SARFORD DEVELOPMENT LTD AND OTHERS v. SUPER STAR PROPERTIES LTD AND ANOTHER

LDCS 14000/2018

[2020] HKLdT 8

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 14000 OF 2018

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J U D G M E N T

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1.  This is an application for a compulsory sale order under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”) (hereinafter referred to as “the Application”) to sell all the undivided shares of the Remaining Portion of Inland Lot No 350 and Section E of Inland Lot No 350 (hereinafter collectively referred to as “the Lots”). Erected thereon are two 5-storey tenement buildings with a common staircase (“the Buildings”) with the street address of Nos 3 & 5 St Francis Street respectively.

2.  The occupation permit for the Buildings (“OP”) was issued pursuant to the then Buildings Ordinance, 1955 on 13 October 1962 whereby permission was granted to occupy the Buildings for the following purposes:

Basement:	Offices for non-domestic use
Ground Floor:	Shops for non-domestic use
First Floor:	Two tenements for domestic use
Second Floor:	-     Do   -
Third Floor:	-     Do   -

3.  According to the Land Registry, there is a Deed of Mutual Covenant for No 3 St Francis Street dated 21 December 1963 by which five undivided shares were allotted with one share for each floor. But there is no Deed of Mutual Covenant for No 5 St Francis Street which has been 100% owned by the applicants.

4.  There is however a Deed of Mutual Grant of Right of Way dated 11 December 1962 granting the owners of Nos 3 & 5 St Francis Street mutual rights of way over along and upon the common staircase.

5.  Mr CY Li, SC (“Mr Li”), counsel for the applicants, summarized in his opening submission that at the time of the Application dated 17 July 2018, the applicants altogether owned an average of 90% of the undivided shares of the Lots subject to the remaining shares as follows:

(a)     The 1/5 undivided share held by the 1^st respondent (“R1”) allotted to the basement of No 3 St Francis Street (“No 3 Basement”)(i.e. R1’s unit);

(b)     The 1/5 undivided share held by the 2^nd respondent (“R2”) allotted to the ground floor of No 3 St Francis Street (“No 3 Ground Floor”).

6.  The interest of R2 was subsequently acquired by the applicants and the action against it was discontinued on 30 September 2019.

7.  The only remaining live respondent is R1 who is represented by Mr Bosco Cheng (“Mr Cheng”), instructed by Messrs Katherine Y W Or & Co.

Whether the Applicants are entitled to make the Application

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

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

10.  The Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice was gazette on 22 January 2010 and came into operation on 1 April 2010 (“the Notice”).  Section 3 of the Notice lowered the threshold for compulsory sale in respect of the classes of lots specified in the Notice from 90% to 80%.  Those classes of lots include: “a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (ie the date of the application under the Ordinance)”. 

11.  As the OP for the Buildings was issued on 13 October 1962 (namely, not less than 50 years before the date of the Application), the Notice is applicable and the threshold percentage should be 80%.

12.  At the time of the filing of the Application, the applicants owned an average of 90% of the undivided shares of the Lots. We agree therefore that the applicants are entitled to make the Application under section 3(2)(b) of the Ordinance which may cover two or more lots—

(i)     on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings; and

(ii)     where the average of—

(a)     the percentage of the undivided shares owned by the majority owner in the lot or lots on which one of the buildings stands; and

(b)     the percentage of the undivided shares owned by the majority owner in the lot or lots on which the other of the buildings stands, is not less than the percentage specified in subsection (1).

The Issues in the Application

13.  Mr Li summarized the following issues as shall be determined by the Tribunal according to section 4 of the Ordinance:

(a)       Issues not disputed by the respondents but subject to proof by the applicants, namely: -

(i)     whether the redevelopment of the Lots is justified due to the age or state of repair of the existing development, ie the Buildings according to section 4(2)(a) of the Ordinance.

(ii) whether the applicants have satisfied the requirement under section 4(2)(b) of the Ordinance by having taken reasonable steps to acquire R1’s undivided share in the Lots on terms that are fair and reasonable.

(b)     Issues in dispute between the applicants and R1: -

(i)      what should be the market value (which is usually termed by the valuation profession as the Existing Use Value or just “EUV”) of each of the units in the Buildings as at 7 May 2018 as assessed in accordance with Part 1 of Schedule 1 to the Ordinance.

 (ii)      if an order for sale of the Lots be granted, what the redevelopment value (“RDV”) of the Lots should be for the purpose of setting the reserve price of the public auction according to clause 2 of Schedule 2 to the Ordinance.

The Evidence

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

(a)     the witness statement dated 1 February 2019 from Mr Lam Kin Chung (“Mr Lam”), representative of the applicants;

(b)     a Building Condition Survey Report by Mr Benson Wong Sai Ning (“Mr Benson Wong”) dated 1 February 2019;

(c)     a Structural Assessment Report by Mr So Kin Shing (“Mr So”) dated 1 February 2019;

(d)     the following reports by Mr Alnwick Chan (“Mr A Chan”) of Knight Frank Petty Limited (“KFP”);

(i)     the Application Report dated 27 June 2018 pursuant to Part 1 of Schedule 1 to the Ordinance;

(ii)     a supplemental EUV Report dated 1 February 2019 on the revised EUV as at 7 May 2018;

(iii)     a rebuttal report dated 13 March 2019 on the EUV report on behalf of R1 prepared by Mr Wong Tsz-choi (“Mr T Wong”) of CBRE Limited;

(iv)     a RDV report dated 12 September 2019 on RDV of the Lots as at 12 September 2019;

(v)     a supplemental report dated 26 September 2019 for further revising the EUV as at 7 May 2018 pursuant to agreement of the valuers made in Joint Statement;

(vi)     a rebuttal report dated 26 September 2019 on Mr T Wong’s RDV report.

15.  R1 relies on the following reports of Mr T Wong:

(a)       an EDV report dated 18 February 2019 on EUV as at 7 May 2018;

(b)       a rebuttal report dated 15 March 2019 on Mr A Chan’s EUV report;

(c)       a RDV report dated 13 September 2019 on RDV as at 13 September 2019;

(d)       a rebuttal report dated 27 September 2019 on Mr A Chan’s RDV report; and

(e)       a supplemental report dated 2 October 2019 for further revising the EUV as at 7 May 2018 pursuant to agreement of the valuers made in Joint Statement.

16.  Mr A Chan and Mr T Wong prepared two joint statements, one dated 29 March 2019 setting out their agreements and disagreements on EUV, followed by another dated 16 October 2019 on RDV.

17.  R1 elected not to adduce any expert evidence on the age and state of repair of the Buildings and Mr Cheng confirmed that R1 would not take issue thereon.

18.  At trial, both Mr A Chan and Mr T Wong submitted revised documents to be included in the trial bundles as Exhibits A3 & A11 and Exhibits R3 & R7 respectively.

EUV as at 7 May 2018

Assessment of G/F units

19.  On the assessment of the EUV of the ground floor units of the Buildings, the most substantial difference between the two experts lies on the choice of shop comparables:

Comp*	Address	OP Date	Transaction Date	Consideration	Saleable Area (m2)	Frontage (m)	Depth (m)	Headroom (m)	Yard (m2)	Effective Area (m2)	Unit Price (/m2)
	G/F, 3 St. Francis Street	1962			34.65	3.62	11.05	3.81	0.00	34.65
KF1	G/F (& Rear Yard, Flat Roof & Front Wall), 97 Queen’s Road East	1965	21 Jul 17	$38,000,000	43.20	3.84	11.45	5.03	5.52	44.12	$861,287
CB1					40.43 + 2.96 Toilet in Yard					42.83	$887,229
KF2	Shop A, G/F, Kelly House, 6-14 Gresson Street	1979	28 Mar 17	$38,800,000	84.76	4.74	17.91	5.01	11.23	86.63	$447,882
KF3	G/F, Shun Pont Commercial Building, 5-11 Thompson Road	1981	20 Feb 17	$18,000,000	37.87	3.08	13.67	3.37	0.00	37.87	$475,310
KF4	G/F, East Asia Mansion,  25 Hennessy Road	1966	20 Oct 16	$36,700,000	81.05	4.59	17.64	3.81	6.42	82.12	$446,907
CB2	G/F & C/L, 2 Sun Street	1974	9 Nov 15	$48,000,000	57.10	4.12	13.77	4.04	0.00	63.63	$754,361
CB3	Shops A & B, G/F, St Francis Mansion, 4 & 6 St Francis Street	1988	16 May 14	$86,000,000	130.30	11.08	11.80	4.36	0.00	130.30	$660,015
CB4	Shop A, G/F & Yard, Bo Fung Mansion, 9-11 St Francis Street	1978	21 Aug 13	$47,000,000	86.67	4.39	19.00	3.05	3.81	87.31	$538,312

* KF stands for comparables adopted by Mr A Chan while CB stands for those adopted by Mr T Wong.

