MANY GAIN INVESTMENT LTD v. CHAN FAI HO AND OTHERS

LDCS 28000 /2012

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO 28000 OF 2012

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D E C I S I O N

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1.  We intend to deal with two matters in this decision:

(1) the 1^st respondent’s application for costs; and

(2) the adjournment of the trial.

Background

2.  The applicant applies in this case for the compulsory sale of two adjourning lots of land known as: (i) Nos 16 & 16A Ka Shin Street, Kowloon (“Lot 1”) and (ii) Nos 18 & 18A Ka Shin Street, Kowloon (“Lot 2”) (collectively called “the Lots”) under the Land (Compulsory Sale for Redevelopment) Ordinance (“the Ordinance”).

3.  According to the Notice of Application, there is erected on each lot a 6-storey commercial/residential building and the two buildings are connected by a common staircase.  The applicant is relying on section 3(2)(b) to make this single application covering both lots.

4.  When this case commenced, the applicant owned all the undivided shares in the Lots except the following:

Ownership	Address	Undivided shares
1st respondent	2/F (Front Portion), No 16 Ka Shin Street, Kowloon	1/12th of the undivided shares in Lot 1
2nd respondent	3/F, No 18 Ka Shin Street, Kowloon	1/12th of the undivided shares in Lot 2
3rd respondent	4/F (Front Portion) No 18 Ka Shin Street, Kowloon	1/12th of the undivided shares in Lot 2
4th respondent	G/F, No 18A Ka Shin Street, Kowloon	1/12th of the undivided shares in Lot 2

5.  Since then, the applicant has acquired the undivided shares of the 2^nd and 3^rd respondents and discontinued the proceedings against them.

6.  In the Notice of Application, the applicant pleaded that the 1^st respondent had agreed by a provisional agreement dated 30 March 2011 to sell his unit to the applicant at the consideration of $4,775,500 but had failed to complete the sale.  The applicant had commenced HCA 1448/2011 against the 1^st respondent to claim for specific performance of the provisional agreement.

7.  The 1^st respondent filed a Notice of Opposition in this case in May 2012 in which he averred that the provisional agreement had been rescinded by the applicant’s repudiation.  The 1^st respondent further alleged that he had sold his unit to Sunny Palace Limited (“SPL”) although the sale had yet to complete.  The 1^st respondent claimed he was a “bare trustee” for SPL and it was an abuse of process to sue him but not SPL in this case. 

8.  Up until he amended his Notice of Opposition in January 2013, it was also the pleaded case of the 1^st respondent that if the provisional agreement was found to be valid in HCA 1448/2011, he would oppose the application for the compulsory sale of the Lots on the ground that: “… the price offered by the Applicant to the 1^st Respondent did not reflect the fair and reasonable market value and the Applicant has taken no reasonable steps to acquire nor offered reasonable terms to the 1^st Respondent.”

9.  In May 2013, the 1^st respondent withdrew his Amended Notice of Opposition by consent and undertook not to oppose the application.

10.  As for the 4^th respondent, it complained in the Notice of Opposition that “[t]he valuation of the premises is low” but filed no evidence in opposition.  By a letter dated 31 October 2013, the 4^th respondent confirmed that it would no longer oppose the application.

11.  As there was unlikely to be any opposition, this case was set down for trial with one day reserved.

12.  The applicant was represented by counsel Nancy Ngai at trial, and the 1^st respondent was represented by counsel Derek Hu. 

13.  Ms Ngai and Mr Hu informed us that the Court of First Instance had just granted judgment in HCA 1448/2011 in favour of the applicant herein and ordered, inter alia, the specific performance of the provisional agreement.  Mr Hu said the 1^st respondent would comply with the order and transfer the property to the applicant.  However, the 1^st respondent would ask for costs against the applicant.

The 1^st respondent’s application for costs

14.  Mr Hu submits that the applicant has jumped the gun in suing the 1^st respondent and should have waited until the conclusion of HCA 1448/2011 to commence this case.  He complains that:

(a)   the definition of “minority owner” in the Ordinance refers to owners with beneficial interest as opposed to paper owners who is holding the property for others;

(b)   there is duplication of proceedings; and

(c)   the applicant should have sued SPL who was the beneficial owner of the property at the commencement of this case. 

15.  With respect, we do not think there is any merit in the 1^st respondent’s contention.

16.  First, Mr Hu has provided no authority in support of his proposition that the term “minority owner” should not cover a paper owner. 

17.  The definition in section 2 provides that:

“‘minority owner’, in relation to a lot which is the subject of an application under section 3(1) –

(a) means the person or persons who -

(i) owns or own undivided shares in the lot otherwise than as a mortgagee; but

(ii) is or are not the person or persons who has or have made the application; and

(b) includes any person who becomes a successor in title to any such person or persons at any time before a purchaser of the lot becomes the owner of the lot where the lot is the subject of an order for sale.”

