EARN BENEFIT LTD v. WONG HUNG AND OTHERS

LDCS 25000/2019

[2021] HKLdT 44

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 25000 OF 2019

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BETWEEN

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JUDGMENT

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BACKGROUND

1.  This is the applicant’s application for an order for sale, for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”), of all the undivided shares of and in Shau Kei Wan Inland Lot No 762 (“the Lot”), together with a building erected thereon known as Chung Chai Building, Nos 67, 69, 69A & 71 Nam On Street, Hong Kong (“the Building”).

2.  The Building is an 8-storey tenement block served by 2 common staircases. According to the approved building plans and the Permit No H76/64 issued for the Building on 26 March 1964, its ground floor is planned as 3 shops for non-domestic use, and its 1^st floor to 7^th floor are planned as 4 tenements on each floor for domestic use.

3.  The Lot together with the Building standing thereon is allocated 32 undivided shares. Each unit from the ground floor to the 7^th floor and the roof is given 1 undivided share, making up a total of 32 undivided shares.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANT

4.  The applicant filed a Notice of Application (“NOA’) on 7 August 2019, which was subsequently amended and re-amended on 17 October 2019 and 3 December 2019 respectively pursuant to the Orders of the tribunal. At the time of filing of the NOA, there were 4 respondents and the applicant owned 29 over 32 (i.e. 90.625%) undivided shares in the Lot.

5.  Section 3(1) of the Ordinance prescribes that the minimum percentage of undivided shares that an applicant or applicants should possess before making an application under the Ordinance is 90%. 

6.  I am satisfied that as at the date of application, the applicant owned more than 90% of the undivided shares in the Lot.  I am therefore satisfied the applicant is entitled to make the present application under section 3 of the Ordinance.

THE REMAINING RESPONDENTS

7.  At trial, the applicant still owns 29 over 32 (i.e. 90.625%) undivided shares in the Lot. The following 4 respondents (collectively referred to as “the Remaining Respondents”) remain in the present action: -

Respondent		Premises
1st Respondent	(“R1”)	1/2 of Shop A on Ground Floor
2nd Respondent	(“R2”)	1/2 of Shop A on Ground Floor
3rd Respondent	(“R3”)	Flat C on 1st Floor
4th Respondent	(“R4’)	The Whole of the Roof

1^st and 2^nd Respondents

8.  R1 and R2 are legally represented. On the 2^nd day of trial, they entered into an agreement for sale and purchase of their premises with the applicant.  By consent of the parties, leave was granted to R1 and R2 to withdraw their opposition and evidence in the present proceedings and that their subsequent attendance at trial be dispensed with.

3^rd Respondent

9.  Lui Wui Yick died intestate and no grant of Letters of Administration of his estate have been issued. Pursuant to the Order dated 3 October 2019, Wong Yim Mui as the daughter-in-law of the deceased was appointed by the tribunal to represent the estate of Lui Wui Yick for the purpose of the present proceedings.

10.  Before the application, Wong Yim Mui and the applicant has entered into an agreement for sale and purchase of R3’s premises at $7,000,000 on 12 June 2019. The sale is conditional upon successful grant of probate and is now pending for registration in the Land Register. In accordance with Clause 19(f) of this agreement, in the event that this agreement has been annulled and if the apportioned sale proceeds payable to the estate of the deceased shall be less than the purchase price, then the deficit shall be paid by the applicant to the estate of the deceased within 30 days after the sale under the Order for Sale is completed, and this clause shall survive completion.

4^th Respondent

11.  R4 is legally represented.  On the 1^st day of trial, R4 entered into an agreement for sale and purchase of R4’s premises with the applicant. By consent of the parties, leave was granted to R4 to withdraw its opposition and evidence in the present proceedings and that their subsequent attendance at trial be dispensed with.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

12.  The remaining issues to be decided in this case are as follows:

1) What was the respective existing use value (“EUV”) of all units in the Building, as at 27 June 2019, the valuation date adopted in the application valuation report dated 27 June 2019, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?

2) Whether the redevelopment of the Lot is justified due to age and/or state of repair of the Building in accordance with section 4(2)(a) of the Ordinance?

