BEST EPOCH HOLDINGS LTD v. KAM CHAN & CO, LTD

LDCS 21000/2011

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 21000 OF 2011

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BETWEEN

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JUDGMENT

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Background

1.  This is an application for an order for sale of all the undivided shares in firstly Section D of Sub-Section 1 of Section A of Inland Lot No. 1946 and The Remaining Portion of Sub-Section 3 of Section A of Inland Lot No. 1946, known as No. 103 Caroline Hill Road, Hong Kong, and secondly Section A of Sub-Section 3 of Section A of Inland Lot No. 1946, known as No. 105 Caroline Hill Road, Hong Kong, (collectively referred to as “the Lots”) for the purposes of the redevelopment of the Lots pursuant to s. 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”).

2.  There is erected on the Lots a pair of 4-storey domestic buildings with basement (collectively referred to as “the Building”) served by two common staircases erected on the Lots.   The building at No. 103 Caroline Hill Road has 9 equal undivided shares.  Likewise, the building at No. 105 Caroline Hill Road has 9 equal undivided shares. 

3.  Originally there are 5 units at No. 103 Caroline Hill Road.  Subsequently the 1st Floor is sub-divided into 2 portions, namely the Front Portion and the Rear Portion.  Similarly, originally there are 5 units at No. 105 Caroline Hill Road.  Subsequently the 2nd Floor is sub-divided into 2 portions, namely the Front Portion and the Rear Portion.  Altogether there are now 12 units in the Building.

4.  The Applicant commenced the present proceedings on 14 July 2011.  At that time, The Applicant owns all the undivided shares at No. 103 Caroline Hill Road.  The Applicant also owns all the undivided shares at No. 105 Caroline Hill Road save and except the two shares of the Ground Floor of No. 105 Caroline Hill Road which is owned by the Respondent.  The Applicant’s ownership is 7 out of the 9 shares.  

5.  Thus, the Applicant owns together 16 shares of the total 18 shares in the Lots.  The average of the percentage of the undivided shares owned by the Applicant in the Lots is 88.89%.  The Applicant contends that it is entitled to make the present application by virtue of   s. 3(2) of the Ordinance.

6.  Originally the Respondent filed a Notice of Opposition dated 29 July 2011.  By Order of the Tribunal made on 5 February 2013, leave was granted to the Respondent to withdraw the Notice of Opposition and be excused from attending the trial of the application.

7.  Before the hearing, the solicitors for the Applicant have duly served all the papers of the Application to the solicitors of the Respondent.  The Respondent did not file any response or expert report and was absent at the hearing. 

8.  In view of the absence of the Respondent, Mr C.Y. Li SC, Counsel for the Applicant, simply calls the Applicant’s witnesses to confirm their evidence.  The Applicant contends that all the requirements of the Ordinance have been satisfied and asks for an order for sale in terms of the draft order submitted.  The Applicant also asks there be no order as to costs.

Section 3 of the Ordinance – Ownership of the Applicant

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

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

10.  Pursuant to Section 3(5) of the Ordinance, the notice was gazetted on 22 January 2010 and came into operation on 1 April 2010.  Section 3 of the Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice ("the Notice"), Cap. 545A of the Laws of Hong Kong, specifies 80% as the percentage required for the purpose of Section 3(1) of the Ordinance in respect of a lot that belongs to any class of lot specified in Section 4 of the Notice.  Section 4(1)(b) of the Notice specifies one of the classes for the purposes of Section 3, as "a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (which is the date of the application).  The occupation permit of the Building was issued on 20 September 1954, which is more than 56 years before the date of application.  The Building therefore is covered by the Notice and the applicable percentage is 80%.

11.  As at the date of application, the average of the percentage of the undivided shares owned by the Applicant in the Lots is 88.89%.    The Applicant is clearly entitled to make the application. 

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

12.  In determining the Applicant’s application, Section 4(2) of the Ordinance requires me not to make an order for sale unless, after hearing the objections, if any, of the Respondent, I am satisfied that:

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

(b) the Applicant has taken reasonable steps to acquire all the undivided shares in the Lots (including negotiating for the purchase of the undivided share owned by the  Respondent on terms that are fair and reasonable).

13.  Mr Li submits that the relevant tests on age and state of repair were set out in Top Sail International Ltd v. Cheng Kai Ming, executor of the estate of Chan Hue also known as Chan Sum Hiu, deceased (LDCS 18000/2010, 15 November 2011, unreported).  Mr. Li further submits that the tests were also applied recently in the decisions of this Tribunal in Champion Success Limited & Another v. Leung Lai Lai the administratrix of the estate of Lai Yin King Deceased & Others (LDCS 41000/2011, 16 January 2013, unreported), and Eversound Investments Limited v. Lee Yuk Fun & Others (LDCS 4000/2012, 17 April 2013, unreported)  I am of the view that "the age" and "state of repair" are two separate grounds and even though there may be considerations common to both, I should still consider them separately.  Since Mr Li relies primarily on "state of repair", I shall deal with this ground first.

State of Repair of the Building

14.  The Applicant’s expert, Mr LAU Kin Kwok of Knight Frank Petty Limited ("Mr Lau"), in his Condition Survey Report, gives his opinion, inter alia, that:

External Walls of the Building

15.  Lots of unauthorized building works (“UBWs”) are found on external walls. Major UBWs involve enclosed approved balconies, an abandoned metal frame and a dilapidated metal frame for air conditioning units. The minor UBWs include air-conditioner supporting frames, drying racks, shop front extension, formation of wall opening in staircase hood and metal door sliding and swinging outward within staircase.

16.  The condition of the external walls is generally fair. Defects identified are as follows:

(a) Concrete spalling with and without exposed reinforcement.

(b) Loose render.

(c) Hairline cracks on external walls, window ledges and concrete canopy.

(d) Water stains and mould growth.

(e) Peeling paint.

(f) Unplanned vegetation growth.

Most of them are due to aging, weathering, and lack of proper maintenance.

