PACIFIC CROWN ENTERPRISES LTD v. MAN YU ON AND OTHERS

LDCS32000/2011

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO. 32000 OF 2011

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DECISION

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1.  This is the application of Topbase International Limited trading as New Kwok Wah Meat Co. (“Topbase”) to join in these proceedings as a respondent.  The application is opposed by Pacific Crown.

Background

2.  Pacific Crown is the majority owner of two lots of land known as Nos 10 and 12 of Kimberly Street (“the Lots”).  It took out an application on 9 September 2011 (“the Main Application”) for the compulsory sale of the Lots under the Land (Compulsory Sale for Redevelopment) Ordinance (“the Ordinance”) against the minority owners thereof:

(a)  the 1st respondents, who used to own Shop 3 on G/F of No 10 of Kimberly Street; and

(b)  the 2nd respondents, who own 5/F of No 12 of Kimberly Street.

3.  Pacific Crown has since acquired the 1st respondents’ property and discontinued the proceedings against them.  A pre-trial review has been set for 18 January 2013 for the Tribunal to consider if the case is ready for trial.  Recently, the 2nd respondents have indicated it will no longer oppose the application and the parties have suggested bringing forward the pre-trial review.

4.  Topbase is the tenant at two properties on the Lots, namely, Shops A and B on G/F of No 12 Kimberly Street.  The tenancy for Shop A is for 3 years and will run up to 11 March 2014, whereas the tenancy for Shop B is for 5 years up to 31 July 2015. The original landlord of Topbase has sold the shops to Pacific Crown subject to the tenancies.

5.  By an application dated 30 September 2011 (“the Connected Application”), Topbase applied against Pacific Crown for determination of the amount of compensation to be paid in the event of termination of the tenancies under s 8(1)(b) of the Ordinance following the making of an order for sale by the Tribunal.  The parties in the Connected Application have been referred to mediation.

Topbase’s joinder application

6.  According to the affirmation filed by Topbase’s director in support of its joinder application, Topbase is conducting a business of supply and sale of frozen meat, poultry and seafood to restaurants, hotels and retail customers at the shops.  It has been planning to expand its business by opening one more shop dedicated to the sale of high-end meat products and Halal meat.  The uncertainty of the tenancies has caused disturbance in their business and the director complains that:

(a) Topbase has been kept in the dark about the progress of the Main Application.

(b) Topbase should be able to derive some benefits from the compulsory sale of the Lots.

(c) The Ordinance does not provide for compensation to be paid to Topbase in the event of an unsuccessfully application or sale.

7.  Mr Heung, the solicitor appearing for Topbase, submits that Topbase “should not be forced to passively wait for the outcome of the Main Application and be confined to a statutory claim for monetary compensation.  It should be allowed to join in the Main Application to defend its property rights under the tenancies.”  He puts forward three bases for his proactive approach:

(a) Since Topbase is directly affected by the outcome of the Main Application, natural justice demands that it be allowed to participate in the Main Application to defend its property rights under the tenancies.

(b) The Tribunal may give direction in the Main Application under s 4(6)(a)(ii) of the Ordinance relating to the termination of Topbase’s tenancies.

(c) The 2nd respondents’ stance not to oppose the Main Application makes no commercial sense.  He suspects that Pacific Crown has deliberately chosen not to settle with the 2nd respondents so as to invoke s 8(1)(b) of the Ordinance to ensure early termination of Topbase’s tenancies.

Discussion

8.  In my view, Topbase’s joinder application is misconceived having regard to the statutory scheme.

9.  The long title of the Ordinance suggests that it was enacted “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 of 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.”

10.  Riberio PJ has, in Capital Well Ltd v Bond Star Development Ltd [2005] 4 HKLRD 363 at para 10-21, summarised an application for compulsory sale under the Ordinance into four distinct phases: (i) the application; (ii) the Tribunal’s determination; (iii) the sale; and (iv) the apportionment and application of the proceeds of sale. 

