NICE BEAUTY LTD v. YAN YAN MOTORS LTD AND OTHERS

LDCS 14000/2019

[2021] HKLdT 77

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 14000 OF 2019

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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 the Remaining Portion of Kowloon Inland Lot No 8662 (“the 1^st Lot”) and the Remaining Portion of Kowloon Inland Lot No 8899 (“the 2^nd Lot) (the 1^st Lot and the 2^nd Lot are collectively referred to as “the Lots”) together with a building erected thereon known as Tai Chi Court, Nos 132 and 134 Austin Road, Kowloon (“the Building”).

2.  The Building is a 12-storey residential / commercial composite building. Vertical circulation within the Building is served by 2 lifts and 2 common staircases. Access to the upper floors is by means of 2 staircases leading from Austin Road to the 1^st floor. Occupation permit No K150/66 was issued for the Building on 14 April 1966, granting permission to occupy its ground floor as 2 shops for non‑domestic use, 1^st floor as 2 offices for non-domestic use, and 2^nd floor to 11^th floor as 4 flats per floor for domestic use.  

3.  According to the approved building plans, there are 2 shops planned on ground floor, 2 offices planned on 1^st floor, and 4 flats planned on each of 2^nd floor to 11^th floor. There is also a set of alteration and addition plans approved by the Building Authority on 2 January 1996, which show that the 1^st floor is altered into 3 offices and 1 kitchen, and the kitchen (i.e. Office D on 1^st Floor) is connected with the shop below (i.e. Ground Floor of No 134 Austin Road) by an open staircase and a dumb waiter.

4.  According to the records of the Land Registry, the 1^st Lot together with part of the Building (i.e. No 132 Austin Road) standing thereon is allocated 24 undivided shares. The shop on ground floor is given 2 undivided shares, each of the 2 offices (i.e. Office A and Office C) on 1^st floor is given 1 undivided share, and each of the 20 flats (i.e. Flat A and Flat C) on upper floors is given 1 undivided share, making up a total of 24 undivided shares.

5.  The 2^nd Lot together with another part of the Building (i.e. No 134 Austin Road) standing thereon is also allocated with 24 undivided shares. The shop on ground floor is given 2 undivided shares, each of the 2 offices (i.e. Office B and Office D) on 1^st floor is given 1/2 of 2 undivided shares, and each of the 20 flats (i.e. Flat B and Flat D) on upper floors is given 1 undivided share, making up a total of 24 undivided shares.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

6.  At the time of filing of the Notice of Application (“NOA”) on 29 April 2019, there were 5 respondents and the applicant owned 91.67% (i.e. 22 out of the total 24) undivided shares in the 1^st Lot and 75% (i.e. 18 out of the total 24) undivided shares in the 2^nd Lot (i.e. on average 83.33% in the Lots), more than the threshold of 80% required for building aged 50 years or above.

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%.  Section 3(2) of the Ordinance prescribes that an application under subsection (1) may cover (a) 2 or more lots where the majority owner owns not less than the percentage specified in subsection (1) of the undivided shares in each lot; or (b) 2 or more lots (i) on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings; and (ii) where the average of (A) the percentage of the undivided shares owned by the majority owner in the lot or lots on which one of the buildings stands; and (B) the percentage of the undivided shares owned by the majority owner in the lot or lots on which the other of the buildings stands, is not less than the percentage specified in subsection (1).

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 1966, i.e. more than 50 years before the date of application (i.e. 29 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 applicant owned on average more than 80% of the undivided shares in the Lots. I am therefore satisfied the applicant is entitled to make the present application under section 3 of the Ordinance.

THE REMAINING RESPONDENTS

12.  At trial, the applicant still owned 83.33% undivided shares in the Lots. The following 5 respondents (“the Remaining Respondents”) remain in the present action: -

Respondent		Premises
1st Respondent	(“R1”)	Ground Floor of No 134 Austin Road and Office D on 1st Floor (“R1’s Property”)
2nd Respondent	(“R2”)	Flat A on 2nd Floor (“R2’s Property”)
3rd Respondent	(“R3”)	Flat B on 5th Floor and Flat D on 8th Floor (R3’s Property)
4th Respondents	(“R4”)	Flat B on 7th Floor (R4’s Property)
5th Respondent	(“R5”)	Flat A on 8th Floor (R5’s Property)

13.  R1 is represented by Mr Ross Yuen (“Mr Yuen) and Ms Emily Ting.  R1 primarily disputes the valuations, both the existing use value (“EUV”) of R1’s Property and the redevelopment value (“RDV’) of the Lots, as assessed in the application and put the applicant to strict proof in respect of the other statutory requirements under the Ordinance. R1 relies on the valuation evidence of Mr Francis Lau of Goldrich Planners and Surveyors Limited.

