MILLION MATE LTD AND OTHERS v. WONG CHI YIU AND OTHERS

LDCS 1000/2014

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION

NO 1000 OF 2014

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J U D G M E N T

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Background

1.  This is an application for compulsory sale of all the undivided shares of and in Kowloon Inland Lot No 1151 (“the Lot”), with a building erected thereon known as Matauwei Apartments at Nos 57, 57A-57H, 57J-57K, 65-69 Ma Tau Wei Road and Nos 2-18, 18A & 20 Bailey Street, Kowloon (“the Building”), for the purposes of redevelopment pursuant to the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”). 

2.  There were 13 respondents originally. After the commencement of the application, the applicants acquired the units owned by the 2^nd, 3^rd, 7^th and 9^th respondents.  The applicants have already discontinued the proceedings against them.

3.  During the hearing, the applicants have entered into agreements with the 1^st, 4^th, 5^th and 6^th respondents.  By respective consent summons, leave was granted to these respondents to withdraw their Notice of Oppositions and all the evidence filed herein and cease to take part in the present proceedings as well.

4.  There are 4 missing owners (8^th, 10^th, 11^th and 12^th respondents) in the Lot.  The 8^th respondent is the registered owner of Flat A10 on 1^st Floor; the 10^th respondent is the registered owner of ½ share (tenant-in-common) of Flat A12 on 3^rd Floor; and the 11^th respondents are the registered owner of ½ share (tenant-in-common) of Flat A6 on 7^th Floor of the Building. 

5.  By various assignments, the 12^th respondent being the 1st owner of the Building had assigned to the others altogether 204/229^th undivided shares and reserved unto himself 25/229^th undivided shares of and in the Lot as well as the exclusive right to use and occupy the Roof of the Building.

6.  Pursuant to the Amended Order made by HH Judge KW Wong dated 21 May 2015, substituted service of the application on the 8^th, 10^th, 11^th and 12^th respondents was effected by publication of the requisite notices on 10 June 2015.  The 8^th, 10^th, 11^th and 12^th respondents had not shown up after expiration of the 1-month period specified in the notices.  By the same Order dated 21 May 2015, service of the subsequent documents on these 4 respondents has been dispensed with.

7.  The 13^th respondent is the Incorporated Owners of the Building. On 3 October 2014, the 13^th respondent commenced HCA1948/2014 against the 12^th respondent in the Court of First Instance, claiming for adverse possession and/or ownership of the 25/229^th undivided shares of and in the Lot together with the sole and exclusive right and privilege to hold use occupy and enjoy the Roof of the Building (“HC Action”).  On 21 May 2015, leave is granted for the 13^th respondent to be joined in these proceedings.

8.  In the Amended Notice of Opposition filed on 23 February 2016, the 13^th respondent indicated the stance of not opposing to the application for compulsory sale but only asked for the sale proceeds to be apportioned to the 25 undivided shares held by the 12^th respondent and the Roof be held by the Trustees pending final determination of the HC Action.

9.  At the Pre-trial Review held on 13 July 2016 where the 13^th respondent was represented by solicitor, this tribunal had raised with the parties about the locus of the 13^th respondent to take part in these proceedings since it is not a minority owner before any determination of the HC Action.  This tribunal had also indicated that should the 13^th respondent have no locus in these proceedings, any application/relief sought by it should be dismissed.

10.  On the first day of trial, representative of the 13^th respondent asked to be excused from the trial upon the indication by Mr Fung for the applicants that the applicants had no objection for the court to make the order that the sale proceeds to be apportioned to the 12 respondent to be held by the trustees.  Leave is then granted for the 13^th respondent to be excused from attending the trial with the understanding that the 13^th respondent’s claim for relief will be dismissed. 

11.  So, all those respondents who had once before this tribunal had dropped out from these proceedings.  In any event, the tribunal has to determine whether the application has satisfied the requirements of the Ordinance in view of the fact that there are missing owners, ie 8^th and 10^th to 12^th respondents.

12.  According to the building plan, the Building comprises a block of 8-storey commercial / residential composite building with 28 shops and a transformer and switch room (which is named as Shop 29 in the Land Register) on ground floor and 25 residential units on each of the 1^st floor to 7^th floor.  With reference to the Land Register, 1 shop and 5 flats are subdivided as follows: -

Shop 8 on Ground Floor	Portions A and B
Flat B1 on 1st Floor	Portions A, B, C and D
Flat A3 on 4th Floor	A3(1) to (3)
Flat A6 on 4th Floor	Front and Rear Portions
Flat A13 on 4th Floor	Front and Rear Portions
Flat A12 on 6th Floor	A12(1) and (2)

13.  The Building was completed in 1958 with Occupation Permit No K25/58 issued on 17 June 1958. Each of the shops (including Shop 29) and flats is given 1 undivided share, making up a sub-total of 204 undivided shares, whilst there is no sub-division register in respect of the remaining 25 undivided shares owned by the 12^th respondent, making a total of 229 undivided shares for the Lot.

