CHAMPION SUCCESS LTD AND ANOTHER v. LEUNG LAI LAI THE ADMINISTRATRIX OF THE ESTATE OF LAI YIN KING DECEASED AND OTHERS

LDCS41000/2011

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 41000 OF 2011

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BETWEEN

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J U D G M E N T

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Background

1.  This is an application by the 1st Applicant and the 2nd Applicant (“the Applicants”) for an order for sale of all the undivided shares in the Remaining Portion of Subsection 1 of Section G of Kowloon Marine Lot No. 47, known as No. 94 Tak Cheong Street, Kowloon and the Remaining Portion of Section C of Subsection 1 of Section G of Kowloon Marine Lot No. 47, known as No. 96 Tak Cheong Street Kowloon, (collectively referred to as“the Lots”) for the purposes of the redevelopment of the Lots pursuant to s. 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”).

2.  There is a pair of 7-storey composite buildings (collectively referred to as “the Buildings”) served by two common staircases erected on the Lots.  The building at 94 Tak Cheong Street has 7 equal undivided shares with each floor from the Ground Floor to the 6th Floor allotted one of the undivided shares.  Likewise, the building at 96 Tak Cheong Street has the same allotment of undivided shares. 

3.  As at the date of application of 21 October 2011, altogether there are 14 units in the Buildings. The Applicants own all the undivided shares at 94 Tak Cheong Street save and except the one share of the 4th Floor, 94 Tak Cheong Street which is owned by the 1st Respondent. The Applicants’ ownership is 6 out of the 7 shares.

4.  The Applicants also own all the undivided shares at 96 Tak Cheong Street save and except the one share of 1st Floor, 96 Tak Cheong Street which is owned by the original 2nd Respondent namely, the estate of Wong Chiu Kit, Deceased.  The Applicants’ ownership is 6 out of the 7 shares.

5.  Thus, the Applicants own altogether 12 shares of the total 14 shares in the Lots.  The average of the percentage of the undivided shares owned by the Applicants in the Lots is 85.71%.  The Applicants contend that they are entitled to make the present application by virtue of s. 3(2) of the Ordinance.

6.  Since then, the Applicants have purchased the interests of the 1st Respondent including its share in the Lots.  The proceedings against the 1st Respondent are discontinued by the order of the Tribunal dated 12 April 2012.

7.  By the order of the Tribunal dated 24th February 2012, Cheung Shui Fun, the widow of Wong Chiu Kit, Deceased, was appointed to represent the estate of Wong Chiu Kit, Deceased for the purpose of the present Application as the 2nd Respondent.

8.  By a Declaration of Trust dated 9th April 1957, it was declared that the consideration of money for the purchase of 1st Floor, 96 Tak Cheong Street was in fact provided by Gin Yan Tak to Wong Chiu Kit and 1st Floor, 96 Tak Cheong Street was in fact held by Wong Chiu Kit upon trust for Gin Yan Tak.  Therefore, the beneficial owner of 1st Floor, 96 Tak Cheong Street, was added as the original 3rd Respondent to the present Application by the Order of the Tribunal dated 23rd March 2012.  Cheung Shui Fun was appointed by the Order of the Tribunal dated 5th November 2012 to represent the estate of Gin Yan Tak, Deceased for the purpose of the present Application as the 3rd Respondent.

9.  A Re-Re-Re-Amended Notice of Application was filed on 10th December 2012.

10.  On 21st December 2012, the 2nd Respondent and the 3rd Respondent respectively filed a Re-Amended Notice of Opposition and an Amended Notice of Opposition to oppose the Application on the only ground that the valuation of 1st Floor, 96 Tak Cheong Street is disputed.

11.  On 18th December 2012, the 2nd Respondent and the 3rd Respondent entered into a settlement agreement with the Applicants for the settlement of the present Application and the further conduct of the Application.  By the settlement agreement, the parties agreed, inter alia, that the minimum value of 1st Floor, 96 Tak Cheong Street is $4,000,000.00. Both the 2nd Respondent and the 3rd Respondent have agreed that they would not contest the proceedings under the Application, nor file any report in relation to the Application on the terms and conditions set out in the settlement agreement.  Thus, the 2nd Respondent and the 3rd Respondent have not called any witness or produced any expert report.  The 2nd Respondent and the 3rd Respondent have also not cross-examined any of the Applicants’ witnesses or made any closing submission.

