ASIA BRIGHT ENTERPRISES LTD AND ANOTHER v. THE PERSONAL REPRESENTATIVE OF THE ESTATE OF LAW KING YIN, DECEASED, NG CHI MING SIMON, NG WAN YEE SAMMI, NG YU MING SIMON and NG PATRICK KON MING AND OTHERS

LDCS 11000/2019

[2021] HKLdT 68

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 11000 OF 2019

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JUDGMENT

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BACKGROUND

1.  This is the applicants’ 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 the Remaining Portion of section A of Kowloon Inland Lot No 4148 (“the Lot”) together with a building erected thereon known as Nos 58 – 70 Lok Shan Road, Nos 1 -  9 Mei Wa Street and Nos 18 – 20 Ha Heung Road, Kowloon (“the Building”).

2.  The Building is an 8-storey tenement block served by 4 common staircases. 2 staircases are leading to Lok Shan Road and 2 staircases are leading to Mei Wa Street. Occupation permit No K222/60 was issued for the Building on 24 October 1960, granting permission to occupy its ground floor as 9 shops for non‑domestic use and 5 tenements for domestic use, and its 1^st floor to 7^th floor as 14 tenements per floor for domestic use.  According to the assignment plans, 7^th Floor of No 70 Lok Shan Road is sub-divided into 4 sub-divided units (i.e. Flats A1, A2, A3 and A4), 7^th Floor of No 18 Ha Heung Road is sub-divided into 4 sub-divided units (i.e. Flats 1, 2, 3 and 4), 7^th Floor of No 20 Ha Heung Road is sub-divided into 4 sub-divided units (i.e. Portions H1, H2, H3 and H4), and Ground Floor of No 20 Ha Heung Road is sub-divided into 2 sub-divided units (i.e. Portions H1 and H2).

3.  There are also 4 existing staircase shops located at the entrance halls on ground floor and underneath the staircases of (i) Nos 62 and 64 Lok Shan Road; (ii) Nos 68 and 70 Lok Shan Road; (iii) No 1 Mei Wa Street; and (iv) Nos 3 and 5 Mei Wa Street.

4.  The Lot together with the Building standing thereon is allocated 113 undivided shares. Each of the units on the ground floor and the upper floors is given 1 undivided share, and the Whole Roof & Spaces in Lower Entrance Halls partly under Staircases is given 1 undivided share, making up a total of 113 undivided shares.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

5.  At the time of filing of the Notice of Application (“NOA”) on 15 April 2019, there were 21 respondents and the applicants owned 84.292% (i.e. 95 and 1/4 out of the total 113) undivided shares in the Lot, more than the threshold of 80% required for building aged 50 years or above.

6.  After the filing of the NOA, the applicants acquired units from 16 respondents, and subsequently discontinued the proceedings against them.

7.  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%. 

8.  Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a lower percentage in respect of a lot belonging to a class of lots specified in that notice. 

9.  The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, made under section 3(5) of the Ordinance (“the Notice”), was gazetted on 22 January 2010 and came into operation on 1 April 2010.  Section 3 of the Notice lowered the threshold for compulsory sale of specified classes of lots from 90% to 80%.  Those classes of lots include:

“a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the relevant date”

10.  Since the occupation permit of the Building was issued in 1960, i.e. more than 50 years before the date of application (i.e. 15 April 2019; the relevant date under the Notice), the applicable percentage is therefore 80%.

11.  I am satisfied that as at the date of application, the applicants owned more than 80% of the undivided shares in the Lot.  I am therefore satisfied the applicants are entitled to make the present application under section 3 of the Ordinance.

THE REMAINING RESPONDENTS

12.  At trial, the applicants owned 96.239% (i.e. 108 and 3/4 out of the total 113) undivided shares in the Lot. The following 5 respondents remain in the present action: -

Respondent		Premises
4th Respondents	(“R4”)	Ground Floor of No 60 Lok Shan Road (“R4’s Property”)
12th Respondent	(“R12”)	4th Floor of No 1 Mei Wa Street (“R12’s Property”)
16th Respondent	(“R16”)	Ground Floor No 18 Ha Heung Road (“R16’s Property”)
17th Respondent	(“R17”)	2nd Floor of No 18 Ha Heung Road (“R17’s Property”)
18th Respondent	(“R18”)	Flat 3 on 7th Floor of No 18 Ha Heung Road (“R18’s Property”)

13.  There are 5 named R4.  By a Consent Summons filed on 5 July 2021, the applicants and the 2^nd named to the 5^th named R4 jointly applied to the tribunal for leave to allow the 2^nd named to the 5^th named R4 to withdraw their Notice of Opposition and the witness statement of the 4^th named R4. An Order in terms of the Consent Summons was granted by the tribunal on 6 July 2021. Further, according to the 2^nd named to the 5^th named R4, the 4^th named R4 has applied for the grant of representation of the estate of the 1^st named R4, but up to the date of trial, no administrator or executor has been appointed by the Probate Registrar.

14.  On 8 July 2021, the 1^st applicant and the Administratrix of R18 entered into an Agreement for Sale and Purchase in respect of R18’s Property. After the completion of the sale and purchase, the applicants discontinued their application against R18 on 10 August 2021.

15.  By reason of the aforesaid, R12, R16 and R17 are the 3 live respondents remaining on record and actively opposing the application.