14.  The applicants filed the Notice of Application (“the NOA”) on 24 January 2014, which was subsequently amended on 26 May 2015 pursuant to the Order made by HH Judge KW Wong dated 21 May 2015. 

15.  At the time of filing of the NOA, the applicants owned 195 out of 229 undivided shares of and in the Lot (ie 85.15%).  The applicants had subsequently acquired the undivided shares owned by the 2^nd, 3^rd, 7^th and 9^th respondents resulting in an ownership of 199 out of 229 undivided shares of and in the Lot (ie 86.9%) at the hearing.

16.  At the hearing, since the expert evidence filed by the 1^st, 4^th and 5^th respondents are withdrawn and there was no expert evidence filed by the other respondents in these proceedings, Mr Fung for the applicants simply called the witnesses to prove the applicants’ case.  The applicants contended that all the requirements of the Ordinance had been satisfied and asked for an order for sale of the Lot.

Section 3 of the Ordinance – Ownership of the Applicants

17.  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.  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 subsection (1) in respect of a lot belonging to a class of lots specified in the notice.

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

19.  As at the date of the NOA, the applicants owned 85.15% of the undivided shares of and in the Lot and the occupation permit of the Building was issued for more than 50 years. We are satisfied that the applicants are entitled to make the application.

Determination of the Existing Use Values (“EUV”) of All Units in the Building

20.  Pursuant to section 3 of the Ordinance, the NOA was accompanied by a valuation report dated 31 December 2013 (“Application Report”) prepared by Mr Eric SK Yeung (“Mr Yeung”) of Savills Valuation and Professional Services Limited (“Savills”), containing assessments of values of all units including the Roof (which are conveniently termed as the existing use values, the “EUV” of all units) of the Building as at 15 November 2013. The report was prepared not earlier than 3 months before the filing of the NOA in accordance with section 3 of the Ordinance.

21.  Under section 4(1)(a)(i), if there is a dispute between the parties on the EUV of the units in the Building on the Lot, the tribunal has to determine the values. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the Lot who cannot be found, the majority owner of the Lot is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is :

“(A)  not less than fair and reasonable; and

(B)  not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

22.  The 8^th, 10^th, 11^th and 12^th respondents are missing owners. The tribunal, before making an order for sale if any, should satisfy that the value of their respective units as assessed in the application is not less than fair and reasonable and not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.

23.  In the Application Report, Mr Yeung explained his valuation method and the assessment process to arrive at the EUV of each unit including the Roof in the Building.  In undertaking the assessment, Mr Yeung adopted the Direct Comparison Method.  He had firstly identified reference units for both non-domestic and domestic portions of the Building and compared them with the actual transactions in the market.  The remaining shops and flats in the Building were then compared with the respective reference units.  Shop 29 on Ground Floor, which is a transformer and switch room on the approved building plan and has no street frontage, was assessed as a shop in accordance to the Land Register and assignment plans, and its EUV was taken as ¼ of the adjusted unit rate of its adjacent unit, Shop 17 on Ground Floor.  The EUV of the Roof was taken as 1/10 of the average adjusted unit rate of all flats on 7^th Floor (the top floor).

24.  Mr Yeung updated his EUV assessments by a supplemental report dated 19 October 2015 (“Supplemental Report”).  He carried out further inspection to 38 flats and then reviewed his adjustments for internal condition accordingly. He also adopted the confirmed property indices covering the date of valuation for time adjustment.  Mr Yeung finally revised the unit price of the reference domestic unit to $56,900/sq m and the unit price of the reference shop units to $319,000/sq m for shops facing Ma Tau Wai Road and Bailey Street and $161,000/sq m for shops facing Sung Chi Street and pedestrian lane respectively, and then updated the EUV of each unit in the Building.

25.  We accept the EUV assessed by Mr Yeung and are satisfied that the value of the units owned by the 8^th and 10^th to 12^th respondents are not less than fair and reasonable and not less than fair and reasonable when compared to the value of the applicants’ properties. The EUV of all units including the Roof in the Building as at the relevant date of valuation, ie 15 November 2013, are reproduced below: -

Non-Domestic Portion on Ground Floor

Domestic Portion on Upper Floor

26.  The total EUV of the Building should be :

Sub-Total for Non-Domestic Portion:	$366,340,000
Sub-Total for Domestic Portion:	$585,810,000
Roof:	$5,010,000
Grand Total:	$957,160,000

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

27.  In determining the application, section 4(2) of the Ordinance empowers the tribunal to make an order for sale if it is satisfied that :

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

(2) the applicants have taken reasonable steps to acquire all the undivided shares in the Lot (including negotiating for the purchase of the undivided shares owned by the respondents on terms that are fair and reasonable).