14.  R2 and R3 are represented by Mr Leung Hing Fung (“Mr Leung’).  The applicant, R2 and R3 have come to agreement on EUV assessment, but they dispute on RDV assessment. R2 and R3 also argue whether the applicant has taken reasonable steps to acquire all the undivided shares in the Lots on terms that are fair and reasonable and whether the redevelopment of the Lots is justified due to age and/or state of repair of the Building.  R2 and R3 rely on the valuation evidence of Mr Tony Cheng of BMI Appraisals Limited, and the building condition and structural assessment evidence of Mr James Chan of Charterwealth Professional Limited.

15.  R4 is represented by Ms Lorinda Lau (“Ms Lau). The position and arguments of R4 are similar to those of R2 and R3.  R4 has also appointed Mr Tony Cheng and Mr James Chan as their experts in these proceedings.

16.  R5 is unrepresented, and did not file Notice of Opposition and any evidence. R5 submitted in her letter dated 22 July 2021 that she does not oppose the application and would not attend the trial.

17.  The applicant is represented by Mr C Y Li, SC (“Mr Li”) leading Mr Jonathan Tai.  The applicant appoints Mr Charles Chan of Savills Valuation and Professional Limited as its valuation expert, and Mr Benson Wong of Benson Wong & Associates Limited and Mr C M Wong of CM Wong & Associates Limited as its building experts.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

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

(1)  What was the respective EUV of all units in the Building as at 25 February 2019, the valuation date adopted in the application valuation report dated 25 February 2019, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?

(2)  Whether the redevelopment of the Lots 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 Lots 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. RDV of the Lots) for the purpose of auction sale?

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING

19.  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.”

20.  Mr Charles Chan and Mr Tony Cheng agree on the EUV of each unit in the Building, whereas Mr Francis Lau put in evidence and dispute about the valuation of R1’s Property only. Nevertheless, the parties agree that in case if the EUV of R1’s Property as agreed by Mr Charles Chan and Mr Tony Cheng is finally adjusted by the tribunal, similar changes should also be applied to the assessment of another shop, Ground Floor of No 132 Austin Road.

EUV of R1’s Property

21.  The parties argue whether the open staircase of R1’s Property of 4.1 square meters should be converted by a factor of 1/10 as adopted by Mr Charles Chan and Mr Tony Cheng or 1 as suggested by Mr Francis Lau. I consider the conversion factor of this staircase, which is not covered and cannot be used as a trading area, should not be the factor of 1, and the conversion factor should also not be the factor of 1/10 because it is useful to the occupier.  Given that the agreed conversion factors for cockloft and yard are 1/4 and 1/6 respectively, I am of the view it is justified to convert the open staircase in this instance at 1/4, and the effective saleable area of Ground Floor of No 134 Austin Road should then be 170.9 square meters.

22.  I am also of the view Office D on 1^st Floor should be converted at 1/4 as adopted by Mr Charles Chan and Mr Tony Cheng instead of 1/2 as suggested by Mr Francis Lau. At the conversion factor of 1/4, the unit rate of Office D on 1^st Floor is higher than the unit rate of its adjacent unit, Office C, which is similar to it at the back of the Building, and is slightly below the respective unit rates of Office A and Office B, which have the benefit of window display onto Austin Road.

23.  In the selection of comparables for direct comparison, Mr Charles Chan and Mr Tony Cheng agree to adopt 7 comparables (i.e. Comparables R1 – R7) on the west of Nathan Road, whilst Mr Francis Lau relies on 1 comparable (i.e. Comparable R9) only.  Although Comparable R9 along Austin Road is much close to the Building, I consider the search for relevant comparables should be extended to a larger area in the district including Comparables R1 – R7. Further, although Mr Charles Chan suspects whether Comparable R9, which was sold by a liquidator, did reflect the market price and opines that it was a forced sale in the middle of the social movement in Hong Kong, there is no evidence to indicate that its transaction price was above the then market level and can create prejudice against the applicant and R2 – R5 who owns domestic flats only.  I agree to analyse Comparable R9, but its adjusted unit rate should be further reviewed in the assessment.

24.  On the other hand, I agree with Mr Charles Chan and Mr Tony Cheng to adopt Comparable R1, which comprises both ground floor and mezzanine floor in 2 separate transactions. Given that they were sold together to related parties, I agree with Mr Charles Chan that this transaction can provide useful market evidence, but its adjusted unit rate should also be further reviewed in the assessment.  Further I agree with Mr Mr Charles Chan and Mr Tony Cheng that the depth of Comparable R5 should be 14.2 meters only excluding the ancillary areas at the back of the shop.