16.  R12 and R17 are not legally represented and have not filed any expert evidence. They do not oppose to the redevelopment of the Lot and the grant of an order for sale of the Lot, but they complain that the purchase prices offered by the applicants to them are insufficient for them to purchase replacement properties in the same district.  They also request for a compensation similar to the terms offered by the Urban Renewal Authority.

17.  R16 is represented by Mr Ernest Koo (“Mr Koo”). R16 primarily takes issue on the valuations as assessed in the application and whether the applicants have taken reasonable steps to acquire R16’s Property, and put the applicants to strict proof in respect of the other statutory requirements under the Ordinance.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

18.  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 18 February 2019, the valuation date adopted in the application valuation report dated 11 April 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 applicants have 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?

19.  Regarding the RDV, the applicant and R16 argue whether or not a service lane and Mei Wa Street within the Lot (the “Green Area”) of about 238.31 square meters can be counted as part of the net developable site area for plot ratio and site coverage calculation upon redevelopment of the Lot.

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING

20.  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.”

21.  Although R12 and R17 dissatisfy with the applicants’ offers, they have not filed any valuation expert evidence in these proceedings.  Whilst, R16 relies on the reports and valuations prepared by Ms Sat Wei Ling (“Ms Sat”) of Memfus Wong Surveyors Limited. The applicants appoint Mr Alnwick Chan (“Mr Chan”) of Knight Frank Petty Limited as their valuation expert.

EUV of Shops

22.  Mr Chan and Ms Sat agree on particulars of the subject shops, including the staircase shops, on ground floor fronting onto Lok Shan Road, Ha Heung Road and Mei Wa Street respectively and the comparables. They also agree on the adopted unit rate for the reference shop unit fronting onto Ha Heung Road (i.e. Ground Floor of No 18 Ha Heung Road) at $340,500 per square meter, and valuation of the units fronting onto Mei Wa Street as shops.

23.  In the valuation of the reference shop unit fronting onto Lok Shan Road (i.e. Ground Floor of No 66 Lok Shan Road), Mr Chan proposes 5 comparables, whilst Ms Sat proposes 3 comparables only, which are common to those adopted by Mr Chan. Since there are 3 common comparables only, I agree to analyse the 2 comparables (i.e. Comparables SL1 and SL2) proposed by Mr Chan, but their adjusted unit rates should be further reviewed because they were transacted in 2016, more than 2 years before the valuation date.

24.  Mr Chan and Ms Sat agree on the adjustment for time with reference to retail price index and the adjustment for return frontage to Comparable SL4 at -3%, but they disagree on the adjustments for location, age, frontage, headroom, size and layout. Although they adopt the same adjustment rates for age (i.e. 1% for every 10-year difference) and headroom (i.e. 2% for every 1-meter difference), they argue whether the final adjustment rates should be rounded to the nearest integer as proposed by Mr Chan.  With the aid of computer, I prefer to make adjustments up to 1 decimal place in this instance.

25.  With the benefit of site inspection together with the parties, I agree with Mr Chan to make location adjustment at 5% to Comparbles SL4 and SL5, instead of 25% and 0% respectively proposed by Ms Sat. I consider that their respective locations are slightly inferior than that of the subject reference unit.  Nevertheless, I am of the view that the adjustment for location to Comparable SL3, which is close to a recently-opened MTR entrance and is better than the subject reference unit, should be -10% instead of -5% only proposed by Mr Chan and 0% proposed by Ms Sat. Further, the adjustments to Comparables SL1 and SL2 along To Kwa Wan Road should be 0% and -5%. The location of Comparable SL2 is close to a pedestrian crossing.

26.  Regarding the adjustment for frontage, I agree with Mr Chan to adopt an adjustment rate at 2% for every 1-meter difference instead of 3% for every 1-meter difference proposed by Ms Sat.  I consider that in this instance adjustment for frontage may not be necessary or at least it should be kept to minimum.  Regarding the adjustment for size, I am of the view that an adjustment rate at 1% per 10-square meter difference is appropriate instead of the greater adjustment rate at 2% per 10-square meter difference proposed by Ms Sat and the threshold approach proposed by Mr Chan.

27.  The adjustment for layout could be comprised of 2 factors, shape and depth.  I consider that there is no material difference in shape between each of the comparables and the subject reference unit, and the depth in this instance could be adjusted at about 0.75% per 1-meter difference.  Accordingly, 6%, 2%, 2%, 6% and 0% should be applied to Comparables SL1, SL2, SL3, SL4 and SL5 respectively.

28.  The valuation of the shop reference unit fronting onto Lok Shan Road is listed in Appendix I of the judgment. The average unit rate of the 5 comparables is about $559,883, and the average excluding Comparables SL1 and SL2 transacted in 2016 is about $528,088. I consider that the adopted unit rate should be $560,000 per square meter, a figure in between the unit rate at $552,000 proposed by Mr Chan and the unit rate at $569,000 proposed by Ms Sat.

29.  In the valuation of the reference shop unit fronting onto Mei Wa Street (i.e. Ground Floor of No 5 Mei Wa Street), Mr Chan and Ms Sat agree on adoption of 3 common comparables.  Their proposed adjustments are similar to those for the reference shop unit fronting onto Lok Shan Road, but Ms Sat has further revised the adjustment for frontage at 2% for every 1-meter difference and the adjustment for headroom at 1.5% for every 1-meter difference, because Mei Wa Street is inferior than Lok Shan Road. 

