EVERSOUND INVESTMENTS LTD v. CHIU HUNG YEU AND OTHERS

LDCS 38000 / 2012

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 38000 OF 2012

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J U D G M E N T

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Background

1.  This is an Application for compulsory sale of all the undivided shares in Sub-section 4 of Section D of Kowloon Marine Lot No. 52 (“the Lot”), known as Nos. 11 & 13 Wan Shun Street and Nos. 12 & 14 Wan Fuk Street, Kowloon, Hong Kong (“the Building”), for the purposes of the redevelopment of the Lot pursuant to Section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”).

2.  There is erected on the Lot a 9-storey composite building with 4 units on each floor served by 2 common staircases. Altogether there are 36 units (not including the Roof) in the Building and each unit or the Roof is allotted one share with a total of 37 undivided shares for the Building and the Lot.  The Building is part of Block B of the development of Nos. 22 & 24 Wan On Street, Nos. 1, 3, 5, 7, 9, 11 & 13 Wan Shun Street and Nos. 2, 4, 6, 8, 10, 12 & 14 Wan Fuk Street (“Block B”).

3.  When the Applicant commenced the present proceedings on 26 April 2012 (“the Application”), it owned 31½ equal undivided 37^th parts or shares in the Lot representing 85.135%.  The remaining units were held by the 1^st to 6^th Respondents respectively.  The Applicant contends that it was entitled to make the present Application by virtue of the Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice under Section 3(5) of the Ordinance (“the Notice”).

4.  Since then, the Applicant has acquired the interests of the 1^st Respondent, the 2^nd Respondents, the 3^rd Respondent and the 4^th Respondent and has discontinued the Application against them by orders of the Tribunal. For the purpose of this trial, the respondents that remain are:

Respondent	Concerned Unit	Undivided Share
5th Respondent	4/F, 11 Wan Shun Street	½ of 1/37
6th Respondent	Roof, Nos. 11 & 13 Wan Shun Street and Nos. 12 & 14 Wan Fuk Street	1/37

Thus, as at the date of hearing, the percentage of the undivided shares owned by the Applicant in the Lot is 95.946%.

5.  The 5^th Respondent had passed away and her personal representatives are named as a party. The Applicant has obtained an order from this Tribunal dated 25 February 2013 for dispensing with service of the Application on the 5^th Respondent. Neither the 5^th Respondent nor her personal representatives have filed any Notice of Opposition or appeared in any hearing for this Application.

6.  The 6^th Respondents have also been the respondents in similar applications commenced by the Applicant in the vicinity, including LDCS 5000 of 2012, LDCS 36000 of 2012, LDCS 4000 of 2012, LDCS 34000 of 2012, LDCS 33000 of 2012, LDCS 11000 of 2012, LDCS 32000 of 2012, LDCS 10000 of 2012, LDCS 2000 of 2012, LDCS 3000 of 2012 and LDCS 39000 of 2012 where orders for compulsory sale were granted by this Tribunal. They were apparently the developer of the Building. I am satisfied that the solicitors for the Applicant had duly served all the papers of the Application to the address of the 6^th  Respondents made known to the solicitors.  Like the earlier proceedings, the 6^th Respondents did not file any Notice of Opposition; they were absent at the hearing and did not file any response or expert report. 

7.  In view of the absence of the 5^th and ^6th Respondents, Mr C.Y. Li SC, Counsel for the Applicant, simply called the witnesses to prove the Applicant’s case.  The Applicant contends that all the requirements of the Ordinance have been satisfied and asks for an order for sale in terms of the draft order submitted.  The Applicant also asks there be no order as to costs.

Section 3 of the Ordinance – Ownership of the Applicant

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

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

10.  Pursuant to Section 3(5) of the Ordinance, the Notice was gazetted on 22 January 2010 and tabled at the Legislative Council meeting on 27 January 2010.  It came into operation on 1 April 2010.  Section 3 of the Notice lowered the threshold for compulsory sale, insofar as it is applicable, from 90% to 80%.  Section 4(1)(b) of the Notice specified one of the classes for the purposes of Section 3 as “a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (which is the date of the Application)”. The occupation permit of the Building was issued on 4 February 1960, which is more than 52 years as at the date of the Application. The Building therefore is covered by the Notice and the applicable percentage is 80%.

11.  As at the date of the Application, the Applicant owns 85.135% of the shares in the Lot.  The Applicant was clearly entitled to make the Application. 

