FANCY MILLION LTD AND OTHERS v. YEAR GLORY LTD AND OTHERS

LDCS 15000/2018

[2021] HKLdT 81

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 15000 OF 2018

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BETWEEN

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DECISION ON REVIEW

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1.  On 23 November 2021, I handed down the written judgment in this case (“the Judgment”).

2.  In gist, I made an order for sale by auction under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (hereinafter referred to as “the Compulsory Sale Ordinance”) to sell all the undivided shares of 7 lots in Kowloon City on which stands the building known as Tai Wah Building situated at Nos 3-13 Nga Tsin Long Road, Kowloon (“the Building”).

3.  The applicants now apply to review my judgment pursuant to section 11A of the Lands Tribunal Ordinance on the market value (which is usually termed by the valuation profession as the Existing Use Value or just “EUV”) of “the Remaining Portion of RCHE” in the Building as at 24 April 2018 as assessed in accordance with Part 1 of Schedule 1 to the Compulsory Sale Ordinance.

4.  As regards the background of “the Remaining Portion of RCHE”, it was noted in the Judgment as follows:

“22. Notwithstanding the OP dated 19 July 1967 which provided for 7 shops on G/F, 1 non-domestic unit on each of 1/F to 3/F etc, by reference to a set of approved building plans (“GBP”) dated 7 April 1967 and its subsequent Alteration and Addition (“A&A”) plans dated 20 February 2017, portion of Shops 1 and 3, whole of 1/F to 3/F were converted to a Residential Care Home for Elderly (“the RCHE”) served by 2 newly constructed exclusive lifts and 2 internal staircases. In addition, the four shops on G/F (ie Shops 1, 3, 5 & 7) on the GBP were merged into an enlarged shop; portion of Shops 1 and 3 were converted to a new lift lobby serving the RCHE. A new transformer room and fire service control centre were constructed at the rear of the enlarged shop.

23. Besides, Flat G on 4/F was converted to a lift machine room and A/C Plant room for lift shaft.

24. More particularly, there was a tenancy agreement dated 23 May 2016 (“1^st tenancy agreement”) whereby portion of Shops 1 and 3 on G/F, the whole of 1/F, 2/F & 3/F and Flat H on 4/F were leased by the 1^st applicant to Tsui Lee trading as Pok Hong Home for Aged for a period of 3 years from 1 January 2017 at a rental of $638,000 per month exclusive of rates and management charges but inclusive of Government rent. This tenancy agreement was superseded by another one dated 31 October 2016 (“2^nd tenancy agreement”) whereby portion of Shops 1 and 3 on G/F, the whole of 1/F, 2/F & 3/F and Flat H on 4/F (“Main Portion of RCHE”) was leased by the 1^st applicant to Hong Kong Hang Yue Medical Care Limited (with Tsui Lee providing personal guarantee) for a period of 3 years from 1 November 2016 to 31 October 2019 at the same rental of $638,000 per month exclusive of rates and management charges but inclusive of Government rent.

25. Like the previous tenancy agreement, ie the 1^st tenancy agreement, the 2^nd tenancy agreement contained the following special conditions:

「1. The Tenant shall be entitled to a rent-free period of six (6) months from 1 November 2016 …

2. The Tenant shall be entitled to renew the tenancy of the Premises for a further term of THREE years from the expiration of the Term … at the monthly rent of HK$701,800…

3. 業主將該物業交吉予租客時須造好以下工程：

(1) 造好消防花灑系統

(2) 造好鋁窗， 窗台須離地1.1米

(3) 業主須提供三相200M 電力， 並設有基本電線位

(4) 造好樓梯， LIFTSHAFT

(5) 業主須提供一部升降機從地下可到達一樓、二樓及三樓 (非專用)

(6) 租客負責升降機的維修， 保養及支付電費

(7) 租客要求向衙前塱道門面須要1800mm 闊度 (非專用)

4. 若於2016年11月1日業主因上述工程未能交吉該物業給租客， 則租約開始日、屆滿日、租期及免租期等將順延， 順延期間， 業主有權以七天通知書通知租客開始租期， 租客不得因租期順延而取消本租約， 或要求任何賠償。」(underline added)

26. Thus, it is apparent that the conversion into the RCHE was carried out pursuant to this tenancy agreement. Then on 7 May 2018, there was a further tenancy agreement (“3^rd tenancy agreement”) whereby portion of Shops 1, 3, 5 and 7 on G/F, and Flat I on 4/F were leased by the 1^st applicant and the 3^rd applicant to Hong Kong Hang Yue Medical Care Limited for a period of 2 years from 2 May 2018 to 1 May 2020 at a rental of $160,000 per month exclusive of rates and management charges but inclusive of Government rent.

