ORIENT SEA INVESTMENTS LTD AND OTHERS v. CHEUNG WING CHING AND OTHERS

LDCS 27000/2018

[2020] HKLdT 30

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO. 27000 OF 2018

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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 Section A of Marine Lot No 430, Section B of Marine Lot No 526 and Section B of Marine Lot No 321 (hereinafter collectively referred to as “the Lots”) on which a building known as State Theatre Building (“the Development”) is erected with the postal address of Nos 277-291 King’s Road, Nos 4, 4A-D, 6, 6A-D Java Road and Nos 2-16 Tin Chong Street, Hong Kong.

2.  The most comprehensive plans to show the general layout of the Development are the plans attached to the Deed of Mutual Covenant (“DMC”). The Development consists of basically a G/F retail arcade covering the whole of the Lots with 2 blocks on top of the arcade:

(a) The low block, occupying about 1/3^rd of the Lots fronting King’s Road, has a dome-shape roof over a billiard centre (which was originally the State Theatre) and (in addition to the G/F level) some non-domestic accommodation on M/F, 1/F and 2/F;

(b) The high block occupying the rest of the Lots and consisting of a 3-storey podium (including the G/F level) with two 13-storey residential towers is situated on the podium deck at 2/F level:

  i. The main façade of Tower 1 overlooking Java Street;

  ii. Tower 2 situated in between Tower 1 and the low block;

(c) The retail portions on the ground floor of the low block and the high block are interconnected with each other by a free and unrestricted internal passage thereby merging the two retail portions as one shopping arcade;

(d) The building service installation serving the 2 blocks are basically of one system with the main installations located in the high block, the Development is governed by one DMC and both blocks are managed by the same Owners’ Corporation and property management company.

3.  According to the approved Building Plans and alterations and additions plans (A&A Plans) (together referred to as “the approved plans”) set out in the table of para 3.1 of the Application Report[1] prepared by Mr Charles Chan (“Mr C Chan”) of Savills Valuation and Professional Services Limited (“Savills”) pursuant to Part of Schedule 1 to the Ordinance and the diagrams in para 3.2.2 & 3.2.8 of the building conditions report[2] prepared by Mr Benson Wong (“Mr B Wong”), there are

(a) G/F: shops;

(b) M/F: sauna bath, shops and offices for non-domestic purposes;

(c) 1/F: elderly care centre, shops and offices for non-domestic purposes;

(d) The State Theatre at 1/F & 2/F of the low block converted into the billiard centre;

(e) 2/F to 10/F of the high block: each having 22 flats for domestic purposes;

(f) 11/F of the high block: 21 flats for domestic purposes.

4.  Occupation Permit No H183 (“the OP”) for the Development was issued on 20 August 1959, which is more than 50 years before the date of the Application.

5.  The ownership of the undivided shares at the time of the Application of the G/F shops, the non-domestic accommodations on the G/F, M/F, 1/F & 2/F and the domestic units are set out in 3 tables in para 2.5 of the Application Report[3]; their floor areas measured from the approved plans are set out in the tables in para 3.2 of Mr C Chan’s Supplemental Report[4] and the internal conditions of the domestic units are set out in the table in para 3.1.2 of Mr C Chan’s Supplemental Report[5]. In short, there are:

(a) 80 G/F shops, each with 1/450 undivided share;

(b) The State Theatre (occupying portions of the G/F, M/F, 1/F & 2/F as shown on Plans 1-4 Annexed to Assignment of memorial number UB336259) with 50/450 undivided shares;

(c) Units of Non-domestic Accommodation (occupying portions of 1/F as shown and coloured pink on Plan 2 annexed to Assignment of memorial number UB354435) with 27/450 undivided shares;

(d) Units of Non-domestic Accommodation (occupying portions of M/F, 1/F as shown and coloured pink on Plans 1 & 2 annexed to Assignment of memorial number UB353273) with 18/450 undivided shares;

(e) Units of Non-domestic Accommodation (occupying portions of 1/F as shown and coloured pink on the 1/F Plan annexed to Assignment of memorial number UB337967) with 20/450 undivided shares;

(f) Units of Non-domestic Accommodation (occupying portions of M/F as shown and coloured red on the M/F Plan annexed to Assignment of memorial number UB364432) with 36/450 undivided shares;

(g) 219 domestic flats with each given 1/450 undivided share and with 2 flats, Flat 2J and Flat 7D, each being subdivided into 2 units with half of the 1/450 undivided share of that flat.