17.  A thermographic survey has been carried out by Building Diagnostic Consultants Ltd (" BDC ") on the external walls. Based on the result of the survey, 101 numbers of delamination detected are of Severity Index I, which indicates minor delamination with routine monitoring recommended. Although the delamination detected is minor, attention is still drawn to the fact that there is a number of loose rendering on the north-eastern, western and north-western elevations and the open yard, posing a potential threat to the public.  In order to maintain the external walls in a tenantable condition, complete replacement of the external wall rendering and repainting should be carried out.

Upper Roof

18.  The upper roof comprises the approved roof of a laundry shed, an unauthorized shed and an unauthorized rooftop structure. The upper roof is accessible by a steel ladder which is a UBW itself.

19.  UBWs on upper roof include a metal framed structure, a concrete bench, supporting structures for satellite disc, antenna and transceiver and brick plinths.  However, the upper roof should be inaccessible according to the approved building plans, but there is an unauthorized steel stair erected on the roof to provide access to the upper roof and no proper protective barrier is provided on the upper roof.  This would easily result in people or object falling from the upper roof and the ladder should be removed.

20.  The condition of the upper roof is generally fair. Defects identified are as follows:

(a) Concrete spading on walls, beams and ceilings.

(b) Severe cracks on floors.

(c) Hairline cracks on walls.

(d) Loose plaster on walls, beams and ceilings.

(e) Water stains on walls and ceilings.

(f) Peeling paint on walls and ceilings.

(g) Defective window sealants, broken window glazing and rusty window frames.

The defects are due to aging, seepage of rainwater, and lack of proper maintenance.

Roof

21.  The laundry sheds particularly for No. 103 Caroline Hill Road ("No. 103") are in a poor condition.

22.  Unauthorized roof structures have been erected at the rear flat roofs.

23.  Windows to laundry shed on roof of No. 103 are generally in poor condition. Broken glazing and rusty window frames are observed during inspection. Poor installation of windows and lack of maintenance spark off seepage of rainwater resulting in the delamination of wall plaster and peeling paint.

Domestic Flats

24.  Most of the domestic flats are subdivided. Defects identified in the domestic flats are as follows:

(a) The domestic flats are generally in a poor condition and require substantial repair or comprehensive renovation. Spallings or loose plasters are generally noted in structural elements such as ceilings, beams and columns.

(b) Open kitchens and kitchens without adequate fire rated doors are noted in some flats.

(c) Most of the internal doors are timber doors and are in a fair condition. Defective finish and missing door handles are found.

(d) Most of the sanitary fitments including water closets, bath tubs and basins are found in a fair condition. In some flats, water supply pipes are found rusty and damaged.

Basement

25.  Lots of unauthorized works are observed in the Basement. A reinforced concrete structure with exit door is found constructed in the south-eastern elevation. This structure is in a poor condition. An unauthorized concrete stair connecting Basement to G/F is found at the rear. A wall enclosing the entrance to the Basement facing Caroline Hill Road is also noted. Natural lighting and ventilation are obstructed by brick walls blocking all windows in the Basement.

26.  Defects identified in the Basement are as follows:

(a) Concrete spading on beams, ceilings, and columns.

(b) Loose plaster on ceiling.

(c) Severe cracks and minor cracks on beams.

(d) Water stains on walls.

(e) Peeling paint on ceiling and walls.

The defects are due to aging and the lack of maintenance.

Staircases

27.  Both staircases are in a poor condition. Defects identified are as follows:

(a) Concrete spalling on ceilings.

(b) Hairline cracks on walls and floors.

(c) Loose plaster on beams, walls and ceilings.

(d) Damaged nosings on stairs.

(e) Loose wirings on walls and ceilings.

The defects are due to aging and lack of maintenance.

28.  Other than the defects identified there are a number of deficiencies in fire safety, which would pose a potential fire hazard to the occupants and the public. These deficiencies include:

(a) Improper Electrical Installations

Meters, trunking and conduits have been installed in the staircases on each floor. According to the Code of Practice for Fire Safety in Building 2011 ("FS Code"), no service installations other than the fire services installations could be installed in the escape staircases unless such services are enclosed by fire barriers with adequate fire rating separating the protected exits from the rest of the building.

(b) Exit Doors

Most of the exits of the domestic flats are installed with different types of wooden doors, which in Mr Lau's opinion, are not fire-rated.

(c) Unauthorized Metal Gates

Unauthorized metal gates have been installed at entrances to most domestic flats for security reasons. These metal gates are either sliding or swinging types and all of them do not comply with the FS Code.

Service Lane

29.  A number of UBWs are erected in the service lane. A lane structure is found near the north-western elevation and two metal gates are noted in the western and south-eastern elevations. The metal gates are found locked with pad locks.

30.  The condition of the service lane is generally fair. Defects identified are as follows:

(a) Uneven floor surfaces.

(b) Damaged concrete paving.

(c) Unplanned vegetation growth.

(d) Hairline cracks on floor.

The defects are due to weathering and lack of proper maintenance.

Electrical Installations

31.  The defects identified in the electrical installations are as follows:

(a) Main Power Distribution System

Absence of any valid WR2 certificate for the Building. Some of the metal trunkings and junction boxes in the staircases are found uncovered and loose and exposed wirings are commonly found.

(b) Power Distribution inside Flats

The Residual Current Circuit Breakers (RCCB) for the domestic flats are in a fair condition.

(c) Lightning Protection System

The lightning protection system of the Building is found removed with some copper tapes left on the external walls and in the front staircase.

32.  According to Mr Lau, the total costs of the proposed repairs are $10,111,398.

33.  The Applicant instructs another expert, Dr James Lau ("Dr Lau") to prepare Structural Assessment Report.  From the approved structural plans, Dr Lau notes that the Building was founded on footing foundations. In some units in the Building, he finds severe cracks and spalling on the beams, columns and slabs. The columns and beams are important structural elements for the stability of the Building. The implication is that the strengths of these structural elements have been reduced. The reinforcements that are exposed show an advanced stage of corrosion. The diameters of the reinforcements have been much reduced due to corrosion. During his inspection of the Building, he notes that corrosion of reinforcements in some places is at an advanced stage. From what he sees, the corrosion of the reinforcing steels in the beams and slabs appear to have extended to the reinforcing steels at the moment joints of the frame. If this were the case, the capacity of the concrete frames to resist lateral forces would be severely affected.