12.  In view of the concession made by the 2nd Respondent and the 3rd Respondent, Mr Erik Shum, Counsel for the Applicants, simply called the Applicants’ witnesses to confirm their evidence. The Applicants contend that all the requirements of the Ordinance have been satisfied and ask for an order for sale in terms of the draft order submitted. The Applicants also ask there be no order as to costs.

Section 3 of the Ordinance – Ownership of the Applicants

13.  Section 3(1) of the Ordinance requires the Applicants to have not less than 90% of the undivided shares in a lot before they can make an application. 

14.  Section 3(5) of the Ordinance also states that the Chief Executive in Council may, by notice in the Gazette, specify a percentage lower than the percentage mentioned in subsection (1) in respect of a lot belonging to a class of lots specified in the notice.

15.  Pursuant to Section 3(5) of the Ordinance, a notice was gazetted on 22 January 2010 and tabled at the Legislative Council meeting on 27 January 2010.  It came into operation on 1 April 2010.  Section 3 of the notice lowered the threshold for compulsory sale from 90% to 80%.  Section 4(1)(b) of the notice specified one of the classes for the purposes of Section 3, as “a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (which is the date of the application)”.  The two occupation permits of the Buildings were both issued on 5 February 1957, which is more than 54 years before the date of Application. The Lots and the Buildings therefore are covered by the notice and the applicable percentage is 80%.

16.  As at the date of Application, the Applicants own 85.42% of the shares in the Lots.  The Applicants are clearly entitled to make the application. 

Section 4(2) of the Ordinance - Justification and Reasonable Steps

17.  In determining the Applicants’ application, Section 4(2) of the Ordinance requires me not to make an order for sale unless, after hearing the objections, if any, of the 2ndRespondent and the 3rd Respondent, I am satisfied that:

(a)     the redevelopment of the Lots is justified due to the age or state of repair of the Buildings; and

(b)     the Applicants have taken reasonable steps to acquire all the undivided shares in the Lots (including negotiating for the purchase of the undivided shares owned by the 2ndRespondent and the 3rd Respondent on terms that are fair and reasonable).

18.  Mr Shum submits that the relevant tests on age and state of repair were set out in Intelligent House Ltd v. Chan Tung Shing & Ors [2008] 4 HKC 421.  Mr Shum also submits that the Court of Appeal in Fineway Property Ltd v Sin Ho Yuen Victor [2010] 4 HKLRD 1, expressed “a preliminary view without the benefit of hearing full argument”, doubting the correctness of the tests in Intelligent House in the following ways (paragraphs 35-37 of the Judgment):

(1)     The “concept of economy lifespan” does not feature in the Ordinance. It is a concept that might have currency with economists.

(2)     The meaning of that concept in the context of the age test and the meaning and scope of the proviso appear unclear.

(3)     How the economists’ theories and concepts are relevant to the proper construction of the Ordinance is not readily apparent.

19.  Mr Shum invites me to consider Fairtex Development Limited v Tso Pee Hong & Ors [2012] 6 HKC 167, where the cases of Intelligent House and Fineway were considered, the Tribunal accepted that “age” and “state of repair” were two separate grounds, and even though there may be considerations common to both, the Tribunal should still consider them separately. The Tribunal further agreed that it did not have to formulate any general test for age and state of repair, and would consider whether the expert evidence was sufficient to show that the age and state of repair were in such state that redevelopment of the relevant lot was justified.

20.  I agree that “age” and “state of repair” are two separate grounds and even though there may be considerations common to both, I should still consider them separately.  Since Mr Shum relies primarily on “state of repair”, I shall deal with this ground first.

State of Repair of the Buildings

21.  The Applicants’ expert, Dr Chan Yuk Kit James (“Dr Chan”) of Charterwealth Professional Limited, in his Condition Survey and Structural Report, gives his opinion, inter alia, that the followings are some of the defects he has noted more frequently during his survey of various parts of the Buildings:

(a) Spalling of Concrete:

This is where patches of concrete are either about to or have broken away from the surface revealing rusted reinforcement behind. This mainly occurs when water is able to penetrate the surface concrete, which in turn causes the reinforcement rods inside to rust.  The rusted rods then expand and in so doing slowly push off the concrete cover. The defective areas can be repaired and if the rusting is not too advanced the reinforcement rods would be cleaned prior to the area being re-patched with concrete and then re-rendered or plastered.  Spalling is considered serious if the steel reinforcing bars are badly rusted or it has affected large areas of the structural members of the structural frames such as columns, beams, floor and ceiling slabs, which will affect the structural stability of the Buildings.  In that case, it would necessitate major repairs.

