 1999 when the demolition with a view to redevelopment commenced. That was not challenged. Mr Au-Yeung, the project manager, referred to the authorised person as the source of authority for saying that the road area should be excluded. As the respondent's counsel acknowledged that the entire Ming Yuen Western Street is a private street, I do not see that the Tribunal can be faulted in taking the view which it did.

34. The only question then remaining, therefore, was the subsidiary argument as to whether a smaller road could be constructed and still comply with the various regulations. In the first place, this seems to me to be quite a different point from whether the Tribunal should have accepted evidence that Ming Yuen Western Street was a street. In the second place, this seems to go simply to the question of the redevelopment potential of the lot and that is not a matter which has yet been dealt with. In any event, given the assignments showing the right of way, in the absence of any evidence that the right of way has been extinguished or otherwise ceased to exist, I cannot see that this argument could be sound.

Conclusion

35. Whereas, as I have already indicated, I consider that the application should not have been made in respect of those lots of which the applicant was the full owner, I do not consider that there would be any prejudice if the application were treated as relating simply to Remaining Portion of Section 8 of Section B of Inland Lot in No. 897 (i.e. No. 28). The issues which the Tribunal has decided in relation to that lot have not been challenged. The Tribunal has reserved for further consideration the matters that are set out in paragraph (3) of its order. In those circumstances, the matter can be remitted to the Tribunal for consideration of those matters in respect of that lot. The only question which might arise is as to whether the applicant was entitled to make an application under section 3(2)(b) on the basis that the building on No. 28 Ming Yuen Western Street had been connected to an adjacent building by a staircase for common use. This point has not been argued as such.

36. I would therefore dismiss this appeal in so far as it relates to 28 Ming Yuen Western Street, namely the Remaining Portion of Sub-section 8 of section B of Inland Lot No. 897. The parties should be at liberty to apply in relation to the proper form of order having regard to whether the Tribunal should treat the application as relating to an adjacent lot. I would make an order nisi that one half of the costs of this appeal be to the applicant. Since the Tribunal has not, as yet, made any order as to costs, no order is required in that respect.

Hon Yeung JA:

37. I have the advantage of reading the draft judgment of Hon Rogers VP. I agree with his judgment and would also make the order set out in paragraph 36 hereof. I only wish to add the following.

38. Under s.4 (2)(b) of the Ordinance, the applicant (the majority owner) is obliged to satisfy the Tribunal that it has taken reasonable steps to acquire all the undivided shares in the lot.

39. Reasonable steps to acquire the undivided shares must include offering a fair and reasonable price for the undivided shares to the respondent (the minority owner).

40. In deciding if the applicant has taken reasonable steps, including offering a fair and reasonable price to the respondent, it is necessary to look at all the surrounding circumstances.

41. From the background of the case, it is clear that when the respondent acquired the undivided shares in question for $2.4 million on 22 June 2000, its intention was to seek an unreasonably high price for such undivided shares. That explains why despite the repeated offers made by the applicant ranging from$1.969 million to $2.5 million, the respondent only responded by asking for $15 million (6 times the price it paid for) despite the general declining property market.

42. It must be borne in mind that the offer of $2.5 million by the applicant already exceeds the valuation figure suggested by a professional valuer.

43. Under Schedule 2 of the Ordinance, the Tribunal (in ordering a sale by auction) has to set a reserve price, which takes into account the redevelopment potential of the lot on its own (or, where 2 or more lots are the subject matter of the auction, on their own).

44. Such reserve price (reflecting the redevelopment potential) does confer upon the minority owner an added premium.

45. I do not agree, however, with the suggestion that there should be any other form of "last unit premium".

46. There may well be such "last unit premium" (which is not susceptible to any logical nor reasonable assessment) in a free market. The majority owner may well want to avoid the need to make an application under the Ordinance to avoid delay or other difficulties. These are just commercial decisions in a free market.

47. The Ordinance itself makes no reference to any "last unit premium". There is no indication as to how such "last unit premium" should be assessed.

48. In enacting the Ordinance, it is clearly the intention of the legislation to prevent "last unit(s) owner)s" from extorting unreasonable high price(s) for their unit(s), as the respondent did.

49. The approach suggested by Mr. Chain completely defeats the intention of the legislation.

50. In my view, in deciding if the price offered by the majority owner is fair and reasonable, the so-called "last unit premium" (whatever it may be) should be disregarded; and in setting a reserve price under Schedule 2 of the Ordinance, any "last unit premium" (other than the redevelopment potential) should also be ignored.

Hon Yuen JA:

51. I agree with the judgment of Hon Rogers VP.