34.  From visual observation, the strengths of some columns and beams are reduced. The columns are load-bearing elements. There is no redundancy in the design of the Building. The failure of the columns would certainly cause the failure of the whole Building. A number of beams/slabs shows an advanced stage of deterioration. Long and wide cracks are found along the lengths of the beams. The strengths of the beams are much lower than their original design strengths. Dr Lau needs to carry out integrity tests on the Building to make meaningful conclusion on the stability of the Building.

Integrity tests on the Building

35.  Stangers Asia Limited ("Stangers"), a HOKLAS accredited laboratory has been asked to carry out various integrity tests on the Building. The tests include cover meter survey, cored samples and uniaxial compression tests, carbonation tests, determination of chloride contents and open up inspection for steel reinforcements.

Carbonation tests

36.  Carbonation tests are carried out on the concrete cores to identify the depth of carbonation in the concrete. The corrosion of reinforcement is made possible by the acidic conditions surrounding the steel reinforcements. Fresh concrete is alkaline in nature. Under this alkaline condition steel reinforcement will not corrode. However, air contains a minute amount of carbon dioxide. Carbon dioxide when dissolved in moisture forms a weak carbonic acid. During the life of the Building, this weak carbonic acid will penetrate the cover of the reinforced concrete, eventually reaching the steel reinforcements that are embedded in the concrete. The weak carbonic acid neutralizes the alkaline conditions of the concrete and turns the environment surrounding the reinforcement acidic. This process is what the material scientists called the carbonation of concrete. The acidic or carbonated environment allows the reinforcement to corrode. The carbonation test is a test to identify the depth of penetration of the carbonation process. This is a test of the conditions surrounding the steel reinforcements. This is an indirect test as to the state of corrosion of the steel reinforcements.

37.  In 9 out of 10 tests, the maximum depths measured are in the range of 33 mm to 140 mm. Except one, the carbonated depths are all greater than the concrete covers specified in the design code. The tests show that the steel reinforcements are embedded in the carbonated zone and are liable to rust and corrosion.

Covermeter survey

38.  The speed of the advance of the carbonation front into the concrete depends on the thickness and quality of the concrete covers to the steel reinforcement. It takes more time for the carbonation front to reach the reinforcing steel if the concrete cover is thick. Similarly if the density and hence the quality of the concrete is on the high side, it takes more time for the carbonation front to reach the reinforcing steel. In general, it is much better if the steel has a larger concrete cover. Similarly it is better if the quality and grade of the concrete is high. Like the depth of carbonation, this is an indirect test for the corrosion of reinforcements.

39.  Stangers has carried out measurements on 12 locations in the Building. After taking into account the thicknesses of the finishes, the thicknesses of the concrete covers measured are generally acceptable.

Chloride content test

40.  Another reason for the onset of corrosion and the deterioration of concrete is the high contents of chloride in the material. A high content of chloride causes an early onset of corrosion in the reinforcement. In the 1960’s when there was a severe shortage of water. The contractors used seawater in mixing concrete. The high chloride contents have caused severe corrosion of steel and early deterioration in the strengths of the reinforced concrete. Sometimes the high chloride content is inherent in the concrete mix. Sometimes the high chloride content is caused by the continuous contact of the structural member with chemicals containing chlorides. A test on the chloride content helps the investigator to make judgment on the quality of the reinforced concrete. One should aim for low chloride contents. This is an indirect test on the quality of the reinforced concrete.

Removal of the concrete covers to inspect the reinforcing steels

41.  A direct way of inspecting the reinforcement is to remove the concrete covers and visually inspects the reinforcing steels. During the inspection, the diameters of the steel would be measured. By comparing the design and actual diameters of the steel, one can tell how much of the reinforcing steels are removed due to corrosion. This is a direct test on the reinforcing steel.

42.  Stangers has opened up 6 locations in the Building for direct visual inspection. Based on the inspection of the transverse and longitudinal reinforcements, 50% shows heavy or heavy to moderate corrosion. Another 50% shows slight/moderate to moderate corrosion. From the result, Dr Lau can state that the reinforcements are in an advanced stage of corrosion. The diameters of some of the reinforcements have been reduced and the strength of the structural elements affected.

Uniaxial compression tests on concrete cores

43.  Concrete has been cored from the existing structure for detail inspection. The cores are tested in the laboratory. By comparing the design strength and the actual tested strengths one may easily tell the degree of deterioration of the concrete in the structure. 75 mm diameter samples are obtained by coring operation. This is a direct test on the strengths of the concrete structure.

44.  25 cores are extracted from various locations in the Building. The cores are then tested in Stangers’ laboratory. 15 out of 25 cores are marked by Stangers as “unsuitable for testing” in the report. According to Stangers, the samples have disintegrated during the preparation for uniaxial compression tests. This is most unusual. The strength of the concrete cores must be poor for this to happen.

45.  For the remaining cores, 30% of the cores have strengths lower than the design strengths of 16 MPa. When the Building was constructed, the concrete strengths normally showed a value much higher than the design strength. This is common. During the life of the Building, the structural elements are subjected to many cycles of loadings. The cycles contain both compression and tension. Concrete is weak in tension and would crack and develop micro cracks in response to the tensile forces. The accumulation of micro cracks would cause a drop in strengths of the structural elements. In the case of the Building, the problem is further complicated by the very weak materials in the concrete. 15 out of 25 samples are so poor that they could not be tested.

46.  The strength of a structural element depends on the compressive concrete strength and the tensile strength of the steel reinforcements. The concrete strengths in the beams and columns as shown by the uniaxial compression tests have deteriorated. From the test report by Stangers, the condition of the concrete is extremely poor. The sample is soft and weak; the cement matrix is in the form of powder. A large portion of the steel reinforcement has been lost due to corrosion. These are critical elements. The failure of the element would lead to progressive failure of the whole Building.