(b) Plaster Cracks:

These can be of any width and are normally caused either by shrinkage in the decorative materials or at the junction between two different building materials.  Plaster cracks are often visible at the start of any spalling within the plaster.  Normally plaster cracks are caused by shrinkage or some minor settlement of an infill wall and could normally cause debonding or bulging of plaster if continue to be neglected.  Shrinkage cracks should be repaired when found but it is quite common for them to reappear over a period of time.

(c) Hair Cracks or Surface Crazing:

The width of the hair cracks or the crazing is generally less than 1 mm and the causes are often due to natural deterioration and/or poor application of the decorative finishes.  Though they are not structural, should be repaired in order to prevent further deterioration.

(d) Blistering and Flaking of Paintwork:

Often this is caused by dampness in the structure or in the atmosphere with the result that the paint bubbles and eventually flakes off.  Ifthe dampness becomes excessive it can cause perishing of the plaster, whichwould have to be repaired prior to any decorations being carried out.

22.  As part of Dr Chan’s condition survey, Fugro Technical Services Limited, a specialist in this field was appointed to carry out an Infrared Thermographic (IT) Survey of the external walls on all facades of the Buildings. The IT Survey is a quick and non-destructive survey method commonly used in Hong Kong to detect spots of delamination in external wall finishes by measuring the surface temperature of external wall finishes. The IT survey has detected a total of 3 spots of suspected delamination requiring further investigation such as hammer tapping and repairing.  In Dr Chan’s opinion, external walls with delaminated spots behind the wall rendering can be potentially dangerous.  With the ingress and accumulation of water to these delaminated spots, the bonding of the rendering to the external wall surface can deteriorate rapidly.  Moreover, the seepages noted inside the flats and other common areas have shown that the rendering in general is not rainwater resistant.  Replacement of the rendering to the external walls to remove the unsound rendering and to stop external water seepages is required.  

23.  Dr Chan notes that there are some unauthorized building works constructed on the balconies, flat roofs, main roof and external walls at various floors on the Buildings’ facades.  In his opinion, these unauthorized structures usually are not structurally sound and would impair the integrity of the structural frames. The unauthorized metal A/C frames and other rusty fixtures are not structurally safe and have generally become defective due to external weathering and maintenance neglect.  The presence of the delamination in the external wall rendering and unauthorized structures in the Buildings are potentially dangerous particularly when the unauthorized structures are projecting over the street.

24.  In Dr Chan’s opinion, the main roof areas over the whole of the Buildings are physically separated by the staircase housing. The roof areas are normally covered with tiles, below which should include a waterproof membrane and screeds.  The overall condition of the main roof is poor with the defects noted as follows:

(a) The cement screed covering on the roof surface is in a very poor condition with extensive cracks scattering on the surface.  The roof is covered with hollow concrete tiles, which allow a gap under them above the surface screeding for thermal insulation purpose.

(b) The main roof areas are surrounded by solid parapet walls. The walls protect the water proof membrane, which is likely to have been dressed up, and bedded into the parapet walls and the walls of the staircase structures to effectively tank the roof areas.

(c) The other structures on the main roof are the staircase housing. All are finished in cement rendering and like everywhere else are generally cracked and stained.

(d) In general, the condition of the main roof areas is poor and the works required to restore the roofs back to the normal standard are as follows:

(i) Replacement of the waterproof membrane and roof covering including the floor tiles and thermal insulations.

(ii) Rectification of the height deficiencies of the parapet walls by adding metal railings on the top of the parapet walls.

(iii) Re-rendering and re-painting of the parapet walls, water tank and staircase housing structure.

(iv) Replacement of non-waterproof steel doors to the staircase housing.

(v) Removal of all the TV antennas in the main roof and replacement with one communal TV antenna.

25.  Dr Chan also notes that the ceilings, beams, stair soffits and walls in the staircases from ground floor up to the main roof are plastered and painted.  The staircases in general are in a poor decorative order and suffer from water seepage.  Dr Chan notes there is no lift.

26.  Dr Chan considers that the defects noted to the internal finishes in the staircases though can be repaired, will recur readily and require regular maintenance. The works required to restore the staircases to the minimum fire safety and back to a reasonable state of repair are as follows:

(a) Construction of new fireproof cable ducts in the front staircase to accommodate all the electrical meters and wirings. However, as the existing width of staircases is already below the minimum required by the Buildings Regulations, it is physically not feasible to construct fireproof cable ducts in the staircase without sacrificing part of the space and headroom in the staircase.

(b) Installation of emergency lights.

