HIGHAIL COMPANY LTD AND OTHERS v. DIRECTOR OF LANDS

LDLR5/2009

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO LDLR 5 OF 2009

______________

______________

______________

J U D G M E N T

______________

1.  This is the application of Highail Company Limited (“Highail”) and the estate of the late Mr Chung Po-Chuen (“Mr Chung”) for determination of the compensation payable to them in respect of their land which was compulsorily resumed by the Government under the Lands Resumption Ordinance, Cap 124 (“the Ordinance”).

Background

2.  Highail was the owner of the lot of land known as No 213 Yee Kuk Street, Kowloon (“No 213”).  Mr Chung was the owner of the adjacent lot known as No 215 Yee Kuk Street, Kowloon (“No 215”).

3.  There was one 4-storey tenement building standing on No 213 and on No 215 respectively at the time of the resumption.  The buildings were built in 1950s and were connected by a common staircase.  Each building comprised a shop with cockloft on the G/F and one residential unit on each upper floor. 

4.  By a notice published in the Gazette, [1] the Chief Executive ordered that the lots of land mentioned therein (including Nos 213 and 215) be resumed for a public purpose and reverted to the Government on the expiration of 3 months from the date of the notice.  Upon the expiry of the notice on 23 February 2008, Nos 213 and 215 were reverted to the Government.

5.  In pursuance of section 6(1) of the Ordinance, the Director made an offer of compensation to Highail and Mr Chung respectively in respect of the resumption of their land but the offers were rejected.  Highail and Mr Chung (then alive) instead applied to the Lands Tribunal under section 6(3) of the Ordinance for determination of the amount to be paid.  They estimated the compensation payable to them to be no less than $40 million.

6.  The Director of Lands (“the Director”) as the respondent opposed the application, contending that the amount claimed was excessive.

7.  The application was subsequently amended on account of Mr Chung’s demise,  and Mrs Chung (the widow and executrix of Mr Chung) has been ordered to carry on these proceedings on behalf of Mr Chung’s estate. [2]

The issues

8.  Mr Anthony Ismail (counsel for Highail and Mr Chung’s estate) and Mr Simon Lam (counsel representing the Director in these proceedings) have helpfully summarised the dispute into 3 aspects:

(1) Whether, in the assessment of compensation, No 213 and No 215 ought to be valued jointly as one single site, or whether they ought to be valued separately as two distinct sites.

(2) If No 213 and No 215 are to be valued jointly as one single site:

(a) how should the matters that could not be agreed between the parties’ valuation experts as set out in their Joint Statement be decided; and

(b) what should be the amount of compensation payable to the applicants under the Ordinance on the basis of the decision(s) of the non-agreed matters in sub-paragraph 2(a) above.

(3) If No 213 and No 215 are to be valued separately as two distinct sites, what should be the amount of compensation payable to the applicants under the Ordinance.

The evidence

9.  The evidence adduced at trial may broadly be divided into factual and expert evidence.

10.  On facts, Mr Craig Ma (a director of Highail) and Mrs Chung testified for the applicants, and the Director did not call any witness. 

11.  Mr Ma and Mrs Chung confirmed and elaborated on their witness statement.  Their evidence may be summarized as follows:

(a) One single occupation permit was issued on 24 December 1952 in respect of the buildings on No 213 and No 215.

(b) Chung’s family acquired No 215 in about 1953 and Mr Chung inherited the property in January 1981. [3] At all material times up to its resumption by the Government, the units comprising No 215 had been let out to individual tenants.

(c) Mr Chung was a pharmacist by profession.  He worked for a pharmaceutical company before setting up his own business in about August 1994 for the sale of medical devises and consumables.  Neither Mr Chung nor Mrs Chung had any experience in property development.

(d) Highail was incorporated in October 1987 by Mr Craig Ma and Mr Michael Kwan.  They are architect by profession and partners of an architectural practice known as “Associated Architects”.  They had prior experience in property development.

(e) Highail acquired No 213 in November 1987 at the consideration of $2 million.  Since then, the whole building had been kept vacant for the purpose of redevelopment.

(f) After the acquisition of No 213, Associated Architects (on behalf of Highail) wrote to Mr Chung on 2 November 1987 in the following terms:

“We act as architect for the re-development of the property located at No 213 Yee Kuk Street, Kowloon. We also act for Highail Company Limited, the owner of the aforesaid property. Highail Company Limited has officially become owner of the aforesaid property with effect from November 1987 and will be proceeding with the redevelopment of the aforesaid property shortly. On behalf of Highail Company Limited, we write to enquire if you are interested in disposing of your property at No 215 Yee Kuk Street, Kowloon, or alternatively whether you are interested in entering into a joint redevelopment scheme with Highail Company Limited for the joint redevelopment of No 213 and No 215 of Yee Kuk Street. If you are in anyway interested in disposing of your property or entering into any arrangement for joint redevelopment, please feel free to contact the under-signed or Mr. Michael Kwan of this office for more details and discussions.”

(g) Mr and Mrs Chung were not minded to dispose of No 215 as they regarded it as family property. They were, however, attracted by the joint redevelopment option.

(h) In the meantime, Mr Ma approached the owners of neighbouring No 217 Yee Kuk Street (“No 217”) and No 219 Yee Kuk Street (“No 219”) through a broker to explore the possibility of acquiring their units. There were altogether 10 owners in No 217 and No 219 and Mr Ma explains at the trial that his intention was to acquire all the units in one or both lot(s). However, the initial result was not encouraging as not all the owners in either lot were willing to sell their units.

(i) Eventually, Highail and Mr Chung entered into an oral agreement in about September 1991 to jointly redevelop Nos 213 and 215 along the following lines:

(i) The redevelopment cost would be financed by construction loans to be secured from a bank.

(ii) The redevelopment cost including repayment of the construction loans would be shared and borne by Highail and Mr Chung equally.

(iii) Upon completion of the redevelopment, the units of the new building would be split equally among Highail and Mr Chung.

(j) Highail and Mr Chung then instructed Associated Architects to prepare general building plans for submission to the Building Authority.  The plans consisted of a proposal to erect a 14-storey composite building on Nos 213 and 215.[4]  The submission was, however, not approved for the reasons set out in a letter issued by the Building Authority dated 20 August 1992.[5]

(k) Mr Ma then discussed with Mr and Mrs Chung on his thoughts of expanding the redevelopment.  The parties agreed to expand the redevelopment to include either No 217 or both Nos 217 and 219 on the following basis:

(i) The acquisition would be subject to acceptable acquisition cost.

(ii) The acquisition must be on a whole block basis with all the units of the block to be acquired simultaneously.

(iii) Highail and Mr Chung would have equal opportunity to participate in the acquisition.  Should any party decide not to participate in the acquisition or opt to take up less interest, the other party could take up that portion of interest.  The ultimate redevelopment, including both the units to be allotted and the expenses of the redevelopment, would be shared in the same ratio as the parties’ initial interest in No 213 and No 215 and their interest in the additional acquisition of No 217 and No 219 under the expanded joint redevelopment.

(l) Thereafter, Highail and Mr Chung made sporadic approaches to the owners of No 217 and No 219 through brokers.  It later appeared to them that acquisition of all the units in either building could not be achieved.

(m) In the absence of any progress in the expanded redevelopment, Highail and Mr Chung adopted a fallback position and instructed Associated Architects to prepare general building plans for a 15-storey composite building on Nos 213 and 215 for submission to the Building Authority.  This time, their submission was approved on 23 May 1995.[6]

(n) Notwithstanding the approval, Highail and Mr Chung did not proceed with the redevelopment.  Mr Ma explains at the trial that:

(i) They were still hopeful of expanding the redevelopment and so approached the owners of neighbouring lots again.

(ii) The market turned volatile in 1997 and the general construction cost escalated significantly to an unreasonable level.  Then followed the Asian financial crisis bringing down the property market. 

(iii) As time went by, it would become more expensive for the owners to maintain the buildings on No 217 and No 219 given their age and condition and the applicants expected the owners to be more inclined to sell their units.

(o) In late 2002, the development restriction for Cheung Sha Wan (where Nos 213 and 215 situate) was relaxed.  Previously, the Outline Zoning Plan generally prescribed a maximum plot ratio of 7.5 for a building that is partly domestic and partly non-domestic.  The new Outline Zoning Plan generally permitted plot ratio of 9.0 for a building that is partly domestic and partly non-domestic.  This prompted the applicants to consider amending their approved general building plans. 

(p) Since early 2004, the applicants had been discussing a 2-phase approach: redeveloping Nos 213 and 215 first (phase 1), and making allowance for the possibility of a later merger with No 217 and No 219 (phase 2).  By adopting such an approach, they thought they could proceed with developing Nos 213 and 215 whilst leaving room for a bigger redevelopment in future.  They were conscious of the fact that the 2-phase approach would entail larger units (one flat per floor as against the previously approved 2 flats per floor design) which would be less marketable in that neighbourhood. They instructed Associated Architects to prepare sketch plans based on the 2-phase approach for further discussion.  The sketch plans produced at trial depict a 24-floor development spanning Nos 213 to 219, with shop on the G/F, E&M facilities on the 1/F and domestic units on the upper floors. [7]  The development may broadly be divided into two parts along the boundary between No 215 and No 217, and the E&M facilities are housed on the Nos 213 and 215 side.

(q) Whilst Associated Architects was still refining the sketch plans, the Urban Renewal Authority (“URA”) announced in 2005 its plan to comprehensively redevelop the neighbourhood including No 213 to No 219.[8] If URA went ahead with its plan, there would be no hope for Highail and Mr Chung to acquire No 217 and No 219 for the second phase of their 2-phase approach.  They therefore re-focused on redeveloping Nos 213 and 215 only.

(r) They instructed Hastings & Co, a firm of solicitors, to write to the Town Planning Board to object to the inclusion of their land in the draft DSP.[9] Significantly, the representation related to both Nos 213 and 215 and was in these terms: “We are instructed to draw your attention that … approval has been duly given to our clients in respect of our clients’ building proposals on the Properties…  Our clients are therefore entitled to carry out development of the Properties by themselves.  Upon the implementation of the Draft Plan as it is, our clients will be deprived of their right to redevelop their Properties.”  The “Properties” referred to being Nos 213 and 215.