6.  The low block of the Development was listed by the Antiquities Advisory Board (“the Board”) as a Grade 1 historic building in March 2017. The grading (irrespective of Grade 1, 2 or 3), however, is only an administrative measure of the Government which does not engage the statutory protection imposed by the Antiquities and Monument Ordinance, Cap 53:

(a) The Board is set up by section 17 of the Antiquities and Monument Ordinance and its function under section 18 is to advise the Authority, meaning the Secretary for Development, on any matter relating to antiquities, proposed monuments or monuments or referred to it for consultation under section 2A(1), section 3(1) or section 6(4).

(b) The Antiquities and Monument Ordinance contains no provision for the administrative grading of buildings to be listed by the Board or legal consequence as a result of the administrative grading of buildings by the Board.

(c) The statutory protection under the Antiquities and Monument Ordinance is engaged if, and only if, the Authority, after consultation of the Board, declares by notice a building to be a proposed monument under section 2(1); or if the Authority after consultation with the Board and with the approval of the Chief Executive declares by notice a building to be a monument under section 3(1).

(d) The Building Authority acknowledges the distinction between the Board’s grading and the statutory protection under the Antiquities and Monument Ordinance in para 5 of the Practice Note PNAP APP-69.

(e) By PNAP APP-69, while graded buildings do not enjoy statutory protection, preservation of privately-owned historic buildings should be encouraged. Upon receipt of A&A proposals and demolition plans of historic buildings by the Buildings Department (BD), the plans will be referred to the Commissioner for Heritage’s Office (CHO) of the Development Bureau and the Antiquities and Monuments Office (AMO) of the Leisure and Cultural Services Department under the centralised processing system and the established monitoring mechanism. The CHO and AMO may approach the Authorized Persons (AP) or the owners to explore viable options for conservation. Hence, when a project involving building works in historic building(s) is commissioned, early contact with the AMO to identify the heritage value of the building(s) and structure(s) including their character defining elements should be made.

(f) In Pacific Base Holdings Limited & Others v Lee Hop Biu & Others, LDCS 14000/2017 (unreported, dated 4 June 2020) at §44, the Tribunal stated as follows:

“The Tribunal is of the view that the granting of the order under the Ordinance is to have the compulsory sale of all the undivided shares of the subject lot but not to order the demolition of the existing structures on the subject lot. In the auction sale under section 5(1)(a), for instance, the applicants may or may not be the successful bidder to become the purchaser. It will then be for the successful purchaser (who may not be the applicants during the trial) to formulate the redevelopment plan and to present a demolition submission to the Building Authority under the Buildings Ordinance to apply for a demolition permit. The so-called “structural safety” or possibility of “dissection/cutting up” of a building at an adjoining lot is not a relevant concern in adjudicating whether No 73 Granville Road could be sold. The granting of an order for sale by itself will not affect the so-called “structural safety” or possibility of “dissection/cutting up” of a building at an adjoining lot.”

7.  I am of the view that whether the Grade 1 status of the Development will affect the redevelopment of the Lots should not be one of the considerations on whether an order for sale be granted under the Ordinance.

Outstanding Interests (Minority Owners)

8.  The outstanding respondents either are missing persons or have not expressed any opposition to the Application:

Minority Owners:

a. 4^th respondent (R4), being the intended personal representative of the deceased owner of Shops 24 & 36 who expressed no opposition;

b. 15^th respondent (R15), being missing owner of Flat 4O;

c. 16^th respondent (R16), being missing registered owner of Flat 4R & Flat 6M who appears to hold Flat 4R for the 30^th & 31^st respondents and Flat 6M for the 32^nd respondent;

d. 19^th respondent (R19), being missing owner of Flat 7J;

e. 20^th respondent (R20), being missing owner of Flat 7O;

f. 21^st respondent (R21), being missing co-owner of Flat 9L;

g. 22^nd respondent (R22), being co-owner of Flat 9L who never appeared;

h. 25^th & 26^th respondents (R25/R26), being co-owners of Flat 10Q who signed a sale and purchase agreement and awaiting completion subject to a condition.

Persons who may have interests:

i. 30^th & 31^st respondents (R30/R31), being missing purchasers of Flat 4R who appear to have paid the full purchase price;

j. 32^nd respondent (R32), being missing purchaser of Flat 6M who appears to have paid the full purchase price;

k. 35^th respondent (R35), claiming R25 & R26 holding Flat 10Q on trust for him and not opposing but being represented by Messrs Henry Chin & Partners, Solicitors.

9.  None of the outstanding respondents filed any Form 33 (ie Notice of Opposition) or evidence.

10.  All other respondents had sold their interests in their units to the applicants with the action against them discontinued.

Whether the Applicants are entitled to make the Application

11.  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.

12.  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.