18.  There is nothing in the language which indicates that a distinction between beneficial owners and paper owners is intended.  In our view, a paper owner nonetheless owns the undivided shares in the property and, insofar as he is not the applicant, is caught by the definition.  In reality, applicants may not be able to find out from land search whether a registered owner has the beneficial interest in the property he owns or not.

19.  Secondly, we do not see any duplication of proceedings.  This case is concerned with the compulsory sale of the Lots whereas HCA 1448/2011 is on the validity of the provisional agreement for the sale of the 1^st respondent’s unit. Disposal of one would not render the proceedings in the other unnecessary.

20.  Thirdly, the fact that the applicant may have a cause of action against SPL does not mean that it may not pursue against the 1^st respondent.  The purpose of suing the 1^st respondent in this case is to bind him with the judgment on the compulsory sale of the Lots.

21.  Ms Ngai has further submitted that the legislative scheme actually permits the joining of a minority owner whose beneficial interest may be uncertain. 

22.  In the context of this case, there was a dispute over the beneficial ownership of the 1^st respondent’s unit.  The writ in HCA 1448/2011 has been registered against the property.  Ms Ngai submits that section 4(6)(a)(iii)(A) of the Ordinance[1] enables the applicant to proceed with this case without the need to await the result of HCA 1448/2011.  We agree.

23.  In our view, the 1^st respondent’s application is fundamentally flawed:

(a)   On the one hand, the 1^st respondent alleged that he had no interest in the property and was a bare trustee.  On the other hand, he contended, at least up to the amendment, that the applicant had neither taken reasonable steps to acquire his unit nor negotiated with him on terms that were fair and reasonable.  Had the 1^st respondent taken a neutral stance, his costs would be minimal.  He elected a combative stance and, as Ms Ngai has submitted, his costs were really self-induced.

(b)             The tribunal has ordered, by consent of the applicant and the 1^st respondent, that:

“Upon the 1^st Respondent’s undertaking not to oppose the Applicant’s Application herein, leave be granted to the 1^st Respondent to withdraw its Amended Notice of Opposition (Form 33) filed on 9 January 2013 with no order as to costs;”[2] (emphasis added)

Mr Hu accepts that given the above costs order, the remaining costs that may be covered by his application would be minimal.

24.  For the above reasons, we dismiss the 1^st respondent’s application with costs and with certificate for counsel. 

25.  Parties have submitted on quantum.  Ms Ngai estimates that the applicant’s costs come to $4,000.  This appears to be proper and necessary having regard to the time spent on the argument (about an hour) and counsel’s seniority.  We summarily assess the applicant’s costs at $4,000.

The adjournment of the trial

26.  The applicant has lodged in trial bundles and opening submissions in anticipation of the trial. 

27.  We appreciate from a general perusal of the papers that:

(a) The scope of the application, as defined in the Notice of Application, is confined to the Lots. There is no mention of any plan to redevelop the Lots together with any adjourning lot.

(b) In a report dated 25 July 2013, the applicant’s expert assessed the redevelopment value (“RDV”) of the Lots to be in the order of $140 million. [3]  It is noted that:

(i) The expert was instructed “to assess the redevelopment value of [the Lots] as at 23 July 2013”. 

(ii) The expert confined his assessment to the redevelopment of the Lots with a site area of 311.59 m². 

(iii) He considered that the optimum development to be “a 27-storey composite building comprising retail use on ground floor and cockloft, podium garden and clubhouse on first floor, and domestic uses on floors above” with a total gross floor area of 2,894.91 m² (including exempted green features).

(c) However, the revised assessment contained in the supplemental report dated 25 October 2013 (“the Supplemental Report”) is very different.  This time:

(i) The expert was instructed “to assess the redevelopment values of [the Lots] as at 23 October 2013 taking into account its redevelopment potential on its own, and its potential for joint redevelopment together with Nos 8-14A & 20-30A Ka Shin Street”. (emphasis added)

(ii) The total site area of the Lots and the adjourning Nos 8 & 8A, 10 & 10A, 12 & 12A, 14 & 14A, 20 & 20A, 22 & 22A, 24 & 24A, 26 & 26A, 28 & 28A and 30 & 30A Ka Shin Street, Kowloon (“the Adjourning Lots”) was to be 1,833.70 m².

(iii) He considered the optimum development for the Lots and the Adjourning Lots together to be: “a 31-storey commercial/residential development with Ground and First floor shops, recreational facilities/club house on First floor and domestic units on the upper floors above” with a total gross floor area of 16,776.79 m² (including exempted green features).