(s) Mr Ma and Mr and Mrs Chung, among other people representing Highail and Mr Chung, attended a meeting of the Town Planning Board on 20 January 2006 and made representations.  According to the extracted minutes of that meeting,[10] they made the points that:

“… after the building plan approval in 1995, [they] had tried to purchase the two adjacent buildings at Nos 217-219, Yee Kuk Street for a more comprehensive redevelopment. No building works had therefore commenced. Due to fragmented ownership of these two lots, the purchase was unsuccessful. [They] now intended to redevelop their land on their own. Further building plans were under preparation and would be submitted to the BD in due course;”

“… the properties on the representation site were not subject to any outstanding mortgage. The building on No 213, Yee Kuk Street was vacant and all the tenancies for the building on No 215 would terminate within 6 months. The site was ready for redevelopment;”

(t) Notwithstanding their objection, the Board considered that a comprehensive redevelopment of the whole area would be more effective and flexible to bring about environmental improvement, better urban design and co-ordinated provision of public facilities and public open space and decided not to propose any amendment to the draft DSP.  The Board took comfort in the fact that any loss of redevelopment right of Highail and Mr Chung (if verified) would be compensated in accordance with established policy.

(u) Mr Ma and Mrs Chung have reiterated at trial that they had cooperated with each other in the redevelopment of Nos 213 and 215 with or without the adjacent lot(s).  That was why Highail had kept No 213 vacant and Mr Chung had let out the units on No 215 on monthly tenancies.  Over the years, they had maintained Nos 213 and 215 together by upgrading the electrical installations there, repairing water leakage, and demolishing unauthorised structures on the common roof and they had never put up their land for sale.

12.  Mr Ma and Mrs Chung were subjected to cross-examination by Mr Lam.  The questions focused on the intention of Mr Ma and his partner Mr Kwan in acquiring No 213, their experience and capacity in property development, and the oral agreements allegedly made between the applicants to redevelop their land.  It was put to the witnesses that they had always been eyeing on a grand redevelopment and only considered developing just Nos 213 and 215 after URA’s announcement.  That was denied by Mr Ma and Mrs Chung. 

13.  We do not think much has come out of the cross-examination.  This is understandable as the Director was not privy to the events and discussions mentioned by the witnesses.  On the whole, we accept the evidence of Mr Ma and Mrs Chung and find the facts mentioned above proven.

14.  On valuation, the applicants called Mr Chan Cheung-kit of Lanbase Surveyors Ltd and the Director’s expert was Mr Lai Wah-chi of AA Property Services Ltd.  They were both expert valuation surveyors and their expertise was not challenged.

15.  Mr Lai estimates that as at the date of the reversion the existing use value of No 213 and No 215 was HK$9,780,000[11] and HK$9,820,000[12] respectively.  The applicants have not put forward any valuation on that basis.  Mr Ismail has accepted that if we find that the applicants should only be entitled to compensation on the basis of the value of their respective land, then the applicants would not dispute these assessments.

16.  However, the experts disagree greatly on the market value of Nos 213 and 215 as an amalgamated site.  Mr Chan has revised his assessment over the course of the trial to HK$51,806,755whereas Mr Lai’s valuation maintains at HK$41,180,000.

17.  Pursuant to the direction of the Tribunal, the experts had met to discuss their differences and identified 9 parameters that divide their valuations:

(i) time for obtaining vacant possession;

(ii) value of unity platform;

(iii) saleable area of G/F shop;

(iv) saleable area of Flat Roof on 2/F and its value;

(v) construction cost;

(vi) developer’s profits;

(vii) construction floor area;

(viii) allowance for rental income; and

(ix) construction period.

18.  Before we discuss these parameters, we shall first dispose of the main issue in this case which is on the basis of assessment.

Discussion

(1) Whether, in the assessment of compensation, No 213 and No 215ought to be valued jointly as one single site, or whether they ought to be valued separately as two distinct sites

19.  The main dispute in this case is on the basis upon which the compensation should be assessed.  The applicants contend that their land should be valued taking into account the development potential of the amalgamated site, but the Director argues that No 213 and No 215 should be valued separately based on their existing use value.

20.  Mr Lam for the Director takes issue with the applicants’ approach on both law and fact.

21.  On law, Mr Lam opens his case thus: “while, in the assessment of compensation, the Tribunal may take into account the added value to a piece of land arising from the likelihood that it might be incorporated into a scheme of redevelopment (eg by amalgamation with neighbouring land(s)), two pieces of land under separate ownership cannot be valued on a joint basis unless they are effectively under common ownership because of:

(a) the lifting of corporate veil (for land held by corporations); or

(b) ownership among close members of the same family.”

22.  On fact, Mr Lam takes issue with the applicants’ intention and their means to redevelop Nos 213 and 215 as one single site. 

(1a) The Director’s objection on law

23.  Essentially, Mr Lam takes the view that: “there is no doubt that [No 213] and [No 215] were under separate ownership.  [The applicants] were not related in any manner whatsoever.  The lands were not under common ownership or effective common ownership, and ought to be separately valued.” Mr Lam has elaborated his thoughts in his written submissions on law.  We have thought long and hard and confess that the argument is at times difficult to follow.  We hope to have done justice to Mr Lam by focusing on the following components of his argument.

24.  Mr Lam started off, correctly in our view, with section 12(d) of the Ordinance which is in these terms:

“In the determination of the compensation to be paid under this Ordinance … subject to the provisions of section 11 and to the provisions of paragraphs (aa), (b) and (c) of this section, the value of the land resumed shall be taken to be the amount which the land if sold by a willing seller in the open market might be expected to realize.”

25.  He praised the judgment in Cheung Lai-wan[13] as “a clear exposition of the legal principles pertaining to this situation” and submitted that: “in order that extra compensation may be claimed for the likelihood of amalgamated development, a claimant must satisfy the Court that it is more probable than not that the sites in question would be acquired for amalgamation for joint development.”  He said that: “For a recent decision in which the Lands Tribunal adopted the approach in Cheung Lai-wan in the valuation of the development potential of a property situated in a lot which the owners were not related to each other, please see Siu Sau Kuen v The Director of Lands [2012] 2 HKC 75.  Please note, in particular, para 36-38 of the case report.” [Submission 1]

26.  He submitted that: “After the Court is so satisfied, it would then proceed to award compensation on that probability.  The higher the probability of acquisition for joint development, the higher the amount of compensation. In other words, a claimant should not be compensated ‘for unrealized possibilities as if they were realised possibilities’ (Maori Trustee v Ministry of Works [1959] AC 1 at 17).  Please see also Transport for London v Spirerose Ltd [2009] 1 WLR 1797.  It must however be borne in mind that no matter how high the probability of acquisition for joint development may be, the value of the land has to be discounted for the possibility that, after all, the developer might not be able to acquire all the lands that he wants for redevelopment.”  He cited the local case of Kwok Lee Sau-sang[14] and commented: “It is sound reasoning that, when a notional developer is acquiring separate pieces of land for joint development, however great the possibility of successful acquisition may seem, a big discount must be made for the possibility that, in the end, the developer might fail in its attempt to acquire the adjoining lots.” [Submission 2]

27.  He examined two slightly different scenarios involving a single owner owning two pieces of adjoining land.  Where both lands are resumed, he said, the owner should be compensated on the basis of an amalgamated site as the lands have in effect become one large piece of land and there is no reason why the owner should be forced to separate them for resumption or sale unless the separation will bring him greater profit.  However, where only one of the lands is resumed, the owner would be entitled to compensation under section 10(2)(c) of the Ordinance for loss and damage due to severance.  He took the view that in both scenarios, the owner would be able to “avoid the discount referred to in Kwok Lee Sau-sang, for there would be no possibility that a purchaser would be able to acquire only one but not the other piece of land.”  

28.  He then referred to Million-Add[15] and submitted that: “The above scenario of land under common ownership was extended through the lifting of corporate veil, to situations where adjacent pieces of land were held, not by the same owner, but by owners who were closely related.” He thought that: “[Mayloy[16] and Joy Take[17]] in recent years extended the Million-Add approach even further, rather surprisingly, the case of Million-Add was expressly referred to in neither of those cases.”  [Submission 3]

29.  He argued that: “the Joy Take case was wrongly decided. What the Tribunal was saying was in effect that, in a no scheme world, the Group A Owners would not sell their land to a purchaser unless that purchaser was at the same time willing to buy the land of the Group B Owners, and to pay a purchase price as if he was buying the land of the Group A and Group B Owners together, as one single piece of land, vice versa in relation to the Group B Owners.  Such an owner would no longer be a ‘willing seller’ and the market in which the land was sold no longer an ‘open market’, within the meaning of section 12(d) of the Ordinance.”   And he concluded that: “Million-Add and Mayloy have extended the common law principles in Cheung Lai-wan and Harding[18] far enough.  They ought not be strained even further, as in the Joy Take case… ”. [Submission 4]

30.  With respect, we do not agree with Mr Lam.

(1b) Our view

31.  The present dispute is on the development value (if any) of the applicants’ land. 

32.  We begin by noting that Cheung Lai-wan was a first instance decision dating back to 1977.  Since then, the highest court of this territory has twice had the opportunity to comment on the overall legislative scheme and give guidance on how compensation for land resumed by the Government should be assessed.[19]

33.  In the latter case of Yin Shuen, the Court of Final Appeal said this:

“‘Fair compensation’: the principle of equivalence

12. The basic principles which govern the assessment of compensation for the compulsory taking or resumption of land were described by Lord Nicholls of Birkenhead in Director of Buildings and Lands v Shun Fung Ironworks Ltd [1995] 2 AC 111 at pp 124-125. ‘In general’, he observed:

‘… the value of the land resumed is taken to be the amount which the land if sold by a willing seller in the open market might be expected to realize: s 12(d).’

Later he said:

‘The purpose of these provisions, in Hong Kong and England, is to provide fair compensation for a claimant whose land has been compulsorily taken from him. This is sometimes described as the principle of equivalence. No allowance is to be made because the resumption or acquisition was compulsory; and land is to be valued at the price it might be expected to realize if sold by a willing seller, not an unwilling seller. But subject to these qualifications, a claimant is entitled to be compensated fairly and fully for his loss. Conversely, and built into the concept of fair compensation, is the corollary that a claimant is not entitled to receive more than fair compensation: a person is entitled to compensation for losses fairly attributable to the taking of his land, but not to any greater amount. It is ultimately by this touchstone, with its two facets, that all claims for compensation succeed or fail.’

13. But, as Lord Nicholls recognized, while the open market value of land is ‘in general’ the measure of fair compensation; it is not universally so.  Sometimes a departure from the open market value may be justified.  Section 12(d) is subject to exceptions, in particular to ss 12(b) and 12(c).  They describe particular circumstances in which the legislature considered that the resuming authority ought not to be required to pay the open market value of the subject land.”