Cost of Repair

47.  According to Dr Lau, an estimate of the repair cost for the Building would be in the region of $25.44 million at today’s price. The cost of the steel frame would be around $8.48 million. The total comes to $33.92 million. In his estimate, Dr Lau has not included any repair works on the foundations.  From what he could observe on the G/F columns, Dr Lau has good reason to suspect that the concrete strengths and the steel reinforcements near or at the footing foundations suffer similar deterioration. His suggestion is that a workable solution is to use mini piles to underpin the existing footings. By a rough estimate, it would cost another $10 million for the mini piles and the new pile caps. Dr Lau has not included this estimate in his report.

48.  In conclusion, for his desk study, Dr Lau has read the approved building and structural plans of the Building dated around 1954. He notes that the Building was designed as a reinforced concrete frame structure based on the London County Council By-law of 1938. This was a reinforced concrete design code commonly used in Hong Kong in the 1950’s. The conditions of the Building are poor. Many slabs, beams and columns have cracks and spalling. In some important structural elements, the concrete strengths only have 50% of its original design strength. Over 60% of the concrete cores could not be tested in the laboratory because the cores have broken during sample preparation. The poor condition is not caused by aging. It is caused by the poor materials used in construction. Stangers has reported finding mud inclusions in the samples. Due to corrosion, the diameters of many steel reinforcements are significantly reduced. The reduced concrete strengths and heavily corroded steel reinforcements have drastically reduced the strengths of the structural members and directly affect the stability of the Building.

49.  The stability of the Building is provided by framed actions of the concrete frames. The frames work only if the columns, beams and their connecting joints are intact. From what Dr Lau could observe, this is clearly not the case. The corrosion has cut into some moment joints and reduced the strengths of the columns, the beams and the joints.

50.  In Dr Lau’s opinion, the Building has to be repaired. His estimate is that it costs $33.92 million to properly repair the Building. In the estimate, he has not included any remedial works to the footing foundations. It is worthwhile to repair the Building at such a cost if there is a need to preserve the Building due to historical, cultural or artistic reason. Otherwise it is more cost effect to demolish and rebuild the Building.

51.  Based on the findings of Mr Lau and Dr Lau, I am satisfied that redevelopment of the Building is justified on the ground of state of repair.

Age of the Building

52.  As to the age of the Building, there is no dispute that the Building is now 58 years old.  The relevant occupation permit was issued on 20 September 1954.

53.  In Mr Lau’s opinion, the design, construction standards and statutory requirements for buildings have been upgraded from time to time in the past 50 years.  The Building appears to be inferior when it is compared with modem buildings in the following aspects:

Means of Escape in case of Fire

54.  The front and rear staircases of the Building should serve as the required staircases under the FS Code. Most of the conditions of the staircases of the Building do not meet the current requirements as specified in the FS Code.

(a) The staircases and the Basement are not provided with an emergency lighting system. The emergency lighting system is required under Clause B5.5 of the FS Code and the system design is governed by FSI Code 2 2012. The requirement for this system was first introduced in the FSI Code 1987. The system should be provided in order to maintain the required illuminance at the floor level in case of emergency. This is also a mandatory system under the current Fire Safety (Buildings) Ordinance governing buildings constructed on or after 1 March 1987.

(b) No handrails are found at the front and rear staircases. Even though a balustrade is provided at the rear staircase, it is inferior to the current construction standards as specified in the Building (Construction) Regulations. Handrails should be provided to both sides of staircases if the FS Code is followed. The balustrade at the rear staircase should be built solid in its lowermost 150 mm with specified design to inhibit the passage of articles more than 100 mm in their smallest dimension.

(c) The average tread width of the rear staircase is less than 225 mm and it decreases the tread width to riser height ratio. The lower the ratio, the more dangerous the staircase would be. The tread width to riser height ratio in a building is now governed by the Building (Planning) Regulations and the safety of users of the staircases is ensured to a greater degree.

Fire Resisting Construction

55.  The fire resisting construction of the staircases is substandard and does not comply with the current requirements of the Building (Construction) Regulations, Fire Safety (Buildings) Ordinance and the FS Code.

(a) Windows of the rear staircase are found non fire-rated. However, all elements including windows in staircases of new buildings are required to be fire-rated for better fire protection. Also, the windows of the Building are erected at the dado in the rear staircase, which could be easily broken due to possible strikes from occupants walking down the staircase.

(b) Meters, trunkings and conduits of the Building are not enclosed by fire barriers with adequate fire rating.  In modern buildings, fire-rated cable ducts are usually included in the original design for compliance with the FS Code.

Fire Services Installations

56.  There is no provision of fire service installations to the Building.  According to the Fire Safety (Buildings) Ordinance and FSI Code 2012, the non-compliances items are as follows:

(a) No exit signs and directional signs are provided in the office at the Basement.

(b) No fire alarm system is provided in the Building.

(c) No hose reel system is provided in the Building. Sufficient hydrants and hose reels are required to be provided on each floor under the Fire Safety (Buildings) Ordinance. Associated works for this system also include installation of a fibre-glass water tank, addition of a pump house for a fixed pump and a stand-by pump and the associated pipework. The pump house and the tank are recommended to be situated in common areas to facilitate future maintenance.

(d) No portable hand-operated fire extinguisher is provided in the Building.

Barrier Free Access

57.  Lack of measures in providing barrier free accesses is noted in the front and rear staircases of the Building.  For newly designed buildings, the Design Manual: Barrier Free Access 2008 ("BFA Manual") would be strictly followed for the full compliance with the Buildings Ordinance and the Disability Discrimination Ordinance. All required staircases should comply with the FS code and the BFA Manual. Handrails, non-slip nosings, and treads and walls of staircases in contracting colours are all required in the required staircases under the BFA Manual. They are provided to help persons with a disability including those with ambulant disability and the elderly to use the staircases.

58.  In Dr Lau’s opinion, as a structural engineer, Dr Lau is concerned about two aspects of the Building. The first aspect is the stability of the Building. The Building should have adequate factor of safety against catastrophic collapse. The second aspect is the strength of essential structural elements in the Building. The failure of individual structural element may cause partial collapse of the Building. In a severe case, the failure of individual structural element may lead to partial collapse and then progressive failure of the whole building.