25.  Other particulars of R1’s Property and the comparables are agreed by the 3 valuation experts.  They also agree on the adjustment for time with reference to RVD indices, the adjustment for age at 1% per 5-year difference, the adjustment for size at 1% per 10-square meter difference and the adjustment for frontage at 2% per 0.5-meter difference.  They have disagreements on the adjustments for location, layout and headroom only.

26.  With the benefit of site inspection together with the parties, I consider Comparables R2 and R3 are better than the reference unit (i.e. Ground Floor of No 134 Austin Road) in terms of location, and the other comparables including Comparable R9 are relatively inferior. I am of the view, except for Comparables R2 and R3 that have heavy pedestrian flow, most of the comparables on the west of Nathan Road particularly those along Shanghai Street and those on the south of Bowring Street serve mainly the local residents of lower-middle income group and/or have limited pedestrian flow. Nonetheless, I cannot agree with Mr Francis Lau that the Building is located in a tourist and high-end area with catchment of high income group. I consider it is a mid-end area only in the fringe instead of the centre of a tourist district. In addition, I consider Comparable R9 is slightly inferior than the reference unit, which is immediately next to a pedestrian crossing. Accordingly, I consider Comparables R1, R2, R3, R4, R5, R6, R7 and R9 should be adjusted at 15%, -7.5%, -15%, 20%, 30%, 15%, 7.5% and 2.5% respectively.

27.  The reference unit is a relatively regular shop with long depth of 26.1 meters, and has a lift pit and columns inside the unit. In terms of layout, I agree with Mr Charles Chan and Mr Tony Cheng to firstly make adjustment for depth, but the adjustment rate in this instance should be 1.25% per 1-meter difference only instead of 2% per 1-meter difference. I also agree to make additional adjustment for shape. I consider the shapes of Comparables R3 and R4 are relatively better than the reference unit, the shape of Comparable R9 is inferior than the reference unit and the other comparables are similar, but all the differences are not significant.  Accordingly, and after rounding, Comparables R1, R2, R3, R4, R5, R6, R7 and R9 should be adjusted at -9%, -16%, -14%, -11%, -15%, -12%, -12% and -18% respectively.

28.  In terms of headroom, the dispute is limited to Comparables R1, R6 and R7 only, which have cockloft above their ground floor areas. The 3 valuation experts agree on the adjustment rate at 2% per 0.5-meter difference, but I prefer to round the results to 3 decimal places. Mr Charles Chan and Mr Tony Cheng make headroom adjustment with reference to the full headroom only, whilst Mr Francis Lau considers that the lower headroom under cockloft should be adopted because the majority of the shop with cockloft is of a lower headroom due to the cockloft above. I consider that the headroom of the respective portions of Comparables R1, R6 and R7 and their respective areas should be taken into consideration in the headroom adjustment and the high headroom vertically at the shop front is an additional benefit. Accordingly, I am of the view Comparables R1, R6 and R7 should be adjusted at -1.5%, -0.5% and -1% respectively.

EUV of Units on Ground Floor and 1^st Floor

29.  The valuation of the reference unit is listed in Appendix I of the judgment.  The average unit rate of the 8 comparables is $429,071, and the average unit rate excluding the highest (i.e. Comparable R3) and the lowest (i.e. Comparable R4) is $419,602. I consider the adopted unit rate should be $430,000 per square meter, close to the adjusted unit rate of Comparable R9, which is close to the Building.

30.  Applying the same principles above, Ground Floor of No 132 Austin Road is assessed at $71,400,000 and its valuation is listed in Appendix II of the judgment. The valuation of Office D on 1^st Floor, which is assessed at 1/4 of the unit rate of the reference unit, and the valuations of the other 3 office units as agreed by Mr Charles Chan and Mr Tony Cheng are also listed in Appendix II. Having reviewed the agreed EUV of all units other than R1’s Property by Mr Charles Chan and Mr Tony Cheng, which is not objected by R1, I accept them in the judgment.

EUV of All Units in the Building

31.  The EUV of all units in the Building as at the relevant date of valuation, i.e. 25 February 2019, and adopted by this tribunal are appended below: -

Floor / Unit	Unit	EUV
G/F of No 132	No 132	$71,400,000
G/F of No 134 and Unit D on 1/F	No 134	$79,760,000
Unit A on 1/F	A	$6,890,000
Unit B on 1/F	B	$6,910,000
Unit C on 1/F	C	$5,100,000
	Sub-total:	$170,060,000