11.  In the first phase, an applicant who is eligible under s 3(1) of the Ordinance (called “majority owner”) applies to the Lands Tribunal for an order for the compulsory sale of the lot in question, joining all other persons owning the remaining undivided shares in the lot (called “minority owners”) as respondents (s 2).  Such an application is called a “main application” in Part XIVA of the Lands Tribunal Rules. 

12.  In the second phase, the Tribunal determines any dispute as to the valuation of the properties comprising the lot and decides whether a compulsory sale order should be made (s 4(1)).  The Tribunal is obliged to hear the dispute of any minority owner on the lot (s 4(1)(a)(i)).  In case any minority owner cannot be found, the majority owner will have to satisfy the Tribunal that the value of that minority owner’s property as assessed in the application is fair and reasonable (s 4(1)(a)(ii)).  And the Tribunal shall not make an order for sale unless it is satisfied, after hearing the objections of the minority owners, that the redevelopment of the lot is justified and that the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (s 4(2)). 

13.  The third phase is the sale of the lot.  This is conducted by the trustees appointed by the Tribunal and subject to the directions of the Tribunal (s 4).  The lot is usually sold by public auction to the highest bidder (s 5), subject to a reserve price to be approved by the Tribunal (sch 2). 

14.  The fourth phase is the apportionment and application of the sale proceeds.  The trustees will apportion and distribute the proceeds, after deducting the sale expenses and legal costs, to the majority owner and the minority owners on a pro rata basis in accordance with the value of their respective property as assessed in the s 3(1) report filed with the application subject to any adjustment made by the Tribunal (s 11). 

15.  So, the focus in the first phase is to include all relevant parties in the main application.  A mere tenant who does not own any undivided share in the lot is not normally qualified to be included.  In the second phase, the Tribunal will determine whether the redevelopment of the lot is justified and whether the majority owner’s valuation of the properties comprising the lot should be adjusted.  It is unlikely that a tenant, who only has a limited interest in the leased property (in terms of his right to use the property for the duration of the lease subject to payment of the agreed rent and other terms of the tenancy), will be concerned with the redevelopment of the entire lot.  A tenant, who is not the recipient of any offer from the majority owner for the acquisition of the leased property, will not be in a position to judge whether the majority owner has taken reasonable steps to acquire the lot.  And since he is not the owner, a tenant should not have a say as to the valuation of the leased property.  That is why the Ordinance is silent on the participation of a tenant in the first phase and only obliges the Tribunal to hear the minority owners in the second phase.  A tenant does not feature in the third phase, and the order and manner of application of the proceeds of sale in the fourth phase is statutorily provided.

16.  Mr Heung recalls that he has seen a bank being named as a respondent in a main application.  He is, however, unable to identify the proceedings concerned and he does not know the circumstances under which the bank was joined.  It would be difficult for me to comment on such a general statement except to observe that a mortgagee in possession of any property on the lot the subject of a main application is deemed to be the owner of the undivided shares relating to that property (s 2(3)(a)).

17.  Where the Tribunal makes an order for sale and the lot is sold, all tenancies on the lot will, subject to any direction made under s 4 (6)(a)(ii), be deemed to be terminated immediately upon the day on which the purchaser of the lot becomes the owner of the lot (s 8(1)(b)).  The Tribunal may order compensation to be paid to a tenant for termination of his tenancy under s 8(1)(b) and, for that purpose, the Tribunal will consider the representations, if any, of the tenant (ss 4(6) and 8(3), (4) and (5)).  If a tenant wishes to make representations on the compensation to be paid to him, he should file a “connected application” in accordance with Part XIVA of the Lands Tribunal Rules.  The trustees will automatically retain out of the proceeds to be paid to an owner the amount of compensation directed by the Tribunal to be paid by that owner to his tenant and pay to the tenant directly (s 11(2)(c) and (4) and s 4(6)(a)(iii)).

18.  By the foregoing analysis, it is clear that the legislative scheme does not normally anticipate the participation of a tenant such as Topbase in a main application. 