(c) Replace the metal gates obstructing the escape routes.

(d) Replace the metal doors open to main roof with a watertight metal door.

27.  In Dr Chan’s inspection of the flats, he finds some of the flats have been sub-divided internally into smaller units and separately occupied.  All the upper floor flats have extended their rooms to the balconies by putting up window enclosure to the balcony.  These unauthorized alterations of balconies have unduly imposed extra loads to the balcony structure which will cause damage to the structure.  Generally speaking, the condition of the internal decorations and finishes ranges from fair to poor suffering badly from moisture and natural wear for some considerable time.  The most common defects in the flats noted are external seepages, dampness from the floor above, cracking and spalling of concrete. The defects commonly found in the flats are as follows:

(a) Dampness to the ceilings and beams in many of the rooms in particular the bathrooms from the flats above.

(b) Surface crazing, blistering and peeling of the plaster paintwork.

(c) Cracking of tiles in kitchen and bathroom.

(d) In general, the internal finishes and sanitary fitments have been worn out and are below the acceptable tenantable standard.

28.  Dr Chan concludes that:

(a) During the life span of buildings, it is important to keep the buildings safe and healthy, and free of hazards and sicknesses.  It is the useful life of the buildings that one should care about.  Not only because they are valuable assets, but more importantly because they exist to serve the basic need for safe and healthy accommodation. After completing the condition survey of the Buildings, Dr Chan is of the opinion that redevelopment of the Buildings is justified due to its age and its existing state of repair.

(b) The Buildings do not possess any historical value or architectural merit and they are merely somebuildings of the past that can be replaced.

(c) For general buildings in Hong Kong, design code normally assumes a design working life of 50 years for reinforced concrete buildings.  The Buildings, aged 55, are some of the oldest residential buildings remaining in the neighborhood.

(d) From his inspections of the external facades, the internal common parts, and the flats, the Buildings have many problems as a result of their age, which impair their appearance and function.  Due to changes in statutory requirements, taste, technology and fashion over the years, the Buildings have become substandard with many hazards and sicknesses affecting the safety, the convenience and the enjoyment of the Buildings.

(e) The physical and functional problems have arisen for many reasons. By today’s standard, these problems are seriously detrimental to the safety of the users of the Buildings and the public as well as the quality of the accommodation.  In his view, some of the problems due to the age of the Buildings are extremely difficult to resolve.

(f) The Buildings are obviously below the tenantable standard with their structural frames in poor condition and most of their components, finishes and services have deteriorated to the end stage of their effective life spans. The compressive strengths of the structural members of the Buildings are significantly below the acceptable standard and the Buildings are structurally unsafe.  The overall state of repair of the Buildings is, in his view, poor with many of the components, finishes and service installations showing deterioration beyond reasonable repair.

(g) The Buildings are currently in a state of disrepair and the demolition of the Buildings will relieve the owners from heavy repair responsibilities, which evidently have been neglected for a long time and inevitably will be increased substantially in the near future.

(h) The immediate repair cost is $15,155,250, which amounts to $1,118/sq. ft. of the gross floor area of the Buildings. Comparing with the cost of constructing a new building, which is approximate $1,500/sq. ft., this unit cost of immediate repairs is about 75% for constructing a new building having the same gross floor area. The immediate repairs amount to such a high percentage of the new building cost are unjustifiably high and prohibitively expensive.  The comparative high cost of immediate repairs also indicates that the Buildings are very defective and the deterioration is at the end stage requiring substantial repairs, which are unjustified when compared with the cost of a new building.

(i) The carrying out of the immediate repairs will be very disturbing and will require a very long work period.  Based on his experience in similar works, the time for completing the repair works would be 21.5 months from initiation of work.  It is inevitable that the uses of the flats will be affected intermittently during the carrying out of work inside the flat.  In fact, for flats with substantial unauthorized building works, the flats will have to be evacuated during the carrying out of work for safety reason.

(ii) The plain fact is that even after the immediate repair works implemented, the Buildings remain old residential buildings with the design and construction outdated and below the market expectations.

(iii) Apart from the immediate repair works, Dr Chan expects that interim repairs have to be carried out in 5-year intervals which incur high maintenance cost.

Age of the Buildings

29.  As to the age of the Buildings, there is no dispute that the Buildings are now almost 56 years old.  The relevant two occupation permits were both issued on 5 February 1957.

