NEW BRILLIANT DEVELOPMENT HOLDINGS LTD v. GOLDEN EARN LTD AND OTHERS

LDCS 8000/2020

[2021] HKLdT 59

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 8000 OF 2020

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BETWEEN

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J U D G M E N T

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1.  This is an application for a compulsory sale order under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”) (hereinafter referred to as “the Application”) to sell all the undivided shares of the Remaining Portion of Section L of Kowloon Inland Lot No 4307 (“the Lot”) with a building erected thereon (“the Building”) at Nos 2A and 2B San Lau Street and No 26 Ko Shan Road in Hung Hom, Kowloon, Hong Kong.

2.  The Building is a 6-storey tenement building served by one common staircase.  Its occupation permit, No K74/58, was issued on 8 March 1958 which granted permission to occupy ground floor for non-domestic use and 1/F to 5/F for domestic use. The Building is thus more than 63 years old.

3.  According to the building plans approved by the Building Authority on 28 May 1957 and 17 August 1957, there are 3 shops on G/F and 3 domestic units on each of 1/F to 5/F. By a Deed of Mutual Covenant dated 25 April 1958, each of the above units has been allotted one equal and undivided share of the Lot.

4.  At the time of filing the Application on 18 May 2020, the applicant already owned all the undivided shares of the Lot save for the following owned by the respective respondents:

Respondent	Unit
1st Respondent (“R1”)	G/F,  No 2A San Lau Street
2nd Respondent (“R2”)	G/F,  No 2B San Lau Street
3rd Respondent (“R3”)	G/F,  No 26 Ko Shan Street

That is, the applicant owned 83.333% of the Lot.

5.  After the Application, the applicant acquired further interests from R1 and R3 and the proceedings against them have been discontinued.

6.  R2, Mr Joe Bing Chang (“Mr Chang”), is the sole remaining respondent who owned G/F, No 2B San Lau Street (“R2’s Unit”) through an assignment dated 25 April 1958. Mr Chang passed away on 24 May 1967 but no probate application was made in relation to his estate.

7.  By an order of the Tribunal dated 26 June 2020, leave was granted to amend R2’s name to “The Personal Representatives of Joe Bing Chang alias Jose De La Cruz (張祖平), deceased”.

8.  By an order dated 15 March 2021 and pursuant to section 3(4) of the Ordinance:

(a) Service of all documents on R2 be dispensed with;

(b) Notice be published in newspapers to call upon R2 and any person claiming to be interested in Mr Chang’s estate to establish his/her claim before the Tribunal within 21 days;

(c) Upon expiration of such 21 days, R2 “shall be bound by these proceedings as if the personal representative(s) of the estate of the Deceased had been duly served” in accordance with section 3(3)(a) of the Ordinance; and

(d) Pursuant to O15 r15, “these proceedings may proceed in the absence of a person representing the estate of the Deceased and any judgment or order … shall bind the estate of the Deceased”.

9.  On 19 March 2021, the said notice was published in South China Morning Post and Sing Tao Daily. No one came forward and R2 made no response whatsoever: R2 is thus bound by these proceedings. In fact, R2 was absent at all stages of these proceedings.

10.  In spite of the above, by a letter dated 26 May 2020, Messrs John Ip & Co wrote to the applicant’s solicitors, Messrs Mayer Brown, informing that they act for Mr Tang Ping Hong (“Mr Tang”) who claimed to have been in adverse possession of R2’s Unit since about 1968 (ie after Mr Chang’s death in 1967).

11.  By an agreement dated 29 July 2020 (“the Agreement”), Mr Tang agreed to sell and the applicant agreed to purchase at $12,500,000 all of Mr Tang’s interest whatsoever in R2’s Unit including any interest in relation to the reliefs granted in the legal action on adverse possession to be commenced by Mr Tang. Completion of the Agreement is subject to Mr Tang obtaining such reliefs.