(iv) The expert revised his assessment to $182 million. [4]

28.  The Supplemental Report was filed after the case was set down for trial and in pursuance of the direction of the tribunal to update the RDV assessment if so advised. The difference of $42 million in the assessments is huge and is not accounted for by time.  There is no pleading pertaining to any plan to redevelop the Lots together with the Adjourning Lots.  And the only evidence in support of a composite site redevelopment is the reference in the Supplemental Report that the Lots and the Adjourning Lots are “currently under multiple ownership”. [5] 

29.  Given that the scope of this case is confined to the Lots and that the Adjourning Lots are not before us, it is not clear how we may take into account the redevelopment potential of the Lots and the Adjourning Lots together in setting the reserve price. 

30.  We wrote to the applicant before the trial to put the applicant on notice of our concern.  On the day of trial, Ms Ngai informed us that:

(a) The applicant had applied for the compulsory sale of Nos 8 & 8A and 10 & 10A Ka Shin Street, Kowloon in LDCS 26000/2012.  The proceedings had been discontinued as the applicant had acquired all the undivided shares in those lots.

(b) The applicant had applied for the compulsory sale of Nos 12 & 12A and 14 & 14A Ka Shin Street, Kowloon in LDCS 27000/2012.  The proceedings had been discontinued as the applicant had acquired all the undivided shares in those lots.

(c) The applicant had applied for the compulsory sale of Nos 20 & 20A and 22 & 22A Ka Shin Street, Kowloon in LDCS 29000/2012.  The proceedings had been discontinued as the applicant had acquired all the undivided shares in those lots.

(d) The applicant had applied for the compulsory sale of Nos 24 & 24A and 26 & 26A Ka Shin Street, Kowloon in LDCS 30000/2012.  The proceedings had been discontinued as the applicant had acquired all the undivided shares in those lots.

(e) The applicant applied for the compulsory sale of Nos 28 & 28A and 30 & 30A Ka Shin Street, Kowloon in LDCS 31000/2012.  That case was tried before a differently constituted tribunal on 17 October 2013 with judgment still pending.

31.  Ms Ngai submitted that:

“1. R4 is the sole minority owner.

…

3. The Applicant and R4 agree to sell the Lots by other means (instead of public auction) pursuant to s 5(1)(b) of the Ordinance on the condition that the Lots shall be sold at a price of not less than HK$182,120,000.

4. Hence, R4 will receive a compensation reflecting its proportionate share in the RDV of the Composite Site (ie Nos 8-8A to 30-30A Ka Shin Street) no matter whether the Applicant would become the sole owner of all the 6 pairs of lots.

5. Schedule 2 does not apply. It is unnecessary to determine any reserve price for sale of the Composite Site.

6. Combined sale of the 6 pairs of lots is unnecessary.”

32.  In our view, the applicant may not get around the problem by invoking section 5(1)(b). 

33.  Section 5(1) of the Ordinance provides that:

“Where an order for sale is granted and the trustees under the order have complied with section 7(1) in respect of the lot the subject of the order –

(a) subject to paragraph (b), the lot shall be sold by public auction in accordance with the conditions specified in Schedule 2; or

(b) if the whereabouts of each minority owner of the lot is known, the lot may be sold by any other means –

(i) agreed in writing by each minority owner and majority owner of the lot;

(ii) approved by the Tribunal in its absolute discretion; and

(iii) in accordance with such conditions, if any, as the Tribunal specifies in directions.”

34.  Even if the parties in this case agree to sell the Lots the subject of the order for sale by means other than public auction, such proposal is still subject to the approval of the tribunal.  Given that one of the key objectives of the Ordinance is to ensure that the minority owners would receive fair and reasonable compensation, [6] the tribunal would naturally be concerned about the selling price. 

35.  Ms Ngai has suggested to sell the Lots by public tender at a price “not less than HK$182,120,000”.  She says that the other details of the tender would be worked out by the parties. 

36.  Paragraph 2 of Schedule 2 to the Ordinance governs the setting of the reserve price for public auction.  It provides that:

“The lot the subject of the auction shall be sold subject to a reserve price –

(a) which takes into account the redevelopment potential of the lot on its own (or, where 2 or more lots are the subject of the auction, on their own); and

(b) approved by the Tribunal.”

37.  So, the tribunal is directed to take the redevelopment potential of the subject of the auction into account in setting the reserve price.  For single lot applications, the subject of the application is the same as the subject of the auction, and reserve price will be set having regard to “the redevelopment potential of the lot on its own”.  In cases (such as the present one) where the applicant is invoking section 3(2), the subject of the auction will be the “2 or more lots” covered by the application, and the reserve price will be set taking into account “the redevelopment potential of the lot…, where 2 or more lots are the subject of the auction, on their own”.

38.  We invited Ms Ngai to point us to other provisions in the Ordinance enabling us to approach the question of the selling price for sale other than by public auction differently.  There appears to be none.  In our view, the applicant may not avoid the operation of paragraph 2 of Schedule 2 (which was drafted with the aforesaid key objective in mind) by invoking section 5(1)(b).

