VENNEX LTD v. LEUNG CHUNG CHING AND OTHERS

LDCS 6000/2009

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LANDS COMPULSORY SALE APPLICATION No. 6000 of 2009

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JUDGMENT

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The Application

1.  This is an Application made underthe Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) for an order of compulsory sale of all the undivided shares of and in Remaining Portion of Section A of Inland Lot No. 1095 (Nos. 90, 92, 94, 96, 98 and 100 Hill Road, Hong Kong) (“the Lot”).

2.  It is not in dispute that a building known as Precious Hill Mansion (“the Building”) is erected on the Lot. The Building is a single block building with shops on the ground floor, stores at the cockloft level and 6 residential units on each floor from the 1^st to 7^th floors. 2 common staircases, accessible from the ground level on Hill Road and the service lane to the roof serve as the vertical access in the Building. The 2 units at the cockloft level at Nos. 90 and 92 Hill Road are served by their exclusive staircases running from the ground level on the Hill Road. The Building was completed in 1967 and was about 43 years old.

3.  The Applicant was the registered owner of all the undivided shares of the Lot with exclusive right to use all the units of the buildings (“the Applicant’s Units”), except 1 undivided share (out of 49) of the Lot held by the 1^st Respondents with exclusive right to use the unit at cockloft level of No. 92 Hill Road (“the 1^st Respondents’ Unit”) and 1 undivided share (out of 49) of the Lot held by the 2^nd Respondent with exclusive right to use the domestic unit at No. 92 Hill Road (“the 2^nd Respondent’s Unit”).

4.  It is not in dispute that the Applicant has 95.92% undivided shares of Lot.

The 1^st Respondents’ Representation and their Stance

5.  On the day of hearing, the 1^st Respondents, through their solicitors, instructed Counsel, Mr. Benjamin Chain, to appear on their behalves to apply to strike out the present Application. I was informed by Mr. Chain that he had only limited instructions to make this striking out application and no more. He said that he had no further instruction to represent the 1^st Respondents in the rest of the proceedings.

6.  With the above understanding, since the parties were in fact ready for the trial to proceed, I indicated that I was going to hear the striking out application first and would treat it as one of the grounds of opposition, even no formal Notice of Opposition was filed by the 1^st Respondent. In other words, if I were to accept the 1^st Respondents’ submissions on this striking out application, I would dismiss the Application entirely instead of granting an order to strike out the same.

7.  After Counsel for the 1^st Respondents finished his submissions on the striking out application, leave was granted for the Counsel and solicitors for the 1^st Respondents to be excused from the rest of the proceedings. The 1^st Respondents were, then, represented by the 2^nd named 1^st Respondents, namely Mr. Leung Nai Ping.

8.  After Mr. Leung had certain discussion with the Counsel of the Applicant, Miss Verna Lui, I was told that 1^st Respondents did not take any further issues of this Application but only put the Applicant to straight proof.

The 2^nd Respondent’s Stance

9.  Despite sufficient notice was given to the 2^nd Respondent, including publication of notices in the Chinese and English Newspapers in Hong Kong and posting of notices at the main entrance of the Building, the 2^nd Respondent never appeared nor has he ever participated in the proceedings. I am satisfied that the 2^nd Respondent should have been aware of the proceedings but has chosen not to participate. I shall deal with this Application in the absence of the 2^nd Respondent.

The 1^st Respondents’ Opposition and the Striking Out Application

10.  The 1^st Respondents’ primary opposition was raised by way of a striking out application. The application was only made orally by the Counsel for the 1^st Respondents on the day of the trial.

11.  The 1^st Respondents complained that the Applicant failed to comply with the requirements set out in section 3(1) of the Ordinance, and more particularly, in Part 1 of Schedule 1 of the Ordinance.

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

“……, 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.  Part 1 of Schedule 1 of the Ordinance states that:-

“A valuation report, prepared not earlier than 3 months before the date on which the application under section 3(1) of the Ordinance is made, setting out the assessed market value of each property on the lot-

(a) on a vacant possession basis;

(b) assessed as if the lot could not be made the subject of an application for an order for sale; and

(c) not taking into account the redevelopment potential of the property or the lot.”