12.  Then on 21 July 2020, Mr Tang took out an originating summons in HCMP 1039/2020 seeking against R2, inter alia, the following reliefs:

(a) A declaration that Mr Tang acquired an indefeasible possessory title to R2’s Unit;

(b) A declaration that R2’s title has been extinguished under sections 7 and 17 of the Limitation Ordinance, Cap 347; and

(c) A declaration that Mr Tang has been in adverse possession of R2’s Unit for a period exceeding 12 or 20 years prior to the commencement of HCMP 1039/2020 and has thereby acquired an indefeasible possessory right, title and interest in R2’s Unit.

13.  Under the Agreement, Mr Tang agreed to obtain the reliefs in HCMP 1039/2020 by a certain date, failing which the applicant has the option to terminate the Agreement or extend such date. More recently, such date was extended to 18 June 2021 but HCMP 1039/2020 has not yet been determined by the court and the applicant did not exercise its right to terminate the Agreement.

14.  By a Consent Summons dated 14 July 2021, the applicant and Mr Tang agreed to have Mr Tang joining in these proceedings as the 4^th Respondent. Should the order for compulsory sale be granted by the Tribunal, the proceeds of sale to be apportioned to R2’s Unit be held by the trustees to be appointed by the Tribunal pending final determination of HCMP 1039/2020.

15.  Mr Jonathan Lee (“Mr Lee”), counsel for the applicant, contended that at the time of the Application dated 18 May 2020, the applicant owned all units of the Buildings which represented more than 80% of the undivided shares of the Lot.

Whether the Applicant is entitled to make the Application

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

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

18.  The Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice was gazetted on 22 January 2010 and came into operation on 1 April 2010 (“the Notice”).  Section 3 of the Notice lowered the threshold for compulsory sale in respect of the classes of lots specified in the Notice from 90% to 80%.  Those classes of lots include “a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (ie the date of the application under the Ordinance)”. 

19.  As the occupation permit for the Building was issued on 8 March 1958, not less than 50 years before the date of the Application, the Notice is applicable and the threshold percentage should be 80%.

20.  The applicant, owning 83.333% of the undivided shares of the Lot, was entitled to file the Application under section 3(1) of the Ordinance.

The Issues in the Application

21.  In his opening submission, Mr Lee summarized the following issues as shall be determined by the Tribunal, namely: -

(1) What is the market value (which is usually termed by the valuation profession as the Existing Use Value or just “EUV”) of each of the units in the Buildings as at 30 March 2020 as assessed in accordance with Part 1 of Schedule 1 to the Ordinance;

(2) Whether an order for sale be granted under section 4(2) if

“(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; 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).”

(3) if an order for sale of the Lot be granted, what the redevelopment value (“RDV”) of the Lot should be for the purpose of setting the reserve price of the public auction according to clause 2 of Schedule 2 to the Ordinance.

The Evidence

22.  The applicant has filed the following documents in support of the Application:

(a) a witness statement of Mr Chan Chi Luen, Thomas, representative of the applicant, dated 20 January 2021 but owing to the departure of him from the applicant, a witness statement of Mr Ngan Yuk Kei dated 14 July 2021was filed with leave in its stead;

(b) a Building Condition Survey Report by Mr Wong Wing Cheung, Dennis (“Mr Wong”) of Prudential Surveyors International Ltd dated 20 January 2021;

(c) a Structural Assessment Report also by Mr Wong of even date.

(d) the following reports by Mr Charles CK Chan (“Mr Chan”) of Savills Valuation and Professional Services Limited (“Savills”):

(i) an Application Report pursuant to Part 1 of Schedule 1 to the Ordinance dated 13 May 2020;

(ii) a Supplemental Report dated 20 January 2021 on the revised EUV as at 30 March 2020 and the RDV as at 8 January 2021; and

(iii) a 2^nd Supplemental Report dated 30 June 2021 on the updated RDV. [1]

EUV as at 30 March 2020

Assessment of EUV of G/F Units

23.  In the Application Report, Mr Chan explained the method of valuation and the process of his assessment to arrive at, inter alia, the EUV of each unit of the Building.