3) Whether the applicant has taken reasonable steps to acquire all the undivided shares in the Lot on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance?

4) If an order for sale should be granted, what should be the reserve price (i.e. redevelopment value (“RDV”) of the Lot) for the purpose of auction sale?

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING

13.  Pursuant to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the EUV of the units as assessed in the application, the tribunal shall determine the proper value. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the lot who cannot be found, the majority owner of the lot is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is: -

“(A) not less than fair and reasonable; and

(B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

14.  The applicant relies on the reports and valuations of Mr Charles Chan of Savills Valuation and Professional Services Limited. In the application valuation report dated 27 June 2019, Mr Charles Chan explained the direct comparison method he adopted and the process of his assessment to arrive at the EUV of each unit in the Building as at 27 June 2019. 

15.  Mr Charles Chan subsequently prepared a supplemental valuation report dated 21 April 2020, in which he reviewed the EUV of all units in the Building. After the without prejudice meeting with the valuation expert then appointed by R1, R2 and R4, Mr Charles Chan further revised and filed his EUV assessment on 7 May 2021. Finally, Mr Charles Chan assesses the reference shop unit (i.e. Shop C on Ground Floor) at $265,000 per square meter and the reference domestic unit (i.e. Flat B on 4^th Floor) at $107,000 per square meter. 

16.  In the absence of evidence to the contrary, I accept the EUV of all shops and domestic units including the Roof in the Building as assessed by Mr Charles Chan.  The EUV of all units in the Building as at the relevant date of valuation, i.e. 27 June 2019, are appended below: -

Floor	Unit
	A	B	C	D
G/F	$15,250,000	$21,570,000	$18,360,000	-
1/F	$5,390,000	$5,060,000	$5,240,000	$4,130,000
2/F	$5,620,000	$4,960,000	$5,130,000	$3,930,000
3/F	$5,190,000	$4,870,000	$4,750,000	$3,850,000
4/F	$5,090,000	$4,630,000	$4,650,000	$3,860,000
5/F	$4,990,000	$4,540,000	$4,560,000	$3,780,000
6/F	$4,830,000	$4,400,000	$4,420,000	$3,770,000
7/F	$4,330,000	$3,810,000	$3,830,000	$3,300,000
Roof	$1,510,000

17.  The total EUV of the Building is assessed at $183,600,000.

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

18.  Section 4(2) of the Ordinance provides as follows: -

“2. The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that—

(a) the redevelopment of the lot is justified (and whether or not the majority owner proposes to or is capable of undertaking the redevelopment)—

(i) due to the age or state of repair of the existing development on the lot; or

(ii) on 1 or more grounds, if any, specified in regulations made under section 12; and

(b) the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”

19.  The applicant must satisfy this tribunal the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted.

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

20.  The applicant adduces expert evidence of Mr C M Wong, a structural engineer, of C M Wong & Associates Limited and Mr Benson Wong, a building surveyor, of Benson Wong & Associates Limited.  Mr C M Wong conducted a structural survey of the Building and prepared a Structural Assessment Report dated 20 April 2020.  Mr Benson Wong conducted a condition survey of the Building and prepared a Condition Survey Report dated 22 April 2020. 

21.  None of the respondents adduced expert evidence to rebut the reports complied by Mr C M Wong and Mr Benson Wong.

22.  Having considered the reports of Mr C M Wong and Mr Benson Wong, I accept their expert opinion. The Building, being erected more than 57 years ago, is in poor condition and has come to the end of its design life.  The design of the Building has become obsolete over time in many aspects, both physically and functionally, and fails to conform to modern safety standards and statutory requirements. 

23.  I am also of the view the Building is in poor state of repair and the costs of repair to bring the Building to tenantable condition is disproportionate to the costs of redevelopment. Even if repair works are carried out, such works will bring about a modest improvement only to the existing condition of the Building and the Building will continue remain a sub-standard one.