59.  The Building was designed and constructed in the 1950’s. The design code, the design method, the materials used and the method of construction do have important implications on the stability of the Building.

Material strengths

60.  The structural calculations and drawings show that the design was carried out in 1954/1954. The design code used at the time was the London County Council By-law of 1938. The design code adopted a working stress approach. (In contrast, modem design code uses a Limit State approach). The concrete used in the Building was specified as 1:2:4 with a compressive strength of 750 lb/sq. in. The 1:2:4 concrete was classified as Grade III concrete.  At 28 days, the crushing strength was 2,250 lb/sq. in. In S.I. unit this may be rounded up to 16 MPa.  In modem buildings, the crushing strength of the concrete used is typically in the range of 30 MPa to 45 MPa. 16 MPa is on the low side. The tensile strength o f the reinforcement was specified in the design calculations as 13,000 lb/sq. in. In S.I. unit this is equivalent to 90 MPa. In modem buildings, the tensile strength of reinforcement used is typically 250 or 460 MPa. The design strengths used in the Building therefore are low compared with those used in modem buildings. This is understandable because the materials used were limited by the technology of the 1950's.

Design life of the Building according to the design code

61.  The modem design codes used in Hong Kong, for example the 2004 codes specified a design working life of 50 years for the building. If a building is considered to be important and a longer design life is required, then the applied live loads and wind loads have to be increased. Similarly the factors of safety applied to the material strengths have to be increased. In simple layman terms, a building designed to say a life of 100 years will have to be designed against heavier loads using much-reduced material strengths than a normal building, which is designed for a normal life of 50. One would therefore expect to see lager member sizes and heavier reinforcements in a building designed to a design life longer than 50.

62.  The London County Council By-laws of 1938 did not specify the length of design life in the code. However, the live loads adopted in the design were based on provisions in CP 3 Chapter 5 (A British Code of Practice used by British and Hong Kong engineers to derive imposed loads on buildings). According to Reynolds’ Reinforced Concrete Designers Handbook, live loads derived in the CP 3 Chapter 5 were based on a probability return function of 50 years. Similarly, the design wind load adopted in Hong Kong and UK for buildings (The Hong Kong Wind Code for example) designed in the 1950's was based on a return period of 50 years. The applied loads on this Building were derived on the assumption of a 50 years return period. If the designer o f the Building wanted to have a longer design life for the Building of say 100 years, he should adjust the applied loads (and also the material strengths) to a return period of 100 years. The designers of the Building in 1954 did not treat the Building as a special building. He did not make any adjustments to the applied loads, wind forces and material strengths. The design working life of the Building was 50.

63.  In Dr Lau’s opinion, at 57 years, the Building has reached the end of its design life.

Progressive failure

64.  The structural system of the Building is one of reinforced concrete framed structure. This type of structural system was very common for buildings built in the 1950's. Unlike buildings that are designed to the modem design codes, these old type of buildings were not designed against progressive failures. In late 1960, a building at Ronan Point, England collapsed in a progressive manner because of the failure of one structural element. In progressive failures, debris from the collapse of one floor in the building overloads the lower floors causing the lower floors to fail in a domino manner. The construction industry the world over was severely alarmed by the progressive failure at Ronan Point. Since then gradually all modem design codes, including those in Hong Kong asked for designs against progressive failures. This requirement is now inherent in the 1987 and the 2004 Hong Kong codes. What Dr Lau wants to say is that the structure of the Building, unlike modern buildings was not designed against progressive failure.

Redundancies

65.  Another feature of these old types of buildings is the lack of redundancy in the structural design. In the language of structural engineering, it means we cannot afford to have a failure in any load-bearing column. In other words, every single load-bearing column counts. Some degrees of redundancies are important to guard against catastrophic failure. But then what are redundancies.

66.  A good example of a redundant structure is the case of the bamboo scaffolding. This type of structure is very common in Hong Kong. Bamboo scaffolding is highly redundant. There are a lot more vertical posts provided in the structure than that are necessary as required under the theory of mechanics. Therefore the cutting away o f some of the posts will not cause the scaffold to collapse. The loads are transferred to the adjoining posts and the whole structure remains stable. The load paths change but the structure remains stable. There is of course a limit in the number of vertical posts that can be cut. If too many posts are cut, the bamboo scaffold still fails. What Dr Lau wants to say is that cutting some vertical posts in the case of a highly redundant structure, such as the bamboo scaffold will not cause the structure to fail. The same is not true if there is no redundancy in the structure. Cutting away one load bearing element will cause the structure to fail catastrophically. In a way the bamboo scaffolds are very much over-designed. It is impossible to work out the stresses in each element without the use of a computer. The builder of the bamboo scaffolds, past and present never uses a computer to help with the design. He uses experience. The scaffold is very much over-designed. It does not matter. Bamboos are cheap.

67.  The same is not true for reinforced concrete designs of the 1950's. The designers did not have computers. He used hand calculations. Without a computer, he could not design a highly redundant structure. Economics also requires the designer not to over design his structure. The result is that every column counts. If a column is cut away, the structure collapses. This happens to the notorious old building that collapsed in Ma Tau Wai about two years ago. Two versions of events leading to the collapse were presented at the inquiry. The Buildings Department version was that someone accidentally damaged a column and the whole building came down, killing and injuring a number of persons. The second version was presented by experts of the other stakeholders. The collapse was caused by deterioration of one column and the building collapsed on its own. There may be different interpretation in the cause of the collapse, but there is one important message presented by the experts. The important message is that there was no redundancy in the building. The failure of one column leads to the failure of the whole building.

68.  Many modern buildings have some degrees of redundancies. Even if one or two columns were cut away, the building would not collapse. Of course the building has to be repaired. But the important point is, it will not collapse catastrophically.

Reinforced concrete framed buildings and the importance of the intact moment joints

69.  Another feature of the 1950's reinforced concrete framed structures is that the lateral stability of the Building depended on the integrity of the concrete frames. The building loses its lateral stability if the concrete frames cease to function. The concrete frames comprise columns and beams that are connected together by moment joints. The concrete frames serve an important function. They are designed to transfer lateral loads such as wind loads from the upper floors to the foundations. For the frame action to function, the columns need to be intact. The beams need to be intact and the joints between the columns and beams need to be intact. To sum up, for a reinforced concrete framed building to be stable one must not allow the columns, the beams and the moment joints to fail.