Floor	Unit	EUV		Floor	Unit	EUV
2/F	A	$10,100,000		2/F	C	$8,560,000
3/F	A	$9,860,000		3/F	C	$8,430,000
4/F	A	$10,220,000		4/F	C	$8,830,000
5/F	A	$10,480,000		5/F	C	$8,870,000
6/F	A	$10,530,000		6/F	C	$8,920,000
7/F	A	$10,590,000		7/F	C	$8,960,000
8/F	A	$10,640,000		8/F	C	$9,010,000
9/F	A	$10,690,000		9/F	C	$8,500,000
10/F	A	$10,750,000		10/F	C	$8,340,000
11/F	A	$10,260,000		11/F	C	$7,960,000
2/F	B	$9,940,000		2/F	D	$8,480,000
3/F	B	$9,690,000		3/F	D	$8,520,000
4/F	B	$10,560,000		4/F	D	$8,830,000
5/F	B	$10,400,000		5/F	D	$8,870,000
6/F	B	$10,450,000		6/F	D	$8,920,000
7/F	B	$10,830,000		7/F	D	$8,960,000
8/F	B	$10,880,000		8/F	D	$9,010,000
9/F	B	$10,930,000		9/F	D	$8,210,000
10/F	B	$10,990,000		10/F	D	$8,090,000
11/F	B	$10,490,000		11/F	D	$7,960,000
Roof of No 134		$2,740,000			Sub-total:	$384,250,000

32.  I therefore accept the total EUV of the Building is $554,310,000 (i.e. $170,060,000 + $384,250,000). 

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

33.  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).”

34.  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

35.  Mr C M Wong conducted a structural survey of the Building and prepared a Structural Assessment Report on 13 July 2020.  Mr Benson Wong conducted a condition survey of the Building and prepared a Condition Survey Report on 9 September 2020.  Whilst, Mr James Chan prepared a Structural Assessment Report and a Condition Survey Report both dated 1 August 2020.

36.  Subsequently, Mr C M Wong has prepared 2 Rebuttal Structural Assessment Reports dated 2 November 2020 and 7 April 2021, Mr Benson Wong has prepared a Rebuttal Condition Survey Report dated 19 October 2020, and Mr James Chan has prepared a Rebuttal Structural Assessment Report dated 30 October 2020, a Supplemental Structural Assessment Report dated 4 March 2021 and a Rebuttal Condition Survey Report dated 30 October 2020. In addition, Mr Benson Wong and Mr James Chan have prepared a Joint Expert Statement on Condition Survey on 18 May 2021. Mr C M Wong and Mr James Chan have prepared a Joint Expert Statement on Structural Assessment on 18 May 2021.

37.  After Mr Yuen indicated in his opening submissions that R1 does not rely on the expert evidence of Mr James Chan on building condition and structural assessment, only R2, R3 and R4 remain to actively oppose the application on “age” and “state of repair”. Nonetheless, following the subsequent agreement of R2, R3 and R4 at trial to adopt the repair cost at $18,853,669 as proposed by Mr Benson Wong, the disputes between the building experts are much narrowed. There is also no apparent dispute in law in this regard.  Mr Li, Mr Leung and Ms Lau just mainly argue with reference to the respective opinion of their building experts whether redevelopment of the Lots is justified in terms of “age” and/or “state of repair”, and agree the matters to be heard by a member of the tribunal only.

38.  The remaining live issues, as submitted by Mr Li, are as follows: -

(1)  Building condition: (a) the experts’ assessment of the “age” of the Building; and (b) the comparison between the total cost of repair works and the construction cost of a similar superstructure.

(2)  Structural assessment: (a) design working life; and (b) the required repair works to tackle the carbonation problem of the Building.

(I)    “Age” of the Building

39.  It is common ground that the Building is now over 55 years of age and is one of the 3 oldest buildings in its immediate neighbourhood.  Although Mr James Chan has commented that there are other older buildings if the area of comparison is enlarged and Mr Leung has submitted that it is irrelevant to consider the physical age of other buildings in the immediate neighbourhood, I accept that such comparison can provide some background knowledge and it is one of the many factors that the tribunal can take into consideration.

40.  In addition to the physical age, Mr Benson Wong has also considered 3 other factors, namely (1) design life of the structural frames; (2) physical obsolescence; and (3) functional obsolescence, in assessing the “age” of the Building.

41.  In terms of design life of the structural frames, Mr Benson Wong relies on the expert opinion of Mr C M Wong. Mr C M Wong agreed in the cross-examination that actual life span could be shorter or longer than the design working life depending on how well the structure is maintained, but he maintained his view that the design working life of the Building is shorter than 50 years, the period specified under the Code of Practice for Structural Use of Concrete 2013 edition (“HK2013 Code”), because concrete cover for many tested structural members of the Building do not comply with the HK2013 Code.

42.  I accept that the design working life of the Building is likely less than 50 years, and the Building is now over 55 years of age.  However, design working life should be one only of the many considerations of “age”.  In fact, all buildings older than 50 years should likely have passed their design working life because the HK2013 Code did not exist back then.  Hence, it is not right to simply conclude that all buildings older than 50 years should then be justified for redevelopment in terms of their age.