34.  The Court of Final Appeal said that apart from section 12(c) of the Ordinance, the law of Hong Kong in relation to compensation for compulsory acquisition is generally the same as the law of England and elsewhere in the Commonwealth.  In particular, the Court accepted the following to be a correct statement of the English position:

“The subject land must be valued not only by reference to its present use but also by reference to any potential use to which it may lawfully be put: see Horn v Sunderland Corp [1941] 2 KB 26, where agricultural land suitable for development was valued as building land; Gajapatiraju v Revenue Divisional Officer Vizagapatam [1939] AC 302; and Maori Trustee v Ministry of Works [1959] AC 1, where undivided land suitable for subdivision was to be valued for what it was at the date of taking, that is to say as undivided land, but taking into account its suitability for subdivision.”[20]

35.  Mr Lam said that this Tribunal has only recently applied Cheung Lai-wan in Siu Sau Kuen.  After the trial of this case was concluded, the Court of Appeal handed down its judgment in the appeal of Siu Sau Kuen[21] in which the court made important comments on the approach of the Lands Tribunal at first instance.  We invited submissions and both counsel have submitted fully by means of written submissions in August 2013.  To our surprise, they do not think much about the Court of Appeal judgment.

36.  This is what the Court of Appeal said in Siu Sau Kuen:

“29. In my view, if what the Tribunal did was to apply the test encapsulated in the formulation of Stage One of the two-stage approach set out in §31 of the Judgment, there would be some justification for Mr Chong’s submission that the Tribunal formulated the test incorrectly. As noted above, that formulation was in the following terms, namely:

‘(a) Stage One: Whether it is more likely than not that such redevelopment will, in a no-scheme world, take place on the date of resumption; if this question is determined against a claimant, that would be the end of the matter.’

As such, the test would appear to look only to development potential committed to take place as at the date of resumption and would not, on its face, appear to cater for the existence of future potentialities for development.

30. However, I accept the submission of Mr Simon Lam, counsel for the respondent, that the test as set out in §31 of the Judgment is in fact merely an adoption of the submission advanced by him as counsel below (and which he did not seek to defend on appeal, accepting it to be too narrow) since the Stage One and Stage Two approach set out there is apparently quoted from his submission. It is therefore not clear that the Tribunal was expressing itself to be in agreement with that formulation. Instead, I would accept Mr Lam’s submission in this court that the test the Tribunal actually applied is to be found in §§37 and 41 of the Judgment, namely: whether the Tribunal was satisfied on the evidence that, at the date of resumption, there were people ready to buy up properties in the subject lot with a view to collecting a site worth redeveloping.

31. That being so, it is not the case that the Tribunal applied a test that required it not to take account of any future redevelopment potential existing as at the date of the resumption. Rather, the Tribunal focused on the question of whether there was evidence to establish that there was this redevelopment potential, ie existing in the future, at that date…

32. Therefore, whilst at first blush the so-called Stage One test identified by the Tribunal appears to contain an error, and would be better not to be expressed in that way in future, the reality is that the Stage One test actually applied by the Tribunal was capable of reflecting the development value for potential redevelopment as at the date of valuation.

33. However, in order to avoid any confusion that might arise by formulating the relevant test in the way the Tribunal appeared to do in §31 of the Judgment and to provide guidance on this for future cases, I would instead suggest that the inquiry on which the Tribunal should focus in deciding whether an element of development value should be included in the compensation to be paid on the resumption of land should look to the considerations that were identified by Cruden DJ when sitting as Presiding Officer of the Tribunal in Tsang Chun Ki & Anor v Director of Engineering Development, unrep, LDMT 2/1984, 24 October 1984 at pp 6-7. There, His Honour said:

‘The applicants therefore only had to establish that redevelopment was likely. They did not have to establish that specific redevelopment proposals contemplated by the owners had been frustrated by the resumption. [The respondent’s expert’s] evidence was misconceived to the extent that it was concerned with the absence of any actual proposals by the applicants to redevelop rather than addressed to the different question whether the likelihood of redevelopment existed and if so to what extent. Although I accept that it is proper to consider whether the absence of any actual proposal is in the circumstances evidence of the possible unlikelihood of redevelopment.

On the other hand, the likelihood of redevelopment would strongly be established if evidence of an actual redevelopment proposal, solely frustrated because of the resumption, was adduced. However, the likelihood of redevelopment may also be established by different and far less positive evidence. For example, in Director of Lands & Survey v Cheung Ping-kwan (1978) HKLTLR 101, 107 there was evidence of redevelopment in the vicinity of the resumed property. The Lands Tribunal inspected the locality and from that merely visual evidence was prepared to find that a merger of the resumed property with two of its neighbours ‘was likely within a for[e]seeable time scale and that such a merger would result in a viable redevelopment scheme.’

34. Restating the relevant test in the light of those considerations will address the concerns of Mr Chong with regard to the Tribunal’s apparent formulation of that test, since the potentiality of future development, existing as at the date of the resumption, will be taken into account. I would therefore restate the test as follows:

‘Whether, on a balance of probabilities, the evidence discloses that, as at the date of resumption, redevelopment of the property resumed was likely. Such likelihood may be demonstrated by:

(i) actual proposals by the applicant to redevelop the property (or unlikelihood demonstrated by the absence of such proposals) whether on its own or by merger with other properties; or

(ii) evidence of redevelopment in the vicinity of the resumed property (whether accompanied by evidence of redevelopment plans for the resumed property or not), so long as such evidence of redevelopment in the vicinity supports a finding that redevelopment on its own or merger of the resumed property with other properties giving rise to a viable redevelopment scheme was likely within a reasonable foreseeable time scale.’”

37.  We feel obliged to take into account the development of the jurisprudence and do not want to get embroiled unnecessarily in a discussion on Submission 1 which is said to derive from Cheung Lai-wan.  Indeed, Dr Cruden has cautioned in his book that:

“Turning to pre-2003 case law, one of the earliest cases where the Lands Tribunal considered the general question of development value, was Cheung Lai-wan v Director of Lands and Survey [1977] HKLTLR 14, now overruled by the Court of Final Appeal judgment in Director of Lands v Yin Shuen Enterprises Ltd. All of the earlier Hong Kong cases need to be approached with caution and land resumption judgments not in accord with Yin Shuen require to be treated as either overruled or at most only given weight on any non-development value issues.”[22]

38.  Mr Lam cited three authorities in support of Submission 2: Maori Trustee, Spirerose and Kwok Lee Sau-sang.  In our view, none of these cases is apt for the present discussion.

39.  In Maori Trustee,  the Crown compulsorily acquired 91 acres of Maori land.  The land was part of an area of 242 acres in respect of which there was, at the date of the taking, no more than a paper plan of a proposed subdivision into lots.  If the plan had been approved by the appropriate Minister and the sub-division had in fact been carried out by the provisions of roads, drainage and other facilities, some of the lots could have been sold immediately for residential or industrial purposes and the balance sold in lots from time to time over a period of years.  However, there was in fact no subdivided lots, no roads or drainage, etc on the date of the taking, and the land had still to be developed for subsequent occupation as building land. The landowner sought to argue before the Privy Council that their land, on the assumption of its being retained for sales in subdivision, should be assessed at a higher value than if it were sold to a hypothetical purchaser for similar development. The Privy Council rejected the argument as it was impossible for the land to have two values upon the hypothesis (required by the relevant statute) that the land was to be sold in the open market by a willing seller.[23]

40.  In rendering its judgment, the Privy Council commented (at pp 16-17) that the earlier case of St John’s College Trust Board v Auckland Education Board[24] had been wrongly decided by the Supreme Court of New Zealand in that the court had assessed compensation on the basis that the land in question, which was suitable for subdivision into allotments for building purposes, had already been subdivided and sold to several purchasers when in fact there had been no subdivisions.  The Privy Council thought the erroneous approach had given the claimant compensation for “unrealized possibilities as if they were realized possibilities”.  This phrase was transplanted by Mr Lam here to describe the present situation. 

41.  The Privy Council noted that the High Court of Australia had dealt with the same question in Turner v Minister of Public Instruction[25]. In that case, the High Court of Australia was reported to have said: “In the case of the land in question no steps had been taken for sub-division.  It was necessary to survey it, to prepare plans for sub-division, to obtain the consent of the local authority, to make streets or roads and then to place it upon the market.  As the land stood it was incapable of sale in sub-division and it was necessary to make improvements or alterations in its physical condition before the sub-divisional prices could be obtained.  In those circumstances it could not be sold in sub-division at the time of resumption.  It was not therefore possible to ascribe to the owner possession of the present value of its sub-divisional potentialities on the footing that all you should do is to estimate what he would gain if he sub-divided the land at a future date and reduced the result to its then present value.”[26] And the court decided that the compensation for the resumption of the land was to be determined “by reference to a hypothetical sale in globo to a purchaser buying with a view to subdividing and selling in subdivision, and prepared to pay for the land no more than such a sum as would return to him out of the transaction an amount representing an appropriate allowance for the risk of the venture and a profit to himself.”[27]

42.  Maori Trustee was understood by the Court of Final Appeal in Yin Shuen (see the above quotation) as an authority on valuation of undivided land which is suitable for subdivision.  Likewise, the Commonwealth authorities discussed by the Privy Council all concerned sub-division.  In the present case, no one has suggested that the applicants should be compensated on the basis that their land would be sub-divided.  In our view, the Privy Council was looking at very different scenarios and Mr Lam may not transplant the argument here.

43.  Mr Lam did not elaborate on how Spirerose is relevant.  In that case, the English Lands Tribunal found on the balance of probabilities that permission for mixed-use development would have been granted as at the valuation date but valued the land on the assumption that permission would actually have been obtained.  The House of Lords came down on the valuation and said that the land should be valued on a “hope value” basis. 

44.   Spirerose should be read subject to section 12(c) of the Ordinance.  It was not discussed in Yin Shuenas it came afterwards.  The Court of Appeal cited the case in Siu Sau Kuen[28]for the value of Lord Collins’ statements of the elementary principles of the law of compensation for compulsory acquisition which echo what was said in Yin Shuen.  The following statement in Lord Collins’ speech is particularly illuminating:

“92. Third, and directly in point on this appeal, one plainly relevant element in the value to the owner is the prospect of exploiting the property. I have already mentioned R v Brown LR 2 QB 630, in which Cockburn CJ said, at p 631, that the jury assessing compensation under the 1845 Act had to consider:

‘the real value of the land, and may take into account not only the present purpose to which the land is applied, but also any other more beneficial purpose to which in the course of events at no remote period it may be applied, just as an owner might do if he were bargaining with a purchaser in the market.’

93. As Cripps, Principles of the Law of Compensation, 1^st ed (1881), p 153 put it:

‘The present value of lands is enhanced by the probability of their more profitable use, and the assessment of compensation should be made on the potential, as well as on the actual value of lands to the owner. When lands used for agriculture are suitable for building purposes, this is necessarily an important element in their value, and a matter for which the owner should be compensated.’