70.  In structural engineering, moment joints require the continuity of reinforcements between the columns and beams. For the framed structure to work the reinforcing steels in the beams must be intact and extend continuously into the columns. If reinforcing steels in the beams could not for some reasons pass from the beams into the columns, there would be no frame actions and the Building could not stand. The Building will collapse under lateral loads and fail as a mechanism. A structural engineer will never allow his structure to behave as a mechanism.

71.  One scenario could be that due to corrosion, the diameter of reinforcing steels that passed from a beam into a column were reduced to such an extent that the moment joint ceased to function properly. Even if the building was properly designed and built 50 years ago, due to aging and poor maintenance, the stability of the building could still be affected because of the corrosion of steel in a beam, in a column or in a moment joint.

72.  In the case of modern buildings, the lateral stability of the building is not provided by framed actions. It is provided by the use of concrete cores. Lateral loads are transferred laterally into the concrete core, which is usually the walls containing the lift shafts or staircases. The concrete core brings the lateral loads to the foundation. Consideration of the stability of a concrete framed building and that of a modem concrete cored building is different. What Dr Lau wants to say is that for a building built in the 1950's, the investigator must not forget that moment joints are an important consideration in the stability of the reinforced concrete framed structure.

73.  Mr Li submits that I should not consider just the physical age of the Building, but should also consider the physical conditions of the Building.  He relies on the remarks of Mr Lau and Dr Lau that it would cost a total of $44,031,398 to properly repair the Building, and that it is more cost effective to demolish and rebuild the Building.  I agree with Mr Li’s submission that the figure of 42.65%, being the total repair cost of $44,031,398, over the higher of the EUV of the Building, which is $103,250,000 as assessed by the Applicant’s valuer (see the discussion below), is a very substantial percentage.

74.  I agree with the view of the Tribunal expressed in Top Sail (supra), that

"when the requirement of “the age” of the Building is considered, we should not restrict our consideration to just the physical age of the Building.  There are many factors related to the age of a building which should also be considered"  (para. 23);

and 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"  (para. 23);

and that

"the physical age of a building is clearly one of the considerations, but it would not be the only consideration.  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."  (para .24).

75.  Having considered all the evidence as aforesaid, I am satisfied that the redevelopment of the Building is also justified on the ground of the age of the Building due to the following factors:

(a) the Building is now  58 years old;

(b) the Building is in very poor physical conditions and very substantial cost is required to repair or maintain the Building; and

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

Reasonable Steps to Acquire All the Undivided Shares in the Lots

76.  As required by Section 4(2)(b) of the Ordinance, the Applicant is under an obligation to negotiate for the purchase of the  Respondent’s undivided shares in the Lots on terms that are fair and reasonable. 

77.  The evidence of the Applicant’s factual witness, Mr Ho Shek Tim ("Mr Ho"), shows that:

(a) Before launching the present proceedings and with an intention to avert the same if possible, the Applicant made offers to the Respondent based on valuation done by Savills Valuation and Professional Services Limited ("Savills''), which was commissioned to assess the value of the units in the Building on the existing use value basis ("EUV") and the redevelopment value ("RDV") of the Lots.  The first offer of $16,230,000 by letter dated 16 June 2011 was based on valuation done by Mr Charles Chan ("Mr Chan") of Savills.  The Applicant revised the offer later in an effort to acquire Respondent’s premises.  Another offer of $18,000,000 was made by a letter dated 4 July 2011. 

(b) According to Mr Ho, the offers made by the Applicant were at prices higher than according to the valuation done by Mr Chan. 

(c) The Respondent did not accept the offers and/or come to terms of settlement with the Applicant. 

(d) The Applicant tried to mediate with the  Respondent and filed a Mediation Certificate dated 14 July 2011 with the Tribunal.  The mediation took place on 1 November 2011 before an accredited mediator Mr Chan Bing Woon but no settlement was reached at the end of the mediation session.

78.  I am satisfied that, on the evidence available, the offers made by the Applicant fall "within the range of what may broadly be regarded as fair and reasonable" as said by Mr. Justice Ribeiro PJ in Capital Well Ltd v. Bond Star Development Ltd (2005) 8 HKCFAR 578 at para. 33.  Thus, I conclude that the Applicant has taken reasonable steps to acquire all the undivided shares in the Lots.

Order for Sale

79.  By reasons of the matters aforesaid, I am satisfied that an order for sale should be granted in favour of the Applicant.  The remaining question is how much I should fix for the reserve price.

Reserve Price

80.  Mr Chan has prepared a report dated 14 June 2011 valuing the EUV of all the units in the Building as at 18 April 2011 ("Savills EUV Report"). The Savills EUV Report is the statutory report attached to the Application. 

81.  Mr Chan finds that according to the approved building plan and the occupation permit of the Building, there are 2 garages planned on Basement, and 2 residential units planned on each of Ground Floor to Third Floor.  However, Mr Chan notes from the Land Registry that the 1/F of No. 103 Caroline Hill Road and the 2/F of No. 105 Caroline Hill Road have been subdivided into 2 units (namely Front Portion and Rear Portion) respectively.  In the course of valuation, Mr Chan has relied on the layout as shown on the concerned assignment plans for the said units.

82.  In addition, during Mr Chan’s inspection of the Building, he finds that all the units on the Basement are used as shops.  Mr Chan therefore has prepared his EUV valuation based on 2 scenarios, one assessing the Basement as garage in accordance with the Approved Building Plan; and two, assessing the Basement as shop according to the existing use.

83.  Mr Chan has been admitted access to 9 residential units and 2 basement units (out of a total of 10 residential units and 2 basement units) for inspection and has noted their internal conditions.  For making comparison between units, he has classified the internal condition of the units into the following grades with reference to tenantable standard (which means the state of a unit which is fit for use with its structural frames and components, its finishes and its service installations, and requiring no repair in the near future):

Good - The condition is above tenantable standard with no obvious defects noted.