19.  Mr Heung submits that the court would be in breach of basic principle of natural justice if Topbase is not afforded an opportunity to be heard in the Main Application.  He prays in aid the following judgment of Hoffmann J (as he then was) in Re First Express Ltd [1992] BCLC 824 (at 828e):

“I am firmly of the view that it was wrong for the application to be made ex parte. It is a basic principle of justice that an order should not be made against a party without giving him an opportunity to be heard. The only exception is when two conditions are satisfied. First, that giving him such an opportunity appears likely to cause injustice to the applicant, by reason either of the delay involved or the action which it appears likely that the respondent or others would take before the order can be made. Secondly, when the court is satisfied that any damage which the respondent may suffer through having to comply with the order is compensable under the cross-undertaking or that the risk of uncompensatable loss is clearly outweighed by the risk of injustice to the applicant if the order is not made.”

20.  In my view, Mr Heung’s reliance on that authority is misplaced.  In that case, the company was put into creditor’s voluntary liquidation.  Its bankers exercised their right under a charge to appoint receivers over the assets of the company.  The receivers applied ex parte to the Registrar for and obtained an order requiring the liquidator to hand over the books and records of the company and all moneys held by him on behalf of the company.  The liquidator failed to comply with the order and the receivers applied to commit the liquidator for contempt.  The liquidator, on the other hand, applied for discharge of the Registrar’s order arguing, inter alia, that the original application should not have been made ex parte.  Hoffmann J agreed with the liquidator on that point for the reasons quoted above. 

21.  The present case is very different.  The issues in the Main Application do not concern Topbase. Mr Lee also confirms at the hearing that Pacific Crown is not seeking any order or direction under s 4(6)(a)(ii) or otherwise against Topbase in the Main Application.  So, the proposition discussed in the above quotation is not engaged at all.

22.  In my view, the fallacy in Topbase’s argument is in its overemphasis on its “property rights under the tenancies”.  It seems that Topbase is equating such right with ownership of some undivided shares in the Lots.  That is why its director has suggested that Topbase should be able to derive some benefits from the compulsory sale.  That is not right.  The natural place for a tenant, according to the scheme of the Ordinance, is in a connected application to claim for compensation upon the determination of his tenancy.  That is the extent of their involvement and they may not otherwise share in the windfall from the compulsory sale.

23.  Topbase has already filed the Connected Application against Pacific Crown.  As explained in an earlier ruling dated 19 December 2011 by Deputy Judge Kot in the Connected Application, the Main Application will come on for trial before the Connected Application (see para 12 of the ruling).  Topbase, not being a natural party to the Main Application, will have to justify why it is necessary for it to participate in the Main Application.

24.  On this, Mr Heung has said that the stance adopted by the 2nd respondents in not opposing an order for sale makes no commercial sense to him.  He suspects that Pacific Crown and the 2nd respondents must have elected not to settle but to press on with the Main Application so that Pacific Crown may eventually take advantage of s 8(1)(b) to determine Topbase’s tenancies earlier upon the making of an order for sale.  He submits that Topbase should be given a chance to cross-examine Pacific Crown (or even the 2nd respondents) on their election. He says this is part of the investigation directed under s 4(2)(b).  I do not agree.

25.  The relevant tenancy agreements have not been placed before the court and it is not known if Pacific Crown is entitled to determine Topbase’s tenancies before the expiry of the original terms apart from s 8(1)(b).  So, Mr Heung’s conspiracy theory remains a possibility.  But Mr Lee, counsel for Pacific Crown, has put forward other innocent explanations.  For example, he says the 2nd respondents may wish the Lots to be sold to the highest bidder in a public auction so that the best price according to market force can be obtained (s 5(5)(a)) or the 2nd respondents may even be planning to bid for the Lots themselves in a public auction for redevelopment (s 5(5)(b)).

26.  More importantly, I do not see how an investigation under s 4(2)(b) on the reasonableness of the steps taken by Pacific Crown to acquire all the undivided shares in the Lots can evolve into a consideration of why Pacific Crown did not settle with certain minority owner.  The fact that Pacific Crown has not settled with all the minority owners does not necessarily mean that Pacific Crown has been unreasonable in its attempt to acquire all the undivided shares.