20.  As shown in the table above, the two experts have only one common comparable, ie KF1 and CB1.

21.  Their agreements and disagreements on adjustments[1] are set out below:

	Mr A Chan	Mr T Wong
Time	On the basis of the Retail Price Index of the Rating and Valuation Department
Age	1% for every 10 years difference
Frontage	2% for every 1 m difference[2]
Headroom	2% for every 1 m difference
Depth	1.5% for every 1 m difference
Size	3% for every 10 sq m difference but: 0 m2 -9.99 m2: 0% 10 m2 – 19.99m2: 3% 20m2 -29.99m2: 6% … 50m2 – 50.99m2: 15%	0.3% for every 1 sq m difference[3]
Internal Condition	+/-2% for internal condition grades: good/fair/poor/very poor/unacceptable (The units are assumed in fair condition if they are not inspected)	No adjustment
Adjustment Method	Multiplication

22.  Based on the above, the two experts arrived at the following values respectively:

Mr A Chan’s Assessment[4]:

Comp	Unit Price (/m2)	Adjustments									Adj Unit Price (/m2)
		Time	Location	Age	Frontage	Side Window	Headroom	Size	Depth	Total
KF1	$861,287	5.6%	-20.0%	0.0%	0.0%	3.0%	-2.0%	0.0%	1.0%	-13.9%	$741,568
KF2	$447,882	7.5%	5.0%	-2.0%	-2.0%	3.0%	-2.0%	15.0%	10.0%	38.40%	$619,869
KF3	$475,310	6.8%	-15.0%	-2.0%	1.0%	3.0%	1.0%	0.0%	4.0%	-2.80%	$462,001
KF4	$446,907	11.2%	-15.0%	0.0%	-2.0%	3.0%	0.0%	12.0%	10.0%	17.50%	$525,116
									Average:		$587,139
							Sample Standard Deviation (σ):				$121,691

Mr T Wong’s Assessment[5]:

Comp	Unit Price (/m2)	Adjustments										Adj Unit Price (/m2)
		Time	Location	Age	Frontage	Side Window	Headroom	Size	Depth	Layout	Total
CB1	$887,229	5.6%	-10.0%	0.0%	0.0%	0.0%	-2.0%	2.0%	1.0%	0.0%	-4.05%	$851,296
CB2	$754,361	5.7%	-5.0%	-1.0%	-1.0%	0.0%	0.0%	9.0%	4.0%	0.0%	11.57%	$841,641
CB3	$660,015	14.6%	0.0%	-3.0%	-15.0%	0.0%	-1.0%	29.0%	1.0%	2.0%	24.31%	$820,465
CB4	$538,312	15.4%	0.0%	-2.0%	-2.0%	0.0%	2.0%	16.0%	12.0%	0.0%	46.87%	$790,619
										Average:		$826,005
								Sample Standard Deviation (σ):				$26,876

23.  According to the websites of the Hong Kong Tourism Board and the Pacific Place which is a regional shopping centre to the west of the vicinity, the Buildings are situated at the peripheral region of a stylish dining neighbourhood, called “Starstreet Precinct”, with design-driven lifestyle stores of special characters. Mr T Wong explained that it was for this reason he adopted comparables all within this dining neighbourhood or in proximity thereto despite their transactions were dated much earlier than the valuation date of 7 May 2018. On the other hand, Mr A Chan adopted comparables which were much farther away within the Wan Chai district.

24.  We prefer Mr T Wong’s approach because, to a certain extent, those aged comparables can be remedied by applying the index of the Rating and Valuation Department. By contrast, when the character and clientele of the comparables are completely different, any adjustment on location tends to be only subjective. We observe, for instance, that both the No3 Ground Floor and No 3 Basement are operated as a small boutique but we find no similar trades in the proximity to KF2, KF3 or KF4. Also, location is the single factor with the highest adjustment rates by Mr A Chan. Assuming all other adjustments by Mr A Chan are acceptable, the sample standard deviation is as much as $121,691[6] with the closest common comparable, ie KF1 at Queen’s Road East which is about 20 metres to the northeast of the Buildings, about 20% higher than the next one ie KF2.

25.  In Wisdom Gaining Ltd v Wisdom Light Industrial Ltd, LDCS 23000/2012 (unreported, dated 3 June 2014) the following passages in Land Compensation & Valuation Law in Hong Kongwas quoted:

“Under the comparative method the valuer is required to exercise a twofold skill. First, in finding comparables sufficiently similar to the property being valued that they require minimal adjustment. Secondly, in making any necessary adjustments…” (underline added)

“However, a careful analysis can only provide useful evidence or enable realistic adjustments to be made where the comparables are sufficiently similar to the property being valued. If the comparables are not reasonably similar, then no matter how detailed the subsequent analysis, the result may well be spurious. The point was emphasized in Lait Kit Lau Mutual Aid Committee v Commissioner of Rating and Valuation [1984] HKDCLR 31…”[7] (underline added)

26.  By reason of the above, we prefer Mr T Wong’s comparable but would accept Mr A Chan’s location adjustment of -20% for the common comparable, ie KF1/CB/.

27.  The other differences between the two experts are minor as Mr T Wong at trial abandoned his original formulae for the adjustments for size and frontage. Subject to such minor difference, we agree with Mr A Chan’s adjustment for the benefit of the side windows that No 3 Ground Floor enjoys over a side lane because the side windows with decoration or placement of advertisement thereat may provide attraction to the prospective customers[8]. Thus, if we add 3% (ie by multiplication) to Mr T Wong’s calculation, the average of the four adjusted comparables would give $826,427/sq m approximately:

Comp	Unit Price (/m2)	Adjustments										Adj Unit Price (/m2)
		Time	Location	Age	Frontage	Side Window	Headroom	Size	Depth	Layout	Total
CB1	$887,229	5.6%	-20.0%	0.0%	0.0%	3.0%	-2.0%	2.0%	1.0%	0.0%	-12.15%	$779,431
CB2	$754,361	5.7%	-5.0%	-1.0%	-1.0%	3.0%	0.0%	9.0%	4.0%	0.0%	14.91%	$866,836
CB3	$660,015	14.6%	0.0%	-3.0%	-15.0%	3.0%	-1.0%	29.0%	1.0%	2.0%	28.04%	$845,083
CB4	$538,312	15.4%	0.0%	-2.0%	-2.0%	3.0%	2.0%	16.0%	12.0%	0.0%	51.28%	$814,358
										Average:		$826,427
								Sample Standard Deviation (σ):				$38,014

28.  As a result, our assessment of the EUV on the basis of direct comparison method for No 3 Ground Floor (ie R2’s unit) would be: 34.65 sq m x $826,400/sq m = $28,634,760

Say $28,635,000

29.  As regards the EUV for the ground floor of No 5 St Francis Street (“No 5 Ground Floor”) which does not have any side window, our assessment on the basis of direct comparison method would be: 32.77 sq m x $802,400/sq m = $26,294,648      

     Say $26,295,000

30.  In the above analysis, the sale that requires the least significant or lower total adjustments (ie the absolute adjustment based on the sum of the adjustments regardless of sign) is often the best comparable. We find the total absolute adjustments for the following comparables significant:

Comparables	Absolute Adjustments
CB1	33.6%
CB2	28.7%
CB3	68.6%
CB4	52.4%

31.  We note that No 3 Ground Floor, ie R2’s unit, was then subject to a tenancy agreement dated 13 June 2017 for a term of one year from 8 August 2017 to 7 August 2018 at $30,000 per month exclusive of rates, government rent and management charges. This tenancy was extended by an agreement dated 22 June 2018 from 8 August 2018 to 31 December 2018 on the same terms and condition.

32.  We also note that when CB3 was sold on 16 May 14 for $86,000,000, it was then subject to two tenancy agreements: Shop A for a term commencing from 1 September 2011 to 31 August 2014 at $80,000 per month exclusive of rates and management charges and Shop B for a term from 16 June 2013 to 15 June 2015 at $60,000 per month exclusive of rates and management charges, that is at a yield around 1.95%.