43.  I agree with Mr Leung that the relevance of design working life, the structural dimension of age, is mainly in relation to the amount of repair and maintenance work that would need to be carried out to maintain the structure and for safety consideration.  However, I also agree with Mr C M Wong that a building that has passed its design working life, like the Building, would need major and frequent maintenance work to maintain the structure.

44.  On the other hand, although Mr James Chan opines that, instead of the HK2013 Code, reference should be made to “Code of Practice for Mandatory Building Inspection Scheme and Mandatory Window Inspection Scheme 2012”, which states that structural assessment to be conducted to assess the safety level of structural elements of an existing building could be based on standards and codes of practice prevailing at the time the building was constructed, I consider the standards and code of practices under this 2012 Code prescribes the minimum safety and health requirements only. Even if a building can meet the minimum requirements, it does not represent that this building should not be justified for redevelopment. The Ordinance should not be interpreted narrowly that a building is justified for redevelopment only if it is unsafe and dangerous, and/or if it cannot meet the then requirements when it was constructed.

45.  In terms of physical obsolescence, Mr Benson Wong identifies 3 aspects, including the plain looking of the Building, the outdated external walls, and the piecemeal and untidy replacement of the original painted mild steel windows. R2, R3 and R4 criticise that Mr Benson Wong’s assessment of physical obsolescence is subjective.  I agree, but I accept that Mr Benson Wong’s findings are relevant in the consideration of “age”. I am of the view that the physical appearance of the Building, in an urban area where is zoned “Commercial” in the outline zoning plan and is undergoing gradual transformation into a business area with primarily commercial developments, appears not to match the development of the district. Although one may argue that different people may have different taste and choice of physical appearance, I consider that such should be viewed generally from the perspective of most of the citizens, particularly the citizens in the district.

46.  In terms of functional obsolescence, Mr Benson Wong identifies 11 aspects from the perspective of safety and hygiene, and he considers that some of the 7 aspects cannot be rectified unless the Building is demolished and redeveloped. Mr James Chan agrees with Mr Benson Wong’s observation on 8 out of the 11 aspects, save and except items (1) the structural safety of the Building cannot meet current safety standards in the respect of ductility and robustness; (7) there is no proper refuse disposal system as prescribed by Building (Refuse Storage  and Material Recovery Chambers and Refuse Chutes) Regulations, Cap 123H; and (8) the Building’s facades have no green features and proper overhangs for weather protection and aesthetical purpose.

47.  In relation to item (1), Mr James Chan considers that it is not appropriate to comment on the structural safety of a building by comparing design values against current standards. In relation to item (7), he considers that without modern refuse disposal system will not necessarily lead to hygienic and fire safety problems and occupants can be educated to dispose the domestic refuse in plastic bags and to place the plastic bags to a collection point.  In relation to item (8), he considers that non-provision of architectural features and overhangs will not necessarily result in lack of weather protection and aesthetical purpose.

48.  Mr James Chan is also of the view that most of the functional obsolescence can be rectified and after rectification, the Building will be restored to safe premises. Further, Ms Lau submits although there would be aspects of design that are outdated, there is no imminent safety and hygiene problems.

49.  I agree with Mr Benson Wong that most of the functional obsolescence cannot be rectified, or at least they cannot be rectified easily without substantial and material works, and even if some functional obsolescence can be partly rectified, the Building will continue remain a sub-standard one. I consider that Mr James Chan’s comments on items (1), (7) and (8) are not persuasive. As compared with the recently completed buildings, items (7) and (8) are deficiencies of the Building. It is also appropriate in item (1) to comment on the structural safety of a building by comparing design values against current standards. The comparison can allow the tribunal to note the differences between the existing state of the Building and what are being required nowadays. Further, I disagree that there is now no imminent safety and hygiene problems in the Building.  I only agree that these problems are not very serious at the moment and are not unbearable at all, but they are quite unpleasant in such mid-rise commercial / residential composite building in the urban commercial area.

50.  Above all, based on the evidence before this tribunal, I accept that the Building, being erected more than 55 years of age, is justified for redevelopment in terms of “age”.  I agree that the Building is suffered from physical and functional obsolescence to a quite unpleasant situation.  The Building has also come to the end of its design life, and therefore would need major and frequent maintenance work to maintain the structure, but such preventive measures have not been well planned and attended in the past.  There are unauthorized building works and asbestos in the Building, and many localized defects have been neglected for a period of time. There will have further discussions on maintenance in the review of “state of repair” below.