30.  In Fairtex (supra), para. 66, quoting the decision of the Tribunal in Top Sail International Ltd v. Cheng Kai Ming, executor of the estate of Chan Hue also known as Chan Sum Hiu, deceased (LDCS 18000/2010, 15 November 2011, unreported):

“23. ……when the requirement of “the age” of the building is considered， [the Tribunal] should not restrict [its] consideration to just the physical age of the building. There are many factors related to the age of a building which should also be considered...... the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question.

The physical age of a building is clearly one of the considerations， but it would not be the only consideration. The physical conditions of a building and the amount that would be required to maintain the building are other factors that the Tribunal should consider，as they would affect the decision on whether the life of a building should be ended or prolonged. The obsolete design of a building should also be considered as it has an important impact on whether it is too old to serve a modem society." [Emphasis added and parenthesis substituted]

I shall examine the evidence of Dr Chan vis-à-vis the decision of the Tribunal in Top Sail. 

31.  According to Dr Chan, there are many major fire safety deficiencies not meeting today's standards noted in the staircases:

(a) The electricity meters and electrical wirings to the flats are surface mounted in the staircases with no fireproof enclosure. These non-fireproofed electrical installations in the staircases are potential fire hazards and are prohibited nowadays.

(b) The width of the front staircases is only about 953 mm wide, which is less than the minimum width of 1,050 mm as required for a fire escape staircase under the current Buildings Ordinance and allied Regulations.

(c) There are no handrails but only plastered balustrade heads provided on one side of the staircase only. The balustrade heads are of a shape and thickness, difficult for people in particular, children to hold on. The current means of fire escape require handrails on both sides of fire escape staircase.

(d) There are no fire hydrants or hose reels provided.

(e) There are no emergency lights.

(f) Metal gates obstructing the escape routes should be replaced.

32.  Dr Chan finds that the concrete cover of samples collected from the columns is less than the minimum requirement of 35 mm.  The covers of existing columns are below the acceptable standard. 

33.  Dr Chan also finds that samples collected from columns are substantially below the current designed and approved concrete strength of 15 N/mm².  He estimates that the majority of the existing columns have concrete strengths considerably below the acceptable standard. 

34.  Dr Chan concludes that the Buildings have exhibited signs that their structural frames have deteriorated to the final stages of their design working life.  According to the investigation results of the structural frames, he opines that the deterioration of the concrete of the Buildings will not stop, but will continue even at a faster speed than before due to extensive carbonation of the structural members.  It is inevitable that new defects will occur on both unrepaired and previously repaired members soon.

35.  Mr Shum relies on the remarks of Dr Chan that it would cost $15,155,250 to properly repair the Buildings, and that it is more cost effective to demolish and rebuild the Buildings.  I consider that the figure of 31%, being the total repair cost of $15,155,250 over the EUV of the Buildings, which is $49,420,000 as assessed by the Applicants’ valuer (see the discussion below), is a substantial percentage.

36.  Having considered all the evidence as aforesaid, I am satisfied that the redevelopment of the Buildings is also justified on the ground of the age of the Buildings due to the following factors:

(a) The Buildings are almost 55 years old;

(b) The Buildings are in very poor physical conditions and the cost required to repair or maintain the Buildings is substantial; and

(c) The obsolete design of the Buildings does not suit the present requirements of a building.

Reasonable Steps to Acquire All the Undivided Shares in the Lots

37.  As required by Section 4(2) (b) of the Ordinance, the Applicants are under an obligation to negotiate for the purchase of the 2nd Respondent and the 3rd Respondent’s undivided share in the Lots on terms that are fair and reasonable. 

38.  The Applicants have commissioned Savills Valuation and Professional Services Limited ("Savills") to assess the value of the units in the Buildings on the existing use values basis ("EUV").  A valuation report for EUV was prepared by Mr Charles Chan (“Mr Chan”) of Savills.  The valuation date is 15 August 2011.  

39.  The evidence of the Applicants’ factual witness, MrHo Wing Hang (“Mr Ho”), shows that the redevelopment value ("RDV") of the Lots as at 30 November 2012 to be $81,000,000.    

40.  According to the Savills EUV report, the EUV of the Buildings is $49,420,000.  The EUV of the 2nd Respondent and the 3rd Respondent's premises is $2,430,000.  In terms of percentage, the share of the 2nd Respondent and the 3rd Respondent's premises is 4.92%.  Based on the RDV of $81,000,000, the reasonable offer to be made to the 2nd Respondent and the 3rd Respondent would be $3,982,800.