33.  Similarly, when CB4 was sold on 21 Aug 13 for $47,000,000, it was subject to a tenancy for a fixed term from 1 May 2013 to 12 August 2015 at $73,800 exclusive of rates and management charges, representing a yield of around 1.88%. During these periods, the retail yields as published by the Rating and Valuation Department were relatively constant:

Year	Month	Retail Yield
2013	July - September	2.4
2014	April – June	2.4
2018	April – June	2.5

34.  Investment approach is no doubt an alternative means of ascertaining the market value of a property by capitalizing the rental income at an appropriate discount rate (or yield).  However, in Fan Chun Keung v The Secretary for the Environment, Transport and Works, LDMR 5/2014 (unreported, 15 July 2005), it was observed that if there were suitable sale comparables, the investment approach would not be adopted because, for instance, a minor change in the capitalization rate for the rental income would greatly affect the capital value of the property.  Nevertheless, in the review decision of this case dated 2 November 2005, it was agreed by the experts thatthis alternative investment method would at least serve as a check to the valuation conducted by the more direct sales comparison method. If we are to adopt the investment approach of valuation as a check here in the present case, we will get $18,000,000 which is some 37% lower than$28,635,000 arrived at by the direct comparison method:

Monthly Rent of the Latest Tenancy		$30,000	per month
	x	12
Annual Rent		$360,000
Yield @2%	÷	0.02
		$18,000,000

35.  We appreciate that there are no true comparables in the present case. Even the common comparable, ie KF1/CB1 is situated on a local distributor outside the Starstreet Precinct. The best comparables in terms of location are CB3 & CB4 which are however dated and have to be adjusted by applying the Retail Price Index of the Rating and Valuation Department.  In our opinion, the preparation of an index is more or less an averaging exercise and there is no guarantee that the price trend for the subject location or property necessarily follows the index which is territory wide. This is particularly the case for shop premises where a slight variation in location would lead to significant difference in value. We have also received evidence from Mr A Chan that the so-called Starstreet Precinct is losing its popularity nowadays.

36.  Whilst the direct comparison method is the primary method of valuation under usual circumstances, more than one valuation approach or method may be used to arrive at an indication of value, particularly when there are insufficient factual or observable inputs for a single method to produce a reliable conclusion. We find it appropriate to adopt the average result of the direct comparison method and the investment method as the EUV for No 3 Ground Floor, ie

($28,635,000 + $18,000,000)/2 = $23,317,500[9] which is equivalent to $672,944/sq m. This also represents a discount of about 18% from the result obtained by the direct comparison method which also indicates that the time adjustments in the direct comparison method might not be appropriate.

37.  The corresponding EUV for No 5 Ground Floorwould become $21,410,000 which is equivalent to $653,343/sq m.

Assessment of Basement Units

38.  Notwithstanding the “Office for non-domestic purposes” as specified in the OP, the parties are in agreement that the basement units in the Buildings should be valued as shops which we consider appropriate.

39.  In Wing Hong Investment Company Limited v Fung Sok Han & Others, [2016] 1 HKLRD 1, Chan J found at §235 of the judgment that there is no provision in the Buildings Ordinance to suggest that it is an offence to adopt a user of premises which is materially different from that stated in the occupation permit although the Building Authority may serve an order on the owner under section 25(2) to prohibit the intended user or require the changed user to be discontinued if it is found that the changed or intended new user is not acceptable[10].

40.  In Join Union Investment Limited v China Tree Investment Limited, [2016] 2 HKLRD 901 (“Join Union”), there was also a subdivision of the ground floor premises into four shops. The structural engineering expert in the case could not cite any example or authority where, in similar circumstances, the Government or the Building Authority took enforcement action requiring demolition of the partitioning and reinstatement of the property to its original state. Chow J was of the view that there was no real risk of enforcement by the Government or Building Authority in respect of the alleged unauthorised partitions. See §§97-103 of the judgment.

41.  At §107 of the judgment, the learned judge observed that:

“... it is apparent, form the evidence of Mr Lai, Madam Chan and Madam Shiu, that none of them considered the 2010 Building Order, or indeed any unauthorised building works in the Property, to be of any great moment. Prior to the respective purchases of the Property by the defendant (through Madam Chan) and the plaintiff (through Madam Shiu), none of them took the trouble to go inside the Property to inspect its physical conditions, or ascertain whether there might be any unauthorised building works in the Property. Even after her attention had been drawn to the 2010 Building Order, Madam Shiu did not carry out any further investigation prior to entering into a binding contract to purchase the Property, and was prepared to accept a modest sum of HK$20,000 from the defendant as sufficient compensation for the costs of complying with the 2010 Building Order. The existence of unauthorised building works in retail premises, especially in the older districts in Hong Kong, is common place and does not appear to have any significant impact on their market or capital values. These properties change hands frequently like ordinary commercial commodities, as demonstrated in the present case by the fact that the defendant (through Madam Chan) purchased the Property in September 2010 and sold it to the plaintiff (through Madam Shiu) in March 2011 for a handsome profit. It is contrary to market reality to treat the existence of an unauthorised cockloft, even of a substantial size like the present one, as constituting a title defect going to the root of title....” (emphasis added)

42.  The differences in opinion between the two experts in relation to the basement units are as follows[11]:

Basement		Mr A Chan’s opinion	Mr T Wong’s opinion
No 3 St Francis Street	Saleable Area of Core Area	43.02 sq m	40.23 sq m
	Saleable Area of Independent Toilet in yard		1.82 sq m
	Value of Basement to Ground Floor	¼	2/5
	Value of Independent Toilet in yard to Basement Proper	1/1	½
	Covered Yard	N/A	12.58 sq m
	Value of Covered Yard to Basement	N/A	1/3
	Open Yard	16.65 sq m	4.3 sq m
	Value of Open Yard to G/F	1/24
No 5 St Francis Street	Saleable Area of Core Area	43.57 sq m	39.76 sq m
	Saleable Area of Independent Toilet in yard		2.35 sq m
	Value of Basement to Ground Floor	¼	¼
	Value of Independent Toilet in yard to Ground Floor	¼	⅛
	Open Yard	16.95 sq m
	Value of Open Yard to G/F	1/24

43.  Evidence shows that the basement of No 5 St Francis Street (“No 5 Basement”) is interconnected to No 5 Ground Floor by an internal staircase. However, such similar staircase which used to connect No 3 Basement and No 3 Ground Floor had been demolished.

44.  Whilst the two experts are ready to assess the EUV of the No 5 Basement and No 5 Ground Floor together, we would not adopt any size adjustment for the reason that the basement and the ground floor units can be separately occupied.We agree with Mr T Wong that the independent toilet should be valued separately by deducting say 50% from the unit value of No 5 Basement. The toilet is situated in the covered yard and we do not consider it forming an integral part of the basement. In any event, it is small, having an area about 2.35 sq m only. Based on the ground floor unit rate of $802,400/ sq m, we arrive at the following:

Core Area	39.76 sq m	x	$200,600 /sq m	=	$7,975,856
Independent Toilet	2.35 sq m	x	$100,300 /sq m	=	$235,705
Open Yard	16.95 sq m	x	$33,433 /sq m	=	$566,689
					$8,778,250
			Say		$8,778,000

45.  We assess the value of No 5 Basement and No 5 Ground Floor together as at 7 May 2018 at: $26,295,000 + $8,778,000 =$35,073,000 on the basis of direct comparison method.

46.  Again, we note that No 5 Basement and No 5 Ground Floor as a whole was then subject to a tenancy agreement for a term of 2 years from 15 December 2017 to 14 December 2019 at $42,000 per month exclusive of rates, government rent and management charges.

47.  If we adopt the investment approach of valuation as a check, we will arrive at $25,200,000 which is some 28% lower than $35,073,000 calculated by the direct comparison method:

Monthly Rent of the Latest Tenancy		$42,000	per month
	x	12
Annual Rent		$504,000
Yield @1.9%	÷	0.02
		$25,200,000

48.  Alternatively, if we adopt $21,410,000 as EUV for the No 5 Ground Floor, ie$653,343/sq m as calculated in paragraph 37 above instead, we will arrive at the following for No 5 Basement:

Core Area	39.76 sq m	x	$163,336/sq m	=	$6,494,239
Independent Toilet	2.35 sq m	x	$81,668/sq m	=	$191,920
Open Yard	16.95 sq m	x	$27,223/sq m	=	$461,430
					$7,147,589
			Say		$7,148,000

49.  The total value of No 5 Basement and No 5 Ground Floor would be $28,558,000[12] which is less than 6% lower than the average of $25,200,000 and$35,073,000 (ie $30,136,500). This confirms that a unit rate of $653,343/sq m for No 5 Ground Floor is more appropriate.

50.  In relation to No 3 Basement, evidence shows that its rear yard  has been covered by open-ended metal frames. As can be seen from the table in paragraph 42 above, there are disagreements between Mr A Chan and Mr T Wong on the “Value of the Basement to Ground Floor” as well as the “Value of the Covered Yard to Basement” which is unauthorized.