Determination of the existing use values (“EUV”) of all units in theBuilding

12.  Pursuant to section 3 of the Ordinance, the Application was accompanied by a valuation report (“Application Report”) prepared by Mr. Alnwick Chan of Knight Frank Petty Ltd. (“Mr. A. Chan”), the Applicant’s valuation expert witness, containing the assessments of the values of all units (which are conveniently termed as the existing use values, the “EUV” of all units) in the Building on the Lot as at 21 February 2012.

13.   Under section 4(1)(a)(i), if there is a dispute between the parties on the EUV of the units in the Building on the Lot, the Tribunal has to determine the values. 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.”

14.   In the Application Report of 25 April 2012, Mr. A. Chan explained the method of valuation and the process of his assessment to arrive at the EUV of each unit of the Building.

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

(a)   He selected 4^th Floor of No. 12 Wan Fuk Street (“the Reference Domestic Unit”), which was situated on the middle floor of the domestic portion as the reference unit for the purpose of valuing its unit price. 

(b)   The unit price of the Reference Domestic Unit was first assessed by making reference to market comparables.  He took into account of 13 comparable transactions in 10 different buildings nearby.  After making what he regarded as the necessary adjustments (for time, location/accessibility, age, lift service, floor, size, building condition, internal condition and view) for all these comparable transactions, he took the average of the adjusted unit rate of the comparables to come to the unit price of the Reference Domestic Unit.

(c)   He further considered the floor difference, view, size and internal conditions 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.

16.   For the roof of the Building, Mr A. Chan converted the saleable area of the roof as domestic by using a conversion factor of 1:8.

17.   The Applicant has noted from site inspection that the existing use of the Ground Floor units is at variance with the use permitted by the occupation permit.  In assessing the EUV of all Ground Floor units, Mr. A. Chan carried out his valuation based on two different scenarios, i.e. scenario 1, assuming permitted domestic uses as shown in the occupation permit for the Building and scenario 2, assuming the existing non-domestic uses.

18.   Mr. A. Chan updated the Application Report by a supplemental report dated 28 June 2013 (“Supplemental Report”) in which he revised the EUV of all the units in the Building after taking into account the inspection of more units in the Building and the updated property index prepared by the Rating and Valuation Department. In the Supplemental Report, Mr. A. 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 21 February 2012.

19.   At the trial, the Applicant was required to confirm which of the two scenarios should be adopted for determining the apportionment ratio.  In other words, whether EUVs should be assessed based on the legally permitted use or the actual or existing use of the Ground Floor units in the Building.

20.   Mr. A. Chan, when giving evidence, recommended scenario 1 because it might otherwise convey the wrong message that those facing acquisition under the Ordinance could take conversion actions on the premises without obtaining approval from the relevant authorities for the purpose of getting enhanced compensation.

21.   The occupation permit issued for the Building has specified domestic use for the Ground Floor units. There is clear evidence of material change of use of these units, see the expert report of Mr. Raymond Chan, the building surveyor, at Bundle D/028-029. 

22.   Mr Li also said that the Applicant, having acquired all the G/F units, was agreeable to adopt scenario 1 in assessing the EUV of their G/F units which would be more favourable to all other minority owners. 

23.   Having considered everything (including the submission of Mr. Li in for instance LDCS 10000 / 2012), I am satisfied that I should adopt scenario 1 and accept Mr. A. Chan’s assessment of the EUV of all the units in the Building, including the 5^th and 6^th Respondents’ units, as set out on page 4 of his Supplement Report: see the table at Bundle E/168 which is reproduced as Appendix of this judgment.

24.   I am satisfied, insofar as it is necessary, that the value of the 5^th and 6^th Respondents’ unit as assessed by Mr. A. Chan is not less than fair and reasonable and not less than fair and reasonable when compared with the value of the Applicant’s properties:

(a) the 5^th Respondent’s unit - assessed at $1,335,996 (representing 2.7987% of the total EUV of all units) whereby its pro-rata half interest is $667,998 (representing 1.3994% of the total EUV of all units);

(b) the 6^th Respondents’ unit - assessed at $519,025 (representing 1.0873% of the total EUV of all units); and

(c) the total EUV of all units - assessed at $47,736,154.

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

25.   The second determination under Section 4(1)(b) of the Ordinance is whether an order of sale should be made.  According to Section 4(2) of the Ordinance, this would involve 2 considerations, namely :-

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

(b) has the Applicant taken reasonable steps to acquire all the undivided shares in the Lot.

26.   The Applicant has to satisfy this Tribunal that the above statutory requirements were met, otherwise, an order of compulsory sale ought not be granted. 