30.  I agree that Mei Wa Street is inferior than Lok Shan Road and therefore the headroom in this instance should be adjusted at 1.5% for every 1-meter difference, but the frontage in this instance should be further revised to a lesser rate at 1% for every 1-meter difference.  In addition, I consider that the return frontage of Comparable SM1 would justify a minimal adjustment at -1%, and the location of the subject reference unit is similar to that of Comparable SM2, but is better that those of Comparables SM1 and SM3.  Accordingly, I am of the view that the location adjustment rate for Comparable SM1 should be 10% instead of 20% proposed by Mr Chan and -15% proposed by Ms Sat, the location adjustment rate for Comparable SM2 should be 0% instead of 10% proposed by Mr Chan and -15% proposed by Ms Sat, and the location adjustment rate for Comparable SM3 should be 15% instead of 20% proposed by Mr Chan and -20% proposed by Ms Sat.

31.  The valuation of the shop reference unit fronting onto Mei Wa Street is listed in Appendix II of the judgment. The average unit rate of the 3 comparables is about $136,331. I consider that the adopted unit rate should be $136,000 per square meter, a figure in between the unit rate at $150,000 proposed by Mr Chan and the unit rate at $104,000 proposed by Ms Sat.

32.  The valuation of each unit on ground floor is listed in Appendix III of the judgment. The same adjustment rates and principles as agreed by the valuation experts or as determined by the tribunal above are applied to the valuation of all shop units fronting onto Lok Shan Road and Mei Wa Street. The adjustment rates and principles for shop units fronting onto Lok Shan Road have also been applied to the valuation of shop units fronting onto Ha Heung Street, except that the frontage is adjusted at 1.5% per 1-meter difference and the size of Unit H2 on Ground Floor of No 20 Ha Heung Road, a relatively small shop, is adjusted at 2% per 10-square meter difference. I also agree with Mr Chan not to allow for adjustment for flexibility in this instance as proposed by Ms Sat because this should have already been reflected in the adjustments for frontage together with other factors.

33.  The valuation of the staircase shops is based on the adjustment rates and principles for shop units fronting onto Lok Shan Road and Mei Wa Street respectively.  Nevertheless, since they are small in size with irregular shape and the 2 staircase shops fronting onto Lok Shan Road are above street level, an adjustment for size at the rate of 2% per 10-square meter difference is applied and their respective layouts are adjusted at -20% and -25%.

EUV of Flats

34.  In the valuation of the domestic reference unit (i.e. 4^th Floor of No 62 Lok Shan Road), Mr Chan and Ms Sat propose a unit rate of $93,000 and $92,000 respectively. They agree to adopt 4 common comparables, but disagree on some adjustments and some of them will be discussed in the paragraphs below. In addition, Ms Sat has adopted weighted average in her assessment and a lesser weight is assigned to Comparable ED3 (i.e. 4^th Floor of No 28 Kowloon City Road), which has the highest adjusted unit rate. If weighted average is not applied in this instance, the end results as derived by both valuation experts are in fact much closer and are close to $93,000. I consider that Comparable ED3 is a relevant comparable and full weight should be assigned to it in the assessment, and therefore agree to adopt the domestic reference unit rate at $93,000 per square meter.

35.  At trial, the applicants agree to adopt Ms Sat’s grading of internal condition in respect of all domestic units, and Ms Sat agrees to adopt Mr Chan’s adjustment for lighting and ventilation, or additional windows, at 3% for Flat A1 on 7^th Floor of No 70 Lok Shan Road. Nevertheless, the valuation experts still disagree on the adjustment rates for internal condition, the adjustment for view to flats facing Mei Wa Street, the adjustment for floor to flats on 6^th Floor and 7^th Floor and whether there is adjustment for top floor.  They also disagree on the adjustment for size.

36.  Although both valuation experts agree to adjust for size at 1% per 5-square meter difference, they argue whether a threshold approach or a linear approach should be adopted in the assessment. With the aid of computer, I prefer the linear approach proposed by Ms Sat and agree to make the adjustment up to 1 decimal place.  I also agree with Ms Sat to make adjustment for top floor in this instance, but the adjustment rate should be -3%, and additional adjustment for floor to 6^th Floor and 7^th Floor, but the overall adjustment rates should be -5% and -7% respectively.

37.  Regarding the adjustment rate for internal condition, I consider that “Very Poor”, “Poor” and “Good” as compared with “Fair” in this instance should be adjusted at -5%, -2.5% and 2.5% respectively, the midway figures as proposed by the valuation experts. Regarding the adjustment for view to flats facing Mei Wa Street, I agree to apply an adjustment rate at -3% to the flats on 1^st Floor and 2^nd Floor as proposed by Ms Sat and an adjustment rate at -2% to the flats on 3^rd Floor and above as proposed by Mr Chan.

38.  The valuation of each domestic unit in the Building is listed in Appendix IV of the judgment.  The Roof is valued at 1/8 of the average unit rate on 7^th Floor.