94. The same point was made more elaborately, when the Privy Council said (through Lord Romer) in Raja Vyricherla Narayana Gajapatiraju v Revenue Divisional Officer, Vizagapatam [1939] AC 302, 313:

‘[The] land is not to be valued merely by reference to the use to which it is being put at the time at which its value has to be determined … but also by reference to the uses to which it is reasonably capable of being put in the future … No one can suppose in the case of land which is certain, or even likely, to be used in the immediate or reasonably near future for building purposes, but which at the valuation date is waste land or is being used for agricultural purposes, that the owner, however willing a vendor, will be content to sell the land for its value as waste or agricultural land as the case may be. It is plain that, in ascertaining its value, the possibility of its being used for building purposes would have to be taken into account. It is equally plain, however, that the land must not be valued as though it had already been built upon … [It] is the possibility of the land and not its realised possibilities that must be taken into consideration. But how is the increase accruing to the value of the land by reason of its potentialities or possibilities to be measured? In the case instanced above of land possessing the possibility of being used for building purposes, the arbitrator … would probably have before him evidence of the prices paid, in the neighbourhood, for land immediately required for such purposes. He would then have to deduct from the value so ascertained such a sum as he would think proper by reason of the degree of possibility that the land might never be so required or might not be so required for a considerable time.’

95. I emphasise that the reference is to ‘possibilities of the land and not its realised possibilities’, and that a deduction would have to be made to take account of the fact that the land might not be required for building or might not be required for a considerable time.  This is a powerful confirmation of a principled approach to valuation.  There is no reason why the same principles should not apply when the modern law of town planning is factored in.  It is elementary that the price which the land in question might reasonably be expected to fetch on the open market at the valuation date would be expected to reflect whatever development potential the land has: Mon Tresor & Mon Desert Ltd v Ministry of Housing and Lands [2008] 3 EGLR 13, para 27, per Lord Brown of Eaton-under-Heywood.”

45.  The local case of Kwok Lee Sau-sang was also concerned with very different facts.  There were two claimants in that case – Mr Siu and Mrs Kwok.  Mr Siu was the owner of the building at No 380 of Queen’s Road Central before the resumption.  Mrs Kwok was the executor of the estate that owned the building at Nos 384 & 386 of Queen’s Road Central, which occupied the corner abutting three roads.  The two buildings formed part of a series of six pre-war buildings extending to No 374.  The next building at No 372 was a post war building. 

46.  One of the valuation models put forward by the claimants’ expert was on the basis that “the subject properties and those adjoining were ripe for joint development … covering street numbers 374 to 386”.  To establish the likelihood of an amalgamated site redevelopment, the expert thought it was sufficient just to show that “the subject properties have been carved out of Lot No 211 and there is nothing whether arising from any mutual covenant or at law to prevent them from being merged together in a joined redevelopment.”  He predicted that the redevelopment would have been realized within four years. 

47.  The tribunal found no real evidence to support the claimants’ model and considered their expert’s prediction as no more than “the suggestion of a possibility”.  The tribunal said the claimants had lost sight of the fact that “the Tribunal awards compensation not upon the realized possibility of an amalgamated site development but upon the value which the property would realize in the open market by reason of its potential for use in an amalgamated site.” 

48.  Central to Mr Lam’s contention here is his idea that by assessing compensation on the basis that Nos 213 and 215 form one single site, we may be compensating the applicants for “unrealized possibilities as if they were realised possibilities”.  We do not agree. 

49.  Unlike Kwok Lee Sau-sang, we are not dealing with a possibility.  The applicants in Kwok Lee Sau-sang did not have Nos 374-378 & 382 but argued for the development value of Nos 374-386.  The applicants here are seeking to unlock the development potential of Nos 213 and 215 and they, together, owned all the land in question. 

50.  At the most, the cases cited by Mr Lam remind us not to over-compensate the applicants for the profits in redeveloping their land[29] and that we should take account of the time factor in the assessment.  As we shall see in a moment, the experts engaged by the parties have agreed to adopt the residual valuation method for the assessment if we decide that the applicants’ land should be valued as one site.  Their agreed formula takes into account factors such as the discount rate for present value, time for obtaining vacant possession, the demolition period, the construction period, and developer’s profit for the hypothetical development.  As such, their assessment has already discounted those elements and what is left represents the value of the land. 

51.  We prefer to start with the basic principles elaborated in Yin Shuen.  The applicants are each entitled to a fair compensation for their land resumed.  They are entitled to be compensated fairly and fully for their loss, which is taken to be the amount which they might be expected to realise by selling their land willingly in the open market.  The value of their land is not restricted by reference to its present use.  Reference may also be made, insofar as it is supported by evidence, to any potential use to which their land may lawfully be put.  Dr Cruden has explained this as follows:

“The land being resumed, again subject to section 12(c), may already have a potential for subdivision, amalgamation or other redevelopment. Where land has these potentialities the possibility, as at the date of resumption, of the potential being realised, must be assessed and the value of the land in appropriate cases increased. This species of increased value is generally described as development value.”[30]

52.  It is common ground that as at the date of the resumption, the two buildings built in 1950s were still standing on Nos 213 and 215.  The building at No 213 had been left vacant and the one at No 215 had been let on monthly tenancies.  Nothing had actually been done to amalgamate or redevelop the land. What the applicants are contending is that their land had the potential of future development as one composite site and such potential exited at the date of the resumption.

53.  In our view, the test propounded by the Court of Appeal in Siu Sau Kuen should be applied to the present case.  Bearing in mind that the applicants are proposing that their land should be developed as one single site, the real question for us (modelling on the restatement at §34 of the judgment) is: Whether, on a balance of probabilities, the evidence discloses that, as at the date of resumption, redevelopment of No 213 and No 215 as one single site was likely.  As said by the Court of Appeal, such likelihood may be demonstrated by:

(a) actual proposals by the applicants to redevelop their land by merging No 213 and No 215; or

(b) evidence of redevelopment in the vicinity of their lands, so long as such evidence supports a finding that redevelopment of Nos 213 and 215 as one single site was likely within a reasonably foreseeable time scale.

54.  Mr Lam has submitted on the basis of Million-Add (which in turn cited DHN[31]) and Mayloy that “two pieces of land under separate ownership cannot be valued on a joint basis unless they are effectively under common ownership because of the lifting of corporate veil (for land held by corporations) or ownership among close members of the same family” (ie Submission 3).  To discuss this objection fully, we need to look at the cases in more detail.  

55.  The first one in time was the DHN case.  DHN was in the business of grocery and provision merchants.  It had a warehouse in London.  It imported groceries and provisions and distributed them to shopkeepers by lorries.  It had also developed a “cash and carry” line whereby private individuals would come to buy substantial quantities wholesale.  Lord Denning described the circumstances as “Three in one”, ie three companies in one.  The business was owned by the parent company (DHN), the land where the warehouse situate was owned by a subsidiary (“the Warehouse subsidiary”), and the lorries were owned by another subsidiary (“the Transport subsidiary”).

56.  The local council wanted to demolish the warehouse and build more houses on the land.  Eventually, the dispute boiled down to one of compensation.  This is how Lord Denning saw the dispute:

“Compensation under the statute is to be made for the value of the land and also compensation for disturbance of the business: see section 5(2) and (6) of the Land Compensation Act 1961.

If the firm and its property had all been in one ownership, it would have been entitled to compensation under those two heads: first, the value of the land, which has been assessed in excess of £360,000. Secondly, compensation for disturbance in having its business closed down. The figure has not yet been assessed. But the firm and its property were not in one ownership…

The question is: what is the effect of the firm being in truth the three companies? The acquiring authority say that the owners of the land [ie the Warehouse subsidiary] … are entitled to the value of the land… But the acquiring authority say the company are not entitled to compensation for disturbance because they were not disturbed at all. The authority admit DHN (who ran the business) and the Transport subsidiary (who owned the vehicles) were greatly disturbed in their business. But the acquiring authority say that those companies are not entitled to any compensation at all, not even for disturbance, because they had no interest in the land, legal or equitable. They say that … DHN being licensees [of the Warehouse subsidiary] only, with no interest in the land, their only claim was under section 20(1) of the Compulsory Purchase Act 1965. That section says that if a person has no greater interest than a tenant from year to year in the land, then he is only entitled to compensation for that lesser interest. Seeing that a licensee can be turned out on short notice, the compensation payable to DHN would be negligible.

The strange thing about the case is this, that the acquiring authority admit that … the people running these three companies could have put their house in order so as to make the claim impregnable. All they had to do was to take a very simple step. Being in control of all three companies, they could have arranged for [the Warehouse subsidiary] to convey the land to DHN. No stamp duty would be payable… And DHN being the owners, could also claim compensation for disturbance. So at any time up to October 30, 1970, this group of three companies could have put themselves in an unassailable position to claim not only the value of the land but also compensation for disturbance. But that were not done. The acquiring authority say that, by failing to do it, the group have missed the boat. They are left behind on the quay because of the technical provisions of our company law whereby each of the three companies is in law a separate person. Each of its interest must be considered separately. DHN had no interest in the land. It was only a licensee. So it cannot claim compensation for disturbance.

The President of the Lands Tribunal was asked to determine preliminary points of law.  He held that DHN had no interest in the land such as to entitle them to any compensation for disturbance beyond the amount allowed by section 20 of the Act of 1965, which is negligible.  DHN appeal to this court.”

57.  DHN took three points in their bid to convince the English Court of Appeal that they should be entitled to compensation for disturbance. And the third one was this: that the Court should lift the corporate veil and treat DHN as the owners.  On this point, Lord Denning said:

“We all know that in many respects a group of companies are treated together for the purpose of general accounts, balance sheet, and profit and loss account. They are treated as one concern. Professor Gower in Modern Company Law, 3^rd ed (1969), p 216 says:

‘there is evidence of a general tendency to ignore the separate legal entities of various companies within a group, and to look instead at the economic entity of the whole group.’

This is especially the case when a parent company owns all the shares of the subsidiaries – so much so that it can control every movement of the subsidiaries.  These subsidiaries are bound hand and foot to the parent company and must do just what the parent company says… So here.  This group is virtually the same as a partnership in which all the three companies are partners.  They should not be treated separately so as to be defeated on a technical point.  They should not be deprived of the compensation which should justly be payable for disturbance.  The three companies should, for present, purposes, be treated as one, and the parent company DHN should be treated as that one.  So DHN are entitled to claim compensation accordingly.  It was not necessary for them to go through a conveyancing device to get it.”

58.  In our view, the lesson to be learned from Lord Denning’s judgment is that the court would not lightly deprive a party of something that he is justly entitled to on technicality.

59.  The next case is the local case of Million-Add. That case involved five lots of land on Kau Hui Chik Street in Tai Po (known as Lots 30, 32, 34, 36 and 38).  The first applicant company owned Lot 30, while the second applicant owned the remaining lots.  The Crown invoked the Roads (Works, Use and Compensation) Ordinance to resume the subject lots (together with other land), and the applicants applied to the Lands Tribunal for compensation. 