14.  It is not in dispute that the present application was made on 30 June 2009 and the accompanied valuation report as required by the Ordinance was prepared by Mr. Henry H. Y. Cheng, MRICS MHKIS, Chartered Valuation Surveyor on 2 April 2009. However the date of valuation as stated in the report was 19 March 2009 which was outside the 3 months from the date of the Application.

15.  The 1^st Respondents submitted that “A valuation report, prepared not earlier than 3 months before the date on which the application under section 3(1) of the Ordinance is made…” meant that the “date of valuation” has to be within 3 months before the date of the Application but not the “date of report”. In other words, the relevant date was not the date of the report but the date of valuation, namely the date which the market value was made reference to.

16.  Mr. Chain submitted that I should adopt a purposive approach in construing the Ordinance. He also relied on section 19 of the Interpretation and General Clauses Ordinance, Cap. 1, namely:-

“An Ordinance shall be deemed to be remedial and shall receive such fair, large and liberal construction and interpretation as will best ensure the attainment of the object of the Ordinance according to its true intent, meaning and spirit.”

17.  Mr. Chain argued that it was meaningless if the Ordinance only required the Applicant to file a valuation report dated within 3 months before date of the Application but the date of valuation could be any date in the past, so long as the report was signed within 3 months before the date of Application.

18.  The authority, Intelligent House Ltd. v. Chan Tung Shing & others [2008] 4 HKC 421, was also relied on by the 1^st Respondents to argue that section 3(1) and Part 1 of Schedule 1 of the Ordinance meant that the “date of valuation” but not the “date of report” should be within 3 months before the date of the Application. At paragraph 59(2) of the Judgment, the Tribunal held that the “… date of such valuation is one which is within three months of the application”. According to the 1^st Respondents, the Tribunal (of different composition) in this previous decision, in discussing section 3(1) and Part 1 of Schedule 1 of the Ordinance, only referred to the “date of valuation” instead of the “date of report”. This therefore suggests that the Tribunal also agreed with the 1^st Respondents’ submissions.

19.  The 1^st Respondents further submitted that since this valuation was for determination of the existing use values (‘EUV”) of various units of the Building and the EUV were relevant to the apportionment of proceeds of the sale among owners, it made sense that the Ordinance required the Applicant to prepare the valuation on a date within 3 months before the date of Application. This could ensure that the apportionment was to be done with reference to an up-to-date valuation or at least, a valuation close to the commencement of the Application. Further, since the minority owners were not entitled to select the date of valuation, the 1^st Respondents therefore suggested that the Ordinance should somehow, for fairness, limit the choice of dates of valuation by the Applicant. If this was construed otherwise, no such purpose could be achieved.

20.  Counsel for the Applicant, Miss Lui, first of all, complained that this striking out application was raised rather late in the proceedings and no Notice of Opposition was filed at all. Mr. Chain argued that, although accepting that this was a rather late application and no Notice of Opposition was filed, the 1^st Respondents were entitled to take the point if this went to the foundation of the Application. I agree with Mr. Chain. If this issue turns on whether the Applicant was entitled to make the present Application or not, in my judgment, this could properly be raised at the beginning of the trial. As I have mentioned above, I shall deal it as one of the grounds of opposition.

21.  Miss Lui further submitted that the entire argument of the 1^st Respondents was misconceived. She suggested that one should read the relevant provisions and, without much difficulty, one would easily come to a plain and obvious conclusion that the Ordinance only required the Applicant to file a valuation report “… prepared not earlier than 3 months before the date on which the application under section 3(1) of the Ordinance is made…” but not a report containing a valuation with its date of valuation within 3 months before the date of Application. She emphasised the words “report” and “prepared”. A report was prepared when it was completed and signed. In other words, it was clear and unambiguous that the completion of the valuation report should be within 3 months before the date of Application but not the date of valuation. She also submitted that nothing in the Ordinance suggested otherwise.