51.  There is no dispute that this covered yard constitutes unauthorized structure under the Buildings Ordinance. Mr Benson Wong during his oral testimony confirmed that the Building Authority would accord low priority to this type of unauthorized structure in taking possible enforcement action. We observe as a matter of fact that the two Superseding Notices No UMB/5OD101/1501-705/0001 issued by the Building Authority both dated 30 October 2017 did not concern or require removal of any unauthorized structure at No 3 Basement. These notices required a prescribed inspection and, if necessary, prescribed repair of the common parts of No 3 St Francis Street only. In any event, it appears that the unauthorized structure has been present for a long time.

52.  Mr Li for the applicants also drew our attention to the Deed of Mutual Covenant for No 3 St Francis Street, clause 8 of which is as follows:

“Each of the parties hereto shall not make any structural alteration to the said building or to the floor of which he is entitled to the exclusive use, occupation and enjoyment and shall not make any alteration to any installation or fixture so as to affect or likely to affect the supply of water, electricity or gas and shall not cut or damage any of the main walls or beams or floors of the said building.”

53.  We opine that the possibility of enforcement action being taken by other owners of the building against the structural conversion of the covered yard is low given that the covered yard has been in existence for quite a number of years and that there have been five owners only for No 3 St Francis Street. It is more likely that a prospective purchaser would not totally ignore the value of the covered yard. We consider that there should be additional value attached to this unauthorized appurtenance by reason of the market reality approach as explained in Join Union, supra, Cheer Capital Limited v Unibase Investment Limited & Others, LDCS 5000 & 6000/2013 (unreported, 12 June 2015) at §§57-66, and more particularly in Gainfield Investment Limited & Others v Legend Time Limited & Others, LDCS 16000/2014 (unreported, 17 October 2016) at §§56-61. We accept the factor of 1/3^rd of the value to the basement proposed by Mr T Wong instead of the norm of 1/6^th for the open yard. In any event, as we shall see at paragraph 55 below, the difference in value is about $470,316 or a contribution of less than 5%.

54.  As regards the value of No 3 Basement when compared with the ground floor, we note that Mr A Chan applied an usual conversion factor of 1/4^th. We consider that this No 3 Basement is at street level though abutting the side lane because this portion of St Francis Street is sloping uphill. Valuers sometimes adopt a factor of 1/3^rd for the commercial accommodation on the first floor (if any) but we consider that No 3 Basement deserves a higher value because of its retail potential[13] despite fronting to a side lane. We also agree with Mr T Wong that the value of No 3 Basement to the ground floor should be higher than that of No 5 Basement as it has a separate entrance at the side lane. Having said that, we share Mr A Chan’s observation that No 3 Basement was flooded on several occasions as evident by some water stains seen on the walls during site inspection. Weighing everything in the round, we are going to adopt a conversion factor of 1/3^rd instead of Mr T Wong’s suggested factor of 2/5^th.

55.  Similarly, we would adopt $23,317,500 or $672,944/sq m[14] for the EUV of No 3 Ground Floor. The assessment of the EUV for No 3 Basement is as follows:

Core Area	40.23 sq m	x	$224,315 /sq m	=	$9,024,192
Independent Toilet	1.82 sq m	x	$112,157 /sq m	=	$204,126
Covered Yard	12.58 sq m	x	$74,772 /sq m	=	$940,632
Open Yard	4.30 sq m	x	$37,386 /sq m	=	$160,760
					$10,329,710
			say		$10,330,000

56.  As the EUV for the upper floor units have been agreed by the two experts, the total EUV of the Buildings as at 7 May 2018 is calculated as follows:

	No 3 St Francis Street	No 5 St Francis Street	Total
Basement	$10,330,000	$7,148,000
G/F	$23,317,500	$21,410,000
1/F	$5,940,226	$5,574,315
2/F	$5,818,885	$5,488,403
3/F	$5,620,008	$5,300,395
	$51,026,619	$44,921,113	$95,947,732

Conclusion on EUV

57.  To conclude, the total EUV of the Buildings is $95,947,732 and the pro rata shares of R1’s unit is 10.7663%.

Whether Redevelopment of the Lots is Justified

58.  Section 4(2) of the Ordinance provides that the Tribunal shall not make an order for sale unless it is satisfied that the "age or state of repair" of the Buildings is justified and that the applicants have taken "reasonable steps" to acquire all undivided shares of the Lots.R1 puts the applicants to strict proof as to whether redevelopment is justified.

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

60.  In Top Sail, the Tribunal said:

“23. ……, we are of the view that when the requirement of “the age” of the Buildings is considered, we should not restrict our consideration to just the physical age of the Buildings.…… we are of the view that the absence of a specific physical age in the Ordinance indicates that the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question.

24. The physical age of a building is clearly one of the considerations…... The physical conditions of a building and the amount that would be required to maintain the building are other factors that the Tribunal should consider, as they would affect the decision on whether the life of a building should be ended or prolonged. The obsolete design of a building should also be considered as it has an important impact on whether it is too old to serve a modern society.”

61.  Such an approach of exercising discretion by the Tribunal was followed in Charmlink:

“30. We areof the view that the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question. The relevant factors in the present case are that the Building is over 50 years old and it has passed its designed life. It is also obsolescent in design and not economical to maintain. All these factors point to the fact that the Building has come to an end of its physical as well as economical life. Thus, we find that redevelopment is justified on the ground of the age of the Building.

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

62.  Parties have no dispute on the applicability of the above legal principles. In any event, during the pre-trial review on 3 October 2019, Mr Cheng on behalf of R1 confirmed that R1 would not take issue about the age and state of repair of the Buildings.

63.  The applicants adduced the expert evidence of two experts namely, Mr Benson Wong who is an authorised person and a building surveyor, and Mr So who is a civil and structural engineer. Their expertise is not disputed.

64.  Mr Benson Wong, in his Building Condition Survey Report dated 1 February 2019, pointed out that the Buildings were 57 years old while the design life of a concrete building structure would be shorter than 50 years by reference to the “Code of Practice for Structural Use of Concrete 2013”. Mr Benson Wong observed that the Buildings appeared to be one of the oldest buildings in the area.

65.  On physical obsolescence, Mr Benson Wong considered the appearance of the Buildings outdated as revealed by five signs of physical obsolescence as compared with other modern buildings:

(a)      The appearance of the Buildings was just a plain looking block with monotonous elevations;

(b)     There were no architectural features and proper overhangs at roof and floor levels on the building elevations whereupon the external walls were rendered more prone to wear and tear resulting in more rapid deterioration for the external wall finishes;

(c)     The external walls of the Buildings were finished externally with cement rendering and paint work;

(d)     An overall untidy appearance was manifested from piecemeal replacements of the old windows with aluminum units of difference types and colours; and

(e)     The internal common areas were limited barely to meet the then means of escape requirements.

66.  According to Mr Benson Wong, the Buildings were suffering from ten aspects of functional obsolescence which had safety and hygiene implications as compared with modern standards:

(a)     Obsolete design and construction of the structural frames as these were made to comply with the less stringent requirements of LCC By-laws applicable more than 50 years ago which were less stringent in seven structural aspects than the current structural design standards;

(b)     The lack of essential fire service systems of a manual fire alarm system and a fire hydrant/hose reel system;

(c)     Outdated fire escape arrangements due to the lack of emergency lighting to the shops, offices and staircase as well as handrails to the staircase balusters;

(d)     Sub-standard fire resisting construction as the flat entrance doors opening to the staircase are non-conforming fire resisting doors, and the electrical installing and wirings installed in the staircase were exposed and not enclosed with fire resisting enclosures;

(e)     The lack of Barrier Free Access facilities;

(f)     The lack of a proper refuse disposal system;

(g)     The missing of equipotential bonding connections for some exposed metal components and fixtures;

(h)     The lack of a lightning protection system;

(i)     The lack of a drainage system for proper discharge of condensates from air-conditioning units installed externally; and

(j)     The lack of some commonly provided building management systems such as CCTV monitoring system and Instant Fault Signal system.

67.  In particular, Mr Benson Wong was of the view that three of the ten aspects of functional obsolescence including (a) obsolete design and construction of the structural frames, (e) lack of barrier free access facilities, and (f) lack of proper refuse disposal system could not be rectified unless the Buildings were demolished and redeveloped. Before then, the occupiers would have to remain in occupation of the Buildings which were sub-standard or even unsafe by current standards. Also, though reparable, the rendering on the external wall surfaces and the waterproofing to roof areas had already passed their respective effective lives.

68.  Mr Benson Wong concluded that the Buildings were aged as many features and facilities which would nowadays be expected to be standard provisions in a residential/commercial composite building were missing or though provided had not been improved to meet the upgraded construction standards and statutory requirements.