Section 4(2)(a)(i) – Age and State of Repair

28.  This tribunal has taken into consideration the expert evidence of Mr Wong Chi Ming (“Mr CM Wong”) (a Registered Structural Engineer and Authorized Person) and Mr Dennis Wong (a Registered Building Surveyor and Authorized Person) adduced by the applicants. 

29.  Mr CM Wong had conducted a structural assessment of the Building and prepared a Structural Assessment Report that was filed on 26 October 2015.  The findings in the report include :

(a) Cracks, spalling and severe water stains were observed at 525 locations;

(b) A total of 93% of the steel reinforcement bars are suffering from a mild to severe corrosion which significantly reduce the strength and effectiveness of the structural elements in the Building;

(c) 80% of the core samples of the structural element have either ‘considerable’ or ‘numerous’ voids, honeycomb was also observed in this Building which provides for easier route for water and air to penetrate into the concrete;

(d) Carbonation has reached the concrete surrounding of the steel reinforcement bars in 98% of the test samples which make the steel reinforcement bar susceptible to corrosion;

(e) 47% of the core samples have a chloride content exceeding 0.40%, the corrosion risk for these samples is classified as ‘moderate’ or ‘high’;

(f) Corrosion of the reinforcement bars has been initiated and is likely to have entered the propagation phase;

(g) Hammer tapping should be carried out throughout the Building to find the extent of spalling and cracking in the structural members and all revealed cracks and spalling should be patch repaired;

(h) Estimated cost of repair for the Building in its current state is $2,794,740;

(i) The Building is 57 years old and considered to have passed the end of its design life; and

(j) Given that ductility and robustness were not considered in the Building, the structure of the Building cannot meet the current safety standards.

30.  Mr Dennis Wong had conducted a condition survey of the Building and prepared a Condition Survey Report that was also filed on 26 October 2015.  He comes to the conclusion that :

(a) The Building is obviously below a tenantable standard with its structural frames in a poor condition and most of its components, finishes and services deteriorated towards the end of their effective life span;

(b) The Building is currently in a state of disrepair and demolition will relieve the owners from heavy repair responsibilities;

(c) Costs of the essential repairs estimated at $92,362,959 which is about 34.02% of the cost for construction of a new building, the repair costs are disproportionately high;

(d) even after essential repair works implemented, the Building will remain an old residential cum commercial building with its design and construction out-dated and below market expectations and constitute a continuing repair liability to the owners; and

(e) Demolition of the Building for redevelopment is economically more viable.

31.  We accept the unchallenged evidence of the applicants in these respects.  We are satisfied that, based on the evidence of Mr CM Wong and Mr Dennis Wong, redevelopment of the Lot is justified due to the poor state of repair of the Building and disproportionate costs to repair and maintain.  We are also satisfied that redevelopment of the Lot is justified due to the age of the Building.  This 58-year old Building is in a poor condition and in fact has come to the end of its life. Its design has become obsolete over time in many aspects both physically and functionally and failed to conform to modern standards and requirements in many material respects.

Section 4(2)(b) – Reasonable steps taken

32.  The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of all the undivided shares of the Lot under section 4(2)(b) of the Ordinance.  However, this obligation is not a mandatory requirement for the applicants in respect of missing owners.

33.  However, before the commencement of the present proceedings, the applicants made the following offers to the 8^th, 10^th and 11^th respondents respectively on 9 December 2013 : -

(1) The 8^th respondent - $6,132,000

(2) The 10^th respondent - $3,025,000

(3) he 11^th respondents -  $2,269,000

34.  After the commencement of the present proceedings, the applicants made the following offers to the 8^th, 10^th and 11^th respondents respectively on 22 July 2014 : -

(1) The 8^th respondent - $6,716,000

(2) The 10^th respondent - $3,313,000

(3) The 11^th respondents -  $2,485,000

35.  In these offer letters, the solicitor for the applicants said that these offers were fair and reasonable because they had already represented a premium (ie 5% in the offers of 9 December 2013 and 15% in the offers of 22 July 2014) above the market value of the respective property reflecting its share in the redevelopment of the Lot as assessed by Savills then.

36.  There is no evidence before this tribunal that the assessments by Savills are faulted.  In these circumstances, we are satisfied that the offers made by the applicants fall within the range of what may broadly be regarded as fair and reasonable and the applicants have taken reasonable steps to acquire all the undivided shares of the Lots for the 8^th, 10^th and 11^th respondents.