27. At the present moment, therefore, the Building comprises the RCHE, 3 shops (ie Shops 9, 11 and 13) on G/F and 10 units on each of the 4/F and 5/F.

28. By virtue of the joint letter to the Tribunal dated 11 October 2021, Mr A Chan and Ms Sat have agreed the following particulars of the non-domestic units of the Building: [1]

Floor	Shop No	Use	Saleable Area (m2)	Yard Area (m2)	Effective Floor Area (m2)	Headroom (m)	Frontage (m)	Depth (m)
G/F	1	Shop (Shop A)*	14.25	14.05	15.03
		Common Area	50.30		50.30
	3	Shop (Shop A)*	39.44		40.22
		Common Area	32.78		32.78
	5	Shop (Shop A)*	64.68		65.46
		Common Area	5.08		5.08
	7	Shop (Shop A)*	14.01	-	14.01
		Shop (Shop B)*	137.12	-	137.12
		Common Area	38.59	-	38.59
	9	Shop	71.48	4.72	72.27	3.57	4.24	18.29
	11	Shop	71.03	4.72	71.82	3.57	4.44	18.29
	13	Shop	59.03	4.72	59.82	3.57	3.76	18.29
1/F	-	RCHE	538.11	-	538.11	3.05	-	-
2/F	-	RCHE	557.10	-	557.10	3.05	-	-
3/F	-	RCHE	558.84	-	558.84	3.05	-	-

* Mr A Chan has sub-divided Shops 1, 3, 5 & 7 on G/F into Shop A and Shop B, which according to him, would enhance marketability.”

5.  The “Common Area” as stated in the table above was explained by Mr A Chan, the valuation expert on behalf of the applicants, to include “transformer room, FS control centre, FS sprinkler inlet, lifts, lift lobby, protected lobby and staircases”[2].

6.  The grounds of review, which are set out in the affirmation of the applicants dated 13 December 2021, are as follows:

“4. The review application is necessitated by the two assessments of EUV of the relevant subject shops made by the Tribunal as set out below: -

(1) The Tribunal, after analyzing the six G/F retail comparables [§§32-51], determined the unit value of the reference shop unit at $366,000 psm [§52] and assessed the EUV of the G/F shops as set out in [§53] by way of the Direct Comparison Method, which included: -

(a) The adjusted unit rate of $360,876 psm and the EUV of $48,617,215 for Shops 1, 3 & 5; and

(b) The adjusted unit rate of $355,020 psm and EUV of $48,680,342 for Shop 7.

(2) However, as set out at [§79], the Tribunal ultimately adopted the Income Capitalization Method to assess the EUV of the “the Remaining Portion of RCHE” (which consists of Shops 1, 3 & 5, Shop 7, and Flat I on 4/F) by relying on the 3^rd tenancy agreement of the Remaining Portion of RCHE [§26] commencing from 2.5.2018 (ie just 2 months before the commencement of these compulsory sale proceedings on 18.7.2018 [§4] and 8 days after the EUV valuation date of 24.4.2018) at the rent of HK$160,000/month to arrive at the EUV of HK$76,800,000 [§79], with the unit rate of HK$282,519 psm (which was derived by HK$76,800,000 [§79]/(134.72m²+137.12m² [§53] without inclusion of the EUV of Flat I on 4/F) .

B. Optimum Use/Value

5. Critically, the unit rate of Shops 1, 3 & 5, Shop7, and Flat I on 4/F derived from the Income Capitalization Method for elderly house use at [§79] is substantially lower than the adjusted unit rate of the Tribunal’s own assessment of the shop comparables based on the Direct Comparison Method for retail use at [§53]:-

…

6. The marked difference in the unit rates demonstrates conclusively that the optimum use of Shops 1, 3 & 5, and Shop 7 is retail, and not as an elderly home.