60.  The Lands Tribunal dealt with a number of preliminary matters before turning to valuation, including: (a) Whether the subject lots was owned or controlled by common parties; and (b) Whether the subject lots could have been jointly developed.  In our view, they are different facets of the ultimate question of whether the applicants were entitled to compensation assessed on the basis of an amalgamated site.  The tribunal approached that question from the angles of the landowners and the land.

61.  On (a), the tribunal found both applicant companies to be controlled by the Yiu brothers and said:

“During argument on ownership, the Tribunal referred to [DHN] where the Court of Appeal lifted the corporate veil of related companies to enable compensation for the land compulsorily purchased, to be increased by an amount for disturbance. The Court of Appeal held that where a parent company was in a position to control subsidiary companies in every respect, the court could pierce the corporate veil and treat the group as a single economic entity for the purpose of awarding compensation for disturbance.

We have found that the applicant companies have similar shareholdings and that the Yiu brothers were in every respect able to control both companies. This entitles the Tribunal to pierce the corporate veil and look at the ownership realities, in accordance with the principle applied in the DHN case…

In the present case, the two applicant companies are interrelated so we are not concerned with a parent and subsidiary company situation but the same principle is applicable.  We are well satisfied that the applicants, under the control of the Yiu brothers and acting in concert, had the power to develop the amalgamated site comprising five lots, to its optimum lawful potential.”

62.  On (b), the tribunal accepted that: “the Yiu brothers, through various different company structures, had for many years been involved in a number of substantial Tai Po developments.  These included taking steps over a period of time, to assemble sufficient lots in the Kau Hui Chik Street locality, to produce an amalgamated site, for a new development.”  The Crown took two objections: (i) the tribunal should not take into account the applicants’ particular development proposals; and (ii) the relatively recent purchase of Lots 32, 34 and 38 (just 1-2 days before resumption) showed that the real motive of the applicants was to increase the amount of compensation.  The tribunal rejected both contentions.  On (i), the tribunal took the view that the owner’s plans were relevant (but not decisive) in the objective determination of development value.  As to (ii), the tribunal held that: “Under Hong Kong law, a person buying land after the Gazette notice but before resumption, also buys the right to compensation.  Unless during the interim period, the owner effects s 11(1)(b) non-repair additions or improvements, it matters not that he hopes his purchase will create marriage value and so increase compensation.  On this compensation issue, the law is not concerned with subjective intent or motivation but with the fact of ownership, as at the date of resumption.”

63.  What must be appreciated is that the tribunal did not decide the ultimate question as a matter of law on the basis of the relationship of the owners (ie (a)) but took all the evidence into consideration (ie (a) and (b)).

64.  The third case cited by Mr Lam is Mayloy.  The essential facts for the purposes of the present discussion can be gleaned from the headnote:

“Mayloy Development Ltd (applicant A) was the registered owner of Nos 2 and 5 Man Hing Lane in Central. Tam Kan Julia (applicant B) was on the other hand the registered owner of Nos 4 and 6 Man Hing Lane. Applicant B was the executrix of one Kan Sik Kau (dec’d). The shares of applicant A were held upon trust for the wife and children of Kan Sik Ming, the brother of Kan Sik Kau (dec’d). Nos 1 to 6 of Man Hing Lane roughly had the shape of a rectangle and each of the numbers, separated by a boundary line, formed a small rectangle within the bigger rectangle. They were contiguous to each other and were on the same side of Man Hing Lane… These four properties were resumed by the Government in 1993. The applicants and the respondent disputed the amount of compensation payable. They disputed on whether the properties at Nos 4, 5 and 6 formed a joined site or separate sites for re-development;… As to the first issue, the Lands Tribunal heard evidence that the mother of Kan Sik Kau and Kan Sik Ming tried to acquire the ownership of Nos 1 and 6 Man Hing Lane for the purpose of re-developing Nos 1 to 6 as a single site and that after failing to acquire the ownership of these two numbers, the mother and Kan Sik Kau discussed on subsequent occasions on the re-development of Nos 4, 5 and 6 as a joint site.

Held, determining compensation to be payable by the respondent to the applicants as $3.29 million in respect of site at No 2 and $22.53 million in respect of site at Nos 4, 5 and 6 respectively:

(1) Nos 4, 5 and 6 of Man Hing Lane were to be treated as one single site for the purpose of assessing compensation.  The survivors and beneficial owners of the properties would have co-operated in order to bring about the most advantages exploitation of their several sites.  Such action would be in keeping with family policy and an obvious thing for a family of building contractors to do. Lucas v Chesterfield Gas and Water Board [1909] 1 KB 16; Cheung Lai Wan et al v Director of Public Works [1977] HKLTLR 14 applied…”

65.  The tribunal explained its reasoning thus:

“Sir John Swaine, SC, counsel for the applicants, submitted that the following citations … were relevant in the present proceedings:

‘In actual life people as a rule act in the way which they believe will conduce most to advancement of their own interests, and owners in such a case would thus not throw away an enhancement of value in which they would all share’ per Fletcher Moulton LJ in Lucas v Chesterfield Gas and Water Board (1909) 1 KB 16.

An owner is entitled to the best market price for the land in its existing state… If several resumed lots joined together would have a higher market value than the aggregate of their individual values, the owner should receive that higher value.’ (Quotations from Judge Cruden’s work, Compensation for Expropriation, A Comparative Study at pages 286-287).

If it is shown that a property has an added value on the open market because of the likelihood that it will be incorporated onto a scheme of redevelopment then this added value must be taken into account when compensation is being assessed, per President Power in Cheung Lai-wan et al v Director of Public Works (1977 HKLTLR 14).’

This Tribunal agrees that these citations are applicable to the facts of this case.”

66.  Having looked at the judgments in more detail, we do not think Million-Add and Mayloy have laid down any test of general application as Mr Lam would have it.  In our view, the tribunal in those cases was merely doing what the Court of Appeal later advocated in Siu Sau Kuen, namely, examined all the evidence in order to find out, on a balance of probabilities, whether the redevelopment contended for was likely.  Likewise, the tribunal in Cheung Lai-wan rejected the redevelopment contended for on the evidence because: (i) the sites in question were lacking in depth; (ii) the proposed redevelopment would produce a singularly narrow and unattractive building; and (iii) there was no evidence that any developers had ever been interested in the land or in similar sites in the area.[32]  

67.  Turning now to Submission 4, we first set out the facts of Joy Take (taken from the headnote in the law report):

“Ten 4-storey buildings were resumed under the Lands Resumption Ordinance (Cap 124) for the implementation of a proposal of the Urban Renewal Authority in 2003. The applicants were two groups of companies which together, owned all the units in the resumed site. The applicants applied jointly for compensation on the basis of the market value of the whole of the site plus interest and professional costs. The respondent opposed the application on the grounds, inter alia, that the claimed compensation of $82 million was excessive. In particular, the respondent contended that the total compensation should not be assessed on the basis of redevelopment value of the market value of the site as a whole.

Held, granting the application and ordering compensation to the applicants for the resumed properties in the sum of $61,833,000:

(1) Based on the evidence adduced, it was more likely than not that, in a ‘no-scheme’ world where in the absence of the resumption affecting the buildings, the applicants would have co-operated in jointly developing the buildings as a single site…”

68.  The tribunal said in the judgment that:

“17. We are also satisfied that without the resumption, it would be inconceivable that these 2 groups of owners would be prepared to sell to the URA voluntarily, to the other purchasers or other developers for any value other than these 2 groups’ fair share of the market value of the Site on a joint site redevelopment basis. In reaching this conclusion, we have taken into account the time that these 2 groups of owners have been acquiring the properties owned by all the applicants in this case. Being experienced property developers, it is inconceivable to believe that these 2 groups of owners would not jointly ask for the market value of the Site as a joint redevelopment site.”

69.  We do not agree with Mr Lam that, in reaching the above conclusion, the tribunal had failed to consider the definition of “willing seller” and “open market”.  We think Mr Lam has read too much into those terms. 

70.  We would refer to the discussion of “market value” in Dr Cruden’s book (at pp 100-102):

“Market Value

The fundamental principle for the determination of compensation for land compulsorily resumed is that the owner shall receive the market value of the land. The principle is enshrined in section 12(d)…

The market value criteria has been widely adopted throughout common law countries. An early and widely approved explanation of market value was given by Griffiths CJ in the Australian High Court appellate judgment of Spencer v Commonwealth (1907) 5 CLR 418:

‘In my judgment the test of value of land is to be determined … by inquiring ‘what would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?’

The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.

To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reasons so ever in the amount which ne would otherwise be willing to fix as the value of the property.’

The English Court of Appeal later arrived at a similar definition in Inland Revenue Commissioners v Clay [1914] 3 KB 466, where it was emphasized that a willing seller was a free agent and that an open market includes every possible purchaser. In particular, Swinfen Eady LJ explained that a sale in the open market:

‘… means such amount as the land might be expected to realize if offered under conditions enabling every person desirous of purchasing to come in and make an offer, and if proper steps were taken to advertise the property and let all likely purchasers know that the land is in the market for sale. It scarcely needed evidence to inform us – it is common knowledge – that when the fact becomes known that one probable buyer desires to obtain any property, that raises the general price or value of the thing in the market. Not only is the probable buyer a competitor in the market, but other persons such as property brokers compete in the market for what they know another person wants, with a view to resale to him at an enhanced price, so as to realise a profit. A vendor desiring to realise any land would ordinarily give full publicity to all facts within his knowledge likely to enhance the price. The local conditions and requirements, the advantages and situation of the property for any particular purpose, and the names of the persons who are probable buyers would ordinarily be matters of local knowledge to the property brokers, agents and speculators. In order to arrive at the amount which the land might be ‘expected to realise’ all these matters ought to be taken into consideration.’

This Court of Appeal decision was applied in Hong Kong by the Lands Tribunal in Cheung Lai-wan v Director of Lands and Survey [1977] HKLTLR 14 and Ching Chun Kau v Director of Lands and Survey [1978] HKLTLR 190.”

71.  So, a “willing seller” is a vendor who would sell his land for a fair price but is not so anxious to sell as to overlook any ordinary business consideration, and “open market” simply encompasses all possible purchasers.  This is consistent with Yin Shuen.

72.  In Joy Take, the tribunal accepted as a matter of evidence that there had been discussions between Group A Owners and Group B Owners to redevelop their land as an amalgamated site and that they had entered into a joint venture agreement about 15 days before the resumption.  In opposing the application, the respondent (ie the Director) argued that:[33]

(a) “The Group A Owners would wish to wait and develop the Site alone, after acquiring the Group B Owners’ interests in the Site.  However, since this purchase never took place before the date of reversion, the Group A Owners are therefore not entitled to the proportional share of the market redevelopment value of a merged site.”