69.  Turning to the state of repair, Mr Benson Wong noted that there were many defects in different parts of the Buildings:

(a)      Visual inspection reveals defects on the external rendering including surface cracking in wall rendering and damp staining of paint work on rendered walls;

(b)     Infrared thermographic survey of external rendering revealed thirty four hollow spots which could cause the external cracks in the rendering to deteriorate rapidly when rainwater penetrates through cracks in the rendering and would in turn slowly push off the rendering from wall surface. Complete replacement of the external rendering was preferred.

(c)     On the main roof, the waterproof coating without surface protection was subject to rapid deterioration from direct wearing and exposure to the elements. In light of the age of the Buildings, the waterproof membranes were old and near the end of their effective lives.

(d)     On the upper roof area, the waterproof membranes to the roof of the staircase housing were found defective as evidenced by dry water marks and spalling defects on the ceiling internally.

(e)     The rendering to solid parapet walls surrounding the main roof areas was in general poor condition with worn surfaces and peeled paint noted on the inside wall surface due to weather.

(f)     The wall surfaces of the staircase housing were noted with surface crazing and staining of paintwork.

(g)     The Fire Safety Direction No BD/FS/TCB1/01103/14 dated 11 April 2014 issued by the Buildings Department required the metal gate installed to the front entrance of the Buildings to be removed.

(h)     For the stairs, there were signs of concrete spalling and paintwork staining throughout the ceilings and stair soffits in the staircase as well.

(i)     For the flats internally, there were common defects including non-fire resisting flat entrance doors, missing or defective doors to various rooms, cracking and spalling of the finished to the floors, walls and ceilings, surface crazing of plastering, blistering and peeling of the paintwork on ceilings particularly under roof or bathroom above, solid and partly broken sanitary fitments and cooking facilities in bathroom and kitchen.

(j)     For shops and offices on ground floor and basement respectively, there was an unauthorized structure constructed in the open yard of No 3 Basement which was constructed with metal sheet supported by steel frames. There are minor spallings on the ceiling of No 5 Basement whose painted ceilings and beams were in poor condition.

(k)     The water meters and stop valves were exposed and not housed inside a lockable cabinet for protection against vandalism.

(l)     CCTV survey on underground drains revealed two out of eleven of the underground pipe section were defective, one manhole and two manhole covers inspected were defective.

(m)     There were simply no fire services installations as required under the Fire Safety (Buildings) Ordinance.

70.  Mr Benson Wong opined that the Buildings were in a poor state of repair and substantial repairs were required to restore the Buildings to the tenantable standards. He estimated that the total repair costs would be $4,446,526 which represented about 56% of the cost of building the superstructure of a new similar building and that it would take about thirteen months for the repair works to complete. His conclusion was that the redevelopment of the Buildings was justified due to the state of repair and age of the Buildings.

71.  According to Mr So in his Structural Assessment Report dated 1 February 2019, at paragraph7.7, the Buildings were designed on the basis of the LCC By-Laws which were less stringent than the current standards. More particularly, the lack of consideration for robustness was the one with utmost importance because the Buildings may not possess adequate robustness against disproportionate collapse in the event of accident.

72.  Mr So identified cracks and spalling on the beams, columns and slabs both inside the inspected units and in the common areas of the Buildings. In addition to visual inspection, cover-meter survey, carbonation tests, compression tests on concrete cores, testing on the cement content and chloride test were conducted. Among other things, Mr So found that there had been carbonation of concrete and corrosion in steel reinforcement bars of the Buildings. The durability of the concrete of the columns, beams and slabs of the Buildings had been impaired. Mr So estimated that the structural repair costs would be $37,800 which did not cover the footing foundations. Although the present cost of repair might be relatively modest, such cost would escalate in the future as the extent and seriousness of the deterioration of the structural elements would increase with age.

73.  Based on his findings, Mr So concluded that the structural frames of the Buildings were in need of repair. He recommended hammer tapping works on all structural elements together with carrying out of repair works to rectify the defects. In view of the age of the Buildings, Mr So also recommended that the next cycle of such repair works should be carried out in five years’ intervals after the current repair exercise.

74.  As submitted by the applicants, no one seeks to challenge these expert evidences. R1 has not adduced any evidence, factual or expert, in relation to the “age” and “state of repair” of the Buildings. Throughout the trial, R1 has not suggested that the Buildings should be retained.  Having considered the evidence before the Tribunal, we are satisfied that redevelopment of the Buildings is justified due to the age and state of repair.

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

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

76.  The applicants have made three offers to the R1 through their solicitors to acquire the unit or interest it owns: -

Date of offer	R1’s Unit
18 May 2018*	$8,800,000
5 June 2018	$9,200,000
25 September 2019	$13,000,000

*   This offer included the advice letters of Mr A Chan setting out the relevant valuation assessments and calculations of the pro rata share of R1’s Unit.

77.  We note that the offers were all higher than the EUV of R1’s unit as at 7 May 2018 and the latest offer on 25 September 2019 was some 69% higher than the EUV of R1’s unit at $7,693,000.

78.  In Intelligent House Ltd v Chan Tung Shing & Others [2008] 4 HKC 421 where the majority owner relied on its valuation expert to formulate some of the offers, the Tribunal ruled at §334(3) that:

“… it is not disputed that Savills is a reputable firm of valuers. In our view, it is also reasonable for Intelligent House to rely on Savills’ expert opinion to formulate the purchase prices offered to the minority owners. There is also no reason for us to believe, nor is there such evidence to suggest, that the advices from Savills were not properly made based on professional valuation of the EUV and RDV of the minority owners’ units.”

79.  There is no reason for us not to believe that Knight Frank Petty Limited is a reputable firm of valuers. The applicants have successfully made offers to and acquired the interest of R2 after commencement of the Application.

80.  More importantly, the Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363 (“Capital Well”) has emphasized at §33 that:

“In making that assessment (whether an offer is reasonable) the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It does not itself arrive at any conclusion as to what figure represents the correct valuation. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question.”[15]

81.  As mentioned in paragraph13 above, R1 actually does not oppose the order for sale on the ground of the applicants not having taken reasonable steps to acquire all the undivided shares in the Lots on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance.

82.  Bearing in mind the above legal principles and on the evidence available, we are satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots including negotiating for the purchase of such of those shares as are owned by R1 on terms that are fair and reasonable.

Disputes on the estimation of the RDV of the Lots

Optimum Hypothetical Development Model

83.  At the trial, no suitable redevelopment site comparables was adduced as evidence for our consideration. Both Mr A Chan for the applicants and Mr T Wong for R1 agreed to resort to the residual valuation method in determining the RDV.  This can be done by deducting development cost (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value (“GDV”) of the completed optimum development.

84.  By their Joint Statement dated 16 October 2019, Mr T Wong agreed with Mr A Chan that the optimum hypothetical form of development on the Lots should comprise a 22-storey commercial and residential composite building over one level of electrical/mechanical basement with retail shops and plant room on G/F[16], recreational facilities on 1/F, open and covered landscaped area on 2/F and residential units on upper floors (each having 1 unit per floor). They also agreed a site area of 135.54 sq m. However, Mr T Wong held different opinion on the following matters:[17]

(a)      Area difference on G/F shop due to the different treatment of the Right-of-Way areas at the rear of the site (“the Right-of-Way areas”);

(b)      Area difference on the upper floor residential units due to the difference in retail gross floor area (“GFA”);

(c)      Private top roof be provided.

85.  The Right-of-Way areas can be explained in the deed poll plans of the Lots vide memorial numbers UB447280 and UB57972 according to which the registered site area of the Lots is 1,459 sq ft (ie approximately 135.54 sq m) and is inclusive of two Right-of-Way areas up to a total of 13.62 sq m.

86.  Situated as the rear part of the Lots, the Right-of-Way areas are currently serving as a rear lane of the Buildings. Pursuant to Regulation 23(2)(a) of the Building (Planning) Regulations (“B(P)R”) under the Buildings Ordinance, in determining the site area for the calculations of plot ratio and site coverage, no account shall be taken of any part of any street or service lane. As explained by Mr A Chan in his Valuation Report on RDV of the Lots however, according to Practice Note for Authorised Persons, Registered Structural Engineers and Registered Geotechnical Engineers (“PNAP”) No APP-73, if a private lane is in the ownership of the developer and is not specifically required for any purpose under the Buildings Ordinance for the proposed scheme, the Building Authority will give favourable consideration to including the relevant area of such lane in site coverage and plot ratio calculations[18]. Where the legal status of a lane has been clearly established by the existence of rights-of way, it would be necessary to apply formally for a modification of BPR23(2)(a).