13.  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)”. 

14.  As mentioned, the OP for the Development was issued on 20 August 1959 (namely, not less than 50 years before the date of the Application).  The Notice is applicable and the threshold percentage should be 80%.

15.  At the time of filing of the Application, the applicants owned 82.22% of the undivided shares of the Lots. I agree therefore that the applicants are entitled to make the Application under section 3(2)(b) of the Ordinance. As at the date of trial, the applicants indeed have collectively owned 98% of the undivided shares of the Lots.

The Evidence

16.  The applicants have filed the following documents in support of the Application:

(a) the witness statement dated 15 November 2019 from Mr Yeung Lau Lun (“Mr Yeung”), representative of the applicants;

(b) a Condition Survey Report by Mr B Wong dated 15 November 2019;

(c) a Structural Assessment Report by Mr Wong Chi Ming (“Mr CM Wong”) dated 15 November 2019;

(d) the following reports by Mr C Chan;

  (i) the Application Report of 16 October 2018;

  (ii) the Supplemental Report of 15 November 2019; and

  (iii) the Updated Report on redevelopment value (“RDV”) of the Lots dated 10 June 2020.

17.  At trial, Mr Mok Yeuk Chi (“Mr Mok”), counsel for the applicants, just relied on the evidence above to prove their case. Both R25 and Ms Abigail Liu (“Ms Liu”) for R35 had no objection.

EUV as at 21 August 2018

18.  Para 3.1.1 of Mr C Chan’s Application Report sets out the following decisions made in the assessment of the market value of each existing unit subject to the Application pursuant to Part 1 of Schedule 1 to the Ordinance which is usually coined by the valuation profession as Existing Use Value (“EUV”) just for the purpose of distinguishing from the market value derivable from taking into account the redevelopment potential of the Development or the Lots in question:

(a) To assess the original front stall lobby and booking office of the theatre on G/F, which have been converted into retail shops, as individual retail units;

(b) To assess (1) Shop 26 and (2) the area adjoining Shop 26 (“Shop 26 Adjoining Area”), which is part of the State Theatre portion in ownership and undivided shares but which has been converted into one single shop with Shop 26, as one combined shop, and to exclude the Shop 26 Adjoining Area from the State Theatre portion when assessing the EUV of the latter;

(c) To disregard the blocked off area on upper 3/F as shown in the Billiard Centre A&A Plan; and

(d) To assess the value of the set of antennas on the Flat Roof of 3/F of the theatre by way of capitalization method by reference to its rateable value of the Rating and Valuation Department (“RVD”) (owing to the absence of the actual rental information), which method was adopted by the Tribunal in Chancemore Limited v Yee On Enterprises Limited, LDCS 17000/2015 (unreported, dated 31 July 2017).

19.  The valuation date of the EUV assessments is 21 August 2018 and save for the assessment of the value of the set of antennas on the Flat Roof of 3/F of the theatre, the assessment is done by the direct comparison method.

20.  The G/F shops are divided into 4 groups as follows[6]:

(a) Group 1 consisting of Shops 1-3, 16-18 & 26 (together with the Shop 26 Adjoining Area), 27 and the former front stall lobby of the theatre, which are fronting King’s Road and portion of Tin Chong Street round the corner of King’s Road;

(b) Group 2 consisting of Shops 28, 32-38, 40 & 62-69, which are fronting Java Road and portion of Tin Chong Street round the corner of Java Road;

(c) Group 3 consisting of Shops 4-15, 19-25 and the former booking office of the theatre, which are arcade shops near King’s Road; and

(d) Group 4 consisting of Shops 29-31, 39, 41-61 & 70-80, which are arcade shops near Java Road.

21.  In the Supplemental Report of 15 November 2019,

(a) Appendix 2 sets out the adjustments of the comparables to obtain the adjusted unit rate of the Reference Shop 17 for the Group 1 and Group 2 shops[7];

(b) Appendix 4 sets out the adjustments of the comparables to obtain the adjusted unit rate of the Reference Shop 12 for the Group 3 shops[8];

(c) Appendix 6 sets out the adjustments of the comparables to obtain the adjusted unit rate of the Reference Shop 59 for the Group 4 shops[9];

(d) Appendix 8 sets out the adjustments of the comparables to obtain the adjusted unit rate of the retail Northern Portion of 1/F[10];

(e) Appendix 10 sets out the adjustments of the comparables to obtain the adjusted unit rate of the Reference Domestic Unit Flat E of 6/F[11]; and

(f) Appendix 12 sets out the adjustments between the reference units and the other units, yielding the EUV of all the units which are set out also in the tables in para 3.8.8[12] which is reproduced herein as Appendix A of this judgment.