EUV of All Units in the Building

39.  The EUV of all units in the Building as at the relevant date of valuation, i.e. 18 February 2019, and adopted by this tribunal are appended below: -

Road / Street

No

Floor

Unit

EUV

Lok Shan Road	58	G/F	-	$24,130,000
Lok Shan Road	60	G/F	-	$18,450,000
Lok Shan Road	62	G/F	-	$26,860,000
Lok Shan Road	64	G/F	-	$28,180,000
Lok Shan Road	66	G/F	-	$25,030,000
Lok Shan Road	68	G/F	-	$30,430,000
Lok Shan Road	70	G/F	-	$27,930,000
Mei Wa Street	1	G/F	-	$6,120,000
Mei Wa Street	3	G/F	-	$6,440,000
Mei Wa Street	5	G/F	-	$6,450,000
Mei Wa Street	7	G/F	-	$5,680,000
Mei Wa Street	9	G/F	-	$7,250,000
Ha Yeung Road	18	G/F	-	$13,900,000
Ha Yeung Road	20	G/F	H1	$9,420,000
Ha Yeung Road	20	G/F	H2	$4,370,000
Lok Shan Road	62/64	G/F	Staircase	$2,080,000
Lok Shan Road	68/70	G/F	Staircase	$2,200,000
Mei Wa Street	1	G/F	Staircase	$500,000
Mei Wa Street	3/5	G/F	Staircase	$520,000

Sub-total:

$245,940,000

Road / Street

No

Floor

Unit

EUV

Lok Shan Rd	58	1	-	$5,460,000
Lok Shan Rd	60	1	-	$3,730,000
Lok Shan Rd	62	1	-	$5,210,000
Lok Shan Rd	64	1	-	$5,170,000
Lok Shan Rd	66	1	-	$4,960,000
Lok Shan Rd	68	1	-	$5,190,000
Lok Shan Rd	70	1	-	$6,600,000
Mei Wa St	1	1	-	$4,390,000
Mei Wa St	3	1	-	$4,390,000
Mei Wa St	5	1	-	$4,390,000
Mei Wa St	7	1	-	$3,760,000
Mei Wa St	9	1	-	$5,260,000
Ha Heung Rd	18	1	-	$5,490,000
Ha Heung Rd	20	1	-	$5,420,000
Lok Shan Rd	58	2	-	$5,350,000
Lok Shan Rd	60	2	-	$3,570,000
Lok Shan Rd	62	2	-	$5,110,000
Lok Shan Rd	64	2	-	$5,070,000
Lok Shan Rd	66	2	-	$4,630,000
Lok Shan Rd	68	2	-	$5,090,000
Lok Shan Rd	70	2	-	$6,310,000
Mei Wa St	1	2	-	$4,190,000
Mei Wa St	3	2	-	$4,300,000
Mei Wa St	5	2	-	$4,300,000
Mei Wa St	7	2	-	$3,690,000
Mei Wa St	9	2	-	$5,160,000
Ha Heung Rd	18	2	-	$5,380,000
Ha Heung Rd	20	2	-	$5,310,000
Lok Shan Rd	58	3	-	$5,250,000
Lok Shan Rd	60	3	-	$3,590,000
Lok Shan Rd	62	3	-	$4,880,000
Lok Shan Rd	64	3	-	$4,980,000
Lok Shan Rd	66	3	-	$4,780,000
Lok Shan Rd	68	3	-	$4,990,000
Lok Shan Rd	70	3	-	$6,190,000
Mei Wa St	1	3	-	$4,260,000
Mei Wa St	3	3	-	$4,260,000
Mei Wa St	5	3	-	$4,260,000
Mei Wa St	7	3	-	$3,660,000
Mei Wa St	9	3	-	$4,990,000
Ha Heung Rd	18	3	-	$5,270,000
Ha Heung Rd	20	3	-	$5,220,000
Lok Shan Rd	58	4	-	$5,150,000
Lok Shan Rd	60	4	-	$3,520,000
Lok Shan Rd	62	4	-	$4,910,000
Lok Shan Rd	64	4	-	$4,880,000
Lok Shan Rd	66	4	-	$4,680,000
Lok Shan Rd	68	4	-	$4,890,000
Lok Shan Rd	70	4	-	$6,070,000
Mei Wa St	1	4	-	$4,180,000
Mei Wa St	3	4	-	$4,180,000
Mei Wa St	5	4	-	$4,180,000
Mei Wa St	7	4	-	$3,580,000
Mei Wa St	9	4	-	$5,010,000
Ha Heung Rd	18	4	-	$5,040,000
Ha Heung Rd	20	4	-	$5,110,000
Lok Shan Rd	58	5	-	$5,040,000
Lok Shan Rd	60	5	-	$3,450,000
Lok Shan Rd	62	5	-	$4,810,000
Lok Shan Rd	64	5	-	$4,780,000
Lok Shan Rd	66	5	-	$4,590,000
Lok Shan Rd	68	5	-	$4,800,000
Lok Shan Rd	70	5	-	$5,950,000
Mei Wa St	1	5	-	$4,100,000
Mei Wa St	3	5	-	$4,100,000
Mei Wa St	5	5	-	$4,100,000
Mei Wa St	7	5	-	$3,510,000
Mei Wa St	9	5	-	$4,910,000
Ha Heung Rd	18	5	-	$5,070,000
Ha Heung Rd	20	5	-	$5,010,000
Lok Shan Rd	58	6	-	$4,890,000
Lok Shan Rd	60	6	-	$3,340,000
Lok Shan Rd	62	6	-	$4,670,000
Lok Shan Rd	64	6	-	$4,640,000
Lok Shan Rd	66	6	-	$4,450,000
Lok Shan Rd	68	6	-	$4,530,000
Lok Shan Rd	70	6	-	$5,770,000
Mei Wa St	1	6	-	$3,970,000
Mei Wa St	3	6	-	$3,970,000
Mei Wa St	5	6	-	$3,870,000
Mei Wa St	7	6	-	$3,400,000
Mei Wa St	9	6	-	$4,760,000
Ha Heung Rd	18	6	-	$4,920,000
Ha Heung Rd	20	6	-	$4,860,000
Lok Shan Rd	58	7	-	$4,740,000
Lok Shan Rd	60	7	-	$3,240,000
Lok Shan Rd	62	7	-	$4,520,000
Lok Shan Rd	64	7	-	$4,400,000
Lok Shan Rd	66	7	-	$4,010,000
Lok Shan Rd	68	7	-	$4,310,000
Lok Shan Rd	70	7	A1	$1,630,000
Lok Shan Rd	70	7	A2	$1,550,000
Lok Shan Rd	70	7	A3	$1,310,000
Lok Shan Rd	70	7	A4	$1,250,000
Mei Wa St	1	7	-	$3,580,000
Mei Wa St	3	7	-	$3,770,000
Mei Wa St	5	7	-	$3,580,000
Mei Wa St	7	7	-	$3,230,000
Mei Wa St	9	7	-	$4,530,000
Ha Heung Rd	18	7	1	$1,270,000
Ha Heung Rd	18	7	2	$1,280,000
Ha Heung Rd	18	7	3	$1,360,000
Ha Heung Rd	18	7	4	$910,000
Ha Heung Rd	20	7	H1	$1,500,000
Ha Heung Rd	20	7	H2	$1,580,000
Ha Heung Rd	20	7	H3	$1,200,000
Ha Heung Rd	20	7	H4	$340,000
-	-	Roof	-	$6,460,000