41.  According to Mr Ho:

(a) On 6 September 2011，the Applicants through their solicitors wrote to the 2nd Respondent and her Solicitors Messrs. Wong, Hui & Co. and/or the 3rd Respondent offering to purchase the 2nd Respondent and the 3rd Respondent’s premises (1st Floor, 96 Tak Cheong Street) at $3,800,000.

(b) On 17 October 2011，the Applicants through their solicitors wrote to the 2nd Respondent and her Solicitors Messrs. Wong, Hui & Co. and/or the 3rd Respondent offering to purchase the 2nd Respondent and the 3rd Respondent’s premises (1st Floor, 96 Tak Cheong Street) at $3,800,000.

(c) On 29 March 2012，the Applicants through their solicitors wrote to the 2nd Respondent and her Solicitors Messrs. Wong, Hui & Co. and/or the 3rd Respondent offering to purchase the 2nd Respondent and the 3rd Respondent’s premises (1st Floor, 96 Tak Cheong Street) at $4,000,000.

(d) The parties on 18 December 2012 entered into a Settlement Agreement regarding the conduct of the present Application and the sale and purchase of the 2nd Respondent and the 3rd Respondent’s premises. 

42.  Mr Shum submits that although the last offer dated 29 March 2012 was made after the Application had been filed on 21 October 2011, it should be taken into account by the Tribunal in determining whether the Applicants have taken reasonable steps to acquire all the undivided shares in the Lots.  In Fully H.K. Investments Ltd and Others v Poon Vai Ching, The Executrix of the Will of Poon Kam Chuen (Deceased) and Others (LDCS 3000/2005, 26th February 2007, unreported), the Tribunal rejected the respondents’ argument that any post-application offer made by the applicants after the filing of the application in the Tribunal should be disregarded. At para. 17 and 18 of the Tribunal’s Judgment, it is stated that:

“17. Section 4(2) of the Ordinance stipulates that:-

‘The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners … the Tribunal is satisfied that …

(b) the majority owner has taken reasonable steps to acquire all the undivided shares in the lot..

18. There is no indication in the Ordinance that the time for taking reasonable steps must be before the application. On the contrary, the phrase “has taken reasonable steps” is in present perfect tense and clearly refers to the present time “after hearing the objections”, which must be after the proceedings have commenced. So we are of the view that the offers made after the proceedings have commenced can be taken into account.”

43.  Mr Shum further submits that in refusing the application of the 2nd respondent for leave to appeal out of time in Fully H.K. Investments Ltd and Others v Poon Vai Ching The Executrix of the Will of Poon Kam Chuen (Deceased) and Others (HCMP 591/2007, 4th April 2007, unreported), Hon Le Pichon JA examined the merits of the appeal.  On the issue of whether a fair and reasonable offer had been made, the Court adopted what was said to be the correct and proper approach found in the judgment of the Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578:

“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. If duly satisfied that the rejected offer was fair and reasonable, the Tribunal may make the order, leaving the value and level of compensation to be determined by the public auction.... ”

44.  Mr Shum also submits that in Intelligent House (supra) at 471H, the Tribunal, in applying the approach laid down in Capital Well, held that the applicant had made offers with reasonable terms. In reaching this conclusion, the Tribunal took into consideration that:

“Savills is a reputable firm of valuers. In our view, it is also reasonable for [the applicant] to rely on Savills’ expert opinion to formulate the purchase prices offered to the minority owners. There is also no reason for us to believe, nor is there such evidence to suggest, that the advices from Savills were not properly made based on professional valuation of the EUV and RDV of the minority owners’ units.”

45.  Mr Shum submits that in Intelligent House at 472B-C, the Tribunal also rejected the argument that the terms of the offer made by the applicant had been unreasonable or unfair by reason of the short time period (being 14 days) given to the respondent to consider the offer.  The Tribunal did not accept this ground of opposition as there was no suggestion that the respondent would have accepted the offer if longer time were given. There was also no evidence given by the respondent to show that she did not have enough time to consider the offer.

46.  I am satisfied that, on the evidence available, the offers made by the Applicants fall within the fair and reasonable range.  Thus, I conclude that the Applicants have taken reasonable steps to acquire all the undivided shares in the Lots.

Order for Sale

47.  By reasons of the matters aforesaid, I am satisfied that an order for sale should be granted in favour of the Applicants.  The remaining question is how much I should fix for the reserve price.

Reserve Price

48.  In his EUV report dated 15 August 2011, Mr Chan valued the EUV of the respective units of the Buildings as at 15 August 2011.  In his valuation of the EUV of the ground floor unit of the Buildings, Mr Chan adopted the following methodology:-

(a) He converted the area of the components of the ground floor unit by using a conversion factor of 1/3 for cockloft, 1/6 for yard and 1/2 for yard with street frontage. 