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

(a) He selected 3/F, No 2B San Lau 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 10 comparable transactions in 9 different buildings of similar ages nearby in the To Kwa Wan/ hung Hom districts.  After making what he regarded as the necessary adjustments (for time, location, building age, size, floor level, view, lighting and ventilation, noise effect, physical condition and building management, etc) for all these comparable transactions, he took the average of the adjusted unit rates of the comparables, save for the two at 119 Ma Tau Wai Road which he believed were acquisition by developers for redevelopment purposes, to arrive at the unit price of the Reference Domestic Unit at $98,000/sq m;

(c) He further considered the floor difference, view, lighting & ventilation, internal conditions, size of the Reference Domestic Unit and the remaining domestic units within the Building and made adjustments to arrive at the EUV of all the domestic units;

(d) He converted the saleable area of the Flat Roofs on the 1/F and the top roofs of the premises by using a conversion factor of 1:6 and 1:8 respectively.

25.  In assessing the EUV of all the ground floor units, Mr Chan selected G/F, No 2B San Lau Street as the Reference Shop Unit.  He then took into account 8 comparable transactions all in different buildings nearby. After making what he regarded as the necessary adjustments (for time, location, size, building age, frontage, layout, headroom and level difference etc) for all these comparable transactions, he took the average of the adjusted unit rates of the comparables (save for the one the lowest adjusted unit rate) to come to the unit price of the Reference Shop Unit at $193,000/sq m. Mr Chan then used the unit rate of the Reference Shop Unit to assess the other ground floor units.

26.  Mr Chan updated the Application Report by the Supplemental Report in which he revised the EUV of all the units in the Building after taking into account inspection of more units and the updated property indices prepared by the Rating and Valuation Department.

27.  In the Supplemental Report dated 20 January 2021, Mr C Chan repeated the exercise he did in the Application Report with the new information and set out his revised assessments of the EUV of each unit as at 30 March 2020.  Particularly, Mr Chan took into account building orders issued by the Building Authority which required various unauthorized structures to be demolished and made deductions of the respective reinstatement costs estimated by Mr Wong.

28.  Mr Chan arrived at the adjusted unit rate of the reference domestic unit and the reference shop unit at $98,000/sq m and $208,000/sq m respectively.

29.  The final assessments of the EUV of the units of the Building by Mr Chan are tabulated as follows:[2]

	No 2A San Lau Street	No 2B San Lau Street	No 26 Ko Shan Road
G/F	$9,040,000	$,10,650,000	$11,890,000
1/F	$6,310,000	$5,670,000	$5,420,000
2/F	$6,190,000	$5,430,000	$5,370,000
3/F	$6,250,000	$5,320,000	$5,420,000
4/F	$5,940,000	$5,210,000	$5,160,000
5/F & Roof	$6,210,000	$5,240,000	$5,330,000

30.  The total EUV of the Building is therefore $116,050,000. I am satisfied that the value of R2’s Unit as assessed 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.

Whether Redevelopment of the Lot is Justified on “Age” or “State of Repair”

31.  Section 4(2)(a) of the Ordinance stipulates that the Tribunal shall not make an order for sale unless it is satisfied that redevelopment of the Lot due to the “age or state of repair” of the Building is justified.

32.  On this issue, the applicant adduced a Condition Survey Report and a Structural Survey Report both dated 20 January 2021prepared by Mr Wong.

33.  In the Condition Survey Report, Mr Wong concluded that[3]:

33.1 The Age of the Building

(1) The Building is over 62 years old, and has many problems as a result of its age which impairs its appearance and function.

(2) Due to changes in statutory requirements, advanced technology and higher expectations over the years, the Building has become substandard and obsolete with many problems affecting the hygiene, safety, convenience and enjoyment of the Building.