87.  Mr A Chan further explained that since the Right-of-Way areas were within the boundary of the Lots and there was already a side lane at the eastern boundary of the Lots, the Right-of-Way areas were not required as a service lane or for any purpose under the Buildings Ordinance for the redevelopment of the Lots. Mr A Chan assumed that the modification of BPR23(2)(a) would be granted by the Building Authority and the Right-of-Way areas were therefore included in the site area for the calculations of plot ratio and site coverage. We agree with Mr A Chan’s analysis.

88.  The first “minor” difference in Mr T Wong’s hypothetical development is that the plant room in the rear can occupy the Right-of-Way areas so that the ground floor could have more retail space. With respect, we do not consider that Mr T Wong’s proposal is supported by what Lord Oliver stated in the Privy Council case of Hinge Well Co. Ltd. v. The Attorney General of Hong Kong [1988] 1 HKLR 32 at 43:

"That, however, does not provide a complete answer to the respondent's contentions because there remains the question whether the area of the former scavenging lane is a "street". The fallacy in the appellant's argument, in their Lordships' view is that it leaves out of account that there are, both as a matter of law and of fact, subsisting rights of passage in adjoining or neighbouring occupiers. It is true that these may at some time in the future be disposed of by arrangement with those entitled to them, but that has not in fact been done. Although, as indicated, the mere existence of these rights is no ground for holding that the site falls to be treated as two separate sites, their impact on the question of the area to be taken into account for density purposes still has to be considered. The philosophy which underlines regulation 23 is effectively concealed by the delphic obscurity with which the regulation is expressed, but in so far as it is possible to discern the purpose of paragraph (2) it appears to be to exclude from computation for building density purposes such part of the land as cannot be built on in fact, whilst at the same time ensuring that the developer does not suffer a disadvantage by voluntarily precluding future building on such part of the land as he is prepared to dedicate to public use.

It does not, however, follow from the "On Hing Terrace case" or from the framework of the regulation that the differentiation in regulation 23(2)(a) of a street from a service lane necessarily involves reading "street" solely in the sense of "street dedicated to the public". In their Lordships' view an area of land (not being a service lane) over which there are private rights of passage in an adjoining occupier may nevertheless remain a street within regulation 23(2)(a). The statutory definition includes, for instance, a private footpath or private way and their Lordships can see no reason for treating the area of such a way as not comprehended in the word "street" where it is used in the regulation. Unless and until the rights of adjoining occupiers are surrendered or extinguished such an area remains as unavailable for building purposes as an area dedicated for passage by the general public. There is no doubt that, prior to demolition of the houses on the site, the scavenging lane was a street within the statutory definition. Equally the existing passages to the east and west were and still are streets or parts of streets.

Their Lordships can see no reason for saying that simply because the physical landmarks which delineated the previously existing street where it passed over the appellant's land have now disappeared that which was plainly a street before has ceased to be such. No doubt if the position were that there was neither any physical delineation of a way on the ground nor any right of any person but the landowner himself to use it the area could no longer be said to be a street in the statutory sense or indeed in any sense. But so long as the rights of passage of the adjoining occupiers subsists the area is apt to serve exactly the same purpose as it was serving before, that is to say, that of providing a communicating link between the passage on the west and that on the east. It continues to be unavailable to be built on and in their Lordships' view it remains a "street" within the meaning of regulation 23(2)(a) and so has to be left out of account in computing the area of the site for purposes of regulations 20 and 21. It follows therefore that inasmuch as the appellant's plans have been based upon a site coverage and plot ratio calculated on the basis of the inclusion in the area of the site of that part of the former scavenging lane which forms part of the proposed forecourt, the Building Authority was and is entitled to refuse approval and was correct in its assertion that a modification of the Building Regulations was required under s. 42 and that it was entitled to impose conditions upon the grant of permission to build in accordance with the present plans." (underline added)

89.  As we find that no building or structure can be erected on Right-of-Way areas, this resolves the “Area differences” suggested by Mr T Wong. The only extant difference in opinion lies on whether a private top roof can be provided for sale.

90.  According to Mr A Chan’s original coverage calculation, the gross floor area of each upper residential floor would be about 51.78 sq m or a coverage of 39.5% and the saleable area of each floor would be about 29.78 sq m. Taking into account the space for water tank, lift shaft etc, we agree with Mr T Wong that the area left would be about 20 sq m which we consider still acceptable. However, we agree with Mr A Chan’s fallback position that the conversion factor for this roof area should be 1/8 of the top floor.

91.  On the other hand, having considered Mr A Chan’s schematic drawing for the hypothetical development, we consider that the entrance to the residential floors can be located on the side lane, like the side entrance to No 3 Basement as observed at the time of the site inspection, so that more ground floor shop space would be available. Our assessment of the RDV will therefore be based on this revised concept on the basis of which Mr A Chan has prepared a revised proposal for redevelopment[19].

92.  The table below sets out Mr A Chan’s and Mr T Wong’s agreement and disagreement on various items:

	Mr A Chan	Mr T Wong
Demolition Cost for the Buildings	$878,460
Demolition Period	0.5 year
Construction Cost	$35,813/m2	$35,810/m2
Construction Period	2 years
Professional Fee	6%
Developer’s Profit	15% on Construction/Demolition cost and Professional fee
Marketing Cost/Agency Fee	3%
Interest Rate	5.125% pa	4.0% pa
Land Value (based on the revised hypothetical development proposal)	$111,100,000	$162,000,000
Accommodation Value	$100,034/m2	$144,931/m2

Assessment of the Value for the hypothetical shop units on the ground floor

93.  Mr A Chan and Mr T Wong rely on their corresponding EUV comparables on assessment of the hypothetical shop units on the ground floor. As their comparables are different in terms of location and time, we start with the same $672,944/sq m[20] without any time adjustment[21].

94.  Because the frontage of the hypothetical shop becomes longer and enjoys a return frontage, we follow Mr A Chan’s proposal of +5%, ie $706,591/sq m plus say, 10% for the age factor and arrive at $777,250/sq m. We note that this $777,250/sq m is very close to Mr A Chan’s revised assessment of $799,000/sq m as attached to Appendix 6 of the applicants’ closing submission. We therefore adopt $799,000/sq m as the value of the hypothetical units on the ground floor.

Assessment of the Value for U/F (Residential)

95.  As regards the residential comparables, Mr A Chan relies on the following transactions at No 1 Star Street and York Place:

	Unit	Actual Floor	Transaction Date	Price	Saleable Area (m2)	Unit Price	Headroom (m)	View
No 1 Star Street, being situated at No 1 Star Street (Year built: 2001)
1.	Unit B on 41/F	38/F	13 Jul 19	$9,100,000	28.80	$315,972	3.15	Open View
2.	Unit E on 9/F	10/F	10 Apr 19	$14,200,000	49.98	$284,114	3.00	Building View
3.	Unit C on 27/F	25/F	7 Apr 19	$13,900,000	49.05	$283,384	3.00	Open View
4.	Unit B on 9/F	10/F	18 Oct 18	$7,500,000	28.80	$260,417	3.00	Building View
York Place, being situated at No 22 Johnston Road (Year built: 2009)
1.	Unit A on 26/F	24/F	17 Jul 19	$18,000,000	63.64	$282,841	3.15	Open View
2.	Unit A on 39/F	36/F	10 Jul 19	$21,400,000	63.64	$336,266	3.15	Open View
3.	Unit B on 17/F	16/F	8 Mar 19	$12,300,000	46.08	$266,927	3.15	Building View
4.	Unit C on 16/F	15/F	4 Mar 19	$9,400,000	38.00	$249,474	3.15	Building View
5.	Unit A on 7/F	7/F	4 Jan 19	$14,860,000	63.55	$233,832	3.15	Building View

96.  On the other hand, Mr T Wong relies on the following transactions:

	Unit	Transaction Date	Price	Saleable Area (m2)	Unit Price	Headroom (m)	View
L’Wanchai, being situated at No 109 Wan Chai Road (Year built: 2017)
1.	Unit B on 25/F	17 Jul 19	$10,500,000	29.37	$357,508	3.10	NA
2.	Unit C on 30/F	17 Jul 19	$11,700,000	29.37	$398,366	3.10	NA
3.	Unit C on 23/F	7 Nov 18	$9,330,000	29.37	$317,671	3.10	NA
The Avenue, being situated at No 200 Queen’s Road East (Year built: 2015)
1.	Unit N on 7/F, Tower 2	11 Aug 19	$8,700,000	32.12	$270,859	3.50	NA
2.	Unit L on 17/F, Tower 2	27 Jun 19	$8,800,000	31.03	$283,597	3.50	NA
3.	Unit G on 18/F, Tower 3	30 Apr 19	$9,200,000	32.12	$286,426	3.50	NA
4.	Unit R on 7/F, Tower 2	27 Mar 19	$8,760,000	31.58	$277,391	3.50	NA
5.	Unit R on 37/F, Tower 2	22 Feb 19	$9,000,000	31.58	$284,991	3.50	NA
6.	Unit L on 6/F, Tower 2	23 Feb 19	$8,300,000	31.03	$267,483	3.50	NA
7.	Unit L on 11/F, Tower 2	16 Nov 18	$7,900,000	31.03	$254,592	3.50	NA
No 1 Star Street, being situated at No 1 Star Street (Year built: 2001)
1.	Unit B on 41/F	13 Jul 19	$9,100,000	63.64	$315,972	3.15	NA
2.	Unit B on 9/F	18 Oct 18	$7,500,000	63.64	$260,417	3.00	NA

97.  As illustrated in the above, save the two comparables in No 1 Star Street, the two valuation experts again adopt different comparables. Mr A Chan challenged Mr T Wong’s comparables being at locations of completely different character and enjoying facilities (the units in The Avenue specifically referred to) which are lacking in the hypothetical development or No 1 Star Street. By contrast, Mr T Wong challenged Mr A Chan’s comparables being too large in size when compared with the units in the hypothetical development.