22.  Thus, the total EUV assessed is $3,217,350,000 whereas the corresponding EUV for the outstanding respondents is as follows:

Respondent(s)	Unit	EUV
R4	Shop 24	$5,080,000
	Shop 36	$25,670,000
R15	Flat 4O	$6,990,000
R16	Flat 4R	$5,820,000
	Flat 6M	$8,080,000
R19	Flat 7J	$7,260,000
R20	Flat 7O	$7,310,000
R21	Flat 9L	$6,330,000
R25 & R26	Flat 10Q	$9,120,000

23.  There is no evidence before this Tribunal to demonstrate that the assessments by Mr C Chan can in any way be faulted. I am satisfied that the EUV of the minority owners’ units as assessed in the Application are—

(A) not less than fair and reasonable; and

(B) not less than fair and reasonable when compared with the value of the applicants’ units as assessed in the Application.

Whether Redevelopment of the Lots is Justified

24.  Section 4(2) of the Ordinance provides that the Tribunal shall not make an order for sale unless it is satisfied that the "age or state of repair" of the Development is justified and that the applicants have taken "reasonable steps" to acquire all undivided shares of the Lots.

25.  Mr Mok for the applicants referred to the guidelines laid down in Top Sail International Limited v Cheng Kai Ming, LDCS 18000/2010 (unreported, dated 15 November 2011 (“Top Sail”) and Charmlink Limited v Lee Tong Hing & Others, LDCS 16000/2010 (unreported, dated 29 November 2011) (“Charmlink”) on the factors that the Tribunal should consider whether redevelopment is justified due to age and state of repair.

26.  In Top Sail, the Tribunal stated:

“23. ……, we are of the view that when the requirement of “the age” of the Buildings is considered, we should not restricted our consideration to just the physical age of the Buildings.…… we are of the view that the absence of a specific physical age in the Ordinance indicates that 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.

24. The physical age of a building is clearly one of the considerations…... 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 modern society.”

27.  Such a discretion by the Tribunal was followed in Charmlink:

“30. We are of the view that 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 relevant factors in the present case are that the Building is over 50 years old and it has passed its designed life. It is also obsolescent in design and not economical to maintain. All these factors point to the fact that the Building has come to an end of its physical as well as economical life. Thus, we find that redevelopment is justified on the ground of the age of the Building.

31. …… It is also within the Tribunal’s discretion to determine in what conditions a building should be redeveloped after considering all the relevant factors concerning the state of repair of the building in question. With the clear evidence from the two experts that the Building is in a poor state of repair and in fact untenantable without substantial repair works to be carried out over a long period of time, we have no hesitation in finding that redevelopment is justified by the state of repair of the Building.”

28.  There is no argument on the principles set out in Top Sail and Charmlink. It is agreed that they are guidelines guiding the Tribunal in the exercise of its discretion.

29.  For the age and state of repair requirements, the applicants relied on the expert evidence of 2 experts: Mr B Wong who is an Authorised Person and a building surveyor and Mr CM Wong who is a structural engineer. Their expertise is not disputed and has been accepted in other similar applications for compulsory sale under the Ordinance.

30.  As regards the age of the structural frames of the Development, Mr CM Wong stated in his Structural Assessment Report dated 15 November 2019 as follows:

(1) In view of the lack of design for ductility and robustness, the requirements for the structural safety of the Development, which were fulfilled at the standards prevailing at the time of the design of the Development in 1959 cannot meet the current safety standard.

(2) Chloride content test results show that 86.5% of the structural elements of the high block do not satisfy the current Code of Practice for Structural Use of Concrete 2013.

(3) Concrete cover test results show that 40.3% of the structural elements of the high block were found to have an actual cover smaller than the minimum requirement of the current design standard and 29.8% of the structural elements of the low block have actual cover smaller than current requirement;

(4) The test results show that 33.5% of the concrete cube strength in the structural element of the high block do not satisfy current design standard;

(5) Based on the above findings, the design working life of the high block and the low block should be shorter than 50 years.

31.  Mr B Wong, in his Condition Survey Report dated 15 November 2019, stated that, in respect of the age of the Development:[13]

(1) The Development is more than 60 years old and is one of the oldest buildings in its immediate neighbourhood;

(2) With regard to durability provisions, the Development being over 60 years old, its structure should have passed its design life of 50 years;

(3) The appearance of the Development is outdated as shown by 4 signs of physical obsolescence as compared with other modern buildings:

(a) Though the low block has been classified as a Grade 1 historic building, the 2 residential towers of the high block are just two plain looking blocks with monotonous elevations;

(b) The residential towers’ facades have no architectural features and proper overhangs for aesthetical and weather protection purposes;

(c) The external walls are simply rendered and painted. These low-cost finishes were only acceptable in the post war era but are commonly not accepted by the property market nowadays.