Sub-total:

$460,650,000

40.  I therefore accept the total EUV of the Building is $706,590,000 (i.e. $245,940,000 + $460,650,000). 

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

41.  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).”

42.  The applicants 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

43.  The applicants adduce expert evidence of Mr CM Wong, a structural engineer of CM Wong & Associates Limited and Mr Dennis Wong, a building surveyor of Prudential Surveyors International Limited. Mr CM Wong conducted a structural survey of the Building and prepared a Structural Assessment Report on 12 November 2020.  Mr Dennis Wong conducted a condition survey of the Building and prepared a Condition Survey Report on 13 November 2020. 

44.  None of the respondents adduced expert evidence to rebut the reports complied by Mr CM Wong and Mr Dennis Wong.  

45.  Having considered the reports of Mr CM Wong and Mr Dennis Wong, I accept their expert opinion. The Building, being erected more than 60 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.

46.  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.

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

Whether the applicants have taken reasonable steps

48.  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……”

49.  The applicants have made 3 round offers to R12, R16 and R17 on 28 March 2019, 9 February 2021 and 5 July 2021. Ms Ngai submits that all these offers fall within the range of fair and reasonable compensation for the interested owned by R12, R16 and R17. The offer prices have made reference to the independent valuation of Mr Chan and have also reflected the then pro-rata share of the RDV. In addition, a premium of at least 34% above Mr Chan’s assessment has been added to each offer.

50.  Ms Ngai further submits that after consideration of the said premium, all the offers in fact were made on the assumption that the Green Area, which is in dispute between the applicant and R16, could be taken into account in calculating the plot ratio and site coverage upon redevelopment of the Lot, and therefore they are more than fair and reasonable.

51.  Mr Koo submits the applicants’ offers were made on the basis inter alia that the Green Area has to be deducted from the net developable site area of the Lot.  Irrespective of whether or not the applicants did have taken the Green Area in consideration and therefore added the premium as alleged, there was a serious fault in respect of Mr Chan’s valuation opinion.  It is also a serious fault for the applicants to have quoted and / or relied on their valuer’s wrongful opinion. This also constitutes a serious and / or material misrepresentation or misleading statement to the minority owners in the offers. Mr Koo further submits that the offers which contain the said serious and / or material misrepresentations or misleading statements cannot constitute “reasonable steps” at all. Alternatively, it is unreasonable for an applicant to make an offer to acquire the shares, which contain material misrepresentation or misleading statement.

52.  Although I, in the determination below, accept that the Green Area can be included in the net developable site area for calculating the plot ratio and site coverage of the hypothetical development and at the same time a higher developer’s profit should also be adopted in the residual valuation to reflect the associated risks, I am of the view that the subject issue is at least arguable and therefore cannot conclude that the applicants’ offers had contained material misrepresentations or misleading statements. The controversial issue on the net developable site area of the Lot in fact had been mentioned in the offers explicitly and a premium that appears to reflect the inclusion of the Green Area had indeed been allowed in the offer prices. Where necessary, the minority owners like R16 can seek their own professional advice to review the offers.

53.  Whilst, the Ordinance has stipulated how to apportion the sale proceeds among all the owners and that the reserve price in public auction should take into account the redevelopment potential of the Lot on its own only. Although R12 and R17 complaint that the offer prices are insufficient for them to purchase replacement properties in the same district and request for a compensation similar to the terms offered by the Urban Renewal Authority, all these are not the considerations of “reasonable steps”. Indeed, the tribunal cannot make any order inconsistent with the Ordinance.