27.   Firstly, for the requirement under (a) above, I have considered the expert opinion of Mr. Raymond Chan, the building surveyor and Dr. Sammy Chan, the structural engineer.  Both have been commissioned by the Applicant to file their expert reports and were called to give evidence.

28.   Mr Raymond Chan led a team of surveyors to inspect the external facades, the roof, the internal communal area (including the staircases) and those units of the building which were accessible to them and compiled a condition survey report dated 27 June 2013.

29.   Based on their findings, Mr Chan opined that the building was generally in a dilapidated and potentially dangerous condition and the structural stability of the building had been compromised by the unauthorized building works therein.  He said that extensive repair works would have to be carried out to extend the life span of the building, but the continuous maintenance costs would be increasingly high given the age of the building.  He further opined that the design of the building was obsolete and substantial upgrading works would have to be carried out to bring it in line with current legislative requirements and the upgrading costs would be enormous.

30.   In conclusion, Mr Chan said that the building was in a state of disrepair with its structural frames in a dilapidated condition.  Some of the building components and finishes were at the end of their effective life span and substantial repairs would have to be carried out to bring it up to tenantable standard.  Adopting the cost estimate of a qualified quantity surveyor, he estimated that the non-structural repair costs would be around $8.2 million.  He expressed reservations that, aside from the astronomical costs involved, it might not be feasible or practical to undertake such repair as it would entail closure of the building for a substantial period of time.

31.   Dr. Sammy Chan (together with his team of engineers) conducted a structural assessment of the Building and prepared a report dated 27 June 2013.  He carried out inspection of the Building and identified a total of 51 structural defects.  An approved laboratory, Qualitech Testing & Consultancy Ltd, was engaged to carry out the following tests on the existing structural conditions of the Building:- (a) compressive strength test, (b) carbonation test, (c) chloride content test, (d) cement content test, (e) sulphur content test, (f) covered meter test, (g) open up survey, and (h) infra-red thermography survey.  The in-situ and laboratory tests revealed that the protective concrete cover had been considerably carbonated and the embedded steel reinforcements were extensively blistered, corroded and pitted.

32.   Dr Chan opined that the degradation of the structural members had adversely affected the overall stability of the building and could cause local structural failure of the members.  Given the considerable extent in terms of area and degree of defects, he said that normal concrete repair works might not be a cost-effective solution to restore the overall integrity of the building.  Furthermore, he considered that the building structures had been overloaded and overstressed for many years due to the presence of unauthorized building works and their structural integrity might have been damaged already.

33.   In conclusion, Dr Chan opined that the existing building had already undergone severe degradation rendering it not worthwhile to be rectified by convention repair and maintenance measures.  He expressed doubts about the overall structural integrity of the building and considered that conventional repair and maintenance works might not be a long-term measure to relieve the prevailing degradation.  For the purpose of his assessment, he adopted the cost estimate of a qualified quantity surveyor of about HK$11.85 million for the structural repair works. 

34.   The Applicant submits that given the total EUVs based on scenario 1 of HK$47,736,154, the estimated repair costs of around $20 million (i.e. 42% of the EUV) is unjustified.

35.   There is no contrary expert evidence and I accept the expert evidence of Dr. Sammy Chan and Mr. Raymond Chan.  I am satisfied that the redevelopment of the Lot is justified due to the age and the state of repair of the Building:

(a)   the Building is now 53 years old;

(b)   the Building is in very poor physical conditions and disproportionate costs are required to repair and maintain the Building; and

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

Reasonable Steps to Acquire All the Undivided Shares in the Lot

36.   The Applicant is under an obligation to negotiate on terms that are fair and reasonable in a situation when the whereabouts of a minority owner are known. The fact that all the Respondents except the 5^th & 6^th Respondents have accepted the Applicant’s offers to acquire their interest is telltale of the reasonableness of the steps taken respecting them.

37.   The Applicant called Mr Alex Au-Yeung (the General Manager of the Applicant) to testify on the steps taken against the 5^th & 6^th Respondents.  The Applicant submits, based on the testimony of Mr Alex Au-Yeung that it has complied with the statutory obligation to negotiate with them on terms that are fair and reasonable although the parties have not reached any settlement.

38.   The offers which were based on valuation done by Mr A. Chan of Knight Frank were made by the Applicant to the 5^th & 6^th Respondents as follows: 

Respondent	Date of offer	Knight Frank’s valuation	Offer amount
5th	2 December 2011	$890,440 (based on scenario 1); $829,539 (based on scenario 2)	$940,000
	3 January 2012	-	$1,070,000
	30 March 2012	$837,735 (based on scenario 1); $776,198 (based on scenario 2)	$1,070,000
6th	2 December 2011	$705,696 (based on scenario 1); $657,430 (based on scenario 2)	$750,000
	3 January 2012	-	$850,000
	30 March 2012	$663,926 (based on scenario 1); $615,157 (based on scenario 2)	$850,000
	26 June 2013 *	-	$920,000

* Post-application offer was made to the 6^th Respondents only as the 5^th Respondent or her personal representatives cannot be found.