(3) The physical and functional hazards are a result of deficiencies in the planning, design, use of material, facilities and workmanship of the Building when it was first constructed. These are further aggravated due to unauthorized building works, sub-division of flats, lack of maintenance and the absence of proper building management. The has rendered the Building to be below a habitable standard and fall short of many basic requirements expected in new buildings. While some of these shortcomings are of a hygienic or environmental nature, others are of a much more hazardous nature which may lead to disasters and tragedies, eg overloading of the structure due to unauthorized sub-division of the flats and unprotected electrical installations in the fire escape staircases.

(4) Due to the age of the Building and its obsolete design, there are certain inherent deficiencies that simply cannot be overcome but impose a very real risk on the safety of the building occupants, especially in case of a fire, and inaccessibility for people with disabilities. These deficiencies include:

• Insufficient width at exit route/staircase

• No protected lobby for access to the required staircase

• No refuse chute/room provided

• Lack of barrier free access (such as ramps and lifts)

33.2 The State of Repair of the Building

(1) The Building is in a poor condition and many of its components, finishes and services installation deteriorated beyond reasonable repair.

(2) The Building is currently in a state of disrepair and demolition of the Building will relieve the owners from heavy repair responsibilities. Apart from the heavy repair responsibilities that the Building owners have to shoulder, the economic benefit brought about by the repair to the Building is far less than the option of re-development. Indeed, demolition of the Building for redevelopment is not only economically more viable but will also improve the living standard of the new occupants and contribute to the renewal of the neighbourhood and enhance the overall environment.

(3) The costs of essential repairs estimated at HK$8,491,895 amounts to HK$8,066.84/sq m of the existing Gross Floor Area of the Building. This unit cost of essential repairs is about 36.28% of the unit cost of HK$22,233.40/sq m for the construction of a new building. In short, the essential repairs costs are disproportionately high as compared with the cost of constructing a new building. The high cost of immediate repairs indicates that the Building is in a poor state of repair.

(4) The carrying out of the essential repairs will cause considerable disturbance and will require a very long implementation period. It is inevitable that the occupation and enjoyment of the flats will be affected intermittently during the course of the repair. In fact, for flats with substandard unauthorized building works, the occupants will have to be evacuated during the carrying out of work for safety reasons.

(5) The fact is that even after the essential repair works have been implemented, the Building will remain an old residential cum commercial building with its design and construction out-dated/ obsolete and below market expectations and constitute a continuing repair liability to the owners.

34.  In the Structural Survey Report, Mr Wong concluded that the structural elements of the Building are currently in a poor state of repair; the Building will likely require extensive maintenance and repair works in the coming few years if it were not redeveloped:

(1) 114 cracks and spalling are found in structural elements throughout the Building. Most of the cracks observed were longitudinal cracks; the reason for such cracks is due to the corrosion of the reinforcement.

(2) Carbonation has reached the concrete surrounding the steel reinforcement in all the tested samples from slabs and beams, and 50% of samples from columns. This makes the steel reinforcement susceptible to corrosion, as such, the carbonation problem is a very serious internal defect of the structural frame and the only long-term solution is to replace the carbonated concrete cover.

(3) The Building was designed in accordance with the London County Council (LCC) By-Laws 1952 and the consideration of the robustness of the Buildings were not required by codes and regulations at that time. Therefore, it generally has a lower performance of robustness in design.

35.  Having considered the evidence before the Tribunal, I am satisfied that redevelopment of the Building is justified due to the age and state of repair.

Section 4(2)(b) – Whether Applicant has taken reasonable steps

36.  The applicant is under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interests of the respondents under section 4(2)(b) of the Ordinance.

37.  The Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363 (“Capital Well”) emphasized at §33 that:

“In making that assessment (whether an offer is reasonable) 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.”[4]

38.  On the other hand, in Intelligent House Ltd, supra, where the majority owner relied on its valuation expert to formulate some of the offers, the Tribunal ruled at §334(3) that:

“… it is not disputed that Savills is a reputable firm of valuers. In our view, it is also reasonable for Intelligent House 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.”