39.  Since the applicant is planning to redevelop the Lots and the Adjourning Lots together, it is only natural that we take into account the redevelopment potential of the composite site in setting the reserve price.  Ms Ngai does not submit otherwise. 

40.  As the present application only covers the Lots and the Adjourning Lots are not before us, there is a risk that we would be unable to set a reserve price that would reflect the full redevelopment potential of the land.  There is no point in proceeding with the trial if, at the end of the day, the applicant would be unable to satisfy the tribunal with the selling price. 

41.  In our view, the problem is much more fundamental.

42.  The Court of Appeal has ruled in Bond Star Development Ltd v Capital Well Ltd[7] that the Ordinance does not apply to land of which the applicant is already 100 percent owner.  Notwithstanding the doubts subsequently expressed by the Court of Final Appeal on appeal,[8] the Lands Tribunal has consistently applied the Court of Appeal ruling. [9]  Given the state of the jurisprudence, it is understandable why applicants do not plead, in an application under the Ordinance, any plan to redevelop the lot the subject of the application together with any adjourning lot(s) that he own(s). 

43.  We have recently decided in Supergoal Investment Ltd v Five F Ming House Limited[10] that the Court of Appeal ruling is not binding on us as it has been undermined by the subsequent comment of the Court of Final Appeal.  And we have answered the following question posed by the Court of Final Appeal in the negative:

“… in cases where a majority owner each qualifies for the making of such a compulsory order and wishes to have that lot put up for auction together with adjacent development lots wholly owned by him, the question arises as to whether, on its true construction, the Ordinance precludes the Tribunal from making an order for sale in respect of the composite site.”[11]

44.  We venture to suggest that in the future applicants should specifically plead in their Notice of Application any intention to redevelop the lot the subject of the application together with any adjourning lot(s) which the applicant already own(s) as at the date of the application.  In our view, this is inevitable.  Section 4(2)(b) of the Ordinance provides that no order for sale shall be made unless the tribunal is satisfied that the applicant has taken reasonable steps to acquire all the undivided shares in the lot the subject of the application.  In case of a minority owner whose whereabouts are known, the applicant will have to demonstrate that he has negotiated for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable.  This is usually done by an officer of the applicant testifying on oath at trial as to the reasonableness of the offers made.  There will be a difference, in terms of the value of the land, between a plan to redevelop the lot the subject of the application on its own and a grander plan of composite site redevelopment. It would be difficult for the applicant’s officer to justify the offers if the applicant only took into account the redevelopment potential of the lot on its own in setting the offers when all along the applicant had been planning a composite site redevelopment.

45.  In cases (such as the present one) where the applicant only acquires the adjourning lot(s) after the commencement of the case, the Notice of Application should be amended to reflect such factual development.  This will enable the tribunal to consider giving directions under section 4(6)(a)(i) in relation to the sale so that the lot the subject of the application for an order for sale may be sold together with those adjourning lot(s) in one public auction.  The tribunal may then set a reserve price reflecting the full redevelopment potential of the land.

46.  This is because section 4(6)(a)(i) provides that:

“Where the Tribunal makes an order for sale, … it may also give such directions as it thinks fit relating to the sale and purchase of the lot the subject of the order, including (but without limiting the generality of the foregoing) settling the particulars and conditions of sale of the lot…” (emphasis added)

In our view, the power to give directions “relating to” the sale and purchase of the lot the subject of the order enable us to go beyond the subject of the order.  After the tribunal has made an order for sale, it may then consider if the lot should be sold together with other adjourning lot(s) owned by the applicant in one public auction.  If so, the lots together will form “the subject of the auction” and the tribunal may set a reserve price reflecting their redevelopment potential in terms of paragraph 2 of Schedule 2.

47.  In our view, the above practice will promote the two-fold objectives of the Ordinancein that:

(a)   It will minimise the possibility of someone exercising “ransom power” through the medium of public auction as cautioned by the Court of Final Appeal in Bond Star, [12] thus facilitating urban renewal.

(b)   It will also ensure that the minority owners will receive fair and reasonable compensation having regard to the full redevelopment potential of the land. 

48.  Returning to the present case, the applicant will need to bring all the lots before the same tribunal to enable the tribunal to give directions for them to be sold together in one public auction and to set a reserve price that would reflect their full redevelopment potential.  Since another panel of this tribunal has already heard evidence concerning the application for the compulsory sale of No 28 & 28A and 30 & 30A, Ms Ngai is agreeable to adjourn this trial and to apply to the tribunal dealing with LDCS 31000/2012 to enlarge the scope of that case to encompass all the lots.

49.  For the above reasons, we have adjourned the trial sine die with liberty to restore. The applicant is not asking for costs and we make no order as to the costs of the adjournment.