LDCS 14000/2021
[2022] HKLdT 38
IN THE LANDS TRIBUNAL OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
LAND COMPULSORY SALE MAIN APPLICATION NO 14000 OF 2021
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BETWEEN
GOLD FOCUS HOLDINGS LIMITED (金楓集團有限公司)
Applicant
and
THE PERSONAL REPRESENTATIVES OF NIEH CHI CHIEH (聶志齊)
Respondent
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Before: Mr Alex Ng, Member of the Lands Tribunal
Date of Trial: 11 July 2022
Date of Judgment: 12 August 2022
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JUDGMENT
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BACKGROUND
1. This is the applicant’s application for an order for sale, for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”), of all the undivided shares of and in section C of New Kowloon Inland Lot No 2801 (“the 1st Lot”) and the Remaining Portion of New Kowloon Inland Lot No 2801 (“the 2nd Lot”) (the 1st Lot and the 2nd Lot are collectively referred to as “the Lots”), together with a building erected thereon known as Nos 28A and 28B Grampian Road, Kowloon (“the Building”).
2. The Building is a 3-storey residential block over a garage level, and is served by 2 common staircases. A domestic permit No 3/4090/49 was issued for the Building on 18 April 1950, granting permission to occupy and use the Building as 2 European type houses. According to the approved building plans, there are 2 garages planned on the level facing Junction Road, 2 domestic units together with garage (facing Grampian Road) planned on the ground floor, and 2 domestic units planned on each of the 1st and 2nd floors.
3. The 1st Lot together with part of the Building (i.e. No 28A Grampian Road) standing thereon is allocated 32 undivided shares. The Garage Facing Junction Road is given 1 undivided share; the Ground Floor and Garage Facing Grampian Road is given 11 undivided shares; and each of the 1st Floor and 2nd Floor is given 10 undivided shares, making up a total of 32 undivided shares. The 2nd Lot together with another part of the Building (i.e. No 28B Grampian Road) has the same allocation of undivided shares as that of the 1st Lot (i.e. No 28A Grampian Road).
SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANT
4. The applicant filed a Notice of Application (“NOA’) on 30 November 2021, and has subsequently amended it on 29 June 2022 pursuant to the Order of the tribunal on 17 January 2022. At the time of filing of the NOA, there was 1 respondent and the applicant owned all (i.e. 100%) undivided shares in the 1st Lot and 31 over 32 (i.e. 96.875%) undivided shares in the 2nd Lot, on average 98.4375% of the Lots.
5. Section 3(1) of the Ordinance prescribes that the minimum percentage of undivided shares that an applicant or applicants should possess before making an application under the Ordinance is 90%. Section 3(2) of the Ordinance prescribes that an application under subsection (1) may cover (a) 2 or more lots where the majority owner owns not less than the percentage specified in subsection (1) of the undivided shares in each lot; or (b) 2 or more lots (i) on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings; and (ii) where the average of (A) the percentage of the undivided shares owned by the majority owner in the lot or lots on which one of the buildings stands; and (B) the percentage of the undivided shares owned by the majority owner in the lot or lots on which the other of the buildings stands, is not less than the percentage specified in subsection (1).
6. I am satisfied that as at the date of application, the applicant owned on average more than 90% of the undivided shares in the Lots. I am therefore satisfied the applicant is entitled to make the present application under section 3 of the Ordinance.
THE REMAINING RESPONDENT
7. The respondent, who owns the Garage Facing Junction Road of No 28B Grampian Road, passed away on 14 December 2016, and is a missing owner in these proceedings. Substituted service of the application on the respondent was effected on 9 December 2021 pursuant to the Order of the tribunal dated 2 December 2021. No one has shown up after the expiration of the 21-day period as specified in the notices.
ISSUES FOR DETERMINATION BY THE TRIBUNAL
8. The remaining issues to be decided in this case are as follows:
1) What was the respective existing use value (“EUV”) of all units in the Building as at 10 November 2021, the valuation date adopted in the application valuation report dated 29 November 2021, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?
2) Whether the redevelopment of the Lots is justified due to age and/or state of repair of the Buildings in accordance with section 4(2)(a) of the Ordinance?
3) Whether the applicant has taken reasonable steps to acquire all the undivided shares in the Lots on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance?
4) If an order for sale should be granted, what should be the reserve price (i.e. redevelopment value (“RDV”) of the Lots) for the purpose of auction sale?
DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING
9. Pursuant to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the EUV of the units as assessed in the application, the tribunal shall determine the proper value. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the lot who cannot be found, the majority owner of the lot is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is: -
“(A) not less than fair and reasonable; and
(B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”
10. The respondent cannot be found in these proceedings.
11. The applicant relies on the reports and valuations of Mr Wong Chi Wai (“Mr CW Wong”) of Grandmax Surveyors Limited. Mr CW Wong prepared the application report dated 29 November 2021, which assessed the EUV of all units in the Building as at 10 November 2021. He subsequently prepared a supplemental report dated 21 April 2022, which reviewed the EUV as initially assessed by him and assessed the RDV of the Lots as at 20 April 2022. He has also prepared a supplemental report dated 30 June 2022, which updated the RDV of the Lots as at 29 June 2022.