22.  Indeed, Mr. Chain’s argument was a forceful one and it appeared to make a lot of sense, in particular, to limit the choice of valuation dates for the EUV within 3 months before the Application. However, if this was not the legislative intention, no matter how sensible the 1^st Respondents’ suggestion was, this Tribunal should not change intention of the legislature. In my judgment, I agree with Miss Lui’s submissions that the relevant provisions of the Ordinance are straightforward. It is plain, clear and unambiguous. The Applicant was only required to file a valuation report which was prepared, signed or completed within 3 months before the date of Application and no more. I do not see that there is any legislative intention requiring that the “date of valuation” should be within 3 months at all, no matter how liberal one reads it. I also do not see why this could not be clearly spelt out in the statute, if what the 1^st Respondents’ suggestion is right. This should not be difficult at all. The most important consideration was the object of the Ordinance. I simply do not see that there was such object as suggested by the 1^st Respondents at all. What the 1^st Respondents have suggested in their submissions, was, perhaps, simply an improvement to the current scheme which I shall leave that for the legislature to discuss and consider in the future.

23.  In my judgment, the 1^st Respondents’ argument that the valuation date could be any date in the past was neither here nor there. I do not see why this could not be so, as long as the valuation is a fair and reasonable refection of the relativity of the EUV between the different units of the Building for a proper distribution of sale proceeds. There was no evidence adduced before me that the relatively of EUV would only be fair and reasonable when the date of valuation was within 3 months before the Application.

24.  Intelligent House Ltd. (supra) is a very useful authority on many aspects of an application for compulsory sale made pursuant to the Ordinance. However, the issue in that case did not turn on whether or not the “date of valuation” should be within 3 months before the date of Application. The reference in the judgment to the “date of valuation” did not provide much assistance to my determination for the present Application.

25.  In my judgment, this Tribunal should not impose a further requirement which was plainly not the object of the Ordinance. I am satisfied that the Applicant was entitled to make this Application pursuant to section 3(1) of the Ordinance and the requirements as set out in section 3(1) and Part 1 of Schedule 1 of the Ordinance were complied with. By reasons of the above, I hereby dismiss the striking out application taken out by the 1^st Respondents.

Valuation of the Existing Use Values (“EUVs”) as per Part 1 of the Schedule 1 of the Ordinance

26.  Under section 4(1)(a) of the Ordinance, it is the duty of this Tribunal to determine the dispute, if any, on the EUV valuation undertaken in the valuation report filed pursuant to section 3(1)(a) of the Ordinance. Since the 1^st Respondents raised no opposition against EUV valuation filed by the Applicant (except the striking out point which I have already dealt with), as far as the 1^st Respondents are concerned, there was no dispute for determination. However, if a minority owner cannot be found, like the 2^nd Respondent in the present case, pursuant to section 4(1)(a)(ii) of the Ordinance, the Applicant has a duty to satisfy this Tribunal that the values of the Respondents’ Units as assessed in this application were not less than fair and reasonable, and in particular, when compared with the values of the Applicant’s Units.

27.  After reading and reviewing the valuation reports dated 2 April 2009 prepared by Mr. Cheng, I am satisfied that the EUV of the 1^st Respondents’ Unit and the 2^nd Respondent’s Unit as assessed by Mr. Cheng satisfied the above test that they were not less than fair and reasonable, and in particular, when compared with the EUV of the Applicant’s Units. I accept the opinion of Mr. Cheng that direct comparison method was an appropriate valuation method for these properties. And I also accepted that the valuation was based on good market comparable transactions with suitable adjustments. According to Mr. Cheng, the EUV for $1,440,000 of the 1^st Respondents’ Unit represents 2.35% of total EUV of the Lot and the EUV for $1,500,000 of the 2^nd Respondent’s Unit represents 2.45% of total EUV of the Lot. The EUV of all the units of the Buildings accepted by this Tribunal are:-