(b) “Likewise, it was in the Group B Owners’ commercial interest to wait for the sale from the Group A Owners’ their interests in the Site. Similarly, since this purchase never took place, the Group B Owners are therefore also not entitled to the proportional share of the market redevelopment value of the whole Site.”

(c) “Also, there were always possibilities that the Group A Owners could have decided to sell to another purchaser or purchasers other than to the Group B Owners.  Similarly for the Group B Owners.”

73.  In our view, the tribunal’s ruling was inevitable given the evidence.  The owners together owned the entire site.  There had been discussions between the owners of developing the entire site culminated in a joint venture agreement. Assuming for the purpose of discussion that there had been no resumption and each group was approached individually for the sale of their land, we agree with the tribunal that it would be inconceivable that the owners would not ask for a price that would reflect the redevelopment potential of the entire site.  It would be asking too much to expect them to ignore the redevelopment potential of the entire site and settled for an inferior price. 

74.  We do not agree that by insisting on a fair price taking into account the redevelopment potential of the entire site, the owners would not be “willing sellers”.  Quite to the contrary, we would turn them into “unwilling sellers” if we were to force them to ignore an ordinary business consideration (ie the redevelopment potential of the entire site) and sell at an undervalue. And the market would not be an “open market” if we ignore the existence of the other group of owners who would obviously desire the land for an amalgamated development. 

75.  Mr Lam sought to demonstrate that Joy Take was wrongly decided by the following argument:

“Suppose in the Joy Take case, only the land of the Group B Owners were resumed by the Government, but not that of the Group A Owners, so that an application for compensation was made by the Group B Owners alone, and not jointly with the Group A Owners. Would the Group B Owners be entitled to compensation assessed on the same basis as that adopted by the Tribunal in that case, ie that the land of the Group A and Group B Owners would be jointly developed? If the answer is in the affirmative, that would in effect extend section 10(2)(c) of the Ordinance … to compensate for severance from land, not only of the claimant’s own, but also that of his neighbor. On the other hand, if the answer is in the negative, absurdity would arise – the amount payable to a land owner becomes dependent on whether his neighbour’s land is at the same time resumed.”

76.  We think Mr Lam is misconceived.  In the scenario put forward by him, the compensation payable to Group B Owners would be determined having regard to the test in Siu Sau Kuen.  If the tribunal is satisfied that, as at the date of resumption, redevelopment of the land belonging to Group A and Group B Owners on an amalgamated site basis was likely, Group B Owners would be entitled to compensation including an element of such development value.  Group A Owners, on the other hand, not being a person having an estate or interest in the resumed land immediately before reversion would be entitled to apply under section 8 of the Ordinance for compensation.  Such compensation would be assessed on the basis of “the loss or damage suffered by the claimant due to the resumption of the land specified in the claim [ie Group B Owners’ land]”, [34] which is the amount of loss or damaged suffered by Group A Owners due to severance of their land from the land of Group B Owners.[35]  There is no absurdity and no violation of section 10(2)(c).

77.  On the other hand, the Director’s contention that, as a matter of law, we cannot assess compensation on the basis that Nos 213 and 215 form one single site because the applicants do not belong to the same group of companies or family appears to us to be very technical.  The applicants had the power, acting in concert, to develop the amalgamated site.  As a matter of fact, the applicants could have effortlessly formed a partnership or joint venture over them for the proposed redevelopment and that would circumvent the technical objection.  One is called to mind Lord Denning’s sentiment expressed in DHN: “They should not be treated separately so as to be defeated on a technical point.  They should not be deprived of the compensation which should justly be payable…”.

78.  For the above reasons, we do not think there is any merit in the Director’s objection on law.

(1b) The Director’s objection on fact

79.  On facts, the Director takes issue with the applicants’ intention and their means to redevelop Nos 213 and 215 as one single site.  Mr Lam submits that:

(a) “But for the scheme in question, the [applicants] would have continued to wait for their chance to acquire Nos 217 and 219.  There was no likelihood that, in a no scheme world, [No 213] would be redeveloped with [No 215] in the foreseeable future, at any rate not by February 2008 (the resumption date).  The applicants had been waiting patiently for 18 years (from 1987 to 2005).  There was simply no evidence, and no material change of circumstances, which suggest that the [applicants] would suddenly lose their patience and go ahead with the redevelopment of Nos 213 and 215 (without Nos 217 and 219) in the next 2-3 years (ie between 2005 and early 2008).  The profits from redeveloping [Nos 213 and 215] on their own were not attractive at all.  In a no scheme world, it simply was unlikely to materialize.” (our emphasis)

(b) “Neither [Highail] nor [Mr Chung] can be said to be ‘experienced property developers’.  The [applicants’] case at the highest establishes that the directors and shareholders of [Highail] (Ma and Kwan) were, in the late 1980s and early 1990s, involved, together with other persons, in 3 development projects.  [Highail] (a limited company) was never involved in any development.  Ma and Kwan never undertook any development project on their own.  In any event, whatever the situation of [Highail] may be, there is no evidence that [Mr Chung] was capable of redeveloping his site on his own.  The evidence clearly shows that [Mr Chung] had to rely on [Highail] if he were to redevelop his land…  The present case is clearly distinguishable from Joy Take, and ought to be decided differently (even assuming that Joy Take was rightly decided).”[36]

80.  In our view, this objection is more or less a reflection of the application of the wrong test.  The submission that: “There was no likelihood that, in a no scheme world, [No 213] would be redeveloped with [No 215] in the foreseeable future, at any rate not by February 2008 (the resumption date)” suffers from the short-sightedness that was discussed in Siu Sau Kuen.  The Court of Appeal said (at §29) that such an approach appears to look only to development potential committed to take place as at the date of resumption but not to cater for the existence of future potentialities for development.  Curiously, Mr Lam (who was the counsel representing the Director in that case) conceded the narrowness of that approach in Siu Sau Kuen but maintains his objection here. 

81.  It is true that the applicants had waited 18 years to purchase the adjoining Nos 217 and 219, but their patience should not be counted against them.  The fact that the applicants may be eyeing on a bigger pie does not mean they cannot eat what they already have. 

82.  There is simply no factual basis for Mr Lam to submit that “[b]ut for the scheme in question, the [applicants] would have continued to wait for their chance to acquire Nos 217 and 219” or that “the profits from redeveloping [Nos 213 and 215] on their own were not attractive at all”. 

83.  As a matter of fact, the URA announced the draft DSP in 2005.  The draft DSP included not only the applicants’ land but also Nos 217 and 219 in the proposed comprehensive redevelopment.  The applicants instructed lawyers to object to the inclusion of their land (not the adjoining Nos 217 and 219) in the draft DSP in 2005 and appeared before the Town Planning Board in 2006 to voice their objection.  In our view, this is good evidence that they had by then abandoned any hope of an expanded redevelopment and settled with just developing Nos 213 and 215.  All these happened before the relevant date of 23 February 2008 for determining compensation.

84.  The submission that Highail and/or Mr Chung may not be “experienced property developers” has initially caused us to enquire whether a finding that one (but not both) of the applicants had the relevant means and experience in property development would mean different basis for assessing compensation.  In the end, we do not think it matters if they are “experienced property developers” or not.  As Mr Ismail has submitted, the fact that Mr Chung did not have the relevant experience would mean that he would be more inclined to team up with Highail.  As explained by Swinfen Eady LJ in Clay,[37] once the market realises that the area is ripe for redevelopment or that there are persons combining individual lots in the neighbourhood for redevelopment (such as Highail, and the developer of the nearby Tak Fu Building and City Regolia, see below), that would raise the market value of the land beyond its existing use value.

85.  To us, these factual objections are misconceived and not supported by evidence.

(1c) Our findings

86.  Applying the test propounded by the Court of Appeal in Siu Sau Kuen, we are satisfied on a balance of probabilities that, as at the date of resumption, redevelopment of Nos 213 and 215 as one single site was likely.

87.  There is no dispute that the buildings at Nos 213 and 215 were old and dilapidated and ripe for redevelopment.  No 213 had been kept vacant and the monthly tenancies in No 215 could be terminated to make way for redevelopment.

88.  There were redevelopments in the neighbourhood in the past decades involving more than one lot. [38]  For example:

(a) Tak Fu Building at Nos 209-No 211 Yee Kuk Street to the immediate southeast is a 15-storey residential building built in 1987.

(b) More recently, a 24-storey development called City Regolia was built at Nos 192-200 Yee Kuk Street across Yee Kuk Street.

89.  The area surrounding Nos 213 and 215 comprises buildings of similar age, height and condition which are also ripe for redevelopment. 

(a) To their immediate northwest (ie No 217 and No 219) are two 5-storey tenement buildings built in 1950s.

(b) To their northeast across Yee Kuk Street are buildings mainly built in the 1940’s and 1950’s with building height ranging from 4 to 7 storeys.

These buildings have been included in the draft DSP and earmarked for comprehensive redevelopment together with Nos 213 and 215.[39] 

90.  We accept the submission of Mr Ismail that the above actual redevelopments and plan lend credibility to the applicants’ approach.  In other words, there is evidence of redevelopment in the vicinity which supports a finding that redevelopment of Nos 213 and 215 as an amalgamated site was likely within a reasonable foreseeable time scale.

91.  There is also evidence in this case of actual proposal to redevelop Nos 213 and 215 as one single site:

(a) The applicants together owned all the interests in Nos 213 and 215. 

(b) The applicants orally agreed, as early as in September 1991, to jointly develop Nos 213 and 215 as a single site.  The submission of the general building plans to the Building Authority is solid evidence of their agreement.

(c) We have noted the Building Authority’s reasons for disapproval in 1992 and accept Mr Ismail’s submission that the general building plans had been disapproved on technical grounds.   As a matter of fact, the reply from the Building Authority expressly called for re-submission.  There is really no legal impediment to redevelop Nos 213 and 215 as an amalgamated site and the modified general building plans were later approved in 1995.

(d) It is true that the applicants had agreed to expand the proposed redevelopment to include the adjoining lot(s) after their initial submission to the Building Authority had been rejected, but their new agreement still entailed Nos 213 and 215 to be redeveloped together.

(e) We accept the applicants’ explanation that given the trust between them and the relatively preliminary stage they were in, they had not considered it necessary to draw up any written agreement on both instances. According to Mr Ma, they might need something in writing at the latest when they arranged for bank finance.

(f) When their grand plan was going nowhere, they reverted to just redeveloping Nos 213 and 215.  Again, their submission of the general building plans for approval in 1995 is evidence of their intention.

(g) We accept the applicants’ explanations for not proceeding with the development right away after their general building plans had been approved in 1995. 

(h) Their decision in early 2004 to adopt a 2-phase approach is borne out by the sketches produced in evidence.

(i) As we have said before, the applicants jointly instructed a firm of solicitors to object to the inclusion of their land in the draft DSP in October 2005.[40]  This coupled with their representation to the Town Planning Board in January 2006[41] is clear evidence of their plan to redevelop Nos 213 and 215 as one single site before the resumption date of 23 February 2008.