(b) He took into account of 12 comparable transactions in different buildings nearby.     After making what he regarded as the necessary adjustments (for time, location, quantum, building age, layout and frontage) for all these comparable transactions, he took the average of the adjusted unit rate of the comparables to come to the unit price at $129,048/m², which was rounded to $129,000/m².

(c) He then used the unit rate to assess the ground floor units.

49.  In his valuation of the EUV of the domestic units of the Buildings, Mr Chan adopted the following methodology:

(a) He selected 4th Floor, 96 Tak Cheong Street (“the Reference Domestic Unit”), which was situated on the middle floor of the domestic portion as the reference unit for the purpose of valuing its unit price. 

(b) The unit price of the Reference Domestic Unit was first assessed by making reference to market comparables.  He took into account of 14 comparable transactions in different buildings nearby.  After making what he regarded as the necessary adjustments (for time, location, environment, floor, age, quantum, view, lighting and ventilation and noise) for all these comparable transactions, he took the average of the adjusted unit rate of the comparables to come to the unit price of the Reference Domestic Unit at $43,411/m², which was rounded to $43,400/m².

(c) He converted the area of the components of the units with flat roof by using a conversion factor of 1/6 for the area of the flat roof.

(d) He further considered the floor difference and internal conditions of the Reference Domestic Unit and the remaining domestic units within the Buildings to arrive at the EUV of all the domestic units.

50.  As a result, the EUV determined by Mr Chan are:

	94 Tak Cheong St	96 Tak Cheong St
6/F	$2,260,000	$2,470,000
5/F	$2,700,000	$2,530,000
4/F	$2,620,000	$2,710,000
3/F	$2,670,000	$2,500,000
2/F	$2,730,000	$2,680,000
1/F	$2,480,000	$2,430,000
G/F	$9,380,000	$9,260,000

51.  In the Re-Amended Notice of Opposition and an Amended Notice of Opposition filed by the 2nd Respondent and the 3rd Respondent respectively opposing the Application, the only ground is that the valuation of 1st Floor, 96 Tak Cheong Street is disputed. 

52.  At the hearing, I asked Mr Chan the rationale of classifying the internal conditions of 1st Floor, 96 Tak Cheong Street, the unit of the 2nd Respondent and the 3rd Respondent as “very poor”.  Mr Chan referred me to the photographs in Dr Chan’s report showing the unit of the 2nd Respondent and the 3rd Respondent and other units.  After a short adjournment, Mr Chan also produced as Exhibit photographs he took when preparing the EUV report to support his analysis.  Upon inspection of the photographs, I am satisfied with the classification of the units inspected by Mr Chan.

53.  The question of the units not inspected by Mr Chan, however, remained unresolved.  Mr Chan opined, quite rightly in my mind, that he inclined not to make adjustments based on photographs alone without inspecting the units.  Mr Chan preferred to leave the decision to the Tribunal.

54.  Mr Shum submits that under the Ordinance, the Application has to be supported by a EUV report produced within 3 months.  In the present case, since Mr Chan cannot gain access to some of the units when preparing the report, he has to do his best. Once the report is filed with the application, it is up to the minority owners to adduce evidence to challenge the report.  It will then be up to the Tribunal to decide after hearing the evidence. 

55.  Mr Shum further submits that the only purpose of the EUV report is to ascertain the percentage to see how much the minority owners will get from the development value.   In the present case, the 2nd Respondent and the 3rd Respondent have agreed to the EUV report and the percentages.  Mr Shum submits that the Tribunal does not need to bother when the minority owners have chosen not to bother. 

56.  Mr Shum also submits that the assumptions made by Mr Chan for the uninspected units are viable and reasonable.  He invites the Tribunal not to put too much weight to the photographs in Dr Chan’s report which are taken one year after the EUV report and to accept Mr Chan’s EUV Report.

57.  I have carefully compared the photographs in Dr Chan’s report and those produced by Mr Chan.  Although looking at the photographs, I firmly believe it is not justified to adopt 0% adjustment for some of the units not inspected by Mr Chan and to adopt -5% adjustment for the unit of the 2nd Respondent and the 3rd Respondent, bearing in mind that I should not perform any valuation exercise based on photographs alone, I accept the submissions of Mr Shum.