51.  I consider “age” of a building should be viewed in the context of its uses, type, physical state, which is related to “state of repair”, and environment.  The criteria for acceptance or tolerance of the same aged building in different environments would be quite different, and it is hardly to form an exhaustive list of criteria for consideration. The determination of “age” for redevelopment is relatively subjective, and should not be an exact science. The judgement on “age” may change over time because of the general change in taste of the society too.  Nevertheless, even if I am wrong to determine the “age” of the Building above, I am also of the view the Building is in poor state of repair and is justified for redevelopment.

(II)    “State of Repair” of the Building

52.  After the eventual agreement on the total repair cost at $18,853,669 including the repair cost of individual units, there are remaining disputes on how to compare the repair cost and whether anti-carbonation paint can tackle the carbonation problem of the Building.  Mr C M Wong infers that, from the results of open-up survey and carbonation test results, a large proportion of the steel reinforcement in the Building is already undergoing corrosion and more significant cracking and spalling of concrete will occur in coming years. Whilst, Mr James Chan agrees that alkaline environment which gives protection to reinforcement of beams and slabs in the Building has lost and chance of rusting is high, but thorough carbonation tests followed by application of anti-carbonation paint can deal with the problem.

53.  Mr Benson Wong compares the repair cost with the construction cost of a similar superstructure at $59,866,000, which exclude all cost of demolition, site formation, ground investigation and foundation works, and concludes that repair cost amounts to about 31% of construction cost is high. What is disputed by Mr James Chan is whether the construction cost should include the demolition cost, new foundation etc. I agree to make comparison as suggested by Mr Benson Wong, which has always been accepted by the tribunal in other compulsory sale cases. This is a theoretical comparison on a reinstatement basis only, which indicates the current state of a building when compared with a new similar building. Although I would also accept the comparison including the cost for demolition and foundation etc as suggested by Mr James Chan on a replacement basis for reference, which indicates the dilemma between the choice of repair and the alternative for rebuilding, but Mr James Chan has not provided a clear reference on type, design, height, number of storey and quality of the new building for further analyses in this instance.

54.  Mr Leung has also compared the repair cost with the EUV of the Building and submits that the percentage of about 2.801% (i.e. based on the repair cost originally estimated by Mr James Chan) to 3.568% (i.e. based on the repair cost originally estimated by Mr Benson Wong) only to bring the Building to a tenantable standard is reasonable and affordable and it would not be difficult for the enhancement value attributed from the repair to achieve such a figure. Nonetheless, based on the agreed repair cost and the determination of the EUV above, the percentage should be about 3.4% (i.e. $18,853,669 / $554,310,000), though their assessment dates are different.

55.  I have no objection to compare the repair cost with the EUV because the affordability for payment of repair cost by most of the owners in a building should be one of the considerations.  If the percentage is high, many owners may be reluctant to make such contribution and then repair may not be a feasible option.  In this instance, I consider that the percentage of about 3.4% is not very high, but it is not a low figure that most owners in the Building are willing to make the contribution. The EUV of each residential flat in the Building is about or below $10,000,000. Such owners in a relatively old building are usually quite caution in spending.  

56.  More importantly in the review of “state of repair”, the effectiveness of the proposed repair is one of the main considerations. It is not in dispute between Mr C M Wong and Mr James Chan that deterioration of the structural frames in the Building had entered the propagation phase, but they argue whether the state of corrosion and carbonation can be remedied.

57.  Mr James Chan suggests the use of anti-carbonation paint. He considers that the effect of anti-carbonation paint currently in the market is very effective and it is also not too expensive and is easy in application, but as revealed in cross-examination he had one experience only in applying anti-carbonation paint in one cantilever canopy of 60 square meters only out of his over 100 building repair projects and he had not subsequently checked the effectiveness of the anti-carbonation paint in this project.  Whilst, Mr C M Wong is of the view anti-carbonation paint may be considered, but he has doubt on its application to internal areas of a building, particularly to whole or most of a building that would also be quite disturbing. Mr C M Wong also points out that application of anti-carbonation paint to one whole building has not been carried out in Hong Kong and the effectiveness of such application has to be further studied.  Based on the evidence before this tribunal, I do not accept that anti-carbonation paint as suggested by Mr James Chan can remedy the carbonation problem in the Building.

58.  Above all, I am of the view the Building is in poor state of repair. I accept that the state of corrosion and environment for corrosion show the Building’s structural frame has deteriorated extensively, and the cost of repair to bring the Building to a tenantable condition is disproportionate to the cost of construction of a similar superstructure.   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, and repair cost will also escalate as deterioration of the structural frame worsens.

59.  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

60.  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……”

61.  Before the application, the applicant has made an offer to each of the Remaining Respondents on 20 March 2019 (i.e. R1) or 7 March 2019 (i.e. R2, R3, R4 and R5), which was accompanied with the assessment of Mr Charles Chan and reflected the then pro-rata share of the RDV. After the application and immediately before the trial, the applicant has made another offer to each of the Remaining Respondents on 21 July 2021, which has also made reference to Mr Charles Chan’s assessment and / or agreement in the joint statements and reflected the then pro-rata share of the RDV. Mr Li submits the applicant has taken reasonable steps in acquiring all the undivided shares in the Lot. I agree.