92.  As confirmed by the Court of Final Appeal in Yin Shuen, the applicants’ land must be valued not only by reference to its present use but also by reference to any potential use to which it may lawfully be put.  There are ample evidence in this case supporting the applicants’ contention that they could have redeveloped Nos 213 and 215 but for the resumption.

(2) Determination of the 9 parameters essential to the valuation of Nos 213 and 215 as onesingle site.

93.  Notwithstanding their disagreement on the basis of valuation, the valuation experts have both carried out valuation of Nos 213 and 215 as one single site.  The experts met in pre-trial conferences to discuss their differences and they have set out items of agreements and disagreements in a Joint Statement for easy reference.  These items will be set out below.

(2a) Items of agreement

94.  The experts agree that if the tribunal considers it appropriate to determine compensation on an amalgamated site basis, residual valuation method should be adopted for the assessment. 

95.  A large number of valuation parameters have been agreed, the details of which are set out in Table B of the Joint Statement.[42]  In short, it is agreed that the most profitable mode of redevelopment of the amalgamated site would be by way of erection of a 25-storey composite building.

96.  The formula of the residual valuation is also agreed, viz:

Market value of No 213 & 215 on a joint site basis

= [({[(A – B) x C] – D – E} / (1 + F)) x G],

Where:

A = Total gross development value (GDV) of the notional development (ie the total market value of the shop/domestic premises)

B = Marketing cost of the notional development, agreed at 1%

C = PV for the entire construction period. The discount rate for the calculation of PV is however agreed at 5.75% pa

D = Development cost

E = Demolition cost, agreed at $1,000,000

F = Developer’s profit

G = PV in respect of the time required for obtaining vacant possession of the subject sites. PV is agreed at 5.75% pa

97.  For the purpose of calculating GDV, the parties agree that:

(a) The notional development should consist of:

(i) Ground floor shop(s);

(ii) 46 domestic premises (from 2/F to 24/F), with total saleable area (excluding balcony and utility platform) of 879 sq m;

(iii) 44 of the domestic premises (from 3/F to 24/F) would have an utility platform of saleable area 1.5 sq m each, totaling 66 sq m;

(iv) the same 44 domestic premises would also have a balcony of saleable area 2 sq m each, totaling 88 sq m; and

(v) each of the two 2/F domestic premises would have a flat roof.

(b) The unit price of various premises in the notional development would be:

(i) for G/F shop premises: average $58,600 per sq m of saleable area;

(ii) for domestic premises: average $77,870 per sq m of saleable area;

(iii) for balconies: average $77,870 per sq m of saleable area; and

(iv) for 2/F flat roof: 1/6 of the unit value of the 2/F domestic premises proper;

(c) In respect of the calculation of the saleable area of the G/F shop(s):

(i) the gross floor area (which is equal to the developable site area) is 201.6 sq m; and

(ii) to arrive at the saleable area of the G/F shop premises, an area of 35 sq m has to be deducted from the gross floor area (of 201.6 sq m) to make way for a residential lobby.

(d) To arrive at the saleable area of the flat roofs, an area of 64.21 sq m has to be deducted from the gross floor area (of 201.6 sq m) to make way for the lift lobby, common staircase and lift shaft.

(2b) Items of disagreement

98.  The experts have also set out their disagreements in their Joint Statement.[43]  These can be summarized in the table below, following the order in the statement:

Items of disagreement	Mr Chan’s estimates	Mr Lai’s estimates
(i) Time for obtaining vacant possession	1 month	6 month
(ii) Unit value of utility platform of each upper floor flat	Equal to the value of the domestic flat’s unit rate	1/6 of the value of the domestic flat’s unit rate
(iii) Saleable Area of G/F Shop excluding the common area and the duct and meter rooms (if necessary)	166.6 sq m (SA of G/F at 201.6 sq m – common area of G/F at 35 sq m)	158.6 sq m (SA of G/F at 201.6 sq m  – common area of G/F at 35 sq m and deduct duct & meter rooms estimated at 8 sq m)
(iv) Sale area of flat roof on 2/F and its unit value	137.4 sq m (SA of G/F at 201.6 sq m –  SA of 2/F at 64.21 sq m) at $12,265 per sq m (estimated by adjusting the agreed average value of domestic flat by allowing a floor level difference of 0.5% per floor)	137.04 sq m (SA of G/F at 201.6 sq m – SA of 2/F at 64.21 sq m  – 0.35 sq m) at $11,681 per sq m (estimated by adjusting the agreed average value of domestic flat by allowing a floor level difference of 1% per floor)
(v) Construction costs	$9,650 per sq m on his estimated construction floor area	$10,400 per sq m on his estimated construction floor area + $20,000 per domestic flat for the provision of home appliances
(vi) Developer’s profits	10%	15%
(vii) Construction floor area	2,045.25 sq m, being the summation of: (1) the total GFA of 1,678.6 sq m; (2) the total area of balconies and utility platforms at 154 sq m; (3) the E&M floor area of 201.6 sq m; (4) duct space of 8.05 sq m (0.35 sq m x 23  floors); and (5) the area of the water tank on the roof of 3 sq m	2,098.29 sq m, being 115% of 1,824.6 sq m which is the sum of: (1) the total plot ratio-accountable GFA of the G/F & 2/F to 24/F (1,670.6 sq m); (2) the total area of the balconies (88 sq m); and (3) the total area of the utility platforms (66 sq m)
(viii) Allowance for rental income receivable from the existing tenants of No 215	The rental income during the re-possession period is included in the valuation	No allowance is made
(ix) Construction Period	23 months	24 months

(2c) An overview of the residual valuations of the experts

99.  Since we have decided that the correct approach is to value the applicants’ land as one single site, we will only deal with the joint site valuations of Nos 213 and 215 of the experts.  Both experts are qualified professional valuation surveyors with the necessary academic and professional qualification and their expertise are not challenged.  We accept those parts of their evidence which they agree and will only focus on those areas that divide them in terms of their factual findings and/or valuation opinion.

100.  As we have summed up in the above table, there are 9 items of disagreements.  At the trial, Mr Chan revised his estimate of the value of the amalgamated site to $51,806,755 (Bundle B/229A) while Mr Lai maintained his estimate at $41,180,000 (Bundle B/230).  The differences in the values and costs inputs of their residual valuation attributable to these items are summarised in the table below:

Value / Cost  due to difference in:	Mr Chan	Mr Lai	Difference
(i) Time for obtaining Vacant Possession	-$239,412	-$1,168,802	$929,390
(ii) Domestic GDV- Utility Platform	$5,139,420	$856,548	$4,282,872
(iii) Saleable Area of G/F Shop	$9,762,760	$9,293,960	$468,800
(iv) Value of the Flat Roof on 2/F	$1,645,916	$1,600,764	$45,152
(v) Unit Construction Cost & Home Appliances for domestic units (2 factors combined)	-$20,098,712	-$22,742,216	$2,643,504
(vii) Construction Floor Area	Included in (v)	Included in (v)	--
(vi) Developer’s Profit	-$5,204,617	-$6,352,186	$1,147,569
(viii) Allowance for Rental Income	$81,540	0	$81,540
(ix) Construction Period	*	*	--

*It is complicated to estimate the differences in value and cost for item(ix).

101.  The difference in (i), (ii), (iii), (v) and (vi) accounts for about $9.5 million, representing a substantial portion of the difference of $10,626,755 between the experts’ final estimates.  The remaining difference is mainly on their estimates of the construction period (ie (ix)), which affects the period of discounting and its resulting discounting percentages for the GDV and the costs.  In addition, there are 2 relatively minor disputes: (iv) and (viii).

102.  We will now consider these items in turn.

(2d)  Disposition

(i) Time for obtaining vacant possession

103.  Mr Chan (for the applicants) opines that as monthly tenancies can be terminated by giving one month’s notice he only allows for one month as the time for obtaining vacant possession of No 215.  The applicants submit that this is sufficient as the evidence of Mrs Chung is that she and her husband were on good terms with their tenants at the material time. 

104.  On the other hand, Mr Lai (for the Director) says that, firstly, monthly tenancies may not always be terminated in a month’s time as the notice must coincide with the rental period and, secondly, it is not uncommon for tenants to hold over.  Mr Lai considers that a period of 6 months is reasonable.

105.  We opine that an average period of about 3 months is reasonable for Mr Chung, who had 5 tenants at the time (one G/F tenant and 4 upper floors domestic tenants who were all monthly tenants at the material time), to obtain vacant possession.

(b)  Value of Utility Platform

106.  Mr Chan opines that there is no difference between the value of the main living area and that of the utility platform in the residential property market.  Mr Lai on the other hand says that the value of the utility platform is only 1/6 of the value of the living area of the domestic unit because its usage is very limited, being restricted to the placing of washing machine and drying of clothes.  In this respect, he draws our attention to the restrictions stipulated in the Joint Practice Note No 2 for Authorized Persons published by the joint Government departments (Buildings Department, Lands Department and Planning Department) as the Second Package of Incentives to Promote Green and Innovative Buildings (in Bundle B/247-249).

107.  We agree with the evidence of Mr Chan.  Indeed, the photographs of the comparable development show that although most of the flats in the development contain a utility platform space and a balcony area and that there is a line delineating the two different spaces, they form part of the same structure in front of the main living area of the flats.  There is also not much difference in appearance looking from the outside, other than the design of the parapet railings.  We also agree with the submission of the applicants that although the above said Practice Note states that one of the criteria for exempting utility platforms for GFA and SC calculations is that “[i]t faces a well ventilated space for clothes drying purposes”, it only sets down where the utility platform should be located but not how it can be used.  There is no restriction in its use as alleged by Mr Lai who actually agrees that in reality, a balcony would also be used for drying clothes.

108.  We therefore agree with the valuation opinion of Mr Chan that the unit value of the utility platform shall be the same as the unit value of the balcony area which in turn is the same as the unit value of the living areas of the domestic units.  Since the overall average unit value for the domestic flats in the proposed development has been agreed between the two experts at $77,870 per sq m of saleable area, we shall adopt this figure in the residual valuation.

(iii) Saleable Area of G/F shop

109.  Mr Chan opines that for a small scale development such as the subject development, the size of the cable duct room is insignificant.  Its area should already be reflected in the ground floor’s common area of 35 sq m (ie covering the domestic entrance lobby and the staircase areas) that has been agreed between the experts.  Besides, the whole of the 1/F has been set aside for the E&M facilities of the proposed development so that less room is needed for the same on the ground floor.  

110.  On the other hand, Mr Lai has a different opinion.  He opines that an additional area of 8 sq m for the duct and meter area has to be allowed for on the G/F of the proposed development in arriving at the saleable area of the G/F shop.  He shows that 5 features are allowed for in the G/F plan of Urbana Lofts (at Bundle B/233) which shows that E&M facilities are still required in the G/F commercial area despite the existence of an E&M floor.