7. There is no good reason why the Tribunal’s valuation of the market value of such shops is restricted to its use as an elderly home in sole reliance upon 1 tenancy agreement commencing just 2 months prior to these compulsory sale proceedings. This is because (1) “market value” is the best price reasonably obtainable in the market by a seller and the most advantageous price reasonably obtainable in the market by a buyer; and (2) the statutory language of Schedule 1 Part 1 of Cap 545 requires the property to be assessed on a “vacant possession basis” and is not based upon its current use.

8. The conclusion that retail use (and not the elderly home use) of the relevant shops is the best use is also consistent with the approach taken by Mr A Chan (for the Applicants) and Ms Sat (for the Respondents) when assessing the EUV of those shops. They did not adopt the Income Capitalization Method for the relevant shops nor had they relied upon the 3^rd tenancy agreement. Both Mr A Chan and Ms Sat adopted a Direct Comparison Method based on the respective shop comparabes, and carried out their EUV valuations on a retail use of all the subject ground floor shops [D1/6/§4.2] [ D2/514/§11] …”

7.  Messrs Iu, Lai & Li, Solicitors & Notaries, on behalf of the 1^st respondent, sent a letter to the Tribunal dated 15 December 2021, stating that the 1^st respondent’s position is that it has no objection to such application and agrees to be bound by the decision to be made by the Tribunal. The attendance of Messrs Iu, Lai & Li, Solicitors & Notaries, for the 1^st Respondent, was in fact excused at trial on 18-22 October 2021.

8.  Messrs Ince & Co., on behalf of the 2^nd respondents, sent a letter to the Tribunal dated 16 December 2021 explaining that due to time constraint and costs concern, the 2^nd respondents would not file any written submission at this moment but reserve their rights to be heard and file submission in case when this Tribunal decides to entertain the applicants’ application for review.

9.  The 3^rd respondent has not filed any submission in response to the review application.

Rebus Sic Stantibus

10.  For better illustration of the layout of the RCHE on G/F of the Building, an extract of the original Approved Building Plan (“GBP”)[3] and an extract of the Alterations and Additions Works Plan dated 20 February 2017 (“A&A Plans”)[4] both on G/F of the Building are copied from Ms Sat’s valuation report dated 23 July 2020 and attached at the end of this decision as Appendices 1 and 2 respectively.

11.  Similarly, a copy of the ground floor plan attached to the tenancy agreement dated 31 October 2016[5] is also attached at the end of this decision as Appendix 3.

12.  At §5.2.5 of Mr A Chan’s valuation report dated 16 July 2018, Mr A Chan explained as follows:[6]

“Referring to the A&A Plan …, four shops on G/F (ie Shops 1, 3, 5 & 7) on the GBP were merged into an enlarged shop while portion of shops 1 and 3 were converted to a new lift lobby serving the RCHE. A new transformer room and FS control centre were constructed at the rear of the enlarged shop…”

13.  It is important to note that the original partitions or boundaries between Shops 1, 3, 5 & 7 are nowhere to be seen. In fact, during the joint inspection on 19 October 2021, save for the entrance at former Shop 1 as shown on the A&A Plan, the previous shop fronts were fully enclosed.

14.  Then Mr A Chan explained his valuation approach as follows:[7]

“5.6.1 Referring to paragraph 5.2.5, Shops 1, 3, 5 and Flat No 7 were merged into an enlarged shop and portion of Shops 1 and 3 were converted to a lobby for the RCHE.

5.6.2 For the purpose of this EUV valuation, I have assumed the enlarged shop (ie Shops 1, 3, 5 and Flat No 7) is sub-divided into two shops namely Shop A (ie Shops 1, 3 and 5 including open yard) and Shop B (ie Flat No 7) to enhance the marketability of these ground floor shops.