	Existing Use Values ($) as at 19 March 2009
	Hill Road
Floor	No.90	No.92	No.94	No.96	No.98	No.100
7/F	1,070,000	830,000	940,000	940,000	1,350,000	1,020,000
6/F	1,090,000	840,000	960,000	960,000	1,380,000	1,040,000
5/F	1,110,000	860,000	980,000	980,000	1,410,000	1,060,000
4/F	1,140,000	880,000	1,000,000	1,000,000	1,440,000	1,080,000
3/F	1,160,000	900,000	1,020,000	1,020,000	1,470,000	1,110,000
2/F	1,180,000	910,000	1,040,000	1,040,000	1,500,000	1,130,000
1/F	1,210,000	930,000	1,060,000	1,060,000	1,530,000	1,150,000
Cockloft	760,000	1,440,000	-	-	-	-
G/F	-	2,610,000	2,770,000	3,150,000	2,830,000
G/F (90A)	750,000
G/F (90B)	1,200,000
Total	61,290,000

Justification for Redevelopment and Reasonable Steps Taken

28.  Another determination under section 4(1)(b) of the Ordinance is whether the order of compulsory sale shall be made. According to section 4(2) of the Ordinance, this would involve 2 statutory requirements, namely:-

(1)  Is the redevelopment of the Lot justified due to age or state of repair of the Buildings; and

(2)  Has the Applicant taken reasonable steps to acquire all the undivided shares in Lot.

29.  If the Applicant fails to satisfy this Tribunal that the above statutory requirements are met, despite the fact that the both Respondents do not adduce any evidence to contest the same, an order of compulsory sale ought not be granted.

30.  For requirement (1) above, I have taken into consideration of the expert opinion of :- (a) Mr. Raymond Y. M. Chan, FRICS FHKIS, a Chartered Building Surveyor and an Authorized Person as stated in his Condition Survey Report dated 26 April 2010; and (b) Ir. Barry T. C. Liu, a Registered Structural Engineer and Authorized Person as stated in his structural Survey Report dated April 2010. The experts were of the view that that the Buildings is in poor and dilapidated condition, namely :-

(1)  The ceiling soffits which are directly underneath the upper roof, main roof and flat roofs, have serious water seepage and extensive concrete spalling;

(2)  The waterproofing system of the roofs is defective and has reached the end of its serviceable life;

(3)  The external walls are defective, with water seepage problems and cracks noted near most of the window openings;

(4)  Some windows are corroded with missing window sashes;

(5)  The abandoned nails, unauthorized racks and canopies attached to the external walls cause concrete defects;

(6)  There are a number of delaminations on the external facade of the Building;

(7)  Unauthorised building works are identified and are not safe structures by themselves and they affect the structural stability and accelerate the deterioration of the Buildings;

(8)  Asbestos containing materials are found which would adversely affect the health of occupants;

(9)  Serious water seepage, defective plaster, defective concrete and extensive concrete spalling at several locations within the internal units cause concrete defects and affect the structural stability of the Building;

(10)  The unauthorized metal gate at the rear staircase obstructs the means of escape;

(11)  The electrical installations at the staircase landing and the main entrance lobby lack fire resisting enclosures and do not comply with current statutory requirements;

(12)  The fire compartment of the escape staircase is damaged by unauthorized openings for the passage of electrical wiring;

(13)  There are defective treads, plaster and cracks at the staircase;

(14)  The corroded metal handrails of the staircases may cause further cracks and deterioration of the staircase walls;

(15)  No emergency lighting system at the common areas and means of escape is installed;

(16)  The main cutout fuse and the individual fuse switch are all exposed in the public staircases and are not provided with a fire-rated enclosure or segregation barrier;

(17)  All sub-main cables running from the fuse switches to individual flats are exposed surface with no protection;

(18)  There is improper or incomplete protection, as well as the absence of weatherproof protection, for the electrical installations which would create a serious electrical risk;

(19)  The existing potable water supply system made from galvanized iron pipes is breach of the current Water Authority regulations; and

(20)  There are no water tank, water pump and a hose reel system for the Building.