62.  On the evidence available, I accept the offer prices have reflected the respective proportionate share of the RDV of the Lots and do fall within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. Although I may not agree with Mr Charles Chan each and every item in his assessments, it is a matter of differences in opinion only and his valuations before this tribunal have no serious fault. I am satisfied the applicant has taken reasonable steps to acquire all the undivided shares in the Lots. Even if there is no reason why the respondents should accept the applicant’s offers, it does not mean that the applicant has not taken reasonable steps.

63.  Further, I consider it is not unreasonable for the applicant not to make the 2^nd offer in accordance with the update of price index as complained by R2 and R3. This accusation is not supported by facts. The 2^nd offer of 21 July 2021 was made 1 day before the 4^th joint statement dated 22 July 2021, which has then considered the update of price index. It is also not unreasonable for the applicant to make the 2^nd offer lower than the 1^st offer as complained by R4 due to change of market condition and consideration of additional facts like the respective internal conditions of the units in the Building. 

64.  Further, I agree with Mr Li that the particular alleged circumstances of individual respondent are not relevant in considering whether the applicant has taken reasonable steps. The individual circumstances of a party can be of infinite variety and give rise to very subjective needs and demands. When one assesses whether section 4(2)(b) of the Ordinance is satisfied, it cannot be the test that the majority owner must on his own find out what the minority owner wants and/or to wait for his response and/or to satisfy the particular requirements, whether in terms of money or other matters, of that minority owner.

RESERVE PRICE FOR THE AUCTION

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

66.  The 3 valuation experts agree to adopt residual method and update their respective RDV assessments as at 25 June 2021.  They agree to develop the Lots on a registered site area of 505.48 square meters and subject to a non-building area of 129.25 square meter to build a 21-storey commercial building (i.e. shops on ground, 1^st and 2^nd floors, plant room on 3^rd floor and retail / office / commercial units from 4^th to 20^th floors) at the plot ratio of 12 and gross floor area of 6,065.80 square meters. They also agree on the saleable area of each portion of the hypothetical development and the unit rate for the upper floor units at $255,350 per square meter saleable subject to further update of RVD indices, but they finally disagree on how to apply the RVD indices.

67.  In the valuation of the ground floor reference unit (i.e. a shop of 95.4 square meters), there are agreements on the adjustment for time with reference to RVD indices, the adjustment for age at 1% per 5-year, the adjustment for size at 1% per 10-square meter, the adjustment for headroom at 2% per 0.5-meter and the adjustment for frontage at 2% per 0.5-meter.  However, they disagree on selection of comparables, and the adjustments for location and layout. They also disagree on the unit rates for the shops on 1^st and 2^nd floors.

68.  In the residual valuation, they agree on interest rate at 4% per annum, professional fee at 6%, demolition cost at $9,02,000, construction cost at $218,319,631 (i.e. about $35,992 per square meter gross), demolition period of 6 months and construction period of 2.25 years, but they disagree on marketing cost and developer’s profit.

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

69.  Similar to the EUV assessment, Mr Francis Lau relies on 1 comparable (i.e. Comparable NR11, which is numbered as Comparable R9 in the EUV assessment) only, whilst Mr Charles Chan and Mr Tony Cheng propose 6 other comparables (i.e. Comparables NR1, NR2, NR4, NR5, NR6 and NR7). I am of the view all these 7 comparables should be analysed, though Comparable NR11 was transacted in September 2019, more than 2 years from the valuation date, and the other 6 comparables are located on the west of Nathan Road, relatively far from the Lots.

70.  Regarding the adjustment for location, I consider Comparable NR4 is similar to the reference unit and the other comparables are relatively inferior.  Basically, the adjustments are similar to those in the EUV assessment. Comparables NR1, NR2, NR4, NR5, NR6, NR7 and NR11 should be adjusted at 10%, 20%, 0%, 10%, 12.5%, 2.5% and 2.5% respectively. I disagree with Mr Francis Lau that the reference unit is much superior.  I also disagree with Mr Charles Chan and Mr Tony Cheng that Comparables NR1 and NR4 are superior than the reference unit.

71.  Regarding the adjustment for layout, similar to the EUV assessment, I agree with Mr Charles Chan and Mr Tony Cheng to firstly make adjustment for depth, but the adjustment rate in this instance should be 1.25% per 1-meter difference only. I also agree to make additional adjustment for shape. I consider the shapes of Comparables NR2, NR3, NR6, NR7 and NR11 are relatively inferior than the reference unit and the other comparables are similar, but all the differences are not significant.  Accordingly, and after rounding, Comparables NR1, NR2, NR4, NR5, NR6, NR7 and NR11 should be adjusted at -16%, -17%, -15%, -19%, -10%, -15% and -17% respectively.