(d) An overall untidy appearance of the residential towers’ facades from piecemeal replacements of the old mild steel windows with aluminum units of different types and colours.

(4) The Development is aged as many of its features and facilities which would nowadays be expected to be standard provisions in a commercial/residential building are missing or though provided, have not been improved to meet the current construction standards and statutory requirements. The Development is suffering from 12 aspects of functional obsolescence and some of which have safety and hygiene implications as compared with modern standards in the following areas including but not limited to:

(a) The fire service installation is overall sub-standard as compared with the Code of Practice for Minimum Fire Service Installations and Equipment 2012;

(b) The fire resisting construction of the fire escape routes is outdated under the Fire Safety Code 2011;

(c) There is no protected passage from street to the fireman’s lift in the shopping arcade;

(d) The Development has no Accessible Lift and Accessible Ramp for disabled persons;

(e) The maximum floor area of the Development was calculated by the now abolished “Volume” method resulting in a more densely populated building than other buildings calculated by the current “Site Coverage” and “Plot Ratio” method;

(f) The Development has no proper refuse disposal system thereby creating convenience, hygienic and fire safety problems;

(g) The Development has no equipotential bonding system for exposed metal fixtures thereby endangering the safety of occupants and breaching the Code of Practice for the Electricity (Wiring) Regulations;

(h) The Development has no lightning protection system to protect its occupants and building parts from lightning strikes;

(i) The Development has no residents’ lift lobbies in order to maximize its internal usable floor areas at the expense of common circulation areas;

(j) The Development has no building management systems commonly provided in other existing buildings nowadays.

(5) The items of obsolescence identified by Mr CM Wong and 5 items of obsolescence identified by Mr B Wong cannot be remedied because of how the Development was constructed.

(6) Accordingly, redevelopment of the Development is justified owing to the age of the Development.

(7) The Development is in a state of disrepair, requiring very substantial repair costs of $146,332,272 which amounts to some 39% of the replacement cost of the superstructure of the Development to restore it to tenantable condition, with repair works requiring up to a total period of 35 months to do.

(8) The huge repair costs show that deterioration of the Development is very serious and has reached a state beyond reasonable economic repair and redevelopment of the Development is justified owing to the state of repair of the Development.

(9) It can be inferred from the carbonation test results in the deterioration of the structural elements has entered the propagation phase and the deterioration will accelerate and additional defects may appear in more locations. Frequent maintenance and repair works may be required in the near future in order to keep the Development in a safe and functional state.

(10) Further, notwithstanding the huge repair costs, the Development continues to suffer from the following inherent structural deficiencies:

(i) Carbonation:

(a) The high block: carbonation has penetrated 70.3% of the concrete cover of the structural elements;

(b) The low block: carbonation has penetrated the concrete cover of 83.3% of slab and 100% of beams;

(c) To tackle the carbonation problem is difficult; to keep the concrete structure from further deterioration, the application of elastomeric cementitious coating may be a solution but the costs, not having been included in the total repair costs above, are $24,848,500 for the high block and $3,131,000 for the low block.

(ii) Chloride content of the concrete:

(a) The high block: 80.6% of the tested samples showed chloride content of more than 0.4% and coupled with the carbonation results showed;

(1) 24.2% and 76.8% of the core samples for beams and slabs have moderate and high risk corrosion;

(2) 59.3% and 33.3% of the core samples for columns have moderate and high risk of corrosion.

(b) The low block: 41.2% of the tested samples showed chloride content of more than 0.4% and coupled with the carbonation results showed 37.5% and 62.5% of the core samples for beams and slabs have moderate risk and high risk of corrosion.

(c) The problem associated with high chloride contents is even more acute: to the knowledge of Mr CM Wong, there is no remedy to stop the steel corrosion due to chloride attack.

32.  As submitted by the applicants, no one seeks to challenge these expert evidences. More importantly, the live respondents have not adduced any evidence, factual or opinion, in relation to the “age” and “state of repair” of the Development. Having considered the evidence before the Tribunal, I am satisfied that redevelopment of the Development is justified due to the age and state of repair.

Section 4(2)(b) – Whether Applicants have taken reasonable steps

33.  The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interest of the respondents under Section 4(2)(b) of the Ordinance.