98.  While the comments from both sides appear valid, we would prefer Mr A Chan’s comparables because in the process of valuation, location is the utmost important factor. Having said that, we prefer the -2% adjustment for the environment factor as suggested by Mr T Wong for comparables in No 1 Star Street to the -5% adjustment for location suggested by Mr A Chan.

99.  Another difference in opinion between the two expert is lies on whether adjustment should be made to “exclusiveness”. Mr A Chan did not make such adjustment whereas Mr T Wong made adjustment on the basis that only one unit on each floor would provide exclusiveness. We find it reasonable to adopt 3% for such adjustment.

100.  Also, we do not agree to the -5% layout adjustment suggested by Mr A Chan for the so-called inefficient use of the space beside the lift shaft and the potential difference between the actual design and the schematic design which, in our view, is obviously excessive. Taking into consideration the photos taken of the decorative design of the former occupier of No 3 Basement on the wall of the side lane[22], we do not agree with Mr A Chan that having an entrance onto the side lane would necessarily adversely affect the value of the residential units. Other than that, we accept all the adjustments proposed by Mr A Chan which are set out as follow:

	Reference Unit: Unit on 12/F of hypothetical development  with saleable area of 30 sq m.
Unit	Unit Price (/m2)	Adjustments									Adj Unit Price (/m2)
		Time	Location	Building Age*	Floor	Size	View	Lift Facilities	Exclusive-ness	Total
	No 1 Star Street, being situated at No 1 Star Street (Year built: 2001)
Unit B on 41/F	$315,972	0.0%	-2.0%	18.0%	-13.0%	0.0%	-5.0%	-2.0%	3.0%	-3.5%	$304,913
Unit E on 9/F	$284,114	0.6%	-2.0%	18.0%	1.0%	2.0%	0.0%	-2.0%	3.0%	17.5%	$333,834
Unit C on 27/F	$283,384	0.6%	-2.0%	18.0%	-6.5%	2.0%	-5.0%	-2.0%	3.0%	3.3%	$292,736
Unit B on 9/F	$260,417	4.1%	-2.0%	18.0%	1.0%	0.0%	0.0%	-2.0%	3.0%	19.2%	$310,417
	York Place, being situated at No 22 Johnston Road (Year built: 2009)
Unit A on 26/F	$282,841	0.0%	5.0%	10.0%	-6.0%	6.0%	-5.0%	-2.0%	3.0%	7.1%	$302,923
Unit A on 39/F	$336,266	0.0%	5.0%	10.0%	-12.0%	6.0%	-5.0%	-2.0%	3.0%	0.3%	$337,275
Unit B on 17/F	$266,927	4.2%	5.0%	10.0%	-2.0%	2.0%	0.0%	-2.0%	3.0%	17.9%	$314,707
Unit C on 16/F	$249,474	4.2%	5.0%	10.0%	-1.5%	2.0%	0.0%	-2.0%	3.0%	18.5%	$295,627
Unit A on 7/F	$233,832	9.4%	5.0%	10.0%	2.5%	6.0%	0.0%	-2.0%	3.0%	34.5%	$314,504
										Average:	$311,882
										Say:	$312,000

* In addition to an adjustment of 1% per annum for difference in building age, Mr T Wong has applied an upward adjustment of 10% to reflect the market preference to new flats. In the absence of analyst whatsoever, we agree with Mr A Chan that such adjustment is not warranted as buyers may only be willing to pay a premium on new flats under a bullish market which is not the case in the present moment in time.

101.  A calculation of the gross development value of the residential portion is set out at Appendix I to this judgment.

Construction Cost

102.  From the table in paragraph 92 above, the difference between the two experts is only marginal. We would simply adopt $35,810/m² under this head.

Interest Rate

103.  Mr A Chan suggested that because the Lots were small in size, the hypothetical development would be small in scale which might only attract small developers whose cost of money would be about the best lending rate at 5.125% per annum. But when Mr Lam Kin Chung, the authorized representative of the applicants, was cross-examined by Mr Cheng, Mr Lam could not deny that the applicants’ cost of borrowing could be at a lower rate of 4% per annum. We would therefore adopt 4% per annum as the discount rate.

Finding on RDV and the Reserve Price

104.  Subject to what we have stated above, we shall follow Mr A Chan’s residual valuation model as contained at page 9 of Exhibit A11 on the determination of the RDV which is reproduced at Appendix II to this judgment. We assess the land value of the Lots at $131,690,000 (ie accommodation value of $118,573/m²).

105.  We shall adopt the estimated RDV of $131,690,000 as the Reserve Price for the auction of the Lots.

Other Incidental Matters

106.  The applicants propose to appoint Mr Andy Ngan and Ms Jonny Ma, being consultant and partner of Messrs F Zimmern & Co, Solicitors & Notaries, as the sale trustees.  Having considered the information on their background and experience as set out in their letter dated 14 October 2019, we are satisfied that they are proper persons to be appointed as the trustees to discharge the duties imposed on them under the Ordinance.  The remuneration package proposed in the said letter appears to be reasonable.

107.  The applicants have prepared a set of draft Particulars and Conditions of Sale of the Lots[23].  Subject to any amendment that may become necessary as a result of our ruling on the arrangement of auction above, the particulars and conditions of sale of the Lots by public auction submitted by the applicants are considered reasonable.

Order

108.  This Tribunal make the following orders:

(1)     This Tribunal is satisfied that the redevelopment of the Lots is justified due to the “age” and “state of repair” of the Buildings and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lots including those of the 1^st respondent;

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

(3)     Mr. Andy Ngan and Ms Jonny Ma of Messrs F Zimmern & Co, Solicitors & Notaries, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to sale of the Lots and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs F Zimmern & Co, Solicitors & Notaries dated 14 October 2019.

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

(i)     The sale of the Lots be on the particulars and conditions of sale substantially the same as those in the draft Particulars and Conditions of Sale to be initialed and approved by the Tribunal.

(ii)     The reserve price be set at $131,690,000.

(iii)     Subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Lots or its successor in title, the redevelopment of the Lots and the Buildings shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lots shall become the owner of the Lots.

(iv)     Liberty to the applicants, the 1^st respondent and the Trustees to apply to the Tribunal for further direction(s) under the Ordinance.

Costs

109.  Initially, Mr Li submits that in accordance with the compensation approach as determined by the Court of Appeal in Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 534, the applicants do not object to paying the respondent’s costs in these proceedings.

110.  In his closing submission, however, Mr Li complained about Mr T Wong’s adopting complicated formulae for adjusting the frontage and sizes of shop comparables. See the footnotes 2 & 3 in paragraph21 above. Mr Li pointed out that only on the 3^rd day of the trial, Mr T Wong came to abandon his formulae and adopted Mr A Chan’s formulae. Mr Li opined that as a professional valuer, Mr T Wong should have considered the usual approach of the Tribunal before he consciously came to devise his own formula. He could not have come to a view only at the time of the trial that it would be better to follow Mr A Chan’s formula and then abandon his own. Mr. Li added that although Mr T Wong’s original formulae had not been explained or tested because it had been abandoned, it had been said in various cases that there could be double counting if one adjusted by frontage and then frontage to depth. Mr Li referred to Main Light Ltd v Time Richie Investment Ltd, LDCS 3000 of 2013 (unreported, dated 31 October 2014) in which the Lands Tribunal had the following comments:

“20. The adjustments for layout of shop particularly by frontage to depth ratio have recently been the subject matter of comments by differently constituted panels of the tribunal in Supergoal Investment Limited v Five F Ming House Limited and Others [2014] 1 HKLRD286 and Main Light Limited v Chow Chiao Shing Tseng and Others. In the latter case Mr Law was also the valuation expert.