5.6.3 According to the Land Registry records, Shops 1, 3, 5, 9, 11 and 13 on G/F were transacted with the open yards … Yet there is no other assignment plan indicating the ownership of yards to individual shop. For valuation purpose, I have assumed that Shops 1, 3 and 5 share the same open yard located at rear of Shop 1 …

5.6.4 The RCHE is subject to a tenancy agreement … dated 31 October 2016 … Referring to the tenancy plan for the RCHE (“Tenancy Plan”), only part of the new lobby area for the RCHE shown on the A&A plan is covered by the Tenancy Agreement. Therefore, I have measured the new lobby area for the RCHE according to the Tenancy Plan …

…

6.2.2 Income Capitalization Method is also adopted. I have valued the RCHE portion in the Property by capitalizing the amount of net income receivable at the market yield after deducting any specific costs which must be borne by the recipient. The RCHE portion is assumed to be let at the market rent at the date of valuation… (underline added)

7.1 Shops on Ground Floor

7.1.1 Referring to paragraphs 5.6.2 to 5.6.3 above, I have assumed in this EUV valuation that the enlarged shop on the ground floor is sub-divided into two shop units namely Shop A and Shop B to enhance the marketability of these ground floor shops. Also I have assumed Shops 1, 3 and 5 share the same open yard located at rear of Shop 1 …

7.1.2 Since I have valued Shop B on the ground floor as a separate unit, I proposed exclusive lavatories will be constructed in the unit in consistent with the layout of the remaining shops and relevant ground floor comparables for valuation purpose. In this respect, construction cost of HK$150,000 reasonably incurred in the erection of the exclusive lavatories and sub-division of shops will be deducted from the market value of Shop B.

7.1.3 I have adopted nil value for the transformer room, disabled ramp and new FS control centre constructed on G/F in this valuation.”

15.  Mr A Chan appeared not to be aware of the further tenancy agreement, ie the 3^rd tenancy agreement whereby portion of Shops 1, 3, 5 and 7 on G/F, and Flat I on 4/F were leased by the 1^st applicant and the 3^rd applicant to Hong Kong Hang Yue Medical Care Limited for a period of 2 years from 2 May 2018 to 1 May 2020 at a rental of $160,000 per month exclusive of rates and management charges but inclusive of Government rent. He did not mention it in his report.

16.  Mr A Chan then prepared a Supplemental Report dated 21 July 2020. Mr A Chan disclosed the 3^rd tenancy agreement for the first time as follows:[8]

“5. SCENARIO 1

5.1 Residential care home for elderly (“RCHE”)

5.1.1 Portions of Shops Nos 1 and 3 on G/F, the 1/F to 3/F and Flat H on 4/F are rented out to operate the RCHE. Portions on G/F, 1/F to 3/F and Flat G on 4/F provide supporting facilities for the operation of the RCHE and their values are reflected in the rental value of the accommodation area of the RCHE. The rental value of the accommodation area of the RCHE reflects the optimum value for the accommodation area and the area providing supporting facilities. (underline added)

Floor	Unit/Flat	Supporting Facility	Area (sq m)
G/F	-	Transformer room, new FS control centre, RCHE lobby, FS sprinkler inlet, new store, staircases, protected lobby	130.64
1/F	-	New customer’s switch room, lifts, staircases, protected lobbies	64.26
2/F	-	Lifts, staircases, protected lobbies	45.27
3/F	-	Lifts, staircases, protected lobbies	43.68
4/F	G	New A/C plant room (for lift shaft)	28.57

5.1.2 Since such types of areas providing supporting facilities are excluded in the tenancy agreements of the RCHE comparables, the above areas of these supporting facilities are excluded from the subject assessment of RCHE for consistency sake.

…

5.2.1 Since portion of Shops 1, 3, 5 and 7 are supporting facilities for the RCHE as mentioned in para 5.1.1 above, the optimum use of the remaining portion of Shops 1, 3, 5 and 7 are assessed by divided (sic) into two hypothetical Shop A and Shop B.”