54.  On the evidence available, I accept the offer prices have reflected the respective proportionate share of the RDV of the Lot and do fall within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. I am satisfied the applicants have taken reasonable steps to acquire all the undivided shares in the Lot.

RESERVE PRICE FOR THE AUCTION

55.  By reason of being satisfied that redevelopment of the Lot is justified and that the applicants have 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 applicants.

56.  The 2 valuation experts agree to adopt residual method and update their respective RDV assessments as at 29 June 2021.  They agree to develop the Lot on a registered site area of 947.28 square meters and at the maximum plot ratio of 9 (i.e. maximum domestic plot ratio of 7.5 and maximum non-domestic plot ratio of 1.5), but they dispute mainly whether the net developable site area is the registered site area as adopted by Ms Sat or 708.97 square meters only (i.e. with deduction of the site areas occupied by a service lane and Mei Wa Street in the Lot, the Green Area) as adopted by Mr Chan.  While Mr Chan proposes to build a block of 22-storey composite building with shops on ground floor and 1^st floor, club house on 2^nd floor and domestic units on upper floors, Ms Sat opines that the optimum hypothetical development would be a block of 24-storey composite building with shops on ground floor, 1^st floor and 2^nd floor, clubhouse with recreational facilities on 2^nd floor, mechanical floor on 3^rd floor and domestic units on upper floors.

57.  Although Mr Chan and Ms Sat agree on the adopted unit rate for the upper floor domestic units at $243,500 per square meter, they argue whether or not this adopted unit rate includes the value of flat roof on 3^rd floor or 4^th floor. They also disagree on the gross development value (“GDV”) of the ground floor shops and the conversion factors for 1^st floor shops and 2^nd floor shops (if any).

58.  In the residual valuation, they agree on the unit demolition costs at $2,214 per square meter, but they differ in opinion on how to derive the unit construction costs. They agree on demolition period of 0.75 years, interest rate at 4% per annum, marketing cost at 3% of GDV, professional fees at 6%, but they disagree on construction period and developer’s profit.

“Green Area” and Hypothetical Development Scheme

59.  It is not in dispute that inclusion of the Green Area, including the areas occupied by Mei Wa Street and a service lane between Lok Shan Road and Mei Wa Street in the Lot over which a third party right of way is subsisting, for calculation of plot ratio and site coverage upon redevelopment would require an application for modification of section 23(2)(a) of the Building (Planning) Regulations, Cap 123F (“BPR’) under section 42 of the Buildings Ordinance, Cap 123 (“the Modification”), and upon redevelopment of the Lot, in any event, the Green Area must be left unbuilt upon and must be made available for use as passages.

60.  It is the applicants’ case that, as a starting point, the Green Area should be excluded from the area of site for calculating the plot ratio and site coverage of the hypothetical development to be erected on the Lot.  Although a purchaser of the Lot in the market may apply to the Building Authority for the Modification, the Building Authority and, on appeal, the Appeal Tribunal (Buildings) may or may not approve an application for the Modification.

61.  Ms Ngai, counsel for the applicants, submits that the tribunal should not make a determination as to whether the Building Authority would approve an application for the Modification because the tribunal simply does not have the power to do so in setting the reserve price under the Ordinance.  It is a matter for the Building Authority and, on appeal, the Appeal Tribunal (Buildings) to decide whether the Modification should be approved at the end of the day.  Nevertheless, Ms Ngai also submits that feasibility in obtaining the Building Authority’s approval of the Modification is part and parcel of the “redevelopment potential” of the Lot and should be reflected in the RDV of the Lot.

62.  On the other hand, Ms Ngai submits that, in assessing the RDV of the Lot for setting the reserve price under the Ordinance, it is not necessary for the tribunal to determine whether the Building Authority would approve an application for the Modification, because selling price of the Lot should be left for determination by market force. If approval of the Modification is assumed in the valuation and then if the reserve price is over-valued in such circumstances, sale of the Lot may fall through and the minority owner respondents will receive nothing to their detriment.  Hence, the reserve price does not need to consider the Modification, and the tribunal should leave it to the market to determine whether a price higher than the reserve price can be achieved.  The final achievable price in the public auction will reflect whether or not the Modification can be approved.  If the Modification can be approved, a higher selling price above the reserve price and reflecting such redevelopment potential would be achieved in the public auction.

63.  Although Mr Chan initially said at trial that in accessing the market value of the Lot, a valuer should not take into consideration of hope value if any, he later rectified in response to an enquiry of the tribunal only that market value indeed can include hope value when there is a reasonable prospect (as reflected in the market of at least 50% chance) that the changes be permitted.  I consider the definition of market value is clear as subsequently rectified by Mr Chan and a prudent valuer should not make such obvious mistake. Nevertheless, Mr Chan considers that the chance for obtaining approval of the Modification is extremely low (if not zero) and therefore, the RDV of the Lot should not reflect the hope value associated with the Modification.