12. In the application valuation report, Mr CW Wong adopted direct comparison method to assess the EUV of each unit in the Building. He valued each of the Garages Facing Junction Road as 2 car parking spaces and each of the Ground Floors and Garage Facing Grampian Road as a domestic unit together with yard, and area of the yard was converted at 1/4 and then added to the effective saleable area of the corresponding domestic unit. In the supplemental report dated 21 April 2022, Mr CW Wong assessed each of the Garages Facing Junction Road at $3,726,000 (i.e. each car parking space at $1,638,000 x 2) and the reference domestic unit (i.e. 1st Floor of No 28B Grampian Road) at $137,000 per square meter saleable.
13. In the absence of contrary evidence, I accept the EUV of all units in the Building as assessed by Mr CW Wong, and am satisfied that the value of the unit owned by the respondent is not less than fair and reasonable and not less than fair and reasonable when compared with the value of the applicant’s properties. The EUV of all units in the Building as at the relevant date of valuation, i.e. 10 November 2021, are appended below: -
No 28A
Garage Facing Junction Rd
$3,276,000
No 28B
Garage Facing Junction Rd
$3,276,000
No 28A
Ground Floor & Garage Facing Grampian Rd
$29,084,000
1st Floor
$24,563,000
2nd Floor
$25,287,000
No 28B
Ground Floor & Garage Facing Grampian Rd
$33,937,000
1st Floor
$25,856,000
2nd Floor
$25,287,000
14. I accept the total EUV of the Building is $170,566,000 (i.e. $6,552,000 + $164,014,000).
SECTION 4(2) OF THE ORDINANCE - JUSTIFICATION AND REASONABLE STEPS
15. Section 4(2) of the Ordinance provides as follows: -
“2. The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that—
(a) the redevelopment of the lot is justified (and whether or not the majority owner proposes to or is capable of undertaking the redevelopment)—
(i) due to the age or state of repair of the existing development on the lot; or
(ii) on 1 or more grounds, if any, specified in regulations made under section 12; and
(b) the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”
16. The applicant must satisfy this tribunal the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted.
Whether development of the Lots is justified due to the age and/or state of repair of the Building
17. The applicant adduces expert evidence of Mr Wong Wing Cheung Dennis (“Mr Dennis Wong”), both a structural engineer and a building surveyor, of Prudential Surveyors International Limited. Mr Dennis Wong conducted a structural survey of the Building and prepared a Structural Survey Report, and a condition survey of the Building and prepared a Condition Survey Report, both dated 22 April 2022.
18. No expert evidence has been adduced to rebut the reports complied by Mr Dennis Wong.
19. Having considered the reports of Mr Dennis Wong, I accept his expert opinion. The Building, being erected more than 72 years ago, is in poor condition and has come to the end of its design life. The design of the Building has become obsolete over time in many aspects, both physically and functionally, and fails to conform to modern safety standards and statutory requirements.
20. I am also of the view the Building is in poor state of repair and the costs of repair to bring the Building to tenantable condition is disproportionate to the costs of reconstructing a new similar building. Even if repair works are carried out, such works will bring about a modest improvement only to the existing condition of the Building and the Building will continue remain a sub-standard one.
21. By reason of the matters set out above, I am satisfied the redevelopment of the Building is justified.
Whether the applicant has taken reasonable steps
22. Since the respondent cannot be found and there is no record of any application for grant of probate or administration of her estate, Mr Kenny Lin, counsel for the applicant, submits that it is simply impossible for the applicant to negotiate with anyone with necessary authority to sell the respondent’s property. I agree.
23. Nonetheless, the applicant has made a written offer to the respondent and sent it to her last known address and the respondent’s property on 15 November 2021. The offer price at $8,100,000 has made reference to the valuation of Grandmax Surveyors Limited and has also reflected the then pro-rata share of the RDV.
24. On the evidence available, I accept that the offer price has reflected the proportionate share of the RDV of the Lots and do fall within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question.
25. By reason of the matters set out above, I am satisfied the applicant has taken reasonable steps to acquire all the undivided shares in the Lots.
RESERVE PRICE FOR THE PUBLIC AUCTION
26. By reason of being satisfied that redevelopment of the Lots is justified and that the applicant has taken reasonable steps to acquire all the undivided shares in the Lots, I am satisfied an order for sale should be granted in favour of the applicant.
27. In the supplemental report dated 30 June 2022, Mr CW Wong assesses the RDV of the Lots (i.e. 935.53 square meters) as at 29 June 2022 by residual method. Although the Lots are located within an area zoned for “Residential (Group B)” on the Ma Tau Kok Outline Zoning Plan No S10/28 dated 25 March 2022 and a maximum plot ratio of 5 (or the plot ratio of the existing building) is allowed under town planning, he proposes to build a 3-storey residential building over a car parking basement at the plot ratio of 1.998 (i.e. gross floor area of 1,869.18 square meters) only.