39.   On the unchallenged evidence of Mr. A. Chan and Mr. Alex Au-Yeung, I agree with the Applicant that the offers made to the 5^th and 6^th Respondents were fair and reasonable.  The offers were generally higher than the valuations. The Applicant was guided by expert opinion in making its offers. Mr A. Chan is a professional valuation surveyor from a reputable firm of surveyors in Hong Kong.  There is nothing to suggest that his valuation is other than proper and professional. 

40.   The 6^th Respondents did not participate in any mediation proposed by the Applicant and have never formally responded to the offers.  I note that at one stage the 6^th Respondents had appointed solicitors to negotiate with the Applicant but nothing fruitful resulted from the discussion.  In the premises, I am satisfied that reasonable steps have been taken by the Applicants to acquire the interest of the 5^th & 6^th Respondents and the offers made by the Applicant “falls within the range of what may broadly be regarded as fair and reasonable” as said by Mr. Justice Ribeiro PJ in Capital Well Ltd v. Bond Star Development Ltd (2005) 8 HKCFAR 578 at para. 33.  Thus, I conclude that the Applicant has taken reasonable steps to acquire all the undivided shares in the Lot.

Reserved Price for the Auction

41.   The Applicant submits that the reserve price for the auction of the Lot should be fixed at $83,700,000, based on the assessment by Mr. A. Chan of the redevelopment value (“RDV”) of the Lot as at 27 August 2013 in his valuation report of 3 September 2013.

42.   I have considered Mr. A. Chan’s valuation. I agree with him that the residual method has to be employed as the method of assessment of the RDV of the Lot.  This is done by deducting development costs (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value of the completed development.

43.   Mr. A. Chan opined that the optimum development on the Lot comprised a block of 24-storey composite development with shops on the G/F, further shops, lift lobby and machine room on the 1/F, and domestic units on the 2/F to 23/F with 2 flats per floor. The details of the hypothetical development and residual valuation were set out in Appendix 9 of his RDV valuation report (Bundle E/271). The details of the comparables with adjustments were set out in Appendix 7 (for shop comparable at Bundle E/250) and Appendix 8 (for residential comparable at Bundle E/268). 

44.   I have gone through his valuation in detail.  I appreciate that Mr. A. Chan’s assessment is based on recent retail and residential sale comparables in the vicinity and I agree with his assumptions and the values and the costs parameters that he used in his valuation. 

45.   Based on Mr. A. Chan’s valuation, I decide that the reserve price for the auction of the Lot should be HK$83.70 million.

Trustees

46.   The Applicant proposes to appoint Mr. Ho Chi Kit and Mr. Cheung Chi Yu, both solicitors of Messrs. Katherine YW Or and Co., solicitors, as sale trustees to discharge the duties imposed under the Ordinance. Based on the information on their background and experience as set out in their letter dated 27 August 2013, I am satisfied that they are suitable persons to be appointed. The remuneration, on a lump sum basis of $60,000 (exclusive of reasonable disbursements and expenses) is also reasonable and will be allowed accordingly.

Particulars and conditions of sale of the Lot

47.   Mr Li has also provided a set of draft particulars and conditions of sale by public auction [F/99-121 of the trial bundle] for my consideration.  I understand these are the usual terms used for compulsory sale and I approve them.

Costs

48.   There be no order as to costs as no one has asked for costs.

Conclusion

49.   For the above reasons, I am satisfied that the redevelopment of the Lot is justified due to the age and the state of repair of the existing building on the Lot and that Eversound Investments Limited (as the majority owner) has taken reasonable steps to acquire all the undivided shares in the Lot.  I therefore make an order that all the undivided shares in the Lot, the subject of this Application, be sold by way of public auction for the purposes of redevelopment.

50.   I appoint Mr Ho Chi Kit and Mr Cheung Chi Yu as the sale trustees to discharge the duties imposed on them under the Ordinance in relation to the Lot and authorized their remuneration for their service as trustees as provided in their letter dated 27 August 2013. I approve the particulars and conditions of sale of the Lot placed before us and grant liberty to the parties and to the trustees to apply for further directions if necessary.

Appendix