37.  We are also satisfied that the settlement agreement reached between the applicants and the 1^st, 4^th, 5^th and 6^th respondents are the indication that the applicants have taken reasonable steps to negotiate on terms that are fair and reasonable for the purchase of their respective undivided shares.

38.  In the circumstances, we are satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot.

Order for Sale

39.  We are satisfied that redevelopment of the Lot is justified in terms of both age and state of repair of the Building and the applicants had taken reasonable steps to acquire all the undivided shares of the Lot and had negotiated for the purchase of the respondents’ shares in their respective units on terms that are fair and reasonable.  In the circumstances, we agree that an order for sale should be granted in favour of the applicants.

Reserve Price for the Auction

40.  The applicants submitted that the reserve price for the auction of the Lot should be fixed at $1,739,000,000, which is based on Mr Yeung’s assessment of the RDV of the Lot as at 1 August 2016 in the supplemental report filed on 4 August 2016 (“RDV Report”), the revised residual valuation attached to 2^nd Joint Statement of the Valuation Experts on Issues In Agreement and Not In Agreement filed on 12 August 2016 and the 2^nd revised residual valuation submitted on 25 August 2016 at the hearing.

41.  Mr Yeung adopted the Residual Method to assess the RDV of the Lot.  Residual Method is the assessment of land value by deducting the development costs (including construction costs, professional fees, financial costs and profit, etc.) from the estimated gross development value (“GDV”) of the proposed development, as if completed, as at the date of valuation.

42.  Mr Yeung opined that the optimum redevelopment on the Lot comprised a commercial/residential composite development with two 28-storey (excluding a refuge floor) residential blocks erected over a 3-storey retail/club house podium and a basement carpark.  Details of the hypothetical development with the proposed total gross floor area of 19,256.157 sq m (excluding 560 sq m green feature concessions) and plot ratio of about 9, the GDV assessed (ie $359,920/sq m saleable area for shops on ground floor, $120,000/sq m saleable area for shops on 1^st floor, $108,000/sq m saleable area for shops on 2^nd floor, $203,764/sq m saleable area for domestic units on upper floors and $1,560,000 per each car parking space), the development costs adopted (ie average $39,802/sq m gross floor area) and the residual valuation were set out in the 2^nd revised residual valuation. The residual land value was assessed at $1,739,000,000, which is equivalent to an accommodation value of about $90,309/sq m gross floor area.

43.  Mr Yeung had also attempted to apply the Direct Comparison Method to assess the RDV of the Lot, but no relevant comparable was identified.

44.  Having gone through Mr Yeung’s valuation in the RDV Report and the two revised residual valuation, we accept that the market value of the Lot reflecting its redevelopment potential on its own, ie the RDV of the Lot, as at 1 August 2016 is $1,739,000,000, which should be the reserve price for the auction of the Lot.

Order

45.  This tribunal make the following determinations :

(1) This tribunal is satisfied that redevelopment of the Lot is justified due to the age and state of repair of the Building, and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot including those of the respondents;

(2) All the undivided shares in the Lot, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lot;

(3) Ms Anna Chow and Mr Anthony Chow, nominated by the applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees by the Ordinance in relation to the sale of the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letters of Messrs Peter C Wong, Chow & Chow (now known as Guantao & Chow) dated 13 October 2015 and Messrs Guantao & Chow dated 2 August 2016;

(4) For the purposes of the sale of the Lot by public auction :-

(a) The sale of the Lot be on the particulars and conditions of sale substantially the same as those in the draft Particulars and Conditions of Sale to be approved and initialed by the tribunal; and

(b) The reserve price be set at $1,739,000,000;

(5) The net sale proceeds of sale to be apportioned to the 25 undivided shares owned by the 12^th respondent and the Roof be held by the Trustees pending final determination of the proceedings in HCA No. 1948/2014;

(6) The relief sought by the 13^th respondent be dismissed;

(7) Subject to further extensions that the tribunal may subsequently allow upon the application of the purchaser of the Lot or its successor in title, the redevelopment of the Lot and the Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot;

(8) Liberty to the applicants, the respondents and the Trustees to apply to the tribunal for further directions;

(9) The applicants do publish notices once in a Chinese language newspaper (and in the Chinese language) and once in an English language newspaper (and in the English language) circulating generally in Hong Kong within 21 days from the date of this order informing the 8^th respondent, the 10^th respondent, the 11^th respondents, the 12^th respondent, the 13^th respondent and all persons claiming to be the owners of the Lot: -

(a) That the tribunal has made an order for sale of the Lot; and

(b) Where and the times during which a copy of the order may be obtained.

Costs

46.  The applicants did not ask for costs.  We make a costs order nisi that there be no order as to costs and such order be made absolute after 14 days if no application is made to vary the said costs order.