39.  The applicant has successfully acquired the interests of R1 and R3 after the Application. In respect of R2, he/she cannot be found and no grant of administration of his/her estate has been issued. It is impossible for the applicant to negotiate with anyone with necessary authority to sell the R2’s unit.

40.  On the evidence available, I am satisfied that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot on terms that are fair and reasonable.

The RDV of the Lot

41.  Mr Chan has adopted the residual valuation method in determining the RDV.  This can be done by deducting development cost (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value (“GDV”) of the completed optimum development.

42.  Based on a developable site area of the Lot at 149.31 sq m, Mr Chan assumed a hypothetical 20-storey residential/commercial composite development with retail units on G/F & 1/F, club house on 17/F, plant rooms on 18/F and 19/F, and domestic flats on 2/F to 16/F. He assessed the unit rate of the G/F retail portion at $243,000 per sq m and that of the domestic portion at $241,000 per sq m.

43.  The construction cost is estimated at $64,150,704.

44.  Mr Chan arrived at a RDV of $136,000,000, ie an accommodation value of $88,345 per sq m.[5]

45.  In Success Active Limited v Harbourview International Holding Limited, LDCS 31000/2018 (unreported, 19 April 2021), the Tribunal was drawn attention to the sale of a high-rise residential commercial composite building at 2C San Lau Street on 27 December 2019 at $175,000,000. The purchaser of this sale is the applicant in the present case. The Tribunal remarked that the purchase price for this transaction should have included a marriage value for joining the Lot and cannot be relied on straightly as a comparable on its own.

46.  Whereas in Success Active, the Tribunal made an order for sale at the reserve price of $300,000,000, the developable site area of the lots there was much larger at 318.00 sq m or an accommodation value of $94,993 per sq m.

47.  Taking into account the very small developable area of the Lot in the present case, I am prepared to adopt the reserve price for the public auction of the Lot at $136,000,000 as assessed by Mr Chan.

Other Incidental Matters

48.  The applicant proposed to appoint Mr Ma Ho Fai and Ms Hung Suet Shan Catherine, both being partners of Messrs Woo Kwan Lee & Lo, Solicitors, Notaries, Agents for Trademarks & Patents, as the sale trustees.  Based on the information on their background and experience as set out in their letter dated 7 July 2021, I am satisfied that they are proper persons to be appointed as trustees to discharge the duties imposed on trustees under the Ordinance.  The remuneration package proposed in the said letter appears reasonable.

49.  The applicant has prepared a set of draft Particulars and Conditions of Sale of the Lot.  Subject to any amendment that may become necessary as a result of my ruling on the arrangement of auction above, the particulars and conditions of sale of the Lot by public auction submitted by the applicant are also reasonable.

Order

50.  This Tribunal make the following orders:

(1) This Tribunal is satisfied that the redevelopment of the Lot is justified due to the “age” or “state of repair” of the Building and that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot;

(2) All the undivided shares in the Lot, the subject of the Application herein, be sold by way of a public auction for the purposes of the redevelopment of the Lot under s.4(1)(b) of the Land (Compulsory Sale for Redevelopment) Ordinance (“the Ordinance”);

(3) Mr Ma Ho Fai and Ms Hung Suet Shan Catherine of Messrs Woo Kwan Lee & Lo, Solicitors, Notaries, Agents for Trademarks & Patents, nominated by the applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to sale of the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Woo Kwan Lee & Lo, Solicitors & Notaries, dated 7 July 2021.

(4) For the purpose of the sale of the Lot by public auction under section 5(1)(a) of the Ordinance:

(i) The sale of the Lot be on the particulars and conditions of sale 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 $136,000,000.

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

(iv) Liberty to the applicant, the 2^nd and 4^th respondents and the Trustees to apply to the Tribunal for further direction(s) under the Ordinance.

Costs

51.  There be no order as to costs.