28. With reference to the salient lease conditions of New Kowloon Inland Lot No 2801, “the leasee will not be allowed to erect any buildings within 20 feet of Grampian Road ” and “in no case may the height or any building to be erected on the lot exceed 35 feet except with the consent of the Director of Public Works ”, the Lots cannot be developed at the plot ratio of 5 unless the government lease should firstly be modified and a land premium is payable in the circumstances.
29. Mr CW Wong opines that, subject to the height restriction of 35 feet in the government lease, only a 3-storey residential building at the maximum site coverage of 66.66% can be built on the Lots, which is a “Class A” site under the Building (Planning) Regulations Cap 123F. He also considers that it is not justified to apply for lease modification as at the valuation date. He quotes a nearby example, No 2 Grampian Road, that only houses were built in this new development and no lease modification was recorded.
30. In the hypothetical development proposed by Mr CW Wong, being a 3-storey residential building over a basement carpark that is served by 2 lifts and 2 staircases, there are 13 car parking spaces (i.e. including 1 visitor car parking space) planned at the basement off Junction Road and 12 domestic units planned from the ground floor to 2nd floor (i.e. 4 domestic units per floor; 2 domestic units facing Grampian Road and 2 domestic units facing Junction Road) with main domestic entrance off Grampian Road, and the domestic units on the ground floor and 2nd floor are attached with garden and top roof respectively.
31. In the residual valuation, he assesses the gross development value (“GDV”) by direct comparison at $680,100,176 (i.e. each car parking space at $4,055,000 and average domestic unit rate at $357,732 per square meter saleable). He adopts demolition cost at $2,200 per square meter, construction cost at $60,942 per square meter, development period of 2.75 years (i.e. demolition period of 9 months and construction period of 2 years), marketing cost at 3% of GDV, professional fees at 6% of development costs, interest rate at 4% per annum and developer’s profit at 15% (i.e. with allowance for stamp duty and legal cost on residual land value). Finally, he assesses the RDV of the Lots at $385,000,000 (i.e. accommodation value of $205,973 per square meter / $19,135 per square foot)
RDV of the Lots as at 29 June 2022
32. Having gone through Mr CW Wong’s assessments in his updated RDV report, I accept his residual valuation. In the absence of contrary evidence, I am of the view the market value of the Lots without lease modification as assessed by Mr CW Wong is fair and reasonable.
33. However, since lease modification can increase the plot ratio of the Lots from 1.998 to 5, I am not persuaded by Mr CW Wong that there is no enhancement in site value for lease modification because of the relatively poor market sentiment as at the valuation date. Mr CW Wong has not checked the development background of No 2 Grampian Road and whether or not its developer had once applied for lease modification. He does not know whether or not the comparable development Ayton has record of lease modification too. He considers that the site value would be lower after consideration of the land premium but he does not know how much the government would charge for relaxation of height restriction.
34. I consider that the option for lease modification, which can increase the plot ratio of the Lots from 1.998 to 5, is valuable. Theoretically, such option should have a value. In response to the question from the bench, Mr CW Wong has commented that some purchasers would take into consideration of such potential for increase of plot ratio and may be willing to pay 5% to 10% more. Having considered the evidence in these proceedings including the comments of Mr CW Wong at trial, I am of the view the potential for lease modification should be reflected in the market value of the Lots and an increase of 5% from Mr CW Wong’s valuation is fair and reasonable in this instance.
35. Based on the residual valuation of Mr CW Wong and my above determination, the Lots as at 29 June 2022 are assessed at $404,250,000 (i.e. $385,000,000 x 1.05%), equivalent to an accommodation value of about $216,271 per square meter (i.e. about $20,092 per square foot), which has reflected the potential for lease modification and should be the reserve price for public auction.
ORDERS
36. For reasons given in this judgment, I have set out reasons why I am satisfied an order for sale should be granted and I therefore make the following orders: -
1) All the undivided shares in the Lots, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lots;
2) Mr Anthony W K Chow and Ms Anna S H Chow, nominated by the applicant, be appointed the trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lots;
3) The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Guantao & Chow dated 27 June 2022;
4) For the purposes of the sale of the Lots by public auction: -
a) the sale of the Lots be on the particulars and conditions of sale the same or substantially the same as those set out in the draft Particulars and Conditions of Sale to be approved and initialed by the tribunal; and
b) the reserve price be set at $404,250,000;
5) The applicant do publish notices once in a Chinese language newspaper (and in the Chinese language) and once in an English newspaper (and in the English language) circulating generally in Hong Kong within 7 days from the date of the sealed judgment informing the respondent and all persons claiming to be the owners of the Lots: -
a) that the tribunal has made an Order for sale of the Lots;
b) that the Lots be sold by public auction; and
c) where and the times during which a copy of the Order for sale can be obtained;
6) Subject to further extensions that the tribunal may subsequently allow upon the application of the purchaser of the Lots or its successor in title, the redevelopment of the Lots and the Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lots becomes the owner of the Lots; and
7) Liberty to the applicant, the respondent and the Trustees to apply to the tribunal for further directions.
COSTS
37. I make a costs order nisi that there be no order as to costs. Unless any parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from the date of this judgment.
(Alex Ng)
Mr Kenny Lin, instructed by Mayer Brown, for the applicant
The respondent was not represented and did not appear