64.  Mr Chan also opines that if he had to assess the RDV on the assumption that the Modification were to be approved by the Building Authority and that the Green Area were to be taken into account for the purpose of calculating the plot ratio and site coverage of the hypothetical development, he would make additional adjustments in his residual valuation to reflect his opinion that the prospect of success in obtaining such approval from the Building Authority was extremely low and that, accordingly, willing purchasers interested in bidding for the Lot had to face and accept an extremely high commercial risk. The additional adjustments include the overall development period would be lengthened, the overall construction costs would be increased and the developer’s profit would also be increased to reflect the high risk involved.  However, except for his general comments at trial, he has never provided a residual valuation in such scenario to the live respondents for comment and the tribunal for consideration.

65.  Ms Sat’s assessment of the RDV relies on the expert opinion of Mr Lam Siu Tong (“Mr Lam’), an Authorized Person and also a former Deputy Director of the Buildings Department. Mr Lam is of the view the Building Authority is highly likely to approve an application for the Modification.

66.  Regarding the service lane within the Green Area, Mr Lam considers that, according to Practice Note PNAP APP-73 issued by Buildings Department, the area of the service lane within the Lot can be included in the site area for plot ratio and site coverage calculation if the design of the redevelopment proposal does not use the service lane for purposes under the Buildings Ordinance such as means of escape and an application for the Modification is approved. Where an abutting private lane is in the ownership of the developer but is not specifically required for any purpose under the Buildings Ordinance for the proposed scheme, the Building Authority will give favourable consideration to including the relevant area of such lane in site coverage and plot ratio calculation. Further, since the Lot is a Class C or a Class B site abutting 3 or 2 streets respectively, a service lane shall not be required in this instance because a street already exists. Section 28 of the BPR provides that a service lane at the rear or side of the building shall not be required where a public lane not less than 3-meter wide or a street already exists.

67.  Regarding Mei Wa Street, Mr Lam considers that the area of Mei Wa Street within the Lot can also be included in the site area for plot ratio and site coverage calculation. He explains that Lok Shan Road and Ha Heung Road should be public streets, which are vested in the Government and are maintained by the Highways Department, whilst Mei Wa Street in its existing state having the characteristic of a private street appears to be a specified street under the BPR.  In the circumstances, the Lot can be taken as a Class C site under section 18A of the BPR. However, the Lot may also be taken as a Class B site upon redevelopment, if Mei Wa Street (i) is not to be used for site classification; (ii) will not be used for any purpose under the Buildings Ordinance; (iii) remains not to be built on or over; and (iv) continue to be available for pass and repass by owners and tenants of the adjoining site. 

68.  Mr Lam is of the view that, so long if the Lot is taken as a Class B site upon redevelopment and complies with the said 4 conditions, the Modification is highly likely to be approved by the Building Authority. He further explains that, even if Mei Wa Street is currently regarded as a street, such street has to be kept for the Building only and the status of a street can be changed upon redevelopment. In addition, Mr Lam quotes an example (i.e. Nos 29 - 39 Kennedy Road), which have obtained approval of the Building Authority to allow the area of right of way to be included in the site area for plot ratio and site coverage calculation.

69.  Whether or not Mei Wa Sreet should be regarded as a street upon redevelopment would affect the maximum gross floor area to be built on the Lot. The town plan of the Lot restricts the maximum plot ratio to be 9 irrespective of site classification. Therefore, if Mei Wa Street is not regarded as a street upon redevelopment and the Lot is a Class B site only, the area of Mei Wa Street within the Lot can be included in the site area for plot ratio and site coverage calculation subject to the approval of an application for the Modification, which would increase the maximum gross floor area to be built on the Lot.  Whereas, if the Lot should be a Class C site upon redevelopment, the area of Mei Wa Street within the Lot would not be counted as the net developable site area.

70.  On balance of probabilities, I consider that there is a high chance for Mei Wa Street to be regarded as a Class B site upon redevelopment and there is also a high chance for the Modification, the inclusion of both the subject service lane and the area of Mei Wa Street within the Lot for plot ratio and site coverage calculation, to be approved by the Building Authority. The expert opinion of Mr Lam, who has much experience in this regard, is logical and persuasive in this instance.  Although I agree that the tribunal cannot make a determination as to whether the Building Authority would approve an application for the Modification, it is now a matter of valuation only, for which the tribunal can decide the probability for the approval of the Modification and how this be reflected in the valuation. 

71.  I consider the risks of fallen through in public auction if a higher reserve price is set reflecting the approval of the Modification, as opined by Mr Chan and advocated by Ms Ngai, is neither here nor there. I must point out again that it is a matter of valuation only, which should truly reflect the redevelopment potential in the market. On the contrary, there are also risks that the reserve price may be under-valued if the probability for the approval of the Modification has not been truly reflected in the valuation and subsequently the public auction may not be able to correct such mistake. 

72.  The majority owner in a compulsory sale case is usually holding most of the shares in a lot(s) to be auctioned. In each bid above the reserve price made by the majority owner in a public auction, the majority owner would need to pay a marginal price to the minority owner(s) only and the rest will finally go to his own pocket, and such advantage cannot be enjoyed by a third party purchaser or minority owner.  This is the limitation of public auction in compulsory sale case. The majority owner and a third party (or minority owner), both as a prospective purchaser in public auction, may not stand on the same ground. Although there are limited examples in the past that there were competitive bids in public auction, such limitation of public auction in compulsory sale case could not be eliminated.  I doubt whether the market force as alleged by the applicants can really adjust the selling price in the public auction of a compulsory sale case. Therefore, under the Ordinance, it is still the upmost duty of the tribunal to determine a fair and reasonable reserve price reflecting the redevelopment potential irrespective of the private agenda if any and worries of the parties.