Fair - The condition is up to tenantable standard with no obvious defects noted, although some minor defects might be noted.

Poor - The condition is below tenantable standard with some minor defects noted. The minor defects noted could be more and/or the extent of the defects noted could be relatively more serious.

Very Poor - The condition is substantially below tenantable standard with obvious defects noted. The defects noted are more and/or the extents of the defects are serious.

Unacceptable - The condition is unacceptably below tenantable standard. Extensive and serious defects are noted.

For the Ground Floor of No. 105 Caroline Hill Road, Mr Chan has assumed its internal condition as Fair in his valuation.

84.  In his valuation of the EUV of the Basement of the Building as garage, Mr Chan considers the maximum number of car parking spaces can be accommodated in the basement of No. 103 Caroline Hill Road is 4 numbers while that for No. 105 Caroline Hill Road is 6. He has made reference to sale transactions of car parking spaces in the vicinity. In the course of valuation, he has considered the different attributes between the subject car parking spaces and the comparables in terms of transaction time, building age and condition, car park ratio, carlift and has made adjustments accordingly. Having considered the above, he has adopted a unit rate of $620,000 per car park.

85.  In his valuation of the EUV of the Basement of the Building as shops, Mr Chan has made reference to sale transactions of shop units in the vicinity. In the course of valuation, he has considered the different attributes between the subject basement retail units and the comparables in terms of transaction time, location, building age and condition, quantum, layout, return frontage and has made adjustments accordingly. Having considered the above, he has adopted a unit rate of $124,000 per sq.m. (saleable area).

86.  In his valuation of the EUV of the domestic units of the Building, Mr Chan has selected Front Portion of 1/F of No.103 Caroline Hill Road as the reference unit ("the Reference Domestic Unit"), which is a unit on the middle floor of the domestic portion.  Unit price of the Reference Domestic Unit is first assessed by making reference to market comparables. Comparison is then made between the Reference Domestic Unit and the remaining domestic units of the Building. In assessing the unit rate for the Reference Domestic Unit, he has considered sale transactions of residential units of similar age in the vicinity.  In the course of valuation, he has considered the different attributes between the Reference Domestic Unit and the comparables in terms of transaction time, accessibility, environment, layout, floor level, building age and condition, quantum, view, noise effect, lift facilities and has made adjustments accordingly. Having considered the above, he has adopted a saleable unit rate of $84,200 per sq. m, for the Reference Domestic Unit.  After assessing the market value of the Reference Domestic Unit, he has further considered the different attributes between the Reference Domestic Unit and the remaining domestic units in terms of floor level, quantum, lighting and ventilation, view and internal condition and has made adjustments accordingly.  For the 3/F of No. 105 Caroline Hill Road which is inclusive of Roof, Mr Chan uses a conversion factor taken at 1/8.

87.  Mr Li submits that insofar as the statutory EUV report is concerned which is used for deciding the apportionment ratio under section 10(3) and Part 3 of Schedule 1 of the Ordinance, following Gilmerton Limited and Others v. Polywin Holdings Limited and Others (LDCS 2000 of 2004, 17 January 2005, unreported) at paras. 12, 13, 14 and 15, the valuation date of Mr Chan’s Savills EUV Report is 18 April 2011, which is within 3 months of the Application.

88.  Mr Li also submits that Mr Chan’s Savills EUV Report gives 2 EUV figures depending on whether the use of the Basement of the Building is garage or shop.  In the first scenario (the use of the Basement of the Building is garage), the total EUV of all the units in the Building in the Savills EUV Report is $79,070,000 and the EUV of the Respondent's premises is $9,780,000 giving rise to a ratio of 12.37%.  In the second scenario (the use of the Basement of the Building is shop), the total EUV is $103,250,000 and the EUV of the Respondent's premises remains the same giving rise to a ratio of 9.47%. Mr Li submits that the Applicant is happy to adopt the higher ratio in the first scenario which is to the benefit of the Respondent.

89.  Having considered Mr Chan’s valuation, I agree with Mr Li’s submission and hold that the EUV of the Building should be determined on the assumption that the Basement of the Building is for garage use, as shown in the first scenario of the Savills EUV Report.

90.  The Respondent has not filed any expert report.  I am satisfied that the EUV of Mr Chan is fair and reasonable.  I hold that the proceeds are to be apportioned on the basis of the first scenario of the Savills EUV Report determined by me as follows:

Floor	103 Caroline Hill Road	105 Caroline Hill Road
Basement	$2,480,000	$3,720,000
G/F	$8,610,000	$9,780,000
1/F	Front Portion: $4,620,000 Rear Portion:  $4,220,000	$9,580,000
2/F	$9,140,000	Front Portion: $5,980,000 Rear Portion:  $3,330,000
3/F	$8,100,000	$9,510,000

91.  In his valuation report dated 26 March 2013, Mr Chan states the RDV of the Lots as at 26 March 2013 to be $162,000,000.

92.  Mr Chan’s valuation is on redevelopment basis in accordance with the prevailing statutory zoning assuming the Lots are free from any tenancy and is available for sale in the market with the existing structures, unified land title and free of any material encumbrances as at the date of valuation. Under the prevailing Outline Zoning Plan, redevelopment of the Lots is restricted to a maximum building height of 100 metres above Hong Kong Principal Datum ("HKPD"). Due to the presence of the restriction on the number of storeys under the existing lease, the maximum height of 100 metres above HKPD could not be achieved without a lease modification. In the event of lease modification, a premium equals to the enhancement in land value before and after lease modification will be charged by the Government. Subject to the question of payment of premium, Mr Chan does not foresee any impediment on obtaining the modification of the Government Lease on the building restriction. In the current assessment, the potential of releasing the height restriction under lease by means of lease modification has been taken into account.

93.  Mr Chan at first approaches his valuation by direct comparison.  There are several land sale transaction in Tai Hang in the past year, however, he considers these transactions are not suitable for direct comparison since there are substantial disparity in development potential due to attributes on location, development scale and development restrictions.