111.  The applicants submit that: (i) the internal area of the duct does not exceed 1 sq m and therefore an 8 sq m duct room on the G/F as opined by Mr Lai is excessive; (ii) a transformer room may not be required for such a small development and even if required, China Light & Power’s standard requirement for a cable duct for a transformer room is only 3 sq m; and (iii) cable ducts are commonly located in the common areas.  Therefore, the cable ducts for the proposed development could well be accommodated within the common area and does not require its own separate area as opined by Mr Chan.  On the ground floor plan of Urbana Lofts, a comparable development, produced by Mr Lai, the applicants submit that: (i) Mr Lai is not even certain as to whether the “Meter Rm” stated thereon is for the duplex shops and not the residential areas; (ii) another architect may use a different design, use less space for the 5 features and thereby have more saleable area for the shops; (iii) the comparable development Urbana Lofts is not comparable to the proposed hypothetical development on the site because there is only one flat per floor; and (iv) the other comparable developments Hey Home and The Prominence are better comparables but their G/F approved plans have not been produced as evidence.

112.  The Director replies that although, as Mr Lai has fairly admitted, different architects may have different design, and neither Mr Chan nor Mr Lai is an architect, Urbana Lofts serves to highlight the fallacy of Mr Chan’s assumption.

113.  After considering the evidence of Mr Chan and Mr Lai, we prefer the opinion of Mr Chan.  Therefore, we determine the saleable area of the shops in the proposed development to be 166.6 sq m and the GDV of the proposed development should be calculated using this saleable area.

(iv) Saleable Area of Flat Roof on 2/F and its Value

114.  It is rather odd that although the experts have agreed on the average GDV unit rate for the upper floor domestic premises, they cannot agree on the relatively small value for the flat roof area on 2/F as they cannot agree on (i) the unit value of the 2/F domestic premises proper; and (ii) the number of floor differences between the “mid-floor” and the 2/F. However, both experts agree that (i) the unit value of the flat roof on 2/F ought to be 1/6 of the unit value of the 2/F domestic premises proper; and (ii) the unit value of the 2/F domestic premises proper ought to be derived by making adjustment to the “mid-floor” value of the domestic premises, agreed at $77,870 per sq m.

115.  We agree with the Director that as there ought to be a provision of 0.35 sq m for duct space for each domestic floor which includes the 2/F, the saleable area of the flat roof on the 2/F calculated by Mr Lai (at 137.04 sq m) should be adopted.

116.  Mr Chan adopts 13/F as the “mid-floor” (being mid-floor of the domestic premises), and a decrease of value of 0.7% per floor.  There is a total reduction of 7.7% (0.7% x 11 floors).  The unit value of the flat roof on the 2/F is therefore estimated by him at $11,979 per sq m ($77,870 per sq m x 0.923 x 1/6).  The 0.7% adopted by Mr Chan was obtained from the price lists of Hey Home and The Prominence, two new comparable developments in the market, which however have not been produced in the hearing.  The applicants have abandoned their reliance on the said price lists and are prepared to use Mr Lai’s approach of using the actual transaction prices of Hey Home. 

117.  On the other hand, Mr Lai adopts 12/F as the “mid-floor” (being mid-floor of the entire building), and a decrease of 1% per floors. There is a total reduction of 10% (1% x 10 floors).  The unit value of the flat roof on the 2/F is therefore estimated to be $11,681 per sq m ($77,870 per sq m x 0.9 x 1/6).

118.  Both experts have agreed that the actual transacted prices of the Prominence should not be used because there are some serious anomalies in the prices which do not reflect the actual market at the time.  Upon our invitation, the parties’ experts have made calculations based on actual transactions in Hey Home (Bundle B/71).  The analysis gives an average figure of 0.83% per floor.  The applicants submit that this is closer to Mr Chan’s estimate of 0.7 % which should be adopted by the tribunal.  On the other hand, the Director submits that after discarding one of the analysed percentages (0.4%) which is not in line with the other analysed percentages, the average figure is 0.9375%, which is close to Mr Lai’s proposed rate of 1%.

119.  We decide to adopt the calculated average figure of 0.9375% (ie, after discarding the odd case) to reflect the floor difference between the agreed average unit rate and the 2/F domestic premises proper.  We agree with the applicants’ calculation of the floor difference by Mr Chan so that there is a difference of 11 floors between 2/F and the mid-floor of the domestic floors (taken to be 13/F).  Therefore, the unit value of the flat roof on the 2/F is determined at $11,640 per sq m ($77,870 x [1- 0.9375% x 11] x 1/6).  Applying this to the saleable area of the flat roof at 137.04 sq m gives a figure of $1,595,146 as to be the GDV estimate of the flat roof on 2/F.

(v) Construction Costs

120.  Both experts make reference to the Rider Levett Bucknall (RLB) construction analysis, under the “High Rise: Ordinary Quality” category, which gives a price range of $8,900 per sq m to $10,400 per sq m.  Mr Chan adopts the average of the said range, at $9,650 per sq m as the unit construction cost of the proposed development.  On the other hand, Mr Lai uses the higher end figure of $10,400 as he opines that the notional development, though rather common in Hong Kong, is among the smallest viable developments which are more expensive to build because of the lack of economy of scale and the difficulty in carrying out works in small sites.  The applicants reply that the subject site although small has no difficult access or other extreme constraints.  The applicants therefore submit that without knowing the raw data from which the above range of the RLB analysis was arrived at, the most reasonable and logical course is to take the average as Mr Chan has done.  We agree to this submission and the opinion of Mr Chan.  

121.  As for the cost of provision of home appliances in the domestic units, Mr Chan opines to adopt a figure of $8,500 (at 2008 price levels) per unit while Mr Lai estimates a higher figure of $20,000 per unit. We decide to adopt the average figure of $14,250. 

(vi) Developer’s Profits

122.  Mr Chan opines the developer’s profit to be 10%, at the relevant date of valuation.  He adds that the risk is lower for small developments, like that to be developed on Nos 213 and 215.  The applicants submit that Mr Chan’s opinion is supported by the Press Release dated 6 May 2009 (Bundle B/241-242).  The change to 20% across the board was in December 2008, which was after the Asian and Global Financial Crisis when risks to the developers of making profits on sales increased because of the falling in property prices.

123.  The applicants also submit that although the hypothetical development on the subject site is a composite development, it should be treated as a “residential development” for the purpose of the Press Release as the non-domestic GFA represents only about 10% of all the GFA of the development. 

124.  On the other hand, Mr Lai opines that the developer’s profit should be estimated at 15%.  He bases his opinion on his experience, as well as the judgment of the Lands Tribunal in Charmlink Ltd v Lee Tong Hing,[44] a compulsory sale case in September 2011.  The Director also draws attention to another Lands Tribunal case of Kaisilk Development Ltd v Director of Lands[45] in which a developer’s profit of 20% was adopted for a resumption in March 2000.  The Director submits that although the figures in both cases were adopted by agreement, the parties would not have agreed upon a figure without reference to the true market situation.  Since Mr Lai’s figure is more in line with real life market situation, that should be adopted in the valuation in the present case. 

125.  After consideration of the experts’ opinion and the parties’ contention, we prefer the opinion of Mr Chan, which was based on the information of the Press Release and his experience.  Therefore, we adopt 10% discounting rate in the residual valuation.

(vii) Construction Floor Area

126.  Mr Chan initially estimates a figure of 2,034.20 sq m by adding 4 notional areas together.  In the course of cross-examination, he admitted that he had failed to take into account an area of 0.85 sq m per floor (of domestic premises) as duct space.  As a result, he revised the construction floor area to 2,042.25 sq m.  The applicants submit that Mr Chan’s method is supported by the footnote in the centre column of the RLB table (Bundle B/76).

127.  On the other hand, Mr Lai calculates the maximum GFA per plot ratio achievable, at 1,670.60 sq m and after adding the area of balconies of 88 sq m and the area of utility platforms of 66 sq m, he arrives at a total GFA of 1,824.60 sq m.  On top of this, he adds 15% to arrive at the construction floor area of 2,098.29 sq m.

128.  We agree with the applicants that there is no good reason why Mr Lai could not simply add up his estimate of the non-agreed gross floor areas with the agreed gross floor areas.  We prefer to adopt Mr Chan’s estimated figure of 2,042.25 sq m as the total construction floor area for the proposed hypothetical development on Nos 213 and 215.

(viii) Allowance for Rental Income

129.  Mr Chan points out that it is a contractual obligation of a tenant to pay rent and the contractual right of a landlord to receive rent during the tenancy period even after a notice to quit has been served.  On the other hand, Mr Lai says that the rental income from the tenant is usually waived by a landlord after the service of a notice to quit.  Although the total rental income reserved under the monthly tenancies in No 215 is modest, we agree with Mr Chan that in the valuation, one should allow for the receipt of the rental income.  However, since the period is only 3 months, we simply take the total arithmetic sum without going into the nitty-gritty of discounting for the very short period.

(ix) Construction Period

130.  Mr Chan considers that 23 months’ construction period is reasonable with the following breakdowns: Foundation – 8 months; Superstructure – 7 months; Installation of Building Services & Fitting out – 7 months; and Issue of Occupation Permit – 1 month.

131.  On the other hand, Mr Lai opines that his estimate of 24 months is reasonable taking into account the scale of the development.

132.  We prefer to accept Mr Lai’s estimate of 24 months as the approximate construction period for the proposed development.  In particular, we agree with him to give one more month allowance for the stage of issue of occupation permit.

(3)  What should be the amount of compensation payable to Highail and Mr Chung’s estate?

133.  We agree with the two experts that in the absence of suitable direct site sales comparables, the compensation on an amalgamated site basis (ie based on the market value of the joint site resumed at the relevant date of valuation of 23 February 2008) ought to be assessed by the residual method of valuation.  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 hypothetical development to be developed over the joint site.

134.  Basically, the experts use very similar formats in their residual valuation approach for the estimation of the compensation for the joint site.  They have set out their various items of agreements and disagreements in their valuations.  We agree to adopt their respective figures when these were agreed.  In case of disagreements between the two experts in various items of inputs in the residual valuation, we have dealt with them above and have also given our opinion as to the figures we shall adopt in the valuation.  Based on these findings, we have set out in the Appendix to this judgment the residual valuation in details that we shall adopt in this case.  We determine that the residual value of the land of Nos 213 and 215 to be HK$50,783,751 which is rounded to HK$50,785,000.

Conclusion

135.  By reason of the above, the compensation payable to Highail and Mr Chung’s estate in respect of their land resumed under the Ordinance and calculated on an amalgamated site basis is HK$50,785,000.