73.  Since I accept that the net developable site area for calculation of maximum gross floor area should include the “Green Area”, I accept the hypothetical development scheme proposed by Ms Sat (i.e. total gross floor area of 8,525.52 square meters). I also accept her proposed layout and shop reference unit.  Nevertheless, I consider that there should have no flat roof on 4^th floor, which is built on top of a mechanical floor on 3^rd floor and a transfer plate.

74.  Although I accept the hypothetical development scheme proposed by Ms Sat, I agree with Mr Chan that there should have a longer construction period and a higher developer’s profit in the residual valuation to reflect the risks for approval of the Modification. In any event, the Modification is subject to approval, and there is no unquestionable right to include the Green Area as the net developable site area for plot ratio and site coverage calculation.

GDV – Shops on Ground Floor, 1^st Floor and 2^nd Floor

75.  In addition to the 4 common comparables for valuation of the shop reference unit on ground floor, Ms Sat has proposed 2 other comparbles (i.e. Comparables SL3 and SL4), which have been adopted in the EUV assessment and were transacted in 2017, more than 4 years before the valuation date on 29 June 2021.  Since there are 4 common comparables only, I agree to analyse Comparables SL3 and SL4 in the initial assessment, but their adjusted unit rates should be further reviewed.

76.  Mr Chan and Ms Sat agree on the adjustment for time with reference to private retail price indices and the adjustment for return frontage to Comparable SL6 at -10%.  Regarding the adjustment for location, I agree with Mr Chan Comparables SL5, SL6, SL7 and SL8 should be adjusted at 5%, 0%, 5% and 5% respectively, and the same adjustment rates for Comparables SL3 and SL4 as determined by the tribunal in the EUV assessment should also be applied in the RDV assessment. I am not persuaded by Ms Sat that there should have additional upward location adjustment in this instance to reflect the impact of the MTR opening because this should have been reasonably anticipated in recent years.

77.  Regarding the adjustments for age, frontage, headroom, size and layout, I am of the view that the same adjustment rates and principles as determined by the tribunal in the EUV assessment for shop reference unit fronting onto Lok Shan Road should also be applied in the RDV assessment.

78.  The valuation of the shop reference unit is listed in Appendix V of the judgment.  The average unit rate of the 6 shop comparables is about $432,421.  The average excluding Comparables SL3 and SL4 transacted in 2017 is $409,991, and the average excluding Comparable SL6, which has substantial adjustments for size, frontage and return frontage, is $444,032. I consider the shop reference unit should be assessed at $435,000 per square meter.

79.  The other hypothetical shops on ground floor proposed by Ms Sat are similar to the shop reference unit or better than the shop reference unit in terms of size, frontage, layout and return frontage. Accordingly, I consider the average unit rate of the ground floor shops should be adjusted upward to say $469,000 per square meter. On the other hand, I consider the unit rate of the 1^st floor shops should be $156,333 per square meter, 1/3 of the average unit rate of the ground floor shops, and the unit rate of the 2^nd floor shops should be $132,883 per square meter, 85% of the unit rate of the 1^st floor shops.

RDV of the Lot as at 29 June 2021

80.  Based on the agreements of the 2 valuation experts and the above determinations, the residual valuation of the Lot as at 29 June 2021 is listed in Appendix VI of the judgment.  Mr Chan and Ms Sat suggest unit construction costs at the rate of $39,601 and 38,247 per square meter gross respectively. The difference between the 2 proposals is minimal, and I consider it is reasonable to adopt the unit construction costs at the rate of $39,000 per square meter gross.

81.  Having considered the characteristics of the hypothetical development and the need to make an application for the Modification, I consider it is prudent to adopt a total development period of 3.25 years as originally suggested by Mr Chan instead of 3 years as proposed by Ms Sat. I agree with Mr Lam that the application for the Modification can be submitted together with the building plans, which can shorten the whole development process.

82.  Regarding the developer’s profit on costs in the residual valuation, I consider it is fair and reasonable to adopt a percentage of about 17.5% in this instance if there is no need to make an application for the Modification and there are also no explicit allowances for stamp duty and legal cost on land value. I agree with Ms Sat that the property market has been improving as at the date of valuation and therefore a lower developer’s profit is justified. However, the developer’s profit should be increased to say 22.5%, an extra 5% instead of an extra 10% as suggested by Mr Chan, to reflect the need and risks for the Modification.

83.  The Lot is assessed at $962,000,000, equivalent to an accommodation value of about $112,838 per square meter (i.e. about $10,483 per square foot), which has considered the inclusion of Green Area in the calculation of maximum gross floor area and the associated risks.

ORDERS

84.  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 WK Chow and Ms Anna SH Chow, nominated by the applicants, 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 6 July 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 $962,000,000;

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 applicants, the 4^th respondents, the 12^th respondent, 16^th respondent, the 17^th respondent, the 18^th respondent and the Trustees to apply to the tribunal for further directions.

COSTS

85.  Following Good Faith ^[1], I make a costs order nisi that the applicants do pay costs of these proceedings to the respondents, on High Court scale with certificate for counsel and including any reserved costs, to be taxed if not agreed.  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.

[1] Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 5340