21. In both cases, the tribunal discussed the limitations of adopting a mechanical adjustment for frontage to depth ratio. As rightly pointed out by Ms Lan at the hearing, frontage to depth ratio only show the relativity of these two factors but such ratio cannot always reflect the impact which each factor may have on the valuation of a particular premises.

22. We consider that there was double counting of frontage adjustment when adjustments for both frontage and frontage to depth ratio were made as Mr Law did in his valuation. Although Mr Law has provided another assessment to the tribunal without adjustment for frontage, Mr Law has still used the frontage to depth ratio to do the adjustment in his supplemental assessment despite its inherent limitation as correctly observed by counsel in the preceding paragraph.

23. On the other hand, Mr Law has at the same time applied a rather substantial adjustment for quantum which, we consider, has balanced off certain effect of the frontage to depth ratio adjustment. In this regard, we agree with the comments in Supergoal Investment Limited that in respect of the same factor it is inappropriate to adopt two or more subjective adjustments simultaneously having the effect of compensating each other. These simultaneous adjustments would present a picture of false accuracy and mask up errors.

24. Conceptually, Mr Law has not been able to explain the rationale of his adjustments satisfactorily. Although these proceedings are not contested, we do not find any merits and justifications to apply an adjustment for frontage to depth ratio (with or without an additional adjustment for frontage) and a rather substantial adjustment for quantum at the same time. We consider a straight forward method could be used for the valuation of shop in the present case. Appropriate adjustments in respect of frontage, depth and quantum should be made in a manner which should not have the effect of doubling the adjustment or compensating each other.

25.      In the present case, this tribunal considers adjustments for frontage and depth should be made separately without any frontage to depth ratio adjustment. Further, only a moderate adjustment for quantum is necessary.”

111.  Mr Li cited as an example the adjustment of CB3 which consisted of two shops with a saleable area of 130.30 sq m which is more than four times of the reference unit. In the original size adjustment, Mr T Wong gave a size adjustment of 8.5% only. But with the abandonment of his formula and adoption of Mr A Chan’s formula, the adjustment then became a drastic 29%. For the adjustment of CB4, Mr T Wong initially applied a frontage adjustment of 27% but with the adoption of Mr A Chan’s formula, the adjustment became -2%.

112.  In short, Mr Li suggested that the change of stance of Mr T Wong came too late because the applicants or Mr A Chan already spent unnecessary costs on investigating the complicated formulae which shall not be borne by the applicants.

113.  With respect to Mr Li and, having been told by Mr T Wong that he changed his stance in order to save trial time, we cannot come to any view as to whether Mr T Wong’s original formulae is necessarily wrong as he explained he found similar formula having been adopted in a certain government department. The courts or even this Tribunal have often emphasized that valuation is more an art than science. We are cautious not to jump to a conclusion that a particular formula for adjustment is correct because there may be no such universal formula in the real world when every person in the market is applying his own formula for adjustment expressly or subconsciously given that each property is unique. For instance, in the present valuation of the EUV of the ground floor of the Buildings, we found the index published by the Rating and Valuation department not applicable. Even though a formula can be true for a particular time, it may no longer be the case when market conditions change. An illustriave example is when some economists designed a formula for calculating the prices of options and by which they won the Nobel price[24], they however lost a fortune when they applied such a formula or model in practice[25].

114.  Therefore, although it appears that the Tribunal tends to follow a particular formula on adjustments, in reality the Tribunal still retains flexibility in applying different formulae based on the evidence available and the facts and circumstances of each and every case.

115.  Mr Li also complained about Mr T Wong’s making no adjustment when he accepted that the internal condition of No 5 Ground Floor was good but that of No 3 Ground Floor was only fair. Mr T Wong’s explanation was that there was no need to consider internal condition of shops as prospective shop operators would do their own decoration or renovation. We agree with Mr T Wong to a certain extent following the market reality principle though we must clarify that this may not be true for domestic premises. In the present case, we allow a downward adjustment or allowance for No 3 Ground Floor only because we agree with Mr A Chan’s observation of sign of flooding or dampness which is a structural issue that may not be easily remedied.

116.  In any event, we prefer Mr T Wong’s choice of shop comparables to those suggested by Mr A Chan.

117.  As regards Mr Li’s further suggestion that R1 was unreasonable to ask for an exorbitant price of $28 million, we would refer to §§37-38 of Purfleet Farms Ltd v Secretary of State for Transport [2003] 1 P & CR 20 which was cited by the Court of Appeal in Good Faith, supra, as follows:

“37 Turning to the question of expert evidence, if the amount of the “exaggerated” claim is based on the valuation, opinion and evidence of the claimant’s expert witness, it will rarely be appropriate in my view to make an adverse costs order against the successful claimant.  Valuation is an inexact science.  In any case where, by reason of the nature or features of the subject site and/or the state of the market in respect of sites for similar development, there is no close or obvious comparable available, there is bound to be legitimate room for argument and difference of opinion as to the validity or usefulness of a proffered comparable, whether by reason of its location, nature or proposed use.  If the Tribunal concludes that, on examination, or as a result of argument, the comparison between the comparable relied on and the subject site is inapt or unhelpful, that should not ordinarily invite a penalty in costs on the grounds that its assertion or resultant discussion has taken up the time of the Tribunal unnecessarily.

38 In my view, Mr Barnes is correct when he submits that, in such cases, disallowance of a proportion of the claimant’s costs will usually only be justified where the Tribunal is satisfied that (a) no competent valuer could reasonably have regarded the comparable as of real relevance or assistance in the valuation exercise; (b) as a result of its introduction and discussion, a significant amount of the Tribunal’s time has been wasted and the proceedings unduly prolonged; (c) no equivalent or near equivalent proportion of the proceedings has been spent dealing with issues unreasonably and unsuccessfully raised by the respondent; (d) the amount or proportion of the costs disallowed is proportionate to the time wasted.”

118.  Having considered the above, we do not consider it justifiable to penalize R1 on cost. Accordingly, we make the usual order that the applicants do pay the respondent’s costs in these proceedings on High Court scale with certificate for counsel, including any costs reserved, to be taxed if not agreed.

[1] See Bundle D1/159.

[2] Prior to trial, Mr T Wong’s adjustment for frontage was based on the difference in ratings as reflected by the hypothetical depths (“HD” calculated as Saleable Area of the Shop / Frontage) of the subject and sample units. The adjustment is RSU/RSA-1 where RSU and RSA representing the rating (in the nearest integer) of the subject and sample units respectively.

The rating is calculated as follows:

Shops with hypothetical depth ˂ 5 metres : 100

Shops with hypothetical depth ˃ 15 metres :

(5 *100%+10*75% + (HD-15)*50%)/HD

Shops with hypothetical depth between 5 metres and 15 metres :

((5 *100% + (HD-5)*(100%+{[10-(HD-5)]/10*50% +50%})/2)/HD

[3]Prior to trial, Mr T Wong’s adjustment for size was based on a coefficient formula

(Sa / Su) ^ 0.06 – 1

where Sa = Effective Area of Comparable Unit

Su = Effective Area of Sample Unit

[4] See Exhibit A3, page 2

[5] See Exhibit R3, page 2.

[6] That is at a confidence level about 95%, the range of the adjusted values would lie between $343,757 and $830,520, ie mean +/- 2σ.

[7] See §132 of the judgment.

[8] See Bundle A/30.

[9] This is higher than Mr A Cham’s assessment on the basis of direct comparison method at $20,339,550.

[10] See also Chan Sing Hoi Enterprises Limited v Vykon Media Technology Limited, CACV 324/2007 (unreported, 4 July 2008) at §§11-12.

[11] See Bundle D1/154 and 155.

[12] This is higher than Mr A Chan’s assessment on the basis of direct comparison method at $24,100,038.

[13] It is undisputed between the parties that No 3 Basement was occupied as a tattoo shop before it was vacated.

[14] See §34 above.

[15] The Court of Final Appeal stated further at §36 of the judgment that: “What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site.”

[16] See Exhibit A4.

[17] See Bundle D2/430.

[18] See Bundle D1/170.

[19] That is page 9 of Exhibit A11.

[20] That is the unit rate found for G/F, No 3 St Francis Street as at 7 May 2018.

[21] The Retail Price index as at 7 May 2018 is 588.9 and that as at today is 523.7 but we find the retail price around the Starstreet Precinct did not follow the index.

[22] See Bundle A/30.

[23] See Bundle C/150-175.

[24] The Black-Scholes Option Pricing Model.

[25]Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management, Random House Trade Paperbacks, 2001; Nicholas Dunbar, Inventing Money, Wiley, 2001.