34.  In this regard, Mr Mok for the applicants referred to Capital Well Limited v Bond Star Development Limited (2005) 8 HKCFAR 578 where the Court of Final Appeal remarked at para 33 as follows:

“… 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 recognize 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. The auction results may prove that the minority’s assessment was commercially wise. Or they may show that the majority’s offer exceeded what was realised at the auction.”[14]

35.  Mr Mok further submits that the applicants are entitled to reply on the assessment of Mr C Chan in making the offers to the respondents. In Intelligent House Ltd v Chan Tung Shing & Others [2008] 4 HKC 421 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.”

36.  Also, by reference to Mr Yeung’s witness statement dated 15 November 2019, after the Application, the applicants acquired the interests of the following respondents: R1-R3, R5, R7-14, R17-R18, R23-R24, R27-R29, R33 & R34.

37.  Since then, the 1^st applicant (“A1”) further completed the acquisition of the interests of R6 (the State Theatre portion, Shop 26, Shop 27 & Shop 80). A1 has also entered into a sale and purchase agreement with R4 to purchase R4’s Shop 24 & Shop 36 subject to a condition that R4 having obtained the grant of representation of the estate of the deceased owner.

Flat 4O

38.  R15 is the missing owner of Flat 4O and pursuant to the Tribunal’s order of 7 December 2018, notice of proceedings was published in the newspapers and no one came forward on behalf of R15 to establish R15’s claim before the Tribunal. R15 is a minority owner who never appeared at any stage of the proceedings. Mr Mok submits that with the Tribunal’s said order and steps taken by the applicants, the applicants are under no obligation to take further steps regarding the acquisition of the undivided shares of Flat 4O.

39.  This notwithstanding, the applicants, by the letter of 5 September 2018 of their solicitors, Mayor Brown (“MB”), offered to purchase R15’s Flat 4O at $12,778,000 and by the letter of 1 March 2019 of MB, offered to buy the unit at $13,420,000. These offers were in excess of Savills’ assessment of the share of the RDV to be apportioned to Flat 4O according to the statutory formula. These offers received no response.

Flat 4R & Flat 6M

40.  Flat 4R involves R16, R30 & R31 whereas Flat 6M involves R16 and R32: by the Assignment of 10 January 1967 vide memorial UB566511 (“the 1967 Assignment”), Commonwealth Enterprises Corporation Ltd (in voluntary liquidation) (“the Corporation”) assigned Flat 4R and Flat 6M to R16 in the following:

(a) Flat 4R was vested in the Corporation subject to an agreement for sale and purchase to R30 & R31 who had paid the whole of the purchase price (as evidenced by instructions for sale and receipt for purchase money) but failed to execute the assignment.

(b) Flat 6M likewise was vested in the Corporation subject to an agreement for sale and purchase to R32 who had paid the whole of the purchase price but failed to execute the assignment.

41.  Accordingly, R16 became the registered owner of Flat 4R seemingly holding it for R30 & R31 and Flat 6M seemingly holding it for R32 but they are all missing owners by Mr Yeung’s 2^nd Affirmation of 4 December 2018 and Mr Yeung’s 4^th Affirmation of 19 March 2019.

42.  There is one further complication for Flat 6M: R33 obtained a judgment dated 3 July 2019 against R16 for a declaration that R16’s title over Flat 6M was extinguished under section 17 of the Limitation Ordinance and R33 has acquired possessory title over Flat 6M.

43.  In respect of Flat 4R and Flat 6M, notwithstanding that R16, R30, R31 and R32 are missing owners and persons, the applicants have taken the following steps:

(a) By MB’s letter of 5 September 2018, the applicants made an offer to R16, R30 & R31 to buy Flat 4R at $10,334,000 and by MB’s letter of 1 March 2019 made another offer of $10,850,000.

(b) By MB’s letter of 5 September 2019, the applicants made an offer to R16 & R32 to buy Flat 6M at $14,750,000 and by MB’s letter of 1 March 2019 made another offer of $15,500,000.

(c) These offers were in excess of Savills’ assessment of the share of the RDV to be apportioned to Flat 4R and Flat 6M according to the statutory formula.

(d) By the Assignment dated 17 September 2019 and registered vide memorial 19100802140104, A1 acquired the possessory title of R33 of Flat 6M. By virtue of the extinguishment of R16’s title to Flat 6M in the judgment in the above paragraph and by virtue of this assignment, the applicants contend that A1 is entitled to the share of the net auction proceeds to be apportioned to Flat 6M.

Flat 7J

44.  R19 is the missing owner of Flat 7J. R34 by the amended judgment dated 17 January 2018 in HCA 3189/2016 obtained a declaration that R19’s title in Flat 7J was extinguished and R34 has acquired possessory title to Flat 7J.