31.  Miss Lui, Counsel for the Applicant, submitted that the existing building is 43 years old. It is not only dilapidated but also in a very poor state of disrepair. Further, one may argue that although extensive repair works could extend the Building’s life span, I accept that the continuous maintenance costs would be high.  Most of the building components and finishes are at the end of their effective life span and without substantial repairs, the Building is not up to the current safety standard. The experts’ views are that the Building is in a very poor state of disrepair and the only sensible solution is to rebuild the same.

32.  Apart from the professional opinions of the experts, I also look at the primary evidence supporting the opinions including:- the photographs, the survey records and the various tests and surveys results (including:- Covermeter survey, Reinforcement Bar Spacing study, Rebound (Schmidt) Test, Open-up inspection records, Coring & Compression Test and Chloride Content & Carbonation Test) in coming my decision. I accept that the expert opinions are sound and supported by the facts.

33.  Further, in consideration of the evidence above, I am entitled to look at all of the above collectively to see if redevelopment is justified, even though when each of them, if considered alone, is insufficient to do so. I am satisfied that the evidence shows that the Building on the Lot is in a very poor state of disrepair. Since the Building requires an unreasonable high costs to restore the same into an acceptable standard but no evidence adduced before me suggests that any reasonable owners would do so, I am therefore satisfied that the redevelopment of the Lot is justified due to age and state of repair of the Building.

34.  In Intelligent House Ltd v Chan Tung Shing & Others [2008] 4 HKC 421, this Tribunal formulated certain tests, which included some economic perspective, for deciding whether or not a redevelopment is justified due to age or state of repair. However, the correctness of these tests were subsequently questioned by the Court of Appeal “without the benefit of hearing full argument” in Fineway Property Ltd v Sin Ho Yuen VictorCACV 95 of 2009 (Unreported). I do not intend to deal with the correctness of the relevant tests formulated in Intelligent House  on “age” and “state of repair” in this Application as it is not necessary for me to do so. In fact there was no issue taken by any of the Respondents at all. I am satisfied on the facts and expert opinions adduced, without applying the relevant economic tests, that the redevelopment is justified due to age and state of repair of the Building.

35.  For requirement (2) above, again no issue was taken by any of the Respondents. However, this Tribunal is still need to look at the evidence to decide, whether or not, the Applicant has taken reasonable steps to acquire all the undivided shares in Lot. If this Tribunal is not satisfied that the offers were fair and reasonable, the order of compulsory sale still ought not be granted. I accept Miss Lui’s submissions that it involves 2 elements, namely the reasonableness of the steps taken to communicate the offers to the Respondents which is a factual matter for this Tribunal’s determination on the evidence before me and the reasonableness of the terms of such offers which according to Capital Well Ltd. v Bond Star Development Ltd. [2005] 4 HKLRD, the Court of Final Appeal has laid down the proper test that:-

“the Tribunal is not conducting a valuation exercise ….. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regard as fair and reasonable compensation for the interest in question. It is obviously necessary to recognize that there will often be differences of opinion on that matter. If duly satisfied that the rejected offer was fair and reasonable, the Tribunal may make the order, leaving the value of the level of compensation to be determined by the public auction.”

(per Ribeiro PJ)

36.  Regarding the offers made to the 1^st Respondents, there is no dispute that the offers had been duly commutated. In fact in respond to the Applicant’s offers, the 1^st Respondents, by a letter dated 11 January 2010 made a counter-offer to sell their interest to the Applicant for $5,328,000.  Evidence also shows that, subsequent to their counter-offer, further written offers were made to the 1^st Respondents on 15 October 2010 for  $5,746,755 and on 27 October 2010 for $5,891,025. However no agreement was reached between them.

37.  Regarding the offers made to the 2^nd Respondent, I accept the Applicant’s evidence that all reasonable steps have been taken to communicate with him, including publication of notices of the proceedings in the Chinese and English Newspapers in Hong Kong and posting of notices of the proceedings at the main entrance of the Building.  Written offers for $2,775,000, $6,148,275 and $6,302,625 were made to the 2^nd Respondent by sending the same to his unit on 31 March 2009, 15 October 2010 and 27 October 2010 respectively. However no reply or response has ever been received by the Applicant.