24.  By reason of the matters set out above, I am satisfied the redevelopment of the Building is justified.   

Whether the applicant has taken reasonable steps

25.  In assessing the reasonableness of the offers, I have considered the case of Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. In particular, I have considered paragraphs 33 and 36 of the judgment in which   Ribeiro PJ stated: -

“33. In making that assessment the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It does not itself arrive at any conclusion as to what figure represents the correct valuation. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. It is obviously necessary to recognise that there will often be differences of opinion on that matter……”

“36. ...... We are of course not suggesting that it is necessary for the offer to “beat” the valuation as if it were a payment into court. What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site……”

26.  The applicant has made 5 offers to R1 and R2 on 24 January 2019, 11 July 2019, 4 May 2021, 21 May 2021 and 24 May 2021, and 3 offers to R4 on 11 July 2019, 4 May 2021 and 21 May 2021. Given that these offers were based on the then valuation of Mr Charles Chan and have reflected the then RDV attributable to the respective units owned by the respective respondents, I accept that they fall within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question.

27.  In addition, the Remaining Respondents have entered into agreements for sale and purchase of their premises with the applicant respectively. In the circumstances, Mr Y C Mok, counsel for the applicant, submits that the applicant has already taken reasonable steps to acquire all the undivided shares in the Lot. I agree.

28.  By reason of the matters set out above, I am satisfied the applicant has taken reasonable steps to acquire all the undivided shares in the Lot.

RESERVE PRICE FOR THE PUBLIC AUCTION

29.  By reason of being satisfied that redevelopment of the Lot is justified and that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot, I am satisfied an order for sale should be granted in favour of the applicant.

30.  Mr Charles Chan considers that there is no relevant land sale transaction for direct comparison, and therefore he adopts residual method only to assess the RDV of the Lot as at 12 April 2021. In the residual valuation, Mr Charles Chan opines that the optimum development on the Lot comprises a 24-storey commercial / residential composite building with retail units on ground floor, club house on 1^st floor, and domestic units from 2^nd floor to 23^rd floor. 

31.  Details of the hypothetical development with the net developable site area of 278.71 square meters, the proposed gross floor area of 2,345.27 square meters (excluding half of the areas for green features that are exempted in calculation) and plot ratio of 8.4148, the gross development value assessed (i.e. on average $266,000 per square meter saleable area for retail units on ground floor, and on average $245,000 per square meter saleable area for residential units on typical upper floors), the construction cost adopted (i.e. on average $40,674 per square meter gross floor area) and the residual valuation (i.e. development period of 2.5 years, stamp duty on residual land value at 4.25%, profit at 15% of costs, and interest rate at 4% per annum) are set out in his valuation worksheets submitted on 7 May 2021.  He assesses the RDV of the Lot at $195,000,000.

RDV of the Lot as at 12 April 2021

32.  In the absence of evidence to the contrary, I accept Mr Charles Chan’s residual valuation in the valuation worksheets submitted on 7 May 2021. The Lot is assessed at $195,000,000, equivalent to an accommodation value of about $83,146 per square meter (i.e. about $7,724 per square foot), which should be the reserve price for public auction.

ORDERS

33.  For reasons given in this judgment, I have set out reasons why I am satisfied an order for sale should be granted and I therefore make the following orders: -

1) All the undivided shares in the Lot, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lot;

2) Mr Anthony W K Chow and Ms Anna S H Chow, nominated by the applicant, be appointed the trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lot;

3) The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Guantao & Chow dated 9 April 2021;

4) For the purposes of the sale of the Lot by public auction: -

a) the sale of the Lot be on the particulars and conditions of sale the same or substantially the same as those set out in the draft Particulars and Conditions of Sale to be approved and initialed by the tribunal; and

b) the reserve price be set at $195,000,000;

5) Subject to further extensions that the tribunal may subsequently allow upon the application of the purchaser of the Lot or its successor in title, the redevelopment of the Lot and the Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot; and

6) Liberty to the applicant, the 1^st respondent, the 2^nd respondent, the 3^rd respondent, the 4^th respondent and the Trustees to apply to the tribunal for further directions.

COSTS

34.  I make a costs order nisi that there be no order as to costs.  Unless any parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from the date of this judgment.