45.  Notwithstanding that R19 is a missing owner, the applicants have taken the following steps regarding Flat 7J:

(a) By MB’s letter of 23 August 2018, the applicants made an offer to R19 & R34 to buy Flat 7J at $12,900,000 and by MB’s letter of 1 March 2019 made another offer of $10,850,000 to R19.

(b) The latter offer was in excess of Savills’ assessment of the share of the RDV to be apportioned to Flat 7J according to the statutory formula.

(c) By the Assignment dated 31 October 2018 and registered vide memorial 18111502160312, A1 acquired the possessory title of R34 of Flat 7J. By virtue of the extinguishment of R19’s title to Flat 7J in the amended judgment in the above paragraph and by virtue of this assignment, the applicants contend that A1 is entitled to the share of the net auction proceeds to be apportioned to Flat 7J.

Flat 7O

46.  R20 is the missing owner of Flat 7O.

47.  This notwithstanding, the applicants, by MB’s letter of 5 September 2018, offered to purchase R20 ‘s Flat 7O at $13,766,000 and by MB’s letter of 1 March 2019, offered to buy R20’s Flat 7O at $14,460,000. These offers were in excess of Savills’ assessment of the share of the RDV to be apportioned to Flat 4O according to the statutory formula.

Flat 9L

48.  R21 and R22 are the co-owners of Flat 9L, and R21 is a missing owner.

49.  The applicants, by MB’s letter of 5 September 2018, made an offer to R21 & R22 to purchase Flat 9L at $11,556,000, by MB’s letter of 1 March 2019 made another offer to R21 & R22 to buy the flat at $12,140,000, and by MB’s letter of 21 June 2019 made an offer to R22 to buy her interest at $6,070,000. These offers were in excess of Savills’ assessment of the share of the RDV to be apportioned to Flat 9L and R22’s half interest according to the statutory formula.

50.  By MB’s letter of 18 June 2020, the applicants made another offer to R22 to buy his half interest in Flat 9L for $4,690,000, which was formulated according to Mr C Chan’s updated RDV assessment.

Flat 10Q

51.  R25 and R26 are the owners of Flat 10Q.

52.  R35 commenced HCA 3021/2015 against R25 & R26 for a declaration that Flat 10Q was held by R25 & R26 on trust for R35 and other orders consequential thereto.

53.  The applicants have taken the following steps regarding Flat 10Q:

(a) By the Agreement for Sale and Purchase dated 12 October 2016, R25 & R26 agreed to sell Flat 10Q to the 7^th applicant (“A7”), completion of which is subject to discontinuance of HCA 3021/2015.

(b) The applicants have managed to obtain, by para 9 of the Affirmation of Madam Tsoi Pui Wah (who was appointed as guardian ad litem of R35) filed on 14 August 2019, Madam Tsoi’s confirmation that R35 is not to oppose the applicants’ proceedings in the Application.

54.  There is no evidence before this Tribunal to demonstrate that the various assessments by Mr C Chan can in any way be faulted.

55.  Bearing in mind the above, I am satisfied that on the evidence available and in the circumstances of the Application, the applicants have taken reasonable steps to acquire all the undivided shares in the Lots including negotiating for the purchase of such of those shares as are owned by the outstanding minority owners on terms that are fair and reasonable.

Disputes on the estimation of the RDV of the Lots

Optimum Hypothetical Development Model

56.  According to Mr C Chan’s Updated Report on RDV filed on 11 June 2020, there was no relevant land sale transaction. He resorted to the residual valuation method in determining the RDV as at 1 June 2020.  This was 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.

57.  Mr C Chan assumed a hypothetical development of a 29-storey commercial/residential building with carpark on basement, retail shops and plant rooms on G/F & 1/F, club house and plant room on 2/F and residential units on 3/F to 27/F. The residual valuation is set out in Appendix 2 of the Updated Report on RDV.

58.  As can be seen from the residual valuation, the largest contribution factor is the value of the residential tower where Mr C Chan adopted an average of $291,000 per sq m. Mr C Chan derived this unit rate from analysis of recent comparable transactions in Novum Point at 3 Marble Road ($278,672/m²), Novum East at 856 King’s Road ($265,549/m²), Fleur Pavilla at 1 Kai Yuen Street ($270,206/m²), The Hemisphere at 3 Gordon Road ($275,985/m²) and The Consonance at 23 Jupiter Street ($297,722/m²).