17.  With regret, particulars of the 3^rd tenancy agreement were not yet disclosed.

18.  When Ms Sat prepared her first valuation report on 23 July 2020, she appeared not to be aware of the 3^rd tenancy agreement. She mentioned nowhere in her report of such a tenancy agreement. On the other hand, Ms Sat realized the letting of portion of Shops 1 and 3 on G/F, the whole of 1/F, 2/F & 3/F and Flat H on 4/F.[9] She then proceeded to assess the market value of that portion by the income capitalization approach.[10]

19.  Then came Ms Sat’s Supplemental Report dated 23 September 2020 which was in effect a rebuttal report on the valuation of Mr A Chan. Ms Sat realized something was wrong:[11]

“3.3.2 Assessment of Market Value of individual G/F shop in Scenario 1 (“as is” basis)

Mr Chan has assessed the Market Value of Shop 9 which is the reference G/F shop and assessed the Market Value of other G/F shops based on existing design and layout. According to the A&A Plans approved on 20 February 2017 (the “A&A Plans”), Shops 1, 3, 5 and 7 have been modified and named as Shop A and Shop B and with the installation of 2 lifts, 2 new staircases and other supporting facilities in the area occupied by Shops 1 to 7 such as transformer room. However, Mr Chan did not follow the same adjustments that he has adopted in the assessment of the Market Value of Shops 11 and 13, but simply assessed the Market Value of Shops 1 to 7 on a pro-rata basis which is unacceptable as the adjustments on frontage, size and layout have not been considered.

As the basic vertical circulation to 1/F, 2/F and 3/F of RCHE is via 2 lifts in addition to the staircases, while the provisions of lift service has to make use of lifts and lobby at Shop 1 and Shop 3 and lift machine room at Flat G on 4/F etc, it is impossible to assess individual property interest of Shops 1 to 7 as RCHE can only be assessed as a single unit. In this regard, valuation of Shops 1, 3, 5 and 7 is not feasible in view of the valuation aspect. Some of the reasons are listed as follows:

1) Shop 1 comprising entrance corridor, part of G/F lobby, part of Shop A in front as well as part of the transformer room, and FS Control room at rear, this resulted in a substantial reduction in saleable area of Shop 1;

2) Shop 3 comprising part of G/F lobby and 2 lifts, part of Shop A in front as well as part of the transformer room at rear. Front and rear portions are separated by lobby and 2 lifts and therefore the small shop area and lavatory at the rear portion are not accessible as Shop 3 has no rear entrance; and

3) Shop 7 comprising Shop B in front as well as part of Shop A, part of the lavatory and the two new staircases at rear. Front portion of Shop 7 within Shop B also encroached the original entrance lobby and staircase which function as the main access to 1/F, 2/F and 3/F according to the assignment plan. The aforesaid main access staircase has been demolished and also covered by floor slab with reference to the A& A Plans.”

20.  Ms Sat repeated the above even in her joint statement with Mr A Chan on 16 October 2020:[12]

“RCHE can only be assessed as a single unit. Besides, Mr Chan assessed the Market Value of Shops 1 to 7 on a pro-rata basis with reference to the selected unit shop 9 which is unacceptable as the adjustments on frontage, size and layout have not been considered.”

and

“Assessment of Market Value should be based on the existing layout in accordance with the A&A plans”

21.  Unfortunately, Ms Sat still was not aware of the particulars of the 3^rd tenancy agreement in the absence of which she agreed with the apportioned areas for the RCHE suggested by Mr A Chan. The 3^rd tenancy agreement was disclosed in Mr Wong Cheuk Fai’s witness statement dated 20 July 2020.

22.  Notwithstanding the above, Ms Sat’s comments in her Supplemental Report dated 23 September 2020 were valid. I did not, as suggest by the applicants, value Shops 1, 3 & 5, and Shop 7 as an elderly home under operation or subject to tenancy. I did assess the market value of the corresponding units on “vacant possession basis” but to let. This echoes Mr A Chan’s approach at §6.2.2 of his valuation report dated 16 July 2018. The “Remaining Portion of RCHE” was assumed to be let at the market rent at the date of valuation and the valuation rule of Rebus Sic Stantibus came into play.

23.  Following the decision of the English Court of Appeal in Williams (VO) v Scottish & Newcastle Retail Ltd and Allied Domecq Retailing Ltd [2001] 1 EGLR 157, [2001] RA 41, [2001] EWCA Civ 185 (which is sometimes known as the City Duck case) on the application of the Rebus Sic Stantibus principle, the sub-division of Shops 1-7 into Shop A and Shop was arbitrary; more importantly the sub-division did not reflect the condition and configuration of the premises in their actual physical state.