58.  I am satisfied that the EUV as prepared by Mr Chan is fair and reasonable.  Under section 10 of the Ordinance, the apportionment between the majority owners and the minority owner of the Lots shall be on the basis as specified in Part 3 of Schedule 1 of the Ordinance.  Under the said Schedule, the proceeds are to be apportioned on the basis of the EUV as determined by the Tribunal.  I hold that the proceeds are to be apportioned on the basis of the EUV as above.

59.  In his valuation report dated 30 November 2012, Mr Chan states the RDV of the Lotsas at 30 November 2012 to be $81,000,000. At the trial, the 2nd Respondent and the 3rd Respondent do not object to this valuation.

60.  Mr Chan’s valuation method can be summarized as follows:

(a) The valuation is conducted on the assumption that the existing Buildings are vacant and to be demolished and redeveloped into certain beneficial usages reasonably reflecting their redevelopment potential.  

(b) Mr Chan has assessed the RDV using the residual valuation method.  The residual method is the assessment of the land value by deducting the development costs from the potential sales revenue, i.e. the gross sale price, of the completed building.

(c) After testing with different scenarios, Mr Chan is of the opinion that the optimum development on the Lots comprises a 23-storey commercial / residential composite building with retail shop units on Ground Floor with Cockloft, and residential units on 1/F to 22/F.

(d) He then identifies retail and domestic comparables, applying relevant adjustments as appropriate.

(e) Mr Chan uses 4 Ground Floor shop transactions nearby as his Ground Floor retail comparables.  For upper floor domestic comparables, he uses a total of 111 flat transactions in 4 developments nearby.

(f) The following unit rates are adopted by Mr Chan in assessing the gross development value:

Ground Floor Retail: $204,000/m²; and

Typical Domestic Unit: $145,000/m².

(g) Mr Chan then deducts the development costs from the gross development value.  Allowing for developer’s profit and discounting for the development period, Mr Chan determines the land value of the Lots on redevelopment basis.

61.  I am satisfied that the RDV valuation of $81,000,000 made by Mr Chan is fair and reasonable, reflecting the current redevelopment value of the Lots.  Thus, the reserve price of the Lots should be fixed at this value.

Conclusion

62.  In the circumstances, I make the following determination:

(a) This Tribunal is satisfied that the existing use value of the 2nd Respondent and the 3rd Respondent’s one equalundivided 7th part or share of and in the building now known as No. 96 Tak Cheong Street Kowloon ("the Building"), erected upon the Remaining Portion of Section C of Subsection 1 of Section G of Kowloon Marine Lot No. 47, together with the right of possession of 1st Floor, No. 96 Tak Cheong Street, Kowloon is $2,430,000as assessed in this Application is fair and reasonable and is fair and reasonable when compared with the existing use values of the other units, the undivided shares of which belong to the 1st Applicant and the 2nd Applicant, as assessed inthis Application;

(b) This Tribunal is satisfied that the redevelopment of the Buildingserected upon the Remaining Portion of Subsection 1 of Section G of Kowloon Marine Lot No. 47, known as No. 94 Tak Cheong Street, Kowloon and the Remaining Portion of Section C of Subsection 1 of Section G of Kowloon Marine Lot No. 47, known as No. 96 Tak Cheong Street Kowloon, (collectively referred to as“the Lots”) is justified due to the age or state of repair of the Buildings, and that the 1st Applicant and the 2nd Applicant have taken reasonable steps to acquire all the undivided shares in the Lots held by the 2nd Respondent and the 3rd Respondent;

(c) 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 under Section 4(1)(b) of the Land (Compulsory Sale for Redevelopment) Ordinance Cap. 545 (“the Ordinance”);

(d) MrCheung Wood Keung and Ms Mok Ka Cheuk Cecilia, nominated by the 1st Applicant and the 2nd Applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to the Lots, and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs. Lo & Lo, Solicitors dated 8 January 2013;

(e) For the purposes of the sale of the Lots by public auctionunder Section 5(l)(a) of the Ordinance:

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

(ii) The reserve price be set at $81,000,000; and

(iii) Subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Lots in the auction sale or its successor in title, the redevelopment of the Lots 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 as specified by Section 9 and Schedule 3 of the Ordinance; and

(f) Liberty to the 1st Applicant and the 2nd Applicant, the 2nd Respondent and the 3rd Respondent and the Trustees to apply to the Tribunal for further directions under the Ordinance.

Costs

63.  The parties have indicated their respective positions on costs. Thus, I make a costs order nisi that there be no order as to costs for the Application herein.  If the parties do not make any further application for costs within 14 days from today, the costs order nisi shall become absolute.