59.  At trial, Mr C Chan explained that he has not taken into account recent sale transactions of Harbour Glory at 32 City Garden Road or Victoria Harbour at 133 Java Road because these two developments are of much larger scale comprising for instance hotel accommodation etc and most of the domestic units enjoy seaview which would be lacking for the subject hypothetical development. Mr C Chan believed (but have not carried out any analysis to verify) that the adjusted unit rates for these 2 developments would arrive at similar average about $291,000 per sq m.

60.  There is however no evidence before this Tribunal to demonstrate that the various assessments by Mr C Chan can in any way be faulted and he was not even cross-examined by R25 or Ms Liu for R35 who were the only respondents present at trial.

61.  On the other hand, I note the developer’s profit adopted by Mr C Chan was 23% which is relatively on the high side when compared with other recent decisions of the Tribunal pursuant to a compulsory sale order under the Ordinance. At trial, Mr C Chan conceded that the political environment and economic outlook has improved when compared with that in early June 2020, Mr C Chan is prepared to revise his valuation on the basis of a lower developer’s profit of 18% and arrives at a RDV of $4,776,000.000.

62.  According to para 3.6.4 of HKIS Guidance Notes on Valuation of Development Land published by the Hong Kong Institute of Surveyors in 2016:

“Developer’s profit needs to reflect:

•   The nature of the development and related risks. These include marketing risks for sales and lettings, risks of construction difficulties and cost overruns, and delays in obtaining relevant development approvals.

•   Competition and market demand for the type of development scheme, plus:

•   The development duration, since lengthening the development period will escalate the necessary return on outlays and capital.”

63.  Para 3.6.6 of the HKIS Guidance Notes also states: “Larger scale and longer duration complex developments involve higher risk, … so it may be appropriate to adopt a higher rate of return in such development land valuations.”

64.  Bearing in mind that the net site area of the Lots has up to 36,201.5 sq m and the total gross floor area assumed is as much as 35,586.75 sq m which is among the highest in the history of compulsory sale applications, and in the absence of evidence to the contrary, I accept Mr C Chan’s revised valuation which is reproduced at Appendix B to this judgment. I determine the land value of the Lots at $4,776,000,000 (ie accommodation value of $134,207/m²).

65.  I am prepared adopt the estimated RDV of $4,776,000,000 as the Reserve Price for the auction of the Lots.

Other Incidental Matters

66.  The applicants propose to appoint Mr Ma Ho Fai and Ms Hung Suet Shan Catherine, being senior partners and partners respectively 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 9 June 2020, 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 to be reasonable.

67.  The applicants have prepared a set of draft Particulars and Conditions of Sale of the Lots[15].  The particulars and conditions of sale of the Lots by public auction submitted by the applicants appear to be reasonable.

68.  Ms Liu particularly requested that the apportionment of sale proceeds to R25 & R26 for Flat 10Q be held on trust by the sale trustees until HCA 3021/2015 is resolved. I agree.

Order

69.  This Tribunal make the following orders:

(1) This Tribunal is satisfied that the value of the minority owners’ units as assessed in the Application is—

(A) not less than fair and reasonable; and

(B) not less than fair and reasonable when compared with the value of the applicants’ units as assessed in the Application.

(2) This Tribunal is satisfied that the redevelopment of the Lots is justified due to the “age” and “state of repair” of the Building and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots including those of the 4^th, 15^th, 16^th, 19^th, 20^th, 21^st, 25^th, 26^th, 30^th, 31^st, 32^nd & 35^th respondents;

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

(4) 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 applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to sale of the Lots 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, Agents for Trademarks & Patents dated 9 June 2020.

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

(i) The sale of the Lots 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 $4,776,000,000.

(iii) Subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Lots or its successor in title, the redevelopment of the Lots and the Development 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 Lots.

(iv) The apportionment of sale proceeds to R25 & R26 for Flat 10Q be held on trust by the trustees until HCA 3021/2015 is resolved.

(v) Liberty to the applicants, the 4^th, 15^th, 16^th, 19^th, 20^th, 21^st, 25^th, 26^th, 30^th, 31^st, 32^nd & 35^th respondents and the Trustees to apply to the Tribunal for further direction(s) under the Ordinance.

Costs

70.  We make a costs order nisi that:

(i) The 4^th, 15^th, 16^th, 19^th, 20^th, 21^st, 25^th, 26^th, 30^th, 31^st, 32^nd & 35^th respondents be awarded costs of the proceedings;

(ii) Costs awarded are to be taxed if not agreed, with certificate for counsel on party and party basis at High Court scale.

Unless any of the parties apply by summons to vary it, the costs order nisi shall be made absolute upon expiry of 14 days.

Appendix A

Appendix A1

Appendix A2

Appendix A3

Appendix A4

Appendix A5

Appendix A6

Appendix B