24.  The English Court of Appeal also gave the example of the physical limb not being so rigid as to prevent Burger King being considered as a possible bidder for the unit occupied by McDonald’s. And it also referred to the absurdity of not allowing any alterations when looking at units occupied by “well-known retail chains seeking to establish their identities and brand loyalties by distinctive fascias and fittings installed in uniform, featureless units”. The latter phrase is a reference to the fact that in Milton Keynes all the retail units started off as standard shell units which were then fitted out to the individual requirements of the occupiers. On the other hand, the works to convert the two Milton Keynes properties to an alternative use, as a shop or restaurant, included removal of brick frontages, internal (mainly block-work) walls, suspended ceilings, raised concrete floor, lift shafts for goods, hoists/” dumb waiters”, staircase to first floor, customer WCs, etc, apart from fitting out works for the alternative use. Looked at overall, the works would be more than “minor” from the viewpoint of a “reasonable man”.

25.  In the present case, there are so many “supporting facilities” at Shops 1 to 7 inside for the operation of the RCHE that render the substantial change or arbitrary sub-division into shops unrealistic.

Income Capitalization Method

26.  In the Judgment at §§55-56, I have explained that in the circumstances, it was appropriate to assess the market value of the Main Portion of RCHE (including Flat G on 4/F) as one property by the income capitalization method.

27.  Turning to the Remaining Portion of the RCHE (ie portion of Shops 1, 3, 5 and 7 on G/F, and Flat I on 4/F) which was let under the 3^rd tenancy agreement, so long as Mr A Chan agreed at his Supplemental Report dated 21 July 2020 at §5.1.1 that “(t)he rental value of the accommodation area of the RCHE reflects the optimum value for the accommodation area”, I find it natural and reasonable to value the same by the income capitalization method.

28.  In this application for review, the applicants refer to Snowland Limited v Director of Lands, LDLR 2/2014 (unreported, 11 November 2016) where the income capitalization method was discussed at §124 as follows:

“This Tribunal has on many occasions indicated that the Direct Comparison Method of valuation based on market evidence should be preferred but this is the case so long as suitable comparables are available and reliable. In the present case, substantial number of adjustments required under the Direct Comparison Method reduced the quality of the valuations.”

29.  The applicants submit that in the present case, unlike Snowland Limited, suitable comparables were available. With respect, I do not agree when the Shops 1-7 have undergone the substantial changes as manifested by the A&A plans.

30.  In any event, the Tribunal is not bound to accept the submission of any party and may rely upon its own experience in determining the dispute under section 4(1)(a) of the Compulsory Sale Ordinance.[13]

31.  And in Lingrade Development Limited v Secretary for Environment, Transport and Works (2011) 14 HKCFAR 439, the Court of Final Appeal said as follows:

“20. These remarks seem to me to demonstrate some degree of misapprehension about the exercise which the Tribunal was required to undertake. It had to form the most accurate view it could about what apartments built according to the original scheme would have fetched, and how quickly they would have sold, if they had been ready for sale in April 2000. For this purpose, the best evidence would have been what apartments in all respects comparable were actually being sold for at the time. However, as is often the case, there was no such evidence. They had evidence of what apartments in Mr Wong’s other development were actually selling for, but did not think that they were sufficiently comparable to be helpful. So they took instead the actual sales of Lingrade apartments under the revised scheme in 2001-2003 and adjusted them to reflect the general decline in the market since 2000. Valuation is not of course an exact science, but the Tribunal’s assessment was solidly based upon which actually happened to very similar apartments soon after the relevant time.

…

23. … The question is not whether Mr Wong’s evidence was accepted or rejected but whether there was evidence to support the decision of the Tribunal. They had before them the evidence of the sales of apartments by Lingrade and the index which they thought appropriate. There is no challenge to the methodology which they, as an expert specialist tribunal, chose to adopt.”

32.  I trust the same principles apply to the present case.

Decision on the review application

33.  In view of the above, there is no merit in the review and I dismiss the application.

Costs

34.  As this decision is made on papers without a hearing pursuant to the Practice Directions issued by the President of the Tribunal: Review No 1/2009, I shall make no order as to costs.