94.  Mr Chan has assessed the market value by using the residual valuation method. The residual method is the assessment of the land value by deducting the development costs from the potential sales revenue, i.e. the gross sale price, of the completed building. Since lease modification is necessary in order to materialize the maximum development potential stipulated under outline zoning plan, the land premium payable for the lease modification is treated as part of the development cost in the residual valuation.

95.  Land premium to be charged by the Government equals to the enhancement in land value before and after lease modification (i.e. After Value - Before Value). Mr Chan has assessed the premium using the residual valuation method which is the usual approach adopted by Lands Department.  After testing for different scenarios, Mr Chan is of the opinion that the optimum hypothetical development comprises one block of 4-storey residential building with open car park on Ground Floor. There will be 4 flats per floor, providing a total of 16 flats with an average flat size of 67.2 square metres (gross, exclusive of green features).

96.  After lease modification, Mr Chan is of the opinion that the optimum development comprises one block of 24-storey residential building over a 2-storey podium for carpark / recreational facilities plus 2 levels of basement car park. There will be a mixture of 1 to 2 flats per floor, providing a total of 46 flats with an average flat size of 72.2 square metres (gross, exclusive of green features).

97.  In assessing the Gross Development Value of the hypothetical developments of the residual valuations, Mr Chan has adopted the direct comparison method. This method entails analysing actual market transactions around the date of valuation to determine the market value of the hypothetical developments.  In the course of valuation, reference has been made to sale transactions of new residential premises and car parking spaces in the vicinity. For the residential portion, he has considered the different attributes between the hypothetical developments of the Property and the new residential comparables in terms of transaction time, location, floor level, headroom, size, view, building age and condition, facilities and holding cost, etc, and has made adjustments accordingly.  Regarding time adjustment, Mr Chan is aware that the price movement of pre-sale units in the locality does not follow the market movement of completed units as shown in property price indices. In the course of valuation, he has relied on the findings of my research in allowing time adjustment for the two pre-sale comparable developments, namely The Warren and Park Haven. For completed development, namely Warrenwoods, he has made reference to property price index as published by Rating and Valuation Department in allowing time adjustment.  For the car parking spaces, he has considered the different attributes between the hypothetical developments of the Property and the car park comparables in terms of transaction time, car lift, building age and condition and quantum, etc., and has made adjustments accordingly.

98.  Based on the proposed hypothetical developments, the land premium for lease modification is assessed by deducting the Before Value of $121,000,000 from the After Value of $379,000,000 to arrive at $258,000,000.

99.  The hypothetical development for the Market Value Assessment virtually identical to that proposed for the "After" Scenario.  The optimum development comprises one block of 24-storey residential building over a 2-storey podium for carpark / recreational facilities plus 2 levels of basement car park. There will be a mixture of 1 to 2 flats per floor, providing a total of 46 flats with an average flat size of 72.2 square metres (gross, exclusive of green features).

100.  At the hearing, Mr Chan confirms his RDV valuation at $162,000,000.  I am satisfied that the valuation made by Mr Chan is fair and reasonable, reflecting the current redevelopment value of the Lots.  Thus, the reserve price of the Lots should be fixed at this value.

Conclusion

101.  In the circumstance, I make the following determination:

UPON hearing Leading Counsel for the Applicant and the Respondent being absent

UPON the trial of the Application for an order to sell all the undivided shares in Section D of Sub-Section 1 of Section A of Inland Lot No. 1946 and The Remaining Portion of Sub-Section 3 of Section A of Inland Lot No. 1946 and Section A of Sub-Section 3 of Section A of Inland Lot No. 1946 (collectively the “Land”) (Nos. 103 and 105 Caroline Hill Road, Hong Kong (collectively the “Building”) for the purpose of redevelopment

UPON the Tribunal being satisfied that the existing use value of the Respondent’s 2 equal undivided 9th parts or shares of and in Section A of Sub-Section 3 of Section A of Inland Lot No. 1946 and of and in the building thereon now known as No. 105 Caroline Hill Road, Hong Kong together with the sole and exclusive right and privilege to hold use occupy and enjoy the Ground Floor of the said No. 105 Caroline Hill Road, Hong Kong assessed at $9,780,000 is fair and reasonable when comparing with the existing use values of the other units of the Building (the undivided shares of which belong to the Applicant as assessed in this Application) and with the total existing use values of all the units of the Building being $79,070,000

UPON the Tribunal also being satisfied that the redevelopment of the Building is justified due to the age or state of repair of the Building and that the Applicant has taken reasonable steps to acquire all the undivided shares in the Land held by the Respondent

I order that

(1) That all the undivided shares in Section D of Sub-Section 1 of Section A of Inland Lot No. 1946 and The Remaining Portion of Sub-Section 3 of Section A of Inland Lot No. 1946 and Section A of Sub-Section 3 of Section A of Inland Lot No. 1946 ("the Lots"), the subject of the Application, be sold by way of public auction for the purposes of redevelopment of the Lots under Section 4(1)(b) of the Land (Compulsory Sale for Redevelopment) Ordinance Cap. 545 ("the Ordinance");

(2) That Mr Ho Chi Kit and Mr Cheung Chi Yu nominated by the Applicant be appointed trustees ("the Trustees") to discharge the duties imposed on trustees under the Ordinance in relation to the Lots, and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs. Katherine Y.W. OR & Co. dated 19 April 2013;

(3) For the purposes of the sale of the Lots by public auction under Section 5(1)(a) of the Ordinance:

(a) The sale of the Lots be sold on the Particulars and Conditions of Sale as to be initialled and approved by the Tribunal;

(b) The reserve price be set at $162,000,000;

(c) Subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Lots in the auction sale or successor in title, the redevelopment of the Lots shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lots becomes the owner of the Lots as specified by Section 9 and Schedule 3 of the Ordinance; and

(d) Liberty to the Applicant, the  Respondent and the Trustees to apply to the Tribunal for further directions under the Ordinance.

Costs

102.  The Applicant has indicated its position on costs. Thus, I make a costs order nisi that there be no order as to costs for the Application herein.  If the parties do not make any further application for costs within 14 days from today, the costs order nisi shall become absolute.