38.  For determination of whether or not the terms of such offers were reasonable, I shall also take into consideration the redevelopment value of the Lot. I have carefully studied the valuation contained in the 28 October 2010 report prepared by Mr. Cheng. He gave his professional opinion that the redevelopment value of the Lot, on the same date, was $245,000,000, with accommodation value of about $6,451 per square foot. In carrying out the valuation, Mr. Cheng used the residual valuation method and was of the view that the optimum hypothetical development should be a 24-storey composite commercial and residential scheme. I have carefully considered and reviewed the steps taken, assumptions made and comparables used by Mr. Cheng in the valuation and accept that they were reasonable in the circumstances.  I am satisfied that $245,000,000 was the open market value of the Lot on the date of valuation reflecting its redevelopment potential, on its own.

39.  Given the fair and reasonable share of redevelopment potential, according to the EUV relativity as determined above, of the 1^st Respondents is $5,757,500 (namely $245,000,000 X 2.35% = $5,757,500) and of the 2^nd Respondent is $6,002,500 (namely $245,000,000 X 2.45% = $6,002,500), I accept that the offers made to the 1^st Respondents (the last one being $5,891,025) and the 2^nd Respondent (the last one being $6,302,625) were fair and reasonable and in particular, they reflected a fair and reasonable share of the redevelopment potential of the Lot. I therefore find that the Applicant has taken reasonable steps to acquire all the undivided shares in Lot by making offers which were fair and reasonable in the circumstance but failed to acquire the Respondents’ Units.

40.  By reasons of the above, I am satisfied that the order of compulsory sale ought to be made.

Auction Reserved Price for the Auction

41.  Given my determination of the redevelopment value of the Lot above, I therefore accept Mr. Cheng’s opinion and approve that the reserve price for the auction shall be $245,000,000.

Costs

42.  The 2^nd Respondent did not take part in the entirely proceedings. In particular, he did not contest the Application at all. In my judgment, he should not be liable to pay any costs. For the 1^st Respondents, although the striking out application is unsuccessful and costs should normally follow the event, not much hearing time was taken for dealing with the same. I therefore decide that the 1^st Respondents should bare the Applicant’s costs of the hearing for 2 hours with Counsel certificate only.

The Order for Sale

43.  I therefore make an order of compulsory sale in the following terms (which is slightly different from what the Applicant asked for) :-

(1)  All the undivided shares in Lot, the subject of the Application, be sold by way of a public auction for the purposes of redevelopment of the Lot under section 4(1)(b) of the Ordinance;

(2)  Mr. Bernard Tam and Mr. Samuel Ching, nominated by the Applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs. King & Co., Solicitors & Notaries dated 8 November 2010;

(3)  For the purpose of a sale of the Lot by public auction under s.5(1)(a) of the Ordinance:-

(a)  The sale of the Lot be on the particulars and conditions substantially the same as those in the draft Particulars and Conditions of Sale initialed and approved by the Tribunal;

(b)  The reserve price be set at  $245,000,000;

(c)  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 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;

(4)  Service of a copy of this Order on the 2^nd Respondent be dispensed with. The Applicant is to publish notices once within 21 days from the date hereof in a Chinese newspaper and an English newspaper circulating in Hong Kong on the same day:-

(a) informing the 2^nd Respondent, that an order for sale of the Lot has been made by the Tribunal; and

(b) giving information as to the place where and the times during which a copy of this Order may be obtained;

(5)  Liberty to the Applicant, the Respondents and the Trustees to apply to the Tribunal for further directions.

(6)  As between the Applicant and the 1^st Respondents, there be no order as to costs except that the 1^st Respondents do pay costs for 2 hours of the hearing on 15 November 2010 to the Applicant, to be taxed on High Court Scale if not agreed, with Certificate for Counsel;

(7)  As between the Applicant and the 2^nd Respondent, there be no order as to costs.