72.  The valuation of the shop reference unit is listed in Appendix III of the judgment.  The average unit rate of the 7 shop comparables is about $452,187, and the unit rate of Comparable NR11, close to the Lots but transacted in 2019, is $476,707.  I consider the shop reference unit should be assessed at $453,000 per square meter, which is also the average unit rate of all the shops on ground floor in the hypothetical development.

73.  The 3 valuation experts agree that the unit rate for 2^nd floor is 95% of the unit rate for 1^st floor.  Mr Tony Cheng and Mr Francis Lau had once agreed in the 3^rd joint statement that the unit rate for 1^st floor is 70% of the unit rate for ground floor, whilst Mr Charles Chan had then made direct comparison to the upper floor units to derive the unit rate for 1^st floor, but he subsequently agreed with Mr Tony Cheng that the unit rate of $267,400, about 73% of their agreed unit rate for ground floor.  I consider it is reasonable to derive the unit rate for 1^st floor at 70% of the unit rate for ground floor, and the unit rate for 2^nd floor at 95% of the unit rate for 1^st floor.  Accordingly, the unit rates for 1^st floor and 2^nd floor should be $317,100 (i.e. $453,000 x 70%) and $301,245 (i.e. $317,100 x 95%) per square meter saleable.

GDV – Upper Floors

74.  Mr Charles Chan, Mr Tony Cheng and Mr Francis Lau had previously assessed the unit rate for upper floors at $252,000, $258,700 and $240,000 respectively, and then they agreed to adopt the unit rate of $255,350 in the 3^rd joint statement. In the 4^th joint statement, Mr Charles Chan and Mr Tony Cheng agrees to update the unit rate with reference to RVD Private Retail Index and finally the unit rate of $264,300, but Mr Francis Lau considers that reference should be made to RVD Private Office (Grade B) Index instead and therefore a higher unit rate of $269,650 [i.e. $255,350 x (1 + 5.6%)] should be adopted. The parties also argue whether RVD Private Retail Index or RVD Private Office Index should be applied all way through in the assessment.

75.  I consider that the upper floors in the hypothetical development would likely be planned with flexibility for office and commercial purposes, and which index should be adopted in the assessment would depend on the nature of the comparables. Nonetheless, given that the parties had once agreed the unit rate of $255,350 and Mr Francis Lau had previously proposed the unit rate of $240,000 only, I am of the view it is fair and equitable in this instance to adopt the unit rate of $255,350 as suggested by Mr Charles Chan and Mr Tony Cheng. If Mr Francis Lau’s previous assessment at $240,000 and the RVD Private Office Index as proposed by Mr Francis Lau are adopted in the update, the result is $253,440 [i.e. $240,000 x (1 + 5.6%)] only.

RDV of the Lots as at 25 June 2021

76.  Based on the agreements of the 3 valuation experts and the above determinations, the residual valuation of the Lots as at 25 June 2021 is listed in Appendix IV of the judgment.  RDV of the Lots is assessed at $812,300,000, equivalent to an accommodation value of about $133,915 per square meter (i.e. about $12,441 per square foot), which should be the reserve price for public auction.

77.  I agree with Mr Charles Chan to adopt the marketing cost at 3% instead of 2% as suggested by Mr Tony Cheng and Mr Francis Lau. In addition to agency fee that is likely higher than 1%, the developer would also bear the cost for production of brochure, set up of sales office and advertising.

78.  Regarding the developer’s profit, I am of the view 17.5% is reasonable in this instance instead of 20% as proposed by Mr Charles Chan and 15% as proposed by Mr Tony Cheng and Mr Francis Lau. I consider that the risk of a commercial development is higher than that of a residential development, but in recent months the property market generally has been recovering and the site market has also improved.

ORDERS

79.  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 Lots, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lots;

(2)  Mr Norman Chui and Mr Stephen Lau, 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 Lots;

(3)  The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Chui & Lau dated 23 June 2021;

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

a)  the sale of the Lots 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 $812,300,000;

(5)  Subject to further extensions that the tribunal may subsequently allow upon the application of the purchaser of the Lots or its successor in title, the redevelopment of the Lots 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 Lots becomes the owner of the Lots; and

(6)  Liberty to the applicant, the 1^st respondent, the 2^nd respondent, the 3^rd respondent, the 4^th respondents, the 5^th respondent and the Trustees to apply to the tribunal for further directions.

COSTS

80.  Following Good Faith ^[1], I make a costs order nisi that the applicant 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