27.  In the course of argument, I asked Mr Heung what Topbase has hoped to achieve by participating in the Main Application.  He says he has no instruction to adduce expert evidence to challenge the justification put forward by Pacific Crown for redevelopment. He merely reiterates his wish to cross-examine Pacific Crown on the steps taken by it in acquiring the Lots.  I do not see how Topbase can have any legitimate basis to cross-examine Pacific Crown in that regard when Topbase, who is not a minority owner, knows nothing about the steps taken by Pacific Crown to acquire the Lots.  I agree with Mr Lee that the proposed course of Topbase is nothing more than a fishing expedition.  Even if Mr Heung is correct in his suspicion, I do not see how Pacific Crown can be criticised for relying on s 8(1)(b) to determine Topbase tenancies.

28.  It is not disputed that a tenant such as Topbase whose tenancy will be statutorily determined upon the making of an order for compulsory sale will suffer some inconvenience.  That will be taken care of separately in the tenant’s connected application.  I do not see how a tenant can guard against its interest in the event of an unsuccessful application or sale by proactively participating in the main application.

29.  Upon closer analysis, it does not appear that the inconvenience to be suffered by Topbase would be as much as that suggested by its director.  The tenancy for Shop A is due to expire in March 2014.  A pre-trial review for the Main Application has been set for January 2013.  There is a pending application to bring forward the pre-trial review.  If that application is acceded to and a trial date is set forthwith, it is likely that the Main Application will come on for trial sometime in about mid-2013.  Assuming there will be a swift determination of the application (as the 2nd respondent no longer opposes the application) and an auction is held within 3 months after the making of the order for sale (s 5(4)(a)), and allowing some time for the purchaser to complete (whereupon Topbase’s tenancies will be determined under s 8(1)(b)(i)) and affording Topbase the full benefit of a 6-month period to vacate the shops (s 8(1)(b)(ii)), the tenancy for Shop A would have expired by the time Topbase is statutorily required to vacate the premises.  That much is accepted by Mr Heung.  By his own estimation, the tenancy for Shop B (which will not expire until July 2015 according to its original term) would be cut short by about 1 to 1½ year.  So, that is the extent of the inconvenience that Topbase will suffer.  There is nothing to suggest that Topbase will not be adequately compensated by a suitable order for compensation in the Connected Application.

30.  Lastly, Pacific Crown has complied with the Ordinance and caused the prescribed notice to be affixed at the main entrance of the buildings in the Lots and to be advertised in newspapers to inform all tenants on the Lots of their application (s 3(3)(c) and Part 2 of Schedule 1).  That was how Topbase was able to commence the Connected Application so soon after the Main Application.  Topbase will be kept informed of the hearings in the Main Application (r 78D of the Lands tribunal Rules).  There is no substance in its complaint that Pacific Crown has kept in the dark about the progress of the Main Application.

Conclusion

31.  For the above reasons, the natural forum for Topbase is in the Connected Application and I see no basis for it to join in the Main Application.  Topbase’s joinder application is therefore dismissed.

32.  I have heard argument on costs.  Both Mr Heung and Mr Lee agree that costs should follow the event.  I make an order that Topbase do pay Pacific Crown the costs of the application to be summarily assessed on the District Court scale if not agreed.  I am satisfied that by reason of the novelty of the point taken by Mr Heung and the relatively infant state of the Ordinance, the engagement of counsel (Mr Lee) to resist the application is justified.  I grant certificate for counsel to Pacific Crown.

33.  I direct Pacific Crown to lodge into the Tribunal and serve on Topbase a statement of costs in the format in Appendix A of Practice Direction 14.3 within 28 days after this decision is handed down, thus allowing some time for the parties to agree on costs.  Topbase is directed to lodge and serve a concise statement of its objections within 14 days thereafter.  The summary assessment will be conducted by me on paper unless otherwise directed, and the parties will be informed of the result in due course.